Boomlet

For seven years the banker has been the forgotten man of U. S. business. But last week commercial loans of banks reporting to the Federal Reserve showed their 24th consecutive rise, touched $8,600,000,000 (up 14.4% since outbreak of World War II to a new high since 1929). The commercial loan figure, once almost as good a guide to business activity as the Federal Reserve Board index of production, was beginning to follow the industrial curve again.

Last summer Congress made defense orders the first Government contracts in a century assignable for borrowing. This cut in the banks on the defense boom, and the boom itself did the rest. The American Bankers Association reported few weeks ago that 195 of the largest U. S. banks (in 79 cities) had lent $572,949,466 to defense industries by the beginning of the year, were negotiating for another $112,235,733. But still the bankers' activity was more boomlet than boom; commercial loans stood far below the 1929 peak.

Although some bankers think of their trouble as beginning with the New Deal, it goes back much farther. In 1923 U. S. commercial banks had more than half their active funds in commercial loans. Then corporations took to financing them selves in the hungry stock and bond mar kets instead of at the banks. By 1929 the banks had only 39% of their funds in commercial loans; it was chiefly their volume of brokers' loans that gave them the appearance of great prosperity. What the corporate financing of the '20s started, the New Deal finished. The Treasury's gold buying and deficit financing pushed up deposits; banks were overwhelmed with money. Corporations, no longer growing, financed themselves out of surpluses. By 1935 only 21% of active bank funds were in commercial loans.

As an outlet for their idle money, banks were forced to turn to Government securities and high-grade corporation bonds; their competition for these securities pushed up prices and pressed down hard on interest yields. The yield on long-term Government bonds dropped from 3.68% in 1932 to 2.21%, on short-term Treasury notes from 2.77% to 0.5%. With the bulk of their earning assets drawing this meagre return, the banks have been hard put to make profits. Net earnings of member banks ($715,000,000 in 1929, before gains and losses on investments) have hovered around $400,000,000 a year, have shown little tendency to pick up as other businesses improved. Many a bank has boosted its earnings by taking profits in the rising bond market--subject now to being offset by losses if the market turns down.

Thus bankers are more inclined to worry about their investment portfolios than to rejoice in their defense boomlet. Last week the Association of Reserve City Bankers (450 bank officials in 57 cities) asked that reserve requirements be raised again to reduce their buying power and competition for these securities.

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