Methods Of Preserving The Reserve

Dealing with the mode of preserving the Reserve a homely illustration may be cited. If we desire to keep people to a certain place or course we effect our wishes by rendering that place and course more attractive than the inducements which exist elsewhere. In the same way the Bank retains the Reserve by making it more profitable to the holders of gold and to those who can command its possession, to employ their funds in England than to transfer them abroad. This course possesses the threefold merit of preventing gold from leaving the country; attracting back the gold that has already disappeared, and inducing gold which exists in foreign monetary centres. Instead of the cash proceeds of debts due to merchants abroad being remitted thither for use, the Bank is enabled to secure their retention here.

The Bank-Rate

The instrument for this purpose is a rise in the rate of interest - the minimum bank-rate, as it is termed - at which it will make advances and discount (or cash) bills of exchange. If, for example, the rate has stood at 3 per cent it may be increased by stages to 7 per cent, and even to a higher level, so that the employment of money in England in the form of loans (since owners of money can thus lend here at, for example, the 7 per cent) becomes substantially more remunerative than would be its similar use in foreign markets; and money consequently is retained and attracted here to secure this advantage.

Until about seventy years ago the policy of the Bank on the occurrence of withdrawals of gold, conaisted either in letting affairs right themselves, or contracting their grant of loans or extending them. The plan of increasing the rate of discount was not adopted, and indeed, such a course would not then have been so available or efficient as it proves at present, since the transit of bullion was more expensive and less expeditious, and the amount of floating capital was considerably restricted, so that the attraction of a higher rate of interest was of inferior effect. It is when loanable capital is so large as to involve constant competition for its profitable use, and so capable of safe and ready transfer that it can be promptly placed in quarters where that profit is secured, that the offer of a greater remuneration proves substantially efficient.

It is true, of course, that unless the increase in the bank-rate (the "official minimum") be followed by the similar action of other lenders - the banks generally - its operation will fail to an extent in the intended purpose. The banks of the kingdom, with their enormous accumulation of funds, must employ them profitably by offering attractive or low terms to borrowers, and there is a tendency consequently in the market rate for loans to prove irresponsive to the action of the Bank. But in periods of grave urgency, when the Reserve (which signifies the reserves and therefore the solvency of all the banks) is subjected to momentous depletion, the general terms for the use of money are brought into close correspondence with the rate settled by the Bank. Banks at these periods increase the rate of interest upon deposits, which helps, by this higher return, to retain and augment this form of loanable capital; and, as persons at home and abroad who possess funds to lend, dispatch their capital for investment wherever the greatest remuneration can be procured (the principal being safe), the cash which foreign firms and banks would, under the existence of an inferior rate of interest, withdraw from England for better use elsewhere, is retained, while the attraction of advantageous lending also induces money to be remitted from abroad to secure the benefit. This process is also aided by the world-accepted assurance that in no form is capital more soundly placed than in that of British securities.

Borrowings By The Bank Of England

Should the Bank, however, find that its protective measure at any stage is not sufficient to compel, in adequate degree, a corresponding upward movement of the general market rate - for action would obviously be inoperative unless all lenders combined - the expedient is adopted of the Bank borrowing money in the market upon the securities it possesses. The amount of external loanable funds is thus reduced and brought under the Bank's own command, and with this restriction of the market supply of capital in proportion to the demand a single rate of discount finally dominates all advances of money, and the power of retaining and attracting gold is established.

A remedy may be largely valueless if its application be deferred until the disease has become fully established, and hence the sagacity and foresight - and the self-control, it should be added - of the Bank of England are exhibited in its vigilant watchfulness over the course of international events - social, political, and commercial in order that preventive measures may be promptly adopted, and the dislocation of our own trading arrangements (which an onerous rate of interest produces) be diminished as substantially as possible by successive advances of the bank-rate rather than abrupt and violent changes.