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X-3669
:NE""r P~ FOR STJ,TING THE RESERVE POSITION OF FEDERAL BESERVE B.l!Nl\5.
Section l:S of the Federal Reserve Act contains the following provision on the subject of the reserves required to be maintained by Federal reserve banks:
"Every Federal reserve ban:r shall maintain reserves in gold or lawful
money of not less than thirty-five per centum against its deposits and reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation.''
and
"That when the Federal.reserve agent holds gold or gold certificate~
as collateral for Feieral reserve notes issued to the bank such gold or
gold certificates shall be counted as part of the gold reserve which such
bank is required to maintain against its Federal reserve notes in actual
circulation."
It seems clear from this that the law contemplates that there shall
be maintained a separate reserve of not less than 35~ a~inst deposits,
and a separate reserve of not less than 4~ a~inst Federal reserve notes
in actual circulation, in each Federal reserve bank.
Section 11 of the Federal Reserve Act provides:
"'!'he said board ~ahall publish once each \veek a staterr.ent showing the
condition of each Federal reserve bank and a consolidated statement for
all Federal reserve banks.
Such statements shall show in detail the
assets and liabilities of the Federal reserve banks, single and combined,
and shall furnish full information regarding the character of the money
held as reserve and the amount, nature and maturities of the paper and
other investments owned or held by Federal reserve banks."
lt would seem that the provision of the Act requiring that the condition statement of the Federal reserve ban1rs "furnish full infarrration
with regard to the character of the money held as reserve";· rea.i in conjunction with the preceding provision regarding reserves quoted from
()~ {",
f . .J_.h_ ~,_:
- 2 -
Section 1~, should be constrt:'.ed ao r,~quiring that the Federal reserve
Board should publish in its weekly st2..t<.-ment the state of the reserves
held res.pectively and separately against d·3posi t liabilitie(j and Federal
reserve notes.
This t,Jle Board is not doing.
It ha~ been tho practice since January,
1918, (when the present practice was adopted as a war-time expedi::ont) to
state the reserve position of the Federal reserve
bank~
by computing the
ratio of their holdings of reserve moneys against their deposit
and note issues
co~bined,
liabiliti~s
although there appears to be no warrant in the
Let for this method, unless it be purely for purpos..es of theoretical compari son.
The Federal Reserve Boar:l. has plenary power, under the terms of
Section
eral
15
of the Federal Reserve Let, with respect to the issue of Fed-
reserv~
notes and the
ch~racter
of the security against which notes
will be issued by it to reserve banks:
"The board shall have the right, acting through the Federal reserve
agent, to grant in whole or in part, or to reject entirely the application
of any Federal reserve bank for Federal reserve nbtes."
"The said Federal Reserve Board rray at any time cnll upon a Federal
reserve bank for additional security to protect the Federal reserve notes
issued to it."
It appears to be clearly within the discretion of the
Board, therefore, to determine
fro~
tirre to
ti~e
Fed~ral
Reserve
against what security it
will authorize the issue of Federal reserve notes, and thus, in its discretion, when conditions seem to the Board to require it, to issue such
notes only against golj collateral.
...
- 3 In other words, it is within the power or· the Federal Reserve :?card
to determine the amount of the gold reserve that shall be carried against
Federal reserve notes.
The 'extraordinary accumulation of gold by the Federal reserve system
during the past two years and more, amounting to approxi~ately 1200 millions,
to uq mind makes more urgent than ever the inauguration of a procedure which
is not only in eonformity with the requirements of the law, but in harmony ·
with a good and effective regulation of the currency and a good administration of credit by the
taken by
Fed~ral
reserve system.
The initiative should be
the Federal Reserve !oard.
I propose, therefore, that beginning say April
~
or such other date
as the Board may determine upon, the weekly statements of the Federal reserve banks, both the separate and the
eonsolida.t~d,
show the reserves
actually carried against deposits and the reserves actually carried against
notes.
(Note: If it
is
thought desirable, purely for purposes of theoretical
comparison, the weekly statement might carry in a footnote the ratio of
the reserve moneys of the Federal reserve banks against combined note and
deposit liabilities.)
An examination of the records of the :Board
shO\VS th:~t
allocation of reserve morteys as of !.!arch 1 ~ 1923,
b~tween
th<::: e. ctual
the banking de-
partment of the Federal reserve banks .and the Federal reserve agent's department, or, otherwise stJ.td., between the de:posi t reserve and the note
..
- 4reserve, was as follows:
TABLE I
Reserve ratio
against depcsitl
Boston
New York
Philadelphia
Reserve ratio
apainst notes
111.5
C4.B
Cleveland
Richmond
Atlanta
90.0
77.3
09.4
94.0
95·5
34.4
Chicago
St. Louis
Min.neapoli s
Kansas City
Dallas
San Francisco
ss.s
49.7
ss.o
System
55·3
This sta.tement shows the actual allocation of reserve moneys_, . It is,
however, never published, and is not 1~mvn even to rrnny persons within
the Federal reserve system.
This statement, it is highly interesting to note, shows that the re, serve banks, under the necessities of the
extraordi~ry
situation
occasioned by the heavy influx of gold during the past two years and the
liquidation of loans and discounts at Federal-reserve banks, have pretty
g~nerally
tendered gold to Federal rGserve agents as the principal security
for fed(1ral reserve notes issu~d to the banks ..
