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how liquid are the banks?
third district farmers have a better year
After nearly a year o f recession,
we have encountered a new upswing
in the demand fo r credit . At the same
time money has been getting tighter.
How readily banks can meet the
needs o f customers in the coming
months depends partly on the
answer to the question —
HOW LIQUID ARE THE BAN KS?
Hundreds of years ago some obscure goldsmith,
whose name history has denied us, made a
remarkable discovery. He found that he did not
always have to keep on hand the entire amount
of gold his customers deposited with him for safe
keeping. He could lend some out to other cus
tomers who wanted to borrow gold and were
willing to pay for the convenience.
So came the dawn of modern, commercial
banking. And ever since, the goldsmith’s bankerdescendants have wrestled with the problem of
how much to lend out and how much to keep on
hand.
The banker today divides the funds at his dis
posal between high-earning assets and other
assets, typically called liquid assets. Earning
assets cannot be conveniently turned into cash
at all times. Liquid assets earn little or no income
but can be quickly converted into cash with little
risk of loss.
The banker must strike a balance between cur
rent income and liquidity. One financial writer
put it to an audience of bankers this way: If you
have nothing but liquid assets, you will not eat;
if you have nothing but earning assets, you will
not sleep.1
How a bank divides its funds for income and
liquidity is clearly important to depositors and
stockholders. It is also important to borrowers.
Individuals, businesses, and governments create
the assets banks hold. Their access to bank credit
depends on the kind of assets they provide. In
return for bank credit, some—such as the Federal
Government—offer highly liquid assets; others—
for instance certain businesses—offer high-earn
ing assets. The way banks wish to divide their
funds between earning and liquid assets greatly
influences the way bank credit is distributed.
1 Let us hasten to add, however, that earning assets often pro
vide some liquidity, while liquid assets frequently provide some
earnings. The balance a banker achieves is part o f his larger prob
lem o f managing all his assets.
b usin ess re v ie w
The Federal Reserve is also concerned with the
kinds of assets bankers want to hold. When banks
have only small quantities of liquid assets, bank
ers are likely to be anxious to increase their hold
ings and may be reluctant to make long-term
loans. If, at the same time, the economy is recov
ering from a recession and there is still a good
deal of unemployment, their demand for liquid
assets may slow down the revival of private
expenditures and hamper economic recovery.
When banks have large amounts of liquid
assets, bankers are likely to feel that they can
sacrifice some liquidity for higher earnings. They
may sell short-term Government securities and,
with the new funds, make long-term loans. If, at
the same time, the economy is booming and
resources are fully employed, this shift of funds
from purchasers of Government securities through
banks to borrowers is likely to increase expendi
tures, particularly for capital goods, and promote
inflation.
A policy to maintain “prosperity without infla
tion” must take account of bank liquidity.
LIQ U ID ITY IN TRA N SITIO N
Bank liquidity is important, then, to bank cus
tomers, bank stockholders, and the Federal
Reserve. But if you ask an individual banker
about liquidity, chances are he won’t say any
thing for a moment or two. He’ll probably sit
back in his chair and briefly recall, in his mind’s
eye, the tiny long-ago sights and sounds of anger,
remorse, frustration, and despair that attended
the Great Bull Market Crash of 1929 and the
Bank Holiday of 1933. To many a modern-day
banker, this dark corner in American history still
symbolizes the terrifying importance of having
liquidity.
But a lot of water has gone over the dam since
1933. Economic conditions have changed a good
deal; we have some new and helpful insights into
the way the economy functions; we think differ
ently about the age-old concept of liquidity; we
have developed some new practices and policies
for maintaining bank liquidity. These changes
have gone a long way to reduce the chances for
another 1929-1933.
Commercial loans and marketable
securities
It wasn’t many years ago that bankers and econo
mists considered the short-term commercial loan
to carry inventories as the ideal bank asset; it
was supposed to return in cash as inventories
were sold within the span of several months; it
was “self-liquidating.”
Since making a loan creates new bank money
(a checking deposit) and repaying a loan de
stroys it, economists reasoned, the money supply
would pulsate with the ebb and flow of economic
activity; there would never be too much nor too
little money but only enough to accommodate the
legitimate needs of trade and lubricate man’s
“natural instinct to truck and barter.”
There was, however, a hole in the hypothesis.
In hard times, bankers usually pulled in their
horns. They were anxious to have borrowers
repay their loans, and they were understandably
cautious about extending new credit. But as the
money supply contracted, prices typically fell.
Borrowers had difficulty selling their inventories
and repaying their loans. The entire economy
spiraled into a whirlpool of liquidation and crises.
