large city institutions, the discrimination against New York City and Chicago banks is no longer warranted. The proposed legislation would be a worthwhile move in the direction of eliminating this ininequity.

Similarly, the proposed broadening of the Board's authority to reduce reserve requirements of individual banks in the central Reserve and Reserve city categories would give the Board more leeway to alleviate some of the inequities that exist in our legal reserve arrange

ments.

The main provisions of S. 1120 add up to a well-balanced legislative proposal that will permit the Board of Governors to make badly needed changes in the legal reserve structure.

S. 1120 has, however, a much wider significance. For one thing, it would tend to strengthen the Federal Reserve System. In the past, excessive reserve requirements have discouraged many banks from joining the System. Enactment of the vault cash proposal, as well as the other provisions of the bill, would have the desirable effect of reducing one of the obstacles to membership in the Federal Reserve System. This, of course, would tend to enhance the effectiveness of Federal Reserve monetary policy.

All in all, the amendments now proposed represent a long step toward a more rational and equitable system of legal reserves. The amendments are comprehensive, yet easy to understand and administer, in addition to being consistent with the previous practice. Passage of this bill would be an important step in the direction of modernizing our legal reserve arrangements in line with the great changes that have occurred in the structure of American banking over the past decades. Even more important, it would tend to strengthen the Federal Reserve System and would improve the ability of the banking system to meet the future needs of our growing economy. Enactment of these proposals into law would thus serve the broad public interest.

Mr. Chairman, thank you.

The CHAIRMAN. Mr. Kennedy, I gather from your testimony and that of Mr. Bell and Mr. Kimbrel that the American Bankers Association, which says this is not quite as comprehensive a bill as they might have preferred, still is strongly recommending action on this bill as it was introduced or as it might be clarified by the amendment I read before the testimony started.

Mr. KENNEDY. Very definitely, Senator. It is a good piece of legislation and goes a long way toward correcting some of the problems.

The CHAIRMAN. While the Federal Reserve banks have a good quantity of banking resources, you say 60 percent of vault cash is in the country banks?

Mr. KENNEDY. Yes, sir.

The CHAIRMAN. So naturally this bill would be very much in the interest of what we call the country banks?

Mr. BELL. That is right.

Mr. KENNEDY. That is right.

The CHAIRMAN. Mr. Bell, has the American Bankers Association taken a very definite position on whether or not we should continue the classification of central Reserve city banks?

Mr. BELL. The American Bankers Association in its report a little over a year ago recommended the elimination of the classification altogether and having one uniform system apply to all the banks. As I pointed out in my statement, the Federal Reserve felt that this was not the time to have that enlarged program presented, and after many conferences with us on the subject, we all agreed upon this bill as being the best.

The CHAIRMAN. Then your advice to this committee is to go ahead with the program the Federal Reserve has presented to us, but continue to study and work for a more comprehensive program.

Mr. BELL. Very definitely.

Mr. KENNEDY. Yes, sir.

The CHAIRMAN. Are there any further questions?
Senator CLARK. Yes, could I ask a question?

The CHAIRMAN. Senator Clark.

Senator CLARK. Mr. Kennedy, has the American Bankers Association made any estimate of the amount of additional credit which would become available to the banks in the country if this bill were enacted into law and reserve requirements were reduced?

Mr. KENNEDY. That is a matter of arithmetic, Senator. The proposal is that the bill would give the Board authority to make the changes. They would reduce the reserve requirements at such times and under such conditions as they would see fit.

Senator CLARK. So it would still be up to the Board whether we change the present requirements or not?

Mr. KENNEDY. Right.

Senator CLARK. Assuming they made the maximum change in requirements which the bill would authorize, do you have any mathematics as to how much that would expand our credits across the country?

Mr. KENNEDY. I don't have the figure in mind, but I could give it to you quickly from the Federal Reserve bulletin on today's situation. It would change as the banking system's resources change. Mr. BELL. May we put that in the record?

