The Old Lady

By CHARLES CROOT

EVERY Thursday, at a little before noon, a man rises from a conference table in the heart of the City of London, and walks across a room to open the inner of a set of double doors. On the other side, one of four waiting men, hearing the movement inside, opens the outer door.

On most Thursdays, the man by the inner door says: 'No change.' Sometimes, however—per- haps two or three times a year—he announces a change. In either case, the Court of Directors of the Bank of England have announced to their senior officials at what level Bank rate shall be for the following week.

The announcement is made by the Bank Court of eighteen men, the Bank's Governor, Deputy Governor and sixteen Directors, and is sent, within minutes, to every financial centre in the world. The Bank itself advises a number of interested organisations, at home and abroad, and the commercial news agencies in London look after the rest.

Bank rate is, in effect, the minimum level of interest that the Bank of England charges on the money it lends to financial institutions. The amount of private banking business done by the Bank now is negligible.

By tradition, many other interest rates— including those charged by the private banks for some of their advances—are linked in some way or other to Bank rate. A change in Bank rate, therefore, has the objective of making money generally either more expensive or cheaper for those wanting to borrow, thereby tending to dis- courage or encourage borrowing, according to the direction of the change.

This, at least, is the classic theory of using changes in Bank rate as a means of regulating the economy. In recent practice, however, minor changes in Bank rate may have been less and less effective as a means of imposing monetary policies unless supported by appropriate policies in other fields. There are those in the City of London who maintain that the last occasion on which a change in Bank rate was really effective was in September, 1957, when Bank rate was raised from 5 to 7 per cent. as a crisis move to stop a run on sterling due, principally, to the strength of the West German Deutschemark and rumours that it might be revalued—upwards—in terms of the pound, and fears of further inflation in Britain.

There is little doubt that this dramatic increase in Bank rate—coupled, however, with other financial moves all pointed in the same direction —did halt a movement of money out of London. With short-term money suddenly capable of earning 7 per cent. or more in London, the out' flow halted and money began to return. But this was an exceptional occasion. In other times, a minor change in Bank rate, even of 1 per cent, has done little more than serve warning on the country that, in the Bank's opinion, the economy needs either stimulating or restraining.

This, of course, is one of the Bank's male functions. The Bank has a prime responsibilitY of seeing that enough money is circulating to paY. at current prices, for all the goods and services being produced.

If it were quite as simple as that, it might be easier to control the circulation of money by merely slowing down or speeding up the rate at which it was issued. But money does manY jobs in the course of its life and, generallY speaking, money changes hands faster as an economy expands and slower as it contracts-- almost irrespective of the amount of money Irl circulation. And the rate at which money changes hands—the velocity of circulation—is a factor largely beyond the direct control of the Bank of England. If everybody is bent on a spending spree, and it appears to the Bank that the rate of spending is too high to be healthy, it earl try to influence the amount of money in circula- tion and, thereby, the velocity of circulation.

Since there are definite limits to the level to which the velocity of circulation can rise, re- ductions in money circulation have been not in- frequently effective as a means of controlling the economy. But if the .economy is contracting, because people are not spending freely, fearing bad times to come, an increase in money circula' tion by itself will not necessarily encourage them to spend more.

One way of controlling the amount of money in circulation is the pursuit by the Bank of 311 'open market policy' when the Bank, acting through the Government Broker, enters the gilt-edged market and buys or sells government securities. If it buys, money is pumped into the economy and the private banks find themselves; with increased capital to offer borrowers. If , sells, money is withdrawn from the economy an a money becomes scarce. The pursuit of an open market policy and a change in Bank rate often go hand in hand, with the former sometime paving the way for the latter.

The Bank of England's role in helping to keep the economy healthy, by trying always to keep supply in approximate balance with demand, 7 the best known of the parts it plays in the national life. It has a number of other functions.; equally important, if less dramatic. Primarily, is the banker's bank, linking together all the commercial banking institutions. The private, commercial banks and other financial institutions traditionally keep around 8 per cent. of their total deposits in cash and keep substantial proportions of their funds at the Bank of England, where they are available on demand.

The Bank of England is also the Government's banker—a role for which it was first founded, in 1694. At that time, when Britain was at war with France, its main function was to supply the Government with the money needed to finance its troops across the Channel.

Today, after two and a half centuries not without difficulties, anxieties, criticism and opposition, the Bank of England takes care of all the Government's revenue and keeps all the Government's accounts. In this connection it acts, for the Government, very much like any private bank for its,own customers, performing a variety of services. It manages the National Debt—a job which occupies almost half the Bank's staff—and this involves handling nearly three million separate stock accounts, including making more than six million dividend payments a year. And it also makes arrangements for pro- viding funds to meet the fluctuating, short-term needs of the Government. Although the Govern- ment, in its yearly Budget statement, makes full allowance for its financial requirements in the following year, revenue from taxation does not come in evenly over the period. The Govern- ment must, nevertheless, make substantial pay- ments regularly, week by week and month by month, for example, by paying the Civil Service.

The Bank's function is to estimate the effect of the Government's short-term requirements upon the supply and price of loanable funds in the market and then advise the Government what adjustments to make in its weekly borrowings, through the issue of Treasury Bills. By so doing, the Bank reduces to a minimum dislocation that might otherwise be caused by irregular move- ments. The issue of currency, in the form of Bank notes, is another task performed by the Bank; and so is the control of foreign exchange.

All these activities make the Bank the best informed financial institution in the British Commonwealth. And the knowledge that the publicly-owned Bank has no profit-motive in its make-up puts it in a unique position to command respect, in the City and elsewhere. Certainly, as far as the City is concerned, the Bank's views on probable developments, as signalled by movements in Bank rate and by manceuvres in the open market, are given the closest attention. This is why a change in Bank rate, despite all the criticisms over its direct effectiveness, still has a powerful psychologica effect on the economy, as it discloses the monetary authorities' views of the future.

And it is significant that this powerful fluence is brought to bear by a few quietlyf spoken words from a member of the Courtci Directors, through an open door, to an attentive audience, every Thursday, just before noon.