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of reserves would go up. When business would become more active, and interest rates would rise, some of the country banks would withdraw some of these deposits to use at home or to place in the market, the duplication would be eliminated, and reserve requirements would decline.

To sum up, the existing law on reserves is susceptible of evasion, it works inequitably as between banks, and works contrary to the trend of business conditions and to Federal reserve credit policy.

We thought, therefore, that it would be wise to modify existing reserve requirements, and after a great deal of figuring we found that one of the real difficulties of the situation was that it applied to regions; that is, to banks in central reserve cities, in reserve cities, and to country banks; whereas there were great differences between banks in the same city. There are banks in New York City that do a country bank business and banks in the country that do more of a city business. The best way to do was to find a way by which each bank could be judged by its own business, and, even further than that, by which each account could be judged by its own behavior. Il a bank has a savings account that does not turn over once a year does not require a great deal of reserve. On the other hand, if it is a deposit that is utilized all the time and circulates all the time, then it should carry a higher reserve. We worked out a plan by which we do away with the classification of cities, do away with the classification of deposits, make provision for counting cash in vault to avoid one of the difficulties I mentioned, and also equalize the matter of deductions. After brushing all these technical difficulties out of the way, we come out with total net deposits all of which carry a á per cent reserve plus 50 per cent reserve on the average daily turn-orer of the deposits.

I would like to show you a chart that shows you how these reserve requirements would have worked, compared with how existing require ments have worked since 1924. The solid line shows how present reserve requirements have worked, and the broken line shows how our proposed requirement would have worked. You can see that during the period of very rapid expansion, the actual reserve require ments were going down, not very rapidly, but going down. The proposal which we had would have made them go up.

Mr. GOLDSBOROUGH. It would have had a stabilizing effect!

Mr. GOLDENWEISER. Yes; as the boom developed it would have constantly made the banks have to borrow more from the Federal Reserve and give the Federal Reserve that much better control over the situation. There was about $400,000,000 more than they would have had to borrow, and it would have fallen exactly on the banks which needed to be controlled, because it was the banks which had the largest amount of speculative activity and brokers' accounts, which turned over several times a day. They are the ones that would have been hit by it. The little country banks would not have been hit In 1920 and 1921 when most of the speculation was commodity speculation it would have been a different set of banks. This chart does not carry it back that far. You will notice that our depression started at the end of 1929 and continued through 1930 and 1931. You will notice that the existing reserve requirements stay up and show relatively little change till the very last period. During the last period, with a decline of deposits that is absolutely unprecedented in

history, the reserve requirement finally did go down. But they stayed up with business going down and prices going down for a long period

of time. Whereas, the other plan would have given you a decreasing * reserve requirement. In other words, it would have been equivalent

to purchase of that much Government security right straight through this period; so that at the present time we would have about $200,000,000 less resources than under existing law.

It is a system by which reserves are distributed more equitably among the banks, and under which they increase when business is expanding and decrease when there is a depression. It would be a helpful device.



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Mr. GOLDSBOROUGH. Did you reduce this thing to a formal piece of legislation?

Mr. GOLDENWEISER. In this report which was given to you, there was a proposal of the committee on the last page, but I would like to add that after this report was published we have given this matter a good deal of additional study and amended the proposal in some particulars. The amended proposal was included in the report which the Federal Reserve Board made to the Senate Committee on Banking and Currency; and if you want to consider the legislation I suggest that you take this latest version rather than the other one, because there are some important amendments which have developed.

Mr. GOLDSBOROUGH. On yesterday Governor Harrison explained to us something that had been done, some practice that had been adopted in an attempt to control credits used for stock-market speculation, and frankly I did not catch--I am sure I did not catch exactly what he meant. "Do you know what he had reference to?

