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.

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.

1940: Banks And Banking

Increased Reserves.

During the first year of the war the banking system of the United States continued its rapid growth in resources and in liquidity. Imports of gold from abroad surpassed even the high figures of recent years and provided an expansion of deposits. In the first ten months of the year idle reserve balances rose, and debits to individual deposit accounts failed to keep pace with the growth of deposits themselves so that the turnover of deposits declined to a new low figure. At the end of the year the early stages of financial expansion occurred. The explanation for these facts lay in the general course of business. In the early months of the year business receded sharply from the high points induced by war speculation at the end of 1939. In the fall the defense program was accelerated and by December even businesses remote from immediate defense needs began to feel the stimulus. Even the expanding demands for funds for defense failed to produce any strain in the money or capital markets. Interest rates declined during the year both for short term and for long term loans. New issues of bonds were absorbed easily. The stock market, which broke considerably when France was conquered and did not recover again completely, nevertheless was very steady during the whole fall. The field in which the new demand made itself felt most was in commodity prices. The prices of some products rose very rapidly and the general average even rose substantially before the end of the year. Because of this threat of inflation and the extreme liquidity of the banking system, the Board of Governors of the Federal Reserve System again asked Congress for the powers necessary to an effective control of credit.

Imports of Gold.

The growth in resources of the banking system arose primarily from imports of gold. Imports in 1939 had been very high but this year the amounts were even greater. In the peak month last year (April) $606,000,000 were imported; this year in the single month of June, $1,163,000,000 entered this country. In the first ten months of this year imports averaged approximately $430,000,000 a month compared to $300,000,000 last year. As a result at the end of November the gold stock reached $21,755,000,000, compared with $17,644,000,000 last year. Most of the gold reached the United States from Canada and the United Kingdom. However, in June, $241,000,000 came directly from France and there were relatively large shipments from Sweden, Switzerland and South Africa in the early months of the year. Japan sent little gold to this country from February to August, but in September and October the level of last year (some $12,000,000) was resumed.

As a result of the imports of gold reserve balances of member banks of the Federal Reserve System increased also. The average for October was $14,000,000,000 compared with $11,900,000,000 a year before. Of these $6,800,000,000 were excess reserves. Increases in reserves were disproportionately heavy in city banks: Central Reserve city banks' excess reserves rose from $3,200,000,000 to $4,100,000,000, Reserve city banks' from $1,200,000,000 to $1,900,000,000 and county banks' from $7,000,000,000 to $9,000,000,000.

Growth of Deposits.

As the growth of excess reserves indicates, deposits failed to grow in proportion to the increase in the basis for credit. Demand deposits for all banks in the United States in June were $61,000,000,000 compared with $58,000,000,000 at the end of last year. For reporting member banks, for which later figures were available, demand deposits which were $18,300,000,000 in October last year rose to $21,000,000,000 in October, and time deposits were $5,200,000,000 compared with $5,000,000,000 a year ago. In New York City the growth of deposits paused in the summer but in outside banks it was continuous throughout the year.

The rate of turnover of demand deposits nearly matched the increase in deposits in banks outside New York City, but in New York itself it continued to decline. The turnover rate for the third quarter of the year for 100 leading cities outside New York was 19.9 compared to 18.7 last year. For New York City the rate was 17.2 compared with 19.4. This is the first year since 1917, when the figures were first compiled, that the rate for New York City was below that for the county as a whole. In October, however, debits increased sharply — by 16 per cent in outside cities and 10 per cent in New York City.

Expansion of Business.

The explanation of the lack of activity of deposits lies in the condition of business during the year. In the early months of the year production declined from an index of 122 (1935-39 = 100, adjusted) to 111 in April and payrolls (1923-25 = 100, unadjusted) declined similarly. Thereafter, however, production increased rapidly to 121 in June, July and August, 125 in September and 128 in October. Payrolls rose to 98 in June, 104 in August and 114 in October. Both in the recession in the spring and in the recovery at the end of the year the durable goods industries led. National Defense spending which was accelerated immensely in the autumn provides the key to these movements. By the late autumn the non-durable goods industries were expanding rapidly also and again reached the peak of the end of last year. Defense orders for textiles were heavy but civilian orders were increasing also.

