The management of the earning asset portfolios of forty-one Chicago state banks 1929 to 1933

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The management of the earning asset portfolios of forty-one Chicago state banks 1929 to 1933

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Northwestern University Library Manuscript Theses

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DATE vf /



s. a. z.


jD j l c

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BY Frederick William MUeller, Jr. EVANSTON, ILLINOIS APRIL 19*2

ProQ uest Number: 10101778

All rights reserv ed INFORMATION TO ALL USERS The quality o f this re p ro d u ctio n is d e p e n d e n t u p o n t h e quality o f t h e c o p y subm itted. In t h e unlikely e v e n t t h a t t h e a u th o r did n ot s e n d a c o m p l e t e m anuscript a n d th e r e a r e missing p a g e s , t h e s e will b e n o te d . Also, if m aterial h a d to b e re m o v e d , a n o te will in d ic a te t h e d eletion.

uest. P roQ uest 10101778 Published by ProQ uest LLC (2016). Copyright o f th e Dissertation is held by t h e Author. All rights reserved. This work is p r o te c t e d a g a in s t un au tho rized co py ing u n d e r Title 17, United States C o d e Microform Edition © ProQ uest LLC. ProQ uest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106 - 1346


PREFACE On# of the outstanding characteristics of the modern commercial banking system has been the elasticity which It has supplied to the modem currency eyetea* and contract*

This elasticity envisages the capacity te expand

A great deal of" research has been done not only on the

problem of controlling the extent of expansion, on the quantitative side, but also on the qualitative aide to the problems of asset acquisition* The importance of these aspects is attested by the volume of research on these problems reaching back for more than a century* Very little attention, except incidentally, has been devoted to the contraction of bask credit*

While numerous studies have analysed the

inability t© contract as evidenced by bank failures, the middle ground of how banks contract credit successfully has been left largely untouched* It is the aim of this study to help fill this gap* The writer is indebted to many students whose research has been duly credited in the proper place*

There are also many bankers and public

officials, while unquoted, who have given the benefit of their knowledge and experience*

Especial acknowledgment is due Mr* J. H* Dillard, Vice

President ©f the Federal Reserve Bank of Chicago, for his continued interest*

Mr* Frank A* Adams ©f the Banking Department of the Office of

the Auditor of Public Accounts furnished information, freely.


indebtedness is due Mr* J« J. Jaeger of the Examiners* Offlee for the Northern District of Illinois for supplying the bulk of the figures for Chapter VII.

The writer is under special obligation to many faculty members of Northwestern University.

Br. Frederick S. Dei bier of the Department

of Economics and Dr. Paul Morrison of the School of Commerce both made many valuable suggestions.

In particular, Dre. Herbert E* Bougall and

Barry C. Guthmann of the School of Commerce gave unstintlngly of their time.

At every stage la the Investigation as much advice was given as

was expected and probably more than was deserved. While the indebtedness is gratefully acknowledged, the author assumes full responsibility for any errors in statement or reason, as well as for all of the conclusions reached.





Index of Total Deposits in Various Classes of Banks


Percentage of Total Deposits in Each Bank Classification to Total Deposits in All Forty-one Chicago State Banks


Index of Deposit Changes in Loop Banks with Increasing Deposits


Index of Deposit Changes in Loop Banks with Decreasing Deposits


Index of Deposit Changes in Outlying Commercial Banks Index of Deposit Changes in Outlying Savings Banks Proportion of Excess to Required Reserves in All Member Banks* New York City Member Banks and Chicago Member Banks


The Reserve Ratio of Loop Banks with Increasing Deposits


The Reserve Ratio of Loop Banks with Decreasing Deposits


The Reserve Ratio of Outlying Commercial Banks


The Reserve Ratio of Outlying Savings Banks Index of Loans in Various Groups of Banks Index of Loans and Discounts in Loop Banks with Increasing Deposits Proportion of Loans in Each Classification to Total Loans in Loop Banks with Increasing Deposits


Median of Individual Bank Loan Indices in Loop Banks with Increasing Deposits


Index of Loans and Discounts in Loop Banks with Decreasing Deposits

Proportion of Loans in Each Classification to Total Loans in Loop Banks with Docreasing Deposits


Median of Individual Bank Loan Indices In Loop Banks with Decreasing Deposits


Index of Loans and Discounts In Outlying Commercial Banks


Proportion of Loans in Each Classification to Total Loans in Outlying Commercls1 Banks


Median of Individual Bank Loan Indices In Outlying Commercial Banks


Index of Loans and Discounts in Outlying Savings Banks


Proportion of Loans in Each Glass!fication to Total Loans in Outlying Savings Banka


Median of Individual Bank Loan Indices in Outlying Savings Banks


Index of Investments In Various Groups of Banks


Index of Investments in Loop Banks with Increasing Deposits


Proportional Changes In Government and Other Bonds in Loop Barks with Increasing Deposits


Median Index of Individual Bank Holdings of Govern­ ment and Other Bonds in Loop Banks with Increasing Deposits


Index of Investments In Loop Banka with Decreasing Deposi ts


Proportional Changes In Government and Other Bonds In Loop Barks with Decreasing Deposits


Median Index of Individual Bank Holdings of Govern­ ment and Other Bonds In Loop Banks with Decreasing Deposits


Index of Investments in Outlying Commercial Banks


Proportional Changes in Government and Other Bonds in Outlying Corona rcia 1 Banks














Median Index of Individual Bank Holdings of Government and Other Bonds in Outlying Commercial Bank s 2^0 Index of Investments in Outlying SavingsBanks


Proportional Changes in Government and Other Bonds in Twenty—five Outlying Savings Banks


Median Index of Individual Bank Holdings of Govern­ ment and Other Bonds in Outlying Savings Banka 24^ Proportion of Losses in Each Period to Total Losses in Loans and Investments in Four Groups of Banks


Proportion of losses in Loans and Investments in Each Period to Total Losses in Each Period in Pour Groups of Banks


Proportion of tosses to Change in Loans and Investments in Loop Banks with Increasing Deposi ta


Proportion of Losses to Change in Loans and Investments in Loop Banks with Decreasing Deposits


Proportion of Losses to Ghang© in Loans and Investments in Outlying CommercialBanks


Proportion of Losses to Change in Loans and Investments in Outlying Savings Banks


Percentage of Rediscounts and Bills Payable in Each Period to Total Rediscounts and Bills Payable for All Member Banks


Percentage Increase or Decrease in Borrowings to Net Decline in Tots1 Earning Assets in All Member Banks


Proportion of Indebtedness in each Period to Total Indebtedness in Loop Banks with Decreasing Deposits


Percentage Increase or Decrease to Net Decline in Total Earning Assets in Loop Banks with Decreasing Deposits

5 18







Proportion of Indebtedness in Each Period to Total Indebtedness in Outlying Commercial Banks


Percentage Increase or Decrease in Borrowings to Net Declines in Total Earning Assets in Outlying Commercial Banks


Proportion of Indebtedness in Each Period to Total Indebtedness in Outlying Savings Banks


Percentage Increase or Decrease in Borrowings to Net Decline in Total Earning Assets in Outlying Banka


Contraction in Deposits in Forty—one Banks as a Result of Reserve Ratio Increases






Index off Dopoeita in loop Banka with I s c m a i n g Dwpoaita


Index of Deposit® la iioop Batik* with ©eereaoing Deposits


Index 9f Deposits in Outlying Commercial Bunks



Index «f Deposit* in Outlying Saving® Banka



Reserve Ratio of Loop Banka with Xncreaeing Deposits




Reserve Katie of Loop Banks with Dee rousing Deposi ts



Reserve Ratio In Outlying CuaE»ercIa 1 Banks


Reserve Ratio in Outlying Sawings Banks


Index of Loans in Loop Banka with Increasing Deposits


Index of Loans in Loop Banks with Decreasing Deposits


Index of Loans In Outlying GexsaereX&X Banks



Index of Leans In Outlying Sawings Bank©



Index of Investment® in loop Banks with



Increasing Deposits XXV XV XVI XVXX XVXXX

Index of Investments in Loop Banks with Decreasing Deposits Index of Xtawos tern ts in Outlying O m e r c i s I Banks

202 216 224

Index of Investments in Outlying Savings Banks


Relative Prices of Industrial Bonds


Relative Prices of Public Utility Bonds





xix xx XXX



Relative Prices of Railroad Bonds


frsportlon of Lease* In Each Period to Total Losses la Loans end Invest® ente


Proportion of Losses tm loans end Investments In Bach Period to Total losses in Each Period


Percentage Increase or Beerease In Borrowings ts Hat Decline in Total Earning Assets la loop Banks with Decreasing Deposits


Percentage Increase or Decrease in Borrowings to Hot Decline in Total Earning Assets in Outlying Commercial teaks


xxv XXVI



Percentage lacrosse or Decrease la Borrowings to Hot Decline la Total Earning Assets In Outlying Savings teak*


Total Assets and Idabill ties in Loop Banks with Increasing Deposits


Proportion e t Principal Items to Total Assets and Total Liabilities in Loop Banks with Increasing Deposits


Total Assets and Liabilities in Loop teaks with Decreasing Deposits


Proportion of Principal Ittee to Total Assets and Liabilities in Loop teak* with Decreasing Deposi ts


Total Assets and Liabilities in Outlying Commercial Bank*


Proportion of Principal Items to Total Assets and Liabilities in Outlying Goaaereial Banks Total Assets and Idabill ties in Outlying Savings teak*



Proportion of Principal Items to Total Assets m d Liabilities In Outlying Savings Backs











x m m m m ftm


Significanoe of Failed Banka Purpose of Study Souree of Cate Banka Included In Study

l 2 4 5 6

Methodology Flan of the

7 9

Growth of Banking System in United States




Internationa1 Position Functional Changes

Structure1 Changes Bank Failures Period Prom 1929 ts Market Collapse Deposit Shrinkage Hoarding Policy Evolution



THE B®A Y I C ® OF DEPOSITS Definition &t Deposit* T i m Deposite Demand Deposits Expansion of Bank Credit Movements of Deposit© in United States Loop Banks with Increasing Deposits Loop Banks with Decreasing Deposits Outlying Commercial Banks Outlying Saving© Barks Summary

It 11

12 *2 18

19 22 22 24 25 26

20 20 22 24 25 26 4o 46 54 6D 66


Chapter IV.




Pas* THE RESERVE RATIO Function Adequacy of Reserve Interpretation of Ratio Problem of Excess Reserve® Reserves under Illinois Statute Loop Banka with Inoreasing Deposit® Loop Banka with Decreasing Deposits Outlying Commercial Banks Outlying Savings Banka Summary THE MANAGEMENT OF t h e LOAN PORTFOLIO Classification of Earning Assets Tenets of the Liquidity Theory Criticiaa of Liquidity Theory Changed in volume of Loans In Banks in the United States Statutory Provisions in Illinois Classification of Loans Loop Banks with Increasing Deposits Loop Banka with Decreasing Deposits Outlying Commercial Bark a Outlying Savings Banks Summary

70 71 72 75 76 77 79 85 89 9** 99 104 104 106 111 115 114 118 119 152 148 167 180

THE MANAGEMENT OF THE INVESTMENT PORTFOLIO Tenets of the ShifWbility Theory Critic! asm of the Shiftafeility Theory Changes in Holdings of Securities in Banks in the United States Statutory Provisions in Illinois Ratings as a Qualitative Measure Loop Banka with Increasing Deposits Loop Banks with Decreasing Deposits Outlying Commercial Banks Outlying Savings Banks Summary

185 185 189 192 195 195 198 208 221 251 244

LOSSES IN EARNING ASSETS Definition Importance of Losses Determination of Losses Bond Ratings and Price Behavior The Occurrence ©f Losses The Source of Losses Loop Banks with Increasing Deposits Loop Banks with Decreasing Deposits Outlying Commercial Banks Outlying Savings Banks Summary

250 250 251 252 256 267 270 275 281 287 294 500


Chapter VIII *



Page BORROWINGS Reason© for Borrowing Tradition Consequence of Borrowing Bills Payable in Member Banks Loop Banks with Increasing Deposits Loop Banks with Decreasing Deposits Outlying Commercial Barries Outlying Savings Banks Summary

505 505 3°7 5*0 5*2 5*5 $16 524 555 346

SUMMARY OF MAJOR FINDINGS Relative and Absolute Contraction Findings in Loop Banks with Increasing Deposits Findings In Loop Banks with Decreasing Deposits Findings in Outlying Commercial Banks Findings in Outlying Savings Banks Summary of Specific Findings

356 3^4 569 375

CONCLUSIONS Behavior of Deposits Implications of Relative Contraction Implications of Asset Readjustment Collateral Loans Business Loans Use of Investments Reaeons for Existing Policy The Achievement of Contraction Alternatives Proportionate Reduction Bank Credit and Capital Formation Crux of the Problem The Problem of Objectives Summary

375 575 379 366 390 392 594 598 400 400 401 4o4 405 416 419







352 353




The banking system ia the United States has undergone a marked devel­ opment during the present century*

Total banking resource© have increased

more than sevenfold within three decades* ^

Such a development Indicates

the growing Importance of banking in the economic system of which it Is a part* Paralleling this growth In significance have been attempts to Isolate and examine the unique problem® involved.

Among the many issues few have

received greater emphasis than the problems concerning the nature and function of bank credit*

Change® In the direction and intensity of econo­

mic activities are closely associated with changes in the quantity and quality of bank credit* and the particular problem of the banking system 1® to realign the volume of bank credit to the new requirements*

During de­

cline® in economic activity* inability to contract bank credit results In failure® and public distrust*

This inability augments the original malad­

justment and during aggravated period©, bank currency fail® as a medium of exchange*

Bow the banking system may reduce its volume of bank credit when

so required by economic change® is of the moat salient concern*

(1) In 1900 total banking resources in the United States and possession© amounted to #1Q#7S5 million* while by 1950 they amounted to $74,020 million (Statistical Abstract of the United States, No. 65, Table 241, Government Printing Office, Washington D.C., 1955)*

is strange that so little time and attention have teen given to the problem of tank credit contraction.

The national Industrial Conference

Board in ita study on The Availability of Bank Credit has touched on this problem*

It receive® only passing notice in most of the banking litera­

ture, emphasis there being placed upon the expansion of bank credit and the causes of bank failures*

To the writer's knowledge, no attempt has been

made to show the effect of strain on an identical group of commercial banks during a period of depression and the consequent ability of various groups to meet these readjustments adequately*

Many short contributions pertaining

to general banking problems may be found in financial journals and other pertodicals,^^ but no attempt to measure the capacities of bank assets to eon* tract bank credit during a period of sever© pressure has been made.


rare exception, most of the research done on the banking readjustment problem has been descriptive and expository with emphasis on the causes and analysis of failures as evidence of incapacity properly to readjust*

As far as is

known, no study devoted to an examinetion of portfolio policies of banks surviving a critical period has boon made*

Any study which might clarify

the development of successful policies during periods of pressure should not

0, 1921 Dee* 21* 1921 dune 20 2 1922 Dec* 21* 1922

lOO 96 93 82 61 so 21


Derived from App* Ill C*

Demand Deposits 100 93 91 19 6Z 51 22 23

Time Deposits loo

98 100 89 60 49 20 20

The decline in total deposits was 66 per cent*

This was a shrinkage

Of the first m a g n i t u d e * T h e s e figures tend to show the extent to which this group was put under pressure during this period*

While some decline

may have been due to voluntary retirement of bank credit, the general sit­ uation was such as t© suggest that a large share was withdrawn for redeposit or hoarding* The most severe decline in total deposits occurred during the fourth period ending In dune 1951# amounting to 02 per cent*

The least trouble-

some period was the last, wading on December 51, 1952* when deposits in­ creased by 5 per cent*

This single Instance is the only period in which

these banks were not pressed, six consecutive periods registering declines* While the fourth period accounted for th© largest decline, the sixth period ending June 50, 1952, and showing a decline of 19 per cent, ranks as th© second largest decline.

These two period© mark the peaks of intensity*

Such extremes and persistent decline© created special problems for manage­ ment* Demand deposits In these bank© declined throughout th© period by 62 per senb*

Some of this decline was due to the retirement of borrowers'


Much of the decline can be traced to th© fact that business

awn faced with declining price© and a level of cost© which was relatively fixed, were drawing on their customary balance© is excess of their regular


The©© outlying bank© take on some of th© characteristics of country banks ©Inc© they are both relatively isolated and depend heavily upon their communities for support* The decline in country member bank de­ posits reached a maxi mum of 52 per cent. Furthermore ©very period re­ corded a decrease in deposits compared to the preceding period. In both these outlying banks and in country member banka the direction of deposit movements was th© same, although the magnitude was sub­ stantially different. Calculated from Annual Reports of the Federal Reserve Board*



This would tend to produce adverse balances showing a~net de­

cline la deposits*

Furthermore, there was a migration of* funds to loop

banks or the hoarding of sash which adversely affected these banks*


of this proportion occur only during periods of severe stress*

Demand deposits recorded declines in every period except the last*


the latter period a 5 per cent increase indicates a net inflow of funds and

a possible return of confidence on the part ©f demand depositors*

But even

with this return flow, descend deposits stood at only 58 per cent of the or­ iginal total* Th# largest decline for any period occurred during the period ending dune 3®§ 1

amounting to 18 per cent, and was nearly equaled in the per­

iod ending dune 50* 1951# when the decline amounted to 17 per cent.


two extreme points in the decline of demand deposits occurred at the earns time as was indicated in

the index for total deposits*

This shrinkage in

demand deposits was both severe and persistent* During this same three and a half years, time deposits shrank to a level of 5Q per cent of the original figure#

Over the whole period, time

deposits were relatively less stable than demand deposits*

The same causes

earlier stressed, such as the resort to savings for purposes of Income and the desire to hoard, were present h e r © * ^ F u r t h e r m o r e , as the depression deepened, time depositors were aware of their insecure position*


there was little disposition on their part to permit demand depositors to present claims In advance, nor could the banks Invoke the contractual wait­ ing period with safety*


The problems of bank management were augmented,

All barks interviewed reported persistent declines in deposits, es­ pecially the cash withdrawals of time deposits* One bark reported its safety deposit boxes completely rented for the first time* Another bank reported heavy time withdrawals, meny of th© owners of which rtbought a cashier ©hock and put it in the boxtt.


particularly since such heavy withdrawals occurred in th© presumably most stable category. The heaviest decline in the time category occurred in th© fourth per­ iod ending dune 3®* 1951* which amounted to a fall in the index of 29 per cent.

This drop, amounting to nearly two-sevenths of total time deposits,

occurred in a single period.

While the first period showed a decline of

3 per cent, this loss was regained la the succeeding period so that on June 5®* 195®* time liabilities registered no net declines.

Thus the time de­

posits declined 40 per cent in one year, as shown In Ta,ble V. The second largest decline occurred in the sixth period ending June 5®* 195^* amounting to 19 per cent.

While this is also a large decline in de­

posit© for a single period, it marks th© end of the movement Inasmuch as the period reflected th© asm® volume of deposits.

The whole decline

of ?0 per cent in these time deposits thus occurred in the space of two years*

The fact that the shrinkage in these liabilities occurred within

such a short space of time added to the complications. In comparing the relative behavior of these two classifications of de­ posits, time deposits appear to have been mere variable and less predictable than demand deposit©*

Chart III visual!©©© this relationship.

Time de­

posit© declined 7® per cent as compared to a decline in demand deposit© of 62 per cent.

Time deposits indicated the most sever© decline of either

category, amounting to 29 per cent, while the largest decline in demand deposit© was only 18 per cent.

This decline of 29 per cent in time deposits

occurred in the fourth period ending June

1951* while th® 18 per cent

decline in demand deposit© did not occur until on© year later.

Tim© de­

posits thus evidenced their most severe contraction before demand deposits.



