§ 3 (to Chapter XII, § 2) Method of Calculating M'

The calculations for obtaining M', or individual deposits subject to check, are shown in the table on page 49.

The figures of column (2) are those of "Individual Deposits" taken from the annual reports of the Comptroller of the Currency (see Report for 1909, pp. 64-66). For the years 1896-1899 correction is made for deposits of trust companies and savings banks misclassified as individual deposits. Prior to 1900 many banks included such deposits of bankers as individual deposits. They should be deducted because such deposits in one bank by other banks are not generally used for commercial purchases, but for banking operations. These deposits, to be deducted from column (2), are given in column (3).

The figures in column (3) are estimates based on the fact that the deposits of savings banks and trust companies in national banks are (whenever comparison is possible, viz. 1900-1908) found to be approximately equal to the deposits of state banks in national banks. As the state bank figures are available for 1896-1899, they are taken in lieu of the missing trust and savings figures. Since the original edition of this book was printed, consultation with the Comptroller has convinced the writer that these corrections are too large and that it would have been better to have omitted them altogether. They are retained, however, in order not to necessitate numerous changes in the plates. Fortunately, as will be seen on page 492, the net error thus retained is very small.

After deducting the correction of column (3), our next step is to add the correction of column (4), the estimated deposits unreported.

The figures for nonreporting banks for 1900 and 1902-1909 are the official estimates of the Comptroller of the Currency. (Those for 1900 and 1902 are entered in the Comptroller's tables under the rubric "reporting capital only" instead of "nonreporting," but I am assured by the Comptroller's office that this is a distinction without a difference.) The figure for 1901 is interpolated between those of 1900 and 1902. The figure for 1896 is estimated by the aid of two assumptions. The first assumption is that the unreported deposits in that year should be larger relatively to all deposits than was the case in 1903, as the table shows that the farther back we go the larger is the percentage of missing deposits. This consideration indicates that the correction exceeds .28. The second assumption is that the correction should be less absolutely than in later years; because the total deposits were then much less than later; and because the official figures in column (4), viz. those for 1900 and 1902-1909 show, as we proceed backward in time, that there is a slight tendency for them to grow less in absolute amount. (The chief exception is for 1909, when the special investigation of April 28 reached an unusual degree of accuracy.) This consideration would make the correction less than .50. Therefore, between .28 and .50 we select .40 as a rough mean. The error involved is not likely to affect the final column more than 3 or 4 per cent. The corrections for 1897-1899 are interpolated.

Column (5) gives a correction to be subtracted, viz. the deposits in savings banks. These deposits, by the nature of the case, are not used as a circulating medium, but are nevertheless included in the official "individual deposits" of column (2). The item for 1909 as here given includes, besides the reported figures, an additional item of .20 (i.e. $200,000,000), being the savings accounts of the state banks of Illinois. The inclusion of this Illinois item is simply in order to make the figures for 1909 comparable with those of the preceding years in which the same item had always been included (see Comptroller's Report, 1909, pp. 43-44).

Column (6) contains another, though small, subtractive correction, viz. the "exchanges for clearing house." In general, these exchanges represent checks which have been deposited by the persons receiving them but which have not yet reached the home bank and been charged against the persons who drew them. Any one (except a sharper or a blunderer) will, as soon as he has drawn a check, deduct the amount of it (say $100) from his deposit balance and refrain from drawing against it again. Such a person—say Smith—regards the $100 as transferred to his drawee—say Jones—and no more Smith's than money would be which he had paid out. But it takes time before the bank on which Smith draws knows of this transfer of Smith's deposits to Jones. In the meantime the bank books still include this $100 among Smith's deposits. The total figure for deposits is not disturbed by the inclusion of the $100 in Smith's account provided it is not included in Jones's account also. But when Jones deposits the check in his bank, this (Jones's) bank adds $100 to Jones's account before Smith's bank can deduct it from Smith's account. That is, the $100 is temporarily counted as both Smith's and Jones's. If both sides of this transfer were recorded at the same time, there would be no double counting. But until the check reaches Smith's bank the only record of the deduction which should be made from Smith's account is in the "exchanges for clearing house" which, accordingly, we must deduct in our statistics.

These figures, however, have to be estimated. Only for April 28, 1909, are they given for all banks, the figures being those of the special Report of the Monetary Commission already referred to. Of this amount, four fifths are of national banks; and as national banks report annually their exchanges against clearing houses, we assume that the total each year is five fourths of that reported by the national banks (see Comptroller's Report, 1908, pp. 514-522). The whole correction is so small that any error in this assumed ratio is quite negligible in the final result.

Column (7) is derived by applying to column (2) the above mentioned corrections,—deduction of items in column (3), addition of those of column (4), deduction of column (5), and deduction of column (6).

