The fault here was in the system, not in any particular banks, nor in a special desire of the banks to facilitate stock exchange speculations. The banks were institutions for profit; they were competing; funds if idle were a source of loss; interest had to be paid to hold the account; investment of the funds was forced; the reserve banks had to depend upon secondary reserves which would be earning assets; since there were no facilities for redis-counting commercial paper, the best secondary reserve open was the collateral stock exchange call loan. The system hurt the banks as well as the country at large. The banks would have avoided the dangers if it had been possible, but they were in the grip of a faulty system from which they could not escape.

If the balances were used as the basis of time loans the hazard to the bank was increased, for its demand liabilities were offset by time assets. The banks' relative readiness to loan on time or call varied with the ease or tightness of the money market.

In his report in 1912 the Comptroller classified the loans of the New York national banks on June 14, 1912, as follows:

Demand

Time

Unsecured paper with one or more individual or firm names ...................

$ 17,796,000

Secured by stock, bonds, or other personal security........................................................

326,897,000

Total.............................................................

$344,693,000

Unsecured single-name paper (one person or firm)

...........

$219,172,000

Paper with two or more individual or firm names

........................

171,791,000

Total.....................................................................

........................

$390,963,000

Secured by stocks, bonds, or other personal security, or on mortgages or other real estate security..........................

$223,410,000

Total...............................................................................

$614,373,000

While the great proportion of the demand loans were collateral loans, no small part of these were loans to correspondent banks, and the security in such cases was mostly bills receivable. Somewhat more than a third of the time loans were also secured by collateral. Probably more than half of the collateral loans were made to others than members of the stock exchange. The situation, however, was not relieved much by the use of bills receivable as collateral, for no rediscount market existed.

Nor was the situation relieved by direct investment or loaning by the client bank in the stock market. If any country bank through its reserve bank as agent loaned in its own name any of the surplus funds which it had on deposit with the reserve bank, it might earn a greater return than the 2 per cent interest allowed on the balance, but when it called the loan and paid the amount again into its balance, the effect would be exactly the same as if the reserve bank had loaned the balance for its own account. Indeed, it was probable that the New York borrower in paying the direct loan to the country bank borrowed from some other New York bank.