BLP. & E: Vig THORAX Tg —p— ' FIGENTUM DES INSTITUTS FUR WELTWIRTSCHAFT MEL BIBLIOTHEK Nr. 7 72 429 NORTHWESTERN UNIVERSITY BUSINESS STUDIES LRN EE, fra Eo pg 3 <EL HI 30 A BS A sn ==" LE BUREAU OF BUSINESS RESEARCH NORTHWESTERN UNIVERSITY HORACE SECRIST DIRECTOR “The object of all science is the separa- tion of what is common and general from what is accidental and different.” W. STANLEY JEVONS The Principles of Science BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM A STUDY OF NORMS, TRENDS, AND CORRELATIONS OF THE ASSETS, DEPOSITS, EXPENSES, AND EARNINGS OF MEMBER BANKS PUBLISHED FOR THE BUREAU OF BUSINESS RESEARCH NORTHWESTERN UNIVERSITY — 5 y ~ ee “3. Lt = Ravi TRE Vo . % yoo Qo NS NN Tron Yr CHICAGO & NEW YORK A.W. SHAW COMPANY LONDON, A. W. SHAW AND COMPANY, LIMITED 1928 740 9 c gifothek Gu 1t51 8 Fo N/ \ Gd COPYRIGHT, 1928, BY A. W. SHAW COMPANY PRINTED IN THE UNITED STATES OF AMERICA PREFACE Tis is a research study: it is intended to be consulted and used rather than to be casually read. It was undertaken on the basis of certain hypotheses and was developed for the purpose of deter- mining their truth or error. It was assumed that out of the experiences of member banks over a period of years it would be possible by detailed analyses to discover norms, trends, and corre- lations—not evident on the surface—which could be measured and stated as tendencies, and that these would have both a prac- tical and a theoretical value. Practical in the sense that, if they were general and pervasive, banks could use them as bases for determining questions of policy; theoretical in the sense that they would relate banking experience to other phases of economic activity, and serve to make clearer the results of the working of competitive effort in a competitive system. Looking at the subject matter broadly, there appeared to be no reason why the results of banking operations could not be meas- ured and the prevailing uniformities quantitatively -expressed. Moreover, there appeared to be no reason for expecting them to be markedly different from those characterizing other lines of business activity carried on under competition. The processes obviously vary from trade to trade, but if, for the most part, competitive effort characterizes our economic order, do not its consequences reveal themselves in much the same way wherever observed? The belief that they do determined our methods of approach and conditioned our forms of analysis. Indeed, it is this belief which prompted not only this but other studies completed and in process. This analysis is exploratory. Not all of the results are “pay dirt,” but enough of them are of this type to warrant the con- clusions, among others, that there are “master facts” associated with banking, and that, quantitatively expressed, they summarize the prevailing and repetitive tendencies found in such enterprise. Those discovered are expressed as norms, trends, and correla- tions. They are not regarded as “laws” in an absolute and mechanistic sense: neither are they intentionally given an applica- WV a. viii BANKING STANDARDS tion beyond the data to which they relate. The banking experi- ence herein analyzed is finite; it relates to a specific period of time, and to a restricted “universe.” The writer has striven to keep these facts in mind, to stay close to his data, and to be specific regarding the types of analysis employed, selecting not one but many methods whenever the conclusions to which they pointed seemed to be doubtful. There is often a false suggestion of finality in statistical studies and in the generalizations arising from them. This some- times comes about because of the claims of the writer, but probably as frequently because of the attitude of mind of the reader. Knowing this to be true, the writer has consciously tried to forestall it by (1) publishing the details with which the analy- ses are concerned; (2) calling attention to both their similarities and differences; (3) confessing his interest in tendencies toward uniformity; (4) choosing methods of analysis intended to reveal them; and (5) explaining in detail the manipulative processes employed to isolate them. By so doing, he has, it is believed, made it difficult for the reader to misunderstand him, and at the same time he has kept constantly before himself the details from which his generalizations are drawn. Rigorously following out this process of study has extended the analysis; it may have complicated the treatment. There are, however, compensations. These are found in the fact that the reader is permitted (1) to follow the analysis; (2) to set up alternative methods of treatment, if he so desires, and (3) to draw his own conclusions provided those given seem to him to be unwarranted. These privi- leges a reader may in justice demand of a research study. Viewing them in this light, the writer has been mindful of making them possible. A number of people have shared in this study. I would name first my colleagues in the Bureau of Business Research, who, under direction, during a period of more than two and one half years, have continued to “prospect” for evidences of order in our banking system in the firm conviction that “pay dirt” lay just beyond the last obstruction. Together, we have labored, and I am glad to acknowledge their assistance. Those who should be mentioned by name are Miss Blanche L. Altman and J. A. Folse. Then, there are my colleagues in the University—]. W. Bell, PREFACE IX Vandeveer Custis, F. S. Deibler, H. P. Dutton, Richard T. Ely, H. A. Finney, H. G. Guthmann, E. H. Hahne, R. E. Heilman, E. P. Hohman, E. D. Howard, and H. C. Taylor—who were kind enough to read the manuscript in part or in whole, and to discuss with me both the manipulative processes and the conclusions. I am also indebted to others, among whom the following, be- cause of their interest, it is a pleasure to name: B. M. Anderson, Economist, Chase National Bank, New York; H. R. Bowser, Manager, Financial Statistics Division, Federal Reserve Bank of Boston; W. Randolph Burgess, Assistant Federal Reserve Agent, Federal Reserve Bank of New York; H. A. E. Chandler, Economist, National Bank of Commerce, New York; Frederic H. Curtiss, Chairman and Federal Reserve Agent, Federal Re- serve Bank of Boston; J. F. Ebersole, Economist, United States Treasury Department; E. A. Goldenweiser, Director, Division of Research and Statistics, Federal Reserve Board; Walter E. Lagerquist, Counselor on Investments, American Exchange- Irving Trust Company, New York; H. G. Moulton, President, The Brookings Institution, Washington, D. C.; Carl E. Parry, Assistant Director, Division of Research and Statistics, Federal Reserve Board; Carl Snyder, General Statistician, Federal Re- serve Bank of New York; and O. M. W. Sprague, Harvard University. Generous and helpful as have been the suggestions of certain of those named, the writer obviously assumes full responsibility for both the accuracy of the processes of analysis and the sound- ness of the conclusions. HORACE SECRIST May 1, 1928 CONTENTS PREFACE ... List oF TABLES ..... List oF CHARTS 2 8 8 vii xvii XxXxv PART I. INTRODUCTION Tue ProBLEM: ITS SIGNIFICANCE AND METHODS OF STUDY 1. The Problem . . . . . . +. . « + «+ «+ « 2. The Periods Covered and the Nature of the Data . 3. The Plan and Methods of Study . . . . . . . 4. The Conclusions, their Nature and Significance ed or PART II. NORMS AND TRENDS IN INDIVIDUAL SERIES FOR ALL MEMBER BANKS, BY DISTRICTS [i INTRODUCTION 11 NorMS AND TRENDS IN EARNING ASSETS i. Introduction . 2. The Composition of the Earning Assets . . . . . . (1) Ratios of Loans and Discounts to Earning Assets . . (2) Ratios of Investments to Earning Assets . . . 3 13 I5 I5 24 [V NorMs AND TRENDS IN DEPOSITS 1. Introduction . 2. The Relation of Total Deposits to Earning Assets . 3. The Relation of Demand Deposits to Earning Assets and to Total Deposits 32 32 32 14 1 BANKING STANDARDS (1) Ratios of Demand Deposits to Earning Assets . . . 41 (2) Ratios of Demand Deposits to Total Deposits . . . 49 4. The Relation of Time Deposits to Earning Assets and to Total Deposits . . . . . . . . ....... 57 (1) Ratios of Time Deposits to Earning Assets . . . . 57 (2) Ratios of Time Deposits to Total Deposits . . . . 63 NorMSs AND TRENDS IN Gross EARNINGS t. Introduction . . . . PE 2. The Relation of Gross Earnings to Earning Assets . . . 71 71 72 NorMs AND TRENDS IN OPERATING EXPENSES . . . . . . . 81 t. Introduction . . . . . . 81 2. Total Expense . . . . . 81 (1) The Relation of Total Expense to Earning Assets . . 81 (2) The Relation of Total Expense to Gross Earnings . . go (4) Al Member Banks . . . . . .. ..... QO (B) National Banks, and State Bank and Trust Company Members . . . . . . 96 3. Individual Expenses . . . . 3 107 (1) Ratios of Salaries and Wages to Earning Assets . . 107 (2) Ratios of Interest on Deposits to Earning Assets . . 111 (3) Ratios of Interest and Discounts on Borrowed Money to Earning Assets . . . . . . . . . . . II§ (4) Ratios of Taxes to Earning Assets . . . . . . . . IIQ (5) Ratios of “All Other” Expenses to Earning Assets . 123 J VII NorMS AND TRENDS IN NET EARNINGS t. Introduction . . . 2. The Relation of Net Earnings to Earning Assets . . . . 3. The Relation of Net Earnings to Gross Earnings . . . . (1) All Member Banks . . . . . . . . . . . ... (2) National Banks, and State Bank and Trust Company Members . . . 127 127 127 137 137 14% CONTENTS xiii PART III. CORRELATED SERIES FOR ALL MEMBER BANKS BY DISTRICTS VIII INTRODUCTION o JJ IX SERIES CORRELATED WITH EARNING ASSETS . . . . . . . . . 157 1. Series Correlated with Ratios of Loans and Discounts to Earning Assets . . . . . . . . . . . . . .. I57 2. Series Correlated with Ratios of Investments to Earning Assets . Lo. . 169 X Series CORRELATED WITH DEpPosITS . . . 1. Series Correlated with Ratios of Total Deposits to Earning Assets . . . . . . ; Series Correlated with Ratios of Demand Deposits . (1) Ratios of Demand Deposits to Earning Assets (2) Ratios of Demand Deposits to Total Deposits . 3. Series Correlated with Ratios of Time Deposits (1) Ratios of Time Deposits to Earning Assets (2) Ratios of Time Deposits to Total Deposits [71 171 175 I75 181 192 192 197 X1 Serres CORRELATED WITH GRoss EARNINGS 212 X11 SERIES CORRELATED WITH OPERATING EXPENSES i. Introduction . . . . . . . 2, Total Expense . > how 3. Individual Expenses (1) Salaries and Wages (2) Interest on Deposits . . . . . . . . . . . .. (3) Interest and Discounts on Borrowed Money . . . . XI111 SERIES CORRELATED WITH NET EARNINGS 228 228 229 242 242 244 247 32 1V BANKING STANDARDS PART IV. NORMS, TRENDS, AND CORRELATIONS OF SERIES IN THE BOSTON AND IN THE NEW YORK DISTRICTS BY MEMBER BANKS XIV [INTRODUCTION 265 XV NorMs, TRENDS, AND CORRELATIONS IN Gross EARNINGS RATIOS 270 1. Introduction . . . A + 2. Norms and Trends in Gross Earnings Ratios . . . . . 270 3. Series Correlated with Ratios of Gross Earnings to Earning Assets . . . C277 XVI NorMs, TRENDS, AND CORRELATIONS IN TOTAL EXPENSE RATIOS 285 t. Introduction . . . . . . «+. 28s 2. Norms and Trends in Total Expense Ratios . . . . . . 285 (1) Member Banks in District 1—Boston . . . 285 (2) A Sample of the Member Banks in District 2—New York . . . . . . CL... . 208 3. Series Correlated with Ratios of Total Expense to Earning Assets—Member Banks in District —Boston . . . . 300 XVII Norms, TRENDS, AND CORRELATIONS IN NET EARNING RATIOS . 313 i. Introduction . . I 3 & 2. Norms and Trends in Net Earnings Ratios . . . . . . 313 3. Series Correlated with Ratios of Net Earnings to Earning Assets . . 32r PART V. GENERAL SUMMARY AND INTERPRETATION XVIII GENERAL SUMMARY 345 INTERPRETATION TL 7 7 4C CONTENTS APPENDIXES TIT AND II APPENDIX I. Relative Effects of Changes in Gross Earnings and in Total Expense Ratios on Changes in Ratios of Net Earnings, Member Banks, Boston Federal Re- serve District, 1924-1925 . . « +. . +. + + +. . . Illustrations of Correspondent Relations of Mem- ber Banks, Boston Federal Reserve District, 1924 389 ApPENDIX II. INDEX TO TABLES AND CHARTS . . . . 305 INDEX TO DISCUSSION . » 7 TABLES 1. Number of Member Banks in the Federal Reserve System by Districts and Years, 1919-1923. . cee Percentage Relation of All Member Banks to the Total Banks in the United States. . 3. Ratios of Loans and Discounts to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts. . . 1. Percentage Difference from District Average, 1919-1925, of Ratios of Loans and Discounts to Earning Assets for All Member Banks, by Years and Federal Reserve Districts Number of Districts with Ratios of Loans and Discounts to Earning Assets Above or Below Their Respective Aver- ages for the Period 1919-1925.... SN Percentage Change from Year to Year of Yearly District Ratios of Loans and Discounts to Earning Assets in All Member Banks, by Years and Federal Reserve Districts Number of Districts with Ratios of Loans and Discounts to Earning Assets Increasing or Decreasing from Year to Year, 1919-1925 . . Comparative Positions and Year-to-Year Directions of Change in District Ratios of Loans and Discounts to Earning Assets . a. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Loans and Discounts to Earning Assets. - Percentage Differences of District Averages of Ratios of Loans and Discounts to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole. . 0 7 Q J. 10. II. Number of Years, 1919-1925, in Which the Different Dis- trict Ratios of Loans and Discounts to Earning Assets are Above or Below the Corresponding Yearly Ratios for the Country as a Whole. 12. Ratios of Investments to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts . . I3 [A [5 rR 9 LQ 9 27) [ Xv. xviii BANKING STANDARDS 13. Percentage Difference from District Average, 1919-1925, of Ratios of Investments to Earning Assets for All Member Banks, by Years and Federal Reserve Districts. ........ Percentage Change from Year to Year of Yearly District Ratios of Investments to Earnings Assets in All Member Banks by Years and Federal Reserve Districts........ Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Investments to Earning Assets..... 16. Percentage Differences of District Averages of Ratios of Investments to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country asa Whole ......... 17. Ratios of Total Deposits to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Fed- eral Reserve Districts ......- 18. Percentage Difference from District Average, 1919-1925, of Ratios of Total Deposits to Earning Assets for All Mem- ber Banks, by Years and Federal Reserve Districts. .... Number of Districts with Ratios of Total Deposits to Earn- ing Assets Above or Below Their Respective Averages for the Period, I9IQ9-I025...cvvevrerveecaensennnns Percentage Change from Year to Year of Yearly District Ratios of Total Deposits to Earning Assets in All Mem- ber Banks by Years and Federal Reserve Districts. ..... Number of Districts with Ratios of Total Deposits to Earn- ing Assets Increasing or Decreasing from Year to Year, 1019-1925 «vo: - vu: . Comparative Positions and Year-to-Year Directions of Change in District Ratios of Total Deposits to Earning Assets .. Cee Percentage Differences of District Averages of Ratios of Total Deposits to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole cee Number of Years, 1919-1925, in Which the Different Dis- trict Ratios of Total Deposits to Earning Assets are Above or Below the Corresponding Yearly Ratios for the Country as a Whole. . 28, Ratios of Demand Deposits to Earning Assets in All Mem- ber Banks, Federal Reserve System, by Years and by Federal Reserve Districts. . 26 26 nr 1 ”8Q 33 34 24 35 26 26 37 38 1° TABLES 26. Percentage Difference from District Average, 1919-1925, of Ratios of Demand Deposits to Earning Assets for All Member Banks, by Years and Federal Reserve Districts Number of Districts with Ratios of Demand Deposits to Earning Assets Above or Below Their Respective Aver- ages for the Period 1910-1925... _. 28. Percentage Change from Year to Year of Yearly District Ratios of Demand Deposits to Earning Assets in All Member Banks by Years and Federal Reserve Districts 29. Number of Districts with Ratios of Demand Deposits to Earning Assets Increasing or Decreasing from Year to Year, 1919-1925 ......- .. 30. Comparative Positions and Year-to-Year Directions of Change in District Ratios of Demand Deposits to Earn- ing Assets .. 31. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Demand Deposits to Earning Assets. . 32. Percentage Differences of District Averages of Ratios of Demand Deposits to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole... 33. Number of Years, 1919-1925, in Which the Different Dis- trict Ratios of Demand Deposits to Earning Assets are Above or Below the Corresponding Yearly Ratios for the Country as a Whole. ..... 34. Ratios of Demand Deposits to Total Deposits in All Mem- ber Banks, Federal Reserve System, by Years and by Federal Reserve Districts... 35. Percentage Difference from District Average, 1919-1925, of Ratios of Demand to Total Deposits for All Member Banks, by Years and Federal Reserve Districts........ 36. Number of Districts with Ratios of Demand Deposits to Total Deposits Above or Below Their Respective Aver- ages for the Period, 1919-1925. . 37. Percentage Change from Year to Year of Yearly District Ratios of Demand Deposits to Total of Time and De- mand Deposits in All Member Banks by Years and Fed- eral Reserve Districts. . - Number of Districts with Ratios of Demand Deposits to Total Deposits Increasing or Decreasing from Year to Year, 1919-1925 .. 38. gx 43 43 414 14d {4 }5 15 17 10 51 51 32 ye y BANKING STANDARDS 39. Percentage Differences of District Averages of Ratios of Demand Deposits to Total Deposits for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole. . 40. Number of Years, 1919-1925, in Which the Different Dis- trict Ratios of Demand Deposits to Total Deposits are Above or Below the Corresponding Yearly Ratios for the Country as a Whole... 41. Ratios of Time Deposits to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts ..... 12. Percentage Difference from District Average, 1919-1923, of Ratios of Time Deposits to Earning Assets for All Mem- ber Banks, by Years and Federal Reserve Districts. .... 43. Percentage Change from Year to Year of Yearly District Ratios of Time Deposits to Earning Assets in All Member Banks by Years and Federal Reserve Districts. ....... 44. Percentage Differences of District Averages of Ratios of Time Deposits to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole ....... 45. Ratios of Time Deposits to Total Deposits in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts .... 46. Percentage Difference from District Average, 1919-1925, of Ratios of Time to Total Deposits for All Member Banks, by Years and Federal Reserve Districts. .... > ® 47. Percentage Change from Year to Year of Yearly District Ratios of Time Deposits to Total Deposits in All Member Banks by Years and Federal Reserve Districts. ........ Percentage Differences of District Averages of Ratios of Time Deposits to Total Deposits for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole. . “% 4 District Ratios of “Interest Received” to Gross Earnings for All Member Banks, 1924 and 192%5....... 48. 49. Ratios of Gross Earnings to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts ........... : ” 51. Percentage Difference from District Average, 1919-1925, of 3.2 53 58 60 60 61 64 66 66 67 "1 7 TABLES Ratios of Gross Earnings to Earning Assets for All Mem- ber Banks, by Years and Federal Reserve Districts. .... 52. Percentage Change from Year to Year of Yearly District Ratios of Gross Earnings to Earning Assets in All Mem- ber Banks by Years and Federal Reserve Districts. ... 53. Comparative Positions and Year-to-Year Directions of Change in District Ratios of Gross Earnings to Earning Assets .. i. 54. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Gross Earnings to Earning Assets. 55. Percentage Differences of District Averages of Ratios of Gross Earnings to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole .... “ee 56. Ratios of Total Expense to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Fed- eral Reserve Districts. . 57. Percentage Difference from District Average, 1919-19235, of Ratios of Total Expense to Earning Assets for All Mem- ber Banks, by Years and Federal Reserve Districts. .... 58. Percentage Change from Year to Year of Yearly District Ratios of Total Expense to Earning Assets in All Mem- ber Banks by Years and Federal Reserve Districts. ..... 59. Comparative Positions and Year-to-Year Directions of Change in District Ratios of Total Expense to Earning Assets ... 60. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Total Expense to Earning Assets. . 61. Percentage Differences of District Averages of Ratios of Total Expense to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as 3 Whole. , 62. Ratios of Total Expense to Gross Earnings in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts. ... 63. Number of Districts with Ratios of Total Expense to Gross Earnings Above or Below Their Respective Averages for the Period, 1919-1925... .- oe 64. Number of Districts with Ratios of Total Expense to Gross xxi 14 75 75 76 77 R 2 34 24 35 R6 37 J0 D2 xxii BANKING STANDARDS Earnings Increasing or Decreasing from Year to Year, 1919-1025 .ovuso nes mR Ra Comparative Positions and Year-to-Year Directions of Change in District Ratios of Total Expense to Gross Earnings . pp 65. 66. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Total Expense to Gross Earnings... 67. Number of Years, 1919-1925, in Which the Different Dis- trict Ratios of Total Expense to Gross Earnings are Above or Below the Corresponding Yearly Ratios for the Country as a Whole. - ae 68. Ratios of Total Expense to Gross Earnings in National Banks, Federal Reserve System, by Years and by Federal Reserve Districts. .. 50. Ratios of Total Expense to Gross Earnings in State Banks, Federal Reserve System, by Years and by Federal Re- serve Districts. . - Number of Districts with Ratios of Total Expense to Gross Earnings for National Banks and for State Bank and Trust Company Members Above or Below Their Respec- tive Averages for the Period, 1919-1925.... - . Number of Districts in Which the Ratios of Total Expense to Gross Earnings in National Banks and State Bank and Trust Company Members Agree or Disagree as to Their Positions Relative to Their Respective Averages for the Period, 1919-1925....... . ny Number of Districts with Ratios of Total Expense to Gross Earnings for National Banks and for State Bank and Trust Company Members Increasing or Decreasing from Year-to-Year, 1919-1925 ... Number of Districts in Which the Directions of Change from Year to Year in Ratios of Total Expense to Gross Earnings in National Banks and State Bank and Trust Company Members Agree or Disagree, 1919-1925..... Number of Years, 1919 to 1925, in Which the District Ratios of Total Expense to Gross Earnings for National Banks and for State Bank and Trust Company Members were Above or Below the Corresponding Yearly Ratios for the Country as a Whole. ........... 75. Number of Years in Which the District Ratios of Total Expense to Gross Earnings for National Banks and for 03 03 04 04 07 08 100 101 102 102 10 TABLES State Bank and Trust Company Members Agree or Dis. agree as to Their Position Relative to the Yearly Aver ages for the Country, 1910-1925. 76. Ratios of Total Salaries and Wages per $1,0co of Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts. . Cees 77. Ratios of Interest on Deposits per $1,000 of Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts. ... »8. Ratios of Interest and Discounts on Borrowed Money per $1,000 of Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Dis- tricts ........- 79. Ratios of Taxes per $1,000 of Earning Assets in All Mem- ber Banks, Federal Reserve System, by Years and by Federal Reserve Districts. ......- Leen 80. Ratios of All Other Expenses per $1,000 of Earning Assets in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts. 81. Ratios of Net Earnings to Earning Assets in All Member Banks, Federal Reserve System, by Years and by Fed- eral Reserve Districts. 82. Percentage Difference from District Average, 1919-1925, of Ratios of Net Earnings to Earning Assets for All Mem- ber Banks, by Years and Federal Reserve Districts. .... Percentage Change from Year to Year of Yearly District Ratios of Net Earnings to Earning Assets in All Member Banks by Years and Federal Reserve Districts. ........ 84. Comparative Positions and Year-to-Year Directions of Change in District Ratios of Net Earnings to Eaming Assets... 85. Comparative Percentage Amounts of Deviation from Dis- trict Levels and Net Year-to-Year Change in Ratios of Net Earnings to Earning Assets. - RE. Percentage Differences of District Averages of Ratios of Net Earnings to Earning Assets for All Member Banks, Federal Reserve System, from Averages for the Country as a Whole .... Ce 87. Ratios of Net Earnings to Gross Eamings in All Member Banks, Federal Reserve System, by Years and by Federal Reserve Districts . xxiii [0g [08 ITY [1g I1Q 123 128 [31 [32 133 [34 [35 (38 KXIV BANKING STANDARDS 88. Number of Districts with Ratios of Net Earnings to Earn- ing Assets and of Net Earnings to Gross Earnings, Above or Below Their Respective Averages for the Period, 1919- 1925 ..-- A IAQ Number of Districts in Which the Ratios of Net Earnings to Earning Assets and of Net Earnings to Gross Earnings Agree or Disagree as to Their Positions Relative to Their Respective Averages for the Period, 1919-1925........ Number of Districts with Ratios of Net Earnings to Earn- ing Assets and of Net Earnings to Gross Earnings In- creasing or Decreasing from Year to Year, 1919-1925. . pr. Number of Districts in Which the Directions of Change from Year to Year in Ratios of Net Earnings to Earning Assets and of Net Earnings to Gross Earnings Agree or Disagree, 1919-1925...... Cees 140 IA 142 02. Number of Years, 1919-1925, in Which the District Ratios of Net Earnings to Earning Assets and of Net Earnings to Gross Earnings were Above or Below the Correspond- ing Yearly Averages for the Country as a Whole. ....... Number of Years in Which District Ratios of Net Earn- ings to Earning Assets, and of Net Earnings to Gross Earnings were, in the Same Years, Above or Below the Yearly Averages for the Country as a Whole, 1919-1925 Ratios of Net Earnings to Gross Earnings in National Banks, Federal Reserve System, by Years and by Fed- eral Reserve Districts. . Ratios of Net Earnings to Gross Earnings in State Banks, Federal Reserve System, by Years and by Federal Re- serve Districts ... 14% 03. 144 04. 146 95. 06. Correlation of District Differences of Ratios in Paired Series; Loans and Discounts and of Gross Earnings to Earning Assets ........- inn ese 138 97. Correlation of District Deviations of Ratios in Paired Series 158 98. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series....... . er-ee. I60 147 99. Net Percentage Year-to-Year Changes in Different Ratios Correlated with Position and Direction of Change in Ratios of Loans and Discounts to Earning Assets, 1919- [025 ee 8 0 ® 0 0 0 To a 0 0 08 100. Correlation of Deviations of Ratios in Paired Series...... roi. Nature of Correlation of Percentage Differences and 163 165 TABLES XXV Changes from Year to Year of Ratios in Paired Series, 1910-1925 «evven- seven 170 ro2. Correlation of District Deviations of Ratios in Paired Series 172 103. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series. . “vee 173 104. Net Percentage Year-to-Year Changes in Different Ratios Correlated with Position and Direction of Change in Ratios of Total Deposits to Earning Assets. .......c.. 174 105. Correlation of Deviations of Ratios in Paired Series...... 174 106. Correlation of District Deviations of Ratios in Paired Series 176 Net Percentage Differences of Ratios from Their District Levels Correlated with Corresponding Differences in Ratios of Demand Deposits and of Loans and Discounts to Earning Assets, 1919-1925... 108. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series... 177 78 I10Q. Net Percentage Changes from Year to Year in Ratios Corre- lated with Corresponding Changes in Ratios of Demand Deposits and of Loans and Discounts to Earning Assets, I10I1Q-1Q2§ * EE EEK] 179 110. Correlation of Deviations of Ratios in Paired Series...... 180 111. Correlation of District Deviations of Ratios in Paired Series 182 r12. Net Percentage Differences from Their District Levels for Ratios Correlated with Corresponding Differences in Ratios of Demand Deposits to Total Deposits and of Loans and Discounts to Earning Assets, 1919-1925. ... 113. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series. oe 183 184 Net Percentage Changes from Year to Year in Ratios Corre- lated with Corresponding Changes in Ratios of Demand Deposits to Total Deposits and of Loans and Discounts to Earning Assets, 1919-1925. . coon 11g. Correlation of Deviations of Ratios in Paired Series. .... 116. Correlation of District Deviations of Ratios in Paired Series ......- 185 189 [93 117. Net Percentage Differences from Their District Levels for Ratios Correlated with Corresponding Differences in Ratios of Time Deposits and of Investments to Earning Assets, 1919-1025 . 104 xxVi BANKING STANDARDS 118. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series... - 119. Net Percentage Changes from Year to Year in Ratios Correlated with Corresponding Changes in Ratios of Time Deposits and of Investments to Earning Assets, 1919-1925 .. 5 W404 120. Correlation of Deviations of Ratios in Paired Series. ...... 121. Correlation of District Deviations of Ratios in Paired Series .... . 122. Ratios of Total Expense to Gross Earnings, All Member Banks in Federal Reserve District 1, Classified by Ratios of Time to Gross (Total) Deposits, 1923-1925........ Ratios of Net Earnings to Earning Assets, All Member Banks in Federal Reserve District 1, Classified by Ratios of Time to Gross (Total) Deposits, 1923-1925. ........ 124. Number of District-Years in Which Member Banks Had Ratios of Time Deposits and Ratios of Total Expense, Deviating Classified Percentage Amounts from District Averages, 1919-1025 ......- 123. 125. Number of District-Years in Which Member Banks Had Ratios of Time Deposits and Ratios of Net Earnings De- viating Classified Percentage Amounts from District Averages, 1010-1028 ...... - 126. Net Percentage Differences from District Levels for Ratios Correlated with Corresponding Differences in Ratios of Time Deposits to Total Deposits and of Investments to Earning Assets, 1919-1925%.... 127. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series. . 10§ 196 197 108 200 201 202 202 203 2006 128. Net Percentage Changes from Year to Year in Ratios Corre- lated with Corresponding Changes in Ratios of Time De- posits to Total Deposits and of Investments to Earning Assets, 1919-1925 .. Cees 129. Correlation of Deviations of Ratios in Paired Series. ...... 130. Nature of Correlation of Percentage Differences and Changes from Year to Year of Ratios in Paired Series, 1910-10925 .. - ceo. 2I0 131. Correlation of District Deviations of Ratios in Paired Series 214 132. Number of District-Years in Which Ratios of Total Ex- pense and of Net Earnings to Earning Assets Differed TABLES by Percentage Amounts from the District Averages, 1919-1925, Classified by the Corresponding Percentage Differences of Gross Earnings to Earning Assets....... 133. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series. . A. 134. Number of District-Years in Which Ratios of Total Ex- pense and of Net Earnings to Earning Assets Changed from Year to Year by Percentage Amounts, Classified by Corresponding Percentage Changes in Ratios of Gross Earnings to Earning Assets, I9I0-1025.c.eceeeeeanren 135. Correlation of Deviations of Ratios in Paired Series. ..... 136. Number of District-Years in which Ratios of Total Ex- pense and of Loans and Discounts to Earning Assets Dif- fered by Percentage Amounts from the Yearly Averages for the Country as a Whole, Classified by the Corre- sponding Percentage Differences in Ratios of Gross Earnings to Earning Assets, 1919-1925. 137. Nature of Correlation of Percentage Differences and Changes from Year to Year in Ratios of Paired Series, 1919-1925 . 138. Correlation of District Deviations of Ratios in Paired Series . 130. Number of District-Years in which Ratios of Investments and of Gross Earnings to Earning Assets Differed by Percentage Amounts from the District Averages, 1919- 19235, Classified by Corresponding Percentage Differences in Ratios of Total Expense to Earning Assets......... 140. Correlation of Year-to-Year Percentage Changes of District Ratios in Paired Series....... IAI. Number of District-Years in Which Ratios of Investments and of Gross Earnings to Earning Assets Changed from Year to Year by Percentage Amounts Classified by Corre- sponding Percentage Changes in Ratios of Total Ex- pense to Earning Assets, 1919-1925... I Correlation of Deviations of Ratios in Paired Series. ...... Number of District-Years in Which Ratios of Investments and of Gross Earnings to Earning Assets Differed by Per- centage Amounts from the Yearly Averages for the Coun- try as a Whole, Classified by the Corresponding Percent- age Differences in Ratios of Total Expense to Earning Assets, 1019-1925 . "a 142. 143. xxvii 216 218 220 224 226 227 220 232 224 236 238 240 xxviii BANKING STANDARDS 144. Correlation of District Deviations of Ratios in Paired Series 243 145. Correlation of District Deviations of Ratios in Paired Series 245 146. Number of District-Years in Which Ratios of Salaries and Wages and of Interest and Discounts on Borrowed Money to Earning Assets Differed by Percentage Amounts from the District Averages, 1919-1925, Classi- fied by Corresponding Percentage Differences in Ratios of Interest on Deposits to Earning Assets. .. . 147. Number of District-Years in Which Ratios of Investments to Earning Assets and of Time Deposits to Total De- posits Differed by Percentage Amounts from the District Averages, 1919-1925, Classified by the Corresponding Percentage Differences in Ratios of Interest and Dis- counts on Borrowed Money to Earning Assets. ........ 148. Nature of Correlation of Percentage Differences and Changes from Year to Year of Ratios in Paired Series, 1919-1925 +... ..- cee 149. Nature of Correlation in Percentage Deviations and Year- to-Year Changes in Different Series Paired........... 150. Nature of Correlation in Percentage Deviations and Year- to-Year Changes in Different Series Paired.... ....... 151. Nature of Correlation in Percentage Deviations and Year- to-Year Changes in Different Series Paired. .. ao 152. Nature of Correlation in Percentage Deviations and Year- to-Year Changes in Different Series Paired. . . — 153. Nature of Correlation in Percentage Deviations and Year- to-Year Changes in Different Series Paired........... 154. District and Years for which Ratios of Operation are Available for Individual Member Banks. “ren 155. Ratios of Gross Earnings to Earning Assets, Classified Member Banks, Boston Federal Reserve District, 1924- 1925 ... - .. 156. Distribution of Ratios of Gross Earnings to Earning Assets, Classified Member Banks, Boston Federal Reserve Dis- trict, for 1924 and 1925, Combined... -t ee Comparative Measures of Regression to Type for Ratios of Gross Earnings to Earning Assets, Member Banks, Bos- ton Federal Reserve District, 1924-1925.............. 158. Average Net Change in Ratios of Gross Earnings to Earn- I57. 248 250 255 256 257 258 259 266 271 272 274 TABLES ing Assets, Classified Member Banks, Boston Federal Reserve District, 1024-1925..cccceee “e 159. Correlation of Percentage Differences of Ratios in Paired Series—Gross Earnings to Earning Assets and Total Ex- pense to Earning Assets—Member Banks, Boston Fed- eral Reserve District, 1924 and 1925.... Correlation of Deviations of Ratios in Paired Series—Mem- ber Banks, Boston Federal Reserve District, 1924 and 1025 «..-- 160. 161. Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, 1922-1925, Classified by Size of City .. 162. Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, 1922-1925, Classified by Volume of Earning Assets . .d 163. Distribution of Ratios of Total Expense to Earning Assets, Classified Member Banks, Boston Federal Reserve Dis- trict, for the Combined Years, 1922-1925, Inclusive... 164. Percentage Deviations of Ratios of Total Expense to Earn- ing Assets from the Group Averages, 1922-1925, Classi- fied Member Banks, Boston Federal Reserve District, by Years ... oe 165. Net Percentage Year-to-Year Changes in Ratios of Total Expense to Earning Assets, Classified Member Banks, Boston Federal Reserve District, 1922-1925.......... 166. Comparative Positions and Year-to-Year Directions of Change in Group Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, 1022-1025 <evven. von 167. Comparative Percentage Amounts of Deviation from Group- Averages and Net Year-to-Year Change in Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, 1922-1925... .- 168. Comparative Measures of Regression to Type for Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, 1922-1925. . 169. Comparative Measures of Regression to Type for Ratios of Total Expense to Earning Assets, Member Banks, Boston Federal Reserve District, the Period 1922-1925....... 170. Average Net Change in Ratios of Total Expense to Earning XxXix 276 280 281 284 286 288 289 200 201 202 204 296 XXX BANKING STANDARDS Assets, by Pairs of Years, 1922-1925, Member Banks, Boston Federal Reserve District. . 2 171. Average Net Change in Ratios of Total Expense to Earning Assets in Successive Pairs of Years, 1922-1925, Classified Member Banks, Boston Federal Reserve District. ..... 172. Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve District, 1923-1925, Classi- fied by Size of City... 173. Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve District, 1923-19235, Classi fied by Volume of Earning Assets... 174. Distribution of Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve District, for the Combined Years, 1923-1925, Inclusive... .. -... 175. Percentage Deviations of Ratios of Total Expense to Earn- ing Assets from the Group Averages, 1922-1925, Classi: fied Member Banks, New York Federal Reserve District, by Years ........ RN 176. Net Percentage Year-to-Year Changes in Ratios of Total Expense to Earning Assets, Classified Member Banks, New York Federal Reserve District, 1923-1925........ 177. Comparative Positions and Year-to-Year Directions of Change in Group Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve Dis- trict, 1923-19285 +... -- ‘ois 178. Comparative Percentage Amounts of Deviation from Group- Averages and Net Year-to-Year Changes in Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve District, 1923-1925. . ' 170. Comparative Measures of Regression to Type for Ratios of Total Expense to Earning Assets, Member Banks, New York Federal Reserve District, 1023-1925. . .e 180. Average Net Change in Ratios of Total Expense to Earning Assets, by Pairs of Years, 1923-1925, Member Banks, New York Federal Reserve District......- Cee 181. Average Net Change in Ratios of Total Expense to Earn- ing Assets in Successive Pairs of Years, 1923-1925, Classified Member Banks, New York Federal Reserve District covonsssssusnsnsvnsnsnnmons wh bE 182. Average Net Change in Ratios of Total Expense to Earning 207 208 200 200 202 303 204 204 305 206 307% 208 TABLES Assets, by Pairs of Years, 1923-1925, Member Banks, Boston and New York Federal Reserve Districts. ...... Correlation of Percentage Differences of Ratios in Paired Series—Total Expense to Earning Assets and Net Earn- ings to Earning Assets—Member Banks, Boston Federal Reserve District, 1924 and 1925... .e 182. 184. Correlation of Deviations of Ratios in Paired Series— Member Banks, Boston Federal Reserve District, 1924 ANd 1925 tevevecncannnannnn tun en rh bees 185. Ratios of Net Earnings to Earning Assets, Classified Mem- ber Banks, Boston Federal Reserve District, 1924-1925. . 186. Distribution of Ratios of Net Earnings to Earning Assets, Classified Member Banks, Boston Federal Reserve Dis- trict, for 1924 and 1925, Combined. . i 187. Comparative Measures of Regression to Type for Ratios of Net Earnings to Earning Assets, Member Banks, Bos- ton Federal Reserve District, 1924-1925. 188. Average Net Change in Ratios of Net Earnings to Earning Assets, Classified Member Banks, Boston Federal Re- serve District, 1924-1925... - Correlation of Percentage Differences of Ratios in Paired Series—Net Earnings to Earning Assets and Gross Earn. ings to Earning Assets—Member Banks, Boston Fed- eral Reserve District, 1924 and 1925 : Correlation of Deviations of Ratios in Paired Series—Mem- ber Banks, Boston Federal Reserve District, 1924 and 1925 .. A. 191. Average Ratios of Net Earnings to Earning Assets, for Member Banks, Boston Federal Reserve District, Classi- fied by the Position of Ratios of Gross Earnings and of Total Expense to Earning Assets, Relative to Their Re- spective Averages for all Banks. . .. . Average Net Change, 1924-1925, in Ratios of Net Earnings to Earning Assets, for Member Banks, Boston Federal Reserve District, Classified by the Position of Ratios of Gross Earnings and of Total Expense to Earning Assets, Relative to Their Averages in 1924...c0cceeveecnceses 193. Average Net Change in Ratios of Net Earnings to Earning Assets, 1924-1925, for Member Banks, Boston Federal Reserve District, Classified by Direction of Change in Ratios of Gross Earnings and of Total Expense to Earn- ing Assets, 1924-1925. . £xxi 208 210 311 114 316 317 318 324 325 326 330 331 Xxxil BANKING STANDARDS 194. Average Net Change in Ratios of Net Earnings to Earning Assets, 1924-1925, for Member Banks, Boston Federal Reserve District, Classified by Direction of Change and Position of Ratios of Gross Earnings to Earning Assets, and by Position of Ratios of Total Expense to Earning Assets .. .... Co 195. Average Net Change in Ratios of Net Earnings to Earning Assets, 1924-1925, for Member Banks, Boston Federal Reserve District, Classified by Direction of Change and Position of Ratios of Total Expense to Earning Assets, and by Position of Ratios of Gross Earnings to Earning Assets ...vruinn... teen 196. Average Net Change in Ratios of Net Earnings to Earn ing Assets, 1924-1925, for Member Banks, Boston Fed- eral Reserve District, Classified by Direction of Change and by Position of Ratios of Gross Earnings and of Total Expense to Earning Assets........ Dominant Factor in Producing Net Changes in Ratios of Net Earnings to Earning Assets, 1924-1925, for Member Banks, Boston Federal Reserve District. . 198. Year-to-Year Trends in Bank Debits to Individual Accounts 199. Years in Which Bank Debits Are Above or Below the Seven-Year Average, 1019-1925. .......- 97. 200. Number of Districts in Which the Proportions of United States Securities to Total Investments, for All Member Banks, Increased or Decreased. ..... 201. Direction of the Year-to-Year Changes (June 30) in the Proportions of United States Securities to Total Bonds and Securities Held by National Banks.............. 202. Number of “Other Reserve Cities” in Which the Year-to- Year Changes in the Proportions of United States Se- curities to Total Bonds and Securities Held by National Banks Moved with or against the Trend for the Total for Such Cities........ 203. Direction of the Year-to-Year Changes in the Proportions of Different Types of Securities to Total Bonds and Se- curities Held by National Banks.... .e Median and Yearly Rates Charged by Member Banks in Different Cities on Prime Commercial Loans, Compared with the Median Rate for All Cities, 1922-1926........ 205. Number of City-Average Rates on Customers’ Paper Redis- counted with Federal Reserve Banks, Above, Below, or 204. 227 334 3358 341 353 354 359 359 360 362 363 TABLES Equivalent to the Average Rates for the Respective City- Groups, on Quarterly Call Dates, 1923 to 1926, for All Member Banks ... 206. Comparison, for Cities of Different Size, of Average Rates on Customers’ Paper Rediscounted with Federal Reserve Banks, Quarterly Call Dates, 1923 to 1926, for Member Banks by Districts .. 207. Comparative Positions and Call-to-Call Directions of Change in Average Rates Charged by Member Banks on Customers’ Paper Rediscounted with Federal Reserve Banks, March, 1923, to December, 1926. . 208. Annual Money Rates Customarily Charged Customers on Six Major Types of Loans. Averaged for All Cities..... xxxiil 364 365 366 357 APPENDIX I I. Groups and Numbers of Member Banks, Boston Federal Reserve District, Relative to Average Gross Earnings and Total Expense Ratios, 1924. - II. Residuals of Solution I .. ITI. Residuals of Solution S IV. Summary of Results for Separate Groups. V. Relative Influence of Gross Earnings and of Total Expense on Net Earnings .. VI. Computation of Best General Value of E’¢, the Coefficient Expressing the Most General Effect of a Change in Total Expense Ratios on a Change in Net Earnings Ratios. ... 374 376 378 380 381 282 APPENDIX II I. IT. IT. Number of Member Banks in the First Federal Reserve District, 1924, Reporting Classified Numbers of Principal Correspondents . . Number of Member Banks Located in Different States of the First Federal Reserve District, Classified by Location of Their Principal Correspondents, 1924. (1) With a correspondent in Boston ...- ‘eo (Continued.) Number of Member Banks Located in Different States of the First Federal Reserve District, Classified by Location of Their Principal Correspondents, 1924. (2) With no correspondent in Boston . . 380 390 301 CHARTS I Distribution of Yearly District Ratios of Loans and Dis- counts to Earning Assets, All Member Banks, 1919-1925 Ratios of Loans and Discounts to Earning Assets—All Mem- ber Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925....... Distribution of Yearly District Ratios of Investments to Earning Assets, All Member Banks, 1919-1925........ 2 3, 4. Ratios of Investments to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925...... Distribution of Yearly District Ratios of Total Deposits to Earning Assets, All Member Banks, 1919-1925.......... 5 6. Ratios of Total Deposits to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925...... Distribution of Yearly District Ratios of Demand Deposits to Earning Assets, All Member Banks, 1919-1925...... Ratios of Demand Deposits to Earning Assets—AIl Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925. ..... Distribution of Yearly District Ratios of Demand Deposits to the Total of Time and Demand Deposits, All Mem- ber Banks, 1919-1925 .. 7 8. D. IO. Ratios of Demand Deposits to Total Deposits—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925....... Distribution of Yearly District Ratios of Time Deposits to Earning Assets, All Member Banks, 1919-1925. .....000s Ratios of Time Deposits to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925. ..... Distribution of Yearly District Ratios of Time Deposits to the Total of Time and Demand Deposits, All Member Banks, 1019-1025 cove ereeceanece. connenesernsnnns t4. Ratios of Time Deposits to Total Deposits—All Member II. 12. 13. 106 23 25 30 33 39 42 18 50 54 50 Ly 6s 9. ® 4% XXXVI BANKING STANDARDS Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925...... 15. Distribution of Yearly District Ratios of Gross Earnings to Earning Assets, All Member Banks, 1919-1925. ........ 16. Ratios of Gross Earnings to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those of the Country as a Whole, 1919-1925....... 17. Distribution of Yearly District Ratios of Total Expense to Earning Assets, All Member Banks, 1919-1925......... 18. Ratios of Total Expense to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925....... 19. Distribution of Yearly District Ratios of Total Expense to Gross Earnings, All Member Banks, 1919-1925........ Distribution of Yearly District Ratios of Total Expense to Gross Earnings, 1919-1925—National Bank Members, State Bank Members... Ratios of Total Expense to Gross Earnings. Comparison of All Member, National, and State Bank and Trust Com- pany Member Banks, by Federal Reserve Districts, 1919- 1928 wvsse-- Ceeeees 22. Distribution of Yearly District Ratios of Salaries and Wages to Earning Assets. All Member Banks, 1919-1925....... Ratios of Salaries and Wages to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925. ..... 24. Distribution of Yearly District Ratios of Interest on De- posits to Earning Assets, All Member Banks, 1919-1925 25. Ratios of Interest on Deposits to Earning Assets—All Mem- ber Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925....... Distribution of Yearly District Ratios of Interest and Dis- counts on Borrowed Money to Earning Assets, All Member Banks, 1919-1925... Ratios of Interest and Discounts on Borrowed Money to Earning Assets—All Member Banks. Comparison of Fed- eral Reserve District Ratios with those for the Country as a Whole, 1919-1925 ... +e vu un 28. Distribution of Yearly District Ratios of Taxes to Earning Assets, All Member Banks, 1919-1925......- ......... 68 73 78 83 88 OI 00 106 109 IIO II2 114 116 118 120 CHARTS 29. Ratios of Taxes to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country asa Whole, 1919-1925. . 30. Distribution of Yearly District Ratios of “All Other” Ex- penses to Earning Assets, All Member Banks, 1919-1925 31. Ratios of “All Other” Expenses to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 32. Distribution of Yearly District Ratios of Net Earning As- sets, All Member Banks, 1919-1925... a Distribution of District Ratios of Net Earnings to Earning Assets with Reference to Variable District Ratios of Gross Earnings and of Total Expense to Earning Assets, All Member Banks, 1919-1925. . Ratios of Net Earnings to Earning Assets—All Member Banks. Comparison of Federal Reserve District Ratios witlr those for the Country as a Whole, 1919-1925...... 35. Distribution of Yearly District Ratios of Net Earnings to Gross Earnings, All Member Banks, 1919-1925......... Distribution of Yearly District Ratios of Net Earnings to Gross Earnings, 1919-1925—National Bank Members, State Bank Members ..- .. Ratios of Net Earnings to Gross Earnings. Comparison of all Member, National, and State Bank and Trust Com- pany Member Banks, by Federal Reserve Districts, 1919- 19025 .... 38. Comparison of Ratios of Loans and Discounts to Earning Assets and of Demand Deposits to Total Deposits, by Fed- eral Reserve Districts, 1919-1925... Comparison of Ratios of Loans and Discounts and of Gross Earnings to Earning Assets, by Federal Reserve Districts, 1919-1925 ... 39. 40. Comparison of Ratios of Loans and Discounts and of Total Expense to Earning Assets, by Federal Reserve Districts, 1010-1025 ...- Comparison of Ratios of Loans and Discounts and of Net Earnings to Earning Assets, by Federal Reserve Districts, 1919-1925 .... .. 42. Comparison of Ratios of Demand Deposits to Total Deposits and of Gross Earnings to Earning Assets, by Federal Re- serve Districts, 1919-1925.. -» kxxvil 122 124 126 120 130 136 130 148 150 162 164 [66 168 188 Xxxviii BANKING STANDARDS 43. Comparison of Ratios of Demand Deposits to Total Deposits and of Total Expense to Earning Assets, by Federal Re- serve Districts, 1919-1925... 44. Comparison of Ratios of Demand Deposits to Total Deposits and of Net Earnings to Earning Assets, by Federal Reserve Districts, 1919-1925 ....- Comparison of Ratios of Time Deposits to Total Deposits and of Total Expense to Gross Earnings, by Federal Re- serve Districts, 1919-1925......- "5a 45. 46. Comparison of Ratios of Gross Earnings and of Total Ex- pense to Earning Assets, by Federal Reserve Districts, 101Q-I025 «veu..- >» a 47. Comparison of Ratios of Gross Earnings and of Net Earn- ings to Earning Assets, by Federal Reserve Districts, 1919- 1925 eoecnconnn- Cr erenans 48. Comparison of Ratios of Total Expense and of Net Earn- ings to Earning Assets, by Federal Reserve Districts, 1010-10928 ....0..- Distribution of Ratios of Net Earnings to Earning Assets with Reference to Variable Ratios of Gross Earnings and of Total Expense to Earning Assets, Member Banks, Bos- ton Federal Reserve District, 1924 and 1925.......... 50. Changes in Ratios of Net Earnings to Earning Assets, Rela- tive to Changes in Ratios of Gross Earnings and of Total Expense to Earning Assets, Member Banks, Boston Fed- eral Reserve District, 1924-1925........ nw x 51. Debits to Individual Accounts—All Member Banks. Com- parison of Amounts in the Federal Reserve Districts with those for the Country as a Whole, 1919-1925.......... Comparison of Amounts of Earning Assets and Debits to Individual Accounts, by Federal Reserve Districts, 1919- [025 «vvvunn- Ceeeiaes APPENDIX I I. Regression Lines of Changes in Ratios of Net Earnings to Earning Assets on Ratios of Gross Earnings and on Ratios of Total Expense to Earning Assets, Member Banks, Bos- ton Federal Reserve District, 1024-1925. ...00c000av.ns APPENDIX II I. Correspondent Relations of a Member Bank, First Federal Reserve District, 1924... 188 100 208 222 223 2471 222 338 350 352 384 302 BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM PART 1 INTRODUCTION *. . . . the solution of any problem is nothing more than the establishment of in- telligible gemeral consistency. . ..’ FREDERICK BARRY The Scientific Habit of Thought THE PROBLEM: ITS SIGNIFICANCE AND METHODS OF STUDY I. THE PROBLEM THE problem with which the following pages deal is one of a type with which the writer has been concerned for a number of years. In the belief that within the current operations of our com- mercial and financial system there are hidden or master facts in- dicative of economic order, studies designed to disclose them have been planned and carried out. The present one proceeds upon the following hypotheses: (1) that norms and trends of similar type characterize series of data reflecting bank operation; (2) that many of the series are interrelated; (3) that the norms, trends and correlations obtaining are quantitatively measurable; (4) that a knowledge of them is of economic significance; and (5) that they are causally related to the operating processes of our competitive system. The problem attacked, therefore, is the verification of the truth or error of these hypotheses. 2. THE PERIODS COVERED AND THE NATURE OF THE DATA The periods, banks, and statistical series selected for study are as follows: 1. For each of the twelve Federal Reserve districts, taken as a unit: Years: 1919-19235, inclusive Banks: the entire membership Series: Total earning assets; loans and discounts; investments; total deposits; time deposits; demand deposits; gross earnings; total expense; salaries and wages; interest on deposits; interest and discount on borrowed money; taxes; “other” expenses: and net earnings. 2. For the First (Boston) District: Banks: the entire membership, individually BANKING STANDARDS Series and years: Gross earnings, 1924-192 5; total expense, 1922- 1925; net earnings, 1924-1925; 3. For the Second (New York) District: Banks: a sample of 280 member banks, individually Series and years: Total expense, 1923-1923. The various series of data were taken from the reports of the Federal Reserve Board, the Comptroller of the Currency, and from the files of the Federal Reserve banks of Boston and of New York, the latter sources being made available through the cour- tesy of the officers of these institutions. It will be noticed that the data for the country as a whole refer to Federal Reserve districts as units and cover the years 1919 to 1925, inclusive. The plan of analysis, briefly described in the next following section and fully set out at various places in the text treatment, required series running over a number of years. Comparable data, being avail- able beginning with 1919, were assembled by years through 1925 —the last year, at the time the compilations were made, for which the required figures, in all of the series, had been published. It was realized, of course, that banking conditions from 1919 to 1921 were somewhat abnormal, but to have selected only the subse- quent years would have so shortened the period as to have made the analysis of doubtful value. Moreover, the fact that the years 1919-1921 were unique argued strongly for their inclusion. The purpose of the study was to disclose norms, tendencies, and cor- relations, and if these obtain both in “abnormal” and in “normal” years, the evidence of system in banking affairs is strengthened. Indeed, it is far from certain that the criteria required to label periods as “normal” are at hand. The data for individual banks in the First and Second districts cover only those years which, at the time they were requested, were readily available. After all, if economic order of the type supposed characterizes the operations of our banking system, the matter of the years selected is relatively unimportant, provided the time studied is long enough for it to be disclosed. The data, with minor exceptions, are ratios, each series being expressed in terms of a suitable base, and the amounts used as percentages. By adopting such units, series are made comparable, changes and differences in absolute amounts, due to differences in the size of districts and shifting membership in the System, being allowed for in this manner. The ratios are given in the text tables THE PROBLEM—ITS METHODS OF STUDY 5 although it did not seem necessary to publish the dollar amounts upon which they are based. The latter, by districts, are matters of record and are generally available. 3. THE PLAN AND METHODS OF STUDY It is unnecessary to do more at this place than to indicate in general the methods of analysis used. Throughout the text dis- cussion, those employed are specifically stated, the steps in the manipulative processes, wherever involved, being set out clearly and in many cases fully illustrated. Briefly described, the meth- ods may be characterized as classificatory, tabular, and graphic. These promised to be most fruitful of results, and it is doubtful whether other methods would have served the purpose so well. Interest centered on district and yearly differences from type and upon changes from year to year, both in individual and related series, and these were most clearly revealed by the methods of study used. A fundamental canon of procedure throughout was to stay close to the data, to study their peculiarities intensely, all the time watching for similarities and differences, and to adopt those devices of summary and illustration best suited to disclose them. No single set of manipulative processes was found to be suf- ficient for the ends in mind. The writer is distinctly not one of those who believe that statistical techniques should be used “rule- of-thumb.” This study, more particularly, is exploratory; a variety of methods serves this end best, and these have been used, care being taken at each step in the process of analysis, to state precisely and, it is hoped, without ambiguity, what is done. Ac- cordingly, the text is extended. Tables and charts are freely used, first, to present the evidence supporting the various conclusions, and second, to assist the reader in following the analysis. The plan of the discussion is indicated broadly by the Table of Contents. Part I relates to the subject matter now being dis- cussed. Part II pertains to a consideration of the norms and trends in the individual series for member banks by districts, at- tention being directed primarily to the uniformities of the nature and of the percentage amounts of difference from type—district and country—the systematic nature of trends and year-to-year changes, analyzed by themselves and with respect to deviation e ) BANKING STANDARDS from district levels. Part III has to do with a study of the rela- tions between district series with respect to their variation and changes, the purpose of the analysis being to discover the manner in which the series are related, to measure the relations, and to record and illustrate them. Much of the text is concerned with a discussion of the probable occasion for those discovered, and with their causal order. This latter phase is best illustrated in Chap- ter XIII, in which the conditions making for relatively high or low net earnings are considered in detail. Part IV utilizes the series of gross earnings, expense, and net earnings in the individual banks in the First and Second districts. The plan of discussion, while embodying the techniques of both Part II and Part III, altered to suit the peculiarities of the data, has the purposes of isolating the uniformities, trends, and cor- relations for the banks in each of the districts; of comparing them in the two districts; and of observing the degree to which they characterize banks within and by districts. It is here that fuller analysis is accorded a study of the causal order in the relations disclosed, Chapter XVII! having to do with ratios of net earnings, being especially addressed to this topic. It is here, also, that the evidence tending cumulatively to verify the hypotheses back of the study is woven together, reviewed, and recapitulated. Part V summarizes broadly the conclusions, and presents briefly and generally the conditions in the economic, financial, and banking system in which an explanation of the phenomena discovered is found. Such in outline are the plan of study and the methods by which it is made. 4. THE CONCLUSIONS, THEIR NATURE AND SIGNIFICANCE It is unnecessary, at this place, to summarize the net results of the study in respect to their specific and general character. To do the former would be to repeat what is said from time to time as the discussion proceeds; to do the latter would be to restate material found in Part V. It is sufficient for our present purposes to say that the truth of the hypotheses with which the study was begun has, it is believed, been demonstrated. There are conclu- 1 And Appendix I THE PROBLEM—ITS METHODS OF STUDY 7 sive evidences of order in our banking system, its several parts, geographical and group, responding in much the same manner to change, and its several processes being interrelated in a definite manner. Moreover, the norms, trends, and correlations seem to be broadly predictable. In general outline, they repeat them- selves year after year in all parts of the Federal Reserve system. They are quantitative evidences of the processes of competitive effort in a competitive system. Are these facts significant? They appear to be. Banks indi- vidually and collectively need standards or norms of operation which will serve as guides. They need also knowledge of trends and of the relative levels upon which banking in its various phases is carried on in different parts of the country. They need to know that forces are constantly in operation tending to bring rates of earnings, for instance, to conditions of equilibrium, and that these forces, interrelated with the fortunes of business, are operat- ing in the same direction at a given time in all parts of the country. They need measures of the nature and of the degree of the in- terrelation of banking processes, representative of groups broad enough to give them statistical significance. They should welcome facts which indicate for groups of banks the combinations of con- ditions concerning the composition of their earning assets and of their deposits, and so forth, tending to be associated with rela- tively high or low gross earnings, expense, and net earnings. It is facts of this and of other types which the study discloses, partly as a direct and partly as a by-product of its major purpose—the search for order in our economic system. The results of the study may have general economic signifi- cance, inasmuch as they seem to demonstrate that, for the years covered and for the institutions involved, the results of widely dispersed competitive effort can be charted and measured. More- over, they disclose patterns, repeated again and again, associated with, if not causally related to, such effort. Then, too, the pat- tern of regression to type, in so far as expenses of operation are concerned, is essentially the same as that found in the field of retail distribution,? the details concerning which, with respect to 2 See the writer's Competition in the Retail Distribution of Clothing—a Study of Expense or “Supply” Curves, The Bureau of Business Research, Northwestern University, Chicago, 1023; Expense Levels in Retailing—A Study of the “Repre- sentative Firm” and of “Bulk-Line” Costs in the Distribution of Clothing, The 3 BANKING STANDARDS men’s clothing, have been presented, and which, with respect to other trades, will soon be published. Bureau of Business Research, Northwestern University, Chicago, 1924; and The Widening Retail Market and Consumers’ Buying Habits, A. W. Shaw Company, Chicago, 1926. BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM PART II NORMS AND TRENDS IN INDIVIDUAL SERIES FOR ALL MEMBER BANKS. BY DISTRICTS “For research is but diligent search whick enjoys the high flavor of primitive hunt- ing.” James HARVEY ROBINSON The Mind in the Making Y INTRODUCTION THE following chapters of Part II have to do with an analysis, by Federal Reserve districts, of individual series of banking data. The dollar amounts, taken from various reports of the Federal Reserve Board for the years 1919 to 1923, are expressed in terms of suitable bases, in this way making them comparable by years and by districts. The ratios thus obtained are used, first, to measure the nature and the percentage amounts of variability, year by year, for each district from its own seven-year average; second, to determine the type and percentage amounts of change from year to year; third, to study the relations between year-to- year changes and deviations from type; and fourth, to determine the nature and percentage amounts of variation of the several districts’ ratios from those for the twelve districts combined. The years covered are those for which data for all of the se- lected series were available. Inasmuch as the fiscal year used by member banks in their reports to the Comptroller of the Currency and to the Federal Reserve Board ends on June 30, it was neces- sary to define the years in keeping with this fact. In the cases of gross and net earnings and of expenses each year, the dollar amounts are the totals for the year ending June 30. The amounts of earning assets and of deposits—both totals and parts—are av- erages of the figures reported as of December 31 of the preceding year and of June 30 of the year in question. For these two dates, data were available for the years 1919-1925. A word of explanation is in point with respect to the use of earning assets as a base for the ratios in the various series. What was wanted were amounts best illustrative of the volume of busi- ness transacted, and this appeared to be the total earning assets— the income-producing portion of capital, surplus, and deposits. This base, however, is not used exclusively, others being selected whenever there appeared to be a logical relation between the numerator and the denominator, and when the amounts expressed [2 BANKING STANDARDS in alternative form seemed likely to indicate norms and trends significant for the purposes in mind. The study is not one of ratios as such; it is rather an analysis of the variability of a se- lected number of ratios, undertaken for the express purpose of discovering, of measuring, and of comparing their nature and de- gree of consistency from time to time and from district to district. TIX NORMS AND TRENDS IN EARNING ASSETS I. INTRODUCTION “EARNING ASSETS,” as used in this study, consist of the total of (1) loans, discounts, and overdrafts,! and (2) investments of all member banks in each of the Federal Reserve districts. The amounts for each of the years 1919-1925,2 inclusive, are the av- erages of the totals reported for December 31 and June 30— December 31 for the year preceding, and June 30 for the year to which all comparisons and statistics relate. That is, the amounts TABLE 1 NuMBER oF MEMBER BANKS IN THE FEDERAL RESERVE SYSTEM BY DISTRICTS AND YEARS, 1019-1025 FEDERAL RESERVE DISTRICTS Total Boston...... New York... Philadelphia. Cleveland... Richmond... Atlanta. ..,. Chicago..... 5t. Louis. ....... Minneapolis. . . Kansas City....... .. Dallas. ................. San Francisco. . 1910 ag. - 47° » or Alyrape ws = © "aa WVip= == Terre an Ic~ 0300 074 Fe 122 171 £88 ‘50 Fam 438 793 rg "0 ~ 3 1 “2 7.9 ¢ -r8 ra ~ Eh Ty i” 0 -fr yo -, Fe 5 v ven 2 201% “4 776 1028 0538 +20 R66 149 Sng ror ‘04 ‘ax iso 048 Uy ISX "Soutoe: Federal ” Reserve “Bulletin 1 The Federal Reserve Board classifies loans as follows: Those secured by United States Government obligations; other stocks and bonds; real estate mortgages or other real estate liens; and all other loans. Investments are specified by classes as follows: (1) domestic securities, which include United States Government securi- ties, state, county, and municipal bonds, and all other bonds, stock of Federal Re- serve banks, stock of other corporations, other domestic securities; and (2) foreign securities, which consist of bonds of foreign governments, and other foreign bonds and securities, including those of municipalities. 2 For the years of 1924 and 1925, ending June 30, the amounts are averages of the reported figures on call dates. A BANKING STANDARDS TABLE 2 PERCENTAGE RELATION OF ALL MEMBER BANKS To THE ToTAL¥* BANKS IN THE UNITED STATES PERCENTAGE YEARS (June 30) Average. ... A a ROR # FF oe B® a 00 vse e er kre * “as eer roe 3028 ns saasescrs O24. cuwisanns 1025... Number 22.0 30.3 21.2 51.6 32.6 “2.7 22 C 23 Earning Assets Total Deposits €or. 2 61.4 60.6 60.5 61.4 60.8 60.5 60.3 60.4 62.0 60.7 61.2 59.8% 61.9 60 1 62.4 ‘Except (1) the Federal Reserve Banks, Federal Land Banks, and Federal Intermediate Banks; and (2) a certain number of non-reporting private banks, which varies somewhat from year to year, but which was reported, by the Comptroller of Currency, to be 437 in June, 1925, and to have de- posits of $105,600,000. for each of the years ending June 30 are obtained by averaging the reported data for the preceding December 31 and for the stated June 30. Between June, 1919, and June, 1925, the number of member banks in the System increased from 8,822 to 9,538.2 The mem- bership, by years and by districts, is shown in Table 1. The im- portance of the banks in the Federal Reserve system, relative to all banks in the United States, is indicated in Table 2. From this table it is seen that the banks in the System, during the years 1010-19235, represent approximately 32% of the number and have approximately 60% of the earning assets and of the total deposits of all of the banks in the United States. Our interest, however, is not primarily in the changes in the membership of the banks in the System nor in the changes in the proportions which the earning assets and the total deposits of the member banks constitute of those for the banks in the entire country. It is rather in the composition of the earning assets of all member banks and of those in each of the several districts, when this is studied according to (1) the positions occupied by each district, year by year, relative to the average for the entire period covered; (2) the changes in each district from year to 8 These data refer to June 30. Source, Federal Reserve Bulletin. NORMS AND TRENDS IN EARNING ASSETS 15 year; and (3) the positions occupied by member banks in each district relative to those for all districts combined. We are also interested in the relations between changes in the relative com- position of the earning assets and other conditions of bank opera- tion, but this problem will receive attention later. It is the former matter with which the present discussion is concerned. 2. THE COMPOSITION OF EARNING ASSETS (1) Ratios of Loans and Discounts to Earning Assets If the ratios of loans and discounts* to earning assets for all member banks, by districts and by years, 1919 to 1925, are as- sembled into a single table, as is done in Table 3, considerable variation in the ratios is apparent. There are differences from year to year for each district, and from district to district for each year. Are there any consistencies or tendencies observable in the data? If the 84 ratios—7 for each of the twelve districts—are classified into frequency groups, as is done in Chart 1, a mode appears at 76% to 80%. Twenty-five per cent of all the ratios fall in this group. Relatively more fall below than above it, the dis- TABLE 3 RaT10S OF LoANS AND Discounts To EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS R aTIOR ne T.aane AND DISCOUNTS TO FARNING ASSETS FrpeEratr RESERVE DISTRICTS Average (All Districts) Boston. ..... New York. . Philadelphia. Cleveland... Richmond. . Atlanta..... “hicago. ... St. Louis. . .. Minneapolis... Kansas City. . Dallas. ........ San Francisen . \verage (1919- 1025) 72.00 (3.22 0.1¢ +4 ~ : Y2 Q7 1919 ! 60.32 13.12 10.08 7.59 1.66 79.14 59.0% 70.00 ww 6 ’ re 1920 1021 | 1922 1023 27%.07 6 OO ef 70.46 76.79 75.64 62.72 77° 18 52 rr 7° &- 70.90 66.92 s¢ °° * , 10 1024 { 1038 71.16 ° 60.60 71.63 68.02 60.52 66.094 3 Zs : 0 se. z . ’ & 7 EK X 2 y he pe a0 ¢ Hereafter, when the term “loans and discounts” is used it is intended to mean *loans, discounts, and overdrafts.” 16 BANKING STANDARDS CHART 1 D1sTRIBUTION OF YEARLY Di1sTRICT RATIOS OF LOANS AND DISCOUNTS TO EARNINGS ASSETS, ALL MEMBER BANKS, 1919-1925 Per Cent 15 20 25 Percentage Groups 0 fe A Number of Cases 66 and under 60 60 and under 64 64 and under 68 58 and under 72 72 and under 76 76 and under 80 80 and under 84 84 and under 88 1 i5 17 21 15 I vn TY ten Ey TIE rm. “ir a Bax: nn tribution “tailing off” to the group 56 and under 60 (57.59 being the minimum), and extending to group 84 and under 88 (84.31 being the maximum). But with this method of presenting the ratios, both yearly and district differences are ignored. Further study is necessary with them in mind. If the seven-year average ratio for each district is taken as a base from which to determine district and yearly variations, and the differences are measured in percentages by which the yearly amounts are greater or less than the base amounts, the details in Table 4 are obtained. This table, while showing considerable variation in the per- centages by which the ratios of loans and discounts to earning assets in each year in each district are greater or less than the district average ratio for the seven years, indicates certain uni- formities. Briefly, they are as follows: in 1919, 1923, and 1925, the ratios were relatively low; in 1920, 1921, and 1922, they were relatively high; in 1924, they were mixed—high and low. Con- sistency of position is apparent, yet it is not necessary by virtue of the way in which the comparisons are made. Differences from averages are, of course, part plus and part minus, yet the time when the respective differences occur does not have to coincide. NORMS AND TRENDS IN EARNING ASSETS 17 TABLE 4 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1925, OF RATIOS OF LOANS AND DISCOUNTS TO EARNING ASSETS FOR ALL MEMBER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVI DISTRICTS ~v Dyer a Orpeeervor vroM NITSTRICT AVERAGE, 1010-1025 ———— —————— -—~, 1928 Boston... .. New York. Philadelphy Cleveland. Richmond. Atlanta... Chicago. ... St. Louis. . .. Minneapolis Kansas City Dallas. .... San Francisco 25 6 t 0 w - They may be distributed at random. In this case, consistent rather than random distribution is found, the degree of consist- ency being indicated, in summary, in Table 5. The ratios of loans and discounts to earning assets for all mem- ber banks in the different districts may be further studied. In a given year, all or part of the districts may have ratios which are relatively high or low—the base of comparison being their own seven-year level. From the level in a given year, the ratios may rise or fall in the following year, the changes in the different dis- tricts tending to be random or consistent. The nature and per- centage amounts of change found to obtain for the data in ques- tion are given in Table 6. From this table, it is seen that the district ratios were higher in 1920 than in 1919, and higher in 1921 than in 1920. In 1922, as compared with 1921, and in 1923, as compared with 1922, the ratios decreased. An upward trend occurred between 1923and 1924, and a downward trend be- tween1924and 1925. Interest at this point is not so much in the average change in all of the dis- ~ Io BANKING STANDARDS tricts combined as it is in the consistency of direction of change among the different districts. Here again, there is no necessary arithmetical reason for this common movement. TABLE 6 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS OF L0oANS AND DISCOUNTS TO EARNING ASSETS IN ALL MEMBER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) — Boston. ...... New York. . Philadelphia . Cleveland. .. Richmond. . Atlanta....... ~hicago....... 5t. Louis. ...... Tinneapolis... {ansas City... Jallas......... 3an Francisco... sees EEE EERE PERCENTAGE CHANGE FROM YEAR TO YEAR 1923 1024 to to 1024 1925 1019 1920 to to 1020 1921 + 8.20 ¢ +r.24 1 —4.53 ° —2.80 +o0.99 | —2.10 + 4.20 + 7.93 {+ 8.90 + 9.20 +10.12 ov .6g +0.72 —0.25 +o0.27 +2.38 +2.42 +a.2¢ 4 —~6.16 -8.:8 -4.7s ~1.54 -0.02 ant —%.31 —3.20 —0.90 —2.82 —0.26 -0.F7 +1.03 +1.65 +-2.10 1.1.46 4-0.06 +0. 50 10.22 fr.12 ~~ 46 -0 12 3.60 +1.53 —0.78 —1.93 —0.90 —2.54 —0.05 —4-08 Fo —7.96 —4.27 +1.0¢ —3.01 + o.z1 ~+I.5I —- 4 —2.206 —0.61 It will be remembered that Table 3 shows the ratios in the dif- ferent districts each year to be widely different. Each district has its own level. Diversity in this respect is to be expected. The significant thing, at this point, is the tendency toward uniformity in the direction of change occurring in the twelve districts. It is not perfect except in two years—r1920 as compared with 1919, and 1923 as compared with 1922—and complete consistency is not to be expected. The directions of change are summarized in Table 7. The direction of year-to-year changes is of interest in another respect. If the ratios in a given year are high, relative to the levels fixed by the seven-year district averages, there is a marked tendency in the following year for them to decrease; conversely, if they are low as fixed by the same standard, the tendency in the following year is for them to increase. This fact is apparent from the detail in Table 8. Moreover, not only is there a tendency for ratios to decrease if they are high and to increase if they are low, but the net per- centage amounts of change vary directly with the percentage NORMS AND TRENDS IN EARNING ASSETS 19 TABLE ¥ NUMBER OF DisTrIicTS WITH RATIOS OF Loans AND Discounts To EARNING ASSETS INCREASING OR DECREASING FROM YEAR TO YEAR, 1010-10258 YEARS TABLE 8 CoMPARATIVE PosiTioNs AND YEAR-TO- YEAR DIrecTIONS OF CHANGE IN Dis- TRICT RATIOS oF Loans anp Dis- COUNTS TO EARNING ASSETS Pos‘tions P-lati-re ons. . a ~~ .e we Traps ~~ =m 1010-1020. ... 1920-1921... 1021-1022... 1022-1023... 1923-1924. . 1024-1025. . amounts of dispersion of the ratios from their seven-year levels. This fact is summarized in Table 9. That is, there is a regression to type—the ratios’ net percentage amounts of change from year to year varying directly with their percentage amounts of differ- ence from the seven-year district levels, and inversely with the signs. It would appear that on the whole there is a tendency for the ratios in each district to seek their own level. This result is not inherent in the amounts themselves; it is rather in the amounts with this sequence, the ratios being controlled by those who de- termine the composition of the earning assets—by those who TABLE 0 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT Levers AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF LOANS AND DiscouNTs TO EARNING ASSETS DIFFERENCES FROM DISTRICT AVERAGES, 1019-1025 Sign Number of Cases Percentage Groups Average Percentage NET PERCENTAGE CHANGE FROM YEAR TO YEAR Average 5.00 and over 2.50 tO 5.00 Under 2.ro0 Under 2.50 7 50 to 5.00 :.00 and over Average oy Whe bY Lo » Ln 51 BANKING STANDARDS decide as between loans and investments in the use of banking resources. There is another approach which is of interest in studying the ratios of loans and discounts to earning assets for the banks in the different districts during this series of years. The foregoing discussion was concerned with (1) the amounts themselves, (2) the variations from the district averages, and (3) the percentage changes from year to year. Attention is now directed to the posi- tions which the several district ratios each year hold relative to the yearly average for the country as a whole. The differences by amounts and signs are shown for the country as a whole in Table 10. How are these details to be summarized and interpreted? TABLE 10 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF LoaNs AND DiscoUNTS TO EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE Prep mack Drereoener ~ *RoM THE COUNTRY’S AVERAGES FEDERAL RESERVE Di1sTRICTS Boston...... New York, .. Philadelphia.. Cleveland.... Richmond. .. Atlanta. ..... chicago. . ... 3t. Louis. ... vinneapolis.. Lansas City. Jallas....... San Francisco, Average 1010-25) & 019 } 1920 1921 "a + ns m- » = 76 3.3% wo. Jy 1022 l 1023 | 1024 TT = 07 ~.62 en es + n.66 — 4.41 —14.95 — 5.93 +10.33 L 2 6 rr GG. + 5.20 | 192% + 2.11 — 4.18 ~13.82 — 0.28 +12.75 +11.49 + 3.88 3.74 Lo.29 + 6.47 © 16.8” + 2.38 If the average ratios for the period 1919 to 1925 are considered first, it is seen that Districts 2, 3, and 4 (New York, Philadelphia, and Cleveland) are relatively below, while all of the other dis- tricts are relatively above the averages for the country as a whole. But in how many of the separate years do the districts hold a given position? The answer to this question is found in Table 11. From this table, consistency is apparent, the districts tending un- mistakably to hold a given position during the entire period. In none of them does there tend to be a chance—fifty-fifty—be- havior. Moreover, those which are above, as those which are be- low, tend to be contiguous. NORMS AND TRENDS IN EARNING ASSETS 21 The foregoing discussion of the ratios of loans and discounts to earning assets has had to do primarily with the direction of change from year to year and with the relative position of the yearly district ratios, with re- spect (1) to a seven-year aver- age ratio for each district, and (2) to the yearly averages for the twelve districts combined. Littlehasbeensaidabout the per- centage amounts of the change from year to year and of the percentage amounts of disper- sion. In order to summarize them, Chart 2 is presented. This chart, drawn on a ratio basis, is to be interpreted as fol- lows: (1) The vertical positions of the pairs of solid and dotted lines on the chart have no significance. The inclinations of the lines represent the percentage changes from year to year in the ratios of loans and discounts to earning assets for the districts named. (2) The korizontal positions of the solid lines, for the districts placed opposite each other on the chart, indicate the rela- tive size of the percentage differences of the ratios for the dis- tricts as compared with the average ratios for the twelve districts combined. The dotted lines refer to the averages for the twelve districts combined. (3) The distance by which the solid line for pach district is above or below the dotted line indicates the per- centage amount by which the district ratio exceeds or falls short of the ratio for the country as a whole in the same year. (4) The short horizontal line for each district indicates the average ratio for that district for the seven-year period, 1919-1925—the dis- tance for any year, between this line and the solid line, indicating the percentage variation. Some of the more important characteristics of a chart drawn on a ratio basis are as follows: (1) equal vertical rises or equal up- ward slopes indicate equal rates of increase; (2) equal vertical drops or equal downward slopes indicate equal rates of decrease; Ko. BANKING STANDARDS CHART 2 RATIOS OF LOANS AND D1SCOUNTS TO EARNING ASSETS — ALL MEMBER Banks Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1923 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE cccacana- DISTRICTS eo 1919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 192° BOSTON TET —— Av, * srt trae... add Seman SI ADELPHIA RICHMOND ———— Teeaas res me aay ——— ran, hd RE CAINE AB LI RA SAL ~~ Seem ma - > eam smasmen cas LY Sr Sw mda —— NEW YORK Steam a mmssacng, co - CLEVELAND rr —— —_— ATLANTA . ST Louis i 7 —— — or KANSAS CITY sss eneoe - - - . ca. Seen, Tt earemmnnotenn SAN FRANCISCO eee ————— CT fe re - Ce eea Scales of « Percentage Change le c t1¢8 td 10 20 i919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 192% (3) comparative rates of increase (or of decrease) are shown by comparative slopes at the positions on the curves. With the facts in mind as to the manner in which the chart is prepared and the nature of ratio charts, the position and inclina- tion of the curves for the various districts may be compared. NORMS AND TRENDS IN EARNING ASSETS 23 The average ratios of loans and discounts to earning assets for the 12 districts combined increased 8.3% between 1919 and 1920, but this increase slackened to 1.2% between 1920 and 1921. Be- tween 1921 and 1922 the ratios fell 4.5%; and between 1922 and 1923, 2.9%. Between 1923 and 1924 there was an increase of 1.0%, this, however, being followed between 1924 and 1925 by a decrease of 2.2%. Between 1919 and 1921 the ratios increased, between 1921 and 1925 they decreased. These rates of change were much the same in all of the districts except the Fifth and Sixth (Richmond and Atlanta), both of which, for the first two years, closely agreed with but subsequently markedly differed from those for the country as a whole. The divergence became in- creasingly larger for Richmond for the years 1920 to 1925, and for Atlanta for the years 1920 to 1924. The districts with ratios throughout the whole period less than the average are Philadel- phia and Cleveland; those with ratios throughout the whole period greater than the average are Boston, Chicago, St. Louis, Minne- apolis, Kansas City, and Dallas. Those with ratios most closely agreeing both in size and in rate of change with ratios for the country as a whole are Boston, New York, Chicago, St. Louis, and San Francisco. In summary, the norms and trends in the ratios of loans and discounts to earning assets in the twelve Federal Reserve districts for the years 1919 to 1925 are as follows: Norms 1. For all the years, the modal or most common ratio is 76% to 80%, and the weighted arithmetic mean,’ 72% 2. District ratios were predominantly low, relative to the av- erage for the period 1919-1925, in 1919, 1923, and 1925. They were predominantly high, judged in the same manner, in 1920, 1921, 1922. In 1024, five districts were high, while seven were low. 3. The ratios of loans and discounts to earning assets for cer- tain districts are consistently below, while others are consistently above the average for the country as a whole—the districts occupying the respective positions being contiguous. 8 Obtained by dividing the total loans and discounts by the total earning assets for the 12 districts combined and multiplying by 100 (see Table 3) 24 Trends BANKING STANDARDS 1. Compared with the preceding year, ratios predominantly rose in 1920, 1921, and 1924; and predominantly fell in 1922, 1923, and 1925. 2. Ratios which are high, relative to the seven-year average for the district to which they apply, generally tend to decrease the following year; those which are low, when measured in the same manner, tend to increase, 3. The net percentage amounts of rise or of fall from year to year vary directly with the percentage amounts of dispersion from the seven-year averages. 4. The trend in the ratios was consistently upward from 1919 lo 1921; from 1921 to 1923, it was generally downward. (2) Ratios of Investments to Earning Assets The ratios of investments to earning assets for the years 1919 to 1925 for each and for all of the districts combined and for the combined years for each of the twelve districts are given in Table 12. The amounts are the complements of those for loans and discounts to earning assets—the two ratios for each year and district equaling 100. The average ratio of investments to earning assets for the com- TABLE 12 RATIOS OF INVESTMENTS TO EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) 3oston. ...... BH HE hin New York. ... RR <hiladelphia. . Cree “Cleveland. ... eee ichmond..... een stlanta........ : i ‘hicago....... -o3 t. Louis. ....,.. PRN “inneapolis. ... vn hon ansas City... ......... Jallas.......... . ........ San Francisco. ............. \verag: (1919- 1925) 28 oo 0.77 19.81 19-59 34 CF 77 6.03 RaTI0® ap INVES™= = 10 EARNING ASSETS I919 | 1920 1021 1922 1023 | 1924 20.68 24.03 | 24.00 27.44 } 20.54 ° 28 84 «0.8% 29.92 42.41 38.34 30 26 30 as 0 "1 6 93 23 17 22.1; 22.4¢ 20.78 22.5%. 24.36 3.28 2 3% 2 go : gn 22. rr 7.07 49% 19.70 28.21 32.60 24.55 37.14 ‘x 20 02 (9.f" 0, | TI "7.42 30.87 40.19 32.12 27 04 Ic 12 ’ ak 209.10 33.08 40.73 34.03 22.24 19.54 26.45 28.01 22.25 22.65 19.06 26.24 20.3% 31.08 39.48 33.06 21.49 10.14 26.29 22 10 1 a. 7 19.0: 25.10 14 J re Ls 38. | 1925 30.40 25.93 33.29 40.02 34.77 21.53 22.40 27.70 27.80 30.20 25.90 73.00 27.3* NORMS AND TRENDS IN EARNING ASSETS CHART 3 25 DISTRIBUTION OF YEARLY DiIsTrRICT RATIOS OF INVESTMENTS TO EARNING ASSETS, ALL MEMBER BANKS. 1010-1025 Per Cent Percentage Groups 0 15 and under 18 18 and under 21 21 and under 24 24 and under 27 27 ana under 30 30 and under 33 33 and under 36 36 and under 39 39 and under 42 42 and under 45 I — — a ‘— 10 15 20 2 25 30 1 Th Number of Cases > 12 20 13 3 bined years for all districts is 28%. From this figure, variation is observed for districts for the combined and individual years, and for years for the combined and individual districts. Neither the typical ratio nor the dispersion of the ratios is apparent from the table. Some notion of these facts is evident, however, from Chart 3, which shows by groups, irrespective of the separate years and districts, the distribution of the ratios. The most common ratio is between 21% and 24%. Differences from this amount, how- ever, are frequent; there are five ratios falling between 15% and 18%, and eight which are as much as or more than 36%. The form of the distribution about the mode is, of course, the opposite of that for ratios of loans and discounts to earning assets; for the latter ratios there was greater dispersion below; for the former, greater dispersion above the modal amounts. The nature (plus or minus) and the amounts of percentage variation of the ratios of investments to earning assets—the seven- year average, 1919-1925, serving as the base—for all member banks in the twelve districts for the years 1919 to 1925 are given in Table 13. Although the signs of the deviations throughout are opposite to those for the ratios of loans and discounts to earning v§ BANKING STANDARDS TABLE 13 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1025, OF RATIOS OF INVESTMENTS TO EARNING ASSETS FOR ALL MEMBER Banks, BY YEARS AND FEDERAL RESERVE DISTRICTS PFRCENTAGF DIFFFPTNCE FROM DISTRICT AVERAGE, 1010-1925 1923 I 1024 1925 -+ 8.07 “+11.68 + 1.09 + 3.36 = 7.44 + 2.85 + 9.57 5 ».07 assets, the amounts are different. Loans and discounts relative to earning assets were low, while investments relative to earning assets were high in 1919, 1923, and 1925. In 1920, 1921, and 1922 the former ratios were high, and the latter relatively low. Consistency of variation, but in the opposite direction from that characterizing the ratios of loans and discounts to earning assets, is apparent. A table, such as Table 3, is unnecessary to illustrate this fact. If the headings to the columns in this table are inter- TABLE 14 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS oF INVESTMENTS TO EARNING ASSETS IN ALL MEMBER BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) LOStOM. vv rri irri New York. .... eevee “hiladelphia. . . een. cleveland. ..... Cereraean Richmond. ..... RU Atlanta......... — hicago....... PEE St. Louis. ...... Wh EMER finneapolis.... ............ {ansas City... . FR Jallas. ........o0. oii, San Francisco. ........cocvvvnn. 1919 to [920 —18.%58 f 10 70 “roa -15.35 PERCENTAGF (HAY ~= wroM VraR TO YEAR 1024 to 1025 + 5.41 + 1.97 + 4.10 + 1.37 + 5.17 + 0.19 +17.03 + 5.36 -~ 1,07 +25.01 +13.05 — 4.46 + 8.96 “21.01 t25.75 + 8.21 i" 3.41 } 0.09 - ~.8 frc2.3c }ia.64 1-13.97 +13.0 + 7.14 + 7.1% - .51 —- 5-33 - 5.07 — 2.8r - 3.3% ~ :.0f — 1.60 —- 8o + &.58 + 0.44 + 2.47 —- 4.34 — 4.52 TT 1.75 NORMS AND TRENDS IN EARNING ASSETS 29 changed, the amounts will indicate by years the consistency among the several districts. Table 14 is similar to Table 6, which relates to ratios of loans and discounts to earning assets. The amounts are different, and the signs throughout are opposite. A negative change in loans and discounts corresponds to a positive change in investments, and vice versa. All districts had lower ratios of investments to earn- ing assets in 1920 than in 1919; all but one, lower ratios in 1921 than in 1920; and all but one, higher ratios in 1922 than in 1921. The increase in 1922, as compared with 1921, continues through 1923—all districts moving in a given direction but at different rates. In 1924, nine of the twelve districts reversed their direc- tion of change, eight of them in 1925 changing the downward trend between 1923 and 1924 to an upward one between 1924 and 1925. The consistency of change in direction does not appear to be of the random type; it is rather indicative of a control of the composition of the earning assets common to the banks in the separate districts. Table 7 (page 19), with the column headings interchanged, summarizes the uniformity of the direction of change from year to year. While Table 8 (page 19), with signs interchanged in both the stub and the caption, serves to indicate the direction of change TABLE 13 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF INVESTMENTS TO EARNING ASSETS DIFFERENCES FROM DISTRICT AVERAGES, 1919-1925 Sign I Number of Cases 2 Percentage Groups vVeraces ud over ~tr - 00 ypnday ~ r 0 art ove rv Avera Average Percentage ~~ r 17 1.8: 4.09 10.20 17.08 10.08 NET PERCENTAGE CHANGE FROM YEAR TO YEAR ~ 6.19 —-J7 12 ~ 8 ox 2.06 + 70 + 4.06 + 9.74 + 5.46 28 BANKING STANDARDS from year to year in the ratios with respect to their positions in a given year relative to the average for the period 1919-1923, it does not indicate the percentage amounts. The latter are summarized In Table 15. Not only did ratios which were high in a given year, relative to the average for the period 1919-1923, tend to decrease in the following year, and those which were low (similarly deter- mined) tend to increase, but the net amounts of percentage fall and rise, respectively, varied directly with the percentage varia- tions from the seven-year district levels. Ratios of investments, as of loans and discounts to earning assets, tend to revert to type —the type in this case being the average for the period 1919-1925 for all member banks in each district. The percentage amounts and signs by which the ratios of in- vestments to earning assets by districts and by years differ from the yearly averages for the twelve districts combined are presented in Table 16. The signs in this table are the opposite of those in Table 10 for ratios of loans and discounts to earning assets; the amounts of divergence are peculiar to the investment ratios. Summary Table 11 shows certain of the districts to have rela- tively low, and certain of them to have relatively high ratios of loans and discounts to earning assets during the seven years; the opposite tendency with respect to ratios of investments to earn- ing assets characterizes these same districts. If the caption head- ings of this table are interchanged, the tenacity of position of the TABLE 16 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF INVESTMENTS TO EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS »oston...... New York... “hiladelphia. Meveland.... ichmond. .. itlanta. ..... hicago..... t. Louis. . . ‘finneapolis. {ansas City. Jallas....... >an Francisco Average 1010-25) ~ 4.39 + 6.46 ‘41.39 120.14 -16.903 —2 22 — Cc rr ~32.06 - 7.03 PERCFNTAGE DIFFERENCES ¥*ROM THE COUNTRY’S AVERAGES gre 1019 1920 1021 1022 1023 | 1024 | 1035 I~ u +4 “aq 1 Q — 6 go : + 3 dey omy » St — 0.0% +12. 50 +46.4° +7.9, = IL.4¢ +11.0 + — I. 410.8 +36.8 +74.62 - a — 4.84 + 9.51 431.64 +1x4.37 —20.18 —26.31 - 8 - 2.03 + 1.12 + 0.20 -_ uy. sa.I7 —12.07 88 . 