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Information > Financial Terms > This page Federal Reserve Ratio The ratio of the prescribed assets to the specified liabilities of Federal Reserve banks, the actually prevailing proportion being reported in the weekly Federal Reserve Statement. Paragraph 3 of Section 16 of the Federal Reserve Act was amended June 12, 1945, so as to reduce the minimum reserve requirements of the Federal Reserve banks from 40% of their Federal Reserve notes outstanding and 35% of their deposits to 25% of both their notes and deposits. Where the former requirements, however, had permitted lawful money as an alternative to gold certificates as the required assets for the 35% reserve against deposits and reserves in gold certificates for the 40% against Federal Reserve notes in actual circulation, the new requirement permitted only gold certificates or gold certificate credits as the reserve. Ratio of gold certificates to deposits and Federal Reserve note liabilities, combined, of the Federal Reserve banks had dipped to 41.7% as of December 31, 1945, compared with 90% at the close of 1940. Under Section 11(c) of the Federal Reserve Act, when the gold (certificates) reserve held against Federal Reserve notes fell below 40%, the Board of Governors of the Federal Reserve System was to establish a graduated tax of not more than 1% per annum upon such deficiency until the reserves fell to 32.5%; and when the reserve fell below 32.5%, a tax at the rate of not less than 1.5% per annum, upon each 2.5% or faction thereof that such reserve fell below 32.5% per annum, was to be paid by the Federal Reserve bank concerned, but the bank was to add the amount of the tax to the discount rate. Under the June 12, 1945, amendment (59 Stat. 237), when the reserve held against Federal Reserve notes fell below 25%, the Board of Governors of the Federal Reserve System was to establish a graduated tax of not more than 1% upon such deficiency until the reserves fell to 20%; and when the reserve fell below 20%, a tax at the rate of not less than 1.5%, upon each 2.5% or fraction thereof that the reserve fell below 20%, was to be paid by the Federal Reserve bank concerned, but the bank was to add the amount of the tax to the discount rate. By act of Congress approved March 3, 1965 (P.L. 89-3), this reserve requirement contained in Section 16 of the Federal Reserve Act for the maintenance of gold certificates of not less than 25% against Federal Reserve bank deposit liabilities was eliminated. Ratio of gold certificates to Federal Reserve notes outstanding and deposit liabilities, combined, had dipped to 27.5% as of December 31, 1964. Based on the new required coverage of only Federal Reserve notes outstanding, the ratio would have been 42.7% as of December 31, 1964. By the end of 1967, the ratio of gold certificates to Federal Reserve notes outstanding was down to 27.1%. By act of Congress approved March 18. 1968 (P.L. 90-269), the revised provision of Section 16 of the Federal Reserve Act, under which the Federal Reserve banks were required to maintain reserves in gold certificates of not less than 25% against Federal Reserve notes (the so-called gold cover against the notes) was finally eliminated altogether. See FEDERAL RESERVE STATEMENT |