In the 1920’s, with the growing importance of
stock exchanges and with a rapid industrial ex
pansion, bankers began to think of certain non
commercial loans and some investments as being
highly liquid. A bond that is easily sold, they
argued, is just as liquid as a commercial loan.
But in the depression that followed, the collapse
3
THE BANKER CALLS IT LIQUIDITY
Like "blue chip" and "red ink," liquidity is a
metaphor. It sets a standard— the easy flow
of a liquid— against which the flow of an
asset into cash is compared. In so doing, it
describes a quality possessed by all assets
to some degree and by some assets to a
great degree.
An asset is liquid to the extent it can be
turned into cash without loss or delay. Be
tween a completely liquid asset (like cash)
and a highly frozen asset (like a bank build
ing), there are numerous classes of assets
(Government bonds, commercial loans,
loans to brokers, etc.) with varying degrees
of liquidity.
The liquidity of an asset depends primar
ily on its marketability, maturity, and qual
ity. If there is a well established market for
a particular asset, it can be sold quickly. If
the quality of an asset is high, the risk of loss
at maturity will be correspondingly low. If
the maturity of an asset is brief, its market
value cannot fluctuate widely prior to ma
turity. Bankers think of an assef that has all
these complementary characteristics of
liquidity as a close substitute fo r cash.
The liquidity of a bank is something else
again. It depends not only on the amounts
of liquid assets the bank holds, but also on
the demands fo r funds the bank must meet.
A banker, in appraising his liquidity, must
relate the supply of liquidity in his assets to
the demands fo r liquidity by depositors and
borrowers.
If the banker thinks there is a good
chance that large amounts of deposits will
suddenly be lost, he will hold large amounts
of liquid assets. Time deposits are usually
not drawn down as suddenly as demand
deposits, but some demand deposits are
more stable than others. Large deposits
held by other banks, Government depart
ments, or corporations are often drawn
down quickly and without warning. Small
deposits held by individuals do not normally
fluctuate as widely or abruptly.
A banker must also try to anticipate the
level of economic activity in the community
he serves. This, in large measure, will deter
mine the demand fo r loans he will be called
upon to satisfy.
Bank liquidity is easier to define than
determine. W e cannot really compare the
liquidities of different assets since they are
based on different degrees of marketability
and quality and different maturities. W e
can no more add together the amounts of
liquidity in a Government security and a
commercial loan than we can apples and
oranges. As a result, we cannot arrive at a
figure or construct an index depicting the
over-all level of bank liquidity. Sometimes,
because bank holdings of both liquid and
earning assets are changing in the same
direction, we cannot easily tell whether bank
liquidity is moving up or down.
But bankers make judgments everyday
about their liquidity. They use certain ratios,
like "loans to deposits" and "liquid assets to
total assets" to obtain a rough idea of
where they stand. It is their idea as to their
own liquidity that will, of course, heavily
influence their loan and investment policies.
The Federal Reserve must make judg
ments as to how bank liquidity will affect
bank policy. The Federal Reserve is the ulti
mate source of liquidity fo r the entire bank
ing system. By selling and buying in the
Government securities market, through its
policies at its discount windows, and by
adjusting legal reserve requirements it can
either increase or decrease the excess re
serves of banks. In combatting inflation and
recession, the Federal Reserve is concerned
with bank liquidity and the kinds of assets
bankers are anxious to purchase.
b usin ess re v ie w
of markets for goods and securities grimly re
duced the value of many assets bankers had
believed liquid, and transferred them to the deep
freeze; it destroyed the value of others com
pletely. Many banks faced not only illiquidity but
insolvency.
New demands fo r credit
Since the depression, changing credit demands by
the Federal Government, industry, and consumers
have had a major impact on the kinds of assets
banks hold and, therefore, their liquidity. Today
“banks depend for liquidity,” the American
Bankers Association tells us, “mainly on their
secondary reserves of short-dated, marketable
Governments.” These include Treasury bills, cer
tificates, notes, and bonds “maturing within a
year or so.”2
Bankers can turn these Government obligations
into cash within relatively short periods by sim
ply allowing them to “run-off.” Moreover,
Governments are the highest quality securities
available. They are backed by the constitutional
powers of the Federal Government to tax and
regulate money. They have a broad and imme
diate market; bankers can, therefore, easily sell
them, at most times, to other investors.
Widespread use of the short-term Government
as the chief repository of bank liquidity would
have been impossible in the 1920’s when Secre
tary Mellon was busily retiring the national debt.
A depression, a hot war, and a cold war, however,
diverted an increasing volume of bank credit to
the Federal Government and channeled increas
ing quantities of Government securities back to
banks.
