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may consist of deposit accounts in banks in central reserve cities or other reserve cities. In all cases the funds kept by the banks with the United States treasurer for the redemption of their notes are counted as part of their legal reserves.

The New York Money Market. Under the operations of this system the cash reserves of the national banks are centered in New York. This appears clearly in Table I, which shows that on the date specified more than a third of the cash reserves of the 6544

TABLE I

DEPOSITS AND Reserves of NATIONAL BANKS: AUGUST 22, 19071

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Compiled from Report of the Comptroller of the Currency, 1907, pp. 222-224.
• Millions of dollars.

3 Per cent.

national banks in the United States were in the vaults of thirtyeight New York banks. These figures do not, however, convey an adequate idea of the national importance of the New York bank reserves. New York is the great wholesale market for foreign exchange, the chief center of gold movements to and from Europe, the principal importing and exporting center for commodities,— in short, the chief market place of the continent and the focus of financial operations. All state banks, private banks, and trust companies of importance find it to their advantage to maintain deposit accounts in New York, both for their own use, and in order

1 The bulk of the deposits of out of town banks were in from twelve to twenty banks which make a specialty of this kind of business.

that they may supply New York exchange to their customers. Even the deposit accounts of national banks in New York are in the aggregate considerably larger than the amount they are allowed to count as part of their reserves.

All together the deposits of other banks constituted more than half of the $825,700,000 of deposits in New York national banks in August, 1907. Moreover, something very much like the reserve system obtains among other than national banks, the banks in smaller places keeping deposits in national or other banks in larger cities, which in turn keep deposits in New York. The trust companies, and some of the state banks' keep in general very much smaller reserves in their own vaults than are required of national banks, - a fact which makes the strain on the New York bank reserves all the greater. Recent legislation in New York has raised the reserve requirements of state banks and trust companies in that state.

Like an inverted pyramid upon its apex, the great structure of bank credit in the United States rests, in large measure, upon the money reserves of the New York banks. Every important change in the demand for money or credit in any part of the country has an effect on the New York money market; similarly, every important disturbance in the New York money market affects financial conditions throughout the country.

The central reserve system leads to a great economy in the use of money, and it seems to be a natural and necessary feature of modern banking, for something like it is found in all of the leading commercial nations, — although, in Europe, the central reserves are kept in one great bank in each country. Some dangers seem to attend its use in the United States, but these are in large measure attributable to other features of our banking system, chief among which are the dominance of speculative influences in the New York money market, the independent treasury system, and the lack of elasticity in our bank note issues.

'Savings banks keep reserves that average for the United States only four fifths of one per cent of their deposits. On account of the nature of their business, which is not banking in the commercial sense, they are a negligible factor in this connection.

Speculation and the New York Money Market. - As Table II shows, a large and increasing proportion of the loans of New York banks are not based on "commercial paper"; that is, on the notes and bills of exchange that arise in the ordinary course of business, but are either time loans on collateral security or demand loans, nearly all of which are secured by collateral. Most of these col

TABLE II

LOANS AND DISCOUNTS OF NEW YORK NATIONAL BANKS ON SPECIFIED

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1 Compiled from Reports of the Comptroller of the Currency.

lateral securities are the stocks and bonds of corporations, and the loans, especially the demand or "call" loans, are used for the greater part in financing speculation in such securities. This system is partly responsible for the excessive and useless expansion of speculation over and above the amount that is necessary to secure the best results for the economic interests of the country. Here we are concerned, however, with its effects on the money market.

The supply of call loans depends primarily on the amount of the surplus reserves of New York banks; that is, the excess of the reserves over and above the legal minimum of 25 per cent of the amount of the deposits. If the weekly statement of the clearing house banks shows a relatively large surplus reserve, this means that the banks can safely expand their loans, the knowledge of which fact has a stimulating effect on speculation. If, however, the surplus reserve is low, the banks are bound to restrict their loans of all kinds and to "call" some of their demand loans.

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1 Some of the banks in the clearing house are state banks, but by the rules of the clearing house these were required to maintain the same reserve as national banks even before recent legislative enactments.

