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W. P. Q. HARDING, GOVERNOR PAUL M. WARBURG, VICE GiOYIRNOR FREDERIC A. DELANO ADOLPH C. MILLER CHARLES S. HAMLIN .~. I!:X·OFFICIO MKMBERS 6~.5 WILLIAM GI,.McADOO SECRETARY OF THE TREASURY CHAIRMAN JOHN SKELTON WILLIAMS H. PARKER WILLIS, SECRETARY SHEifiiAN P. ALLEN, ASST. SECRETARY AND FISCAL AlENT FEDERAL RESERVE BOARD • COMPrROLLER OF THE CURRENCY ADDR ..SS REPLY TO WASHINGTON FEDERAL 'RjtSERVE I!OARD CONFIDENTIAL August 71 1918,; x-i11a Dear Sir:. Th~ Board·has. given special attention 6f late to ~he question of reserves, which for.son:e 'tirr.e J)ast have.shonn a dONnw.ard tendency •. .A decline in reserv.e petce~tages is inevitable as long as the Treasury iii forced to clraw ll:pon the financial resouraes of the cbu11:try ·:mp·1.0.1~· than deposits based upon earnings ca.n accumulate. chould n.ct forget that $9.o,poo.,ooo more However, we silver has been withdrawn from cir- Cl:.latio:r.. since April, and when the FederaJ. reserve bank notes, which we are assu~ed will be available about August 15th,. can be pUt into circulation i.l an.a;nount -equivalent to the silver certificates which have been w~thdra.vm. we will be· able to strengt}:len our gold reserves by a.pproxi- I;~ataly $45 1 000,000~ In addition to thi.s, . the Treasury will be able in the near future to turn over to the Federal reserve banks ten or tv."'Snt·y million dollars more of gold, and we should thus be able to naint.ain our reserves for awhile in the neighborhood of 58%•. The Board has reaChed the conclusion that before any steps looking to the suspension of reserve requirements are seriOQely considered, the Fe.daz:a,l resanre banks should nake an arbitrary computation of their serves against deposits on a. basis of 35%, .thereby increasing in a. \ re~ X-1113 - 2 corresponding degree the reserves against note issues, which, for the time being, on the basis of 35% for reserves on deposits, would be abpve 7!S%. The position of 19]8, was as the twelve Federal reserve banks on August 2, foll~ns: Total cash reserve·•• ~ •................... $2,034,918,000 Net deposit liabilities ..................... 1,558 1 839,000 35% thereof ............. .-.................. 545,594.,000 Federal reserVe notes in circulation....... 1,906,465,000 Note reserve available .................... 1,489.,324,000 Per cent.4•••••••·····~·~~ ••••••••••• ~... 78.1 Vv'henever the reserve against notes shall fall to 40%., the deposits reserve having been maintainea at 35%, it will then be the policy of the Board to maintain the note issue reserve at the 40% level, and, if necessary., b.:Jgin to reduce the reserve against deposits until it reac}1es a figure :o:ete rially below nonraJ. - say 20%.. Section 11 reqUires that the Board 11 shall establish a graduated. te.x upon the amounts by which the reserve requirerr.ents of this Act rray be permitted to fall below the amount hereinafter specified 11 .. The Board is authorized., therefore, to establish a very reoderata graduated tax upon deficiencies in deposit reserves, but in suspending the re- quirements on note issue reserves,the Board would be bound by the tax imposed by the Act, as follows: 66 X-11~ - 3'- • fi'When the reserve falls below forty per centum, until it reaches thirty two and one half per centum, a tax of not more than one per caatum." Down to 3ai%, therefore, the Board has the discretion of imposing , a moderate tax upon the deficiencies in note issue reserves in the same manner as.it can deal with deposit reserve deficiencies. Whenever the Federal reserve note issue reserve falls below 38!-·%., however., it will . become the Board's duty to fmpose.a tax of not less than zk% It% upon each deficiency or fraction thereof. There seems ·to be no reason., however, to apprehend in the near future·, if ever, a fall in our reserves to this point, and we can do a great deal in the nanner above indicated to delay any such development. \~en confronted with such a condition, we can then consider the advis- ability of asking Congress to modify the terms of the Act. Before any action is taken looking to the suapension of reserve requirenants, we should exert every effort to complete the concentration of gold in the Federal reserve banks. There are still in the vaults of member and ·non-member banks, in circulation, and in hoarding, entirely outside of the vaults of the Federal reserve banks - about $SOo,ooo,ooo. of gold and gold certificates. As much of this gold as possibl.e should ·be brought into the bankS' while our note reserves are still high and before there is any tendency upon the part of mhe public to become alarmed~ . In view of the foregoing the Federal Reserve Board desires that the Federal reserve banks adopt a dual method of calculating their reserves, as follows: 67 X-1113 - 4- :1: As heretofore, (a) gold reserve and (b) cash reserve on combined deposits and note issues; a·: Fixes reserve on deposits of 35%, in gold and lawful money, 5% on Federal reserve bank notes, leaving a Iluctuating reserve on the Federal reserve· not"e issue, which would receive the benefit.of the entire excess aboTe 35%, and 5% respectively. These reserve percentages will be published in the weekly statement of the Federal Res~rve Board, and in this way the public will gradually becorr~ accustomed to a.reserve of 35% against deposits, \ while Federal reserve note issues will,for a considerable time show a very strong gold aover. ·The Federal res&rve ·banks are not expe c. ted to publish their percentages in their- own statements, and this letter is confidential and·not for publication. Very truly yours~ Governor• .. 68
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