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C O N T E N T S Page S"ummary of Business Situation - by Frank Garfield 1 Effect of Increase i n Reserve Requirements on Stock Market Speculation - by Carl E# Parry 2 Deposits and Loans and Investments of Banks by Victor M# Longstreet 3 Volume and Distribution of Excess Reserves by L# M. Piser and Woodlief Thomas 11 Probable E f f e c t of an Increase in Reserve Requirements on Money Rates - by Woodlief Thomas 20 SUMMARY OF BUSINESS SITUATION ty Frank Garfield Business conditions and prospects are not the same as last summer* Recovery has proceeded farther and i t s momentum appears to "be great* Industrial production has increased rapidly, "but has not kept pace with the demand for goods, with the consequence that a substantial volume of u n f i l l e d orders has accumulated* Shortages of equipment and s k i l l e d labor are appearing in certain lines, although there i s s t i l l a large number of unemployed* There has been a rapid rise i n prices for two months and a h a l f , not only i n farm products but also i n industrial materials, which had shown l i t t l e change i n price for three years* Increased buying accompanying greater industrial a c t i v i t y has been supplemented by buying of a speculative nature and "by foreign and domestic buying for armament purposes, with the purchasers more concerned about promptness of delivery than about price* The most important factor i n the situation that may interrupt the progress of recovery i s i n the f i e l d of labor relations, with the p o s s i b i l i t y of extended strikes i n some leading industries. In general, developments i n production and prices indicate that some slowing down i n the rate of advancement may be desirable from the viewpoint of sustained recovery* - 2 EFFECT OF INCREASE IN HE SERVE REQUIREMENTS ON STOCK MARKET SPECULATION by Carl E« Parry An increase i n the reserve requirements at this time would affect speculation i n securities i n two principal ways. In the f i r s t place, be- cause of i t s general implications, i t would weaken the conviction and impair the influence of such brokers and other f i n a n c i a l advisers as have long been advertising aggressively the view that i n f l a t i o n i s absolutely inevitable and that investors and speculators should govern their p o l i c i e s accordingly* In the second place, because of i t s tightening effect on the very lowest of short-term money rates and i t s s t i f f e n i n g effect on long-term rates, i t would c u r t a i l some of that demand for securities which arises from the widespread b e l i e f that prices of income-bearing securities have not yet risen far enough to bring them into l i n e with the current level, or i n any event with the prospective l e v e l , of long-term interest rates® With the volume of stock speculation as large as i t has now become, both of these effects would be i n the public interest at the present time* There can be l i t t l e doubt that the broad underlying trend of the stock market i s s t i l l upwards, notwithstanding the fact that a very substantial advance has already occurred* The factors accounting for this trend are quite s u f f i c i e n t l y strong without the reinforcement they have been receiving from b e l i e f i n the i n e v i t a b i l i t y of i n f l a t i o n or from expectation that money rates are destined to go even lower than they have already gone* - 3 - DEPOSITS AND LOANS AND INVESTMENTS OF B A M S ty Victor M* Longstreet Since the r a i s i n g of reserve requirements of member "banks i n the middle of August there has "been a narked growth i n loans to customers of weekly reporting member "banks i n 101 leading cities* As a consequence t o t a l loans and investments of these "banks have continued to expand, notwithstanding some reduction i n their holdings of Government securities* There appears also to have "been a continued growth in loans and investments of other member hanks* Bank deposits have also increased further, r e f l e c t i n g the increases i n total "bank loans and investments., as well as gold imports and a reduction in Treasury "balances with the Reserve "banks* The amount of money in c i r c u l a t i o n has also increased and by more than the usual seasonal amount* As a consequence, the total amount of bank deposits and currency held by the general public was abo-ufc $2,-* 300,000,000 larger at the end of 1936 than i n the middle of the year and about $1,300,000,000 larger than at the end of 1929* Increase i n bank loans The following table shows for the central reserve c i t i e s of New York and Chicago and f o r each Federal Reserve d i s t r i c t the increase i n so-called "other" loans to customers of reporting member banks since August 12, 193&* just before the r a i s i n g of reserve requirements, and for the year 193& a whole* a s LOANS AND U.S. GOVERNMENT OBLIGATIONS of Member Banks in Leading Cities "OTHER" LOANS OF REPORTING Decenber 30, 1936 (Million dollars) Total City of Chicago*...... MEMBER BANKS Change since: Decenber 31, 1935 Aiuznist 1L2, 193D Million Million