The securities deposited by bill-brokers for loans of this class consist either of first-class bills or what are known as “floaters.” “Floaters” are bearer securities of the highest class, such as Consol certificates, the debentures of certain Indian railways, the bonds of the Corporation of London and the London County Council. They obtain the name of “floaters” from the fact that they float from bank to bank, as one bank calls and another lends.
In the case of a banker buying bills from a broker, the broker sends in a parcel of bills which roughly amount to the agreed figure, and draws a cheque for the amount less the discount. It is not usual for brokers to endorse the bills they so sell, but they give the banker a continuing guarantee in respect of all the bills which he may buy from them from time to time.
It frequently happens at certain seasons of the year when there is a pressure for money, or on special occasions—such as on the issue of a big public loan, when a large amount of bankers’ floating balances is temporarily withdrawn—that heavy demands are made on brokers to repay money they have at “call” from the bankers. The brokers are then placed in the position of having large sums to repay, and as none of the banks are lenders, they are forced to apply to the Bank of England for assistance. The brokers are then said to be “in the Bank,” and they usually try to get out as soon as they can, in order to escape the higher interest there demanded from them. Formerly the Bank of England declined to discount any bills for brokers and would only make them temporary advances. This rule, however, is now relaxed, and the Bank will either discount approved bills at the “official” rate, or make temporary advances. The bills discounted with the Bank of England are not supposed to have more than sixty days to run before maturity, and must bear the names of at least two British firms, one of which must be the acceptor.
The advances made by the Bank of England are not at “call,” as with other banks, but for a fixed number of days, never less than three, and sometimes for as many as ten. The rate charged varies from Bank Rate to ½ per cent., or even 1 per cent., above that rate.
It follows from this that when brokers have to obtain assistance from the Bank, the rate for money in the open market at once begins to stiffen, as demand exceeds supply; and if any considerable amount has to be borrowed from the Bank, the outside rate will rise until it is on a level with the Official Rate; or even slightly higher, if the Bank is charging above the Official Rate for its advances.
Generally speaking, the aggregate amount of money from all sources available for the use of the market keeps approximately at a level figure, but a portion of it is not always in the same hands; and it is this shifting balance of market money which really controls the rates charged for the use of the whole of the money. If this shifting balance finds its way into the Bank of England, all rates harden, owing to the competition among brokers to obtain money without applying to the Bank. On the other hand, if the shifting balance passes into the coffers of the bankers, the competition among them to lend their funds will tend to reduce the rate of interest which can be obtained for the use of the money.
CHAPTER XI
THE CLEARING HOUSE
A work dealing with the subject of the Money Market would not be complete without reference to the Clearing House—the institution by which our enormous financial operations are adjusted. Without such arrangements as are carried out so practically and automatically by the Clearing House, it would be impossible to carry on our present trade, and our banking system could not have developed into such a high state of efficiency as we at present find.