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52 X-9805 BOARD OF GOVERNORS OP THE FEDERAL RESERVE SYSTEM Statement for the Press For release in morning newspapers of Sunday, January 31, 1937 January 50, 1957 The Board of Governors of the Federal Reserve System today increased reserve requirements for member banks by 33-1/3 percent, as follows: On demand deposits, at banks in central reserve cities, from 19-1/2 to 26 percent; at banks in reserve cities, from 15 to 20 percent; and at "country" banks, from 10-1/2 to 14 percent; on time deposits, at all banks, from 4-1/2 to 6 percent. For the pur- pose 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) Class of bank Demand Deposits Present March 1 May 1 and Requirethrough ments April 30 after Time Deposits Present March 1 ' Require- through ments April 30 May 1 and after : : : ; Central reserve city 19-1/2 22-5/4 26 4-1/2 5-1/4 6 : Reserve city 15 17-1/2 20 4-1/2 5-1/4 6 s "Country" 10-1/2 12-1/4 14 4-1/2 5-1/4 6 j X-9805 -2- 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 $1,503,000,000 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 Reserve System will be placed in a position where such reduction or expansion of member bank reserves as may bu 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. X-9805 54 '-3- 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 rrther 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 1935 and December 24, 1936, when the United States Treasury put into effect' its progrr.m 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 pre-depression levels, is sufficient to sustain a vastly greater rate of business activity than exists today. In order to sustain and expand re- covery, 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 correspondent banks are twice 55 X-9805 -4as large as they have generally been In the pact. All but a small number of member banks have more than sufficient excess reserves and surplus balances with other banks to meet a 33-1/3 percent increase in reserve requirements. As of January 15, 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 erectcd 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 re- serve 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. 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. X-9306 56 —o— It is the Board's expectation thct, with approximately $500,000,000 of excess reserves remaining with the banks, credit conditions vd.ll 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 those 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." 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 business, 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.
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