Suspending The Bank Act Of 1844

This state of impending disaster has occurred, and the remedy is the anomalous one of suspending (as it is termed) the Bank Act of 1844; in other words, the relief is afforded by the violation of the Act which was intended and expected to prove a permanent and unassailable national safeguard.

It will be remembered that under no circumstances can the Bank increase its issue of notes against securities beyond the limit which that Act prescribed; and a suspension means that the Bank is at liberty to disregard this restriction and to increase its circulation of notes to any extent that may be deemed expedient. Suspensions of the Act were allowed by the Government of the day during the crises of 1847, 1857 and 1866; and on each occasion the public apprehension at once subsided as soon as it became clear that notes could always be obtained.

The reader should not forget that an institution which becomes bankrupt may nevertheless be perfectly sound - the cause of disaster being the unwisdom of concentrating its funds too closely in investments which, in a condition of commercial strain, are incapable of being reduced into cash.

The Effect Of Fluctuation Of The Reserve On The Price Of Securities

The fluctuations of the prices of securities, so far as the Reserve is concerned, will now be perceived. An adequate Reserve implies a low rate of interest for borrowed capital; and a low rate of interest aids in raising the prices of securities in two ways: (1) surpluses that would at other times be employed in trading or loans seek Stock Exchange investments as yielding a higher return, and (2) more investments are purchased with borrowed money on account of the lowness of the terms on which it can be obtained. If an advance of £500 can be gained from a bank at 2½ per cent, the bank accepting as security a stock (bearing, we will assume, 3½ per cent interest) worth £550 (that is, demanding a margin of 10 per cent), and if the stock be purchasable at par the borrower thus expends the loan of £500 and £50 of his own money, and pledges the investment as security; he thus receives on the stock £19 5s. per year, pays his interest of £12 10s. and realises a profit of £6 15s., which is at the rate of 13½ per cent per annum upon the £50 which he has himself alone provided.

When, however, the Reserve is diminished appreciably, the bank-rate of interest is increased: prices of securities accordingly become depressed in consequence of three causes: (1) Some investors sell in order to utilise their capital more profitably in trade or loans (either directly, or indirectly by purchasing industrial shares, or placing their money on deposit with banks, whence it is lent); (2) The diversion of savings for the same reason into the channels mentioned, which in other circumstances would have been invested in securities; and (3) The compulsory sale of securities by speculators who had bought them with borrowed money, and who are now compelled by the pressure of the enhanced rate of interest to abandon their transactions.

"Drug."

A few words and phrases which the reader will most frequently meet with in financial statements may be briefly explained. Money is said to bo a drug (the remote origin of the word is uncertain) when its supply is greater than the demand for loans, discounts and investments in trade or securities, and the rate of interest consequently falls.

"Glut."

When, also, the amount of money available for loans and other purposes exceeds the demand, there is said to be a glut1 of capital.

"Hard" Or "Hardening."

Rates of interest for loans - or the value of money - are said to be hard or hardening when the demand for advances increases and the rate of interest accordingly tends to rise. Prices harden when they remain steady and show a tendency to increase.

Liquid Assets

Liquid assets consist of securities which can promptly be converted into cash by ready sale. They resemble metaphorically a liquid in its ease of flow, that is, in their instant passage into money. A bank's liquid assets comprise cash in the bank's till; its balance with the Bank of England; money lent which can be called in immediately or at short notice; and investments such as Consols, securities guaranteed by the British Government, and other investments which are equally quick of realisation.

Cumulative Preference Stocks

Cumulative Preference Stocks are those where, if any deficiency occur in the payment of the full rate of interest, which the stock bears, in any half-year, the deficiency must be satisfied in subsequent half-years before any stocks and shares ranking lower in security become entitled to any payment.

The only other agency in the money market which requires notice is the business of Bill 2 Brokers and Discount Houses. A Bill of Exchange, it has been explained, is an order on paper to pay a certain sum of money at a specified date - the drawer of the order being the seller of goods - the person on whom the order is made being their purchaser, and the document being based on valuable consideration in the form of the commodities which the former has delivered and the latter bought.

1 From the Latin glutirc, to swallow, to gulp down (hence glutton); one's fill of something, which finally cloys the appetite; a surfeit.

2 Bill: from the Low Latin billa, a writing, - billa being a corruption of the classical Latin bulla, which meant a knob or boss. Whence in mediaeval Latin bulla denoted a seal, and particularly the seal appended to a document as attesting its authenticity; then by transference the term was applied to the document itself; a further extension embraced any official or formal writing, though without a seal.

Bill Brokers And Their Relation To The Banks And To Traders

The great mass of these bills are discounted, not by the banks, but by a specialised class of intermediaries acting between the banks and the merchants who draw and accept the bills. The bill is, perhaps, an order to discharge the debt to the person by whom it has been drawn or to whomever he may convey his rights, on the expiration of two or three months. But the holder requires immediate money for the conduct or extension of his business, and hence, instead of waiting to receive the payment when the bill matures or becomes payable, he presents it to a bill broker for discount. The broker then hands him the amount expressed in the bill, after deducting interest at the prevailing rate for the period which must elapse before the bill falls due.

The Necessity For Bill Brokers

The necessity of a division of skilled labour in the complicated business of finance has created this specialised class of dealers. A banker cannot afford the time from the administration of his ordinary business to keep himself minutely acquainted with the character and solvency of merchants between whom these documents circulate in the (representative) payment of indebtedness; but the bill broker makes it his special vocation to watch vigilantly the history of men and firms; the soundness or riskiness of the commercial transactions in which they engage; the changes which occur from time to time in their financial position, and, generally, the extent to which they can be trusted (the standard of credit they possess) in the fulfilment of their obligations. For, obviously, the worth or valuelessness of the Bill (or security) depends upon these conditions. They are thus enabled to distinguish sound bills from inferior ones - those, in short, which (from the character and reputation of the drawer and those on whom he draws) represent real transactions (the delivery and existence of goods of equivalent value), or the reverse.

The Bill Broker, A Supplier Of Capital

As the broker must be prepared to discount approved bills to practically any amount, he borrows funds from the bankers on the security of bills, or sells to them a portion of his stock of bills. In the last resort, when sufficient advances cannot be obtained from the banks (which perhaps are, at the time, preparing for the payment of their own dividends, or the interest upon Colonial and Corporation Stocks which they manage, and require accordingly to strengthen their balances) he must apply to the Bank of England for resources. His relation accordingly to the variations of prices on the Stock Exchange consists in supplying immediate capital which may partly proceed to the purchase of securities when money is cheap (that is, when the rate of interest is low) and trade languid, or be diverted from investments, when money is more valuable (through an increased rate of interest), into the channels of a more remunerative trade.