Short and Long Rates of Interest

IT is a little surprising that the abundant literature of the London Money Market should show so little sign of curiosity on what might well be expected to be one of its main interests: the relations between the different prices in the market; in other words, the relations between the different rates of interest on capital supplied for short and long periods. Why do the average levels of short and long rates differ ? How far is it true that these two sets of rates rise and fall together ? And, finally, are changes in long rates appropriate in magnitude to corresponding changes in rates for short loan money? To some of these questions, no doubt, market experience can readily give a general answer. This paper is concerned with the answers given by such figures as are available for the purpose. The development of the London Short Loan Market has been greatly favoured by fortune. Its supply of short loan money could hardly have been so abundant had historical events given our banking system any other than its present form. For the practice of our English banks of offering either cheque-making facilities or a rate of interest in exchange for deposits is peculiarly efficient in attracting the spare funds of the public. At the same time the highly centralized character of the system makes it convenient for bankers to lend a substantial part of these deposits for short periods and by so doing to provide, perhaps, two-thirds of the total supplies available in the London Discount market. On the other hand, innumerable uses for short period supplies of capital arise from our vast merchanting operations. And these uses, expressed in the form of bills, and supplemented by the needs of the Stock Exchange, provide a wide and ample demand for short period funds. This great and even development of the two sides of the London market, in sharp contrast to that of New York, has naturally had its balance disturbed by the finance of war. A great increase in its supplies, together with a decline in the volume of bills to about one-half of a pre-war amount estimated at ?350,000,000, left a deficit in demand which has been filled, and much more than filled, by Treasury bills. It would be interesting to speculate on the level which short loan rates may reach when recovery in our foreign trade expands the volume of commercial bills. But we are concerned here with rates as they have been and as they are. First

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  Open Access•Lucy Brillant•Journal of the History of…•2024

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