The Dealers In Money

The dealers or traders in money, in the shape of loans on securities, and the discount1 (or immediate payment in money under deduction of interest) of bills of exchange maturing at the expiration of a brief specified period, are the Bank of England, the joint stock banks, the few to the funds of a trader, company or corporation which serve as a basis or support for commercial and other operations.

1 Discount: from the old French des (the Latin dis), apart, away, and eompter, to count; to make a deduction for payment in ready money.

The Method Of Advancing Money

Thus the monetary requirements of the commercial and investment markets (for the purchase and sale of commodities, and capital for the purchase of securities) are provided by the money market; and the activity of the money market - the volume and frequency of its advances - varies with the expansion or restriction of the business in the markets named. The medium employed in the money market in the grant of its loans is the cheque or order for money upon a bank; if a loan be obtained upon the pledge of security the borrower's account is increased by the amount, and upon this he draws cheques in settlement of his varied indebtedness; if a bill of exchange be discounted the same process is pursued, for, like a cheque, the bill of exchange is simply an order for money upon some person or firm - the obvious difference, that in the one case the order is to be executed at once, and in the latter case at the end of a definite period, being cancelled by the arrangement for discounting the bill or reducing it into ready money.

1 The unique position which tho Bank of England occupies, and its dominant sway over the financial world when occasion arises, will be hereafter described.

2 Mercantile bills: bills drawn by merchants on each other expressing the price of goods sold and bought, and evidences of the debts thereby created: derived from the Latin mercari, to trade.

Supply Of Funds For Loans, Etc

The supply of funds available for loans and discounts will depend upon the extent of the savings of the country deposited with banks and other financial houses, and on current account, which can be utilised in loans. The nation in ordinary times earns more than it spends, and this surplus, unless diverted directly into extension of trading operations, or placed in investments, flows, as deposits, into the banks, whence it percolates into the money market generally in the modes already described.

It has been estimated that of the supply of money thus held by the banks, 95 per cent is employed in advances for promoting the industries of the country throughout the world, while only 5 per cent is retained in cash.

The demand for this supply will depend upon the fewer or more numerous business transactions which require to be settled: in other words, the briskness or slackness of trade. Increased trade will create a larger number of Bills of Exchange as the evidence of indebtedness thereby created, and the representative mode of its discharge; and the greater the volume and value of bills the more augmented the demand for money for their discount. Many other causes will affect the range of this demand - enlarging or contracting it - but all associated with the state of commerce and trade: the soundness and genuineness of business as well as its mass; political, financial and social conditions and difficulties; the current extent of credit or trust in each other's capacity to fulfil his obligations; and the scope of investment in securities on the Stock Exchange.

Rate Of Interest Determined By Supply And Demand For Loans

Finally, the relation between the amount of the supply and the concurrent amount of the demand will determine the Bate of Interest or the extent of the consideration required for the use of funds. If the demand exceed the supply, this rate will obviously ascend until an equilibrium is established; and a reduced rate marks the fact that the supply is excessive for current requirements. The terms for loans are mainly based upon what is termed the "official minimum" of the Bank of England, or the lowest rate at which that bank will lend to its customers, since this affords a reasonable index to the intensity or feebleness of the prevailing competition for money.

The Commercial And Financial Fabrio Is Built Upon Credit Or Confidence

It has already been pointed out that the entire commercial and financial fabric is built upon credit or confidence in each other: trust in character, in soundness of business methods, and in solvency. A Bill of Exchange, for example, is readily accepted in discharge of a debt, when the receiver feels assured, from personal knowledge or general reputation, that it represents a genuine sale of goods; that those goods supporting its value are existent; that the person upon whom it is drawn is of established repute and standing; and that, consequently, the bill is equivalent to cash.1 The extent of credit, obviously, is incompetent of numerical expression, but its measure at any time is furnished by the number and value of the commercial transactions which are undertaken and completed upon its basis.