When the reserve is below the legal limit demand loans have to be called in large quantities in order to enable the banks to meet pressing demands for credit on the part of their regular customers.1 The precipitate calling of demand loans by some banks simply increases the demand for credit at other banks, which in turn have to curtail their loans. Such a condition of the money market leads to a depression in the price of speculative securities, which is increased by the forced sales of securities in order to obtain the money funds that had previously been lent on them; the fall in the price of securities leads brokers to demand more "margins" from the customers for whom they have bought securities, and it leads the banks to demand more securities as collateral for their outstanding loans. Under such conditions the interest rate on call loans sometimes goes as high as 125 per cent, or even higher.2

If the ruling prices of speculative securities have been higher than industrial conditions would warrant, such a disturbance of the money market is apt to be long continued, and might easily develop into a general financial crisis. The call loan market is essentially

1 The rigidity of the New York bank reserves is itself an element of danger to the money market. The Bank of England protects its reserves when they are threatened by the simple process of raising its discount rate. The effect of this is to restrict the loans of other banks as well as of the Bank of England to the more necessitous borrowers. Under our national banking law limiting the rate of interest, further loans have to be stopped absolutely when the reserve goes below the legal minimum. The New York bank reserve is accordingly a real reserve only in the sense that it makes it possible for the banks to meet extraordinary demands for ready cash. So far as the extension of credit is concerned, it is not a reserve, but a dead line. In practice the law is not rigidly observed, a warning from the comptroller of the currency being the only penalty exacted for a temporary deficit in the reserves. Nevertheless the reserve does not often fall more than one or two points below the legal minimum. The sudden curtailment of loans which the rigidity of the reserve entails is one of the things that tends to convert an incipient panic into a real panic.

2 That is, the rate on what may be called marginal call loans, effected at the stock exchange by bankers' agents, or by individuals or corporations. Many banks continue to make call loans to their regular customers at such times at rates not exceeding 6 per cent. Under normal conditions the rate on call loans is lower than the rate on time loans. For the period 1901-1906 the bank rate on call loans averaged 3.3 per cent as against an average rate of about 4.5 per cent on time loans. Excessive variability is the chief characteristic of the call loan rate. Cf. W. A. Scott, "Rates on the New York Money Market," Journal of Political Economy, Vol. XVI, pp. 273-298.

speculative, and it is unfortunate that the condition of the supply of credit for the normal commercial needs of the country should be periodically unsettled on account of this fact. In no other great money center of the world do call loans occupy the important place that they do in New York.1

The Independent Treasury System.—The United States government is to a very large extent its own banker. It keeps its own money in its own strong boxes, quite after the fashion of a mediæval monarch. The strong boxes in this case are, however, the vaults of the treasury in Washington and of nine sub-treasuries located in important cities. Apart from the fact that the government revenue and the government expenditures are naturally not distributed evenly throughout the year, the government has the further difficulty that a close balance of revenues and expenditures for any given year must be wholly accidental. Even if the federal budget were carefully and scientifically constructed, as it is not, the public revenues would be liable to uncertain fluctuations, a result in part of the importance of customs receipts among them. The government, furthermore, receives most of its income in money, not in bank credit instruments. When a surplus accumulates in the government treasury, that much money is taken out of circulation, which reduces the bank reserves, and contracts the amount of bank credit available.

The government is permitted, however, by the national bank act of 1863 to deposit money in selected national banks. Some secretaries of the treasury have made little use of this privilege, but in recent years such deposits have become more common.

Until 1902 banks had always been required to deposit government bonds with the federal treasury as security for federal deposits, but in that year and again in 1906 Secretary Shaw offered to accept approved state and municipal bonds in lieu of a certain amount of government bonds, on condition that the latter should be immediately used as security for increased note issues. In 1897 only 168 banks were government depositories. In 1907

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1 The control of groups of powerful banks by great chains of "financial interests is another anomalous condition of the New York money market. For an account and criticism of this situation as it existed in 1903, see C. J. Bullock, "The Concentration of Banking Interests in the United States," Atlantic Monthly, Vol. 92, pp. 182-192.

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