The Bank of England as Agent of the Mint.

In theory any person can take gold bullion to the Mint, which, under the Coinage Act, is compelled to give him in exchange sovereigns containing an equal quantity of gold to that left; but nobody ever does, and practically the Bank of England acts as the Mint's agent. By the Bank Act he receives £3 17s. 9d. per ounce, instead of £3 17s. 10-1/2d., the full Mint price, the deduction of 1-1/2d. being about equal to the loss of interest incurred, for the Mint does not bargain to pay out coin immediately on delivery of bullion.

All the bankers in the United Kingdom, we know, obtain their supplies of cash from the Issue Department of the Bank of England, which, as a natural consequence, supplies the currency requirements of the nation. Possessing the only large store of bullion, it can, so to speak, feel the pulse of the whole trading community; and, directly a demand sets in for specie, it sends bullion to the Mint for conversion into coin. This it can do without any loss of interest whatever, for, of course, the bullion is lying idle in the Issue Department. A bank which keeps the Government accounts, and stands in this relation to the other bankers, must of necessity become the agent of the Mint, which, even in its output of silver and bronze coins, relies absolutely upon information received from the Bank of England. The Bank, in fact, supplies both the London and country bankers with these token coins.

As an illustration of this one of those little social amenities which take place between bankers and their clients about Christmas time may be mentioned. Naturally I am not alluding to the higgling occasioned by the increase of advances and bills discounted to meet a growing demand at this period of the year. But many persons, just before the festive season sets in, like to obtain supplies of bright new silver coins with which to anoint the palms of their humbler fellow-subjects, whose manners about that time become aggressively pleasant and ingratiating. These coins they get from their bankers, who receive them from the Bank of England and its branches, either directly or through their agents. As soon as the bankers run short of silver coins, they apply to the Bank, which, being in close touch with every source of demand, is able to guide the Mint on a question of supply.

The Bank of England does not possess a legal monopoly, but occupies this position solely because it holds the final reserve of cash. If the Government and all the bankers keep accounts with the Bank of England, then the Bank must act as the agent of the Mint so long as this state of affairs continues, because its Issue Department has to meet all demands for cash made upon it by the Bank's customers and the holders of its notes; and as these customers, either directly or indirectly, include every large dealer in gold in the land, it supplies the currency as a matter of course. Dealers do not send their bullion to the Mint, because it is more convenient to sell it outright to the Bank, which settles with them immediately, thereby removing all uncertainty as to the length of time coinage will occupy.

It follows, therefore, that the Bank of England has to meet all demands for gold, whether for home or foreign requirement; but it is when gold is leaving the country in large quantities that drastic measures have to be taken in order to stop the depletion of the Bank's reserve of the precious metals, for some of the home drains are only of a temporary nature, and unless capital be greatly in demand at the time they do not affect the rate of interest, as the money flows back to the Bank after a short interval.

The Bank of England on 5th January, 5th April, 5th July, and 5th October pays the quarterly dividends on the National Debt. The Government, which at the present time has to provide over £6,000,000 each quarter, has a huge sum standing to its credit before one of these payments matures, and the sudden release of so much capital often causes the rate of discount to fall, especially during those years when trade is good, and the demand for loanable capital consequently brisk. If times are dull, then the rate will not ascend when the Government is taking money off the market, as the demand upon the reduced resources of the banks will not be sufficiently keen to drive a large number of borrowers to the Bank of England.

We have an illustration of this in the fact that from February, 1894, to September, 1896, trade was so inactive, and demand therefore so small, that the Bank rate stood at two per cent. during the whole period. In other words, we had two and a half years with the Bank rate at two per cent. With trade bad and money cheap, speculation soon became rampant. The gilt-edged variety of securities yielded less, because trade was less productive, and consequently capital, instead of being kept idle in the banks, was transferred to the better class securities, which returned less to the investor in proportion as increased demand forced up prices. With incomes reduced and balances lying idle at the banks, the public developed a speculative mania, and one result was the Stock Exchange boom of 1895, for investment business and speculation always increase when trade is bad. Bad times, in fact, at first add to the business of the House.

Traders keep large balances with the banks for the same reason that the banks themselves have huge sums standing to their credit in the books of the Bank of England, because they are bound to accumulate credit in order to meet their engagements, and, also, to maintain a surplus in case of accidents, such as bad debts and the inability of customers to pay their debts immediately on maturity. When trade slackens and prices fall, producers reduce their output, and the result is an accumulation of credit in the books of the banks. Moreover, a certain proportion of these balances is not then required to finance and guarantee commercial undertakings. Hence the movement to which attention has already been drawn.

But the holders of gilt-edged securities require some inducement in order to persuade them to sell; and this is forthcoming in the shape of accretions to the capital value of their stocks and shares as a result of the increased demand. But the floating capital of the country is not decreased by this exchange. It is left at precisely the same figures. The buyers draw cheques upon their bankers, and the sellers pay the same cheques to their own credit; consequently, the floating capital in the hands of the banks is always about the same, be the times good or bad, so long as speculation or investment is confined to British securities. When, however, foreign securities are purchased, gold sometimes has to be sent out of the country to help pay for them; and it is then that the situation may cause apprehension—for capital is leaving the country. Should the drain prove serious, the Bank would have to raise its rate; and were it to prove continuous, notwithstanding an abnormally high Bank rate, we might have a crisis.

Returning to the dividends on the funds, "Public Deposits" are increased before the above-mentioned dates, and when this money is released, the result is a large addition to "Other Deposits," because most of the money returns to increase the bankers' balances. A small part, however, is taken by the fund-holders in cash; so we may notice a decrease in the Bank's reserve of notes, and, consequently, an increase in the circulation, together, perhaps, with a fall in the bullion, representing the small proportion withdrawn in actual cash. Should the banks, in consequence of this increase in their deposits, be taking bills from the brokers at cheaper rates, then "Other Securities" would also lessen, because the bill brokers would pay off the Bank and borrow in the cheaper market. The converse occurs when the Government is collecting the revenue, issuing a new loan, or borrowing on Treasury bills.

The principal currency drains will be discussed in the following chapter.