284

AUTOBIUGRk PHT

I, Uharles Silvus Overrailler, wa3 born in Vililkes-Barre,

Pennsylvania, April 21, 1920. 1 received my secondary school

education in the public schools of the Uity of Uarrisburg, Penn­

sylvania. My undergraduate training was obtained at ohio Wesleyan

University, from which I received the degree bachelor of arts in

1947* from The uhio State University, 1 received the degree haster

of Arts in 1948. While in residence at The Ohio utate University,

I was employed as a Graduate Assistant, Assistant, and assistant

instructor in the Department of hconomics. In 1950, I accepted an appointment as Assistant Professor at Louisiana State University. 2*3 Btewartl, w. B. , "Shifts in the Geographical and industrial rattern of economic Activity", The American economic neview, Volume AXXVI, Number 2, May, 1946.

bykes, J . , “Larger Banks Not Necessary to Meet Demands of Business", Chain. Group, and branch Banking, New lork, The H. w. Wilson Company, 1930. xrant, J. B., Bank Administration, New lork, IcGraw-nill, 1931*

United otates Department of commerce, Survey of current business, April, 1950; March, 1946; December, 1949.

United btates census Bureau, compendium of the oeventh census of the United States, Washington, 1850.

United States oenate, Economic concentration and world War 11, Document number 6, Washington, 194&7 vanderlip, F. A., “Rediscount runctions of Regional yanks", Banking and Currency in the United States, hew lork, Columbia University Tress, 1913.

wallich, h. C., "The Changing Significance of the interest Kates", The American Economic Review, Volume aJCXVI, December, 1946.

Warshaw, R. 1 ., The Story of wall Street, new York, Greenberg, 1929.

Westerfield, R. B., Historical Purvey of Branch yanking in tne unitea States, New lork, American economists council for the otudy of Branch yanking, 1939* white, H », Money and banking. boston, Ginn and Company, 1914.

Whittlesey, C. R., Trineipies and rractices of Money and banking, i.ew York, Macmillan and Company, 1948.

, The Banking by stem and war Finance. National bureau of Economic Research, New lork, 1943.

Young, A. A., An Analysis of Bank Statistics for the °nited utates, Cambridge, Harvard University rress, 1928. loungman, A., Hie Federal Reserve System in wartime, National Bureau of Economic Research, New lork, 1945* 282

Lee, F. E., "The postwar Pattern of American Banking", Commercial and Financial Chronicalt September 6, 1945.

Madden, J. T., and M. Nadler, The International Money Market, „ew York, Prentice-Hall, 1935.

Mikesell, R. F., "international Disequilibrium", The American Economic Review, June, 1949.

Moody's Manual of inves tiaents, Dew York, 1951.

"Multilateral clearing for Europe", The Banker, January, 1946.

Murphy, u. C., National Debt in mar and Transition, hew York, .-.cGraw- Hill, 1950.

Musgrave, R. a ., "Credit Controls, Interest ;tates and Management of -Public Debt", Income, Employment, and Public Policy, New York, Norton, 194-8.

Myers, M. G., The New York Money Market, Volume I, New York, Columbia University press, 1931*

National City Bank of Lew York, Monthly Letter on Economic Conditions.

Poole, K. E., Fiscal Policies and the American Economy. lew York, Prentice-Hall, 1951.

Powell, E. T., The Evolution of the toney Market, London, 1915.

Report of the Subcommittee on Monetary, Credit and Fiscal Policies of Joint Committee on the Economic Report, united States Senate, Document 129, 81st Congress, 2nd Session.

Rosa, u. V., "impact of the >*ar on the member Banks, 1939-1945", Federal tieserve rostwar Economic Studies, Number , Washington, 1947*

Robinson, R. 1., 'The Management of Bank Funds, New lork, >.cGraw-nill, 1951. Southworth, S. D., Branch Banking in the United States, New iCork, McGraw-Hill, 1928.

Spalding, rt. F. , The London Money Market. London, Sir I. Pitman and Sons, 1930-

Standard Corporation Records. New lork, 1948. 281

Eiteman, 4. J., "Economics of wanker's Loans", American Lconomic Review, March, 1932.

Federal Deposit Insurance Corporation, Annual Report, 1949, 1959.

Federal Reserve Bank of Hinneapolis, The Future of northwest dank Deposits. March, 1946.

Federal Reserve Bank of New lork, Monthly Review, “Marketing of Treasury bills", Volume 33, dumber 10, October, 1961.

Financier Company, History of the new York Stock Exchange, uew York, 1887. Hansen, a. H., Financing American Prosperity, dew York, Twentieth Century Fund, 1945-

______, Fiscal Policy and Business Cycles, new York, Norton, 1941.

______, Monetary Theory and Fiscal Policy, dew York, McGraw- Hill, 1949.

Harris, S. E., Twenty Years of Federal Reserve Policy, Cambridge, Harvard University Press, 1933*

Hart, A. G., Money, Debt and Economic Activity, Few York, Prentice- Hall, 1948.

Hoover, C. B., and B. U. Ratchford, Resources and rolicies of the South, New York, Macmillan Company, 1951.

Institute of international Finance of New York State university, "Effect of the ,tar on the Commercial Banks of tne United States", Bulletin, Nuraoer 122, September 19, 1942.

______, "How to Read the New York Money Market", Bulletin . Number 109, March 25, 1940.

Keynes, J . M., The General Theory of Employment, Interest, and Money, New York, Harcourt, Brace and Company, 1936.

Kuznets, S., National Income and Its Composition, 1919-1938. New York, National Bureau of Economic Research, 1941.

Lawrence, J. S., Banking Concentration in the Uniued states, New York, Bankers Publishing Company, 1937. 280

SELECTED BIBLIUGRAPHY

Amtell, J. W., The Behavior of Money. New York, McGraw-Hill Company, 1936. bag®hot, N., Lombard Street, London, E. P. Dutton and Company,

Beckhart, B. J., and J. G. Smith, The New York Money Market, Volume II, New York, Columbia University Press, 1931.

Board of Governors of the Federal Reserve System, Annual Report3, 1928, 1941, Washington, D. C.

______, Banking and Monetary Statistics, Washington, 191-3*

______, Debits and Clearing Statistics, Their Background Interpretation, Washington, 191-7.

Bopp, K. R., ''The Agencies of Federal Reserve Policy", University of Missouri Studies, Volume X, Number 1, October 1, 1933.

Bourne, H. R. F., English Merchants, London, 1886.

Burgess, W. R., The Reserve Bank3 and the Money market, lew York, Harper Brothers, 1916.”

Cartinhour, G. f., Branch, Group and Chain Banking, New York, The MacmilLan Company, 1931.

Chapman, J. EL, Concentration of Banking, New York, Columbia University Press, 1931*

Childs, C. F., and Company, "An Era in Kmerican rublic finance", Investment Bulletin, Lakeside Press, Chicago, 1951-

Coiaptroller of the Currency, Annual Report, 1921.

Conant, C. A., A History of Modern Banks of Issue, New York, G. P. Putnam*s Sons, 1927*

Dewey, D. R., "State Banking before the Civil War", National Monetary Commission Report. 1910.

Dice, C. A., and P. P. Schaffer, "Neglected Components of Money Supply11, American Economic Review, Volume 29, September, 1?3?>

Sinzing, P., "International Currency Clearing", Red River plate, May 21, 1943. 279

APmiDIX D

Demand Deposits of All Member Banks ana of Banks in New York Distract as uf r,nd of Year, 1930-1950 (In millions of dollarsJ

All New York as Year All Member New iork a percentage Banks Banks of Votal

1930 $ 24,017 £10,055 41.87%

1931 19,947 8 ,3 2 0 41.71 1932 18,937 7,985 42.17 1933 18,909 7,6o6 40.54 1934 24,533 1 0 ,1 3 0 41.29 1935 28,413 11,637 40.96

1936 32,159 12,ol9 39*24 1937 29,551 1 1 ,4 0 1 3«. 58 1938 3 2 ,0 5 6 12,539 39.12 1939 37,693 15,428 40.93 1940 44,308 18,813 42.46

1941 49,421 19,400 39.25 1942 65,524 1 6 ,3 6 1 24.97 1943 76,994 18,195 23.63 1944 91,658 21,652 23.02 1945 105,460 23 , 008 21.82

1946 90,980 18,110 19.90 1947 94,188 1 9,8 6j» 21.09 1948 9 2 ,5 2 2 19,347 20.91 1949 94,725 22,^31 23.57 1950 102,084 25,174 2 4 .6 6

1951 (August) 98,623 21,874 22.17

Source: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, (Washington, 1941), pp. 711-722; and Bulletins - Feoruary Issues, 1941-1951> and December, 1951. 278 APPENDIX C (Continued)

linkl»i Facilities and Deeand Deposits by Stats, as of End of Year, (945*1950

Total Cssaercial Branch Total Bank Total Oensnd Oenand Deposits Bank Off Ices Facilities deposit* * per Bank b State

1945 1950 1945 1950 1945 1950 1945 1950 1945 1950

Tennessee 299 295 6l 98 354 393 1588 1602 5420 5430 Tenaa 843 905 20 12 863 917 5456 6806 6472 7520 Utah 57 55 19 24 76 79 401 409 7035 7436 Veraont 72 69 9 If 81 SO tio 103 1528 1493 VIrgiaia 914 313 •9 114 403 427 1357 1382 4322 4415

•aehingten 122 ilS M 2 144 234 262 1647 U 73 13500 12483 ■oat VIrglrla 179 ISO 1 0 ISO 180 660 694 3687 3856 ■tecoasfn 555 551 146 152 701 703 1783 1875 3222 3403 lyealag 56 53 0 0 56 53 171 226 3054 4264

Total 14011 14015 3947 4824 17958 18839 119898 119322 -- --

1950 as a percentage of (945 100.29* 122.229 104.90*

National Average $66?7e $6281* $8557 $8443

!• In all I ions of dollars, b* Is thousands of dotlars. s..Average aooputad for Total Sanfcfag Facilitlss tours*■ Adopted fron Federal Neeerve Bulletins. Statistical thtri&t Si ilLS United States, and Asnost Nesorta of the Federal Deposit Insurance Corporation. 27? APPENDIX C

Banking Facilities and Oenand Deposits by State, as of End of Year, 19*5-1950

Total Connoretal Branch Total Bank Total Denand Deoend Deposits Bank Offices Fact 1 It)as Deposits * per Bank 6 State

19*5 1950 19*5 1950 19*5 1950 19*5 1950 19*5 1950

AIabase 216 225 25 26 241 251 1085 1014 5023 4506 Arizona 11 10 3* 55 *5 65 290 371 26363 37100 SrktSsasi ■ 215 292 22 19 23? 251 683 747 3177 3220 fat Ifsen la 209 192 891 979 1099 1171 8449 8124 *0620 42312 Colorado 139 1*8 * * 1*3 152 897 992 6500 6703

Connecticut 125 10* 16 50 141 15* 1167 1301 9336 12510 Delaeare 40 38 13 20 53 58 *13 *45 10350 II7II Oiatriot of Colusbia 21 19 3* ♦5 55 64 857 935 40810 4921 1 Florida 175 191 • 3 5 188 •96 1524 1644 8709 8607 Georgia 906 597 32 42 338 *39 1563 1462 5108 3683

Idaho *6 43 *0 55 86 98 928 338 7130 7860 111 inols 851 888 5 2 856 890 9685 9861 11381 11105 Indiana *91 486 79 109 570 595 2155 2393 4389 4924 loea 6*6 662 156 16* 302 826 I663 1842 2574 2782 Kansas 615 612 3 A 618 612 1421 1517 ?3!1 2*79

390 381 4* 425 426 1396 1390 3579 3639 Louisiana 151 165 IS 77 21? 242 138? 1559 9152 9*12 Mains 62 62 66 70 110 IJ2 300 257 *68? 4145 Maryland 170 16* 90 119 260 283 13*1 1253 7888 7640 M|ssachusetts 187 176 137 176 32* 352 3931 ?S50 21021 20739

MIchlgan *3* 437 179 259 6ll 676 303* 3619 7023 8281 Minnesota 678 678 6 6 684 684 2086 2083 3077 3072 Mississippi 202 201 51 68 253 269 693 684 3*03 M ioseurI 592 595 5 I 597 596 3648 3879 f S & 6519 Montana III MO 0 0 111 n o 417 *84 3757 440C

Nebraska *10 *11 2 2 412 *13 1165 »235 2841 3005 Nevada 8 8 16 19 24 27 112 117 14000 1*625 Nee Naapshlre 65 7* 3 2 68 76 165 167 2538 2257 Nee Jersey 352 321 131 •65 483 456 2818 2840 8006 8847 Nes Mexico *1 51 7 15 48 66 2 35 31* 5732 6157

Now York 690 627 671 782 I36 I 1409 33557 28290 *8633 45120 North Carolina 229 208 150 218 379 426 1527 1504 6668 7231 North Dakota 151 150 £5 22 176 172 379 405 2510 2700 Ohio 677 659 175 226 852 885 j9*2 5213 7900 7910 •klahoea 980 384 4 1 38 * 305 T368 1605 3 C00 4180

Dragon 72 69 72 102 144 171 1057 1037 14681 15C29 Pennsylvania 1027 965 lie 193 1145 1158 7615 7706 7415 7985 Rhode Island 25 15 *5 49 70 64 500 480 20000 32000 Booth Carolina 1*5 I4B 30 *9 175 197 562 584 3*76 39*6 South Dakota 166 169 ** *9 210 218 336 *15 199* 2456 APPENDIX B (C o n tin u e d ) 27to Selected Net lot of Inturtd Ceooercial Banks* by State* December 30* 19*9

Proportion of Ratio of total net profits Ratio of Net Ratio of capital ac­ after taxes profits after dividends to counts to retained in taxes to total total capital total assets capital capital ac­ accounts accounts counts

■ashIngton 5.65 68.65 10.711 3.575 Rest Virginia R.l 63.0 8.82 2.82 RisconsIn 6 .0 6 7.1 8.07 2.65 Ryooing 5-4 7 2 .6 t t .43 3.13

Un itod States 6.9 57.4 7.98 3.40

Sourcei Fedcrel Deposit Insurance Corporation* Annual Report. (Raahington* 1950)* p. *7. APPENDIX B 27 ^ Selected Ratios of Insured Connercial Banka, By State* Decenber 3°» 1949

Proportion of Ratio of Total net prefita Ratio of net Ratio of capital i > after taxes prof i ta after dividends counta to retained In taxea to total total capi total aaaeta capital capital »c- account* accoun ts counto

AI tbim 6-71 64.75 9.83< 3.475 Arizona 4.8 65.1 11.99 4.19 Arkansas 6 .3 69.5 11.75 3*59 California 5.4 51.7 1 1.70 5.65 Colorado 5.9 71.1 10.26 2.96

Connecticut 7.6 52.4 6.80 3.23 Delaware 9-6 46.9 6.97 3*71 District of Coljnbia 6.3 47.9 7.30 3.81 Flor Ida 6.2 75.7 10.52 2.55 Oeorgla 6.8 61.1 10.49 4.08

1 daho 4.9 84.8 >2.61 1.91 111 i no i a 5.8 67.1 9.13 3.02 Ind iana 5.3 71.7 a.6s 2.45 Iowa 6.2 73-4 11.02 2.93 Kansas 5.8 73-3 11.23 3.00

Kentucky 6.9 64.4 9.19 3.28 Lou 1 a tana 5.1 72.0 10.12 2.93 Maine 8.8 6l.O 7.16 2.79 Maryland 6.6 54.4 7.41 3.38 8.2 40.4 5.73 3.42

Michigan 5.4 62.7 9.08 3*38 Minnesota 6.2 65.3 9.27 3.22 Mississippi 6.0 67.9 10.15 a. 26 Miaaourl 5.8 6 4 .3 9.93 3*55 Montana 4,2 45.4 7-58 4.14

Nebraska 5.8 69.3 10-78 3.26 Nevada 5.6 84.9 12.04 1.51 'lew Hampshire 10.3 58.2 5.59 2.34 Nan Jeraey 6.7 70.5 9.20 2.72 New Mexico 4.9 73*) 13-95 3*75

New York 8.4 33.9 5.(9 3*44 North Carolina 6.5 75.8 12.01 2.90 North Dakota 5.0 70.2 13.14 3.91 Oh io 6.1 67.0 8.20 2.71 Oklahoma 6.4 C9.3 11.24 3.40

Oregon 6 .0 75.5 10.40 2.55 Penney1 van ia 9.7 52.2 6.31 3-02 Rhode 1 aland 7*3 48.2 6.07 3.14 South Carolina 6.0 67.4 II.06 3-61 South Dakota 5.5 72.B 13.01 3*54

Tenneeaee 6.1 67.3 10.19 3*33 Texas 5.5 60.1 9.52 3.90 Utah 5.9 61.4 11.04 4.26 V ament 10.1 56.9 6.30 2.72 Virginia 7-3 6 2 .7 9.12 3.40 274

aPPi^HDIX A

CoiMnercial Banxs and Branch Banks, 1920-1950

Unit Banks as Year Number of Number of i umber of Number of a Percentage Commercial Branch Branches Banking of Total Number Unit Banks Systems Offices of Banks

1 9 2 0 28,557 530 1,281 30,348 94.14 1 9 21 29,241 547 1,455 31,243 93.o 1922 2 8 ,8 4 8 olO 1,801 31,259 ■2, 3 lv23 2 8 ,2 0 6 671 2,054 3-0 93 -L 91. 2 1924 27,479 7ob 2,297 3o,482 •^o • J~ 1925 27,919 719 2,524 3 1,lb2 8V.6 1926 2 0,0Q8 743 2,701 29,452 8 8. 3 1927 25,061 739 2,912 28,71? 87.3 1928 24,194 774 3,136 28,104 3b. 1 1929 23,263 763 3 ,j>49 27,i75 85-0 1930 2 1,4 2? 750 3,518 25,690 83.4 1931 18,653 722 3,463 22,838 8I .7 1932 17,122 680 3,191 2b,993 81. b 19 33 1 3 ,8 6 8 572 2,744 17,184 81.0 1934 14,807 712 2,966 18,485 80.1 1935 14,556 803 3,113 18,472 78.3 1936 14,280 840 3,228 18,348 77.8 1937 13,953 890 3,367 18,210 7o.6 1938 13,747 905 3,401 13,053 76. ]. 1939 13,499 921 3,449 17,869 75.5 1940 13,390 954 3,525 17,369 74-9 1941 13,209 968 3,558 17,735 74.5 1942 13,141 998 3,596 17,755 74 • 1 1943 12,937 1 ,0 9 7 3,76 7 17,831 72 . 6 1944 12,850 1,142 3,924 17,916 71.7 1945 12,889 1,122 3,947 17,958 '71. 9 1946 12,951 1,093 3,981 18,025 71.8 1947 13,062 1,119 4,161 18,342 71.2 1948 13,005 1,166 4,349 13,520 70.2 1949 12,930 1,226 4,579 13,735 69 - 0 1950 12,895 1,226 4,843 18,964 68.0

Source: Bureau of the Census, Historical Statistics of tne United States, 1789-1945 . (Washington, 1949)» p* 270. 273

significance; quantity and quality controls will have to be employee if munetary regulations are to be of any use.

The necessity of using two types of monetary controls becomes even more important when it is recognized that money cenas to flow out of the estaDlished money markets during m e expansion phase of the cycle and into the money markets during the depression phase.

To use quantitative controls alone during either one of mese periods will merely speed up the flow and not control it. because of the tendency of money to flow out of the money market during the expan­ sion phase, tight money conditions usually ap;ear first in hew York.

The traditional "hiking" of interest rates instead of controlling the financial strain, really added to it.

Again we have tight m-mey in the money :i£trket and at a time when the Treasury is in need of large amounts of funds. The Federal Re­ serve, whether it wants to or not, will come to the rescue of the

Treasury » 272

un the basis of these implications, it is possible to make certain recommendations for control of money and banking in this country. of course, the most effective means of controlling monetary concentration would be to control the concentration of business.

Steps have been taken in this direction. The war brought with it a stimulant to the decentralization of industry as far as location is concerned. Furthermore, it is expected that the years ahead vill witness a further effort to reduce the concentration of our large factories. Industry seems to be on the move, and in time new money centers will be established. Large industries are now a part of the

American way of life; the advantages of large-scale production ap­ parently outweigh the disadvantages. The war, in addition to making large firms larger, also dispersed one industrial might of this coun­ try. Along with this change went the dispersion of money. The war was a better regulator than the direct controls of the government.

Since business is subject to so many changing factors which do not always lend themselves to the purpose of policy making, monetary controls will also have to be used to prevent the shifts in ra^ney in bringing about regional and national hardships. Alien money is analyzed from the point of view of + he Clearing Principle, it can oe seen that some controls of money are relatively weak instruments to regulate the economy. It is true that by controlling money supply, certain restrictions can be imposed on business; however, it remains that a control of the economy based on quantity controls of money i3 not a policy at all, but rather a hope. The quantity of money has little 271 but the underlying forces of our economic system--the forces m a t brought about the concentration in the first pL&ce. The Industrial expansion in other sections of the country was responsible for tne establishment of other m^ney narkets. jT.gain hew York funds :ound higher profits elsewhere.

The tendency of money to decentralize during tne present emer­ gency could present as grave a problem to the Federal tieseive toaay as the problem of concentru tion ill a during tne early 1900's. per­ haps tne federal Reserve would like to promote a little more con­ centration so that more funds would be in the market to absorb tne large amounts of government securities now being issued. Slice the

Treasury prefers to maintain low service costs on tne debt by con­ centrating issues in short term securities, the money -arket will be called upon to buy a large f>art of t.iese securities, a task tnat poses serious problems under the present not-so—easy money conditions.

A great nelp to the Federal Reserve would oe the return flow of funds to the money market, but this is not expected as long as we are in

the prosperous phase of the business cycle. fhe Federal Reserve will be called upon to absorb more government securities or to relax credit conditions in the money market. The latter would net be effective ue- cause the credit would probably flow out of the market and not be available for future issues. The problem is a serious one that will force tight money conditions on the New York money market, After tne present emergency, New York nay regain its old domestic position, al­ though at this writing such a trend seems doubtful. 270 business conditions surrounding it. Whether it be by currency, or the means of payment made by businessmen themselves through the clearing principle, money is still a means and not an end.

Some measures designed to control the flow of money to pirticu lar areas are at tne same time Pleasures inadvertently hampering business. The Federal Reserve System was aole to affect a compromise because it did not break up the concentration of money in New York, and therefore did not necessarily tend to destroy the very essence of our system, that is industry and production. The tendency of money to concentrate existed after the inauguration of the Federal

Reserve; any attempt on the banking authorities to curb the flow of money would have resulted in serious repercussions. Buoij.ess has to be encouraged and fostered; a federal policy in opposition to unis view would result In the business depression that tne authorities are trying to eliminate. In view of this possibility it would be pure folly to break up the money market because the market serves the business concerns of the nation. If the money market were removed, and if coujnercial enterprises could not find new ways of transacting trade within the cultural pattern, then the inevitable result would be depression and the retarding of business.

Despite the tremendous change in our financial structure during the past decade, it appears that some concentration of money still continues; although it is no longer completely restricted to New

York City. The conditions that brought this change about were not the controls of the Federal Reserve System or the Treasury Department, 2r9 methods of handling Dusiness transactions of yesterday soon oecome inadequate. oven now large suins of money can be transiV.rred from one section of the country to another just by the use of tt. le ;rams.

All t..e time our money is taking on new forms to keep up the pace set by our faster communications, transportation, and business con­ ditions. i.oney will change as -,ur means of doing business on nge.

Money will follow business to sections whore business procpm-s, so that money becomes concentrated for logical reasons; reasons that tend to make business concentrated in certain areas.

Since our money does change, it follows that wha^ we call our money sunply is a r tuer nebulous concept. with tne clearing principle, a development that is being constantly refined by better clearing systems, we have a new- type of money; a money that can be created, or Just as important, not created, by b . d tuu; icn by cancelling credits against debits. The flow of goods and services serves as a base for this development, and the amount of the stock of money has little relation to the ousinessraen1s "money supply".

from another point of view, to emphasize money i3 to give it an importance that it does not deserve. There are a multitude of factors that must oe considered in discerning a good, sound policy. Money is just one of these factors. There is more to the nation’s economy than just the surface; merely manipulating the level is not one of controlling the whole. Money is generally not dominant causal factor; it takes on its form and its characteristics because of the during the decade, 1940 to 1950, business and money were dis­ persed more equally throughout, the nation. The imooroance oi' the

New York money rtfcirket gave way to soi/ie extent to cities ohat were

rising in commercial and 1‘inancial importance. Chief among these

new contenders for financial supremacy were Jhicago and dan Fran­

cisco with the Dallas area not far be. ind. .lS business movea away

from the Northeast, money followed. The New ungland states lost

tremendously boon in non-financial as well as financial industries.

The Liiddle Atlantic States also lost in both categoriest but to a

smaller degree. The regions that benefited were the Taut forth

Central, the .Vest South Central, and the Pacific States. J.1 three

areas increased in importance as measured by shifts in coimnerce ; nd

finance.

From these findings certain implications become apparent. As long as trade and commerce are confined to a sp cifi.c area, money

tends to oecorae confined to that area also, as soon as business expands and reaches out to other areas, money becomes lispersea and

decentralized as far as location and control is concerned, i.tney

tends to follow business. Another implication is that money is institutional in nature. As business develops and takes on many forms, the means of payment and tne necessary institutions will attempt to keep pace with developments of business. The social in­ vention of the check as a means of payment allowed t e financial mechanism to keep pace with changing conditions of ousiness. Since our cultural pattern tends to lag behind business development, 267 the Mew York money market, it still played a dominant role in the financing of this country and the world, only time will texl if the recent decrease in importance of Mew York is of a permanent nature or merely a short run, temporary decrease. Evidence available at the present favors the latter.

During the post war period, the national economy experienced a further expansion and in some respects even greater than that which took place during the war years. As a result, banking and money made some significant changes. First of all, the tendency of monetary de­ centralization, started during the war period, continued; that is, money tended to spread out over a wide territory. Furthermore, there was * noticeable change in the size of banks throughout the country.

Jnlike tne .vorla Aar I period, the number of banks during and after

'Vorld (iar II did not increase to meet the larger money sup fly. in­

stead there was a decrease in the nuiiuer of oanks; the banks "grew

up" to the money supply. a s a result of these changes tne average

bank douoled its size between 1940 and 1950, and to many this move­ ment would oe an indication of greater concentration. nowever, to

judge the degree of concentration solely on the change in the size

of the average bank would be misinterpretacing the facts. oven

though all banks increased their holdings in an absolute sense, the

extent of concentration would not necessarily change. In fact it

was found that large d nks with the exception of he yank of America

did not increase as rapidly as smaller banks. in this resnect, con

centration of money held by the nation's banks decreased. difficulty. Since nx>ney had become centralized it. was an easy matter

to take over control.

As was pointed out previously, the long run tendency of money was to concentrate in a particular money market, history has shown

that, given a long enough time, nwney markets do topple or diminish

in importance. During the short run period, however, money concen­

tration seems to be reduced. These conclusions call for further ex­

planation. Monetary concentration in a money market has a secular growth and at the same time also has cyclical fluctuations. In the

same way that civilizations are born, prosper with minor ups and downs and then die, that National income in countries will increase ov^r a

long period of time, even though it has periodic fluctuations, so it

is with money concentration in the money market. New York has in­ creased slowly its monetary concentration through the years; however,

this trend was interrupted during the expansion phase of Due business cycles. During this period, money seems to become decentralized, a short run development that reverses itself during the depression phase of the business cycle. Since the beginning of the hew York money mar­ ket, it has steadily grown. Business seems to follow a similar pattern monetary concentration in the financial centers apparently follows.

This phenomenon is a culmination of domestic and international changes.

New York, during the period 1940 to 1945, decreased in relative im­ portance not only by its share of the nation's demand deposits, but also by its share of foreign deposits. In both cases, the deposits tended to spread out over the nation. Despite these reverses to 265

»

Intends to maintain this policy, and as long as we nave a high national debt and are faced with huge govermaent expenditures for one emergency or another, it is inconceivable tte+t we could have any other interest rate policy. ihe point that is of interest for this paper is that the money market had become so developed that the Treasury could use it to control the nation's money supoly and interest rates with little 26 /+

District System and the Interdistrict Clearing System was not suf­ ficient to overcojiie this flow of money. The Federal Reserve was successful in removing eome of the defects of the money arket by making money more flexiole, not oy breaking up concentration. thus the results of the Federal Reserve’s efforts at decentralization further substantiate the conclusions expressed in the preceding pages and in a very cogent manner.

Another striking demonstration of the forces in action is dis­ played in the growth of banks in this country. Since 1921 the trend in the number of banks has been declining. This trend, of course, reflects changes in state and national laws, out it axso highlights the trend in the long run tendency toward monetary concentration by banks— a condition that is not necessarily disadvantageous. During the time the number of banks was decreasing, the size of banks was growing larger. This increase was to oe expected because as non- financial concerns grew larger, banks had to expand to ;ieet the tar ger business needs, banks grew in many ways, mergers and consoli­ dations became an accepted method for i^-ny years, giving way xinaLly to the development of branch banking. In many cases these two methods worked together, a bank would take over another bank and then ake it a branch. Ibis toebhod, a combination of the two, was important during the *20'a and '30's. More recently, nowevor, branch banks movement seems to be an independent method; new branches are started by a large bank wherever they are needed and permitted by law. 263

funds, instead tne money would either return to the Federal Reserve

Bank or go to a city where such markets were available.

In view of these two conditions the local sank had no choice

but to go along with the New York money market. The Federal Reserve

was able to make money available but the loan markets to absorb funds

did not develop. The lack of a local market presented a problem to

the banker. When he needed funds he could obtain them from the

Federal Reserve Bank, but he still had no place to invest his idle

funds. Because of this problem, the internal bankers decided to

maintain balances with New York banks. In New York these funds could

be used in the loan markets and thus earn their keep, another reason

to maintain the correspondent relation with Mew Yore banks was be­

cause New York still was a commercial center. Th« customers of i,he

internal bank would frequently buy goods from New York, or goods coming

through New York. If the customers paid for the goods by check, the

check could be cleared directly through the correspondent bank. On

the other hand, if the customer needed financing, dew York money could

be used and the paper sold in the market at a slight discount, bince

these factors placed a premium on New York balances, New York money was readily accepted throughout the nation. New York exchange looked much better than the funds at the local Reserve Bank.

Internal banks continued the policy of "business as usual" with

New York, Many of them retained their correspondent relations with

New York banks. The Federal Reserve was not successful in decentral­ ising money; money still flowed to gain the highest reward. rhe 262

Some of the larger cities throughout the nation, aided by the local

Federal Reserve District Bank, were able to increase tneir financial importance.

However, this is not to say that tney became serious threats to the New York money market. Instead, all that the Federal deserve accomplished in this respect was to make the money supply more flexi­ ble all over the nation. In most cases, funds could be obtained locally without resorting to the New York money market. For example, if rice farmers in Louisiana needed funds, their local banks would recall some of their balances from new York. This chain reaction had disturbing consequences on the nation's banking system, simoly because at certain times money was not free to move. fhrough the use of the local Federal Reserve District Bank, money could be supplied.

There was no longer any necessity to rob Peter to pay Paul. However, there is a distinction between flexible money and decentralized money.

It was thought that by doing the first the second would be accomplished, but history shows that this was not the case. In the first place, cities throughout the nation that were expected to develop the local money markets were only partially successful, many of the cities did not have the trade and commerce necessary to support a money market.

In this case, money would not remain in the area but would follow trade. If there was little clearing in commodities, there would be limited clearing in money. Another reason was that the cities aid not develop the loan markets which would be necessary to absorb excess 261 does not need them. The fact that clearing takes place reduces

the necessity of reserves and credit expansion; in order to have

high clearing, a regular, balanced flow of commsrce is required.

These two factors are essential for the success of a financial

center.

As the financial superstructure becomes refined it will aid in

the development and expansion of business; business can prosper be­ cause it nas brougnt with it the means necessary for its suoport.

The two elements, commerce and finance, grow together and as they grow the base becomes wider, so that in their development new in­

stitutions are called in to perform certain functions in the evolu­ tionary growth of a money market. Until the development of banking, the business center was unorganized and inadequate to meet the needs of the community. Banks, then, arose out of necessity; they evolved out of their environment so that business centers could go on to grow to our present day money markets. rfith b-nks tne two elements of a money market were harmonized; on the one side, the development of comnerce and trade, and on the otner, the development of clearing of payments and of loan markets.

The Federal Reserve, when it was established in 1913-14, took on, as one of its primary functions, the task of decentralizing money.

To accnsylish this objective, the Federal Reserve System established twelve districts, with the hope that each district could foster its own money market. fhis expectation met with only partial success. 260 constructed. It will be started because oi‘ the volume of Dusiness

found xn tne locality. as the center grows buth in business and

financial strength and scope, as the institutions involved in this

center develop and become more standardized, tne center will take on tne aspects of a money market* It will become tne center of

finance, the channelling agency for the nation’s money supply as well as the center of industry and trade.

Furthermore, for a city to become a raone'/ market, it must have

a high decree of clearing; clearing that arises fi-om payments and

receipts in the flow of goods and services. rhis flow of good3 in­ volves the income and outgo of payments. Payments coining into the

center will be cancelled by payments for goods going out. If these payments tend to offset, there is a high degree of clearing, which

in more fundamental terms, means that the center will be able to keep its funds for various transactions within the money market.

Banks will need balances to make uu debits that may occur in the clearing process. If businessmen find that their income and outgo will not clear; that is, if they expect the outgo to be greater than income for a given period, loans are made to cover Lhe gap. If the center has a banking system, loans, and therefore new money, can be created, On the other hand, loans will oe repaid, or money will decrease, when income is greater than outgo.

Hie ability to lend calls for a flexible banking system. Such a system must have reserves to provide the market witn liquidity wnen needed. It must also have an outlet for funds if business 25?

CHAPTER X

Implications of Monetary Decentralization

As was mentioned in the introduction, the purpose of this dis­ sertation is to bring the underlying factors of a money market into the proper light so that they can be analyzed. Once they are dis­ covered, it will be a relatively easy matter to discern their re­ lation to the economy, on the one hand, and changes in particular industries and locations, on the other. In order to present the conclusions of this dissertation, that is, the underlying factors discovered and the consequences thereof, it will be necessary to review the findings of the chapters and then point out some of the implications of these findings.

In the way of a review, it was found that a money market, whether it be New York, Chicago or Detroit, London, Paris, or Berlin, must have certain fundamental factors that are basic for its very ex­ istence. Without these factors, a city would never become a fi­ nancial center; or if a city should lose any of these factors, it would also lose its power as a money market, just as many cities have fallen throughout history. The money market is such a market primarily because it enjoys commercial and business advantages. Here, the trade routes will grow and prosper; here will be the center of trade and business. On this basis, the financial mechanism will be 258

York increased absolutely in ohe greater post war trade, ^here is an indication that New York had to share a lit* le more of the new business with other money markets in the nation. Even at that,

New York 3till has a good lead as the nation's money market, and it would take something similar to a national catastrophe to shake the city from its present position. f 57 of banks but the decrease in deimnd deposits. However, in some sections as money flowed in the number of banka did not increase and therefore larger banks resulted. In most cases Lhe larger bank^ that resulted were in areas that were already below the nation's average, while demand deposits were decreasing tne number of bank­ ing facilities increased, tiost of the increase that came about was through branch banking, which is also a continuation of a tendency that started many years ago. More and more of our banking facilities are branch offices. Perhaps some day this country will nave a bank­ ing system similar to Canada's.

Again there was a great deal of correlation between economic forces and demand deposits. In this chapter, imnfcer of Firms and

National tncome were correlated with changes in demand deposits and in both cases there was a high degree of correlation. Where there was a discrepancy, the change in pattern could be accounted for by new money markets that were developing. Now New York has more rivalry than ever before. California and Illinois, although by no means serious rivals as yet, are becoming monetary centers.

Although New York lost in relative importance domestically, it gained internationally. The United States continued to dominate foreign trade in the {cat war period and as a result New York con­ tinued to be the center for this increased trade. There is, however, a tendency for increased government financing in international trade and until this trend changes the money markets will always have to look to the government for outlets for private funds. Although New 256 expansion while the middle Atlantic States were recovering slightly from the war period. The war undoubtedly greatly influenced the economic pattern of this country, so much so that the nation did not revert to the pre-war pattern.

While the basic economic forces were undergoing change, so also was monetary concentration changing. New England, Middle Atlantic, and pacific States lost their relative importance as measured by demand deposits, while West North Uentral, East North Central, West

South Central and East South Central gained. One of the objectives of the Federal Beserve System, that of decentralizing money, was accomplished, but the forces of economic expansion were mich more effective than the controls of the Federal Reserve in accomplishing this objective. Furthermore, evidence shows that there is a tendency for money to decentralize during times of economic expansion and to flow back to the money markets during depressions. Angell's analysis and the analysis of this thesis verifies this tendency. The long run tendency as yet is not clear; however, New York, in view of present world conditions will probably remain the nation's money :narket.

With the outward flow of money during the po3t war period, a better distribution of money on a nation-wide scale developed. The range in distribution of demand deposits was decreased. The large states declined in relative importance; the small states increased.

At the same time the average bank became smaller, with average de­ posits of $8,557,000 in 1945 and $8,443,000 in 1950. By and Ja-ge the cause of this decrease was not so much a change in the number 255

In this table, although there is a decline in the relative importance of New York City in the holdings of foreign deposits, this city still has a big edge over all potential competitors. Its chances of remaining the nation's leading money market is enhanced more by its foreign position than its domestic importance. Any city with only 5*2 per cent of the nation's population, that has 6.5 per cent of the nation's workers in manufacturing, 17.1 per cent of the nation's adjusted demand deposits and 36.6 per cent of all bank debits need not worry about losing the center of the 3tage.^ It has lost some of Its importance but New York seems to here to stay. Some of the hidden hopes of New York authorities apparently were not realized. The Federal Reserve Bank of Minneapolis apparently was too pessimistic; the expected drain of funds did not take place.

Whether or not the hopes of New York or the fear of Minneapolis will come true in the next five years can be determined only by future world developments.

In summary, the period 19A6 to 1950 showed a continuation of the economic expansion that started during the war. The New England and East North Central states decreased in their relative importance, joined during the period by the Pacific States. At the same time the tfest South Central and Mountain States, prolonged their economic

Letter from George G&rvy, Chief, Domestic Research Division, Research Department, Federal Reserve Bank of New York. 254 was doing in the field of foreign financing it is necessary to turn to foreign deposits in this country.

As was mentioned earlier as the third reason for using foreign deposits, nations want to maintain deposits where they will be as­ sured of protection both politically and economically. For this reason, most of the European countries were ruled out. In England exchange was difficult to move because of government controls, in other European countries the economic conditions following tne havoc of six years of war prevented apy stability of prices and exchange rates. The only alternative was the City of New York. The dollar was in demand all over the world. New Ycrk money was at a premium.

The following table will show the trend in foreign deposits in this country and the amount of these deposits held in New York City.

Table XXVII

Foreign Interbank Deposits in All Commercial Banks, and in New York City, 1945-1950 (In millions of dollars)

Total Foreign New York Year Foreign Deposits in as a Per Cent Deposits New York City of Total

1941 674 607 90.19a> 1945 1,246 1,105 88.54 1946 1,364 1,195 87.61 1947 1,379 1,217 88.25 1946 1,468 1,278 85.89 1949 1,313 1,084 82.43 1950 1,442 1,162 80.58

Source: Board of Governors of the Federal Reserve System, Bulletin June, 1951, p* 671. 253 are influenced by government activity. Table XXVI supports this view. Foreign deposits, however, do show a definite trend, and one that tends to conform, to a pattern of an expanding econony.

Table XXVI reflects the economic conditions of the post war period. As was stated earlier, the volume of trade maintained Its high level, but it would certainly be difficult to find any definite trend. No doubt export trade will decrease and one might be tempted to say that this trend is present from the year 1947 on. However, such a conclusion would not be warranted in view of the short pe riod involved and the erratic changes in imports. It is found that the government's share of foreign financing has remained at a fairly high level and therefore has not given way to private financing. This 1 point was discussed earlier. Private financing has fluctuated vio­ lently during the six-year period. It would appear that private financing increased somewhat during the post war period, and when it is recognized that some private financing is hidden in government figures, this trend becomes more definite. It should be noticed that, after a four year loss of gold holdings in this country, foreign countries regained balances in this country by an increase of

$3,628,000,000 in 1950. This table, although not giving any measure that can be used to point out the importance of any one money market, does show that this country is maintaining its newly acquired im­ portance in international trade. To find out what New York City

1 See page 250. 2 5 2

second, they do show a definite trend; and third, changes in the amount of deposits are indicative of changing attitudes on the part of foreigners to economic and financial conditions in this country.

To explain the first factor; if Canada buys goods from England,

Canada can pay for the goods either by the use of sterling exchange or dollar exchange. The former method was the customary c-r.e until certain cities became recognized as money markets. Then countries that acquired balances in other countries began to use these funds as means of making payment in countries where they did not have balances. In the same way nations would like to receive payraant for their goods by exchange drawn on the money market because this in turn would increase their balances. In view of this development nations liked to have balances in other countries to make such pay­ ments, but at the same time they wanted these balances in countries or money markets that offered safety and convenience. In this case they wanted a money market that was financially sound, which pre­ supposes not only the basic commercial requirements as discussed in this paper but also political stability. A money market then serves as a bank not only for the domestic trade but for international trade as well. In the second case, that is when deposits show a definite trend, it is quite difficult for the period under discussion to find statistical data that is not distorted out of all proportions to money market conditions. Uost of the data for the 1940 to 1950 period re­ flect war conditions or war preparations and as a result most factors 251 heavily on private financing in order to secure funds for the foreign loans, i-any of the loans made by the International Monetary fund and

International Bank utilized funds of private financiers, so that, part of the government share in Table XXVI represents in reality private financing. There is a tendency for more of this type of financing, particularly in the foreign countries. Most governments today keep a watchful eye on the flow of capital into and out of the country and have taken steps to control the flow. As a result private financing now works through the government. If this trend continues, private financiers in the world will have to depend more heavily on the government and look to the governments and international institutions for outlets for their funds.

