The practice of over-certification amounts to a tem porary loan. In order to secure this privilege from the bank the broker has entered into an agreement which provides that, in return for a certain minimum balance which the broker shall keep at all times, the bank will over-certify his checks up to a certain speci fied amount. It is also understood that as soon as the stock is secured from the seller, it is to be taken to the bank and offered as collateral for a call loan. The temporary loan which the broker had made by the over-certification of his check is therefore transferred into a regular call loan. But this practice of over certification is now largely extinct. It existed for many years in direct violation of the National Bank Act, which provides That it shall be unlawful for any officer, clerk or agent of any National Bank to certify any check drawn upon the Association unless the person or company drawing the check has on deposit with the Association at the time an amount of money equal to the amount specified in said check.
In spite of the provision of the law and the punish ment which is provided for its disobedience, over-cer tification went on for years. The magnitude of the practice can be judged from the fact that in a single year it is estimated that more than fourteen billion dollars of checks were over-certified in this manner.
9. unsecured the present time the bankers and brokers escape the law by a practice which in reality is little different from the former one. The broker who desires a certified check for an amount in excess of that which he has on deposit will go to the bank and present his own note for discount, drawn to himself and indorsed only by him. This note is made payable the same day on which it is presented and it is understood that it will be taken up before the close of banking hours by the broker, who will deposit the collateral which he had purchased and make call loans for the amount of his indebtedness. The bank dis counts this note and places the proceeds to the credit of the broker. This gives him a balance on the books of the bank equal to, or in excess, of the amount for which he has asked certification. The officers of the bank are therefore relieved of the necessity of over certifying his checks, for the broker's balance is now equal to the amount for which he desires certification.
In spite of the apparent laxity of this arrangement very few losses have resulted. The banks are extreme ly conservative about extending the privilege and be fore doing so make rigid investigations. They must have intimate knowledge of the broker's character, his judgment and his business methods, and if he fails to meet the standard in any particular the privilege is refused. In the second place the bank stipulates that
the broker must keep a minimum deposit—for exam ple, $50,000—in order to have the privilege of making one day loans to the extent of one million dollars. They count upon having the use of the $50,000 of the broker at all times, thus making the customer pro vide at least a portion of the 25 per cent reserve which must be held against his deposit. The banks pay no interest to the brokers on their balances, and charge no interest for one day unsecured, or clearance, loans, as they are sometimes called. They are also known as day-to-day loans.
Finally, it is understood that the broker must make his deposits at the bank as frequently as he receives checks in payment for the securities which he sells. Frequently he makes deposits six or seven times a day. As a result the broker, while he has received a large unsecured loan, is on the other hand, receiving at fre quent intervals, deposits representing payments from firms which have bought securities from his house.
The practice of over-certification still exists to some extent in the case of state banks and trust companies. In this class of institution the prohibition against it is not so strict and the state banks therefore continue the practice. Two large brokerage failures a few years ago have made the banks more careful than ever. In these cases the United States Supreme Court held that the banks were not preferred creditors. Several of the national banks no longer make one day unse cured loans.
10. Interest rates.—Money lent on call loans yields a rate that fluctuates normally around 2 or 3 per cent. Here the law of demand and supply clearly operates to determine the amount of business to be done. Oc casionally when money is scarce, the rate rises consid erably higher than the figures quoted and causes em barrassment in financial circles. When the interest charges are high, business will decrease.
Three terms are employed in connection with the trend of rates. If the rates are normal, that is to say range from 1 to 3 per cent, call money is "easy"; it becomes "firm" when it rises to 6, 7, 8 or 9 per cent. If call money proceeds higher, the word "stringent" is applied.
Call loans sometimes jump to 100 per cent or higher. For a few minutes during the height of the panic of 1907, call loans were not to be had at any price. The President of the Stock Exchange rushed across the street to J. P. Morgan's office and said that if money was not forth-corning immediately the Exchange would be obliged to close, or brokers would fail in a whole sale manner. Thru J. P. Morgan's influence a bank ing syndicate was formed at once and within a few moments the brokers were able to obtain $25,000,000.