Percent Percent dollars dollars ^,290 +607 1.556 ^05 +318 +57 +16 +26 +16 +SS9 + 2 6 +395 +l4g +3U +5S Federal Reserve d i s t r i c t : New York 1/ Chicago 1/ St* Louis 307 157 191 239 119 — — +s +5 + 3 1 + 1 9 162 Ikk 123 151 159 Hoi 176 + 2 0 +26 +15 +9 +23 +33 +33 +19 + 2 + 2 1 +19 +33 +14 + 6 1 + 1 0 + 2 2 +l4 +6 +17 +9 +12 +14 +12 +3U +9 + 3 1 +62 +29 +21 +62 +25 +19 +14 + 2 6 + 2 0 +39 + 1 1 1/Bxcludes central reserve c i t y "banks. These loans include a l l loans other than loans on securities, loans to "banks, loans on real estate, and acceptances and commercial paper "bought. They cover, therefore* loans for agricultural, commercial, and industrial purposes, as well as instalment loans, personal loans, etc. As shown by the table, these loans at reporting member banks increased by nearly $900,000,000, ot by 25 percent, during 193^ the increases occurred i n a l l Federal Reserve d i s t r i c t s outside Minneapolis, where there was a slight decline. Increases have been especially marked since the raising of reserve requirements l a s t August, and since shared i n the general inqrease. t h a t time the Minneapolis d i s t r i c t has A part of the recent increases is undoubtedly attributable to some seasonal demand for credit i n the late summer, but during December there was further narked growth, contrary to the usual seasonal movement* Some of the growth in these loans as compared with a year ago i s also a result of special transactions! such as the purchase last July of Commodity Credit Corporation notes, c h i e f l y by banks i n the c i t y of Chicagot and the granting of loans to receivers of closed banks, which was important i n Detroit last spring* I t i s believed, however, that perhaps the bulk of the increase r e f l e c t s a demand for additional funds by producers and distributors of goods* No statement of condition for a l l member banks i s available since June 30, 1936* The above figures for weekly reporting member banks, however, are f a i r l y indicative of what has taken place at central reserve and reserve c i t y member banks* Latest figures for country member banks, set forth i n the table below, show that there was also an increase of about $100,000,000 i n "other" loans at these banks between March 4 and June 30* 193&* increases were in each Reserve d i s t r i c t outside Minneapolis* Again, I t is l i k e l y that as much as one-half of the growth i n "other" loans of country banks during this period night have been of a seasonal character* As explained l a t e r , there appears to have been a further substantial increase i n t o t a l loans and investments of country member banks in the l a s t half of the year, although there is no way of t e l l i n g what part of this might have been i n "other" loans* Loans on real estate, loans to banks, acceptances and commercial paper bought, and loans on securities to customers have shown no significant change at weekly reporting member banks for some time* Loans to brokers and dealers, although they have fluctuated widely, have exhibited no d e f i n i t e tendency to increase or decrease during 1936* -6 "OTHER" L O M S OF COUNTRY MEMBER June 30, 1936 (Million dollars) Total. Federal Reserve d i s t r i c t s Boston New York . Philadelphia Cleveland...... Richmond Atlanta Chicago St, Louis Minneapolis Kansas City Dallas San Francisco t ' RANKS Change since March U>1936 Million Percent dollars 1,893 +101 +6 195 3^6 238 I5U l60 105 lUO 88 88 I30 +15 +11 +3 +13 +12 +5 +10 +5 -1 +6 +8 +3 +1 +9 +8 +6 +8 +6 -1 +5 130 +8 119 +12 +7 +12 Holdings of United States Government obligations In the l a s t half of 1936 United States Government direct and f u l l y guaranteed obligations, which had theretofore been the p r i n c i p a l faetor accounting for the growth i n member bank credit, declined from $10,800,000,000 to $10,500,000,000 at reporting member banks, r e f l e c t i n g a reduction of $500,000,000 i n holdings of New York City banks and an increase of $200,000,000 at reporting banks i n other leading c i t i e s . In the f i r s t half of 1936 Government direct and f u l l y guaranteed securities held by reporting member banks had increased by $1,200,000,000, The recent reduction i n holdings of Government securities at New York City banks appears to have been due i n part to the f a c t thfcit the Treasury has been issuing fewer shortterm obligations, of which New York banks usually take a large share, and i n part to the desire to maintain large reserve balances i n anticipation of a further increase i n reserve requirements. An additional consideration might he the expectation that an increase in reserve requirements may possibly result i n a rise i n short-term money rates and a f a l l i n the prices of shorter-term Government issues. Securities other than Government obligations held by reporting member banks, after increasing by about $300,000,000 i n the f i r s t four months of 1936, declined somewhat i n the l a s t quarter* At the end of the year they amounted to $3,250,000,000, representing an increase of about $200,000,000 during the year. Increase i n t o t a l loans and investments