RESERVES AGAINST DEPOSITS UNDER NATIONAL BANKING ACT Legal Requirements The Act of 1864 required that national banks located in the seventeen principal cities named carry reserves consisting of lawful money, equal to 25 per cent of the aggregate amount of their circulation and deposits, and that all other national banks keep similar reserves, which, however, needed to equal only 15 per cent.
Whenever the reserves on hand fell below these minimum amounts for any bank, the bank was forbidden to make time loans, to discount time paper, or to pay dividends. Three-fifths of the 15 per cent required reserves might be carried as balances with approved banks of the seventeen cities named and thus be available to redeem the circulation of the bank.
The Act of 1874 abolished the reserve requirements against national bank notes, and provided that the 5 per cent redemption fund against national bank notes might be counted as part of the required reserve against deposits.
The Act of 1887 provided for additional reserve cities. When ever three-fourths of the national banks located in any city hav ing a population of 5o,000 or over applied to the Comptroller of the Currency to have their city added to the list of cities above mentioned, the Comptroller was empowered to grant the request, and the city was thereafter known as a "reserve city." Though all the banks in such city were thereafter required to have re serves equal to 25 per cent of their deposits, they had the profits and advantages arising from the bank balances carried with them. The classification of the banks, therefore, turned on the net balance of these advantages and disadvantages and proved to be somewhat artificial, for in many cities the banks were tech nically country banks, while in many smaller places they were reserve city banks.
Also, whenever three-fourths of the national banks in any city having 200,000 population or over requested it, the Comp troller might designate it a "central reserve city," in which one half of the lawful money reserve of the reserve city banks might be deposited, and such city was required thereafter to carry reserves equal to 25 per cent of its deposits.
The Act of 1903 reduced the minimum population of a reserve city from 5o,000 to 25,000.
System of Redeposited Reserves Under the laws of 1864, 1887, and 1903, a complicated system of redeposited reserves against deposits developed which may be presented by the chart on page 389.
Bank Correspondents Under the National Bank Act no bank was required by law to carry any reserve with banks in reserve or central reserve cities, but it was permitted to do so if it found it advantageous. No bank, however, kept its entire reserve in its own vaults. Every bank found it necessary to carry balances with other banks in the larger centers of trade to facilitate the domestic exchanges and to accommodate their customers in making settlements at a distance. These balances were essentially checking accounts against which the local banker sold domestic exchange and which he would have had to carry irrespective of whether they counted as reserves; it was a particular favor to the banks to permit such balances to be regarded as part of their required reserves. To count them as reserves rested upon the assumption that they were available upon demand and, in turn, that the reserve bank kept them in liquid form.
Each country bank chose one or more reserve agents in one or more reserve and central reserve cities, and each reserve city bank chose one or more reserve agents in one or more central reserve cities. These agents were commonly spoken of as "cor respondents"—New York correspondent, Pittsburgh correspond ent, etc. Very intimate co-operative relations were developed between the correspondent and customer banks. Out of con sideration for the balance carried the reserve correspondent under took various lines of service for its customer bank, and competition among reserve agents for these accounts amounted to a contest in the kind, amount, and quality of the services offered.