JUNE 2 9 , 1 9 2 9 - TOO % SOURCE: TABLE JT

140 120


100 80



\ Nt\

. ShX \




K 40 \


JUNE 29 DEC. 31 JUNE 30 DEC.H 1929 >930

JUNE 3 0 DEC.3I 1931


JUNE 30 DEC 3) 1932

Even though th* shrinkage in demand deposits was less than in time deposits* such decline was spread over

six periods*

cline was registered in only four periods*

In time deposits* the total de­ For these reasons* it appears

that time deposits in these banks were more variable and leas consistent than the demand category* In order to judge th® magnitude of these changes, it is necessary to the determine/proportion of each ©l&esification to total deposits* As of June

29 , 1929# time deposits amounted to 4$ per went of total deposits* while de­ mand liabilities accounted for 57 per cent*

Since time deposits declined

at a more rapid rate than demand claims* the latter would show a relative rise over the period*

On December 51* 195^# the demand category accounted

for 65 per cent while the time c la ©si ficati on accounted for 57 per cent* While time deposits were proportionately lees important than demand deposits* liabilities amounting to from one-third to more than two-fifths were signi­ ficant* In examining the individual indices of these banks* two were found to be unique* 1929*

Both banks had been organised within the year previous to June

As a result they benefited by withdrawals from other banks*

showed deposit increase through December 1951 •

One bank

The other bank reflected

deposit increases up to December 195®* but in 1951# liquidated all of its deposits* In determining the mean deviation for these banka* the two banks just mentlimed have been, excluded and the value for the remaining seven amounts to l£*J per cent* ^ ^


the size of this figure is due chiefly to two banks*

Calculated from Individual statements issued semi-annually by the Journal Printing 0©** loc. 011*

On© reported that it had a number of “controlled accounts1* originating with the d i r e c t o r s * A 8 a result, deposits actually increased slightly throughout the ear ly peri ode*

Th© other bank experienced immediate and

sustained withdrawals* the Index in every period being the lowest of any bank*

G» December 51* 19^2* It had leas than one per cent of its original

volume of deposits remaining.

The divers© movements in these two basks

tend to augment the figure* There was uneven pressure upon thee© banks originating in the deposit movements*

Since they were widely separated geographically, location

played little part in their deposit instability*

In spite of the favor­

able beginning evidenced fey some of the banks* they all eventually became subjected to serious deposit declines* Outlying Savings Banka The last classification of banka is comprised of twenty-five outlying savings banks*^}

In number 1h©y amounted to over 60 per cent of th© banka

under investigation and over 70 per eeni of the outlying banks Ineluded in the study.

Th© predominance of savings deposits in these banks was ob­

served in an earlier study which indicated that 8 *. *the outlying state barks have com© to cater largely to savings accounts...**^) and these

(1) ' *


< )

Personal interview* The laek of specialised savings institutions has led one writer to conclude that ®0n© would expect, under the circumstances, an accumu­ lation of savings deposits in Chicago commercial banks in place of specialised thrift institutions1*• These outlying savings banks filled just such a need (Felyi, Melchior* The Chicago Credit Market* Organi­ sation end Institutional Structure* Chicago: University of Chicago Press* * 0 3 7 / P.'3 5 0 11An Analysis of Earning Assets of Chicago Banks8, University of Illinois Business Bulletin. Ho.*28, Urbane: University of Illinois Press, 1928,p.55.


twenty—five banks had 65 per cexit of -their total deposits liabilities so classified*

The predominance of time deposits must have been a consider­

ation In the formulation of bank policy. CSfc&ages in deposits are shown in Table VI* twenty-five banks declined 6p per cent*

Total deposits in these

The deposits were made up pri­

marily of email neighborhood business accounts together with a high volume of time deposits*

Small businesses are normally among the first to exper­

ience difficulty in a declining trade c y c l e * F u r t h e r m o r e , the owners ef small time deposits during periods of unemployment must rely on their TAB&E VI

mmx m

June 29, Dee. 51.

1929 1929


1930 1930


Sib 31. June 30, Boo. 51,

1932 1952



fro. tho figj*r**"

Flrat, none of the groups of banks carried reserves

•lth their raapeetlve Central Sardes In June 1929 ouch in excess of their


App- IT A



This «ad true generally through December 1950*


frost the U t U r data to the same month la 1952, there was an Important gala h» the proportion tf #xe®«« reserves to required roeeryea.

In th® ease of

the Chicago Masher Ssittf tfetir excess reserves on the final date more than equalled their required reserves* indicating a complete change in thie re­ lationship* the primary reserve of the state banka under examlnablm is u&de up of ©ash# due from banks and sash Items*

Cash requires no explanation while

due from basks baa bean esse light as actual sash* •.

Cash Items ****are regarded In th© Oovernisent bond coupons* postal money orders*

orders on Municipal treasurers* etc** that sill be cleared String the next business day Can qualify as cash items**

the sum of these three items

represents the primary reserve* The Illinois statutes neither specify a minimum ratio nor distinguish classes of deposits*

Jus Interpretation of any required ratio has been left

with the banking department which has adopted an adjustable fifteen per cent reserve for total deposits* regard lees of classification*

Two considerations

are effective in their decisions first, the type of portfolio which a bank carries;

second, the type of liability it possesses*

1 bank with a large

volume of banker** acceptances, call loans, and short governments, would be permitted to modify its reserve below the customary fifteen per cent ratio*

{*> * * (2)

A bask with most of Its advene ©a made up of time loans, and showing

See Chapter III* lour Sank* Publication of the Banking Department of the Office of the E d i t o r of Public Accounts, Sprlngflelds 19^0, p* $$*

a large volume of unlisted induo trial or real estate securities would be required to maintain a reserve ratio higher than fifteen per cent*


more, banka with liabilities consisting chiefly of time deposits have been permitted to maintain a lower reserve than those banks showing a predomi­ nance of demand deposits*

Examining, practice has thus tended to be re-

fleeted In a flexible ratio, depending upon the nature of the assets and the character of the deposits* Such practice obviated on# difficulty during this period*

Those state

banks were not tempted to permit or encourage a reclassification of deposits in order to benefit by a lower required r e s e r v e * T h e principal inducement for the depositor would have b a m to tike advantage of a more favorable in­ terest return in one classification than in another*

tn the larger loop

basks it was not unusual to pay Interest on minimum demand balances. I n outlying beaks Interest on demand deposits was Infrequent thus the banks in which a shift in th# classification would be most likely to occur would be in the outlying banks*

Such reclassification was here improbable sine#

small business and commercial establishments rarely have redundant working capital*

Any affects upon the reserve ratio of these banks due to deposit

shifts could not have arisen as a consequence of different reserve requiremanta*

Bodkey, Le^sal Reserves* etc* * toe. Clb* , ****there is much to be said for requiring Identical reserves against time deposits and Individual demand deposits9 p* 71* Mow prohibited fey amendment to the Federal Reserve Act for Member Banks, and by th# Federal Deposit Insurance Corporation for insured banka* Sees Federal Reserve Act, Sec* 19, Far. 12* Also Regulation g (and supplement.) effective January 1* 195^*

79 tooc Banks with I n e m a l n E Deposl ta Th® f » » « m ratio for th® loop banka which recorded deposit Ins rease® la indicated in Table VIII*

too Important facts are observable.




asaswrs ratio o p loop basics w i t h moasAsma deposits ' Am * 2 9 ,


XJ*e. 51,


2 4 .2 4 * 24.08

Am. 30,


2 4 .8 4

s*«. Jl,



Am * 30, Dm . J l , Aw* JO ,

1931 19?1 1992

2 4 .1 1 2 7 .8 6 5 2 .2 1

gw. 31#



th® reserve ratio at th® beginning of the period under review was substan­ tially higher than was required by the banking authorities* Increase %m later periods*

second* its

There is nothing to prevent a bank from ex­

ceeding the adjustable 15 per cent reserve*

Such a policy reduces the

bank*a earning capacity and a working reserve of more than 9 per cent ex­ hibited here Is the largest for any of the four groups examined*

The exam­

ining department may require a higher ratio but It is probable in the esse of thee® loop banks that this was voluntary*

as of the date Indicated*

markets were strong* production was high, and employment ©atisfactory.


Impending ©train on the banking system had net developed and there would seem to have been no reason why the banking department should have imposed this high ratio*

The management of these institutions favored a relatively

liquid position. Succeeding peri ode Indicate important changes, graphically shown ia Chart V*

Through dune $0* 195** the ratio remained fairly constant, the

Derived from App* tf B*







1 9 2 9 - 1932 SOURCE:


100 |






3 5 --------------- ^------- 1----------------------- ^ ------N.

: ----- ^

>.72 +





/ —



si /

25 —



\ ---------

\ \



I S ----------------------------------- ------- ------------------

1 0


------- —




^ JUNE 2 9 DEC. 31 JUNE 3 0 DEC. 31 1929 1930

JUNE 30 C£C.3t 1931

JUNE 30 DEC. 3 / 1932

iht changes being unimportant.

Such a ratio wan maintained

in spite si* increasing d e p o s i t t o t a l deposits,against which the re­ serve ratio ia calculated# Increased by 16 par asst*

sines deposit a and

reserves increased in the same amount* there should hare bean a rise in tli© reserve ratio except for offsetting factors*

The only ©aimer in which

aneh ratio consi sbenoy sen Id prevai 1 would be through the extension of bank credit*

It was observed that

*«»*the State banks shewed changes

with Inc res cos ©f l ^ » ^ # O 0 O in loons end discounts*.. .8

during this

period end in th© light mt a constant reserve ratio and Increasing deposits* the management of these banks doomed their primary reserve satisfactory* The ratio following Jtee 50» 1951, rose to a high of more than thirty two per cent and ended th© period only slightly below the peek* this period, deposits showed their greatest growth*


Consequently, reserves

were increasing at a rate relatively greater than deposit®, Indieating either a retardation or cassation of lending*

Since the ratio did consistently in­

crease for a year and a half* Its persistency indicates that this was a deliberate choice cm the part of management*

One writer, commenting up cm

th® liquidity of the Chicago backing system# observed that 11Apparently most deposits as returned (from hoarding) and fluid® obtained through liquidation of loans# have been held in liquid form* #^5)


i M l i the volume of reserve®

gae Ch* III. Chicago Dally Tribune* July 5* 1950, p* 20*


G M c a & e Journal of Commerce# January 5, 1955* P* 1* See also: national Industrial Oe&f* Board, Availability of Bank Credit, Hew fork: 1952* "Faced with increasing demands for the redemption of deposits*••• banka generally endeavored to hold reserve balances In excess of actual banking requirement© even at the expense of refusing or restricting credit**1 p* 45*


ift« lser9ft«ing ia these becks* th© letter were not willing in th© fete of generel imeerteinty to continue their onr11 or r e e e m policie** It was not necessary that banka call loan# to reetri ct th© supply of tank credit*

An i&ereeee in the ratio in tide group was an indication

that new loan# were not feeing extended at the same rate that old leans were feeing repaid, or that net increase* In primary deposits were not feeing need mm

a feasts for the extension of credit in the same proportion as before*

To S m m 30* 1951* one dollar of reserve was supporting four dollars in de­ posits, while on June 3®* 1932* the sense dollar was supporting only slightly wore than three dollars in deposits*

There was a relative decline

In the lending rate over what it had been in the previous fOur periods* Such policy was definitely a contraction policy* Tee periods reflected declining ratios*

Such decline would occur only

In the ease of not declines in deposits or an expansion of hark credit at a more rapid rate than primary deposits Increased*

Since deposits In­

creased during both of these periods* the fall in the ratio must have been the result of lending operations* period ending December 51*

The first marked decline was in the and appears to hare been an attempt by

the#® banks to expand credit and restore the earlier ratio*

lit they

actually went farther than this* reducing the reserve below th© minima® level maintained the previous year*

Much the same explanation Is appli­

cable to the fall in the set io during th© period ending December 51* 1952* In this period* however, while the ratio declined, it indicate* a convic­ tion to maintain a high dcgrse of liquidity since the final position 1* substantially above any previous ratio* except one* The conformance of the individual bank reserve ratio* may be shown

by the scatter about the line of regression*

The standard error in these

leap banks with Increasing deposits amounted to 4*$0£*

Since the regression

line Indies tee a positive slope* it may fee sold that the Individual banks pursued policies resulting in an increasing degree of liquidity*^^


assets throughout this period sere made up of & progressively larger pro­ portion of primary reserves« loop Banka with Decreasing. Deposits In turning attention to H e loop bank* with decreasing deposits* there

is exhibited a different behavior «f the reserve ratio* ft* Indicated In Table II*

The ratio on

1929* ejEeeede the 15 per cent rati© of TABU; XX


.fen* 29,



D*c. 51,



f e w 50,



0*e> 31*



.tone 0**. ton* 9m.

1931 1931 1932

24.67 24.56 23.90 51.46

30, 31, 30* 31*


the State banking department fey only ^ per cent, which tended to limit substantially th© extent to which this group could lose primary reserves


tm a personal interview, one featker reported that *Th* reserve ratio laereased because of the stress of the 11®©*** - These banks however were confronted with substantial deposit increases* Derived from App* XT B*

reaching the « » t a U U M


T M e group was comprised ©f th©

smaller loop institution© end th© problem of earnings ©as a eoneid erati on mm t© th© reserve policy*

fho item of due to banks was not important#^*^

and those hacks sore not likely to to so directly affected la their own deposits fras deposit moveraents originating ia other banks* la examination of the behavior of this ratio in Chart TI reveals four distinct movements*

Un-ring th© whole of the first year tap to June JQ, 1930*

the ratio was relatively constant*

During the second year to June 30# 1931#

both periods reflected an increase#

the succeeding year to dune 30# 1932#

indicated a relatively consistent ratio# as in the first year, except that it was 5 per cent higher*

in the six months to December 31# 1932, a rapid

rise occurred, mere rapid than the two previously recorded increases*


final level was not unl«pe for these banks since fibres of the Chicago banking system revealed that **•• *caah resources of these banking institu­ tion© have l n e m s « S to © point never before witnessed**^}

there was a

tendency for this group to increase the ratio as it moved through the period*

Such increases meant both a relative and an absolute decline in

the outstanding bank credit* Am examination of the ratio in the light of deposit behavior will illuminate th© ratio changes*

for throe years, these banka experiencod

decline© in deposits with only cm o minor exception*

*** (a>

during the first year#

3«* App* III B. Chicago Journal of Commerce# January 5# 1933# p* 1* Also Chicago 2©ily Tribune# January 5# 1933s *• *• the baryta have steadily improved their cash position and ability to meet the demands of depositors*..** p. #






1 9 2 9 - 1932

SOURCE: 100 (

3 5









--------------------------------------------------------------------------------------------------------------------------------------------- :-----------------------


3 0 --------------------------/ /




2 5 ---------------------------------------------------------/ X* I 114 X „cC ' \ I.II4X 19.00 g i,f i &oo +







y y

, 5 --------------------------------------------------

1 0 --------------------- j ---------------------------l £





0 JUNE 2 9 DEC. 3/ JUNE 3 0 DEC. 31 JUNE 30 DEC. 31 JUNE3 0 DEC 3! 1929






4i steady Adeline in deposita* with i cona tan t ratio, indicated bank credit m e t have been contracted or Indebtedness ft«9uswd«

f 1th only eighteen

per cent of deposits in the for® of primary reserve, eighty-two per cent most have originated from other sources*

km far mm can he read out of

the figures daring this year, these backs contracted credit only mm re­ quired by the behavior of deposits* la the succeeding year, deposits felt drastically but the whole shrinkage m e t in the six months ended dune JO, 1931*

During the first

six months, dune be December 19JO, the Increasein the ratio was accompanied by s level of deposits shewing no significant move*

Consequently, with

deposits stationary, and an increased reserve ratio, these basics continued to convert their assets into cash* contraction of bank credit*

this meant both am absolute and relative

In the second six month©, deposits fell sharply

while the ratio continued to rise*

Credit was being contracted not only

at a rate sufficient to discharge shrink lag deposits, but at a rate enough more rapid to actually increase the relative volume of reserve,



ing in a relative reduction in bank credit* hiring the year from dhne JO, 1951 to June JO, 1952, the reserve ratio remained constant but at a higher level « M 1« deposits declined about 27 per cent*

Contraction in bank credit was at the same rate as

the decline In deposits, as Indicated by a constant ratio* While this


* faced with Increasing demands for the redemption of deposits In 1951* backs generally endeavored to told reserve balances in excess of actual banking requirements...** (Availability of Bank Credit* toe* Pit*, p* 45}*


result** in an absolute decline in the volume ©f bank credit, the relative position remained the same*

The higher level ©f the ratio, hevever, in­

dicated a relative decline In bank credit compared to earlier periods* In the last eix months there was again a substantial Increase fro® about 2& per cent to


There was during this period

perceptible check in the rate of deposit decline In many hides, and sons of the major bariSt* In the metropolitan dietri etc shoved substantial insmsfts**^

These loop banks shared In such deposit increases but at the

same time, reflected a substantial rise in their ratios*

This see a cotton

experience: * ***since the low point Is at June tst^s reported an increase In total deposits, (and) a higher degree of liquid!ty.****^ ^


retiming from hoarding or as a consequence of a reduction in the circu­ lation need in crossed equally slit* reserves*

This could result in a rise

In the reserve ratio unless assets core expanded at a rate sufficient to offset the Increase*

It oatmeb be said that loans sere not expanded abso­

lutely but there was e relative decline In the rate of lending activities evidenced by an increasing ratio* These four loop banks reveal through the reserve ratio a policy of

(I) {a>


16th Annual kepcrt of the. Federal Reserve bank of Chicago* 1952* p* 5* That this increase was not unique with these banka is indicated by the proportion of excess reserves in each period to total excess reserves of Chi cage Member Banka* 1929 I% m 1951 1952 dimte *6 1*2 2o*5Dee* *6 1*2 2*6 £>^$*6 App* IT A* Chicago Sally Tribune, January 5, 1955*

both absolute and relative decline In the volume of outstanding bank credit* A strict policy of reducing bank credit at the same rate as deposit shrink­ age would have been reflected In a constant reserve ratio*

3uch a condition

would have Indicated no change in liquidity policy and bank credit would have been retired at the sane proportional rate as deposit®.