Total loans and investments of a l l member banks probably increased during the last half of the year by roughly $500,000,000, as compared with an increase of $2,300,000,000 i n the f i r s t h a l f . Total loans and invest- ments of reporting member banks, which are representative of central reserve and reserve c i t y banks, increased by about $350,000,000 i n the last half of 1936, and loans and investments of country member banks are estimated to have increased by about half of that amount* Although figures on loans and investments of country banks are not available since June 30 l a s t , a rough indication of the increase i n their t o t a l i s afforded by the difference between the increase i n deposits of country banks and the increase i n the t o t a l of their reserve balances and estimated due from banks* The greater increase i n loans and investments of member banks during the f i r s t half of the year was due p r i n c i p a l l y to acquisition of United States Government obligations by weekly reporting member banks i n leading cities* Increase i n member bank deposits Expansion i n loans of banks, further gold imports, and expenditures by the Treasury from balances previously accumulated have resulted i n continued DEPOSITS AND CURRENCY BILLIONS Of DOLLARS 60 ( June 30 through 1928: call dates thereafter. ) I I I Total Desposifs an<Curirency BILLIONS OF DOLLARS 60 y 50 50 sits ofal Depoi I 40 40 30 30 Demoind Deposits-Aadjusted (Inelutf ing U.s. gov!inwniftl1 tftpoi(its) \II 20 (C I / 20 % Depc>sits ciol bonkt) —- 10 10 M t rtual Savirigs Banks P0St(]| S a vings Syst<em i 1920 1921 1922 1923 1924 1929 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 ~g ~ growth of hank deposits during the last h a l f of 193^, notwithstanding the flow of additional currency into circulation* It i s estimated that deposits of banks i n central reserve and reserve 9 c i t i e s are now $3,700,000,000 greater than they were at the end of 1929» an increase of 21 percent* As shown by the following table, deposits at country banks, however, are somewhat smaller than i n 1929* This i s due partly to the fact that f a i l u r e s among country banks were r e l a t i v e l y more numerous than among c i t y banks, so that losses to depositors were also greater* There has also been a greater increase i n Postal Savings deposits i n smaller c i t i e s , where country banks are located, than in the larger cities* Another important factor has been the movement of i d l e funds, especially i n the early stages of depression, to the money markets of the f i n a n c i a l centers i n order to seek profitable employment. Since the middle of the year the percentage increase i n deposits has been half again as large at country banks as at c i t y banks and deposits at banks in New York City and Chicago have shown much smaller increases than i n other parts of the country* There i s evidence, therefore, that a redistribution of deposits more i n accordance with the pre-depression pattern i s under way* DEPOSITS OF MEMBER BANKS (In millions of dollars) Dec.31, 1929 Central reserve c i t y "banks: New York City Chicago 5. ?00 1,400 June 30, 1936 Dec.31, 1936 (est.) 1,300 7, too 2,000 7,600 2,000 J-une 30, 5 , 0 0 0 too Reserve c i t y "banks 10,000 6,900 10,S00 1 1 , Country banks 12.200 7,000 10.600 11.300 A l l member banks 29,500 20,200 30,goo 32,300 Note: Deposits, other than United States Government deposits, interbank deposits, and Postal Savings redeposited i n banks, and less cash items i n process of c o l l e c t i o n . The g e n e r a l e s t i m a t e d p u b l i c a t t h e e n d t h e e n d o f t h e v o l u m e a t t h e e n d 1 9 2 9 , o f e s t i m a t e s b e f o r e c o v e r i n g w h i c h c o m p a r a b l e i t e m s i n t h e y o f V a u l t c u r r e n c y h e l d o f 1936 d e p o s i t s n o t o f i n t h e o f i n t h e a l l t h e h a s b e e n AND ( I n d e p o s i t s T o t a l M u t u a l s a v i n g s b a n k s P o s t a l S a v i n g s S y s t e m d e p o s i t s l l o t e : a l l T o t a l b a n k s S y s t e m . S t a t e s P r i v a t e B y t o t a l t h e c u r r e n c y t h e Demand b a n k s m i d d l e a n d c u r r e n c y U n i t e d d e p o s i t s Government a r e o f y e a r s , t o t h e e x c l u d e d i n o b t a i n i n g f o r e x c l u d e S t a t e s w h e t h e r f i g u r e s a t a r e b a n k s U n i t e d i n a n d f i g u r e s S y s t e m , w i t h f o r t h e o r t i m e amount d e - o f HELD o f BY J u n e a r e 30, D e c . 