< Pt* RURAL NEW-YORKER 
1053 
A Primer of Economics 
By John J. Dillon 
Part XXXIX 
It is generally known that banking is a 
paying business, and men unfamiliar with 
it frequently ask how the banks accumu¬ 
late such large profits. In the first place, 
the banks have an income from their own 
capital and surplus. The surplus of the 
most prosperous banks is constantly in¬ 
creasing, and helps to increase the profits. 
Then the national banks are authorized to 
issue their own notes as money. They 
deposit government bonds in the United 
States Treasury, and issue their own 
notes to the amount of the bonds. The 
government pays them interest on the 
bonds, and the people who borrow money 
pay interest on the bank notes, which, 
because of the government’s guarantee, 
circulate sis money. This virtually gives 
them two interests on the amount of their 
investment in government bonds. The 
Federal Reserve Banks also rediscount 
notes and bills for them at a lower rate of 
interest than customers pay them, and a 
profit accumulates from these transac¬ 
tions. The banks accumulate large sums 
from depositors, on which they pay com¬ 
paratively little or no interest. Experi¬ 
ence has shown that about 35 per cent ->i 
this is all that is needed to pay the checks 
drawn against them by depositors. Con¬ 
sequently, tin 1 banks loan substantially *>•» 
per cent of the deposits and receive in¬ 
terest on the loans. They also charge a 
commission on bills of exchange, and b>r 
collecting checks and drafts. 1 nder a 
recent amendment to the law. national 
banks are now permitted to do a trust 
business. They may act as executors, ad¬ 
ministrators, guardians, and in other 
financial capacities. This enlarges their 
gcope and increases their opportunity for 
profits. Sometimes, individually, and 
often in syndicates, the banks underwrite 
large issues of bonds, and through their 
organizations distribute them at a good 
profit. They are wholesalers of bonds, 
and in some cases the profits in retailing 
them are very large. In one issue of $02,- 
000,000 of government bonds during the 
Cleveland administration, it was estimat¬ 
ed that the banks in tlic syndicate made 
an immediate profit of $18,000,000. Aside 
from these largely legitimate sources of 
revenue, banks at times take part in the 
promotion of “securities" companies, the 
refinancing of railroads, and other specu¬ 
lative enterprises. Some o! these under¬ 
takings are attended with hazard, but 
when worked on a large scale, through a 
highly developed system, the ventures are 
highly profitable to the hanks and bank¬ 
ers in the undertaking. 
Another source of questionable profit- 
fo the banks is the “call loan" business in 
the large commercial centers, especially 
in New York. The “call loan” is a neces¬ 
sary incident to the speculation or gam¬ 
bling operations of \\ all Street. 4 be 
Stock Exchange is a membership organi¬ 
zation. accountable to no mu* but its own 
members. From day to day a number of 
the members consult one another in per¬ 
son or over the telephone and decide what 
tlie rate of interest should be for the day. 
They are not bound by the money law 
which limits interest rates in New A ork 
to f> per cent. These members ascertain 
the amount of money the banks arc will¬ 
ing to loan for the day, and .act as 
agents of the. banks in making the loans. 
The rate of interest to be charged is posi¬ 
t'd on t lie exchange bulletin, and the banks 
mark the rate up or down to the rate 
posted Oil the exchange. During the year 
1020 the rate varied from (> to 30 per 
cent. The Controller of the Currency 
estimated from his reports tlial $1,000,- 
000,000 was out on “call loans” on June 
;;0. 1020. At 0 per cent this would mean 
a daily profit to the .New A ork banks of 
330.000. At 00 per cent (lie profit would 
be $100,000 a day. II does not appear 
that 00 per cent was charged on all the 
loans by all the banks on any day. but 
substantial amounts were loaned at rates 
from 1.5 to 30 per cenl ■ 
Incidentally, this custom reveals a sig¬ 
nificant practice in the Stock Exchange. 
The brokers who have the exclusive priv¬ 
ilege to buy or sell on the exchange for 
either themselves nr customers have it in 
their power to say what the customers 
must pay for the use of money, whether 
loaned by tin* bank or advanced by the 
broker. The brokers speculate freely on 
their own account. Sometimes they buy 
and sometimes they “sell short”; that is 
to say, they sell stocks which they do not 
own, below the last quotation, for the 
purpose of driving prices down to suit 
their own manipulations. They bet that 
the stock will fall in price. If they sire 
loaded up heavily they can reduce the 
“call rate” and encourage buying. If they 
want to buy themselves, or work the 
“short.” sales, they can put the rate high 
enough to discourage buying. They help 
their own bet. The broker takes orders 
on a 10 per cent margin, and names the 
rate of interest bis customer must pay on 
the 00 per cent of his purchase. If the 
stock declines on the market, the cus- 1 
tomcr must be prepared to increase his 
margin and to pay the loan on “call.” 
