So, in the United States our $346,000,000 of United States Notes, or greenbacks, instead of being an actual reserve to that extent, are not only a burden resting upon our gold, to the amount of their face value; but the burden our gold is carrying is multiplied to the extent of all the credit that is resting, or is based upon these United States Notes, which may be anywhere from one billion to three billion according to the per cent of the reserves the banks using them carry. They may be used as a 5 per cent reserve, and carry twenty times the amount of the reserves, or more than six billion; it is possible that they may be carried as a 17 per cent reserve, the average of all the National Banks, or only 7 per cent, the average reserves of all the other State Banks, excluding the Mutual Savings Bank.
Mr. Merchant: What's that? Do you mean to say that the State Banks do not carry more than an average of 7 per cent reserve, and that the National Banks carry an average of two and a half times as much or 17 per cent cash?
Mr. Banker: I have the statement of the Comptroller right here, which shows that the average cash reserves of all the State Banks is 5 per cent, including the Mutual Savings Banks, but excluding them, only an average of 7 per cent, and that the average reserves of all the National Banks is 17 per cent.
The report of the Comptroller also shows this fact, that while all other banks than the National Banks, excluding the Mutual Savings Bank, hold only 7 per cent cash reserves of their individual deposits, or demand liabilities, they have 24 per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the National Banks, which hold 17 per cent in cash of their individual deposits, have invested only 17 per cent of their assets in bonds, or other securities.
The inconvertibility of a great per cent of the assets of the State institutions is another burden then, thrown upon the total cash bank reserves of which the National Banks carry $996,000,000, with $5,825,000,000 individual deposits, while the other banks, excluding the Mutual Savings Banks, have only $577,000,000 cash reserves, with individual deposits amounting to $7,589,000,000.
The average cash reserves of the United States therefore are only a trifle over 11 per cent, when they should not be less than 16 per cent under any circumstances at the low level, reaching nearer 20 per cent at the high level. That is, reserves should be held for use, not ornament. There should be such an elasticity in the use of reserves, as to enable any community or section of the country to adjust itself to the ever-changing conditions of trade.
Let me make this point perfectly clear by giving you an illustration. Under the law of today, our bank carries 6 per cent cash, which amounts to about $120,000. There are times of the year when I could carry $180,000 or even $200,000 a good deal easier than I could carry $60,000, or even $50,000 at another time. Common sense would say that I ought to be able to adjust my business and my reserves somewhat to the varying conditions, but no, I am tied down by a cast-iron rule, so that I cannot bend without breaking the law. There is no doubt that my reserves ought to average for the year fully 6 per cent cash. In addition to this, I ought to carry at least 10 per cent more that I know absolutely is available at any time. Yes, and this should be so carried with the combined reserves of my fellow bankers all over the United States, as to make any amount available that could possibly be necessary at any time under any circumstances. This is the principle of the elasticity of reserves.
The wide variation between the State reserves and the reserves of the National banks is not difficult to explain. There are eighteen states today which have no reserve requirements at all. In the remaining states, the reserve requirements range all the way from 5 per cent to 25 per cent. The reserve laws in some of the states are excellent, just as good as that of the National Bank Act, while in an adjacent state, there may be no provision whatever requiring reserves. The result is that half of the banks of the country which are compelled to carry adequate reserves are carrying the other half, a condition that is unfair, unjust and manifestly unsound.
Mr. Merchant: It is not only manifestly unfair as between the bankers themselves, but such a condition imperils the banking situation as a whole, and more than any other single cause, brings on a general commercial disaster, as things now stand. The banking of the United States and all the productive and transportation interests are, comprehensively speaking, but one single business, so intimately associated and interwoven are their affairs. The banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. Since the banks, commerce and the people are all bound up together, the contracts of the banks with the people should take one common form, and each bank, from one end of the country to the other, should be compelled to assume its proper share of the burden, both as to paid-up capital and as to reserves.
It is interesting to note that the capital of the 7,312 National banks amounting to $1,033,000,000 is just about equal to the capital of the other 17,804 banks, outside the National System reporting, and the estimated capital of $70,000,000 of the non-reporting banks, $1,047,000,000.