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The Papers of Charles Hamlin (mss24661) 370 03 001- Hamlin, Charles S., Scrap Book — Volume 267, FRBoard Members P05.001 - Hamlin Charles S Scrap Book - Volume 267 FRBoard Members ö Form F. R. 131 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To The Files From Mr. Coe DateAugust 12, 1941 Subject: Iwo.Q After correspondence with Mrs. Hamlin (see letters of May 25 and June 4, 1941) the items attached hereto and listed below, because of their possible confidential character, were taken from Volume 267 of Mr. Hamlin's scrap book and placed in the Board's files: VOLUME 26.2 Page 19 International Gold and Capital Movements. Page 50 Letter from Mr. Goldenweiser attaching memo summarizing data re reserve requirements of member banks. a • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Division of Research •Ind. Statistics Highly Confidential October 21, 1935 INTERNATIONa GOLD AND CAPITAL MOVEMENTS The current movement of gold from Europe to the United States began early in September with small shipments from London, On September 17 the first gold arrived from France, and on September 23 shipments were received from the Netherlands. In the five weeks ending October 21 about $370,000,000 of gold arrived in the United States, and $50,000,000 more is scheduled to arrive during the next ten days. Of this $420,000,000 France has shipped $195,000,000, England $125,000,000 and the Netherlands $55,000,000, nowremainder has come largely from India and Canada. This heavy movement of gold does not reflect an excess of payments due to the United States on ordinary transactions with the world. Recent- ly this country's merchandise exports have exceeded its imports by only a small amount. Largely because of agricultural developments the surplus of exports has been cut down from an average of $32,000,000 a month for the first eight months of 1934 to less than $4,000,000 a month in 1935. This small excess, together with income from foreign investments, has been more than balanced in 1935 by tourist expenditures abroad, immigrants' remit- tances, and freight payments to foreign vessels. That gold nevertheless has flowed to the United States during the year is attributable to the heavy movement of capital to this country. The volume of gold imports has been held below the inward movement of capital by purchases of silver abroad for account of the United States Treasury. VOLUME 267 PAGE 19 2 During the crisis in the gold bloc countries last spring, the movement of capital was largely in the form of short-term balances. Speculative and flight funds were being transferred from these countries to New York. There was also a large return of New York funds from London, where the discount on forward sterling made the continued holding of balances unprofitDuring the summer forward quotations on sterling and gold bloc cur- able. rencies continued to be at a discount, and there was little return to Europe of funds that had come here in the spring crisis. There was, in fact, a considerable net inflow of short-term funds, reflecting liquidation of Garman short-term indebtedness to the United States, and a movement of balances to this country from Latin America and the Far East. In addition there was a large movement of Europe= resources into the New York security market. Purchases were mostly of American rather than foreign securities. From the end of the spring crisis until September the greater part of this inward movement of capital was offset 137 purchases of silver abroad for account of the United States Treasury, There were, however, imports of gold amounting to about $60,000,000 during July and August, half of Which was shipped from the Netherlands during the week in which the Dutch Cabinet was overturned. The movement ceased with the passing of the Cabinet crisis. Aside from the Dutch shipments Europe lost little gold to the United States during the summer months, but losses in reserves suffered by commercial banks in Paris and Amsterdam during the outward movement of gold in the spring were not restored and these centers continued to carry the indebtedness incurred at their central banks at that time. Early in September, f• a - 3- when the current gold movement began, reserves were still at the lowest level reached since the international crisis in 1931 and indebtedness was near the srring peak. The cost of this indebtedness has been lowered in France, however, by successive reductions in the rate Charged by the Bank of France. From 6 percent on June 20 the bank had lowered its rate by August 9 to 3 percent. The Netherlands Bank, after reducing its rate