RATES OF INTEREST 173 liabilities of a national agricultural credit corporation are limited to ten times its paid-in and unimpaired capital and surplus. The amount of rediscounts that a large national agricultural corporation with rediscount powers may make for any corporation is subject to regulation by the Comptroller of the Currency. Paul M. Warburg, former member of the Federal Reserve Board, in a recent speech took the position that the strongest of the first-class banks should not rediscount with the Federal reserve banks except for special reasons, and that the less powerful banks of that class ought to rediscount normally only their short maturities, leaving the rediscounting of the larger maturities chiefly to the small banks. To the small banks he said: "Use your rediscount facilities unhesitatingly and freely in certain seasonal periods with these restrictions only: don't exceed a reasonable limit indicated by a safe proportion to your own resources; don't borrow all the year around; liquidate your rediscounts with the Federal reserve system entirely, at least once every year, when the seasonal demand is over; for the Federal reserve system is not designed to furnish you permanently with additional working capital, or to put it another way to permit you chronically to encroach upon your reserves by being a perpetual borrower from the system." 128. Rates of interest. Just as there are grades of cotton and grain, so there are grades of credit. The published rates of interest in the money market quotations are for paper of first-class standing. In 1915 the market in New York reached as low as 24%. Most mercantile and manufacturing paper even at that time would pay 1% to 2% more. Call loans on the highest collateral sometimes fall to 12% though 2% is a common low figure. A rate 12% to 12% higher is usually charged if the securities are all industrial. In 1919 call loans in New York ranged from 2 to 30 per cent and the commercial paper rate was often 8 per cent. If interest rates are low, the longer the term of the loan the higher the rate. If interest rates are high the reverse is true. Singlename paper may bring less than indorsed paper. In an interior city quotations are more nearly the same for all classes of paper of high grade, usual rates being 6% to 8%. The following discount rates of the Federal Reserve Bank of Cleveland in effect on Aug. 1, 1916, were available only to bankers, but they illustrate some of the grades of credit: 12 Maturities of 10 days and less Maturities of over 10 to 30 days Maturities of over 30 to 60 days Maturities of over 60 to 90 days 31% 4 % 41% 41% Agricultural and live-stock paper, over 90 days ... 5 % Trade acceptances of over 30 to 60 days 3 % 31% 4 % 2 to 4 % In 1923 the rates at Federal reserve banks did not show such a variation. On March 31, 1923, each bank had a uniform rate for all classes of paper. Interest on time paper is calculated for the time to maturity. It may be paid in advance, or at maturity, according to the contract, but the same rate governs throughout the period. For demand loans the rate may fluctuate, being at one figure one day, and at another the next day. Interest is charged on the basis of 360 days to the year. The daily rate is 1/360 of the annual rate. The United States government in all of its interest calculations uses 1/365 of the annual rate as the daily rate. The same method is applicable in the District of Columbia. An interest statement issued by a bank to its customer 12 Federal Reserve Bulletin, August 1916, p. 383. RATES OF INTEREST 175 will read so many days at one rate, and so many days at another rate if there has been any change. The legal rate (that allowed by law when interest, but no rate is specified) varies from 5% to 8%. In Maine, Massachusetts, New York, Rhode Island, Pennsylvania, Colorado, and California, high rates may be charged by special agreement. Not to exceed 12% is allowed by written contract in Connecticut, Montana, South Dakota, Idaho, Nevada, New Mexico, Washington, Wyoming, and Utah. A few banks have charged and their customers have been willing