Let us see for a moment what are the various rates of interest prevailing in London.

First, there is the Bank Rate - that is, the advertised minimum rate at which the Bank of England will discount bills. This rate is fixed by the Bank Court at their weekly meeting each Thursday, though in times of emergency alterations are made at other times.

Secondly, there is the Bank of England Loan Kate, usually a trifle higher than their Discount Kate.

Thirdly, there is the Market Kate of Discount, that is to say, the rate charged by the bill brokers and bankers for discounting bills. There are usually two quotations of this rate - the lower one for first-class bills, that is to say, bills drawn upon bankers and certain other houses of well-known standing in the City; the higher rate for the better class of trade bills.

Fourthly, there is the Other Bankers' Deposit Kate. The Bank of England do not allow interest on money deposited with them, but most of the joint stock and private banks, called the "Other Banks" in contradistinction to the Bank of England, allow a rate which bears a fixed relation to Bank Rate, usually 1 1/2 per cent below, though when the Bank Rate is as low as 2 per cent the Deposit Bate does not often fall below 1 per cent.

The bill-broking houses also allow interest on deposits, usually slightly higher than the Other Bankers' Rate.

Fifthly, there is the Bankers' Call Bate and Seven-Day Bate, that is, the rate charged for lending money to the bill brokers and others. Besides these five rates, there is. the rate of interest charged by banks to their customers for loans or overdrafts. This is not strictly a Money Market rate, but it often bears a fixed relation to Bank Bate.

All these rates of interest are related to and dependent upon one another.

Take the first and third, the Bank of England official rate of discount and the market rate of discount. As a general rule the latter is slightly lower than the Bank rate. The bill brokers have no responsibility in the shape of a Reserve to hamper them, and can afford to discount at a fractionally lower rate, though it must be noted that the Bank of England will usually discount for regular customers at the market rate, in spite of the fact that their own published rate is higher.

We will suppose that the Bank of England, who are usually well informed as to the probable trend of the movements of specie, anticipate a strong-demand from America for gold, and therefore think it advisable to raise the rate of discount. It is not sufficient if they merely raise their own rate of discount; they must carry the market rate with them, or the only result will be that they will get no bills offered to them, and their rate will be merely nominal.

The result of raising the Bank Kate will be that the Other Bankers will raise the rate which they allow on deposits. This will compel them, or at least will offer them a strong inducement, to raise the rate which they charge the bill brokers for money lent at call and short notice, otherwise their rate of profit will be seriously diminished. But if the bill brokers have to pay more for their borrowed capital, they will be forced, in self-defence, to raise the discount rate which they charge the public. Thus it will be seen the rise in the Bank Kate has brought about a rise in the Market Kate of discount.

There is another method in which the Bank of England are enabled to powerfully influence the ruling rates of interest. The amount of money which the banks are disposed to lend to the market at any particular period is a limited amount, and if it should prove insufficient, the only recourse of the bill brokers is to borrow from the Bank of England, which, since it has the monopoly of the note issue and the custody of a large reserve, is usually disposed to lend, if necessary, but of course at its own rate.

Speaking generally, the Market will not borrow from the Bank of England if it can get the money elsewhere, not only because the terms which the Bank gives are less favourable than those of the Other Banks, but also because the Bank is not so accommodating as regards the period of the loan. But if they cannot borrow the money from the banks, the bill brokers must go to the Bank of England, and this gives the latter the opportunity of raising the market rate, because the bill brokers have to pay a higher rate on their borrowed capital, and must therefore charge their customers higher. This is the meaning of the phrase which constantly occurs in the daily money article in the morning paper, somewhat as follows: "A considerable amount being locked up in the instalments of the X. loan, the Market was driven to the Bank." Occasionally the Bank of England is compelled to use various makeshift expedients in order to gain the control of the Market. For instance, they "borrow money from the Market on Consols." That is, they sell large amounts of Consols for cash; in order to provide the money to pay for these Consols, the Other Banks have to call in from the bill-brokers some of their loans at call, and the brokers therefore are driven to the Bank.

