One of the greatest factors in causing sudden demands for funds is the calling of loans up to one o'clock; the stock broker who figured his position early in the day cannot know exactly what loans will be called; when a loan is called, he must borrow to replace the called funds. The loans of stock have the same effect; the lender of the stock may demand that it be returned, or the borrower may return it at will; if the broker replaces the stock successfully through the stock-loan crowd on the exchange, he can cut his borrowings at the bank; but if the borrower of the stock returns it, the lender will probably reborrow on it at the bank.
Another factor is the call loan funds placed by the metro politan banks for their interior correspondents. These funds come later in the day according to how far west the correspondent is. The metropolitan banks are not sure, therefore, how much they will have to loan until the day has progressed. They may receive notice from the federal reserve bank, just before three o'clock, that some Pacific Coast bank has remitted for credit to loan in the Street; the rate at that time may be high or low, depending upon the supply and demand of funds at closing time.
Frequently the call money quotations for the day in the newspaper are somewhat as follows: The low closing rate does not signify that money is getting cheaper or that the bottom has fallen out of the money market and that call money is getting back to where it belongs; in all probability it means nothing more than that some broker has at the last moment found himself with an oversupply of money and loaned $50,000 at any rate he could get, and the demand for the day being over, he must take a much lower rate than the ruling rate.
The loan department gets rate quotations by messenger service directly from the bank's representative in the money crowd and also on the news ticker. In addition to these channels of infor mation, any sudden change is relayed by telephone through the office of said representative.
Call money usually commands a very low rate of interest, the prevailing rates before the war ranging from to 2I2 per cent, but it is subject to wide fluctuations. 'Very low rates pro mote speculative activity and a rising stock market, and high rates force heavy liquidation, falling prices, and depression. At times when a heavy demand for investment funds synchronizes with a heavy demand for commercial funds and a relative dearth of loanable funds, the call rate rises abruptly. "The call rate rose to 127 per cent on October 29, 1896; to 96 per cent on No vember 2, 1896; to 186 per cent on December 16, i9o5; in 19°6 to 6o per cent on January 2; to 3o per cent on April 5 and 6; to 4o per cent on September 5, and to 45 per cent on December 3r."
As explained elsewhere, the fundamental conditions which occasioned these wide variations were laid in our peculiar banking system of redeposited reserves and sectional and seasonal de mands for money. One of the objects of the federal reserve system was to provide a system of rediscount whereby money rates would be stabilized. In this it has not been entirely successful to date, for in 192o call loan rates ranged as high as 3o per cent.
The call loan rates charged in New York frequently exceed the legal rates allowed for commercial paper, but under the law they are not usurious, for the law specifically exempts from the 6 per cent limitation collateral call loans in amounts not less than $5,000, and the National Bank Law authorizes national banks to receive and charge, on any loan or discount, interest at the rate allowed by the state in which the bank is located.
Method of Determining Time Loan Interest Rates Rates for time loans in Wall Street are not made on the board by the "money crowd," but are determined by a different set of money-brokers, who go around from office to office with their bids or offerings, as the case may be. Quite a number of money-brokers are engaged in this business, some of them making it a specialty. These money-brokers are either independent or attached to some stock broker's office. The time rates are made for 3o-, 6o-, and go-day periods, and also for and 6-month periods; the tendency, however, is toward the shorter periods. The rates are published daily and indicate the true general condition of the money market, to a much greater degree, indeed, than does the call rate. Brokers wish to get a certain proportion of their loans on time and thus shift more of the risks onto the banks; but the banks are generally very conservative in making such long-time loans. When money tightens the bankers are in a more dominating posi tion with respect to the stock brokers, and call loans displace time loans quite largely. Time rates are generally higher and steadier than call rates; the range of fluctuation in any week is scarcely ever more than r per cent and in the great majority of weeks is zero; and the tendency to vary is greater in the case of the longer loans.