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.
The market for bills is a special market, into which the banks pour
their surplus funds, so customers will be careful not to confuse the
price of a bill with the price of a loan, though, of course, there is
a close connexion between the two; for when loanable capital is dear
discount rates too are high, and when the former is cheap the latter
are low. The London customer, who discounts fine bills with his banker,
will naturally take care that he does not pay a higher rate than the
bill-brokers would charge him, and when he discounts second-rate
trade-bills he will remember that competition is very keen, and that if
his credit be good he can generally induce the manager to quote a fine
rate.
Coming to provincial banking, we have seen that the large merchants
and manufacturers remit some of their best trade-bills to London; but
in the great cities, where the banks are numerous, the competition
for good paper is considerable; and as the customer usually keeps his
current account at the bank with which he discounts his bills, he can
generally, if his account be worth retaining and his credit good, get
his paper discounted at Bank rate, or even slightly under when the
market rate is below it.
In the small country towns, however, the banks’ rates are higher, but
then, of course, the paper they discount there is not of the same
class; and a capitalist, be he a money-lender or a banker, raises his
rate in proportion to the risk he runs, the one thinking a bill so
doubtful that 100 per cent. will just tempt him to risk his principal,
and the other drawing the line at about 7 per cent.
A, for instance, has an acceptance of C’s for £100, dated the 1st
January and drawn for one month, so the bill, allowing the usual three
days’ grace, will be due upon the 4th February. A takes this bill on
the 5th January, to his banker, by whom it is discounted. From the 5th
January exclusive, to the 4th February, inclusive, there are thirty
days; and assuming that the discount rate be 5 per cent. per annum, and
the rate of commission upon the amount of the bill ⅛ per cent., we get
the following:--
100 × 5 × 30
------------ = 8s. 2d.
100 × 365
⅛ per cent. upon £100 = 2s. 6d.
--------
10s. 8d.
A, therefore, has paid about 6½ per cent. per annum for the
accommodation. The country banks, when they charge 5 per cent. per
annum interest and ¼ per cent. commission upon short bills, obtain
something like 8 per cent. per annum upon their capital; but, needless
to say, the persons who pay these rates are either out of touch with
the market or else their credit is so bad that they are glad to
discount their bills with a banker upon almost any terms. And then,
again, there is not much paper of this description under discount with
the provincial banks.
Country customers, whose credit is above suspicion, make very
close bargains when they take good trade-bills to the banks to be
discounted, and seldom pay any commission upon the amount of the
bill, though, of course, the manager will attempt to exact it if he
think that his man will pay without protest. As previously stated the
customer almost invariably discounts his bills with the banker with
whom he keeps his current account, and he generally pays the same rate
on his paper as he does upon his overdraft. Competition for desirable
accounts being keen, it follows that a client who discounts largely can
always bring pressure to bear upon the manager, should he consider that
his rates are excessive and altogether out of touch with the market
rates.
Coupons.
Many people leave their coupons with bankers for collection, and here,
again, we get an example of making those pay who will. The usual rates
are ⅛ per cent. commission on English and ¼ per cent. upon foreign and
colonial coupons, but, as a matter of fact, certain managers keep a
list of those persons who refuse to pay these charges, while they who
do not protest, no matter how large a sum they may keep to their credit
upon current account, are made to pay the ordinary rates. It is only
fair that a person whose average credit balance does not exceed £50
should pay a rate; but when a man keeps from £250 to £500 and above on
the right side, the banker can quite well afford to forego his charge.
Suppose a banker receives £40 from his London agent or through the
coupon department of his head-office on account of coupons remitted
for a customer. He deducts his charge of 2s., and, without informing
the person for whom they have been collected, credits £39 18s. in his
pass-book. The client, in five cases out of six, remains under the
impression that he has received the market value for his coupons,
whereas, had the manager credited the account with £40, and debited it
with 2s. commission, the customer in every probability would have asked
for an explanation.
The customer, by examining his pass-book, will soon discover whether
a rate has been deducted, and if he consider that the balance he
keeps at his credit amply repays the bank, then he can request that
the commission be returned to him, and that his name be placed on the
free list with those of other “conscientious objectors.” Where the
face-value of the coupons is given in a foreign currency, he will, of
course, have to discover the rate of exchange at which they were sold.
Allowance, too, must be made for income-tax.
When purchasing stocks or shares through his banker the latter divides
the commission with the broker, and it is perhaps advisable to see the
broker’s note, as a zealous manager, anxious to augment the profits of
his branch, and believing devoutly in the old-fashioned maxim “every
little helps,” occasionally adds a small charge of his own. Should he
do this, then he sends the customer a _copy_ of the broker’s note
instead of the note itself, and in the copy he has, it need not be
said, added a small commission of his own to the broker’s. As a banker
guarantees the customer against loss through the failure of either
the broker or the jobber, purchasing shares through a bank has its
advantages for the bona-fide investor; but the speculator, who may want
to “carry over” from account to account, must deal with a member of the
Stock Exchange.
Again, when buying foreign drafts through one’s banker inquiry should
be made as to the rate of exchange, so that one can check his figures.
In a small book of this description much must necessarily be omitted,
but it may just be added that in these days the facilities bankers
grant their customers range from taking charge of their plate and
valuables to allowing them to have their letters addressed to the bank,
while they will even pay their subscriptions for them. The difficulty
is to say what they will not do, and some day, perhaps, we shall have
their young men calling in the morning for orders with the baker.