Mr. Banker: I presume you gentlemen all know just how the National Banks carry their reserves; but fearing that you do not, I will explain the system to you. All so-called country banks are required to carry 15 per cent reserves; that is $15,000 cash against every $100,000 of deposits; that they may send 9 per cent or $9,000 for every $100,000 of deposits away to what we call reserve cities. Now, there are 320 banks in 48 of these reserve cities. These reserve cities are required by law to carry a reserve of 25 per cent, or $25,000, for every $100,000 deposits; but they may send away 12½ per cent, or $12,500, for every $100,000 of deposits to a central reserve city, of which there are three: New York, Chicago and St. Louis.
These central reserve cities must carry 25 per cent cash reserves or $25,000 in cash for each $100,000 of deposits. Experience shows that these 320 banks in the 48 reserve cities and these 55 banks in the three central reserve cities keep all of their money loaned out all of the time; that is, right up to the reserve limit. Since they have no margin, when called upon for anything more than the usual daily current requirements, something extraordinary must be done to meet the demand. Loans must be called in and paid off. But since these same banks that are calling loans are supposed to be carrying the real, the final, the ultimate reserves, a deadlock follows, and the borrower is up against it; rates go almost anywhere that the banks want to put them; from 1 per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 per cent; I believe that's the record rate. In other words, we have no true, final reserves in this country at all, for you cannot break the Government limit fixed by statute, and therefore we have a complete lockup all along the line, until through straining, something breaks somewhere.
There is absolutely no use of sending a part of your reserves away, if you cannot get them when you want them; for then it is no reserve at all, and that is the actual position or situation in the United States today. Our so-called central reserves are not reserves; it may be written down as a purely fictitious scheme, for there cannot be found a single year in which any substantial arrangement has ever been made by running the reserves up in the central reserve cities until they amounted to an average of 35 or 40 per cent, which would be the only practical way of providing for the crop-moving period.
If there is one thing more barbarous in our banking practices than a bond-secured currency, it is our system of superimposed bank reserves, especially in connection with the fixed limit, established by the Government. What would you think of a railroad company which ran out through the wheat country, having one-quarter of all its freight cars idle all the time as a reserve, and yet when thrashing time came, refused to use them, although the wheat was rotting on the ground, because the management of the road demanded that the railroads should always have at least one-quarter of the cars idle, as a reserve to meet the demands during the crop-moving period. Wouldn't you think that that was idiotic?
Mr. Laboringman: Well, I should say so.
Mr. Lawyer: Mr. Banker, there is another point in that connection, and that's this. You started off to get a central reserve, a true reserve, as I supposed, as distinguished from the reserves of the National Banks that are all loaned out all the time. Then, your reserves were all broken up in the end, first into three hundred and twenty banks, and at the end into fifty-five banks, located in New York, Chicago and St. Louis. What we must have, it seems to me, is a real central reserve in the form of unloaned gold, and then permit the banks to use their cash reserves, if by any chance they needed them in part at least.
I notice that you carry about $100,000 in accordance with the legal requirement. Now, just as you said a while ago, there are times of the year when you could easily carry $200,000; but again there are times when you want to use a part of the $100,000, possibly as much as $75,000 of it. Why should you not do it, and then accumulate the necessary excess in the slack time to make up your average for the year.
Mr. Banker: That is precisely what we ought to be permitted to do.
Mr. Lawyer: Then, Mr. Banker, instead of sending as you now do, 9 per cent of your deposits, or $175,000, to a reserve city, and that city in turn sending a part of it to some central reserve city, your balance with your reserve city should be sufficient to carry your exchange account, and the balance go to a great central gold reserve, upon which you and your fellow bankers throughout the country could rely absolutely when the emergency came.
Mr. Manufacturer: I have been listening to you gentlemen with intense interest, and must say that you have worked this plan out completely and practically.