Centralization of Financial Transactions in London. - William Stanley Jevons, Money and the Mechanism of Exchange [1875]
Edition used:
Money and the Mechanism of Exchange (New York: D. Appleton and Co. 1876).
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Centralization of Financial Transactions in London.
There is a similar advantage in centralizing foreign transactions in London. In the absence of any general centre each two commercial towns must settle their transactions directly and separately. A merchant will be receiving bills upon the bankers and merchants of many other towns. There is a double inconvenience in this. The supply and demand for bills upon comparatively small places must be comparatively small and variable, and the bills will be drawn upon minor firms, of the soundness of which it will not be easy to get satisfactory information. Many firms, too, in the, present day have houses in several parts of the world, and it would be more convenient that their mutual transactions should be brought to a centre somewhere, just as the transactions of branch banks are brought to a centre in the head office. Thus there arises a tendency to prefer bills drawn upon well-known London banks, or other great London firms, whose credit is known all over the world, and ceteris paribus, such bills will command a readier acceptance in the exchange market. Persons having to draw bills will get a better price if they can draw upon London, which they can do by opening an account with a London firm, and arranging that remittances due to them shall be deposited to their credit in London. It comes to pass that a merchant in America, Australia, or India, will prefer to receive money in London rather than anywhere else. Everyone wishing to remit money can then do so in the form of a bill upon the holders of these funds in London, and the fund will be recruited from time to time by similar bills received and transmitted to London for collection.
This tendency to the centralization of financial business in London is much promoted by the fact that the largest mass of cheap loanable capital exists there. The general rate of interest in New York is at least 2 per cent. higher than in London, so that a trader who has credit enough to obtain loans in London, will make a profit by borrowing there rather than in New York. Thus, instead of first depositing money in London, and afterwards drawing against it, the more usual and profitable form of the transaction is to get a credit there, that is, leave to draw against a banker, making subsequent remittances to recoup the banker accepting and paying the bills. As regards continental trade, Paris, Berlin, Vienna, Hamburg, and Amsterdam are of course highly important centres, but recent wars have occasioned a considerable transfer of financial business to London. Moreover, the great foreign trade of England, reaching into every quarter of the globe, and the distant colonies and dependencies which naturally have financial relations with the capital of the an empire, tend to give London a unique position.
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