Credit Policy and Control of Recovery

Report Outline
Present Rapid Rise of Business Activity
Excess Reserves and Credit Inflation
Gold Imports and Capital Movements
Margin Requirements and Credit Expansion
Special Focus

Present Rapid Rise of Business Activity

The depth of the administration's concern lest the present recovery movement assume boom characteristics and proportions was given forceful expression on December 21, 1936, when the Treasury announced adoption of an entirely new policy evolved for the purpose of preventing future gold imports from being used to enlarge an already more than ample credit base. This step supplemented the previous action of the Federal Reserve Board of Governors in raising by 50 per cent, effective August 15, 1936, the reserve requirements of member banks. It is now generally anticipated that announcement of a further lifting of reserve requirements, to the full amount authorized by the Banking Act of 1935, will be made later this month.

For more than a year prior to the Board's action of last summer, reserves held by member banks equalled in each month nearly, if not more than, twice the amounts required. While the margin between required reserves and total reserves was substantially narrowed by the increase of reserve requirements in August, excess reserves continued to accumulate thereafter. The principal influence in this increase was a large inflow of gold from abroad, reflecting heavier foreign investment in American securities following conclusion, September 25, of an understanding between the United States, Great Britain, and France for cooperative action to maintain monetary equilibrium.

The new “sterilization” policy is intended to eliminate gold imports as a credit and market factor, by preventing them both from swelling bank reserves and from exerting a contracting and depressing effect in case of sudden and wholesale withdrawals. An increase of reserve requirements, by converting excess reserves, or a, portion thereof, into required reserves, reduces the volume of potential bank credit. The large amount of excess reserves has provided the basis for an enormous credit expansion, much greater even than that which occurred in 1929 and the immediately preceding years. The action which has already been taken, and the further action which is believed to be contemplated, is aimed to forestall recurrence of such a development by placing federal authorities in a position where other controls can be employed to prevent the present marked recovery trend from turning into a feverishly accelerated advance leading only to another and perhaps worse depression.