67 ~10.0! NORMS AND TRENDS IN EARNING ASSETS 29 districts, in the matter of the proportion of their earning assets represented by investments, is illustrated. A graphic summary of the ratios of investments to earning as- sets showing (1) the rates of change from year to year, (2) the percentage deviations of the yearly averages from the seven-year average for each district, and (3) the percentage differences of the yearly district averages from the yearly averages of the twelve districts combined is given in Chart 4. This chart is con- structed in the same way, and should be interpreted in the same manner,® as Chart 2. The direction of change in ratios of investments to earning assets for the twelve districts combined was generally downward from 1919 to 1921, and generally upward from 1921 to 1923, al- though there was a decline between 1923 and 1924. The greatest percentage fall was between 1919 and 1920, and the greatest per- centage rise between 1921 and 1922. The level in 1925 was al- most exactly the same as in 1919. The districts with rates of change closely corresponding to the average for the twelve districts combined are as follows: Boston, New York, Philadelphia, Cleveland, Chicago, St. Louis, Kansas City, and San Francisco; those with markedly different rates are Richmond and Atlanta. Dallas and Minneapolis follow the general direction of the country as a whole, but differ noticeably in certain years. All of the twelve districts had a downward trend between 1919 and 1921, and all of them (except Richmond) an upward trend between 1921 and 1925. The district having the smallest year-to-year percentage changes and the most uniform ratios over the whole period is Philadelphia; the one having the most violent year-to-year changes and the most varied history is Minneapolis. Between 1919 and 1925, the direction was upward for Boston, New York, Minneapolis, Kansas City; for the others it was down- ward, the fall being relatively large in Richmond, Atlanta, and Dallas—southern agricultural districts. Districts with ratios closely corresponding in size to those for the country as a whole are Boston, New York, Chicago, St. Louis, and San Francisco; those with ratios markedly different for the seven years from those for the country are Philadelphia, Cleve- land, Kansas City, and Dallas. In Richmond and Atlanta the ratios in 1919 and 1920 closely agree with those for the coun- % See page 21 for discussion of both points. 20 BANKING STANDARDS CHART 4 RATIOS OF INVESTMENTS TO EARNING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1923 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS AWHOLE coecocser DISTRICTS we 1920 "ei 1922 "ne 1924 1923 1919 1920 1921 1922 1929 1924 1929 AY ay Ce or eee Pa a P— er, NEW YORK CLEVELAND i Tm Se J we ot? ot Yeogg. Scales of Percentage Change + « 20 20 * re v 16 et otrananaeett” pol ——— . revbann eet” San Francisco, AL in 1919 1920 1921 1922 1029 1924 1923 919 1520 1921 1922 23 194 102) NORMS AND TRENDS IN EARNING ASSETS 31 try; for the remainder of the period (except in 1925 for Atlanta) the ratios increasingly diverge. The ratios in Philadelphia and Cleveland are markedly above, and those in Richmond and At- lanta (except for 1919 and 1920), in Minneapolis (except in 1925), in Kansas City, and in Dallas are markedly below, the averages for the combined districts. The norms and trends in the ratios of investments to earning assets in the several Federal Reserve districts for the years 1919 to 1925 are as follows: Norms 1. The modal or most common ratio is from 21% to 24%— 69% of the district-year ratios falling between 18% and 30%. 2. Ratios were generally low, relative to the average for the period 1919-1925, in 1920, 1921, and 1922; they were generally high, as determined in the same way, in 1919, 1923, and 1925. 3. Ratios in certain districts are higher and in certain ones lower throughout the seven years than those of the country as a whole. Trends 1. The trend in the various districts was generally downward from 1919 to 1921; from 1921 to 1925 it was predominantly upward. 2. Ratios which are high, relative to the seven-year averages for the districts to which they apply, predominantly tend in the following year to decrease. Contrariwise, those which are low, tend generally to increase, the net percentage amounts of rise or fall varying directly with the percentage distances by which the ratios are removed from the averages for the seven years. 3. Ratios in all districts fell between 1919 and 1920, and in all but one between 1920 and 1921. Between 1921 and 1922, and between 1922 and 1923, they predominantly rose, while between 1923 and 1924 they generally fell. Between 1924 and 1925, the direction of change was upward in all districts except two. TV NORMS AND TRENDS IN DEPOSITS I. INTRODUCTION IN this chapter the deposits of all member banks in the Federal Reserve system are referred to as total deposits, demand deposits, and time deposits. By total deposits are meant the combined de- mand and time deposits.! Demand deposits are those payable within 30 days; time deposits, those payable after 30 days, and include all savings accounts, certificates of deposits which are subject to not less than 30 days’ notice before payment, and all nostal savings deposits. The data for each deposit classification for each year are averages made from the amounts reported for December 31 of the preceding, and for June 30 of the year in question, as reported in the Federal Reserve Bulletin. 2. THE RELATION OF TOTAL DEPOSITS TO EARNING ASSETS From the total deposits and earning assets for all member banks in each district for each of the years 1919-1925, the percentage amounts in Table 17 have been obtained. For the combined years and districts, the average percentage is 85.68. From this figure, however, there are variations peculiar to the separate years and to the individual districts. The frequency grouping in Chart 5 indicates the range through which the percentages extend and the amounts around which they cluster. The modal percentage of total deposits to earning assets falls in the group 81-84. The actual percentages range from 74 to 101, 67% of them, however, falling within the group-range 78-go. The amounts are fairly evenly distributed about the modal or most common group, there being a tendency, however, for the amounts to “tail off” to the higher levels. L «Total deposits” as used by the Federal Reserve Board include, in addition to demand and time deposits, the following amounts: “Due to Federal Reserve banks; Due to banks, bankers, and trust companies; Certified and cashiers’ or treasurers’ checks outstanding; and United States deposits.” NORMS AND TRENDS IN DEPOSITS 34 TABLE 17 Ratios oF TotarL Deposits To EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS CT. NTI Average . (All Districts) Boston. .... New York. . Philadelphia. Cleveland... Richmond. . Atlanta.... Chicago. ... St. Louis... ... Minneapolis... Kansas City. . Dallas... ......... San Francisco. . . oo oem. Peano \verag: {1910~ 1025) Re 68 6.42 ‘4.95 1.24 5.45 n.24 1.60 7.40 1.15 7.19 6.48 34.23 33.72 Pr oF ToTAL DreesITE © 1919 | 1020 | 10321 | 1922 Rn. 62 81.612 =29.86 8c 66 79.53 80.14 73.72 82.88 76.74 79.34 84.31 75.10 90.03 80.71 75.80 fz. ¢c1 B2.34 79.18 76.81 B4.18 78.37 11.92 33.42 15%? 22.8¢ 1.09 83.99 01.60 81.96 79.54 78.38 Fr.39 10 86.98 86.92 31.45 34.76 =n 32 - es 6 ’ re 7 7¢ 5¢ 75.96 86 <6 . 97 36.50 81.70 02.60 “MING ASSETS 1923 1024 1028 86.82 * go.27 ' 92.95 87.02 85.42 32.62 “7.39 95 ra eg go. 88 30.21 36.02 20.44 3 an 93.54 31 62 Ie os hs] . 9 ot 04 5 06 2a 07 05-59 08.51 05.74 101.30 «7 Y % I 86.34 04.42 an. ¢.86 88.42 08.17 CHART § DisTtrIBUTION OF YEARLY DisTrICT RATIOS OF ToTAL DEPOSITS TO EARNING ASSETS, ALL MEMBER BANKS, 1919-1925 Par Cont Percentage Groups 0 72 and under 75 75 and under 78 78 and under 81 B81 and under 84 84 and under 87 87 and under 90 90 and under 93 93 and under 96 96 and under 99 99 and under 102 i0 5 ae roy rp! 20 Number of Cases 2 3 3 17 15 4 BANKING STANDARDS TABLE 18 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1019-1025, OF RATIOS OF ToTAL DEPOSITS TO EARNING ASSETS FOR ALL MEM- BER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Boston. .............. New York....... ... Philadelphia. . .. Cleveland. . .. 3 Richmond..... : Atlanta. .......... .. Chicago. .....ovnunenn St. Louis. ............ finneapolis......... {ansas City..... Dallas. .......... ... San Francisco. ......... PERCENTAGE ~r.oM DISTRICT AVERAGE, 1910-1925 1919 | 1020 i 1021 © 1022 ' 1023 ! 1924 | 103s « J < re JT - = $a at . of ~-3.6¢ 40.58 +1.7¢ +x.00 4-0.8¢ 497 BA " 10 +0.19 +5.87 +4.6 4-4.03 “+4. 8 + 5.24 + 7.85 + 7.18 + 4.00 + 7.01 + 9.908 + 8.77 + 0.76 + 9.63 +13.95 +13.67 4 8.00 Iy Jy The variation in the ratios of total deposits to earning assets, as indicated by Table 17 and Chart 5, suggests the necessity of further study in order to determine the norms and tendencies, if any, in the ratios when the districts and the years are considered separately. The first approach to this analysis is contained in Table 18, which shows, for each district, the signs and the per- centage differences of the ratios for the individual years from the corresponding ratios for the period 1919-1925, inclusive. Table 18 indicates that in 1919, 1920, and 1921, all districts? were below, and in 1923, 1924, and 1925 all were above the levels established by their respective averages for the seven-year period 1919-1925. In 1922, the ratios in five districts were high, while in seven they were low. The relative consistency among the several districts, with respect to posi- tion, is summarized in Table 19. TaBLE 19 If the seven-year average ratio in each district is taken as a standard by which to gauge yearly district levels, then it is apparent, generally, except for the year 1922, that what is true for one district is true for them all. And yet there is no mathematical reason why 2 Except Minneapolis, in 1919. NORMS AND TRENDS IN DEPOSITS 35 this uniformity should obtain. From an arithmetical point of view, judged by the manner in which the differences from the level are measured, a random order of relative positions, as in 1922, could have characterized each year. The interesting fact is that this is not the case. Consistency is the rule, and this suggests the hypothesis, later to be examined, that the economic conditions prevalent at a given time tend to be experienced in much the same manner by all districts, different as they are geographically and varying as they do functionally with respect to the control and use of the funds placed at their disposal. The percentage relations between total deposits and earning assets, for the various districts for the years 1919 to 1925, may be studied further. The foregoing tables relate to the nature (plus and minus) and percentage amounts by which the ratios deviate from the seven-year district levels. The district ratios were low in 1919, 1920, and 1921, and high in 1923, 1924, and 1925. From these low or high levels, what were the directions and percentage amounts of change from one year to the next? Table 20 supplies the answer. The year 1920 was generally low, measured from the seven- year base; yet it was high as compared with 1919. Similarly, 1921 was generally low, yet unlike 1920, which was also low, it was low when compared with 1920. All districts except two (New York TABLE 20 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS oF TotaL DEPOSITS To EARNING ASSETS IN ALL MEMBER BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS DracrNTAnE CHANCY wan Veas va Viear FEDERAL RESERVE DISTRICTS Average {All Districts) Boston. . .. New York. . Philadelphia Cleveland. . Richmond. Atlanta.... Chicago. ... St. Louis. . .. Minneapolis. . Kansas City. Dallas......... San Francisco..... ci eesaan “=m ve se muses 1919 to 1920 + 1.24 15 -— + -.59 +10.80 + 7.12 +020 to 104° 7 ~ aK §.50 Crm: IC In 6 77 - 0.00 -- - 1 *~ 08% 73 44 2 -—r yr 43 1.97 vr13 Le £ 07 da. 44 -€, 01 LIX J .AQ of 07 65 2. }2.55 1024 to reas 26 93 .56 * 20 -.%0 74 38 ob S7 1.8¢ 2.62 +5. 38 }3.10 36 BANKING STANDARDS in 1923 and Cleveland in 1925) were high in 1922, 1923, 1924, and 19235, as compared with the preceding years. That is, in the upward swing from year to year, beginning in 1922, all districts fexcept New York, which began its year-to-year increase in r921 and showed a slight decrease in 1923; Philadelphia, which increased from year to year throughout the whole period; and Cleveland, which showed a decline in 1925 compared with 1924) participated. The rates are uneven, but consistency of direction is almost universal. This phenomenon, apparent from Table 21, probably finds its explanation in the fact that relatively larger and larger proportions of earning assets are represented in invest- ments and smaller and smaller proportions in loans and discounts, thus restricting relatively the form of assets normally giving rise to deposits.? But the character of total deposits likewise changed TABLE 21 TABLE 22 NuMBER OF Districts wirHE Ratios oF COMPARATIVE POSITIONS AND YEAR-TO- Totar DErosiTs To EARNING As- YEAR DirectioNs oF CHANGE IN Dis- SETS INCREASING OR DECREASING TRICT RATIOS OF ToTAL DEPOSITS FROM YEAR TO YEAR, 1910-1925 TO EARNING ASSETS NTe—-—r~ - = DISTPICTS Direction of Change CC — from Year to Year 1acreasing ' Total 30 42 72 Laws during these years, which fact supplies the basis for the isolation of norms and trends relating to the components. The correlation of the dispersion and year-to-year changes in related ratios is dis- cussed later. It is of interest, before leaving the subject of year-to-year changes, to discuss briefly the changes when they are related to the districts with high or low ratios relative to the seven-year level. Do ratios which are high in a given year tend generally to move downward, and those which are low generally to move up- ward in the following year? Are the net percentage changes from year to year functions of the positions of the ratios relative to the “long-time” levels? Table 22 supplies a negative answer to the first question. Of the 30 district ratios which were high, "8 See Charts 2 and 4, pages 22 and 30. NORMS AND TRENDS IN DEPOSITS 37 go% went higher and 10% went lower in the following year; con- trariwise, of the 42 which were low, 71% rose and 29% fell. The general tendency was for the percentages over the whole period, from year to year, to increase. With respect to the second question—are the year-to-year changes functions of the distances above or below the long-time levels?>—the evidence is conflicting. The direct relation between the percentage amounts of dispersion from the seven-year level and the net percentage amounts of change from year to year, so striking for ratios of loans and discounts and for investments to earning assets, does not hold for the ratios of total deposits to earning assets. While all member banks in each district, taken as a unit, have their own yearly and periodic ratios of deposits to earning assets —these ratios being high or low for all or a part of the districts each year during the years 1919 to 1925, and moving upward or downward from year to year—the levels of the ratios for the several districts differ widely each year from the average level for the twelve districts combined. It is of interest to consider the level for each district for each year in order to see whether dis- tricts are consistently or sporadically above or below the country level. A summary of the facts in this respect is contained in Table 23. This table shows that consistency of position, with respect to TABLE 23 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF Total Deposits TO EARNING ASSETS FOR ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS Boston...... New York... Philadelphia.. Cleveland. ... Richmond. . . Atlanta...... Chicago. .... St. Louis. ... Minneapals. | Kansas City.. Dallas...... | San Francisco Average 1010-2" +c 84 -2.8 - x +1.9¢ +o0.90 —-1.69 +0.38 ~rarparAcT DirevepNCES ROM TEE ( ~UT 1010 .Q~ [Q2' 1031 —-— 43 = $9 F 6.0% --44 + 2.89 413.22 —4.58 +8.30 = +5 10 gl Parewa ~re -~ 68 of? " < 54 .00 —0.4$ —2.08 +8.7¢ 102¢ a2 16 ~o 1 a¥ 3 12 S- 38 BANKING STANDARDS the percentage relation of total deposits to earning assets, is not marked among the various districts. Only four were high or low, relative to the country level, throughout the seven years. More- over, these districts are non-contiguous. In this respect, these ratios are strikingly different from those of loans and discounts to earning assets, as shown by Table 11. A brief summary of Table 23 is shown in Table 24. It will assist in viewing as a whole the ratios of total deposits to earning assets to place them on a chart. This is done in Chart 6, the basis upon which it is drawn and the method by which it should be interpreted being the same as those for similar charts previously pre- sented.* Forthecombined districts, the percentage rates of change were as follows: 1.24 upward between 1919 and 1920; 2.17 downward between 1920 and 1921; a rise of 7.26 and 1.35 between 1921 and 1922, and 1922 and 1923, respectively, and 3.97 and 2.76 between 1923 and 1924, and 1924 and 1925. Over the whole period, the rise was 15.0%. All of the districts followed this gen- eral movement, but unequally contributed to it. Indeed, in all of them, the direction of change was upward between 1921 and 1925. The rates of change in the several districts, except those in Atlanta, Minneapolis, and Dallas, closely followed those for the country as a whole; there were marked differences in the years 1920 to 1921 in Atlanta, and in 1919 to 1920 in Minneapolis and in Dallas. The rate of increase over the whole period, character- izing all districts combined, was exceeded in Kansas City and Dallas; in Cleveland it was less. Marked variations from the rates of change from year to year, found for the country as a whole, occurred in New York between 1922 and 1923; in Phila- delphia between 1919 and 1920, and 1920 and 1921; in Cleveland 4 See pages 21 and 22. NORMS AND TRENDS IN DEPOSITS 39 CHART 6 RATIOS OF ToTAL DEPOSITS TO EARNING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE cesccccss DISTRICTS coemmememanems 1919 1920 1528 1922 1923 1924 1925 919 1920 19219 1922 1923 1924 629 AV « "YW egg ton seme” oe — aT i NEW YORK AV. ce CLEVELAND — —— 1d — rt La DELPHI AV. ales ®* "°° "00" ir A ATLANTA ee Scates of accentage Change sT. Le “NSAS CIT ets” = '® A 1919 1920 192% 1922 1923 1924 192% 1919 1920 1921 1922 1923 1924 1928 between 1921 and 1922; in Atlanta between 1920 and 1921; in Minneapolis between 1919 and 1920; in Kansas City between 1924 and 1925; and in Dallas between 1919 and 1920, 1920 and 1921, and between 1924 and 1925. The differences, however, are far less marked than are the similarities; consistency of directions and rates of change tend to prevail. , BANKING STANDARDS The ratios of total deposits to earning assets are smaller than those for the country as a whole during all of the seven years, in New York (except in 1922), Philadelphia, Richmond, and St. Louis. They are higher throughout in Boston (except in 1919) and in San Francisco. The districts having percentages closely agreeing with the country’s averages are Boston, New York, Cleveland, Chicago, Minneapolis, and Kansas City. ns In spite of the minor differences in the ratios and in the rates of change from year to year in the various districts, the outstand- ing picture presented by Chart 6 is the consistency and uniform- ity which obtains. Similarity is far more apparent than dissimi- larity. And such is to be expected provided that (1) the basic factors contributing to the results are common to the various dis- tricts; (2) the individual banks making up the totals in each dis- trict are subject to a common control with respect, among other things, to reserve requirements; and (3) banking experience and competition between banks tend to determine a normal relation between deposits and assets. More will be said later about the factors contributing to such “normal” relations. In brief, the norms and trends characterizing the ratios of total deposits to earning assets for all member banks, by districts and years, are as follows: Norms 1. The modal or most common ratios fall in the group 81-84, the weighted arithmetic mean being 85.68. 2. District ratios were predominantly low, relative to their seven-year averages, in 1919, 1920, and 1921; they were pre- dominantly high, measured in the same manner, in 1923, 1924, and 1925. 3. Except for Districts 3, 5, 8, and 12—Philadelphia, Rich- mond, St. Louis, and San Francisco—the percentages closely cor- respond to those for the twelve districts combined. Trends Between 1921 and 1925, the ratios, with two exceptions, rose from year to year. Between 1919 and 1925, an increase occurred in each of the districts. i. NORMS AND TRENDS IN DEPOSITS 41 3. THE RELATION OF DEMAND DEPOSITS TO EARNING ASSETS AND TO TOTAL DEPOSITS For purposes of further analysis, deposits are separated into demand and time items.®* The amounts are then expressed as percentages of earning assets and of total deposits, and the norms and trends are studied. This section of the discussion has to do with ratios of demand deposits to earning assets, and to total deposits. The next section relates to time deposits similarly measured. (1) Ratios of Demand Deposits to Earning Assets The average® ratio of demand deposits to earning assets, for the seven-year period 1919-1925, for all member banks in all districts, is 57.65. This amount, together with the ratios for each of the separate districts, is contained in Table 23. When the yearly district ratios are grouped as in Chart 7, the modal or typical amounts fall in the group 48-52. There is, however, concentration at the amounts 60-64, in a range which TABLE 25 RATIOS oF DEMAND DEPOSITS TO EARNING ASSETS IN Arr MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. .... New York. . Philadelphia Cleveland... Richmond. . Atlanta.... Chicago. ... 5t. Louis. ... Minneapolis. Kansas City Dallas. .. I San Francisco... \verage ‘1919- iqaac) ry fe €, of : _ RATIO DEMAND or DEPOSITS Tr FARNING ASSETS pom I rrr —— —————— I91Q 1920 1921 1022 | 1023 | 1024 10326 ee EER Sew Re Ra en ep ca mr gy .22 6.26 56.02 57.88 - 40 66.12 68.14 56 28 60.83 66 14 53 £» rt 4 62. 2¢ 69.8€ 53.38 48.02 14.96 se 60.01 65.33 s7.78 + 46 60.22 67.71 £I.QI $7.50 ts 26 60.30 68.07 50.52 46.23 46.17 ef oo fy “4 ..k2 "40 om Ir - wv FF Yr - Ya 3a O4 ya. 50 5 For definitions of these terms as used, see page 32. ® Weighted. Obtained by dividing the total demand deposits of all member banks in all districts for the years 1919-1925 by the total earning assets of such banks for the same years and by multiplying by 100. (The amounts for both numerator and denominator each year are the averages of the amounts reported on December 31 of the year preceding, and on June 30 of the year in question.) i BANKING STANDARDS CHART 7 DISTRIBUTION OF YEARLY DistrIcT RATIOS OF DEMAND DEPOSITS TO EARNING ASSETS, ALL MEMBER BANKS, 1910-192} Percentage Groups 36 and under 40 40 and under 44 44 and under 48 48 and under 52 52 and under 56 56 and under 60 60 and under 64 64 and under 68 58 and under 72 72 and under 76 0 a ee Per Cent Number 10 15 20 25 of 2 2 i de Cases 3 12 19 16 RB 12 1 3 n extends from 39 to 75. Both Table 25 and Chart 7 show consid- erable diversity of these percentages but they do not disclose the norms which characterize their relative positions, nor sum- marize the trends in the direction and percentage changes in the amounts. These facts are emphasized in subsequent tables and in Chart 8. Table 26 shows the direction (plus or minus) and the per- centage difference by which the ratio in each of the districts for each of the years deviates from the district average for the period 1919-1925. While the ratios were generally high in 1919 and 1920 and generally low in each of the years between 1921 and 1924, in none of the years is there complete agreement among the district ratios as to the direction of the deviations from their own seven-year levels. This generalization, however, puts too much emphasis on the dissimilarities, as is evident from Table 27, in which is indicated, for each year, the number of districts with ratios above or below their respective seven-year averages. In each of the years, a prevailing tendency is clearly apparent—a tendency less marked than and of a nature inverse to that illus- NORMS AND TRENDS IN DEPOSITS 45 TABLE 26 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1925, OF RATI0S OF DEMAND DEPOSITS TO EARNING ASSETS FOR ALL MeM- BER BANKS, BY YEARS AND FEDERAL RESERVE DistrICTS FEDERAL RESERVE DisTRICTS Boston. . .. New York. Philadelphi Cleveland. Richmond. Atlanta... Chicago. ... St. Louis. . . Minneapolis. Kansas City Dallas. ..... San Francisco. P¥CENTAGE Mrerrerrer yoay Distri— Aves AGE, 1010-1925 vCcay ! 102¢ rv 56 4 ». 82 04 23 +4 0 ad * ag trated in Table 19, in which a similar study is made of the deviations for ratios of total deposits to earning assets. It is apparent, therefore, that the years and districts in which ratios of total deposits to earning assets were high or low are not the same as those in which ratios of demand deposits to earning assets were high or low. It must, of course, be remembered that account is here taken only of the fact (as indicated by plus and minus signs) and not of the percentage amounts of variation from the seven-year level. The latter aspect of the problem is consid- ered later. From the positions which the district percentages hold yearly with respect to the levels fixed by the seven-year period, what are the characteristic directions of change from year to year? These are summarized in Table 28. Between 1919 and 1920, and 1920 and 1921, they fell. The ratios in all of the districts in 1921 as compared with 1919 followed the average trend. By 1922, the direction of change (except for three districts) was upward and continued so for nine districts through 1923, for seven during 1924, and for nine during 1925. The changes in the respective districts, summarized in Table 29, are not of the ran- BANKING STANDARDS TABLE 28 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT Ratios oF DEMAND DEPOSITS TO EARNING ASSETS IN ALL MEMBER BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS PERCENTAGE CHANGE FROM YEAR TO YEAR Icn2 1023 1024 i to to 1923 1024 1925 FEDERAL RESERVE DISTRICTS 1919 1020 | 1921 to to te 1920 1921 1922 Average All Districts) - 3.36 a " 6o +r.17 ' + 1.60 Boston. .... isms cee New York. ........cocvvvnvnnn Philadelphia. . . PE Cleveland. .... os . Richmond. ... Atlanta........ ‘hicago....... st. Louis. ..... finneapolis. . . Tansas City. Jallas........ San Francisco. . 5. %, bos mem + 0.13 + 0.52 — 2.68 - 2.67 + 0.68 > 6.46 3.12 4.76 7.28 -.8s 25 -.20 dom type. There is some, if not perfect, community of response. Moreover, other tendencies are apparent in the nature and percentage amounts of change from year to year in the ratios of demand deposits to earning assets. These are best illustrated by the two following tables. As shown by Table 29, the direc- tion of change from year to year in the ratios of demand deposits to earning assets was not uniform among the various districts. It is of interest to determine whether the ratios which were increas- ing or decreasing from year to year were high or low, or vice versa, relative to their own levels. If the seven-year averages for the re- spective districts are used to indicate these levels, and if the direc- TABLE 30 NUMBER OF DisTrIcTS WITH RATIOS OF COMPARATIVE PosITIoNS AND YEAR-TO- DeMAND DEpPosiTS TO EARNING As- YEAR DIRECTIONS OF CHANGE IN Dis- SETS INCREASING OR DECREASING trict Ratios oF DemanD De- FROM YEAR TO YEAR, IQIQ-1025 POSITS TO EARNING ASSETS £ Change from © Tr1Q—-1025 Total 30 42 2 TABLE 20 [010~IQ20.... [g20—102I.... [92I-1022.... [922-1023.... 1023-1024. ... 1024-1025... Is, total. NORMS AND TRENDS IN DEPOSITS 45 tions of change from year to year are studied for ratios classified according to their positions with respect to their levels in the first of each pair of years, it is seen that (1) those which are high in a first tend in the following year to fall, and those that are low in a first, tend in the following year to rise; and (2) the net percentage amounts of rise or fall vary directly with the percent- age amounts of dispersion of the ratios from the seven-year levels in the first years. The first fact for the 72 year-to-year changes—six for each of the twelve districts—is summarized in Table 30. The predominant tendency is for percentages which are high to decrease; for those which are low, to increase. That is, there is regression to type, all but 12 of the 72 ratios following this rule. TABLE 31 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF DEMAND Drrosits To EARNING ASSETS DIFFERENCES FROM DISTRICT AVERAGES, 1919-192§ Sign Number of Cases a Percentage Groups Average 5.00 and over 4.00 to 6.00 2.00 to 4.00 Inder 2 an Under 2.00 2,00 t0 4.00 4.00 to 6.00 6.00 and over Average Average Percentage NET PERCENTAGE CHANGE FROM YEAR TO YEAR T —~ 16 06 81 2 ob 3 t. 05 46.00 +2 .60 The tendency in the ratios for the net percentage amounts of change to vary directly with their percentage amounts of disper- sion from the district averages is shown by direction and amount in Table 31. This tendency, so apparent for the ratios of demand deposits to earning assets, was not found for ratios of total deposits to earning assets, although it held for the ratios of loans and discounts and for investments to earning assets, the trend in the former case being upward from 1919 to 1921 and downward 16 BANKING STANDARDS from 1921 to 1925, and in the latter case the reverse. The trend in the ratios of demand deposits to earning assets was generally downward to 1921 and upward for the remainder of the period. The tendency discovered, however, is not a function of long-time trend alone. It is rather a function of year-to-year trends, the same being determined for ratios classified with respect to the nature and amount by which they deviate from their respective seven-year district normals. The positions which the ratios occupy each year, and for the period covered, relative to the averages obtaining for the country as a whole, are also of interest. These are given in Table 32. An inspection of this table shows that the respective positions of the districts, relative to the country level, are the same for all of the years being studied. Boston, New York, Kansas City, and Dallas are invariably high; the others are invariably low, 1919, for San Francisco, being the only exception. The degree of con- sistency in this case is greater than in the case of the ratios of total deposits to earning assets. In the latter instance, in only four districts were the ratios on a given side of the average for all of the seven years; in the former, consistency, with one excep- tion, is complete, as is illustrated in Table 33. Of course, a distribution of this sort is not fortuitous. The fact that the deviations are taken plus and minus from the country’s average does not make such alignment necessary. The TABLE 32 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF DeMAND Deposits TO EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES tor THE COUNTRY AS A WHOLE Drpovi pans ~~ —wrAps PROM TET OS Ayraerm— == AVERAGES FEDERAL RESERVE DisTRICTS Boston. ..... New York... Philadelphia.. Cleveland.... Richmond... Atlanta..... | chicago. .... St. Louis. . .. Minneapolis... Lansas City. Dallas....... San Francisco Average (1010-25) fro -14. -18.0 -1 - =2 + 9.80 +10.93 ~10.00 1010 l 1920 1921 . fH.o0 fro. _— rr ~IX.5f 14.2" +4 -.c +r. + 1.x + ~ ” 9. + 1.08 ¥ +... -— 3 BA -—T2 22 1022 1023 I 1024 1025 + 82 4-22.07 - 6.72 —-1€.1¢0 —-21.44 -_. .02 -— B + ~,6" +14. 1 — 6.10 + .8 +1 95 - A —16.¢° —-19. 4A; —- . —-10.42 —-22.82 +10.58 +22.49 - 0.52 + 4.18 +17.6x —12.72 -20.13 20.23 - 3.35 - 8,71 - 8.02 ~18.59 +321.63 +30.39 -—13.00 »- - +1y.43 -—12.%74 -_ 0 NORMS AND TRENDS IN DEPOSITS 47 TABLE 33 respective district ratios in the various years differ so markedly from those for the country as a whole that they may fluctuate widely from their own peculiar levels and increase or decrease from year to year without cross- ing the levels for the country. And yet, different as are the dis- trict levels, the ratios tend to revert to type and systematic- ally to oscillate about their own averages. How closely these os cillations in the various districts agree in extent at a given time and synchronize in direction of change from year to year has already been pointed out. The district ratios of demand deposits to earning assets, their directions and rates of change from year to year, and their positions relative to those for the twelve districts combined, are graphically shown in Chart 8.7 This chart shows that the ratios for the combined districts varied relatively little from year to year. The direction of change was downward from 1919 to 1920, and from 1920 to 1921, the rates, respectively, being 3.36% and 8.13%. From 1922 to 1925, the direction of change was upward, the year-to-year changes following this trend, except for 1923 compared with 1922, when there was a fall of 1.69%. With these changes, those in the respective districts generally agree, the outstanding exceptions being the increase from 1919 to 1920 in Dallas, and the persistent decrease over the period 1920 to 1925 in Philadelphia, and from 1919 to 1923 (except for a slight rise in 1923) in Cleveland. Large declines occur in Minneapolis and San Francisco between 1919 and 1921, and in Atlanta and Dallas between 1920 and 1921. The districts with percentage changes in their ratios most closely corresponding to those for the country as a whole are Boston, New York, Rich- mond, Chicago, and Atlanta; those with percentage changes in "For a description of the basis on which this chart is drawn and of the manner in which it should be interpreted, see page 21 NuMBER OF YEARS, 1919-1025, IN WHaIicH THE DIFFERENT DisTrRICT RA- 110s or Demanp Deposit. TO EARNING ASSETS ARE ABOVE OR Berow THE CORRESPONDING YEARLY RATIOS FOR THE COUNTRY As A WnoLe POSITION RELATIVE TO THE COUNTRY’S YEARLY AVERACES Abhavae Palawe 18 BANKING STANDARDS CHART 8 RATIOS oF DEMAND DEpPOsiTs T0 EARNING ASSETS - ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE cavnccena DISTRICTS eee. 1919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1925 BOSTON seu —————— Trea, sesso eetarmanaveneent tT ep e0”® ADELPHIA oni A. --— tlt i ge “ereea., aos - aso” oy oot cs agiss0n0ner a, ee Tee tome cavanoe ®t” CLEVELAND J tt tage ene cea —as wre Sagan WES LL eewamaveer at _ Steven — as - “teerienonvest"® — ATLANTA * -n » eo ntenin como nssnteo te’ © Louis PD a —_ SITY ness pn GEESE eeq, pete sans eto SAN FRANCISCO Nr e———— Scales of Percentage Change o 30 Te 10-, 4 8 o ® iH : 10 1 a. 1919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1925 NORMS AND TRENDS IN DEPOSITS 49 their ratios most markedly varying are Philadelphia, Cleveland, Dallas, and San Francisco. The districts with the ratios most distinctly below those for the country are Cleveland, Richmond, Chicago, Minneapolis, and San Francisco; those with ratios most noticeably above those for the country are New York, and Dallas. In spite of the differences in rates of change for the various districts, when compared with each other, a high degree of simi- larity obtains. District percentages are more like each other (1) in the time at which they are above or below their own seven-year averages, and (2) in the direction and rates of change from year to year, than are the several district ratios like those for the country as a whole. The immediately foregoing discussion relates to the ratios of demand deposits to earning assets, and to the nature and per- centage amounts of change characterizing them during the years 1919 to 1925. But demand deposits may be studied in relation to the total deposits of the banks in question. Such an analysis is given in the following section, at the close of which the norms and trends typical of such deposits are briefly summarized. (2) Ratios of Demand Deposits to Total Deposits For the period 1919-1925 taken as a unit, the demand deposits of all member banks in the Federal Reserve system constitute TABLE 34 Ratios oF DEMAND DEposiTs To TotrarL Deposits IN ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DIsTRICTS — Average (All Districts) Boston. . .. New York. . Philadelphia Cleveland. . Richmond. . Atlanta... .. Chicago. ... St. Louis. . .. Minneapolis. . Kansas City. . . Dallas.......... oe. San Francisco. .............. Average (1919- rose) £. 1 Summ - 82.10 §5.33 RATIOS OF DFraNy Dr-nsrre 7 Total DEPOSITS 1019 ' 1020 I 1021 1922 1923 1024 nb a2 ma ar NER <1 66 Rv 1 64 Re £- aL 82.44 89.00 12 32 © 74 FPN 30.20 86 06 72 40 6 9 6: ~ 62 6c "T-: 52 9° 76.88 87.90 50.0I 74.22 83.14 68.42 59.72 50.14 £; “7 .60 Io 22 65 i ef 68.96 76.47 63.88 LT 46 66.26 75 o7 fo. 3s 53 23 .C "0 fi8 56.95 77.54 87.40 73.80 19.39 73.30 2.4 os 8g 72.40 80.566 $3.03 .1.51 80.04 54.08 7 v3 (2.4¢ -— a— 1028 62.40 64.46 74.29 58.04 51.37 53.31 60.901 55.58 59.77 49.28 "1.47 18.83 20.067 50 BANKING STANDARDS approximately two-thirds of the total deposits. During these years, however, the ratios for the combined districts decreased from 76% to 62%. The district having the highest ratio for the combined years is Dallas; the one having the lowest is Minne- apolis. Table 34 shows the ratios for the individual districts. The range and distribution of the ratios in Table 34 are illustrated in Chart 9. The most typical amounts fall in the group 60-65, although there is concentration also at groups 55-60 and 70-75. While the range extends from 48.17 (for Min- neapolis in 1924) to 89.09 (for New York in 1919), 61% of the instances fall between 55 and 75. Because of the fact that yearly and district peculiarities in the ratios are ignored in Chart ¢, further study of the ratios is required. CHART ¢ DISTRIBUTION OF YEARLY DistricT RATIOS OF DEMAND DEPOSITS TO rHE ToraL oF Time AND DEMAND Deposits, ALL MEMBER BANKS, 1010-1025 Percentage Groups 45 and under 50 50 and under 55 55 and under 60 60 and under 65 65 and under 70 70 and under 75 75 and under 80 BO and under 85 85 and under 90 0 1 a J Per Cent 10 15 1 2 J 20 1 Te fr — R—— ie—— Number of Cases 6 9 14 15 9 13 7 3 If the seven-year average ratio in each district is taken as a standard of comparison and if ‘the yearly ratios in each district are expressed as plus and minus percentage differences from this standard, the results given in Table 35 are obtained. This table shows that in both 1919 and 1920 the ratios in all of the twelve districts were relatively high, and that in 1923, 1924, and 1925 they were all low. In 1921 they were predominantly high and NORMS AND TRENDS IN DEPOSITS 34 TABLE 35 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, Ratios oF DEMAND TO ToTAL DEPOSITS FOR BER BANKS, BY YEARS AND FEDERAL RESERVE 1019-1925, OF Arr MEeMm- DistrICTS FEDERAL RESERVE DISTRICTS CARNAL Yrewpwpnrr rgnrs fiverpy— Ae 'O1I0 tv, 1019-1025 1028 ra Boston. .... New York. Philadelphi Cleveland. Richmond. Atlanta... Chicago. ... St. Louis. . . Minneapolis. Kansas City. Dallas... ... San Francisco . ut | in . i T- oa 3 in 1922 predominantly low. If the size of the percentage differ- ences is ignored for the present and if only the positions of the percentages with respect to the seven-year district levels are indicated, the results shown in Table 36 are obtained. While the ratios by districts are different, they are generally alike as to the years in which they stand above or below their own average levels. Relatively less similarity was discovered when demand deposits were expressed as percentages of earning assets.® That is, the districts agree more completely as to the time at which their ratios of demand deposits to total deposits are high or low relative to their average level than they do in respect to the time when their ratios of demand deposits to earning assets are high or low. The consistency is of the same order as, but different with respect to the time from, that shown in Table 19, relating to the ratios of total deposits to earning Tazz 36 assets. On the whole, the years which are relatively high, for total deposits in relation to earning assets, are relatively low for demand deposits in relation to total deposits, and vice versa. It is of interest to determine, from year to year in each of "# See Table 27. y 2 BANKING STANDARDS TABLE 37 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT Ratios oF DEMAND DEPOSITS TO ToTAL OF TIME AND DeMaND Deposits IN ALL MEMBER BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS PERCENTAGE CHANGE FROM YEAR To YEAR FEDERAL RESERVE DISTRICTS sr emt Boston. . . New York. .. Philadelphia. Tleveland.... _ichmond. .. itlanta. .... “hicago...... t.Louis...... Jinneapolis. . . lansas City. . vallas......... San Francisco. Average (All Districts) 1919 | ¥920 | 1021 to - to to 1920 1921 1922 — 4.54 — 6.06 —2.48 6o 40 = af -1i 1022 to “naa —" af 1023 1024 -_—2.70 1024 to 1025 —1.,08 —1.08 -3.012 -—~2.20 -2.05 “+1.50 40.10 —0.88 “+2.31 +2.03 —0.20 —-£.30 the districts, the direction of the change in the ratios of demand deposits to total deposits. The district levels are different, as shown in Table 34, yet the years when the ratios are high or low are essentially the same. Is there consistency among the districts in the direction of the changes from year to year? The average change, for all districts combined, was downward each year, as shown in Table 37. All of the separate districts (except Dallas in 1920, as compared with 1919; Chicago in 1922, as compared with 1921; San Francisco in 1923, as compared with 1922; and Atlanta, Chicago, Minneapolis, and Kansas City in 1925 as compared with 1924) register similar year-to-year changes. This marked uniform- ity is in sharp contrast with the TABLE 38 changes from year to year.in the ratios of demand deposits to earning assets. In the latter case, except in 1921 as com- pared with 1920, the direction of change varies among the different districts. Striking asis the fact of down- ward year-to-year changes in all of the districts, as summarized NORMS AND TRENDS IN DEPOSITS J3 TABLE 39 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF DEMAND Deposits 10 ToraL DEPOSITS FOR ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE PERCENTAGE DrrrerENCFe ¥roM THE COUNTRV'e AVERAGES FEDERAL RESERVE DISTRICTS Boston. . .... New York. . Philadelphia. Cleveland. ... Richmond. . . Atlanta..... Chicago. . .. St. Louis. . . Minneapolis. Kansas City. Dallas. ..... San Francisce Average 1010-25) + 6. 7¢ +19.0/ — 2.4¢ —15.06 —12.50 ~ F.31 + +: -Y7.%¢ 1010 8f +7. . 58 Ud 1020 +10.0¢ +:7.9¢ + =-& 1021 + 8.2: +21 2 — 0.1 —r2.8: — ~~ ns Tw ~10.04 1022 + 7.10 420.31 — 90 —_—r xr —- 10. 2t 1023 + 6.40 +17.99 = 44 a —106.60 © 1024 o7 + Ss. 2 baf.04 - T-4-4 -316.82 3925 + 2.30 +rr.0% - oe fa 7 vod -20. 40 in Table 38, it is also of interest to know that the average net per- centage decline for ratios above their district seven-year averages is more than three times as large as is the average net percentage decline for ratios below these standard levels. That is, the down- ward change is larger for ratios which are high than it is for those which are low, in spite of the fact that, in the nature of the case, percentage changes are larger when computed on small than when computed on large bases. Table 34 shows that the percentages of demand deposits to total deposits vary widely in the different districts. It is not apparent from this table, however, by what amounts the respective ratios differ from district to district, nor by what amounts the respective district averages deviate from those for the country. The latter facts are summarized in Table 39, the differences being expressed in percentages. Even a casual inspection of this table BANKING STANDARDS CHART 10 Ratios or DEMAND DEPosits To ToraL Deposits —- Arr MEMBER BANKS . aq Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE ccucacuee DISTRICTS 1919 1920 192 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1923 AA a. tte en reenane. CAPD tf ereea * Ste edtcnaan. ATUANTA TTT el = KANSAS CITY Trea % etna reer an Seales of Percentage Change 30- x to] 118 2H bs fro a Cra A PRONG Re a, cetennns 1a AV an 1919 1920 1929 1922 1623 1924 1923 1919 1920 1921 1922 1923 1924 1925 NORMS AND TRENDS IN DEPOSITS 58 indicates consistency of position for the respective districts over the seven years. Districts are not high in one year and low in another, but generally high or low. Moreover, those which have high and those which have relatively low ratios of demand deposits to total deposits, respectively, are the same as those which have relatively high or low ratios of demand deposits to earning assets. In the high class are Boston, New York, Kansas City, and Dallas; the others are all low, but low by varying percentages. The districts with ratios of demand deposits to total deposits which are above and those which are below the country’s average, and the number of years between 1919 and 1925 during which they remained in these positions, are summarized in Table go. A graphic summary of the ratios of demand deposits to total deposits, as given in Chart 10,° shows among other things (1) the percentage difference of the ratios each year in each district from that for the period 1919-1925 in the same district, (2) the rates of change from year to year in each district, and (3) the percent- age amounts by which the district ratios each year deviate from those for the twelve districts combined. Probably the most striking feature of this chart is the essential uniformity of the downward slopes of the solid lines, this fact indicating equal rates of decrease in the ratios for the various districts. There is not perfect uniformity among the various dis- tricts, nor is it to be expected. Neither is the slope for each district absolutely uniform, and this fact is not surprising. Forces contributing to a decline in the proportions which demand deposits make up of total deposits are seemingly operating in all districts, but they do not produce the same effect. Neither are these forces exerting uniform influence from year to year. There can, however, be no doubt that the similarities of the slopes of the solid lines are more pronounced than are their dissimilarities. Chart 10 is interesting in another respect. The distances between the solid and the dotted lines (these being the coun- try’s ratios) indicate the percentage amounts by which the ratios for each district differ from those for the twelve districts combined. Not only are certain district averages higher and some lower than those for the country for the full term of seven ® For an explanation of the way in which this chart is drawn and for a state- ment of the manner in which it should be interpreted, sce page 21 56 BANKING STANDARDS years, but on the whole the size of the differences tends to be about the same for the different years. One district in which this is conspicuously not the case is San Francisco; districts in which it is strikingly true are Cleveland and St. Louis. Certain general conclusions relating to norms and trends in the ratios of demand deposits to earning assets and to total deposits may be drawn from the data presented and from the foregoing analysis. Norms 1. For the period 1919 to 1925, the average percentage of demand deposits to earning assets was §7.65; to total deposits, 67.29. Measured in the former unit, the typical ratios fell in the group 48-52; in the latter, in the group 60-635. Ratios of demand deposits to total deposits were high in all districts in 1919 and 1920, and low in 1922 (one district ex- cepted), 1923, 1924, and 1925. When demand deposits are expressed in terms of earning assets, the districts show a less sys- tematic tendency to be high or low in a given year. 3. Districts 1, 2, 10 and 11—Boston, New York, Kansas City, and Dallas—have ratios of demand deposits to earning assets above the country’s level during all of the years 1919-1925; those for the other districts (except San Francisco in one year) are below the country’s average for the entire period. Similar condi- tions hold when demand deposits are expressed in terms of total deposits. Trends 1. The trend of ratios of demand deposits to earning assets was generally downward from 1919 to 1921 and upward from 1921 to 1925; of ratios of demand deposits to total deposits, the trend was downward during the whole period 1919 to 1925. In the years in which the ratios of demand deposits to earn- ing assets in each district were high relative to the seven-year district levels, the direction of change in each following year was downward; in those in which they were low, similarly meas- ared, it was upward, the net percentage amounts of change from year to year varying directly with the amounts of dispersion from these levels. When the demand deposits are expressed in terms 2. NORMS AND TRENDS IN DEPOSITS 57 of total deposits—the ratios being prevailingly lower each suc- cessive year—the downward movement from year to year was larger for districts in the years in which the percentages were high than for those in which they were low—high and low being determined by the average district levels for the seven years. That is, there appears to be a tendency for the ratios to seek a level, this tendency being a function of their dispersion about the seven-year average. 4. THE RELATION OF TIME DEPOSITS TO EARNING ASSETS AND TO TOTAL DEPOSITS The total deposits of member banks in the Federal Reserve system, as used in this study,!® consist of the combined demand and time items. The discussion in Section 3, immediately pre- ceding, had to do with an analysis of the demand items, measured in different ways, in the different districts for the years 1919 to 1925, separately and combined. The following section is con- cerned with a study of the norms and tendencies in the time deposits. (1) Ratios of Time Deposits to Earning Assets According to Table 41, which gives the ratios of time deposits to earning assets for all member banks by districts and years, the average for the combined years for all districts is 28.03. The corresponding amount is 19.01 in 1919, and almost double this, 34.88, in 1925. The smallest percentage for the combined years is 15.08, for Dallas; the largest is 43.01, for Minneapolis. Wide differences exist in this series. The individual amounts range from 8.74 (for New York, in 1919) to 50.98 (for San Francisco in 1925). If the 84 ratios—seven for each of the twelve districts —are distributed into frequency groups, as is done in Chart 11, more of the percentages fall in the group 20-25 than at any other place, as the groups are set up, although there is concentration of instances at groups 30-35 and 35-40. Indeed, these two groups contain one-third, and the limits set by 20% and 40% contain two-thirds of all of the ratios. Chart 11 pictures the distribution of the ratios when the period 1019-1925 is taken as a unit. Even a casual inspection of Table 10 See page 32. BANKING STANDARDS TABLE 41 RATIOS OF TIME DEPOSITS TO EARNING ASSETS IN ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. ...... New York... “hiladelphia. _leveland... Richmond... Atlanta.... Chicago. . .. St. Louis. .... Minneapolis. Kansas City. Dallas. ..... San Francisco \verag: ‘1019- t925) 28.03 3 .91 79 .04 2.89 .38 -t 1019 | 1020 | 102% | 1922 | 1923 RATIOS TIME DEPOSITS TO FARNING ASSETS | 1035 19.01 "22.08 | 25.13 | 28.43 | 30.36 33.35 " 34.88 9. 74 I. 20 2R, of 22.0" 6.22 I1.04 20.43 30.07 a! "1.13 13.40 24.7% 33.5% 24.70 17.06 22.07 36.74 34 6 27." 20.00 20.94 38.03 35 54 33.2. °. 6c 3 22.50 34.11 42.94 37.61 cr.ob ,00 33.24 23.55 36.53 43.76 40.42 35.94 12.22 5£.83 48.47 28.11 20.27 £0.08 3 afl $a 18 41 shows that there was a tendency for the ratios in each of the districts to increase from year to year, the result being, when the period is treated as a whole, as is done in Chart 11, that the ratios for the later years fall in the upper, and those for the earlier years in the lower groups as provided. Account must be taken of this almost universal upward trend in any analysis purporting to show both the norms and tendencies characterizing the percent- ages. This is done immediately below. If, as in the preceding discussion of other ratios, the seven- year averages for the respective districts are taken as bases from which to measure percentage variations from type, the results shown in Table 42 are obtained for the ratios of time deposits to earning assets. From this table it is apparent for each district that the years 1919, 1920, and 1921 are low; and that 1923, 1924, and 1925 are high. The turning point from low to high comes in 1922 for all but three districts. The similarity of results for the ratios of time deposits to earning assets in the various districts is more marked than that found for ratios of demand deposits to earning assets.!’ In the latter case, there is some evidence of community of behavior; in the former, it is almost perfect. The percentage amounts by which the yearly district ratios of time deposits to earning assets are above or below their own seven- 11 See Table 26. NORMS AND TRENDS IN DEPOSITS 50 year averages vary widely. This is to be expected because of the fact that the ratios themselves are markedly different. How dif- ferent, is a matter for later consideration. The ratios shown in Table 41 merit further study. As noted immediately above, the amounts differ in the different districts. Moreover, they are generally low in some years and generally high in others. Are the directions of change from year to year con- sistent? An affirmative answer to this question is found in the detail of Table 43. To the general rule that from year to year in CHART 11 DISTRIBUTION OF YEARLY DisTRICT RATIOS OF TIME DEPOSITS TO EARNING AssETs, ALL MEMBER BANKS, 1919-1925 Percentage Groups 5 and under 10 10 and under 15 15 and under 20 20 and under 25 25 and under 30 30 and under 35 35 and under 40 40 and under 45 45 and under 50 50 and under 55 D = — — Te —— nad — Per Cent 10 15 20 ” | I Se ——— — pb Number of Cases i 15 12 4 14 every district the direction of change is upward, there is but one exception (Minneapolis in 1920 as compared with 1919). The rates of increase vary from district to district and in the same district from year to year, but to the general fact of increase there is but the one exception indicated. Moreover, there is a pro- nounced tendency for the ratios for the districts combined, as well as those for the districts separately, to increase at a decreas- ing rate. This fact is illustrated in Chart 12. The ratios, it will be remembered, are generally high in all districts during 1923, 1924, and 1925, and in nine of the twelve 50 BANKING STANDARDS TABLE 42 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1925, OF RATIOS OF TiME DEPOSITS TO EARNING ASSETS FOR ALL MEM- BER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS ] PERCENTAGE DrrreroNcT ROM DISTRICT A-""™AGE, 1010-1025 1022 | 1933 I 1024 103% -:-36.40 +39.28 430.80 +18.18 +23.52 +18.30 +13.56 4-23.80 4-12.70 +21.43 +34.42 +21.76 Boston...... New York. . hiladelphi:. Jleveland. . Richmond. . Atlanta. ... Chicago. .... 5t. Louis. ..... Minneapolis. . . Kansas City... Dallas. .............. San Francisco.......... in 1922, In the other years, they are low. If in each district they are classified by their positions relative to the seven-year average, the dispersion plus and minus being measured on a per- centage scale, and if the direction and net percentage changes from year to year are determined, it is found that (1) essentially as many increase when they are high as increase when they are low—the direction generally being upward; (2) the rate of in- crease for those that are low is twice as great as for those that are high; and (3) the net rate of increase for those that are low TABLE 43 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS OF TIME DEPOsiTS TO EARNING ASSETS IN ALL MEMBER Banks BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DisTRICTS — Average (All Districts) Boston. . . ees New York.... es Philadelphia. veraee wees Cleveland.... cocoevorsancnnes Richmond. .....ceo0vveneennee Atlanta....... Pp chicago. .....u. araH EE St.Louis. ..ovvver vi iaeennns Minneapolis...oev. seereacecns {ansas City.... Ceraerannas RE | TN San Francisco...... . . 1919 to | 1020 Lr 1° -+ =F I] +26 37 +12 2° + 7.5 +r4.c . 20 +3 + 7 TF I 4... + 6.60 +61.07 PRRCEN" GF C— --~ ~~ "ip 10 YEAR 1023 | 1024 to to 1024 1038 + 4.50 “= 8.41 + 4.67 + 7.00 + 1.01 + 7.47 + 2.51 +4 2.98 4 6.8 +4 2.58 + 4.42 + 8.30 +4 8.4% i0.g +27.32 b13.4: 9.4 BE TT i= 7.00 4 Er $12.2 +17.10 4 0.16 NORMS AND TRENDS IN DEPOSITS 61 varies directly with the percentage amount of dispersion from the basic seven-year levels. For those that are high there appears to be no systematic relationship between the amount of dispersion and the net rate of change. But what positions do the ratios in the respective districts hold relative to the amounts for the country as a whole? The answer to this question is found in Table 44. For each of the years 1919 to 1923, Districts 1, 2, 10, and 11— Boston, New York, Kansas City, and Dallas—are below the coun- try’s average, while Philadelphia holds this position from 1919 to 1923. The other districts, with the exception of St. Louis in 1920, are above the country’s average throughout the seven years. It is these same districts, with minor exceptions, that show a systematic relationship to the country’s average, so far as their ratios of demand deposits to earning assets are con- cerned, their positions, with respect to signs (plus and minus), however, being reversed. In spite of the upward tendency of the ratios in each district from year to year and over the whole period, the rates of change so closely conform to those of the entire coun- try that relatively they hold their positions above or below the country’s average over the whole series of years. This fact is not so striking in those districts with ratios widely deviating from the average for the combined districts, but it is of interest for At- TABLE 44 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF TiME Deposits To EARNING ASSETS FOR ALL MEMBER BaNks, FEDERAL RESERVE SYSTEM, FROM AVERAGES ¥OR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS Boston. ..... New York. . .: Philadelphia.. Cleveland.... Richmond. . .. Atlanta...,..! Chicago. ..... 5t. Louis. . .. Minneapolis. . Kansas City.. Dallas. ...... San Francisco Average 1010-25) =-13.0¢ -30.68 - 0.36 t32.15 t+17.70 t+ 8.39 fes.of 3.23 +53.44 ~-17.41 ~46.30 440.38 rorrareacw DrreroeNCES FROM THE COUNTRY’S AVERAGES IQIQ .Q2¢C 1021 1022 102 1024 1038 -26.52 —54.02 ~ 4.20 +50.24 t+25.62 t17.73 £67.64 + r.-0 -103.54 =~ 4.63 —49.82 +10.235% —26.54 —-£r~.00 = 5.47 +38.01 +23.33 4-2. 0c A -C +173.0 -14.1¢ —53.08 +66.31 - —46.72 — 1.59 +33.52 +19.0¢ +10.6° tar.¢’ + 3.6 +60.00 —15.851 —46.01 +55.30 -13.12 —~39.99 - 1.27 +29.23 +20. 8¢ L 8.6: 30.6: F577 $50.44 -16.00 —44.99 +50.0% -Ir.02 —34.26 ~ 2.36 +27.39 L-€. 20 \ - - 8.07 —33.54 + 2.28 +28.76 +13.78 + 13 teq.0a + 0.6c +41.68 -19.28 —43.02 +30.04 — 4.70 ~32.49 + 4.73 +25.46 +15.88 + 3.04 $21.08 + 2.72 +38.97 —10.41 ~41.80 +46.18 -ry. 7 —~43.73 +41.08% 89 BANKING STANDARDS CHART 12 RATIOS OF TiME DEPOSITS To EARNING ASSETS ~ ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1923 "The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE c-cvecece DISTRICTS ceemeee 1919 1920 192¢ 1922 1923 1924 1925 1919 1920 1924 1922 1923 1924 192% ean si ee” ot J AV, = ~~ BOSTON AV. come New York ~~" AV AY. cer — ya ves 22a PHILADELPHIA Ric HMOND eee —————— CHICAGO, ,oeese-"""""" “ aw’ MINNEAPOLIS ore cessevee=t AY ae CLEVELAND J Jt seven AY cw a wren ST Louls = > ees ovee caw meee” meee” eon?" AV em seeeeee rt CITY Scales of Percentage Change 3 ty 2 2 tle af AV a Pree am Laesesetettt tT | gant _— coven? SAN FRANCISCO wees on” ceoet” wun 919 1920 1921 1922 1923 1924 1923 919 1920 1921 1922 1923 1924 1925 NORMS AND TRENDS IN DEPOSITS 63 lanta, for instance, the ratios for which closely correspond to those for the country as a whole. Chart 12!2 makes it possible to compare the ratios of time de- posits to earning assets for the individual and combined districts during the years 1919 to 1925. An outstanding, if not the main, characteristic is the upward trend of the solid lines which repre- sent the ratios in the various districts. While the slopes differ, the chart indicates a tendency for the ratios to increase, the rates of increase, however, generally decreasing. This is noticeably true for the ratios in the First and Second districts—Boston and New York—and for the twelve districts combined. It will be re- membered that uniform slopes, on charts of this type, indicate equal rates of change. In this connection, it is of interest to com- pare the slopes of the various solid lines. The rates of change are particularly uniform for Cleveland, Richmond, Atlanta, St. Louis, and Kansas City. Moreover, the rates are much alike in the following pairs of districts: Boston and New York; and Chi- cago and Minneapolis. The ratios in Philadelphia, Atlanta, and St. Louis closely agree with, while those in New York, Minneapolis, Dallas, and San Francisco widely differ from those for the combined districts. Those in New York and Dallas are noticeably lower, and those in Cleveland, Chicago, and Minneapolis are distinctly higher than those for the entire country. Yet in spite of the variations from the country’s averages, the ratios in the several districts are above or below their own seven-year levels at the same time, change from year to year in the same direction and by much the same rates, and describe the same long-period trends. (2) Ratios of Time Deposits to Total Deposits Time deposits, measured in terms of the earning assets of all member banks in the respective Federal Reserve districts, in- creased at a diminishing rate during the years 1919 to 1925. When measured as proportions of total deposits they also increased during these years. It is the norms and trends of deposits meas- ured in this latter manner with which this section of the dis- cussion has to do, the ratios themselves being given in Table 43. 12 For a statement of the basis upon which this chart is drawn and of the way it should be interpreted, see page 21. 94 BANKING STANDARDS TABLE 45 Ratios oF Time Deposits 10 ToTarL Deposits IN Arr. MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS — FEDERAL RESERVE DISTRICTS \verage (ro19-| 1919 , IX9230 1025) RATIOS OF TtME DEPNSITS TO TOTAL Deposits 1021 | 1022 | 1023 1024 | 1025 i — Average (All Districts) ' 32.71 © 23.58 27.06 31.40 1 33.10 1 35.10 36.04 | 37.60 boston. .... New York. . 2hiladelphia.. Cleveland... Richmond. . Atlanta..,.. Chicago. .... it. Louis. . ., .. Minneapolis. . Kansas City. Dallas....... San Francisco. . 20 toc 9.71 or Lo 2. .4C 19.6 74.4L 2T-04 tr 52 LAL Cs C74 "4.93 39.65 Te a 35.54 25.71 41.96 48.63 46.69 39.00 44.42 40.23 50.72 8.53 21.17 50.33 i The average ratio for all districts for all years is 32.71%. The lowest yearly amount for all districts is 23.58, in 1919; the high- est, 37.60 in 1925. For the combined years, Dallas with 17.90 is the lowest, and Minneapolis, with 49.33, the highest. By group- ing all of the ratios into a frequency form, it is found, as shown in Chart 13, that they range from 10% to 55%, the smallest one being 10.91 for New York in 1919, and the largest, 51.83 for Minneapolis in 1924. The modal or typical group is 40-435, al- though concentration also appears at groups 25-30 and 35-40. The general tendency in each district being for the ratios to in- crease, those for the early years are found in the lower, and those for the later years in the upper groups of the chart. This being true, further study of district and yearly differences and similari- ties is necessary. The first approach to such a study is to compare the ratios each year in each district with the average district amounts for the period 1919-1925. In this comparison, plus and minus percentage deviations are used. Table 46, giving the resultant amounts and signs, shows that in all districts 1919 and 1920 are low, 1923, 1924, and 1925 are high, 1921 is predominantly low, and 1922 is predominantly high. The ratios in all of the districts (except New York) are higher than the seven-year averages in 1922 and subsequent years; they are lower during 1919 and 1920 NORMS AND TRENDS IN DEPOSITS 65 in all districts; and, except Atlanta, Chicago, Minneapolis, and San Francisco, they are lower also in 1921. With the exception of 1921, almost identical conditions were observed above when ratios of time deposits to earning assets were under discussion. It is apparent, of course, that the signs in Table 46 are the opposite of those shown in Table 35, in which ratios of demand deposits to total deposits are given. The percentage variations in the two tables, however, are not related in this manner—they are peculiar to the ratios themselves. The ratios of time deposits to total deposits, for all districts combined, increased from year to year and over the period 1919 to 1925. Is this general or average trend true for the separate districts? The answer to this question is found in the detail in Table 47. To the general rule of successive yearly increases, there are exceptions in the following districts: Dallas, between 1919 and 1920; Chicago, between 1921 and 1922; San Francisco, between 1922 and 1923; and Atlanta, Chicago, Minneapolis, and Kansas City between 1924 and 1925. Otherwise, the directions of change throughout are the same. The rates differ, and of these CHART 13 D1sTRIBUTION OF YEARLY District RATIOS OF TIME DEPOSITS TO THE ToTAL oF TIME AND DEMAND DEPosITS, ALL MEMBER BANKS, 1919-19235 Per Cent Percentage Groups 10 and under 15 15 and under 20 20 and under 25 25 and under 30 30 and under 35 35 and under 40 $0 and under 45 5 and under 50 50 and under 55 D 10 1X3 = Rand Fad mr PEER eee Py EE. esassame Number 20 of Cases 9 - v J 36 BANKING STANDARDS TABLE 46 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1025, OF Ratios oF Time 10 ToTtaL DEPOSITS FOR ALL MEMBER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Boston. ....uccurcnann New York... is 2hiladelphia.. ... ... Cleveland. ....... ... ichmond........ ... tlanta.......... .. WCagD. .oeneerar os . Louis. ,....-- ie “inneapolis. . . sy aansas City. .- Dallas. ..... San Francisco. Pr—CENT he NTAGF TN - ma ~=-=wr NITenRICT AVERAGE, 1010-1025 1924 | 192% 1019 | 1020 }' 1921 1 1922 | 1923 ~37.% —g = -1¢. 50 -23.0] nk —: —T1" ¢ wb. 55 -r 28 = *.14 —- ‘ 28 6 + .7 —T1.4 + .22 41.10 soar 6- +4 n.05 diate I r.of Cor ¥ 9. “70,04 + al ot PO +26.03 429.19 +21.08 +13.51 +13.54 + 7.57 + 4.42 12.85 + 2.82 + 6.57 418.27 +12.67 ny ~~ fy something is said later. While there are six districts in which the directions of change in the ratios of time deposits to total deposits do not follow the rule in at least one year, there is only one dis- trict (Minneapolis, 1919 to 1920) which is “out of step” when year-to-year changes in ratios of time deposits to earning assets are studied. The general tendency is for time deposits, measured in both ways, to increase, but at a decreasing rate. Attention should be called to the fact that the signs, plus and minus, in Table 47 are the opposite of those in Table 37, the TABLE 47 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS OF TIME DEPOSITS TO ToTAL DEPOSITS IN ALL. MEMBER Banks BY YEARS AND FEDERAL RESERVE DistrICTS FEDERAL RESERVE DISTRICTS Average fAll Districts) Boston. ... J New York... eines Philadelphia. . RE Cleveland. .. fee Wi richmond... ws Atlanta. ..... . Chicago. ..... . .t.Louis...... . ve eee Minneapolis... ............ Snes CY. curmssmmrsmmsss DANS sou cmiivmmes mms yams mms San Francisco. .....oovvveeenn- moM "7 «®v To YEAR 1019 1920 1021 | 1922 1923 1024 to to to to to to 1920 102% 1022 1023 1024 1925 v4 26 der aw tw oan ' KR ma + 1 a7 4- 1 Sa 27.7, C71 > 5.75 11.67 - 8.04 * 4.07 6.77 2.7% v1.04 - 3.97 $21.28 4. 4 3.0. +18." bio. t14.7. +42.7¢ 1-10.92 119.34 + 9.93 +15.4¢ +45.30 412.62 +16.: t+ o.1 + 7.60 FCL6 Foor Foo tos {2.3 + 8.87 4+ 2.02 9.7. 4.0L , 3.7? £1.32 som oF r ’ b Car 4 4.28 —_— rn ah 9 y =~ 9.7 { 6.5. } 2.66 + 4.70 <6 0.97 + roa + 5.96 4 3.48 vo 034 + 3.13 + 5.83 + 2.44 + 3.59 - 2.28 —- 0.07 + 1.18 —- 2.14 = 4.77 +4 0.09 +4 ¢.8¢ NORMS AND TRENDS IN DEPOSITS 67 former relating to the year-to-year changes in ratios of time de- posits to total deposits, and the latter to ratios of demand deposits to total deposits. Table 47 shows consistency among the respective districts in the direction of change characterizing the ratios of time deposits to total deposits. Table 48 indicates as striking consistency in the positions held by districts relative to the averages for the country as a whole. Boston, New York, Kansas City, and Dal- las, for the entire seven years, are below, while the remaining districts (except Philadelphia, in 1920) are above the country’s averages. If, as determined in this manner, districts are rela- tively low in one year, they are low throughout all of the years; conversely, if they are high, they remain high. Such a condition might be accounted for by the wide differences between the dis- trict ratios and those for the country, or by similarities of change from year to year. It will be seen later that it is primarily due to the uniformities of the rates of change. An explanation for such similarity will be offered in due course. The signs in Table 48 are, of course, the opposite of those in Table 39. That is, those districts which have high or low ratios of time deposits to total deposits have low or high ratios of de- mand deposits to total deposits, and vice versa. Chart 14 graphically presents the ratios of time deposits to total deposits for the respective years and districts. It is drawn TABLE 48 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF TiMe Deposits 10 ToraL Deposits For ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE FepERAL RESERVE DISTRICTS Boston. ..... New York. .. Philadelphia.. Cleveland... . Richmond... Atlanta...... Chicago. .... St. Louis. . . . Minneapolis. . Kansas City.. Dallas. ...... San Francisco Average 1919-25) =TI.7¢ ~39.1( Ls.1c Lio.96 “5.71 11.10 r3o0.of } 8.99 t50.80 —18.16 —45.27 F36.56 PERCENTAGE DIFFFRENCES *20M THE COUNTRY’ AVERAGES — 1010 10320 1021 1022 1023 1024 1928 -..53 —53.72 + 4.66 +46.14 +31.03 $19.67 60.3: $rs5.c +8» - —- —46.5. +13.18 6 LI Zihas ~ x +34. ] be. —+(.12 ~46.46 + 0.29 +27.01 kc6. 58 +s Ra —~14.4 -~40.88 + 3.82 430.58 +30.52 t14.52 19.44 +10.7- +53. —16.84 —42.33 +38.8 -I11.7¢ — 6.66 —33.14 =—32.51 t 32.64 + 7.34 +126.57 +28.50 24.7 ‘aaz.01 L. Ray 4 8.af Par,61 'eal3n sot kgf +45.87 +c 31 —19.04 =—1%. go —43.28 —42.94 430.58 . +28.72 -— ©. 48 -31.62 +11.50 +129.33 424.17 + 3.96 +18.14 + 6.99 +34.80 —324.12 —43.70 +33.8% “* 5¢ -. .28 +48.15% 2 "00 ~r5.31 —44.17 +43.38 58 BANKING STANDARDS CHART 14 Ratios oF TiME Deposits To ToraL DEPOSITS — ALL. MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE ccvccacea DISTRICTS cee 1819 1920 192% 1922 1923 1924 1923 1918 1920 1921 1922 1923 1924 1928 ne BOSTON AY == NEW YORK Ne HLADELPHIA AV a em — cu AND cosnssssase aces oed sessnenmaaseso’ - oe” Caeser - XY ret ATLANTA w= condos maneners® ae ase Scales of EE Sates dl aeons” eran ol} "i ee mre HICAGO eaeeaannmanee ities — : oss oe KANSCAR CITY maT | panies maori senses eset aaa AY. — a ———— ~~" 5aN FRANCISCO eeneesessnaoe aaenmenmeementt ~ Leese AV —m— . 1819 1920 1921 1922 1923 1924 1928 1919 1920 1921 1922 192% 1924 1923 NORMS AND TRENDS IN DEPOSITS 69 on a ratio basis!® and shows, among other things, for the country as a whole, that (1) the ratios increase over the whole period 1919-1925; (2) the rates of change are largest for the years 1919- 1921; and (3) the rate, almost constant from 1921 to 1924, de- creases between 1924 and 1925. While the actual percentages in New York and Dallas are noticeably lower and those in Min- neapolis and San Francisco appreciably higher than those for the combined districts, the rates of change, with minor differences, are much the same. The district with ratios most closely con- forming to those for the country as a whole is Philadelphia; the one with rates of change most closely paralleling the averages for the combined districts is St. Louis. A brief summary relating to the norms and trends in the ratios of time deposits to earning assets, and to total deposits, is in place at this point: Norms 1. The typical ratios of time deposits to earning assets, for all member banks by districts and by years, 1919 to 1925, fall in the group 20-25. Other common amounts range from 30% to 40%. When time deposits are expressed as proportions of total deposits, the most common ratios fall in the group 40 to 45, concentration appearing also at the groups 25 to 30 and 335 to 40. 2. Ratios of time deposits to earning assets and to total de- posits are relatively low in 1919, 1920, and 1921, and relatively high in 1922, 1923, 1924, and 1925—the standards of comparison in each case being the respective average district ratios for the vears 1919-1925, combined. 3. Time deposits, when measured as percentages of earning as- sets and of total deposits, and when compared with corresponding yearly averages for the combined districts, are low during the entire seven years in Boston, New York, Kansas City, and Dallas. The other districts are generally high throughout the period. Trends 1. During the period 1919-1925, and from year to year, ratios of time deposits to earning assets and to total deposits increase. This is true of all member banks in the System as a whole and of 13 See the discussion relating to such charts, page 21. BANKING STANDARDS those in each of the districts. Between 1919 and 1921 they in- creased at an increasing rate, and between 1921 and 1925 at a decreasing rate. 2. Ratios of time deposits to earning assets and to total de- posits which are high in a given year, relative to seven-year av- erage district levels, rise relatively less the following year than do those which are low when judged by the same standards. That is, when ratios are increasing from year to year, as they generally are in this case, those which are low, relative to their respective dis- trict averages, show larger percentage rises than do those which are high. Reversion to type, in this case, takes the form of amount of percentage change alone rather than of both direction and amount, movements found, for instance, to characterize ratios of demand deposits to earning assets in their regression to type. JO kr NORMS AND TRENDS IN GROSS EARNINGS I. INTRODUCTION THE analysis in the preceding chapters was concerned with norms and trends relating to those aspects of bank operation which determine, in one way or another, the amounts of gross earnings, operating expense, and net earnings. The discussion in this chapter relates to the norms and trends in the ratios of gross earnings in all member banks by districts and years. Subsequent chapters will deal with ratios of operating expense and of net earnings. The amounts of gross earnings used are those reported in the Federal Reserve Bulletin for the years ending June 30, 1919 to 1925. The earning assets with which these are compared are, as in the case of the preceding analysis relating to this item, the average amounts for December 31 for the year preceding and for June 30 of the year in question! Gross earnings are composed of interest and of “other income.” For the years under discussion, the total amount is used. It is this which is expressed as a percent- age of the earning assets as defined? and used above. It is of in- terest to note in passing that for the combined districts, for the years 1924 and 1923, the ratios of the interest item to the total grossearnings were, respectively, 86.65% and 83.70%, the modal or common percentages falling in the group 87 to go. The dis- tribution of the ratios for the twelve districts for the two years is shown in Table 49. 1 See, however, note page 13. *See page 13. TABLE 49 72 BANKING STANDARDS 2. THE RELATION OF GROSS EARNINGS TO EARNING ASSETS For the combined twelve districts for the years 1919-1925, in- clusive, gross earnings constituted 6.58% of earning assets. The lowest ratio for the combined districts was 6.00% for 1919; the highest, 7.33% for 1921. For the combined years, the lowest ratio, 6.08, is that for Boston; the highest, 7.92, for Dallas. Dif- ferences characterize the respective years and districts, as shown in Table 50, the ratios ranging from 5.44 to 8.85. TABLE 50 RATIOS OF GROSS EARNINGS To EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DisTrICTS Boston........ Chee New York... ve Philadelphia. . ae Cleveland... . ‘e Richmond. . . ve Atlanta....... . Chicago....... . “t. Louis. ...... is us Vinneapolis........o.00entn Tansas City..... ......-.. Dallas. .........coviivinnnn San Francisco. ......... Average (All Districts) \verag 1010- | 1925) Ta op £7 nt FAPNINGS TO FTARNING ASSETS : 1021 | 1922 | 1923 | 1024 i 1025 6.58' 6.00! 6.451 7.33} 6.971 6.421 6.501 6.37 an +e 3.6 Lag L wn ras re e- ( Lek 6.3: re. Is pe ra ay 04 L.49 90 ¢.08 6.12 3.53 ol ” o LC.aY 6.30 6.67 6.44 7.27 Su 6.5 6.78 "49 “na 7.0rI 6.058 £.89 6.21 6.77 6.45 7.12 6.2 6.50 6.52 7.40 | 7.86 6.97 ).04A If the period 1919-1925 is taken as a unit and if the gross earnings ratios by years and by districts are classified in fre- quency form, as is done in Chart 15, it is found that the common or modal amounts fall in the group 6.25-6.75, and that the form of the distribution approaches the normal type. Inspection of Table 50, however; shows a correlation between the location of the districts and the ratios of gross earnings. Accordingly, when the ratios for the different years and districts are grouped, as in Chart 15, the eastern districts, generally, fall in the lower, and the west- ern in the higher groups. Account is taken of this fact in the following analysis. If the average ratio in each district for the combined years 1919-1923, inclusive, is taken as a standard from which to de- termine the dispersion of the ratios each year, it is found from NORMS AND TRENDS IN GROSS EARNINGS 73 CHART 13 DiIsTRIBUTION OF YEARLY DISTRICT RATIOS OF GROss EARNINGS TO EARNING Assets. ALL MEMBER BANKS, 1019-1023 Percentage Groups 5.25 and under 5.75 5.75 and under 6.25 6.25 and under 6.75 5.75 and under 7.25 7.25 and under 7.75 7.75 and under 8.25 3.25 and under 8.75 B.75 and under 9.25 3 Per Cont 15 30 a — T— 25 30 Number of Cases 4 15 25 18 '4 3 Table 51 that the ratios were predominantly low in 1919, 1920, 1923, 1924, and 1925, and predominantly high in 1921 and 1922. To this general rule, in the years which are termed low, Minne- apolis in 1919, New York and Richmond in 1920, and Philadel- phia, Cleveland, Richmond, and San Francisco in 1924 and 1925, are exceptions. In the years which are called high, there are no exceptions to the rule, although the percentage amounts by which the ratios in the several districts differ from their own seven-year average levels, particularly in 1921, vary widely. It appears, therefore, that in the matter of gross earnings, years which are “poor” or “good” in one district tend to be “poor” or “good” in all districts. Such a condition is not surprising in view of the fact that from 87% to 90% of the gross earnings of member banks is received in the form of interest, and that interest rates, while varying from district to district, reflect economic conditions. Moreover, the amount of interest received by a bank or by a group of banks depends upon the relative composition of its earning assets, and this changed in a more or less uniform way throughout the coun- try during this period. Then, too, the “other income” received depends largely on the use which is made of current funds. Capi- tal represented in such assets is fluid, tending, other things being *4 BANKING STANDARDS TABLE 351 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1019-1925, OF RATIOS OF GROSS EARNINGS TO EARNING ASSETS FOR ALL MEM- BER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS d0stown..... oe New York...... .... Philadelphia.... -.... Cleveland. ........... Richmond............ Atlanta. ....cc000-0i0 Chicago. ...ooeeene. on St.Louis. ...ooo0en.s Minneapolis. ..... Kansas City.... Dallas. ....... San Francisco..... PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1910-1925 raz 1923 | 1024 1925 eI - ,.02 -~XI.55 ~10.1] yc not Lf «3 + .4 -2.7 - + 6.4 t17.5 + 5.0 + 2.4 + ” 3 + <a = .49 —6.80 + .08 +2.58 +1.57 -3.13 4.7% a; 9.C X.73 -4.55 4+ .43 LL equal, to be attracted to regions where rates are high and to be deflected from those where rates are low. In spite of this fact, however, district differences in the ratios of gross earnings to earning assets, as will be seen later, tend to persist over a series of years. Yet the years in which rates are relatively high or low in one district tend also to be high or low in others. From Table 50 it was seen that for all districts combined, the rates were higher in 1920 than in 1919, and in 1921 than in 1920. [n 1921, a recession began, lasting through 1925, except for a slight revival in 1924. Accordingly, it is well to observe the nature and amounts by which the ratios in the different districts changed from year to year in order to determine the similarities, if any, which obtain. A summary of such changes, expressed on a percentage basis, is given in Table 52. How nearly are the directions of change, true for the country as a whole, duplicated in the respective districts? This table shows that in all of the districts, except Minneapolis, the rates were higher in 1920 than in 1919, and in all except Richmond, higher in 1921 than 1920. Contrariwise, all of the districts ex- cept three (Philadelphia, Cleveland, and Richmond) followed the downward trend experienced by the combined districts between 1921 and 1922. A decrease—by unequal percentages—between 1922 and 1923 occurred in every district. Complete uniformity in the direction of change does not obtain among the various dis- tricts between 1923 and 1924 and between 1924 and 19235, al- though between the latter years, in all but three of the districts, NORMS AND TRENDS IN GROSS EARNINGS 75 TABLE 52 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS OF GROSS EARNINGS TO EARNING ASSETS IN ALL MEM- BFR BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average {All Districts) Boston. . .. New York. ... Philadelphia. Cleveland... Richmond. . Atlanta..... Chicago. ... St. Louis. ... Minneapolis. Kansas City. vallas....... San Francisco... [919 to i920 > ra DEeRCrN=* re (IANA spar Vs "020 te rQaT -—~Aae “nag + +12 60 Tr 30 20 Ng pra Veag ~~ ~ 1924 ‘eo 1028 -6 10 4 aq a the ratios decreased. In spite of this lack of uniformity, the di- rections of change from year to year are markedly consistent in the various districts. Another aspect of the year-to-year changes is of interest. If the respective seven-year district levels are taken as a base from which to measure the yearly positions—plus and minus—of the ratios in each district, and, as thus classified, the directions and percentage changes from year to year in the ratios are measured, it is found, as shown in Tables 53 and 54, that (1) ratios which are high or low in a given year tend to decrease or to increase, respectively, in the following year, and (2) the net rates of in- crease or decrease vary directly TABLE 53 with the percentage amounts ToMPARATIVE Positions anp Year-ro- by which the ratios are high YEAR DIRECTIONS OF CHANGE IN Dis- or low TRICT Ratios OF Gross EArN- * . NGS TO EARNING ASSETS The foregoing results seem to be fully in accord with the prin- ciples underlying the determina- tion of rates of interest and of “other income.” The earning as- sets of banks, composed of loans and discounts and of invest- ments, are the principal sources 76 BANKING STANDARDS TABLE 54 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF Gross EARNINGS To EARNING ASSETS endif DIFFERENCES FROM DISTRICT AVERAGES, 1919-1925 Sien Number of Cases Percentage | Average Groups Percentage 31 Average 6.30 8 1x 12 10.00 and over 5.00 to 10.00 Under =.00 12.78 | 6.09 2.40 ~~ Under 5.00 5.00 to 10.00 10.00 and over 2.14 7.12 11.21 Average 4.24 NET PERCENTAGE CHANGE FROM YEAR TO YEAR - 3.78 - 6.52 — 6.01 4+ 0.08 + 4.40 + 4.96 +11.06 + 5.10 of gross earnings, their composition depending primarily upon the demand for bank accommodation and the attractiveness of the investment market. As the demand for loans increases, interest and discount rates tend to rise; as it decreases, they tend to fall. High rates of interest have the effect (1) of discouraging bor- rowers from placing new and renewing old loans and (2) of at- tracting capital. Either or both tend to lower interest rates. Contrariwise, low rates of interest stimulate borrowing and the placing of loans in more attractive fields. Both conditions tend to increase interest rates. Moreover, there is a continuous flow of capital, in the form of loanable and investment funds, into and out of different markets (geographical but overlapping), which fact tends to equalize interest rates at the levels common to such markets because of the type of business transacted, risks and ex- penses incurred, and so forth. It is this process of equalization which is observed in the above phenomena. Gross earnings—in- terest received, for the most part—regress to type, the type being the average level peculiar to each district. And further, the amount of regression—net percentage change—varies directly with the extent to which the equilibrium is disturbed. Moreover, the gross earnings of a bank or of a group of banks depend upon the composition of its earning assets—matters under NORMS AND TRENDS IN GROSS EARNINGS 77 the control of banks individually and collectively. Each bank is free, within certain common restrictions, to use its funds in the manner most conducive to profit. Presumably it exercises such restricted freedom, as financial prudence dictates, in increasing or decreasing the proportion of its assets as between different forms of revenue-producing agents. Loans and investments are avail- able, but the returns upon them are determined by forces common not alone to one market but to markets, integrated and overlap- ping, a fact which helps to explain why the tendency of regression to type is not isolated but general. Each district, as has already been indicated, has its own level of gross earnings in terms of earning assets. About this level the ratios fluctuate, the years which are high or low in one district tending to be high or low in all districts. But what are the levels for the respective districts? While the ratios themselves are given in Table 50, the nature (plus and minus) and the percentage amounts of variation from the averages for the country as a whole are shown in Table 55 for each district for the combined and for the individual years. Based upon the seven-year period 1919 to 1925, the ratios in Boston, New York, Philadelphia, Richmond, and Chicago are lower than those for the country as a whole, while those for the other districts are higher. Moreover, Boston and Philadelphia are lower than the yearly country average for the full period of TABLE 55 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF Gross EARNINGS TO EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE PERCFNTAGE DrerweENCES FROM THE COUNTRV'S AVERAGES FEDERAL RESERVE Di1sTRICTS Average 010-25) 1910 1020 1021 922 IL .Q24 102% Boston. ..... New York. .. “hiladelphia.. “leveland.... Richmond. . .: Atlanta...... chicago. ....: 5t. Louis. . . .! Minneapolis. . Kansas City. . Dallas. ..... | San Francisco 00 - 3.95 ~ 6.54 F 0.30 - 3.50 F11.70 - 0.76 t+ 2.28 + 8.97 t14.44 F20.36 + 5.47 - 17 - 0.97 - yc Lo¢ io- + trg.2, +16.65 +24 .66 + 8.172 r - 55 - 1.29 — 0.63 L- 8€¢ of 26 70 + ,.7% +12.24 +190.84 +4 1.71 i v.00 ) “7 x ~3 2 2 "= .023 -54 .51 28 26 .77 ar oF F o1.38 +16.1%7 418.68 + 0.42 a ra t20.7. + 0.53 $a. +19.37 + 3.73 “1. 422.13 4 c.14 An 2 - 2.68 78 BANKING STANDARDS CHART 16 RATIOS OF GROSS EARNINGS TO EARNING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the - Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE cocccases DISTRICTS commmmanese 1919 1920 1921 1922 1923 1924 192% 1919 1920 1928 1922 1923 1924 1928 ons & SIO aa A —— A Ew Yor Storeg on S——————— TW ave Scales & Parcentage Change 20-4 o 204 3 ® 104 8 Tr ! 10 1 2 - Cees ee Pa Ero L Elo tadabd dX PUR 8 19°¢ 1920 192% 1922 192% 1928 1925 919 1920 1920 1922 1923 1924 WO NORMS AND TRENDS IN GROSS EARNINGS 79 seven years, New York for six, and Richmond and Chicago for five of the seven years. Of the districts which are high, relative to the seven-year average, Cleveland holds this position three years, and all of the other districts the full period of seven years. But “high” and “low” are relative terms; the districts which are “high,” as well as those which are “low,” are not equally high or low for each of the seven years. This fact is graphically illus- trated in Chart 16. This chart serves several purposes. It indicates for ratios of gross earnings to earning assets for each of the districts (1) the direction and percentage amounts of change from year to year and over the whole period, (2) the position held by each district rela- tive to that for the country as a whole, and (3) the nature and percentage amounts by which the ratios each year deviate from the seven-year level. Several features of the chart claim one’s interest. First, there is substantial agreement, among the twelve districts, that gross earnings ratios increased between 1919 and 1921 and fell between 1921 and 1925, the ratios in 1925 for the combined and for the majority of the districts being approxi- mately the same as those in 1920. Second, the rates of change from year to year and over the whole period in the several dis- tricts generally conformed to those for the districts combined. To this generalization there are exceptions, the chief of which, for the year-to-year changes, are Minneapolis and Richmond, the for- mer experiencing a fall between 1919 and 1920, and the latter, between 1920 and 1921. Moreover, the downward trend from 1921 to 1925 was not felt in the Fourth district (Cleveland) and only moderately so in Richmond, both, however, except for 1921, having actual ratios not markedly different from those for the combined districts. The districts with gross earnings ratios chang- ing most nearly in accord with those for the country as a whole are Chicago, St. Louis, and Dallas; those behaving most diverg- ently are Richmond and San Francisco. Third, the ratios in Dallas each year are relatively the highest; those in Boston gen- erally the lowest. As a rule, gross earnings (interest rates for the most part) are consistently high in the South and Middle West (Atlanta, Minneapolis, Kansas City, and Dallas); they are con- sistently low in New England and the East (Boston, New York, and Philadelphia). Fourth, while each district has its own gross BANKING STANDARDS earnings level, the years which were high as well as those which were low were in general the same in all districts. Bo Norms 1. While the typical or modal ratios of gross earnings to earning assets for all districts for the years 1919 to 1925 fell within the group 6.25-6.75, the weighted arithmetic mean ratio was 6.58. The range extended from 5.44 for Philadelphia in 1919 to 8.85 for Dallas in 1921, but 69% of the ratios fell between 5.75 and 7.25. 2. The ratios were generally low, relative to the respective dis- trict averages for the seven years, in 1919, 1920, 1923, 1924, and 1925; they were universally high, measured in the same manner, in 1921 and 1922. Trends 1. Ratios of gross earnings for all member banks in each dis- trict and in all districts tended to increase between 1919 and 1921 and to decrease between 1921 and 1925. To this generalization there are exceptions in 1924, as compared with 1923, for the country as a whole, and in several pairs of years for individual districts. In spite of these exceptions, however, the trend is un- mistakable. 2. From year to year and over the period 1919-1925, the rates of change in the ratios in the various districts, while differing from district to district, are much alike. The greatest rise came be- tween 1920 and 1921 for all but three districts; the year of great- est fall for ten of the twelve districts came between 1922 and 1923. 3. District ratios which are high in a given year, relative to the respective district levels established by the seven-year period, tend in the following year to fall, and those which are low tend to rise, the net percentage amounts of change varying directly with the percentage amounts of dispersion in the first year. Regres- sion to type is general, and probably finds its explanation in the fluidity of capital, banks individually and collectively being free, within certain common restrictions, to distribute their assets be- tween loans and investments in keeping with the demand for and supply of funds and the consequent ruling interest rates. VI NORMS AND TRENDS IN OPERATING EXPENSES I. INTRODUCTION THE operating expenses of member banks in the Federal Re- serve system, reported by years ending June 30, are classified as follows: 1. Operating expenses (total); 2. Salaries and wages; 3. Interest on deposits; 4. Interest and discounts on borrowed money; 5. Taxes; and 6. “All other” expenses. It is an analysis of the total and of each expense item with which this chapter is concerned. Attention is given first to the total; the amounts in the respective districts for the years 1919 to 1925 being expressed in terms, first, of earning assets, and second, of gross earnings. 2. TOTAL EXPENSE It will be recalled that in the earlier chapters the different amounts and ratios used applied to all member banks, combined, in each Federal Reserve district. That is, the banks in each dis- trict were considered as a single institution, the loans, invest- ments, deposit items, gross earnings, being totaled into a single figure and expressed as a percentage of a suitable base. The operating expenses are similarly treated and in this section of the study are expressed as percentages of earning assets.! [1) The Relation of Total Expense to Earning Assets If the seven-year period 1919-1925 for all member banks in the twelve districts is considered as a unit, the average ratio of 1 For method of calculation in an analogous case, see note 6, page 41. Y 32 BANKING STANDARDS total expense to earning assets is 4.59. This figure is derived by dividing the total expense during these years and for these dis- tricts by the total earning assets and multiplying by roo. The yearly figures for the combined districts and the seven-year av- erage amount for each district are obtained in a similar manner. The ratios for the twelve districts and for the years in question, as thus derived, are given in Table 56. An inspection of this TABLE 56 Ratios oF ToTAL EXPENSE TO EARNING ASSETS IN Ari MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS ——————————« Boston. ..... New York..... Philadelphia. . .* Cleveland. .. Richmond... Atlanta. ..... Chicago. ..... 