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The Pamphlet Collection of Sir Robert Stout: Volume 78

The Decline in the Ratio of Banking Capital to Liabilities

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The Decline in the Ratio of Banking Capital to Liabilities.

Summary.

I. The decline has taken place, for the national banks, by abrupt drops in periods of business revival, with steadiness in intervening periods, 697.—Has extended to all classes of banks, 698.—Due proximately to rapid increase of deposits, with stationary capital, 699.—II. The main cause has been an increase of lawful money supplied to the banks by the general public, 703.—III. The same tendency appears in the English banks, the Canadian banks, the State banks, 708.—IV. The decline not necessarily an indication of weakness, 712.

I.

Critics of the national banks have often called attention to the fact that the ratio of capital to total liabilities has fallen. But seemingly no one has noticed the curious way in which this fall has occurred. Practically, the whole decline of the ratio has taken place in two periods of rapid recovery from severe business depression,—1878-80 and 1896-99. Table I. presents the facts succinctly. "Capital liabilities" includes capital, surplus, and undivided profits. The ratios for each year are averages of the ratios computed from the reports made to the Comptroller of the Currency,—four a year from 1864 to 1869, five since 1870. For 1909 only two reports are now available.

Table I. Ratio or Capital Liabilities to Total Liabilities or the National Banks. 1864-1909.
Years. Ratios. Years. Ratios. Years. Ratios. Years. Ratios. Years. Ratios.
1864 35% 1874 36% 1884 32% 1894 29% 1904 20%
1865 33 1875 37 1885 31 1895 29 1905 19
1866 33 1876 38 1886 31 1896 30 1906 19
1867 34 1877 37 1887 31 1897 27 1907 19
1868 35 1878 36 1888 31 1898 24 1908 19
1869 36 1879 32 1889 30 1899 21 1909 18
1870 37 1880 30 1890 31 1900 20
1871 35 1881 28 1891 32 1901 19
1872 36 1882 29 1892 29 1902 20
1873 37 1883 30 1893 31 1903 21
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Suummary.
Lowest Ratio. Highest Ratio. Average Ratio.
1864 to 1878 33% 38% 36%
1880 to 1896 28 32 30
1899 to 1908 19 21 20

The striking feature of this series of figures is not the drop in 1878-80 and again in 1896-99, but the relative steadiness of the ratios from 1864 to 1878, from 1880 to 1896, and from 1899 to 1908. Within each of these periods the extreme range of the ratios is less than the fall from one period to the next. Further, the lowest ratio of each period is higher than the highest ratio of the succeeding period. These differences between the three periods of relatively steady ratios would be still more striking if the figures for the first four years, when the national banking system was in process of formation, were omitted. Through years of established prosperity, through years of panic, and through years of depression the capital of the national banks has expanded or contracted in proportion with changes in the volume of their liabilities to the public. But in periods of transition from prolonged business stagnation to business activity capital has fallen rapidly behind, and in after-years has never regained its former proportion. Recovery from minor crises, such as occurred in 1884 and 1903, has been attended by changes similar in kind, but slight in degree.

Closer examination shows that this change has extended to all of the classes into which the national banks are divided by the legal provisions regarding minimum reserves (Table II.).1

1 This table is based upon only one report for each year because the Comptroller publishes summaries for the reserve city and country banks of the autumnal reports alone. But the variations in the ratio between different reports for the same year are so slight as to make the lack of fuller data of little moment.

page 699
Table II. Ratio of Capital Liabilities to Total Liabilities in the Various Classes or National Banks, 1878 and 1880, 1896 and 1899.1
All National Banks. Country Banks. Reserve City Banks. Boston, Philadelphia, and Baltimore Banks. New York City Banks.
October 1, 1878 35% 42% 33% 34% 20%
October 1, 1880 30 37 25 29 17
5% 5% 8% 5% 3%
All National Banks. Country Banks. Reserve City Banks. Central Reserve City Banks. New York City Banks.
October 6, 1896 30% 35% 29% 21% 19%
September 7, 1899 21 27 18 12 11
9% 8% 11% 9% 8%

At the beginning of both periods, in 1878 and in 1896, the city banks had a decidedly lower ratio of capital to total liabilities than the country banks. But, nevertheless, the decline in the ratio during both periods was greater in the reserve cities than in the country. In New York, on the contrary, the decline was smaller than in the country in 1878-80, and the same as that in the country in 1896-99.

Since the change occurred among national banks of all classes, its cause may be sought in the Comptroller's summaries of the "Aggregate Resources and Liabilities of the National Banks." Tables III. and IV. are based upon these summaries of the autumn reports of 1878 and 1880, 1896 and 1899. To facilitate comparisons, the Comptroller's statements have been condensed by combining similar items.

Both tables show that the chief cause of the decline in the ratio of capital to total liabilities was an extremely rapid increase of deposits at times when capital was stationary

1 Computed from tables in the Reports of the Comptroller of the Currency: 1878, p. v; 1880, p. iv; 1896, p. 561; 1899, p. 419.

page 700 or declining. In the earlier period of business revival (1878-80) deposits increased more than $300 millions, while capital did not change: in the later period (1896-99) deposits increased more than $1,400 millions, while capital actually declined $29 millions. In comparison with the vast increase of deposits, the changes in liabilities for notes and for miscellaneous items were almost negligible. Of course, the rapid growth of deposits swelled the total liabilities, so that the proportion borne to this total by the stationary or declining capital became rapidly less.
Actual Figures Millions of Dollars. 1878. 1880. Changes. Capital, surplus, profits . National bank notes . . Deposits Other liabilities ....

Table III.

Summary of the Condition of All National Banks, October 1, 1878, and October 1, 1880.