In the face

of declining deposits, however, these banks net only reduced their out­ standing bach credit enough id maintain their reserve ratio which resulted In an absolute decline In bank credit but contracted further, resulting in a relative decline, * .**even at the expense of refusing or restricting ©redtt.*^1^

Such a policy added to the difficulty of the barring system

and marks a definite change in policy* The standard error of the reserve ratios for the individual banks results In a value of 6*12 per cent*

This figure indicates a somewhat

aider scatter than in the loop banks with Increasing deposits*


four hanks acre faced with persistent deposit declines taking cither of two feres* m s

or eoutlmal adverse balances*

Degree® of liquidity,

therefore, would tend to vary with expectations*^^

Bis scatter tended

to increase throughout the period* being particularly significant in the period ending la June 1951

h®« heavy deposit declines were experienced*

While there was a trend in these banks toward greater liquidity* the stan­ dard error indteatee a uniqueness'in the individual ratio movements*

Availability of dsuak Credit* toe* Cit** p* ^6* (2)

All of these banks reported that they were 11looking for liquidity* because of the Increasing uncertainties*

Attention is neat a M ft e d to ttieee outlying comber d e l banka whose ib«KM». *ii closely allied to the f a r t ^ a of local esgsamni ty centere- tbs composite reserve ratio of these banka- is indicated In tebla 3U

th& beginning



B s a u rft su m o of a m a r n » o c m i m n s*m» 29* b « * 31*

1929 1929 ie*ao

ten* 3$*



see* 51* 30* tee* 30*

1930 1931 1931

i$*s8 Z6*kt 19*S&

iso* 31*



Jems 50 *




ratio »•* tbs lowest ratio so far disclosed ami tended toward tbs minimis* Iffceee banks tare faced with tbs pmliieai of small seals operations and they sou 14 a t t e s t to nos story dollar of prtoory reserve mm effectively mm pesslfelo*

they carried only #71 thousand tee to banks* out of total de­

posits of store town #10 million*

Hons was « recognised depository m& that

these bankers* balances sera no,totalised mm working, rather than legal, re­ serves*

Consequently, tbs nature of tbs deposit liabilities was such that

dhesigee would originate principally with their & m customers* Changes to tbs ratio throughout tbe period are indicated in Chart VII* Through tbs period t e e 50* 1950# tbs ratio rseined relatively constant in toe face of a 5 per sent dwells*® to total deposits*

1 decline in deposits

M y arias through toe repayment of loans and according to one study, 9during {2) 1950 only *.{lM»}**a«t of Influences*** mmm operating generally*. Sato


derived front App* IV fi*

Availability of Bank Oredi t» toe*01t*p*4l






1929 - 1932


too r 35 /\ - // \ \ / \ / \ f \ / _V " /





/_\ \



\a Q



\ \



i ! i

/ /

- r / / / / /

\ -

" / / \ / \ / \/

i j



JUNE 2 9 DEC. 31 JUNE 30 DEC. 3/ JUNE 30 DEC. 31 JUNE 30 DEC. 1929 1930 1931 1932


however tta met tfee ease In these outlying banks since, If a decline in leans was tli# only #r shlef cause of a decline in deposits, an increasing raid# would have resulted* drawals or adverse balances*

There o u t have been therefor# cu rreney with­ It can be said that during thia year the

m s g m i i of thee# bank# did not materially change its credit policy* Succeeding period# shewed abrupt and violent changes In the reserve ratio*

fn each of the period# ending December 31 in 193© cad 1951 a# ##11

no in 1932* there were sharp declines*

In ih# remaining period#, ending

dun# 30, 193I and 1932# there cere large increase# In the ratio*


succeeding decline in the ratio wa# larger than the preceding one, amounting to 3, d# and 9 per cent respectively*

Progressively, the ratio declined in­

creasingly* the decline# in the ratio during the periods ending December 31# 193© and 1931# were accompanied by sharp contraction# in deposits*


the smallest fall In the ratio accompanied the smallest decline in de­ posits while the largest change coincided with the largest deposit decline* Beth of these periods were times of backing stress due to uncertainty on the part of depositors# created in part during 193© by ****matsy rumors that have been whispered about LaSalle Street*

Hiring the latter part

of I93I# the continued decline In business activity and the withdrawal of savings deposits for living purposes resulted in *the most drastic defla­ tion (which) has been experienced In the bank liabilities of the Chicago srea*****^^


Thus a severe pressure was placed upon the primary reserve,

Chicago Dally Tribune, January 1, 1931# P* 21. Chicago Journal of Cosmserce, January 5, 1932, p* 1* The Chicago Daily Tribune said that bank statements of condition should " much to dispel the flood of disquieting rumors [email protected] have been circulated in resent months** January 2, 1932, p* 15*



in which wns u©i completely ©ffset by contraction or borrow­

ing opera t i m e or thee* I M s * While the deposit pressure not only eased but changed direction to reflect a net Increase In idle lest period, this period indicated the grew test fell In the ratio,

this draft on the primary m e m

could here

been occasioned by increased lending or a liquidation of previously in­ curred indebtedness*

Which of these two forces was responsible cannot be

readout of these figure* and exact determination must be postponed*

It is

clear that such change* in the ratio originated in a s ^ m s beyond the con­ trol of m a a p e m t on at lesst two occasions* The periods siding dime JO, 1 ^ 1 cod

each indicated substantial

rises In the ratio, amounting to 11 per cent In each case.

Each rise

followed a substantial decline in the ratio and reflects an effort on the part of wwansgwMat to raise the ratio at least to Its earlier level* But each period of increase was of sufficient amplitude to raise the level substantially above the earlier level, an indication of the desire of man­ agement to increase its position of liquidity*

Since deposits were ex­

periencing a net decline In both periods, they could not have been a source of primary reserve*

A contraetlea of credit, or borrowing operations, were

the only alternatives to accomplish the results exhibited. Two conclusions may hm drawn from on examination of these ratios* First, management was content to maintain a constant reserve ratio for the first year*

Declines in deposits during the periods up to June 50, 1950,

did not change credit policy noticeably and bank credit tes contracted only to the extent necessary*

Second, following June 50, 19*&, violent decreases

and Increases in the ratio occurred.

This eaw-tooihed behavior is important


since m h

succeed!ag rise recorded a ratio lit excess of the previous

retie end each succeeding decline stopped at a point stove the previous the « K M V N M * M S that these banks held an increasing amount of cash la relation to their deposite and a policy of increasing liquidity see pursued* The value of the standard error of the individual bank ratios le 12*21 per


This shoes a very side scatter shout the trend line*

furthermore* this value applies to only seven of the nine beinks*

Two banks

displayed such unique ratios that their inclusion destroyed any significance to the resulting figure* 29*6 to 100 per cent* 166*6 per cent*

Ga© of these hanks showed a ratio varying from

The ratio far the other hank varied from 29*8 to

This latter bank paid out all of Its deposits by dune 1952*

Since both hanks sere very small* changes of small amounts were magnified* The scatter tended to increase throughout the period* being the great­ est In both periods in 1952*

this indicates differences in the abilities

of the individual hat&s to keep up with the trend of increasing liquidity* There were difference* In the extent of deposit declines and particularly In the final year*

(I) ■

The Inability of some bank© to attain and maintain an

ft similar behavior was shorn by the ratio of excess reserves to re­ quired reserves in Heserve City Banks*

Am* u H eStt 2»e. 1.2 2.0 J.7 7.6 la these banks,each alternaterise in the ratio reacheda higher level than the precedingride, endeach fall in the ratio* with m e exception* did act fell to the level of the previous decline* App. IV ft*

increased liquidity* while ether beaks under ether circumstances sere enabled t© ©o do* resulted la a wide scatter from tbs trsnd.^^

This re­

sult ess net one ©T choice hut wee imposed by el rcu® stances* Outlying Savings Banks the final

t© be examined are the outlying savings banks.

behavior ©f the composite reserve ratio is indicated in Table K1+



.f&Bt* XX THE RESEHVS RATIO OF OOTLHSa 3AVXS3S BANKS*2) A m . 29* 1929 Bee. 31* 1929 Ante 30, 19?0 Dm . 31, 1950 A m . 30, 1951 Bee. 31, 1931

12.78* 17.82 14.87 18.91 22.22 18.84

June 50, 1932


Om . 31* 1932


group records a lower reserve ratio than any of the other three groups* The 10 per ©eat rule of the examiners* office is subject to either an up­ ward or downward revision, depending upon both the character of assets and the character of deposits* other ©lass*

These banks hadlsrger time deposits than any

This factor would have resulted in some relaxation in the

minimus reserve required fey the examiners*

Oise banker said that the officers were si raid *b© let go of our eesfe ressta roes*} another, that it was necessary to *increase liquidity for any emergency"; while another reported that *the rate of deposit de­ alt©* required a liquid position*. Derived from App* IT B*


the behavior

the ratio was erratic.

Such motion mi&t b© Inter*

preted in the light of the behavior of deposits which reflected a continual decline im ovary period with the exception of only a minor ri so of on© par cent in the k a i period.

Contrary to thla movaatmt, th© reserve ratio

Increased in four periods, remained constant in on© period, and declined in only tea peri ode. In the period ending 'December 51* 192$?, the ratio Increased 5 par cent, the managements of these basics were seeing a more liquid position and in order to attain such an objective, they obtained funds at a more rapid rate than was required to offset deposit declines which resulted In a restriction %m the volume of outstanding bank credit*

the cam© policy prevailed during

the year ending Jhm® 58, 1951, the ratio Increasing fey 6 per cent.

This In^-

ereaee m s also In the face of declining deposits, a very marked decline oc­ curring in the latter sin men the*

to offset deposit shrinkage and to increase

reserve ratio during such a period © M a t an increase in the rate of contraction or borrowing*

this resulted in a ***** position of liquidity probably never

equaled by a metropolitan hanking system*****?^

on December 51, 1958;

while els months later, on June 50, 1951, H a view of this reduction in de­ posit liabilities, the relative liquidity of the banks gained....*^) ®ope than was indicated by the absolute increase in cash*

String this period

of decline la deposits, the management of these banks pursued a common pol­ icy with other banks in the area In increasing the liquidity of their assets.

Staring the period ending June 50, 19?2, there was again an increase in the

Obiflftge Journal of Commerce, January 4, 1951, ?* 1 ibid. Ally 7. 1951. »• 1*






1 9 2 9 -1 9 3 2 SOURCE: TABLE 3 1

100 i t 1




25 ✓■

s s'



X 1/











_______ x — ""



/ -—








10 .


5 i

i 1

JUNE 2 9 DEC. 31 JUNE 30 DEC. 31 JUNE 30 DEC. 31 1929 1930 1931

JUNE 30 1932

DEC 31


This «fts on© ef the moot severe periods of d spool t doe lines com­

parable la magnitude to the decline a year earlier* rati® Increased almost by e^tal m t t i a *

In both periods, the

Thea# movements indicate that the

managements, even during periods of* severe stress, oar© striving not only for an at so lute eonirsetlon bat for a relative contraction as "Too periods, those ending June 3$, 1920, and December 51, 1951, refleeted declines in the ratio*

Both declines occurred during a fall in de­

posits, but also after the ratio had reached a peak during the preceding as


Management having built up Its liquidity position, was either

f l l h n g to permit a temporary full in the ratio with the hope that the Dill would not long continue or else,during these two periods, was unable to ac­ quire primary reserves with sufficient rapidity*

Bines both of these periods

were comparatively sal Id in the extent of deposit decline, it appears that such a policy of reserve decline was voluntary*

the fact that such declines

occurred only twice in N three and a half years is sigsifleant* the period ending December 51, 1952, was one of relative ease, since *«***lasbead of withdrawing funds, depositors having regained their confi­ dence In Chicago financial institutions, have bean putting more money in ihtc they have taken

In spite of these deposit increases, the re­

serve ratio declined slightly, but It still remained close to th© highest point recorded and nearly double the beginning ratio*



Consequently, either

"Perhaps It Is regrettable that this credit contraction took place, but it was necessary in view of deposit withdrawals* (Chicago Bally Tribune, January 5, 1952, p* 19}*

m « , January 5 , 1935, P- 19-

a policy of credit expansion wee instituted or there was some debt liqui­ dation*

Management was not willing to return to ite earlier and lover

standard however* Dae lines in savings deposits take on more than ordinary significance tee to the manner of effecting a discharge of the liabilities*


bank depositor® almost without exception require payment la cash*


*»©h tends may fee redeposited In another institution, waning confidence in the system together with in&eeeasafel 11 ty on account of closures are strong reasons for act doing so* system*

Such tends therefore are temporarily lost to the

This result is different fro® the net decline la an ordinary com­

mercial bank*

tends at least remain in the ay stem and may be used by the

recipient as a basis for further lending* bearing upon the ultimate effect on the the

The difference has an important

banking system*

reserve ratio in these savings banks throughout

the three sada

half year period reflected a strong tendency toward greater liquidity*


no time subsequent to t e e %?, 1929, was the ratio as low as at the beginn­ ing*

While the increase was irregular, there was the definite tendency to

increase the relative proportion of cash to deposits to nearly double the original figure.

In addition probably the bulk of the discharged liabili­

ties were in the f&vm of cash whitsh would react detrimentally to the whole system*

The meet revealing consideration is the fact that these savings

banks, with a presumably lethargic deposit behavior, were forced to take the same

general precautions and follow similar policies

as commercialbanks*


scatter of the individual bank ratios about the

regression line

has a value of 9*?6 per cent*

This indicates a larger deviation than was

found to exist In either type of the loop banka but a smaller deviation than In the outlying commercial banks*

There was a distinct increase in

North w e s t e r n University


thi deviations beginning In the period ending In June 1951*

This was a

period of severe deposit shrinkage, the incidence of which was not uniform In the Individual banks*

While subsequent periods were generally less

severe in terms ©f deposit declines* the deviations in the ratios were only slightly reduced.^)

Each bank was attempting to increase its own liquidity

position but its success was tempered by peculiarities in circumstances.

ISSgMfX Several characteristics are apparent in a comparison of these groups* On June 29# 1929# the primary reserve ratios appear like concentric circles the highest ratio being reflected in the loop banks with increasing deposits* lower in the loop backs and in both groups of outlying banks* the savings banks shewing the lowest ratio.

This is shewn by the value of the y inter­

cept which was 22.72 per cent in the loop banks with increasing deposits* 19*00 per cent for loop banks with decreasing deposits* 16.9 per cent for Outlying commercial bank© and 14.46 per cent for outlying savings banks. Since all of these banks were required to maintain the same legal reserve* the proportion over this figure represented managements* policy with regard to the proper working reserve.

The outlying savings banks* the ratio of

which fell below the variable minimum, must have represented a policy with the examiners1 permission. In the outlying savings banks* the lowest ratio was the one recorded


One banker reported that after “the crash**, he attempted to keep a 25-^0 per cent ratio; another, that ttexeeptional times required an exeeptioual cash position*. All bankers interviewed were in agreement that liquidity was the primary objective.



on June 29* 1929*

# M l e deposits la this group declined during this per­

iod# the ratio increased in the succeeding period* and did not at any time fall to the original level*

Since the deposit decline was relatively small,

the increase in the retie could well have been merely a result of loan liquidation*

fearing this particular period however these outlying savings

honks took homed!ate steps to increase their reserve. The lowest ratios in the other three groups all occurred in the year 195$.

In the esse of the loop banks with decreasing deposits# the lowest

ratio was registered on June 50, 1950# and in the loop hanks with increas­ ing deposits end outlying eusmeveial hanks* the lowest ratio was recorded on Dseember 51, I95&* hi the ease of the loop banks with decreasing deposits* the decline was accompanied by a continued fall in deposits* the outlying comae ret a I basks*

I M t was also true In

There appears to be little consistency in

the occurrosace of the low point in the ratios.

In only two groups did the

lew points coincide and each must rest upon a different explanation*


three out of the four groups, the explanation rests principally upon the behavior of deposits* There m s more consistency in the time of occurrence of the highest ratio*

That group of loop basks with declining deposits recorded its

highest ratio on Deees&er 51, 1952, whereas all of the other groups re­ corded their highest rati© six months earlier, on June 50* 1952 *

All of

these groups recorded their highs not farther apart then six months and toward or at the close of the period trad or examination* The order in which the h i p e s t ratios occurred Is almost identical with the order found in the low ratios*

The loop banks with increasing deposits attained the

highest ratio, amounting to 52*21 per cent while the outlying commercial

101 banks and the loop banka with decreasing deposits follow in order, with the outlying waving* bask* recording the lowest peak ratio of 22*59 per cent. In the ease of these high points, the loop banks with decreasing deposit* whanged place* with the outlying commercial banks when the order is com­ pared to the order of the lowest recorded ratios*

Outlying commercial banks

showed a peak ratio less than one per cent higher than the loop banks, and thus the change in position is not Important*

There is to be found practi­

cally the same distributIon of high reserve ratios as was found in the lowest reserve ratios* only m m period did all groups record consistency in action* In the period ending June JO* 1951# all groups recorded increasing ratios* This uz&anloiby of policy was doubtless a reflection of the first severe de­ cline in deposits except in the three loop banks which experienced increas­ ing deposits*

Sensing that the tide could turn against them at any time,

they evidently preferred to permit their ratio to rise*

The other periods

reflected Individual group changes as dictated principally by deposit be­ havior*

Out of a total of twenty-elght ratio changes In all groups# thirteen

changes wore decreases and fifteen were increases*

Since the in areasew were

more frequent and larger than the decreases, the direction of movement was toward a mere liquid position* This increase in liquidity resulted In a relative reduction In the volume of bank credit outstanding*

This is the clearest in the ease of

the loop banks with increasing deposits* posits, the ratio increased*

In spite of increasing de­

Any increase In earning assets was at

a less than proportional rate to the increase in reserves*


other throe groups of banks also Increased their relative liquidity,


4mm to the acquisition or retention of fhnds at a mere rapid rate than liabilities were retired*

The slopes of the peel tire inclination of the

trend line a are Indicated by the value of b In the equation. banks with increasing deposits the value la 1.04x; decreasing deposits, 1.1lx;

For loop

for loop banks with

for outlying savings banks, 1.22x5

for outlying commercial banks, l.J2x.


Except for the change in places in

the outlying banks, the order of increase in the reserve ratios was just the re vers® of the order of the beginning ratios on June 29, 19^9*


was however an unwillingness in all of these group a of banks to maintain the same relative volume of bank credit as was originally outstanding* There was another source of contraction*

The loop basks with in­

creasing deposits gained approximately as much in deposits as the other three groups lost*

While such deposit accretions may not have come en­

tirely from these other groups, to the extent that they did, the mere shift In deposits operated toward contraction.

The ratio in the three loop

banks was twice as high as in the outlying savings banks.

As funds were

transferred from a bank in the later group to the former, the differences in ratios would halve the possible expansion by a mere bhangs In domicile. While this change is not so noticeable as are changes in the ratio itself, it Is just as effective In the curtailment of bank accomodations. It is significant to observe the behavior of the volume of primary re­ serves in the four groups as indicated In Appendix IV B.

In the loop banks

with increasing deposits the volume doubled indicating a net increase from the inflow of deposits or the contraction of assets, while the Increase in the reserve ratio resulted from either a cessation or a reduced rate of asset acquisition.

In the loop banks with decreasing deposits the volume of prl-


navy reserve* remained practically constant, while reflecting a rising reserve ratio*

Such stability indicates that contraction was at a more

rapid rate than deposit declines or the ratio would have remained constant* If the deposit declines had been the result of voluntary loan liquidation only, the volume of reserves would of necessity have had to Increase, sines such repayments would have had to he preceded by a favorable primary reserve Inflow*

Finally, bank credit could have been expanded at the same rate as

loans were repaid*

This would have had the effects produced.

Which of

these alternatives or combinations existed cannot be read out of these figures* In both of the outlying groups the volume of primary reserves was halved although in each case reserve ratios Increased*

This indicates a net loss

In reserves as a result of withdrawals, adverse balances or bank credit ex­ pansion-

There 1* also Indicated a contraction rate in excess of that required

by the movements In deposits*

It is to the earnings assets that attention

must be directed In order to explain these changes.

CHAPTER V m i nmAQ&wmn o r t h e u>a5 p o r t f o l i o It M s already been o b s e r v e d t h a t of the fear groups of banks under examination three groups reflected declines in deposits*


the three end a half years* these banks discharged deposit liabilities amounting to


On June 2^, 1929, these same banks

possessed only $25,627 thousand as a primary reserve*^)

The difference

of $&T,BJ6 thousand must hare been obtained from the secondary reserves or other sources*

Three loop banks Indicated Increases in deposits

amounting to $115,29® thousand*^)

During the first four periods the re­

serve ratio was practically sons tent and In one period* actually receded in spite of increasing deposits*

Throughout the whole three and a half (r \ years* reserves increased by $41,35? thousand** * funds amounting to &71#961 thousand must have been applied to uses other than building up the primary reserve*

Both the acquisition and disposal of these amounts can

be explained only by an examination of the earning asset portfolio* For a proper examination of these assets* It le necessary to classify them into loans and discounts, and Investments*

There has been a sharp

cleavage in the lines of thought with regard to the proper uses to which

See Oh* III*



Derived from Appendix IT*


Derived from App* IT*

Derived from App. Ill B-D* (*)

Derived from App. Ill A.

105 taw banking system should load Its flupfoH*

One opinion hold® to the con­

viction that bank credit should bo expended principally upon the be si & of bheri term industrial working capital loons as represented by loans and discounts, which lino of thought has cone to be known as the liquidity tlmery*

Opposed to this is s school of thought which reaches the conclusion

that long term fixed capital loans represented by investment securities* in addition to short tern washing capital loans ere quite as good channels for bank credit*

The ttra, shifts bill by theory, has bees applied to the

lines ef thought which reach this conclusion.

