Banks and Gold.

Thames Star, Volume XV, Issue 4777, 1 May 1884, Page 2

Banks and Gold.

The Saturday Review of February 16th .publishes the following :—The course of the money market during the past twelve months has been very abnormal. At the beginning of last summer, the season when the rate of interest payable for the use ot capital in the short-loan market usually falls, the Directors of the Bank of England found themselves compelled to raise the rate of discount to 4 per cent. And they had to keep the rate at that figure until the beginning of the autumn, when under ordinary circumstances the rate of interest payable forr the use of capital in the short-loan market would have risen. 'At the end of September, however, the Directors found it expedient to reduce their rate of discount to 3 per cent. At that figure they kept it until last week, when they raised the rate to 3| per cent., although we have now reached a period of the year when the value of money in the London market ought to be lower than in November or December. What is the cause of this curiously abnormal condition of the market ? Trade is very dull, and all the, indications point to increasing depression rather than: to revival. At the same time, there is no speculation. Consequently the demand for the use of loanable capital, either by merchants or speculators is exceedingly small. It might be reasonably expected, therefore, that the value of money would be low. But the internal causes affecting : the market are over-ruled by external causes. As our readers are aware, the Bank of England holds the ultimate reserves of all the banks of the United Kingdom. Directly or indirectly these banks keep what passes for their reserve with the Bank of England, and .upon the Bank of England they have to draw in every, emergency. The condition of the market then depends in the first place upon the amounts of the reserve held by the Bank of .England. Bat the Bank of England reserve itself depends upon the i.amount of gold held by the Bank. Now for several years past there has been a drain upon the gold held by the Banks of England and France. First, on account of Germany when she exchanged a silver for a gold currency; then on account of -the United States, when- they resumed specie payments; then on account of Italy, when it followed the example of the United States; and now on account of Australasia. The stock of gold held by the Bank, therefore, is much smaller than it was some time ago ; so small indeed, that the directors of the Bank are obliged carefully to watch that it be not seriously diminished further. When, therefore, they see any reason to believe that a new drain is beginning, they are bound to adopt the only means within their power for protecting . their supply of gold; that is to say to raise their rate of discount, and thereby increase the value of money in London. The step they took last week has now rendered the rate payable in the short-loan market of London higher than in any of the great continent* tal cities or New York. The first cause, then, if the enhancement of the value of money in London is the export of gold to Australia that has recently taken place. How is it that gold has been sent from this country to Australia ? Australia is a producer of gold, and hitherto has always been a seller of the metal. How is it that Australasian banks should have imported gold into England, and then exported it back again to the place of its production P To aend it round the world in this way seems to be a very unprofitable business, and no doubt it must be so. That the banks have been compelled to import gold, notwithstanding the unprofitableness of the transaction, is proof that they have not displayed very much foresight. Usually the value of the exports from this country is much higher than the value of imports of Australusian commodities to the United .Kingdom, consequently the Australasian colonies have to send gold here tojmake the balance, every now and then borrowing to settle their account. But quite lately the position has temporarily changed, so as to give the Australasian colonies a command over the London money market which they usually have not. There has been for several years past a very active speculation in the Australasian colonies. The banks have lent money largely to " squatters " to buy their holdings, to " planters" to develop their sugar plantations, and generally they have I increased largely their advances in every way. During the single year ended with September last, the increase in their loans has- amounted to over seven millions sterling. But at the same time they have been allowing their supply of gold to diminish. The banks, of course, are able to make their advances to merchants and others only out of their deposits; that is to say, they thc-tnselvea borrow in the first place the money they lend tq their customers, and the deposits are repayable in gold. Some of our contemporaries have been pointing out that the coin reserves of the banks do not amount to oneeighth pf their liabilities, but it is to be borne in mind that a large proportion of the deposits held by the Australasian banks are lodged with them for fixed periods of a year or more. They are not, th*refore, repayable on demand,

and consequently the banks are not bound to keep always a coin reserve to meet these deposits. Still it is evident from the fact that the banks have been obliged to send gold to Australasia that they felt their coin reserves to be insufficient. They had clearly been doing a risky business, using up their reserves too fast without exerting themselves to repleni h him, and Ib/y at length wakened up to the conviction that aa accident might cause disaster. They have been enabled to send out gold to'make up their reserves by a combination of favorable circumstances. The exports of wool from Australasia to this country are larger this year than last year, and at the same time the wheat harvest seems to be exceptionally good. ,It is estimated that the exports of wheat from the Australasian Colonies will this year exceed those of last year by about six millions sterling. There will, therefore, be a smaller debt due by ,the Australasian Colonies to this country than in past years. At the same time, the Governments and local authorities of the Australasian Colonies have during the past few months been borrowing very largely in the London money market, and the banks and mortgage companies have also been borrowing deposits largely. The loans made to the Governments, and the deposits received by the banks not only set off the debt due by the Austra- , lasian Colonies to this country, but leave in the hands of the banks a considerable surplus which they are free to employ as they please, and several of them, as already stated, have found it expedient to ship a portion of this surplus in gold to make up their own reserves. The amount so sent in itself is not large, and had it been remitted to Paris or any other part of the Continent, it would have had little effect upon the London money market. But for some time past we have been depending upon Australasia alone for any considerable gold supply. Since the resumption of Bpecie payment in the United States, the whole yield of the Californian mines has been retained at home; and since the adoption of a gold currency by Germany, the whole yield of the Bussian mines has been retained in Eussia and Germany. We have, therefore, been dependent upon the Australasian mines for our gold supply; and the fact that the Australian banks have begun to take gold from us, and send it back to Australasia, shows that for some time to come at least this supply will be cut off. But at all times there are demands of greater or less amounts upon the Bank of England for gold. London is the centre of J;he banking system of the world, and demands are constantly coming upon it for Egypt, the Continent, North and South America, and elsewhere, which have to be pronounced. Moreover there are always possibilities of accident of one kind or another. A considerable war might necessitate the remittance of large sums of gold to pay the troops and provide provisions. Or a panic in Paris or New York might lead to a drain of gold from London. The Directors of the Bank of England, therefore, knowing that their supply of gold is small, that they have kept it up for some months past in spite of an export of the metal of over 3£ millions sterling solely by withdrawing gold from the home circulation, and they, cannot hope for a fresh supply from Australasia for some time to come felt it incumbent on them to adopt measures to protect their supply, and if possible to attract gold from the Continent or New York.