But even yet we have not reached the desired item,—deposit currency, or deposits subject to check. The net individual deposits which we have estimated include, not only current accounts, but deposits on certificate and other deposits which are considered investments rather than media of exchange. The first published attempt to give the true deposits subject to check is that of the National Monetary Commission. In their valuable special Report as of April 28,1909, constructed through the Comptroller of the Currency, the checkable deposits are given as 6.94 billions.This 6.94 is subject to an addition for "nonreporting banks" and a deduction for "exchange against clearing house." The unreported deposits of all kinds are estimated for 1909 in the table at .39, of which, by proportion, only 6.94/14.01 of .39 or .19, is probably checkable. The .38 exchanges against clearing houses must be assumed to be almost wholly against deposits subject to check. The net corrected figure is therefore 6.94 + .19 - .38 or 6.75 billions as the checkable deposits in 1909. These constitute about 67 per cent of the "net individual deposits" of column (7).

This figure for checkable deposits in 1909 is found at the bottom of column (9) in the table. As it is only 67 per cent of the net individual deposits, and as it could not be assumed that the same ratio obtained for other years, I was unwilling to guess at the deposits subject to check for these other years without further light. Accordingly I wrote to Mr. A. Piatt Andrew, then Director of the Mint, and asked him whether, in his capacity as advisor to the Monetary Commission, he could not have a search made among the Comptroller's records for 1896 and a few other years in order to obtain the corresponding ratio for such years. Through his kindness and that of the Commission and Comptroller, in acceding to my request, it has been made possible to work out the corresponding ratio for 1896 as 85 per cent; for 1899 as 89 per cent; and for 1906 as 78 per cent.

Mr. Andrew gives 4.97 billions as the total (uncorrected) deposits of all banks as of July 14, 1896. This figure is slightly more complete than what I had already used from the Comptroller's Report (viz. 4.95), doubtless because, for this particular inquiry, a larger number of banks were included than had originally been used in the Comptroller's tables. Mr. Andrew gives the checkable deposits as 2.59 billions. This figure is subject to two corrections: one to account for unreporting banks, and one to account for exchanges for clearing house. We have estimated the deposits of nonreporting banks at .40; and, since Mr. Andrew has discovered in such banks .02 more total deposits (4.97) than the Comptroller reported, we must assume that there are .02 less unreported deposits in his figures than in the Comptroller's. This would make the estimated unreported deposits for Andrew's figures .38 instead of .40 which we assumed for the Comptroller's. The part of this ascribable to the deposits subject to check (2.59) is (2.59/4.97) × .38 or .20. This is the first (and additive) correction. The second (and subtractive) correction is the exchanges for clearing house, viz. .11. The final corrected figure is therefore 2.59 + .20 - .11 or 2.68. The ratio of this to the "net deposits" is 2.68/3.17 or 85 per cent.

For 1899, Andrew's figures for total net deposits are 4.38 and for checkable deposits 4.09. His figures for total deposits (7.07) are .30 completer than those of the Comptroller employed in the first column of the above table, and thus reduce the estimate for nonreporting banks applicable to Andrew's figures from .44 to .14, of which (4.09/7.07) × .14 or .08 are ascribable to the deposits subject to check. The correction consisting of exchanges for clearing house is .27. The figures for checkable deposits are therefore 4.09 + .08 - .27 or 3.90, which is 89 per cent of the "net deposits" (4.38).

For 1906 Andrew's figures for total net deposits are 8.75 and for checkable deposits, 6.90. His figures for total deposits (12.37) are less complete than those of the Comptroller, thus increasing the estimate for unreporting banks applicable to his figures from .41 to .61, of which (6.90/12.37) × .61 or .34 are ascribable to the deposits subject to check. The exchanges for clearing house were .40. The figures for checkable deposits are therefore 6.90 + .34 - .40 or 6.84, which is 78 per cent of the "net deposits" 8.75). We thus have figures for column (9) and column (8) for the years 1896, 1899, 1906, 1909.

If now, for intervening years, we interpolate evenly between these percentage figures for the years 1896, 1899, 1906, 1909, we shall have column (8) of the preceding table.

Column (9) may next be formed for the remaining years by applying the percentages in column (8) to the net individual deposits in column (7). Thus the table is made complete.

The results are of course subject to a probable error which, however, is believed to be only some 2 or 3 per cent for the years 1896, 1899, 1906, 1909, and perhaps double as much for years midway in the intervals between these four years.

It seems strange, since so much has been said of the relative importance of check and money circulation, that no attempt has previously been made to estimate or record the volume of the currency which circulates by check. This currency and its circulation are of many times the statistical importance of money and its circulation. Our wonder is the greater when we consider that "deposits subject to check" have been regularly reported by individual banks to the Comptroller of the Currency. The published figures began in the '60's to omit this category and lump all "individual deposits" together, and subsequent reports have simply followed the precedent thus established. The present Comptroller states that he intends, hereafter, to separate the item of deposits subject to check; so that we may hope from now on to have annual returns of the checkable deposits. We shall then know each year the magnitude of that item in our circulatory medium which, as we shall see, does nine tenths of the exchange work of the country.