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or an amount equal to 15 percent of their total deposits, whichever is smaller. This amount is to be invested in Government or Governmentguaranteed securities for deposit at the Bank of Italy, or held in an interest-bearing blocked account at the Bank of Italy or the Treasury. Furthermore, 40 percent of any increase in a bank's deposits after October 1, 1947, is to be set aside in a similar fashion until the bank's total reserves reach 25 percent of its total deposits. From then on the percentage of any increase that has to be set aside falls to 25 percent so that eventually this ratio becomes a uniform requirement for all banks.

France (October 1948).-Banks are required to keep their minimum holdings of Government securities at 95 percent of the volume held on September 30, 1948. Twenty percent of any new deposits have to be invested in Government securities. In case of a decrease in deposits from the level of September 30, 1948, holdings of securities can be decreased by no more than 80 percent of the decrease in deposits.

Sweden (October 1950).-Banks are required to maintain a cash and Government security reserve equal to 6 to 10 percent (depending upon the size of the bank) of demand and term liabilities with the exception of savings deposits. Of the total reserve, 25 percent must be held as demand deposits with the central bank, and an additional 15 percent as demand deposits or as vault cash and other cash items. Netherlands (January 1951).—Banks are required to hold a minimum reserve in Treasury bills and cash items amounting to 40 percent of demand liabilities. In addition, banks are given the following option:

(a) They may maintain a reserve of Treasury bills or cash at 90 percent of the average of their holdings as of June 30, 1949, and December 31, 1949. A similar reserve, to the extent of 67 percent, has to be established against increases in deposits.

(b) Alternatively, banks may maintain the volume of private credits at no more than 105 percent of the level reached as of September 30, 1950.

Austria (May 1951).—Banks entered into a voluntary agreement with the Austrian National Bank to maintain reserves in cash or Government securities amounting to 25 percent of deposits until December 31, 1951. After that date the reserve ratio will increase to 30 percent, with a minimum of one-third of the total reserve in the form of cash items.

H. THE BANKING STRUCTURE

54. Trace the principal changes in the functions and activities of commercial banks since the establishment of the Federal Reserve System, with special emphasis on the periods since the middle thirties. Cover changes in the various types of assets and liabilities.

Since the establishment of the Federal Reserve System, as before the System's existence, the primary functions of commercial banks in the nation's economy have been to:

(1) Serve as a depositary for the public's liquid resources and savings, and through the credit-granting process provide expansion of the country's means of payment;

(2) Provide a mechanism by which these resources may be transferred readily as between depositors and converted at the convenience of the depositor into currency and coin;

(3) Make credits available to the various sectors of the economy in such amounts as may be consistent with the current needs of the economy and a sound banking position, and through this process facilitate expansion of employment and output;

(4) Provide various service functions for the economy, including records of depositors' disbursements; collection of notes, coupons, and similar items; domestic and foreign transfers of funds; acting in various fiduciary capacities; acting as fiscal agents for Federal, State, and local governments; and providing similar agency services for others.

In performing the functions listed above, the activities of banks have undergone important changes. In general, these changes have been in the direction of (a) providing depositary and savings facilities to a growing proportion of the nation's citizens; (b) steadily improving the money transfer and conversion mechanism that commercial banks provide; (c) significantly broadening commercial bank lending activities to accommodate various classes of private and governmental borrowers and to provide credits on terms more closely tailored to the needs of borrowers; and (d) enlarging materially the scope of commercial bank service activities. Commercial banking today is certainly a more integral part of the financial life of the average American citizen than it was three and a half decades ago. A much larger segment of the population now makes regular use of banking facilities, through the ownership of a deposit account, through the cashing of a wage or salary check, through a consumer, mortgage or business loan, or through some form of service rendered by a commercial bank.

The various changes in commercial banking activities are traced in some detail in succeeding sections of this reply. Principal changes in the assets and liabilities of commercial banks from 1914 through mid-1951 are shown on Charts 17 and 18. The mechanics of the money supplying activities of banks are discussed elsewhere, especially in the reply to Question F-28.

Commercial Banks as Depositaries

Commercial banks provide an indispensable service to the economy as the most convenient depositaries for the liquid resources and savings of the public. Savings placed with commercial banks may take the form of demand or time deposits.81 Such savings are then loaned out or invested and in this way are used to increase the nation's output and employment. Between 1920 and 1951, as may be seen in Table XIII, total deposits at commercial banks rose by about 115 billion dollars, or from 37 to 152 billion. This growth included increases of 75 billion in demand deposits, 25 billion in time deposits, and 14 billion in interbank and Government deposits.

81 In general terms, demand deposits under Federal law and regulation comprise all deposits payable within 30 days or subject to less than 30 days' notice of intended withdrawal; time deposits comprise all other deposits.

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TABLE XIII.—Deposits of all commercial banks on selected dates

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Data are as of end of June. For years prior to 1951, they are taken from a preliminary tabulation of a revised series of banking statistics.

Demand deposits

Demand deposits of individuals and business firms serve primarily as working balances or checking accounts available for making payments for goods and services. To a considerable though unknown extent, however, they also represent savings being held indefinitely in this form or for investment whenever attractive opportunities arise. For the most part, as explained in the reply to Question F-28, demand deposits are created by the extension of bank credit. The newly created deposits may be converted into time deposits or used to discharge liabilities, to purchase assets, or to defray current expenditures.

The use of checks or drafts on demand deposits in making payment for goods and services has grown greatly in the United States over the years as the nation has grown and become more industrialized and as its financial transactions have become more complex. In considerable part, the general use of checks results from the fact that they provide a very convenient, inexpensive, and safe means of payment, for both out-of-town and local transactions. Although precise data are not available, Federal Reserve studies have indicated that more than 85 percent of all money transactions in the nation are settled by check. Surveys of consumer finances show that 41 percent of all spending units had checking accounts in 1951 compared with 34 percent in 1946. In recent years banks have provided checking services to an increasing proportion of individuals in the lower income groups by making available to them a variety of "no minimum balance" checking accounts. Depositors with such accounts generally pay a small charge for each check drawn rather than a fixed service charge when their balances drop below a specified minimum, as is the case in regular checking accounts.

Since the volume of demand deposits is directly responsive to the extension and contraction of bank credit, changes therein, as shown in Chart 18, tend to be in the same direction as changes in loans and investments. In times of Government deficit financing through the banking system, changes in bank holdings of Government securities may dominate changes in the volume of demand deposits held by

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