Time-Deposit Inflation

August 11, 1958

The recent dramatic rise in the stock market has been hailed by many as a sign that the recession is over. But the rise has been quite disproportionate to the recovery in business. The Dow-Jones industrial average rose from 420 on Oct. 22 last year, and from 437 on Feb. 25 this year, to 505 on Aug. I, an overall increase of 20 percent.

The Federal Reserve index of industrial production, on the other hand, which stood at 142 last October, was only 130 in June of this year, a decline of about 8 percent. Unemployment was estimated at 2.5 million last October and is now estimated at about 5 million.

Well, it may be said, the stock market isn’t supposed to reflect actual conditions at the moment, but anticipated conditions; it is forecasting further recovery. But perhaps what the stock market really is reflecting is current credit inflation and the belief in a further shrinkage in the dollar.

The continued existence of inflation is plain enough not only from the rise in the stock market while unemployment is substantial and the level of output is down, but from the rise of both wholesale and retail prices in the face of this lower activity. The dollar has lost about 3 cents in purchasing power in the last twelve months. And it has done this because government (and Federal Reserve) policy has been increasing the number of dollars.

SWOLLEN MONEY SUPPLY

There are many economists and statisticians who contend that this has not occurred. The money supply, they argue, consists of demand bank deposits and currency outside of banks. The total of demand deposits, they point out, was $104.8 billion at the end of May 1957 and only $105.8 billion at the end of May this year. For the same period, currency outside of banks was $27.9 billion in 1957 and $27.8 billion in 1958. So for the twelve months the total money supply was almost unchanged.

This picture alters, however, as soon as we take account of time deposits. Between the end of May 1957 and the end of May this year, these increased by nearly $10 billion.

Here is where the expansion of bank credit—the inflation—has taken place. Since the end of 1951, demand deposits have increased only 8 percent and currency outside of banks only 5 percent, but time deposits have increased from $61.5 billion to $94.6 billion, or 54 percent. It is common to think of time deposits as “savings.” That is why their growth has been rather complacently regarded. But another interpretation may now be called for.

1958—AND 1928

There is a striking parallel between the present situation and that exactly 30 years ago. In June of 1928 Benjamin M. Anderson analyzed the situation in two bulletins for the Chase National Bank. “Since July of 1927,” he wrote, “there has been an immense expansion of bank credit flowing into the securities market. . . . The most conspicuous effect of cheap money and bank expansion has been in the speculative rise in the prices of securities and real estate, but this rise has in itself had a very marked effect upon the volume of consumer demand.” He went on to show how the Federal Reserve authorities, by lowering the rediscount rate and by other means, had brought about an expansion of bank credit which had taken the form primarily of increased time deposits. In the seven years ending in April 1928, whereas the net demand deposits of the reporting banks of the Federal Reserve System had increased 34 percent, their time deposits had increased 135 percent.

“The fact,” he continued, “that an immense expansion of bank credit has taken place, unneeded by commerce and industry, has made it inevitable that a high percentage of this increase would take the form of time deposits rather than demand deposits. . . . The greater part of time deposits in great cities” are not true savings deposits but “represent the temporarily idle funds of business corporations. . . . Most of the growth of the time deposits . . . is a product of bank expansion rather than of savings.”

All this applies to the present situation. Bank credit has expanded. Out-of-line wage rates have not been adjusted. So we have a booming market with continued unemployment.