Bank rate

“ By fixing the rate at 2-1/2 per cent., or 3 per cent., or 4 per cent., they can regulate the rate we fix for our own customers. We regulate our deposit rate in accordance with the bank rate. We also regulate the rate we charge for our loans in accordance with the bank rate, and we are bound by it to a certain extent, and they themselves feel at liberty to depart from it. ”

“ Therefore, advancing the rate of interest may check for a time, but will not stop altogether, the shipment of bullion, but it may attract here some of the gold held by the Bank of France. The bank rate does not govern the street rate, and a further advance by the bank, which it is very likely may be made, is not to be considered as indicating that we are to have a dearer money market. ”

“ The Bank could not on their own principles, then urge that most erroneous opinion, that the rate of interest would be affected in the money market if their issues were excessive, and would therefore cause their notes to return to them, because, in the case here supposed, the actual amount of the money of the world being greatly diminished, they must contend that the rate of interest would generally rise, and they might therefore increase their issues. ”

“ Under almost any sensible banking system the rate of discount is one of the regulators of the volume of credit relatively to reserve. If there is undue expansion of credit relatively to the reserve, the rate of discount is raised to curb it. If, on the other hand, there is a plethora of reserve, the rate of discount is lowered to stimulate an increase of credit. As the expansion and contraction of credit are directly related to the price level, the rate of bank discount is thus concerned very vitally with the price level. ”

“ The applications to the Bank for money, then, depend on the comparison between the rate of profits that may be made by the employment of it, and the rate at which they are willing to lend it. If they charge less than the market rate of interest, there is no amount of money which they might not lend,—if they charge more than that rate, none but spendthrifts and prodigals would be found to borrow of them. We accordingly find, that when the market rate of interest exceeds the rate of 5 per cent. ”

“ The sole particular in which national banks are placed on an equality with natural persons is as to the rate of interest, and not as to the character of contracts they are authorized to make; and that rate thus ascertained is made applicable both to loans and discounts, if there be any difference between them. ”

“ Where the loan is a small one, however, the directors will not trouble themselves greatly as to whether it either goes or remains.
The much-vaunted 1 per cent. above Bank rate is, of course, only paid by the small man, whose securities are not of the better class, and by the customer who has not studied the market. ”

“ Coming to provincial banking, we have seen that the large merchants and manufacturers remit some of their best trade-bills to London; but in the great cities, where the banks are numerous, the competition for good paper is considerable; and as the customer usually keeps his current account at the bank with which he discounts his bills, he can generally, if his account be worth retaining and his credit good, get his paper discounted at Bank rate, or even slightly under when the market rate is below it. ”

“ When common wages were $5 a day, the ordinary bank rate of interest was twenty-four per cent. per annum. Now that20 common wages are $2 or $2.50 a day, the ordinary bank rate is from ten to twelve per cent. ”

“ At a smaller rate than upon their deposits, I presume?—I think at a smaller rate, but I believe it is a fixed rate on the minimum balance for some period, either six months or one month, I do not exactly know the period. I think I ought to add (and I believe it is the case with all the banks) that the London and Westminster Bank, from the day of its first institution until the present day, has never re-discounted a bill. No bill has ever left our bank unless it has been for payment. ”

“ And first, to take the minimum rate to be charged on the £11,000,000 of42 notes issued on the loan to Government. On these £11,000,000, as has been more than once observed, the Bank receives 3 per cent. from Government in addition to the profit which it derives from operating on the notes issued in lieu thereof. Assuming therefore, as a not unreasonable rule, that the Bank and the State should share this extra 3 per cent. on equal terms, it would follow that 11⁄2 per cent. to each would be a fair participation of the profits; and if we allow the Bank an additional 1⁄2 per cent. ”

“ All one has to do, therefore, in order to ascertain the London rate for money on deposit-receipt is to deduct 11⁄2 from the Bank of England rate which may be seen in the city-article of every newspaper. Whether or not certain banks offer special rates to favoured individuals is a matter of opinion; or, again, they may bid higher for large sums for fixed terms; but the small depositor may take it for granted that, with their rates on loans and advances reduced by competition among themselves, the banks are determined to keep down the deposit rate. ”

“ The banks in consequence have less to lend to the brokers, who are then bound to apply to the Bank of England, which compels them to discount their bills at its own terms, and the rate in the outside market, of course, advances. ”

