Since time rates are made by individual bargaining by the various parties at various places and times during the day, frequently no one rate can be quoted, and therefore the prevailing range is usually quoted. For instance, the quotations of October 18, 1917, in the New York Times, were: As in the case of call rates, the character of the collateral is seen to affect the time rate. As a general rule the rate tends to rise as the length of the loan increases, but to this rule there are many exceptions, some of which are evident above. The differ ence between the rate on 6o-day loans and 6-month loans rarely exceeds I z per cent and tends to grow less as the length of the loan increases.
The loan department keeps not only a complete record of rates for each day of the year, but in the daily earnings book it records the daily average rate on each class of loans. These rate statistics are interesting besides being useful to adjust misunder standings as to the change of rates on call loans.
Daily vs. Fortnightly Clearings The New York Stock Exchange, through its Stock Clearing Corporation, has employed daily clearings; whereas the exchanges of London, Paris, Berlin, and Vienna have used term clearings, that is, fortnightly or weekly clearings. The fortnightly clearing and settlement plan occasions less duplication of the handling of securities and payments, fewer flurries in call money rates, less borrowing on call, than does the daily system, and efforts are being made to introduce the European plan in the United States. The establishment of the Stock Clearing Corporation in 1919, by the New York Stock Exchange, reduced both the amount of certification required by brokers for intermediate credits in case of called loans and also, by the clearing of security balances, the volume of payments required. Under the old scheme, when a member of the stock exchange clearing house bought shares of United States Steel and sold 90o shares, he had a balance of ioo shares to receive and pay for on the following day. If, however, he bought i,000 shares of United States Steel and sold 90o shares of Southern Pacific, no economy was effected. Under the new plan, in the case given, the proceeds of the delivery of the goo shares of Southern Pacific go to reduce the debt caused by the purchase of the r,000 shares of United States Steel, and it is necessary only to provide for the payment of the difference.
Relation of the Call Loan Rate and the Commercial Paper Rate of Interest The call and time rates for brokers' loans are dependent upon the supply of and demand for such funds. The supply consists of the loanable funds seeking temporary investment, as held by banks and bankers inside and outside New York City, including foreign banks and agencies of foreign banks, and by firms, indivi duals, and corporations. The contributors to the supply vary
with the season and with the attractiveness of other opportunities for investment, either locally or in other markets. It is the policy of most banks to provide for their commercial clients first and to invest only the excess in call loans and commercial paper. The demand for call loan funds varies with the activity of the market; low rates in turn promote speculative activity. The demand is often very sudden and necessitous, and to call forth and assure a call loan fund sufficient to finance the securities market it is recognized that the limitation of the rate to the legal rate for commercial transactions is an intolerable restriction.
The federal reserve provides a source of funds for members by rediscounts, but the rediscount facilities are specifically denied to paper used in speculative activities on the stock and produce exchanges. Therefore, to assure themselves of a liquid secondary reserve, member banks are inclined to invest their surplus fund in rediscountable commercial paper rather than in call loans. Interior banks tend to send less of their excess funds to Wall Street, but invest it in commercial paper. But until a large dis count market develops which absorbs the loan fund, call loans on stock exchange collateral will continue to be an important feature of our banking system. Moreover, the prevalence of high demand renewal rates will divert funds from the commercialpaper market to the stock market, for some banks and some other lenders will take advantage of the higher rates. This diversion restricts the commercial paper market and will in time force a higher rate on commercial paper. The two markets thereby react one upon the other. The commercial paper rate is affected by many factors which only indirectly affect the call loan rate. The commercial paper rate, as well as its seasonality, is much more steady. These facts are shown in the following graph (Figure 35): The Collection and Computation of Interest The rule of the Street is to allow, the banks to collect interest on call loans at the end of each month for the actual number of days the loan has been in existence; more latitude is given in the case of time loans, special demand loans, and merchandise loans, on which interest is collected every three months. Few brokers pay their interest voluntarily, and in most cases the bank makes out and mails interest bills. When the principal of any loan is paid the interest on that particular loan is also paid, regardless of whether the borrower has other loans with the bank at that time.