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THE FIRST PRINCIPLES OF 
 INVESTMENT 
 
THE FIRST . . 
 PRINCIPLES OF 
 INVESTMENT . 
 
 A SEQUEL TO 
 
 "THE WHEEL OF WEALTH'* 
 
 BY 
 
 r. BEATTIE CROZIER, LL.D. 
 
 Published by 
 
 THE FINANCIAL REVIEW OF REVIEWS, 
 2, WATERLOO PLACE, LONDON, S.W. 
 
 Copyright] [All rights reserved 
 
PRINTED BY 
 HAZELL, WATSON AND V1NEY, 
 LONDON AND AYLESBPRY. 
 
DEDICATION. 
 
 Go 
 
 MY OLD FRIEND, SCHOOLMATE AND CANADIAN 
 FELLOW-COUNTRYMAN 
 
 JAMES I. BUCHANAN, ESQ. 
 
 (PITTSBURG, U.S.A.) 
 
 WHO IN HIS LONG CAREER AS BANKER, FINANCIER, 
 
 PRESIDENT AND DIRECTOR OF MANY AND VARIED 
 
 BUSINESS ENTERPRISES, HAS UPHELD ABROAD, 
 
 BY HIS STERLING HONESTY AND BUSINESS 
 
 ACUMEN, THE GOOD NAME OF 
 
 CANADA, I DEDICATE THIS 
 
 VOLUME 
 
 9, Elgin Avenue, W. 
 
 239245 
 
CONTENTS 
 
 PAGE 
 
 Introduction 1 
 
 CHAPTER I 
 
 On the Natural Value of Different 
 Stocks : Banks and Insurance Com- 
 panies 10 
 
 CHAPTER II 
 
 On the Natural Value of Different 
 Classes of Securities : Industrial 
 Monopolies 33 
 
 CHAPTER III 
 
 Corporation Loans, Railway Debentures, 
 
 etc. 50 
 
 CHAPTER IV 
 
 The Effect of Politics, Stock Exchanges 
 
 and Money Markets . . . .78 
 
Vlll CONTENTS 
 
 CHAPTER V 
 
 PASS 
 
 Geographical Distribution versus Insur- 
 ance 105 
 
 CHAPTER VI 
 Mr. Lowenfeld's Scheme . . . .123 
 
 Index 163 
 
THE FIRST PRINCIPLES 
 OF INVESTMENT 
 
 INTRODUCTION 
 
 ^HE distinguished political economists, Eng- 
 lish and foreign, who, in The Financial 
 Review of Reviews, have taken part in the dis- 
 cussion of the question of the " Geographical 
 Distribution of Capital " have, with the single 
 exception perhaps of Mr. Hobson, been ad- 
 herents of the Old Political Economy of the 
 Schools, and have taken not only their method 
 of approach but the point of view which they 
 have brought with them to the discussion, from 
 its distinctive and peculiar teachings. It is 
 perhaps hardly necessary for me to say here that 
 all the fundamental principles and tenets of 
 this Old Economy of Adam Smith and Stuart 
 Mill have Free Trade as their logical sequence 
 and corollary ; or, to repeat what I have so often 
 had occasion to point out elsewhere, that they 
 all end in the belief that whatever benefits 
 
 1 
 
2 INTRODUCTION 
 
 trade in any one country necessarily benefits 
 it in each and every other with which that 
 country has international business dealings. 
 Effect of Now, this latter proposition I venture to un- 
 
 Trade. hesitatingly deny, and to affirm, on the contrary, 
 
 that under a universal Free Trade between 
 nations it will only the more certainly be found 
 that an increase of wealth founded on the 
 supremacy of a particular trade in any one 
 country is sure to be followed by a corresponding 
 decline in the same trade in all those other 
 countries which up to then had, by natural or 
 artificial Protection, become rich and powerful 
 by its exercise. 
 Hamburg's gain This is a proposition to which universal 
 history, mocking the delusions and hopes of 
 the Old Economists, has in every age of the 
 world borne witness ; but at no period perhaps 
 has it focussed itself with so much clearness 
 and pregnancy as in the case of the Hanse 
 towns and of Holland on the ruins of the mer- 
 cantile trade of Genoa and Venice which fol- 
 lowed directly on the discovery of the new Cape 
 route to the East ; or of England, in turn, on 
 that of Holland. But it is a proposition as true 
 of manufacturing countries engaged in an inter- 
 national rivalry with the same class of goods as 
 it is in the mercantile and shipping trades. 
 Sooner or later under a universal Free Trade 
 
INTRODUCTION O 
 
 they must come to a hand-to-hand grapple 
 with each other, and the quicker the more free 
 is the trade between them ; and then, as in all 
 human things, the strongest will carry off the 
 prize. There is no sharing and sharing alike 
 between the conquerors and the conquered any- 
 where or in any concern in this world. 
 