5t. Louis...... Minneapolis. . . Kansas City.. Pallas. ....... San Francisco. .. Average (All Districts) Averag: (1919- 1925) A.50 RaTine OF ToTAL EXPENSE TO ™ARNING ASSETS 1024 | 1025 1019 | 1920 | 1921 1022 | 4.08 4.33 i 5.08 4.54 ) 4.68 | 4.56 ——————— 4.82 aD. - 4.17 4.04 “a Jo Ar. 4.29 4.23 4.04 PARR. 4.30 3.99 4.c5 4.85 4.69 5.08 4.65 4.77 r.26 r.74 '.387 5,AT table shows that the ratios differ from year to year for the com- bined districts and from district to district for the individual and for the combined years. Accordingly, they may be analyzed with these and other characteristics in mind. If they are grouped in frequency form, no account being taken of the separate years and districts, the distribution shown in Chart 17 is obtained. The chart shows that the ratios cluster at the group 4.25-4.75, the distribution around this modal or typical group approaching the normal or bell-shaped type. They range from 3.49, for Phila- delphia in 19109, to 6.46 for Dallas in 1921. There are, however, comparatively few amounts at the extremes, 68% of the instances falling between the limits 3.75 and 5.25. This chart, while it takes no account of district or yearly differences, has the merit of showing in simple form the typical or modal ratios, the range over which the ratios extend, and the manner in which they cluster NORMS AND TRENDS IN EXPENSES CHART 17 8: D1sTRIBUTION OF YEARLY District RATIOS OF TotrarL EXPENSE TO EARNING Assets, ALL MEMBER BANKS, 1019-19238 Por Cent Percentage Groups 3.25 and under 3.75 3.75 and under 4.25 4.25 and under 4.75 4.75 and under 5.25 5.25 and under 5.75 5.75 and under 6.25 5.25 and under 6.75 . = Cc \ Fis = Ny 10 15 20 TE —— SOME A 53 yon Sm Re abr nT A = ov si J Number 25 30 uot ) » Cases 2 i6 24 17 14 ) about a center. Further analysis is required if the norms and trends of this body of data are to be determined. If the average ratio for the period 1919 to 1925 in each district is taken as a base from which to measure the percentage amounts by which the yearly ratios in the districts differ from this level, it is found that (1) in all of the districts the years 1919 and 1920 are low; that is, the ratios are smaller for these years than they are for the seven-year period; (2) in all districts in 1921 and 1922, and in all but two districts in 1924, the ratios are high rela- tive to this level; and (3) in 1923 and 1923, part of them are high and part of them are low. That is, for five of the seven years, the influences which help to determine the ratios of operating expense to earning assets have the effect generally of making a given year high or low in all districts, notwithstanding the fact that the levels for the districts differ. The percentage amounts by which the district ratios are above or below their own seven-year level, of course, vary. Such variation is to be expected because of the differences in the levels themselves, as shown in Table 56. It is the fact of their being high or low at the same time which is now of interest. From this point of view, Table 57 is important. But in the search for norms and trends in expense ratios, other types of analysis are required. Keeping in mind the fact that while the ratios in the several districts have different seven-year RA BANKING STANDARDS TABLE 57 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1019-1025, OF RATIOS OF ToTAL EXPENSE TO EARNING ASSETS FOR ALL MEM- BER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS MFFERENCE FROW NISTRICT A-~=1GE, 1919-1925 1024 192s aston. . New Yorh.. ‘e iladelphia. . . eveland.... _- ichmond.... «eevee SA. cas eres nnn ~hicago.....eeeeeeees 3t. Louis. ..voveannen. viinneapolis. cc eeeese. Kansas City. cee0ne.. Dallas. ......ccu0een. San FrancisCo..coeeee. be - 2 se -3C | -ya + _— - — El L oi Lovely +17.5 + 3.8; + 32.16 + 4.92 16.99 £.12 CoE I 4.8 9 42.3 +12.31 44.7 +3 a ne - « — — —, dm ‘1.42 -L.7X “13.59 “4.79 2.24 34 - +4.30 1.65 —5.00 +3.85 ~+5.66 +4.92 —3.63 — .64 + .42 -8.20 + .70 ~3.43 S4c.06 levels and yet generally are above or below their respective levels at the same time, the direction of change which they take from year to year, as shown in Table 58, may be studied from two points of view. Every district ratio was low in 1919 and in 1920. Moreover, each ratio? increased between 1919 and 1920, and 1920 and 1921. Similarly, every district ratio was high in 1921 and 1922, and in all but two districts, Cleveland and Kansas TABLE 58 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DisTrICT RATIOS OF TorAL EXPENSE TO EARNING ASSETS IN ALL MEM- BER BANKS BY YEARS AND FEDERAL RESERVE DISTRICTS mew Yeap ro Yr 1024 to 102% Average (All Districts) Boston. ... New York. ... Philadelphia. . cleveland. ... Richmond... Atlanta....... Chicago. ..... it. Louis. ..... finneapolis. .. {ansas City. . Dallas......... San Francisco. ... .... + 6.1 Tae 43 .03 ..33 6 og +X “ 00 +12.08 90 70 20 £ oe 7 2 Ca —2.56 +0.22 —~5.67 +0.33 +0.83 +2.63 —~4.00 ‘2.12 ~.20 7.34 —X.54 .10 41.20 2 In Dallas, the only exception, the fall was less than one-half of one per cent. NORMS AND TRENDS IN EXPENSES 8s City, the ratios decreased between 1921 and 1922, and 1922 and 1923. While 1923 was both high and low—high for some and low for other districts—the direction of change was upward in all but two districts between 1923 and 1924. From the level of 1924, which was high as compared with the seven-year level, the direction of change to 1925 was generally downward. That is, as a general rule, two facts are apparent: (1) a given direction of change tends to be common to all districts at the same time, and (2) the nature of the change is related to the level at which the ratios in a given district stand. Table 59 shows the degree of uniformity in the behavior of the district ratios with respect to the first generalization; Table 6o serves a similar purpose for the second. Table 59 shows that out of the 72 direction-changes of the re- spective district ratios from year to year from 1919 to 1925, 39 were upward and 33 were down- ward. But when these changes are differentiated according to the position held by the ratios in the first of each pair of years, relative to the level for the period 1919 to 1925, it is found that of the 39 increases, 30 were associated with ratios holding “low” positions, and of the 33 decreases, 30 are asso- siated with ratios holding “high” positions. That is, if the ratios were high in a given year, they tended to be lower in the following year; conversely, if they were low, they tended to increase. To these general rules there are but 12 exceptions— one-sixth of the total. Moreover, it is interesting to observe that it is apparently easier —the basis of generalization being the frequencies 9 and 3—for expenses which are high to increase, uncommon as this is, than for those which are low to decrease. Too much significance ought not to be attached to this conclusion—the instances are few—yet such a finding agrees with what one would expect. It will be recalled that a similar type of analysis for gross earnings indi- “3 No change. 86 BANKING STANDARDS cated the opposite condition to be true. It was shown in Table 53 that relatively more ratios decreased when they were already low than increased when they were already high, and this again appears to be in keeping with the results to be expected. But what are the percentage amounts of change from year to year for district ratios positively and negatively placed in the first of each pair of years with respect to the level of the district to which they belong? While the directions of change tend to vary inversely, the net percentage amounts of change vary directly with the positions occupied. This fact is shown quantitatively in Table 60. Not only are the directions of change downward for ratios which are above the average and upward for those which are below, but the net percentage amounts of change increase with the percentage amounts of dispersion. Over the whole range of percentages and from group to group, this condition obtains for ratios holding positive (+4) positions; for those with nega- tive (-) positions, there is one exception for the group arrange- ment, There is regression to type in the case of operating expenses as there is in the case of gross earnings. Operating expenses are subject to administrative control, the effort of management being to reduce them, and the effect of competition relating to salaries TABLE 60 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF ToTAL EXPENSE TO EARNING ASSETS DIFFERENCES FROM DISTRICT AVERAGES, 1019-1925 Sign Number of Cases Percentage Groups Average Percentage 20 Average 5.54 2A 10.00 and over 5.00 to 10.00 Under =.0co I 61 « . IO 2.68 In II Under 5.00 5.00 to 10.00 10.00 and over 1.21 7.50 12.54 33 Average ” NET PERCENTAGE CHANGE FROM YEAR TO YEAR — 3.06 -— 6.96 5.00 - 1.53 + 4 4 +13.62 + 9.76 + 8.06 NORMS AND TRENDS IN EXPENSES 87 and wages, interest on deposits and on borrowed money, and so forth, being to equalize them. A normal tends to obtain in each district. While these year-to-year changes are taking place in each district—the direction varying inversely with the nature, and the net amounts of change varying directly with the amounts of dis- persion—they occur at different levels when the yearly averages for the country as a whole are taken as a basis of comparison. That is, specifically, each district has its own level relative to the average for the twelve districts. How true this is, is apparent in tabular form in Table 61, and is graphically illustrated in Chart 18. TABLE 61 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF Total EXPENSE To EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS Boston. ..... New York. .. Philadelphia.. Cleveland. ... Richmond... Atlanta...... Chicago. .... St. Louis. ... ‘Ainneapolis. . Kansas City.. Dallas....... San Francisco Average 1010-25) 4 50 -2 ~ 4 +31. +11.58 PrecENTAGE DIFFFRENCES FROM THE COUNTRV'E AVERANFTS rQI0 T0020 3 04 Qs rn 15 or » 33 ~_ 02 A7 Ey. 11 bd IO. ea. 2 03 enn 10928 = .70 —~¥7, 50 — 1.318 “-6 J . 10.64 _ Taking as a basis of comparison the average ratios for all dis- tricts combined for the period 1919 to 1925, Table 61 shows that (1) Boston, New York, Philadelphia, and Richmond have lower expenses, and all of the other districts higher expenses than the country as a whole; and (2) the districts which are low, relative to the level for the country as a whole for the seven years, tend generally to be low, and those which are high tend generally to be high, for each of the separate years. For Boston, New York, and Philadelphia, which are low, and for Atlanta, St. Louis, Minne- apolis, Kansas City, Dallas, and San Francisco, which are high, there are no exceptions. Of course, it is apparent that some of "4 Cleveland’s ratio agrees with that for the twelve districts combined 28 BANKING STANDARDS CHART 18 RATIOS OF TOTAL EXPENSE TO EARNING ASSETS — ALL, MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE eccveees DISTRICTS 1919 1020 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 192% Mew vo PT ee een, ATLAL at aad LTT Scales of Parcentage Change ©-' 204 J ALY 3 3 re < [° em oy oo wn 4 FRANCISCO ee eet Tag 919 1920 1920 1922 1923 1924 1925 1919 1920 1929 1922 1923 1924 1925 NORMS AND TRENDS IN EXPENSES 89 the districts must be above and that some of them must be below the average. But it is not required that the same districts should be on a given side of the average during the seven separate years, more particularly when the deviations from the average, as in the case, for instance of St. Louis, are small. Moreover, the districts with ratios in a given year farthest removed, plus or minus, from the average for the country as a whole, tend to hold the same rela- tive positions throughout all of the years. This fact is more ap- parent in Chart 18 than in Table 61. Chart 18 is drawn, as are the others of this type already pre- sented, on a ratio basis.® While a common scale is used for the ratios for the various districts, the position of a solid line on the chart has no significance except when it is compared with the dotted line and with its own seven-year average. An inspection of this chart shows, among other things, that (1) for the country as a whole, and for each district® the trend of expense ratios was upward from 1919 to 1921, the rate tending to be greater be- tween 1920 and 1921 than between 1919 and 1920; (2) the ratios for the country as a whole and for most of the districts tended to fall between 1921 and 1925, the rate of decrease being most marked between 1921 and 1923; (3) the ratios, as a rule, were higher in 1924 than in 1923; (4) the average for the country was lower in 1925 than 1924, but the individual districts were not consistently either higher or lower; (5) on the whole, the rates of change in the respective districts do not, except in certain years, markedly differ from those for the country as a whole; (6) the ratios for certain districts are consistently above, and for others consistently below, those for the twelve districts combined; and (7) the years in which the ratios in the several districts are above or below their own seven-year average levels are generally the same. It should be recalled that we are here discussing the percentage relation between two variables—the operating expenses and the earning assets—of all member banks in the districts separately and combined. Both the expenses and the earning assets changed from year to year in each of the districts. Moreover, the abso- lute amounts and the composition of each differ markedly among the districts. Yet when ratios of expenses to earning assets are 8 For discussion of the interpretation of such a chart, see page 21, "Except for Dallas between 1010 and 1020. )O BANKING STANDARDS computed for each district and for all districts, for each year and for all years, and the ratios are studied in keeping with the form of analysis already described, norms and trends of the character indicated obtain. (2) The Relation of Total Expense to Gross Earnings A. All Member Banks Expenses of operation of the banks, by districts, may be ex- pressed in terms not only of earning assets but also of gross earn- ings—the funds out of which they are paid. This is done for the purpose of determining the norms and trends, if any, charac- teristic of such ratios as thus expressed. We shall later observe the similarities and differences in these respects for two groups of banks—national, and state bank and trust company members. At- tention is now addressed to the entire bank membership—all banks in a given district being treated as a single institution. For the period 1919-1925, taken as a unit, all member banks paid as operating expenses $69.80 out of each $100 of gross earn- ings received. That is, operating expense as a percentage of gross earnings was 69.80. The year of highest expense thus measured was 1924, the average amount for all members being 72.00%; that for the lowest year, 1920, was 67.10%. On the basis of the seven-year average, the percentage was least, 63.40, TABLE 62 Ratios oF Total EXPENSE To GROSS EARNINGS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. . .... EERE New York, «oooviinnisnnean Philadelphia. ............... Cleveland...... ............ Richmond...... .. ........ Atlanta.........e00 cenrenen Chicago. .......vveerennnnn. 5Y LomiSn ¢ 5 su o swim os vere s 2 MVinneapolis.......ooovvnnnn. Kansas City. .......o0cvuen. Dallas......... “5g memo B80 San Francisco. . . Ra=r~e or T. ~ 41 FXPENSE' "ROSS FARNINGS verage \ | 1010-1 1919 1020 | 1921 1922 | 1023 | 1024 1028 1925) 60.80 ! 67.90 67.10 I 69.30} 69.30 I 70.70 72.00 | 71.60 39.6¢ 6.40 3.40 9.60 ‘0.40 1.20 ~.70 ~.60 +.go _.70 3.20 72.00 t-3 vo. 20 64.2¢ $7.60 69.20 £5 ar re © 6.8¢ 35.00 33.00 5.50 7.20 6.70 ‘9.00 ~7.00 "7.10 2.70 53.70 .8.30 | J§5.7¢ 66.30 62.70 69.40 72.10 73.70 vQ.70 6¢.8c 70.10 75.40 72.90 72.80 Jo IC b4.8¢c 61.50 69.20 70.30 73.20 39.60 0.50 ‘0.70 48.00 73.20 72.00 9 ig. ie 69.70 ..20 . 20 .3¢ 4 8c 6 64.2 "2.1 70.0¢ 73.1c 74.3¢ 2.70 a 7¢ ..80 .-.30 76. 20 71.10 67.70 65.30 71.70 72.70 70.90 74.8¢ 72.60 80.70 77.60 71.00 nq .60 "a -c.80 06.10 67.20 . ea v2.6. 76 10 NORMS AND TRENDS IN EXPENSES o1 in Philadelphia; it was greatest, 79.90, in Minneapolis. That is, the percentage amounts vary by years for the entire System, and by districts for the period 1919 to 1925. They also vary widely among the various districts for a given year and among the vears for a given district. A summary of such variations is necessary, inasmuch as they are not readily apparent from Table 62. If no account is taken of the individuality of the years and districts, and if the ratios in Table 62 are arranged in frequency form, the distribution in Chart 19 is obtained. This chart shows that (1) the ratios ranged from the group 60.00-62.50 to the group 50.00 and over, the minimum ratio being 61.50 for Philadelphia in 922, and the maximum, 83.90 for Minneapolis in 1923;7 (2) the CHART 19 D1sTRIBUTION OF YEARLY DisTRIcT RATIOS OF ToTAL EXPENSE TO Gross EARNINGS, ALL MEMBER BANKS, 1919-1925 Percentage Groups 50.00 and under 62.50 52.50 and under 65.00 65.00 and under 67.50 67.50 and under 70.00 70.00 and under 72.50 72.50 and under 75.00 75.00 and under 77.50 77.50 and under 80.00 80.00 and over 0 d_ Per Cent 10 15 20 a Sm— Aw oem. Empl SC wow... i m— ow a - a ET in ear 25 Number of Cases } 13 16 {5 | 8 B most common ratios—21% of the total—fall in the group %2.50- 75.00; and (3) concentration appears within the limits bounded by 65% and 75%, approximately three-fourths of all the ratios being included within this spread. But this distribution does not indicate the district and yearly peculiarities; it serves only to give a graphic picture of the range and of the form of distribution of the 84 percentages. Further analysis is necessary. If the yearly ratios in the respective districts are compared with “7 Details are in Table 62. )2 BANKING STANDARDS their seven-year averages, as is done in Table 63, the following generalizations may be made. The amounts were low—that is, below the averages—in 1919, 1920, and 1921; high—that is, above the averages—in 1923, 1924, and 1925; and mixed— high and low—in 1922. All districts were low in 1920; all but one, Philadelphia, in 1919; and all but three, Richmond, Atlanta, and Dallas, in 1921. Similarly, all districts were high in 1924; all but one, Atlanta, in 1925; and all but three, Philadel- phia, Cleveland, and Richmond, in 1923.8 In 1922 the districts were neither prevailingly high nor low. Speaking broadly, yet with comparative accuracy, then, the years in which ratios of operating expenses to gross earnings in the respective districts were greater or less than the typical amounts—the respective seven-year average levels—were essentially the same for all the districts. Prior to 1922, operating expenses were relatively low; subsequent to 1922, they were relatively high. Dissimilar as are the ratios in the various districts, they have these common yearly characteristics. While the district ratios in all cases but one were low in 1919 relative to the seven-year level, the direction of change between 1919 and 1920 was downward for the twelve districts combined and for all but three of them individually. Between 1920 and 1921, the general direction was upward—that is, operating ex- nenses were encroaching on gross earnings—and to this rise the banks in all but two of the districts contributed. While the aver- age ratio for all districts in 1922 was the same as that for 1921, ratios in Boston and the districts west of the Mississippi River registered a rise, and those in the other districts a fall, between these two years. Beginning in 1922 and lasting to 1924, the av- erage and prevailing tendency was upward; from 1924 to 1925, it was generally downward. The directions of change from year to year are summarized in Table 64. 8 In two districts, New York and Atlanta, the ratios were the same as the seven- year average. NUMBER OF DISTRICTS WITH RATIOS OF Tora. EXPENSE TO Gross EARNINGS ABOVE OR BELOW THEIR RESPECTIVE AVERAGES FOR THE PERIOD 1Q10-102% r NORMS AND TRENDS IN EXPENSES 93 During the successive pairs of years, 1919-1923, the ratios in- creased 39 and decreased 33 times. What is the relation of these direction-changes to the positions—high (+) or low (-) relative to the district levels—which the ratios held in the first of each pair of years? The answer to this question, found in Table 65, is that the prevailing tendency, for ratios which were high in a given year, is to decrease; and for those which were low is to increase in the following year. This tendency, however, is not so marked for ratios of total expense to gross earnings as it is for those of total expense to earning assets.? To the inverse rela- TABLE 64 NUMBER OF DISTRICTS WITH RATIOS OF Total EXPENSE TO Gross EArN- INGS INCREASING OR DECREASING FROM YEAR TO YEAR. 10T0-TOAC ATq =. —— - YEARS TABLE 6% COMPARATIVE POSITIONS AND YEAR-TO. YEAR DIRECTIONS OF CHANGE IN Dis- TRICT RATIOS OF ToTAL EXPENSE To Gross EARNINGS Positions Relative . tothe Distri-* ¢ «rere. ne 19010-1020... 1920-1021... 1021-1022... 1022-1923... 1023-1024... 1024-1025... tion there are 30 exceptions in the former case; in the latter, there are 12. While the relation between the positions of the ratios, relative to their own district levels and the directions of change from year to year, is inverse, that between the percentage amounts of devia. tion from type and net percentage amounts of change is direct. This fact is illustrated in Table 66. While the net percentage change of the ratios which are above the average is upward, it is downward in the majority of the cases, and varies directly with the percentage amounts of dispersion. For the ratios which are below the average, the direction of change varies inversely and the net percentage amounts of change vary directly with the de- gree of dispersion. The ratios in the different districts may be further compared. If the yearly percentages for the country are taken as a base and the ratios in each district each year are computed as plus or minus ? See Table co. 7 - A BANKING STANDARDS TABLE 66 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF Total. EXPENSE TO Gross EARNINGS DIFFERENCES FROM DISTRICT AVERAGES, 1919-1925 Sign Number of | Cases Percentage Groups Average Percentage NET PERCENTAGE CHANGE FROM YEAR TO YEAR — - Average 4.00 and over 2.00 to 4.00 Under 2.00 Under 2.00 2.00 to 4.00 | 4.00 and over Average 2.58 4.68 2.08 0.8¢ 0.80 3.10 5.70 2 86 40.15 —1.42 —0.66 41.08 +o0.27 41.20 +4.20 +1 42 differences, as is done in Table 67, it is found that (1) in general, ratios of total expense to gross are relatively low in the East and high in the other parts of the country; and (2) the positions of the respective districts relative to this level tend to obtain through- out the seven years under dis- cussion. Such persistence is not required because of the type of comparison made, as the cases of Districts 4 and 11, for instance, indicate. Changes from year to year, upward and downward, still leave a major- ity of the district ratios of total expense to gross earnings above or below the level for the coun- try as a whole. In the foregoing analysis of ratios of total expense to gross earnings, certain norms and tendencies have been discov- ered. These relate to the yearly district amounts compared (1) NORMS AND TRENDS IN EXPENSES 05 with the seven-year district levels, (2) with each other from year to year and over the period 1919 to 1925, and (3) with the aver- age yearly amounts for the country. Moreover, having expressed the expenses as ratios of both earning assets and of gross earnings, and having found norms and tendencies peculiar to them as thus measured, we may summarize the similarities and differences. If a summary is to be brief, it must be drawn in general terms and in broad outline. Exceptions to the rules suggested are accounted for in what has already been said. Norms 1. Total expense measured in terms of earning assets and of gross earnings, relative to the district levels for the period 1919 to 1925, was prevailingly low in the early and generally high in the later years in the various districts. Both measures agree in showing the ratios to be low in 1919 and 1920, and to be high in 1924. In the other years, agreement is less complete. In 1921, expenses were high in terms of earning assets and generally low in terms of gross earnings; in 1923, the ratios according to both measurements were low in the East and hich in the other parts of the country. 2. Total expense, when expressed as percentages of earning assets and of gross earnings and when compared with the coun- try’s yearly average level, was low in the eastern, high in the western, and about average in the central districts. The ratios in New York and Philadelphia were below and those in Chicago, St. Louis, Minneapolis, and Kansas City above the country level during each year from 1919 to 1925. Trends 1. The trend of total expense, as percentages of earning assets and of gross earnings for the country as a whole, was irregularly upward between the beginning and the close of the period. To this general rule there are no exceptions for the different dis- tricts for the amounts based on gross earnings, and only one for those based on earning assets. Both measures indicate increases to be general among the districts between 1920 and 1921, and be- tween 1923 and 1924; in the other pairs of years they show con- flicting trends. )0 BANKING STANDARDS 2. Ratios of total expense to earning assets and to gross earn- ings which are high or low in a given year, relative to the seven- year level of the district to which they belong, tend generally to decrease or to increase, respectively, in the following year, the net percentage amounts of decrease or of increase varying directly with the percentage amounts of dispersion from these levels. That is, according to both measures, operating expenses regress to type —the type being the seven-year district averages. Such, in brief, are the more common norms and trends which characterize these ratios. Total expense data for individual member banks are not avail- able in the publications of the Federal Reserve Board, although those relating to national banks, and to state bank and trust company members as groups are given. The ratios which have been used up to this point in the discussion are broad averages— averages for all of the member banks in a given district for a given year, for the membership in all districts for a given year, for single districts for the period 1919 to 1925, and for all districts for this stretch of years. Such averages cover up a multitude of differences attributable to types of banks, their location, sizes, and so on. In order to be clear about this matter, care has been used to indicate that the ratios are averages, to use the types of analysis which would bring out significant differences, and to gen- eralize in terms suitable to the data themselves. While the foregoing norms and trends relating to total expense may characterize the entire bank membership in the System, they may or may not be typical of any one part of the total. Accord- ingly, it is of interest to determine the similarities and differences which characterize ratios of total expense to gross earnings (1) for national banks, and (2) for state bank and trust company members, and to observe wherein the norms and trends discov- ered for the entire membership hold for the two groups. This is done immediately below. B. National Banks, and State Bank and Trust Company Members Out of each $100 of gross earnings received by all national banks in the Federal Reserve system during the years'® 1919 to 0 Ending June 30. NORMS AND TRENDS IN EXPENSES 9 TABLE 68 Ratios oF Total EXPENSE TO Gross EARNINGS IN NATIONAL BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS Rr=ne nr Tomar. Ry—wree~ ~~ goss WARNINGS FEDERAL RESERVE DISTRICTS I —— Average (All Districts) Boston. ... New York. . Philadelph? Cleveland. Richmond. Atlanta... Chicago... St. Louis... Minneapolis. Kansas City. Dallas........ San Francisco. Averag- (x19190- 1025) 60.12 97. & pe =a yy re 10.74 1010 1920 1021 67.04 | 66.40 ' 60.0% 20 q 04.79 64 ~7 ¢° ~¢ £ - 04.24 62 s& ‘99 64.16 66.42 f= 3p 1922 : 68 6o 87.84 3.64 6r =~ F 192] 70.20 6 rc & © 1024 LA a 6. ar I07, 71.06 2, g 6 ~ 78.2¢ 1925, inclusive, they paid $60.12 in the form of total expense. The corresponding amount paid by state bank and trust company members was $70.96. The year of cheapest operation for both classes of banks was 1920, the average ratios of total expense to gross earnings for national banks being 66.40, and for state banks and trust companies, 68.51. For the seven-year period, the lowest district ratio for national banks, 63.84, was in Phila- delphia; the highest, 79.59, was in Minneapolis. For the same period, for state banks,!! Philadelphia had the lowest ratio, 62.10, and Minneapolis the highest, 82.49. The foregoing paragraph and Tables 68 and 69 show that the ratios differ as between the two groups of banks, and within the same group depending upon the averages that are used. If yearly district ratios are taken as the bases of comparison, the variations are numerous, a casual inspection of the amounts showing little or no uniformity or consistency among them. Before reducing them to orderly form, however, it will be helpful to arrange them in frequency form from which, by inspection, the range, grouping, and concentration can be seen. This is done in Chart 20, uniform groupings being used for the two types of member banks. The ratios for national banks range from the group 60.00-62.50 to the group 80.00 and over; those for state banks, from 57.50- " 11uGtate banks” will hereafter be used as a substitute for the longer expression “State bank and trust company members.” ng BANKING STANDARDS TABLE 60 RATIOS OF ToTAL EXPENSE TO GROSS EARNINGS IN STATE BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS I —— EDERAL RESERVE DisTrICTS Boston. ..........ovveinnnn New York..... NPI Philadelphia. . .. Cleveland. ... . Richmond. . Atlanta...... “hicago. ..... it. Louis. ..... finneapolis. . Lansas City. . SOs. rss San Francisco. .... Average (All Districts) Average | (tpr9- | 31010 | 1020 { 1921 1022 1023 | 1024 102%) Pr Ap T-—:v, Ev" -- rn Cnag5 EARNINGS | 1925 20.06 " 60 nn AR ¢y 60.74 70 22 | 71 46 1 73.06 | 72.54 79 ‘4 38.0 £6.7¢ 75.40 jo.5§ fo &2 74.54 68.74 64.80 73.37 73.00 70.48 *.99 2» 1! 7 2 ng. 84 (8'® 60.00 to 80.00 and over. For the first group, the modal amounts occur at group 70.00-72.50; for the second, at group 72.50-75.00. For the national members, the concentration extends from 62.50 to 75.00; for state members, from 67.50 to 75.00. In general, the amounts are higher for state than for national banks; this fact the frequency distribution and Tables 68 and 69 reveal. As to whether the ratios for given years and given districts for the state banks are higher or lower than those for national banks is not shown by Chart 20, nor is it apparent from the tables in the {orm presented. If ratios for the two types of institutions for the individual years and districts, are compared, it is found that (1) of the 84 ratios for the respective years and districts, the amounts are less for national banks in 75% of the cases; (2) for the three years 1020, 1922, and 1925, the ratios for national banks are lower than for state banks in ten of the twelve districts; (3) for every year they are lower in as many as or more than eight of the twelve dis- tricts; (4) in only one district (Philadelphia) are the ratios higher for national than for state banks during all seven years, while in three districts (Boston, Cleveland, and Minneapolis) the reverse is true; and (5) with the exception of Philadelphia, in each dis- trict the ratios for national banks were less than those for state members for at least four of the seven years. Judged, therefore, NORMS AND TRENDS IN EXPENSES 99 by average ratios for the two groups of banks, as well as by yearly amounts for individual districts, the total expense, as a percent- CHART 20 D1STRIBUTION OF YEARLY DISTRICT RATIOS OF ToTAL EXPENSE TO Gross EARNINGS, 1919-1925 NATIONAL BANK MEMBERS Pear Cont Percentage Groups 80.00 and under 62.50 62.50 and under 65.00 65.00 and under 67.50 67.50 and under 70.00 70.00 and under 72.50 72.50 and under 75.00 75.00 and under 77.50 77.50 and under 80.00 80.00 and over 0 Pr = -— = - 10 15 = | naa ——— A —— RE. a 0 Sel. 25 1 —-—— Number of Cases od « ~ . STATE BANK MEMBERS Percentage Groups 57.50 and under 60.00 60.00 and under 62.50 $2.50 and under 65.00 65.00 and under 67.50 67.50 and under 70.00 70.00 and under 72.50 72.50 and under 75.00 75.00 and under 77.50 77.50 and under 80.00 80.00 and over Per Cont 15 0 5 10 20 28 Numbers . of — um Casas 4 = | = prm— a — ye JO £0 OY) BANKING STANDARDS TABLE 70 NuMBER oF Districts WITH Ratios oF Total EXPENSE TO Gross EARNINGS FOR NATIONAL BANKS AND FOR STATE BANK AND Trust CompaANY MEMBERS ABOVE OR BELOW THEIR RESPECTIVE AVERAGES FOR THE PERIOD, 1019-1025 YEARS (919. -cocvcnee nee (G20. cs euunss eee 92. (922. 0... ee 1023. cvurennn ce 1024... 102%... ABOVE National Banks State Bank and Trust Company Members b ! & < « BELOW National Banks State Bank and Trust Company Members ~y / 6 6 4 £- age of gross earnings, is lower for national than for state bank members. How do the ratios for the two groups of banks each year com- pare with their respective average levels for the period 1919 to 1925? That is, are they high or low at the same or at different times in the various districts? Do the high and low years coin- cide district by district for the two groups of bank members? Answer to the first question is found in the detail in Table 7o, which shows marked agreement for the two bodies of data as to the years, from 1919 to 1925, which may be termed “low,” “moderate,” and “high.” In the first category belong 1919 and 1920, in which the ratios for ten and eleven, respectively, of the twelve districts for both groups of banks were below their re- spective seven-year levels. The years 1921, 1922, and 1923 are neither generally “high” nor “low,” the number of ratios for both national and state banks which are above and below the district levels being approximately evenly divided. The years 1924 and 1925 are clearly “high,” all the districts for national and all but one for state bank members giving them this position. In sum- mary, therefore, both groups of banks point to the same general tendency—the early years are low, the middle years moderate and the later ones high—the standards of comparison being the re- spective district levels. NORMS AND TRENDS IN EXPENSES 101 But the second question asked in the paragraph above requires an answer inasmuch as the marked uniformities given in Table 70 do not necessarily indicate agreement by districts as to the years which are high or low. Specifically, the question is: Do the ratios for the respective types of banks, when paired by districts, agree in giving a year a particular position in the scale of “low,” “moderate,” “high”? The answer is found in Table 71, from which it is apparent that except for 1921, and possibly 1923, the ratios by districts for both groups of banks were high or low, relative to their respective levels, at the same time. Not only, for given years, are the district ratios for the twe types of member banks, in general, similarly placed with respect to their own levels, but the greater the percentage deviation for the national, the greater the percentage deviation for the state banks. That is, if in a given year ratios of total expense to gross earnings for national banks deviate widely, plus or minus, from the district levels, ratios of expense for state banks, similarly measured, deviate widely, the percentage amounts in both cases varying directly with each other. Abnormal conditions making for high or low total expense in terms of gross earnings affect similarly both types of banking institutions. This fact, of course, is to be accounted for partly by the conditions, common to all banks, which affect interest rates—the dominant part of gross earnings—and by compe- tition and regulation, applying as they do to interest on de- posits, interest and discounts on borrowed money, reserve re- quirements, and so on. So much for the relation of the ratios, for the two banking groups—national and state members—to their own seven- year average levels. The ratios, being above or below their own district levels at different times, change from year to year. There are year- to-year oscillations and long- time trends. Are these alike in [O02 BANKING STANDARDS direction and amount in the various districts for the two classes of members? It is, of course, apparent that if certain amounts are above an average, other amounts entering the average must be below. But it is neither apparent nor necessary that the direction of change must be coincident in time for the various districts with respect to one type of banking institution, nor is it required that the times and direction of change in two classes of banks must coincide. [f the directions of change from year to year in district ratios of total expense to gross earnings for national and for state banks are compared, it is found that (1) the national and the state ratios for the same districts agree in 46 out of the possible 72 direction-changes—six for each of the twelve districts between 1919 and 1925; (2) from year to year approximately an equal number of national and of state bank district ratios recorded the same type of change; (3) in none of the separate districts are the disagreements more numerous than, and in only three as numerous as, the agreements; (4) for the respective year-to-year changes, with the exception of those between 1921 and 1922, a clear majority of both ratios for the same districts agree as to the direction of change; and (5) the percentage amounts of change in the ratios for the two groups of banks vary directly with each other. That is, large positive or negative percentage changes in the district ratios for national bank members are positively cor- TABLE 72 NuMBER OF DistrIcTs WITH RATIOS OF TOTAL EXPENSE TO GROSS EARNINGS FOR NATIONAL BANKS AND FOR STATE BANK AND Trust CoMpaNY MEMBERS INCREASING OR DECREASING FROM YEAR TO YEAR, IQIQ-1Q2§ YEARS 101—I1020.. +. ++... [QIOTOZE. evr vrnnn. (9211022. ver rse- . 19221023. ven vrvennn. Jolie or 1024—1025. . SR INCREASING DECREASING National Ranks State Banks and Trust Combanies National Ranks State Banks and Trust Companies 3 0 [O I0 2 6 7 6 8 7 4 J 9 2 5 ” 5 h Y 5 5 r 2 “ NORMS AND TRENDS IN EXPENSES 103 related with those for state bank members. In some of the above respects, Tables 72 and 73 are of interest. It was pointed out above that total expense in terms of earn- ing assets,!? and also in terms of gross earnings,'® for all member banks in certain dis- tricts differs markedly from that for the twelve districts combined, and that for some of them the ratios were above or below the country level for each of the seven years. What are the facts in these and other respects for the two groups of member banks? Specifically, our inquiries are as follows: (1) Are districts similarly placed accord- ing to the ratios for the respective types of banks? (2) Are the numbers of years which districts hold such positions essentially the same for the two member groups? (3) Is there agreement between the ratios in respect to the positions which the districts occupy relative to the country level? (4) Are the percentage amounts of dispersion for the district ratios for the two groups of banks positively correlated? In order to answer these questions, resort is made to tabular summaries. Table 74 supplies the data necessary for answering the first and second questions. It indicates that (1) the district ratios of total expense to gross earnings, for the respective types of banking membership, are below the country level in Districts 2, 3, and 4, and generally above in the other districts; and (2) the number of years during which both types of banks hold these positions is substantially the same. Table 74, however, throws no light on the third question, inas- much as the positions of the banking groups each year are not paired by districts. When this is done, as in Table 75, an answer to the third question is secured. From this table it is seen that for seven of the districts the ratios for both types of banks were 12 Page 82. 13 Page oI. 5 "QA BANKING STANDARDS TABLE 74 NuMBER OF YEARS, 1919 TO 1925, IN WHICH THE DisTrIcT RATIOS OF TorAL EXPENSE To Gross EARNINGS FOR NATIONAL BANKS AND FOR STATE BANK AND Trust ComPANY MEMBERS WERE ABOVE OR BELOW THE CORRESPONDING YEARLY RATIOS FOR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS ABOVE National Banks State Banks and Trust Caomnaniee National Banks Brrow State Banks and Trust Comnanies Boston......... New York...... Philadelphia. ... Cleveland. .... . Richmond... ... | Atlanta........| Chicago. .......} 5t. Louis. . pe. Minneapolis. . . . Kansas City. ... Dallas. ........ San Francisco... — generally on the same side of the averages at the same time. In four of them, the ratios for both sets of banks occupied the same positions relative to the country’s yearly averages for the entire seven years. From Table 74, it is shown that two of them (New York and Philadelphia) were below, and two (Minneapolis and Kansas City) above this average level for each of the years in question. To question 4 on page 103, the answer is “yes.” That is, the wider the dispersion of district ratios for national bank members from the country level, the wider the dispersion for the corre- sponding district ratios for state bank members from the country level. To this rule, when the amounts of dispersion for the two groups of banks, by districts, are classified by percentage groups, there are only two exceptions. In general, and in summary, therefore, the district ratios of total expense to gross earnings for national and for state bank members compare as follows: (1) they are generally higher for state than for national bank members; (2) relative to their re- spective district levels for the period 1919 to 1925, both sets of NORMS AND TRENDS IN EXPENSES 105 ratios essentially agree as to the years which are “low,” “mod- erate,” and “high,” the percent- age deviations from such levels for the respectives ratios being positively correlated; (3) the year-to-year changes in the ra- tios for the respective groups of banks are coincident with re- spect to time, and positively correlated with respect to direc- tion and amount; and (4) the positions of the district ratios for the two classes of banks, relative to their respective yearly levels for the country as a whole, coincide as to time and vary directly as to amount. A graphic picture of the rates of change from year to year of the district ratios for all member banks, for national banks and for state bank members, is given in Chart 21. The manner in which it is drawn is as follows: TABLE %% Disagree 1. The vertical positions of the lines for the different types of banks and for the total membership for each district, and also for the several districts, have no significance when compared with each other, the respective lines being drawn so as to reduce as much as possible any overlapping. This was accomplished by beginning the lines for each district equally distant apart in 1919. Accordingly, the relative size of the ratios is #zo¢ indicated. It is the relative rates of change, indicated by the slopes of the lines, which are shown for the banks in each district, the percentage amounts of increase and of decrease being drawn to the scales shown on the right-hand side of the chart. 2. The short lines at the left of each district indicate the seven- year average ratios for the types of banks to which they apply— the distances above or below such lines, for the respective types of banks, indicating the percentages by which the ratios for the different years are greater or less than such averages. From the chart it is apparent that (1) there is marked uni- ‘06 BANKING STANDARDS CHART 21 RATIOS OF ToTAL EXPENSE TO GROSS EARNINGS Comparison of All Member, National, and State Bank and Trust Company Member Banks, by Federal Reserve Districts, 1919-1925 (The slopes of these lines. not their vertical positions, are significant. See page 105.) ALL MEMBER ces NATIONAL ew = = STATE...... nie 1920 "2 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 192% AV. BOSTON — ee a. our AY. AV. 3% cevovan, AL HL ANE BIA — aememenet tT Seng © _EVELAM™ A —— AV eons oen®?? _— AY. lens eee adi. Leet eo sos ATLA AV. em aan oy Fr. ~ Scates of dgrcentage Change 3 wd ? tf v . ; Fa I, com maane aga -me anes _esmener sees MN Te eesasne,,,, Soscnae ®¢ ammo - Soon pero” od 8J90 1920 1920 1022 1923 1824 192% 1918 1920 162% 1922 1923 19284 1928 NORMS AND TRENDS IN EXPENSES 107 formity by districts between the rates of change in the ratios for all member banks, for national, and for state bank members; and (2) the rates of change in the ratios for the different districts are much the same. Both these and other similarities, previously pointed out, indicate the presence of distinctive norms and trends for the years 1919 to 1925. 2. INDIVIDUAL EXPENSES As indicated above, the total expenses of all member banks are segregated by the Federal Reserve Board into five classes.!* The norms and trends characterizing each of the items, when expressed in terms of earning assets, for the banks in each and all of the districts for the years 1919 to 1925, separately and combined are summarized immediately below. Limited space makes it im- possible to accord to each of them the same attention that is given to the total. Accordingly, tables showing for each item percentage differences calculated from the seven-year district levels, and from the yearly and seven-year country levels, and also those showing percentage changes from year to year, are omitted. Those who are interested in such amounts may secure them with approximate accuracy by using the respective ratio charts and the corresponding scales of percentage increase and decrease. (1) Ratios of Salaries and Wages to Earning Assets Based on the entire period 1919 to 1925, and on the experience of all member banks in the entire Federal Reserve system, the average amount of salaries and wages for each $1,000 of earning assets was $11.82. From this amount, however, yearly and dis- trict ratios differ considerably. While $11.82 is the average, the least amount for the combined years, $9.77, occurred in District 3 (Philadelphia), and the largest, $18.06, in District 11 (Dallas). Moreover, for the combined districts the smallest amount, $9.08, occurred in 1919; the largest, $12.94, in 1924. If the 84 amounts for the individual districts and years, given in Table 76, are distributed in frequency form, as in Chart 22, uniform groupings being used, and the lengths of the bars are drawn proportional to the number of cases encountered in each group, it is found that (1) the most common or modal amounts fall in the class $10 TM gee page 81. "8 BANKING STANDARDS TABLE 96 RATIOS OF TOTAL SALARIES AND WAGES PER $1,000 OF EARNING ASSETS IN ALL MEMBER BANKS, FEDERAL RESERVE SySTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. . .. PT New York. . . hiladelphia. Vee Cleveland... A. Richmond. . wt Atlanta..... “. Chicago. .... a 3t. Louis. . .. ‘eo Minneapolis. . Kansas City. ‘ Dallas....... Cee Jan Francisco. .... .....-. RATIOS ne Tarar Saravree AND WacF~ =~ ~ $1,000 Nn? EARNING ASSETS \verage! {1919- 1025) 1019 1920 1021 | 1022 1023 I 1924 1925 11.82! o.08 | 10.12 | 12.27 | 12.8¢ } 13.27 12.04 | 12.52 9.06 0.09 0.77 - 99 5.14 5.88 © hr 5 Com ba [0..3 ~~ 50 Cc. 5k [I.14 9.70 [0.90 11.2; 1c.7¢ <I.nc c.i2 - 8 aa Q.& 10.69 10.27 II.3I 90 31 4c I~. 54 11.37 10.81 12.11 2.24 1.01 © oe 45 oT ie. 60 i0.63 10.73 12.15 12.05 14.47 12.53 13.59 “4.43 7.04 .37 0.67 4+ - 0.46 10.29 i2.c2 g.l7 Xa i TA Pe [2.51 > ? v.02 ra A6 Rd s.XI0 70 LK.20 8.48 18.44 20.32 16.20 5.80 "12 to $12 per $1,000 of earning assets; (2) the form of distribution “tails off” toward the larger amounts, (3) the amounts, while ranging by groups from $6 to $22—the actual minimum and maxi- mum (as shown by Table 76) being respectively $6.88 for New York in 1919 and $20.32 for Dallas in 1g22—<cluster closely around $10 to $12—68% of them falling within the limits $10 and $16. But, since the amounts vary from year to year and from district to district, such a grouping as that in Chart 22 has the effect of placing the district and yearly amounts in separate parts of the chart, and makes it desirable to extend the analysis further. This is done in Chart 23 and in the accompanying dis- cussion. Chart 23!® shows the average amounts of salaries and wages for each $1,000 of earning assets for all member banks by dis- tricts and years, as given in Table 76, so drawn that it is possible to compare (1) the nature (increase or decrease) and percentage amounts of change from year to year of the ratios in each dis- trict with those in the others separately and combined, (2) the percentage amounts by which the ratios each year by districts vary from the averages for the seven years 1919 to 1925, and (3) the percentage amounts by which the ratios each year by districts 15 For discussion of the basis upon which such a chart is drawn, and for a de- scription of the manner in which it should be interpreted, see page 21. NORMS AND TRENDS IN EXPENSES CHART 22 ICC Di1sTRIBUTION OF YEARLY DISTRICT RATIOS OF SALARIES AND WAGES To EARNING ASSETS, ALL MEMBER BANKS, 1919-1925 { Ratios based on $1,000) Per Cont Groups 0 10 15 0 25 30 Nd 6 and under 8 8 and under 10 10 and under 12 12 and under 14 14 and under 16 16 and under 18 18 and under 20 20 and under 22 o- "u. re I et A waa. a. ! wedi Ta ima SY Jax =’ J vary from the average ratios for the country as a whole. study of this chart shows the following norms and trends: Norms Number of Cases 2 10 25 18 4 A 1. Salaries and wages in relation to earning assets in every district were below their respective district levels in 1919 and 1920; they were above in every district in 1922, 1923,'® 1924, and 1925.17 That is, low and high years, respectively, were com- mon throughout the system. 2. Four districts (Boston, New York, Philadelphia, Cleveland) have amounts below those for the country level each year from 1919 to 19235; six districts (Atlanta, St. Louis, Minneapolis, Kan- sas City, Dallas, and San Francisco) have amounts above those for this level each year from 1919 to 1925. That is, districts which are low or high in a given year, relative to the average level for the System as a whole, retain such positions during the seven years under review. 3. Districts with ratios most markedly higher than the general 18 One exception—Boston. 17 One exception—Minneapolis. BANKING STANDARDS CHART 23 RATIOS OF SALARIES AND WAGES TO EARNING ASSETS — ALL MEMBER BANKS “TO Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLEeaceseeae DISTRICTS 19 1920 1521 1922 1923 1924 1923 1919 1920 1921 1922 1923 1924 192% enti ea, Fria teem we .. ttre es. all Scates of Yercentagd Changs " 2 1 u- 0 . | § 3 b 0 | a Eman SAN FRAMCISCO ore ere ay eevee, tr? ~a— _— a een, 1819 1920 i321 1922 1923 1924 1925 1919 1929 1928 1922 1923 192¢ 1923 NORMS AND TRENDS IN EXPENSES ITI average are in the Northwest, Southwest, and West; those with ratios markedly lower are in the East. Districts with ratios most closely conforming to those for the country are Richmond and Chicago. Trends 1. Comparing 1919 with 1925, the trend in the amounts of salaries and wages for each $1,000 of earning assets was upward in each of the separate districts, and in all of the districts combined. 2. Year-to-year increases between 1919 and 1922 occurred in every district except three (Chicago and Minneapolis between 1919 and 1920, and New York between 1921 and 1922). Be- tween 1922 and 1923 all districts showed a decrease. The change, except for three districts, was upward between 1923 and 1924 and generally downward between 1924 and 1925. 3. Similarity of trends as between separate districts, and be- tween individual and all districts are far more common than are differences. (2) Ratios of Interest on Deposits to Earning Assets For each $1,000 of earning assets, all member banks for the combined Federal Reserve districts, for the period 1919 to 1925, TABLE 77 RATIOS OF INTEREST ON DEPOSITS PER $1,000 OF EARNING ASSETS IN ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS Sy FepERAL RESERVE DISTRICTS Average {All Districts) Boston. ... New York. Philadelphir Cleveland. . Richmond. Atlanta.... Chicago. .. St. Louis. .... .. Minneapolis... .. Kansas City... wt i Dallas...................... San Francisco. .... ......... Ratios or INT-~=sT ON DEPOSITS PER ®r 600 OF EARNING ASSETS \verag: . - {1919-1910 ! 1920 | 1021 | 1922 102%) 10.70 18 100 17.8% 18.01 ' 20.17 20.27 ' 21.00 | 27 62 20.36 19.62 36 17.69 18.96 15.50 20.07 cc 17.67 18.61 14.01 v.32 20.26 19.26 16.74 20 r< 20.77 20.46 17.60 12.28 Tar 20.57 19.66 17.70 22.30 1” of o o£ 21.04 20. 3€ 18.7: 2. - 12.71 19.04 19.05 24.91 30.34 19.97 31.83 20.61 25.56 23.37 3% 24.61 ap ,~ ~ 15.2 20. 86 °C I.:, 16.10 wy id. ro 68 re 20. 15.0. an 8a -a 17.44 21.42 16 ¢ 21.04 i BANKING STANDARDS CHART 24 D1STRIBUTION OF YEARLY DISTRICT RATIOS OF INTEREST ON DEPOSITS TO EARNING ASSETS, ALL MEMBER BANKS, 1919-1925 (Ratios based on $1,000) Groups 10 and under 12 12 and under 14 i4 and under 16 {6 and under 18 18 and under 20 20 and under 22 22 and under 24 ?4 and under 26 26 and under 28 J 10 rer Cent 15 20 ¢ t I 1 25 30 ’ - Number of Cases ) 15 24 19 naid $19.79 in the form of interest on deposits. The average amounts for the combined districts were less than this in 1919, 1920, and 1921, and more than this in 1922, 1923, 1924, and 1925. Based on the seven-year period, the average amount was lowest in Dallas ($15.32) and highest in Minneapolis ($25.10). For the different years, the lowest amount was in Dallas in 1919 ($11.57) and highest ($26.47) in Minneapolis in 1924. Table 77, giving the amounts for the several years and districts, shows that there are both district and yearly differences. Some form of summary of them is necessary. If all of the amounts, irrespective of years and districts, are distributed in frequency form, as in Chart 24, it is found that while the most common amounts are between $18 and $20, concentration appears at the groups $16- $18, and $20-$22, 69% of all of the amounts being included within the outer limits of these groups. There are district and yearly differences in the amounts, as there were in the case of salaries and wages when measured in terms of earning assets, but they are not so systematically dis- tributed. Yearly and district alignments, while not so clearly established, are nevertheless present. So, too, are norms and NORMS AND TRENDS IN EXPENSES 113 trends, but these will be more readily seen by consulting Chart 25. Summarized, they are as follows: Norms 1. The amounts in all districts in 1919, 1920, and 1921 are below, in 1923, 1924, and 1925 above, and in 1922 predominantly above, the respective seven-year district averages. That is, years which are low or high in one district are low or high in others. To this general rule, the exceptions—four in number and oc- curring in 1922—do not relate to any one geographical area. 2. The amounts in Districts 3, 5, 6, 8, and 11 (Philadelphia, Richmond, Atlanta, St. Louis, and Dallas) are below the country’s average, while those in Districts 4, 9, and 10 (Cleveland, Minne- apolis, and Kansas City) are above this level for each of the seven years. Those in the other districts are at times above and at times below the country average. It is of interest to note, how- ever, that “high” or “low” districts are not generally contiguous, and that for contiguous districts the amounts which are continu- ally above or below the country average for the seven years do not show similar dispersion. Trends 1. For the country as a whole, and almost without exception for the separate districts, the trend of interest on deposits, ex- pressed in units of earning assets, was upward from 1919 to 1925. For the twelve districts combined, and in eight of the twelve districts separately, there was a slight downward trend between 1919 and 1920, but this was interrupted in 1920, so that for the balance of the period all but five of the year-to-year changes were upward, the exceptions being those in Boston and New York in 1923 as compared with 1922, Dallas in 1924 as compared with 1923, and New York and Minneapolis in 1925 as compared with 1924. 2. For all districts combined, and almost without exception in each of the separate districts, the upward trend was greatest be- tween 1920 and 1922. Moreover, it was generally least between 1922 and 1923, although to this generalization the 11.63% in- crease for Dallas and the 3.92% decrease for New York are con- spicuous exceptions. BANKING STANDARDS CHART 23 RATIOS OF INTEREST ON DEPOSITS TO EARNING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 {The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE seccecses DISTRICTS — 1919 1820 1921 1922 1923 1924 1928 1919 1920 1921 1922 1923 1924" 1928 A ~ re NEW Yo J i rhs mea” veo PaDELsA AV, ame Vu CLEVELAND eaneneet™ - RR —_— ete em" L— sesso nesses” Joeaseneunesest a ATLANTA — Seles of Pareontage Change 10 0 »]3 old ’ - E Fro i -20 rl AY Derr aman AY am Tote —-— - aes ment” -— Lames ITY - ma oma seen nese? - "= 7 SAN FRANCISCO, one A oamnn OALLAS —— AY ~~ 1919 1920 182% 1922 1923 1924 1928 1919 1920 1921 1922 1923 1924 1928 NORMS AND TRENDS IN EXPENSES 115 3. The district trends of Philadelphia, Cleveland, and Chicago closely agreed with, while those for New York, Dallas, and San Francisco markedly differed from, those for the country as a whole. 4. Districts with ratios showing closely similar trends are Chicago and Cleveland; and Richmond and Atlanta. Those which are unique as to trend are Minneapolis and San Francisco. (3) Ratios of Interest and Discounts on Borrowed Money to Earning Assets Member banks in the Federal Reserve system paid, in the form of interest and discounts on borrowed money, $2.92 for each $1,000 of earning assets held by them. This figure is an average secured by dividing the total money so spent by all member banks during the seven years 1919 to 1925 by the aggregate aver- age earning assets held by these banks on December 31 of the preceding year, and June 30 of the years in question, and multi- plying by 1,000. Relatively, it is 24.7% of the amount paid in salaries and wages and 14.8% of that paid as interest on deposits. It is the smallest single expense item as the items are classified by the Board. But the amount, $2.92, has all of the limitations of an average TABLE 78 RATIOS OF INTEREST AND DI1scouNTs oN BORROWED MONEY PER $1.000 oF EARNING ASSETS IN ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Dictiricte) Boston. . ... New York. .. Philadelphia. Cleveland... Richmond. . Atlanta...... Chicago. .... St. Louis. . ... Minneapolis. .. . Kansas City... Cera Dallas. .................... San Francisco. . RATIOS OF INTEREST AND DISCOUNTS ON BoxrowED MONEY PER $1,000 nr FARNING ASSres ‘verage 1019~ 102%) 1010 1920 1G%4 1923 1933 + 10124 192§ 2 02 2.40 rl 663" 2.871 1.481 7.40! 6a ? 05 03 o 2.19 3.60 4.01 ». 10 3. 4 ¢ r 1 44 I .49 I ot . 1.01 .83 1.36 i .50 9 £ r 7 5.33 1.43 1 5 2.41 1 - I 32.0% IC 1 ¢.¢6 3 B83 1.30 OF . 16 BANKING STANDARDS suggested by the expression “a fictitious substitute.” It does not serve accurately to characterize the average amounts paid by the separate districts during the period 1919 to 1925, nor to describe the yearly average amounts spent by the combined districts.18 These facts are apparent from Table 78 and from Chart 26. CHART 26 Di1sTRIBUTION OF YEARLY DisTrIcT RATIOS OF INTEREST AND Dis- COUNTS ON BorrROWED MoNEY TO EARNING Assets, ALL MEMBER Banks, 1919-1925 (Ratios based on $1,000) Per Cont 15 20 05 Number . be! dew Cases Under 1 J and under 2 2 and under 3 3 and under 4 4 and under § 5and under 6 a f and under 7 A —. and under 8 Taal Band undor9 [nea 3 and over ol A If the 84 amounts for the individual years and districts given in Table 78 are distributed, as in Chart 26, it is found that (1) they’ range from less than $1.00 to more than $9.00; (2) the most common amounts fall in the group $2.00 to $3.00; and (3) the form of distribution “tails off’ to the upper groups. It is apparent. from Table 78 that the instances in the upper groups apply primarily to the early and middle years, and those in the lower groups to the later years. Moreover, certain of the dis- tricts supply the cases for the upper as do others of them for the lower groups. Accordingly, the amounts for the districts and years should be presented in other ways. Such a presentation, 18 Except for the year 1923. NORMS AND TRENDS IN EXPENSES 117 given in Chart 27, makes it easier to determine the norms and trends characterizing the different amounts. Norms 1. Amounts of interest and discounts on borrowed money, ex- pressed in terms of earning assets and related to the seven-year district levels, were larger than the average in every district in 1920 and 1921, in all but three of them in 1919, and in all but four of them in 1922. In every district in 1923, 1924, and 1925 they were lower than the averages. That is, the turn from high to low, relative to the district levels, came in 1923, except for four dis- tricts in which the change came one year earlier. In general, previ- ous to 1923, the amounts were high; subsequently they were low. 2. Relative to the yearly levels for the country as a whole, amounts in Boston and Cleveland were low, and those in Rich- mond, Atlanta, St. Louis, and Dallas high during each of the seven years. Similarly, those in New York, Chicago, and San Francisco were prevailingly low, while those in Minneapolis and Kansas City were generally high. Trends 1. The trend of the amounts between 1919 and 1921 for the country as a whole, and for each of the twelve districts, except Dallas and San Francisco between 1919 and 1920, and Philadel- phia between 1920 and 1921, was upward. It was downward for the country as a whole, and for all the districts between 1921 and 1923, and between 1924 and 1925. Over the whole period, 1919 to 1925, it was in all cases downward. 2. The downward trend between 1919 and 19235 is greater than that for the country as a whole in New York, Philadelphia, and Kansas City; it is appreciably less than that for the country in Cleveland and Richmond. 3. Districts with downward trends from 1921 to 1925 closely corresponding to each other are Atlanta, Chicago, St. Louis, Kan- sas City; those with upward trends much alike between 1919 and 1921 are New York, Chicago, St. Louis, and Minneapolis. Different as are the rates of change upward and downward among the various districts, there is clearly more similarity than difference. In general, the “typical” behavior of the averages of 23 BANKING STANDARDS CaArT 27 RATIOS OF INTEREST AND DISCOUNTS oN BORROWED MONEY TO EARN- ING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE covcacone DISTRICTS cose 919 1920 1921 1922 1923 1924 1528 1919 1928 1922 1928 1924 192% seales of centage hangs 9 &) de 3! 2 . € Fa ~ 1919 1920 1921 1022 1928 1924 1928 1918 1220 1921 1922 1929 1028 1928 NORMS AND TRENDS IN EXPENSES 119 all districts combined is traced out with minor variations by those in each district. It is this tendency to similarity which is the most distinguishing single feature of the chart. It should be kept in mind, of course, that Chart 27 shows the amounts paid in relation to earning assets, and that it is drawn, as are the others of this class. on a ratio basis.1? (4) Ratios of Taxes to Earning Assets According to the classification of operating expense of member banks, as reported by the Federal Reserve Board, the average amount of taxes paid by such banks for the years, 1919 to 1925, combined, was $4.11 for each $1,000 of earning assets.2® This amount is 9.0% of the total operating expenses paid and, relative to salaries and wages, interest on deposits, and interest and dis- counts on borrowed money, respectively, is as {:llows: 34.8%; 20.8%; 140.8%. While $4.11 is the average, there are wide varia- tions from this amount for the combined districts by years and for the combined years by districts. For instance, the highest amount, $4.93, for all districts combined, was paid in 1921; the lowest, $3.46, in 1925. Similarly, the largest amount for the combined years paid by a single district was $6.39 for Dallas; the smallest, $3.07 for Philadelphia. TABLE 79 Ratios oF TAXES PER $1,000 OF EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average {All Districts) Boston. . .. New York. Philadelphi Cleveland. . Richmond. Atlanta.... Chicago. . .. 5t. Louis. . .. “Ainneapolis. Kansas City. Dallas. ..... San Francisco Averag ‘1919- rg2c) 4 I Qs- EO EEE ~~ 7 TARNIN- ASSET" 1028 1910 1020 1021 4.001 4.22 4.03 1 311 4.80 32.70 2 90 | 2.46 4.0; a Of : 4.74 3.81 op 5°! 4 52 & r d 2 < 5 * 35 3.99 2.39 3.04 Pr 3.¢ .78 3.7" 3 3.72 3.57 a pb 1% See discussion of such charts, page 21. 20 For the method for computing earning assets, see explanation, page 13. £20) BANKING STANDARDS CHART 28 DistriBUTION OF YEARLY DistrIcT RATIOS OF TAXES TO EARNING AsseTs, ALL MEMBER BANKS, 1919-1925 (Ratios based on $1,000) 10 Per Cent 15 r Groups D 2.00 and under 2.50 2.50 and under 3.00 3.00 and under 3.50 3.50 and under 4.00 4.00 and under 4.50 4.50 and under 5.00 5.00 and under 5.50 5.50 and under 6.00 6.00 and under 6.50 6.50 and under 7.00 Tiki 1.00 and under 7.50 e 20 25 LI - Number of Casos a. ) 5 13 le 19 1 8 > Moreover, the district and yearly amounts vary. If the 84 separate amounts, twelve for each of the seven years, given in Table 79, are distributed as in Chart 28, it is found that (1) the most common or modal amounts fall in the group $4.50-$5.00; (2) 63% of them occur within the limits $3.50 to $5.50; and (3) they range by groups from $2.00 to $7.50, the smallest actual amount, $2.39, being paid in New York in 1923, and the largest, $7.49, by Dallas in 1921. But in Chart 28 no account is taken of the separate years and districts. Differentiation is necessary if the norms and trends characteristic of the amounts are to be discovered. The most satisfactory manner in which this can be done is by using a graphic figure such as Chart 29. This chart illustrates, among other things, the relation of the amounts each year in each district to the average for the district and for the country, and also shows the rates of change from year to year and over the whole period 1919-1925. It makes it easy to observe the following norms and trends: NORMS AND TRENDS IN EXPENSES 12. Norms 1. Taxes, when measured in terms of earning assets, were high in all districts relative to the seven-year district levels, in 1921 and 1922; they were low in eleven in 1924 and in 1925. In 1910, 1920, and 1923, most of the districts were low. 2. Taxes in New York, Philadelphia, and San Francisco were lower, and in Atlanta, Chicago, St. Louis,?! Minneapolis, Kansas City, and Dallas they were higher, during the seven years 1919- 1925, than the yearly averages for the country as a whole. In five of the seven years they were low in Cleveland, and in four of the seven, high in Richmond. Generally speaking, therefore, taxes in relation to earning assets, when compared with the level for the country, are low in the East, and far West (San Fran- cisco), and high in the balance of the country. Trends 1. For the country as a unit for the seven years 1919-19235, the trend of taxes relative to earning assets was downward. It was generally upward from 1919 to 1921 or 1922 and thereafter downward, the fall exceeding the rise, thus leaving the amounts in 1925 at a lower level than in 1919. This condition also obtains for all the districts except Philadelphia. Cleveland, Richmond, Atlanta, and Kansas City. 2. For the entire country, and for eight of the twelve districts, the greatest rise occurred between 1920 and 1921, all of the districts except Richmond registering an increase of some sort. The greatest fall for the country as a unit and for nine of the twelve districts came between 1922 and 1923. In New York, Minneapolis, and Dallas the fall began in 1921 and continued, with interruptions for New York and Minneapolis between 1923 and 1924, to 19235. 3. Districts with trends over the whole period similar to that for the country are Chicago, Minneapolis, Kansas City, Dallas, and San Francisco; those with trends generally different are Rich- mond and Cleveland. 4. Districts with somewhat similar trends over the whole period are Philadelphia and Richmond; Atlanta and Chicago; St. Louis and Kansas City; Minneapolis and Dallas. “2p one year, 1020, those in St. Louis were the same as the country average. "29 BANKING STANDARDS CHART 20 RATIOS OF TAXES To EARNING ASSETS — ALL. MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 ‘The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE wacsccess DISTRICTS 1920 1821 1922 1923 1924 192% 1919 1920 1921 1922 1923 1924 1929 BOSTON © FORadl TN A Scales of 'srcentage “hange Q 9 Ty ‘ la 30 10 ent” RR 1013 R20 1923 1822 1923 1924 192% 1919 1920 1921 1922 19823 1924 1929 NORMS AND TRENDS IN EXPENSES 123 Dissimilar as are the amounts spent as taxes, when measured in terms of earning assets, they are characterized by well defined norms and trends in the years 1910 to 1925. (5) Ratios of “All Other” Expenses to Earning Assets According to the form of classification of expenses for mem- ber banks used in the reports of the Federal Reserve Board, ex- penses not comprehended in the classes Salaries and Wages, In- terest on Deposits, Interest and Discounts on Borrowed Money, and Taxes are called “All Other.” Based on the entire member- ship in the System for the period 1919-1923, the average amount of such expense for each $1,000 of earning assets was $7.29. The lowest average amount for the System as a whole was $6.04 in 1919; the highest, $7.95 in 1921. For the combined years, Dallas spent most, $10.63, and Philadelphia least, $5.93. While the amounts vary for the entire System from year to year and for the several districts for the combined years 1919-1925, they also differ year by year in the individual districts. This fact is shown in the detail in Table 80. If the separate years and districts are treated as a unit and the amounts distributed in a frequency form and graphically illustrated, Chart 30 is secured. This chart shows for all member banks that (1) the most com- mon amounts fall in the group $6-$7; (2) the amounts range TABLE 80 Ratios oF “ALL OTHER” EXPENSES PER $1,000 OF EARNING ASSETS IN ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average All DistricteY Boston. . .. New York. Philadelphi Cleveland. . Richmond. . Atlanta... .. Chicago. ... St. Louis. ..... . Minneapolis. . . eee Kansas City...... . ........ Dallas..................... San Francisco. . . LL RATIOS oF Art OTHER EXPEN""S PER 1,000 ~~ FARNING Asc— Average 1919- 1QIQ | 1020 1023) 720! 6 064' 6 cc ~on ~ rh 5 ig 5.27 5.32 1.93 /-13 2a Car 5.03 4.69 5.17 6.2¢ 6 ~ § - ¢ # 5.80 5.52 39 7-15 -3 ¢ 7 « ¢ { 29 { 65 €or € 4; & 5.7¢ 10. §€ 0.63 8 68 ge 0.2 7.74 S.. 7.18 ww & AY 8.8¢ 3A BANKING STANDARDS CHART 30 DISTRIBUTION OF YEARLY DistrIcT RATIOS OF “ALL OTHER” EXPENSE 10 EARNING ASSETS, ALL MEMBER BANKS, 1919-1025 (Ratios based on $1,000) Groups 4 and under 5 5 and under 6 5 and under 7 7 and under 8 8 and under 9 3 and under 10 10 and under 11 11 and under 12 {2 and under 13 4] x 9 a iD Pear Cont 16 20 diiihi NR gr 10 Number of Cases 3 24 17 14 0 1 from the group $4-$5 to $12-$13, the minimum amount being $4.69 and the maximum $12.04; and (3) the distribution “tails off” toward the upper groups, the frequencies decreasing regu- larly to the group $12-$13. The typical amounts, however, may refer to particular years or to particular districts and, therefore, be unrepresentative of the data as a whole. By plotting the amount for the respective districts each year on a ratio chart, as is done in Chart 31, it is possible (1) to study the dispersion for each district each year around the seven-year district average, (2) to observe the directions and rates of change, and (3) to compare the district amounts with those for the coun- try as a whole. A study of this chart shows the data to be char- acterized by the following norms and trends: Norms I. “Other” expenses, expressed in terms of earning assets, were helow the seven-year district levels in all of the districts in 1919 and 1920; for the other years they were generally above, all of the districts in 1922 and 10 and 11 of them, respectively, in 1923 NORMS AND TRENDS IN EXPENSES 125 and 1924, showing this to be true. That is, years in which the amounts were high or low were substantially the same in all districts. 2. The yearly district amounts were below the yearly levels for the country during the full seven years in Boston, New York, and Philadelphia; they were above these levels during all of the years in Atlanta, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. In the other three districts (Cleveland, Rich- mond, and Chicago) the amounts were at times above and at times below the yearly levels. That is, in all but three districts the positions of the amounts relative to the country averages were either positive or negative during the seven years. This condi- tion is not surprising for such districts as Atlanta and Dallas, for instance, in which the amounts differ widely from those charac- terizing the country as a unit, but it is interesting in the case of St. Louis. where differences are small. Trends I. For the country as a whole, the trend of “other” expenses in relation to earning assets was upward when the entire period of seven years is considered. It was markedly so between 1919 and 1921, the rate being accelerated between 1920 and 1921. Following 1921, the trend is downward for one year, then essen- tially horizontal—no change—then upward between 1923 and 1924, and then downward at approximately the same rate as be- tween 1921 and 1922. 2. The movement and rate of change for the country as a whole are generally followed in Boston, New York, Philadelphia, Atlanta, St. Louis, Kansas City, and Dallas. They are deviated from in Cleveland, Richmond, Chicago, Minneapolis, and San Francisco, the characteristic rise from 1919 to 1921 and the fall from 1921 to 1925 being uncertain in Cleveland and Richmond, and differently timed in Chicago, Minneapolis, and San Francisco. Yet here, as in the case of the other items of expense, there are similarities among the different districts in the changes from year to year and over the whole term of years. These are the rule rather than the exception; they point to the presence of common problems or common methods of meeting them in the discharge of banking functions by the banks in the different districts. BANKING STANDARDS CHART 31 RATIOS OF “ALL OTHER” EXPENSES TO EARNING ASSETS — Ar, MEMBER BANKS 26 Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE ccacances DISTRICTS eae 1919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1925 oo eee - a A ve. oe, Seay Seg | e———— — .nrug, ame” RT Scales of ercentagoe Change 50 LY 30 0- ¥ 10 th MINNEAPOL = i my LT ett, amg ews ones?” en Ay — “ag asoee TEEN Seu, -y_ —— SAN FRANCISCO porn pT eo ® wre? - ow - anne 919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1925 V. qi 1 NORMS AND TRENDS IN NET EARNINGS I. INTRODUCTION THaE Federal Reserve Board publishes the net earnings of all member banks by years and by districts for years ending June 30. It is these amounts which constitute the basic data for the fol- lowing analysis. But to study the amounts alone is unsatisfactory for our purpose, because of the changing number of banks in the respective districts over the period 1919 to 1925, and further because of the fact that the data in this form do not meet our needs. Accordingly, the amounts are expressed as ratios (1) of earning assets,! and (2) of gross earnings. In this form the ratios are comparable from year to year and from district to district, and may be analyzed in any way thought desirable. Net earnings, as reported by the Board, are the differences be- tween gross earnings and operating expenses. They are distin- guished from “net addition to profits,” the latter expression being net earnings less “net losses.”? While, undoubtedly, some of the banks in the respective districts experienced gross losses—that is, had higher operating expenses than gross earnings—this is not, of course. the case for member banks as a whole. 2. THE RELATION OF NET EARNINGS TO EARNING ASSETS The average net earnings for all member banks, for the years 1919 to 1925 taken as a unit, was 1.99% of their earning assets. That is, for every $100 of earning assets during this seven-year period, member banks earned $2 over and above their operating expenses. For the combined districts, the lowest percentage was 1.81, in 1925; the highest 2.25, in 1921. When the individual dis- tricts for the period 1919 to 1925 are considered, the lowest per- 1 For the manner of securing the earning assets, see discussion, page 13. 2¢Total losses less recoveries on assets previously charged off.” Zz 128 BANKING STANDARDS centage was 1.82 for San Francisco; the highest, 2.36, for Dallas. While these amounts show considerable variation, they tone down the extremes which characterize the individual districts and years as shown in Table 81. TABLE 81 Ratios oF NET EARNINGS TO EARNING ASSETS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND 8v FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. .... New York. . 2hiladelphia “leveland... richmond. . jtlanta...... “hicago..... 5t. Louis. . . . dinneapolis.. {ansas City. Dallas......... yan Francisco. ......... -1 TARNINGS TO TABNING ASSETS 1925 1.83 1.81 Average one 1019 | 1020 1021 | 1922 ro2x) Tpgrr-n oT 1.00 ve a ro ; Sr ry - <. AY < ~ “2 “a 5 A ~§ .60 [.04 2.26 -. 86 87 96 “3 X.75 1.00 2.16 1.02 1.76 2,07 57 .7¢ 1.26 1.66 2.19 1.¢6 ~ 92 _ 67 Deferring for the time being a consideration of the yearly and district differences, a general conspectus of the range, the group- ing, and the typical amounts can be secured by placing them, as s done in Chart 32, in frequency form. When this is done, it is seen that (1) the most common ratios fall in the group 1.90-2.10 —the group of which the average for the entire bank membership for the period 1919-1925 is approximately the center; (2) the amounts cluster about this center, the number of cases above 2.30 and below 1.50 being few; and (3) 71% of the instances are in- cluded within the group-range 1.70 to 2.30. If, for convenience, 2% is taken as the normal or typical ratio, then it may be said that, for the twelve districts for the years 1919 to 1925, inclusive, the amounts in 71% of the district-years fall within limits 15% above and 15% below this amount. But such a method of describing the ratios is incomplete be- cause it does not set out the district differences from the typical or average amount. Chart 33 is presented in order to do this. This chart is drawn as follows: (1) the ordinate, or vertical scale, shows the ratios of gross earnings, and the abscissa, or horizontal NORMS AND TRENDS IN NET EARNINGS 129 CHART 32 DistriBUTION OF YEARLY DisTrRICT RATIOS OF NET EARNINGS TO EARNING ASSETS. AL, MEMBER BANKS, 1010-10925 Percentage Groups 1.10 and under 1.30 1.30 and under 1.50 1.50 and under 1.70 1.70 and under 1.90 1.90 and under 2.10 2.10 and under 2.20 2.30 and under 2.50 2.50 and under 2.70 2 70 and under 2.90 0 0) Per Cent 20 = ' au. RW— oes oh x he " RT ae 25 30 Number SN Cases } I" 6 23 21 3 oy scale, shows the ratios of total expense to earning assets; (2) the figures in the body of the chart show by position each year (plain figures) and for the combined years, 1919-1925 (enclosed figures) the ratios of net earnings to earning assets in the different dis- tricts—the numbers being those assigned by law to the districts. The horizontal line is drawn at the average ratio of gross earn- ings to earning assets, and the vertical line at the average ratio of operating expense to earning assets, the average in each case being that for the combined districts during the period 1919-1925. The solid diagonal line indicates a net earnings ratio of 2 %—that found for the country for the period 1919-1925. The dotted diagonal line above, and the one below the line of 2% serve as boundaries for ratios of net earnings ranging from 1.70 to 2.30— that is, for those falling within limits 15% above or below the average. The upper left-hand quarter is the region of high gross earnings and high expenses; the upper right-hand one, of low operating expenses and of high gross earnings; the lower left one, of low gross earnings and of high operating expenses; and the lower right one, of low gross earnings and of low operating expenses. The area above the solid diagonal line is the region of high, and that BANKING STANDARDS below, the region of low net earnings relative to the average ff 2%. This chart shows, among other things, that (1) the district ratios hover closely around 2%, the dispersion or spread being less CHART 33 D1STRIBUTION OF DISTRICT RATIOS OF NET EARNINGS To EARNING ASSETS WITH REFERENCE TO VARIABLE DisTrRICT RATIOS OF GROSS EARNINGS AND OF ToTAL EXPENSE TO EARNING ASSETS, ALL MEMBER BANKS, 1919-1g25%* ® on Ratios: Total Expense to Earning < Assets eS 6.25 6.00 5.73 5.50 5.25 5.00 4.75% 4.50 4.25 4.00 3.75 3.50 3.28 o et ee ee re re t 3,75 3.50 3.251 3.00 j 7.750 20d 225] . sol. 6.75! Av- rage 6.60" 5.25! 5.00! 3.751 ~~ 3.25 LL *Plain figures refer to the yearly and the enclosed figures to the seven-year average atios for the respective districts by number. NORMS AND TRENDS IN NET EARNINGS 131 when both gross earnings and operating expense are below the average (the lower right-hand quarter) than when they are above this level (the upper left-hand quarter); (2) based upon the av- erage for the period 1919-1925, and generally also on that for the individual years, net earnings are high in Districts 2, 3, 4, 6, and 11; they are low in Districts 1, 5, 7, 9, 10, and 12; and they closely agree with the average in District 8; (3) low gross earnings and low operating expense ratios are frequently associated with high net earnings (as witness the case of District 3), and conversely, high gross earnings and high operating expenses are oftentimes accompanied by low net earnings, as in the case of District ¢; (4) the ratios for the same districts vary from year to year— notice the scatter of the plain figures of the same denomination, and (5) the seven-year average district ratios (the amounts in circles) differ markedly from the yearly ratios for the same dis- tricts. While the variations of the yearly ratios in the respective dis- tricts, relative to the seven-year level, are distinguished on Chart 33, it is impossible to single out the ratios for the individual years and to observe the uniformities among them in the various dis- tricts. It is desirable to do this. Accordingly, Table 82 is pre- sented. Relative to the seven-year levels in the respective districts, net earnings as percentages of earning assets were generally high in 1920, 1921, and 1922. To this general rule, there is one exception TABLE 82 PERCENTAGE DIFFERENCE FROM DISTRICT AVERAGE, 1919-1925, OF RATIOS OF NET EARNINGS TO EARNING ASSETS FOR ALL MEM- BER BANKS, BY YEARS AND FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Boston. ..... New York. .. Philadelphia Cleveland. . . Richmond. . Atlanta. . .. Chicago. .... St. Louis. . ... Minneapolis. . Kansas City. . . Dallas. .............. San Francisco... .... ~ : 3 +17.01 Peo FNTAGF DIFFFRENCE Fo~tr Drepior Arm aGE, 1019-1025 1024 T 102% 70 "2 + + + € cn +c 4¢ 1¢ T31.3 +17.9- + 1c + J] Ad Hi 1 — 87 ~t — 5.40 —10.38 - 4.00 - 4.48 .38 00 "14 9.60 -_2.50 = 9.29 — 7.20 -14.20 +19.¢7 4+14.20 + + 6 ~10.00 .20 — 5 24 [32 BANKING STANDARDS in 1920, one in 1921, and two in 1922.2 In 1919, 1923, 1924, and 1925, they were generally lower than their own seven-year levels. This is true of all districts in 1925, and of all except four districts in 1910, three in 1923,% and one in 1924. Generally speaking, therefore, years of relatively high and of relatively low net earn- ings, measured in terms of the respective district levels, were com- mon throughout the whole System, a condition similar to that observed for certain ratios analyzed in preceding chapters. But further analysis is needed in order to take account of the directions of change—plus or minus—{from year to year in the different district ratios. The nature and the percentage amounts of change are given in Table 83. Between 1919 and 1920 the TABLE 83 PERCENTAGE CHANGE FROM YEAR TO YEAR OF YEARLY DISTRICT RATIOS OF NET EARNINGS TO EARNING Assets IN ALL MEM- sir BANKS BY YEARS AND FEDERAL RESERVE DisTRICTS Prom ans CHANGE FROM VAR TO Year FEDERAL RESERVE DISTRICTS — —————————— Average {All Districts) Boston. ....... ye dB EEE New York. .....coovenvecnnnns Philadelphia. ... - coo cen Cleveland...... ..covavienennn Richmond. .....oovveneeecnenn Atlanta. ..oveereocecernoroanes ThiCAEO. cv vvreniereenaeaen louis. viii finneapolis.....covvveercnenes {ansas City... ..oovvvvennenns dallas... viii aT Francis . oo oe vseens ones 1919 to 1020 410.42 | + 9.45 +rq.36° +13.33 t12.00 +. r.73 Se. RN + i > aL 1920 | 1921 to to 1021 toa + 6.13 To +. 1 + —~ A.00 -8 - 1022 to 10922 —X2.1! —10.26 —r .82 - 80 eo 0 1923 to 1024 rr 3.23 —- 4.00 - 0.90 f.38 - $ fo) 1024 to 1925 - ~9 1 9.40 — 2.06 — 4.42 + 3.22 —- 5.90 + .6o ~- 44 5 «..50 F.3.50 = 0.00 £ 0.00 —_ 6.20 ratios in all but three districts increased. Moreover, with the ex- ception of Dallas, all of the districts showing a rise between 1919 and 1920 were low in 1919 relative to their own district level. Of the four districts with ratios in 1919 higher than these levels, the ratios in three decreased between 1919 and 1920. Between 1920 and 1921 net earnings decreased in five and increased in seven districts. By 1921, however, a general downward move- ment set in and continued until the close of 1925, all districts, except three between 1921 and 1022, one between 1922 and 1923, three between 1923 and 1924, and four between 1924 and 1925, “3 Tn one district, Atlanta, the ratio was the same as the seven-year average. NORMS AND TRENDS IN NET EARNINGS 133 registering this type of change. The greatest percentage decline for all districts combined, as well as for the majority of the dis- tricts, came between 1922 and 1923; the greatest percentage rise came between 1919 and 1920. Between 1919 and 1921, net earn- ings increased at a diminishing rate; between 1921 and 1923 they fell at an increasing and between 1923 and 1925 at a diminishing rate. But the percentage amounts of decline and of rise in the ratios in the various districts are functions not alone of time but also of the district levels themselves and of the positions held by the ratios in a given year relative to these levels. These facts are apparent from the detail in Tables 84 and 85. If the yearly district ratios of net earnings are classified into two groups, plus and minus, according to the positions which they hold relative to the seven-year district levels, as is done in the stub of Table 84, and for each class the direction of change from year to year is determined, as is done in the caption classes of the same table, it is found that (1) ratios which are low tend to increase, and (2) those which are high tend to decrease. To this rule there are 22 exceptions in 72 cases. It will be recalled that, in general, during 1921 to 1923, ratios of net earnings to earning assets decreased from year to year. This is evident from the fact that of the 72 year-to-year changes, 43 were decreases and 29 increases. But of the 72 possible positions held by the ratios in the first of each pair of years, relative to their respective district levels, 41 were high, and of the number so placed, 31 decreased in the following year. Conversely, of the 31 which were low in a given year, 19 increased the next year. In 25% of the cases the year-to- year changes were upward when the ratios were relatively high, and in 39% they were downward when they were al- ready low. That is, there is a tendency, so far as direc- tion of change is concerned, for net earnings to regress * In Kansas City and in Dallas, the ratios were the same in 1924 and 1025; in Atlanta they were the same in 1022 and 1022 U4 BANKING STANDARDS TABLE 83 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM DISTRICT LEVELS AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF NET EARNINGS TO EARNING ASSETS DIFFERENCES FROM DISTRICT AVERAGES, 1010-102 Sign Number of Cases iy Percentage | Average Groups Percentage Average 0.31 5.00 and over ".50 to 15.00 Under 7.<o 20.05 10.86 2.6¢ Under 7.50 4.69 7.50 to 15.00 9.79 ‘5.00 and over 20.45 Average 8.072 NET PERCENTAGE CHANGE FROM YEAR TO YEAR 2.02 —II JI - 4.13 —- 2.02 + 5.17 + 2.22 + 5.28 4. A to type, the type being in each case the level common to the re- spective districts. Earlier discussion showed that gross earnings and operating ex- penses also revert to type. In these cases, however, the reversion is greater than that for net earnings. But this is to be expected in view of the fact that net earnings, as residuals, are dependent not only upon the amounts of gross earnings and of operating expenses, but also upon the relations between them. While inverse correlation obtains between the positions of net earnings ratios in a given year and the directions of change from year to year, direct correlation occurs between the net percentage amounts of such change and the percentage amounts of the dis- persion. That is, as shown in the detail in Table 85, the greater the distance, measured on a percentage scale, which ratios of net earnings are above or below the levels of the districts to which they belong, the larger are the net percentage changes from year to year. There is, as the table shows, but one exception to this rule. Regression to type is indicated, accordingly, not only by the direction but also by the amount of change. The yearly net earnings ratios in the various districts may be compared with their own district levels, and these levels may be compared with one another and with the levels for all districts NORMS AND TRENDS IN NET EARNINGS 135 combined. Inspection of Table 86, which presents the details for such a comparison, shows that (1) the ratios in New York, Philadelphia, and Dallas are above, and those in Minneapolis be- low the level for the country as a whole in each of the years dur- ing the period 1919-1925; (2) the ratios are markedly high in Philadelphia and Dallas, and markedly low in Minneapolis; ( 3) in only one year did the ratios in Boston, Chicago, Kansas City, and San Francisco rise above the country average, and in only one year did those in Cleveland sink below the average for the combined districts; (4) the ratios most nearly agreeing with those in the entire System are found in St. Louis, and those deviat- ing most widely from this general level occur in Minneapolis; and (5) the ratios in the East (New York and Philadelphia) and in the South (Atlanta and Dallas) are generally high; and those in the New England and the Northwest (Minneapolis and Kan- sas City, especially) are markedly low during the years under review. TABLE 86 PERCENTAGE DIFFERENCES OF DISTRICT AVERAGES OF RATIOS OF NET EARNINGS TO EARNING ASSETS FOR ALL MEMBER BANKS, FEDERAL RESERVE SYSTEM, FROM AVERAGES FOr THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS Boston. . ... New York. . Jhiladelphia. Cleveland.... Richmond. . . ‘tlanta...... “hicago..... St. Louis. . .. ‘finneapolis. . Kansas City.. Dallas....... san Francisco Average {101Q-2¢ — 7.04 + £.53 bo? + oc PeneeNTAGT DIFFERENCES FROM THE COUNTRY’S 4 VERAGT® IOIO TO200 1027 1072 Yeo? YO ~ — 0.2! + xs Fos + ~~ + 4 I¢ ” ~~ —vn 28 "J 34 $ wn — 102¢ me og ~1 + 4.97 +19. 24 + ‘ These and other facts, however, are more readily seen by con- sulting Chart 34, which, like others of this type, is drawn on a ratio basis.® This chart graphically shows, among other things: (1) the percentage amounts and directions of change in ratios for each of the districts and for the country as a whole, (2) the direc- —————————— 8 For discussion of the method of drawing and of interpreting such a chart, see page 2I. 26 BANKING STANDARDS CHART 34 RATIOS OF NET EARNINGS TO EARNING ASSETS — ALL MEMBER BANKS Comparison of Federal Reserve District Ratios with those for the Country as a Whole, 1919-1925 (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE oaueecean DisTRICTS ________ 1919 1920 1921 1922 1923 1924 1925 1919 1920 192t 1922 1923 1924 192% N o fea Yon, — — 2rreer au Scafes of tercentage Changs 0. i 14 0 to fn I’ n be etree. "eee om Bs DA. ee thetacsee nan AY «aN Fras less vomsse ha i919 1920 1921 1922 1923 1024 192% 1919 1920 1921 1922 1923 1924 1024 NORMS AND TRENDS IN NET EARNINGS 137 tion and percentage amounts of variation of the district ratios each year from the seven-year district levels, and (3) the per- centage amounts and nature, plus or minus, by which the ratios in each district differ from those for the country taken as a whole. Summarizing the relations according to these criteria, it is seen that (1) for the country as a unit, net earnings increased between 1919 and 1921 and decreased between 1921 and 1925, the rate of increase being largest between 1919 and 1920, and the rate of decrease greatest between 1922 and 1923; between 1923 and 1925 there was a gradual decline, the rate being less between 1924 and 1925 than between 1923 and 1924; and (2) while, with minor differences, the direction of change from year to year, and over the whole period, typical of the country as a whole, was followed by New York, Philadelphia, Chicago and St. Louis, it was deviated from by Minneapolis, Kansas City, Dallas, and San Francisco. Other features of this chart will receive attention after the norms and trends characterizing net earnings expressed in terms of gross earnings have been considered. 3. THE RELATION OF NET EARNINGS TO GROSS EARNINGS The gross earnings of member banks consist of interest and of “other income,” the former, it will be recalled, constituting 87% to 90% of the total.® The average amount of net earnings per unit of earning assets for all member banks for the period 1919 to 1925, was 1.99%. What are the relations between the net and the gross earnings for the banks in the respective districts for the years to which this study applies? Moreover, what are the norms and tendencies characteristic of the ratios? To answer these questions, first, for all member banks, and second, for na- tional and for state bank and trust company members, is the purpose of the following discussion. In this analysis, as in that which has preceded it, the ratios refer to the banks in the respec- tive districts taken as a single institution. (1) All Member Banks Out of each $100 of gross earnings received by all member 8 See Table 40, page 71. 28 BANKING STANDARDS TABLE 87 Ratios oF NET EARNINGS TO Gross EARNINGS IN ALL MEMBER Banks, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Average (All Districts) Boston. . . .. New York... . awa gee Philadelphia. . .. cow Cleveland...... Pp Richmond. .... ves Atlanta.......... FN Chicago. ...v.vvvvvvrenanes St.Louis... vveiinenr inne Minneapolis......... ....... Kansas City. ......covveeen. Dallas.......... # ost 8 $ihon » San Francisco... eee \verat I191Q~ 1925) Ramr-= re Nor EARNINGS TO GROSS T wNINGS 1919 | 1920 | 1021 | 1922 | 3923 1925 30.20 | 32.10 22.00 30.70 ¥ 30.70! 20.30 * 28.00 ' 28.40 0.40 3.60 "6.60 0.40 9.60 “.8 T.30 9.40 0.10 24.30 29.80 26.10 32.70 33.80 35.80 32.40 ‘0.80 31.10 “0 "0 - 2 Rr ££. '3.60 2.80 13.20 35.00 37 20 © =o a 0 30 ~0 34.3 aif age 3 .60 2.90 30 ~9 20.00 35.20 38.50 30.80 19.90 6.80 20.40 "2 50 ~ 30 20 . bo 6.10 27.10 33.60 37.30 31.00 3¢.30 2? Ro ~~ R- J7.20 31.40 35.80 27.90 20.10 €.90 - ne gn a: gL 22.80 28.90 32.30 34.70 28.30 17.30 9.10 '§.20 7.40 19.30 "2.40 20.00 2.40 2r 2 C T.40 22 .Q0 sL.:0 «7,20 banks for the period 1919-1925, inclusive, the average amount of net was $30.20. That is, approximately $70 was paid in the form of operating expenses, leaving $30 as net earnings. The largest net relative to gross earnings, for the membership as a whole, was received in 1920, the amount being $32.90; the small- est, $28.00, was in 1924. Based upon the entire period as a unit, the highest amount $36.60, was received by banks in Philadel- hia; the lowest, $20.10 by those in Minneapolis. By districts, therefore, there was a range of $16.50; by years, one of $4.90. But yearly averages for the respective districts vary widely from those for all districts combined, as they do from the seven- year average amounts for individual districts. During the seven years, the highest yearly ratio, 38.50, occurred in Philadelphia in 1922; the lowest, 16.10, in Minneapolis in 1923. It is difficult, therefore, accurately to represent the ratios by an average. A frequency distribution of the 84 ratios will be of assistance in visualizing the amounts given in Table 87. Such a distribution, as that shown in Chart 35, while it has the defect of obliterating yearly and district variations, is help- ful in throwing into relief the typical or modal ratios, the range over which they extend, and the manner in which they are dis- tributed. Specifically, this chart indicates that (1) the most common ratios fall in the group 25.00-27.50; (2) the range NORMS AND TRENDS IN NET EARNINGS 139 extends from the group 15.00-17.50 to the group 37.50-40.00; and (3) the ratios are concentrated above the modal amount, the positions of density being between 25.00 and 35.00. Accord- ingly, it may be said that out of each $100 of gross earnings received, banks retain over and above their operating expenses between $25 and $35. The foregoing generalizations take little or no account of the variations of the ratios in the different districts. Further analy- sis, with these in mind, is necessary. CHART 35 Di1STRIBUTION OF YEARLY DisTRICT RATIOS OF NET EARNINGS TO Gross EARNINGS, ALL MEMBER BANKS, 1919-1925 Percentage Groups L t = = 3 Per Cent 10 15 20 15.00 and under 17.50 17.50 and under 20.00 20.C0 and under 22.50 22.50 and under 25.00 25.00 and under 27.50 27.50 and under 30.00 30.00 and under 32.50¢ 32.50 and under 35.00 35.