The adventure of the money store: Part 1, money
“Bah,” said Holmes, throwing down the agony column of the Financial Times, “as if home prices are the same as home builders.”
“Home prices in both the
It seems my lot in these matters to echo Holmes’ pronouncements. “The money store?”
“The kingdom where brother Mycroft rules,” said Holmes with a satisfied drawl.
“You are right in thinking that he is under the British government. You would also be right in a sense if you said that occasionally he is the British government.”
– Arthur Conan Doyle, The Bruce-Partington Plans
Portrait of a banker?
Mycroft Holmes, from The Greek Interpreter
He stretched out his long legs, flexing the points of his black leather boots. “What say you to a visit to the City of
“The fish market? What has that in common with men of enterprise and deep finance?”
“Let us go then, you and I …” murmured Holmes futuristically. “Shall we?”
“We talk proudly of man’s discovery of fire, as if homo sapiens deserves credit for observing and containing what is so plainly before him. No, the true invention, if one sets aside mathematics as divinely inspired, is money. To be precise, paper money. Think of it!” he exclaimed as the pungent aromas of Billingsgate heralded its proximity. From his waistcoat he removed a five-pound note.
“What is this?”
“Why, five pounds.”
“Of silver, as was prescribed? No, this is paper. Mr. Pitt the Younger began issuing it, in 1797, to finance the war against
“And a very good thing too,” he added in a lower tone, “else we should all be saluting Bonaparte’s heirs. Paper, Watson.” He waved it like a leaf. “Why is this worth five pounds? Because you and I believe it to be worth so. And we can exchange it for goods.” By now we were deep in Billingsgate, stalls filled with crushed ice displaying carp, bream, trout, cuttlefish, octopus, squid, scallops, flounder, haddock, pike. “Hear those voices, Watson? Those fishmongers crying for our custom? They are competing to exchange their produce — their valuable, consumable produce — for this paper. And what makes the paper valuable? The Bank of England.”
And in a hundred years, they will have an internet logo
He gestured in the direction of Threadneedle Street. “Read that note.”
Written right on the note, I promise to pay the bearer on demand …
“It is signed, you see, signed by Her Majesty’s faithful Treasurer, who makes his pledge, his promise to redeem it.” He restored the note, with a protective pat, to his billfold slipped back into his coat.
“And with money, comes that other great creation, the market.“ Holmes twirled before me, his arms outstretched as if he had summoned Billingsgate into being, and I suppose it was his point that our money had in some sense done so — when there are buyers and sellers, they meet and it becomes a marketplace. The stalls, the vendors crying their wares, the hustle and bustle, all of us — all brought together, in the closest and most confined space, there for one purpose only — to transact business. To exchange wares for paper, paper for wares, an endless cycle.
“It is very efficient,” I said with realization. “All this activity, all this energy.”
“It is the hub of our commerce. Note how it is specialized. Shellfish over here, large ocean fish there, crawfish. Ice for the larder. Salt. Cutting implements, sideboards, utensils, crockery, pans of copper and brass and tin. Even, at some small remove, sideboards, drop-leaf tables, all the accoutrements of storing, preparing, cooking, and eating fish. All in one place.”
“But why do the merchants choose to congregate adjacent to their competitors? Or is it their customers that bring them here?”
“You have hit upon it, Watson. Were the choice left to the vendors, they each would prefer to have the field to themselves. But the customers like the convenience, so the vendors follow the money. Follow the money,” he repeated. “I like the sound of that. Which brings us,” he added as we strolled west from Billingsgate and Cheapside —
— the piscine aromas wafting away from us downriver to Wapping Steps, “to the market of finance. The City. And the Diogenes Bank.”
The money store, viewed from outside
We stood before it. “Shall we?”
Inside, Holmes murmured a few words to the guard, who immediately reached for his speaking trumpet as we turned away, Holmes with his top hat and stick held in hands clasped behind his back. In a moment a brisk young man with shining center-parted hair plastered to his skull hurried himself up. “Carlton Adams,” he said breathlessly. “The Director is occupied at present, although he conveys his greatest delight at your unexpected arrival and assures me the delay shall be no longer than a few minutes. Should you care to wait?”
“I should rather you escort us throughout the building, from bottom to the Director’s top-floor office, and in so doing make our wait both enjoyable for me and instructional for my friend Dr. Watson.”
Carlton Adams bowed. “It would be a pleasure. This way, please, and he led us to that newest of inventions, the elevating engine, guarded by a double sliding grate of black iron that was folded back with a crisp clatter by a small cheerful man who then threw over its lever with the greatest of enthusiasm.
“We are descending?” I asked Holmes.
“Why yes,” said Carlton Adams. “To see the gilts.”
“Gold?”
“Some, yes. Vaults of the stuff, in fact,” Holmes commented. “For all that I praise paper money, our system is still backed by gold, and it would be dubious indeed were we to detach our currency from fiscal anchor. Gold,” he mused, “is the most secure commodity,” the safest. As such it is the foundation. May we see some?”
Carlton Adams nodded eagerly. “Oh yes, sir, and so lovely is its gleam!”
“Money,” said Holmes a few moments later, as Carlton Adams returned us, slightly dazzled, to the lifting device, “that is, investment capital, can be bought and sold — which is equity, hard or soft. And it can be rented, with debt also hard or soft. But regardless of the form, equity or debt, it has a price, and that price is measured in yield, the weighted average cost of capital. We saw with my friend Musgrave that he needs capital.” “
Musgrave had expensive tastes, and vast ambitions.
“He comes to the City as a fishmonger comes to the market — with goods to sell.”
Capital consumers need cash for business or personal reasons
“Goods?”
“Yes. His goods are the expected returns from his venture. He wishes to sell them for cash today. Meanwhile, others come to the City with capital looking to be used. Some put their funds in a bank such as this. They are depositors. They are accommodated on this floor, just above the gilts.”
Capital providers want to put their money to work
“The depositors are capital providers. They have money they do not immediately need, and they bring it to the capital market in hopes of renting it to someone — in this case, a bank — for a yield. Now, what yield do the depositors wish?”
“A high one.”
“And our friend Musgrave?”
“In stitching together his financing quilt, he wishes to pay as little as possible.”
“How then do they meet? Why, by bargaining.”
“Depositors,” I said, “seek safety, investments with little risk, and complete liquidity. So Musgrave offers them the safest piece, say the long-term first mortgage, seeking a forward commitment subject to conditions.”
“Actually, he offers that to the bank, which makes the loan, and the depositors in turn look to the bank.” He gestured at the row of thin-barred windows, each with its proper clerk perched atop a stool, each alertly transacting and noting the results in the saver’s passbook.
People on one side, money on the other
“It looks so solid,” I said. “Yet banks may fail for all that.”
“Yes, Watson, banks do fail, and black days they were when they did in the Napoleonic wars, when their failure ruined many a fine man. Now our Bank of England is so strong, however, that it in turn can provide capital and credit to banks.”
“What is in the other floors, the upper ones?”
“Sherlock!” boomed an immense voice.
[Continued tomorrow in Part 2.]
