New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1920-03-30
Reserve Bank
Chief Opposes
Rate Control
Governor Harding Tells the
Senate Speculation Must
Be Limited if Curb Is Put
on Deals i'm Call Loans
Money in Great Demand
Declares Banking System
Has I'm Undergone Big
Change as Result of War

From The Tribwme's Washington Bureax
WASHINGTON. March 29.--Control
ef rates for call loans without at the
same time limiting speculation would
be Extremely hazardous" Governor
Harding Of the Federal Reserve Board
to-day informed the Senate, in reply
ing to resolution recently adopted in
curing into the reasons for existing
high rates on call loans.
Governor Harding. in a letter to the
Senate, said that while the rates
charged for call loans in New York.
the only financial center in the United
States in which there is maintained a
call money market of national imuor-
lance, "are frequently in excess of the
legal rates allowed for commercial
paper, they are not 'usurious' under
the laws of the State of New York,
which specifically exempt collateral
call loans from the per cent limita-
ton which lenders must observe on
other loans"
Reason for High Rates
Governor Harding inclosed in his
letter to the Senate statement from
the Federal Reserve agent in New
York in which the New York agent
declared that unlimited speculation
caused the high rates on call money.
The statement declared that call money
now constitutes about rs per cent of
the total money employed in the Sc
curties market. The statement said
in part:
prior to the institution of the Federal
Reserve system bankers were accus-
toned to look upon call loans as their
principal secondary reserve. This at
ttude of the banks toward call loans
has been greatly modified by two
causes.
"The first was the closing of the Stock
Exchange at the outbreak of the Eu-
ropean war, when it became practically
impossible to realize on call loans Sc
cured by investment securities, which
became, therefore, frozen loans This
resulted in more or less permanent
prejudice against dependence on call
loans as secondary reserves.
"The second and more important
factor was the creation of the Federal
the Federal Reserve act provision is
made for the rediscount of commercial
paper, but the rediscount of loans for
the purpose of carrying investment Sc
curities other than United States gov
eminent obligations is excluded.
Consequently, in order to maintain
maximum liquidity with suitable pro-
vision for secondary reserves that can
be Immediately availed of, banks now
invest greater proportion of their re-
sources in assets that can be realized
upon at the Federal Reserve banks.
The Demand for Money
Changed conditions are also present
in the factors governing the demand
for money. Prior to the armistice the
agencies Of the government were en-
ployed to restrict the issues of new
securities for purposes other than
those which were deemed essential for
carrying on the war. After the armi-
stlce these restrictions were removed
and ordinary market forces reasserted
themselves.
"The issuance Of new securities was
resumed in unprecedented volume and
consumed vast amount of capital and
credit when bank credit was already
expended by the necessity of carrying
large amounts of government securi-
ties which the investment market was
not prepared to absorb.
THUS arose a further cause for the
increased cost at times of accommoda-
ton on collateral call loans. Since the
arnistice these causes have been aug
mented by the increased volume and
velocity of transactions in securities
generally.
AT time Of such heavy credit re-
quirements as the present the greater
volume of borrowings, not only in the
aggregate but in the day to day de-
mands, naturally often results in high
rates for the money loaned. Indeed
SO reluctant have the bankers been dur
ing the past few months to supply the
large demand for credit based on Sc
curty that the occasional loan of rel
atlveiy small amounts of money at very
hgh rates often represents a desire
not to secure the high rates quoted
out to prevent the rate from going
very much higher, with the consequent
generalization which might result"
Remedy for Situation
In response to the resolutions refer
ence to a remedy for the present Sit
uatlon, the memorandum said:
SO long as collateral call loans are
made under prevailing conditions it is
uihicult TO see now the present situa-
hon can be altered because of the
impracticability of controlling the un-
DERIVING cause Of high rates, which in
the last analysis is the excess of de-
mand over supply.
AN attempt to control the rates for
ea!l loans by the establishment of an
arbitrary limit on low level, without
Inc ability to modify the causes above
enumerated, which operate to increase
rates, would be distinctly hazardous.
lor the reason that up to the point
Where the arbitrary rate would limit
sne supply of new money speculation
ana expansion might proceed un-
checked and the natural elements of
tain. ''0' w
-. In other words, high rates act as a
Selsrrent to overspeculation and I'M
que expansion Of credit. On the other
aahd, should the supply Of money
AVAILABLE at fixed maximum of rate
become exhausted, liquidation might
suddenly be forced because the de-
mands for additional accommo dation