It looked for a while, in fact, as though Govern
ments would become the one and only asset held
by banks. But after World War II, banks were
able to reduce holdings of Governments and loans
increased. “We are back in the banking busi
ness,” exclaimed one banker, “thank Heaven!”
The banking business of the 1950’s, however,
was not the banking business of the early 1900’s.
Borrowers wanted different kinds of loans. Con
sumers wanted credit to buy durable goods.
Industry wanted long-term credit for investment.
Bankers generally feel that the new kinds of
loans they have extended possess substantial
liquidity. Since consumer loans are usually paid
back in installments and term loans are typically
amortized, bankers reason that these assets
regardless of their maturities are similar to short
term commercial loans in that they also supply a
regular inflow of funds.
THE LOAN-DEPOSIT RATIO:
A MIRROR OF CHANGE
The fluctuations of this rough indicator of bank
liquidity reflect the changing importance of different
assets that member banks have held over the years.
The ratio was high when the short-term commercial
loan was the chief bank asset. It fell sharply when
government security holdings mounted during the
Depression and World War II. It has been climbing
with the expansion of consumer, term and other loans
in the post-war period.
2 American Bankers Association, "Th e Problems of Commercial
Bank Liq u id ity , 1957."
5
b usin ess re v ie w
This is one reason why bankers are less con
cerned than they otherwise might be by the way
in which their loan-deposit ratio has risen since
the end of World War II. Moreover, despite the
increase of recent years, this ratio is nowhere
near as high as it was before the depression. Also,
since the beginning of World War II, time de
posits and small deposit accounts in the hands
of individuals—not generally subject to abrupt
withdrawals—have been increasing. The growth
of these deposits tends to reduce the amount of
liquid assets banks have to hold.
Role of the Federal Government
and the Federal Reserve
Perhaps the biggest improvement in bank liquid
ity since the 1930’s, however, has stemmed from
new insights and a changing outlook. We have a
better understanding of how the banking system
and the economy function and have revised our
view of Government’s role in the economy.
We know now that if the Federal Government
spends when most people are cutting back,
reduces taxes, and in other ways puts purchasing
power into the hands of consumers and investors,
it can mitigate an economic crisis and modify
the needs of depositors to draw down their depos
its. Also, we have seen the FDIC, by insuring
deposits, quiet the fears of depositors which, in
the past, moved them en masse to demand their
funds. In these ways the peak-load demands upon
bank liquidity have been reduced.
We have also improved the ability of banks to
meet demands in troubled times. The Federal
Reserve, by buying Government securities in the
open market, making loans to member banks,
and reducing reserve requirements, can supply
the banking system with new funds. (The Federal
Reserve can work the other side of the street also.
It can restrict the expansion of bank funds in
6
inflationary times.) The Federal Reserve is the
well-spring of liquidity.
These changes have improved the over-all
liquidity position of the banking system and, by
so doing, helped the banker. But they have by no
means completely eliminated his problem. Some
industries, because of a newly developed tech
nology, may suddenly decline; banks and com
munities depending on such industries may
suddenly lose deposits. Some regions of the coun
try may unexpectedly begin to develop faster than
other regions; banks in the slower developing
communities may lose deposits to banks in
the faster growing regions. Likewise, the demand
for loans in some communities, some regions, or
following a recession throughout the country,
may rise dramatically. Unforeseen developments
like these can put individual banks under a great
deal of pressure for indefinite periods without in
any way jeopardizing the liquidity of the entire
banking system.
BANK LIQ U ID ITY IN RECENT YEARS
This long look at bank liquidity reveals how the
concept and practices have changed with the
changing times; and it calls attention to what we
consider today in deciding how liquid the banks
are. Now, let’s take a closer look at recent
developments.
In prosperity: 1955-1957
In 1953 and through part of 1954 the economy
stumbled through a mild recession. But by the
summer of 1955, business and consumer spend
ing had been rising for about a year and so had
bank loans. As a vigorous demand for loan funds
continued to press against a limited supply of
bank reserves, credit became tight. It remained
tight until the latter part of 1957 when business
slowed down and Federal Reserve policy changed.
b usin ess re v ie w
Banks financed a very rapid loan expansion dur
ing the tight money period partly by selling
Government securities. At the same time mutual
savings banks, insurance companies, and business
corporations also were obtaining funds for invest
ment by reducing their holdings of Government
securities. A part of the reduction came about
through a decline in the national debt. But most
of it can be accounted for in increased holdings
of Governments by Federal agencies and trust
funds, state and local governments, individuals
and other miscellaneous investors.
LOAN MATURITIES LENGTHENED
AS THE BOOM MATURED
Member bank intermediate and long-term business
loans outstanding became more important and short
term loans less important between 1955 and 1957.