three times, raised it from 3 to 6 percent during the crisis in July and thereafter reduced it to 5 percent. On September 17, in the,face of the renewed gold outflow, the rate was again raised to 6 percent. In view of the substantial volume of indebtedness to the central banks, the course of central bank rates has largely determined the course of open-market rates in Paris and Amsterdam. The fact that the current movement of gold to tho United States led only the Netherlands Bank to raise its discount rate is attributable to several peculiarities in the situation. Pressure on European currencies developed toward the end of August as silver purchases abroad by the United States Treasury diminished in volume. During September there was little further activity of the Treasury in foreign markets and consequently the movement of capital had its full effect upon the movement of gold. The direct shifts in capital between countries, however, did not correspond with the flow of gold. Throughout the month funds continued to be trans- ferred to New York for Far Eastern account; and, although gold began moving in heavy volume from the Netherlands and France, the transfer of funds on Continental account was largely for Switzerland and the smaller European countries. It appears that the Japanese, Swiss, and others who moved bal- ances to this country were for the most part transferring London balances to New York. In addon the Brsh themselves were building up balances and buying securities in New York. As a result the pressure of the capital MS vement was concentrated on London. Tho Brsh Fund transferred this Sressure to Ftance by selling francs obtained through the release of gold earmarkeS in Paris. The sale of francs depressed the franc to the gold export point and nearly half the gold received in the United States has consequently come from Ftance. But it has come, not from reserves of the Bank of Ftance which have increased during the movement, but from holdings of the Brsh Fund. In addition substantial amounts of gold reaching the London bullion market from Sguth African mines, Indian hoards, and other private holdings have been transferred direct to the United States. Recently there has been some evidence that the Fund it- self has been selling gold nSndon It is in the nature of the Fund's operations, however, that they cannot affect either the reserve poson of the Bank of England or of eSndon clearing banks, for its gold transactions are automatically compensated by Treasury bills. sSurcas or sales of Hence not only has the Paris money market been unaffected by the gold flow from Fraace to the United States but the London market has also been.unaffected by the heavy outward movement of balances and gold together. The movement of balances from London to New York appears to reflect the disturbing possibes of the exAsting situation in Europe and the prominent r5e played in it by England. On the other hand there is little 4/6 • evidence that the movement of gold from the Netherlands in September was attributable to the same cause. Dutch exports of gold began on the eve of the reconvening of Parliament when there was considerable chance that the Catholic Party might withdraw its cooperation with the Government and overthrow the economy program. When the Catholic Party failed to develop a program of its own and voted for most of the Government's measures de— signed to balance the budget, the gold outflow practically ceased. Dutch shipments of gold to this country during October have been negligible, and the Netherlands Bank has been able to replace through purchases in Paris some of the gold lost in September, On October 17 it reduced its discount rate to 5 percent. Gold has continued to flow to the United States, however, from England and France. The movement has been moderated somewhat by renewed purchases of silver abroad for account a the United States Treasury. IL BOARD OF GOVERNORS z OF THE tr 6104, • FEDERAL RESERVE SYSTEM f= • A&A WAS , rn ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD February 10, 1957 Mr. Charles S. Hamlin Special Counsel Board of Governors of the Federal Reserve System Washington, D. C. Dear Mr. Hamlin: With reference to your letter of February 3, there is attached a memorandum which summarizes data regarding reserve requirements of member banks. Very truly yours, . A. Director of Re denweiser arch and Statistics VOLUME 267 PAGE 50 • form F. +31 •BOARD OF GOVERNORS OF THE • FEDERAL RESERVE SYSTEM Office Correspondence To Mr. Goldenweiser From L. M. Piser and Miss Coffey Date_February_B. 1937 Subject: d_ This memorandum refers to Mr. Hamlin's letter of February 3 regarding reserve requirements before and after the original Federal Reserve Act of 1913. The reserves required against deposits under the law have varied as follows: (Percent of deposits) Class of bank 1917_:Aug.1936:Mar.1937:May 1937 ! 