FACTORS OF THE MONEY MARKET
Having now surveyed the history and development of our financial system
up to a point when “system” can really be said to have started, and
also having glanced at the causes which have placed London in the
forefront of all financial centres, we will consider the formation, as
a whole, of what is called the “Money Market”; and then more carefully
examine certain of the more important factors which help to form that
market.
There is no definite “market” for money in the sense of a “place of
purchase and sale,” like a cattle market or a corn market; when we
speak of the “Money Market” we refer to the body or aggregation of
large dealers in money—bankers, bill-brokers, etc.—who either have
money to lend or who require to borrow money, and by whom the rate to
be charged for the use of money is largely settled, as a result of
their mutual transactions.
This body of money-dealers is not clearly defined into two
classes—lenders and borrowers—as an ordinary market is divided into two
classes—buyers and sellers; but with money-dealers all are practically
both buyers and sellers; that is, all are ready to sell the use of
money at a certain price, and to buy the use of money at another price.
The Bank of England in bygone days was the predominant factor in the
Money Market; but now, in ordinary times, it has somewhat fallen from
its high estate in that respect. It is only at certain times that its
funds find their way into the Money Market to any large extent. But the
Bank still has the power, when occasion arises, to make its influence
predominate, as it constitutes the final reserve, in case of need,
of our banking system. The Bank likewise has the power to make its
influence felt when the directors deem it advisable to obtain control
of the Money Market, for the purpose of maintaining the monetary
position on a basis of safety. As we shall see when dealing with the
subject of the foreign exchanges, if, in order to check an outflow
of gold, the directors of the Bank wish to raise the value of money
in London—that is, to raise the rate at which money can be borrowed
or lent—they raise the official rate of the Bank of England. If the
outside market lags behind, or does not keep in line with the movement,
they force it to do so by themselves borrowing large sums from the
market, thus reducing the available supply of money in the hands of the
market, and consequently enhancing the value of money.
The chief factor in the formation of the Money Market is the body of
the joint-stock and private banks of London, and through them of the
bankers of the kingdom. Practically all the working capital of the
country and the floating money of private individuals, together with
moneys awaiting permanent investment, are now in the hands of our
bankers.
Of this vast accumulation of capital held by bankers—amounting in
the United Kingdom to some £800,000,000—a certain part is retained
in actual cash, besides a balance which is kept with the Bank of
England or a London agent, some is invested in securities, and the
balance is used in lending to those that require the use of further
capital for their business or private needs. Of this balance so lent,
a large percentage is advanced to individual customers by way of loan,
overdraft, or in the discounting of bills; and the remainder is used in
the Money Market proper, or what has been aptly called “The Short Loan
Fund.” The rate of interest which private individuals have to pay for
advances from time to time is largely based on the prevailing official
rate of the Bank of England as regards loans, and on the “market rate”
as regards the discounting of first-class bills.
For the greater part of the money in a banker’s hands no interest
whatever is paid, that is, for practically the whole of the current
account balances. For the remainder, the money on deposit, only a small
interest is paid; but a banker must always keep before him the fact
that nearly all his liabilities are repayable in cash on demand. Thus
he must _always_ keep himself prepared for eventualities, and his first
line of defence consists of cash and balance with the Bank of England
or London agent, and he reckons his advances to the Money Market as his
next most quickly convertible and available asset.
For the money advanced to the Money Market bankers are content to
receive a low rate of interest, provided that the advances are
absolutely safe, and can quickly be called in when necessary. These
conditions can be obtained by lending money at “call” (that is,
repayable on demand) or at a few days’ notice to the bill-brokers, who
deposit as security for such loans, first-class bills, or certain of
the highest class of securities, such as Consols, etc.
The bill-brokers and discount houses of London form the second most
important factor in the Money Market. These firms and institutions
practically act as middlemen or intermediaries. Many of them possess
large capital themselves with which to conduct their business, but
the bulk of the funds which they employ consists of borrowed money.
This money is borrowed from various sources; the greater part from the
banks, some from the India Council, and some from our merchant princes
and finance houses, who of themselves really constitute another factor
in the Money Market. Besides these sources for borrowing money, the
bill-brokers further increase their working funds by receiving money on
deposit from the public. With the funds so collected they buy bills,
usually only those of a first-class character, and these they either
hold until maturity or rediscount with the banks, and occasionally with
the Bank of England.
