Because a very large proportion of deposit liabilities are created by the method of loans and discounts, and because receipts of cash deposits ease the bank's position and incline it to extend loans to an amount about equal to the cash received, deposit liabilities tend to increase and decrease pari passu with loans and discounts over a period of time. Temporary conditions may obtain in which deposits of any one bank or group of banks may expand faster than loans, or loans may even be decreasing. Instance the New York Clearing House banks the first week of April, 1917, when loans contracted nearly $40 million while deposits expanded over $86 million; the contraction largely reflected the withdrawal of funds from the time market in anticipation of the Victory Loan, and the expansion of deposits represented the flow of funds from interior banks to New York for investment in the call market. During 1915-1916-1917, before the United States entered the war, the heavy importations of gold from abroad created such an easy money market that bankers found real difficulty in loaning funds as fast as they came from depositors. On the other hand, loans may increase faster than deposits, and then the money market will tighten.

The history of the ratio of loans to deposits in the New York Clearing House banks is shown by Figure 1. It will be noted that at times of crises the ratio of loans to deposits runs high (instance the autumns of 1904 and 1907, the midsummer of 1914, and the latter part of 1917) and then falls precipitately as contraction develops.

Figure 1. Graphic Chart Showing Ratio of Loans to Deposits of New York Clearing House Banks

Brookmire Curves Used In This Chart