cn. 2

BANK-MONEY

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by the particular bank’s clients, and partly on thescale of the bank’s business which for this purpose isgenerally measured by the amount of its deposits.Thus each bank fixes in its own mind on a certainproportion of its deposits ( e.g . 10 per cent) which itwill aim at keeping in reserve—a proportion which isnot necessarily the same for different banks and whicha given bank may vary at different seasons or fromtime to time, unless the law forces uniformity onthem. Having fixed on this proportion, the bankwill then be as unwilling to see its reserves rise aboveit, since this generally means that it is doing lessprofitable business than it might, as to see them fallbelow it. Consequently it will be actively creatingdeposits by lending and investing on a smaller or ona larger scale, according as its reserves, apart fromday-to-day fluctuations, are showing a tendency todiminish or to increase.

We now perceive that there exists, not only thecheck on individual banks that they must keep step,but also a check on the banks as a whole. For if thebanks as a whole are creating deposits at a rate whichwill cause the reserves as a whole to fall too low,some bankers will find their reserve-ratios deficientand will, therefore, be compelled to take a step back-wards ; whilst if the aggregate deposits are belowtheir normal ratio to reserves, some banks will findtheir reserve-ratios excessive and will be stimulatedto take a step forwards. Thus it is the aggregate ofthe reserve-resources which determines the “pace”which is common to the banking system as a whole.

To pursue the argument to the further point ofdiscovering what determines the aggregate of thereserve-resources of the member banks would be toanticipate subsequent chapters. But the elements ofthe problem may as well be stated here.

Assuming that the Central Bank is also the note-issuing authority , the aggregate reserve-resources of