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MONEY MARKET ESSAYS

Federal Reserve Bank
of New York
March 1952

MONEY MARKET ESSAYS

Federal Reserve Bank
of New York
March 1952

FOREWORD

This booklet is the second of a series of publications
designed to furnish the student of banking with informa
tion not readily available elsewhere, concerning various
aspects of the national money market and factors affect
ing it. The first of the series, Bank Reserves—Some
Major Factors Affecting Them, was published in March
1951.
All but the first of the articles in this second booklet
appeared originally in the Monthly Review of Credit and
Business Conditions of the Federal Reserve Bank of New
York; the first article—“ The Money Market” —is the
text of a talk given by its author at the Federal Reserve
Bank of St. Louis. All have been brought up to date for this
reprinting. The booklet comprises brief discussions of the
more important elements in the private sector of the
money market; we hope in the future to publish a com
panion piece that will consider Governmental instruments
and operations important to that market.
Copies of this and the earlier booklet are available for
classroom use and for similar purposes.

llan

S pboul,

President.
New York City
March 1952

MONEY MARKET ESSAYS
Page

The Money Market .................................................................................

Member Bank Borrowing from the Federal Reserve Banks.........................

Federal Funds.......................................................................................... 13
The Commercial Paper Market................................................................ 17
Bankers’ Acceptances............................................................................... 22
Financing Security Brokers and Dealers.................................................... 27

THE MONEY MARKET
ly
H a r o ld

'TpHE financial pages of the newspapers, economists’ professional publications, and other
periodicals make frequent reference to "the
money market,” but the term is rarely defined.
Probably the reason is that the money market is,
in fact, a rather nebulous affair, consisting of
interrelationships and transactions among varying
participants, rather than a definite group of in
dividuals like the members of the New York
Stock Exchange or the Chicago Board of Trade;
it has no specific location, as does an organized
security or commodity market; and its principal
activities have changed gradually but markedly
over the years. In earlier periods, references to
the money market were frequently so narrowly
limited as to mean chiefly the market in which
security trading and speculation was financed—
the market for "call’' and "time” loans to security
brokers and dealers, or "street loans” as they used
to be called.1 At other times, the term has been
used so broadly as to include long-term borrow
ing and lending operations in the form o f security
flotations.
For the purposes of this discussion, "the money
market” may be defined as the central national
market in New York City where temporary surplus
funds of various types of organizations (including
secondary reserves of the banks) go to find in
come-producing employment without sacrifice of
liquidity, and where short-term needs for funds
are satisfied, usually at interest rates that are ad
vantageous to the borrower. It is a place where
final adjustments between the supply of funds
and the demand for funds are made for the
country as a whole, after much regional clearing
has been effected. In general, it is an impersonal
market involving the usual lender-customer re
lationships only to a limited extent. The openmarket borrower frequently has certain sources
from which he expects to obtain part o f the
funds he needs fairly regularly, but he usually
1 See the article beginning on p. 27.

R o e ls e

feels no obligation to go to any particular lender
or group of lenders for his financing any longer
than he considers that to be in his interest, and
he gets his money from whatever source he can
on the most favorable terms. Similarly, the lender
in the money market ordinarily assumes no re
sponsibility for financing the borrower any longer
than suits his convenience.
So u r c e s

F unds

By far the most important source of money mar
ket funds, usually, is commercial banks. For many
years considerable amounts of the secondary re
serves (and even primary reserves) of the com
mercial banking system have tended to concentrate
in New York City through the correspondent
banking system, the amounts varying with the fluc
tuations in public demands for currency and credit
and the flow of funds throughout the country.
This condition was especially true before the estab
lishment of the Federal Reserve System when the
large New York City banks provided a kind of
limited central banking system.
At that time, some of the funds of out-of-town
banks were loaned or invested for them in "street
loans,” short-term business paper, or securities,
but considerable amounts were simply deposited
with the New York City banks and those banks
employed them in the money market if suitable
outlets were available. In addition to facilitating
deposits and withdrawals of funds by correspon
dent banks, the New York City banks could to
some extent (within the limits of their own re
serve positions) increase the total volume of bank
reserves by making loans to their correspondents.
But their own reserve requirements were high and
they seldom had very large amounts of excess
reserves, so that their ability to supply additional
funds to correspondent banks was rather narrowly
limited. Consequently, when demands for funds
from other parts o f the country were heavy, they
tended to cause stringencies in the New York
money market, which occasionally reached the

M o n e y M arket Essays

point of becoming money panics. It was this
kind o f situation that led to the creation of the
Federal Reserve System.

portunities.
Another, distinctly minor and quite irregular,
source of funds is State and local governments
It was expected that the establishment o f the and their subsidiary organizations, as well as some
twelve regional Reserve Banks would end the agencies of the National Government. For ex
concentration of bank reserve funds in New York ample, if a State government sells a bond issue
and the dependence of the commercial banking for purposes which will involve disbursements
system on the liquidity of the New York money over an extended period, such as a veterans’ bonus
market after a transitional period. To a consider or a construction program, or accumulates funds
able extent it did. But the practice o f sending to pay off a bond issue, it may wish to invest
secondary reserves to New York (also primary some of the proceeds temporarily in the money
reserves in the case o f many nonmember banks) market.
For many years, especially since the first World
continued and still prevails on a large scale. And,
of course, the New York City banks lend or War, during the period in which New York City
invest in the money market not only the funds has gained in importance as an international finan
of their correspondents, but also considerable cial center, it has been the custom o f many foreign
amounts of their own funds. Some of their most central banks to keep some of their reserves in
temporary lending is to other banks, in the form New York in the form of earmarked gold or
of sales of "Federal funds,” which will be dis dollar assets of various kinds. To a considerable
extent dollar assets are kept on deposit in the
cussed later.
Reserve
Banks, but frequently the foreign central
The second major source of supply o f funds
banks
like
to obtain some income on dollar funds
for the New York money market has been tem
they
do
not
need to draw upon immediately. The
porary surplus funds of business concerns. Many
Federal
Reserve
Bank of New York began more
national corporations maintain accounts with the
than
25
years
ago
to buy bankers’ acceptances for
New York City banks in which they deposit funds,
foreign
central
banks
in the market, and added
for meeting interest and dividend payments, taxes,
its
guarantee
of
payment
(for a fee), in behalf
and other general expenses, and also such addi
of
all
Federal
Reserve
Banks.
But in recent yean,
tional funds as are not needed at other points
the
supply
of
bankers’
acceptances
has been insuf
around the country for the conduct of their
ficient
to
supply
all
such
demands
and several
business. When these funds accumulate in
foreign
central
banks
have
requested
the invest
amounts in excess of needs for current working
ment
o
f
some
of
their
dollar
funds
in
Treasury
balances, and appear likely to remain idle at
bills
and
other
short-term
Government
securities.
least for some foreseeable period ahead, it has
New York agencies of foreign commercial
been the common practice o f corporations to em
banks
also supply fairly sizable amounts of funds
ploy them in short-term loans or investments if
to
the
money market through loans to security
suitable outlets are available and offer sufficient
dealers
and
short-term investments.
return to make it worth while. Furthermore,
Finally,
the
Federal Reserve Banks serve as a
business concerns frequently invest the proceeds
residual
source
of supply of funds for the New
of long-term security issues temporarily, pending
York money market, but further discussion of that
their use for capital expenditures.
matter will be left until later.
A smaller source of money market funds is in
vesting institutions, such as insurance companies.
So u r c e s o f D e m a n d f o r F u n d s
These institutions normally employ most o f their
Reference was made previously to the predomi
funds in longer-term investments, but sometimes nance of brokers loans ("street loans” ) as a source
enter the money market for substantial amounts o f o f . demand for funds in the money market in
short-term securities, pending disbursements on earlier years. For many years security brokers
their investment commitments or the development and dealers have borrowed on either a demand or
of more attractive long-term investment op a time basis to finance their customers’ trading on

F ederal R eserve B a n k o f N e w Y o rk

margin, and to carry their own holdings of
securities, to the extent that their "portfolios"
have been in excess of their capital funds. Usually
the greater part of their borrowing has been on a
"call loan” basis— that is, it has been repayable
on demand in clearing house funds, so that the
lender could get his money back on one day’s no
tice. These "street loans” were for many years
considered the safest and most liquid available
use for temporary surplus funds of banks and
others. The only disadvantage— and frequently
it proved to be an advantage— was that the yield
was unpredictable, depending upon the relation
ships between the total supply of funds and total
demand for funds in the money market, and the
consequent fluctuations in interest rates. The
amount of such loans has fallen far below the
volume of earlier years— to a range of about 200
to 800 million dollars since 1945, as compared
with several billion dollars in the late ’20’s. In
recent years borrowings on a demand basis by
Government security dealers have been substantial
(frequently 500 million to 1 billion dollars or
more), but they have by no means taken the
place of the "street loans” of earlier years.
At least until the '20’s the next most important
outlet for money market funds was open market
commercial paper2— that is, short-term notes of
well-known business concerns with strong credit
ratings (for example, some o f the big milling
companies and mail order houses), which are
purchased by commercial paper dealers and resold
by them, chiefly to banks. Such paper has long
been attractive to banks all over the country (es
pecially the "country” banks) as a means of
employing their secondary reserves. This is still
an active market, but not as important as in earlier
years.
Another type of business paper which was de
veloped in the United States after the Federal
Reserve System was established, and with its en
couragement and support, is bankers’ acceptances8
or "bankers bills” (which were commonly referred
to simply as "bills” until a new type of bill—
the Treasury bill—was created about 20 years
ago). These bankers’ acceptances, which are used
a See the article beginning on p. 17.
8 See the article beginning on p. 22.

mainly in the financing of exports, imports, and
storage of staple commodities, soon attained the
rating of top-quality business paper, as in the
form in which they are sold in the open market
they represent two-name paper—that is, the
bankers’ acceptance is not only the obligation of
the concern on which it is drawn, but it is alsothe unconditional obligation of the "accepting”
bank. In some instances it may also carry the en
dorsement of the dealer by whom it is sold. Use of
bankers’ acceptances has diminished considerably
in the past 20 years because of low rates on direct
loans, but has shown some revival recently.
A minor and sporadic source of demand for
money market funds is short-term borrowing by
State and local governments. The commonest form
is tax anticipation notes, which are frequently
issued by local governments to provide them with
funds, pending the receipt of large periodic tax
payments. A considerable part of such borrowing
is done in the local communities, but a fair amount
is done in the New York money market.
A far more important type of government
borrowing in the money market developed from the
adoption by the United States Treasury in 1929
of the practice of selling securities in the form of
discount bills, generally maturing in 91 days,
through competitive bidding.4 This represented
an adaptation of British practices to the financial
system of the United States. These Treasury bills
are, of course, offered throughout the country, but
a large proportion has been absorbed in the New
York money market, and most of the trading
subsequent to issuance is done in the New York
money market. Even earlier—as far back as the
first World War—short-term Treasury obligations
in the form o f certificates of indebtedness had been
a fairly important money market instrument. The
certificates were sold at a fixed price, and for a
number of years were commonly of one-year ma
turity, whereas the Treasury bill provided weekly
issues and redemptions of securities with shorter
maturities (most commonly three months), and
4 These Treasury bills carry no interest coupons but are
sold at prices slightly below par, the difference between
the purchase price and the par value at maturity pro
viding the income, or yield, on the investment (See article
on "Marketing o f Treasury Bills” in the October, 1951
issue o f the Monthly Review o f the Federal Reserve Bank
o f New York.)

