Recent Trends in American Banking • •

Ti I n fundamental change which has taken place under the present administration in the United States in regard to the attitude Of Gevernthent towards its •reSponsibilities to the citizen could not fail to be reflected in the banking system. Outwardly the Banks appear unaffected by the imposing • • array of Government lending agencies that have sprint lip around them, and except that the Federal Reserv=e Board will, under the Banking Act of 1935, be known as t I "Board of Governors of the Federal Reserve System,” 'ven the banking nomenelature.in this era of alphabetical tlesignatidif has been left undisthrbed. array of Government lending agencies that have sprint lip around them, and except that the Federal Reserv=e Board will, under the Banking Act of 1935, be known as t I "Board of Governors of the Federal Reserve System,” 'ven the banking nomenelature.in this era of alphabetical tlesignatidif has been left undisthrbed. however, there has been a stupendous change, both in 1 he composition of the assets of the banking system and in the extent and, direction of public control of bankirig • operations. • • To illustrate the contrast between the banking picture just before the Roosevelt administration assumed offiee and the present time, I give below a comparison of the principal balance7shect items of the .Member Banks of the Federal Reserve System as of early 1983 and September 18th, .1985, as well as a similar comparison for the Federal Reserve. Banks : Comparison of Principal Balance.Sheet Items Member Banks of Federal Reserve

(In millions of Dollars). System.

of Reporting * Sept. 18th, 1935 Jan, 4th, 1933

18,713 19,084 10,214 7,465 8,499 11,619 5,205 8,648 3,294 2,971 2,271 4,254 • • 17,861 21,307 "'Figures for Reporting Member Banks represent about 75-80 per cent. of those for all Member Banks.

Federal Reserve Banks.

Jan. 4th, 1933 'Sept.'I8th, 1935

Total Reserves ..„ ... 3,353, 6,794.

Total Bills discounted and bought 284 13 U.S. Government Securities .. 1,850 2,430 Notes in circulation .. 2,737 3,430 Deposits 2,587 5,609 RISING. GOVERNMENT SECURITIES.

As will be seen, an increase of $2,000 millions in the nash resources-of.the-IVIember. Banks.-has ..been ,aecorn-

Loans and Investments,.

Loans Investments Of which : Government Securities Other Securities .. Cash Resources ..

Deposits • • "

partied by a decrease of $2,750 millions in the commercial loans and discinints, whilst holdings of Government securities have risen by $8,401) millions. Compared" with. total earning assets, Government securities early in 1983 represented 27 per cent. against 45 per cent.. now. .. The excess reserves abiiVe legal 'requirements • of the members of the Federal Rekrve ,System aniounted to the vast "sum. of $2,620 millions 'at the end of September last. • • An exact computation of the credit structure that could be reared on these reserves is not practicable, as -in t he United States a much larger proportion of new credit extended finds its way into circulation in'. the form of notes than is customary elsewhere, but we may safely place the figure of potential credit-creating power at well over $10,000 millions. .„ • 4 The Federal Reserve Banks themselves naturally . reflect in the composition of their assets the trans- formation in the assets of their members. - At the same time the Cash Reserve held by the Ifederal Reserve l3a,nks has increased by $3,441 millions since earlY.1033.: Sceing that the ratio of reserves to depiisit and Federal Reserve note liabilities at Ant 75-per Cent; is vastly in excesS,of . the-minifnum requirements, the Reserve Banks would be iii a position to supply to Menaber banks a huge ninontit of lidditional credit, which, as Bankers' cash, could again serve for several; times that figure of new Member Bank credit, in addition to that justified- by existing excess reserves of Member flanks above referred to. , A lIrraosPEcT. -' Having .thu$ outlined. the phenomena, it may 1 be not interest roughly to sketch recent Ainerican 'banking history:. so that. we may undeptand 'the probleM with whin the American banking world is confronted at present.

The Strongly.' individualistic sentiment Of a, pioneer community hail combined with lack of,,pcilitieal eohcsion in the realm of government to make the banking system of the United States a vast conglomeration of lietero.- geneous Units. The establishment of the Federal Reserve System some twenty years ago was the first comprehen- sive step towards a measure of uniformity of policy in the banking system. It must be remembered, however, that membership was compulsory only for National Banks, Whilst adherence :by State Banks was voluntary, and minimum capital requirements eliminated.a large number of State Banks. Even on June 80th, 1984, there were still close on 10,000 Banks outside the system, with total resources of close upon $20,000 millions, as against 6,880 Banks, with total resources of $37,500 millions, within its orbit.

Coming, as it did, at the beginning of the phenomenal transition of the United States to the position of a world industrial and financial power, the Federal Reserve Systeni permitted American Banks engaged in inter= national business to discharge in some degree the re- sponsibilities which, as a result of the War, fell upon their shoulders. The .vast bulk of. American Banks, however, were not concerned in international trade at all, and their interests were regional—nay, in most cases, parochial. Try as it would to encourage a banking mentality inspired by conceptions of commercial banking such as. obtained in the older banking countries, particu- larly Great Britain, the Federal Reserve System could, with such material to work upon, hardly be other than an adaptation of the prevailing banking methods in the United States.

Ma. ROOSEVELT'S PROBLEM.

