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Ill April 11, 1935« Mr* J* P* Thornton, Vico President-Cashier, The Hatioot.l Ketrls Bank, Hancock, Michigan* Dear Mr* Thornton: It wa3 kind of you to ?/rite me about rsy speech before the Ohio Bankers Association and I \?as glad to receive your consents about it* The particular paragraph of *iy speech which you referred to in your letter dealt with the monetary situation existing in 1931-3C - a period of lrxge gold exports, largo currency wit!>drairal3 for hoarding and rapid deflation. The Federal Recerve Act at that time required that Federal Reserve notes shrill be secured by s 100* collateral of gold or eligible paper placed with the Federal Reserve agents and that notes in actual circulation shell have a 40? gold reserve. Oirtng to the fact that eligible paperres..1.:hold by the reserve banks in relatively small anounts, the .majority of notes in circulation had to be backed 1005 b/ gold. In order to relieve the pressure of liquidation, the Reserve System might liave adopted a policy of purchasing government secixritiea, thereby incfeusing the reserve balances of member bnnk3* To do this, however, n-pould have further decreased the reserve banks* holdings of eligible paper because :ae:aber benkts in 3uch • period normally apply ?<.ny Fodernl Reserve i^juids they receive to reducing their indebtedness at the Federal Reserve baakfe f U l loss of eligible paper would have necessitated the rledging of gold to replace the paper which vms then held M collateral behind aote^, thus further diminishing the reserve haakff1 "Free gold11 and furtlier encroac?iing jpon the legal gold reserve requirements. Therefore, the reserve aatharitie3 were deterrejd rroa follo?dng an open mukmt poXloj -^d to stea the tide of deflation. Of course, the Glass-Steagall Act of 195°: correcte-t:' the situation b. nakiiig 0-overnaent seevxitieG eligible as collaterrl for tiie issuance of Federal Heiierve notes* H M W W T J this bill was an emergency measure which expires in 1037 and was paosed only after suc$i of the harm had been done* The proposed Banking Act of 1935 will prevent a reoccurrence of the3e difficult! Mr* J. P, Thorton - Zm by completely abolishing the specific collateral requirements and simply providing that 40^ gold reserve shall be maintained behind the Federal Reserve notes in actual circulation. I hope this brief explanation has clarified the x>i^t which you raised* Enclosed nre additionil copies of ny Veiy truly yours, 3, Kccles, Govor :or. Enclosures)
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