1942: Banks And Banking

On June 30, 1942, there were in the United States 14,773 banks — 82 less than a year ago — of which 6,647 were members of the Federal Reserve System and an additional 547 were mutual savings banks. Total deposits, excluding inter-bank items, were $72,382,000,000, an increase of $5,210,000,000 in twelve months, as against $6,590,000,000 for the corresponding period 1940-41. Total loans and investments on June 30, 1942, were $63,976,000,000, an increase in the twelve-month period of $234,000,000 and $6,264,000,000 for the respective categories, the latter including both short and long-term government obligations. It was estimated by The American Banker at the close of 1942 that total deposits of all banks at that time were approximately $99,000,000,000, indicating a rise of some $18,000,000,000 in the calendar year. This total compares with $37,000,000,000 at the end of the first World War, and somewhat less than $60,000,000,000 at the 1929-30 peak. The year-end statements of New York City banks showed nine with assets of $1,000,000,000 or more. The deposits of Chase National reached $4,291,000,000, making it the largest commercial bank in the world.

The combined statement of the twelve Federal Reserve Banks on Dec. 30, 1942, showed total deposits of $14,914,837,000 as compared with $14,678,057,000 a year earlier; member-bank deposits were $12,788,013,000 as against $12,450,333,000. Total money in circulation stood at the all-time record of $15,407,000,000, an increase of $4,247,000,000 during the year 1942.

Commercial Banks and United States Securities.

The foregoing figures show the effect of the huge Government disbursements for war purposes, which were running at the rate of $6,000,000,000 a month at the end of 1942 and were officially expected to go up to about $8,000,000,000 in 1943. Despite new taxation, by far the greater part of these expenditures continued to be covered by borrowing, and despite all efforts to reach non-institutional lenders, the major reliance continued to be upon commercial banks. This situation, which caused considerable anxiety in the latter part of 1942, is reflected in the banks' holdings of United States Government securities. In the calendar year 1942, the fifteen principal Wall Street banks increased their holdings of Government securities by $4,583,002,000, or 63.2 per cent. At the year's end their holdings totalled $11,840,167,000, a sum amounting to 51.6 per cent of the total resources of these banks. It was noteworthy that the rate of increase in Government holdings far exceeded that of either deposits or total resources.

According to an estimate of the National City Bank, total commercial bank holdings of United States Government securities at the end of the year were about $40,000,000,000, to which should be added Reserve Bank holdings of some $6,000,000,000. Many authorities saw in these figures an indication that saturation point was approaching.

This view was strengthened in certain quarters by the very narrow margin of success attained in October 1942 in the record flotation by the United States Treasury of its $4,000,000,000 bond issue consisting of 1 per cent notes of 1946 and 2 per cent bonds of 1952. The issue was not fully placed without considerable pressure being put on the banks to increase their original subscriptions, and the final margin of only $100,000,000 sharply contrasted with oversubscriptions of from 30 to 50 per cent on previous issues. The Treasury Department subsequently stated that about 75 per cent of the issue was taken by the Commercial banks, and about 60 per cent of the total was concentrated in the New York and Chicago districts — both proportions being by general consent far too high. Critics of Mr. Morgenthau argued that a slightly higher yield and a longer term would have resulted in a wider distribution of the debt and some relief for the banks. The Secretary emphasized the saving to the public in sticking to the 2 per cent rate. To complete the picture, however, brief mention should be made here of the Victory Loan campaign inaugurated on Nov. 30, 1942. The variety of securities offered ranged from short term certificates to 26-year 2 per cent bonds, and the December total reached $12,906,000,000, or $3,906,000,000 in excess of the goal set by the Treasury. Of this total $7,834,000,000 was raised from non-banking sources.

Bank Reserves.

The continued process of credit-creation, leading to expanding deposits and circulation, pressed hard in 1942 upon the reserve situation of the banks, especially those of New York, which were subject to a heavy drain in favor of the industrial centers of the rest of the country. New York was subject to some additional drain as a result of the increase in reserve requirements effective Nov. 1, 1941. Out-of-town banks withdrew considerable amounts held on deposit with New York correspondents in order to meet the higher reserve requirements in their own districts. The situation called for some remedial action in respect of both reserve requirements and open market operations.

Amendments to the Federal Reserve Act.

On July 7, 1942, the President approved certain amendments to the Federal Reserve Act, of which the most important was one empowering the Board of Governors to alter the reserve requirements of the two central reserve cities without at the same time making corresponding changes for the rest of the system. Prior to the passage of this amendment, central reserve cities and reserve cities could not be dealt with independently of one another; and the intention of the new ruling was to enable the Board to relieve conditions at points of pressure without necessarily adding to the volume of reserve funds in centers where coverage was ample.

Under this new provision the reserve requirement for New York and Chicago was cut in August from 26 to 24 per cent of demand deposits, thus releasing upwards of $400,000,000 to the surplus reserves (other requirements stood as of Nov. 1, 1941, viz., reserve city banks 20 per cent; country banks 14). A second cut for the central reserve cities was made in October, bringing the requirement down to 20 per cent. On Oct. 30 the New York reserve bank followed the rest of the system in reducing the discount rate from 1 to  of one per cent against collateral comprising Government securities callable in less than one year.

