ttfosftmnts; THEIR HISTORY; PRACTICE ; AND RESULTS. FOURTH EDITION, REVISED AND ENLARGED. LONDON : SIMPKIN, MARSHALL, HAMILTON, KENT & Co., LTD. 1897. (All rights reserved.) PREFACE TO THE FOURTH EDITION. THE design of this Work is fully set forth in the Introduc- tory Chapter. Its aim is to be practical, but it also deals fully, and in a manner never before attempted, with the History of Finance. The methods of Stock Exchange Transactions are clearly explained, and valuable informa- tion is given such as is likely to be of great service to intending Investors. Special attention is called to the " Financial Land- marks " and to the Chapters entitled " How Money is Made," " Brokers and Jobbers," " Permanent Investments Utilised for Profits," " Short and Quick Profits/' and the " Choice of Stocks." The design is to show how capital may be used to the extent of its money-earning power, and how unprofitable investments, of which millions are held by the public, can be turned to advantage. Various points suggested by correspondents who have read the preceding large editions have received careful consideration, and have been treated, wherever possible ; while the facts and figures are brought down to date. The Statistical Tables given in the Appendices have been carefully compiled, and are quite unique. UNIVERSAL STOCK EXCHANGE, LIMITED, May, 1897. TITLES OF CHAPTERS. I. INTRODUCTORY II. GROWTH OF CAPITAL III. HOW MONEY IS MADE IV. SAFE AS THE BANK OF ENGLAND... V. JOINT STOCK AND LIMITED LIABILITY VI. GOVERNMENT SECURITIES ... VII. BANKS VIII. INDIAN SECURITIES... IX. BRITISH COLONIES X. RAILWAYS AND TRAMWAYS... XI. MINES XII. CORPORATION STOCKS XIII. COMMERCIAL COMPANIES XIV. AMERICAN VENTURES XV. FOREIGN STOCKS XVI. TRANSFER OF STOCKS AND SHARES XVII. BROKERS AND JOBBERS XVIII. EIGHT MILLIONS WASTED YEARLY XIX. INEVITABLE FLUCTUATIONS XX. BX)OMS AND PANICS XXI. PERMANENT AND TEMPORARY INVESTMENTS XXII. HOW AND WHERE TO SECURE BEST RESULTS XXIII. HOW TO START AN ACCOUNT XXIV. THREE-MONTHLY SETTLEMENT SYSTEM XXV. PERMANENT INVESTMENTS UTILISED FOR IMME- DIATE PROFITS ... XXVI. UNPROFITABLE INVESTMENTS XXVII. SHORT AND QUICK PROFITS XXVIII. CHOICE OF STOCKS XXIX. CONSOLS, AND WHY THEY SHOULD BE BOUGHT ... XXX. THE LAW OF AVERAGES XXXI. HIDDEN PITFALLS ... v PAGE I 7 27 34 42 59 65 74 80 9i 96 101 in "5 119 122 128 137 146 I 5 J - 158 167 !75 180 186 191 195 2OI 205 210 216 ANALYTICAL TABLE OF CONTENTS BIBLIOGRAPHICAL LIST FINANCIAL LANDMARKS OF THE NINETEENTH CENTURY PAGE ... xvii xxi-xxiv CHAPTER I. INTRODUCTORY. Growth of Stock Exchange Investments 2 Interest in the Subject ... 2 Aggregate of Business 2 Bankers' Clearing House Returns 2 Financial Literature 3 Dogmatic Ignorance 4 Newspaper Money Articles 4 General Laws apply 4 Prices and Values 4 Money and Credit 5 Supply and Demand 6 Meaning of "Securities"... 6 CHAPTER II. THE GROWTH OF CAPITAL. Sir R. Giffen's Estimate ... 7 Amazing Progress 7 The National Income 7 Growth of Manufactures ... 8 The Cotton Industry 8 The Improvement in Ma- chinery 8 Pottery : Cutlery 9 Application of Steam Power 9 James Watt ... 9 Money and Commerce at the beginning of Queen Victoria's reign 10 The Colonial Empire i o Mercantile and Social Con- ditions n Gold Discoveries in Cali- fornia and Australia ... 12 Accumulations of Property. . . 12 Increase of Capital 1871-80 12 Investments in Railways ... 13 House Building 13 Mines and Iron Works .. 13 Continuous Growth 14 Capital seeking Invest- ment 14 CONTENTS. Vll Amounts at different periods 15 Present Estimates 15 Mr. John Bright, M.P., on Wages and Prices 16 Sources of Wealth 17 Nominal and Real Values ... 17 Distribution of Wealth ... 18 Production and Cheapness... 18 Cost of Living 19 Increasing Public Expendi- ture 19 Mr. Dudley Baxter's Esti- mate.. . 20 And that of Mr. Leone Levi 20 Sir Robert Giffen's 20 Growth of Population 21 Estimates for Income and Property Tax 22 The Yield at Various Periods 2 2 The Imperial Revenue and Local Taxation 22 Exports and Imports 23 Savings Banks and Building Societies 23 Life Assurance and Friendly Societies 24 CHAPTER III. How MONEY is MADE. Wealth and Earnings 27 Position of England 27 Foreign Competition 27 Warnings of Cassandra ... 28 Causes of Trade Disturb- ances 29 Lancashire Cotton Famine... 29 Bank Panics and Failures ... 29 The Irish Famine and Emi- gration 30 Money does not grow 30 Hoarding 30 Reproductive Capital 31 Two Methods of Obtaining a Return 31 The Course of Exchange Bankers and Bill Brokers Financial Facilities Bankers' Deposits The Circulating Medium 32 32 32 32 33 CHAPTER IV. "SAFE AS THE BANK OF ENGLAND." Safety a Relative Term ... 34 Suspensions of the Bank Act of 1844 34 Notes and the Gold Reserve 35 John Stuart Mill's opinion ... 35 Crisis of 1847 36 How the Act of 1844 ope- rates 37 The Bank of England and Mercantile Credit 37 Bagehot's Dictum 37 Country Bankers' usage ... 38 The Baring Collapse of 1890 38 Other Catastrophes 38 The Bank intervenes 39 Possible Dangers 39 No Interest without Risk ... 40 A Sinking Fund 40 Reserves 41 Vlll CONTENTS. CHAPTER V. JOINT STOCK AND LIMITED LIABILITY. John Law and the Missis- sippi Scheme 42 Macaulay on Projects 42 Universal Speculation 43 Preposterous Companies ... 43 The South Sea Bubble ... 44 Inflated Prices 45 A Mania for Projects 46 A Universal Craze 47 The Collapse and the Crash 48 Board of Trade Report of 1846 48 Groups of Schemes 49 Unlimited Liability 49 The Limited Liability Act ... 49 Different Kinds of Shares ... 50 Joint-Stock Banks 50 Company Epidemics 51 Transient Virtue 51 Bacon and Carlyle on Human Folly 52 The 38th Section and Con- tracts revealed 52 Methods commonly pursued 52 Number of Limited Com- panies formed 53 Those Registered during 1896 5 3 Advantages and Drawbacks 54 Need for discrimination ... 56 Glowing Prospectuses 56 Who bears the loss ? 56 Inflated Prices 57 Fluctuating values 58 How Premiums are forced ... 58 CHAPTER VI. GOVERNMENT SECURITIES. Origin of National Debt ... 59 Founding of the Bank of England 59 Growth of the Debt 60 The Great French War ... 60 Stringent Terms 61 MacCulloch's Opinion ... 62 Mr. Goschen's Scheme ... 62 Specie Payments suspended, 1797 to 1819 62 Present National Indebted- ness 63 Gradual Reduction 63 Enhanced Price of Consols 64 CHAPTER VII. BANKS. Bank Charter Act of 1844. . . 65 The Two Departments of Business... 66 Security for Note Issues ... 66 Drain of Gold 66 The Act of 1892 67 CONTENTS. IX Profits made by the Bank of England 67 Its Private Business 68 Bank Stock 68 Origin of Joint Stock Banks 69 Growth of Deposits 69 The London and West- minster and other Banks 69 Leeman's Act 70 Amount of Deposits and of Capital 70 Notes of Country Banks ... 71 Comparison of Specie Re- serve 72 Relative Position of the Bank of England 72 Opinions of Experts 73 CHAPTER VJ I L INDIAN SECURITIES. Vast Extent of the Empire 74 Area and Population 74 The Boundaries Traced ... 74 Early Struggles with the French, Dutch, and Por- tuguese 75 Determined by England's Sea Power 76 The East India Company 76 Gross Indian Revenue ... 76 State Railways 77 Safe as Investments 78 Indian Exports and Im- ports 78 Internal Developments ... 79 Tea and Coffee Growth ... 79 CHAPTER IX. BRITISH COLONIES. Initial Mistakes 80 Bacon on " Plantations "... 80 Extent of the Territory ... 8 1 Contest with the French for Canada 82 Capture of Quebec 83 A Great Question Deter- mined 83 The Dominion of Canada 83 Australia explored 84 Successive Settlements ... 84 Gold Discovery in 1851 ... 84 Nature of Colonial Secu- rities 85 Excessive Borrowing 85 The Grand Trunk Railroad 86 The Canadian Pacific ... 87 Scattered Population ... 87 South African Colonies ... 88 The Dark Continent Opened Up 88 Recent Partitions 88 English Settlements 89 Cape Colony Acquired ... 89 CONTENTS. CHAPTER X. RAILWAYS AND TRAMWAYS. Early Engineering Enter- prise 91 Macadam and Roads ... 91 James Brindley and Canals 91 Beginnings of the Railway System 91 Stockton and Darlington Line 92 Manias of 1836 and 1846... 92 A Financial Panic 93 The Present Mileage and Traffic 94 Working Expenses 94 Favourite Investments ... 94 Tramway Lines 95 Excessive Loading 95 CHAPTER XI.-MiNES. 96 Spaniards in South America Excitement in Queen Elizabeth's time Beginnings of the Iron Manufacture 96 Present Production 97 96 Other Metals 97 Coal and Iron Companies 98 Land and Exploration ... 98 Kimberley Diamond Fields 98 Richmond Mine 98 West Australia 99 CHAPTER XII. CORPORATION STOCKS. Municipal Loans 101 The Principal Stocks ... 101 Local Government Debts 101 The Public Works' Loan Board 102 Competition with Private Investors 103 Treasury Interference ... 104 Post Office Savings Bank 105 Telegraphs and Telephones 106 Money Orders 107 Complaints of Private Banks 108 Excessive Interest 109 Cost of Working 109 Terms to Friendly Societies no CHAPTER XIII. COMMERCIAL COMPANIES. A Wide Range for Choice in British Shipping in Perils of Trading Com- panies IT2 Gas Undertakings 112 The Electric Scare 113 Submarine Cables 113 English Waterworks 113 Conversion of Business Enterprises 114 Risks to be Avoided 114 Further Liability 114 CONTENTS. CHAPTER XIV. AMERICAN VENTURES. XI Railways in the United States 115 Powers of Presidents ... 115 Repudiations and Recon- structions 116 First Mortgage Bonds ... 117 Many Millions Hopelessly Lost 117 " Watering the Stock " ... 117 Political Derangements ... 118 Venezuela Case 118 Possible Developments ... 118 CHAPTER XV. FOREIGN STOCKS Largely Speculative 119 South American States .. 119 Mr. Lowe's Select Com- mittee 120 Its Severe Censures .. .-..120 Dishonourable Methods ... 120 Knowledge and Care Re- quired in Dealing 121 Special Case of Egypt ... 121 Foreign Relations 121 CHAPTER XVI. THE TRANSFER OF STOCKS AND SHARES. Different Kinds of Stocks 122 Inscribed Stocks at Bankers 122 Personally, or by Power of Attorney 123 The Object to insure Accu- racy 123 List of Inscribed Stocks ... 123 Prices Ex div,^ or x.d. ... 124 Dividend Warrants 124 Fees on Transfers 125 Transfer of Colonial Stocks 125 Stocks transferred by Deed 125 Ten Days Allowed 126 American Shares 126 Special Arrangements ... 126 Bonds and Shares to Bearer 127 The Issue of Coupons ... 127 Care in the Preservation ... 127 CHAPTER XVIL BROKERS AND JOBBERS. Mercantile Exchanges ... 128 The Stock Exchange 128 The Members form a close Corporation 129 Vast Increase of business ... 130 New Methods and New Facilities 130 The Need for Caution ... 131 Xll CONTENTS. Difference between Brokers and Jobbers 131 Modes of Transacting Busi- ness 132 " Turn of the Market " ... 133 Rates of Commission ... 133 Written Contracts 135 Days of Settlement 136 Carrying Over : Contangoes 136 The Heavy Cost 136 CHAPTER XVIII. EIGHT MILLIONS WASTED YEARLY. Need for Accuracy 137 Two Kinds of Contracts ... 137 Settling Day Accounts ... 138 Excessive Charges 139 An Illustration 139 Cause of discrepancy 140 Position of the Jobber ... 142 A Needless and Costly Luxury 143 The Objection that Charges are small 144 How they Accumulate ... 144 Advantages of Direct Dealing 145 Mutual Confidence 145 Essential Conditions 145 Customers' Interests Para- mount 145 CHAPTER XIX. INEVITABLE FLUCTUATIONS. Their Frequency 146 Changes foreseen 146 Their Periodicity 147 Vacillations of Prices ... 147 Epochs and Cycles 147 Sensitiveness of the Money Market 147 How Securities are affected 148 Relation to the Prices of Commodities 148 Common Mistakes ... ... 149 Not Luck or Chance 149 The use of available Means 149 Carefully selected Stocks ... 150 No Invariable Rule 150 Safeguards 150 CHAPTER XX. BOOMS AND PANICS. Their Common Causes ... 151 A Scare in the Money Market 151 President Cleveland and Venezuela 151 The Effects of his Message 156 CONTENTS, Xlll Panic in Wall-street 152 Depreciated Securities ... 152 Effects of Rumours and Apprehensions 153 How Panics Spread 153 Run on the Birkbeck Bank 153 Unfounded Alarms 154 Sagacious Action 154 Opportunities for the wise and judicious 155 Panics in Recent Years ... 155 Preliminary Inquiries ... 156 How a "Boom" is got up 156 The Objects Sought 156 The Public suffer 157 A sure Remedy 157 CHAPTER XXI. PERMANENT AND TEMPORARY INVESTMENTS. Business Ventures The Dew-Point... Fluctuations Interest and Profit Instances Varying Prices ... Secret of Success 158 159 160 161 161 "Gilt-edged Securities" ... 162 Trust Funds 162 Possible Increased In- comes 163 Supply and Demand 164 Dividend -paying Railways 165 Some of the Best 165 CHAPTER XXII. How AND WHERE TO SECURE THE BEST RESULTS. Universal Stock Exchange. . . 168 Capital and Reserve 168 Testimonies 169 Salient Principles 170 Modes of Business 171 Ruling Prices 171 Telegraphic Orders 172 Weekly Market Report ... 172 Selected Securities 173 Lists of Shareholders ... 173 CHAPTER XXIII. How TO START AN ACCOUNT. Apparent Difficulty removed 175 Banker's Reference 175 Statement of Holdings ... 176 Part Purchase Money and Interest allowed 176 Correspondence Simplified . 177 Market Information 178 XIV CONTENTS. CHAPTER XXIV. THREE-MONTHLY SETTLEMENTS. An Advantageous Plan ... 180 The Method Pursued ... 180 Time, Trouble, and Money saved . 182 Brokers Irresponsible ... 182 Large Saving of Expenses... 183 The Test of Experience ... 183 An Instance 184 CHAPTER XXV. PERMANENT INVESTMENTS UTILISED FOR IMMEDIATE PROFIT. Twofold Values 186 Capital used to extent of its Money-making power 186 Advance in Price, or In- creased Dividend 187 A Practical Plan Specific Illustrations . . . How they work out ... Reasonable Probabilities Increased Incomes .. 187 ,. 188 ,. 189 ,. 189 ... 190 CHAPTER XXVI. -UNPROFITABLE INVESTMENTS. How to Utilise them 191 380,000 Shareholders ... 191 Locked-up Money 192 Methods of Dealing 193 Profitable Purchase of Home Railways 193 CHAPTER XXVII. SHORT AND QUICK PROFITS. A Rapid Turn-over in Trade 195 The Rule Applies to Stock Dealing 195 Re-Investments 196 Conditions of the hour ... 196 A careful choice of Stocks 196 Avoidance of Brokerage ... 197 An Actual Example 197 Money needs to Circulate... 198 The Nimble Ninepence ... 198 Accumulation of Fractional Profits 199 Aggregate of Littles 200 CONTENTS. CHAPTER XXVIII. THE CHOICE OF STOCKS. xv PAGE Determining Factors 201 The Reasons not always known 201 Peculiar Preferences 202 History of a Stock 203 The Reasonable Proba- bilities 203 When to Buy and to Sell ... 203 Various Contingencies ... 204 Aids to the Choice 204 CHAPTER XXIX. CONSOLS, AND WHY THEY SHOULD BE BOUGHT. Suited to Large or Small Capitalists 205 Safest for Quick Profits ... 205 Larger Amounts with Less Risk 206 Range of Prices 206 Three Years' Fluctuations 206 Examples 207 ^300 in four months ... 208 A possible Return of from 10 to 20 per cent, per annum 209 CHAPTER XXX. THE LAW OF AVERAGES. No Short Road to Success 210 The Operation of the Law 210 How it Works 211 An Instance . 211 The General Tendency to be Watched 212 An Accurate Forecast ... 212 Other Instances 213 CHAPTER XXXI. HIDDEN PITFALLS. Diversities in the Market ... 216 Judgment and Decision ... 216 " The Elegant Simplicity of the Three per Cents" 217 " High Interest and Low Security" 217 Limits of the Maxims ... 217 Investment an Art 217 Favouring Conditions ... 218 No Absolute System 218 Two Maxims of Vital Importance 218 Safe Rules 219 Design of the Work 219 XVI CONTENTS. APPENDICES. A. Definitions of Stock Exchange Terms and Phrases 223 B. Classified List of the Principal English In- vestments .. 233 C. Price of Consols, their Mean Yield, the Bank Rates of Discount and of Dividend, and the Mean Price of Wheat, 1850-96 235 D. The National Debt and the National Expen- diture at Periods of Five Years, and the Rate of Income Tax, with the Debts and the Taxation of other Countries .. ... 237 E. The Principal Joint- Stock Banks, with their Capital, the Nominal Share Values, and the last Dividends 239 F. Highest and Lowest Prices of Stocks and Shares, 1881-96 242 G. Highest and Lowest Prices of the Principal Mines, 1891-96 262 H. Dividends on Leading Stocks, 1890-96 266 I. Dividends on Principal Mines, 1890-96 272 K. Table for Computing Dividends 274 BIBLIOGRAPHICAL LIST. Reference may be made to the following books for additional information on the various subjects treated in this Volume. Acvvorth (W. M.), The Railways of England. 1889. Aubrey (W. H. S.), Rise and Growth of the English Nation. 1896. Bagehot (Walter), Lombard Street. Eighth edition, 1882: Economic Studies. 1895. Bankers' Magazine. (Monthly.) Bannister (S.), Wm. Paterson : His Life and Trials. 1858. Bastiat (F.), Essays in Political Economy. 1881. Baxter (Dudley), National Income of the United Kingdom. 1868 : The Taxation of the United Kingdom. 1869. Beeman (G. B.), Australian Mining Manual ; a Handy Guide to the West Australian Market. 1896. Bradshaw's Railway Shareholder's Manual. 1896. Brassey (Lord), Foreign Work and English Wages. 1879. British India Statistical Abstract. 1884 to 1895. British South Africa Annual Report. Buckley (H. B.), Law and Practice under the Companies Acts. 1887. Burden (Henry C.), Official Intelligence. 1897. Canada Statistical Year Book. 1896. Cape of Good Hope Statistical Register. 1896. Castelli (A.), Traite des Operations de Bourse a Primes. 1882. Cobb (A. S.), Banks' Cash Reserves. 1891. Coghlan (T. A.), Statistical Account of the Seven Colonies of Australasia. 1895-96. Colonial Possessions Statistical Abstract. 1880-94. XV111 BIBLIOGRAPHICAL LIST. Cordingley (W. G.), Stock Exchange Guide. 1893. Crump (Arthur), The Theory of Stock Exchange Speculation. 1875 : Key to the London Money Market. 1877 : Banking, Currency, and the Exchanges. 1866 : English Manual of Banking. 1878. Cunningham (W.), The Growth of English Industries and Commerce during the Early and Middle Ages and in Modern Times. 1890-2. Customs Commissioners' Reports. Dilke (Sir C. W.), Greater Britain. 1889. Dowell (Stephen), The History of Taxation and Taxes' in England. 1888. Economist, The Banking Supplements, May and October, Annually. Evans (D. Morier), The Commercial Crisis of 1857-8, and the Stock Exchange Panic of 1859 : Facts, Failures, and Frauds. 1859 : Speculative Notes. 1864. Fenn's Compendium of the English and Foreign Funds ; by R. L. Nash. 1893. Finance Accounts of the United Kingdom. Francis (John), History of the Bank of England. 1848 : Chronicles and Characters of the Stock Exchange. 1855. Gabbott (E. R.), How to Invest Money. 1895. George (E. Monson), Railways in India. 1894: The Silver and Indian Currency Questions. 1894. Giffen (Sir Robert), Stock Exchange Securities : An Essay on the General Causes of Fluctuations in their Price. 1879 : Essays in Finance, First and Second Series. 1887 : The Growth of Capital. 1889. Gilbart (Joseph), History, Principles, and Practice of Banking. 1882. Goldmann (C. S.), South African Mining and Finance. 1895-6. Goschen (G. J.), Theory of the Foreign Exchanges. 1886. Greville (Edward), Year Book of Australia. 1895. Hayter (H. H.), Handbook to the Colony of Victoria. Higgins (L. H.), The Put-and-Call. 1896. Hunt (Robert), British Mining. 1884. Hunter (Sir W. W.), Indian Empire. 1893. BIBLIOGRAPHICAL LIST. xix Inland Revenue Commissioners' Reports. Jenks (E.), Australasian Colonies from their Foundation. 1895. Jevons (W. Stanley), Investigations in Currency and Finance. 1884. Joplin (T.), Principles and Practice of Banking. 1826. Journal of the Institute of Bankers. (Monthly.) Keltic (J. Scott), The Partition of Africa. 1895. Kerr (Andrew W.), History of Banking in Scotland. 1884. Kindell (A.), African Market Manual. 1896. Kinnear (George), Banks and Exchange Companies. 1847. Kinnear (John G.), The Crisis and the Currency. 1847. Levi (Leone), History of British Commerce. 1880 : Wages and Earnings of the Working Classes. 1885. Local Taxation Returns (England). Macleod (H. D.), Theory and Practice of Banking. 1883-6 : History of Economics. 1896. Mathieson's Highest and Lowest Prices and Dividends paid during the past six years. 1896 : Investor's Vade Mecum. 1890: Railway Traffic Tables. (Monthly): American Traffic Tables. (Monthly) : Investor's Handbook of Railway Statistics. 1896: Indian Railway Companies. 1896. Melsheimer (Rudolph E.), The Law and Customs of the Stock Exchange. 1891. Merchant Shipping, Annual Tables showing Progress of. Mill (John Stuart), Principles of Political Economy. 1888. Mineral Statistics of Great Britain and Ireland. Mitchell (Wm.), Our Scotch Banks. 1879. Morgan (Henry J.), Canada Dominion Annual Register and Review. 1894. Mulhall (Michael E.), History of Prices since the year 1850. 1885 : Dictionary of Statistics. 1892 : Industries and Wealth of Nations. 1896. Nash (R. L.), Inquiry into the Profitable Nature of our Investments. 1881. National Debt Annual Accounts. New South Wales Statistical Register. 1895. New Zealand Official Year Book. 1895. XX BIBLIOGRAPHICAL LIST. Ormerod (J. J.), Municipal Taxation at Home and Abroad. 1894. Palmer (F. B.), Company Precedents subject to the Acts. 1891. Pattinson (J. P.), British Railways. 1893. Playford (W. M.), Hints for Investors. 1882. Poor's Manual of American Railroads, &c. 1896. Post-Office, Annual Reports of the Postmaster-General. Price (Bonamy), Currency and Banking. 1876. Queensland Statistical Register and Year Book. 1895. Railway Returns. (Annual). Reid (John), Manual of Scotch Stocks and British Funds. 1841. Report of Royal Commission of 1877. Rogers (J. E. Thorold), Industrial and Commercial History of England. 1892. Royle (Wm.), The Laws relating to English and Foreign Funds, Shares and Securities. 1875. Shaw (W. A.), Writers on English Monetary History, 1626-1760. 1896: History of Currency. 1252-1894. Skinner (T.), Stock Exchange Year Book. 1897 : The Mining Manual. 1897. Somers (Robert), The Scotch Banks and System of Issue. 1873. South Australian Annual Statistical Register and Blue Book. Statesman's Year Book. Statistical Abstract for the United Kingdom, 1881-95. Statistical Society's Journal. Stutfield (G. H.) & Cantley (H. S.), Stock Exchange Rules and Usages. 1893. Tasmania Annual Statistical Register and Blue Book. Van Oss (S. F.), Stock Exchange Values ; a Decade of Finance. 1895- Victoria Annual Statistical Register and Blue Book. Walker (J. N.), Investor's and Shareholder's Guide. 1894. Wilson (A. J.), A Glossary of Colloquial, Slang, and Technical Terms in use on the Stock Exchange and in the Money Market. 1895 : The Investor's Review. (Monthly) : Hand- books for Investors. 1893. FINANCIAL LANDMARKS OF THE NINETEENTH CENTURY. 1801. First iron railway, Croydon to Wandsworth. Five per cent. Property Tax. 1803. Bank of France established. Bimetallic Currency in France. 1805. Consols 58f. 1806. Property Tax 10 per cent. 1807. Resignation of Abraham Newland, cashier of Bank 50 years. 1810. Commercial crisis. Report of Francis Homer's Bullion Committee. 1811. Bank issues silver tokens for 35. and is. 6d. 1814. Cape Colony ceded by the Dutch. 1816. Savings Banks brought under Parliamentary control. Legal tender of silver limited to 403. 1821. Cash payments resumed. (Suspended since 1797.) 1825. Stockton and Darlington Railway. Colony of Van Diemen's Land, or Tasmania. 1825-6. Commercial Panic ; 770 banks stopped. i8?6. Joint-stock Bank Act for the provinces. English and Irish currency assimilated. 1827. Bank of England opens country branches. 1828. Savings Banks Amendment Act. 1829. Colony of West Australia. 1830. Fauntleroy's forgeries cost the Bank ,360,000. Liverpool and Manchester Railway. 1833. Bank Act : Quarterly statements of its affairs. 1834. South Australia colony formed. Joint-stock banks established in London ; the London and West- minster being the first. 1835. Railway mania. Savings Banks Act extended to Scotland. 1836. London Joint-Stock Bank, and London and County Bank. xxi xxii FINANCIAL LANDMARKS OF NINETEENTH CENTURY. 1838. London and Birmingham Railway. 1839. Union Bank of London established. 1840. Penny Postage inaugurated. 1841. Colony of New Zealand. Census of United Kingdom, 27,057,923. 1842. Peel's Income Tax Act. 1843. Colony of Natal. 1844. Bank Charter Act. Board of Trade empowered to examine railway schemes. 1845. Peel's new Tariff. Irish and Scotch Banking Acts. 1845-6. Railway mania ; 272 Acts passed. 1846 Corn-Laws repealed. Numerous bubble companies. 1847, Commercial panic through railway mania. Discount rate 8 per cent. Gold discovered in California. 1849. Silver florin issued. Navigation Laws repealed. 1850. Railway Clearing House. 1851. Australian gold discovered. Colony of Victoria. Census, 27,595,388. 1853. Income Tax extended to Ireland. Succession Duty imposed. First Indian Railway opened, from Bombay to Tannah. Australian Mints established. 1854. Crimean War ; Income Tax is. 4d. and n|d. Usury Laws repealed. 1855. Strahan, Paul, and Bates' bank failed. Limited Liability introduced. 1856. Grand Trunk Railway of Canada opened. Royal British Bank failure. 1857. Commercial panic through American failures. Bank Charter Act suspended. Bank Reserve ;i, 462,000. Discount rate 9 per cent. Many Banks fail. (Nov. 5.) 1858. India transferred to the Crown. First Atlantic Cable. 1859. Colony of Queensland. Commercial panic, through fear of European war. 1859-66. Period of contractors' railways. 1860. Commercial Treaty with France. (Jan. 23.) Great failures in the leather trade. (July.) Bronze coinage issued. (Dec. I.) 1861. Census, 29,321,288. Cash payments suspended in America. 1862. Cotton famine in Lancashire, owing to the American Civil War. Companies Act amended. 1863. Savings Banks Acts consolidated. Underground Railway opened. Confederate States Loan for ^"3,000,000. 1865. Commercial Treaty with Austria. 250 Railway Bills passed. Indo-European telegraph. FINANCIAL LANDMARKS OF NINETEENTH CENTURY. XX111 1866. Commercial panic, through over-speculation in companies. " Black Friday," May 10. Overend, Gurney and Co.'s failure. London, Chatham, and Dover Railway stopped payment. Second Atlantic Cable laid. Mansion House Indian Famine Relief Fund of ,493,000. 1867. Companies Act further amended. Leeman's Bank Act. , Dominion of Canada formed. 1869. Albert Assurance Co. failed for 8,000,000. Telegraphs acquired by the Post Office. Suez Canal opened. (Commenced in 1858.) 1870. Commercial panic. Coinage Act. (April 4.) 1871. European Assurance Society failed. Census, 31.845,379. 1871-3. Payment of Franco-Prussian War Indemnity of 200,000,000. 1872. First Railway in Japan. (June 19.) Depressed Trade and numerous Strikes. 1873. Regulation of Railways Act. 1874. Fiji annexed. 1875. Railway Jubilee at Darlington. 1876. Imperial Bank of Germany opened. (Jan. i.) Demonetization of silver in Germany. Suez Canal Shares bought. 1877. Mr. Goschen's scheme of Egyptian finance. 1878. City of Glasgow Bank stopped payment. Gold at par in the United States for the first time since 1862. Bland Silver Coinage Bill. (Feb. 16.) Royal Commission on the Stock Exchange. 1880. Canadian Pacific Railway sanctioned. 1881. Census, 35,269,483. 1883. Bankruptcy Act and Board of Trade control. Parcels Post established. (Aug. i.) Northern Pacific Railway opened. (Sept. 8.) 1884. Conversion of Three per Cents, into 2f by Mr. Chiklers. Metropolitan Inner Circle Railway completed. 1885. Egyptian Financial Scheme for reduction of Interest and loan of 9,000,000. Canadian Pacific Railway opened. Glyn, Mills, Currie & Co. formed into a Joint Stock Company. 1886. Royal Niger Co. incorporated. Witwatersrand Gold Fields. 1887. Johannesburg founded. Double florin, c., issued. (June 20.) 1888. Bimetallic League. Conversion of Three per Cents, by Mr. Goschen. 1889. British South Africa Co. incorporated. Numerous strikes and labour disputes. 1890. \Vinding-up Amendment Act for Companies. Bank of England authorised to increase note issue by 250,000. XXIV FINANCIAL LANDMARKS OF NINETEENTH CENTURY. 1890. The Baring collapse. 1891. Census, 37,732,922. 1892. Railway and Canal Traffic Amendment Act. Silver coined in Victoria, Australia. Utah (U.S.A.) Gold Fields. Bank Act. Coutts' Bank formed into a Company. 1892. Failure of Liberator Group of Companies. (Sept.) Department of Trade and Commerce created in Canada. Sir Julard Danvers retires after fifty years' service as Government Director of Indian Railways. Value of Indian rupee is. 3d. Committee appointed to consider Australian Federation. 1893. India Currency Committee Report. Silver Purchase Repeal Bill passed by United States Congress. Imperial and Intercolonial Conference at Ottawa. Twelve Australian Banks stopped payment. (May.) New Coinage Act. (March 28.) East India Loan Bill of 10, 000,000. (Dec. 21.) 1894. India Stock converted from 4 to 3^ per cent. Manchester Ship Canal opened. (Jan. I.) New Zealand Loan and Mercantile Agency Co. reconstructed. Loss to Bank of England of ^"250,000 on unsecured advances. Coolgardie Gold Fields. 