Evening star., 1936-08-15
FEDERAL DEFICIT
REMAINS THREAT
Heimann Says New Reserve
Rule Has Not Ended In
fIation Danger.
BY HAROLD b. ROGERS.

BY HAROLD b. ROGERS.
Despite the Federal Reserve Boards
new rule for so per cent increase
in reserve requirements of member
banks, possibilities of uncomfortable
imitation" still continue because of the
deficit in the Government budget,
according to Henry H. Heimann, ex-
ecutive manager of the National Asso-
citation of Credit Men.
The matter of excess reserves" he
says, in his monthly review of busi-
ness, out today. lis, of course, only
one of the factors threatening an un-
comfortable imitation. The continu-
ing deficit in the United States budget
is of equal or greater concern.
Each issue of bonds by the Treas
ury is the equivalent of that amount
of new bank deposits, since the money
raised by the bonds is spent by the
Government and finds its way to
the banks eventually, and thus in
creaSes the credit basis. The rise in
excess reserves in recent years has
been due to this policy, and until
the national budget is brought into
state of balance this tendency will
continue"
Points to New Financing.
Declaring the budget deficit threat
ems the return of complete confidence
in the business world, Heimann de-
clares "thiS incomplete return of con-
fidence is reflected in recent figures
on new financing during the first six
months of 1886"
In announcing its action on eX-
cess reserves the Federal Reserve
Board reiterated its policy favoring
easy money rates. In recent months
new corporate financing for conversion
purposes has continued despite cou-
pons which offer a yield in many
cases of from per cent to 3 q per
cent.
"A recent study by the American
Bankers Association on the matter
of low interest rates came to the
conclusion that the prevailing low
levels are primarily due to the ex-
isting high excess reserves of member
banks and that a contributing factor
operating to keep interest rates low
Is found IN the large volume and
slow turnover of demand deposits in
the bank. The report also emphasized
the need of balanced budget and
refunding of much of the Govern
ment's short-term debt"
Discussed by Ayres.
The new Reserve Board ruling. ef-
&c SC oil
cussed by Col. Leonard P. Ayres,
well-known vice president of the
Cleveland Trust Co., in his business
bulletin, out today. The significance
of this move" he says, lis that it
is the first step in a policy by which
the board aims to regain control over
bank credit, and to be able to check
If necessary any future infationary
expansion of credit.
Under our banking system" he
says. the lending power of bank
depends on the amount of its re-
serves. During the depression, how
ever, bank deposits have grown to be
SO large, and loans have shrunk to
be SO small, that the banks have held
which a great and sudden expansion
of credit might have been based.
The Reserve banks have held large
amounts of Federal securities and it
has always been possible for them to
increase the owned reserves of men,
ber banks by buying more, for the
money they paid for them would find
a. iota hn
member banks, and it has always been
possible for the Reserve banks to de-
crease the owned reserve of member
banks by selling their Federal securi-
ties, for the money paid would leave
the member banks and be held by
the Reserve banks. These dealings
are known as open market operations.
The new regulation has not stiff
9ened interest rates or effected a re-
striction on credit expansion. 1t is
merely an adjustment of a brake
mechanism by which the brake shoes
could, if necessary, be frightened down
against the brake drum. For a long
time past that could not have been
done and it is prudent precaution to
have it done now before any neces-
sity for using the financial brakes has
arisen"
Casualty Firms Gain.
Midyear statements of fire and
casualty insurance companies are
generally showing substantial increases
in surplus and liquidating value and,
in most cases, an increase in premium
reserves, according to Hare's Research
Is Management, Ltd. From December.
1885, to June 30, 1886, the aggregate
surplus of 10 outstanding companies
has increased 112 per cent, and pre-
MUM reserves 1.9 per cent, while the
average increase in liquidating value
is per cent.
Census of business statistics for
1885, now being released in prelim-
mary reports for States, will not only
supply a definite measure of the re-
covery attained in the field of retail
business, but will also indicate sig
niflcant trends which have occurred
in merchandise operations and in the
buying habits of customers, according
to Col. Clarence o. Sheriff., president
Col. Sheriff. is well known in Wash
ington for his prominence as head of
the former Office of Public Buildings
and Public Parks years ago.
Commenting on reports from the
State Of Washington, the first to he
released, Col. Sheriff. said the sales
volume and the tonnage of goods sold
clearly indicates the retail business
has made remarkable recovery in
the last two years.
Recover 20 Per Cent.
Total sales in the State of Wash
tngton. for example, dropped So per
cent between 1929 and 1898, but in
creased AZ per cent between 1888 and
1885, attaining a 10 per cent recovery
OF the volume for 1929
In a depression consumer buying
is restricted. in large measure, to
the essentials of life" Col. Sheriff.
explained. "Luxuries and articles of
adornnoent s1IIrnn in the SaleS totals