The charge made by banks upon promissory notes as distinguished from bills of exchange usually follows the rate of discount very closely, but is not always identical with it. The Bank of England has often made a difference of two per cent between the two, and it is probable that most banks charge more on the former class of loans. The explanation of this practice is to be found in the purpose for which such loans are made and in their relation to the banking business. The money thus borrowed is used for an almost infinite variety of purposes, but very often for the expansion of business, the making of improvements, and the meeting of temporary deficits due to all sorts of causes. In such cases the funds for payment must come from profits which depend upon the outcome of the operations undertaken or from other sources which are frequently uncertain to some extent. Bankers are frequently asked to renew such loans upon the date of their expiration, a circumstance often due to the fact that the expectations of the borrowers have not been realized. From the banker's point of view, loans of this character are distinctly inferior as investments to bills of exchange. Unlike these, they are not based upon transactions the completion of which creates the funds which may be used for their payment, and though they may mature in comparatively short periods of time, they are much less apt to be paid at maturity. On the score of security in the ordinary sense, promissory notes may be quite as good as bills, since the bank may require the deposit of securities, or goods of a value considerably in excess of the notes, or the endorsement of men of known financial ability, but in spite of this fact such notes lack the high degree of fluidity possessed by the best bills.

In some cases doubtless the higher rate on loans of this character may be explained by the law of demand and supply. Ordinarily we may suppose that a bank prefers first-class bills and will invest as large a portion of its funds as possible in this way. Only the surplus, therefore, which cannot be thus used, will be available for loans of the other class, and this as compared to the demand for such loans may be relatively so small as to raise the rate considerably above the discount level. Such a circumstance would undoubtedly tempt the bank to increase the investments of this class at the expense of the discount fund, but ordinary prudence might render this inadvisable. Safety demands that a sufficient portion of the funds should be automatically transmutable into cash to enable banks to keep their reserves at the proper level, and, whenever possible, they use bills for this purpose.

The proportion between bills and promissory notes in the portfolios of banks varies greatly according to their situation and the nature of the business conducted in the vicinity. In country towns and small cities bills are rare and most of the investments belong to the other class. In such places it is probable that no distinction is made between the two rates, but in the large centres it is otherwise, and a consideration of the difference in the character of the two classes of securities is imperative. It must be remembered also that a promissory note may be used as a substitute for a bill. An exporter, for example, may demand cash for his goods, and the purchaser may obtain the necessary funds from his bank on the security of his note due on the same date as a bill of exchange that might otherwise have been drawn upon him. In this case the sale of the goods purchased enables him to pay the note, just as otherwise it would have enabled him to meet his bill at maturity. There is, of course, no substantial difference between notes of this character and bills, and banks would be quite as willing to take the one as the other. In those lines of business and in those places where cash transactions are the rule doubtless many promissory notes are of this character, but this is not the case on a sufficiently large scale to obliterate the distinction here drawn, and to reduce to insignificance the difference between the rate of discount and that on short loans.

3. The rate on "call-loans." - In large commercial centres bankers frequently lend considerable sums on condition that the money be returned on demand. The funds used for this purpose come chiefly from two sources, namely, from that portion of the reserve which is not needed to meet the regular, daily demands of depositors, and from that portion of the regular discount fund which may chance to be temporarily unemployed. As we have seen, the reserve of a bank consists of two elements, one representing the cash needed in the everyday transactions of its customers and which is entrusted to it simply for safe-keeping, and the other an amount retained as a means of safety and used to meet unforeseeable and irregular demands. This latter fund cannot be safely invested even in bills, unless it is very large, and the business of the bank's customers is of an unusually certain character, but it may be lent on call. An unemployed surplus in the discount fund may also be lent in this way, but this is not its only possible use. If the portfolio of bills is ordinarily large relatively to the reserve, such a surplus may be invested in short loans instead.

The demand for call-loans comes from people who have opportunities to turn capital over rapidly, and who can, therefore, profitably use funds available only for a few days. The fact that money is borrowed on call does not, of course, necessarily mean that it will actually be "called" within a day or two. Borrowers may be able to retain it for considerable periods of time, but the obligation to return it upon demand involves the necessity of investing it in such a form that cash can be readily realized, if necessary. The investments of bill-brokers and stock-brokers are the most easily disposed of, and it is, therefore, from these two classes chiefly that the demand for call-loans comes. As intermediaries between the drawers of bills and the banks, bill-brokers are able to sell very soon after they buy, or they are able to hold their bills until maturity, provided they can borrow at low rates and are not pressed for payment. Stock-brokers are in much the same situation, though as a rule they are expected to settle at regular intervals. In case of necessity, however, they can throw their securities upon the market and realize upon them at once.

The rate on call-loans is ordinarily low, but at times rises to astonishing heights. Banks can afford to lend the funds above described at any price which will more than pay the expenses involved, because otherwise they constitute dead property and bring in no income at all. Ordinarily brokers can afford to pay low rates only, because they trade on very small margins and take heavy risks. If they were obliged to pay even ordinary discount rates, the total expense of their business might more than offset the difference between the prices at which they buy and sell. The extraordinarily high rates on call-loans which are sometimes observed are due to severe monetary stringency, such as usually accompanies the panic point of a crisis. At such times brokers find themselves between the horns of a dilemma. Their loans are called by the banks which are in need of their reserve funds and more, and the shortage of money makes it difficult and sometimes impossible to sell bills and stock-exchange securities at any price. Brokers will then bid extremely high in order to save themselves from failure.

The rate on call-loans is in some respects an excellent indicator of certain commercial conditions, because it is the first to exhibit the effect of sudden changes and is the most sensitive of all the rates. The slightest pressure upon the money market is certain to affect it, and every degree of increase is sure to be registered in a higher rate. At such times the banks resort first to their loans at call, and may demand them all, if the situation becomes serious. This rate is also very sensitive to stock-exchange conditions, since any unusual operations or events in this quarter increase the needs of brokers for temporary accommodations from the banks, while a sluggish market diminishes their demand. International trade, affecting, as it does, the market for bills, registers its sudden and unexpected fluctuations in changes of this rate. Indeed, it is a kind of commercial danger signal warning the public of any occurrence out of the usual order.

The relation of this to the discount rate is close and often direct, since both may be affected by the same causes. A disturbance in the money market which compels the banks to call their loans may prove serious enough to cause a curtailment of discounts, in which case both rates rise together, though that on call-loans is quite certain to exhibit the greatest fluctuation. Both are apt also to reach their minimum at the same time, since a sluggish market for bills is certain to increase the funds available for call-loans and may decrease the demand for them. As a rule, however, the call-loan rate moves first and most rapidly, the range of its fluctuations is the greatest, and certain of its minor movements may be quite independent.