Banking: Money Makes Money

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Banks are usually good mirrors of prosperity, but the $312 billion U.S. banking industry is sharing in the current economic advance to a degree that surprises even it. Bankers, in fact, are making more money than ever before. Last week alltime high first-half earnings were reported by several banks, including the two largest ones, San Francisco's Bank of America and New York's Chase Manhattan. Despite their rising operating costs and the higher interest payments they are forced to pay to remain competitive, the nation's major banks earned 9% more in 1964's first half than in the first half of 1963.

Many Happy Returns. The prime reason for the rise is that U.S. businessmen and consumers are clamoring to borrow more. Outstanding loans of U.S. commercial banks jumped from $150 billion to $157 billion in this year's first five months, and they are still climbing sharply. Much of the gain came in the kind of loans that bankers like most of all—consumer installment loans, which give them interest yields of 12% or more. The banks' consumer installment credit has increased by 13% in the past year, to $22 billion. At the same time, the amount of real estate loans, which yield more than 5%, has risen from $34 billion to $39 billion.

The bankers have also been earning more from the $59 billion that they have tied up in Government securities. Thanks to Washington's policies of firming up interest rates to prevent investment capital from flowing to foreign countries, the yields on U.S. securities have risen about 1/2 of 1% in the past year — to 3½ for short-term Treasury bills, and to 4% or more for longer-term issues. To further increase their income, the bankers have been switching increasingly from Government securities to municipal bonds, which are taxexempt. In the past year, they have boosted such investments by 23% , to nearly $23 billion.

More Powers. Prudence is a way of life for the bankers, and they would be the last to claim that their fortunes can continue to rise indefinitely.*Some bankers complain that interest payments on deposits are too generous and inflexible, while others, including Federal Reserve Chairman William McChesney Martin, worry that the bankers have taken on too many chancy construction loans. On the other hand, the fact that the bankers have lent out so much reduces the prospect of economic excess. Because the banks have only a small supply of liquid funds, the Federal Reserve now has greater power to tighten up on credit should strong signs of inflation appear.