Of these returns the fourths of the months give us some idea as to the amount of bills in circulation, whereas those of the fortnightly settlements and the Consol settling days on the Stock Exchange illustrate the amount of speculative and investment business transacted in the country.

If the returns were falling off, they would show that less capital was necessary to carry on the business of the country, and we should expect to see a gradual reduction in the rate of discount.

The returns for 1889 showed an increase of £654,878,000, which indicated that capital was in great demand.

The high bank rate at the beginning of the year had the effect of turning the foreign exchanges in our favour. For example: As we have already discussed the composition of the reserve at the Bank of England, it will only be necessary to study the changes which occurred.

The stock of bullion and the reserve in the banking department in January were both low in comparison with previous years.

Thus: -

In the early part of the year the market was affected by a financial transaction which has occurred on several previous occasions.

In order to effect the conversion of the Russian debt from 5 per cent. to 4.per cent. it was necessary that it should be done when rates were low. A forced ease was effected by means of a million of gold being brought here, and this additional capital would temporarily affect the market.

The note circulation in March generally shows a contraction of £2,000,000 to £3,000,000 in consequence of money being required for revenue purposes. Although a 6 per cent. rate prevailed in the market, yet it had not the effect of attracting gold to this country. The Bank of England paid a halfpenny per ounce more for bar gold in order to draw capital from abroad.

The rate was however reduced to 5 per cent. on 20th February in consequence of an increase in the bullion at the Bank, and also because the banking reserve showed a proportion of 50 per cent. to liabilities.

When the bank rate is high, the traders of this country suffer somewhat, because most of the banks are guided by the bank rate in fixing their charges. It is therefore important to the trading community that a high bank rate should not exist when the reserve at the bank is abnormally high.

On 5th March the rate was reduced to 4 1/2 per cent., the market rate being 3 1/8 per cent. There was nothing of importance in favour of cheap money, because there were several calls due on new undertakings and the business of the country showed some improvement; however the rate was reduced to 4 per cent. on 12th March in consequence of an increase to 51 per cent. in the Bank's reserve.

As we have already remarked, there is a close connection between the banks and the Stock Exchange, and all applications for new capital affect the rate of interest.

The following table shows the increase from 1885 to 1890: -

The quarterly dividends due 5th April would affect the market in the same way as in January, and consequently the rate was reduced on 10th April to 3 1/2 per cent., the reserve at the Bank being in the proportion of 43 7/8 per cent. There was a further reduction, 17th April, to 3 per cent., the reserve being 45 1/4 per cent. This ease however was not prolonged, because we find that in the following week a withdrawal of gold on balance of £357,000 had taken place and the reserve had fallen to 44 1/2 per cent. Of this gold £200,000 was shipped to Buenos Ayres, where financial difficulties existed. The market also expected that the Russian Government would send its surplus capital from London to Paris, where most of its securities were held. This withdrawal of bullion had the effect of hardening market rates, especially when it was known that gold would also be required for Scotland in the following month, viz., May, in order to meet payments due on the Scotch quarter day.

The Bank of England returns for 1st May showed that the market was short of capital, because applications had been made at the Bank for loans. This was shown by an increase in the other securities of £1,358,000. Again, the Government had issued £1,500,000 of Treasury bills, which would cause the withdrawal of surplus capital from the market. On the other hand, it was known that £2,000,000 of Treasury bills falling due at a later period would not be renewed and therefore tend to ease rates.

The market at this time was somewhat affected by speculations in silver. This was in consequence of the United States authorising the coinage of additional silver. The sudden rise in the price of that metal naturally followed, and the price of all silver securities rapidly rose. It was stated that several large financial companies had speculated in such securities.

The effect of the silver legislation in the United States would cause gold to leave that country and increase the stock here. This is in accordance with Gresham's law, which states that if two metals are used as currency in a country, the one of less value will remain, whilst the other is exported.

It was also observed that the high bank rate in January and February had affected the value of the securities quoted on the Stock Exchange, where 7 per cent was charged for loans.

On the other hand, the United States securities had risen considerably in consequence of the silver legislation. However, a few months later a reaction occurred, which showed that any attempt to give an artificial value to silver must fail.

With regard to the Stock Exchange, the cause for anxiety was the state of affairs in the Argentine Republic, where £150,000,000 of English capital had been invested. This would naturally affect banks and their rates of interest, especially as it was estimated that £9,000,000 of additional capital had been lent on the Stock Exchange.