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October 51, 1956* Chairman Ecdee iauchlin Currie the effect of an increase in bank loans on holdings of Government securities. Enclosed is a brief listing of the main factors bearing on the future movements of bank loans and holdings of Government securities* On balance the probabilities appear to be that the demand for accomodation by customers will not entail much liquidation of Governments* especially if the Treasury does not fund very much of the short-term debt* The most important consideration that points in the opposite direction is the expansion of *A11 other loans* of reporting member banks that has occurred in the past year* I am wondering whether you think it worthwhile to try to get more information on this expansion* Without tasking an elaborate statistical study you could pick up some information by asking reserve banks in those districts in which the major expansion occurred to inquire of a few large member banks what, in general, had been the nature of the increase; how far it arose from refinancing operations and the taking over of existing debtj and how far from financing an actual increase in production and inventories, and how far from financing installment sales* The examiners might also be directed to keep their eyes open and to make inquiries along the same lines* It would be helpful if in the call reports we could get more information on the classification of loans by purpose rather than by form* LBC:em 13 THE EFFECT OF M IHCfiE&SE IH BAHK LQAffG 03 B0LDI3GS OF GQVI-HM£!jT SECPRETISB The expansion in *A11 Other Loans* of member banks which has taken place in the pact year raises the question whether increasing demand© for accommodation by customer** may not result in liquidation of Government securities and pressure on the Government bond market frosa this source* At present excess reserves are large enough to permit demnds for loans to be met without entailing the necessity of liquidating other assets. It is to be expected, however, that we will eventually return to what was the normal situation of no excess reserves that prevailed up to 1932* In this case increased accommodation of custoa~ er& will entail either a total expansion of essets or & liquidation of Government obligations* If it is thought inadvisable to permit an expansion of circulating deposits it would gstill be possible for totel bank assets to increase through an increase in savings deposits end the capital and surplus of bsnks* Whether &uch expansion will be sufficient to supply the requirements of local borrowers depends upon the magnitude of such requirements^ While a definite answer cannot be given, the following observations are pertinent to this que&tion* Xm The cash reserves of American business ae a whole are probably in excess of 19£9# 2» The repugnance of the larger snd financially strong corporations to bank indebtedness noticeable in the was probably intensified by the depression* J 5* Higher margin requirements will act as a check on the expansion of security loans* 4* While real estate loans trill increase it Is to be expected that the bulk of this business will* as heretofore! be handled by aon«*bank lenders • S* With a lower level of call loans than in the *£0fs it is to be expected that banks will rely more heavily on Governments to satisfy their requirements for liquidity. 6* If nAll Other Loans* of member banks regain the level of 1929 this *ould mean an expansion of $6,265 million over the present level* 7. Previous experience in this country* From June 1981 to June 19£5 the index of production rose from 65 to 106 * In the^same period national bank loans other than on securities and real estate declined $607 millionf and holdings of Government bonds increased #570 million• From June 1925 to June 192® the Index of Production rose from 106 to 1£5* *A11 Other Lo^ns* of reporting member banks increased by tip401 million* Member bank holdings of United States Government securities increased hp |S20 B&llion* In the same period the Government debt outstanding decreased by |Sf569 million. In the past year *A11 Other Loans* of reporting member banks have shown a net increase of $701 million* 8* Experience in other countries* Holdings of Loans and Investments by Commercial Banks in Foreign Countries Canada (millions of dollars) Loans Investments England (millions of pounds) Loans Investments Sweden (millions of kronor) Loans Investments %f July $J August jftgg Dec*31 ^951 Deo* 31 2,288 448 1,660 694 962 267 905 297 8*205 595 S*59£ 411 PS5 Dec* 51 ^956 ^ , 069 V 1 * ™ 4/ 850 $J 618 %f 2»76g 648 9« Other factors bearing upon the future movements of bank holdings of Governments include the policy of the Government in retiring the debt and in funding the bhorWterm issues * In general the larger the proportion of short-terra issues the larger will be the proportion Of the total debt held by commercial banks*