The Bank of England as Agent of the Mint.
In theory any person can take gold bullion to the Mint, which, under
the Coinage Act, is compelled to give him in exchange sovereigns
containing an equal quantity of gold to that left; but nobody ever
does, and practically the Bank of England acts as the Mint's agent.
By the Bank Act he receives £3 17s. 9d. per ounce, instead of £3 17s.
10½d., the full Mint price, the deduction of 1½d. being about
equal to the loss of interest incurred, for the Mint does not bargain
to pay out coin immediately on delivery of bullion.
All the bankers in the United Kingdom, we know, obtain their supplies
of cash from the Issue Department of the Bank of England, which, as a
natural consequence, supplies the currency requirements of the nation.
Possessing the only large store of bullion, it can, so to speak, feel
the pulse of the whole trading community; and, directly a demand
sets in for specie, it sends bullion to the Mint for conversion into
coin. This it can do without any loss of interest whatever, for, of
course, the bullion is lying idle in the Issue Department. A bank
which keeps the Government accounts, and stands in this relation to
the other bankers, must of necessity become the agent of the Mint,
which, even in its output of silver and bronze coins, relies absolutely
upon information received from the Bank of England. The Bank, in fact,
supplies both the London and country bankers with these token coins.
As an illustration of this one of those little social amenities which
take place between bankers and their clients about Christmas time may
be mentioned. Naturally I am not alluding to the higgling occasioned by
the increase of advances and bills discounted to meet a growing demand
at this period of the year. But many persons, just before the festive
season sets in, like to obtain supplies of bright new silver coins
with which to anoint the palms of their humbler fellow-subjects, whose
manners about that time become aggressively pleasant and ingratiating.
These coins they get from their bankers, who receive them from the
Bank of England and its branches, either directly or through their
agents. As soon as the bankers run short of silver coins, they apply to
the Bank, which, being in close touch with every source of demand, is
able to guide the Mint on a question of supply.
The Bank of England does not possess a legal monopoly, but occupies
this position solely because it holds the final reserve of cash. If
the Government and all the bankers keep accounts with the Bank of
England, then the Bank must act as the agent of the Mint so long as
this state of affairs continues, because its Issue Department has to
meet all demands for cash made upon it by the Bank's customers and
the holders of its notes; and as these customers, either directly or
indirectly, include every large dealer in gold in the land, it supplies
the currency as a matter of course. Dealers do not send their bullion
to the Mint, because it is more convenient to sell it outright to
the Bank, which settles with them immediately, thereby removing all
uncertainty as to the length of time coinage will occupy.
It follows, therefore, that the Bank of England has to meet all demands
for gold, whether for home or foreign requirement; but it is when gold
is leaving the country in large quantities that drastic measures have
to be taken in order to stop the depletion of the Bank's reserve of the
precious metals, for some of the home drains are only of a temporary
nature, and unless capital be greatly in demand at the time they do not
affect the rate of interest, as the money flows back to the Bank after
a short interval.
The Bank of England on 5th January, 5th April, 5th July, and 5th
October pays the quarterly dividends on the National Debt. The
Government, which at the present time has to provide over £6,000,000
each quarter, has a huge sum standing to its credit before one of these
payments matures, and the sudden release of so much capital often
causes the rate of discount to fall, especially during those years when
trade is good, and the demand for loanable capital consequently brisk.
If times are dull, then the rate will not ascend when the Government is
taking money off the market, as the demand upon the reduced resources
of the banks will not be sufficiently keen to drive a large number of
borrowers to the Bank of England.
We have an illustration of this in the fact that from February, 1894,
to September, 1896, trade was so inactive, and demand therefore so
small, that the Bank rate stood at two per cent. during the whole
period. In other words, we had two and a half years with the Bank rate
at two per cent. With trade bad and money cheap, speculation soon
became rampant. The gilt-edged variety of securities yielded less,
because trade was less productive, and consequently capital, instead
of being kept idle in the banks, was transferred to the better class
securities, which returned less to the investor in proportion as
increased demand forced up prices. With incomes reduced and balances
lying idle at the banks, the public developed a speculative mania, and
one result was the Stock Exchange boom of 1895, for investment business
and speculation always increase when trade is bad. Bad times, in fact,
at first add to the business of the House.
Traders keep large balances with the banks for the same reason that the
banks themselves have huge sums standing to their credit in the books
of the Bank of England, because they are bound to accumulate credit in
order to meet their engagements, and, also, to maintain a surplus in
case of accidents, such as bad debts and the inability of customers to
pay their debts immediately on maturity. When trade slackens and prices
fall, producers reduce their output, and the result is an accumulation
of credit in the books of the banks. Moreover, a certain proportion of
these balances is not then required to finance and guarantee commercial
undertakings. Hence the movement to which attention has already been
drawn.
But the holders of gilt-edged securities require some inducement in
order to persuade them to sell; and this is forthcoming in the shape
of accretions to the capital value of their stocks and shares as a
result of the increased demand. But the floating capital of the country
is not decreased by this exchange. It is left at precisely the same
figures. The buyers draw cheques upon their bankers, and the sellers
pay the same cheques to their own credit; consequently, the floating
capital in the hands of the banks is always about the same, be the
times good or bad, so long as speculation or investment is confined to
British securities. When, however, foreign securities are purchased,
gold sometimes has to be sent out of the country to help pay for
them; and it is then that the situation may cause apprehension--for
capital is leaving the country. Should the drain prove serious, the
Bank would have to raise its rate; and were it to prove continuous,
notwithstanding an abnormally high Bank rate, we might have a crisis.
Returning to the dividends on the funds, "Public Deposits" are
increased before the above-mentioned dates, and when this money is
released, the result is a large addition to "Other Deposits," because
most of the money returns to increase the bankers' balances. A small
part, however, is taken by the fund-holders in cash; so we may notice a
decrease in the Bank's reserve of notes, and, consequently, an increase
in the circulation, together, perhaps, with a fall in the bullion,
representing the small proportion withdrawn in actual cash. Should the
banks, in consequence of this increase in their deposits, be taking
bills from the brokers at cheaper rates, then "Other Securities" would
also lessen, because the bill brokers would pay off the Bank and borrow
in the cheaper market. The converse occurs when the Government is
collecting the revenue, issuing a new loan, or borrowing on Treasury
bills.
The principal currency drains will be discussed in the following
chapter.