1941: Banks And Banking

On June 30, 1941, there were in the United States 14,855 banks — 98 less than a year ago — of which 6,556 were members of the Federal Reserve System and an additional 547 were mutual savings banks. Total deposits, excluding inter-bank items, were $67,172,000,000, an increase of $6,590,000,000 in twelve months, as against $4,590,000,000 for the corresponding period 1939-40, $3,797,000,000 for 1938-39, and a decrease of $1,092,000,000 for 1937-38. Total loans and investments on June 30, 1941 were $57,945,000,000, increases in the twelve-month period of $2,971,000,000 and $3,638,000,000 for the respective categories, the latter including both short and long-term government obligations. On Dec. 31, 1941, total loans and investments of member banks in 101 cities stood at $30,085,000,000, an increase of $4,558,000,000 in the calendar year; demand deposits were $23,650,000,000, an increase of $1,351,000,000.

A difficult banking year was marked by the continued disbursement of vast amounts of credit-created purchasing power on the part of the government and its agencies, against which neither taxes, prices nor war-savings had as yet made compensatory inroads. The increase of private deposits was accompanied by increases in excess reserves and in currency outstanding, with some evidence of hoarding in the closing weeks of the year. Note circulation of the Federal Reserve System stood at $8,192,169,000 in the week ended Jan. 3, 1942, as compared with $5,930,997,000 a year earlier. Total money in circulation was $11,161,000,000 as against $8,732,000,000.

Available indices at the end of the year suggested that the possibilities of the monetary situation had hardly begun to work themselves out. The Department of Labor wholesale price index, calculated on 1926 = 100, stood at 92.2 on Dec. 6, 1941, comparable with 79.8 a year ago and 79.0 in Dec. 1939. The Bureau of Labor's index of twenty-eight basic commodities rose in the last week of 1941 to 160.9 per cent of August 1939, although seventeen of the commodities covered fell under various types of government regulation. The Bureau's cost-of-living index, calculated on 1935-9 base, stood in mid-November at 110.2.

While institutional investors provided the main demand for both public and private offerings during 1942, the United States Government on May 1 launched a determined effort to attract purchasing power directly from the public. The Defense Savings Bonds and stamps then made available in small denominations brought in over $2,500,000,000 by the end of the year. Payroll deduction plans were on the increase, and the course of the war in December stimulated buying. It remained probable however that such voluntary action would by itself prove inadequate to restrain the effects of the vast additions to purchasing power in the hands of consumers.

The difficulty of finding satisfactory earning assets for the banks continued as an ever-widening sphere of economic life passed into the nation's war effort, and thereby under direct or indirect government control. Discussion in banking circles was concentrated on the issue of inflation, especially as to how far purely monetary measures could or should be used to control the process.

Excess Reserves.

As part of the program for combating inflation, the Federal Reserve Board, after consultation with the Secretary of the Treasury, announced on Sept. 23, 1941 that reserve requirements would be raised as from Nov. 1 to the maximum permitted by existing law. Compared with the requirements as last established on April 16, 1938, the change was from 5 to 6 per cent on time deposits; on demand deposits from 22 to 26 per cent for central reserve cities; from 17 to 20 for reserve cities; from 12 to 14 for country banks. The peak of excess reserves for the year occurred on Jan. 15, when the total stood at $6,864,000,000; after the new requirements the excess stood at $3,500,000,000 on Nov. 1, rising to about $3,800,000,000 in December. It was of interest to note that, in contrast to previous years, the bulk of the excess was now held outside the New York district, with country banks in the strongest position.

While expert opinion approved the change, its effectiveness as an anti-inflation device was obviously qualified by the fact that the government was by far the major source of the credit-demand originating in the defense program and other types of deficit financing. Cost increases due to non-monetary factors would require other methods of control, and the situation precluded any marked movement toward higher interest rates. Cheap money prevailed throughout the year: call loans at 1 per cent, prime commercial paper throughout November at , and customers' loans in the September quarter averaging 2.60 (New York City 1.98).

Gold and Silver Movements.

Of especial interest to the metropolitan area was the marked decline in gold imports. The net acquisition during the year was under $900,000,000 (as compared with $4,744,500,000 in 1940), bringing the total stock to approximately $22,800,000,000, of which $2,200,000,000 was earmarked for foreign account. Statistics covering the first ten months of 1941 showed Canada and South Africa the leading sources of supply, sending respectively 366.8 and 292.6 millions of dollars (at the U.S. customs valuation of $35 an ounce). Publication of export figures by destination was suspended by the Department of Commerce from May 1941.

Purchases of silver by the U.S. Treasury amounted in 1941 to approximately $75,000,000 by American valuation, as compared with $99,400,000 in 1940. Of the 1941 total $50,900,000 came from foreign sources. The Treasury's buying price for foreign silver stood throughout nearly all the year at 35 cents an ounce, with the world price of silver steady at 34. After the conclusion of the agreement with Mexico in December, the Treasury price was advanced to 35. The buying price for domestic silver, of which the Government stands committed to take the whole output, was 71.11 cents an ounce. On the basis of the statutory valuation at $1.29 an ounce, the Treasury's monetary stock at the end of October represented $4,201,600,000 covering holdings on that date of about 3,250,000,000 ounces.

