Weekly Differences in the Return.

It were better, before proceeding further, to give a copy of the Bank Return as it appears in the daily papers each Friday, when comparisons are made with the figures of the preceding week, and the various differences carried into distinctive columns. That for the week ended Wednesday, 1st October, 1902, has been selected, in order that the figures may be the same throughout this volume. The statement is given below:

Issue Department.

Banking Department.

Why, it may be asked, is so much importance attached to this return, and why do the critics, each week, endeavour to state precisely how much the "market" has borrowed from, or repaid to, the Bank, and to explain the cause of the various accretions and diminutions in the different assets and liabilities? With regard to the latter attempt, each critic, it is said, is quite convinced that he alone understands the true inwardness of the various movements which result in the increases and decreases recorded in our table; but it is just whispered that those persons at the Bank of England who know the cause laugh at their deductions.

The return is of the greatest moment to the public, for the simple reason that it shows the ratio per cent. of the Bank's reserve of notes and cash in hand to its liabilities, and, also, the amount of coin and bullion in the Issue Department. The Bank holds the final reserve; and if demand is brisk and the other bankers have advanced largely to the outside market, the bill brokers are driven to the Bank. As the banking companies have advanced all their spare capital, demand can only be supplied from the reserve at the Bank of England; and the Bank, which must protect its gold, checks demand by charging high rates to all who borrow.

The return, then, tells us whether loanable capital is likely to be cheap or dear. If the ratio to liabilities be small, and the store of gold diminishing, we know that demand has reached the Bank, and that money will be dear. When money is dear, Consols and other so-called gilt-edged securities are almost certain to fall in value. If it become really scarce, then the banks, which lend huge sums on the Stock Exchange, charge the brokers enhanced rates, and "carrying over" becomes difficult. Numerous speculative accounts have to be closed, and securities, consequently, fall in price.

Now, a glance at the return of 1st October, 1902, shows that the ratio on that date is 44·6 per cent., and the Bank's discount rate four per cent. The bullion in the Issue Department decreased £1,492,620, and the Bank, in order to arrest this drain, raised the rate from three to four per cent. The political unrest in France, which at first threatened to disturb the London money market, and the tightness of money in New York, were, undoubtedly, two factors which largely influenced the decision of the directors, who, no doubt, also took into their consideration the fact that the autumn demand for currency might further reduce their reserve. Noticing that Consols were at 93-1/8, and believing that the stringency was only temporary, one might feel disposed to buy, trusting that cheaper money during the earlier part of the new year would drive them up to 96 or so.

The weekly return of the Bank of England, then, is the barometer which tells us whether loanable capital is either scarce or abundant, dear or cheap; and, when read with the Board of Trade returns and the foreign exchanges, it enables us to guess, with more or less uncertainty, but still intelligently, and with a degree of probability, whether or not money is likely to be in future demand. The Railway and Bankers' Clearing House returns, too, indicate the course of trade, and are of more than academic interest. It is, however, always wise to remember that finance is not an exact science, for if it were the theorists would be fabulously rich; and we know that they are generally so hard up as to be compelled to write books and financial articles for a living.

Now we can see why the Bank of England's weekly balance sheet is keenly interesting to every person who possesses capital either to lend or to invest, to dealers in bills and securities, and to every speculator on the Stock Exchange, as a strong or a weak return may make all the difference to the rates charged on "contango" day. Borrowers and lenders are equally concerned, for the rate of interest does not depend upon the caprice of any individual or of any bank, but is solely the outcome or result of demand and supply; and demand, when the banks have exhausted their supplies of spare capital, then centres itself fiercely upon the Old Lady of Threadneedle Street simply because she holds the final reserve of cash, and for no other reason whatsoever.

Reverting to our statement, we find that the increases and decreases of the various totals balance each other; and if the differences agree, then the assets and liabilities, on adding the Bank's capital of £14,553,000 to the latter, must also balance each other, for the simple reason that the Bank keeps its books by double entry. The best system of bookkeeping which can possibly be adopted is the simplest system, because the very fact of accounts being complex and involved is sure to result in a multiplicity of mistakes, which prove that the system is faulty. In double entry there must be a debit for every credit; so every sum debited to one account in the books of the Bank of England is credited to another or to others; and as the assets and liabilities in the statement tally, therefore the balances in the last two columns, which are the result of multitudinous debits and credits made during the week, must agree also. But how is it possible for an outsider to follow these internal movements? He simply cannot. Consequently his deductions made from the differences shown week by week are sometimes very wide of the mark, and, for his own reputation's sake, it would be wiser if he were to confine his remarks principally to the all-important questions of the ratio in the Banking Department and the bullion in the Issue Department.

For instance, simply with the differences in question to go upon, it may be said that the return shows that the market has borrowed largely from the Bank, "Other Securities" being up over £5,000,000. Part of this amount increased "Other Deposits," and a transfer was also made to "Public Deposits" in order to pay the Government for £2,000,000 of Treasury bills, while the accretion to "Government Securities" seems to indicate that the Government borrowed a certain sum from the Bank on Ways and Means, and that loans were made to the market on this class of security.

In London the "loan account" system is greatly in evidence among the banks. That is to say, when a customer is granted a loan for, say, £10,000, his current account is credited £10,000, and a loan account, opened in his name, is debited £10,000. The interest is calculated upon the loan account, and the advantage resulting to the banks is too evident to call for explanation in these pages.

When loans are made by the Bank of England, accounts which increase "Other Securities" are debited, and other accounts, which increase "Other Deposits" are credited—if the loans are made to the public. Should the loans be made to the Government, "Public Deposits" and "Government Securities" also increase proportionately from the same cause. The Bank, because it keeps the bankers' accounts, occupies a peculiar position in relation to these entries, and that position will be discussed in a later chapter.

The notes in the Banking Department have decreased £2,694,960 and the specie £17,314, so, if we add these two sums together, the total, £2,712,274, represents the diminution in the reserve. A glance at the Bank's liabilities shows us that they have increased appreciably, and as the reserve has shrunk considerably, it follows that the ratio is very much smaller than that of the previous week. Indeed, the reserve had not fallen so low since May; and the monetary outlook being uncertain, the directors, as a precautionary measure, raised the rate of discount.

Next, suppose that we wish to ascertain the amount of cash which has been withdrawn from the Bank to meet the demand within the country. The bullion in the Issue Department is £1,492,620 down, and the coin in the Banking Department £17,314; so the Bank has lost £1,509,934 in coin and bullion. But £730,000 was exported during the week; therefore, if we deduct £730,000 from £1,509,934, the difference, £779,934, is the amount that is gone into home circulation.

But, it may be asked, how can one ascertain the amounts of the exports and imports of the precious metals? Late in the afternoon of each day the Bank exhibits a statement on its walls giving this information, and it was from these placards that it was ascertained that the sum in question had been sent abroad. Hence it is possible to learn how much cash was withdrawn from the Bank for home requirements during the week, or, better, the amount of the efflux on the day of the publication of the return.

But, as has already been explained, these deductions are not always reliable.