istence.
Foreign legislators have approximated more closely than ours what is
needed in the regulation of bank investments. In the case of their
central banks, many of them, notably those of France and Germany, have
recognized the fundamental distinction between commercial and
investment paper, and have required them to hold the former against
their demand obligations, especially their notes.
The regulation of reserves has become a subject of legislation in this
country only. Our national banking act classifies national banks into
three groups, called country, reserve city, and central reserve city
banks, and requires those in the first mentioned group to keep cash in
their vaults to the amount of at least six per cent of their deposits,
and balances in approved reserve city banks sufficient to bring the
total amount up to fifteen per cent of their deposits.
Banks in reserve cities are required to keep in their vaults cash to
the amount of at least twelve and one-half per cent of their deposits,
and balances in central reserve cities sufficient to bring the total
up to twenty-five per cent of their deposits. Banks in central reserve
cities are required to keep at least twenty-five per cent of their
deposits in cash in their vaults. When the reserves of a bank fall to
the prescribed minimum, all discounting must cease. Regulations
essentially similar are found in the banking laws of most of our
states.
The purpose of these regulations is to set a limit to the extent to
which banks may expand the volume of their loans and discounts, in the
belief, apparently, that, if at least the prescribed proportion of
cash is all the time kept on hand, the banks will be able to meet
their obligations. As in the case of the regulations concerning
investments, the authors of these failed to recognize the
significance, from the point of view of the cash demands likely to be
made upon banks, of the kind of paper admitted to discount. If
discounts be confined to commercial paper, the demand obligations they
create will be met for the most part by transfers of credits on the
banks' books or by the return of the notes issued, and, as foreign
experience has demonstrated, the adjustment of cash resources to needs
can safely be left to the judgment of the bankers themselves, who,
through variations in the discount rate, rediscounts, and other means,
can regulate it with ease. If investment paper is admitted to
discount, reserves less t
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