RELATION OF BANKS TO THE SECURITY MARKET 1. Amount of loans to brokers.—The fact that a large part of all dealings in stocks is carried on with borrowed money, or on margin, raises the interest ing question: where does this money come from? In brief, the brokers, who in the aggregate, supply vast sums to their customers, usually obtain it from the banks. There are no data to indicate how extensive a business this is, but it is so large that it forms one of the most important financial activities in the coun try.
The amount of loans made to brokers on "call," which is only one of three kinds of ways in which brokers negotiate, has been estimated all the way from one hundred to seven hundred million dollars out standing at any one time in the New York market. In a single day as much as $50,000,000 has been loaned on call on the Stock Exchange floor, while the extent of loans directly made by banks' to brokers off the floor is unknown.
Another way of finding the size of this business is to note the extent of speculative stock transactions, the majority of which are carried on margin. Tak ing an extreme case, we find that in a single year, 1906, more than forty-three million shares of Reading stock were "sold" on the stock exchange and hardly more than three million shares were transferred on the books of the company. While many investors who pay for their stocks in full do not have them transferred on the companies' books, most investors do take this pre caution, and it is safe to infer that the bulk of the sales which did not result in transfers were margin operations and therefore required borrowed money. As Reading stock sold at an average price of perhaps $70 a share in 1906, the enormous total of money in volved, even after making every conceivable allowance, is apparent. And Reading was, and is, only one of scores of active stocks.
It is safe to assume that customers do not supply on the average more than 10 to 15 per cent of the money required to carry thru a margin operation, leav ing the remainder to be supplied by brokers. In some cases the broker is rich enough to supply the entire sum out of his own resources. In the majority of in stances, however, a bank is the usual resort, the broker using, the stock which he has purchased for his cus tomer as collateral security for the loan.
2. Source of brokerage loans.—It must not be sup posed that money loaned for this purpose comes from any one source. Much of it is supplied by wealthy corporations with surplus funds available for tempo rary investment. The United States Steel Corpora tion, for example, has had at one time more than $100,000,000 in ready cash. The General Electric Company, the Singer Manufacturing Company and many other large corporations likewise have big sums available in cash ; rich individuals, such as John D. Rockefeller, as well as many wealthy estates, also have much ready cash. Russell Sage frequently loaned as much as $20,000,000 at one time to brokers, and Hetty Green was supposed to engage in the same business.
But nearly all the money finds its way thru the channels of the big New York banks. Not only do these banks lend their own surplus funds and those of wealthy individuals and estates, but for many years they have loaned the funds of thousands of banks located in other parts of the country, altho this prac tice has been somewhat altered by the Federal Reserve Act. In testimony before a Congressional com mittee' in 1913 it was brought out that the chief lend ers at that time were J. P. Morgan and Company, First National Bank of New York City, National City Bank of New York, Lee Higginson and Com pany of Boston and New York, Kidder Peabody and Company of Boston and New York and Kuhn, Loeb and Company. Several of the trust companies in New York City have grown enormously since 1913, and are large lenders to brokers.
3. Kinds of loans to brokers.—Loans to brokers are of three kinds, time, call and one-day unsecured. The first named are for a definite period of time, stated at the moment of borrowing. With a time loan the broker is certain that nothing will be required by the bank until the end of the stipulated period. Normally time loans cost more than call loans, but the rate fluctuates less. They are usually issued for thirty, sixty or ninety days.