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October IS, 1935
R. & S.
Cr. 10
BUSINESS AND CREDIT COm)ITIONS
General summary
Sustained activity of business at a level near the high point reached at
the beginning of the year is the outstanding fact in the current economic
situation.
The increase over last year has been chiefly in industries producing
durable goods, the low level of activity of which has been the principal characteristic of the depression.
There has been this year, for the first time
since the decline which in this industry began early in 1928, a marked and
sustained increase of residential building—though the volume of construction
is still relatively small.
Greater activity in industry has been accompanied by an advance in the
income both of industrial workers and of farmors, and the distribution of
commodities to consumers also increased.
There has been no evidence of accumu-
lation of stocks of commodities. Wholesale prices of farm products and foods
have continued to advance, but at a slower rate than in 1933 and 193^«
Prices
of most industrial products have shown little change in the past two years.
Notwithstanding tho improvement in business, there is still a large
volume of unemployment and the burden of relief continues to be heavy.
Continued ease in the money mark2t and the accumulation of a vast amount
of idle funds in the hands of investors has been reflected in a revival in
the capital market.
Security flotations ha.vo been in larger volume than in
any year since 1931; for the most part they have been refunding issues reducing
i
c
,
^r
- 2 -
the debt service, particularly of corporations, "but there has also been an
increase in the amount of new money raised to be used in part in liquidation
of bank debt and in part for productive purposes.
Industrial profits have increased, and there has been a sustained advance
in security prices—representing the effect of cash buying by investors.
Bank loans to brokers have not increased and security loans to other borrowers
have declined.
Expansion of total bank loans and investments has been continuous during
the year and has reflected for the most part additional purchases by banks of
United States Government obligations and of securities guaranteed by the
Government. Bank deposits have grown as the result chiefly of gold imports
and disbursements by the Government, and demand deposits of member banks are
at a higher level than at any previous time.
The growth in deposits has been
large enough to meet the increased demands of business and the turnover of
deposits has shown little change.
In recent months disturbed conditions abroad and expectations of a rise
in security prices have resulted in a large flow of capital to this country
and consequent imports of gold.
These imports have been the chief factor in
carrying member bank reserves to a new high level, as shown In the accompanying
chart.
Notwithstanding a considerable increase in legal reserve requirements
consequent upon the increase in deposits and a more than seasonal growth in
the demand for currency arising from the greater volume of trade, excess reserves of member banks Increased further and at $2,900,000,000 are at the
highest point on record.
Immediate prospects in the business situation taken as a whole appear
to be favorable.
r
I
MEMBER BANK RESERVE FUNDS
AND FACTORS OF CHANGE IN THEIR VOLUME
BILLIONS OF DOLLARS
Since January 31,1934
Wednesday figures
BILLIONS OF DOLLARS
Money in Circulation
Member Bank
Reserve Balances
Treasury Cash and
Deposits with F R. Banks
Treasury
National Bank
Currency
Non-member Deposits and
Other Accounts
F. M. A. M. J . J . A.S.O. N.D. J . F M.A.M.J J A S. O N.D.
1934
1935
F M. A. M. J. J. A. S. 0. N. D. J. F. M.A.M.J. J. A. S. 0. N. D.
1934
1935
•I
r
3usiness activity
During the first three quarters of 1935 industrial activity and employment have been maintained at a level higher than in any of the four
preceding years and about half way between the lowest point of the depression
and the 1929 level.
The increase in production over last year, amounting to
about 10 percent, has been largely in durable manufactures, particularly
automobiles, machinery, and steel, v/hile output of nondurable manufactures
in the aggregate has shown a relatively small increase.
Since the beginning of the year, industrial activity has shown less
change than in the corresponding period of any other recent year.
In
September the Board's seasonally adjusted index was at 89 percent of the
1923-1925 average as compared nith a high point of 91 percent in January
and a low point of 85 percent in May.
Industrial prices also have fluctuated
within a narrow range and there has been no general accumulation of stocks
of industrial products such as occurred in the rapid speculative advance in
prices and production during the summer of 1933.
The volume of residential building, which had remained unchanged at exceptionally low levels in 1932, 1933, and 1934, has shown an increase this
year, reflecting improvement both in the real estate situation and in the
mortgage market.