€0 and under 37.50 37.50 and under 40.00 RE — en) ere wilt 25 Nu mae ' Casag I 15 16 12 3 From Table 87, it is seen that the yearly ratios in the respec- tive districts vary. But it is not apparent that there are uni- formities in the variations. If the amounts, district by district, are measured as deviations, plus and minus, from the seven-year averages, it is found that the ratios were generally high in 1919, 1920, and 1921; low in 1924 and 1925; and mixed, high and low, in 1922 and 1923. In the years called “high,” Philadel- phia in 1919, and Richmond, Atlanta, and Dallas in 1921, are the only exceptions; in those which are termed “low,” the one exception is Atlanta in 1925. The mixed years show in general that the ratios were high in regions east of the Mississippi River AO BANKING STANDARDS TABLE 88 NUMBER OF DisTtrRIcTS WITH RATIOS OF NET EARNINGS TO EARNING ASSETS AND OF NET EARNINGS TO GROSS EARNINGS, ABOVE OR BELow THEIR RESPECTIVE AVERAGES FOR THE PERIOD 1919-1925 Er ————— YEARS {0} {+ J (920. evo rennnn (021 .vunennnn. (022: covimuies! (923. ..0.enene [024 ceeennsns [02%5... Net Earnings to Earning Ascets Jk ABOVE Net Earnings to Gross Earnings Net Earnings to Earning Acgets BELOW Net Earnings to Gross Earnings E* 98 I2 TY *One =. §Two = and low in the balance of the country. It will help to visualize these conditions and to compare them by years and by districts with net earnings expressed in terms of earning assets if tabular summaries are used. The yearly comparisons are found in Table 88. This table shows that district ratios of net earnings to earning assets and of net earnings to gross earnings were generally above their respective seven-year district levels in 1920 and 1921 and generally below them in 1924 and 1925. In the other years, the two measures less com- Numer oF Districts In WHICH THE # . RATIOS OF NET EARNINGS TO EARNING pletely agree in placing them AssETs AND OF NET EARNINGS TO high or low. The fact is of in- Gross EARNINGS AGREE OR Dis- AGREE AS TO THEIR POSITIONS terest, however, that generally RELATIVE To THEIR RESPEC- speaking, the conditions deter- TIVE AVERAGES FOR THE gy ’ PERIOD 1910-102% mining the ratios tend to be felt throughout the whole Fed- eral Reserve system. More- over, as indicated in Table 89, the two measures of net earn- ings place the respective dis- tricts in the same relative posi- tions at the same time. To this NORMS AND TRENDS IN NET EARNINGS 141 rule, the year 1919 is the only significant exception. That is, if a district’s net earnings are low (or high) in terms of earning assets, they tend also to be low (or high) in terms of gross earnings. Of the 84 district-positions, there is agreement in 81% and disagreement in 19% of the cases. But, as indicated, each district has its own level of net earnings in terms of gross. From year to year the ratios change. From the level of 1919, which it will be recalled was high, in terms of the seven-year average, for every district except Philadelphia, what was the direction of change to 1920? For all of the dis- tricts combined, and for nine of the twelve individually, it was upward. While the direction of change from 1920 to 1921 was downward for all districts combined, and for each of them except Boston and Philadelphia, the 1921 level was still above that for the seven years. For 1922, the average ratio for the com- bined districts remained the same as for 1921, the ratios in the East (except Boston), the Southeast, and Central districts rising, and those for the balance of the country falling. For subsequent pairs of years, the ratios tended to decrease between 1922 and 1923 and between 1923 and 1924, and to rise between 1924 and 19235, but there is little uniformity of direction among the several districts. Dissimilar as are the directions of change in certain of the years, there are marked uniformities from year to year in TABLE 00 NUMBER OF DisTrRICTS WITH RATIOS OF NET EARNINGS To EARNING ASSETS AND OF NET EARNINGS TO GROSS EARNINGS INCREASING OR DECREASING FROM YEAR TO YEAR, 1919-1925 YEARS 1919-1920. . 1920~192I.. 1921~-1922..... 1922-1923... ... 1023-1924... . [1024—10Q2¢%.... INCREASING Net Earnings to Earning Accate Net Earnings to Gross Farnines DECREASING Net Earnings *o Earning Accpte Net Earnings to Gross Earnings 10 6 7 9 4 “One =k. §fTwo +. 142 BANKING STANDARDS the direction taken by net earnings measured first in terms of earning assets, and second, in terms of gross earnings. If no account is taken of the agreement or disagreement by districts, the results given in Table go are secured; if directions from year to year, as indicated by both measures, are paired by dis- tricts, those in Table 91 are obtained. The latter table is the more significant in measuring uniformities of direction-trend. The two measures of net earn- ings indicate uniformities in direction of year-to-year dis- trict changes in 74% of the possible cases. On the whole, therefore, upward or downward year-to-year trends of net earn- ings measured in terms of earn- ing assets agree with those of net earnings measured in terms of gross earnings. While each district has its = own seven-year net earnings level—the ratios increasing or decreasing from year to year—it also has a yearly level relative to that for the country as a whole. For instance, the ratios of net to gross earnings for St. Louis in 1919 and 1920 were 31.80 and 32.10, respectively. Relative to its own seven-year level, these ratios were high (that is, they were higher than 29.40), the direction of change between 1919 and 1920 was upward, but the ratios for both years were below the levels for the country as a unit. If the various district ratios are compared with those for all districts combined, it is found that net earnings measured in terms of gross earnings are high in New York and Philadelphia, and low in Chicago, St. Louis, Minneapolis, and Kansas City during the entire seven years. In the other districts they are at times below and at times above this level. Are these districts high, low, or mixed, as determined by the same standard of comparison, when net earnings are measured in terms of earning assets? Table 92 gives, by districts, the number of years during 1919 to 1925 when net earnings were high or low measured in both units. It does not, however, pair the respective districts as is done in Table 93. The former NORMS AND TRENDS IN NET EARNINGS 143 TABLE 02 NUMBER OF YEARS, 1919-1925, IN WHICH THE DISTRICT RATIOS OF NET EARNINGS TO EARNING ASSETS AND OF NET EARNINGS TO Gross EARNINGS WERE ABOVE OR BELOW THE CORRESPONDING YEARLY AVERAGES FOR THE COUNTRY AS A WHOLE FEDERAL RESERVE DISTRICTS ABOVE Net Earnings to Earning Assets Net Earnings to Gross Farnines Berow ————— Net Earnings to Earning Assets Net Earnings to Gross Earnings Boston......... New York...... Philadelphia. . .. Cleveland. ..... Richmond. ..... Atlanta........ Chicago....... St. Louis. ..... Minneapolis. . . Kansas City. .. Dallas. ..... San Francisco One ob table indicates the fact of the districts at some time during the years in question being above or below the country average; the latter one shows agreement or disagreement of position at tke same time. The detail of Table 93 are the more significant, therefore, in showing uniformities of the positions occupied by districts relative to the country’s average. For the twelve districts for the seven years, there are 84 paired positions for the two types of ratios. In 81% of them, the two ratios for the various districts occupy the same relative place at the same time. That is, if they tend to be high (or low), judged by one criterion, they tend to be high (or low) at the same time judged also by the other. Agreement of this type for the two measures of net earnings serves to emphasize the fact of position and persistence in holding it. Some of the districts must, of course, be below if others are above the country level, but it is not required that some districts should consistently be above and others below, nor is it necessary that both measures of net earnings should generally agree in placing them in such positions for an equal number of years, and that the years in 44 BANKING STANDARDS NuMBER OF YEARS IN WaIcH DISTRICT RATIOS OF NET EARNINGS TO EARNING ASSETS, AND OF NET EARNINGS TO Gross EARNINGS WERE, IN THE SAME YEARS, ABOVE OR BELOW THE YEARLY AVERAGES FOR THE COUNTRY AS A WHOLE, 1010-1925 question for the two measures should be the same. Yet all of these facts tend to obtain. In" summary, the following generalizations may be made concerning the amounts and the percentage changes from year to year of net earnings, expressed as percentages of earning assets and of gross earnings, for the districts and years to which this study re- lates. Norms FEDERAL RESERVE DisTrRICTE Boston.... .,.. New York....... Philadelphia. .... Nleveland........ ichmond....... tlanta......... _hicago......... 5t. Louis. ,...... ‘finneapolis...... .ansas City...... allas........... san Francisco. ... Both Above Doth Ipivided t. Out of each $100 of gross earnings, the average net earn- ings for the period 1910 to 1925 is $30.20, the most common amounts ranging from $25.00 to $27.50. Relative to earning assets, net earnings constitute 2%, the bulk of the districts having ratios falling within the group 1.90 to 2.10. 2. The years in which district ratios of net earnings to gross earnings were high were 1919, 1920, and 1921; those in which they were generally low were 1924 and 1925. The years in which ratios of net earnings to earning assets were high were 1920, 1921, and 1922; those in which they were generally low were 1019, 1923, 10924, and 1925. 3. In general, if net earnings are high or low in terms of gross earnings, they are also high or low in terms of earning assets. 4. Based upon the yearly levels for the entire bank member- ship in the System, districts in which the ratios of net earnings to gross earnings are high or low are the same as those in which net earnings, measured in terms of earning assets, are high or low. Trends 1. The year-to-year trend of net earnings in terms of gross sarnings is on the whole the same as that of net earnings meas- ured in terms of earning assets. NORMS AND TRENDS IN NET EARNINGS 145 2. When net earnings in terms of earnings assets and of gross earnings are high or low in a given year, relative to their own district level, the year-to-year trend is, respectively, downward or upward, the net percentage amounts of change varying directly with the percentage amounts of dispersion from normal. That is, measured in both units. net earnings tend to regress to type. (2) National Banks, and State Bank and Trust Company Members Sections 2 and 3(r) of this chapter had to do with compari- sons of the amounts of net earnings in all member banks, by dis- tricts, expressed in units of earning assets and of gross earnings. Section 2 (2) of Chapter VI was concerned with a comparative an- alysis of the ratios of total expense to gross earnings for national banks and for state bank and trust company members, the treat- ment of the district ratios relating to their variations year by year from the district and the country levels, and to the direction and percentage amounts of change from year to year. If the ratios of net earnings expressed as percentages of gross earnings were similarly treated, the actual amounts would be the complements of the operating expenses, and the nature of the variations from the district and country average levels and the directions of change from year to year would be of the inverse type. That is, whenever a plus (+4) or a minus (-) sign was encountered with respect to operating expenses, a minus (-) or plus (+) sign would be found for net earnings. It is unnecessary, there- fore, to discuss the nature of the directions of change from year to year of net earnings for the two groups of banks. If the reader is interested in making such comparisons, he may consult the respective tables for operating expenses in terms of gross earnings, and reverse the signs. While the signs for operating expenses and for net earnings for the respective groups of banks—national and state mem- bers—in terms of gross earnings are opposite in every case, the percentage amounts of change are different. Accordingly, atten- tion is given primarily to the rates of change for the two groups of banks, and for this purpose a graphic representation will most fully serve our purpose. Before considering the chart on which the rates are indicated, it is well to present both the actual ratios "Ab BANKING STANDARDS TABLE 04 Rarios oF NET EARNINGS TO Gross EARNINGS IN NATIONAL BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND : BY FEDERAL RESERVE DISTRICTS RATIOS oF Nr EARNINGS T0 Gross EARNINGS verage reel 1919 | 1920 | 1021 | 1022 | 1923 / 1924 | 102% 1925) 28.68 | 28.04 30.52 Ba 4. sai 27.36 12.48 *5.45 73 .54 2.5. < t4.7% and the frequency groupings for the two groups of banks. This is done immediately below. Tables 94 and 95 give the ratios for the two groups of banks by district-years from 1919 to 1925, the average ratios for each district for the period 1919-1925, and the yearly average ratios for each year for the twelve districts combined. [f these tables are compared, it is found that (1) for the entire period 1919-1925, and for each year, the ratios for the banks in the entire System were lower for state than for national banks; (2) the ratios for the period 1919-1925 were lower for state than for national banks in every district except Philadel- phia, the smallest difference occurring in Dallas and the largest in San Francisco; and (3) the ratios were lower for state than for national banks in every district every year except for Phila- delphia, St. Louis, and San Francisco in 1919; Philadelphia and Dallas in 1920; New York, Philadelphia, Atlanta, and Dallas in 1921; Philadelphia and Richmond in 1922; Philadelphia, Chi- cago, St. Louis, and Kansas City in 1923; Philadelphia, Kansas City, and Dallas in 1924; and Philadelphia and Atlanta in 1923. That is, of the 84 pairs of ratios, those for state banks were lower in 75% of the cases. The nature of the grouping of the ratios for the two types of banking members is shown in Chart 36, from which it is apparent that the ratios most common for the national banks NORMS AND TRENDS IN NET EARNINGS 147 TABLE 93 Ratios oF NET EARNINGS TO GROSS EARNINGS IN STATE BANKS, FEDERAL RESERVE SYSTEM, BY YEARS AND BY FEDERAL RESERVE DISTRICTS FEDERAL RESERVE DISTRICTS Boston. ... New York. .. Philadelphia. Cleveland... Richmond. Atlanta..... Chicago. ... St. Louis. . .. Minneapolis. Kansas City. Dallas. ...... San Francisco. . Average (All Districts) Averag (1910- 102%) 20.04 .0¢ 18 "lg £1. 1. 16-0 Ratios NET FARNINGE TO Gross EARNINGS [ 1025 k {ol 1 od al 20 &r 20.68 . 28 ea 26.04 27.46 25.46 31.26 5. .20 26.63 27.00 an ~~ a 3 3 3¢ ” z 4 - ad 27.97 1. vg 25.02 32.07 37.87 30.12 + 24.00 20.4 37 °° 2F ar ~ * £ 20. N 1G. 1 TH 2. 20.16 fall in the group 27.50-30.00 and for the state banks in the group 25.00-27.50. That is, there is a difference of 2 points—an amount somewhat larger than that indicated by the difference between the seven-year averages for the two groups in the entire System. Accordingly, it is of interest to observe both the ranges and the groupings for the two types of institutions. The minimum and the maximum ratios for the state mem- bers extend beyond those for the national institutions. More- over, within the respective ranges, the nature of the grouping is different. For the state banks the area of concentration extends from 25.00 to 32.50; for the national banks from 25.00 to 37.50. There are relatively more low and relatively fewer high ratios for state than for national banks. Accordingly, not only the average ratio but also the prevailing ratios of net earnings to gross earnings is higher for national than for state banks—‘“bank,” it should be remembered, being the abbreviated term used for all of the respective member banks of the class in question in an entire district. So much for the size of the ratios. How about the rates of change from year to year and over the whole period 1919-1925 of the ratios for the two kinds of institutions? The rates are graphically shown in Chart 37, which is drawn on a ratio basis. It is difficult briefly to summarize the various facts disclosed by this chart, and only those most clearly indicated will be DISTRIBUTION OF Percentage Groups 15.00 and under 17.50 17.50 and under 20.00 20.00 and under 22.50 22.50 and under 25.00 25.00 and under 27.50 27.50 and under 30.00 30.00 and under 32.50 32.50 and under 35.00 35.00 and under 37.50 37 50 and under 40.00 418 BANKING STANDARDS CHART 36 YEARLY DisTrRICT RATIOS OF Gross EARNINGS, 1919-1925 NATIONAL BANK MEMBERS Per Cent 10 15 20 ) a | outa . a tr ug NET EARNINGS TO 25 ' Number of Cases 2 ¢ i i3 19 14 4 StaTE BANK MEMBERS Percentage Groups Under 15.00 16.00 and under 17.50 17.50 and under 20.00 20.00 and under 22.50 22.50 and under 25.00 25.00 and under 27.50 27.50 and under 30.00 30.00 and under 32.50 32.50 and under 35.00 35.00 and under 37.50 37.50 and under 40.00 30.00 and under 42.50 D Per Cent 10 5 2 Raa — aman aa co BO a Tr met a N . " " IR 5 conn espa eee beesioniifola cans ps. 2g matt [ages Le EE Er LE 20 25 » i Number of Cases R 20 18 12 6 NORMS AND TRENDS IN NET EARNINGS 149 mentioned. Whatever details are omitted the reader can supply for himself, but his interpretation, as ours, must be made in the light of the manner in which the chart is constructed.” With these facts in mind, the following general conclusions may be drawn from Chart 37: 1. While the rates of change from year to year and over the whole period 1919-1925, for the two groups of banks, are more alike within than between districts, there is in general for both types in each and in all districts, (1) a decrease between 1919 and 1925, (2) a more rapid decrease in the earlier than in the later years of the period, (3) reversals of direction and rates of change from year to year, (4) more rapid rises and falls in state than in national members, and (5) an accelerated fall especially in state banks between 1920 and 1921 or 1922. 2. The rates of change from year to year and over the whole period are relatively least for both sets of institutions in New York, Philadelphia, Cleveland, Chicago, and St. Louis; from year to year they are relatively greatest in Atlanta and Kansas City; and over the whole period they are most pronounced in Minneapolis and in San Francisco. 3. The greatest decline occurred between 1920 and 1921, the rates for state banks being largest in Richmond, Kansas City, and Dallas, and those in all districts, except Boston and New York, following the prevailing movement. Between these two years, the rates for national banks, except Boston and Philadelphia, declined in all districts, the decline, however. being generally less than for state members. At various places in the foregoing discussion of net earnings for all member, for national, and for state member banks, out- standing norms and trends have been briefly summarized. It is unnecessary to repeat what has already been said. It will suf- fice, as a closing word to this chapter, to call the reader’s atten- tion to the fact that, in the matter under discussion, substantial uniformities obtain, and that the chief purpose of the study is to point them out, to express them quantitatively, and if possible to explain their occasion and significance. 7 See page 21. "50 BANKING STANDARDS CHART 37 RATi0os OF NET EARNINGS TO GROSS EARNINGS Comparison of All Member, National, and State Bank and Trust Company Member Banks, by Federal Reserve Districts, 1919-1925 {The slopes of these lines, not their vertical positions, are significant. See page 105.) ALL MEMBER oes NATIONAL wi 0 STATR conse pn 1921 1922 1923 1924 1928 1919 1920 1921 1822 1928 1924 1928 -— Nf ORK Ay adr getlos of een! 1 d a oe . Seen, 1039 1920 1921 1922 1923 1924 1929 1919 1920 1921 1922 1923 1924 229 BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM PART III CORRELATED SERIES FOR ALL BY DISTRICTS MEMBER BANKS “The aim of science is to trace order in Nature.” A. Worr Essentials of Scientific Method VIII INTRODUCTION THE discussion in Part II was concerned primarily with tracing out norms and trends in the individual series of data relating to member banks in the different Federal Reserve districts, three bases of comparison for the most part being used. These were as follows: first, the nature and the percentage amounts by which the respective ratios for member banks in the several districts differed from their own seven-year average levels; sec- ond, the directions and the percentage amounts of change in the ratios from year to year; and third, the nature and per- centage amounts by which the ratios in the respective districts each year deviated from the average ratio for the country as a whole. These three sets of comparisons were made for each of the types of data available, the norms and trends being determined by summarizing in various ways the experiences in the different districts, by observing the uniformities. and by generalizing as to their preponderance. In Part III the purpose of the discussion is different, although the method of attack and the bases of comparison are much the same as those just described. Interest now is not in the discovery of norms and the measurement of trends in individual series of data, compounded out of the experience of the banks in the several districts year by year; it is rather in observing and measuring the interrelations of norms and trends in fwo or more series at the same time. Previous analysis has shown that while variations characterize the ratios in the individual series, they are not generally of the random sort. Are there also uniformities and tendencies com- mon to the paired variations and changes in different series? Moreover, in what way and to what degree are the series re- lated? Specifically, such queries as the following arise: In what manner are variable ratios of gross earnings, of operating expense, and of net earnings associated with variable ratios of " 12 BANKING STANDARDS loans and discounts? If time deposits are high relative to appropriate average levels, are operating expenses high or low? In general, what are the types and amounts of correlation between related series of banking data, and can these be expressed in terms of norms and tendencies? Answers to this general ques- tion, as well as to questions relating to particular series, are supplied in the following chapters of Part III. Before discussing these relations, however, it is necessary to explain the methods by which they are determined. At various places in the discussion under Part III, charts such as Chart 38 are introduced. Each of them, drawn on a ratio? basis, has the following characteristics: (1) the vertical posi- tions of the respective districts on the charts are without significance; (2) for the districts separately and combined, the seven-year average ratios, to which each of the lines refer, are equated to a common base and indicated by horizontal solid lines; (3) in each district the distances of the two types of lines above or below the solid horizontal line indicate the percentage amounts of dispersion of the amounts for such lines from the seven-year average; (4) the slopes of the lines indicate from year to year, and over the whole period, the rates of change of the ratios to which they apply. So much for the graphic form used to illustrate the similarity of the differences of the ratios from their respective averages year by year, and of the nature and rates of change of the ratios for two related series from year to year. The tabular form of analysis is somewhat different. As has already been indicated, three types of comparisons are used in detecting and in measuring the relations between different series. The first has to do with the paired deviations of the dis- trict ratios in two series from their respective seven-year average levels; the second, with paired rates of change from year to year; and the third, with paired deviations of yearly district averages from yearly averages for the country as a whole. Table 96, while applying to the first type of comparison, will serve to illustrate the others. Its preparation involves the fol- lowing steps: (1) selecting series which seemed to be or might be related; (2) calculating, for each district, the percentage 1 Gee discussion, page 21. [54 CORRELATED SERIES BY DISTRICTS 155 TABLE 96 CORRELATION OF DISTRICT DIFFERENCES OF RATIOS IN PAIRED SERIES: LoaNs AND DISCOUNTS AND OF GROSS EARNINGS T0 EARNING ASSETS (Percentage Differences from District Averages for Period 1919-1925) ToraL Average Percent- age Differences RaTtI10S8: Loans and Discounts to Earning Assets (Percentage Differences) l RATIOS: Gross Earnings to Earning Assets (Percentage Differences) Number of Nictrict-Years Above District Averages Below District Averagee Number of District- Years Ratios: * Ratios: Loans - Gross and Earn- Dis- | ings counts to to “1rning ‘arpin Assets Ac nes AY Position Amount (0.00 and over 5.co re Tnder oe Under 5.00 po 10.00 and over Above District Averages e ns and nave 2.50 tO k.00 Under 2.<o Below District Averages Under 2.50 2.50 to £.00 ¢ 00 and over 4 - V 99 1 LE i643 3 2 3 a 0 ve Wm nw 8, CDE a Din © BLE d” «<'D End X= «+ ” ” ~ LL | wv » " © [J do += | - | & «© ~~ b = deviations of the yearly ratios from the seven-year ratios for the respective series; (3) choosing suitable groups into which these percentage deviations from the average can be placed; (3) constructing a form, such as Table 96, into which the paired deviations of the related series, according to the classification of deviations, are inserted; (5) totaling the number of instances in the respective lines and columns; (6) adding and then averag- ing the amounts in each line so as to get the average percentage dispersion for the factor in the stub, used as the independent variable; (7) algebraically adding and then averaging the 6 [5 BANKING STANDARDS amounts in each line so as to get the net average percentage deviation for the factor in the caption treated as the dependent variable; and (8) reversing processes (6) and (7) so as to get the average percentage dispersion of the factor in the caption, when used as the independent variable, and the net average per- centage dispersion for the factor in the stub, when treated as the dependent variable. The results secured from these processes for two series are contained in Table 96. The total columns at the right show, for districts with ratios of loans and discounts to earning assets which deviate different percentage amounts above or below their respective seven-year averages, the net percentage amount of deviation in their ratios of gross earnings to earning assets—the loans and discounts ratios being the independent and the gross earnings ratios the dependent variable. On the other hand, the totals at the bottom of the table show, for districts with ratios of gross earnings to earning assets which deviate different per- centage amounts above or below their respective seven-year aver- ages, the net average percentage amount of deviation in their ratios of loans and discounts to earning assets—the gross earnings ratios being the independent, and loans and discounts the depend- ent variable. By carrying through the successive steps enumerated above, the net average percentage deviation of ratios of gross earnings ior each percentage group-deviation of ratios of loans and dis- counts, as shown in Table 97, was secured. In a similar manner, the net average percentage deviation of ratios of loans and dis- counts for each percentage group-deviation of gross earnings, as given in Table 131, was obtained. The procedure followed in correlating district differences in paired series is the same as that used in correlating year-to-year changes and deviations from the levels for the country as a whole, the only exception being, of course, that the deviations and changes are measured in ways suitable to the comparisons involved. IX SERIES CORRELATED WITH EARNING ASSETS IN Chapter III, the earning assets of member banks, by dis- tricts, are divided into (1) loans and discounts, and (2) invest- ments. While the same classification is used in this chapter, the purpose of studying the amounts, expressed as ratios, is different. In the former chapter, it was the norms and trends of the ratios themselves, differently compared, which were con- sidered; in this it is the manner in and the degree to which a variety of series of data, all having to do in one way or another with bank operation, are correlated with variable ratios of loans and discounts, and of investments to earning assets. The way in which the variables—both independent and dependent—are treated, in order to accomplish this purpose. is described in Chapter VIII. I. SERIES CORRELATED WITH RATIOS OF LOANS AND DISCOUNTS TO EARNING ASSETS The independent variable in the stub of Table ¢7 is the series of percentage amounts by which the yearly district ratios of loans and discounts to earning assets deviate from their respec- tive seven-year averages. The items named in the caption head- ings are the dependent variables, for each of which are given the net average percentage deviations by which the yearly ratios differ from their own seven-year district levels, selection of the districts being made according to the classification provided for in the stub. That is, the table contains the material for answering the following question: What, on the average, are the types and the net average amounts of variation from district levels, for the series named in the caption, associated with the types and percentage amounts of variation for the series named in the stub? The averages of the paired deviations in the correlated series show that (1) high and low ratios, respectively, of loans [57 TABLE 97 CorRELATION OF DistricT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages, Period 1919-1925) vd 4) on INDEPENDENT VARIABLE— Ratios of Loans and Discounts to Earning Assets A er — | Nunes : o Distance from Average District- Years Position Percentage Groups Average Per- centage Total. .... b3.27 | 39 Above 5.00and over 2.50 t0 5.00. . Under 2.<0.. 16.34 8 +3.57 15 L1.45% 16 Under 2.50. . 1.50 t0 5.00. . 5.00and over —I.21 26 -3.70 xr -7.%72 4 Below Demand deposits to Total Deposits + 0.45 + 3.56 + 1.68 - 2.20 ~ 0.30 — 2.5% +1x.71 Time Deposits to Total Deposits - 1.61 -_ 9.69 —~ 4.0 + 4.71 -~ 0.64 + 6.96 ~16.58 DEPENDENT VARIABLES—Net Average Percentage Interest and Discounts | on Borrowed Money to Earning Assets Gross Earnings to Earn- ing Assets Total Expense to Earn- ing Assets Net Earnings to Earn- Ing Assets Salaries and Wages to Earn- ng Asset Interest on Deposits to Earn- ing Assets Taxes to Earning Assets 43.77 | + 3.30 48s Vang | -1.77 |+ 41.230 | + 8.58 +8.04 +3.70 +1.70 + 5.34 + 3.45 + 2.36 t15.24 + 4.35 + 0.13 - 1.81 + 0.46 + 4.87 —5.56 —4.10 +2.20 4102.30 + 56.21 - 3.19 +14.44 + 9.35 + 4.02 | —-Y.24 —4.62 =8.43 - 1.74 ~ 2.86 —10.43 - 1.02 ~ 9.24 —- 3.58 — 0.2% + 0.66 —-14.30 +3.00 0.85 —-2_00 — 32.3% —~ 42.36 - 11.613 —- 2.61 —13.25 —-10.28 “Other Expense’ to Earn- ing Assets +r.122 +32.31 +0.14 +1.73 -0.83 —-—0.0$ -0.74 — Total. .... -2.07 1 4! + 1.23 —- 3.01 —3.34 - 3.33 2.83 I +0.52 — 31.08 | = 6.56 SERIES CORRELATED WITH EARNING ASSETS 159 and discounts to earning assets are positively correlated with high and low ratios of gross earnings, net earnings, total expense, and with each class of operating expense except interest on deposits, for which the correlation is inverse; (2) there is little or no systematic relation between high or low ratios of loans and discounts to earning assets and ratios of demand deposits and of time deposits to total deposits; and (3) with minor excep- tions, the greater the deviation, positive or negative, of ratios of loans and discounts to earning assets from ‘their seven-year average levels, the greater the net deviations of gross earnings, net earnings, and operating expense from their respective levels, That is, in general, whenever and wherever district ratios of loans and discounts to earning assets are above their average level for the period 1919-19235, the corresponding district ratios of gross earnings, of operating expense, and of net earning tend to be above their average levels, the positions being deter- mined by taking an average, algebraically, of the positive and negative deviations relative to their respective levels. It should be remembered that the average percentage deviations of each of the series paired with loans and discounts are nef amounts. If the net amount is positive, this means in general that the majority of the deviations are positive; if it is negative, that the majority are negative. See, for illustration of the frequency grouping in two series, the detail in Table g6. One further word about Table 97. The net percentage dif- ferences for the series correlated with loans and discounts refer in all cases to the number of district-years having the classified percentage dispersions indicated for loans and discounts. For instance, there were 16 district-years which, at some time or other for the years 1919-1925, had ratios of loans and discounts deviating positively from their respective seven-year levels by less than 2.50% —the average being 1.45. The net percentage deviation of these same districts for each of the related series is indicated on the line of the table bearing this amount, the average for gross earnings being + 1.70; for operating expense, +2.36. Moreover, it will be seen that the table provides net average amounts in the various series for the totals of all positive and of all negative deviations with respect to loans and discounts. These summaries, being more general than those referring to the 4 ON } TABLE 98 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DisTRICT RATIOS IN PAIRED SERIES INDEPENDENT VARIABLE— Ratios of Loans and Discounts to Earning Assets DEPENDENT VARIABLES—Net Average Percentage Change Amount of Change Number of District- Years Demand Deposits to Total Deposits Gross Earnings to, Earning Assets Total Expense to Earning Assets Interest on Deposits to Earning Assets Interest .and Discounts on Bor- rowed Money to Earn- no Acsat Time Deposits to Total Deposits Net Earnings to, Earning Assets Salaries and Wages tc Earning Assets Direction Taxes to, Farning Assets “Other Expense” to Earn- ing Assets Percentage Groups Average Per- centage Total 12 #9 4 411 Fr 1L6 22 LR oo dea aR 4-10.22 des x tT > og + 7.27 + 4.41 + 8.26 —-— 0.03 — 6.99 — 0.98 Increase 3.00 and over Tnder c.on “~ “9.41 + : j .46 YQ pie Decrease Under 5.00 5.00 and over Total a9 —%.09 SERIES CORRELATED WITH EARNING ASSETS 161 classified percentage deviations, smooth out the peculiarities from group to group and define in broader terms the relations between the corresponding deviations. For many purposes, they are more significant than are those for the percentage groups. There are, however, other ways in which the ratios in various series may be paired. While district ratios in related series may, at the same time, be above or below their respective average levels, they may or may not move in the same direction from year to year, and the rate of change in one series may bear little or no relation to that in another. Let us determine the percentage amounts of increase and of decrease from year to year in the ratios of loans and discounts to earning assets and, in a number of related series, pair each series of deviations with those of loans and discounts, year by year and district by dis- trict, according to the direction and the amount of change, summarize the changes by the use of averages, and observe the results secured. Carrying out this series of steps gives the results shown in Table 98, from which it is seen that (1) when ratios of loans and discounts to earning assets were increasing, the net direction of change was an increase in each of the series, except demand deposits to total deposits; (2) when they were decreas- ing, the net direction of change was a decrease in all series except time deposits, salaries and wages, and interest on deposits; (3) the greater the increase in ratios of loans and discounts, the greater the net change in the same direction, in time deposits, gross earnings, net earnings, and interest on borrowed money; and (4) the greater the decrease in ratios of loans and discounts, the greater the net decrease in gross earnings, net earnings, total expense, interest on borrowed money, taxes, and “other expenses.” In general, increasing ratios of loans and discounts to earning assets are accompanied by increasing ratios in all but one of the series with which they are paired; when they are decreasing by decreasing ratios in all but three of the series. High and low ratios of loans and discounts, relative to district levels, and increasing and decreasing ratios of loans and discounts from year to year, respectively, are positively correlated with high and low and increasing and decreasing ratios of gross earnings, of total expense, and of net earnings. This much is apparent from material already submitted. Let us see what effect increasing and decreasing ratios of loans and discounts 6H BANKING STANDARDS CHART 38 COMPARISON OF RATIOS OF LOANS AND Di1scouNTs TO EARNING ASSETS AND oF DEMAND DEPosiTS T0 ToTAL DEPOSITS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 LOANS mma DEMAND DEPOSITS<wwx i919 1920 1921 1922 1923 1924 1923 JISTRICTS ALL - —— eee naan 1. .BOSTON 2. NEW YORK . 3. PHILADELPHIA Cen aa 3. CLEVELAND Scales of Percentage Change -0 1 5. RICHMOND ( 0 3. ATLANTA § 10 7. CHICAGO —————— 20 ’* 8. ST Louis 5. MINNEAPOLIS 10. KANSAS CITV 1%. DALLAS a — 12. SAN FRANCISCO — a TTT een 1919 1920 1921 1922 1923 1924 1925 SERIES CORRELATED WITH EARNING ASSETS 163 TABLE 99 NET PERCENTAGE YEAR-TO-YEAR CHANGES IN DIFFERENT RATIOS CORRELATED WITH POSITION AND DIRECTION oF CHANGE IN RATIOS OF LOANS AND DISCOUNTS TO EARNING ASSETS, 1919-1925 Mer Prr~yTAGE Vrar-Tn-V>1x CHANGES RATIOS: Loans and Discounts to Earning Assets Increasing From positions above District Average... .. From positions below Distnict Average..... Decreasing From positions above District Average... .. From positions below District Average Number of District Years Rarios: Gross Earnings to Rarnine Accate ~ of RaT108: Total Expense to Famine Acsets RaT108: Net Earnings o Earning Assets +3.58 +1.06 5.22 sg = = have upon the rate of increase in each of the three series when the district ratios, increasing and decreasing, are classified by their relative positions above or below the district levels. That is, the inquiry is of the following order: Knowing that the ratios in each of these series tend on the whole to increase when loans and discounts are increasing, and to decrease when they are decreasing, are these rates accelerated or retarded when at the same time the increasing and decreasing ratios, respectively, are classified according to their positions above or below the district levels? The answer to this question, for each of the three series, is found in Table gg, from which it is seen that conditions con- ducive (1) to the greatest percentage increase in each of the series is found when loans and discounts are high and increasing, and (2) to the greatest percentage decrease in gross earnings and operating expense when loans and discounts are low and decreasing. But further comparisons are of interest for series paired with loans and discounts. If ratios of loans and discounts to earning assets for given districts and years are higher than yearly average levels for the country as a whole, are other ratios for the same districts and years higher or lower than their respective country levels? Answer to this question for certain series is found in the details in Table roo, which indicate that (1) when loans and discounts are above, gross earnings and operating expenses “64 BANKING STANDARDS CHART 30 CoMPARISON OF RATIOS OF L.oANS AND DISCOUNTS AND OF Gross EARNINGS To EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 LOANS men GROSS EARNINGS ceam: 1919 1920 1921 1922 1923 1924 1925 DISTRICTS Atl }. BOSTON 2. NEW YORK 3. PHILADELPHIA 4. CLEVELAND 8. RICHMOND 8. ATLANTA 7. CHICAGO Scales of grcentage Change 30 20 “0. oo ? ¥F : a v| re 21 0p 3. ST Louis BD. MINNEAPOLIS 10. KANSAS CITY 19. DALLAS 12. SAN FRANCIS Oz 1919 1920 1921 1922 1923 1924 1925 SERIES CORRELATED WITH EARNING ASSETS 165 TABLE 100 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country’s Yearly Averages) INDEPENDENT VARIABLE—RAatios of Loans and Discounts to Earning Assets Distance from Average Averag c Percent- age Position Tt al rr A ga Above ro and over jtoro.. Mader = So iY, a. Relow 1S pe Total Number of District. Years iw DEPENDENT VARIABLES—Net Average Percentage A... — Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets f. ® mm "om € - J == | - i; -7f Are. 50 - 3.475 -— 0. IS + 5.44 are above, and net earnings below, the country level; (2) when loans and discounts are below, gross earnings and operating expenses are below, and net earnings above, the country level. These are the net results in the three series for all ratios of loans and discounts to earning assets which were, respectively, above or below the level for the combined districts. They do not, however, hold in every case when the ratios of loans and dis- counts are classified by amounts and direction of deviation. In general, however, the greater the deviations in loans and dis- counts, the greater the net deviations—direct or inverse—in the other series. Having expressed in three different ways the relations between loans and discounts in terms of earning assets, and other series suitably measured, deviations and year-to-year changes in each of the series being paired with corresponding deviations and year-to-year changes in loans and discounts, and having found, according to the different methods, evidence of both direct and inverse relations, a synthesis of the results is required. This can take the form of a summary showing the like or unlike behavior of the respective series, when paired with loans and dis- counts, as indicated by the three methods, paired variations from district ratios and paired year-to-year changes applying to all the series, and paired deviations from country averages applying to series of gross earnings, net earnings, and total expense. 66 BANKING STANDARDS CHART 40 CoMpPARISON OF RATIOS OF LOANS AND DISCOUNTS AND OF TorAL EXPENSE TO EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1025 LOANS cme TOTAL EXPENSE am we 1919 1920 1921 1922 1923 1924 192% DISTRICTS ALL I. BOSTON 2. NEW YORK te — 3. PHILADELPHIA f. CLEVELAND 5. RICHMOND B. ATLANTA 7. CHICAGO == Scales of Jarcentage Change 9 . x] = 8 aL 0 -| -10 1.90 B. ST. LOUIS 3, MINNEAPOLIS— 10. KANSAS CITY 11. DALLAS re et a 12. SAN FRANCISCO—— ~~ owe’ : 1619 1920 1921 1922 1923 1924 1925 SERIES CORRELATED WITH EARNING ASSETS 167 1. District ratios of loans and discounts to earning assets which are above the district levels, and district ratios which are éncreas- ing from year to year, have associated with them #kigh ratios and changes in the same direction in the following series, each expressed as ratios to earning assets: Gross earnings Total expense Net earnings Salaries and wages Interest and discounts on borrowed money Taxes “Other expenses” 2. District ratios of loans and discounts to earning assets which are below the district levels, and district ratios which are decreas- ing from year to year, have associated with them low ratios and changes in the same direction, in the following series, each expressed as ratios of earning assets: Gross earnings Total expense Net earnings Interest and discounts on borrowed money Taxes “Other expenses” 3. District ratios of loans and discounts to earning assets which are above the district levels, district ratios which are increasing from year to year, and district ratios which are above the yearly levels for the country as a whole, have associated with them high ratios relative to the district level, high relative to the country level, and increases from year to year in the follow- ing series: Gross earnings to earning assets Total expense to earning assets 4. District ratios of loans and discounts to earning assets which are below the district levels, district ratios which are decreasing from year to year, and district ratios which are below the yearly levels for the combined districts, have associated with them low ratios relative to the district level, low ratios relative to the country level, and decreases from year to year, in the following series: Gross earnings to earning assets Total expense to earning assets "68 BANKING STANDARDS CHART 41 CoMPARISON OF RATIOS OF LOANS AND DISCOUNTS AND OF NET EARNINGS TO EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 LOANS cee NET EARNINGS csoa 1919 1920 1921 1922 1923 1924 1928 ae®0eg DISTRICTS ALL }. BOSTON 2. NEW YORK y. PHILADELPH! 4. CLEVELAND 2. RICHMOND Scales of Percentage Change a . Ta 6. ATLANTA 1. CHICAGO v F10 t 20 3. ST. LOuIs ). MINNEAPOL'® 10. KANSAS CITY>» 11. DALLAS 12.SAN FRANCISCO— 1919 1920 192% 1922 1923 1924 192%) SERIES CORRELATED WITH EARNING ASSETS 169 That is, in so far as positions relative to the district averages and directions of change from year to year are concerned, per- fect positive correlation occurs between loans and discounts and six other series; for these measures and for deviations from the country’s averages, it obtains between loans and discounts and gross earnings and total expense. Graphic illustrations of the relations, district by district and for the country as a whole, between ratios of loans and discounts to earning assets, and (1) ratios of demand deposits to total deposits, (2) gross earnings to earning assets, (3) total expense to earning assets, and (4) net earnings to earning assets, are shown by Charts 38, 39, 40, and 41, respectively. These charts are drawn on a ratio basis and are to be interpreted in keeping with the details relating to such charts given in Chapter VIII. They are based upon the data used in constructing Tables 97, 98, and roo. Not only is there marked correlation between loans and discounts and the series illustrated, as summarized in tabu- lar form for all districts and years, but such correlation obtains for each of the districts. 2. SERIES CORRELATED WITH RATIOS OF INVESTMENTS TO EARNING ASSETS The two parts of earning assets, as used in this study, are loans and discounts, and investments. Accordingly, when the loans and discounts are expressed as percentages of the earning assets, the complements of the amounts are the ratios of invest- ments to earning assets. Moreover, when the ratio of loans and discounts to earning assets for a given year for a given district de- viates plus (4) or minus (=) from the district or country level, or increases or decreases from year to year, the corresponding ratio of investments to earning assets deviates minus (=) or plus (4), or decreases or increases. Accordingly, it is unnecessary to dis- cuss the relations of the different statistical series to the ratios of investments to earning assets, the signs of deviations and of directions of change in the two cases invariably being opposite to those for loans and discounts. The percentage amounts of change in the two sets of ratios are, however, different, but, inas- much as, in general, the relations of each of the series to invest- ments are opposite to those to loans and discounts—the paired 170 BANKING STANDARDS series being treated in the same manner—it seems unnecessary to include tables showing such relations. Indeed, the net average percentage deviation of ratios of gross earnings to earning assets, for instance—the base being the respective seven-year district averages—is precisely the same when they are paired with ratios of investments to earning assets below or above the district levels as when they are paired with ratios of loans and discounts to earning assets above or below the same relative positions. Similar conditions obtain for the other series. Table 101 sum- marizes the types of correlation found to obtain. TABLE 101 NATURE OF CORRELATION OF PERCENTAGE DIFFERENCES AND CHANGES FROM YEAR TO YEAR OF RATIOS IN PAIRED SERIES, 1919-1025 NATURE OF MEASUREMEN1 Inde- pendenf Varia- ble Loans and Dis- counts to Earn: ing Assets(3 SERIES CORRELATED (Expressed as Ratios) Differences from District Averages Changes from Year to Year Differences from Country’s Yearly Averages Dependent Variables Direc- tion Amount Direc- tion | Amount il 1 Amount Demand Deposits to Total Deposits Time Deposits to Total Deposits Gross Earnings to Earning Assets Total Expense to Earning Assets Lo — Net Earnings to Earning Assets Salaries and Wages to Earning Assets Interest on Deposits to Earning Assets Interest and Discounts on Borrowed Money to Earning Assets Taxes to Earning Assets —— “Other Expense” to . . Earning Assets | Positive | (x) | Positive (1) | @ (2) Positive ! (x) Positive Positive Positive Positive Positive ® @ o (2) (oo! i. (2) | @ 2) (x) Ww wo @ Positive | (2) | (1] Doubtful. (2) Not computed. {3) For each of the series correlated with ratios of investments to earning assets, the nature of the correlation, so far as direction of deviation is concerned, is inverse to that found for the same series correlated with ratios of loans and discounts to earning assets. As to the amount of deviation, the type of correlation of each of these series with investments is the same as that found for them when they are correlated with ratios of loans and discounts to earning assets. X SERIES CORRELATED WITH DEPOSITS THE deposits of member banks, as noted in Chapter IV, are classified for purposes of analysis into two parts: (1) demand deposits, and (2) time deposits.! Each of these items is then expressed as percentages, first of earning assets, and second, of total deposits, in order to determine the norms and trends char- acterizing the amounts for all member banks by districts and by years. The same method of expressing the amounts is used in this chapter, the purpose of which is to find out and to measure the relations obtaining between deposits and a number of other series of banking data, measurements in the paired series relating to deviations from type—district and country averages—and to changes from year to year, deviations and year-to-year changes in all cases referring to ratios for all member banks in a district taken as a unit and being expressed as percentages. [. SERIES CORRELATED WITH RATIOS OF TOTAL DEPOSITS TO EARNING ASSETS Before discussing the relations of various series of data to demand deposits and to time deposits, both measured in terms of earning assets, brief account should be taken of the relations of gross earnings, operating expenses, and net earnings to total deposits. The problem is to determine the nature and amount of correlation of the ratios in each of these series with those of total deposits, the amounts correlated being the deviations from district averages and the year-to-year changes, and the methods of expressing the relations being the same as those described in Chapter VIII. The results, for district deviations, are contained in Table 102. This table shows that when total deposits are high—that is, above the district levels for the respective districts—ratios of “1For definitions of these terms and for a statement of the manner in which vearly figures are secured, see page 33. TT py BANKING STANDARDS TABLE 102 CORRELATION OF DisTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages, Period 1019-1925) INDEPENDENT VARIABLE—Ratios of | Total of Demand and Time Deposits to Earning Assets Distance from Average Position Percentage Groups Average Percent- age Total. — A. 67 Above QaANA OVer.....c.ovuevan OID Oicowmes ssmssrne BIB. uu eo imssmmennme Underz.............. I.29 7.74 4.54 Af Below Jnder 3... - ‘ww ww t06. coven PO smi mms me oandover.............. Cc QO Total. . i Number of District- Years 42 7 4 a ? DEPENDENT VARIABLES—Net Average Percentage —— Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets — 0 Q + 0 %4 - 5.26 1 ~ Bd 2 4 2 + + + 1.28 — 8.10 — 9.15 — 5.04 — 3.12 I! +10.10 + 2 48 4 42 + 3.66 re + “+ 0.79 + 6.13 gross earnings and of net earnings are low—that is, below the corresponding levels—and that when they are low, the ratios for both of the other series are high. These are the net results for the districts with high or low total deposits. Moreover, for every classified dispersion group, except two, this inverse condition obtains. While the relations between positions are inverse, those between percentage amounts of difference are direct. That is, the more the total deposits deviate from type, the more widely do both gross and net earnings for the same districts vary from normal. When the deviations from the district levels for total expense are paired with corresponding deviations for total de- posits, the relation of the positions, rather than being inverse, as is the case for gross and for net earnings, is moderately direct, high total deposits being generally associated with high total expense, and low total deposits with low total expense. When the directions and classified percentage amounts of year- to-year changes in gross and net earnings and in total expense are correlated with similar changes in total deposits, it is found that with all decreases, and with increases of less than 4% in ratios of total deposits, the net direction of change for the related series is upward, no exceptions being found for the groups for gross earnings and for total expense and for only two groups for net earnings. Increases of 4% and more in the ratios SERIES CORRELATED WITH DEPOSITS 173 of total deposits to earning assets are accompanied by net de- creases in gross and net earnings and in total expense, the net amounts of the decrease in these series varying directly with the amounts of increase in total deposits. Table 103 contains the detail from which these generalizations are drawn. TABLE 103 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES INDEPENDENT VARIABLE—Ratios of Total Deposits to Earning Assets Amount of Char: Direction Percentage Groups Average Jercentage Number of District- Years DEPENDENT VARIABLES—Net Average Percentage Change Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets Total Increase Decrease 5 and over... 1t06... to4... Thnder a snder 2 to. $4t06... 5 and over Total When year-to-year percentage changes of the ratios in each of these series are determined for districts with total deposits which are increasing or decreasing relative to the district posi- tions—high or low—occupied, it is found that (1) the average rate of decrease is accelerated when total deposits are high and increasing, and (2) the average rate of increase is accelerated when total deposits are low and decreasing. These rates of change for the three series, according to the varied conditions of total deposits, are summarized in Table 104. It is of interest to pair the variations of the ratios in. the series mentioned with those of total deposits when the deviations are taken from their respective country levels. When this is done, it is found that the net percentage differences from the country level, for both gross earnings and total expense, are positive— that is, the amounts are above this level—irrespective of the direc- tion or percentage amounts by which the total deposits, with which they were paired, deviate from this level. This is the rule “14 BANKING STANDARDS TABLE 104 NET PERCENTAGE YEAR-TO-YEAR CHANGES IN DIFFERENT RATIOS CORRELATED WITH PoSITION AND DIRECTION OF CHANGE IN RATIOS OF ToTAL DEPOSITS TO EARNING ASSETS NET PERCENTAGE YEAR-TO-VEAR CHANGES RATIOS: Total Deposits to Earning Assets Increasing From positions above the District Level. ... From positions below the District Level. ... Decreasing From positions above! the District Level. . .. From positions below the District Level... Number of District Years 57 27 RATIOS: Gross Earnings | to Earning Assets 1! -0.59 — 1.30 + o.05 +8.61 — 3.42 J-x1.62 RATIOS! Total Expense to Earning Assets —_0.,23 —~ 0.61 + 0.14 [412.57 — 1.55 416.10 Ratios: Net Earnings to Earning Assets 1.4% —2.33 -~0.63 40.27 —8.04 +2.34 for ratios above and below the country level. For total deposits, grouped according to percentage amounts of dispersion, there is one exception for gross earnings and two for total expense. The case, however, is different for net earnings. Low ratios of net earnings—that is, ratios below the country level—are associated with high ratios of total deposits. Contrariwise, high ratios of net earnings are accompanied by low ratios of total deposits. The detail of such comparison are contained in Table 103. TABLE 103 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country’s Yearly Averages) Position Above Below INDEPENDENT VARIABLE—Ratios of Total Deposits to Earning Assets Distance from Average DEPENDENT VARIABLES—Net Average Percentage - Bivins Number of District- Years ! Gross | Total Earnings Expense to to Earning Earning Assets Assets | Net Earnings to Earning Assets Average Percentage Groups | Percent- Total. .. +2.24 20 -+-4 .04 + 8.30 —g. 78 6andover.............. tO 0....oo0civernnsens 204. initia Under2............... Jnderz................ CEO dun so ww swe vw us ww A300. ..ouvimmas murs vy 6andover.............. Total. ...............1 i fy | 9 ‘9 : AT I +0.70 <a , of 1 +: 2 +4 i. +14. 34 — 64 + 5.37 4 2 28 —6.84 —8.17 —1.50 —_ 71 en 3 5 5 —3.81 | 45 | +2.91 | + 3.12 | +2.60 1. Coe 13 10 , cad 1. 5 ay —0.76 +6.47 +6.00 +1.21 SERIES CORRELATED WITH DEPOSITS 175 2. SERIES CORRELATED WITH RATIOS OF DEMAND DEPOSITS (1) Ratios of Demand Deposits to Earning Assets Table 106 gives, for gross earnings, total expense and net earnings, and so on, the net percentage differences of the ratios for the respective series from their own seven-year district levels, corresponding to the nature and percentage amounts of disper- sion of demand deposits in terms of earning assets. It shows, among other things, that (1) on the whole, when demand deposits, as measured, were above their district levels, gross earnings and total expense were below and net earnings were above their respective district levels; (2) when demand deposits were below such positions, gross earnings and total expense were generally above and net earnings generally below their corresponding aver- age levels; and (3) the greater the deviations of demand deposits, the greater are the net deviations, direct or inverse, in the paired series. That is, districts having relatively high demand deposits had high net earnings and low gross earnings and total expense; and those having low demand deposits had low net earnings and high gross earnings and total expense—all amounts being expressed in terms of earning assets. There are, of course, conditions other than variable amounts of demand deposits which determine those of gross and net earnings and total expense. If the percentage amounts by which the ratios for each of these series deviate from their seven-year district level are determined (account being taken of the paired positions of demand deposits and of loans and discounts, each expressed in terms of earnings assets), it is found, as summarized in Table 107, that (1) high demand deposits and low loans and discounts are associated with the lowest gross earnings and total expense; (2) low demand deposits and high loans and discounts accompany the highest gross earnings, total expense and net earnings; and (3) variations in the amounts of loans and dis- counts seem to have more influence than variations in amounts of demand deposits on ratios of net earnings, the lowest ratios occurring, however, when both demand deposits and loans and discounts relative to earning assets are below their respective district levels. But the ratios of demand deposits, as of other series, change TABLE 106 CORRELATION OF DISTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES Percentage Deviations from the Respective District Averages, Period 1919-10258) tt x N . INDEPENDENT VARIABLE— Ratios of Demand Deposits to Earning Assets —_— | Distance from Average i Pacition Percentage Average Groups Percentage Total +4 g.21 Number of District- Years Loans and Discounts to Earning Assets -r 28 DEPENDENT VARIABLES—Net Average Percentage Investments to Earning Assets Gross Earnings ! to Earning Assets Total Expense to Earning Assets + 4.45 -_2.27 =-A4 OX Net Earnings to Earning Acsets 41.08 — a ea imi Above Belaw 6.00 and over 1.00 to 6.00 2.00 to 4.00 “Inder 2.00 Under 2.00 2.00 to 4.00 4.00 to 6.00 5.00 and over Total } 10.038 + 5.12 + 2.52 kL o.70 — 0.01 - 3.10 = 4.79 - 0.46 Ie 6 0 Iz Io 2 -3.33 —~1.61 +0.82 +1. .2¢ {0.25 ~0.06 +1.83 +2. 11 La 02 +12.97 —4.79 + 4.31 —6.21 — 2.49 —0.83 —- 2.00 —-0.20 — X.I4 + 0.24 — 5.32 ~11.17 +0.905 aes 3.99 +7. 41 a7 492 62 -8.33 -6.97 —0.11 -0.0% +1.79 +3.10 +4.42 4.46 +2. 67 +4.61 —~3.95 +2.56 +0.98 -1.77 —4.54 +2.90 +7.95 -n_ 16 SERIES CORRELATED WITH DEPOSITS [77 TABLE 107 NET PERCENTAGE DIFFERENCES OF RATIOS FROM THEIR DISTRICT LEVELS CORRELATED WITH CORRESPONDING DIFFERENCES IN RATIOS OF DEMAND DEPOSITS AND OF LOANS AND Discounts To EARNING ASSETS, 1910-192¢ RATIOS! Demand Deposits to Earning Assets Above District Levels Below District Levels Average RATIOS: Loans and Discounts to Karning Assets .verage...... Above District Levels. .... Below District! .verage...... Above District Levels. ..... Jelow District! I avele .verage...... Above District Levels...... Below District Levels... Number of District- Years 5 12 26 NET PERCENTAGE DIFFERENCES FROM District LEVELS RATIOS: Gross Earnings to Earning Assets RATIOS: Total Expense to Earning Assets RaTies: Net Earnings to Earning Acsets 34% 7 -1.62 -4.Q1L —_4a 06 -T 70 an —-r 20 v6 +3.67 +6.70 -_—ry +1.92 Q ~-n.64 I +5.39 + 20 8s 8 -32.33 oo. from year to year. Let us pair the percentage changes in the related series and observe the results. Table 108, containing the net percentage changes for gross earnings, total expense, and net earnings for classified percentage increases and decreases of demand deposits, shows that (1) when the latter increase, as they do in 38 of the 72 possible instances, the net change in the three related series is downward; (2) when they decrease, the net change in these series is upward; (3) for all of the classi- fied groups except one of increase and one of decrease, net changes in the three series varied inversely; and (4) in general, the greater the rise or fall in demand deposits, the greater the net fall or rise in gross earnings, total expense, and net earnings. That is, the three series by direction of change are negatively correlated, and by amount of change positively correlated, with demand deposits. This does not mean that the nature of the change is inverse and the percentage amount of change is direct in every one of the 72 cases (six movements between 1919 and 1925, for each of the twelve districts), as between the related series, but in these cases it does mean that a large majority of them are of this type. Neither does it mean that changes in 178 BANKING STANDARDS TABLE 108 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES INDEPENDENT VAriaBLE—Ratios of Demand Deposits to Earning Assets Amount of Chane- Direction Percentage Groups Total............ Increase 6andover............. gtob...... oo... 104... iii tees Under2............... Decrease Jnder z..... to 4..... 4tob...... 6 and over. .... Total. .... Average Percent- age 2 nT Number of District- Years DEPENDENT VARIABLES—Net Average Percentage Change Gross Earnings to Earning Assets Total , Net Expense Earnings to to Earning Earning Assets Assets —_e af - —- 3.12 + 1.1§ — 8.15 — 8.24 - 0.04 1 1 97 TT ..20 gross and net earnings and in total expense are attributable alone to the relative amounts of demand deposits. It is shown above that the amounts of dispersion in these series from their district levels are functions of the amounts of loans and discounts. A simi- lar functional relationship occurs in the year-to-year changes. If the net changes are measured for districts with increasing and decreasing ratios of both demand deposits and loans and dis- counts, the results shown in Table 109 are secured. To illustrate: The net year-to-year changes in ratios of gross earnings, of total expense, and of net earnings were downward in districts having increasing ratios of demand deposits. But for districts which had increasing ratios of demand deposits and of loans and discounts, the net change in each of these series was upward. On the other hand, while the net change in ratios of gross earnings, of total expense, and of net earnings for dis- tricts with decreasing ratios of demand deposits was upward, the rate of change in each of the series was accelerated in districts having decreasing ratios of demand deposits and increasing ratios of loans and discounts. Briefly, and in summary of Table 109, it is seen that conditions associated with the greatest falls in gross earnings, in net earnings, and in total expense are increasing demand deposits and decreasing loans and discounts; those SERIES CORRELATED WITH DEPOSITS 179 associated with highest rises are decreasing demand deposits and increasing loans and discounts. Demand deposits which are high or low relative to the district levels and which are increasing or decreasing from year to year may be above or below the level for the country as a whole. The same is true of each of the other series being discussed. It is TABLE 109 NET PERCENTAGE CHANGES FROM YEAR TO YEAR IN RATIOS CORRE LATED WITH CORRESPONDING CHANGES IN RATIOS OF DEMAND DErosits AND OF LoANS AND Di1scOUNTS To EARNING ASSETS, 1919-1925 RATIOS: Demand Deposits 0 Earning Accepts Increasing Decreasing A ————————— Average RATIOS: Loans and Discounts o Earning Accete iverage ncreasing Nacrsacing Average acreasing Nacreagie — Average Increasing Decreasing Number of District- Years ‘» NET Prprevrane CHANGYF »e ut Vreap 10 YEAR RATIOS: Gross ! Earnings to Earning Assets RaTt10S: Total Expense to Earning Assets Ratios: Net Earnings to Earning Assets —~2.12 A= . 89 ‘2 >. 40 IN y 3 ew 8 L230 La.r6 jab] ® og - ob +12.46 —d.43 of interest, therefore, to pair the ratios for such series with those for demand deposits, the items correlated being the district devia- tions of the respective ratios from the corresponding yearly aver- ages for the combined districts. When this is done, the details in Table 110 are secured. This table shows that when demand deposits relative to the country level were high, the net positions of the ratios of gross earnings, of net earnings, and of total expense, judged by the same standard, were high. When demand deposits were low, gross earnings and total expenses were high, while net earnings were low. That is, relatively high amounts of gross earnings and of total expense are associated with either low or high amounts of demand deposits. It is net earnings alone which seem to be influenced, so far as position is concerned, by that of demand deposits. Yet, even in this case, direct correlation is not com- plete when the dispersion groups are considered. Obviously, fac- tors other than the relative amounts of demand deposits influence 180 BANKING STANDARDS gross earnings, total expense, and net earnings. What is said here, as in other places respecting the correlation of related series, is not necessarily intended to imply a causal order between the series discussed. Such a relation may obtain, but more than statistical devices are required to determine it. TABLE 110 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country’s Yearly Averages) INDEPENDENT VARIABLE—Ratios of Demand Deposits to Earning Assets Position - Distance from Average Percentage I Average Groups . Percent- i 1 AECL +12 36 Total. .............. Above 20 and over............ IOI0 20... 00ias sarnsnn Underzo.............. ol 42 QA Below Underzo.............. oto20................ 2oand over. ........... Total. ouisunisans sna =IZ Number of District- Years ~n » DEPENDENT VARIABLES—Net Average Percentage Gross Earnings ~ Earning Aggets Total Expense to Earning Assets Net Earnings to Earning Assets + 2.85 ” ~ ag - 10 t.no = ar 1 26 + .80 - 36 ~1 BN] E 8 TT Based upon the various types of summaries given above in tabular and in generalized form, it appears, therefore, that (1) demand deposits and gross earnings, and demand deposits and total expense, each being expressed as ratios of earning assets, are negatively correlated when measurements are made in terms of their respective positions relative to district levels and accord- ing to their directions of change from year to year, but that they are positively correlated in both respects according to net percentage amounts of deviation and of change; (2) net earnings are high when demand deposits relative to the country and to the district levels are high, and they decrease from year to year when ratios of demand deposits increase; (3) districts having demand deposits above and loans and discounts below their own levels have the lowest gross earnings and total expense, those with both demand deposits and loans and discounts below these levels have the lowest ratios of net earnings, and districts with demand deposits below and loans and discounts above their levels have the highest gross and net earnings and total expense; and SERIES CORRELATED WITH DEPOSITS 181 (4) districts with demand deposits increasing and with loans and discounts decreasing from year to year have the greatest decreases in gross and net earnings and in total expense. The increases in these ratios are highest in districts with ratios of demand deposits decreasing and with loans and discounts increasing. But demand deposits may also be measured in terms of total deposits, and with their variations from type and changes from year to year similar variations and changes in other series may be correlated. A study of this nature follows. (2) Ratios of Demand Deposits to Total Deposits The deviations of the district ratios of demand deposits to total deposits for the several districts and years, when meas- ured by percentage group-amounts, plus and minus, from the respective district levels for the period 1919-1925, are contained in the stub classes of Table 111. If, for the ratios thus classi- fied, the net percentage dispersion is determined for related series, corresponding districts and years being paired, the figures shown in the caption classes (the columns) are secured. It is these amounts in relation to variable ratios of demand deposits which may be observed for evidence of systematic association. [t is unnecessary to specify the relations for all of the series because they are generally apparent from an inspection of the table. Accordingly, attention is directed to those between varia- tions in demand deposits and in gross earnings, total expense, and net earnings, inasmuch as for these series comparisons are available with demand deposits measured in units, first, of 2arning assets,? and second, of total deposits. When district ratios of demand deposits to total deposits are above their respective levels, gross earnings and total ex- pense are below and net earnings are above their respective district levels. When demand deposits are below, relations the inverse of those just noted hold for each of the different series. Conditions similar to these were observed when demand deposits were expressed in terms of earning assets. In terms of both measurements, therefore, low gross earnings and total expense and high net earnings are associated with relatively high demand deposits, while high gross earnings and total expense and low 2See Table 106, page 1%6. TABLE 111 CORRELATION OF DistrICT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages. Period 1919-1925) =) >] AN) INDEPENDENT VARIABLE— Ratios of Demand Deposits to the Total of Time and Demand Denosits Distance from Average Average Per- centage | Position —————— Total + 8.77 | Number of istrict] Vears 3 | Loans and Discounts to Earning Assets “40.32 DEPENDENT VARIABLES—Net Average Percentage [nvest- ments to Rarning Agcete | Gross Earnings to Earning Assets Total Expense to, Earning Assets Net Earnings to Earning Assets Salaries and Wages to Earning Aqcets Interest on Deposits to Earning Accatg — 0.32 | —1.44 —4.44 | +6. 32 —11.17 — 0.50 Interest and Discounts on Borrowed Money to Earning Assets 445.88 { Taxes to Earning Acsets 42.10 |! “Other ©xpense”’ to, Zarning Assets -6.75 Above Ralow 10.00 and over|+14.28 14 5.00 to 10.00 | + 7.12 | 9 [Inder 5.00 + 2.56 10 Jnder 5.00 - 2.68 ;-00 tO 10.00 |- 7.00 :0.00 and over! -v0.53 af T —2.26 +0.22 +2.08 ~0.14 -0.44 -1.70 + 7.14 1 0.44 -TX.A4A4 + 0.23 + ~.os2 - 4.40 -6.03 ~4.03 +17.8¢ +1.43 -—0.07 +0. 88 ~—9.25 =90.23 L8.62 +2.57 tr.76 4 21 +2.66 +8.87 40.8% -2.07 -7.30 -7.04 —17.67 ~16.33 + 2.¢8 F 5.54 - 8.62 ~ R68 —11.76 —11.42 — 4.02 + 3.42 + 8.24 14.20 +33.55 126.69 +80.432 —13.04 —49.43 -21.06 — 1.02 —~ 3.86 lyna ya 1.21 t x ra = ¢ 11 —12.36 + 4.50 + 3.31 4.35 L 2.28 — Total I.) ——y Tq I + 0.64 +0.87 Laer —17.%0 b+ 6.37 + 5.31 —c cy | + 3.43 SERIES CORRELATED WITH DEPOSITS 183 net earnings accompany relatively low demand deposits. These relations obtain not only for demand deposits, positively and negatively placed relative to the district levels, but also in gen- eral for the respective dispersion groups. For the other series which, in Table 111, are paired with demand deposits, inverse relations are found between the devia- tions of demand deposits and those of salaries and wages, interest on deposits, and “other expense”; for interest on borrowed money, and for taxes, the relations are direct. Let us measure the net amounts by which the ratios of gross and net earnings and of total expense deviate from their respec- tive district averages in the districts having both variable demand deposits and variable loans and discounts. The results secured from this approach, found in Table 112, indicate that (1) gross earnings and total expense are lowest for districts having demand deposits, measured in the indicated manner, above, and loans and discounts below their respective district averages, while net earnings are lowest in districts having both series below their levels; and (2) gross earnings and total expense are highest in TABLE 112 NET PERCENTAGE DIFFERENCES FROM THEIR DISTRICT LEVELS FOR RATI0S CORRELATED WITH CORRESPONDING DIFFERENCES IN Ratios oF DEMAND DEPOSITS TO ToTAL DEPOSITS AND OF LoANs AND Discounts TO EARNING ASSETS, 1919-1925 NET PERCENTAGE DIFFERENCES FROM DistricT LEVELS RATIOS: Demand Deposits to Total Deposits Above District Levels Below District Levels Average Rarios: f.0ans and Discounts to <arning Assets \verage...... \bove District Levels. ..... Jelow District Levels .... verage...... Above District Below District! Levels .verage...... Above District Levels. ..... Below District Levels...... Number of District. ‘Years 33 a7 vi -2 -—y 45 RATIOS: Gross Earnings to Earning Assets -T 44 12 RE -6 o1 +0.89 +4.48 1 —31 87 CM, A +3.77 —-3.34 | RATIOS! Total Expense to Earning Assets -—4.44 +0.77 ~-0.07 +2 fa +5.41 +0 24 —0.21 +3.39 —3.33 Ratios: Net Earnings to Earning Assets +6.53 +8.33 tr 6 IL9 +2.16 a nf +. +4.8s —13.48 TABLE 113 -v d CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES —— = INDEPENDENT VARIABLE— Ratios of Demand Deposits to Total of Time and Demand Deposits Amount of Change | DEPENDENT VARIABLES—Net Average Percentage Change i det co——— Sumber of Tistrict- Years Loans and Discounts to Earning Assets [nvest- ments to Earning Accets Gross Earnings + to Sarning Assets Total Expense to Earning Assets | Net Farnings to Earning Assets Salaries and Wages to Rarning Accete Interest on Deposits to Earning Accote "Interest and Discounts on dorrowed Aoney to Earning Accets Taxes to, Earning Assets " “Other Expense” to Earning Assets Direction Percentage Groups Average Per- | centage —— Total rv za | v | —a 62 i 4 0.00 | — 2.31 — 3.33 | 41.17 - XI.IO +2.88 —354.33 — 5.26 - 1.56 Increase .00 and over] Inder 2.00 +a.18 | 2 | —6.00 | 40.48 Lo.72 g —I.24 + 4.81 - 2.5 i — 2 29 — 4.39 | -_ 2 00 46.75 -¥ 0% — 3.16 —- 0.27 +1.35 +4.80 —~64.85 —50.I3 — 6.44 —- 4.00 —- 8.70 {+ 0.10 Inder 2.00 .00 to 4.00 +00 to 6.00 ronan over —X.04 -2.08 —5.14 =8 62 20 I ~-I.34 24 41.62 Io {1.02 rr on BT + 5.49 - 2.69 - 3.14 - Q ar — 3.86 + 1.70 + 2.66 =TT OA — 3.14 + 2.02 + 3.73 Lr 02 -5.02 40.69 -0.14 la fz + 0.34 4 5.00 + 6.27 +17 68 1 +3.87 +2.35 +5.01 +8.28 25 - 3s bac. 87 - 5-63 — 1.84 + 1.10 4-13.23 | — 0.33 + 2.45 + 3.84 x2.27 Decrease Total | —2.67 J 6¢ 40.78 — 1.10 + 1.72 | 4 3.07 | -1.32 ! + 5.01 | +4.28 .K8 += 0.00 + 3.64 SERIES CORRELATED WITH DEPOSITS 185 TABLE 114 NET PERCENTAGE CHANGES FROM YEAR To YEAR IN RATIOS CORRELATED WITH CORRESPONDING CHANGES IN RATIOS OF DEMAND DEPOSITS TO ToTAL DEPOSITS AND OF LOANS AND DISCOUNTS To EARNING ASSETS, 1919-1925 RATIOS: Demand Deposits to Total Deposits [ncreasing Decreasing Average RATIOS: ~oans and Discounts to Earning Assets iverage ncreasing decreasin— verage creasing Yarraaninme \verage ncreasing decreasing Number of District- Years NET PrRRCENTAGF MIANGFS PROM VFAR TO YEAR RATIOS: Gross Earnings to Farnine Assets RATIOS: Total Expense to Earning Assets RaTI0S: Net Earnings to Earning Assets 1Y ] -2.12 — > 40 em 1.17 +10.62 - 5 ~ districts having demand deposits below and loans and discounts above their average district levels; while net earnings are high- est in districts having both series above these levels. Except for net earnings, where the differences are slight, the same conditions obtain for these series of data when the net differences from their district averages are determined for paired variable amounts of demand deposits and loans and discounts both in terms of earning assets.3 In Table 113, year-to-year changes between 1919 and 1923, for ratios of demand deposits to total deposits, are classified by percentage amounts and directions, and for each of such classes the net percentage changes are determined for related series, the method being the same as that previously used. If attention is directed to the three series, gross earnings, total expense, and net earnings, it is found that the relations between the ratios in each of them and ratios of demand deposits are the same as those indicated by the total lines in Table 111. Moreover, changes in the ratios of gross earnings and of total expense are related in the same manner to ratios of demand deposits to total deposits as they are to ratios of demand deposits to earning assets.* That is, the types of relations between demand deposits and gross earn- " 3Gee Table 107, page 177. ¢ See Table 108, page 178. ‘RQ BANKING STANDARDS CHART 42 CoMPARISON OF RaTros or DEMAND DEposiTs TO TOTAL DEPOSITS AND OF GROSS EARNINGS TO EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 DEMAND DEPOSITS cee ~~ GROSS EARNINGS wwe 1919 1920 1921 1922 1923 1924 192% DISTRICTS ALL ). BOSTON 2. NEW YORK 3. PHILADELPHIA —— ts ke te Se. 4. CLEVELAND eo ,o - SS. RICMMOND —— $. ATLANTA - Scales of *arcentags Change 0+ 330- 20 7. CHICAGO 8. ST. Louis 9. MINNEAPOLIS sn 10. KANSAS CITY. tl. DALLAS le a. 12.8AN FRANCISCO— == 1919 1920 1921 1922 1923 1924 1928 SERIES CORRELATED WITH DEPOSITS 187 ings and demand deposits and total expense seem to be inde- pendent of the units in which deposits are expressed and of the types of details which are correlated. The general direction of year-to-year changes, between 1919 and 1925, of ratios of demand deposits to total deposits was downward, district by district, this fact already having been noticed in Chapter IV. Of the 72 changes for all districts, 65 were downward, and for districts with ratios moving in this direc- tion, the corresponding net direction of change in ratios of gross earnings, total expense, salaries and wages, of interest on de- posits, and of “other expense,” was upward; for ratios of net earnings and of interest on borrowed money, it was downward, the relations in each of the paired series being identical with those found to obtain when the net deviations from district levels for these series were determined for districts having ratios of demand deposits to total deposits below their respective district levels.’ But what is the net direction of change from year to year for the three series, gross earnings, total expense, and net earnings for districts with ratios of demand deposits to total deposits and of loans and discounts to earning assets, respectively, increasing or decreasing, account being taken of the nature of the changes simultaneously? The results of such an analysis are found in Table 114. Because of the fact that demand deposits relative to total deposits generally decreased from year to year, the lower section of the table, containing the bulk of the instances, is the part which is significant. In this group of districts, ratios of gross earnings and of total expense increase and those of net earnings decrease. For the districts which have decreasing ratios of demand deposits to total deposits and at the same time increas- ing ratios of loans and discounts to earning assets, however, the rates of increase in gross earnings and in total expense are greatly accelerated, and the decrease in net earnings is changed into an increase. Moreover, when ratios both of demand deposits and of loans and discounts decrease, the net results are decreases in all three series, the largest percentage amount applying to net earnings. Ratios of demand deposits to total deposits in each district may be measured with respect to the level for the country as a whole, the differences being expressed by signs and percentage “ESee Table 111, page 182. 88 BANKING STANDARDS CHART 43 ComprArISON OF Ratios oF DEMAND DEPOSITS T0 ToTAL DE- POSITS AND OF ToTAL EXPENSE To EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 DEMAND DEPOSITS cuane TOTAL EXPENSE cca 1919 1920 1921 1922 1923 1924 192% Rr — aaltSaas i. BOSTON Trea an 2. NEW YORK 3. PHILADELPHIA—— ot S— 4. CLEVELAND —- 8. RICHMOND & Scales of Percentage Change 40 ~ 30- 20- 6. ATLANTA 1 a 7. CHICAGO 98. ST. Lous 9. MINNEAPOLIS 10. KANSAS CITY 11. DALLAS Temes secon 12.8SAN FRANCISCO. nee @eosans 0008 rteen coe” Senay? ———— EEE wr T— 1919 1920 1921 1922 1923 1924 192% 2 Sy x on Ss > SERIES CORRELATED WITH DEPOSITS Zbybliothck 3 2 : amounts. A summary of such measurements is contained I (the NO stub of Table 115. If, for such classes as there shown, the & * fig)» deviations of loans and discounts, of gross earnings, of total ex- pense, and of net earnings—each expressed as ratios of earning assets—from their respective country levels are calculated, the detail in the columns are secured. An inspection of the results obtained by pairing the deviations of demand deposits and those TABLE 115 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country's Yearly Averages) INDEPENDENT VARIABLE—Ratios of Demand Deposits to Total of Demand and Time Deposits Distance from Average Position Percentage Groups Average Percent- age Total Lys a+ Above oto 30..... oto20.... [Inder 10 Below Jnder 10. 10 to 2{, 20 to 20. Number of District- Years Loans and Discounts to Earning Assets DEPENDENT VARIABLES—Net Average Percentage Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets - Zz £m % 4 Total _ of each of the other series shows that (1) gross earnings and total expense are high for districts having either high or low amounts of demand deposits, the net amounts, however, in both cases, being higher when demand deposits are high than when they are low; and (2) net earnings are generally high when de- mand deposits in relation to total deposits are high, and low when they are low. Conditions similar to those enumerated under (1) and (2) are found when the net positions for the respective series are determined for variable demand deposits expressed in units of earning assets, and when the paired deviations are differ- ences of the ratios from their respective country averages. The results are the same not only for the general, but also for the detailed classification, “same” meaning directions rather than percentage amounts of deviation. It is difficult briefly to summarize these varied relations, and QQ BANKING STANDARDS CHART 44 CoMPARISON OF RATIOS oF DEMAND DEPosITS TO ToTAL DE: POSITS AND OF NET EARNINGS To EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 DEMAND DEPOSITS come NET EARNINGS gerne 1919 1920 1921 1922 1923 1924 1928 DisYR cre ALL -~ - a ~ a 3. BOSTON 2. NEW YORK - $. PHILADELPHIA— 8. CLEVELAND - Scales of Percentaga Change . 3. RICHMOND §. ATLANTA J. CHICAGO # ST. Louis DP. MINNEAPOLS 10. KANSAS CITY. ]3. DALLAS 12. SAN FRANCISCO - “ou ar 1919 1920 19520 1922 192) 1924 1928 SERIES CORRELATED WITH DEPOSITS 191 others which may be observed from the tables in this chapter, but the following generalizations may be of some service in this respect. 1. Yearly district ratios of gross earnings and of total expense are generally low, relative to their respective district seven-year levels, when district ratios of demand deposits to total deposits are high with respect to their levels, and generally decrease from year to year when demand deposits increase. Inverse relations obtain when demand deposits are low and when they are decreas- ing. The same respective relations obtain when demand deposits are measured in terms of earning assets. 2. Yearly district ratios of net earnings are generally high, relative to their respective seven-year district levels and to their respective yearly country levels, when district ratios of demand deposits are high. 3. Ratios of gross earnings and of total expense to earning assets are lowest in districts in which ratios of demand deposits to total deposits are high and ratios of loans and discounts to earning assets are low. Ratios of net earnings to earning assets are lowest in districts in which ratios of demand deposits to total deposits and of loans and discounts to earning assets are low. Conversely, ratios of gross earnings and of total expense are highest in districts in which ratios of demand deposits are low and loans and discounts are high, while ratios of net earnings are highest in those districts having high ratios of both demand de- posits and loans and discounts. The relations between demand deposits as ratios of total deposits and gross earnings, total expense, and net earnings, respectively, expressed in terms of earning assets, are shown by districts individually and combined in Charts 42, 43, and 44. The bases upon which these charts are drawn and the manner in which they should be interpreted are described in Chapter VIII. The norms and trends of each of the series separately have already been summarized. The charts are designed to show the similarity and the percentage amounts of the deviations of the yearly ratios from their respective district levels, and the nature and percentage amounts of change from year to year between the respective correlated series. They supplement the tables presented above, inasmuch as they show that whatever BANKING STANDARDS is true for the paired districts as a whole tends, generally, to be true of them individually. 192 3. SERIES CORRELATED WITH RATIOS OF TIME DEPOSITS Section 2 of this chapter was concerned with an analysis of the relations between the ratios in various series of bank data and demand deposits expressed, first, as percentages of earning assets, and second, as proportionate parts of total deposits. Sec- tion 3 pertains to the interrelation of certain of these series with time deposits, use being made not only of data for all member banks as a unit in each district, but also of groups of banks in the Boston district. (1) Ratios of Time Deposits to Earning Assets In Chapter IV, section 4, the norms and trends of ratios of time deposits to earning assets and to total deposits were de- veloped in detail. While there is no occasion for repeating even in summary what has already been said in this connection, the major conclusions are germane to the present discussion. Our purpose now is to determine the type and amount of correlation between different banking series and time deposits, by the use of methods similar to or identical with those already employed. The first approach to this problem is to classify into suitable groups the percentage differences, plus and minus, of the district ratios of time deposits to earning assets from their respective seven-year district levels, and for each group, as classified, to determine the net percentage deviations of other ratios from their district averages, the districts and years in all cases being paired. The results secured for three series of data, as given in Table 116, indicate the following relations: (1) high and low ratios of gross and of net earnings are associated, respectively, with low and high ratios of time deposits—that is, the correlation is in- verse; (2) high ratios of total expense in terms of earning assets and of gross earnings are associated with high ratios of time deposits, and low ratios of total expense with low ratios of time deposits—that is, the correlation is direct; and (3) the larger the variations of time deposits from the district levels, the larger the variations, direct or inverse, in the other series, such relations being particularly systematic for ratios of total expense to gross SERIES CORRELATED WITH DEPOSITS 103 earnings. In summary, then, it is seen that relatively high time deposits, in relation to earning assets, are associated with low gross earnings, high total expense, and low net earnings; and that relatively low time deposits accompany high gross earnings (the relation is not marked), low total expense, and high net sarnings. But variations in ratios of the total expense and of the earnings of banks individually or collectively are, of course, attributable TABLE 116 CorrRELATION OF DisTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages, Period 1910-1925) INDEPENDENT VARIABLE—Ratios of Time Deposits to Earning Assets Dictanra from Average Position Percentage | Groups Average Percent. age Total bya 02 Above jo and over... roto 30..... '0t020...... Tnder vo 1'34.79 {-22.08 L14. 70 Realow nder 10.... otozo..... oto 30..... io and aver. Total... Number of District. Years DePENDENT VARIABLES—Net Average Percentage Gross Earnings to Earning Assets Total Expense to Earning Assets Total Expense to Gross Earnings Net Earnings to Earning Assets rw ds ~< te ~~ i to conditions other than variable amounts of time deposits. This fact is apparent so far as groups of banks are concerned, from the detail in Table 117, account being taken of the effect on ex- penses and earnings of variable ratios of time deposits and of investments. The amounts in this table indicate that (1) gross and net earnings ratios are highest in districts having both time deposits and investments low, while total expense is highest in districts with time deposits high and investments low; (2) gross earnings and total expense are lowest in districts having time deposits below and investments above their respective district levels, while net earnings are lowest in those in which both time deposits and investments are relatively high; and ( 3) relatively large ratios of time deposits and of investments are conducive 104 BANKING STANDARDS to low, and small time deposits and investments conducive to relatively high net earnings. So much for the prevailing types of association between each of these series and varying amounts of time deposits and of investments, the bases of comparison being the differences of the district ratios from their respective seven-year average levels for the period 1919-1925. TABLE 117 NET PERCENTAGE DIFFERENCES FROM THEIR DISTRICT LEVELS FOR Ratios CORRELATED WITH CORRESPONDING DIFFERENCES IN RATIOS OF TIME DEPOSITS AND OF INVESTMENTS 10 EARNING ASSETS, 1919-1925 Rarios: Time Deposits to Earning Assets , Above District Levels Below District Levels I eee ere Average RATIOS: Investments to Earning Assets Number of District- Years Average...... 4§ Above District! Levels... | 30 Below District! Levels..... 15 Average...... Above District Levels...... Below District Levels. .... 39 15 Average...... Above District Levels...... Below District Levels...... 29 NET PERCENTAGE DIFFERENCES FROM District LEVELS RATIOS: Gross Earnings to Earning Assets RarTios: Total Expense to Earning Assets RATIOS: Net Earnings to Earning Assets +1.56 + 0.40 + 3.88 +0.32 -2.20 oT —6.75 —10.80 +4.74 + 3.08 —0.04 —o.21 — —3.34 1 — 3.33 +3.77 + 3.30 =5.55 -7.35 ~1.97 +7.24 +4.24 B +9.11 to.30 —3.48 +4.85% But whatever positions the ratios in the various series may have relative to their own levels, they change from year to year. Do they tend to change in the same or in an opposite direction; are the percentage amounts of change related in any way; and what are the effects upon gross and net earnings and upon total expense of changes, first, of time deposits alone, and second, of both time deposits and investments? These questions are an- swered in the details in Tables 118 and 119. Table 118 shows the net direction and percentage amounts of change from year to year of ratios of gross earnings, of total expense, and of net earnings, associated with classified percent- age changes of time deposits. For districts showing increases in time deposits, the net change was an increase in gross earnings SERIES CORRELATED WITH DEPOSITS 195 TABLE 118 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES INDEPENDENT VARIABLE—Ratios of Time Deposits to Earning Assets Direction Amount of Change -_— 7 17 Average Percentage Percent- Groups ape Number of District- Years DEPENDENT VARIABLES —Net Average Percentage Change Gross Earnings > Earning crates Total Expense o Earning Aceate Net Earnings o Earning Accate T'atal Increase Decrease 's and over........ ‘oto xs... to ro... g (VT - Und-- NL and in total expense, and a net decrease (slight) in net earnings. For those in which time deposits increased by as much as or more than 10%, there was a net increase in all three series; for those with increases of less than 10%, the types of change for the dis- persion groups are less consistent. While the year-to-year changes in ratios of time deposits to earning assets were upward in all of the districts, except Minne- apolis between 1919 and 1920, the ratios of investments to earn- ing assets in some districts were increasing and in others decreas- ing from year to year. What were the net directions and changes in ratios of gross earnings, of net earnings, and of total expense in districts in which both time deposits and investments were increasing, and in those in which time deposits were increasing and investments decreasing? While on the whole, a net increase in gross earnings of 1.39% is associated with increasing ratios of time deposits, the rate is increased to 6.60% in the districts in which ratios of time deposits are increasing and ratios of in- vestments decreasing. On the other hand, gross earnings ratios show a net decrease of 3.40% in the districts in which ratios of both time deposits and investments increase. Not only are gross earnings ratios relatively low when time deposits and investments expressed as ratios are high,® but their average net change is downward when both of these ratios increase from year to year. The relations of increasing and of decreasing time deposit and 6 See Table 11%, page 194. 