As was pointed out previously there are no statistics available which would throw some light on the amount of foreign trade financing handled by the various money markets. At best all that can be done is to show the change in importance of various financial centers relative to foreign financing. To do this involves a selection of a good measure. If information were available to show what part of foreign trade was financed by New York, Chicago, New Orleans, or

London, it would be an easy task to show the relative changes that have taken place. In the absence of ideal conditions it is necessary to turn to the next best. Foreign demand deposits in this country were selected because first of all as long as deposits in New York are used by nations as a means of buying and selling exchange they will serve to highlight the financial importance of the money market; 250 foreign trade and rrethods of financing the net export balance. It is, of course, true that the amount of financing is not limited to the net export balance; all of the trade, both exports and imports, calls for financing of one type or another, but how or where this is done, it is impossible to determine.

Table XXVI

Foreign Trade and Capital Movements of the United States 1945 to 1950 (In millions of dollars)

Payments Year Exports Imports Net Liquids Errors bxport Gkivern- tion of and Balance ment Private Gold Girenissions

1945 16,273 10,232 6,041 7,659 1,023 -2,633 8 1946 14,966 7,167 7,799 5,053 933 1,968 155 1947 19,741 8,463 11,278 6,473 1,295 4,514 - 1,004 1948 16,791 10,481 6,311 5,030 1,665 857 - 1,242 1949 15,956 9,715 6,241 6,084 1,131 2 976 1950 14,351 12,142 2,209 4,309 1,528 -3,628 XX

Since 1947* includes financing oy International Monetary Fund and International Bank.

Source: Department of Commerce, Survey of Current Business, January, 1951, p« 20.

Fk*om the above table it can be readily seen that the hopes of

New York City were never fully realized, that the government would step out of the field of foreign financing leaving this growing mar­ ket to private financing. Although the figures seem to indicate dis­ appointment for private financiers, the government did rely more 249 and because of this one factor New York will probably retain its position as a national and world financial center. Since world trade influences demand deposits and since the money markets of the world retain funds for foreign commerce and finance, it is necessary to analyze the trends in foreign trade and the impact of foreign trade on money market funds.

This analysis of foreign trade will be primarily concerned with the post war period. fhe amount of exports and imports for this period will give some indication of the trend of foreign trade.

F'rom this information the trend of finances can be seen. although this particular phase is complicated by government financing during this period, it is possible to discern a definite trend in private financing. After this point, however, data become quite sparse. As yet there has Deen very little done in the field of research to de­ termine what part of foreign financing is handled by particular cities. the problem is complicated by the fact that the source of financing is not confined to uarge port cities of this country but also to the small banks scattered throughout this count:y as ^eil foreign nations. Because of the lack of accurate information it is not possible to distribute the financing to the cities or money mar­ kets concerned. It is only possible to obtain a close approximation of the relative importance of various money markets.

As expected the volume of foreign trade continued at a high level during the post war period, reaching a peak in 1943 and then tapering off. The following table gives 30me indication of the trend of 248

0.21 per cent In demand, deposits. There is the possibility that this discrepancy is due solely to the limitations already mentioned; however, it is more likely caused by a time lag between changes in the two measures. If demand deposits of 1950 were used, there would have been closer correlation although it is impossible to determine with any high degree of certainty the true cause of the discrepancy; it could also be explained by the recent tendency of of bankers' balances to move out of New York to other money markets, particularly to Chicago and Dallas. Between 1948 and 1949 New York

State decreased 4295»OoO,000 in demand deposits while Illinois was gaining $100,000,000 and Texas, 4218,000,000.

The above analysis reveals a high degree of correlation between business activity as measured by national income and demand deposits during the past war period. Further, it also shows that the economic importance of geographical sections of uhe nations have undergone a great deal of change since 1940. The war apparently did not serve as an equal stimulant to all states; some were favored more than otners.

The trend in business, and of demand deposits, seems to be a move­ ment away from the North East to the Great Lake otates, the South

(Vest and Pacific States. It is well to remember that such shifts in importance occur with the business cycle and a reverse trend will probably take place if and when the economy takes a downward turn.

Another important factor that must be considered in appraising the economic importance is the amount of foreign trade that a region or city handles. In this respect New York has a distinct advantage, 247

Table XX.V

Shifts in Individual Income Payments and Demand Deposits, by Geographical Division, 1944 and 1949

Geographical Total Income Demand Division Payments Deposits

New England -Q.Qk% -0.12-0 Middle Atlantic +1.20 -3.37 East North Central -1.77 +0.21 West North Central +0.67 +1.37 South Atlantic +0.08 +0.68 East South Central +0.07 +0.02 West South Central +0.57 +1.64 Mountain +0.39 +0.37 pacific -0.31 -0.31

Source: Total Income Payments adapted from Tables in Department of Commerce, Survey of Current Business, August 1950, p. 19; Demand Deposits from Appendix C.

The above table shows a remarkable correlation between the relatives

of the two measures used. J-he only two regions that do not conform

to the general pattern are the regions holding the largest shares of national income and demand deposits. mese two regions possess the

largest money markets in the country and therefore would not neces­

sarily follow the pattern of the other state groups. The apparent

discrepancy between the two regions presents the problem— why do these

similar groups show opposite results? 'The Middle Atlantic States with

an increase of 1.2 per cent in income payments show a decrease of 3*8

per cent in demand deposits; while the East North Central States show

a decrease of 1.77 per cent in income payments and an increase of 2U&

If this ia the case, then New York, although by no means seriously threatened since it enjoys a port on the Atlantic sea­ board, doe a face sojoe corape tit ion from the two new money markets,

San fYancisco and Chicago* Apparently the findings in 1946 of :v.

Blair Stewart is still withstanding - he of time. it the

American Economic Association Convention in 1946, he said, "'{here is evidence of a relative decline in the Atlantic seaboard states and a relative increase in the industrial importance of the rest of the country, particularly the South Central and Pacific regions*

The Great Lakes states will emerge from the reconversion stronger industrially than ever oefore,"^-

As was mentioned in the previous chapter, the use of National

Income as a measure of economic activity is also subject to some limitations, but it ia the uest index of this sort that con i>e found.

It may be argued by some that National Income is the true picture of a region and the demand deposits are the distorted or biased element.

Ihis, of course, may well be the case since .errand deposits as used in this analysis, do not include time deposits and since demand de­ posits by the Clearing Process can fluctuate greatly over a short period of time. In view of the above criticisms at best all that can be done is to reduce the margin of error as much as possible and come out with a close approximation. fable XXV shows the trend in national income and the relative change by regions.

^Stewart, w, B., Shifts in the Geographical and Industrial Pattern of Economic Activity. Tbnerican Economic Review", May 1946, Supplement, P* 44# 245 this region, war production started the economic wheels rolling and they did not stop afterwards.

The Pacific States emerged as a new threat to the financial suprejaacy of the Mew York area. For the period 1940 to 1950 ne population of this region increased 45*3 per cent, compared to a national increase of only 11.0 per cent, at the same ..ime it iiad an increase of 3 1 * 9 per cent in business, and most of this change took place in tne State of California. The East North Central States, although not showing tne tremendous increase n commerce and industry shown by the Pacific States, do have soraetning in common with the

Pacific States. These two regions, judging from the trends in ae- mand deposits, as exhibited in appendix C, seem to follow the pat­ tern of a money market area, particularly the states of California and Illinois. First, these two states hold the largest percentage of deposits outside of New York State; second, as a result of the war they both enjoyed an extremely large increase in industry which provided more funds for the local banks; and third, the changes or fluctuations of their demand deposits relatives seem to follow a pattern similar to that of New York State. The pacific States and particularly California had two peaks during the past decade, one in 1942 and the otuer after the war in 1946. The East North central

States i.ad a peak in 1942, fell until 1946, and started a gradual rise. During the war periods both areas received lar ;e government contracts which shot demand deposits up very rapidly. Afterward, these funds were used to support production elsewhere so the money was slowly drained out, a condition up to that time peculiar to ew fork. 2Uh

England had a gain of only 14.3 P«** cent. The New England States became a serious casualty of tne war, and measures will nave to be taken if the area is not to drift into economic distress. While the New England States were declining in importance other sections were making great gains. The discrepancy that exists between uhe business index and demand deposits for tne West North Central States can be accounted for by the bias in the index used to measure the change in commerce. Since this region is primarily agricultural, the number of firms index does not represent the true economic im- portande of this region. If an agricultural index were included, 1 the commerce index would undoubtedly be a plus item. The West South

Central and Pacific were the two regions making the greatest improve­ ment. Although the West South Central States, that is, Texas,

Louisiana, Arkansas and Oklahoma, did not show any appreciable gain

in population during the post war period, this group was well above

the national average in new business, reporting an increase of 38.3 per cent. A large part of this increase took place in Texas, but by no means was it the contribution of the Lone Star state alone.

For example, between 1940-1949, the State of Louisiana had an in­

crease of 339 per cent in retail sales and 2 9 7 p«r cent increase 2 in the value of manufactured products, to mention only a few. In

1 See Chapter VIII for a further discussion of the agricultural im­ portance of the West North Centztal States.

^Pamphlet, Your Economic frontier. Public Utilities of Lhe middle South, p. 18. 243

Table XXIV

Shifts in Number of Firms in Operation and Demand Deposits, by Geographical Division, March 31, 1944-1949

Geographical Firms in Demand Division Operation Deposits

New England -0.34% -0.46% Middle Atlantic -1.23 -4.56 South Atlantic +0.29 +0.24 East North Central -1.54 +0.69 West North Central -0.86 +1.26 East South Central +0.29 +0.26 West South Central +0.84 +2.13 Mountain -0.03 +0.60 Pacific +1.86 +0.07

Source: Number of firms data adapted from Tables in Department of Conraerce, Survey of Current Business, December, 1949, p. 10; Ddmand Deposits from Appendix C* number of firm relatives and therefore places negative values on other regions which would not exist if a more accurate measure could be ob­ tained. Nevertheless, the measure does give a good insight into the post war shifts. It will be noticed that the hew England States con­ tinued their downward spiral. This is particularly serious because the region was not very wealthy in the first place. According to

Appendix C, this group of states, in 1940, held 10.6 per cent of the nation's demand deposits, but in 1950, its share was down to 5 per cent. For the same period, whereas the rest of the nation re >orted an increase of 11.0 per cent in population, the New England States

Increased only 10.2 per cent. In a similar manner, while the number of business firms was increasing in the nation by 22.2 per cent, hew 242 and retail trade, financial, insurance, real estate and service in­ dustries were used. This index is subject bo certain limitations; first of all, it i3 too sensitive as to commerce and not enough as to finance and therefore does not always show a close relationship between changes in the index and in demand deposits, wnich usually take longer to shift. Secondly, there is no reason to believe L,hat one industry is as important as another as far as dollar values are concerned, in other words, thei'e is no set ratio between the number of firms and the contribution to national income; for example, one manufacturing firm may contribute as much as ten retail firms in another state. Since not all state groups or divisions have an equal amount of each type of industry, therefore, those regions with smaller firms because of particular location advantages, will show up equally as important in rate of change as regions vfith the same 1 number of large firms. However, this defect does not eliminate the index completely because the 3hift of industry is the primary concern at this point and this shows up very clearly by using rela­ tives. Later national income will be correlated with bank deposits.

ihe measure in Table XXIV, as was mentioned earlier, is too sensitive to industrial shifts and not enough to changes of the financial markets. As a result, the shift from the Middle Atlantic

States and therefore, New York, is undervalued according to the

1 A further limitation closely associated with the second is that number of firms index does not include agriculture, which in many states is the dominant industry. 241 correct. It would seem from this change .hat there is a v-.ry close parallel between the nature and growth of business and banking; they both become decentralized during a prosperous period and centralized during hard times.

Before commerce and trade are discussed, it is necessary to re­ view the sectional trends of demand deposits as exhibited in Table

XVI. It was found that the New England, Middle Atlantic and Pacific

States declined in relative importance whereas ohe reraaining sections remained fairly stable at the 1945 level or increased slightly. This would seem to indicate that the expected reversal of the war trends never came about. Apparently the states that benefited by the war retained their production and prosperity even to the extent of em­ barrassing the New England and Middle Atlantic States. A few facts and figures will clarify this point.

Again, it is difficult to find a suitable measure of commerce that will highlight the changes that have taken place for so many dissimilar regions. In the previous chapter it was possible to use manufacturing as a measure because it was primarily responsible for the shifts that took place in a war econony. However, in a peace time economy, when civilian goods and services, retail and wholesale trade are becoming increasingly important, the use of manufacturing as the only index of economic activity introduces an unwarranted bias. For the purpose of showing the commercial trends in the post war period, the number of firms engaged in mining and quarrying, con­ struction, manufacturing, transportation and comnunications, wholesale 21+Q

rather than unit banka. This trend is in line with the general

tendency as shown in Chapter VI. During the period the number of

branch banks increased 22.22 per cent while the number of unit banks

increased by less than three-tenths of one per eent. however, since

the number of branch banks is so small, relative to she nurrber of

unit banks, the total number of banking facilities increased only

4.9 per cent. Ix" total banking facilities were used, instead of the

number of unit and main office banks, to determine the average of bank

deposits, the figures would have been $6,677,100 in 19^5 and Jo,281,00j

in 1950, a decrease of 6 per cent.

In dealing with these figures two things should be kept in mind.

First of all, averages cover up a multitude of sins; they do not deal with individual cases. fhe good cases make up for the bad ones. For

example, in California and Nfew York the very small banks, of which

there are many in both states, averaged with the few large ones in both states, make the state average conform fairly closely with national averages. The fact remains that in both states there still exists a great deal of monetary concentration by certain banks; how­ ever, dt, the present time there seems to be a relative decrease in their holdings. Ihe second factor is that this analysis deals only with the post war period, or more broadly, with the period 1940 to

1950, a decade of unprecedented economic expansion, as was shown earlier such a prosperous period would tend to decentralize commerce and banking; The opposite tendency would undoubtedly result during a depression; that is, more concentration, if Angell's analysis is 239 the flow of money but also by state banking laws, it is dangerous to go beyond the point of saying that there was or was not a tendency toward bank concentration. Since for the nation as a whole there was a tendency to spread the funds more evenly, according to the national 1 average, it would probably be safer to say that concentration of funds by banks actually decreased despite the 3? states that increased average bank deposits. This view seems more in line with the tendency of money to become decentralized as far as location is concerned as 2 set forth in the preceding chapter. In this case, the increase of average bank deposits represents nothing more than an effort by the nation's smaller banks to get more in line with national average. In other words, again we have a better distribution of the nation's funds not only in state groups or locally, but also by the nation's banks. This view is supported by the fact that of the 37 states re­ porting increases in average bank deposits, 27 of them were below the national average.

Turning now to the changes that have taken place in the number of banking facilities, the depositors of the nation were better ser­ viced in 1950 than in 1 9 4 5* By banking facilities is meant the total number of banks— unit banks, head office and branch banks thi t accept demand deposits. The increase in bank facilities thao took place during the post war period represents an increase in branch banking

^See page 236. ? See page 220. 238

were not established to handle the new business. Apparently banks followed the same method of expansion that non-financial concerns

did during the war. Of the 37 suates that had increases in average

deposit per bank, in 31 states this condition was brought about by

a less than proportionate increase in the number of banks. In fact

in many states the number of banks actually decreased in the face of

larger deposits. The remaining five states had increases in average

deposits as a result of a more than proportionate decrease in the

nunber of commercial banks. California, Kentucky, North Carolina,

Oregon and Rhode Island were the five states involved. Rhode Island

after losing deposits for many years apparently decided that there

were too many banks. In 1945 there were 25 commercial banks in the

State but by 1950 this number was down to 15, and since that tine

one more bank has disappeared. Unlike California, the decrease in

Rhode Island aas not made up by new branch banks because in 1945

there were 45 branch banks as opposed to 49 in 1950, resulting in a

net reduction of bank facilities.

Altogether there were only twelve states showing a decrease in

concentration of money by banks, three because the number of banks

increased too rapidly in relation to the increase in demand deposits,

and nine because the number of banks did not decrease rapidly enough

in relation to the decrease in demand deposits. Une might be tempted

to read into these figures a number of trends, but since the tendency

toward the concentration now being analyzed is influenced not only by 237

Table XXIII

Change in Size of Average Bank* by Demand Deposits, and by Geographical Division, 1945 to 1950

Geograpnical Change in Division Average Size

New England -11.28^ Middle Atlantic - 3.66 East North Central - 8.33 West North Central - 8.21 South Atlantic - 2.05 East South Central - 2.31 West South Central - 9.12 Mountain -16.05 Pacific - 0.34

Source: Appendix C

The above table shows the percentage change of the average else bank for each group from 1945 to 1950. The average used in each case

reflects changes in demand deposits as well as changes in the number

of banks. Using the data from Appendix C, it is found that:

1. 35 states had more deposits in 1950 than in 1945* of

these 35, 32 states had increases in average bank de­

posits, and, therefore, 3 showed declines.

2. 14 states had decreases in total demand deposits. Of

this number, 5 states had increases in average bank

deposits and 9 declines.

In view of these facts, it appears that in 37 states concentra­ tion of money, as far as banks are concerned, increased. i'hat is, it appears that the existing banks handled the new business. New banks 236 1 14,015, a very email change. -f’or the eame years, demand deposits decreased from $119,898,000,000 to $118,322,000,000. Using these figures the average bank in 1945 had deposits of $8,577,0(30, compared

to $8,443,000 in 1950, a decrease of 1.33 per cent. This would in­

dicate that at least on the national level concentration of demand 2 deposits by banks decreased during the post war period. It seems worthwhile to point out r,hat most of this change was brought about by the decrease in total demand deposits rather than an increase in

the number of oanks. The latter increased 0.28 per cent while de­

mand deposits increased 1.4 per cent. However, while nationally there was a decrease in concentration of demand deposits by banks, as well as by sections, there was a growing concentration by banks within

certain sections of the country. As the money flowed from one section

to another, the number of banks apparently did not decrease or in­

crease in proportion to the change in the demand deposits.

^The figurds given include only unit bank and head offices of branch bank systems. It does not include branches. 2 Only head office commercial banks were considered because this would highlight the concentration if it took place. If all commercial bank offices (including all branch offices) were included, the to­ tal bank facilities in 1945 would be 17,958 compared to 18,839 in 1950* However, since many of these offices are owned by one bank it would be misleading to use this figure in an effort to determine the concentration of banks. 3 This change in averages cannot be construed to mean that all banks decreased in size. Such was not the case. In a previous chapter, the growth of some of the larger banks was discussed. Later in this chapter other averages showing the trend in bank concentration will be given. 235

Table XXII

Shifts in Demand Deposits, by Geographical Division, 1945 to 1950

Geographical Percentage Division Changes

New England - 0.1256 Middle Atlantic -3.87 East North Central +1.37 WeBt North Central +0.68 South Atlantic + 0.21 East South Central + 0.02

West South Central +1 * 64 Mountain +0.37 Pacific -0.31

Source: Appendix C relative importance after World War II. In other words, demand deposits continued the shift started during the war period. It 3eems plausible that as the demand deposits left one section and went into another there would be a decrease in concentration in the first section and an increase in concentration in the second. And, furthermore, it seems that for the nation as a whole there would be little change in the na­ tional concentration since the losses of one section would be offset by gains of another. This would have been the case if there were no change in the number of banks. However, this was not true.

As shown in Appendix C, there were, on the national level, 14,011 commercial banks in December 1945, while in December 1950, there were 234

Turning to another aspect of monetary concentration, during

the pre war period there wasn't any great tendency toward concentra­ tion as far as the nation's banks were concerned. As was noted in the previous chapter, demand deposits tended to spread out over the

United States, with some sections accumulating more funds tnen others.

After the war this tendency of decentralization continued, thus de­ creasing the concentration of demand deposits in the New York money market, and increasing the importance of other sections. In other words, during the period, 1940 to 1950, the greatest part of the na­ tion’s money was decentralized as far as location was concerned.

Along with this, it is important to determine if concentration of demand deposits by bank holdings increased or decreased. It would seem, as in the case of the u'est South Central States with an increase of 1.6 per cent in relative importance, that this increase in demand deposits in the area would result in larger banks. If this were true, there would be increasing concentration as far as banks are concerned.

In analyzing the concentration of demand deposits, the relative changes in importance that have taken place must be determined. Table

XXII shows the changes in demand deposits since December 31> 1945. In 1 most cases the trend during the war continued in the post war period.

The Northeastern States continued their downward movement, joined during the 1945-1950 period by the Pacific States, which had been declining since 1946. The other state groups continued to gain in

1See Table XVI. In the case of demand deposits as exhioited in Table XVI, tne direction of the trends tended to continue during the post war period, although the rate of change generally decreased. The New England and middle Atlantic States continued to decrease in relative importance, while the East North Central, the West South Central and the Mountain

States tended to continue the war trend. The other four state groups conformed to the expected pattern; tnat is, the demand deposit rela­ tives decreased after the war; however, two recovered and started to

Increase while the other two continued the downward movement. Of the two that recovered, the South Atlantic and East South Central, they did not reach the peak year at the same time. The South Atlantic group reached the peak in 1946, fell sharply in 1947, levelled off in 1943 and 1949, and regained in 1950. On the other hand, the rela­

tive importance of the East South Central States reached a peak in

194S, fell sharply in 1947, and increased almost as sharply in 1950.

The other two groups that declined in the post war period, the Pacific and West North Central States, maintained a similar pattern with the one distinguishing factor that the former state group reached its peak year in 1946 while the latter was more important in 1947- After

the peak years both groups show a steady decline in relative impor­

tance; however, the West North Central States were much more im­ portant in relative demand deposits whereas the Pacific States had decreased so nuch that their relative Importance was not much higher in 1950 than it was in 1940. l^re will be said later on this point. 232

CHAPTER IX

Ihe Postwar Period and Monetary Concentration

In order to complete the discussion of the national trend in bank deposits, and therefore of the changing importance of the na­

tion's money market, it is necessary to extend the analysis of

Chapter VIII into the post war period, that is, from 1916 go 1930.

In this chapter, although much of the discussion has as its basis

Table XVI in the preceding chapter, it is necessary to discern the

trend in absolute amounts of demand deposits and the change in the number of banks for the various sections of the country. After the monetary and banking trends are determined, it becomes important to look behind the scenes to find out why money and banking have the trends they do. To do this, domestic, as well as foreign trade, will be analyzed.

Despite the beliefs of many writers, the trends noted in the preceding chapter did not reverse themselves after the war. In fact

the war seemed to set the machinery in motion, and it continued to operate long after the war stopped. There is no doubt that the ex­ tremely rapid reconversion after the war was the main reason why the economic machine did not go into reverse. The short reconversion period gave stimulus to the economy, helped out to a great extent by the large savings accumulated during the war. 231 relatively high, but that the government would back out of the fi­ nancing. This gap could be filled by the money market.

It can be said that there won't be any great change in either the national or international field for some time. As long as our money supply is backed by long terra bonds, there won't be any great change in the deposit balance simply because the banks, having such a large ratio of deposits to capital funds (averaging about 17 to 1), could not very well sell many of the sound government bonds for other investments that could imperil the overexpanded banks. Ahe danger to the banks was not to be found in the bank's operation but instead in the shifts of peace time production. 1 "hard*1 goods manufactured outside this area". xt would appear that in tirue the Northwest would lose soiae of its war*— spoosored prestige; however, the events following the war did not tor'ing the black clouds that everyone imagined.

In the same way that other areas were pessijnistic at the end of the war New York was overly optimistic. It wa s felt that as long as

New York could lay claim to the abnormally large volume of foreign trade, it would, to a large extent, retain for itself the nation's money imrket. Apparently New York recognized t h e national trend and was doing everything possible to prevent the t x w n d from continuing.

The New York banks usdd as one of their sales t*a.iks the handling of foreign transactions for prospective customers - As long as our na­ tion continues to lead the world in foreign treuic, there will always be a need for this type of service, so that N e w York should be able to regain some of its lost deposits. This, according to a pamphlet published by the Institute of International Finance, in 1946, should take place as it is of the opinion that the increase in foreign trade will insure for New York the continued development of the money mar- 2 ket. They apparently believed that foreign tr-a.de would remain

1 Federal Reserve Bank of Minneapolis, The Future of Northwest Bank Deposits. (March, 1946), p. 22. p Institute of International Finance, op. cit.. p . 20. 229

trade that developed in the other sections shrink to their forner

level, because then New York would regain its old position; ap­ parently this was just wishful thinking as the following chapter will 3how.

Whether or not the state groups could retain their new position

was a serious problem to the bankers all over the country. They

were concerned, first of all, because they disliked the idea of

losing their higher status, but secondly, they were worried about

what would hapoen when the funds started to drain out through their

banks.

In the case of the Northwest, where the tremendous increase in

bank deposits was a consequence of agricultural rather than industrial

expansion, the problem was serious because any drop in the highly

flexible agricultural industry could seriously damage the banks.

The deposit ownership studies of the bank of the Northwest indicate

that farmers, other individuals, retailers and wholesalers own the

biggest part of the deposits in these banks. According to a report

of the Federal Reserve Bank of Minneapolis in 1946 the banking of­

ficials were of the opinion that, "It would not be realistic to

assume that the large farm income (from heavy production and high

prices) will continue to draw funds on balance from other areas as

did occur during the war. War time incomes were abnormally large.

And the heavy demand accumulated during the war are largely for 2 2 8

It can be said that the war forced a new role on the United

States, that of the leader of world trade. In less tuan four years, the exports of this country increased almost three and one-half times. At the same time, the increased trade thoroughly taxed the facilities of our nation's harbors. New York was the nardest hit, called upon to ship almost 50 per cent of all exports. >Vith changes of such proportions, private financing could not be called up to handle the task, but instead the government moved in to provide the necessary funds. Although exact data on New York financing are not available, it is possible to discern that in absolute terms New York increased in importance during the war period, although there is evi­ dence to show that the relative importance declined. If New York can maintain the machinery established during the war, there is reason to believe that it will retain its international and domestic money market. The first will continue until Europe recovers from the war; the second will depend on a return of domestic funds to

Mew York. In analyzing this problem, The Institute of International

Finance said, "Whether the deposits created by the production of war naterials remain in the respective localities or are withdrawn from them when the war plants have ceased to operate will depend on whether the war industries can and will be converted into peace industries.

The Tri-State Area was interested in seeing all the commerce and

Institute of International Finance of New York University, "Effedt of the War on the Coimiercial Banks of the United States11, Bulletin No. 122. September 10, 1942, p. 20. 227

the increase in importance of New York in international finance is

to show the increase in foreign accounts held by New York banks.

Table XXI

Foreign Interbank Deposits In All United States Banks and in New York City Banks, 1939 to 1945 (In millions of dollars)

All U.S. New York New York as Date Banks Banks Percentage of All U.S. Banks

1939 $ 759 & $ 695 a 92.79* 1940 702 641 91.31 1941 673 607 90.19 1942 813 733 90.15 1943 #93 810 90.70 1944 948 851 89.77 1945 1,248 1,105 88.54

Member banks only.

Sources Board of Governors of the Federal Reserve System, Bulletins.

The above table shows the relative importance of New York City in holding foreign deposits. It will be noticed that total foreign de­ posits in this country have been constantly increasing, but the reason for this increase was not necessarily to take advantage of the facili­ ties of the New York money market but more than likely represents a flight of capital from European countries and surplus balances from

Latin American countries. While England and France were drawing down their balances, the Netherlands and Switzerland were increasing theirs slightly. At the same time, Canada, Latin America, and Asia increased their balances by more than a third. 226

the war, most of the war goods available were shipped to Europe and

apparently New York handled most of these shipments as the percentage

of this port increased from 40.7 per cent to $2.4 per cent in the

course of two years. However, as domestic production got into high

gear and more goods were available for a two-ocean war, New York

started to decline in importance as cities on the West Coast took

over some of the shipping duties. Secondly, even though imports in­

creased, very little of the increment came for European countries but

instead from South America. As a result of this change, other ports,

notably New Orleans, received much of the trade.

With the increase in trade, and since there was such a large in­

crease in export balance, there was of necessity an increase in the

means of financing. On this point the records of the various gov­

ernment agencies do not give much usable data. During the war, the

government did most of the financing; that much can be determined.

It can also be determined how much private financing was done, but

so far there is no information available that will show what areas

or money markets did the private financing. Here only a random guess

can be made of the amount that was financed by the New York money

market. For example, in the balance of payment in 1945, the govern­

ment financed $7,659,000,000 whereas private financing amounted to

only $1,023,000,000. Of this $1,023,000,000 in private financing

there isn't much chance of tracing down to source, and for certain years it is impossible to determine whether it was short term or

long term capital financing. At best, all that can be done to show 225 Table XX

Exports and Imports of Goods by the United States and by New York City, 1939 to 1945 (In millions of dollars)

EXPORTS IMPORTS Year United New New York as United Hew New York a States York Percentage States York Percentage of Total of Total

1939 « 3,177 $1,294 40.756 $2,318 $1,149 49.1* 1940 4,021 1,945 46.3 2,625 1,242 47.3 1941 5,147 2,699 52.4 3,345 1,518 45.3 1942 8,079 3,804 47.1 2,744 971 35*3 1943 12,965 5,016 38.6 3,381 1,146 33.9 1944 14,259 5,938 41.6 3,919 1,276 32.5 1945 9,805 4,020 40.9 4,Q8o 1,477 36.1

Source: Department of Commerce, Statistical Abstracts of the United States.

The above table gives some idea how the war changed the inter­ national Importance of the United States and at the same time shows the important part the City of New York played in this role. From

1939 to the peak export year, 1944* the United States increased its exports by 349 per cent, and at the same time New York harbor in­ creased its exports 358 per cent. These figures were unheard of be- for in this country. In the course of a few years, the United States export balance was equal to the combined exports and imports of 1939; no other country was ever expected to do this before in the history of the world. The figures would be even more startling if services, as well as goods, were included. The table is a fairly good reflection of the conduct of the war. In the first place, in the early years of 224

existed. At the time, New York was the only logical place for this

movement. It was untouched by the war, the basic factors were still

intact, and the mechanism for the flow of funas was still operating.

It was inevitable that the money market of New York, under these con

ditions of world strife, should take over the role of the world fi­ nancial center.

In order to show clearly the impact of the war on international

trade of this country, a few facts and figures are necessary. Broadly

speaking, this section will attempt to show the new importance of

foreign trade to this country during the war and the i>art New York

city played in this new undertaking. It is to be admitted that no

long run conclusions can be reached from the statistics of the war period, first of all because much of the foreign shipping was of war

goods, and secondly, a great deal of the financing was done, not by

any money market, but by the government. The specific purpose of

this discussion Is to show the increase in trade that took place

during the war period, the increased ability of the New York facili­

ties to handle the increased trade, and finally, how the war changed

international finances. It must be remembered that this period pre­

sented unusual conditions and it would be pure folly to surmise that, on the basis of the changes that took place during 1939-1945, a new day was dawning for New York. It Is true that the war effort in­

creased the potential of New York. It will remain for the next chap­

ter to discuss what the city made of its new position. 223 at the present time is still that of trying to overcome this loss.

If and when England is able to accomplish this, perhaps London will again regain her old position.

New Tork during the war was the world financial capital, it was called upon to finance not only this nation’s war effort, hut also the struggling countries of Europe and the rest of the world.

It is true that the foreign official accounts held in New York de­ creased to some extent, which on the surface v;ould appear to be a decline in the importance of New York as a world financial center; however, it must be renembered that these deposits were withdrawn during the war as payment for goods and services received from this country. On the other hand, the private accounts in this country continued to increase during the war, indicating a flow of capital to this country for safekeeping. The w a r situation was identical with the transfer of the financial power from Philadelphia to New

York in our early history. Philadelphia lost control of the finan­ cial leadership because it lost its conmercial advantages. Holland,

Prance, Germany, Belgium and England lost the control of the finan­ cial market because they lost the pillars to support that narket; that is they lost the commerce and trade necessary as a basic factor to the continuation of a money market. With the ravage of war and the destruction of industries, the interruption of transportation and communication, there was no foundation for a money market. It had to move to new sites, a place where the commercial and cultural advantage 222 The big check to the decrease in the importance of the New York money market was the large increase in foreign trade and financing of that trade during the war. With the downfall of London, Paris,

Berlin, and Antwerp, New York was called upon to take over the finan­ cial strings for these former world markets. Not only were these markets, such as Berlin and Antwerp, ravaged by the war but they were also the victims of the complete breakdown of their economic structure. Paris lost its importance because of the disruption of the financial and economic organisation of the country. The French franc suffered immeasurably as a result of the war. This money market became an empty shell with the financial breakdown of the country.

Whether this situation will be permanent is another matter; it is quite possible,of course, that these old world centers will regain some of their power and prestige when the internal conditions of their countries become more settled.

London met a similar fate; although it is difficult to get facts that would have any significance in determining the trend in this money market. Because of the English government's method of tight controls and heavy taxes for war finance, it is not possible to de­ termine any consistent trend one way or another. Just to say that

New York has a larger amount of deposits does not prove the relative significance of this city. It can be said, however, that in view of the great loss Inflicted on London and surrounding areas by the devastating bombings, the result was a lessening of its productive capacity and therefore financial importance. The problem of England 221 never stopped to realize that when the profitable opportunities were outside of the money market, the money would flow out of New York 1 JuBt as readily. This is indicated in Angell's book for previous periods but not quite as emphatically as this past war period. New

York was having a constant decline during the war. It would be in­ teresting to have the deposits relatives compiled for the past cen­ tury; however, the difficulties of the task would probably outweigh the advantages. Apparently money leaves New York until the clouds appear and then heads back for cover, a return Journey that seems to foretell dark days ahead. Perhaps this tendency could be used as an indicator of the nation's business conditions.

As the New York money market declined in relative importance in

Indus try (in this study manufacturing and agriculture were used as measures of general industry) and as the people moved to new terri­ tory, the national income share of the state declined, and so also did the demand deposits of the state. While the domestic situation was somewhat detrimental to the money market position of New York, the fall was somewhat checked by its increasing international position.

Before a complete appraisal of the effect of the war on the New York money market can be made, the international position must be dis­ cussed.

^Angell could also be classified as one of thos writers that saw money going only one way. In discussing the period 1928-1929, when money was on its way back to New York, he commented on the safety factor but he did not think it important to discuss the outflow from 1919 to 1920 and 1922 to 1927. 220 from the money market without necessarily affecting New York's national Income. Foreign deposits would be an example of this point.

In summary, it is found that the war caused an economic revo­

lution in the domestic shift in demand deposits. It reduced the economic importance of the Northeast and tended to spread it to the

Midwest, Southwest and West Coast states. This change took place, first of all, because of military reasons, and secondly, because of

the distribution of government war plants. Private business, as was determined in the first part of the chapter, expanded tremendously but not by adding to existing plants. Instead new plants were scat­ tered all over the country in an effort to get away from the military target of the North East. The government also had this point in mind but it was not the only deciding factor, for labor markets, nearness 1 ot raw materials and weather were also considered. As a result of the shift in industry, the working public started on the march, when the Middle Atlantic states lost 1.92 per cent of their manufacturing importance, they also lost 4.4 per cent of their total population, a relative decline of 5,1 per cent.

So many writers saw money flowing into New York because of the profitable opportunities that existed in the m ney market that they

1 To further substantiate the point that the government did not dis­ tribute the war plants with the sole purpose of decentralization in mind, a brief study of the distribution will show th%t 25 per cent of the new facilities were established in the North East. 219 1947 for the industrial expansion of the South to take place. By

1947 this region had increased its manufacturing production from

$2,217,000,000 to $6,942,000,000, most of which took place in the later years of the war and the early part of the post war period.

Although this region lost ground from 1940 to 1944, it had .none than made up for it in the 1944 to 1947 period, because in 1947, the per cent change in manufacturing had increased 0.28 per cent which means that by 1947 it had increased its relative share of manufacturing.

Another factor that could account for the difference between national income and demand deposits was the tendency for the large corporations of the South to recall the deposits that had been sent North during the *30's. As was noted in a previous chapter, Southern companies preferred to keep their funds in the large banks of the North rather 1 than the small banks in the Southern states. As the need for these funds arose they were recalled so that the Atlantic States would show a more than proportionate gain in demand deposits. A3 could be ex­ pected the New York area also lost in relative importance. The ap­ parent discrepancy between the decline in National Income (1.5 per cent) and the more than proportionate decline in Demand Deposits (7.88 per cent), must be accounted for by other factors. It must be re­ membered that all funds in New York do not contribute to New York's share of the national income so that there can be a drain of funds

1 Hoover, C. B., and B. U. Ratchford, Economic Resources and Policies of the South. (New York, 1951), p. 115* 218 some data that will summarize all the factors involved. The index of national income serves this purpose. It is directly connected with and a result of cosmerce and trade; and, therefore, although not very helpful as a causal factor, certainly verifies the basic premise of this paper that money will follow business. The follow­ ing table demonstrates this fact.

Table XIX

National Income and Demand Deposit Changes, in Percentage Points, by Geographical Division, from 1940 to 1944

Geographical National Demand Division Income Deposits

New England -2.756 -5.18£ Middle Atlantic -1.5 -7.38 East North Central +1.5 +2.43 West North Central +1.2 +2.79 South Atlantic -2.2 +2.00 East South Central +0.6 +1.42 West South Central +0.6 +2.33 Mountain +1.2 +0.58 Pacific +1.6 +0.69

Sourcei National Income data from Department of Commerce, Survey of Current Business. (March, 1946), p. 14; Demand Deposit Data from Appendix C.

In the above table the South Atlantic group is the only one that does not conform to the pattern. It was found that by 1944 this re­ gion was still in the formative stage of development. Lar^e corpor­ ations of the North East were in the process of moving to the South but had not by 1944 moved in. It remained until the ye*rs 1945 to 217 and Pacific States were the recipients of the migrating workers, with increases of 6.0 per cent and 24.3 Per cent respectively.^

This is quite understandable since so many of the New England firms moved to the Carolines and the war production on the West Coast created a vacuum that had to be filled. In 1940 there were 600,000 people employed in manufacturing in California. Tiis figure increased 2 to 1,450,000 in 1944* It seems tlat during a war people throw off

their old homestead ties and start to follow the jobs. Apparently labor complies with the old competitive assumption of mobility only when large salaries are offered.

Turning to another approach to the problem of why demand de­ posits shifted during the war, the breakdown of national income gives a very high degree of correlation, and of course there is no reason why it shouldn't. However, even though this approach does show re­ lationship, the concept of national income is so large and all in­ clusive that It serves more as a blanket rather than an approach.

But since the factors involved with the shift of demand deposits are so numerous, and since the dominant national industries, such as manufacturing and agriculture, are not by any means the only influ­ encing factors on demand deposits, the only alternative is to use

United States Department of Commerce, Statistical Abstract of the United States. 1944-1945, (Washington), p. 123. o Stewart, W. B., op. cit.. p. 40. 2 1 6 increase in agriculture in the Midwest. In 1940 the East North Central and West North Central States produced approximately 40 per cent of the farm commodities but by 1947 these two regions produced over 65 per cent. A closer money market had to be found. New York apparently gave way to Chicago.

Returning to the other state groups shown in the table, there were only three state groups, West North Central, West South Central, and Mountain, where agricultural production was greater than industrial production. Two of these regions, the West North Central and Mountain, reported increases in relative importance in both agriculture and man­ ufacturing which increased their shares of demand deposits. The other region, the West South Central States, lost in relative importance, but still had an increase in relative holdings of demand deposits.

This can be explained by the very large increase in manufactur i ng, an absolute increase of 271 per cent. This absolute increase in manu­ facturing more than offset the relative decline in agriculture.

As a result of the job opportunities created by war production in other areas, the kiddle Atlantic States declined in absolute and relative importance in papulation. In 1940 the population of the

Middle Atlantic States was 27,539,487* whereas in 1944> it was

26,321,000, a decline of 4.4 per cent. At the same time the nation's population increased 0.7 per cent. The New England States suffered a similar fate, a decline of 2.7 per cent. The population apparently decided to try greener pastures. It appears that the South Atlantic 215 be accounted for hy the decline in international balances and the

drain of banker's funds from New York City to other money imrkets

throughout the nation. The first point will be discussed later in

this chapter; and the second, the domestic shift, can be supported

by a few facts that clearly demonstrate the internal drain. During

the years 1940 to 1947, the total demand deposits in New York banks

had an absolute increase of only 34 per cent while demand deposits

in Chicago banks increased 88 per cent. In the same manner Chicago

increased its share of domestic interbank deposits. While New York

lost 22 per cent of its interbank deposits, Chicago increased 14 per

cent. Again in 1940, and viewing interoank deposits by relative

shares, New York held 43 per cent to Chicago's 10 per cent, whereas

in 1947 New York banks held only 28 per cent to 12 per cent for

Chicago.^" Apparently Chicago was becoming a good competitor of New

York for national funds. This contention is.further supported by

Table XVIII. According to this table, the East North Central States

suffered a decline in industrial and agricultural importance, but at

the same time the relative importance of demand deposits held by the

East North Central States increased. This can only be explained by bank balances flowing out of New York banks, where a decrease was re­

ported, to other cities, such as Chicago, where gains were reported.

Perhaps most of the increase in Chicago can be accounted for by the

Board of Governors of the Federal Reserve System, Bulletins. June, 1941* p. 552, and June, 1943, p. 686. 214 dominant factors as manufacturing or agricultural or to use data that will summarize all the factors, such as national income. The first method is not conclusive, and the second not very useful.