The current level is approximately twice that of last year
and one-fifth that of the peak years 1925 to 1928, Commercial and factory
building has continued at a low level.
There has been less public con-
struction in recent months than a year ago; currsntly, however, a considerable amount of new public work is being undertaken.
Incomes in industrial communities have increased somewhat, as compared
with a year ago, reflecting primarily increased industrial activity. Relief
f
<»
-5-
ft
expenditures by the government have continued at a high level. Factory
pr-rolls for the first three quarters were 10 percent larger, and there
was also an increase in wage pajnnents on the railroads, where employment
declined somewhat but wage rates advanced.
Industrial profits have also been larger than in the corresponding
period of 1934. The largest increases have been in the automobile,
building materials, machinery, and eloctrical equipment industries,
while the profits of public utilities, which had shown a relatively small
decline during the depression* have decreased somewhat further this year.
Agricultural income has been above that of a year ago by about 5
percent, chiefly as a consequence of higher prices for livestock and
livestock products.
Marketings of livestock have been sharply reduced
while crop production has shown a considerable increase over last year,
when drought conditions prevailed.
The voltoca of domestic trade has been somewhat larger than a year
ago, particularly in rural areas.
Purchases of household equipment and
automobiles have shown a substantial growth, and the dollar volume of
sales by department stores has been larger, with the most marked increases over last year reported in recent months.
Although economic activity has increased substantially from the
low levels of the depression, the current level is considerably below
that in 1929 and the volume of unemployment continues high.
The accompanying table shows a comparison of business conditions
in September and the first three quarters of 1935 with conditions in the
years 1929, 1932, 1933 and 1934.
- 6-
BUSINESS CONDITIONS
Index numbers, 1923-1925 = 100
ConstrucDepart- Whole- Retail
Industrial tion con- Factory factory ment
sale
food
employ- payproduction tracts
store
prices
prices
ment
rolls sales
awarded
1/
2/
(value)
1929
119
117
105
109
ill
1932
6U
76
79
2S
25
32
64
69
79
46
U9
27
31
3g
1933
193^
Jan.-Sept,\j
Aug.2/
Sept .^/
S7
P*9
PUi
62
69
67
75
95
65
66
75
102
100
111
Si
6S
IS
SO
122
S2
pS2
70
P7i
79
SI
SI
122
157
124
p.—Preliminary •
1/ 1926 = 100; index of Bureau of Labor Statistics.
2/ 1913 = 100; index of Bureau of Labor Statistics.
2/ Indexes for periods less than a year, except those for wholesale and
retail prices, adjusted for seasonal variation.
I'
Industrial production
Since the middle of 1932 there have been four periods of increased
industrial output, each quite different from the others.
Some of the dif-
ferences are evident on the accompanying chart, which shows the Board!s seasonally adjusted index of industrial production and the production of iron
and steel, automobiles, other durable manufactures, textiles, meatpacking,
other non-durable manufactures, and minerals, all expressed in terms of points
in the total index, so that it is possible to see just how much of any
movement in the total index is accounted for directly by changes in activity in
any of these industries. The indirect effects, such as an increase in the
output of materials owing to an increase in output of finished goods, are
not shown separately.
INDEX OF INDUSTRIAL PRODUCTION
POINTS IN
TOTAL INDEX
ADJUSTED FOR SEASONAL VARIATION, 1923-25 AVERAGE FOR TOTAL MOO
POINTS IN
TOTAL INDEX
100
100
Total
/ \ Indus trial Production
90
\
80
v
70
60
90
A1
80
70
60
50
50
20
A
10
—"\/
20
Iron and Steel
v • ^ \
/ V
J ^—^
10
Automobiles
<^—~^r-—^
0
10
10
'
^^
Other Durable
Manufactures
30
Other Nondurable
Manufactures
20
10
20
20
Minerals
10
10
0
1932
1933
1934
1935
The first of the four advances was in the summer of 1932. It was small
in amount and reflected largely an increase in textile output from an unusually low level. By the following March, at the time of the banking
crisis, production had declined to about the same levol as in the middle of
1932. .
The second advance, stimulated by the reopening of banks, the low level
of stocks of certain commodities, and the prospect of higher costs and higher
prices in many lines, was widespread and exceptionally rapid.
