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i&S 388
CONFIDENTIAL
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Division of Research and Statistics
October 3, 194-1
PROGRAM FOR DEALING WITH BANK RESERVES
The following memorandum presents in summary form the results
of informal discussions among staff members dealing with proposals for
increasing reserve requirements*
The various methods described in the
memorandum are given for purposes of discussion and should not be considered as recommendations#
Objectives
The following objectives were considered to be basic to a satisfactory handling of the problem:
1#
Restraint on the expansion of bank deposits.
2. Adoption of a method of restraint that would
not cause banks to liquidate their holdings
of United States Government securities*
3#
Provision of adequate bank funds to finance
defense loans and to serve as a reservoir for
such bank purchases of Government securities
as may become necessary.
Gradual bridging of the gap between the Federal
Reserve System and the money market to a point
where adjustments in the credit situation can
be made through open~market operations*
Methods
It should be assumed that any additional authority over reserve
requirements should make all commercial banks, or at least all insured
commercial banks* whether they are members of the System or not, subject
to the same reserve requirements*
Reduction in excess reserves for the purposes stated above can
be achieved by different methods, three of which are outlined in the following paragraphs:
1* An increase in the Board's powers to raise reserve
requirements on the existing ratio basis# This
method would immediately absorb some additional
excess reserves. It should be coupled with some
provision by -which banks that do not have enough
reserves to meet the increase will be relieved of
penalties on deficiencies and of other restrictions
until such time as they will have been able to build
up the reserves to the necessary level.
2. Authority for the Board to impose higher reserve
requirements on additional deposits above the now
existing level« The requirement could be 50 per
Confidential
- 2 -
cent, 66 2/3 per cent, 100 per cent, or any
other percentage that the authorities may determine. The ratio could also vary for the
different groups of banks. For example, ratios
of 60 per cent for New York City, 50 per cent
for other reserve cities, and 40 per cent for
country banks, or some modification of those
figures, might be adopted. The higher ratios
for additional deposits would remain in force
only so long as there is danger of inflation.
This plan v/ould not immediately absorb any
existing excess reserves, but would limit
potential credit expansion to the extent of
excess reserves multiplied by 2, 1 1/2, or
1 depending on what ratio is selected.
3# A combination of these two methods, by which
higher requirements would be prescribed for
additional deposits but there would be a proviso that no bank would be required to hold
aggregate reserves in excess of a predetermined
percentage of its deposits, including old deposits subject to the old ratio and new deposits
subject to the new ratio.
Technical improvements
Modifications of the present method of computing reserves and
of items to be included in reserves were considered with a view to establishing a system that is more rational and realistic and that would
permit the adoption of more nearly uniform reserve requirements for the
various classes of banks. The two modifications that were considered
were:
1. To permit banks to count cash in vault as
reserves.
This would have the merit of reducing the
existing disadvantage of banks that are not
located close to Federal Reserve Banks or
branches and therefore have to carry larger
amounts of vault cash.
Nonmember banks can now count vault cash as
reserves under State laws.
2. To adopt a high reserve requirement on bankers*
demand balances — the ratio to be uniform for
the country as a whole — and to couple that
with authority for banks to count as a part
of their reserves a proportion of their demand
balances with correspondents equivalent to the
reserve requirement on such balances.
Under this system, balances held with correspondents would be reserves to the same amount
that the bank with which they are held is re^quired to maintain reserves against them.
This proposal would have the advantage of making
compliance with reserve requirements more acceptable
for nonmember banks which hold a substantial part
of their reserves with their correspondents.
It would eliminate the effect on the banking system!s
reserve position of movements of interbank balances.
It would also diminish the inducement for country banks
to withdraw their balances in order to meet increased
requirements and would make city banks less vulnerable
whenever withdrawals do occur.