1895. Financial Crisis, Newfoundland. (Jan.) Australian Federation Enabling Act. (Feb. 6.) Treaty of Peace between China and Japan, the former paying an indemnity of 20,000,000. (April 16.) President Cleveland's Message to Congress respecting Venezuela and England. (Dec. ) 1896. Consols reached H3|. (June I.) Budget estimates for year 1896-7 : Expenditure, 100,047,000, and Revenue, 101,755,000. Capital of New Limited Companies formed Jan. I to June 30, 97,000,000. Bank Rate of Discount raised to 2\ from 2, at which it had stood since February, 1894. (Sept. 10.) Bank Rate again raised to 3 (Sept. 24), and to 4 (Oct. 22). 1897. Bank Rate reduced to 3^ (Jan. 21), and to 3 (Feb. 4). CHAPTER I. INTRODUCTORY. ONE of the most remarkable developments of modern times is the rapid growth of Stock Exchange investments. Every year an increasing number of persons take a deep interest in the fluc- tuations of the Money Market. Probably no por- tion of the newspaper is perused with more attention and interest than the columns devoted to this subject. Many weekly papers are entirely occu- pied with it, and several daily papers, conducted with signal ability and enterprise, are wholly en- gaged in the discussion of financial topics, and in recording financial information gathered from a wide area. Nor is this surprising, considering the enormous monetary interests involved. As is shown in a subsequent Chapter, the wealth and the savings of the country are rapidly in- creasing, and scope must be found for profitable employment. It is natural, therefore, for investors to make themselves conversant with a subject that STOCK EXCHANGE INVESTMENTS. concerns them so intimately, and they are to be commended for their intelligent study and for their watchfulness over the laws and the events that so vitally affect their prosperity. They manifest a growing desire to become acquainted with the business in which their fortunes are embarked, and with the many circumstances, direct or remote, that tend to cause fluctuations in value. To help to satisfy such laudable thirst for information is the design of the present work. Upward and downward movements in the prices of securities, if genuine, and not caused by " rings " and " corners," indicate the political and commercial positions of States and corporate bodies whose stocks are quoted. On a moderate estimate ^5,237,000,000, representing the national savings, 1 are largely dependent for their value and yield upon the quotations current on the Stock Exchange. Its aggregate of business is enormous, as shown by the cheques passed through the Bankers' Clearing House on settling days, which occur every fort- night, all the year round, besides special settlements. According to the returns, the total for 1896 was ;7>574> 8 53>> or 18,033,000 less than in 1895. The amount in 1868 was ^"3,425,185,000. The average on ordinary days during the past year was ^21,633,000, which increased by two millions and a 1 See Appendix B. INTRODUCTORY. 3 half on the fourth of each month, and by ten millions on Consols settling days ; while on those of the Stock Exchange the average rose to ^48,452,700. The whole of the very large amount is promptly settled day by day, without trouble or inconvenience, merely by receiving or paying the difference by a single cheque on the Bank of England. The Provincial Clearing Houses of Birmingham, Leeds, Leicester, Liverpool, Manchester, and Newcastle-on-Tyne transact an average annual business of ^400,000,000. Many books have been written upon the subject, like Burdett's Official Intelligence, Skinner's Stock Exchange Year Book, Francis' Chronicles of the Stock Exchange, John Stuart Mill's Political Economy, Giffen's Essays in Finance, Fenn On the Funds, Poor's Manual, &c., but their size, intricacy, and technicalities repel ordinary readers. Numerous smaller manuals and vade mecums have appeared from time to time, such as those mentioned in the prefixed Bibliographical List. Occasionally a writer appears of the " I am Sir Oracle " temper, or of the Doctor Slop type, with no special know- ledge of the subject, or like the proverbial literary hack of the Grub-street order, ridiculed in Pope's Dunciad, who, having egregiously failed himself, sets up as a conceited censor of others. Nothing is easier than for the arm-chair critic of 4 STOCK EXCHANGE INVESTMENTS. politics, war, literature, or finance, to pronounce an absolute and a dogmatic opinion on subjects of which he is profoundly ignorant. The value of his opinion is in exact proportion to the extent of his information, which may be represented by x, the unknown quantity. The prisoner for debt, in Hogarth's famous picture, being wholly impecunious, writes a pamphlet to show how the National Debt may be paid off quite easily. He, advises others in making the fortune which he has dismally failed to make for himself. It is a safe aphorism that by no financial legerdemain can lead be transmuted into gold. Most of the works mentioned above pre-suppose an amount of information on the part of the reader as to the usages of the Stock Exchange. The daily newspapers, both metropolitan and provincial, usually devote much space to a Money Article, and give elaborate tabular lists with cabalistic or arbi- trary signs. Yet the necessity exists for a plain, clear, elementary, authentic elucidation of the subject. Stock transactions are regulated by general laws similar to those which govern commerce, trade, industry, wages, and prices. It is mathematically demonstrable that an increase of securities or com- modities, like a diminution in the quantity of money, will cause a general fall in prices, and that a diminution in articles, like an addition to the quantity of money, will cause a general rise. A INTRODUCTORY. 5 high average yield on capital is a bounty on savings. A low yield tends to check savings, or causes investments to be made elsewhere. An increase of consumable commodities, where the rate of yield on capital is not at the minimum, will lead to a rise in the price of securities, or, in other words, to a fall in the yield. The tendency of capital is to flow to trades in which the profits are high, and to leave those of low profits, with a con- sequence that some kind of equilibrium is produced, regard being had to other circumstances. Money lying idle, or at a nominal interest, in the hands of bankers, is instantly attracted towards a trade that is unusually profitable. There is always a large speculative fund ready to be embarked in anything likely to yield high profits. The amount of money in circulation, and the state of credit, are important elements in fixing the price of securities. The conditions of business depend also upon political and public events ; upon harvests and trade ; upon the glut or the scarcity of money ; and upon the number and the necessities of intending dealers. Dull and disagreeable weather, as a rule, affects the Stock Market, more or less. Other conditions being equal, the first half of the year is more active than the second, when the moneyed classes scatter for the holidays, and the 6 STOCK EXCHANGE INVESTMENTS. activity of general business is lessened. But prices always regulate themselves, in the end, by the inexorable laws of supply and demand. In the language of the Money Market, "security" means almost any kind of property which can be given in pledge for an advance ; with the special characteristic that the article can be divided into such parts as can be exactly defined, and then sub- mitted to the speculative manipulation of the market. Lands, houses, mortgages, bills of exchange, bills of lading, dock-warrants, and other things have an interest-bearing power in common with shares of joint-stock or of limited companies, or the debts of States. There are also articles capable of easy definition, but without interest-bearing power, such as raw materials in bulk and manufactured goods, which can be dealt with in Produce Markets. But the combination of interest-bearing power with facility of handling in a light and compact form, renders Stock Exchange securities easy and safe. CHAPTER II. THE GROWTH OF CAPITAL. IN a paper read before the Statistical Society, December 17, 1889,' Sir R. Giffen estimated the increase in total capital at from ^6,113,000,000 in 1865 to ^8,548,000,000 in 1875, or 40 per cent. ; and at ,10,037,000,000 in 1885, or 17^ per cent. By way of contrast, it may be stated that Sir William Petty and Sir William Davenant, who were among the earliest to study political arithmetic, writing at the end of the seventeenth century, and with the imperfect data at their disposal, estimated the property of England at from 250 to 320 millions, at a time when its population was only five millions and a half. The growth during two hundred years is amazing. It was then, taking a mean between the amounts, only ^52 per head. Now it is ^270. A century ago the national income could be estimated at not more than ^"200,000,000. It is 1 Journal, March, 1890. 8 STOCK EXCHANGE INVESTMENTS. upwards of seven times that amount at the present day. In other words, there has been an increase from 16 to ^"35 per head. Similar increases have occurred in Germany and France, and to a less extent in other Continental countries. A wonderful impetus was given during the latter part of the eighteenth century to every branch of manufacturing industry. Old, tedious, and expensive methods of production were superseded. Marvellous ingenuity and enterprise were displayed in the improvement of machinery. The first marked increase in the cotton manufac- tures of Great Britain had taken place about 1751. The cotton imported annually was ,976,610. Twenty years later it had doubled; in 1780 it had risen to ,6,767,613 ; and in 1895 the value was ,30,429,428, in addition to ,3,360,330 of yarn and goods. Inventive genius had long been engaged in devising improvements on the domestic spinning wheel, which could spin only one thread at a time, and that of an inferior description. The practical difficulties were at length overcome, mainly by the genius and perseverance of Sir Richard Arkwright, of James Hargreaves, of Samuel Crompton, and of Dr. Cartwright. Arkwright invented the spinning loom ; Hargreaves the carding machine and the spinning jenny ; Crompton the mule jenny, and Cartwright the power loom. THE GROWTH OF CAPITAL. 9 By these means the productive capacity was enormously increased. Great improvements were also made in other textile manufactures, such as linen, cambric, silk, lace, and the allied industries of dyeing, bleaching, and calico printing ; and the cheapening of the supply led to a corresponding increase in the demand. Josiah Wedgwood founded the great pottery works in Staffordshire about 1 760, at the same time that Matthew Boulton commenced his great hardware works in Birmingham. Sheffield also about the same period became distinguished for its cutlery. The above important inventions were crowned, and, indeed, were rendered practicable, by the application of steam power. Ever since the time of the Marquis of Worcester, in 1655, and of Savery and Thomas Newcomen at the end of that century, efforts had been continually made to devise steam machinery. James Watt, about the year 1763, commenced those investigations which ended in his great discoveries and applications. He succeeded in making a steam engine capable of being worked with a comparatively small expenditure of fuel, and of yielding any desired amount of power. Lord Jeffrey remarks of him, " His remarkable contrivance has become a thing stupendous alike in its force and flexibility, for the prodigious power which it can exert, and the ease and precision and dignity IO STOCK EXCHANGE INVESTMENTS. with which that power can be distributed and applied." Just after the commencement of Queen Victoria's gracious reign the wealth of England, though much in excess of other countries, was small when com- pared with the recent increase. Foreign commerce was only beginning to reveal its latent possibilities. Money advanced for great exploring, manufacturing, engineering, and mercantile enterprises, at home and abroad, large in amount as it appeared to finan- ciers and economists in those days, fell far short of the " potentiality of wealth beyond the dreams of avarice " of which Dr. Johnson spoke in sonorous phrase. The great Empire of India was a vision of the poets, w r ho sung of golden sands, and spicy breezes, and pearls and gems. Not a third of the territory and of the people now comprised within that vast Oriental sovereignty then recognised, even indirectly and remotely, the British sway. Only a thin and broken fringe of the Australian continent was settled. Cape Colony and Natal were small and insignificant, and the Africa beyond was un- explored and unknown. Canada was a scattered and half rebellious province, of which England knew little and cared less. Its thousands of square miles in the Far West, given over to a few hunters and trappers who returned once a year to the borders of civilization, were as shadowy THE GROWTH OF CAPITAL. I I as the fabled land of Prester John in the Middle Ages. Nor were the home resources comparable to exist- ing accumulated and available capital. England had gone through a long and difficult crisis since the Great French War, at the close of which the National Debt was ,885,186,323 ; or one-third of the estimated wealth of the country. With con- tinual trade struggles ; prices ever falling ; enormous expenses of government ; a plague of pauperism that seemed incurable ; the rapid growth of a surplus population which agriculture was insufficient to employ and to which the manufacturing system was imperfectly adapted, the country, just emerging from the prolonged Corn- Law strife, was hardly able to make ends meet. Of twenty-five millions of people, one-third were in Ireland in a state of semi-starvation through disastrous failures of the potato crop. In England and Scotland the great modern army of well-to-do artisans and factory operatives had not been formed, and there was no miscellaneous manufacturing industry to mitigate the sufferings of particular classes, like hand-loom weavers, whose primitive machinery was being rendered obsolete. Railways and steam-shipping were in their rudimentary stages ; as were the thousand and one ingenious inventions since devised for utility and comfort. 12 STOCK EXCHANGE INVESTMENTS. The commencement of the second half of the nineteenth century witnessed the gold discoveries in California and Australia ; a wide extension of the railway system, on the Continent as well as in England ; and improvements in every branch of manufacture. Home trade and foreign commerce received a mighty impetus. The national wealth increased by leaps and bounds. Accumulated pro- perty compelled fresh outlets for its profitable investment, in shipping, in expanded trade, in telegraphy, in the iron, coal, and textile industries, in great public works, and in numerous useful inventions and processes. Compared with what was the case under a purely agricultural system, England is not only far richer absolutely under an improved manufacturing and commercial rtgime\ but the extremes between good and bad years, owing to occasional failures in crops, are fewer and less irksome ; and even the most untoward events have diminished in intensity, because of almost boundless supplies that can be drawn from other countries. The decade 1871-80 was especially remarkable for an abundance of capital. No less a sum than 2, 000,000,000 the greater portion being from England was devoted to the construction of rail- ways in different parts of the world, besides ^800,000,000 in loans to various nations. Many new THE GROWTH OF CAPITAL. 13 factories, equipped with improved machinery, were built at enormous cost in Lancashire, Yorkshire, and elsewhere, to meet growing demands for textile fabrics. Fresh shafts were sunk to open prolific beds of coal and ore, and gigantic engineering establishments began to work. The vast sum of 967 millions, as compared with two millions in 1850, is now invested in Railways ; besides enormous amounts in the Funds, in Municipal and Foreign Stocks, and in American, Indian and Colonial enterprises of various kinds. The total value is estimated at ^"7,276,031,441 according to a table given by Burdett. 1 Fifty years ago, the foreign investments held in this country can scarcely be said to have existed. Judged by recent facts and figures there is an annual increase of capital, that is, of savings, to the extent of more than ^200,000,000, for which, of course, profitable employment must be found. Besides the incessant expenditure on railways, agriculture, notwithstanding long depression, shows a constant outlay. House-building has gone on at an increasing rate in London and in all large towns. Mines and ironworks, it is true, show a diminution, after the busy and somewhat inflated period a decade and more ago. Machinery in the textile trades has been virtually superseded within living 1 Official Intelligence, 1897 ed., p. 2086, and Appendix B. 14 STOCK EXCHANGE INVESTMENTS. memory by new appliances, and gigantic structural works have been reared at enormous cost. From the nature of the case, every other species of accumulation continues as before, but on a larger scale. The truth is that, owing to a wide division of labour, there must be a vast disorganization of industry, not a mere falling off from a former inflation, before accumulation can be suspended. Then, and only then, would the building trades, railway construction, ship-building, and numerous other industries, exhibit a widespread stoppage of work. There would be masses of unemployed labourers, far exceeding anything witnessed even in the terrible times of depression that were frequent before the free-trade period, when industry was deranged, and pauperism assumed threatening dimensions. In the absence of such effects, it may reasonably be assumed that the causes are not present, and that there is no stoppage of accumulation. On the contrary, it goes on at an average annual rate ; steadily increasing every decade. A considerable portion of it, beyond what is employed in the pro- ductive works or solid investments above named, may be described as floating capital, employed in what are known as liquid investments easily realis- able. They have a great influence upon the Money Market and the Stock Exchange. Some of the THE GROWTH OF CAPITAL. 15 millions thus used are in steady, if not in fixed, securities ; but a varying surplus, always large in amount, is ever available, and the changes in this surplus indicate the general state of trade. What- ever the amount, it is constantly accruing, and must find some suitable investment. Sir Robert Giffen estimates the annual average of what he terms " free saving," for investment purposes, at about 0, 000,000. x Mr. G. R. Porter 2 estimated the personal pro- perty of the nation in 1814 at ^1,200,000,000, and at ^2,200,000,000 in 1845. Thirty years later it had risen, according to Sir R. Giffen, to close upon five thousand millions, and real property was ^6,643,000,000. The same writer, in his work on The Growth of Capital, estimated the total income of the country in 1885 at 1,2 00,000,000, and its capital value, ranging from four to thirty years' purchase, at ^10,037,436,000. This is more than a two-fold increase since 1850, when, from some- what imperfect data, it was estimated at ^4,050,000,000, or a growth from ^150 to ^270 per head of the population. The present annual income is probably ^"1,500,000,000. Withal, no rise has occurred in prices, except in house rent in large cities, but rather the reverse ; while there has been a marvellous diffusion of comfort. 1 Growth of Wealth, p. 153. 2 Progress of the Nation, p. 600. 1 6 STOCK EXCHANGE INVESTMENTS, Mr. John Bright, in a letter to a correspondent, and published in The Times, November 18, 1884, after referring to the great reductions in the prices of wheat, tea, sugar, and other commodities since the introduction of free trade, went on to say, " As to wages in Lancashire and Yorkshire, the weekly income of the thousands of Workers in factories is nearly, if not quite, double that paid before the time when free trade was established. The wages of domestic servants in the county from which I come are, in most cases, doubled since that time. A working brick-setter told me lately that his wages are now 75. 6d. per day ; formerly he worked at the rate of 45. per day. Some weeks ago I asked an eminent upholsterer in a great town in Scotland what had been the change in wages in his trade ? He said that thirty to forty years ago he paid a cabinet-maker 125. per week; he now pays him 28s. per week. If you inquire as to wages of farm labourers, you will find them doubled or nearly doubled in some counties, and generally over the whole country advanced more than 50 per cent, or one-half, while the price of food and the hours of labour have diminished. It may be said that milk and butter and meat are dear, which is true, but these are dear because our people by thousands of families eat meat who formerly rarely tasted it, and because our imports of these articles are not suffi- cient to keep prices at a more moderate rate." THE GROWTH OF CAPITAL. 17 These observations are not weakened after the lapse of twelve years, and it is gratifying to know that cheapness and comfort are so widely diffused. Other considerations, however, must be kept in view. As Mr. Bagehot points out, 1 popular writers and speakers, ignorant of Political Economy, but eager for a cheap popularity, are prone to flatter the working classes by telling them that they create the wealth of the country. As well might it be said that the compositors produce The Times newspaper day by day. The craftsmen are necessary, but there must be inspiring, directing, controlling minds, who have the sagacity to perceive what is required, and the enterprise and the capital to adopt proper means and to open up new markets. It must be remembered, however, that nominal values are not everything, nor are they the surest test. The range of prices for most commodities is far lower than it was formerly, so that the average real income per head must have more than doubled. The facts are exactly known as regards wheat and other staple articles, while it is equally well known, as regards articles of manufacturing industry such as coal, iron, and the textile trades, that the cost ot production has enormously diminished. The uni- form testimony of statisticians of the highest order, in England, on the Continent, and in America, 1 Economic Studies, p. 69. 3 1 8 STOCK EXCHANGE INVESTMENTS. shows that there has been a general rise of money wages within the period ; in few cases of less than 50 per cent , and in many of 100 per cent. This tends to refute a misapprehension, not in- frequently entertained, as to the distribution of the increased wealth of the country. It is sometimes said, for example, that the labourers, so called, pro- duce the whole of the ^1,500,000,000 of annual income, which, it is alleged, is largely consumed by a small minority. The difficulty, however, lies in determining what is really labour and what is really production. An inventor, a great merchant, or a distinguished artist is as much a producer as the man who labours with his hands for daily wages. Those who contribute under Schedule D of the income tax, which embraces trades and professions, are most certainly to a very large extent producers, as is the case with the farming class, who return their income under Schedule B. The unskilled labourer cannot work machines, which are essential to modern production. Left to himself, he would be unable to carry on the work. It is his misfortune, if not his fault, that he is so poorly equipped as to be able to produce so little. Not only has there been a large increase in money wages, but the hours of labour have materially diminished, probably to the extent of nearly 20 per THE GROWTH OF CAPITAL. 19 cent. There has been at least this reduction in the textile, engineering, and house-building trades. Thus the skilled workman receives from 50 per cent, to 100 per cent, more money for 20 per cent, less work, in addition to which the purchasing power of money, perhaps with the sole exception of house rent, has been enormously increased, and the style of living is an immense advance upon that which prevailed one or two generations ago. Moreover, while the cost of government has been greatly diminished to the artisan, he receives more from the public ex- penditure than was the case formerly. Many indirect taxes upon the necessaries of life have been wholly abolished, and the rest have been reduced to an extremely small amount. Few people seem to be aware how, simul- taneously, there has been an increase of expenditure out of the taxes and rates for miscellaneous public purposes, of the benefit of which the working classes receive their full share, and, as some allege, considerably more than their share. Stating the case broadly, it may be said that nearly ^20,000,000 of the public expenditure for education, for the Post Office, for inspection of factories, and for other purposes, is entirely new, as compared with fifty years ago. It is the same with local govern- ment ; the total of which has trebled in the same period, mainly from improved systems of poor 2O STOCK EXCHANGE INVESTMENTS. relief and from the enormous outlay for sanitary purposes. Mr. Dudley Baxter, in his estimate of the national income in 1867, arrived at the general conclusion that there were in the United Kingdom 13,720,000 persons having incomes or wages, out of about 30,000,000 of the then population. He further estimated that 1,162,000 were assessed for income tax; that 1,497,000 belonged to the middle and upper classes, with incomes of less than 100 a year; and that 10,961,000 belonged to the manual labour class : by no means to be identified or con- fused with the working classes in the economic sense of the word. Their incomes were estimated at ^"325,000,000, and the total income of all classes at ^"814,000,000. Mr. Leone Levi, by a different process, arrived substantially at the same conclusion, which of course must be regarded only as approxi- mate. Making comparison, so far as means exist, with fifty years ago, the total income of the country then was only about ^500,000,000 ; two-fifths of which were derived from agriculture. Sir R. Giffen z gives a table showing how, in his judgment, the income of the capitalist class has increased only no per cent, in 50 years, whereas the income of the working class appears to have 1 Essays in Finance^ Second Series, p. 404. THE GROWTH OF CAPITAL. 21 increased 160 per cent. At the same time the former class has greatly increased in number, so that the amount of capital possessed among them per head has only increased 15 per cent., notwith- standing the great increase in the capital itself. In his opinion the richer become more numerous, but not richer individually, while the poorer are, to some smaller extent, fewer, and those who remain poor are individually twice as well off, on an average, as they were fifty years ago ; so that he thinks they have enjoyed almost all the benefit. Not to burden these pages with statistics, full particulars of which may be found in the works already mentioned, the following items of informa- tion are interesting. They will give point and emphasis to subsequent Chapters which deal with the judicious use and profitable investment of accumulated wealth. No one is likely to expose himself to the reproach which Shakspere puts in the mouth of Shylock, " Tell not me of money. This is the fool that lent out money gratis." x According to the census of 1851, the population of the United Kingdom was 27,595,388. In the middle of 1896, according to the Registrar-General's estimate, it was 39,465,720. Owing to migra- tion, the growth has been chiefly in London and in 1 Merchant of Venice, iii. 3. 22 STOCK EXCHANGE INVESTMENTS the large centres. Property and income tax returns show steady progress. The gross assess- ments fifty years ago were ,251,000,000 for Great Britain and thirty-two millions for Ireland. The last returns for the whole of the United Kingdom give "690,251,675. The largest items under Schedules A and D were for houses, ^151,645,646 ; for land, "55,769,961 ; for railways, 34>354> 8 5 2 5 and for mines, ,13,744,712. Of the total annual value of the property and profits assessed for in- come tax, the increase per head of the population is from "9 145. 