If a stranger to the great Metropolis visited the Bank of England on a certain day in the week, viz., Thursday, he would witness a sight which might somewhat puzzle him. He might observe in one of the corridors, a crowd of persons, composed of telegraphic messengers, officials from various banks, discount houses and other kindred institutions, waiting patiently until a notice is displayed on the wall, stating that the rate of discount is so much per cent., or that no alteration has been made. Immediately this announcement takes place, the crowd quickly disappears. All this excitement would naturally puzzle a stranger, and he might ask a series of questions such as - What is the meaning of the term discount? Why should the Bank of England fix the rate? And again, What causes the rate to fluctuate?

We shall endeavour to answer some of these questions, which are of great importance to the mercantile world. These changes in the bank rate of discount are especially important to the banks of this country, because their profits or dividends are largely dependent upon the rate of interest. At every bank meeting reference is made by the chairman to the rate of interest ruling in the money market during the preceding six months, and what effect such rate has had upon the profits of that particular bank. The causes and effects of such changes are rather of a. complex character, because every year the English money market has to take note of new developments of trade and commerce.

As Prof. Marshall justly stated at a meeting of the British Association: "When economic problems become more complex every year, the necessity of studying them from many different points of view, and in many different connections, becomes more urgent".

The Bank of England, being, we might say, the most important storehouse of capital, has assumed the responsibility of fixing the price for the loan of capital. The variations in the amount of loanable capital existing in this country cause the price to fluctuate.

There are various forms of capital, but there is only one which concerns us - and that is floating or circulating capital. This kind of capital has been defined by J. S. Mill as that "which fulfils the whole of its office in the production in which it is engaged by a single use". Other kinds, such as houses, land, machinery, etc., it will not be necessary to consider, although the income derived from such property would increase the amount to be utilised as loans by those who can profit by its employment. Capital is said to be the result of saving, or a sacrifice of present enjoyment for the sake of the future.

The money income derived from the loan of capital is called interest, but we find the term discount used at the Bank of England. This word, however, in reality means the same as interest, because discount is the difference between a sum of money due at a future period and its present value, or a deduction that is made from the amount of a debt that is paid before it is due. The amount deducted depends upon the value of money or what we term interest.

There are other large houses grouped around the Bank of England, and they collectively are known as the organised market for the loan of capital, or, in other words, the money market.

When we are standing inside the Bank of England we are, as it were, in the centre of the market. The value of money, like every other commodity, is dependent upon the laws of supply and demand, but it differs from other commodities in being liable to great fluctuations.

Like the value of iron, tea or coal, the price for the loan of capital depends upon the state of the market.

In the money market, however, we do not ask the price of capital, but the rate of interest. Thus price and interest with regard to capital would be synonymous.

We will endeavour to state briefly some of the causes which affect the supply of capital. We have seen that the accumulations of capital are dependent upon self-denial. The people forego pleasures for the sake of future enjoyments. An increase of surplus income above the necessaries of life augments the power to save, and an increased regard for the future increases the will to save. Capital is originated by these means; and then we have people who become possessed of it and, not requiring the same for their own use, are so eager to lend it to others that they will accept a constantly lower and lower rate of interest.

We have therefore fluctuations of interest caused by an eagerness to lend.

Again, the accumulations of capital are dependent upon the rate of interest. If the rate is high, people save in order to obtain the advantage of a large return for their capital. If on the other hand the rate is low, the return is too small for the effort required to save.

The following formula shows how capital accumulates at compound interest. Thus if I = rate of interest, then 69/I

= the number of years for a sum of money to double itself. Thus if I = 5, then a sum of money would double itself in 13.8 years.

At the present time the growth of capital does not show any sign of overtaking the growth of the scope for its employment. It however happens that at stated periods there is a vast accumulation of capital, but in consequence of previous losses there is a want of confidence and consequently a dearth of new undertakings.

"In the market the rate of interest cannot fall beyond that limit at which it only offers just sufficient inducement to those who are on the margin of doubt whether to save or not. For if it did there would be a gradual shrinkage of capital relatively to the growing demand for it. Its marginal utility would rise in consequence of this relative scarcity, and therefore the rate of interest which is paid as the price of loans would rise also."

With regard to the demand for capital we find it is largely dependent upon the population, the natural resources of the country, and the state of trade. Thus the demand would vary with the prosperity of the country.

The commercial business transactions of this country are effected by means of borrowed capital. The trader enters one of the storehouses of capital designated a bank, and borrows capital for which he pays a certain rate of interest. With this capital he is able to purchase goods, and sell again at a profit after paying interest to the bank for the loan of the same. The trader's net profit would be the difference between the amount paid to the banker and the amount charged to the purchaser of his goods.

One of the reasons why the trade of this country has progressed so rapidly is due to the fact that capital can be borrowed at a low rate of interest. We have given some elementary principles with regard to the laws of supply and demand in connection with capital, and have also stated that unlike other commodities it is subject to great fluctuations. Although we shall consider these fluctuations, yet it will be convenient to mention at this point why capital is subject to great changes. The great force at work which causes such changes, is the state of credit. The greater portion of the capital of the country finds its way into the banks, because the depositors trust such institutions with their surplus funds. The banks must find borrowers who require the loan of capital, or else it would lie idle and no profit would be made. This is especially the case when the banks allow interest on money deposited with them. The banks therefore act in the capacity of brokers. On the one hand they take capital from the depositors and lend it to others, viz., the borrowers. We can easily understand that if at any time public confidence in such institutions becomes shaken, capital may be withdrawn from the banks by the depositors. These institutions in order to protect themselves from any sudden withdrawal of capital are obliged to keep in reserve a portion of their assets, which is called a reserve fund, to meet such contingencies. The tendency of the present day is for the banks to utilise capital as much as possible in order to avoid any waste, that is to say, to prevent capital from lying idle. This is of course beneficial in one way because it increases the profits of the banks, but on the other hand it makes our banking system a very delicate one. For example, in a speculative period there would be no capital available to meet a sudden demand. At such times traders exhaust their credit, that is, they have borrowed in excess of their means, and have greater liabilities than they can possibly meet without the assistance of the banks. We should except, therefore, to see great fluctuations in the rate of interest when a speculative mania exists, because of a dearth of capital, created in some degree by small reserves held.

The state of credit is therefore of great importance in relation to capital. We have seen that a vast system of credit is founded upon the reserves of the banks, which are the great storehouses of capital. Therefore any increase or decrease in the proportion of such reserves must have a great influence upon the rate of interest.

The following remarks of Mr. Wynnard Hooper at a British Association meeting upon the London money market state clearly the present position of capital. He says: "The volume of business is larger and the liabilities of London and the whole country are much larger, but the reserve held against them is only slightly larger than was the case twenty years ago. The deposits of banks have enormously increased. Those of the fourteen principal London banks have risen from 103 millions in 1870 to 178 millions in 1889. Other banks' deposits have also increased, and a larger proportion of the deposits are kept in London to be lent. On the other hand, the reserve of the Bank of England is on the average very little larger than it was during 1870-9. Of course the reserve is now more efficient than it used to be for reasons already given, but nevertheless it is too small."