Loans of banks followed somewhat the same course as business. In January, loans of reporting member banks were $8,600,000,000; by June they were $8,400,000,000; in September, they expanded to $8,700,000,000 and were $9,100,000,000 at the end of November. The decline was almost entirely due to changes in New York City banks while a slow rise in outside banks continued throughout the year. The increases of loans in the fall were in New York City predominantly. Many of these loans were connected with the defense program. The loans were for somewhat longer maturities than are usual and were for large sums to a relatively small number of borrowers. Industrial borrowing was facilitated by the new laws intended to simplify borrowing for the National Defense Program. Producers of goods for defense were given two contracts. One of these, under the 'plant option' plan, provided means for borrowing to expand plants, the other covered the process of producing the goods themselves. (See also BUSINESS.)

Increased Purchases of Securities.

Besides increasing loans the banks continued their purchases of securities. In January the reporting member banks of the Federal Reserve System held $14,600,000,000 in securities of which $8,800,000,000 were direct government obligations and $2,400,000,000 were fully guaranteed. These holdings mounted almost continuously throughout the year. At the end of November they had $15,800,000,000 of securities. Direct obligations of the government amounted to $9,500,000,000 and fully guaranteed obligations to $2,700,000,000. Banks both in New York City and in the rest of the country shared in the increase in holdings.

Although the increase in demand deposits was not great and bank debits were low, demands for currency increased throughout the year. The total amount of currency in circulation was $7,376,000,000 in January and $8,300,000,000 in October. The increase came in silver certificates which rose from $1,469,000,000 to $1,620,000,000 and in Federal Reserve Notes which rose from $4,796,000,000 to $5,541,000,000. Although expanding payrolls accounted for some of the increase in demand for currency the amount of increase was too large to arise from this cause alone and must have been caused in part by hoarding.

The Reserve Banks were amply able to supply all demands for currency. At the end of November these banks had on hand and due from the Treasury $19,492,000,000 of gold certificates and total reserves of $19,807,000,000. Since total Reserve Notes outstanding were only $5,670,000,000 and total deposits $16,185,000,000, the reserve ratio was nearly 90 per cent. Demands upon the Reserve Banks were slight. In addition to their large cash holdings, these banks had $4,100,000 of bills discounted, $7,900,000 of industrial advances, and $2,231,000,000 of government securities. They thus had a basis for either a great expansion of loans or for increased holdings of government securities. This year, however, the amount of bills discounted was no greater than a year ago, and the amount of government securities held has declined to the lowest point since 1933.

Effect of Banking and Business Policies on Prices.

The effect of the policies of banking and business combined on prices was little in the first three quarters of 1940. The wholesale price index (1926 = 100) was 79.4 in January and declined steadily to 77.4 in August. The declines were fairly general throughout the whole list of commodities. In the autumn, however, with the increased demands for defense, prices began to rise sharply. The general index number increased to 79.5 at the end of November. Those products most closely related to defense needs increased in price most rapidly. Prices of building materials responded very sharply, rising by 20 per cent between July and November. Federal requirements for lumber for the year 1940-41 were estimated at 8 per cent of the entire year's production and most of this supply was ordered in September and October. Prices of many minerals advanced; that for lead especially. Import duties of some 20 per cent protect these products from foreign competition. Prices of woolen goods increased so much that in November the government announced that further orders could be filled from foreign sources though the duty is 75 per cent. Prices for silks, on the other hand, fell in November after an increase in October common to all Far Eastern commodities. Farm products rose in price also. Livestock prices increased as payrolls advanced. Prices of grain and of cotton were increased by the government loan program which encouraged withholding of supplies from the market. Loan rates were below market prices. The loan rate for corn was advanced and the government made loans for three, instead of one, years. The Federal Government itself increased its stocks of essential materials but these were not available to the market. Stocks of some products, notably cotton, were large. The export of cotton was the lowest since Civil War days.

Effect on Interest Rates.

The effect of large reservoirs of credit and small demand continued to effect interest rates. In the open market the rate on prime commercial paper (4-6 months, prime names) was .56 per cent throughout the year; that on ninety day prime bankers acceptances was .44 per cent; stock exchange time loans were 1.25 per cent and call loans 1.00 per cent. New offerings of United States Treasury bills varied from .001 per cent in January to .072 per cent in June and were .004 per cent at the end of November. United States Treasury Notes were .47 per cent in January, .76 per cent in June and .32 per cent in November. Customer rates rose from 1.96 per cent at the end of December, 1939, to 2.14 per cent in September, 1940 in New York City. In other centers they declined in the first two quarters of the year but were firmer in the fall.

