| 200 × 2½ × 105 | = | £1 | 8 | 9 | |
| 100 × 365 | |||||
| 28 days at 2 p.c. per annum on £200 | = | 0 | 6 | 1½ | |
| 17 days at 1½ p.c. per annum on £200 | = | 0 | 2 | 9½ | |
| Interest due | £1 | 17 | 8 | ||
Mr. Jones, of Whitechapel, then, should have received £1 17s. 8d. from his banker in cash and a fresh deposit-receipt, dated the 5th July, 1903, for £200. At each change of the bank rate the London depositor, when calculating his interest, must make a fresh sum, as in the above illustration, and so, too, must the country depositor when the fluctuation of the Bank of England rate is sufficiently wide to influence the rate of interest allowed in the provinces, though the latter must remember that he can only ascertain the rate by making inquiries of the bankers themselves or among those of his friends who deposit with them.
Adverting to the dates in the foregoing illustration, a few words of explanation are perhaps necessary, for it will be seen that under the heading “Bank rate was,” 21st May and 18th June, the days upon which the official minimum was changed, are placed opposite different rates. The Bank of England directors examine their weekly return or balance-sheet, which is made up to the close of business each Wednesday on the Thursday following, and in the afternoon of the latter day any change in the Bank’s rate of discount is announced. Of course, during abnormal times the rates may be changed on any day as the exigencies of the moment may direct; but, fortunately, though the money-market is subject to fits, its surface, as a rule, is seldom so violently perturbed as to call for drastic remedies, and we shall find that the dates in question were Thursdays. It follows, therefore, that these days opened with the bank rate at one figure and closed with it at another. Hence the anomaly to which attention has been drawn. The banker owed Mr. Jones, of Whitechapel, interest at 2½ per cent. from 5th February (exclusive) to 21st May (inclusive). On the 21st May, we know, the Bank rate was reduced from 4 to 3½ per cent.; so he owed him 2 per cent. on his principal from 21st May (exclusive) to 18th June (inclusive)—the date of the next change. Should not the reason of this be quite clear to any reader, if he remember that from 21st to 22nd May the Bank rate would have been one day at 3½ per cent. the difficulty will probably disappear.
From an investment point of view the deposit-receipt seems hardly worth consideration, because even Consols, over a period of five years, will return an appreciably higher yield; but when one is merely waiting for a suitable investment to turn up, or for a revival of trade, then the deposit-note exactly meets one’s requirements, for its only charm lies in the fact that the depositor gets back his principal intact. When the deposit rate is low trade is generally dull, and the prices of gilt-edged securities consequently move up. The depositor, therefore, when the rate is high should not be tempted to let his money remain with his banker for that reason alone, because he can then, as a rule, buy gilt-edged securities at cheaper figures, and, needless to say, the average return on his purchase-money will greatly exceed the average rate of interest on deposit. Conversely, if he buy the so-called gilt-edged variety of securities when interest is low, he is much more liable to a loss of capital should he want to realize them when trade is good and the rate of interest high. It follows that the man of business, who finds capital accumulating in his hands during periods of temporary depression, when interest, of course, is low, prefers taking a deposit-receipt for his idle capital, which he hopes to again use in his business directly markets improve, to purchasing, say, Consols at a time when demand has enhanced their price, and, consequently, added to his risk of loss upon realization.
Some banks, instead of issuing a deposit-receipt for money left at interest, give the depositor a pass-book, in which the sum he leaves is credited. Each time the depositor leaves new money he takes his book with him, and the cashier enters the amount therein to his credit, while he draws out his interest, or any part of the principal he may require, by cheque. As the banker rules off his deposit-ledgers half-yearly, and then adds the interest due to each customer to the principal, it follows that principal and interest, when the balance is brought forward, give a return to the customer, who by this method receives compound interest on his capital or savings. The advantages of this system are too obvious to call for explanation, but it may be added that, when a deposit customer is given a cheque-book, he should be careful not to operate too freely upon his account, as some bankers then transfer the balance to their current-account ledgers, their reason being that the account has ceased to be used for the purpose for which it was opened, and that, therefore, the depositor is no longer entitled to interest.
The chapter on “Unclaimed Balances” should prove especially interesting to depositors.
CHAPTER VI
THE BANK RATE IN RELATION TO BANKERS’ CHARGES
Very many persons who are out of touch with money-market problems fail to see why the Bank of England’s rate of discount should be in any way connected with a banker’s charges; and though, to those who have not studied the question, the swaying of the pendulum seems due to some occult influence, the forces that move it are both visible to the naked eye and capable of explanation. In the first place, the Bank of England keeps the cash reserves of all the banks in the United Kingdom, and, as a natural consequence, possesses the only large store of gold in the land. The other banks, which are dependent upon this accumulation, become nervous immediately the gold in the Bank’s vaults begins to leave the country in appreciable quantities, because, should not the Bank of England be able to meet their demands, they, too, will be unable to supply the requirements of their own customers.