in commercial banks, 14,000,000 depositors in the mutual savings banks, 6,000,000 members of building and loan associations, and 3,000,000 depositors in the Postal Savings System.41

RESULTS OF CONCENTRATION OF SAVINGS

Once the savings pile up in these huge reservoirs they tend to become idle, or go into Government bonds, or into securities earning a low rate of return.

The extent to which life insurance companies have hundreds of millions of dollars in banks which earn no return is dealt with in a later chapter. 42 But they are not the only institutions embarrassed by an oversupply of funds. The mutual savings banks had $572,000,000 of cash on deposit in 1938. The excess reserves and cash holdings of commercial banks have likewise reached all-time highs.

Commercial banks, savings banks, insurance companies, and trustees have increasingly turned to Government bonds as outlets for their funds. In 1921, member banks of the Federal Reserve System held $2,600,000,000 of Government obligations, or 11 percent of their loans and investments; in 1938, they held $12,300,000,000, or 40 percent. In the 1920's two-thirds of the assets of commercial banks were invested in short-term commercial loans. Today only one-third is so invested. The balance is in Governments, real-estate mortgages, and other long term securities. Commercial banks are losing their traditional commercial banking functions. More and more they are coming to resemble investment trusts purchasing fixed-interest-bearing securities. Savings banks show a similar trend to Government securities. From 1931 to 1938, the New York savings banks increased their holdings in Governments from 5 to 23 percent of their assets. 13 In the same 7 years the 26 largest legal reserve life insurance companies in the United States increased their holdings of Governments from $347,000,000, or 2 percent of their assets, to $4,500,000,000, or 19 percent. Both trustees and trust companies, according to the testimony of William R. White, superintendent of banks of the State of New York, have also been investing more heavily in Government securities.** Interest yields have fallen sharply, as table 52 shows.

1

Source: Government bond yields: Average yield of all outstanding bonds due or callable after 12 years, compiled by the U. S. Treasury Department; municipal bond yields compiled by Standard Statistics Corporation; corporate bond yield figures since 1937 from Federal Reserve Bulletin, and earlier figures from Federal Reserve Board Annual Report for 1937, p. 80.

"Hearings before the Temporary National Economic Committee, Part 9, p. 4063.

42 See ch. XI, infra.

43 Hearings before the Temporary National Economic Committee, Part 9, p. 3801. 44 Ibid., p. 3800.

45

Interest rates on loans by commercial banks have shown similar or greater declines. Rates charged in New York City declined from 5.88 in 1929 to 2.26 percent in 1939, those charged in 8 other eastern and northern cities declined from 6.04 to 3.37 percent, and those charged in 27 southern and western cities declined from 6.14 to 4.10 percent. Mortgages appear to have shown no such declines. The records of the Bowery Savings Bank in New York City indicate that interest rates on urban mortgages decreased from 5.93 percent in 1929 to 4.41 percent in 1937.46 The effective interest rates charged by savings and loan associations have shown general decreases throughout the country; in Illinois and Wisconsin, for example, they decreased from 7.4 percent in 1931 to 6.4 percent in 1936.47

Interest rates on farm mortgages, on the whole, appear to have decreased less than any other type of interest rate. In Iowa they decreased from 5.5 percent in 1929 to 4.9 percent in 1935, and for the United States as a whole they appear to have decreased from 6.2 percent in 1929 to 5.5 percent in 1935.48 Farm mortgages may be in a class by themselves, insulated from general money market conditions. Or, as abundantly illustrated in the testimony of the executives of large financial institutions, there may have been a concept of a reasonable rate for farmers, accompanied by a general habit-pattern of business conduct not to take business away from other companies by quoting lower interest rates. It was stated on behalf of the Metropolitan that it did not go after loans on the books of other companies; “ and it appeared that the Prudential instructed its agents not to "raid" the business of others.50 Thus farmers find it relatively difficult to obtain interest rate concessions on their mortgages. They cannot refund their obligations when money market conditions are favorable, as the large business enterprises can. Without Government intervention, the decline in farm and urban mortgage interest rates would have been even less.

The concentration of funds in savings institutions, by sharply reducing the number of persons responsible for investment decisions, has limited competition in important respects.

Concentration has made it possible to dam off part of the savings stream, diverting part of the flow of savings into cash balances-idle cash hoards. This diversion has reduced the pressure of savings upon interest rates, and has prevented them from falling to competitive levels.