M o n e y M arket Essays

at prices and yields to be fixed in the market. For
several years, Treasury bills replaced certificates of
indebtedness entirely, but the use o f certificates was
resumed during the second World War, and the
volume of both types rose to unprecedented levels.
Certificates were rapidly replaced by short-term
Treasury notes during 1950, and disappeared en
tirely at the beginning of 1951, but their use was
resumed after a few months.
In addition, obligations of Government-spon
sored organizations, such as Federal Intermediate
Credit Bank debentures, are minor sources of
demand for funds in the money market.
A final source of demand for short-term funds
in the money market is the banks themselves,
chiefly the large city banks. The reference here
is to interbank borrowings of immediately available
reserve funds or "Federal funds.” 6 These dealings
involve the transfer of reserve balances on the
books of the Federal Reserve Bank, from the
reserve account of the lending bank to the reserve
account of the borrowing bank, generally through
an exchange of checks, one drawn by the lending
bank on the Federal Reserve Bank payable im
mediately, and the other by the borrowing bank
on itself payable through the clearing house the
next business day (i.e., "clearing house funds” ) .
In other words, they represent day-to-day loans
between banks. Most of the transactions are be
tween New York Gty banks, although not infre
quently large banks in other cities are also in
volved—probably more often as lenders than as
borrowers— in which case borrowings and repay
ments of reserve funds are effected by telegraphic
transfers.
O r g a n iz a tio n

the

M oney M arket

Several different types of organizations are in
volved in the mechanism of the money market:
1. The large New York Gty banks, sometimes
referred to as the "money market banks” or the
"Wall Street” banks (although most o f them
are not located on Wall Street);
2. Dealers in securities, especially Government
security dealers;
3. Commercial paper dealers;
4. Bankers’ acceptance or "bill” dealers;
5. Money brokers, whose function it is to
6 See the article beginning on p. 13.

know who in the money market is in need of
quickly available funds, and who has money to
lend (although much less is heard now of this
function than in earlier times);

6. Federal Reserve Banks.
There is no clean-cut separation of functions
among all these various types of organizations.
For example, the dealer in bankers’ acceptances
is likely to be a dealer in Government securities,
and at times may also serve as a money broker.
The Government security dealer may be a dealer
in other securities as well; he may act as a broker
as well as a buyer and seller on his own account;
he is almost always a borrower. The role of the
commercial bank in the money market is pre
dominantly that of a lender of funds, either on
its own account or on behalf of its correspondent
banks or other customers; but the commercial bank
is also a buyer and seller of short-term Govern
ment securities and frequently of other types of
open market paper; and, as was noted previously,
the large city banks are often day-to-day borrowers
of reserve funds. A few o f the large New York
Gty and Chicago banks serve as dealers in Govern
ment securities, in which case they are sometimes
referred to as "dealer-banks.”
While all the different organizations have im
portant functions to perform in facilitating the
smooth operation of the money market, easily the
most important and essential (with the possible
exception of the Federal Reserve Banks) are the
New York Gty banks. Most money market trans
actions are cleared through their books, and all
inflows or outflows of funds between New York
Gty and other parts of the country (except for
Federal Reserve or Treasury account) go through
their reserve accounts on the books o f the Federal
Reserve Bank of New York.
The Federal Reserve Banks were referred to
earlier as residual suppliers of funds to the money
market. Federal Reserve credit may be considered
a balancing factor in the market—supplying funds
when they are needed and absorbing them when
there is a surplus. There has never been any
question but that the Reserve System should
supply, through the money market or directly to
the banks (at a price), whatever amount of
funds is needed to enable member banks to main

F ederal R eserve Ba n k o f N e w Y o rk

tain their reserves at the required levels. But the
Reserve System has never willingly accepted the
obligation to supply passively, at a fixed level of
rates and at the option of the market, all the funds
that might be in demand (except perhaps in
periods of national emergency when major national
objectives, such as the winning of a war, could
not be permitted to be impeded by a lack of
adequate financial support), since that would con
flict with its responsibility for maintaining, as
far as it is able, the monetary conditions necessary
for economic stability.
Fa c t o r s A

f f e c t in g

C o n d it io n s

and

M
O

oney

pen

arket

In terest R ates

Conditions in the money market and changes
in the levels of open market interest rates reflect,
of course, the interaction of changes in the supply
of and demand for funds. While the aggregate
demands from Federal, State, and local govern
ments and from business organizations in the
open market fluctuate considerably over fairly
long periods, the day-to-day and week-to-week
changes in money market conditions are usually
determined much more largely by changes in the
supply of funds. As was mentioned earlier, the
commercial banks are by far the most important
single source of funds in the market, and that
supply is determined chiefly by the banks’ reserve
position, especially that of the large New York
Gty banks.
The reserve position o f the commercial banking
system as a whole reflects the various factors that
are shown in the weekly statements published by
the Board o f Governors of the Federal Reserve
System, such as gold inflows or outflows and
changes in the deposits of foreign central banks
in the Federal Reserve Banks, changes in public
demands for currency, net receipts or disburse
ments by the Treasury reflected in changes in its
balances .with the Federal Reserve Banks, fluctua
tions in the volume o f Federal Reserve "float,”
and changes in the reserve requirements of the
banks.* It is through the last named factor that
business and public demands for credit in the
• These factors and their influence on bank reserves are
discussed in a companion booklet, Bank Reserves— Some
Major Factors Affecting Them, available on request to
the Federal Reserve Bank o f New York.

form of direct borrowings from the banks have
their indirect effect upon money market conditions.
As bank loans expand or contract, the volume
o f deposit liabilities and the reserve requirements
of the commercial banks change correspondingly.
Changes in the banks’ reserve requirements as a
result of action taken by the Board of Governors
of the Federal Reserve System to increase or
decrease the percentages of reserves which member
banks are required to maintain are, of course,
also an occasional influence of some consequence
upon the money market. Changes in Federal
Reserve credit, which are also included in the
weekly statement— especially Federal Reserve
credit in the form of discounts and advances to
member banks and holdings of United States
Government securities— constitute the balancing
factor, and the readiness and the rates at which
such credit is supplied to the banking system are
a major factor in determining money market
conditions.
Not all the changes reflected in the weekly
statement have an immediate impact upon the
money market, but their influence usually is not
long delayed. For example, a demand for cur
rency in the Dallas Federal Reserve District may
be met initially by drawing upon the excess re
serves of banks in that area, but if it attains con
siderable volume it is likely to result in withdrawals
of balances from city correspondents or sales
of short-term Government securities in the New
York money market. Similarly, an increased de
mand for credit in the San Francisco District, and
a resulting rise in the reserve requirements of
banks in that area, may be met for a while by
drawing upon excess reserves or borrowing from
the Federal Reserve Bank of San Francisco, but
if continued it is likely sooner or later to have
some reflection in the money market.
The most important immediate determinant of
day-to-day money market conditions is the reserve
position of the New York Gty banks, .through
which practically all transfers of funds in and out
of the money market are made. The reserve position
of the New York Gty banks is, of course, affected
by the local impact of all the factors mentioned
above which affect the reserve position of com
mercial banks generally, but in addition there
are day-to-day movements o f funds between New

M o n e y M a r k e t E ssays

York City and other parts of the country which
frequently amount to' 100 million dollars or
more. Consequently, even though banks in other
areas may be experiencing an’ increase in their
excess reserves, if the New York City banks are
short of reserves, firm money market conditions
are likely to prevail at least temporarily. Similarly,
when New York City banks have substantial
amounts of excess reserves, money market con
ditions are likely to be easy, and the most sensi
tive open market interest rates are likely to decline
temporarily, even though banks in other areas may
be losing reserve funds through Government tax
collections, public demands for currency, or other
factors. Through deposits or withdrawals o f cor‘respondent bank balances and business transfers
of funds, however, such disparities between the
reserve positions of the New York City banks and
of banks in other areas are likely to be equalized
quite rapidly. Thus by putting funds into the
'money market or taking funds out of the market,
the Reserve System can exert an immediate in
fluence on money market conditions and, fairly
quickly, an influence on credit conditions through
out the country, even though the initial effect is
reflected only in the reserve position o f the New
York City banks.
The essence of effective regulation o f credit
and the money supply is to retain control over
the amount and cost of reserve funds supplied
to the commercial banks, and the manner in which
they are supplied. Reserve funds can be made
available to the banking system on the initiative
of the Federal Reserve System through the pur
chase of Government securities in the market, or
by forcing the banks to come to the Reserve Banks
and borrow the reserve funds they require. Offer
ings o f securities to the Reserve System can be
greatly influenced by the willingness or unwill
ingness of the System to take the securities at
current market prices, and the extent to which the
banks are ready and willing to borrow can be
influenced by the Reserve Bank discount rate. In
general, it is the policy of the Reserve System to
limit the availability of reserve funds to the banks
in periods of inflation, and to make reserve funds
easily available in periods of business recession
and deflation.

Changes

the

ver th e

oney

arket

ears

Aside from major changes in supply and de
mand conditions which have been reflected in
broad movements in the general levels of interest
rates, the money market has been subject to
gradual but important changes in its functioning
and principal activities over the years. The crea
tion of the Federal Reserve System itself was
probably the most important single development
affecting the functioning of the money market.
It lessened the dependence of the commercial
banks of the country on the New York City banks
(or, more broadly, on the New York money
market) by providing twelve regional institutions
to hold the reserves of banks that became members
and to provide facilities for supplying banks in
their respective areas with additional reserve funds
and with currency to meet the demands of their
customers. As was noted earlier, however, it did
not break down correspondent bank relations, nor
end the use by commercial banks of the facilities
of the New York money market for employment
of their surplus funds and secondary reserves.
Other major changes (some of which have been
more gradual, so that their significance was not
at first so readily recognized) include:
1. The great change in supply and demand
relationships in the money market, which grew
out of the depression of the '30’s and the great
inflow of gold that followed, and the resulting
major lowering of the general levels of interest
rates;
2. The virtual disappearance, as an important
factor in the money market, of call loans to
security brokers and dealers;
3. The shrinkage in business borrowing
through the open market in the form of sales
of commercial paper and bankers’ acceptances, be
cause of the diminished advantages of such forms
of borrowing, compared with direct borrowing
from the banks;
4. The great increase in the volume of short
term Government securities available for trading
in the money market;
5. The growth of the market for "Federal
funds” (rates on which have now taken the place
of the call loan rate as the most sensitive and the

F ederal R eserve B a n k o f N e w Y ork

most widely fluctuating interest rate in the money
market).
The extent of some of these changes may be
illustrated by a few figures comparing the present
volume of loans and short-term securities avail
able for trading in the money market with the
amounts available 25 years ago.
(Approximate amount in millions of dollars)
1925
1950
Brokers loans*
2,400-3,5OOe
Commercial paper
600- 800
Bankers’ acceptances 600- 800
U. S. Treasury bills,
certificates of in
debtedness, and
short-term notesf 2,500-3,000

500250200-

800
350
400

42,000-46,000

* Borrowings in New York G ty by members o f the
New York Stock Exchange; 1925 figures estimated on
basis of related data; 1950 figures represent borrowings
on collateral other than Government securities,
f Certificates and notes only in 1925; Treasury bills
initiated in 1929; notes maturing within two years are
included in both 1925 and 1950.
e Estimated.

It is evident from these figures that the impor
tance of business borrowing (including the securi
ties business) as a source o f demand for funds in
the money market has greatly diminished, both
absolutely and even more relatively. Short-term
Government securities have become by far the
most important type of money market instrument.
The present predominance of Government se
curities (and the growth in the public debt which
it reflects) has important implications for the
freedom of the money market, since it involves, of

course, greatly increased interest and influence of
the Government in money market conditions. One
reflection of this influence is the very narrow
range of fluctuation in most interest rates during
recent years; day-to-day changes in rates now are
usually not even in, eighths of one per cent— on
short-term Government securities they are in
"basis points” or l/100ths of 1 per cent. (The
one exception is the rate on "Federal funds”
which has fluctuated between rates as low as 1/16
of one per cent and rates only slightly below the
Federal Reserve discount rate.)
Nevertheless, the tremendous growth in public
debt and the dominant position of Government
securities in the over-all debt structure of the
country and in the investments of its financial
institutions have induced much greater sensitivity
to small changes in interest rates, and especially
to changes in the direction of rates. There is reason
to believe, therefore, that the Federal Reserve
System may in the foreseeable future be able to
carry out its credit policies effectively within the
limits of considerably narrower fluctuations in
interest rates than was the case some years ago.
In fact, it does not seem likely that, even if the
System had a completely free hand to influence
the money market as it deemed most appropriate,
without having to consider the effect of its actions
on the market for Government securities, this
country will again in the near future witness any
thing like the rate fluctuations of earlier days,
when the rate for call loans to security brokers
fluctuated by 1 or 2 per cent (and sometimes
much more) from day to day.