PER CENT
Looking only at the expansion of bank loan port
folios and the decrease in bank holdings of Gov
ernment securities, we might conclude that bank
liquidity declined. Moreover, the business loan
surveys taken by the Federal Reserve in October
1955 and October 1957 indicate that, between
these dates roughly corresponding to the tightmoney period, longer-term loans became more
important and short-term loans less important.
Heavy borrowing at the Federal Reserve also
tended to decrease bank liquidity. The reserves
member banks are able to obtain by borrowing
from Federal Reserve Banks are “reserves with a
string attached.” The borrowings must be repaid.
When we looked more closely at the maturities
of Governments that banks continued to hold,
however, we found some interesting changes.
Commercial bank holdings of marketable Govern
ment securities fell about $9 billion between early
1955 and mid-1957. But their holdings of longerterm issues (maturing in one year or more)
decreased about $15 billion while their holdings
of short-term obligations (maturing within one
year) increased about $6 billion.
Our calculations show that about three-fourths
of these changes in bank holdings of marketable
Governments simply reflected the changing im
portance of short- and longer-term securities in the
total marketable debt. With the economy boom
ing and prices and interest rates rising, the Treas
ury found it difficult to interest investors in long
term issues. As time passed, long-term securities
moved into the short-term classification. The pro
portion of the debt maturing within one year
increased from approximately one-third in early
1955 to one-half in mid-1957.
What, then, was happening to bank liquidity?
There is no simple answer to this question. True,
the loan-deposit ratio increased steadily in 1955,
(Continued on Page 10)
7
NET FREE AND BORROWED
RESERVES
PRINCIPAL ASSETS
Member Banks
Member Banks
BILLIO NS $
HOW LIQUID ARE
THE BANKS?
90
TOTAL LOANS
\
70
Here is a "chart exhibit" of
some recent financial develop
ments that helps answer this
question.
^ S * V ^ _ r O T A L IN V ESTM EN TS jT
50
TOTAL UNITED STA TES
w
GOVERNMENT OBLIGATIONS
30
0
iH
1953
i H H H H HI m m
1954
1955
1956
19 57
Bank loans swung sharply up
ward on the wave of economic
recovery in 1954 and continued
to rise during the boom years of
1955 and 1956. Banks sold Gov
ernment securities and other in
vestments throughout this period
to get funds with which to make
loans. When business dropped
o f f in 1957, loan demand
slackened and banks used their
surplus funds to purchase large
MARKETABLE
DEBT
GOVERNMENT
BILLIONS $
LIQUIDITY RATIOS — COM
MERCIAL BANKS
RATIO
pKSSSBP' » JP . ^1
NET BORROWED RESERVES
1958
1953
1954
19 55
19 56
1957
amounts of Government, muni
cipal, and corporate securities.
The upsurge in loan demand,
coupled with a limited supply
of bank reserves, tightened
credit in 1955. Member banks
had net borrowed reserves—
their borrowings from the Fed
eral Reserve exceeded their ex
cess reserves— throughout most
of the boom. However, in the
NET FREE AND BORROWED
RESERVES
MILLIONS S
90-
In the recession of 1957-1958,
as in the previous recession,
banks added substantially to
their holdings of longer-term
Government securities.
In the boom years, a large
part of the shift in bank holdings
of Government securities re
flected the shortening maturity
8
of the public debt. In the reces
sion that followed, the maturity
of the debt lengthened, but
banks, on their own account,
were quite active in purchasing
long-term Governments.
What then, was happening to
bank liquidity? There is no sim
ple answer to this question.
Banks picked up some liquidity
in the boom by expanding their
holdings of short-term Govern
ments. Their liquid asset ratio
(cash plus short-term Govern-
ments to assets) rose gently in
1956 and 1957. Banks lost some
liquidity by expanding loans.
T h e ir lo a n -d e p o sit ra tio in
creased sharply.
In the recession, the loandeposit ratio dropped, and this
signifies some improvement in
bank liquidity; but the liquid
asset ratio also stopped rising.
The impact of these diverse
movements was not evenly dis
tributed throughout the bank
ing system. The smaller country
banks had ample free reserves
at all times. The larger central
CHANGE IN OWNERSHIP OF
GOVERNMENT DEBT (AUGUST
1955-NOVEMBER 1957)
CHANGE IN OWNERSHIP OF
GOVERNMENT DEBT (NOVEM
BER 1957-JUNE 1958)
BANK HOLDINGS OF MAR
KETABLE GOVERNMENT SE
CURITIES
BILLIONS S
7-
latter part of 1957, with a de
cline in loan demand and a
switch in Federal Reserve policy
from tightness to ease, the
banking system accumulated
net free reserves.
