The bulk of call loans, known also as demand loans, are made to stock exchange brokers on stock and bond security. As the name indicates, call loans are made subject to call at any time; the borrower as well as the lender has the right to terminate the loan at any time. Business men generally borrow on time loans where both the rate of interest and the time are fixed in advance. They could not afford to run the risk of having their loan called at the will of the bank because the kind of collateral they offer for loans cannot be converted instantly into money. The stock broker, if his loan is called, can sell the stock pledged at once or borrow from another bank and so pay the first lender. In practice call loans are one-day loans, that is, they are subject to call the next day. The practice of Wall Street is to give the broker until 2:15 p.m. to pay a loan, and no loans are called after 1:00 p.m. Calls are made in the morning, so that the broker is given several hours in which to arrange for the payment of the loan. Many banks give the borrower more than a day's notice, sometimes a week or longer. Many call loans run for weeks or months without being called. The bank is just as eager to continue a loan, if the security is ample and the market rate of money steady, as is the borrower. Yet if the demand for money becomes pressing, or if the bank fears the borrower's solvency, it will not hesitate to call a loan instantly to protect itself from loss.
While the rate of interest on call loans fluctuates considerably from time to time, it is lower as a rule than on time loans. Why. then, do banks lend so much in this way? The answer is that banks believe they have a more complete command of their funds. The chief source of a bank's loaning resources is the deposits of its customers, and since these are for the most part subject to call or check, it is essential to keep a considerable amount of the deposits loaned in such a way that the bank can recall them at short notice.
The banks of New York City, which is the center of banking in this country, have had a very good reason for loaning on call. Every national bank is required to keep a cash reserve to meet the demands of depositors. Previous to the passage of the Federal Reserve Act the law required bunks in reserve cities to keep a reserve of 25 per cent, and in the three central reserve cities, New York, Chicago and St. Louis, this fund had to be kept in their own vaults. National banks in the other reserve cities were required to keep only one-half of their reserves at home, and country banks, whose reserve requirement was 15 per cent, might keep 9 per cent in a reserve city. The result was that banks all over the country kept a considerable part of their reserves in New York, partly to meet the demand for New York "exchange" from their customers, and partly because the New York banks are willing to pay a low rate of interest, generally about two per cent, on these "bankers' balances," as they are called. If these balances were not thus deposited they would lie idle in the vaults of the country banks possibly for months at a time. The New York banks, on the other hand, must keep these bankers' deposits, belonging to hundreds of banks and bankers throughout the country, and subject to demand at any time, in loans that can promptly be recalled. This practice in the past of concentrating reserves in New York constituted one of the fundamental weaknesses of our banking system. The Federal Reserve Act, which provides a reliable rediscount market where banks can always realize on the high-grade paper they have discounted when they need funds to meet an emergency, will bring far-reaching changes. Since New York is the financial center of the country, and is likely to hold that position for many years to come, it is probable that banks will continue to keep some part of their reserves in that city to meet the demand for New York exchange. Since, however, every member bank is required to keep part of its reserve in a Federal reserve bank, and since each of the cities having such a bank will be a par exchange point, the necessity of keeping funds in New York for this purpose will diminish. On the other hand, if the Federal reserve banks do not pay interest on the deposits of member banks, the latter will be prone to keep only the minimum reserve required in the reserve bank and to send unemployed funds to the great financial centers as heretofore; and, in any case, banks and trust companies that are not members of the new system are likely to continue this practice. The New York banks will not be under the same necessity of resorting to call loans in order to keep their assets fluid if they are members of the Federal reserve system, since they, in common with all other member banks, can always procure funds by rediscounting their commercial paper at the Federal reserve banks. The stock broker, however, will continue to need funds to carry on his business, and though he may have to pay higher rates for accommodations under the new system, the call loan modified, perhaps, in some particulars is likely to continue as an important element in our banking mechanism.