In a system of small banks, one bad result comes from the necessity of making this rule. Many busi ness concerns are so large that no single bank can offer them sufficient credit facilities. They are com pelled to borrow from several banks at one time. Even small houses follow the same custom altho it is not necessary for them to do so. As a result, an adventurous or dishonest concern may borrow from each of several banks as much as it is justified in bor rowing altogether before the bankers are aware of what is going on. One way of guarding against this practice is cooperation among bankers in the way of giving information about borrowers. Grave objec tions are raised to this plan. The problem is more vexing when a house is not only borrowing from va rious banks but also selling its paper in the general market thru note brokers. It has been proposed that a law be passed requiring the registry of all com mercial paper so that any one can learn just how much a concern is borrowing in this way.
When we come to a discussion of the national banking system, we shall find that certain types of loans are singled out for special regulation.
5. Usury laws.—Any rate of interest higher than that fixed by law is usurious. How then can New York bankers and money brokers charge forty or eighty per cent for call money? Before explaining how this is possible, let us see just what is meant by the legal and maximum rates of interest, as fixed by statute in most states. There is a very wide miscon ception of what is meant by the legal rate. Con trary to the usual impression, it is not always the highest rate that can be charged for borrowed money. Instead, it is essentially the rate that the court would impose if a judgment to collect an account "with in terest" were entered. If the legal rate, in the state where the judgment was entered, happened to be six per cent, the defendant would have to pay six per cent. The maximum rate is the highest rate that can be charged for loans and any rate above the maxi mum is usury.
In some states, as, for example, in New York and Pennsylvania, the legal and maximum rates are the same — six per cent; in Alabama, both rates are eight per cent; in Illinois, the legal rate is'five per cent, and the maximum rate seven per cent; in Kansas, they are six per cent and ten per cent respectively; in Indiana, six per cent and eight per cent.
Altho the maximum rate in New York State is six per cent, bankers can charge any rate of interest for call loans by reason of a section of the state bank ing law which says Upon advances of money repayable on demand to an amount not less than $5,000 made upon warehouse receipts, bills of lading, certificates of stock, certificates of deposit, bonds or other negotiable instruments pledged as collateral security for such repayment, any bank or individual banker may receive or contract to receive and collect as com pensation for making such advance any sum to be agreed upon in writing by the parties to such transactions.
Thus on call loans for sums of $5,000 and over the banker can charge any rate that the borrower is will ing to pay. On a time loan the interest cannot be higher than the maximum rate.
The law is easily evaded by purchasing borrowers' paper at a discount instead of loaning outright. The maximum rate in such a case acts merely as a moral force.
6. Deposit most important reg ulation with respect to deposits has to do with the re serve requirement. This is discussed in Chapters XIV and XVII. It is to be noted that some coun tries do not find it necessary to fix a minimum reserve by law.
In some states, banks are forbidden to pay out time deposits or loan against them as collateral until the maturity date arrives. The reason for this is that banks are not required to carry as heavy a reserve against time deposits as against demand deposits, or they may not be required to carry any at all. It is properly considered that the banks are making pro vision to pay only at a specified time and that, there fore, they should not be permitted to pay them out as if they were demand deposits. For a bank to loan against its own time deposits as collateral is merely an evasion of the law. If one has a certificate of deposit not yet come to maturity and is in immediate need of cash, he can usually go to some other bank and secure a loan by depositing his certificate as collateral. If necessary, title to the certificate can be transferred to the lending bank on the books of the bank which is sued it.
Some of the states forbid corporations chartered in other states or in foreign countries to accept deposits within their borders. This is an indirect tax upon the importation of capital, for the business of lending is most profitable when combined with that of accept ing deposits. A Massachusetts bank cannot loan in a western state at as low a rate as it could if it were permitted to accept deposits there. The same is true of a Canadian bank making loans in New York State. It is partly a question as to whether home banks and other lenders are to be protected against competition from outside bankers or whether home borrowers are to be provided with funds at the lowest possible rate regardless of where those funds come from.