BANK OF ENGLAND RATE

Greymouth Evening Star, 29 November 1929, Page 4

BANK OF ENGLAND RATE

HOW IT OPERATES.

The following interesting simple explanation of the bank rate was written for the London “Daily Telegraph” by “A Banker” on the day it was raised: The fixing of a bank rate has as its primary object the regulation of the flow of gold in and out of the Bank of England. When money is cheap the bank rate is very low; when money is dear the rate is high. The bank rate, therefore, may be said to express the condition of the money market. In relation to foreign exchanges the bank rate affects the gold reserve. A high rate attracts gold by making it more profitable to use in a market where money is dear, a low rate tending to cause gold exportation from a market where money is From the Bank of England during the past few weeks the efflux of gold has been on a considerable scale. On August 14 bullion at the bank was £ 138,201,824. The extent to which the gold holdings have been reduced since that date may be gauged by a comparison of the following figures:— £ August 21 - .. • • 138,202,004 August 28 •- 137,633,677 September 4 .. .. 137,548,740 Septemberll 137,392,581 September 18 ' .. 136,921,000 . The bank rate has been raised to stop that flow. The rise ought to have taken place some time ago, for in the present state of the international foreign exchanges there is nothing in sight which would make gold flow back to this country (Britain) and restore our exchange. The balance of trade and the ordinary working of the world rates is not such as would make money flow back to us, and the only classical step to ensure an inflow of gold is the one which has now been taken. The process is quite simple, no matter whether the article to be sold is in the form of goods, stock, credit, or money, the article will nearly always flow to the dearest market.

From the standpoint of the banker nothing could possibly be worse than an expensive bank rate. His margin is not merely decreased, but his ability to assist his clients at reasonably low rates of interest is seriously diminished. The banker’s ideal is a bank rate standing round about 4 per~ cent or 4i per cent, for at those figures his profits are, probably, better than at any other stage. At the same time a great deal of ill-informed criticism is often written about the effect of a high bank rate on trade in general. It is true that the rate of interest and. discount has its proper place in the 7 computation of the cost price, as well as the selling price of every stable article of commerce. All the grain we import, all the cotton we import, as well as all the manufactured articles we import, are paid for very largely with money which is borrowed at some stage or other in the transaction. If money is expensive the increased rate must bear upon the cost. But if we pause for a moment and work out arithmetically exactly how much additional weight is carried on a ton of grain or a bale of cotton, it will be seen that an increase of 1 per cent in . the Bank of England rate of discount is not a serious item in these costs. 1 LEVELLING THE EXCHANGES.

Similarly, a manufacturing business, if carried on on sound lines (bj; which

is meant one mainly relying on its own capital and having recourse to the bank only for the purpose of its seasonal trade), would not find in the total of the costs which it has to add on to manufacturing costs, that is to say overhead charges, any very great change per cent of its turnover due to the addition of 1 per cent upon its interest costs.

This belated change in the bank rate should have its classical effect. It is the only means historically by which we have been able to bring in gold and keep our exchanges level. It will stop foreign lending on this market; in the normal course it will bring in moneys for employment in this market, if the rate is high enough relative to world rates. I think it is. ■.

The uninitiated may possibly see some connection between the present increase and what has been called the Hatry crisis, but which is, indeed, a relatively small matter alike to the City of London, to the Stock Exchange, or even to the ordinary investor. The Hatry trouble is a mere ripple oh the water, and in no sense can it be regarded as a serious factor in world finance. The necessity to bring gold into this country (Britain) is a serious factor, and the Bank of England has recognised it in the only possible way. It cannot be too strongly emphasised upon the general public that there is no more relationship between the Hatry trouble and the rise in the bank rate than there is between chalk and cheese.

What are the possible alternatives to the step which has now been taken? Had there been no increase in the bank rate we should have come, before the autumn activity and the Christmas demands for money had arrived, to a stage when we should have had to put into operation the powers of the Treasury to increase this fiduciary issue. Such a step might be justifiable on special and peculiar grounds for a very temporary period to tide over purely temporary conditions, when it can be seen that gold would flow in again without recourse to the classical measure which has now been taken. But in the last resort what is the alternative to making credit expensive, and thereby causing an inflow of gold? Is it not that we should have to embark upon a policy of inflation, the evils of which we have seen sufficiently and demonstrated in almost every European country except our own?