Perhaps it is now easier to understand that the Bank of England, when it from time to time states the lowest rate at which it will discount bills for outsiders, occupies the position of a most important lender, whose minimum rate, though not always the market rate, is seldom either greatly above or below those of its rivals.
CHAPTER XI.
The London Money Market.
It is usual, when describing the Money Market, to assert that it consists of the numerous banks in the City of London; but it seems to me that, in reality, the money market extends throughout the United Kingdom, for wherever there is a bank or a branch bank there is a market for money. Moreover, the demand arising for loanable capital in the provinces largely influences the rates of interest ruling from time to time in London, because, if demand is brisk in the country, the banks have less to lend in London, consequently the rate advances there.
When reference is made to the money market the London short loan fund is invariably meant, and we now have to consider how this fund is formed. The banks, which are liable to the public for huge sums of money at call and short notice, are obliged to keep a certain proportion of cash in their tills and strong rooms and with the Bank of England in order to be prepared for any sudden demand that may be made upon them.
Their cash in hand is, of course, required to meet the ordinary demands of a banking business, and that deposited with the Bank of England is held as a reserve fund against those risks of withdrawal from which a credit institution owing immense sums at call is never free. Roughly speaking, a well-managed bank would keep, say, six per cent. of its public liabilities in legal tender on the premises, and a further ten to twelve per cent. at its credit in the books of the Bank of England. The latter accumulation might be called the bank's real reserve, for it is upon this that it would have to rely during a run.
Secondly, from eighteen to thirty per cent. of its liabilities to the public would be invested in first class securities. Those of and guaranteed by the British Government are in great request for this purpose, as the Bank of England would not hesitate to advance against such investments should a company find itself compelled to meet a sudden drain upon its resources. Every prudent banker therefore takes care that a large proportion of these securities is included in his list, which would also contain Metropolitan and other Corporation Stocks, English Railway Debentures, Colonial Government Securities, and so on. A banker's list, in short, should be a so-called "gilt-edged" one.
Thirdly, a banker lends a certain proportion of his deposits in the London money market. Some banks have eight per cent. there, some fourteen per cent., and others from fifteen to twenty per cent., though the larger and better managed companies generally employ from seven to fourteen per cent. therein. A certain amount of this "call money," however, represents money which has been lent to jobbers and brokers on the Stock Exchange for "carrying over" purposes at the various settlements, but by far the larger part of it is money which has been lent to the bill brokers and discount houses.