Regional President Speech

CHANGING CONCEPTS OF BANK KESEKVKS by Karl R. Bopp Philadelphia Chapter American Institute of Banking October 2, 1945 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Introduction u * , £xr5 ^ T2,^£> rr^ !• lords are like battles ^ <£u^>* a. Mew words for oXd things like new bottles for old wine - an acadsaic fault. Instructor brings chicken to biology **1 iff it 1b 1915 1915 - an innovation 1900 - a. problem 1925 - a project 1930 - imit of work 1935 - activity 1940 - Integrated prograa 1945 - fraae of reference One esnaot solve real pfobleps by changing ^____iwv* i&xAA 4lr lu ^ij V t tu i b. Old words for new things like old bottles for new wine - the fault of the practical. Illustration: Means of transportation On foot Horseback Automobile Railroad Steamship Airplane No guarantee it is the same thing because it bears the old label. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - Ul*. J*usuJ *44j! 2. N— rmnnt~nnr iilfthe bottle called bank reserves a. Widely differing uses of the word in accounting. Can't even tell if it is an asset or a liability. b. This discussion concerns Hcash*reserves*&^ ^ (1) Commercial bank reserves (2) Central bank reserves. Similar in origin^ but greatly different now. I. History of commercial bank reserves A. Early form and purpose 1. Note as well as deposit liabilities 2. Cash in vault to meet cash needs B. Changes in amount of reserve 1. Wide fluctuations from time to time. Wide variations from bank to bank and area to area. 2* Profits a pressure to keep at a minimum. Demand for loans at the frontier. 3* Inadequate and minimum re serves Inadequate - failure because of ¿reserve funds, despite solvency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 - - D. Implications of fractional reserve system 1. Customer must have right to withdraw his deposits 2. If reserve ratio is fixed, where is the money coming from? - Central bank 3« Need of control over total means of payment. &• Over volume of reserves (1) Procedure (a) Gold (b) Central bank credit (c) Money in circulation (2) Inadequacy of power in 1930 * 8 b. Reserve ratio C{%) Banks expand on basis of reserves ^|) Power over requirements (3) The 100% reserve proposal 4* Services and earnings of banks Attractiveness of industry to capital £. Concluding remarks 1« Form of reserves has changed from cash in vault to deposit at central bank. 2. Function has changed from meeting cash needs to instrumentality of regulating volume of means of payment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Minimum: Self-discipline of banks - England, Germany, France, and branch linking Legal - United States U* Minimum reserves become average reserves a. Means only small excess of reserves Changes in form of reserves 1. From cash in vault to correspondent balances a. Maintain local money rates and lend the excess to money center. b. Correspondent as a source of cash to meet withdrawals« 2. Motion of "liquid” secondary reserves a. Necessity for banking system to make new loans or new investments as old ones are paid off. b« Primary function of short-term paper is to reconsider the distribution of credit. 3* Correspondents apt to be unable to meet calls of country ftmks. 4* Scattered excess reserves of the system inadequate, especially to meet calls for e&sh in crises. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - II. History of central bank reserves A. Early form and purpose 1. Not distinguished from commercial ban* reserves. B. Regulating of To assure ability to retail notes and de­ posits in gold. ' 9 I.e., to prevent excessive expansion. 1. The English system &: Fixed fiduciary system plus 100% 9 b. Fell down in 1847, 1857, and 1866. Formal accounting view - need to expand in crises. 2. The French system Maximum note issue 3* Percentage system a. Against notes b. Against notes and deposits C. The objectives of legal provisions 1« To assure central bank ability to meet its obligations. Z* 10 afford Govera*antel supervision. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - D. Alternative methods of achieving 1. Ability to pay out reserves a. Remove reserve requirements b. Remove from notes (1) Make them truly elastic (2) Now put heavier strain than deposits of members on reserves 2« Governmental supervision a. Inadequacy of existing limits b. Benchmarks Ideally a financial litmus. Practically must be satisfied with substitutes. (1) Gold holdings (2) Volume of means of payment (3) Price level III* vl dm_» B. Necessity of meeting the real issue concern- ' iBf private Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1945, October 1). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19451002_karl_r_bopp

@misc{wtfs_regional_speeche_19451002_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1945},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19451002_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}