MEMBER BANK BORROWING
FROM THE FEDERAL RESERVE BANKS
ly
M

a d e l in e

buy (borrow) Federal funds.1 If they are not
available in adequate volume at a satisfactory
price, it will borrow or sell securities, depending
upon cost. (If the market is tight, the sale of even
short-term securities may be relatively costly.) If
a reserve deficiency is expected to be o f some
duration, the bank will probably sell securities,
although it may have to borrow until it finds an
acceptable bid for its securities.
Smaller banks have generally not made as
much use of the borrowing privilege. They usually
try to keep their deposits at the Reserve Banks
above the required level, since the expense of
keeping a constant watch on their reserve posi
tions and of making continual adjustments in their
assets is likely to be greater than the additional
income which they could realize by keeping fully
invested. However, some of the smaller banks,
particuarly those in agricultural or resort areas,
have strong seasonal swings in both deposits and
demands for loans. These banks often borrow
from the Reserve Banks prior to their lending sea
son in order to be able to meet their customers’
demands for working capital, and they repay their
borrowings after crops are marketed or the vaca
tion season draws to a close. Although many more
banks have borrowed for seasonal purposes in
recent years than have borrowed for day-to-day
reserve adjustment purposes, seasonal loans have
accounted for only a small proportion of the dol
lar volume of total member bank borrowing.
Two developments o f recent months have
tended to increase the amount of borrowing done
by the member banks. The first is the TreasuryFederal Reserve "accord” announced last March
and the Reserve System’s subsequent withdrawal
of its support of Government securities at fixed
prices. The sharp decline in security prices which
followed this announcement and the uncertainty

T'XURING the early postwar years member bank
borrowing from the Federal Reserve System
was for the most part a tool by which large money
market and correspondent banks could keep their
cash reserves at a minimum and their earning
assets at a maximum. Toward the end of 1951,
however, as the Reserve Banks, in their open
market operations, began to show an increasing
reluctance to supply the market with reserves
to carry it over periods of temporary stringency,
the resort to borrowing became much more wide
spread.
Banks regularly assess their future needs for
funds, and attempt to manage their loan and
investment portfolios so as to be able to meet those
needs as they arise. But most banks, and particu
larly those in money market centers, encounter
periods of temporary money market tightness
when they lose reserves unexpectedly .through a
withdrawal o f funds from the market in con
nection with unforeseen security transactions, gold
outflows, or other factors. Since large banks find
it profitable to keep their resources as fully in
vested as possible and therefore seldom maintain
substantial excess reserves for more than a few
days at most, such losses of funds are likely to
draw their reserves down below the required level.
Banks may obtain funds to tide them over such
periods in one o f three ways: (1 ) sell securities;
(2 ) buy reserves ("Federal funds” ) from
other banks which have excess reserves; or (3 )
borrow from a Reserve Bank. (A bank could also
call loans, but this is not a likely procedure today,
particularly for the short run.) The choice of
method depends primarily on two factors— the
cost and the length o f time the funds will be
needed. If a bank expects its money position to
ease shortly, as a result of such factors as an in
flow of funds from correspondent banks or a
return flow of currency, it is likely first to try to

cW h i n n e y

1 See the discussion o f this procedure in the article be*
ginning on p. 13.

Federal R eserve B a n k o f N e w Y o rk

engendered as to the future trend o f prices have 1951 may be attributed to a number of reasons.
tended to discourage the sale of securities. In First, the large amounts of excess reserves acquired
addition, the Federal Reserve System’s open market by the banks during the late 1930’s largely obvi
policy has been directed toward keeping the ated the banks’ need to borrow. Second, a tradition
money market fairly tight as an anti-inflationary developed against incurring a substantial indebted
measure. The second factor is the widening of the ness for an extended period of time. Third, the
spread between the bid and offer prices of Govern wartime arrangement whereby banks could sell
ment securities. Such a development increases the Treasury bills to the Federal Reserve Banks under
cost of a "turn-around,” i.e., the repurchase of a repurchase option largely eliminated the neces
the same or similar securities previously sold dur sity for borrowing during the time it was in effect.
ing a period of strain.2
Finally, during a large part of the period it was
Member bank borrowings in the first 15 years cheaper to sell Government obligations than to
of Reserve System history were large. They were borrow, and most banks had relatively large port
often close to or above the billion dollar mark. folios of Government securities from which such
The peak, which was reached in November 1920, sales could be made. Yields on short-term Govern
was 2.8 billion dollars. During the Great Depres ment securities generally were lower than the dis
sion they dropped off sharply and remained at a count rate, and prices moved within a relatively
negligible level until the latter part of World War narrow range. This stability reduced the risk of
II. At that time the banks began to borrow heavily loss for banks holding Government obligations.
in connection with the payment periods for the A bank which sold Government securities, instead
last three War Loan drives. This borrowing was of borrowing, to meet a temporary demand for
facilitated by the special wartime discount rate of funds felt fairly confident that it could buy them
y 2 of 1 per cent on advances secured by short back at approximately the same price as it had
term Government obligations. After the end o f the sold them.
war and especially after the elimination of the
A bank which wishes to borrow may do so in
special discount rate in the spring of 1946, the
one of two ways: it may rediscount eligible paper
amount of borrowing again declined. In 1950 the
with the Reserve Bank, or it may obtain a direct
average amount outstanding on statement dates
advance on its promissory note, which in turn is
was only about 125 million dollars, although
secured by either Government securities or eligible
amounts on these days ranged from 25 million to
paper. Eligible paper is defined in the regulations
394 million dollars. As the result of the moder
of the Board of Governors of the Federal Reserve
ately restrictive credit policy followed by the System as "a negotiable note, draft, or bill of
Reserve System since the announcement of the exchange, bearing the endorsement of a member
Treasury-Federal Reserve accord in March 1951, bank . . . the proceeds of which have been used or
however, banks are finding it increasingly neces are to be used, in producing, purchasing, carrying,
sary to borrow to meet temporary reserve deficien or marketing goods in one or more of the steps of
cies (see the accompanying chart). During a the process of production, manufacture, or distri
period of tight money market conditions in De bution, or in meeting current operating expenses
cember 1951, borrowings outstanding reached an of a commercial, agricultural, or industrial busi
18-year high of 959 million dollars.
ness, or for the purpose o f carrying or trading in
The relatively limited use o f the borrowing direct obligations of the United States . . . .” Fur
privilege during most of the period from 1929 to thermore, to qualify as "eligible,” commercial or
industrial paper must have a maturity of not more
2 Another, possibly temporary, consideration tending to
than
90 days, while agricultural paper must ma
increase the use of borrowing when banks need funds is
the inclusion of such borrowings in the excess profits
ture within nine months of the date of discount.
tax base when the invested capital method o f computing
N o maturity restrictions apply to Government
this tax is used. Unnecessary borrowing to obtain a tax
benefit is discouraged by the Reserve Banks, however,
obligations, although at some periods in the past,
and there is no evidence that it is being done to any
special preferential rates have been available on
appreciable extent.

M o n e y M arket Essays

Member Bank Borrowing from Federal Reserve Banks
All Member Banks and Second District Banks
(Wednesday dates, December 31, 1949 —January 16, 1952)
M illions
of d o lla rs
1000

M illions
o f dollars
IOOOi---------

900

800

e oo

7 00

A ll other
member banks

6 00

5 00
•400

Second D istrict
member banks

'3 0 0
200

I 00

1950

loans against short-term Government obligations.
As a result of the banking crisis of 1931-33,
the Federal Reserve Act was amended (Section
10[b ]) to permit member banks to borrow, in
case of emergency, against any asset acceptable to
the Reserve Banks. This extension of the borrow
ing privilege beyond the holdings of normally
eligible paper was enacted in 1932 to enable the
banks to obtain additional cash reserves in periods
of declining.business activity, when their volume
of eligible paper would tend to be low. Since
1933, borrowing of this emergency type has been
rare. Section 10(b) loans carry an interest charge
at least ^ of 1 per cent higher than the rate for
loans against eligible paper, and may be out
standing for as long as four months.

1951

1952

In the first two decades of Reserve System
history member banks used the rediscount and
direct advance methods about equally, but
nowadays almost all member banks employ
the direct advance method. The mechanics of the
direct advance method are simpler and, in the
case of renewals, more flexible. Most loans are
currently made against Government obligations—
partly because of the relatively simple procedures
involved and the large holdings of Government
securities available for use as collateral. Applica
tions for loans secured by eligible paper must be
accompanied by a complete financial statement of
the original borrower for each piece of paper of
$ 1,000 or more that is to be used as security.
For the past ten years Government securities have

F e d e r a l R e serve B a n k

been almost the only collateral offered to secure
advances in the Second District; in some other
sections of the country, however, minor amounts
are advanced on some types of eligible paper,
principally loans guaranteed by the Commodity
Credit Corporation. On November 30, 1951, less
than 1 million dollars, out o f a total of 624 mil
lion in outstanding loans to member banks, was
secured by some type of paper other than Govern
ment obligations.
Under normal conditions, loans to member
banks may have a maturity of up to 90 days and
arrangement can be made for renewals.8 In recent
years, however, most advances to member banks
have been outstanding for short periods only. The
large city banks which still account for the bulk of
the dollar volume of borrowing usually want the
money overnight or for a few days at the most.
Loans to banks outside the large money centers
occasionally have fairly long maturities. Of the
624 million dollars of advances outstanding on
November 30, 596 million dollars matured within
15 days. In the 1920's sometimes as much as 30
per cent of the total amount outstanding had a
maturity of 31 days or more.
Total member bank borrowings fluctuate fairly
widely over a year without any clear seasonal pat
tern, depending for the most part on money market
conditions. While there are periods each year when
the money market is apt to be relatively tight or
easy, other factors which do not follow seasonal
patterns, such as Reserve System open market
operations or inflows or outflows o f gold, may
counteract the tendency. In 1951, however,
changes in the amount of borrowings outstanding
began to show a high degree of inverse correlation
with changes in excess reserves. The amounts bor
rowed by individual banks at any one time range
from a few thousand to 100 million dollars or
more, depending on the size of the bank, the char
acter of its operations, and its need for reserves at
any given moment.
Although the central reserve New York City
banks normally account for a large percentage o f
the dollar volume o f loans outstanding, both in
the Second District and in the country as a whole,
8 Loans secured by the securities o f certain Government
corporations may f>e outstanding only 15 days.

Y ork

they usually account for only a small fraction of
the number. At peak periods, as many as 80 or
100 of the 735 member banks in the Second
District may borrow at a time, but only 5 or 10
of them are likely to be central reserve city banks.
In 1951 the twelve Reserve Banks combined
made 11,077 loans to 1,168 member banks; the
total amount of credit extended was 43.4 billion
dollars. The Federal Reserve Bank of New York
made 3,118 loans, to 333 banks, totaling about
13.5 billion dollars, or about 28 percent of both
the total dollar volume and the total number of
loans extended by the System. In earlier years New
York’s share of the total was larger.
The repurchase agreements which the Federal
Reserve Bank of New York makes with qualified
Government security dealers are somewhat analagous to member bank borrowings. Under such
agreements the dealers sell Treasury bills or other
short-term Government securities to the Bank sub
ject to repurchase within 15 days at the same price.
These agreements are arranged to help dealers
over periods of temporary market stringency and
to assist them in carrying sufficiently large "posi
tions” to do their part in maintaining markets for
Government securities.
The Board of Governors, in promulgating
Regulation A (Discounts for and Advances to
Member Banks by Federal Reserve Banks) noted:
The guiding principle underlying the dis
count policy of the Federal Reserve banks is
the advancement of public interest . . .
In extending accomodation to any member
bank, the Federal Reserve banks are required
to have due regard to the demands of other
member banks, as well as to the maintenance
o f sound credit conditions and the accommoda
tion o f commerce, industry, and agriculture,
and to consider not only the nature o f the
paper offered, but also the general character
and amount o f the loans and investments of
the member bank, and whether the bank has
been extending an undue amount o f credit for
speculative purposes in securities, real estate,
or commodities, or in any other way has con
ducted its operations, in a manner inconsistent
with the maintenance o f sound credit conditions.

The Reserve Banks are thus in a position not
only to control to some extent the amount of
member bank borrowing through the discount
rate, but also to refuse credit accommodation to
member banks in some circumstances. The Federal
Reserve Act provides that the Board of Directors
of each Reserve Bank shall set its discount rate,

M oney M

arket

subject to "review and determination” by the
Board o f Governors of the Federal Reserve
System. On occasion in the past, different rates
have been set in the various sections o f the coun
try, and at times there have been differential rates
on various types of paper, but a single uniform
rate has prevailed throughout the System since
1942.4 At the beginning of 1952, the rate at all
Federal Reserve Banks was 1% per cent per
annum. In the past the rate has ranged as high as
7 per cent and as low as 1 per cent. During
World War II a special preferential rate of
y 2 of 1 per cent for borrowing against short-term
Government securities was in effect.5
Changes in the discount rate are concrete
evidence of the Federal Reserve System’s view of
economic conditions and the need for facilitating
or restricting the extension of credit. Furthermore,
such changes tend to set the pattern for other
market rates. Since the Federal Reserve discount
rate is the rate of "last resort,” rates on open

E ssays

market commercial paper, bankers’ acceptances,
and prime business loans usually move up or down
when a change is made in the discount rate, but
they may, of course, change at other times as
well even though no change in rediscount rates
occurs.
4 Since the Boards o f Directors o f each o f the Reserve
Banks do not always act on the discount rate the same
day, there may be differences for a few days in the rate
charged by the various Reserve Banks.

