activity reached record levels, commercial-bank loans, as shown in the following graph, comprised a smaller percentage of the gross national product than at any time during the depression and recession laden years of the 1930's.

It is therefore evident that commercial credit extended by banks has not risen to the extent of other factors in the Nation's economy. It may well be that the Nation's economic activities were adequately financed by retained earnings and depreciation accounts, equity financing, or resort to other credit facilities and that the low rate of commercial advancements indicated the existence of a surplus of CHART 6

BANK LOANS AND MONEY SUPPLY

AS PER CENT OF GROSS NATIONAL PRODUCT

capital readily available for sound and solvent borrowers. Or, as the Joint Committee on the Economic Report recently concluded:

The low level of business loans relative to the gross national product showed that large numbers of business firms had large unused lines of credit of A-1 quality which the banks would have been loath to dishonor.41

It is undoubtedly true that

* * * the great majority of capital expenditures by corporations in the postwar period were financed from undistributed earnings and accrued depreciation and depletion rather than by new borrowing.41 41 a

Nevertheless, the possibility that the failure of credit extension to expand over the long run-period at a rate comparable to other economic factors in the economy may have resulted in credit shortages should not be disregarded.

During the depression period the sharp contraction in credit outstanding accompanying the decline in the number of banks served to

accentuate the severity of the economic collapse. Between 1929 and 1933 loans and non-Government investments declined more than $21,000,000,000. Loans alone decreased more than 45 percent, while bank liquidations of loans and securities were about $6,000,000,000. more than the decline in deposit liabilities. According to authorities on the subject:

These changes in the condition of the banking system aggravated the process of business contraction by cutting off sources of credit to which the public had become accustomed, and so forcing liquidations."2

Between 1933 and 1937, bank holdings of loans and nongovernmental securities continued below the depressed levels of 1933. Meanwhile, gross private domestic investment increased some seven times, while currency outside banks and total deposits increased approximately $15,500,000,000.3 Thus, despite increased lending potential and excess reserves, borrowers were turning elsewhere for funds either through choice or necessity. By 1940 bank loans and holdings of nongovernmental securities were only 30 percent of bank earning assets compared to 43 percent a decade before.44

The military needs of World War II and the increase in the Nation's productive capacity was accompanied by an increase in the lending activities of banks. However, as of June 30, 1945, approximately 18 percent of commercial and industrial loans of insured commercial banks were supported by Government guaranties of one form or another, indicating expansion of credit during the war period was due in large part to Government priming of lending facilities.45

While lending activities of banks expanded rapidly during the postwar period, loans still failed to occupy as an important position in banking portfolios as in former years, their place being taken principally by investments in Government securities. Between 1914 and 1930, loans of all types constituted more than 70 percent of all commercial bank investments. Loans were only 43.1 percent of commercial bank investments in 1935 and 20.7 percent in 1945, reflecting a continuing decline in the percentage of loans to all investments during the period despite a rise in the total dollar volume of loans extended. By June of 1951, although the total dollar volume of loans of commercial banks exceeded 54.8 billion dollars and was higher than ever before in the Nation's history, the percentage of loans to total loans and investments in commercial bank portfolios was barely above the 1935 ratio of 43 percent.

Taking commercial loans alone, these holdings comprised about 52 percent of total loans and investments of member banks in 1921 but only 7.8 percent in 1945.6 The rise in percentage of commercial loans to all loans and investments of member banks to less than 22 percent during the mobilization year of 1951 still fell far short of previous attainments.

42 Copeland and Brill, Banking Assets and the Money Supply Since 1929, Federal Reserve Board (1948), p. 3. 43 Ibid.

46 Alhadeff, the Market Structure of Commercial Banking in the United States, LXV Quarterly Journal of Economics (February 1951), pp. 83-84.

TABLE XV.-Loans and investments at all commercial banks on selected dates 1

1 Data are as of end of June. For years prior to 1951, they are taken from a preliminary tabulation of a revised series of banking statistics.

2 Figures for various loan items for 1951 data are shown gross (i. e., before deduction of valuation reserves); they do not add to the total and are not entirely comparable with prior figures. Total loans continue to be shown net.

Prior to 1940, includes loans secured by collateral other than securities.
Source: Federal Reserve Board.

Not only has comparative lending activity of banks 'dropped, but loans have not been dispersed equally to all segments of the economy. A study prepared under the auspices of the Federal Reserve Board studying loans outstanding of member banks in the year of great industrial activity immediately following the cessation of hostilities of World War II disclosed that large companies during the period had been the greatest recipients of commercial loans from banking houses.47 According to figures of the Board, "Large concerns, that is those with total assets of 5 million dollars or more each, were responsible for the greatest part of the dollar volume of bank loans to commercial and industrial concerns outstanding near the year end 1946 * * * 48

Approximately 45 percent of the dollar volume of all business loans and two-thirds of the volume of term loans of member banks outstanding on November 20, 1946, had been placed with the largest corporations having total assets of $5,000,000 or more. This was a

47 "Since member banks account for a very large fraction of commercial bank activities of the country, the results of this study are representative of the business loans of the country as a whole." Thomas, Our Modern Banking and Monetary System, second ed. (1950), p. 165.

