SECURITY COLLATERAL LOAN MARKET 30I
The general function of stock market loans, as we have
seen, is, by promoting security distribution and facilitating new
security flotations, to finance the establishment of new produc-
tive equipment, and thus to assure industrial and commercial
progress. Without a mechanism in its leading money market
for making security loans, it would be impossible for any
modern country to engage in wholesale or mass production
with low costs and high wage levels. It is no mere coincidence
that America, which has so conspicuously excelled in these
economic achievements, should possess in the New York call
loan market the broadest and most highly organized security
loan market in the world. N evertheless, existence is an even
more fundamental need than progress, and thus commercial
loans in general deserve the preference which is accorded to
them by bankers here and in other countries. Both forms of
loan are, however, vitally necessary to continued national pros-
perity, and therefore both are suitable investments for our
commercial banks and also for rediscounting at a central bank
of issue,
After the angry attacks which have been made on our
banking system for allowing funds which are alleged to be
needed very desperately in our fields and factories to be
“wasted in the stock market,” it may surprise the layman that
in reality stock market loans do not to any important extent
compete for the money supply with commercial loans, that only
the excess funds which bankers cannot safely lend in com-
mercial loans are loaned in stock market loans, that usually the
latter bear a lower rate of interest than the former, and that
as far as “waste” is concerned there is no record of a lender’s
money being actually lost when loaned to a Stock Exchange
house on listed security collateral. Senate Document 262, 66th
Congress, 2nd Session (PP. 9-10) states: “The rates of call
money do not determine and have not exerted an important
influence on the rates for commercial borrowings.”
In respect to this alleged tendency of the New York call
loan market to draw away from interior centers funds needed