3d. to "18 os. lod. The increase in the assessments for houses is almost five-fold in the half-century. The following table sets forth the growth of the income tax, a penny of which yielded ,770,773 in 1843, whereas now the yield for each penny is ,2,012,500. The assessments and the yield were as follows at different periods : Year. Assessments. Rate. Yield. 1813 ... ^140,000,000 ... 2S. ... ^14,978,557 1843 283,000,000 ... 7d. ... 5,350,000 1853 ... 308,000,000 ... 7d. ... 5,509,637 1865 ... 395,000,000 ... 4d. ... 7,958,000 1875 571,000,000 ... 2d. ... 4,315,132 1895 ... 706,130,875 ... 8d. ... 16,100,000 During the same period the Imperial revenue has swollen from ,60,000,000 to "101,974,000 ; nearly one-half of which comes from Customs and Excise. Reductions in taxation have taken place THE GROWTH OF CAPITAL. 23 to the extent of twenty-five millions over new taxes imposed. The National Debt has been diminished from ,820,000,000 to ^619,998,590, and the annual charges of all kinds from ^28,100,000 to ^"25,068,092. Against these reductions, however, must be placed the rapid growth of local expendi- ture, from about fourteen millions to ^82,129,425, including expenditure of every kind for local pur- poses ; though the ability to meet this has increased with the increase of wealth, excepting as regards persons with fixed incomes, and the very large number of struggling tradesmen. The amount allocated to local purposes from beer and spirit duties, licenses, and probate and estate duty was ,7,366,117 for the year that ended March 31, 1896, in addition to which the contributions to local purposes for Government property were According to the last returns of the Board of Trade, the total declared value of the year's exports was ^285,832,407, and that of the imports ^"418,689,658. The capital employed in banking is ^"188,802,775, and the aggregate deposits ex- ceed ^700,000,000. The number of depositors in Post Office Savings Banks is 6,454,763, and those in Trustees' 1,521,583; the amount standing to their credit being 107,830,000 in the former and ^46,188,000 in the latter. There are 2390 building 24 STOCK EXCHANGE INVESTMENTS. societies making returns to the Registrar, with a total capital of ^51,538,691. In addition, there are 1677 industrial and provident societies registered under the Acts, with a membership of 1,284,662 and a total capital of ^18,579,024. Ordinary life assurance companies have a paid-up capital of i 1,120,920, accumulated life and annuity funds ^190,918,237, and reserve funds ^4,070,823. Fire and marine funds of companies transacting life business amount, in addition, to ^10,389,422. The above and other modes of insurance, as guarantee, accident, hail- storm, and plate-glass, are carried on by proprietary companies, and are of interest to investors, but the shares are not dealt in extensively. They may be bought to yield from 4 to 5 per cent. The business has been reduced almost to an exact science, and is conducted within a narrow area. There are also industrial assurance companies with a paid-up capital of ; i, 106,085, and lifeand annuity funds ,12, 473, 373; and numerous friendly societies, headed by the Oddfellows and Foresters, with a membership of upwards of four millions, and property valued at ^22,000,000, in addition to many unregistered societies. These figures serve to indicate the enormous growth of capital in recent years, and it must be repeated that suitable outlets have to be found for its profitable employment. THE GROWTH OF CAPITAL. 25 Personal enterprise, energy, courage, and skill, becoming a mighty aggregate in the mass, have achieved incalculable benefits in the past, and will accomplish yet more in the future, with free and fair scope. Every man must judge and act for himself. The world of investment is before him where to choose. If he succeeds, he has himself to thank. If he fails, the blame is his own. By following the directions in these pages, it ought not to be difficult to avoid the latter and to ensure the former. The rules laid down and the hints given have stood the severe test of experience, and can be confidently recommended for adoption. It is certain that much latent wealth in the country might be brought to light, and made to increase and grow with perfect safety, at a far more rapid rate than at present. The world was amazed, at the close of the Franco-Prussian war, when the enormous indemnity of five milliards 'of francs, or ^200,000,000 sterling, was raised with comparative ease, mainly out of the unsuspected hoards of French peasants and shopkeepers. When the loan was opened they subscribed in a few days more than twice the required amount, so that Bismarck is reported to have expressed regret and vexation at not having exacted a larger indemnity. The case of France is typical and instructive. In every civilized country 26 STOCK EXCHANGE INVESTMENTS. there are to be found many hundreds of people whose aggregate savings represent a large total. This is especially true of England. Notwith- standing all complaints of badness of trade, and of failures in crops, it is indisputable that the accu- mulated and surplus capital is steadily growing. Any who can tap this vast reserve, so as to employ it in sound and paying investments, will increase the income of thousands of persons, will add to the volume of trade, will set money in profitable circulation, and will extend the wealth of the country. CHAPTER III. HOW MONEY IS MADE. INDUSTRIES, values, and prices depend in a large measure on the wealth and earnings of a country. Rich nations are always the largest con- sumers. Their supplies of necessaries and luxuries are drawn from every part of the world. Great Britain has the most extensive import trade, while Spain and Russia have the smallest. The real estate of the English people consists in their superior industrial qualities ; in their skill and enterprise ; in their vast and varied foreign com- merce ; in being the sea-carriers of the world ; in their acquired capital ; in their established credit ; in their large investments at home and abroad ; in ample stores of coal and iron ; in great manufactur- ing resources ; and in the ability to import boundless stores of food and of raw materials. It is not forgotten that other nations are advanc- ing along similar lines ; but, if England is true to herself, she will hold her own. No amount of '7 28 STOCK EXCHANGE INVESTMENTS. foreign competition can really injure an industrious, enterprising, thrifty, and vigorous community with a far-reaching and long-established trade. If danger exists, it is from the same direction as that which enfeebled and at length overthrew the pride and pomp of ancient Rome. Luxury, supineness, self- indulgence, an aversion to hard and honest work, an excessive craving after mere amusement and excitement, constitute the bane and entail the ruin of any nation. Without yielding to mere pessimism, it may be conceded that enough truth lies in the warnings of some modern Cassandras to justify an appeal to all who occupy responsible positions, and who wield influence over others, to warn them against the indolence and the shirking of disagreeables which are apt to appear with the swift possession of assured wealth. Shorter hours, frequent holidays, and extravagant living can only be justified by increased energy and skill in work. Production must continue, in spite of artificial rules to limit and regulate it, if wealth is not to be lost. The maximum of pay with a minimum of labour is not the end of existence, or the means of securing individual and collective prosperity. The great object with many seems to be to extort the highest possible wages for the fewest hours of perfunctory work, with as many holidays as possible, and a HOW MONEY IS MADE. 2 9 gratuitous pension in old age, provided at the expense of others, like self-respecting, industrious, and thrifty artisans, who must not be identified with the clamorous and incompetent assertors of pre- tended " rights." Such events as the gold discoveries in California and Australia disturb the normal course of trade by causing an immense migration and temporary colonization, and by the commercial demands which are suddenly created. The Lancashire cotton famine, also, itself one of the secondary con- sequences of the American Civil War of 1861, disturbed the trade of the civilized world. For nearly fifteen years it stimulated the growth of cotton in India, Egypt, and Brazil, leading to a great export of capital to those countries for their further development, and induced a great movement of the precious metals, which in turn stimulated trade in various ways, and finally contributed to such incidents as the City of Glasgow Bank failure in 1878, due to the excessive investment of capital in the Eastern trade during the cotton famine. The payment of the German indemnity in 1871-3 was another disturbing event which swelled for a time the export trade of France, and the countries which lent money to France. Besides such notable events, the history of the last fifty years comprises 30 STOCK EXCHANGE INVESTMENTS. the Irish famine, and the exodus to America which followed ; the Crimean, the Franco-Austrian, and the Franco-Prussian wars ; the demonetization of silver in Germany ; the resumption of specie pay- ment of gold in the United States ; and cycles of bad seasons of agriculture in England. Money does not increase of itself. To use Lord Bacon's expressive phrase, " Money is like muck : no good except it be spread." ' The fable of Aladdin, in the Arabian Nights, has no counter- part in real life. The ancient plan, still largely practised in the East, was to hoard gold and jewels, or to bury them in the earth for safety. Some people in England are not much wiser. During the last financial panic a man drew ^5000 from a bank that was perfectly solvent ; preferring to have the sovereigns tied up in bags in his house, where he kept them, in constant apprehension of fire and burglars, until his decease some years later. Not only did he run the risk of fire and thieves, but the money yielded him absolutely nothing. Even at 2 per cent, he lost. ^500 in five years, to say nothing of his constant anxiety over his treasure. If an extreme instance, in degree, the above is far from being solitary in kind. It is wanton and wicked waste to destroy the necessaries of life, or 1 Essays, No. 16. HOW MONEY IS MADE. 3! to burn valuable pictures and books. It is surely culpable for ignorance or indolence to lock up money in unproductive investments, or to be content with a paltry return when the bulk of the capital might be judiciously and safely increased, and its actual money-earning power extended. Every one should seek to obtain the most he can for his money ; but in the eager desire for high dividends the principal is not seldom lost. In preference to locking up the money in unprofitable investments, of which mention is made later on, advantage should be taken of the fluctuations of the market to buy and sell opportunely, so as to earn a percentage far beyond the usual rates of dividends. Possessing capital, even to a moderate extent, conjoined with common sense, it is easy enough to earn money. There are two ways of obtaining a return for capital ; either in the form of dividend, or by an increase in the value of stocks or shares on realization or redemption. Hence there may be but a small dividend declared, or none at all, and yet a good profit may result from enhanced value. The difference in price, added to the accrued interest, if any, represents the percentage gained during the holding. Care must be taken in the selection, and none chosen without full investigation as to their history, or without reasonable probability 32 STOCK EXCHANGE INVESTMENTS. of success in some form, either in the way of dividend, or, better still, by selling to advantage and then re-investing, and so on, da capo. In our complex commercial and industrial system the use of actual cash is economised in many ways. Bills of Exchange are at once certificates of debt and substitutes for cash. By their means remit- tances between different countries become possible. Debts owing by various persons in distant places are exchanged and balanced by bankers and bill discounters, and the actual use of cash is econo- mised. Bank notes are also certificates of debt and substitutes for cash, of which only a part is kept for the total of the nominal value issued by banks, thus saving usually two-thirds or more of the amount. Besides, paper circulates more easily than gold or silver, and the same nominal amount is more serviceable in settling transactions. The introduction of banking deposits and of cheques still more economises cash and increases its potency. In this way capital is kept in constant circulation. The amount as represented by loans from banks, and by deposits with them, may vary from day to day, but the adjustment is easy and instantaneous. Facilities are now so great, that any one possessing fixed capital can command circulating capital at any moment, either by borrow- HOW MONEY IS MADE. 33 ing on his securities or selling them. The final result is that enormous payments are made, and extensive operations are carried out daily, for which the cash actually available would be a mere bagatelle. A given, but very small, quantity of the precious metals is thus made to do infinitely more work by means of the banker than it could do otherwise. The steady increase in the use of cheques and other negotiable instruments in carrying on the growing volume of trade with all parts of the world, shows that the small percentage of 2\ of coin and notes, as against 97^ of credit instruments, the recognised proportion some twenty years ago, is probably still smaller at the present day. Vast commercial transactions between one country and another, made up of an aggregate of individual transactions, are adjusted, not by actual payments in cash, but by an interchange of commodities, the value of which is represented by paper remittances between bankers, bill-brokers, and other financial agents, who have to collect and to receive money, or money's worth, from their customers. CHAPTER IV. "SAFE AS THE BANK OF ENGLAND." 1^ HE phrase at the head of this Chapter is " familiar in our mouths as household words." It is supposed to indicate absolute and unimpeach- able security. Strictly speaking, there is no such thing^r This is a disagreeable doctrine, but it is true. The Old Lady of Threadneedle-street her- self has gone through a number of serious financial crises. The gravest during the last fifty years were in 1847, 1857, 1859, 1866, and 1870, when the Bank reserve was reduced from the average of ten millions to less than two, and when universal panic and terror prevailed. The immediate remedy resorted to was the suspension of the Bank Act of 1844, under authority of the Government, which had to be condoned by the Legislature at its next meeting. That Act provides for the separation of the business of the Bank of England into two departments, having entirely distinct accounts ; the one for the issue of notes, and the other for ordinary banking transactions. The design was to prevent 34 35 a note-issue beyond a certain amount, unless against an equal amount of gold held, so that the mixed currency of notes and coin might expand or contract with circumstances. Experience has shown, however, when a foreign drain of gold occurs, that the quantity exported is chiefly taken from the Bank's reserves ; being the withdrawal of deposits or loans. The amount of notes in the hands of the public has not been affected by the Act of 1844. In practice, when there are signs of a foreign drain, and the reserve is diminishing, the Bank counteracts the tendency by raising the discount rate, and thus restricting ^^ advances. The purchasing power of the public is thereby limited, and prices are kept down. At the same time gold is attracted to this country for investment, and the circulation is not really inter- fered with. Some economists doubted at the time whether the unquestionable advantages obtained by the Bank Act of 1844 might not be too dearly purchased. Since the stringent test to which it was subjected in 1847, writers of high authority have expressed un- favourable opinions. Mill points out that the exten- sion of credit by bankers is a great benefit in seasons of collapse, and the aid formerly yielded by the Bank, at whatever cost, was salvation in a crisis like 36 STOCK EXCHANGE INVESTMENTS. that of 1825-26; that the notes thus issued in aid do not circulate, but go where they are wanted, or lie by, or come back again immediately as deposits ; that the new law does not allow expansion till gold comes for it, when the worst of the crisis is over ; and that, as banks must be the source of aids in crises, such an Act as that of 1844 must, in such times, be either repealed or suspended. The experience of 1847 suggests a yet worse objection. There are many causes of high prices besides that of undue expansion of credit. Prices may rise by war expenditure ; by foreign invest- ments ; by the failure in supplies in raw material from abroad ; or by extraordinary importations of food owing to bad harvests at home. In these cases the gold would not be withdrawn from circu- lation, but from hoards and bank reserves ; but the arrangement of the Act for securing converti- bility is aimed at a state of high prices from undue expansion of credit, and from no other cause. The result is that the paper currency is contracted on occasion of every drain, from any cause whatever, and not merely when the gold is withdrawn from circulation ; and thus a crisis is occasioned by every derangement of the exchange, or, at least, whenever there is pressure in the money markets. Before the crisis of 1847 there had been no 37 speculation which could account for such a terrible collapse. The railway mania raised the rate of interest, but it could not affect the exchange. The drain of gold was caused chiefly by the failure of the potato crop at home and by the partial failure of the cotton crop abroad. The Act of 1844 could not operate beneficially here ; but, on the contrary, it wrought injuriously, by compelling all who wanted gold for exportation to withdraw it from the deposits at the very time that interest was highest and the loanable capital of the country most deficient. If the Bank might then, before there was any collapse of credit, have lent its notes, there would have been no crisis : only a season of pressure. As it was, it was necessary to suspend the Act of 1844; and Mill's conclusion concerning the measure is that the disadvantages greatly preponderate. Bagehot remarks, " All our credit system depends on the Bank of England for its security. On the wisdom of the directors of that one joint-stock com- pany it depends whether England shall be solvent or insolvent. This may seem too strong ; but it is not. All banks depend on the Bank of England, and all merchants depend on some banker." 1 He also says, " All country bankers keep their reserve in London. They only retain in each country town the minimum of cash necessary to the transac- 1 Lombard Street, p. 35. 38 STOCK EXCHANGE INVESTMENTS. tion of the current business of that country town. They send the money to London ; invest a part of it in securities ; and keep the rest with the London bankers and the bill brokers. The habit of Scotch and Irish bankers is much the same, and therefore the reserve of the banking department of the Bank of England is also the banking reserve of all London, England, Ireland, and Scotland too." J Who could have foreseen, unless familiar with the inner arcana, the overthrow of the great House of Baring,in 1890, for liabilities exceeding 2 1,000,000, with all its presumed wealth and its long-continued financial prestige; or such failures in 1857 as the Liverpool Borough Bank, the Royal British Bank, and the London and Eastern Banking Corporation ; or the collapse of Overend, Gurney & Co., for eleven millions, on Black Friday, May 10, 1866; or the stoppage of the City of Glasgow Bank, for twelve millions and a half, in October, 1878 ; or that of the West of England Bank ; or of the Oriental Bank Corporation ? To be wise after the event, and to say that such catastrophes were only to be expected, is easy enough ; but with regard to most of the above, few, if any, persons were really appre- hensive. Even those " in the know " on financial matters were staggered by the rude awakening to unexpected disasters. 1 Lombard Street, pp. 30, 31. " SAFE AS THE BANK OF ENGLAND." 39 A crisis was averted at the time of the Baring collapse in 1890, by the Bank of England and other great banks boldly standing in the breach, and taking over the assets and guaranteeing the liabili- ties. If in this case the usual course of liquidation had been followed, one result must have been a heavy fall in prices, and that not only in the securities directly affected, but in every class of investment. Finance is like a galvanic battery. A shock applied to any portion of the chain, however remote, is instantly felt throughout the entire circuit. Persons affected indirectly by the cataclysm of the Baring stoppage would have been forced to sell good securities at a low price, so as to meet losses upon others of a less solid character, and there would have been varying but universal depreciation, ending in "confusion worse confounded." It will be seen, therefore, that the phrase, "Safe as the Bank of England," is of restricted application. A danger exists of a partial loss of capital in any investment, apart from the question of unsoundness of the security. Prices are constantly fluctuating, as is shown in subsequent chapters, owing to the state of the Money Market. Though there are natural limits to the fluctuations, and they operate under general laws which only the few comprehend, the many who do not may lose by this incessant movement. Buying at a high price, and being compelled to sell 40 STOCK EXCHANGE INVESTMENTS. at a low price, necessarily diminishes capital ; but it is so common as to cease to awaken surprise. Hence the term " Safe as the Bank," is true only in an accommodated sense and in a limited degree. It is the same in other things. There are risks in all securities. It is a truism to say that where no risk obtains there can be no interest accruing. Even "gilt-edged" stocks have possible danger attaching to them, either from the fisk of diminished income or from falling off in the capital value. This is the case with all things mundane and o human. Storms, earthquakes, floods, drought, pes- tilence, war, catastrophes, accidents, and other un- foreseen events may occur at any time to destroy valuable property, to stop productiveness, and to spread ruin and desolation over a wide area. Prudence suggests that, no matter how solid the security may be, or how trustworthy the income, a portion should always be set aside as a sinking fund to guard against danger from inevitable losses. Large investors virtually do so by spreading their risks over a variety of investments, as Shakspere makes Antonio say " My ventures are not in one bottom trusted, Nor to one place : nor is my whole estate Upon the fortune of this present year." ' 1 Merchant of Venice, i. i. "SAFE AS THE BANK OF ENGLAND." 41 As occasional realisations are unavoidable, there is always a risk of losing some nominal capital. Well-managed banks and other institutions adopt the precaution of having a reserve fund in solid and easily realisable securities, and writing off every year a part of the cost of purchase. It is not possible to avoid all risk, and those most concerned must make the best of it, even if they cannot, in a financial sense, carry out Lady Macbeth's advice, to " make assurance doubly sure." " Find me an investment to yield me a regular four per cent., without risk or fluctuation," is a common remark. To do so is not always practicable, owing to the constantly accumulating wealth seeking profitable outlets, and to the amount of trust money and of other funds for which a permanent invest- ment must be Tound. But it is possible, by watching the fluctuations of numerous perfectly sound dividend- paying stocks, to buy when they are low, and to sell when they improve ; repeating the process continu- ally as occasion serves, and in this way obtaining returns, in the shape of enhanced values, far beyond the usual rates of dividends. Some security should be selected at a price below its normal rate, as shown by its recent history, but with a reasonable proba- bility that it will rise again ere long. CHAPTER V. JOINT STOCK AND LIMITED LIABILITY. JOINT-STOCK enterprise is of ancient date. John Law's Mississippi Scheme in 1716, and the South Sea Bubble of 1720, are commonly regarded as its congeners, excepting a few earlier incorporated trading bodies, like the East India Company, the demand for the stock of which was greater than the supply. Macaulay has pointed out that in the interval between the Restoration of 1660 and the Revolution of 1688 wealth had rapidly increased. The difficulty of finding safe and profitable investments led to much hoarding of gold and silver. " The natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, occupied themselves in devising new schemes for the employment of redundant capital. It was about the year 1688 that the word * stock-jobber ' was first heard in London. In the short space of four years a crowd of com- panies, every one of which confidently held out to subscribers the hope of immense gains, sprang into JOINT STOCK AND LIMITED LIABILITY. 43 existence : the Insurance Company, the Paper Company, the Lutestring Company, the Pearl Fishery Company, the Glass Bottle Company, the Alum Company, the Blythe Coal Company, the Sword-blade Company. " There was a Tapestry Company, which would soon furnish pretty hangings for all the parlours of the middle class, and for all the bedchambers of the higher. There was a Copper Company, which proposed to explore the mines of England, and held out a hope that they would prove not less valu- able than those of Potosi. There was a Diving Com- pany, which undertook to bring up precious effects from shipwrecked vessels, and which announced that it had laid in a stock of wonderful machines resembling complete suits of armour. There was a Greenland Fishing Company, which could not fail to drive the Dutch whalers and herring busses out of the Northern Ocean. There was a Tanning Company, which promised to furnish leather superior to the best that was brought from Turkey or Russia. There was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the Royal Academies Company. " In a pompous advertisement in was announced that the directors had engaged the best masters in 44 STOCK EXCHANGE INVESTMENTS. every branch of knowledge, and were about to issue twenty thousand tickets at twenty shillings each. There was to be a lottery. Two thousand prizes were to be drawn, and the fortunate holders of the prizes were to be taught, at the charge of the company, Latin, Greek, Hebrew, French, Spanish, conic sections, trigonometry, heraldry, japanning, fortification, book-keeping, and the art of playing the theorbo." * Jonathan's coffee-house and Gar- raway's were in a ferment with buyers and sellers, with brokers and agents. Time bargains came into fashion. Preposterous tales were circulated, so as to raise or depress share prices. Every day some new bubble was blown ; only to burst the next day or the next week. The result, as might have been expected, was widespread disaster, and, to many, irretrievable ruin. The South Sea Bubble of 1720 was accompanied by a mania just as absurd. Dean Swift satirized it in his sketch of Balnibarbi, a region in his fabled Island of Laputa, colonized by chimerical projectors and schemers. Hogarth made it the theme of one of his most pungent caricatures. Daniel Defoe's Essay on Projects, many of which, being practical, have since been carried into effect, was probably suggested by the outbreak of the speculative spirit. It was a time when characters flourished like those 1 Macaulay's History of England, iv. 320. JOINT STOCK AND LIMITED LIABILITY. 