America's Money Machine

The Fulcrum and the Lever 145
For demand deposits the Act reduced the reserve requirements to 18 per
cent for central reserve city banks, of which six-eighteenths (6 per cent
of total net demand deposits) were to be held in the bank's own vault,
seven-eighteenths to be held on deposit with the Federal Reserve Bank
for its district, and five-eighteenths optional, either in the bank's own
vault or on deposit with the Federal Reserve bank. Reserve city banks
were required to maintain against demand deposits a reserve of 15 per
cent, of which five-fifteenths (5 per cent of total net demand deposits)
should be held in vault, six-fifteenths on deposit with the Federal Reserve
bank, and four-fifteenths optional. Country banks were required to maintain
reserves of 12 per cent against demand deposits, of which fourtwelfths
(4 per cent oftotal net demand deposits) should be held in vault,
five-twelfths on deposit with the Federal Reserve bank, and three-twelfths
optional. For time deposits the reserve was only 5 per cent for all classes
of banks.
(2) By the Act ofJune 21, 1917, as an aid in floating government war
loans, the reserve requirements were further relaxed, the proportionate
reserves being reduced to 13 per cent, 10 per cent and 7 per cent,
according to the classification of the bank, with 3 per cent for time
deposits for all classes. The amendment provided that all reserve cash
should be held on deposit with the Federal Reserve banks.
Since till, or vault, cash could no longer be counted as reserves, the
effect of the amendment was to encourage the banks to maintain even
smaller amounts ofvault cash, in order to expand their operations to the
maximum, and to rely on the nearby Reserve bank for accommodation
to meet sudden cash withdrawals. For instance, between June, 1917,
before the new reserve requirements went into effect, andJune 30, 1930,
net demand plus time deposits ofmember banks of the Federal Reserve
System increased from $12 billion to $32 billion, but holdings of vault
cash at the same time decreased from about $800 million to less than
$500 million. By making progressive economies in their use ofvault cash
at a time ofrapid increase in their deposit liabilities, member banks were
able to reduce their vault cash to less than 3 per cent oftheir net demand
plus time deposits by 1919, to less than 2 per cent by 1924, and to less
than 1.5 per cent by 1930. In New York City, for instance, member bank
holdings ofvault cash inJune, 1930, averaged only three-fourths of 1 per
cent of their net demand plus time deposits and less than 1 per cent of
their net demand deposits alone. The practical effect ofthe 1917 amendment
was, it was found, to reduce reserves against net demand deposits
from 18 per cent to 14 per cent for central reserve city banks and from