There are three central reserve cities: New York, Chicago, and St. Louis. Every national bank in these cities is a central reserve city bank. The reserve cities are forty-seven in number and include the larger cities of the country. Every bank not situated in any one of the three central reserve cities or the forty-seven reserve cities is a country bank. This last term includes all the national banks of the smaller cities in the country, of the manufacturing towns and communities of New England and the Middle States and thousands of national institutions doing business in the agricultural sections.
The Country Banks.—The country banks, by the terms of the National Bank Act, are required to keep a cash reserve at all times equal to 15 per cent. of their deposits. Under the old law the country bank must keep only 40 per cent. of this required reserve in its own vaults, while it is allowed to deposit 60 per cent. of the required reserve on call in such national banks in any of the reserve cities or central reserve cities as may be approved as "reserve agents" for it by the Comptroller of the Currency....
The Reserve and Central Reserve Cities.—The second class of national banks, known as reserve city banks, includes all national banks located in forty-seven cities of the country, which from time to time have been designated as reserve cities. Every national bank in them is required to keep a reserve at all times equal to at least 25 per cent. of its deposits. It must be borne in mind that the deposits of a reserve city bank include not only what the banker refers to as individual deposits—the deposits of individuals, firms, partnerships, and corporations—but also deposits which have been made with the reserve city bank by country banks, for which it is the reserve agent.
A reserve city bank is permitted by the National Bank Act to keep one-half of its required reserve on deposit, subject to withdrawal on demand, in a national bank or banks in a central reserve city, approved by the Comptroller of the Currency, as its reserve agent....
Every national bank within the central reserve cities must keep a reserve equal in amount to at least 25 per cent. of its deposits, including not only individual deposits but deposits by bankers for whom it acts as reserve agent or correspondent.
The Reasons for the System.—This rather complicated system of reserves was authorized by Congress because it was necessary to allow the banks of the country districts or smaller cities to keep reserves in other banks in the larger centres of trade in order to facilitate the commercial exchanges of the country; and also because it was necessary to have some means by which banks of the larger cities could finance payments for their customers in the great centres of the country, especially in New York, Chicago, and St. Louis....
Its Weaknesses.—Our system of deposited reserves has failed miserably in times of stress, although it has worked reasonably well in ordinary times. It is contended that it has, to a large degree, built up the great centres, and more especially New York City, at the expense of country districts. It has been responsible for the seasonal withdrawal of money which was at one time a most serious embarrassment to business, especially in New York, Chicago, and other large cities in the fall months, but which has practically disappeared in New York City since the panic of 1907.... It was not until the system of deposited reserves brought about the panic of 1907 that the country at large became convinced that this feature of the national banking system was vicious, dangerous, and likely to produce trouble at any time. With this conviction began the movement which finally ended in the enactment of the Federal Reserve Act.
Much of Our Reserve Fictitious.—As a matter of fact, the actual available reserves of the three classes of national banks in the country are much less than is indicated by the percentage specified in the act quoted above.... This condition is referred to frequently as the pyramiding of reserves, which means, in substance, that the national banks of this country, omitting from consideration the state banks where the same conditions exist in an even more aggravated form, are doing business largely upon a paper reserve, which experience has shown is utterly useless in times of panic. The seven thousand five hundred and nine national banks held cash and paper reserves on October 21, 1913, as follows:
| Cash in vaults. | Due from banks. | |
| Country banks | $294,000,000 | $534,000,000 |
| Reserve city banks. | 251,000,000 | 258,000,000 |
| Central reserve city banks | 381,000,000 | |
| —————— | —————— | |
| $926,000,000 | $792,000,000 |
As a matter of fact the national banks of the country held $926,000,000 in cash as against total deposits subject to reserve requirements of $7,172,000,000, or about 12.8 per cent. of the liabilities subject to the requirements.