48 Business Loans of Member Banks, Federal Reserve Board (1947), p. 3.

substantial increase over the 30 percent of the dollar volume of all loans outstanding which had been awarded to the big borrowers with assets greater than $5,000,000 in the spring of 1942.49

Companies with assets under $5 million received altogether about 55 percent of the total dollar volume of credit outstanding on November 20, 1946. Although a sizable amount, this was probably less than had been previously extended to smaller business enterprises, for, according to studies of the National Bureau of Economic Research, between 70 to 80 percent of the total amount of bank credit granted to business in the year 1940 was received by concerns whose assets were less than $5 million.50

Although by total number of loans, a large percentage (90) had been placed in 1946 with small businesses with assets of less than $250,000, "In all probability the proportion of small borrowers to total business borrowers at banks was less than the proportion of small concerns to the total business population." 51

While these figures are not conclusive in showing a decline in credit extended to small-business enterprises during the immediate postwar expansion period, they are at least indicative of the possibility that credit was not as easily forthcoming for certain portions of the economy as it might have been. They are buttressed by later studies of the Reconstruction Finance Corporation pointing to certain difficulties encountered by smaller enterprises in obtaining necessary bank credit. In the latter half of 1948 and the early part of 1949, for example, when a temporary period of economic readjustment occurred in the economy, a sharp increase in the number of applications for RFC loans was noticeable. In the year 1949, the total amount of commitments by the Corporation exceeded that of 1948 by 55 percent due principally to the decline in participation in RFC loans by commercial lenders. As the Corporation concluded in its annual report:

A noticeable restriction of private credit developed, as was evidenced by an unusual increase in the number of loan applications submitted to all of the Corporation's loan agencies with increasing acceleration throughout the year. * * * These comparisons indicate the increase in the extent to which the Corporation was called upon to meet the financial requirements of business concerns which were unable to obtain credit through normal channels.51a

Again in 1950, the Reconstruction Finance Corporation reported that the expansion of economic activity during the fiscal year had not resulted in any decrease in the volume of applications for RFC loans, citing as one of the reasons, "An increasing tendency for commercial financial institutions to emphasize liquidity in their loan portfolios." The RFC indicated that commercial lenders had shown a greater propensity to avoid long-term loans and that "reports from the Corporation's agencies also have indicated that such institutions were somewhat more selective in the granting of short-term credits." 51b

A study of 300 selected loans, each under $300,000 in amount, made by the Reconstruction Finance Corporation during the years 1948 and 1949 to various business enterprises was also made in an

49 See Commercial and Industrial Loans at Member Banks, April 16-May 15, 1942, Federal Reserve Board (1912), D. 2.

Jacoby and Saulnier, op. cit., supra, note 44, p. 8.

51 Business Loans of Member Banks, Federal Reserve Board (1947), p. 4.

51a Reconstruction Finance Corporation and subsidiary, Annual Report and Financial Statements (June 30, 1949), pp. 6, 8.

51b Reconstruction Finance Corporation and subsidiary, Annual Report and Financial Statements (June 30, 1950), p. 9.

attempt to determine the reasons why such loans had been previously refused by commercial banks. According to the survey, 40 percent of the cases had been rejected principally because the maturity was too long 510 while "Unacceptable collateral, a shortage of lendable funds, restrictions on loans to an individual, and similar reasons pointing to a gap in the credit system added to another 32 per

cent

* * * 51d

Whether possible credit shortages may be in any way attributable to the concentration of financial resources in the banking system. should also be considered. Referring once more to the study prepared under the auspices of the Federal Reserve Board of member bank loans outstanding as of November 20, 1946, it was there disclosed that the largest banks, or those with deposits of $500,000,000 and over, accounted for the highest dollar volume of loans outstanding, while smaller banks made the largest number of loans. Three-fourths of the dollar volume of the large banks, however, went to large borrowers those big concerns whose assets were $5,000,000 and over— whereas only 5.1 percent of the dollar volume of loans from the large banks went to smaller enterprises whose assets were under $250,000. There was a direct correlation between the size of the borrower and the size of the lending bank, with big banks doing by far the preponderant share of their business with the largest borrowing units which accounted for only about 2 percent of the total number of loans extended. Of all classes of banks, those large banks with deposits of $500,000,000 or more had the least number of loans with small business, 52 next to the smallest dollar volume with small business, and the smallest percentage of dollar volume of all business loans with small business.

TABLE XVI.-Member bank loans to small businesses, Nov. 20, 1946, as a percentage of all business loans, by size of bank

Source: Business Loans of Member Banks, Federal Reserve Board (1947), p. 68.

Accordingly, it can readily be seen that if a shortage of bank credit existed during this period, it certainly was not relieved to any extent by the degree of concentration existing among banking units and the increase in the ranks of large banking houses. It is also evident that further study is necessary to determine if the degree of banking concentration might not have exercised a restrictive influence on the extension of bank credit, especially to smaller enterprise. The trend

51c See Senate Committee on Banking and Currency, hearings on Study of Reconstruction Finance Corporation, 82d Cong., 2d sess. (May 8, 1950), p. 18.

51d S. Rept. 1068, 82d Cong., 2d sess. (1952), p. 150.

52 Small business defined in terms of total assets as follows: Manufacturing and mining, under $750,000; wholesale trade, under $250,000; retail trade, public utilities, services, construction and other, under $50,000.