In publishing aweekly statement showing the deposit reserve and the
note reserve separately, we might start with the c.<.ctual existing alloc2.tion
of reserve moneys, or we might consider some slight departure from the existing allocation more in accordance with what tha Board might believe to
be an ideal apportionment.
I offer therefore the following plan for the
4
•
- 5consideration of the Board:
TABLE U
Table based on the we~k1y statec·. nt for ~;72;_rch 7,
1923, ~hewing the deposit and note reserve ratios
for each of the banks and f cr the tw2l ve banks combined i f the reserve rr.oneys were so allocatd. between the deposit reserve e.nd the note reserve a::;
to w.alte the minimum deposit reserve ratio shown
for any reserve bank 50~.
(In millions)
Deposit reserves
Boston
D;;J20Sit reserv~
~
63
New York
50.0
h9 (
50.0
50.0
50.0
1)0.0
491
Philadelphia
..J
59
79-5
Cleveland
Richmond
.Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
32
29.5
System
• ,)
143
so.o
39
29
5l.C
Note
rsse~ ~ote
~
1!34
90.6
570
100.0
175
227·5
371
sG
100~0
75
43
26.5
74.5
so.o
50.0
15 .. 5
173·5
llll.O
57,2
2<J90.0
50.0
Z7.1
s:.r.J.
92.0
,..,.., 3
94 .. 8
;50
109~5
50.0
reserve
53
~c.
z5.2
Cl.G
50.0
G4.6
92.7
Under the above allocation, no bank would have a reserve of less than
so.o~, which is the lowest reserve shown under the :!card's present form of
statement for any of the
Bank of Dallas.
The
ba~.
highest
namely, in the
dep~sit
c~se
of the Federal
R~serve
reserve ratio would be shown by New
Yorlr, to...wit, 5;,.5~. and two banks, to ... wit, New York and r.unnea.polis, would
show 100% note reserves.
In the event that it should be felt that this form of statement show•1
too great a disparity between the deposit reserve ratio of the New York
bank and the other banks, the deposit reserve of the New York bank could
be brought down by New York•s purchasing open market investments from other
..
.. 6 reserve banks to an amo,lnt sufficient to bring down the New York deposit
reserve ratio to the average for the system, to-wit,57.2%.
The way in
which this operation would vvo:r:k out is shown in the following
table~
Calculation of adjustment of open market holdings of
Federal reserve banks through transfer of gufficient
holdings to New York to bring ths New York deposit
reserve ratio do~m to the system average (57.~~).
:rased on the weekly ste1t:2n:ent for Harch 7, 1923.
(In millions)
Actual
holdings
of 0}2en
market
m1rchases
Boston
New York
Philadelphia
Cl. eve land
Richmond
Atlanta
Chicago
St. Louis
fHnneapolis
Y>.ansas City
Dallas
San Francisco.
40
System
55
53
Chanee in Ad,iust;ld Deposit Deposit Deposit Deposi~
holdings ho1din,gs reserves reserves reserve reserve
i2_ bring
ratio
ratio
after
~ before
down N.Y.
change adjust- ad,iust- b~fore after
ratio tc
ad.i'.lS t- ad ius tment
m.mt
ment
5].2~
msml
-8
+;::~
--..
-c
76
- g
2
0
25
- g
34
- 3
563
63
71
491
'iO
59
403
57
se:
50.0
30
32
32
50.0
50.0
33
31
29
143
39
32
153
47
32
31
43
43
2£
74
553
1110
~c
2
22
-3
103
. 39
17
47
67
32
143
-2C
- s
14
39
- 3
-19
29
51
5C.C%
C,e:
(. •
l..J ......
so.c
50.0
50.0
51.8
!'" 3~
5o.
-~
57.2
sc.s
55·5
50.0
54.2
55-9
60.3
57-l
59.0
54.8:
93
50.0
50.0
50.0
62.5
1110
57.2
57·2
<.'
_,J..
lt is to be noted that in such a redistribution of the earning assets
of the twelve banks, each bank would retain a sufficient volume of earning
assets to make its expenses and dividepts.
!:
•
The allocation of reserve moneys thus proposed would show an average
for the Syste~ of
57.2(, for the deposit reserve ratio, and 92.77o for the
note reserve ratio.
The greatest variations from the average for the system for the de-
••
- 7posit reserve ratio would be shovm in the case of San Francisco (52.5~) .-
and Richmond (50.0%).
For the note reserve ratio, the greatest variation from the average
for tpe system, as sho\vn in Table II, p. 5, would be in the casa of :>allas
(5o.oe,:),
New York (100.0~.). ani ~.Tinneapolis (100.0~).
Under the allocation of reserve moneys outlined e.bove, and. with a
deposit ratio for the twelva ba.nks combined of 57 .2:::-~, the t\•rel,,e Federal
reserve banks would bs able to expand their loans to an amount of s,pproxirnately £50 millions before the deposit reserve fell to
40~.
Othe~vise stat~d,
for each drop of 1~ in the deposit reserv$ ratio, the twelve banl':s cor.:bincd
would have an added lending power of approxirrately C50,000,CCC.
A. C. M.
March 22, 1923.
@FedFRASER