 But all this is, indeed, only the natural 
 and necessary deduction from the principles ^SnS^ 7 
 of the New Economy which, in this discussion, Economy. 
 I am now to apply to the problem of the 
 Geographical Distribution of Capital, and which 
 I have set forth with a sufficiency of detail 
 in my Wheel of Wealth. Or, to put it 
 differently, a policy of Protection for nations 
 in the present industrial development of the 
 world follows as naturally and by as rigid 
 a logical sequence from the principles of the 
 New Economy as a policy of Free Trade fol- 
 lowed from the opposite principles of the Old 
 Economy ; but with this advantage in favour 
 of the New Economy, that it is founded through- 
 out on maxims which every business man recog- 
 nises, believes in, and acts upon, and not on 
 false abstractions like that of the " economic 
 man " of the Old Economy, or (especially in 
 this age of Trusts, Combines, and Tariffs), on 
 the delusive imagination of an " absolutely free 
 competition," or the now played-out role of 
 
4 INTRODUCTION 
 
 laissez-faire — all of which business men have 
 long since thrown on the dead scrap-heap as 
 quite useless either for their instruction or 
 profit. 
 Principles of It is a fine piece of pedantry on the part 
 
 Old Economy. , . _.. _ _ r . l . / . , r n _ 
 
 oi the Old iiconomists that, having founded 
 their system on the industrial regime of a par- 
 ticular nation — and that, too, covering a period 
 of not more than fifty years in all its history — 
 they should still continue airily and com- 
 placently to keep it going on the same principles 
 of that regime, under the pretence that they 
 would allow for the exceptional instances where 
 Trusts, Combinations, Monopolies, and Tariffs 
 have taken the place of the " economic man," 
 free competition, and laissez-faire ; and of the 
 instances where the industrial or money powers 
 of individuals, classes, or nations have, like 
 highwaymen, held up other individuals, classes, 
 or nations, while they appropriated to them- 
 selves the spoils. As if, indeed, there ever was 
 a time in the history of the- world (even in the 
 short reign of industrial Free Trade and Free 
 Contract) when some individuals, or classes, or 
 nations, had not by their power managed either 
 to enslave outright, to reduce to serfdom, or to 
 industrially exploit the rest, from the time of 
 the dominion of the sword in the ancient and 
 mediaeval world to that of the dominion of the 
 
INTRODUCTION 5 
 
 dollar, as in the American Trusts of to-day. 
 They might as well, like the old anatomists, 
 start from the dissection of the dead body, and 
 then allow for the laws of its physiology when 
 alive, instead of starting from the living, and 
 allowing for its manifestations when dead. 
 
 And I appeal to the reader whether it is not New Economy 
 time that Political Economy should start afresh advancing. 
 from the living industrial facts of to-day — Trusts, 
 Combination, Monopoly, Co-operation, and the 
 incidence of personal or money power, all of 
 which have come to stay — and only then allow 
 for the effects of Free Competition, Freedom of 
 Contract, and laissez-faire, when these still 
 linger on around the outskirts or in the shade. 
 And I take it as a step in this direction, and as 
 a recognition of the rapidity with which the 
 New Economy is making its way, as well as an 
 indication of the freedom from bias which the 
 Editor of The Financial Review of Reviews has 
 shown in desiring to have all schools of economic 
 thought represented in his pages, that I should 
 have been invited to set forth the principles 
 of the New Economy in their bearings on 
 this important and practical problem of the 
 Geographical Distribution of Capital. 
 
