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75TH CONGRESS)
1st Session
/
SENATE
/DOCUMENT
\
No. 19
RESERVE REQUIREMENTS OF MEMBER
BANKS OF THE FEDERAL
RESERVE SYSTEM
LETTER
FROM
THE SECBETABY OF THE BOABD OF GOYEBNOBS OF
THE FEDEBAL BESEBYE SYSTEM
TRANSMITTING
IN RESPONSE TO SENATE RESOLUTION No. 78
A REPORT ON THE RECENT ORDER OF THE BOARD
INCREASING THE RESERVE REQUIREMENTS OF
MEMBER BANKS ON MARCH 1, 1937
A N D MAY 1, 1937
FEBRUARY 15, 1937.—Referred to the Committee on
Banking and Currency and ordered to be printed, with illustrations
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1937
RESERVE REQUIREMENTS OF MEMBER BANKS OF
THE FEDERAL RESERVE SYSTEM
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
Washington, February 15, 1937.
T h e PRESIDENT OF THE SENATE.
SIR: Reference is made to Senate Resolution 78, of February 5,
1937, requesting the Board of Governors of the Federal Reserve
System to transmit to the Senate, as soon as practicable, a reportsetting forth the reasons for the issuance of the recent order of the
Board increasing the reserve requirements of member banks after
May 1, 1937, the actual and probable effect of such order with respect
to interest rates upon public and private obligations, and its probable?
effect upon the banking system of the country.
The resolution was referred to the Board of Governors and in
response thereto it has directed me to transmit to you the following:
(1) The statement contained in the Board's minutes of January 30,
which sets forth the substance of the action taken by the Board and
the reasons therefor; (2) material, authorized by the Board for
inclusion in the Federal Reserve Bulletin for February 1937, which
relates to the ability of the banking system of the country to meet the
present and prospective credit requirements of agriculture, commerce,
and industry, to the reserve position of the member banks of the
Federal Reserve System, and to the effects of proposed changes in
reserve requirements; and (3) additional data with respect to interest
rates* upon public and private obligations.
The statement contained in the Board's minutes of January 30,
setting forth the substance of its order increasing the reserve requirements of member banks and the reasons for this action, is as follows:
The Board of Governors of the Federal Reserve System today increased reserve
requirements for member banks by 33^ percent, as follows: On demand deposits,
at banks in central reserve cities, from 19?^ to 26 percent; at banks in reserve cities,
from 15 to 20 percent; and at "country'' banks, from 10% to 14 percent; on time
deposits, at all banks, from 4}{ to 6 percent. For the purpose of affording member
banks ample time for orderly adjustment to the changed requirements, one-half of
the increase will become effective as of the opening of business on March 1, 1937,
and the remaining half will become effective as of the opening of business on May 1.
The following table shows what the reserve requirements are at present, what
they will be from March 1 through April 30, and what they will be commencing
May 1:
Reserve requirements
[Percent of deposits]
Demand deposits
Class of bank
Central reserve cityReserve city
"Country'*
125324—37
Present
requirements
-
19H
15
10 H
Mar. 1
through
Apr. 30
22X
17H
12H
Time deposits
May 1
and
after
26
20
14
Present
requirements
4M
4H
4M
Mar. 1
through
Apr. 30
May l
and
after
SH
5X
m
1
&
6
&
2
RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
This action completes the use of the Board's power under the law to raise
reserve requirements to not more than twice the amount prescribed for member
banks in section 19 of the Federal Reserve Act.
The section of the law which authorizes the Board to change reserve requirements for member banks states that when this power is used it shall be "in order
to prevent injurious credit expansion or contraction." The. significance of this
language is that it places responsibility on the Board to use its power to change
reserve requirements not only to counteract an injurious credit expansion or
contraction after it has developed, but also to anticipate and prevent such an
expansion or contraction.
