The Money Market

by F. Straker

“Here I am directly and once again challenging critics, who do not agree in my view of the non-elasticity of the Money Market, to show how, in their view, the alleged elasticity of the market may be utilised to produce a fund of £15,000,000. My contention is that only by the increase of the note issue or by increase of capital can it be reached. Suppose the bankers were authorised to issue £15,000,000 of £1 bank-notes. How could these be kept in circulation unless they were legal tender? Of what use would they be if they took the place of gold in our tills? This plan, under which alone could credit be created, would be futile to attain our end. There remains only the creation of new capital, unless our friends, whom I am challenging, and to whom we are looking to give us a discussion which cannot fail to be interesting under the auspices of Mr. A. C. Cole, who has undertaken to read a paper on ‘Notes on the London Money Market,’ can show us some adequate alternative. If each bank of the kingdom increased its paid-up capital 20 per cent. by an issue of a Three per cent. Preference Gold Stock, the fund could be attained. The proceeds should be devoted in each individual case to the acquisition of a corresponding amount of gold, in addition to present holdings, and this gold should be deposited at the Bank of England, but not merged in the Bank figures, so as to stand week by week intact, and shown under a separate heading in one aggregate, though, of course, the absolute property of each bank in detail. Carefully thought out arrangements whereby, under a joint committee of the bankers and the Bank of England, whenever occasion arises, a percentage of each holding should be transferable to the credit of each bank in the books of the Bank of England should be made, the gold thus forming an addition to their reserve until again withdrawn and added to the Bankers’ Gold Fund.”

Needless to say, this suggestion, coming from such an authority, caused much comment in monetary circles, and was generally received as a valuable contribution to the various schemes having for an end the settlement of this important matter.

In certain quarters, however, the scheme was held to be an impracticable one; and at a subsequent meeting of the Institute of Bankers, Mr. Cole, a director of the Bank of England, spoke as follows:—

“As regards the proposal to increase the capital of the banks, my reply is that the floating of a loan in this market of £15,000,000, or of £100,000,000, will not add one single golden sovereign to the bankers’ cash reserves.

“We can only increase our stock of gold in this country by getting it from abroad. To do that we must offer to the holders of gold abroad something that they will take in exchange for their gold.

“A loan in this market to increase the capital of the banks, to be subscribed for by the public who have deposits with them, is merely transferring a liability now existing on the part of the bankers to the public, from their depositors to their shareholders. The only way the bankers can increase their cash in hand, or balances at the Bank of England, is by following the method now pursued, namely, calling in their short loans so that the market has to borrow at the Bank of England. To put their position permanently on a sounder basis they must agree that instead of calling in their loans temporarily, they must all keep permanently larger balances at the Bank of England. Then the gold reserves of the country will be increased, provided that the Bank of England maintains its usual ratio of cash to liabilities. Taking that as 45 per cent.—the average proportion for the last twenty years ending 31st December, 1903, has been 46·6 per cent.—a permanent increase of £15,000,000 to the bankers’ balances would increase the gold reserve of the country by £6,750,000, and bring the average holding of the Bank of England in the Banking and Issue departments combined up to about £40,000,000. The reason for desiring to have a rather larger stock of gold at the Bank is that the export then of a few millions is of relatively less importance. But we do not want more than is requisite for the easy and safe working of our system. To sit on a hoard of unused gold is to do away with the advantages of banking. What is requisite is for this country to retain the power of attracting gold when it is required. Neither the system of banking nor the bankers can give it that power, for it is dependent, not on them, but on the successful business energy and activity of the nation. Of course, in order to attract and retain here the amount of gold mentioned above, the Bank of England must adjust its rate to circumstances, but with the increasing supplies of gold, actual and prospective, a reasonable rate is likely to suffice.”

These remarks caused some discussion, during which it was pointed out that under Mr. Tritton’s proposal the banks would collectively form a gold fund of £15,000,000, at a cost to themselves of £450,000. Under Mr. Cole’s proposal, however, for the banks to increase their balances at the Bank of England by the sum of £15,000,000, the extra gold held in the country would only be increased by the sum of £6,750,000 (according to the proportion of the reserve held to public liabilities, which has been 45 per cent. on an average for the last twenty years), while the Bank would make a considerable profit from the remainder of the increased balances—a profit earned entirely at the expense of the banks.

It was also pointed out that the requisite gold could be acquired by offering a slightly higher price for it, thus retaining imports of the metal which would otherwise be bought up by exporters. Finally, it was stated by one speaker of eminence in the banking world, that in his opinion the matter was not one for the banks to deal with alone, the additional gold not being required for the sole benefit of the banks, but for the security of the community at large.

The matter here rests for the present, but when it has to be settled, as doubtless it must at some time, the ideas and suggestions contained in these discussions will probably become of importance.