America's Money Machine

PART II / THE GREAT REVERSAL
15 per cent to 12 per cent for reserve city banks, with no change for
country banks. 2
(3) During the decade ending 1930, at a time when the banking power
ofthe countrywas being strengthened inordinately by large accretions of
gold from abroad, the banking system further diluted its reserves by a
process ofwholesale reclassification ofdemand deposits into time deposits
in order to take advantage ofthe lower reserve requirements. A special
investigation conducted in May, 1931, by the Federal Reserve System
revealed that out of $13 billion of time deposits held by member banks
at that time, $3 billion consisted of individual accounts with balances in
excess of $25,000. Even though accounts of this size may consist of
inactive deposits with a low turnover, the Committee on Member Bank
Reserves concluded that they were not the typical small savings accounts
for the accommodation of which the low reserve against time deposits
was primarily instituted. In 1914, when national banks were required to
maintain the same reserve against all of their deposits, they held only
about $ 1 .2 billion in time deposits. Following the lowering of the reserve
requirements against these deposits, time deposits increased steadily and
amounted to about $8.7 billion at national banks alone in 1930. During
the same period, time deposits ofnon-national commercial banks, including
both state member and non-member banks, increased from about
$2.8 billion to $10.2 billion and savings deposits of mutual and stock
savings banks from $4.8 billion to $10.5 billion. The increase in time or
savings deposits for national banks was over 600 per cent, for nonnational
commercial banks over 250 per cent, and for savings banks 120
per cent.
"With only a 3 per cent reserve required against time depsoits," the
Committee found, "there is an inducement for member banks to persuade
or permit commercial customers to classify a large part of their
working accounts as time deposits and then to permit a very rapid turnover
on that small part of these accounts that remain in the demanddeposit
classification."
As a result of these various provisions and subterfuges, the Committee
reported, between 1914 and 1931, the period covered by its
survey, total net deposits of member banks increased from $7.5 billion
to $32 billion or more than 300 per cent in less than two
decades. Some of this increase reflected the accession of state banks
to membership in the Federal Reserve System, but the greater part
reflected the expansion of.member bank credit. While war financing
and the huge inflow of gold which followed the war constituted the