David Friday

J. H. Riddle

Walter Lichtenstein

Winfield W. Riefier, Chairman

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the
National Bureau of Economic Research
Volume Title: A Program of Financial Research Vol 1: Report
of the Exploratory Committee on Financial Research
Volume Author/Editor: Exploratory Committee on Financial
Research
Volume Publisher: UMI
Volume ISBN: 0-870-14458-8
Volume URL: http://www.nber.org/books/expl37-1
Publication Date: 1937
Chapter Title: Major Factors in Fluctuations in Bank Deposits,
1929-1936
Chapter Author: Winfield W. Riefier, Chairman, David Friday,
Walter Lichtenstein, J. H. Riddle
Chapter URL: http://www.nber.org/chapters/c0626
Chapter pages in book: (p. 47 - 50)Section A 47
MAJOR FACTORS IN FLUCTUATIONS IN
BANK DEPOSITS, 1929-1936
General Background
Between 1929 and 1933 the volume of bank deposits
belonging to the people of the country declined about
30 per cent. Simultaneously, prices of securities, includ-
ing high grade bonds, collapsed. The factors responsible
for this unparalleled collapse would under any circum-
stances merit the most careful evaluation. In this particu-
lar case; however, investigation must be especially pains-
taking, since the attendant circumstances were quite other
than those which would be expected under ordinary bank-
ing and credit theory. Insufficiency of reserves, for ex-
ample, which theoretically is considered by far the most
important factor in deposit liquidation, was not important
during this period.
Viewed from the assets side of the bank balance sheet,
furthermore, the liquidation of security loans was the
largest single factor in this decline, although both call
and time loans on securities were freely available at ex-
ceptionally low rates throughout the period. The magni-
tude of the problem posed for theorists in money and
banking is illustrated by contrasting the situation in the
crisis of 1919—22 with that in 1929—33. In the former, a
6 per cent discount rate, maintained by the Federal Re-
serve banks over an exceptionally long period, and appli-
cable to a volume of member bank borrowing equal to
per cent of their required reserves, resulted in an aggre-
gate decline in deposits of about io per cent. During
1929—33, despite aquickdrop in discount rates, a negli-
gible volume of member bank borrowing, and a wide48 PartTwo
availability of excess reserves, the decrease in deposits
amounted to 30 per cent.
Equally as challenging as the decline in available bank
deposits from 1929 to 1933 is their subsequent rise of
more than one-half from to 1936.Parallelingthis
rise, there occurred: (a) an unprecedented increase in
banking reserves; (b) a sharp decline in interest rates;
(c) a bond market boom; (d) a doubling of stock prices;
(e) a relatively modest increase in commodity prices;
(f) a gradual recovery in production and trade. Granting
that extraordinary forces, precipitated by the emer-
gencies of 1932—33 and leading to gigantic fiscal opera-
tions on the part of the Treasury as well as far reaching
innovations in monetary organization and policy, domi-
nated this rapid change in financial conditions, it still
presents many significant angles for inquiry. Theoret-
ically, this rapid growth of deposits should have induced
simultaneously a veritable boom in production and trade,
a rapid expansion of money incomes, a marked stimula-
tion of capital formation from savings and from bank ex-
pansion, and a sharp and extended rise in commodity
prices. Indeed, this presumably should have happened on
the basis of orthodox theories as well as on those of more
modern schools. Under classical theory, the sheer im-
pact of a larger quantity of credit on the economic sys-
tem should have had irresistible accelerating effects; under
modern analysis, the primary and secondary impact of
funds introduced into trade by governmental relief and
public works expenditure should have found prompt ex-
pression in like effects.
This projected investigation can readily be divided
into three parts. [ii The specific factors in the decline in
deposits from 1929to1933 will be studied in the order
of their relative importance, which appears to be:(a)Secticrn A 49
bank failures; which' account for about one-half of the
total decline; (b) security loan liquidation, which ac-
counts for perhaps a fourth more of the total decline;
(c) cOntraction in other banking assets. \'Vith 'both the
aggregate magnitude of these factors and their incidence
in time from the final quarter of 1929 through the first
quarter of' determined, the inquiry would be directed
to the specific factors to which bank failures are attrib-
utable. in this phase the work of the Federal Reserve
Committee on Branch, Group, and Chain Banking would
be helpful.'In addition, however, three aspects of the prob-
lem not adequately covered in those reports should be
analyzed carefully: (a) the extent to which failures were
due to assets regarded as substandard, (b) the extent to
which pressure' on banks arose from regional deficiencies
of funds reflecting deficiencies in the balance of pay-
ments, (c) the incidence of hoarding and the importance
of' transfers' 'of 'smart money' from banks in difficulty to
more 'solvent institutions. Finally, the extent to which
pressure on the bond market arose from sales of securities
by open banks should be compared with the liquidation
of 'bonds by receivers of closed banks.
[z'] In a similar way the basing point for 'the second
part of the project would,be the relative importance of
specific factors in the increase in deposits subsequent to
1933: (a) the reorganization of banking facilities and the
rehabilitation of banking capital with the 'aid 'of 'the Re-
construction Finance Corporation; (b) dishoarding of
currency by the public with the reestablishment of finan-
cial confidence; (c) the inflow of gold from abroad fol-
lowing dollar devaluation and concomitant foreign polit-
ical disturbance; (d) the expansion of Treasury currency
in consequence of the silver purchase program; (e) the
growth of 'the Federal debt and its considerable absorp-50 Part Two
tion into bank assets; (f) the divergent movements of
other elements of bank assets. With these data assembled,
investigation would concentrate on the financial aspects
of the Federal recovery and relief program and the Treas-
ury operations necessitated by it. Borrowing operations
of the Treasury and the movement of its balances would
be studied intensively. The disbursement of funds in con-
nection with various phases of the recovery and relief
program, and the activities of various Federal agencies,
would be carefully traced and related to the movement
and activity of deposits in different economic areas and
for different classes of banks. Deposit data collected by
the Board of Governors of the Federal Reserve System
in connection with its study of bank reserves from 1924
to1935 would prove of immense value for this part of the
project, and some use might be made of the large deposit
survey, recently concluded.
[3] These two parts of the project completed, it should
be possible to trace effectively the sequence of evçnts
from 1929through1935 with greater detail and authority
and to evaluate: (a) the relative efficiency of the almost
innumerable measures taken to combat the crisis and pro-
mote recovery; (b) the extent to which our financial sys-
tem should be reorganized further to stabilize bank de-
posits or bring them under better control. An indication
of the limitations to which much of prevailing banking
and credit theory is subject when viewed against an ade-
quate factual setting should also be possible.
Procedure
This study could be made only with the thorough co-
operation of the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the
Reconstruction Finance Corporation and the Federal

A Program of Financial Research Vol 1: Report of the Exploratory Committee on Financial Research

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