Frederick R Macaulay.

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REPRINT FROM MOODY'S MAGAZINE



BANK CLEAHINCIS AND SFXURITV PRICES

Bv Fred Tt. Macahlay, M. A.



I.

WERE I asked to name the half-
dozen most important eco-
nomic I'actors for an in-
vestor or speculator in American se-
curities to carefully watch, I should
include among them bank clearings.
Considering that both the speculator
and the wise investor are more inter-
ested in the future than the present,
such advice would undoubtedly be
held by most financial writers to be
slightly unsound. The Commercial
and Financial Chronicle of New York,
for example, has remarked a number
of times that, though clearings are
of great interest as showing, better
perhaps than any other single class
of statistics, the pro^ent condition of
business, they are almost valueless
as a means of forecasting the future.
A Boston market letter writer who
has come into print quite often re-
cently and who, partly because he is
almost entirely eclectic, well repre-
sents his class, thus speaks of clear-
ing statistics: —

"Some people make the mistake of
assuming that by studying clearing
house statistics one can easily fore-
cast business conditions. A study of
these statistics is an aid in forecast-
ing business conditions and therefore
is one of the factors used in making
such a forecast, but taken by them-
selves they are of little value, as
they refer only to present-day condi-
tions." ^

The above writer never discusses
New York clearings separately (i.e.,
other than as contained in the totals
for the United States), let alone ana-



lyzing the excess of New York over
the rest of the country. When ana-
lyzed as practically all financial writ-
ers analyze them, clearings are al-
most valueless as a guide to the fu-
ture, but, when correctly analyzed, I
believe them to be of paramount im-
portance and that they should be
watched by the careful speculator
only less closely than such factors as
the condition of the New York Asso-
ciated Banks and the reports of the
Comptroller of the Currency.

In this article I shall first point out
the methods of treatment of clearing
house statistics at present used by
financial writers, and then place be-
fore the reader a new" method of
treatment which is, at least, not un-
meaning and impotent in the face of
the facts.

In examining the methods oi' treat-
ment at present in use, let us con-
sider :

1. What figures are selected for
discussion.

2. With what are such figures
compared ?

What Fig-ures Are Selected for Discussion ?
The Commercial a n d Financial
Chronicle, which makes quite a spe-
cialty of clearing statistics, makes
weekly reports of the week's clear-
ings for the whole of the United
States, for the country outside of
New York, for New York, and for
each other important city in the
United States individually. Once a
year this magazine publishes an edi-
torial entitled "Clearings and Specu-
lation in the Preceding Year." Here
we find quotations as follows: —



* R. W. Babson — "Business Barometers for Forecasting Conditjions" — page 210.



346067



V'



A-



2 /A .* :-•*: ;.'.• '..'. '-. :,,' :\ -MOODY'S MAGAZINE



Yearly — New York; outside New
York ; total United States ; a number
of leading cities.

Quarterly — New York ; total
"Other Middle"; total New England;
total Middle Western; total Pacific;
total "Other Western"; total South-
ern ; total all ; outside New York.

Monthly— Total United States;
outside New York.

The first point I wish to draw at-
tention to is that, in discussing such
a rapidly fluctuating factor as bank
clearings, statements of yearly totals
are valueless and statements of quar-
terly totals of but little significance;
we must get down to the month or
week to attain anything like an ideal
unit.- This is not done in this analy-
tical article, and any references, in
the week to week notices, are hardly
ever more than a mere verbal resume
of the figures themselves.

Secondly, quotations are not given
for New York minus the rest of the
country in this or any other financial
paper that I have ever seen. As I
shall attempt to show later, the quo-
tation for "New York minu>i tJie rest
of the count)]],'" though it be but a
mathematical abstraction, is the one
important feature to notice. Without
it, the whole subject is but an inex-
plicable hodge-podge of figures. A
glance at the chart annexed to this
article will show the regularity with
which the clearings for the country
outside of New York (E) increase'-
from year to year, and the wild ec-
centricity of New York's clearings
(D). This eccentricity is apparent
to the most casual observer, and calls
for some explanation. In a correct