Confidential
3 -
If these technical changes are adopted, new ratios of required
reserves would have to be worked out. In working out these new ratios
the objective should be that these ratios when first applied should
not materially change the existing volume of excess reserves or its
distribution by classes of banks. This can be done and at the same
time differences in the ratios required for the different classes of
banks can be eliminated or reduced»
Results of various methods
Attached tables show estimates of the effects of the various
proposals on the reserve position of different groups of banks. The
first table shows the amount of excess reserves, the credit expansion
ratio, and the amount of potential credit expansion for each of the
various methods*
The second table shows the distribution of excess re-
serves by classes of banks for each of the methods of canputing reserve
requirements, except those involving higher requirements on increases
in deposits. The third and fourth tables show, by classes of banks,
the process of computing required and excess reserves under various combinations of technical changes. The more important results shown by the
tables may be summarized as follows:
1. An extension of the November 1 reserve requirements to include nomonber insured commercial
banks, without any of the proposed technical
changes, would reduce excess reserves from about
$4 billion to about $3»5 billion. The multiple
of demand deposit expansion, after the increase,
would be about 4.7 to 1, giving a potential credit
expansion of about $17 billion* (Table 1, item A-2)
Changes in the distribution of deposits among the
various classes of banks would depend largely upon
shifts in interbank balances caused by bringing
in nonmember banksj it is assumed that these would
be proportional to the present distribution of such
balances. (Table 2, item A-2 and footnote l/)
2. If the proposed technical improvements are adopted,
excess reserves would vary from $2.9 billion to
$4.4 billion, depending upon the new ratios that
would be established. The multiple of expansion of
demand deposits other than interbank would be 4 to
1 in the first case and about 4.6 to 1 in the second,
and potential credit expansion would vary from about
$11 billion to $20 billion. (Table 1, items C~1 and
C-2)
3« Under the proposed technical changes, the requirements shown in item C-2-a (40 per cent on interbank
balances, 25 per cent on other demand deposits and
6 per cent on time deposits) would involve least
change in total volume and in distribution of excess reserves. The total amount of excess reserves
would be $3»l'billion and potential credit expansion
$12.6 billion.
Confidential
- 4 -
City banks would have somewhat smaller excess reserves, but their interbank deposits would be less
liable to withdrawal; country banks would have somewhat larger excess reserves but would have a smaller
amount of free balances with correspondents. (Table
2, item C-2-aj also Tables 3 and A)
To further reduce potential credit expansion without technical changes, a uniform increase in reserve
percentages of about 15 per cent above November 1
requirements applied to all insured banks would reduce excess reserves to $2,1 billion and potential
credit expansion to $8.4 billion* (Tables 1 and 2,
item B-l)
5. Starting frcm the same conditions, a reserve requirement of 50 per cent on increases in demand deposits
would permit a credit expansion of $7 billion on
the basis of $3« 5 billion of excess reserves. (Table
1, item B-3)
Practically the same results on the average would be
obtained by having different requirements on additional deposits for each class of banks, provided
that the higher requirements are such as to average
50 per cent, as is assumed in the example. (Table 1,
item B-4)
With a 100 per cent requirement on additional deposits
potential credit expansion would be limited to $3*5
billion, the amount of excess reserves at the beginning*
(Table 1, item B-2)
6. Starting with the set of proposed technical changes
suggested in (3) above (requirements of 40 per cent
on interbank balances, 25 per cent on other demand
deposits and 6 per cent on time deposits) a uniform
increase of 10 per cent in requirements on all deposits other than interbank would leave excess reserves of about $2.1 billion and potential credit
expansion of about $7.7 billion. (Tables land 2,
item D-l)
7. Starting with this same set of proposed technical
changes, a requirement of 50 per cent on all in«creases in demand deposits other than interbank
deposits would permit a credit expansion of about
$6.3 billion or twice the amount of excess reserves^
at the beginning. (Table 1, item D-3)
Almost the same results on the average would be obtained by having different requirements on additional
deposits for each class of banks, provided that the
higher requirements are such as to average close to
50 per cent, as is assumed in the example. (Table
1, item D-4)
Basic assumptions
These computations are all based on figures as of June 30,
1941* and involve the following assumptions:
a. The distribution of total reserves among the
different classes of banks remains unchanged,
except far the transfer of sane of them to nonmember banks.
b# All credit expansion results in an increase in
demand deposits other than interbank; time de~posits and interbank deposits remain unchanged.
