Lombard Street : a description of the money market eBook

This eBook from the Gutenberg Project consists of approximately 238 pages of information about Lombard Street .

CHAPTER V.

The Mode in Which the Value of Money Is Settled in Lombard Street.

Many persons believe that the Bank of England has some peculiar power of fixing the value of money.  They see that the Bank of England varies its minimum rate of discount from time to time, and that, more or less, all other banks follow its lead, and charge much as it charges; and they are puzzled why this should be.  ‘Money,’ as economists teach, ‘is a commodity, and only a commodity;’ why then, it is asked, is its value fixed in so odd a way, and not the way in which the value of all other commodities is fixed?

There is at bottom, however, no difficulty in the matter.  The value of money is settled, like that of all other commodities, by supply and demand, and only the form is essentially different.  In other commodities all the large dealers fix their own price; they try to underbid one another, and that keeps down the price; they try to get as much as they can out of the buyer, and that keeps up the price.  Between the two what Adam Smith calls the higgling of the market settles it.  And this is the most simple and natural mode of doing business, but it is not the only mode.  If circumstances make it convenient another may be adopted.  A single large holder—­especially if he be by far the greatest holder—­may fix his price, and other dealers may say whether or not they will undersell him, or whether or not they will ask more than he does.  A very considerable holder of an article may, for a time, vitally affect its value if he lay down the minimum price which he will take, and obstinately adhere to it.  This is the way in which the value of money in Lombard Street is settled.  The Bank of England used to be a predominant, and is still a most important, dealer in money.  It lays down the least price at which alone it will dispose of its stock, and this, for the most part, enables other dealers to obtain that price, or something near it.

The reason is obvious.  At all ordinary moments there is not money enough in Lombard Street to discount all the bills in Lombard Street without taking some money from the Bank of England.  As soon as the Bank rate is fixed, a great many persons who have bills to discount try how much cheaper than the Bank they can get these bills discounted.  But they seldom can get them discounted very much cheaper, for if they did everyone would leave the Bank, and the outer market would have more bills than it could bear.

In practice, when the Bank finds this process beginning, and sees that its business is much diminishing, it lowers the rate, so as to secure a reasonable portion of the business to itself, and to keep a fair part of its deposits employed.  At Dutch auctions an upset or maximum price used to be fixed by the seller, and he came down in his bidding till he found a buyer.  The value of money is fixed in Lombard Street in much the same way, only that the upset price is not that of all sellers, but that of one very important seller, some part of whose supply is essential.

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Lombard Street : a description of the money market from Project Gutenberg. Public domain.
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