The Money Market is a general name for the sphere of operations of certain classes of men who wish to borrow or lend money, and is grouped around the Bank of England and those streets in the immediate neighbourhood where for centuries the City bankers have congregated.

The Money Market deals more especially in loans for very short periods. The fund which is dealt in is called the "short loan fund of the London Money Market." This short loan fund consists for the most part of the unemployed money of the banks. By "unemployed' is meant that money which is not permanently invested by the banks, but which it is thought advisable to have ready at hand. It is described in the balance sheets of the various banks as "money lent at call or on short notice."

On the one hand, we have the banks who have money to lend; on the other hand, there is a group of men who carry on their business partly by means of borrowed capital. These are the bill brokers and the operators on the Stock Exchange. Added to these are the British Government, which borrows money from the market from time to time, and the Indian Government, which lends money. Foreign governments and foreign banks also take advantage of London's position as a free gold market, and there is, as a general rule, a very large amount of foreign capital invested in the London Money Market.

London occupies quite a peculiar financial position compared with the other capitals of Europe. The Bank of England is compelled by its charter, as we saw in a previous chapter, to buy all gold offered to it, and it never attempts to place any obstacle in the way of those who wish to export gold, beyond the legitimate method of raising the rate of interest. In this way London has acquired the reputation of being the only perfectly free market for gold.

Of course the Bank of England is intimately connected with the Money Market; in fact it is the pivot of the Market, but the Bank is generally spoken of as apart from the Market, which is, as we shall see later, often slightly antagonistic to the Bank.

The position of the bill brokers demands a few words of explanation. In most, if not all, of the European capitals the business of bill discounting is carried on by the banks, but in London there is a class of middlemen between the banker and the holders of bills. These are the bill brokers, who have acquired the greater part of the business of discounting bills in London. A great part of this business is conducted with money borrowed from the banks, either in the form of seven-day loans or day-to-day money, or even such short loans as "overnight" money, lent from one afternoon to the next morning.

Two things are of especial interest to all who study the Money Market; these are, the Bank of England Reserve of coin and bullion, and the Bates of Interest prevailing in the Market. Owing to the unique position occupied by the Bank of England in our banking system - a position which has been explained in a former chapter - the Reserve of the Bank of England has come to be regarded as the National Reserve. All of the London Clearing bankers are compelled to keep an account at the Bank of England, and as the other bankers all appoint London agents with whom they keep a balance and upon whom they draw, it follows that the Bank of England is open to be drawn upon directly or indirectly by the whole of the English banks. With the exception of the balances kept at the Bank of England or the London agent, no banks keep a gold reserve of any great extent beyond the money held as till money, and which is required for day-to-day purposes. It is easy to see, therefore, the importance which attaches to the Bank of England Reserve. Not only is this Reserve open to be drawn upon for the purposes of our English banking system, but it may also be diminished at any moment by a drain of money for export purposes, a danger which is accentuated by the international position occupied by London as the financial centre of the world.

During the eighteenth century, if gold was being drained from the country, and the Bank of England's reserve was abnormally diminished, the remedy was found in a contraction of the paper currency, which caused gold to flow into the country to fill the vacancy so caused. But since the passing of the Act of 1844 the note circulation varies automatically with the influx and efflux of gold to and from the Bank of England. Another method is now used to attract gold to the country - a method much more certain and rapid in its action; that is, the raising of the prevailing rates of interest in the Money Market. If the general level of interest in the Market rises, the prospect of increased profit induces foreigners to remit money to the London Market and to buy bills on London, both of which tend to make the foreign exchanges more favourable to this country, and so bring about an import of gold from other financial centres.

It can now be seen why the Bank of England is often antagonistic to the Money Market. The Market, that is to say, the borrowing portion of the Market, is always anxious to keep the rate of interest low. "Cheap money," that is, money which can be borrowed at a low rate of interest, is a necessity to those classes who trade in part with borrowed capital. The Bank of England, on the other hand, must always keep one eye upon its Reserve, and it often is compelled to use every effort to force up the prevailing rates of interest against the inclination of the Market. The Bank of England cannot altogether control these prevailing rates, but they are able to influence them powerfully through their own official rate of discount, commonly called the Bank Bate.

There is consequently a see-saw tendency in the Money Market - one set of forces at work endeavouring to raise the rate of interest in order to protect the Reserve, another set of forces working to lower rates in order to obtain cheap loanable capital; and this forms the chief point of interest to those who are concerned with Money Market operations.