 What, then, are the points of this problem on The meaning of 
 which Political Economy is invited to pass D?stnbution of 
 judgment ? The problem itself may be stated CapitaL 
 
6 INTRODUCTION 
 
 in a word, namely, how to get out of investments 
 the greatest amount of income compatible with 
 the absolute safety of the capital invested. 
 And the questions which the Editor wants an- 
 swered from the standpoint of adherents both of 
 the Old and the New Economy are : 1st, What 
 effect will the Geographical Distribution of 
 Capital have on individual investors ; 2nd, What 
 on the nation to which these investors happen 
 to belong ; and 3rd, What on the world of 
 international trade and industry as a whole ? 
 Safety of the Now, it is to the security and welfare of the 
 
 Geographical individual investor under this scheme that the 
 Capital! 1 * 1011 ° greater part of the following pages will be de- 
 voted ; but I may say here in a general way that 
 I do not think that on this point there can be 
 two opinions. In my judgment, Mr. Henry 
 Lowenfeld, the author and originator of this 
 scheme of Geographical Distribution, has, as 
 we shall see in detail later, reduced it to some- 
 thing like a scientific demonstration, when 
 regard is had, that is to say, to the ticklish risks 
 which attend every investment of capital in a 
 world so rapid-changing and everywhere subject 
 to so many unforeseeable industrial and financial 
 contingencies and cataclysms. And, in passing, 
 I may be permitted here bo congratulate him on 
 the wonderful unanimity with which his scheme 
 lias been everywhere received by financial ex- 
 
INTRODUCTION 7 
 
 perts of every kind : bankers, brokers, officials 
 of the Chambers of Commerce, foreign financial 
 authorities, etc., as well as by the most eminent 
 political economists, English and foreign, of the 
 old Academic School. To this unanimity of 
 opinion from the adherents of the Old Economy 
 I am willing to subscribe for what it is worth my 
 own tribute of appreciation from the point 
 of view of the New. 
 
 To many, if not most readers, perhaps the False impres- 
 phrase " Geographical Distribution of Capital " Geographical 
 
 n , ,i • ,i i • i i Distribution of 
 
 would suggest that the scheme is only a variant capital. 
 on the old general injunction that if you wish 
 to sleep o' nights you ought not to put all your 
 eggs into one basket. But this kind of security 
 can, as regards capital safety, be had almost 
 haphazard, as out of a bag, by any one who will 
 select a sufficient number of gilt-edged securities 
 from out of the ordinary miscellaneous assort- 
 ment of them on the market. And yet, when 
 we remember that Consols even, with their low 
 rate of interest, would, during the last ten or more 
 years, have lost the investor quite a fourth of his 
 capital were he obliged to sell them out to-day, 
 it is obvious that even the most gilt-edged 
 securities cannot be depended on even as re- 
 gards the safety of the capital invested in them. 
 But when an increase of income over and above 
 that of the humble yield from Consols or other 
 
O INTRODUCTION 
 
 Consols and loss first-class stocks of the same character is desired, 
 a P i a . ^ en ^. g eas ^ method of putting all your eggs 
 into these various gilt-edged baskets is quite 
 out of the question. No ! Mr. Lowenfeld's 
 scheme, although, it is true, a question of baskets, 
 is not one of this simple and easy kind ; but, on 
 the contrary, is a scientific statement of precisely 
 what quality, kind, and location of basket you 
 are to put your eggs into ; and, like all scientific 
 generalisations which are of ultimate value, is 
 founded on what I believe is admitted to be 
 perhaps the largest and most carefully sifted 
 collection of stocks and shares from all the 
 world yet known, and includes their past 
 history as well as their present status ; all of 
 them being brought together month after 
 month in the pages of The Financial Review of 
 Reviews. 
 Opinions on Later on, I shall put the whole scheme, 
 
 Dtatnbution of with its appendages and abutments, on to the 
 Capital. world-wheel of wealth production and distri- 
 
 bution which symbolises the method of the New 
 Economy, to see how it will turn out. Bui in 
 the meantime I can personally re-echo the 
 opinion of Professor Karl Bramer, as expressed 
 in a recent number of the Review, that " Mr. 
 Lowenf eld's book develops the principles of a 
 new science — Comparative Trade Statistics — 
 formerly treated as a side branch of statistics ; 
 
INTRODUCTION U 
 
 but now it can claim to be a special science of 
 itself " ; or of Mr. Hobson, who says that 
 " Lowenfeld has shown that profit varies directly 
 and risk inversely with Geographical Distribu- 
 tion, which gives the largest, safest, and most 
 equable dividends." It will be interesting, 
 therefore, to see how this scheme in its inter 
 national, national, and individual aspects 
 works out under analysis. 
 