Output of
s^mi-finished products showed the most rapid expansion in this period, and
the index, which is based in largo part on output of such products, advanced
^1 points in four months, from 59 percent of the 1923-1925 average in March
to 100 percent in July.
This advance, partly of a speculative character, was
not sustained, however, and beginning in August there was a general, rapid
decline in output, which by November had brought the index down to 72 percent.
The third advance in the index, to a hi,^h of 86 percent in May
reflected primarily increased output of steel, part of which was purchased
for stock in anticipation of prico advances announced for the third quarter.
Increased automobile production was also a factor in this advance. After
May the index declined rapidly, reflecting chiefly an abrupt decline in
steel production which continued at an exceptionally low level for several
months.
There was also a decline in activity at textile mills while meatpack-
ing showed a marked increase, largely as a consequence of the drought.
The low point of this downward movement in the index of industrial production was reached in September 193^, partly owing to the textile strike in
that month.
- 10 -
Tho fourth advance, from this low point of 71 percent in
September I93H to 91 percent in January 1935 > was general for the industries shown on the chart, oxcopt that in the meatpacking industry
activity showed a rapid decline during this period.
The level of
industrial output reached in January was somewhat higher than that
reached in the spring of 193^ and has been largely maintained.
This
is tho first advance that has not been followed in the immediately
succeeding months by a sharp decline. The lowest index reported so far
this year is 85 percent for May.
The most recent index, for September,
is S9 percent, and thero is no indication of a decline in the immediate
future.
Steel production has boon maintained generally at a level of betwoen
^0 and 50 porcont of capacity and currently is at 52 porcont, reflecting
sustained demand from many sources, 0spectally the automobile and machinery and miscellaneous industries; orders from the railroad and building
industries have continued to be in limited volume. Automobile production,
which had increased from a lot* level of 1/400,000 cars for the whole year of
1932 to 2,800,000
for 193U, has totaled 2,900,000 during the first nine
months of 1935. Output was sharply reduced in September as preparation was
made for new models which are now boirt£ produced in increasing volume.
- 11 -
I if
Lumber output has increased considerably, accompanying an advance in residential building and increased activity in the furniture industry.
Textile
production as a whole has been unusually stable at a level somewhat higher
than was reached at any time during 193^. This higher level, however, has
been due chiefly to unusually large production by the wool industry, partly
offset in the total by a relatively small volume of output in the cotton
textile industry.
At mines output has fluctuated more from month to month this year than
in other recent years on account of uncertainties concerning a possible coal
strike, which finally occurred in September and was settled after a few says.
Employment and payrolls
Total volume of employment is slightly higher than a year ago and substantially above the lowest level of the depression.
It is, however, con-
siderably below the 1929 level and, with a growing number of persons of
working age, the volume of unemployment continues at an unusually high level.
The course of factory employment since 1928 is shown on the accompanying chart with separate lines for employment in the industries producing
durable manufactures, such as iron and steel, automobiles, machinery, lumber,
and furniture, and for employment in the industries producing non-durable
manufactures, such as foods, textiles, and leather products.
adjusted for seasonal variation.
The figures are
2
FACTORY EMPLOYMENT
Adjusted for seasonal variation
MILLIONS OF EMPLOYEES
MILLIONS OF EMPLOYEES
10
8
Total Factory Employment
1928
1929
1930
1931
1932
1933
1934
1935
"
-13-
,
The total number of wage-earners employed at factories in August was
about 6,800,000 as compared with 6,600,000 a year ago, a low of U, 900,000
in the spring of 1933, and a high of 9,000,000 in the middle of 1929. Preliminary figures indicate that in September the number employed showed a
seasonal increase.
In 1929i as in most of the earlier post-war years, the number employed
in the durable group was slightly larger than in other manufacturing industries.
From the high in 1929 to the low point of the depression, the decline
in tho non-durablo- group
was about 1,500,000 persons, while in the durable
group it was about 2,700,000 persons. The subsequent increase reported for
the durable group has been larger than for the non-durable group, amounting
to about 1,100,000 persons as compared with 900,000.
Thig year employment
in both groups has been maintained with little change, with the durable
group generally higher than a year ago.
Detailed comparisons for leading
groups of industries are shovm in the following table.