explanation lies the solution of the
whole problem. The Commercial ayid
Financial Chronicle (and I refer to it
as an example of the best financial
journalism of the country) has all
along assumed that the eccentricities
of New Yoi'k's clearings were caused
by some uoti -significant factor which
should be carefully eliminated if the
figures were to mean anything. Some
years ago it formulated the theory
that these vagaries of New York's
clearings were caused by stock ex-
change transactions and that if we
were to subtract tivice the "actual"
value of the shares traded in on the
New York Stock Exchange (B) from
the New York clearings total (D),
we would get the "normal business"
clearings for New York and a result
worth while examining. This factor
of 2 was used in 1885^, 1886"', and
1887'=; in 1888" the factor was
changed to 21/2 and remained so until
1892 (inception of the New York
Stock Exchange Clearing House)
when the whole system was aban-
doned.^

During all this period the out-
spoken attitude of the Chronicle was
that the fluctuating factor equalled
twice (later 2Y> times)'' the actual
value of the shares traded in on the
New York Stock Exchange and was
of almost no significance, merely fog-
ging the result'" — that the non-fluc-
tuating factor which remained after
the fluctuating one had been sub-
tracted from the New York total,
though of no particular significance,
was rather interesting as showing
New York's "normal business" clear-
ings.



^ Could Moody's MAfiAziNK imlilish
3 C. & F. Chron. \'ol. XC. p. so.
* C. & F. Chron. \'.>1. XT.. ,,. 7(i.
■'■ C. & F. Chron. \ol. Xl.ll. ].. .T
« C. & F. Chron. \ol. WA\\ p. :
■ r. & F. Chron. \'
method," the Cltroiiicle still clung to
the "stock sales' theory, though real-
izing that its practical application
was gone". An examination of the
two curves (stock sales — B — and
New York's Clearings — D — ) soon
reveals the fact that, though there
are many surface similarities, the
contours are essentially different. '-
This is entirely aside from a consid-
eration of the true significance of the
peculiar irregularities of New York's
curve.

We thus see that the figures studied
are Total United Statei^ (which is an
hermaphroditic sort of a combination
of New York and the rest of the
country), The Rest (which is of an
extremely steady and unfluctuating
character and moves, when it does
move, after nearly all other factors),
and Neic Yoik — when they can elim-
inate the fluctuating factor ! As my
object in writing this article is to at-
tempt to show that in this fluctuat-
ing factor we find the solution of the
whole problem, the above methods of
treatment naturally do not greatly
appeal to me. Let us now examine :
"With What Are Such Figures Compared?

There are four comparisons that
have been used by diff'erent writers.
They are : —

1. With the immediately preceding-
month.

A mere glance at the chart shows
this comparison to be almost mean-
ingless. It takes no account of nor-
mal growth or of the great "waves"
on w^hich the monthly variations are
often but as ripples and foam.
Through the influences of seasonal or

" In AiJiil. IIMII, fur L-xaniplc. 2 >j linus tin- acUial v;
total of Ntw York's clearings. This woiilil give New \
The stock clearing house iloes not now ])ul)lish statistics.

'- In only !) months (Sept., 1903, to June, 1004) the ratio of the ".Vetual \alue" to tile .\e\v York
clearings dropiK-d from about 10 per cent to about « per cent: the ratio of the actual to the Xcw York
excess dropped from about 7T per cent to about -.^3 per cent. While the one was increasing tlie other
was decreasing. (.See chart.)



other temporary factors, the monthly
variation may run absolutely counter
to the great movement in progress.
None but the most ignorant journal-
ists now rely upon such a method.

2. With the same calendar month
in the preceding year.

This is the common comparison in
use by nearly all financial writel's. It
is better than number one, but is
open to many objections. It does not
show at what stage in a movement
we pre, because there is no possible
comparison with what would be nor-
mal figures but only with last year's
figures, which are probably normal
neither for last year nor this year.
The method is an incomplete attempt
to eliminate seasonal variations in
the use of number one, and this
brings us to

3. With a ten or twenty year aver-
age for the same calendar month.

This is an atternpt to eliminate
seasonal variations and in so far it is
rather good. However, a mere glance
at the chart and at the Te7i Year Au-
erages will convince anyone that sea-
sonal variations in clearings, though
facts, are negligible when compared
with the variations which occur in
great waves covering from two to
five or six years. Moreover, the
growth element is, in this method,
again entirely unconsidered. In TJie
Rest this growth element is the great
and ever persistent factor, to neglect
which, is to be absolutely at sea in an
attempt to interpret results.