(The following was submitted in response to the above:)

The ABA witnesses were asked what the implications of the bill would be for additional credit expansion. This could be calculated in several different ways, but it would seem that the most realistic way would be to assume:

(1) That the Federal Reserve authorities will eventually permit all vault cash of member banks to be counted as legal reserves, and

(2) That they will reduce the requirement ratio for central Reserve city banks from the present 18 percent to 162 percent, the ratio now required for Reserve city banks.

Total vault cash of all member banks was recently reported at $2,370 million and if this could be counted as part of legal reserves this would release an equal amount of reserves for use by member banks. At the end of 1958, Central Reserve city banks held $26.4 billion of net demand deposits. A reduction of the requirement ratio from 18 percent to 161⁄2 percent against these deposits would release about $400 million of reserves.

It is impossible to say how much credit expansion would take place if these changes were to be made. In theory, there could be a multiple expansion of something like 61⁄2 times the amount of the reserves released (about $18 billion) if we were to assume that none of the released reserves would be absorbed by open market sales of Government securities by the Federal Reserve System. Actually, of course, the reserve authorities would undoubtedly absorb a substantial part of the released reserves in this manner, at least for the time being.

Senator CLARK. If the chairman would permit, I think it would be very helpful.

A staff member tells me that the vault cash change would release $2 billion of reserves. Does that sound about right?

Mr. BELL. Yes; $2.4 billion.

Senator CLARK. And the change in reserve requirements would release a substantial amount of money for credit, would it not? Mr. BELL. Yes; it would.

Senator CLARK. That necessarily-and do not misunderstand me, I think correctly--would make it possible for all the banks to make a good deal more money than they are making now?

Mr. BELL. I think there, again, it isn't possible to say just how much this would enhance the earnings of the banks.

Senator CLARK. But it would to some extent?

Mr. BELL. It would, and should.

Senator CLARK. I agree.

Mr. BELL. The immediate effect might be to lower earnings, because when you lower reserve requirements there is a tendency to have lower interest rates, at least for a while.

Senator CLARK. On the other hand, you would have more funds with which to make interest.

Mr. BELL. You would have more money to offset any lowering in interest rates.

Senator CLARK. Generally speaking, as a banker you agree that you would rather be in a situation where you had money to loan than in a situation where you were tighter on credit, would you not?

Mr. BELL. I would like to be in a position where we can meet the demands of our customers, and that puts us in a better position. Senator CLARK. That is right.

Mr. Chairman, I think this is a fine bill.

The CHAIRMAN. In line with a statement made by the Senator from Pennsylvania, the Chair calls attention to the exact wording in the bill

Notwithstanding the other provisions of this section, the Board of Governors, under such regulations as it may prescribe, may permit member banks to count all or part of their currency and coinage as reserves required under this section. So it does not automatically set up any given amount of new credit. The bill also authorizes the Board to place any bank in the Reserve and central Reserve cities in other classifications as well as the outlying banks, if the general situation justifies it. The whole bill is permissive. It would increase, if you please, the power of the Federal Reserve Board to manage our money supply. The Board is the agency the Congress set up to manage it. When the Board thinks there is need for more capital, either because it takes more money to give jobs or because our economy has expanded, the Board can lower the Reserve requirements and make more credit available, or they can tighten them; as they think best. They are the agency set up to manage currency, are they not?

Mr. BELL. They certainly are.

The CHAIRMAN. We have to manage currency. Somebody has to manage it. It will not manage itself.

Senator CLARK. I am in complete accord with the chairman. I think this bill will make credit easier and interest rates lower. I am for it.

The CHAIRMAN. Thank you very much.

Mr. BELL. Thank you, Mr. Chairman.

The CHAIRMAN. The next witnesses are from the Harris Trust & Savings Bank of Chicago. We have the president, Mr. Zweiner, and two of his associates. We will be glad to hear from them.

Gentlemen of the committee, I have a letter dated March 7 from the Harris Trust & Savings Bank, by the president, which gives me a summary of his views. It may be that he would like to have permission to insert that summary in the record, rather than to read the whole statement here today. We can give each witness permission to insert in the record memorandums or briefs, if they so desire, in order that their viewpoint may become a matter of record.

