XV EXPANSION BY MEMBER BANKS. The opportunity for expansion by member banks because of reduction in the required reserves was pointed out in a previous article. It wll now be shown in detail how this expansion may come about. It has been generally figured that the country banks and the reserve city banks would draw heavily upon the central reserve city banks for their initial payments in transfer of deposit account to the Federal reserve banks. This assumption does not seem to be warranted by the figures given in Article XIV, and for convenience reproduced here. The country banks, therefore, which had cash, October 21, of 270 millions can pay in their 74 million dollars in cash into the Federal reserve banks and still have 11 millions surplus cash at home. Should they desire, however (and considering the number of banks they should certainly desire), to keep about the same excess cash they had Oct. 21, or $47,000,000, they have only to use in making payments to the Federal reserve banks 36 millions of their commercial notes. This shows that the country banks, concerning which so much has been said, can by the use of 36 millions of commercial re-discounts make their initial payments to the Federal banks, have the same surplus cash at home as last October, and then hold 517 millions of credit reserves and credit surplus with other banks to meet the 185 millions optional reserves, leaving a surplus of 332 millions. Should they elect to make no re-discounts with the Federal banks they could keep the same surplus cash at home and draw only 36 millions of their 517 millions reserves and surpluses with other banks. Evidently the country banks do not need to make any primary disturbance in the money market in their initial payments to the reserve banks. Instead, with their large surplus credits, they are in a position to expand loans heavily. The banks of 47 reserve cities have their cash requirements reduced in the beginning from 239 millions to 115 millions, or by 124 millions. But they are required to pay at the start, to the Federal reserve banks 57 million dollars. This leaves them with 67 millions of surplus cash or 95 millions should they elect, as they may, to pay in re-discounts one-half the required 57 millions to the Federal banks. In this matter the Federal Board has no choice, for the Reserve Bank is under control of the member banks until there is an application for the new Federal notes. The law reads that the Federal reserve bank "may receive" "one-half of each instalment" in "eligible paper." But the Federal Reserve Board may raise the rate of discount and thereby induce cash payments. The Federal Board should welcome the paying of half the instalments in commercial bills, for these give the new banks some earnings at the start and later the Federal Board some control over the money market. By raising the rate of discount the Federal Board may drive the makers of maturing paper into the outside discount market. These reserve city banks may make payments of first instalments as above noted without calling upon their credit reserves whose requirements are reduced from 240 millions to 115 millions, thus giving a basis of 125 millions for some credit expansion. The banks of the three central reserve cities have their reserve requirements on the basis of the figures of last October reduced from 385 millions to 277 millions, a reduction of 108 million. They have no credits with other banks, nor are they, like the country or reserve city banks, permitted to count any moneys they have with other banks as in any way reserves. All their reserves must therefore be in cash, or with the Federal reserve banks. They may, however, make payment of one-half their 108 millions to the Federal banks in re-discounted paper. To sum up, therefore, on the initial payments at the inauguration of the new banking system, the cash reserve requirements of 847 millions fall to 392 millions, a drop of 455 millions. But from this latter sum must be deducted 119 millions cash which must be paid into the reserve banks and so much of the other half, 119 millions, as the banks do not elect to offset with commercial paper. Initially also there should be deducted 77 millions which the central reserve city banks must hold within their own vaults or pay over to the reserve banks. This makes in cash requirements a net reduction of 259 millions which becomes immediately the basis for credit expansion. It can be still further added to by the central reserve banks passing all their optional 77 millions over to the Federal reserve banks and as fast as checks are drawn against it making good their reserves by re-discounts, the proceeds of which fill up the reserves. It is provided in the Act that the first reserve obligation of a member is to hold its own cash. It is next provided that it must maintain reserves with the Federal reserve banks. It is also specifically provided that the reserve with the Federal bank is a working reserve and that the entire sum may be used in meeting checks or drafts. Called upon to make good its deficiency with the Federal bank, the member bank responds by offering paper for re-discount to make its credit reserves. If currency is not wanted the only control the Federal Board has is to raise the rate and thereby permit the member banks to earn with re-discounts the dividends on their own shares. Suppose, however, all the banks elect at the start to pay in and hold their reserves wholly in cash with no