3 1 , 1936 1 9 3 3 1936 2 3 , 6 0 0 25,300 28,500 8,900 200 19.1*00 21.600 9,700 1,200 10.700 2U.700 10,100 1,200 13.U00 25.100 10,200 1,300 13.600 3,600 k, 800 5^,500 1+0,500 i n c i r c u l a t i o n a n d c a s h t o w i t h e x c l u d e i t e m s i n 5,Uoo 5 , 2 0 0 53.500 o u t s i d e d e p o s i t s a d j u s t e d a n d J u n e 3 0 , 1^,100 S t a t e s , d e p o s i t s PUBLIC d o l l a r s ) 22,^00 b a n k s i n c l u d e s i n d e p o s i t s b a n k s a n d t a b l e a d j u s t e d a n d t h e e s t i m a t e d d e p o s i t s — a d j u s t e d o u t s i d e of p r i v a t e a r e S a v i n g s 1929 C u r r e n c y e x c e p t d e p o s i t s , D e c , 3 1 , C o m m e r c i a l The i n c l u d e d CURRENCY m i l l i o n s P a r t l y T i m e r e c e n t 30.'s. t h e y h a n d s b a n k s * DEPOSITS Demand t h e f o l l o w i n g o f e a r l y a n d i n t h e p o i n t P o s t a l banks, a r e i n b a n k s , i n t e r b a n k i n c u r r e n c y l o w a v a i l a b l e , b a n k s o u t s i d e a n d c o m p a r e d d e c l i n e D e p o s i t s c a s h i s 1 9 3 3 , c o l l e c t i o n , r e d e p o s i t e d p o s i t s . d e p o s i t s t h e a r e d e p o s i t s . a r e o f J u n e t o t a l d a t a p r o c e s s G o v e r n m e n t n o t vol-ume b a n k s , t h e d e p o s i t s P o s t a l i n t e r b a n k p r o c e s s 55,800 o f a t S a v i n g s a n d U n i t e d c o l l e c t i o n . e x c l u d e d * 1 9 3 6 , c u r r e n c y p r i o r h e l d t o b y t h e t h e r a i s i n g p u b l i c o f h a d r e s e r v e i n c r e a s e d r e q u i r e m e n t s , t o $ 5 3 , 5 0 0 , 0 0 0 , 0 0 0 , r .10 which was about $1,000,000,000 below the 1929 figure. 1936 further increases brought the t o t a l to In the last half of $ 5 5 , 8 0 0 , 0 0 0 , 0 0 0 , 000,000 or over 2 percent more than i n 1929# about $ 1 , 3 0 0 , - The recent increase, as well as the increase since the low point of 19331 ^a® b e e n largely i n demand deposits, which are now at an all-time peak of $25,300,000,000 and are about 13 percent larger than i n 1929* Velocity of bank deposits The volume of checks drawn against bank deposits i s currently below the volume of pre-depression years, and accordingly the rate of turnover of deposits i s also smaller, r e f l e c t i n g the fact that although the volume of bank deposits and currency held by the public i s above the pre-depression level, there i s a large amount of i d l e funds awaiting investment or other use* The rate of turnover of deposits i n a l l banks, excluding mutual savings banks, as measured by the ratio of check payments to deposits, has been at about 15 times per annum since 1933» as compared with about 20 times per annum i n the period 1922-1926, prior to the speculative boom that culminated i n 1929* In view of the increase i n population and the consequent l i k e l i h o o d of an increase i n the volume of business — when prosperity i s restored — the volume of funds i n the hands of the public does not appear to be excessive* The volume, however, i s s u f f i c i e n t l y large so that an increase i n turnover to the l e v e l of 1922-1926 would carry t o t a l transactions to a level where i n f l a t i o n a r y tendencies might develop. I t i s clear that no further increase i n deposits should be encouraged by the federal Reserve System, - 11 - VOLUME AMD DISTRIBUTION Off EXCESS RESERVES L . M. Piser and Woodlief Thomas Excess reserves i n November and the early part of December averaged about $2,200,000,000. As a result of a seasonal increase i n currency i n c i r c u l a t i o n and additions to Treasury balances in the second and t h i r d weeks of December, excess reserves declined to about $1,900,000,000, but with the return flow of currency and disbursements by the Treasury from accumulated balances member banks i n February w i l l probably have excess reserves of $2,200,000,000, about the same as i n November, Distribution by classes of banks It i s d i f f i c u l t to estimate what s h i f t s may take place by February i n the distribution of excess reserves among the individual banks and classes of banks. The l i k e l i h o o d of withdrawals of bankers1 balances i n case of an increase i n reserve requirements makes such estimates even more difficult. Assuming that the distribution w i l l be approximately the same as i n November, the following table shows probable excess reserves of the various classes of member banks after an increase of 33 1 / 3 percent i n reserve requirements. ~ 12 ~ DISTRIBUTION OF EXCESS RESERVES (Amounts i n millions of dollars) Actual Nov.16-30, 1936 Probable Feb.1937 After increase of 3 3 l/3# i n reauirements Percent excess over required (Feb.) Central reserve c i t y banks New York City Chicago Reserve c i t y banks Country banks A l l member banks 76g 225 728 516 2,237 SO 4.2 13.7 2^0 12.1 270 27.2 700 11.3 110 I t i s expected that after an increase i n requirements a l l member hanks i n the aggregate would have about $700,000,000 of excess reserves — approximately 11 percent over the enlarged requirements. Total reserves of country banks would be about one-fourth larger than requirements and their excess reserves i n dollars would be about the same as i n the early part of 193^. Reserves of banks i n Chicago and i n reserve c i t i e s would be i n excess of requirements by about one-eighth, while those of central reserve c i t y banks i n New York would be only k percent in excess of requirements. While no allowance has been made i n estimating these figures for s h i f t s i n bankers1 balances, which might involve withdrawals of some $200,000,000 from New York City and Chicago banks, i t i s l i k e l y that a number of banks in those c i t i e s would