The business of the bill-broker is one that has grown up during the past century—chiefly during the latter part of it. A bill-broker acts the part of an intermediary between banker and merchant. At first glance the need of such an intermediary is not very apparent, considering the large number of banks now in existence which keenly compete for business. On looking further into the matter, however, the importance and utility of the bill-brokers, both to banker and merchant—that is, to those who wish to buy bills and those who have them to sell—become apparent.

To undertake the business of discounting bills successfully great knowledge and discrimination are necessary; knowledge that can only be obtained by experience, and discrimination by keeping in touch with the changes occurring in the standing and position of the mercantile and financial community. As with the rest of the world, merchants and financiers do not stand still; they progress or they fall back. Many bills which in 1893 would have been treated as first-class paper are now, in 1903, looked at askance; while the acceptances of many firms who were unknown ten years ago are now readily taken. It is the business of the bill-broker to keep himself thoroughly informed of the “standing” and “position” of the mercantile community, so that he can readily discriminate good bills from doubtful ones.

A bill-broker does not confine his operations to what is called “bank paper”—that is, to bills accepted or endorsed by one of our well-known banks or leading finance houses—but he is prepared to deal in bills accepted or endorsed by members of the ordinary mercantile community, provided he is satisfied as to the position of the parties whose names appear on the bills. These latter bills are called “trade bills.” The rate for discounting such bills is always somewhat higher than the rate for bank paper because of the slightly greater risk.

The bankers of the present day discount a large number of bills for their customers in the ordinary course of business. Bills obtained from this source, however, do not meet a banker’s requirements in several particulars. For one thing, the amount of bills offered directly to bankers for discount is not sufficient, as a general rule, to satisfy their demands; and, moreover, a banker has no power of regulating the supply of bills offered to him in this way. One day he may be asked to discount bills to a very large amount, when he is not anxious to increase the amount of his holding of bills; on another day he may wish to increase his holding, but none may come forward. And lastly, with bills offered for discount by ordinary customers a banker has no power of so picking his bills that he can ensure having a large amount of bills maturing at any given period, when he anticipates that he will require to increase his cash. But all these conditions can be met by dealing with the bill-brokers. A banker can obtain bills to any desired amount from the bill-brokers, he can regulate the supply of the same according to his wishes, and he can stipulate that the bills sent in by the bill-brokers are to mature within any given time—thirty days, sixty days, ninety days, and so on; and he is thus in a position to provide automatically for an expected demand for cash at certain times, by the maturing of bills.

Bankers therefore find it easier, and, owing to the broker’s specialised knowledge of the position of parties, on the whole safer, to buy bills from the bill-brokers than to try to obtain directly all that they require. Bills so purchased possess a further advantage, for not only are they secured by the names on them, but, in addition, they usually carry the guarantee of the bill-brokers as well; and this, when dealing with large and wealthy firms, is a distinct advantage. It must also be remembered that there are a large number of banks—principally country banks—who are so situated that in the ordinary course of business they never have what is called “A1 paper” offered to them for discount, and yet they require to invest a certain amount of their funds in such bills. These institutions of necessity make use of the bill-brokers to satisfy their needs.

In consideration of the bill-broker’s guarantee, and of having had the advantage of his knowledge in selecting and collecting bills, a banker is content to buy bills from a broker at a slightly lower rate than the ruling market rate, usually ?th or ¹/16th per cent. per annum lower. For instance, if bank or first-class paper is quoted in the market at 2?ths per cent. per annum for bills due in three months’ time, bankers would buy such bills from the broker at 2¼ per cent. The broker thus makes a turn of about ¹/32nd per cent. on the deal, but in active times this “turn” is often divided with the merchant from whom he buys. This profit may seem small, but when the enormous turnover of a bill-broker is taken into consideration, it is apparent that the total profits derivable from this business are very considerable. This is confirmed by the satisfactory dividends paid by the two or three public companies conducting discount business.

Looking at the other side of the question, persons who have good bills to discount find they have a readier market in the bill-brokers than in the banks, and practically all the first-class bills throughout the country find their way to the London market for discount.