Rates on long term loans were also low. United States Government bonds yielded 2.30 per cent in January and 2.25 per cent in April, rose to 2.39 per cent in June and were 1.94 per cent at the end of November. Corporate bond yields averaged 3.63 per cent in January, rose to 3.72 per cent in June and declined to 3.39 per cent in November.

Effect on Common Stocks.

The prices of common stocks were adversely affected by the unfavorable turn of events abroad and probably also by sales by foreign governments for foreign exchange purposes. All groups of stocks dropped in price in the first half year and recovered again in the late summer to a level which was maintained throughout the remainder of the year. This level, however, was substantially lower than that of the beginning of the year. The general index of the Standard Statistics Company (1926 = 100) declined from 93 in January to 73 in June and rose to 85 in November. The index for industrials declined from 109 to 85 then rose to 99, that for rails dropped from 30 to 23 then rose to 29, while the index for public utilities fell from 88 to 75, and advanced to 80.

New Capital Issues.

New capital issues were small in volume in the early part of the year. In 1939, the issues for new capital had averaged $186,000,000 a month of which borrowings of the Federal Government accounted for $80,000,000, municipal borrowings for $80,000,000 and corporated borrowings for $30,000,000 approximately. Throughout most of 1940, corporate borrowings were a little higher, with $89,000,000 in the peak month (May) and municipal issues were substantially less. The Federal Government offered two large issues, one of $289,000,000 in July and one of $112,000,000 in October. Refunding issues were maintained at the 1939 levels. In the last month of the year, however, the new issue market became very active. In the first week of December, $248,000,000 of securities were offered of which $105,000,000 were for new capital. Although many of these issues were from State and municipal governments which wished to borrow before defense borrowing became heavy, there were several large corporate issues.

The ease with which the market absorbed new issues and the lowness of interest rates made it evident that the financing of the defense program would not be difficult at least in its early stages. This very abundance of credit coupled with the fact that prices of many commodities did rise rapidly when demand became heavy gave evidence of the danger of inflation. In 1939 the Board of Governors of the Federal Reserve System had warned Congress that it had not sufficient power to control credit should the necessity arise. Congress failed to act upon this suggestion. At the end of 1940, the Board of Governors again addressed a warning to Congress asking for specific powers to control the volume of credit and its use. See also INTERNATIONAL BANKING AND FINANCE; PAN-AMERICAN COOPERATION; and BUSINESS.

1939: Banks And Banking

Three Phases of the Year.

During 1939 banking in the United States passed through three phases with crises abroad marking the dividing line between them. In the first phase, general business was in recession again, after an upturn which had begun in April 1938 and ended in December of that year. During this period, banking was stagnant with only minor changes in deposits, reserves and loans. Bond prices rose a little and stock prices declined. At the end of March the crisis attendant upon the consolidation of the remnants of Czecho-Slovakia into the German Reich outweighed all other factors. The security markets broke and gold poured into the United States in amounts even surpassing those which accompanied the crises of the previous September. In the second phase, business turned upward again. The movement was slow at first but gathered momentum during the summer months. Throughout this phase, gold continued to flow into this country at a rapid rate. Fed by these imports and in part by Treasury operations, bank deposits and excess reserves mounted. Bank loans began to expand by summer and money rates declined. Security prices recovered slowly. The outbreak of war abroad ended this second phase. The immediate effects of war were less serious for the financial markets of the United States than those of the war scares of the previous year. Stringent controls were immediately put into effect abroad which served indirectly to protect our markets, and the Federal Reserve Banks took steps to strengthen them further. Although the government bond market broke badly, rises in the prices of the securities of war industries dominated other markets. In the latter part of the year the pace of industrial activity increased rapidly. Accompanying this increase in general activity went increases in commercial bank loans, deposits, and reserves. Commodity prices rose spectacularly partly because of speculation movements, and partly because of demands for war materials. Security prices remained at the higher levels but did not continue to rise. New capital issues had not increased and interest rates for loans had not tightened according to the latest available figures. Throughout the year, Federal Government spending continued at the pace set during 1938 and the deficit mounted. An attempt by the administration to instigate even further increases in the lending program was defeated in Congress. The monetary powers of the President were extended for two years. Purchases of foreign silver were curtailed but the price for domestic silver was raised. Congress began an inquiry into the whole monetary and banking system of the United States following a complaint by the Board of Governors of the Federal Reserve System that our present system was badly organized and lacked coordination.

