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Dallas, Texas, January 3,1941


To All Banking Institutions in the
Eleventh Federal Reserve District:
There is quoted below a statement by the Board of Governors of the Federal Reserve System, the
Presidents of the Federal Reserve banks, and the Federal Advisory Council which has been sent to the
President of the Senate, the Speaker of the House of Representatives, and the Chairmen of the Banking
and Currency Committees of both houses of the Congress:
“ For the first time since the creation of the Federal Reserve System, the Board of Governors, the
Presidents of the twelve Federal Reserve banks, and'the Members of the Federal Advisory Council repre­
senting the twelve Federal Reserve districts present a joint report to the Congress. This step is taken in
order to draw attention to the need of proper preparedness in our monetary organization at a time when
the country is engaged in a great defense program that requires the coordinated effort of the entire
nation. Defense is not exclusively a military undertaking, but involves economic and financial effectiveness
as well. The volume of physical production is now greater than ever before and under the stimulus of the
defense program is certain to rise to still higher levels. Vast expenditures of the military program and
their financing create additional problems in the monetary field which make it necessary to review our
existing monetary machinery and to place ourselves in a position to take measures, when necessary, to
forestall the development of inflationary tendencies attributable to defects in the machinery of credit
control. These tendencies, if unchecked, would produce a rise of prices, would retard the national effort
for defense and greatly increase its cost, and would aggravate the situation which may result when the
needs of defense, now a stimulus, later absorb less of our economic productivity. While inflation cannot be
controlled by monetary measures alone, the present extraordinary situation demands that adequate means
be provided to combat the dangers of over expansion of bank credit due to monetary causes. The volume
of demand deposits and currency is fifty per cent greater than in any other period in our history. Excess
reserves are huge and are increasing. They provide a base for more than doubling the existing supply of
bank credit. Since the early part of 1934 fourteen billion dollars of gold, the principal cause of excess
reserves, has flowed into the country, and the stream of incoming gold is continuing. The necessarily
large defense program of the Government will have still further expansive effects. Government securities
have become the chief asset of the banking system, and purchases by banks have created additional
deposits. Because of the excess reserves, interest rates have fallen to unprecedentedly low levels. Some of
them are well below the reasonable requirements of an easy money policy, and are raising serious, long­
term problems for the future well-being of our charitable and educational institutions, for the holders of
insurance policies and sayings bank accounts, and for the national economy as a whole.
“ The Federal Reserve System finds itself in the position of being unable effectively to discharge all
of its responsibilities. While the Congress has not deprived the System of responsibilities or of powers,
but in fact has granted it new powers, nevertheless, due to extraordinary world conditions, its authority
is now inadequate to cope with the present and potential excess reserve problem. The Federal Reserve
System, therefore, submits for the consideration of the Congress the following five-point program:
Congress should provide means for absorbing a large part of existing excess reserves, which
amount to seven billion dollars, as well as such additions to these reserves as may occur. Specifically,
it is recommended that Congress
increase the statutory reserve requirements for demand deposits in banks in central
reserve cities to 26 per cent, for demand deposits in banks in reserve cities to 20 per cent, for
demand deposits in country banks to 14 per cent, and for time deposits in all banks to 6 per cent;

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

(b) empower the Federal Open Market Committee to make further increases of reserve
requirements sufficient to absorb excess reserves, subject to the limitation that reserve require­
ments shall not be increased to more than double the respective percentages specified in para­
graph ( a ) ; (The power to change reserve requirements, now vested in the Board of Governors,
and the control of open market operations, now vested in the Federal Open Market Committee,
should be placed in the same body.)
(c) authorize the Federal Open Market Committee to change reserve requirements for cen­
tral reserve city banks, or for reserve city banks, or for country banks, or for any combination
of these three classes;
(d) make reserve requirements applicable to all banks receiving demand deposits regard­
less of whether or not they are members of the Federal Reserve System;
(e) exempt reserves required under paragraphs (a), (b) and (d) from the assessments of
the Federal Deposit Insurance Corporation.
2. Various sources of potential increases in excess reserves should be removed. These include:
The power to issue three billions of greenbacks, further monetization of foreign silver, the power to
issue silver certificates against the seigniorage now amounting to one and a half billion dollars on
previous purchases of silver. In view of the completely changed international situation during the
past year, the power further to devalue the dollar in terms of gold is no longer necessary or desirable
and should be permitted to lapse. If it should be necessary to use the stabilization fund in any manner
which would affect excess reserves of banks of this country, it would be advisable if it were done
only after consultation with the Federal Open Market Committee whose responsibility it would be to
fix reserve requirements.
3. Without interfering with any assistance that this Government may wish to extend to friendly
nations, means should be found to prevent further growth in excess reserves and in deposits arising
from future gold acquisitions. Such acquisitions should be insulated from the credit system and,
once insulated, it would be advisable if they were not restored to the credit system except after con­
sultation with the Federal Open Market Committee.
4. The financing of both the ordinary requirements of Government and the extraordinary needs
of the defense program should be accomplished by drawing upon the existing large volume of deposits
rather than by creating additional deposits through bank purchases of Government securities. We
are in accord with the view that the general debt limit should be raised, that the special limitations
on defense financing should be removed, and that the Treasury should be authorized to issue any type
of securities (including fully taxable securities) which would be especially suitable for investors other
than commercial banks. This is clearly desirable for monetary as well as fiscal reasons.
5. As the national income increases a larger and larger portion of the defense expenses should
be met by tax revenues rather than by borrowing. Whatever the point may be at which the budget
should be balanced, there cannot be any question that whenever the country approaches a condition
of full utilization of its economic capacity, with appropriate consideration of both employment and
production, the budget should be balanced. This will be essential if monetary responsibility is to be
discharged effectively.
“ In making these five recommendations, the Federal Reserve System has addressed itself primarily
to the monetary aspects of the situation. These monetary measures are necessary, but there are protective
steps, equally or more important that should be taken in other fields, such as prevention of industrial and
labor bottlenecks, and pursuance of a tax policy appropriate to the defense program and to our monetary
and fiscal needs.
“ It is vital to the success of these measures that there be unity of policy and full coordination of
action by the various governmental bodies. A monetary system divided against itself cannot stand securely.
In the period that lies ahead a secure monetary system is essential to the success of the defense program
and constitutes an indispensable bulwark of the nation.”
In view of the importance of the subjects referred to in the statement, and the fact that the full text
does not appear to have been published in this district, this circular letter is being sent to all banks in the
Eleventh Federal Reserve District for their information.
Yours very truly,