1938: Banks And Banking

Changed Banking Conditions.

Changes in banking conditions during 1938 sprang primarily from three fundamental causes: (1) in the spring, the renewal of the Federal spending program coupled with a change in gold policy and reserve requirements for member banks of the Federal Reserve System; (2) in the summer, the revival of business activity; (3) the heavy imports of gold during most of the year, but especially accompanying the European crisis in the fall. The most obvious result of these changes was the increase in excess reserves of the commercial banks. These reserves reached their highest point at the end of the year. Bank deposits, too, increased, beginning in the second quarter of the year, fed by the gold imports, and were higher at the end of the year than they had been in 1937. The velocity of circulation of these deposits was exceedingly low. Earning assets of the commercial banks did not increase with the increase in deposits; for the increase in holdings of Government and Government-guaranteed securities was counterbalanced by decreases in loans and discounts. The money market reflected the general easiness of credit, and rates declined slowly throughout the year. Only briefly during the European war crisis did they firm at all. Security markets reached their low point in April; and the recovery movement was substantial, although prices at the end of the year remained below the average for 1937. The European crisis affected the market, though severely, only for a few weeks. The volume of trading which accompanied the rising prices became heavy in the later months of the year. New issues of securities increased rapidly at the same time. Issues for new capital for industry were a substantial factor in the increase, though Government issues were important. The Federal debt continued to increase and reached $39,000,000,000 at the end of the year.

New Treasury and Reserve Bank Policy.

The change in Treasury and Reserve Bank policy was a continuation of the attempts to create a revival, which had been inaugurated during 1937. The new policy had three aspects. The first to be introduced was the change in gold policy. On Feb. 14, the gold sterilization program, in operation since 1936 except for a brief interval in September 1937, was modified. Only increases in the gold stock in excess of $100,000,000 per quarter were to be sterilized. On April 14, the whole sterilization program was abandoned, and all the gold accumulated by the Treasury was restored to the monetary system. The amount of this gold was some $1,400,000,000, and Reserve Bank reserves were accordingly increased by this amount. Later, as the Treasury drew on this account for current expenses, these funds became the basis for increased reserves of member banks.

The second aspect of the policy was the reduction in reserve requirements for banks, members of the Federal Reserve System. On April 15, the Board of Governors announced the reduction to take effect on April 16. Reserves against demand deposits of central reserve city banks were reduced to 22 per cent, those of reserve city banks to 17 per cent, and country banks to 12 per cent. Reserves against time deposits for all classes of member banks were reduced to 5 per cent. This approximates a reduction of 13 per cent for all deposits of all member banks. The banks had not been operating on a close margin of reserves prior to this change. On Sept. 1, 1937, the low point of the previous year excess reserves had been $750,000,000; but in March 1938 they were $1,560,000,000. The new requirements, coupled with the gold policy, raised them to $2,071,000,000 in April.

The third aspect of the new policy was the resumption of the spending program. Expenditures on recovery and relief had been at the rate of approximately $160,000,000 a month in the latter part of 1937. In March 1938, they were $153,000,000. In April, they rose to $202,000,000 and in June to $314,000,000. Later, they dropped to some $240,000,000 a month. The category of 'all other expenditures' (i.e., excluding relief, National defense, interest, and revolving funds) also increased substantially, from a level of $175,000,000 a month to some $230,000,000. These increases, accompanied as they were by large excesses of expenditures over receipts, further tended to increase reserves of member banks.

Gold Imports.

Imports of gold into the United States had dropped during the recession. In June 1937, when these imports were at their high point for that year, the United States had received $262,000,000. By January 1937, the amount per month had dwindled to $2,000,000. In March, following the tension in Europe when Germany annexed Austria, imports jumped to $52,000,000 and remained at approximately that rate until August. Then another jump occurred to $166,000,000; and in September, with the real war scare, it became $521,000,000. Although this figure was the highest for any single month, imports continued to be heavy for the remainder of the year. For November, the latest available figure, they were still $189,000,000.

The net result of these changes was to strengthen the reserve position of the banking system. The total reserves of the Federal Reserve Banks at the end of the year were $12,100,000,000, compared with $9,500,000,000 at the end of last year. The total gold stock of the United States was $14,100,000,000 at the end of October, compared with $12,700,000,000 at the beginning of the year. Member bank reserve balances which had been $7,000,000,000 at the end of 1937 were $8,600,000,000 at the end of 1938, an increase of $1,594,000,000. Excess reserves rose from $1,200,000,000 to $3,300,000,000. Thus the banking system was abundantly able to supply credit to finance vastly expanded productive activities.

Federal Reserve and Member Banks.

However, the banks were not called upon to supply such credits. For the Reserve Banks themselves, bills discounted declined from $12,800,000 to $7,000,000; bills bought in the open market from $2,800,000 to $500,000; and direct industrial advances from $18,200,000 to $15,700,000. Their holding of Government securities remained at the end of the year just what they had been at its beginning, $2,300,000,000. Federal Reserve note circulation also remained nearly stationary, with $4,300,000,000 outstanding at the end of 1938 compared with $4,500,000,000 at the end of 1937. Thus, although deposit accounts increased, the reserve ratio at the end of the year was 83.6 per cent, though it had been only 80.1 per cent the year before.

