NOVEMBER 9, 190$
The Commoner.
The Bank of England Rate
The anxious discussion in financial
circles, since the Bank of England on
Friday put up its' minimum discount
rate to 6 per cent, shows the impor
tance of that stop. The general pub
lic, however, remains perplexed why
the bank's announcement should alarm
a foreign market; wonders how the
fact of an arbitrary advance from
5 to 6 per cent in the interest rate of
one institution can stop gold exports
from London, or shut out American
borrowers from the London money
market and asks why so rich and pros
perdus a community as our own need
be disturbed if either of these results
is effected.
We pointed out on Saturday ono rea
son for the world-wide excitement
London is still the world's central
money market. English capital seeks
investment in all rconey markets of
the world. When, therefore, demand
tor money, the world over, has sud
denly become urgent, the situation
is necessarily reflected by the strain
upon London. The interest rate
charged by the bank which holds the
reserve against English banking 11a
bilities is the most accurate index.
Hence, if the Bank of England marks
up its rate to the highest figure
touched in more than thirty years, it
is a fair conclusion that pressure on
the world's money markets is severe.
This inference is the more reason
able from the well known fact that
rise in the London bank rate causes
similar rise in the cost of money to
evdry British merchant The Birming
ham and Manchester tradesman may
not be a customer of the Bank of
England; but since that bank, directly
or indirectly, controls a large part of
the London supply of capital, and
since it refuses to let its money go
at less than the 6 per cent rate, other
lenders are bound to follow suit. If
they did not, dealers in money would
snap up the funds offered by private
banks at the lower figure and would
relend them at the bank rate. Exact
ly here comes in the process whereby
the bank, raising its interest rate,
"controls the foreign, exchanges."
London's own capital moves back and
forth between London and every other
market of the world. If money rates
on these other markets rise substan
tially higher than at London, and bor
rowers have the necessary credit, Eng
lish capital is transferred from Lon
don in great volume.
Its transfer causes the rate of in
ternational exchange to move against
London; when that rate has fallen
far enough, it reaches a figure at
which it is profitable to ship gold
from England. This is what lately
happened with New York exchange.
Wall street's money rate, during our
"September squeeze" was so much
higher than London's, our bankers ap
plied so urgently for loans in London,
and their credit was so high, that
something like $40,000,000 gold was
taken from London for New York
within a month. Loss of this gold,
much of which was drawn from the
Bank of England's own reserve, grave
ly impaired the position of that in
stitution; its ratio of reserve to lia
bility, which London dislikes to sqe
below 40 per cent, fell ten days ago
to 35.
If exchange on London is low, and
English gold exports uncomfortably
heavy, an obvious remedy is to raise
the London bid. If the Bank of Eng
land, and with It the general Lon
don market, outbid the other markets,
English capital loaned abroad will nat
urally return. It left England because
it could earn more abroad; it will
come back if it can earn more at
home. But as its outgo from England
moved the exchange rate against Lon
don, so now its re-transfer to London,
bo now ita re-transfer to London from
New York, Berlin, Paris, or elsewhere
turns the balance of international ex
change in London's favor. Where
lately, "sterling was falling" on all
these' markets, now "sterling is rising
rapidly." With its rise, profit in ex
porting gold from London ceases.
Were it to rise much further, London
would import gold.
This Is the simple mechanism of
"control of the foreign exchanges" by
the Bank of England. The question
whether New York need be concerned
at Friday's abnormally high bid of
the bank for money involves other
considerations. Our floating indebted
ness on the London market Is very
large. Our market owes much less to
Europe, through Europe's investment
in our stocks and bonds than it owed
a dozen years ago; but it has prob
ably never before owed anything like
so much on our banker's notes. Dur
ing several months it has been the
common talk of financial London that
New York houses were borrowing in
such sums as almost to strip the Lon
don market of its usual surplus re
sources. The head of a great London
bank, which had itself at the start
loaned heavily in New York, declared
in a published interview, a fortnight
or so ago, that the London banks had
reached a pitch of infatuation, that
they wero advancing to New York
their "purest resources," that the pro
ceeds of these loans were invested in
stocks by the borrowers, notwithstand
ing the kind of loan involved was one
which is never allowed for stock ex
change purposes in London. His
warning was directed quite as much
to London as to New York, and the
view then set forth is reflected In the
Bank of England's action. It has
been clearly understood in financial
circles, since the Bank of England rate
went to 6 .per cent last Friday, that,
in the bank's own view, these Amer
ican loans not only must not be in
creased, but that those now outstand
ing must be repaid as fast as they
fall due.
If the Wall Street borrowers ac
quiesce, then the interesting question
is exactly how our market will be af
fected by the transfer to New York
banks of these London loans. Our
weekly bank statements indicate that
not less than $30,000,000 of such obli
gations have been assumed by our
banks in the past two weeks. The
problem remains how much more
must be similarly shouldered by New
York, and how far the bank position
will be weakened in the process. It
is possible though we should say
hardly probable that our bankers,
bidding against the Bank of England,
will endeavor to raise further loans
in London despite the higher bank
rate. This would precipitate an unus
ual and most dangerous struggle in
the international market. People
closest in touch with the Bank of Eng
land say that such an attempt would
mean a further rise in the bank rate
to 7 per cent or higher. When one
considers that the few occasions of
higher rates have been seasons of ser
ious financial panic, the nature of the
situation Is easily understood. New
York Evening Post.
NATURALLY CONFUSING
Professor L. O. Howard, entomolo
gist in chief of the government, has a
little daughter 4 years old, named
Janet. She showed him, the other
day, the well known photograph of
the president jumping his horee over
a fence.
"Papa," said she, "ith it a picture
of the good Lord?"
"No, dearie," replied her father.
"Ith it the thecretary of agricul
ture?" "No, my pet. It Is Mr. Roosevelt."
Janet looked thoughtful for a mo
ment. Then she said: "Why, of
couth! It'th funny how I alwayth get
thothe three people mixed up." Lip-pincott's.
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