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Summary of Remarks of
George W. Mitchell,
Member, Board of Governors
of the Federal Reserve System,
Washington, D. C. U.S.A.
at the
International Banking Conference
Munich, Germany
May 26, 1971

My comments are specifically directed at assessing the
monetary consequences of transforming deposits in savings and
loan associations and mutual savings banks into money.


would be accomplished by permitting savings depositors in these
institutions to write checks on their deposits or, in a more
limited application, to make credit transfers to other depositors
in the same institution.

It is assumed, of course, that the

transformation of savings into money would take place without
such deposits becoming subject to the reserve requirements imposed
by the Federal Reserve on commercial bank demand deposits.
Put this way, both equity and effective monetary control
would seem to require that the rules presently in force for demand
deposits in commercial banks should become applicable to mutual
savings banks and savings and loan associations.
The demand deposit component of our $220 billion money
stock is now about $170 billion (coin and currency amount to
$50 billion).

Deposits at mutual savings banks are about $74 billion

and saving capital at savings and loan associations is about $152 bil­

The idea of doubling the present money supply of approximately

-2$220 billion by adding $225 billion of savings accounts in
mutual savings banks and savings and loan associations is,
at first exposure, an unthinkably inflationary thought.


would undoubtedly be a major catastrophe for U.S. monetarists
and their followers whose correlations of

would become worth­

less as guides and evidence of future monetary action.

Such a

situation would be even more frustrating for some monetary
analysts than that which arose when ceiling regulations on time
deposits produced ebbs and flows of intermediation which recently
have often vitiated M 2 '8 usefulness as a monetary guide.
On the other hand, to take a calmer view, except for
the competitive climate between banks and other depository insti­
tutions, not much else would necessarily change if savings deposits
became money.

People would not, because their savings accounts

could be used to pay household bills, spend more or less, and the
liquidity position of small savers probably would not be signifi­
cantly changed.

If the terms of fixed maturity time deposits

were not disturbed market interest rates should not be much
affected, nor would the flow of funds be likely to change in
tempo or volume.
Before assessing the problems caused the monetary
authorities or the monetarists by such a broadening of the money
supply, it would be helpful to consider how such a proposal might
be implemented, and how money is subject to central bank control.

-3Money is a term that is almost as loosely used as it
is sometimes spent.

In our newspapers today full page ads

identify bank credit cards, nonbank credit cards and travelers'
checks as money.

None of these instruments is subject to the

Federal Reserve's reserve requirements today and none of them
is money, either, except in the sense of some copywriter's
license to convert similiarities into identities.

Money is coin

and currency in circulation and demand deposits of commercial
banks other than those due to domestic commercial banks and the
U.S. government.
Not all money so precisely defined is directly subject
to the Federal reserve requirements, notably demand deposits in
nonmember banks.

There is, to that extent, a precedent for

exempting other depository institutions from such requirements—
i.e., if one is prepared to argue that a leaky boat is no less
safe if another leak or two is added.

It so happens that the

nonmember bank component of the money supply has grown steadily
in relative importance throughout the I960's.

It was a little

over 14 per cent of the money supply at the beginning of the
Sixties and rose to 18 per cent in 1970.

More significantly,

nonmember deposits have consistently shown a sluggish response
to monetary restraint.

In 1966 and 1969, for example, the non­

member banks added more to the money supply than did member
banks even though member bank shares of the money supply were,
respectively, four and three times as large as those of nonmembers.

-4Without being too technical or too elementary, I'll
assume we could agree that among the conventional tools of
monetary action in the United States the ability to change
reserve requirements is not essential.

Desirable and convenient

in certain circumstances, yes, but not absolutely indispensible.
We could go it alone with open market operations, or open market
operations and discounting.

But to do so would place a heavier

burden on financial markets and would forfeit the advantages of
immediacy and pervasiveness inherent in a general change in
reserve requirements.

These are not unimportant considerations;

they cannot be duplicated by other tools.
There is no way of knowing the point at which changes in
reserve requirements would cease to be an effective monetary tool
as the reserve base shrinks.

Commercial banks now are reacting

to significant cost disadvantages inherent in membership in the
Federal Reserve System, and there is not only a steady attrition
in System membership but, more importantly, a steady growth in
the number of larger and larger banks outside of the System.
This trend should be reversed: it would have been better if non­
member bank shares of money supply had declined from 14 to 10
per cent in the past decade instead of increasing from 14 to 18
per cent.

-5Adding another exempt category of depository institutions
might not significantly weaken monetary control but it would surely
weaken the case for using reserve requirements as a monetary tool.
Moreover, it would certainly strengthen the case for experimentation
with untried monetary tools.

Perhaps this experimentation is needed.

But it would also reinforce the case for depository rate ceilings,
and regulatory credit controls over the access of banks and other
depository institutions to money and credit markets.

I am less

persuaded these measures should be encouraged or extended.
The way in which any monetary tool works is not fully
understood in the sense that we know the linkages or exactly how
much reserve input will produce how much change in the economy's
spending and investing, and when.

And some monetarists say we

don't need to know, referring us to regressions.

But we do know

that as the System changes the rate at which it supplies funds
through open market operations or otherwise, changes in money
market conditions, investor expectations, interest rates and
credit flows ensue.

These changes, as they work through

financial markets, even though they may start with member banks,
affect all kinds of financial intermediaries.

Who here does not

remember the financial pangs of 1966, and how general they were
in the financial world.
I think we must all agree that monetary restraint is
not a condition uniquely affecting banks, member banks, or even


money market banks.


Banks, generally, may be in the front line—

and some in the vanguard— but other financial institutions are
not far behind.

