ABSTRACT
How bills of exchange originate and come into the money market we have already seen in Chapter IV. In the case of the bill drawn by Chung Ling Soo on Steinfelds, it will be remembered that the manager of the Canton branch of a British bank trading overseas made an advance to Chung Ling Soo against the bill before acceptance. When the bill has arrived in London and been accepted by Steinfelds., the London office of the bank, if they do not wish to hold it till maturity., will sell it to a discount house. The difference between the London discount rate and the rate at which the Canton manager made the advance represents profit to the bank. Before dealing with the bill-brokers and discount
houses, it will be well to be clear as to the ultimate consumers of bills-the joint-stock banks. Why can the banks be relied on by the bill-brokers to buy bills ? The reason is this : The outstanding considerations in English banking policy are to keep resources liquid and at the same time to earn interest on them. Apart from the general desirability of keeping resources liquid, since a bank's liabilities are payable on demand (current accounts) or at seven days' notice (deposit accounts) there are certain times of the year at which a bank is particularly in need of ready cash. One such time is the end of December, when, as we all know, there is a certain amount of " window-dressing " in order that the banks' balance sheets may present a favourable appearance in the sense that there is plenty of ready cash available. Another time the banks require particularly large cash resources is during the months of February and March, when clients are drawing large cheques in order to meet income tax. The banks therefore are faced with the necessity of earning interest on money deposited with them in such a manner that a large proportion of that money can be turned into cash at a moment's notice, or better still, will turn itself automatically into cash within a definite time. The way the bank fulfils these two requirements is by :
(a) Investing its money in bills of exchange. (b) Lending money at call or short notice.