Federal Reserve and Member Banks.

The recession in the early months of 1939 was less violent than that which developed in 1937 and resulted only in minor changes in the banking system. Demand deposits at banks, members of the Federal Reserve System, which had been $22,293,000,000 on Dec. 31, 1938, were $22,364,000,000 at the end of March, a decline in individual deposits being counterbalanced by a rise in state deposits. The velocity of circulation of these deposits declined also. Time deposits rose from $10,846,000,000 to $10,940,000,000, while loans declined from $13,208,000,000 to $13,047,000,000. Reserve balances at the Federal Reserve Banks increased from $8,745,000,000 to $9,021,000,000. Gold imports into the United States in January amounted to $156,000,000 and in February to $223,000,000, a rate much lower than that prevailing during the last quarter of 1938. The effect on bank reserves was offset in part by an increase in the general fund balance of the Treasury of $410,000,000 in February. Open market money rates in the New York market remained unchanged. Corporate bond prices rose from 81.1 in December to 82.1 in February while those for United States Government bonds rose from 104.1 to 104.8. The Standard Statistics Company's index of common stock prices declined from 92 to 90. Offerings of securities to raise new capital were at a standstill with $200,000,000 in January, $398,000,000 in February, and $162,000,000 in March, most of which arose from Government financing, state and Federal. General commodity prices changed but little, the index of the Bureau of Labor Statistics for wholesale prices (1926 = 100) declining from 77.0 to 76.7.

The crises in Europe at the end of March and early April brought an abrupt end to these conditions of stagnation. The immediate effects of the crises showed themselves primarily in the security and the international capital markets. Stock and bond prices declined. Just before the crises, the index of stock prices (March 29) stood at 88; on April 12, it was 79. Corporate bond prices declined from 82.3 to 78.7 during the same period. United States Government bonds, however, declined hardly at all (106.6 to 106.2). The rate on Treasury notes declined slightly (.52 to .49 per cent) and that on Treasury bills rose from a negligible amount to .025 per cent. Thus although the stock market was affected more than in September, the market for Government bonds was better sustained than it had been in the earlier crisis. Recovery, too, for the stock market was much slower and the level of March was not regained until September. In the international capital market, the effect was an immediate increase in the imports of gold. These imports rose with the increasing tension in March to $365,000,000; in April they were $606,000,000, an amount greater even than in October 1938, a previous high point; in May they were still $429,000,000 and the amount did not drop below $250,000,000 a month until October after war had actually broken out.

Although the effects of the crisis aggravated by the bituminous coal strike did not disappear quickly, by June a real improvement in business was evident. Even before this, the business of the banks had improved. Fed by the imports of gold and by a Treasury policy which allowed the general fund balance at the Federal Reserve Banks to decline, reserves of member banks increased to $9,997,000,000 in May and $10,659,000,000 in August, just prior to the outbreak of the war. Excess reserves increased from $3,559,000,000 at the end of March to $4,758,000,000 at the end of August. Demand deposits of member banks stood at $23,587,000,000 at the end of June and time deposits at $11,063,000,000. For 'reporting member banks' for which later figures are available, demand deposits which had been $16,032,000,000 at the end of March, increased to $17,182,000,000 in June and $18,096,000,000 the end of August. The velocity of circulation of the deposits of New York City banks had begun to increase in May but for outside banks declines continued throughout the summer. In keeping with the expansion of business, loans, too, expanded, but not until the summer months. For reporting members banks loans amounted to $8,241,000,000 in March, were $8,094,000,000 in June and $8,209,000,000 at the end of August.

Effects of the European War.

The immediate effects of the outbreak of the war were surprising in the light of the experience in the earlier crises and at the outbreak of war in 1914. The stock market instead of breaking rose rapidly. The Standard Statistics index for the week before war broke out stood at 84; on Sept. 6 it was 92 and Sept. 27, 96. Certain stocks responded even more. Between Aug, 30 and Sept. 27 industrial stock prices rose from 98 to 113 and railroad stock prices from 24 to 34. Even prices for corporation bonds rose a little. Their average (Standard Statistics) for Aug. 30 was 80 and for Sept. 27, 83. The brunt of the desire for liquid funds fell on the Government bond market. Treasury bonds dropped in price from 107 on Aug, 30 to 101 on Sept. 27 and municipal issues from 113 to 107. The yield on Treasury notes rose from .53 per cent to 1.18 per cent at the maximum and those for Treasury bills from .08 per cent to .16 per cent. Meantime rates in the open market for commercial paper and stock exchange loans remained unchanged and rates for customers' loans at banks declined. The foreign exchanges broke rapidly with sterling declining from $4.68 just before the crisis to $3.73 on Sept. 15. Later it recovered to a point just above $4.00. Wholesale commodity prices which had been declining for more than a year jumped from 75 on Sept. 2 (Bureau of Labor Statistics index, 1926 = 100) to 80 on Sept. 30.

