We next come to the other side of the picture. The broker, when he goes his rounds, sometimes finds that the surplus resources of the banks are abundant, and that they are ready to let him have even more than he requires. When he makes this discovery, he begins to higgle, to try to ascertain the lowest rate certain banks are prepared to accept; for the difference between the rate at which he discounts bills for his own customers and the rate at which he re-discounts or borrows, is his margin of profit, and he is naturally anxious to make it as wide as possible. (The poor man, be it remembered, does not visit Lombard Street simply because he finds the air pure and the society of bank officials congenial.) He therefore does his best to discover those banks which are in funds, and, having found them, to induce them to lend as cheaply as possible. This he can do when loanable capital is cheap and abundant, and the Bank of England probably doing but little business. Possibly, though the Bank rate is at two and a half, bills are being taken by the brokers at one and a half. Then the Bank, in order to get business, either lowers its rate of discount or else, by selling stock, endeavours to lessen the resources of Lombard Street.
If the Bank adopt the latter expedient, it usually sells Consols for cash, and buys them back for the account, thereby temporarily reducing "bankers' balances," and attracting business to itself. The banks, having less to lend, raise their rates, which then approximate more closely to the Bank rate.
The brokers often complain bitterly of this interference by the Bank of England with the market's supply of loanable capital, asserting that this artificial enhancement of rates by the reduction of bankers' balances through the sale of stock affects their business injuriously, and benefits the Bank but little; and it certainly is difficult to see how the Bank of England can make a profit out of the transaction.
On the other hand, when the market rate is appreciably below the Bank rate, it is impossible to attract foreign gold to London; and the Bank, by borrowing on Consols, and making its rate representative, is acting in the public interest, should it be desirable either to attract gold to this country or to prevent its leaving these shores.
We can now see that the Bank of England, though it states its minimum rate, is often powerless to transact business thereat; and, recognising that its own rate is out of touch with the market rate, the Bank often discounts bills for its own customers at the rates ruling in the open market, as, were it to refuse to do so, its clients would naturally take their bills to the cheapest house. When, however, Lombard Street is empty, and the bill brokers are compelled to approach the Bank which holds the final reserve, the Bank of England is frequently in a position to charge its rivals one per cent. above its declared minimum, and the bill brokers quite naturally feel a little sore. For this reason they try every source of supply before making application to the Bank.
As security against loans made to them the brokers usually deposit either bills which they have discounted in the ordinary course of their business or gilt-edged securities, but sometimes the bill broker's credit is so good that the banks lend him money at call practically without security. When securities are deposited they are of course returned directly the loan is paid off.
There is also another little point to which attention may be drawn: to wit—that, although the market we are discussing is a special market, yet if a borrower's credit be good it is generally possible to obtain an advance either at or about Bank rate.