continue to have excess reserves, and that the aggregates of these holdings would be l i t t l e i f any less than the amounts given i n the t|ible. As shown later 15 New York City banks, on the basis of their November reserve position, would continue to have excess reserves of $200,000,000 after the increase i n requirements. Some of the withdrawals of bankers* balances would come from these banks and, moreover, banks deficient i n reserves would make up their shortages by borrowing or by s e l l i n g assets to banks with excess reserves both i n New York and outside* Distribution by d i s t r i c t s Detailed tables attached show the effect of an increase in reserve requirements upon the various classes of banks i n different d i s t r i c t s . It would appear that i n November reserve c i t y banks as a whole i n the New York, Atlanta, Dallas, and San Francisco d i s t r i c t s did not have quite s u f f i c i e n t reserves to meet a one-third increase i n requirements. The largest ratios of remaining excess reserves to increased requirements among reserve c i t y banks would be held by those i n Boston and Philadelphia. Country banks i n the aggregate i n a l l d i s t r i c t s would s t i l l possess substantial amounts of excess reserves, with the smallest excess over requirements i n the San Francisco d i s t r i c t and the largest i n the Chicago, Kansas City, and Dallas districts. Distribution by individual banks The survey, recently completed by the Division of Bank Operations, of the reserve position of individual member banks i n the f i r s t h a l f of November indicates that there was a substantial number of banks, 2,600 out of 6,^00, which did not have reserves s u f f i c i e n t to meet an increase of 33 1 / 3 percent i n requirements. The amount by which the reserves of these 2,600 banks f e l l short of the requisite volume was $350,000,000. A l l but 165 of these, however, - 14 could meet the increase hy drawing upon not more than half of their "balances with correspondents. These I05 hanks would s t i l l have lacked $120,000,000 of having s u f f i c i e n t reserves. The following table shows the number of banks of each class that would have had i n s u f f i c i e n t reserves to meet the increase. Number of banks C l a s s e s o f banks Total With insufficient reserves With shortage after using 1/2 of bankers1 balances C e n t r a l r e s e r v e c i t y banks New York City Chicago R e s e r v e c i t y banks Country banks 37 17 22 336 1S1 5 6,388 17 1*50 5.99S Total IS 2,616 165 That banks can dispense with one-half of the balances they now hold with correspondents i s a reasonable assumption, since balances now carried by banks outside of Hew York City with correspondents are about twice as large as those carried prior to the last few years, when excess reserves have become abundant and widespread. The amounts formerly carried are no doubt s u f f i c i e n t to cover needs for secondary reserves and f o r clearing purposes. On June 30, 193^> a l 1 member banks held demand balances with other domestic banks amounting to $3^00,000,000, whereas from 1922 to 1929 they held an average of $1,900,000,000, which may be considered as more nearly normal working l e v e l s . Prom June to November there was a further increase of f u l l y - $200,000,000 i n bankers1 balances. 15 - I t maybe said, therefore, that about one-half of outstanding bankers1 balances represent excess secondary reserves. The following table summarizes the amount of the shortage by classes of banks, with and without using their excess bankers* balances. Classes of banks Central reserve c i t y banks New York City Chicago Reserve c i t y banks Country banks Total Additional reserves required, to meet 1 list i n renuirements Required after Obtainable from use of l / 2 of Total bankers' bankers' balances balances (In millions of ' dollars) 1 2 2 3 1 6 3 IS 3 1*7 10U 1 6 67 65 2 355 233 1 2 2 Of the 163 banks that would have been short a f t e r using half of their bankers' balances about I 3 0 were country banks, but the amount of the def i c i e n c y for country banks would have been very small, only $2,350,000. Reserve c i t y banks would have been able to supply a l l but $15,500,000 of their needs from excess bankers1 balances; over h a l f of this remaining shortage would have been at two banks i n the San Francisco d i s t r i c t . Most Of the deficiency would have been i n New York C i t y , where 22 banks, holding about two-fifths Of the deposits at a l l banks i n the c i t y , would have been short by $122,000,000. Por these banks no allowance can be made for the use of balances due from banks since New York City banks hold only small -16- - working balances with other banks which have not been increased i n recent years. Hew York City banks would lose additional reserves through withdraw- a l s from them of balances held for country banks and reserve c i t y banks* A similar study made prior to the time reserve requirements were increased l a s t August indicated that 2,100 member banks would have needed $215,000,000 of additional reserves to meet an increase of 50 