Table XVIII, however, does show remarkable correlation at least be­ tween manufacturing and demand deposits. As was pointed out pre­ viously, manufacturing and agriculture were two of the dominant in­ dustries during the war and post war period. To measure the extent of manufacturing, the value added to the product was used, for agri­ culture the total production in dollars was used. The year 1940 was selected aa the beginning year because it was relatively free from war sponsored production, and for the same reason 1947 was selected because it not only represented peace time production but also would reflect the influence of the war. The table in most cases shows an extremely close relationship between dejnand deposits and manufactur­ ing, more so than betveen demand deposits and agriculture. This was to be expected because manufacturing was the dominant industry during the period concerned. Using national totals, manufacturing was about two times as important as agriculture in 1940. By 1947 the gap be­ tween the two was even greater as manufacturing stood at $74,426,000,000 while agriculture was only $21,551,500,000. Again New England and the Middle Atlantic States declined in relative importance, although the decline in per cent share of demand deposits held by the Middle

Atlantic States seems to be out of proportion to the decrease in relative inportance in the two economic factors. This decrease can 213 plants and number of units produced, and also that the production is homogeneous, there would be no difference on the total econon\y whether one plant is producing tanks, and another, rifles. These defects, however, do not invalidate the principle involved but instead are helpful in demonstrating some of the variations to be found in the industrial changes. The following table shows the relationship be­ tween manufacturing and agricultural changes, on the one hand, and demand deposit relatives on the other.

Table XVIII

Shifts in Manufacturing, Agriculture, and Demand Deposits, by Geographical Division, 1940 to 1947s

Geographical Agriculture Manufacturing Demand Division Deposits

New England - .51 - .71 - 5.86 Middle Atlantic -1.46 -1.92 -11.33 East North Central - .13 -0.08 + 2.06 West North Central +4.14 + .03 + 4.40 South Atlantic -1.78 + .28 + 2.33 East South Central - .88 + .50 + 1.92 West South Central - .72 - .74 + 4.39 Mountain + .39 + . 4«i + 1.20 Pacific + .94 +2.07 + 1.00 aThis table is also expressed in percentage point changes. It high­ lights the shifts among divisions.

Source: Appendix D.

In appraising the value of Table XVIII, it must be remembered that there are an untold number of factors influencing demand de­ posits and at best all that can be done is to consider some of the 212 also provided by the government. The inportant point here is that the new facilities added to the national economy were not all placed in the pre-war manufacturing states; and where they were added, they were not added in the same proportion. For example, let us suppose we have three manufacturing areas, producing the percentage of total manufacturing as follows: Area A, 50 per cent; Area B, 40 per cent; and Area C, 10 per cent. Then, let us suppose that the government wants to Increase production of manufactured goods and does so by adding new plants to the areas in such a way that Area A will pro­ duce 50 percent of the addition; Area B, 40 per cent; and Area C,

10 per cent. In this way there would be no change in the relative

Importance of the three areas. However, let us supoose that addi­ tional plants are distributed in such a way that Area A will produce

40 per cent of the addition; Area B, 30 per cent; and Area G, 30 per cent. Assuming that the new facilities increase total production by

50 per cent, that is, if 100 units were made before, now 150 units are produced, we find that the relative importance of the various 1 areas has been changed. Area A would have decreased in importance from 50 per cent to 46.6 per cent; Area B, from 40 per cent to 36.6 per oitt, (although both would be producing more), and Area C in­ creased from 10 to 16.6 per cent. Of course, this example leaves a lot to be desired. Assuming that there is a constant ratio between

1 The assumption of a 50 per cent increase does not alter the validity but merely the proportionate changes that would be made in each area. If with the new plants total production was doubled, Area A would have decreased to 45 per cent, B to 35 par cent, and C increased to 20 per cent. 211 was 180 per cent. Two other large contributors in 1939, Trade In­ dustry and Government, followed a similar pattern* trade decreased in importance whereas Government increased 150 per cent. Two other industries, Agriculture and Transportation, followed the general pattern, Transportation decreased in relative importance, while 1 Agriculture increased 165 per cent. rihen the economy was revamped

in this way, it was bound to change the holdings of demand deposits;

that is, to cut down the demand deposits relatives in areas depressed

by the conversion to war production and at the same time increase the relatives in those areas benefiting by war production. There are, of

course, many factors involved in this change and it would be impossible,

in the first place, to determine all the variables, and, in the second

place, to find data to measure them. It will suffice for this study

to select a few economic factors that have some bearing on the changes in group relatives.

Since the government, In carrying out the war effort, altered the economy drastically by making raanufacturing the dominant industry

in the national product, then it stands to reason that those states or state groups having the facilities for manufacturing should be the ones to increase in importance. However, this would have been the case if it were not for the fact that most of the increase in manufacturing did not come for existing facilities but from new plants

1 Stewart, W. B., "Shifts in the Geographical and Industrial Pattern of Economic Activity", American Economic Review, May 19^6, Volume XXXVI, Nuntoer 2, p. 39. 210 reversed their direction; that is, they started to decline in rela­ tive importance. All state groups that had at least eight per cent or more of the nation1s demand deposits in 1940, were by 1945 on the decline. On the other hand, all regions that had a small per- dentage of total deposits in 1940— West North Central (5.6 per cent),

South Atlantic (6.0 per cent), East South Central ^2.2 per cent),

West South Central (3.9 per cent) and Mountain (1.5 per cent)— were increasing their shares in 1945. Apparently the state groups holding the larger shares of demand deposits were not able to increase with the increase in the national average. The East North Central and the Pacific, spurred on by war production during the early part of the war, increased their relative position, but after they nad in­ creased in absolute amounts to a high level they were unable to a&in- tain their rate of increase and declined in relative importance. The

East North Central States increased from 16.27 per cent in 1940 to

20.51 per cent in 1942, a very rapid increase. From 1942, they show a steady decline for the duration of the war. With the war, the complexion of the econony was drastically changed. Using 1939 as a base year, it was found that by 1943 in­ dustries were completely shuffled in their importance or relative share of total national income. Naturally, some industries faded into the background as others came to the front. Whereas in 1939> manuf acturing and services industries contributed the largest single shares to national income, in 1943 manufacturing Jumped way out in the lead. Actually the increase in the contribution of manufacturing 209 the North Eastern States. Apparently the New York area loses its 1 relative importance during periods of national economic expansion.

This is further supported by a study made by Angell in 1936. In

his study he found that money tended to flow to New York before

and during the depression of 1929- In 1928 the relative importance

of the New York Federal Reserve District was 34*21 per cent; in 1929

it had increased to 36.28 per cent; 1930, to 37*05 per cent; 1931,

to 39*34 per cent) 1932, to 41*27 per cent; 1933, to 42.75 per

cent— an increase of 8.54 per cent in relative importance in five

years. According to Angell this increase was brought about by the

profitability of stock market speculation in the first part and the 2 tendency for funds to seek safety during the early depression years.

In any event in the analysis at hand it seems apparent that the pro­

fitable opportunities were outside of the New York area, tfith the

exception of the South Atlantic States, mos.t of the decrease that

was made by the New England and Middle Atlantic States, as well as

increases in other state groups, was made by 1943* After 1943, with

the exceptions of the East North Central and Pacific States, the di­

rection of the change remained the same, but the rate declined. Be­

tween 1942 and 1943 the East North Central and the Pacific States

1It was because of this tendency that in 1917 the member banks of the Federal Reserve System were required to transfer their required re­ serves from their own vaults to the Federal Reserve District Bank. 2 Angell, J. W., The Behavior of Money. (New York, 1936), p. 66. 208

New Jersey, decreased 9 percentage points in relative importance while the New England States decreased 5*5 percentage points. The state group making the greatest increase was the v^est South Central with an increase of 3*4 percentage points* The following table will show the relative changes in state groups made during the year 1940 to

1945* Table XVIX

Shifts in Relative Importance of Demand Deposits, by Geographical Division, 1940 to 1945

Geographical Percentage Division Change

New England - 5*52 Middle Atlantic - 9.00 East North Central + 1*75 West North Central + 3*28 South Atlantic 4 2.15 East South Central 4 1.66 West South Central + 3*42 Mountain 4 0.32 Pacific 4 1.08

Sources Appendix C

This table, Table Number XVII, clearly shows the changes that were made during the years involved* The loss in importance of New

England and the Middle Atlantic States was made up by increases in 1 others. The table shows the areas that benefited by the loss of

It is not to be construed that all money flowed from area to another. Although this did take place, it is more likely a situation where the other areas merely expanded their demand deposits on the basis of their excess reserves* It is to be remembered, however, that the excess re­ serves in the increasing areas could have been expanded by the federal tax policy. See page 202. 207

Table XVI

Demand Deposits for Commercial Banks as Percentage of National Total, by Geographical Division, on December Gall Dates, 1940-1950*

l94(^ 1941942 1943 1944 1945 l94* 1947 1944 1949 1950

N«» EcslccO 10.67)1 10.055 9.245 5*655 5.495 5.155 4.935 4.815 4.835 5.005 5.035

Mlddl' Atlantic ♦5.65 ♦3.«3 ♦ 1.50 38.52 37.71 36*69 3 4 .2 6 33.86 33.03 33-15 32.82 tact North Central 16.27 16.85 20;5I 10.88 18.70 18.02 17.99 I8 .3 3 18.66 19.39 19.39

Icat North Central 5.65 5 .96 6.66 8.37 8 . 4 4 8.93 9.73 10.05 9.98 9.70 9.61

tacth Atlantic 6 .01 6. *2 6.6? 7.55 8.01 8.16 8 .6 0 8 .3 4 8 .3 4 8.25 8.3?

Eaat Couth Central 2.20 2.56 2.04 3.56 3-70 3.94 4.15 4.20 4 .3 0 3.67 3.96

feet teeth Central 3-55 4.12 ♦«6o 6.46 6.82 7.41 7 .9 6 8 .3 0 8.79 8.95 9.05

Newntaln 1.54 1 .60 i.«6 2.14 2.12 2 .3 6 2 .6 2 2.74 2.80 2.72 2.73

Pacific 0.22 8.57 9.10 8.81 8.91 9 .3 0 ’ 9.59 9.22 9.18 8.98 8.99

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

The above table needs & word of explanation. The percentages shown give the relative shares, or distribution, of total demand deposits, per state group for each year. For example, In 1940, the New England States held 10.67 par cent of the nation*s demand deposits. By 1943, this share had decreased to 5.65 per cent, a decrease of 5*02 per­ centage points in relative importance. The table does not in any way show absolute changes, that is, it cannot be said that, between the two years mentioned above, demand deposits for the New England states decreased 5.02 per cent, or that demand deposits were 5.65 per cent greater in 1943 than 1940. bIncludes time deposits.

Source; Appendix C. 206 of New York City and the three—state area, so the criticism would not be valid in this case; this is especially true since the de­ mand deposits of New York City constitute the greatest part of the total deposits of the area— over 70 per cent in 1912 and about 65 per cent in 1950. While there tends to be a high degree of homogenity between New York City and the three-state area, the same cannot oe said of other money market areas. But unfortunately data for other

cities are not always available. However, it is felt that despite the limitations involved, the method of relatives for state groups

will still give a fairly good indication in the changes that have

taken place. After the relatives show the shift of funds throughout the nation, the next purpose of this analysis is to point out some of the reasons why the changes were made. Unfortunately, this is not

quite as simple as the first; however, it is believed that there is enough evidence to throw some light on the economic factors involved.

It is in this manner that the relationship between money and banking, and commerde can be readily seen* By this means, the relative im­

portance of the money market can be viewed as the ravages of war,

prosperity and inflation make themselves felt on the total econoay. It is apparent from Table XVI that there were many changes in

the relative importance of the various districts involved. At a

glance, one can see that, during the period concerned, 1940 to 1945,

two state groups decreased in relative importance and seven increased.

The Uiddle Atlantic States, made up of New York, Pennsylvania, and 205 but it is a difficult task to find how much steel was produced or how many people lived in the Third Federal Reserve District of Penn­ sylvania as opposed to the Fourth District. In other word3, it is impossible to obtain non-financial data that corresponds to the

Federal Reserve Districts.

As was mentioned previously, the use of relatives has certain defects, but at the same time it also has certain advantages. It eliminates all trends, cyclical, seasonal or other changes to be found in economic data. Furthermore, because of the enormous changes during the war, a method had to be used that would eliminate absolute magnitudes. The relative gives us the changes for each state group around the national average.

The purpose of this analysis is to determine what changes, if any, took place in the relative importance of the various state groups, and particularly those states that were considered to be the financial leaders. The method is subject to some logical de­ fects because underlying the analysis is the assumption that a particular state group will be representative of the states included and that the states, or state, will be representative of the large cities or money market* For example, to find out what happened to the New York money market, data for the st^te of New York was used, combined with that of Pennsylvania and New Jersey, and permitted to

show the relative change of the New York money market. However, it was found that, at least for the period covered in this analysis,

there was a high degree of correlation between the demand deposits 2 0 4 information isn't always available particularly for a long period of time nor broken down by states or state groups. Demand deposits were used not because they represent an ideal device for determining trends, but because they lend themselves more readily for the pur­ pose at hand.

Using the demand deposits as relatives for each state group, the change in relative importance can be easily seen. This method of relatives is in effect an expression of each item as a percentage of the total. If the percentage is increasing, it means that the total demand deposits for the particular state group is increasing faster than the national average or that it is not decreasing as rapidly. The relatives used were obtained by dividing the national total demand deposits into the total demand deposits for each state per year. Then the relatives for the states were grouped into geo­ graphical location and totaled, which gave the relative for each group.

The state groups were used rather than the Federal Reserve Districts in order to eliminate a problem of obtaining comparable data. Most of the data issued by the Department of Conxoerce are given on a state basis, rather than by Federal Reserve Districts. In trying to cor­ relate financial data released by the Federal Reserve Board with non-financial data issued by other agencies and institutions, a break­ down problem arises which introduces more statistical maneuvering.

For example, in the case of Pennsylvania, it is a relatively easy problem to find the financial data for the eastern and western part of the state, that is, for the two Federal Reserve districts involved, 203 of this chapter will deal with the war period, that is, 1940 to 1945, and the next chapter, with the period, 1946-1950.

The iiiethod used in this analysis will be similar to Angell’s analysis in his book The Behavior of Money. In order to point out the changes that were made by World War II on the national econon^y, total demand deposits were broken down into state gro ps and then expressed as a relative (or percentage) of the total. Demand de­ posits were selected because the data is more accessible than ether banking data for states and for an extended period. It is admitted that there are many disadvantages to using total demand deposits, but, of course, the same thing could be said of any data used to present the relative changes. In the first place, savings deposits could be used as money in a short period of time and therefore in­ fluence demand deposits. Then, too, from various studies it is found that there isn't always the same ratio between time and demand de­ posits in every state. However, since savings deposits have not been definitely classified as money (although some writers call them near­ money), it was decided to exclude savings deposits. Another weakness is that demand deposits are not necessarily an indication of the our- ohasing power of a given area. With a given amount of money or supply as it is called in money and banking texts, and high clearing of checks, an area could Increase its purchasing power or decrease it depending upon whether or not individuals want to spend or hold their money.

In view of this it would have been better to use bank debits, but this 202 1 for war production in other districts." Since these districts apparently were able to keep the funds in their sections, the re­

sult was a diinunition of the Importance of New York. These losses

to the New York money market became greater as the war continued.

In a publication of the Federal Reserve Si/stem, we find that in 1942

. .the New York Reserve District lost more than two billion dol­

lars of reserves to banks in the country as a result of Treasury

disbursements outside the district. In 1943 the New York District

losses were nearly five billion dollars."

However, New York gained in another direction as a result of

the war. The city, although losing a great deal to other centers

of the nation, fell into the world leadership as the only surviving

world money market. Before this emerging international aspect is

discussed, a few facts and figures concerning the national scene is

necessary.

It appears that during the period 194C to 1950, more was done

on the domestic scene toward making a redistribution of money, at

least statewise, than at any other time in our history. The follow­

ing table highlights the changes that have been made in holdings of

demand deposits by states during the past ten years. The remainder

1 Youngmen, A., The Federal He serve System in Wartime, National Bureau of Economic Research, January, 1945, p. 43. 2 Rosa, R. V., "Impact of the War on the Uember Banks, 1939-1946", Federal Reserve Postwar Economic Studies, Number 8, (Washington, 1947), p. 35. 201 little significance for the purpose of this analysis, but it does seem to verify the fact that the expansion of banking facilities took place within the existing banks, the degree of this expansion depending upon the amount of industrial expansion in each bank's area. In contrasting the decrease in the number of banks during the past war with the increase in the number during World War I,

C. R. Vlhittlesey said, "It is worth remarking that the present re­ luctance to charter new banks is favorable to banks now in operation.

It signifies that the enlarged volume of business is not divided, as 1 was the case before, among an increasing nuj&er of banks". It be­ comes apparent, then, that the slow, gradual development of the economic expansion continues on its evolutionary path. As a result of the war, the position of New York somewhat changed; that is, it lost some of Its relative financial importance and power to other newly developing money markets that had their own origin in the fi­ nancing of the war. New York gave way somewhat to Chicago, San

Francisco, and other financial centers as far as the concentration of domestic banking was concerned. This occurred in several ways, as explained by Anna Youngman, "The funds obtained by the Treasury from the sale of government securities to the New York banks and from tax collections in the New York District were largely disbursed

^Whittlesey, C. R., The Banking System and War Finance. National Bureau of Economic Research, (New York, 19A3)> PP* 43-44- It was probably because of the realization of this fact that the New York banks started an extensive selling and advertising campaign. In order to gain some of their old national prestige, various New York banks even at the present time are pushing their

salesmen in an effort to increase their interbank deposits. In

Ohio, as a result of this campaign, companies which formerly main­

tained their deposits at local banks, and banks which kept deposits

in nearby banks, are now being persuaded to transfer their accounts

to New York banks. A large company in Columbus, Ohio, is a good

example; this company transferred a large part of its local deposits

to New York as a direct result of this selling program. New York is out to regain her old position; competition either by the new finan­

cial centers that are developing or the many other financial insti­

tutions, such as insurance companies, farm loan agencies, etc., will present serious problems to the New York banks.

Uost of the change in the size of the nation* s bank sysi.em took

place without much of a change in the number of banks. As in the

case of the manufacturing industries, it seems that the existing banks

Just expanded to meet the local needs as the new industries developed.

Between 1940 and 1945 the nunber of banks decreased by 129, but at

the same time, there were 301 new branches established, mostly by the

larger banks. However, if we go back to 1939, at this time ths;re were

15,035 commercial banks and in August of 1948, this number dropped to

14,719, a decrease of 316. This change is so small that it has very 199 Table XV

Total Deposits by Selected States, 1940 and 1946

Rank Total State (as of December) Percentage Change Deposits 1940 1945 1946 1940-1946 1945-1940 1946

New York 1 1 1 48.42^ -1 0.79% $ 41,382,364 California 4 2 2 176.67 - 1 .0 1 13,122,187 Illinois 3 3 3 1 0 7 .1 2 - 8 .2 0 10,955,841 Pennsylvania 2 4 4 73.62 - 5.52 10,555,716 Massachusetts 5 5 5 60.62 - 4.25 7,2 8 7 ,6 1 0 uhio 6 6 6 140.77 - 5.79 0,949,625 Texas 9 7 7 217.06 - 5 .1 0 5,627,914 New Jersey 7 8 8 109.97 - 3.47 4,824,968 Michigan 8 9 9 136.14 - 4.71 4,677,885 Missouri 1 0 1 0 10 132.97 - 5.61 3,922,295 Indiana 13 1 2 11 1 7 6 .8 8 - 0 .5 2 2,8 8 8 ,6 1 2 Wisconsin 14 13 12 176.62 - 0 .1 1 2,863,909 Minnesota 1 2 1 1 13 157.46 - 2.92 2,825,335 Connecticut 1 1 14 14 76.00 + 1.34 2,62o,211 Iowa 16 15 15 199.65 + 4 * 66 2,226,055 Washington 18 15 16 218.94 - 6.57 2,140,483 Maryland 15 17 17 8 9 .2 0 - 6.59 1,953,180 Tennessee 19 18 18 187.49 - 3.78 1,822,705 North Carolina 2 2 19 19 233.97 • +11.84 1,856,302 Virginia i 2 2 0 2 0 - 3 .6 3 1,786.371 XX XX XX 105.74% - 5.48% ♦158,156,498

Sources Business Week. October 18, 1947, p. 83.

nation. In 1940 the average deposits in each bank amounted to 4.2

millions of dollars; in Deceofcer, 1945, this amount increased to 8 . 6 millions of dollars, or an increase of about 105 per cent. Since in­

dustry moved out of the Sast and into the South and West, the eastern

banks did not maintain this average; whereas the banks in the other

sections more than doubled their deposits. 198

from Table XV that, although the percentage gain in total deposits

of the nation .just about doubled between 1940 and 1946, quite a few

of the traditional centers of economic activity did not keep pace with the nation's average. From this table, the states that did not keep up with the national average can be compared to those states

that were above this average. In comparing some of the banks in

these states, it is found that the Bank of america held approximately

2,5 per cent of the nation's deposits in 1940; whereas in 1948,

this bank held about 3*8 per cent, While the bank in California was

increasing its share, the "Big Three" of New fork City were undergo­

ing the opposite effect; in 1940 these banks, the National City Bank

of New iork, the Chase National Bank, and the Guaranty trust Company,

together held about 15*7 per cent of the nation's deposits; whereas 1 in 1948, this percentage was reduced to 7*7 per cent.

It would appear from these data that the degree of concentration

in banking, as in non-financial industries, was reduced as far as the 2 concentration in any one location is concerned. The direct result

of the war was to reduce the importance of New York as the money mar­

ket and to establish a number of other minor centers throughout the

Board of Governors of the Federal Reserve System, Bulletin, October, 1948, p. 1260, and Standard Corporation Records, (New York, 1948), P* 989* 1 The Clearing Statistics also substantiate this conclusion. See Board of Governors of the Federal Reserve System, Debits and Clearings Statistics. Their Background and Interpretation. (Washington, 1947), p. 12. 197 five such combinations during the whole decade of the 30's, this figure gradually moved upward to about 125 in 1945* This tendency 1 toward concentration will continue as it did after the last war.

With this war, however, there does seem to be evidence to sup­ port the contention that industry tended to spread out over the wide expanse of the nation; Texas and California came into prominence as

the new lands of opportunity. Industry tended to shift from the East

to the South and West; thus establishing more production centers in

the nation. Since the large companies did not lose any of their in­

dustrial power, it would seem that they, instead of enlarging their existing plants, started new ones in different sections of the coun­

try. In this case, then, the concentration of ownership did not diminish but the concentration in location did. ^ith this situation, one would expect a change in the concentration of money and banking.

As a result of the changing profile of. business activity, one

of the basic forces in the development of money, the financial insti­

tutions also changed, resulting in a few more money markets in the nation. Since industry became more dispersed, the banks in these

new areas had to increase in order to keep pace with the changing en­ vironment. The expansion of the Bank of America has already been

cited as a case in point; this bank had to expand to serve the

surrounding community; the same conditions, although not quite so

strikingly, apply to other sections of the country. It can be seen

1 J United States Senate, Ibid.. p. 40. 196 1 war, while the position of small business declined11. During the war, the employment in the small manufacturing firms dropped to

3&.1 per cent of the labor force in 1944 from a high of 51.1 per cent in 1939. It is of great interest to note, however, that the number of small firms in both years constituted about 95 per cent of the total number of firms, uf the usable production facilities, two hundred and fifty corporations increased their holdings from 65.5 per cent of these manufacturing facilities in 1939 to 66.5 per cent in 1945, an increase of 1 per cent. This change doesn't amount to much on the surface, but the fact remains that the giants were able to increase their holdings from a total value of 25.9 billion dollars of capital assets in 1933 to 39.6 billion dollars in 1945, just short of the total value of the capital assets held by all 75,000 manu­ facturing corporations in 1939* In 1945, if the above figures are correct, and we must assume they are, three-tenths of one per cent of the manufacturing corporations owned or controlled 66.5 per cent of the corporate assets; thirty-one of these 250 firms are controlled by five interest groups; the Morgan-First National, Mellon, rocke­ feller, duPont, and the Cleveland group. These five groups controlled approximately 30 per cent of the capital assets.

During World War II the number of consolidations in industry started on an upward trend. From a yearly average of about twenty-

1 United States Senate, World War II and Economic Concentration, Document No. 106, (Washington, 194&), p. 21. 195

CHAPTER VIII

Monetary Concentration and World War II

No one can deny that the direct result of the war was bigness in practically every phase of life; production reached record- breaking levels, sales topped all previous marks, income surpassed all previous marks, and even the national debt reached such pro­ portions that it is no longer fashionable for government officials to use the word "millions'1. These momentous achievements cannot take place without fundamental changes in our banking system. The changes have taken place, but too often they are overlooked because they are institutional in nature; and, to many, do not seem as im­ portant as the benefits received from our record-breaking production.

In most cases, the war promoted this evolutionary advancement of our economic system.

From the point of view of industry, there is no doubt that the war has resulted in a higher degree of economic concentration than existed in 1939. A pamphlet released by the Special Committee to

Study Problems of American Small Business, United States Senate, in

1946, stated that the war aided the forces promoting economic con­ centration. According to an investigation of the changes in industry as caused by World War II, "The relative importance of big business, particularly the giant corporations, increased sharply during the 194 1951, we have an expanding economy, but this time the expansion is promoted by the government war effort, which means that the Federal

Reserve System cannot use its old methods of controlling cyclical fluctuations.

In summary, we see that the money market is a collection of mone­ tary factors, and all of them have at least an indirect influence on interest rates. Before the Federal Reserve System, the market was subjected to sharp breaks caused by either a sudden surplus or short­ age of funds. Up to the present difficulties, that is, up to 1940, the Federal Reserve System did a great deal toward softening the dis­ turbing influences to the money market; however, it did not eliminate them completely. Since 1940 it is found that the Federal Reserve has had to cope with a new disturbing factor, nefore the Federal Reserve could use the interest rate as one of its weapons, but now with this new influence, this old weapon cannot be used. The interest rate will be low and other disturbing balances will have to be offset by adjust­ ing the supply and demand for funds, consistent with an orderly gov- 1 eminent securities market. This task will be a difficult one.

^Phere is evidence already that tight money conditions prevail in the money market which, because of Treasury policy, will probably force Open Market Buying. In the week ending September 26, 1951, the Fed­ eral Reserve holdings of government securities increased $399,000,000. The investment analyst for Banking interprets this prompt action of the Open Market committee ", . .as evidence that agreement had been reached between the Treasury and the Open Market Committee that the short-term interest rate would be stabilized at about the present level". See Olyphant, M., "Government Bonds", Banking. November, 1951, p. 46. (Since January, 1951, short-term interest rates have increased much faster than long-term.) 193 Table XIV

Distribution of Member Bank Reserves 1941 - 1948

New fork and All Other Total Member Chicago Bank Bank Reserves Date Bank Reserves Reserves as as a (in millions) a Percentage Percentage of Total of Total

December 1941 12,396 49. 4* 50 M 1942 13,072 40.4 59.6 1943 12,835 34.4 65.6 1944 14,261 32.0 68.0 1945 15,811 31.3 68.7 1946 16,015 30.4 69.6 1947 17,797 31.9 67.9 1948 20,406 34.1 65.7

Source: Board of Governors of the Federal Reserve System, Bulletin, May, 1951, P- 533.

It would seem from this tendency of money to flow out of the money market areas during periods of rapid economic expansion, the

Federal Reserve System, In addition to buying on the money market to make money available, would also have to buy more and more to sta­ bilize the government securities market.^" The banks of the money market in order to obtain funds to meet the withdrawals for the economic expansion of the interior, would be forced to call in some of their holdings and sell government securities. Now again, in

About 7056 of the new issues of Treasury bills are sold in the New York money market. Federal Reserve Bank of New York, op. clt., p. 149. 192 Another factor, although prcbably not very important from a policy point of view, is that the Federal Reserve will have another leakage giving rise to excess reserves. It has been found that dur­ ing a war period or a national emergency of similar dimensions, that there is a tendency for money to flow from money markets to interior banks, on the surface, this doesn't present any problem to the na­ tional econosgr, but it is an offsetting factor to a "tight" money policy. Money will tend to flow from the Central Reserve Cities, or money markets, to other parts of the country— cities with lower re­ serve requirements. That is to say, at the present time, $100 in

New York or in Chicago would require $24 as reserves; whereas if a company transferred its funds to a country bank, only $14 would be required, thus giving the banking system more excess reserves* fte find that the mere transferring of funds from one place to another, although not affecting the total amount of legal reserves, will af­ fect the total amount of excess reserves. The following table will point out the relative changes in reserves of member banks during recent years.

As the percentages indicate, there seems to be a tendency for money to flow out of the markets during the period of war emergency.

However, in order to maintain a stable market for government borrow­ ing the Federal Reserve will, to the extent that this is a serious drain on the market, have to be busy broadening the market.

1 One of the important factors causing this leakage is the distribu­ tion of tax receipts by the Treasury Department. See Chapter iX. 191 Table XIII

Treasury Factors Influencing Bank Reserves (In millions of dollars)

U.S. Govt. i'reasury Date Securities Treasury Treasury Deposits Member held by Currency Cash with Bank FR Banks Outstanding Holdings FR Banks Reserves

1950 - Mar 29 17,516 4,599 1,321 997 15,782 Apr 26 17,640 4,600 1,316 833 15,898 *ay 31 17,389 4,606 1,309 588 15,814 June 28 18,217 4,608 1,306 806 15,988 July 26 17,964 4,605 1,315 504 16,415 Aug 30 18,584 4,611 1,308 676 16,285 Sept 27 19,353 4,614 1,307 1,144 16,699 OCt 25 19,229 4,618 1,300 420 16,649 Nov 29 19,569 4,626 1,298 564 16,799 Dec 27 20,337 4,631 1,295 781 17,174 1951 - Jan 31 21,484 4,638 1,297 807 18,984 Feb 28 21,881 4,640 1,293 465 19,066 Mar 28 22,606 4,637 1,299 1,052 19,023 Apr 25 22,940 4,641 1,296 678 19,176

Sources Board of Governors of the Federal Reserve System, Bulletin, May 1951, p. 515* little change in this trend of bank reserves as a result of the Full

Accord Agreement, ^or the week of April 18, 1951, the reserves stood

at $19,674,000,000, a figure well above the peak before the agreement 1 was announced. The Inflationary effect of this increase in bank re­

serves was offset to a large extent by higher reserve requirements,

gold exports, and, of course, credit Restraint on the part of in­ dividual bankers.

Board of Governors of the Federal Reserve System, Bulletin, June, 1951, p. 655. 190 1 outlook is not quite as dark as it may appear.

ihe following table will show what the Treasury has been doing since the first of this year to increase bank reserves. It is im­ portant to mention, however, that gold exports and other measures for the same period aided the Federal Reserve greatly in keeping excess reserves at a low level.

This table, although not a full coverage of the influencing items of member bank reserves, does show what the Treasury Depart­ ment has been doing to member bank reserves. Admittedly, some of the other influences, at times, may offset the Treasury influences, and in such cases there would be no change in reserves. However, for the period shewn in the table, it is found that this was only par­

tially the case; the Treasury policies dominated the market and other

factors were in general not sufficient to offset Treasury action.

Reserves of member banks increased from #15,702,000,000 in March,

1950, to #19,176,000,000 in April, 1951. During the period Jan­ uary 11 to 25, 1951, the Federal Reserve Board increased the reserve

requirements of the member banks in an effort to cut down the excess

reserves and therefore the inflationary tendency. Although at this

writing it is a little too early to tell, the data available show

1 Aside from the present emergency, low interest rates might not be inflationary. Since a wealthy nation has a tendency to save an increasing amount out of an increasing income, the problem the nation would face is not inflation but deflation brought about by the inability to invest savings profitably. In this case, savings do not increase as a result of interest rates but instead are a function of income. For a further explanation of this problem, see Hansen, A. H., Business Cycles and National Income, (New York, 1951 P. 155. 139 to bolster the market, the Federal Reserve would buy securities from the market, and unless the buying was offset by selling other 1 types of securities, bank reserves would be increased. At the present time, the Treasury seems committed to years of borrowing, which i3 saying at the same time that the Federal Reserve Credit

Outstanding must increase because it is committed to maintain an

"orderly government securities market". If the Treasury must borrow

(and apparently Congress has decided it will) then the Federal Re­ serve is also committed to an inflationary policy. Unless other measures, such as gold movements, Voluntary Credit Restraint Frogram, rationing and price controls, taxation or higher reserve requirement and proper distribution of the debt, can be effectively used, we are 2 threatened with another inflationary spiral. Fortunately, the

1 For a thorough description of the Federal Reserve's Open Market dealings, see "Marketing of Treasury Bills", Monthly Review, Fed­ eral Reserve Bank of New York, Volume 33, No. 10, October 1951, p. 150. For a good current analysis of money market analysis, see the Monthly Review. 2 Marginal Requirements have also been suggested as another means of controlling inflation. This control does not seem too effective as very little bank credit finds its way into the stock market. Accord­ ing to Siteman’s theory (see page 105) brokers clear out most of their accounts even during an upturn of the stock market. All that the margin requirement does is to cut down the nuntoer of people buying stock which merely is a control of inflation of stock prices and not a control of credit. There might be some Justification for reducing margin requirements during the present emergency so that money which otherwise would have been idle or would be bidding up prices of con­ sumer goods could now flow into the side arena of the stock market. There are many limitations to this argument, chief among which are (1) the stock market might, in addition to drawing idle savings, at­ tract funds that would have gone into government securities, and (2) the inflated stock prices would have to drop when the present emer­ gency was over. Someone would have to take a loss during the squeeze. 188 silver certificates are tied to silver purchases and other forms are of minor importance. Treasury cash, although the Treasury has more leeway here, is determined by tax receipts, expenditures and borrow­ ing which in most cases cannot be changed drastically by an Treasury official for the sole purpose of influencing interest rates. This is not to say that changes in Treasury cash does not influence re­ serves, but merely that it is not as easy to control for the purpose of influencing the market.

The Treasury Department does have more influence by borrowing at the Federal Reserve Banks and changing the amounts of Treasury deposits with Federal Reserve Banks and member banks. Since Federal

Reserve Credit Outstanding can be such an important influence on in­ terest rates and since it will be an important source of funds during the present emergency, it deserves a further explanation at this time.

The Federal Reserve is called upon to furnish credit to the market, banks and Treasury by making discounts and advances and by buying industrial loan paper and government securities. When the

Federal Reserve buys this paper, that is, extends credit, bank re­ serves increase. On the other hand, when the Federal Reserve sells this paper, bank reserves decrease. The buying and selling make up the Open Uafcket Operations. For the past twenty years the government securities made up the large part of the Federal Reserve Credit Out­ standing. The Treasury could either borrow directly from the Federal

Reserve or borrow from the market by floating securities. In order 187 peg on government securities. It could restrain credit expansion

“consistent with the policy of maintaining orderly conditions in the government securities market". How effective the Federal Reserve would be in accomplishing its stated purpose would still be deter­ mined, in part, by the Treasury. The interest rates would be allowed to move upward, high enough to restrict private borrowing but no so high that the flow of investments would be interrupted.

The Treasury is, at any time, in an important position to in­ fluence the money market and the reserves of the banks. Also, by tax receipts and expenditures, the Treasury influences not only the supply of and demand for funds but also the interest rates. The

Treasury can influence reserves of banks by (1) selling securities, which might force the Federal Reserve to buy securities on the open market in order to stabilize it, and shows up in Federal Reserve Cre­ dit outstanding, (2) by increasing Treasury currency outstanding

(this is no longer an important influence), (3) by Treasury Cash holdings (only indirectly controlled by the Treasury), and (A.) by changing the amount of Treasury deposits with Federal Reserve Banks and member banks. These four factors are of varying importance to the Treasury in influencing bank reserves, and it is admitted that to some extent the Treasury is not free to use these four just for the purpose of influencing interest rates. For example, by increas­ ing Treasury currency outstanding, the Treasury could increase bank

reserves; however, recently currency outstanding has been stabilized by laws and custom. The supply of greenbacks is controlled by law, 186 desires of the Federal Reserve and those of the Treasury. There is still some doubt as to the advantages gained by the Federal Reserve.

The reconciliation permitted long-term interest rates to move above

2£ per cent. As a result of this agreement, money market rates in general moved upward. For all intents and purposes, the Treasury was able to quiet the Federal Reserve System and still maintain an easy money policy, but admittedly, not as easy as it was before the agree­ ment of Uarch 1951* The big advantage to the Federal Reserve was that again Open Market Operations could be used to curb credit expan­ sion. Before, the Federal Reserve, being committed "to maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government's requirment", could not use Open Uarket Operations to encourage a contraction or % expansion of credit. Instead, the Federal Reserve had to buy and sell government securities in order to keep the pattern of rates set 3 by the Treasury. In effect, the Full Accord Agreement pulled the

Senator raul H. Douglas apparently does not have much faith either in the “Full Accord Agreement" or the combined monetary and fiscal policy. Before a Senate Debate on Uarch 6, 1951* Senator Douglas said, in supporting a return to orthodox monetary policy, “I hope to stiffen the back of the Federal Reserve and clip the wings of the Treasury4'. Douglas' views are not the only side of the picture. For a complete description of the operations of monetary and fiscal policies in action, see roole, K. E., Fiscal Folicies and the American Economy, (New fork, 1951); also Hart, A. G., op. clt.. Chapters XXIII and XXIV. ^Board of Governors of the Federal Reserve System, Annual Report. 1941-

For an interesting discussion of how the pattern was determined, see Murphy* H.C., National Debt in war and Transition. (New iork, 1950;, p. 93. 185

System and the money market, the Treasury demand for funds was not 1 only met but accomplished at a very low interest cost.

When the war was over, the Federal Reserve was ready to go back to "normal" operations; however, it wasn’t long before it discovered that this new disturber was here to stay. 1116 Treasury with a debt of over $250,000,000,000 was not willing to consider any movement to tighten money. As a result, the Federal Reserve found itself de­ pendent upon Treasury policy. Since the war there has been a constant battle between the Federal Reserve bystem and the Treasury, during which time, and rightly or wrongly, the Treasury was the dominant 2 power. It wasn't until March 4, 1951, that the "Full Accord" agree­ ment was reached. This agreement, although acclaimed by many as a victory for the Federal Reserve System, was a compromise between the

There seems to be some relation between low interest rates and mone­ tary concentration; although the connection is more than likely de­ pendent upon a third factor. During the 1930's and 'J+O's this coun­ try had low interest rates, but during the '30's the New York District Banks held on the average about 40 per cent of the nation's demand deposits, yet during the 40's the share of New York decreased to 25 per cent. Apparently it takes more than interest rates to change the asiount of concentration, when profits are possible, money will flow and the rate of interest does not seem to be a determining factor. 2 Chairman Eccles feeling the pinch of inactivity said, ". . .if the Congress disagrees with us and feels, as do some bankers and in­ surance coxapmny executives, that we should more fully use existing powers, we would welcome such an expression from Congress. In that case there would be no need to consider any alternative powers". Fortunately, Congress did not make any expression that would have taken the country back to monetary policy alone. 1BU usually produced variations In the Interest rates; if the supply of

funds was large, the interest rate would drop, thus discouraging an

inflow of money and tending to encourage a greater demand, on the

other hand, if the demand for funds was large the interest rate would go up tending to discourage any further demand and at the

same time encourage more inflow of money from outside the money

market. At times the money market could not meet the sudden increase

in demands or absorb the sudden flood of savings. As a result, the

difficulties of the money market would soon be felt in the rest of

the nation. As has been pointed out, one result of these money mar­

ket difficulties was the establishment of the Federal Reserve System.

This System was to stand behind the money market and to supply funds

to the money market when funds were needed and to drain them off when

they weren't needed.

Nineteen hundred and forty-one and tforldWar II brought a new

disturber to the money market. The new disturber was a federal de­

partment, the United States Treasury. Conditions at the time seemed

to favor the Treasury. There was no doubt that the nation faced an

emergency and routine controls for normal conditions had to be set

aside in the face of the task ahead. The new disturber needed funds

and it was up to the Federal Reserve System to see that they were

supplied regardless of whether this new demand would be good for

the national economy. The national economy took a back seat to the

needs of the government. Through the efforts of the Federal Reserve 183 arose, necessitated the continuation of government policy for some

time to come. But at the same time, when the money market was used as a support for government policy, under present conditions, it no

longer could be used to control the economy; the Federal Reserve

found itself without any controls except as it supplemented govern­ ment policy.

Rightly or wrongly, the Treasury has more influence today on money and banking than the Federal Reserve System, and there seems

to be every reason to believe that this new uody of control will be with us until the national debt had decreased substantially or that national income had increased to the point where a higher interest

rate burden will not be any greater than it is now. ^ in 1946, this burden, the interest charge on the national debt as a percentage of 2 National Income, was 3*07 per cent.

The question now is, what part does the. money market play in

this new scheme of things. It will be remembered that the money

market was to be the channelling agent for the nation's fUnds. It was to absorb the excess monetary savings at one time and to pro­

vide funds for unprecedented demands at another time, ihese extremes

^Hart suggested the possibility that the Treasury might lose sight of the broader aspects of the m od e m approach and narrow itself down to low interest Just for low eosts. Bee Hart, A. U., Money, Debt and Economic Activity. (New York, 1948)* p. 424. 2 Whittlesey, op. clt., p. 587. 182 were set aside during this Interim did not necessarily eliminate the difficulties involved after the war. Today because of the continu­ ation of the easy money policy, that is, the maintenance of low in­ terest rates to finance the government and to service the national debt, the economy is in a rather precarious position; on one hand, we have the threatening problem of inflation and, on the other, the possible expense to the government as well as the damage to the banks and other holders of the national debt.^ This is the present day dilemma arising as a result of a conflict between the Federal Reserve

System and the Treasury Department. So far the method of handling this problem has been one of appeasement and compromise, allowing the interest ratda to climb slowly, so slowly in fact that the effects will be negligible.

