Besides those influences which affect the rate of discount through the bank reserves there are others which operate more or less independently. This is evident from the fact that there is no fixed relation between the figure by which the rate is expressed and that which indicates the proportion of reserve to liabilities. For example, the records of the Bank of England show that when its reserve has stood at about thirty-six per cent of the liabilities the rate of discount has been sometimes six per cent, sometimes five and one-half per cent, and sometimes five per cent, and that when the rate has been five per cent the percentage of reserve to liabilities at different times has varied from twenty to fifty. These facts indicate that safety at some times demands much larger reserves than at others, and that the state of credit is a factor in the determination of discount rates. It is evident that when confidence between man and man is weak and business people are unwilling to grant to their customers the usual credit, bankers must keep larger reserves, and, in order to do so, must curtail discounts by raising rates. It is equally obvious that under the opposite circumstances they may safely expand their credit to much wider limits by continuing to discount at profitable rates until the proportion of reserves to liabilities has reached a much lower figure. Every commercial crisis has furnished numerous illustrations of the point here under consideration, but even in ordinary times the credit system is subject to change, and with it the ratio between the rate of discount and the bank reserves. It is possible that the future may witness a considerable change in the practice, so long prevalent, of making international payments in time bills and sight drafts, cable transfers being substituted for them on a large scale. If so, discount rates will certainly be affected and the proportion between them and bank reserves changed. During the period of the development of our credit system many changes have taken place in the proportion between reserves and liabilities demanded by safety, and with them in the proportion between the demand and supply of bills.

There is hardly any limit to the extent to which one might go in particularizing the influences affecting the rate of discount. In order to make a complete list, it would be necessary to indicate all the circumstances which might affect deposits on the one hand and the supply of bills on the other, and this would require a minute analysis of the various industrial forces acting at a given time. For the purposes of this book, however, it is sufficient to have pointed out the nature of the charge and the most common causes of its fluctuation.

The effects of changes in the rate of discount need not long occupy us, since most of them are sufficiently obvious from what has already been said. That they may influence the international movement of the precious metals, and thus the foreign exchanges we have already shown. Their effect upon commerce was also suggested when it was shown that a rise in the rates might check discounts. Business men transform their bills into cash for the purpose of making immediate use of the proceeds in commercial transactions, and, if they are prevented from so doing by a high rate of discount, commerce must be proportionately checked. Some people trade almost exclusively with borrowed capital, and are, therefore, obliged to present their bills for discount, whatever the rate. To these a high rate means diminution and perhaps complete loss of profits, and a low rate greater gains. The value of most interest-bearing securities is also affected by the rate of discount. The capital used upon the stock exchanges is largely borrowed from the banks, and, accordingly, when the rates are high there will be less inclination to borrow and the demand for securities will decline. On the other hand, when the rate is low stock-brokers will be inclined to borrow freely and to make large investments, with the effect of raising the price of the securities in which they deal. One needs simply to follow influences of this kind through their various ramifications to see that the effect of the rate of discount is far-reaching and by no means insignificant.