Of course, the banks do not have to accept this renewal rate; they can arbitrarily fix a higher rate of their own. But if they do not conform, or nearly conform, to this rate, they will in all probability have a lot of money lying idle in their vaults before the end of the day. A very large Wall Street bank, in fact, can make its own renewal rate, but it seldom makes it more than per cent above the Street renewal rate and often only M per cent higher. Usually it makes it the same. Brokers may seek a bank's money, in spite of a trifle higher though fair rate, because of the bank's fair treatment, accessibility, and rapidity of service. Up-town banks may undercut the down-town banks from to per cent in order to get loans, the cut being necessary to over come the handicap of their relative inaccessibility. Nearly every bank in New York City changes the rates charged on "brokers"' loans to conform with the posted rate, and the only alternative for a borrower is to pay his loan or be charged the current rate. Inasmuch as nearly every bank charges the posted rate, it is impossible for the borrower to obtain money in New York by shifting his loan to some other bank. The renewal rate applies to all brokers' loans placed by the banks for themselves or for their correspondents, unless special arrangements are made to the contrary.
With a few exceptions it is not customary with the banks, when making advances in interest rates, to increase the rates on demand or call loans made to their own regular customers who keep deposit accounts with them, but these regular customers are treated differently from the ordinary brokers or Street borrowers. Demand loans, secured by stocks and bonds, made by banks to their own officers or to officers of other banks, are also generally excepted from the high call rates.
Dangers of System of Rate Determination It is the thought, presumably, of the coterie of men who fix the renewal rate that this rate will be the one that will clear the market for loans that day. It is based upon their estimate of the supply and demand for call loans that day. The money expert at the money table sounds the borrowers and lenders, on the floor or by telephone, and tries to gauge the market situation; the other members of the group make similar diagnoses. Obviously they may misjudge the situation; unforeseen factors may arise, and the rate fixed may prove too high or too low. Consequently during the day applications for loans and offers to loan come to the "table," and in the light of these bids and offers the call rate is adjusted so that it will clear the market for new loans. The "table" expert then apportions the loan money among appli cants roughly in proportion to their demands. This apportion ment, however, cannot be carried out exactly for several reasons: The offers may specify the size of loan to any one borrower, the kind of collateral (whether mixed or all-industrial), and the char acter of borrowers who will be acceptable; in general the custom ers of the loaning bank are favored; loans to banks are subject to the io per cent limitation; etc. During 1920 and 1921 it was
a common occurrence to find "outside" money, as it is called— that is, money loaned at call but not through the agency of the money table—loaned at rates lower than those fixed in the stock exchange.
Various dangers in the call loan rate system have been pointed out. A small group of men determines these important interest rates; the rates are a powerful factor in the movement of security prices; the rate-makers are not forbidden to engage in stock operations; there is opportunity, therefore, for manipulation of the market if these men are not honest; the temptation is surely very great. Wall Street call loans average above a billion dollars; a shift of the renewal rate from 6 to i8 per cent for one day would add $360,00o to the net profits of the lending banks of New York. High call rates probably attract funds from the interior and from legitimate lines and put them into speculative activities. They are used as an argument to defend high rates on time loans and tend, therefore, to embarrass corporate financial management. New York is the only money market where wide fluctuations of rates are known. The London market handles a much larger volume of business, but its rates are quite constant; the great need in New York is a wide discount market, which has a stabilizing effect.
Call loans are made in any amount from Sio,000 to $5oo,000 each, but $5o,000 is the lowest amount considered for quotation purposes; that is, $ r,000,000 might be loaned at 4 per cent in lots of Sloo,000 each, and $35,00o at 434 per cent, but money would still be quoted at 4 per cent.
Factors Influencing Call Money Quotations In an active money market the call rate is quite likely to make some quick changes, and the loan clerks must keep posted at all times on the different rate changes. For instance, money may open and renew at per cent, but it does not necessarily follow that new loans will be made at this rate; for it frequently happens that within fifteen minutes after the renewal rate is made call money will be loaning above the renewal rate; also it is quite possible for a broker to renew his loans, say, at 4 per cent, borrow some other money through the day at 4r 2 and 5 per cent, and then pay 6 per cent for his balance loan late in the afternoon. Of course these various rates remain in force only for one day, or until the renewal rate is fixed the next morning, at which time all his loans will be renewed at the new renewal rate.