Confidential
- 5 -
c#
The proportionate distribution of demand deposits
among the different classes of banks continues to
be as it was on June 30, 1941»
It should be noted that for the week ending September 19, the
total volume of excess reserves was slightly larger than on June 30.
Total reserves had increased by $300 million and required reserves by
$200 million in the period. Excess reserves at New York City banks were
about $300 million less than on the earlier date, while those at each of
the other groups had increased by #100 million or more. These changes'
are important with reference to the various computations for the New
York City banks, but make little difference with regard to the other
figures«
Table 1
POTENTIAL EXPANSION UNDER VARIOUS RESERVE PROPOSALS
(Dollars in millions; based on June 30, 19^1 figures)
Types of proposals
A.
Under November 1 requirements
1. Applied to member banks alone
2. Applied to all insured banks
B. From A-2 above, with additional action as
follows Î
1. Uniform 15% increase in requirements on
all deposits
2. 100$ on additional demand deposits at all
classes of banks
3. 50$ on additional demand deposits at all
i+. Raise fractional requirements on additional demand deposits, different for each
class of bank 3/
C. Under technical changes i±/ proposed for all
insured banks:
1. On interbank 50%, on other demand deposits
a. Uniform 2$%
.
b. 25% in New York, 20$ elsewhere
2. On interbank i±0$, on other demand deposits
a. Uniform 25$
b. 25% in New York, 20$ elsewhere
3-2-a above, with additional action as
D. From 1
follows :
1. Uniform 10$ increase in requirements on
all deposits other than interbank ....
2. 100$ on additional deposits at all
classes of banks
50$
on
additional deposits at all classes
3of banks
u. Raise fractional requirements for
additional demand deposits, different
for each class of bank 5/
Credit
expansion l/
Excess
Multiple Potential
expansion
reserves
of
expansion
$3,950
$19,750
3,520
5'
1+.7
2,100
h
8,1+00
3,520
1
2/ 3,520
3,520
2
2/ 7,01+0
3,520
2
7,01+0
2,920
i+,177
h
U.6
11,680
18,910
3,lUo
l*,l+oo
h'
h.6
12,560
20,21+0
2,130
3.6
7,670
3,iUo
1
2 / 3,11+0
3,iUo
2
2/ 6,280
3,iUo
1.9
16,51+0
5,970
posits increase and that the increase is distributed among classes of banks in
the same proportion as present demand deposits. In computing potential expansion it is assumed that total bank reserves do not show any net change because
of gold or currency movements, Treasury operations, etc.
2j In addition predetermined higher ratios could be established for each class of
bank and, once a bank's total required reserves reached these higher ratios, it
would thereafter be subject to only that ratio. Assuming, for illustrative purposes that these ratios would be 1+0% for New York City, 30$ for other cities,
and 20$ for country banks, total potential expansion would not be much different
from the amounts shown because this expansion would be reached about the same
time that the reserves of banks were generally at about the predetermined ratios,
These ratios would give a multiple of credit expansion of about $3 of credit for
$1 of deposits on the basis of new reserves created by gold imports, currency
inflow, etc.
3/ The higher requirements assumed for illustrative purposes are 60% for demand
deposits in New York City, 50% for Chicago and other Reserve cities, and i{.0$
for country banks.
UJ For full description of technical changes see note (3) in Table 2.
5/ The predetermined limits assumed for illustrative purposes are 60$ for New York
and 50% elsewhere.
