FEDERAL RESERVE SYSTEM' 1. Reserves of member banks.—The Federal Re serve Act changes the reserve requirements for na tional banks in two important ways. The percentage of reserves required is lowered; and the reserves which might be deposited with approved reserve agents in reserve and central reserve cities under the National Banking Act were gradually withdrawn from those agents and placed partly in the banks' own vaults and partly on deposit with the reserve banks. As before, national banks are not required to carry any reserves against outstanding circulation. The five per cent redemption fund must be maintained, how ever, and it may not now be counted as a part of the legal reserve against deposits, as it could be under the National Banking Act. This is no great burden on the banks, because of the great reduction which has been made in their reserve requirements.
It will be remembered that before the establishment of the Federal Reserve system, national banks in re serve or central reserve cities were required to carry reserves of 25 per cent against both time and demand deposits, and country banks were required to carry reserves of 15 per cent. All member banks now maintain a reserve of only three per cent against time deposits. These are defined in the Act as de posits which are subject to not less than thirty days' notice before payment and postal savings deposits. All other deposits are counted as demand deposits.
The reserves required against demand deposits are changed radically. The classification of reserve and central reserve cities remains the same as under the National Banking Act, but it may be changed by the Reserve Board. A period of three years was allowed for the transferring of reserves to the Federal Reserve banks. After three years from the date of the estab lishment of the reserve banks, which was November 16, 1914, member banks were required to keep the fol lowing reserves against demand deposits and dis tribute them as specified below: Central reserve city banks were required to main tain an 18 per cent reserve : six-eighteenths in their own vaults, seven-eighteenths in the reserve bank of the district, and the remainder either in their own vaults or in the reserve bank.
Reserve city banks were required to maintain a re serve of 15 per cent: five-fifteenths in their own vaults, six-fifteenths in the reserve bank, and the re mainder either in their own vaults or in the reserve bank.
Country banks were required to maintain a 12 per cent reserve : four-twelfths in their own vaults, five twelfths in the reserve bank, and the remainder either in their own vaults or in the reserve bank.
An amendment of September 7, 1916, provided that the Reserve Board might from time to time per mit member banks to carry in the reserve banks such reserves as they were ordinarily required to keep in their own vaults. The idea of this amendment was to encourage the building up of heavy reserves in the twelve regional banks instead of leaving them scat tered among all member banks. Figure 4, page 302, indicates the way in which reserves were shifted from approved reserve agents into the reserve banks. It also compares the total reserves required under the old law and the new respectively.
Reserve requirements against demand deposits were still further reduced and simplified by an amend ment of June 21, 1917. They now stand as follows: for central reserve city banks, 13 per cent; for reserve city banks, 10 per cent; and for country banks, 7 per cent. All of this required reserve must be on deposit with the reserve banks. The law does not require now that member banks shall carry away reserves in their own vaults; altho, of course, they need to carry a cer tain amount for every day purposes. This same amendment reduced to 3 per cent the required reserve against time deposits, which was 5 per cent under the Act originally passed.
The reserve carried by a member bank with the reserve bank may be checked against, under regula tions of the Reserve Board, but no bank may make any loans or pay dividends until its total legal reserve is fully restored.