The Pamphlet Collection of Sir Robert Stout: Volume 78
The Decline in the Ratio of Banking Capital to Liabilities
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.
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 |
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.
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.
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.