CHAPTER I 
 
 ON THE NATURAL VALUE OF DIFFERENT STOCKS *. 
 BANKS AND INSURANCE COMPANIES 
 
 TT is an indispensable preliminary to any 
 
 really scientific estimate of the value of 
 
 An essential the principle of the Geographical Distribution 
 
 Geographical of Capital, as a mode of investment, that we 
 
 Distribution of ■, i -i , . i , , ■ i , n 
 
 Capital. should at the outset ascertain what we may call 
 
 the natural value of the different classes of securi- 
 ties on the market, with the view of determining 
 the order in which, like geological strata, they 
 lie one above another in the financial hierarchy. 
 For just as it is necessary to know the natural 
 order of the rocks composing the earth's crust 
 before we can understand the topsy-turvy in- 
 versions and dislocations which local upheavals 
 and depressions have here and there produced 
 among them, so it is necessary to know the 
 natural order and rank of the credit values of 
 different species of stock if we arc to take advan- 
 tage of those inversions of their natural order 
 which are always occurring in some of the coun- 
 10 
 
NATURAL VALUE OF STOCKS 11 
 
 tries of the world, where, like an inverted 
 pyramid, stocks naturally highest in the scale 
 are found lying far down towards the bottom, 
 and those naturally at the bottom high up to- 
 wards the top. Indeed, as we shall see farther 
 on, it is on these inversions and dislocations, 
 and on a knowledge of the causes which give 
 rise to them, and, therefore, on the advantage 
 that can be taken of that knowledge, that the 
 principle of the Geographical Distribution of 
 Capital gets its foothold and justification. 
 
 I am aware, of course, that there is no such 
 thing as a purely natural value adhering to any 
 particular stock or piece of property whatever ; 
 for all, of course, depend on circumstances and 
 conditions, on supply and demand, and the rest. 
 What I wish the reader to understand by the Definition of 
 natural value of a stock is the value which at- 
 taches not to any particular stock as such, but 
 to the class of securities to which it belongs, 
 whether this value be due to the possession of 
 certain positive natural advantages, or negatively 
 to the freedom from certain natural risks, or 
 both. 
 
 As a rule, the natural value of a stock includes 
 both advantages and risks ; but it will be found 
 that while some stocks get their rank mainly 
 from their advantages, others get it mainly from 
 their absence of risk. It is only when the two 
 
12 NATURAL VALUE OF STOCKS 
 
 The difference are taken together and a balance struck between 
 
 in rank of . . 1 .. 
 
 stocks. them that the difference in natural value or 
 
 rank of the stock, whether as higher, lower, or 
 on an even level with other classes of stocks, can 
 be said to be determined ; as, for example, 
 between Government stocks and Banking, 
 Banking and Insurance companies ; between 
 these again and Corporation Loans or Railway 
 Debentures, and between all these and the ordi- 
 nary shares of industrial and commercial enter- 
 prise. But to ascertain this it is necessary to 
 reduce them all alike, if possible, to some common 
 denominator as it were, by passing them through 
 a number of generalised categories which shall 
 sum up their main characteristics, both of 
 advantages and risks. They may be classified 
 as follows : 
 
 Advantages of 1. The extent, mass, permanence, and stability 
 classified. of the securities on which they rest. 
 
 2. The extent to which they rest primarily on 
 
 Money and its range of fluctuations, and 
 only secondarily on Industry ; or pri- 
 marily on Industry and its range of fluctu- 
 ations, and only secondarily on Money. 
 
 3. The extent to which they rest on such 
 
 previsions as are possible in the lips and 
 downs of industrial business of all kinds 
 on the one hand ; or on calculations that 
 
NATURAL VALUE OF STOCKS 13 
 
 fall under the mathematical Laws of 
 Probability on the other. 
 
 4. The extent to which the element of Time 
 
 enters into the composition of their busi- 
 ness bargains. 
 
 5. The amount of natural Monopoly that 
 
 attaches to them from peculiarities of 
 their situation or surroundings, or owing 
 to the mass of free Capital which they 
 can concentrate on any business situation 
 at any moment. 
 
 The above have direct reference to the positive 
 advantages of different classes of stock. But 
 these once ascertained, we have still to turn 
 the stocks over on to their negative or reverse 
 side, as it were, for the purpose of ascertaining 
 the extent, magnitude, and imminence of the Risks of stocks 
 risks to which they are exposed. These com- 
 prise : 
 
 1. The extent to which the risks are sudden 
 and incalculable, or so foreseeable as to 
 enable investors to prepare against them 
 either wholly or in part. An altogether 
 incalculable risk is, of course, a pure 
 gamble, and not a proper subject for 
 scientific investment, unless, indeed, it 
 can be controlled by the mathematical 
 Law of Probabilities. 
 
