In order to afford a practical illustration of some of the forces which from time to time cause fluctuations in the rate of interest, we intend to give a short account of the money market for the year 1890, because it was an anxious period for the banks of this country. In doing this we shall be able to judge somewhat whether the Bank directors exercised their powers rightly, in making alterations of the rate. We might notice that each year has some leading features which distinguish it from the preceding one.

Thus the failure of the City of Glasgow Bank in 1878 had an important effect upon the money market. Then again a gigantic speculation in some great commodity has an effect upon the rate of interest, such as the copper speculation in 1889.

Again, the requirements of a. foreign country in order to place its currency on a satisfactory basis, which may lead possibly to a drain of gold, have caused great changes in the value of money. In fact we might almost say that the requirements of the world for specie, are supplied from Lombard Street. The year 1890 opened with a bank rate of 6 per cent., and also with the outside market denuded of capital, because the Bank return showed that the market had borrowed seven to eight millions. Of course this showed that the Bank of England had control over the outside market, and therefore little competition existed between the Bank and the said market. The year therefore began with a deficiency of surplus capital, in consequence of the heavy calls upon the resources of the market in previous years, which have been described as mania periods. Thus in 1888 £160,000,000 of capital was invested in South American securities, followed in 1889 by £190,000,000 of capital subscribed for breweries, mines and trust company investments. These facts explain to us the position of the market throughout the year. The consumption of capital has been larger than the supply.

Mr. Giffen has estimated the annual savings of this country to be £150,000,000, but of this amount a large portion would be invested in stock, premises, machinery, land, etc., and he therefore estimates that a balance of £80,000,000 can be regarded as free savings which require to be invested through the medium of the Stock Exchange. If, as he says, an additional £20,000,000 were added to any one year it would make a great difference in the prices of securities, which would be inflated, and paper profits would be large.

By means of these instructive figures we are able to ascertain whether the capital required for new undertakings is in excess of the annual accumulations. In order to show this we will take the capital called up for ten months to October, 1889, in comparison with the same period of 1890: October, 1889, called up £128,670,798 1890 „ „ 104,729,709

From these amounts we should have to deduct the amount of capital returned to this country by means of redemption drawings. After making allowance for this return of capital, the figures given are very large in comparison with previous years.

For example, new issues of Colonial Government Municipal Loans, etc., were as follows, viz.: -

We must therefore conclude that during the previous three years the amount of capital subscribed for new undertakings had been in excess of the annual savings. The above facts clearly show why a 6 per cent rate was prevailing in January.

The first relief which the market obtained was through the payment of dividends on Government Stocks on 5th January, amounting to £5,250,000. These quarterly payments on Government Stocks are always taken into account by the money market and naturally tend to ease rates.

In the first quarter of the year there is another force at work which must not be forgotten, and that is the collection of taxes for the revenue. As the financial year ends on the 5th April, the collectors of taxes make strenuous efforts to obtain payment of all outstanding amounts. The revenue receipts for the quarter are about £31,500,000, and if the Chancellor of the Exchequer lends any of this amount, it would tend to lower rates.

The power of the Government in the money market must not be forgotten in considering fluctuations of the rate of interest. The Government borrows on Treasury bills, and whenever they are paid off or renewed, we have some changes in the rates for money.

Every week we find reference made to the two rates prevailing, viz., the bank rate and the market rate, and sometimes when there is a great difference between the two, the Bank of England endeavours to make its rate more effective by borrowing in the outer market. This is effected by borrowing on stock, which denudes the market of surplus capital. If we study the weekly balance sheets of the Bank of England, this result is shown in a decrease of Government securities. For example: -

This amount, viz., £635,000, would represent the amount borrowed in the open market by the Bank.

Another important element to be remembered is the rates for money prevailing at places abroad where capital is concentrated. These rates tell us whether capital is likely to be drawn away from this country. They are quoted weekly in the Economist in the following form, viz.: -

The foreign exchanges also indicate whether capital is drifting towards this country or not. For example, we find a quotation as follows, viz.: -

As a rule, the foreign exchanges follow the changes of the bank rate, rather than precede such alterations.

The Bank of France is able to retain gold by charging a premium, and therefore high rates of discount prevailing here are unable to attract it, if that institution wishes to maintain its reserve of gold.

There were other indications showing the expenditure of capital. For example, the clearing house returns, which are always studied by the market because they illustrate the condition of business in the country.