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LAWFUL-MONEY RESERVE. Legal Requirements.
The “reserve" of a bank is that proportion of its “deposits” or liabilities payable on demand, which it is required, by law, “at all times” to “have on hand in lawful money of the United States."
The law bearing on the subject is to be found in sections 5191, 5192, and 5195, United States Revised Statutes, chapter 4, National-bank Act; in sections 2 and 3 of the act of June 20, 1874; and
3 in sections 1 and 2 of the act of March 3, 1887. All of these will be found in the National-bank Act,” edition of 1888, compiled under direction of the Comptroller of the Currency.
The cash resources which the law requires a bank to lay aside at all times in this way
constitute the sheet-anchor of safety in stormy financial weather, and as a matter of policy alone, apart from other considerations, too great stress can not be laid upon the importance of a faithful and uniform compliance with the law in this particular, in spirit as well as in letter.
Striking proof that this view of the subject is held and practiced by bank managers as a body is found in the fact that although the law requires National banks located outside of reserve cities (over 2,800 in number) to maintain a reserve of 15 per cent. only, their reports show that these banks habitually carry a reserve equal to an average on the whole of over 28 per cent. (See page 195, Comptroller's Report for 1888.)
That the framers of the law evidently realized the importance of this feature also, is apparent from the fact that the law prescribes for habitual violations of the statute, in this particular, the summary and severe penalty applying in only a few other places, viz., the appointment of a receiver to wind up the bank's affairs.
(See section 5191.)
Required on Deposits only.
Attention is here called to the fact that previous to the passage of the act of June 20, 1874, the law required National banks to maintain a reserve on their “circulation” outstanding as well as on their “deposits,” but this requirement was repealed by the act named, and since then a reserve has been required on “deposits” only. The act of 1874 also provided that each bank should keep on deposit with the Treasurer of the United States an amount of lawful money equal to 5 per cent. of its “circulation,” for the redemption of which at the United States Treasury this act provides, but the bank was at the same time permitted to count this “5 per cent. redemption fund” as a part of its reserve on “deposits." List of Reserve Cities.
There are at present nineteen reserve cities,” as per list given below, sixteen of which were designated in section 5191, while three others, viz.: Kansas City, Mo., St. Joseph, Mo., and Omaha, Nebr., have been recently added under the operation of the act of March 3, 1887.
Chicago and St. Louis, which had been cities” previously, became “central reserve cities" under the provisions of the act of March 3, 1887.
See note on page facing first page.
Central Reserve Cities:
New York City, N. Y. Chicago, Ili.
St. Louis, Mo.
Reserve Cities : Albany, N. Y.
Milwaukee, Wis. Baltimore, Md.
New Orleans, La. Boston, Mass.
Washington, D. C. Cincinnati, Ohio. Omaha, Nebr. Cleveland, Ohio.
Philadelphia, Pa. Detroit, Mich.
Pittsburgh, Pa. Kansas City, Mo. San Francisco, Cal. Louisville, Ky.
St. Joseph, Mo.
Classification of Banks with regard to Percentage
of Reserve required.
It will be found, from the portions of the law quoted, that in the matter of reserve requirements the National banks are divided into three distinct classes, according to location, viz.:
1. Those located in the three “central reserve cities, which are required to maintain a reserve equal to 25 per cent. of their “deposits,” and to keep the entire amount on hand in bank.
2. Those located in the sixteen other “reserve cities,” which must also maintain a reserve of 25 per cent. on deposits,” but are required to keep only one-half of same on hand in bank, while they may keep the remainder on deposit with any National bank, or banks, located in any of the “central reserve cities.”
3. Those located outside of the nineteen “reserve cities,” which are required to maintain a reserve of only 15 per cent. on “deposits,” and to keep on hand in bank only two-fifths
See note on page facing first page.
of this, while the remainder may be kept on deposit with any National bank, or banks, located in any of the nineteen “reserve cities.”
Of course, if any bank of the second or third class does not avail itself of the privilege of keeping a portion of its reserve with “reserve agents," it must keep the entire required amount on hand in bank.
It will be observed that while section 5192 included banks located in Richmond and Charleston among those privileged to act as “reserve agents ” for the 15 per cent. banks, section 5191 did not impose upon them the necessity for keeping a reserve equal to 25 per cent. of their “deposits," as was required of banks located in the other cities named in section 5192, and for this reason the privilege of acting as “reserve agents” has never been accorded by the Comptroller's office to National banks in those two cities.
Various forms of Lawful Money available for Reserve.
As the law prescribes that the reserve of a bank must be in “lawful money of the United States," the terın “lawful money” is defined as follows:
Previous to the resumption of specie payments, on the ist of January, 1879, “lawful money” virtually meant United States “legal-tender" notes,