Reserve Bank), the reserves run three, four and five per cent. for "optional," "cash" and "Federal" deposits, and likewise three, four and five per cent. for "optional," with the country, reserve and central reserve banks.

The central reserve city banks make their change to the five, six and seven per cent. basis immediately on inauguration of the system. With both the country banks and reserve city banks the Federal requirements rise one per cent. at the end of the first year; one per cent. in the middle of the second year, and one per cent. at the end of the second year. There is no change during the third year, but at the end of the third year the cash reserve, which has been stationary through the three years, drops one per cent. by transfer to the optional column.

It shows how the country banks, which hold half the national bank deposits, and must now maintain 15% in reserves-of which 6% must be in cash and 9% may be credits with other banks in reserve or central reserve cities must then keep only 12%. Of this, 2% of reserve is set up with the Federal Reserve Bank to be later increased up to 5%. The cash reserve is 5% and the optional reserves, which may consist of credits, are likewise 5%.

The reserve city banks which must now maintain 25% in reserves of which one-half may be credit with banks in central reserve cities, must transfer 3% of their deposits to the Federal banks, and, as an offset for this, their cash and credit reserve requirements are each reduced to 6% at the start; but at the end of two years the Federal reserve has been doubled to 6% and at the end of three years the cash reserve requirement of the bank is reduced to 5% and the optional reserve increased to 4%-but then optional only as between cash at home and in the Federal reserve bank.

The central reserve city banks-New York, Chicago and St. Louis-which now have to maintain 25% in cash, not only against their individual deposits and other bank reserve deposits, but also against the net of the "due to" and "due from" banks where there are no reserve relations, must immediately transfer 7% to the Federal reserve banks, hold 6% in cash, and hold an optional 5% either in cash or with the Federal Reserve Bank.

There is no further change in the relations of these banks of the New York class and they continue as at the start to hold 5, 6, and 7 per cent. as "optional," "cash" and "Federal reserve." At first they will, of course, hold 11% in cash in their own vaults as the Federal banks pay no interest upon reserves, but eventually the 7% with the Federal Bank and the 5% optional reserve, or 12% in all, may become in toto credit with the Federal Reserve Bank and,

through the medium of re-discounts, the new federal notes will ultimately be issued for more than the amount of this reserve. Therefore, the 25% cash reserve requirements with the banks of the three central reserve cities, while being reduced to only 18%, nominally, are actually reduced immediately to 6% cash and in time the other 12% is transmuted from cash reserves into credit reserves.

This table should be studied and memorized. It is the most vital thing in finance not only for 1914, but possibly for many years thereafter; and not only for the United States but for the whole world.

XIV

HOW CONTRACTION MAY BE FORCED.

It will be recalled that Mr. Glass, one of the reputed authors of the currency bill, said in several public addresses, substantially: "What do they want? An eminent Chicago banker denounces the bill as contraction, and just as eminent a New York banker denounces the bill for its inflation. They cannot both be right."

Yet, strange as it may seem, both results are possible. This may be seen by studying the tables below:

First we repeat the acrostic table from Article XIII:

How the banks stand at the start in actual cash and credit reserves, may next be charted as follows:

NATIONAL BANK CASH AND CREDIT RESERVES.

In this table the required cash reserves are arrived at by applying the percentages of 6, 122 and 25 for country, reserve city, and central reserve city banks, as given in the first table, to the deposits of Oct. 21. Thus, the cash reserve required of country banks was $223,000,000 and their required credit reserve, assuming that they had no cash surplus, was $334,000,000. As a matter of fact, they had $47,000,000 surplus cash and $183,000,000 surplus credit reserves.

The required cash and credit reserves of the reserve city banks were $239,000,000 each. These banks had $3,000,000 surplus cash, but were deficient $17,000,000 in their credit reserves.

The central reserve city banks were $8,000,000 under their required cash reserve; they, of course, had no credit reserves.

No account is taken of the 5% redemption fund which on the signing of the Act was eliminated from bank reserves. On Oct. 21 these deficits would have been reduced one-half by the 5% reserve fund. The central reserve banks then had in it four million dollars, and the reserve banks eight million dollars. The country banks held the balance, twenty-four millions, in this redemption fund.

The reserves required to sustain the above "net" deposits of seven billions, which arise, however, from six billions of individual deposits, are 847 millions in cash and 573 millions in credit with other banks, as will be seen by transferring the starred deficits to the column to the left.

When the

The sum of these requirements is $1,420,000,000. new reserves go into effect and also when they are finally in effect this required reserve of $1,420,000,000 drops to $1,008,000,000 on the percentage of reserves as applied to the above deposits.

The question will naturally arise, as it did with Mr. Carter Glass, how anybody could show that the new reserves meant at any time a contraction.

At the outset no contraction can be forced, for the total cash and payments required by the new banking system at the start are less than the 847 millions cash tied up under the present system. This is shown by the table below, which is arrived at by applying to the same deposits used above the percentages given in the acrostic table under the heading, "New at Start":

NEW RESERVE REQUIREMENTS AT THE START.

On same net deposits (000,000 omitted):

The country banks and reserve banks have four options-cash, in Federal reserve, reserve city or central reserve city banks.

The central reserve banks have option for their 77 millions only between cash at home and deposit with the Federal Reserve.

This table shows that the actual required cash of member banks drops from 847 millions to 392 millions. The total reserves to be paid over to the Federal reserve banks are but 239 millions, and of the optional reserve all but 77 millions (namely, that held by central reserve banks) may be in credits with other reserve city banks. Therefore, at the start, even assuming that the Federal Reserve Bank receives nothing but cash, the total amount of actual cash

holdings which can be forced under the new Act is 392 millions plus 239 millions plus 77 millions, or 708 millions, against 847 millions now tied up. It may be much less. Clearly, therefore, there is no contraction at the commencement of the new system. The possible expansions will be treated in later articles.

After 36 months all optional reserves must be held either in Federal Reserve banks or as cash in vault. Here contraction may be forced.

While there is only 889 million cash in all the national banks of the country, the new Federal Reserve Act calls (on the Oct. 21st basis) for a reserve of $1,008,000,000, all of which may be cash eventually at the will of the Federal Reserve Board.

In other words, while the member bank cash requirements are reduced from 847 millions to 392 millions, it is within the power of the Federal Reserve Board to make the remaining 616 millions ultimately cash, should the Board elect to hold ultimately nothing but cash in the reserve banks.

All this is shown by the table below, arrived at by applying to the same deposits above used the "final" percentages given in the acrostic table:

Sum of the three reserves $1,008,000,000.

Here then is a possible increase in required cash from $847000,000 to $1,008,000,000, or by $161,000,000. While it may well be doubted whether any such amount of cash will actually be impounded, nevertheless it is within the power of the Federal reserve banks to bring about such a contraction, should they elect ultimately to hold nothing but cash in their own reserves.

In view of the fact that 108 millions in gold may also in three years be paid in by the member banks to constitute the capital of the reserve banks, it is only theoretical to hold to the possibility of the impounding by the reserve banks of 269 millions in gold and lawful money. The banks and the Federal Board would have to conspire to this end.

However, the possibility of actual contraction under the new system is one which no banker can afford to ignore.

Lyster