-14i
FACTORY EMPLOYMENT
January-August 1935
Average
number
of
employees
Change from
year ago
Number of
Percent
employees
Total
6,77+,700
+111,100
+1.7
Durable group
3,024,000
+119,300
+4.1
U45,loo
73S,loo
+35,900
224,100
+15,500
+18,800
+8,600
Automobiles and parts
Machinery
Non-ferrous metals and products
Lumber and products
Iron and steel and products
Transportation equipment, other
than automobiles
Stone, clay, and glass products
Railroad repair shops
Non-durable group 1/
Textile wearing apparel
Paper and printing
Chemical group, except petroleum
refining
Textile fabrics
Leather and products
Petroleum refining
Pood products
Rubber products
Tobacco products
465,900
613, too
+57,500
+8.4
+7.4
+4.2
+1.4
+i,too
255.900
-1.700
-16,700
+1.4
-0.9
-6.1
3.750,700
- g,200
-0.2
446,700
+15,200
+11,600
+3.5
+2,700
+2,900
-2,700
-800
-29,700
-6,000
-6,500
+0.9
+0.3
96, too
185,100
510,900
292,100
1,023,too
287,600
70,900
653.900
108,600
79,300
+2.3
T0.9
-1.1
-+.3
-5.3
-7.5
Includes a few miscellaneous industries not shown soparately.
Employment at mines has fluctuated considerably in recent months, reflecting the threat of a strilce in the bituminous coal industry; the average
for the year to date, however, is about the same as last year.
On railroads
employment has shown a seasonal increase since the beginning of the year,
while in public utilities little change has been reported.
Payrolls at factories for the period from January to September this
year have been about 10 percent larger than a year ago and on the railroads
payrolls have also been larger, partly on account of higher uage rates.
Payrolls at mines and public utilities have shown little change.
The figures
for these four groups of industries are given below; for other groups, such
as trade, constr-action, professional and government service, no satisfactory
data are available,
AVERAGE WEEKLY PAYROLLS IN FOUR GROUPS OF INDUSTRIES
(In millions of dollars per T7eck)
Jan.-Sept.
Jan.-Sept
1935
Total—factories, mines, railroads,
public utilities*
Factories
Durable group
Change
183-9
199.0
+15.1
126.5
+12 .3
+8 . 1
6s!2
13s. 8
66.
72.
12.7
12. k
-
28,0
30. 0
22.9
23. 8
Non-durable group
.2
.Mines
Railroads
Public utilities
•3
+2 .0
+
.9
•Steam railroad repair shops are included in factories and also
in railroads, but the duplication has been eliminated in this
total.
/6
- 16 -
Domestic trade
The total amount of domestic trade has boon larger during the first
throe quarters of 1935 than it was a year ago.
Sales of general merchandise
in rural areas, as reported to the Department of Commerce by mail-order
hour.es and chain stores, have boon substantially larger than in any other
year since 1930*
Department store sales, as measured by the Board's season-
ally adjusted index, have shown, an increase during this year and the average
for the third quarter was SO percent of the 1923-1925 average, as compared
with 75 percent in the third quarter of 193^*
Sales of automobiles showed
a considerable advance in the early part of the year and were well maintained
until September when they declined prior to the introduction of new models.
There has been an increase over a year ago in the sales of chain grocery
stores, owing in part to higher food prices, while in chain variety stores
sales have been in about the same amount as last year.
Foreign trade
In the first 8 months of this year the value of exports was about the
same as in the corresponding period last year while the value of imports was
one-fifth larger.
The excess of exports amounted to $22,000,000 as compared
with $259,000,000 a year ago.
Reflecting chiefly the effects of last summerfs drought, exports of meats,
lard, and grains showed a marked decline from last year and imports of livestock products, grains, and feeds increased.
Exports of cotton showed a
marked decrease and the quantity,of tobacco exported was also considerably
smaller. Exports of automobiles, machinery, and crude petroleum, however,
have been in larger volume than last year.
(0
The increase in imports this year has "been general,with marked increases over a year ago reported for sugar and tin, as well as for meats
and grains.
Imports of crude rubber have "been larger in value but slightly
smaller in volume.
