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EX-OF'P'ICIO MI!:MBBRS
W. P. G. HARDING, GovERIIOR
ALBERT STRAUSS, VICE
CARTER GLASS
SECRETARY OF THE TREASURY
ADOLPH
Go"J'R~
C. MILLER
CHARLES S. HAMLIN
,
CHAIRMAN
JOHN SKELTON WILLIAMS
COIIPTROLLI'R
0, TH! CURRENCY
FEDERAL RESERVE BOARD
J. A. BRODERICK, SICRETAIY
L. C. ADELSON, ASSISTANT St:CRITARY
W. T. CHAPMAN. ASSISTANT SICIITAIY
W. M. IMLAY, FISCAL MEIIT
WASHINGTON
ADDIID8 REPLY TO
FEDERAL RESERVE BOARD
December 20,1918.
X-1323
SUBJECT:
Reserves against Deposit and Note
Liabilities of Federal Reserve Banks~
Dear Sir:
As the reserves of the Fede'ral Rc:::Jerve Bcmks have been declining
and approaching more and n,ore the minimum percentages required to be held
Reser~e
against deposits and Federal
notes 1 several of the banks have written
to the Boa.rd inquiring as to the proper and most practicable rr.ode of disI
tributing their reserve holdings between Bank and rederal Reserve Agent.
This rratter has been discussed on .several occasions by the Board, which has
forrrulated its views in the
~#O
circular letters dated January 8 and
August 7, copies enclosed herewith.
As you may remember, before the passage of t:1e June 21,1917 arrendments to the Federal Reserve Act, gold with the Reserve Agent could not
be counted as reserve
~gainst
either deposits or
Feder~l
Reserve notes,
such gold merely reducing the bank•s liability on. Federal Reserve notes.
Section 16, as amended., provides
that~
When the Federal Reserve .Agent holds gold or gold certificates
as collateral for Federal Reser~e notes issued to the funk, such
gold or gold certificates shall be counted as part of the gold
reserve which such Bank is required to rraintain against its Federal
Reserve notes in actual circulation. 11
11
The Board has interpreted this clause to n.ean that gold with the
Federal Reserve Agent can be counted as part of the note reserve, but not
a part of the deposit reserve. On the other handJ it has taken the position
that gold under the banks 1 exclusive control (including gold in vault, in
sett].ement .f:un.d and vv:it~ fo.rei&n agenc"ies) may
.. ~
,
- \··
.:; r~,
~~ ·~. •} (.
,.zbe counted
~s
part of the Banks'
X-1323
co~bined
reserves against notes and
deposits.
Soon after the Act was amended in
June~
1917, th0 banks were requesteli
to distribute their gold holdings between Bank and Federal Reserve Agent in
such a rranner as to show in the weekly statement approxirrately equal resene
percentages against net deposits and Federal Reserve notes, and thus to
indicate the actual reserve position of the banks. Ordinarily no additional
suggestions would have been rr.<:.<.de., but conditions have been abnorrral and the
reserve percentage of the system since June,
1917~
has declined from about
75% to 50 per cent, some of the banks at tirr.es showing reserves considerably
below 45 per cent. These developments account in part for the suggestion
made in my letter of August 7,. ths.t in computing reserve against Federal
Reserve notes the banks
assun:e, jl.lst as the Board does in figuring at
present the Neekly rsserve
percentage against Federal Reserve notes, that
a fixed reserve of 35 per cent is held against net deposits, leaving the
balance of the gold reserve available as reserve
ag~.. inst
notes. Of course,.
as long as the reserves are sufficiently large, tha Board would have the
banks rr.aintain at least 35 per cent reserve against net deposits, and at
least 40 per cent against Federal Reserve notes in circulation.
To surr.n-arize the situation:
A.
Actual Reserve.
The
~ctual,
or statistical position of each
bank is measured by the ratio of cash reserves to combined
deposit and note liabilities. This ratio is given as a memorandum item on Daily Statet::-:ent .• Fonn 34. In the Woekly State~Jnt
issued by the Board, this percentage is shown for the
whole System, to indicate the actual reserve position of the
banks.
B.
Legal Reserve.
To comply with the Federal Reserve Act the banks
X-1323
-3must rraintain a reserve of at least 40 per cent in gold
a~inst
Federal
Reserve notes in actual circulation and of 35 per cent ~ gold and
lawful rr,oney against (net) deposits.
In the letter of August 7 (X-1113) the Board suggested that the
Reserve Banks set aside a fixed reserve against deposits of 35 per cent
in gold and lawful rr.oney, and that the balance of the reserves, including
the geld pledged with the Federal Reeerve Agent as collateral against
Federal !Reserve notes outstanding, be counted as reserve against Federal
Reserve notes in actual circulation.
Foll~Ning
the lines laid down in this circular the Board's Statis-
tical Division has figured the reserve percentage for each bank and tbe
systeffi as a whole in the rranner
sho~~
below:
(Figures as of· Decerr.ber 6,1918.)
Gross deposits •.•••• : ....•.•...••
Deduct ions •••....•...........••••
Net deposits ••.•...•••.•...••
2l'354g 390
-'--·
__ . ____
650.0:i9
1., ~(04., 351
Required reserve 35% ••••••••
596,523
Total cash reserves ••.••.••••...
Balance available as Federal
Reserve note reserve •.•..•.•••
Federal Reserve notes in actual
circulation ••••.••.• , •••••••••
1,524,523
2,584,523
Ratio of gold reserves to
Federal Reserve notes in
circulation, after setting
aside 35 per cent against
net deposits ..••••....•••••.••
As a rratter of policy it would be well for Federal Reserve Agents
to hold, as part of the collateral security for Federal Reserve notes an!
atr.ount of gold which when combined with the· Ba.nk 1 s redemption fund
will be equal at all
t~,es
to at least 40 per cent of the Federal Reserve
notes in actual circulation {Letter Jan. 8, X-636). Similarly, total
cash reserves
of the
banks~
exelusive of the gold with the Federal
X-1323
Reserve Agent and in the Eank 1 s redemption fund should be reaintained at
least at a
min~
In this
of
35 per cent of the
connection~
B~nk 1 s
net deposit liability.
it should be borne in mind that while the gold
redemption fund maintained by the bank is part of the 40 per cent legal
gmld reserves against Federal Reserve nctes in §!:stual circuJ.:..ation., i.e.,
net amount of Federal Reserve notes re;.1eived from the Federal .Reserve Agent
less notes on hand and in process of recemption 1 it cannot be counted as
part of the 100% collateral cover wh~ch the Federal Reserve Agent rr:ust hold
against Federal Reserve notes issued to the Bank and
amount of notes issued less amount returned by 1 or
g:~-:11
for~
c.tts·i;;an~ting.
i.e.·'
account of bank.
The balance to the credit of" the Federal Reserve Agent in the gold redemption
fund is part of the 100% collateral cover which the Agent nust hold and also ·
part of the rr.ininum 40% gold reserve which the Bank n:ust rPaintain against
their Federal Reserve notes in actual circulation.
If the reserve percentage against the combined deposit and note liabilities for the System declines to a :point where, after setting aside 35 per
cent againflt net deposits, the rerr.ainder is
insuffi~;ie'!!t
to provide·· t!le
40 per cent cover against Federal Reserve notes in actual circulation,
the Federal Reserve Board can meet the situation by permitting the Reserve
Banks to
~.aintain
reserves against deposits at a rate lower than 35 per
cent.
Kindly acknowledge receipt.
Yours very truly 1
Governor.
@FedFRASER