unusually large number of cattle during the last half of the year as a result of the drought. The other decreases noted were largely the result of corrections occasioned by the sharp increases in 1933.

COST OF LIVING

The cost-of-living index of the National Industrial Conference Board advanced from 77.3 percent of the 1923 average in December 1933 to 80.8 in December 1934. This rise was occasioned by the upward trend in the cost of food and housing, which increased 9.3 and 6.4 percent, respectively. The cost of sundries rose slightly while the cost of clothing declined fractionally, and that of fuel and light was unchanged. Of the two fuel and lighting items, the cost of coal increased slightly during the year and that of gas and electricity declined 2 percent.

Retail food prices, according to the Bureau of Labor Statistics' index, which is the food series used in the cost of living index discussed above, reached a high for the year in September. During the year the prices of 5 of the 6 group components increased, and one, fruits and vegetables, declined. The increases from January 2, 1934, to January 2, 1935, varied from 6.1 percent for cereals to 23 percent for meats and eggs. Miscellaneous foods increased 12.8 percent and dairy products 14.6 percent. Fruits and vegetables declined 13.8 percent.

FARM PRICES

The general level of prices received by farmers, as reported by the Department of Agriculture, increased from 77 percent of the 1909-14 average in January 1934 to 107 percent of that base in January 1935. Of the 47 commodities included in this series only 4 were priced lower in January 1935 than in January 1934, namely, potatoes, wool, citrous fruit, and cabbage. Prices received by farmers increased considerably more than did the prices paid by farmers during the year. The index of prices received increased from 77 percent to 107 percent of the 1909-14 averages and the index of prices paid from 117 percent to 126 percent of that base. Thus, the ratio of prices received by farmers to prices paid increased from 66 to 85 percent of their pre-war parity during 1934.

FACTORS INFLUENCING THE PRICE MOVEMENTS

The rise of the prices of farm products and foods during 1934 is largely attributable to the severe drought which sharply curtailed the supply of agricultural crops and livestock, as is told in greater detail in the section on agriculture. The restrictive program of the A. A. A., including the marketing agreements covering agricultural products, has also played a part in this price rise. The N. R. A. code policy with its price controls and restrictions on output, together with the increased costs of production that were part of the N. R. A. policy, contributed to the rise in the prices of finished products.

The expenditures and loans of the Federal Government for relief and recovery purposes undoubtedly operated to increase or maintain prices during the year. The marked increase in Government expenditures, which began in the summer of 1933, was a factor in

the price rise of the latter half of that year, but as compared with the last six months of 1933 the average monthly expenditures for 1934, exclusive of public debt retirements, showed an increase of $197,297,000, or 46 percent. Purchasing power is not increased, of course, as a result of transfer by the Government of funds from one group to another through taxation and expenditure, but such transfers may alter the effectiveness of the Nation's buying power in the different markets. Insofar as the funds expended by the Government arise out of credit extended at banks, which would otherwise not have been extended, a net addition to the money flow of national income necessarily results. Credit extension through banks has been the major source of Government funds for the expenditure for relief and recovery.

FINANCE

BANKING AND CREDIT

In contrast to the year 1933, in which the collapse and reestablishment of commercial banking produced events both tragic and dramatic, the year 1934 has been characterized by the more prosaic activities of reconstructing and strengthening the banking structure and by continued efforts to expand bank credit.

The program of reopening closed banks and strengthening the stronger institutions while liquidating the weaker ones was carried forward in 1934. As a result of the steps taken in 1933 and the improving business and price trend, bank suspensions during 1934 were fewer than in any year since 1920. During the year, 56 licensed banks, with deposits of $37,000,000 suspended operations and 920 banks which had not been licensed to operate on an unrestricted basis, with deposits of $647,000,000, were placed in liquidation or receivership. Unlicensed banks, other than mutual savings banks, were reduced from 1,769 at the end of 1933 to 190 at the end of 1934. Through reorganization and consolidation and subscription of new capital by the Reconstruction Finance Corporation and private interests, the capital structures of many banks were repaired and doubtful assets were written off. The Reconstruction Finance Corporation alone increased its holdings of preferred stocks and capital notes and debentures of banks by over $600,000,000 during the year. The liquidity of the banks was also improved as a byproduct of the extensive mortgage refinancing program carried on during the year. The effects of this program were to permit banks and other financial agencies to replace real estate mortgages with Government-guaranteed bonds with a ready market.

