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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
m a n ’ signature?
s

I certainly do

not like his alternative and, in­
cidentally, his memory is at fault.




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T h e P e o p l e s S a v in 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 m seoond statement to that cosh*
y
mittee which I m
ade on Decanber 10, 19i*7, with speoial reference to
the reserve proposal.
W realize that sane banks nay not have individually ex­
e
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 becom apparent* *00 purpose of the proposal
e
1
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 m ber bank in the Reserve
em
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 com up from time to time in the
e
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 O
pen Market Committee, sinoe the adequaoy of the power of that
committee and of "th Reserve Banks to carry out the open market pol­
e
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 m ber banks*
em
The fundamental purpose of reserve requirements is to influence the
volume of credit extended by m ber banks, because the ability of
em
m ber banks to expend credit is dependent upon the am
em
ount 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 am
ount equal to 90 per oent of their net earnings after providing
for ■theoe'obligations, Sinoe there would be no offsetting inorease in
Inobme, the paym
ent of interest on their deposits would be equivalent to
a g ift from the Government because it would ourtail by that am
'
ount the
payments to the Treasury*
Incidentally, I should like to com ent on what appears freet
m
your letter to be a misunderstanding* M ber banks have reoeived the
em
fu ll am
ount of dividends due them at the rate of 6 per oent per an um
n
for the entire period of their ownership of stook in the Reserve Banks*
You m have in mind that for a short period after the Reserve Banks
ay
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 m
ake 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 > 11rs.
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