By its present action the Board eliminates as a basis of possible credit expansion
an estimated $1,500,000,000 of excess reserves which are superfluous for the present
or prospective needs of commerce, industry, and agriculture and which, in the
Board's judgment, would result in an injurious credit expansion if permitted to
become the basis of a multiple expansion of bank credit. The Board estimates
that, after the full increase has gone into effect, member banks will have excess
reserves of approximately $500,000,000, an amount ample to finance further
recovery and to maintain easy money conditions. At the same time the Federal
iteserve System will be placed in a position where such reduction or expansion of
member bank reserves as may be deemed in the public interest may be effected
through open-market operations, a more flexible instrument, better adapted for
keeping the reserve position of member banks currently in close adjustment to
credit needs.
As the Board stated on July 15, 1936, in its announcement of the previous increase of reserve requirements, excess reserves then held by member banks had
resulted almost entirely from the inflow of gold from abroad rather than from the
System's credit policy. Since that time the country's gold stock has been further
increased by a large inflow of gold, amounting to $600,000,000. Between the time
of the banking holiday in 1933 and December 24, 1936, when the United States
Treasury put into effect its program for preventing acquisitions of gold from adding to the country's banking reserves, the gold inflow aggregated approximately
&4,000,000,000. This inflow of gold had the effect of adding an equal amount to
the reserves of member banks as well as to their deposits. The total amount of
deposits in banks and the Postal Savings System, plus currency outside of banks,
is now $2,000,000,000 larger than in the summer of 1929.
The present volume of deposits, if utilized at a rate of turnover comparable to
prddepression levels, is sufficient to sustain a vastly, greater rate of business activity than exists today In order to sustain and expand recovery, the country's
commerce, industry, and agriculture, therefore, require a more complete and productive utilization of existing deposits rather than further additions to the amount
now available.
The excess reserves of about $1,500,000,000 eliminated as a base of further credit
expansion by this action could support an increase in the supply of money, in the
form of bank credit, which beyond any doubt would constitute an injurious credit
expansion.
. The present is an opportune time for action because, as was the case when the
Board announced its prior action last July, excess reserves are widely distributed
among member banks, and balances with con espondent banks are twice as large
as they have generally been in the past. All but a small number of member
banks have more than sufficient excess reserves and surplus balances with other
banks to meet a 33^-percent increase in reserve requirements. As of Januaiy 13»
the Board's survey indicates that only 197 of the 6,367 member banks lacked
sufficient funds to meet such an increase in reserve requirements by utilizing their
present excess balances with the reserve banks and not more than one-half of
their balances with correspondent banks. On this basis these 197 banks, in order
to meet the full requirements, would have needed an additional $123,000,000, of
which $110,000,000 would have been needed by banks in central reserve cities,
$11,000,000 by banks in other reserve cities and only $2,300,000 by country
banks.
, Another reason for action at this time is that, as stated by the Board last July,
"it is far better to sterilize a part of these superfluous reserves while they are still
unused than to permit a credit structure to be erected upon them and then to
withdraw the foundation of the structure."
The available methods of absorbing excess reserves have been under consideration. It has been decided that under present circumstances changes in reserve
^requirements should precede reduction in reserves through open-market operations,
.because changes in requirements affect all banks, regardless of their reserve position, and consequently should be made while reserves are widely distributed.
3
RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
This action increases reserve requirements to the full extent authorized by law.
It is not the present intention of the Board to request from Congress additional
authority to absorb excess reserves by means of raising reserve requirements.
It is the Board's expectation that, with approximately $500,000,000 of excess
reserves remaining with the banks, credit conditions will continue to be easy. At
the same time the Reserve System will be in a position to take promptly such
action as may be desirable to ease or tighten credit conditions through openmarket and rate policy.
In announcing the previous increase in reserve requirements, the Board said:
"The prevailing level of long-time interest rates, which has been an important
factor in the revival of the capital market, has been due principally to the large
accumulations of idle funds in the hands of individual and institutional investors.
The supply of investment funds is in excess of the demand. The increase in
reserve requirements of member banks will not diminish the volume of deposits
held by these banks for their customers and will, therefore, not diminish the
volume of funds available for investment. The maintenance of an adequate
supply of funds at favorable rates for capital purposes, including mortgages, is
an important factor in bringing about and sustaining a lasting recovery."