14 NATURAL VALUE OF STOCKS 
 
 2. The extent to which Politics and other 
 
 outside complications interfere with 
 different classes of stock, and make their 
 possession, as a permanent source of 
 investment, precarious. 
 
 3. The extent to which the condition of the 
 
 Money Market in the different countries 
 or the particular Money Market in which 
 stocks of different countries are mainly 
 dealt in, affects the relative value of stocks 
 of the same class in these different coun- 
 tries by imparting to them either activity 
 or stagnation. 
 Now, as we shall see farther on, it is to the 
 intrusion of Politics on the one hand, and of 
 the condition of the Money Markets of the world 
 on the other, that are chiefly due those dis- 
 locations and inversions of the natural value of 
 Reasons for stocks on which, as Mr. Lowenfeld was the first 
 EMsSbution of to point out, the principle of the Geographical 
 Capital. Distribution of Capital depends for the success 
 
 of its operations. Let us then pass the different 
 classes of stocks through the categories I have 
 just enumerated, with the view of seeing how 
 their natural values as securities will turn out 
 in relation to each other when they are passed 
 through this mill and reduced to common 
 denominators. 
 
 The first category we have mentioned, namely, 
 
NATURAL VALUE OF STOCKS 15 
 
 the extent, mass, permanence, and stability of 
 the securities on which any class of stocks rests, 
 is, in spite of its being the most generalised and 
 vague, the most important of all in so far as the 
 natural value of a stock is concerned. It is 
 what gives Consols, and the stocks of the different 
 Governments of the world, their position at the Security of 
 
 , , j. , Government 
 
 head of all other stocks whatever ot the same stocks. 
 country ; and that for the simple reason that 
 they are secured on the entire resources of a 
 nation, whereas all other loans — except those 
 with a definite Government guarantee — are 
 secured both on a lesser amount and on a 
 narrower range of resources, as in the case of 
 Corporation Loans, which are secured only on 
 the property of particular cities or towns, or of 
 Joint Stock Companies and other ordinary busi- 
 ness loans, on the property of a lhnited number 
 of individuals only — the proprietors. 
 
 Now, if this be the case, the reader may object 
 that if an ideal safety be an investor's aim, all 
 he would have to do would be to distribute his 
 capital among the Government stocks of the 
 best accredited nations, and his problem would 
 be solved. Yes ; were it not for certain impor- 
 tant reservations and qualifications. But it 
 must be remembered that Government stocks, 
 by reason of their position at the head of all 
 other stocks in their own country, yield the 
 
16 NATURAL VALUE OF STOCKS 
 
 lowest rate of interest ; and something more 
 
 than that is what the investor wants. The 
 
 Security ideal safety of his capital is not, in a word, the 
 
 versus . . 
 
 Yield problem only object the prudent investor has in view. 
 His problem, on the contrary, is rather a triple- 
 sided one, namely, how to get the greatest yield 
 of interest for his money compatible with the 
 greatest practical security and stability, not the 
 greatest ideal or ultimate security. In other 
 words, he balances the ideal security of Govern- 
 ment stocks against their low yield of interest ; 
 and, if he can get practical security and stability 
 with larger yield, he will take the chances, as is 
 now done by trustees. 
 Object of And it is precisely this larger yield with equal 
 
 Distribution of practical security which the Geographical Dis- 
 api a ' tribution of Capital professes to insure to those 
 
 who follow its teachings. How it is done, and 
 how stocks, which, although possessing less 
 ideal safety, perhaps, than Government stocks, 
 can yet be held with as much practical safety, 
 and often, eventually possessing greater uni- 
 formity and stability, can only be fully seen 
 wl irn we have ascertained the natural value 
 and rank of the other great classes of securities 
 outside Government stocks. And this we shall 
 be able to do by applying to them the other 
 categories I have laid down. 
 
 It will be expedient, perhaps, to consider the 
 
BANKS AND INSURANCE COMPANIES 17 
 
 next three categories together : firstly, the Risks to stocks 
 
 . , r . . -. must be 
 
 extent to which a class 01 securities gets rank considered, 
 by resting throughout primarily on Money rather 
 than on Industry ; secondly, the extent to 
 which it gets rank from resting on the mathe- 
 matical Law of Probabilities rather than on such 
 prevision as is possible in the ups and downs of 
 industry and trade ; and thirdly, the part which 
 the element of time plays in raising or lowering 
 the rank of any class of stock, into which it 
 enters as a leading factor. Now, the stocks 
 which get their rank from the parts played in 
 them by these distinctive features are mainly 
 those of Banks and Insurance Companies, and 
 to those I would now direct the reader's attention 
 somewhat in detail. 
 