Government Controls.

The peculiar response of the market to the outbreak of war is partly traceable to the speed and efficiency with which government controls were applied, partly to the extremely liquid condition of our banks. In Europe, declines in prices of securities were cushioned by the establishment of official minima, and prohibition of the export of securities and the taking over of supplies of foreign exchange by the government were instituted. These measures prevented a throwing of securities on our markets such as occurred in 1914. Speculative accumulation of stocks of commodities caused prices to rise and the anticipation of war orders and profits tended to stimulate industrial activity which was already expanding. The excess reserves of commercial banks were so high that all conceivable demands could be easily met while the demands upon the open money market had been so low that the Federal Reserve Banks had been allowing their holdings of Treasury bills to decline to provide business for the market. To protect the Government bond market, the Reserve Banks bought bonds and announced that they would make loans secured by Government bonds to non-member banks on the same conditions as to member banks. This offer was not made use of. The Reserve Banks did buy some $400,000,000 of Government bonds in the open market. The pressure on the Government bond market was short-lived and the demands for liquid funds were not sufficient to cause any serious increase in Federal Reserve note issues. The break in the foreign exchange markets came as a result of the discontinuance of sales of gold by the equalization funds in Britain and France, in accordance with an agreement under the Tripartite monetary convention.

Banking Activities.

Such were the effects of the war crisis itself. In the remainder of the year, although the immediate speculative movements did not persist, all the accompaniments of a period of rapid industrial expansion were present, accelerated after the embargo on arms shipments was lifted. Bank deposits expanded. On Nov. 15 (latest available figure), demand deposits of reporting member banks were $10,348,000,000. Loans expanded to $5,606,000,000. Although investments in securities, especially United States Government securities, still bulked large ($8,550,000,000) the change was a healthy one for the banks. Reserves continued to increase primarily because of declines in the Treasury's general fund balance, for imports of gold became small after the embargo on exports from Europe ($70,000,000 in October and in November). Open money market rates remained unchanged while yields on Treasury bills and notes declined again to .018 per cent and .63 per cent respectively. Stock market prices declined a little from their September highs. On Nov. 15 (latest figure) the index for common stocks was 94 and average corporate bond prices were 83. New capital issues had not appeared in any volume by the end of October. The Government bond market recovered but not to its previous high points.

Government Policy.

Throughout the year the Government continued its policy of deficit spending. Expenditures in excess of revenues averaged nearly $400,000,000 a month. In July, the administration introduced a bill to provide expansion of loans by Federal Agencies which are not directly parts of the Government thus allowing an increased spending program without exceeding the debt limit. Congress did not approve this bill, but it did extend for two years the monetary powers of the President, with respect to the devaluation of gold as well as the power of the Treasury over the exchange equalization fund, and the right of the Federal Reserve Banks to use Government bonds as a cover for Federal Reserve notes. The lives of the Export-Import Bank, the Commodity Credit Corporation and the Reconstruction Finance Corporation were similarly continued. The price of domestically mined silver was raised to 71 cents an ounce but the policy of purchasing foreign silver was curtailed.

In the fall, the Senate Banking and Currency Committee, headed by Senator Wagner, began a consideration of the whole banking and currency structure. In its annual report for 1938, issued in April 1939, the Board of Governors of the Federal Reserve System had protested that the present system allows for conflicts of authority and gaps in authority among the various government organs such that prompt and effective action in a crisis is no longer assured. In particular, the Board no longer has sufficient power to cause a contraction of excess reserves should inflation threaten. The matter is aggravated by the fact that various divisions of the Government are following different monetary theories. The Senate Committee is to consider the whole problem of currency and banking regulation and, it is hoped, will introduce new legislation next year. See also BUSINESS; FINANCIAL REVIEW, UNITED STATES; WORLD ECONOMICS.

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.