45 embodied recently in Charles Mathews' favourite impersonation in 7^he Game of Speculation, or in that of Jeremy Diddler in Kenny's farce of Raising the Wind. The origin of the craze was a proposal made by the South Sea Company to purchase the irredeem- able annuities granted in the two preceding reigns, and to amalgamate all the public funds into one stock, so as to become the sole public creditor. The Bank of England made a rival proposition, and the two great corporations continued to outbid each other until an offer was accepted on the part of the South Sea Company to provide a sum of seven millions and a half. In a few weeks the ^100 shares of the South Sea Company sold for ^1000. The directors opened supplementary subscriptions, all of which were eagerly taken up ; and they asserted that a dividend of 50 per cent, would be realised. Some of the holders of stock sold out when the price was at the highest ; thereby realising immense fortunes. During the short time that it lasted, the excess to which the general intoxication proceeded is almost incredible. Anderson, in his Deduction of Trade and Com- merce, published in 1762, has given a curious table of the crowd of new projects, and an interesting description of the general scene of competition and 46 STOCK EXCHANGE INVESTMENTS. clamour among the dealers and purchasers of the various stocks. The East India Company 100 shares rose to ^445 ; those of the Bank of Eng- land to ^260 ; and the Royal African Company's 2$ shares rose to ^200. There was a vast num- ber of what Anderson describes as "projects or bubbles, having neither charter nor Act of Parlia- ment to authorize them : none of which were under one million, and some went as far as ten millions ; very many whereof are distinctly remembered by the author of this work, how ridiculous and impro- bable soever they may now seem to many not acquainted with the infatuation of that year." Among them are enumerated eleven fishing pro- jects ; four salt companies ; ten insurance com- panies ; four water companies ; two for the remit- tance of money ; two sugar companies ; eleven for settlements in or trading to America ; two building and thirteen land companies ; six oil companies ; four harbour and river companies ; four for supply- ing London with coal, cattle, and hay, and for paving the streets ; six hemp, flax, and linen com- panies ; five for carrying on the manufacture of silks and cottons ; fifteen mining companies ; and a miscellaneous rabble, sixty in all, among which were projects for the building of hospitals for bastard children ; for importing a number of large jackasses from Spain, in order to propagate a larger kind of JOINT STOCK AND LIMITED LIABILITY. 47 mules in England ; for trading in human hair ; for the fattening of hogs ; for a grand dispensary ; for a wheel for perpetual motion ; for furnishing funerals ; for insuring and increasing children's fortunes ; for trading in and improving commodities of this kingdom. The most absurd of these schemes seem not to have wanted dupes. No one thought of inquiring if the projects were practical or not. One was announced, and its shares bought, which was merely advertized as " for an undertaking which shall in due time be revealed." Within two or three days after they were subscribed for, the shares in these different companies sold for amazing prices. " From morning till evening," says Anderson, "the dealers therein, as well as in South Sea stock, appeared in continual crowds all over Exchange Alley, so as to choke up the passage through it." The utmost that appears to have been paid even on those projects that "had one or more persons of known credit to midwife them into the alley " was ten shillings per cent. About Midsummer it was calculated that the value of the stock of all the different companies and pro- jects at the current prices exceeded five hundred millions sterling ; probably five times as much as the current cash of all Europe, and more than twice the worth of the fee-simple of all the land in the 48 STOCK EXCHANGE INVESTMENTS. kingdom. It is impossible to conjecture how much higher the prices of shares in the most absurd of these bubbles would have risen, if the mania had not received a sudden check and collapse. There was a painful awakening to the absurdity and danger of the mania. Within a month, South Sea stock fell from 850 to 175. By this time all faith in the possibility of its being kept up at a price above its original cost and real value was irre- trievably gone. The bubble had burst ; the delu- sion was over ; the drunkenness had passed away, and only exhaustion, aching ruin, and repentance were left. But the hurricane which so greatly dis- turbed the air probably made it purer and healthier for a long time to come. The calamitous effects of the mania were individual and immediate, not general or permanent. The national credit was not impaired, nor was there an actual loss of property, but the ordinary course of business was for a time deranged, and the skilful piloting of Sir Robert Walpole was required to escape from the financial panic. A report issued early in 1846 by the Board of Trade demonstrated a fertility of invention on the part of promoters of joint-stock companies which rivals that of any former period. Among the non- descript projects included in the return were a Biographical Dictionary Company ; the Tehuantepec JOINT STOCK AND LIMITED LIABILITY. 49 Colonization and Canal Company ; the New Pro- tecting Society ; the Norfolk Ramoneur Associa- tion ; the Patent Cork-cutting Company ; the Great British Advertising Company ; the General Canal Steam Haulage Company ; the Patriot Association ; the Miniature World, or Grand National Associa- tion for the Profitable Employment of Capital, Skill, and Labour in Trade, Commerce, and Agriculture, with companies for concentrated tea, patent fuel, baths, spinning, mining, drainage, discount, in- surance, glue, sugar, glass, timber, cotton, water, sewage, gas, cemeteries, hops, newspapers. The recital could be extended by a reference to the manias and projects of more recent years. Under the old joint-stock law every shareholder was liable to his uttermost farthing for the debts of a company, even though he had no direct control over and no acquaintance with its business affairs. He could seek relief only by the costly process of an action against his fellow-shareholders. Instances have occurred, like the City of Glasgow Bank, where shareholders have seen their all swept away to meet gigantic claims, or they had to take refuge in bankruptcy. To prevent the recurrence of such a catastrophe, the Limited Liability Act was intro- duced in 1855 by Mr. Robert Lowe, afterwards Viscount Sherbrooke. It was an adaptation of a French plan, which had also been carried out in the 5 5O STOCK EXCHANGE INVESTMENTS. United States. It provided that each shareholder should be responsible for no more than the nominal value of the shares allotted to him. For the protec- tion of the public in doing work or in supplying goods, the word " Limited" has to be appended to the name of the company, and to appear on all documents. Various Amending and Consolidating Acts have since been passed, but there is still a keen struggle between the law, on the one side, and promoters on the other, Shares in Limited Companies are usually divided into Ordinary, Guaranteed, Preference, and Deferred. To the first are accorded, pro rata, such profits as may be made. The second and the third agree to accept a smaller but fixed dividend, while the fourth usually receive a moiety of the remaining profits after the others' claims are met. Companies also usually take powers to borrow money on mortgage by the issue of Debentures, constituting a prior charge on the assets. All these kinds of holdings are nego- tiable, with more or less facility, on the Stock Ex- change. The price secured represents the market value of the property, which necessarily fluctuates. The large joint-stock banks have availed them- selves of a recent statute (42 & 43 Viet. c. 76) whereby the liability of their shareholders is re- stricted. The nominal amount of capital may be increased, without rendering it liable to be called JOINT STOCK AND LIMITED LIABILITY. 5 [ unless in the event of winding up, or a portion of the existing uncalled capital may be set aside by resolution for such a contingency. Liability for notes remains unlimited. With a kind of periodicity an epidemic of com- pany-promoting breaks out. Transient or apparent success induces a crowd of imitators. During the last decade or two there have been several hot mining fits, located in England or Wales, in the United States, in India, in Australia, and in Africa. Elec- tricity, shipping, co-operative stores, hotels, asphalt, tramways, skating-rinks, coffee-palaces, foreign loans and mines, Continental mineral springs, entertain- ments, tea plantations, nitrates, and trusts of all descriptions have had their little day, usually fol- lowed by a long and dark night for those who were so verdant as to find the money. Then there is an indignant outbreak, which ought rather to be directed to their own folly and credulity. If there were no dupes, knaves could not thrive. Demands are heard for condign punishment. Legislation is forced through in a hurry. Officialism displays spasmodic energy. A great parade is made of inquiries and examinations, and much talk is heard of prosecutions ; which usually end in smoke. After a brief lull, the company epidemic breaks out in some new form ; to be followed by the old and 52 STOCK EXCHANGE INVESTMENTS. miserable round of blind acceptance, foolish trust, and untold disaster. Bacon says " There is in human nature generally more of the fool than of the wise, and therefore those faculties by which the foolish part of men's minds is taken are most potent." This remark anticipates Carlyle's severe and cynical dictum, in Latter-Day Pamphlets, " The population of Britain consists of twenty-seven millions of people mostly fools." Probably no Statute can be framed for the protection of fools who are tempted, like gudgeons, by an alluring bait. There is no Act of Parliament through which legal ingenuity will not contrive, as Daniel O'Connell said, to drive a coach and four. The 38th section of the Companies Act, 1867, was thought to be a sure remedy against secret and fictitious contracts ; but it is openly violated every day by a clause in most prospectuses requiring applicants to waive it. " More is meant than meets the ear." One company is formed to take over another, or to produce a brood of subsidiary com- panies, as " flat, stale, and unprofitable " as itself. This was notoriously the case with " Father Brush" and a swarm of electric companies, and with the Date Coffee swindle of a few years since. The Founders'-Share dodge is nearly played out, happily for investors. But human credulity is still largely appealed to, with success, by a long parade of Press JOINT STOCK AND LIMITED LIABILITY. 53 Notices, of the authenticity of which there is no proof, and which in many cases are supplied to a certain class of unscrupulous black-mail newspapers as one of the conditions for a large and costly advertisement. Many persons are frightened to invest their money, because others have been overwhelmed by disaster through carelessly placing money in things they knew nothing about. Investments, especially in the shoal of new companies, is beset with risk and uncertainty, as many of these ventures are proverbially short-lived. Since the Limited Liability Act was first passed, no fewer than 49,607 companies were registered, but nearly three-fifths 28,384 out of the whole are believed to be extinct, and only one-fifth are more than ten years old. No fewer than 4276 companies were registered during 1896, with a nominal capital of ^263,423,167 ; being more than thrice as much as in 1893. The nominal capital of mining companies, the largest in the group, was ^"94,419,194; followed by manu- facturing and trading, 18,139,000. Breweries and distilleries stood for ^18,162,200; Home, Indian, Colonial, and Foreign railways, ^17,816,300; British, Colonial, and Foreign Corporation stocks, ^13,490,100; cycles and appliances, ^17,187,100. 54 STOCK EXCHANGE INVESTMENTS. The last-named is a curious illustration of the way in which fashion reacts upon commerce and investments. In the United Kingdom, of the 21,223 companies actually existing the capital is i, 145, 402, 993, which exceeds by ^300,000,000 the amount invested in French and German companies. Thus during forty years there has grown up the present vast system of joint-stock enterprise in association with the principle of limited liability. One great object has been realised to an extent far beyond all expectation, viz., to call into the direct service of industry and of all orders of production and commercial enterprise whatever available money resources were possessed by the community. These resources, without such an easy and effective outlet, safeguarded by limited liability, might have continued to be hoarded, unproductively consumed, or merely put out at interest. Under the company system, with limited liability, the amount of capital embarked in various operations and enterprises is enormous, and, not- withstanding defects and abuses, it demonstrates the value of the machinery which has called forth such a capital for the expansion of productive industry and of profitable trade, Having regard to the resources, the energy, and the enterprise comprised within the system, it may be justly described as colossal, and it occupies a place of JOINT STOCK AND LIMITED LIABILITY. 55 constantly increasing importance in the industrial and commercial life of England and of other nations. Gigantic manufacturing and trading con- cerns, when properly managed, can undertake business to an extent which no private firm dare attempt, and with highly satisfactory results to the shareholders. On the other hand, many an enterprise which has been successful when conducted by one or two persons, has signally failed as a limited company for lack of competent supervision and personal responsibility. In other cases the loading has been excessive and crushing, and promoters and intermediaries have created a fictitious capital on which it was impossible to pay a dividend. It not infrequently happens, also, that companies are floated merely for purposes of allotment, so as to secure for vendors and promoters as much ready cash as possible, and then the duped shareholders are left to face a winding-up order. Investors should be cautious about embarking in such ventures, because, in round numbers, fourteen shillings out of every twenty actually subscribed are irrecoverably lost. The outside public, forming the major part of the investors in new companies, are made to pay through the nose by promoters and their associates. The market is rigged with vendors' shares, always 56 STOCK EXCHANGE INVESTMENTS. a glut as to number, and never worth anything like the face value which they bear. To force these off at par is a supreme object, and it is aided by the foolish eagerness of many to get in at the outset for what they have been told by interested parties is a good thing. Ere long, and perhaps within a week, they wake up to the unpleasant discovery that any number of the shares may be had at a discount. If they had waited, instead of swallow- ing the first alluring bait, they might have obtained ten or twelve shares for the price of nine. The application of this caution is especially needed in the case of the numerous trading and manufacturing companies formed during recent years to acquire private businesses. A compari- son of the price of similar ventures already on the market should furnish a clue to the actual value of the dazzling schemes that appeal every week to the investing public. The old saying, " Fools build houses, but wise men buy them/' is true of most of the commercial enterprises that have been launched as limited companies. The wise in- vestor reads between the lines of a glowing prospectus. He compares and judges as to the chances, by reference to similar undertakings. By waiting a short time, and watching his opportunity, he obtains such a holding as he desires, at a price that enables him to realise a fair profit when he JOINT STOCK AND LIMITED LIABILITY. 57 sells again ; as he will assuredly wish to do ere long. It is not intended by the above criticism to depreciate mercantile limited companies, or to suggest that all new ventures are to be avoided as undesirable or dangerous. But it is well to allow the first flutter of excitement to pass, and to wait until the business is fairly on its feet under the new arrangements. The commercial value can better be judged from actual trading than from promoters' and accountants' estimates. Many original holders of the shares are sure to wish to dispose of them, at prices that are worth considering. Anyway, it is a safe rule that a new company without a history furnishes no means for determining the actual value of its shares, which should therefore be avoided until some accurate and reliable data are known. Their original price is fixed by vendors and pro- moters, " snappers-up of unconsidered trifles," as well as of lump sums, whose interest it is to obtain just as much as credulous and confiding members of the public can be induced to pay. A wise man, therefore, will not apply for such shares prior to allotment, unless he has good reason to believe that they will at once go to a premium. By this is meant a genuine premium, not a bogus one got up for selling purposes, and unattainable 58 STOCK EXCHANGE INVESTMENTS. by an outsider. As a rule, it is safer to wait until there is an actual market when the real price is known. It will probably be from two to ten or more points under the price of emission. Then, if the business is sound and progressing, the dis- count may tempt an investor to purchase for a brief holding. Should they return to par, or rise to a premium that may be really secured, the purchaser will know that value has been obtained for his money. It is a safe maxim not to join any company without being prepared to pay up the whole of the liability, and to lose it, if the emergency arises. Far greater caution would then be exercised ; and less would be heard of disasters caused by misplaced confidence in tricksters and their newspaper touts. There are not a few feeble prints, hanging on to the outer skirts of the noble profession of journalism, the sole reason of whose fitful existence is to extort money, as the price of silence, or of turgid puffs and sickening laudation. CHAPTER VI. GOVERNMENT SECURITIES. OVERNMENT securities represent the debt V_T of the nation, secured upon the public credit, with a Parliamentary title and the guarantee of the Exchequer. They rank highest as financial invest- ments, and are probably unequalled in the world. Dating back to the year 1689, the National Debt has furnished for two centuries a convenient means for securing moderate interest at regular intervals. With the founding of the Bank of England the system of public credit was established on a plan first mooted in 1658 by Samuel Lamb, a sagacious and enterprising London merchant. He published a pamphlet, in the form of a letter to Cromwell, urging the formation of a bank in London, similar to the successful one at Amsterdam, and giving reasons to explain the vast superiority of Holland as a commercial nation. William Paterson (1658-1719), a Scotchman, has the credit of the actual formation of the Bank, 59 6O STOCK EXCHANGE INVESTMENTS. which received its charter as a joint-stock associa- tion July 27, 1694, with a capital of ,1,200,000 ; being the amount lent to the Government, at 8 per cent, to relieve existing embarrassments. This character of financial agent has been main- tained ever since by successive renewals of the Charter. Certain privileges and immunities were granted in return, in the issue of notes ; in managing the Public Debt and paying the dividends ; in holding the State deposits and making temporary advances ; and in aiding in the collection of the revenue. In this way the National Debt was created ; the money being lent on condition that the principal could not be demanded, although power was re- served to pay it off. At the end of the reign of William III. the amount was sixteen millions. Not until the great French War, from 1793 to 1815, did the Debt assume gigantic proportions. The principal additions prior to that time had been during the reign of George II. and the earlier part of that of George III., arising chiefly from the American War of Independence. The amount was enormously increased by the French Revolutionary War ; to the extent of ^601,500,000. The burden of the war was largely transmitted to posterity. On January 5, 1816, the National GOVERNMENT SECURITIES. 6 I Debt, including liabilities of every kind, was ^885,186,323, or nearly four times the amount at which it stood at the close of the American War of Independence ; and seven times more than in 1760. The taxes from 1793 to 1816, irrespective of loans, amounted to ^"1,129,000,000, an average of nearly fifty millions per annum ; whereas the total expenditure in 1792 was under twenty. This is exclusive of the cost of collection, which, under the system then in vogue, was deducted from the sums paid into the Exchequer. Most of the loans were raised on stringent and wasteful terms for the nation as is shown in Fenn's treatise on the Funds while highly lucra- tive to money-jobbers, speculators, and fundholders. In 1797, for instance, a loan of ^14,500,000 was obtained by giving, for each 100 actually paid, ^"175 of Three per Cent. Consols, with twenty of Four per Cent., and an annuity of six shillings for sixty-three years. Another loan was raised by an issue of ^219 Three per Cents, for each hundred. In the following year ^17,000,000 were obtained for exactly double the sum in Consols, with an annuity of 45. nd. for sixty-two years. Other large sums were borrowed from time to time on conditions more or less onerous and costly. Of ,480,000,000 actually paid into the Ex- 62 STOCK EXCHANGE INVESTMENTS. chequer from 1801 to 1815, stock was issued for ,572,000,000 at 3 per cent, for ,37,000,000 at 4 per cent., and for ,99,000,000 at 5 per cent., besides annuities for ,316,529, terminable in 1860. Taking the whole period of the war, the average issue was "169 of debt for each ,100 actually borrowed. MacCulloch affirms that, owing to the method of funding, the country has been paying ever since for interest from six to seven millions annually more than was just or needful. A partial adjustment, but at the expense of existing bondholders, was made in 1888, when Mr. G. J. Goschen was Chancellor of the Exchequer ; the rate of interest being reduced from 3 to 2f per cent., until 1903, with the option of redemption by the Government in 1923. Other Three per Cents, had been reduced to 2f in 1884 by Mr. Childers, redeemable in 1905. A further difficulty arose during the Great War. Owing to the continuous exports of bullion the Bank of England was in great straits, and an Order in Council authorized a compulsory sus- pension of specie payments, and was confirmed by an Act of Parliament. The suspension con- tinued from 1797 until 1819, by which time the market price of gold was 42 per cent, above the Mint price, and the pound notes sunk in value by one-third. The evil was aggravated by a sudden return to specie payments. Those who had lent GOVERNMENT SECURITIES. 63 money when the currency was at par, and the owners of house property and the public creditors, had been receiving only two-thirds of the nominal values ; but, on resumption, all who had borrowed money during the depreciation had to repay in full. Thus trade and commerce were deranged. From 1793 to 1801 the average price of ^100 Three per Cents, was ^"57 175. 6d., and from 1803 to 1815 it was 60 173. 6d. The present gross indebtedness is as follows ; but the net amount, after allowing for the present value of Suez Canal shares, Exchequer balances, &c., is ^619,998,590. Comparative figures are given in Appendix D. Funded Debt ^589,146,878 Unfunded Debt 9,975,800 Estimated Capital Value of Terminable Annuities 49 ) 35 I >465 Other Capital Liabilities 4,066,002 Total ^652,540,145 Strictly speaking, the obligation is confined to the payment of a quarterly annuity. The principal cannot be demanded, although the Government can repay it on certain notice. If the holder wishes to realise, all that he can do is to sell to another, and then execute a form of transfer. Being readily marketable, great facilities are furnished to investors. But the gradual reduction of the National Debt, and 64 STOCK EXCHANGE INVESTMENTS. the holdings by various Government departments, to the extent of ^198,701,782, and by banks, in- surance companies, trustees, and others, with the state of the Money Market, have tended to enhance the price of Consols. The average from 1851 to 1880, during which the fluctuations were slight, was 9O . Then they reached par, but again sunk when the interest was reduced in 1887. For some time they ranged at 105-107, but on February 27, 1896, they rose to 109^ as the actual selling price, and on June i to 113^. The price is affected by the state of home and foreign politics, by the harvest, by commerce, and manufactures. It also serves as a barometer of the degree of national prosperity, and of confidence in the Government of the day. The prices and the mean yield during the last forty-seven years are given in Appendix C. CHAPTER VII. BANKS. HHHE Bank of England, as stated in the JL last Chapter, was incorporated in 1694. A charter was granted for eleven years, and it has been renewed fifteen times, under varying condi- tions, The last was in 1844. Exclusive privileges were conceded, and no other joint-stock bank was allowed in the country until 1826, and then only beyond a radius of sixty-five miles from London. Even now the Bank has the sole right to issue notes in London. Any country bank possessing the privilege forfeits it on opening an office in the metropolis. In May, 1844, Sir Robert Peel introduced a measure into the House of Commons for the better regulation of the affairs of the Bank of England, and of banking business generally. In doing so he propounded his famous financial conundrum, "What is the signification of that word 'pound,' with which we are all familiar ? " He entered at 6 6 * 66 STOCK EXCHANGE INVESTMENTS. considerable length into an examination of various theories as to the standard of value, and avowed himself in favour of retaining the existing gold standard. He proposed, and the Legislature agreed, that in future the business of the Bank should be separated into two distinct departments one for the issue of notes, and the other for ordinary banking transactions. The former was to be based on the possession of a definite amount of public securities, and on bullion ; notes not being allowed to be issued on deposits and on discounted bills. The fixed amount of securities was to be ^14,000,000; while of the remainder the note circulation was to be exclusively on the bullion in stock. The periodical publication of accounts was ordered. The design of the Act of 1844 was to prevent the issue of notes beyond a certain amount, unless against an equal amount of gold held by the issuing bank, so that the mixed currency of notes and coin might automatically expand or contract. Experience has shown, however, that when a foreign drain of gold occurs the quantity exported is taken chiefly from reserves in the Bank of England, and that the amount of the notes in the hands of the public has not been seriously affected by the Act of 1844. Practically, when there are signs of a foreign drain, and the reserve is diminish- BANKS. 67 ing, the Bank counteracts the danger by raising the rate of discount and by restricting its loans. The purchasing power of the public is thereby limited, prices are kept down, and at the same time gold is attracted to this country for investments. The currency in circulation is not really interfered with. The annual sum payable by the Bank for its exclusive privileges is now ,180,000. All profit from the increase in the issue of notes beyond ^14,000,000 is directed to go into the Exchequer. By the Act of 1892 the remuneration payable to the Bank for the management of the National Debt is a yearly sum at the rate of ^325 per million of the debt, up to five hundred, and of /TOO for every million beyond. The arrangement holds until the year 1912, and thereafter as Parlia- ment shall direct ; but the total amount is not to be less than 160,000. A sum of /ioo per million is paid for the management of Exchequer Bonds and Bills, and ^200 per million for Treasury Bills, on the amount outstanding on the last day of the preceding financial year The profit derived by the Bank upon its issue department is the interest of 3 per cent, on the /i 4, 000,000 of Government debt and securities, less i 20,000 paid for its exclusive privileges, and ,60,000 in lieu of stamp duties. The net yearly 68 STOCK EXCHANGE INVESTMENTS. profit is about half a million, and in addition there is a profit of ,30,000 to 40,000 upon bullion, which the Bank is bound to purchase whenever offered at z J 7 S ' 9^. per ounce. For the management of the National Debt the Government pays nearly a quarter of a million annually, and the remaining profits of the establishment are derived from the use of the Bank capital, and of deposits by customers, on which no interest is given. The Bank also transacts private business, but this department has to be kept distinct, and its interests are somewhat antagonistic to those of the other branch. The Bank Stock, belonging to the proprietors, is now 14,553,000, and the " Rest," or surplus funds, necessarily varying from week to week, about 3,500,000. Its stock is regarded as one of the best investments. The earnings correspond with the rates of discount, which are regulated by the state of trade and of the Money Market. It is natural that the proprietors should desire even a better return, as they cast longing- eyes upon the much larger dividends of other banks. In 1844 the dividend was 7 per cent., and the price of Bank Stock was 212. It is now March, 1897 from 32910 332, and the rate in 1896 was 8J per cent. Details are given in Appendix C. In the same period London and Westminster BANKS. 