30, 1908, a decrease of 23.3 per cent compared with the corresponding week of 1907 and 37.2 per cent compared with the corresponding week of 1906. The decrease in New York and Philadelphia exceeded 28 per cent, compared with 1906, and was greater than in any other cities.

For the first two weeks of January, 1908, gross earnings of railroads were about 13 per cent less than in 1907. For the last week in December they were 15.52 per cent below those of 1906. For the entire month of December gross earnings were 1.13 per cent, while net earnings were 17.46 per cent less than were those for December, 1906.

Transactions of the New York Stock Exchange amounted to 16,634,817 shares, compared with 22,712,420 in January, 1907.

The sharp falling off in the net earnings of the United States Steel Corporation in the last quarter of 1907 shows the remarkable decline in industry. The net earnings fell from $17,052,211 in October to $10,467,253 in November, and to $5,034,531 in December. This is a decline of over 70 per cent.

The unparalleled number of idle cars affords a barometer of our industrial condition. Today there are approximately 320,000 freight cars and 8,000 locomotives standing idle, representing an investment of more than $400,000,000, and there are more than 30,000 unemployed trainmen. And yet three months ago there were not enough railroad cars to move the traffic of the country.

The general state of industry and trade is summarized by Bradstreet's as follows: "It is safe to say that estimates of shrinkages of 30 to 50 per cent in sales and general turnover are not unreasonable. Iron output will probably be 50 per cent below a year ago. Shoe shipments are about 30 per cent below January, 1907. Lumber and all kinds of building material are very quiet the country over. production, though larger than in December, is easily 50 per cent below the fullest capacity. Coal has been helped by cold weather, but is dull; stocks have accumulated because of past mild weather or of reduced industrial consumption, and there is talk of miners of bituminous coal being asked to take lower wages as an alternative to reducing production. There are widespread reports of large numbers of unemployed in all sections of the country, and some southern reports point to a return of idle city labor to the farms."

The returns for the prices of commodities show a probable decline of about 10 per cent in the cost of living.

The money market affords one of the best barometers of the great change that has come over the industrial situation. From a deficit of $54,103,600 on November 23, in the surplus reserves of the New York Associated Banks, there was a surplus of $40,626,725 on February 1. From rates of 25 per cent or more last fall for call money we now have rates of less than 2 per cent. From rates of from 7 to 12 per cent for time money last fall we now have rates of from 4 to 4 per cent on Stock Exchange collateral and from 5 to 6 per cent on commercial paper. The return of hoarded money and the slackening demand for money in industrial and commercial operations are mainly responsible for this sudden transformation of the money market.

Already gold exports have begun from this country. They may reach a considerable volume before next July. Money rates, however, may be expected to remain about as at present. Money rates are being followed by rising prices for bonds and other secure securities. During January the price of bonds rose about twice as much as the price of common stock. Under existing conditions investors find bonds very attractive in view of the uncertainty of the situation. Many interior banks have put their idle funds in bonds on account of the comparatively high interest return they can secure by such

a course.

77. BANKING CONDITIONS DURING DEPRESSIONS1

BY WALTER W. STEWART

The business conditions prevailing during periods of depression bring about certain changes in the loans, the deposits, and the reserves of banks. Those concerns which are borrowers at the banks find that their declining volume of business can be financed with smaller banking accommodations. Consequently, as accounts are collected and goods are sold, the funds are first deposited and then used to pay their loans at the banks. This method of payment, by which the borrower gives back to the bank the desposit account and receives in return his canceled note, results in the reduction of deposits as well as the cancellation of loans. Both the loans and the deposits, therefore, are lower during the depression than during the prosperity. In case the banks have pursued a policy of loan contraction during the crisis preceding the depression, then early in the depression the 'From an unpublished article.

loans will increase. But it is an increase only as compared to the low point of the crisis, and not as compared to the period of prosperity.

The business conditions of depression are also reflected in the movement of bank reserves during the period, for the decrease in sales reduces cash requirements as well as credit requirements. The diminished volume of business causes merchants to keep less tillmoney; the increased unemployment causes wage-earners to carry less pocket-money; and the depositors who withdrew money during the crisis now redeposit it. This new distribution of money between the banks and the public results in an accumulation of reserve-money during the depression.

Thus it comes about that the cash held by the banks is actually increasing at the very time that the deposits are decreasing. The result is a favorable ratio between reserves and deposits, which in part explains the easy money market and the low interest rates characteristic of the depression.