8 The rate charged by the Federal Reserve Banks on
loans to member banks under Section 10(b) have ranged
from V2 to 2V2 Per cent above the regular discount rate.
However, since 1941 this rate has been held uniformly
by all the Reserve Banks at Vi of 1 per cent above the
discount rate. Rates under the last paragraph o f Section
13 on loans secured by direct obligations o f the Govern
ment to borrowers other than member banks are not tied
to the discount rate. They have ranged from 2 to 4y 2 per
cent, although from the fall o f 1939 to the spring of
1946 a special rate of 1 per cent was in effect on loans
to nonmember banks secured by direct Government obli
gations. At the beginning o f 1952 the rate was 2 ^ /2 per
cent at eight o f the Reserve Banks and 2% per cent at
the other four.

FEDERAL FUNDS
ly
H obart 0 . C arr
enough to cover the expense of writing checks and
making bookkeeping entries. A helpful rule of
thumb used in the money market is the calculation
that interest at 1 per cent per annum for one day
on $1 million is about $28. Since millions of dol
lars are being exchanged in the Federal funds
market on many days, the interest return available
to the seller and the savings available to the buyer
(when the rate is below the discount rate) are
more than enough to justify the transactions to
cost-conscious bankers. During the last quarter of
1951, as the chart shows, there were a number of
days when the rate was below I per cent.

are Federal funds? Who wants them
W HAT
and who supplies them? Essentially,
Federal funds represent the title to reserve balances
with the Federal Reserve Banks. They are thus
immediately available funds, as contrasted with
other types of balances, such as clearing house
funds (checks or drafts on clearing house banks),
which in New York are not available to the holder
of the check or draft until the day after receipt.
To put it another way, a check drawn on a mem
ber bank’s account at the Federal Reserve Bank
is collectible (upon presentation there) in funds
immediately available at the Reserve Bank, while
a check drawn on a clearing house bank is collect
ible in funds available at the Reserve Bank the
next day, when clearing balances are settled on
the books of the Reserve Bank.
The principal supply of Federal funds comes,
therefore, from banks with balances at the Federal
Reserve Bank beyond their needs for meeting
reserve requirements and from non-banking in
stitutions holding drafts on the Federal Reserve
Bank. For example, if the ABC National Bank
is required to have a balance in its reserve account
of $22 million on a given day, and it actually has
on deposit $25 million, it is in a position to let
another bank use the excess of $3 million. The
ABC National Bank, then, might let the X Y 2
State Bank use the $3 million so that the latter
could thereby avoid incurring a deficiency in its
own required reserves.
The rate on Federal funds varies from day to
day as buyers and sellers negotiate in the money
market. The X Y Z State Bank normally would
not pay more for the use of the funds than it
would have to pay if it borrowed from the Federal
Reserve Bank at the discount rate. Under present
conditions the upper limit, o f course, is the current
discount rate;1 the lower limit is usually barely

Sales of Federal funds between banks in dif
ferent banking centers are made by using the
Federal Reserve wire transfer service. The lending
bank transfers funds to the borrower on one
day and a reverse shift is made the next day. In
New York City, these transfers to and from
out-of-town banks have increased of late. Or
dinarily, only the large banks in other centers are
involved. When banks in the City need Federal

1 If the discount rate is IV2 per cent, the upper limit
of the Federal funds rate is usually I t ’ s per cent; if the
discount rate is V/4 per cent, the Federal funds rate
usually does not exceed i l l per cent.

* Transactions are usually for a single day; but over
week ends they are for two or three days, depending
upon whether the participating institutions are open for
business on Saturday.

The actual transfer of Federal funds within a
given locality usually involves an exchange of
checks. The buying bank gets a check on the Re
serve Bank and gives a check drawn on itself,
which becomes payable in Federal funds the fol
lowing business day. Ordinarily, the interest pay
ment based on the number of calendar days2 of
use is included in the clearing house check, but
some banks prefer a separate check covering the
interest payment. Sometimes no interest is charged
and the borrowing bank merely makes a commit
ment to return the same amount of funds upon
demand or at a specified later date. Since this com
mitment involves risk in terms of the cost of the
funds at the time of "returning the favor,” such
"swapping” of funds is not a common practice.

M o n e y M a r k e t E ssays

Federal Funds Rate in New York City
(Daily for the Fourth Quarter of 1951*)

Per cent

P e r cen t

1951
* The figures shown represent the modal rate for each week day’s transactions; holidays are indicated by dashed
lines.
Source: Garvin, Bantel & Company.

funds, their requirements are so great that the
borrowing of small amounts of Federal funds is
not worth the trouble. When funds are scarce
elsewhere and relatively plentiful in New York
City, the same reasoning applies with respect to
the lending of Federal funds by the City banks.
A bank with an ’’overage” of 10 million dollars,
for example, would not care to put itself to the
trouble of parceling it out in lots of, say, 100
thousand dollars.
The increase in out-of-town participation in the
New York City market has contributed to a
widening of fluctuations in the flow of funds
in and out of this area. One day large amounts of
funds will flow into the Gty and the next day
large sums will flow out. The magnitude of these
daily flows is often upwards of a hundred million
dollars. Under such conditions the Federal Reserve
System’s problem in gauging money market pros
pects and in conducting its operations in Govern
ment securities is made more difficult. The System,
and the New.York Federal Reserve Bank in par
ticular, must take into account not only country
wide developments affecting member bank reserve
positions but also the situation in New York Gty,
which is by far the most important money market
in the country. Anything that causes money market

conditions in New York Gty to depart widely and
unpredictably from those in the country as a
whole complicates the System’s problems, for it
may give rise to a situation where one type of
operation may be called for locally and another
in the country as a whole.
It is obvious from the nature of the trans
actions that the sale of Federal funds is a loan
and that their purchase constitutes borrowing;
member banks have been directed by the System
to treat them as such on their statements.8 This
results in limiting the amounts of Federal funds
which may be sold by either National or State
banks. With certain exceptions, a National bank
is prohibited by the National Bank Act from
lending to any one borrower more than 10 per
cent of its paid-in capital and unimpaired surplus.
New York State banks are subject to a similar
limitation, except that undivided profits are in
cluded in the base. National banks, moreover,
may be restricted in their purchases of Federal
funds by the provision that aggregate borrowings
of such banks cannot exceed their capital stock;
there are some exceptions to this rule, however.
8 The Bureau o f Internal Revenue o f the Treasury De
partment so views them, too. It permits their inclusion
in the "capital base” used in calculation o f excess profits
tax liabilities.

F e d e r a l R eserve B a n k

There are no restrictions on borrowing by New
York State banks.
In practice, borrowing limitations would be a
hardship only to those National banks whose
capital stock is very small relative to the fluctua
tions in their deposits and reserves. The loan
limitation, on the other hand, makes it difficult at
times for banks to dispose of large excess reserves.
The over-all supply of Federal funds is deter
mined by the familiar factors of supply and use of
reserve balances. For example, when currency in
circulation or Treasury balances with the Reserve
Banks go down, Federal funds tend to become
more plentiful. On the other hand, when the
gold stock, Federal Reserve "float,” 4 or System
holdings o f Government securities fall, Federal
funds tend to become scarce.
The reservoir of available Federal funds at times
is smaller than the aggregate amount of excess
reserves o f member banks— first, because not
all member banks wish to make their excess bal
ances available to the market, second, because
considerable amounts of excess reserves which are
usually held in relatively small sums by banks
all over the country do not reach the market, and
third, because excess reserves o f certain banks may
be immobilized to offset a previous (or an antic
ipated) deficiency in the current reserve require
ment period. On the other hand, a bank may
sell Federal funds even when its reserves are
temporarily deficient if it is protected by "over
ages” (excess reserves) during the earlier part
of the same reserve requirement period. Generally,
however, a bank will supply Federal funds in the
market only when it has excess reserves.
In each banking center, local banks are normally
the chief source of supply of Federal funds. O f
late, however, sales of Federal funds have been
made, on an increasing scale, by out-of-town banks
also. Banks, moreover, are not the only suppliers
and users of Federal funds. In fact, the supply of
Federal funds which is put on the market by non
banking institutions is quite significant. Chief
among such suppliers are the Government security
dealers. In the course of their operations these
4 For a discussion o f the nature o f "float,” see Bank
Reserves— Some Major Factors Affecting Them (page
25 ), available on request to the Federal Reserve Bank
of New York.

ork

dealers frequently acquire title to Federal funds,
either before such funds reach commercial banks
or on the way from one bank to another. For
example, when a dealer sells Government securities
to the Federal Reserve System he receives payment
in Federal funds. The dealer may sell the funds
for other means of payment (such as clearing
house funds), which he may deposit with his bank
or use to repay his borrowings. Government security
dealers also acquire Federal funds in other ways.
They may have contact with nonmember banks
or with local agencies of foreign banks in posses
sion of Federal funds. In addition, they may ac
quire such funds through the sale of Government
securities to nonbank investors which have ob
tained Federal funds (in the form of Treasury
checks) from redemptions of Treasury issues.
The demand for Federal funds stems mainly
from member banks which need to adjust their
reserve positions. Many times it is cheaper to buy
such funds than to borrow at the Reserve Bank.
In addition, some banks have a tradition of not
being in debt to the Reserve Bank. A few of the
New York City banks, for example, have not
borrowed from the New York Federal Reserve
Bank for years.
Banks, however, are not the sole source of
demand. When dealers buy Government securities
from the Federal Reserve System, they need
Federal funds in order to be able to make payment
on the day the securities are delivered. They may
need this means of payment also in order to do
business with other investors who require cash
settlement on the date of sale. Among such in
vestors are corporations and State and local
governments, all of which have been increasingly
anxious to keep their funds invested in Govern
ment securities up to the day when the funds are
needed for actual disbursements. Thus, they may
sell Government securities on the day when their
own securities must be paid off, or on the day
when funds are needed for transfer to distant
areas. As a result of such close timing, these
groups of investors need immediately available
funds.
Owing to their strategic position, Government
security dealers not only participate in the Federal
funds market but also contribute greatly to its

M o n e y M a r k e t E ssays

functioning. For example, a tank in need o f funds
may indicate its needs to a dealer who, if he does
not have the funds himself, may know some bank
that does. He will also know approximately what
the going rate is and will put the buyer in touch
with the seller. Some dealers will perform, even
for a bank, the function of agent in placing or
obtaining Federal funds.
In rendering such services, for which they
make no charge, the offices o f many Government
security dealers become, in effect, a market place.
Probably the most important single New York
Gty market in terms of daily dollar volume of
transactions, however, is in the offices o f a Stock
Exchange firm. This particular firm merely per
forms the service function o f bringing buyers and
sellers of Federal funds together and is in no
way a participant in the market. After having
determined their reserve positions from the clear
ing house settlements and from other transactions,
some banks telephone the broker's office in the
morning and indicate whether they are in need
of funds or have them for sale; sometimes they
also indicate approximate amounts. Buyers and
sellers are then brought together by the broker and
rates are agreed upon. This service and that of

recording rate changes (or prospective changes)
during the day is performed by the intermediary
without fee or differential. Other banks in the
City make little use o f the services of an inter
mediary in their Federal funds operations, prefer
ring to deal directly with one another.
Most of the above discussion of Federal funds
relates to the New York Gty market, since that
market is by far the most important one in the
country. The trading in Federal funds in New
York City consists for the most part of transactions
between City buyers and sellers or between Gty
banks and out-of-town institutions, but some of
the trading involving out-of-town banks exclusively
is also consummated here. Local markets do exist
in a number of other banking centers, and the
bonds between some of them (particularly the
Philadelphia market) and the New York market
are very strong. A few outside markets used to
have rates which bore no close relationship to the
New York City rates. This was true, for example,
on the West Coast and in the St. Louis area, where
a flat rate was charged to participating banks.
Now, however, most o f the rate quotations in mar
kets outside New York Gty are based on City
rates.

THE COMMERCIAL PAPER MARKET
ly
C l if t o n

T)USINESS concerns may obtain short-term
credit accommodation either by borrowing from
banks directly or by disposing of their promissory
notes through an intermediary— the commercial
paper dealer—who in turn places the notes with
financial institutions seeking investment outlets for
short-term funds.1 Transactions of the former
type are said to take place in the customers’ loan
market, those of the latter type in the commercial
paper market. While the term "commercial paper”
may refer, in a broad sense, to all types o f short
term negotiable instruments, its more restricted
meaning (and the one used in this article) is that
of short-term promissory notes discounted with
dealers for resale to financial institutions, mainly
banks. For the banks, commercial paper, besides
providing an investment outlet for short-term
funds, may also give access to reserve funds, when
needed, by serving as eligible collateral for bor
rowing from Federal Reserve Banks.
The commercial paper market is the oldest of
the several segments of the open market for short
term funds. It developed to substantially its
present form shortly after the turn of this century,
but its antecedents can be traced in our financial
history for over a hundred and fifty years. An
outstanding characteristic of this market is the
impersonality of its operations. All borrowing
and lending is effected through commercial paper
dealers, except in the case o f paper sold by certain
large finance companies. O f the ten dealers in
the market, five handle commercial paper only,
while the other five are engaged in various lines of
the brokerage and securities business as well.
Nationwide distribution of paper is achieved
through branch offices and correspondent relation
ships.
Formerly it was customary for dealers to accept
paper from would-be borrowers for sale on a
commission basis, but presently prevailing practice
1 Businesses may also secure short-term funds by sell
ing accounts receivable to factors or borrowing against
them from commercial receivables companies.