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* GO! Mr. GOLDENWEISER. I believe what you are referring to is a rue adopted by the New York Clearing House. The rule adopted by the

zd pold New York Clearing House that no member of the clearing house can place loans in the market for account of outside corporations

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Go other words, those loans for account of others which went to such enormous extent in 1929, are now outlawed by a rule of the clearing house.

EST Mr. STRONG. That is, banks out in Iowa and Kansas could not send sung their reserves in here?

WEGO Mr. GOLDENWEISER. No, it does not apply to banks. If a big cor

S1 poration should decide because the call rate happened to be 6 or 7 078

ME per cent to say: “There is no use in keeping our money on deposit in the bank at the small interest rate we get; let's put it in the call market.” Those loans were an evil in 1929 because they got in with

WS out being under control of the reserve banks. They did not increase deposits and did not increase bank loans.

Mr. STRONG. Do you not think that rule ought to be abolished to prevent banks from other States sending in deposits?

Mr. GOLDENWEISER. I prefer not to discuss things that might be proposed, but I might add that there is an amendment in the Glass bill which makes this rule of the New York Clearing House a part of the permanent law.

Mr. GOLDSBOROUGH. Is that just banks?
Mr. GOLDENWEISER. No. I mean it refers to nonbanking lenders

V. Mr. GOLDSBOROUGH. Since the passage of the Glass-Steagall bil. how much reserve have you?

Mr. GOLDEN WEISER. Free gold on the lastest date which I hare, which was April 12, was $323,000,000.

Mr. GOLDSBOROUGH. $323,000,000?
Mr. GOLDSBOROUGH. How much reserve?
Mr. GOLDENWEISER. We have excess reserves of a billion and a hall.
Mr. GOLDSBOROUGH. That makes a total of how much?

Mr. GOLDENWEISER. One includes the other; $1,500,000,000 is the full amount we have.

Mr. GOLDSBOROUGH. Now, how much does it take to maintain you: full 40 per cent reserve, which you have a right to waive, if you see fit?

Mr. GOLDENWEISER. I have not the figures here, but about a billion dollars is what we need for reserve against notes, and about seven hundred millions against deposits; so that we have about : billion seven hundred million that is required, and the other is exceso reserves.

Mr. GOLDSBOROUGH. About how many gold certificates are there out that you could use for reserves if you wanted to?

Mr. GOLDENWEISER. About $800,000,000 in gold certificates.
Mr. GOLDSBOROUGH. How much is that in all?

Mr. GOLDENWEISER. You can add to your $1,500,000,000 about per cent of the gold certificates we call in, because we would have put out notes against them. So you can add 60 per cent of $500,00 000. That is about $300,000,000. The actual and potential exc* reserves amount to about $1,800,000,000.

Mr. Strong. I understood you to say the gold to be used to put ba of the certificates for the service men would be about $20,000,

Mr. GOLDENWEISER. The question, as I understood it, was how much gold the Treasury had?

Mr. STRONG. Oh, yes.

Mr. GOLDENWEISER. I think I overstated it then. The rest is either in the Federal reserve system or impounded 100 per cent against gold certificates,

Mr. STRONG. There is approximately $1,800,000,000 of reserves, including gold certificates and excess reserves?

Mr. STRONG. This is excess reserves?
Mr. STRONG. The Federal reserve system has a right to dispense
with reserves, if it sees fit?

Mr. STRONG. How much is that?
Mr. GOLDENWEISER. How much is the reserve we have?
Mr. STRONG. Yes.
Mr. GOLDENWEISER. About $1,700,000,000.
Mr. STRONG. That is about $3,500,000,000?
Mr. GOLDENWEISER. Yes; I should think so.

Mr. STRONG. So that it is possible in case it became necessary for that $3,500,000,000 to be used as a 40 per cent basis for the issuance of Federal reserve notes?

Mr. GOLDENWEISER. Yes; if we suspend—not only suspended but did away with all reserve requirements.

Mr. STRONG. Which you have a right to do?