percent i n reserve requirements, but that by using one-half of their bankers1 balances they would have reduced their needs by $133,000,000, leaving only $32,000,000, mostly at New York City banks, to be obtained by the sale of openmarket material and by borrowing. Actually, $110,000,000 of bankers1 balances were withdrawn from New York City banks i n the week in which the previous increase i n requirements became effective. Outside of New York City $100,000,000 of b a n k e r b a l - ances were withdrawn from reporting banks, but these banks apparently adjusted their position i n the aggregate by withdrawing balances from other banks, so that as a group they showed no net change i n their position. Only a few scattered banks borrowed from the Reserve banks, and the t o t a l amount of borrowing was negligible, amounting to about $2,000,000. There was apparently no interbank borrowing or trading i n Federal funds. Shifts of earning assets among banks apparently were small. After a l l of the ad- justments were completed reserves were s t i l l ample and widely distributed among a l l classes of banks i n a l l parts of the country and among individual member banks. The increase i n reserve requirements consequently had no perceptible effect upon the money market. By comparing the actual results of last August with those indicated i n the previous study, i t may he possible to estimate the effect of a further increase i n requirements. Member banks outside of New York City would need to raise about $230,000,000 of additional reserve funds, as compared with about $125,000,000 l a s t summer. Most of this amount would probably be ob- tained, as before, by withdrawals from bankers1 balances, less than half of these balances are held with New York City banks, and some of the withdrawals w i l l be absorbed by reserve c i t y banks with adequate excess reserves, but a substantial portion of the withdrawals from reserve c i t y banks w i l l be met i n turn by withdrawals from New York. As a consequence a large part of the ad- ditional reserve funds obtained from bankers1 balances w i l l i n the end come from New York. These withdrawals may be as mach as $200,000,000® Outside of New York City, borrowings should be negligible and sales of assets unim?portant i n amount. New York City banks would be subjected not only to an increase of onet h i r d i n their present reserve requirements but also to a further loss of perhaps $200,000,000 of reserves through the withdrawal of bankers* balances* Probably half of the withdrawals would come from the 15 New York City banks which, after the increase i n requirements, would s t i l l have excess reserves of more than $200,000,000* Excess reserves of New York City banks would probably not be entirely absorbed. Individual New York City banks that would be short of reserves could adjust their position temporarily by purchasing Federal funds from banks that s t i l l had an excess or more permanently by the sale of asoefcs to such banks* In view of the public discussion of the pos- s i b i l i t y of an increase i n requirements, i t i s l i k e l y that many of the banks that would have been deficient i n November w i l l by February have taken steps to b u i l d up their reserves. These adjustments would probably have some effect on money rates, a matter which i s discussed i n another memorandum. EFFECT OF SPECIFIED INCREASES IN RESERVE REQUIREMENTS Amount that Amount that Percent excess over*" would be would be required reserves that ; Present absorbed by left after would t e l e f t after excess Full Increase Increase Full Increase Increase Pall Increase Increase reserves increase outside increase outside in in increase outside in (Nov«av.). of of of demand of demand of of demand 33 1/3 country deposits 33 1/3 country deposits 33 1/3 country deposits percent banks alone alone percent banlcs banks alone percent ll.H A l l member b a n k s 2,219 1,522 1,27* 1,359 9H0 360 Central reserve c i t y banks: New Y o r k C i t y Chicago Reserve c i t y banks: Boston....... New Y o r k . * . , . Philadelphia. Cleveland.... Richmond.. • •. Atlanta C h i c a g o 9 St. L o u i s . . . . Minneapolis.. Kansas C i t y . . Dallas....^.. San Franc i sco, Total.... Country banks: Boston New Y o r k . . * . , Philadelphia. Cleveland.... Richmond Atlanta...... Chicago...... St. L o u i s . . . . Minneapolis.. Kansas C i t y . . Dallas San Francisco Totalc... 16.1 697 751 221 ^ 6ftS 1^3 6ftg lft3 106 2 Ill 120 59 12 1 3S 15 ftg 23 9° 72ft Hg 11 52 70 23 2k Hg 39 16 36 23 102 kB7 Hg 11 52 70 2S 2H kg 39 16 36 23 102 kg 7 638 137 ft6 kl 59 25 22 Hi $ % 27 10 2 73 58 -9 59 50 31 10 2 73 58 -9 59 50 31 60 H.o H.o 13.6 13.6 30.2 30.2 -10 •20. 