K eeps,

Jb.

is for dealers to purchase paper outright. Interest
at the current rate is deducted in advance, as
is the dealer’s commission of one fourth of one
per cent of the face value of each note. Notes
ordinarily bear maturities of from four to six
months, and are issued in convenient round de
nominations.2
Dealers generally resell commercial paper on a
ten-day option basis, although in some cases op
tions may be granted for fourteen days. Options
are usually granted for credit checking purposes
only and dealers have refused to accept paper
returned for reasons other than the unsatisfactory
credit standing of the maker.
The standards required of borrowers in the
commercial paper market are so high as effectively
to limit the number of firms which may employ
this form of short-term financing. "Prime names”
are found, however, in diverse lines of business
and in every section of the country. The accom
panying table shows how commercial paper bor
rowers in 1951 were distributed among various
lines of activity. The geographic location of these
borrowers was very wide. The Chicago Federal
Reserve District, where 64 business concerns used
the market in 1951, had the largest number of
borrowers. The New York District, with 58
borrowers, was second, and the Boston District,
with 57 borrowers, was third. In other Federal
Reserve Districts, the number of concerns borrow
ing in the commercial paper market ranged from
47 in the Richmond District down to 12 in the
San Francisco District.
O f the total of 398 borrowers in 1951, 386
(97 per cent) used one-name, unsecured promis
sory notes. Endorsed or guaranteed notes were
given by only 9 borrowers, and notes secured by
collateral were used in but 3 instances. Borrowing
* Denominations o f 5, 10, 25, 50, 100, 250, and 500
thousand dollars are in use, but the larger denominations
are infrequent. A borrower o f 1 million dollars might
execute, for example, eight notes o f 50 thousand, 12 of
25 thousand, 24 o f 10 thousand, and 12 o f 5 thousand
dollars.

M oney M

arket

Distribution of Commercial "Paper Borrowers by
Line of Activity in 1951
Number of
Line of activity
borrowers
Manufacturers
Textiles ..........................................................
68
37
Grains, flour, fertilizers, and seed ..............
Leather and leather products ......................
21
Metal products ........................................... 18
Meat packers, canners, and sugar refiners....
14
Lumber, wood, paper, and r o p e ................
9
Food and dairy products...............................
9
9
Chemicals, drugs, and paints......................
Other ............................. ................................
10
Total .........................................................

195

Wholesalers
Groceries and food products ......................
Hardware and paints ...................................
Textiles and leather products ....................
Other ..............................................................

31
20
8
17

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

Retailers
Department and chain stores ......................
Other ..............................................................

27
14

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

Finance*
Automobile ................................................... .......44
Small loan companies.......................................... 21
Commercial ................................................... .......14
Total .........................................................
Other ..................................................................
Total .............................................

’ 79
7
398

* Does not include General Motors Acceptance Corporation,
Commercial Investment Trust, Inc., and Commercial Credit Com
pany, which do not use dealers but instead place their paper
directly with purchasers.
Source: National Credit Office.

concerns had a net worth ranging from 250
thousand to over 25 million dollars, but more
than half of them were concentrated in a group
with net worth o f from 1 to 5 million dollars.
Commercial paper is not viewed as a source of
permanent working capital. Firms borrowing in
the commercial paper market do so normally for
the seasonal financing o f inventory or other current
working capital requirements, such as the carrying
of trade receivables. Finance companies, however,
are in the market more or less continuously,8 and
some other concerns have at times borrowed for
considerable periods.
8 Three of the largest finance companies now sell their
paper direct, and do not use dealers at all. ^Paper of
these companies outstanding totaled 884 million at the
end of 1951, as compared with market outstandings of
434 million dollars at that time.

E ssays

The commercial paper market is properly conconsidered not as a substitute for direct bank lines
of credit to borrowing firms, but as a supplement
to them. Its use as a supplement to direct bank
lines of credit in obtaining short-term accommoda
tion has certain advantages for business concerns.
Borrowing on commercial paper is generally less
expensive than direct borrowing. It enables bor
rowing concerns to secure part of their funds in
a national market, and thus to obtain more favor
able terms from their banks on direct borrowings.
If properly coordinated with direct bank borrow
ing, use of the commercial paper market permits a
periodic '"clean-up” of bank loans, and also en
ables firms whose banks are unable to supply the
full amount of funds required to obtain additional
accommodation in a market broader than the cus
tomers’ loan market.
In addition, concerns which are able to use
commercial paper financing become better known
in the financial world and are presumably thereby
placed in a more favorable position for raising
such long-term capital as they may from time to
time require.
Only firms in good financial and trade standing,
as disclosed by statements audited by outside ac
countants, have access to the commercial paper
market. Borrowers must be willing to submit de
tailed information on finances and operations to
dealers and to prospective purchasers of their
paper. A satisfactory current ratio, a reasonable
amount of invested capital,4 and earnings in fair
proportion to volume, as compared with similar
concerns, must be shown. Funds borrowed must
be used for current purposes, not for permanent
investment. In addition, some commercial paper
dealers have at times required firms using their
facilities to borrow amounts sufficiently large to
make the accounts profitable to handle.
Although commercial paper was formerly held
by a wide range of investors, participation on the
lending side of the market has been limited in
recent years almost exclusively to commercial
banks. Traditionally, commercial paper has been
regarded as well adapted for use by banks as
4 In recent years, the minimum invested capital figure
appears to have been about 250 thousand dollars. Few
firms this small enter the market, however.

F e d e r a l R eserve B a n k

secondary reserves. It can be purchased from
dealers in amounts and maturities which suit the
needs of the individual banker. Since open-market
borrowing does not lend itself to renewals, com
mercial paper can be relied on as a certain source
of cash at maturity. Furthermore, eligible paper
within ninety days of maturity may, if necessary,
be rediscounted with or used as security for ad
vances from Federal Reserve Banks. (Federal
Reserve Banks cannot, however, purchase commer
cial paper in the open market.) Finally, the ac
quisition by banks of profitable new accounts may
be facilitated by the purchase of commercial paper.
Rates charged on commercial paper are generally
lower than those on direct bank loans, even after
allowance is made for the one fourth of one per
cent commission customarily charged by dealers
on each note handled. The differential reflects the
fact that commercial paper represents prime risks,
on which the possibility of loss is very small. In
fact, judging from the experience of national
banks, credit institutions have suffered much
lower losses on commercial paper than on either
customer loans or investments. Aggregate losses
of all holders were negligible prior to 1932,
and no losses have been experienced since 1937.5
This record largely explains the strength and.
steadiness of the demand for commercial paper,
which in recent years has enabled dealers to
dispose readily of their offerings.
In spite of the strong demand for commercial
paper, and of low interest rates and other ad
vantages connected with its use by borrowers, a
downward trend in commercial paper financing
has been evident since 1920. The volume of
paper outstanding, the number of borrowers, the
number of dealers, the number of lenders, and
the relative importance o f this method of financ
ing as compared with direct borrowing from
banks have all declined since the end of World
War I.
Commercial paper outstanding is reported to the
Federal Reserve Bank of New York by dealers ac
tive in the market. The volume of such paper
reached a peak in January 1920, when it totaled
1,296 million dollars. It declined to a low of
8 Defaults occurred in five o f the fourteen years since
1937, but full payment was subsequently made in every
case.

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60 million in May 1933, and although it had
recovered to 388 million in February 1942, the
impact of war brought another decline to 101
million in June 1945. The highest volume reached
through the end of 1951 (435 million in Novem
ber 1951) was only one third of the 1920 total, in
spite of the great increase in the dollar value of
national income. Part of this decline reflects the
fact that while in earlier years some leading
finance companies placed their paper through
dealers, they now sell it directly to banks through
out the country, and these borrowings, therefore,
are not included in the totals compiled by this
bank.
On the other hand, the decrease in volume has
been accompanied by, and in part results from,
a corresponding fall in the number of borrowers
using the market. This number declined from well
over 4,000 in 1920 to a low of 375 in 1945.
Thereafter, the number of borrowers rose to a
postwar peak of 429 in 1947 and then declined
to 397 in 1950, rising by one, to 398, in 1951.
The shrinkage in the volume of commercial
paper has greatly reduced the number of dealers,
and has led also to a narrowing of the market
on the buying side. About thirty dealers were
operating in the country during the decade of the
twenties, compared with only ten now (including
one not recently active in the market). Purchases
of paper from dealers by individuals and cor
porations seeking short-term investments have long
since come to an end, and the large banks in New
York City and some other cities have not bought
commercial paper for their own account for a
number of years past. The withdrawal of these
banks from the market has been explained as prob
ably resulting from the decline of the rate on
prime names below the minimum commercial
lending rate to which banks in leading centers
tend to adhere. Large increases in the volume
of other instruments suitable for use as secondary
reserves (e.g., short-term Government securities)
must also have contributed to the withdrawal. The
shortage of offerings and the attendant limitation
on new account prospects in the existing small
market, coupled with unwillingness to break the
rate structure, seem likewise to be important
reasons.

M o n e y M a r k e t E ssays

In recent years, although there has been nation
wide distribution of commercial paper, buying
has been primarily by moderate-sized and smaller
banks. The banks of New England, a section of
the country which has always looked with favor on
commercial paper financing, are among the most
important purchasers.
These developments have naturally led to a
decline in the relative importance of commercial
paper in the loan portfolios o f banks. Such paper
probably never constituted an important part of
these portfolios. Even at the end of 1919, openmarket commercial paper outstanding was less than
five per cent of the total loans of all commercial
banks. But this proportion had fallen by the end
of 1932 to y10 of 1 per cent, an all-time low. By
the end of 1946, it had risen to % o f 1 per cent of
all commercial bank loans. It fell again, however,
to 6/10 of 1 per cent at the end of 1950. Thereafter
it rose slightly to % 0 of 1 per cent at the end of
December 1951.
Several broad reasons may be advanced in ex
planation of the decline in the commercial paper
market since 1920. First among these is changes
in general business conditions. Generally lessening
activity in the commercial paper market during
the twenties has been attributed in part to the
advantage taken by many companies o f inflated
conditions in the stock market to acquire per
manent working capital, and thus to reduce their
need for open-market borrowing. Depressed
economic conditions following 1929, resulting in
a greatly decreased business demand for short-term
funds, account for the sharp drop in the volume
of commercial paper outstanding to the May
1933 low o f 60 million dollars. Our entry into
World War II," and the subsequent development
of special arrangements to finance war production,
caused the termination, in 1942, o f a period of
rising volume associated with the improvement in
general business conditions after 1934. And dur
ing the war and postwar periods, some business
concerns have used part o f their prevailing high
earnings to build up working capital positions,
thus again, as in the twenties, reducing their need
to use the commercial paper market.
A second reason for the long-run shrinkage of
the commercial paper market may be found in

changes in business borrowing practices, including
the large-scale resort to term loans. The develop
ment by large finance companies of methods of
direct placement for their paper, by-passing the
dealers altogether, has doubtless had a substantial
effect in reducing the volume of open-market paper
outstanding, since the high figures of the twenties
undoubtedly included considerable amounts of
finance paper.
The change in structure of the commercial bank
ing system since World War I has also contributed
to the decline of the commercial paper market.
Mergers, the growth of branch banking, and de
velopment of the practice of correspondent par
ticipations have resulted since 1920 in the appear
ance throughout the country of banks and groups
o f banks with lending limits large enough to
enable them to supply substantial lines of credit
to single borrowers.8 Many large institutions have
aggressively sought business on a national scale.
This increased competition of the customers’ loan
market with the commercial paper market has been
favored by the low money rates generally prevail
ing over the last two decades. Low interest rates
tend to make the open market’s cost advantage
over the customers' loan market seem less attrac
tive than when higher rates prevail.
‘ Finally, the commercial paper market no longer
fully enjoys one of the advantages claimed for it
in years prior to 1920, namely, its usefulness in
equalizing the supply of and demand for short
term commercial credit between geographical areas
of seasonal surplus and deficiency. The Federal
Reserve System, by providing means for the ready
movement of funds throughout the country and
thereby leveling out local conditions of tight or
easy money, has materially reduced the market’s
appeal in this respect. Also, the growth of com
mercial bank holdings of Government securities
has given banks ready access to Federal Reserve
funds. These factors have contributed inescapably
to the market’s decline.
Commercial paper borrowing expanded steadily
in the first ten months following the beginning
o f hostilities in Korea, rising from 240 million
National banks are prohibited by law from lending
an amount larger than 10 per cent of their unimpaired
capital stock and surplus to any one borrower, and many
State banks operate under similar restrictions.
8