In order to keep their connection, bill-brokers must be prepared to do business in good bills at any time, to practically any amount; and to be in a position to do this, they rely either on borrowing the necessary funds from the banks, or on selling some of their stock of bills in hand to the banks. The interest on the call and short-notice money borrowed from banks is on an average materially lower than the rates at which bills are discounted, and consequently a profit is made by the bill-broker (who holds the bills he buys), of the difference between the two rates; and when bills are sold to the banks a turn is made on the transaction, as we have already seen. Competition among the various brokers, however, is always tending to keep down rates, and consequently the profits of the business.

Bill-brokers also buy very large amounts of trade bills from colonial, and in some cases foreign banks, which are endorsed by the banks in question. These bills, when not held by the brokers, are sold to various banks throughout the country, and of course form a first-class security. It may be mentioned that it is not the custom now for any London bank to rediscount bills which they may have discounted for their customers, and only in very rare instances do country banks adopt this course, though the names of two or three of such sometimes appear as endorsers.

Unlike a banker, a bill-broker has to pay interest on all his working funds, and this makes him anxious always to utilise those funds to their fullest extent. Unlike a banker also, he has no large reserve of idle funds to keep for meeting sudden demands. Should such demands arise, he relies on being able to borrow from banks or elsewhere, sufficient funds to meet those demands, or, as a last resort, to obtain assistance from the Bank of England.

As regards the funds with which the bill-brokers conduct their business, we have already seen that they are largely borrowed from various banks. The business is very simple, and is marked by an absence of any kind of red tape. Every morning the representatives of the brokers call on the banks with which they do business, and ascertain whether the latter wish to lend any more money, or if any of the money already borrowed is required to be repaid; at the same time usually arranging the rate to be paid for money. They also ascertain if the banks wish to buy any bills, and arrange the rate for such business.

In the case of money being lent to a broker, he simply sends in security to cover the advance, and draws a cheque on the banker for the agreed amount. In the case of money being “called in” by a banker, the broker sends in his cheque on some other banker for the sum called, and takes away a corresponding amount of security.

The securities deposited by bill-brokers for loans of this class consist either of first-class bills or what are known as “floaters.” “Floaters” are bearer securities of the highest class, such as Consol certificates, the debentures of certain Indian railways, the bonds of the Corporation of London and the London County Council. They obtain the name of “floaters” from the fact that they float from bank to bank, as one bank calls and another lends.

In the case of a banker buying bills from a broker, the broker sends in a parcel of bills which roughly amount to the agreed figure, and draws a cheque for the amount less the discount. It is not usual for brokers to endorse the bills they so sell, but they give the banker a continuing guarantee in respect of all the bills which he may buy from them from time to time.

It frequently happens at certain seasons of the year when there is a pressure for money, or on special occasions—such as on the issue of a big public loan, when a large amount of bankers’ floating balances is temporarily withdrawn—that heavy demands are made on brokers to repay money they have at “call” from the bankers. The brokers are then placed in the position of having large sums to repay, and as none of the banks are lenders, they are forced to apply to the Bank of England for assistance. The brokers are then said to be “in the Bank,” and they usually try to get out as soon as they can, in order to escape the higher interest there demanded from them. Formerly the Bank of England declined to discount any bills for brokers and would only make them temporary advances. This rule, however, is now relaxed, and the Bank will either discount approved bills at the “official” rate, or make temporary advances. The bills discounted with the Bank of England are not supposed to have more than sixty days to run before maturity, and must bear the names of at least two British firms, one of which must be the acceptor.

The advances made by the Bank of England are not at “call,” as with other banks, but for a fixed number of days, never less than three, and sometimes for as many as ten. The rate charged varies from Bank Rate to ½ per cent., or even 1 per cent., above that rate.

It follows from this that when brokers have to obtain assistance from the Bank, the rate for money in the open market at once begins to stiffen, as demand exceeds supply; and if any considerable amount has to be borrowed from the Bank, the outside rate will rise until it is on a level with the Official Rate; or even slightly higher, if the Bank is charging above the Official Rate for its advances.

Generally speaking, the aggregate amount of money from all sources available for the use of the market keeps approximately at a level figure, but a portion of it is not always in the same hands; and it is this shifting balance of market money which really controls the rates charged for the use of the whole of the money. If this shifting balance finds its way into the Bank of England, all rates harden, owing to the competition among brokers to obtain money without applying to the Bank. On the other hand, if the shifting balance passes into the coffers of the bankers, the competition among them to lend their funds will tend to reduce the rate of interest which can be obtained for the use of the money.