The Corner for the edition of May 30, 2014

Every country that has a monetary system of its own has some kind of money market (not to be confused with money market fund investments). The term money market refers to the short-term borrowing and lending of money. These financial markets are not necessarily located in any particular place; they are arrangements for the purchase and sale of financial instruments. New York City is still the major financial center of the nation and, accordingly, the great majority of security transactions are ultimately channeled there.

In short, the money market is a set of institutions or arrangements for handling what might be called the “wholesale” transactions in money and short-term credit. The need for these wholesaling facilities arises in much the same way that it does in the process of distributing any of the products of a diversified economy to their final users at the retail level. If the retailer is to provide reasonably adequate service to customers, he or she must have active contacts with others who specialize in making or handling bulk quantities of whatever is his or her stock-in-trade. In the case of money, the money market is made up of specialized facilities of this kind. It exists for the purpose of improving the ability of the retailers of financial services – commercial banks, savings institutions, investment houses, lending agencies and even governments – to do their job. It has little if any contact with the individuals or firms who maintain accounts with these various retailers, or purchase their securities, or borrow from them.  Thus, its prime function is to service the bulk wholesale side of the money business.

The main functions of a money market has to be performed in order for any modern economy to function smoothly on a daily bases. The general distinguishing feature of a money market is that it relies upon open competition among those who are bulk suppliers of funds at a particular time, and among those seeking bulk amounts, to work out the best practicable distribution of the existing total volume of funds. In the US, the money market is huge by international standards and is usually transparent to most of us. It is truly a “behind the scene” type of activity.

Banks which supply the money markets are known as “money center banks.” They are located in financial capitals throughout the world. The major money center banks are ABN AMRO, Barclay’s, BNP Paribas, Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, Mitsubishi Tokyo Financial, UBS, and Wells Fargo.

In carrying out a succession of transactions to “clear the market” from hour to hour and day to day, those with bulk supplies of funds, or demands for them, usually rely upon groups of intermediaries who act as brokers or dealers. The characteristics of these middlemen, the services they perform, and their relationship to other parts of the financial mechanism are very well tuned here in the US. The unifying force of competition is reflected at any given moment in a common price (that is, rate of interest) for similar transactions. Continuous fluctuations in the money market rates of interest result from changes in the pressure of available supplies of funds upon the market, and in the pull of current demands upon the money market itself. Therefore, as institutions demand money to cover short-term needs, the price they pay will differ slightly, from hour to hour and day to day. In the end, these transactions take place without much of a hitch and, as I said before, are rather transparent to most of us.

Quote of the Week: “Decision is a risk rooted in the courage of being free.” – Paul Tillich

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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