CHAPTER X
BILLS, COUPONS, FOREIGN DRAFTS, ETC.
Discounted Bills.
The city-article of every morning paper contains a list of market discounts from which one can see at what rates the bill-brokers and discount-houses are taking the various classes of bills. Bank-bills would be paper either accepted or indorsed by the banks; and fine trade-bills or best trade-bills would be the acceptances of those firms whose credit is so good that the question of their paper not being paid at maturity is practically never considered. As the credit of the banks ranks highest it follows that bank-bills can be discounted at the finest rates. Again, less risk is run on a three months’ bill than upon one for four or six months. In other words, the position of an acceptor is less liable to change in three months than in six, therefore short bills are in greater favour; consequently, the rate upon a six months’ bill, other considerations being equal, will be higher than that upon one which has three months to run, though the difference, of course, will only be a fractional one.
The bill-brokers, we know, obtain most of the bank and the fine bills, but they are also dependent upon Lombard Street for the greater part of their resources; and as a bank, which owes huge sums on demand, likes to keep its assets as liquid as possible, it follows that bankers take short bills from the brokers in preference to those which are drawn for long terms, for the simple reason that should they think the outlook uncertain and deem it prudent to strengthen their reserves, the shorter bills will run off the more quickly, thereby providing them with additional cash. A three months’ bill, therefore, from a banker’s standpoint, is considered more desirable than one at six months’ date.
When trade is active and loanable capital dear market rates of discount will naturally be high, and the Bank rate, speaking broadly, is generally in touch with the market rate for three months’ bank-bills. Conversely, when trade is dull and the prices of commodities are falling, fewer bills will be on offer; but the fund with which they are discounted will be proportionately greater, consequently the market rates of discount will be low, as, also, will be the Bank rate. It must be remembered, however, that the Bank of England discounts bills for its own customers below its published rate—when its minimum is temporarily above the market rate; for were it not to adopt this course its customers would naturally discount their bills with the brokers.
As the bill-brokers are middlemen between Lombard Street and those merchants who have bills to sell it follows that the market rate of discount is always below the bankers’ rates, and that, therefore, holders of the better-class paper take it to the brokers, but this peculiarity has been mentioned in Chapter VI. It may, however, be added that the remittance of the best country bills to the London bill-brokers is a comparatively new movement, which the banks do not regard with favour. Competition between the brokers being keen, it is questionable whether the finest rates are quoted in the papers, for the merchants who have bills for sale will, of course, not neglect to higgle with the brokers, who, like the bankers themselves, certainly would not advertise their lowest rates.
The large discount-houses and brokers possess considerable capital, though it would look extremely small when contrasted with the short-loan fund, and they deposit certain approved securities with the banks against the money at call advanced to them; but the small bill-brokers are little better than runners for the banks with whom they re-discount their bills almost as soon as they are in their cases, and their capital would consist principally of a silk-hat and a bill-case. Certain brokers on the Stock Exchange, it may be added, stand in much the same relation to Lombard Street. Besides borrowing from the banks the bill-brokers also accept deposits from the public, basing their rate upon the Bank rate, and allowing a slightly higher rate than the London bankers.