Table 2
EXCESS RESERVES UNDER VARIOUS SETS OF RESERVE REQUIREMENTS
By classes of banks
(In millions of dollars; based on June 30, 1941 figures)
Insured
Member banks
nonmember
Reserve
New
All
C ountry commember York Chicago city
mercial
City
banks
All
insured
banks
A. Under November 1 requirements
Applied to 1• Member banks only
2 . All insured banks l/
3,519
3,947
3,479
1,626
1,478
236
162
1,407
1,247
678
592
2/ 40
B. From A-2 above, with additional action as follows:
1. Uniform 15% increase in
requirements on all
2,103
deposits
2,147
851
42
845
409
3/ 44
2,832
813
118
861
1,040
87
3,914
813
233
1,402
1,466
263
3,143
3,243
1,257
194
992
800
_3/l00
4,401
4,325
1,257
309
1,533
1,226
76
2,128
2,336 1
i
961 1 133
693
549
3/208
C. With proposed technical
changes 4/
1. On interbank 50%, on
other demand deposits
i 2,919
a. Uniform 25*
b. 25<b in New York, 20%
4,177
elsewhere
c . On interbank 40%, on
other demand deposits
a. Uniform 25$
b. 25% in New York, 20%
elsewhere
D. From C-2(aJ above, with
additional action as
follows:
1. Uniform 10% increase
in requirements on
all deposits other
than interbank
i
l/ Assuming that nonmember banks transfer $600 million to Reserve banks from member
correspondents — £200 million from New York City, $100 million from Chicago,
200 million from other reserve cities, and $100 million from country banks •
No allowance is made for transfer of some of nonmember banks' vault cash holdings to the Reserve banks; this would increase total excess reserves and might
amount to as much as ¿100 million#
Z/ln addition nonmember banks would have about .¿1,357 million of balances with
correspondents.
3/Defic iency, Could be met by transfers of funds from correspondent banks to
Federal Reserve banks.
4/The proposal is (1) count vault cash as lawful reserves, (2) require a reserve
of either 50 or 40 per cent against interbank demand deposits and permit banks
to count, as part of their legal reserves, the same percentage of their demand
balances due from domestic banks, (3) require either a uniform percentage of
25 per cent on "other11 demand deposits, or 25 per cent at New York banks and
20 per cent elsewhere, (4) 6 per cent requirement on time deposits» Only cash
items would be deductible from gross demand deposits before computing reserve
requirements; balances due from banks would no longer be deductible.
Countrybanks
654
8,524
6,254
3,041
4,125
385
1,379
5,889
1,915
437
1,521
3,873
242
979
1,221
205
45
884
1,134
--
955
5,191
9,208
15,354
750
5,146
9,324
14,220
49
2,283
2,913
5,245
30
509
575
1,114
296
2,027
2,705
5,028
375
327
2,131
2,833
2,919
2,832
813
118
861
1,040
4,177
3,914
813
233
1,402
1,466
4/ 263
3,519
3,479
1,478
162
1,247
592
40
CO
-a
6. Proposed required reserves —
a; 6% on time deposits
b; 50% on interbank demand deposits
c. 25% on other demand deposits
Total
7. Excess reserves —
a; On basis of above requirements
b. With ZO/o requirement on "other" demand outside
New York City
c. If November 1 requirements are extended to all
insured banks 3/
Insured
nonmember
banks 2/
90
3,534
3,420
1,957
Reserve
citybanks
4,053
10,820
4,929
2,759
. '<
1.
2;
3.
4.
Table 3
ESTIMATED REQUIRED AND EXCESS RESERVES AFTER PROPOSED TECHNICAL CHANGES l/
ON BASIS OF 50 PER CENT FOR BANKERS' BALANCES
for June 30, 1941, in millions of dollars)
Central reserve cityAll
All
insured
banks
member
New York
banks 2/ banks
Chicago
Interbank demand deposits
1,018
10,381
4,566
10,291
Other demand deposits (less cash items)
11,652
2,300
36,830
33,296
Time deposits
502
15,916
811
12,496
Demand balances due from banks
258
6,188
130
8,145
Proposed "lawful" reserve —
a; Reserve with Federal Reserve bank
12,959
5,857
12,959
1,062
b. Cash in vault
999
41
1,241
136
c. One-half of due from banks
129
65
4,073
3,094
Total
17,052
6,058
1,232
18,273
Proposed changes are: Reserve requirements: on interbank demand deposits 40$or 5 0 o n demand deposits other than interbank (a) uniform 25% or (b) Zh%
in New York City and 20% elsewhere; on time deposits 6%. Reserves to include (in addition to present reserves) cash in vault and 4($or 50% of demand
balances due from domestic banks.
