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DISTRICT NO. 10-KANSAS CITY.

Asa E. RAMSAY, Chairman and Federal Reserve Agent.

FINANCIAL RESULTS OF OPERATION.

At the beginning of the year 1918 undistributed earnings were shown amounting to $295,759.08. At that time unpaid dividends had accumulated for the latter half of the year 1917, and some depreciation existed in the holdings of United States bonds; consequently no distribution was made.

Gross earnings for the year 1918, as shown in Schedule 1, which is appended hereto, were $3,451,936.13. Current expenses as reflected by Schedule 1 were $689,228.11, leaving net earnings for the year of $2,762,708.02. This, together with undistributed earnings on hand at the beginning of the year, left $3,058,467.10 available for distribution. The depreciation charge of $100,000 against banking premises recently acquired, $6,577.14 miscellaneous depreciation items, and $220,734 set aside as reserve for depreciation on United States bonds left a net amount available for dividends, surplus, and franchise taxes of $2,731,155.96.

Dividends paid for the period July 1, 1917, to December 31, 1918, amounted to $309,729.25; $1,210,713.35 was carried to surplus fund and an equivalent amount set aside in reserve for franchise tax.

Reference is made to Schedule 3 for the 1918 balance sheet as of December 31, 1918, as compared to those for December 31, 1917, 1916, and 1915.

GENERAL BUSINESS AND BANKING CONDITIONS.

Business and banking in 1918 responded to war-time requirements, although handicapped by acute labor shortage, a season of hot and dry weather at midsummer, and an epidemic of Spanish influenza at the end of the year. As a producer of food and other war essentials, the problem for the Tenth Federal Reserve District was that of bringing production up to market demands, while for the bankers the task was that of providing a sound money market with a plentiful supply of loanable funds at favorable rates of interest for the proper financing of production and movement to markets.

How the district met current requirements may be judged by the annual reports, which show that, all in all, 1918 was the high record business and banking year of history. The bank clearings of the 15 clearing-house cities of the district, which may be taken as an index to the volume of business, show banking transactions aggregating approximately $17,000,000,000, or about $4,000,000,000 more than the aggregate of transactions in 1917.

The district in 1918 sent to its six market cities approximately 26,288,000 meat animals, as against 22,847,000 in 1917, the increase being 1,055,000 cattle, 2,104,000 hogs, and 281,000 sheep, which enabled the meat-packing plants to turn out by far their largest volume of products in any twelve-month period. In spite of a long season of dry weather, which cut down the corn crop to less than 50 per cent of normal, and also affected other crops, the year brought to the six markets of the district the largest movement of grains and foods in any one year. It was also the year of greatest production of coal, lead, zinc, petroleum and by-products, but the poorest year in 20 in gold and silver mining. The volume of mercantile trade was larger than in any other year, despite the fact that dealers were restricted at times by a shortage of stocks. Manufacturing industries, save those engaged in producing nonessentials or in work that could wait until after the war, were operated on as high a plane of productive efficiency as was possible under existing conditions.

The calling of some 400,000 young men from the district to the colors and the taking of many other thousands of men for work in munitions plants, shipyards, and other war activities were responsible for the great shortage of man power. Efforts to relieve this situation by shifting men from nonessential to essential employment were only partly successful. Wage increases were readily granted by employers to meet the high cost of living until the wage scale reached the highest level ever known in the district. A few local strikes occurred, but all were settled by arbitration or through the War Labor Board with the exception of a strike of street railway employees in Kansas City.

Under these conditions production was maintained on a warwinning basis through the year until in late autumn the influenza epidemic prostrated many thousands of wage earners and their families and caused a slump in productive activity.

The vast volume of business which was recorded for 1918 naturally opened up new and larger problems for bankers and called for business and crop financing on a larger scale than anything before attempted. There was at all times of the year plenty of money available for all legitimate business and at no time was the rate increased to check rediscounting made necessary by the unusually high level of prices on all products and the further fact that merchants' and manufacturers' stocks and labor called for vastly more money than ever before to keep business moving. Therefore, the only restrictions laid upon business were physical rather than financial.