W hile money was tight, busi
ness corporations and other
financial institutions as well as
commercial banks reduced their
holdings of United States Gov
ernment securities.
When business declined and
credit eased, banks purchased
large amounts of Governments
from business corporations and
others. By so doing, they helped
satisfy the increased demands
for cash in other parts of the
economy.
LOAN-DEPOSIT RATIOS
In the recession of 1953-1954,
commercial banks reduced their
holdings of short-term Govern
ments (maturing within a year)
and increased their holdings of
intermediate and long-term se
curities. But through 1956 and
1957, they increased their hold
ings of the highly liquid short
term Governments.
LIQUID ASSET RATIOS
IO
RATIO
■ i AUGUST 1955
NOVEMBER 1957
I AUG UST 1955
NOVEMBER 1957
JUNE 1958
CITY BANKS
CITY BANKS
CITY BANKS
BANKS
reserve and reserve city banks,
more closely tied to the indus
tria l expansion, had net bor
rowed reserves throughout the
boom. They accumulated only
small amounts of free reserves
in 1958.
Loan-deposit ratios show all
classes of banks losing liquidity
CITY BANKS
BANKS
while credit was tight. The larg
er central reserve and reserve
city banks probably lost the
most. But the liquid asset ratios
show that all banks were, at the
same time, also gaining some
liquidity.
A fte r credit eased in the re
cession, only central reserve city
banks seemed to clearly improve
their liquidity positions. Their
loan-deposit ratio dropped rap
idly and their liquid asset ratio
rose. Other banks gained little
if any liquidity.
Banks are not so liquid today
as they were in mid-1954. The
loan-deposit ratio for all com
mercial banks is substantially
higher and the liquid asset ratio
is substantially lower now than
they were then. Th is raises the
question as to whether bankers
will want or be able to expand
loans as rapidly in the coming
months as during the inflationary-pregnant recovery of 19541955.
9
b usin ess r e v ie w
1956, and 1957. This points to a decrease in bank
liquidity. But in the latter two years, the ratio of
cash plus short-term Governments to assets—
we’ll call it the liquid asset ratio—was also rising.3
This signifies an increase in bank liquidity.
The answer to the question is further compli
cated by the fact that the impact of these diverse
movements was not evenly distributed throughout
the banking system. Country banks experienced
very little pressure on their liquidity. They had
ample free reserves at all times. Their loans main
tained a steady upward movement; their deposits
rose gradually; through the period in which
credit was tight their ratio of loans to deposits
showed an increase. But their liquid asset ratio
increased also—and substantially.
On the other hand, the larger central reserve
and reserve city banks, at the heart of the busi
ness expansion, experienced greater pressures on
their liquidity. They were frequently in debt to
the Federal Reserve. Their loans expanded
sharply; their deposits changed very little; their
ratio of loans to deposits increased rapidly. But
their liquid asset ratio also increased, though
somewhat less than for country banks.
From 1955 through most of 1957 the banking
system lost liquidity in one respect; over much of
the period it was regaining liquidity in another.
Banks may not have been so liquid at the end of
1957 as they had been at the beginning of 1955.
But neither did they lose so much liquidity as we
might have expected. This was largely associated
with the shortening maturity of the public debt.
In recession: 1957-1958
In the last half of 1957 the economic boom began
to sputter and the economy drifted down into a
third postwar business recession. The demand for
3 W e've defined short-term Governments as those maturing
within one year. A d iffere nt definition could, conceivably, lead
to different results.
10
loans dropped off. Federal Reserve policy
changed to one of ease and after December 1957,
free reserves increased rapidly. Banks found for
the first time in a couple of years that they had
plenty of funds. They quickly put the excess
funds at their disposal into investments. Most of
it went into United States Government securities.
Federal agencies and trust funds and the
Federal Reserve also increased their holdings of
Government securities. Part—a very small part—
of the increased holdings of Governments by
banks and these others came about through an
increase in the national debt. But most of it can
be accounted for in decreased holdings of busi
ness corporations, individuals, and other invest
ors. During the recession, the banking system,
including the Federal Reserve and other pur
chasers of Governments, helped satisfy the in
creased demands for cash in other parts of the
economy.
If we looked, once again, only at investments
and loans, we might conclude that bank liquidity
had increased. But the investments banks were
purchasing after mid-1957 suggest something
else. In their quest for earnings, banks were
concentrating about one-fourth of their new in
vestments in corporate, municipal, and other
securities. But perhaps even more importantly,
almost all of their investments in marketable
Government securities were going into interme
diate and long-term obligations.
The Treasury was now able and quite anxious
to extend the maturity of the debt. Once again
part of the shift in bank holdings of Governments
reflected this—our calculations show about onehalf. After the recession began, banks were, by
themselves, actively shifting into long-term
Governments.
