It must not be assumed that the bank has to pay out money each year to an amount equal to fifty times the total deposits. We must remember that in most cases a withdrawal of one deposit means an addition to another.
How much reserve shall a particular bank carry against deposits? The answer to this question de pends upon the nature of the bank's business—upon the amount of money that is called for from day to day. The amount will vary with different banks and at different times of the year. Experience and fore sight are the only guides.
As a rule, a bank which has a large number of small depositors does not need so heavy a reserve as the bank which has a small number of large depositors, any one of whom may be able to withdraw enough to cause the bank embarrassment. The bank with small depositors can figure on averages, and it is on a bet ter basis, altho this principle should not be carried too far. If the deposits are too small, bookkeeping expenses and other overhead charges connected with them may be so great as to wipe out all the profits. This is especially true in a large city where an ex pensive clearing system must be maintained. There is a golden mean for each bank.
Reserves must be increased at certain seasons when the demands for cash are especially heavy. When the people of one community are sending money to another community a much smaller percentage of the checks and drafts are redeposited than is the case in ordinary times. Money not only leaves the bank, it leaves the community, and there is no prospect of its returning to the bank at an early date.
Wo to the bank which is confronted with such a situation when its reserves are low. The fall demand for money for crop-moving purposes forces such a situation on our eastern banks every year. The dif ficulty has not always been met successfully, as the wrecks of many crises testify.
4. Reserves in the United of the great number of small banks thruout the United States, it has been found necessary to fix by law a minimum reserve requirement. As has been said be fore, any such blanket regulation can only approxi mate the reserve which each individual bank should hold. The minimum is higher than some banks find necessary if left to work out their own policies. On
the other hand, some banks find it too low and at times voluntarily carry excess reserves.
For the purpose of reserve requirements, banks which are members of the Federal reserve system are divided into three classes. Those located in the central reserve cities (New York, Chicago and St. Louis) are required to maintain a reserve, in lawful money, of 13 per cent against demand deposits. In certain other cities, called reserve cities, the amount is 10 per cent. All other national banks, called coun try banks, must carry a 7 per cent reserve. All mem ber banks are required to carry a three per cent reserve against time deposits. All required reserves must be deposited in the Federal reserve bank of the district.
There is no legal requirement as to the amount of cash which a member bank shall carry in its own vaults. The details of this plan will be explained in a later chapter.
The various states establish by law the reserve re quirements of the banks chartered by them.
5. Prgfits on everywhere are anxious to build up their deposits, because these are indirectly a source of profit. It must be remembered that deposits generally originate in two ways: the pro ceeds of loans are left on deposit; or money, checks and other cash items are left with the bank. When a borrower leaves a part of or all the proceeds of a loan on deposit, the bank has already made a profitable trade. It has given its promise to pay (the deposit) without interest, for the borrower's promise to pay with interest.
But the transaction described above cannot be car ried out by the bank unless it has a supply of cash on hand, for its promise is to pay on demand, whereas the borrower waits until a specified time. Where does the bank get the cash with which to back up its loans? The bank's cash is derived from capital subscrip tions, earnings, sales of investments, loans paid back, etc., and from cash deposits. It is because cash de posits can be made the basis of further loans that banks are so anxious to get them. They are worth more than the average banker thinks they are, or at least more than he will admit. An illustration will make the point clear.
Suppose $1,000 in cash is left with the bank. The statement stands: