§ 7. Reserves in member banks. Important changes were made in the rules as to the reserves against deposits that had been in force under the old national banking system. A new distinction was made between time and demand de posits. Time deposits are defined as those payable after thirty days or subject to not less than thirty days' notice ; and demand deposits as those payable within thirty days. In every case the reserve requirement against time deposits is now only 3 per cent (first 5 per cent, but later amended). This gives encouragement to banks to maintain savings de partments and to make agricultural loans. The Federal Re serve banks take the place of the banks in reserve and cen tral reserve cities as the depositories of funds that were' The complete application of the new• rule was deferred for a period of three years from the passage of the act.
counted as a part of the reserves of member banks. The legal minimum reserves for country banks (as fixed by amend ment June, 1917) is 7 per cent; for banks in reserve cities 10 per cent; for banks in the three central reserve cities 13 per cent, all of which must be kept in the Federal Reserve bank, till-money not being counted as part of the reserve.? These legal requirements as to proportion of reserves, as compared with those of national banks under the old law, are smaller by 53 per cent, 60 per cent, and 48 per cent, re spectively (though practically less reduced because till-money is no longer counted). The large increase in lending power thus given to the member banks explains in part the large expansion of banking credit between 1915 and 1920, the en couragement of speculation in 1918-1920, and the large earn ings of most member § 8. Rediscounts by Federal Reserve banks. More im portant than any other single feature of the act is that by which each Federal Reserve bank is to rediscount notes, drafts, and bills of exchange arising out of actual com mercial transactions, when endorsed and presented by any of its member banks. This, quite apart from the note issues, gives a power to the banks collectively, under the general supervision and control of the board, to expand credits in definitely at any time for real business purposes. This en ables any business man who can offer commercial paper of sound quality to borrow on it at some rate of discount, even in the most stringent times. And, in turn, every member bank should be able at such times to rediscount such paper 7 By amendment, September, 1918, banks in outlying districts of central reserve cities, or of reserve cities, may, by affirmative vote of five members of the Federal Reserve Board, be permitted to hold reserves less than the usual 13 and 10 per cent, respectively.
8 The original act reduced the legal minimum of reserves required of each of the three classes of banks to 12. 15, and IS respectively, and laid down an over-ingenious rule for the proportion that must be left in the member bank's own vaults and in the Federal Reserve Bank, respectively, or that might be in either place.
and thus secure credit toward its reserve requirement on the books of its Federal Reserve bank. Suppose, for example, that a member bank (in a central reserve city) saw its re serve in the Federal bank fall below 13 per cent of its de mand deposits. It could by rediscounting $13,000 worth of notes increase by $100,000 the amount to which it might legally extend credit to its customers. The deposits of the Federal Reserve bank would then be increased $13,000, against which it must have a reserve of 35 per cent or culation of the Federal Reserve banks during the war period, and their continued expansion after the end of the war. This caused the "free gold" (the margin of gold above the legal minimum requirements) to decrease until the middle of 1920. This was getting nearer and nearer to the point where discount rates must legally be raised (in some dis tricts the point was passed), and finally compelled a contraction of credit, which then came quickly and violently.
$4550. If the reserves of any Federal Reserve bank fall too low, it can in turn rediscount its paper with the other Federal Reserve If the time comes when no one of the twelve banks can longer maintain a 35 per cent reserve 9 See on "piping" provision, 2, above.
the Board may reduce or suspend the requirement, levying a tax graduated according to the deficiency. The provision here for elasticity of credit, combined with union and solid arity of all the central banking reserves of the country to meet unusual demands in emergencies, exceeds any needs that can be expected to arise.
§ 9. Changes in national banks. There was thus created a national system of reserves, but it will be observed that membership in the new system of the Federal Reserve banks was not limited to national banks, but was opened on equal terms to banks organized under state laws. While in most respects the general banking law remained as it was, cer tain changes of importance were made. The percentage of reserves required of all member banks (as above indicated) is a substantial reduction of the former requirement for na tional banks. In some other respects the powers of national banks were enlarged. One with a capital and surplus of $1,000,000 may with the approval of the Board establish foreign branches, and one not situated in a central reserve city may lend on farm-lands for a term not longer than five years, but not to exceed one third of its time deposits or 25 per cent of its capital and surplus. National banks may now be granted permission by the Board to act as trustee, executor, administrator, or registrar of stocks and bonds, thus having the rights that have proved in many cases to be of advantage to trust companies organized under state laws.