Because of the war the government has moved further into the field of banking. The controls of the Federal Reserve originally designed to serve the interest of business had to be modified to serve the interest of carrying on the war effort and now the peace effort. This change in policy resulted in serious disruption of the peace-time econony, which, because of various problems that

1 C.F. Childs sees this problem as one involving a conflict between the declared duties of a central bank and the avowed purposes of the Treasury. Musgrave views it as a "triangular conflict" involv­ ing the traditional objectives of credit controls, the maintenance of a lower level of Interest costs in the Federal budget, and the task of meeting the liquidity and earning needs ofvarious investor groups. All three are public policy, bee C.F. Childs, op. cit. . p. 1; also Musgrave, R.A., Income. Employment, and Public Policy, "Credit Controls, Interest Rates, and Management of Public Debt", (New York, 1948), p. 221. 181

With the war, however, financial needs of business were neces­

sarily set aside for the more pressing problem of financing the war.

This task of the government was simplified, because it had a tool to work with; it could set its hands on something that could be used to manipulate the nation's money rates. In this way the money market

became a convenient instrument of government policy. Through the

machinery as established in the financial center, the government was 1 able to regulate money supply and interest rates* It is analagous

to a river dam* If the water is already contained, and the locks

are ready for use either for stopping or starting the flow, it is a

relatively easy matter to open the locks at the proper time, much

easier than trying to drain the swamps, clear the basin and build

the dam and locks. The money market, then, being highly refined,

could come to the assistance of the government.

However, there would be repercussions to this government policy,

but they were to be handled by such measures as rationing, price con­

trols, consumer credit regulations and other wartime controls too

numerous to mention. rtith a commitment to low interest rates as a

national policy, the government successfully financed the war and at

an extremely low cost. However, the fact that the business conditions

^Tbe interest rate is determined by the supply and demand forces of the market* The way the government would influence the rate would be by influenc ing the demand for and/or supply of loanable funds. The Tfceasury could arbitrarily set a rate on government securities but the results would probably be contrary to the Treasury's wishes. 180 or lowered to control economic activity, the old idea of stable rates could no longer apply. With this revelation, interest rates were to be stable in so far as economic, or more specifically, mone­ tary conditions, permitted. When this stage was universally ac­ cepted, conditions had changed drastically and a new stage of economic thinking was being formulated. The economic conditions were, of course, to be found in the years just before and after the

Great Depression* Many of the authorities had come to the belief that the interest rate instead of stabilizing the econony actually made it more unstable by choking off investments and thus contributing to a depression. On the other hand, during the 1930's, the low in­ terest rate policy was not able to stimulate the economy. "The ex- 1 perimental phase**, as Hansen calls it, was over. Time for a reju­ venation in interest rate thinking was necessary. Finally about 1937, the interest rate as a control of economic activity came to an end.

From 1937 interest rates were to be stabilized at a low level for the good of the economy, and inflationary effects, if any, would be handled 2 by more direct means.

Hansen, A. H., Financing American Prosperity. (New York, 1945), p. 202. 2 TWo very good descriptions of the so-called modern approach can be found in The American Economic Review by Wallich, H. C ., " The ^hang­ ing Significance of the Interest Rate", Volume XXXVI, December, 1946, pp. 761-787, and another in the 1945 issue by Lutz, F. A., "The in­ terest Rate and Investment in a Dynamic Economy", Volume XXXV, De­ cember, 1945, pp* 811-835* What can be called an appeal for "the good old days" can be found in An Era in American Public Finance. and "Investment Bulletin", published by C. F. Childs and Company, New York, dated May, 1951. 179 activity in the money market. The government undertook the task of pegging interest rates at a very low level in order that high gov­ ernment expenditures could be financed at a low cost. This pro­ cedure also made money readily available for war purposes. It was a continuation of the easy money policy of the *30's but on a scale unprecedented in our history.

The money market during the war was dominated entirely by the

Treasury and the Board of Governors of the Federal Reserve System.

Since the national debt was expected to rise to unheard of proportions, the government's monetary policy aimed primarily at maintaining low interest rates. It must be remembered that monetary authorities had the power to do this at any time, but under normal, peacetime cir­ cumstances the interest rate was to be a means of control for the econongr as a whole and could be changed by Government or Federal

Reserve policy as necessity dictated. If easy money was indicated a low interest policy would be pursued; on the other hand, if there was a tendency towards inflation, controls would be toward a higher interest rate. By manipulating the interest rate, monetary authori­ ties could regulate business conditions with the hope of curbing the ups and downs of business cycles. The banking authorities were guided by the pulse of the national econoiqy in determining what the interest rate policy should be.

In carrying out this Monetary control, the banking authorities soon discovered that it was impossible to have both stable money rates and a stable economy. If the interest rate was to be raised 1 in eleven Southern and Western cities. If the first theory were correct, one would expect general money rates in New York to rise and rates in the rest of the nation to fall. This obviously was not the case. If the second theory is correct, rates all

rfith the advent of the second World War the money market took on a new and important role, that of financing the government to an extent never before thought possible. This tremendous change in character or purpose necessitated a change in the money market it­ self; It became an instrument of government policy. With the war, the interest rate changed from a control of money for business pur­ poses to a control of money for government finance. This develop­ ment was important because it involved a change in government

Board of Governors of the Federal Reserve System, Banking and Monetary Statistics. (Washington, 1943)> p. 4 6 4. 177

Hie first theory can be rejected because bankers balances in the money market did not change to any appreciable extent during the period, 1933 to 1935* (This result was almost identical with the re­ action to a similar efiort in 1913 when federal Reserve banks were prohibited from paying interest on interbank deposits.) According to Angell, the relative deposits held by New York banks dropped from 41.27 per cent in 1932 to 39-62 per cent in 1934- a drop too 1 small to attribute to any factor. According to the figures used in this study (see Appendix C) in absolute amounts, demand deposits in

New York increased from $6,650 million in 1933 to $11,132 million in

1936, during the same period, New York decreased its relative share from 35.17 per cent to 34.62 per cent. Obviously the difference is so small that it would be difficult to Justify aryconclusion. The only point that could be made is that the second argument seems to be a better explanation than the first.

When the final effect of the discontinuance of interest payments on demand deposits is considered, again the second theory seems more plausible. Between the years 1933 to 1937, rates charged on Cor^ier- cial paper (as an example of general interest rates) dropped 1.71 per cent in New York, compared to a decrease of 1.42 per cent in seven Northern and Eastern cities and a decrease of 1.64 per cent

1 Angell, J. W., The Behavior of Money. (New York, 1936), p. 182 176 would on a call loan in New York City, the Federal Reserve did re­

duce the disparity between these rateB by removing the barriers to

the flow of money.

dome writers have suggested that interest payments on demand

deposits also influenced interest rates in general, at best any

statement concerning the effect of demand deposit interest payments

on interest rates in general would be mere speculation. a few of

the writers were of the opinion that when interest payments on de­ mand deposits were discontinued, funds in the m^ney market would re­

turn to interior banks; thus breaking up the concentration of funds

in New York. In this case interest rates in general would move up

in New York and down elsewhere until an equilibrium was reached, on

the other hand, some writers felt that interest rates in the money

market would decrease because deposits of Interior banks, although

in a particular New York banks for interest payments, were in the money market for other reasons. fhese bankers' balances were serving

as reserves and also as clearing balances. dince interior deposits

were not in New York for interest payments alone, the discontinuance

of interest payments would have no or little effect on these bankers'

balances. Further, since these balances would be retained in the

money market and since the costs to new York banks would be reduced

by the amount of the interest payments on demand deposits, some of

this difference would be passed on in the way of lower interest rates

to borrowers in the money market. 175 in location of the banks and the type of loans made by different

banks. However, when the rates on government securities were con­

sidered, large banks received 1.4 per cent while the small banks re­

ceived 1.9 per cent, still a difference even though the securities 1 are the same.

The Federal Reserve did very little to eliminate the spread

of interest rates caused by different types of loans, but it did

a great deal toward removing barriers to the free flow of funds.

The System, or any system, could not be expected to institute any

cheaper form of banking for the banks throughout the nation; it did

not alter this condition, so therefore the spread in money rates as

caused by this factor still remains, a s for the other condition,

the Federal Reserve instituted a check clearing system, which

eliminated the costly delay of money exchanges. Now transfers between sections are handled by bookkeeping changes through the

interdistriet Settlement Funds. The machinery for check clearance made access to New York funds much easier, inasmuch as all the Federal

Reserve Banks operating through the Federal Reserve Bank of New fork could meet their local needs for funds. fhe Federal Reserve was thus able to reduce to some degree the spread in money rates be­

tween different parts of the country. Although the Kansas farmer will still have to pay a somewhat higher rate for his loan then he

Whittlesey, C. R., Principles and Practices of Money and Banking. (New York, 194B), p. 564. 174 Table XII

Rates Charged on Connercial Loans by Banks in Principal Cities, 1928-1950 (Per cent per annum)

7 Northern 11 Southern iear Total New York and eastern and Western 19 Cities City Cities Cities

1928 5.17 4.96 5.16 5.41 1929 5.83 5.76 5.82 5.93 1930 4.85 4.39 4*84 5.40 1931 4.30 3.82 4.26 4.90 1932 4.71 4.20 4.81 5.21 1933 4.27 3.43 4.46 5.04 1934 3.45 2.45 3.71 4.32 1935 2.93 1.76 3.39 3.76 1936 2.68 1.72 3.04 3.40 1937 2.59 1.73 2.8 8 3.25 1938 2.53 1.69 2.75 3.26 1939 2.78 2.07 2.87 3.51 1940 2.63 2.04 2.56 3.38 1941 2.54 1.97 2.55 3.19 1942 2.61 2.07 2.58 3.26 1943 2.72 2.30 2.80 3.13 1944 2.59 2.11 2.68 3.02 1945 2.39 1.99 2.51 2.73 1946 2.34 1.82 2.43 2.85 1947 2.28 1.81 2.33 2.7t> 1948 2.64 2.34 2.68 3.02 1949 2.65 2.38 2.67 3.03 1950 2.84 2.51 2.87 3.28 1951 (March) 3.02 2.74 3.02 3.42

Sources Board of Governors of the Federal Reserve bystem, banking and Monetary Statistics. (Washington, 1943), p. 464, and February, 1945; to February, 1950, and August, 1951. the $1,000,000 deposit class. Furthermore, there was a gradual in­

crease in interest rates as the size of banks declines. It is true

that part of this disparity may be accounted for by the difference 173 market, ere usually for & long period of time and therefore have some bearing on interest rates. The first reason for this spread between sections of the country involved the inability of money to flow where it was needed* Since the nation’s banking system was not fully or­ ganized and perfected, there arose certain barriers to the free flow of funds between sections. The old check collection system was ex­ pensive and time consuming. Payment of balances required the sub­ sequent exchange of currency, and of course, exchange charges, pre­ miums and discounts had their influence on the flow of money, ihese factors were responsible for some of the spread between money rates in New fork and other sections of the country. As long as they con­ tinued as an integral part of the banking system, the spread in money rates remained. The following table points out the spread as it ex­ isted between 1923 and 1950.

There is still a fourth reason for the comparative low interest rates in the New York money market, and that is the difference in the size of the banks of the money market and of the interior. It has been suggested by various writers that large banks can lend money at a lower rate than small banks. In the New York money market there are many large banks; in fact New York City has 6 of the top 10 banks in 1 the country. According to a study made by the federal Reserve Bank of Philadelphia, the average rate for loans charged b y banks in the

#100,000,000 deposit class was 2.6% as compared to 5.3% for banks in

^Tha American Banker, Volume CXV, No. 54, March 21, 1950. 172

The lowering of interest rates resulted in tv/o important ad­ vantages to business* First, business firms could now borrow at lower cost and thus stimulated business. Second, business firms

now had a good outlet for excess funds; thus greater liquidity was given to commerce and the economy.^ Business money was cheaper and

stock exchange money tended to be dearer.

Of the other aspect of importance in connection with interest

rates, the wide spread of rates between various parts o f the country,

the Federal Reserve was able to curtail this tendency also; although

the money market on its own had removed many o f the causes o f this

discrepancy. Even before the Federal Reserre was established, money

rates all over the country fluctuated closely with New fork rates,

but they were not the same for three fundamental reasons. In the

first instance, a bank loan to a Nebraska farmer is not the same as

a call loan in the market where it can be -liquidated at any time.

Second, the smell country bank must maintain the expense of handling

many small accounts and at the same time make the necessary credit

investigations on a number ofsslatively small loans. And third, the

fact that loans to farmers, in contrast to call loans in the money

Some writers have argued, and in fact still do, that lowering in­ terest rates merely postpones the panic and does not prevent the ensolmg depression. The argument states that even at low interest rates profits would soon decline to the point where funds would be forced to seek outlets elsewhere. If this movement occurs at the same time a speculative boom is taking place elsewhere, say in real estate or stocks, money will be attracted here to the detriment of the econooy as a whole. 171 that time, the Treasury needed temporary advances pending receipt of taxes or returns from Bonds. In order to cover these short periods, short-term securities were used and as the war continued, the quantity of securities released by the Treasury became extremely large. Most of these securities were taken by the banks because they made an ideal short-term investment, but in time the volume became too large even for the banks. A wider market had to be encouraged.

In time, dealers were urged to buy and sell the government paper, being assured of the support of the Federal Reserve System in its

Open Market Operations.

The establishment of this markst brought about a good outlet for bank funds either directly in government securities or indirectly in call loans to dealers. In this way there was now a further market 1 to absorb some of the surplus funds.

Furthermore, the new market tended to-lower the interest rate level since banks, having sound and liquid outlets for short-term funds, would not have to hold funds idle during off seasons.

The market, since it was an addition to the bill and couniercial paper market, served to give the banks more diversification of their assets. If financial difficulties arose in one market, it would not necessarily spread to other markets, since each one presumably would be a small part of the total market. In practice, however, there were many exceptions to the theory, but in general the diversification of bank assets is always a desired objective.

^Burgess, op, Cit.. p. 122. 170

Chart IV InUrvit ftatee on Coanercial Paper In the (Jpan Market, 1830-1940

WBS moo T535 m o

Source* hirjti*, M. ii. , Ihe rteaerre Banka and the Money Market, ,< (Now Tork, 1946), p. 197. *

* 169 introduction of district banks in 1914* The call of funds no longer needed to produce tight money conditions and drastic changes in the money rates. The Federal Reserve, through its controls, was able to curtail these changes in rates as evidenced by Chart IV. The Federal

Reserve System through its various control measures did supply a great deal of elasticity to the money supply, and by doing so tended to reduce the cost of obtaining money. At the same time the wide fluctuations in money rates were reduced. This can be seen on Chart

If. The Federal Reserve improved the interest rate by providing the means to banks whereby they could quickly adjust their reserves in times of stress* Banks could borrow from the Federal Reserve at times when their reserves were being reduced and thus eliminate the neces­ sity of restricting credit. Another means placed at the disposal of member banks was the addition of two new short-term loan markets.

The bill market and the market for short-term government securities served to bolster the commercial paper market so that banks could be assured of short-term paper for their portfolios. These additional assets gave banks more freedom, and at the same time they could have more diversified investments, all making for a more liquid and sounder financial condition.

Since short-term government securities play an important part today in our monetary and fiscal policy, the market for these secur­ ities deserves some special attention. The market for Treasury bills, notes, and certificates got its big start during World War I. At 1 6 8 agent for the nation*e money supply. When the money wasn't needed in Kansas, it flowed into the money market and there it was rationed out to sections of the country that were in need of funds. Thus the money market was the coordinating body of the nation's money supply.

However, it must be admitted that before the Federal Reserve was established, because of certain imperfections of the loan mar­ kets, money rates at times changed drastically and in general were high. With wide fluctuations in New York, the repercussions would soon be felt all over the nation. If, for instance, people of

Kansas called their money because of seasonal changes or other reasons, and reserves of New York banks were endangered, money supply became tight and a money crises followed. Before the Federal

Reserve System, the money market was not equipped to handle such situations; New York banks were the last line of defense. The bur­ den of responsibility was with them. When they could not meet this responsibility, there was nothing they could fall back on.

The people involved in the money market were perfectly willing to perform the market's function, but they lacked the necessary means of carrying out its role because of the inflexibilities of the nation's money supply. This condition, and subsequent money panics, remained a part of the nation's economy until the establishment of the Federal

Reserve.

Probably the biggest cause of wide fluctuations in money rates was the seasonal changes that influenced the flow of money through­ out the year. This disturbing element was greatly reduced by the 167 Chart III Seasonal Changes in Business and Interest Hates, 1899-1913 and ly1^-1932

s a p * * 1 SWING ♦io —'— BUSINESS _L

• 10

BEFORE i _ _ RESERVE -tew

•io------i s L _ _ J L _ •“I— nc5 T ▼ „ 0 T > « F E I RVE

-tfl

n r MftVJUN * * ' MjT G Z T hB* 6Ec

Sourest Burgess, W. R., The Heserve Banks and the koney Market. (New fork, 19^^), P« 197. 166

Furthermore, and closely associated with the first, the mechan­ ism of large banks, the many specialized institutions such as ac­ ceptance and commercial paper houses, the markets for brokers’ loans and new government securities, and the smooth flow of lUnds to and from the money market, tended to reduce the level of interest rates.

Without the ability of money to flow freely from one place to

another, the rate of interest will vary greatly in different parts

of the country— one section will have a high rate because of tight

money, whereas another area, having excess fUnds, wi!3 have a low

rate.

The money market, before the Federal Reserve System, could not

cope with all of these fluctuations and variations of the money

rates, nor in times of stress could the money market by itself ab­

sorb all the excess funds, thus causing, at times, drastic changes

in the money rates. However, as the muney market became more spe­

cialized, as the various institutions became better geared to the

gigantic machinery of the nar,ion's economy, tne money market did

improve in performing its functions for the nation, as evidenced by

Chart III.

Even a perfectly functioning money market, without the assist­

ance of a central banking system, could not be expected to eliminate

all changes in money rates. The money market did, however, establish

for the nation an interest rate structure around which all the nation's

money rates seemed to cluster. The money market achieved this dis­

tinction because, as was mentioned previously, it was the channelling 165

CHAPTER VII

Concentration and Interest Hates

The history of interest rates prior to the establishment of the federal Reserve System shows that the level of interest rates had declined over the long run but certain defects of the market prevented the type of interest rate necessary for a good money market. Until these defects were corrected, a task that fell to the Federal Reserve System, interest rates from the point of view of the market would be imperfect in three waysf wide fluctuations

in a given location, high level of rates, and extreme variation

from place to place.

With the concentration of money, whether this concentration be

in the hands of private groups or government agencies, it cannot be

denied that interest rates tended to be stabilized. This does not

mean, though, that with concentration there wouldn't be any fluctu­

ations, but it does mean that since the funds could be generally

obtained in the fund markets, the wider perturbations of interest

rates were greatly reduced not only in the market itself but all

over the country. This feature of the money market was greatly im­

proved, with the establieliment of the Federal Reserve System, be­

cause as was mentioned in a preceding chapter, it provided the

necessary mechanism to abeorb the surplus and provide funds when

and where needed. 164 necessarily the dominant part that early writers once thought. Banks expanded because business expanded; banks merely aided the growth of the econony. Since banking is not a dominant factor in our econony

and since money is only partly a function of banking, then the dif­

ficulties of controlling the econony by purely monetary controls 1 become more apparent. Suggestions as a result of this conclusion will be found in Chapter X.

Chapter III pointed out that money was also a function of business­ men's attitudes toward the future. If their expectations were fa­ vorable, they could create their own money through clearing. 163 able to look ahead and plan accordingly, were bound to grow. Lead­ ership, coupled with favorable surroundings, point out the distinc­ tion between a successful and a failing bank.

In the way of a summary, there is no doubt that today there is greater bank concentration than ever before. The question that should be considered is not how much concentration we have, but is our present concentration dangerous to the nation as a whole. The answer to this second question so far seems to be in the negative. The ex­ pansion of our banks, instead of being an obstacle to progress, helped the progressive movement on its way. The greater degree of concen­ tration today seems to be less dangerous than the swell concentration that existed, say, fifty years ago. The reason for this was the gov­ ernment policy toward banking. Although not always objective, the government authorities did, in general, administer banking in such a way that the nation benefited. Bank expansion was not discouraged, but the dangerous aspects of bank concentration were controlled. In this way the government did not impede the evolutionary process but instead Just guided it.

The expansion of banks took on many forms, chief among which was the slow Internal growth that accounts for the present size of most banks. Other forms of expansion were merger, branch banking and chain banking, with the merger movement being the most important for the nation as a whole.

As a further point of this chapter, it was found that banks, and therefore money, are a part of the economic system and not 162 process took on many forms, but in moBt cases it led to greater concentration. Ihe only way that banks could meet the increasing demands of business was by Joining forces.

With this greater concentration, however, came greater efficiency.

Banks now could not only meet the requirements of local businessmen, but they could also have a more stabilizing effect on money rates.

The analysis of bank expansion so far is incomplete without paying tribute to another important element which explains why some banks in a city increase while others stand still. This element is leadership, for it is only through leadership that one can explain why all banks in an area did not increase at the same rate as industry.

Gian Ini, the man behind the Bank of America, is a good example of this element. Some may criticize his methods, but his ability to foresee the problems and opportunities ahead, and take advantage of even ad­ verse situations, places him well out in front of most men in the field. Furthermore, his willingness during'The Big Quake", to set up shop in the midst of ruins in order to lend money to people to rebuild their homes made him a popular man in the community. The fact that most of the loans were made without security of any kind even more demonstrates that fact that he had complete confidence in the people and in the ability of the city to rise again.

A similar type of leadership can be found in the history of other large banks in this country. Banks that had men who were ready to take a chance on the future of their city and their nation, who were 161 1 is larger than most banks in the nation.

It is interesting to note that the large banks are ibund in the large money markets. New York City, the world's largest money mar­ ket, has three of the nation's four largest banks. The Bank of

America, the only one surpassing these three, enjoys complete domi­ nation of banking in the State of California, so it is quite con­ ceivable why it has grown to such a staggering size— it has a money market of its own. A further study of various banks in the nation will show a correlation between the size of the banks and the fi­ nancial strength of the money market. In Chicago, the Continental

Illinois National Bank and Trust Company, the largest bank in the

Mid-West, has deposits amounting to #2,378,44/3,252 as of December,

1950. This bank grew, as did all others, through a series of con- 2 Solidations and mergers. The Philadelphia National Bank, chartered in 1809, the largest in this city, has total deposits of #765,583,170 and operates two branches. This bank, although nowhere near the size of the others, expanded in the same manner, it never reached the size of the banks either in New York or Chicago, because the business foundation and therefore the local money market, never re­ quired the rapid expansion as found in other cities.

It becomes readily apparent that banks In order to keep pace with their surroundings were more or less forced to expand. This expansion

1 Ibid.. p. 1785.

2Ibld,. p. 178. 160

National Bank, with 20 branches, (chartered in 1810) was merged.

This bank had already taken over several others, 'Iw York Produce

Exchange Bank, 1920, with 9 branches, and Lincoln National Bank,

1922, with 3 branches. In 1927, Chase acquired by merger the Na­ tional Bank, and in 1929> the Garfield National and the National

Park banks. In 1930, the Equitable Trust Company, including the

Seaboard National Bank, with resources of $900,000,000, and the

Interstate Trust Company joined the Chase family. The American

Express Bank and Trust Company was acquired in 1931- As of January,

1951, the Chase National operated twenty-seven branches in the New

York area (7 in 1926) and 19 foreign branches, and had total de­ posits of $4,871,424,028, with capital funds of $353»007,00c.1

Another bank in New York City, now the fourth largest in the nation and the third largest in this money market, is the Guaranty

Trust Company of New York. This bank, chartered in 1864 as the New

York Guaranty and Indemnity Company, also, and about the same time, carried out an expansion program. After changing the name of the institution, in 1896, to its present name, the bank in 1910 acquired the Morton Trust Company and the Fifth Avenue Trust Company. In 1912, the Standard Trust Company joined the group, to be followed in 1929 by the National Bank of Commerce, a bank that was chartered in 1839.

At the present time, the Guaranty has total deposits of $2,503,010,000, and operates three branches, one of which, the Fifth Avenue Branch,

1 Ibid.. p. 160. 159

Bank of Peurto Rico. In 1931 the Long Island National Bank of Now iork, Astoria, Now York, and in the following year the Mew York Bank of America Joined the growing National City. Of course, in 1924, the City Bank Farmers Trust Company, chartered as the Farmers Fire insurance and Loan Company in 1822, became affiliated with the 1 National City Bank, carrying on all trust business for the National.

As of June, 1948, this bank was the second largest in the United btatee, having total deposits of #4,719,391,427, and operating sixty- seven branches in Greater New York as well as forty-eight foreign branches. Most of the branches within the city were acquired through consolidations. Again as the bank grew through the process of ab­ sorbing other banks, the number of banks were reduced and the size of National City became greater, thus leading to further concentra­ tion. As of December, 1950, the City National was second largest in the nation with total deposits of #5,130,853,626, and had increased 2 its foreign branches to 52.

Another bank in New York that followed a similar pattern was the

Chase National Bank. This bank, chartered in 1877 under the National

Bank Act, soon grew, by the processes of mergers and consolidations,

to the size necessary to supply the needs of the surrounding community.

In 1921, the Chase took over the Metropolitan Bank, and in 1925, three foreign banks were acquired. In 1926, the Mechanics and Petals

^Standard Corporation Kecords. (New York, 1948), p. 1045.

^Moodv1 s Manual of Investments, (New York, 1951), p. 91* 1 5 8 Table XI

Gross Deposits, Capital Funds, and Hatio or Deposits to Capital Funds, Bank of America, End of Year, 1930-1950 (Amounts in Millions of Dollars)

ttatio of fear Gross Capital Deposits to Deposits Funds Capital

1930 * 998,039 #104,136 9.5 to 1 1931 749,797 104,290 7.3 to 1 1932 700,448 99,891 7.0 to 1 1933 767,818 99,592 7.6 to 1 1934 978,333 97,164 10.0 to 1 1935 1,155,265 100,867 11.4 to 1 1936 1,298,977 105,024 12.3 to 1 1937 1,357,379 109,105 12.4 to 1 1938 1,437,027 114,059 12.5 to 1 1939 1,482,792 116,846 12.6 to 1 1940 1,632,228 145,279 11.1 to 1 1941 1,908,384 146,108 13.1 to 1 1942 2,586,141 145,493 17.7 to 1 1943 3,498,153 149,257 23.4 to 1 1944 4,350,540 212,941 20.4 to 1 1945 5,339,307 225,403 23.6 to l 1946 5,415,850 236,882 22.8 to 1 1947 5,467,199 257,172 21.2 to 1 1948 5,639,523 279,519 20.1 to 1 1949 5,775,110 305,845 18.8 to 1 1950 6,191,705 394,822 15.6 to 1

Source; Standard Corporation Records. (New York, 1948), p. 2813, and Moodr's Manual of Investments. (New York, 1951), p. 202.

period as the Bank of America. The National City Bank was chartered

in 1812; in 1921 it acquired the Commercial Exchange National Bank and the Second National Bank of New York. These combinations added greatly

to the sise of the National City. In 1926 the Peoples Trust Company

joined the family, to be followed in 1930 by the American Colonial 157 Bank of America experienced & very rapid expansion, and in the year

1946, it became the largest bank in the nation, with total deposits amounting to >5,415,850,049. In June, 1948, the Bank of America operated branches in three hundred communities, and had a capital, surplus, and undivided profit account of >273,814,399. As of December 31, 1950, the Bank of America operated 526 branches and had a combined capital, surplus and undi- 1 vided profits of >394,822,146. The present bank is a consolidation of the Bank of America of California and Bank of Italy National Trust

and Savings Association (organised August-10, 1904). This consoli­ dation took place on November 1, 1930. Table XT shows the original capital and deposits of this new bank and the rapid growth up to

December, 1950.

The growth of this bank is astounding. It has broken all records

in its development, so much so that it has caused the Federal Reserve a great deal of concern. The growth of this bank has brought with It a high degree of concentration, but a concentration that is under­

standable in view of the tremendous increase in the commercial activity

of the state. It is interesting to note the change in the ratio of deposits to capital funds. With the change in the nature of banking 1 standards, the old ratio could no longer be applied.

To focus attention again on New York, the National City Bank has Also shown a tremendous increase in size; although not in so short a

^Tloodr's Manual of Investments. (New York, 1951), p. 271. 2 See page 75. 1 5 6

this decrease In the number of banks is, of course, the development 1 of branch banking in this state. This fact is further substantiated by the following statistical

Table X

Commercial Banking Facilities in the State of California, 1919-1941

Total Unit Branch Year Banking Banks Banksa Facilities

1919 883 623 260 1924 1309 576 733 1929 1308 402 906 1934 1070 246 824 1939 1079 194 885 1941 1077 195 882

&Includes Head Offices and Branches.

Sources Board of Governors of the Federal Reserve System, Banking and Monetary Statistics. (Washington, 1943), Tables 8 and 74.

A large part of the decrease in the number of commercial banks and at

the same time the increase in the number of branches can be partially

accounted for by the growth of the Bank of America, uf the $4,343,000

in total deposits in the State of California for the year 1941, the

Bank of America held about $1,840,000. In 1950 the Bank of America

held about 47 per cent of all deposits in California. Since 1941 the

In 1941 the branch bank systems in the State of California held 92% of all commercial bank deposits. Federal Deposit Insurance Corpor­ ation, Annual Report. (Washington, 1951), Tables 102 and 103* 155 California has had the grsateat improvement of all other states.

Table IX, showing the change between the years 1940-1946, will serve to demonstrate this fact. Table IX Pereentage Change of Economic Factors in the State of California, 1940-1946

Economic 1940 1946 Pereentage Factors Change

Population 7,000,000 9,500,000 35.7% Employment 2,500,000 3 ,500,000 40.0 Income 5,700,000,000 15,000,000,000 163.1 Liquid Assets 5,000,000,000 13,000,000,000 260.0 rtetail Sales 3,500,000,000 9,000,000,000 157.1 Foreign Trade 450,000,000 625,000,000 38.7 Agriculture 700,000,000 2,100,000,000 200.0 Construetion 700,000,000 1,400,000,000 100.0 bianufac ture s 3,250,000,000 7,500,000,000 130.8 Mineral Products 350,000,000 525,000,000 50.0

Source: Bank of America. What's Happening in California, (San Fran­ cisco, 1949). With changes in business aetivity as shown by this table, it would be impossible to expect the banks of this state to stand still.

They would have to expand in order to keep up with the changes around

them. Total bank deposits increased in order to permit this tremendous business expansion to take place. Total deposits increased from

♦961,000,000 in 1914 to #4,843,000,000 in 1941, an increase of about

400%. During the same period, however, the number of banks decreased

from 73$ in 1914 to 227 in 1941, a drop of about 70%* The reason for 154 It can be said that the movement toward branch banking, as well as bank mergers, tended to bring banking under the influence of a smaller and smaller number of banking officials. It is well worth­ while to point out, however, that not al 1 of this movement of con­ centration was a direct result of the change in the nature of busi­ ness activity; part of the cause lies in other factors, such as 1 atteiqpts to avoid failures. For the purpose of illustrating the correlation between the growth of banks and the tendency toward concentration, a few of the larger banks in the various national money markets will be discussed.

TIE GROWTH OF A FEW BANKS

An interesting example of the theory as expounded in this dis­ sertation can be found in the growth of tne Bank of Aiuerica on the

West Coast. California, in the past fifty years, had made tremendous strides in the development of its economic resources. Population has been constantly increasing; so much so that today the state stands third in population; whereas at the turn of the centory, it was twenty-first in rank. This change in relative position came about as a result of an increase of 8,066,000 people. With this change alone, one could expect tremendous repercussions in the commercial and financial activities of that area. In the field of commerce,

1 Just recently another causal factor made the headlines in banking Journals. In May, 1951* the Bankers Trust Company absorbed the Conmercial National Bank and Trust Company for the purpose of securing "the highly qualified staff" of the latter bank. See American Banker. Uay 28, 1951, p. 6. 153 Chart H »rcl*l Bank Pacllitlas, Unit and Branch Banka, Unitad Stataa, 1920-1950

),000

),000

.,000

>,000

,000

,000

,000 152 it again became the chief form of banking in certain sections of the country. In 1898, New York changed its laws and permitted branch banking, and from that date, this form of banking haa enjoyed an uninterrupted growth in the state. With the exceptioncf a few states that had branch banking, the system as a general practice no longer existed. Probably the cause of this was the changing attitude of the Federal government. Each administration, or more accurately, each year brought with it a different opinion concern­ ing branch banking. The decisions were constantly vacillating, making the establishment of branches a rather dubious and risky undertaking. It was a battle centered around the age*>old question of state versus national banks, and it wasn't until the passage of the McFadden-pepper

Bank Act in 1927, that any clear-cut policy was adopted. This act tended to place national bank on a par with state banks in the matter of establishing branch banks. It was a limitation of the growth of member state branches and at the same time permitted the national banks to establish branches on the same basis. It remained for the

Glass-Steagall Act of 1933 to give national banks the same opportunity as state banks in establishing branches anywhere in the state if state banks had that privilege.

Although the movement of branch banking was not as important as mergers in bringing about concentration in banking, it did make rapid strides in unifying the banking 3ystan of the nation. Chart II shows the trend in branch banking from 1920 to 1950. 151 Table VIII Branch Banks by States, Date Established and Number of Branches

Name of Bank State Date Number of Established Branc he s

Bank of kichmond Virginia 1792 Bank of Pennsylvania Pennsylvania 1793 State Bank of Vermont Vermont 1806 4 Bank of Kentuclgr Kentucky 1806 13 Nashville Bank Tennessee 1807 5 Fanners Bank Delaware 1807 3 Bank of Philadelphia Pennsylvania 1809 8 Bank of the State of South Carolina South Carolina 1812 2 Bank of the State of Georgia Georgia 1815 2 Bank of Vincennes Indiana 1816 4 State Bank Tennessee 1820 1 Bank of the Common­ wealth of Kentucky Kentucky 1820 State Bank Illinois 1821 4 State Bank Alabama 1823 4 Bank of the State of Louisiana Louisiana 1824 5

Sources Chapman, J. U, , Concentration of Banking. (New York, 1934), p. 98. exception; Pennsylvania discontinued the branch system in 1810, and

New York temporarily in 1350. The State Bank of Indiana was probably the most successful because it was profitable not only from the point of view of stockholders but also for the state as it established a sound and efficient banking system. After the Civil War branch bank­ ing declined in importance as a general means of banking in the United

States. The idea, of course, lived on in our history and about 1390 1 5 0 portation, there was very little contact between the various branches, and for this reason, the systems were not as effective as they should have been. Furthermore, there arose resentment on the part of state banks; they looked upon branch banking as monopolistic. State banks could not compete with national banks because they neld the public confidence and prestige. Generally speaking, the duration of the national banks was limited because of the mounting opposition. Their days were numbered and they had to give way to the political forces that eventually brought about their downfall.

About the same time there was a wave of state branch banking, although In most cases all attempts to establish state branches proved a dismal failure either because of Inexperience on the part of the managers or because of the meddling of state legislatures.^ In 1793, the Bank of Pennsylvania opened several branches, an experiment which 2 lasted Just a few years; by 1810 all branches were closed. Table VIII lists the state branch banks established during the early part of our history.

Most of this movement took place in the South and West. Although branch banking existed in the East, this practice was more of the

^Dewey, D. R., "State Banking before the Civil War", National Monetary Commission Report. (Washington, 1910), p. 138.

2Southworth, S. D., Branch Banking in the United States. (New York, 1928), p. 4, says, " In some cases, these early state banks seem to have been thinly veiled attempts to evade the federal constitutional prohibition of state issues of bills of credit, and, in most cases, the desire for more paper money and easier credit furnished at least a background for the experiment". With this depression and the financial difficulties that ensued, banks merged for other reasons than merely to become larger. What­ ever the cause, the result was the same— more concentration.

BHANCH BANKING

Another important method of bank expansion was tia t of estab­ lishing branches in various sections. Again in order to avoid any confusion over terms, branch banking is a system of banks, brought together under a parent bank. Actually the branches are merely of­ fices of the parent institution as they do not have a separate cor­ porate existence. Chain or group banking, on the other hand, in­ volves a number of Independent banks brought together under common management. The Federal Reserve System has defined chain banking as

"control exercised principally through stock ownership by an in­ dividual or group of individuals, or by a holding coi pany, or in some instances by a bank either directly or indirectly through a 1 subsidiary company." Although branch banking is not common through­ out the United States, it has been used very successfully in various parts of the country. Ihe idea of branch banking in this country had as its beginning the establishment of the First and Second Bank of the United States. Both of these banks maintained branches dur­ ing their period, but they existed at a time when their survival seemed impossible. Because of the lack of communication and trans-

of Governors of the Federal Reserve System, Annual Report. (Washington, 1928), p. 30. 1 U &

Joseph Sykes, in criticizing the merger movement in hngland,

suggested that there is a certain point of efficiency in the size

of banks; so that this optimum point would place a limitation on the

growth of any bank. A bank would expand to this point but no further.'1'

This point is undoubtedly true for a given set of circumstances, but

as these conditions change, that is, as the environment takes on new

form, this so-called optimum point will also change, so that banks

could be more efficient even at a higher level of expansion. Sta­

tistically, it has been demonstrated that no great change in total

deposits or resources took place after such mergers. It was found,

however, that the quantity of resources owned by banks became in­

creasingly greater through the years which seems to indicate that banks continued to absorb other banks and grow to the size of a giant

by means of mergers and other methods.

It can be said that the merger movement in the United States, as in England, was largely responsible for the concentration of bank­

ing. In most cases, and until recently, mergers were for the primary

purpose of enlarging bank facilities in order to handle the increas­

ing volume of business. Of course, banks resorted to the combination

in order to avoid failures, a practical application of the old adage

that in unity there is strangth. This movement as a cause of con­

centration did not become important until the depression of 1929.

^Sykes, J., "Larger Banks not Necessary to Meet Demand of Business", phA-tw| Group and Branch Banking. (New fork, 1930), p. 321. 1 U 7 This table shows the extent of mergers as they gradually in- increased through the years. After 1918 the country was undergoing rapid and sharp economic changes, business enterprises were ex­ panding, new ideas as a result of the war were going into commer­ cial use, and the financing of the war itself were all important factors necessitating the expansion of banks. According to J. S. Lawrence, the bank merger movement resulted in a reduction of de­ posits in the merging banks, because, as he puts it, "Clients which formerly had deposits in both institutions now sought another bank 1 to replace the one which had disappeared in the merger process".

However, Lawrence is basing his conclusion on 3u*t a few examples. It was true, of course, during the early part of the merger movement, depositors tended to split their accounts in several different banks, but through time practice taught them to alter this tendon, cy somewhat since it became cumbersome and expensive. Furthermore, as banks be­ came stronger through growth businessmen no longer deemed it neces­ sary to keep small accounts in a large number of banks for protection. The merger movement compensated for any losses in deposits that de­ veloped, because to offset any deposits that were removed as a result of combining with another bank, other deposits came into this combi­ nation as a result of the consolidation and merging that was going on &mong other banks.

1 Lawrence, J. S., Banking Concentration in the United States, (New York, 1937), p. 29. 146 From 1910 to 1931 * more drastic movement of bank mergers oc­

curred, particularly after the close of the first World War. Table

VII clearly shows this movement.

Table VII

Bank Mergers and Consolidations in the United States from 1910 to 1931 Inclusive, Including National Banks, State Banks, Trust Companies and Savings Banks

Number of Banks Absorbed Number Number Total National State State National Year of of Number Banks by Banks by Banks by Banks by Uergers Banks of Banks National National State St^te Absorbed Banks Banks Banks Banks

1910 127 250 128 32 13 70 13 1911 119 235 119 25 18 66 10 1912 128 253 128 39 13 67 9 1913 118 229 118 16 10 78 14 1914 142 276 143 29 24 76 14 1915 154 305 154 33 24 75 22 1916 134 263 134 36 15 62 21 1917 123 232 123 26 15 62 20 191A 119 231 125 16 20 73 16 1919 178 345 183 32 19 101 26 1920 181 349 292 29 30 88 36 1921 281 559 292 38 50 159 45 1922 337 616 340 49 53 182 56 1923 325 584 325 47 41 172 65 1924 . 350 668 352 56 60 174 62 1925 352 657 356 41 46 214 55 1926 429 814 429 70 57 243 59 1927 543 955 544 69 95 286 94 1928 501 916 507 71 88 277 71 1929 571 1,060 575 96 108 261 110 1930 699 1,346 698 130 135 322 111 1931 706 1,363 719 164 107 320 128

There were only 91 auch mergers during the year 1950. See Board of Governors of the Federal Reserve System, Bulletin. February, 1951, p. 190.

Sourest Ibid.. p. 57. 145 reserved certain measures to promote the health, safety and welfare

of society. For all intents and purposes this movement of concen­

tration was identical with the forerunner of concentration in bank­

ing. The advantages of large soale banking were recognised and

accepted, so measures of control were inaugurated not to prevent

this movement but to supervise it.

Unfortunately, there is not much information available about

the merger movement prior to 1925, but according to data taken from

files of various state banking department, there were about 570 such 1 mergers between 1900 and 1909* However, it must be remembered that

this figure is only an estimate since in most cases the state records

were incomplete. If all the data were obtainable the figure would

undoubtedly be much larger. It is understandable why the mergers

were so great in scope. Usually in the earliest development of towns

and cities there was one bank that served the community. It was

probably operated locally for the main benefit of local enterprise.

However, as the town grew, another bank entered the scene to help

the community and also to serve the different interests of the area.

Later other banks were organised. None of the banks was large enough

to provide adequate banking facilities for the growing business con­

cerns. Businessmen and bankers recognized the advantages of having

one or two large banks rather than a number of small ineffective

banks; the bank merger movement followed.

1 Chapman, J. U., Concentration of Banking. (New York, 1934), p. 52. 1 hh th« slowing down of economic activity* The question then became how can we eliminate the disadvantages of a money center but keep the advantages.