The British Government is at certain times a factor in the Money
Market, that is, when on account of any extraordinary outlay, or when
expenditure is temporarily exceeding revenue, it issues Treasury Bills
and Exchequer Bills. If these bills are bought by the Money Market, it
follows that the amount of money in the hands of the Market is, at
least for the time, decreased by the amount of money paid for the bills
(which goes into the Bank of England and helps to increase “Public
Deposits”), and consequently the rates for money in the open market
are inclined to rise or “harden.” When these bills are repaid the
contrary effect is produced, market supplies are increased and rates
are inclined to droop.
Another factor which has to be taken into account in this matter is the
India Government. The India Government has, from time to time, large
funds lying here which are not required for immediate use, nor are they
available to lend for long periods; these funds practically constitute
a floating balance. Use is made of this money by lending it out to the
market through a well-known house, much in the same manner that banks
lend their floating balances. The money is usually lent in sums of not
less than £50,000, for periods from a fortnight to a month; and it is
generally stipulated that the securities deposited against the advances
shall consist of either Consols, or Indian Securities of certain kinds,
such as rupee paper and the guaranteed debentures of a few of the
first-class Indian railways. The India Government generally manages to
obtain a very fair return for the money so lent.
The Stock Exchange is another element which requires consideration,
although it is a rather one-sided element, inasmuch that it is nearly
always a borrower. In busy times on the Stock Exchange enormous sums
are borrowed from the banks for the purpose of speculation of one kind
or another. Stocks are bought by various persons who have not the money
to pay for them, in the anticipation that they will increase in value;
and these persons arrange with their brokers to “take up” the stock for
them—that is, that the brokers shall find the money to pay for these
purchases—and this ultimately results in a banker advancing the money.
During periods when the rates of interest are low also, large amounts
of stock bearing a higher interest are then “taken up,” for the purpose
of securing the difference in the amount of the interest paid for the
loan and the interest received from the stock, and the money for these
purchases is largely borrowed from banks. These Stock Exchange loans
are made from “account to account”—that is, from one settling day on
the Stock Exchange to the next—and as there are two settling days every
month, the loans are nominally granted for about a fortnight each. The
interest charged is fixed at the beginning of each account for that
account, and varies according to the prevailing conditions at each
renewal.
Lastly, we have a somewhat new factor entering into the Money
Market, but one which is increasing in importance, and that is
the establishment in London of branches of many powerful and rich
continental banks, who make use of the London Money Market for
employing their surplus funds when they can do so to advantage. They
lend money to the bill-brokers much as do ordinary London banks; and at
times, when the conditions are favourable, they invest their funds in
English bills, occasionally absorbing considerable amounts of Treasury
and Exchequer bills. These purchases of English bills increase the
money in the market for the time being, and the competition of these
foreign bankers tends to depress the rate charged for discount. It must
be remembered, however, that this course of business gives the banks
in question power to draw gold from us heavily on the maturity of the
bills, or at any time when they see fit, by selling their bills before
maturity.
From a consideration of these various factors, we see how largely they
are interwoven together and dependent on each other. The banks gather
in deposits from all quarters and lend to the bill-brokers, while
leaving a large amount with the Bank of England; and the bill-brokers
borrow from the banks and buy up bills from all quarters; but if the
banks “call” their money from the bill-brokers the latter are driven
into the arms of the Bank of England, to reborrow the money which
the banks have called from them. This is also the case if the India
Government call in their loans, and the money to repay the same cannot
be borrowed from the banks. Similarly with the Stock Exchange, if
much money is absorbed in this quarter, the banks will reduce their
accommodation to the bill-brokers, who may by this action again have to
rely on the Bank of England; and again, lastly, if the foreign banks
commence to draw money from us, the strain comes as usual on the Bank
of England.
All these factors work round the Bank of England as a centre, and
the need of strength on the part of that institution becomes at once
apparent when it is seen what mighty interests are dependent on it,
that the financial credit of the country rests ultimately upon its
stability, and that its policy and actions involve consequences of weal
or woe to the community at large.