Another factor which has to be taken into account in this matter is the India Government. The India Government has, from time to time, large funds lying here which are not required for immediate use, nor are they available to lend for long periods; these funds practically constitute a floating balance. Use is made of this money by lending it out to the market through a well-known house, much in the same manner that banks lend their floating balances. The money is usually lent in sums of not less than £50,000, for periods from a fortnight to a month; and it is generally stipulated that the securities deposited against the advances shall consist of either Consols, or Indian Securities of certain kinds, such as rupee paper and the guaranteed debentures of a few of the first-class Indian railways. The India Government generally manages to obtain a very fair return for the money so lent.
The Stock Exchange is another element which requires consideration, although it is a rather one-sided element, inasmuch that it is nearly always a borrower. In busy times on the Stock Exchange enormous sums are borrowed from the banks for the purpose of speculation of one kind or another. Stocks are bought by various persons who have not the money to pay for them, in the anticipation that they will increase in value; and these persons arrange with their brokers to “take up” the stock for them—that is, that the brokers shall find the money to pay for these purchases—and this ultimately results in a banker advancing the money. During periods when the rates of interest are low also, large amounts of stock bearing a higher interest are then “taken up,” for the purpose of securing the difference in the amount of the interest paid for the loan and the interest received from the stock, and the money for these purchases is largely borrowed from banks. These Stock Exchange loans are made from “account to account”—that is, from one settling day on the Stock Exchange to the next—and as there are two settling days every month, the loans are nominally granted for about a fortnight each. The interest charged is fixed at the beginning of each account for that account, and varies according to the prevailing conditions at each renewal.
Lastly, we have a somewhat new factor entering into the Money Market, but one which is increasing in importance, and that is the establishment in London of branches of many powerful and rich continental banks, who make use of the London Money Market for employing their surplus funds when they can do so to advantage. They lend money to the bill-brokers much as do ordinary London banks; and at times, when the conditions are favourable, they invest their funds in English bills, occasionally absorbing considerable amounts of Treasury and Exchequer bills. These purchases of English bills increase the money in the market for the time being, and the competition of these foreign bankers tends to depress the rate charged for discount. It must be remembered, however, that this course of business gives the banks in question power to draw gold from us heavily on the maturity of the bills, or at any time when they see fit, by selling their bills before maturity.
From a consideration of these various factors, we see how largely they are interwoven together and dependent on each other. The banks gather in deposits from all quarters and lend to the bill-brokers, while leaving a large amount with the Bank of England; and the bill-brokers borrow from the banks and buy up bills from all quarters; but if the banks “call” their money from the bill-brokers the latter are driven into the arms of the Bank of England, to reborrow the money which the banks have called from them. This is also the case if the India Government call in their loans, and the money to repay the same cannot be borrowed from the banks. Similarly with the Stock Exchange, if much money is absorbed in this quarter, the banks will reduce their accommodation to the bill-brokers, who may by this action again have to rely on the Bank of England; and again, lastly, if the foreign banks commence to draw money from us, the strain comes as usual on the Bank of England.
All these factors work round the Bank of England as a centre, and the need of strength on the part of that institution becomes at once apparent when it is seen what mighty interests are dependent on it, that the financial credit of the country rests ultimately upon its stability, and that its policy and actions involve consequences of weal or woe to the community at large.
CHAPTER VII
THE BANK RETURN
We will now examine the weekly “Return” issued by the Bank of England in accordance with the requirements of the Act of 1844, and consider the significance of the various items appearing therein. The Return is made up to the close of business on every Wednesday, and is published on Thursday. Though the figures given always attract attention, and are regularly made the subject of analysis and criticism in the financial articles of the Press, yet the interest taken in the Return varies considerably from time to time. During periods of financial quiescence this interest is somewhat of an academical character; but in times of doubt and distrust a very real and practical interest is exhibited, not only by the group of bankers, bill-brokers, and merchants constituting the “Money Market,” but by that section of the general public who have financial transactions at stake, and who possess the requisite knowledge to understand the true import of the figures of the Return.
For the purpose of our analysis we will take the Return of the 2nd September, 1903.