41. INTEREST RATES IN THE NEW YORK MONEY MARKET' BY WILLIAM A. SCOTT

The published rates on money loaned on the New York market include two sets of quotations under the head "Call Loans," namely, call loans at the stock exchange and at banks and trust companies; seven under the head "Time Loáns," namely, 30-, 60-, and 90-day, and 4-, 5-, 6-, and 7-month; and three under the head "Commercial Paper," namely, double-name, choice 60- to 90-days, and two varieties. of single-name, prime 4- to 6-months, and good 4- to 6-months. In the weekly summaries contained in the Commercial and Financial Chronicle the minimum and maximum quotations for each class of loans are given. A comparison of these quotations reveals some interesting facts.

The five varieties of time loans quoted regularly often differ from each other in magnitude and range. A comparison of the minimum quotations for the last eleven years reveals the general rule that the rate tends to rise as the length of the loan increases, but to this rule there are many exceptions. For example, in 126 weeks of the period the minimum rates were identical for all classes of time loans. The 90-day and 60-day minimum rates were identical in 308 weeks, the 4-months and 90-day in 320 weeks, the 5-months and 4-months in 374 weeks, the 6-months and 5-months in 501 weeks.

The difference between these quotations rarely exceeds one-half of 1 per cent, and the general rule seems to be that the influence of time in raising the rate grows less as the length of the loan increases. For example, there is apt to be a greater difference between the quotations of 60- and 90-day paper than between 90-day and 4-months. Likewise, there is a greater difference between 90-day and 4-months than between 4-months and 5-months paper.

The range of time loans is much less than that of call loans, being rarely above one-half of 1 per cent in a given week, and on all classes being zero during the great majority of the 572 weeks investigated. The tendency for the rate to vary during the week grows stronger as the period of the loan increases. In the case of 60-days loans, for example, there were variations in only 162 of the 572 weeks, while in that of 90-day loans there were variations in 190 weeks, and in that of 4-months loans, in 238 weeks.

• Adapted from "Rates on the New York Money Market, 1896--1906," Journal of Political Economy, XVI (May, 1908), 273-98.

2

During the greater part of the last eleven years the rates on all classes of time loans have averaged higher than those on call loans. This was true of the annual averages of these rates for seven of the eleven years and of the monthly averages for 86 of the 132 months of the period. The exceptions to this rule, however, are important.

A comparison of the quotations on commercial paper reveals the same kind of differences that are noted in the case of call and time loans. The minimum rate on double-name paper is usually below

A Commercial paper, double name 60-day.
B60-day time.

C- Call loan.

that on single-name, but during 254 of the 572 weeks of the period it was identical with that on prime single-name paper. The difference, when one exists, is usually one fourth of 1 per cent. The range for single-name paper is usually greater than for double-name and the fluctuations are more frequent. As compared with the rates on time loans running for the same period, that on commercial paper, as a rule, averages higher. The exceptions to this rule correspond in time to those mentioned above, in which the call-loan rate averaged above that on 60-day time.

The chart above indicates the fluctuations in the following rates: the minimum rate on 60-day time loans, the minimum rate on 60to 90-day commercial paper, and the average call-loan rate at the

stock exchange. The fluctuations of these particular rates are typical of the others in each class.

It will be observed that in all their principal and in most of their minor fluctuations these three rates move together. In degree of change the call-loan rate was decidedly the champion, the 60-day time rate, as a rule, occupying second, and the commercial-paper rate third place. The cases in which these statements do not hold true are decidedly exceptional. These facts point clearly to influences common to all the rates as the chief causes of their fluctuations. These causes are to be found in the influences which affect the relations between the supply of and demand for loanable funds in the New York market.

V

RELATIONS BETWEEN BANKS

Introduction

In the foregoing chapter the bank has been studied as a type of business institution, and as such treated by itself alone, that is, independently of other banks. In actual practice, however, a bank is never isolated in this way. In the ordinary conduct of its business every bank is in many ways brought into contact with other banks-with those in the same city or community, with those in other cities, and even with the institutions of other countries. The development of the present interrelations of banking institutions has been partly due to a desire to effect certain economies in the conduct of the banking business; but it has also been due to a very considerable degreemuch more than has been generally realized-to the driving force of competition under conditions that were proving mutually disadvantageous, if not disastrous, just as the combination movement in industry was originally due in no small degree to the disastrous results of various practices inherent in competition.

Within a given city, for instance, the banks are constantly brought into relations through the daily granting of loans. The extent to which any bank may loan is dependent in part upon the extent to which other banks are loaning. And when the reserves of any particular bank are low there are numerous means by which it may increase its loaning power at the expense of, or through permission of, its competitors. One of the most important reasons for the establishment of clearing-houses appears to have been the common practice among banks of making use of each other's funds between settlement days. The clearing-house, once organized, has, moreover, come to serve the banks of a given community in a great variety of ways. Among these the clearing of checks has attracted the most attention; in fact, the clearing-house in this regard is one of the wonders of the modern world. There is something about this daily settlement of many millions of obligations in the space of a few minutes that makes a tremendous appeal to the imagination. Yet, after all, the "clearing" is merely an interesting, and relatively simple, labor-saving device,

and at the present time cannot be regarded as the most important function performed by the clearing-house.

By the "system as a whole" is meant not only the banks of a given community but those of the entire country, for though independently organized they are all inextricably bound together by mutual interests. These interrelations are discussed under two headings: first, the general relations that exist in the conduct of daily business, and, secondly, the peculiar relations that develop periodically with the ebb and flow of business activity. This periodical tension and ease in the system as a whole is, moreover, of two sorts, seasonal and cyclical, each of which has its own peculiar problems. It is in connection with these seasonal and cyclical variations, in fact, that the hardest problems of banking organization and control arise.

The banks through their clearing-house associations have endeavored to control certain competitive practices that work havoc in the system as a whole in every period of stress in the money market. To some extent they have been successful in this voluntary regulation of the machinery of banking; but in certain respects the immediate selfinterest of the independent members of the system has always proved too powerful to be controlled by voluntary association. Even though many, or even the great majority, of the banks of the system be willing and anxious to sacrifice immediate gains for the sake of saving the entire structure from crumbling, they are powerless to resist the minority. When some strike out to save themselves, leaving the system as a whole to its fate, the rest must follow suit, for the system is then already crumbling, and self-preservation becomes the first law of banking.

When the strain on the system is great at one point, some relief has often been gained by calling upon banks in some other part of the country; but there are limits to this in consequence of the independent basis of organization of our banks, and for the reasons suggested above. When the strain on the entire system becomes severe, relief has frequently been sought from the federal treasury; but this, too, is a limited source of aid. Finally, gold may be imported from other countries when the supply of loanable funds is inadequate to meet the requirements of business. At times some assistance has been procured from this source, but one of the striking weaknesses of our independent banking system has been the lack of effective machinery for controlling the international flow of specie; gold has often flowed out of the country at the very time when it was needed as a basis for domestic loans.