The liquidity theory will

be examined in this chapter In the light of the changes in the loan port­ folio of the banka under examination* while the shiftability theory will be examined is the succeeding chapter on investments* The primary reserve la always inadequate at any particular time to discharge the total deposit liabilities*

There must therefore be other

sources to which a bank may turn in order to maintain or restore a depleted primary reserve and Insure liquidity*

The Committee on Member Bank Re­

serves concluded that the primary reserve could net insure liquidity, but rather •fbc maintenance of liquidity Is necessarily the re­ sponsibility of bank management and la achieved hy the Individual bank when an adequate proportion of its portfolio consists of assets that can be readily con­ verted into ea®h»tt{l) * An adequate proportion" *• subject to variation and therefore ssist be Interpreted to mean a necessary proportion, depending upon the circumstances of the times*


Assets should be of such a nature that their exchange for

Report of the Oomssittee on Member Bank Reserves, ashington: Printing Office, p* 5*

Gov *t*

106 each way be tteacamattd as the need arises*

the a x a ^ a a U o n of the u l U -

mabe liquidity of nay bank t^ertlora turns upon an analysis of Its earning asset portfolio* (*) those supporting the liquidity theory believe that short loans for working capital eaa boat p erfor® this function of conversion* of thought baa significant historical support*^^

f M s line

the cardinal considera­

tion of thi eh lata bean *•••*«& Insisteaes that eemmercisl banka confine them­ selves exclusively to abort ter® financing of a mercantile rtwrttWr and not supply fixed capital for Industrial or other undertakings* ..."15) ifee support of the theory has rested on the presumption that loans «ould



A credit instrument may be liquid by virtue of the self-liquidating Character of the transaction underlying the credit* the market ability of the collateral or the mark stability of the credit instrument Itself* *’ £esberfleld* Bay B«, * liquidi by,* Encyclopaedia of the Social Sciences) * Bmtth*Adam* §m Inquiry Into the Nature and Causes of the health of Nation** London: MetSien sad Co*, 1904, (Cannon Ed*} V* X* p* 290* 3ut such loans should be for 9****periode of time as suit the conveniency of the bank9* Ibid* UseCloud* Henry Dunning* the Theory and Practice of Banking $ew fork: Longmans* arson and Col, 19&5/"v* II, p. 420* OUfcart, James $** fteo Srluotgloa sad Praotloo of Banking* London: Oeorge W* Sell Co** 1 8 7 5 (aiir'



Parker, Henry Willis and Chapman, John #*, The Banking Situation, in the United States, Hew Yorks Columbia University Press, 1954, p* 76* flllis* Henry Parkers Chapman, John W.j and Stobey, Balph W*s Contestpokqry Banking* Hew York: Harpers, 1954, p* 825* James, F* Cyril, Economies of Honey* Credit and Banking, Hew York: Ronald, 1958, p* 802,


*..*.the only kind of Mgti-rat© in tereat-feesring credit that it may safely handle*., are the short-time obliga­ ti one of lb* cuetemera* The observance of this principle i* e condition necessary to success**' Such short time obligations depend for their acceptability as bank assets upon the function pefTonsed*


Bank loans may be classified as time loans or demand loans*


the bulk of a bank*® deposit liabilities are demand, in law or in fact, the bulk of the assets should be demand loans.

While this la desirable

from the point of view of the bonk, #***.if there is to be any profit from the transect!one.... if any disposition la to be made of ita assets, they must be

fleas liquid than the demand claims against the®8.(5)

There is an

essential element of time necessary in the extension of bank credit* This la due to the fact that most borrowers obtain funds for the acquisition ©f goods to be further processed, or merchandised, and time is an essential element*

(!) (2)


There results the difficulty of a bank possessing time claims

Cleveland, Frederick A*, Funds and Their Uses. Hew York: Appleton, lp22, (Hall Ed*) p* 244* See entire Ch* X, The Commercial Bank.


fWhtle this type of loan 1ms a very brisk sounding title and appears to be highly liquid in print, it usually works out just the opposite in practice* A very high percentage of so-called •demand loan a* even­ tually find their way into the 1alow1 classification* Our experience with this type of loan has often led us t© wonder who is supposed to sake the demand, the borrower or the lender.8(Banking Department of the Office of Public Account©, State of Illinois, Your Bank, Springfibld: Auditor of Public Accounts, 1940, p* 29)* Beyle, A* A* and Pederson, Victoria J*, liquid Claims and National Wealth, ^ew York: MacMillan, 19*4, p. 39* See Gh. Ill passim; also pp* 55**60 for a distinction between ‘•real0 and ttartificial8 liquidity.


a source to pay demand liabilities* Another classification of loans may be based upon security*

loans are specifically secured while others are not*


Loans classified as

secured are loans with specific and additional pledge, aside from the pro­ cess financed*

It is by no means true that banks prefer secured to unse­

cured loans and Insistence upon some collateral security *••*!& by no means always good business p o l i c y * * ^ S u c h a continued insistence upon collateral security may mislead the bank Into a more strict examination of the security than Into the process financed*

Furthermore, It may

raise a presumption in the minds of customers that the possession of col­ lateral Is the single requirement entitling the® to th® borrowing privilege* ©sees are common where the specific pledge of collateral Is Justified.


small business whose unrefined accounting system might prevent it access to bask credit might well be required to pledge collateral.

Whether the

loan la secured or unsecured, th© bank should look principally t© the pro­ cess financed for the extinction of the indebtedness* In th© last analysis, th© steady flow of goods mate liquidity to the loan portfolio*

furnishes the ulti­

Such liquidity can only be obtained

by a close study of the assets together with th© processes they represent* It is the banker*a business

Willis, K* Parker and Edwards, Ooorge «*, SankIr k and Business, How Turks Harpers, 1922, p* 110*

*«.*te prevent, credit from being granted to a manufacturer whoa© goods will not find a ready market, either because of a glut In the market or by reason of a change in consumer demand* It Is his business to prevent credit from being granted a producer who has so overextended M o enterprise that he will not be able to meet his commitments* It io equally the banker's Itmctldn to see that credit is granted to producers whose products are me ricetable and chose business is sount3U The corollary of this statement Is that credit extensions should be liquidated lay the sale of goods end granted for a period of time dependent upon the period of production**'*' This Is the meaning of the phrase, self-liquidating loans*

loans are

repaid with the proceeds of the floe of goods upon the market, which flow was made possible by the original loan*

Thus short term working capital

loans form the basis of the liquidity theory, with the banking system a passive vehfele^i*or the wider and more effective distribution of goods* The liquidity theory has been subjected to criticism*

It has been

said that in reality loans are not paid off as is supposed, but ***»«at least 40 or S) per cent of unsecured loans in the large cities is renewed at m a t u r i t y * L i q u i d i t y theorist* fail to distinguish between ulti-


£2) K *


Bcdehart, Benjamin H*, Qualitative Credit ^Control, Chicago: Aaaociatioa of Reserve City BankersT^i^^,^?* S-dL" """ Dunkaan, Wm* £*•, Qualitative Credit Control, How York: Columbia Uni* varsity Press, 1^55,'jrpp*11281-2s''*The proper""control of credit should begin with and root on the extension of credit, the aim being to keep the volume of credit as nearly a» possible equal to the exchange value of the goods which industrial commercial and agricultural activities are making available for sale** *Tfci« conversion power in business operations is what the banker has to measure and should afford the limit of current bank credit** ("illis. Chapman and Robey, Op* Cit., p* 52^)* Beckhart. Op. Cit*, p. 2. MOulton, Harold 0., *CosHsercial Banks and Capital Formation,3 Journal of Political Economy, V* XXTTI, p* TOT*

mat* liquidation and the possibility of shifting the paper*(l) possible to have two bank era another11, ^ )

It is

*. -*and settle with one by borrowing from

which results in undetected multiple borrowing*^}


where this occurs, * The liquidity of the first (bank) Involves the il­ liquidity of the t©eoad»#

furthermore* no bank Is certain that loaned

ftmda will be put Into merchandise, ficient to pay the tean#(^

the proceeds of which will be suf­

finally* bank funds release a portion of

the borrower*® own * *••* clroulating capital* so that he can new Invest his own funds in fixed espiial*,^

and the withdrawal of these funds by

the bank will result in redundant fixed capital*


Consequently, shifts

Currie* Xauchlin, Supply and Control of Money in the United States, Harvard University Press, 195^* P* 5&*7* SSOwrllbon, Harold 0** Op* Cit., p* 719*

(at\ Snyder* George 0** nThe Heed for Credit Bureaus In County and Hegionsl Clearing House Organisations,* Address before the Hew Jersey Bankers* Association* * •*.wherever there are banks* automobiles and roads - good or bad - there the multiple borrower operates* Multiple borrowing is not confined to any particular section of the country nor to any one class of persons* Xt is gen oral throughout the country* It permeates every class of borrower - merchant* manufacturer* farmer* bank director* credit bureau manager, letter carrier* lawyer, physi­ cian* laborer; practically every business and occupation that you can mime contains its full share of multiple borrowers* therein lies the danger* The very commonness of the condition stakes It so herd to combat*” Bulletin of Robert Morris Associates, May, 1951* p* 5^5* Machlup, Frits, ”Ths Liquidity of Short terra Capital*” Bconomicc* Londons London School of Economics, Mo; >7* p« 275* Mitchell, Waldo F*, The Uses of Bank Funds, Chicago: University of Chicago Press* 1925, p* 17* Machlup, frits* Op* Cit*, p* 272*

Initiated by bank credit make such funds a permanent part of the finan­ cial structure*

Liquidity *«*•!• not a problem of maturing loans so much

mm It is « problem of shifting assets to other banks in exchange for cash.*..


and it Is not the fora of the asset which insures liquidity*

Whatever may he the merit or criticism of the liquidity theory, the shrinkage la deposits in the hanking system during the period under review required discharge* and the Impact on loans is clearly shown In the follow-

mats %Zt xiffDs* a? total w m & All Banks la 8* 8* June Dec* dbnto Bee* June Dec. dene

29* 51* 5^ * 51, JO, 91* JO,

Dec# 31*

192? 1929 1950 1950 1951 I95I 195^ 1952

1m 101 96 92





18 YA 8 Z C M 0ROOPS or BAHRS (dune 29* 1S&9 * 1O0)(2) Hmsber national Basks 100 102 100 97

as 80 69 as

Member State Banks 100 102 90

as 60 as 58 49

Won Member A11 Banks Illinois State Banks 100

99 97 90


39 52


Alt Chicago State Banks

100 90 91 a/?




48 22*

* This dee line la In large part due to the exclusion of one of the largest State hanks the figures for which have been ear H e r Included*

{!> ^

Moulton, Sordid 9*, Op* Cit*, p. 725* Derived from the Anneal Report of the Federal Reserve Board for the year 1932, p. 119* Table 64 i except for State bank figures obtained from toe Reports of the Auditor of Public Accounts for the State of Illinois* toe* Cit* App* V E*

96 95 90 70 62 49 17*


ft** declines in i o m t in the above groups of banka indicate

a fall in

volume which varied from a minimum of 57 per sent to veil ever 20 per cent. Regard leas of the reasons for which such consequences ensued, the general banking system contracted its loans from one* third to on e-ha If of their original total* the group of Chicago State banks under examination was one segment Included in the above general figures*

It has already been revealed^}

that deposit shrinkage in some groups of banks was severe, requiring actions to offset this movement* and 11that liquidity la an important factor in s bank’s condition was brought hems In mn unforgettable manner in 193*0# 1951 and 195& **** and while that experience might rightly be considered as an unfair test* the blunt fact remains that we had to meet it*•**w(2) All of the forty-one banks under oxsndnatlsn did meet their deposit shrinkage through this period* had to be acquired*

This meant that funds for such discharge

One source of acquisition was the loan portfolio*

{SI The authority to grant leans Is s t a t u t o r y * S e c t i o n 10 of the Banking Act is directed exclusively to limiting 11•••the amount that a bank may lean to any single borrower*


There is implicit in this

Oh- III. Tour Bonk, I*e. Cit., p. 20. ’’An Act to revise the law with relation to banks end banking,* Oh. 16§> Smith-Hurd Illinois Revised Statutes* approved dune 25, 1919* All references to the banking act are to the Smlih-ffurd edition* Tour Bank, toe* Gib*, p* 125*

i 'Sr


section tee fact U n i banka are organised bo lend and tee chief problem la one of retarding any overex tone! on* the Act provides for a limitation on money borrowed# baaed upon the amount of capital# or tee amount of capital together with unimpaired surthe total debt be any bank# owing by a® individual# corporation

o r parte«r«lhtp#^^

.shall at no time exceed 15 per cent of the amount

of tee capital stock.«* actually paid in and unimpaired# end 15 per cent of its unimpaired surplus fhnrt**^^

Such proportion of capital and stir-

plue tens becomes tee legal borrowing limit for a debtor*

There la the

farther prevision teat the indebtedness of a single obligor ‘’...shall at no time exceed 30 per cent of the amount of capital actually paid i a * . ^ In effect# this limits loans after tee surplus account equals more than tee Capital account*

This might be called *.*.the basic or ordinary loan­

ing limit of an Illinois State bank; that is# 15 per cent of capital and surplus and not to exceed 3® por cent of capital1* determined by /whichever of tee above means of calculation applies*

The lending limit is

The Act contains certain exceptions as to what constitutes *money borrowed**


“Bat {1} tee discount Of bills of exchange drawn in good faith

"..•undivided profits plus’*(Illinois Banking

shall net be construed as a part of the sur­ Act# See* 10)*

* •••inslading in the liabilities of a partnership the liabilities of tee several members thereof*..* (Ibid, Sec* 10)* ^

Ibid. Sw*. 10. Tour Bank, Inc. Clt* * p*

Ibid. 3oo. 10.


"agsimcb a c t u a l l y « xl sU a g T a l m i

(2) the dleeomt of commercial or

business paper aeiualiy evued bp the person n ©gotiating the same; ()) the purchase or leaning money la exchange for evidences of Indebtedness which shall be secured by mortgage or trust deed upon productive real estate*** shall fist fee considered as money borrowed si thin the meaning of this sea* tiofx**^^

That is to say* sight or time drafts which a manufacturer may

have In his possession, custom era9 notes for goods purchased or services performed* or paper secured by real estate protected by a trust deed or mortgage are not to be construed as #money borrowed** and therefore to the same limitations earlier specified in the act.

The applicable limitation

on these three classes * ****for money^borrowed* ** shall per oentttmlt&i^y'of the deposits such total liabilities shall* at the sum of the capital stock, and ouch bank or association*11'*'

not exceed twenty—five of any such bank* *and no time* exceed one-half unimpaired surplus of

Having exempted three classes of operations as not constituting **money borrowed-, and thus segregating them from the earlier general classifica­ tion, the law Immediately construes them as *money borrowed* *

that the

exempted transactions and the succeeding limitations must be read together Is Indicated by the Examiners** since *Th& law then exempts {these) three types of liabilities from the basic limit and permits said exemptions to run to a higher or what might be termed an absolute limit of fifty pe* cent of Capital and Surplus or twenty-five per cent of deposits* whichever is lesser. *C5)



Banking Act, Sec* 1® (underlining mine). Ibid* See* 10 (voiderlining mine) • Tour Bank* toe* Gib*, p. 125*


® M l t auoh intention 1*

clear, examining practice is undoubtedly

the current construction. * M l e the burden of the Act is to limit access of any one borrower to bank credit*^}

it els® disiinguishea indebtedness on the basis of

the stags of repletion in which the trimsaction necessitating the borrow­ ing operation appears to fee*

Borrowing tor uncompleted transaction© cannot

exceed 15 per cent of capital and surplus or JO per cent of capital, whichever It lower*

Purchases of raw materials for fabrication or inven­

tory would fall 1m such category.

However, time or demand bills, drawn

against existing values, or notes receivable acquired In the ordinary course of business would represent completed transactions.

beans in

this latter slassl fl call on can be extended to as much as 50 per cent of capital and surplus or 1$ per cent of deposits, whichever la lees* the classification of loans secured fey real estate, “....the value of which as ascertained by the oath of two disinterested appraisers, in double the amount of the principal debt*...

as the same type as

those evidenced fey the discount of bills or notes is questionable* Strong


*th& legislature sought to afford all protection possible to banks fey prohibiting loaning of money or the acquisition of liabilities in such a large amount to a single Individual corporation or partnership, as would have the effect of Jeopardising the interests of the deposi­ tors of the bank** (Opinion of the Attorney General of Illinois quoted In four Sadr, toe. Cit*. p* 121}. It should not fee Inferred that ^uncompleted transactions11 do not represent *existing values4 • Bather, such values have not yeat been accurately and finally ascertained, as is the case in completed tran­ sact! one*


Illinois Banking Act, Sec* 10*

doubt exists as to the propriety of using m l this a«aa«r*^^

estate as a bank asset in

These are the Hesitations as well as the prerogatives

under which tfee loan portfolio® were acquired by these forty-on© banks* For report purposes, lotus are divided into three categories*

In the

order of appearance on the balance sheet these elaaai flections are loans on collateral security* other loans, and loans on real estate* of these three items amkea up the loan portfolio*

The sum

There la no arbitrary

length of time within which limits loans must fell*

Mather, the duration

of a lean is be sad upon the turnover In the particular business financed, thus permitting the borrowers to anticipate their seasonal requirements, *****getting into debt to do soi and getting out of debt as the seasons send their products to m a r k e t * * ^

Used la this manner, bank credit is an

aid In the maintenance of a steady flow of goods through the economic chan­ nels* Loana on collateral security represent leans which are secured by specific pledge with security other than real estate*

Motes receivable,

drafts, bills of lading, warehouse receipt©, stocks and bonds make up the varied collateral securing these loans*

The other category of secured loans

represents indebtedness against which only real estate la pledged*


*Eeal estate loans, notably an improved urban realty, showed no ten­ dency to decline*•• owing to the inelasticity of mxeh loans, which is due to the lack of a ready market for real estate collateral and to their long maturities** €Aval lability of Bank Credit* Xoe. Cit*, p* 52)

119 i

loaiidf represents all other uaeteurftd loans ot whatever satnts aaeh as saetoaer paper, purchased paper, open merket eoi< merciel paper and acceptances*

These items aske up tbs loan portfolio

ropreaeaiiog the asset acqulai lions through the banking process*

loos Banka with Increasing Deposits Examination Is first turned to that group of loop banks which re­ flected Increased deposits* cated In Table I'HI*

The changes In the loan portfolio are indi­

Total loans declined 26 per sent over this period* turn® A i n

indkx of t s m s A m

maoaana is

loop b a m s with ibch&aszsc B S B s m f 1!

(Am* 29, 1929 * IOO) Total bum A m 29 , o**. 51, A m 30, 0«KU 31, A m * 30, &*e. Jl, A s m JO, dm. 31*

1929 1929 1930 I93O

1931 19JI 1932 1932

Lome on Colla­ teral security

loo 9® 95

95 ftK on © ?5 7*

Other Loons

Real Sstat*

K® 193 94 83 n



111 121 122


59 71 105 146








112 346

thleb o& dune 2p, 1929# stood at more than $100 million* declining to leas than #?4 million*^}

These feas&s were under no pressure from depositors

but were In the position of acquiring d e p o s i t s * I n t w r y period a net rise in deposits was indicated In tense of the p r e v i o u s l y recorded level

App. t Am




308 Ch. III.

1 2 0

tttkd *l*o i* relation to the beginning level*

Throughout this period*

deposit* increased by more then H 6 m i l l i o n , w h i l e total loans de­ clined sore than $25 m i l l i o n * T h e smallest decline la loans amounting to one per cent during the period ending December JI, 19J2, coincided with the largest rise In deposits*

Ordinarily this would be expected*

However* the largest decline in loan*, amounting to 8 per cent# occurred during the period ending June 50, 19JE*

During the seme period, deposits

reflected the next to the largest increase*

The decline in loans cannot

be explained in terms of deposits* Some answer stay be found to the decline in total loans In the light of* the reserve ratio policy*

Through the period ending June 50, 1951# (n\ only minor changes in the reserve ratio occurred* Boring these four periods, the ratio declined below the beginning ratio on two occasions, and Increased above it twice*

In both periods of decline, total loans

alee declined and it might be supposed that loans were contracted in order to maintain the ratio*


Bepesito were increasing during both of these per-

App* III A. The leisure with which these loop banks contracted their total loans by Z6 per sent in three and a half years Is indicated fey a comparison of the Index of total loans in Reporting Member Banks In Hew York City. JUne 193? 100 June 1951 92 Bos* 1929 110 Bee* 1951 81 June 1950 ill June 1952 6Q Bee. 1951 106 Bee. 1952 Sf In thee# Heporting Ktaaber banks, loans declined from a high of 111 to s low of 65, or 48 per cent, in two and a half yes re* figures derived from inaual Reports of the Federal Reserve Board*


( )

See Oh* XT*



Gon* equ ent ly, while lean contraction may have been dictated by

retie changes, these ratio change© were themselves the result of other managerial activities aside from loan contraction* The two periods ending June JO, in 195© end 1951# each indicated ratio Increases*

tn the first period, loans declined J per cent and In

the second period, i per cent,

loth of these declines exceeded the Z per

cent fall recorded in the other two periods*

U n c o the heaviest loan

declined occurred during the periods of rising ratios, and because the latter each followed periods of ratio declines, there la some evidence that upon these former two occasions, loans were eon tree ted In order to restore tfee impaired ratio, in order to counteract whatever other poli­ cies were reducing the reserve proportion* During the last three periods from December 51, 1951 through December Jl, 1952, there was a much closer connection observable* first two periods recorded sharp ratio Increases*


During the same two

periods, loans decreased 2 per cent and 0 per cent respectively, with the sice of the decline corresponding to the email set and largest ratio increases*

This marked increase in the ratio was a definite change in the

policy of these banks toward a more liquid position*

In the last period,

loans declined by erne per cent while the ratio declined by 5 per cent, still at a Mgfcer level than on Jtas 29# 1929*

This resulted in spite

of Inc leasing deposits, the latter recording an increase of 56 per eent*^ ^ It Is clear that sent other factor, aside from the level of reserves wee

{1} w

See Ch. Ill*



Otherwise the retie would not have declined la the face of

declining leans end Increasing deposits, While the decline In total loans was only one part of the general policy of this group of banks, two conclusions are clear.