Concentration has not permitted the pressure of the flow of savings to affect all streams of investment equally. Those who can tap the central money markets for large amounts have been the principal beneficiaries the Federal Government, States, and municipalities, and,, perhaps most of all, industrials and public utilities, as shown by

45 Twenty-third Annual Report of the Board of Governors of the Federal Reserve System (1936), table 44, p. 120; Federal Reserve Bulletin, July 1939, p. 587.

40 M. H. Hoffman, "Rate of Return on New Mortgage Loans Made by the Bowery Savings Bank," Association News Bulletin of the Savings Bank Association of the State of New York, vol. XIX, p. 154.

47 Hearings before the Temporary National Economic Committee, Part 11, p. 5485.

48 From data prepared by the Bureau of Agricultural Economics in conjunction with the Work Projects Administration. Data on contract rates charged on life insurance company loans are in Hearings before the Temporary National Economic Committee, Part 10-A, p. 163. It should be noted that the rates there shown are probably for the best grade of mortgage and for mortgages of increasing quality.

The average rate of interest paid on all outstanding farm indebtedness appears to have decreased from 5.96 percent in 1929 to 5.59 percent in 1933, to 4.95 percent in 1938 (Hearings before the Temporary National Economic Committee, Part 28, ex. 2270, p. 15498). 49 Ibid., Part 28, p. 14979.

50 Ibid., Part 4, p. 1224.

decreasing interest rate differentials in face of the increasing advantages of tax exemption. The rates charged by banks on commercial loans show the same characteristics. The greatest reductions have gone to large business enterprises who can shuttle between the banks and the security markets. For them the banks have offered term loans up to 10 years at very low rates.

Farmers and owners of small urban properties cannot readily change from one institution to another. Hence rates do not fall to competitive levels; the interest rate structure becomes distorted, and potentially large fields of investment are choked off.

When these trends are coupled with the element that many large corporations tap the capital markets very infrequently, that many are able to finance their requirements from internal sources, as indicated in the next chapter, the problem of putting all our savings to work emerges in all its gravity.

CHAPTER X

CONCENTRATED CONTROL OF INVESTMENT POLICIES 1

The evidence summarized in the preceding chapter shows that expansion of national income is not limited by shortages of funds. Gross savings always provide a volume of funds sufficient to finance the capital expenditures necessary to maintain the level of national income.2

When an individual makes what he calls an "investment," he usually means that he has bought out in whole or in part somebody else's investment. He speaks of "investing" in bonds or stocks. But that is merely exchange of ownership. Obviously, no matter how often or at what prices the shares of United States Steel are bought and sold on the New York Stock Exchange, ingot capacity remains unaffected, unless the executives of the company take either their own money or other people's money and build new coke ovens and furnaces. Investment refers to the physical fact of spending money for capital goods. Employment is thus created by investment in the production of capital goods, whether they be producers' capital-for example, plant and equipment-consumers' capital, such as houses, or community capital, such as bridges or roads. Whether or not any of these "investments" pay makes no difference so far as initial employment is concerned. The building of a factory which later goes bankrupt and ceases to operate gives just as much employment at the time of building as one that earns steady returns. Employment is created whether or not projects are self-liquidating. Nor does it make any significant difference who spends the money—a businessman, a home-owner, or a Government official, or whether it comes from long- or short-term funds, from savings already made, or from bank credit.

3

The process of investment performs two useful functions. In the first place, it maintains and expands productive capacity. In good times investment expenditures provide approximately 20 percent of the gross national income. In financial and accounting terms, approximately one-half the gross investment in the United States in good years represents replacement. In the same terms, approximately two

This chapter was originally written by Dr. Oscar L. Altman, senior economist, National Resources Planning Board. It was read by Dr. Alvin H. Hansen, professor of economics, Harvard University; Dr. E. A. Goldenweiser, director of research and statistics, and George Terborgh, Federal Reserve Board; and revised by Dr. Theodore J. Kreps, professor of business economics, Graduate School of Business, Stanford University.

See Temporary National Economic Committee Monograph No. 12, Profits, Productive Activities, and New Investment, pp. xix and xx.

3 The niceties of definition are not considered here, since the issue is whether investment, no matter how defined, is a process controlled by few persons. One of the better definitions is that "Investment may be taken as the value of durable goods produced, excluding consumers' durable goods; plus additions to monetary stocks of gold and silver; plus additions to business inventories; and plus the net increase in assets acquired from non-residents."

223