EXCESS RESERVES OF MEMBER BANKS
BILLIONS OF DOLLARS
BILLIONS OF DOLLARS
4
4
1932
1933
1934
1935
1936
1937
The same considerations apply with equal force at the present time. The
Board's action does not reduce the large volume of existing funds available for
investment by depositors, and should not, therefore, occasion an advance in
long-term interest rates or a restrictive policy on the part of institutional and
other investors in meeting the needs for sound businesss, industrial and agricultural
credit.
In view of all these considerations, the Board believes that the action taken
at this time will operate to prevent an injurious credit expansion and at the
same time give assurance for continued progress toward full recovery.
The following material, authorized by the Board for inclusion in the
Federal Keserve Bulletin for February 1937, relates to the ability of
the banking system of the country to meet the present and prospective
credit requirements of agriculture, commerce, and industry, to the
reserve position of the member banks of the Federal Reserve System,
and to the effects of proposed changes in reserve requirements:
Member bank reserve balances with Federal Reserve banks on January 27,
were $6,770,000,000, of which $4,620,000,000 were required reserves, leaving
excess reserves of $2,150,000,000, as shown in the chart (p. 3). After reserve
requirements were increased by 50 percent last August, excess reserves grew from
$1*800,000,000 to $2,200,000,000 in November and early December. They were
4
RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
then temporarily reduced to $1,880,000,000 on December 23 as a result of withdrawals of currency into circulation to meet holiday demands and of the building
up of Treasury deposits at the Reserve banks.
In the subsequent 5 weeks excess reserves increased once more as currency
returned from circulation and Treasury deposits were reduced. Further growth
of $120,000,000 in the country's gold stock from December 23 to January 27 was
more than offset by an increase of $160,000,000 in Treasury holdings of cash,
including inactive gold. An increase of foreign-bank and other nonmember
deposits, amounting to $60,000,000 in the 5 weeks and to $100,000,000 since the
beginning of December, has also withdrawn funds from member bank reserves.
The increase in money in circulation in the three months preceding Christmas
amounted to $450,000,000, the largest in several years, while the decrease of
$360,000,000 in the following 5 weeks was somewhat less than the usual seasonal
amount, indicating that the growth of money in circulation, which has been
pronounced in the past 2 years, continued over the holiday period.
Effects of the announced increase in reserve requirements upon the various
classes of member banks are shown approximately in the following table based
upon the reserve position of the banks as of January 27, 1937. It is not possible
t o show precisely how each group will be affected, because by the time of the
effective dates of the two increases in requirements the total amount of reserves
and their distribution among the various classes of banks and also the amount of
deposits on which required reserves are based may have'changed, although the
•changes within the next month will probably not be substantial. The figures
indicate what the results would have been if the increase in reserve requirements
had become effective on January 27. A factor that may considerably affect the
distribution of reserves will be the withdrawal of bankers' balances by country
banks from their city correspondents for the purpose of providing additional
reserves needed.
Reserve position of member bank6} Jan. 27, 1937
[In millions of dollars.
Figures partly estimated]
Reserves with Federal Reserve banks
Class of bank
Total
Central reserve city banks
Reserve city banks
"Country" banks
All member banks
Required
Excess
E x c e s s reserves
after increase in
required reserves
of—
16J5 per- 33H percent
cent
3,378
2,147
1,248
2,371
1,492
756
1,007
655
492
612
406
366
217
158
240
6,773
4,619
2,154
1,384
615
Figures in the table show that banks in each class taken as a whole, on the
basis of their January 27 position, would still have had large excess reserves after
the
first
percent increase in requirements, with country banks having the
largest relative amount. The effect of the second increase will depend upon
changes that may take place in the amount and distribution of member bank
reserves by the end of April, but it would appear from the present situation that
all the classes of banks would still have substantial excess reserves.