69 Bank shares, in spite of a doubling of the capital have risen from 27 to 51, while the dividend has increased from 6 to 10 per cent. One expla- nation is that whereas this bank has only 13 percent: of its liabilities lying idle, the Bank of England has over 40 per cent. The creation of joint-stock banks in London arose from a discovery that the Bank Charter Act did not really prohibit such institutions being formed to carry on business on the lines adopted by private banks. The only exclusive privilege was the issue of notes payable on demand, but there was no monopoly granted for receiving deposits. In the olden time, when the Charter was first framed, banking referred exclusively to the issue of notes. Deposits were scarcely known. Goldsmiths had acted as bankers, and they were accustomed to deposit surplus coin and bullion in the Exchequer, the arbitrary closing of which by the Government in 1673 caused wide-spread ruin, and deranged trade and credit for many years. The Bank Act of 1833 contained a new clause, permitting joint-stock banks which had existed in the provinces since 1826 to be formed in London, provided they did not issue notes ; but for some years legal technicalities arose as to the acceptance of bills, the power to sue for debts, and similar questions, which constantly embarrassed the opera- tions. The London and Westminster was the first 7O STOCK EXCHANGE INVESTMENTS. joint-stock bank founded in London, in 1834. Its great success speedily led to the formation of the London Joint-Stock Bank, the Union Bank of London, the London and County, the National Provincial, and others. The dividends of the best range from 10 to 20 per cent., but then the market price of the shares, even with the unpaid capital in- volved, is proportionately high (see Appendix E). Bank securities are naturally regarded as being among the best. Since the passing of Leeman's Act every seller of bank shares must supply the numbers of those he is disposing of. Reckless advances, fraud, and misappropriation, as in the notorious case of the Royal British Bank in 1856, or that of Strahan, Paul, and Bates, in 1855, are the chief dangers of banking. Sudden crises in finance and trade have to be guarded against by means of a judicious reserve, securely invested and easy of realisation. Few persons possess the philosophy of the man who, being asked on the failure of his bank, " Were you not upset ? " replied, " No ! I only lost my balance." The liabilities on deposits and on current accounts are shown in the following instances, taken from the reports of 1896 ; the aggregate deposits in banks that publish accounts being upwards of ; 7 70,000, ooo : BANKS. 71 National Provincial Bank 45,889,744 London and County 38,202,824 London and Westminster 24,306,081 Lloyds 32,644,925 London Joint Stock 16,760,060 Union of London 15,633,056 Capital and Counties 14,567,805 The total capital held by the banks in the country which publish accounts may be stated in round figures as follows : CAPITAL. RESERVE. Bank of England ... ,14,553,000 ... 3,000,000 English Banks ... 54,520,000 ... 27.336,000 Scotch Banks 9,302,000 ... 5,927,000 Irish Banks 7,109,000 ... 3,177,300 85,484,000 Total 124,924,300 Allowing for the banks which do not publish accounts, the estimated total capital is brought up to 188,802,775, of which the capital actually paid, according to Burdett, is 58,712,600. The main increase, about forty millions, during the last twenty years has been in England and Wales. The in- crease in Scotland, amounting to about a million and a half, has been confined to the Reserve Funds. The Bank of England has about 26,000,000 of notes in circulation, country joint-stock and private banks about one and a half millions, and the Scotch 72 STOCK EXCHANGE INVESTMENTS. and Irish banks together fourteen and a half millions. Since the Act of 1844 158 private banks and 37 joint-stock banks in England and Wales have ceased to issue notes, to the amount of ^"5,1 19,780. The position of the Bank of England with respect to specie reserve, though somewhat improved when contrasted with 1876, is not nearly so strong as compared with other countries, where similar insti- tutions have made greater advances. This will appear from the following statement : BANK OF ENGLAND. Reserve of Notes and Coin. 1876 ^19,200,000 | 1896 ^25,400,000 BANK OF FRANCE. 1876 ^"85,600,000 | 1896 (Gold) ^79,200,000 (Silver) ^49,200,000 Total ^128,400,000 sa IMPERIAL BANK OF GERMANY. 1876 (Coin and Bullion]... ^24,500,000 1896 ^41,600,000 NEW YORK ASSOCIATED BANKS. 1876. Specie ,3,600,000 Legal Tenders ... 8,500,000 Total ... 12,100,000 1896. Specie . 1 2,700,000 Legal Tenders ... 1 2, 1 00,000 Total ...24,800,000 BANKS. 73 The above increase shows that the Bank of England is a little stronger, but that while banks in other countries have felt the necessity of improving their position, it has not done so in the same pro- portion. It cannot be denied that an adequate specie reserve, which is the first requirement of business security, is not maintained, or that in proportion to the banking liabilities of the country the reserve is smaller now than it was twenty years ago. As Bagehot points out, and as Sir R. Giffen confirms, the cash reserve of a banker is the condition of his solvency. If all depositors and holders of notes demanded their cash at once, they could not be paid. A banker has to keep enough in hand for current demands, and also a reserve for emergencies. Practically, however, the ultimate resource is in the Bank of England, which dominates not only other banks, but has many foreign connec- tions. The latter, and provincial banks generally, have London agencies, usually the leading joint stock and private banks, which in their turn keep deposits with the discount houses, the bill brokers, and the Bank of England. Thus one bank leans on another, and the final result, as was shown in the sixth and the seventeenth Chapters, is that the main reserve is kept by the Bank of England only. Its proportion of reserve to liabilities at the end of 1896 was 54 per cent. CHAPTER VIII. INDIAN SECURITIES. FEW persons have any idea of the extent, the area, and the population of British India, and of the native States under British protection. According to the Census of 1891 the area in square miles was 1,560,160. The number of towns and villages was 717,549. Houses occupied, including, of course, large numbers of frail constructions, were 52,932,102. The total population was given at 287,223,431 ; being 184 to the square mile. The British Empire in India extends over a territory larger than the Continent of Europe, excluding Russia. In addition, there are vast tracts on the North-Western and North-Eastern frontiers which are under the political influence, though not under the administrative rule, of the Indian Government. Its actual barrier extends from Persia along the Russian territory as far as the Oxus ; thence by the Panjah branch to Victoria Lake, and up to the line of Chinese territory as 74 T-ffc'J KS/ry ) >RN1A^/ ^%^GRN\* INDIAN SECURITIES." 75 defined in 1895 ; from which it passes along the crest of the Himalayas to Siam, and halfway down to the Malay Peninsula. . Continental India, including Baluchistan, reaches from the 8th to the 87th degree of North Latitude, and from the 6ist to the zooth degree of Longitude. In addition, the great province of Burmah was annexed to the Asiatic dominions in 1886. The whole comprise a territory compared with which the ancient Mogul Empire fades away into insig- nificance. Most of this has been acquired within the present century. Since the Indian Mutiny, in 1857, the supreme control of affairs is invested in the Secretary of State for India in Council, who is always a member of the English Government. For upwards of a century prior to 1750 the English and French, the Dutch and. Portuguese had been carrying on, with varying but slight success, a trade with India. There were mutual jealousies and rivalries and frequent collisions with native rulers. The English had been barely tole- rated in 1640 in founding a settlement in Madras. By the middle of the next century they became formidable. Clive, Warren Hastings, and other capable and daring men had the courage to under- take responsibilities from which weaker men would have shrunk. 76 STOCK EXCHANGE INVESTMENTS. 9 In the dispute with the French, which was brought to a crisis by the great game of political chess played between Clive and Dupleix, the deter- mining factor was England's supremacy on the sea, which rendered her ultimate conquest of India not only possible but certain. In this way was determined the question whether France or England was to rule India. Possibilities were opened up, such as not even the most adventurous and far- seeing could have anticipated, of a sovereignty or a protectorate embracing within about a century more than one-fourth of the human race. The great trading corporation, so long known as the East India Company, was established in 1702 by an amalgamation of two existing chartered bodies dating back to the time of Queen Elizabeth. Ere long it wielded sovereign authority. It set up and dethroned princes ; made peace and war ; levied vast taxes, and exercised a commercial monopoly which no private persons could break down. Successive charters were granted, conferring additional powers ; always in return for valuable consideration, and reserving a control to the English Government. The gross revenue in India during the year 1895-6, the last for which the returns are available, was ^"97,877,900, chiefly derived from the land, from taxes on opium and salt, and receipts from INDIAN SECURITIES. 77 railways. These comprise 19,677 miles, three- fourths of which are State lines owned by the Government. There are also four guaranteed companies, like the Great Indian Peninsula, with a mileage of 2587, and a small number of assisted companies. The native States, which retain a certain amount of independence, have also 1560 miles. The grand total of passengers conveyed on all the systems during the year was 153,081,477, and the quantity of goods and minerals 33,628,030 tons. 5789 miles of railway were also sanctioned. The aggregate receipts from all sources were ^26,236,906 ; the working expenses being 46*15 per cent. The total capital raised by the railway companies to the end of the year 1895 was ^114,701,259. The companies pay into the Trea- sury the net receipts, and if these do not suffice the amount required is made up from the public revenue. Any profits in excess are paid to the stock-holders, after refunding any advances made in previous years by the Government, which has six months' option of purchase on the expiration of a lease, on the average price of the stock for three years. No competing lines are allowed, and those constructed are under rigid supervision, both in building and in working. They are essential for the rapid transit of troops and materials of war, and this was the principal reason for the State guarantee 78 STOCK EXCHANGE INVESTMENTS. in such a vast territory, where 287 millions of people are governed by a mere handful of English adminis- trators. Indian railways are safe investments, and pay a fair rate of interest. The general prospects are good. Rich and productive districts have been opened up for the cultivation of grain, tea, coffee, chincona, jute, cotton, silk, and other valuable pro- ducts. China used to supply us with tea. In 1872, the imports thence were 122,000,000 Ibs. In 1895, they were only 31,500,000 Ibs. India now grows fourfold the quantity. Its annual exports exceed 133,000,000 Ibs. A few years ago but little corn was raised in India for export, but a large portion of the staple supply of food now comes to England from her Eastern possessions. The abundant supply of cheap labour, and the prolific tropical growth, have largely supplanted Russia and the United States as the sources of England's supply of cereals. India is now our principal market. The imports from England of such articles as manufactured textile goods, metals, machinery, salt, beer, &c., amounted, by the last returns, to ^"58,322,906, and the exports to ,40,578,469; one-third being cotton, jute, and seeds. The India Public Debt, now amounting to ^233,186,886, and largely held in this country, has been incurred partly for war INDIAN SECURITIES. 79 expenses, but chiefly by the large outlay on public works, such as roads and water supply and storage. Irrigation works alone have cost ^30,343,404. The country has been greatly benefited, and the money is reproductive. The interest is charged upon revenue. Indian Government securities are deemed as safe as Consols, and they yield a better return. The debt is managed and the dividends are paid by the Bank of England. Of a widely different order are the numerous tea and coffee plantations in India and Ceylon that have been brought forward of late years under the guise of limited companies. To those who are thinking of investing in the great majority of such ventures may be applied the im- mortal advice given by Punch to persons about to marry " Don't." CHAPTER IX. BRITISH COLONIES. OUR Colonies have experienced great and rapid alternations. Of late, disaster has been more marked than prosperity. Fatal mistakes in the methods of settlement, in the convict system, in land and labour troubles, in sending unsuitable emigrants, and in reckless trading and borrowing, have borne their certain fruit. If Lord Bacon's sage advice, given at the time when " Plantations," as they were called, began to be formed across the Atlantic, had been followed, much subsequent trouble and disaster might have been avoided. He wrote : " It is a shameful and unblessed thing to take the scum of people, and wicked, condemned men, to be the people with whom you plant. Not only so, but it spoileth the Plantation, for they will ever live like rogues, and not fall to work, but be lazy, and do mischief, and spend victuals, and be quickly weary ; and then certify over to their country to the discredit of the Plantation. The people wherewith you plant ought to be gardeners, Sn BRITISH COLONIES. 8 1 ploughmen, labourers, smiths, carpenters, miners, fishermen, fowlers ; with some few apothecaries, surgeons, cooks, and bakers." x This wise counsel was disregarded. Even so late as the settlement of Australia the things were done from which Bacon dissuaded ; and hence the calamities occurred which he foretold. He added, " Let there be freedom from Customs, till the Plan- tation be of strength ; and freedom to carry their commodities where they may make the best of them, except there be some special cause of caution. Cram not in people by sending in too fast company after company ; but rather hearken how they waste, and send supplies proportionably, but so as the number may live well, and not by surcharge be in penury. When the Plantation grows to strength, then it is time to plant with women as well as with men, that it may spread into generations, and not be ever pieced from without." Australasia, that is Australia, or Southern Asia, comprises the great island continent of that name, with New Zealand and Tasmania, and a vast num- ber of smaller islands in the Southern hemisphere, together with a portion of New Guinea. The whole of the British possessions in this scattered area are estimated to contain 3^ millions of square 1 Essay, No. 34. 2 Essay, No. 34. 7 82 STOCK EXCHANGE INVESTMENTS. miles. Portions of the coast on the north-west and south of the main continent were sighted by the Dutch, the Spaniards, and the English at different times, but no attempt was made to explore or settle it. Practically it was made known to the world by Captain James Cook in 1770. The first British settlement was formed in 1788 at Port Jackson, now called Sydney. William Dampier, in the course of his voyage round the world, from 1684 to 1690, visited Australia and New Guinea, and gave his name to the Dampier Archipelago and Strait. The only use to which the continent was put by England for many years was as a penal settlement, with which the name of Botany Bay will always be dismally associated, Captain George Vancouver afterwards discovered the island that bears his name ; and this led to the eventual acquisition of the vast territory of British Columbia. The Spanish monopoly of the Pacific was finally broken, after an existence, almost un- challenged, of nearly three centuries. Across the Atlantic the French occupation of Canada for a century and a half had been more in the nature of a military post than of a colonial and commercial dependency. The French movements in Canada were always viewed with dislike by the English settlers in New England and in Virginia BRITISH COLONIES. 83 the feeling was intensified when the French aimed to establish a connection between the basins of the St. Lawrence and the Mississippi, by the great intermediate lakes and waters lying to the west of the British possessions. Local collisions had fre- quently occurred long before Sir James Wolfe was sent in 1759 to lay siege to Quebec, where "he fell upon the lap of smiling Victory." His achievement led to the surrender of the whole territory to England by the Treaty of Paris, February i o, 1 763. In this way England took a leading place among European people. She had already given birth to two nations, in America and in India, destined to become mighty empires such as the world had never seen, not even in the palmy days of Egypt or Persia, of Greece or Rome. She was also destined, ere long, to call into being other settlements in Africa and in Australia, constituting, with older and later dependencies, the Greater Britain on which the sun never sets. The Dominion of Canada includes the various provinces of North America, formerly known as Upper and Lower Canada, New Brunswick, Nova Scotia, Prince Edward Island, British Columbia, Manitoba, and the North- West Territories. New- foundland and Labrador alone remain outside. This territory, nearly as large as Europe, stretches from 84 STOCK EXCHANGE INVESTMENTS. the Atlantic to the Pacific, and contains a total area of nearly 3^ millions of square miles, exclusive of the great lakes and rivers. Canada and New- foundland have a population of 5,031,073. The gross revenue is ,7,816,138, of which Customs yielded ,4,257,189, The total value of imports is ^26, 864,2 1 7, and the exports 25,359,622. The public debt is ,62,258,461. The interior of the vast continent of Australia had been heroically explored since 1813 by men like Wentworth, Mitchell, Lander, and Burke. A thin and scattered fringe of settlements was formed around the coast ; imaginary and arbitrary lines dividing what are now known as the separate colonies. New South Wales was the generic name given by Cook to the whole of the vast continent. South Australia was established in 1834 ; Victoria, formerly called Port Phillip, in 1851 ; and Queens- land in 1859. Van Diemen's Land, or Tasmania, was settled by Englishmen in 1825, and New Zealand in 1841. The island of Fiji was annexed in 1874. Within a decade after the discovery of gold in Australia, in 1851, quantities of no less value than ,960,000,000 reached England from New South Wales and Victoria. Seventeen years later a similar excitement attended the discovery of diamonds in BRITISH COLONIES. 85 Cape Colony. In course of time things found their natural level. Trade and industry reaped the chief share of the benefit, and the community found the advantage in a diffusion of wealth that assisted the development of the colonies. The population of the Australian Colonies at the end of 1894 was given at 4,149,084, and their gross public revenue at 27,969,108; of which Customs yielded ,7,822,208. The value of im- ports for the year was ,48,817,685, and of the exports 62,900,055. The public debt exceeded 200,000,000. In addition, there were Treasury and Deficiency balances outstanding to the amount of nearly 10,000,000. For a time Colonial Securities were in great fequest, and some of them are still deservedly popular. But it cannot be denied that certain colonies have borrowed recklessly, far beyond their financial strength. In a natural desire to construct railways, harbours, and docks ; to lay out towns and cities ; to provide drainage, lighting, and water supply ; and to open up the resources of the interior, they have attempted too much within the time, and have undertaken extensive works that ought to have been spread over a lengthened period. These re- marks apply not only to the obligations of particular colonies, as a whole, but to certain cities and towns 86 STOCK EXCHANGE INVESTMENTS. which have incurred heavy debts. So long as English investors were willing to provide the money, so long was there a disposition to borrow ; and it is to be feared that sufficient heed was not given to the inevitable day of reckoning. This applies especially to New Zealand and to the two great railways that traverse the Dominion of Canada. Both the Grand Trunk and the Canadian Pacific must be regarded as speculative lines. What they may become in the future cannot be predicted. The original shareholders in the former have long since lost the whole of their money, and the line, which was essentially a con- tractor's line, has had to be reconstructed from time to time, so badly was it built and equipped. No less a sum than ^32,000,000, chiefly of English capital, has been embarked, and for the most part hopelessly sunk, in the Grand Trunk and its associated lines, which are comparable, as a bottom- less pit, to the Erie and the Philadelphia and Reading roads. The proposal to construct a line of nearly 3000 miles, mainly through a desolate and unprofitable region, with the scandalous political jobbery con- nected with the transaction, involved the downfall of the Macclonald Ministry in 1873. The public memory is proverbially short, and, seven years later, BRITISH COLONIES. 87 the project was revived by the restored Cabinet, and glowing pictures were drawn of the vast wealth which the line was expected to develop and of the commercial and political future that awaited the country. The measure was forced through, in the face of strenuous opposition, and by means, as was alleged, of unscrupulous bribery and of lavish promises. As finally settled, the terms on which the Canadian Pacific was constructed were onerous for the Dominion ; but everything is there done on a reckless scale, for political reasons and ends. The Company received a free gift of ,500,000, of 713 miles of completed road, and of 25,000,000 acres of land, free of taxation for twenty years. All materials were admitted duty-free. The Com- pany had absolute control in fixing rates and charges until a 10 per cent, dividend was paid, and no competitive line was to be sanctioned for twenty years. The results have been unsatisfactory from an investing point of view, whatever gains may sometimes have accrued to the promoters and to professional politicians. Perhaps one through railway is more than Canada requires, or is likely to require for a long time to come. Its entire population is not five millions, scattered over an area extending 3300 miles from 88 STOCK EXCHANGE INVESTMENTS. the Atlantic to the Pacific, and numbers of emi- grants perhaps a majority continually cross the border into the United States. Omitting Montreal, Toronto, Hamilton, London, and a few other cities, and a dwindling place like Quebec, there are none of any size or importance, and the agricultural and mineral resources are checked by six months of severe winter, South Africa was colonized after the middle of the present century to a much greater extent than formerly. Cape Town had been ceded to England by the Dutch in 1814, and new settlements were established at Natal and elsewhere in 1843. The centre of the vast continent was supposed for ages to be a trackless desert. Many intrepid explorers were foiled in attempts to penetrate into the interior, until, in 1849, David Livingstone opened up a way into the Dark Unknown, revealing populous regions teeming with natural resources. Later discoverers have completed the task which Livingstone set himself to accomplish, and there has been in recent years a scramble among the English, French, Belgians, Germans, Italians, and Portuguese for the apportionment of the coast line, giving access to the hitherto unsuspected wealth of Central Africa with such of the interior as can be seized and held. The two leading groups of British colonies in BRITISH COLONIES. 89 Africa consist of those on the west coast near the Equator, and those in the southern extremity, which alone are adapted for European settlement. The latter comprise Cape Colony, Natal, Bechuanaland, Basutoland, and Zululand. These partially sur- round the two Dutch-speaking republics, the Trans- vaal and the Orange Free State, with certain de- pendent native territories, and the South African protectorates of Germany and Portugal. Besides the above-named colonies large portions of territory are under British protection, such as those of the Royal Niger Company, the British South Africa Company and others. The total area of these colonies, excluding the protected territories, is more than 300,000 square miles, and the white population is about 330,000. Considering that four hundred years have elapsed since Bartholomew Diaz and Vasco da Gama first doubled the Cape of Good Hope, it is somewhat sur- prising that the European Settlements along the South African coast have not much more rapidly increased. The African Colonies, including the West Coast Settlements, had a population in 1894 of 3,871,721. Their united public revenue was ,4,909,032, of which ,1,979,364 were derived from Customs. The imports amounted to "16,245,691, and the exports to "17,887,130. The Public Debt, so far as it can be given returns from some smaller 9O STOCK EXCHANGE INVESTMENTS. settlements, like the Gold Coast and St. Helena, being missing was ^36,000,000. Other colonial settlements, like the West Indies, the Windward and Leeward Islands, British Guiana, &c., have a population of 1,635,472, with a gross public expenditure of ,232,309, about one-half of which was derived from Customs. The total im- ports were ^9,85 1,156, and the exports /935357- The Public Debt stood at a little more than ^4,000,000. CHAPTER X. RAILWAYS AND TRAMWAYS. ENGINEERS like Telford and Rennie did much at the beginning of this century to open up communications and to facilitate traffic by the great roads which they constructed. From 1760 to 1773 no fewer than 452 Acts of Parliament authorized the making or the improvement of roads, which led to an amount of travelling hitherto unknown. The name of Macadam is associated with a later method of using broken granite, pressed so as to cohere. James Brindley, aided by the far- seeing Duke of Bridgewater, developed the system of navigable canals. Other great works of public utility were constructed in the closing decades of the last century. New Titanic forces, undreamed of years before, were employed to assist the growing manufacturing industries which made England for generations the workshop of the world. The first Act of Parliament for the construction of a railway was that of the Surrey Iron Railway 92 STOCK EXCHANGE INVESTMENTS. Company in 1801, for a line of six miles from Croydon to Wandsworth, so as to make connection for goods with the river Thames. The develop- ment of the iron trade in the North of England, and inventions by William Symington, William Mur- doch, James Watt, Richard Trevethick, Stephenson, and others, in the direction of a workable loco- motive, led to the rise of the great railway system in the pioneer Stockton and Darlington line, which was opened September 27, 1825. This was followed by the Liverpool and Manchester line, five years later, and by the one from London to Birmingham in 1838 Then set in the era of rail- way extension and development, with which every intelligent reader is acquainted. Until the middle of 1836 few railway under- takings had been projected since 1825, but a host of proposals then appeared for lines to almost every part of the country. The wildest schemes were freely entertained. One projector proposed sails to propel his engine. Another offered to use rockets, and confidently promised a speed of one hundred miles an hour. Railways to carry invalids to bed were advertized. A safety railway out of reach of injury was proposed. With the excitement there was a sudden rise in the shares of existing com- panies. Scrip in the greater number of the new projects speedily commanded a premium, usually RAILWAYS AND TRAMWAYS. 