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Raymond E. Hengren

The tremendous growth of the investment portfolio held by
commercial banks, both in dollar amount and relatively, is the out­
standing development over the period encompassing the two world wars.
As illustrated by the accompanying chart, these investments in any
year during World War II were roughly 10 times the amount reported for
the corresponding year in the first war period.

Moreover, the port­

folio accounted for about one-fifth of total assets through World War
I, whereas by the end of the recent war the portfolio had grown to in­
clude slightly more than three-fifths of the total.
Dwarfing all of the other items in the investment portfolio,
securities issued by the Federal Government accounted for almost 95
percent of the total amount of bank investments at the conclusion of
World WTar II,

During the first war period, Federal securities never

accounted for more than 1+0 percent of the investment portfolio.


from another angle, it is interesting to note that the first World War
left the commercial banks with securities evidencing about one-fifth
of the Federal debt as compared with approximately one-third of the
total at the present time.

Furthermore, a little over two-fifths of

the Federal debt may be found in the combined holdings of the Federal
Reserve and the commercial banks.
Notwithstanding the overwhelming preponderance of Federal
securities in the portfolio of bank investments, the total dollar




amount of securities in the other investment categories has increased

Thus, the volume of obligations issued by States and

minor subdivisions of government held as bank investments has grown
with relatively few interruptions throughout the entire period now
under consideration.

For the years immediately preceding World War I,

municipal securities totaled in the neighborhood of

$450 millions; by

the late 1920*s, the figure had climbed to $1 billion; during the
1930*s, it grew steadily to a total of slightly more than $3 billion,
and in 1946 it was just short of $4 billion.

The proportion of all

outstanding municipal securities in bank portfolios has increased to a
surprising extent since the middle

1930 fs.

According to the best avail­

able estimates, bank holdings of these securities expanded from about
18 percent to slightly more than 30 percent between 1937 and

1946 . Pro­

bably the commercial banks now constitute the largest single class


investors in municipal securities.
Railroad bonds, which prior to World War I loomed as one of
the major types of securities held by commercial banks, now in relative
terms, have almost disappeared.

In the years immediately prior to the

first world war, rail investments came to roughly $800 million, or
about one-fourth of the entire securities portfolio.
I, these

During World War

holdings shrank dollarwise so that by 1913 they stood at less

than one-half billion dollars and accounted for approximately 6 percent
of bank investments.

Thereafter the downward trend was reversed, and

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in the postwar years bank holdings of rail bonds gradually rose to a
peak in 1931 of $2| billion.

At that time, about 16 percent of the

portfolio consisted of rail bonds.

A substantial liquidation of these

securities occurred during the ensuing three years, incidentally on
rather unfavorable price terms; then the holdings stabilized at about
|1 billion for several years.

In 1941* the latest year for which

statistics are available, scarcely more than |800 million of railroad
bonds remained in the portfolio, or approximately the total held by
commercial banks in the years immediately preceding the first world
Data with respect to categories of securities held by com­
mercial banks, other than Federal, municipal and railroad bonds, have
not been compiled with consistency over the 1909-1946 period.


miscellaneous investments, however, increased from fig to $5 billions
during World War I and then climbed to a record high of $8g billions
in 1928.

Subsequently the total declined quite rapidly to about $3

billion in 1934; it continued at that level for the remainder of the
decade, and exhibited practically no change during World War II,
According to the consolidated data for all commercial banks,
it would appear that the only remaining investment problems are those
which might arise in connection with Federal bonds.

However,the sta­

tistics conceal the tremendous diversity in the composition of the
securities portfolios held by individual banks, as well as the regional

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Sometimes banks with only nominal amounts of U. S. Govern­

ments present investment problems which are especially troublesome to
the supervisory authorities —

and the FDIC.

To sum up, Federal Government securities now predominate in
the investment portfolio of the banking system.

In relative as well as

absolute terms, they dwarf all other types of securities.

However, the

dollar amounts of non-Govemment issues are still considerable.


the period between the Wars, the amount of municipal securities held by
banks has grown substantially.

As a consequence, the banks now appear

to be the largest single group of municipal bond holders.

Bank commit—
ments in railroad securities opened and closed the period/about the
same figure.

Overall statistics, however, conceal the tremendous diver­

sity in the composition of investment portfolios for the individual

These differences give rise to many knotty problems which con­

front bank supervisory authorities.