With total deposits still climbing, increased
holdings of relatively illiquid assets tended to
b usin ess re v ie w
impair bank liquidity. While the loan-deposit
ratio had begun a gradual descent, the liquid
asset ratio had stopped rising.
Once again the impact of these changes was not
evenly distributed among all classes of banks. All
had free reserves, but country banks, as might be
expected, still had the most. In contrast to what
happened earlier, however, country banks seemed,
for other reasons, to be losing some liquidity.
These smaller banks increased their deposits
steadily, but partially isolated from the recession
as well as the boom, their loans kept pace. Their
loan-deposit ratio did not change significantly
after credit eased. But they reduced their holdings
of short-term Governments and by mid-1958,
their liquid asset ratio had fallen back to where
it had been almost three years before.
Reserve city banks improved their liquidity
positions very little. Their loans did not increase
significantly, their deposits did, and their loandeposit ratio fell. But even though their holdings
of short-term Governments increased by a small
amount, their liquid asset ratio fell also.
Central reserve city banks in contrast, seemed
to have clearly restored some of the liquidity they
had lost in the earlier period. Their loans
increased slowly, but their deposits increased
rapidly and their loan-deposit ratio fell sharply.
These banks increased their holdings of short
term Governments substantially; and this raised
their liquid asset ratio.
It would probably not be far wrong to say that
liquidity was being restored, during this period
of easy money, by those banks—central reserve
city banks in particular—whose liquidity had
been most seriously impaired during the previous
period of prosperity and tight money. But it
would be well to remember that most of the im
provement in liquidity throughout the banking
system stemmed from deposits increasing faster
than loans and not from increased holdings of
liquid assets.
PRO SPECTS FOR TH E FU TU RE
Many observers feel that the recession is now
over and that the economic pulse of the nation
will beat faster from here on in. How, then, will
the liquidity position of banks affect their ability
to lend?
During the boom of 1955-1957, all classes of
banks, as we saw, picked up some liquidity by
purchasing short-term Governments and lost a
good deal by expanding loans. In the recession
that followed, central reserve city banks clearly
gained a little liquidity, but this was the excep
tion. Most banks did not perceptibly improve
their liquidity positions. And whatever gains
there were, largely stemming as they did from
increases in deposits, may prove to be somewhat
illusory.
A sudden increase in loan demand could erase
these recessionary gains very quickly. If the loandeposit ratio rises as rapidly now as it did during
the business revival of 1955, it will exceed its
pre-recession peak before the end of the year.
Moreover, bankers seem wary of their new
deposits. They recall that during the period of
tight money, when the Treasury bill rate in
creased to 3 per cent and above, many banks lost
large amounts of deposits. Corporate treasurers,
anxious to earn a high return on their idle funds,
drew down demand deposits and invested in
Treasury bills. Bankers believe that when the bill
rate nose-dived during the easy-money period, a
large portion of these corporate funds were put
into time deposits on which interest rates did not
fall very much.
With Treasury bill rates now rising again to
ward levels above the time deposit rates, many
11
b usin ess re v ie w
bankers reason that one day soon they will be
abruptly confronted with a rapid loss of these
funds. This may induce them to go slow in
increasing loans.
Bankers may go slow in another way for
another reason. With interest rates rising, they
would normally prefer not to get their available
funds tied up in long-term illiquid loans. Bor
rowers, on the other hand, would no doubt prefer
a long-term loan at the interest rate prevailing
today rather than a series of short-term loans at
successively higher rates of interest. To the extent
that bankers are able to resist the pressure of
borrowers, the new credit that they do extend may
take the form of short-term, highly liquid loans.
12
All this raises a question whether bankers will
want or be able to expand loans as rapidly in the
coming months as during the inflationary-preg
nant recovery of 1954-1955. For one thing, the
Federal Reserve has moved more rapidly this
time. Free reserves, a rough indicator of tight
ness in the money market, have declined faster.
Interest rates have risen more sharply.
As they look into the future and check their
liquidity positions, bankers may well be cautious.
Their loan-deposit ratio is now about one-fifth
higher and their liquid asset ratio about one-fifth
lower than in mid-1954. In short, while banks are
not exactly bone-dry today, neither do their cups
runneth over.
THIRD DISTRICT FARMERS
HAVE A BETTER YEAR
“When farmers have a good year, that’s bad;
when they have a bad year, that’s good.” This
seems to be the average person’s conception of
how farming works. In the tri-state area of Penn
sylvania, New Jersey, and Delaware, 1958 shapes
up somewhat along these lines. Productionwise,
the past growing season ranks among the best.
Marketwise, the current year leaves something
to be desired.
