Banks carrying good balances could reasonably expect ready and ample accommodation by way of loans if they faced sudden and unexpected demands for cash, knowing that the reserve agent when called upon by wire would remit in as liberal and expeditious a manner as possible. The reserve agent, among other services, acted as financial adviser to its bank customers— answered their credit inquiries about names found in its credit files, bought and sold securities and commercial paper for them, acted as agent in loaning their money in the reserve city, made payments to and received payments from the United States Treasury and sub-treasury, handled their foreign exchange con nections, and provided an agent at Washington, D. C., to care for inspection of securities, notes, plates, etc.
Probably the two most important services rendered by the reserve correspondent were the handling of collections, on which it sometimes absorbed the exchange charges, and the payment of interest on the net average balance. The local bank arranged to send to the reserve agent as many of its collection items on out-of town parties as it found expedient, and the exchange charges on these items were a source of profit to the reserve agent. The reserve agent reciprocated. by sending to the local bank customer all its collections on parties in that district, out of the proceeds of which the customer deducted exchange charges high enough to constitute a fair profit. Through its customer banks, the reserve banks established national connections and got into con tact with innumerable areas, customers, and lines of business. The competition for customer bank balances led to paying interest of 2 per cent or more on the balances and to various agreements as to when transit and collection items should be credited and remittances debited and when interest should start. The pay ment of interest was the most powerful force in shifting the spare funds and the reserves of national and other banks to the banks of reserve and central reserve cities.
Effect of System on Concentration of Money The result of the system was a high degree of concentration of money in the three central reserve cities and in relatively few banks even there. According to the returns of the last Comp troller's call before the enactment of the Federal Reserve Act, October 21, 1913, the concentration in the central reserve cities was as follows: In other words, about half of the total deposits of these central reserve cities were bank balances, and over half of the bank de posits were from national banks. The Pujo Money Trust In
vestigating Committee in 1912 found that ten of the leading banks and trust companies of New York had 15,483 bank deposi tors distributed as follows: Competition for Deposit Balances Although these bank balances were not very profitable to the reserve banks, the correspondents were useful in giving access to business lines and houses in every part of the United States. Accordingly the central banks waged a serious campaign to attract them, particularly after the rgoo amendment to the National Banking Act and the rapid expansion of national banks that resulted therefrom. The chief inducement offered to the banks to make such deposits was the interest allowed. The bid ding was at first competitive, and varying rates were paid. By a process not quite understood the rate most commonly adopted came to be 2 per cent, which rate was not determined by careful cost and profit analysis but rather by guesswork. At first inter est was allowed only on balances of banks, but later on, owing to competition, interest was paid on balances of insurance companies, railroads, big capitalists, and on all accounts of unusual size. Some banks came to make general rules to pay interest on all balances above certain minimum amounts, others kept to the practice of private arrangements with each depositor.
Effect of Redeposited Reserves on Securities and Money Markets The payment of interest on deposits, undertaken in addition to the other multiplex services of the reserve city banks and brought about by the force of competition among the reserve city banks for these accounts, resulted in making them unprofit able unless the funds were, as nearly as possible, employed con stantly and at good rates and at call. Therefore the reserve banks were inclined to seek profitable investments based upon these balances, and because of the want of a discount market the banks built "lines" of demand loans to stock exchange speculators for trading purposes; if such loans were called, the speculators would liquidate the securities and pay their loans, and thus replenish the bank with funds to meet the demands of their correspondents —an operation which was perfectly safe when the market was buoyant but dangerous in times of panic.