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October 23, 1935 I KEC'D IN PILES SECTION Chairs rccles , Golaenv^iser I OCT 2 1 1949 F o l l o w i n g i d a b r i e f s t a t e m e n t of t h t arguatttnt^ l o r fcrid a g a i n s t action by the System at this time to of1 set increases in excess re-serves | MULLO some arguments for aoinr i t through raising reserve requirements and for rioin^ i t through the sale or run-of: of securities! •* CTION Xi later. Easier to act now, vnen it would cauat no reetraint on trudc» than Leplyi why act at all »hen there is no apparent reaaon? now used will not be available for later 2* The bystem is out of touch with market* Ktplyi 3« Ammunition *ill continue to be sof unless action is terribly drastic. Impress public with System's readiness to fight inflation, fceplyt no evidence of inflation. 4* money. It aiay reassure investors anci transfer short money into long Reply* raising short money rates would counteract that; and would tney be re&seiired? 5» ftould be easier to ask for more authority froa Congress, if ex* isting authority will have been used. Replyt unused, 6. little difference so long as a large part of power remains Now is a good time - to offset war-scarec golci. Beply$ good argument as to promptness of action, but does not touch on question of desirability of action. 7. Government's can now be sold without harm to Government bond market. Keplyt starket. they can always be allowed to r*n off without much harm to Chairman Eccles, 8. - #2 October 23, 1935 A good tiae to experiment *ith new device* Replyt not a real experiment, if conditions do not warrant i t . ARCX&&IL, AGAISS? ACTION !•• Psychological/ important to a*vl action ilwk/l Blgftity policy« ELepl/l Statement of reasons v.calci overcome tl.at* k:* Reasons for action should be perfectly cleai ui^d not. oOphlS't Reply: 3, Absorption of MMtSSive reserves it. fciiaplfc and oleajr enou.h AMBnitlOftf which i s Ii*aittd t should be used Ibfn i t f i l l be lt«t T impressive amounts. sach action would be hard to get and mi^ht prove too defla- tionary • U* Action taken nc% sight deter recovery. Reply: i t should be nlttrij ex^l&inud a^. not t revcr^ax o: polloj bat as absorption of fortuitous additions to excess reserves* ^: or. fox rf serve a 1» 2* 3* U* 5* 6« I t does i.ot deplete our earning U M I t reaches d i r e c t l y more banks. I t la nexf $a6 inteiosting. It does not directly affect Government security aarkets. It ascustoae banks to use of this device at & time when its use will not impose a burden* It has only becoae pc^ible eince Bonking Act of I)35* Argus&nts for sale of sec ritiesx 1. 3ystea should scae tiiae reduce United Statea holdings; this is a good time* 2* It is a faaili&r device t:at will not scare banker*;. 3* It can be so used as to increase earnings bj partial replacement with long-term oblig&tiouB* I* Reserve changes should be used only as an exceptional thing for long-time readjustments. Their frequent use makes banking too uncertain* October 23, 1935 Chairman Ecolos, - #3 Points to consider JX reserves ict l£ hi If action is decided upon and is to take the form of advance 1 A re* BWT% requirements, the following should be taken into account! I 1* It appears that it would be better to have the action apply to all cities and not to reserve cities alone* The argument for exempting country banks is only political in a broad sense, because as a natter of fact these banks have aore excess reserves than the city banks and in addition have large balances due from city banks which they can withdraw* While it is true that the gold lands in New iork, the disbursements by the Government scatter the proceeds all over the country* The city banks have bought more Government issues, while the country banks have kept idle balances with their city correspondents* There is no reason at this time for the discrimination in favor of country banks* 2* The action should be moderate - not to exceed 25 percent* 3* There should be a clear statement made about the reasons for the action and the method adopted* 4* Banks should be advised that, if they have no excess reserves, the Reserve banks will stand ready to ta c over from them the necessary amount of Government obligations (the System can then allow an equivalent amount in its portfolio to ran oft)* If a bank has no Government securities and no excess reserves and no balances with a correspondent,and if the incrtr.se in reserve reqaireaents will cause it to borrow from a Reserve bank, it should be given a preferential rate - perhaps something like the open mmrket Chairman Ecclee, - H October 23, 1935 5« Before action ia taken i t would be desirable to Lave i l l tue Ee•crve banks report about how many banke in their districts Mold not have fuffleieat exceed reserves to sect th? g d W i t i and slao for m^fc b i k j fine out whether thej' have adequate b&lcuxer t&tb ^thei bu^..:^ or w holdings of Governiaent securities* •
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