Evening star., 1941-01-01
Huge Idle Reserves
Remain Pressing
Problem for 1941
Loan Demand Gains,
But Bond Portfolios
Still Are Heavy
BY III. Mem. BUSH.
Cambride Associates STAFF.

Cambrde Associates STAFF.
Deposits are still increasing. Gold
Is still flowing into the United
States. The Federal Government is
embarked on an enormous deficit
financing program. All of this poses
to bankers the question of how TO
employ profitably and safely the
tremendous volume of loanaele
funds at their disposal.
Two principal factors are work
ing for solution of the problem.
First, the impact of the war and
consequent domestic armament has.
and undoubtedly will continue. to
increase the demand for credit. Sec
ondly the banks themselves have
already found partial solution. at
least, in the establishment of mod
ernized loan activities.
On the other hand, the large vol
ume Of Federal issues and other
high grade bonds held constitute a
source of danger in case of financial
shock which is not compensated for
by the low return provided. Thus
the problem of securing a better
balance between loans and invest
ments, and the profitable invest
ment of now idle funds is the prime
consideration of most bank mana
gers.
OneThird in Governments.
Bank investments in Government
bonds have grown sharply in the
last 10 years. Such investments
now constitute roughly a third of
banking resources. Price levels for
these and other high-grade bonds
are the highest on record, and Yields
are correspondingly low. This sit
uation has been brought about by
the continued ease of money rates.
In view of this, these securities
are vulnerable to sudden shifts in
financial confidence, so that sud-
den drop in principal value of 10
per cent is not impossible for longer
maturltieS.
In the last few years, when de-
clnes approaching this magnitude
have occurred, Government con-
trolls have been powerful enough to
rapidly reverse the trend. 1t is prob
able that if they occur in 1941 they
can again be checked by Federal
action. However, the supply of Gov
ernment securities is constantly in /.
creasing and the law of supply and
demand implies that maintenance of /
high price level may become in
creasingly difficult.
Merchants of Money.
An increasing demand for credit
would, of course. further affect
money rates and high-grade bond /
prices. 1t is this thought that .
moves banking managementS to
watch their bond portfolios closely |
and avoid the dangerous potentiai- !
ties of the longer term issues in so
far as possible. Indeed. more and .
more the sizable bond portfolios are
being regarded as temporary. pend .
ing opportunities to place funds at .
work IN more satisfactory manner.
The prime function of a bank is
to loan money. The banker is in
effect merchant, just as the store
operator is a merchant of goods. In
the 20s it did not require much
effort for the banks to secure busi-
ness, as the demand was constantly
at rate greater than the
supply. In the last 10 years the
exact reverse has been true. and it
has been difficult for management
to adjust itself to sales viewpoint.
With the opening of the present
decade, a change in loaning methods
developed. Bankers began to ap-
proach the problem from a mer-
viewpoint. This is evidenced
by the development Of personal loan
and installment finance depart
ments. With one or two exceptions
these activities have until recently
been confined to specialized loaning
companies. The growth and profit
ableneSS of these concerns bear wit
ness to the amount of business
which the banks have been losing
through sales inertia.
Equipment Loans Sought.
Other opportunities for loan ex-
panslon are enviSaged in the devel-
opment of amortized housing finance
under the auspices of the Federal
Housing Authority. In addition, the
study of long term amortized loans
for plant betterment has been un-
dertaken. Such loans might be
compared to the equipment trust
certificates issued by the railroads
when new rolling stock is bought.
Such loans involve a small down paw
ment, with the balance paid grad
uauy as the equipment is used. This
contrasts with the type of accom-
mediation involving a 60 to 80 dav
renewable line of credit with no
amortization. The latter type was
based on pledge of acceptable COL
lateral, or qualified for by financial
conditions. The more modern type
of loan on the other hand is based .
on savings that it is believed will
accrue to the borrower on the equip
ment of modernization for which |
1t Is to be used
These new style loan departments.
OF course, require additional per-
sonnel and knowledge. However,