for those few member banks suffering an increase in requirements of more than 2 percent of their net demand deposits.

On balance the average member bank was expected to benefit substantially from the new regulations. The Fed estimated that about $3.5 billion in required reserves would be freed which implies a reduction in the average required reserve ratio from .086 to .077, based on the deposit distribution for the four weeks ending June 14, 1972. Large banks were expected to get the most benefit in dollars released; but small member banks, the largest percentage reduction in their requirements, and hence the major contribution to their profit margins.

It was planned that about half of the released reserves could be absorbed by the change in check collection procedures requiring all banks to which the Fed presents checks for payment to remit in immediately available funds the same day. This was expected to eliminate a major source of Federal Reserve float, which represents a credit to bank reserves because the Fed on average under present regulations credits reserve accounts of collecting banks before debiting accounts of paying banks. The balance of the released reserves was expected to be absorbed by Fed sales of open market securities to member banks.

Representatives of nonmember banks, which would also have been required to make payments faster than before but without benefit of reduced requirement ratios, obtained on September 19 a ten-day restraining order from the U.S. District Court for the District of Columbia barring introduction of the same day-payments rule. Because the rule changes were interrelated, the Fed Board of Governors indefinitely postponed the effective date of both the reserve requirement and check collection regulations pending judicial determination.

A number of other changes have been promulgated in recent years:

1972

• Differential requirements on the basis of bank size were established for time deposits in 1966. The principle was extended to demand deposits in 1969; and as noted the Fed has now proposed making bank size the only basis for requirement differences on demand and time deposits.

• The reserve settlement period for country banks was shortened by one-half in 1968, making the week ending Wednesday the uniform settlement period for all member banks; the requirement for current settlement was based on daily average deposits lagged two weeks rather than on the current average as before; and banks were authorized to count their average vault cash from two weeks earlier plus the currently held deposits average with the Fed as legal reserves to satisfy requirements for the current period.

Also in 1968 banks were permitted to carry forward to the next settlement period excess or deficit reserves up to 2 percent of requirements whereas previously deficit carry forwards were limited to 1 percent of requirements, and there was no opportunity to carry forward excesses.

As a consequence of these changes in the regulations, the present requirement system differs from that which obtained during the study period of this article— most fundamentally in that the current availability of legal reserve balances is no longer as tight a constraint on current levels of deposits. The irony is that the Fed seems to be taking steps that weaken its control over deposits at the very time that it is expressing publicly a new concern for monetary control.

FOOTNOTES

Wilham G. Dewald, Monetary Control and the Distribution of Money, Ph.D. dissertation, University of Minnesota, 1963.

George J. Benston, "An Analysis and Evaluation of Alternative Reserve Requirement Plans," Journal of Finance, Vol. XXIV, No. 5 (December 1969), 849-70.

2 William G. Dewald, "Reserve Requirements for Banks and Savings Institutions: A Proposal for Reform." Bulletin of Business Research, The Ohio State University, Vol. XLVI, No. 4 (April 1971), 1-8.

For example, Albert E. Hurger, The Money Supply Process, Belmont, Calit: Wadsworth Publishing Co., Inc., 1971; also A. J. Meigs, Free Reserves and the Money Supply, Chicago: University of Chicago Press, 1962.

"In recent years the Federal Open Market] Committee has been making use of daily-average statistics on total member bank deposits as a bank credit proxy-that is, the best available measure, although indirect, of developing movements in BANK CREDIT. Because the deposit figures are compiled on a daily basis with a very short lag, they are more nearly current than available bank loan and investment data. Moreover, average deposit figures for a calendar month are much less subject to the influence of single-date fluctuations than are the available month and data on total bank credit, which represents estimates of loans and investments at all commercial banks on one daythe last Wednesday-of each month." (Board of Governors of the Federal Reserve System, 57th Annual Report, 1970, p. 95.)

System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining the prevailing firm conditions in money and short-term credit markets; provided, however, that operations shall be modified if BANK CREDIT appears to be deviating significantly from current projections Board of Governors of the Federal Reserve System, 56th Annual Report, 1969, p. 171.

WILLIAM G. DEWALD is Professor of Economics at The Ohio State University. This article, adapted from an invited paper prepared for The President's Commission on Financial Structure and Regulation, expands on ideas presented by the author in the April 1971 issue of The Bulletin of Business Research in an article entitled "Reserve Requirements for Banks and Savings Institutions: A Proposal fer Reform."

BULLETIN OF BUSINESS RESEARCH