196 BANKING STANDARDS investment ratios to the three series are summarized in Table 119, from which it is found that all three series (1) decrease when both time deposits and investments increase and (2) in- crease when time deposits increase and investments decrease. TABLE 110 NET PERCENTAGE CHANGES FROM YEAR TO YEAR IN RATIOS CORRELATED WITH CORRESPONDING CHANGES IN RATIOS oF TIME DEPOSITS AND OF INVESTMENTS TO EARNING ASSETS, 1910-1025 NET PrecENTAGE CHANGES FROM YEAR TO YEAR RATIOS: Time Deposits to Earning Assets RaTti0S: Investments to Earning Assets Number , of District- Years Ratios: Gross Earnings to Earning Assets | Ratios: | Total Expense to Earning Assets RATIOS: Net Earnings to Earning Assets re een Increasing Average 71 41.390 ncreasing | 37 —3.40 Decreasing 34 +6.60 iverage - —3.34 increasing | _— ee Decreasing 1 —3.34 Average 72. +1.33 Increasing 37 —3.40 Decreasing 35 46.32 +3.47 +o. " 56 R 40.56 — 0.89 — 4.42 + 2.96 —14.72 —14.53 Decreasing Average | ort —-_— 7 “+z — 4.42 + 2.46 One further type of comparison of the ratios of time deposits to earning assets with other statistical series should be made before closing this section of the discussion. It relates to the district ratios of time deposits relative to the average for the country as a whole. It is patent that if the ratios in certain dis- tricts are above, others are below this level, but it is not apparent that the districts with ratios above (or below) this level have gross earnings, total expense, and net earnings at the same time above (or below) the country averages for the respective series. From what has been said, however, it might be assumed, since ratios of time deposits to earning assets which are high relative to district levels, or which increase from year to year, tend to be associated, respectively, with high or with increasing ratios of total expense to earning assets, for instance, that districts in which the ratios of time deposits to earning assets are higher or lower than the country level would tend to have ratios of total expense to earning assets higher or lower, respectively, than the country level. But such is not the case for all districts holding SERIES CORRELATED WITH DEPOSITS 197 these positions, nor for those with different amounts of dispersion on either side of the average figure. It is true, however, that net earnings tend to be low in districts in which ratios of time deposits are above the country levels, and to be high in those which are below these levels, although these relations do not hold for all of the dispersion groups. Table 120, showing the association of the paired ratios with respect to the country levels, summarizes the various relations found to obtain. TABLE 120 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Countrv’s Yearly Averages) a Pacition Ahave Relaw INDEPENDENT VARIABLE— Ratios of Time Deposits to Earning Assets — Distance from Average Percentage Groups Average Percent- Age T™tal Lan AR Ao and over. 40 to bo... 10t040.. Turia ry. s an! Number of District- Years DEPENDENT VARIABLES—Net Average Percentage _Gross Sarnings to Earning Accete Total Expense to Earning Accate Net Earnings to Earning Asseta I. -— ZL re (2) Ratios of Time Deposits to Total Deposits Total deposits of member banks, as used in this study, are the total of demand and of time items. Accordingly, when the respective amounts are expressed as percentages of the total de- posits, the percentages added together equal 100. Moreover, if in a given district for a given year, the ratio of demand deposits is above the district average, the ratio of time deposits is below this level, but not by the same percentage amount. Similarly, if a district ratio of demand deposits increases from year to year, the corresponding district ratio of time deposits decreases. In fact, in each of the three methods of measuring the ratios—plus and minus deviations from district and from yearly country levels, and also plus and minus changes from year to year—the signs for demand and for time deposits, expressed as percentages of TABLE 121 CORRELATION OF DISTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES {Percentage Deviations from the Respective District Averages, Period 1010-102¢) -y D ba) INDEPENDENT VARIABLE— Ratios of Time Deposits to Total of Time and De- mand Deposits Distance from Average ' Number of istrict Years [nvest- ments to Rarning Assets Position Percentage Grouns Average Per- | centage Total | 8.66 | [3 ¢ + 0.64 | Ahave 10.00 and over] +25.64 4 0.00 to 20.00! 4-13.87 15 Inder 10.00 L 4.00 32 7.03 F :.56 —- 1.06 Inder 10.00 | —4.63' 10 | 10.00 to 20.00 | 14.85 vs 10.00 and overl 20.c=0 —11.13 + oz Vov.ad Relaw Tatal |—17.48 33 | — 0.32 Gross | Earnings to Earning Assets Lo0.87 | -2.17 -1.37 La 209 +5.43 -1.%9 77 -—Y An DEPENDENT VARIABLES—Net Average Percentage Total Expense to Tarning Accets Total Expense to Gross Earnings Net Farnings to Earning Assets Salaries and Wages to Tarning Accets Interest on Deposits to Earning Assets + 2.53 +1.68 - 2.80 +6.37 + 5.31 + 0.30 tb or.47 + 2.20 +2.61 +2.86 1 02 —- 7.07 —~ 8.34 - 0.006 }- 8.58 + 6.33 L 6.12 + 7.97 t10.22 = 2 68 t+ 4.22 - 6.18 -20.00 ~1.19 ~4.41 -2.47 {+ 8.7x $10.32 + 1.28 + 0.10 —~13.44 -18.47 - "ef -i ~14.0" - 4.44 i 1 -2.00 ! + 6.22 -TT.%%7 - 0.80 Interest and Discounts on Borrowed Money to Tarning Assets —25.51 | —74.10 —52.00 —- 6.07 +67.76 go nt {27 2k d4¢. 88 | Taxes | “Other to Expense” Earning to Assets Earning Assets — 0.63 | + 3.42 —~18.34 —- 8.55 <4 £.26 + 4.55 4+ 2.84 + 3.58¢ i 8.26 nl. EP” - OO 26 + 1.84 a ~-712.13 4- 2.10 — 6.7 SERIES CORRELATED WITH DEPOSITS 199 total deposits, are invariably opposite. This condition, however, does not necessarily hold when the deviations by type are clas- sified into percentage groups, and when the net deviations or year-to-year changes are calculated,” although it is required for the averages of all plus and minus deviations.? Moreover, since for any district, if the ratio of demand deposits to total deposits is above, the corresponding ratio of time deposits to total deposits is below the district average, it follows that the average net deviation in any series paired with demand deposits above the district level is the same as the net deviation in that series paired with the time deposits below the district level.? Similar relations hold for net year-to-year changes and net devia- tions from yearly averages. Accordingly, having determined the net deviations and year-to-year changes in a number of series paired with variable amounts of demand deposits in terms of total deposits, it is unnecessary to discuss at length similar rela- tions between these same series and variable time deposits. Table 121, for each of a number of series of bank data, gives the net deviations from the seven-year district levels obtaining in districts having ratios of time deposits to total deposits deviat- ing by sign and classified percentage amounts from the corre- sponding levels. The relations here shown are, in general, and as is indicated above, the reverse of those given in Table 111, but differ for certain of the dispersion groups. It will be observed that total expense is expressed in units of earning assets and of gross earnings, and that when time deposits are high or low, such expense is high or low, respectively, as thus measured. These are the relations for the country as a whole, the correlations applying to yearly district ratios relative to the levels obtaining for the period 1919-1925. Do such relations hold for groups of banks in any one district? Fortunately, an answer to this question is available from studies made by the Federal Reserve Bank of Boston for member banks in the Boston district. Table 122 shows the ratios!® of total expense to gross earnings for all member banks in the Boston Federal Reserve District, T As witness the detail, for instance, for total expense in Tables 111 and 121. 8 Compare the respective totals in Tables 111 and 131. ? See the total sections for ratios of total expense in Tables 111 and 121. 10 These percentages are not arithmetic averages, but are reported to be those which are “most nearly typical of the greatest number of banks.” 00 BANKING STANDARDS TABLE 122 ° RATIOS OF ToTAL EXPENSE TO GROSS EARNINGS, ALL MEMBER BANKS IN FEDERAL RESERVE DistrICT 1, CLASSIFIED BY RATIOS oF TiME To Gross (ToraL) Deposits, 1923-1925* RATIOS: Time Deposits to Gross (Total) Deposits Total. .. No time Deposit. as and less...... 316-50... c00en. 1gS ye Ver 75...000n. Number of Ranks 1023 RATIOS: Total Expense to I»oss Earninc 5 7 1924 Number “a RATIOS: Total - “<pense to -3ss Earnin< c 3.0 1925 RATIOS: Total Expense to Gross Earnings Number of Banks H 70.8 4 . QO IC4 | 66.0 97 73.0 I x16 74.0 47 24.0 *Taken from the 1923, 1924, and 1925 reports on ‘Operating Costs and Profits, based on the Exper- iences of all Member Banks in Federal Reserve District I,” prepared by Frederic H. Curtiss, Chair- man and Federal Reserve Agent, Federal Reserve Bank of Boston. classified according to percentage amounts of time to gross (total) deposits. Concerning a chart illustrating the ratios for 1925, Mr. Frederic H. Curtiss, Chairman and Federal Reserve Agent of the Federal Reserve Bank of Boston, writes as follows: “Tt [the chart] indicates that banks having less than 14 of their gross deposits in the form of time deposits are the cheapest to operate, and therefore [sic] the most profitable. As soon as the ratio of time deposits to gross deposits rises appreciably above 25% the operating costs rise above 70% of gross earnings— 70%! being the typical operating ratio for all banks in Federal Reserve District 1.”12 Similar explanations are given for the charts applying to the years 1923 and 1924. That is, for 1923, 1924, and 1925, for member banks in the Boston district, Mr. Curtiss found that amounts of time deposits, as ratios of gross (total) deposits, were positively correlated with amounts of total expense as ratios of gross earnings. We find a like correlation between these ratios for member banks in the entire Federal Reserve system for the years 1919-192 5—*“bank,” in our analysis, being the combined member banks in each dis- trict.!3 Mr. Curtiss found inverse or negative correlation between 11 The arithmetic means computed by us for 1923, 1924, and 1925, are respec- tively 42.00, 72.80, and 91.10. For the seven years, 1919-1925, the average per- centage is 69.60. 12 Curtiss, 0p. cit., Report for 1925, p. 3. 18 Gee Table 121. SERIES CORRELATED WITH DEPOSITS 201 TABLE 123 RATIOS OF NET EARNINGS TO EARNING Assets, ALL MEMBER BANKS IN FEDERAL RESERVE DISTRICT 1, CLASSIFIED BY RATIOS OF TiME T0 GRrOSs (TotaL) DEPOSITS, 1923-1925¥ RATIOS: Time Deposits to 3ross (Total) Deposits Np LE “od "ATIOS: hat ane ta 102% Number RATIOS: Net “arnings to ming Aceats Total . No Time Dep 25 and less. . 26—50..... SI=75...... Over 7¢...... ‘Taken from the 1923, 1924, and 1925 reports on “Operating Costs and Profits, based on the Exper- iences of all Member Banks in Federal Reserve District L” prepared by Frederic H. Curtiss. Chair- man and Federal Reserve Agent, Federal Reserve Bank of Boston. ratios of time deposits to gross (total) deposits and ratios of net earnings to loans and investments (earning assets). Our findings are of the same type! for the member banks in the entire Sys- tem for the years 1919 to 1925—“bank” being used in the sense given above. His data for 1923, 1924, and 1925 are given in Table 123. In explaining the reasons for net earnings, in terms of earning assets, declining with increasing time deposits relative to gross (total) deposits, Mr. Curtiss says: “ . . . . net earnings de- cline as the proportion of time deposits rise on account of the greater cost of handling savings deposits in banks equipped to do a commercial banking business. Chief among these heavy expenses is interest paid on deposits.’ Such charges are neg- ligible in banks doing exclusively a commercial business, but con- sume two-thirds of all current expenses in banks handling pri- marily savings accounts. The clerical cost of an organization intended to handle commercial deposits is so heavy that, when added to the interest costs incidental to handling savings deposits, 14 Similar relations for 1923 and 1924 are shown by member banks in the Second District. These are presented in Circular No. 674 of the Federal Reserve Bank of New York, May 29, 1925. 15 See Table 121, page 108, in which it is shown for the country as a whole, and in keeping with the form of analysis already presented, that, relative to the several district levels, when time deposits as percentages of total deposits are high, interest on deposits in relation to earning assets is also high. Contrariwise, when time de- posits are low, interest on deposits is low. Moreover, percentage variations from ‘ype in the two series are positively correlated 202 BANKING STANDARDS TABLE 124 NUMBER OF DIsTRICT-VEARS IN WHIicH MEMBER BaANKs HAp RATIOS oF Time Deposits AND Ratios oF TOTAL EXPENSE, DEVIATING CLASSIFIED PERCENTAGE AMOUNTS FROM DISTRICT AVERAGES, 1919-1925* RATIOS! Time Deposits to Total Deposits (Percentage Differences) Position Amount RATIOS: Total Expense to Gross Earnings (Percentage Differences) . i p—— Abhnere 6.00 4.00 2.10 and to b 7% | Under over 6.00 aan 2:00 Below 2.7) 4.00 6.00 Under te to | and 2.00 4.00 6.00 over 20.00 and over ADOVE 10.00 to 20.00 € Under 10.00 Under 10.00 Below 10.00 to 20.00 20.00 and over] a *Boston district a=r1010; b=1020; c=1921; d=1022; e=1923; f=1024; §=1925 little balance is left for profits. When, however, the proportion of savings deposits exceeds 75% of all deposits, earning power again begins to increase because under such conditions it is not necessary to maintain a large clerical organization.”*® The type of association between net earnings and time de- posits found for the classified member banks in the Boston dis- trict is paralleled by member banks for the country as a whole, in spite of differences in bank location and size and of the fact that in the present analysis member banks in a given district are treated as a single institution. Positive correlation between ratios of total expense to gross earnings and of time deposits to total deposits, for the member banks in the Boston district treated as a single institution and for the member banks in all districts similarly treated, for each of the years 1919 to 1925—one pair of ratios for each year—is "16 Curtiss, op. cit., Report for 1924, pp. 1-2. SERIES CORRELATED WITH DEPOSITS 203 illustrated in Table 124. This table shows the frequencies of the deviations from the district levels of the paired ratios of total expense to gross earnings and of time deposits to total deposits, the positions of the ratios for the Boston district each year being distinguished from those for all districts. The numerals refer to all districts; the letters to the Boston district. The alignment of the frequencies indicates that the series are positively corre- lated. That is, districts with high (or low) ratios of time deposits have high (or low) ratios of total expense. For the twelve dis- tricts for the seven years, there are fifteen district-years in which this was not the case; for the Boston district alone, there are no exceptions to the rule. Table 125 shows inverse correlation between ratios of time deposits to total deposits and ratios of net earnings to earning assets for the country as a whole and for the member banks in the Boston district. Similar analyses of ratios of interest on de- TABLE 125 NUMBER OF Di1sTRI¢T-YEARS IN WHICH MEMBER Banks Hap RATIOS oF TIME DEPosITS AND RATIOS OF NET EARNINGS DEVIATING CLASSIFIED PERCENTAGE AMOUNTS FROM DISTRICT AVERAGES, 1QIQ-1Q25%* RATIOS! Time Deposits to Total Deposits (Percentage Differences) RATIOS: Net Earnings to Earning Assets (Percentage Diflerences) ee —— Position Amount 1 00 and NYT OP “ave J vr An Inder 1. en Palow 15.00 and over 20.00 and over Above ee pps 10.00 t0 20.00 Under 10.00 ee— Under 10.00 Relow 10.00 to 20.0 20.00 and ove- *Boston district: a=1010; b=1920; c=1021; d=1923; e=1023;f=1024: =107%. 204 BANKING STANDARDS posits and of wages and salaries show that member banks in the Boston district are correlated in the same manner with ratios of time deposits to total deposits as are those in the entire System. But, as Mr. Curtiss points out, “Banks handling a large volume of savings deposits also invest heavily in securities.”*” Moreover, “Banks carrying the largest proportion of savings deposits gen- erally have the highest gross earnings because the low reserve requirements on time deposits entail tying up a very small pro- portion of non-productive funds.”® This being true for indi- vidual banks in the Boston district, it is instructive to determine for the country as a whole, by districts, the effect upon gross earnings, total expense, and net earnings of varying amounts of time deposits to total deposits and of investments to earning assets. Gross earnings tend to be large when savings de- posits are large. But when savings deposits are large, total expense tends to be large also, and net earnings tend to be small. Accordingly, what effect upon each of these series have variable ratios of deposits and of investments? Mr. Curtiss does not an- swer this question for the member banks in the Boston district, but an answer for the twelve districts combined, for the years 1919 to 1925, is found in Table 126. The following are the conditions, respecting the relative amounts of time deposits and of investments, associated with the highest!? and the lowest? ratios in the three series: Highest gross earnings: Large time deposits and small investments Lowest gross earnings: Small time deposits and large investments Highest operating expenses: Large time deposits and small investments Lowest operating expenses: Small time deposits and large investments Highest net earnings: Small time deposits and small investments Lowest net earnings: Large time deposits and large investments But the effect of variable time deposits on gross and net earn- 17 Curtiss, op. cit., 1925, p. I. 18 0p. cit., 1024, D. 1. 19 The percentages in all cases are net amounts, account being taken of the signs as well as of the percentage amounts of the difference from the district levels. SERIES CORRELATED WITH DEPOSITS 205 TABLE 126 NET PERCENTAGE DIFFERENCES FROM DISTRICT LEVELS FOR RATIOS CORRELATED WITH CORRESPONDING DIFFERENCES IN RATIOS oF TIME Deposits To ToTAL DEPOSITS AND OF INVESTMENTS TO EARNING ASSETS, 1910-1925 NET PERCENTAGE DIFFERENCES FROM DistrIiCcT LEVELS RaTI0S: Time Deposits to Total Deposits Above District Levels Below District Levels Average RATIOS: Investments to Earning Assets \verage..... “ Above District Levels. .... 3elow District! Tevels. . \verage...... Above District Levels. .... Below District Levels... .. \verage...... Above District Levels...... Below District] Levels... ... Number of District-| Years x 20 < RarTIO0S! Gross Earnings to Earning Assets +0. 87 —1 8% +4.48 — —6.01 Ia 86 0.04 -3-34 +2 77 Ratios: Total Expense to Earning Assets +2. ¢c2 +0.34 +c a1 —4.44 ~-0.097 40.77 —0.421 —3.33 +3.39 RaTIOS: Net Earnings to Earning Assets —2. 80 —-7.06 L + ¢K +6.53 +4.63 +8.33 +o0.39 -—1.48 +4.8¢ ings and on total expense may be measured by methods other than those which relate to the respective positions of the series above or below their several district average levels. Ratios of time deposits, as of other series, whether high or low, change [rom year to year. Are such changes, in each of a number of series, functions of similar changes in time deposits? The an- swer to this question is found in the detail of Table 12%, from which it is evident that functional relationships obtain. More- over, these are of the same kind as those observed when the deviations of the respective series from district types were cor- related 20 The relations between ratios of time deposits to total deposits and of total expense to gross earnings, summarized in Table 121 for district differences, and in Table 127 for year-to-year changes, are graphically illustrated in Chart 45. This chart, drawn ac- cording to the method described on page 154, shows in general that (1) relative to the respective district averages, the two series of ratios were similarly placed at the same time, and (2) 20 See Table 121, page 108. TABLE 127 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DistrIcT RATIOS IN PAIRED SERIES nN INDEPENDENT VARIABLE-— Ratios of Time Deposits to Total of Time and Demand Deposits i Amount of Change Direction Percentage | Average Groups Per- centage Total V+ g.11 | Increase s.0oand over! {26.25 ‘ooo tox5.00, $11.85 ;.00 tO 10.00 |+ 7.37 Under 5.00 + 2.34 Under 5.00 I- 2.71" Total I— 2.1% Decrease Number of Jistrict-] Vears 6s | 11 | F 2: 28 Loans and Discounts to Earning Acgete 40.78 +1.39 +2.47 +1.74 -0.80 i -—_. V2 i i 62 DEPENDENT VARIABLES—Net Average Percentage Change Gross Carnings to Earning Accets Total | Total Lxpense Expense to } to Earning Gross Accepts Rarnings Net Earnings fo Earning Assets Salaries and Wages to Earning Acsets Interest on Deposits to Earning Assets Interest .and Discounts on Borrowed Money to Earning Assets Taxes to Earning Assets | “Other Expense’ to Earning Assets Fr.492 + 3.07 | 41.31 | —-—f.22 + 5.01 i 44.25 —_ 5. 88 = 0.00 + 3.64 la +8.45 +6.67 F1.c7 -2_ be Frx.77 9.82 L 2.46 - 2.II +2.85 t3.19 to.55 Lg. 26 +1.95 40.21 }o0.61 a RR +16.41 13.12 b 4.81 a. 24 +6.61 44.01 43.88 t2 60 +22.68 +22.73 + o.11 -200 R7 + 5.98 $11.89 —- 0.55 - © 48 }13.74 + 6.82 t+ 2.11 ~ 0.38 — 5.26 | — 1.56 - I.1I0 | +3.88 | —2.31 | — 5.5 I —x.00 | +1.17 | — x50 | +3.88 J—_ | = 5.26 | - oss —54.33 SERIES CORRELATED WITH DEPOSITS 207 the directions (but not the rates) of change from year to year tend to agree. In other words, ratios of time deposits to total deposits and ratios of total expense to gross earnings are posi- tively correlated with respect to position relative to their own district level, and also as to direction of change from year to year. The year-to-year changes between 1919 and 1925 in ratios of time deposits to total deposits were predominantly upward; in ratios of investments to earning assets, they were almost evenly divided between increases and decreases. If the upper half of Table 128 is observed, it will be found that (1) net increases in ratios of gross earnings, of total expense, and of net earnings are associated with increasing ratios of time deposits and decreasing ratios of investments, and (2) that the ratios in each of the series show a net decrease when the ratios of both time deposits and investments increase. Moreover, it is seen that the net per- centage increase of 1.72 in ratios of gross earnings, for the 635 district-years in which time deposits increase, becomes 6.41% increase for the 34 district-years in which ratios of time deposits increase and those of investments decrease. For the 31 district- years in which both ratios increase, the net change in ratios of gross earnings is a decrease of 3.43%. Similar relations, accord- ing to direction of change, obtain for ratios of total expense. For net earnings, however, the type of association is different. The net decrease of 1.32% obtaining for the 65 district-years in which the ratios of time deposits increase becomes 5.20% for the 31 in which ratios of both time deposits and investments increase. On, the other hand, for the 34 district-years in which ratios of time deposits increase and in which investments decrease, the net change in ratio of net earnings is an increase of 2.22%. On the types of association between ratios of gross earnings, of net earnings, and of total expense and variable amounts of time deposits in relation to total deposits, when the ratios for the correlated series are the deviations from the yearly averages for the country as a whole, it is unnecessary to speak at length. In general, however, and in spite of the fact that geographical and other factors make it difficult to isolate the functional relation- ships, the inverse correlation between ratios of time deposits to total deposits and ratios of net earnings to earning assets, found for deviations from district averages and for year-to-year changes, holds for districts which were respectively above and below the 20R BANKING STANDARDS CHART 43 CoMpARISON OF Ratios oF TiME Deposits To ToTaL DEPOSITS AND or TotAL EXPENSE To Gross EARNINGS, BY FEDERAL RESERVE DISTRICTS, 1919-1025 TOTAL EXPENSE eee. TIME DEPOSITS, .... 1920 1921 1922 192) 1924 1928 1919 1920 1921 1922 1923 1924 1928 ad cose’ aes oot ae © BOSTON LADELPHI/ RICHMOND ceameeeettttt NEW YORK CLEVELAND TL Leo — Lee ssest % x settee, 50 maazzzeitteeestt” “a , se » Scates of Percentage Change 100 i on wn 2 10 » ZHICAGO Lov” ro ST. LOUIS Leese Leeswesseeee® ‘10 20 og . 40 MINNEAPOLIS . woos es ALLA. ath KANSAS.CITY ae" 00ee, op“. ha SAN FRANCISCO oo Loe boro? cosa sett so sae E ee —a ts 1919 1920 1921 1922 1923 1924 192% 1919 1920 1921 1922 1923 1928 192% SERIES CORRELATED WITH DEPOSITS TABLE 128 20¢ NET PERCENTAGE CHANGES FROM YEAR TO YEAR IN RATIOS CORRELATED WITH CORRESPONDING CHANGES IN RATIOS oF TiME Deposits To Total DEPOSITS AND OF INVESTMENTS TO EARNING ASSETS, 1919-1925 Neer PERCENTAGE CHANGES wer Var v0 YEAR RATIOS: Time Deposits to Total | Deposits . Rarros: investments ' to Earning Accets Number of District. Years RaT10S: Gross Earnings to Earning Accate RaT10S! Total Expense to Earning Assets RaTi08: Net Earnings to Earning Assets Increasing Average ncreasing Yecreasine 6s +1.72 —3 43 1 LK 49 +3.07 —t v2 FP ay -1.32 - §.320 “+ 2.22 Decreasing iverage ncreasing Nacrraacing an wr 28 +214 -=3.33 _— — 40 +7 — 0.41 +10.02 — Average Average ncreasing Decreasing - BX —-3.40 +6.132 +3.45 —2.% +8. 00 = 4.43 + 2 46 country level, but it does not hold for each dispersion group. Notwithstanding this fact, the results secured are of sufficient in- terest to warrant their inclusion as a part of this record. They are found in Table 129. A summary of the relations of time deposits, measured as per- centages of earning assets and of total deposits, to other series of banking data must be drawn in broad outline if it is to be brief. TABLE 129 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country’s Yearly Averages) INDEPENDENT VARIABLE—Ratios of Time Deposits to Total of Demand and Time Deposits Distance fram Average Position Percentage Groups Average Percent- tage Tatal tal 2 Above to and over.. 10 t0 40..... ‘Tndar 20 Relnw Inder --.. oto 40.. 10 and Aver Total Number of - District Years DEPENDENT VARIABLES—Net Average Percentage Gross Earnings to Earning Accept Total Expense to Earning Agacts Total Expense to Gross Earnings Net Earnings to Earning Assets -% -9 47 28 - ¢.62 - 0.3% +14.33 661 +o0.79 1 + 2.63 soak r' 710 BANKING STANDARDS TABLE 130 NATURE OF CORRELATION OF PERCENTAGE DIFFERENCES AND CHANGES FROM YEAR TO YEAR OF RATIOS IN PAIRED SERIES, 1919-1925 NATURE OF M=AST! *- SERIES CORRELATED (Expressed as Ratios) Differences from District Averages Changes from Year to Year Differences from Country’s Yearly Averages Inde- pendent Variables Dependent Variables Direc- | Amount tion Tr be [Negative [Positive I | a [Negative Positive ! w | ® [Negative ! o Negative | } o | w | 0 [Negative "Positive | | o (1) [Positive | (1) Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets Gross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets Sross Earnings to Earning Assets Total Expense to Earning Assets Net Earnings to Earning Assets Salaries and Wages to Earning Assets Interest on Deposits to Earning Assets Total Deposits to Earning Assets ‘Negative [Positive [Positive | (1) (Negative | (1) AE rear Demand Deposits] to Earning Assets Negative [Positive Negative [Positive Positive | (x) [Negative i Negative (x) Negative Positive | (1) | (a) Negative | (1) 'Negative ‘Positive | (x) Ipositive Positive | (1) [Positive | (1) Negative Positive | a | a 0 ol wl e Positive | | We Cw Weve! ® | @ ow Positive [Positive © | @ lolol eo o | ol ola ® I [Negative IPositive Demand Deposits to Total Deposits Positive (1) Negative {Positive Negative |Positive Interest and Discounts on Borrowed Money to Earning Assets Positive Taxes to Earning Assets “Other Expense’ to Earning Assets Gross Earnings to Earning Assets Total Expense to Earning Assets Total Expense to Gross Earnings Net Earnings to Earning Assets Time Total Expense to LL Deposits] Gross Earnings [positive [Positive |Positive [Positive (1) | (1) to Total De- posits (3) Positive f(x) (1) Doubtful. (2) Not computed. (3) By direction, all series correlated with ratios of time deposits te total deposits are the reverse of those correlated with ratios of demand deposits to total deposits. SERIES CORRELATED WITH DEPOSITS 211 The one given below is not intended to cover all of the relations discovered nor to take account of them in their varied forms. [ndeed, most, if not all, that has been said is in the nature of a summary, based as it is upon groupings of data for conditions widelv diverse. 1. When time deposits as percentages of earning assets and of total deposits are relatively large, or when they increase from year to year, the following conditions obtain for all member banks in the country as a whole—the banks in each district being treated as a single institution—and certain of them for groups of banks in the Boston district: Gross earnings as percentages of earning assets tend to be large or to increase. Total expense as percentages of earning assets and of gross earnings tends to be large or to increase. Net earnings as percentages of earning assets tend generally to be small or to decrease. 2. When account is taken of the relative size of district ratios of (1) time deposits to earning assets and to total deposits, and (2) of investments to earning assets, it is found that: (a) large gross earnings ratios and large total expense ratios accom- pany large time deposits and small investments ratios, and (b) large net earnings ratios accompany small time deposits and small investments ratios. Table 130 summarizes the nature of the correlations found for different series paired with deposits measured in various ways. XI SERIES CORRELATED WITH GROSS EARNINGS CuArTER V was concerned with the norms and trends of gross earnings as percentages of earning assets, the discussion relating in the main to the size of such ratios for the member banks in the different Federal Reserve districts, their characteristic devia- tions from district and country levels, and their year-to-year changes from 1919 to 1925. In Chapters IX and X, the net amounts of dispersion and of year-to-year changes in gross earn- ings were discussed in relation to variable amounts of and changes in the earning assets and deposits of member banks by districts. That is, in the latter chapters, attention was directed to the nature of the association of variable ratios of earning assets and of deposits, with variable ratios of gross earnings, the latter being only one of a number of series bearing functional relations to such amounts. In the present chapter, the study of gross earnings is different. Interest now relates to the net amounts of dispersion and of change in various series of bank data associated with amounts of dispersion and of change, respectively, in gross earnings. What are wanted are measures of bank activity for series paired with variable amounts of gross earnings. Specifically, and for one series, for instance, our inquiries are of the following nature: If ratios of gross earnings to earning assets of banks in given dis- tricts and years are above their district levels, are ratios of loans and discounts to earning assets of the banks in the same districts above or below their district levels? Contrariwise, if they are below these standards, are ratios of loans and discounts, on the average, below their standard levels? Moreover, do the same or different relations obtain when the yearly deviations from the country’s averages for the respective series are correlated? In addition, are year-to-year changes in gross earnings ratios ac- companied by similar or by different net year-to-year changes in ratios of loans and discounts to earning assets? In general, what 212 nN rN A » — : oN SERIES CORRELATED WITH GROSS EARNI : pappiot? = types of dispersion and of change in a number of series Fdata ‘od ST are associated with different types of dispersion and of chargé in gross earnings? These are some of the questions which it is the purpose of this chapter to answer. The questions in part may be answered by classifying the 84 ratios of gross earnings to earning assets—those for the twelve districts for the years 1919 to 1925—according to the types and percentage amounts by which they differ from the district aver- ages. This is done in the stub (horizontal) classes of Table 131. Then, for the districts falling in each of such classes, the net amounts by which the ratios in each of a number of series differ from their average district levels may be determined. The results are shown in the caption (column) classes of the same table. Such a table permits one to observe both the nature and the de- gree of association of each of the series with gross earnings, but not with each other, the reason for the latter being that the basis of comparison is not between such series but between each of them and gross earnings. Table 131 is of interest in at least two particulars: It shows first, by sign, plus or minus, and second, by percentage amounts, the manner in which the respective series are associated with gross earnings. Let us examine it closely, paying attention first to the sections which show separately the correlative positions of the respective ratios for districts which have gross earnings above and below their respective district levels. Of the 84 ratios, 35 ful- filled the first, and 49 the second condition, the average percentage amounts of deviation being + 5.81 and ~ 4.22, respectively. For the 35 district-ratios of gross earnings to earning assets above their district levels—the average amounts for the seven years, 1919 to 1925, serving as such standards—and which are termed “high,” the net positions of ratios of loans and discounts, of total expense, and of net earnings to earning assets were also high. Moreover, the net position of each of the several expense items in these districts and years was above its seven-year level. On the other hand, for the districts with high gross earnings, the amounts of demand deposits, measured as proportionate parts of total deposits and as percentages of earning assets, were below their levels—that is, they were “low.” Contrariwise, for the 49 district-ratios of gross earnings to earning assets below their dis- trict levels, positions the inverse of those just given obtain for 27 fs oO —- TABLE 131 CORRELATION OF DISTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES ‘Percentage Deviations from the Respective District Averages. Period 1919-1923) ~ 4 Ny INDEPENDENT VARIABLE— Ratios of Gross Earnings to Earning Assets Distance from Average Vumber of district Years .oans and discounts to | Earning Agsets | Demand Deposits to Earning Accate emand eposits to Total of Time and Demand Nanncite Position Percentage | Average i Gs = TOUDS centage Total | + 5.81 | 33 | +2.31 —_n AR — 1.26 | Ahave r0.00 and over’ +13.34 7 "00 t0 10.00 |+ 6.32 12 Tnder cco | + 2. 1c 6 +5.59 +2.10 iy An —8.02 —2.75 —0. 20 + 0.35 — 0.60 -—_ 2 _A7 Inder 5.00 ,~— 2.28 .00 to 10.00 |- 7.26 ooo and overl —rr ar | 33 | 12 a —0.32 —3.60 —8 2c +1.49 +2.87 18 2e — 0.73 + 6.85 va RA | Relow Total |- 22) 40 | -1.%78 | 42.38 | + 2.20 | DEPENDENT VARIABLES—Net Average Percentage Total Expense to Earning Assets Net | Salaries Earnings ind Wages to to Earning Earning Assets Assets | Interest on Deposits to Earning Accpta Interest and Dis- counts on Borrowed Aoney to garning Acente Taxes to Earning Acceta “Other Expense” to Earning Assets + 6.01 1 5.48 + 5.52 + 0.75 + 32.00 | 411.34 | 4 1.66 t12.70 + 6.01 + 2.08 +14.82 + 6.70 L 0.40 + 5.97 t7.15 L 4 10 — 4.05 — 0.49 + 2.49 +128.30 t 31.27 — 0.8% +19.95 $16.15 + 2.07 + 0.50 + 3.79 4+ 0.08 — 2.04 - 9.10 —12 66 —3.03 —2.43 7.20 + 0.21 —12.93 -2 OY + 2.00 — ~.61 —-12.07 - 27.29 - 6.06 l- y6 48 - v2 -C 1 -Y2.24 + 0.29 —11.66 11 60 —~ 4.6% | -~ 3.26 4.82 Ge - 18. 22 —- 7.30 | — 3.60 SERIES CORRELATED WITH GROSS EARNINGS 213 each of the series. It follows from the above that if ratios of loans and discounts to earning assets are high when ratios of gross earnings are high, ratios of investments to earning assets are low, and vice versa, and that if ratios of demand deposits to total deposits are low when ratios of gross earnings are high, ratios of time deposits to total deposits are high, and vice versa. However, if ratios of demand deposits to earning assets are low when gross earnings ratios are high, it does not follow that ratios of time deposits to earning assets are high. Indeed, they tend to be low when gross earnings ratios are either high or low. Table 131 makes it possible also to determine, for each dis- persion-group of gross earnings ratios, the associated net disper- sion in the other series of data. Not only, for instance, are ratios of loans and discounts high or low, respectively, when gross earn- ings ratios are high or low, but the higher or lower the second, the higher or lower the first. These relations also obtain, in gen- eral, for ratios of total expense, salaries and wages, taxes, “other expense,” and net earnings, each series being expressed in terms of earning assets. In general, therefore, and with respect to ratios of total expense and of net earnings, for example, wherever and whenever— “wherever” relating to separate districts and “whenever,” to separate years—during the years 1919 to 1925, districts had gross earnings which were high or low, they also had total expense and net earnings which were high or low, both positions and amounts, for the series paired with gross earnings, being de- termined algebraically. Moreover, the higher or lower the gross earnings ratios, the higher or lower, respectively, the total expense and net earnings ratios. These relations, of course, do not obtain in every district every year. It is the prevailing tendency which is certain, and to which the summaries in Table 131 point. The details from which the net average percentages of ratios of total expense and of net earnings are drawn are given in Table 132. Both series of data vary directly with gross earnings, the rela- tion being more clearly marked in the case of total expense. The frequencies apply to the twelve districts for each of the seven years 1919-1925. But what is true for the total, as thus built up, tends to be true for the individual years for a single district, and for a single year for individual districts. Both facts are evi- dent from the scatter of the figures in bold type and of the letters TABLE 132 NuMBER OF DistrICT-YEARS IN WHICH RATIOS OF ToTAL EXPENSE AND OF NET EARNINGS TO EARNING ASSETS DIFFERED BY PERCENTAGE AMOUNTS FROM THE DISTRICT AVERAGES, 1919-1925, CLASSIFIED BY THE CORRESPONDING PERCENTAGE DIFFERENCES OF GRroSS EARNINGS TO EARNING ASSETS* — RATIOS: Gross Earnings to Earning Assets (Percentage Differences) Dacition Amount 10.00 and over Ratios: Total Expense to Earning Assets (Percentage Differences) Above Below 10.00 | 5.20 and | to | Under over 10.00 5.00 Under £.00 5.00 10.00 to and 10.CO over [5.00 and over C Ratios: Net Earnings to Earning Assets (Percentage Differences) Above —_ Below 7:50 to 15.00 © 9.50 15.00 Under | to and 7.50 12.00 over Under 7.50 - shove Relow 5.00 to 10.00 «eee. . Under 5.00 Under 5.00 5.00 to 10.00 g 2 ¥¢ 8 10! in to.00 and over *Boston district: a = 1919; b = 1920; Cc = 1921; d = 1022; € = 1023; f = 1024; § = 1025. The numbers in black face type refer to the respective Federal Reserve districts for the vear 10z2¢. SERIES CORRELATED WITH GROSS EARNINGS 21% in the blocks of the table. The bold type figures relate to the year 1925, the individual districts being assigned the numbers given to them under the Federal Reserve Act; the letters in alphabetical order refer to Boston! for the years beginning 1919 and ending 1925. Ratios of gross earnings and of total expense in the same year in the Boston member banks deviated from the average according to the same sign in five of the seven years; similar deviations for all districts occurred in 67 of the 84 district-years. These rela- tions expressed in percentages are, respectively, 71.4 and 79.8. In 1925, for nine of the twelve districts, deviations in gross earnings and in total expense were of the same sign, the percentage rela- tion in this case being 75.0. Ratios of gross earnings and of net earnings in the Boston district in the same year deviated from the average according to the same sign in six of the seven years; deviations of like sign for all districts occurred in 58 out of the 84 district-years. Comparatively, like behavior in the two cases is indicated by 85.7% and 69.0%. In 1925, eight of the twelve district-deviations in gross earnings and in net earnings were of the same sign, the percentage relation in this case being 66.7. There are other ways in which the relations between gross earnings and other series of bank data may be measured and expressed. From year to year, during the years 1919 to 1925, it is found that in 35 cases the ratios of gross earnings to earning assets increased, and in 37 they decreased. In the districts with year-to-year increases and decreases, respectively, what were the net directions and percentage amounts of change in other series? Table 133, which answers this question, shows that the ratios in the different series, with respect to direction of change, are related to gross earnings in much the same way that they are with re- spect to position relative to the district averages. That is, for instance, increasing gross earnings ratios are accompanied by increasing, and decreasing gross earnings ratios by decreasing ratios in loans and discounts, in total expense, in net earnings, and in each of the items of operating expense, except interest on deposits. On the other hand, the directions of change of ratios of gross earnings and of demand deposits to earning assets are 1 The reason for using the Boston district and the year 1925 is that data of the nature indicated are available for individual banks for this district and year. These are discussed later TABLE 133 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES ~ HF INDEPENDENT VARIABLE— Ratios of Gross Earnings to Earning Assets — Tat ber 0 Amount of Change | District- Years _oans and Discounts to Earning Assets Direction Percentage | Average] Grouns . Per- [ ~entage Total | F744] 35 +3.08 | Increase + 5.00 and over 10.00 £0 15.00 | *.00 to 10.00 Jnder <.00 16.80 6 +3.23 12.20 6 “+4.76 t 7.08 6 +s5.08 L 2.22 17 +1.41 Tnder 5.00 .00 tO 10.00 0.00 t0 15.00! -".27 22 ~-1.48 - 7.19 13 —2.47 -x0.67 3 -5.35% Decrease Total }e as | 37 —2.04 | Demand Deposits to Earning Accets -—3.57 =9.5% -8.18 -2.12 -0. 24 43.02 42.46 40.00 +2.12 DEPENDENT VARIABLES—Net Average Percentage Change — — Demand Deposits to Total of Time and Jemand Deposits Total Expense to, Earning Assets Net Earnings to Earning Assets Salaries and Wages to Earning Assets Interest on Deposits to Earning Assets Interest and Discounts on Borrowed Money to Earning Assets Taxes to Earning Assets “Other Expense” to Earning Assets -—4.77 + 8.70 1 4.86 f11.30 | +4.93 | +19.63 + 7.33 + 8.72 —6.98 —5.68 —3.02 -2.07 }10.17 t16.51 t+ 7.78 - 2.¢7 411.08 + 3.67 + 8.32 L 1.58 +20.03 {20.89 F12.77 + 4.00 +7.16 {5.50 1.31 +c.00 +60.55 455.31 +23.31 - 8.70 {20.44 t1r.01 t+ 9.06 + 0.40 +18.62 <+16.19 + 8.10 L 3.80 -—x.67 —1.54 ~2.c0 -—r a - 5.82 - 0.8% - 3.82 -10.50 —- 5.24 t+ 0.32 - 1.96 - 4.82 +3.78 +3.32 +a 62 —20.49 —S§1.57 -C4.40 —~ 3.50 —~12.89 -24.0¢ - 2.22 —- 1.38 - 5 17 —3.93 | -— 2.46 - 6.67 | —- 0.76 | 43.54 | —-28.60 | — 7.04 1 — 2.18 SERIES CORRELATED WITH GROSS EARNINGS 219 inversely correlated. Net decreases in ratios of demand deposits to total deposits accompany both increases and decreases in ratios of gross earnings to earning assets, but the decreases are greater on the average and for each dispersion group when gross earn- ings ratios are increasing than when they are decreasing. More- over, both for direct and for inverse correlations by direction of change, the percentage amounts of change are positively cor- related. That is, for instance, the greater the percentage rise or fall in gross earnings ratios, the greater the net percentage rise or fall in ratios of total expense. These series are positively cor- related both by direction and by amount of year-to-year change. But the greater the percentage rise or fall in gross earnings ratios, the greater the net percentage fall or rise in ratios of demand deposits to earning assets. In the latter series, correlation by type of change is inverse; by percentage amount of change it is direct. The results shown in Table 133 summarize the changes of the ratios in the twelve districts for the seven years. The ratios in the various districts, while having their own peculiarities, as is evident from matter presented in earlier chapters, are suffi- ciently alike in their dispersion from district and country aver- ages and in their year-to-year changes to suggest common norms and trends. Moreover, when the series are correlated, uniformi- ties of a direct or of an inverse nature obtain. Are the correlations of ratios for individual districts for the various years, and of those for different years for a single district, the same in general as those for all districts and all years? This condition was found to obtain for the correlations of total expense and of net earn- ings with gross earnings for the Boston district for the years 1919 to 1925 and for all districts for the year 1925, the correlated series being deviations from district averages. Does it obtain between the same series, for this restricted experience, when the pairs of items are year-to-year percentage changes? The answer to this question is found in Table 134, which shows by position the frequencies for (1) all districts and all years, (2) the Bos- ton district for each of the years 1919-1925, and ( 3) each of the districts for the change between 1924 and 1923. From this table it is seen that (1) year-to-year changes in the ratios of total expense and of net earnings are positively corre- lated with year-to-year changes in gross earnings ratios: (2) the TABLE 134 NUMBER OF DisTrIcT-YEARS IN WHICH Ratios OF ToTAL EXPENSE AND OF NET EARNINGS TO EARNING ASSETS CHANGED FROM YEAR TO YEAR BY PERCENTAGE AMOUNTS, CLASSIFIED BY CORRESPONDING PERCENTAGE CuANGES IN RaTiOos oF Gross EARNINGS TO EARNING ASSETS, 10I1Q-1Q25%* RATIOS: Gross Earnings to Earning Assets ‘Percentage Change) Direction |Amount| '5.00 and over 10.00 | to | 15.00 INCREASE 5.00 to [0.00 Ratios: Total Expense to Earning Assets (Percentage Change) INCREASE DECREASE [5.00 | T0.00 and | to over 15.00 5.00 to on ma Under £.00 Inder 8.00 5.00 10.00 to | to 10.00 15.00 9 5 4 a [5.00 and i over D Ratios: Net Earnings to Earning Assets (Percentage Change) INCREASE DECREASE 10.00 5.c0 | to to 15.00 10.00 Under £,00 Under I £.00 5.00 | to 10.00 10.00 to 15.00 [5.00 and over Tnder <.00 Tnder 2.00 DECREASE 5.09 to (0 0 ads ‘Boston district: a = 1019; b = 1920; ¢ = 1921; d = 1922; € = 1923; = 1924; 8 = 1925. The numbere in hnld face tvne refer to the recnective Federal Recerve dictricte for the veare 1024-102. SERIES CORRELATED WITH GROSS EARNINGS 221 correlation is higher for ratios of total expense than for those of net earnings; and (3) the type of correlation characterizing the changes in all districts and all years obtains for the Boston dis- trict for the years 1919 to 1925, and for all districts for the changes between 1924 and 1925. That is, in general, the relations obtaining for all districts obtain for the Boston district, and those which hold for all yearly changes characterize those between 1924 and 1925. Space is not available in which to insert, for all series correlated with gross earnings, tables similar to Table 134. The net figures given in Table 133 reflect the prevailing relations. Moreover, as is apparent from Charts 46 and 47, relating, re- spectively, to (1) ratios of gross earnings and of total expense and (2) ratios of gross earnings and of net earnings, all ratios being expressed in terms of earning assets, the positive correla- tion of both series with gross earnings, found for the twelve dis- tricts combined and for the Boston district alone, holds also for the other districts. These charts are drawn according to the method described on page 154, and should be interpreted in keep- ing with what is there said. They illustrate, more graphically than do words, the close relationship obtaining between the re- spective pairs of ratios. There is another basis according to which various banking ratios may be correlated with those of gross earnings. If the average yearly amounts for the combined districts are taken as a base and if those for the respective districts are expressed as percentage deviations, plus and minus, the distribution shown in the stub (horizontal) classes of Table 135 is secured. The net percentage deviations in different series, for the districts having the classified types and amounts of dispersion with respect to gross earnings, are given in the caption classes of the same table. This arrangement indicates the manner in which different series are related to variable gross earnings. It is obvious that if the ratios of gross earnings in a given dis- trict are persistently above or below the country level, which is frequently the case,? the position of that district in the dispersion classification, provided for in the stub of Table 135, will tend to remain fixed. There is less occasion for such a condition to obtain when the dispersion-classes apply to deviations from district levels ?See Table 53, page 77, and the discussion in Chapter V. 32% BANKING STANDARDS CHART 46 CoMmPrARISON OF RATIOS OF GROSS EARNINGS AND OF TOTAL EXPENSE TO EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 GROSS EARNINGS cee TOTAL EXPENSE nec 1919 1920 1921 1922 1923 1924 1925 DISTRICTS AT ny ALL {. BOSTON +s ~" 2. NEW YORK 3. PHILADELPHIA 4. CLEVELAND 5. RICHMOND Scales of Jarcentage Change ~ | \ 6. ATLANTA 7. CHICAGO 8. ST. Louis 9. MINNEAF~ 10. KANSAS CITY- 11. DALLAS Sco teoees Leseecese so nm 12.SAN FRANCISCO - 1919 1920 1921 1922 1923 1924 1925 SERIES CORRELATED WITH GROSS EARNINGS 223 CHART 47 CoMPARISON OF RATIOS OF GROSS EARNINGS AND OF NET EARNINGS To EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-1925 GROSS EARNINGS cee NET EARNINGS oa 1919 1920 1921 1222 1923 1934 se AN [a . PMA CLEVELAS MEHMOND . ATLANTA ), CMICAGO ). SF Louis )., MINNTAPO? * 10. KANSAS CITY 31. DALLAS 12. SAN FRarer aa Pe 9” 192} 1922 1923 1924 1929 TABLE 135 “ORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country's Yearly Averages) nN N J INDEPENDENT VARIABLE— Ratios of Gross Earnings to Earning Assets Distance from Average Number of District- Years Position Percentage Groups Average Per- centage Tatal + g.15% | ge 1! Ahaove £5.00 and over 1.50 to 15.00 Under 7.50 {18.04 12 +10.83 16 L 2.50 22 Under 7.50 | 1.50 and over — 3.15 : - 0.31 Wo. XC Loans and Discounts to Earning Assets + 6.17 +11.36 + 8.72 + 1.40 | «04 | 1.60 Total Deposits to Earning Assets 40.21 | 40.64 +o0.59 | -y. 20 -x.65 I -T 172 DEPENDENT VARIABLES—Net Average Pescentage Demand Deposits to Earning Assets Demand Deposits to Total of Time and Demand Deposits Time Deposits to Earning Assets Time Deposits to Total of Time and Demand Deposits ~ pir | -— 4.70 411.29 | 410.49 | +13.90 — 0.50 -TY_.AX t13.590 - 0.94 -10 8% ~23.48 —21.33 +22 0¢ —25.10 +20.48 42a 68 — 4.66 LL 4-0 — 3.10 + 2.00 + 4.82 | - 7 IT + 6.58 ' - 5.97 Total Expense to Earning Assets Net Earnings to Earning Assets +14.05% —2.18 +23.12 +19.08 + 5.34 48.05 —7.90 —4.0% ~ 5.0 | -10.37 42.84 -0_.76 Baloo Total | — 4.96 — 3.06 ~I.50 | — a6 | —1.33 | + 2.3 | + 2.08 | = 7.01 +o0.13 SERIES CORRELATED WITH GROSS EARNINGS 22 5 and to year-to-year changes. In respect to district averages, the ratios must of necessity be sometimes above and sometimes below these levels; in respect to year-to-year changes, both the direc- tions and percentage amounts vary from year to year. In spite of the fact that the distribution of deviations of gross earnings ratios from the country level tend to remain fixed for the differ- ent districts, it is still significant to correlate for paired series the types and amounts of percentage deviation. While it is ap- parent that gross earnings in relation to earning assets vary geo- graphically, the ratios in the newer sections of the country gener- ally being higher than those in the older parts, it is not self-evi- dent that, in general, the districts having high and low ratios of gross earnings have high and low ratios, respectively, of total expense and of loans and discounts. And yet such are the facts for member banks, by districts, for the years 1919-1925, as shown in Table 135. Moreover, similar relations were found when the bases of comparison were percentage deviations from district levels and year-to-year changes. On the other hand, the relations between variable gross earn- ings and net earnings ratios are not so clear. On the average, net earnings tend to be low when gross earnings are high, and high when they are low, but these relations do not hold for all of the dispersion-groups. Neither are the relations unmistakable between variable gross earnings and variable demand deposits expressed, first, as a proportionate part of total deposits, and sec- ond, in terms of earning assets. But let Table 1 35 speak for itself, the reader remembering the manner in which it is constructed and the bearings which district locations have on interest rates, and hence on gross earnings. It is of interest to compare the distribution of the yearly paired ratios of gross earnings with loans and discounts and of gross earnings with total expense—all ratios being expressed in terms of earning assets—for (1) member banks in the Boston district for the different years 1919 to 1923, (2) those in all districts for 1925 alone, and (3) those for all districts for the years 1919- 1925. This is done in Table 136. Gross earnings and total ex- pense, and gross earnings and loans and discounts, are positively correlated in all districts for the year 192 5, as well as for the years 1919-192§. Comparisons in this chapter are made between district ratios TABLE 136 NUMBER OF DISTRICT-YEARS IN WHICH RATIOS oF ToTAL EXPENSE AND OF LOANS AND DisCouNTs TO EARNING ASSETS DIFFERED BY PERCENTAGE AMOUNTS FROM THE YEARLY AVERAGES FOR THE COUNTRY AS A WaoLE, CLASSIFIED BY THE CORRESPONDING PERCENTAGE DIFFERENCES IN RATIOS OF Gross EARNINGS TO EARNING ASSETS, 1919-1925% N NN i RATIOS: Gross Earnings to Earning Assets (Percentage Differences) Position Amount A —— A —————— t<.00 and over ihove 2.20 to 18.00 i 12.50 and ver 0 » RATIOS: Total Expense to Earning Assets {Perceniare Differences) A have Below 15.00 7.50 to to 22.50 15.00 Under 7.50 Under 7.50 7.50 15.00 to and 15.00 over 1 L2 © RATIOS: Loans and Discounts to Earning Assets (Percentage Di Ferences) Ahove Nala 0.00 | 5.00 and to aver 10.00 Under 5.co Under 2.00 5.00 to 10.00 19.00 and over 0 Under 7.50 Under 7.c0 Qelow 7 zo and over "Boston district: 2 = 1919; b = 1920; ¢ = 1021; d = 1922; ¢ = 1023; f = 1924; € = 1025. The numbers in black face tvpe refer to the respective Federal Reserve districts for the vear 102%. SERIES CORRELATED WITH GROSS EARNINGS 227 of gross earnings to earning assets and a number of other series, variations in all cases being measured by directions and percentage amounts according to three criteria (1) differences from district levels, (2) year-to-year changes, and (3) differences from yearly averages for the twelve Federal Reserve districts combined. Gross earnings are treated as the independent and the related series as the dependent variables. It will assist in summarizing the dis- cussion to set out in tabular form, as in Table 137, the relations found to exist. TABLE 137 NATURE OF CORRELATION OF PERCENTAGE DIFFERENCES AND CHANGES FROM YEAR TO YEAR IN RATIOS OF PAIRED SERIES, 1919-1025 NATURE oF MEASUREMENT Inde- | >endent Varia. hla Gross Carnings to Earning Assets SERTES CORRELATED (Expressed as Raiios) Dependent Variables er “oans and Discounts to Earning Assets Demand Deposits to Total Deposits Demand Deposits to Farning Assets Total Expense to ‘arning Acsets Net Earnings to Earning Assets Salaries and Wages to Earning Assets [nterest on Deposits to Earning Assets Interest and. ;:ounts on Borrowed Money to Earning Assets Taxec to Farnine Acceate “Other Expense” to Earning Assets Differences from District Averages Direc- tion Amount Ynsitive Positive Negative | (1) Negative "Positive Dositive Positive Positive Positive Dacitive Dagitive Dhcitive (1) Positive (1) dacitive dncitive Positive Positive Changes from Year to Year Direc- tion Amount Dositive Positive {1} (1) Negative [Positive Pacitive Positive Daeitive Positive Positive Positive (1) (1) Positive Positive ‘nejtive Dositive Positive Positive Differences from Country’s Yearly Averages Direc. tion Amount. Pocitive Positive smi m—— (1) (x) m | ow Positive Positive Nezative | (1) (2) 2 (2) ™ -» (2) (x) Doubtful. ‘ay Not computed. XT1I SERIES CORRELATED WITH OPERATING EXPENSES I. INTRODUCTION THE total expenses of member banks by Federal Reserve dis- tricts received attention in Chapters VI, IX, X, and XI. In Chapter VI, the norms and trends of the district ratios, without reference to other types of data, were traced out in detail. In Chapter IX, it was found that both the directions and percentage amounts of deviation and of change in ratios of total expense were positively correlated with the respective corresponding devi- ations and changes in ratios of loans and discounts to earning assets. Moreover, the conclusion was reached in Chapter X that total expenses, expressed in terms of earning assets and of gross earnings, were positively and negatively correlated with deposits variously measured, the items correlated being percentage dif- ferences from district and country averages and percentage changes from year to year. These several correlations are sum- marized in Table 130. Again, as shown in Chapter XI, ratios of total expense to earning assets are positively correlated with ratios of gross earnings to earning assets, the bases of correla- tions being the same as those just mentioned. In these correlation studies, ratios of total expense are the dependent variables. That is, what is observed are the net amounts of dispersion, by sign and by direction, in ratios of such expense, variously measured, associated with other series of data, the latter, in each case, being the independent variable. These several analyses show how ratios of total expense are associated with variable ratios and changes in other series. They do not, however, show the manner in which percentage deviations and year-to-year changes in the ratios in each of these series are asso- ciated with similar deviations and changes in the ratios of total expense. It is considerations of this nature with which this chap- ter is concerned. ”, 2 SERIES CORRELATED WITH EXPENSES 22° 2. TOTAL EXPENSE Let us begin our analysis by determining the percentage amounts and the directions by which the yearly district ratios in each of a number of series deviate from their seven-year aver- age levels, the classification of the districts being made according to the directions and percentage amounts by which their ratios of total expense deviate from their own seven-year average levels. This is the conventional form of analysis found in earlier chap- ters. That is, what is now done, in the case of total expense, is (1) to classify the percentage amounts by which the ratios in each district each year deviate from the respective district aver- ages for the years 1919-1925, (2) to total the frequencies, and (3) to compute for each dispersion group the average amount of deviation or difference. Such a summary is found in the stub classes (lines) of Table 138. For the districts having the re- spective classified deviations of ratios of total expense, the net percentage amounts of deviation in a number of series from their district averages for the period 1919-1925 are then calculated. Such percentage amounts by sign are shown in the caption classes (columns) of Table 138. It will be observed that the basis of selecting the districts in order to determine the net amount of deviation is the nature and percentage amount of their deviation in the matter of total ex- pense. In earlier chapters where an analogous method was fol- lowed, the basis of selecting the districts, in order to determine the type and net percentage amounts of dispersion of ratios of total expense, for instance, was the classified percentage amounts of dispersion with respect to loans and discounts, deposits, and 50 on. Our interest then was in the types and net amounts of deviation in total expense associated with variable amounts of deviation in other data; our interest now is in the types and net amounts of deviation in other data associated with variable amounts of deviation in total expense, the amounts, in all cases, being measured on a percentage basis. But what are the findings, given in Table 138, from such an analysis? Briefly, they are as follows: (1) In years and districts in which ratios of total expense to earning assets are high or low —that is, above or below the district levels for the period 1919- TABLE 138 CORRELATION OF DisTrICT DEVIATIONS OF RATIOS IN PAIRED SERIES [Percentage Deviations from the Respective District Averages, Period 1919-1925) ™~N » yy INDEPENDENT VARIABLE— Ratios of Total Expense to Earning Assets Distance from Average Jumber of District! Years © Pusition Percentage Average Groups Per- ~entage Total | Lsa0| 46 Above to.oo and over ;.00 to 10.00 | Inder <.co 15.61 | +7.72 L 2.62 4 13 20 Inder 5.00 — 1.96 3.00 tO 10.00 - 7.42 ro0.0oand over! -t2.54 -5 2 T Loans and Discounts | to, Tarning Assets Lr.14 +5. 21 +2.71 -y 12 —0.46 —0.22 -4.5%0 [nvest- ments to Larning Assets - 3.50 | ~17.08 —- 8.99 ~ 0.60 + 1.64 + 0.96 12.74 DEPENDENT VARIABLES—Net Average Percentage Demand Deposits to Total »f Time and Jemand Napasite Total Deposits to Earning Assets | Time Deposits to Earning Assets Time Deposits to Total of Time and Demand Deposits Demand Deposits to Tarning Assets 40.41 —2.8Q — 3.07 * + 6.20 | + 2.54 —0.25 —2.00 La 82 | —9.50 —4.29 -0.87 —- 0.17 — 2.17 - 3.87 —11.78 + 1.16 yy co — 2.62 + 3.04 L » ~2 +2.59 - v.59 v.02 +1.30 4." 2a — 0.97 L€.75 15.44 + 5.79 —12.79 20.28 {+ 2.61 ~11.99 ng .02 Ta gp AB Gross Earnings to Earning Accets + 2 81 +13.88 + 7.23 4 0.88 ~.3% 4G 10 Total Expense to | Gross Tarnings 4-1. 20 41.55 +0.53 1.78 +0.46 —2 gb -4.68 Net Earnings to Tarning Agcets Lo.11 +10.07 + 5.70 —- 2.728 — 3.78 + 4.15 + 2.13 Relow Total |— 6.751 38 | —r1.56 | 1 4.02 1 » A, — | 52 I0. a | —_Tr 26 0.732 —_" TY | + _ SERIES CORRELATED WITH EXPENSES 231 192 5—the following other series are high or low: loans and dis- counts to earning assets, time deposits to total deposits, time de- posits to earning assets, gross earnings to earning assets, and total expense to gross earnings. In general, similar direct rela- tions were found between these series when the dependent variable was total expense and the independent variables were each of the above series.! (2) In years and districts in which ratios of total expense to earning assets are high or low, ratios of investments to earning assets are low or high. A similar relation was found be- tween these series when ratios of total expense to earning assets were the dependent variables and ratios of investments to earn- ing assets were the independent variables. (3) The relations between variable ratios of total expense to earning assets and variable ratios of net earnings to earning assets are neither mark- edly direct nor inverse—they are mixed.2 (4) Large deviations in the ratios in each of the series tend to be associated with large deviations in those of total expense, irrespective of the nature of the association—positive or negative—between the series with respect to signs of deviation. To this rule, there are some doubt- ful cases, as shown in Table 138. The reader should remember that it is the net position and percentage deviation in each of the series which is measured for variable amounts of deviation in total expense. The averages shown in Table 138 should not be taken as indicating, for in- stance, for the 13 district-years in which the ratios of total expense to earning assets were between 5% and 10% above their respec- tive district averages for the period 1919-1925, that all of them had ratios of investments to earning assets below their respective district averages. The net percentage amount of dispersion, - 8.99, indicates that the general tendency measured in this man- ner is for the ratios to be below the district levels. The same line of reasoning applies to each of the other dispersion classes, the amounts in the columns of Table 1 38, relating to ratios of investments to earning assets, of gross earnings to earning assets, and so on, summarizing the net tendency for all dispersion classes. In order that the full meaning of such figures shall be thoroughly 1See Tables 97, 116, 121, and 131. 2 For a measurement of the net deviations in total expense associated with vari- able amounts of net earnings for member banks in District I, see Table 183. TABLE 139 NuMBER OF DisTRICT-YEARS IN WHICH RATIOS OF INVESTMENTS AND OF GROSS EARNINGS TO EARNING ASSETS DirrFERED BY PERCENTAGE AMOUNTS FROM THE DISTRICT AVERAGES, 1919-1925, CLASSIFIED BY CORRESPONDING PERCENTAGE DIFFERENCES IN RATIOS OF Total ExPENSE TO EARNING ASSETS* 4 ~ A> RaAT10S: Total Expense to Earning Assets ‘(Percentage Differences) Position Amount Yo.00 and over Above 5.00 to 10.00 Under 5.00 Under 5.00 Relow 5.00 to 10.0¢ 10.00 and over RATIOS: Investments to Earning Assets (Percentage Differences) Above Below 1 15.00 | 7.50 and to over X5.00 Under 7.50 Under 7.50 7.50 to 18.00 d 4 ‘12 f 3 14 8 10 2 1 5 * 15.00 and over RATI0S: Gross Earnings to Earning Assets (Percentage Differences) r Above Below 10.00 5.00 and to over 10.00 Under 5.00 Under 2.00 5.00 10.00 to and 10.00 over 4 * > = a , “ . a 2 —— Q 2 Rr 1 "Boston ‘district: a=1919; b=1020: ¢ =1021: d=1022: ewtaz3: f=1024: g =x025. The numbers in black face type refer to the respective Federal Reserve districts for the vear 102%. SERIES CORRELATED WITH EXPENSES 233 understood, Table 139 is presented, showing the distribution of the district-year frequencies for two of the series paired with total expense. The table also contains the positions of the ratios in 1925 in all districts, and of those for all years in the Boston istrict. The relation between ratios of total expense and ratios of in- vestments is generally inverse; that between ratios of total expense and ratios of gross earnings is direct. While not all of the frequencies for series showing inverse and direct correlation are distributed as are those in Table 139, conformations are generally of these types, net earnings heing one series, paired with total expense, about which the nature of the association is clearly in doubt. But an analysis of the relations of different types of banking data to variable total expense need not be restricted to correlat- ing district deviations. It may be pushed further with the intent of discovering and measuring the type and extent of the associa- tion between year-to-year changes in the ratios of a number of series paired with ratios of total expense. Specifically, it is de- sired to know whether, with increasing or with decreasing ratios of total expense, net changes of a like or of an inverse nature occur in those of other banking series. Such an inquiry is under- taken not for the purpose of establishing cause-and-effect relations between such series, but only with the intent of measuring the type and degree of the association, if any, which is present. Ratios of total expense are again treated as the independent variable. In earlier chapters, where this process was carried out with total expense as the dependent variable, it was found that by directions and by percentage amounts of change ratios of total expense were positively or negatively associated with variable changes in a number of other series. In the case now being studied, the process, as noted, is the reverse, interest being cen- tered in the directions and net percentage amounts of change in different series accompanying variable changes in direction and amount in ratios of total expense. Table 140 shows the net year-to-year changes in the ratios in a number of series paired with changes of a like nature in ratios of total expense. The classification of the changes in the ratios of total expense is secured by a method analogous to that already TABLE 140 CORRELATION OF YEAR-TO-YEAR PERCENTAGE CHANGES OF DISTRICT RATIOS IN PAIRED SERIES » A Ia INDEPENDENT VARIABLE— Ratios of Total Expense to Earning Assets Amount of Change Direction Percentage Groups Average Percent- age 1 Total + 7.08 Number of District: Years wo | Loans and Discounts to Earning Assets 42.85 | Invest- ments to Earning Accets Total Deposits to Earning Aggets ».8 ! +0.67 DEPENDENT VARIABLES—Net Average Percentage Change Demand Deposits to Total of Time and Demand Deposits Time Deposits to Total of Time and Demand Deposits Demand Deposits to Earning Assets Time Deposits to Earning Assets Gross Earnings to Earning Accete — 4.00 —4.75 412.20 4rr. or + 6.07 Total Expense to Gross Earnings + 4r.70 Net Earnings to Earning Assets 41.83% i e————— Increase Decrease 15.00 and over| 420.75 to.0o to 15.00|+410.87 5.00 to 10.00|4 6.98 Under 5.00!+ 1.88 Under 5.00 |= 2.36 5.00 and over! — 6.85 Total |= 4.47 0 +2.03 2 +6.25 II +5.79 IR 41 of "n XI, —1.04 —3.24 —2.55 ad — 7.59 —13.81 ~12.853 2 61 —4.1I5 40.59 +1.74 +2. 43 + “.47 +10.65 +5.72 “+4.10 + 8.43 | +4.96 ~10.01 ~ 5.08 ~ 2.30 —- 1.064 —7.99 —5.65 —3.99 —-3.95 415.76 411.76 +12.9¢ 4108 2a~ + 4.54 + 2.66 —1.15§ —I.41 + 7.08 + 9.05 + 3.66 —1.27 | + 8.48 : 4-20.90 411.11 +11.09 + #7 or + 2.17 4.78 + 3.40 415.32 110.27 + 6.49 LL o0.72 44.67 40.74 40.61 ivy TO $4.01 19.50 +5.39 -2,25 — 2.43 —- 7.00 — 4.61 | +o0.20 | —-4.73 —2.60 -7 18 SERIES CORRELATED WITH EXPENSES 235 described respecting the percentage deviations given in Table 136, the difference being that in Table 140 the percentage changes from year to year are taken as the bases of classification. Then, for each classified group, the net year-to-year changes are deter- mined for the associated series. An inspection of the stub (horizontal) classes of Table 140 shows that the direction of change in ratios of total expense was upward in go district-years and downward in 32—six yearly changes being possible between 1919 and 1925 for each of the twelve districts. If the direction of change alone is first consid- ered, it is found that (1) net increases and decreases from year to year in the ratios in the following series are positively corre- lated with increases and decreases, respectively, in ratios of total expense to earning assets: loans and discounts, gross earnings, and net earnings to earning assets; and (2) net year-to-year changes in the ratios of investments to earning assets, and of demand deposits to earning assets, are negatively correlated with similar changes in ratios of total expense to earning assets. Further study of the table shows that while the net changes in ratios of time deposits to total deposits and to earning assets and in ratios of total expense to gross earnings were upward for both rises and declines in ratios of total expense, the rise was greater for districts having increasing than for those having de- creasing ratios of total expense, and that the greater the percent- age change in ratios of total expense, whether increasing or de- creasing, the greater the net percentage rise in each of the asso- ciated series. In general, net percentage amounts of change of the ratios in each of the various series tend to be positively cor- related with percentage amounts of change in ratios of total ex- pense to earning assets, while the directions of change in some of them are positively and in others negatively correlated with the directions of change in total expense ratios. In the latter con- nection, loans and discounts and demand deposits are of interest. It is of interest to observe also, that positive correlation of differences from district averages and of year-to-year changes obtains between ratios of gross earnings and of total expense, and that negative correlation obtains for district differences and changes from year to year between ratios of investments and of total expense. TABLE 141 NUMBER OF DISTRICT-VEARS IN WHICH RATIOS OF INVESTMENTS AND OF GROSS EARNINGS TO EARNING ASSETS CHANGED FROM YEAR TO YEAR BY PERCENTAGE AMOUNTS CLASSIFIED BY CORRESPONDING PERCENTAGE CHANGES IN RATios oF ToralL EXPENSE To EARNING ASSETS, 1919-1925* nN AN [@,Y Ratios: Total Expense to Earning Assets (Percentage Changes) Direc- tion ' Amount 15.00 | and over 15.00 and over [0.00 to 1R.00 Increase —l—— RATIOS: Investments to Earning Assets (Percentage Changes) Increase T — ME Decrease 10.00 to 1.0 5.00 to 10.00 Under £.00 | 5.00 Under to 5.00 10.00 | 10.00 to 15.00 b 15.00 and over 15.00 1 and over D - RaTI0S: Gross Earnings to Earning Assets (Percentage Changes) Increase ro —— 1 Decrease 10.00 to 12.00 5.00 to 10.00 Under 2.00 Under 5.00 5.00 to 10.00 10.00 to 15.00 5.00 to 10.00 Decreas: Under 5.00 Under PF an iC 5.00 and Over i 9 € ’ 1 a! e 12) 0 il 6 1- ”y oO iz 9 «© 20 d — *Boston district: a=1919; b=1920; c=1921; d =1022; e=1923; f =1024; g=1025. The numbers in black face tvpe refer to the respective Federal Reserve districts for the vears 1024-1025. SERIES CORRELATED WITH EXPENSES 237 A frequency grouping of the percentage year-to-year changes in the correlated series will serve to illustrate the detail from which certain of the net amounts in Table 140 are secured. The nlain figures in Table 141 relate to the frequencies for all of the changes for all of the districts; the bold type figures refer to the respective districts, as named in the Federal Reserve Act, for the changes between 1924 and 1925; and the letters indicate the different pairs of years in the Boston district. It will be observed that the alignments of the changes in the single pair of years in all districts, and in all year-to-year changes in one district, follow generally that for the combined experience in all districts. The discussion immediately above relates to the types and measures of correlation obtaining between deviations and net year-to-year changes in district ratios of total expense to earning assets and similar ratios in other series of bank data. Another basis upon which correlations between such series may be deter- mined is available. It has already been determined that while ratios of expense and of other indexes of bank operation vary among the respective Federal Reserve districts, a single ratio each year for each series being compounded out of the records for the entire membership in each district, these variations for individual series, rather than being haphazard, are characterized by clearly defined norms, and that those for certain paired series are cor- related positively or negatively. The nature of this association, with ratios of total expense treated as the dependent and each of a number of other series as the independent variable, has al- ready been determined. In the matter which immediately fol- lows, variations by districts being taken from the averages for the country as a whole, the order of the correlated variables is reversed. Specifically, and with respect to ratios of gross earn- ings, for instance, the questions to be answered are of the follow- ing order: Do districts having ratios of expense above (or below) the country levels have ratios of gross earnings above (or below) the country level, or vice versa? Moreover, what is the nature of the relations between the percentage amounts of such deviations? Similar questions may be asked respecting each of the other series of ratios. It has already been learned that districts having high or low gross earnings ratios, respectively, have high or low ratios of total TABLE 142 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Country’s Yearly Averages) 5 “ry Position Above INDEPENDENT VARIABLE— Ratios of Total Expense to Earning Assets Distance from Average Number of District- Years Loans and Discounts to Earning Assets Percentage Groups Average Percentage Total +12.00 cx ' 4+ 6.42 22.50 and over 15.00 to 22.50 7.50 to 15.00 Inder 7.c0 $26.84 12 +10.46 XI t1r.90s 9 L 3.50 10 410.62 + 9.08 + 6.75 + 2.08 Under 7.50 7.50 £0 15.00 [€.00 to 22.50 — 3.00 —10.27 -17.90 15 1” 5 + 0.26 -~ 5.00 -10.01 Invest- ments to Earning Accets —~16.40 —27.87 ~23.1I —-16.90 — 5.20 — 0.68 412.96 +46.36 DEPENDENT VARIABLES—Net Average Percentage Total Deposits to Earning Assets Demand Deposits to Earning Assets Demand Deposits to Total of Time and Demand Denosits Time Deposits to Earning Assets Time Deposits to Total of Time and Demand Deposits Gross Earnings to Earning Assets +0.34 —- 5.28 — 8.48 +12.83 “411.80 -+ 8.8% +o0.92 —0.38 +2.62 -—0. 70 — 1.24 — 0.74 = 3.90 —1X.20 ~ 1.83 - 0.16 - 6.12 —-10.47 }10.67 r 2.17 14.08 tenn an + 8.72 - 2.19 +10.75 +20 eR +15.06 +13.00 410.08 + 1.04 —X.37 —-1.68 —2. 8% ~ 6.34 t+ 3.51 - 4.00 — 5.08 + 5.13 - 1.16 + 90.31 -—12.01 -— Yh +10.84 —I0.20 4 2 ae -— 9,25 —- 6.98 —- 2 81 Net Earnings to ' Earning Assets |. —-12.02 - 2.33 + 5.21 —- 1.03 — 0.57 + 0.97 4-12.07 Below Total | —- 7.64 33 — avs | +4 g.709 —-1.%74 —~ 1.74 Q— - 1.28 J + 4.03 —- 4.02 + 1.5% SERIES CORRELATED WITH EXPENSES 239 expense, and that the higher or lower the ratios in the first series, the higher or lower are those in the second series. But is the reverse of these conditions true? The answer to this question, and to similar questions for other series, is found in Table 142. From this table it is seen that ratios in certain series are closely correlated with those of total expense. Generally speaking, the relations are as follows: (1) when ratios of expense are high or low—that is, above or below the level for the country as a whole —ratios of investments and of net earnings to earning assets are low or high; that is, the correlations are negative; (2) when ratios of expense are high or low, those of time deposits and of gross earnings to earning assets are also high or low—that is, they are positively correlated; and (3) the greater the deviation from type in the matter of total expense, the greater the deviation in ratios of investments and of gross earnings to earning assets. The net percentage amounts of deviation in the ratios in these series are positively correlated with similar deviations in ratios of total expense. That these relations markedly characterize the bulk of the frequencies dealt with, at least for certain of the series, is ap- parent from the alignment of the distributions shown in Table 143, the association between total expense and gross earnings ratios being strikingly consistent. Space is not available in which to record the paired frequencies for all of the correlated series. In general, however, the type of distribution is accu- rately summarized in the net amounts given in Table 142. Moreover, as shown in Table 143, the type of relations found for deviations for all districts all years tends to obtain for all years for the Boston district, and for the year 1925 for all districts. A table, summarizing the types of relations measured in dif- ferent ways found to obtain between variable ratios in a number of series (the dependent variables) and ratios of total expense (the independent variable) will bring together our findings in these respects and supply, with other tables already presented, the bases for the generalizations on pages 249-250. Such a table is that found on page 250. Chart 48 shows graphically the rela- tions between ratios of total expense and net earnings to earning assets. TABLE 143 NuMBER OF DisTrICT-YEARS IN WHICH RATIOS OF INVESTMENTS AND OF GROsS EARNINGS TO EARNING AssETs DIFFERED BY PERCENTAGE AMOUNTS FROM THE YEARLY AVERAGES FOR THE COUNTRY AS A WHOLE, CLASSIFIED BY THE CORRESPONDING PERCENTAGE DIFFERENCES IN RATIOS OF Total EXPENSE To EARNING ASSETS, 1919-1925% >) ,~ J Ratios: Total Expense to Earning Assets (Percentage Differences) Position Amount 30.00 and over 22.50 and over 15.00 to 22.50 | oo 7.50 to 15.00 | Under 7.50 Above Under 7.50 Below 7.50 to 15.00 RATIOS: Investments to Earning Assets (Percentage Differences) Ahoy 2» Below 20.00 to 20.00 10.00 to 20.00 Under 10.00 Under [0.00 IC.00 to 20.00 20.00 to 30.00 10 - 112 7 8 o d 1 30.co and over £00 and Over 10 RATIOS: Gross Earnings to Earning Assets (Percentage Differences) _— rrr Above Below 7.50 Under to 7.50 cE AO Under 7.5% 7-50 15.00 2 9 s 6 4 5x: 2 v7 | I 3 je a 2 1" 3a be 8 i 2 —— 1.00 to 22.0 *Boston district: a=1919; b=1920; c=1021; d=1922; e=1923; f =1024; g=1025. The numbers in black face tvpe refer to the respective Federal Reserve districts for the vear 103¢. SERIES CORRELATED WITH EXPENSES CHART 48 244 CoMpARrISON OF RATIOS OF TOTAL EXPENSE AND OF NET EARNINGS To EARNING ASSETS, BY FEDERAL RESERVE DISTRICTS, 1919-102¢ NEY EARNINGS ee. TOTAL EXPENSE ae ee 919 1920 1921 1922 1923 1924 192% DISTRICTS - ALL BOSTON l. NEW YORK ). PRILADELPHI~. i. CLEVELAND tales of -centage “108 3. RICMMOND ATLANTA CHICAGO SY Lous ). MINNEAPOLIS — 10. KANSAS CITY 11. DALLA® 12. SAN FRANCISCO™ cd coanen®t® 2319 1920 — ~ 1921 1922 1923 1924 192% 242 BANKING STANDARDS 3. INDIVIDUAL EXPENSES The individual expense items of member banks, as distinguished in the reports of the Federal Reserve Board, are as follows: salaries and wages, interest on deposits, interest and discounts on borrowed money, taxes, and “other expenses.” Each of these expense elements has been examined as to norms and trends in Chapter VI. Moreover, the manner in which each of them is correlated with variable loans and discounts, deposits, and gross earnings, and so on, is discussed in the chapters relating, respec- tively, to these topics. Correlations of ratios of individual ex- pense items with ratios of total expense were not considered in Section 2 of this chapter, inasmuch as together they make up the total, and it is statistically inappropriate to correlate a total with any one of its parts. In view of the relations found to obtain between variable ratios of loans and discounts and of deposits,® and so on, with ratios of individual expense items—the respective items constituting the dependent, and the ratios in the other series, respectively, the independent variable—it is unnecessary to trace out the relations with the positions of the variables reversed. The type of asso- ciation between the series correlated according to the first is, in general, the same as that found according to the second method. The present analysis, therefore, relates to the association of paired deviations from district averages between the expense elements themselves, attention, because of the limited space available, being restricted to the following items: salaries and wages, interest on deposits, and interest and discounts on borrowed money. It is, of course, unlikely that there are direct functional relationships exist- ing between the separate elements of expense. On an a priori basis none would be expected. Correlations found to obtain are prob- ably indicative of mutually direct or inverse effects attributable to common causal elements—a phenomenon frequently encountered in social affairs. This fact is particularly true with respect to cer- tain correlated series; with respect to others, it is not so apparent. (1) Salaries and Wages By taking the seven-year average ratios of salaries and wages 8 See Tables 9%, 08, 111, 113, 121, 127, 131, and 133. SERIES CORRELATED WITH EXPENSES 243 TABLE 144 CORRELATION OF DisTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages, Period 1019-1028) Position INDEPENDENT VARIABLE— Ratios of Salaries and Wages to Earning Assets Di Fon = ve istance fr-~- Ayerara Percentage Groups “rerage cg Number of District- Years DEPENDENT VARIABLES— Vat Averaoce Percentage Interest on Deposits to ‘arning interest and Discounts on "srrowed " "oney ..arning Accate Tatal N Above Below 10 and over. to I. Ted ar y ¢ _— I 36.40 mst to earning assets in the respective districts as standards, and by expressing the yearly deviations of the ratios in percentage form, the distribution shown in the stub (horizontal) classes of Table 144 is secured. With the data treated in this manner, it is found that in 53 district-years the ratios were above, and in 31 dis- trict-years they were below the standard levels. On a percentage basis, the deviations range from 10 or more above to 10 or more below, the form of the distribution approaching the “U” type. If, then, for the district-year deviation groups, the net percentage deviations by sign and amount in the correlated series are deter- mined, the percentages found in the caption (column) classes are secured. Based upon direction of deviation alone, ratios of interest on deposits are positively correlated, and ratios of interest and dis- counts on borrowed money are negatively correlated with ratios of salaries and wages, all expense amounts being expressed in terms of earning assets. These types of relations, moreover, ex- tend to each of the dispersion groups. That is, in general, when- ever and wherever ratios of salaries and wages are high or low, the standard for determining these relations being the respective dis- trict averages, paired ratios of interest on deposits tend to be high or low, respectively, and paired ratios of interest and discounts on borrowed money tend to be low or high, respectively. In addi- tion, the higher or lower the ratios of salaries and wages to earning 244 BANKING STANDARDS assets, the higher or lower, respectively, the ratios of interest on deposits. Neither positive nor negative correlation obtains, how- ever, between the net percentage deviations of ratios of interest and discounts on borrowed money and percentage deviations of salaries and wages. Positive correlation, found to obtain between the district devia- tions of ratios of salaries and wages and of interest on deposits, should not, it is believed, be interpreted as of a causal order. The reasons for this belief are as follows: At a given time, the larger the proportion of time deposits to gross deposits, the smaller the ratios of wage and salary expense to earning assets, and the larger the ratios of interest on deposits to earning assets. The positive correlation, found in Table 144, is due to the fact that during the years 1919 to 1925 there was an upward trend in both series. The inverse correlation between ratios of salaries and wages and of ratios of interest on borrowed money is due to the fact that, for the period 1919-1925, the direction of change in the ratios of the first series was generally upward and in those of the second series generally downward. When yearly deviations in the respective series are paired, the correlation, therefore, tends to be of the negative type. It would be perfect only if a plus deviation in one series were always accompanied by a negative deviation in the other, and vice versa. (2) Interest on Deposits The average amounts of interest paid on deposits, relative to earning assets, by all member banks in each of the Federal Re- serve districts by years weré analyzed with respect to norms and trends in Chapter VI. In later chapters, the types and degrees of correlation obtaining between each of a number of banking series and interest payments in this form were given in various tabular summaries. There is no necessity of repeating what has been said relative to such correlations in each of which interest payments on deposits, in the form of ratios to earning assets, were treated as the dependent variable. Neither is it advisable, because of £ See Frederic H. Curtiss, “Operating Costs and Profits in 1925,” Federal Reserve Bank of Boston, from which this relationship may be determined for banks in the Boston district. SERIES CORRELATED WITH EXPENSES 245 limited space, to reverse the process of measuring the association by making ratios of interest on deposits the independent, and ratios in other series the dependent variables. The order of asso- ciation is the same in both types of comparison; it is only the degree which differs. Accordingly, as is the case immediately above with respect to ratios of salaries and wages in terms of earning assets, correlations are restricted to the individual ex- pense items alone. Moreover, it is only the district deviations which are correlated, ratios of interest on deposits being used as the independent variable. Table 145 shows the type and nature of the association between ratios of salaries and wages and of interest and discounts on borrowed money and variable ratios of interest paid on deposits, the amounts in all cases being related to earning assets. It is apparent, from the showing in this table, that both by direction and by net percentage amounts of deviation, salaries and wages are positively correlated with interest payments. Moreover, as noted above, interest payments are positively correlated with salaries and wages. That is, in general, whenever and wherever high or low ratios of interest on deposits (or ratios of salaries and wages) are found, high or low ratios of salaries and wages (or ratios of interest on deposits) are encountered. This state- TABLE 145 CORRELATION OF DISTRICT DEVIATIONS OF RATIOS IN PAIRED SERIES (Percentage Deviations from the Respective District Averages, Period 1919-1925) Pacsition INDEPENDENT VARIABLE— Ratios of Interest on Deposits to Earning Assets Distance fr~m Average Percentage Groups Average Dercentage Number of District- Years DEPENDENT VARIABLES— "Tet Average Percentage — — Salaries and Vages to "arning Aceete Interest and Discounts on Borrowed Money to Earning Assets ThAt Abhave rand o tr ‘to. Td k 1 Jelow cm BVM LL eYTAR ‘'atal 40 3 '3 +54.49 TABLE 146 NuMBER oF DISTRICT-YEARS IN WHICH RATIOS OF SALARIES AND WAGES AND OF INTEREST AND DISCOUNTS ON BORROWED MONEY TO EARNING ASSETS DIFFERED BY PERCENTAGE AMOUNTS FROM THE DISTRICT AVERAGES, 1919-1925, CLASSIFIED BY CORRESPONDING PERCENTAGE DIFFERENCES IN RATIOS oF INTEREST oN DEPoSITS To EARNING ASSETS RATIOS: Interest on Deposits to Earning Assets (Percentage Differences) RATIOS: Salaries and Wages to Earning Assets (Perceniage Differences) Above Below Rartios: Interest and Discounts on Borrowed . Money to Earning Assets (Percentage Differences) Below — Position Amount 10.00 5.co and to | nver 10.00 Under 2.00 5.00 Under to 5.co ir "0 10.00 and over 60.00 | 30.00 and to over fa ne Under 20.00 Under 20.00 30.00 to 60 no 60.00 and over 15.00 and over nN = ) Above 10.00 to 15.00 5.00 to 10.00 Under 5.00 Under 5.00 5.00 to 10.00 Below ar mimm—inimim——— 10.00 tO 15.00 15.00 and over 4 n y SERIES CORRELATED WITH EXPENSES 247 ment should not be interpreted as meaning that such relations hold in every district-year; the association discovered is that found generally, or as a rule, to prevail. Neither should it be understood that there is necessarily a direct causal connection between these items of expense. Both items being positively correlated with :ime deposits, are positively correlated with each other.5 Table 145 also shows the type and net amount of deviation of ratios of interest and discounts on borrowed money, calculated from the respective district averages, for each variable amount of deviation in ratios of interest on deposits taken from their district averages. By direction of deviation, the two series are negatively correlated; by amounts of deviation, correlation is moderately positive. That is, whenever and wherever high or low ratios of interest payments on deposits occur, ratios of interest and dis- counts on borrowed money tend to be low or high, respectively. Moreover, in all groups except two, the greater the deviation from type of ratios of interest on deposits, the greater the deviation of ratios of interest and discounts on borrowed money. The inverse relation by direction of deviation may be explained as follows: Ratios of interest on deposits to earning assets are positively correlated with those of time deposits to total deposits; and time deposits ratios are positively correlated with ratios of in- vestments to earning assets. Relatively large investments, as per- centages of earning assets, indicate that banks have funds adequate for the accommodation of their customers, thus reducing the necessity of borrowing from each other and of rediscounting with the Federal Reserve banks. Hence the inverse relation between ratios of interest and discounts on borrowed money and those of interest on deposits. The direct and the inverse correla- lion, respectively, between interest on deposits and salaries and wages and between interest on deposits and interest and discounts on borrowed money are shown by the distribution of the fre- quencies in Table 146. (3) Interest and Discounts on Borrowed Money In the discussion of the items of expense which, according to district deviations, are correlated with salaries and wages, it was found that the relations obtaining between interest and discounts 5 See the discussion of this point, pages 201-202. TABLE 147 NUMBER OF DISTRICT-YEARS IN WHICH RATIOS OF INVESTMENTS TO EARNING ASSETS AND OF TiME DEPOSITS TO ToTAL DEPOSITS DIFFERED BY PERCENTAGE AMOUNTS FROM THE DISTRICT AVERAGES, 1919-1925, CLASSIFIED BY THE CORRESPONDING PERCENTAGE DIFFERENCES IN RATIOS OF INTEREST AND DiscouNTs oN BORROWED MONEY TO EARNING ASSETS ul Loe OO RaTr0S: Interest and Discounts on Borrowed Money (Percentage Differences) Position Amount 60.00 and over Ahave 20.00 to 60.00 [5.00 and over Ratios: Investments to Earning Assets (Percentage Diflerences) Above Below 7-50 to 18.00 Under 7.50 Under 7.80 room — —— 15.00 and over 20.00 and over Ratios: Time Deposits to Total Deposits (Percentage Differences) Above Below 10.00 to 20.00 Under [0.00 Under 10.00 10.00 to 20.00 20.00 and over 2 Under 20.00 Under 20.00 Relow 20.00 to 60.00 3a. 00 and over . SERIES CORRELATED WITH EXPENSES 249 on borrowed money and this series are of the inverse or negative type. Similar inverse relations are present when the positions of the correlated series are reversed—that is, when salaries and wages are made the dependent and ratios of interest and discounts on borrowed money the independent variable. The explanation of the relation in the first case holds for that in the second. Moreover, in the discussion of the nature and degree of corre- lation obtaining between interest on deposits and interest and discounts on borrowed money—the first being the independent and the second being the dependent variable—it was found that the relations are negative or inverse. When the positions of the series are reversed as to the type of variable, the same relations hold. The explanation found for the type of association in the first case also applies in the second case. It will be recalled that the causal order extends through investments and time deposits. Accordingly, it is instructive to observe the type of correlation found between ratios in each of these series—district differences being paired—and ratios of interest and discounts on borrowed money. It is apparent from Table 147 that the correlation is negative for both series. It is difficult briefly to summarize the findings of this chapter, and only those relating to series correlated with the total expense seem to require restatement. For the collective member banks by districts, it tends to be true, as shown in Table 148, that whenever and wherever® ratios of total expense to earning assets are relatively high or are increas- ing from year to year, both time deposits and gross earnings, as percentages of earning assets, are high or are increasing. Con- versely, if the former are low or tend to decrease, the latter are also low and tend to decrease. On the other hand, if ratios of total expense, expressed in this form, are high, ratios of invest- ments to earning assets tend to be low, and vice versa. Moreover, if ratios of total expense to earning assets are high, they also tend to be high in relation to gross earnings. In a word, high or low ratios of total expense are associated with high or low ratios of lime deposits and of gross earnings, and with low or high ratios of investments. 8 “Whenever” refers to ratios in any one of the years 1919 to 1925, or to the percentage changes in the respective ratios from year to year. “Wherever” refers to the respective Federal Reserve districts. 