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Dallas, Texas, January 30, 1937


To the Member Bank Addressed:

The Board of Governors of the Federal Reserve System today adopted, a supplement to its Regula­
tion D, a copy of which is enclosed herewith, and issued the following press statement in regard to its
“ The Board of Governors of the Federal Reserve System today increased reserve require­
ments for member banks by 33 1/3 percent, as follows: On demand deposits, at banks in cen­
tral reserve cities, from 1 9 ^ to 26 percent; at banks in reserve cities, from 15 to 20 percent;
and at ‘country’ banks, from 1 0 ^ to 14 percent; on time deposits, at all banks, from 4% to 6
percent. For the purpose 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 busi­
ness 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:
(Percent of Deposits)
City Banks

City Banks


Present Requirements........................ .. .......191/2
March 1 through April 30....... *......... ....-....... 22%
May 1 and after................................... .............26



IO /2




lPresent Requirements........................
March 1 through April 30................................. 51/i
May 1 and after....... ....................... .... ......... .



This action completes the use of the Board’s power under the law to raise reserve re­
quirements to not more than twice the amount prescribed for member banks in section 19 of
the Federal Reserve Act.

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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 responsi­
bility 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 esti­
mated $1,500,000,000 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 be 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.
As the Board stated on July 15, 1936, in its announcement of the previous increase of re­
serve requirements, excess reserves then held, by m em ber banks had resulted almost entirely
from the inflow of gold from abroad rather 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 1933 and December 24, 1936, when
the United States Treasury put into effect its program for preventing acquisitions of gold
frpm 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 recovery, 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 ex­
pansion 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 an­
nounced its prior action last July, excess reserves are widely distributed among member banks,
and balances with correspondent banks are twice as large as they have generally been in the
past. 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 13, 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 corre­
spondent 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 per­
mit a credit structure to be erected upon them and then to withdraw the foundation of the
The available methods of absorbing excess reserves have been under consideration. It has
been decided that under present circumstances changes in reserve requirements should pre­
cede 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.

It is the Board’s expectation that, with approximately $500,000,000 of excess reserves
remaining with the banks, credit conditions will 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 open-market 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 these banks for their customers and will, therefore, not dimin­
ish 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 agri­
cultural 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 con­
tinued progress toward full recovery.”
Yours very truly,
b. a

. McK i n n e y ,


Reserves required to be maintained by member banks with
Federal Reserve banks

Pursuant to the provisions of section 19 of the Federal Re­
serve Act and section 2 (a) of its Regulation D, the Board of
Governors of the Federal Reserve System increases by 33 1/3
percent the reserve requirements established by the supplement
to Regulation D made effective at the close of business on August
15, 1936: Provided, however, that 1/2 of such increase shall be
effective as to each member bank at the opening of business on
March 1, 1937, and the remaining % of such increase shall be
effective as to each member bank at the opening of business on
May 1, 1937.

NOTE: Effective at the opening: of business on March 1, 1937, the
requirements as to reserves to be maintained by each member bank will be
75 percent above the requirements prescribed by Section 19 of the Federal
Reserve Act and, effective at the opening of business on May 1, 1937, the
requirements as to reserves to be maintained by each member bank will be
100 percent above the requirements prescribed by Section 19 of the Federal
Reserve Act.