Prices
Since the beginning of the year the general level of wholesale prices
has shovm less change than in the corresponding period of any other year
since 1929. The course of the index has boon gradually upward, with an irregular advance from 7^ percent of the 1926 average in the early part of
January to SI percent currently. As is indicated on the accompanying chart,
movements in the index have been largely dominated by changes in the prices
of farm products and foods, while prices of other commodities as a group
have shown little change from the level reached in the autumn of 1933
maintained throughout 193^ •
18
WHOLESALE PRICES
PER CENT
PER CENT
1926 average = 100
11 O
110
1OO
100
90
90
80
80
Other
-'
1
Commodities,/
70
70
60
60
50
50
40
40
3O
30
1932
1933
1934
1935
- 19 • -
The principal changes in prices of fana products and foods
have been narked increases in the prices of livestock and. livestock products, a rapid decline in the prices of grains other
than wheat, and a smaller decrease in the price of cotton. Wheat
prices declined in the early part of the year but from the end of
June to the first week of October they advanced rapidly, and although they have declined somewhat since then, they are now higher
them at the beginning of the year.
Prices of sugar have also
shown a considerable increase.
Trr
hile other commodities as a group have shown little change,
there have been marked movements in the prices of several individual
commodities.
Since last spring prices of hides ind leather, silk,
textile products, and scrap steel have advanced, and since summer
nonferrous
metals have ?,\ao increased.
Prices of tires and tubes
and. crude petroleum have shovn declines during the year.
Retail prices of foods advanced considerably during the early
months of the year, reflecting chiefly a sharp rise in meat prices.
Since April there has been little nob change in food prices and at
the present ti:no they are ipproxinately 6 percent higher than they
were a year ago.
Profits ana dividends
Industrial profits, as indicated by reports of large corporations,
were somewhat larger in "both the first and second quarters of 1335 than
In the corresponding periods of last year. Automobiles, "building materials,
machinery, and electrical equipment were among the industries showing the
most marked increases. Results for the third quarter are not yet available,
but knoTm developments indicate that profits were above those of the previous year.
Since 1932> when industrial corporations wore generally operat-
ing at a loss, profits have recovered substantially, but their current
volume is still only about one-third of that attained in 1929*
During the first half of 1935 profits reported by public utility
companies were somewhat below those of the previous year.
Since the re-
cession in this field, however, was much less than for industry generally,
profits of utilities are almost two-thirds as high as the best levels
reached a few years ago. Railroad companies as a group failed to earn
their fixed charges during the first half of !93r>> as in other recent
year s.
Dividend declaration* for a large group of corporations during the
jfivsti aino month? of the p«ap a,s apupilod by the Now York Timos agc*O£ftt«4
$2,000,000,000, an increaee of about $100,^00,000 over the -orevious yoar.
Several of the largest banks in Hew York City have recently reduced dividends because of low average yields on available funds.
Member bank deposits
Deposits at member banks have continued to show a ra'oid growth during
1935* reflecting principally the influence of gold imports and cf disbursements
- 21 -
by the Government of funds raised through the sale of obligations to the banks.
The following table shows for recent years the various types of deposits
at all member banks. On June 29, 1935» adjusted demand deposits, which
exclude United States Government deposits, interbank balances, and reported
"float," amounted to $17,530,000,000, the largest amount ever reported.
Deposits at nonmember banks, however, and at all banks continued below
their previous peak.
Time deposits at member banks, excluding those of
banks and the Postal Savings System, increased in the first half of this
year and at $9,S9O,OOO,OOO were $1,700,000,000 larger than two years
earlier, but considerably smaller than in the period from 1928 to 1931•
The recent decline in Postal Savings deposits at "banks reflects the direct
investment of funds by the Postal.Savings System; the amount of deposits
held by the public in Postal Savings accounts has shown little change since
1933•
Tho continuous growth in interbank balances, which are now the
largest on record, reflects an increase in idle funds held "by banks.
- 22 DEPOSITS AT ALL MEMBER BASKS
017 SELECTED CALL DATES
(in millions of dollars)
Adjusted
demand*
Time
(excluding
Postal
Savings)
United
States
Government
Postal
Savings
Inter
"bank
1929 June 29
16,32U
13,210
34S
115
3,766
1933 June 30
12,089
8,192
8O0
188
3,3^0
193^ June 30
1*. 261
9,226
1, 65S
585
^,397
Dec. 31
15,686
9,^56
1, 636
H52
U.9O5
1935 June 29
17,530
3,8,8
779
307
5,10*2
* Demand deposits, other than those of banks and the United
States Government, plus certified and officers' checks, cash
letters of credit and travelers1 chocks, and due to Federal
Reserve "banks (deferred credits), minus cash Items reported
as on hand and in orocess of collection.