re-discounts. This would amount to 631 millions, to which must be added the 77 millions of the central reserve city banks, which are optional only as between cash and the reserve bank. There is then a net reduction of 139 millions in cash reserve requirements. This permits, eventually, at least one billion of credit expansion before the Federal Bank has taken in a commercial note, or issued a Federal note, or done anything but lock up 239 million dollars. Of course, these figures take no account of the first 54 millions paid in on capital account which can be taken care of from reduced credit reserves which have now come down to just 300 million for the country and reserve city banks, where before 573 millions were required and 740 millions actually held. The surplus here of 440 millions in bank credits might release sufficient cash to provide this payment of 54 millions; but if it were taken from the surplus cash reserves of the banks there would still remain 85 millions surplus cash after every obligation to the Federal government had been met in cash. And this 85 millions could be the basis of a 750 million dollar credit expansion at the outset. Before the full payments are made to the reserve banks the re-discount program must be set up and a fair amount of credit expansion permitted. The expansion that can follow when rising markets, and rising demands for labor and material, have forced the issue of Federal notes to prevent any contraction of the expanded base, must be considered later. Let it be here said that there would appear to be no initial necessity for the issue of any Federal reserve notes. It can be assumed right from the start that no bank will pay a dollar into the Federal reserve banks beyond its obligations so long as its correspondents will pay anything for the use of money. Indeed, there will be a tendency on the part of the member banks to "nig" on their reserves with Federal Reserve banks provided the Federal bank pays no interest; for any deficiency in reserve comes about by the checks other people draw upon member banks, without the bank's primary knowledge. Should the Federal banks some time in the future desire that the member banks keep their reserves full up, the Federal Reserve Board might well pay 2% on surpluses over the legal requirements and charge 21% or 3% on deficiencies. This would put the laboring oar upon the member banks to keep up their reserves; otherwise the Federal reserve banks will have to be not only bookkeepers but schoolmasters, daily reminding the member banks of their deficiencies. There is no patriotism in an organized bank until its own existence is in some way jeopardized. And be it ever remembered that the national banks under the new Act will play for their own profit in these reserves for dollars and cents in full confidence that they are released from reserve obligations in the letter of the law. The maintenance of reserves not only for elasticity but for all emergency has been undertaken by the Federal government and its new banking system. Just as the national banks at present take out circulation when money is least needed because they can get a small profit thereby, so will they pass out all their reserve moneys, to the full limit, competing with each other and lowering the rate of interest until all their moneys are earning "cent per cent." The government at Washington will ultimately learn, from its own children in the banking field, the result of unrestrained price competition. XVI THE NEED FOR EXPANSION. Before taking up the possibility of future expansion, or inflation, in all its forms, from the new bank act, it is necessary to carefully consider the business of the country in relation to its money and credit requirements. It must first be noted that the United States has expanded its gold money base more rapidly and to greater proportions than any other nation. We now hold almost one-quarter of the world's gold money and since 1900 have increased our gold base by a larger percentage than any other leading nation. Nevertheless, on the figures now to be presented it would appear that both in 1907 and in 1913 we had reached the limit of credit expansion upon our metallic base. Here are the figures of the money in the country, both in total sum and per capita of population, also the amount of gold in the country and the amount of money in the banks upon which credit is built up: June 30 1913 1912 1911 1910 1909 1908 1907 1906 1905 1904 1903 1902 1901 as Total in circula- Per Total gold in U.S. money treas. Total Total Per in in with caption inc. capU.S. assets banks people ita banks ita .3,720.0 356.3 1,552.3 1,811.4 18.61 3,363.7 34.56 1,868.8 .3,648.8 364.3 1,563.8 1,720.7 17.98 3,284.5 34.34 1,818.2 .3,555.9 341.9 1,545.5 1,668.5 17.75 3,214.0 34.20 1,753.2 .3,419.5 317.2 1,414.6 1,687.7 18.68 3,102.3 34.33 1,636.0 .3,406.3 300.1 1,444.3 1,661.9 18.68 3,106.2 34.93 1,642.0 .3,378.8 340.8 1,362.9 1,675.1 19.15 3,038.0 34.72 1,618.1 .3,115.6 342.6 1,106.5 1,666.5 19.36 2,773.0 32.22 *1,466.4 .3,069.9 333.3 1,010.7 1,725.9 20.39 2,736.6 32.32 1,475.7 .2,883.1 295.2 987.8 1,600.1 19.22 2,587.9 31.08 1,357.6 .2,803.5 284.3 982.9 1,536.3 18.77 2,519.2 30.77 1,327.6 .2,684.7 317.0 848.0 1,519.7 18.88 2,367.7 29.42 1,248.7 .2,563.2 313.9 837.9 1,411.4 17.90 2,249.3 28.43 1,192.6 ..2,483.1 307.8 794.9 1,380.4 17.75 2,175.3 27.98 1,124.7 *In 1907 the director of the mint reduced his estimate of stock of gold coin in country by 135 millions. |