In any case, when trouble comes and panic conditions prevail, it requires no stretch of the imagination to say that the stockbroker’s loan is a better loan than that of, let us say, the silk merchant, for he, perhaps, cannot easily repay. He is under immense liabilities in various directions and he has many obligations; whereas the stockbroker feels every minute of the day that his first duty is to the bank; the customer who owns the securities in the loan must either deposit sufficient margin or the broker will sell him out, in which case the loan at the bank is paid off. Finally, it may be added that in the October panic of 1907, when merchants’ failures were announced daily, and when certain banks and trust companies closed their doors, not a single failure was announced on the New York Stock Exchange.
Another objection often lodged by critics of present-day banking conditions, has to do with the practice of New York banks in the over-certification of brokers’ checks. These over-certifications are held to be objectionable because the National Banks are forbidden by law to certify for a sum greater than the drawer has on deposit. In practice it works out this way: The broker’s clearing-house sheet of to-day tells him what payments he has to make, so on the following morning he acquaints his bank with the fact that payments are to be made necessitating certifications beyond the amount of his deposit. He then sends to the bank the promissory note of his firm, payable on demand, and the bank credits his account with the proceeds. As the day advances the broker’s checks come in and are credited to the account, which is always balanced and the note paid off before the close of the day’s business. The risk is nominal.
Of course a few hours elapse between the certification and the receipt of the broker’s checks, and in this brief interval it would be possible for a dishonest man to abuse the privilege extended him, but the fact that such a thing does not happen affords tenable ground for the belief that it will not happen. The bank does not deal with an individual, but with a firm, and it knows that the firm has a membership in the Stock Exchange, with a cash balance on deposit in the bank that extends the accommodation. Any banker will bear witness that the business is quite satisfactory and that it involves no loss. Moreover, this certification of stockbrokers’ checks is essential to the maintenance of broad speculative markets, and, whether that portion of the public that criticises the practice likes it or not, speculation is a necessary part of our business life.
It may be pertinent to remark in this connection that the law prohibiting these certifications by National Banks is unnecessary and unwise, as is evidenced by the facility and safety with which it is honored in the breach. State Banks in New York are under no such restriction, nor has it occurred to our lawmakers that a necessity for the prohibition exists. The experience of these banks in the matter of certifications, like that of the National Banks, shows that the business is safe and sound. If the merchant discounts his paper for thirty, sixty, or ninety days, why prevent a similar accommodation to stockbrokers for an hour or two? Both are engaged in a strictly legitimate business upon which the welfare of the community in greater or less degree depends, and the fundamental purpose of a bank is to promote and encourage such business. That is what banks are for, and bank officers are supposed to know something about how, when, and where accommodations may be extended with safety to all concerned.
Mr. Horace White cites the year 1909 as an illustration of the employment of loanable bank funds by brokers which brings up another point. For long periods in that year, money loaned on call on the floor of the New York Stock Exchange at 1½ per cent., while our banks were paying 2 per cent. to the interior banks to which the money belonged. This does not necessarily mean that the banks were losing money; because the greater part of these funds was employed in time loans and in commercial discounts at 3 and 4 per cent., thus raising the average income rate. There is also to be considered the unearned increment which the bank gains by “holding” its depositor, even though no large profit accrues from the funds thus deposited.44
As the ratio of reserves to liabilities at that time was much above the legal requirement, it might be inferred from this and from the 1½ per cent. rate that money was easy; but it was not, as many persons in commercial pursuits learned when they tried to borrow it. There was a great deal of money that was not being used in daily business, and one of the reasons was that the period was one of distrust. Stockbrokers got funds at 1½ per cent. while many other borrowers were required to pay stiffer rates, because the banks that controlled the money market—i.e., the loanable funds—were unwilling to part with them except for short periods and on instantly marketable security, and this state of mind on the part of the New York bankers was shared by the bankers of Europe. It was good banking, because it was prudent and conservative. In other words, at a time when danger threatened, bankers in all important centres of the world regarded Stock Exchange collateral as ideal security, and, as we have seen, the aggregate of their loanable funds pressing on the market kept call rates down to 1½. If in times of doubt and distrust this form of collateral proves its safety, is it not a fair hypothesis that it is safe at all times?
If the critics are correct in their contention that pressure of easy money in the New York market holds out inducements for foolhardy speculation on the Stock Exchange, the year 1909, just cited, should have witnessed a great boom in securities. If speculators could borrow at 1½ per cent. on securities that netted 5 and 6 per cent., the theory of our adversaries is that this disproportion entices a large number of people into such speculative ventures that inflation takes place, followed by collapse. That nothing of the sort occurred shows that critics, like other less gifted persons, may err; it shows, too, what every thoughtful person knows, that booms are not created on the Stock Exchange, which merely reflects in its dealings external conditions of all sorts, among them psychological processes which neither brokers nor money markets may hope to control. As a matter of record, 1909 showed but little increase in the volume of business transacted on the Stock Exchange as compared with 1908, and the increase, such as it was, represented nothing more than a natural recovery from the paralysis following the débacle of 1907, plus an investment of funds at attractive levels. The same state of affairs prevailed in 1910. From June to December of that year call money rates almost never exceeded 3 per cent., and time money might be had at from 3½ to 5, yet far from stimulating speculation—far from revealing an excessive employment of bank funds by stockbrokers—transactions both in shares and bonds dwindled to insignificant proportions.
Cheap money is by no means a “bull argument” from the Stock Exchange point of view, because it arises from dull conditions in commerce and industry, and there can be no boom in the securities which represent the nation’s business unless mills and factories and railroads are prosperous. There have been more bull markets with tight money, or with money in the neighborhood of 6 per cent., than in cheap money markets of the sort just described. This is not equivalent to saying that a prolonged rise can be conducted through a period of dear money. As a matter of Stock Exchange experience such a condition seldom arises, because the Stock Exchange discounts the future, foresees those economic conditions that spell prosperity for the country, and advances the prices of securities on a money market that has not yet felt the demands of improved conditions.
In June, July, and August, for example, conditions may warrant a hope of bountiful harvests, while general business is dull and idle money abundant. Such a prospect is always discounted, other things being equal, by a rise in securities, and money that is not yet required to market the crops thus finds employment as loans on Stock Exchange collateral. Later on, when reviving business leads the interior banks to call their New York balances, the depository banks meet the demand by calling loans and by advancing rates. The speculative movement on ’Change is then checked or reversed just in proportion to the demand for money elsewhere. It may continue for a while if the discounting process has not been complete, or if there remains a wide disparity between interest rates for money and net returns on securities; or if the independent resources of the city banks are large enough to furnish comfortable interest rates even after the westward drain has commenced, but, generally speaking,