Clean bills drawn upon bankers are discounted at the private rate, while those drawn upon firms in good standing are generally discounted at about % per cent above the private rate.
The Bank of England rate governs the rate of in terest paid on deposits by the London joint stock banks. This rate is generally 1% per cent below the Bank of England rate.
5. Retirement rate.—In cases where bills have docu ments attached, with instructions to accept payment "under a rebate of per cent above the rate of inter est allowed on deposits by joint stock banks," if the bank rate were 4 per cent the deposit rate would be 2% per cent and the rebate rate three per cent. This is known as the "retirement" rate, and the bill is said to be taken up "under rebate" in order that the drawer may obtain possession of the relative goods before ma turity. Such bills are known as D/P bills (docu ments on payment) and are not discounted by Eng lish banks.
6. Importance of the Bank of England rate.— The movement of gold from one country to another, or even the probability of such a movement, is an im portant 'factor in determining the rates of exchange on the countries affected. London, owing to the ex treme sensitiveness of the Bank of England rate to gold movements, is particularly interested in its dis count rate. Suppose, for instance, on account of a low sterling rate, New York commences to import gold from London. The Bank of England, seeing its stock of gold becoming too low, raises its official rate of discount, which is the term applied to the minimum rate at which it will discount approved bills. The London market, whose rate is usually a little lower than that of the Bank of England, will probably rise in sympathy, but if it does not do so the Bank of England, by borrowing money in the open market, will force up the rate and the effect of dear money is soon apparent. The foreign money markets, in order to take advantage of the higher interest rate in Lon don, will allow their balances to accumulate there for investment or will purchase bills on London. Brit ish merchants will decrease their imports and increase their exports. In this way the balance of payments
gradually swings around again in favor of Great Britain. Exports of gold, therefore, cause ster ling rates in New York and elsewhere to stiffen and, if the high rate is maintained sufficiently long, it will check the export and eventually induCe an inflow of gold to London. Thus, the reserves of the Bank of England will again become normal and the rate will then be reduced. The importance of the Bank of England rate in controlling international exchange and gold movements cannot be overestimated, and its effects are so far reaching that monetary conditions thruout the world are directly or indirectly influenced by it. The rate is fixed by the directors of the bank on Thursday of each week and tho as few changes as possible are made, the publication of the rate is always a matter of interest to the financial world.
The Bank of England is, at all times, fully pre pared to make advances against satisfactory collat eral, or to rediscount approved acceptances at its minimum rate of discount. Facilities of this nature naturally create a feeling of stability and confidence among the English bankers, and the protection and assistance at their command in times of emergency enable them to conduct their business on a smaller cash reserve basis than is possible by bankers in coun tries without similar protection.
7. What the Bank of England rate effects.—It has been said that the Bank of England rate acts as a barometer of the financial condition of the world and any features of political or economic significance are reflected by its course.
Mr. A. W. Margraffi in pointing out the import ance attaching to the fluctuation of the discount rate of the Bank of England states the various results which are effected as follows: The discount rate: 1. Establishes the minimum rate at which the Bank of England will discount acceptable paper.
2. Fixes the rate of interest allowed by London joint stock companies on short deposits, since this rate is one and one-half per cent under the Bank of England rate.