A Year of Banking and Monetary Policy

Abstract

TN this article, I am concerned with the banking and monetary policies of the Treasury, the reserve banks, and the commercial banks of the country in the year that has passed since the Bank Holiday was proclaimed. By way of introduction, a brief discussion of the developments in the preceding year or so follows.2 On February i, I933, the investments of reserve banks in government securities were approximately one billion dollars more than that on February 3, I932. The reserve banks, despite the help which the Reconstruction Finance Corporation provided by advancing 850 million dollars to 5,6oo banks in I932, were not successful in stopping the liquidation, although some improvement was noticeable in the second half of I932. Transfers of cash from the strong to the weak were bound to have a disturbing influence later; but in I932, as the reserve banks and the Reconstruction Finance Corporation created additional cash and redistributed available supplies, the stronger banks, both in the East and the West, tended to gain cash, many of them depositing their excess cash with correspondents. For the year ending January 25, I933, bank balances with correspondents in leading cities increased by I,2I3 millions, of which 772 millions were deposited at reporting banks in New York City. Transit clearings through the gold settlement fund in Washington, which give some indication of the balance of payments between the I2 reserve districts, reveal that in the year ending January I933, the New York, Boston, and Philadelphia reserve districts gained I,I99 millions on clearing account while six western districts lost 1,045 millions. Official interference is evident in the loss by the eastern group of I,OI2 and the gain by the western of 993 millions through government transfers. The statements of reserve banks did not always reflect the effects of these clearings. Thus despite the very favorable balance of transit account for eastern districts in the first half of I932, the condition of eastern reserve banks, as revealed by a study of the distribution of the system's cash, rediscounts, and securities, was not strong. The explanation is probably the large transfers of cash on government account and losses of gold which are first felt by the New York reserve bank. In the second half of the year, the position of the eastern reserve banks improved as large deposits of cash were made by correspondent banks. New outbreaks of banking failures early in I933 led to withdrawals of bankers' balances from New York. Very large withdrawals of notes (I,485 million dollars in five weeks ending March 8) and losses of gold (305 millions) were financed for the most part by borrowing at reserve banks (II,45 millions), and by the purchase of bills (386 millions) and securities (I20 millions) by reserve banks. Withdrawals of bankers' balances from New York and the large losses of gold explain the large proportion of the additional borrowing at the New York reserve bank; and also sales of i8i millions of securities by the New York bank and borrowings of 2I0 millions from other reserve banks. Reserve authorities did heroic work, and in little more than two weeks after the Bank Holiday, two-thirds of the additional funds borrowed from reserve banks the previous five weeks had been repaid and fivesixths of the losses of reserves suffered by reserve banks had been recouped.