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THE PHILOSOPHY OF BANK CREDIT 51 insistent demands of borrowers for funds during a period of expansion,FREE BANKING BOOKS rising prices, and swollen profits, place the lending banker in an advantageous position to exact the maintenance of high balances in relation to loans. "You are straining your credit," says the banker to the credit-seeking customer, "and, with tight money staring us in the face, I shall have to ask you to keep a more liberal balance in relation to loans than previously, as a requisite to additional accommodation."{GOOGLEADS} A relatively high ratio of derivative deposits to loans is a part of the price that the borrower may have to pay for the use of funds during periods of expansion. We may, therefore, bring forward business FREE BANKING BOOKS PDF conditions and the state of trade,—the business cycleL —as among the numerous factors determining the ratio of derivative deposits to loans. In short, where loans are made mainly to merchants and manufacturers as distinct from farmers and livestock men, where the rate of interest charged to borrowers is low, where borrowers court the esteem and goodwill of their bankers against the time of financial need, where loans on collateral and mortgage security are of slender proportions,FREE BANKING BOOKS DOWNLOAD PDF where lines of credit do not run into large figures, where maturities are short and paper seldom renewed, where the peddler of commercial paper is rarely seen, where requirements as to balances are strict and well enforced even in dull times,—there the ratio of derivative deposits to loans will be high, if not indeed at a maximum. Reverse the conditions and you reverse the result. Under typical conditions in the United States, the ratio, as we have seen, does not exceed FREE BANKING STUDY MATERIALS 20 per cent.

BANK CREDIT Aggregate Derivative Deposits Tend to Remain Constant in BANKING BOOKS 2017-2018 Amount After a bank has struck its pace, so to speak, and its loans have begun to mature, aggregate derivative deposits tend to remain constant in amount. This is shown in diagram 2, which is a series of derivative deposits curves each similar to that contained in diagram 1. Here, as in diagram 1, time is measured along the horizontal axis and derivative deposits by the perpendicular distance above the line M N. Vertical axes erected at any two points between a and b would cut the BANKING STUDY MATERAILS derivative deposits curves in such a way that the sum of the vertical distances of the points of intersection above the M N line would be approximately equal in the two cases. Another and perhaps clearer way of saying the same thing is that if any given perpendicular axis, or vertical line, is moved from left to right or right to left between a and b along the time line M N, the vertical line will cut, at whatever point it may be, about the same number of derivative deposits curves EXAM PREPARATION & TUTORING —some going up, others going down—and at points approximately the same distance above the M N line. The perpendicular erected at c, a point of time, touches first a derivative deposits curve at a point so low as to indicate a derivative deposit balance of only about 3 per cent of the relative loan.FREE DOWNLOAD FOR PDF The next two points of intersection, as we follow the perpendicular upward, indicate a balance of approximately 5 per cent of the corresponding loan in each case; then one of 8 per cent, one of 10 per cent and one of 14 per cent; then 20 per cent, 25 per cent, 30 per cent, and 80{GOOGLEADS}

BANK CREDIT per cent; the average derivative deposit balance being 20 per cent. Whatever point of time is taken, the derivative deposits are substantially the same in amount. If the diagram were drawn with derivative deposit curves asymmetrical and representing loans of varying maturities, irregularity would tend to offset irregularity, and substantially the same result as stated above would be obtained, as such a diagram, if drawn by the reader, would plainly show.