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Form P. R. 511 T O ___________ Mr. Morrill ^ ^ R O M _________Mr. Thurston REMARKS: 12/8/l;7 Would you feel disposed to ac knowledge this one for the Chair man’ s signature? I certainly do not like his alternative and, in cidentally, his memory is at fault. 0 Th e P e o p l e s Sa v i n g s B a n k C e d a r R a p i d s , Io w a December Second of The Peoples Savings* Forty-Eighth Year 1947 Mr M S Eccles, Chairman Board of Governors Federal Reserve System Washington D C Dear Mr Eccles: I have for acknowledgment your letter of November 28 and wish to advise that I have read over your statement twice. Upon referring to the financial statement of this bank, I find that on December 31, 1941 our deposits were $5,800,000.00 and our loans were $3,050,000.00. Our state ment of October 6, 1947 shows deposits of §18,570,000.00 and loans of all kinds totaled #3,^2^,000.00. /q 4/ f The merchants National Bank of this city as of December 31, % 9U ji)had deposits of $45,800,000.00 and total loans of $11,152,000.00. On October 6, 1947, their total deposits were $89,900,000.00 and their total loans were $11,450,000.00. Our two banks represent more than 85% of the total banking resources of Cedar Rapids and 1 don't think any fair minded person could be heard to say that we have unduly expanded bank loans in Cedar Rapids. I agree with you that many banks have materially expanded their loans and discounts since December, 1941, but I wonder if your plan is the best available one. If you don't now have authority to pay interest on bank deposits lodged in the Federal Reserve System, why don't you ask Congress for that authority. Would it not be possible for the System to attract sufficient funds and thereby immediately curtail general market credits while at the sametime place funds in the hands of your open market committee, so as to permit them to handle the gaerunent security market in an orderly way. I agree that under such a procedure, it might not be possible for you to pay 6% dividends to your stockholders, but my memory tells me there were some years in the past when the "Fed" was not able to do this. fl FRANK C WELCH President Deo ember 16, 1924? Mr* Hrank C. Weloh, President, the Peoples Saving* Bank, Cedar Sapid*, Iowa. Dear Ur. Welch* I an glad to learn from your letter of December 2, 19i*7» that you have read my statement to the Joint Canaittee on the Eco nomic Report on November 25* 19k7» In 'view of your evident interest, I an sending you herewith a copy of my seoond statement to that cosh* mittee which I made on Decanber 10, 19i*7, with speoial reference to the reserve proposal. We realize that sane banks nay not have individually ex panded their loans and investments, and also that fron tits point of view of idie consideration of each particular loan or investment there nay have been no reason apparent to the banker why he should question its soundness* So long as there was no over-all restriction upon the •mount of fimds that could be used for the purpose of making loan* and investments, eaeh banker would naturally be guided by his oredit judg ment. Yet in the aggregate the loans of a ll banks sight expand, as they have been doing ia fact, and the inflationary possibilities of bank loans would then become apparent* *010 purpose of the proposal for a special reserve requirement is to exert a strong restraining in fluence on bank oredit expansion as a whole. Individual bankers would then need to guide their loan policies with an eye to the restricted amount of funds remaining available, just as they would i f there were to be an increase in tie existing reserve requirement* The difference, however, between an inorease in an existing reserve requirement and the proposed speoial reserve is that the fomer would oampletely im mobilize a oertain amount of funds of eaoh member bank in the Reserve Bank, whereas the proposed speoial reserve requirement could be met by investmo&ts in short-tern Government securities which would yield a reasonable inoone to the bank. Tour suggestion that authority be obtained to pay interest cm reserve deposits is m e that has come up from time to time in the history of the Baserve System* Aside fran the ffeot that, if interest were offered merely for the purpose of attracting deposits to the Beseinre Banks cm a voluntary basis, it would not accomplish its purpose unless the rate were so high as to more than equal the return that Hr* Frank C. Welch, President -2- could be obtained from loans and investments, it is apparent that the suggestion is based upon an important siooonoeption of the func tion of reserve deposits at Federal Seserve Banks# Baey are not needed by the Reserve Banks in order to plaoe funds in the hands of the Open Market Committee, sinoe the adequaoy of the power of that committee and of "the Reserve Banks to carry out the open market pol icy of the System doss not depend upon having the use of the funds to be derived from an inorease in the reserve deposits of member banks* The fundamental purpose of reserve requirements is to influence the volume of credit extended by member banks, because the ability of member banks to expend credit is dependent upon the amount of reserves which they are required to maintain* Moreover, it should be bome in mind that, under the express terms of the law by which the Reserve Banks were chartered, any surplus funds of the Reserve Bonks, after providing for their expenses end the retirement of their oapital at par together with accrued dividends at 6 per oent, w ill belong to 1he Government in oase of liquidation of the Reserve Banks* Ihey have in the past paid .franchise taxes and they are currently paying interest to the Treasury on their Federal Reserve notes in an amount equal to 90 per oent of their net earnings after providing for ■theoe'obligations, Sinoe there would be no offsetting inorease in Inobme, the payment of interest on their deposits would be equivalent to a g ift from' the Government because it would ourtail by that amount the payments to the Treasury* Incidentally, I should like to comment on what appears freet your letter to be a misunderstanding* Member banks have reoeived the fu ll amount of dividends due them at the rate of 6 per oent per annum for the entire period of their ownership of stook in the Reserve Banks* You may have in mind that for a short period after the Reserve Banks were organised, while they were getting under way, they did not have sufficient earnings, but at an early date they had paid a ll arrears and have continued ever sinoe to make the payments currently as required by law. May 1 say in conclusion that the proposed speoial reserve requirement is regarded as only a part of any effeotlve anti-inflationary program and that the need for aotion of this kind would'be reduoed to the extent that other mare important aotions were taken* If suoh actions were taken and if voluntary aotion on the part of bankers were sufficiently ef fective to avoid further over-all expansion of bank credit, the purpose of the special reserve plan would be met* We do not regard it as a selfsufficient panaoea. We simply have not been able to formulate any better or more reasonable plan to aooonplish the purpose* Sinoereljr >011rs.
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