BANK RATE is the name given to the price at which the Bank of England states its willingness to grant loans. This price varies from time to time c..ccording to periodical financial conditions, and is generally some what higher than the market value of money for the time being. Though the published rate is a minimum rate, yet under certain conditions the bank will discount bills below it. Large borrowers of money avoid tine, bank if they can possibly do so, because it only lends at the bank rate for a period of seven days, and reserves the right to state for what period the loan shall be made.• • .
The main reasons for the position of financial dictator to which the bank has attained are found in the privilege it possesses in the issue of notes ; in its being the depository of the Government funds ; in the London banks keeping accounts with it ; and in its practice of lending capital to outsiders, that is, to those who do not keep an account there. The reason for variation in the rate is found in the almost automatic operation of the supply of, and demand for, gold. If, money being scarce, there is a great demand for it, the ultimate source of supply, viz. the bank, is bound to put up the rate ; and this is done not only for the sake of profit, tint equally and perhaps more particularly in order to protect its own stock of gold and bullion—the reserves upon which our whole commercial system practically depend. But in times of panic and commercial crises the bank has always readily come to the rescue, with the result that its responsibility over the money market is something no longer to be talked about, but rather to be considered and encouraged as a necessity to the commercial system. Thus in 1872-73 an enormous amount of bills were created with a view to withdrawing gold from England to assist in the payment of the French indemnity to Germany. The bank recognised the danger which might arise from this being carried to too great an extent, crippling thereby the ordinary business of the country, and it rapidly raised the rate of discount. In 1872 there were seventeen changes, and in 1873 twenty-four changes in the rate ; the latter itself varying from 3 to 12 per cent. This was not done with a view to making large profits, but with a view to keeping the public from encroaching unduly upon the reserves, and telling them that it lias a class of business the bank would do everything in its power to keep within reasonable bounds. Before raising the rate, the bank has often to take precautions that it shall be effective. This is done by borrowing largely in the money market and so limiting its supplies, and preventing undue competition from the outside.
The causes of fluctuation in the rate are many and varied ; the varieties themselves interact upon one another, and are, moreover, always increasing.
A few may be enumerated. Since our trade is conducted, as a whole, upon credit, active trade meals increase in the capital required and a higher rate ; when trade is depressed, the rate decreases. When there is a great difference between the values of imports and exports the balance must be finally paid in gold, and the rate rises ; but if large sums are returning to England as repayments of loans, or for interest, the rate decreases. Add to these few instances the above-mentioned necessity to retain the gold reserves as against the bank's own liabilities, and it will be readily seen how strong, compli cated, and ever-working are the forces concentrated upon the bank rate. To raise the rate is to attract gold from abroad and to replenish our stock ; to lower it is to make capital susceptible to foreign attraction. In fact the causes of fluctuation are all affected by, and dependent upon, the reserve. At the time of writing the bank rate is 3 per cent. If the reader will turn to the article on the BANK RETURN, he will find that at the same time the reserve i* considered to be in jeopardy, and the bank is urged to raise its rate. At the corresponding period in the year 900 the rate was 4 per cent., the high amount thereof being accounted for by the reserve being low, and the bank weak owing to a considerable withdrawal of gold for export. In 1899, at the same period of the year, the rate reached the high figure of 5 per cent. This was a memorable week in the history of the money market. The reserve was about a fifth less in amount than in 1901 ; the rate was raised from 31 to 41 per cent. on Tuesday, and on Thursday a further advance was made to 5 per cent. Official rates were put up all over the Continent ; the markets were quite disorganised, and Consols momentarily touched 101f. This was the time of crisis in South Africa. And so we could proceed with this subject did the limits of space allow ; but sufficient has been said to show the reader how to watch the bank rate and understand generally its causes and effects. But before concluding, reference should be made to some more special effects of the bank rate. A high rate restricts trade, stops speculation, and postpones the issue of Government loans, both home and foreign. Low rates have the contrary effect, giving an opportunity, amongst other things, to the speculator on the Stock Exchange to carry over his purchases or sales. Again, the rate determines the interest allowed by the banks for money on deposit, the London banks generally allowing 11 per cent. below bank rate, unless the latter is very low. The day after the bank rate is fixed, the London banks and discount houses advertise in the daily papers their deposit rates. See BANK OF ENGLAND.