equal to three-fifths of the reserve required,' and also the 5 per cent. redemption fund with the United States Treasurer. Banks located in the "reserve cities" must keep a reserve equal to 25 per cent. of their deposits; but one-half of this may consist of balances with approved reserve agents in the central reserve cities-New York, Chicago, and St. Louis, and the redemption fund may be counted as a part of the required

reserve.

There are unquestionably some serious difficulties growing out of our reserve-city system because of the extent to which, under its operation, the financial centers are periodically flooded with country deposits, and shortly afterwards drained again. But the problem is a commercial one to be settled by the laws of trade, which, as explained elsewhere,2 naturally lead at times to the shipment of currency and transfer of balances to the financial centers. Furthermore, it would appear that to the extent that depositors wish to have their funds furnished them in New York, or in other reserve cities, the system is logical. enough.

'It is interesting to note the origin and development of this permission to count deposits in other banks as cash on hand. In Massachusetts, the act of 1858, which made the first legal requirement in that state for the maintenance of a specie reserve, applied to both deposits and to notes; and as the notes of the Massachusetts banks were then almost entirely redeemed in Boston - very few being presented for redemption at the counter of the issuing bank - it was quite natural that the reserve to be maintained should include "balances in other banks, not bearing interest, which may be applied to the redemption of their bills." The provision for counting deposits in other cities as a part of the required reserve originated, therefore, in the desire that the funds to meet the liabilities should be where the chief liability was to be met.

So, too, under the national banking system, as it existed for the first ten years, where a reserve against both notes and deposits was required, the notes were to be redeemed by national banks in certain cities acting as agents, and balances in their hands, presumably placed there to provide funds for that redemption, were permitted to be counted as a part of the required reserve.

After the substitution of a separate redemption fund for notes in 1874, the required 15 per cent. and 25 per cent. reserves were left to apply only to deposits; nevertheless though the reason which originally existed no longer prevailed — the deposits with agents in the "reserve cities" were still counted as a part of the reserve. It is no doubt true that, as applied to deposits, this system as it exists is illogical, except to the extent that those deposits are called for in the shape of exchange payable elsewhere.

2 See Section 76.

In the requirement for the maintenance of a definite reserve, it is not intended that this reserve should not be used. On the contrary, the very idea of a reserve implies that it is there for use -to be drawn down to the last dollar if need be. It is merely intended that the limit imposed by the law should act as a warning bell—a notice to the bank that its reserve, when it falls below the limit, is less than conservative bankers would in general approve, and that steps should be taken to restore a better proportion between cash and liabilities. To this end the bank is forbidden to loan or discount time paper when its reserve is below the limit, and the Comptroller of the Currency may, if the reserve is not made good in thirty days, appoint a receiver to take charge of the bank.

Under the conservative exercise of this power by the Comptroller of the Currency, it will be seldom necessary to take summary action. The reserves of numerous banks have on several occasions fallen below the limits; but they have been · restored in each case within a few days. Probably the most striking instance occurred in the first week of August 1893, when the aggregate reserves of the New York City banks were $14,000,000 below the 25 per cent. limit.

234. With the ultimate retirement of the United States notes and Treasury notes contemplated in the recommendation of the Commission, and the dispersion of the greater part of our silver currency in the form of coin and certificates of small denomination in actual use as the large change of the country, the only kind of money left for bank reserves will be gold. Looking toward this end, it has seemed advisable that even now the banks should be required to hold in coin at least one-fourth of such reserve as is prescribed by law. Such a requirement would result in no hardship to the banks operating under the national system, even if, under the necessity of acquiring the gold, some special sacrifice would be involved. How the gold would be obtained has already been considered in the discussion on the Movement of Gold. As a matter of fact, however, most of the national banks of the United States already hold more gold See pp. 146-158.

than would be required under the plan proposed. As may be seen from Table 28 of Appendix II to this Report, there are but few states and cities where the present gold holdings of the banks do not considerably exceed the coin which these banks would be required to hold under the plan proposed by the Commission.

INSPECTION AND EXAMINATION OF BANKS.

235. Inspection of banks and publication of the reports of. examinations into their condition is necessary in a system of comparatively small but numerous banks. Where only banks of large capital, directly responsible to the government for their conduct, exist, there is little or no need of minute investigation into their condition, unless there are restrictions upon the business of these banks to be enforced. The situation is different under a system of free banking like that of the United States. Here banking may be engaged in by any persons, however unfamiliar with its principles, who have the necessary capital.

Inspection and publication of reports, therefore, are desirable for several different reasons. (1) Where but small amounts of capital are devoted to the establishment of individual banks, sudden losses, even though of comparatively insignificant amount, are likely to result in the ruin of the institution. It is, therefore, necessary to make public the accounts of such banks in order to show their condition. Depositors and the public will thus be informed of the situation of banks with which they may wish to have business relations, and need not ignorantly run any risk. This, however, applies quite as well to banks of large capital. (2) A system of free banking sometimes makes necessary a regulation of the business of banks, both large and small, owing to the inexperience or indiscretion of their managers. Examples of such restrictions are seen in the reserve requirements of the national banking system, and in various other regulations. In order that officials may be in a position to know that these regulations are observed, some system of reports or inspection is necessary.

236. One of the most important forces in holding banks to sound business methods is frequent publication of reports upon their financial condition. In order to make these of much use they should exhibit clearly the movement of all of the important

items in the accounts of the banks. This is absolutely necessary to a thorough understanding of the nature of the bank's business, as well as of its immediate condition. The fuller these reports are made the greater will be the security against illegitimate business, since the character of this business will at once appear.1

'By the original National Bank Act of the United States, in addition to quarterly reports, showing under appropriate heads the resources and liabilities of the banks, a general monthly statement was required from them. This was to show only the average amount of loans and discounts, specie, and other lawful money, deposits and circulation.

The system of reports thus provided for proved to have serious defects. "This monthly statement," said the Comptroller in 1867, "is too vague and general to give any correct or reliable information as to the actual condition of the banks. A full and detailed report monthly would be of great value to the public, and would afford more constant insight into, and familiarity with, the management and condition of the banks for the guidance of the Comptroller than he can possibly obtain under the present system of quarterly reports. . . . . It is, therefore, recommended that in lieu of the present quarterly reports and meagre monthly statements a full exhibit of the affairs of each bank shall be required on the first Monday of each month." These reports were done away with by the act of March 3, 1869. The reports now required of national banks must specify:

The weekly reports of the German banks must specify (a) on the side of liabili ties: The amount of the reserve fund, the amount of notes in circulation, obligations (both demand and other), deposits, and all other liabilities; (b) on the side of assets, coin and bullion, the sum of German currency on hand (gold in bullion or in foreign coin to be reckoned at 1,392 marks per pound fine), the amount of Imperial Treasury bills, notes of other banks, bills of exchange, loans on security (both merchandise