4. With the immediately preceding
month, attempting to eliminate sea-
sonal variations by quoting both
months in percentages of a ten-year
average for corresponding months.

This method has all the merits of,



ue of the stock sail
rk a "'normal busine



iiuallrd more than the
of less than nothingl



MOODY'S MAGAZINE



and but few defects not inherent in,
either "two" or "three." However, it
absolutely neglects the element of
growth, and, like the other methods,
often fails to watch the great two and
three-year movements. I consider
these movements so overwhelmingly
important that all the consideration
I give seasonal variations is to keep
a ten-year average chart at hand by
which to roughly check up whether
the year's clearings are running in a
normal or an abnormal fashion from
the standpoint of seasonal vari .tions.
Moreover, when we remember that
both the supply of, and the rates on,
money, also run through a seasonal
variation, we begin to see why it is
perhaps even better to have the clear-
ings figure in their bare and un-
doctored shape than in percentages
of a ten-year average. The ten-year
average is a good servant but a bad
master.

II.
Without further discussion of the
methods of treatment of others, I
shall now attempt to explain and
demonstrate a new theory of my own.
First of all, a few words as to the
chart accompanying this article. All
quotations are monthly, the vertical
black lines representing January.
The Ten-Year Averages for New
York and The Rest are charted from
the lower base. The Teii-Yeai- Aver-
uijei^ for New York minus The Rest
are charted from the upper base.
The Ihie^^ x, 2.r, 3.ra, ?>xh, and 6.r are
such that their ordinates are in the
ratio of their numerical coefficients.
The line 3xb is, as can be plainly
seen, an excellent "fit" — the actual
curve as checked up by least squares
and areas is so close to this straight
line that I considered it better to keep
to the straight line than make the
chart too difficult for readers to con-
tinue — the curve E crosses this
straight line 58 times, there are 90



points above and 117 points below —
the true curve runs a very little
; bove at each end and below in the
middle of the straight line. The dot
inside a circle placed on the line 2x in
1896 represents a point such that
from that point to the present month
the areas of the curve A above the
line 2x exactly equal the areas below.
Asterisks above the curve A corre-
spond to asterisks on the curve C.
All points on the Twenty Rail curve
C are true maxima and minima — that
is, between any two consecutive
points no quotation higher than the
one or lower than the other occurs.
I begin the chart with 1894 to be be-
yond both 1892, when stock clearing
began and 189.3, the year of the panic.
My method is to study: (a) the fig-
ures in their relation to "growth
9xes"' — (the strright lines), (b) The
figures in their relation to each other
— (New York to The Rest) . (c) The
artificial figures for "New York
minus The Rest" in their relation to
a range between zero (the upper
base) and the growth axis for The
Rest. (3xa.)

In the first place I base all growth
axes on the line 3xb. I have already
remarked on the peculiar manner in
which the clearings outside New
York increase steadily from year to
year with comparatively slight fluc-
tuations and these generally of a
clearly seasonal nature. When, there-
fore. New York (D) passes the line
6x or the Excess (A) passes the line
3xa, New York is clearing roughly
more than twice what the-rest of the
country is clearing. I have already
pointed out that the line 2x is about
the normal for the Excess of New
York over The Rest, or in other
words. New York normally clears
nearly one and two-thirds times as
much as The Rest. One great advan-
tage of thus studying New York mi-
nus The Rest (A) is that we have a



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BANK CLEARINGS AND SECURITY PRICES



base below which tlie figures tlo not
go, hill irliicli tlii'ii sometimes ap-
proach, whereas in studying New
York, without The Rest as such a
base we cannot judge of the depth of
a decline with any degree of ac-
curacy.