Since deposits

increased in each period, there could have been no depositor pressure for liquidation,

Second, retie policy indicated only moderate changes for the

first two years.

Since the reserve level was constant and there were no

deposit Increases* ft cannot be said that thedecline in loans was required to preserve the reserve ratio.

In the last year and a half, there was a

decided dbaags in ratio policy and the continued decline in total loans was consistent with such a policy.

For the larger part of the whole period there

must be some ether explanation for the Indicated decline la total loans. This requires an examination of the separate classification which are graphically presented in Chart XX, Throughout the three and a half years, collateral loans declined 49 per sent.

Two periods reflected either an increase or no change at all.

During the period ending December Jl* 1929# the index rose J per cent which was contrary to the decline s h a m in total loans.

One explanation for this

increase may be due to the fact that •After the collapse of security prices in October and Heveobar* broker** loans by a m b e r banks declined further* but loans to customers directly on securities increased rapidly* representing a shift in the burden of carrying these securities from brokers to banks.*(*)


national Industrial Conference Board* The daokin# Situation in the y*S3^*jiI>oc* Qlt*| p. 112.

123 CHART X T INDEX o f LOANS in LOOP BANKS uNh. INCREASING DEPOSITS 1 9 2 9 - 1932 IN D EX: JUNE. 2 9 ,1 9 2 9 - 1 0 0 % 350

1 1— --- -


--- -- --- ' --—




i i


// \




L - / ■■ /

/ \ 80







\ \















_____ X X X X X„




JUNE 29 DEC 3/ JUNE 30 DEC. 3/ JUNE 30 DEC.31 1929 1930 1931 '" ' KEY TOTAL LOANS------------COLLATERAL L O A N S --------OTHER LOANS —



JUNE 30 DEC. 31 1932

k ltrg# volume of brokere1 loans for the account of "others'* had b om placed at the disposal of security houses which had boon derived from business corporation®, investment trusts and from foreign s o u r c e s * W h a n the market collapsed fn 1929# the withdrawal of these funds ****•furthered the leek of responsibility for orderly conditlona in the money market* ftie credit granting function ess pissed In the hands of a class of irre­ sponsible Isadora attracted to a nee field by abnormally high Interest raise, she were ready to *raa out* on a moment** notice* *wj To prevent a complete collapse It was necessary that funds be made available by the banking system*

the result was an Increase in collateral loans,

while there was a general decline in total leans*

Since these banks were

located In the loop, forming an integral part of the whole mldweetern money market* they would have a direct connection with brokerage and investment houses* In subsequent periods* one reflected no change.

The other five re­

corded declines which can be explained In terms of market behavior*


period* ex©apt m s * reflected a lower index of stock prices than the preceding period.

C4 1

* As prices in the market receded* either the customer

This phase of financing was thoroughly discussed in the he©rings on Brokers1 Loans* U* S* Senate* 70th Ceng** 1st less** S. It* 115* (2) Willis* H. P* and Chapman* John !•* The Banking Situation* toe* Cit**

p. 629* (5)


Fro® 4 per cent throughout the three and a half year period*

Such an Increase reflects both an effective demand for loans and

The Availability of Bank Credit* tec. Cit., p. 22* (2)

Chicago Daily Tribune, January 9, 1932* p« 10.


ft willing©*® to lend on the part of these banks* •i p i f l e a n U

This tendency Is

While the circumstances of the times

"....placed many independent banka in a position in which they were forced either to pros* for the liquidation of bank loans to business and other cue towers or to refuse new lotas, In order to conserve cash to sect possible de­ mands ©f depositors* these loop banks held a unique position.

Set increments in deposits were

a permissive factor in bank credit extension.

While the rise la these

loans wes not sufficient to offset liquidation in other classes of loans, the extent to which ether leans did Increase relieved th© general credit stricture.

Furthermore, sines many of %he better borrowing names were

net la need of additional fUnds, ^

this tended to limit the channels

through which acceptable loans could be granted*

To th© extent that they

were granted, credit tension was modified and is illustrative of the com­ pensatory action^)

in the banking system.

Availability of Bank Credit, toe* Oit., p* 4©. (2)

*ffee relative scarcity of applications from the larger units in the bbavy-geode industries may plausibly fee explained by the part that large concerns which were able to sell stock during the stock-market boon are now generally well supplied with working capital; Indeed in many eases have money to lend. The comparative leek of applications from concerns engaged in distribution is probably also an indirect result of the same phenomenon* •• they are apparently able to get trade credit directly or Indirectly fro® the large manufacturers who have an abundant supply of ftrada* (Escort on the Availability of Bank Credit in the Seventh Federal Reserve District by Hardy, 0. 0. and Tiner, Jacob, hashingtent Government Frio ting Office, p. ^5)» Currie, Lauchlin, The Supply and Control of Money in the IJ.S.» Loc* Cit., p. 67*

128 An examination of Chart IX reveal © the cat©gory of real ©state loans a* being extremely variable*

Throughout the ©hole period these loans ©ore

than tripled, the entire increase being confined to four periods* other three periods all recorded declines.


The first decline occurring

during the period ending December 51# 1929, correspocvled to a like movement la other loans* dun©

In t»o other period a, those ending December 51* 1931, and

1952# declines sere also recorded*

Both of these latter declines

occurred during periods in which these banks had changed their reserve policy and cor© seeking a higher degree of liquidity,

The first of these

%mm periods paralleled a decline in other loans with collateral loans showing no change*

8©a! estate loans and other loans therefore performed

the service of increasing liquidity*

In the last of the two periods, that

ending June J0, 19*2, real estate loans declined, as did collateral loans, with other loans increasing*

This, too, was a period of increase in the

reserve ratio which might be a partial explanation of the decline in real estate loams* Every other period reflected an increase In real ©state loans-


might suppose that these banks adopted a policy of expansion In this classi­

fication a© they did in other loans since it appears to bar© been general that *.**th© proportion of real estate loans, important mainly for pro­

vincial reserve city banka, failed to decline and even rose sll^ily*1* ^ It 1* doubtful that this represented a deliberate policy of expansion* Esther, it appears that shifts frees other categories were responsible for

the Aval labi 11tv of Bank Oredit, Loc* Cit*, p* 2S*

the growth*

Sinee *rsal estate mortgages, indeed, are the type case of

securities e&tl sfying an Investment desire tut which have no supporting mechanism of liquid! t y * * ^

It la net likely that these loop tanks would

have voluntarily attempted to expand at the very ties that other banks In the same area were being embarrassed by the same medium*

The mere rational

explanation appears to be that existing loans were transfer red to this cate­ gory la order to give these banka some* or better, security* Reference to Table XI? Indicates the proportion each category bore to

mmmtim or toasrs m m m IS U )0? BASES r r a

O th er Loans


25.8=5 2 2 .8

a m . 51, 1950

JO , 51, 50, 51,

1951 1951 1952 1952

total leans on each date*


to total


ik c r s a s is k s D H P O em **'

lo an * m C o lla te r a l S e c u rity A m . 29, 1929 3**. 51, 19^9 A m * 50* 1950 Am* S *e. Am. SM .


70 • 4


05.7 61 .9 5 4 .6

?5 -« 5 7 -0 5 5 .5 4 4 .5



ioana on

E a ta t

.6% •5 •5 •7 1.1

.9 •9 2.9

the most obvious consideration is the unequal

distribution of these assets*

Collateral leans were three times as impor­

tant as other leans while real estate loans were of negligible significance.



lorle* Adolph A* and Pedersen* Victoria J-* liquid Ola lisa and National Wealth* Hew fork* The MacMillan Co., 193&* p* ©2* Derived from App* ? A*


As far as policy to concerned, manageaaiit vac concerned almost exclusively with collateral loans and ether leans*

Had all of the loans secured by

real estate been m e o l lea table, it could have made slight difference In policy* While there wee a substantial decline in the amount of outstanding leans, there was also a substantial shift in the relative importance of each category*

Collateral leans declined In importance chile other loans

nearly doubled in importance*

Progressively, less emphasis was being

placed open collateral security due to weakened markets and the col lapse of the speculative fever*

Also, these banks were leaking an attempt to

relieve the general credit stringency through increasing other loans* these tee categories thus present a changed bank policy* the figures in fable Ef? further substantiate what has been said with regard to real estate loans* as sue per cent of the total*

Only twice did such loans represent as much this is an Indication that these loop banks

did not eon aider loans so secured favorably*

The tremendous increase in

the relative behavior in Chart IX Is here explained since areal estate loans increased from *6 per cent of total loans to Z*9 per cant, or nearly hQO per cent*

With this tremendous upsweep, they still amounted to a negli­

gible total*

Since these banks did not make any extensive real estate loans

daring the period In which they were most common, it seems certain that the

fhis eontaaets sharply with the distribution ©f loans in Reporting Member Banks in Mow to*k City which reported 50.2$ of total loans as collaterally secured in dune 19&9 46*6$ la December lp^2, while all other leans amounted to 4p*8$ and 5}*2I respectively* Derived from Annual Reports of the Federal Reserve Board*

t*o principal increases shown were principally a chi ft fro® other categories* The behavior of the individual bank portfolios as indicated by the median la ahead la Table X?*

The figure for collateral loans la repreT m m 11

wmnn or xstxmaoAL


win imto&s w

le a n s on C o lla te r a l S e e u r lty Jtme 29* 8m . 51, mwxms m loop sots with bborbasim Deposits^2) T o ta l Lean, oa 1ms* on Colla­ Ottff Loan.

teral S e c u ritv


29 , 192?



31, 1909 30, 1930 31 , 1930 JO, 1931 Jl, 1931

98 92


98 89 81 SJ kt

8m * J I, 1932

70 69 *3

100 90 100 96 71


Ju n e Sw . «?un. 9m. Am. Dao.

Am. JO, 19S*


5% 29


•arrant# thi* inference**(?)


8«*1 E e ta to 100 113 93


98 100 102


The loan portfolio i# an important part of

a tank* a e&raisg assets and since earnings

heub t

ultimately comp an sat# the

investment, only under the moot drastic conditions would banks permit or fore# a contraction in loans to ouch an extent* An explanation may lie la either or both the deposits and/or the pri­ mary reserve position*


*** ^

Boring this three and a half year period, deposits

that this prsecure m e general is indicated by the feet that total loans for Reporting Member Banks outside of Kew York reflected a drop from |il,012 million 1# June 19&9 to |£,®80 million in December 193&* a doe line of 58 per cent* Derived fro® the Annual Reports of the Federal Reserve Board* Kpp. V 8. Baricing S l t m U O B In tfa* U. 3.. loc. Cit., p. 12J. I M 1 » the decline iu^loans 'umia 1l y 'dhows'itaelf during a depressed state of trade * unquestionably represents pressure by banks upon customers for repayment of loans, and refusals of banks to grant new loans.6 Ibid, p* 12J*


declined $15,545 thousand^*) or 40 per emt*

$lth a beginning reserve

ratio of a lightly more than 19 per ©eat, even a maintenance of that ratio would repairs eubaiaivtial

eontraction in seme part of the earning assets*

Bet tie reserve ratio stood ll| per cent higher on December }l# 1923» than at the beginning period which would require additional contraction*


tee dominating coaelderatioae, therefore, in contracting the lean portfolio, were the large shrinkage in deposits and the increase in the reserve ratio.

A perusal of the manner in which total loans were managed reveals three distinct periode*

the first period was one in which declines were

moderate and ended December $1, 193$. fits second period reflects a drastic increase in the rate of decline and extended from December Jl, 1920 to A m v 30, 1932*

The last period was for the sir months ended December 21,

1933, and reflected a sharp decline In the rate of decrease*

These periods

will be examined in the above order* The period extending to December 21# 1920, was a lapse of a pear and a half daring which each six months reflected declines, totaling 14 per cent* In the first sis months ended December 21, 1929, total loans fell 2 per cent, declining 6 per ©eat tm each succeeding period. These declines are explained principally by the course of deposits*^ In wash of the first two periods, deposits fell 4 per cent*

The fall in

deposits could have originated In a repayment of loans duo to a less active business need*

It sen Id have been a result of withdrawals for hoarding*

Derived from App. Ill 5*

'2* 3** Ch. III.

*The first set of influences operates to reduce mainly demand deposits, but does not effect the cash reserves of banks, sad therefore, tends to encourage banks to lend more actively**.*8'1' Under such circumstances, the reserve ratio should show an increase.


the period ending December 21* 1929# the ratio did increase but by less than a quarter of one per cent while in the succeeding period, the ratio actually fall fey 1*26 per cent*

Such declines must therefore have origin

mated In adverse balances or by withdrawals*^ the period ended December JX* 1950, continued to reflect a fall in total loans, but deposits showed an Increase.

The Increase in deposit#,

however, was only one per cent and in the light of the fall la the re~ serve ratio during the preceding six months, management preferred to re­ build Ita primary reserve position*

T M s was dene, In part, by a continued

decline in total leans, increasing the ratio by 4*25 per cent from the previous period,

resulting in a ratio level higher than in the pre­

ceding periods and reflecting a change In policy*

This change was alee

reflected in the entire Chicago system since *cash resources of all the (4) banks in the city*** rose to the all time record level;8' * on that date*

Aval lability of bank Credit* I*ee* Cit*, p* 40 s “During 1930 only the first set of influences*** was operating generally*11 Ibid, p. 41* The bulk of the deposit decline in these banka was in the demand category, savings deposits actually Increasing in some periods* “It affords the evidence of the tenacity with which workers cling to habits of thrift even la periods of depression*11 (Chicago Daily Tribune, January 4, 1931, p* 19)* 3se ale© Availability of Bank Credit* toe* Cit* p* 41* 8 «* tab!. K*» IX.


Chicago Journal of Commerce, January 4, 1931, P* 1*


la the first W o aix-roontfe periods, loan policy was dictate by with* dr&w&la or adverse Blancos while in the last six months, loan poliey was also made to confer® to a new lstel of primary reserves* Beginning with the period ending Jane 30* 1951* and lasting through the period ending June 30, 1932, the index of total loans declined 45 per cent*

It was this year and a half period, earlier alluded to,^^

Chicago banks experienced their most severe period of distress* declined by 40 per eeat^^

in w M e h Deposit©

requiring unusual Measures for the liquidation

of bank credit* the six months ending June JO, 1951, reflected a decline in total loans of 16 per cent while deposits declined 1J per cent*

A decline of

this magnitude in deposits requires some readjustment in the assets and It Is to be expected that loans should be a source to offset this decline, at least in part*

In addition, the reserve ratio was increased by 2*45

per cent over the previous level to a new high figure*

Both deposits end

the reserve position required loan contraction* The period ending December JX, 1931, showed a continued reduction in total loans amounting to 10 per cent*

While the rats of loan decline had

been retarded, deposits also were declining less rapidly, the fall amount­ ing to 6 per cent only*

Nevertheless, loans were not declining at a suf-

S** Oh. III. ^

"The n p « M l M la currency denead - l»rg«ly a reflection of banking disturbances In the district - was effected through a 580 million dollar Increase in Federal Beserve Motes in circulation1* (l?th Anmigl Report of the Federal Reserve B&njt of Chicago for 1931, p, 6) • Also, 11The demand tor currency la the Seventh District expanded further in I952.*..rt (Ibid, 18th Annual Report for 1932. p* 6; see pp* 5-7 passim) •


ficiently rapid rate to maintain the re^ejryp flected a decrease of *11 per cent*

since this eeriem re­

While this was only a nominal decline,

It reflects the fact that a greater degree of liquidity was not necessary in view of the retarded rate of deposit decline.

There was strong reason

for not continuing to force loan liquidation in view of the existing high reserve ratio* The last six months ending June 50, 1952, showed an accelerated decline In total loans, the largest decline in any of the three periods, amounting to 17 per cent*

The Increase in the decline is explained by the fact that

deposits declined 21 per cent# three times the decline experienced in the previous six months*

In addition, the reserve ratio declined nominally*

The decline of total loan® during this period was the largest single decline registered throughout the three and ai half years and the fact that loans had declined by 57 per cent, Including this period, would he ample reason not to further harass borrowers*

This 17 per cent decline in loans was only

one of three successive declines amounting to 4J per cent of total loans and the only option was to have permitted the ratio to decline*

The prin­

cipal concern was the behavior of deposits which forced a decline in tank credit and since the movements in deposits were without the jurisdiction of the management, it was compelled to make its policy confer® to such changes* In the period ending December Jl, 1952, total loans continued their decline at a much reduced rats, the decline amounting to only 3 per cent



#fi* tli© last quarter of 1952, there was a perceptible check 1b the ret© of deposit decline is many banks, end •erne of the major banka la the metropolitan districts showed substantial Increases*8^ } These four loop basks sheaved a reversal of deposit movements and reflected a T per coat increase*

An expansion la outstanding bank credit would

have to ensue or the ratio would of necessity rise*

The latter happened,

deposits increasing |2,756 thousand and primary reserve by #2,974 thou* (5) sand,

the reserve ratio showing an increase of 7*56 per cent, to the

highest level recorded, amounting to more than 51 P®r cent*

"the liquida­

tion of these loans together with returning deposits contributed largely to the increase in cash resources;# (4)

while this nay have been good

bank policy, It restricted the available amount of bank credit at the dis­ posal of borrowers* One factor is observable in the movements in total loans:

every per­

iod registered a decline with the bulk of the decline being centered during the periods from dime 9$* 1991, through the period ending

5$, 1952*

during the four periods ending December 51, 1929, dune 5®, 195®# December 91, 1951 and June ^0, 1952, deposits appear to have been the principal consideration requiring a contraction*


l&th Annual Begart of the Federal Becerra Bank of Chicago for the year 1932V g* 6* '' (under lining mine) »


Ss* Tabla 8*. *.


B*rlv*4 tram App. Ill B and I¥.


in each of these periods there was

Chicago Journal of Commerce, January 5, 1953* P* 1*


* practically stationary ratio lad 1eating that the loan contraction was Just keeping pea# with the decline In depoalt#* firing three periods, those ending December JX, 1950, dune 20, 1951, end Deco de r Jl, 1952# e change in ratio policy appears to hare dictated an increased contraction in loan#*

In %mo of these period#, deposit# do*

creased and this movement n « accompanied by a continued decline in loans* In the third period, last mentioned, loans were reduced in spite of an In­ crease in deposit#*

The movement in deposits and a changed reserve policy

sore the %mo principal eenai derations la forma lating the loan policy during these tines* It will be observed from fable H¥l that collateral loans sere reduced by 6$ per cent*

It has been stated by on© banker that * Liquid collateral

loans to local borrowers, carefully watched and skillfully handled, are a very deaireable form o f Xoan®,^^

and as far as the extent of the decline

here indicated la testimony, they formed a very Important source for the contraction of bank credit* There are two principal explanation# for the extent of the decline* these loans ware probably largely speculative loans, though the certainty could only be established by an #*ewination of the particular loans*


these bades were in the loop and contiguous to the financial markets, they undoubtedly attempted to obtain an equitable share of leans arising out of


Fridley, 3* Carroll, -great Lakes Banker, Chicago: October X9?2, p* 15* But see Had lor, $krcus, "Security Loans***cannot be liquidated to a great extent without incurring other loans* They are frosea* Security loans looked upon from the point of view of the banking system as a whole, are not liquid, and the larger the volume of such loans outstanding the less 1# the liquidity of the banking system*11 (hearing# S* Kes* 71# 1*#®* Git*, Ft. Ill, p* 498)*


curroat practices.

