Evening star., 1933-02-25
FINANCING OF SPECULATION
BYU. S. BANKS IS CONDEMNED
Presidents Committee Finds That Prac-
tices During Boom Years Were Radical
Transformation of Loan Policies.
,pecial Dispatch TO The Star.

Special Dispatch to The Star.
NEW YORK, February 25.-Financ-
ing of speculation by the commercial
banks of this country during the post
war period, 1922-1e29, is arraigned in
the recent report of the Presidents
Research Committee on Social Trends
The course followed by banks during
the boom is characterized in the re-
port as radical transformation" Of
the banking business in the United
States.
The chapter on Trends in Eco
nomic Organization" of the report
written jointly by Dr. Edwin F. Gay,
professor of economic history. Harvard
University, and DR.. Leo Wolman, pro-
fessor of economics. Columbia Uni
versity, reviewing the practices and
policies of our commercial bapks since
1921. state:
Beginning with the recovery of
business from the 1921 depression, the
increase in bank loans and invest
ments continued steadily onward and
was not halted, except for brief and
slight reversals in trend until after
1929 In this latest phase Of the proc
ess Of credit expansion. however. the
wholesale prices of commodities failed
to register wide Quotations and stood,
indeed, in June, 1929, not much
higher than they were in the middle
of 1924 Comparative price stability
of this nature induced many observers
either to disregard the changes in the
volume of bank credit or to regard
them as appropriate to the legitimate
needs of business since they produced
no observable effect on the prevailing
level of prices.
Character of Loans.
part, at least, of the explanation of
this discrepancy in the movement OF
the volume of bank credit and Of
commodity prices is to be found in
the changes in the types of loans and
investments made by the banks of the
country in the last period of credit ex-
pansion. For, as subsequent events IN
dicated. the character and quality OF
the loans and investments held in in
creasing amounts by the banks, were
probably more powerful sources of
strain and weakness in the banking
system than the extent of the total
expansion In CreQlt.
Statistics based on United States
Federal Reserve Board data are pre-
sented by the authors, showing that of
the total loans and investments by
member banks in 1921, amounting to
s24, ,121 900, ,0oO, investments accounted
for $6,002 100000, loans on securities
for 4,400 600, 900. loans on urban real
estate for $S75 100000, and all other
loans, 844,OO0,00O. In June, 1929,
when the total loans and investments
had mounted to 35,711 900 900, the
investment item accounted for $10,-
O52, 900 900. the loans on securities
item was S10,095 ,00O, 900, loans on urban
real estate amounted to $2,760,000 900,
and all other loans remaining at about
the 1921 level, or s12,8o4, 900 900.
1T is clear from this exhibit" the
authors continue, that the banking
business in the United States, as prac-
ticed by our commercial banks in the
past decade, experienced radical
Transformation. Commercial loans,
which traditionally constituted the bulk
of the commercial banking institutions,
were no greater in the exceptionally
active year 1929, than in the depres-
sion year 1921. The practice of oper-
ating business with low inventories,
universally adopted by American firms
as a result of their sad experience in
liquidating theshuge inventories of 1919
and 1920; the unusual cash reserves
and surpluses accumulated by the large
corporations of the country; and the
ease with which business needs could
be financed by the sale of capital stock
in these years accounted for the
stability in the volume of commercial
loans at time when the volume of in
dustrial output and general business
activity were increasing by leaps and
bounds.
Increase in Loans.
meanwhile, however, the more specu-
lative and less liquid loans on securi-
ties and on urban real estate together
rose nearly $4,000 000,0 900, representing
almost three-fourthS of the total in
crease In loans and investments during
the period. Diversion of credit into
these markets had the two-fold conse-
quence Of financing a prolonged and
colossal speculation and of loading
the banks with appreciable assets which
are particularly difficult to liquidate
under conditions of declining prices.
From 1922 to 1929, then, the ratio
of loans on securities to the total loans
and investments of reporting member
banks advanced from Is to somewhat
more than "a per cent; while from 1924