As pointed out in the Board's statement of January 30, a recent survey by the
Board showed that all but 197 member banks>f taken individually, were able to
meet an increase of 33^ percent in reserve requirements either from excess
reserves or by using one-half of their balances with correspondents, and all but
60 banks could meet an increase of 16J{ percent in that way. The Boardrs survey
covered the situation on January 13 and the additional reserves needed by banks
in the various classes to meet increases in requirements of
and 33# percent
as of that date are shown in the following table:
5 RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
Additional reserves required by member banks to meet increase in requirements,
position as of Jan. IS, 1937
[In millions of dollars]
Increase of 1 6 ^ percent
Class of bank
Total
Obtainable
by using
one-half of
bankers'
balances
Increase of 33H percent
Required
after using
one-half of
bankers'
balances
Total
Obtainable
by using
one-half of
bankers'
balances
Required
after using
one-half of
bankers'
balances
Central reserve city banksReserve city banks
"Country" banks
28.0
48.0
24.4
8.0
47.8
23.8
20.0
.2
.6
147.1
159.0
70.4
37.6
148.0
68.1
109.5
11.0
2.3
All member banks,.
100.4
79.6
20.8
376.5
253.7
122.8
These figures indicate that to meet a 16%-percent increase in requirements,
member banks outside of the central reserve cities would need to raise about
$70,000,000 of additional reserve funds, most of which would probably be obtained
by withdrawals from balances with city correspondents. Probably half of these
balances are held with reserve city banks, and some of the withdrawals will be
absorbed by correspondent banks with adequate excess reserves, but a substantial
portion of the withdrawals from reserve city banks will be met in turn by withdrawals from central reserve city banks. As a consequence, a large part of the
additional reserve funds obtained from bankers' balances will in the end come from
central reserve city banks, 15 of which on the basis of their position as of January
13 would need to raise $28,000,000 of additional reserves, in addition t o meeting
such withdrawals by correspondents as may occur. The other 35 centra) reserve
city banks would still have over $500,000,000 of excess reserves. Since this survey was made the New York City banks as a whole, as shown in the chart on page
6, have increased their excess reserves by $100,000,000 and are in a position to
meet the increase with a smaller amount of readjustment.
These figures indicate that the amounts involved in the necessary adjustment
of reserve positions of member banks to the increase of 16^ percent in reserve requirements at the end of Februarj^ will be smaller than those needed at the time of
the 50 percent increase in requirements last August. At that time the change
was accomplished with little effect on the money market. The effect of the final
increase at the end of April will depend to a large extent upon the distribution of
the excess reserves remaining at that time.
Growth of bank deposits and of currency in use by the public is limited by the
amount of reserves held by banks. The total of deposits and currency outside
banks is now larger than at any previous time, and the excess reserves held by
member banks provide the basis for a further expansion in deposits. Increases
in reserve requirements substantially reduce the magnitude of possible further
credit expansion not only by decreasing the volume of excess reserves but also
by lowering the ratio of expansion possible on the basis of a given amount of
reserves. The chart (p. 6) shows for selected dates the relationship between
member bank reserves, on the one hand, and all bank deposits plus currency outside of banks on the other, and also indicates the potential expansion on the basis
of excess reserves outstanding on the dates shown.
In 1922 member banks held $1,780,000,000 of reserve balances with Federal
Reserve banks and all bank deposits and currency at the disposal of the public
aggregated about $39,000,000,000, or 22 times member bank reserves. By 1929
deposits and currency had expanded to $55,000,000,000 and reserves were
$2,360,000,000, giving a ratio of more than 23 to I. In those years member
banks held only the minimum amount of reserves required. In June 1933
deposits and currency were $13,000,000,000 smaller than in 1929, but reserves
held were only slightly smaller, and member banks held $360,000,000 of excess
reserves, which would have permitted on the basis of the 1922 ratio an expansion
of $8,000,000,000 in deposits. From June 1933 to June 1936, notwithstanding
an increase in deposits and currency to the 1929 level, the growth of member
bank reserves was so great that there were $2,700,000,000 of excess reserves.
These reserves were sufficient to permit a further theoretical expansion of
$60,000,000,000 in deposits. The increase in reserve requirements made last
August considerably reduced the possible expansion, but at the beginning of this
6
RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
year, with deposits and currency $2,000,000,000 larger than the previous maximum, the $2,200,000,000 of excess reserves held by member banks could still
support a further expansion of $32,000,000,000 in bank deposits and currency,
an amount far in excess of the present or prospective needs of the country. The
final increase in reserve requirements will reduce the amount of potential expansion in deposits and currency, on the basis of existing reserves, without recourse
to the Reserve banks, to a maximum of $5,500,000,000.