9 28.4 17.9 27.9 •12.4 l 11 6.0 -20.9 2S.H 17.9 27.9 -12.4 22.5 o.b 12 - l 12 Ik - 1g.H .6 - 1g.H .6 -H ~H -1.0 -1.0 -12 i -1 -12 k 0 237 237 20 50 61 50 £ 303 12.2 12.2 H21 50 96 46 ftg 27 23 SS 22 31 37 38 17 523 30 53 28 23 lb 13 2b 11 11 11 11 12 2HH —— — — 21 V lH 25 11 H6 10 23 7 62 11 20 22 10 26 27 11 10 — — — — — lg i sg 9 g 163 5 279 kg 27 8S 31 37 3g 17 523 f63 32 16.8 2O.3 16.1 27.5 17.2 lH 2k 23 2B 360 56.2 So.H 70.6 19.6 59.6 25.6 56.2 60.5 112.0 6g.7 H5.5 93.9 bl.H 10.6 23.6 108. S 1,15. Z Hi 6 71.5 H.H lH.g 31.6 -17.1 30.9 22.3 31.5 -10.5 27.2 9.3 9.9 I'2 6.3 lb.l 26.H 32. g 2.7 i 1.5 27.1 27.1 72.9 35.0 60.0 65.1 65.I 20.9 Ho; 3 BANKS HAVING INSUFFICIENT FUNDS TO MEET INCREASE OF 33 I/3 PERCENT IN RESERVE REQUIREMENTS (Based on daily average figures for f i r s t half of November 193&) Number of banks unable to meet Amount by which increase f o r these increase from banks would exceed Reserve Reserve Reserve Reserve balances Reserve balances balances balances Reserve Class of bank balances plus one-half plus t o t a l balances plus one-half plus t o t a l bankers' bankers' alone bankers' bankers * alone balances balances balances balances (In thousands of d o l l a r s ) Central reserve c i t y "banks: IS New York C i t y 22 11 122,2U0 103,871 *9.^59 Chicago ..... 2.6^2 — — Reserve c i t y banks: Boston..... New York Philadelphia Cleveland. Richmond. Atlanta. Chicago . . . . . . . . . St. Louis Minneapolis. Kansas C i t y Dallas San Francisco. Total 4 9 14 13 11 16 30 13 4 29 1? 20 131 Country banks: B o s t o n . 1 5 5 New York 290 Philadelphia. 337 Cleveland 263 Richmond. 123 Atlanta. I32 Chicago 136 St. L o u i s . . . . . loO Minneapolis 135 Kansas C i t y . . . . 237 Dallas lbl San Francisco.••,•••••.. 17^ Total 2,^03 A l l member banks. 2,616 1 5 3 1 1 1 2 0 , 3 ^ 5 7,962 1^,789 1 2 1 2 1 2 17 II 19 13 3 12 1+ 2 8,57$ 6,5^6 202 2 6 1,681 ^5 2 5 6 3 , 3 2 2 1 170 66 15,880 1.3^9 253 55.75.6 2,^7 1 2 , 2 3 3 M31 3.926 6,121 1 6 3 , 2 1 s 1 5 , ^ 5 2 566 6 25 k 2 1 6 9,0Ul 14,256 2.356 .151 .310 I ,106 ^.791 2,282 2,519 1,829 2,lU3 130 U6 165. 61 ^ 2 2 1 , 2 9 0 209 P U2 77 iki 9 3 530 — 3,1 1 7U —— 72 66,51*7 2,356 121,679 61 735 9 0 , 7 6 0 VjD 1 - 20 PROBABLE EFFECT OF AN INCREASE IN RESERVE ~ REQUIRE'.tENTS ON MONEY RATES Woodlief Thomas Analysis of the reserve position of individual member banks indicates that an increase of 33 1/3 percent i n reserve requirements w i l l necessitate the sale of a not inconsiderable amount of marketable assets as w e l l as probably some borrowing on the part of a number of New York City banks* There w i l l also be some readjustment by banks outside of New York but, except for withdrawals of balances carried with correspondents, which i n the end w i l l be drawn mostly from New York banks, the amounts w i l l not be large* The adjustment of the reserve positions of New York City banks may be large enough to be reflected at least temporarily i n an advance i n shortterm opeiwnarket money rates* In view of the remaining excess reserves, however, and the large volume of i d l e funds held by corporations and others awaiting profitable use, i t i s not l i k e l y that the rise i n money rates w i l l be considerable* Some open-market rates, which have been exceptionally low, may become established at a s l i g h t l y higher level than at present* Rates on customers1 loans and long-time rates are not l i k e l y to be much affected* There appear to be definite l i m i t s on the probable r i s e i n money rates* These l i m i t s are set by two entirely different considerations — ( l ) the l e v e l of rates at which i d l e funds would be attracted from banks outside of New York and from non-banking lenders, and (2) the b i l l - b u y i n g rate of the Federal Reserve Bank of New York* OPEN MARKET MONEY RATES - 21 Rates most l i k e l y to be affected are those on readily saleable openmarket paper. The following table shows the level of the principal money rates and Reserve bank rates i n New York during December, together with corresponding rates i n January 193*+. After a further increase i n require- ments excess reserves would be no larger than i n January 193*+« I t does not follow that money rates should return to or above the level then prevailing, but that level may indicate an approximate maximum* At that time complete adjustment had not been made i n some of the rates to the comparatively new easy money situation. This was especially true of Treasury bonds and notes and rates on customers' loans, which are slower i n r e f l e c t i n g changed conditions* MONEY RATES IN NEW YORK CITY December 123i B i l l s , 90-day unendorsed Prime commercial paper, H-6 months Stock exchange c a l l loans Federal Reserve funds (interbank loans) U. S. Government obligations - yields Treasury b i l l s Treasury notes, 3-5 years Treasury bonds, long-term 1 1/8 January 12& 1/2 1 i / b - 1 1/2 1 i/s 0.21 1.0k O.67 2.27 3.50 2.U3 3.58 1 1/2 2 1/2 1/2 3.11 Customers1 loans Federal Reserve bank Rediscount rate Buying rate for 90-day endorsed bankers-t bills Banks and b i l l dealers might take advantage of the opportunity, as they did l a s t summer, to raise rates on bankers1 acceptances another fraction. -22The rate i s now 3/16 of one percent on 90-day h i l l s * The present c e i l i n g on t h i s rate i s l / 2 of one percent, which i s the "buying rate of the Federal Reserve bank* Rates cannot advance beyond that l i m i t so long as the Reserve banks stand ready to purchase a l l e l i g i b l e b i l l s offered* The rate on open-market