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times of threatened panic the different parts of the system worked at cross purposes. They were without effective leadership at those times when prompt cooperation under national leadership was urgently needed.

Reserves Scattered

The most serious feature of this decentralization was the scattering of reserves. Thirty thousand different banks meant 30,000 cash reserves, and these reserves for the commercial banks were more than the mere "till money" which the "cash balances" of most foreign banks represent. They were actual reserves, substantial in amount, upon which the banks placed their prime dependence for times of emergency. It is true that most banks had so called "deposited reserves," namely, funds on deposit in other banks, which they were allowed to count as part of their "legal reserves"; and they had so called "secondary reserves," namely, funds invested in securities and call loans, which were supposed to be quick assets that could be liquidated at once in time of need. Strictly speaking, however, neither of these "reserves" was a reserve at all. The deposited reserve was after all merely a deposit in another bank, which the depository bank loaned outcommonly at call on the stock exchange-and

against which it held its own reserve, a reserve which in turn was often further attenuated by being placed on deposit in a third bank, there again to be loaned out on stock exchange collateral. In times of emergency, therefore, the "deposited reserve" could be realized upon only to the extent that call loans could actually be called, and this meant to the extent that stock exchange securities could be sold. Invested "secondary reserves" could be realized upon, likewise, only to the extent that securities could be sold. In times of threatened panic, however, stocks and bonds can not be sold on any extensive scale except at great sacrifices and at the risk of financial corlapse. Experience has shown that securities are not sold to any large extent by banks at such times. The losses involved would be too great. The result was that in times of serious danger the banks of the country were forced to rely to a very large extent upon their own cash reserves, which, as a consequence, had to be maintained at a high level-higher than in other advanced countries. This situation gave the vault reserve in American commercial banks an importance not found in the commercial banks of Europe. European joint-stock banks normally carry little cash in vault; they place their reliance for emergency funds directly or indirectly upon the

central banks. In America bank reserves were so scattered and so jealously guarded that in times of threatened panic they were comparatively ineffective in staying the storm. The situation was analogous to what would happen today if after drilling our American army to a high point of fighting efficiency, we should scatter the men in small units all over the United States to protect the country from a threatened invasion. Each community would be jealous of its own squad of soldiers, but the invader would come and the efficiency of our well drilled soldiers would be practically nil. The point of the illustration will be clear to everyone recalling the mad scramble for reserve money on the part of banks throughout the country at the time of the panic of 1907. Our supply of reserve money was large. In fact we had at that time in the United States the largest supply of gold in the world. It was ineffective, however, because widely scattered; hence, suspension of cash payments throughout the country, currency premiums, the breakdown of our domestic exchanges, the illegal issue of millions of dollars of money substitutes, and all the other disgraceful accompaniments of an American panic.

Reserves Immobile

Obviously a country's reserve money must to a large extent be concentrated in one reserve or, at most, in a few large reserves, if it is to be effective. It must be marshalled in armies, not scattered in small squads. But these armies must be mobile so that they can be quickly moved singly or in combinations to places of threatened attack. An army's mobility is a big factor in its efficiency—a truth which the great mobility of the armies of the Central Powers in the recent war has emphasized. Our American bank reserves were not only scattered, they were also immobile. There was no effective way of quickly gathering them together and massing them at the points of financial danger.

These then were the three most serious phases of our banking decentralization: (1) Absence of a responsible national conservator of our money market, like the Bank of France or the Bank of England. (2) Scattered bank reserves. (3) Immobile bank reserves.

CHAPTER III

INELASTICITY OF AMERICAN BANK CREDIT PRIOR
TO FEDERAL RESERVE SYSTEM

The second group of defects of the old banking system, defects closely related to those of de¿centralization, were those of credit inelasticity. A very large part of the country's current business is carried on by means of funds borrowed from commercial banks. These borrowed funds are left on deposit with the banks, and the deposits are circulated by means of checks, the debits and credits of individual accounts being offset in such a way that the total commercial deposits of the country do not normally vary greatly in short periods of time.

Extent to which Bank Credit is Used as a

Medium of Exchange

The point may be illustrated by a few figures, and, inasmuch as conditions have been very abnormal since the outbreak of the European War, the figures used will be those for the year 1913. Reports made to the Comptroller of the Cur

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