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of a class of dealers in bills who specialize in handling them and may be regarded as intermediaries between the holders of the bills—that is to say, originally, the drawers of them, or their representatives or anyone else into whose hands they may have passed them on—and the bankers, who are the ultimate buyers and hold them as investments until maturity. It is the business of the discount houses to buy these bills on a wholesale scale, using for this purpose funds largely lent them by the banks, and to meet the requirements of the bankers with regard to the date named and quality of the bill, providing them out of the store that they keep constantly replenished. Some of the larger firms, and two joint-stock companies which have applied the joint-stock principle with great success to this business, constantly keep a very considerable supply of bills in their own hands. Nevertheless, even they still retain the appearance of intermediaries to a very great extent, and the majority of the discount houses are intermediaries almost entirely. Some few of them, commonly designated running brokers, hold practically no bills and do a commission business by taking a parcel of bills from a seller and disposing of them at the best possible terms, charging him a brokerage on the transaction; but the most common form of the business is the one indicated above, by which the discount houses keep a considerable floating supply of bills always, with a view to disposing of them to bankers, meeting the requirements of the latter in the respects indicated.
The function of the discount houses is thus of considerable importance in the London money market, because the terms on which they do their business may have a considerable effect upon the foreign exchanges and so
upon the inward and outward movement of gold. Ultimately and in the long run it is probable that the discount rates current in the London money market are decided by the banks themselves, since if the bankers decide that they will not buy below a certain rate that rate is almost certain to become very speedily effective. Nevertheless, the discount houses may have a considerable temporary effect on the rates current, since if they take a strong view concerning monetary probabilities in London their sentiment is almost certain to express itself on the rates current for the moment.
We have also seen that the discount houses fulfill a very important function by borrowing funds from the bankers at call and short notice. These funds are regarded by the bankers, and actually described in their balance sheets, as cash, cash at call, and short notice. It is a somewhat elastic extension of the term “cash” to apply it to money that is being lent to any borrower, even of the highest credit and against the most liquid possible collateral. But it is always assumed by the bankers that these funds placed in the discount market can be called in readily at any moment. That they can be called in is practically a fact; but it arises chiefly from the ability of the discount houses when pressed for repayment of these loans by the bankers to fill the gap in credit by an appeal to the Bank of England and the production of fresh cash, as it is called, by borrowing from it. The discount houses take security to the · Bank of England and raise with it the right to draw checks. These checks they pay to their bankers, whose cash at the Bank of England, which we have already
seen to be regularly used as part of the basis of credit in England, is thus increased.
It follows from the necessities of their position that the discount houses are liable to be affected by the least fluctuation or change in the current value of credit, either momentary or for the future. Any change in the position which makes it appear that money is going to be dearer later on will make a considerable difference to the price at which they will be able to dispose of the large holding of bills which we have seen to be their stock in trade. Any change in the position which necessitates an immediate demand for cash causes the bankers to call in funds from them and drives them into the Bank of England, which discounts bills for them at its official rate, and generally charges one-half of i per cent more for advances. They thus conduct their operations on terms which require extremely alert ability and a capacity for gauging monetary probabilities not only in England, but all over the world, since London's position as the free market in gold necessarily makes its rates extremely sensitive to any possibility of disturbance elsewhere. Besides the money that they habitually borrow for short periods from bankers, the discount houses also have considerable amounts placed on deposit with them by other lenders, some of which they employ, especially in times when the volume of bills is comparatively small, by loans to the Stock Exchange for financing the speculative commitments of the public, and by holding or carrying securities of a reasonably liquid character. They also take some. part in the underwriting of new loans and in the general financial business of the London market.
LAW AND CUSTOM IN THE ENGLISH SYSTEM.
English banking is regulated by law to a very small extent. As has been observed in earlier parts of this memorandum, very strict regulations were imposed by the act, generally known as Peel's Bank Act, of 1844, upon the note issue of the Bank of England and of other banks which issue notes in the United Kingdom, but, as has before been shown, these regulations are now a matter of minor importance, owing to the extent to which-partly in consequence of them—the bank note has been superseded in England as the currency of commerce and finance by the check. The chief function of the English banker, as it is understood to-day, is not that of issuing notes, but of receiving deposits and making advances which take the form of deposits and are drawn against and circulated in the form of checks.
This part of the banker's business is not in any way restricted or regulated by the law, and as the great majority of English bankers confine themselves to it and the business connected with it and resulting from it, it follows that the ordinary English banker rarely finds himself affected by the law in the management and direction of his business. Books on banking law are devoted almost entirely to questions arising out of ordinary banking practice, such as the circumstances under which a banker who has paid money in reliance upon a forgery can recover from the person to whom he has paid it, and give a very small proportion of their space to the functions and questions to be discussed in this memorandum. They are left almost entirely to the custom and tradition of the business.
(A) THE BANK OF ENGLAND.
In the case of the Bank of England, which was instituted under special circumstances and by a special charter, certain definite arrangements were laid down by the act constituting the Bank concerning its organization and directorate. The act, which was passed in 1694, states that
“William and Mary by the Grace of God do hereby ordain and appoint that there shall be from time to time for ever of the members of the said company, a governor, a deputy governor, and 24 directors of and in the said corporation, which governor, deputy governor and directors, or any 13 or more of them, of which the governor or deputy governor to be always one, shall be and be called a court of directors for the ordering, directing and managing the affairs of the said corporation." The act appointed the first governor and deputy governor and states that they have been chosen by a majority of the subscribers, having £500 each in the capital stock. It also makes arrangements for the holding of general meetings or courts “for the appointment of governor, deputy governor and directors, and for the making of bye laws, ordinances, rules, orders or directions for the government of the said corporation, or for any other affairs or business concerning the same." It provided for the annual election of the governors and directors and restricted the right of voting at the general courts to holders of at least £500 stock in the Bank. No member was allowed to have more than one vote. It was further provided that no one could be governor of the Bank unless a subject of England, naturally born or naturalized, and holder of £4,000 stock in the