MONEY MARKET. This term is sometimes used to include the whole machinery of a financial centre and so to include the Stock Exchange and the instruments of company promotion.
More usually, it is confined to the organization which provides credit of short duration, consisting of the banks which make ad vances for short periods, the discount houses which buy and sell bills of exchange, the accepting houses or merchant bankers which, with the banks, provide trade with first-class bills by putting their name to them for a small commission. Dealers in exchange who buy and sell foreign currencies and foreign bills of exchange, are also sometimes included, but in London the parlance of the City usually confines the term to the banks, the accepting houses and the discount houses.
At the centre of the system stands in London the Bank of Eng land, and in other centres the central bank, which derives most of its power and prestige from acting as banker to the Government and to the other banks, receiving deposits from them and making advances to them, though in London, as will be explained, the Bank of England's advances to banks are seldom made directly.
In America, owing to its vast area, there are twelve central banks known as Federal Reserve banks, co-ordinated under the regula tion of a Federal Reserve board which sits at Washington. The Bank of England is peculiar as a central bank by reason of its freedom from Governmental control, though this freedom is more apparent than real. While in other countries it is usual for the Government, by a poWer of appointing part of the board of direc tors and sometimes by owning part of the capital, to have a direct influence on, or interest in, the operations of the central bank, the Bank of England is by its constitution, a joint-stock bank owned by shareholders who are members of the general public, with its board elected nominally by the shareholders, though in fact any vacancies are filled by the board itself subject to confirmation by the shareholders. But while the Bank of England is thus, in ap pearance, an ordinary company working to earn dividends for its shareholders, the prestige that it gains from acting as banker to the Government gives the latter, as its most important customer, power to exercise strong influence on its policy. In actual practice, the bank and the Treasury work together to regulate England's monetary policy, especially since the World War, which, by creat ing a huge public debt, both long-dated and floating, has made the Government a much more important factor than it was before in the monetary position. On the other hand, in other centres, especially in Europe, although Government influence over the central bank is more direct, the experiences of the war and of the after-war period have demonstrated the necessity for freeing the bank from it as far as possible, especially in the matter of con fining the power of the Government to demand unlimited advances from the bank.
The need for this restriction arises from the fact that advances made by a central bank increase the amount of money, or pur chasing power, in the hands of the community, whether the ad vances are made in the form of bank-notes issued for this purpose or in the form of a credit in the bank's books (as is done in Eng land) against which the Government can draw cheques; the cheques are paid in to their banks by the contractors and others who receive them ; and the advance made to the Government in creases the amount of "cash in hand and at the Bank of England" held by the other banks, and so widens the foundations on which they build their credit operations. The same increase in purchas ing power is effected whenever a central bank makes an advance to any kind of borrower, and its power to widen the basis of credit, when moderately exercised, gives great elasticity to the monetary systems of those countries in which it has been highly developed. Those who charge the English banking system with cast-iron rigidity because the Bank of England's note issue has to be cov ered (above a certain fixed line) pound for pound with gold, f or get that the bank's power to create credits in its books, by making advances or by buying securities, is regulated solely by the bank's own prudence. The ease with which a central bank can create new purchasing power, either by the printing press or by entries in its books, afforded, during and after the war an easy way of financing themselves to impecunious Governments which had not enough courage to tax their citizens or reduce expenditure; when purchasing power is increased without a corresponding increase in goods to be purchased, prices go up and inflation begins with disastrous consequences if carried too far. Hence the need for restricting the demands of Governments on central banks, to which is entrusted the duty of regulating the supply of money so as to maintain the country's gold stock and the exchange value of the currency, which is liable to immediate deterioration if in flation sets in. This duty of maintaining the gold stock has been always an especially important part of the Bank of England's functions, owing to London's exceptional position (now shared by New York) as a free gold market, and by performing this duty and acting as the banker of the Government and the other banks it has long ceased to be a company working for its shareholders (though it incidentally earns them a dividend) and become a na tional institution, working to give the country sound money.