That the grov:th of deposits has continued since Juno, although at a
somewhat slower rate than in the second quarter of this year, Is indicated
by figures for weekly reporting member bank1.: in 91 leading cities, shown
on the chart. Adjusted demand deposit:;, at these banks increased "by over
$200,000,000 between June 26 and October 9» while time deposits showed a
small increase, notwithstanding a decrease in Postal Savings deposits,
which are included in the figures shown. Balances 01 domestic banks continued to increase, and there has also been some growth in recent weeks
in deposits of foreign banks, reflecting the movement of short-term funds
from abroad.
I
I
MEMBER BANKS IN LEADING CITIES
DEPOSITS AND LOANS AND INVESTMENTS
Since Sept. 5,1934
BILLIONS OF DOLLARS
Wednesday figures
13
BILLIONS OF DOLLARS
20
Total Loans and Investments
Adjusted
Demand Deposits
it
19
18
U.S.Gov't.
Direct Obligations
Balances of
Banks in U. S.
Loans on Securities
to Customers
Loans on Real Estate
Acceptances &
Commercial Paper
S. 0 N. D.| J. F. M. A. M. J. J- A. 3. 0. N. D.
1934
1935
S. 0. N. D. J. F. M. A. M. J. J. A.
1934
1935
S 0. N. D.
Bank debits and turnover of deposits
Reflecting an increased volume of financial and other business transactions, the amount of debits to depositors' accounts at banks has been
larger in 1935 than in any of the three previous years. At banks in 1^0
cities outside of New York debits in the first three quarters of this
year were 13 percent larger than in the same period of last year.
In New
York City, where debits are to a considerable extent affected by speculative stock-market activity, the increase amounted to 6 percent.
The increase in debits for the country as a whole has been somewhat
slower than the growth of deposits, and therfore the rate of deposit turnover has decreased slightly.
Member bank loans and investments
Loans and investments of member banks have increased this year by a
somewhat smaller amount than in the same period last year.
This difference
has reflected in large part the smaller volume of borrowing by the United
States Government and its agencies this year as compared with last. Another
factor has been the retirement
circulation privilege.
in- . July and August of bonds bearing the
Holdings of direct obligations of the United States
Government by all r.er/ber banks chov/ed little change in the first half of
the year, while those of weekly reporting member banks in leading cities,
as indicated on the chart prm-iorsly shown, have increased by about
$200,000,000 since June. Additional securities purchased have exceeded
in amount the circulation bonds retired.
Obligations fully guaranteed by the United States Government increased
by $570,000,000 at all member banks in the first half of the year and by
$lU0,000,000 at weekly reporting banks subsequently.
Digitized for securities
FRASER
increased
by a somewhat smaller amount.
Holdings of other
Total loans of member banks declined in the first half of the year,
but since the end of July loans of weekly reporting banks have increased
somewhat.
Loans on securities to customers continued to decline, -r.hile other
customers1 loans showed seasonal increases in the spring and again in
recent weeks. Loans to brokers and dealers in securities, which are discussed more fully in a subsequent section, fluctuated within a relatively
small range, reflecting principally operations of dealers in Government
securities.
Money ratesraid"bond yields
Short-tem money rates 'nave continued at low levels during 1935• with
rates on open-market commercial paper at j/h of one percent since January,
those on call and time loans on the New York Stock Exchange at l/U of one
percent since April, and rates on acceptances at l/S of one percent throughout the year. Yields on 9-month Treasury bills, which declined in the
first half year to .05 of one percent in July, have recently been between
.20 and . o
°f
or e
t percent.
Rates charged on prime loans to customers by bonks have shown a further
slow decline during the yonr. Rates at NOT? York City banks now average
less than 2 3/^ percent; those in other northern and eastern cities, 3 3/^"
percent; and those in southern and western cities, c.bout h l/2 percent.