As a rule, the greater the stringency in the Money Market, the greater the power of the Bank of England. At times when the financial horizon is clear and money is cheap and plentiful, the influence of the Bank of England is small, but if the outlook becomes really threatening, the Bank obtain practical control of the market. In such circumstances, the Other Banks, wishing to strengthen their position, call in a large proportion of their loans to the Market, which is thus forced into the hands of the Bank of England, and the Bank are enabled to raise rates to such a height as they think necessary to prevent the further export of gold from the country, and attract fresh supplies.

The amount of money available for lending in the Money Market depends upon a variety of circumstances which cannot be accurately gauged. Trade conditions, the political outlook, especially the prospect of peace or war, the state of the foreign exchanges, the condition of credit - that is to say, whether there is general confidence in the financial outlook, or whether distrust is more prevalent - all these things affect the short loan fund of the Money Market. If trade be brisk and more money be required for commercial undertakings, there will usually be less to lend on the Market. Conversely, in periods of trade depression, money is usually plentiful and cheap in the Money Market, because there are few openings for its profitable employment in other directions. A great war always has the effect of "hardening' rates, in other words, of raising the rate of interest, because it is always anticipated that a war will lock up large sums of money in the shape of war loans, and that governments will strengthen their position by increasing their stock of gold, some of which is sure to be drawn from London. An adverse condition of the foreign exchanges will probably mean the export of gold, which will make bankers cautious in lending money.

But besides these general causes, which are uncertain and often unexpected, there are certain special recurrent forces at work whose action is known and looked for each year.

First of all, money is always more plentiful at those periods when the Government dividends are paid - the four quarterly periods. At these periods, money is liberated from the Government accounts at the Bank of England, and finds its way to the deposits of the Other Banks. The warrants are sent to the proprietors, who pay them into their banking accounts, and so increase the deposits of the joint stock and private banks, which are enabled to lend more freely.

Secondly, during the first three months of the year money is generally scarcer in the Market owing to the payment of taxes. The payments on account of Income Tax and other taxes transfer money from the other banks to the Government accounts at the Bank of England, and, as we saw just now, the Market will not borrow from the latter if it can avoid doing so. The Other Banks have less to lend, and the Market is more dependent on the Bank of England.

Thirdly, experience shows that trade is usually brisker in the autumn of the year, and that there is not only more demand for borrowed capital, but also for notes and gold, which reduces the Bank Reserve and so tends to harden rates. What is called the "autumn drain" is anticipated each year, and can be explained in various ways. We have to pay for our imports of corn from America at this season, besides paying for our own harvest. Money which is sent down into the country to pay for agricultural operations does not so easily find its way back to the London Money Market as money sent by cheque to pay the usual business debt; the latter soon returns to London through the medium of the Clearing House.

A similar condition of affairs happens in Scotland and Ireland about May and November each year. In Scotland, rents and interest on mortgages are not payable quarterly as in England, but at the half-yearly periods of Whitsuntide and Martinmas. Both in Scotland and Ireland many such payments are made, not by cheque as in England, but by bank notes, which circulate much more freely than in this country, one pound notes being in common use. Now the Scotch and Irish note circulations are governed by the Bank Acts of 1845, under the terms of which all notes issued beyond a certain fixed sum must be secured by the deposit of gold to an equal amount. The consequence of this autumnal increase in the demand for notes is that the Irish and Scotch banks require more gold, and the only place they can easily obtain this from is the Bank of England. Every autumn, therefore, gold is sent from the Bank to Scotland and Ireland, and this means that the Bank Reserve is diminished, and that the rate of interest tends to become higher.

Mr. Palgrave(a) has worked out the average monthly Bank Rate over the period 1845 - 1900, and compared it with the average monthly note circulation in Scotland and Ireland, and his tables show that all three of these are higher in the month of November than at any time of the year.

There is one other periodic movement which is supposed to influence the amount of the short loan fund of the Money Market, and that is the operation spoken of in the Money Articles of the daily paper as "window dressing," or "shop buying for decoration purposes." According to some writers, at the seasons when the joint stock banks issue their monthly statements or half-yearly balance sheets to their shareholders, they call in a proportion of their loans to the Market in order to increase the asset, "Cash on hand and at the Bank of England," and thus make their position appear stronger, and this operation is supposed to materially reduce the available loanable funds at certain periods. It is, however, very doubtful whether this practice is indulged in to the extent which these critics imagine.

(a) R. H. Inglis Palgrave, The Bank Rate and the Money Market, pp. 130, 131.