F e d e r a l R eserve B a n k

dollars in June 1950 to 387 million dollars in
April 1951. This substantial (61 per cent) in
crease in volume reflected in part the waves of
scare buying by consumers and in part business
attempts to anticipate shortages by accumulating
inventories. As scare buying and inventory ac
cumulation waned in early 1951, commercial paper
declined from its April peak to 364 million dollars
in May and 331 million dollars in June.
Some concern was expressed in the market at
that time over the possibility that the nation’s
rearmament program might soon have adverse
effects on commercial paper financing similar in
nature, though of lesser extent, to those associated
with our participation in World War II. These
adverse effects have not yet been felt, however.
Instead, the volume o f commercial paper out
standing increased steadily from its June low to a
figure of 410 million at the end of October, the
largest amount outstanding since November 1930.
A further six per cent increase in November
brought commercial paper outstanding to 435
million at the end of that month, and the year end
figure (434 million) showed little change from
this total.
This considerable increase in volume during
the last half of 1951 occurred in the face of a
firming of rates on commercial paper which was
evident throughout the year. The rate on prime,
4-to-6-month notes (1 % per cent at the end of
December 1950) rose to a range o f 2 ^ -2 % Per
cent by mid-May. By the end o f the year, partly
as a result of two increases (in October and De
cember) in the bank rate on prime business loans
(which brought it to 3 per cent), prime four-tosix-month borrowers in the commercial paper mar
ket were paying 2% per cent for accomodation.
The commercial paper market still possesses
a three-eighths per cent rate differential for prime
borrowers over the customers’ loan market, how

Y ork

ever, even after taking account of the dealers’
quarter per cent commission on each note. On
the assumption that such a differential should
assume more significance for prospective borrowers
in a period of rising interest rates, this advantage
might serve to explain some of the increase in
volume of commercial paper outstanding which
occurred in the last half of 1951. It might also
be interpreted as a factor operating to increase
volume still more in the future.
Dealers and others close to the market, how
ever, do not appear to attach much significance
to this cost advantage as a factor influencing the
volume of commercial paper borrowing. Instead,
they tend to explain the recent increases in volume
largely in terms of normal seasonal expansion, on
a larger base than has existed in recent years, and
to continue to express some concern over the pos
sible adverse effects of the defense effort on com
mercial paper financing.
Thus the increase in the volume of commercial
paper outstanding during the past six years (from
101 million dollars in June 1945 to the November
1951 peak of 435 million) does not necessarily
presage any permanent revival of the market. It
is measured from an abnormally low postwar level.
It occurred, moreover, while economic activity was
reaching heights never before achieved in peace
time and it was influenced by unusual rates of
consumer and business expenditure. The latest
increases in volume have been attributed largely to
seasonal factors, and the possibility still exists that
conditions arising out of the defense program may
eventually bring about a decline in the volume of
commercial paper marketed. Finally, both the
volume of paper currently outstanding and the
present number of borrowers are seen to be small
when compared with the figures associated with
previous periods of prosperity.

BANKERS’ ACCEPTANCES
ly
C l if t o n

H. K

*T*HE postwar period has witnessed some increase in the use of the bankers’ dollar ac
ceptance as a device for financing trade and as a
medium for short-term investment. The peak
volume of acceptances outstanding from the end
of World War II through the end of 1951 (490
million dollars in December 1951) was almost
five times that recorded in the spring o f 1945,
when the wartime low in acceptance financing was
reached, and represented the highest level reached
since February 1935. This postwar peak volume
was still small compared with the prewar peak of
1,732 million dollars reached in December 1929,
but the recent growth in acceptance use follows a
period of continuous decline in the market which
began in 1930.
The bankers’ acceptance is a time draft which
has been drawn on and accepted by a bank, trust
company, or other institution engaged in the
business of granting bankers' acceptance credits.
Upon acceptance, such a draft becomes’ an un
qualified promise to pay at maturity and is eligible,
under certain conditions, for purchase or redis
count by Federal Reserve Banks. After presentation
and acceptance, bankers’ acceptances are either re
turned to the presentor (the drawer or other
owner, or his agent) for sale in the open market,
or discounted for him by the accepting bank.
The bankers’ acceptance thus makes possible the
addition o f the credit of a bank or accepting in
stitution to that of a purchaser or holder o f mer
chandise. This addition of credit makes of the
bankers’ acceptance a readily marketable, negotiable
instrument, through the sale o f which sellers of
goods may obtain funds quickly and easily. For
accepting drafts on behalf of their customers
financial institutions charge a commission, custom
arily i y 2 per cent per annum,1 and a customer
is required to provide the accepting institution
1 That is, Vs per cent on 30-day sight drafts, 1 /4 per
cent on 60-day sight drafts, % per cent on 90-day sight
drafts, etc.

eeps,

Jr.

with funds to meet his drafts before they mature.
The financing of trade through the use of
bankers’ acceptances is a practice of very long
standing. Active markets for bankers’ "bills” have
existed in Europe—notably in London— for cen
turies. Prior to World War I, however, bankers'
dollar acceptances were used but little in this
country. It was not the practice of national banks
to accept drafts drawn on them, and only a com
paratively small amount of acceptance credit was
created by State banks and private bankers. The
Federal Reserve Act, enacted in December 1913,
authorized member banks of the Federal Reserve
System to accept drafts, subject to certain restric
tions and to the regulations and rulings of the
Federal Reserve Board. The Act also made accept
ances eligible for discount at Federal Reserve
Banks, subject to the usual requirements as to
maturity and endorsement, and authorized Federal
Reserve Banks to deal in eligible acceptances on
the open market. The passage of the Federal Re
serve Act (and its amendment in 1916 broadening
the accepting powers of member banks) thus
made possible the development of an acceptance
market in the United States.
The Federal Reserve Act authorizes member
banks to accept drafts or bills of exchange drawn
upon them to finance four broad categories of
transactions: the import and export of goods; the
shipment of goods within the United States; the
storage of readily marketable staple commodities,
either in the United States or in foreign countries;
and the furnishing of dollar exchange. Drafts or
bills accepted must have not more than six months
to run, except for those drawn to furnish dollar
exchange, which must have not more than three
months to run.
The use of bankers’ dollar acceptances for finan
cing exports and imports is not limited to financ
ing the foreign trade of the United States. Ameri
can accepting banks are also permitted to extend
dollar acceptance credits to finance the movement

F e d e r a l R eserve B a n k

of goods between foreign countries. Such broad
acceptance powers were granted to facilitate finan
cing the foreign commerce of the United States,
to aid in establishing the dollar as an international
currency, and to promote the development of an
international money market in the United States.
Drafts to finance exports and imports are often
drawn for acceptance under authority of a letter
of credit, issued to the drawer by the accepting
bank.2 American accepting banks issue such
"credits” on behalf o f their own customers and
customers of their domestic correspondents. In
addition, letters o f credit are issued on behalf of
foreign residents by arrangement with foreign
banks,8 which are usually correspondents or
branches of the accepting bank.
Acceptances covering domestic shipments of
goods must have attached at the time of acceptance
the shipping documents conveying title to the
goods. Further, domestic shipment acceptances
must have a maturity consistent with the customary
credit terms in the particular business involved.
These requirements are designed to prevent the
improper use of this type of acceptance credit as
a source of working capital.
The storage of readily marketable staples in the
United States or in any foreign country may be
financed by means of bankers’ acceptances. Bills
drawn for this purpose must be secured at the
time of acceptance by warehouse, terminal, or
similar receipts for the goods stored. Also, the
acceptance must remain secured until paid.4 Since
the purpose o f warehouse acceptances is to permit
the temporary holding of readily marketable
staples in storage pending their sale, shipment, or
distribution, such acceptances ordinarily should
not have maturities in excess of the time necessary
to effect reasonably prompt sale, shipment, or
distribution of the goods into the process of
manufacture or consumption.
2 Letters o f credit authorize the drawing o f drafts in
accordance with certain terms, and stipulate that all
drafts drawn in conformity with these terms will be ac
cepted and honored at maturity.
8 The arrangements provide that the foreign bank will
supply the American accepting bank with funds to meet
the drafts at maturity. Both banks charge a commission,
the cost o f which is borne by the foreign customer in
itiating the transaction.
4 Goods may be withdrawn from storage prior to the
maturity of acceptances secured by them provided other
acceptable security is substituted.

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Member banks of the Federal Reserve System
are also authorized by law, upon receipt of permis
sion from the Board of Governors, to accept drafts
having not more than three months to run for
the purpose of furnishing dollar exchange to
foreign countries, or to dependencies or insular
possessions of the United States, where banks
or bankers are justified by the usages of trade
in drawing on member banks in this country to
create such dollar exchange. The Board of Gov
ernors publishes a list of these countries and
areas.6 In an early ruling, the Board appeared to
imply that "the usages of trade” referred primarily
to the practices growing out of a lack of frequent,
regular mail connections. In later years, however,
the degree of seasonality in a country’s foreign
trade became an important consideration.
The use of dollar exchange credits makes it
easier for foreign banks to provide dollar pay
ment for imports from the United States during
periods when exports to the United States suffer
a seasonal decline. Their use may thereby also
help to smooth out seasonal fluctuations in ex
change rates between the dollar and other cur
rencies. However, drafts are drawn to create dollar
exchange in anticipation of actual exports, and
Federal Reserve regulations prohibit the acceptance
o f drafts drawn merely because dollar exchange is
at a premium, or for any speculative purpose.
Neither are member banks permitted to accept
"finance bills,” which are not drawn primarily
to meet the demand for dollar exchange arising
out of the normal course of trade.
O f a total of 490 million dollars of bankers’
dollar acceptances outstanding at the end of De
cember 1951, 235 million was based on imports
into the United States, 133 million on exports
from the United States, 48 million on goods
stored in the United States, 44 million on goods
stored in or shipped between foreign countries and
7 million on goods shipped in the United States.
Twenty-three million, an unusually large amount,
was for the purpose of furnishing dollar exchange.
With this exception, however, the order of relative
importance indicated by these figures is one which
8 All countries o f Latin America (except Haiti and the
Dutch West Indies), Australia, New Zealand, the Aus
tralasian dependencies, and the Dutch East Indies (In
donesia) are presently on the list.

M oney M

arket

has persisted with but slight change since the mid
thirties. Since 1943, imports alone have been the
basis for more than half of all dollar acceptance
credits granted in every year.
The market for bankers’ acceptances includes, in
addition to the various sources o f supply, dealers
and a variety of institutions which buy and hold
acceptances.
Acceptance dealers buy bills from holders seek
ing to dispose o f them, sell bills to those seeking
them, and generally make ready markets, for either
purchases or sales. They ordinarily purchase ac
ceptances outright, instead o f handling them on
a commission basis. Dealers operate with small
portfolios and endeavor to sell bills purchased as
quickly as possible. The dealers’ compensation is
represented by the spread between the rates at
which they buy and those at which they sell, cur
rently % of 1 per cent.
Dealers were active in the acceptance market al
most as soon as the market was established. One
of the largest of present-day acceptance houses
commenced business in January 1919, and by the
spring of 1921 Eastern dealers had established
branches on the Pacific Coast. Some dealers active
during the twenties withdrew from the market
following 1929, and in 1931 only eight dealers
remained. At present, there are six dealers, of
whom four account for the greater share o f the
business. Only one of these deals exclusively in
acceptances, the others being also engaged in one
or more phases o f the securities business.
Accepting banks discount some o f their own
bills directly and also purchase the bills o f other
acceptors from correspondents and in the open
market. They purchase for their own account and
for the account of foreign and domestic corre
spondents. At the beginning of the American
acceptance market, the number o f accepting banks
increased rapidly, and in the years 1918-21 a total
of several hundred was reached. The number has
declined since then, as banks in smaller interior
cities, and those without adequate knowledge of
acceptance financing or properly equipped accep
tance departments, dropped out of the market. By
the end o f 1930, about 164 banks were listed as
acceptors o f bankers’ bills, while at present there
are about 125 accepting institutions. But through

E ssays

out the history of the American acceptance market,
by far the greater part of the accepting has been
done by 40 to 50 institutions. These large ac
ceptors are located in major financial centers. New
York, the country’s foremost financial center, is the
principal acceptance market.
Prior to 1932, both Federal Reserve Banks and
"others” (that is, all other buyers except accepting
banks) were much larger holders of acceptances
than the accepting banks. But during the period
1932-45, accepting banks held well over half
of the total volume of acceptances outstanding in
every year. Yields on acceptances in the years be
fore the depression were low in comparison with
commercial paper, Government securities, and call
loans secured by stock exchange collateral. Banks
therefore held acceptances only in moderate
amounts, for use in adjusting their reserve posi
tions. However, between 1932 and the outbreak
of war, when excess reserves were large, accepting
banks retained larger amounts of their own ac
ceptances than before, and also sought bills more
aggressively in the market. Starting in 1930, on
the other hand, the total volume o f acceptances
outstanding declined sharply. As a result of these
factors, bill portfolios of accepting banks came to
represent a much larger proportion of total ac
ceptances outstanding than had previously been the
case. By 1945, when the low point in volume of
acceptances outstanding was reached, accepting
banks held over three fourths o f the total, com
pared with only 11 per cent in 1929. Also, within
their portfolios, the accepting banks’ own bills
increased markedly in importance relative to bills
bought, rising from less than one third in 1929
to almost 60 per cent in 1945. In the postwar
period, as acceptances outstanding increased in
volume from their wartime low, and as short-term
interest rates became firmer, the proportion of
total acceptances outstanding •held by accepting
banks declined (to 40 per cent in December
1951). But the proportion of accepting banks’
own bills to their total acceptance portfolios (60
per cent in December) showed little change.
In the earlier years, as already indicated, Federal
Reserve Banks were large purchasers of accep
tances. They bought both for their own account
and for the account of foreign central banks. Tra

F e d e r a l R eserve B a n k

ditionally, Reserve Banks never sought actively to
buy acceptances for their own account; instead,
they stood ready to purchase, at specified rates, all
prime, eligible, endorsed acceptances offered by
banks. Also, it was the policy of the Reserve Banks
not to sell acceptances acquired for their own
account, but to hold them until maturity. Reserve
Banks did enter the market actively in order to
purchase and sell for foreign central bank corres
pondents, however.

