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November 5, 1935.

On November

the Board of Governors of the Federal Reserve

System issued a regulation increasing by 25 percent, effective on
« the reouirements as to reserves to be maintained by member
banks against demand and time deposits. The Board's action in this
matter was under the authority conferred by the Banking Act of 1955
which amended paragraph 6 of section 19 of the Federal Reserve Act,
to provide that, upon the affirmative vote of not less than four of
its members, the Board, in order to prevent injurious credit expansion
or contraction, may change, within certain limits, the requirements
as to reserves to be maintained against deposits by member banks.
The recent increase in member bank reserves has carried them to
a level at which they exceed legal requirements by the unprecedented
amount of $5,000,000,000. These excess reserves, if utilized in full,
could support an amount of bank credit more than double the existing
volume and far greater than can be soundly employed, even with full
business recovery. Such a growth of bank credit would constitute an
injurious credit expansion.
The increase in reserve requirements should not cause an advance
of money rates or tighten credit conditions and should not act as
a restraint on the lending policies of banks. It is not, therefore,
a reversal of the System1s policy of encouraging business recovery by
maintaining easy conditions in the money market. After meeting the
increased requirements the member banks, in the aggregate, will still

have $2,300,000,000 of exfiess reserves, and these reserves are so
vri.dely held that all but a very few member banks are in a position to
meet the increase in requirements by the use of their balances with
the Reserve bank or with correspondents.
In view of the abundance of reserves in all classes of banks, the
Board has made the increase in reserve requirements applicable to all
member banks, including country banks as well as banks in central
reserve cities and in reserve cities, A survey made by the Board shows
that country banks have a larger amount of excess reserves in proportion
to their deposits than have reserve city banks and have, in addition,
large balances with their city correspondents on which such country
banks a« do not have sufficient reserves with the Reserve banks can
draw for the purpose of meeting the increased requirements, A large part
of the existing excess reserves is, in fact, directly or indirectly,
owned by country banks which are consequently in fully as good a position
as city banks to meet the increase in reserve requirements without curtailing their loans or investments.
The increase of reserve requirements prescribed by the Board will
absorb the reserves created in recent months largely by an inflow of
gold not arising out of ordinary transactions in international trade
and finance, but caused by a movement of funds from foreign countries
due to disturbed political and economic conditions. It would not be good
policy to have reserves arising from this cause incorporated in our
credit base. An advance of 25 percent in requirements at this time
will have the effect of restoring excess reserves to the level of last
spring, -when the recent flight of capital from abroad began.