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ances in other banks if it suits their convenience to do so all that is their own affair for which their responsibility is to their stock holders and their customers-but their legal reserve, the reserve which the Government looks upon as the minimum below which the public interest demands that banks should not go, that reserve must all be kept on deposit in federal reserve banks, the nation's reservoirs of reserve money.

For reasons that will soon be made clear the concentration of the country's reserve money in a few large reservoirs makes possible a much more efficient use of each dollar of reserve money than under the old system of scattered reserves, and, as a result, the legal reserve requirements have been greatly reduced. The percentage reserves at present required against demand deposits and time deposits are as follows:*

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♦ Banks located in the outlying districts of a central reserve city or a reserve city, or banks located in territory added to such a city by the extension of its corporate charter, may, upon the affirmative vote of five members of the federal reserve board, reduce their legal reserves to the percentages required of country banks. In the case of banks located in central reserve cities the reduction may be authorized to the percentage required of country banks or merely to that required of reserve city banks.

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On November 1, 1918, the twelve federal reserve banks held deposited reserves of other banks to the amount of $1,442 millions. Reserve money collected in a few large reservoirs is quickly available in large quantities either for export or for domestic use, and the fact that it is readily available in large quantities inspires public confidence and lessens the danger of financial panic. When the public knows that gold in abundance is available on demand it does not want it, except to meet the normal demands of international trade. The federal reserve banks, of course, do not keep on hand all the reserve money deposited by member banks. Like other banks, they invest it. The law, however, requires them to keep a reserve of thirty-five per cent against deposits, and it is their established policy to maintain reserves much larger than this normal legal minimum.

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Mobilization of Reserves

A corollary to the district centralization of reserves is their mobilization. Reserve money must not only be piped into a few large reservoirs, but these large reservoirs must be piped together, and there must be a pumping engine of sufficient power to force the reserves promptly and in large quantities to any place desired. The federal re

5 See pages 58-60.

serve system creates just this machinery. It provides numerous devices by which reserve money can be quickly moved from places of redundancy > to places of scarcity. A few of the more important of these devices will be briefly described here, while others will be discussed later in connection with the general topics of currency and credit elasticity and the transfer system. Let us consider first the inter-district mobility of reserve money, namely the movability of reserves from one federal reserve district to another; and second, the intra-district mobility of reserves, or the movability of reserves within the boundaries of one district.

Inter-District Mobility

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Broadly speaking there are three ways in which the federal reserve law has increased the interdistrict mobility of reserve money. They are: (1) Rediscounting by one federal reserve bank for another. (2) Open market operations of federal reserve banks. (3) Creation of a broader discount market for commercial paper.

Rediscounting by one Federal Reserve Bank for Another

Under the old banking system, as we have seen, in time of emergency, each bank held tight its own reserves, or, to change the figure, "sat firmly on the lid." In the controversy for banking re

form, which culminated in the federal reserve act, the advocates of a single central bank contended that a system of eight to twelve banks like that proposed in the federal reserve bill would perpetuate the old evil by leading to the same sort of scramble for reserves, in time of emergency, among the different federal reserve banks, that had formerly existed among the individual banks of the country. Specifically to meet this danger a provision was inserted in the act (Section II) empowering the federal reserve board "to permit, or, on the affirmative note of at least five members of the reserve board to require federal reserve banks to rediscount the discounted paper of other federal reserve banks at rates of interest to be fixed by the federal reserve board." This means that in case there is an exceptionally heavy demand for reserve money in any section of the country-a demand heavier than the banks of that section can reasonably meet-the reserve banks in other sections where money is more plentiful will come to the rescue, either voluntarily or under compulsion of the federal reserve board, and will rediscount the paper of the reserve bank in the section under financial stress. process, of course, will cause a flow of cash from the reserves of the former banks to the reserve of the latter, thereby easing the money market in the threatened section.

This

After the United States entered the war there developed a strong tendency for a compensatory movement of reserves among the federal reserve banks. Reserves of some of the banks frequently fall rapidly while those of others are rapidly rising, often with little or no change in the reserve position of the twelve federal reserve banks as a whole. This compensatory movement is due largely to operations of the government which often result in heavy withdrawals of funds from banks in one section of the country for the making of payments in another. This situation has made it desirable from time to time that one federal reserve bank should make advances to another. At times the federal reserve board has taken the initiative in this matter, but apparently the banks, in most cases, have willingly complied with the board's request. The twelve federal reserve banks have so far worked very harmoniously, thanks largely to the frequent conferences of the governors and the federal reserve agents both among themselves and with the federal reserve board, so that it seems improbable that compulsion by the board will often be necessary to require the more favorably situated banks to come to the rescue of those less favorably situated, in time of danger. The reserves of the twelve reserve banks are so closely piped together, particularly since the formation of the gold settle

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