DISCOUNT OPERATIONS.

The credit transactions of the Federal Reserve Bank of Kansas City represented by advances to member banks for the year 1918 far exceeded previous years, as may be observed in detail from Schedule 4 appended to this report. This result has been due to two primary causes--the demand on the part of member banks growing out of cooperation with Government war financing, and the larger needs of commercial banks to supply productive enterprises, occasioned by increased costs and higher standard of values. The discount operations, directly and indirectly incident to the cooperation of banks in war financing, have overshadowed the purely commercial credit transactions, although the latter activities have shown a marked increase in volume, as is exhibited by Schedule 4. This schedule provides full classified record and detailed information covering the discount transactions for 1918, which aggregate over $833,000,000, as compared with $237,000,000 of the previous year, all classes of paper showing increased lines.

The purely rediscount operations have been almost altogether representative of “commercial paper" transactions, the proportion of bills discounted secured by war obligations being small. These credit instruments, however, were in turn representative of war conditions in that the enterprises financed were in most cases of a character contributory to the winning of the war; essential war industries had, in large measure, the first call on the commercial bankers of the district; and the volume in dollars and cents was augmented by war-time values. Notwithstanding these facts, the commercial paper transactions reflect the business activities of the district within the period because this territory is a producing section, providing for the market at all times commodities essential in times of peace and more especially when war exists.

For practical purposes the credit advances styled "member banks' collateral notes secured by Government war obligations” are the index of the extent to which discount operations based upon Liberty loan bonds and certificates were conducted. In this section local conditions make the 15-day paper undesirable for general use commercially, and the operations of the Federal Reserve Bank of Kansas City in this class of paper were, in a large measure, confined to direct assistance to commercial banks based upon war obligations. It will be observed from Schedule 4 of the appendix that the aggregate transactions represented by advances on account of war obligations amounted to almost $500,000,000 within the year, and multiplied several times the experience of the previous year. Demands of this character from commercial banks have fluctuated as immediate needs recurred and declined, and the discount facility has helped materially to supply expeditiously and with equitable proportion from this district the funds required by the Government.

TRADE ACCEPTANCES.

While the use of the trade acceptance has not grown to any considerable extent in this district, transactions in this class of paper are occurring more frequently. The trade acceptance is not altogether unknown in the credit instrument field of this section, but the offerings submitted to this bank are mainly representative of the production and sale of oil, or in some cases of the cotton industry, rather than of changed methods on the part of the mercantile establishments growing out of the educational program of credit men and large wholesale and industrial concerns.

ACCEPTANCES.

The acceptance in its true character is not generally used in the business activities of the Kansas City district. There are exceptional occasions promoting inquiries from time to time in particular lines of industry, and in a few instances the adoption of the bankers' acceptances covering domestic transactions of larger concerns in this territory. The volume of bankers' acceptances originating within the tenth district has been proportionately small, but the number of transactions representing the offering of this class of paper by local member banks is showing some increase.

The management of the Kansas City Bank has continued its policy of participating from time to time in open-market acceptance transactions, both foreign and domestic, with the Federal Reserve Bank of New York, and periodically with the Federal Reserve Bank of Boston. When local demand requires the conserving of reserve funds, these purchases are discontinued. Schedule 5 provides a record of openmarket transactions in bankers' acceptances.

RESERVE POSITION.

The average

reserve

for the year 1918 has at all times been considerably in excess of the legal requirements, although reduced from the 1917 record, as indicated by Schedule 9, the yearly average for 1918 being 55 per cent as compared with 70 per cent for 1917. This was a natural consequence of increased operations and heavier demands, which have been handled expeditiously and met promptly. Large credit lines requested by a limited number of banks at certain seasons of heavy demand have caused a temporary decline from the general average reserve status.

MOVEMENT OF MEMBERSHIP.

During the past year there was a net increase of 33 member banks within the district, the membership now being 994, of which 239 are within the Omaha branch district and 139 are served by the Denver branch.

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