When rates rush up to 100 per cent or more it is only the few weaker brokers who pay the highest fig ures. The more far sighted ones have sometime pre viously borrowed enough time money at lower rates to enable them to do business. Some banks will not loan to brokers above 6 per cent, regardless of what the prevailing rates may be. If the banks have no money to lend they withdraw from the market, but they never charge more than their fixed maximum.
The reader might be led to believe that a high rate of interest benefits the banks, yet the contrary is often true. The banks' available resources for borrowing purposes consist in considerable part of large deposits of individuals or corporations. It is obvious that when the interest rate rises, perhaps to 20 or 25 per cent, the latter can derive greater profits by withdraw ing their funds from banks paying to 4 per cent and lending them directly to willing speculators and brokers. Consequently it is to the interest of the banks to keep the rate down to a point where it will not encourage the withdrawal of individual or cor porate resources.
11. Renewal loan interest rates are usually subject to change, according to market fluc tuations. If, for example, the bank agrees at 11 a. m. to lend a certain sum of money on stock given as col lateral at, say per cent, and if the market rate rises to 3 per cent, the bank immediately proceeds to notify the borrower that a 3 per cent rate will be charged. The statement would read thus: "If agreeable, we mark your loan of $10,000 dated February 16, 1916, as renewed at 3 per cent from this date." If this is satisfactory to the person concerned he merely stamps the perforated slip attached to this statement and sends it back to the bank as an indication of acquies cence.
12. W eaknesses and services of the call loan system. —The practice of lending money on call to brokers has been much criticized. That funds from all parts of the country should be absorbed by stock speculation seems wrong to many persons. No doubt much of the sentiment which led to the passage of the Federal Reserve Act received its impetus from this criticism. Curiously enough the operation of the Federal Re serve Act, far from curtailing the amount of money available for brokers' loans, has thus far had the oppo site tendency. This is due to the fact that with the much smaller reserves required under the Act, the banks have larger funds available for the purpose, at least temporarily.
It is the purpose also of the Federal Reserve Act to build up a market in bills, or discounts, similar to that which existed in London before the war, in order to furnish temporary investments for banks other than call loans. It is doubtful, however, if any short term investments are safer for banks than call loans. The reason money flows to Wall Street from all parts of the country is simply because the stock market fur nishes plenty of loans at all times which are quickly convertible into cash. A country bank prefers to send its spare cash to New York to loan to a broker rather than let a farmer or merchant or contractor have it, for the reason that these business men cannot repay the loan in ten days if necessary, whereas the broker, as a matter of course, repays it when demanded.
Call loans furnish the banks with a safe means of using surplus funds, the great advantage being that if regular customers need or desire money the call loans can always be cashed in at once. Unlike nearly all other bank investments, call loans can be cashed in without loss, trouble, ill feeling or expense. They are completely liquid, which is a great essential in the banking business.
13. Effect of money rates on stocks.—Possibly the relationship between stock speculation and the banks is too close. Certainly the stock market depends very largely upon the banks for existence and in turn the banks possibly depend too much upon the market. This relationship is a most important force in causing changes in stock prices. When money is easy, prices naturally rise and when rates become firm they tend to fall. Brokers and speculators naturally take an intense interest in the condition of the banks and the rates for money.
Aside from the quoted rates, the surest indication of money market conditions is contained in the weekly statement of the Bank Clearing House in New York. In normal times the statement of the Bank of England is also of importance.' The relationship between money rates and speculation is discussed also in a later chapter of this book.
While many forces operate to influence money rates, the one which most commonly engages the attention of stock operators has to do with the seasonal influences, especially the flow of currency in the autumn to "move" the crops.'