The Dominion. MONDAY, MARCH 28, 1910. THE BANK RATE.

Dominion, Volume 3, Issue 776, 28 March 1910, Page 6

The Dominion. MONDAY, MARCH 28, 1910. THE BANK RATE.

Tta; advance in the Bank of England discount rate from 3 to i per cent., which as previously stated' is an unusual movement at this time of the.year, has been made to check the outflow of gold. When the set of the gold-current. is against London, the only practical way in which the Bank can counteract the outflow is to raise the value of money above the Continental lovel. This not only tends' to: make the export unprofitable, r; but also induces bankers in other countries to buy up London paper for temporary investment, thus turning, the exchanges in Britain's favour, and eventually bringing gold from other'quarters to replace that which has been lost. The success of: this .measure always depends upon the extent to; which if ' is seconded by ..the 'open' 'market. ■Continental: bankers, who have float-, ■■ing.funds toinvest care nothing for the rate that thb.Bank of England is supposed'to charge.' In bidding for bills their competitors are not' the : Bank of England, but the dealers in the open market, and it is the market rate alone, that affects their calculations. .For the Bank, then, to declare that money, for which yesterday 3 per, cen£ was asked,; shall to-day be worth i per cent, lis of no avail unless other big dealers concur, and fix their charge Accordingly.. As a rule the other banks follow the Bank of England because the interest they pay to their depositors is regulated by the official rate, and as they have to give more when the rate advances, they must'also charge more or be out of pocket. But the price of money in the open market, like, that of other commodities, is ad-: justed by the equation between supply and demand. So far as supply goes, a ready test of strength, is afforded by the amount of the Bank's "Other Deposits." If the Other Deposits stand at , a low figure, the supply is short, and the fmarket will, as a general rule, keep well up to the Bank, responding readily to the latter's initiative. If, on the other hand,, the Other Deposits are high, indicating a supply in excess of requirements, then tho pressure of this margin on'unlcnt money will cause lenders to beat down rates in their, anxiety to use up the funds under their control, and the Bank will- be powerless to influence outside quotations.' .' When any foreign nation requires gold it at once exploits the Bank of England, for that : is the simplest and quickest way of obtaining tho metal. ' The Bank must give notes for gold and gold for notes, and the Bank of-England is the only bank that is ready, or is supposed to be ready, at all times to give gold for any amount.' It is the only free gold _ market in the world, and it is this fact which makes it the easy prey of foreign bankers. The usual course adopted for obtaining gold from the Bank is to obtain credit with a London banker by discounting bills, or soiling securities,• etc., and to make use of that credit by asking for Bank of England notes, and to convert the notes into gold at the Issue Department. The result of an export of gold is to cause .a reduction of_the Reserve, and a consequent falling-off in the power of the Bank to pay its debts in gold. The Bank of, England is thus the guardian of the nation's only storo of gold, but,: though unwilling to actually avow responsibility, the Bank, at the same time, is unable to disavow it, and the promptitude with which it has j always defended the Reserve from foreign assault, oven at times when by so doing it was puttiDg itself out of the market, proves 'that it tacitly accepts the situation. Tho Bank rate is constantly fluctuating, through foreign .attacks on tho.gold reserve, consequently the maintenance of an adequate gold reserve has been the subject of considerable discussion in recent years.' While all parties agree that something should bo done in the matter, the difficulty appears to be in apportioning responsibility: Tho Banking .and Currency Committee of the Association of (British) Chambers of Commerce recommended for consideration at tho jubilee meeting of the Association that the Government should hold a reserve in cash, against the deposits in tho Trustee and Post Office. Savings ' 'Banks, sufficient to provide means I for faceting any, probable sudden ..

demand on tho part of depositors, thus avoiding the necessity, in such a case, for putting pressure upon the money market in times of difficulty. _ Another interesting recommendation was that the Bank of England should issue £l notes, under similar conditions to the notes now issued, so as to increase the proportion of coin to securities hold in tho Issue Department, but with the proviso that such £l notes may_ be issued, four-fifths against bullion and one-fifth against securities, so as to provido for the expense of issue. It was also proposed that the ordinary reserve of gold having been increased by the measures suggested, the Bank of England, on the recommendation of a committee representative of the State, tho Bank, and the joint'stock banks, should be given an increase of its powers of issue against securities in times of emergency, on payment to the State of a rate of interest to be fixed by law such rate of interest to be neither so high as to make the permission inoperative, nor so low _as to .encourage speculation up to it. Quito recently the joint stock banks have taken to Buying bar gold when there is no premium on it and using it as a reserve to be disposed of later or at a profit when foreign demands are important. If this practice is widely adopted by the joint stock banks in London it will act as a safety buffer to tho market. In the first place the purchase of 'the bar gold prevents the accumulation of bankers' balances at the Bank of England, and_ so prevents the reserve of that institution from growing with its' consequent influence on the money market. Then when the demand comes the bar gold of ■ the joint stock banks comes in as a kind of buffer to be sold .before the stock of the Bank of England is touched.