Evening star., 1934-01-01
DRASTIC CHANGES
SEEN IN BANKING
Continued Progress Expected
Toward Unified u. S.
System.
tBy Cambridge ASsoclatesO

our banking system during the past II
months. accompanied by such startling
occurrences as Naton-Wlde oanK
holiday. abandonment of the gold stand
ard and the Inauguration Of a new and
unorthodox monetary policy, not TO
mention the passage OF laws deslgned cd
the average citizen in his attempt to
safely care for his wealth,
Events prior to and including 1893
demonstrated without question that our
financial system is not satisfactory, that
It is only vaguely entitled to the COM
pliment of being CalleS a system, ana
that further and more drastic reforms
must be Inaugurated II we are TO loCk
forward with any confidence to avoid
ing repetition Of a series OF events SuCn
as we have recently passed through.
What the future Will bring forth is un-
certain. but it is highly probable that
an increasing amount OF attention Will
be given in 1884 to the development OF
an all-inCluSiyC national banking SyS-
TEN.
It is interesting to review the events
Of the last year aid see how the sweep
ing changes in our financial Set-up
have taken place. Back in the closing
weeks of 1882 IL was felt that the bank
ing system had passed through the
worst of its difficulties and was pre-
pared to operate in normal fashion dur
ing an extended business recovery. How
ever the first month Of the year was
barely over when it became apparent
that such was not the case
State Holidays Come.
Bank failures began to increase IN
most startling fashion and. contrary TO
previous experience, they began to come
l.. Stata-ujHR hank HOLIDAYS
were declared in ever-inCreaSlng num-
bcrs. under the leadership Of Ohio AS
the movement spread the strain on the
New York banks became terrific. De
pOSitS of these institutions declined
5000 900 900 in four weeks indicating
the demand for funds from Oeposltors
in the holiday States. On March D
Nationwide banking holiday was oe-
clared by the new administration and
the crisis had arrived
On March IS. Just 10 days after the
nounced that all banks which could
convince Washington of their Solvency
would be allowed to reopen. The re-
Spouse to this was highly satisfactory.
For one week deposits OF the New YORK
CITY member banks cOnEnued to de-
cline. after which money began TO re-
turn at only a slightly slower rate than
that at which 1t had gone out prior 10
the holiday BY the enc OF May de-
posits stood at a level comparable TO
that witnessed in January. The re-
snonse on the part OF business was
equally auSpicious; in the week ended
March %. steel operations declined
to IA pei. cent of capacity. the low point
of the year. and the following week
began to increase at a rate htheTto
uneoualed in the history of the in
dustry. and by the end of June stood
at 81 per cent of capacity.
Meanwhile the question arose as TO
whether the United States was on or of
the gold standard The situation was
simply that no official announcement
had been made in this regard, with the
result that we had not officially aban-
doned gold on basis for our currency
but as its maintenance presuppOSeS the
free interchange of gold and paper
money it was virtually Abandoned with
the bank holiday. Officially the an
nounCement was made in the mlodle OF
April when it was stated that it was
essential for recovery that commodity
prices should be brought back to more
normal levels. Coincidentallv. it was
announced that Congress would De
asked for authority to devalue the dol
lar in an attempt TO restore purchasing
power and prices to more normal Levels
The response to this is well known
prices, bank deposits and productive
activity rose rapidly till the middle OF
July. However. bank deposits and the
banking system failed to keep pace
with the industrial recovery and, unoer
the influence of continually declining
dollar. deposits again declined as CAPT
tai was expatriated in an attempt to
make profit on an eventual further ap-
probation in foreign currencieS in terms
of American money.
Reserve Banks Cooperate.
The Federal Reserve banks cooper
ated with the administration in its at
tempt to secure industrial recovery
through moderate expansion OF ther
holdings of Government bonds. Inc
result of this policy was to build up
an increasingly large reserve for the
member banks. which gives them a
powerful incentive to put such reserves
to work by making loans to industry.
That this program was moderately sue
cessful is indicated bv the fact that
the trend of commercial loans since the
middle of March has been upward. How
ever. the commercial loans Of the banks
do not begin to tell the whole story OF
credit expansion during the past year.
The Government, through the Recon-
struction Finance Corporation. has
taken I'D the slack left by the recalci-
trant bankers and financed numerous
projects during the year.
By the end Of August the decline IN
deposits had apparently run its course
and, under the stimulus of more rapid
accumulation Of Government bonds by
the Federal Reserve banks. loans began
to increase somewhat more rapidly. BY
this time production had passed its
far ba rptal sales
expanding-a normal economic adjust
ment between the two phases Of buSl-
ness activity.
It was now apparent that, fundamen-
tally the banking system had been
enormously strengthened by the rise
in the domestic value of gold brought
about by the decline in the value OF
the dollar. Gold reserves of the coun-
try amounted to about $4,000, 100000,
and as this had appreciated about one
third, it was apparent that gold cover
age for the currency in circulation, II
market values we're taken as a basis.
was Approximately 100 per cent With
this situation existing the adminiStra-
ton in what may later be construed
as the first move toward stabilization,
announced a new monetary policy de-
signed to raise prices through the open
market purchases of gold through the
Reconstruction Finance Corporation at
a price to be announced daily
The immediate response was another
decline in bank deposits as a result of
second flight Of capital to other
countries. However, this was short
lived and as soon as it became appar-
ent that the new policy was to be car
ried on conservatively deposits resumed
their normal action.
Many Banks Still Closed.
Il must be recognized that while we
have made considerable progress during
the year in establishing the banking
system on a firmer foundation. much
remains to be done before it can be
considered satisfactory. Many banks
are still closed throughout the country,
tying up deposits of considerable