STATEMENTS OF KENNETH V. ZWEINER, BERYL SPRINKEL, AND JAMES J. SAXON, FOR THE CENTRAL RESERVE CITY OF CHICAGO

Mr. ZWEINER. Mr. Chairman, if I may, I would like to read the summary at the end of the statement for the record here today. I have furnished a complete copy of the statement to each member of the committee.

The CHAIRMAN. Without objection, that will be included in the record.

(The documents referred to follow :)

STATEMENT OF KENNETH V. ZWIENER FOR THE CENTRAL RESERVE CITY OF CHICAGO

I. INTRODUCTION

Mr. Chairman, my name is Kenneth V. Zweiner. I am president of the Harris Trust & Savings Bank, Chicago, Ill. I am appearing before this committee on behalf of the central Reserve city of Chicago. Harris Trust & Savings Bank is one of the 14 central Reserve city banks of Chicago.

I am glad, indeed, to have the opportunity to testify on S. 1120 and S. 860. S. 1120, which I understand was proposed by the Board of Governors of the Federal Reserve System and introduced by Chairman Robertson on behalf of himself and Senators Fulbright and Capehart, would amend section 19 of the Federal Reserve Act in three principal respects: (a) To allow a member bank in the discretion of the Federal Reserve Board to count part or all of its cash on hand (so-called vault cash) as part of the reserve it is required to keep on deposit with its Federal Reserve bank; (b) to grant the Federal Reserve Board discretionary authority to lower the Reserve classification and therefore the Reserve requirements of individual member banks in central Reserve or Reserve cities; and (c) to authorize the Board to fix the reserve requirements for demand deposits of central Reserve city banks within a range of 10 to 20 percent, instead of the present authorized range of 13 to 26 percent. S. 860, introduced by Senator Proxmire, deals only with the matter of vault cash and in substantially the same terms as S. 1120.

At the outset of this statement I wish to describe briefly the reserve classification of member banks in the city of Chicago, thereafter to comment briefly on S. 1120 and S. 860 especially with respect to the vault cash provision, and finally to urge an amendment to section 19 of the Federal Reserve Act to eliminate the central Reserve city classification of Chicago and New York. Unfortunately, both S. 1120 and S. 860 would retain this separate classification of Chicago and New York. This matter will constitute the principal part of my statement.

II. DESCRIPTION OF MEMBER BANKS IN CHICAGO

During my 27 years of experience in Chicago banking, there have been vast changes in the numbers and functions of Chicago banks. At present there are

14 central Reserve city banks in Chicago with 12 located in the central district, and two so-called livestock banks located 51⁄2 to 7 miles from the outer edge of the central district. The central district is usually defined as the area bounded by Lake Michigan on the east, Jackson Boulevard on the south, and the Chicago River on the west and north. The central district comprises roughly 8 blocks beginning at Wacker Drive on the north and running to Jackson Boulevard on the south, and roughly 9 blocks beginning at Michigan Avenue on the east and running to Wacker Drive on the west. Clearly, the central district is a very small part of the area embraced within the corporate limits of the city of Chicago which covers 26 miles running north and south and 15 miles running east and west (excluding O'Hare Field).

There are no country banks in Chicago and no Reserve city banks in the central district. There are 48 Reserve city banks in the outlying area of the city of Chicago as well as the two central Reserve city banks previously mentioned. In addition, there are 15 nonmember banks located in the city.

Below is a listing of the 14 central Reserve city banks together with their capital funds and total deposits and grouped by central district and outside central district.

Capital funds and deposits of Chicago central Reserve city banks (June 30, 1958) [In thousands]

Chicago central Reserve city banks support the provision of S. 1120 which will permit the counting of vault cash as reserves when and to the extent authorized by the Board. Although the enactment of this provision, considered separately, will have the effect of increasing the reserve differentials between classes of banks when actual vault cash holdings are included as a portion of required reserves, we favor this provision because of the desirable overall effects upon the banking system, particularly the smaller banks, as illustrated in the following table respecting Chicago member banks.

Vault cash held by Chicago member banks (June 30, 1958)