Yields on outstrjiding Treasury bonds continued to decline during the
first half of the ye~x but rose somewhat in August and September as a
consequence of declines in prices. Yields on high-grade corporate bonds
have beer, relatively stable at a low lovel since early in the ye.ir.
- 26 -
Prices and security loans
There has "been a substantial increase in security prices and in st©ck
r'-.t activity during recent months, reflecting for the most part cash
haoea "by investors. The following chart "brings out the fact that this
•'•'••': In prices of securities has not "been accompanied "by an increase in
'-•••'• <r\ fcy l o a n s .
•
SECURITY LOANS AND STOCK PRICES
BILLIONS OF DOLLARS
Wednesday figures
BILLIONS OF DOLLARS
LOANS ON SECURITIES
BY REPORTING MEMBER BANKS
Total
Loans on Securities
Loans to Borrowers
other than Brokers
and Dealers
Loans to
Brokers and Dealers
0
0
PER CENT
PER CENT
120
120
STOCK PRICES
421 Common Stocks
( 1926 - 100 )
A
80
40
V
80
J
40
0
0
1932
1933
1934
1935
~ 28 -
The average increase in stock prices since last March has exceeded
35 percent, according to the most comprehensive available index, while
the security loans of the weekly reporting member banks have shown little
change, A small increase in their loans to brokers and dealers in securities has "been offset "by a decrease in their security loans to other customers .
It is an unprecedented development for a rise of 35 percent in stock
prices in a short period of time not to "be accompanied "by an increase in
the amount of "bank credit used for Carrying securities.
This unusual con-
dition is due in part to the abundance of funds in the hands of investors
and in part to the effects of the Board's Regulation T, which limits withdrawals of cash from margin accounts for the purpose of realizing profits
from a rise in stock prices, and thereby reduce:; the need of "borrowing "by
"brokers.
A somewhat paradoxical situation arises out of the nature of the formula
for determining margin requirements stated ("but not prescribed) in the law
and adopted by the Board.
The formula provides that a loan on a security
must not "be greater than whichever is the higher of:
(1) 55 P c r centum of the current market price of the
security, or
(2) 100 por centum of the lowest market price of the
security during the preceding thirty-six calendar months,
hut not more than 75 F e r centum of the current market price.
The theory on which this formula was based wan to provide for a constant increase of restraining influences as the prices of stocks advanced
further and further above their lows.
The way the formula works out in
practice is not entirely consistent with thin theory. Up to the point
- 2° -
when the price of a stock rises to 133 porcent of its three-year low it is
permissible to "borrow as much as 75 percent of its market price and an increase in price can result in pyramiding of profits. From that point until
the price reaches 182 percent of its low, the amount that can "be "borrowed
remains constant at 100 percent of the low price
During that period the
percentage of the margin to the permissible loan increases, but the actual
amount that can be borrowed remains unchanged and, therefore, no pyramiding
is possible.
When the price of the security gets above 182 percent of its
low, the formula results in a constant Us percent margin requirement.
This
is the highest proportionate margin provided for in the formula, but since
every increase of $1.00 in the price of the stock from that point permits
an increase of 55 cents in the amount that can be borrowed on it, it becomes possible once more to pyramid profits arising from price advances.
In thin way the formula, though providing a higher margin requirement for
stocks that have advanced rapidly, results in removal of the anti-pyramiding restraint when the stocks have advanced beyond 132 percent of their lows
At the present time stocks in which two-thirds of the trading is done,
including many market leaders, have emerged from the anti—pyramiding zone
and, though subject to the U5 percent margin requirement, will afford
opportunities for pyramiding profits in the event of further advances in
prices.
The course of the market in the immediate future requires close
observation to determine whether and when a change in the formula or
in the level of required margins shall become desirable.
•4
- 30 Oapital issues
The supply of funds seeking investment and the low level of
money rates brought about a revival of the capital markets "beginning early in 1935*
^ e w issues, particularly for refunding
purposes, were offered in increased volume in March and have
continued to come into the market in a volume substantially
above that of recent years. Total issues increased from $lHOt000,000 in January and $100,000,000 in February to $290,000,000
in March,
month.
