The Dominion. MONDAY, NOVEMBER 29,. 1909. WHAT THE BANK RATE MEANS.

Dominion, Volume 3, Issue 676, 29 November 1909, Page 6

The Dominion. MONDAY, NOVEMBER 29,. 1909. WHAT THE BANK RATE MEANS.

The Bank of England rate;of discount, or tho Bank Kate, as it is familiarly known, is of world-wide importance, for; as the rata is'raised or lowered,' so the money markets of tho world are jiffected. Bank Hate is the official minimum rate at which the Bank of England will discount hills. It differs from the market rate of .discount in that it is normally higher, and in that it is not a constantly fluctuating rate, shifting. with the supply: of and demand: for bills, but -is fixed and announced every Thursday morning at a: special meeting of the Bank Court,, and except under most umjsual circumstances is . not changed on any other day. It should be noted - that the official rate only rules at ita head office, and there only partially. : The Bank of England discounts at the market' rate for private customers at its head, office and also at its branches. London is the world's great banking centre, and the Bank of England is tho hub of tho banking world,' London is the financial clearing house of the world, because in international flnanbe, bankers' credits must be immediately and unquestionably convertible into gold,'the only form of payment which is universally- and always acoepltable. : : Money; of this kind is only to be had in London. It is the cherished ambition among Americans to see; New York S9me day established as the monetary . centre of the, world, but that day is a long way off. In 1907 tho American banks Tycro so strongly suspected by their own public of being indiscreet,- that the" public preferred to take care of its own money. And American banking met the situation by refusing to meet demands on it; It will be long before international finance will look with > much confidence on a dra,ft on New York, which has been shown by experience to. be inconvertible in times of crisis. A draft on another centre . is only. valuable from \the international point of vjew from. the. readiness with'which it can-be turned into a draft on London, which is the real cash of international commerce and finance, because, gold, or its equivalent, is only to bo had always" and without question, and to any amount, in; London. Its money is not only moro genuine, that is, morp . undoubtedly convertible than that of any other centre, but is also, under normal circumstances, both more cheaply and . easily Iprpduced to suit the convenience of the user.'

./ London, as the' world's money factory,' labours under grave responsibilities, and is at, all times' obliged to strictly guard tne. basis of credit—gold; - And yet it is remarkable how gold is economised in England. In France the central institution holds about £140,000,000 in gold, : while the gpld holding of tho Bank, of England is "about £35,000,000.; The Bank of England has the exclusive right of note-issuo in London, and the notes aro legal tender. Notes to the . extent of about £18,000,000 are .issued; against British 'securities,:- but each £o-noto issued, above that.amount is actually'represented by £5 in gold. If British trade had to bo developed on this basis, there woujd have been a vast accumulation of gold in the vaults of'the : Bank. The ; commercial community, however, early recognised tho advantages .of the cheque, arid the free and full use of this convenient credit'instrument has- eni abled the Bank : of England to ccpnomise its gold, .while at tho' same time it has imposed enormous burdens and difficulties on .this great institutio'n. In these days', ■\vhen a banker lends'; money, he lends the right ;to draw a cheque and promises to meet it on domand. The Bank of England is the banker for tho banks, and' tho" latter .hold quantity 'of gold and silver coin as till money, and Bank of England notes which' are. as pood as gold. When one of these: banks discounts a foreign bill or a bill of exchange, it provides the customer , with the right. to • draw a cheque, and. the. cheque is paid in Bank of- England notes, which again are readily converted into gold, and so' it is possible' to withdraw' any amount of the metal from tbe. Bank. It would be' impossible to enter into any discussion on the bill; of exchange, and the operations of the bill-brokers aiid discount houses, but it .is mainly through the .discounting of such .documents that the right to take gold from England is obtained.; When a foreign. Government or corporation raises a loan, or when the securities of a foreign railway or other undertaking are sold'in London; the right to take gold accrucs. .

The store of gold which the Bank, of England is, oxpccted to keep is constantly threatened by. a- mass; of credit created by other banks'which work witlw out any immediate reference to the Bank of England, but. to. suit the rnquircments of ' tbeir'. own- business.■ ■ It thus becomes ■necdssary, occasionally, for the Bank- to employ .drastic measures to maintain .its gold lesorve. It 1b : only in exceptional

circumstances that it is able to regulate tho supply of- credit which is :bascd onits : reserve. • . These .circumstances : arise when the lending power of tho other banks has-reachcd'its limit,-and any further credit required has to bo provided by tho Bank of England on its own terms; when the payment of'direct taxes during tho first quarter of the year sweeps millions into the Treasury Account at the Bank; at tho end of tho quarters, when the demand for credit and currency, exceeds the outside supply, and the Bank has to fill the gap; and finally, when the Bank decides that regulation is imperative and borrows money that it does not want in order to curtail the masß of credit created by the other banks, and force discount. rates up to a point at which, will have the desired effect on the foreign exchanges. If the rate of discount be relatively low in London, bjlls will be poured in from abroad to be discounted and turned into cash, and foreigners with ■ credits will draw bills on London and'discount them. The import' of securities, is thus increased, and the exchange rate is said to be against London. If tho exchange rate is such as (o; cause gold to be exported in payment of the securities, tho position is remedied by advancing the rate of discount, .which checks the import of bills, and induces foreigners to remit funds to London to bo employed in the discounting of bills. Last month the Bank of England found it necessary toregulate the money: market and in three weeks doubled its rate of discount— ner cent, to 5 per cent. The rate soon became effective, for the Bank has been able to .add several millions sterling; to its store of gold.