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offered to the Reserve Banks from 1934 through
1945. The small purchases of 1946 and 1947
coincided with a relatively sharp increase in the
supply of acceptances in these years. By 1948,
private demand for acceptances had accommodated
itself to the larger supply and Federal Reserve
purchases for own account ceased until the end of
March 1951, when an offering of 2 million dol
lars was taken by the Reserve Banks.

During one or more stages in the life of the
American acceptance market, bankers’ acceptances
have been held by various categories of investors
other than the Federal Reserve Banks (for own or
foreign account) and the accepting banks (for
their own account). Such categories include non
accepting banks (for their own account), custo
mers and correspondents of domestic commercial
banks, dealers in bankers’ acceptances, foreign
banks with agencies in the United States, savings
banks and insurance companies, and individuals,
partnerships, associations, and corporations in
many other lines of activity. The great decline
since 1929 in the volume of acceptances outstand
ing,
however, has caused a considerable narrow
Reserve Bank acceptance portfolios shrank very
rapidly in 1932, but rose slightly in 1933, owing ing of the market. The major holders of accep
to the banking crisis. Thereafter, the Federal. tances today, other than accepting banks for their
Reserve Banks held no acceptances for their own own account and Federal Reserve Banks for the
account until 1945, and they made only nominal account of foreign correspondents, are believed
purchases for foreign correspondents in scattered to be foreign banks with agencies in the United
years. In 1946, in 1947, and again in the spring States and domestic commercial banks for the ac
of 1951, small amounts offered at Reserve Bank count of foreign customers and correspondents.®
Holders other than the Reserve Banks and ac
buying rates were purchased by the Reserve Banks
for their own account. In 1946 also, there was a cepting banks were an important source of demand
resumption of purchases at market rates for the for bankers’ acceptances prior to 1932. Their
account of foreign correspondents. These purchases holdings from 1925 through 1930, for example,
have continued throughout the postwar period, were in most months larger than those of the
though in amounts greatly reduced from those of Reserve Banks, and exceeded holdings of accepting
banks in every year. But from 1932 through 1945
the late twenties.
they played a subsidiary role to accepting banks as
The almost complete cessation since 1934 of
buyers of acceptances. After 1945, as the supply
Federal Reserve acceptance purchases for their own
of acceptances began to increase, both accepting
account is primarily the result of two factors— (1 )
the spectacular decrease in the supply of accep banks and other holders added to their portfolios
through 1947. Holdings of accepting banks de
tances following 1929 and continuing until the
spring of 1945, and (2 ) the concomitant growth * Foreign correspondents o f domestic commercial banks
of demand by accepting banks (which had not are usually also commercial banks, although some for
eign central banks maintain deposits with American com
been large holders of acceptances during the mercial banks. Like the foreign correspondents o f Federal
twenties) for the smaller supply. As a result of Reserve Banks, they have for years followed the practice
o f investing part o f their dollar holdings in bankers’
these influences, practically no acceptances were acceptances.
When private demand for acceptances was
strong, open market rates tended to fall below the
buying rates of the Reserve Banks. But throughout
the period from 1916 to 1931, private demand
was generally insufficient to clear the market.
Market rates therefore rose toward Federal Reserve
buying rates, and the Reserve Banks were offered
large quantities of acceptances. Between 1916
and 1924, they bought each year from 25 to 60
per cent of all bills drawn. And from 1925
through 1931, their holdings for their own account
at the end o f each year averaged from one fifth
to one half of total acceptances outstanding.

M o n e y M a r k e t E ssays

dined in 1948 and 1949; those of other holders,
however, continued to increase. Thus in 1949, for
the first time since 1930, other holders provided a
larger source of demand for bankers’ acceptances
than accepting banks. They continued in 1950
and 1951 to be the most important factor in the
demand for acceptances. At the end of December,
they held 272 million (56 per cent) of the total of
490 million dollars of acceptances outstanding.
This compares with holdings at the same time
of 197 million (40 per cent) by accepting banks
and 21 million (4 per cent) by Federal Reserve
Banks for the account of foreign correspondents.
Two reasons may be advanced in explanation of
the strong demand for acceptances by "others” in
the postwar period. First, as indicated above, this
demand is mostly foreign in origin, and bankers’
acceptances have long enjoyed a high degree of
popularity abroad as a short-term investment
medium. Second, the income (discount) earned on
bankers’ dollar acceptances owned by nonresident,
foreign corporations has been held by the Treasury
Department (in a 1947 ruling) to be exempt from
Federal income taxation. From the standpoint of
foreign investors, this gives the bankers’ accep

tance a considerable advantage over other com
parable, short-term, dollar investment media
(Treasury bills, for example), the income from
which is subject to a 30 per cent withholding
levy.
Further growth in the use of bankers’ dollar ac
ceptances depends on the future course of privately
financed international trade. Domestic uses of
acceptances have never been important in this
country, since the practice of open-account financ
ing was firmly established here before an accept
ance market developed. It is the international uses,
particularly the financing of merchandise imports
and exports, which have traditionally accounted
for the bulk of the bankers’ dollars acceptances
drawn. Substantial increases in the volume o f ac
ceptances outstanding, therefore, can be expected
only from expansion of these international uses.
Such expansion presupposes a growth of inter
national trade in nongovernmental channels,
whether through an over-all increase in trade
(both private and governmental) or through a
shift of existing trade from governmental to
private channels.

FINANCING SECURITY BROKERS AND DEALERS
by
S ta n le y
'FUNDAMENTAL changes have occurred since
-*• the thirties in the market for bank loans
secured by stock exchange and other security
collateral. In slightly more than two decades the
call loan market has contracted greatly both in
volume and in its relative importance in the money
market. Although at one time call loans were the
most important means used by banks to employ
surplus funds and to adjust reserve positions, they
have now become a comparatively small outlet for
loans direct to borrowers and the formal arrange
ments of an impersonal market no longer exist.
While students of the money market need no
longer focus as much of their attention as they did
in the past upon the fluctuations of call loan rates,
the volume of call loan activity, the mechanics of
market operations in call loans, and upon the
degree of interdependence between this market,
the money market, and bank reserves, it is impor
tant to understand the institutional arrangements
which have succeeded to the functions formerly
served by the call loan.
In 1929, before the stock market break, security
loan rates in New York varied from day to day
over a range from about 5 to 15 per cent, generally
remaining well above the rates for prime com
mercial paper. The aggregate volume o f security
loans extended by banks and others was several
times the volume of recent years. The market
then was impersonal, with transactions occurring
largely through the money desk on the New York
Stock Exchange; that desk was discontinued in
1946, after more than a decade of negligible
activity at an unchanging interest rate o f 1 per
cent, and for many years security loans have largely
been made by banks through direct negotiation
with the borrowers. Loans "for the account of
others” (than banks) have been legally prohibited
since mid-1933. The proportion of their earning
assets which the weekly reporting banks in New
York city lodged in security loans at the end of
December 1951'was about one third of the 1929

L. M

ille r

ratio; for all other banks, the proportion was only
about one ninth that of 1929. To a degree, secu
rity loans have tended to become comparable with
customer loans and so are part of the normal lend
ing business, rather than representing primarily a
residual employment for excess funds, or the first
means of obtaining funds from the money market
in the event of a drain on bank reserves.
Bank reserve adjustments have not for some
time centered on the call loan market, and for
nearly a decade short-term Treasury securities have
been relied upon as the principal (negotiable)
money market instrument. As a result, the liquidity
of the money market no longer depends upon
call loans that reflect activity and prices in the
stock markets; nor are the stock markets heavily
influenced by short-run changes in the availability
o f money market funds. Thus, an institutional
arrangement that was at one time an important
source of cyclical instability in the financial sector
of the economy has largely disappeared.
This article will describe, in part, the kind of
security loan market that has emerged, following
these fundamental changes. It discusses the present
characteristics of one of the most important seg
ments of that market, the loans to brokers and
dealers. The review will include a brief summary
of the purposes for which brokers and dealers
borrow, the sources of funds for these loans, the
principal types of loans made, the legal margin re
quirements, and the customary practices of the
banks in relating their own margin requirments
and interest charges to the nature of the securities
offered as collateral.
W

B rokers

and

ealers

Borrow

Brokers and dealers in securities require bank
credit in order to finance: (1 ) their customers’
purchases of securities, (2 ) their own "positions”
or inventories of securities held either in short
term trading accounts or in longer-term investment
accounts, (3 ) their purchasing and carrying of
new security issues pending sale to ultimate in27

oney

M a r k e t E ssays

Chart ‘I
Borrowing on Collateral by Members of the New York Stock Exchange*

Billions
of dollars

B illio n s
o f d o lla rs

* Amounts outstanding at end o f month, January 1929— December 1951. Loans on U. S. Government securities first
shown for March 1943. The figures in this chart differ from those shown in Chart II. Chart I represents loans
exclusively to members o f the New York Stock Exchange. They include loans from banks and all other sources in
and outside of New York City.
Source: New York Stock Exchange.

vestors, and (4 ) the delivery or clearance of
securities traded.
Available data are not sufficiently detailed to
show the actual volume of bank funds used in
satisfying the various purposes for which brokers
and dealers borrow. It is possible, however, to
indicate thfeir order of magnitude within the two
broad classes into which broker and dealer loans
are subdivided— those for "purchasing or carrying
other securities” and those for "purchasing or
carrying Government, securities” . On December
26, 1951, loans on other securities at the weekly

reporting member banks were about 1.0 billion
dollars; those on Government securities were
roughly 390 million dollars. The total of 1.4
billion dollars included practically all loans made
to brokers and dealers by banks in the United
States; and the reporting banks in New York City
accounted for more than three quarters of this
total. Although the reporting banks themselves
do not submit data indicating the amount of their
loans used for each of the four purposes men
tioned above, rough approximations can be esti
mated from data released by the New York Stock

F e d e r a l R eserve B a n k

ork

Chart II
Outstanding Loans to Brokers and Dealers for Purchasing
or Carrying Securities by New York City Weekly
Reporting Member Banks*
Bi I lions
of dollars

B illio n s
of dol lars

2.0

1.5

Government
securities
1.0

0.5

1943

1944

1945

1946

J________L
1947

1948

1949

J________L
1950

1951

* Amounts outstanding on last Wednesday o f the month, March 1943— December 1951. See also footnote to
Chart I.
f Change in the number of weekly reporting member banks.

