MONETARY CONTROL

Northern Advocate, 1 June 1925, Page 2

MONETARY CONTROL

FUNCTIONS OF BANK RATE.

RFGULATION OF CURRENCY.

(By Hartley Withers)

Some of us can remember the period, in the 'ninties of last century, when the English Bank rate stood for more than two years at 2 per cent., and a businesa generation began to grow up which had never heard of a change in bank rate. So much so that a jobber in the Kaffir market, when the change to 2i per cent, at last occurred, asked what it meant and why it should have so much effect 011 the market; and an enterprising speculator, on receiving a telegram from his broker saying that bank rate had risen to 2\ per cent, replied by instructing the broker, if he thought that bank rates were likely to go up still further, to buy 500 of them. To the present more sophisticated generation, which has learnt so many hard lessons in finance and economics from the war and is a highly intelligent student of exchange movements, '

there is little mystery about bank Tate and its fucntions. Nevertheless, when movements occur in it, and a decree thundered from Threadneedle Street alters the level of money Tates and the prices of most securities in which there is any active speculation, one still hears sceptical voices ' wondering why these things should bewhy, in these democratic days all the leading countries 'of the world should allow their money matters to be ruled by a more or less self-elected and apparently irresponsible oligarchy, which canj by its mere statement, given without any reason why, produce such widespread effects upon business conditions. "SINGS ITS UfN SOLO." There is nothing, in other spheres of business, quite like the precision with which the money market is regulated. In spite of the overwhelming power in many industries, of combines, conferences and "gentlemen's agreements," no voice speaks with the same authority as that of a central bank, and any voice that does speak is the agreed decision of a group, whereas the central bank sings its own solo, in the key that it has itself selected, which is then obediently followed by the rest of the choir, with an unbroken harmony which shows once more that the most effective power is often that which is wielded without any legal right or sanction behind it, but by the mere consent of those who accept its dictation of their own free will. It is interesting to note that the power of the Bank of England over the London money market has been even stronger since the war than it was before. For many years before the war, when the bank thought it necessary to raise the price of money, it was often obliged to -take money off the market, by boi rowing or selling securities or lending them temporarily, in order, as used to be said, to make it 3 rate "effective" —that is, to ensure that money would be so scarce that lenders would have to come to it, and so the price at which it lent would rule the price asked by others. Since the war, in spite of the great increase in the volume of money —both legal tender and bank credits —it has been so scarce in relation to the volume of commodities and securities to be carried and handled that either the Treasury or members of the outside market are nearly always obliged to borrow from the .bank, so that the bank rate is continually effective. THE PRICE OF MONEY. As to the reasons why monetary control is so necessary that not many even of the wildest revolutionaries propose to leave the price of money to take care of itself, and the money market submits cheerfully to the domination of a committee, whose actions it criticises with the utmost freedom —the reason for those things is easily found in the great importance of well-regulated money to the whole of the community. Like most other institutions of English origin, the power of the Bank of England over the other banks and money dealers, nearly all &£ which -came into being after its establishment, grew up as if by accident and without anybody noticing it, constantly adapting itself to the needs of the time, until gradually people became conscious of its existence, and then came to the conclusion that a regulating central bank, with a ring of other institutions working more or less subject to its control, was the ideal arrangement for securing an elastic and efficient money market. The system has consequently been in other countries, with variations to suit local tastes. In most of them the connection between the Government and central bank—which in England is merely that between banker and a j customer whose account is so important that his wishes cannot be ignor- [ ed—-is closer and more definite. But in all of them the prestige of the ; bank is largely due to its official position, combined with the fact that it works for a lower rate of profit than most other monetary institutions. It is the same thing in the case of •the directors; at least those of the Bank of England are remunerated 011 a scale quite incommensurate with the value, of the time and effort that they put into the job. At the .same time, though apparently an irresponsible oligarchy chosen by itself, with a merely nominal confirmation bv the

proprietors, in fact the Bank Court knows that it is responsible to public op'iiioH, and that any mistakes in its policy are certain to have world-wide effects. Central banks and their boards, working in the public service al a low rate of profit, can thus sho»v «'tii exceptional foundation for their authority, which modern tendencies show more inclination to increase than to diminish.