“It is stated by Mr. Rodwell, the Chairman of the Association of the Private Country Bankers" [distinguished from joint-stock banks], "and delegated by them to give evidence to your Committee, that in the neighbourhood of Ipswich this practice has lately increased four-fold among the farmers and shopkeepers of that district; that almost every farmer, even those paying only £50 per annum rent, now keeps deposits with bankers. The aggregate of these deposits of course finds its way to the employments of trade, and especially gravitates to London, the centre of commercial activity, where it is employed first in the discount of bills, or in other advances to the customers of the London bankers.” (p 496)
The London banks, unable to loan all of these deposits, utilise the other funds to discount bills for the bill brokers or discount houses. In other words, these discount houses, provide cash for commercial clients, by discounting their bills. The banks then, in turn, discount these bills for the discount houses, therefore, providing them with the liquidity to conduct their own discounting activities. The basis can be seen here for the development of the London Interbank Operations (LIBOR).
“What this leads to is shown by the following:
"Extensive fictitious credits have been created by means of accommodation bills, and open credits, great facilities for which have been afforded by the practice of joint-stock country banks discounting such bills, and rediscounting them with the bill-brokers in the London market, upon the credit of the bank alone, without reference to the quality of the bills otherwise" (loc. Cit., p. XXI).” (p 497)
If that sounds familiar it is the same process that stands behind financial derivatives today, and which played a major role in the financial crash of 2008.
Marx quotes an article from “The Economist” of November 20th 1847, concerning the swindles that could arise from the accumulation of these bank deposits in the country banks. It related that, in agricultural areas, the banks found insufficient demand for money-capital to properly utilise the money in their deposits. At the same time, banks in commercial, industrial and mining areas had more demand for money-capital than they could meet from their deposits. This led to the development of these bill brokers and discount houses, who were really “bankers upon an immense scale”.
They effectively arbitraged this difference, taking funds from the country bankers, in agricultural areas, as well as deposits from large public companies and merchants, and then advancing this money-capital at higher rates to banks in those districts where money-capital was in greater demand.
“... and in this way Lombard Street has become the great centre in which the transfer of spare capital has been made from one part of the country, where it could not be profitably employed, to another, where a demand existed for it, as well as between individuals similarly circumstanced.” (p 497-8)
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