Exchange and other sources. Loans on "other
securities” are largely o f the first type (broker
borrowing to finance customer purchases— mainly
of stocks), although at times perhaps as much
as one fourth of the total might be accounted for
by either the second or the third purpose (that is,
financing broker or dealer "positions” , or their
holding of new securities pending sale to ultimate
investors). The fourth purpose relates largely
to over-the-counter market transactions, which may
have to be financed briefly during the process of
transferring ownership; but since the greater part

of these loans are made and repaid within the same
day they are not shown in bank data on outstand
ing loans (which are reported as of the close of
business on the reporting date). As far as the
broker and dealer loans on Government securities
are concerned, these are predominantly for financ
ing "positions,” although a small portion often
represents overnight loans arranged to finance the
"carry” while a transfer of ownership is being
effected.
The aggregate volume of loans to brokers and
dealers has fluctuated between two thirds of a

M o n e y M a r k e t E ssays

for several years. Treasury refunding operations
have often been an important influence on the
volume of dealer loans on Government securities.
At such times there is ordinarily an increase in the
volume of trading in Government securities, as
those investors whose needs are not exactly met by
the newly offered security attempt their own re
funding through sales of the maturing issue in the
market. In the course of facilitating this redis
tribution within the market, dealers tend to in
During the war and early postwar years, dealer crease their own positions. It is, to a large extent,
loans on Government securities constituted the only after the new securities are actully issued
largest single category of loans to brokers and that sales bring about a reduction in dealer posi
dealers. Toward the end o f 1945, for example, tions and dealer loans. Dealer positions may also
the loans on Governments amounted to close to be increased by the shifting of securities within
2 billion dollars, more than twice the volume of the market that precedes Treasury new money
borrowings on other collateral at that time. There offerings.
has been a sharp reduction in dealer loans on
So u r c e s o f F u n d s
Governments since 1947. And, as already noted,
Security loans are mainly an outlet for the funds
on December 26, 1951 loans to brokers and dealers
of banks in the leading financial centers. The
for "purchasing or carrying Government securi
member bank call report for June 30, 1951 showed
ties” at all weekly reporting member banks were
that loans to brokers and dealers by central reserve
less than two fifths of the loans on other securities.
city banks in New York and Chicago were about
In aggregate amount, broker borrowings on listed
11 per cent of the total loans of these institutions
securities at the end of 1951 constituted the larg
and 87 per cent of all member bank loans to
est outlet for bank loans to security brokers and
brokers and dealers. The loans of the New York
dealers, although they have not changed materially City banks, furthermore, were 11 times those of
in volume over the past several years. Dealer the Chicago banks. Within New York City, only
borrowing on Government securities ranked second
banks located in the financial district in lower
in volume, and loans to finance dealer positions
Manhattan make loans to brokers and dealers on a
in unlisted bonds and stocks appeared to rank
large scale. Other banks apparently have neither
third. A large segment of this third type probably
the experience nor the large volume of demand
represented funds borrowed to carry dealer posi necessary to make this kind of loan profitably
tions in State and local government issues.
at the comparatively low interest rates prevailing
billion and two billion dollars over a large part
of the post-World War II period (through the
end of 1951). The variation is influenced by
such factors as the current volume of trading in
securities, the amount and rate of sale o f market
offerings o f securities by business and govern
mental bodies, changes in security prices and in
interest rates, and variations in the readiness of
investors (including dealers) to take speculative
positions.

New security financing plays at times an im
portant part in the fluctuations in outstanding
security loans. As a rule, new publicly offered
security issues will have been largely sold by the
underwriters before payment is due to the issuing
corporation. Loans to carry the remainder, pending
sale to investors, are usually outstanding no more
than one week. But a turnabout in security prices,
creating difficulties in the sale of new issues and
congestion in the market, can become an important
factor leading temporarily at least to an increase in
security loans. Some new bond issues floated dur
ing past periods o f market weakness have been
carried by the underwriters on a call loan basis

over the last two decades.
Brokerage firms which are members of an or
ganized stock exchange have a second important
source of funds, the "free" cash credit balances of
their customers. Member firms may utilize such
balances to finance the margin purchases of other
customers. Thus, on June 30, 1951, New York
Stock Exchange member firms reported that while
customer and firm accounts had debit balances of
about 1.3 billion and 375 million dollars, respec
tively, outside borrowing amounted to only 680
million dollars. The difference of more than one
billion dollars was largely supplied by the free
credit balances in the accounts of other customers.

F e d e r a l R eserve B a n k

ypes

Se c u r i t y L o a n s

Security loans may be divided into two types,
those which finance holding and those which are
made for a few hours to finance a change in
ownership. The former may be either demand
(call) or time loans; the latter are either day or
overnight loans. The call and time loan agreements
between brokers or dealers and the banks are
similar in that under either form the borrower
agrees to keep the loan properly margined (that
is, a specified proportion of his own funds invested
in the securities) and to permit securities pledged
against the loan to be sold by the lender in satis
faction of the debt in the event of default or of
failure to maintain adequate margin. The time loan
takes the form o f a note in a specific amount with
a specified maturity date, and may be renewed
at the current renewal rate o f interest. The call
loan, on the other hand, takes the form of a
general agreement, in which the amount of the
loan is not specified. Under this agreement succes
sive loans and repayments are made, and any in
debtedness may be terminated at short notice either
on demand of the lender or repayment by the
borrower. In both cases, substitution of collateral
is freely permitted with due regard for the quality
of the new collateral and the margin required.
Most security loans are made on a call basis, and
in current practice such loans are rarely called.
Repayment is normally at the initiative of the
borrower. Interest costs are usually computed daily
at the prevailing rate.
The maximum amount of call (and time) loans
outstanding to any one borrower is governed by
the quality of the collateral, the credit standing
of the broker or dealer, and the loan limit of the
bank. The New York Stock Exchange stipulates
that the aggregate indebtedness of a member
firm may not exceed 15 times its net capital. The
loan officer o f an individual bank determines the
credit limit for each broker or dealer on the basis
of the borrower’s credit standing and the quality
of the pledged securities. The aggregate amount
of loans to any one broker or dealer may not, of
course, exceed 10 per cent of the capital and
surplus of a national bank (or 10 per cent of the
capital, surplus, and undivided profits of a New
York State member bank), except that for certain

Y ork

security loans including those on Government
securities the maximum is 25 per cent.
The practice in this countiy of making full
cash payment daily for security purchases (in
contrast with the fortnightly settlements in Great
Britain, for example) has necessitated the creation
of special types of temporary credit accommodation
for dealers in securities. These are known as the
day loan and the overnight loan, which are used
primarily by those dealing in Government securi
ties and various over-the-counter issues (most
payments for stock exchange transactions are offset
through clearing arrangements). Day loans, pay
able on the same day they are made, enable dealers
(1 ) to pay for securities they have contracted to
purchase and receive, and (2 ) to pay off a loan
against which securities have been pledged in
order to release those securities for delivery to a
buyer against payment. Overnight loans provide
dealers with funds to pay off day loans, and thus
enable them to hold overnight the securities they
have not been able to deliver during the day.
Both the day and the overnight loans are evi
denced by a note for a specific sum of money. The
overnight loan is fully secured by securities
pledged against the loan. The day loan is safe
guarded by a lien or chattel mortgage on the
securities in the process of receipt or delivery, and
a list of the securities involved may be attached as
part of the day loan note, but the lender does
not have possession of the securities. Day loans
require no margin and the rate of interest in
New York has remained fixed at one per cent
since the middle of 1929. Overnight loans are
subject to the same maximum loan values and
interest rates as other security loans.
R e g u l a t io n s

and

Under powers delegated by the Securities Ex
change Act of 1934, the Board of Governors of
the Federal Reserve System has issued Regulations
T and U which, in general, place limits on borrow
ing to purchase or carry "listed” securities (i. e.,
securities listed on national security exchanges
registered with the Securities and Exchange Com
mission). Regulation T applies to extensions of
credit which brokers and dealers (including
members of national security exchanges) make to
their customers; Regulation U applies to loans

M o n e y M a r k e t E ssays

made by banks on any stock for the purpose of
purchasing or carrying listed stocks. The Board
has the power to vary the borrowing limits,
through stipulating ‘ maximum loan values,” with
changing conditions. At the present time, the effect
of the Regulations is to require customers (in
cluding brokers when operating for their own
account) to use their own funds, that is to provide
"margin,” for 75 per cent of the purchase price
of a security. Federal Government, State, and
municipal bonds are exempt from both Regula
tions. Other bonds are exempt from Regulation
U (loans made by banks) but not Regulation T
(loans made by brokers). Regulation T, in addi
tion, prohibits brokers and dealers from extend
ing credit for the purpose of purchasing or carry
ing those securities which are both unlisted and
nonexempt.
,
In extending credit to firms which are members
of a stock exchange, the New York Gty banks re
quire such firms to sign a statement declaring that
they are subject to Regulation T. In the case
of loans on listed issues, borrowing firms are
also required to segregate their customers’ securi
ties from their own holdings. Among other pur
poses, this segregation permits the banks to lend
to brokers somewhat more freely against cus
tomers’ securities, which have already been "mar
gined” by the customers under Regulation T,
than on securities owned by the broker himself,
since the banks must treat these in conformity
with Regulation U.
The legal prescription of maximum loan values,
generally referred to as the regulation o f margin
requirements, has been effective in limiting the
volume of bank credit used to finance speculative
transactions in listed stocks. The security loan,
and more particularly the call loan, has in the
process been made a relatively more stable money
market instrument, much less vulnerable than
formerly to forced sales because o f changes in
security prices;
In flu en ce
Loan

alues

Collateral

and

In terest R ates

As shown in the accompanying table, the maxi
mum loan values which banks themselves permit
for security loans, and, to a lesser extent, the in
terest rates charged on such loans, vary with the

Terms o f Call Loans to Brokers and Dealers
on Securities by New York G ty Banks
(as o f December 31, 1951)*
Type of issue
Outstanding
Stocks
Listed
Customer accounts..................
Firm accounts ........................
Unlisted .......................................

Loan values Interest rates
(In per cent of (In
per cent)
market price)

66%
25

2l/2-23/4
21/2-23/4

50-60

2Y2-2Y4

75-95
80-98

2-2Yi

95-100
95-98

2-2l/2
2-21/a

N ew issues
Stocks
Listed ...........................................
Unlisted .......................................

90-95
90-95

2-234
2-23/4

Bonds
Corporate .....................................
Municipal ..................................

90-95
90-95

2-234
2-23/4

Bonds§
Corporate.....................................
Municipal ..................................
Government! ..............................
Maturing in 1 year or less....
Maturing in over 1 year.......

2-23/4

* Data are a composite o f lowest and highest loan values
and interest rates found in a survey o f four leading New
York G ty banks.
§ Includes short-term securities.
f Loans to dealers maintaining active markets in Govern
ment securities.

type of security offered as collateral. Inquiries at
four leading New York Gty banks showed that
as of December 31, 1951, the loan values which
the banks specified for brokers’ loans on listed
stocks generally amounted to two thirds of the
market value of such securities whenever the
purpose of the loan was to finance customer deal
ings already subject to Regulation T. Banks
may permit these loan values to rise to, but not
often over, 75 per cent. To carry listed stocks
(apart from underwriting operations) in their own
portfolios on borrowed money, however, stock
exchange firms and others could borrow no
more than 25 per cent of the market value, as
required by Regulation U. The loan values which
the banks specified on loans secured by unlisted
stocks were in the neighborhood of 50 per cent.
Progressively higher loan values are customarily
allowed on loans secured by corporate bonds, the
securities of State and local governments, and ob
ligations of the Federal Government Loans on

F e d e ra l R eserve B a n k

new corporate and municipal security issues, held
in underwriting syndicates pending distribution
to the public, are regularly permitted to represent
a higher proportion of market value than would
normally be allowed for loans on outstanding
issues.
Rates charged brokers and dealers on security
loans also vary somewhat depending on the
quality o f the collateral and the character of the
business of the broker or dealer. Interest rates
charged by the New York City banks on loans
secured by stock exchange collateral are usually
1/4 to y 2 of one per cent higher than those charged
when the collateral consists of Government securi
ties. The interest rate on call loans secured by
stocks was raised to 2% per cent on December
18 by most banks, although a few banks continued
to quote the previous prevailing rate of i y 2
per cent. Most New York Gty banks also charge
the stock exchange call rate on broker and dealer
loans secured by corporate and municipal bonds

ork

and unlisted stocks. Only those dealers who ac
tively maintain markets in Government securities
are granted the lower rate on Government security
loans. Call rates on Governments fluctuate daily
with money market conditions. Toward the close
of 1951, the rate ranged from a minimum of 2
per cent to a maximum of 2 y 2 per cent.
Se c u r i t y L o a n s
N o

Longer

arket

In str u m

ent

The present characteristics of the security loan
market are markedly different from those of the
late twenties. As presently organized, on an overthe-counter basis, the market for loans to brokers
and dealers accounts for a relatively small pro
portion of the earning assets of the commercial
banking system. Despite the fact that most of
these loans are made in demand (call) form, the
possibility no longer exists for a repetition of the
type of "call money panic" that at times proved
so disastrous in the past. The call loan has ceased
to be an important money market instrument.

Full text of Money Market Essays

FRASER