93 fictitious. The time of reaction soon arrived. Money became scarce. The eyes of the public were opened to their folly, and shares of every description fell. A panic occurred in the City. The Bank rate of discount was raised to 5 per cent., and interest on Exchequer Bills was from ijd. to 2^d. per day, yet they fell to 10 per cent, discount. Consols fell to 89!. Merchants of high character, who were known to be more than solvent, could neither sell the goods which crowded their warehouses, nor discount their bills. Many great houses were brought to the brink of ruin, and not a few sank beneath the struggle. Half the cotton mills of the country were closed, and the skilled operatives suffered much distress. Notwithstanding all this, the country was seized with another and a worse mania of the same kind ten years later, and recovered from it only after more aggravated sufferings had been endured. A few keen and clever men made immense fortunes, and more netted thousands by knowing when to sell ; but the majority, as was inevitable, were plunged into grievous loss or utter ruin. Railways hold on land the same relative position as ships on the sea, and exercise a powerful influence on trade and prices. In 1850 the total 94 STOCK EXCHANGE INVESTMENTS. mileage in Great Britain was only 6621, and in the whole world 24,487. Now, in the former case, the railways opened and at work have a reported mile- age of 21,174. The ordinary paid-up capital is ^364,037,405, and the guaranteed, preferential, and loan and debenture stock ^"637,072,816. The number of passengers conveyed, exclusive of season- ticket holders, during the year was 929,770,909. The weight of goods and minerals conveyed was 334,230,991 tons ; the gross receipts from them were ^44,034,885, and from passenger traffic ^37,361,162, or an average from both sources of ^3844 per mile of line open. The working expen- diture was ^47,876,637, or 56 per cent. ; the chief part being in the form of wages. Upwards of 350,000 men are directly employed. Adding those em- ployed indirectly, half a million are dependent for a livelihood on railway enterprise. In 1850 the ordinary cost of land-carriage for goods was ^3 per ton for 100 miles, or six times the present amount. Railways are among the soundest investments. The excitement, waste, and recklessness that marked the mania of 1845-6 have long since given place to careful working and judicious management. Profits depend on the prosperity of the country, on the state of trade, on the cost of fuel, on the weather, and on the absence of accidents and of strikes. Weekly traffic reports enable an approximate calcu- RAILWAYS AND TRAMWAYS. 95 lation to be made of actual earnings and of prospec- tive dividends. Some lines come to be regarded as favourites because of prudent management, or economical working, or immunity from accidents. The North-Western attained its present high credit, in part, from a belief, widely diffused, in the rigour of the auditing, whereby numerous items of expense were charged to revenue instead of to capital. A general opinion that any stock is well thought of enhances its reputation and its value. According to a return issued in January, 1897, the length of 154 tramway lines open is 1009 miles, and the total capital expenditure ,15,195,993. Only twenty-seven miles were added during the previous year. The number of passengers conveyed was 759,466,047; the gross receipts were ,4,151,016, and the working expenses ,3,105,511. The ex- cessive cost and " loading " of some of the earlier tramways, preventing a profitable return upon a fictitious capital, and often ending in bankruptcy, and the smirched character of many of the pro- moters, have created a strong prejudice. Yet many persons deal in them largely, and with satis- factory results. Care should be exercised in the selection, for it is easy to make fatal mistakes in the choice. CHAPTER XL MINES. FROM the time of the great discoveries by the Spaniards of gold and silver in South America hope and cupidity have been eager to share in what seemed to be fabulous wealth. The comedy of Eastward Hoe! first performed in 1605, an< 3 ascribed to the joint authorship of Ben Jonson, George Chapman, and John Marston, expresses the popular opinion then cherished as to the supposed wealth of Virginia, as the vast, unknown region beyond the Atlantic was termed : " Gold is more plentiful there than copper is with us. All their dripping-pans and pots are pure gold . . . and as for rubies and diamonds, they go forth on holidays and gather them by the sea-shore." The covetous hunger after wealth, aroused by such rumours, is also shown in Michael Drayton's spirited Ode to the Virginian Voyage, and in Ben Jonson's Alchemist. * Iron and steel manufactures rapidly developed 1 Act ii. scene i. 9 6 MINES. 97 under new and improved mercantile appliances. The first iron bridge on a large scale was erected in 1776 over the Severn at Coalbrookdale. In 1802, 1 68 blast furnaces were at work, producing annually 170,000 tons. Steam was also applied to the drainage of mines, and to the raising of their produce to the surface, and this, combined with improved methods of constructing the working galleries, and providing effectual ventilation, gave a great impetus to this important branch of industry. In 1762 only 570,774 chaldrons of coal were brought to London. The quantity increased by 1785 to 675>995- The last return, for 1895, gives 189,661,362 tons raised in the United Kingdom, valued at ^"57,231,213. The number of persons employed in mining was 739,097, of whom 589,689 worked underground ; 559,824 being engaged in coal mines. The quantity of salt raised was 2,236,000 tons, valued at ,763,629. Metals were produced from British ores during the year in the following quantities : pig iron, 7,703,459 tons; fine copper, 579 tons; metallic lead, 29,687 tons ; white tin, 6290 tons ; zinc, 6654 tons ; and silver from lead, 280,434 ounces. The estimated value of the whole at the places of pro- duction was ^76,601,257. Home coal and iron, though representing a large industry and an enor- mous capital, make an unsatisfactory show when 8 98 STOCK EXCHANGE INVESTMENTS. judged by results, owing to competition, strikes, royalties, and heavy fixed expenses. Risks and speculations abound. Successful coal and iron com- panies are few, and failures are numerous and serious. Land and exploration companies, especially in ' South Africa, look for valuable results from selling or leasing some of their extensive mineral proper- ties. The prospects are good; remembering the great wealth of the Transvaal and other districts. The Kimberley Diamond Fields have become famous for their riches, but this branch of mining is fickle, owing to the caprices of fashion, and the constant risk of outbreaks from local jealousies and rivalries, and is highly speculative Moreover, the enormous " loading" of some of the concessions has created a fictitious paper capital, that is perpetually being thrown on the market. Mining shares therefore require caution, as the notorious and disgraceful case of the Emma Mine demonstrates ; but, with good judgment, large profits can be made, notwithstanding Bacon's caution, " Moil not too much underground, for the hope of mines is very uncertain." 1 Indeed, they offer greater opportunities than any other kind of investment. The Richmond Mine produced in 1 Essay on Plantations. MINES. 99 twenty years 83,183 tons of lead, 15 tons of gold, and 460 tons of silver ; the total worth exceeding five millions, and ,915,502 was paid in dividends. 5 shares sold at 16. Other mines have done as well, or better. Many that pay no dividends are yet in a sound and hopeful state, though not sufficiently developed to yield present returns. Shares are bought and held for a time, with a view to probable value, or in order to watch the market for a rise, which is certain to occur as soon as there is a prospect of dividends. Values are then often doubled or quadrupled. West and South Australia present possibilities on which even a sober forecast would be thought by some to be extravagant. The aggregate nominal capital of companies formed in connection with mining, financing, and a few subsidiary concerns, is a little over forty-six millions within two years. A growing interest is being taken in this market, which bids fair to become a leading market for speculators. It is impossible at present to say how many of the swarm of new undertakings will prove to be successful, until something more definite is known of the actual returns. In certain cases rich results have been indicated, and undoubtedly some will prove to be large prizes. The output of gold is growing. In 1895, according to official returns, it reached 231,512 oz., valued at ,880,000. IOO STOCK EXCHANGE INVESTMENTS. The number of persons interested as investors in mines is very large. Our register embraces nearly 100,000, compiled from the shareholders' lists at Somerset House. Circumstances have arisen, especially in the Transvaal, to depress values, but, judging from experience, this is only temporary. A revival of business in this depart- ment may be confidently expected. With the opening of new districts, with improved methods of extracting the ore, and with favourable and authenticated reports of crushings, an impetus will be given to the mining market, and investors may anticipate gratifying results. Among mines and exploration companies we believe in the future of the following, among others: the Associated Groups in West Australia, the British Dominions Explora- tion, the Mount Catherine Gold Mine in the Coolgardie district, the Talunga Gold Fields Development Company, near Adelaide, Aladdin's Lamp, Great Boulder, Hannan's Brownhill and Mount Lyell, in Australia, and, among South African, City and Suburban, Crown Reef, Durban Roodepoort, Ferreira, Henry Nourse, Meyer and Charlton, and Worcester mines. As an instance of valuable information being placed at the disposal of our customers, we were in a position in 1895 to advise the purchase of shares in the Associated Gold Mines of Western Australia, about 29,000 of which we were able to place at the par price of i. They subsequently reached 3^- in the market. CHAPTER XII. CORPORATION STOCKS. LOANS for municipal purposes are extensively dealt in. Raised for such objects as paving, drainage, lighting, and water supply, the payment of principal and interest is secured on the rates, and is usually deemed safe. The amount of such debts in the United Kingdom is ^106,141,632. The chief stocks are those of the City Corporation, of the London County Council, and of places like Manchester, Liverpool, Birmingham, Glasgow, &c. Most of them, at existing prices, yield only about 2 i"f P er cen t-> and the fluctuations in price are inconsiderable. In buying, notice should be taken of the time of redemption, lest the purchaser loses any premium he may have paid. So far as the imperfect data exist, down to the year 1893, and not including the whole indebtedness of the kind in Scotland and Ireland, for which there are not complete returns, a sum of ^240,000,000 has been borrowed by Municipalities and by Local Boards of IO2 STOCK EXCHANGE INVESTMENTS. Health, Boards of Guardians, School Boards, and other authorities, for various purposes. The Public Works Loan Commissioners issued a circular in December, 1895, to various local bodies who made application to be allowed to repay loans before the time agreed upon. The London School Board, for instance, asked for leave to repay about three millions, and a like amount was offered by various local authorities. The Treasury department intervened to forbid the arrangement, although here- tofore it has been the practice to accept repayment without question. The reason assigned for the refusal was that, although the practice worked well enough when the amounts were comparatively small, it could not be allowed to an extent of six millions at one time. It was apprehended that other local authorities might apply to repay the loans which they have obtained from the Treasury, amounting in all to nearly twenty-two millions. It was said that such a contingency would destroy the solvency of the Public Works Loan Board, and would impose a heavy and unjust burden upon the taxpayers. There is, however, another side to the whole question. From the point of view of the borrower, the application was natural and reasonable. With a glut of money, Local Boards, School Boards, CORPORATION STOCKS. 1 03 Sanitary Authorities, and others, can go into the open market and borrow money more cheaply than they can from the Commissioners. It would be possible, therefore, to pay off their indebtedness to the Government, and at the same time to diminish the annual charge for the benefit of the ratepayers. But they are also taxpayers for Imperial purposes, and in that capacity it is said by the Treasury that their interests must be studied. The Local Loans Stock, amounting 10^38,856, 034, by means of which money has been raised and advanced to local authorities, bears interest at the rate of 3 per cent. It was created under the National Debt and Local Loans Act, 1887, at a time when high-class securities were much lower in price. The stock is now quoted at the large premium of nearly 1 1 per cent., and is not repay- able until 1912. It was urged therefore by the Treasury that large repayments on account of loans could not be employed in cancelling the stock, except on terms which would involve the ultimate insolvency of the capital account ; for every million received in repayment would cancel only ,900,000, because of the above premium. The only other way of investing the money would be in Consols, which at their present price yield about ^ per cent, less than the average interest IO4 STOCK EXCHANGE INVESTMENTS. earned by loans to local authorities. The Treasury therefore decided that, in future, applications to repay local loans in advance shall be complied with on three conditions : firstly, that three months' notice be given ; secondly, that the applicants agree to repay at such times and in such instalments as the Treasury require, after consulting with the National Debt Commissioners ; and thirdly, that for every ,100 outstanding on the loan account, such sum shall be repaid as may be certified to be equivalent to the price at which ^100 of Local Loans Stock can be purchased. Of course, looking at the matter from the depart- mental point of view, nothing can be said against the substantial justice of the decision, but there is a much wider question. Why should the Govern- ment enter into competition with the great body of the investing public ? The leading municipal cor- porations of the country experience no difficulty in raising loans at a reasonable rate of interest. Usually the amount required is subscribed several times over. Thousands of persons are always to be found ready to invest their money in perfectly safe securities of this kind that are easily negotiable. A recent illustration is furnished by the issue, in March, 1896, of ^71,854 Ipswich Corporation Three per Cent. Redeemable Stock. The tenders for it amounted to ,933,966, and applicants at CORPORATION STOCKS. 1 05 110 6s. 6d. only received about 4 per cent, of what they applied for. Allotments in full were not made below 111 ios., and ,10,000 was sub- scribed as high as ^i 1 2 us. 6d. The Treasury can only enter into competition by means of money raised in a similar way ; but there is no necessity for a great Government department to become an intermediary between the local authorities and the investing public. The latter are quite competent to manage their own affairs, and the former are precluded from borrowing in excess of their rateable security. In all matters of finance, commerce, and industry, the less there is of Government interference the better. Affairs of this kind can be far more easily and advantageously carried on in the open market, and the prices of emission will always be regulated by the current value of money. A cognate objection arises in connection with the Post Office Savings Bank. The Post Office does for the nation what no individual could possibly do for himself in the transmission and delivery of letters and papers. It has added other functions, and undertaken other duties, professedly in the public interest, but chiefly with an eye to larger profits, so as to hand over a greater surplus to the Exchequer by means of indirect and unnoticed 106 STOCK EXCHANGE INVESTMENTS. taxation. The gross receipts from the Post Office and the Telegraphs, according to the last returns, were ^14,639,000, out of which a profit of ,3,632,000 was paid into the Exchequer. The action of the Post Office with regard to the telephones was characterized by what would be styled sharp practice if perpetrated by private individuals. In 1869 the telegraphs were acquired on extravagant terms, at a cost exceeding ten millions. At that time the telephone was not invented or dreamed of, but a general clause was inserted in the Act, which the Courts held, when the question was raised in 1880, to constitute an absolute monopoly for the Post Office, not only of methods existing at the time of the passing of the Act, but of any others since devised, or to be devised, in connection with telegraphy by means of electric wires, including all such inventions as the phonograph, the telephone, and the phctophone. The case was decided on a mere technicality, and on a stringent verbal con- struction of a comprehensive clause in the Act. The Telephone Companies were driven into an arrangement to pay a royalty to the Post Office, and the cost was thereby greatly enhanced. Whether it will lessen through the Post Office taking over the trunk lines, April 4, 1896, remains to be seen. What has been for many years a CORPORATION STOCKS. 107 necessity in America, used at reasonable rates, is a costly luxury in England, owing to the toll levied by the Post Office. Many more business houses, and probably ten times the number of dwelling- houses, are supplied with telephone communication in the United States, because of the greater facilities and the lower cost. The Telephone Companies there work in alliance with the Post Office, while both are distinct. From every country telegraph station a telephone wire branches out to most of the gentlemen's houses in the district, as well as to commercial premises, so that orders can be trans- mitted, and inquiries made, and much time and labour saved by being able to communicate direct, at slight cost. With the enormous growth of the remunerative Money Order business there has been little, if any, alteration in the methods devised forty years ago, when the scheme was in its infancy. It would appear as if the design was to cause the public as much trouble and irritation as possible in cashing the Orders. Literal traditions are kept up, while their essential spirit is violated by the functionaries themselves in their rigid adherence to red-tape. Pedantry pervades the Department, and the Quarterly Postal Guide is crowded with petty and vexatious rules. The primary object of the Post Office is to raise the largest possible revenue. A IO8 STOCK EXCHANGE INVESTMENTS. subordinate arid incidental object is to convey the letters of thirty-nine millions of people, who are fined in ingenious petty ways as a penalty for not observing hundreds of trivial regulations and excep- tions, which life is not long enough to master, and which only irritate by their microscopic character. How far some departments of Post Office business interfere with trade in the open market is a question on which much controversy wages. Bankers, for instance, complain that they are handicapped by the way in which Money Orders are issued and deposits are received and paid in the Savings Bank branch. Insurance companies also allege that they are unfairly treated through the operation of the Annuity and Insurance department. It is said that the machinery and the staff of the Post Office are used in a way that places private undertakings at an unfair disadvantage. The arguments advanced in connection with banking demand consideration. The amount stand- ing to the credit of depositors in the Post Office Savings Bank in the middle of November, 1896, was ^107,830,000, being an increase during the year of ^"10,480,000. It is also stated that 35,874 persons deposited the maximum annual limit of ^50 in one sum, or an aggregate of ,1,793,700. Under the new rules deposits are also received for investment CORPORATION STOCKS. IOQ in Government stock up to ^200 in one year, and to ,500 in all, instead of ^100 and ^300 respec- tively, as used to be the case. The increase is not surprising when it is remem- bered that the rate of interest allowed, 2\ per cent., is more than can be obtained elsewhere with existing values, and on the highest possible secu- rity. The amount credited for interest during the year was no less than ,2,015,903. But at the recent and present price of money it cannot be earned, so that the business is really carried on at a loss. Owing, moreover, to the intricate checks devised, so as to guard against mistakes and defal- cations, it is said that every transaction, both of deposit and withdrawal, costs on an average nearly sevenpence. The actual cost cannot be determined, because much of the work in receiving houses and local offices is done by general members of the staff in the midst of other duties. Besides all this, bankers naturally complain that depositors are allowed to transmit money free, or at nominal charges, and to nominate persons to receive the amount on death, if under ^100 although the official difficulties interposed, and the pedantry of red-tape, render the latter practically inoperative thus unfairly competing with ordinary banks. Even manifest public advantages ought not to be con- I IO STOCK EXCHANGE INVESTMENTS. ceded unjustly or at the expense of other great sections of the community. It is further stated that the National Debt Commissioners are offering ex- ceptional terms of ^"3 os. tod. per cent, to friendly societies which now place their funds in trustee savings banks, though it is difficult to perceive how such an amount can possibly be paid except at a loss to the Exchequer. CHAPTER XIII. COMMERCIAL COMPANIES ^HESE include a large and miscellaneous class, such as manufacturing concerns and gigantic shops and stores which have been turned into limited companies ; hotels, breweries and distilleries ; ship- ping, canals, docks, and harbours ; tramways, omni- buses, and cabs ; telegraphs and telephones ; and the supply of gas and water. British shipping registered under the Merchant Shipping Acts amounts in number to 21,206, and in tonnage to 8,956,181. Of steam vessels the number is 8263, and the tonnage 5,969,020. Lloyd's Register of British and Foreign Shipping shows that during 1896, 579 vessels, of 841,447 tons, were launched in the United Kingdom, Only one-fourteenth of the number and the tonnage were sailing vessels. The war ships built in Govern- ment and private dockyards amounted to 59, of 148,111 tons. The total output was less than in 1895 by 109,52010115. The proportion to steamships was much higher. Of the entire number, 16,547, 112 STOCK EXCHANGE INVESTMENTS. or about three-fourths, are engaged in the home and foreign trade, and they employ 240,458 persons. Trading companies are always attended with a measure of risk. Even if they pay large dividends for a time, the capital is by no means secure, or an adequate amount is not written off for depreciation of plant and stock. The business is never so care- fully and 'economically administered as when it belonged to an individual or to a firm. Moreover, there are risks arising from keen competition, from caprices of fashion, from the launching of other companies with more seductive baits, from over- trading, from careless purchases, from waste and speculation, and from similar causes. If 10 per cent , or even 5 per cent., be paid probably out of capital for a time, and the holder then has to dis- pose of his shares for one-fourth of their cost, he is manifestly a heavy loser. Not a few such instances occur annually. They have proved to be mere castles in the air, with lofty battlements, long corridors, and spacious apartments ; all of which, being unsubstantial and shadowy, are tenantless. Gas companies are fairly sound investments. Occasionally a scare arises that a new and cheaper illuminant may be invented. Electricity is the most formidable rival, but for domestic purposes coal-gas is likely to continue in great demand. Profits are COMMERCIAL COMPANIES. 113 large, and the shares are for the most part well held. The last Parliamentary return relating to all authorized gas undertakings in the United Kingdom, other than those of local authorities, gives the re- ceipts of the Metropolitan companies at ,5, 402, 197, leaving a gross profit of ,1,756,443. Outside London the total receipts were ,7,604,022, and the gross profit ,2,139,291. Measured by cubic feet of gas the receipts for London represent 35. lod. per thousand, and in the provinces 45. A similar return for gas undertakings belonging to local authorities gives the total receipts at ,6,402,046, and the gross profits, after allowing for certain cases in which the expenditure exceeds the receipts, at ,1,721,011; these receipts represent an average of 35. 