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Taken to President by Mr. Eccles on July 9, 1936 7 ' June 30, 1955 B&reh 4, 1956 (Xa billions) #6,890 in dea&nd deposits Inc eases la time deposits total ll MS this Increase was attributable to an lacreas® la the holdings of Goveraaent and securities of Increase in ©th@r &a«urltles of 704 Aa inflow of gold and ®ilY©r of Decline in bsnks* other loans Other factors • • • Required re«erv*3 held by aembar banks on June 50# 195S , 1^790 Excess held lay asaber banks on 50, 1955 r«s«rv©i held lap aoaber banks on March 4, 1956 «,780 £xc«ss held b^r aemb©r banks on larch 4, 3,004 The growth of deposits inere&a^d requirements by nearly ft billion, foe»ea reserves lner®seed over #2§ billion in the aaae period* this due to the inflow of gold m& silver of approximately $5.4 billion. total supply of deposit currency plus cash outside benksi June 50, 1929 June SO, 1933 lime m, 1956 26.4 19*9 $0.0 - Memorandum for the Chairman Arguments for, ^creasing reserve requirementst X* Excess reserves are beyond all present and prospective needs of businessi £• The excels has been created by gold Imports and not bj Sy@tea policies which created easy money prior to the inflow of gold. 3. It would remove the danger of inflation fron this quarter show that the Board appointed by the President is on guard to prevent inflation* 4* The very existence of this surplusage of reserves la disquieting$ removal of the surplusage should be reassuring and tend to encourage inrest^nt ifl the long term market* |« A more than adequate base for legitimate credit expansion would still remain. 6« Action would vindicate the Banking Act of 1955 which contemplated the exereis© of just such control of credit by & public body* 7* The action would in fsct place the reserves under the control of the Open Market Cooaitteei this is & flexible inBtrusttmt whereas reserve r©quireia«nts are not* 8. The longer action is delayed the more difficult it will be to act because banks will get In deeper, use up their excess reserves and action then would require liquidation with consequent deflationary effect, it present practically a U itmkB have excess reserves* Deposits mre now back to 1029 levels so that no such leeway M is represented by the abnormal excess of resei^ves is needed to replenish 10. the reserves hav© recently dropped by a billion dollars without causing a ripple* XX* the time is opportune to act as Congress is out of session* Treasury financing is out of Ike way and the stock n&rket is quiet, so th**t action would aot be misconstrued as aimed in th&t direction. — 2* • 1« It is still uncertain how such »ore f,old Bay come in or how much aay leave the country, 2« The continued existence of the vast excise of reserves has done no hara« S. Action ©ay be Misinterpreted as putting U M I br&fe«® on recovery Just as the capital aarket is reviving for new Investment and construction is getting well under 4. Banking opinion is mixed with an apparent preponderance now opposed to action; those who have been aoet sympathetic toward Administration policy, including the Morgan partners, have b@en against action — B O is David Stern. 5« The Le®3£e*Coiighlia group might be ®xp©ct«4 to attack the action as restrictive, deflationary and typical of the "aoney 6« The action contemplated will not satisfy those groups which have been cl&storing for action in the hope that it would stiffen interest ,rates. If there were any serious danger of such a result, I should tuppose action* I would not favor action under any circumstances unless assured of authority through the Open Market Executive Committee to counteract any recession of a point or more in the price of governments*