But the growing season was not entirely favor
able, as some farmers can tell you in recalling
the frustrating job of curing hay or harvesting
grain between frequent and sometimes heavy
rains. Neither were farm markets altogether dis
appointing. They had a brighter side, particularly
markets for livestock, eggs, and milk, all of which
were remarkably stable through the summer and
early fall.
County agricultural agents have given us a
reasonably bright picture of over-all prospects
for this crop year. And their expectations are
being borne out by the cash income received by
farmers over the greater part of 1958.
Field crops are a source of encouragement
Feed grains like wheat, oats, and rye appear to
have done quite well this year. In some cases
harvesting operations were delayed by wet wea
ther but quality and yield ran average or better
in most places. Hay also was a good crop,
although many farmers experienced considerable
difficulty in curing the early cutting. Pastures
have never been better. Corn for grain and silage
looks like an outstanding crop this year. Some
say it is the best in their memory. Early potatoes
in Delaware yielded almost one-third more than a
year ago. Late potato yields in Pennsylvania and
New Jersey also look good but in both states the
crop will be relatively light on a smaller planted
acreage.
13
b usin ess re v ie w
Tobacco yields are high
In Pennsylvania’s Lancaster County this year’s
tobacco harvest promises to be of record, or near
record proportions. Latest estimates indicate a
crop of about 50 million pounds, compared with
the 41 million produced last year. The harvest
started early and was nearly completed by late
September. Tobacco is of unusually high quality
and should command a good price.
Vegetable growers raised large crops but
prices were low
Mid-season vegetables yielded considerably more
this year than last. But heavy supplies in the
fresh market depressed prices and, in many cases,
processors’ contract prices also were low. Quality
seems to have been a problem with some early
vegetables because of plant diseases induced by
wet weather. Early tomatoes, snap beans, and
limas were among the crops so affected. But con
ditions were spotty, with New Jersey farmers
reporting most of the trouble from rust, mildew,
and similar wet-weather maladies. Asparagus was
another large crop of high quality in some places,
low in others. Canhouse tomatoes, grown later,
were a near-bumper crop. Many farmers labeled
sweet corn the best ever. Melon production in
Delaware was exceptionally high but in heavily
supplied markets, prices sagged badly.
Cranberries look promising in New Jersey
Latest estimates indicate that this year’s cran
berry crop in New Jersey will be larger than a
year ago and well above average. A late frost in
the spring was a problem with growers and wet
weather that caused some rot was another. Bloom
and set of the fruit were on the light side but the
berries appear much larger than usual. The fruit
has colored slowly because of so much cloudy
weather early in the season and harvest time may
come late this year. Other small fruits, like blue
14
berries, also yielded heavily although mildew
occasioned some losses after packing.
Orchard fru its w ill be a good crop
The peach crop harvested in late summer was
high in both yield and quality. Because the fruit
reached maturity over a longer period, marketing
was less of a problem than in some other years.
Early fall varieties of apples and the later ones,
too, look like an excellent crop with size and color
generally up to standard or above. Because proc
essing prices are low this year, it is possible that
a larger proportion of the apple crop will be
marketed as packaged fruit.
Poultrymen, except broiler growers, are
better off
Egg production has been fairly heavy all year.
Even so, demand has stabilized and most poultrymen have received reasonably good prices. Those
who cover part of their feed requirements with
home-grown grains are in a much stronger posi
tion than last year when yields were scanty at
best. But in the broiler business it’s another story.
Heavy production this spring and summer has so
depressed markets that prices received for poultry
meat have taken much of the profit out of the
enterprise. Over-production of broilers this year
has not been peculiar to the Delmarva area. It
seems to have been a thorn in the side of poultrymen in just about all the more important growing
areas.
Our dairymen are in a stronger position
With pastures remaining in excellent shape since
the early spring and corn for silage and grain
promising to be bumper crops, the winter feed
needs of dairymen and livestock farmers can
easily be met. This is exactly the reverse of the
situation prevailing at this time last year, when
so much of the milk check was diverted to the
b usin ess r e v ie w
purchase of feed. Milk production has remained
high all season and market demand continues to
show considerable stability. Surplus production
in excess of market quotas has been less of a
problem than in some other years.
Farm production costs are still rising
Labor, a most important cost item on our farms,
is somewhat more expensive this year than last.
However, more workers could be employed for
productive jobs than in 1957, when so much help
was needed to move irrigation pipes from one
field to another. Rising wage rates for both day
labor and regular farm hands and a continuing
trend toward larger enterprises are prompting
increased outlays for labor-saving machinery.
This equipment has become an increasingly large
item in many farm budgets in the past year or so.