250 BANKING STANDARDS Moreover, total expense as a percentage of earning assets tends to be low or high, respectively, as ratios of investments are high or low; and high or low as ratios of time deposits and of gross earnings are high or low. That is, low or high expense ratios tend to be associated, respectively, with high or low investment ratios, and high or low investment ratios tend to accompany low or high expense ratios. Then, too, high or low expense ratios, respectively, accompany high or low ratios of time deposits and of gross earnings, and high or low ratios of time deposits and of gross earnings are associated with high or low expense ratios— high or low being interpreted not alone with respect to the seven- TABLE 148 NATURE OF CORRELATION OF PERCENTAGE DIFFERENCES AND CHANGES FROM YEAR TO YEAR OF RATIOS IN PAIRED SERIES, 19109-1925 NATURE of MEASUREMENT Inde- pendent Varia- bles Total Expense to Earning Assets Salaries and Wages to Earning Accets [nterest . on Deposits’ to, Earning | Assets SERIES CORRELATED (Exbressed as Ratios) Differences from District Averages | Changes from Year to Year Differences from Country’s Yearly Averages Dependent Variables Direc- tion Amount Direc- res | Amount Direc- rec | Amount [nvestments to Earning Assets Time Deposits to Total Deposits Time Deposits to Earning Assets Gross Earnings to Earning Assets rt —— Negative ‘Positive Negative "Positive Positive [Positive (1) (x) Positive (1) Positive Positive dositive | (1) Positive Positive [Positive (2) [Negative ! (1) (2) (2) i | | (x) (2) (2) (2) (2) __ oe | | Positive [Positive (2) (2) (2) (2) Interest and Discounts on ] LL. | | Borrowed Money to |Negative [Positive (2) (2) (2) Earning Assets (1) Doubtful. (2) Not computed. SERIES CORRELATED WITH EXPENSES 251 year level for the respective districts, but also in terms of the level found to characterize the entire bank membership in the Federal Reserve system over the period 1919-1925. Such are the relations between ratios of total expense and those of other banking series for all member banks, ratios in all cases being the yearly averages for the membership by districts. The relations are summarized in Table 148. rr Hh 11 SERIES CORRELATED WITH NET EARNINGS THE net earnings of a bank, according to the accounting pro- cedure followed by the Federal Reserve Board in reporting the operating details of member banks, are the difference between the gross earnings and the total expense. That is, they are resi- duals, the amounts depending not upon the absolute size of the gross earnings and of the total expense but rather upon the dif- ference between them. For instance, a rate of 2%—relative to earning assets—may come about by virtue of a gross earning rate of 8% and a total expense rate of 6%, both expressed in terms of earning assets, as in the case of the banking experience of Dallas in 1922, or from a gross earning rate of 6% and a total expense rate of 4%, as, for instance, in the case of Philadelphia in 1925. Accordingly, if 8—~6=2, and 6—-4=—12, conversely, 6+ 2=38, and 4 -}- 2=26. For a single bank, or for a group of banks treated as a unit, if gross earnings are large, other things being equal, net earnings are large, and if they are small, other things being equal, net earnings are small. Conversely, if total expenses are large, other things being equal, net earnings are small; if they are small, other things being equal, net earnings are large. But such simple relations do not obtain when averages, relating to any one or to all of the variables, are dealt with. This fol- lows because “the other things” which are supposed, as above, to be equal are unequal. For instance, large gross earnings are at times and at places associated with small, and at other times and places accompanied by large total expense, and vice versa. Conversely, large total expenses are at times and at places ac- companied by small and at other times and places by large gross earnings, and vice versa.! Accordingly, when data for individual banks, or for groups of banks taken as a unit, are combined with Em 1 For a graphic summary of the relations between ratios of gross earnings and of total expense for member banks by districts, see Chart 33, page 130. 52 SERIES CORRELATED WITH NET EARNINGS 253 respect to the items just mentioned, and an average result is calculated, it does not necessarily follow that the average rate of net earnings is large when gross earnings rates are large or when total expense rates are small, or that it is small when inverse conditions obtain. Neither does it follow that when the average rate of gross earnings is large or small, the average rate of net earnings is large or small, because nothing is said about total ex- pense, and, of course, this is the important “missing link” in the equation of relations. Now the facts are, as shown in Chapters V, VI, and VII, that ratios of gross earnings, of total expense, and of net earnings for member banks, by districts, vary from district to district and from year to year. Such variations are of two types: the respec- tive ratios vary among themselves, and with respect to each other. That is, for the experience studied, gross earnings, total expense, and net earnings do not stand in the simple relation given above— 8—-6=2 and 6 —4==2. They are rather of the following type: 8—6=2 and 7-4=3. Accordingly, with variation character- izing all three series, comparisons of them individually and one with another can be made only by using some form of an average as a standard. And when this is done, the relations found to obtain are true only “on the average.” For the collective experi- ence compounded into an average figure, the simple relations be- tween high or low gross earnings, high or low total expense, and high or low net earnings, or vice versa, do not necessarily hold. This much is apparent with respect to the correlations found to obtain between different series, as developed in previous chapters. But more of this presently. Average net earnings, as has already been noted, are residuals, depending upon the relations between average gross earnings and average total expense, each of these averages summarizing condi- tions varying with respect to the member banks by districts and by years. Moreover, both average gross earnings and average total expense ratios are functionally related to operating condi- tions, and these vary among the respective banks. It is apparent, therefore, that in studying by districts (1) the norms and trends in the ratios of net earnings themselves, relative to appropriate average conditions within the districts or for the country as a whole, and (2) the correlations of net earnings with other series, variation rather than strict uniformity rules: and, further, that BANKING STANDARDS account must be taken of the relative influence exerted by varying operating conditions, years, and districts, in so far as they bear upon both gross earnings and total expense, the relations between which determine the net earnings. All of this has been done in so far as the nature of the data permits. It is of interest, apropos of what has just been said, to review briefly the manner in which this has been accomplished. The analysis began with the presentation, for a variety of series of data, of the actual ratios for member banks, by districts and years. Diversity was immediately apparent—differences re- lating to the various years and to the several districts. In order to secure a basis for the study of the ratios, an average or a series of averages, therefore, was selected from which the ratios were measured ‘as percentage deviations. Moreover, the percentage changes from year to year for the ratios in each district for each series of data were also calculated. These, together with the percentage differences from type, were the data out of which, for each series, norms and trends were determined. But the dis- cussion of such differences and trends related specifically to the individual series; each was treated independently, the relations between them being left for subsequent study. What in general resulted from the first type of analysis? In spite of diversity of district location, of number of banks, and of yearly and district variations in the ratios, each series of data revealed norms and trends. [t was patent, however, that the different series were not in- dependent of each other. Even the barest knowledge of the func- tions performed by banks and of banking operations suggested this fact. But in what way and to what degree they were related was not, on an @ priori basis, apparent; analysis of a type designed to reveal these facts was necessary. Accordingly, later chapters of the discussion were concerned with this problem. It is un- necessary to repeat in detail the findings in these respects, save certain of those which have to do with ratios of gross earnings and of total expense, the relations between which determine the ratios of net earnings, and to which attention is called inasmuch as they have a direct bearing on the matter which follows. In reviewing our findings, so far as correlation between series is concerned, it is appropriate to begin with the subject of gross earnings. Other things being equal, it is to be remembered, the 254 SERIES CORRELATED WITH NET EARNINGS 255 TABLE 1409 NATURE OF CORRELATION IN PERCENTAGE DEVIATIONS AND YEAR-TO- YEAR CHANGES IN DIFFERENT SERIES PAIRED SERIES CORRELATED Independent Variables Dependent Variables Loans and Discounts to Earnine ASSIS... unurn singin Gross Earnings to Earning As- sets. |. . Gross Earnings to Earning As- sets. ........ i. Loans and Discounts to Earnir- Assets... Tatal Deposits to Earning As- BEY. . LL .iieiisihe nanan Gross Earnings to Earning As- pte Gross Earnings to Earning As: Sets. ..... ci, Total Deposits to Earning As- ets NATURE oF CORRELATION Differ- ences from District \verages Changes from Year to Year Differ- ences from , Country's Yearly Averages Positive Positive Positive Positive Positive Positive Negative Negative® Negative®! Nerative®! Positive® ow larger the gross earnings, the larger the net earnings. Accord- ingly, it is well to observe the conditions favorable or unfavorable to large gross earnings and, hence, also to net earnings, provided total expense remains constant. The fact that it does not remain constant may be ignored for the moment, but must, of course, later be taken into account. It will simplify the review of matter already presented if the expressions “positive correlation” and “negative correlation” are used, and if, as appears likely in the instances under review, the presence of correlation indicates a causal order of relations. The relations between variable conditions in two important series and those in ratios of gross earnings are summarized in Table 149. From this table it is apparent that, in general, when- ever and wherever loans and discounts as proportions of earning assets are relatively large or small, gross earnings in relation to earning assets are large or small; and whenever and wherever ratios of gross earnings are large or small, ratios of loans and discounts are large or small. That is, the series are positively correlated. On the other hand, the larger the ratios of total deposits to earning assets, the smaller the ratios of gross earnings to earning assets. Similarly, the larger the ratios of gross earn- ings to earning assets, the smaller are the total deposits? ap- 2 There is low positive correlation for the paired ratios taken from the country’s vearlvy averages. 26 BANKING STANDARDS TABLE 150 NATURE OF CORRELATION IN PERCENTAGE DEVIATIONS AND YEAR-TO- YEAR CHANGES IN DIFFERENT SERIES PAIRED SERIES CORRELATED Independent Variables Dependent Variables Loans and Discounts to Earning! Assets................... Total Expense to Earning Assets| Total Expense to Earnins P30 0 Loans and Discounts to Earn ing Assets... ... .. .. Total Deposits to Earning Assets................... Total Expense to Earning Assets Total Expense to Earning ASSES. ... oe vunigs engi] Total Deposits to Earning Assets. NATURE OF CORRELATION Differ- | Changes | ences from from Year District , to Averages Year Differ- ences from Country’s Yearly Averages Positive Positive Positive Positive Negative | Negative® Neezative*! Positive® Positive* Positive* *Low. propriately measured. In general, therefore, relatively large loans and discounts seemingly operate to produce relatively large gross earnings, while relatively large total deposits operate to re- duce them. Accordingly, gross earnings are functions of at least two conflicting variables. If no account is taken of conditions other than variable ratios of loans and discounts and of total deposits, then the amount of average gross earnings for the member banks in a given year and district depends upon the relative influence of each of these fac- tors. It is of little avail to attempt to measure, other than in general terms, their respective causal effects. Indeed, it is prob- able that they are related, both being effects of causes latent in the state of business at given times and places. Accordingly, we shall not attempt a separate appraisal of the causal influences of either of them upon ratios of gross earnings.® If other things, as respects total expense, are held to be con- stant, then relatively large ratios of loans and discounts to earn- ing assets and relatively small ratios of total deposits to earning assets should be associated with relatively large net earnings. Whether operating expenses do remain constant with variable conditions respecting loans and discounts and deposit items, there- fore, is pertinent to the subject matter of this chapter. The rela- tions discovered, and developed at length in previous chapters, are summarized in Table 150. "2 See. however, Table 107, page 177, and the accompanying discussion. SERIES CORRELATED WITH NET EARNINGS 257 It is apparent at once, from an inspection of this table, that ratios of total expense to earning assets are not independent of —that is, remain the same with—variable ratios of loans and discounts as measured. Indeed, the types of relations between ratios of loans and discounts and of total expense are the same as those between ratios of loans and discounts and of gross earn- ings. Accordingly, with both gross earnings and total expense positively correlated with loans and discounts, and with total ex- pense indifferently correlated with deposits, the relation between gross earnings and total expense is in doubt when approached in this indirect manner. But if high gross earnings go with high total expense and low gross earnings with low total expense, as is the case when the ratios themselves are directly correlated with respect to the district and yearly variations and percentage changes from year to year, the manner in which net earnings are related to both of them, and to the series correlated with gross earnings and with total expense, is not self-evident. Further study is necessary to establish these relations. TABLE 151 NATURE OF CORRELATION IN PERCENTAGE DEVIATIONS AND YEAR-TO- YEAR CHANGES IN DIFFERENT SERIES PAIRED SERIES CORRELATED Independent Variables Dependent Variables Gross Earnings to Earning Assets. .................. Total Expense to Earning Assets Total Expense to Earning Assets... ............... Gross Earnings to Earning Accets NATURE oF CORRELATION Differ- ences from District Averages Changes ‘rom Vear to Year Differ- ences from Country's Yearly Averages Positive . Positive Pocitive + Positive Positive Positive But first, attention should be directed to the type of relations between variable gross earnings and variable total expense. The nature of the correlation is shown in Table 151. If, as shown in this table, high or low ratios of gross earnings, respectively, ac- company high or low ratios of total expense, how are ratios of net earnings affected by these sympathetic changes? Conflicting evi- dence bearing on this question is found in Table 152, in which is summarized the nature of the relations between variable gross ag BANKING STANDARDS TABLE 152 NATURE OF CORRELATION IN PERCENTAGE DEVIATIONS AND YEAR-TO- YEAR CHANGES IN DIFFERENT SERIES PAIRED — — SERIES CORRELATED Independent Variables Dependent Variables Gross Earnings to Earning Assets. ................. Net Earnings to Earning As- ante Net Earnings to Earning As- SOLS. on ov wis 8 mis 8 in 8% win Gross Earnings to Earning Accate Total Expense to Earning Assets, conn civiirinin Net Earnings to Earning Assets. ei Net Earnings to Earning Assets. ..........co0nn. Total Expense to Earning Assets *Low. NATURE OF CORRELATION Differ- | ences from District | Averages Changes from Year to Year Differ- ences from Country’s Yearly Averages | Negative* ! None None | Positive Negative® Positive | None | None - neni. earnings and variable total expense (positively correlated) cor- related with variable net earnings. It is apparent from this table that the probable causal order leading to high or to low net earn- ings runs from gross to net earnings. rather than from total expense to net earnings. Now, from what has been said, it is known that net earnings are positively correlated with gross earnings and indifferently correlated with total expense. But ratios for both of these series are positively correlated with loans and discounts; while those for total expense are indifferently correlated with deposits. Accordingly, it is of interest to observe the relations, if any, between loans and discounts and deposits and net earnings. The relations are given in Table 153. In view of the relations between variable ratios of loans and discounts and of variable ratios of deposits to earning assets and ratios of net earnings, as disclosed in Table 153, it is desirable again to set up the simple relation between gross earnings, total expense, and net earnings. This runs as follows: gross earn- ings—operating expenses=net earnings. Quantitatively, the ratios may stand at any figures, but the ones which are used for purposes of illustration are 6—4=z2. It has been found that relatively large ratios of loans and dis- counts accompany relatively large ratios of gross earnings. Accordingly, if 6% is the average gross earnings ratio for series with average ratios of loans and discounts to earning assets, SERIES CORRELATED WITH NET EARNINGS 250 TABLE 153 NATURE OF CORRELATION IN PERCENTAGE DEVIATIONS AND YEAR-TO- YEAR CHANGES IN DIFFERENT SERIES PAIRED SERIES CORRELATED Independent Variables Dependent Variables Loans and Discounts to Earn- ing Assets. .............. Net Earnings to Earning As- ast Net Earnings to Earning Assets. .............u... Loans and Discounts to Earn- ing Assets Total Deposits to Earning Assets. . oouvwiiomiionisg Net Earnings to Earning As- tets Net Earnings to Earning As- SES. itera Total Deposits to Earning NATURE oF CORRELATION Differ- ences from Jistrict Averages Changes , {rom Year to Vaap Differ- ences from Tountry’s Yearly Average Positive Positive Positive Positive Negative None —— Negative Negative Negative Positive® Negative Negative iw. ratios of loans and discounts to earning assets larger than the average will tend to raise the ratio of gross earnings to some- thing more than 6%. But, as already found, loans and discounts are also positively correlated with total expense. Accordingly, if average ratios of loans and discounts are associated with aver- age ratios of total expense, ratios of loans and discounts higher than the average will tend to be associated with ratios of total expense in excess of the average. That is, if the total expense ratio is 4% under average conditions, it will tend to be in excess of 4% for series with ratios of loans and discounts in excess of the average. If both ratios, 6 and 4—gross earnings and total expense—tend to be high under these conditions, then their effect on net earnings remains in doubt. It is only when it is learned that ratios of loans and discounts to earning assets are also positively correlated with ratios of net earnings to earning assets, that it becomes apparent that their effect upon gross earnings is greater than upon total expense, thus making the ratios of net earnings something above 29% —the amount found, for purpose of illustration, to characterize average conditions in respect to loans and discounts. But forces other than those associated with variable loans and discounts are tending to influence gross earnings, total expense, and net earnings. These, among other things, have been found to be the relative size and type of change in the amounts of total deposits. Their influences, too, acting simultaneously with those 260 BANKING STANDARDS of loans and discounts, must be allowed for in forecasting the changes in the equation, 6—4=2. From Table 149 it is seen that, in general, the larger the ratios of total deposits to earning assets, the smaller the ratios of gross earnings. Accordingly, in series in which these ratios exceed the average, the gross earnings ratio tends to be something less than 6%. The total expense ratios and ratios of total de- posits are indifferently correlated. Accordingly, ratios of total expense may be more or less than 4%, the assumed average. It follows, therefore, that the net earnings ratio may be less than 2%. This conclusion seems valid, because, as indicated in Table 153, ratios of deposits and ratios of net earnings are inversely or negatively correlated. That is, high or increasing ratios of de- posits tend to be accompanied by low or by decreasing ratios of net earnings. If this is true, then it appears likely, since ratios of gross earnings are positively correlated with net earnings and ratios of total expense indifferently correlated with them, that the effect of relatively large ratios of deposits in lowering net earnings exceeds that of relatively large ratios of loans and dis- counts in raising them. And yet this causal sequence does not necessarily hold, inasmuch as, under actual conditions, variables of a variety of sorts are operating simultaneously to determine net earnings. The only thing which, from the analysis, seems to be certain is that for the experience to which it relates, the types of correlation to which attention is called obtain—all variables, except those correlated, being ignored. In a word, conditions associated with relatively high or increas- ing net earnings in terms of earning assets are relatively high or increasing ratios of loans and discounts to earning assets, and vice versa; those accompanying relatively low ratios of net earnings to earning assets are relatively high ratios of total deposits to earning assets, and vice versa. The manner in which such causal relations probably extend through gross earnings and total expense, the immediate dif- ferentials determining net earnings, has already been indicated. Attenuated as is this chain of causal sequence, and unsatisfactory as are the data—relating as they do to groups of banks—by 4Tn this connection, the proportion of demand deposits and of time deposits to the total is of significance. See discussion in Chapter X. SERIES CORRELATED WITH NET EARNINGS 261 which it is traced out, it is believed that it represents conditions as they exist. Supporting evidence for that part of the sequence which relates to gross earnings, to total expense, and to net earnings, is submitted later for individual banking institutions. 5 See Chapter XVII, below. BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM PART IV NORMS, TRENDS, AND CORRELATIONS OF SERIES IN THE BOSTON AND IN THE NEW YORK DISTRICTS BY MEMBER BANKS “Scientific method . . . . consists in the careful and often laborious classification of facts, in the comparison of their relation- ships and sequences, and finally in the dis- covery by aid of the disciplined imagination of a brief statement or formula, which in a few words resumes a wide range of facts.” KARL PEARSON The Grammar of Science T1V INTRODUCTION In the preceding chapters, the basic data from which norms and trends of individual series and correlations for related series are developed are annual ratios for the respective Federal Reserve districts, all member banks in each district being taken as a single institution, Here, and in the other chapters in Part IV, the data are those for individual member banks in Districts 1 and 2—Boston and New York—the entire membership in District 1 and a sample of the banks in District 2 being included. These data were furnished by Frederic H. Curtiss, Chairman and Federal Reserve Agent, Federal Reserve Bank of Boston, and by W. Randolph Burgess, Assistant Federal Reserve Agent, Federal Reserve Bank of New York. They were placed at the writer's disposal with the understanding, among other things, that (1) his purpose in using them was scientific, (2) the identity of the several institutions would not be disclosed, and (3) that whatever analysis was made of them would be generally avail- able. He willingly subscribed to these conditions—indeed, they were made the bases of his request for the data. The data for each bank are as follows: (1) an identification number; (2) the population of the city in which it is located; (3) the average earning assets indicated by group amounts; and (4) for one or both of the districts, ratios of gross earnings, of total expense, and of net earnings to earning assets. The years and districts to which the ratios apply are shown in Table 154. A brief account of the nature of the data in each of the districts is necessary for an understanding of the discussion in the following chapters. For the Boston member banks, the meanings of the terms used and the years to which they apply are as follows: I. Earning Assets. These consist of the “gross loans and discounts, overdrafts, bonds and stock owned,” as taken from the Comptroller’s Calls, the amount for each year being “an VA 66 BANKING STANDARDS TABLE 154 DISTRICT AND YEARS FOR WHICH RATIOS OF OPERATION ARE AVAILABLE FOR INDIVIDUAL MEMBER BANKS RATIOS 1922. £923. . 1924. 1025 YEARS Gross Earnings to Earning Assets Boston Boston Total Expense to ’ Earning Assets Boston.............. Boston and New York Boston and New York Boston and New York Net Earnings to Earning Assets Boston Boston average of five Calls, two of which are in December—one of them for December 31 of the preceding year and the other for December 31 of the calendar year under review.”? 2. Gross Earnings. This item is “the total of Section 1 in the semiannual report of earnings, expenses and dividends made to the Comptroller of the Currency, and consists . . . . of interest and discounts on loans, interest (including dividends) on investments, interest on balances in other banks, domestic exchange and collection charges, foreign exchange department, commission and earnings from insurance premiums, and the negotiation of real estate loans, trust department and other earnings. . . . . The period covered is the sum of the first six months of the calendar year, plus the second six months of the calendar year, the data being compiled from two semiannual reports.’’2 3. Total Expense. This is the total of the items “comprising Section 2 in the semiannual report of earnings, expenses and divi- dends made by national banks to the Comptroller of the Cur- rency and includes, in accordance with that ‘schedule, salaries and wages, interest and discount on borrowed money, interest on bank deposits, interest on demand deposits, interest on time deposits, taxes, and other expenses. And, as in the case of gross earnings, total expenses cover two semiannual periods, represented 1 Extract from a letter from H. R. Bowser, Manager of the Financial Statistics Division, Federal Reserve Bank of Boston. 2 Ibid. MEMBER BANKS IN DISTRICTS I AND II 267 by the first six months plus the second six months of the calendar year.”’3 4. Net Earnings. This item is the difference between the yross earnings and total expense, as defined above. For the New York member banks. the items are defined as follows: 1. Earning Assets (Loans and Investments). This item is the “average for the year of the total of items 1 to 4 on the resources side of the condition statements of the member banks, which are submitted on ‘call’ dates, usually four times each year. The items included are loans and discounts, overdrafts, United States Government securities owned, and other bonds, stocks, securities, etc., owned. The ‘call’ dates . . . . were as follows: 1923—April 3, June 30, September 14, December 31 1924—March 31, June 30, October 10, December 31 t925—April 6, June 30. September 28, December 31.”¢ 2. Total Expense. This is “the aggregate of the items listed ander ‘Expenses’ in Section 1 of the Report of Earnings, Expenses and Dividends, which is submitted by the member banks twice each year. Each report covers a six months’ period— the first ends June 30 and the second December 31.” The items are as follows: salaries and wages, interest and discounts on borrowed money, interest on bank deposits, interest on demand deposits, interest on time deposits, taxes, and other expenses. The sources of the data for the Boston and for the New York district banks being the reports made to the Comptroller of the Currency, the data themselves are basically the same. Only as respects the number of calls which are averaged does the method of computing the yearly earning assets differ as between the Boston and the New York reports. Moreover, the reports to the Comptroller are the sources of the data used in Parts II and III, and taken from the Federal Reserve Bulletin. Accordingly, the data used throughout this study are substantially homogeneous respecting definition of terms and groupings of items. "3 Ibid. # Extract from a letter from W. Randolph Burgess, Assistant Federal Reserve Agent, Federal Reserve Bank of New York. fF D1 268 BANKING STANDARDS It will be recalled that the district ratios in Parts II and III were secured by dividing one statistical aggregate by another and multiplying by 100. That is, for instance, the average ratio of gross earnings to earning assets for a district and for all districts was obtained by dividing the total gross earnings by the total earning assets and multiplying by 100. In the case of the ratios for the individual banks, this process was carried out for each bank, the resulting ratios only being made available. Accordingly, in order to secure.averages for all banks and for groups of banks, it was necessary to add and average the ratios themselves. By this process each bank ratio is given the same weight, the size of the bank, with respect to the factors deter- mining the ratios, being ignored. Marked as are the uniformities, tendencies, and correlations for member banks by districts and years, as shown in the pre- ceding pages, it is not self-evident that similar conditions char- acterize the interrelations of individual banks. Data which could be analyzed to determine these and other facts for member banks in the First and Second districts were fortunately available. By using methods of analysis similar to or identical with those already found to be useful in isolating and measuring these “master facts behind the unit facts,” the operating history, in the matter of gross and net earnings, in one, and of total expense in both districts, has been traced out in detail. The questions, among others, to which answers were sought are the following: Do member banks in their interrelations truly constitute a sys- tem, and if so what are its characteristics? Do the norms, trends, and correlations which characterize the banking structure for member banks by districts also characterize the individual banks within districts? The following analysis makes use of techniques suited to answer these and other questions. Aggregates, averages, and so on, are obviously required, inasmuch as it is from them only that generalizations are possible. In the matter now to be dis- cussed, they refer not to all member banks by districts but to individual banks by groups within districts. Moreover, inas- much as the sizes of the cities in which the banks are located, as well as their average earning assets and identity by number are given, it is possible to classify the data fully and to observe not only the norms, trends, and correlations for the group as MEMBER BANKS IN DISTRICTS I AND II 269 a whole but also those for each significant part. How this is done is described in the several chapters which follow. What significance the findings may have as a basis for bank operation, and for the interpretation of our banking system, are matters discussed at some length in Part V and briefly summarized in Part I. Vv NORMS, TRENDS, AND CORRELATIONS IN GROSS EARNINGS RATIOS I. INTRODUCTION Tis chapter relates to the norms, trends, and correlations in ratios of gross earnings to earning assets, for all of the member banks in the Boston Federal Reserve district for the years 1924 and 1925. Unfortunately, data are available to us for only these years, but limited as they are in point of time, they neverthe- less seem to be significant. In what way, it is the purpose of this chapter to develop. 2. NORMS AND TRENDS IN GROSS EARNINGS RATIOS The average ratios of gross earnings to earning assets for 410 member banks in the Boston district in 1924 and 1925 were, respectively, 6.04 and 6.17.! When the banks are classified by the sizes of the cities in which they are located, as in Table 155, ‘he amounts range from 5.83 to 6.28, the ratios being generally lowest for the banks in the largest cities. Moreover, as shown in this table, there is some evidence of a functional relationship between the size of the city of location and the size of the ratios. The same may also be said concerning the ratios for the banks classified according to volume of earning assets. But the amounts in Table 155 are averages from which there are variations each year for banks in different city-size and volume (earning assets) groups, and in the same city-size and volume groups for different years. Table 156, which, according to two methods of classification, shows the distribution of the ratios for the combined years, indicates the range over which they extend and the points at which they cluster. With such 1 These averages, being derived from the ratios themselves, differ from those for Boston as shown in Table go, the latter being weighted figures. 270 GROSS EARNINGS IN DISTRICT I 271 TABLE 155 RATIOS OF GROSS EARNINGS TO EARNING AsseErs, CLASSIFIED MEMBER Banks. BostoN FEDERAL RESERVE DISTRICT, 1024-1925 S1zE oF City in ooa’s) Total... . Tnder1o........ cco... toand under 20......... 20 and under 4o......... 40 and under 1z0......... ‘20 and over. Co EARNING ASSETS fin o0o.000’s) Total. ... Unders.................. sand under 1o........... toand under zo........... 20and under so........... 0 and over } TorAL Num- * ber Av- erage 820 6 17 360 150 92 | 136 Ra 6.18 6.12 6.00 6.11 c. 86 TorAL Num- ber Av- erage 820 6 11 [12 184 198 182 "AA 6.20 6.09 6.18 6.07 5 01 Num- ber AIO 8A ia 46 68 \Tum- ber AIO [O24 Av- erage 6.04 6.09 6.06 5-89 6.10 ,.80 1024 Av- erage 6 oA o8 o1 1 mom 1025 Num- |! Av- ber + erage 410 & 17 180 7% ab € £ 28 18 I I 3 I1Q2% Num- ber Av- erage AIO nn Ta 36 02 nN I 2 5 ix distributions, averages, obviously, are incomplete as descriptive devices. This is more particularly true when comparisons are made between the ratios in 1924 and in 1925. For the entire experience, the ratios increased from 6.04 to 6.17 between 1924 and 1925. Moreover, as between the two years the averages for each of the various groups, except one, increased. But, as shown in Table 156, the groups contain a wide range of amounts—amounts which are high and low, com- pared with the averages for the respective groups, themselves, and for the entire membership. Accordingly, the changes from year to year, which may be read from Table 155, do not disclose, for individual banks, the relations between positions held (relative to any average) and the changes from year to year. Did all of the individual ratios increase between 1924 and 1925, or were the types of change in some way related to the levels TABLE 156 D1sTRIBUTION OF RATIOS OF GROSS EARNINGS To EARNING AsseTs, CLASSIFIED MEMBER BANKS, BostoN FEDERAL RESERVE DISTRICT, FOR 1924 AND 1925, COMBINED 3 J RY GROUPS Total... ... 4.0 and under 4.5......... 4.5 and under s.0......... s.0 and under 5.5......... s.5 and under 6.0......... 6.0 and under 6.5......... 6.5 and under 7.0......... 7.0and under 7.5......... 5 and under 8.0......... 8.0 and under 8.5........ RB. and over, .. Co Total Bank- Years R20 | 21 102 233 252 [29 46 18 Io Under [Oo 260 4 10 41 99 101 55 3I I2 6 10 and ander 20 I850 15 36 6o 29 Size or City (in 000s) 20 and under 40 40 and under 120 120 and over 02 126 2 io 39 26 12 5 x 6 19 | 34 40 | 21 6 3 17 25 25 12 Under 5 112 7 17 29 28 10 8 3 EARNING ASSETS (in 00.,000’s) 5 and under 10 10 and under 20 20 and under 50 . §o0 and over 184 108 J 182 144 27 27 (0 3 th 2 17 r8 63 oO rs 6 22 41 45 21 -~ 5 72 GROSS EARNINGS IN DISTRICT I 273 occupied in 1924? There are various ways of securing answers to these questions, and because of the importance of the problem each of them is set out in detail. Let us (1) take as standards of reference the average of the ratios for the 410 banks in each of the years 1924 and 1925; (2) compute the percentage amount and direction by which the ratio for each bank each year deviates from the yearly average for all banks; (3) determine suitable groups for the deviations above and below the averages for the respective years; (4) by signs and by percentage amounts, distribute the deviations each year for the several banks into the groups provided for in (3) above; (5) for each percentage group, determine for the first year the arithmetic mean deviation, and for the second year the arithmetic mean net deviation, the latter amount being secured by adding the amounts of the deviations algebraically and by dividing by the number of devia- tions; and (6) for each of the groups and for those above and below the averages for the respective years, compare the amounts as secured in (4). Then the differences will represent the amounts of regression to type as measured by differences in mean disper- sion—minus (=) amounts for ratios above the average, and plus (+) amounts for those below the average in the first year indicating regression toward the average in the second year. That is, measures of change, in terms of dispersion, are secured for ratios which are differently placed, plus and minus, relative to the average levels for all banks in each of the years. When this process is carried through it is found, as shown in Table 157, that the net result for ratios which were high in 1924 (relative to the average in that year) is a decrease, and for those which were low in 1924 (relative to the average in that year) it is an increase, the changes being determined by the differences in the amounts of dispersion in the first and in the second years with respect to the averages in these years. Ratios which are high or low in the first year tend to be high or low in the second year, but the net dispersion is less the second year. That is, regression to type varies inversely with the signs but directly with the percentage amounts of dispersion. It is apparent, therefore, that the unmistakable tendency for 274 BANKING STANDARDS group ratios to increase between 1924 and 1925, as shown in Table 1535, is not true of all the individual banks. Relative to the average in the first and in the second year, the ratios are widely dispersed, but in summarizing, bank by bank, the dis- persion in the two years it is seen that it is the ratios which are above the average in the first year which decrease (approach the average in the second year) and it is those which are below the average in the first year which increase’ (approach the aver- age in the second year). Forces are seemingly at work tending to establish an equilibrium or normal ratio of gross earnings to earning assets. But, as indicated in Table 155, each group of banks, as there classified, has its own average ratio of gross earnings to earning assets, the ratios, as already noted, tending generally to decrease as cities and volumes increase in size. Accordingly, if the yearly averages for the respective volume groups are taken as points of reference from which to measure variation, and if the deviations are treated in the same way as were those taken from the aver- TABLE 157 CoMPARATIVE MEASURES OF REGRESSION TO TYPE FOR RATIOS OF GROSS EARNINGS To EARNING AsseETs, MEMBER Banks, BosToN FEDERAL RESERVE DISTRICT, 1924-1925 (Percentage Differences from three different averages.) DIFFERENCES PERCENTAGE DIFFERENCES: (First Year of the Pair of Years) Position 1 Groups Average Above 40 and over 30 and under 40 20 and under 30 to and under zo Mondor i Below Under 10 10 and under 20 20 and under 30 30 and under 40 1 and aver LA Veraoce Yearly Averages of All Banks Number Second year less than First am ” I 4a 5 - 9 + 6.9 5 1 6 Yearly Averages of Citv-Grouns Number Second year less than First AY - oO —30.0 | —I10.0 —12.% — 4 9 39 Tr ~ + v.06 + 4.7 + 7.3 - + 2.7 Yearly Averages of Volime-Groups | Second year | less than First vear* Number TAR -_— a 8 4 4 9 a7 —20.0 = 7.5 —I11.X — 7.0 —- 169 [3 T4 + 1.0 + 5.1 + 7.1 242 + 2.2 *The signs relate to the prevailing changes in the ratios themselves compared with the averages in the first and the second years, minus (~) indicating that the ratios decrease, and plus (4) that theyincrease. GROSS EARNINGS IN DISTRICT I 275% ages for all of the banks, do the ratios similarly regress to type? Answer to this question is found in the types and amounts of difference—second year (1925) less than first year (1924)— set forth in the last section of Table 157. It will be seen that, for ratios greater and for those less than the average in the first year (1924), the signs in the column “second year less than first year” are minus (-) and plus (4), respectively, and that the greater the deviation, either plus (+) or minus (-), in the first year, the greater the amounts in the second year. Again, there is regression to types—types in these cases being the averages for the banks in the respective volume (earning assets) groups in 1924 and in 1925. Similar regression occurs when the averages, as standards of reference, are those for banks classified by the sizes of the cities in which they are located. This fact is indicated by the detail in the middle section of Table 157. In the foregoing methods of treating the data, in order to determine the fact and the amounts of regression, deviations have been taken as percentage amounts from three types of averages. Will similar results be secured if, for the individual banks, in the first and second years, the ratios are compared without respect to averages as standards of reference? To answer this question it is necessary only to classify them into suitable groups in 1924, secure an average for each group in this year, and compare each amount with the average for the same banks in 1925. When this is done, as summarized in Table 158 for the banks in each city-size group and for all groups, the answer is unmistakable. The ratios which increase are those which are low; those which decrease are those which are high. Moreover, the lower they are, the more they increase; the higher they are, the more they decrease. To these general rules, for banks by groups without respect to location, there are no exceptions; for those classified by size of city of location, the exceptions are few and occur within only one group. Two methods of study show that ratios of gross earnings to earning assets, for member banks in the Boston district, regressed to type between 1924 and 1925. Is this tendency significant and indicative of the persistent operation of forces, not only as between 1924 and 1925 but for other years as well, making toward the establishment of an equilibrium? It is believed that it is. Let us briefly review our findings with TABLE 158 AVERAGE NET CHANGE IN RATIOS OF Gross EARNINGS To EARNING ASSETS, MeMBER BaNks, BosToN FEDERAL RESERVE DISTRICT, 1924-1925 CLASSIFIED S1zE or Crry IN WHICH BANKS ARE LOCATED ‘in 000’s) 1 J - RATIOS: Gross Earnings to Earning Assets (First Year of the Pair of Years) Total... 4.5 and under s5.0.... | 5.0 and under 5.5... .. 5.5 and under 6.0....." 6.0 and under 6.5.....- 6.5 and under 7.0..... 7.0 and under 7.5..... 7.5 and under 8.0.....- Ra and over oo Total Under 10 Second year less “first vear Number | Second . | year Number ' less First wear 410 40.1 180 “+o0.2 18 2 ot Hos BES re Does $50 Zot yo 7 _ : a —o0.6 10 to 20 ! Number Second year less First vear 75 +o.1 9 51 13 +o.5 +o0.2 —o0.1 —T1.0 20 to 40 Second | year Number less First vear 46 “40.2 7 35 +0.3 ¢ +o0.2 +o.4 4 40 to 120 Second | year Number ' less First vear 68 +=0.0 I3 | 40.3 *0.0 %0.0 —0.9 34 ol 120 and over Second | year Number less First year aT —o.1 | +o0.2 | —0.X —0.3 9 26 6 Cw a = GROSS EARNINGS IN DISTRICT I 277 respect to a similar phenomenon for the district ratios for the country as a whole for the years 1919-1925, and consider together the cumulative evidence bearing on this point. In Chapter V it was shown, first, that there was substantial uniformity in the directions of change from year to year in the district ratios of gross earnings to earning assets.? Similar con- sistency between 1924 and 1925 is now found for member banks in the Boston district classified by city-size and volume (earning assets) groups.® Second, that district ratios which are high or low in a given year tend to decrease or to increase, respectively, in the following year.* It is now found that the same phenomenon occurs between 1924 and 1925 for the separate member banks in the Boston district.® Third, that the net rates of increase or of decrease from year to year for district ratios vary directly with the percentage amounts of dispersion from type—type being the seven-year averages for the respective districts.® Simi- lar tendencies are now discovered for the Boston member banks, regression being measured with respect to averages of three types, and irrespective of averages at all as standards of reference.” These various kinds of corroboratory evidence lend support to the contention, already made,® that the phenomena observed are expressive of the results of the operation of forces deter- mining rates of interest and of “other income”—the components of a bank’s or of banks’ gross earnings. It is unnecessary to repeat what has already been said on this point. With the wording altered so as to apply to individual banks rather than to groups of banks taken as one institution, it will serve to describe what is going on within the Boston—indeed, in any— district. It is believed that these forces are constantly operating and that their results are measurable and repetitive. 3. SERIES CORRELATED WITH RATIOS OF GROSS EARNINGS TO EARNING ASSETS District ratios of gross earnings have been found to be func- ions of operating conditions. Do similar relations for the indi- 2 See Table 52. 8 See Table 54. $See Table 155. 7 See Tables 157, 158. ¢ See Table 53. ® See pages 75-77. See Tables 157, 158. 278 BANKING STANDARDS vidual member banks obtain within the several districts? No answer can be given to this question for districts other than Boston, and for it only in certain respects. But limited as are the data which are suitable for functional analyses of the types sresented in Part III, they indicate that what is true for the several districts for the years 1919-1925, as respects the rela- tions of gross earnings to total expense and to net earnings—all series being expressed in terms of earning assets—is also true for the individual banks in the Boston district for the years 1924 and 1925. Let us review briefly our findings in these respects for the district ratios. For the years 1919-1925, it was found that (1) districts which had high or low gross earnings ratios had high or low ratios, respectively, of total expense and of net earnings; (2) the higher or lower the gross earnings ratios the higher or lower, respectively, the ratios of total expense and of net earn- ings, the standards of reference which determine the positions of the district ratios being their respective seven-year averages; and (3) increasing gross earnings ratios are accompanied by increasing, and decreasing gross earnings ratios by decreasing ratios of total expense and of net earnings. These conditions obtain for all districts and for the Boston district, separately, for the years 1919-1925, and for all districts for changes between 1924 and 1925. The foregoing comparisons, it should be remem- bered, relate to district ratios and summarize prevailing ten- dencies. Are they essentially duplicated by the individual member banks in the First district? To answer this question calls for detailed analysis. For the years 1924 and 1925 there are 410 member banks in the Boston district for each of which ratios of gross earnings, of total expense, and of net earnings® to earning assets are avail- able. The respective types of ratios differ from bank to bank and from year to year. We have already noted the extent of the variations in the gross earnings ratios, and shall later pre- sent those for the other series. Moreover, the ratios vary accord- ing to the size of the cities in which the banks are located and the volume of the banks’ earning assets. The problem by which we are confronted, therefore, in determining the relations 9 408 showing positive net earnings in both years. GROSS EARNINGS IN DISTRICT I 279 between gross earnings ratios and those of total expense and of net earnings, is to select for the respective series suitable aver- ages with which the ratios in the correlated series may be com- pared. Those chosen are the yearly averages of the banks in the various volume (earning assets) groups. Having selected standards of reference for the series to be correlated, as for instance gross earnings and total expense, the process of manipulating the data is as follows: (1) For each volume group, determine the percentage amounts and directions by which the ratios in the correlated series for each of the banks in 1924 deviate from the 1924 group average. (2) Select classes of uniform widths into which are placed the paired variables (deviations) for each bank, the resulting distribution being of the double-frequency type. (3) Repeat this process for each of the volume (earning assets) groups and combine the fre- quencies, thus securing a distribution for all banks in the year 1924. (4) Repeat processes (1) to (3) for the year 1925. (5) Combine the distributions for the two years. The frequencies in Table 159 show the results of carrying out these steps for paired ratios of gross earnings and of total expense to earning assets, and supply the bases for the sum- maries at the right and at the bottom of the table. These are obtained as follows: (1) total the number of instances in the respective lines and columns; (2) add and then average the amounts in each line so as to get the average percentage disper- sion for the factor in the stub, used as the independent variable; (3) algebraically add and then average the amounts in each line so as to get the net average percentage deviation for the factor in the caption treated as the dependent variable, and (4) reverse processes (2) and (3) so as to get the average percentage dispersion of the factor in the caption when used as the independ- ent variable, and the net average percentage dispersion for the factor in the stub when treated as the dependent variable. The results of steps (2) and (3) supply measures of regression of total expense on gross earnings; those of step (4) measures of regres- sion of gross earnings on total expense. Similar analysis was made of the relations between ratios of gross and of net earnings, the results of carrying through the processes for the two paired series being summarized in Table 160. ‘RO BANKING STANDARDS TABLE 150 CORRELATION OF PERCENTAGE DIFFERENCES OF RATIOS IN PAIRED SERIES—GROSS EARNINGS TO EARNING ASSETS AND TOTAL EXPENSE To EARNING ASSETS—MEMBER BANKS, BosToN FEDERAL RESERVE DISTRICT, 1924 AND 1925 (Percentage Differences from Respective Yearly Averages for the Respective Volume-Groups. See page 279.) Ratios: Gross Earnings to Earning Assets (Percentage Differences) Position | Amount 40 and over i to a0 20 fogs to to 20 Under 10 Under 10 | 10 to 20 20 to 30 30 to 40 ) “40 and over | Above Below Id Ul" a Mo es 37 2% LE 2 . £4 al ga 22 Ratros: Total Expense to Earning Assets (Percentage Differences) Number of Bank-Years Above Below 5 wer 5 eps = 2 1 al 8 | FE V1 “a Di. ERIE: TF | 2] se (so l1ol 71 2 214 tl s| 70a lsshmet eglim)l <b «Vg26 “Ve” welaltgsizmisel 6 we - Se. 30 to 40 1 . 20 10 tc to 3 Un Un der! der IO I0 I I0 to 20 20! 30 | 40 to © to |and | 30 | 40 lover = | " & a) N I o « © - 0 €. ~ a oo © ~ wv v © wy © 3 oO vw, © \ Pp o wv ToTAL Average Percentage Differences he Ratios: | Ratios: Bank-! Gross Total Years 1 Earnings Frpeise to A Earning | Earning Assets | Assets (Net) 458.3 468.3 +35.0' +42.1 425.0} 414.5 ter. ! 411.0 “~o' + 4.8 — go! = 2.1 —If.0' —II.Q -25.0 I —24.1 GROSS EARNINGS IN DISTRICT I 281 These tables show that (1) banks having high or low ratios of gross earnings to earning assets have high or low ratios, respectively, of total expense and of net earnings to earning assets, and (2) the higher or lower the ratios of the first type, the higher or lower those of the other types. To the first gen- eralization there are no exceptions as the data are classified; to the second, the two exceptions apply to the groups with few frequencies. But the detail in Table 159 and the averages in Table 160 refer to the experience of the entire number of member banks in the two years 1924 and 1925. Space is not available in which to present similar tables for all of the banks for the separate years and for the various groups of banks for the individual and combined years. Suffice it to say that the relations presented above are repeated with substantial uniformity for each yearly- and group-class. Indeed, the relations obtain irrespective of the averages that are used as bases for computing the devia- tions, of the way in which the deviations are expressed—i.e., abso- lutely or relatively, and of the number of banks included—i.e., the entire membership or any part. TABLE 160 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES—M EMBER Banks, BosToN FEDERAL RESERVE DISTRICT, 1924 AND 1925 (Percentage Deviations from Respective Yearly Averages for the Respective Volume-Groups. See page 270.) Position INDEPENDENT VaARIABLE—Ratioe of (Giross Earnings to Earning As~~*~ Distance from Avera Percent» Cronne “verage -rcentage Number | of 3ank- Years DEPENDENT VARIABLES—Net Average Percentage Tatal Expense to Tarning Aseetg “Tet Earnings o Earning Assets Total Ahove Ralow 10 and over jo and under 40 10 and under 30 o and under 20 Inder 1a Under 1 to and under 20 10 and under 30 jo and under 40 sn and aver ~f id - SC -*n Q -— TX .0 *332 bark-years t212 bank-veare 282 BANKING STANDARDS Confidence in the significance of the results is secured from these different approaches to the problem so far as the member banks in the Boston district are concerned. It is true that the data refer to but two years, but, as indicated in Table 132 for district differences and in Table 134 for percentage changes from year to year, analogous relations hold for all districts, for the Boston district alone for the years 1919-1925, and for the respec- tive ‘districts in 1924 and 1925. These results suggest the prob- ability, if they do not demonstrate the fact, that the phenomenon observed in the Boston district for each of the years, 1924 and 1923, and for the two years combined, is not peculiar to this period and to this district. It is unfortunate that data are not available for the individual Boston member banks with which to duplicate, for gross earn- ings ratios, the types of analyses presented in Chapters IX and X, in which district ratios of gross earnings are correlated with variable operating conditions. It will be recalled that, accord- ing to three methods of measurement, such ratios were positively correlated with ratios of loans and discounts to earning assets. Moreover, they increased most from year to year when ratios of loans and discounts to earning assets were high—that is, above the respective district levels—and increased, and they decreased most from year to year when such ratios were low—that is, below the district levels—and decreased from year to year. On the other hand, gross earnings ratios were generally negatively cor- related with total deposit ratios and also with ratios of demand deposits to earning assets and to total deposits. Again, when total deposit and demand deposit ratios increase or decrease, ratios of gross earnings decrease or increase, respectively. On the other hand, ratios of time deposits to earning assets and to total deposits are positively correlated with gross earnings ratios. Such are a few of the types of relations found to obtain between district ratios of gross earnings and variable operating conditions. But district ratios of total expense are correlated in much the same way as are district ratios of gross earnings with each of the above series. Accordingly, gross earnings ratios and total expense ratios tend to be positively correlated with each other. This relation is undoubtedly causal so far as interest is common to both series. District differences in gross earnings ratios depend primarily GROSS EARNINGS IN DISTRICT I 283 upon differences in interest rates, and these in turn are functions of the demand for and the supply of capital funds, of risk, and so on. Similarly, district differences in ratios of total expense are traceable largely to interest rates—the rates paid on deposits and on borrowed money—and to wage and salary scales. As between districts, this common element, interest, serves only in part to explain the direct relation between the two series. But does it explain the positive correlation between gross earnings and total expense ratios within a given district, when the entire member banking structure or any significant part, as banks in tity or volume groups, is considered, and when presumably rates of interest, as expense and as revenue, vary less widely from bank to bank over the entire district or within any city or volume (earning assets) group than they do between districts? Addi- tional reasons, it is believed, must be sought to explain the phenomenon. These are found in the varying proportions of time deposits to total deposits and of investments to earning assets —topics discussed at length in Chapter X.1° Positive correlation between gross earnings and net earnings cannot be explained even in part on the basis of a common ele- ment such as that suggested above for that of gross earnings and total expense. Other things being equal, if gross earnings ratios are high or low, those of net earnings are high or low. But other things are not equal, inasmuch as total expense and net earnings ratios are negatively correlated, and net earnings are the difference between gross earnings and total expense. Accordingly, net earnings ratios are dependent upon the rela- lions between variable gross and variable total expense ratios, each of which series itself is dependent upon variable operating conditions. Data are not available with which to trace out for individual sanks the relations between these antecedent conditions and ratios of net earnings. We shall content ourselves here with the statement that gross earnings ratios are positively correlated and total expense ratios negatively correlated with net earnings ratios, and leave to a later chapter the measurement of the relative effect on net earnings of these divergent factors. 10 See pages 190-204, particularly. TABLE 161 Ratios oF Total ExpPeNSE To EARNING AssETs, MEMBER BANKS, BosTON FEDERAL RESERVE DisTRICT, 1922-1925, CLASSIFIED BY S1ZE oF CITY » oo Ln Size or City (sn 000s’) Total... erin TURAEr 10. aeunanan. ro and under 20...... 20 and under 4o......! 40 and under 120......! 12zo0andover.......... TOTAL 1Q22 1Q22 Number Average Number ' Average 4.07 ) 3.82 181 ! 4.15 76 4.02 46 4.42 69 4.35% 1653 4.17 412 723 | 4.01 I 18: } 302 4.23 | 76 184 4.16 | 46 273 4.50 67 171 4.28 42 Average 4.16 3.08 | 4.20 | 4.16 4.55 4.22 1924 Number 415 181 1 75 46 60 44 Average 4.23 4.07 | 4.32 4.22 4.52 4.27 1928 Number Average so | 42s 180 - 8 4.25 4.22 4.51 75 46 ’ 68 a1 4.290 XVI NORMS, TRENDS, AND CORRELATIONS IN TOTAL EXPENSE RATIOS [. INTRODUCTION IN this chapter an analysis is made of the ratios of total expense to earning assets for the member banks in the First and Second Federal Reserve districts. The data from the First district cover the entire membership, bank by bank, for the years 1922-19235, inclusive; those for the Second district relate to a sample of 280 individual banks for the years 1923-1923, inclusive.! Both sets of data were reported in the form of ratios, the amounts each year, together with other relevant data for the same institution, being separately distinguished. 2. NORMS AND TRENDS IN TOTAL EXPENSE RATIOS (1) Member Banks in District 1—Boston The average ratios? of total expense to earning assets for the member banks in District 1, classified by years and by size of city in which located are shown in Table 161. The lowest ratio for the entire district is 4.07, in 1922, and the highest, 4.23, in 1925. For banks in the several groups of cities, the ratios tend to increase in amount as the cities increase in size until the popu- lation reaches 120,000. In this group the ratios are somewhat lower each year than are those for banks located in cities with population of 40,000 to 120,000. This table shows that the average ratios vary according to years and to the population of the city in which the banks are located. An alternative method of presenting the data is illustrated in Table 162, the bases of classifying the banks being years and volume of earning assets. The table shows that, except for two 1 Except for certain substitutions; see page 299. * Obtained by adding the ratios and dividing by the number of banks. TABLE 162 Ratios OF ToTAL EXPENSE To EARNING Assers, MEMBER BANKS, BosToN FEDERAL RESERVE DisTRICT, 1922-1925, CLASSIFIED BY VOLUME OF EARNING ASSETS nN x CN EARNING ASSETS (in 00.000’s) Total. . .. Under §............... § and URder 10. +++ to and under 2o0........ 20 and under 50........" ro and over... TOTAL [Q22 [022 Number Average Number ' Average Number 1653 a 412 4.0% 416 227 3.77 57 3.60 57 367 | 3.92 o1 3.73 | 92 398 | 4.25 100 4.15 | 100 369 | 4.42 | 92 | 4.33 | 93 202 4.20 2 4.36 74 [024 Average Number Average Number 4.16 415 4.22 | 410 3.69 | 3-89 4.26 4.41 | 4 A2 57 3.87 56 92 3-99 92 99 4.31 99 93 | 4.47 ' or v4 430 | 2 025 Average 4.25 3.92 4.06 4.32 4.47 4.30 EXPENSES IN DISTRICTS I AND II 287 groups, one in 1924 and one in 1925, the ratios increase with increasing earning assets. The amounts in Tables 161 and 162 are averages; they do not disclose the variations of the ratios each year for (1) the entire district, (2) a given volume (earning assets) group, or (3) a given city-size group. Further presenta- tions with them in mind are, therefore, required. Table 163 serves this purpose. It shows the distribution of the ratios for the banks classified as to size of city of location and as to amounts of earning assets. Both parts of the table agree in indicating that the ratios vary and that the larger the city and the greater the amount of earning assets, the less the variation. Not only do these facts obtain for the combined years, but they hold also for the individual years for which data are available. Different as are the averages and the distributions of the ratios for the entire district and for the several groups of banks as classified, there are nevertheless clearly defined norms and trends char- acteristic of the years for banks in each of the groups and for the groups of banks for each of the years. These are of interest in themselves and in the manner in which they resemble similar norms and trends of the ratios for individual banks in District 2, and for all member banks by districts. If the average ratio of total expense to earning assets for the banks in each city group and in each volume group for the period 1922-1925 is taken as a standard, and if the percentage amounts by which the yearly ratios for the banks in each of the respective wroups deviate from this standard are determined, the details given in Table 164 are secured. This table shows that (1) the ratios for all banks, for those in each of the city groups, except one, and in each of the volume groups, were low in 1922; (2) they were low in 1923 for all banks and for those in all but three? of the city and volume groups; and (3) they were high through- out the various groups in 1924 and 1923, the only exceptions to the rule being the city group 120,000 and over, which was low in 1924, and the volume group $5,000,000 and over, which had he average ratio in each of the years. Consistency of this sort, obviously, is not due to the manner of making the comparison. Differences from averages are, of In one city group the ratio in 1923 was the same as that for the period 1922- 102%, inclusive. TABLE 163 DISTRIBUTION OF RATIOS oF TOTAL EXPENSE To EARNING AsSETs, CLASSIFIED MEMBER BANKS, BosTON FEDERAL RESERVE DISTRICT, FOR THE COMBINED YEARS, 1922-1025 ND 0 SO GROUPS Total r.o and under 1.5......... i.§ and under 2.0......... 2.0 and under 2.5......... 2.5 and under 3.0......... 3.0 and under 3.5......... 3.5 and under 4.0......... 4.0 and under 4.5......... 4.5 and under 5.0......... s.0and under 5.5......... 5.5 and under 6.0......... b.0 and under 6.5..... .. 6.5 and under 7.0...... . 7.0 and over Total Bank- Years 1653 [ 3 25 86 182 311 470 348 t6o 28 10 Under | IO 723 |! { 3 21 62 104 T47 66 Size oF City (2 000’ ¢) 10 to 20 20 to 40 202 | 134 ‘iw 7 : 7 a | 90 | to 120 29 73 ee Lo 18 34 2 120 and over 171 ir 78 68 . Under 5 227% R 21 9 8 EARNING ASSETS (in 00.000’s) - to 10 10 to 20 20 to £0 50 and over 367 398 i 360 202 1 13 | 30 £3 95 go €2 4 Ic 70 2 3 I . 2) 5 9 3 10 0 9 r : 22 39 (II 75 3) A EXPENSES IN DISTRICTS I AND II 289 course, part plus and part minus, but it is not necessary that, as in this case, the years in which the signs agree be substantially the same. In general, the years in which ratios of total expense to earning assets are low or high in banks in a given city or volume group are the same as those in which ratios are low or high in all city and volume groups. That is, any set of influ- ences tending to increase or to decrease the ratios permeates the banking structure of the entire district. This phenomenon is analogous to that already observed in the discussion of the deviations of yearly district ratios of total expense to earning assets from the levels fixed by the averages for the period 1919-1925. It was found that districts, relative to their own levels, tend to be high or low at the same time. It is now found that a similar condition obtains within a single district, when the four-year averages for the city and the volume groups constitute the standards from which the percentage devia- TABLE 164 PERCENTAGE DEVIATIONS OF RATIOS OF ToTAL EXPENSE TO EARNING ASSETS FROM THE GROUP AVERAGES, 1922-1925, CLASSI- FIED MEMBER BANKS, BosToN FEDERAL RESERVE DistrICT, BY YEARS YEARS Crry-Groups (Population in 000's) Average = I — Undero............... ro and under 20....... 20 and under 40....... 40 and under 120....... 120 and over VoLUME-GROUPS {Earning Assets tn 00.000’s) Averace Unders................ sand under ro........ ro and under 20........ 20 and under so... ..... soandover..... ...... 1022 1Qg2% army ~T O72 ~ ny n er 400 1.11 1.17 +1.44 +o0.44 -—y - +3.49 +0.47 +1.44 +o0.22 40.23 1 EARS 192§ +1.02 -4.01 -2.12 +2.63 +3.08 ~4.85 =0.77 +1.79 +3.57 ~2.35% 40.24 +1.41 +1.65 —2.04 —o0.23 +1.13 +1.13 -0.68 +0.68 +£0.00 %=0.00 2Q0 BANKING STANDARDS TABLE 165 NET PERCENTAGE YEAR-TO-YEAR CHANGES IN RATIOS OF TOTAL ExpeENsE To EARNING AssETs, CLAsSIFIED MEMBER BANKS, BostoN FEDERAL RESERVE DISTRICT, 1922-1925 YEARS City-GroOUPS ( Pobulation in 000’s) BYVEIHIR. cnnvinnvinmutnmes ~ > wy Underio........ooviveeevnnn. roandunder 20............. 2o0and under 40............. 4oand under 120.......00unnn 120 and over Cee 1922 to 1923 “+2.21 +4.19 ~+2.26 . +1.097 +1.20 +2.86 —1.62 +3.48 +1.44 %+0.00 “+2.94 .—0.66 —0.22 —2.76 +o0.08 +o0.47 ! 1924 to 1925 “+0.47 YEARS VoLuME-GROUPS (Earning Assels in 00.000’s) re ee ret —————————————— ett Average. .....covveve on, Onder Boe; coms snmrsssrennns sandunderro.............. roandunderzo.............. 2oand under so.............. 20 and over. .. BE da 1022 tO 1023 1023 to 1924 | 1924 to 1925 +0.47 +2.50 44.88 ‘“+1.29 +4.29 +2.57 +1.75 +2.65 +1.17 “+0.23 41.85 41.36 =0.00 41.28 —0.68 =0,00 tions of yearly ratios are computed. The. several districts, in the district analysis, are geographically distinct, yet ratios of total expense to earning assets for banks within these districts respond in much the same manner as do those for banks in city and volume groups in District 1, to influences making for high or low expense ratios. The ratios for member banks in District 1 may with advan- tage be studied further. The form of analysis already presented classifies banks into city and volume groups, each having its own average ratio for the period of years 1922-1925, from which the yearly ratios similarly deviate at a given time. But the average ratios for all banks vary from year to year. Do those for the respective city and volume groups change from year to year in the same direction? Is the direction of movement consistent among the different groups as were the positions held by them at a given time relative to their own four-year level? An affirmative answer EXPENSES IN DISTRICTS I AND II 201 must be given to these questions. The details in Table 165 show that if ratios for banks in one group increase from year to year, so likewise do those in all groups. To this general rule there are some exceptions, but these are insufficient to invalidate the rule. If, for the various groups of banks, account is taken both of the position of the expense ratios in the first of each pair of years, relative to the group level, and of the direction of change from year to year, it is found, as shown in Table 166, that group ratios which are high in a given year decrease, and those which are low in a given year increase in the following year—*“high” and “low,” respectively, meaning positions above or below the four-year average group ratio for the period 1922-1925. This condition, while generally true, most clearly obtains for the grouping by size of city of location, despite the fact that, in gen- eral, as shown by Table 165, the trend in the group ratios from vear to year 1s upward. TABLE 166 CoMPARATIVE POSITIONS AND YEAR-TO-YEAR DIRECTIONS OF CHANGE IN GrouP RATIOS OF ToTAL EXPENSE TO EARNING Assets, MEMBER BANKS, BosToN FEDERAL RESERVE DISTRICT, 1922-1025 Positions Relative to City-Group Averages 1022-102°%¢ ~~ -*isp of Change [rc:* par t » yaar Positions Relative ‘0 Volume-Group Averages, 1022-102¢ Direction of Change from year to vear Te. 'One group = in position. {One group = in direction. One group == in hoth direction and position. This tendency for ratios of groups of banks in the Boston district to regress to type is analogous to that already found for member banks by districts for the country as a whole, as shown in Table 59, (page 85). But the similarity of tendency, as be- tween the two bodies of data, is not restricted to directions of change with respect to positions held. Not only do the group ratios by directions of change regress to type, but the net per- centage amounts of change vary directly with the percentage amounts of deviation from type. This fact, most pronounced 102 BANKING STANDARDS TABLE 167 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM GROUT AVERAGES AND NET YEAR-TO-YEAR CHANGE IN RATIOS OF TOTAL EXPENSE 10 EARNING AssETS, MEMBER BANKS, BosTON FEDERAL RESERVE DISTRICT, 1922-1025 DIFFERENCES FORM CITY-GROUP AVERAGES, 1022-1925 Sirn Number of Cases r Percentage Groups Average Percentage Average r 28 2 and over Under 2 2.13 1.22 Under 2 | 0.93 2 and over 4.05 Average NET PERCENTAGE CHANGE FROM YEAR TO YEAR —O0.55 —1.63 —0.33 +1.73 +3.84 42.20 DIFFERENCES FORM VOLUME-GROUP AVERAGES, 1922-1025 Sign | Number of | Percentage Cases Groups 5 Average 2 and over Under 2 Under 2 2 and over Average Average Percentage T.1°7% 2.65 1.0°¢ 0.43 3.17 1.08 NET PERCENTAGE CHANGE FROM YEAR TO YEAR 40.62 “+1.29 “+o0.41 +1.33 +3.23 “42.120 —eva— *One group = in position. for the banks classified by city-size groups, is shown in Table 167. This tendency is similar to that already observed for expense ratios by districts, and summarized in Table 60 (page 86). But, in studying trends and regression to type of expense ratios for member banks in District 1, it is unnecessary to use grouping of the sort just presented. Results similar to those noted above are found if, in each of the respective pairs of years—first and second, as 1922 and 1923, and 1923 and 1924, and so on, during the period 1922-1925—the ratios are treated as follows: (1) Compute in the first and in the second of each EXPENSES IN DISTRICTS I AND II 293 pair of years the arithmetic mean ratios for all of the banks in the district. (2) Determine the percentage amount and direc- tion by which the ratio for each bank each year deviates from the yearly average for all banks for that year. (3) Select suitable groups for the deviations above and below the averages in the first and in the second of each pair of years. (4) Distribute the deviations for the several banks by signs and percentage amounts into the groups provided for in (3) above. (5) For each per- centage group, determine for the first year the arithmetic mean deviation, and for the second year the arithmetic mean net devia- tion. To secure the net deviation in the second year, add the amounts of the deviations algebraically and divide by the num- ber of deviations. (6) For each of the groups and for the totals above and below the averages for the respective years, compare the amounts of deviation as secured in (5). The differences between them represent the amounts of regression to type as measured by differences in mean dispersion—minus changes for ratios larger than the average, and plus changes for those smaller than the averages indicating regression toward the average. By carrying through the steps in the process just indicated, :hree sets of results are obtained for the pairs of years between 1922 and 1925. These may then be combined and averaged to secure regression measures for the entire experience. The dif- ferences for the three pairs of years, separately and combined, provided for in (6) above, are indicated in Table 168. What is the meaning of the details in this table? It will be observed, first, that for ratios larger than the average in the first year of each pair of years (See the stub class marked “Above”) the signs in the columns headed “Second year less than first year,” are invariably negative, thus indicating that ratios of the banks involved deviated less in the second year from the average in that year than did the ratios of the same banks in the first year deviate from the average for that year. Second, that for ratios smaller than the average in the first year of each pair of years, (See the stub class marked “Below”), the signs in the columns headed “Second year less than first year” are invariably positive, thus indicating that ratios of the banks involved devi- ated less in the second year from the average in that year than QA BANKING STANDARDS TABLE 168 CoMPARATIVE MEASURES OF REGRESSION TO TYPE FOR RATIOS OF TOTAL ExPENSE To EARNING AssETS, MEMBER BANKS, BosToN FEDERAL RESERVE DISTRICT, 1922-1925 (Percentage Differences from Yearly Averages for all Banks. See page 293.) aerate —_— PERCENTAGE DIFFERENCES: {First Year of Each Pair of Years) All Pairs ' 1922 and 1923 |} 1923 and 1924 1024 and 1925 Second Second Second wear year year less mbes less |Number| Jess an than than rst First First | yom. Rm, — an DIFFERENCES BY PAIRS OF YEARS rem Number Position Groups ! Average ¢o and over 24 30 and under 40 34 20 and under 30 ! 108 10 and under 20 102 TTnder To ® 5 Above -~11.8 } - 7.11 3 -— e 4 TF -, 2 —-—0 7 -7.% le 2 s | ' —14.3 —- 5.0 —- 6.6 - 1.7 - 0.06 Under 10 ro and under 2¢ 20 and under ar 30 and under - 40 and over r » - ~o . 5 . + 2.4 + 3.8 + 2.3 + 3.9 + 4.3 42.0! 107 | +2.0) 210 | + 2.9 Below Aversa 0 10% *The signs relate to the prevailing changes in the ratios themselves compared with the averages in the frst and second vears, minus {(—) indicating that the ratios decrease, and plus (+) that they increase. did the ratios of the same banks in the first year deviate from the averages for that year. The signs show the fact, and the figures the amounts of regression to type—type in each year being the average for the entire group of banks. Third, that the greater the deviation, plus or minus, of the ratios from the general aver- age in the first of each pair of years, the greater the amount of regression to type in the second of each pair of years. The lat- ter fact is indicated by the sizes of the differences “Second year less than first year,” which, it will be noted, increase without exception for all pairs of years, and generally so for each separate pair, with the dispersion of the groups in the first years. Briefly, and in summary, Table 168 shows that the percentage amounts of change are positively correlated with the percentage amounts of dispersion from type. A similar phenomenon was observed in Part II, in the analysis of district ratios. It was there shown that district ratios of total expense which, in a given year, are above their own seven-year average level tend to decrease, and that those which, in a given year, are below their own seven- EXPENSES IN DISTRICTS I AND II 205 year average level tend to increase in the following year, the net percentage amounts of decrease or of increase being positively correlated with the percentage amounts of dispersion from type. It is now shown that similar tendencies for the individual banks in the Boston district are in operation, the ratios of the indi- vidual banks being compared in the successive pairs of years with the yearly averages for all banks. Are these regressions to type due to the method of expressing the deviations and to the fact that the averages change from year to year? They do not appear to be. It is true that the averages change, but the amounts of variation, except as between 1922 and 1923, are small. Moreover, as shown in Tables 161 and 162, the averages are functionally related to volumes of earning assets and to sizes of city of location. Accordingly, let us treat the data in a manner similar to that used to secure the detail in Table 168, but compute the deviations, not in terms of the averages for all banks, but as compared with (1) those in the different city groups, and (2) those in the various volume groups. In measuring regression, we shall later discard all averages as points of departure for computing deviations. It will be found that whatever methods are followed, the results are substantially the same. These appear to be due to the properties of the data rather than to the methods of manipulating them. Table 169 shows the nature and amount of regression to type in the ratios of total expense to earning assets when the indi- vidual bank ratios are expressed as deviations in the first and in the second of each pair of years, 1922-1925 (1) from the respective city-group averages, and (2) from the respective volume-group (earning assets) averages, the results being those secured from aggregating and averaging the amounts found in the respective pairs of years. For purposes of comparison, the total section of Table 168 is also included. As is indicated in Table 169, the three methods of computing the deviations give substantially the same results, both as to the fact and as to the amounts of regression. That is, according to all methods, ratios deviating from type in a given year deviate less widely the following year, the changes in the deviations in the second year varying directly with the percentage amounts of deviation in the first year. This condition obtains not only for 206 BANKING STANDARDS TABLE 160 COMPARATIVE MEASURES OF REGRESSION TO TYPE FOR RATIOS OF TOTAL EXPENSE TO EARNING Assers, MEMBER BANKS, BosTON FEDERAL RESERVE DISTRICT, 1922-1925 (Percentage Differences from three different averages.) DIFFERENCES: ALL PAIRS OF YEARS PERCENTAGE DIFFERENCES: (First Year of the Pair of Years) Position Groups Average 40 and over \ 30 and under 4o0 20 and under 30 to and under 20 Sere i aap wom Below Under 10 10 and under 20 20 and under 30 30 and under 40 10 and over Average Yearly Averages Yearly Averages 1 Yearly Averages of All Banks of City-Groups of Volume-Groups I Number Second Second years years less than | Number less than First First vears® years® | Number Second years less than First years® iwi ANE “nb — ag ud $ -n.1 .- a 32 YI1o —1r.§ -n 2 3 -.b jr i 26 ‘x 179 —11.0 — 4.6 — 5.4 - 3.2 _— TT de + . 2 pa + 1.5 + 2.8 + 4.4 + 5.3 + 6.7 41.7 1. < yy 6o¢ 620 + 2.3 641 *The signs relate to the prevailing changes in the ratios themselves compared with the averages in the frst and the second years, minus (—) indicating that the ratios decrease, and plus (+) that they increase, the combined pairs of years, but also for each pair of years when the deviations are taken from the respective yearly averages for all banks. When they are taken from the averages for the respective city groups, it holds for the combined first and second pairs of years for each city group, and when taken from the aver- ages for the respective volume groups, it holds for the combined first and second pairs of years for each volume group. But is uniformity of results in any way related to the use of averages as points of departure in computing deviations? To answer this question we shall dispense with the averages, so far as the calculation of differences from type is concerned, and search for tendencies of regression. The method employed is simple. the steps in carrying it out being as follows: (1) Distribute the ratios for the individual banks in frequency groups for a given year, say 1922. (2) Add the ratios in each group, and divide by the number of ratios, thus securing an 4 See Table 168. EXPENSES IN DISTRICTS I AND IJ 297 average for each group in 1922. (3) Add the ratios for 1923 for the banks falling in each of the groups in 1922, and divide by the number of ratios, thus obtaining a 1923 average for each group for which a 1922 average is secured. (4) Compare the two averages by subtracting the amount for the first from that for the second year. In order to cover all years, repeat these processes for 1923 and 1924, and 1924 and 1925; total the sums of the ratios and of the instances by groups for the three pairs of years, compute averages for the combined first years and combined second years, and compare the results by subtracting the amount for the first from the amount for the second years, By carrying through these several steps for member banks in the Boston district, the results in Table 170 are secured. They give direct and simple measures of regression, expressed in points of change in the average ratios between successive years, of the same types as those already found for the same body of data, but arrived at in other ways. All methods agree in indicating that, on the average, total expense ratios which are low in a given year tend to increase, and those which are high tend to decrease the following year, the amounts of the change, expressed abso- lutely or in percentage form, being positively correlated with the positions of the ratios on the expense scale. There is re- gression to type, the amount being largest for banks in “exposed TABLE 170 AVERAGE NET CHANGE IN RATIOS oF ToTAL EXPENSE TO EARNING ASSETS, BY PAIRS OF YEARS, 1922-1925, MEMBER BANKS, BosTON FEDERAL RESERVE DISTRICT YEARS RaT108: Total Expense to Earning Assets First Year of Each Pair of Years) and under and under , and under «4 and under : ; and under 6 > and under 7 + and over iumha- Total Second ears less _irst ton po ‘IT 6 1022 and 1022 Numkbe Second =a" less t te “0 1923 and 1024 Second “»ar less irst >. 0.4 -— 2 1924 and 102% Number Second =r less -st - ST to.x -0.3 -0.2 -_y A 208 BANKING STANDARDS positions” and decreasing as “normal” positions are approached. But this is not all. Not only are the ratios of total expense in constant flux, yet changing according to a pattern, when the entire membership in the Boston district is considered, but similar conditions obtain for groups of banks within this dis- trict. ‘This fact is evident from the details in Table 171, which are derived in the same manner as are those in Table 170, the only difference being that the ratios for banks in the different city groups are classified in frequency form in the first of each pair of years, and averages computed for the first and second of each pair of years and for the combined pair of years. TABLE 171 AveEraGE NET CuANGE IN Ratios oF TorAL EXPENSE TO EARNING ASSETS IN SUCCESSIVE PaAIRs OF YEARS, 1922-1925, CLASSIFIED MEeMBER BANKS, BosToN FEDERAL RESERVE DISTRICT —— RaT10s: Total Expense to Earning Assets (First Year of Each Pair of Years) Total t and under 2 2 and under 3 3 and under 4 ¢ and under 5 5 and under 6 6 and over Size oF CITY IN WaICH BANKS ARE LOCATED (in o00’s) - Under 10 10 to 20 — 120 and over ! Second years less First years Num- ber Second years less -irst vears Num: per Seconc years less rst ars Num- ber Second years less Tirst vears Num- ber Secon years less First vears - -~ gp #*=0.0 Yo.3 +o.1 =0.0 —0.2 -_Y. & So much for the norms and trends of total expense ratios for the member banks in the Boston district for the individual and combined pairs of years, 1922 to 1925. Do these agree with or differ from those for member banks in other districts? For- tunately, data are available for answering this question for a sample of member banks in District 2, New York, for the years 1023 to 1925, inclusive. (2) A Sample of the Member Banks in District 2—New York In discussing the norms and trends in total expense ratios of the sample member banks in the New York district, the order of presentation follows that already used for the Boston member EXPENSES IN DISTRICTS I AND II 29 TABLE 172 Ratios oF Torar ExPENSE T0 EARNING Assets, MEMBER BANKs, NEW York FEDERAL RESERVE DISTRICT, 1923-1925, CLASSIFIED BY Size or CIty Size or Crry {in 000’s) Total Numhe- a Ccra- on 102¢ Number ! Average Under 10 foto 20 20 to 40 40 to 120 ‘ 120 and over* : New York City *Excent New York Citv banks. Data are available for 280 banks in 1923, 299 in 1924, and 277 in 1925, the same banks being used each year “except for closed banks and others which changed their classification because of increased loans and investments.” The basis of selection is described by the Federal Reserve Agent as follows: “There are more than 850 member banks in this district, and it did not seem practicable or necessary to tabulate the figures for all of these banks. It was found that typical operating ratios could be secured by dividing the banks into 7 groups, in accordance with their total loans and investments, and then selecting 40 banks, varied as to location, from each of these groups to show the tendencies of the group.”® It is the ratios for- the individual banks, as thus selected in 192 3, and with the substitutions supplied by the Assistant Federal Reserve Agent [or the years 1924 and 1923, that this Section deals. Table 172 gives the ratios? for the sample member banks in the Second district, classified by the size of the city in which ‘hey are located, those for banks in New York City being sep- arately distinguished. There seems to be little or no functional relationship between the sizes of the ratios and the city-group SPart of a letter to the writer from W. Randolph Burgess, Assistant Federal Reserve Agent, Federal Reserve Bank of New York, July 6, 1926. 6 “A Comparison of the Operation of Representative Member Banks in the Sec- ond Federal Reserve District for the Vear 1923,” Federal Reserve Agent, Federal Reserve Bank of New York, Circular No. 618, July 17, 1924, p. 1. "The figures in the table, which are arithmetic means of the ratios, are gener- ally larger for the various years than the weighted ratios for all member banks in the district. as shown in Table <6. 00 BANKING STANDARDS TABLE 173 Ratios oF ToraL ExPENSE To EARNING AsseTs, MEMBER BANKS, NEw York FEDERAL RESERVE DISTRICT, 1923-1925, CLASSIFIED BY VOLUME OF EARNING ASSETS EARNING ASSETS (in 00,000’s) Total Under 5 sto 10 Io to 20 wo to 50 50 to 100 100 and over* New York City Number nL4 TOTAL Average | Number a ” ’ FR a. .. 1. [c22 1924 1925 Average | Number Average ' Number Average 277 | 4.35 10 ox .22 .45 44 i aR 4.2% . fo 45 4.10 40 4.42 41 4.55 | 44 4.46 40 4.40 Aa 4.08 39 4.52 40 4.24 39 4.40 40 4.45 40 4.50 40 4.27 -9 4.0" +Except New York Citv. sizes, a condition contrary to that which in general held for the member banks in the Boston district.® An alternative method of presenting the ratios for the banks in the New York district is given in Table 173. Here again, and in contrast to a similar table showing the ratios for the banks in the Boston district, the amounts do not tend to increase or to decrease with changes in the volume (earning assets) groups, although, in general, they are low, both within and outside of New York City, for banks with earning assets of $10,000,000 and over. The amounts in Tables 172 and 173 are averages, from which there are marked variations each year for banks within a given city and volume (earning assets) group. This fact is apparent from the detail in Table 174, which, for the banks classified in two ways, gives the frequency distributions of the ratios for the three years, 1923, 1924, and 1925, combined. Variable as are the ratios, they seemingly respond in much the same way in each city group and earning assets group to influences deter- mining (1) their relative positions within the groups each year, (2) the types of change from year to year, and (3) their posi- tions relative to the average each year for the entire number of banks. Tendencies toward uniformity of behavior are apparent from Table 1735, which shows, by city groups and by volume (earning assets) groups, the percentage amounts by which the average 8 Gee Table 161. EXPENSES IN DISTRICTS I AND II 301 ratios of total expense to earning assets for banks each year deviate from the group average for the combined years 1923 to 1925, inclusive. According to this table, the bank ratios were generally low in 1923 and high in each of the other years. To this general rule for the combined groups, there are exceptions in each of the separate groups for one or more years, but in no year is the situation of the random type, nor is there serious disagreement, as between the two methods of classifying the banks, respecting the conditions which obtain. In general, and on the average, what is true for one group of banks is also true for other groups. The percentage amounts by which the yearly averages differ from the three-year averages for the respec- tive groups obviously vary widely. While this is to be expected because of the variations in the averages themselves, the varia- tions, as will be seen later, are not haphazard. They conform to a pattern observed, first, for district ratios for all member banks for the country as a whole, and second. for the indi- vidual banks in the Boston district. From the average yearly levels of the banks in each group, changes occurred between 1923 and 1924, and between 1924 and 1925. So far as direction is concerned, were they of a similar type? Consistency in this respect has already been observed for district ratios for the country as a whole, and for the individual member banks in the Boston district. Do similar conditions obtain in the New York district for the years in question? From Table 176 it is seen that the directions of change, according to the two bases of classifying the banks, were upward between 1923 and 1924, and downward between 1924 and 1925 for all groups except two in each of the respective yearly comparisons. Moreover, as is shown by comparing Tables 165 and 176, the ratios were prevailingly higher in 1924 than in 1923 in the respective groups of banks, as classified, both in the Boston and in the New York districts. But directions, as well as percentage amounts of change in ratios of total expense to earning assets, are found to be func- tions of the positions of the ratios relative to their own average levels. This is true for district ratios for the country as a whole and also for group ratios for banks in the Boston district. Is it true for the sample banks in the Second district? The answer to this question, so far as direction is concerned. is found in TABLE 174 DisTRIBUTION OF RATIOS oF Total EXPENSE To EARNING Assets, MEMBER Banks, NEw York FEDERAL RESERVE DISTRICT, FOR THE COMBINED YEARS, 1923-1025 »N 0 N Groups Total . . . 2.0 and under 2.5....... 2.5 and under 3.0......." 3.0 and under 3.5....... 3.5 and under 4.0....... 4.0 and under 4.5....... 4.5 and under 5.0....... 5.0 and under 5.5....... 5.5 and under 6.0... .. 6.0 and under 6.5... ... 6.5 and under 7.0....... ».0 and over. Seen. Size oF City (in 000’) EARNING ASSETS (in 00,000’s) Total Bank- Years Under T1060 10 | 20 to to 20 40 4C to 120 r ny and over S 10 to to I0 20 nr ky) a a Under] = 20 to co | x. YL Citv 50 to 100 AN 856 | 401 ' 75 1 64 - o1 ! 8r 144 124 ! 125 ! 119 | 121 124 2 I II I0 49 | 31 F323 50 2x 150 SA Te ? wv [ » bo} 4 a I 24 a7 TQ y2 IO “0 2 18 42 L hl 8 gy ” ‘2 3 100 and over Except! N.Y. N.Y. City 120 | 123 I ve I 23 35 3 46 a 16 10 2 EXPENSES IN DISTRICTS I AND II = oY TABLE 175 PERCENTAGE DEVIATIONS OF RATIOS OF TOTAL EXPENSE TO EARNING ASSETS FROM THE GROUP AVERAGES, 1922-1925, CLASSI- FIED MEMBER BANKS, NEw York FEDERAL RESERVE DISTRICT, BY YEARS Crty-Grourps (Podulation in 000’s) Average... .. Underzo..................... roand under 20............. 20 and under go... ......... 40 and under 120... ....... 120 and over*. .... eee New York Citv 1923 -n 6a 20 ..08 -0.90 ~0.23 +1.80 +2 40 (LAR - Lo € 0.6 7 2-46 .67 4€ ~~ a2 €g ¢ VoLuME-GRrOUPS (Earning Assets in 00.000's) Average. ..... Unders..... 5 and under 10 to and under 20 20 and under so. so and under 100. too and over*. .... New York Cit 61 56 oo 16 ~ 1.57 42.41 41.15 —0.07 +0.90 —2.5I -1.60 Except New York City. Table 177, which shows that, even for the limited experience, covering as it does but two pairs of years, group ratios which are high or low, respectively, in the first of a pair of years tend to decrease or to increase in the following year. Moreover, this phenomenon obtains for both methods of classification, regression to type, so far as direction alone is concerned, being all but uni- versal. But regression is evidenced not only by directions, but also by percentage amounts of change, the changes, however, varying directly rather than inversely with the amounts of devia- tion from type. This fact is shown in Table 178, according to which, for the groups, there are no exceptions to the rule. But, as in the analyses of similar tendencies for the banks in the Boston district, groups are used. By treating the individual bank ratios in the Second district according to the plan used 104 BANKING STANDARDS TABLE 176 NET PERCENTAGE YEAR-TO-YEAR CHANGES IN RATIOS OF ToOTAL ExPENSE To EARNING AssETS, CLASSIFIED MEMBER BANKS, New York FEDERAL RESERVE DISTRICT, 1923-1925 Ciry-Grouprs {(Pobulation in 000’) Average. ........ocenen-n-- NACE TO. «vote ee iene ean err annen, roandunder 20....... iii zoand under 40........cciiiiniiiniaaan an goand under 120... .. iii 120and OVer®. . oot New York City. . eee VoLuME-GROUPS (Earning Assets in 00,000's) LL —————————. Average. ......ocooeo oon Under §...oeovmenineeorons eanennnannnne. sand under IO...........ciiiiiiiiiiinnn. oand under 20........ciiiiiiiiiaaai 20oandunder 50... ie 50and UNdEr T00 ....viniiiiiiii coandover®.... ..... aan New York City . vv vviiinineeernnnnnnnns 1923 to 1924 YEARS 1924 to 1925 —0.46 “+1.30 +4.52 +o0.65 +1.59 -+0.69 —I.10 —A4.70 +=0.00 “+1.08 —0.45 —1.14 —3.35 -—0.74 YEARS 1923 to 10924 1924 to 1925 —0.46 +5.35 +3.74 +4.74 +2.25 +o0.45 —1.35 —a.67 —0.22 +1.92 —0.45 —2.20 -}+o.g90 —2.95 —0.25% *Except New York City. ) TABLE 177 CoMPARATIVE PoSITIONS AND YEAR-TO-YEAR DIRECTIONS OF CuaNGE IN Group Ratios oF ToTAL EXPENSE TO EARNING AssETS, MEMBER BANKS, NEW YORK FEDERAL RESERVE DISTRICT, 1023-1025 Positions Relative to City-Group Averages Total. Direction of Change from Year to Year iL Positions Relative to Volume-Group Averages Total. . ..... Direction of Change from Year to Year Total 7 78 14 *One group = in direction. §One group = in position. EXPENSES IN DISTRICTS I AND II 305 TABLE 178 COMPARATIVE PERCENTAGE AMOUNTS OF DEVIATION FROM GROUP AVERAGES AND NET YEAR-TO-YEAR CHANGES IN RATIOS OF TOTAL EXPENSE To EARNING Assets, MEMBER Banks, NEw York FEDERAL RESERVE DISTRICT, 10223-102¢ DIFFERENCES FROM CI1TY-GROUP AVERAGES, 1923-1925 ~e r SET Number.” (Cacpe Percentage Groups Average Average Percentage rr 40 NET PERCENTAGE CHANGE FROM VEAR TO YEAR =~ 70 —— “nd over [Under 2 Inder 2 and over Average 3.40 1 60 0.82 2.00 Q -1 70 (.21 40.65 +4. 52 + 20 DIFFERENCES FROM VOLUME-GROUP AVERAGES, 1923-1025 Sign Number of Caen. Percentage Groups Average Percentage NET PERCENTAGE CHANGE FROM YEAR TO YEAR Tearaqaoe nd over Inder 2 "nder 2 nd over Average *One group = in direction. One group = in position. for those in the First,® measures of regression to type, both by directions and percentage amounts, are secured for the indi- vidual banks. The results secured by this process for the respec- tive pairs of years, and for the two pairs combined, are given in Table 179. They show that (1) ratios in the first of each pair of years, deviating positively or negatively from the average for the entire number of banks in that year, deviate less widely in the second of each pair of years from the average for that year, and (2) the greater the percentage deviation in the first year, "9 Gee pages 202-203. 