Member-bank deposits expanded only moderately during the year. In the first quarter, they continued practically unchanged at the low point of the end of the previous year. Demand deposits were $20,513,000,000, compared to $20,387,000,000 at the end of 1937; time deposits were $10,845,000,000 compared with $10,806,000,000 for December. During the second quarter, expansion of demand deposits was still slow; but during the summer months a more rapid rate was maintained. On Sept, 28, the date of the latest call report, demand deposits were $21,596,000,000, an increase of $1,200,000,000 over December 1937. Most of this increase came in New York City banks, whose demand deposits increased by $914,000,000. Country bank deposits decreased in the same period by $60,000,000. This distinction may be explained in part by the fact that a large part of the proceeds of gold imports lodge in the New York banks, and in part by the increase in interbank deposits. Time deposits during the same period declined by $35,000,000, and United States Government deposits by $99,000,000. For the trend of deposits for the rest of the year, figures for reporting member banks have to be substituted. In March, at their low point, demand deposits for these banks were $14,360,000,000; and, at the same time, time deposits were $5,239,000,000. At the end of December 1938, their demand deposits were $15,986,000,000; and time deposits, $5,160,000,000. This increase was very moderate in view of the degree of industrial recovery which was achieved. Moreover, the velocity of circulation of the deposits was very low. The index of the New York Federal Reserve Bank (1919-25 average = 100), which had been 69 in September 1937, was only 61 in September 1938; for New York City banks and for outside banks it declined from 45 to 38. Figures for bank debits, available through the end of the year, suggest that velocity did not rise.

Banking Activities and Opportunities.

This sluggishness in the development and use of deposits was in accord with the use to which the banks were able to put their surplus funds. Total loans expanded only very slowly. For reporting member banks, they were $9,137,000,000 for January, declined to $8,213,000,000 in July, and expanded only to $8,430,000 at the end of the year. Of the various types of loans, only those on real estate were as high at the end of the year as they had been at the beginning. Business loans had declined during the year from $4,600,000,000 to $3,800,000,000, and security loans from $1,500,000,000 to $1,400,000,000.

Investments of the banks, on the other hand, had expanded. For reporting member banks, total investments were $12,148,000,000 in January; at the end of December, they were $13,219,000,000. The expansion came principally in holding of Government securities. Reporting banks held $8,118,000,000 of direct Government obligations and $1,131,000,000 of fully guaranteed ones in January; at the end of December, their holdings were $8,226,000,000 and $1,732,000,000. Other security holdings increased from $2,899,000,000 to $3,221,000,000.

With such abundant funds and so little demand for their use, money rates naturally remained at low levels. Rates for rediscounts at the Federal Reserve Bank remained unchanged throughout the year at 1 per cent at the New York Bank and 1 per cent for the others. Customers' rates at member banks in New York City declined from 2.36 per cent in January to 2.33 per cent in November; for Northern and Eastern cities, from 3.37 per cent to 3.28 per cent; for Southern and Western cities, from 4.14 per cent to 4.05 per cent. Open market rates for stock exchange loans remained at 1.00 per cent for call loans and 1.25 per cent for time loans throughout the year. Bankers' acceptances were at 7/16 per cent. Rates on prime commercial paper (4 to 6 months) declined from 1 per cent at the beginning of the year to  per cent at the end of the year. The European crisis showed itself only in the rates for short-term Government loans. New issues of Treasury bills were selling for .10 per cent at the beginning of the year, declined to .02 per cent in June, and rose to .05 per cent in August. In the last week of September, they were .14 per cent; and on October 1, after the crisis, only .03 per cent. The yield on three-to-five-year bonds followed a similar course with a rate of 1.13 per cent in January, .71 per cent in August, .85 per cent at the end of September, and .67 per cent in the second week of October.

Security Prices.

Security prices fluctuated only mildly compared to 1937. The New York Times average for fifty stocks was 86 at the end of 1937, declined to a low of 70 in March, and rose to a high of 103 in August. The European crisis carried it back to 80; but it rebounded immediately to 99 at the end of September and stood at 100 at the end of December. Industrial stocks improved much more than the average, while railroad stocks improved very little during the year. The average for 25 industrials was 150 at the end of 1937 and 191 at the end of 1938; for railroads, the indexes were 22 and 26 respectively. The average daily volume of trading on the New York Stock Exchange followed the course of prices. The figure for 1937 had been 1,510,000 shares; it fell to 920,000 shares in May 1938, but by December was 3,121,000 shares.

Bond prices recovered more slowly than stock prices. For corporate issues the average price (Standard Statistics) was 81 in January, 74 in April, and 82 at the end of November. The small degree of recovery, again, was occasioned in large part by the severe decline in the price of railroad bonds. Government securities had not declined during the year, except briefly in April and again during the European crisis. Treasury issues stood at 105.3 in January, 106.1 in May, and 103.8 at the end of November. Municipal issues were 112 in January and 110 in November.

Offerings of new securities became heavy in the second quarter of the year. At first, the increase was in Government issues — Federal, state, and municipal. Later, there were increasing issues by corporations for new capital. Total offerings for new capital were $81,000,000 at the low point in February, rose to $390,000,000 in July, and declined to $165,000,000 in October. For corporations, new bond issues were at their lowest in April with $11,000,000, rose to $191,000,000 in June, and remained at a high level for the rest of the summer. During September and October, they declined to $62,000,000, primarily because of the war scare. New stock issues were very small in volume throughout the year. Refunding issues were small except during August and October. The low level of all new issues compared with pre-depression years was occasioned almost entirely by the lack of issues for railroads and for public utilities. Industrial issues compare favorably with former years.

New issues of Government securities were inevitable with the renewal of the spending program. Although the use of the gold released from sterilization for current expenses relaxed the pressure for a few months, the debt of the Government mounted rapidly. At the end of 1937, the interest-bearing debt was $37,000,000,000; in June it had declined to $36,500,000,000; but by the end of the year it was $39,000,000,000. During the year, Treasury notes and bills declined in amount by some $2,000,000,000, while bond issues increased not only to take their place, but to provide for the new borrowings. See also INTERNATIONAL BANKING.