Now, let me pass on to another topic, Mr. Martin.

Incidentally, in connection with proxy solicitation by banks, there have been any number of bills introduced over the last 4 or 5 years for regulation of solicitation of proxies. I am rather surprised that your Board has not considered those bills and has not made some recommendation with reference to them, either affirmatively or negatively.

Mr. MARTIN. I will take a look at them, Mr. Multer.

Mr. MULTER. What, if anything, Mr. Martin, is recommended in this bill with reference to reserve requirements?

Mr. MARTIN. Mr. Multer, we have had that one up, as I have indicated to this committee, a number of times.

Mr. MULTER. Here is my file of correspondence with the Federal Reserve bank over the years.

Mr. MARTIN. Well, I have larger files.
Mr. MULTER. I know you have.

Mr. MARTIN. I can assure you, with others.

I will ask Mr. Thomas to comment on that, because we are working right now on a reply to you, as a matter of fact, in connection with the proposal you have made. We have not yet reached a satisfactory reserve requirement plan that the Board is willing to present to the Congress, but we have really slaved on this problem.

I would like Mr. Thomas, if he will, to review this for you very briefly.

Mr. MULTER. Before you touch on that, am I right that this proposed bill makes no change in the statute as to reserve requirements? Mr. MARTIN. That is correct.

Mr. MULTER. Now, I would like to direct ourselves as to why we shouldn't put something into this bill as to that, and there I think Mr. Thomas can be helpful.

Mr. THOMAS. Well, I suppose the answer to your question as to why there should not be something in this bill is that it is considered a more substantive matter and requires much more careful study of the substance, and the results than you would want to consider in a bill designed for the purpose for which this bill is designed.

The matter of reserve requirements is a subject that is important to the operation of the monetary policy of the System, because it is through the control over the supply of reserves, and the control over the amount of reserves that banks are required to hold, that the Federal Reserve can exercise its influence over the money supply and the volume of credit.

The matter of the particular requirements that individual banks have to carry, the percentages, the classification of banks, and so forth, is another question. That is a question of the equitable distribution of the volume of reserve requirements as among different banks. That is related to, but somewhat different from, the question of the total volume of reserves, or the total volume of reserve require

ments.

The latter is the primary concern from the standpoint of monetary policy. From that standpoint, the Federal Reserve has, you may say, adequate powers. It has enough ability to expand the supply of reserves, and with $23 billion of Government securities, it has a considerable amount of ability to contract the supply of reserves.

It

also has the ability to change the percentage requirements, so that they could reduce the amount of reserves that banks have to hold and thereby release reserves, or increase their requirements and absorb any excess reserves the banks may have.

Now, the second question is what each individual bank should hold, whether it is equitable to require New York City banks to hold, say, from 13 to 26 percent against their demand deposits, while the banks in the reserve cities hold from 10 to 20 percent, banks in smaller places would hold from 7 to 14 percent.

That is a matter of equitable distribution as between banks, and whether there is any basis for a different requirement as between one bank and another.

The system we have is inherited from the National Banking Act. It is a system that was evolved at a time when banks were required to hold a part of their resources in other banks. Therefore, those banks which carried those reserve balances were required to hold larger amounts of cash until finally you got up from the central reserve city banks, that had to hold 25 percent of their deposits in cash with no credit given for balances carried with other banks. The others would hold a certain amount of their reserves in cash and a certain amount in balances with other banks.

So that our present system of reserve requirements, in effect, is based upon the one rational principle-that is, it is related to the amount of interbank deposits that the banks hold. That is the basis for the present system of the classification of banks for reserve requirement purposes. That factor is not really as important as it was under the National Banking Act, because now banks carry all of their reserves with the Federal Reserve banks, and the amount that they carry with other correspondent banks is carried for what we call secondary reserves or liquidity purposes. It gives them a source of cash which they can draw upon when they need to make loans or adjust their reserve balances with Federal Reserve banks, or to meet deposit withdrawals, and they hold them for liquidity purposes; but they have continued to hold substantial balances with other banks.

