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June 2, 1937*

Yhe following arguments can be urged in favor of a grant of broad
discretionary power to the Board of Governors to detemlne reserve
retuiresaente against deposits heltr by or on behalf of son-rest dent aliens
in American banksi
1* Such power could be used a© s deterrent to the inflow of shortt&m capital* If reserve requirements were raised aufficiently* banks
would be relnctant to accept foreign deposit* and nsould certainly not
solicit theau
2* In «o far as capital inflows tske the form of depositsf end to
the extent to *hich reserves were required against such deposit*» the
Treasury wuld be relieved of the neceseity of increasing the public debt
end sterilis&ag incoming jgold* Pros the erA of 1933 to Kay of this year
foreign deposits increased by nearly a billion dollare*

If high reserve reeuir&aGnts were in force against foreign

deposits, ihle would minimi;**? the extent to which bank© wonld be forced
to liquidate their loans or to borrow tvcvi the Federal Keserve in the
event of a sudden withdrawal* Jrcm the end of 1939 to the en3 of 1933
foreign deposits were

do^n by $1.3 billion* In addition, other

shortness! balance® declined |1#3 billion®

wrst period of bank

deflation, that of late 1951, was associated with withdrawal of forei{tBheld deposits in this country* Corsditions have changed since then but
a large withdrawal of forelgnr-hold deposit a would still result in aone

4« Discrimination could be exercised as between a net increase
In foreign deposits arising trcm ©a inflow of capital and a net increase
arising from stock market liquidation* In the latter case reserve
requirements need not be raised and might actually be lowered or the
increased requirements might be supplied by open market purchases*
5» Ability to very reserve requirements against foreign deposits
would afford a valuable additional power to operate on the -volume c
reserves of the Sew York banks*
6* Such a grant of power would constitute the strongest grounds
for testing our authority to determine reserve requirements for nonmember banks. The m*ln non^aember bank affected would be

3 . Iforgan

and Company* Th© addition of this po^er to our easting power to
determine margin requirements for noiHas&ber banks tsould constitute
another step toward bank unification*

As against these advantages m y be contrasted the following disadvantages:
1* Raising reserve requirements against existing foreign deposits
would tend to absorb excess reserves, force liquidation or cause
borrowing from the Federal Reserve, and would therefore be restrictive
in nature*

(This disadvantage could be met by confining an Increase

la requirements to a future increase in deposits until such time as it
is desired to exarcise sorte general sne&sura of restraint)*
Hew Tort banks would be exposed to an element of uncertainty
with respoct to reserve rwquirsoents against their foreign deposits*

3* Foreigners could ©Trade sorvics charges, if any were imposed*
by ^ithdraulns cash or by investing in Treasurj* bills and acceptances*
If invested in treasury bills, there would be a tendency to convert
inactive deposits into uefcivo deposits, t*hich at times may not be
desirable on general no notary grounds*

(The withdrawal of cash

be equivalent to the imposition of 100 ^rcant reserves and the purchase
of Treasury bills could be net by the imposition of jaod^r&te transfer
taxes* In any

it is doubtful if service charges tiould be iiapoeed

and an increase in the withholding tax rate would diiaii&sh the attractiveness of Treasury biHe}#
4# If higher reserve requirements vrcre in force gainst foreign
deposits and such deposits iver© drawn down for the purpose of buying
securities^ reserve requirements of tes&s as u vrhole ^ouid be reduced
and en expansion of loans and deposits made possible*

{This could be

counteracted by opexwaorket saltjo oT socurltles or by Treasury absorption
Of excess reserves)*
If the Treasury did not sterilise #old that resulted in an
increase in foreign-held deposits on the grounds that the high reserve
requirements couatituiad the etorilisation, excess reserves *ould be
increased when, as, and if these deposits were tirmm Harm for the
purchase of securities*

{The Treasury night undertake to absorb excess

reserves arising from this source*)

A grant of power should be broadly discretionary, so as to perait
of discrimination as between ordinary working balances and other deposits*

Reserves for foreif:n-held dspositfi in nonna&mber baxOcs should take
th* for® of deposits in the Federal Reserve banks*
For the particular purpose at

it appears proper to require

high reserve requiremants against forsign~hsld t i e deposits as v^ell
as demand deposits*
The problem of enforcement should not prove unduly difficult*
The bulk of foreign-held deposits are now known to anc reported by banks*
A general notice to the effect thst all deposits bold by or on behalf
of non-resident aliens crust be reported to the banfcs, with penalties
provided for failure to report, should bo all th^t is needed* There will
be very little inducement not to report such deposits, as the service
charges, if any are imposed, ^oiild bo raall relative to tb© penalties*