Brakes Tightened

For the first time since Congress amended the Federal Reserve Act in 1917, the legal base of U. S. credit was arbitrarily changed last week. Emerging from a sweltering all-day session in Washington, the Federal Reserve Board announced a 50% increase in reserve requirements for member banks, effective Aug. 15. After nearly a year of public and private debate over the inflationary dangers of excess reserves, Reserve Board Chairman Marriner Stoddard Eccles had finally taken up the slack in the elaborate brake system provided by the Banking Act of 1935 to stop runaway credit expansion.

The slack lay entirely in the fact that the nation's banks now have some $3,000,000,000 in reserves over & above what they need to support their present business. That excess could support a credit expansion of at least $30,000,000,000. It is the threat of such credit inflation that gives bankers like Chase National's Chairman Winthrop Aldrich the jitters every time they think about it. And, through the mysteries of central banking, excess reserves are about to take another rise as a result of the payment of the Bonus, the Reserve Board estimating that the total will be about $3,400,000,000 by mid-August. This will be merely a delayed rise, since the real cause of mounting bank reserves is the flow of foreign gold to the U. S.

Chairman Eccles can do nothing to stop the inflow of gold, but he can do several things about the effects of gold imports. One of them is the power to boost reserve requirement as much as 100%. Another is to sell the Reserve System's Government bonds, resulting in a dollar-for-dollar reduction in reserves. By raising the reserve requirement 50%, Chairman Eccles mopped up nearly $1,500,000,000 of the excess, leaving about $1,900,000,000 to worry about after Aug. 15. And while $1,900,000,000 is a larger figure for excess reserves than ever recorded prior to 1935, it could be more than wiped out by selling the Reserve System's $2,400,000,000 worth of Government securities. Furthermore, with reserve requirements averaging 15% of demand deposits, the excess $1,900,000,000 will then represent not $19,000,000,000 of potential credit but less than $13,000,000,000.

Both the Board and the Administration are still committed to an easy money policy. Easy money means cheap financing, government as well as corporate. And a $1,900,000,000 cushion of excess reserves guarantees low interest rates and high bond prices for some time to come. Nevertheless, to squash any widespread notion that it was deliberately moving for tighter money, the Board took pains to state that its move was an anti-inflationary step offering "further encouragement to sound business recovery and confidence in the long-term investment market."

Interpreted as everything from a courageous demonstration of political independence to a smart New Deal bid for business votes, Chairman Eccles' decision was generally approved by bankers big & little. Excess reserves are pretty evenly distributed, but a few banks will feel the pressure of the Eccles brake and have to borrow to build up reserves to the new requirements. These bankers will undoubtedly howl "Deflation."

Measured praise for Chairman Eccles and his Board was heard last week from none other than Montagu Collet Norman, foxy old governor of the Bank of England, who arrived in Manhattan for one of his hasty U. S. visits. Asked what he thought of the boost in reserve requirement, he replied :

"I think it is a good thing. I know it has been contemplated for a long period. If it wasn't a good thing they would not have done it. But of course, it is very experimental."

Pushing back his blue beret and twirling his spectacles, the bearded dean of British banking was then asked if some of the gold which caused the expansion in bank reserves would not soon return to Europe. Expressing a facetious wish which the Reserve Board feels will be fulfilled in all seriousness, Governor Norman replied : "I hope not. You can keep it. We had all the trouble digging it out of the ground, but you can keep it. You are too rich over here, but you can keep your gold."

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