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C H A IR M A N O F T H E B O A R D O r G O V E R N O R S

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May 21, 1971

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Dear Mr. Chairman:
The Board of Governors recoinaends legislation (1) to authorize
a more flexible system of graduated reserve requirements, (2) to apply
such requirements to the demand deposits of all depositary institutions
that accept deposits subject to withdrawal b y check, and (3) to authorize
the Reserve Banks to extend credit to such institutions on the same
basis as they extend credit to member banks.
Since 1964 the Board has rec.orviended that the Congress extend
Federal Reserve reserve requirements to all federally insured banks. In
this connection I would like to bring to your attention the following
observations based on the enclosed data:
(1) The rate of growth in deposits in nonmember banks
has consistently exceeded the rate of growth in deposits
in member banks during the last decade.
(2) Noniaember bank deposits now constitute approxi­
m ately 18 per cent of the money supply.
(3) Yvithin the money supply total, the norunember bank
component has regularly responded leSs and more slowly to
monetary restraint than has the member bank deposit compo­
nent; in fact, in the years (19C5 and 196S) when che
Federal Reserve was trying hardest for monetary restraint,
nonmember banks added more to the money supply than did
member b a n k s .

The Board believes that, rationally and equitably, all of
our n a t i o n ’ institutions that offer checking deposits should be
required to maintain reserves against those deposits in the sarae
amount and form that are applicable to member banks.

Photocopy fro Gerald R. Ford Library

The Honorable John Sparkman, Chairman
Committee on Banking, Housing and Urban Affairs
Cnited States Senate
Washington, D. C.

T h e H o n o r a b l e John Sp a r k m a n


Othervise, if present trends continue, reserve requirement
changes as a tool of monetary policy will, sooner or later, become
practically ineffective. Even now, the incentive to avoid reserve
requirement costs by shifting to a nonmember status is a‘
factor that
the Federal Reserve must reckon w i t h in considering any increase in
reserve requirements to achieve stability goals.
~Because, of economies of scale in banking, the application
of reserve requirements to deposits in small institutions is more
onerous than the application of those requirements to deposits in
large institutions. Accordingly, in applying reserve requirements
to small institutions, whether member or nonmember banks or other
nonmember depositary institutions, the Congress might consider it
appropriate to establish graduated reserve ratios for demand deposits.
By authorizing the imposition of lower reserve ratios against some or
all of such deposits (say, the first $5 or $100 million), the Board
would be able to develop a rational and equitable reserve requirement
system consistent with the effective implementation of monetary policy.
As in the past in recommending extension of Federal Reserve
reserve requirements to nonmember banks, the Board believes that all
institutions subject to such requirments should have access to
Federal facilities on the same basis as member banks.


A draft bill based on the foregoing considerations is
The Board urges its introduction and enactment.
Sincerely yours,

Arthur F« Burns

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102