THE MERGER MOVEMENT

So far the writer has confined himself to the analysis of the underlying forces of a money market; now it is important to point out that the impulse of bank expansion as a result of business ex­ pansion was a movement of nationwide importance. Banks everywhere, feeling the pinch of increased business without an increase in their capital accounts were forced to take steps to enlarge their facili­ ties through various means. Chief among the methods of bank expan­ sion was the merger movement which of course reduced the number of banks in existence and therefore led to greater concentration all over the country. In order to distinguish between consolidations and mergers, it may be said that a consolidation results in a new bank that has a separate entity apart from the former banks. It comes about as a result of two or more banks combining and forming a new bank. A merger, on the other hand, involves one bank taking over another; the latter gives up its charter and its identity as a separate institution.

The merger movement in the United States has been an evolutionary process for some time. As in industry this trend was not impeded but rather encouraged because it was felt that large scale enterprise of­ fered advantages not found in smaller concerns. Rather than prevent this movement, the government encouraged it but at the same tiros 143 trends at the sane tine that others were worrying about the growing monopolies in the business field. It must be considered, however, that there were a large number of banks that should never have been chartered. These banks were forced out of business simply because they were already operating on a shoe string. They could not keep pace with the increasing demands of their customers, nor were they able to compete with larger banks simply because they could not offer the services made possible by large scale banking. As a result of this change in the structure of the economy, there was a tendency

for concentration. Bank concentration, before the Federal Reserve

System, resulted in the control of a large part of the nation's funds by a small group, or as Beckhart and Smith say, "Control of the funds concentrated was not in the hands of a publicly established and regu­ lated central bank, but had become vested through competitive forces in the hands of a group of large New York city banks. ihe bank­

ing organisation, and therefore the control of money, was concen­

trated because it was actually more efficiently operated this way.

It is true that other considerations must be appraised in a final analysis of this concentration; efficiency alone is not the only consideration. The difficulty was not in the fact that concentra­ tion existed but that periodically panic conditions developed in certain areas as a result of it. The elimination of concentration would have removed this problem, but only by bringing on another—

1 Beckhart, B. J, and J. CJ. Smith, Hie New York Money Market. (New York, 1931), Volume II, p. 183. 142 banks In theas states were more prepared to stand the strains of the war, or to put it another way, banks in the remainder of the country were caught short when the war hrought new business and industry into their territory; again pointing out the fact that the war tended to decentralise the industry of this nation geographically. See Ap­ pendix B.

From another point of view, banks recognized that there were certain economies of scale connected with expansion. As business changes took place, more services could be offered to the public by larger banks. This impetus to expand takes into consideration the movements into the trust fields by many commercial banks, financing the increasing foreign trade and carrying on international banking business. Furthermore, larger banks can maintain service departments for the purpose of credit analysis and thus reduce to some extent the element of risk in their loans. They are also able to give bank cus­ tomers information concerning current business trends. Thus, with this increase in size, banks were able to take advantage of the as­ pects of large scale efficiency, aspects that evolved because of outside factors.

1IKTH0DS OF BANK EXPANSION

Through this expansion of banks there also appeared a tendency for greater concentration. The most effective means of bank expan­ sion were by merger, chain, and branch banking. These movements, particularly after the first World War, so reduced the number of in­ dependent banks that many writers became alarmed at the banking 141 (excluding building and equipment) to capital funds. If the possible

losses of assets will eat up the capital funds, the bank is over­

expanded either in terms of the size of the bank or type of assets.

If it were the latter case, the bank could cut down the possible loss

by quality controls. Banks then would have to expand to keep pace with their environment.

It is worthwhile to point out that although the old capital to

asset ratio as a rating factor in bank expansion has faded away in

importance, it has not by any means been rejected completely. Accord­

ing to the 1949 Annual Report of the Federal Deposit Insurance Cor­

poration, banks seem to be keenly interested in preventing the capital buffer from dropping too low. In those states where the ratio was very small the amount of profits retained in capital accounts were

large. In 1949* of the thirty-seven states with a capital-as set ratio below the national average of 6.9%, thirty-three retained profits above

the national average of 57. On the other hand, of the eleven states

with capital-aaset ratios above the national average of 6.9%, seven

retained profits less than the national average. Apparently these

banks were of the opinion that no further expansion was necessary.

It is necessary to point out here, even though it has been considered

in the preceding chapter, that the eleven states with capital-asset

ratios above the national average are restricted to the area around

New fork City. The eleven states included all six of the hew England

States, New York, Pennsylvania, and Delaware of the Middle Atlantic

States, end Virginia and Nest Virginia. It would seem from this that 140 banking text writers, although it was not ignored by the lawmakers. It is quite possible to conceive a situation in which capital funds could be more of a limitation to bank loans than reserve require­

ments. Reserve requirements may be the least important consider­

ation in bank expansion problems of small banks. Through time an increase in deposits forced banks to expand in order to safeguard

adequately their customers' deposits. This tendency again demon­ strates the relationship between business expansion and bank expan­ sion and hew this relationship resulted in the necessity of banks to expand.

As was mentioned before, the framers of our banking laws were

more realistic than some of the subsequent economic experts as the former group placed minimum capital requirements on banks in accord­

ance with the population of the community. The minimum requirements

for national banks are as follows: Capital Surplus Under 6,000 Population $50,000 2056 6.000 to 50,000 100,000 20% Over 50,000 200,000 20% For Ohio state banks Under 5,000 35,000 20% 5.000 to 25,000 50,000 20% Over 25,000 100,000 20% Up to 1930 it was generally recognised that the ratio of total

capital accounts to total assets should be about 10%, but as every­

thing else changed this standard no longer held valid. As a result

of the financing of the war, a new standard was established. Now the soundness of a bank la Judged by the relationship of assets 139 also had its effect on the banking structure. with the inventions of nee types of far* machinery, less people were needed on farms; more people moved to the large cities to obtain work. It was a period of urbanisation as well as trustification. These factors alone would have demanded a change in the banking structure. In speaking of these same conditions, Cartinhour said, "However unusual, the chasges may seem the fact must be recognised that the banking system is aligning itself, perhaps in a tardy manner, with these developments. After all, it is inevitable that the trend toward con­ centration In industry should enfold the banking system in view of 1 their close relationship". Since banks have limitations on their loans in relation to their capital funds, that is, since national banks are limited to ten percent of their capital and surplus to anyone on an unsecured note, banks with a capital account of #10,000, would be limited to loans of #1,000 to any borrower under the above conditions. This amount, of course, would be quite ample for a businessman as long as he was carrying on a small business, but when his trade became greater and he expended his plant capacity, he would probably need more financing from his local bank to carry him over. His bank, however, unless it expanded, could not satisfy this Increased demand, thus reducing the possibility of servicing its customers. This point is too often overlooked by money and

1 Cart inhour, G. T., Branch. Group and Chain Banking. (New York, 1931), p. 1. 138

Out-of-town depositors found it necessary to keep large deposits in

New York, and even within the center there was a concentration of 1 these deposits— some banks could handle deposits better than others.

There is, of course, the tendency of concentration as a result of bank expansion; that is, as business needs become greater and greater, the smaller banks being unable to meet these greater needs will tend 2 to failf or merge with other banks. As this tendency continues, we leave the stage of '*atomistic individualisa" of small banks and move to a stage of a smaller number of large banks. A bank is a creature of its environment, tfhen the environment changes, so will the bank.

Banks in order to keep pace with the expanding business condi­ tions had to expand to meet the larger and larger demand on the part of business. As business grew and prospered their demands for loans and their deposits with banks became greater and greater.

This was also a period of "trustification" of business; the stores and factories were uniting by centralised production and distribution.

Corporations gained nationwide representation by opening branch of­ fices, or chain stores all over the country. The shift in population

1 Of the total interbank and postal savings deposits held by banks as of December 31, 1949, $4,602,246,000 of the $12,716,507,000 was held by banks in the State of New fork and presumably most of these bal­ ances were held by banks in New York City. Federal Deposit Insurance Corporation, Annual Report. (Washington, 1950), p. 145* 2_ This problem took On serious proportions in the Southern States dur­ ing the 1920* s. Large corporations of the South borrowed funds from banks in Northern cities because small local banks were not able to supply the funds either in the quantity desired or at the rate the borrower was willing to pay. This point will be considered further in the chapter on interest rates. 137 categorically that the expansion of any one firm was the direct cause of the expansion of any one bank or a group of banks. There is, how­ ever, evidence to show that a general expansion of business both in­ tensively and extensively causes a general expansion and concentra­ tion of money and banking. To explain this proposition involves an explanation of the concentration of funds in certain banks within the money market. It can be seen from Table VI submitted by Samuel Unter- meyer to the Senate Hearings on the Federal Reserve Act in 1913 > that there was a high degree of concentration of deposits in certain New

York banks.

Table VI

Number of Out-of-Town Banks Depositing Funds in New York City Banks

Name of New York City Bank Number of out-of-town Bank Depositors

Bankers Trust Company 237 National Bank of Coasierce 1,671 Chase National Bank 3,103 First National Bank 579 Guaranty Trust Company 182 Hanover National Bank 4,074 Liberty National Bank 312 Mechanics and Metals National Bank 1,010 National City Bank 1,889 National Park Bank 2,426

Total 15,483

Sourcei Senate Hearings on the Federal Reserve Act. Volume 1, pp. 819*25 * 136 1 velocity of turnover (V).” In relation to this analysis of the money market, Hansen would be more interested in the economic fac­ tors that compose the money market then he would be in the supply

of money and turnover of that supply. iVith Hansen it is no longer a matter of numbers but a matter of the basic elements that bring

about economic phenomena. In the case of a money market the basic elements would include the trade and commerce that exists in the fi­ nancial center and the reasons why business concentration attracts the funds to the center. These factors are basic; they are the im­ portant Elements, and money merely follows these factors.

This being the case, it is pure folly to think that by control­ ling money supply the problem would be eliminated, if money were controlled, trade and commerce would merely find new ways of carry­

ing out their functions. This would be done within the limits of

the institutional framework and conventions. If monetary controls wore too stringent, such a policy could result in the breaking up of commercial lines and techniques and bring about a falling off of business activity. Monetary regulation designed for the purpose of alleviating difficulties of the economic system could easily do more

harm than good. The effect would be unpredictable.

w e Hscsssnr OF BANK EXPANSION

In connection with the often considered question of the relation of business expansion and bank expansion, it is difficult to say

1 Hansen, A. H., Fiscal Policy and Business Cycles. (New York, 1941)* P. 37. 135 often Ignore the politlc&l and social factors Involved; the poli­

ticians in most cases are forced to overlook the economic angles.

Even in the field of economics, for example, those interested in public finance measure everything in terms of sound principles of public finance, and too often ignore the social changes that are taking place; bankers think in terms of sound banking principles and ignore the broader social aspects. Host analysts arrive at value judgments on the basis of the data in their own field and become most perturbed when someone in another field arrives at a different con­ clusion. Even Keynes is guilty of this sin. It remained for others to refine his theories and bring them back to reality.

Alvin H. Hansen, on the other hand, was somewhat more realistic in his approach in that he deemphasised money as a causal factor.

It was a retreat from the extreme Keynesian approach, a movement toward the Neo-Classical theory in that it reduced the importance of money as a dynamic element and considered it only as one among many factors. According to Hansen, money is important but does not deserve the position Keynes set aside for it. In explaining this theory, Hansen said, H. . .the trend of modern monetary thinking runs in the direction of emphasising the factors which influence fluctuations in total money income rather than factors influencing the constituent elements in the total volume of money payments, namely, the amount of money, including demand deposits (M) and the 134 of the general social advantage, taking an ever greater responai- 1 bility for directly organising Investment. . If interest rates would not culminate In the desired results, then the government would have to bring about this same result by more active participation.

Keynes has always been criticised for his interest rate policy. In his analysis of the marginal efficiency of capital and interest rates, he gave the cost of money a role of importance that in reality does not exist. He never fully explained why an entrepreneur considered

the rate of interest any more important than any of the other costs of production. Where Keynes* analysis fell down was in the fact that he did not recognise fully all factors that would be considered in 2 determing whether production would take place or not. It is again

the problem of abstracting factors without due consideration to the other fields.

To digress for a moment, this abstracting has been the cauee of many of the difficulties in the social sciences. The economists too

Keynes, J . U., The General Theory of Employment. Interest and Money, (New York, 1936J, p. 164. 2 This error is not uncommon in the field of the social soiences, and, therefore, Keynes it no more at fault than other writers. The prob­ lem involved is the number of variables that must be considered, and, of course, all of them cannot be controlled. The Harvard Graduate School of Business Administration made a survey of business firms to determine the factors Influencing investment decisions. Of the 118 eases studied, only 10 cases showed that Interest rates were con­ sidered and at no time were they a dominant factor. J. A. Estey, Business Cycles. (Hew York, 1950), p. 280. 133 money In the market, but this does not mean that the Interest rate alone accomplished this purpose. It merely means that other con­ ditions in the money market were compelled to take on new roles and unstable rates were one of the obstacles to be overcome. The mere adjustment of an Interest rate will not bring about the desired re­ sults, because the Interest rate is not the only factor to be con­ sidered. There are a multitude of other things Involved.

Generally speaking, Keynes looked upon money as an Important and dynamic factor in the national economy. Although he was not the first to introduce this doctrine, his contributions aided greatly In the shift of the monetary approach from the neutral money philosophy of earlier writers to the more recent doctrine of money as the operat­ ing factor within the economy. However, unfortunately Keynes swung too far over to the other side. He took the role of money out of the passive state and made it the active and dynamic element of the economy. With this philosophy, If money could be controlled then the economy as a whole could be regulated. Keynes, although with many reservations, said that money could be regulated as long as other factors did not interfere. With Keynes it was probably more of a hope than a promise because he said that if monetary controls did not work, other government measures would have to be employed, as he says, Tor sy own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest.

I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis 132

CHAPTER VI

The Role of Banks and Monetary Concentration

The problem of business concentration has been the cause of much discussion in the past three quarters of a century. One ques­ tion involved is whether money Is the cause or the effect of busi­ ness. If money is the dynamic factor, can It be used as an instru­ ment of control? If money is not the dynamic factor, then what re­ sult, if any, can be expected if money is manipulated for the purpose of controlling business. The analysis of this dissertation shows that money is a result of business; that is, business is basis for ths existence of money. When there is a concentration of business, there will be a concentration of money, and therefore, for the pur­ pose of control, monetary regulations are largely on surface and do not dominate ths basic essentials of economic activity.

However, money is a part of the overall economy and has an im­ portant role to play. It is not ths neutral factor that many of the earlier economists considered when they explained economics in terms of a barter economy. Since money is a part of ths system, it will hgve sosm effect on the system as a whole but cannot be used as the only measure of effective control. The stabilisation of interest rates by the Federal Reserve System hslpsd make New fork the center of world finance because people were more willing to invest their 131 foreign trade and finance. The fact that there were now eleven other Monetary centers in the nation did not detract from the im­ portance of Mew York, but instead aided and increased the importance of New York since the Federal Reserve Bank of New York acted as an agent for other banks in the system.

It can be said that the Federal Reserve was an institution set down upon certain forces that were operating within the economy.

Its purpose was to curb some of the difficulties existing within the economy and at the same time to promote a better flow of funds between the various sections. It emphasised monetary and banking controls which were instrumental in eliminating some of the causes of the early money panics; but however, it must be remembered that this emphasis on money as a means of controlling the whole econony was in reality giving money a position it did not earn. There was money because of trade and commerce and not just because there was money. Money was just a part of the overall economy and could not be used as an effective means of steering the course of business.

The Federal Reserve, although it eliminated the dangers of monetary concentration in the New York money market, made it possible for

New York to become a bigger and better money market because it stabilised the flow of funds by providing the sponges to absorb surplus funds, and the power of expansion when more money was needed.

This stability resulted in more confidence in the market and increased its Importance both dosiestioally and internationally. 130 did this not by means of destroying the tendency to monetary concen­ tration but by setting up and supporting more points of concentration; that is, breaking the nation up into twelve key centers rather than 1 one. In doing this, the banking system could be more flexible and

at the same time more reliable from the point of view of bank policy.

It established, generally speaking, twelve money markets by intro­ ducing ths twelve Federal Reserve Banks, but at the same time it created a new world center for finance by removing some of the dif­

ficulties that faced the New York money market in connection with

Ths reader has only to reasnber the Great Depression of 1929 to realise that control of money by either the Federal Reserve System or any institution will not solve all of our problems. Prior to 1929 many thought ths days of depressions were over. Monetary controls of the Pederal Reserve System would be sufficient to handle all difficulties. One need only read T. Conway and K. 1C. Patterson, The Operation of ths New Bank Act. (Philadelphia, 1914) to discern the general optimism. However, with the crash of >29, optimism gave way to pessimism. The Federal Reserve was not able to banish de­ pressions fTom this earth. In describing this period, Whittlesey, C* R., Principles and Practices of Money and Banking. (New York, 1949), p. 379, says "Despite valiant assistance afforded by the Federal Reserve Banks in providing liquidity at tines of parti­ cularly heavy strain, the great depression was a period of distinct frustration for tbs Federal Reserve System. The extent of the boom in 1928 and 1929 mas influenced by overconfidence in the ability of ths Federal Reserve System to prevent crisis. It was an easy des­ cent from this state of undue confidence in the Federal Reserve to a state of excessive disillusionment. In this prevailing hopeless­ ness, the Federal Reserve authorities, as their efforts to expand credit by lower discount rates and open market purchases proved unavailing, earns generally to share". The difficulty of 1929 wasn't newj it was a problem that faced the money market before— a lack of liquidity. With deposits at a new high even the Federal Reserve with its existing controls was not strong enough to withstand the shock. The New York Bank attempted to do its part. Between September and October, 1929, this bank increased its investment account from 2 millions to 96 millions. For more details on the role of the Fed­ eral Reserve System during the 1 9 S 9 depression, see S. E. Harris, Twenty Tears of Federal Reserve Policy. (Cambridge, 1933), pp.615-851. 129 to the situation we x'lnd in business concentration. Standard Oil of New Jersey today is larger then its parent company which was broken up in 1911* The reason for this, of course, is obvious.

Monetary controls in themselves would not break up the tendency or causes that brought about this concentration. Just as in the days when credit shortage in New York forced businessmen to use other means of selling goods, so today controls on the amount of money will only bring about other means of making payment.

Probably the factor most often overlooked in this respect is the fact that businessmen, without controls of any kind, can create

their csm means of payment through check clearing. The amount of this check clearing is not a function of the stock of money, so

that quantity controls will not influence this factor. Money then is Just a part of the overall economy and not a separate and peculiar factor that can be used as an effective control measure. With the

Depression of 1929* or as Hansen called it, 11 The Orest Divide**, came

the end of the reign of money. It was a "divide" because it brought into being a new approach to the problem and completely outmoded the old. There was a concentration of funds in the money market because money was attracted there by many business and commercial advantages.

In view of this, then, it is easy to understand why a policy of con­

trolling money doss not necessarily control the basic roots of avmey.

Ths Federal Reserve System, although by no means the final an­ swer to all economic and monetary problems, did remove some of the dangers of money panics as existed in our earlier history but it 128 invested in American securities, ranging from short term paper to long term government bonds, although most of the funds were in short term bills. With this large increase in funds, the New York money market became increasingly greater as a world center. With an in­ crease in its sice there existed an increase in its importance. More and more institutions were taking part in the market, and as this took place it became on one hand more diversified and on the other more standardized. It is a perfect example of external economies.

Actually, however, the Federal Reserve System was just a super­ ficial structure. It touched the surface without getting below and interrupting the trends or factors on which this tremendous money market had been built. Where the system was to control various monetary pressures, these pressures grew out around the system, be­ cause they were not oamsed by the monetary conditions tut by the business factors discussed earlier. Through time it was learned that monetary controls were not sufficient because the basic economic factors were commercial rather than monetary. With the quantity controls of the federal Reserve System, the banking authorities were able to remove some of the dangers of monetary concentration; that is, they made it possible for New fork to have funds but not at the expense of another segment of the nation. However, it must be re­ membered that despite the Federal Reserve System, monetary concen­ tration still exists; in fact, there is more concentration of power and control of money today in the New York money market than existed before the introduction of the Federal Reserve System. It is similar 127 insignificant in comparison to the total supply. Because of this low ratio, interest rates tended to be somewhat stabilised. These two factors, the large amount of funds flowing into the money market and the consequent tendency of stabilised money rates, greatly fa­ cilitated the development of the money market. Before the Federal

Reserve System, the use of New York balances as reserves was con­ fined to the area around New York; as conmunications and better means of making payments developed, it spread out over the whole nation, with the machinery supplied by the Federal Reserve, this aspect took on international importance. New York, then became one of the world centers.

Because of the stability of the market and the use of the bank­ er's acceptance and large supplies of short term Treasury obliga- 1 tions, New York has attracted large amounts of foreignbalances.

Most of the foreign funds deposited in the United States are kept in

New York. Of the $634*927,000 foreign deposits in the United States 2 on December 31, 1930, nearly 87£ were held by the New York banks.

New York was the financial center of the nation and of the world.

Foreign funds were attracted to the United States and New York for many reasons; although probably the most important was the stable financial condition in this country. These foreign funds were

1 See Chapter H . 2 Board of Governors of the Federal Reserve System, Banking and Monetary Statistics. (Washington, 1943), PP. 78-85. 126 exchange. Formerly, the American banka could not discount foreign acceptances so that the merchant had to deal with an English bank thus exposing himself to loss because of currency fluctuations*

Also the English bank was able to collect the commission and dis­ count. However, the Federal Reserve permitted American banks to handle foreign exchange so that United States merchants could play a greater role in foreign trade, and American banks could also en­ joy a much more important position in financing this trade.

Uie System increased the importance of hew Xork in another way.

Since New York became a center of world trade, and oince it now had ths mechanism to finance world trade, foreign balances in New York became increasingly important to foreign countries. In the sane way that Cleveland could pay Columbus with a check drawn on New York, so also could Peru pay England with a draft drawn on New York. In view of this situation, foreign countries were always interested in ob­ taining Mew York balances so that New York balances were in demand all over the world. When other nations of the world recognized the importance of maintaining balances in New York, they would exert every effort to keep balances in this money market. As a result of this propensity on the part of many countries, New York received large amounts of money, Which could be used since there was a high degree of clearing in such a center, to support the various secur­ ities markets. Furthermore, as a result of these large amounts of funds finding their way to New Xork, after a certain point was reached, any change of money flowing in or out would be relatively 125 Reserve changed all this. Banker's acceptances, along with foreign drafts, served as a new inpetua to the expansion of banks and tnere- fore the money market, with the introduction and fostering of bank­ er' s bill, the commercial paper market declined in importance; this 1 was a complete reversal of the situation as it existed about 1830.

From another important aspect, that is, the increasing develop­ ment of the money market as caused by the Federal Reserve System's ability to stabilise interest rates, it can be said that the New York money market was in a position to challenge the supremacy of

London. Before the system, London enjoyed undisputed reign as the world financial capital, chiefly because of the stability of interest rates. hngland could finance world trade because there was no fear of losses due to fluctuations in the cost of loans. New York did not have this advantage until the Federal Reserve supplied the neces­ sary support to the market. It could draw off excess money when it was not needed, and it could supply money when there was a shortage, thus preventing drastic changes in the cost of the funds. With this change, New York became a world financial center. It took over some of the aspects of the London money market. Furthermore, the Federal

Reserve made possible the use of banker's acceptances in international

^However, since 1929# the volume of bankers' acceptances has been declining at a rapid rate; so much so that some writers believe that this market is on the way out. It is true, of course, that the mech­ anism of this type of paper is not in keeping with the conventions and habits of this nation, so therefore, its volume at least for the present is limited. Treasury Bills are now supplying the short term paper needed for liquidity and to provide some earnings. See Burgess, op. clt.. p. 158. 124 Table V

Average Interest Rates on Customers' Prime Commercial paper, 4-6 months

Cities 1911-1913 1922-1924

New York 4.74$ 5.03$ Boston 4*86 4.99 Philadelphia 4.97 5.22 St. Louis 5.87 5.27 Chicago 5.98 5.28 Minneapolis 6.15 5.49 New Orleans 7.11 6.10 Kansas City 8.00 5.96

Source: Burgess, W. R., The Reserve Banka and the Money Market. (New York, 1946), p. 203. balanced portfolio. In this way the banks are protected by hawing income reserves without resorting to long tens or risky loans. In

1913, the President of the National City Bank of New York, in dis­ cussing the desirability of a central bank, discounting the loans

of the member banks, said, "If this measure will accomplish it, it will bring lower commercial rates for the whole business community 1 of ths United States. It will accomplish a leveling process".

With the advent of the Federal Reserve, the banker's acceptance came

into prominence as short term paper. As was mentioned in an earlier

chapter, this tjpe of paper existed before but was not used widely

because it was not accepted by various banks. However, the Federal

1 Vender lip, Frank A., "Rediscount Functions of Regional Banks", Banking and Currency in the United States. (New York, 1913), p. 142. 123 1 Reserve. The member banks could also lend money on call In the stock market according to Federal Reserve regulations. The Federal

Reserve was a factor of great importance in the development of the money market. It served as the clearing house for the banks of the nations. Previously, that is, before the Federal Reserve System, the New York banks were the last stand during tight money conditions.

There was no way that they could get money by selling their paper without causing some serious results on the various markets. The

Federal Reserve now serves this purpose. The member banks can now sell or borrow on their paper thus preventing to a degree the ruin­ ously tight money situations and the greatly fluctuating rates of interest. The Federal Reserve in its capacity as a control mech­ anism also provides a few more sponges to sop up surplus money and therefore gives more stability to the market by preventing the con­ stant ups and downs of the cost of loans. Furthermore, the Federal

Reserve reduced the spread between rates, as shown in Table 7. From

1911-1913 a spread of 3.26 per cent, was reduced to 1.11 per cent during 1922-1924.

'Aw Federal Reserve can maintain the nation's liquidity by its adtivities in the money market. By the use of the Treasury bill, banks can be assured of short term paper to provide them with a

^The government securities market became the most important outlet for bank funds. Of the total member bank investment in 1929, 71% were investments in direct or indirect government obligations. The Guaranty Survey. November 25, 19M>, Vol. IX, No. 8 , p. 1 3 . 122 its many advantages, remained the center for investment, the people of the nation looked to New York for these opportunities and did so with more confidence and assurance as a result of the Federal Re­ serve System. The banka from all over the nation through the

"agency" of the Federal Reserve System relied on New York paper for their portfolios. There came a greater dependency on New York than ever before in the history of the nation. This dependency strength­ ened the development of the msney market institutions. They became more refined and specialised. Their efficiency increased as they performed the larger tasks made possible because of the establish­ ment of the Federal Baeerve System.

Furthermore, the Federal Reserve not only aided the nation's banks but it also took an active part in the money market. It be­ came active because of the increased volume of government buying and selling not only for the purpose of financing the government but also as a measure of control of monetary conditions, rtith this new development the classification of the institutions become more com­ plex and more related, uirectly the Federal Reserve bought and sold

Banker's acceptances and government securities or government guar­ anteed securities in ths open market; the member banks could delve in the bill market, government securities, or the commercial paper market, using these papers as collateral for loans from the Federal 1 2 1 growth of the money market. It placed the government in the invest­ ment market both directly and indirectly; directly from the point of view of actually buying and selling securities and indirectly in 1 uhe way of controlling interest rates.

It is interesting to note that with the establishment of the

Federal Reserve System, the New York money market, instead of being broken up and reduced in importance as a point of monetary concen­ tration, actually became a more effective and better coordinated center for world funds. This result came about partly as a result of the Federal Reserve acting as a support for the existing banking institutions and partly because the System unwillingly aided the evolutionary development of the underlying forces within the money 2 market.

In the first case, since the New York banks could now rely on

the Federal Reserve to emmm to their aid in time of stress, the

difficulties and hardships of financing the nation's business trans­

actions were somewhat reduced. The Federal Reserve offered greater

flexibility to the money supply; it was able to spread money over a

wider area without taking it from one place to give it to another.

This resulted in a better money market. Since New York, because of

1See Chapter VII. 2 It can be said that the Federal Reserve started the development of two additional loan markets; the government securities and the Fed­ eral Fund Market. For more detailed information on the latter, see Turner, B. C., The Federal Fund Market. (New York, 1931). See also Chapter II of this dissertation. 120

Chart I

Beakers* Balances la heer York City and ether Baser** Cities, by Qsegrsphtoal Divisions, fcovesber, 1914.

Geographical Percent of hankers1 Deposits Divisions Held la hpsolflad Cities 25* 50* 75*

State*

Beaten States

•3 set he n Bills* State*

Biddle sastan Statea

Wester* states

Paelfls states

Sourest V l . # sad J. O. M t k , the W m Task m m XSefc, 19*31, Tel. IX, p. ZL5. 119 THE CONTINUATION OF CONCENTRATION

It Is Interesting to note, however, that the interior banks maintained large reserves in New York after 1913. As was mentioned before, these deposits were in the money market not only beoause they were reserves but because of business connections or the lines of trade between New York and the local communities. Even though the

Federal Reserve required local reserves, the banks still maintained deposits in New York so that the money market retained its position as a storehouse for a large amount of the nation* s money supply.

Chart I demonstrates the fact that the interior banks throughout the country recognised the advantages of maintaining balances in the money markets.

Beoause of the tendency on the part of interior banks to main­ tain funds in New York, the Federal Reserve Bank of New York became an agent for the Pederal Reserve Banks in the other districts. The

Federal Reserve Bank of New York and its member banks became the pulse of the nation's economy. The Federal Reserve took advantage of the money market and used its resources to serve other districts. The money market was still the center but now the Federal Reserve Banks 1 did ths manipulating. The Federal Reserve System, in carrying out its function as an instrument of control, added to the evolutionary

I ----- From one point of view it might be said that the control did change to a large extent— new this huge money supply is no longer solely handled by private individuals alone but by a combination of both Private and public controls. 118 any inflationary tendency in the m y of surplus funds in any dis­ trict the District Federal Reserve Bank presumably could control 1 that tendency by means of various controls. With these controls the Federal Reserve attempted to offset the dangers of concentra­ tion of funds, but they did not prevent this concentration in the various money markets. New York still remained as the monetary center; it expanded in scope and importance as a world monetary center. The Federal Reserve did not impede with its monetary meas­ ures ths commercial advantages that brought about the money markets.

The reason for this, of course, is that the underlying advantages of the money market could not be denied. It is true that with the

Federal Reserve System, the local, interior banks no longer needed to depend upon the money market as they did before; under the system, local banks could receive reserves from their district reserve bank.

This reserve bank, however, was aided in its efforts to service the district by tapping the money market. The Federal Reserve Banks did the leg work for their member banks. Despite this function of the Federal Reserve Banks, the interior banks still found it con­ venient to keep their old ties with the money market. In fact the

Federal Reserve Bank of New York made the money market of that cen­ ter more attractive than ever.

*Tha banking authorities, about the year 1914# were confident that the discount rate was the only control needed by the Federal Re­ serve System. This passive control, in conjunction with self- liquidating paper and "automatic" operations of the gold standard, would be sufficient to handle any monetary disturbance. 117 necessary funds. If the call was of a rather large amount, the dumping of portfolios would lower the value of the paper and drop the bottom out of the securities markets. The Federal Reserve was

to prevent this; it was to supply a sponge to absorb this paper.

Generally speaking, the Federal Reserve through its discount operations and later the reserve requirements, open market operation, marginal requirements, and moral suasion, was to carry out its func- 1 tion as a buffer for the nation's economy. It attempted to decen­

tralize the control of money so that each district could supply its own need for funds without reliance on the New York money market.

If a Kansas City farmer needed money, the Federal Reserve Bank of

Kansas City could make such credit available through the member banks without resort to New York. If at any particular time there existed

One of ths most ambitious efforts of the Federal Reserve System was the attempt to stabilise prices with the hope that the economy would be stabilised. Such an atteaqpt would be doomed to failure because the methods of such controls would deal only with the surface and would not get down into the economic processes. This effort was based on the Fieherine theory of the value of money, which states that pricee can be controlled by controlling money supply or U. The Clearing Principle points out the fallacy of this control, as in this theory, prices are not a result of money balances but of the attitudes of consumers and businessmen expressed by income and outgo. A regulation of balances would not necessarily control these attitudes. During the '20's the stable price policy backfired since there is evidence that it Just hastened the spill-over of funds in­ to the speculative markets. Burgess, in discussing this point in The Reserve Banks and the Money Market, p. 282, says, "Although conmodity price averages did not rise, and in fact showed something of a declining tendency, prices of real estate rents, labor, and securities climbed rapidly". We had what Whittlesey calls "relative inflation". 116

Federal Reserve Bank In each district, there arose a local clearing house and a local money market for each section. With this regional banking system local banks could now call upon the district Federal

Reserve Bank, or all district banks, rather than to rely upon the 1 New York money market. Each member bank was required to keep its reserve with ths Federal bank in its district, and these reserves could be used for the benefit of the whole district. The idea in­ volved was the break-up of the dependency of interior banks on the

New York money market by supplying interior banks with funds when needed and at the same time drawing off funds when the demand fell.

The Federal Reserve was to eliminate monetary disturbances to the economy through its discount and open market controls. It served as a buffer against the inelasticity of the money supply. Before 1913, the New York money market was the last resort for the nation's banks in times of monetary stress; when the New York banks could not come to the rescue, or more accurately, when they tried to come to the rescue of the interior banks, the securities markets in New York were flooded with paper and there was nothing that could draw off this surplus. When the interior banks called for their money, New

York banks would be forced to sell their securities to obtain the

1 The interior banks, even though the local District Bank stood ready to provide liquidity, continued to keep deposits in New York and did not, as expected, withdraw their funds from the money market and rely solely on the local Federal Reserve Bank. This point very clearly illustrates the fact that the local banks were not recog­ nising the money market only as a banker* s bank but also as a busi­ ness and clearing center. 115 bank a went out with the fire; there probably would have been more if it were not for the efforts of the Secretary of the Treasury and

Ur. Morgan in making large sums of cash available throughout the country and to the stock market. Although the money market handled this panic better than it did previous ones, it was still not as liquid as it should have been. It was still not able to absorb the shock of cash drains without setting up repercussions t.hit in themselves added to the drain.

THE OPERATION OP THE FEDERAL RESERVE

As one of its functions, the Pederal Reserve System was to provide the necessary machinery to eliminate money panics. It was an institution set down into the structure of the financial market with the purpose of making the streams of money flow a little more smoothly. The Federal Reserve was to direct the natural tendencies of business and, therefore, money into the proper channels; that is, to maintain a controlled flow without the flooding at one place and the draughts at another. This was one of the overall purposes of the Federal Reserve System; its method of achieving this purpose was 1 the regional banking system.

As a substitute for one money market in New York, the Federal

Reserve System attempted to establish twelve; that is, by breaking the nation into twelve districts and with the establishment of a

^See Chapter VIII for the discussion on the conflict between Btable interest rates and a stable economy. 1 1 6 1 gain and the stock slumped to 10. ihis financial manipulation had the affect of making the conservative bankers even more conserva­ tive and the speculators more dubious. Since some of the banks in­ volved in this unorthodox banking practice found themselves without funds j they had to resort to the Clearing House for clearing house certificates. Wtien this information was made known to the public, the bank runs started. The Trust Conpany of America, an institu­ tion with $60,000,000 in deposits, lost $34,000,000 in payments to 2 depositors and to claims by other banks. Soon the shock wave spread to other banks in the community, hot only was banking brought to a standstill, but so also was business and the stock market.

The chain of credit started to move in reverse, that is, when one man could not get his money, he could not repay his creditor, and the panic was on, moving from hew York to Cnicago, Philadelphia,

Boston, Baltimore and other centers all over the country. The cor­ respondent banks throughout the nation, feeling the pinch of local demands for cash and fearing the loss of their own deposits in other banks, started to withdraw fimds. Altogether about $296,000,000 of currency was withdrawn during this panic, and of this amount about 3 $21$,000,000 passed through the New York money market.

When the fire was out and the smoke was beginning to subside

akeleton of the financial system was still remaining. Many

1 Ibid., p. 666 2 Ibid., p. 6 6 4 . 3 Ibid., p. 664. 113 with panics; and thirdly, the decline was soon arrested and well on the way to a new speculation before interior banks thought about withdrawing their funds. Because of these reasons, the panic of

1903 was really not a panic but simply a financial feud in which a 1 few stocks and a few commodities were primarily concerned.

However, the complexion of the stock market was not to remain rosy for long. In the early part of 1907* the bankers developed a

sudden conservative attitude and tightened up on loans. It is, of course, possible that this sudden change in the attitude of bankers might have made the bankers correct in their survey of the future. That is, if they thought the future was going to be a dark one, they

m^Sht have promoted the darkness by their actions. However, since

this le mere speculation from the point of view of the writer, it

remains for us to determine what happened in the money market and

the effect on the banks of the interior.

As ths first consequence of the bankers' actions, there was a

slight drop in the stock market, a decline that took on more serious proportions as a few of the scandals of the stock market were brought

to light. Many banks had contributed to the speculative fever by

tying up their assets in a few companies, and by letting brokers

bid up stock prices in the hope of a killing. United Copper went

from 37 to 60 in a few days in a battle between the bulls and the bears; however, the bulls found themselves unable to pay for the

p. 664 112

closely followed by the Metropolitan Bank which had to close its

doors. Money became the scarce item in the money market and the

rates were exorbitant even if a loan was obtainable, ihe interior

banks feeling the pinch at horns started to draw heavily on their

New York reserves. Money was just not available. At this time

Clearing House certificates came into use and alleviated the situ­

ation somewhat, but deposits in national banks fell from $1,060,778,338

to $979,020,349 in two months tlme.^

The Panic of 1903, although of minor significance, is still im­

portant enough to deserve some attention at this point, ibis crises

was primarily a loeal collapse brought about in part by the decreas­

ing gap between tbs rising discount rate and the declining profit

on stock speculation. The pessimism of the stock market spread to

tbs commodity markets and prices declined gradually over a period

of several months. This long process of liquidation became known as 2 "The rich man's panic". However, this "panic* did not last long

and by 1904 speculation was at a new high.

Tbs stock market collapse did not generate a nationwide panic

for many reasons. First of all, the panic, if it can be called by

that name, was more or 1m s confined to a limited nusfeer of stocks

and cosastdities, particularly iron. Secondly, the decline was so

gradual it never set into operation the fear usually associated

1Ibld.. p. 662.

P- 662* Ill

So far In the study of the panics, we see that the money mar­ ket was not equipped to handle any sudden desire for liquidity brought about either by an internal or external cause. There was no reserve that could be thrown in, no shock troops to come forth and absorb the blow of the large demands for capital. The money market always stood ready to receive funds either from this country or abroad but was never as willing to release these funds when the scare demand became too great for the market.

Turning to the panic of 1884, it can be seen that the situation was very similar. The United States was profiting at the expense of

France and England. This country enjoyed an export surplus of 1 $259,712,718 in 1881. France and England tightened money controls because of the loss of capital; this action had serious repercus­ sions in the United States.

England and France were forced to raise discount rates and thus cut off ths flow of capital to ths United States; as a result, the inflationary pressure within the hew York money market was brought to an end. To make matters worse, money started to flow out of the

United States, thus tightening money conditions here. The financial center was ripe for a panic, and the inevitable doom was close at hand. Soon there were large demands for funds from ths New York banks, and banks unable to meet the demands, were forced to suspend payment. The Marine Bank of Mew York suspended payment on May 5th,

1 Conant, op. cit.. p. 661. 110 banks of the interior were forced to do likewise and soon the panic spread all oyer the cotin try.

In the panic of 1857, the situation was somewhat similar. Again the country, and more specifically the New York money market, was ripe for a crash. Hie fever of speculation had generated an unpre­ cedented demand for capital, The ultimate rise in the discount rate was postponed for a while by the inflow of foreign capital and by government bond purchases, but these two factors Just got the fire roaring. The economy had already gone beyond the danger point. The final straw was the collapse of the Ohio Life Insurance and Trust

Company, of Cincinnati and New York, a company with total liabilities of $7,000,000. The fall of this concern spread a pervading fear throughout ths country, and particularly in the New York stock raar- 1 ket. lioney went into hiding or, if it dared to peek out from cover, did so only at exorbitant rates. Soon there was a run on banks, a panic that did not confine itself to New York. Almost simultaneously

Philadelphia banks were faced with the same problem. Interior banks were soon in the same predicament. At the time there were about

180,000,000 of English money invested in profitable American securi­ ties. nith the downfall of the Ohio Life, the Illinois Central

Railroad, the New York and Erie, and the Michigan Central, England started to withdraw its funds from New York thus making for more stringent conditions in the money market.

^See Burgess, op. clt., p. 1A9* 109 this country. ihe Erie Canal connected markets and sources of raw materials and placed a new emphasis on the South and West. The value of property in these two areas Increased twenty-seven times in some sections, lfuch of this speculation was financed by paper money issued by banks that were originated by speculators to pro­ vide the owners with funds to carry on the land rush. From 1823 1 to 1836, deposits had increased from $10,000,000 to #41,500,000.