206 BANKING STANDARDS TABLE 170 CoMPARATIVE MEASURES OF REGRESSION TO TYPE FOR RATIOS OF TOTAL EXPENSE To EARNING ASSETS, MEMBER BANKS, NEW YORK FEDERAL RESERVE DISTRICT, 1923-1925 (Percentage Differences from Yearly Averages for all Banks. See page 293.) PERCENTAGE DIFFERENCES: (First Year of Each Pair of Years) ve f Position Groups Average 40 and over 30 and under 40 20 and under 30 10 and under 20 Tnder 10 Above Below Under 10 ro and under 20 20 and under 30 30 and under 40 10 and over Average Te All Pairs D1rrERENCES BY PAIRS OF YEARS 1923 and 1024 1924 and 192% Second year less than First year® — 2.7 —15.0 —20.0 - 7.1 — 0.5 ~~ 1.8 Number Second years 'ess than First yranpa® Number Second year les: than First vear® > ~ Tr + 1.4 + 1.9 + 4.3 + 5.0 %= 0.0 + 1.0 *The signs relate to the prevailing changes in the ratios themselves compared with the averages in the first and the second years, minus (—) indicating that the ratios decrease, and plus (+) that they increase, the larger the difference between the deviations in the first and in the second years. That is, the ratios regress to type, the types in each of the years being the average amounts for all banks being considered. Conditions essentially duplicating those just described for the New York district banks were seen to characterize the member banks in the First district.}® Are these results due to methods of manipulating the data? They did not appear to be in the case of the Boston banks, inasmuch as similar results were secured by different methods, and there are equally valid reasons for believing that they are not so in the case of the New York banks. This conclusion follows because of the fact that (1) the same phenomenon appears when, as in the case of the Boston banks,!! the deviations in the first and in the second of each pair of years are taken from the respective city-group and volume-group averages, and (2) when the ratios are studied without respect to averages as standards of reference.!? "10 See Table 168. 11 See Table 160. 12 See Table 170. EXPENSES IN DISTRICTS I AND II TABLE 180 397 AVERAGE NET CHANGE IN RATIOS OF ToTAL EXPENSE TO EARNING AsSETs, BY PAIRs oF YEARS, 1923-1925, MEMBER BANKS, NEW York FEDERAL RESERVE DISTRICT YEARS RATIOS! Total Expense to Earning Assets 'First Year of Each Pair of Years) Number Total Second vears less rirst vears 1923 and 1924 Number Second vear less First vear 1024 and 1925 Number | Second year less First vear Total. ..... 2 and under 3.... j and under 4... 4 and under gs... 5 and under 6. . 6 and under 7.. r and over 0,0 to.x 0.0 -n.1 -0.4 Space is not available in which to include for the New York banks regression measures as provided for in (1) immediately above. Suffice it to say that the results are substantially identical with those given in Table 179. Those secured without resort to the use of averages as points of departure from which to measure deviations are given in Tables 180 and 181, the methods of obtaining them being identical with those used above in the case of the Boston district banks.!®* Table 180 shows the results for the separate and for the combined pairs of years; Table 181, those for the combined pairs for banks in cities of different size. Despite the fact that for the New York district only a sample of the member banks is used, regression to type obtains. It is generally present for the entire sample in each pair and for the classified members for the combined pairs of years. Small as are the changes, they nevertheless are present and occur according to a definite pattern. It is the low ratios which tend to rise, and the high ones which tend to fall. This is the pattern which is traced out from year to year not only for individual 13 See pages 206-207. 208 BANKING STANDARDS TABLE 181 AVERAGE NET CHANGE IN Ratios oF ToTraL EXPENSE TO EARNING AssETS IN SuccessivE Pairs oF YEARS, 1923-1925, CLASSIFIED MEMBER Banks, NEW York FEDERAL RESERVE DisTrICT S1zE oF City IN WHICE BANKS ARE LOCATED (118 000’s) RATIOS: Total Expense to Earning Assets (First Year of Each Pair of Years) Under 10 ro to 20 20 to 40 40 to 120 120 and over I Second | years less Num- First ber vears Num- ber Second years less First vears Num- ber Second | years less First vears Total LL opm © - +n =®=0_r ‘ wy yap —0.1 2 and under 3 7 3 and under 4 56 4 and under 5 160 ¢ and under 6 | 33 6 and under 7 3 7 and over Cee +0.3 . +o.2 s +o.1 36 —0.2 9 -—0.5 + ... *0.0 ®=0.0 | N] —0.1 6 Fo.2 ol ~0.§ +o.1 +=0.0 -0.5 I 42 88 12 ‘t —0.2 *=0.0 —o0.1 +o.1 -_—0.7 TABLE 182 AVERAGE NET CuANGE IN Ratios oF TorAL EXPENSE TO EARNING ASSETS, BY PAIRS OF YEARS, 1923-1925, MEMBER BANKS, BosToN AND NEW York FEDERAL RESERVE DISTRICTS YEARS RATIOS! Total Expense to Earning Assets (First Year of Each Pair of Years) Total........... t and under 2... . 2 and under 3.... 3 and under 4... . 4 and under 5... . ; and under 6... . 5 and under 7... . +» and over . Total Second years less First vears Number | 1276 +=0.0 2 ' +4o.7 60 “40.2 365 +o.1 767 *0.0 164 —0.2 12 —0.4 € —I.§ 1022 and 1024 1924 and 1925 Second year less First vear Second year less First year Number | Number 60% 0 Tr 631 *=0.0 2 Es or 381 “+0.7 a to.3 ad 1s 386 to 89 my 9 —0.5 ; -—1.7 “+o.1 40.1 +=0.0 —0.I —0.2 —T./ | EXPENSES IN DISTRICTS I AND II 3090 bank ratios in the New York and Boston districts, but also for district ratios for the country as a whole. Whatever method of manipulating the data is used, essentially the same results are secured—results seemingly inherent in the economic processes and conditions under which banking is carried on, and about which considerable will be said later. Table 182 summarizes, according to the “Points difference” method,'* the nature and amounts of regression to type for the individual banks in the Boston and in the New York districts, combined, the effect of consolidating the experience being to sharpen the outline of the regression pattern. 3. SERIES CORRELATED WITH RATIOS OF TOTAL EXPENSE TO EARNING ASSETS—MEMBER BANKS IN DISTRICT I—BOSTON In Chapter XV it was shown, for the entire banking member- ship and for classified banks in the First district, that ratios of total expense and of net earnings are positively correlated with ratios of gross earnings. Table 159 contains the frequencies of the paired variables for gross earnings and for total expense ratios, as well as regression measures for ratios of total expense on gross earnings and of gross earnings on total expense. From this table it is apparent that the higher or lower the ratios of gross earnings, the higher or lower those of total expense; and that the higher or lower the ratios of total expense, the higher or lower those of gross earnings. Viewed in either way, a clearly defined functional relationship obtains. But in what way are net earnings ratios related to ratios of total expense? If high or low ratios of total expense and of net earnings accompany high or low ratios, respectively, of gross earnings, and if high or low ratios of gross earnings accompany high or low ratios, respectively, of total expense, then it would appear, other things being equal, that high or low ratios of total expense should be found with high or low ratios, respectively, of net earnings. But the other things are not equal, as is indicated in Table 183, which shows negative correlation to obtain between these series. That is, in general, and other things being equal, if ratios of total expense are high or low, ratios of net earnings 14 That used in securing the details in Tables 170 and 180. 210 BANKING STANDARDS TABLE 183 CORRELATION OF PERCENTAGE DIFFERENCES OF RATIOS IN PAIRED SERIES—ToTAL EXPENSE TO EARNING ASSETS AND NET EARN- INGS TO EARNING ASSETS—MEMBER Banks, Boston FEDERAL RESERVE DISTRICT, 1924 AND 1925 (Percentage Differences from Respective Yearly Averages for the Respective Volume-Groups. See page 27%9.) RATIOS: Total Expense to Earning Assets (Percentage Differences) Ratios: Net Earnings to Earning Assets (Percentage Differences) Number of Bank-Years TOTAL Average Percentage Differences Num- : ber of (Ratios: | Ratios: Bank-| Total E Net Years Expense ating ' to y 40 20 30! 40 Earning Earning and | tc to and Assets = Assets aver! +> 40 lover (Net) 40 and over’ 1 6 +58.2 + —18.2 30 to 40 2 113 425.0 ' —390.3 20 to 30 Fa. 2 81 71 4°12 39 425.01 —22.7 otozo 1s] rl 31 6lisbi6] 7117] 20) 22 112 | +15.0 —18.3 Underio | 20} 5s | 8111 22 203127] 21128 202 + 5.0! — 8.2 Underzo |2t |ralonlaclgglaolar|ag fax! 6122s — rol +30 totozo ‘21 c -2° 150 re —vc.0 | 415.6 20togzo | 16 I nl ~~~ o | 428.0 30 to 40 "og! ol +36.7 40 and nver 61! » —<6.8 | “+s51.4 Position | Above Below J a8 = 388 ag © on oe o boy «8 ne | , i | Cc hos = ~ z o o I~ oQ 8 3 EXPENSES IN DISTRICTS I AND II 311 are low or high, respectively. But the other things are not equal. It is the relations between gross earnings and total expense ratios which determine ratios of net earnings. And these are functions of variables with respect to both factors. Neither of them can be considered without respect to the other. The detail and averages in Table 183 refer to the entire bank- ing membership in the Boston district for the years 1924 and 1925, averages for the different volume groups for the respective years for both total expense and net earnings ratios being the standards of reference from which the deviations in the paired series are computed. But the relations found to obtain for the entire membership for the combined years hold for each year. Moreover, they are true for each city-size group for each year and for the combined years and for each volume group each year, the averages used as points of reference in order to deter- mine the deviations being those applying to the respective groups and years. That is, negative correlation seems to be independent of the period covered and of the manner in which the banks are selected. The rule is general. TABLE 184 CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES—MEMBER BANKS, BostoN FEDERAL RESERVE DISTRICT, 1924 AND 1925 ‘Percentage Deviations from Respective Yearly Averages for the Respective Volume-Groups. See page 2%9.) Pnhcition A have Below [NDEPENDENT VariasLE—Ratios of Total Expense to Earning Assets Y-+ance from Average recente > anc over ‘0 and under 40 ‘= 2nd under 30 0 and under 2. Inder 10 Jnder 10 0 and under 20 ~ and under 3c nd under 4¢ wel er Average Darcantapa Number of Rank-Years DEPENDENT VARIABLES— Net Average Percentage Gross ‘arnings to ‘arning Assets Net Earn- ings to Earning Assets a 6B *+13.9 paired with net earnings. b<458 2 paired with net earnings. $302 for total expense paired with net earnings, 119 for total expense paired with net earnings. 312 BANKING STANDARDS Table 184 summarizes the results secured from pairing ratios of gross earnings and of net earnings with ratios of total expense, the former being the dependent variables and the latter the inde- pendent variable. From the foregoing presentations it is patent that, on the average and in general, banks can increase their net earnings by increasing their gross earnings, provided their total expenses are not increased. But as a general rule, such increases take place. Similarly, they may increase them by decreasing their total expense if they do not decrease their gross earnings. But as a general rule, such decreases occur. Accordingly, which proc- ess—to increase gross earnings or to decrease expenses—seems to offer the better chance of gaining the desired result? An answer to this question is given in Chapter XVII. XVII NORMS, TRENDS, AND CORRELATIONS IN NET EARNING RATIOS I. INTRODUCTION THE following analysis of ratios of net earnings to earning assets is restricted to the member banks in the Boston district for the years 1924 and 1925. Amounts of net earnings, as used in Chapter VII, are the differences between gross earnings and total expense, and are to be distinguished from “net addition to profits,” the latter expression being net earnings less “net losses’? —that is, “total losses less recoveries on assets previously charged off.” The term is used in the same sense in this chapter. The data for each bank, expressed as percentages of earning assets, refer to the calendar years, the base amounts used in computing the ratios each year being the average earning assets reported by the banks for five calls, two of which are in Decem- ber—one for December 31 of the preceding year and the other for December 31 of the calendar year in question. 2. NORMS AND TRENDS IN NET EARNINGS RATIOS The average? ratios of net earnings to earning assets for 408 member banks in 1924 and for 410 member banks in 1925 were, respectively, 1.82 and 1.92. For the combined years the ratio was 1.87. But these amounts, while characteristic of the banks as a whole, do not represent those of different size and location. This fact is shown in Table 185, from which two tendencies are apparent. First, the ratios for banks classified by city groups tended to increase between 1924 and 1925; second, those each vear tend to decrease as the cities increase in size. Moreover, the ratios for banks classified by volume groups increased between 1See page 127. * Obtained by taking an arithmetic mean of the ratios themselves. 2 ? X14 BANKING STANDARDS TABLE 183 RATIOS OF NET EARNINGS TO EARNING Assets, CLASSIFIED MEMBER Banks, BostoN FEDERAL RESERVE DISTRICT, 1924-1925 (Net Losses Excluded) Size oF City (in 000’s) Total. ..... ... Underio..........o..... 1o and under 20......... 20 and under 4o0......... 40 and under 120......... 20 and over. .. Ce EARNING ASSETS (21 00.000’s) Total. ...... .. Unders................. sand under1o........... ro and under 20........... 20 and under 50........... co and over. ToTAL 1 1924 1925 Num- | Av- ber erage Num- ber Av- erace Num- ber Av- erage R18 1.87 408 1.82 ! 410 ! : 1.92 } 360 2.07 180 2.02 180 2.13 149 1.84 | 74 | 1.76 | 75 1.02 oI 1.80 45 1.72 - 46 1.88 136 1.59 68 1.59 68 1.60 82 1.57 43 1.60 4x 1.54 TorAL (Q24 1925 Num- | ber Av- erage Num- | ber Av- erage Num- | ber Av- erage 1.02 R18 1.87 - 408 1.82 410 112 184 £197 181 144 2.30 2.06 1.88 1.61 =~ 6r 56 92 08 00 2.20 2.02 1.82 1.79 56 02 99 GI 2.39 2.11 1.93 1.63 64 1924 and 19235, and within each year they decrease as the volume increases. But the amounts in Table 185 are averages. What are the characteristic ratios for the banks in the different groups, and how general, among the various banks, are the increases from year to year? The first part of this question is answered by the details in Table 186, which, for the combined years 1924 and 1923, give the distribution of the ratios for banks classified by size of city of location and by volume of earning assets. The second part of the question is considered later. Table 186 shows that (1) the ratios for the combined years for all banks, while ranging from less than 0.5% to more than 1%, concentrate at the group 1.5-2.0; and (2) the spread tends to decrease, and the ratios at which the instances tend to con- NET EARNINGS IN DISTRICT I k3 4 centrate generally become smaller as the city and the volume groups increase in size. Similar conditions obtain in each of the years. It is apparent, therefore, that to present the average ratios by years and by groups of banks, as is done in Table 185, is not to disclose the variations in the net earnings of these insti- tutions. It is because of this fact that the details in Table 186 are presented. In Table 183, it is seen that the average ratios for the banks, as grouped, increased between 1924 and 1925. Was this tendency general for the banks individually, and is it in any way related to the size of the ratios in 1924? The fact of variation is evident from the details in Table 186. Some are high, some “average,” and some low. Did those falling within these several categories increase between 1924 and 1925? To answer this question, stand- ards of reference from which to measure the amounts of differ- ence from type, and measures of change must be selected. Let us use those already employed in the analyses of gross earnings and of total expense ratios, follow through the processes of analysis, and observe the results. These may then be used as bases for certain generalizations. A convenient and logical standard is the average ratio for the 408 banks® in each of the years 1924 and 1925. With such amounts as points of departure for measuring dispersion, the process of determining the types and amounts of change between £924 and 1925, used above in the analysis of gross earnings ratios, may be employed.* The results of carrying it out are shown in the first section of Table 187. But the average ratio for all of the banks in a given year does not agree with the yearly averages for the banks in the respective city and volume groups. Indeed, the averages for the banks in four of the five city groups in 1924, and in three of the five in 1925, are less than the corresponding yearly averages for all of the banks. Accordingly, since banks by city groups have different yearly average ratios, these may be taken as standards of refer- ence with which to compare, group by group, the ratios of the individual banks. If this is done, and if the yearly ratios are treated in a manner similar to that used immediately above, the 8 For 1924, two of the 410 banks had total expenses exceeding gross earnings. t See page 273. TABLE 186 DisTRIBUTION OF RATIOS OF NET EARNINGS TO EARNING AsSETS, CLASSIFIED MEMBER BANKS, BostoN FEDERAL RESERVE DISTRICT, FOR 1924 AND 1925, COMBINED gy > ~ , GROUPS Total = ....... ... Undero.5................ 0.5 and under 1.0......... r.o and under 1.5........ t.5 and under 2.0......... 2.0 and under 2.5......... 2.5 and under 3.0........ 3.0 and under 3.5........ 3.5 and under 4.0........ 4.0 and over Ce Total Bank- Years Under 10 RR 260 5 0 4 28 14 185 54 230 88 192 08 102 66 32 19 5d Ix 10 and inder - en 140 9 35 40 AT I Size or City (in 000’s) 20 and under AND 40 and under r rN or Vo126 120 and ver Qn ‘3 54 4 £ EARNING ASSETS (in 00,000’s) Under ¢ 5 and inder 10 and under 20 20 120 and and under over “rN rro 184 1Q7 181 | 144 4 3 9 12 14 : 33 32 61 25 37 64 53 33 54 so 37 24 32 25 11 9 12 6 I 5 6 7 ’ [ I 10 §1 51 18 10 4 I NET EARNINGS IN DISTRICT I 317 results in the center section of Table 187 are secured. These are substantially the same as those in the first part, and suggest the conclusion that they are independent of the averages with which the individual bank ratios are compared. The ratios differ, however, not only by city groups but also by volume groups. Accordingly, if the respective volume-group averages are used as points of reference, and if the data are treated in a manner similar to that used when the district aver- ages are employed, what results are secured? Those obtained, and given in the last section of Table 187, essentially agree with those in the other parts of this table. Confidence in the signifi- cance of these findings increases as the results in essential detail are duplicated. But what is the meaning of these plus and minus quantities? An answer to this question is obtained by reviewing the methods of study used to obtain them. TABLE 18% CoMPARATIVE MEASURES OF REGRESSION TO TYPE FOR RATIOS OF NET EARNINGS TO EARNING ASSETS, MEMBER Banks, BosToN FEDERAL RESERVE DISTRICT, 1924-1925 (Percentage Differences from three different averages.) PERCENTAGE DIFFERENCES: (First Year of the Pair of Vears) Position Groups Average Above 50 and over to and under 60 yo and under 40 10 and under 30 to and under 20 Inder 10 Under 10 to and under 20 0 and under 30 jo and under 40 to and under 6¢ AA and nus Relow Avserace Yearly Averages of All Banks Number Second year ess than First vear® 8A —-10.6 Seca 4 DIFFERENCES Yearly Averages of Citv-Groups Number Second year ‘ess than First vear® Ry —~10.9 -» “hy r.6 | | a'ZY +10.2 Yearly Averages A Vak--wa Groups Number ~mannd year ‘es7 ‘han rst vane® 0¢€ ~10.7 iL "4 —29.8 19.7 -14.2 - 3.8 -7 .3 3 3 ! tis | 3s 12.2 0.8 dng." 213 | <4-10.6 *The signs relate to the prevailing changes in the ratios themselves compared with the averages in the first and the sacond years. minus ( —) indicating that the ratios decrease. and plus (+) that they increase. TABLE 188 AVERAGE NET CHANGE IN Ratios oF NET EARNINGS TO EARNING ASSETS, CLASSIFIED MEMBER BaNks, BosToN FEDERAL RESERVE DISTRICT, 1924-1925 Size or CITY IN WHICH BANKS ARE LOCATED (in 000’s) » ~ On RATIOS: Net Earnings to Earning Assets (First Year of the Pair of Years) Total. .....o....... Underr............. t and under 2........ 2 and under 3........ 3 and under 4........ s4andover........... Total Number An 53 274 Siw 2 9 Second year less First renr +o rT +o0.5 +o.2 *0.0 —0.4 -1.5§ Under 10 ' Second year less First vear Number 1R0 +4o.1 13 4 76 IA 3 +0.6 +o0.3 *0.0 —0.4 —1.§ 10 to 20 20 to 40 Second year less First vear Number Number | Second year less First vear nA 4-0 2 435 +40. 2 25 28 5 i +0.6 4 +o0.3 26 =0.0 14 —0.6 I 40.3 “+o0.1 +o.1 +o.9 | 40 to 120 Second year less First vear Number 68 401 0 £7 ¥ +o0.4 *=0.0 —0.1I -I.0 120 and over Number | Second year less First vear 41 -—0.X 36 | 4 I %=0.0 -0.1 —-0.3 —t NET EARNINGS IN DISTRICT I 319 The first stage in the process secured measures of disper- sion for ratios in 1924 which were distributed above or below their averages (those for all banks, those for banks classified by size of city of location, and those for banks classified by amounts of earning assets) by different percentage amounts. The second stage, for banks with classified percentage amounts of dispersion from their average in 1924, determined the net average amount of dispersion from their average in 1925. If ratios of net earnings are above or below their average in 1924, they are in general above or below their average in 1925. But some of those above the 1924 average are below, and some of those below the 1924 average are above their 1925 average. Accordingly, when, for each dispersion group in 1924, the average amount of deviation in that year is compared with the net average disper- sion in 19235, it is found that the dispersion is less in 1925 for ratios which were either above or below their average in 1924. The amounts of difference in dispersion, in the two years, vary directly with the degree of dispersion in 1924. Ratios which are above as well as those which are below the average in 1924 tend to regress or move toward the average in 1925. The plus and minus quantities in the different parts of the table indicate by signs and amounts the regression or movements of the ratios back to type.’ The foregoing methods of measuring the directions of change with respect to the size of the ratios, while making use of three separate standards of reference to determine relative size, and identifying as changes differences in dispersion in 1924 and 1923, secure substantially uniform results. If measurements of both directions and amounts of change between 1924 and 1925 are made without reference to district-, city-, and volume-group averages in these years, is a tendency of regression, analogous to that already noticed, present? Answer to the question is found in the signs and amounts in Table 188, the method of treating the net earnings ratios being the same as that already employed in the analysis of ratios of gross earnings.® The table shows that, with the exception of the banks in cities with population of 20,000 to 40,000, it was the ratios which were relatively low 5 For a fuller description of the meaning of the signs and amounts secured from such an analysis, see pages 273-275. See page 27%. 320 BANKING STANDARDS which increased, and those which were relatively high which de- creased between 1924 and 1925. Moreover, the lower they were, the more they rose; and the higher they were, the more they fell. It should be observed that these latter results are obtained by the simple process of (1) classifying the banks into groups ac- cording to their net earnings ratios in 1924, (2) calculating the average ratio for each class in that year, and (3) comparing this amount with the average for the same banks in 1925. This proc- ess is direct. It does not involve the use of averages as standards of reference to determine positions, nor does it identify changes from year to year with differences in relative dispersion. And yet the results secured by both methods of study indicate changes according to a well-defined pattern—a pattern encountered in the discussion of gross earnings ratios in the Boston district for 1924 and 1925, and of total expense ratios in the Boston and New York districts for the years 1922 to 1925 and 1923 to 1925, respectively. In the discussion of gross earnings and of total expense ratios for individual banks, confidence is expressed in the belief that results secured by the types of analyses just presented are sig- nificant. It is maintained that they seem to indicate that forces are operating to establish equilibria with respect to these ratios. It is also believed that forces are similarly tending to bring ratios of net earnings to an equilibrium. What is the evidence which appears to support this conclusion? In Chapter VII it was found, first, that from year to year, during the years 1919 to 1925, district ratios of net earnings to earning assets which were low tended to increase, and those which were high tended to decrease.” Similar tendencies between 1924 and 1925 are now found for the net earnings ratios of individual banks in the Boston district.® Second, the net rates of increase or of decrease from year to year, during the period 1919 to 1925 for district ratios, varied directly with the percentage amounts of deviation from type—type being the seven-year average ratios for the respective districts.? It is now found that similar condi- tions obtain for the Boston district member banks for the years 7 See Table 84. 8 See Tables 187 and 188. 2 Gee Table 853. NET EARNINGS IN DISTRICT I 321 1924 and 1925.!1° In short, the two bodies of data agree in in- dicating that net earnings ratios, different as they are by districts and by banks within a given district, and dependent as they are upon the relations between variable gross earnings and variable total expense ratios, tend to come to an equilibrium through ~hanges following a well-defined pattern. 3. SERIES CORRELATED WITH RATIOS OF NET EARNINGS TO EARNING ASSETS In Chapter XV it was shown, for the member banks in the First district, that if gross earnings ratios are high or low, net earnings ratios tend to be high or low.!? That is, the two series are positively correlated. In Chapter XVI, it was found that if total expense ratios are high or low, net earnings ratios are low or high.!? In this case, the two series are negatively correlated. By considering, as is the case, that the series are causually related in the manner indicated, these facts are to be interpreted as fol- lows: other things being equal, net earnings ratios are high or low when ratios of gross earnings are high or low; and, other things being equal, net earnings ratios are high or low when ratios of total expenses are low or high. But the other things are not equal, for the following reasons: 1. It is generally true that banks having ratios of gross earn- ings larger or smaller than the average have ratios of total expense larger or smaller than the average, and that those having ratios of total expense larger or smaller than the average have ratios of gross earnings larger or smaller than the average. These facts, summarized in Table 159, are graphically illustrated in Chart 49, which shows the distribution of the paired ratios for the 408 member banks in 1924 and for the 410 in 19235, in the Boston district, which had positive net earnings in these years. The area enclosed by the horizontal parallel lines is drawn opposite to the average gross earnings ratio for the two years; that en- closed by the vertical parallel lines is drawn opposite to the average ratio of total expense for the combined years. The area 10 See Tables 187 and 188. 11 See Table 160. 12Gee Tables 182 and 184. CHART 49 DisTrRIBUTION OF RATIOS OF NET EARNINGS TO EARNING ASSETS WITH REFERENCE TO VARIABLE RATIOS OF GROSS EARNINGS AND OF ToTAL EXPENSE To EARNING AssETs, MEMBER BANKS, BosToN FEDERAL RESERVE DISTRICT, 1924 AND 1925 Ratios: Total Expense to Earning Assets ‘ Average Below - Nn N Pe _ 8 6. 5 « I il L A CoH EE ~ a Net Exnings Faties | i Balow ihe Average 2 points} v OF a 1 |! 1 *! t ot NET EARNINGS IN DISTRICT I 323 enclosed by the zigzag lines represents, for variable ratios of gross earnings and of total expense, the average ratio of net earnings to earning assets—1.9. The distribution of the dots shows posi- tive correlation between ratios of gross earnings and of total expense. 2. It is generally true that banks having ratios of gross earn- ings larger or smaller than the average have ratios of net earn- ings larger or smaller than the average.!* This fact is shown graphically by the distribution and the frequency of the dots on Chart 49. It will be observed that for banks with ratios of gross earnings above the average the net earnings ratios tend to be to the right and above the zigzag lines—the area showing average net earnings ratios. Similarly, banks with ratios of gross earnings below the average, as indicated by the distribution below the parallel horizontal lines, had net earnings falling below and to the left of the zigzag lines. That is, they tended to be lower than the average. While net earnings ratios are positively correlated with ratios of gross earnings, this condition does not tend to obtain when the order of the variables is reversed.!* If net earnings tend to be higher or lower than the average, gross earnings tend to be lower than the average for all banks except those having exceptionally high net earnings. That is, relatively low gross earnings are some- times associated with relatively high net earnings. This fact is shown in Tables 189 and 190. Moreover, it is generally ap- parent from Chart 49, from which it is seen that relatively high net earnings ratios—those above the zigzag lines—and relatively low ratios of net earnings—those below these lines—fall in areas of relatively high and of relatively low gross earnings ratios, the average amounts being indicated by the space between the parallel horizontal lines. 3. It is generally true that banks having ratios of total expense larger or smaller than the average have ratios of net earnings smaller or larger than the average.!® This condition tends to obtain when the order of the variables is reversed. Both facts are illustrated by the distribution of the dots in Chart 49. The space “13 Gee Table 160. 14 See Table 190, in which the deviations of the respective ratios are taken from their yearly volume-group averages. 15 See Table 182. 124 BANKING STANDARDS TABLE 180 CORRELATION OF PERCENTAGE DIFFERENCES OF RATIOS IN PAIRED SERIES—NET EARNINGS TO EARNING ASSETS AND GROSS EARN- INGS TO EARNING ASSETS—MEMBER BANKS, BosToN FEDERAL RESERVE DISTRICT, 1924 AND 1925 (Percentage Differences from Respective Yearly Averages for the Respective Volume-Groups. See page 279.) RarT1os: Net Earnings to Earning Assets (Percentage Differences) Ratios: Gross Earnings to Earning Assets (Percentage Differences) Number of Bank-Years Above ——— SS ———— Below Position | Amount 40 30 and to aver| 40 Ic 4 Ele} ™n- es Ce Jn! 10 wt 10 20 20 ' 30 40 to to yand | 20 | 40 EY Fal 40 and over 30 and under4o ' 1 | 21 » - Ta 1 Th " ~ 4 | o! 1 Above 20 and | under 30 10 and under 20 Under 10 Under 10 10 and under 20 20 and | under 30 1 ar | 2p wlohe! 2 wok a6) pt 4 Cafe] 1 ' a 12 rf K £ Below * 18 30 and | under 40 20 and over SA 40 o 8.48 lel EE 0 ~ 21» E588 o 0 2 ear obo = ~N w= aan oF od QL, Bm 8 2 Teng) ~ oo 0 iY: + 2 wv oy L oO wv. ™N x ~ ne 1 o wr In ToraL ' Average Percentage Differences Ratios: | Ratios: Net | Gross Earnings Earnings to + to, Earning Earning Assets + Assets (Net) “+10.7 +35.0 | + 4.8 66 | +25.0 — 0.6 +15.0' — 0.9 + 50! — 1.4 —- 5.0 | - 1.3 —15.0! ~ 4.6 -—25.0 I~ 3.6 ~25.0! — 4.5 —gK § - A 5 70 ' 104 — oI 106 Qn Q ® ide <i 2 (Hoo Bl VS 7 _- + + + + NE C © | NET EARNINGS IN DISTRICT I TABLE 100 LL CORRELATION OF DEVIATIONS OF RATIOS IN PAIRED SERIES—MEMBER Banks, BosToN FEDERAL RESERVE DISTRICT, 1924 AND 1925 Percentage Deviations from Respective Yearly Averages for the Respective Volume-Groups. See page 279.) Position Abhave Jelow INDEPENDENT VARI apLe—Ratios of Net Earnings to Earning Assets Distance from Average --~entar” Sapsina we Inc mn nce lado vv nc- . a inde 2 ~nd 1nder ‘c and under. ~ and over Average Yarcentage Number of Bank- Years D)FPENDENT VARIABLES— Net Average Percentage Gross Earn- ings to Tarning Assets Total Expense to Farning Agsets enclosed by the vertical parallel lines divides the distribution of the total expense ratios into two parts. To the left of this space are shown banks with ratios larger, and to the right those with ratios smaller than the average. It is apparent that the dots found in the area to the left tend to be below and that those to the right tend to be above the diagonal zigzag lines. It is the area above these lines in which are found net earnings ratios larger, and in that below them, net earnings ratios smaller than the average. In the light of the general tendencies indicated above under the numbers 1, 2, and 3, further analysis is necessary in order to determine the relative effect of gross earnings and of total expense ratios on ratios of net earnings. In making such an analysis it is desirable to distinguish between tke levels of net earnings ratios at a given time, and the nature of the change of these ratios from year to year. Briefly, and in repetition of what has already been said, the following propositions respecting the ratios at a given time are true: TABLE 191 AVERAGE RATIOS OF NET EARNINGS TO EARNING Assets, FoR MEMBER Banks, BosTtoN FEDERAL RESERVE District, CLASSIFIED BY THE POSITION OF RATIOS OF GROSS EARNINGS AND oF TorarL EXPENSE TO EARNING ASSETS RELATIVE To THEIR RESPECTIVE AVERAGES FOR ALL BANKS* Rar10s: Total Expense to Earning Assets ~ N -— RATIOS: Gross Earnings to Earning Assets Position Above Below Above or Below Above r Qt ire [. 16 rel 1.86 Average Below 2.72 23 1.08 aR a | 2.18 [Tey d Above or Below 2.11 228 1.67 A AM 1.87 | | 8:8 Above £.78 200 .IO Ra i.81 2T2 1024 Below 2.04 6a | [.02 122 2.16 tof Above or Relow 2.07 103 rt Or 21¢ 1.82 108 Ahove 1.84 126 £.22 ye 1.61 2 OM) r'Q28 Relow 2.81 50 .0Q7 rea 2 20 Above or Below 2.18 18s .73 a23¢ J3 Ts —_ *The ratios which were the same as the average were. in each case, distributed alternately ABovE and BELow. The figures in small type represent the numbera of bank-vears to which the ratios apply. NET EARNINGS IN DISTRICT 1 327 Gross earnings ratios vary;!® they are positively correlated with ratios of total expense,!” and are indifferently correlated with ratios of net earnings.!® Ratios of total expense vary;!? they are positively correlated with ratios of gross earnings,?? and are negatively correlated with ratios of net earnings.?! Ratios of net earnings vary; 22 they are positively correlated with ratios of gross earnings,?® and are negatively correlated with ratios of total expense.?* Knowing these relations to obtain, let us determine the aver- age levels of net earnings ratios in 1924, in 1925, and in the two years combined for the Boston district member banks classified by their positions, in the matter of both gross earnings and of total expense, relative to their average levels. These amounts, given in Table 191, bear out the generalizations just presented respecting the relations of gross earnings and of total expense ratios to those of net earnings. Moreover, they indicate in each year that (1) net earnings ratios are higher when both gross earnings and total expense ratios are relatively low than when they are relatively high; (2) they are highest when ratios of gross earnings are relatively high and those of total expense low; and (3) they are lowest when relations inverse to those just presented for gross earnings and for total expense ratios obtain. While in general it is true, as shown in Table 191, that net earnings ratios tend to be high when gross earnings ratios are high and when total expense ratios are low, and that they tend to be low when inverse conditions obtain, it is also true generally, as shown by the same table, that low ratios of net earnings ac- company high ratios of gross earnings when ratios of total expense are also high, and, conversely, that high ratios of net earnings are found with low ratios of gross earnings when low ratios of total expense accompany them. Accordingly, it is necessary, 16 See Table 156. 17 See Table 159, and Chart 49. 18 See Table 189, and Chart 49. 19 See Table 163. 20 See Table 159 and Chart 49. 21 See Table 190 and Chart 49. ?2 See Table 186. 28 See Table 160 and Chart 49. *% See Table 183 and Chart 49. 328 BANKING STANDARDS in determining the level of net earnings at a given time, to con- sider the relative levels of both gross earnings and of total ex- pense ratios, the relation between which determine net earnings. But the level of the ratios in both series in a given year are functions of their levels in the preceding year. This fact has been demonstrated above, not only for the ratios for individual banks in a given district but also for the total member banks by dis- tricts.2® Accordingly, it must be taken into account in determin- ing the relative effect of variable gross earnings and of variable total expense ratios on ratios of net earnings. Data showing ratios of gross earnings, of total expense, and of net earnings are available for 1924 and 1925. Let us trace out the regression pattern, as it relates to each of these types of ratios, in terms both of levels and of year-to-year changes, and pbserve the results. Between 1924 and 19235, gross earnings, total expense, and net earnings, as percentages of earning assets, regressed to type, the amounts of change varying directly and the nature of the change inversely with the amounts and the positions of the ratios rela- tive to their 1924 average. Stated in another form, and without respect to averages as points of reference in the three series, ratios which were low tended to increase and those which were high tended to decrease between 1924 and 1925, the amounts of change being functions of the size of the ratios themselves in 1924. The net earnings ratios in 1925, therefore, are functionally related to these regression tendencies. The same condition, it is believed,2® obtained in 1924, although data for establishing the fact are not available. If, as between 1924 and 1925, ratios of gross earnings, which are high in 1924, tend to fall, the net earnings of the banks in question, other things being equal, will tend to fall. Contrariwise, if those which in 1924 are low tend to rise, the net earnings of the banks in question, other things being equal, will tend to rise. But the other things are not equal, inasmuch as total expense 25 Gee the discussion of regression to type in chapters relating to these ratios, passim. 26 Confidence in this belief is found in the similarity of regression tendencies for banks within and between districts. As between districts for the three series, re- zressions of the nature indicated characterized the years 1919 to 1925; as within districts, they obtained for the item of expense in the Boston district between 1922 and 102%, and in the New Vork district between 1923 and 1925. NET EARNINGS IN DISTRICT 1 329 ratios also regress to type. If these ratios are high, they tend to fall; and if they are low they tend to rise, the former tendency, other things being equal, operating to increase, and the latter, other things being equal, to decrease net earnings. But again, the other things are not equal, inasmuch as net earnings them- selves regress to type, those which were high in 1924 tending to be lower, and those which were low in 1924 tending to be higher in 1925. Accordingly, merely to take account of the actual net earnings ratios for banks having ratios of gross earnings and of total expense differently placed relative to their average levels at a given time, as is done in Table 191, or to take account only of the fact of regression to type, without at the same time observ- ing the amounts at different levels, is not fully to consider all of the influences, latent in gross earnings and in total expense ratios, which determine ratios of net earnings. Between 1924 and 1925, the average ratios of net earnings to earning assets for the 408 member banks in the Boston district increased from 1.82 to 1.92, or by one-tenth of a point.2” When the ratios in 1924 are grouped, as in Table 188, the largest in- crease was one-half of a point, and the largest decrease one and one-half points.?® In determining these changes, however, no account is taken of the positions of the gross earnings and of the total expense ratios of the banks relative to their average levels in 1924. This is done in Table 192, the result being that (1) for banks with gross earnings ratios above the average in 1924, ratios of net earnings fell, and for those with gross earnings below the average in 1924 they rose between 1924 and 1925; (2) for banks with total expense ratios above or below the average in [924, net earnings increased between 1924 and 1925; (3) the greatest fall in net earnings occurred in banks with gross earnings above and total expense ratios below their average level in 1924 —it was these which were highest in 1924;2° and (4) the great- est rise in net earnings characterized the banks with gross earn- ings below and total expense ratios above their average levels in 1924—it was these which were lowest in 1924.29 Other features of Table 192 are of interest. When gross earn- Ings and total expense ratios were both above their respective average levels in 1924, net earnings ratios declined slightly be- iween 1924 and 1925; when they were both below these levels, the 27 See Table 18s. 28 See Table 188. 29 Gee Table 1071. 230 BANKING STANDARDS TABLE 192 AVERAGE NET CHANGE, 1924-1925, IN RATIOS OF NET EARNINGS TG EARNING ASSETS, FOR MEMBER BANKS, BOSTON FEDERAL RESERVE DisTrICT, CLASSIFIED BY THE POSITION OF RATIOS OF GROSS EARNINGS AND OF TOTAL EXPENSE TO EARNING ASSETS, RELATIVE TO THEIR AVERAGES IN 1Q24% RATIOS: Gross Earnings to Earning Assets Position Relative to the Average, 1024 Above Below Above or Below ron 2 AVERAGE NET CHANGE, 10924-1925, IN RATIOS OF NET EARNINGS TO EARNING ASSETS Ratios: Total Expense to Earning Assets (Relative to the 1024 Average) Above Below Above or Below 0} - IT - 0A A a 102 4-27 ,— TR + .22 (22 2&3 +. 10 + of : .O0 LW 4 *The ratios which were the same as the averages in the respective series in 1924 were distributed alternately ABOVE and BELOW. The figures in small type represent the number of banks to which the net change applies. ratios noticeably increased. Essentially constant net earnings ratios in 1924 and 1923 for banks in the former group mean that the decreases from year to year, characteristic of gross earn- ings and of total expense ratios so placed, canceled each other; increasing net earnings ratios for those in the second group could have come about only by ratios of gross earnings increasing more than those of total expense—types of change from year to year characterizing ratios below their average levels. But changes in net earnings ratios between 1924 and 1925 are functions not only of the positions of gross earnings and of total expense ratios relative to their own average levels3? and relative "80 Gee the averages for the respective lines and columns in Table 102. NET EARNINGS IN DISTRICT I 331 TABLE 193 AVERAGE NET CHANGE IN RATIOS OF NET EARNINGS TO EARNING As- SETS, 1024-1925, FOR MEMBER BANKS, BosTON FEDERAL RESERVE DisTrICT, CLASSIFIED BY DIRECTION OF CHANGE IN RATIOS oF Gross EARNINGS AND OF TOTAL EXPENSE TO EARNING ASSETS, 1924-1925%* RATIOS: Gross Earnings to Earning Assets Direction of Change, 1024-102¢ Increasing {10 AVERAGE NET CHANGE, 1024-1925, IN RATIOS OF NET EARNINGS TO EARNING ASSETS Ratios: Total Expense to Earning Assets { Direction of Change. 1024-1025) Increasing Decreasing [ncreasing or Decreasing L 18 = re O07 Decreasing Increasing or Decreasing Me r OM *The ratios in each series which made no change, 1924 to 1925, were counted alternately as INCREASING and DECREASING. The figures in small type represent the number of banks to which the net change applies to each other,3! but they are also dependent upon the year-to- year changes in these ratios taking place (1) irrespective of the levels occupied, and (2) at such levels. Let us consider the net year-to-year changes in net earnings ratios under the first con- dition named. The amounts found in Table 193 indicate that when gross earnings ratios increased, the net effect is an increase in ratios of net earnings: when they decrease, the net effect is a decrease.?? On the other hand, when ratios of total expense increase, those of net earnings decrease; and when they decrease, net earnings 31 See the averages in the respective sections of Table 192. 82 Gee the averarces of the lines in Table 102. 332 BANKING STANDARDS ratios increase.®® But increasing gross earnings ratios occasion a larger increase in net earnings ratios than do decreasing total expense ratios.3* Similarly, decreasing gross earnings ratios bring a larger decrease in net earnings ratios than do increasing ratios of total expense.?> Moreover, when gross earnings ratios increase (a condition favorable to increasing ratios of net earnings) and at the same time total expense ratios increase (a condition making for decreasing ratios of net earnings), the net change in net earnings ratios is a rise, proof conclusive that the dominating influence is the change in ratios of gross earnings. Similarly, when gross earnings ratios decrease (a condition tending to re- duce net earnings ratios) and at the same time ratios of total expense decrease (a condition tending to increase ratios of net earnings), the net change in net earnings ratios is a fall, thus indicating the dominant influence of the change in ratios of gross earnings. Changes in net earnings ratios between 1924 and 1925 have been found to be functions of the size of ratios of gross earnings and of total expense in 1924,3% and of the type of change in these ratios between 1924 and 1925.3" In general, the forces exert opposite influences. This is universally the case when the effects of the respective forces are measured concurrently for both series —gross earnings and total expense ratios.2® Moreover, it tends to be true when they are measured separately.®® Accordingly, the net effects on the changes in ratios of net earnings between 1924 and 1925 need to be determined when the two forces act simul- taneously. Table 194 shows by direction and amount the net year-to-year changes in net earnings ratios for banks with gross earnings ratios increasing or decreasing from positions above or below the av- erage in 1924, and having ratios of total expense differently placed relative to their average in 1924. The net change is upward when ratios of gross earnings are increasing, and down- 33 See the averages of the columns in Table 193. 3% As indicated by the respective points change: 4.34 and 4.23. 85 As indicated by the respective points change: —.27 and -.04. 8 See Table 192. 7 See Table 193. 8 See the signs in the corresponding blocks in Tables 192 and 193. Mo the signs in the corresponding average lines and columns in Tables 192 and 193. NET EARNINGS IN DISTRICT I 333 TABLE 104 AVERAGE NET CHANGE IN RATIOS OF NET EARNINGS TO EARNING As- SETS, 1924-1925, FOR MEMBER BANKS, BosTON FEDERAL RESERVE DistrICT, CLASSIFIED BY DIRECTION OF CHANGE AND PosI- TION OF RaATios oF Gross EARNINGS TO EARNING AsseTS, AND BY PosiTioN OF Ratios oF TorAL EXPENSE TO EARNING ASSETS* AVERAGE NET CHANGE, 1924-1925, IN RATIOS OF NET EARNINGS TO EARNING ASSETS RATIOS: Gross Earnings to Earning Assets Direction of Change, [1024-1028 Position Relative to the Average, 1024 Above f Ratios: Total Expense to Earning Assets (Relative to the 1024 Average) Above Below Above or Below -6 ET Lr 26 Increasing Below Above Decreasing Relow *The ratios which were the same as the averages in the respective series were distributed alternately ABOVE and BELOW; while the ratios of gross earnings which made no change were counted alternately as INCREASING and DECREASING. The figures in small type represent the number of banks to which the net ~-hanee applies. ward when they are decreasing, irrespective of and with respect to the positions of the ratios of total expense relative to the 1924 average. Similarly, as shown by Table 195, the net year-to-year changes in net earnings ratios are downward when ratios of total expense are increasing, but by smaller amounts than when ratios of gross earnings are decreasing. Indeed, when ratios of total expense are increasing and ratios of gross earnings are below their average level—in these positions such ratios tend to increase from year to year—the net change in ratios of net earnings is upward. When ratios of total expense are decreasing, ratios of net earnings tend to increase irrespective of and with respect to the position of gross earnings ratios, but generally by less amounts 334 BANKING STANDARDS TABLE 195 AVERAGE NET CHANGE IN RATIOS OF NET EARNINGS TO EARNING As. SETS, 1924-1925, FOR MEMBER BANKS, BOSTON FEDERAL RESERVE District, CLASSIFIED BY DIRECTION OF CHANGE AND Posi- TION OF RATIOS OF TOTAL EXPENSE TO EARNING ASSETS, AND BY POSITION OF RATIOS OF Gross EARNINGS TO EARNING ASSETS¥* Ratios: Total Expense to Earning Assets AVERAGE NET CHANGE IN RATIOS OF NET EARNINGS TO EARNING ASSETS RATIOS: Gross Earnings to Earning Assets (Relative to the 1024 Average) Direction of Change, [024-102€ Increasing Decreasing Position Relative to the Average, 1024 Above Below Above Below Above —_ 16 54 —.3% 20 +.10 75 + 20 Below - + 24 .Q7 '.29 40 4.22 Above or Below 88 - OI —.07 IIL +.17 124 4 28 Kc *The ratios which were the same as the averages in the respective series were distributed alternately ABOVE and BELow; while the ratios of total expense which made no change were counted alternately as org snie 2nd DECREASING. The figures in small type represent the number of banks to which the net change applies. than occur when gross earnings are increasing and ratios of total expense are differently placed with respect to their 1924 average. That is, in general, increasing ratios of gross earnings increase net earnings ratios more than do decreasing ratios of total ex- pense;® and decreasing ratios of gross earnings reduce them more than do increasing ratios of total expense. In Tables 194 and 195, account is taken of increases and of decreases in gross earnings and in total expense ratios separately, the paired series in the respective comparisons being classified by 10 Compare the amounts in the lines of the upper section of Table 194 with those in the lines of the lower section of Table 195. 41 Compare the amounts in the lines of the lower section of Table 194 with those in the lines of the upper section of Table 195. NET EARNINGS IN DISTRICT I TABLE 106 335 AVERAGE NET CHANGE IN RATIOS OF NET EARNINGS TO EARNING AsS- SETS, 1924-1925, FOR MEMBER BANKS, BOSTON FEDERAL RESERVE DisTRICT, CLASSIFIED BY DIRECTION OF CHANGE AND BY PosiTtioN OF RATIOS OF GROSS EARNINGS AND OF ToTAL EXPENSE TO EARNING ASSETS* RaTI0S: Gross Earnings to Earning Assets AVERAGE NET CHANGE IN Rat10s OF NET EARNINGS To EARNING ASSETS Rat105: Total Expense to Earning Assets {ncreasing 1024-1025 Decreasing 1024-1Q2§ Increasing or Decreasing 1024-1028 Direction »f Change, 1024-102% Position Relative to Average, rQ24 Above or Below Aver- age, 1024 Above Aver- age, | 1024 Below Aver- age, 1024 Above or Below Aver- age, ot Above Aver- age, 1924 Below Aver- age, 1024 \bove or Below Aver- age, 1024 Above Aver- age, 1024 Below Aver age, 1024 Above or Relow +.18 ¥.39 14.38] S58 130 | 67 72 I 102 08 | —.o1 toos)t0 jot 34 | +.24 1 toar| tse] toe +.50 7 t.61 +.34 242 y a6 Ay 26 +.34 118 +27 1, 41 J +.37 —.z7)= -al= 31 fe »0 wk [ncreasine Above t.59° +52 +.78 Ie Below +.48 ar 1.56 t ;39 Above | -— or 55) 62 Below 1 bo I con — 1 eo - Fr 2. 3 Decreasing Above 36 Ka Q = #3 Relow ~~ - Above or Relaw Increasing or Decreasing ’ Relo *The ratios which were the same as the averages in the respective series were distributed alternately ABovE and BELow; those which made no change were counted alternately as INCREASING and DECREASING. The figures in small type represent the number of banks to which the position or the net chanze applies. position alone. Ratios in both series, however, were differently laced relative to their averages in 1924, and changed between 1924 and 1925. What were the net directions and amounts of change in ratios of net earnings when gross earnings and total expense ratios are classified in both these respects? The details in Table 196, supplying the answer, require close analysis. It will be seen from this table that (1) irrespective of the posi- 336 BANKING STANDARDS tion of total expense ratios in 1924 and of the type of change between 1924 and 1925, increasing gross earnings ratios invari- ably*? result in net increases, and decreasing gross earnings ratios in net decreases in net earnings ratios; (2) increasing and de- creasing total expense ratios sometimes produce net increases and sometimes net decreases in net earnings ratios; (3) when in- creases occurred in gross earnings ratios and also in ratios of total expense, net earnings ratios increased, thus indicating the dominant influence of gross earnings; (4) when decreases oc- curred in gross earnings ratios and also in total expense ratios, net earnings ratios decreased, thus demonstrating the greater influence of changes in gross earnings ratios in producing the results; and (5) on the average, increasing ratios of gross earn- ings and decreasing ratios of total expense increase net earnings ratios by the same amount as they are decreased by decreasing ratios of gross earnings and by increasing ratios of total expense. While these are some of the general conclusions which may be drawn from Table 196, the detail are illuminating in other re- spects. Let us compare the net changes in net earnings ratios for banks with gross earnings and with total expense ratios differently placed with respect to the 1924 averages, and observe the relative effect upon such changes of the regression tendencies in the two series. Position of Ratios in the Two Series Both above Both below Regression Tendencv Net Change in Net Earnings Ratios To decrease | A fall* To increase A rise Dominant Factor in Producing the Result Gross Earnings ratios Gross Earnings ratios * Slight. If the net changes in net earnings ratios are determined for banks with both gross earnings and total expense ratios changing, the following results are secured: Nature of Change : Net Change in in Both Series Net Earnings Dominant Factor in Producing the Result i Both increasing Both decreasing A rise A fall Gross Earnings ratios Gross Earnings ratios 2 One slight exception—a decrease of .01 of a point. For explanation of this decrease. see Case 1. Appendix I, page 386. ————— NET EARNINGS IN DISTRICT I 337 These and other relevant facts are graphically illustrated on Chart 50, which is constructed as follows: The vertical scale provides for the points change in ratios of gross earnings to earn- ing assets between 1924 and 1925, no-change being indicated by the space between the parallel horizontal lines, increases by the distances above, and decreases by those below these lines. The horizontal scale relates to the points change in ratios of total ex- pense to earning assets, no-change being shown by the space between the vertical parallel lines, increases by the distances to the left, and decreases by those to the right of these lines. These no-change areas divide the chart into four quarters or quadrants; the upper left-hand one represents increases in the ratios in both series; the upper right-hand one, increases in gross earnings and decreases in total expense ratios; the lower right-hand one, de- creases in both series; and the lower left-hand one, decreases in gross earnings and increases in total expense ratios. The dots on the surface of the chart indicate, for the 408 member banks in the Boston district, (1) the amounts of change by tenths of a point in their gross earnings and total expense ratios, and (2) the points change in the ratios of net earnings. The diagonal zigzag lines running across the page enclose an area of no-change in net earnings ratios. The part of the chart above these lines is the area of increasing, and that below them the area of decreasing net earnings ratios between 1924 and 1925, the amounts of the increase or of the decrease for the respective banks being indicated by the horizontal distances between the zigzag lines and the several dots. With these facts in mind, the chart may be interpreted as follows: When gross earnings ratios are increasing and total ex- pense ratios are increasing or decreasing, an overwhelming pro- portion of the dots are above the zigzag line, thus indicating increasing net earnings ratios to be the rule. When total expense ratios are decreasing, while a majority of the dots are above this line—the banks thus having increasing net earnings—a consider- able proportion are below. It is these which had decreasing net earnings ratios. Moreover, this number is relatively larger than that falling below the no-change net earnings line for banks having increasing gross earnings. For banks with gross earnings ratios increasing and with total expense ratios decreasing—those in the upper right-hand quar- 3138 BANKING STANDARDS CHART 50 CuaNGEs IN Ratios oF NET EARNINGS TO EARNING ASSETS RELATIVE 70 CHANGES IN RATIOS OF GROSS EARNINGS AND OF ToTAL EXPENSE TO EARNING ASSETS, MEMBER BANKS, BosTON FEDERAL RESERVE DISTRICT, 1024-1025 Changes in Ratios of Total Expense to Earning Assets, 1924-1928 Increases No Decreases (Points) Change (Points) 1.8 1.0 0.5 0.0 0.5 0 5 0 Tel RAE NEBRREEREEEEEEREERNERER aa 1 Peder |] [] i. HE [ [1] od] 41] Co LT TTT TT] EE _. i |] 1] | HE I] 1] IT cd avo by 3 RE =O 1] PE 1 CI rT [TTT ITT Fotos LL ”» \ | | — ; i HEN i Ca HH dad] ~ ale. CI Td a | 1 [| o + be lA ll. dL a roan rw dd voy vs ~T += {rp of 11 nolnts .. wd _1_T__ | Net Earnips ™--* EE ad 1.5 q £3 $5 1.07 © 8s 6 O.: — -— — 2.5, — + —— kK $a is 2 i 8 8° Te 2 © 2.0 N ; Chanze o.r wd 4 dr adobe I A TTT TT rT TT rr I AE EE EEEEE) as’ NET EARNINGS IN DISTRICT I 339 ter—the dots, of course, are all above the line; that is, in the area of increasing net earnings ratios. It is of interest to observe, however, that the dots tend to be distributed over a wider range vertically than horizontally, this fact indicating that the increases in net earnings ratios are generally more dependent upon changes in the gross earnings ratios than upon those of total expense. A similar distribution of the dots in the lower left-hand quarter obtains. The banks here represented had decreasing ratios of net earnings, inasmuch as gross earnings ratios were decreasing and ratios of total expense were increasing. The alignment, how- ever, shows that the fall is primarily to be attributed to the de- creases in gross earnings ratios. When gross earnings and total expense ratios are both increas- ing, the dots are predominantly to the right of the area of no- change in net earnings; that is, net earnings ratios tended to increase, this condition being primarily due to the greater changes in gross earnings. On the other hand, when both ratios are de- creasing, a majority of the dots are to the left of the no-change area of net earnings; that is, net earnings ratios tended to de- crease, a condition brought about by relatively greater changes in gross earnings than in total expense ratios. If the net changes in net earnings ratios are determined when changes in the ratios in one series are paired with the positions in the other, relative to the 1924 average, the following results, under conditions making for increases and for decreases, respec- tively, in net earnings ratios, are obtained. ConDITIONS MAKING FOR INCREASES IN NET EARNINGS RATIOS Ratios Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Nature of Change ncreasing Decreasing ‘ncreasing Decreasing (ncreasing Decreasing Increasing Decreasing, Position Above A hove ibove Above Below Below Below Below Ratios Total Expense (Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Position Above Above | Below Relow Above Above Below | Relow Net Change in Net Farnings 26 4.10 +.27 + +9* + .41t +.20% +.37 +.132 *4For exclanation of these signs and amounts. see Appendix I, page 387. Cases 2 and 3, respectively. 340 BANKING STANDARDS It will be observed that the net increases in ratios of net earnings are larger in all cases but one when gross earnings ratios are increasing than when total expense ratios are decreasing, this fact indicating the dominance of changes in ratios of gross earn- ings in producing these results. ConNpiTioNs MAKING FOR DECREASES IN NET EARNINGS RATIOS Ratios Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Nature of Chance [ncreasing Decreasing Increasing Decreasing Increasing Decreasing Increasing Decreasing Position Above Above Above Above Below Below Below Below Ratios Gross Earnings Total Expense Gross Earnings Total Expense Gross Earnings Total Expense Gross Earning: Total Expense Position Above | Above Below Below Above Above Below Below ' Net Change in Net Earnings -,16 ~-~.20 +.24* —.43 -.32 -.08 + .071 -— AT *tFor explanation of the nature of these signs, and size of the amounts, see Appendix I, page 387, Cases ¢ and 5, respectively. It will be seen that, in every case except one, the decreases in net earnings ratios for banks having decreasing gross earnings ratios are larger than are those for banks having increasing ratios of total expense. If the net changes between 1924 and 1925 in ratios of net earnings are determined for banks with gross earnings and with total expense ratios classified by the nature of the change be- tween 1924 and 1925 and also by their positions relative to their averages in 1924, the results shown in Table 197 are secured. The general conclusion to be drawn from the preceding sum- mary is that the dominating influence in producing both increases and decreases in net earnings ratios between 1924 and 1925 are changes in ratios of gross earnings. This finding is fully in accord with that secured by a separate analysis developed in Appendix I. It should be remember that this conclusion refers to the mem- ber banks in the Boston Federal Reserve district, the changes in the net earnings ratios being those observed between 1924 and 1925. Lying back and partly in explanation of these changes NET EARNINGS IN DISTRICT I 341 TABLE 197 DoMINANT FAcTOR IN PRODUCING NET CHANGES IN RATIOS OF NET EARNINGS TO EARNING ASSETS, 1924-1925, FOR MEMBER Banks. BostoN FEDERAL RESERVE DISTRICT Nature of Changes in Ratios of Gross Earnings and of Total Expense 0 Earning Assets, 1024-102% _ Both increasing Both Decreasing | Position of Ratios with Respect to Their Averages, 1024 Gross Earnings | to Earning Assets Total Expense to Earning Assets Above Jelow Above Below Above Below Below Above Above Below Above or Below Above or Below \bove or Below ihave or Ralaw Above RalAaw Above Below ibove Below Below Above “bove or Below t.ave or Below Above Below Above Relow \bove or Below Above or Below Shave R alow Net Change in Ratios of Net Earnings to Earning Assets, [024-102% Rise Rise Rise Fall® Rise Rise Rise Dies Fall Tall Fall Fall “11 A Al ~all Dominant Factor— Ratios to Earning Assets Gross Earnings Gross Earnings Gross Earnings Gross Earnings Gross Earnings Total Expense Gross Earnings rose Farninge JT0SS Larnink: Gross Earnings Gross Earnings Gross Earnings Gross Earnings Gross Earnings Gross Earnings (Gross Earnings *Clight. See note. p. 136- are the regression tendencies of the gross earnings and of the total expense ratios of these same banks, the first being observed between 1924 and 1925; and the second, for each pair of years be- tween 1922 and 1925. Whether the dominant factor controlling the size of ratios of net earnings at a given time or the nature of their changes in time would be found to be gross earnings, if other periods were under review, is, of course, an open question. No data of the types needed are available for this purpose. It is of interest, however, to remember that the conclusion stated above agrees with that formulated in Chapter XIII,*® in which, with respect to district ratios of net earnings for the years 1919-1925, it was said that the probable causal order leading to high or to low ratios of net earnings runs from gross earnings rather than from total expense ratios. This discussion closes the analysis of the ratios themselves. To summarize briefly the more important conclusions to which it 43 Pape 228. BANKING STANDARDS has led, to interpret their meaning in terms of banking theory and practice, and, if possible, to explain how they come about, is the surpose of Part V. 342 BANKING STANDARDS UNDER THE FEDERAL RESERVE SYSTEM PART V GENERAL SUMMARY AND INTERPRETATION “The aim of scientific thought . .. . is to apply past experience to new circumstances, the instrument is an observed uniformity in the course of events.” W. K. CLIFFORD Lectures and Essays XVIII GENERAL SUMMARY THE foregoing discussion has resulted in a number of con- clusions which have been stated from time to time. In closing, it is appropriate briefly to summarize them in their most general aspects, and to sketch in broad outline the economic, banking, and business conditions in which an explanation may be found. The more important norms, trends, and correlations are as follows. 1. The tendency, among the various series of data, for district ratios at a given time to be similarly placed with respect to their own seven-year averages. If, for a given series, the average amount for each district for the years 1919-1925 is taken as a standard or norm, and if the ratios in the several years are ex- pressed as percentage differences from such average amount, then it tends generally to be true that all of the districts will be on the same side of their own average at the same time. With respect to the various series, districts have their own average levels, and these may and do vary markedly. Yet, relative to such levels, districts tend to be similarly placed at a given time. It is the uniformity among the several districts in this respect which is distinctive. It is obvious, of course, that if items differ, some of them must be above and some below their average. It is not required, however, that the ratios in the twelve districts should tend to be on a given side of their own averages at the same time, and yet this tendency is unmistakably present in most of the series studied. 2. The tendency in each of the series of data, despite the dif- ferences in their average levels, for district and group ratios to change from year to year and over a series of years in the same direction and by similar percentage amounts. This tendency, while not everywhere present and while differing in degree, is nevertheless the rule, as even a casual inspection of the various ratio charts will make evident. What is observed is consistent Cg 346 BANKING STANDARDS rather than random behavior, a consistency extending alike to all of the twelve districts. 3. The tendency for ratios in the various districts and for the different groups of banks in given districts to regress to type. This phenomenon shows itself in two ways. First, ratios which are high or low in a given year tend, respectively, to decrease or to increase in the following year. As respects the type of change, increase or decrease, it is the ratios which are high—that is, above their average levels—which tend to decrease, and it is those which are low—that is, below their average levels—which tend to increase. Second, the net percentage changes in the ratios from year to year vary directly with the percentage amounts by which they deviate from their own average levels. The rule is for direction of change from year to year to vary inversely and for percentage amounts of change to vary directly with the positions which district and group ratios occupy, in the first of each pair of years, relative to their own average levels. 4. The tendency for ratios in the various districts and for the different groups of banks in given districts to be consistently above or below the country and the district averages, respectively. That is, in the case of the different districts, geographical differ- ences in the ratios in the various series of data tend to obtain, while for groups of banks within a given district, differences asso- ciated with bank size and location persist from year to year. In general, therefore, and in summary of the tendencies for the individual series analyzed, it is concluded as follows: Dis- trict ratios relative to their own levels tend to be high or low at the same time; relative to the levels for the country as a whole, they are consistently high or low during the entire period studied; and they change in the same direction from year to year, those above their levels in a given year tending to decrease, and those below these levels tending to increase in the following year, the percentage amounts of decrease or of increase varying directly with the percentage amounts of displacement from their own average levels. The foregoing summary has to do with series of banking ratios treated individually. But such series are not independent of each other in respect to bank operation, nor are they unrelated in so far as deviation from type—district or country—, change from 347 year to year, and regression pattern are concerned. The analysis of the interrelation of the series, both among and within dis- tricts, has resulted in a number of conclusions respecting the nature and the degree of association. It is unnecessary to repeat them in detail. Suffice it, for present purposes, to illustrate for certain series the types of association found to obtain. A few of the relationships discovered and measured for member banks when district ratios are the units of measurement are given on page 348. When ratios for groups of banks within districts are correlated, it is found that, for those for which data are available, similar relationships obtain. But summaries of the types just presented, while suggesting the nature, do not indicate the de- gree of association discovered between the several variables. Those who are interested not only in the fact that series are positively or negatively correlated but also in the extent to which district differences, year-to-year changes, and so on, in paired series correspond are asked to consult the tables and charts and the interpretative material in the text, where the methods used and the results secured are stated in detail. In review, then, two types of conclusions have been reached. The first is that for series of data relating to member bank opera- tion by districts and within districts, there are marked tendencies of similarity of behavior, measurements being made with respect to district deviations, year-to-year changes, regressions to type, and consistency of position relative to the yearly levels for the combined membership in the System. The second type is that within the banking system as such, the several types of trans- actions or services rendered by banks are interrelated, the pattern of such interrelation repeating itself with substantial uniformity year after year, not only in one part but throughout the whole Federal Reserve system. Explanation of these facts, it is believed, must be found in the essential unity and competitive character of our banking system and in its relation to business and economic conditions the country over. GENERAL SUMMARY 348 BANKING STANDARDS ASSOCIATION BETWEEN SERIES WITH RESPECT TO DIFFERENCES FROM THEIR DISTRICT AVERAGES: Positive Loans and discounts to earning assets and Gross earnings to earning assets Total expense to earning assets Net earnings to earning assets Total deposits to earning assets Time deposits to earning assets Time deposits to total deposits Gross earnings to earn- ing assets and Total expense to earning assets and Total expense to earning assets and Gross earnings to earning assets Total expense to earning assets and Total expense to earning assets Net earnings to earning assets Negative Total deposits to earn- ing assets and Gross earnings to earning assets Net earnings to earning assets Demand deposits to earn- ing assets and Gross earnings to earning assets Total expense to earning assets Demand deposits to total deposits and Gross earnings to earning assets Total expense to earning assets ASSOCIATION BETWEEN SERIES WITH RESPECT TO YEAR-TO-YEAR CHANGES: Positive Loans and discounts to earning assets and Gross earnings to earning assets Total expense to earning assets Net earnings to earning assets Time deposits to total deposits Gross earnings to earn- ing assets and Total expense to earning assets and Total expense to earning assets Net earnings to earning assets Negative Total deposits to earning assets and Gross earnings to earning assets Total expense to earning assets Demand deposits to earn- ing assets and Gross earnings to earning assets Total expense to earning assets . — = \ INTERPRETATION To rest the case with the general summary given in the preced- ing chapter would leave the study incomplete. Certain phenomena have been discovered, measured, and described. To what condi- tions are they due? How do they emerge? Are they consistent with the facts relating to banking theory and practice, and with the services which commercial banks render to business and industry? To describe the workings of our economic system and the relations of banks to it during the years 1919-1925 for the country as a whole, and for certain of these years for the First and Second districts, to which special attention is given, is obviously impossible in short compass if it is possible at all. No such task is here attempted. Economic annals relating not only to banking, business, and industry in the country as a whole but also to the peculiarities in each district would have to be written and interpreted if this colossal task were completed. The materials for such an undertaking are not at hand, and if they were it is doubtful whether their fullest use would serve unmistakably to ‘explain’ what has happened during these postwar years. While this project is doubtfully possible, the one which is germane to the present inquiry is not impossible. If the phe- nomena discovered and measured are kept in mind, both the economic and banking conditions, out of which a plausible ex- planation may be formulated, may be sketched in outline. The banking membership of the Federal Reserve system com- prehended in 1922, the median year in the period under review, 0,892 banks. These were geographically distributed over the entire United States, the largest number, 1,441, being located in District 7 (Chicago) and the smallest number, 433, being found in District 1 (Boston). In this year, the total number of mem- ber banks represented 33% of the number and 60% of the earn- ing assets of all banks in the United States. By and large, these banks do a commercial banking business; that is, they currently "TAs of June 30. See Table 1. - 10 280 BANKING STANDARDS CHART 51 DEBiTs To INDIVIDUAL AcCOUNTS—ALL MEMBER BANKS Comparison of Amounts in the Federal Reserve Districts with those for the Country as a Whole, 1919-1923. (The slopes of these lines, not their vertical positions, are significant. See page 21.) COUNTRY AS A WHOLE cecevscee DISTRICTS esmmmmnas 1919 1920 1921 1922 1923 1924 1925 1919 1920 1921 1922 1923 1924 1925 “\ A a _ wt. wiht — HEW Yor Scales of >srcentage Change 0 x] 3 30 i “Tl "Fo ! t 2 kao Ed Y 192. 1921 1922 192’ 192~ 1928 1919 192f 1921 1922 1923 1924 192% 351 supply the funds necessary for the conduct of business and indus- try. Closely linked as they are with the fortunes of business, it may be assumed in general that whatever fluctuations occur in business as a whole will tend to be reflected in banking resources. If this is true, then, provided general business is substantially the same district by district during the years 1919 to 1925, the first link in the chain of phenomena which accounts for the similarity of behavior of banking series in the several districts is secured. “Bank debits . . . . constitute an extremely representative measure of the complex of activities included under the term general business. Production of consumption goods, wholesale and retail trade, construction of buildings and engineering projects, and agriculture—these and all other forms of economic activity have a share in making up the total of check transactions.”? If this is true, and if the general trend and year-to-year fluctuations of bank debits by districts closely agree with each other and with those for all districts combined, then the conclusion follows that business conditions tend to be the same and to change together in the various parts of the country, as indicated by the geo- graphical limits of the districts themselves. This chain of reason- ing may be set out as follows: Total bank debits tend to fluctuate with general business conditions; Bank debits by districts tend to fluctuate with total bank debits; District bank debits tend to fluctuate with district business condi- Hons. INTERPRETATION This set of relations is illustrated in Chart 51, on which are plotted, to a ratio scale, for each district, the debits for the cities located therein and also the total debits for all of the 141 cities combined. But from the above reasoning and from the graphic illustration in Chart 51, the conclusion follows that district business con- ditions tend to fluctuate together. This comes about because District bank debits tend to fluctuate with district business condi- tions; District bank debits tend to fluctuate together; District business conditions tend to fluctuate together. 2 Weekly Letter No. 2, Vol. VII, January 14, 1928, page 11, Harvard Economic Society, Cambridge, Massachusetts. 3 This condition follows by analogy only. 3 §2 BANKING STANDARDS CHART 52 CoMPARISON OF AMOUNTS OF EARNING ASSETS AND DEBITS ro INDIVIDUAL ACCOUNTS, BY FEDERAL RESERVE DISTRICTS, 1919-1925% EARNING ASSETS cme DEBITS....ucereeer 1921 1922 1923 1924 1925 1919 1920 192% 1922 1923 1924 1929 NEW YORK Scales of Parcentage Change 0 § e 20 8 o 10 | 10 20 30 zt ; eft i019 1920 1921 1022 1923 1924 192% 1919 1c 19° 192° 192% 1924 1925 *See note 4, page 353. INTERPRETATION 10% But District bank resources* tend to fluctuate with district bank debits; District bank debits tend to fluctuate with district business condi- tions; District banking resources tend to fluctuate with district business ~onditions. In summary, then, it may be said that if bank debits tend to Auctuate with general business conditions, and if bank debits by districts tend to fluctuate together, then general business by dis- tricts tends to move together. But district banking resources tend also to move sympathetically with district bank debits. Hence, banking resources by districts tend to oscillate with busi- ness conditions, and these oscillations are much the same from year to year over the period covered, in all of the various districts. Evidences of tendencies toward uniformity in banking and business conditions in the various districts are the net results of these several approaches to the problem. But the member banks, the expenses of which, by districts, are compounded into total or average figures for the years in question, are located in cities in these districts. Do the bank debits of different cities tend to fluctuate concurrently with those for all cities? The facts showing this to be the case are given in Table 198. Moreover, are bank debits of different cities generally above or below their own seven-year average levels at the same time that the bank debits of the 141 cities combined are above or below their corresponding level? The facts which indicate this to be the case, are given in Table 199. But to continue the line of reasoning: City bank debits tend to fluc- tuate with total bank debits;® Total bank debits tend to fluctuate with general busi- ness conditions; City bank debits tend to fluc- tuate with city business = conditions.® 4See Chart 52. This chart is drawn on a ratio basis. The debits for the respec- tive districts are the totals reported for the calendar years; the resources are the average total earning assets per member bank by districts for the months of June and of December. 5CQae Tahle 108 354 BANKING STANDARDS Moreover, Bank debits of different cities tend to fluctuate together;’ City bank debits tend to fluc- tuate with city business conditions; Business conditions in cities tend to fluctuate together. TABLE 199 YEARS IN WaICH BANK DEBITS ARE ABOVE OR BELOW THE SEVEN- YEAR AVERAGE, 1919-1025 Total Bank Debits 'Y4T cities) Percentage of Cities with Bank Debits on Same Side of Their Averages as the Total for vax Cities But City bank debits tend to fluc- tuate with district bank debits; District banking resources tend to fluctuate with dis- trict bank debits; City bank resources tend to fluctuate with city bank debits. The following conclusions, in summary, have now been reached: First: National, district, and local business conditions tend to fluc- tuate together; and Second: Such business fluctuations tend systematically to be re- flected in fluctuations in bank debits and banking resources. *In this year the bank debits of New York City run against the prevailing tendency. By and large, commercial banks wherever situated render similar service to business. Moreover, this service is rendered competitively. Banks are daily brought into relation through the granting of loans, in the investment of surplus funds, in com- peting for deposits, and in rendering a large number of other services. Their lending and investment areas overlap. “The ex- tent to which any bank may loan is dependent in part upon the extent to which other banks are loaning. And when the re- serves of any particular bank are low there are numerous means by which it may increase its loaning power at the expense of, or through the permission of, its competitors.”® ¢, . . . Indi- vidual banks cannot escape relations with other banks, their own prosperity and safety being fundamentally linked with that of the system as a whole. . . .”® Moreover, they are subject to much the same type of government regulation and inspection, "See Table 108. 8 Harold G. Moulton, Principles of Money and Banking (The University of Chi- cago Press, 1916), Part II, p. 04. ® Ibid., Part II, p. 197. INTERPRETATION 355 are accorded similar privileges of rediscounting, and, by classes, are subject to the same reserve requirements. They customarily and continuously keep on deposit with cor- respondents a part of their funds in order to meet the financial requirements of trade and industry. These funds, placed at the disposal of city banks, and by them variously invested, are sub- ject to withdrawal on demand, thus giving rise to a flow of credit funds and gold'® from country to city and from city to country, seasonal in part, but tending to repeat itself year after year. Moreover, the purchase and sale of goods and services at near and remote points keep in continual flux not only the state of trade and industry, but also the movement of money and credit into and out of banks, into and out of different parts of the coun- try, into and out of liquid securities and permanent investments. And in this mechanism of exchange, in this state of business, not one but all banks take such part as their resources permit and their specialized or general clientéle demands. The following statement, descriptive of the New York money market, applies with more or less precision to each of the larger centers to which the hinterland, in a banking and financial sense, is tributary. “The New York money market is national in scope, and the member banks in New York City, because of the system of correspondent rela- tionship which characterizes American banking, carry balances for interior banks, both members of the Federal Reserve system and non- members, and lend funds received from out-of-town banks in the money market. It is in the New York money market that sales and purchases of securities for account of persons in all parts of the United States are largely made, and that the large issues of domestic and foreign secur- ities are floated. It is to New York houses that issue and distribute securities that investors in all parts of the country turn to purchase stocks and bonds. Thus the sources of the funds that flow into the New York money market are country wide, and the uses to which these funds are put also represent demands that arise in all parts of the country, particularly in connection with the purchase, sale, and carry- ing of securities. Changes in the condition of the New York money “Some of the more important occasions for interdistrict gold movements are the following: “(1) Settlement of interdistrict balances on account of checks and drafts cleared or collected through the Federal Reserve System, also transfers be- tween Federal Reserve banks for account of member and non-member banks; (2) Government operations in issuing and redeeming obligations and in transfer- ring funds in connection with tax collections, payments on contracts, etc.; (3) in- erdistrict accommodation; (4) interdistrict movement of reserve notes.” Federal Reserve Bulletin, April, 1022. D. 400. 356 BANKING STANDARDS market, therefore, which are reflected in the changes in the volume of funds in New York and in changes in money rates in that market, are national in character and have a definite relationship to changes in credit and banking conditions in all parts of the country.”*! That banks in all parts of the country through correspondent and other relations? are linked together? through debtor and creditor relationships,’* and that these relationships are inter- twined with business growth and decline are facts well under- stood. Indeed, the “complicated relationships of creditor and debtor . . . . make the disaster of one enterprise a menace to many. On this financial side of their operations, the banks bear a relation to all other enterprises not unlike that which the rail- ways bear on the industrial side; for most enterprises need bank credit not less than they need freight service. As a serious con- gestion of railway traffic applies the brake to industrial operations, so any hampering of banking operations applies the brake to business dealings.”*? To consider at length the interrelations of banks the country over and their connection with business would be to emphasize the obvious. Our only interest in calling attention to them is to indicate the background of interdependence in which must be 11 Annual Report of the Federal Reserve Board, 1925, p. 15. 12 The duties of correspondent banks “may be of a more or less elaborate char- acter or they may be comparatively few in number. The country correspondent of a city bank usually does nothing for that bank except to collect funds, remit them, and carry a balance in its favor. The city correspondent for a country bank does the same kind of work, but is ordinarily called upon to carry a larger balance and to allow interest upon it. From time to time it may be allowed to invest this balance or a part thereof, passing upon the securities or notes that are taken and thus morally guaranteeing their goodness. Conversely, it may be asked to con- vert such securities or notes into cash through repurchase or rediscount. It may also be asked to open foreign credits on behalf of the country bank and to trans- act various other kinds of business. The city bank usually supplies its correspond- ent information from its credit files, and the latter may be occasionally requested by the city bank to supply information regarding some individual or concern in its own immediate neighborhood as to which the city bank wishes to be informed.” H. Parker Willis and George W. Edwards, Banking and Business (New York, 1922), p. 241. 13 Ag to the manner in which this is effected for member banks in the Boston Federal Reserve district, see Appendix IL 14 «An important class of borrowers from reserve city banks is their correspond- ents. . . . . In general, the lending bank stands ready to supply the reasonable requirements of the correspondent, but only in proportion to the average balance carried and with due regard to the applicant’s assets and borrowings elsewhere and within the limitations set by law.” Ray B. Westerfield, Banking Principles and Practice (New York, 1921), Vol. IV, p. 871. 15\W. C. Mitchell, Business Cycles (New York, 1927), p. 102. 357 sought an explanation for the phenomena discovered and meas- ured in other parts of this study. Given such interdependence, then, how are the uniformities and tendencies in, and the correlations between, series of banking data to be explained? The conditions out of which they arise may be sketched broadly and generally, attention being given primarily to the national aspects of our banking system and money market. The yearly fluctuations in business, roughly synchronizing by districts, give rise to sympathetic fluctuations in the demand for loanable funds. These are available in a market which is both national and international. Business, tending relatively at a given time to be in the same stage of activity the country over,8 requires for its financing the same sort of banking service—ex- pansion or contraction of loans, as the case may be. Banks in- dividually are free in a competitive market to use their resources as demanded. Moreover, they share competitively in the sources of funds—stocks of gold, savings, interbank borrowing, and the rediscount privilege. Being free, in both a loan and investment market to convert their earning assets into the form required to administer to business needs, and business needs tending to Auctuate simultaneously from year to year in different parts of the country, it is but natural to find that, with respect to the proportions of loans and discounts to earning assets, for instance, districts, relative to their own long-time levels, are similarly placed at the same time. But the state of business changes from year to year—not hap- hazardly, but with an approach to uniformity the country over. This fact is established, measures of general business oscillations being found in the fluctuations of bank debits. With these changes come different demands for the services of banks, the form of their resources being adjusted to suit business needs. If a rela- tively larger proportion of their earning assets is required in the form of loans to finance business expansion, then loans are ex- panded. On the other hand, if the earnings of business have made it possible for them to finance their needs without recourse to banks, then, relatively, the proportion of earning assets in the form of loans decreases and that of investments increases. That is, the proportions of the earning assets of banks or groups of banks by districts, represented by loans or by investments, tend 16 Account here is taken only of the cvclical and ‘long-time’ uniformities. INTERPRETATION 358 BANKING STANDARDS to vary from year to year in the same direction—such proportions reflecting the needs of general business in its year-to-year changes, which, it will be recalled, tend to be relatively the same not only among districts but also among cities within districts. Banks, however, though interrelated with the fortunes of gen- eral business, are distinctive as banks. If they are essentially commercial, their assets must be measurably liquid. Yet, within the realm of administrative discretion, the business needs of the clientéle which they serve, standards of regulation, and matters of solvency, they are free as they see fit to divide their resources as between loans and investments. Moreover, they are free, with essentially the same limitations, to seek increases in either or both their time and demand deposits, attracting them from new or old accounts, from immediately adjacent or distant territory, by the competitive devices freely employed by all, and held to be legiti- mate according to standards of business ethics and likelihood of success. The flow of goods, of gold, and of credit from district to district, and the geographical specialization in industry, in trade and commerce, and in investment opportunity, as well as the geographical distribution and concentration of wealth, place different parts of the country on different levels with respect to the distribution of their earning assets as between loans and investments, and the proportion of their deposits as between time and demand items. Yet, relative to their own levels, changes in the proportions of both tend to occur with regularity and to follow much the same course from year to year. District differentials, however, tend to persist. If, with levels divergent from district to district with respect to ratios of loans and discounts to earning assets or of time de- posits to total deposits, for instance, conditions occur which disturb the “normal” relations, then administrative control— suggestive of the existence in bank management of a conscious standard of “right” relations—, requirements in the loan and in- vestment market, regulation, and competitive pressure apply correctives which tend to re-establish an equilibrium. How much of this process is consciously carried out, and how much is due to the working of competitive forces governing the use and price of credit, it is difficult to say. But that such phenomena occur cannot be disputed. There are regressions to type, not only for the series indicated but for others as INTERPRETATION 359 well—regression characteristic not only of ratios for districts as a whole but also of those for groups of banks within districts. That shifts in the proportions of earning assets represented in loans and in investments tend to occur simultaneously in the TaBLE 200 various districts has been shown Numser or Districts In WHICH THE in the tables and charts relating rorORTIONS OF Ty Sn to these subjects. Moreover, MEMBER BANKS, INCREASED OR DE- for different groups of banks in CREASED a given district, and for those located in different parts of the country, changes from one to other types of investments tend to be made at the same time. This is more particularly true with respect to investments in United States securities, but in general it obtains for other types of securities. In these respects, Tables 200 to 203, inclusive, are of interest. Moreover, changes in the relative amounts of United States securities held by National banks in different cities and in vari- ous parts of the country tend to occur simultaneously. This fact is apparent from the detail in Table 201. TABLE 201 DIRECTION OF THE YEAR-TO-YEAR CHANGES (JUNE 30) IN THE PROPORTIONS OF UNITED STATES SECURITIES TO ToTAL BoNDs AND SECURITIES HELD BY NATIONAL BANKS* (+ —increase: — —decrease) CITIES AND STATES [919 FO 1020 '920 | 1921 0 0 1021 1022 22 3a OER 1924 TO ne United States. ............. Central Reserve Cities. ......... Other Reserve Cities... .. Country Banks... New England.... East....... South...... Middle West. West... Pacific. . .. "Data comniled from Rerorte of tha Comptroller of the Currency. 360 BANKING STANDARDS The nature of the changes from year to year in the proportions of Government securities to total bonds and securities, held by National banks in “Other Reserve Cities,” is common the coun- try over, as is indicative by the frequencies in Table 202. General as is the uniformity Tamiz woe with which the proportions of nah O "Oenm Romy Cums on Government securities to total THE PROPORTIONS oF Unitep States Se- bonds and securities held by Ties Tain og Nan BoNDs AND SECURI- national banks increase or de- WITH OR AGAINST THE TREND FOR THE Crease from year to year, as Torar. vor Suc Crops indicated in Table 201, it is hardly less marked than that for other types of securities as summarized in Table 203. In- deed, decreases or increases in the former, in different parts of the country, are respectively met by increases or decreases in the latter. This again shows a generality of response, among groups of banks differently situated, diverse as are the types of industry which they serve. It is indicative of the fact that the market for securities is nationwide, and that banks trad- ing in that market, despite their wide geographical distribution, generally favor a given type of security at the same time. Similar as are the shifts from year to year in the proportions of earning assets represented by investments and in the propor- tions of total bonds and securities represented by different types of securities, in all member and in national banks in different parts of the country, the return on such investments, plus the interest and discount on loans and the “other income,” leaves the banks in the different districts with different rates of gross earnings to earning assets. These differentials, persisting from year to year, are shown in Table 50 (page 72). Different as are the average levels by districts, however, the ratios from year to year tend to move in the same direction, to be above or below their own seven- year levels at the same time, and to regress to type, the tendency being for those which are high in a given year to fall, and for those which are low to rise in the following year. 361 Do these characteristics and tendencies find a counterpart in the money market as measured by interest rates charged by banks on customers’ loans? Dr. Frederick C. Mills, by using data showing by cities the prevailing rates charged by member banks on prime commercial loans, finds certain regional differences which he summarizes as follows :17 INTERPRETATION GROUP AVERAGE RATE ON CusTOMERS’ Loans (1022-1026) Cities of the Middle Atlantic and Northeast (Boston, Phila- delphia, New York, Buffalo) .......................... Cities of the Upper Mississippi (St. Louis, Chicago, Minneap-| olis, Detroit, Pittsburgh, Cincinnati, Cleveland). ........ Cities of the South (Baltimore, Richmond, Atlanta, New Orleans, Louisville, Birmingham, Jacksonville, Nashville). . Cities of the Pacific Coast (San Francisco. Portland, Seattle, Los Angeles, Spokane)............ CC eee Cities of the Western Plains and Rocky Mountains (Kansas City, Omaha, Denver, Salt Lake City, Helena).......... Cities of the Southwest (Dallas, Houston, Little Rock, Okla- homa Citv. Fl Paso. . .. 2.12 5.40 5-86 6.12 6.32 65.35% From this summary the Annalist concludes: “The differences between cities and between the various groups of cities . . . . represent variations in the degree of commercial develop- ment and business stability, differences in the amount of available credit, and differences in the intensity of the demand for capital and credit, as well as the variations in local business conditions and banking habitg 2718 By using the basic data compiled by Dr. Mills for 34 cities for each of the years 1922-1926, the median rate for the entire period 's found to be 5.71. By using this amount as a standard of ref- erence by which to divide the cities into three groups—the bases of classification being their own median rates for the years 1922- 1926 compared with the median rate for all cities—and then by arraying them by the sizes of the differences from type, it is seen, as indicated in Table 204, that the rates vary by the location and by the size of city, and that the differentials persist from year to year. Moreover, they are high or low, relative to their 17 Reported in an article, “Regional Differences in Discount Rates,” The Annalist, July 20, 1927, p. 171. The basic data used by Dr. Mills are published currently in the Federal Reserve Bulletin. \8 Thr pit BANKING STANDARDS TABLE 203 DIRECTION OF THE YEAR-TO-YEAR CHANGES IN THE PROPORTIONS OF DirreERENT TvPES OF SECURITIES TO ToTAL BONDS AND SeEcUurITIES HELD BY NATIONAL BANKSX LY YEARS (Ending June 30) DirectIoN oF CHANGE, BY CITIES AND CLASSES OF NATIONAL BANKS TYPES OF SECURITIES United States Central Reserve Citipa Other | Reserve [Country Cities 1919-1920 1920-1921 1021-1022 1922-1023 1923-1024 1024-1025 Railroad Bonds........... 3 + J + + -+ + + + + 1910-1020 1920-1921 1921-1922 1922-1923 1023-1024 1024—10Q2F% + + + + Other Public Service Corpo- ration Bonds. .. + - + - J + - + do Stock Other than Federal Reserve Bank Stock... ... 1919-1920 1920-1921 1921-1922 1922-1923 1923-1924 1024—~10Q2°% + 1 + + + == ie Collateral Trust and Other Corporation Notes. . . .... 1919-1920 1920-1921 1921-1922 1922-1923 1023-1024 1024—102¢% + + *Data taken from the Reports of the Comptroller of the Currency. own median rates, in the same years, the median amounts in 26 of the 34 cities being those for 1924. That is to say, in general, that what is true by districts for gross earnings ratios tends to be true by geographical areas and by cities for discount rates on prime commercial loans. There is another way in which district and city differentials in interest rates, the similarity of their changes from period to period, and their regression tendencies may be measured. From data showing the average rates charged by member banks on customers’ paper rediscounted with Federal Reserve banks,!? “19 Te Thirteenth Annual Rebort of the Federal Reserve Board, 1926, pp. 97-99. INTERPRETATION TABLE 204 MEDIAN AND YEARLY RATES CHARGED BY MEMBER BANKS IN DirrereNT CITIES ON PRIME CoMMERCIAL LOANS, COMPARED WITH THE MEDIAN RATE FOR ALL CITIES, 1022-1026 Crry MEDIANS COMPARED WITH MEDIAN FOR ALL CITIES (1022-1026) Greater than median for all cities Same as median for all cities | Less than median for all cities CITY 1Paso....... ..... lelena.............. Dklahoma City. ..... Spokane. ........... ‘acksonville......... 0s Angeles......... Yortland............ Seattle. ............. Nashville. .......... Little Rock.......... Jirmingham......... salt Lake City....... Jenver............. ouisville........... “leveland........... Cincinnati. .......... {ansas City (Mo.)... ouston............ ‘uffalo. ............ Jittsburgh.......... Vew Orleans..... .. Jmaha.............. \tlanta............. detroit. ............ Richmond........... 3altimore........... san Francisco........ Dallas.............. Minneapolis......... Chicago............. St. Louis............ 2hiladelphia......... New York....... ... Boston..... .. . DIFFERENCE BETWEEN ~1TY MEDIAN AND MEDIAN (5.71) FOR ALL CITIES 2.04 .96 hE 7. 20 25 22 20 14 02 0 ~~) “ AA of ro 99 ..08 [ 08 YEARLY CIiTY RATES COMPARED WITH ME- DIAN RATE (5.71) FOR ALL CITIES NUMBER oF VraRrs Greater than Same aq Less than 364 BANKING STANDARDS for banks in each of the twelve districts, classified according to the size of the cities in which they are located, the summaries in Tables 205 to 207, inclusive, have been prepared. Table 205 shows that, relative to the “all district” levels on quarterly call dates from 1923 to 1926, the rates charged by banks tended to be “low” in Districts 1, 2, 3, 4, 5, and 7, and “high” in the others. This is the general condition without re- spect to the size of the cities in which the banks are located. When account is taken of city size, geographical differences are less marked in the large than in the small cities. TABLE 203 NUMBER OF CiTy-AVERAGE RATES ON CustoMERrs’ PAPER REDIS- COUNTED WITH FEDERAL RESERVE BANKS, ABOVE, BELOW, OR EQUIVALENT T0 THE AVERAGE RATES FOR THE RESPEC- TIVE CrTy-GRoOUPS, ON QUARTERLY CALL DATES, 1923 TO 1926, FOR ALL MEMBER BANKS DisTrICTS DIFFERENCES OF AVERAGE RATE IN EACH DistRICT COMPARED WITH THE Crry-GrouP For ALL DISTRICTS Number of Average Rates on Call Dates ota’ Cities: Under 15,000 Cities: 15,000 and under 100.000 Cities: 100.000 ahd over hr Boston........, New York. ... Philadelphia. .. Cleveland. . ... Richmond..... Atlanta. ...... “hicago....... it. Louis. ..... Minneapolis. . Kansas City. . Dallas. ...... San Franciera x , i 4 x 1 4 2 Not only are there district differences in the rates charged by banks on customers’ paper which is rediscounted, but there are differences for banks by size of city of location within each dis- trict, and these differences tend to be of the same type. In general, the rates are highest in the small and lowest in the large cities in each district at each call date. A summary of the types of difference between the rates for banks in cities of different size by districts is contained in Table 206. Eighty-four per cent of the call-date rates—i148 out of 176—were lower in cities with population of 15,000 to 100,000, than were those on the INTERPRETATION 365 TABLE 200 CoMPARISON, FOR CITIES OF DIFFERENT SiZE, OF AVERAGE RATES ON CusTtoMERS’ PAPER REDISCOUNTED WITH FEDERAL RESERVE Banks, QUARTERLY CALL DATES, 1923 TO 1926, FOR MeMBER BANKS BY DISTRICTS ——— DisTRICTS Cities: 15,000 to 100,000 Compared with under r<.000 COMPARISON OF tTv AVERAGE RATES--NUMBER OF CALLS Cities: 100,000 and over Compared with under 15,000 Total Boston....... New York.... Philadelphia. Cleveland... Richmond... Atlanta..... Chicago. ..... St. Louis. .... Minneapolis. . Kansas City. Dallas. ...... an Francisco same dates in cities with population under 15,000. This pro- portion increases to 91% in the second and to 98% in the third comparison given on the total line in Table 206. Moreover, similar proportions hold for the comparisons between the rates in successive city sizes in each district. That is to say, differ- entials of the types indicated are general the country over for each city-size comparison and for the various city-size compari- sons in each district. The district and city differences in rates illustrated in the sum- mary on page 361 and in Tables 204, 205, and 206 help to explain the differences in gross earnings ratios found to characterize banks by districts and groups of banks within districts. But interest rates on customers’ loans in cities of different size in the various districts, different as they are when compared with the “all district” level, change from time to time. Inasmuch as the rates are available quarterly for the years 1923 to 1926, inclusive,2® the nature of the changes may be studied in detail. If the average rate on rediscounted customers’ paper in banks, for the 16 calls, in each city-size group in each district is taken as a standard from which to determine the levels of the rates on different call dates, and the nature of the change from date to 20 Report of the Federal Reserve Board, 1026, pp. 97 to 99. TABLE 207 COMPARATIVE PosITIONS AND CALL-T0-CALL DIRECTIONS OF CHANGE IN AVERAGE RATES CHARGED BY MEMBER Banks oN CusToMERS’ PAPER REDISCOUNTED WITH FEDERAL RESERVE BANKS, MarcH, 1923, To DECEMBER, 1926 » nN NN PosrTIoNS RELATIVE ro Ciry-Grourp AVERAGES, MazcH, 1923 10 DEC., 1020 Total DIRECTION OF CHANGE FROM CALL DATE To CALL DATE—NUMEBER OF CITY-AVERAGE RATES A A As ft A A Unde" re.cno Population of Cities 15,000 and under 100,000 -— ™oent Total moa, 2 119 100,000 and over Total 74 8 9 | 136 INTERPRETATION 367 date is determined for rates above, below or equivalent to the average rate, it is found, in general, as shown in Table 207, that it is the rates which are high at a given time which decrease, and it is those which are low which increase from call to call. This is the same type of relation which is found to obtain in ratios of gross earnings to earning assets, and in other banking series with which this study deals. If, in the fluctuation of interest rates as measured by rates on customers’ paper rediscounted with the Federal Reserve banks, there is a tendency of regression to type, then such pattern is reflected in the gross earning ratios of banks in so far as the two are common. Discount rates, moreover, are related to in- terest rates of all types. There are no reasons for believing that those of one type can be seriously out of line with those of others in the same market. That this assumption is valid, so far as the activities of banks are concerned, is confirmed by the tol- lowing facts. 1. The direction of change from year to year, for 34 cities, in the annual average money rates customarily charged customers is the same on the six major types of loans given in Table 208. TABLE 208 ANNUAL MoNEY RATES CUSTOMARILY CHARGED CUSTOMERS ON Six Major TYPES OF LoANS. AVERAGED FOR ALL CITIES* VEAR 1919... 1920. . 1921... 1922... 1923..... 1024........ 102. ... . NUMBER OF CITIES _USTOMERS’ CoM- MERCIAL LOANS 4-0 "fonths iy {NTER- Bank LOANS 3 23 ~8 ro 8s fr 5.80 Loans SECURED 8Y LIBERT BonDs "3 “4 - 3.02 LOANS SECURED BY IR STOCK AND BoNDs Time Demana 7 1 13 40 19 20 ox _- 19 i i 32 -. 7X we FL *Winfield W. Riefler, “Differentials in Rates Charged Customers,” Federal Reserve Bulletin, December, 1927, p. 804. 2. “Differentials in rates . . . . charged customers . . . . are not characteristically differentials that can be ascribed to risk, to maturity of the loan, or to the type of collateral by which it is secured.” 21 21 Winfield W. Riefler, “Differentials in Rates Charged Customers,” Federal Re- serve Bulletin, December, 192%, p. 804. 168 BANKING STANDARDS 3. “. . . . the rates applying to the bulk of the loans in any given city . . . . conform in a sense to the standards of a single competitive money market.” 22 But, as pointed out above, geographical differentials in interest rates obtain and tend to persist. This fact, arrived at independ- ently by the author just quoted, is summarized as follows: 1. “The spread [in the rates] between the highest and lowest communities is from three to six times larger than the largest differential in any year between the rates charged on different types of paper averaged for all communities.” 23 2. “Banks in the cities in which Federal Reserve banks are located seem in general to have charged lower rates for loans than those in cities where there are merely branches of the system.” 24 3. The larger the volume of deposits of cities, the lower the average rate charged customers.’ The rates of interest charged customers depend, among other things, upon (1) the personal relation between banks and bor- rowers; (2) the collateral offered as security; (3) the time which a loan is to run; (4) the purpose for which it is to be used; and (5) the demand for and the supply of funds available in different parts of the country. Differentials are traceable to all of these conditions; the one most influential and operating to make the rates consistently different geographically is the finan- cial and industrial specialization characterizing different parts of the country. The market for loans, however, is national, local areas overlapping and being linked together because of the bank- ing needs of commerce and industry and of the competitive neces- sity of banks to supply them. Locally, the differentials tend to disappear; in wider areas, they tend to persist. It would be of interest, if space were available, to describe the conditions out of which an explanation of the norms, trends, cor- relations, and regression tendencies in the matter of operating expense, of net earnings, and so forth, might be sought. To do 22 Ibid., p. 810. 28 Ibid., p. 810. 24 Ibid., p. 810. See the discussion of differentials on customers’ loans by size of city, pages 364-365, above. 25 Ibid., p. 811. INTERPRETATION 369 this would extend the discussion far beyond the limits of tolerance —boundaries already far extended. What would be said, if such a task were undertaken, would of necessity be partly in repetition of material already presented. Accordingly, we shall rest the case at this point except for a final paragraph. The discussion of the interrelation of business the country over during the period 1919-1925, and of the manner in which the resources and check transactions of banks fluctuate with its changes from year to year, serves to indicate briefly the condi- tions in which an explanation of the phenomena, summarized in the first pages of Part V, may be found. The market for loans and for deposits for the thousands of member banks which, in part, go to make up our banking system, consists of overlapping territories. These are connected industrially by the purchase, sale, and transfer of goods and services, and are financially bound together by money and credit transactions. While the parts of this market are linked together in the manner indicated, each is more or less specialized with respect both to its industrial develop- ment and its financial needs. Each district has its own levels of banking requirements, and these are registered in geographical differentials tending to persist from year to year. Different as are these levels in respect to ratios of loans and discounts and of gross earnings to earning assets and to interest rates on cus- tomers’ paper, for instance, changes originating in local or in national causes tend to be felt in all parts of the banking market and give rise in banking series to similar yearly trends and com- mon correlations, raising them above or lowering them below their own levels at the same time. It is the discovery and measurement of these and other patterns indicative of a banking system with which this study has been concerned, and which in some respects, at least, the observations in this chapter help to explain, APPENDIXES I anD II I. RELATIVE EFFECTS OF CHANGES IN GROSS EARNINGS AND IN TOTAL EXPENSE RATIOS ON CHANGES IN RATIOS OF NET EARNINGS, MEMBER BANKS, BOSTON FEDERAL RESERVE DISTRICT, 1924-1925 II. ILLUSTRATIONS OF CORRESPONDENT RELATIONS MEMBER BANKS, BOSTON FEDERAL RESERVE DISTRICT, 1924 OF “The progress of science lies in the con- tinual discovery of more and more compre- hensive formulae, by aid of which we can classify the relationships and sequences of more and more extensive groups of phe- nomena.” KARL PEARSON The Grammar of Science APPENDIX I RELATIVE EFFECTS OF CHANGES IN GROSS EARNINGS AND IN TOTAL EXPENSE RATIOS ON CHANGES IN RATIOS OF NET EARNINGS, MEMBER BANKS, BOSTON FEDERAL RESERVE DISTRICT, 1924-1925 IT was shown in the analysis in Chapter XVII that gross earn- ings, total expense and net earnings? regress to type—the type being their respective averages. That is, if they are high in one year, they tend to be lower the following year. Conversely, if they are low in any year, they tend to be higher the following year. It was also shown in the same chapter that gross earnings generally predominate over total expense in determining the net earnings of member banks within the Boston district. The pur- pose of this note is to present an analysis, the results of which give quantitative expressions to the relative influences of gross earn- ings and of total expense on the net earnings of these institutions. For the purpose stated, two types of linear equations are used. These are as follows: Ki+E AT— AN=v.. - (1) K:+E,AG— AN=yp. . and - in which — AN is the decrease in the ratio of net earnings to earning assets from 1924 to 1925, in units of o.1 point; + AT is the increase in the ratio of total expense to earning assets from 1924 to 1923, in units of o.1 point; + AG is the increase in the ratio of gross earnings to earning assets from 1924 to 1925, in units of o.1 point; +X, is a constant representing the average amount of increase in 1 Prepared, for the most part, by Mr. J. A. Folse, Research Assistant, Bureau of Business Research, Northwestern University. 2 Throughout this note it is understood that in the use of these terms unqualified, their respective ratios to earning assets is meant. 374 BANKING STANDARDS net earnings for banks in which total expense did not change, from 1924 to 1925, in units of o.1 point; +X. is a constant representing the average amount of increase in net earnings for banks in which gross earnings did not change, from [924 to 1925, in units of o.1 point; +E’; is a coefficient expressing the effect of a change in total ex- pense ( AT) on a change in net earnings (AN); +E’, is a coefficient expressing the effect of a change in gross earn- ings (AG) on a change in net earnings (AN); pis a residual. It represents the discrepancy between the observed change in net earnings and (1) that computed from the observed change in total expense alone (from equation (1) ); or (2) that com- puted from the gross earnings alone (from equation (2) ). Otherwise stated, equations (1) and (2) are merely the equa- tions of the regression lines, respectively, of the annual change in net earnings on the annual change in total expense, and of the annual change in net earnings on the annual change in gross earn- ings, the origin of each line being the point of zero change in net earnings and in the other two variables. The assumed constants, K,, K,, E,” and E/, were derived by the method of least-squares. The probable errors of these quanti- ties were, in each case, computed rigorously from the normal equations, and the residuals, v, of the substitution in the observa- tion equations. TaBreE I Groups AND NUMBERS OF MEMBER BANKS, BosToN FEDERAL RESERVE DistrIiCcT, RELATIVE TO AVERAGE GROSS EARNINGS AND TotAL EXPENSE RATIOS, 1024 RATIOS: GROSS EARNINGS TO EARNING ASSETS, ABOVE OR BELOW THE 1924 AVERAGE OF 6.0%, Above Below Ratios: Total EXPENSE TO EARNING ASSETS ABOVE OR BELOW THE 1024 AVERAGE OF 4.29% Group 1 Number of banks, 129 Group 4 | Group 2 Number of banks, 83 Number of banks, 132 ABOVE BerLow Group 3 Number of banks, 64 For purposes of analysis, the 408 member banks were divided into four groups according to the amounts of the gross earnings and of the total expense ratios in 1924 relative to the average gross earnings (6.0%) and the average total expense (4.2%) in APPENDIX I 375 that year. Thus, in Group 1 were placed all banks whose gross earnings were above 6.0%, and whose total expenses were above 4.2%. Banks having gross earnings or total expense ratios equal to 6.0% or 4.2%, respectively, were divided equally among adjacent groups. Table I shows the number of banks in each group, and the definitions of the groups. One observation equation of the type of equation (1) was written for each of the 408 banks. A sample of these equations, taken from the least-square solution designated as Solution I,, follows: Examples of Observation Equations: Bank No. 414 168 QA 1 4 -n ' 2c 2 2f co. (3) Nia ar Solution I, contained 408 of these equations. The normal equations for that solution, formed in the usual way from the 408 observation equations, are +408Ki+ 134E.— 375=0............(4) +134Ki+5774E A 2772=0] The solution of the normal equations, (4), gives the following values for the unknowns: Ki=+41.08%=0.21 E'i=—o0.497%+0.026..........(3) The probable errors were computed rigorously from the normal equations (4) and the 408 residuals, v, of Solution Z,. Substituting the derived constants (5) in the general equation (1), there is obtained +1.08—0.497 (AT)= AN.. .. which is merely the equation of the “regression line” of annual change in the net earnings on the annual change in total expense, the unit being o.1 of a point. Its interpretation is as follows: (1) for banks in which total expense did not change from 1924 to 1925, net earnings increased on an average of 0.108 of a point, 376 BANKING STANDARDS and (2) the most probable effect of a change of, say, 1, (0.1 of a point) in total expense from one year to the next is to change net earnings 0.497, (0.0497 of a point)—neglecting the constant— in the opposite direction. If total expense were the only thing determining net earnings, and if a straight-line equation like (1) represented the law of variation perfectly, the residuals, v, would all be zero. The smaller the residuals and the more closely their frequency dis- tribution approaches the normal law of error, the closer the agree- ment between theory and fact. While it was not expected that the residuals in (1), applied to all 408 banks, would be zero, first, because gross earnings is neglected, and second, because of a possible variation from a linear relationship, it might be expected, in the absence of knowl- edge to the contrary, that the character of the distribution of the residuals in Solution 7, would be the same for each of the groups of the 408 banks. That is, the most natural supposition would be that the law of variation of net earnings, in so far as it depends upon total expense alone, is the same for the banks in each of the groups in Table I. In order to determine whether the influence of total expense on net earnings is the same, regardless of the group-location of the banks, the residuals of Solution I, were studied in groups, as shown in Table II. TasrLE II RESIDUALS OF SOLUTION [, Group! mT. - Son NUMBE® ~® WAL NUMBER OF BANks Fy2 ‘Te 73 MEAN 9 Proz- ABLE Error +7.0 *5.7 *=10.3 *=6.3 *See Table I of Appendix 1. This table contains very strong evidence—if not proof—that the law of variation of net earnings, in terms of total expense, is not the same for banks in the different groups, and, if it is assumed for the moment—a fact which will be demonstrated later—that APPENDIX I 3717 the influence of gross earnings on net earnings is substantially the same for banks in any group, the conclusion is unavoidable that the influence of total expense on net earnings is significantly different for banks in the different groups. This fact is shown particularly in the mean v’s. Note that the mean v’s for Groups 1 and 2 are opposite in sign and 4 times their own probable errors (+ 1.2 =0.3 and — 1.1 += 0.3). The mean v is the algebraic sum of the 4+ and — v’s divided by the total number of v’s or banks; for example, for Group 1 it is (324-173) = 129= + 1.2. The probable error of the mean v for each group is com- puted from the relation r, ===, where r, = the probable error of the mean v, r = the probable error of a single observation of Solution /,, + 3.5, and # the number of banks in the group. The mean 2’s for Groups 3 and 4 are also opposite in sign, and four times their own probable errors. According to the laws of prob- ability, there are only about 7 chances in 1,000 that these mean v’s, four times their own probable errors, are entirely fictitious. This is the most significant evidence pointing to a different effect of total expense on net earnings for banks in the several groups. The interpretation of the signs of the mean residuals is as fol- lows: Referring to equation (1), in which are substituted the specific constants (5) from Solution I,, it is evident that if the observed decrease in net earnings, —AN, is larger than the com- puted increase, + 1.08 — 0.497 AT, the residual is 4, and vice versa. Hence, in Solution 7,, the observed decrease in net earn- ings was larger in Groups 1 and 3 than the increase computed from (6). In Groups 2 and 4, the observed decrease in net earn- ings was smaller than the computed increase. Bearing in mind the assumption of uniform influence of gross earnings on net earnings in all groups, this fact is to be interpreted as follows: in Groups 1 and 3, the influence of total expense on net earnings is probably larger, and in Groups 2 and 4, smaller, than that represented by (6), based upon all 408 banks. If it is now assumed that the influence of total expense on net earnings is the same in all groups, and if the preceding processes for the 408 banks, using equation (2) instead of (1), are repeated, there is obtained, for the equation of the regres- sion line of annual change in net earnings on annual change in gross earnings, 378 BANKING STANDARDS —o0.040+0.767 (AG)= AN....... +=0.12 =£0.02 cee) The probable errors of the constants K, and E./, + o.12 and + 0.02, respectively, were computed rigorously, as in the case of total expense, from the normal equations and the residuals, v, of the 408 observation equations. The constant — 0.040 = 0.12 has no significance in this case because it is 14 its own probable error. The interpretation of (7), therefore, is, that the most probable effect of a change of, say, 1 (0.1 of a point) in gross earnings from one year to the next is to change net earnings 0.767 (0.0767 of a point) in the same direction. From (7) and (6), therefore, one can obtain at once an ap- proximate measure of the relative influence of a change in gross earnings and of a change in total expense on a change in net earn- ings; that is, their respective importance is as 0.767 is to 0.497, or a change in gross earnings is (1 =— 1.54), 54% more in- fluential on net earnings than total expense. But this result (54%) is not the best obtainable because it has been shown in Table II that if one assumes gross earnings to influence net earnings equally in all groups, total expense does not influence net earnings equally in all groups. The evidence from Solution S;, which produced equation (7), is given in Table III, from which the mean v column, especially, shows that if it is assumed that total expense influences net earnings equally in all groups, gross earnings influences it unequally, particularly in Groups 3 and 4. The interpretation of the mean v in Group 3, + 1.2 4 0.3, is that (bearing in mind the above assumption) TasLE III RESIDUALS OF SOLUTION S, 1 Grour* Total I ~ a Sou oF +e +exz +182 ™ ~o tree tran " “n +30 | — 4-0 NuMBER 0% - . MEeaN v rr +o. 4 _- +- 40 | —1.0 =0.3 ” Number OF Banks To? MEAN nd ProsB- ABLE Error 4" 8 *5.2 — — 1079 2 __*34 | 1322 21 | ®7.9 oT 7 Is *3.6 260 #See Table I of Appendix I. APPENDIX I 379 the influence of gross earnings on net earnings is greater than that given by (7), which expresses the most probable effect for all the banks. Similarly, the negative mean v of Group 4, — 1.0 + 0.3, indicates that the influence of gross earnings on net earnings in that group is smaller than that given by (7), if the influence of total expense is assumed everywhere to be the same. Thus far in this analysis, an approximate measure of the rela- tive influence of gross earnings and of total expense on net earn- ings is secured. It has also been shown that the probability is great that either one or the other of the following propositions is true: (1) if the law of variation of net earnings with gross earnings is the same for banks in all groups, then the probability is about 1,000 to 7 that the law of variation of net earnings with total expense is different for banks in the different groups; (2) if the law of variation of net earnings with total expense is the same for banks in all groups, then the probability is also large that the law of variation of net earnings with gross earnings is different for banks in the different groups. One method of proving which of the two above propositions is the more true is to treat each of the four groups separately, in a manner similar to that followed for the entire 408 banks. This has been done. The constants K,, K,, E’;, and E’, in the general equations (1) and (2), for each of the groups, together with the probable errors, are shown in Table IV. The outstanding facts in this table are, first, that the law of variation of net earnings with gross earnings is practically the same in all groups; that is, the constant E, = 4 0.77 + 0.04, ap- proximately, and is the same as that given by equation (7) based upon all banks. Second, the law of variation of net earnings with total expense varies widely from group to group; that is, the constant E,” has a minimum numerical value of 0.33 in Group 4 and a maximum numerical value of 0.62 in Group 3. The differ- ence between these two values is nearly 3 times their probable errors, significant indication that total expense influences net earnings more in banks in which it is low—it is these which tend to increase—than in banks in which it is high—it is these which tend to decrease. Moreover, the difference between any two group values of E. (with the possible exception of those for 3 The difference is about eleven times the probable error of E from Solution IL viz., * 0.026. 180 BANKING STANDARDS TasLE IV SuMMARY OF RESULTS FOR SEPARATE GROUPS GrOUP® CHARACTER OF REGRESSION —_— Net on Total ! Net on Gross — — th? I — —0.7¢ =a 22 + + =n ~r —0.40 =*=0.08 == 29 =0.0¢ N74 0.04 ~ esp 1 oa ; Bh =0, 10 Lo .3I =0.Y *See Table I of Appendix I. - ProBABLE ERROR OF A SINGLE DBSERVATION Net on Gross =2.8 =2.0 =3.1 x1.6 Groups 2 and 4) and the difference between any group value of E.’ and the value for all groups, equation (6), (with the possible exception of the value for Group 1 and the value based on all groups)—these differences are significant in indicating different laws of variation of net earnings between any two groups and between the respective groups and the combined groups, with the exceptions noted. It is this variation of influence of total expense on net earnings which accounts for the distribution of the residuals in Tables II and III, and, from the evidence in Table IV, it is clear that proposition 1 on page 379 is much more true than proposition 2 on the same page. A third outstanding fact from Table IV is that gross earnings is the dominant factor in determining net earnings in every group, although, relatively, it is more important in some groups than in others. The relative influences are shown in Table V. From this table it appears that annual changes in gross earn- ings ratios have from 24% to 133% more influence than do annual changes in total expense ratios in causing annual changes in net earnings ratios, and that the order of the relative influence in the different groups is—Ilargest first—Groups 4, 2, 1, and 3. Further inspection of this table shows that for banks having gross earnings ratios below and total expense ratios above their respective averages in 1924 (Group 4), the relative influence of changes in gross earnings ratios and of changes in total expense ratios from 1924 to 1925 was Cn =) 5.5 times as great as were the relative influences of these changes in Group 3—banks having gross earnings ratios above, and total expense ratios below, their respective 1924 averages. APPENDIX I TABLE V RELATIVE INFLUENCE OF Gross EARNINGS ON NET EARNINGS I % AND OF ToTAL EXPENSE Group* Gross Earnings more influential, per cent *See Table I of Appendix 1 BEST VALUE OF GENERAL RELATIVE INFLUENCE OF GROSS EARNINGS AND OF TOTAL EXPENSE RATIO CHANGES ON NET EARNINGS RATIO CHANGES FOR ALL 408 BANKS An approximate, general measure of the relative influence of gross earnings ratios and of total expense ratios on net earnings ratios, for any of the 408 banks picked at random, regardless of (group) location, has already been given as 1.54 is to 1.00. This result is based upon equations (6) and (7), each being de- rived from the 408 banks treated together in one group. This, however, it will be recalled, was a first approximation. It was later shown that while the law of variation of net earnings with total expense varies for the different groups, that of net earnings ratios with gross earnings ratios is substantially the same for all groups, individually and combined. In order, therefore, to ob- tain for any bank in this district, picked at random, a general measure of the relative influences of annual changes in gross earnings and of total expense upon net earnings, it is necessary, first, to obtain the best general expression like (6) for all groups combined, and then to use this in connection with (7). To obtain this best expression for the 408 banks combined, the separate values of K, and E/, shown in Table IV, were weighted inversely as the squares of their probable errors, and the weighted mean values determined. The computation of the best obtainable (general) value of E,’, according to this process, is given in Table VI. The values of E,” and their probable errors in Table VI are the same as those shown in Table IV. Each value of E,” is weighted inversely as the square of its own probable error. The 382 BANKING STANDARDS probable error squared for unit weight is taken as equal to o.1. The weighted mean value of E. is thus —- 0.46 + 0.05. In a similar manner, the weighted mean value of K, was deter- mined to be + 1.39 = 0.16. Substituting the above two values in (1), there is obtained +1.39—0.46 (AT)= AN... ....(8) which is an expression superior to (6) because in (6) the groups are weighted according to their respective number of banks, whereas in (8) the weighting of each constant is inversely as its own probable error squared. Hence, using (8) and (7), the best obtainable general measure, for any bank in this district picked at random, of the relative influence of the annual changes in gross earnings and in total expense upon net earnings is =) 1.67. That is, generally speaking, gross earnings are 4 57% more important than total expense in determining net earnings. TaBLE VI CoMPUTATION OF BEST GENERAL VALUE oF E’,, THE COEFFICIENT ExprRrRESSING THE M0ST GENERAL EFFECT OF A CHANGE IN TOTAL ExPENSE RaTios oN A CHANGE IN NET EARNINGS RATIOS Groun* Probable Error +=0.08 +0.09 0.10 = MN (Probable Error)? 0.00064 0.0081 0.0100 0.0144 Value of E'¢ —0.40 —0.30 —0.62 —0.33 Weight 15.6 12.4 10.0 8 Product, Weight X Probable Error —7.644 —~4.836 —6. 200 2.739 Ses Table I of Appendix I. . . ] Sum of products = —21.419; sum of weights =46.3; weighted mean = —o.46; probable error of weighted mean = =#%0.0%. GRAPHICAL REPRESENTATION OF RELATIVE EFFECTS OF CHANGES OF GROSS EARNINGS AND OF TOTAL EXPENSE RATIOS ON NET EARNINGS RATIOS In Chart I are shown the various regression lines, plotted with net earnings as ordinates and gross earnings and total expense as abscissae. The equation of each line is shown immediately APPENDIX 1 383 beneath the figure, each line being numbered the same as its equation and the same as the group to which it pertains. Equa- tions and lines (A) and (B) are the general equations applicable to all groups. The relative influence of gross earnings and of total expense on net earnings is readily apparent in the relative slopes of the paired lines (1) for each group, and (2) for the combined groups. The uniformity of the slopes of the gross earn- ings lines is easily contrasted with the variation in slopes of the total expense lines, which are also easily compared and con- trasted with each other. (Note, for example, the large difference in slope of lines@ and @.) The regression lines also show a rela- tion which is not readily apparent from an inspection of Table IV —that is, the tendency for the total expense lines to cross the line of no-change in gross earnings, or total expense ratios above the origin. The interpretation of this is that, generally speaking, for banks in which total expense did not change from year to year, there is a strong constant tendency for net earnings to in- crease, and this increase can be due only to an increase in gross earnings in those banks. Stated in other words, it means that, generally speaking, total expense ratios must increase about 0.3 of a point before net earnings will show a decrease; i. e., before the influence of the increase in gross earnings is counteracted. Further reference to Chart I will be made subsequently. CONSTANT REGRESSION TENDENCIES IN NET EARNINGS The tendency for the three variables here under discussion to regress to their respective average values has been developed in Chapter XVII. It is proposed to discuss briefly the constant tendency for net earnings ratios to regress to their average value, independently of changes in the other two variables, each of which is thought of as acting separately, as indicated in equa- tions (1) and (2). Group 1. In this group both constants, K, and K,, in the re- gression equations are without significance. (Note in Chart I that lines and @ practically pass through the origin.) The amount of regression, therefore, of net depends almost wholly upon the changes in gross earnings ratios or total expense ratios. That is, the constant tendency for net earnings ratios to change is negligi- 134 BANKING STANDARDS CHART 1 REGRESSION LINES oF CHANGES IN Ratios oF NET EARNINGS TO EARNING ASSETS ON RATIOS OF GRoSs EARNINGS AND ON RATIOS OF TOTAL EXPENSE TO EARNING ASSETS, MEMBER BANKS, BosToN FEDERAL RESERVE DistrICT, 1924-1925 CHANGES IN RATIOS OF TOTAL EXPENSE TO EARNING ASSETS, 1924-1928 DECREASE NO INCREASE (POINTS) CHANGE (POINTS) - 0.5 0.0, 0.5 1.0 1.5 ——r - TTT TT TI ——t ¥ Zz "wn dg 0 2 0.0, oy o- -N ¢ r # ~ - n= : — =f | = = che a IN EN 2B] Nel 20 : ——— —-— v3 0.0 > Lx DECREASE NO INCREASE (POINTS) CHANGE (POINTS) CHANGES IN RATIOS OF GROSS EARNINGS TO EARNING ASSETS, 1924-1925 ® AN=+0.08+40.738 AG 3 AN = —0.15—0.490 &” AN = —0.20+0.766 A @ AN=-2.16—0.3002" (A) (B) AN = —1.32}0.769 AG tN =—o0.35—0.625 AT N= +41.0240.776 AG AN = +2.47—0.333 AT —~0.04+0.77 AG— Av +£0.12 %+0.02 +1.30—0.46 AT = AN +£0.16 +=0.05 The lines sloping upward to the right are the regression lines of “net on gross”; those sloping downward to the right, of “net on total.” The line numbers correspond to the equation numbers beneath the chart and to the groups to which they pertain in Table I. The regression equation for each line is shown above. The heavy lines are the weighted mean regression lines for the whole experience. 38s ble. Change occurs normally only when either or both gross earnings and total expense ratios change. APPENDIX I Group 2. In this group, the constant, K, = -o0.20, is without significance, but the constant, K; = + 2.16 4- 0.27, (see Table IV), is significant. For banks in this group, in which total ex- pense ratios did not change, there is a strong constant tendency for net earnings ratios to increase 0.216 points per year. This is presumably due to the regression tendency for gross earnings ratios in this group to increase. Moreover, total expense ratios must increase as much as (G2=) 5.5 (or 0.55 of a point) to offset this. This fact may be seen also from regression line @ in Chart I. Group 3. For banks in this group, in which gross earnings ratios did not change, there is a strong constant tendency for net earn- ings ratios to decrease. The amount of the decrease is given by the constant K,=—-1.32 + 0.39, which means a decrease of 0.132 of a point per year. This is presumably due to the regres- sion tendency for total expense ratios in this group to increase. Moreover, gross earnings ratios must increase as much as Goons =) 1.7 (or 0.17 of a point) in such banks to offset this tendency. This is shown graphically on Chart I, regression line ®. The constant K; == — 0.35 + 0.48 also shows a constant tend- ency for net earnings to decrease, but it is without significance because of its large probable error. Group 4. In this group, both constants, K, = -} 1.02 + 0 20 and K, = 2.47 + 0.31, are significant in showing a strong constant tendency for net earnings ratios to increase from year to year, in the first case, for banks in which gross earnings ratios did not change; and in the second case, for banks in which total expense ratios did not change. In the latter case the tendency is the larger. In banks in this group, gross earnings ratios must decrease =) 1.3 (or 0.13 of a point) to offset this constant tendency for net earnings to increase, and total expense ratios must increase as much as Gal=) 7.5 (or o.75 of a point) annually to offset it. These facts are shown graphically in Chart I by the regression lines ® and @, respectively. 386 BANKING STANDARDS These detailed studies of the constant regression tendencies in each group, as given by the constants K, and K,, all show the predominating influence of gross earnings over total expense in determining net earnings, and are consistent with the evidence revealed in the constants E,” and E./. It seems worth while briefly to generalize about these constant regression tendencies by referring again to Table IV, and by noting the signs and amounts of the constants K; and K, in the different groups. In Groups 2 and 4, gross earnings ratios are below their 1924 average (see Table I). If they tend to increase the following year—to regress toward their average of 6.0% —net earnings must increase in banks in which total expense does not change. The large positive values of K, for these groups represent the increases in net earnings and furnish strong indication of regres- sion of gross earnings to type. In Groups 1 and 3, gross earnings are high in 1924. If they tend to decrease the following year, net earnings must decrease in banks in which total expense did not change. The negative values of K, for these groups repre- sent the decreases in net earnings, and furnish evidence of regres- sion in gross earnings. In Groups 1 and 4, total expense ratios are above their 1924 average of 4.2%. If they tend to decrease the following year, the result must be an increase in net earnings ratios for banks in which gross earnings ratios did not change. The increase in net earnings ratios is shown in the positive values of K, for these groups. In Groups 2 and 3, total expense ratios are below their 1924 average. If they tend to increase the following year, the result must be a decrease in net earnings ratios for banks in which gross earnings ratios did not change. This decrease in net earn- ings ratios is shown in the negative values of K, for these groups. APPARENT EXCEPTIONS AND CONTRADICTIONS IN TABULAR ANALY- SES EXPLAINABLE IN TERMS OF CONSTANT REGRESSION TENDENCIES IN NET EARNINGS In the light of the discussion of constant regression tendencies in net earnings, it is possible to explain and interpret the meanings of certain values obtained in the analyses in Chapter XVII, which appeared to be exceptions or contradictions to the ruling tenden- cies there discussed. APPENDIX 1 387 Case 1. (See footnote, page 336.) On referring to the results for Group 3 in this analysis (Table IV), it is seen that this excep- tion is probably due to the large constant tendency for net earn- ings ratios to decrease. (See discussion under Group 3, above.) The natural tendency for gross earnings ratios in banks in this group is to decrease, and it was shown that gross earnings ratios must increase o.17 of a point in banks in which it alone is assumed to determine net earnings ratios before the constant tendency for net earnings ratios to decrease is counteracted. Hence, in so far as the value —o.o1 results from such banks, its meaning is that gross earnings ratios increased less than 0.17 of a point on the average in those banks. Case 2. (See footnote to page 339.) This exception is prob- ably due to a strong constant tendency for net earnings ratios to increase for banks with increasing or with decreasing total expense ratios, as shown by the constant K;, = + 2.47 + 0.31. (See discussion of regression tendencies, Group 4.) Case 3. (See footnote to page 339.) This exceptionally large difference is probably due to the combined strong tendencies (a) for net earnings ratios of banks in Group 4 to increase, re- gardless of the direction of change in gross earnings ratios, and (6) for net earnings ratios of banks in Group 3 to decrease re- gardless of direction of change in total expense ratios. That is, it is measurable in terms of the combined constants K, (for Group 4) == + 1.02 and K, (for Group 3) =- 1.32. Case 4. (See footnote to page 340.) The fact that the net change in this case is positive (+ 0.24) is probably due to the large constant, K, = + 2.47. Even though total expense is as- sumed to be increasing, which has the effect of decreasing net earnings, the increases are not large enough to predominate over this large constant tendency for net earnings ratios to increase. (See further discussion of Group 4, above.) Case 5. (See footnote, page 340.) This positive 0.07 is evi- dently due to the strong tendency for the net earnings ratios of banks in Group 2 to increase, regardless of the direction of change in total expense ratios. The constant, K,, for this group = 4 2.16. Even though total expense ratios are here assumed to be increasing, which has the effect of decreasing net earnings, 388 BANKING STANDARDS the increases are not large enough to predominate over the strong constant tendency for net earnings to increase. It is thus apparent, from a consideration of the preceding five cases, that they are explainable principally in terms of the con- stant, as distinguished from the variable, part of the changes in net earnings ratios of banks. These constant tendencies are re- flected by the values of the terms K; and K, for the various groups. APPENDIX II ILLUSTRATIONS OF CORRESPONDENT RELATIONS OF MEMBER BANKS, BOSTON FEDERAL RESERVE DISTRICT, 1924! TABLE I NUMBER OF MEMBER BANKS IN THE FIRST FEDERAL RESERVE DisTrICT, 1924, REPORTING CLASSIFIED NUMBERS oF PrRINcCIPAL CORRESPONDENTS NUMBER OF MEMBEP® RAVIN~ CLASSIFIED NUMBERS OF CORRESPONDENTS STATE a 10 Or m~-e First District "Maine. . New Ham" ‘Vermont . + I rR a 21 Connec 1 Based on Rand-McNally Bankers Directory, Chicago, 1¢ ~80 140 BANKING STANDARDS TABLE II NUMBER OF MEMBER BANKS LOCATED IN DIFFERENT STATES OF THE FirsT FEDERAL RESERVE DistrIcT, CLASSIFIED BY LocaTioN OF THEIR PRINCIPAL CORRESPONDENTS, 1024 1. With a correspondent in Boston LOCATION OF CORRESPONDENTS i —— Boston and Other Cities Bostononly........ Albany............... Jangor....... ....... ‘oncord............... fanchester............ fontreal.............. Jewton ,............. New York. ............ TA ohia we sass ortland.............., rovidence............ -t. Leonard (N. B.)..... arcester. . Boston and......... .dbany... TY ‘uffalo.... ‘va Jhicago......oinl.ll concord. ,............ lartford. ............. Jdontreal.............. vew Haven............ Philadelphia. .......... Portland, roo Lil ’rovidence............ Worcester. ........... Albany................ Montreal. ............. Philadelphia.......... Rack Island (Que.).... Boston, New York, anc Boston, Portland, and Boston, Albany, and. Boston, New York, Philadelphia, and. . Albany................ Chicago............... Northampton.......... Providence. ........ Boston, New York, Chicago, and...... Boston, New York, Albany, and....... Boston, New York, New Haven, and.. Albany.............. Toronto............. Raleigh. ....... Waterbury. . . Boston, New York, Philadelphia, Chicago, and...... Albany..... Montreal......... LocATION oF MEMBER BANKS, BY STATES Conn. 13 3 2 9 2 Xx - x . .e .s — A — i | be I I APPENDIX II 1G! TasLE II (Continued) NuMBER oF MEMBER BANKS LOCATED IN DIFFERENT STATES OF THE FIRST FEDERAL RESERVE DistRICT, CLASSIFIED BY LocATION OF THEIR PRINCIPAL CORRESPONDENTS, 1924 2. With no correspondent in Boston LocATiON oF CORRESPONDENTS None in Boston "New York only...... New York and. ..... Albany....... Chicago. ... *hiladelphia . . Providence. New York, Chicago, and... .. .. a Jdbany.......... Montreal. . ... Philadelphia... ... New York, Hartford, Springfield. . . Baltimore. ...... .. ondon. .... en Montreal. .... ... st. Louis. ..... .. ... ,an Francisco...... .. Washington.......... New York, Philadel- phia, Chicago, and. New York, Philadel- hia, Chicago, Rontreal. and..... ADANY. ...c nvr san Francisco.......... Albany, London, Paris. . London, Los Angeles, St .ouis, San Francisco Toronto. .... LocaTtioN or MEMBER BANKS, BY STATES Total Maine New damp Ver- mont Mass. Rhode Island: Conn. Albany only. ... Portland and........ Berlin, iv Providence only... .. All parts of the world *These banks are all located in Boston except 5, Indic: + $One bank not in Boston. 302 BANKING STANDARDS CHART 1 CORRESPONDENT RELATIONS OF A MEMBER BANK, FIRST FEDERAL RESERVE DisTRICT, 1924 MEMBER BANK f First Nationa! Bank of Suffield, Conn. PRINCIPAL CORRESPONDENT BANKS National Bank of Commerce, New York City Nationa! Park, New York City Chase National, New York City Bank of the Manhattan Co., New York City Irving Bank-Columbia Trust Co. New York City . First National, New York City National Bank of the Republic, Chicago Franklin National, Philadelphia First National, New York City 3ankers Trust Co., New York City shasa National, New York City Continental & Commarcial, Chicago First National, Chicago National Bank of the Republic, Chicago Shiladelphia National, Philadelphia National Bank of Commerce, St. Louis 3ank of California Natiomal Association, San Francisco “rocker National, San Francisco Nelts Fargo Bank & Trust Co., San Francisco “irst Naticnal, Los Angeles Pacific Southwest Trust & Savings, Los Angeles Royal Bank of Canada, Montreal Canadian Bank of Commarce, Toronto’ Midland Bank, Ltd., London Hartford-Aetna National, Hartford, Conn. Nationa! Shawmut Bank, Boston Springfield Safe Depasit and Trust Company Springfield, Mass. Hanover National, New York City Girard National, Philadelphia Firat National, Boston i Correspondents in all parts of the world * Branches in Buenos Aires and Havana. Special representa live in London, II MEMBER BANK White Mountain National, Gorham, New Hamoshire PRINCIPAL CORRESPONDENT BANKS National Park, New York City Continental & Commercial, Chicago i National Commercial Bank & Trust Co., Albany -irst National, Portland, Maine’ Correspondents in all parts of the First National, Boston world. Branches in Buenos Aires and Havana. Special representa- tive in London. Coal & Iron National, New York City } Correspondents tn all parts of the “irst National, world Branches in Buenos Aires Boston » and Havana. Special representa 1 tive in London, Irving Bank-Cotumbia Trust Co., New York City Hanover National, New York City Northern Trust Co., Chicago Sidetity Trust Co., Philadelphia National, Philadelphia " Partland, Maine ¥, arian a | Correspondents in 24 party ao the i i world. Branches in Buenos Airos First National, Boston and Havana. Special representas tive in London. INDEXES INDEX TO TABLES AND CHARTS (See also Index to Discussion) (For the most part, the tables and charts refer to series of data expressed as ratios, the base amounts, distinguished by the corresponding abbreviations, being as follows: Earning Assets — E. A.; Gross Earnings = G. E.; Total Deposits = T. D. Where ratios are not used, the terms are given in full. The data are those for all member banks except when stated otherwise.) » BostoN DISTRICT. See Corre- spondents, Gross earnings, Net earnings, Total expense CORRELATION. See also Loans and discounts, Gross earnings, et cetera Summaries of, for ratios corre- lated with Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. Interest on deposits to E. A. Investments to E. A. Loans and discounts to E. A. Salaries and wages to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to E. A. CORRESPONDENTS, BOSTON DIS- TRICT Location of, by cities Location of, by states 390, 391 Number of, by states 389 CUSTOMERS’ PAPER, rates on By years and types of paper 36% Compared by sizes of city 363 Differences of, from country’s average rate 364 median rate 363 Position of, and changes in 366 DEBITS TO INDIVIDUAL ACCOUNTS Amounts of by districts and years compared, by districts and years, with Earning assets differences of, from city av- erages 354 trends of 353 DEMAND DEPOSITS TO E. A. Amounts of by districts and years Changes in and position of by districts and years correlated with changes in Gross earnings to E. A. Tar™-- 178,179, 210, 218, 22% CHARTS 350,352 352 350, 352 42 20 206 BANKING STANDARDS Pace TABLES 178,179, 210 178,179, 210, 234 Net earnings to E. A. Total expense to E. A. and in loans and discounts to E. A. correlated with Gross earnings to E. A. 179 Net earnings to E. A. 179 Total expense to E. A. 1%9 Differences of, from country’s yearly averages by districts 46,47 correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Differences of, from district average~ and changes in 44,45 by districts and years 43 correlated with differences of Gross earnings to E. A. 176,177, 210, 214, 22% Investments to E. A. 176 Loans and discounts to E. A. Net earnings to E. A. Total expense to E. A. Position of, and of loans and discounts to E. A. correlated with differences of Gross earnings to E. A. 177 Net earnings to E. A. 177 Total expense to E. A. 177 Demanp peposits 10 T. D. Amounts of by districts and years 49 compared, by districts and years, with Gross earnings to E. A. Loans and discounts to E. A. Net earnings to E. A. Total expense to E. A. Changes in by districts and years 52 correlated with changes in Gross earnings to E. A. 184,183, 210, 218, 227 [nterest and discounts on borrowed money to E. A, 184, 210 Interest on deposits to E. A. 184, 210 Investments to E. A. 184 {Loans and discounts to E. A. 160, 170, 184 Net earnings to E. A. 184, 185, 210 “Other” expense to E. A. 184,210 Salaries and wages to E. A. 184,210 Taxes to E. A. 184, 210 CHARTS yO 186 162 100 188 54,162, 186, 188, 190 INDEX TO TABLES AND CHARTS Pace Total expense to E. A. and in loans and discounts to E. A. correlated with changes in Gross earnings to E. A. 183 Net earnings to E. A. 185 Total expense to E. A. 183 Differences of, from country’s yearly averages by districts and years 53 correlated with differences of Gross earnings to E. A. 189,210, 224, 22% Loans and discounts to E. A. Net earnings to E. A. Total expense to E. A. Differences of, from district averages by districts and years correlated with differences of Gross earnings to E. A. Interest and discounts on borrowed money to E. A. Interest on deposits to E. A. Investments to E. A. Loans and discounts to E. A. Net earnings to E. A. “Other” expense to E. A. Salaries and wages to E. A. Taxes to E. A, Total expense to E. A. Position of, and of loans and discounts to E. A. correlated with differences of Gross earnings to E. A. 1 Net earnings to E. A. 1 Total expense to E. A. ace EARNING ASSETS Amounts of compared, by districts and years, with Debits to individual ac- counts trends of EXPENSE. See Interest, “Other” expense, Salaries and wages, Taxes, and Total expense Gross EARNINGS TO E. A—ArL MEMBER Amounts of by districts and years TABLES 184, 185, 210, 234 3 397 CHARTS 162,186, 188, 190 73 I5C 308 BANKING STANDARDS PAGE compared by districts and years, with Demand deposits to T. D. Loans and discounts to E. A. Net earnings to E. A. Total expense to E. A. Changes in and position of by districts and years correlated with changes in Demand deposits to E. A. 178,179, 210, 218, 227 Demand deposits to T. D. 184, 185, 210, 218, 227 [nterest and discounts on borrowed money to E. A 218,227 Interest on deposits to E A. 218, 22% Investments to E. A. 196, 200 Loans and discounts to E. A. TABLES 160, 163, 170, 179, 185, 218, 22%, 255 218, 220, 227, 258 218, 227 Net earnings to E. A. “Other” expense to E. A. Salaries and wages to E. A. Taxes to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to E. A. correlated with changes in Investments to E. A. and Time deposits to E. A. Time deposits to T. D. Loans and discounts to E. A. and Demand deposits to E. A. 179 Demand deposits to T. D. 185 and position of Loans and discounts to E. A. 163 Total deposits to E. A. 174 Differences of, from country’s yearly averages oy districts and years correlated with differences in Demand deposits to E. A. Demand deposits to T. D. Loans and discounts to E. A. 218, 227% 218, 227 193, 196, 210 200, 209 173,174, 210, 255 218, 220, 227, 234, 236 77 180, 210, 224, 227 189, 210, 224, 227 165, 170, 224, 226, 227, 255 224,227,258 197, 210, 224 209, 224 174, 210, 224, 255 Net earnings to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. CHARTS 86 164 130,223 £30, 222 78,164,186, 222,223 INDEX TO TABLES AND CHARTS Pace TABLES 224,226,227, 238, 240, 250, 257 Total expense to E. A. Differences of, from district averages and changes in by districts and years torrelated with differences in Demand deposits to E. A. Demand deposits to T. D. Interest and discounts on borrowed money to E. A. Interest on deposits to E. A. Investments to E. A. Loans and discounts to E. A. 75, 76 74 176,177, 210,214, 229 182, 183, 210, 214, 22% 214, 227 214, 227 194, 205 155,158,163, 170,177 183, 214, 227, 255 214,216,227%,258 214,227 Net earnings to E. A. “Other” expense to E. A. Salaries and wages to E. A. Taxes to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to E. A. 214,227 214,227 193, 194, 210 198, 205 172,174, 210,255 114, 216, 227, 230, 232, 250 ~17 correlated with position of Investments to E. A. and of Time deposits to E. A. 194 Time deposits to T. D. 205 Loans and discounts to E. A. and of Demand deposits to E. A. 177 Demand deposits to T. D. Gross EARNINGS T0 E. A— BOSTON DISTRICT Amounts of by city size by volume by years compared with Net earnings to E. A. Total expense to E. A, regression of, on Net earnings to E. A. Total expense to E. A. regression to type Changes in by city size by volume compared with changes in Net earnings to E. A. Total expense to E. A. correlated with changes in 271,272 271 2606, 271 324 280 276 274,276 297A 300 CHARTS 164,180, 222,223 322 322 338 338 338 100 BANKING STANDARDS Pace TABLES 331,333,335, 341 Net earnings to E. A. and in total expense to E. A. correlated with changes in Net earnings to E. A. and position of, and changes in and position of total expense to E. A. correlated with changes in Net earnings to E. A. and position of, and position of total expense to E. A. rorrelated with changes in Net earnings to E. A. Differences of, from yearly av- erages for all member banks in district 374 correlated with changes in Net earnings to E. A. 330, 333, 334, 335, 341, 380, 381 correlated with ratios of Net earnings to E. A. 326 position of, and of total expense to E. A. correlated with changes in Net earnings to E. A. 330 correlated with ratios of Net earnings to E. A. 326 changes in, and in total expense to E. A. correlated with changes in Net earnings to E. A. 335,341 changes in, and position of total expense to E. A. correlated with changes in Net earnings to E. A. position of, and changes in total expense to E. A. correlated with changes in Net earnings to . E. A 334 regression to type 274 residuals of Solution S, 378 respective city groups regression to type 274 respective volume groups correlated with differences of Net earnings to E. A. Total expense to E. A. regression to type INDIVIDUAL DISTRICTS. See by dis- tricts under each ratio 335,341 CHARTS 3184 INDEX TO TABLES AND CHARTS Pace INTEREST AND DISCOUNTS ON BOR- ROWED MONEY TO E. A. Amounts of by districts and years 113 Changes in by districts and years correlated with changes in Demand deposits to T. D. 184, 210 Gross earnings to E. A. 218,227 Loans and discounts to E. A. 160 10 Time deposits to T. D. 206 Differences of, from country’s yearly averages by districts and years Differences of, from district averages correlated with differences of Demand deposits to T. D. 182, 210 Gross earnings to E. A. 214,227 Interest on deposits to E. A. 245, 246, 250 Investments to E. A. 248 Loans and discounts to E. A. 158,170 Salaries. and wages to E. A. 243 Time deposits to T. D. 198, 248 [INTEREST ON DEPOSITS TO E. A. Amounts of by districts and years IIx Changes in by districts and years correlated with changes in Demand deposits to T. D. Gross earnings to E. A. Interest and discounts on borrowed money to E. A. Loans and discounts to E. A. Time deposits to T. D. Differences of, from country’s yearly averages by districts and years Differences of, from district averages correlated with differences of Demand deposits to T. D. Gross earnings to E. A. Interest and discounts on borrowed money to E. A. Loans and discounts to E. A. Salaries and wages to E. A. Time deposits to T. D. Interest received to G. E. TABLES 153,100 43,2 ie 45, 246, 250 1 401 CHARTS 116 r18 "r4 BANKING STANDARDS PAGE InvESTMENTS TO E. A, Amounts of by districts and years Changes in and differences of by districts and years correlated with changes in Demand to T. D. Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. and in time deposits to E. A. correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. and in time deposits to T. D. correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Differences of, from country’s yearly averages by districts and years correlated with differences of Total expense to E. A. Differences of, from district averages and changes in by districts and years correlated with differences in Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. Interest and discounts on borrowed money to E. A. Net earnings to E. A. Time deposits to T. D. Total expense to E. A. Position of, and of time de- posits to E. A. correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Position of, and of time de posits to T. D. correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Loans AND piscouNTs To E. A. Amounts of by districts and years compared, by districts and years, with TABLES 24 27 26 84 :96, 209 :96, 209 196, 209, 234, 236, 250 (96 (06 196 100 200 200 28 238, 240, 250 27 26 176 .82 104, 205 148 [94, 205 [98 194, 205, 230, 232, 250 [94 194 194 208 208 208 I5 CrArTS » INDEX TO TABLES AND CHARTS Pace Demand deposits to T. D. Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Changes in by districts and years 18 by years 18,10 correlated with changes in Demand deposits to T. D. 160, 170,184 Gross earnings to E. A. 160, 163, 170, 179, 185, 218,227,255 Interest on borrowed money to E. A. 160,170 Interest on deposits to E. A. 160, 170 Net earnings to E. A. 160, 163, 170, 179, 185, 259 “Other” expense to E. A. 160,170 Salaries and wages to E. A. 160,170 Taxes to E. A. 160,170 Time deposits to T. D. 160, 170, 206 Total expense to E. A. 160, 163, 170, 179, 188%, 234,256 10 TABLES and position of correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. in demand deposits to E. A. correlated with changes in Gross earnings to E. A. 179 Net earnings to E. A. 179 Total expense to E. A. 179 and in demand deposits to T. D. correlated with changes in Gross earnings to E. A. 183 Net earnings to E. A. 183 Total expense to E. A. 183 Differences of, from the coun- try’s yearly averages by districts 20, 21 by districts and years 20 correlated with differences in Demand deposits to T. D. Gross earnings to E. A. 189 165, 170, 224, 226, 227, 255 Net earnings to E. A. 165, 170, 259 Total expense to E. A. 165,170,238, 256 Differences of, from district averages by districts and years correlated with differences of Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. 17 176 158,170,182 155,158,170, 177, 183, 214,227,255 403 CHARTS 162 164 168 166 22,162, 164, 166, 168 22,162,164, 166, 168 a 22 162,164, 165, 168 LOZ BANKING STANDARDS PAGE Interest on borrowed money to E. A. Interest on deposits to E. A. Net earnings to E. A. “Other” expense to E. A. Salaries and wages to E. A. Taxes to E. A. Time deposits to T. D. Total expense to E. A. TABLES 158,170 158, 170 158, 170,177,183,259 158,170 158,170 158, 170 158,170 158, 170,177, 183, 230, 256 Position of and changes in correlated with changes in Gross earnings to E. A. 163 Net earnings to E. A. 163 Total expense to E. A. 163 and of demand deposits to E. A. correlated with position of Gross earnings to E. A. 177 Net earnings to E. A. 177 Total expense to E. A. 177 and of demand deposits to T. D. correlated with position of Gross earnings to E. A. 183 Net earnings to E. A. 183 Total expense to E. A. 183 MEMBER BANKS Earning assets of, ratio to total banks Number of National members. See Na- tional banks Ratios for. See Loans, et cetera State bank members. See State bank and trust company members Total deposits of, ratio to total banks NATIONAL BANKS, ratios of. See Net earnings to G. E. and Total expense to G. E. NET EARNINGS TO E. A— ALL MEMBER Amounts of by districts and years 128 compared with by districts Net earnings to G. E. 143,144 by districts and years Demand deposits to T. D. Gross earnings to E. A. Loans and discounts to E. A. [4 CHARTS 120 130 190 130, 223 “68 INDEX TO TABLES AND CHARTS Pace 405 TasLes Total expense to E. A. by years Net earnings to G. E. 140, 141,142 Changes in and position of 133,134 by districts and years 133 by years 132, 141, 142 correlated with changes in Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A, Investments to E. A. Loans and discounts to E. A. CHARTS 130, 241 136, 168, 190, 241, 223 178, 179,210 184, 185, 210 218, 220,227, 258 196, 200 160, 163, 170, 179, 185, 259 195, 106, 210 206, 209 173,174, 210, 259 234,250,258 Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to E. A. correlated with changes in Investments to E. A. and in Time deposits to E. A. in Time deposits to T. D. Loans and discounts to E. A. and in Demand deposits to E. A. 179 in Demand deposits to T. D. 185 and position of loans and discounts to E. A. 163 and position of total de- posits to E. A. 174 Differences of, from country’s yearly averages by districts and years 135 by years 135,143, 144 correlated with differences of Demand deposits to E. A. 180, 210 Demand deposits to T. D. 189, 210 Gross earnings to E. A. 224,227, 258 Loans and discounts to E. A. 165, 170, 259 Time deposits to E. A. 197, 210 Time deposits to T. D. 200 Total deposits to E. A. 174,210,259 Total expense to E. A. 238, 250, 258 Differences of, from district averages and changes in by districts and years by years correlated with differences in Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. Investments to E. A. Loans and discounts to E. A. 136, 168, 190, 223, 241 168, 190, 223, 241 176,177, 210 182,183, 210 131,216,227%,258 104, 205 158,170,177,183, 259 0 BANKING STANDARDS Pace TABLES Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to E. A. correlated with position of Investments to E. A. and Time deposits to E. A. 104 Time deposits to T. D. 205 Loans and discounts to E. A and Demand deposits to E. A. 177 Demand deposits to T. D. 183 NET EARNINGS TO E. A— BOSTON DISTRICT Amounts of by city size by volume by years compared with Gross earnings to E. A. Time deposits to T. D. Total expense to E. A. correlated with Gross earnings to E. A. Total expense to E. A. regression of, on Gross earnings to E. A. Total expense to E. A. regression to type Changes in and position of by city size by volume compared with changes in Gross earnings to E. A. Total expense to E. A. correlated with changes in Gross earnings to E. A. Total expense to E. A. correlated with position of Gross earnings to E. A. Total expense to E. A, correlated with position of and changes in gross earnings to E. A. and position of Total expense to E. A. correlated with position of, and changes in total ex- pense to E. A, and po- sition of Gross earnings to E. A. 334 correlated with position of and changes in Total expense to E. A. and Gross earnings to E. A. 335,341 193, 194.210 198, 203, 205 172,210,259 230, 250, 258 314, 316 314,316 266,314, 316 326 201 326 380, 381 380, 381 324 310 318 382 317,318 317,318 317 331,333,335, 341 331,334, 335,341 330,333, 334, 335, 341 330,333, 334,335, 341 CHARTS 322 322 338 338 384 384 INDEX TO TABLES AND CHARTS 40’ Pacer Differences of, from yearly av- erages for all member banks in district regression to type 317 residuals of Solution I, 376 residuals of Solution 5, 378 respective city groups regression to type 31% respective volume groups correlated with differences of Gross earnings to E. A. 281, 324, 328 Total expense to E. A. 310,311,225 regression to type 317 NET EARNINGS TO G. E. Amounts of all member banks by districts and years TL national member banks by districts and years 146 state member banks by districts and years 14% Changes in by districts and years all member, national, and state member banks compared, by years, with changes in Net earnings to E. A. Differences of, from country’s yearly averages compared, by districts, with differences of Net earnings to E. A. 143, 144 Differences of, from district averages compared, by years, with dif- ferences of, Net earnings to E. A. 140 New York pistrRICT. See Total cxpense “Other” expense to E. A. Amounts of by districts and years 127 Changes in by districts and years correlated with changes in Demand deposits to T. D. Gross earnings to E. A. Loans and discounts to E. A. Time deposits to T. D. Differences of, from country’s yearly averages by districts and years Differences of, from district averages correlated with differences of TABLES CHARTS i39 148 148 50 ro 126 108 BANKING STANDARDS TABLES Demand deposits to T. D. 182,210 Gross earnings to E. A, 214, 227% Loans and discounts to E. A. 158,170 Time deposits to T. D. 108 RATIO CHARTS. See Compared with under different ratios REGRESSION TO TYPE in ratios of Demand deposits to E. A. 44,45 Gross earnings to E. A. All member banks 75, 76 Boston district 274,276 [Investments to E. A. 27 Loans and discounts to E. A. 19 Net earnings to E. A. All member banks Boston district Total deposits to E. A. Total expense to E. A. All member banks Boston district PAGE 133, I 3 fir 36 85,86 291, 292, 294, 296, 297, 298, 308 New York district 304, 305, 306, 307, 308 Total expense to G. E. 93, 94 REGRESSION OF NET EARNINGS On Gross earnings 324, 380, 381 Total expense 310, 380, 381, 382 SALARIES AND WAGES T0 E. A. Amounts of by districts and years 108 Changes in by districts and years correlated with changes in Demand deposits to T. D. 184,213 Gross earnings to E. A. 218,227 Loans and discounts to E. A. 160, 170 Time deposits to T. D. 206 Differences of, from country’s yearly averages by districts and years Differences of, from district averages. correlated with differences of Demand deposits to T. D. 182, 210 Gross earnings to E. A, 214,227 Interest and discounts on borrowed money to E. A. 243, 250 Interest on deposits to E. A. 243, 245, 246, 250 Loans and discounts to E. A. 158,170 . Time deposits to T. D. 198 SECURITIES Changes in classes of, by classes of banks 362 United States CHARTS 384 384 100 IO YD INDEX TO TABLES AND CHARTS 400 Pace TABLES Percentage of total invest- ments 359 Percentage of total securi- ties 359, 360 STATE BANK AND TRUST COMPANY MEMBERS, ratios of. See Net earnings to G. E. and Total expense to G. E. Taxes 10 E. A. Amounts of by districts and years 119 Changes in by districts and years correlated with changes in Demand deposits to T. D. 184, 210 Gross earnings to E. A. 218, 22% Loans and discounts to E. A. 160,170 Time deposits to T. D. 206 Differences of, from country’s yearly averages by districts and years Differences of, from district averages correlated with differences of Demand deposits to T. D. 182, 210 Gross earnings to E. A. 214,277 Loans and discounts to E. A. 158,170 Time deposits to T. D. 198 TiME DEPOSITS TO E. A. Amounts of by districts and years Changes in by districts and years correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. and in investments to E. A correlated with changes in Gross earnings to E. A. 196 Net earnings to E. A. 196 Total expense to E. A. 196 Differences of, from country’s yearly averages by districts and years 61 correlated with differences in Gross earnings to E. A. 197, 210, 224 Net earnings to E. A. 197, 21¢ Total expense to E. A. 107, 210, 238. 250 Differences of, from district averages by districts and years correlated with differences 0 Gross earnings to E. A. 193, 104, 210 Net earnings to E. A. 103, 104, 210 105,196, 210 195, 196, 212 195, 196, 210, 234, 250 CHARTS “16 - +. Be AIO BANKING STANDARDS Pace TABLES 193, 194, 210, 230, 250 103, 210 Total expense to E. A. Total expense to G. E. Position of, and of investments to E. A. correlated with differences of Gross earnings to E. A. 194 Net earnings to E. A. 194 Total expense to E. A. 104 T1ME pEposits TO T. D. Amounts of by districts and years 64 compared, by districts and years, with Total expense to E. A. correlated with ratios of, District 1 Net earnings to G. E. 201 Total expense to G. E. 200 Boston district correlated, by years, with ratios of Net earnings to E. A. 201 Total expense to G. E. 200 Changes in by districts and years correlated with changes in Gross earnings to E. A. Interest and discounts on borrowed money to E. A. Interest on deposits to E. A. Loans and discounts to E. A. Net earnings to E. A. “Other” expense to E. A. Salaries and wages to E. A. Taxes to E. A. Total expense to E. A. Total expense to G. E. and in investments to E. A. correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Differences of, from country’s yearly averages by districts and years torrelated with differences of Gross earnings and E. A. Net earnings to E. A. Total expense to E, A. Total expense to G. E. Differences of, from district averages by districts and years correlated with differences of 66 206, 206 206 2006 160, 200 200, 209 200 200 206 200, 200, 234, 250 200, 210 200 209 209 200, 224 209 200, 238, 250 2009, 210 CHARTS A: 3208 58, 208 3 INDEX TO TABLES AND CHARTS Pace TABLES Gross earnings to E. A. 198, 205 Interest and discounts on [nterest on deposits to E. A. 198, 248 Interest on deposits to E. A. 108 Investments to E. A. 198 Loans and discounts to E. A. 158 Net earnings to E. A. 108, 203, 208 “Other” expenses to E. A. 198 Salaries and wages to E. A. Taxes to E. A. Total expense to E. A. Total expense to G. E. Position of, and of investments to E. A. correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. ToTAL DEPOSITS TO E. A. Amounts of by districts and years Changes in by districts and years by years correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. and position of correlated with changes in Gross earnings to E. A. 174 Net earnings to E. A. 174 Total expense to E. A. 174 Differences of, from country’s yearly averages by districts 37,38 and years 37 correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Differences of, from district averages by districts and years correlated with differences of Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. Position of and changes in correlated with changes in Gross earnings to E. A. Net earnings to E. A. Total expense to E. A. ToTAL EXPENSE T0 E. A— ALL MEMBER 198 108 198, 205, 230, 250 202, 210 173,174, 210, 255 173,174, 210,259 173,174, 210, 234, 256 174,210, 224,255 174,210,259 174, 210, 238, 256 172,210,253 172,210,259 172,210, 230, 256 411 Crarts 112 BANKING STANDARDS Pace Amounts of by districts and years compared by districts and years with Demand deposits to T. D. Gross earnings to E. A. logs and discounts to E. Net earnings to E. A. Net earnings and gross earnings to E. A. Changes in and position of by districts and years correlated with changes in Demand deposits to E. A Demand deposits to T. D. Gross earnings to E. A. TABLES R2 35,86 B4 '78, 179, 210, 234 184, 185, 210, 234 118, 220, 227, 234, 236, 250, 257 196, 209, 234, 236, 250 160, 163, 170, 179, 185, 234,256 234, 250, 258 195, 196, 210, 234, 250 200, 209, 234, 250 173, 174, 210, 234, 356 234, 250 Investments to E. A. Loans and discounts to E. A Net earnings to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to G. E. sorrelated with changes in and position of loans and discounts to E. A. 163 and position of total de- posits to E. A. 174 investments and in time deposits to E. A. 196 investments to E. A. and time deposits to T. D. 209 investments and in total deposits to E. A. 174 loans and in demand de- posits to E. A. 179 loans to E. A. and in de- mand deposits to T. D. 185 Differences of, from country’s yearly averages by districts and years correlated with differences of Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. 180, 210, 238 189, 210, 238 224, 226, 227, 238, 240, 250, 257 238, 240, 250 Investments to E. A. Loans and discounts to E. A. Net earnings to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. 165, 170, 238, 256 238, 250, 258 197, 210, 238, 250 209, 238, 250 174, 210, 238,256 Crarts 33 130 188 130, 222 166 130, 241 130 88, 166, 188, 222, 241 INDEX TO TABLES AND CHARTS Differences of, from district averages and changes in by districts and years correlated with differences of Demand deposits to E. A. Demand deposits to T. D. Gross earnings to E. A. TABLES Pack 85,86 84 176, 177, 210, 230 182, 183, 210, 230 214, 216, 227, 230, 232, 250, 257 194, 205, 230, 232, 250 158, 170, 177, 183, 230, 256 230, 250, 258 193, 194, 210, 230, 250 98, 205, 230, 250 172, 210, 230, 256 230, 250 Investments to E. A. Loans and discounts to E. A. Net earnings to E. A. Time deposits to E. A. Time deposits to T. D. Total deposits to E. A. Total expense to G. E. correlated with position of Investments to E. A. and of Time deposits to E. A. Time deposits to T. D. Loans and discounts to E. A. and of Demand deposits to E. A. 177 Demand deposits to T. D. 183 ToTAL EXPENSE TO E. A— BOSTON DISTRICT Amounts of by city size by volume by years compared with Gross earnings to E. A. Net earnings to E. A. regression of, on Gross earnings to E. A. Net earnings to E. A. regression of net earnings on regression to type Changes in 284, 288 286, 288 266, 284, 286 280 310 380, 381 101, 292, 204, 296, 297, 208, 308 390, 291, 202, 296, 297, 208 291, 292, 204, 296 and position of tompared with changes in Gross earnings to E. A. Net earnings to E. A. correlated with changes in Net earnings to E. A. and in gross earnings to E. A. correlated with changes in Net earnings to E. A. and position of, and of gross earnings to E. A. 341 341 331, 334,335,341 331 413 CHARTS 166, 188, 222, 241 322 322 384 338 338 374 1 BANKING STANDARDS P.cE TasLES correlated with changes in Net earnings to E. A. 334, 335,341 Differences of, from yearly av- erages for all member banks in district 294,296 correlated with changes in Net earnings to E. A. 330,333, 334, 335, 341 correlated with ratios of Net earnings to E. A. 326 position of and of gross earnings to E. A. correlated with changes n Net earnings to E. and position of and changes in gross earnings to E. A. torrelated with changes in Ne earnings to E. and changes in and position of gross earnings to E. A. correlated with changes in Net earnings to E. A. regression to type residuals of Solution I, respective city groups regression to type respective volume groups Sopseliten with differences 0 Gross earnings to E. A. Net earnings to E. A. regression to type ToTAL EXPENSE T0 E. A— New YORK DISTRICT Amounts of by city size by volume by years regression to type Changes in and position of Differences of, from averages for all banks city groups volume groups ToraL EXPENSE TO G. E. Amounts of all member banks by districts and years national member banks by districts and years state member banks CHARTS J! YQ INDEX TO TABLES AND CHARTS TABLES by districts and years 08 compared by districts and years, with Time deposits to T. D. for District I. 200 Changes in and position of 93,94 by districts and years all member banks with national and state members by years all member banks 93 national member banks 102, 103 state member banks 102,103 correlated with changes in Time deposits to T. D. 206, 210 Total expense to E. A. 234,250 Differences of, from country’s yearly averages all member banks by districts 04 correlated with differences of Time deposits to T. D. 209, 210 national member banks by districts 104, 108 state member banks by districts 104, 105 Differences of, from district averages all member banks and changes in 93,94 by districts and years by years 92 correlated with differences of Time deposits to E. A. Time deposits to T. D. Total expense to E. A. national member banks by years state member banks by years Pace 193, 210 198, 202, 210 230, 250 100, 101 100, 101 415 CHARTS 208 106, 208 106 106, 208 106 100 208 208 INDEX TO DISCUSSION (See also Index to Tables and Charts) A “Abnormal” years, inclusion of Bank debits fluctuation of city 353-354 district 750-353 and changes in business conditions 357 i representative measure of general business 3851 Banking standards. See Norms, Trends, and é orrelation Banks competition of 354, 356, 357 interrelation of functions of 355, 356, 358, 369 need of standards by 7 overlapping of competitive areas of 354 Boston district members definition of gross earnings 266 net earnings 267 total expense 266-267 dominant effect of ratios of gross earn- ings on net earnings 329-342, 373-388 nature of correlation for ratios of gross earnings with ratios of net earnings 311-312 series with ratios of net earnings 3¢ 0 ~ arva34a, ve 228 r2 -4 total expense nature of data for norms in ratios of gross earnings net earnings total expense regression in ratios of gross earnings net earnings total expense relation o gross earnings to net earnings 321-342, 373-388 gross earnings to total expense 321-342, 373-388 net earnings to gross earnings 321-342, 373-338 net earnings to total expense 321-342, 373-388 relative effect of total expense on net earnings - 329-342, 373-388 series correlated with ratios of gross earnings 277-283 ‘rends in ratios of gross earnings net earnings total expense Bowser, H. R. Burgess, W. Randolph 270-277 313-321 285-298 265-207 367, 599 Charts interpretation of ratio methods of drawing ratio Competition, measurement of the effects of Cc 21-22 2x 2-f Conclusions, significance of the 7-8 Correlation general sum mary of 348 interpretation o 349-369 method of measuring 154-156, 279 nature of, for series with ratios of demand deposits 175-192 gross earnings 212-2279 for Boston district members 277-283, 311-312 interest and discount on borrowed money interest on deposits investments vans and discounts net earnings for Boston district members 247-249 244-247 169-170 157-169 252-261 salaries and wages time deposits total deposits total expense for Boston district members Correspondents functions of bank illustrations of relations between bank Curtiss, Frederic H. 309-312, 321-342, 373-388 242-244 192-211 171-174 228-251 309-312 356 389-392 200-202, 204, 244 J Data all districts Boston district lefinition of a year respecting form of nature of New York district sources of ‘emand deposits definition of aorms in ratios of ratios of, in relation to earning assets 41-49 total deposits 49-57 regression tendencies in ratios of . 44-46, 53 series correlated with ratios of 175-192 trends in ratios of 56-57 uniformities in positions of ratios of 42-43, 46-49, . 50-52, 53-56 year-to-year changes in ratios of 43-46, 48, 52-53, 54-56 Deposits. See also Demand deposits, Time deposits, and Total deposits definition of total ‘ 32 definition of year respecting 32 norms and trends in ratios of 32-70 series correlated with 171-211 J 3-4, 265-267 IX S54 4 207 4,26 67 Earning assets composition of . and business conditions E It, 15-31 357-358 47% 418 BANKING STANDARDS Earning Assets (Continued) definition of 13 for member banks Boston district 265-266 New York district 267 year respecting iz use of, as a base for ratios 11, 12 Edwards, George W. 356 series correlated with ratios of 169-170 trends in ratios of 31 uniformities in changes in proportion of, represented by United States securities by districts 359 by types of banks 359 for ‘‘other Reserve” cities 360, 362 positions of ratios of 25-26, 29-30 year-to-year changes in 26-28 Gross earnings correlation of ratios of, with ratios of net earnings, Boston district members 311-312 definition of 71 for member banks, Boston district 266 dominant character of, in determining net earnings, Boston member banks 329-342, 373-388 interest as a part of 24 norms in ratios of 71-80 “other income’’ as a part of 71 regression of ratios of explained 75-77 for Boston district members 273-277 relation of net earnings to 129-131 Boston district: members 321-342, 373-388 ratios of to earning assets 72-80 to loans and discounts 255 to net earnings 258 to total deposits 255 to total expense 257 total expense to ratios of, Boston district mem- bers 321-342, 373-388 series correlated with high or low ratios of 199-200 ratios of 212-227 Boston district members 277-283 trends in ratios of 71-80 aniformities in positions of ratios of . 73-75, 78 year-to-year changes in ratios of 5-77, 78 Gold movements, occasion for interdistrict 355 Cc Loans and discounts definition of 13 norms in ratios of 23 ratios of 15-24 regression to type of ratios of 18-19 relation of ratios of to gross earnings 255 net earnings 259-260 total expense 256-257 series correlated with ratios of 157-169 trends in ratios of . 24 uniformities in positions of ratios of 16-17, 20-21 year-to-year changes in ratios of 17-19 ed Member banks, number of, in the System 14 Methods of study, characterization of 5 See also Charts, Correlakon, and Regression Mills, Frederick C. 361 Mitchell, W. C. 356 Money market, banks and the 355-356 Moulton, Harold G. 354 National bank members relation of ratios of total expense 96-107 uniformities in positions of ratios of net earnings 146-148, 150 total expense ‘97-102, 104-106 year-to-year changes in ratios of net earnings 149-150 total expense i 102-103, 106 Net earnings correlation of ratios of, with gross earnings, Boston district . _ members 309-312 definition of 127 for Boston district members 267 dominant effect of gross earnings on, Boston district members 329-342, 373-388 a0rms in ratios of 127-150, 144 cegression tendencies in ratios of 133-134 Boston district members 317-321, 328-329 relation of ratios of, to . earning assets 127-137 gross earnings 129-131, 137-150, 252-254, 258 Boston district members 321-342, 373-388 national and state members 145-150 loans and discounts 259-260 total deposits 259-260 total expense 120-131, 252-254, 258 Boston district members 321-342, 373-388 relative effect of ratios of total expense on ratios of, Boston district members 329-342, 373-388 series correlated with Co high or low ratios of 199-209 ratiosof = : . 2§2-261 Boston district members 321-342, 373-388 NM Interest relation of, to gross earnings 7: and discounts on borrowed money norms in ratios of 117 relation of ratios of 115-119 series correlated with ratios of 247-249 irends in ratios of 117, 119 uniformities in positions of ratios of 118 year-to-year changes in ratios of 118 on deposits norms in ratios of 113 relation of ratios of II1-II5 series correlated with ratios of 244-247 trends in ratios of 113, 115 uniformities in positions of ratios of 114 year-to-year changes in ratios of 114 rates charged customers conditions determining 367-568 geographical differences in 361, 363-368 Interpretation of norms and trends 349-369 Investments definition of 13 norms in ratios of 31 ratios of Co. . 24-31 repression tendencies in ratios of - 27-28 H Hypotheses back of study INDEX TO DISCUSSION 1 LQ Net Earnings (Continued) trends in ratios of 127-150 to gross earnings and to earning assets 144-145 yniformities in positions of ratios of 131-132, 134-136 national and state member banks 146-148, 150 to gross earnings, and to earning assets 138-141, 143-144, 150 year-to-year changes in ratios of 132-134, 136 national and state bank members 149-150 to gross earnings and to earning assets 141-142, 150 New York district members definition of earning assets total expense nature of data norms in total expense ratios regression in ratios of total expense trends in total expense ratios “Normal’’ years, inclusion of Norms general summary of interpretation of in ratios of demand deposits deposits gross earnings Boston district members interest on deposits interest and discounts on borrowed money 117 investments sl loans and discounts 23 net earnings : 144, 313-321 Boston district members 313-3271 “other” expense 124-27" salaries and wages 109-1 taxes 1213 time deposits 69 total deposits 40 total expense 95, 285-309 Boston district members 285-298 New York district members 298-309 summary of type of study revealing 254 and trends in individual series 9-150 Problem, purpose of study significance and methods of study 3 3-8 Ratios data as 4, 268 earning assets as a base for 11, 12 Xegression conditions explaining tendencies toward 358-359 explanation of tendencies of, in ratios of gross earnings 76-77 general summary of tendencies of 346 methods of measuring 273-276, 293-298, 319-320 pattern of 7 tendencies of, in ratios of demand deposits 44-46, 53 gross earnings 75-77 Boston district members 273-277 investments 27-28 loans and discounts 18-19 net earnings 133-134 Boston district members 317-321, 328-329 time deposits 60-61 total deposits 36-37 total expense 85-87, 93-94 Boston district members 291-298 New York district members 301, 303-309 Retailing ] regression to type, of expenses in 7-8 Riefler, Winfield W. 367-368 : Salaries and wages norms in ratios of relation of ratios of, to series correlated with ratios or trends in ratios of uniformities in positions of ratios of year-to-year changes in ratios of Securities. See Investments Series Method of correlating related 154-156 Norms and trends in individual 9-150 Standards, need of banks of 7 See also Correlation, Norms, and Trends State bank members relation of ratios of total expense to gross earnings 96-107 uniformities in positions of ratios of net earnings 146-148, 150 total expense 07-102, 104-3106 year-to-year changes in ratios of net earnings 149-150 total expense 102-103, 106 Statistical techniques, use of 5 Study nature of 12 and significance of conclusions of 6-8 plan of by parts 5-6 and methods of 5-6 purposes of 12 109-111 107-111 242-244 III 108-110 110 0 Order, evidences of, in banking, See also Correlation, Norms, and Trends “Other’’ expense norms in ratios of trends in ratios of relation of ratios of, to earning assets uniformities in positions of ratios of year-to-year changes in ratios of “Other income,” relation of, to gross earnings Overdrafts, inclusion of, in loans and discounts - 124-128 125 ve 1.126 126 126 yi Part [1 nature of discussion in summary of 11 -ummary f v 7 summary os summary of Taxes norms in ratios of relation of ratios of, to earning assets trends in ratios of 121 119-123 121, 123 420 BANKING STANDARDS Taxes (Continued) uniformities in positions of ratios of 122 year-to-year changes in ratios of 122 Time deposits definition of 32 norms in ratios of 69 relation of ratios of 57-70 series correlated with ratios of 191-211 trends in ratios of 69-70 uniformities in positions of ratios of 58-59, 62-65, 67-69 year-to-year changes in ratios of 59, 62, 65-67, 68 Total deposits definition of 32 norms in ratios of 40 regression tendencies in ratios of 36-37 relation of ratios of, to earning assets 32-40 gross earnings 255 net earnings 259-260 total expense 256-257 series correlated with ratios of 171-174 trends in ratios of 40 uniformities in positions of ratios of 34-35, 37-40 year-to-year changes in ratios of 35-37, 39-40 Total expense definition of, for Boston district members 266-267 New York district members 20 norms in ratios of « Boston district members 285-208 New York district members 298-309 norms and trends in ratios of 81-126 vegression of ratios of, to * type 7-8, 85-87, 93-94 Boston district members 291-298 New York district members 301, 303-309 elation of ratios of, to gross earnings 81-96, 257 Boston district members 321-343, 373-388 national and state bank members 96-107 loans and discounts 256 net earnings 129-131, 23F Boston district members 321-342, 372-338 total deposits 250-257 relative effect of ratios of, on ratios of net earnings Boston district members 329-342, 373-388 series correlated with ratios of 228-251 Boston district members 309-312 high or low 199-209 summarized 249-251 ‘rends in ratios of 95-96 Boston district members 285-298 New York district members 298-309 iniformities in positions of ratios of 83, 87-90, 91-92, 106-107 national and state bank members 97-102, 104-106 year-to-year changes of ratios of 84-87, 88-90, 92-94 106-107 national and state bank members 102-103, 106 Trends general summary of 345-346 interpretation of 349-369 in ratios of demand deposits §6-57 deposits 32-70 gross earnings 71-80 Boston district members 270-277 interest and discounts on borrowed money 117-119 interest on deposits 113, 11§ investments 31 loans and discounts 2+ net earnings 144-14" Boston district members 313-31 “other” expense 12 salaries and wages II. taxes 121,123 time deposits 69-70 total deposits 40 total expense 95-96 Boston district members . 285-298 New York district members 298-309 summary of type of study revealing 254 i Westerfield, Ray B Willis, H. Parker Lh. EE 206307833709 357 sought an explanation for the phenomena discovered and meas- ured in other parts of this study. Given such interdependence, then, how are the uniformities and tendencies in, and the correlations between, series of banking data to be explained? The conditions out of which they arise may be sketched broadly and generally, attention being given primarily to the national aspects of our banking system and money market. The yearly fluctuations in business, roughly synchronizing by districts, give rise to sympathetic fluctuations in the demand for loanable funds. These are available in a market which is both national and international. Business, tending relatively at a given time to be in the same stage of activity the country over,!® requires for its financing the same sort of banking service—ex- pansion or contraction of loans, as the case may be. Banks in- dividually are free in a competitive market to use their resources as demanded. Moreover, they share competitively in the sources of funds—stocks of gold, savings, interbank borrowing, and the rediscount privilege. Being free, in both a loan and investment market to convert their earning assets into the form required to administer to business needs, and business needs tending to fluctuate simultaneously from year to year in different parts of the country, it is but natural to find that, with respect to the proportions of loans and discounts to earning assets, for instance, districts, relative to their own long-time levels, are similarly placed at the same time. But the state of business changes from year to year—not hap- hazardly, but with an approach to uniformity the country over. This fact is established, measures of general business oscillations being found in the fluctuations of bank debits. With these changes come different demands for the services of banks, the form of their resources being adjusted to suit business needs. If a rela- tively larger proportion of their earning assets is required in the form of loans to finance business expansion, then loans are ex- panded. On the other hand, if the earnings of business have made it possible for them to finance their needs without recourse to banks, then, relatively, the proportion of earning assets in the form of loans decreases and that of investments increases. That is, the proportions of the earning assets of banks or groups of banks by districts, represented by loans or by investments, tend 18 Account here is taken only of the cyclical and “long-time” uniformities. INTERPRETATION nN Q . DN i Oo - © Q < wv 0 £ oo ld © oO : Wr T ~ m { ~ OQ 4 -— oO oN 0 3] oO p DN 2 SO — Bef ag <8] 3s = = | ha = I= y F oO — - — 0 > N ! Io) = £) 0 N N 0 N 3 NG Ape =F « ¢ ~ » 3 o 5 n-