But even if Indian banks had succeeded in making use of credit in a form other than that of notes, they could not have eased the money market to the same extent as the English banks have been able to do. One of the incidents of banking consists in the liability of banks to pay cash on demand. If all their deposits were received in cash this liability would involve no risk. As a matter of fact, a large part of their deposits consists of bills which they make it their business to undertake to pay in cash. One of the first things, therefore, that a banker has to look to is the proportion which his cash deposits bear to his credit deposits. Now, this proportion may be adversely affected either by an increase in his credit deposits or by diminution in his cash deposits. In either case his ability to pay cash is _pro tanto_ weakened by lowering the ratio of his total cash to his total liabilities. Against an undue expansion of credit a banker may effectually guard himself. But, notwithstanding the development of the cheque system, there is always lurking the possibility of withdrawal of some cash at some time or other. A banker must, therefore, provide by keeping on hand a certain minimum reserve. How large should be the reserve depends upon what the possibilities for the withdrawal of cash are. The point is that to the extent of the reserve the power of the bank to grant credit is curtailed. If the reserve of the bank is already at the minimum it must stop discounting or must strengthen its position by recovering the cash withdrawn from its coffers. Now it is obvious that if the amount of money withdrawn is kept in the current of business where the banks can get at it, they of course can strengthen their position again immediately, and not only always keep themselves well away from the danger line of minimum reserve, but be always prepared to meet the needs of the money market. What was the position of the Indian banks from this point of view? Owing to the absence of a cheque system the [pg 66] possibilities for the withdrawal of cash are great, and the reserve was required to be large in consequence thereof. A large part of their funds being thus held for a reserve, their resources for discounting were small. But there was a further weakening of their position as lenders by reason of the fact that the cash withdrawn did not speedily return to them. The result was the Indian banks were obliged to curtail their discounts to a far greater extent than were the English banks, in order to preserve a due proportion between their cash and their credits. The absence of branch banking was an important desideratum in this regard. But, even if there were branch banks, the money withdrawn could not have returned, for it was not left in the current channels of business. It was locked up in Government treasuries whose operations were independent of the banking transactions of the country. Of course there could be nothing inherently wrong in