Bank Reserves and Credit Inflation

Report Outline
Existing Basis for Rapid Expansion of Credit
Reserve Requirements and the 1929 Crash
Rise of Bank Deposits and Reserves in 1934
Means of Controlling Credit Inflation
Special Focus

Existing Basis for Rapid Expansion of Credit

The August Number of the Federal Reserve Bulletin noted a steady increase during recent months in member bank reserve balances and stated that these balances amounted “to about $4,000,000,000 during the latter part of July, the largest figure ever recorded, and about $1,900,-000,000 in excess of legal requirements.” By the end of August member bank reserves held by the Federal Reserve banks had risen to $4,126,973,000. During the first week in September, however, there was a $220,000,000 decline, accompanied by a sharp expansion of bank loans to business.

At the end of August, 1929. when the pre-depression credit inflation had reached its peak, reserve balances of member banks amounted to only $2.322,000,000, and excess reserves to only $35,500,000. Loans and investments of member banks at that time were nearly $36,000,000,000. By the end of June, 1934, they had fallen to $27,104,000,000.

Figures made public by the Federal Deposit Insurance Corporation on September 5, covering all insured banks, showed that these banks were 55 per cent liquid on June 30. “With the progress made in recovery,” said Chairman Crowlcy, “the banks arc altogether too liquid. The banks can't make money if they don't make loans. I should like to see the banks make more loans. We can't have real recovery unless the banks make more loans.” Crowley was further quoted as saying that the banks could safely expand their loans by more than $5,000,000,000 at the present time. Chairman Jones of the Reconstruction Finance Corporation agreed that the hanks could make more than $5,000,000,000 of “good” loans. The difficulty was not so much a reluctance of bankers to make loans to finance business and industry as a present lack of demand for good loans.