1874-: 1914-: : to : to : and • 1914 • 1917 • 1936 :Feb.1937:Apr.1937: after : : Reserve against demand deposits Central reserve city banks: : Reserve city banks : Country banks 25 : 25 : 15 : : : Central reserve city banks: Reserve city banks : Country banks : 18 : 13 : 19 0: 22 3/4 : 15 : 10 : 15 : 17 1/2 : 12 : 7 : 10 0: 12 lb : 26 20 14 Reserve against time deposits __ : : -- : 5: 5: 5: 3 : 4 1/2 : 3 : 4 0: 3 : 4 03 : 5 1/4 : 5 1/4 : 5 1/4 : 6 6 6 The original Federal Reserve Act reduced total reserve requirements by about one-third. The following table shows reserves held, required re- serves, and excess reserves before and immediately after the inauguration of the Federal Reserve System. -2- NATIONAL BANK RESERVES 1 Class of bank Central reserve city banks Reserve city banks Country banks Total October 31 1914 Re.uired Excess Held December 31 1914 Held Reouired Excess 409 456 576 411 484 538 -2 -28 38 389 424 693 306 281 _371 83 143 322 1,441 1,433 8 1,506 958 548 The 1917 amendment made a flat reducticn of 5 percent for net demand deposits and 2 percent for time deposits at all banks, which on the average offset the effect of the discontinuance of vault cash as part of legal reserves. Banks located in the vicinity of Reserve banks and branches benefited somewhat, however, since they could obtain currency Quickly. Banks at a distance found it necessary to keep on hand sub- stantial amounts of vault cash, and con6equently held larger reserves than previously or than were apparently required by the law. The fol- lowing table shows the required reserves for national banks prior to the 1917 amendment and about three months after the amendment went into effect. The decrease in reserve requirements reflects principally the effect of the amendment which removed vault cash from required reserves. Since the banks still needed to hold some vault cash the reserve needs of national banks showed little change between these two dates. • • Central Reserve All reserve Country city national banks city banks banks banks Class of bank June 20, 1917 Required reserves September 11,..1 .917 Vault cash Required reserves Vault cash plus required reserves 1,468 509 443 516 492 964 1,456 102 377 479 147 282 429 243 305 548 —1 —6 —3 +6 Percent changf in: Required reserves The decline in reserve requirements of city banks relative to those of country banks became intensified during the next twelve years. Since vault cash was made a dead asset, neither earning interest nor available as reserves, pressure was placed upon member banks to reduce their vault cash as much as possible. On the averzlge member banks held about one— half as much vault cash as required reserves. had been reduced to less than one—fourth. By 1929 this proportion The most substantial reduction occurred at city banks and the smallest reduction at country banks, as is indicated in the following table: In millions of dollars Required Required reservesreserves Class of bank under Per— Vault Total under March 27, 1929 cash existing original cent Federal change law Reserve Act. Central reserve city banks 71 927 998 —23 1,298 Reserve city banks 149 911 762 1,166 —22 Country banks 297 619 916 —13 1,052 All member banks 517 3,516 2,307 2,824 —20 The 50 percent increase in reserve requirements effective on August 15, 1936, came as a result of a tremendous growth of excess reserves through large imports of gold from abroad. This action of the Board was taken to absorb the idle funds of member banks and to prevent any possible injurious expansion of credit. The growth in reserves continued in the following months and on February 1 the Board announced a further increase in reserve requirements of 33 1/3 percent. On May 1, when the full increase goes into effect, excess reserves will be reduced to about ft500,000,000. The following table shows the required reserves as of January 27, 1937, under the 1917 amendment, under present requirements, and under the requirements on March 1 and May 1, 1937. RESERVE BALANCES January 27, 1937 (In millions of dollars. Figures partly estimated) Class of bank Central reserve city banks Reserve city banks Country banks All member banks Required After an in— Held Present crease of: Prior to Aug.15,1936 16 2 3 33 1 3 percent ercent 2,766 3,161 2,371 3,378 1,581 2,147 1,741 1,989 995 1,492 11008 1.1_248 504 756 882 3,079 4,619 5,389 6,159 6,773
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