Although there .fere many other factors involved in the crash

of the New York money market, all of them merely made the system

more vulnerable. All prices were too high as a result of the

speculative urge on the part of most citisens. The federal gov­

ernment distributed its Treasury surplus to the States and the

change in the coinage act increased the amount of gold in circu­ lation. All of these conditions worked together to blow up the baloon; the puncture came from the direction of England when the

Londoh money market started to withdraw its funds from New York banks. Even before this withdrawal the profit margin was for all

intents and purposes squeeaed out of every form of enterprise, and

of course, in time the discount rate went up. fhe crash came in

April, 1837. one hundred and twenty-eight banks were forced to

class their doors, cotton fell nearly fifty per cent, and many banks 2 in New York were forced to suspend specie payments. As a result,

1 Conant, C. A., A History of Modern Banks of issue. (Mew York. 1927), p. 626. 2 Ibid.. p. 627 108

country would involve * lengthy explanation of all panic s since

1776, but since the purpose of this chapter is to point out the

significance of money markets to panics, it will sufJice to dis­

cuss only those panics that contain the factors mentioned above,

and only a few of those panics. It is, of course, perfectly true

that in the panics discussed there were very many factors influencing

the chain of events. The two conditions mentioned above, however,

are still of paramount importance or at least of strong secondary

importance. It should also be realised that the ironey market of New

York can be influenced greatly by international financial repercus­

sions, which could cause a drain of funds from New York. Such a possibility is not necessarily excluded from the above conditions because in many oases the panics originated in a foreign money mar­ ket, s a y London or Paris, when the banks in these foreign centers

started to bring home liquid funds to meet the rush of the depositors.

Ihe panics to be discussed, those that had a direct connection with the New York money market, are the Crises of 1837, 1857, 1903 and 1907. These panics very clearly display the movement of money into and out of the money market, and at the same time demonstrate quite adequately the swelling of money within the financial center.

History telle us that in the Crises of 1337 the groundwork for this panic was found in over speculation in a new and promising country. xhs fact that the United States was able to pay off the total debt in a short time gave foreign conn tries the promise of

* S°od market for capital, a s a result, foreign capital poured into 107 time involved, and the Tear of uncertainty, it is not altogether impractical to assume that a reaction to this equilibrium might set in which could force the market downward, margins would be lost, and speculators would be forced to cover or take a loss. In the latter case some banks might have to close their doors, thus crippling some of the Interior banka. This situation was found in a few of our panics.

Although these conditions emphasise the flow ooncept of money, it should be remembered that in a sense a money market is a self- generating entity. With the given amount of money as determined by the attitudes of the interior bankers, uhe operation of money within the money market is more accurately described as a swell rather than a flow, ihe money market and the clearing principle contribute to 1 the effective money available. It is this swelling of money, along with the clearing between the money market and the interior banks that the Federal Reserve attempted to control. Before an analysis of the operation of the j*toderal Reserve is made, it is necessary to lay bare the actual relationship between the money market and the interior banks. A brief study of history will reveal the pertinent facts.

To do a thorough job of discussing the money panics in this

1 Some writers prefer to describe this swelling as an increase of V (velocity; and therefore an increase in money supply, but here it seems much more realistic to call it by what it is rather than by a mathematical expression for increased business activity. 106

With money flowing to the money market, interest rates would fall, thus encouraging the borrowing of money. If profit expecta­ tions in enterprise did not call for any increased investment even at the lower interest (and there is no assurance that it would), it might be more profitable to put money in the stock market. When the banks' finds were used to buy stock on call, it set in motion two factores first, the short-term interest rate would atart to climb, and secondly, the yield on securities would fall. Theo­ retically, an equilibrium would be reached at which the flow would level off and become stabilised. However, the stock market does not always lend itself to equilibrium conditions because it is based on a vast system of varied psychological attitudes on the part of thousands of speculators, Because of the complexities and

net effect is a transfer of bank credit not an increase. The total amount of bank credit need not be large} with a given amount of credit, brokers, through clearing, can support a large volume of transactions. The point at hand, however, is that when bank credit gets tight, brokers' loans are called in to restore liquidity to the banks, and as a result someone will be forced to take a loss. The writer is of the opinion that bite man would not dispute this point. His main contribution, aside from demonstrating the importance of clearing in our economy, was to remove the blame from the stock market. He points out that only after the panics have started do brokers * loans Increase. When speculators start to withdraw their accounts from the brokers, they in turn borrow from the banks. Whittlesey, in Principles and Practices of Money and Banking, (New York, 1948), p. 378, points out that in 1929, "Member banks in New York City cgpe to the rescue of the brokers by taking over a large amount of brokers' loans. In the course of one week, October 23 to October 30, the loans and investments of reporting msober banks in New York City increased from $7.6 billion to $9 billion. * Large brokers' loans are not the cause of a panic but instead a result. Usually in our history, the banks could not provide enough liquidity and the stock market would suffer. 105 banks had a tremendous impact on the New York money market; this market was the focal point for the business transactions of the surrounding territory, and any changes in any part of the nation would be reflected in the pulse of the New York money market. ±he difficulty was the shortage of cushions to absorb the various shocks, the money supply wasn't as flexible as it should have been.

From time to time, uncontrolled speculation in the stock and commodity markets contributed to the seriousness of this problem of inelasticity and thus brought about a few of our panics. This condition is not completely disassociated from the first, but it had at times a singular significance and therefore deserves atten­ tion as a separate factor. **hen a few interior bankers, for sea­ sonal reasons, could find no profitable outlets for loanable funds, these funds would wend their way to the money market because of the 1 interest payment on deposits.

The amount of money going into the stock market is not the cause of alarm. The difficulty shows up when the banks try to withdraw their funds. Many of the early writers in the field of money and banking criticised the use of bank funds for speculative purposes on the grounds that such loans were depriving business firms of needed funds. Professor W. J. Biteman, in an article in The American Economic Review. March, 1932, p. 66, entitled "Economics of Brokers' Loans", quite clearly shews the fallacy of this view. According to Eiteaan, broker loans are not detrimental to the economy either be­ cause of the else of total loans or the speculative use of the money. The reason is that brokers, with a small amount of bank credit, can undertake many transactions because of the clearing in the accounts of tbs brokers. When a broker buys stock for a customer, the broker may borrow from the bank to support the account. However, if one person buys, someone must sell, which means, in most cases, that another broker is now in a position to pay off bank credit. The 104 in & report from the monetary commission, said, "The entire absence of liquidnees and (sic) call loans, so far as the New York banks are concerned, is the most certain, and by no means the least important.

And out of a total loan of $63,000,000 the call loan account was

$54,000,000 and, furthermore, the time loans with collateral se­ curities were stock exchange loans, to the extent of $4,000,000.

The only kind of loan which was reduced at all was the ones of the variety of conmercial loans, a time loan on paper with a single in­ dividual."*

From a practical point of view, if it is assumed that the First

National Bank of Kansas City had on deposit with a New York Bank

$200,000 then the problem can be analyzed more clearly. With this initial deposit the New York bank can expand its loans. However, in the harvesting seasons Kansas City will call for its funds, thus re­ ducing the reserves of the New York bank which could result in a crises because of a tight money condition that would follow. Although there were reserves left in the New York bank, for the most part they remained inflexible, or as Burgess states it, "There was still plenty of money in the banks, but it could not be used because the lew pre­ scribed a legal minimum below which reserves should not go. There was no machinery by which these reserves could be either used with safety or increased with promptness." These withdrawals by interior

1 Beckhart, B. J. 4 J. G. Smith, The Mew York Money Market. Volusm II, (Mew York, 1941), p. 161.

Burgess, op. cit.. p. 149. 103 period, it is necessary to study these conditions to discern their relationship with the money market.

In the study of the periodic rigidities of money; several

factors become apparent* ihe interior banks held large deposits

in the money market; deposits that would supposedly be withdrawn when a local need for funds arose. At times when there were large drains on these New Xork deposits; that is; when the interior banks wanted to withdraw funds for local use, the institutions of the money market were not always in a position to meet these withdrawals,

in this case money became stringent in the money market as well as

in the area of the interior bank. As mentioned previously; de­

posits of interior banks were covered by assets, such as call loans

on stock collateral, when a bank in Kansas needed funds it would

call for part or all of its deposit in the correspondent New York

bank. However, since this money wav usually tied u p in loans and

investments, it could not always be taken out of New York without

causing some damage to the monetary and banking system. It will be

remembered that at certain times of the year, particularly around

harvesting tine, the interior banks withdrew tremendous sums to

finance the harvesting of local farmers. Without any other cushions

or pponge than the New York banks to absorb the investments thus

cast adrift, the bottom would drop out of the market, and a money

panic would follow, in explaining the importance of the volume of

call loans as a cause of the money panic of 1907# 0.11.W. Sprague, 102 expansion of finanoe is the clearing of payments to and from the money market. The banking system ties all the business firms to­ gether by acting as a national bookkeeper, and as such the money market acted as a central bookkeeper. Banks of the interior for­ merly used the money market as a reserve agent, a place to deposit funds when not needed at home and a place to obtain funds when a local need arose. Because of this relation between money market banks and interior banks, banks of the financial center were serving as a Federal He serve Bystem before the system was established. lhe big difficulty was that the money market was not equipped to handle any sudden drains, Ohen the interior banks needed funds they would call on the money market, and most of the time the money market could come to their rescue. But if the demands of the interior banks were large, the money market had nothing to fall back on. The need for liquidity was one of the basic reasons why the Federal He serve

System was established. A discussion of some of the money panics and the role of the Federal Reserve Bystem follows.

Generally speaking, one of the big difficulties involved in the high concentration of funds in the New York money market was the in­ elasticity of funds at particular times of the year. These con­ ditions, although not the sole causes of all depression in the history of the United States, did cause some of the panics, as they were called in earlier times, and contributed greatly to other periods of financial stress. Sines they were isg>ortant in the pre-1914 101 frant is of ths opinion that modern Mg started to emerge in

England about the middle of the seventeenth century; this date Is 1 close enough for our purposes.

The banks stood ready to make loans when an individual expected his outgo to be greater than his income. The reason that the bank was able to make this loan was because of the clearing of bank funds; that is, the bank did not expect to lose funds to other banks either in the financial center or outside in the surrounding areas. This expectation is of extreme importance because without clearing the bank could not expect to make multiple loans regardless of how low the reserve requirement went. These funds must be cleared out. The bank balances then become reserves against an unfavorable change in income and outgo. As long as clearing takes place, these reserves in the form of balances can be placed in various loan markets. A loan to the individual borrower will not necessarily deplete the re­ serves of the bank because of the clearing among city banks at the clearing house. Part of this money will find its way to another bank because of unfavorable clearing for the issuing bank, but in this case the receiving bank will have to back up this new deposit by a good asset and again we are right back to the various loan markets.

Thus it is possible that the money market can expand by a swelling rather than a flaming movement. The support for this

^Trant, op. cit. . p. 57. 100 the effects of Monetary concentration on economic and banking de­ velopment prior to 1914 will be discussed; and third, the influence of the Federal Reserve System on monetary concentration will be studied. In this connection, it will be pointed out that the ac­ tions of the Federal Reserve injected new elements into the money market which made a better monetary center and at the same time re­ duced some of the dangers of monetary concentration. This section will also attempt an evaluation of Federal Reserve policy as to its effectiveness under various conditions.

Thus far, the importance of commerce and trade, the significance of clearing, and the history of the operations of some early money markets have been discussed. Near commerce, clearing, and monetary

institutions must be related to each other in order to get a better

understanding of the operations of a money market. It seem obvious

at this point to say that a money market cannot take place without

some form of a bank on the scene. Without a system of banks, a city would be Just a business center and never a financial center. A bank, then, is the nucleus around which financial payments and various loan markets revolve. The speed of these satellites is da­

te rained by the clearing that takes place. As was pointed out pre­ viously, the London money market did not get its start until the

Lombards embarked on sons of the functions of a modem bank. These

functions never became important enough to develop a money market

until many years later when the present banking system was bom.

When this actually took place is a difficult question to decide but 99

CHAPTER V

The Federal Reserve sad Concentration in the Money Market

In the discussion to this point, emphasis was placed on the evolutionary growth of aoney centers and the underlying factors in­ volved. However, no attempt was made to evaluate these factors. It is well understood by many writers that, even though the money market became the clearing house for the nation* s funds and served many de­ sirable functions in this respect, the money market was also the source of many financial difficulties in our past history. Through the years there was a growing recognition of the dangers of monetary concentration, dangers that became more clearly defined and recog­ nised in the form of recurring money panics. The Federal Reserve

System had as one of its main purposes the elimination of this dan­ ger but not neoessarlly the prevention of the concentration of money.

Monetary concentration was a result of various factors that culmi­ nated in business concentration. To offset the tendency of money to flow to a certain area would have involved the restriction of com­ merce and trade; this obviously was not the thing to do. It is not good policy to cause death in order to prevent illness.

This chapter has three primary purposes. First, an effort

*111 be made to relate the factors that have been discussed so far and to stress banking as the center of a aoney market. Second, 9* made iondon a financial center, for it is only through commerce

that money is made and made available to be used to carry on more

trade and therefore build money markets, a s was seen London was

not alone in its early history as a convnercial center, but because

it had a conmercial tendency and for other reasons, the government

was established there. Ihese two factors together stimulated the

development of the Goldsmiths, which in turn established the basis

for modern banking, and specifically, the Bank of Er^land. This

financial institution, because it was a central organization within a central financial network, was able to channelize more funds than

the large number of small Goldsmiths. With the Bank of England a new day was born unto the money market of London* 97 the funds gave liquidity to the market, an essential feature if a market is to stand ready to lend money. Probably more important

than this last feature is that clearing also provides a method of

payment, as described in Chapter III.

Because of the premium placed on London money, bankers from

all over the country wanted to maintain balances with London banks.

These balances could be used to make payment to other banks with­ out any inconveniences, or more important, without losing cash.

Once London became established as a world trade and financial center,

banks in other countries soon saw the advantages of maintaining balances in London. If a South African bought goods from a mer­ chant in New Zealand, payment could be made by drawing exchange in

London. The account of South Africa would be decreased butthe ac- dount of New Zealand would be increased; there was no cash payment

(or more accurately, gold payment) by South Africa and London did not lose any money. Ahe funds in the money market remained the

same and continued to be used for other financing. As was pointed

out earlier in this chapter, New York relied heavily on the London money market for the financing of foreign trade; although for do­ mestic trade in the United States New fork money was at a premium,

internationally, London was the center of world finance and remained

so until World War II.

Thus we see that London, not unlike the growth of New York,

had its origin in the trade and commerce of the day. it was the

early fairs and markets that developed throughout the country that As was mentioned in an earlier chaptar, London always stood ready to finance trade around the world, and one of the reasons for the slow development of the New York money market, aside from its battle with Philadelphia, was the easy access of funds from the London money market. Loans on goods were as long as eighteen months which provided time for the goods to land on the American coast and move inland to be sold. As a result, most of the financing of lo­ cal commerce was handled by London and not New fork. At the same time that London was financing trade all over the world, it was also serving as a vacuum for excess funds of the world. Capital would pour into London. xhe harbor of London expanded to meet the in­ creased demand for shipping facilities; even if the goods did not enter the London port, they were financed by the London oxmey market that is, goods bought in one part of the world and shipped to an­ other, all of it financed by funds from London. Ibis dependence on London remained up until World War II, at which time, because of the losses to English production, the flight of capital, and the various controls on the fleer of money, New York took over as the world money market.

In the same way that bank balances in New York became a ne­ cessity to the interior banks, so also balances in London became important for other banka in England. The premium placed on ^ndon money served two important functions. First of all, it attracted funds from all over the country, and later, from all over the world. Secondly, since London enjoyed a sound commercial basis, 95

Lombard street. The bank continued many °f the practices of the

Goldsmiths, but these practices were not subject to the individual whims of each Goldsmith, but instead after a few mishaps, an open and above board policy of banking as specified in the charter was in force. Ahe bank was to issue notes and lend money, both of which were badly needed. In fact, it soon became the hub for international

trade. As for the domestic trade of London, it is interesting to note that as late as 1931* Greater London and the Southeast Section

of Lngland produced 30 . of all the goods produced in tne country;

the Greater London area ale— produced 19.56>6 of the national pro- 1 duction. This percentage had increased to 24,8 in 1935*

Prom the establish— nt of the Bank of England on July 27, 1694,

to the establish— nt of the Federal He serve bystem in the United

States in 1914* London remained undisputed champion of money mar- 2 kets. London was not reduced in importance by the beginning of the

Federal Be serve System in this country, but its advantage over New

forte was cut down to a great extent. The supremacy of London over

New York remained until World War II, at which time New York and

London grew closer together in importance; in fact there is reason

to believe that New York gained a slight advantage.

1 Political and Economic Planning, Location of Industry in Great Britain. (London* 1939)* p. 262. 2 1 It snst not be forgotten that London had attracted men of rare ability in the handling of financial affairs. Men like Childs, Paterson* Peel and others provided London with the leadership that eventually — de it the world center. with the Dutch, fell upon the resources of the Goldsmiths which were so near at hand In the Government Exchequer. At first, Charles closed the Exchequer and then suspended all payments, leaving the

Goldsmiths to face a money panic. Many of them were bankrupt, others were forced to suspend payment to customers. All in all, the money

of the country was tied up, and it had such an effect on the coun­

try that far-seeing individuals at once recognised that other finan­

cial measures would have to be provided. Aside from that fact that

this act of Charles provided the government with the first step

toward a national debt, it also contributed greatly to the founding

of the Bank of England, a step of tremendous importance in the es­

tablishing the Condon Money Market.

It is perfectly true that as far as the coracercial aspects of

the many English cities ware concerned, they were practically of the

same importance. however, by 1690, London had moved out in front as

the leading conercial city of England, and for that reason promised

to be the money market. Commercially, London held its own with re­

spect to other cities in the country, and there is reason to believe

that even on this score, London had somewhat of an advantage. «'ith

commerce serving as the base, plus the influence of the government

and the Goldsmiths, the road was paved for the establishment of the

Bank of England in London, which at that time staked out for London

the new role of the aoney market for the country.

Ihe Bank of England got its start by lending money to the gov­

ernment, but whatever the beginning, it served as the pillar of 93 bills of exchange for its customers drawn on some remote Goldsmith.

It is, of course, quite Interesting to note that the Goldsmiths

also had their bankers bank, the same as our coontercial banks have

today, before the Goldsmiths became of any great importance on the

financial seene of London, the well-to-do people kept most of their

funds in the Tester of London for safe-keeping* However, it wasn't

long before Charles I got the idea that this money would come in

handy for some of his wars and confiscated the treasures of his

people. After this blow the financiers of the country were not

willing to tempt fate the second time and looked for some other

means of safeguarding their wealth. This lot fell to the Gold­

smiths, and soon they had attracted more funds, in plate and coin,

than they could handle. As a result of funds piling up, and, of

course, not earning their keep, the Goldsmiths soon resorted to the

Government Exchequer. This early "Federal Reserve Bank" provided

the Goldsmiths with a safe storage place for the excess funds and

at the same time, provided the Goldsmiths with an interest return.

In effect, the Goldsmith was lending the government money at

a rate of interest. When the Goldsmiths needed funds to lend to

individuals, they would withdraw money from the Exchequer. In a

sense, the Goldsmiths were able to balance liquidity, safety, and

profitability. This relationship between the Goldsmiths and the

Exchequer continued fSr gome time to the benefit of the govern­

ment, the Goldsmiths, and the customers of the latter, lbs harmony

ended abruptly In 1672, however, when Charles II, involved in a war 92 ability or negotiability was questioned. It was through these notes that our present credit money originated. At first the Goldsmiths issued the notes to cover the amount deposited, but afterwards, as soon as the Goldsmiths discovered that in many cases the people did not claim their deposit but instead Just wanted a haven for their wealth, the Goldsmiths we re not at all aversed to lending more re­ ceipts; that is, expanding money supply. There is a great deal of historical confusion as to Just how much money the Goldsmiths issued on the basis of a given deposit; although it is quite evident that they did not hesitate to expand money supply at least seven times.

An addition in deposits of $1,000 would support $7,OCX) in receipts; one thousand going to the original depositor in the way of a pri­ mary deposit and the other six thousand being issued as a loan to an individual, in the way of derived deposits. This ability of the

Goldssdth-banker to change money supply by issuing notes contributed greatly to the establishment of a flexible currency. However, as

Trant, in discussing the early Goldsmiths, points out, "The lack of restrictions on note issues and the failure to provide automatic redemption facilities, resulted in the issuing of bank notes in ex­ cess of the needs of trade.

History also tells us that various Goldsmiths promoted their own correspondent relationships, as a Goldsmith in one city would honor bills of a Goldsmith in another town and quite often would accept

^Trant, J. B., Bank Administration. (New York, 193&1), p. 59. 91 practice, with this competition, the Goldsmiths turned to other fields, fields that were opened either directly or indirectly by the

Bank of Amsterdam. It seems that the apprentices of the merchants got into the habit of depositing the merchants' cash at the Gold­

smiths. At first the apprentices, being charged with this money, deposited the funds with the Goldsmiths for their own protection, and were not interested in receiving any return, but in time, how­ ever, when the Goldsmithe lending trade started to take on new im­ portance, the Goldsmiths soon became extremely willing to pay an

interest for the use of these funds, (at a rate of about six per cent per year). It is quite interesting to note that while the

apprentices were making a little money on the side, without the

knowledge of the merchants, this act contributed greatly to making

London the money market it is today.

The Goldsmiths became in time a rather specialised but still

diverse financial institution* They conducted exchange operations,

advanced funds against securities, issued notes against deposits,

opened new deposits, bought and sold metallic money, and helped

business by accepting their bills. The first check, dated 1675,

was drawn on the Black Lion Goldsmith Shop; although for all prac­

tical purposes chsck books were not used extensively until about

1770. Before this time, Goldsmiths issued deposit receipts which

soon became acceptable as money to most of the people. Ttiis type

of money was in effect the earliest form of bank notes. It is, of

course, quite understandable why at various times their transfer- 90 of Lombard Street. At that time, the nobility, the ones who had wealth, kept their riches in the form of jewelry and plate, and therefore times would arise when the safe-keeping of wealth became a serious problem. As a result, the Goldsmiths became the unof­ ficial custodians of the wealth of the nation. There was an of­ ficial place for such treasure, the Royal Mint or Tower hill, but after 1640, when Charles I confiscated all the money in the Royal iiint, the people were not so eager to trust their money here for safe-keeping. Although many historians and economists give the credit to the

Goldsmiths for originating the idea of bank money, apparently the

Bank of Amsterdam was the first to attempt our present demand de 1 oosit system. This bank, formed in 1609, originated bank msney and served to put the Goldsmiths on the path to success. At first

the Goldsmiths were satisfied with merely collecting heavy coin in

England and sending it to the bank of Amsterdam for a slight fee.

However, in time, Charles I, in 1627, also seeing these opportun­

ities, reestablished the Royal Exchange office to take over this

It is, of course, true that banks and bankers were on the stage of civilisation long before this time. As Conant points out, "One of the first forms of banking was the exchange of foreign monies for domestic sarnies and the return of the foreign monies to the coun­ try of origin", and "the mechanism of credit dates back to the civ­ ilisation of antiquity. It was much more fully developed in As­ syria and Babylon than in early Greece and Roms . . . Assyria, as early as the seventh and even the ninth century before Christ, pos­ sessed a system of commercial instrtunents, which included promis- sary notes, bills of exchange, and transfer checks, not unlike the modern check." Conant, C.A., A History of Modern Banks of Issue, (New fork, 1927), p. 1. 89 page. it ±0 impossible to find any information to throw light on the relation between the Lonfcards and Goldsmiths; that is, there is no information available to show that the -bombards were Goldsmiths or whether the Goldsmiths were a separate, specialized group of financiers. It is quite possible, though, that the Goldsmiths sprang from the early dealings of the Lombards; in other words, a separate branch or group started off in a new direction, and in time, became a little circle of its own. No doubt this group or circle soon attracted many others into the field, such as the early

Jews and other businessmen in the communities. Spaulding is of the opinion that this circle of money lenders, known as the Goldsmiths, evolved from the earlier financial markets because of the special advantages of the division of labor, as he says, ". . . Just as the cabinetmaker followed the carpenter, the Jeweller the blacksmith, the sculptor the mason, the wool—broker the wool-merchant, the bullion-broker the goldsmith, so the goldsmith himself followed or was evolved from the 'general dealer1 , the Lombard. In a word, separate branches of the trade carried on in Lombard street became distributed among distinct classes".^

Although there is on record that one Goldsmith company was in­ corporated in 1392, no doubt many existed before that time, how­ ever, this type of money lender never made much headway until the reign of Queen Elizabeth, when about 1600, it was a definite part

^Spalding, op. pit., p. 16. 8 8 expanded, and individuals became more conscious of wealth and economic security, there appeared an underground movement of capital accumulation. People soon started to accumulate, junk­ ing social interest for individual interest, and placed their funds in depositories not only for safekeeping but also to avoid the pos­ sibility of being caught. It was not by accident that the Lombards, and later, the Goldsmiths, were the recipients of these accumu­ lation of funds, and it was not by accident that the Goldsmiths put these deposits to good use.

bo we see that the efforts of the government in attempting to control accumulation actually contributed greatly to the develop­ ment of the money market. The government actually forced the people to turn their funds over to centralised and safe money lenders. It is mere speculation to attempt to determine what would have happened if there were no such capital restriction; however, it seems safe to say that funds would have sooner or later found some sort of a central market.

This big step of gat hairing capital having been accomplished, the growth of money markets took a long step forward. The Goldsmiths now were in a position to contribute greatly to the development of the money markets. i'his aspect necessitates further study, because

in actual practice the Goldsmiths became the first commercial bankers

of England.

The origin of the Goldsmiths presents a rather vexing problem

to the student of early Snglish history, for history reveals a blank 87 that trad* and commerce were the Important causes of early money markets. It was on this foundation of business that the early

Jews and Lombards constructed, step by step, the money markets.

Although the origin of money markets can be found in early fairs and markets, supported by financial methods already discussed, the development of money markets had to wait for two items to take place, the wide use of credit and the establishment of a bank.

These two steps were not long in following this early development.

In fact they were necessitated by growth and occurred as a natural sequence of events.

The first of these two essential conditions necessary to the establishment of a m u e y market, namely, the wide-spread use of credit, in reality got started during the days of the Lombards. At the risk of saying that the early governmental rulers were under- consuiqptionists, it is found that savings or capital accumulation was discouraged. It was felt an individual's place in society de­ termined the amount of capital accumulation that an individual may have, so that people were in effect held down, not allowed to ac­ cumulate, and therefore were unable to lend. This, as a philosophy, was part of the culture and therefore accepted. Although there are many factors to explain this, it suffices here to point out the idea existed and as a result a potential money market was greatly restricted.

In time, however, there seems to have been an opposing philos-

°P^f growing in the minds of tbs peoole. As commerce grew and 8 6 the Lombards were merchants on their own right; that is the bought and sold goods the same as any other merchants, using the funds they had gathered from various sources.

In addition to the functions mentioned above, there is evidence to support the belief that the -Lombards took over some of the duties of the early Jews. That is, there is evidence that the Lombards also performed the function of a money lender as indicated by some of the early court records. Mien the Jews were banished someone had to take over this gap in the realm of finance, and this task fell to the Lombards.

However, it must be remembered that the Lombards were not with­ out some competition in their many diverse undertakings, a s money changers the Lombards had at times stiff competition from the gov­ ernment. Even as early as Henry I (1100-1135) money changing was a monopoly of the king. He meted out franchises to various men in the market cities for a share in the profits. 'These Exchanges were es­

tablished in all principal cities and for all intents and purposes were the money changers of the day. So for the most part the Lom­ bards confined their activities to money lending, merchandising, and handling funds for international trade.

So far we have dealt with the development of the money markets in the early history of England, showing how some of the Influences were carry overs from Rone and Greece. The mechanisms themselves had

to be developed on the spot; although the form they took no doubt was

influenced by the cultures of older civilisations. History reveals 85

As soon as Edward X had banished the Jews from the streets of

London, the royal treasury started to dwindle. The -Lombards were in a position to perform a great service for the royal authority. Ed­ ward XI and Edward XII at times used the Lombards in times of finan­ cial needs, and in the way of compensation, the Lombards received an inmunity from the rigid control of foreigners. There was one re­ striction placed on the Lombards and that was they should stay in a certain place so they could be found without difficulty. Xn order to make this possible the Merchants of Florence were required to reside in houses on a certain street, known now as Lombard Street.

It was with this beginning that we now have the London Money Market.

It seems that the Lombards, in addition to the above working arrangement with the royal exchequer, also had a similar connection with the Papacy. That is, the Lombards were authorised to collect

dues on the English beneficies for payment to Home. However, since

English law would not permit bullion to leave English shores, the

Lombards transferred these funds by way of exchange to Home. This

process supplied the Lombards with large funds, available for many

purposes, among which was the handling of exchange between England

and Home. The money of the rope permitted Italian merchants to buy

goods from England by exchange and then pay the papacy in Italy the

amount involved. This method supported a rather extensive inter­

national trade between the two countries, and in time, these funds

eerved to carry on trade with other countries of Europe, uf course 8k later the authorised money changers rather than exchange each coin for any andeU. coins, with all the exchange rates involved, soon discovered the advisability of using the fair bills, which in a sense, became an international money of account for a particular location— an international clearing house.

In the early growth of the English markets, that is, when the method of buying and selling more closely resembled fairs, it seems that the same payment mechanism existed. Although through time, as the use of various types of money gave way to Just one, the advantage of fair bills disappeared. The Jews brought to England by William the Conqueror became the money lenders. It seems that these new financiers operated under the cloak of protection of the royal powers. It was, of course, the Jews who were called upon to keep the exchequer filled for the many military campaigns. However, in

1290, Edward I abolished the protection of the Jews and banished them from their quarters. This banishment created a vacuum which was soon filled by the Longobards, or Lombards, from Florence, Italy.

It fell to this group to start the London money market as we know it today. This group had an odd combination of talents. It was at the same time, not only the chief source of revenue to the royal ex­ chequer, a service for which the Lombards were handsomely compensated, but also, it was the accredited agent of the Papacy, merchants on their own right and money lenders.1

^Spalding, o p . cit.. p. 1 3 . 83 and Roman fair a as well as the later fairs in England, uf course these early fairs were periodic, ranging from every eight days in

Rome to once or twice a year in England. The fairs were usually closely supervised by the church officials, as in Rome, or the mayor of the city, as in early Greece. At Greek fairs, the local bankers, or trapesitae. huddled together in a convenient spot, ready to do business. ihese bankers were for all purposes merely money changers, both in foreign or domestic exchange, it is im­ portant to notice that in these early European fairs a new form of money came into use. As the fairs became more of an attraction and as they were held more often, the authorities for the local fairs in time started to use their own money; a person on entering a fair would turn in his money at a fixed exchange for fair bills and then buy and sell their goods in the fair, when their business was over they would redeem their fair bill for their own exchange, ihe method is the same as going to a foreign country today, just exchanging your domestic currency for foreign and when the trip is over, just ex­ change your chips and go home.

This method of the fair bill was a great b^ on to the fairs, it not only saved a great deal of time for the merchants but it also saved them from tbs difficult problem of knowing the exchange rates for the various types of monies used at the fairs. It eliminated the necessity of each individual having all types of money needed to do business with the many foreigners, ihis problem at first caused the Introduction of centrally located money changers but 8 2 were the onee that trudged the dirty roads, willing to do business with buyers and sellers in the market places. In effect, they were more of a huckster than financiers, as we know them today. It also seems apparent that the idea of a money market did not take shape in these fair areas until the money changers took on the more important financial aspect of a money lender. In other words, it was necessary to have some financial institution to carry out the function of a bank. This important step had to wait its turn until the tempo of cowerce made it possible and profitable for the Lombards to accept deposits and to lend funds. This phase was a slow Institutional de­ velopment, but as it progressed, so also did it provide the founda­ tion for the money market.

Some of the fairs in time became commercial centers not only

for nearby villagers but soon attracted buyers and sellers from all

over the world, is a result of the conglomeration of nationalities,

there soon arose the necessity of having someone around that would

and could exchange the various types of monies. To fill this need,

money-changers came into vogue. Also from time to time, the need

arose for someone to stand ready to lend money to carry out some of

the bargains that were available in the market places. These two de­

velopments have their beginning in early history, and therefore in­

volve further explanation.

Before the conquests of England by William of Normandy in 1066,

most of the financing at the fairs wan handled either by barter or

by a primitive means of payment. This was true in the early Greek ex 1 of our Lord Jesus Christ". The guild system, thus, was an important cultural and even institutional factor in the development of trade and conraerce in cities of early Briton.

With all of these influences, trade in cities grew, and in time

London became one of the important centers. As colonies flourished in the 1600's, London reaped the benefits also, because much of the goods passed through the port of -London. Even in the case of the colonies trading with other countries, such as Spain and Portugal, the receipts from the sale of the cargo, and many times the ship, were taken to tendon to buy goods for shipment to America, tondon stood as the center of this new world of commerce that seamed to get in the blood stream of everyone, and during the reign of Henry VIII, those who were immune to the disease before now fell victim to the fever.

While most of this discussion pertaining to England had dealt with the business or commercial side of the origin of the money mar­ kets, such a study should also include the development of the fi­ nancial side. In reality, however, the two aspects developed to­ gether, conmerce setting up the need for financial aspects, finan­ cial aspects in turn drawing more commerce because of the convenience they offered. The term, money market, as it is commonly known today, got its start in the dusty roads around the early fairs. In England the Jewry and Lombards were money changers and money lenders, xhey

1Ibid.■ p. 23. 80

Commerce was not only restricted to small areas of a country, but in time the market areas became confined to certain sections of cities. With the advent of the guild system, this tendency became even more apparent. Whatever the reasons for their aloofness, the guild members lived almost a monastic life. This cloistered life can be traced to the early influence of the church, as there was almost a religious devotion to commerce. Of course it can also be

said that the apparent reason for this type of system was to avoid competition shsswver possible and thus provide themselves with a cloak of protection. It was a type of internal spy system as each member was pledged to seek out any dishonest traders and report him to the mayor of the city. It was also suggested that members purchase peri­

odically small gifts for the poor and also to maintain a chaplain for

the group.

Foreigners moving into London would sooner or later join to­

gether to form a guild. These people divided themselves into groups

of particular nationalities and trades. The alderman of each group

had complete power over the lives and habits of all members. The al­

derman laid down rules for trading with other foreigners and the

people of the city. To them, the guild was dignified enough to war­

rant a name; there was the Society of the Merchants of the Steelyard,

the Fishmongers1 Company, and, of course, we cannot overlook "the

Vaster and Wardens, Brothers and Sisters, of the Gild or Fraternity

of the Skinners of London to the honour of God and the precious body 79 1 there are hundred* of cities today that originated in this way. however, it would not be at all difficult to show that in many cases the reasons forts were located where they were was because they made an ideal spot for trading. Even if there were proof that the fort came first and business afterwards, it would not upset the point of this chapter, namely, that before it becomes a financial center, it must be a business center.

We find that in Briton many of the larger cities got their start in this way, either as a haven for the oppressed or a heaven for the merchant* London, however, seemed to be especially favored; it was gifted with an excellent harbor and made the real seat of government.

These factors are important in explaining the great progress of this city. In speaking of the importance of London during the days of the

Elantagenets, Bourne says, "London is filled with goods brought by the merchants of all countries, but especially with those of Germany; and when there is scarcity of corn in other parts of England, it is

a granary where the article may be bought more cheaply than anywhere 2 else.'* London then had an early start and was able to maintain that

lead because of its location and port facilities.

1 It is interesting to note that in Europe today there are very few single farm houses dotting the countryside as one finds in the united States. In Europe most farmers live in a little community, some of them still have the surrounding walls, and every morning each farmer winds his way to his farmland which may be miles from his village. 2 Bourne, op. clt., p. 10. 78

for * given article, a s a result, many times disputes took place when a dissatisfied buyer or seller would object to a deal that had

transpired, leaving him on the short end of the bargain. Also many

of the foreigners found themselves discriminated against by the many

ground rules installed by the local merchants. When this situation

occurred there again was a dispute. Usually to solve many of these

legal problems stemming from the nefarious operations of some of the

merchants, the lords of the manor, or the mayor, established ped­

dlers or travellers courts to settle disputes. Apparently these

courts were equipped to mete out Justice in a hurry as it was said

the decision was returned "before the dust could fall from the foot".

So we see that trade or commerce soon cloaked around itself the

cultural support of its time. In the efforts of the village lords

to promote business, which of course was to their advantage, they

also fostered the growth of large cities, but the fairs were not

the only cause in the growth of cities. For military reasons, or

more specifically in the early part of history, because of the tribal

wars, the people soon discovered that in unity there was strength.

They found that it was much better to live in a fort or a fortified

village, where they could depend on the number ox' people and the

buildings to defend themselves against invading armies. It is be­

lieved by many that fear of invasion was the reason for the develop­

ment of villages. No one would attempt to dispute this point, as

Spalding, W. F., The -London Money Market. (London, 1933;» P* 9. 77

could oversee the transactions. On thsss sites sprang up many of

our cities of today. It, of course, was not a mass migration to

these areas, but a slow development.

At first the bargaining at these fairs was done out in the open,

then tents were used, and finally buildings were erected. Around the

shopping centers houses soon sprang up and a town was on the way.

Soon the laws and customs supported and extended the growth of busi­

ness and therefore the new towns. Merchants were looked upon as men

of honor by their countrymen. They were given new social prestige

and had to be respected by other members of the town. Such laws as

the following are commonly found among the old records: "By a law

of ina it was appointed that every merchant, even though he were by

birth a serf, who had made three Journeys across the sea with his own

• ship and goods, was to have the rank of a thane".^ In the effort of

town lords to keep trade at a high level they enacted certain laws

to control the bargaining, laws that tended to promote cities as the

center of trade. >or example, in Kent, one of the laws required

that any transaction of over five pounds had to take place within

the town walls and in the presence of the chief magistrate, or two

or more town witnesses.

Because of the various nationalities involved at the early fairs

and because of the odd assortments of goods that would be offered for

sale, it was quite often difficult to decide what a fair price was

^Ibld., p. 3 76 changes are much more noticeable. ^ong before the concept of a money market was visualised, England as a whole was emerging as the center of trade. As early as the fifth or sixth century before Christ,

England was already exporting lead, hides, and timber. Tin also was a big export item to the early traders, and at least according to

Bourne, the reason for this trade was because ancient Britons had more tin and it was better prepared than that of any other country in the known world. Boon the trade of the Britons expanded to corn, gold, silver, iron and precious stones, and about the time of Julius

Caesar, pearls also were a big export item in trade. According to

Bourne, "It was the fame of the British pearls, according to one tradition, that first prompted Caesar to cross the Gallix Straits; and the report of his soldiery speedily opened up a thriving trade with the Eentish towns for oysters to augmsnt the luxuries of Roman feasting, for bears to fill the Roman circus, and for dogs to be used by Roman sportsmen.

Along with this growth of trade, there was the growth of cities.

ndon, Canterbury, Rochester, Richborough, Dover, Chester, Exeter,

York, Aberdeen and Dunbarton, all had a part to play in this new business of comneroe. Most of these cities had their origin in local fairs or markets. The people would gather to exchange their wares* *he location naturally would be a convenient place for the surrounding land, usually near a church, where the cloak of religion

^Bourne, H. R. F., English Merchants. (London, 1886), p. 1. 75 establishing its own financial houses. But since this was a slow process, New York remained subservient to London until the estab­ lishment of the Federal Reserve System. It was in 1 9 1 4 , then, that

New York was set free, its dependency on London removed, and per­ mitted to Jump ahead on Its own power. In the following chapters, we will touch on the development of the New York money market and its relation to the Federal Reserve System, and also the more re­ cent changes in the importance of New York as a world financial center will be discussed.

Now, in turning to a study of London as a world financial center, it is well to remember that what has been said of New York or what applies to •L*ondon, can Just as readily in principle be applied to any of the world money markets today. 1hey all got their start in practically the same way. It is important, however, to remember that a money center, as we know the term today, is measured in terms of its financial importance; that is to say, a money market to be a good or influential money market must develop the ways and means of build­ ing up various large loan markets; however, the important part of this so-oalled center is its ability as a clearing center and in lending money, but these qualities depend upon the amount of trade and c o m e roe that take place.

Ihe study of the London money market is in reality a study of any money market because by comparison it fits the same pattern. In a on treat, however, to the cities of the United States, London had its origin far back in history and therefore the effects of the cultural 74

In the early part of our economic expansion and until the es­ tablishment of the Federal Reserve System, most of our foreign trade was financed by the London money market. London, being perfectly willing to maintain her privileged position, granted credit for as high as eighteen aiontha, and of course, the unorganised and poorly developed financial and banking system of New fork could not com­ pete with this foreign competitor. Since New fork was handicapped it had to depend on London and on other means of carrying on trade.

Aj was already mentioned, some of this trade was handled by a combi- nation of barter and cash payments, later by Jobbers, who bought the imports in New fork and then resold the goods in the rest of the country. Also the period witnessed the rise and fall of the au­ ctioneers who stepped into the picture almost by necessity. This means of selling foreign merchandise eliminated the necessity of credit and was another step In the development of the New fork money market.