In making these computations deposits of nonmember banks, as well as those
of member banks, are included because nonmember banks hold most of their
reserves with member banks, so that in the final analysis reserve deposits of
member banks constitute reserves back of all deposits in the United States.
RESERVES AND CREDIT EXPANSION
(
1922
1929
^
In millions of dollars )
1936
PRESENT
Changes in currency are also reflected in and limited by available member bank
reserves.
The figures for potential expansion indicate the maximum possible expansion
on the basis of reserves. The figures for June 1933 and June 1936, were computed
by applying to excess reserves on those dates the 1922 ratio of reserves to deposits
and currency. In computing potential expansion on the basis of excess reserves
now outstanding the 1922 ratio was reduced by one-third to allow for the 50percent increase in reserve requirements last August and by one-half to provide
for the further increase to double previous requirements. In 1929 and 1933
corresponding ratios were somewhat larger than in 1922.
These figures indicate in a general way the nature of the changes in the credit
situation effected by the further increase in reserve requirements; they are not
exact measurements of what as a practical matter could have happened had there
been no such increase. An expansion of as much as $60,000,000,000 or even of
$32,000,000,000 in deposits and currency would not have been likely, because other
7
RESERVE REQUIREMENTS OF FEDERAL RESERVE BANKS
forces would have prevented it, but a substantial movement in that direction would
have been injurious to the business and credit system. The extent to which deposits and currency actually will expand in the future depends upon developments
that may influence the attitude of borrowers and lenders, change the volume of
reserves, or affect the composition of deposits and therefore the ratio of deposits
and currency to required reserves. Increases or decreases in the amount of
currency in circulation, for example, would affect reserves as well as the total
supply of means of payment, and shifts in the relative importance of demand and
time deposits, of deposits in the various classes of reserve cities, or of those at
member and nonmember banks would change the ratio of potential expansion on
the basis of a given amount of reserves.
The foregoing statements set forth the Board's expectation that
credit conditions would continue to be easy after the increase in
reserve requirements goes into effect. Inasmuch as the increase has
not yet gone into effect, since the Board's order provides tllat half of
the increase shall be effective at the opening of business March 1,
1937, and the remaining half at the opening of business May 1, 1937,
whatever influence the Board's action may have had up to this time
has been anticipatory and psychological in character. The possibility of such action by the Board has been the subject of discussion
for some months past and it is thought that market expectations that
such action would be taken have had some influence. On the other
hand, so many factors affect interest rates that, in the Board's opinion,
it would not be accurate to ascribe changes in these rates exclusively
to the Board's action or to expectation that action would be taken.
A table giving the course of the principal available quotations of
long- and short-time money rates in recent months follows:
Money rates in New York City
[Percent per annum]
In week ending—
July 18,
1936
Bankers* acceptances, 90-day unendorsed
Commercial paper, prime, 4-6 months
Stock-exchange call loans
U* S. Government obligations:
Treasury bills, 9 months
Treasury notes, 3-5 years
Treasury bonds. 8 years and over..^
Corporate bonds, high-grade
Federal Reserve bank:
Rediscount rate
Buying rate for bankers' acceptances, 90-day
endorsed..
-
H
%
Dec. 5,
1936
Me
H
Jan. 23,
1937
M
%
Jan. 30,
1937
V*
H
Feb. 6,
1937
H
1.00
1.00
1.00
1.00
1.00
.12
1.18
2.50
3.22
.09
.94
2.25
3.11
.36
1.19
2.30
3. OS
.40
1.20
2.31
3.13
.37
1.19
2.31
3.17
lX
m
X
1X
X
m
X
1M
X
The Board hopes that the foregoing information meets fully the
desires of the Senate as expressed in its resolution.
I am also directed by the Board to say that if there is m y further
information which the Senate may desire to have in connection with
this subject, the Board will be pleased to furnish it if it is available.
Respectfully submitted.
CHESTER MORRILL,
O
Secretary.
@FedFRASER