There is a very important reason for making short loans in New York City, which is the center, of banking in this country. Every national bank must keep a reserve in United States notes as a fund to answer the calls of depositors; and it must never be long below the legal limit. With respect to the amount of this reserve banks are divided into three classes: banks in the central reserve cities, in the reserve cities, and other banks.1 The banks in the central reserve cities must keep a reserve of twenty-five per cent, those in the reserve cities must also keep as much, but one half of this amount may he kept with a bank or banks in a central reserve city. The country banks must keep fifteen per cent; of this amount they must keep six per cent at home, and may keep the re maining nine per cent with a hank in a reserve or central reserve city.

The national country banks and those in the reserve cities keep, for a large portion of the year, the full amount of their reserve permitted by law in the central reserve banks. The amount of the reserve kept in them, especially in the New York national banks, is a very large sum. A few figures may be given.

1 For the names

By the September statement, 1902, returned to the Controller of the Currency, the aggregate deposits of the New York banks were $884,407,908. Of this sum $260,-010,282 belonged to outside national banks, $64,003,846 to state banks and bankers, and $106,950,048 to trust companies and savings banks. This vast fund, aggregating $430,964,176, was essentially a reserve held by the New York banks for other banks and bankers.

The New York banks realize the importance of keeping this reserve, belonging to hundreds of banks and bankers throughout the country, in loans that can be instantly demanded.

To whom are such loans made? Principally to speculators, who use it to pay for stocks. A speculator may buy stock, pay a part of the purchase price with his own money, and borrow the remainder of a bank, turning over the stock as security. The reason why the bank will not lend him the full amount is, the stock may decline in value, and then the security would be inadequate. On most of the loans of this character there is a margin left for depreciation, and the agreement also contains a stipulation that, if the stock declines in value, its margin must be made good by depositing other stock or paying a portion of the loan; and that, if this is not done, the bank can at once, without further notice to the borrower, sell his stock and apply the proceeds to discharge his loan. This is known as a collateral stock note. By virtue of this agreement the lending bank is clothed with great power in dealing with the security. There is need of having a wide latitude of authority, as we shall soon learn.

Call loans are made in another way to brokers for the use of speculators. A speculator buys through the broker some stock and pays one tenth of the purchase money, the broker agreeing to furnish the remainder, or, to use their term, "carry" the stock for his customer. He is expected to keep the margin good, that is, if the stock declines, to pay more money or give additional security, and if he does not, or can not, the broker has the right to sell it in the same manner as the bank could if it were the lender. Brokers obtain their money largely to accommodate their customers by borrowing of banks and pledging the stock of their customers. In other words, brokers act as agents for their customers to raise loans for them, on the security of the stock which has been bought through them.

Call loans are made to some extent to other persons than to speculators. But merchants and business men generally borrow on time, for they do not wish to be put in a corner where payment can be demanded of them at any hour or day. How, then, can a broker or speculator run this risk? Suppose a loan is demanded, what ran he do, for he has no money wherewith to pay? He expects, if his loan is called, to be able to do one of two things: either to sell at once the stock pledged as security, or obtain a new loan at another hank and with this money pay the first lender. A business man can not run such a risk, because his loans are not backed by collateral that is instantly convertible into money.

If a hank should call only a few loans at any given time, it would he easy for the borrowers to negotiate new loans with other banks on the same security, and pay the original lenders. Suppose many of the country banks should demand their reserves at the same time, which often happens, then it would not be so easy for borrowers to obtain new loans of other banks. The reason is apparent. They, too, are calling loans, and of course have no money to lend. Such a state of things occurs every year of two among the New York banks. When one country bank wishes its reserve, a similar condition of things often exists with many other banks which results in calling theirs. Consequently all the reserve keepers call loans at the same time; and of course cut off all applications of borrowers.

What, then, can borrowers do? They must sell the stocks or securities on which their loans are based. But, unfortunately, the offer of so many stocks for sale at the same time has a disastrous effect on their price. By the operation of the familiar law of supply and demand, prices rapidly decline. This is the explanation of some of the violent revulsions in the stock market. Prices quickly recede, margins are swept away, and banks suddenly discover that their loans are not properly secured.

Then comes a most anxious question with the banks, shall they sell the stocks thus pledged to them for loans at ruinous prices, or try to keep them until the market recovers? If they are sold and do not yield enough to pay the loans based on them, the borrowers are liable for the balance ; perhaps they have failed, and the lending banks may fear that if their loans are not repaid from the sale of the stocks pledged by them as security, a loss will ensue. Rather than incur this risk of loss the banks conclude to hold the stocks until the market recovers. But banks all around are calling for their reserves; what, then, must the reserve keepers do? Money must be forthcoming from some source to respond to these demands. So they cut off all loans to their ordinary borrowers, merchants, and the like, and the money received from the discharge of loans previously made to them is sent to the country banks. Thus the mercantile class is sacrificed to obtain the money to pay the country banks, and the speculators are saved, not because they are more worthy or more highly regarded than others, but through fear that the sacrifice of them might result in a loss to the lending banks themselves. In other words, the banks become involved through this system of call loans which can not be easily liquidated or paid when demanded, and, to escape loss, they squeeze the most deserving borrowers, who, from every point of view, are entitled to the highest consideration.

Therefore it follows that call loans do not always prove to be call loans. In truth, it is more nearly correct to say that they are never call loans when the banks demand a great quantity at the same time. This policy, therefore, to a considerable degree, is delusive, and banks which lend their deposits in this manner' do not have them so completely under their command as they imagine.

Some large non-banking concerns occasionally, when the rates on call loans are high, lend their bank balances in a similar manner. The aggregate amount of loanable funds in the market is not increased by this operation, for they simply lend money which would otherwise be lent by the banks wherein it is deposited. The object of lending them is apparent, to get a temporary higher rate of interest than is paid to them by the banks or trust companies. On the other hand, as the institutions in many cases pay their depositors a regular rate, whether it is earned on their money or not, it is not quite fair for the latter to take their deposits out when they can get more from other customers and put them back when the bank rate is highest Doubt less the matter will be adjusted in due time, for banks can not afford to give, nor can depositors expect to receive, more than a fair proportion of the profit accruing from the lending of their money.