Excess Reserves.

Despite the easing of reserve requirements, excess reserves for the System as a whole on Dec. 30, 1942, stood at $1,660,000,000, the lowest level in more than five years. The last week of the year alone saw a reduction of $530,000,000, due mainly to payment by banks for the new Treasury issue of one-year  per cent certificates, which was only partially offset by open market purchases of $362,010,000 United States securities for reserve account. The excess reserves of New York City banks dropped $90,000,000 in the same week to $235,000,000, lowest since Sept. 30, 1942.

Bank Loans and Investments.

As in previous years of deficit financing, loan and investment portfolios showed the restriction of the opportunity for bank earnings outside the Government field. Total loans of all member banks on June 30, 1942, were $16,928,000,000 as compared with $18,021,000,000 at the start of the year and $16,729,000,000 on June 30, 1941. Investments stood at $29,872,000,000 on the later date, of which $24,098,000,000 were United States Government obligations. These figures compare with $23,930,000,000 and $18,078,000,000 for a year earlier. The New York City proportion on June 30, 1942, was, as is usually the case, somewhat higher than for the country as a whole, total investments being $9,953,000,000 of which government obligations constituted $8,550,000,000.

New financing similarly remained at a low level throughout 1942. The total bond offerings, in 232 issues, were $1,193,363,000 as against $2,091,023,000 for the previous year. The 1942 total was the smallest since 1933. Stock emissions also were the lowest since 1934, totaling $80,739,000 in 23 issues, compared with $301,503,000 for 76 offerings in 1941.

Federal Reserve Bank Earnings.

Earnings of member banks in the first half of 1942 showed practically no change as compared with the corresponding period of 1941. Both gross earnings and expenses showed a considerable increase, leaving net current earnings unchanged at $206,000,000 and cash dividends declared at $101,000,000 for both periods.

Gold Movements.

Among topics of banking interest during the year 1942 the future of gold occupied a prominent place in the last quarter, owing to the curtailment of production by the United States and Canada. While particulars of gold movements have not been made available since the entry of the United States into the war, it is generally known that this country holds about four-fifths of the world's monetary gold stock. World production in 1941 reached the record total of 40,800,000 ounces, valued, at the American buying rate of $35 an ounce, at $1,428,000,000. Of the 1941 production the British Empire controlled about 60 per cent: 35 per cent came from South Africa (the premier producing region), about 13 per cent from Canada, and 14 per cent from the United States. The United States War Production Board early in October suspended gold mining for the duration with a view to releasing man-power for copper and other non-ferrous mining. In Canada, important transfers of labor from gold to nickel mines had already taken place and a further gradual cessation of gold mining was announced. In Australia, Rhodesia, and the Gold Coast some curtailment of operations also took place owing largely to rising costs of production and the difficulty of obtaining new equipment. South Africa, however, where about two-fifths of the Union's national income comes from the gold mining industry, maintained a rising rate of production, encouraged by the continuance of the American buying price throughout 1942. It may be noted that this is yet another illustration of the fact that subsidizing of private industry, whether at home or abroad, constitutes one of the most effective and least remarked methods of reducing ever-wider sections of economic life to dependence on political decisions.

The American curtailment orders renewed discussion of the world's monetary future. Following the restrictions put first by Great Britain and later in 1942 by the United States on the importation of their own paper currencies, both pound and dollar notes went to a considerable discount in neutral centers, following to a more limited extent the paper of other belligerent or occupied countries. Correspondingly gold coins and bars went to very high premiums both in India, Latin America, and the neutral states; Lisbon at the close of 1942 was reported to be offering from 150 to 200 per cent, and Turkey from 300 to 400. American forces in North Africa were similarly finding it expedient to make considerable use of gold currency. Under these circumstances there appeared to be little ground for the reiterated fears as to a worldwide abandonment of the gold basis. The difficulty of finding any other international basis was more than ever patent, and the fact that during 1942 the Argentine, Sweden, and Switzerland all converted substantial parts of their foreign exchange holdings into gold gave similar reassurance. The case of Switzerland was particularly significant inasmuch as that country was a center of refuge capital; Swiss holdings of earmarked gold in New York increased by no less than 58 per cent in the course of 1942.

On the other hand, the attendant problems of monetary policy were made still more urgent by these developments. The United States valuation dominated the entire world position, though it may safely be conjectured that in this respect further action would be taken only in consultation with at least the British Commonwealth of Nations. The more difficult problem was that of correcting the abnormal distribution of the world's monetary gold. While all authorities recognized the necessity of such correction if international currency stability were ever to be restored, specific authoritative proposals were conspicuously absent — perhaps because of their necessary bearing upon international trade and tariff policy. The question of restoration of some internationally acceptable basis of monetary value therefore remained, at the close of 1942, one of the most urgent and most difficult issues in the path of economic reconstruction.