The declines In these loans then would follow the

course of the security markets-

Also, during the three periods from

June 50, 1951 to June JQ# 1952# collateral loans declined 40 per cent. This was the period of most severe deposit shrinkage and it appears that these banks leaned heavily upon collateral loans to offset the movements ia deposits*

The predominant factors in Inducing this decline appear to

have been a combination of market and deposit behavior* Other leans ref looted an even more severe decline, the index falling, to 26 per cent# or 11 per cent more than did collateral loans*

These other

loans were unsecured paper and while it has been said that HLoans secured by collateral of known and marketable value are far better for a bank than unsecured paper***** The problem of * Indebtedness* la reserved for Ch. VIII*


Sine® deposits declined 22 per eeni in the same period, asmmtltig to |291SJ

it i® clear that loans ware not the

only source ot funds and there was a drastic effort made to increase the r a t i o * U d i

m «

tendency occurred a year later when the ratio la*

creased 11*79 per cent over the previous period hut during which period loans declined only 7 per cent*

In view of the decline in deposits, other

sources than loans mist have been used to repair the reserve ratio* Thera are two general conclusions which way be drawn from the manage­ ment of total loans, both of which appear to have been Initiated by the behavior of deposits*

first, a decline in loans of such magnitude was

by no means voluntary on the part of those banks but rather * reason of local demands for cash, {banka) had no alternative to restriction of c r e d i t * . T h i s in turn led banks Into a scramble to increase the rati® Itself which was a limitation on their capacity for credit expansion*


two causes for such contraction and the resulting credit restriction are directly traceable to the behavior of deposits* Examination la directed to the behavior of loans collaterally secured* The movements in this category are shown in Chart II*



P? by the sal# of the collateral# Other loans and real ostato loans each comprised nearly an equiva­ lent proportion of the total portfolio on June 29, I929.

Other loans

indicated a relative as veil as an absolute increase in the first too periods as set forth in Ohart XI*

During the period ending June %09 1950*

while the total in this category declined, its relative importance con­ tinued to risa*

Beginning with_th© period December Jl* 19>0# other loans

not only declined absolutely but with the exception of one period declined relatively t o total loans*

this meant a greater than average pressure on

these loans in order to secure contraction* Loans on real estate showed a decidedly opposite development*


ginning this period by representing about one-eighth of total loans* on December $%w 195^> they represented nearly one-half-

The early absolute

growth in these loans was due to a reclassification of loans originally In other categories* estate loans*

Such deficiencies cannot be charged against real

On the other hand* the relative growth of these loans in­

dicates that as a medium for the contraction of bank credit they were con­ spicuously deficient*

One study concluded that *****the proportion of

real estate loans* important mainly for provincial reserve city banks* failed t® decline and even rose slightly#*^ ^

In those particular banka

they roes substantially and as a medium for the contraction of bank credit were of little service. Table XXI indicates the medians of the individual fear& Indices*


Availability of Bank Credit* Loo* Cit*, p. 25*



A»© Dos* duns Os®.

29, 51, 50, 51#

1929 1929 1950 1950

100 101 70 71

A aas 50 #



£*c. 50, Am ® 50, Baa. 31,

1951 19J2 1952

54 29 29

Other Loans

Loans on Real Estate


100 100 114 120 89 89 87


91 as 6$ 41 27 23


The Index of collateral loans follows the said pattern found to prevail in otter banks*

Of the banks interviewed# all but one sere frank in ad­

mitting that the large proportion of these loans sere *sold out4* shore one toner a offered additional quality or of insufficient value*


collateral# it was usually of Improper The course of deposits was such that

only a minima® of requests could be accommodated*

While the exceptional

hank claimed that it *sold out few custom ere'*, nevertheless Its collateral loans, as well as Its deposits# shewed no different course than other out­ lying commercial banka*

The accuracy of such a statement may well be ques­

tioned* Other loans in these banks reflected a larger relative decline than collateral loans*

In the face of this decline# all banks reported a bor­

rowing demand throughout the whole period but all banks reported that they •were afraid to loan11*

One back did report its willingness •to take cere of

oar regular customers*# but still the course of other loans in this bank

Calculated from individual statements, Loc. Cit

w*# sharply 4otaf«rj. While the index &f real estate loan a recorded « minor decline In the median bank, four hanks reflected a higher volume at the end of the period than at the beginning*

Of the banka Interviewed, this teae

found to be a result of a reclaeolfication of loans, rather than new ex­


Of the banka interviewed which showed declined there woo general

agreement that real eatetc lean* were the least satisfactory type of loan in the portfolio* It la Important to not# that in these outlying eotsmereial banka, there we* a const stent demand for loan* they 11cow Id not accommodate* *


addition, loan* already negotiated were preweed for payment due to the continued decline In depoel te and the attempt* to a#cure incroaaed liqui­ dity*

Analysis 1* next turned to outlying bank* whose liabilities were Chiefly time deposits*

the behavior of lean* Is indicated in fable XXII.

fetal leans declined in these bonk* by 62 per cent*

fhe extent of the

decline excludes a voluntary redaction on the part of borrowers as the principal cause*

fetal deposit* in these bank* declined 69 per eeat,^^

which la sufficient te explain the fall in total loans*

Also, the reserve

ratio maintained by the#* bank* on June 2p, 19&9* *a# only elightly less than

per eent*^^

See Table He. VI,

While at the end of the period, it stood at 22 per


3«e Table No. XX


TABI® XXXt XROSX OF L0AH3 MB BISCOOBTS IB OUTLYING SAYINGS BANES*1) T o ta l Uw» Ju n o B ee. Jtt» « Bm . / Jkm* »«».


see eh* IV*


standard Statistics Sasa Book.


holdings, or M r # likely, « reduction of previously incurred indebtedneaeness m y have been the motivating factor.

The feet that the re­

duction occurred at a time of Increasing deposits lends strong support to the fact that debt liquidation was occurring* Other securities also showed substantial declines In the three and a half years*

On December 51, 1952, the Index registered 44 Indicating

a decline of 06 per cent*

This Is a slightly smaller decline than was

registered by total Investment® but considerably lees then shown by gov­ ernments*

This resulted, as shown la Chart XVI, in a lag in the decline

of other securities*

On the other hand, the total decline of 56 per cent

was substantially greater than that recorded by outlying commercial bank© Ia which the decrease measured only 51 per cent* Xt& no period wae the index equal to 100*

(iy *

J£v#ry period, with a single

exception, reflected decreases although of varying amounts*

An examina­

tion of Chart &VI Indicates that these movements divided the holdings of other bonds into two distinct periods, as was Indicated in both the total and government series, by the period ending in December 1930* The first segment of the three and a half years was composed of three six-month periods, the first and last of which registered declines, while the second six months reflected tin increase*

The first decline

measuring 6 per cent and the decline In the period ending in December 1938* amounting t# J par cent, reflect a normal movement under the cir­ cumstances although at a diminishing rate*



table XXXII

Th# period ending in June 1950


besever registered * 5 ptr eeab increase, and ere&eee already noted in other

ettb other in-

*.* ..undoubtedly furnished the ha*

*1* for the •traig h»a4 market prevailing during most or 1 9 3 0 * * ^


this period# there ««$ a slight Increase in total securities, although got* t m a i t bond* decreased, Indicating that the ae^ulsltion or other securities mere than afreet the sales la governments* served that in these M r m % three

Furthemer©, it should be ob­ vhile ether bead* declined h

per seat* government* declined 2a per cent*

tide whole year and a half is

marked if the continued and rapid decline in governments as compared to

other bonds* In the succeeding too years beginning with the period ending in June l$Jl, other bends Indicated $ decline 1n every period*

the largest decline

oceurredin the period ending In June 1931 end amounted to 28 per sent* T M e decline coincided with the first drastic decline In deposits*^}

and oc­

curred at the am m time the largest decline in governments was registered* this 21 per sent decline kossver amounted to only three-fourth* of the decline registered in governments* The succeeding three period* also each ref looted decreases*

A slight

qualitative Change ess Indicated In the period ending In December 19$ 1# since other bonds declined but governments Increased*

the increase In

governments was not sufficient to offset the decline In other bends as la Indicated by the decline of $ per cent In total Investments*

The follos­

ing period ending in June 19$2 registered a decline of 9 per cent*

Banking Situation in the United States, bee* Git** p« 125. te)

3** 0h* XXI*



%B a particularly

period, since the severity of deposit

dec 11lie itt the sees as m o year earl Ior,

n\ ' requl ring drastic contraction*

V & m * 9 per cent decline m e only one*third the decline registered a year earlier and yet Hie requirement for contraction was even more urgent* Icete M


besoms demoralised and only minor declines could be permitted

Ultimate absorbing losses of large proportion*

the decline of 8 per cent

In the pelted ending in December 1 9 ^ occurred despite increases In deposits*

ds has teen indicated the continued liquidation of securities by

these bank* wsteprobebly far the purpose of liquidating previously Incurred indebtedness*

these individual mmvmssmts in ether securities resulted In

a total decline o£ 88 pear cent compared to 69 per cant in governments and SJfr per cent in total investments indicating a smaller relative decline in ether securities* W M l e both categories of investments registared an absolute decline during the three and a half years, a clearer vies of their relative be­ havior is presented In fable M ? l * commercial haafce#(3}

km in Hie ease of the nine outlying

these savings banks sere much more heavily com­

mitted to other securities than to governments* on governments

Since the relative rate

*****!« very low**** It would not be practical to Invest £51 a large portion of your funds in government bonds.***# and inasmuch


3** Ch. III.


S«* T*bl* XXXIII.


McCoral etc, b.f. , Ob. Cl t.. p. JJ.


as earning* *re * eurreat problem eitfe these smaller institution*, it Is only logic*! that principal emphasis should he placed upon the higher yield corporate securities*^ The re latire changes in holdings reflect Increase* in ether tends In every period except tee*

these tee decreases occurred in the periods

ending In December 1991 end 1932.

the first decrease sac due to acquisi-

H e n s of geeermrtmt securities# resulting in a reduced proportion of other hands to total investments*

the second decrease css the result of a sore

rapid decline In other securities than ess registered by governments and marks the only period In which such m relationship existed*

The result

eas a gradual rise is ether tends* The behavior of the indices in the individual hank* is indicated by the medians in Table XIOTfXI#

One of these barks at no tine reported any T A B U joom




£1) ***

G ovsraaient Sonde

O th e r Bends 7 4 -7 7 6 .0 7 8 .2 7 6 .4 8 2 .6 7 6 .2 8 2 .5 8 1 .0




3«c. 51, A m 50, D M, 51, A m * 3®, M R . 51, A m * 50, D m . 51,

IS®? 1?J0 1930 1951 1931 195* 193®

2 4 .0 2 1 .6 2 1 ,6 17 -2 2 1 .9 1 7 .5

M e next peg** TO S.




BEOlAJS s u m

or X80XTXSOA& IJOO BOLOIMas OF SOVSBKMSHT ms Bosas m ooTWxao satxbos bahks^ (Am


29* 1929 * 100} 9o»»r»!ient Banda 200 ISO 100 94 61 58 25 19

f a * 29 • 1929 3*e. $1, 1929 A b w 50/ 1930 B**. Jl, 2930 A m * JO, 2932 s m . 52. m i June JO. 29J2 Bmm* Jl, 1952

Other Bonds 200 98 192 9% 72 69 58 46

gewsriments and at the ©ad ef il» period thraa had sold all their holdinge* Fir# hanks increased their holdings over the beginning level however*

Mo at

banka liquidated a l a r p proportion af this account* nil basics reported

m s s

v a l w of bonds other than governments*


banks indicated holding a In the sane or larger volume than in dune 1929* the ether hanks all shewing declines*

Ho hank completely liquidated this



Calculated fros individual statements* toe* Pit* (frost previous p&gejifcsfortunately however* **.**the average hank has displayed almost entire disregard of* the principles of investment*• (the Seeking 31 tuatlon, loo* 011.* P* 5^7)* also Stevenson* Russell* ^ Bulletin of th® Employment Stabilisa­ tion Institute* V* XV* Ho* 1* University of Minnesota Frees* Minneapolis* 19$%* *lh* f» Baid Investment Standard** passim* Also, * *.•*the erabarrassmeni resulting from the aon-liquidity of nai-govtmsms& investments was aggravated by the relatively low volumes of government security holdings** (Cleveland, I l l l k s Q*t Op* Pit*, p* 115}*

All cf the teak* iAtortlervd complained that market acts on was so adverse that they eetld mot take the losses*

While customers* loams

should he protected, la cm© ease, * *..the heat securities sere pledged and the ether© ©ere selling tee let**


In another ©see, one banker

reported that: *A bank dees met sell securities at a less, but ©111 ©all demand loans first* and let the easterner leans run off*’1 Another bank held a large volume of * local municipals on which there was no market* * A leek of market or large depredation was e definite barrier to the shifting of securities.

On &tna 29, 1929, loop teaks with increasing deposits reported 59*4 per seat of their investments as government bonds*

On the sane

date* loop banks with decreasing deposits* outlying commercial banks and outlying savings banks reported governments as amounting to 25.2 r 1^.1* and 25*5 per cent respectively*

It is d e a r that the banks which were

mot required to contract credit wore in the best position to do so* as far as governments sera concerned.

Furthermore* outlying commercial banks

whose deposits were chiefly demand and consequently presumptively mors liable to dissipation, carried only about half the relative volume of govermaents owned by the neighboring savings banka whose deposits could have beam presumed to have been more stable*

^^ #

Personal taberrlew# these ratios are derived from App* VI B*

Conversely* the importance


of otter bend* was exactly m t r u d .

Those outlying teaks she** business

is apt to feel Una first impact in say economic disequilibrium wars de­ pending upon securities, the markets for fhieh vara mors vulnerable than the government market,

thus Una teaks with the least stable deposits

owned tte smallest proportion of governments, while the banks with the asset stable deposits* owned the largest proportion of governments* loop teaks with Increasing deposits were in a unique position by being able to expand*

the purchase of securities was a policy sigoreue-

ly followed in every period^the net increase amounting to $101,16$ thousand, (I) and the proportion of government securities to total investments increased from }^*$ per cent to 61*2 per #«nt,^^ for govsrxxvCEits*

indicating a decided preference

If this were general in teaks experiencing the sane

deposit behavior then principal relief to those backs suffering withdraw­ als weald come through the median which they possessed In the smallest proportion*

far every dollar eewKttted to corporate securities more

than two dollars was used for the purchase of government securities* this sane preference for government securities was shorn by loop bank* with decreasing deposits* increased $1,156 thousand,


While total investments in these barks this was the result of an increase in

government bonds amounting to #1,542,

more than doubling their orig­

inal holdings ted a dee lino of #?66 thousand, In their other bond a c c o u n t * ^ this again indicates a decided preference for government securitise*

A,p. VI *•

U ) T«ble XXVII.

App. VI S.


246 In neither group of loop banks was there a contract!on brought about by a reduction in the holdings of securities*

In the ease of

those banka with increasing deposits such contraction was not necessary* In the case of the loop banks with decreasing deposits, however, they were required to discharge deposits amounting to #15,545 thousand, ^ no part of which, with the exception of the first period, was supplied from the investment account* The investment portfolio contributed nothing in contracting bank credit, all of the contraction being obtained through the loan account* tm addition, sufficient funds were derived from loan contraction to permit an expansion of the Investment account* The two groups of outlying’banka presented quite e different situation in the investment account.

Each group displayed substantial declines, out-

lying commercial banka a JJ per cent decline,.^5) while outlying savings banks reflected a fall of 59 per cent*^^

la centra at to the two groups of loop

banks both of which displayed absolute increases, these outlying banks both reported absolute declines*

It is to be noted in both of the out­

lying groups, however, that with a single e x c e p t i o n , g o v e r n m e n t s de­ clined at a much more rapid rate than did other securities.

This early

S«* Ch. III. (2)

See Ghart XIV* Using all member banka ©f the Federal Reserve System for examination. It was shown that tt*. **the secondary and Investment reserves actually were used to the exteat of only 1*4 billions of dollars or less than 5 per cent of total deposits11* See H&rtsel, Elmer* “The Measurement of a Bank *s Secondary and Investment Reserves, * Journal of Business* Chiea^as University of Chicago Press, Y* VII, lk>*4, p. J50. See Table XXIII.


See Table XIV.


See Chart XV.


and eonai stoat dependence upon -evernrsenta leads to the conclusion that tlsay natt have shewn the grfittest profit er the least loss la comparison

to other securities hence their prompt choice sc s vehicle to obtain funds. All group® of beaks shewed s distinct tendency* with varying intensity and for different lengths of time* to shift their ssssitsols from gdtem* stent to corporate securities*

In same smses it see sorely a relative shift;

in others* mm absolute shift*

loop bunks with Increasing deposits in the

period ending la Haeag&er 19&9 decreased their gcwemmeais but increased corporate holdings*


Since corporate securities increased store than

governments declined, there ess en absolute Increase In investments and an absolute and relative decline in governments la favor of corporate aad r lU «8«

this apparent shift to other securities ess short-lived for

the succeeding period roflecte

& reversal In policy*

the four loop banka

with decreasing deposits showed the same type of movement through June 5Q#

total investments increased to

governments decreased to only

P*7 P0jr cent of total securities, and corporate securities increased to

creased with governments

an increasingly smaller proportion for

varying leegths of time* savings bonks were the only group which did not reflect an


T m b U XXVX.

arnaaats but each category of loans declined. In the outlying banka, Investments and loams in every category declined, but investments destined only a half to a third as much as did loans*

Inasmuch as contraction was

required, this meant a relatively heavier buddeu upon loams then would have beau the case If investments had been used more freely* fferee general conclusions appear to be Important*

First, there was

an increase in total governments in the two groups of loop banks through­ out the three end a half years, one of the groups deriving funds from its loan account to expand its portfolio*

gmpam&lon also occurredin the out­

lying commercial banks for the first year and a half, funds being derived principally from loans*

3 m Chart VII.

Second, In all groups there appeared to be In the

3** Ch. T

#arly periods a preference for beside ether tfees governments for the Increased income avail able*

In the two groups which continued invest-

meat increase** the emphasis was changed to government securities in preference to other bonds and over the whole period, government bonds were acquired In much greater volume than other bonds*

lest* in those

banks showing destine* in their holdings* in each case governments de­ clined relatively were than did other bonds*

These appear to be the

M i n results in the mmngsmsnt of the Investment portfolio in these four groups of batits*

CHAPTER VII LOSSES IN EARNING ASSETS The two preceding chapters have been devoted to an analysis of the changes in the earning assets*

Under ordinary circumstances, these

changes are a function of deposit behavior*

As deposits increase, earn­

ing assets will be increased while in the ease of deposit declines a reverse movement In earning assets usually follows.

The inference

follows that the amount of funds acquired or applied may be measured by such asset changes*

General-Speaking this la true but declines or

increases in assets may also include charge-offs and depreciation which alter the effectiveness of such changes*

The extent to which such loeses

occurred forma the subject matter of this chapter. A loss may be defined as the difference between the book value of an asset which Is carried at a higher value than its potential or actual realization value.

If a loan were partially repaid, the difference be­

tween the repayment and the book value would represent the loss*


wise in the investment account, the difference between the book value and the amount received upon sale of the instrument represents a loss*

A de­

cline in either loans or investments is a measure of the funds acquired only when there are no losses*

Where there are losses, the balance sheet

figures must be corrected else the amount of funds acquired will be over­ stated* A like adjustment must be made In case the balance sheet reflects increases or the fUnds applied to such acquisitions will be understated*

Where the reported value of commitmenta remained at the same level for two successive periods* the conclusion miggit be that no new loans or investments had been acquired* there were no looses*

This however would fee the ease only if

tf some leans were oha rged off during the period,

the new loans would exactly equal the losses, resulting In no change in the total volume.

In m s s loans increased, such increase would hide the

lessee if funds applied were greater than losses, true in increases in the Investment account.

The same problems hold

In order to measure the

changes in earning assets properly, the amount of losses must fee consid­ ered* Losses in earning assets are important for two reasons. are a general measure of managerial capacity.