Also, before the prohibition of interest on demand deposits, and before the regulation of stock market loans, a lot of the banks carried balances with the New York City banks, and the city banks paid interest on those deposits and invested the funds in call loans which they could draw upon at will. That gave rise to certain abuses which have been more or less removed by the subsequent changes in law.

Correspondent bank balances are not as important as they were, but they are still an essential part of our banking system.

Now, the question of changing the system of classification of banks for reserve requirement purposes raises the question as to what rational basis requirements might be based upon.

Should we still make allowance for the fact that city banks do carry large balances of other banks? Should they, therefore, continue to have to carry higher reserves against those deposits, and if so, would they be related only to the interbank deposits, or should the higher reserves be also carried, as is true now, on all demand deposits?

Or is there a difference in the money quality between the deposits of one set of banks as against the deposits of another set of banks?

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Do the big city banks-we know that the deposits of those banks turn over more rapidly; they are used more rapidly. Should there be a reserve requirement based on classification of cities that takes into consideration that principle? That was the principle that was recommended as a result of a study of reserve requirements in 1930-31 by a system committee, which recommended at that time, that velocity, as well as volume of deposits be used in computing reserve require

ments.

Should size of banks make a difference? Some people think big banks carry larger percentage reserves than small banks.

So you can see that the problem is one that is not very simple. And then, once you change your system, whatever it is, some banks are going to be affected more than others. Some banks are going to have their requirements raised somewhat; others may be lowered somewhat. And that raises a question.

So all this shows is that the problem is a complicated one, that requires careful study, and we are making a study of it.

The American Bankers Association has recently made a study of reserve requirements, and has come out with a suggestion which would have uniform requirements for all banks, abolishing completely the reserve classifications that now exist. They recommend that the Board be given authority to put that scheme into effect gradually, over a long period of time.

The proposal would amount to a substantial reduction in the volume of reserves that the banks would be required to hold, but they say that that could be done a little bit at a time, as the growth of the economy requires additional reserves, or even-they go so far as to say, also it could be done in a larger amount, and the Federal Reserve could offset the excess by selling Government securities in the market so as to absorb any redundant reserves.

It is one of the schemes that the Board is now in the process of studying to see how it would affect individual banks, what would be the relationships, the changed relationships as between banks that do different types of businesses and have different types of deposits. They would reduce the requirements gradually to 10 percent on demand deposits, for all banks, and to 2 percent on time deposits. Another one of the difficult questions in this problem is to what extent there should be a differential between the requirements against time deposits and demand deposits.

Under the National Bank Act, there was no difference. Under the laws of most other countries, there is no difference. We have had a difference here, but there is a question as to how big that difference should be.

That is another one of the problems that we face, and we are studying the ABA proposal now, but have not completed our study as of the moment.

Mr. MARTIN. The long and short of it, Mr. Multer, is-and I want you to get that review-that we have really worked hard on this, but we haven't come to any agreement.

Mr. MULTER. I thought I saw a statement in one of the trade publications or daily newspapers that the Board had completed its study on the subject. Did I misread something?

Mr. MARTIN. They were jumping the gun, if they published that. Mr. MULTER. How soon do you think it may be ready?

Mr. MARTIN. I just couldn't make any commitment on it. It is complicated, in part, by the general credit situation, also, because, under present conditions, we have to determine how we would put any new plan into effect, and what the impact of the suggestion would be on the present credit situation.

Mr. MULTER. Two of the devices that are used to control inflation, and also to control deflation, for that matter, are, one, the interest rates, and the other, bank reserves. Am I not right? Mr. MARTIN. Those are two of the tools. ever, Mr. Multer. Let me comment on that.

They are related, how

From time to time we hear people say, "Why don't you raise reserve requirements, instead of the discount rate?" Well now, under present conditions, my own judgment is that we would really have had a rise in interest rates if we had raised reserve requirements. That is just another way of putting pressure on.

The delicate adjustments that have been made in the open market, by the discount rate, have, I think, permitted a healthy, strong bond market to continue. If we really wanted to put the kibosh, not on the market-it wouldn't have been destroyed by it-but on letting interest rates rise gradually, we would have just raised the reserve requirements bluntly, and I think you would have an interest rate considerably higher than the present one.