Except nonmember mutual savings banks.
3/ For the purpose of this estimate it was assumed that nonmember banks would transfer $ 6 0 0 , 0 0 0 , 0 0 0 from correspondent banks to Federal Reserve banks, and
that that would directly or indirectly result in the following decreases in member bank reserve balances and net demand deposits: New York $200,000,000,
Chicago $100,000,000, Reserve city banks #200,000,000, and country banks $100,000,000. In calculating the reserve requirements of nonmember banks, a
reserve percentage of 16% was used, on the assumption that about one-third of the deposits of the nonmember banks are in Reserve cities.
/ If no balances wore transferred from correspondents to Federal Reserve banks. In addition to excess reserves, these banks would hold $979,000,000 of
demand balances with other banks not eligible as reserve.
Table 4
ESTIMATED REQUIRED AND EXCESS RESERVES AFTER PROPOSED TECHNIC/,L CHANGES l/
ON BASIS OP 40 PER CENT FOR BANKERS BALANCES
~
(Based on figures for Juno 30, 1941, in millions of dollars)
r1
1. Interbank demand, deposits
2. Other demand deposits (loss cash items)
3. Time doposits
Demand balances duo from banks
•
5. Proposed "lawful" reserve —
a. Roservo with Federal Roservo bank
b. Cash in vault
c, 40% of duo from banks
Total
6. Proposed required rosorvos —
a. 6% on time doposits
b. 40% on interbank demand deposits
e. 25% on other demand doposits
Total
7. Excess reserves ~
a. On basis of abovo requirements
b # With 20% requirement on ffothDrff demand outsido
Now York City
c. If November 1 requirements arc extended tc all
insured bardes 3/
1/
2/
V
~
Ail "
All
insured
member
banks 2/ banks
10,381
10,291
36,830
33,296
15,916
12,496
8,145
6,188
Central reserve
banks
Now York
|
4,566
11,652
811
130
cityChicago
1,018
2,300
502
258
Rosorve
city
banks
4,053
10,820
4,929
2,759
Country
banks
654
8,524
6,254
3,041
Insured
nonmembor
bonks 2/
90
3,534
3,420
1,957
12,959
1,241
3,258
17,458
12,959
999
2,475
16,433
5,857
136
52
6,045
1,062
41
103
1,206
4,125
385
1,104
5,614
1,915
437
1,216
3,568
242
783
1,025
955
4,152
9,208
14,816
750
4,116
8,324
13,190
49
1,826
2,913
4,788
30
407
575
1,012
296
1,621
2,705
4,622
375
262
2.131
2,768
205
36
884
1,125
3,143
3,243
1,257
194
992
800
4/ -100
4,401
4,325
1,257
309
1,533
1,226
3,519
3,479
1,478
162
1,247
592
mm
4/
76
40
Sec Note 1/ of Table 3.
~
Except nonmember mutual saving s barks-.
.
,
For the purpose of this estimate it was assumed that nonmenbor banks would transfer $600,000,000 from correspondent banks to Federal Reserve banks, and
that that would directly or indirectly result in the following decreases in mcxibor bank roservo balances and n<~\;
and deposits: New York #200,000,000,
Chicago $100,000,000, Reserve city banks #200,000,000, and country ^nks #100,000,000. In calculating the resort requirements of nonmembor banks, a
reserve percentage of 16 per cent was used, on the assumption that about one-third of the deposits of the nonmembor banks are in reserve cities.
4/ If no balances were transferred from correspondents to Federal Reserve banks. These banks would hold #1,174,000,000 of demand balances with other banks
not oli'giblo as reserve until transferred to the Federal Reserve bank.
@FedFRASER