The Money Market

by F. Straker

Having now surveyed the history and development of our financial system up to a point when “system” can really be said to have started, and also having glanced at the causes which have placed London in the forefront of all financial centres, we will consider the formation, as a whole, of what is called the “Money Market”; and then more carefully examine certain of the more important factors which help to form that market.

There is no definite “market” for money in the sense of a “place of purchase and sale,” like a cattle market or a corn market; when we speak of the “Money Market” we refer to the body or aggregation of large dealers in money—bankers, bill-brokers, etc.—who either have money to lend or who require to borrow money, and by whom the rate to be charged for the use of money is largely settled, as a result of their mutual transactions.

This body of money-dealers is not clearly defined into two classes—lenders and borrowers—as an ordinary market is divided into two classes—buyers and sellers; but with money-dealers all are practically both buyers and sellers; that is, all are ready to sell the use of money at a certain price, and to buy the use of money at another price.

The Bank of England in bygone days was the predominant factor in the Money Market; but now, in ordinary times, it has somewhat fallen from its high estate in that respect. It is only at certain times that its funds find their way into the Money Market to any large extent. But the Bank still has the power, when occasion arises, to make its influence predominate, as it constitutes the final reserve, in case of need, of our banking system. The Bank likewise has the power to make its influence felt when the directors deem it advisable to obtain control of the Money Market, for the purpose of maintaining the monetary position on a basis of safety. As we shall see when dealing with the subject of the [foreign exchanges], if, in order to check an outflow of gold, the directors of the Bank wish to raise the value of money in London—that is, to raise the rate at which money can be borrowed or lent—they raise the official rate of the Bank of England. If the outside market lags behind, or does not keep in line with the movement, they force it to do so by themselves borrowing large sums from the market, thus reducing the available supply of money in the hands of the market, and consequently enhancing the value of money.

The chief factor in the formation of the Money Market is the body of the joint-stock and private banks of London, and through them of the bankers of the kingdom. Practically all the working capital of the country and the floating money of private individuals, together with moneys awaiting permanent investment, are now in the hands of our bankers.

Of this vast accumulation of capital held by bankers—amounting in the United Kingdom to some £800,000,000—a certain part is retained in actual cash, besides a balance which is kept with the Bank of England or a London agent, some is invested in securities, and the balance is used in lending to those that require the use of further capital for their business or private needs. Of this balance so lent, a large percentage is advanced to individual customers by way of loan, overdraft, or in the discounting of bills; and the remainder is used in the Money Market proper, or what has been aptly called “The Short Loan Fund.” The rate of interest which private individuals have to pay for advances from time to time is largely based on the prevailing official rate of the Bank of England as regards loans, and on the “market rate” as regards the discounting of first-class bills.

For the greater part of the money in a banker’s hands no interest whatever is paid, that is, for practically the whole of the current account balances. For the remainder, the money on deposit, only a small interest is paid; but a banker must always keep before him the fact that nearly all his liabilities are repayable in cash on demand. Thus he must always keep himself prepared for eventualities, and his first line of defence consists of cash and balance with the Bank of England or London agent, and he reckons his advances to the Money Market as his next most quickly convertible and available asset.

For the money advanced to the Money Market bankers are content to receive a low rate of interest, provided that the advances are absolutely safe, and can quickly be called in when necessary. These conditions can be obtained by lending money at “call” (that is, repayable on demand) or at a few days’ notice to the bill-brokers, who deposit as security for such loans, first-class bills, or certain of the highest class of securities, such as Consols, etc.

The bill-brokers and discount houses of London form the second most important factor in the Money Market. These firms and institutions practically act as middlemen or intermediaries. Many of them possess large capital themselves with which to conduct their business, but the bulk of the funds which they employ consists of borrowed money. This money is borrowed from various sources; the greater part from the banks, some from the India Council, and some from our merchant princes and finance houses, who of themselves really constitute another factor in the Money Market. Besides these sources for borrowing money, the bill-brokers further increase their working funds by receiving money on deposit from the public. With the funds so collected they buy bills, usually only those of a first-class character, and these they either hold until maturity or rediscount with the banks, and occasionally with the Bank of England.

The British Government is at certain times a factor in the Money Market, that is, when on account of any extraordinary outlay, or when expenditure is temporarily exceeding revenue, it issues Treasury Bills and Exchequer Bills. If these bills are bought by the Money Market, it follows that the amount of money in the hands of the Market is, at least for the time, decreased by the amount of money paid for the bills (which goes into the Bank of England and helps to increase “Public Deposits”), and consequently the rates for money in the open market are inclined to rise or “harden.” When these bills are repaid the contrary effect is produced, market supplies are increased and rates are inclined to droop.