The Money Market

by F. Straker

Bankers’ balances form, as we shall see, the ultimate reserve on which our banking system rests. Hence the subject is one of great importance. Every “clearing” banker keeps a balance for the purpose of settling the difference which may arise with each day’s settlement at the Clearing House. In addition to this, they, as well as other London and country banks, maintain a large balance at the Bank of England for the purpose of meeting any sudden or extraordinary demands which may be made on them. This is done in place of keeping cash in their tills for the purpose, though of course a sufficient sum in ready cash is kept in hand to meet the ordinary daily requirements. In the case of those country banks which do not keep an account at the Bank of England, the custom is adopted of keeping a reserve balance with a London agent. This reserve swells the amount under the control of the latter, and consequently of the balance he deems it prudent to maintain with the Bank of England. Thus our system is so knitted together that a demand for cash, in whatever part of the country arising, has a prompt effect, to a less or greater degree, on the bankers’ balances at the Bank of England.

From this can be seen the great importance of bankers’ balances, and the great responsibility thrown on the Bank of England of keeping itself strong enough to meet demands from all quarters. The system is certainly a peculiar one, that results in all banks keeping a large part of their surplus funds with another bank, and that not a State bank, though the banker of the State. It is an interesting fact that on many occasions since the passing of the Act in 1844 the “reserve,” or actual cash held by the Bank of England, has been less than the bankers’ balances alone.

This custom of the reserves being held by a central bank has been, and is, the subject of much criticism, principally on the ground that a “one reserve system” is not a sufficient guard against disaster in time of crisis, and that it would be a much safer method were each bank to keep its own special reserve in cash against sudden need. The discussion of the subject during the last few years, combined with other circumstances, has led to some increase in the cash held by bankers in general, and several banks are understood to have commenced keeping a special reserve in cash, on a small scale. The whole subject is a very intricate one, and one that cannot be more than glanced at in the course of this small book.

Taken as a whole, and in ordinary times, “Other Deposits” indicate the state of the Money Market. They rise and fall fairly regularly at certain known seasons of the year; but if they rise above the average for the time of year, it may be taken as an indication that money is abundant, and that bankers and others have funds in hand for which they cannot find profitable employment, and therefore the interest rate charged for the use of money is likely to fall. On the other hand, if “Other Deposits” are below the average, money is evidently in request, and rates are likely to rise. This is in ordinary times. In times of trouble, however, “Other Deposits” will rise considerably, and at the same time interest rates will also advance. The reason of this is that on any note of alarm being sounded in the financial world, bankers will at once begin to strengthen their position—to “keep their powder dry”—and consequently will begin to increase their balances at the Bank of England. Owing to the curtailment in their loanable funds resulting therefrom, money will increase in value, and a higher rate will have to be paid for the use of it by borrowers.

Together with the bankers, other large customers of the Bank of England will increase their balances against emergencies, and possibly, if the trouble become acute, money will be transferred to the Bank from other banks for greater safety. Thus in such times we see the “Other Deposits” of the Bank increasing, while the deposits of other banks are decreasing. It is related that during one crisis a customer of a certain bank became alarmed, and drew out his balance. Not knowing what to do with his money when he had got it, he wrote to the financial editor of one of the great daily papers, asking him where it would be safe to put it, and quickly got back the reply, “Put it in the——,” naming the same bank from which the customer had withdrawn it!

The remaining item on the liability side of the Banking Department, namely, “Seven-day and other Bills,” largely explains itself by its title. The item is not a growing one, as can be seen by referring to the first return issued after the passing of the Bank Act in 1844, when the amount under this heading was over one million pounds.

The seven-day bills referred to are what are known as Bank Post Bills, and are practically drafts on the Bank of England. The custom of issuing these bills appears to have originated about the year 1738, when, in response to representations, the Bank announced that it would give “bills payable at seven days’ sight, that, in case of the mails being robbed, the proprietors might have time to give notice thereof.” The changes which have occurred since this date, and even since 1844, amply account for the falling off in this item. It may be noted that the Bank does not take advantage of the customary three days’ grace in respect of these bills.

Government Securities.—As an ordinary bank in issuing its balance sheet roughly summarises the classes of securities in which its funds are invested, so does the Bank of England in its Weekly Return. The item “Government Securities” comprises, as its name indicates, the amount of all securities held which are guaranteed by the British Government, and it also includes any temporary advances made to the Treasury on “Ways and Means” or “Deficiency Bills.” Advances which are made on the security of “Deficiency Bills” are generally required at the end of each quarter, excepting the March quarter, when, as we have seen, the Public Deposits are large, and the advances are required to meet the interest due on the public funds at the beginning of the ensuing month. The advances are repaid in the course of a few weeks from the incoming revenue. While in force they have the effect of increasing the figure at which Government Securities stand, and also, on the other side of the account, of increasing the total of Public Deposits.

Other Securities.—Under this heading are included all the investments of the Bank other than Government Securities—investments in general securities, loans, bills under discount, and advances to bill-brokers.

No particulars are given as to the amount invested in the various items above mentioned; the investments in general securities, and the loans to ordinary customers of the Bank, may be presumed to be fairly steady in amount, as is the case with other banks; but the amount of investments in bills under discount and of advances to bill-brokers are subject to wide fluctuations from time to time. These fluctuations are due to the complicated system of our Money Market. As will be explained later, ordinary banks employ a certain portion of their funds in advances to bill-brokers. These loans are either repayable at “call,” or are fixed for a certain number of days, and the amount lent varies with each particular bank from day to day, and from week to week. In the aggregate, however, the amount advanced in this way by all the banks combined is not subject to much fluctuation, for this reason—what one bank may lose in available lending balance another will gain, and so the total is not materially altered. At certain seasons of the month and of the year, however, or during periods of threatened disturbance in the Money Market, this is not the case. Circumstances may compel several or even all the banks simultaneously to call on the bill-brokers to repay their advances or part of their advances. Thus the aggregate of the money lent in this manner is materially reduced.