Since then they have averaged about $500,000,000 a
This compares with average issues of $1^0,000,000 a
month during the years 1932-1934 and of $7^0,000,000 a month
during the period 1925-1930,
Capital issues for the period January 1—September 30>
1935,, totaled $3,530,000,000, including $2,560,000,000 for refunding existing securities and $97O»OOO|OOO for raising new
capital to be used in part in liquidation of bank loans and
in part to improve or expand plant and equipment.
The increased flow of new securities into the capital market
during 1935 ^ a s been chiefly for the purpose of reducing interest
charges on existing debt. ITcarly three-fourths of the securities
were offered to refund outstanding securities into issues bearing
lower coupon rates. In fact the total issued fcr refunding purposes during this nine-month • period exceeds the amount of such
issues during any post-war year. Refunding issues of the farm
- 31 -
loan and Government credit agencies totaled $865,000,000, inof
eluding offerings to redeem $400,000,000|Federal land bank bonds
and $325,000,000 of Home Owners1 Lean Corporation bonds guaranteed
by the United States as to interest. Public utility companies
were the next most important group participating in refunding operations.
They issued $7^0,000,000 for refunding purposes, in-
cluding twelve issues varying in amount from $30,000,000 to $70,000,000 each and aggregating $530,000,000.
Corporate is3ues have become a more important factor in the
capital market in 1935 than in any year since 193^«
Total issues
by corporations in the period January 1—September 30 were $196OO,000,000, including $1,370,000,000 for refunding purposes and $230,000,000 for new capital. In addition to the refunding issues offered by public utility companies, which h?.ve already been mentioned, $120,000,000 were offered for this purpose by railroads,
$340,000,000 by various manufacturing companies, and $110,000,000
by companies producing and refining oil. Corporate issues to raise
new capital averaged $35,000,000 a month during the period April 1—
September 30, which is in excess of average monthly issues for such
purposes in any year since 1931*
Stock-:, preferred and common,
have been issued to only a small degree. Nearly three-fourths of
the issues for new capital have been in the form of long-term bonds
and notes.
31
)
Treasury finance
During the period July 1 to September 50, 1935, Treasury expenditures, excluding debt retirement, wore &1,700,000,000, receipts totaled 01?000,000,000, and the public debt increased by
C700,000,000.
On the basic of revised budget estimates, included in a recent statement by the President, the deficit (excluding debt retirement) for the fiscal year ending Juno 30, 1956, is expected to
be about $2,700,000,000, as compared v.'ith a deficit of '.^,000,000,000 in the fiscal year 1935. Whereas during the fiscal year 1935
the Treasury met a large portion of its deficit by drawing on its
previously accumulated general fund balance and the public debt
showed an increase of only $1,650,000,000, it is anticipated that
during the current fiscal year the deficit viJ.l be met principally
by borrowing and the public debt will increase by §2,600,000,000.
During the current calendar yea?? the Treasury's refunding program has included about f"> 5,700,000,000 of its bonded debt called for
redemption.
The retired issues include '-I,870,000,000 of 4th Liberty
Loan bonds on April 15, the remaining $1,250,000,000 of 4th Liberty
bonds on October 15, 01,930,000,000 of let Liberty bond;: on June 15,
^600,000,000 of Consols on July 1 and §75,000,000 of Panama Canal
bonds on August 1.
About $4,£00,000,000 of this bonded debt was
retired by exchange offerings; the new issues included $2,510,000,000 of 2 7/8 percent 20-P.5 year bonds, £570,000,000 of 2 3/4 percent 10-12 year bonds, i:"C60,000,000 of 1 5/8 percent 5-year Treasury
notes, and '-"430,000,000 of 1 1/2 percent 5 l/2 year Trer.nury note;;.
- 33 -
With the redemption of the remaining 4th Libertier on October
15 the Treasury completed the refunding program which was begun in
October 1933 with the first call of the 4th Liberties. Under this
program about $8,875,000,000 of bonds have been retired, including
all remaining war bonds and practically all pre-war bonds. Redemption of about $6,900,000,000 of these bonds v;as made through exchange offerings of notes and bonds carrying lower interest rates
and with varying periods to maturity and about ^1,900,000,000 have
been redeemed in cash or are Bubjoct to cash redemption.
The effect
of the exchanges was to reduce the interest charges on that part of
the redeemed debt by about 0100,000,000 per annum.
"
@FedFRASER