4d. per thousand cubic feet of gas, or 6d. per thousand less than the average for London, and 8d. per thousand less than in the provinces, as stated above. With improved and economical methods in gene- rating and storing electricity, and in applying it to a variety of purposes, an impetus will be given to the shares of electric lighting companies. Those formed for laying and working submarine cables now extended to every quarter of the globe have hitherto been manipulated by a " ring." The expense of working and of repairs is great, as is the risk of fracture, and the transmission of messages is largely affected by the state of commerce. English 9 114 STOCK EXCHANGE INVESTMENTS. waterworks furnish a steady form of investment, and are likely to extend with the increase of local self- government. As regards manufacturing and trading companies, it is essential to allow for casualties, for contingent liabilities to pay up the capital, and for commercial fluctuations. As a rule, small ventures should be declined, and those liable to severe competition ; with such as spring up in new and untried countries. Especially should further liability be avoided, as in the case of banks and insurance companies which treat the uncalled capital as a reserve fund It may never be required, and will not be, so long as busi- ness is prosperous and large gains are secured. Yet, in the event of commercial depression or of financial panic, it may be found needful to call up the working capital, to the great inconvenience, or loss, or ruin of many persons. It is needless to enter into details regarding investments in other things, each group or member of which has its own market and its own special sources of information. There are personal and local reasons, and what may appear to be accidental circumstances, that largely determine their selection. CHAPTER XIV. AMERICAN VENTURES. THE great and rapid development of railways in America has brought many securities on the English market. Some are very good, others are extremely bad. The whole system of manage- ment in the United States differs from the one in vogue in this country. " Pools," and " deals," and " cut rates," exert a disturbing influence. Returns of traffic are not always reliable. The powers exer- cised by " presidents," with enormous salaries and with opportunities for making money out of con- tracts and by rigging the share market, are perilous to the interests of shareholders. Political influence is largely exerted, and politics form a lucrative trade with unprincipled adventurers in America. Hence, although many lines, such as the New York Central, the Pennsylvania, the Illinois Central, and others are ably managed, and are comparable for construction and equipment to the London and North Western, the Midland, the Great Northern, Il6 STOCK EXCHANGE INVESTMENTS. and similar English roads, the confidence of in- vestors has been so rudely shaken by repeated repudiations, bankruptcies, reconstructions, and as- sessments of notorious roads like the Erie, the Philadelphia and Reading, the Wabash, the Union Pacific, and many others, that ordinary stock is, not unnaturally, viewed with suspicion and dislike. With regard to the second of the above lines, the question is often asked whether there is a reasonable hope of recuperation ? English investors have provided during the last twenty-five years at least eighteen millions sterling in its shares and bonds. If to this enormous sum be added unpaid interest and dividends, the aggregate becomes still more serious. It is a pitiable story. All concerned know too much about suspended coupons, and first, second and third mortgages, and. deferred income bonds, and voluntary assessments. They have been made to run up and down the gamut of hope and fear. Plausible statements have been made, and estimates without end, all more or less roseate, have been issued, but their realisation is a thing yet to be desired. Of voluble talk, by successive presidents, managers, and receivers, there has been more than enough. Brilliant but empty promises have been as thick as blackberries. Solid pudding, in the shape of actual dividend, has been conspicuous by its absence. It is not surprising, therefore, that AMERICAN VENTURES. 117 many English investors in American railroads will only accept First Mortgage Bonds that are really bonds, and not illusory or Gold Bonds payable in London. Even then there is a haunting fear of possible repudiation, or of an utter derange- ment in the market value by some political panic. Yet, by exercising due precaution, numerous good temporary investments are to be found in American railroads. The marvellous development of the Western and Southern States calls for increasing facilities of com- munication ; but, in the absence of personal know- ledge of the country, it will be well to seek advice from reliable experts in order to estimate the value of new and prospective roads. Through lack of this many millions have been hopelessly sunk in American lines. They have been over-capitalized by reckless " watering " of the stock. The origin of the expres- sive phrase is attributed to a plutocrat who began life by purchasing cattle along the Hudson River Valley for sale in New York. He gave the animals salt, and then as much water as they could imbibe, because they were sold by weight. Fictitious capital has been created by a mere stroke of the pen, without any actual increase of property. Considerable money has been made by judicious investment in American stocks, as is shown later in Il8 STOCK EXCHANGE INVESTMENTS. the chapter on Temporary Investments, and there is every facility for making more by watching the markets and knowing when to buy and when to sell. The panic caused in the closing days of December, 1895, in connection with President Cleve- land's message to Congress on the affairs of Vene- zuela, as already mentioned, caused an enormous number of shares to be flung upon the market by timid English holders. The result was that prices rapidly deteriorated. The depression was sure to be only temporary. Those who had the discern- ment and the courage to purchase were rewarded within three weeks by the gradual recovery, and they were able to realise to great advantage. It was not to be supposed that the great trunk lines of America, with their perfect equipment, their volume of traffic, and an established reputation, could be permanently affected by what, after all, was a false move on the political chessboard, made for ulterior purposes of the game. American Railway Stocks are quoted in dollars ; most of them being in $100 shares, excepting those in the State of Pennsylvania, which are fixed by law at $50. Five dollars may be taken as equal to a sovereign, so that fifty American Railway Bonds or Shares of $100 each are equivalent to ^1,000 English Stock, nominal value. CHAPTER XV. FOREIGN STOCKS. FOREIGN stocks are not regarded with much favour ; being largely speculative. Some of them are more or less rotten, like those of Chili, Bolivia, Paraguay, Peru, Argentine, and other South American countries, which are badly governed, or are liable to constant revolutions, or have the vicious and dishonest habit of repudiating their obli- gations. Debts were contracted under the pretence that the money would be applied to works of public utility and to mineral and commercial development ; whereas it was squandered on luxurious living by political adventurers, on military and naval display, and on similar wasteful expenditure, or it was openly stolen and misappropriated, or was illegally spent in paying interest on other and dubious claims ; a modern version of A New Way to Pay Old Debts. This condition of things explains the periodical panic in foreign stocks, which are handled only by daring speculators, who have freely to discount the extreme risk. I2O STOCK EXCHANGE INVESTMENTS. A Select Committee of the House of Commons, under the presidency of Mr. Robert Lowe, after- wards Viscount Sherbrooke, made a searching inquiry into the circumstances attending the making of contracts for foreign loans, and into the causes which led to the non-payment of principal and in- terest. The inquiry was not directed to the old defaulting States of Greece, Spain, and Turkey, but to the four South American Republics of Honduras, Costa Rica, San Domingo and Paraguay, whose recent default was peculiarly aggravated and deceit- ful. By a series of clever but unscrupulous opera- tions on the Stock Exchange, the loans were forced up to artificial prices. Important informa- tion was suppressed, and false statements were made. The Committee reported that certain persons, whose names were given, had been " regardless of the financial resources of the borrowing States ; had violated undertakings that the proceeds were to be spent on works calculated to develop the industrial resources of the different countries ; had resorted to means which in their nature were flagrantly decep- tive," with a view of inducing the public to lend money upon a totally insufficient security ; and, by trading upon credulity, had obtained money and then betrayed the interests of the lenders. One beneficial result of the inquiry was that the invest- FOREIGN STOCKS. I 21 ing public became more wary with regard to foreign loans. States that are well-governed, and have estab- lished ' a reputation for prompt payments, are viewed more favourably. They yield a higher return than English funds, but knowledge and care are needed to deal in them with confidence and success. The hypothecation of special sources of revenue for the payment of interest is a guarantee in little more than in name, for no means exist of enforcing it in case of default. Egypt is an exceptional instance. England and France hold such a gigantic stake in that country, and occupy such a position, that terms were effectu- ally dictated in the interests of foreign bondholders. But Egyptian stocks are not what they were in the palmy days of Ismail Pasha, when he was Khedive, and freely expended the money so readily furnished, on stringent terms, by English and French investors. There is a quick and active market for foreign stocks. Transfers are made with little expense. Some investors are attracted by foreign railways, because of the higher rates of interest, but the stock is always seriously affected by disquieting political rumours and by the absence of any effectual check upon the management. CHAPTER XVI. THE TRANSFER OF STOCKS AND SHARES. VARIOUS methods prevail in the transfer of stocks and shares. They are commonly known as Inscribed Stocks ; such as are transferable by deed ; and those to Bearer. In the case of Inscribed Stocks no certificates are given, but the names of the holders and the respective amounts are carefully entered, or inscribed, in books kept for the purpose at the Bank of England or by other bankers. They are regarded as the safest form of security. No transfer can be effected without the actual presence of the person whose name is recorded, unless a power of attorney has been executed authorizing some one to act for him. The cost of this is 6s. 6d. for sums less than ^20, and us. 6d. above that amount. Application has to be made in the Power of Attorney Office, on a form provided for the purpose, which gives all details as to procedure. The form has to be lodged before 12.30, and will THE TRANSFER OF STOCKS AND SHARES. 123 be ready in the afternoon of the same day. It has then to be signed by the vendor, and again returned to the bank. In any case, the stock-holder or his attorney must be accompanied by some one known to the bank authorities for purposes of identification, unless he be a member of the Stock Exchange or a banker. The object of all these precautions is to prevent the holder of Inscribed Stock being de- prived of it without his consent or knowledge. The following stocks are transferable at the Bank of England, in any amount, except those printed in italics, which must be in multiples of i. The first seven on the list are redeemable in or after the years named. 2 155. per cent. Consolidated Stock, 1923 ( u Goschens "). 2 155., ditto, reduced from Three per Cents, in 1884 by Mr. Childers, and redeemable in 1905. 2 i os. percent. Annuities, 1905. 2 155. per cent. Annuities, 1905. Local Loans $ per cent. Stock, 1912. Metropolitan Police Debenture Stock, 3 per cent, 1920. India $ los. per cent. Stock, 1931. India 3 per cent. Stock, 1948. Bank Stock. Annuities for Terms of Years. Red Sea and India Telegraph Annuity, expiring August, 1908. Metropolitan $ ios. per cent. Stock, 1929. >$ P er cent. Stock, 1941. 2 ios. per cent. Stock, 1949. Liverpool $ ios. per cent. Stock. Manchester 3 per cent. Stock, 1941. Birmingham $ ios. per cent. Stock. 124 STOCK EXCHANGE INVESTMENTS. Birmingham $ per cent. Stock. Swansea $ los. per cent. Stock. Hull ^"3 i os. per cent. Stock. Wolverhampton $ los. per cent. Stock. Nottingham ^3 per cent. Stock. New Zealand 4 per cent. Consolidated Stock, 1929. 3 IOS - P er cent - Consolidated Stock, 1940. New South Wales 4 percent. Stock, 1933. $ TOS. per cent. Stock, 1918 and 1924. Queensland 4 per cent. Stock, 1915 and 1924. 3 IOS - P er cent. Stock, 1924 and 1930. Egyptian Government 3^ per cent. Preferred Stock. Eastern Bengal Railway " A " Annuity, expiring July 30, Eastern Bengal Railway " B " Annuity, expiring July 30, 1957- Eastern Bengal Railway 4 per cent. Irredeemable Debenture Stock. Scinde, Punjaub, and Delhi Railway " A " Annuity, expiring December 31, 1958. Scinde, Punjaub, and Delhi Railway " B " Annuity, expiring December 31, 1958. East Indian Railway 4^ per cent. Irredeemable Debenture Stock. Oude and Rohilkund Railway 4 per cent. Debenture Stock, 1898. South Indian Railway Perpetual 4 J ptr cent. Debenture Stock. Dividends on the 2f per cent, stock are payable on the 5th of January, April, July, and October, until April 5, 1903, when the interest will be re- duced to 2^ until 1923, when the Government has the right of redemption at par. This stock is quoted ex div. a month previously to the date of payment. Of late years the warrants are transmitted by post under a special form of request, which obviates much trouble in the case of country holders. THE TRANSFER OF STOCKS AND SHARES. 125 Arrangements can also be made for the accruing dividends to be invested in fresh Consols, when the amount of stock held is under ^1000. The fee payable on every transfer is 93. on amounts under , and 125. above 25. Canada Inscribed Stocks and Cape of Good Hope 4 per cents., with the Victoria Inscribed Stock, are transferable in any amount and by similar procedure, but free of expense, at the London and Westminster Bank, with the exception of the 4 per cent. Canada Reduced 1910, on which there is a stamp duty of 2s. 6d. per cent. South Australians are transferred at the office of the Agent-General for the Colony, i, Crosby-square; and the Ceylon Inscribed Stock, the Jamaica, the Natal, and the Western Australia at the offices of the Crown Agents for the Colonies, Lothbury. Another large class of stocks are transferred by deed, involving no personal attendance or identifi- cation. The holder is entitled to a certificate under the company's seal, showing the amount held. When it is desired to sell either the whole or a portion another transfer deed has to be prepared, signed by the vendor and the purchaser, and duly registered at the office of the company. Not the slightest alteration or erasure should be passed unless it is initialled by the transferrer, and also 126 STOCK EXCHANGE INVESTMENTS. that every particular required in the deed is duly supplied. Some companies have special forms of transfer. In any case immediate registration should be seen to. The usage of the Stock Exchange allows ten days for the delivery of registered securities, so as to give sufficient time for execution of the transfers. When a temporary loan is obtained on stock, without the absolute sale being made at the time, it is usual to take a blank transfer, which is held by the bank or the person lending the money as security until the loan is paid off. In the case of American railway shares the custom is not to register the names of the actual proprietors, but of bankers or other well-known persons, who act as agents in England for the railways, and who undertake to receive and duly transmit the accruing dividends. The latter sign a form in blank on the back of the certificate, which can then be transmitted from one person to another, no transfer deed being necessary ; so that they are practically shares to bearer. If a purchaser desires a fresh certificate in his own name, he can obtain it by sending to an agent in America, who will go to the office of the company and exchange the old certificate for a new one. It is quite safe, however, to accept the usual form of certificate endorsed, so long as it is allowed to remain blank. THE TRANSFER OF STOCKS AND SHARES. 127 The third form of transfer is by bonds and shares payable to bearer ; requiring neither registration nor any legal document. The usual name given is Scrip Stocks, and they include all foreign Govern- ment stocks and most American railway bonds and shares. The former have attached to them a sheet of coupons. Care should be taken to see that they are intact, so far as regards future dividends. They bear a distinguishing number, which is the only mode of identification. However convenient for purposes of expedition and inexpensive transfer, there is, of course, the danger of their being lost or stolen. It may not be unnecessary to suggest as a cau- tionary remark that the deeds should be kept in the owner's possession, or in a box with a Safe Deposit Company, of which he alone retains the key. He should only remove the coupons when they fall due, paying them into his bankers for collection ; and should never allow the original documents to pass out of his hands, unless for pur- poses of raising a loan upon them. Constant diffi- culties arise in administering the estates of deceased persons through missing securities, the custodians being unknown ; and they are sometimes mis- appropriated. CHAPTER XVII. BROKERS AND JOBBERS. IFFERENT branches of commerce have their Exchanges, or places in which dealers meet to transact business. The Royal Exchange in London was founded by Sir Thomas Gresham, in the time of Queen Elizabeth, on the model of the Continental Bourses. Merchants assemble to dispose of various commodities in bulk ; and ship-owners, financiers, and agents of all kinds meet them. Coal, corn, wool, metals, and different sorts of produce or of manufactured goods have their respective centres and marts ; regulated by settled rules and customs, to which usage has given the force of law. Stocks and shares are bought and sold under like condi- tions, in a place devoted exclusively to such matters. The presence of a stranger is regarded as an intrusion in England ; but the New York and Paris Stock Exchanges have visitors' galleries, whence the busy, excited, clamorous scene can be surveyed. 128 I'.ROKERS AND JOBBERS. 1 29 Stock Exchange transactions date back more than two hundred years. As a matter of convenience, buyers and sellers of stocks and shares met for busi- ness at first in the parlour of the Bank of England, and then in Change Alley and in the Royal Ex- change, as an open market, to which all had access. In 1 80 1 the stone of a permanent Exchange was laid. Recently, after repeated enlargements, the present commodious structure was built. The members, some 3600 in number, are tenants of the shareholders, are elected by ballot, pay an entrance fee of ^525 and an annual subscription of thirty guineas, and elect a Committee for General Purposes, whose decision on all internal matters is final. About 2600 clerks are admitted on special terms. Strin- gent regulations are framed, and those members who cannot meet their engagements on settling-day are " hammered " in the midst of the day's business, and proclaimed as defaulters. The members, who form a private club, or close corporation, as rigid as any trade union, make it their business to buy and sell securities, either on their own account or on commission. The House is divided into markets for various kinds of business. The leading provincial Exchanges are those of Liverpool, Manchester, Leeds, Birmingham, Shef- field, Edinburgh, Glasgow, and Dublin. On the Continent special regulations are framed by Govern- 10 130 STOCK EXCHANGE INVESTMENTS. ment, which do not concern these pages. The procedure of the Stock Exchange has formed the subject of numerous litigations and judicial pro- ceedings, treated at large by Melsheimer and Gardner in The Laiv and Ciistom of the Stock Exchange, and in Royle's Laws Relating to English and Foreign Funds. With the rapid expansion of business, and with the growth of the accommodation, numbers of persons have been tempted into the ranks of stock- brokers and stockjobbers, in the hope of quickly realising a fortune amidst the noisy and excited scenes. Stories, freely circulated and credulously accepted, of lucky individuals making fabulous sums before noon on a given day, have lost nothing in the process of narration, as they served to arouse admiring envy, and promised a short and easy cut to riches. The widening area of securities, the growth of companies, the increase in investors, and the accumulating wealth of the community of late years, have opened up new methods and have pro- vided greater facilities for investing. It is no longer possible to keep the Stock Exchange as a close preserve for the exclusive transaction of business. Just as physicians and surgeons object to any outside their professional monopoly being allowed to treat patients, and just BROKERS AND JOBIJEKS. 131 as lawyers rigorously maintain their traditions against all intrusion of what they call "the lay mind," so the members of the Stock Exchange resent and forbid, as far as they can, any operations by persons who are not in " the House." Whatever may be thought of the rule, the ques- tion arises, and will have to be met, why the public should be expected to conduct financial business in a particular way and only through one set of men ? Do the public exist for their special benefit, or should not the advantage of the individual or of a limited class be subordinated to the good of the whole community ? There are good and bad, both within and outside the portals of the Stock Exchange, and no reason exists why a really sound business should not be conducted beyond the charmed circle. Members of the Stock Exchange are known as jobbers and brokers. The former are merchants. The latter are agents, who act for the outside public; buying and selling stocks and shares on commis- sion. Their practice is to resort to a jobber, or merchant, who keeps a supply of stocks, usually of a specific class, and who is ready to buy or sell, as the case may be. He quotes two prices ; the one price being that at which he is willing to purchase, and the other that for which he will sell. But he 132 STOCK EXCHANGE INVESTMENTS, does not know whether the broker is an intending buyer or seller. Whichever he elects to be, the jobber must deal with him at the quoted price. He makes his own profit on the ''turn," or difference between the two, and he determines the price, in competition with other jobbers, by the supply or demand at the moment. Having made a price, he is bound to deal, if required, though in the less negotiable kinds of stock he will probably decline to make a price. It is obvious that the supply or demand on the part of the public controls the prices of all stocks. If, for instance, on any given morning the total amount of orders received by brokers to sell North Western Railway Stock amounted to ^400,000, while the total amount of orders to buy amounted to ,1,200,000 although of course the total would be unknown to any one the brokers would apply to the jobbers for quotations, and the price might be, say, 190 to 190^. As, however, there would be more buyers than sellers the jobbers would soon run short of the stock, and would thereupon become reluctant to sell, and make higher quotations ; the price rising exactly in the proportion of the demand, and as long as it continued. If, on the other hand, there were more sellers than buyers the reverse result would follow. Hence, as all buying and selling are carried on for the general public, jobbers BROKERS AND JOBBERS. 133 are practically driven to make higher or lower quotations, and thus it is that the law of supply and demand influences prices. When prices are quoted, as Consols, inf-ii2^, the meaning is that an intending purchaser would have to give ,112 2s. 6d. for every ^100 of stock, while a seller would receive only 111 175. 6d. This is the " turn of the market," which forms the jobber's profit. In addition, the broker's commis- sion must be met, if the bargain is made through him. A jobber does not, or should not, charge commission, for that would be making a second profit, in addition to the one which he makes out of the difference between purchasing and selling prices. The rules of the Stock Exchange permit commis- sion to be charged on the actual value, but brokers seldom exercise this right, because, over a large number of transactions, a natural average adjust- ment takes place between stocks above and below the nominal value. Much has been written in the public Press re- lative to the want of uniformity in the commissions on Stock Exchange dealings. In one case a corre- spondent uttered a plaintive complaint that his broker, without any risk to himself, makes almost as much profit on a transaction as the one who has to run all the risk. He wrote: " On 134 STOCK EXCHANGE INVESTMENTS. looking through my accounts I cannot help being struck by the size of the amounts representing my broker's charges, which seem to me quite disproportionate to the services rendered." He then gave specific instances where he made about 7-J per cent, in six weeks on one transaction, and 6 per cent, in about three months on another trans- action ; whereas the broker's gains work out at 29 per cent, and 26 per cent, respectively. In another instance a firm of family solicitors, having to employ different brokers from time to time, said that they were struck with the want of uniformity in the commissions charged, adding that " there are no two scales alike." " In a recent case where we had to sell some Brewery Preference Shares the broker charged gd. for partly paid shares, and is. for fully paid shares ; but our own regular brokers informed us that their charges would have been 6d. and Qd. respectively." As the Stock Exchange Committee does not profess to lay down any rule as to brokers' charges, it is only natural that much discrepancy should prevail, owing to the inevitable competition. It is pointed out that a difference arises between per- manent investment charges and those for temporary investments. It would be well for clients to in- quire beforehand what a broker intends to charge, and if they consider his commission unreasonable BROKERS AND JOBBERS. 135 they can take their business elsewhere. There is said to be a vicious system which has come up in recent years, under which lawyers and bankers who introduce business to a broker expect a share of the commission ; and, therefore, the broker has to make a higher charge. One reason of the excessive charges is that in many cases a provincial broker is employed, who, in his turn, has to employ a London broker, who again transacts his business with a jobber, so that there are three middlemen who have to be repaid out of the transaction. The root of the difficulty, however, lies in the fact that people have got into the habit of supposing that they cannot deal direct with a jobber. This is quite a fallacy. The Universal Stock Exchange buys from and sells to principals direct, ignoring the broker, thereby saving any intermediate expenses. Any client wishing to deal receives from his broker a written contract, setting forth the name of the stocks or shares and particulars of the bargain. In addition, he pays the commission, the rate of which exhibits a gradual tendency to rise. In theory, the broker is required to set forth on the contract the name of the jobber with whom he has carried out the transaction, but this is not always done. Perhaps it is not too much to say that it is very often omitted. Thus the object is defeated of 136 STOCK EXCHANGE INVESTMENTS. enabling customers to verify the accuracy, if they choose, by reference to the jobber. If the broker refuses to give the information, he can be held responsible for any loss on the transaction, or it may be cancelled. His client has the right to gc to a jobber, when named, and ask to see his book, in order to verify the figures. Probably this is not done once out of a thousand cases. The contract-note specifies the day on which the settlement is to take place. This usually comes once a fortnight, as regulated by the Committee of the Stock Exchange. If all transactions were for cash, and for actual delivery, the process would be simple ; but, as already stated, nine-tenths are for a " carrying over." Arrangements are generally made for doing this on agreed terms ; in other words, for deferring until the next settlement the completion of the sale or the purchase. This process is carried on again and again, and may be done indefinitely. The postponement is regulated by the medium price i.e., the one between the buying and selling price ruling at noon on the day for carrying over. In addition to the broker's commission for buying and selling, he sometimes charges for carrying over, and also the Contango. Whether any ultimate profit is realised by the investor depends upon the final selling price and the length of the deferred procedure. Anyway, the broker is sure to gain, as is shown in the next Chapter. CHAPTER XVIII. EIGHT MILLIONS WASTED YEARLY ""HE vast business of the Stock Exchange is JL conducted under conditions and circumstances that are perpetually fluctuating-. Therefore the greatest accuracy is needed in making contracts and in keeping the accounts. The details of each trans- action are carefully set forth in the contract, which every one should insist on receiving, as it forms the basis of the negotiation, and is the only standard for determining the accounts. A jobber's contract always bears upon its face that certain stock was bought of or sold to the purchaser. The contract with a broker, on the other hand, always sets forth that the stock was bought or sold by order of and for account of the client. It is essential to remember that a broker is not respon- sible for the proper fulfilment of the contract. If the jobber fails with whom he has dealt, any money is lost that a client may have advanced. The only 137 138 STOCK EXCHANGE INVESTMENTS. responsibility attaching to the broker is in a case where he has omitted to give the name of the jobber. On settling day a statement is delivered, in which the investor is debited with the cost price of the stocks, and with commissions, and also with any Contangoes, if the stocks have been carried over. He is credited with the amount realised, less commissions on the sales, which commissions may vary from - to ^ per cent., with a charge of from 6d. to is. per share on American railways, and from i^d. to 2s. 6d. on mines, according to value. If he chooses to exact the full amount allowed by the rules of the Stock Exchange, he can do so. The Contango charges vary in amount ; and on certain kinds of securities they are very high. By dealing with the Universal Stock Exchange direct, the whole of the profits are secured to the customer. Supposing A. to have bought ,10,000 Brighton "A" Stock at 1 60, and sold the same later on at [6iJ, employing a broker to do the, transactions, who charges him per cent, commission which is only one- half of what the rules of the Stock Ex- change permit to be charged his account, when rendered, would be as follows : EIGHT MILLIONS WASTED YEARLY. A.B., in account with John Jones, broker. Dr. Cr. 10,000 Brighton "A"($i6o ... Commission on buying 5 per cent. Do. on selling per cent .......... Cr. balance ... 