The one big saving in production costs in 1958
has been on the livestock feed bill. Not only are
purchased feeds likely to be cheaper, but supplies
of the home-grown variety are so much greater
than in drought-stricken 1957.
Farm cash income is running above
1957 levels
Cash receipts from crop and livestock marketings
in Pennsylvania, New Jersey, and Delaware were
4 per cent larger in the first seven months of this
year than last. Lower market prices for crops,
however, resulted in a drop of 6 per cent in
income from this source, owing to heavy supplies
of fresh market vegetables offered throughout the
past season. Cash income from livestock and live
stock products was up 8 per cent from the 1957
period. Higher prices for meat animals, dairy
products, and eggs were the important factor in
the year-to-year increase in this segment of the
cash income total.
Looking ahead to the remaining months of this
year, it appears probable that these trends will
continue. Much will depend on prices received
for livestock and livestock products, which so far
this year have accounted for three-quarters of the
cash income of local farmers. At this point, profits
look best for dairymen and those poultrymen
raising chickens for eggs. Broiler prospects, in
view of the heavy supply, appear bleak. Good
returns seem probable from the large peach har
vest of high-quality fruit recently marketed. But
apple prospects are less favorable from the mar
keting standpoint, because of bumper crops in
several competing areas. All in all, it has been one
of the better years for Third District farmers,
particularly those with a good measure of diver
sification.
15
FO R
TH E
RECORD...
Th ird Federal
Reserve D istric t
United States
Per cent change
Per cent change
SU M M A RY
Aug. 1958
from
mo.
ago
year
ago
8
mos.
1958
from
year
ago
Aug. 1958
from
mo.
ago
year
ago
Factory*
8
mos.
1958
from
year
ago
Check
Payments
Employ
ment
LO C A L
CH A N G ES
Department Store
Payrolls
Sales
Stocks
Per cent
Per cent
Per cent
Per cent
Per cent
change
change
change
change
change
Aug 1958 Aug 1958 Aug. 1958 Aug. 1958 Aug. 1958
from
from
trom
from
from
mo.
ago
year mo. year mo.
ago ago ago ago
year
ago
mo.
ago
year mo.
ago ago
year
ago
O UTPUT
Manufacturing production
Construction contracts . . .
Coal mining ........................
+ 2
+20
+42
-1 0
+23
-1 9
— 12
— 4
-2 5
+ 9
— 4
+57
— 6
+23
— 16
-10
+ 5
— 22
Lehigh Valley. +
EM PLO YM ENT AND
IN C O M E
Factory employment
(Tota l) ................................
Factory wage income . . . .
+
+
+
1
3
- 8
— 8
— 7
-10
+
2
— 9
-
9
Lancaster . . . .
Department store sales ..
Department store stocks .
2
2
+ 4
— 1
— 2
+
0
0
+ 2
+ 2
+ 1
- 8f
+ 7
+ 1
+ 14
+ 1
1
+22
- 2f
+
+
0
0
+ 3
+ 3
+ 2
— 10
+
+
5
0
+ 2
— 3
— 2
+
+ 5
+ 2
+ 12
+ 1
1
+ 16
(A ll member banks)
Deposits ................................
Loans ......................................
Investments ........................
U .S. Govt, securities . . . .
O ther ..................................
Check payments ................
4
1
+ 8
+ 5
+ 17
+ It
7
0
+20
+21
+20
— 2
Reading ........
+
S c ra n to n ........
BA N K IN G
2
— i
12 +
— 18
+
2 +21
— 4 — 4
2 — 17
+
2
0 — 3 +
3 — 4 + 10 +
3 +10
2 — 5 +
7 — 4 +
5 +
8 — 1 — 6 — 8
1 -1 0
1 — 9 +20
6 +
9 +
+
7 + 18 +
8 — 3 -
1 — 4
0 — 7 +
+
Philadelphia .
TRADE*
1 — ii
6 +
+
4 +
-
Trenton ..........
0 — 15 — 2 — 13 + 18 +
9 + 14 +
W ilkes-Barre . +
1 — 6 +
2 — 8 + 17 +
1 +
+ 4
W ilm in g to n ..
0 — 10 +
1 — 8 + 14 + 11 + 10 +
+
York ................
5 -
7
2 -
2 -
7 — 4
6 -10
9 -2 1
+ 18
3 — 4 — II
— 5
8 — 19 + 16
PRIC ES
Consumer
............................
ot
•Adjusted fo r seasonal variation.
+
it
+
2t
|20 C itie s
0
0
+
+
I
2
2
+ 3
{Philadelphia
+
3 +
0 + 18 +
8 +
7 +11
-1 0
+
•Not restricted to corporate lim its o f cities but covers areas of
one or more counties.
1
@FedFRASER