Marketable Securities

MARKETABLE SECURITIES The Discount Market.—The bill of exchange possesses both the special attributes of liquidity. Not only is it a genuinely short dated security with safeguards for prompt payment at maturity, but it is also marketable. Banks can sell bills to one another, and when a bank has to make large and unforeseen payments, its holding of bills forms a secondary reserve behind its cash. There are degrees of marketability. The facilities for dealing in bills of exchange in any centre are not necessarily adequate to meet the requirements of banks. The most highly organized market in bills is to be found in the London discount market or money market. Here there is a class of dealers, the discount houses, specializing in the buying and selling of bills. They not only act as intermediaries between the banks which want to sell bills and those which want to buy; but they buy and hold bills on their own account. To provide funds for this purpose, they borrow money from day to day, at call, from the banks and other lenders with free balances. It is the dealing in this day-to-day money that constitutes the money market properly so called.

Rediscounts.

To the banks the loans to the discount market represent their most liquid asset. The borrowers are dealers in the most liquid of all securities, the bill of exchange. But that is not the whole story. It happens from time to time that the volume of bills coming into the London market for sale is exces sive in relation to the capacity of the banks to absorb them. If the market were left entirely to itself the effort to dispose of the bills might result in the rate of discount and the rate of interest on day to day money being forced up to an exorbitant level. But the Bank of England intervenes on such occasions, and stands ready to lend to the discount houses or buy bills from them at a specified rate (bank rate). In other countries, where no counter part of the London discount market exists, substantially the same result is secured by the presence of a central bank which undertakes to buy or rediscount bills for the other banks. There is a market in bills because the central bank is always a willing buyer at its own price (bank rate). The functions of a central bank are further explained below and in the article CENTRAL