Undoubtedly banks, savings and loan associations,

insurance companies and other types of financial institutions are,
by their nature, diversely affected by monetary restraint but the
investment policy of each institution is also a very important
element differentiating their exposure.

Large holdings of non­

earning assets and short-dated debt cushion the onset of monetary

Of course, cushions are not costless especially if

the central bank seems poised to strike over a long period of time.
The more venturesome— i.e., the fully invested— institutions, of
whatever type, really become the leading edge of monetary restraint
for they have the shortest time to adjust their investing and
lending terms and are affected by even a modest change in interest
rates and money flows.
A word may be needed on the economization of demand
deposit balances, a trend which has been going on for some time,
as most of you have noted at first hand.

Since 1964, total trans­

actions by check have roughly doubled— 9 trillion per year compared
to almost 18 trillion in 1970.

Money supply has not doubled by any

means in these six years: it has increased less than 40 per cent.
More active use of balances has made the difference: turnover
doubled in New York, increased 85 per cent in six other money
centers, and elsewhere rose about 40 per cent.

-7Our experience with acceleration in money payment has
not given the central bank problems of monetary management up to

In fact, the Federal Reserve is encouraging the adoption

of techniques to expedite money payments.

I do not foresee that

we will wind up in a monetary cyclotron with salaries, rent,
and credit card chits being paid hourly in milli seconds, but
if we were to, I doubt it would raise any serious problem of
monetary control.
Monetary restraint does not work efficiently if it
creates a payments crisis; it is most effective as it impinges
on future spending and investment plans.

Thus, monetary effective­

ness is a matter of changing the liquidity position of households,
businesses and financial institutions and not of stopping in its
tracks money settlement for previous commitments.
I have been sketching in a very general way the con­
sequences of putting savings institutions into the demand deposit

It, of course, makes a great deal of difference, so

far as monetary control is concerned, how this might be done and
the extent to which savings aggregates are incorporated into
some such system.
There are many aspects of the general proposal to use
savings accounts as money other than the effects on monetary

Indeed, until details are specified and effects on

-8depository institutions and their customers are known and the
effect on the money payments system can be appraised, the
monetary impact cannot be adequately assessed.

If, for example,

such payments were limited to so~called third party transfers the
potential for a practical and useful improvement in our monetary
system and mechanism seems to me to be fully capable of realiza­
tion with very limited exposure to monetary effectiveness.
The idea of permitting a commercial bank, a mutual
savings bank, a savings and loan association or a credit union
to transfer funds from one to another of its deposit customers
hardly seems an earth-shaking innovation.

Yet some obvious

innovations initiate a line of development that is revolutionary.
This one is about as simple a record-keeping transaction as can
be imagined.

For the depositor who authorizes the institution

to charge his account and to transfer a specified amount to
another account, it is the ultimate in money convenience.


the depository institution, there are several advantages: the
transaction can be under continuous internal surveillance; no
funds are drained away, no float is absorbed, no outside trans­
fer requirements are imposed, the money position becomes more
stable and a new service has the potential of attracting
additional customers.

For the central bank, it would introduce

a new category of demand deposits which should include similarly
qualified accounts in all types of depository institutions.


-9is, all institutions offering such a service should be subject
to the same level and change in reserve requirements.


broadening of the narrowly defined money supply would, I believe,
sharpen the usefulness of this aggregate by incorporating into it
the major source of liquidity for the household sector.
The concept of third party transfers— since it has yet
to be incorporated into a law or regulation— has not been
sufficiently defined to avoid misinterpretations or understandings
of its merits or disadvantages.

For clarity's sake, I refer to

such transactions as credit transfers.

A debit transfer, in

contrast, takes the form of a conventional check which is the
bank's authority to charge a customer's account.

A credit trans­

fer would occur when the customer, by prior agreement or specific
instruction to his institution, directed it to transfer funds
from his account to another customer's account.
Thus a third party credit-type transfer would not
result in a negotiable instrument, such as the check, but would
be based on a contractual agreement between the bank and its

The agreement might be flexible enough so that the

bank was authorized to charge the customer's account without
specific prior notice for mortgage, utility and other repetitive
payments for known, or approximately known, amounts.

The arrange­

ment suggested for savings and loan associations— and perhaps
other depository institutions— would limit transfers to those
between customers of the same institution.

-10In conclusion, but more as an aside from my specific
topic, as I have reflected on the banking industry's reaction
to the efforts of the savings and loan associations and the mutual
savings banks to get into the money business I have wondered about
its wisdom.

Hasn't it been too negative in its implications for

the public interest and for the industry itself?

The encourage­

ment of third party transfers would clearly, in my opinion, add
greatly to the public convenience, especially that part of the
public whose cash and liquidity resources are limited.


technique which adds to the convenience and reduces the costs
for these depository customers should be encouraged.
As a matter of equity, and monetary efficiency, I would
urge that any depository institution going into the money business
should be required to treat accounts eligible for third party
transfers as demand deposits.
argument does not end there.

But the equity and public benefit
Banks ought to have the right to

offer third party transfer service to their saving deposit cus­
tomers with $100 billion in deposits on the same terms as savings
and loan associations— say, at a reserve requirement somewhat
higher than savings accounts not eligible for such transfers.
According to the FDIC's latest survey of deposits
(June 1970) there are 69.6 million demand deposit accounts
with balances of less than $1,000 (the total number of such
accounts is 86.6 million).

There are 58.6 million bank saving



accounts with balances of less than $1,000.

The overlapping

of accounts is substantial and there are several million of
these depositors who could manage conveniently on a single
savings account with third-party transfer privileges.


shouldn't the industry be exploring this opportunity for
improved service to millions of its customers?