FINANCIAL NOTES.
In view of the further rise which has taken place in money rates, it is scarcely surprising that gilt-edged securities should have shown some dullness during the week. The ultimate course of prices in the investment markets seems likely to be very largely linked with the outcome of the political Conference. A revival in com- mercial activity is the supreme need of the moment, but if it comes there must necessarily be some diversion of funds from fixed interest securities to the financing of trade. A relapse to a position of deadlock as regards reparations might, however, prevent any trade revival and prolong those tendencies which have been responsible in recent years for the strength of the investment markets. To some extent no doubt the substantial rise in the American exchange on London during the past few weeks is connected with the ease in money in New York and the higher range of money rates there, but it must not be for- gotten that during the past two months, when the Ameri- can exchange has been moving in our favour, there has also been an enormous rush of American tourists to this country in connexion with the Wembley EXhibition, and the aggregate sum involved in disbursements must be very large. * * A correspondent asks me to explain a little more fully why " post-War conditions make it more difficult to bring up Market rates close to the Official Bank Rate." There are many causes contributing to the difficulty, but to Mention the chief one will, perhaps, make the general situa- tion sufficiently clear to those unfamiliar with the techni- calities of the Money Market. In the first place, it may be well to explain- what Bank Rate really is. It is the minimum rate at' which the Bank of England is prepared to discount bills for its customers, while it is also prepared to make loans to the Money Market at per cent. above that rate. It follows, therefore, that the power of the Bank to make its rate effective must depend very largely upon whether, on the one hand, the abundance of money or credits in the open market is such as to make it quite independent of assistance from the Bank of England, or whether, on the other hand, the margin of abundance is so small that the knowledge of having possibly to borrow at the Bank of England at a certain rate keeps market rates near to the Official minimum. * * * * Slack trade, such as we have had lately, is in itself a cause tending to make money abundant, and the Market independent of the Bank. Since the War,• however, another important influence has operated. Ordinarily, the portfolios of the banks and the discount houses are filled, with mercantile bills, and if such bills are not re- newed by the banks and the Market, excepting at higher; rates, the effect is to bring up the Market rate near to the Bank Rate. If, however, as - happens to have been the case since the War, a large proportion of the, bills in the banks and discount -houses' portfolios happens to be in the -form of Treasury Bills, it does not necessarily follow that, if the banks or the market should not wish to tender for new bills in place of maturing bills, the same results would follow, because if the Treasury so desired, it could borrow from the Bank of England on Ways and Means Advances, and thereby actually increase the supply of credits in the Market. In other words, a large floating debt by the Government constitutes a source of potential increase to Market credits. This, however, is an influence which is now decreasing in force, owing to the extent to which the floating debt has been reduced during the last
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