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October 15, 1941 Chairman Eccles Arguments against the E. A* Goldenweiser ceiling plan. I attach a slstoi&ent of the six principal objections that I csn think of against the ceiling plan. I should appreciate it if you vould r**4 them and! tell me of any other a that oay occur to you. I have also written possible answers to these objections, My cntn conviction in the matter is that we need additional powers and should get the© in any form w© can. Attachment October It, 1941 ARGUMEKTb AGAINST THE CU^Ii.u ShhL The Plan, The ceiling plen proposes that the Board be given authority to require a higher reserve ratio for demand deposits in excess of the present amount. The authority sight be limited to a ratis of 10, 66-2/5, or 75 per cent. Arausents against the plan. 1« It would penalise growth, and consequently interfere with competition and thus remove incentive for good management. Evan though the ratio on nets deposits be limited to between 80 end 75 per cent, so long ea it is higher than the ratio on existing deposits, a bank has less incentive to compete for new deposits and gets lesa reward in the way of increase in available funds through good MkMifjMMlA* 2. The ceiling plan would be unintentionally deflationary, In addition to the intentional restraint, because if a bank on the £0 per e#nt reserve ratio loet, for example, flOO in deposits (and reserves) the banking system would have to liquidate $500, unless it borrowed, while the receipt of $100 by another bank irould m#ke possible an expension of only $200, or |150, depending on whether the requirement on nen deposits were SO per cent or 66-2/S per cent. Such a deflationary influence might at tines be undesirable. 3. The plan in operation would be vary sdld at first so long as the banks be>va & large aaottiBt of excess resarv^s, Ssoh individual bank would hay© as large t ¥oliar.e of Idle funds to invest M it now has. Bttt it would become highly restrictive as the limit af expansion was approached* For #:«i2pi@ a 66-S/B per cent requirement on new deposits would $@&n that the hillri could ttpapd by about 8 billions on the basis of present r i m t l l . It would not se#t the na®d for i&sediate restraint but might ba too restrictive later mhen expansion has progr@ss#d farttaun 4. MkHf the calling plsii th© ratio of re<|uir@d reserves to deposits would vary frora h&nK to bank and this might *sake banka feel that it Is unfair, S« The plan is (MB nd« therefore# raises aajqr questions. It would b© easier to obtain power® along familiar lines. Opening up a nen approach might delay legislation and offer opporturdties for the introduction of all kinds of •MMtatfltl - such, for exazaple, ai th€ 100 p&r eeat r@ss.rY8 plan, 6. year-end« The plan in contrary to the Board's oorasiitasnt of the last Its introduction would be herd to reconcile with the Board1s earlier position and would alienate banking support, pad particularly that of the pjliFll Advisory Council and posslblj of the Presidents of the Federal Reserve Banks, c Answers to these arguments aay b« stated as fallows* 1« Any control of expansion penalises growthj that is its purpose tad expansion VMXd IM restrained at U M very hank wh©r@ It is is evidence. The argument la much more valid against a 100 per cent requirement on new deposits, which «ould aak© such deposits entirely unusable by the bank that receives th©jsf than against & 50 to 75 per cent PtqvlMMttfcj which would diminish but not eliminate the attractiveness oi deposits. It would consequently not eliminate the incentive for attracting dspSiitts by good jaanageatnt or otherwise. £. This argument w&3 auch aore valid when s 100 per cent reserve for new deposit© was proposed to continue sore or less indefinstely. It was then intended to rseet this situation by raallottlng ceilings. The argument also applies only to teaks that have no excess reserves o£ which there &r© fti present very fen. With less than 100 per cent reserves on new deposits there is not aucfc in the argument, •specially if the plan is to be in effect only during the emergency, when restraint of expansion is what ii* desired. A recent survey shows that in the past three years only 500 banks out of 6,000 lost ciesand deposits &mL the losses aggregated only 150,000,000, &s against a total imUTSSJt of |lf #000^000,000. In & period of expansion there I® not auch in thia arguiaant, and in a period oi* contraction the higher requirements would be rescinded. 8* It is true that the plan would beeoese progressively sore restrictive as expansion proceeded farther and the ultimate limit case nearer. But is that not whet we want? Is it not best to let banks kr.orc that they have e leeway but that there is &n ultis&te iirrdt on total expansion? Isn't this true of any plan, except that this plan brings th« lisslt ttMVtPf M d f therefore, is more effective against inflation? 4. The survey referred to above sho«s that in the past three years the rat** of growth of deposits at different banks has not varied A great deal. In isueb cirorasstg-nees the average ratio for the differ- ent banks would not vary either. In any case the over-adl ratio is an academic concept. All banks will b© subject to the ssae reserve reQillfff iltl tap to the ceiling and to the same reserve requirements above the ceiling, The total ratio need not and probably would not be computed . 5. Against the novelty argument nothing MMB be said, except that isany new things have to b# done under new conditions* Crank e^end- s^nts can be attached to any banking legislation. It is a question whether powers along the old fasiliar lines can b© obtained more easily. There seems to be very strong opposition to tlMM i?i the Treasury on the ground that they would immediately absorb existing excess reserves whlsfa the Treasury views ©s its cushion agaimet possible difficulty in placing issues with non-banking investors. Ihat the attitude of Congress will be ia herd to aay, 6. The Board's commitment is a policy ©atter for the Board to consider. It aay feel that it is under obligation to repeat its previous request for power and in the same form. If it should find it posslble to obtain Administration support for W i H authority, It bi best to do thft. But If that Is not possible, the Board mightfeel fre® to ask for power? in • modified fora, for that is all the eellinf p3*8 represents. IK sdditior. to these M M M r i to the trgiMMttti against th© ceiling plan this additional point should be Mtof after the powers bren ofcteined it Will bt BttOb easier to get prompt action and cence of tlw Tf •••UIj if the u@# of the powers will place mo tank under the necessity of IlQUidating its iMtli or bsrrowitig* If prompt action is wanted it is much &or® likely to 'be t&fcen under the celling pltn than under the ratio plan.
@FedFRASER