ncy, 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 emplo
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