The maintenance of the government’s independent treasury contributed to the difficulties by causing the irregular withdrawal of money from circulation and thus depleting bank reserves in periods of excessive government revenues and by returning these funds into circulation only in periods of deficient revenues.  Efforts to modify this system by a partial distribution of the public moneys among national banks had resulted, it was charged, in discrimination and favoritism in the treatment of different banks and of different sections of the country.

Sec. 6. #Inelasticity of credit#.  Our banks, considered both separately and collectively, were unable to increase their loaning powers quickly and easily to respond to business needs.  The need of greater elasticity of credit was felt in the more or less regular seasonal variations within the year, and in the more irregular variations in cycles of years from periods of prosperity to those of panic and depression in business.  The inelasticity was necessitated by illogical federal and state laws restricting absolutely the further extension of credit when the reserves fell below the percentage of deposits (15 or 25 per cent) fixed by law.  Reserves thus could not legally be used to meet demands for cash payments at the very time when most needed.  This feature has been likened to the rule of the liveryman who always refused to allow the last horse to leave his stable so that he would never be without a horse when a customer called for one.  The refusal of credit by the banks at such times when they still had large amounts of cash in their vaults increased the need and eagerness of the public to draw from the bank all the cash they could, and often precipitated the insolvency of the banks.  Clearly some means were needed to enable the loaning power of the individual banks to be increased at such times, so that no customer with good commercial paper need fear to be refused a loan, even tho the rate of interest might have to be somewhat higher for a few days or weeks than the normal rate.

Our bond-secured bank notes lacked almost entirely the quality of elasticity needed to meet these changing business needs.[6] Their value being dependent primarily upon the amount and price of United States bonds, they might be most numerous just when least needed as a part of our circulating medium.

Sec. 7. #Periodical local congestion of funds#.  In times of general confidence each bank finds it profitable, and is tempted, to extend its credit to the extreme limit permitted by the law governing the proportion of reserves to deposits.  Of the 15 per cent reserves required in most banks, three-fifths (9 per cent) might be kept in banks in reserve cities, and of the 25 per cent in reserve city banks, 12-1/2 per cent might be kept in central reserve cities, where it counted as part of the depositing banks’ legal reserves, was a fund upon which domestic exchanges could be drawn, and usually earned a small rate of interest (usually 2 per cent).  Very large reserves were kept in New York city where they could be loaned “on call,” and the largest use for call loans was in stock-exchange speculation.  Thus every period of prosperity encouraged an unhealthy distribution of reserves, gave an unhealthy stimulus to rising prices, and “promoted dangerous speculation.”