1 Hartley Withers, The Meaning of Money, p. 265.

Percentage

Composition

Bank of England

Reichsbank and Bank of France

Reserves at the general market banks

The market banks in their statements make no distinction, however, between cash on hand and balances with their respective central banks or reserve agents. In England some of the country bankers lump cash on hand, at the Bank of England, on call and at short notice. On the continent, as long as there is a good balance at the central bank and a good stock of bills in the portfolio, the actual cash on hand is regarded as an unimportant matter. Ten per cent, seems to be regarded as about the proper reserves to be maintained, although the ultimate reserve in gold drops, of course, considerably below this level.

The most effective and flexible control of credit expansion is found in connection with the rates. Here a distinction must be made between the "official" or the "bank" rate, and the ordinary market rate.

The "official" or "bank" rates are those determined by the central banks. These rates are fixed weekly by the governing authorities, although if occasion demands they are more frequently changed. Owing to the heavy reserves maintained by the Bank of France and, perhaps, more particularly to London's position as the money market of the world, the French rate is changed less often than is the English official rate. According to figures cited in the publications of the National Monetary Cornmission,1 in the period from 1870 to 1907 the French rate was changed 41 times while the English rate was changed 273 times. The range of fluctuation was from 2% to 4 1/2% in France and from 2% to 7 1/2% in England. The Reichs-bank occupies in this particular an intermediate position.

Composition

Reserves in central banks

Percentage

Credit rates

The "official" or the "bank" rates

The official "bank" rate is almost uniformly above the market rate. Hence in England in ordinary times the bank has also a "private" rate at which it will discount for its private customers. The official rate is applied only when the bank is discounting in its capacity as the leader of the market. The Bank of France and the Reichsbank have no private rate. The Reichsbank is permitted to have a private when the official rate is under 4%, but the use of a private rate has been given up. In England the private rate is not uniform at all the branches, but in France and Germany, where no distinction obtains between private and official rates, uniformity throughout the country is the rule.

The official rates are effective as checks to credit expansion only to the extent that the banking systems as a whole depend upon advances from the central banks. This dependence is more or less constant in Germany and France. In these two countries the general-market banks are not strong enough to meet unaided the demands of the market. Moreover, the widespread dependence upon notes rather than upon deposits has given the central banks with monopolistic power of note issue a position of special strength. This has been of particular significance in the collection of "out-of-town" bills. Bills payable in communities other than those in which they are held are discounted, simply for collection purposes, from five to seven days before they mature. The charge for the discount thus covers collection. In England dependence on the central bank is only intermittent. The banks in the general market have grown to be very strong, and bank notes have been in England relatively unimportant. Hence the Bank of England must at times take definite steps to insure the effectiveness of the official rate when this effectiveness is considered desirable. Such steps usually involve direct borrowing of funds in the market, or the sale of securities. Every pound sterling that the bank thus obtains results in a corresponding reduction of the reserve balance of the institution from which the funds are obtained, and forces therefore a disproportionately large contraction of credit. Hartley Withers says that the English money market but dimly grasps this regulatory function of the Bank of England.1

Private rates

Effectiveness of the official rates

1 Maurice Patron, The Bank of France in its Relation to National and International Credit, p. 33.

The market rate of discount is, of course, fixed by competition. It is usually below the bank rate, but that does not mean that there are not a large number of bills which have to pay a higher rate. The market rate applies only to the choicest paper, namely bills of a certain minimum, running as a rule not longer than three months and bearing a banker's acceptance or indorsement. As was seen in the chapter dealing with the protection of the reserves these market rates of discount are of importance in connection with the rates for sterling, mark, and franc exchange quoted in foreign lands.

The loan rate, as already indicated, is uniformly higher than the discount rate. In the field of loans the official discount rate is the standard and the loan rate varies automatically with it. The rates for speculative transactions on the stock exchanges are independently determined, tending to vary with the demands that the general speculative situation tends to make on the money market.

In connection with the expansion of note issue it has already been mentioned that in all three countries the system of note issue is practically monopolistic. There are eighteen banks outside of London still enjoying the right of note issue but their issue is unimportant. The maximum was fixed by the Peel Act of 1844. At that time it stood at £1,204,490.1 Since then, through surrender by some of the banks of their right of issue, it has dwindled to about one-quarter of this amount. Two-thirds of the issue so surrendered was added to the Bank of England's "uncovered issue." France has an absolutely monopolistic system. In Germany there are besides the Reichsbank four other banks of issue. These German banks have no fixed maximum but their issue of notes is regulated as is that of the Reichsbank. When the Reichsbank was founded there were thirty-three other banks of issue, but all except the four already mentioned have surrendered their rights. As issue rights were surrendered by the other banks the Reichsbank was permitted to add to its own tax-free "kontingent" the full contingent that had been allotted to the banks making the surrender.