The reserve is largely maintained in order to instil public confidence in the bank's ability and willingness to pay. If the bank maintains only the minimum required, the slightest run on the bank sends its reserves below the legal limit, and the bank cannot then make use of the reserve for the purpose for which it is kept. Inability to pay out the reserve, by turning suspicion into positive distrust, stimulates the run and often forces a solvent bank with a good supply of gold to suspend. It is like arming a soldier for defense but telling him not to shoot. If a legal mini mum reserve is to be required at all, the law should be so drawn as to make this reserve elastic, permitting its use under ties which would be prohibitive except temporarily in times of Decentralization of Reserves One of the most objectionable features of the former reserve system was the decentralization and parceling of the reserves among the 7,500 national banks and the 21,000 state institutions. The system was positively wasteful of our gold reserves so far as supporting a credit superstructure was concerned. The same
size of credit structure as was supported by the gold in the na tional bank system could have been supported with as great or greater safety by a much smaller amount of gold had that gold been concentrated in a central institution. The seasonal in creases and decreases of reserves required would largely balance one another, and the demands of any one section would amount to only a small fraction of the total massed reserves. By this means the central institution would be enabled to extend loans in the direction needed, runs on banks could be abated and deserving solvent banks protected, and the strength of the whole system correspondingly increased. What is essential is that this central reserve-holding institution should hold the reserves in actual cash or in highly liquid form. The object of the federal reserve scheme is to mobilize and concentrate the gold reserves into the federal reserve banks and increase their efficiency.