 To begin with, there are various reasons why Bank and 
 all such stocks as rest throughout primarily on s^cks" 100 
 Money have the advantage over all stocks that 
 rest primarily on the ups and downs of business 
 and trade. The first is that Money is itself the 
 final term in every business transaction, the 
 commodity into which all other commodities and 
 credit values must be reduced before the wealth 
 contained in them can be estimated or realised. 
 Like Jupiter among the lesser gods, it coerces all 
 other commodities and values into terms of 
 itself ; and hence it is that, whereas all other 
 commodities after a business deal come out 
 
 2 
 
18 BANKS AND INSURANCE COMPANIES 
 
 either enlarged or shrunk in value through the 
 ups and downs of markets and the process of 
 sale, Money, like a billiard ball, comes out pre- 
 cisely of the same value as it went in ; and, as 
 
 stock^wh/ch ** can never want * or customers, stocks that 
 rest on money. re st on money throughout have a natural 
 security, stability, and freedom from risk which 
 are not to be found in industrial and commercial 
 commodities, which have to run the gauntlet of 
 sale and the finding of a customer before they 
 can be turned into money. 
 
 Again, being itself the standard of value as 
 well as its measure, Money is the commodity 
 which varies least over great lapses of time, while 
 over short periods, when compared with all 
 other commodities, it may well stand as the 
 image and type of stability itself. It neither 
 deteriorates appreciably by wear and tear, as 
 other commodities do, nor at all by keeping ; 
 nor is its value affected, as with other commo- 
 stabiiity of dities, by new inventions and processes ; nor 
 does it depend for its stability on the genius, 
 foresight, skill, or life of its owners ; and so it 
 can be more depended on to keep its own proper 
 value intact over the ordinary periods during 
 which business transactions run, than any other 
 commodity whatever. And accordingly, busi- 
 nesses resting throughout primarily on Money 
 as their stock in trade, both of purchase and sale, 
 
BANKS AND INSURANCE COMPANIES 19 
 
 take a natural rank for stability and security 
 of investment, as well as for freedom from risk 
 of loss of capital, far above what is attainable 
 in the wide fluctuations of market values and 
 the constant ups and downs which characterise 
 the business transactions which rest primarily 
 on Industry and Trade. It is true, of course, 
 that Money, like the sun in its relative position 
 among the planets and stars, slowly changes its Money 
 value in reference to other commodities over value 8 . 63 ' 
 long periods of time, but over short periods the 
 change is so slight as to be practically inappre- 
 ciable. But if, besides resting primarily on 
 Money, a business rests also on the mathematical 
 Law of Probabilities, it will take an even higher 
 rank for stability than if it rested on Money 
 alone ; for the possessor will not only be able 
 to equalise the risks that arise amid the multi- 
 plicity of individual transactions which make 
 up his business, so that he will get back sove- 
 reigns for sovereigns, but also to make sure of an 
 even profit as well. And, further still, if a busi- 
 ness rests on transactions in which the element 
 of time is so short that they are as near to cash 
 transactions as possible, it will have attained 
 to the highest natural rank of investment for 
 stability, security, and freedom from risk. 
 
 Now, the ideal of a combination such as I have 
 described, where a pure Money business rests on 
 
20 BANKS AND INSURANCE COMPANIES 
 
 Bank of Monte ^q L aw f Probabilities, and confines its trans- 
 
 Larlo an 7 
 
 example of a actions to cash payments only, is best seen in 
 
 money . 
 
 business. such an institution as the gaming Bank of 
 
 Monte Carlo ; and it may well be taken as a 
 standard by which all stocks which rest pri- 
 marily on this basis, although not in such ideal 
 form, may be measured. For not only its capital 
 and reserve, but all its transactions are in money 
 down, with no process of bargain and sale to 
 disturb calculations, nor ups and downs of supply 
 and demand, nor conditions of Money Markets, 
 no estimates of the credits of customers, no in- 
 trusions of outside or business complication; 
 while all risks from the chances of individual 
 spins or runs of luck are neutralised by the 
 operation of the Law of Probabilities, which, 
 working under ideal conditions in the construc- 
 tion of the tables, grinds out its level profit in 
 cash with undeviating regularity. In other 
 words, while the previsions and calculations, 
 on which all ordinary businesses depend for 
 success, must always be a matter of more or 
 less uncertain speculation, and of hit or miss, 
 the Bank of Monte Carlo, like a piece of m i illery 
 Security of the mounted and planted on a level plain, can be 
 Cario.° ° ,s0 sighted and adjusted by means of the zero 
 and the limitation of stakes, as to hit its mark — 
 the share of profit it proposes to bake Eor itself 
 — every time ; and the longer I he wheel continues 
 