“ Having disposed of the paying average credit balances we can now discuss those accounts that [42] have a large turn-over. A trader, for instance, who draws a considerable number of cheques during the course of a half-year, and whose balance is small, cannot expect his banker to work his account free of charge; but it is difficult to draw up a table showing what he ought to pay, for the simple reason that some bank-managers debit him with a rate which they think he will stand. A 1/16 per cent. commission, that is to say, 1s. 3d. upon each £100 he draws out by cheque, seems a very full rate ”

“ The new offices may find a difficulty in this which they have not estimated, and which may materially interfere with their profits; although it is more than probable that even this objection is over-rated, because there are principles which govern the interest of money, quite as certain as those which govern life, and because the rate of discount of the Bank of England is no safe criterion to those who are out of the money market. ”

“ Oftentimes with the New York banks to-day any rate which they can secure for their money whether losing or not is acceptable as helping to meet this fixed interest charge on bank deposits. To pay 2 per cent. for deposits and to keep a 25 per cent. reserve a bank must loan its money at 2-3/4 per cent., to come out even, taking into consideration the actual expense of making and recording the transaction. It is better to loan at 1-3/4 per cent., however, than to let the money lie idle. It is better to lose 1 per cent. ”

“ Bank, in order to arrest a drain of gold outwards, raises its rate, when the other banking companies, equally anxious to stop the efflux, raise their rates too, with the result that borrowers, whether upon bills or securities, have to pay more. ”

“ During this period the legal maximum of the circulation of a bank is its paid-up capital plus 15 per cent. of its combined paid-up capital and surplus or rest fund. This emergency circulation, which consists of notes in form and in other respects exactly like the regular issues, is subject to a tax at a rate not to exceed 5 per cent. per annum, the rate being fixed by the governor in council. If a bank's circulation does not exceed its paid-up capital, it pays no tax. ”

“ Those who advocate the return to a gold standard do not always appreciate along what different lines our actual practice has been drifting. If we restore the gold standard, are we to return also to the pre-war conceptions of bank-rate, allowing the tides of gold to play what tricks they like with the internal price-level, and abandoning the attempt to moderate the disastrous influence of the credit-cycle on the stability of prices and employment? Or are we to continue and develop the experimental innovations of our present policy, ignoring the “bank ratio” ”

“ The fortunes of the group of individuals representing the bank is less doubtful than that of any one person. The borrower in this instance pays in the discount of his note the difference in risk between his fortune and that of the combination. Such deposits purchased upon credit must be distinguished from deposits of cash, lest the bank should nominally increase its power to lend while in fact it has already lent up to its ability. Sometimes such nominal deposits are maintained by persons deeply in debt for the sake of paying a larger rate of interest than is allowed by law. ”

“ It can regulate the reserve by alternately selling securities for cash and loaning cash on securities. The more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. In the long run a bank maintains its necessary [Pg 145] reserve by means of adjusting the interest rate charged for loans. If it has few loans and a reserve large enough to support loans of much greater volume, it will endeavor to extend its loans by lowering the rate of interest. ”

“ If, however, his [76] business be in a healthy condition the corner will soon be turned; and as his payments in begin to exceed the cheques he draws, his indebtedness to the bank speedily sinks below the average. Each payment to his credit reduces his debit balance, and every cheque debited, of course, increases it, but as the banker charges him a rate upon the sum owing at the end of each day, it follows that the customer only pays interest upon the actual money he has borrowed—not upon the amount of the “limit” as does the London client upon the amount of his “loan.” ”

“ In the ultimate analysis, and outside of its function of insuring credit, a bank is really an intermediary between borrowers and lenders. It is by virtue of bringing borrowers and ultimate lenders together and providing the former with a supply of loans which would not otherwise exist, that a bank simultaneously tends to lower the rate of interest and increase the supply of credit currency. ”

“ The reader should be mindful that deposits and reserves tend to expand simultaneously and that the Federal Reserve's control often is exerted through the market place as individual banks find it either cheaper or more expensive to obtain their required reserves, depending on the willingness of the Fed to support the current rate of credit and deposit expansion. ”

“ The money of savings bank depositors should be invested in bonds and mortgages and then could be made to yield a net return of over 5 per cent. If the depositors were not allowed to check upon their accounts they would be a source of such little expense to a bank that it could easily afford to pay them interest at the rate of 4 per cent. At the present time the banks are paying 3 per cent. interest on money which they are lending to commercial borrowers and for the care of which they are maintaining an expensive force of clerks. ”