B y 1837, with the fall of Philadelphia as the only important rival, New fork, with the assistance of London, became the undis­ puted money market in the United States. Trade flourished and mors credit was extended by London. At the same tins, New fork was slowly

students of history who hold, with Carlyle, that it is chiefly the record of the work of a few great men, will doubtless find in the annals of Vail Street evidence to support their theory. Leadership is nowhere more pronounced than in the New fork stock market. No­ where is it more effective in achieving results." S. C. Stedman, A Library of American Literature. (New York, 1890), p. 64. 73 the Bank of New Tork v u organised in 1784* followed by the Bank of

Manhattan in 1799* In 1791 * breach of the Bank of the United States was established in New Tork. In 1810 the Mechanics Bank was formed and in 1811 the Bank of America was chartered, followed by the

National City Bank in 1812. In 1817, the Second Bank of the United

States was organised and a branoh established in New Tork. By 181$ the City Bank of New Tork was chartered, making a total of seven banks established in this city alone. In Philadelphia, on the other hand, although the data may not be complete, aside from the two

United States Banks, the city had only three other banks by 1815, the Bank of Pennsylvania, 1780, the Bank of North America, 1784, and the Bank of Philadelphia, in 1803. The growth of banks and the need for financing was as>re apparent in New Toxic. As a result of this need, the banks grew and developed, setting the stage for the money market.^

10ne of the main factors causing the great need of banks in New Tork was the unprecedented demand for capital by the new railroad industry. Although the railroad was scattered all over the nation, the source of large investments was confined to a few large cities. Since many of the men connected with the railroad expansion were from or con­ nected with New Tork, the job of supplying funds to this new industry fell to New Tork. Per more inforsoatlon on this point see R. I. War- shaw, The Story of Wall Street. (New Tork, 1929), P« 58. Another factor, although more Important in continuing the development of the New Tork money market rather than in starting it, was the element of leadership. The stock exchange was able to surround itself with a group of wssltHy and shrewd financiers. Such men as Hamilton, little, Norse, Jerome and others shared their ability to speculate and knowl­ edge of investments with others of the market. This early leader­ ship paid big dividends for the future of Nall Street, so big that even Khsiml Clarence Stedman acknowledged it when he said, "The 7 2

In 1810, the value of the manufactured goods "excluding doubtful articles as to thsir nature", for ths stats of New York was

$24 ,370 ,289, whereas the corresponding figure for the state of 1 Pennsylvania was $33,369,111* The same figures for both states in 1850 were $99,904,405 and $94,473,810 respectively. In I860 the total value of all production for the County of New York was

$159,107,369, while Philadelphia County produced $135,979,777 in various coanaodities. In 1880 thess figures increased to $777,222,721 2 for New York and #577,234,446 for Philadelphia. New York slowly moved ahead of Philadelphia not only in the field of foreign trade but in domestic commerce as well. A further example of the increas­ ing cosetsrcial i^ortance can be found by comparing ths amount of capital invested In the two cities. In 1824, New York had 7*8 million dollars of invested capital, while Philadelphia had only

5*7 million. By 1840, New York had Increased to 55 million dollars while Philadelphia had 31 million.3

Of course, with this increase in cOMssree and trade it followed that there would be a need for more banking facilities. In New fork

Come, Tench, A Statement of the Arts and Manufacturers of the unlted States of America fOr the Year 1810. (Philadelphia. 1814). p. 28. 2 United States Census Bureau, Eleventh Census of the United States. (Washington, 1890), Volume 6 . 3 Hyers, op. pit.. p* 7* 7 1 first goods wsrs traded by * combination of barter and payment. Later, after ths War of 1812, ths British sent agents to New York to sell the goods at auction, thus bringing Into play a relatively new form of business transaction In America. This method became Increasingly important up to 1830; In 1812 there were two licensed auctioneers In New York; In 1830, there were 59.^

This Is an Interesting point, not In itself, but because it demonstrated the fact that there are forces underlying our whole economy that seem to make business the dynamic element of our so­ ciety. Although Philadelphia at the time was the financial center because of the facilities of the national bank, New York was still the trade center, a center established because it met the require­ ments necessary for business transactions. Since New York did not have the financial where-with-ell that existed in Philadelphia, business condition adapted themselves to their environment. This method of transacting business remained in New York until the com­ plete breakdown of Philadelphia as a financial oenter, at which time the funds necessary for commercial transactions moved to New

York. There is no question that with the use of funds, the trade was greatly facilitated, but trade did not come to an abrupt stop because of the lack of them. This period, 1812 to 1836, excellently

demonstrates the evolutionary nature of commerce. The relative change in the commerce of the two cities can be sees from a study of the dollar value of comnercs of the two areas. 70

Table IT

Population of Cltlee at Each Census, 1791 to 1850

Cities 1791 1800 1810 1820 1830 1840 1850

Baltimore 13,502 26,114 35,583 62,738 80,625 102,313 169,054 Boston 13,033 24,937 34,381 43,298 61,392 93,383 136,881 New Tork 33*131 60,439 96,373 123,706 202,589 312,710 515,547 Philadelphia 42,520 69,403 91,874 112,772 161,410 220,523 340,045

Sources *^rers, op. cl t . . p. 8. ahip crumbled, and New Tork became the undisputed champion. It Is interesting to note, however, that New Tork was gaining dominance 1 before the discontinuance of the national bank. Even though conmer- cial credit was tight in New Tork because of inadequate banking, the flew of foreign trade into New Tork did not decrease; instead busi- 2 ness continued to expand at a rapid rate. The nature of this trade took on characteristics to meet the tight credit conditions. At

There is little doubt that Hamilton, in the "Bargain of 1790", sounded the death knell of Philadelphia. When he agreed to a southern location for the capital in turn for the passing of the "Assumption" Bill, Philadelphia at that time lost its main sup­ port for a financial market. 2 For a long time the Bank of New Tork held a virtual banking monop­ oly in the City of New Tork. Alexander Hamilton was a member of ths board of this bank and beoause of his efforts it was impossible to charter another bank. It remained for Aaron Burr in 1799 to break this monopoly by securing a charter for the Cotton Water Works which turned out to be the Manhattan Company Bank. After this organisation made itself kncsm as a coexisting bank, opposition to bank charters fell apart and other banks hesitatingly appeared on the scene. R. I. War shew, op. clt.. p. 43. 6 9 however, Philadelphia was not willing to giro up har privileged position without some sffort. The Pennsylvania Canal to the Ohio

Hiver was undertaken for the designated purpose of restoring the commercial position of Philadelphia. This canal, completed In

1834* however, was more time-consuming and more expensive for the merchants than the trie Canal. The results were disappointing to

Philadelphia as the trade from the west could not be persuaded to

come to the Atlantic port by this means of transportation. The

Brie Canal as the best route to the west had a profound influence

on foreign trade. The foreign merchants preferred to trade with

New fork because there was a bigger market and greater facilities

for the transportation of the goods to the other parts of the country.

Because of the many advantages discussed above, New York was

becoming a world trading center, and also because of these advan­

tages, it was becoming the largest city in the new world, as evi­

denced by Table IV. With this rapid increase in population, New

fork was following the evolutionary process of economic and commer­

cial expansion. It became inevitable that New York would take over

the role of leader in foreign trade; and, as the West became more

influential and shipped more goods to New lork, its position be­

came further substantiated as the new world center.

Because of the government support of Philadelphia as a finan­

cial center, New Toxic did not assume its favored position until 1836,

when the charter of the national bank lapsed* When the commercial

and political props under Philadelphia were weakened, its leader- 6 8 favor of Now Tork, it at first in 1796 outstripped Philadelphia in isports and in the following year took over first place in exports.

Actually as far as foreign trade was concerned, Boston was more of a contender for the leadership in this field than Phila­ delphia. Up to 1776 Boston led both New fork and Philadelphia in exports and imports, but the war with England and the arie Canal gar* the nod to New York, and by 1821 New York was far ahead of the other two cities in both exports and imports; New York having a total export trade of £13»l62,9l6 to Philadelphia's t7,391,767> 1 and imports of fc23,629,246 to fa8,153,922. This tremendous increase in comae roe was partly due to the expanding West. ihe importance of this new territory now made itself felt. Xt far surpassed the com­ merce of the South which sent most of ths goods to Philadelphia.

At the tine of the establishment of ths Bank o f the United

States Philadelphia was not only the closest large city to the geo­ graphical center of ths states but also the political center, ihe eapitol soon moved to Washington and with Pulton's Clermont in

1807 and the opening of the Erie Canal in 1825, the geographical and commercial importance of Philadelphia was gone. With the com­ pletion of the Erie Canal, Blew York had a trade route to the rapidly expanding West, which gave to New York an early advantage that her

rivals could never overcosw. Over this relatively cheap route,

goods and services flowed back and forth to the Ohio Territory.

^United States Census Bureau, Cospendlum of the Seventh Census of the United States. (Washington, 1850), p. 183. 6 7 agreement needed overhauling and a committee was sent to the rival city of Philadelphia to study the local organisation. Upon the re­ turn of this committee, a constitution and by-laws were drawn up. in 1820 the membership was expanded and brought into the Exchange some of the wealthiest men in the country*

As was pointed out, in 1791, when ths head office of the Bank of the United States was located in Philadelphia, that city was the comnercial center of the new world, but by 1796, the natural ad­ vantages of New fork made themselves felt, and Philadelphia was slowly sinking in importance. In citing the rivalry between Phila­ delphia and New Tork, Njrers said, "The location of the Second Bank of the United States in Philadelphia was of great advantage, but by itself it was not enough to retain for Philadelphia its ancient 1 prestige”. It had to give way to New Tork, since it no longer had the prerequisite neoessary for a money market, whereas Phila­ delphia possessed ths artificial advantage of government support,

New Tork possessed ths basic necessities of a money market. New

Tork had excellent harbor facilities, central location, and her pop>\!ation was increasing rapidly. As 1(ye re explains it, **. . . her strategic location at the mouth of the Hudson, convenient both to New England and to the new Vest were factors with which Fhila- 2 delphia could not compete”. Because of these natural forces in

2Ibid., p. A. 66 1 and Stock Exchange developed. It remained for many other factors to asks New Tork the leading financial center of this country and the world, The original docuasnt of the New Tork Stock Exchange 2 is as follows:

We the Subscribers, Brokers, for the purchase and sale

of Public Stock, do hereby solemnly promise and

pledge ourselves to each other, that we will not

buy or sell from this day for any person whatso­

ever, spy kind of Public Stock at a less rate

than one quarter of one per cent commission on

the specie value, and that we will give a prefer­

ence to each other in our own negotiations;

In testimony whereof, we have set our hands this 17th

day of May A.D. at New Tork 1792*

From this loosely organised group, we have the modern New Tork

Stock Exchange. In 1817 the New Tork members decided that the old

I There is much confusion about the origin of New Tork as a finan­ cial center. The difficulty can be traced to the use of "money market" and "stock exchange1* as synonymous with "financial center** If a person is thinking in terms of the present Stock Exchange, than the beginning of this organisation was at 70 Wall Street. However, if the beginning of the New Tork money market is being questioned, then the 22 Wall Street group deserves the spotlight. For further information on the present Stock Exchange, see Financier Company, History of the Mew Tork Stock Exchange. (New Tork, 1887). For information on the beginning of the New Tork money market, see H* I. Wars haw, The Story of Wall Street. (New Tork, 1929).

2Ibid., p. 2 65 formed around it, rttrtherraore, issues of government certificates from time to time were added to the market* New York, being further removed from the center of financial activity did not participate in these new issues as much as Philadelphia. After 1792 the New York stock market was stimulated by the wave of bank stock that was being issued. These stocks maintained a market in New York during the try­

ing days when Philadelphia had the advantage of government support.

The struggling New York market tied itself to a business that proved

to be permanent; the Philadelphia market relied heavily on the gov­

ernment, which was soon to move to Washington.

As was pointed out, the beginning of the money market in New

York originated with a few loosely organised auctioneers dealing in

Continental money and government certificates. By 1792, most of

the stock transactions were handled by auctioneers at private sales.

In time, a few individuals seeing the advantages of acting as in­

dependent agents, set up a small shop for dealing in public stock.

The auctioneers did not like this intrusion and in order to monopo­

lise the business, established in 1792 a public "stock exchange11 at

22 Wall Street. Meanwhile, the Independent agents had begun to ex­

change quotations at a regular meeting place— under a buttonwood

tree in front of 70 Wall Street. In March, 1792, the independent

agents made an alliance which eventually eliminated the auctioneers

from stock dealings. From this beginning the New York money market 6 4 the u m ; London, Paris and Berlin ruled not only politically but financially. New York as ths capital of the nsw nation was hardly possible because of the delay in getting the British troops out of that city. Philadelphia was the logical choice; it was free from

British troops, it was a large city, and at the same time was con­ veniently located with reference to the rest of the country* Here the capital was established, and here started the first important money market on this side of the Atlantic.

The possible start of ths financial markets in this country,

Philadelphia, and to a lesser extent, Mew fork, could be found in syndicates that formed to buy up the "Revolutionary Shlnplasters".

These groups, established at least for a temporary period, soon became the core for a more permanent organisation. Even though they themselves did not last long, the sowed the seeds of specula­ tion which soon took root in other forms. Philadelphia was ths first city to establish a Stock Exchange. It was, after all, the center of government and at the time, important commercially. For these reasons, when the First Bank of the United States was organised, the only logical location was in Philadelphia. ihis Institution

furthered the development of the Philadelphia Stock Exchange not

only by furnishing loanable funds but also by fanning the fire of

speculation. Ths issue of stock by this bank did more than Just

furnish another commodity for ths market; it also attracted new in­

terest in stock speculation because of the bull market that soon 63

1635 it was already doing a business of $ 53,000 in pelts alone.1

In fact, New York got its start as a center of commerce and trade; although it is admitted that military reasons played a great part in locating the city at the junction of the many rivers. Even

though New York got a head start in this country, other sections

developed more rapidly and new cities soon became more important

as trading centers.

Boston was closer to ths shipping lanes as the vessels crept

down the northern coastline, so that city soon put in its challenge

for supremacy. Philadelphia became the geographical eenter of the

new territory as ths settlers moved south for the wide open spaces;

Philadelphia then became a competitor also. These two cities, Boston

and Philadelphia, were well on their way to be the leading centers

of trade and commerce. However, when the country expanded west­

ward, the pioneers in the virgin territory continually needed new

equipment and supplies. The expanding market made Philadelphia come

to the front but the completion of the Erie Canal reversed the trend.

When the Revolutionary War was over, the new nation found itself

without a financial center of any consequence. So it was that the

nation not only had to establish a government but also a money mar­

ket. The two started together and naturally in the same place, in

European countries the seat of government and finance were always

1The Imerican Quids. (New York, 1949), p. 273* 62

CHAPTER IV

Die Development of Important Money Centers

In order to test the correctness of the Ideas presented In the first three chapters, and at the same time to clarify some of these Ideas, It Is necessary to analyse the development of some of the most important money markets in the world today. Hie writer hopes this historical study will reveal the significance of trade and casmaeree in the oarly stages of a money market; how essential trade is to the growth of a money market; and through what channels

this growth takes place. This chapter also will discuss some of

the financial Institutions that have appeared on the scenes in the

past and their importance to the money market as a whole.

To write a book about the various financial centers of the world is quite possible. However, in order to avoid a lengthy and

needless analysis, the writer has selected two large cities as rep­

resentative of the large number of possibilities. New York and

London are not only the largest, but they also are more varied in

design, containing, to one degree or another, all of the financial

institutions that one might expect to find in a money markst.

History tells us New York had its beginning as a Dutch settle­

ment known as Ftort Amsterdam. The city was founded primarily as a

trading post by Peter Minult and, according to various reports, by 61

Now that we have analyzed the forces that are instrumental in the development of s. money market, let us turn our attention to a few specific money centers in order to discern how these forces operated in practice. 60 of all. Another function of the money market is that it should pro­ vide the mechanism whereby funds can be readily shifted from place to place and thus promote commerce and trade. It should be the channelling agent for the nation's or even the world's resources.

In summary, it can be said that the clearing principle is the key to the money market, it is the means by which money is made available for use by the various investment markets. However, the clearing principle exists simply because there is clearing of goods and services. Without the cancelling of goods for goods, there would be no clearing of debts. Again it was found that trade and commerce are the foundations for the economy, the monetary aspects are facilitating or enabling in nature. When business is upset, then the flow of money is upset. As a result of the clearing of debts, money can be made available to the various markets that evolve in the money center. Each market becomes standardised and better equipped to handle a certain type of loan, lfrsm this de­ velopment cams about, then the money market became more diversified,

all types of paper could be purchased by all types of borrowers.

In this manner, then, the money sorbet serves the surrounding com-

mmity because through its mechanism it provides the country banks with all types of paper thus enabling them to be of better service

to their local eomsunity. In this ease, then, the money market is

not something set apart from ths rest of the nation, the money mar­

ket is a clearing house for the trade and coomerce of the nation

as a whole* 59 controlling the flow of money will not suffice simply because It is a control that Just skims the surface and actually Interferes with the underlying business transactions. Recently, economists have be­ come reconciled to this point so that they no longer rely on quan­ tity controls as a means of regulating the economy as they did two decades ago.

When the Money market has a large amount of clearing, then it

can carry out the functions of a good money market. A money market

has certain functions to perform for the national economy. To de­

termine whether a money market is a good one or not is to test how

well it performs these functions.

The financial center should be a continuous market for short

term paper. Short term paper should be readily bought and sold

without breaking the price. If the price of short term paper con­

stantly changes, then there is too much risk involved and the market

is not coordinated to the degree necessary. The price of short term

paper should be stable and this depends on the meohaniam of the money

market. This is important not only because of the stable price in

itself but because it serves the country bank with a good reserve

for their loans. They can make large local loans if there is good,

readily saleable short term paper available. The money market should

perform this service for the interior banks. By supplying this fy pe

of paper, a bank can remain liquid and at the same time be able to

keep less sash in working reserves and more in secondary reserves.

A good money market should perform useful functions for the benefit 58 providing their own means of payment. With this concept of money as presented by the clearing principle, the supply of money merely serves as the foundation on which the means of payment can expand or contract consequent upon expectations. With a given money supply, the actual amount of transactions taking place can be large or small depending upon the amount of clearing taking place in the various 1 bank accounts.

Since clearing was an important factor in the development of a money market, and since it was a result of the clearing of purchases and sales of commodities, the real nature of the money market again

stands out* The monetary aspects of the money market are functions

of the underlying business transactions; money is no longer the im­

portant part of the economy, but instead a result of other more im­

portant factors. The clearing system, which makes possible the

large sums of money for use in the money market, would not be present

if it were not for the highly developed commodity market which serves

as the foundation for the whole financial structure. This point

again stresses the necessity for more realistic controls. Merely

The reader may be of the opinion that the clearing principle, as described above, is nothing more than a velocity concept in dis­ guise. It is true that the idea of velocity is implied in such an illustration, but the importance of the clearing principle is its eophasis on the income and outgo of money and not balances. To put it another way, the clearing principle Is interested in money in action, not the so-called money supply. When the clearing prin­ ciple approach to monetary phenomena is used, a whole new outlook must be formulated. The concept of a "supply of money” loses M i meaning because businessmen can create their own funds. This ap­ proach explains why in the past the banking authorities were not always successful in stabilising the economy through quantity controls. 5 7 question Is that it completely supersedes the concept of a supply of money, i-he old Idea of a stock of money merely serves as a base on which businessmen can create their own means of payment. For example, let us examine the bank accounts of two individuals,

Ur. A and Ur. B. Let us assume that they both have on deposit the amounts of $10,000. Of course, it is realised that reducing the problem to just a few accounts introduces certain inaccuracies, but they will not offset the consequences of the principle in gen­ eral. Let us suppose that Ur. A purchases $5*000 worth of mer­

chandise from Ur. B and Ur. B purchases $5,000 worth of merchandise

from Ur. A. in these transactions, there is perfect clearing; that

is, the income and outgo will offset each other and thus there will

be no change in their bank balances. The two businessman could re­

peat this procedure over and over again or could even raise the in­

come and outgo to $10,000. In this case, then, the original de­

posits could support transactions many times the amount of the money. 1 The businessmen could create their own money as they say fit.

This concept takes on more meaning when the facts are con­

sidered; that is a large number of companies all over the nation

carrying on their business transactions in the same manner, each

trying to match their outgo with their expected income, and thus

1 For more detailed information on this point see Dice, C. A., and P. Schaffiler, "Neglected Component of Money Supply", American Economic Marlow. Volume XXXI, Mo. 3, September 1939* 56

'Dm bankers’ balances that permit tad the large amount of clear­ ing In the money market became the moat Important source of funds

for use by the Institutions of the money market, The balances, without the clearing, would not be available for business trans­

actions because they would have to be held for the protection of the

local banks, but since there was clearing, the funds could be made

available to the many loan markets that evolved in the center. For

the purpose of stability and protection against possible losses at

the clearing houses, the banks found it necessary to stagger their

loans in different types of paper, that is, to place their funds in

the investment, the commercial paper and the call loan markets. The

development of these markets aided the banks and at the same time

their growth was of paramount importance to the many businessmen that

wanted to borrow funds* Later, of course, as in the development of

most businesses today the actual lending of these funds to the bor­

rowers was taken over by the middleman; the brokers came into being

and specialised in certain types of loans and thus brought about the

establishment of the many types of markets as we have today. The

banks and the brokers mads the large sums available to the people

that wanted to borrow the money* The large suma were made available

to the brokers of hew York, who, in turn, through various outlets,

wade the money available to a businessman in Paducah, Kentucky, or

a banker in Wichita.

Wow the question is, what relationship does the clearing prin­

ciple have to the money supply. The Immediate answer to this 55 Table III

Nuatoer of M u b e r a , Capital, Clearings, Balances, Balances to Clearings of the Mestoer Banks of the New *ork Clearing House, quinquennially , 1855-1920

Year No. Balances ended of to clear- Sept. Mem- Capital Clearings Balances ings, per 30th bers cent

1855 48 * 48,884,180 • 5,326,912,098 ♦ 289,694,137 5.40 1860 50 69,907,435 7,231,143,057 380,693,438 5.26 1865 55 80,363,013 26,032,384,324 1,035,765,108 3.97 1870 61 82,417,400 27,804,539,406 1,036,484,822 3-72 1875 59 80,435,200 25,061,237,902 1,408,608,777 5.62 1880 59 60,475,200 37,182,128,621 1,516,538,631 4.0? 1885 64 58,612,700 25,250,791,440 1,295,355,252 5.12 1890 65 60,812,700 37,660,686,572 1,753,040,145 4.65 1895 67 62,622,700 28,264,379,126 1,896,574,349 6.71 1900 64 74,222,700 51,964,588,564 2,730,441,810 5.25 1905 54 115,972,700 91,879,318,369 3,953,875,975 4.33 1910 50 132,350,000 102,553,959,069 4,149,484,028 4.22 1915 62 178,550,000 90,842,707,724 5,340,846,740 5.87 1920 55 261,650,000 252,338,249,466 25,216,212,386 9.99

Total — |137,556,00C^ ♦3,570,157,362,590° ♦207,269,155,418° 5.80b

The capital Is for various dates, the amounts at a uniform date In each y e a r not being obtainable. ° Yearly average for 66 years. cTotals for 66 years.

Sources Comptroller of the Currency, Annual Report. Volume 2, (Washington, 1921), p. 849*

expand their loans not only to finance a shipment of goods from

Atlanta to Denver but also to the brokers in the stock market. Ac­

cording to the Table, in 1920, 25 billion dollars did the work of

252 billion dollars. 54 available funds in the money market would be Maintained at a fairly

•table level. In this case, then, there can be large amounts of in­ vestments on the part of the banks and the brokers without the fear of money drains.

The interior banks, in order to protect themselves from get­ ting "beat" through the clearing system, will keep deposits In the money market; then most of the money will remain In the community and flow between the local banks rather than leave the community.

Of course there are exceptions to this rule, but these exceptions are seasonal in nature and because of the specialisation within the money market and the surrounding area, the seasonal drains are no longer too important. It ie true, of course, that at times one of the community banks may suffer losses at the clearing but because of the standardisation of the money market, the cooperation and the co­ ordination of the various money agencies, this loss does not en­ danger the flow of funds within the center.

Since the interior banks keep large reserves on deposit with

the local banks, these deposits will have to be put to work to earn

their board. Since the local banks have been assured of high clear­

ing, these funds can become the source of the expansion of the money

market; that is, these funds serve as the foundation for the greater

part of the activity whether it is by the banks directly or through

the brokers. It can be seen from Table III that the clearings at

the Mew York Clearing House provided the banking system with a tre­

mendous asmunt of funds. With these funds the member banks could 53 simply because the funds would have to be held by the banks for the expected money transfers. Clearing, then, Is the key to the money market.

If the local banks, that is, the banks In the money center, could be sure of a large volume of clearing, then their funds would be free to supply the many money lending agencies that developed in

this center. The situation is identical with the isolated community

having one bank. If we assume that the people of the community will

not cash their checks, there is no limit to the amount of loans that

this bank can make because all the money in the form of checks that

go out will return to the same bank by other customers; that is, the

bank will have the same amount of debits and credits. In this case,

then, there is perfect clearing, the bank does not get “beat" at

the clearing house and no reserves have to be held for this purpose.

This same situation applies Just as smelly to a community where there

are several banks, such as a money market where there is a large 1 amount of clearing* Since there tends to be a high degree of clear­

ing between the money market banks and the interior banks, and since

the debits and credits of the money maziest banks would tend to be

cancelled out, the money market banks will not be losing funds to

tbs interior banks or to other banks in the community, and the

^This concept reduces the importance or effectiveness of the re­ serve requirements as a means of credit control and brings into light other factors, such as the bank's capital account and the qppOity of leans, which seem to be greater limitations cm bank expansion* 52

could buy In the English market sight unseen and know exactly the quality of coonodity they were getting merely by the grade number.

This condition thus promotes trade, introduces liquidity, and pro­ vides for the cancelling out of payment and receipts; therefore

there was a regularity of goods flowing in and out of the money

center, and the payment for these goods was generally cancelled

against funds going out of the center. The clearing system is

important because it is the means by which large amounts of goods

can be bought and sold and purchases are paid by sales, with little

need for deposit balances as long as purchases and sales largely

cancel. Without the clearing process, there would be no money

market, but without a regular flow of purchases and sales there

would be little clearing.

When any city has the commercial advantages mentioned pre­

viously, It will become the trading center ibr the surrounding

area. All of the smaller communities will do their buying and

selling in the market. As a result there will be high clearing

in goods and services between the trading centers and the surround­

ing communities taken as a whole. It follows from this clearing of

goods that there will be clearing of funds, and it is the clearing

of funds that permits the banks of the trading center to supply the

necessary funds for the various loan markets. If the banks faced

the possibility of losing at the clearing house then there would

be less money for the loan markets and therefore no money market, 51 of clearing, than the banka will be in a battar position to make loans. If there is a chance of losing a great deal of reserves in the clearing process then the banks will not expand.

Because of clearing, then, the banks can expand more rapidly; they can keep more of their assets working and facilitate the econom­ ic expansion of the community. Where you find a large volume of trade and commerce, you will also find a large volume of clearing.

The money market by its very nature has a high clearing ratio, which in turn gives liquidity to the various loan markets. It now remains to show how the money market can build up large clearing and how this clearing will influence the community as a whole.

As explained in the first chapter, the money center has its origin in the commercial advantages of its area, and as a result of these advantages a large volume of trade takes place which necessi­

tates receipts and expenditures of money; this transfer of funds back and forth will tend to cancel debt against debt. The higher

the amount of this clearing the better will be the money market.

Through time, as trading became more specialised and standardised,

clearing of checks became more important as a means of furnishing

the monetary institutions with the necessary funds.

To have a liquid money market, there amst be a liquid commodity market. London became the monetary center of the world because it

had the best and most highly developed commodity market. Host of

the commodities were graded and standardised, thus facilitating the

buying and selling of goods and services. People in foreign lands 50 than they ara today. lh« answer ia obvioua; they could not keep pace with changing aocial and economic conditions. Just as paper money came into uaa to supplant coins, checks entered the scene to replace paper money. But our evolutionary process has not stopped herej with the use of checks, and even earlier, with bank notes, a new developaient occurred, and this development is the clearing principle.

Checks providsd not only a safer method of transacting busi­ ness but at the same tine they permitted another factor to take place which was responsible for the achievement of greater economic progress. Because of the clearing of cheeks either in an individual account, between banks of one district, or banks between districts, our money supply takes cm new meaning, our banking system takes on new significance, and, of course, the money market has a wider basis

for activity.

To explain the importance of clearing in view of this broader application of the principle, let us examine a typical situation at the banking level. If a bank makes a loan to an Individual, because of the possibility of cancelling "on-us" checks against foreign cheeks, the bank making the loan might not lose any of its reserves

to other banks. Because of this process, banks would not have to be concerned so much with their reserves as they would with the market conditions and what the other banks in the community were doing.

Whether clearing is one hundred per cent or not does not change the principle in kind but only in degree. Of course, with a high amount U9

It was discovered, with ths development of ths banks, that cradlt papsr in tha fora of bank notss oould bo circulated in the sanas manner. *be principle behind this type of money was actually the same as that behind the government money. Ths only difference was that the bank notes represented the indebtedness of the issuing bank rather than of the sore reign power. Basically, there wasn't any material change except that it permitted a more flexible money supply which was needed with the increase in commercial activity.

This method of payment soon gave way to the use of checks. Checks, then, are in reality the transfer of indebtedness from one person to another— the same as bank notes. There is, however, an important difference and that is that checks are a much safer means of making payments. This factor, in view of the expanding economy in space and time, made cheeks the most important medium of exchange. Our nation grew larger, our transportation and communication facilities stretched over thousands of miles, the check was the social inven­ tion made necessary by these changing conditions.

However, since our society, our means of doing business, and our commercial activity continued to advance, again it was necessary to invent a acre rapid method of making payment; this phase involves the clearing principle, the cancelling of evidences of indebtedness.

Thus we have the evolutionary developamnt of the means of money pay­ ments. If one would deny the evolutionary development of money, one would be faced with the problem of why coins are not more important 4B 1 as money. Ths obvious conclusion, or course, is that coins wars able to fit in with ths environment of ths day. ihe adoption of coins as ths means of payment enabled exchange to keep pace with changing business conditions. In this early phase of development

of money, coins as money permitted business to expand and elimi­

nated the time-consuming methods of bartering. However, in time, with the tremendous changes in technology and the rapid advance­

ments in the cultural and social environment, these coins became

a hindrance. Business conditions outstripped the means of payment.

It m s necessary, then, for society to Invent a faster, more con­

venient means of payment. The outcome of this condition was the

use of representative money. The old gold and silver coins were

kept by the government in bullion form and paper money was issued.

This type of money was more convenient, and it permitted a more

rapid flow of goods and services. Actually, the paper money repre­

sented the coins behind it; it was recognition of the Indebtedness

of the government, and the exchange of this money was the trans­

ference of the ownership of that Indebtedness. Later, as society

progressed and as new and better ways were discovered, even this

method of making payments fell behind the economic advancement of

the country.

1 It Is, of oouree, admitted that gold or silver coins were not the first type of money used in exchange; however, since they are still a part of our money today, wo need not go back any further in his­ tory as It immediately bee news apparent that with eaoh new money Invention ths old type Just drops a notch In Importance. 4 7 1 restricted it to the cancelling or debts between banka. This defi- nition la too narrow aa it excludes tha cancelling of dabita and oradita in tha acoounta of tha bank customers. Actually, to « - elude this clearing by definition ia to exclude one of tha funda­ mental a a pa eta of our banking and monetary ayatem. A more accept­ able definition of clearing would be the offsetting of debita and credita in any coanercial bank account, or aa Schaffner puts it,

M. . . any simultaneous posting of debita and credits to a particu- 2 lar bank account on the part of a bank*. This account could belong to an individual, a corporation, or to the bank itself. This defi­ nition ia sufficiently broad to include the dynamic aspects and therefore give Meaning to the clearing principle. Ibis principle or process is important to the money market because it is the basis cm which the money market can evolve.

The clearing principle aa a form of money ia actually Just the

latest phase in the development of money. Going back in history to

the time that coins were circulated by the government to facilitate

the ooMsrcial activities, one must discover why coins were accepted

^Prather, C. L., Money and Banking. (Chicago, 1946), pp. 201-220. 2 Schaffner, P. P., The Bank Clearing Process aa an Approach to the Theory of money. (Thesis, Ohio State University, 1940), p. 2. 4 6

CHAPTXR Ill

Bank Clearing and the Money Market

In the preceding chapter the evolutionary growth or the New

York eoney Market and the subsequent development of the various

Monetary institutions were analysed. It must be remembered, how­

ever, that during this growth a phenomenon was taking place that was of the upmost Importance to this development; but, because this

phenomenon was hidden in the grass roots, so to speak, it remained

an unknown quantity to many writers until recent times. This un­

known involves the cancelling of checks, but in view of its more

recently recognised aspects, it is called the clearing principle.

Ths purpose of this chapter is to show the relationship of this

principle to the money market; how the various loan markets grow

as a result of clearing, how the banks are able to use clearing as

a part of the banking process, and how clearing can increase the

money supply, in a nutshell, the clearing principle will be set

down as one of the fundamentals of the noney market. Since the

concept of clearing is of such vital Importance, this chapter will

be devoted to its analysis and the Implications and policies that

can be derived from it.

Qenerally specking, olearing has been defined as the off­

setting of debts and credits, but the usage of the term has usually 45 problem, however, despite its ever impending danger to the banking system, was never serious enough to overcome the advantages of the call loan market. It flssxisbed despite its main weakness, and when it grew, so did the other factors in the money market.

In summary, it can be said that a money market evolves. It reaches the level of great importance as the center of a nation* s or district's finances, not because it is a money market, but be­ cause it possesses the factors necessary to make it a money market.

At first it has its origin as a business center, but through time,

the Institutions of the commodity markets branch out, become more

specialised, until each part has a separate, distinct function to play in the vast machinery of trade.

So far, this study has been concerned only with the embryology

and subsequent development of the financial center, but before we

make any analysis of what Impact our modern economy, and particular­

ly the many controls of the Federal Reserve System, had on the money

markets, we will first turn our attention to a study of the clearing

principle and its relation to the sonsy market. 4 4

•*7, to cover their deposits with assets, would make loans to In­ vestors as well as speculators through brokers on stocks and bonds.

These loans were on call and not term loans, a practice that started 1 somewhat earlier in Philadelphia.

The call loan market provided the banks with a means of cov­ ering their large flexible deposits, in fact it was because of these large amounts of flexible bankers* balances that the call loan mar­ ket was started, of course, from another point of view the call loan market was not without some misgiving. From the beaks* side, they provided liquidity, but from the social point of view, the call leans started speculation In the stock market which at first was a great lagmtue for its progressive strides but at the same time in­ troduced a danger since a large percentage of ths money in the call lean market was really the reserves of tha interior banks. When these banks needed their funds, either because of seasonal changes, which always placed a strain on the money market, or because of lo­ cal, temporary difficulties, the call loans and the local banks were caught. The banks could not always recover their funds from the mtoek market without causing some repercussions so that a chain re­ action was sent throughout the whole national banking structure. This

^In fact, White believed that this practice was one among many that caused the downfall of the Second Bank of the United States after it had received its Pennsylvania Charter. He said, "Before March, 1£>6, it (Penawfftvania Bank) had 920,000,000 invested I advances in stock). The country was la the fever of speculation which culmi­ nated in the panic of 1S37, and the bank was tbs leading speculator. '• White, o p . olt.. p. 26. 4 3 of the oall lout nark*t. This market bafora it could develop had to dapand on tha existence of a suitable banking structure for its support^ so that tha call loan market, if it could ba called such in its blossoming period, was delayed or retarded until tha bank­ ing system reached a level capable of supporting tha machinery in­ volved with tha operation of a call loan market. *hen the balances found their way to tha money market and tha banking facilities de­ veloped to handle these deposits, the call loan market was able to take shape.

Since for smny reasons the interior banks, found It expedient

in some eases and necessary in others to maintain balances in the

money market, the banks in the center were forced to keep these

balances working. However, since the amount of these balances was

not fixed, that is to say, since some of the deposits would flow

in and out of the market, the money market banks had the task of

placing these funds in operation and at the same time, they had to

be sure that the funds could be pulled out again in case they were

called home. This situation led to the establishment and the de­

velopment of the call loan market. die banka in the money market

would make demand leans on stocks and bonds to the brokers. The

bankers* balances and the investment market were related through

the call loans, which vent on to establish a market of its awn.

Thus they all grew in Importance, but all were dependent on each

other. The banks in order to keep their funds liquid, that is to A2 ticularly England was financed by the London banking houses. And in this period of ths expanding American economy, this dependency on the London money market was inevitable. Business activity was expanding at a such Taster pace than the means of financing the ex­ pansion. The banks, as has been mentioned before, were slow in de­ veloping, so that our csm credit system could not cope with the tremendous demand for funds. It had to rely on London for support, and, of course, London and Liverpool mere quite willing to extend credit. Although there were other currencies involved, the ster­ ling exchange was by far the most Important. England in return for part of this extended credit obtained large holdings in American industry, although in the panic of 1637, a large amount of these holdings were liquidated. London remained ths dominant creditor to the New *-ork money market until the establishment of the Federal

Reserve System. Actually, for political reasons in the early part of its history, and, lack of the necessary machinery later on, the

New York money market never did emerge as a leading contender for ths title of the world financial center until 191A- The Federal

Reserve System, in the following ten years, enabled New York to take advantage of a favorable chain of world events, and London lest in favor of New York, particularly during end after World War I,

TIB CALL LOAN MARKET

Whereas the investment and the commercial credit markets were not primarily dependent open ths development of the banking system for their expansion, it was a different matter with the development 4 1

la the beginning they were considered as shysters, hut as their pro­

fession became a part of the mores, the brokers became respected.

As a further consequence to the changing philosophy of the age, brokers changed their methods of doing business. Instead of being an agent for a business concern, they became the dealers as we know

of them today; that is, they started to boy and sell the notes on

their own accounts and thus no longer worked for a commission. This

step, then, was the start of the present commercial paper houses in

the money market, ihe buying and selling of certain types of notes was now becoming centralised within the money market. No longer did

the banks haws to perform the task of investigating the borrowers.

Near the process of making Loans was becoming more specialised and

the brokers performed this function, ihe brokers then were the go-

between from the borrowers to the banks— a function that reduced to

soa* extent the guess woxic of making loans and at the same time

helped to bring about relatively stable interest rates.

As was mentioned previously, the foreign trade of a particular

center will be of great importance in developing that area into a

money smrket. Since New Toxic was slowly taking on the aspects of a

money market, and since this new position was attained largely be­

cause of the Large amount of foreign trade, it is of great Impor­

tance to determine how this large volume of foreign trade was fi­

nanced, and to determine the degree of Influence, if any, this fi­

nancing had on ths various loan markets in New Tork. It can be said

that for ths most part the foreign trade between New Tork and par- 40

Table II

Changes in the Type of Loans at the Bank of the United States (In thousands of dollars, at date nearest to January 1 each year)

"Bills discounted on "Dorn*atic Bills Tear personal security" of Exchange" (Loans on promissory (Discounts of notes) trade acceptances)

1620 20,981 1,467 1621 20,598 1,509 1622 20,343 1,573 1623 22,597 1,940 1624 24,324 2,324 162$ 23,170 2,728 1826 27,10$ 3,119 1827 24,331 3,347 1628 26,452 5,022 1629 29,655 7,689 1630 30,655 8,691 1631 32,827 10,457 1632 46,853 16,691 1633 40,066 18,069 1634 35,703 16,302

Sourest Ityers, U. G., '^hs Mew fork Money Market. (New York, 1931), pp. 103-104*

In the original phase of the commercial credit market, the banks did most of the financing; however, in the early part of the nine­ teenth century, brokers, acting as agents for various business con­ cerns, entered the picture. These brokers peddled the notes around to the banks and tried to sell them. If they were successful, they charged a commission for their services. It waan*t until the time of tbs Civil War that tbs brokers took on the Job they now perform. 39 tha banka In tha Wast had thair money tiad up In A r m mortgagee be­ cause of tha absence of coonercial paper. However, In tha large eastern cities, there was a different situation, and here the banka had a more promising future. It was in the large business centers that the banks made their greatest progress. As soon as the volume of domestic trade increased, there arose the need for short term loans and an adequate banking system, The initial difficulty was overcome; now it remained for tine to iron out some of the problems and to develop the commercial paper market.

Since the factors necessary for a commercial credit market took so long to develop, it is rather difficult to give a starting date of this loan market. There was no one factor that can be considered as the touching off point, nor did the market appear in any recog­ nisable form at any particular time. It can be said, however, that by 1 8 3 0 , the commercial credit market was in the formative stage.

For a long time and because of the mores of the people, the promissory note, or in other words, accommodation paper, was the most generally used form of ccamnercial paper. The banks as well as

the businessmen preferred this type of paper; although the trade

acceptance at times did inorease in importance, it never became more

than a secondary type of commercial paper. These two forms of loans

dominated the market; the use of the promissory note was the accepted

means of making loans so it was actually the commercial credit of the

period. The following table shows the relative importance of the two

types of loans for the period, 1830 to 1834* in rnaqy types of loans and evolved out of tha growing needs for funds as a rssult of tha expanding trada and cameroa. As long as tha country was small and tha domestic trada dapandad much on for­ eign trada, and as long as London stood raady to financa tha for­ eign trada thara was no naad to establish a coimaercial credit mar­ ket in this nation, Ucwever, as the country expanded and as activity increased and spread out over a larger area, some means of finan­ cing this increased volume of trada had to be found. Credit ad­ vanced by London could not be used to finance tha trade with remote regions of tha United States; a source of credit closer to home had to be developed* The stage was set for the entrance of the commer­ cial credit market.

Another factor to consider in the slow evolution of this market was the inadequate banking facilities necessary to finance this type of loan. Since the banks were slow in developing in response to tha needs of business and since there was no recognised banking technique to follow as existed in London, tha evolution of the commercial credit had to wait its turn in history. In time, banking procedure was a- dogrted, and banks began to spring up throughout the country. Once they were established, then the commercial credit field could taka on fbrm and prestige. Of course, it can be said that the reason tha banks did not develop at a faster pace was because of the lack of short term paper for the bank's portfolio. It is true that in the outlying districts banks were faced with this problem, for here there wasn't such of a market for self-liquidating paper. In fact, most of 37 peculiar lavs binding ths -independent Treasury System, the govern­ ment did not have much influence in the money market from 134.6 up to the time of the Federal Reserve System. Mne of the biggest dif­ ficulties with the Treasury during the impending panics was that it was generally too late in coming to the rescue with effective aid. In 1 3 7 3 the government support of the bond market was inef­ fective because the bond market had already reached the breaking point. In the panic of 1 9 0 7 > the Treasury was prevented from, giv­ ing effective aid to the market at the time of the crash because 1 it had already loaded up With bonds and had no funds to spare.

It was in reality a period of government responsibility but without the means of control— an eagle without wings.

It might be said that, with the limited government activity in the money market between 1 8 4 0 and 1913# there was no government in­ vestment market either in name or in fact, it is true that the govern­ ment financing gave the initial impulse to the investment market, but the government in this market soon lost its importance and gave way to the budding business of the private corporations.

