The Supply Of Cash

The credit balances on checking accounts and the notes of commercial

banks are payable on demand in the legal-tender money of the nation to

which they belong, and such banks must at all times be prepared to

meet these obligations.



The term employed to designate the funds provided for this purpose is

reserves, and in this country they consist of money kept on hand

and of credit balances in other banks. In ther countries there is

also included under this head commercial bills of the kind which can

always be discounted. The term secondary reserve is sometimes

employed in this country to designate certain securities, such as

high-class bonds listed on the stock exchanges, which can be sold

readily for cash in case of need.



The amount of reserve required can be determined only by experience.

In ordinary times it depends chiefly upon the habits of the community

in which the bank is located regarding the use of hand-to-hand money

as distinguished from checks and upon the character of its customers.

These habits differ widely in different nations, and considerably in

the different sections and classes of the same nation. In most

European and Oriental countries, for example, checks are little used

by the masses of the people, while in the United States and England

they are widely used. In these latter countries, however, they are

less widely used by people in the country than in the cities, and by

the laboring than the other classes in the cities. Within the same

city one bank may need to keep larger reserves than another on account

of the peculiarities of the lines of business carried on by its

customers and the classes of people with whom it deals.



In times of crisis and other periods of extraordinary demand, bank

reserves must be much larger than in ordinary times. Hoarding,

unusually large shipments of money to foreign countries and between

different sections of the same country, and payments of unusual

magnitude, increase the demands for cash made upon banks at such

times.



The manner in which clearing and other balances between banks are met

also has an influence on the amount of reserves required. If such

balances are paid daily and always in cash, the amount needed for this

purpose is much larger than if they are paid in checks on some one or

a few institutions and at longer intervals.



The note issue privileges of a bank also affect its reserve

requirements. Since, if not prohibited by law, notes may be issued in

all denominations needed for hand-to-hand circulation within a nation,

and since for all purposes except small change such notes are as

convenient as any other form of currency, a bank with unrestricted

issue privileges can supply all the demands of its customers for

currency for domestic use, except those for small change, without

resort to outside sources of supply. In this case, however, it needs

to keep a reserve in order to meet demands for the redemption of

notes. Such demands arise on account of the need of coin for small

change or for shipment abroad or of means for meeting domestic

clearing and other bank balances. The aggregate needed for the supply

of such demands, however, is much less than would be required if the

privilege of issuing notes did not exist.



In the maintenance of reserves the chief reliance of commercial banks

is the circulation of standard coin within a nation and the

importation of such coin. The coin within the borders of a nation

passes regularly into the vaults of banks by the process of deposit,

and on account of the credit balances they carry with foreign

institutions, the loans they are able to secure from them, the

commercial paper they hold which is discountable in foreign markets,

and the bonds and stocks sometimes in their possession which are

salable there, they are able to import large quantities in case of

need. Since the standard coin in existence in the world adjusts itself

to the need for it in substantially the same manner that the supply of

any other instrument or commodity adjusts itself to the demand, banks

ordinarily have no difficulty in supplying their needs, and under

extraordinary circumstances, though difficulties along this line

sometimes arise, means of overcoming them are available which will be

discussed in the proper place.



If, as is the case in the United States, certain forms of government

notes are available as bank reserves, these find their way into the

banks' vaults by the process of deposit in the same manner as coin.

The possession of such notes by a bank enables it, to the extent of

their amount, to throw the responsibility for the supply of standard

coin upon the government, and in the circulation of the country such

notes take the place of an equivalent amount of standard coin. Whether

or not a government ought to assume such a responsibility is a

question which will be discussed in a subsequent chapter.



For the nation as a whole, the balances in other banks and the

discountable commercial paper and bonds which a bank may count as a

part of its reserves are not reserves except to the extent that they

may be employed as a means of importing gold. They are only means

through which real reserves of standard coin are distributed. The

payment in cash of a balance with another bank or the discount of

commercial paper with another domestic bank or the sale of bonds on

domestic stock exchanges do not add to the sum total of the cash

resources of the banks of a nation. Their only effect is to increase

the cash resources of one bank at the expense of another.



Adequate facilities for the distribution of the reserve funds of a

country, however, are second in importance only to the existence of

adequate supplies of standard coin. If such facilities are lacking,

existing reserves can be only partially and uneconomically used, with

the result that much larger aggregate reserves are required than would

otherwise be necessary and that the entire credit system is much less

stable than it otherwise would be.