BANKS AND INSURANCE COMPANIES 21 
 
 to spin, the more exactly will the profits of the 
 table correspond to the amount allotted to it 
 beforehand by the application to it of the Law 
 of Probabilities, and with nothing to limit the 
 yield of these profits but the number of cus- 
 tomers who can be induced to patronise the 
 bank in a given period of time. In this way it 
 defies, in its freedom from risks, the mutations 
 of ordinary business, as the Pyramids defy the 
 mutations of time. 
 
 Now, with the Bank of Monte Carlo as our An ideal money 
 ideal and standard for estimating the status of s oc 
 all stocks resting primarily on the triple pillars 
 of Money, the Law of Probabilities, and Cash 
 Payment, we may next proceed to try to esti- 
 mate the relative status, as safe and stable in- 
 vestments, of Banking and Insurance companies 
 respectively, both of which rest mainly on the 
 same triple pillars, but are prevented from 
 reaching this ideal security by the admixture 
 in each, in varying degrees and proportions, of 
 the risks pertaining to ordinary industrial and 
 commercial businesses. 
 
 Let us then begin with banks. Like the Bank 
 of Monte Carlo, they rest throughout primarily 
 on money, or on such securities for money as 
 cheques, which, although not legal tender, and, 
 like railway tickets, good only for a single trans- 
 action, can nevertheless perform all the functions 
 
22 
 
 BANKS AND INSURANCE COMPANIES 
 
 Banks and the f money with a minimum of risk 
 
 Law of J 
 
 Probabilities. 
 
 Risks bank 
 stock is 
 subject to. 
 
 Like the 
 Bank of Monte Carlo, too, ordinary banking 
 relies on the action of the Law of Probabilities 
 for the stability and security of its profits ; for 
 it is only on the probability that the cash drawn 
 out of the bank by cheques and discounts at 
 one counter will be replaced by a continuous 
 return of different cheques and deposits at 
 another, that the outgoings and incomings of the 
 bank can be counted upon to keep in a moving 
 equilibrium with each other. Indeed, without 
 this antecedent probability it would be impos- 
 sible for a bank (with its legal compulsion to 
 meet its notes and floating deposits in cash on 
 demand) to estimate the amount of reserve in 
 cash necessary to keep on hand, or, indeed, to 
 do business on borrowed capital at all. 
 
 Again, the capital investments of banks are 
 lent only on such securities as can be turned 
 into cash at the shortest notice, and so the bank 
 keeps as closely to the ideal security of Monte 
 Carlo as is possible. Where it falls short is in 
 the necessity, under which it lies, of having 
 collateral as security at all, instead of cash. For 
 on any hitch occurring, this collateral, however 
 gilt-edged it may be, has to be sold, and so is 
 subject to the state of the Money Market al the 
 time, and to the fluctuations of Stock Exchange 
 securities generally. And although this would 
 
BANKS AND INSURANCE COMPANIES 23 
 
 not be any very great detriment, provided the 
 collateral were sufficient to amply cover the 
 debt, and there was time enough to realise it in, 
 it is always a danger, where liabilities have to 
 be met, as in banking, by cash on demand on 
 pain of bankruptcy. Indeed, if we turn the 
 banking business over on its reverse side to see 
 what its natural risks are, we shall find that this 
 is essentially its only risk, just as when an army 
 has its lines extended so far from any given 
 point of attack that it cannot bring up its full 
 strength in time. 
 
 The Panic, which descends so suddenly out of 
 the clouds, and leaves so much desolation behind 
 it, and which is the form that this risk of not 
 keeping time usually takes, is not in itself a 
 natural risk in banking, in the sense, that is to 
 say, that it is either inherent in the ordinary 
 rules of the game, or due, as most other business 
 risks are, to the impossibility of absolute fore- 
 sight into the state of markets and prices in the 
 future. These panics are due rather to the Directors' 
 
 - , , . - j , , j. and managers 
 
 bad faith and unscrupulousness ot directors or methods 
 
 , -i -, n , ,i • r responsible for 
 
 managers on the one hand, or to their excess ot pan j C3 . 
 optimism or good nature in making advances 
 to their customers on insufficient or improper 
 collateral on the other — not to the want of 
 capacity to master the few plain rules which 
 are sufficient to enable any honest and sensible 
 
