Fluctuations in the rate of discount are therefore due to the movements of comparatively small amounts of capital. We have, as it were, all the forces which affect the money market concentrated upon the reserve of the Bank of England.

Mr. Giffen says that "the rate of discount in the short loan market of a banking centre like London is not to be identified with the rates for loans generally, and it is only the rate for special loans between special classes of borrowers and lenders. Every change tells on the sensitive short loan market."

The position of the Bank of England in the money market is that of a large dealer who fixes the price, and then sees whether customers will transact business. Outside the Bank are grouped large dealers in capital, who undersell the Bank in order to get business.

These large money dealers are known as bill brokers, who obtain their principal resources from the banks and then discount bills at low rates in the market. It seems rather an anomaly that the banks should lend capital to outsiders to enable them to discount bills at fine rates. The effect of this has been that the banks get a less number of bills for discount than formerly. This change in the system of banking business is to be regretted, because good bills are one of the best investments for surplus capital.

A few years ago the bill brokers only discounted the acceptances of large financial houses and those of the various banks, but at the present time they discount a large amount of trade bills.

Bankers, however, find it convenient to lend their day to day balances to the broker, because an investment is at once found for surplus resources, and the money so lent can be called in at a day's notice. It must also be remembered that banks allow interest for deposits, and therefore it is necessary that no portion of the capital entrusted to them should remain unproductive.

The bill brokers either lodge bills which they have discounted as security for money advanced at call or short notice or they deposit marketable securities such as Consol Certificates, India Government Bonds or Indian Railway Debentures. The latter class of securities are known as "floaters". When the loan is called in, the banker returns such hypothecated securities.

As the bills which are lodged as security mature, they are replaced by others having a longer time to run.

The position of the bill brokers is however one of great delicacy, because they are dependent upon the banks for the greater portion of their funds. If the banks have no surplus capital to lend, the brokers apply at the Bank of England for loans,' in order to meet their requirements. However, they always endeavour to avoid making applications at the Bank because that institution only grants loans for seven days, and it is manifest that within a week great fluctuations might occur in the value of money.

No doubt this system of lending capital to the bill brokers has an important effect upon the value of money. This is shown in the daily quotations for money. We find sometimes the bank rates say 5 per cent., whilst the market rate is only 3 per cent. If the Bank finds its discount business getting less, it lowers the rate in order to bring it more in conformity with the market. The Bank certainly does affect the rate for money at a particular moment, but it cannot affect the average rate.

"The reason is that any momentary fall caused by the caprice of such a bank tends to create an immediate rise, so that upon an average the value is not altered."

There is therefore no ground for believing that the price of capital is governed by different laws than that of supply and demand like any other commodity.

We have already stated that both the demands for the internal and foreign trade of this country are reflected in the reserve of the Bank of England. With regard to the foreign trade, we are able to understand the position of the market by the foreign exchanges. These tell us whether a demand for capital exists in any of the great financial centres of the world. All the forces which affect the supply and demand for capital are exhibited in these rates.

The following table shows us the extreme points when gold is likely to reach this country or the reverse:-

The par of exchange is the identical value of the sovereign expressed in its foreign equivalent.

The extreme fluctuations of the exchange are known as bullion points, because when the rates reach these points, gold would be shipped either to or from this country. However, it is possible for the rates to rise or fall beyond such points, because on the shipment of gold to and from this country a saving might be made on freight, insurance, and other charges. One mercantile house might be in a better position than another to secure better terms on the shipment of gold.

Our trade is continually shifting from one place to another. A fresh demand for capital springs up in one corner of the globe, followed possibly by a diminished use of it in another. All these movements of capital react upon the price of commodities and in their turn affect the foreign exchanges.

Many years ago the Bank directors looked to the foreign exchanges as their principal guide in fixing the rate of discount, but in recent years they have considered the demands for capital by the Stock Exchange as being of more importance.

Mr. Birch says: "The great thing which governs us is the enormous transactions on the Stock Exchange in France, in Germany, and in the United States. These are the operations we have to follow most carefully."

All such demands would affect the reserve of the Bank of England. The following figures will give us some idea of the demand for capital by the Stock Exchange: In 1889 there were registered 2788 companies with a capital of £241,277,000, the largest number ever registered, exceeding the previous year by 238.