to pay, under the subterfuge of discounts, expenses, and commissions for services, more than the lawful rate. This has not been very dangerous, for even if the customer squealed, in most cases only the excess interest would be forfeited. When a man needs to borrow, he isn't squeamish about the rate, and if he turns out to be a squealer, the next time he is not accommodated. The Comptroller of the Currency 13 found upon investigation in 1915 that while the national banks could rediscount notes at the Federal reserve banks for 32% to 5%, one in three were charging on some of their loans 10% or more. He said: "The records also show that as of Sept. 2, 1915, 1022 national banks in 25 states were by their sworn reports, charging an average of not less than 10%, and in some cases 18%, on all their loans. The sworn statements of the banks in one particular state inIclude a list of 131 banks whose maximum rates of interest ranged from 15% to 24%; 67 banks whose maximum rate was between 25% and 60%; 22 banks which charged between 60% and 100%; and 26 banks whose rates were 100% or more." Three banks in one state averaged 25%, 36%, and 40%, respectively, on all loans from Sept. 2 to Nov. 10, 1915. This shows how dearly some borrowers 13 Report of the Comptroller of the Currency, 1915, Vol. 1, pp. 20-31, 149-217. had to pay for loans at a time when the overwhelming majority of the banks of the United States were every day lending millions at from 2% to 6%. In November, 1918, the Comptroller wrote: 14 "I am very glad to be able to say that these sensational and inexcusable rates are steadily disappearing." The Comptroller of the Currency has the power to enter suit to forfeit the charter of any national bank which charges usury. In its annual report for the year 1922 (page 16) the Federal Reserve Board tabulates the charges for interest which were made by member banks during the years 1921 and 1922. The table which is submitted below is an excellent comparison of the interest rates now in force all over the United States. AVERAGE RATES CHARGED BY MEMBER BANKS ON CUSTOMERS' PAPER REDISCOUNTED WITH FEDERAL RESERVE BANKS DURING DECEMBER, 1921 AND 1922. Dec.. Dec., Dec., Dec., Dec., Dec., Dec., Dec., Dec., Dec. 1922. 1921. 1922. 1921. 1922. 1921. 1922. 1921. 1922. 1921. Boston.. Chicago. Total. 4.81 6.05 5.49 6.12 5.82 6.22 4.84 6.05 4.00 4.50 4.94 6.00 5.97 6.02 5.74 6.11 4.99 6.00 4.00 4.50 4.98 5.96 6.00 6.00 5.86 6.03 5.00 5.97 4.50 4.50 5.63 6.26 6.05 6.42 6.22 6.30 5.67 6.26 4.50 5.00 5.93 6.07 6.19 6.75 6.74 6.94 6.20 6.60 4.50 5.13 5.81 7.10 6.98 7.52 7.91 7.93 6.34 7.34 4.50 5.28 4.97 6.38 6.27 7.07 7.46 7.52 5.36 6.60 4.50 5.00 5.33 6.37 6.63 7.55 7.78 8.04 5.61 6.69 4.50 5.00 5.73 6.78 7.38 8.88 8.98 8.74 8.08 7.65 4.50 5.50 6.26 7.18 6.36 7.33 8.80 8.92 7.06 7.87 4.50 5.00 6.34 7.60 8.55 8.30 9.75 9.69 8.41 8.97 4.50 5.50 5.23 6.08 7.24 7.31 8.01 8.19 5.44 6.37 4.00 5.00 5.10 6.12 6.41 7.15 7.69 7.97 5.38 6.50 4.30 4.91 14 Report of the Comptroller of the Currency, 1918, Vol. 1, p. 209. PAYING LOANS 177 129. Paying loans or maturing instruments. It is customary, though not compulsory, for banks to send a notice, ten days prior to when a note, or acceptance, is due. It is a good practice for the maker of a note to add his address below his signature. Unless arrangements are made for a renewal before the due date, payment is made. If the instrument is payable at the borrower's bank, the bank as a matter of practice will charge it to his account, as a check, which is the most convenient way. of settling such paper, or in a state where such is not the rule, one's bank will do it upon request. If the bank itself discounted the paper it is charged without any request. Anyone can if he prefers write his check and take up his note, or acceptance, across the counter. He can get it from the cashier, the collection teller, or the note teller, depending upon the size and practice of the bank. This he will have to do at any other bank than his own. Payment. of paper at a strange bank should be by cash, or certified check, else the holding bank would probably prefer to |