16,000 o o 25 o o 25 o o 75 o o 16,125 o o . . 10,000 Brighton "A" ($ i6i| ... 16,125 o o 16,125 The profit is ^75, whereas, had he dealt direct with the Universal Stock Exchange, it would have been ^125, as he would have had no commission to pay, which amounts in this case to ^50. This is supposing that the purchase had been completed during the account then running, without carrying over the stock from one settling day to the next. A customer also sent up the following account, and asked us to let him know the result if carried out for forward delivery on our Three-Monthly Settlement System as compared with the result if done through a broker. He sold 100 shares Rio Tinto on June 20, at 24^ for delivery, but the price going down somewhat, he postponed the delivery from account to account and repurchased the shares later on at 23^, thus making a clear profit if it had been done for forward delivery on our Three- Monthly Settlement System of ^"87 ios., as there I4O STOCK EXCHANGE INVESTMENTS. would of course be no interest charged, as no pur- chase money was advanced. If this had been done through a broker it would have extended over six accounts, the commissions amounting in all to ,43 155., i.e., 2s. 6d., per share for the original sale, and five times is. 3d. per share for postpone- ment of delivery. The Contangoes amounted alto- gether to 15 35. iod., thus making the total of unnecessary charges ,58 i8s. iod., which deducted from his total profit, left only 28 us. 2d. to go into his pocket, instead of the 87 IDS. if he had conducted the business through us. On this one little transaction alone it will be seen the broker netted over double the amount that the investor had for himself. In another case, B bought ,5,000 Dover A. at ill, 1,000 District at 28, and ,2,000 Denver Preferred at $41^, making the total purchase money "6,660. Ten days later he sold the above at 113!, 27^, and $44 respectively, which yielded "6,821, showing a profit of "161 55. The interest, at 5 per cent, on the actual purchase money, for as many days as the stock remained undelivered or unsold, amounted to "8 los. yd. Deducting this from the 161 53. left a total profit to the investor of 152 145. 3d. Had this business been done through a broker, the commission charged only at ^, which is the lowest charge, it being sometimes ^ EIGHT MILLIONS WASTED YEARLY. 141 and Contangoes would have amounted to ^36 2s. 2d. as against the & ics. gd. on the Three- Monthly Settlement, making the total profit to the investor only ^125 2s. icd. as against ,152 145. 3d. by dealing with us. In another case, on business amounting to ,50,000, B received, as the result of Fortnightly Settlements, ^748 55, 3d. as profit from his broker, who on his part pocketed ^248 155., at his cus- tomer's expense in the shape of commissions and Contangoes. In other words, the man who had to bear the entire risk had three-fourths, while the broker had one-fourth for his perfunctory and un- necessary services. The result of the same transac- tion for the same amount, dated from precisely the same period, if carried on direct with the Universal Stock Exchange, would have been expenses on the 5 per cent, rate, 92 i6s., while the investor's profits would have amounted to ^903 95. In this way he would have gained 22 per cent, more on the identical transaction. These are, no doubt, somewhat startling state- ments, but that they are borne out by the figures can easilybe tested and proved byeveryreader for himself. If any reader, who has been dealing with a broker, will only work the matter out, he will be able to see. that this is in no way exaggerated. Of course it 142 STOCK EXCHANGE INVESTMENTS. will not always show .the same difference. But undoubtedly it will always show a great difference, amounting exactly to the excess of the broker's Contangoes and Commission over the small amount of interest charged on the Three-Monthly System for the use of the money, and it represents no alterations in price or in duration of time. It may be again pointed out for the sake of emphasis that the 5 per cent, charge is made only for as many days as the purchase remains undelivered or unsold, while the Contangoes on the fortnightly system are for the full account. On a purchase made just before the account day and sold on the day following, as is often the case when small quick profits are taken, the Contango would be charged for the whole period of from fourteen to nineteen days, according to the duration of the account, even o though the transaction was open for only two days. It will probably never have struck the investor that he is paying a large percentage of his profits to his broker for the honour of having him conduct his account. Directly he begins to see it in this light, it will appear to him, as it has done to many intelligent readers, that to continue dealing in the same costly way would show that he had more money than sense. It will be seen that brokers are middlemen. Like other intermediaries they increase expenses without EIGHT MILLIONS WASTED YEARLY. 143 enhancing actual values. The great and just com- plaint in all business is that the prime cost of the producer and the manufacturer, with their legiti- mate profits, are doubled or quadrupled by middle- men before reaching the consumer, who has to bear the whole burden, just as the taxation of all commo- dities ultimately falls on him. Why should not the public deal direct with the jobber or merchant, in- stead of having to employ these middlemen, with the added risk of having to invoke the aid of law to enforce payment of money alleged to be due from another broker on an entirely different account, as in the case of Anderson v. Sutherland, in January, 1897 ? The only answer to the question is that such is the pleasure of the ruling powers in the Stock Exchange ; just as an unwritten but in- exorable law forbids a client consulting with a barrister excepting through the costly medium of a solicitor. Some idea of the extent and costliness of brokers' charges, all of which the investing public have to bear, may be gathered from the fact that the brokers on the London Exchange, and the large number in provincial Exchanges, are said, on a moderate computation, to derive /"S, 000,000 per annum from their transactions as agents. Without impugning the honour of a great body of men, it is obvious that under existing methods a broker 144 STOCK EXCHANGE INVESTMENTS. can, if so disposed, sell or buy stock for his clients and charge them with the lowest or the highest prices of the day, retaining for himself the difference at which the transaction was actually carried out. The broker is a needless but costly luxury. He does not add one iota to the intrinsic worth of the commodities in which he deals. The services rendered, such as they are, could as easily and more advantageously be performed by the investor in direct dealings with a jobber. It may be asked, What would become of the thousands of brokers if the plan of direct dealing with jobbers came into vogue ? The obvious reply is that they would have to find some other direction for their talents and energies. It is sometimes said that thirty -nine millions of people do not exist for the benefit of forty-two thousand lawyers ; although the latter seem to think otherwise. A similar remark may be made of brokers, without implying any disrespect for individuals. It may be objected that the fees are small, and only infinitesimal compared with the magnitude of the sums dealt in. But they speedily mount up in a series of transactions, and absorb an appreciable portion of the profits. It is not surprising that the Stock Exchange has been likened to a barn where the fowls repair daily to pick up golden grain freely flung in by the public. EIGHT MILLIONS WASTED YEARLY. 145 The sure way of conducting investment accounts economically, and with the greatest chance of profit, is to deal directly with a well-known and responsible firm of jobbers, like the Universal Stock Exchange, and thus avoid the numerous charges made by the brokers, or middlemen. Care must be exercised in the selection, and in ascertaining the financial strength and the standing of the firm or the company. The fullest confidence ought to prevail on both sides. The company must be satisfied of their customers' ability to meet engagements, and also that they will honourably carry out mutual trans- actions and treat the Company with confidence. Customers, on their part, should take the utmost pains to be convinced of the stability and rectitude of the jobber to whom such important matters are entrusted, that orders will be diligently executed, the stocks promptly delivered, and the accounts cheer- fully settled. Time is an essence of the contract. Whether the dealer selected, after such cautious inquiry, be an individual, or a private partnership, or a registered company, there should be on their part a thorough knowledge of all the ramifications of a most intricate business ; observance of all in- structions received ; a business record that is un- impeachable ; and sterling integrity and promptness in every transaction. Moreover, there should be frankness in giving needful particulars and in satisfying legitimate inquiries. 1 1 CHAPTER XIX. INEVITABLE FLUCTUATIONS. IT has been already pointed out that changes in the value of stocks and shares are mainly determined by the universal law of supply and demand, and thus the Stock Market affords un- limited scope for judicious investments, particularly in good dividend-paying stocks. It has as many possible combinations as the letters of the alphabet. Not a day, and scarcely an hour, passes without some fluctuations in prices, which furnish oppor- tunities to intelligent investors. Attentive observa- tion, accompanied by sound judgment, will perceive that occasions are constantly presented for buying good stocks at a low figure, which are certain to advance. Great changes seldom come as a surprise. They are foreseen, and their effects are discounted long before they occur. Hundreds of investors make it their business to watch prices and to study events, and thus are able as by intuition to calculate to a certain degree the immediate course of busi- INEVITABLE FLUCTUATIONS. 147 ness on the market. At the same time they take care to avail themselves of such intermediate fluctuations as are sure to happen, knowing that a stock rarely, if ever, moves straight up or straight down for any period, but vacillates widely and frequently between extreme points. Nothing is more certain or remarkable than the periodicity of prices. They run in cycles of varying intervals and duration. Tooke was one of the first to point this out in his History of Prices. It applies not only to stocks, but to all commodities. At one period the range of prices falls lower than it has been for some time. This lasts for a few months, or a year or so, and complaints of dulness and depression are general. Then prices begin to rise in one market, and others are speedily affected, until the ascending movement becomes general, and at length a high range is established for a longer or shorter period. Again there is a reaction, and the reverse process is again brought about. As a rule, however, there is a permanent tendency to a rise, provided the existing state of affairs is favourable, through a lack of suitable new outlets for accumu- lating capital, or from the necessity for a large amount being kept in securities that are 'quickly realisable. The steady appreciation in Consols during recent years illustrates this tendency. 1 1 See Appendix C. OF THE UNIVERSITY 148 STOCK EXCHANGE INVESTMENTS. The price, or realisable value of every article, let it be what it may, is regulated by the supply and demand of the moment ; that is to say, it is fixed by the number of buyers and sellers. At one time the investing public seem suddenly to discover that the best possible investments are English railways. Thereupon they rush in to buy these stocks, thus creating a demand, and, as a consequence, sending up the prices. At another time they arrive at the conclusion that the mining market shows the best chance of a profitable investment. Hence they neglect the other markets and turn their attention to mines, with the same results that prices are driven up, A shrewd investor will always make use of these temporary fluctuations, and on the system of short, quick profits will doubtless reap a very great advantage over those who only think it worth their while to take notice of larger movements. We may point out here that, as a general rule, it is a mistake, when sending his order, for an investor to strictly limit the price at which he wishes to buy or sell, as, with the constant fluctua- tions, changing every moment, he may just miss the market by a small fraction, and not get an early opportunity of such an advantageous price again. At the same time it is as well to make up his mind beforehand as to a^o^U what figure he intends to give or take. The principal point, INEVITABLE FLUCTUATIONS. 149 however, is to know when to buy and when to sell. Some people do not think of buying until a stock has experienced a considerable rise. In like manner, when it has greatly fallen, and probably has reached the lowest point, then they sell. The chances are, in both cases, that a turn is about to take place, and they find themselves in the un- pleasant predicament of being too late. They have purchased at the highest and sold at the lowest. Naturally, they lose their money and then attribute it to ill-luck. Luck, as a matter of fact, has far less to do with business in general, and with investing in particular, than is commonly supposed. What is often attri- buted to luck, or chance, or to fate, is really the product of prompt judgment and common sense. Careless inquiries, erroneous information, haste or hesitancy, are the real causes of failure, and the result is exactly what reasonable persons might have anticipated. There is no secret in successful investments, except the art of buying at a low price before the rise sets in, or of selling on the eve of a fall, and thus reaping the benefit of the upward or downwad movement. If it be asked, How is the critical juncture to be known ? the obvious reply is that the knowledge is to be attained, and can alone be I5O STOCK EXCHANGE INVESTMENTS. attained, by the exercise of average intelligence ; as is the case with all other affairs of daily life. In no way can experience be gained so easily and so profitably as by the judicious purchase of one or two good dividend-paying securities for forward delivery on the Three-Monthly Settlement plan. Yet money might often be made and more money gained by seeking available information and taking ordinary care in the choice of stocks. Many of these which appear unlikely are favourable at some time or other, the precise period being determined by the special circumstances of each case. No in- variable rule can be laid down, but a careful and regular study of the highest and lowest prices, as published in the Universal Stock Exchange weekly Market Report, compared with former prices over a lengthened time, will enable any person of average discernment to decide as to the most likely securities in which to invest. It is well to learn to form one's own opinion, and to trust to one's own judgment. The man who shrinks from entering the water will never learn to swim. CHAPTER XX. BOOMS AND PANICS. A FALSE alarm of fire, the escape of a little gas, the slamming of a door, or the cracking of plaster in a public building, suffices to cause a multitude of people to lose their heads, and to give way to wild alarm. It is then a struggle for sauve qui peut, and the weakest are sure to go to the wall. A little thing suffices to create a scare or to get up a panic in the Money Market and the Stock Exchange. They are sensitive to every breath that stirs. A remarkable illustration was furnished in December, 1895, m tne case f President Cleve- land's message to Congress respecting Venezuela, For a few hours it was supposed that he had the whole of the United States with him ; but Nemesis was swift and certain. The aboriginal inhabitants of Australia have a weapon known as the " boomerang," made out of a flat, curved piece of wood, which cleverly flung, returns to the feet of the person who throws it. In 152 STOCK EXCHANGE INVESTMENTS. the case of the United States the financial boome- rang recoiled with deadly results. When the first excitement, however, passed by, the common sense of the great body of the American people came to the rescue. Bankers and business men in particular instantly perceived the disastrous effects of the Presidential message. Within three days a panic suddenly burst upon Wall-street. Before noon 400,000 shares were flung upon the market for realisation at any price, and nearly double the number were dealt in before that night. Prices kept dropping, until in some cases they reached 14 points. From 50 to 75 per cent, was demanded and paid for money. Even the soundest railway properties, like New York Central, the Pennsylvania, and the Illinois Central, lost from 6 to 10 points of the market value of three days before. Mr. Chauncey Depew, president of the New York Central Railway, speaking to a gathering of leading business men, said that the depreciation in American securities amounted in three days to $400,000,000. Another great financial authority estimated the total loss to bankers, stock-holders, and to commerce during the week at $1,000,000,000, or ^200,000,000. Probably both these conjectures were much in excess, but in all such cases a long period elapses ere confidence can be restored. Nothing is easier than to create a panic ; but BOOMS AND PANICS. 153 nothing is more difficult to allay. When public suspicion or timidity is aroused, and there are apprehensions of impending loss, the alarm spreads like fire on a common, and a sure method is taken to accomplish what is dreaded. A run takes place on a bank. Every one demands his money. It is ignorantly supposed that the coffers can be made suddenly to overflow with gold ; as if bankers locked up their customers' balances and deposits for the pleasure of handing them back at a moment's notice. No institution, however solvent and well-managed, could bear such a strain. Not even the Bank of England would be equal to it. Hence, in all such cases of ridiculous panic, a number of sound institu- tions and firms are certain to be brought down, through no fault of their own, but solely owing to the childish dread that precipitates a crash. In 1892, one of the largest, wealthiest, and best- conducted building societies in London the Birk- beck experienced a sudden run upon its funds. How the rumour of insolvency originated no one was able to explain, but in the course of a few hours the office was besieged by an excited, im- patient, clamorous crowd, all wishing to withdraw their money at once. The adjacent streets were filled from early morning for several days, and enormous sums were paid out as fast as the 154 STOCK EXCHANGE INVESTMENTS. accounts could be verified. Fortunately, there were large available resources in Consols and in other liquid securities. Then a reaction gradually set in. Some who had withdrawn their money in a fright paid it in again when they saw the actual coin and bank-notes forthcoming, but of course they forfeited interest and entrance fees. A similar scene was witnessed in Lombard Street in January, 1879, during an equally senseless run upon the London and County Bank. At such a time it behoves all who can exert a salutary influence to do their utmost to stem the rising tide of foolish and unreasoning panic, and to show how absurd and suicidal it is. Calm- ness and firmness will do much to allay the fears of the timid ; and a display of confidence will inspire it in others. Some years ago, during a spasmodic run upon the London banks, a wealthy and well-known merchant did much to check it by driving up to his bank in a cab with ,20,000 in gold, which was carried through the noisy crowd and openly paid in as a proof of his own confidence in the stability of his bankers. Some of the would-be withdrawers paused, reflected, and then decided to allow their money to remain. New arrivals, seeing the turn in the tide, altered their intentions. The panic was checked, and in a few days it wholly ceased. In another instance, the manager had BOOMS AND PANICS. 155 the reserve of gold brought from the strong room, and placed in glittering heaps beside the cashiers ; the sight of uncounted wealth, which seemed to be fabulous and inexhaustible, produced a similar effect. A sudden elevation or depression is easily caused in the Stock Market. Disquieting rumours about foreign affairs ; reported or anticipated bankruptcies ; the bursting of a reservoir ; a great railway collision ; a sudden and extensive withdrawal of bullion ; or mere vague street talk that a panic is impending, serves to bring it about. Timid holders of stocks and hesitating investors become alarmed, They hear that others are about to sell, and so they press in, hoping to be first. It is like pouring oil on flames. The excitement spreads, and prices go down with a rush. Those who know this, and the con- vulsions to which it leads, learn to act accordingly. The number of commercial panics in the last half century, since the great one of 1825-6, when 770 banks stopped payment, mainly through the number of bubble companies, were the following: in 1847, through the railway mania ; in 1857, through the American failures ; in 1859, owing to the fear of a European war; in 1866, through over-speculation in limited companies; in 1870, through the Franco- Prussian War; in 1885, through the Russian attack on Afghanistan ; in 1887, by the war panics in Paris 156 STOCK EXCHANGE INVESTMENTS. and London ; and in 1895, as before cited, in the case of the United States and Venezuela. Ordinary prudence suggests a preliminary survey and a calm inquiry before yielding to and increasing the alarm. Are the suggested adverse causes likely to operate ? Do they even exist otherwise than in the imagination ? If they do exist, is there any true relation between them and the apprehended results ? Will the supposed evils be averted by people frantically rushing hither and thither and proclaiming that things are going to the bad ? Are not the evils, if real, likely to be aggravated? If imaginary, will not the fiasco overwhelm every one with vexation and remorse, when fancied danger brings actual loss and disaster ? It is w r ell to ponder questions like these before yielding to a panic ; notable instances of which have occurred within living memory ; although advising men to be calm and collected under such circumstances is like Shakspere's famous illustration about preaching patience, as put into the mouth of Leonato. 1 Sometimes the process is inverted, for the sake of getting up a " boom." Its object is to inflate prices, and to create an artificial scarcity, so that people may be tempted to buy at enhanced and fancy values. The theory of modern advertising may be 1 Much Ado about Nothing, v. i. BOOMS AND PANICS. 157 expressed in a formula " Blow your own trumpet loud enough and long enough, or get a number of persons to blow it for you, and the world will at length take you at your own appraisement." It is the same with a financial " boom." One class of securities may be diligently talked up and written up until the unthinking public are led to believe in what seems to be the universal theme. Usually, when emphatic and repeated advice is given by unknown and untried persons to invest heavily in a particular thing, it is well to reject the advice, and sometimes to do exactly opposite to the suggested course. A respectable dealer will not jeopardize his reputation by becoming sponsor for shady transactions, and his counsel, when given, may be relied on. Moreover, the Three-Monthly System is a safeguard alike against the ill-effects of booms and panics, while enabling the judicious investor to take advantage of their occurrence. It often happens that the most ready to seek advice are the least disposed to take it. They go first to one oracle and then to another, and if, as is the case with most oracles, they are not mute or enigmatical, the impression made lasts just so long as it takes for another to be produced, which, in its turn, yields to the next in an unending series. CHAPTER XXI. PERMANENT AND TEMPORARY INVESTMENTS. EVERY business venture has in it more or less of the element of uncertainty. It is entered upon in the hope of attaining a success which must, for a time, be problematical. A manufacturer produces new designs on the chance of selling the goods and extending his connection. A merchant brings a cargo from a distant port, or he consigns one to the other side of the world, hoping that a profitable market will be found. A tradesman stocks his shop every season with articles about which he is quite uncertain as to whether they will meet the taste or strike the fancy of his customers ; though he trusts that an inclination to purchase will be awakened by the attractiveness of his wares. Caterers of every kind produce or display an endless variety of articles that minister to the needs, or the pleasure, or the vanity of the public. Into all such cases this element of uncer- tainty or risk largely and necessarily enters. With- '58 PERMANENT AND TEMPORARY INVESTMENTS. 159 out it, no business could be carried on ; and the same applies to financial transactions. Philosophers have written lengthy disquisitions, and have carried on wearisome controversies, in order to determine the dew-point, when the thick, viscid, noxious vapours of night are changed into the pellucid, clear, refreshing dew of the morning. In like manner much has been said and written for the purpose of distinguishing between permanent and temporary investments. But they insensibly merge into one another. The border-line is so dim and vague as to be almost impalpable. In theory a permanent investment is supposed to mean com- parative safety, if not absolute certainty ; but an element of uncertainty enters into every such trans- action. Every investor, therefore, runs a certain amount of risk, as it is the unforeseen that fre- quently happens, If money is placed where the actual value is subject to little or no fluctuation, and if the dividend upon it is regularly paid, though the amount be small, the name of permanent invest- ment is given. But if the money be placed out, not so much with this view as with a reasonable expec- tation that the market-price of the capital stock will rise, it is temporary investment. The gain in the latter case is styled profit, while in the former case it is styled interest ; but the two things are practically identical. 160 STOCK EXCHANGE INVESTMENTS. For instance, an investor buys ,1,000 South Western Ordinary Railway Stock for forward delivery in three months. The stock perhaps goes down, and he has no opportunity of selling to advantage. On the date of delivery he therefore takes it up, pays for it, and has it transferred into his name ; being content to hold for the sake of the dividend regularly paid upon it. This is clearly a