CGttORCIAL CREDIT MARKET

The commercial credit sexiest was ths next that appeared on the scene in any tangible form. Like the other markets in the financial center, the coimaercial credit phase at first had a peculiar structure with no distinct lines or particular activities. It had its origin

'Suhlte, horace, Money and Banking. ^Boston, 1914), p* 179* on son* kind or project, which ranged from expansion of banks to the building of roads and canals. Most of these state debts were re­ pudiated when the credit structure becaae top-heavy In the late

1830's. With the downfall of the state-sponsored projects, the short-lived government Investment era came to an end. Private companies took over the Incompleted roads, sold stock to gain capital, and started operations. This then was the situation that

Introduced the speculative stock exchange market, and was the first real beginning of the present Investment market. Up until this time the Investment market was limited In volume and completely dominated by government financing even more so then It Is at the present time.

Now with the Increase In importance of corporate stock and bonds, the Investment market grew to gigantic proportions, and at the same time opened the door to the development of the stock exchange market

Because of the Independent Treasury System, established In 1846 the government's role In the securities market was that of a central bank without controls. The independent Treasury System was on the one hand to be separated from the money market, but at the sane time

Its purpose was to provide elasticity for currency, to prevent in­ flation, to curb ths money panics, and prevent depressions; all with out the effective aid of the money market. As a result of these

^Although the basis for the stock exchange market was now present, developsMnt was retarded until the call loan market could be or­ ganised at which time the stock exchange market becaae deserving of Its name. This development will receive further attention at a later time. 35

Whan tha g o r cmamt finances ware once organised. It no longer had to depend on foreign loans; the banks and the individuals stood

ready, at this particular tine, to buy all the government securities.

The banks were ready to supply short term credit, and the individ­

uals advanced the funds for the longer loans. With this start, the

government securities market mas on the way; although its activity

died down somewhat until the War of 1812, at which time government

again revived the market by increasing its public debt through the

sale of "governments" from 56 millions of dollars in 1813 to 123

millions in 1817* This increase in the market brought with it a

pest war flurry ami served as the beginning of the Stock Exchange

haricot in New Tork* As long as the federal government remained the

stock seller, Philadelphia held sway in the stock market, but as the

corporate form of business organisation started either as public

utilities or state-sponsored projects in the way of canals and

roads, New Toxic became more important as a stock oenter.

The market at this time was an investment market more than a

speculative one, so that the term, the stock exchange market, in its

present connotation, did not apply as broadly as the term investment

market. To meet this gx*owing demand for investments, the comnercial

banks at first took on the task. It remained for a later period to

develop the more specialised Investment banks and brokers.

Probably the great ixq>etus to the investment market, and at the

same time the cause of part of the grief, was the sudden building

boom of the states. Every state from Florida to Michigan was carrying 3 4 impossible.^ The banks took on the rols of a clearing center for the money market, supplying the necessary funds to the middlemen that grew up around It.

It was because of the banks that the three loan markets were able to develop. Although at first their functions were not dis­ tinct, their fields overlapped, and there seemed to be no speciali­ sation or standardisation, through years they evolved Into working, well-defined Institutions In themselves. Actually, because of many circumstances both within the money market and without, the begin­ ning of all three markets did not take place at the same time. The first one that appeared In any recognised form was the Investment market. The path of thle market was a rather rocky one, having its ups and downs with the difficulties of ths national banks and the

United States Treasury. It got its start I n 1 7 9 0 with Hamilton's funding plan for ths state debts. This was probably the first opportunity for Individual Investors to buy securities on a large

scale. Later, In 1791, when the Bank of the United States In Phila­ delphia and the Bank of New fork issued stock, all the issues were

sold In less than an hour. The people were willing to Invest In

securities but at that time the trouble was not in the unwilling­

ness of the Investors but the lack of Investment opportunities.

Burgess says the banks wore the key to the money market, but of course this could be considered an overstatement when one con­ siders ths more fundamental reasons of why banks are present. 3 3 1 fairly loir rat* of int*r«st. Money that was idl* in any particular section of th* country or th* world b*oaus* of seasonal or cyclical difficulties could flow to the money market and there be employed.

As a result of the availability of funds in this center, prospective borrowers would go there to borrow money at the relatively low in­

terest rate. The money center was actually a clearing house for

loans; at first putting aoney out in one direction sad then in an­

other, and securing it from all sections. It supplied the nation

with ths funds necessary for economic expansion. As time went on

the aoney market became acre specialised in handling these funds.

Various houses developed and refined the lending process by concen­

trating their efforts to a particular phase of the loan markets. The

business of lending money beoaae iso re specialised; the people and the

banks had acre confidence in them.

THE INVESTlfSNT MARKET

It is true, however, that whereas th* backbone of the money

aarket is business activity, the greatest spurt to this activity

and to the development of the present aoney market came from the

establishment of the so-called commercial banks. For without commer­

cial banks the development of the money market was practically

^Although interest rates, even before the Federal Reserve System, were loser and more stable than those prevailing in the rdst of the country, they were not as stable as the rates In the London aarket; this aarket was already well organised and developed. 3 2 the varied demands of business. As a result we have a diversified money market, and in order to be a good or permanent money market, it must be diversified. The early stages of a money market can be broken down into three principle parte, the investment aarket, ths short term paper market, and the call loan market, fhese three arose as a result of the needs of businessmen, and in response to business activity. Their evolution was a slow one, going through many phases and constant refinements before they reached their present stages. Actually, today the above classification is no longer ade­ quate because of the sharp distinctions that arose.

The above three types of markets developed over a period of time as a result of the increaeing business activity in the city.

Money from all over the nation found its way to the financial center either in payment for goods and services received, to take advantage of the loan market, or even further, to avoid the poesibility of getting caught in the payment of checks. When these funds came into the center they were used to carry on the ordinary business trans­ actions; thus the banks of the city were able to up reserves and finance trade by credit. In order to make theee deposits pay for themselves the banks made leans to various individuals.

As time went on, and as business within the community became mere diversified, tbs different loan markets could offer funds at a ■ftttor, And not by mere superficial deposition, like the crystal*.

However, for the purpose of discerning what the forces are that bring about a aoney aarket, a classification is necessary. Generally speaking, the aoney market can be divided into two phases— one deal- ing with the actual business transactions, and the other concerned with the financial structure of the money center which grows as a result of the underlying business conditions. It has already been explained how the forces underlying business operations made a par­ ticular city a business center. The remainder of this chapter will be a study of the development of various loan markets that make up the financial structure of the city. At first glance, it can be said that once a money market starts developing, it will pick up momentum and become larger and larger, but it mast be remembered that this cumulative process is dependent upon and determined by

ths basic forces of commerce and trade.

As a result of expanding and diversified business growing up

in a certain area, there arose a need for some method to finance

this complex eoaaercial activity. Business concerns had cash at one time and needed cash at others. Businesses, depending upon their nature, demanded short term loans one day and long term the next.

The result of this loose growth of business activity was the estab­

lishment, little by little, step by step, of the money market as we

kneer it today. This financial structure took on many forms to meet

■^Powell, Kills T., The Evolution of the Money Market. (London, 1915), p. 106. 3 0 local banks m a t find profitable outlets for those funds, that Is,

the banks must find assets to back these funds if they are to be properly safeguarded; thus the banks would place this money in in­ vestments In the local community. As time went on, however, and money became more plentiful in the money market, investment houses were established to work for and with the banks. These institutions were established for the primary basis of centralising the supply

of and demand for funds. It is with their establishment that the money market as we know it today came into being. As they grew and

became better known and more efficient, they could knit together the

national economy at a much lower cost to the borrower; therefore

businessmen in need of funds would prefer to borrow from the money

market rather than their local banks. This, of course, forced the

banks of ths interior to channel their excess funds into the aoney

aarket. As a result of these actions on the part of the suppliers

and borrowers of funds, the aoney market became the funnel into which

all excess funds were poured to be again distributed to prospective

borrowers all over the country.

At first this market was an Inchoate etnarture; its lines were

crossed and for practical purposes it is impossible to break it down

into types of loans or ths methods of business. In discussing the

growth of the money aarket, Powell says, "... the money market

grows, by absorption, transformation, assimilation, and incorporation,

toward increasing complexity of structure and enhanced capacity of

self-protection, self-adaptation, and self-repair, Just like living 2 9 trad* routes, but also must provide adequate harbor arrangements,

Including a sheltered Inlet, good anchorage, and the necessary land transportation and conwmlcatlon to other parts of the country.

Die Importance of foreign trade to the development of the aoney markets Is not so much that it adds something new to the cumulative growth but that it is an addition to domestic trade in its effect on the money aarket. This is not to say that foreign trade is not important, because experience has shown this to be far from the truth, but it does mean that foreign trade Just in* creases institutions that were already in existence. It will suf­ fice here to point out that in effect foreign trade acts the same as domestic trade; the ramifications and special effects of for­ eign trade can wait for a later chapter.

THE EBVIL0P1ENT OF THE LOAN MARKETS

So far in this study we have considered the steps involved in the expansion of a money aarket, or more accurately the aspects

or characteristics that establish an area as a money center, how

it remains to explain how these aspects are transformed into being

as a aoney market; that is to say, how the aoney aarket develops as

* result of these business and financial developments. Through time,

as these developments took form, more business and funds found their way into this center, new institutions arose that brought about a

better utilisation of these fhnds through a better organisation of

accepting and distributing these funds into the profitable channels.

When the aoney from ths interior banks acres into the center, the 28

•AX*, "In th* n u w r of I860 over •r'liions of dollars ar* sup­ posed to have boon on deposit in New forte on European account". ^ Sine* these accounts at this tlws were always changing, they could not add to th* permanent building of ths money market; however, in the process of developing the banking structure, even these deposits cannot be overlooked or reduced in importance.

As a result of the various advantages to the interior banks of keeping their balances in the money market, the deposits within this money market soon grew to staggering amounts. In summary, it nay be

•aid that the balances flowed into the money market as payment for goods or future payment for goods, to act as reserves, and also to take advantage of the commercial paper within the center. These balances in the aoney aarket came about as a result of many factors, but they were at the same time th* cause of ths development of the various loan nsrtcets of today.

FUSION TRACE AND THE 1CNET MARKET

Of course an analysis of the development of a aoney market must take into consideration th* importance of foreign trade as well as do— stlc trade which was discussed previously. In order that a city or an area may achieve the status of a money market, it not only must be centrally located domestically — mentioned previously, but also mast have facilities which will enable it to attract world commerce. These fee ill tie* not only include the necessity of being on the world

*lfr*rs, on. clt». p. 113. 2 7 that the money market possessed numerous investment opportunitiaa that attraetad thaaa balances. The intarior banka not only had a good reserve in thaaa balances in the aonay aarkat but thay also received a raturn in tha way of intaraat on depoaita or a return by direct participation in tha T&rioua loan markets. Therefore, thaaa balancaa ware not greatly influenced by eeaaonal change a, and therefore this aonay would not flow in and out of the aoney aarkat aolely because of seasonal causes. To say that tha sisa of bankers' balances in the money aarkat were a purely seasonal phenomenon cosh* pletely overlooks ths underlying forces of a aoney aarket. It is perfectly tree that a certain fraction of tha balances flowed back and forth, but a large amount of bankers' balances were maintained in the center because of the natural advantages that brought then there in the first place. Since the aoney aarkat through evolution became an ideal place to keep the reserves of tha interior banks, these balances reaained throughout the year.

From another point of view, the New *ork money market also at times held large amounts of foreign deposits. These balances fluctu­ ated according to ths changing interest rates in the world markets as well as the changing political and economic conditions in the various nations. Although these funds never had any great degree of perma­ nency before the establishment of the Federal Reserve Systea, it is interesting to note that about 1850, many foreign nations thought it worthwhile to send their capital to ths New forte aoney market. Ac­ cording to IQrers these balances at tines became rather high, as she 26

Tabl* I (continued)

Met Deposits for Now York Banks and ill Banks Outsids of How York City* 1871-1914 (In Millions of Dollars)

Net Deoosits Date ^utside Total New Tork New New Net as Percentage Tork York Deposits of Total

1906 891 3306 4197 21.2 1907 860 3639 4499 19.1 1908 905 3559 LLfJ. 20.3 1909 1159 4021 5180 22.3 1910 1053 4434 5487 19.2 1911 995 4594 4489 17.9 1912 1248 4960 6208 20.1 1913 1189 5285 6474 19.2 1914 1144 5340 6484 17.7

Sources To u b j , Allyn A., An Analysis of Bank Statistics for ths United States. (Caabridge, 1928), pp. 8-13> and Coap- troller of the Currency, Annual Report. 1921, pp. 331-332. fork was able to hold its own during this period of econoaic expan­ sion is that New fork was still the center of coosMrce and trade for the country. It is worthwhile to point out that, although the table

doesn't shew it, the deposit balances in New Tork would fluctuate

through the year because of seasonal changes. However, to say that

the rise and fall of deposit balances during the year were due solely

to seasonal factors would be a coaplete Misunderstanding of ths forces underlying the existence of the aoney aarket.

Balances rose in the aoney aarket not only because of the possi­

bility of withdrawals at a later period but also because of ths fact 2 5 Table I

Net Deposit# for New Tork Banks and All Banks Outside of New fork Cltjs 1871-1914 (In Millions of Dollars)

Net Deposits Date “ OuVaIHe Total New fork New New Net as Percentage Tork Tork Deposits of Total

1871 199 293 492 40.1# 1872 183 346 529 34.5 1873 174 374 548 31.7 1874 210 358 568 36.9 1875 202 410 612 33.0 1876 200 403 603 33.1 1877 204 407 611 33.3 1878 188 378 566 33.2 1879 180 391 571 31.5 1880 246 485 731 33.6 1881 248 591 839 29.5 1882 255 684 939 26.0 1883 249 713 962 25.8 1884 302 749 1051 28.7 1885 294 712 1006 29.2 1888 324 803 1127 28.7 1887 315 902 1217 25.8 1888 309 947 1256 24.6 1889 358 1012 1370 26.1 1890 334 1136 1470 22.9 1891 336 1170 1506 22.3 1892 439 1268 1707 25.7 1893 360 1381 1741 20.9 1894 449 1198 1647 27.2 1895 430 1290 1720 25.0 1896 399 1274 1673 23.2 1897 475 1258 1733 27.4 1898 609 1446 2055 29.6 1899 726 1648 2374 30.6 1900 650 1872 2522 21.9 1901 809 01 Q1 2930 27.9 1902 2387 3229 26.0 1903 773 2602 3375 22.9 1904 822 2673 3495 23.5 1905 930 2957 3887 23.9 is, an interior bank, finding that it had axcaaa funds that could not be employed locally, could make these funds available to its correspondent banks, which in turn could sake loans either directly, or indirectly through a broker, to a section of the country that was then in need of money. The aoney market thus served not only as a depository for funds, but also as a weans of making money available when needed. As Burgess so aptly put it, "What a bank balance is to the individual the money market is to the country's credit system. Both represent ready cash available for the immediate needs".1 Prom another point of view, the importance of the clearing of funds can­ not be overlooked in a study of the development of a money market, and a discussion of the importance of this principle will be reserved

until the next chapter.

The bankers' balances in the money market were important not only as an investment opportunity for the interior banks but also

as a causal factor in the grcarth of banking technique. In Table I

the Net Deposits in Hew Toxic are shown as relatives of the Net De­

posits for the nation. Fx*om this table, it can be seen that even

up to 1 9 1 4 New Tork held a relatively large amount of the nation's

total demand deposits. Kven though New fork's share declined from

about 40 per eent in 1 8 7 1 to 1 8 per oent in 1 9 1 4 , i t still had a

relatively large share of the nation's balances In view of the

rapid expansion of the country during this period. The reason New

^Burgess, V. K., The Reserve Banks and the Mon^y (New X0rk, 1946), p. 144. 2 3

&nd a s a result, th* demand for money grows Along with it, becAuse a s these houses gsin a reputAtion for efficiency end soundness, most of ths Interested borrowers went to then for their loAns. As a re­ sult the loan market grew becAuse it could centrAllse And standardise the supply a s well a s the demand for funds. The loan market took on even a wider scope, as the interior banks discovered there were in­ vestment opportunities in the money market, they would send their funds to their correspondent bank in the financial center to be placed an call, thus leading to a further concentration of the na­ tion's funds* The Interior banks were somewhat forced to follow this procedure, since the prospective borrowers would take advantage of the low interest rates prevailing in the well-organised and highly liquid money market, rather than borrow the money from the local banks at a somewhat higher charge, These interior banks had as their only alternative then to place these fbnds at the disposal of their correspondent bank in the money market in order to keep the funds profitably employed.

This does not imply, however, that the interior banks were thus at the mercy of the money market; or in other words, it does not mean that ths money market was nedessarily encroaching on the prospective borrowers of the interior banks, but it does imply that

the money market served as the directing agency for the nation's

loanable funds* If one section had excess money, this surplus could be employed through ths money market by another section, that 2 2

As a result of the large volume of business taking place in the aoney market, it follows that there will also be a large supply of aoney in this c naan ml ty. Kven before the center takes on the characteristics usually associated with a aoney aarket, that is, a loan aarket In the present sense of the word, it can be easily seen that there are conditions existing within it structure, that, on the one hand, necessitate large suas of aoney to transact the business within the coaaunlty, and, on the other hand, attract funds from the interior, thus leading to an accumulation of funds in the business center.

'Therefore, these two factors, working together in an evolu­

tionary aanner, brought about the aoney aarket as we know it today.

Because of the expansion of business, funds are needed and then

supplied. Through the building up of balances, the Inflow of money

from the interior, the growth of banks to handle the expansion of business, sad the clearing of these balances, aoney is made avail­

able for further expansion, and what is nore important, different

types of aoney are made available for different types of loans. The

coaaunlty then becomes a center of ready cash, at first made avail­

able as a result of the expansion of business, which in turn causes

the origination of loan aarkete, and then as it takes form and ex­

pands, aore funds move in from the interior to take advantage of the

centralisation of business opportunities. Of course, this process

results in a growth of aoney outlets, the brokerage houses and banks} 2 1 balances, payable to someone in another city. For example, a Cleve­ land businessman could pay a Columbus merchant by check or draft drawn on a balance In the money market. The Cleveland businessman con arrange with his bank for a draft drawn on funds in New York and payable to the Columbus merchant. When the Columbus merchant re­ ceives the draft, he deposits it in his bank which in turn will send it to the New York bank for collection. The collection method that takes place is to transfer the amount of the draft from the account of the Cleveland bank to the account of the Columbus bank, assuming,

for simplicity, that they have their accounts in the same bank. This became a convenient method of asking payment between interior banks

and eliminated the necessity of keeping correspondent relations with 1 all banks all over the country. For this reason, interior banks maintained deposits in the money market and were usually willing to accept drafts drawn on New York funds because it meant they could

draw on them if and when the need arose. This factor, itself, is

of sxtrsme importance in the growth of the money market, because it brought to the center the large amounts of bankers' balances which made ths various loan markets possible. This point has further im­

plication in connection with international finance; a point which will be considered later.

^Xarge concerns, in time, learned of the advantages of maintain­ ing balances in New *ork banks, so these funds also were made available to money market banks. 2 0 balances in tha aoney aarkat wara an idaal reserve. Thaaa balances than aade it possible to keep small balances at home since their notes and deposits vara core red by tha balancas maintained in tha money center. This was especially true because a large part of tha bank notes found their way to the money market and wara there re­ de earn d. Tha interior banks' customers would often prefer a draft on a money market bank to oash because of tha large flow of trade between the interior communities and the omney market. This con­ dition freed the interior banks from the necessity of maintaining large cash reserves at horns where they would remain idle, or com­ paratively unprofitable, for the greater part of the year. To build up these reserves, the Interior banks were quite eager to obtain Mew York money so that the funds of ths market circulated at a premium. A check drawn on a New Tork bank payable to someone in a distant center was always willingly accepted by the interior banks because they could then send this check to a New *ork corres­ pondent for collection and thus build up the balances of the in­ terior bank. It was a rather common practice in the 1800's to discount the notss of other interior banks; however, it is evident froei various historical documents that the notes of New Tork banks were accepted throughout the nation at an extremely low discount as compared to the charges on notes of interior banks.

furthermore, after the Importance of the balances in the money market became apparent, the Interior banks could use ths money aar­ ket as their bank by writing checks or drafts on their New Tork 1 9 deposit in New Toxic. However, such legislation placed the interior banks at a disadvantage, and when the folly of such laws was seen, they were repealed. As early as 1854, the state legislature of

Connecticut took steps to curtail the amount of funds flowing out of the state Into New Toxic banks. The legislature at first decreed that no local bank could lend more than one-fourth of its combined capital and deposits to an outsider. When this law brought undue harships to the state banks it was changed by requiring the state banks to lend funds equal in amount to its capital to local bor- 1 rowers before considering out-of-state loans.

The second point involved the fact that since the bank notes of the Interior banks were constantly flowing into the money center in the usual course of trade, and since the interior banks had to keep these notes at par in order to keep them in circulation, then the only — cns available at that time to accooplieh this end was the establishment of deposits with correspondent banks in the money mar­ ket. These balances were maintained to provide redemption at par, and as long as the bank had an adequate balance within the money aarket, its bank note would remain in circulation; or in other words, they would be generally accepted since they would not be discounted.

From another point of view, after the bankers of the country got a little more sophisticated, it was soon discovered that the

1 Infers, M. 0., The Mew Tork Money Market. (New Tork, 1931)* PP. 103- 104. id reserves that not only could bo usod in times of domestic shortages, but alao served aa a clearing mochanlam for tha interior banks.

In the first ease since the importing houses were already es­ tablished, their reputations known all over the country, the drafts accepted by these houses were a far better investment then the great majority of local paper for the interior banks, the paper possessed soundness at least by comparison, and there was always a market for this paper, auch more so than the notes of the small merchant in the local coanauiity. Because of the advantages of the money aarket paper, the banks found it advisable to transfer their deposits to ths money market. Of course this procedure also brought with it the usual amount of resentment against ths local banks, because at times ths local merchant had great difficulties in getting a loan from his bank— a bank which be thought was established for the pri­ mary purpose of serving his interests, km a result of this effort on the part of the Interior banks, the paper of the money center became increasingly important and highly desired by the banks of

the nation. It was more important to have a substantial amount

deposited in the financial center than it was to have all these

funds at beam. For this reason, many banks in the United States made every effort to keep funds in the financial centers, even to

ths extent of reducing their ability to come to the assistance of

the local borrower.

Various state legislatures found it necessary to place limi­

tations on the amount of aoney the looal banks could keep on 1 7 as a result of business expansion. Money, then, from all oyer ths nation Is attracted to the aoney aarket. The next step, therefore,

is to determine why and how the evolution of aoney takes place as

a part of the aoney aarket.

THE BULK OF BANKERS' BALANCES

In the early stages of the development of a aoney aarket, the

constant flow of goods out of the aarket into the interior, resulted

in a constant flow of aoney into the aoney aarket as payment for

these goods or in anticipation of the payaent for goods at a later

period; therefore, the banks of a financial center always had on

hand large deposits of the Interior banks. These banks, then, used

various aesns to get balances in the aoney centers, at first because

of the protection they offered and later because of the possibility

of keeping deposits working.^ However, once the aoney aarket had

stftrted, there were aany reasons for the concentration of bankers'

balances in the auney market and the flow of funds to It. Probably

the three most important, but by no means the only three, were the

profitability in buying the paper originating in the financial cen­

ter, the necessity of the interior banks to keep their own notes at

per, and finally, the discovery on the part of the interior banks

that the deposits held in the aoney aarket were excellent reserves;

1 It is this point, that is the oross-flow of goods, that provided the aoney aarket banks with the liquidity they needed. When funds were not drained from the banks, loans of all types could be made. 1 6 adrantafaa previously sinticxMd, -thsss artificial in flue ness will not endurs the ravages of ties. The importance of the city will decline muse the outside or unnatural support is removed.

Many times in the history of mankind the conditions just set forth have taken place. A city, either cut off from tbs rest of the nation by invading armies or actually engulfed and destroyed by force of arms, will rise again because of the unique advantages it offers to the trading world and asmne its old position in commerce. Une might look to the many ups and damns of Rone as evidence of this point. Also from time to time a government may find it expedient

to favor one city rather than another by giving it special advan-

tages and considerations $ however, if the new eity does not on its

own merits possess the necessary commercial advantages, the diffi­

culties of keeping that city as a money center will become so great

that ths special government privileges eannot be maintained. The artificial forces of war and polities may have some influence on

the determination of the aoney market in the short run, but usually,

unless other conditions change during the interval, such influences

are not sufficient by themselves to change the tide of trade. *Chis

point will be considered again in another part of this chapter.

Mace business is established and concentrated in a certain

center, then aoney will fleer into the vacuum created not only by,

but Along with, the growth of business. Actually the need for and

the supply of funds develop at the same time as business expands and 15 tha accumulation of funds and therefore the opportunities of be­ coming or remaining a money market*1 Business then is the dynamic element of the money center. It comes first and the monetary as­ pects follow; this is a point too often overlooked by many econo­ mists; they think in terms of aoney as the dynamic factor; thus it

follows from their theories that the whole economy in its growth

and trends follows ths growth and movements of the supply of money.

But money, as will be shown, is basically or in its origin the out­ growth of business activity.

Of course, there are other factors to be considered in a study of the general development of a money market. ihe fundamental causes

of the growth of a money center have already been discussed, that is,

the natural advantages that arise because of location or facilities.

However, there are other factors that can inflwsnee the developnwnt of a aoney center; these causes can be classified as freaks or acci­

dents, which may, on the one hand, promote the natural forces, or,

on the other, impede these forces, thus making some other city the money market. Such accidents, in determining the location of the aoney aarket, can be the result of wars or the manipulations of politicians. However, it Is well to remember that if a particular area or city takes the lead as a money market as a result of strife or political logrolling, if the city does not possess the business

1 The term "money aarket" as it is used today has a connotation that is too marrow to fully describe the operation of a eoMsrcial money center. The name "money market" applies only to the financial side and does mot take into consideration ths eomesrolal factors that are necessary before a city can become a money market. 14 1 canter. When it lose a this start or this prerequisite or when other cities through tins beoojse more important because of their relative business advantages, then the city will lose its commercial prestige and the money market will move elsewhere. Unce a city has this start, then its business expansion becomes cumulative; once it has gained this unique position, it will expand and grow attracting new industries into the core. As it becomes more and more the con­ centration point of business activity, more and mors bqyers will be prone to do their purchasing in the city that can supply all the methods and conveniences of buying and selling. When this process has started in a given area, it is well on the road to a money mar­ ket. This cumulative nature can be brought to a halt only by the rise of some other city, that through tine, can offer more as a business community. As Walter Bagehot said, in explaining the evolutionary development of the London money aarket, "• . . when a trade has settled la any one spot, it is very difficult for an­ other to oust it— impossible unless the second place possesses some 2 very great intrinsic advantages. " If the city can retain its rela­ tive advantage as a center of business activity, it will retain

1 Prom William P. Spalding's, The London Money Market. (London, 1930), pp. 8-11, we find that the fairs of early Europe played an Important part in the determination of money markets, for as he says, "From ths earliest times those who have something to sell have been wont to foregather at some such convenient spot with those who have the wherewithal to bay." These "spots" eventually became business cen­ ter* as society developed and new, with few exceptions, are our large cities.

2Bagehot, W., Lombard Street. (London, 1915), p. 11 1 3 provide harbor* with suitable dock* and wharfa, and Maintain air­ ports that can accommodate a larga amount of freight and passengers.^*

Although thara ara many factors involvad in tha development of a money market, th* conditions Just mentioned ara of primary impor­ tance, as on thesa prerequisites will be built the structure of a money market.

At first hand, with a central location, suitable harbors, and adequate transportation facilities, business will boom and spread out over th* surrounding territory; that is, the city will hold sway over more and more area. It is analagous to the dropping of a pebble in water and watching the swells flow out from the center; so it is with the influence of the central city. As it becomes more and more important as a trade center, then newer and faster methods will be developed in the ordinary transactions of business.

The commodity market, as it grows will become more standardised and graded, thus enabling people from distant lands to buys goods sight unseen through various organisations that spring up to take car* of the increasing business activity. Thus it is essential that before a city can become a money market, or before it takes on the aspects of a aoney aarket as we know it today, it first Mist be a business

1 It is interesting to note the efforts of the New Tork Port Author­ ity to expand their airport facilities to keep pace with this moving world. Of course, this authority, aside from the desire of keeping up with the world, wants to make sure that New Toxic maintains its leadership as a world trading center. 1 2

CHAPTER II The Nature of Monetary Concentration

Ae «aa mentioned in the first chapter, a study of the causes of monetary concentration is at the same time a study of the raison d'etre of a money market. With this In mind, let us, at first, take an overall view of the factors involved in a financial center and then consider their developsmnt. The origin of the money market, in most cases, lies in the advantages that support the growth of business activity in a given area, that is, the money center or money market must be located in such a way that the surrounding districts can ship in goods without too much cost or difficulty, and at the same time afford the surrounding areas with suitable means of transportation and convenient and safe facilities to buy goods from distant points.1 To be able to meet these require­ ments, a center must not only be centrally located in respect to the potential buyers and sellers, but also it must provide adequate transportation by water, rail, and now even by air. This neces­ sitates, of course, large expenditures in order to build railroads,

'There are exceptions to the manner in whioh aoney markets are born. A few of the famous cities in the past arose because of the safety provided to the people) others, because of actions of governments • XI econoalc and therefore Monetary concentration, this aspect is ana­ lysed in Chapters VIII and S . Chapter X covers the recommendations for policy based on the findings of this study. 11 economic end therefore monetary concentration, this aspect is ana­ lysed In Chapters VlUand IK. Chapter X covers the recommendations for policy based on the findings of this study. 10 was felt that In dealing with this topic, the wisest thing to do would be to wake the basic factors or principles known in the be­ ginning. This Is the purpose of the first two chapters. Chapter II deals with the commercial and banking aspects of a center, and

Chapter III deals with the result of these two conditions, the clearing process and the clearing principle, These two chapters, in short, are a cross-sectional view of a money market. Here are revealed the conditions that permit a money market to operate. The next chapter, Chapter IT, attempts to trace these factors to show how they originated and developed. Chapter 7 is, in a way, a con­ tinuation of Chapter IT in that it discusses the development of the basic factors during the time of the Federal Reserve System. Fur­ thermore, this chapter points out how the Federal Reserve utilised the clearing principle and the basic factors in its efforts to con- 1 trol money supply. Thus far, the origin, nature and development of money markets are discussed. The remaining chapters deal with the outgrowths of an expanding financial center and points of policy to be followed. More specifically, Chapter 71 discusses the con­ centration of money in certain banks throughout the nation. Chapter

Til deals with another aspect of the concentration problem— the affect on interest rates. Since the war would influence greatly

1It will become quite obvious to the reader that today the Federal Reserve and Treasury Department could also be considered as basic factors of the money market. The part they play is so dominant that no writer could ignore their influence. 9 nark*ta develop beetuM the money is available and because of the large volume of business in the area. With these factors present, a money market emerges. The growth is similar in process to the formation of capital; that is, the more savings present, the more capital, the more capital present, the more savings available. The growth is a long, difficult process. All the basic factors of a money market are now present. When the circle is complete, the process becomes cumulative; that is, these conditions working together will tend to expand business, bank balances, and the mechanism for lending money. Thus, briefly, are outlined the basic conditions of a money market; or more accu­ rately, the conditions of monetary concentration. One of the pur­ poses of the next chapter will be to look into these various con­ ditions and to determine how they function and what other factors

enter into their operation.

The New Tork money market will serve as the model for this dis­ sertation, although this does not imply that New York is the only money market or that there is no such thing as a money market if

there are too or more equally important cities in the same nation.

What can be said of the development of New York as a financial cen­

ter can, for the moot part, be applied just as readily to London,

Paris, or even Chicago, St. Leuls, and San Francisco.

The first part of this dissertation is generally historical

in nature. Since the money market is a result of an evolutionary

process, it is a difficult task to find a good starting point. It After the forces in the development of e m o n e y market are known and analysed in their proper role, then we can ascertain why other conditions arise as a result of these forces and can make some suggestions as to the control measures that should be followed.

If money accumulates simply because it is money, then money should be controlled; however, if money flows to a certain area because of other factors, then the other factors should be considered in their proper role. The purpose of this analysis is to bring the other factors to light.

A study of the underlying forces of monetary concentration is a study of the evolution of a money market, because the money market is the center where money tends to concentrate. As a first approxi­ mation, it can be said that the money market has its origin in the developsient of business activity in a certain specified area. This business center, because of its location, and other factors that will be discussed later grows and becomes the heart of the trade routes.

As this community prospers because of its relative advantages the banks all over the country will not only find it convenient but at

times even necessary to maintain balances with banks in the business center so that notes and checks will circulate at par. Thus the funds of the nation are attracted to the money market and since business

concerns need funds, either for local transactions or those further

removed, and since a great part of the money transactions both within

the center and between the center and outlying districts will clear,

money Is made available for the various loan markets. In fact loan 7 system, to one degree or another, are interrelated, it is possible that a policy of decentralising money may at the same time decen­ tralize other factors that are necessarily concentrated for their proper function in the economic system. Since this relationship does exist, then monetary concentration could be a result rather than a cause, and a policy of controlling monetary concentration alone could be nothing more than a policy of attempting to hold the lion by the tail.

It may be true that from an ethical as well as an economic point of Tiew complete monetary concentration is an evil and will result in undue hardships and strains on various segments of the econony; but it is Just as possible that the complete decentralisa­ tion of money may retard or entirely stop economic progress. Then the question reduces itself to how much decentralisation can be afforded, or more accurately, hcer can money, on the one hand, be decentralised and thus aid certain isolated sections of the country, and, on the other, be permitted to concentrate to aid the country as a whole. This problem was effectively handled by the Federal

Reserve through the establishment of a regional system.

However, sines the Federal Reserve did decentralise money, by eliminating the necessity of robbing Peter to pay Paul, it remains for us to determine why we still have monetary concentration. The answer to this question involves a study of the underlying forces that bring about this phenomenon. 6 and control or money being transferred to Washington. There are, therefore, three forme of monetary concentrations by location, by particular banka, and by control. All three forme will be discussed in this paper. The problem of analysing monetary concentration is a problem of selecting a suitable measure. Relative holdings of total demand de­ posits were selected not because they necessarily reflect any or all changes in monetary concentration but because, of all monetary data, demand deposits figures are most accessible for cities and states and for a long period of time. Since this measure may be biased, it will be checked, at least over short periods, by using bank debits. Under certain conditions, it is possible for the change in demand deposits to show concentration of money; whereas if an­ other measure were used the opposite would be found. For example, a city or state may lose some of its demand deposits but this loss could be more than offset by a further turnover of the remaining balances* In the first case concentration would decrease but in the second it would increase. To alleviate the possibility of presenting a biased picture, two measures will be used.

In order to arrive at a valid solution to the problem of mone­ tary concentration, it must first be ascertained what factors or forces within our economr bring about this phenomenon; or, in other words, before a policy ef decentralisation is pursued, it must first be determined what repercussions or consequences this policy may have on the economy as a whole. Since all the factors of an economic 5 largely dominated by the Federal Re serve Board".'1' Also, In case

there is any doubt in the reader's wind, one cannot overlook the

purpose and Method or the open Market operations; a point that will

be considered in Chapter V. Be that as it stay, it is still neces­

sary to study the actual concentration or money, which remains,

despite the control measures or the Federal Reserve System, under 2 the influence or the money market.

In order to rurther clarify the primary purpose of this disser­

tation, a row working derinitlona are necessary. Concentration of

money may take on many forms. There may be concentration by loca­ tion, such as in a money market or a particular state; furthermore,

there nay be concentration ef funds held by certain banks within a

given location. A bank, in a state with a n amount of the na­

tion's funds, may have a large share of the state's holdings. This situation is not common. The large banks are usually found in the

large business centers. Another type or method of concentration is

concentration of control. The control of money was generally con­

fined to the large banks of the large money markets. However, since

1 9 H the concentration in control of funds and the actual location

of money tended to separate— funds tending to remain in New York

^Madden, J. T., and M. Madler, The International Money Miriest. (New York, 1935), p. 133.

2It is to be recognised, however, that at the present time the Treas­ ury Department through its fiscal policies has greatly influenced the money market. u somBtlrass concentration would be encouraged and at other times it would be criticised. It must be remembered that the business side was more generally considered. At first the centralisation of money was encouraged either by direct or indirect government policy. Later on, however, particularly with the advent of the Federal Reserve Sys­ tem, this attitude changed to one of breaking up monetary centrali­ sation.

As a result of the growing opposition to monetary concentration about the turn of the century, the decentralisation of money became one of the objectives of the Federal Reserve, established in 1913*

Through various means, the Federal Reserve was able to offset some

of the Jeopardising consequences of monetary concentration, such as

money shortages in certain sect ions, but it did not prevent the ac- cumilation of funds in the money market. It can be said that the

Federal Reserve was more interested in decentralising the control

of money rather than in decentralising money itself. But even on

this technical point there is some doubt as to whether or not the

control was decentralised or merely transferred. As Madden and

Madler see this situation, the control of money merely shifted

from the money market to Washington. They assert, ^Closer exami­

nation of the operation of the Federal Reserve Banks, however,

shows that the decentralisation of our central banking system is

■ore legal than actual, since the policies of all Reserve Banks are 3

In Analysing the trends In money and banking, it must be re- aambered that the Institution of money and banking Is a part of Its surroundings and has Its origin In other Institutions that dereloped through time. In other words, the Interactions of these institu­ tions are of great importance, but the changes that hare taken place

In the field of money and banking are our primary concern. The growth of banks and banking, the tendency for money and banks to concentrate In certain areas known as money markets, the causes and results of this concentration and tbs relation to trade and commerce are the conditions to be observed. Money and banking are the focal points of our analytical msgnlfying glass.

As has been pointed out, banking has Its setting in the sur­ rounding business conditions. As business firms became larger, banking and other financial Institutions were forced to follow suit.

It also became evident that as business concerns were attracted to particular areas, banking facilities had to follow their source of business; that is to say, as business became concentrated geograph­ ically, banking also tended to cluster in these areas, and as this movement took place, there was a tendency for money to become cen­ tralised in the key business centers.

In most cases this relationship of Interdependence between business and banking was Ignored by students and criticisms of concentration were usually confined to criticisms of tbs centrali­ sation of business In Itself, and of banking in Itself. In both fields the attitudes of those concerned vacillated greatly; 2

in the field of money and banking we not only have more banka, but we also have larger and battar onaa than In the daya of old; and naturally the money supply la larger than aver bafora in our history.

T h e national Income baa increased from $20,000,000,000 in 1899-1900 to $244,100,000,000 in 1 9 5 0 . There la no end to these changes. They ware with us In the past, they are with us today, and tomorrow will witness more of the same.

there la no doubt that as these changes In our economy and

standard of living came about, economic concentration moved right along with the steady growth. In fact there are those who say that economic concentration was ths cause of our continued progress. In

1939, the 250 largest corporations controlled 62 per cent of the pro­

ductive facilities; by 1945 these corporations held 68 per cent.1 In

the field of money and banking the story Is about the same. There Is

concentration In else of the banks and In the location of banking

facilities.

It seems evident that there has been economic progress and also

economic concentration. The purpose of this dissertation Is to study

the growth of and concentration In banking as one segment of the econ—

°ey• It Is true, of course, that to carry out this purpose some re­

lations with other segments must necessarily be discussed and ana­

lysed If a causal relationship Is to be determined.

1 Se n a t e Document Number 206, Economic Concentration and World War II. (Washington, 1946), p. U . 1 ECONOMIC FORCES EKTERUDiUO MONETARY CONCENTRATION

CHAPTER I

StaUaent of the Problem

The so-called modern economy has brought with It a multitude of new Institutions and has changed old ones almost beyond recogni­ tion. The mechanised farm now makes it possible for one farmer to produce fire and a half times as much as our forefathers could pro­ duce. In agricultural income, the farmers haws experienced many changes in the last decade, in 1059* agricultural income amounted to *1,264,000,000, whereas in 1919 It was *10,362,000,000.^ By

1947, farm income had reached *30,323,000,000.^ Agriculture has been changing, but it is not alone.

We have many new industries in our present system; automotive, chemical, electric and allied industries offer our society comforts that were beyond the wildest dreams of the pioneers. It was quite an event when in 1 9 0 1 the United States Steel Corporation became the first billion dollar corporation, but today we have fifty of them and take them as a matter of fact.

1 S h a n n o n , Fred A., The Farmer*a Last Frontier. (New York, 1945), P. 353. 2 Rennets, Simon, National Incnms and Its CoMoosition. 1 9 1 9 - 1 9 3 3 . (New York, 1941 ) , P. 543. 3United States Department of Cosmmrce, Survey of Current Business. April, 1950, p. 23. i

TABLE OF CONTENTS

Chapter Page

J Statement of the problem 1

II The kature of monetary Concentration 12

III Bank Clearing and the Money Market 4b

IV The Development of Important Money Centers 62

V The Federal Reserve and Concentration in the Money Market 99

VI The Role of Banks and Monetary Concentration 132

VII Concentration and Interest Rates 163

VIII Monetary Concentration and Aorld V/ar II 193

IX The Postwar Period and Monetary Concentration 232

X Implications of Monetary Decentralization 239

Appendices

A Commercial Banks and Branch Banks, 1920-iy>o 274

B Selected Ratios of Insured Commercial Banks 273

C Banking Facilities and Demand Deposits 277

D Demand Deposits of All Member Banks and of Banks in New York District 279

BIBLIOGRAPHY 280

AUTOBIOGRAPHY 284

£00469 ECONOMIC FORCES DETERMINING U jNETARY CONCENTRATION

DISSERTATION

Presented in Partial Fuli'illment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University

By

CHARLES SILVUS OVEk MILLER, B.A., A.M. The Ohio State University

1952

Approved by;

Adviser