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 existence in many cities of Europe by the middle of the 17th century. (See .)

In the 18th century the “money market” consisted of the Bank of England and various banks and merchants, and distinction between the two being still not complete. Towards the end of that century arose an important class of dealers in credit, the bill brokers, and with their appearance the modern money market of London may be said to have assumed its present

form, for though the process of development has not ceased, the changes have been of the nature of growth and not of the acquisition of new organs. The formation of joint-stock banks and discount companies, however, and the reconstitution of the Bank of England by the Act of 1844, exercised an important influence on the way in which the money market of London has developed. It must be explained that in the every-day talk of the City “the market” has a special meaning, by which only the banks and discount houses, or even only the latter in some cases, are denoted, as in the phrases constantly seen in the daily reports published in the newspapers towards the end of a quarter, “the market has to-day borrowed largely from the Bank of England,” or, “the market was obliged to renew part of the loans which fell

due to the Bank to-day.” But this use of the term in a special sense, thoroughly understood by those to whom it is habitual, and resulting in no ambiguity in practice, is not in accord with the requirements of economic analysis.

The working organs of the money market of London at the beginning of the 20th century were:—

The institutions included in group A are the most constantly active organs of the money market; those included in group B are intermittently active, but in the case of section (4), though their activity is greater at some times than others, they are never wholly outside the market. Even in the case of (5) a certain amount of qualification is needed, which is indicated by the fact that most of the great merchant houses are “registered” as bankers, though they do not perform the functions usually associated with that term in the United Kingdom. Several of the great houses were originally and still are nominally merchants, but are largely concerned with finance business—that is, with the making of loans to foreign governments and the issue of capital on behalf of companies. These powerful capitalists often have large amounts of money temporarily in their hands, and lend it in the money market or on the Stock Exchange; one or two of them are large buyers of bills from time to time, and generally the members of this group may be said to be in sufficiently close touch with the active organs of the money market to form part of it.

The actual working of the money market has been described by Walter Bagehot in his Lombard Street, a work which has attained the rank of a classic. Most of what he said in 1873 is true now, but in certain minor respects developments have taken place, the most important

being the greater extent to which money is “used up” every day, or rather every night. In Bagehot’s time the discount houses only quoted “allowance” rates for “loans at call and short notice,” based on the rate “allowed” by the banks for loans at seven days’ notice; but since then the bill-brokers have been obliged—(1) occasionally to fix their terms independently of the banks, and (2) to “allow” a rate for “money for the night.” This latter practice became usual about 1888 or 1889. The change it introduced was not a vital one, but has some importance from the point of view of the historian. A good deal of the “money” thus dealt with is derived from the group of traders included in class (5). It is (a) money which is temporarily in the hands of houses or institutions which have just received subscriptions to loans or other capital offered to the public; (b) balances left temporarily with finance houses or banks on behalf of foreign governments or other parties who have payments to make in London. In the former case the “money” is almost invariably only available for a short time, probably only for a few days; in the latter case also it probably will be only available for a few days, but may be available for months. Money derived from either of these sources is usually to be had cheap, but is not, in the slang of the City, “good,” because it is uncertain how long loans at call obtained from either of them will remain undisturbed. Nevertheless, there has been at times so much “money” of this fugitive character, and derived from such varied sources since about 1888, that its cheapness has been an attraction to the less wealthy bill-brokers, who have occasionally been able to go on using it profitably for many continuous weeks, or even months, in their business. The risk run by employing it is, of course, the certainty that it will be “called” from the borrower sooner or later, and probably at a time when it is very inconvenient to repay it. The more wealthy houses take money of this kind when it suits them, but never rely on it as a basis for business.

Since Bagehot wrote the growth of the big joint-stock banks has been enormous, not so much through the increased business done by banks generally, though the expansion in banking has been considerable, as by the absorption of a great number of small banks by three or four

large institutions (see ). The growth of these large institutions tends to facilitate combination for purposes of common concern among banks generally—e.g. to support the Bank of England in maintaining its reserve, which is the sole reserve of all the banks, at a proper level, and thus render the money market more stable. Two or three of the banks have for a long time, owing to their large holding of bills, had much more influence than the Bank of England over the foreign exchanges, on which the foreign bullion movements chiefly depend; and since 1890 persons of weight in the joint-stock banking body have implicitly, though not explicitly, admitted a certain degree of responsibility in the matter on behalf of their institutions. It is, however, characteristic of British business arrangements that the question of the responsibility for the reserve of the Bank of England, the ultimate reserve of the whole country, is still in as nebulous a condition, so far as explicit acceptance of responsibility by any institution is concerned, as it was in 1870. There has been no improvement in theory, though in practice there has been real improvement, since Bagehot’s time. The tendency is, indeed, decidedly in the direction of closer combination between the Bank and the banks. On more than one occasion the Bank has, not merely by borrowing “in the market,” but by more or less private negotiations with the big banks, obtained temporary control of large sums belonging to the banks in order to take cash off the market. This proceeding, and its concomitants, did not meet with universal approval; but the results were satisfactory on the whole, and on the later occasions when the measure was carried out there was little or no friction.

The enormous war loans raised by Japan in 1904, 1905, 1906 exemplified aptly the more modern methods of dealing with the disturbance to the money market which such operations produce. The loans were issued by three banks, one of which was a Japanese institution and

represented the Japanese government in the operations connected with the various loans. Of the other two, one was a leading London bank and the other the principal British bank doing business in China. These large loans were issued with the minimum of disturbance to the London money market. The very large amounts of cash which were suddenly withdrawn from other banks, and deposited with the institutions issuing the loan as “application money,” were lent out again in the short loan market as soon as possible, usually on the afternoon of the day of issue. The work involved was very heavy, as a great number of cheques had to be cleared in a brief space of time, but by skilful organization this was done. Similar promptitude was displayed when the successive instalments on the loans