78. BANKING POLICY IN PERIODS OF EXPANDING BUSINESS1 BY O. M. W. SPRAGUE

At the beginning of the ten years of business activity which culminated in 1907 the banks were in an exceedingly strong condition, as is usually the case at the end of a long period of depression. During the four years following the crisis of 1893 the loans, deposits, and cash reserves for the banks fluctuated within narrow limits, reflecting the stagnant condition of trade. On October 5, 1897, against net deposits of $2,195,000,000, the national banks held a cash reserve of $388,900,000, giving them the tolerably high ratio of 17.7 per cent to deposit liabilities. Their loans also must have been of high average quality after four years of thoroughgoing liquidation and recuperation in the business world.

Beginning with the autumn of 1897, the cash reserves of the banks increased rapidly. At first the gain was due to gold imports secured through abnormally large grain exports to Europe, and afterward on account of increasing gold production, of which the United States. acquired a considerable share. A further gain was secured indirectly as a result of the currency act of 1900. As a result of these various influences, the cash holdings of the national banks increased from $388,900,000 on October 5, 1897, to $701,600,000 on October 22, 1907.

1 Adapted from Crises under National Banking System, pp. 216–26. (National Monetary Commission, 1910.)

With this increase of nearly $313,000,000 in their cash reserves it would have been possible for the banks to have nearly doubled their productive investments without diminishing the ratio of cash to deposit liabilities. As a matter of fact, these investments were increased far more than this.

The following table shows the changes in loans, net deposits (not including government deposits), cash reserves, and reserve ratio at the time of the early autumn return of the condition of the national banks from 1897 to 1907:

Every year witnessed an increase in loans (that for the last year of the series being the most considerable) and also in deposit liabilities. Cash reserves showed a gain, except in 1902 and 1906, but the reserve ratio was subject to greater fluctuations. Between 1897 and 1902 the decline was continuous, with the exception of 1900, when the banks enjoyed the benefit of the change in the requirement as to note issue from 90 per cent to the full par value of the bonds deposited as security. By 1902 the banks had evidently approached as near to legal-reserve requirements as they felt was consistent with safety, and thereafter loans and deposit liabilities were kept roughly within limits determined by the amount of cash holdings. It will be noted that in 1902 the banks were a little above and in 1906 somewhat below the ratio of reserve on August 22, 1907, the date of the last return before the crisis. That the banks were slightly stronger in cash in 1907 than in 1906 may be in part due to the earlier date of the return of 1907, nearly two weeks earlier than that for the corresponding period in 1906. It is evident, however, that the banks were at least

in, what was for them, a quite normal condition of strength just before the beginning of the crisis. But this was not on account of any exercise of restraint in making loans, since the increase during the previous twelve months was greater than for any other year of the period under review. Finally, it may be noted that the proportion of reserve to deposit liabilities which had become customary was distinctly less than it was during the years before either the crisis of 1873 or that of 1893.

Analysis of the condition of the banks by groups does not give different results in the case of the country banks and those of reserve cities. The net deposits of the country banks increased without interruption from $963,000,000 on October 3, 1897, to $2,527,000,000 on August 22, 1907. The reserve ratio, which was 11.6 per cent at the outset, declined rapidly and was constantly in the neighborhood of 7.5 per cent from 1902 onward; in 1906 it was 7.5 per cent; in 1907, 7.6 per cent. In the reserve cities also deposits increased with the exception of a single year, 1903, rising from $586,000,000 to $1,423,000,000. The reserve ratio was 17.8 per cent at the outset, but was in the neighborhood of 12 per cent from 1901 onward. In 1906 it was 12.1 per cent; in 1907 it was 13.4 per cent.

The condition of the banks in the central reserve cities presents greater individual differences. In St. Louis deposits increased regularly with the exception of 1900. The reserve ratio of the St. Louis banks was below 25 per cent even in 1897 and was above that point in only one year, 1905. In 1906 it was 24 per cent and in 1907, 23.5 per cent. In Chicago deposits fell off somewhat in two years, 1900 and 1906, but increased from $105,700,000 in 1897 to $262,900,000 in 1907. Beginning with a high reserve ratio of 36 per cent in 1897 the Chicago banks soon broke away from the traditionally ample reserve which had characterized the banks of the city. In 1899 the reserve was 25.4 per cent, in 1902 only 21.9 per cent, and thereafter every autumn return showed a deficiency until 1907, when the banks held a cash reserve equal to 25.3 per cent of their deposit liabilities.

The upward tendency of loans was not so marked in New York as in the case of the banks in general. The $408,000,000 of New York bank loans in 1897 was nearly 20 per cent of all the loans of the national banks, while the $712,000,000 of loans in 1907 was just above 15 per cent of the total. Even at the beginning of the period the New York banks were able to find borrowers for all they were prepared to lend, and throughout the period they were evidently handling their