Composition of the Money Market

The money market is composed of several financial agencies that deal with different types of short-term credit. We may describe the following important components of the money market:

1. Call Money Market: It is a market for short-period loans. Bill brokers and dealers in stock exchange require financial accommodation for very short periods. Money may be lent for periods not exceeding seven days. Sometimes money is lent only overnight. These loans are called call loans or call money as the banks recall these loans at very short notice. The banks prefer this kind of investment for two reasons.

Firstly, call loans can be treated almost like cash and they form the second line of defence for the banks after cash. Secondly unlike cash, the call loans earn some income, in the form of interest, for the banks. The commercial banks are the lenders and the bill brokers and dealers in stock exchange are the borrowers in the call money market. The call money market is an important section of the money market.

2. Collateral Loan Market: When loans are offered against collateral securities like stocks and bonds, they are called ‘collateral loans’ and the market is known as the collateral loan market. This market is geographically most diversified.

3. Acceptance Market: It refers to the market for bankers acceptances which arise out of trade-both inland and foreign. When goods are sold to anyone on credit, the buyer accepts a bill. Such a bill cannot be discounted anywhere easily. The banker adds his credit to the bill by accepting it on behalf of his customer who has purchased the goods. Such bills can be discounted anywhere. In London, there are specialist firms called acceptance houses which accept bills drawn on them by traders. They are well known all over the world. In the past, the acceptance market was a prominent section of London money market. Its importance has declined considerably in recent years. The function of the acceptance houses is being performed by the commercial banks is several countries.

4. Bill Market or Discount Market: It refers to the market where short-dated bills and other paper is discounted. Before the First World War the most important paper discounted in the London money market was the commercial bill which was used to finance both inland and foreign trade. During the inter-war period the importance of the commercial bills declined. This place has been taken by treasury bills. The treasury bills are promissory note of the government to pay a specified sum after a specified period, generally 90 days. The treasury bills are purchased by the investors and when necessary they are discounted in the discount market.

These markets are not water-tight compartments. They are related to one another.

The borrowers in the call money market deal in treasury bills which are discounted with them. Acceptance houses accept bills which are later discounted in the discount market. Thus, the various sections of the money market are intimately related to and are dependent on one another.