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56. Trace the course of the earnings and expenses of all member banks from the first year (1919) for which such data are available to the present time. Cover especially the following points: (a) the gross amounts of earnings and expenses and of current net earnings and net profits; (b) the ratios of current net earnings and of net profits to total capital accounts; (c) changes in the relative importance of different sources of earnings, especially (i) loans, (ii) investments other than United States securities, (iii) United States securities, and (iv) service charges distinguish as far as possible between current earnings and profits and losses on sales or disposition of securities; (d) changes in the relative importance of different categories of expenses, especially (i) wages and salaries, (ii) interest on time deposits and borrowed money, (iii) taxes, and (iv) deposit insurance assessments-this may be estimated if this item was not shown separately in bank earnings reports.

Variations in the earnings and expenses of member banks during the past three decades have reflected both the general economic fluctuations during the period and the adaptations of the banking system to changing financial needs, markets, and laws.

The interactions of these forces resulted in wide variations in profitability over these decades as well as fundamental changes in the sources of earnings and expenses. A persistent downward drift in the level of interest rates resulted in pressure on bank earnings that was offset only by the tremendous expansion of earning assets, new sources of earnings, and a reduction in interest paid on deposits. Earnings on loans represented the most important source of earnings throughout most of the period, but varied in importance between 65 and 28 percent of total earnings. As a result of the methods used to finance the huge expenditures of World War II, Government securities became the most important source of bank earnings for a number of years prior to 1947. Throughout the entire period the return per annum on capital accounts for all active member banks, as shown in Table XXVI, varied between average profits of 10.9 percent and average losses of 7.3 percent.96

In the following discussion the important developments and changes in bank earnings are described by periods having broadly consistent economic characteristics: the prosperous twenties, the general depression and recovery in the thirties, and the war and postwar periods of the forties. Charts 22 and 23 (and the accompanying Tables XXIVXXVI) indicate in greater detail the extent and nature of the changes for the entire period. The figures used throughout are averages for all active member banks; in each year earnings and profits of individual banks varied widely from these averages. With the exception of a few references to differences by region or by class of bank, this analysis is concerned only with data for all member banks.

The prosperous twenties, 1919-29.-Aggregate earnings of member banks in the twenties reflect a period of general prosperity, except for agriculture, characterized by moderate fluctuations in business activity. Analysis of the course of earnings and expenses starts appropriately

Capital accounts comprise capital stock, surplus, undivided profits, and capital reserves, as shown in reports of condition. The ratios do not reflect losses sustained by banks placed in receivership.

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Current earnings do not include recoveries, profits on securities sold, etc., except that prior
to 1927 profits on securities sold are included in "other earnings". Beginning in 1942,
"service charges and fees on loans", formerly included in "other earnings", are included in
earnings on loans. Current expenses do not include losses, charge-offs, etc.; beginning in
1942, they exclude taxes on net income but include recurring depreciation,

1920

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1950

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1935

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1945

1920

1925

1920 1925 1930 1950 1930 1935 1940 Prior to 1927 profits on securities sold are included in "other earnings". Beginning in 1942, current expenses exclude taxes on net income but include recurring depreciation.

1945

1950

Note. Net current earnings are total earnings from current operations less current operating expenses. Net profits are net current earnings plus recoveries, profits on securities, etc., and less losses, charge-offs, and taxes on net income. Capital accounts consist of all forms of capital including capital notes and debentures, surplus, undivided profits, and reserves for contingencies. Capital account figures used for ratios are averages of call report figures during year.

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with 1919, the first year after World War I, although during the period 1919-21 economic developments were dominated by postwar readjustments.

Earnings on loans in 1919 accounted for about 65 percent of all earnings of member banks, and United States Government and other securities accounted for only about 12 and 10 percent, respectively. The largest item of expense was interest paid on deposits, which amounted to 29 percent of total earnings. Salary and wage payments used only about 16 percent of total earnings. In that year net profits of member banks totaled 351 million dollars, a return of 10.4 percent on total capital accounts.

The sharp decline in security and commodity prices during 1920 and 1921 was reflected in large losses on loans and securities and in a decline in bank earnings. Net profits of member banks declined to 293 million dollars in 1921, and the return on total capital declined to 7.1 percent.

