Evening star., 1953-08-30
Lesson in Bonkinq

@SSSVH III DuHKtH9
This is with reference to a recent
column by Lowell Mellett about money
left on deposit with banks by the
Treasury. He was critical of the Treas
ury for following this practice, for not
at least demanding interest on the bal
ances and cited Senators Byrd and
Douglas, who had argued that instead
of raising the debt limit above $275 bill
lion, the Treasury had better draw
down the bank balances.
AS for the banks paying interest, at
tention is called to the law enacted by
Congress prohibiting any member of
the Federal Deposit Insurance Corpora
ton from paying interest on demand
balances. The reason for this was that
the F. D. I. c. original law provided
that banks should pay insurance on all
deposits and not just on the amount
insured, which is limited to $4,000 to
any one person or corporation. Elimi-
mating the interest on demand de-
positS was to offset this extra cost. Fur
thermore, it would be uneconomical
for banks to pay interest when the bal
ances remain with them such short
time.
Just where would he have the bal
ances kept? With the Federal Re-
serve Banks? They pay no interest.
Also. the banks must keep 19 per cent
of these balances with the Federal as
reserve on which they get no interest.
If the Treasury took out of the banks a
total Of $5.5 billion on one day, it
would be quite a shock to the whole
Do oil tA
out over period usually no longer than
so days. The money left with the
banks can assist the national economy
by credits to industry and others which
would be available if these deposits
were transferred to the Federal Re
serve in one lump and thus Tightening
money rates.
Banks issue savings bonds for the
Treasury without charge. It is gen.
orally agreed these cost not less than
81 each. The bank of which I am an
officer issues over 5000 a year. The
Treasury balance is its only compensa-
ton. That balance, just prior to the
recent sale of $5.5 billion of new Treas
ury obligations was $65 900. less than
the amount we put in the account each
month from the sale of savings bonds.
When the Treasury offered the new
obligations it was realized that such an
amount could not possibly be raised
from subscriptions other than banks.
I am sure it was with great reluctance
the Treasury included the banks be-
cause Of the realization that it would
add to the money supply. When the
Treasury sells bonds to banks and takes
credit, as the money is spent, it flows
back into the banking system. This does
not occur when individuals, corpora
tions and others subscribe.
1t has been the practice for many
years for the banks to take Subscrip-
tions to new issues and pay the Treas
ury by credit to it's account-at one
time called "War Loan Account" and
now Treasury Tax and Loan Account" "
This account in each bank is secured
by Government bonds.
/ feel sure that if Mr.. Mellett. or the
Senators, realized how short time the
balances stay with the banks, they
would not be much troubled. 1t was
estimated that the proceeds of the re-
cent issue would not remain with the
banks an average of more than 30 days
They surely will not get rich out of it.
Banks redeem savings bonds for which
they get little more than 10 cents each
which is less than the cost, and take the
risk of forgeries, which is considerable.
Altogether as far as my institution is
concerned, we would be very glad not
to have the Treasury account if they
would relieve us of writing bonds. re-
deeming bonds and performing other
services we are asked to render.
suggest that Mr.. Mellett dig deeper
before writing an article of this sort. If
he did, it is reasonable to assume that
he would conclude that it is in the in
terest of the Treasury to use the COM
mercial banking system as the profits
are small, if any, considering the cost
OF services rendered. If there be any
profit, one-half would go back to the
Treasury in the form of income taxes.
Bankers are just businessmen and
not tribe set apart. Certainly the
earnings of banks are not Sucn as to
create big demand for their stocks.
Throughout the country the vast major
ity of bank stocks are today, and have
been. selling below the book value. It is
simply because they are unable to pay
enough to render fair return on the
book value of the stocks. In view of
the criticisms that have been leveled
at them for paying low salaries, GER
tainly it cannot be attributed to over
payment of compensation.
Clarence F. Burton,
President, City Bank Of Washington.