The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1934-12-06
Trends
Slash in Interest
Rate on Deposits
Favorable.
. BY VINCENT S. LYONS
Times Financial Editor

L. BY VINCENT S. LYONS
Times Financial Editor
DEGINNING Jan. 1, all member
- institutions Of the Indian
polls Clearing House Assn. viii
pay to depositors per cent an
nually on savings accounts, con-
trasted with the prevailing rate Of
3 per cent. AS a consequence, those
individuals fortunate enough TO
have funds in the banks will re-
ceive only two cents Of interest
yearly for each dollar deposited,
against three cents now.
II may seem anomalous 10 ex-
press the viewpoint that this slash
IL interest should be welcomed by
all people who now have sums on
deposit with any member of the
association. But there is no deny
ing that that is really the way the
announcement should be received,
albeit it means a decline in the
earning power Of the depositors'
dollars.
Getting away from the local sit
uation for a minute and taking a
look at the national banking situa-
ton over the last few years will
give a definite indication of why
the slash in interest rates is a lau-
datory development. For a time
when things economic we're out Of
gear there was a tendency on the
part of many commercial banks
throughout the country to attract
deposits into their vaults by any
means.
WTHAT this virtually amounted
w to was that some banks we're
engaging in the unsound practice
OF competing for bank deposits at
the risk of safety. Rates of 81 and
4 per cent were paid for the loan
Of funds and, in order to pay this
rate to depositorS. the banks in
turn had to search out investments
which yielded them considerably
more than that. But every one
knows that when the rate of return
on an investment is high. the ele-
ment Of safety is on the downgrade.
The attempt to put to productive
use these funds which were en-
ployed at 81 and 4 per cent placed
the banks which adopted this prac-
tice on thin ice. The institutions
threw their money into question
able investments and when the de-
nouement came they found them
selves in the embarrassing position
of carrying on their books secur-
tiles which could not stand up I'M
der a strict investment analysis.
After this unhealthy situation
was uncovered, the banks adopted
an exactly opposite policy. Funds
were invested only in the highest
grade securities, such as United
States Government obligations and
issues of municipalities and corpor-
ations which were generally &C
corded triple-A rating by recog-
nized advisory services. One result
of this was the sharp decline in
loans to business, which the Gov
eminent is now trying to foster.
MYTH the arrival of. the de-
w preston a new impeachment
came, in the virtual closing of
the new capital market. Whereas
in former years banks had been
able to invest the funds of de-
positorS in new bond issues of cor
porations, they suddenly found this
avenue shut by the reluctance of
underwriting syndicates and corpo-
rations to chance public offering of
new securities. Thus, the invest
ment outlet for banking funds was
considerably thinned.
This, in turn, brought about ris-
ing values for United States Gov
eminent securities and other high
grade issues to such an extent that
yields were whitfield down draS-
tically. AS matter of protection,
banks had to pare the interest
which they paid on deposits. This
trend has been nationwide and
has been in effect for more than
q year.
In view of the changed condi-
tons which have taken place in
the banking field in the last few
years, it can readily be seen that a
scaling down of the interest rates
on deposits is a healthy develop
ment. Excess reserves, which are
nothing else but funds looking for :
work, have piled up in bank vaults
throughout the country and banks
can not pay high rates for new
deposits when they have large sums
lying about idle.
A FTER all, i5 must have become
"A apparent in the minds Of
many during the last few years
that safety of principal is much
more desired than a high rate of
interest. There is no victory in re-
ceiving an attractive rate of in
terest when the deposit itself is
placed in jeopardy by the banks
scouting around for investments"
which will allow it to pay a high
interest rate.
In announcing the contemplated
change, the Indianapolis Clearing
House Association stated that the
action had been delayed more than
a year in the hope that money mar
ket conditions would change. But
they haven't. For instance, call
money on the Stock Exchange to-
morrow will end a full year of re-
manning stationary at l per cent.
Time money and other forms of
credit accommodation also have
been easier.
The sooner people realize that
the rate of interest paid on
banking deposits should be flexible