By 1923 an upward trend in both earnings and expenses was under way that continued almost without interruption until 1929. This trend, however, was not immediately reflected in all regions, as the agricultural depression of this period greatly reduced the earnings and profits of banks in certain areas and many banks in agricultural regions failed.

Earnings on loans continued to account for the largest part of the dollar increase in the earnings of all member banks during the latter part of the twenties and reflected both a larger volume of loans and portfolio shifts toward higher yielding loans. Loans on securities, which were only about 26 percent of total loans in 1922, rose to 39 percent in 1929, and real estate loans which were 8 percent of total loans in 1922 amounted to 12 percent in 1929. Although the volume of other loans (primarily business loans) remained practically unchanged during this period, they declined as a proportion of total loans from 65 to 49 percent.

The increase during the twenties in the amount earned on securities reflected primarily the increase in holdings of securities other than United States Government. Bank earnings from United States Government securities remained practically unchanged.

Expansion of the functions of commercial banks during this period also contributed to the increase in earnings. Earnings from miscellaneous sources increased from 10 percent of total earnings in 1919 to 15 percent in 1929. Although a breakdown of this item is not available, a number of banking changes contributed to the increase; among these were the development of trust departments, investment affiliates, and foreign branch facilities, and increases in service charges.

The increase in total expenses during the twenties was accompanied by a number of changes in the relative importance of various types of expenses. Salaries and wages, which were only about 16 percent of total earnings in 1919, were 19 percent in 1929, and interest on deposits (both demand and time) increased during the same period from 29 to 32 percent. The increased importance of this expense item reflected the intensity of the competition for deposits and the relatively larger increase in time deposits than in demand deposits. Expansion in total earnings and favorable developments in noncurrent items, particularly profits on securities sold, resulted in a

steady increase in net profits during the latter part of the twenties. Net profits of all member banks increased from 337 million dollars in 1923 to 557 million in 1929. A similar rate of growth in capital, however, kept this increase from being reflected in a higher rate of return on bank capital; the ratio of net profits to total capital accounts during this period ranged between 8 and 9 percent.

General depression and banking crisis in the early thirties, 1930-34.-The break in stock and bond prices and the cumulative business contraction affected adversely the bank earnings picture during this period. Although net current earnings declined sharply from the peak in 1929, bank profits were affected principally by chargeoffs necessitated by actual or expected losses. Annual losses and charge-offs during 1931-34 averaged over 50 percent of total earnings and reached 70 percent of earnings in 1933 and 1934. Even these figures do not adequately reflect the extent of the losses during this period, as many banks suspended and the losses of these banks were not included in official statistics.

Violent readjustments during this period were also reflected in the general pattern of bank earnings and expenses. Earnings on loans, which had accounted for 65 percent of total earnings in 1929, declined to 43 percent in 1934. This reflected both a large decrease in the volume of loans of all types and a decline in the rates of interest received. Dollar earnings on securities remained practically unchanged throughout the period but, as a result of the sharp decline in earnings on loans, they increased in relative importance from 20 percent of total earnings in 1929 to 38 percent in 1934. Bank holdings of United States Government securities more than doubled and represented about 27 percent of total assets in 1934 as compared to 8 percent in 1929. The decline in interest rates and a slight decline in holdings of other securities offset the effects of the increase in holdings of Government securities on earnings.

As a result of a decline in the rates paid on time deposits, and the statutory prohibition of the payment of interest on demand deposits provided in the Banking Act of 1933, interest paid on deposits was only 20 percent of total earnings in 1934 compared with 32 percent in 1929. Salaries and wages declined sharply in total dollar amount during this recession period, as banks were closed and as the size of bank staffs was contracted in line with the reduced volume of banking activity and general operating economies. Nevertheless, wages and salaries became the principal item of expense and were 26 percent of total earnings in 1934 in contrast to 19 percent in 1929. The proportion of current earnings used for taxes remained at about 5 percent throughout this period.

Halting economic recovery prior to World War II, 1935-41.-When banks again reported net profits in 1935, they were operating under greatly changed conditions. Funds available for the expansion of earning assets were large and growing in volume as a result of a heavy inflow of gold from abroad not offset by credit and monetary operations. These funds, however, were not utilized as fully as in predepression years because of the steadily declining level of market interest rates and the dearth of attractive loan and investment opportunities at attractive yields. The result was a sustained member bank position of large excess cash reserves.

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