Evening star., 1941-07-14
Arms Needs Absorb
Billions Of Huge
Bank Reserves
Big Lending Increase
Breaks StuIemote Of
Last DECIDE
BY FRANK MaeMILLEN,

and agriculture-mostly to war
spurred industry-about billion
and q half dollars more than at this
time a year ago and the implica-
tions for the Nations economy are
enormous, representing perhaps the
turning point in the change-ovel
TO a war-geared economy, banking
experts said today.
For, bankmen pointed out, thi,
eountry's business is done pri.
marily with bank deposits-checl
money-and every dollar a bank
lends becomes a dollar of deposits
Of which, roughly. 80 cents can be
reloaned to another borrower.
The balance of 20 cents is the
banks reserve against deposits. To
put 1t simply, few of us, either cor
porations or individuals, ever take
out OF the bank at one clip more
than 20 per cent Of our balance, 50
that the bank lends the balance Of
20 per cent to other borrowers.
But this means that bank bor-
rowing begets further bank borrow
ting, for 1t literally provides, when
ever any one borrows. additional
funds which the bank can lend to
some one else.
The country has gone through
more than a decade in which the
bulk OF bank depositors' money has
been invested primarily in United
States Government securities.
Uncertainty Blamed.
This was because business as 4
whole. most bankers thought. was
uncertain, and they found govern
ments," the classic risk-free employ
ment for idle funds. most adaptable
for their needs despite the low in
terest rae obtainable from them.
Yet in the past wear bankers have
gone back to pouring your bank de-
posits and mine into industry. The
total now is about $500 900 900, an
increase OF $l,457 900, 900, and most
Of the increase has come since late
September. when the arms drive
began to develop momentum.
This does not mean that banks
have slowed down as BUYERS OF Gov
eminent bonds. In fact. they have
bought somewhat more Govern
ments in the past year than they
have lent to industry.
Yet the very increase in what
bankers are shellins out to industry
10 enable 1t to meet enormously ex-
panded defense requirements has
raised the question in many quarters
as to what happens now in the mar
ket for Government bonds.
Because the obligations OF the
Treasury have been in abnormal
demand for long time, their prices
have risen to a point where. most
bond men feel. they are somewhat
out of line with what might be re-
garded as good balance as between
price and yield
Obligations of the Government
due in few months are at a price
which yields the buyer as little as
IL OF l per cent, the bonds with
the longest maturity giving a return
Of about 215 per cent.
Yet. experts said today, the situa-
ton shows little sign of immediate
change. despite the implications Of
the greatly increased employment
Of bank money in industrial loans.
Future Debated.
What happens if these loans con-
tinue to expand, however, was the
subject of intensified discussion in
Wall Street, banking and bond
quarters said.
They pointed out the price for
Government securities. or. as one
observer put it. the rock bottom
price of lending money" was a
basic, il not the primary. cost under
living all other kinds of costs. such
as raw materials. wages and living
expenses.
That is the reason. bankers said.
that so much attention is concen-
trated on the course of the Gov
ernment bond market now.
Many OF these men believe that
. lowering of the price of Govern
ment bonds. or conversely. q rise In
the price of lending money. may
prove the tipof1 in the final change
over to an economy where the de-
mands of industry for funds TO be
spent in the defense effort have
finally Cancelled out the decade
long lag in lending for production.
Key to the Government attitude
toward this developing situation.
which fnanciers agree is crucial in
the handling of the defense effort.
Is the stepped-up drive to sell Gov
ernment securities to individuals in
the form of the new defense stamps
and small-denomination bonds.
Small Buyer Courted.
Washington is anxious to sell
direct TO the ultimate small inves-
tor BY this course the little man
defers his expenditures as con-
sumner to take his place as a cred
itor, and so does not buy automo-
biles. homes and gadgets which
might take up productive capacity
better used for defense needs.
At the same time. by selling bonds
10 him. the Government avoids the
necessity of borrowing from banks.
where the borrowing Of every dol
lar leaves 80 cents balance to be re-
lent and so tends to create what
money men call credit imitation"
Mariner S Eccles. chairman Of
the Federal Reserve Board. in sug-
eesting recently that one approach
to the problem was to cut the re-
lending power Of banks to some
lower figure than the present 80
cents on the dollar-60 or 10 cents
has been mentioned elsewhere as a
possibility-said:
This would diminish the pres
sure on banks to find outlets for
their funds in Government securi-
Ties and would facilitate the plac-
ing Of a larger part Of the new
issues with non banking investors"
All n>~I:~