302 THE WORK OF THE STOCK EXCHANGE
there by merchants, farmers, and others, it is well to remember
that: (1) usually call loan rates rule below local interior in-
terest rates on bankers’ advances, and thus provide no incentive
for diverting funds to New York; (2) local interior bankers
are guided by self-interest to lend their funds locally rather
than on call in New York, since the former loans create de-
posits, and thus increase the local bank’s size and income and
also build up the local community and turn fresh loans and
deposits into the local bank, while New York call loans possess
none of these advantages to the local lender; (3) such call
loans as local interior banks make are therefore due to the
need of placing a certain amount of the bank’s funds in unques-
tionably safe and liquid investments, under penalty of the
suspension or insolvency of the bank itself; and (4) the exten-
sive insolvencies of local American banks during recent years
go to show that many such institutions have, for the good
of their own communities no less than their own, loaned too
little rather than too much of their funds in the New York
call loan market.?®
In recent years there has been a noticeable tendency for
companies to provide themselves with working capital by issu-
ing new stocks or bonds rather than making short-term com-
mercial loans at the banks. Such new issues as a rule cannot
be immediately and completely sold to outright investors, and
the amount remaining ovér and .above investment purchases
must be carried in the market floating supply by security loans
for which they serve as collateral. The practical effect in
banking of this marked tendency is, that security loans are
now largely resorted to instead of commercial loans to furnish
not only fixed but also working capital to our corporations.
As company mergers and consolidations proceed, and as our
companies themselves continue to prosper, this trend away
from commercial to security loans has constantly become
more pronounced, and ultimately it may revolutionize the basic
methods and technique of American commercial banking.
8 See Appendix XIk.