Mr. MULTER. The immediate effect of raising the reserve requirements is to tighten the money supply.

Mr. MARTIN. That is right.

Mr. THOMAS. It should be pointed out, though, that any rise in reserve requirements, when banks don't have excess reserves, makes it necessary for those banks to obtain the additional reserves; they would either have to borrow very large amounts form the Federal Reserve banks or they would have to sell Government securities to the Federal Reserve Bank, and, if the Federal Reserve did not buy those Government securities and if the banks didn't want to borrow, they would have to liquidate their assets, in very large amounts. They would have to liquidate assets equaling six times the amount of the increase in their reserve requirements, and that would be a severe process of adjustment.

Mr. MULTER. If one of the elements required the banks to sell Government securities, that would depress the market and the Open Market Commitee might than be compelled to step in and support the market.

Mr. MARTIN. If the market became disorderly, we unquestionably would have to. But, if it were an orderly market, it would be merely rising interest rates.

Mr. MULTER. Of course, if a rise in bank reserves forced these banks to sell a substantial amount of Government securities, they could very well become insolvent, if most of the investment portfolio was in Government obligations, and you let the market run away, and, as they offered them, the market continued to drop, they could become insolvent; isn't that so?

Mr. MARTIN. They would tend toward insolvency.

Mr. MULTER. I hope nobody is going to be scared by what I said and run to the bank to take their money out. It is a theortical possibility. I hope it will never be a reality.

Mr. MARTIN. That is right.

Mr. THOMAS. That is when they could borrow at par on Government securities.

Mr. MULTER. The alternative would be for the Open Market Committee to peg the market or let them borrow at par from the Federal Reserve.

Mr. MARTIN. That is right.

Mr. MULTER. That creates a discriminatory situation as to a man who owns Government bonds; he can't borrow at par, but has to borrow on a percentage of what the market value might be. Isn't that so?

Mr. MARTIN. That is back to our discussion of yesterday.

Mr. SEELY-BROWN. Do I understand, from your questioning, that you would favor or would not favor a change in the reserve requirements?

Mr. MULTER. I am trying to develop that, Mr. Seely-Brown. I think it is high time that the Federal Reserve Board and the banks and other agencies came in here with definite recomendations. If we are going to consider substantive changes in this codification, I think reserve requirements should get priority in the treatment of changes in substantive law.

Mr. MARTIN. I know, and the members of the Board probably feel they ought to move slowly. I am beginning to think that they are moving too slowly. This is not a new problem, but I started talking to the Federal Reserve about it back in January 1954, and we are still talking about it, and still corresponding about it, and I have been putting bills in on it for some time, in order to get some discussion about the problem. I think our chairman, Mr. Spence, has asked the Federal Reserve Board to send up a report to us on my pending bill, which I introduced early in this session.

Just to pursue the subject a little further, I think everybody is in agreement, are they not, that the existing statutory reserve requirement limitations and there are limitations as to how high or how low your bank reserve may be that those, however, are fixed so far as statute is concerned, today, geographically?

Mr. MARTIN. We have central reserve, reserve in city and country banks.

Mr. MULTER. The sole standard is the geographic situation that must be taken into account in setting reserve requirements.

Mr. MARTIN. That is right.

Mr. MULTER. When was that law first enacted; do you remember? Mr. MARTIN. I will ask Mr. Thomas to comment on the history of it. In 1863, the National Bank Act provided it, and, as Mr. Thomas outlined, it was because of a different system of reserves, and a different purpose for reserves, because reserves were to provide the solvency for the banking system. They were not, primarily, a credit and monetary device.

Now, that has been carried on in all of our legislation, right up to and through the Federal Reserve Act. I think there were some changes made in 1887, and then in the Federal Reserve Act we still have, again, the designation of these cities, with these percentages, which we presently have.

Mr. MULTER. Except for the change in the percentages, minimum and maximum limitations, there has been no change in the three Re