books
prescribing the amount of cash which banking or other financial
institutions shall keep in their vaults. The custom of these
institutions regarding that matter is to keep on hand relatively small
sums and to rely upon the Bank of England or some other London banking
house for the replenishment of their supply as needed. For this
purpose, London and many provincial banks keep balances with the Bank
of England, and other banks maintain balances with other London
institutions. These balances may be obtained by the deposit of coin or
Bank of England notes or by rediscounts. Another widely used resource
is the calling of loans made to bill brokers or discount houses. Such
loans or a considerable volume of bills of the kind discounted by the
Bank of England, or both, are regularly carried by London banks and
counted as a part of their reserves.
On account of these practices, surplus cash not needed in the conduct
of the current business of the country speedily finds its way into the
vaults of the Bank of England, and additional supplies, when needed,
come from this source. The administration of the cash reserves of the
country thus becomes one of the important duties of the Bank of
England, in the performance of which variation of the rate charged on
discounts is the most important device.
Many years' experience has enabled the Bank to determine with a
considerable degree of accuracy the volume of the demands for cash
likely to be made upon it from day to day, and consequently the amount
that it should keep on hand in the vaults. Whenever this amount
approaches the minimum regarded as consistent with safety, the
directors raise the rate of discount, and when the amount on hand
becomes excessive, they lower it. The efficiency of this procedure in
increasing the reserves in the one case and in decreasing them in the
other is due to certain conditions and practices which deserve
attention at this point.
Long-established custom has made the rate of interest paid on deposits
in London and other parts of England vary with the discount rate of
the Bank, and on this account the market rate of discount also varies
in the same manner. The Bank of England is thus ordinarily able to
regulate the market for commercial paper. Since paper payable in
London is a favorite form of investment for continental bankers, by
raising its rate of discount and with it the market rate above the
level of the rates of some or all of the cont
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