View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Form N"o. 131

Office Correspondence


Governor Eccles
Mr^Goldenweiser and Jtr^ Ch&grie



December 20 1 193A

Admini strati on of .Unemployment
Insurance Reserve Funds


The accompanying list of proposals was worked out *by Ifessrs. Viner,
Riefler, Hansen, Powell and Sweezy. It is not in any way official and
has not been passed upon by any committee* Mr. Viner proposes to see
the Secretary this morning in order to ascertain whether he is agreeable
to the administration of the reserve funds being undertaken by the Federal Reserve Board.
In our judgment it would be better for the Federal Reserve banks not
to have the responsibility for handling the insurance reserve* Our proposal would be that the handling of that reserve be left to the Secretary
of the Treasury who would be expected to keep it invested in United States
Government obligations or otherwise.
So long as the Secretary of the Treasury keeps the funds invested in
the market, changes in the fund arising from growth during periods of
prosperity and from the necessity of making payments in times of unemployment would in no way conflict with our open-market policy. While it is
true that during a period of business decline more Government securities
would be coming on the market under this plan, it is at just such times
that the Reserve banks would most likely be buying securities, so that the
Government bond market would not be unfavorably affected.
Our chief reason for suggesting that the Secretary of the Treasury
handle the insurance reserve is that the payment of interest at not less
than 3 per cent by the Federal Reserve banks would create unnecessary
difficulties. As the proposal reads at the present time it does not make

Governor Eccles, - #2

December 20, 1934-

it clear whether the Government guaranty includes the member banks1
dividends* If it does not, it would arouse a good deal of opposition
on the part of the banks or else necessitate the use of the Federal
Eeserve banks1 surplus in years when net earnings, after payment of
interest on the insurance,reserve, will not be sufficient to pay the
dividends. On the other hand, if the Government guarantees dividends
as well as expenses of the Reserve banks, then it would seem that a
6 per cent return to member banks would be excessive•
The necessity for the Federal Eeserve System to depend on Government appropriations to meet deficits arising from the need of paying
interest on these funds would be highly undesirable because it would
bring the Federal Reserve System to Congress periodically and create
a lot of opportunity for meddling with the System•
As an alternative, we propose that the Federal Reserve banks take
charge of the insurance reserves, with the under standing that they will
keep them invested and that they will credit the fund with such earnings
as they actually make on these investments• If, however, it is felt desirable to guaranteea minimum return for the funds, then let the Government undertake to make up to the Reserve banks the difference between
what the investments actually earn and the guaranteed miniiaum, which may
be 3 per cent or any other figure. This alternative would avoid the complications about member bank dividends and about the necessity of the
Federal Reserve asking for appropriations from Congress* Such appropriations as will be necessary will be entirely in pursuance of the Government's guaranty of a minimum return to the insurance reserve on its investments*

Governor Ecdes, - #3

December 20, 1934

It is, of course, impossible to estimate now the probable magnitude
of the reserve fxxnds. Mr. Sweezy tells us, however, that if the insurance
plan had started in 1922 with the proposed rates the reserve fund would
have amounted to around |2,000,000,000 in 1929*

(1) The funds of each state shall be deposited with the Federal Reserve
bank of the district in which the state capital is located*
(2) The insurance reserve deposits shall be managed by the authorities
of the Federal Reserve System as an Integral part of the means at their disposal for carrying out their general function of credit control and business
stabilization, with authority to Invest or sterilize these funds*

(See ap-

pendix A)
(3) la investing the insurance reserve deposits, the Federal Reserve
authorities shall be restricted to such categories of earning assets as the
Federal Eeserve banks are otherwise permitted to hold*

(See appendix B)

(H) She Federal Eeserve banks shall pay interest on the -unemployment
Insurance reserve deposits at the average rate paid by the United States
Treasury on its outstanding interest-bearing obligations, provided, however,
that the rate paid on these deposits shall not be less than three per cent*
Interest shall be paid monthly on dally average balances, and the rate, If
above three per cent, shall be that computed by the Treasury on a daily
average basis for Treasury obligations outstanding during the preceding month.
(5) Whenever the expense and realized losses of any Federal Reserve
bank, including interest on unemployment insurance reserve deposits, exceed
its Income during any year so that a charge against surplus mast "be made*
the United States Treasury shall reimburse the Federal Reserve bank for such
charges against its surplus account*

(See appendix C)

(6) The Federal Seserve banks shall not be required to carry any
minimum cash reserve against unemployment insurance reserve deposits. (See
appendix D)

November 13,