The deposit insurance system, which became effective on January 1, 1934, lessened the threat of wholesale withdrawals of deposits. The temporary system covering deposits up to $2,500, which was to be replaced by a permanent system on July 1, 1934, was extended to July 1, 1935, and the insurance was increased to cover deposits up to $5,000. On October 1, 1934, $15,647,000,000 of deposits in banks other than mutual savings banks were fully insured, representing over 43 percent of the deposits of insured banks. However, 49,726,000 accounts, or over 98 percent of the total number, were fully insured.

The volume and character of member bank earning assets at the end of 1934 are shown in chart 5 in comparison with similar data for earlier years. Total earning assets rose $2,874,000,000, or about 11 percent, in 1934, mainly as a result of increased purchases of Government securities during the year. Government securities held by member banks, amounting to $9,895,000,000 at the end of 1934, were 28 percent above 1933 and two and one-half times the volume held by member banks at the end of 1929. Whereas only 11 percent of the earning assets of member banks were represented by Govern

ment securities at the end of 1929, this percentage had risen to 35 percent by the end of 1934. The portion of the gross debt of the Government held by these banks rose from 24 percent in 1929 to 35 percent in 1934.

Member bank loans declined still further in 1934. Total loans, which amounted to $26,150,000,000 at the end of 1929, were reduced to $12,834,000,000 by the end of 1933, and to $12,001,000,000 by the end of 1934. Of the $833,000,000 decline in loans in 1934, $581,000,000, or about 70 percent, were security loans. Total loans accounted for 42 percent of total earning assets at the end of 1934, as compared with 73 percent at the end of 1929, while security loans accounted for 15 percent and 29 percent, respectively, for the same dates. Although real estate loans of member banks have declined

Chart 5.-The volume and character of member bank earning assets (Federal Reserve Board).

$920,000,000 since the end of 1929, this class of loans accounted for 8 percent of total earning assets at the end of 1934 as compared with 8.9 percent at the end of 1929 and 9.3 percent at the close of 1930.

Net demand deposits of member banks increased $4,200,000,000 or about 29 percent, during 1934. This gain is traceable largely to the increase in earning assets noted above and to a net inflow of gold amounting to $1,134,000,000 for the year. The purchase of Government securities by banks created deposits to the credit of the Government, which were transferred to private accounts through the disbursements of the Government for relief and other purposes. Gold imports, however, increased deposits without a corresponding increase

of earning assets. A part of the increase in deposits was used to pay bank indebtedness, thus contributing to the decline in loans, but a large portion remained as a net increase in potential purchasing

power.

The increase in bank deposits during the year should not be interpreted as a measure of the gain in effective purchasing power since it was neutralized by a continuation of the decline in the turnover of deposits. The extremely low velocity of deposits during the last 3 years as compared with earlier years is shown in chart 6. Given an increase in deposit velocity to something like its predepres

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Chart 6.-Rate of turnover of demand deposits in principal cities (Federal Reserve Bank of New York index adjusted for seasonal variation).

sion level, the present volume of deposits could furnish the means of payment to finance a very large increase in business activity.

Despite increased reserve requirements of member banks as a result of increasing deposits during the year, reserves in excess of legal requirements continued to rise throughout most of the year. From an average of $766,000,000 for December 1933, the figure rose to $1,900,000,000 in August and stood at about $1,800,000,000 at the end of the year. Aside from the continued inflow of gold, the most important factor contributing to this increase was the reduction in Treasury cash and deposits with the Federal Reserve banks. The continued presence of idle reserves reflects not only the special forces tending to augment reserves, but also the inability and unwillingness of the business community to borrow at the banks.