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3Z~9 W. P. G. HARDING, GoYDIIOR ALBERT STRAUSS, VICE GoYDNOI ADOLPH C. MILLER CHARLES S. HAMLIN EX-OP'PICIO MEMBIDIS CARTER GLASS SI!I:RETAI't'W ,-HI TIEACIIAIIIIM JOHN SKRTON WILLIAMS COIIP.-..11 OP THI CURII!NC't J. A. BRODERICK, SI!I:RETART W. T. CHAPMAN, ASSISTANT SI!I:RETART W. M. IIILAY, FISCAL MINT . FEDERAL RESERVE BOARD ADDRESS REPLY TO WASHINGTON FEDERAL RESERVE BOARD June 10, 1919. X-1576 Subject:Reclassification of Reserve and Central Reserve Cities. Dear Sir~ In a.ection 13 of the Federal Reserve Act there is a clause which :provides tba.t 11 the orgd.!lization of Federal reserve districts and Federal reserve cities shall not be construed as changing the :present status of reserve and central reserve cities", and consequently in the exercise of the. power conferred u;pon the :Board in paragraph (e) of section ll, "to add to the number of cities classified as reserve and central reserve cities under existing law in which national banking associations are subject to the reserve requirements set forth in section twenty of this Act; or to reclassify existing re~erve and central reserve cities or to termi~te their desi~tion as such", the :Board did not change the status of the three central reserve cities, New York, Chicago and St. Louis, which had been central reserve cities for many years prior to the passage of the Federal Reserve Act4 Consequently member banks in th~se cities are obliged to carry reserves of 13% against their demand deposits while banks in the other cities having Federal reserve banks, which .were also reserve cities under the old law, need carry only 10~ reserves a~inst their demand deposits. More than two years ~go the :Board announced its policy of classifying all cities in which branches of Federal reserve b~ks might be located as reserve cities, and accordingly member banks in all such cities are now required to carry lo% reserves ~ga.inst their demand deposits. It is obvious, however, in view of the change in reserve requirements made by th~ Federal reserve law as originally enacted ~nd more'particularly by the amendment of June 21, 1917, that the old classification of reserve and centr~l reserve cities has become obsolete. The member banks in St .. Louis, for example, have no greater opportunity for expansion than have those of Boston, Philadelphia and Cleve!Qnd, all of which cities exceed St~ Louis in population, but because of the previous status of St. Louis as a central reserve city they are required to carry 13~ reserves asainst demand deposits while thuse of the other three cities named need carry only 1~. The Board is considering the advisability of reclassifying the list Of central reserve and reserve cities, and as all twelve cities in whi~t Federal reserve banks are located have become the financial centers of thei:·· respective districts, it seems that there may be good reasons for classifyiilf. .. . X-1576 - 2 - them ~11 as central reserve cities. Such action would increase the reser~e requirements in nine of the Federal reserve cities from 10% to 13% as against demand deposits. It is not the purpose of the Boarc. to take hasty action, and if the Board should determine to make the change, it would give a:"'ll,p1e notice. The present ~w does not require nor permit any part of a member bank's lawful reserve to be carried :i.n ~.ts o~~ vati.:lt, and the amount of ca.sh carried by a member bank is opi;iona.l with it. A mer:iber bank in a Fede1·al reserve city can, therefore, afford to let i.ts vault cash run do·.m. to a minimum for the reason that it can replenish its cash OLJ. a. few minutes notice, while banks located at a dist.,;~,nce feel that prude:r.:.ce demands tru,t they carry a larger amount of vault cash as time is a necessary factor in adding to their cash holdings in case o.f t:;nsxp~cted need or eiLergency. The same observa.tions apply to cities which have bra::~ches of Feder.:1.l reserve banks, and it may be argued that those cities a.lso should be classified as central reserve cities. The Board feels, however, that it must consider the effect upon the member banks and particuJ~rly upon State banks which have become members of the system and which can exercise their statutory privilege of withdrawing on .six months' notice. , If it should be deemed advisable to classify branch bank cities as centralreserve cities, it might be well to give them longer notice than in the case of Federal reserve bank cities of such intention in order tlut the member banks in any branch bank city may have ample time to decide whether to increase their reserves or to have their branch discontinued. The Board is receiving a good many applications for the establishment of additional bra.nches, and perhaps if it were known that all branch ba.nk cities would be classified as central reserve cities the desire to have additional branches established would not be so keen. This is a confidential letter and in discussing it with your executive committee and your directors you should have it so understood. It is important, however, that the matter be carefully considered before any action is decided upon, and yo~ are requested, after conferring with your officers and directors. to write the Board stating frankly the consensus of opinions expressed. You are also invited to give a full dnd free expression of your ovvn views. Very truly yours, Governor. LETTER SENT TO CHAIRMAN OF ALL BANKS
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