Currency Export.

Year-end figures released by the Federal Reserve Bank of New York showed that shipments of United States currency abroad in 1941 totalled $23,631,000. Of this amount $17,775,000 went to Cuba, $3,145,000 to the Dominican Republic, and $1,194,000 to Canada. Imports of currency amounted to $14,874,000, of which Canada sent $7,002,000 and Argentina $2,643,000, with the balance coming chiefly from Latin America.

Reserve Bank Earnings.

Reserve Bank earnings in 1941 showed a heavy net decline from 1940, the figures being $9,137,000 against $25,860,000. The fall was ascribed to a combination of lower gross earnings with increased expenses.

New Security Issues.

New security issues in 1941 reflected the increasing concentration of the nation's economy on the war effort, with a resultant decline in volume. Apart from Federal Government loans, bond issues touched their lowest total since 1937, aggregrating $2,091,023,000 in 1941 compared with $2,635,000,000 in 1940. State and municipal borrowing led all other groups in this field, with municipals probably stimulated by the possibility of losing their tax-exempt status in the future. Stock issues amounted to $301,503,000 as compared with $354,061,000 in 1940.

Bank Loans and Investments.

As in previous years of deficit financing, the outstanding feature was the predominant position of Government obligations. In the third quarter of 1941, for all member banks, these accounted for three-quarters of all listed investments. New York City banks showed, as usual, a still higher proportion; the situation indicated in the detailed classification of June 30, 1941, for member banks in that area, showed total loans of $3,778,000, of which $2,405,000 were commercial and industrial; together with total investments of $8,715,000, of which $7,268,000 were obligations of the U.S. Government.

RFC Loans.

The relative decline of the banks, as compared with the State, in financing the economic life of the country is further illustrated by an expansion of about $1,500,000,000 in the assets of government corporations and credit agencies during the first ten months of 1941. Reconstruction Finance Corporation loans to industrial and commercial businesses on national defense account rose from $9,000,000 in January to $93,000,000 in October, while RFC advances to Government national defense companies (including the Metals Reserve Company, Rubber Reserve Company, Defense Plant Corporation and Defense Supplies Corporation) increased from $63,000,000 in January to $643,000,000 in October. At the close of 1941 total RFC commitments for the war program stood at $5,495,000,000. The Federal Loan Administrator, in a year-end statement, pointed out that the commercial loan program of the RFC was virtually complete when the United States entered the world war; direct advances to business since 1934 had totaled $460,500,000, but monthly commitments by September 1941 were down to about $600,000. With the intensification of the war program RFC funds were made available on a large scale not only for the government corporations above cited but for purchases of tools and materials necessary for defense purposes in advance of congressional appropriations. Referring to the construction of new defense plants, for which the Defense Plant Corporation had contracts placed for over $2,500,000,000 at the end of the year, Mr. Jesse Jones stated that while private construction on a five-year amortization basis would have been preferable, private industry was unwilling to accept the risks.

Of considerable interest to investment bankers was the purchase by the RFC in February, of an issue of $136,330,557 highway refunding bonds of the state of Arkansas. The size of the issue, and the state of the market, led the original banking syndicate to request RFC participation; but at the last moment the Government corporation took over the entire issue at an interest rate substantially lower than that asked by the bankers, and was subsequently able to market nearly all of it to various groups at a substantial profit.

Two other developments in 1941 aroused both comment and controversy in investment banking circles. One was the increasing proportion of new issues sold direct to institutional purchasers without the assistance of underwriting intermediaries. The other was the promulgation by the Securities and Exchange Commission of a rule, effective May 7, requiring competitive bidding on all new issues of public utility securities.

Export-Import Bank.

Under the general direction of the RFC, this institution now occupies a leading role in the direct financing of economic enterprise outside the United States. It has authorized $837,696,143 in foreign loans since the start of operations, of which at the end of 1941 $512,232,868 represented loans outstanding and commitments not yet disbursed. Latin America alone accounted for $486,984,547 of the authorizations, with $314,726,462 outstanding; the entire total of $112,928,000 new commitments in 1941 was for Latin America. The largest recent items included a loan to Columbia of $12,000,000 for the purchase of American materials, services and equipment; $11,300,000 for the Cuban Sugar Stabilization Institute; $25,000,000 to Cuba for road-building; $30,000,000 to Mexico under the recent general economic agreement. Among other enterprises of the bank are large electrical projects in Brazil, Columbia and Chile, meat-packing plants in Venezuela, mining and agricultural developments, hotel construction and international highways, water systems and sanitation works, many small industrial ventures, and a fifty per cent participation in a large new Brazilian steel plant.

While the bank's dealings with the governments and banks of Latin America show not a single item in default, the Director of the Export-Import Bank states that it can hardly be confined to the lending standards of private institutions in its endeavor to promote the economic development of Latin America in directions which also serve the cause of hemisphere solidarity. In this connection it may be recalled that Latin-American republics have also received about $400,000,000 in 'lend-lease' aid for military and naval equipment and other defense purposes approved by the United States Government.