First, they

It has been said 11...♦ that

credit leasee are not often the result of catastrophe or quick changes in the affairs of customers. can read In advance11.^ ^

There usually arc signs which the careful banker Since losses are expensive, the objective of

every banker Is to maintain as low a loss record as possible and his suc­ cess may be measured fey this record* A second reason why loss as are an important consideration lies in the fact that losses reduce earnings and bankers hesitate to take losses unless forced to do so.

As a consequence, In the contraction of bank

credit bankers may shape their



with a view to averting a loss.

American Bankers* Association, Clearing House Section, Commercial Bank Management Booklet No. 1, "Loan Administration Policies,” New York} {no date) p• iV.


many eases it has unfortunately been the ease that banks *.... wars forced to retain assets of questionable value and eventually suffered larger losses than would have been the case had the assets been sold earlier*1.


An attempt to evade losses may be the initiating consid­

eration in the policy pursued with regard to contraction. The losses in loans which a bank writes off in any period may actually be realised or may be merely potential losses.

Loss realisa­

tion during any period is readily determinable but potential losses are determined with difficulty*

All loans in a bank’s portfolio have a ma­

turity value and the bank’s problem is to determine by what amount they may not be paid in full.

It has been suggested that *if at all possible

a committee of the Bireetore should review the loans in detail with the examiner and classify them ae good, slow, doubted, and loss....**^^ Such a course presume© that the directors possess information not incorporated on the face ©f the obligation.

While this may be the case, it is un­

likely that any extensive Information will be available* There are some eigne, which if observed and used as a basis for es­ timation, are helpful in determining potential losses.

Periodic renew­

als by the same borrower lead almost Inescapably to the conclusion that



Ostrolenk, Bernhard and Massie, Adrian M*, How Banks Buy Bonds, Hew fork: Harpers, 195^* P- 1?6# Millet, John F., Bank Audits and Examinations, Hew fork: Ronald Press, 1927, p* 105* But see Stronck, H. N., and Eigelberner, J., Bank Loan Management, Chicago: Rand, McNally and Co., 1950* pp* 160— 1 *Here and there a director will make some comment but, in the main, any comment or discussion is largely general and does not really add anything to the exact knowledge regarding the loan.1*

k>L 33

a permanent investment has been made by the bank*

Payment of interest

in Installments, where not a part of the original agreement is a sign of financial weakness*

A loan which at maturity is made dependent upon

a contingency, or the indebtedness of a borrower whose assets are in lit­ igation, are examples which would ordinarily require conservative manage­ ment to write out at least a portion of the loan*

These are all signs

which a wcarefhl banker can read in advance,41 and signs to which the con-

(1) servative banker will respond* There is always the hope that such questionable loans may be met fey the debtor at maturity and inasmuch as bad debts affect the profits

(2 )

and thus the dividend policy of a bank,' '

there Is a tendency to post­

pone the writing off of a loan as long as possible*

Under such circum­

stances, the examining authorities of Illinois State banks will consider nAll debts due to any bank or banking association on which interest Is past due and unpaid for a period of six months, unless the same are well secured and in pro­ cess of c o l l e c t i o n . b a d debts within the meaning of thi s section-... •11vJ) and require the creditor bank to write off such paper* The amount of losses in loans and discounts in any particular period


(2 )

11Where losses are reasonably determinable, bank managements are quick to recognise and eliminate them* (Your Bank* Illinois Auditor of Public Accounts, Springfield: 19^0, p* 55)* *

If losses have at any time been sustained--.- equal to or exceeding Its undivided profits then on hand, no dividends shall be made* and no dividends shall ©verbs made*** to an amount greater than its net pro­ fits then on hand, deducting first therefrom its losses and bad debts* (Illinois Hev. St*, Oh* 16|> Sec* 11a)-

represents both realised and potential losses*

Frequently “...bankers

hesitate to remove Items that are practically worthless of themselves when there is a possibility of recovery from outside sources'*.


such reluctance is the case during ordinary times, periods of pressure would strengthen the determination to write out only realised losses* bosses in the Investment account are not so difficult to determine as in loans and discounts*

When a security is sold at a price below the

book value at which it is carried, the realised loss is readily determined* Depreciation in the balance of the investment portfolio may ordinarily be readily obtained by comparing current quotations against cost prices* la some instances however these quotations are not at all reliable and may tend to present a very unreal view of the status of the portfolio. In the case of local securities* #about all that can be done is to obtain

information as to the most recent sales* ***“'■

as a guide*

and use such figures

However such prices may be purely nominal* a general attri­

bute of many ^over the counter41 markets*

Even though a bid price may be

firm* it will generally be strong enough to absorb only on© or two bonds* The amount of depreciation or potential loss which should b© written out of the bond portfolio may b© grossly understated*

Your Bank, boo* Cit** pp. But see Comptroller of the Currency Begulatlous in Federal Reserve Bulletin, January 193® > PP* 52 Ibid, March, 1956, PP* 194-5} **•»•the revised examination procedure recognises the principle that bank investments should be considered in the light of inherent soundness rather than on a basis of day to day market fluctuations (Fed— eral Reserve Bulletin, July 195&# P* 564 (underlining mine)^(Lillet, John F*, Op* Pit*, p. 125*


It ha a bean earlier i n d i c a t e d ^ t h a t many banka depend heavily upon ratings as a basis far the determination of suitable investments. Two principal difficulties however limit dependence on this device* First, commercial rating agencies do not rate securities specifically for bank investmeat*^^ the rating*

Second, rating agencies reserve the right to ^revise*

Such revision frequently takes the direction of a reduction

during periods of financial stress which is the principal time at which banks Can least afford to have their portfolio impaired.

While at-

tempts have been made to measure the quality of an investment portfolio, the re milt itself depend* upon ratings and in addition introduces arbi­ trary weights which Influence the final result*

Since rating changes are

influential in Initiating the disposal or retention of a security, they also will have an effect upon prices* In order to obviate the effect which changes in bond ratings might have exerted upon the price of securities, several series of relative (5 } bend prices have been constructed.In all, one hundred and eight bonds were chosen for an examination of their price behavior from dune 29, 1929

Supra, Oh. VI.


See Harold, Gilbert, Bond Ratings as an Investment Quids, Haw York: Ronald Go*, Ch. 3V, *The'Bases of Ratings,y passim* See Palyi, Melchior, Hank Portfolios and the Control of the Capital Markets* Chicago: Cniverdlty of Chicago Press, ffoumal of Business, V* XI, Ho* 1, p* 66, et seq*



INDEX: JUNE 39, 192.9= IOO %





X \___ ____ ------— /// \ ""7/"" " V // \ / \ // */ vx



xZ j -



X o' x \X \\




v-,: '•




\ \ > i * \ \ ; x x; \ s

\\\ '\ \

V \



\ \



>/ X


"V .

v \

x y ■ ' j x / A(y,(j

\° \ \ \ \



1 X

\ XV ^ V

\ /

\ and Such price behavior explains the re*-


Table 3TV#

App* V B*

App* tJ B.


Standard Statistics Base Boofc*

Table XVI*

lalively small loss which was th© smallest loss recorded, both rela­ tively tad absolutely* In the period ending in December 1950* the highest relative loss, amounting to 24*05* v&s recorded.

This was the period In which these

banks began to change emphasis from other bonds to governments. of* #79 thousand^ ^

A total

was devoted to the acquisition of securities but #19

thousand or 14*05 per cent was absorbed by losses*

While this period

did not record the largest absolute change* it was relatively the most expensive period in terms of losses since nearly one quarter of the funds devoted to the portfolio were absorbed by losses* The three remaining periods* those ending in June and December 1951* and the single period ending in December 1932* were periods la which in­ vestments also increased and in which periods losses varied from a low of 1*55 Per cent to a high of 14*55 per cent*

These ratios reflect the

increasing burden of losses in the later periods* The loss records of the Individual banks were established during a time when deposiba reflected a severe decline*

Of the twenty-eight

pairs of changes in investments and loans, both classes declined together in twelve periods, increased in one period, and increased and decreased in fifteen periods*


In the twelve periods of concurrent decreases,

investments showed the largest relative less to decline In eight periods while losses In loan© were largest in four periods*

In the one case of

concurrent Increase, loans reflected the largest loss*

In the fifteen

cases where diverse movement© were shown, loans reflected thirteen de-

App. TX 8. (?)


See Oh. III.

Calculated from individual statements, Loc. Git*

alines and investments only three declines*

In twelve of these periods,

loans reflected the largest relative loss while Investments reflected the largest loss in three periods.

Loans reflected the largest relative loss

in seventeen periods while investments showed the largest losses in only eleven periods* The magnitude of these losses however reveals important differences* two hanks Increased their investment portfolio throughout the period and both contracted their loans*

The proportion of security depreciation

to funds applied amounted to J and 17 per cent respectively in spite of the fact that there was no net liquidation*

These same banks however

wrote off only k and 8 per cent respectively of their loan declines as a loss even though the deposit decline required severe Contraction.


the other two banks which reflected declines In both categories, one bank wrote out $2 per ©ent of its Investment decline and only 12 per cent of its loans while the other wrote off

per cent of Its investment de­

cline and only 2 per cent of its loan decline.

Principal recourse to

loans for contraction was an effort to evade heavier losses* confirmed this conclusion.

One banker said he

•preferred to call loans and hold onto investments because of deprecia­ tion**

Another banker **sold no Investments on account of the deprecia­

tion, bat did not renew loans because there was little loss**


tion in seme securities was s© severe that *©11 depreciation was not written out*; while la one ease, the banker *©v©rlooked depreciation...

A responsible officer in each of these four banks was interviewed.


*and Judged them (securities) at their intrinsic value11.

All of the

bankers interviewed indicated that the principal reason for depending upon loans for contraction was due to the necessity of minimizing losses* Outlying; Commercial Banks Examination is next turned to the losses sustained by the outlying commercial banks.

Throughout the whole three and a half years, the de­

cline In loans amounted to $4,809 thousand^

while losses during the

same period amounted to $168 thousand or 5*^9 P©r cent*

The continuous

pressure from depositors under which these banks labored and the persis­ tent reduction in the loan portfolio resulted in a relatively small pro­ portion of losses* The proportion of losses to the decline in the loan portfolio varied from a low of *95 per cent in the period ending in dune 195G to a high of 18*96 per cent in the period ending in December 1952, as shown in Table X.LII*

The small ratio first mentioned was also the period of the

minimum absolute loss*

But th© period registering the 18*98 por cent

loss was not due to the largest absolute loss*

This last mentioned period

reflected the smallest absolute decline in loans for any period, amounting to only $216 thousand,^ ^ to $1,587^^

whereas the largest decline for loans amounting

occurred in the period in dune 1951 but showed a ratio of

lose to decline of only 1*76 per cent*

There is little relationship dis­

played between the size of the decline and th© loss record.

Rather, since

the absolute amount of loss appears to increase through the three and a

( 1) w

App* V C.




zti 8

half years#



the amount appears to be mere a function of time than

of portfolio deeline. TAB IE x m mOFOETIOH OF LOSSES TO CHANGE IB LOAMS AKB IN?ESTMEOTS IN 0OTLYB5& COMMERCIAL BANKS^2 ) Lessee to Beelines in Leans and Discounts BOO. 51, 192? Jbas 5 0 . 1950 Boo. 51, 1950 A m o 5 0 , 1 95 1 Boo. 5 1 , 1951 am* 5 0 . 1952 Boo. 51. 1952 Total .........


lessee to increase* in Investments

6.1J% .90

.00% . 00

2.48 1-7(5

.56 5.59* 2.14 I6 .7 4 * 57.09* 29.29


1.54 18.98 5.49

Denotes decrease* These outlying commercial banks presented both increases and de­

greases in their investment portfolio* with three periods showing declines.

Four periods reflooted increases Through the period ending in Decem­

ber 1950, every period reflected an increase* total acquisitions amount­ ing to #598 thousand.^}

Bering the two periods ending in December 1929

and duns 1950# there wore mo writs offs.

During the succeeding period

ending In December 1950# Investments were Increased by 1X79 thousand sad write offs amounted to only -56 per cent of the funds applied.^^ This Increase in security holdings was typical of loan and Investment readjustments going on. during this period and rt.*. .undoubtedly furnished





Ay*. VI B.


App. VII E.


App. VII E.

H l w bast& for the strong bond market prevailing during most of 1950,*^^ while lessee during this period were neglig ible* The only other increase in securities was in the period ending In Pesetafear 1951 when the index mowed 5 per cent above the previous level and acquiaiilona amountad to $137 thousand.^2)

Total ftrad* applied

amounted to $1^K> thousand, including #5 thousand in losses which resulted to a ratio or loss to funds applied of Z* 14 per sent.

These additions

to the portfolio were thus about four times as expensive in terms of losses as were the next preceding security purchases, and acquisitions in this period were carried out in spite of continued declines in deposits and loans* Decreases in investments were recorded In three periods* those ending In dime 1951 and in dune and December of 195&-

The first of

these periods reflected the largest decline for any period* the Index {$} falling 5? per sent* This 1# explicable in terms of urgency, sines deposits and loans also recorded the largest declines in this period* In order to meet this contraction,

thousand of investments were

liquidated and losses sustained amounted to $51 thousand,^) per cent*

or 5*59

While the bend market during most of 195$ had been relatively

steady, nowing to unfavorable developments affecting the stability of the bend market in l^X**.***^^ fee accomplished with some loss*

& disposal of investments could only This marks th© first period in which


Availability of Bank Crodit, 3U»e. Cit., p. J4.



m m










1931 o




75 -


50 m £5 ~


l£ 030

2^\N §




at no U i w required to contract bank credit by external pressure, their policies could be adopted and executed with a deliberation not permitted under other circumstances*

Bine# it was not necessary to force collections,

shift securities rapidly, or appeal to other institutions in more propi— bleu# circumstances* such a record is not surprising This group ©f banks, as a whole, was singularly free from depositor pressure for the contraction of bark credit*

The only contraction which

was exhibited was due to a deliberate change in policy and this change re­ quired only a relative contraction*

While different categories of assets

were not managed uniformly, the net effect was an increase in the absolute volume of bank credit due principally to the increase in investments ac­ companied by a relative contraction*

Such a position during this period

f«s unique* Banks with Heoreaainjz: Deposits Here representative of the general banking situation during this period were the remaining thirty-*eight banks of which the group of loop banks with decreasing deposits Includes four*

This latter group reflected

substantial external pressure resulting in credit contraction, initiated lay movement© la deposits*

This is graphically shown in Chart XXVII.

t&l deposits at their lowest point declined 47 per cent,


requiring im­

portant steps t© offset the fall*

With two minor exceptions, there was no

respite in th© continued decline*

Th© most sever© decline as would be

/1\ #

Bee Oh* VIII for a discussion of circumstances conducive to borrowing*

(2 )

Table IT.

359 c m rn

ch art




50 -





30 -


SO -



10 -


7. trifi


'y y y rrz







40 -


-- JdCLL___ 30 -







^ 7___________\s;-7 ____

O ' -


/ 7 T7


expected, occurred in the demand category, a decline of 52 per cent being (1) registored at the low point* Time deposits on theether hand registered a maximum decline of only 20 per cent.v /

This latter category also was (K\ slower in reacting, an important lag being clear* An explanation of th© differences in behavior has already been givea^^

but the net effect

was a substantial decline in the total deposits of this group• This decline in deposits represented either adverse balances or cash withdrawals* and impinged directly upon the volume of primary reserves* In the first three periods,, each period reflected a declining reserve vol­ ume, totaling in a year and a half $1 mi 1lion*

During this time these

banks were content to permit a fall in the reserve ratio as indicated in 0hart XXVIII but beginning with the period ending in December 1950, the reserve ratio was increased substantially.

In the following two years while

the volume of primary reserves remained practically constant,

such a

trend in deposits would give rise to some concern with regard to the con­ tinuance and possible increase in the movement*

The most rational means

of anticipating such a development was an increase in the ratio.

Thus net

only was an absolute contraction required due to deposit movements but at the same time, a change in reserve policy Imposed a relative contraction* While only 19 per cent of total deposits were carried as cash at the be­ ginning, by December 1952 the proportion of cash to deposits amounted to more than 51 Per cent*


This meant that except for th© Increase In the





Chart II


App. IV B.


(7 )

ib id .


Ch. III.


increase in the ratio, during the last five periods, assuming the same distribution, an additional total of nearly $15 millions in deposits could have been carried except for this change. A policy of Increasing the primary reserve ratio must result in either a slowing down In the rate of lending or la an actual reduction in tfee earning asset portfolio.

Since primary reserves in this group of

basics remained on the whole relatively constant in amount, it was neces­ sary for these banks to reduce their bank credit by retiring loans or shifting investments.

This reduction in earning assets amounted to mora

than $1$ mlllien,^^

while total deposits declined only slightly lose

than this amount.

It was the movements in the latter category, gener­

ated externally, which forced an absolute reduction in bank credit* The net reduction in bank credit was a result however of diverse movements in both loans and investments. $18 mill ion.

Total loans declined nearly


An examination of earlier figures^^ reveals that rela­

tive dependence on the three principal categories was by no means uniform* Other loans, that is loans to business, declined loans

per cent, collateral

per cent and real estate loans only 19 per cent.

In porportion

to their holdings of these various classes, these banks reduced their bus­ iness loans to a greater degree than any other classification. Reasons f& \ for such a policy have already been examined but It is clear that re­ latively, business loans furnished the most responsive medium in the pro­ ceed of contraction.


D erl*© d from App. V 8 & VI B.


Table EC.

App. Ill 8™

Oh. V.


App. V B

Investments on the other hand showed a substantial relative increase as is Indies ted in ©hart XXVIII.

With only two except! one# there was no

period reflecting a decline and except for the first period, each period reflected a larger volume of securities owned than at the beginning date*^* This policy of expanding investments thus offsets to some degree the net contraction indicated by the loan policy*

The retirement of loans however

was in such a substantially larger volume as to resultin a net contraction Loans thus furnished all of the contraction and other loans were relatively the most important medium* Losses in the case of this group became extremely important*


furnished funds totaling nearly $18 million but of this amount J.66 per cent had to be written out as a loas*^^

As unsatisfactory as such a

record was, it was not so unsatisfactory as in investments in which account cent of the fhnda applied to increase this account had to be used to absorb depreciation.^^

In both categories, losses increased


tially in the last year and a half* Borrowings also loom -important in this group.

The bulk of the bor­

rowings appeared In the first two years but throughout the three and a half years, while loans declined In every period, investments declined in only two periods and then in unimportant amounts*

There appeared to

be a general disposition on the part of management to continue increases In investments In spit© of the fact that it was necessary to resort to outside financial help*


Table XXIX

App. VII E,



363 CHAR7

KM H .

for the maintenance^^

Seme claims are used

of their owners relatively Inflexible consump­

tion standard and they will expect to bridge the gap in their income by using all or a portion of their deposit **surplus*1* for an extension of maturity dates*

Borrowers also press

Since all banks are faced with a like

problem and since increased liquidity becomes Important, a mere reshuffling of reserves Is not sufficient*

It is necessary for the banking system to

retain its solvency, to mature its claims against its own debtors in the earn© amount as the creditors of the banking system generate an adverse balance against the system*

This therefore throws the backs back upon

their asset portfolio* As long as any paper remains in the system, no net contraction In bank credit can occur*

It is simple enough te shift paper from institution to

Institution, but the only manner In which contraction in th© aggregate may occur is by the exchange of an equivalent amount of bank credit, owned by those outside of the system, for such obligations.

The problem of the

banking system then la to contract its credit at the same rate that debts are presented to it*


Unless this Is done, insolvency results.

*Here th© maintenance of money consumption demand naturally has the effect of sustaining the prices of consumption goods.# (Ifardal, Gunner, Monetary Equilibrium, tendon: Win. Hodge, 1959, P* 17)* ****.the consuming habite of the middle and upper classes are fairly Stabilized and resist considerably any change, especially a reduction of their standards of living11 (Ibidf p. 166)*


T# meet this problem banka have two principal weapons* contract their leans or they may shift their investments* be m&de upon both convenience and coat*

They may The choice will

The steps with regard to loan

policy are a retardation In the previous lending rate, a complete cessa­ tion of lending, or an actual calling of leans*

This process impinge©

upon industry which la required to abstract from the market in the form of sales, more funds than it directs toward the compensation of the factors of production*

Since bank loans customarily provide a safety margin, the

decrease in market price occasioned by the increased flow of goods will in moat eases not endanger the loan but must be borne by the debtor* the latter has no alternative when a bank refuses a loan extension.