The principal characteristic of American banking has always been its rooted preference fOr securities. Many of the more important Institutions derived a large pro- portion of their profits from underwriting and participa- tion m public issues. It is not surprising,. therefore, that the enormous potentialities for the creation of credit, which the inflow of Gold in the 'twenties pro- vided, should have culminated in a debauch of credit on the basis of securities, le which much Of the sUbsequent sufferings of the nation must be ascribed. . . Roosevelt administration, on its accession, was confronted with two financial problems ; the first, to insure the smooth absorption of the huge volume of Government credit that would have to be created in Order to re-start the economic life of the country ; and, secondly, to safeguard the country against the recurrence of the abuses and excesses that had led to the collapse 01 the banking system. If it is realised how great was the influence which Wall Street exercised over Washington, the achievements of the Roosevelt administration in curbing the licence With which banking in the United States was conducted will be appreciated in their true greatness. By successive steps the need for credit facilities. in different spheres of economic activity was met by the creation of specialised agencies equipped with capital and with borrowing powers. At the same time, provision, was made for the absorption of the obligations of these Institutions, or, failing this, for the issue of currency. In practice, no difficulty has been encountered in the placing of the evidences of indebtedness of the new lending agencies, i 6f which there are 17 in existence, with estimated assets', so far of $11,000 millions.

THE NEW BANKING ACT.

Simultaneously, by the Banking Act of 1988, now, slperseded by that of 1935, steps were taken to eliminate from the banking structure the obnoxious features that had conduced to its downfall, and to introduCe safe- gUards against undue credit extension. . The insurance of deposits, which was incorporated in the 1938 Act on a temporary basis, is made permanent by the 1985 law, and applies to deposits up to $5,000 only. The assessment iS 142th per cent. per annum on the dOosits of the Banks who participate in the scheme, which is compulSory for all ineinbers of the Federal Reserve System. The hardship to. the larger Banks with a low Proportion of small deposits should on this basis not be an unduly heavy_ one._ .State Banks with certain minimum deposit qualifications must join the Federal- Reserve System in order to remain insured after 1941. : It is calculated that this will bring 2,500 more Banks into the Federal Reserve .System.

Credit at the Federal Reserve Banks is made dis- cretionary with the latter, instead of being mandatory upon them. On the other hand, the range of assets on which the Federal Reserve 'Banks may lend is practically un- limited within the restrictions placed upon member Banks in regard to various categories of operations. Thus, real estate loang are limited, in the aggregate to 60 per cent. of time and savings deposits or 100 per cent. of 'capital and surplus of the member Bank, whichever is the greater. Member Banks are exempt from any limitations. in the purchase for their own account of United States Govern- ment and Government-guaranteed bonds.

The segregation of deposit and security banking is maintained, and so is the prohibition for Banks to lend out funds against securities for the account of third parties.

UNIFICATION OF BANKING POLICY.

The Board of Governors of the Federal Reserve System, together with five representatives of the Federal Reserve Banks, will form an Open Market Committee, which has complete authority to decide upon Open Market. policy, thus ending the confusion and division of responsibility hitherto existing on this point. The right is given to the Board of Governors of the Federal Reserve System to raise reserve requirements of the member Banks. up to double their present proportions, which should prove a valuable weapon in the event of signs of speculative excess. The prohibition to pay interest on demand deposits is maintained.

For the first time in the history of banking in the United States a degree` of unified control over the extension of credit 'promises to becorn.e a reality. At each successive stage in the New Deal dire pre- dictions of imminent disaster. have not been wanting. 'In the domain of banking the critics have been ex- iccptionally virulent. The bogey of political inter- ference, which in the United States in view of the ad- mittedly low standards in politics is a more formidable one than elsewhere, has been incessantly paraded before the public by those who strenuously object to restrictions of freedom in their activities. Yet it • had been clearly demonstrated that some of these activities were inimical to the interests of the community, and if the position is examined without bias, it must be recognised that, so far As State intervention in banking is concerned, it is fully justified by the flagrant violations of sound banking principles which had been committed. • After all, any banking -system 'depends on the confi- dence of its customers, and without- Government aid that Confidence would have been permanently destroyed when the Banks throughout the United States had to close their doors.

FUTURE GOVERNMENT CONTROL.

Under conditions such as prevail in the United States the attempt to keep the Government out of monetary policy and the management of the nation's bank deposits out of polities must be increasingly recognised as futile. It is meet and right, in view of the failure of the Banks themselves to safeguard this trust, that the nation Should intervene in the control of these vast resources. It is the will of the nation, too, that the Government Shall spend more-than its revenue, at least for the present, in order that forces might be set in motion that will lead to a resumption of normal economic activity and de- liverance from the scourge of unemployment. The nation should be aware that this involves the absorption by the banking system of evidences of Government indebted- ioess so that a gradually growing proportion of their savings are invested in that form. They should also be aware that the creation of new money, which Government deficits involve, must entail a rise in the price level. Both these trends are in full swing. So far as the bank invest- ients arc concerned, the figures furnished at the outset of this article afford eloquent testimony. --There is,- of -course; •a' real danger that continuance of ).+Inbalanced budgets will, in the long run, cause the price level to rise out of relationship to purchasing power. f we remember the sweeping reforms that have been carried through by the President and his, advisers in the face of unparalleled difficulties, it is not to be assumed that he will ignore this important feature. It is rather to be anticipated that in due course the definite deter- mination gradually to reduce excessive spending will be announced, that past expenditures will be funded into long-term loans, the service of which would be well within the capacity of a community restored to prosperity by the re-establishment of a profitable price level for pro- ducers, and that thus once again the dark forebodings of Unconstructive critics will be set at nought.

S. S. METZ.