The outsider lias a slim chance indeed in 
that kind of business. 
The banking system is designed to en¬ 
courage the Wall Street game. Because 
of the large volume of foreign and domes¬ 
tic trade, cleared through New York, 
many houses in the interior keep deposits 
in New York banks. Being a central re¬ 
serve city, many interior banks keep 
their reserves in New York, and because 
• •f the high rate of interest on the “call 
loans,” country banks send money there 
for investment. Consequently, the whole 
country is drained to flood Now York 
City banks with money. Agricultural 
and commercial interests of the interior 
are left without money for their needs, 
and speculation is encouraged in the large 
centers. Through periods of speculation 
and high prices the banks are encouraged 
to increase loans to earn large incomes. 
When the reserves begin to fall below the 
legal limit they refuse new loans and de¬ 
mand payment on old loans, ’l’bis forces 
liquidation and a downward tendency of 
prices. Houses find themselves insolvent. 
Failures follow, and if carried far enough, 
panic develops. 
The national banks were, as a whole, 
opposed to the law which created the 
Federal Reserve System, hut experience 
lias shown that it has served them well. 
There are now 8.157 national hanks in the 
country, with more than 20,520,117 de¬ 
posit accounts, or one depositor out of 
every five persons, young or old. in the 
country. Their resources are $22,711.- 
375,000. In the last seven years their re¬ 
sources have been increased more than in 
the 50 years previous. Their capital is 
now $2,022,075,000, and their deposits 
$17.1 ”5,421,000. Their net earnings for 
1020 were $282,083,000. The increase in 
six years has been $41,700,770 more than 
the total increase for 44 years preceding. 
The high earning ran for the year 1020 
from 33 to 55 per ccp,t. The national 
hanks have prospered under the Federal 
Reserve law. 
To establish standards and to coin 
money is clearly a governmental function. 
The right to issue paper money is akin to 
the right to coin money. It is also a 
governmental right. This privilege is now 
delegated to the national banks and Fed¬ 
eral Reserve Banks by the national gov¬ 
ernment. Those banks are corporations. 
Their purpose is to make money for their 
stockholders. This purpose is not consis¬ 
tent with the right to increase or. de¬ 
crease the amount of money and credit in 
the country at will. Bankers are the ac¬ 
knowledged authority on financial mat¬ 
ters, and naturally influence the govern¬ 
ment in shaping of new financial leg¬ 
islation. as well as in the administration 1 
of financial laws. From it all. it would , 
seem that the interests of all the people 
would be better served by .a policy that 
would reserve the right, to issue currency 
and to regulate its volume to the national 
government. 
Stray Hens and Automobiles 
AY hen it comes to an argument between 
a farmer and a man from the city about 
chickens on a public road, 1 guess one has 
to ask The It. N.-Y. for a decision, so 
here is the argument : B owns a place on 
both sides of the road, house on one side 
and chicken coop on the other side. C 
owns a car and uses this road three 
or four times a day, and every time G 
comes along with his car It’s chickens arc 
on the road, and, as all chickens do when 
a car comes along, flock right in front 
of it, and, oi course, one of them is apt 
to be unlucky and lose his bead twice. 
B provides a place to keep his fowls in. 
hut does not keep it in repair, and they 
get out. all the tjme. G told B t*> kepp 
his chickens off the road, and that if lie 
killed any of them lie would not pay for 
them unless he was with them <>r driving 
them across the road. B said if G did 
kill any, regardless whether he was with 
them or not, G would have to pay for 
them. B has threatened to slmot un 
G’s tires and car. Don’t you think R 
is very unreasonable? Who is right? 
Pennsylvania. A. it. n. 
As tin 1 value of fowls killed in the high¬ 
way by automobiles is usually trivial, 
there seems to have been hut few actions 
brought for the death of the fowls. There 
is, however, a recent case decided in 
Oneida County Court in the State of 
New York, where the court held that 
highways are constructed for public travel 
and not for animals to stray in, and’ the 
owner of fowls has no right to permit 
them to run at large in the public high¬ 
way. The owner of an automobile who 
kills fowls straying on a public highway 
is not liable to the owner for their value 
without proof of their negligence, or that 
tlm killing was intentional. 
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