But The

principal point is that when the system requires a return flow of bank Credit, It may within limits command it through calling or refusing to re­ new leans* The alternative Is for the system to dispose of its long terra securi­ ties outside the barking system*

Some one must be willing to exchange pur­

chasing power in the form of bank credit for the asset* are unattractive because of reduced earnings*

But such assets

The public has already "saved1 1

in terms of real goods, due to previous aberrations in the price structure, and the banks have taken the evidence of such effects*

The publle has

not uniformly made the financial previsions for such an eventuality except in very modest proportions and individually is therefore not the owner of


"For banks instead of investors to absorb securities means that in­ vestors must hold bank deposits instead of securities* (Hardy, Ghaa. 0* Credit Policies of the Federal Reserve System, Washington: Brookings Institution, 1952, p* 355* In the contraction process the reverse must be true* See Oh* XVII passim)*

ft proportionate amount of bank credit.

Some depositor a will own more bank

deposit* and some less than the financial evaluation of the previous real savings would entitle them.

If in every case they were equal, ©r were

the units of Investment evidences properly divided, bank credit could be contracted by handing over to each depositor hi© pro rata share of the previously Imposed savings* nor could it*

Such a course does not square with reality,

Individuals expected they were keeping unexpended gener­

alized purchasing power but as a matter of fact, capital commitments have already been made for thee® owners by the banking system. ^

Faced with

the problem of a desire on the part of the banks for greater liquidity and thus reducing the previous securities market and finding that it is unable to encourage financial savings at this time on the part of the com­ munity, the banking system finds itself unable to contract Its investment portfolio and thus turns principally to loans*

In the final analysis the

question arises as to what the community is most willing to exchange for bank credit, goods, or evidences of Investment©*

The former is not only

th© simplest but th© most efficacious at the time which has been well dem­ onstrated by the banks examined*

**Investment (In the sense of the creation of real capital equipment) financed by bank credit was proceeding at a rate in advance of th© aecumulatlon of real saving11 (Phillips, McManus and Nelson, Op* Cit*» p. 115*)


The Problem of Objectives Th© successful building of a portfolio however can only be deter­ mined in the light of standards raised by the communityno unanimity of ©pinion as to exact objectives*

But there ie

By some It is held that

•'-.....the banking system should so conduct its operations as to remain a passive factor... .* %

from which point of view it can be said that

banks must remain the servant of industry.

Such an explanation ie akin

t© wonHayek*© concept of "neutral* m o n e y * S u c h passivity is practi­ cally unrealizable ainee rt* is to monetary causes that we must as—


©rib© th© divergence© ©f the pricing process- ...{l

Others urge a general

price level policy.' * There must be defined the kind of price level, whether stable, increasing or decreasing through time.

It is urged by

mome that "with plenty of money, there could be no great fall of prices and without a fall in prices, the subsequent links in the depression chain would be almost non-existent*.^^

(1) *

There Is thus a© agreement among the-

Beokbart, Benjamin B*, Qualitative Credit Control» Chicago: Associa­ tion of Reserve 01ty Bankers, 195^, p* 2* this must not be construed to© liberally since *© con©apt of neutral money was meant in the first place to be an instrument of theo­ retical analysis and not necessarily a tool of practical policy* (von H&yek, Frederick A*, Fric es and Production, tendon: Rout ledge, 1935, pp. 160-1* While it may be unattainable, it still remains an objective).

(3) vonKayek, Fried©rick A*, Monetary Theory and the Trade Cycle, ^ew York: Harcourt—Brace, 1952* P* 1&3*



But what price level? See Keynes, J* RU, A Treatise on Money, Loc. Cit*, V* I, Book 2, Ohs* XV, V and YXX* Also see Robertson, B- H., Money, Loc. Cit-, Cfe. VIII, "Monetary Policy* passim*


Fisher, Irving, 100^ Money, Loc* Git», p*


#rlflta a* to *bat tfe® objectives of8the banking Bystem should be* 0antral Banking authorities take a breeder view with regard to the general objectives of monetary and banking policy which objective **..• means the maintenance of as ft*11 employment of labor and of the produc­ tive capacity of the country, as can he continuously sustained* *^^


extent to which the basking cyst am In conjunction with the Central Bank authorities may bring this about by the manipulation of reserves and bank credit is limited since **..*priees are not controlled by the amount ear coat of money**

Both circulating media and bank credit were larger

In volume In 195$ than ten years earlier but prices had declined by 25 per cent*

The conclusion Is that *-*• •other things have a greater influ-

one© on price a than has -the amount of m o n e y * . T h e capacity of the Central Bark in its influence on the banking system is limited to pro­ viding the means for whtefe the end may be accomplished rather than insuring the satisfactory attainment of the end itself.

Once the Central Banks goes

(11 BftOuetary Measures and Objectives. Reprints of Statements by the Board of Governors of toe Federal Heserve System, Washington? 1959# p* 3L, *to sum up, the Beard believes that economic stability rather than price stability should fee the general objective of public policy*, p. 2 *

P* 5* *5)

XM*. P*

beyond this point,,


important, questions of1propriety are raised*

Sfor should it be supposed that th© statement of domestic monetary objectives and their accomplishment ean be carried forward in vacuo* Objectives of price level stability, purchasing power stability, full employment or any other criteria of banking policy can only be carried out in accordance with reality*

Where a monetary standard exists in

its classical form, the Central Bank *•* *.cannot afford to maintain credit conditions which are out of relation to those which obtain in the rest of the (international) system1**^^

To disregard such limitations would re­

sult in unnecessary and disturbing gold migrations*

Where countries be­

come divorced from the gold standards, manipulations designed to aid domestic policy may well be at variance with those dictated by interna­ tional problems*

Vested political and business interests also attempt

In recent years Central Banks have increasingly become th© tools of social policy* Th© Board has said that it feels strongly the neces­ sity of having the mechanism of monetary and banking control w.**at all times in condition to function effectively In the public interest* 1 (see Monetary Measures and Objectives, Loc.Cit*, p* 8)* One prim© consideration has been sinc© 195^ ****** to help maintain orderly condi­ tions in the market for high grad© bonds* (Historical Review of Objec­ tives, Federal Reserve Bulletin, April 19^0, p. 289)* '*In spit© of the nominal dissociation of the Reserve Banks and th© Treasury made in the Banking Act of 19^5# a real test of independence has not been made* (Smith, Ban T., Op* Cit*, p. 182). See also Committo© on Finance and Industry, Parliamentary Report, Hie Majesty*s Stationery Office, London: 19^1, Pt* I, Ch. XI, *Influence of Monetary Policy on the Price Lavel,* pp. 92—102 passim).


Report on Finance and Industry, Loc. 011., p* 105


to influ©nee monetary policy for their own primary benefit, both of which are apt to require diverse action*

11The government itself is in on© aspect a vested Interest; it la interested in borrowing as cheaply as possible for its own purpose* Hot only may the monetary authorities not be allowed to do what they think is beet, but various poli­ tical interests may face conflict* Any picture which seeks to describe the conditions of economic stability from one angle alone is very wide of the mark.M(1) The setting in which it is necessary as a practical measure to carry out any policy, no matter what its merits, is by no means simple.

There are

not only rigidities in domestic institutions but also In the international pattern*

These are decided limitations to effective and comprehensive

monetary and banking control.

It Is the setting however to which the

banking system must conform* Summary The barks examined in this study were like all banks faced with limitations within which they were permitted to operate*

Such reality

mist carry with It an ability to keep pace both In expansion and contrac­ tion with the system of which it is a part*

Expansion Is by far the *

simplest and easiest course to which to conform*

During such periods


however banks enter into competitive relations which may ultimately be detrimental to them*

Ordinary banking canons become obsolete because

during periods of expansion there is no demonstrable need to conform to them*

It is only when sustained contraction becomes evident that asset

deficiencies appear.

At this time It is necessary to offer assets of such

11The FUture of Monetary Policy*, Report of the Royal Institute of International Affairs* London: Oxford Press, 1955, p* 115.

420 a kind previously monetised which may be disposed of outside of the system*

It makes a substantial difference whether holders of

credit are tendered their own debt or the debio

another, in ex—

ft* The effectiveness in eontraction therefore lies in the extent of authority which may be exercised by the banking system as a whole over the outstanding bank credit* The principal problem originally posed was to determine and analyze the earning asset policies of a group of identical commercial banks which survived the 1^ 9-52 period unchanged in legal status as an aid in determining the ability of various classes of assets to meet the need for contraction* Only hi banks survived, while

115 like chartered backs in the same area

failed*^^ While interest Is aroused in the differences in policies between the two groups, a proper comparison would also require a study of the failed banka which would go beyond the scope of this study*

Both group a were required

to contract bank creditj one did so sweceesfully, the other did not*

The fore­

going analysis has detailed the response by th© surviving banks in terms of the original problem* It must not be supposed that the Identical policies found to exist in these surviving banks would insure the survival of any other groups, nor necessarily the same group at a different time*

Obscure qualitative

attributes of bank paper enhance or handicap contraction*

Important In­

formation could be gleaned from a qualitative analysis of the type of asset most responsive*

This would require a meticulous portfolio exsml—

It i# interesting to note that on Beceaiber 51* 1940, of the original i a8 banka were still in operation under original charters, 8 banka had paid off depositors and liquidated voluntarily, 1 bank had consolidated, 1 bank had converted to a National Charter, and 5 banks had been forced into receivership*



By such a study It might be possible to determine the re­

sponsiveness of various types of assets to the need for contraction from which might be formulated qualitative standards for future appli­ cation*

All that can be said for this study Is that loans were the

most effective medium* It must be added that the criticisms aimed at the policies pursued by the banks examined are by no means meant to reflect on management nor to belittle the attainment of their unique positions* to have followed successful policies by definition*

They were Judged Such policies as

have been evident were to a large extent dictated by the nature of the banking system, and criticism has been directed toward the system which requires such actions.

The managements of theee banks deserve more than

ordinary credit for having steered their institutions through the fi­ nancial maelstrom of the times* The detailed examination in the previous chapters leads strongly to the conviction that the problems of both the relative and absolute contraction in bank credit merit more attention than they have received* Here are problems of the first magnitude concerning which very little has been said, while the incidence of such changes are of concern to the economic system and the social order*

Furthermore, while these figures

relate to specific bank a, the problems themselves are general, differences in degree being the chief distinction*

If this be true, more frequent

attention, more discriminating examination and the formulation of sound canons for a rational policy of bahk credit contraction would be a boon to the more effective working of our banking system*


BIBLIOGRAPHY The htbliography has been arranged to provide for a ready reference, according to the foil owing plans and related subjectsf


special studies In hanking probins;

articles In technical journals;

hearing* and reports; (f)



(a) hooks on hanking


government publications,

pamphlets, art!else and speeches;

encyclopaedias and manuals;


newspapers and magazines.

Those works marked by an a atari ck (*} have been found to be parti* solarly significant fhr this study*

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February 1951*

♦American Bankers Association (Clearing—house Section) Come Bank Management Series: No* 1* Loan Administration Policies* No* 5* Secondary Reserves and Security Buying* No. 19* Investment Standards and Procedure* No.11* investment Policies of Banka* N&.21* Loan Administration Policies* American Barkers Association Research Council The Earning Power of Banks American Bankers Association New York: 1959* Anderson, B*M«J* *The Federal Reserve ‘Velocity1 Proposal11 Economic Bull* V* XII No.l April 1952 *


Anderson, B*M*«J* "Bank Money and the Capital Supply* Chase Economic Bulletin V* VI M©*5* Chase National Bank New York*

"Bank Expansion versus Savings" June 19&&*

♦Anderson, B*M*J*


Phase Sconomle Bulle­

Andersen, B* J* HA Critical Analysis of the Sank by Lauchlin Currie* Privately printed April 1935. Garter, A* 18* *A Balanced loan and Investment Policy* Great Lake® Banker February 1951* —— — — ~— “Committee and Officer®1 Reports* A* S. A* Savings Bank Division 56th Animal Convention A* R* A. Commercial and Financial Chronicle See*2 October 16, 1950* Davis, BSSitt *What sf the Bond Account in Today*® Market?* Banker June 1951•

Great lake®

Ellsworth, Fred ®*

11Bank Management ~ Yesterday, Today and Tomorrow* Commercial and Financial Oh row! ole Sec* 2 October 1951*

Gridley, 0* Carroll 19J2*

“Credit FundamentsIs*

Great take® Banker '

Harris, Clyde D* *A Ceimbry Banker*® Idea® on Buying Bonds" Bankers* Association Journal July 2, 1930* Harris, Clyde D“Bond® a® Secondary Reserve* otation Journal April 193* •

October American

American Banker®* Asao-

McCormick, H* F* *Es ta b1iehing Definite Policies* February 1931*

Great lake® Banker

MeLanahan* Austin entitled Address before A* B* A* Savings Bank Divi­ sion 56th Convention Commercial and Financial Chronicle See* 2 October 1930 • Osterhtt®, Gustav “Flaw Teeter for Bond 11®!®“ ciation Journal V* XXIV So*2* *FaXyi, Ifelchior 1936*


Flal star, Richard M.


“Our Bend Account*1

Price, Andrew “Bank Investments* Sec* 2 Hovember 1$52*

American Bankers* Asso­

Minnesota Bakers* Association Great Lake® Banker

June 1932*

Commercial and financial Chronicle

Prochrtow, Herbert V* “Some M o d e m and Safe Loan Policies** Banker July 195**

Great Lakes

Simon®, Henry 0* A Positive Program for Lai see® Fair® Public Policy Pamphlet He* 15 Harry D* Gideouse, Ed. Chicago: University of Chicago Press 193^Snyder, Press Brown “Heal Estate Loans** Robert Morris Association Monthly Bulletin Philadelphia: V* XII No.ll April 1930*

Snyder, George D* *The Heed for Credit; Bureaus in Country and Regional Clearing House Organisations* Robert Harris Associates Monthly Bulletin Philadelphia: F#XtIX No.12 May 1951* Stevens, Eugene 81* *ffee Function of the Commercial Bank** and Financial Chronicle See.2 October 1951*

Commercial '

Stronck, H# II# 8An Approach to the Problems of Bank Management* Commercial and financial Chronicle Sec-2 October 19* 1929* S trends, M. N* *Fundaments 1 Banking Policies and Principles*1 cial and Financial Chronicle Sec-2 Nor ember 1952*


Wall, Alexander 8Merchant Leans* Robert Morris Associates Monthly Bulletin Philadelphia: T* %lt iTxi April i95&* Wood, Mar old B*

8The Bond Account*

Great Lakes Banker

February 1951*

Eneyclopaedla of social Sciences. Moody*a Security Manuals. Palgrove, R. H# Xnglls

(Henry Higgs, Ed#)

Btetlonary of Political

Standard Statistics Base Book*

Hewgpapera and Magazines American Bankers* Association Journal* Bulletin of the Robert Morris Associates* Chicago Bally Tribune# Chicago Journal of Commerce.

The Commercial and Financial Chronicle. The Great lakes Backer (Formerly: The Illinois Bankers* Association Journal) Illinois Bankers* Association Chicago*

4 34 LIST ©r APFK3DICSS till#

i* i

Specimen Balance Sheet, a a Published by 'the Auditor Of Public Accounts tor the State of Illinois


Alphabetical list or Banks


*37 4 ^8

Index ©f Deposits in ffe m Loop Banka with Increasing

Deposits XXX B


*3 9

Index or Deposits In four Loop Banks with Rereading Deposits



Index mf Depoelta In Mine Outlying Oosssreial Banks



Index of Deposits in Twenty-five Outlying Saflngs Banks


Index of Deposits in Various Member and Hcn-Member Groups ot Banks


X¥ A

B«filrvl and Excess Iteaervea of Member Baines



Reserve Reties of four Groups of Chi cage State Banks


f A

leans of Three loop Banks with Inereasing Deposits



Loans of four Loop Banks with Decreasing Deposits


¥ 0

Loans of Mine Outlying Commercial Banks


¥ 0

Loans of Twenty-fire Outlying Savings Saaks


¥ S

loans of Various Groups of Member and Mon-Member Banks



Total Investments in Various Groups of Member and Mm-Memher Banks


¥1 B

Investments in Four Croups of Chicago State Banks



List and Prices of Thirty-six Industrial Bond#



List and Prices of Thirty-six Public Utility Bonds


¥XI 0

Idat and Prices of Tfclrty-slx Railroad Bonds






YXI 8 yxx



rtxt & YXXX S

In Four Group®


Chi e&go Stab© Bank®


Sttlo looses to fund© Acquired or Applied to Fottr droops of Chicago state Banks


proportion of lost to C t a g t in I i s m t a m i t tai loans 1st Ail t a l t r Bank© and national and State Member Beaks


Berroslng® of Various Hooter and Won-Mensber Banka



of Thro* 0 m p « of Chicago Stab* 475



Proportions X dtatrXtouiion Asa* to and Liabiliti e®

t o to r * * lo o p Sardto m


XX Q m


Proportion*1 Distribution Assets In F e w h o o p Bonk*

474 mmi


Proportion&X distribution Itftit and Mobilities to Hi** Outlying Oosssoroto! Btflii


Proportional distribution of iso*to and Mobilities to Tseaty-flv# Outlying Savings Banka







Specimen Balance Sheet as Published by the Auditor of Public Accounts Acme State Bank of Chicago John Doe, President Richard Hoe, Cashier Resources Cash, Other Cash Resources and Due from Banks 0. S* Government Investments Other Bonds and Securities loans as Collateral Security Other Loans Loans on Real Estate Overdrafts Other Real Estate Banking House, Furniture and fixtures (a) Customers Liability under Letters of Credit (a) Customers Liability Account of Acceptances (a) Other Resources (a) Total Resources Llabl 11ties Capital Stock Surplus Undivided Profits (Net) Reserve Accounts Demand Deposits Time Deposits Due to Banks Bills Payable He—di acounts Dividends Unpaid Letters of Credit Bank Acceptances Other Liabilities Total Liabilities

(b) (b) (b) (b)

(a) In collecting the data these four assets were summed into a single figure*

(b) In collecting ih© date these four liabilities were summed Into a


Semi-Annual Reports of the Condition of Illinois State Banks — Maditor of Public Accounts




Alphabetical List of Banks Name of Bank Aetna State Bank Amalgamated Trust & Savings Bank Austin Stats Bank Belmont-Sheffield Trust and Savings Bank Beverly State Savings Bank Boulevard Bridge Bank of Chicago Broadway Trust and Savings Bank Cosmop oil tan State Bank Drexel State Bank of Chicago Drovers Trust and Savings Bank East Side Trust and Savings Bank Edgewater Trust and Savings Bank Edison Park State Savings Bank Halsted Street State Bank Hamilton State Hank Harris Trust and Savings Bank Howard Avenue Trust and Savings Bank X-G Bank and Trust Company Lake Shore Trust and Savings Bank Lake View Trust and Savings Bank Lawndale State Bards: Main State Bank Mercantile Trust and Savings Bank Metropolitan State Bank Midway State Bank Pioneer Trust and Savings Bank Safety State Bank Second Security Bank of Chicago Security Bank of Chicago Sixty-Third and Haleted State Savings Bank Ska la State Bank South Central State Bank South Chicage Savings Bank State Bank of Clearing State Bank of West Pullman The Northern Trust Company The Stockyards Trust and Savings Sank The Upper Avenue lank The West Side Trust and Savings Bank of Chicago University State Bank West Thirty-first State Bank

Classification* o.S. L. o.s# 0.3. Q.C. L. O.S# 0.3* O.S. O.S# O.S* O.S. O.S. O.S# O.S. L. 0.0. 0.0# L* 0.3. o.S. O.C. L* O.S. O.C. O.S. O.C# O.S# O.S. O.S. 0.3. O.C. O.S. 0.0. 0#S* L. O.S* k. O.S* O.C. O.S.

*L. — Loop Bank 0*0* — Outlying Commercial Bank O.S. - Outlying Savings Bank Source:

Semi-Annual Reports of the Condition of Illinois State Banks — Auditor of Public Accounts

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