Mr. GOLDENWEISER. The Federal Reserve Board has a right to do it; but has to charge an enhanced rate. It is not a painless process. It would make money very expensive. On that basis you could issue close to $9,000,000,000, but once reserve requirements are removed they cease to be a contention and there would really be no limit to the notes the Federal reserve banks could issue.

Mr. STRONG. In Federal reserve notes if you had to?

Mr. Busby. In your official bulletin for March, on page 143 of that bulletin, you go into the figures that Mr. Goldsborough was striking at in his questions?

Mr. GOLDENWEISER. Yes, sir. Mr. Busby. In a rather careful way? Mr. GLODENWEISER. Yes, sir. We did discuss that in connection with the passage of the Glass-Steagall bill.

Mr. Busby. If the chairman does not have any objection, I would like to read the full working out of the facts as relate to that question.

Mr. GOLDSBOROUGH. All right.
Mr. Busby. From that bulletin I read as follows:

On February 24, for instance, reserves of the Federal reserve banks were $3,140,000,000. Federal reserve notes in actual circulation were $2,643,000,000, and deposits $1,973,000,000. The 35 per cent reserve against deposits would be $691,000,000 which would have absorbed all of the $102,000,000 in reserves other than gold and in addition $489,000,000 of the gold. Mr. GOLDENWEISER. That is right.

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Mr. BUSBY (reading): And the 40 per cent reserve against Federal reserve notes would be $1,057,000. inte 000, so that the total reserve requirements would be

As I understand for all outstanding Federal reserve notes
Mr. GOLDENWEISER. And deposits.

Mr. BUSBY. And deposits on hand with the Federal reserve banke- , ma total of $1,748,000,000; and excess reserves," which I understand Go to be gold that would not be employed if the Glass-Steagall bill were put into operation, the amount of $1,392,000,000?

:GO Mr. GOLDENWEISER. Yes. That has gone up since then to $1,500,000,000.

Mr. Bussy. That amount of gold has increased since this bulletin To was published to $1,500,000,000?


Mr. Busby. Of course that would increase your ability to increes to currency against your added amount of gold?

Mr. Busby. Your bulletin continues:

On the basis of these excess reserves the Federal reserve banks could * $3,500,000,000 of credit, if the demand were for currency, and $4,000,000,000 t it were for deposits at the reserve banks.

That is right. Now, with the increase of gold you mentioned, these figures would be increased somewhat? Mr. GOLDENWEISER. Increased somewhat.

Mr. Busby. So that, to my mind, is a suggestion that with your present set-up, present gold holdings, if you put into operation the Glass-Steagall bill, you could issue and give to the country safely $3,500,000,000 additional currency in the form of Federal reserve notes?

Mr. GOLDSBOROUGH. In addition to that, if you reduce the reserve requirement, by reducing the requirement below 40 per cent, in proportion as you reduce the requirement below 40 per cent you could continue to increase your Federal reserve issues till you could reach s maximum of something like $9,000,000,000?

Mr. GOLDEN WEISER. Nine billions, or any other amount. There would be no limit. I would like to make just one comment on this: that is, that the Federal reserve banks can issue Federal reserve notes only to the extent that the notes are required by the business of the country. Federal reserve banks have no channel for issuing notes just on the basis of their reserves without some asset coming in. They can issue Federal reserve notes if business increases, and it people want more Federal reserve notes, they can obtain them. The Federal reserve banks, owing to these reserves, are in position to meet the demand. They have no way however, not even through open market purchases, to issue currency, unless there is a demand from the outside. I would like to elaborate that. Assuming the Federal reserve buys $100,000,000 Government securities and thereby places $100,000,000 at the disposal of some member banks. These banks, if they owe money to the Federal reserve, will use that to pa it up; if they do not owe it, and if no one else owes it so that it does not get around and pay off indebtedness to the reserve bank, it is added to the reserve of the member banks, and then they have that much excess reserve; that is all the Federal reserve can socomplish;

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