Evening star., 1920-04-03
RATES ON CALL LOAN MONEY
DISCUSSED BY GOV. HARDING
Letter Sent by the Head of Federal Re-
serve Board to Senate Explaining
Cause of High Figures.

The rates of interest charged for
call loan money in New York are dis
of the Federal Reserve Board to the
Senate in response to a resolution
adopted by that body asking the
board to inform the Senate what Is
the cause and justification of the
high rates charged, and what steps
are required to abate this condition.
Gov. Harding says that the board
could not undertake to form a judg-
ment upon the matters referred to
without study and investigation of
such a comprehensive nature as
would seriously interfere with the
conduct of its regular work" He
says in part:
"As to the cause End Justification
of the high rates OF interest which
1t thus appsGfa may legally be
charged % collateral call loans in
required to abate this condition,
there is, as is well known, wide dif-
ference of opinion among persons
who have given thought and study to
the question. Indeed, broad and fun
damcntal questions of general eco
homie and social policy are involved
in the last analysis. the whole ques-
tion of the utility Of speculative deal
ings in securities and commodities on
organized exchanges Ia involved; and
more Immediately the question OF the
methods and practices of the leading
speculative markets of the country.
margining. stock manipulation and
kindred matters also susceptible OF
abuse. AS to these the board has
never had occasion officially to form
an opinion; the federal reserve act
specifically precludes the purchase or
discount hv federal hanks of
notes, drafts or bills covering
merely investments or issued or
drawn for the purpose of carrying or
trading in stocks. bonds or other in
vestment securities, except bonds and
notes of the government of the
United States.'''
Explains Call Money Market.
There is included in the reply to
the Senate a memorandum prepared
by the federal reserve agent in New
York, explaining in general the ma
ture and operation of the New York
call money market and causes of high
and f1uctuating rates for call money
In that center.
1t is shown that call loans, in the
general acceptation of the term. are
made chiefly in New York. practically
the only important call money mar
payable on demand, secured by the
pledge of investment securities. The
memorandum continues:
The reference in the resolution to
the present high rates for call money
in the financial centers and the in
Quiry as to their causes require, it is
felt. survey of the operations of the
money markets and the reflection
therein OF the underlying economic
conditions which govern. in varying
degrees. all money rates, including
those for call money.
I'm former times and snpcfAcal l1v
prior to the institution of the federal
reserve system. bankers, especially in
reserve centers, were accustomed to
look upon call loans as their prin-
cipal secondary reserve on the theory
that inasmuch as those loans were
payable upon demand, funds SO invest
ed could always be promptly obtained
on short notice to meet Withdrawals
of deposits or for other use. In these
circumstances there was ordinarily
available for collateral call loans a
supply of funds sufficient for ordi-
nary market requirements and at low
rates, although at times the rates rose
to high levels as the supply Of funds
diminished or the demands increased.
Bank Attitude Nodded.
This attitude of the banks toward
call loans as their chief secondary
reserves has been greatly modified
by two causes. The FIRST was the
closing Of the stock exchange at the
outbreak OF the European war in the
summer of 1914. when it became prac-
loans secured by investment secu-
rites. which became. therefore.
frozen loans This resulted in a
more or less permanent prejudice
as secondary reserves. The second
and more important factor was the
creation of the federal reserve sys-
tenn Under the terms of the federal
reserve act provision is made for the
rediscount OF commercial paper, but
the rediscount OF loans for the pur-
pose OF carrying investment secu-
rites. other than United States gov
eminent obligations. is excluded. Con-
seQuently. in order to maintain max
1mum liquidity, with suitable pro-
vision for secondary reserves that can
be Immediately availed of. banks, in
cluding foreign agency banks, now
tnvest a greater proportion of their
resources in assets that can be real
lied upon at the federal reserve bank.
Loss OF Foreign supply.
Another changed factor in the pres
that the war and postwar conditions
have rendered unavailable supplies
of money which formerly came from
foreign banks. Since the summer of
have largely increased, the volume of
bank money available to the secu-
rifles market at low or normal rates
has not increased proportionately,
but on the contrary has probably de-
creased. All of these circumstances
explain in some measure the increased
rates which have often been required
during the past year for money loan
ed in the securities market.
Changed conditions are also pres
ent in the factors governing the de-
nnand for money. Prior to the armi-
stice agencies of government were
employed to restrict the issue of new
securities for purposes other than
those which were deemed essential
for carrying on the war. At the same
time. as the Treasury undertook to
sell large amounts of certificates of
indebtedness and liberty bonds bear
ing low rates of interest, the question
arose as to whether the competition
of the general investment markets
might not prejudice the success of
the government issues. In these cir
cumstances. with full understanding
on the part of the Treasury Depart
1nent. the officers and members of the
New York Stock Exchange undertook
volve the increased use of money for
other purposes. in consideration Of
which the principal banks of New
York city endeavored to provide a
stable amount of money for the re-
Quirements of the security market.
Removal Follows Armistice.
After the armistice these restric-
fions were removed and ordinary mar
ket forces reasserted themselves. The
issuance Of new securities was re-
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