New York's clearings may be ex-
haustively divided into three parts :

1. Clearings originating in trans-
actions outside New York.

2. Clearings originating in com-
mercial transactions within New-
York.

3. Clearings originating in non-
commercial (or "financial") transac-
tions within New York.

The fact that, in periods when New
York's financial or non-commercial
transactions are know^n to be almost
at a standstill, the city clears, a little
more than the whole of the rest of
the country, gives a valuable hint as
to the average sum total of the clear-
ings originating in transactions out-
side New York plus the clearings
originating in commercial transac-
tions within New York — namely, the
total amount of the clearings outside
of New York for the corresponding
month. In other words, the commer-
cial transactions originating in New^
York in general about make up for
the transactions outside New^ York
which do not influence New York.
The slight Excess of New York over
the rest of the country, which con-
tinues even in the deepest depression,
probably roughly corresponds to the
amount of financial clearings occur-
ing even then. We thus arrive at the
conclusion that the Excess of New
York over The Rest about equals the
non-commercial or "financial" trans-
actions in New^ York. (This is curve
A.)

Again, New^ York being the finan-
cial center of the United States in a
very real and overshadowing sense,
we see that this curve is a very good



index to the i)rogress of financial
transactions in the United States. In
New York's financial transactions I
include all transactions both on the
Stock and Consolidated Exchanges,
and also the va^t mass of unrecorded
t ransactioyis consisting of the sales
and promotions, purchases and nn-
derivritings, of the bond houses and
(/reat private banks, etc. In a w^ord,
the figures plotted on this curve indi-
cate the selling to the public of se-
curities, and later the return of some
of the same (at generally lower
prices), and thus are an index to the
Fixation of Capital and, later, the
Progress of Liquidation. This is the
reason why the curve is so valuable
to consider and why its relations to
the maxima and minima of the stock
market are so noticeable as to be be-
yond the realms of coincidence. Fix-
ation of capital naturally brings
about a dearth of loanable funds and
a fall in the price of securities. Li-
quidation produces loanable funds
and recovery is in the immediate fu-
ture.

Both these phenomena are very ap-
parent on the curve A. When the ex-
cess of New York over the rest of the
country approaches anyw^here near
zero, as it has done in 1900, 1903,
1907, and 1910, liquidation has been
in progress for some time and is then
probably reasonably complete. When
the Excess passes the straight line
3xa or, in other w^ords, when New^
York is clearing more than twice the
normal for the rest of the country,
there is revealed a progress of fixa-
tion and a condition of tension that
cannot long be continued. The Ex-
cess curve passed this line 3xa in
1899 and w^e had the "Rich Man's
Panic" of 1900. It passed this line
again tow^ard the end of 1900, went
to unheard-of heights beyond it in
1901 and remained so through 1902,
and w^e have the extreme slump of



BANK CLEARINGS AND SECURITY PRICES



base below whieli the figures do not
go, but It'll ich tlicji sometimes ap-
proach, whereas in studying New
York, without The Rest as such a
base we cannot judge of the depth of
a decline with any degree of ac-
curacy.

New York's clearings may be ex-
haustively divided into three parts:

1. Clearings originating in trans-
actions outside New York.

2. Clearings originating in com-
mercial transactions within New
York.

3. Clearings originating in )ion-
commo'cial (or "financial") transac-
tions within New^ York.

The fact that, in periods when New
York's financial or non-commercial
transactions are known to be almost
at a standstill, the city clears, a little
more than the whole of the rest of
the country, gives a valuable hint as
to the average sum total of the clear-
ings originating in transactions out-
side New York plus the clearings
originating in commercial transac-
tions within New York — namely, the
total amount of the clearings outside
of New York for the corresponding
month. In other w^ords, the commer-
cial transactions originating in New
York in general about make up for
the transactions outside New York
which do not influence New York.
The slight Excess of New York over
the rest of the country, which con-
tinues even in the deepest depression,
probably roughly corresponds to the
amount of financial clearings occur-
ing even then. We thus arrive at the
conclusion that the Excess of New
York over The Rest about equals the
non-commercial or "financial" trans-
actions in New York. (This is curve
A.)

