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RAYsth

8-3-48

Restoration of the previous r a t i o of required gold c e r t i f i c a t e
reserves held by Federal Reserve Banks of 40 per cent against Federal
Reserve notes and 35 per cent against Federal Reserve Bank deposits has
been proposed to your Committee as an a n t i - i n f l a t i o n a r y measure*

This

proposal would make no contribution whatever to the f i g h t against
inflation*

I t would not s t e r i l i z e new acquisitions of gold nor would i t

give the Federal Reserve System any a d d i t i o n a l powers to curb i n f l a t i o n a r y
expansion of bank c r e d i t *
The present reserve requirements of the Federal Reserve Banks
stand a t a uniform l e v e l of 25 per cent*

Congress established them a t

t h i s l e v e l i n consequence of the wartime expansion of currency and Reserve
Bank c r e d i t *

The previous requirements of 40 per cent against notes and

35 per cant against deposits, incorporated i n the Federal Reserve Act of 1913,
were l a r g e l y a r b i t r a r y *
To restore the prewar l e v e l s now would only e n t a i l needless
operating d i f f i c u l t i e s f o r some of the Federal Reserve Banks*

The combined

Banks a t present hold gold c e r t i f i c a t e s amounting to 50*6 per cent of t h e i r
t o t a l note and deposit l i a b i l i t i e s y or approximately 6 b i l l i o n d o l l a r s i n
excess of the proposed higher requirements.

Thus, they would not p r o h i b i t

Reserve Banks from providing member banks w i t h additional funds on which
to base a considerable f a r t h e r expansion of bank c r e d i t *
I f Reserve Banks were t o b e prevented by t h i s device from issuing
currency and member banks were thus unable t o supply currency to t h e i r
customers, i t would p r e c i p i t a t e the kind of money panic which the Federal
Reserve System was created to prevent*

Likewise, i f the Federal Reserve

System, because of an a r t i f i c i a l l i m i t a t i o n , were unable to supply c r e d i t



-

2 -

t o member banks, the r e s u l t s could w e l l be demoralizing i n the Government bond market *
Although the Reserve System as a whole has gold c e r t i f i c a t e
reserves i n excess of the proposed higher requirement, there i s considerable v a r i a t i o n among i n d i v i d u a l Federal Reserve Banks*
requirement applies to each of the twelve Reserve Banks•

The

As a p r a c t i c a l

operating matter, these Banks cannot permit the r a t i o s t o go down to the
vanishing point and hence require a working margin of at l e a s t 3 per centage
points•

I f the higher requirement were restored, some Federal Reserve

Banks would have a substantial deficiency, others would be below or close
to the necessary operating margin, while s t i l l others would have a large
excess•

Reserve Banks w i t h a deficiency would be obliged to s e l l some of

t h e i r Government s e c u r i t i e s to or to borrow from Reserve Banks which had an
excess*

The reserve position of the i n d i v i d u a l Federal Reserve Banks i s

constantly changing w i t h seasonal and other movements of funds i n the
economy® Therefore, the proposal would e n t a i l operating d i f f i c u l t i e s
and constant inconvenience without accomplishing any useful purpose •
Expansion or contraction of Reserve Bank c r e d i t should be
determined by the needs of the economy and not by the amount of gold
c e r t i f i c a t e s which Reserve Banks happen to have, nhich i n t u r n i s contingent
upon i n t e r n a t i o n a l movements of gold.

Likewise, i n a b i l i t y to supply

c r e d i t to member banks would compel the System t o withdraw support from
the Government securities market and perhaps even to s e l l securities which
i t now holds at whatever prices or y i e l d s they would bring i n the market*




- 3 -

The Reserve Banks do not control the amount o f currency which the public
wishes to hold*

I t i s the depositors of the banks and the r e c i p i e n t s

of checks who determine the volume of outstanding currency*

Thycreate

the demand and member banks come to t h e i r respective Federal Reserve
Banks to obtain such amounts of currency as t h e i r depositors or others
presenting checks may desire t o have*
I f the Reserve System were unable to meet demands f o r currency
i t would jeopardize public confidence and might lead to runs on banks and
to hoarding of currency, such as occurred i n 1931#
I t i s already w i t h i n the System1 s power t o invoke such drastic
measures*

The System has r e j e c t e d such a course because of the possible

disastrous e f f e c t s on the e n t i r e f i n a n c i a l s i t u a t i o n of the country*
The proposal would appear to be designed t o force the Federal Reserve
System to abandon support of the Government securities market and thus
bring about sharp increases i n i n t e r e s t r a t e s *

I t i s inconceivable t h a t

Congress or the public desire e i t h e r to create a run on the currency or
collapse of the bond market*

I f t h a t were the w i l l of the m a j o r i t y ,

should be done openly and f r a n k l y and not by i n d i r e c t i o n *




it

EXCESS GOLD CERTIFICATE RESERVES OVER REQUIREMENTS
OF 35 PER CENT SOLD CERTIFICATES AGAINST
DEPOSITS AND 1+0 PER CENTISAINS? FEDERAL RESERVE NOTES
July 31, 19U8
( l a thousands of d o l l a r s )

Total
required
reserves
135* and m > )

Excess of gold
certificate
reserves

894,530

-16,063

4,550,294

2,534,050

997,087

75,232

1,362,301

152,012

Richmond

960,567

112,849

Atlanta

830,1)45

243,526

Chicago

2,889,077

1,521,868

St* Louis

699,706

-60,623

Minneapolis

439,810

51,992

Kansas C i t y

708,i|i+9

154,123

Dallas

579,575

-1,472

1,777,952

949,514

16,689,793

5,717,008

Boston
New York
Philadelphia
Cleveland

San Francisco




Total

9/3/I48

ACTUAL RESERVES NECESSARY ALLOWING A 3 PER CENT OPERATING MARGIN
OVER 35 PER CENT AND i|0 PER CENT GOLD CERTIFICATE RESERVE
REQUIREMENTS AGAINST DEPOSITS AND NOTES, RESPECTIVELY
July 31, 19U8
( I n thousands of d o l l a r s )
Total reserves necessary
To t a l
i noluding 3% margin
inoluding
(38$
(38JS and k3%)

Bzoess of gold o e r t i f i e a t e s
available f o r purchase of
Government s e c u r iittiie s
secur es

965,105

-86,638

New York

4,916,822

2,167,522

Philadelphia

1,075,579

-3,260

CIereland

1,470,104

1*4,209

Richmond

1,036,018

37,398

Atlanta

896,007

177,964

Chicago

3,117,252

1,293,693

S t . Louis

755,050

-115.967

Minneapolis

474,885

16,917

Kansas C i t y

765,206

97,366

Dallas

626,667

-48,564

1,919,777

807,689

18,018,472

4,61)2,758

Boston

San Francisoo




Total

8/3A8

t o t a l of
positive
figures