We have been considering some forces or economic causes which tend to increase the value of capital in the market. There are, however, causes which have the effect of lowering the rate of interest.

Sometimes a large Government loan is paid off, which has the effect of throwing capital on the market. Again, a railway is purchased by a Government and its capital returned to its shareholders. This recently occurred, when a Dutch railway was purchased by the Government, and produced some effect upon market rates. . We have, in fact, rates for money continually changing in consequence of the movement of comparatively small amounts of capital.

However, for more permanent causes of annual average rates, whether high or low, the condition of trade is the most important factor. When trade is depressed, less capital is required, and therefore years of depression would mean low average rates of interest.

Our commercial system is highly organised. The division of labour has made trades dependent upon each other. A depression in one trade soon affects another, and this reacts upon the banks, which find that less capital is required, and consequently rates for money fall.

Again, we find credit an important factor in the money market, not only in connection with the mercantile community, but also with banks. Trade is carried on by means of borrowed capital obtained from the banks, which lend capital belonging to others.

A greater portion of the resources of banks is utilised in the discounting of bills which represent credit transactions, and we have seen that the term discount is used in the money market rather than the term interest, showing that the purchase of these credit documents is the most important business in the money market.

We have already stated that the Bank is only in the position of one of the largest dealers in capital. We must, therefore, consider the action of the other lenders, especially the bill brokers and large discount houses, that wield a great power in the market. These institutions compete against the Bank, in order to obtain capital and to utilise the same in the discount of bills.

For example, the effect of this competition may be seen by the following quotation of rates prevailing at one time in the market, viz.: -

The above rates tell us somewhat as to the position of the money market.

We note that the rate for three month bank bills differs only 1/4 per cent from the bank rate. This would indicate1/4 that the Bank is able to effect some discount business, and, therefore, that its rate conforms to the market value for capital.

The rate for six month bank bills is a fraction less, because the market assumes that the average value of money for that period will be less.

It is to be noticed that the rate for fine trade bills is a little more, viz., from 1/4 to Per cent. This additional interest is charged because more risk attends the discount of trade bills than bills accepted by banks, which will almost to a certainty be paid.

We observe that the Bank charges 1 per cent. above the published rate for seven day loans. This is the usual custom of that institution, and therefore every dealer in money endeavours to meet his engagements without its aid.

The banks generally allow 1 1/2 per cent, below bank rate for deposits, unless the rate is very low, when there is only a difference of 1 per cent. Recently, we have seen the rate for deposits allowed by the banks lowered to 1/2 per cent.; whilst the Bank of England remains at the nominal rate of 2 per cent. This would show the great difficulty experienced in utilising deposits at a profit. The cause of this difference between discount and deposit rates is that the banks have at times to lend money at call, at rates much below bank rate. Then again, they have to find an investment for depositors' money, which of necessity entails risk, and, therefore, some margin is required as an insurance fund. We note that day to day money is only worth 2 1/2 to 3 1/2 per cent., and, therefore, if a banker allowed 3 1/2 per cent. on deposit there would be a loss by the transaction. However, it is the average rate which must be considered.

The brokers' deposit rate is a little higher than the banks', viz., 1/4 per cent., which would indicate that they are anxious to secure the use of capital, and therefore are willing to pay a higher rate.

The brokers prefer a low average rate for money in order to conduct their business rather than a rate continually fluctuating. The profit of the brokers would be the difference between their deposit rates and market rates for discount. They also allow an additional \ per cent. for money lent them for seven days, in order to avoid applications to the Bank of England.

The last quotation is for day to day money, that is, money which can be called in at any moment by the banks. Naturally money borrowed on such conditions is not so valuable to the broker, because, if loans are called in, he is obliged to borrow elsewhere, and what the requirements of the market will be on the following day, may not be known.

By studying these rates we get an insight into some of the forces which cause fluctuations in the value of money. The tendency in the money market is towards an equalisation of rates. Naturally every borrower endeavours to find the cheapest market. When bills of a certain class are discounted at the banks, it is in consequence of the holders not being able to discount them below bank rate, because, although their credit is good, yet they are not sufficiently known in the market. The forces at work in the market are always tending to make the bank rate equal to the market rate. When there is a great discrepancy between the two, a less number of bills are discounted at the banks. Some of the large banks, however, compete for bills, that is, they discount for their customers at market rates, and such banks would not experience the movements indicated.