Evening star., 1920-04-03

known as the renewal rate. The daily
| borrowings. either in replacement of
loans called for payment or repre-
| senting new money borrowed, are
! made at rates which may or may not
| which frequently vary during the
same day.
Billion Used in Securities Market.
Turning to the figures, it appears
that over period of years during the
pre-war period the volume of all
money. both time and call. employed
in the securities market was est1-
mated at about 81. .000, 100000. of which
the average on call was about 60 per
cent and the average on time ABOUT
40 per cent, or a normal volume OF
call money. say. of $600,000.O00. The
daily turnover in call money!. e., old
loans called for payment. loans made
in replacement thereof, and new
money borro%edMransed Hdo daa from sis,
about s2O.oOo.000. The daily turn
over during the year 1919. however.
ordinarily ranged from $25 100000 to
$40. .000,0 900, and averaged about $780,
C00.00 Moreover. it is important to
notice there has been a dispropor-
tionate increase in the amount OF call
loans. as distinguished from time
money. with the consequence that the
former. it is now estimated. consti.
tutes about 75 per cent of the total
money employed in the securities
market.
There are certain other factors. the
influence Of which is principally mani
tested in intermittent wide fluctuations
in the daily rates or in the rates which
apply for bri' periods. The ased
volume of demand loans called daily
for payment noted above. coupled with
the decreased amount of time money
loaned on securities. produces more or
less apprehension on the part OF Dor
rowers as to their ability to reborrow
money called for payment. This ap-
prehension, quickened by the number
of insiStent borrowers bidding at times
when momentarily loanable funds are
exhausted or are being offered in small
quantity frequently results in competi-
tive bidding for funds which advance
the rates for a day or part of a day
beyond the actual necessities of the sit
uation.
Affects Collateral Loans.
Another active and important influ-
ence which has recently affected the
supply of funds available for collateral
loans and precipitated at times-a rise
in the rates has been the periodic trans
fers of government deposits from de-
positary banks to the federal reserve
banks in connection with the fiscal op-
erations OF the Treasury. Such wit
drawals frequently result in the de-
positary banks calling money from the
securities market, which causes sharp
advances in the rate bid for call money
in replacement of the loans called for
payment.
THE underlying cause of f1uctua-
tions, and especially of increases in
call money rates. is the operation of
the law of supply and demand. In
other words. as the supply Of loanable
funds diminishes in proportion to the
volume of the demand, the rate for
collateral demand loans advances
1.-THE operation of the law of supply
and demand is equally effective in de-
termining the rate for commercial
loans and all other borrowings. In
fact. rates for commercial loans and
rates for collateral call loans have q
common root in the law of supply and
demand. and the conditions which at
feet one m the main anect the other,
although not in like degree, as is
tuation of call rates and the higher
points to which they 60. The rates
for call money do not determine and
have not exerted an important in1u-
ence on the rates for commercial bor-
rowings. It is the universal custom
of the banks to satisfy first the COM
mercial needs Of their customers.
They feel an obligation to customers,
but none to those who borrow in the
open market on securities. Besides. as
the resources Of the banks mainly
come from the commercial customers,
their own self-interest compels a
preference in favor of their CONNER
ciaI borrowers, since failure to grant
them reasonable accommodation
would induce them to withdraw their
deposits and so reduce the ability OF
the banks to do business. Although
the money of the banks and trust
companies comprises by far the great
err proportion Of the money loaned
on the securities market. an exami- :
nation of the prevailing rates on
commercial paper at times when the
call money market is particularly
strained indicates that there is little
casual relation between the rates for
call money and those on commercial
loans. Exhibits Nos 1 and 2. show
ing. respectively, the rates for call
change during the years 190s-1s1s and
the rates for commercial paper in
New York for the period from 1915 to
1890, are attached.
$50 long as collateral call loans are
made under prevailing conditions it
is difficult to see how the present
situation can be altered, because Of
the impracticability Of controlling the
underlying cause of high rates. which
in the last analysis is the excess Of
demand over supply.
Call Money Indispensable.
Call money in some form is in
dispensable to every important fnan-
cial center. There must be not only
an outlet for the employment of
funds temporarily idle. but a large
volume Of call and short time money
is essential to the successful and
economical conduct of business. 1t is
particularly essential to the interna-
tional and domestic commercial busi-
ness, but the diversion Of the use of
the major portion OF such money to
the securities markets is not in ac-
cordance with sound banking prin-
ciples. It is to be noted that in no
great world market other than New
York is the call money market SO
dependent upon investment securities
fiuences. In other markets the reverse
is true, as their call money IL based
principally on commercial paper upon
which realization can be had at the
central bank, at a price. in case need
We have seen that IN this country
call loans on securities lack this es-
sential quality Of liquidity required
for quick and certain realization, and
that this fact has now been more
generally taken into consideration by
our lenders. But the safe and sue
cessful divorce in this country OF the
use of call money from its dependence
upon investment securities as basis
requires careful study in order TIA,
safe and adequate methods may be
substituted for the present methods
Of the securities market"