Image provided by: University of Nebraska-Lincoln Libraries, Lincoln, NE
About The Conservative (Nebraska City, Neb.) 1898-1902 | View Entire Issue (Jan. 11, 1900)
Conservative * cnpital in banking , as compared with other enterprises , would thus produce competition and reduce the nverage loaning rate to the point of equilibrium , where the not return was no greater than in other lines of business. As a result of this survey we are in a position to understand what the force is which has given to our great cities and commercial centers the low rate of in terest which they have enjoyed in recent years. It is , in large measure , nothing more nor less than this tenden cy of competition to force down interest f rates as fast as the increased use of deposits by the business community has made it possible to earn the same return upon the capital invested , even where loans are made at lower rates. Itcstrictions Upon tin1 Issue of Note Currency. When we turn from the users of deposit - posit currency to those whose habits de mand the use of notes instead , \vo find a very different situation. The deposit- using communities are the cities. They have been left free from restrictions up on the use of their favorite medium of exchange. The note-using communities , as has been explained above , are mainly our rural population , the inhabitants of the country districts. By the severity of the burdens and restrictions placed upon the employment of their favorite form of currency notes they have been virtually denied the right to use it except at a cost so great as to be practical ly prohibitive. In what , then , do these restrictions lie ? Of what do these burdens consist ? Though there are in all quite a num ber of provisions of law which rest more heavily upon the note-user than upon the deposit-user , the others are insignificant by the side of two , viz. : 1. Requirement that a bank shall in vest in United States bonds an amount exceeding the notes it shall issue ; 2. The taxation of bank notes with out a corresponding tax upon deposits. In order to put the country districts upon an equality with the city com munities in the matter of supplying themselves with an economical and convenient currency , it is essential that these restrictions upon the issue of bank note currency should bo removed. It is to these restrictions especially the first mentioned that must be attributed the largest share in the high interest rates which prevail in the more distinctively rural and agricultural portions of our country. The following illustration by way of comparison between a typical city bank and a typical country bank may help to make this clear. Typical City Bank. Take for example a city bank of $100- 000 capital with $150,000 deposits. Supposing it to hold a reserve of 25 per cent of its demand liabilities , its condi tion would bo represented by the following balance sheet. ASSKTS. Loans mid Discounts ? 212..r > 00 Cash Reserve- ii'/iOO WoO.OOO MAlllMTIKS. Capital ? 100,000 DcpoHits 150,000 $2.- > oooo Let us suppose that its expenses ( over and above its profits from exchange and sundry sources ) amount to § 5,000. In order to earn a 6 per cent dividend upon its capital , the income from the loana and discounts must be $11,000. To pro vide this amount it is necessary that the loans should bo made at an average rate of 5.18 per cent. And under con ditions where this is a typical bank , that is the rate toward which the loans will tend by the force of competition , as explained above. Typical Country Bun It. Contrast with this the situation of a typical country bank under the existing system. The distinguishing feature , as will be understood from what has gone before , is that the clientele of the country bank demands that a large part of the bank's liability serving a medium of exchange shall be in the form of notes rather than deposits. Take , as before , a bank of $100,000 capital , with $150,000 of demand liabilities , $90,000 of which are notes and $00,000 deposits. It is first necessary under the present system that the bank should buy $100- 000 of United States bonds to be de posited with the treasurer at Washing ton. There are more of the 4 per cent bonds of 1007 than of any other ; there fore it is fair to take them as an illus tration. Suppose the bank purchases them at the present price ( October , 1899) ) , 112 . The cost , will be $112,500. This will leave the bank ( after deduct ing $37,500 for a cash reserve ) only $100,000 for general loans and discounts. Its situation will be represented by the following balance sheet : ASSKTS. U. S. Bonds $112,500 Loans and Discounts 100,000 Cash Reserve 87,500 ! ? 2oO,000 TjlAlllUTIUS. Capital $100,000 Deposits 00,000 Circulation 00,000 $250,000 To the same expenses as are borne by the city bank ( $5,000) ) must be added $900 for tax upon the circulation. A G per cent dividend would take $0,000 , as before. The bank's total income from loans and investments , therefore , must be $11,900 in order to make possible a 6 per cent dividend upon the capital stock. Now , the net return upon the $112,500 invested in government bonds , after providing for a sinking fund to liquidate the premium by the time the bonds mature , is only 2 % per cent. The net income on the $112,500 thus invested is therefore only $2,531.25. In order to make the total income up to $11,900 , the loans and discounts must produce $9- 8G8.75 which requires that they should be made at on average of about 9.4 per cent. In other words , those communities in which the note constitutes the predomi nant currency in the proportion suggest ed ( that is , distinctly rural communities ) are denied the use of their local credit in the form required by their business except at ruinously high rates of in terest. While the commercial com munities , properly left free to utilize their credit as they see fit , under similar circumstances find the interest rate tending toward 5.18 per cent and re ceive the benefit in the shape of oven lower rates , of every increased use of deposits by the community. The question is sometimes asked : "Why are the rates of interest so high as they are in portions of the west and south ? And why does not more bank ing capital go into those sections to take advantage of 8 per cent and 10 per cent rates of interest ? " The answer is easy. It is because more money can be made by a bank lending in an eastern city ( on $150,000 of deposits ) at 5.18 per cent than in lending in Arkansas ( on $60,000 deposits and $90,000 notes ) at any less rate than 9.37 per cent , Another aspect of the same subject which should appeal strongly to borrow ers in the west and south is seen when we look at the amount of loans offered to local borrowers. The city bank with $212,500 ( o invest is left free to loan the whole to local borrowers : while the country bank is compelled to withdraw , for investment in bonds , $112,500 , which might otherwise be loaned at home. In this way , by the operations of our present bond requirments , the capital available for loans is greatly restricted wherever the habits of the people re quire the use of notes instead of deposits. The result must necessarily be scarcity of credit accommodations and consequent quent high rates of interest. Again , the absolute necessity for a high rate of interest under the existing system in those sections whore notes are required is apparent from another standpoint. Wo may assume , in the first place , that banks will not be organ ized to do business and make loans in a rural locality unless they can get as good a rate of return upon capital as could be obtained by doing business in a city. Now , if a country bank is forced ( by the requirements of the law ) to invest , say , half of its resources in an invest ment bearing a rate of interest far be low the normal commercial rate ( as , for example , 2J < or 2j per cent ) it "stands to reason" that in order to make any given rate ( say 5 per cent ) upon the whole , the other half must be loaned