commercial paper — now 3/H of one percent —might r i s e to ono percent' or 1 l / k percent, which i s almost back to the l e v e l of l a t e 1933* In view of the fact that such paper i s largely pur- chased by country banks, which w i l l continue to have substantial excess reserves, a greater r i s e i n t h i s rate i s not likely* The c a l l money rate i s new f i x e d by New York City banks at one percent and they charge correspondents l / 2 of one percent for making loans for them, which e f f e c t i v e l y keeps outside banks from this market§ The c e i l i n g on this rate i s the l e v e l at which outside banks would come into the market; this i s probably not over 1 l / 2 percent, which would give the banks a net return of one percent. The inflow of money from the i n t e r i o r would keep the rate from r i s i n g above that level* Treasury b i l l s , which now provide the most important medium f o r l i q u i d investment i n the money market, are largely held by New York City banks* The rate on these b i l l s might be expected to r i s e above the recent extremely low level; i n fact there has been a slight increase i n recent weeks, r e f l e c t i n g i n part increased offerings by the Treasury, but perhaps i n part adjustment of reserve position of New York banks i n anticipation of increased reserve requirements* Since, however, several New York City banks would s t i l l have substantial excess reserves, and since these b i l l s are also popular investments for i n s t i t u t i o n s and others seeking short-term uses f o r funds, much - 23 6f a r i s e would "bring a substantial amount of funds into t h i s market. It i s to be doubted that Treasury b i l l s would r i s e above 3/4 of one percent, especially i n view of the fact that bankers' b i l l s cannot go above l / 2 of one percent. Treasury b i l l s have a maturity of nine months, while the rate quoted on bankers1 b i l l s i s for 90-day paper, which might j u s t i f y a difference i n rates. Some increase i n yields on Treasury notes has already occurred i n recent weeks, partly because of the l i k e l i h o o d that exchange rights on future issues w i l l be smaller, i n coming years than they have been i n the past and perhaps partly because of adjustments of reserve positions. The shorter- term Treasury bonds, which have been s e l l i n g on a y i e l d basis of about one percent, have also been affected somewhat, but i n view of the large amount of l i q u i d funds that would s t i l l be held by banks outside of New York and by others than banks, no substantial r i s e in these rates would be anticipated. The long-term bond market might be somewhat affected by the readjustment of the reserve position of a few banks, but this effect would probably be temporary. A change i n reserve requirements by i t s e l f should not have a l a s t i n g effect upon the bond market, since the large supply of available investment funds outside banks i s an important factor i n t h i s market. Rates charged customers by banks should not be i n the least affected by increased reserve requirements. and may continue to show a borrowing by customers. These rates have been slow i n coming down downward tendency, notwithstanding increased - a^ Reserve System action to check increase i n rates Federal Reserve authorities could l i m i t the effect of the increase i n reserve requirements on money rates, i f the maintenance of present extremely low short-term rates should he desired* Since the b i l l - b u y i n g rate of the New York Reserve Bank establishes an effective c e i l i n g on the open-market rate for bankers* b i l l s and probably also on that for Treasury b i l l s , increases i n these rates could be checked by a reduction i n the New York Bank*s buying rate from l / 2 of one percent on b i l l s maturing i n 90 days or less to 3/8 or l / b of one percent, with corresponding reductions f o r the longer maturiReduction i n the New York Bank1 s rate on Government securities bought ties* under repurchase agreement and of i t s discount rate from 1 l / 2 percent to one percent or l / 2 of one percent might also assist i n keeping money rates down* Although banks might not borrow from the Reserve banks, therd would probably be an increase i n interbank borrowing, and the rate charged by banks on interbank loans — now l / S of one percent among New York City banks — would not r i s e above the Reserve bank rediscount rate* Other Reserve banks might reduce discount rates to one percent, although i n most cases such action would be merely a gesture* The effect of the adjustment upon the money market might be further reduced i f the Open Market Committee should authorize any Federal Reserve bank to purchase Government securities from member banks needing to s e l l them i n order to obtain s u f f i c i e n t funds to meet the increase i n requirements* Such securities might also be bought from banks or dealers under repurchase agreements* The System's holdings can, of course, be readjusted, i f i t i s not desired to increase the total*
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