Money Market

The constitution and course of the organisation which is termed the Money Market now claims special attention, as practically the financial pivot on which the business of the nation turns; the word "pivot" suggests the closeness of analogy with the compass needle, both in the constant oscillations common to each, their erratic and violent movements under the influence of external stress, and their extreme sensitive-ness - market and needle alike - to the faintest impressions from surrounding conditions.

The definition of "market," which has already been furnished, is also exactly applicable to the money market, which denotes no specific locality, but comprises the aggregate capitalists, bankers, merchants, traders, and the public who borrow or lend money, and by whom the rate charged for the use of money is settled as the result of their mutual transactions.

It will be convenient to divide this section into the three inquiries: the nature of the article dealt in; the dealers; and the manner in which the dealings are effected. It will be seen that the process is entirely an exchange between persons of what one desires to obtain, and the other wishes to dispose of on an equality of value, and that the principle of supply and demand1 is still the determining factor.

The article dealt in is money2 in the shape of loans for purposes of trade, commerce and financial operations - the exchange consisting of so much money for so much security. Money, in popular conception, is considered to be synonymous with gold or silver that has been coined into the several denominations which are called currency1 (though it will be soon observed that this term carries a wider sense), that is, portions of a valuable substance which are current (or flow; the implied metaphor is somewhat mixed) between persons as conveying, so to speak, a commodity from the one person who wishes to part with it, to another who desires it. But the term Money possesses an extended meaning, and applies to Representative money in the form of banknotes, cheques, and bills of exchange - all of which are promises to pay given by one person in favour of another - the cheque being an order upon a banker to transfer the sum expressed to the holder of the cheque, and containing therefore an implicit assurance to the receiver of the document that a sufficient amount of money belonging to the drawer of the cheque is in the possession of the banker for its discharge. A bill of exchange is a written order upon a person to pay on a stated date a specified sum of money to the person by whom it is drawn, or to any person to whom he may assign his rights, in consideration of the equivalent value of goods which the drawer has supplied.

1Supply and demand: these words form simply the shorthand expression for the relation between the number and intensity of desire of buyers and the amount of the stock of goods available at the time for their wants. If the supply be small, and the buyers many and eager, the latter compete with each other for the stock by higher offers. If the supply be large, and the possible purchasers few and indifferent, the sellers must, in their turn, bid against each other by reducing prices.

2 Money: derived from the Latin moneta, a surname of Juno, in whose temple at Rome money was coined: hence the term Mint also. The literal sense of monela is the "warning one," from the Latin monere, to warn, to admonish - literally, to cause to remember. Cicero states that Juno was also worshipped as Morula, or " the ad-monisher." The term Money affords a striking illustration of the vagaries into which a superficial derivation may lead. It is not derived from the quality here attributed to Juno, but from the incidental fact only of her temple being used as a place of coinage. In these ancient times the temples were utilised as banks for the safe keeping of money and valuable articles on account of their deep foundations and massive construction - impervious to thieves - and also of the tutelary sanctity which they possessed. Possibly similar reasons suggested the temple as a place for coinage, by reason of the safety and secrecy which the process involved.

The Nature Of Money

1 Currency: derived from the Latin currere, to speed, to pass quickly. As running is the rapid progress from point to point in space, so currency forms the means of the swift passage of goods from one to another person.

The acceptability of these paper substitutes necessarily rests entirely upon the degree of credit l which the givers possess; in other words, the confidence which the receivers repose in their honour and solvency, and the consequent belief in final convertibility into the actual gold which the documents represent. It is really, then, gold that is circulating in this economised and facile shape, so that the popular notion of the identity of money with gold is substantiated. And hence, in periods of financial unrest - the root of which is the distrust or diminished confidence of each man in the solvency of those with whom he traffics - paper money cannot be circulated, since the certainty of its prompt conversion into gold - or indeed, its conversion at all - has become undermined. This state is expressed by the phrase of a decline or failure of credit or trust.

Thus the article dealt in on the money market is money lent and borrowed for the selling and buying of commodities; loans to be employed in conducting and extending business enterprises, and advances for investment in Stock Exchange Securities.

The dealers in money consist of the aggregate of lenders at interest, and the merchants and others who are willing to pay for the use of capital2 which they do not possess private banks, the discount houses and bill brokers, the larger mercantile firms which have funds to lend from time to time, and the Stock Exchange, where some of the more important dealers also lend. As a general rule, however, the term "The market" is restricted to the joint stock banks, the private banks (which are gradually diminishing in number), the discount houses and the bill brokers, since (owing to the preponderant development of joint stock banking) the Bank of England1 does not now possess the commanding power and influence which it formerly exerted over the rate of discount as an extensive holder of mercantile bills;2 while the operations of mercantile firms in the advance of loans are more or less of an intermittent character, and the Stock Exchange is rather a customer for money from lenders than a dealer itself in money.

1 Credit: Latin credere, to give as a loan, to lend: then by metonymy, to entrust, to confide, to trust to, to confide in, to believe.

2 Capital: the term answers to the Latin capitellum, diminutive of caput, the head; then applied to the head of a pillar which supports the upper structure of a building; and hence figuratively transferred in sufficiency but which they can command by pledging securities which they do possess. Indeed every dealer in the money market is both a buyer and seller of money; he is prepared to lend or sell the use of money at a stated price, but he is also ready to borrow or buy the use of money at another price, so that if he can obtain its services from one person at a given rate of interest he may employ it in advances to another person on higher terms and thus secure a profit in the difference of price. He may, for example, borrow from a bank on security and pay the interest required, for the purpose of lending the amount to traders upon security, who will allow him a higher remuneration for its use in business, or he may lend it, on superior terms, to the Government, or a municipal body, or a railway, in the form of investment in their stocks and bonds. The banker himself is simultaneously a borrower and a lender; he borrows the savings of people in the form of deposits upon which he allows interest, and these sums he advances to merchants and others for their different purposes at a higher price.