Again, New York being the finan-
cial center of the United States in a
very real and overshadowing sense,
w'e see that this curve is a very good



index to the progress of financial
transactions in the United States. In
New York's financial transactions I
include all transactions both on the
Stock and Consolidated Exchanges,
and also tJie vast mass of unrecorded
t ransactio7is consisting of the sales
and promotions, purchases aiid un-
deriuritings, of the bond houses and
( treat private banks, etc. In a word,
the figures plotted on this curve indi-
cate the selling to the public of se-
curities, and later the return of some
of the same (at generally low^er
prices), and thus are an index to the
Fixation of Capital and, later, the
Progress of Liquidation. This is the
reason why the curve is so valuable
to consider and why its relations to
the maxima and minima of the stock
market are so noticeable as to be be-
yond the realms of coincidence. Fix-
ation of capital naturally brings
about a dearth of loanable funds and
a fall in the price of securities. Li-
quidation produces loanable funds
and recovery is in the immediate fu-
ture.

Both these phenomena are very ap-
parent on the curve A. When the ex-
cess of New York over the rest of the
country approaches anywhere near
zero, as it has done in 1900, 1903,
1907, and 1910, liquidation has been
in progress for some time and is then
probably reasonably complete. When
the Excess passes the straight line
3xa or, in other words, when New
York is clearing more than twice the
normal for the rest of the country,
there is revealed a progress of fixa-
tion and a condition of tension that
cannot long be continued. The Ex-
cess curve passed this line 3xa in
1899 and w^e had the "Rich Man's
Panic" of 1900. It passed this line
again toward the end of 1900, went
to unheard-of heights beyond it in
1901 and remained so through 1902,
and w^e have the extreme slump of



MOODY'S MAGAZINE



1908. 1903 was worse than 1900 be-
cause the fixation had continued for v,
longer time. The same results were
seen in 1907 and in 1910. A study of
the area figures and the percentages
will illustrate the wonderful correla-
tion between the amount of fixation
and the severity of periods of panic
or depression.

Conversely, a long period of low-
ness in the curve, which means inac-
tivity in the financial world and sav-
ing in the country at large, is the
sure precursor of a period of activity
in finance snd a rise in the price of
securities. The continued low level
of this curve during 1894, 1895, and
1896 was followed by "The Ameri-
can Invasion of Europe" and the
great bull market of 1897 and 1898.
The low level of this curve A in 1900
was followed by the phenomenal rise
in securities during 1901 and 1902,
and this even though the drop in se-
curities during 1900 was so small as
to make it appear questionable
whether liquidation was complete or
not. The prolonged low level of 1903
and 1904 was followed by the ram-
pant bull market of 1904, 1905, and
1906. So with 1907 and 1908.

The extreme ranges of the market
(asterisks) follow the curve A very
closely. Whenever this curve crosses,
(m the (lownirard movement, the line
X, a turn for the better is probably
about to occur. The^^e /v/rw.s /;/ the
m.arket seem to ocr/tr as soon as the
curve so crosses the line x ivithoiif
ivaiting for ann recovery in the curve
A itself. Vice versa, whenever the
curve crosses, on the upward move-
ment, the line 3xa, overexpansion and
fixation is indicated and a turn for
the worse likely to occur, though
when it is not so definite as upon the
lower crossings.

I do not claim that this curve A is
a touchstone by which, without the
aid of other statistics, turns of the



market may be predicted, but I do
believe that any speculator who
would neglect it is acting in a very
foolish minner. When used in con-
nection with, say the reports of the
New York Associated Banks, for in-
stance, its significance is apparent.
One of the surest signs of the ap-
proach of liquidation is the loans
passifig the deposits. There is no
single sign telling when to sell so in-
fallible as this. But all single signs
mislead and, again, when shall we re-
purchase?

Toward the close of 1902 loans
began to run in excess of deposits,
and then a few weeks later deposits
were again in excess of loans — shall
our speculator sell out or is the hori-
zon clear? He examines the Excess
figures (A) and finds them running
up to 3xa or New York clearing
twice what The Rest is clearing. Of


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Online LibraryFrederick R MacaulayBank clearings and security prices → online text (page 1 of 2)