24 BANKS AND INSURANCE COMPANIES 
 
 man to avoid either the immediate or the pre- 
 disposing cause of these terrible visitations. In- 
 deed, so strongly is the credit of banking naturally 
 entrenched in its basis at once of Money, of the 
 operation of the Law of Probabilities, and of the 
 most easily realisable substitutes for Cash itself, 
 that it only requires the most ordinary prudence 
 and honesty to reduce everywhere the danger 
 from panics to the minimum negligible point, 
 which it has reached in England to-day. Now, 
 taking all these considerations together, it will 
 be evident that banks have as easy and auto- 
 matic an action, as high a natural rank as stable 
 and safe investments, as is possible perhaps 
 outside the ideal of the Bank of Monte Carlo. 
 Further peculiarities bearing on their natural 
 rank and risks will appear when we contrast 
 them with insurance companies, as I now propose 
 to do. 
 insurance To begin with, we may say generally that 
 
 compared S w ith Insurance companies, although, like banks, 
 they rest primarily on Money and the operation 
 of the Law of Probabilities, do not lie as closely 
 to a cash basis at all points as banks, and so 
 participate more largely in the risks inseparable 
 from long-time as compared with short-time 
 investments. They would seem, therefore, at 
 first sight to have a less natural stability and 
 freedom from risk than Bank stock ; but whether 
 
BANKS AND INSURANCE COMPANIES 25 
 
 this superior position may not be reversed in 
 the future will depend upon considerations at 
 which we shall now have to glance in passing. 
 Both banks and insurance companies rest 
 primarily, as we have said, on money, and upon 
 their transactions in it — the banks on their 
 capital deposits received from the public, the 
 insurance companies on their capital and the 
 premiums received from their policy holders. In 
 both, again, their returns come back directly in 
 money, and not in merchandise which still has 
 to run the uncertain risks of sale before it is 
 converted into money. But while with banks the 
 mathematical Law of Probabilities is so smooth 
 and even in its working — owing to the short 
 circuit of each transaction — that the deposits and 
 discounts, on which the profits of the bank so 
 largely depend, come in in equable and regular 
 file, in insurance companies, on the other hand, Effect of Law 
 
 ' ... of Probability 
 
 the Law of Probabilities has to work through on insurance 
 
 1-111 i Companies. 
 
 statistics and tables ot chances, which, although 
 they are always being improved and provided 
 against, are still far from reliable. And the 
 consequence of this is, that, while in the ordinary 
 way of business the proportion of cash which 
 the bank must keep by it as its reserve can be 
 easily estimated, and can be depended upon 
 to remain steady throughout, if the rules of 
 prudence proper to banking are observed, in 
 
26 BANKS AND INSURANCE COMPANIES 
 
 insurance companies, especially in cases of fire, 
 the risks come rolling in for payment inter- 
 mittently, like epidemics, and so require not 
 only a larger proportional reserve to meet them, 
 but one which demands more careful watching, 
 if it is to keep time and proportion with the 
 risks. So far, then, the risks not being so calcu- 
 lable, they are not so safe as banks. But as a 
 set-off, the insurance companies, so far as the 
 Risks of future is concerned, have this advantage, that 
 
 Insurance _ " 
 
 Companies. whereas the risks of the banks are neither 
 diminished nor increased by the extent of their 
 operations or the circle of their clientele, inas- 
 much as the extent of their business does not 
 affect either way the periodicity and accuracy of 
 their incomings and outgoings, the risks of in- 
 surance companies must diminish as the field 
 covered by their policies increases in magnitude 
 and range ; so much so, indeed, that were a 
 single insurance company to embrace the world, 
 its risks could be taken haphazard for all coiners 
 without inspection, or, in the case of lives, 
 medical examination, inasmuch as the Law 
 of Probabilities working on the statistics of the 
 death rates of all nations would enable the 
 average of profits to be calculated to almost a 
 working certainty. 
 
 And the question arises whether banks have 
 any set-off in the future which will balance 
 
BANKS AND INSURANCE COMPANIES 27 
 
 this progressive advantage on the side of the How panics 
 insurance companies. Yes, if the probability be averted. 
 of a higher moral standard in the management 
 and administration of banks in the future may 
 be relied on to lessen the risks of panics. All 
 the foremost nations of the world become, as 
 time goes on, more sensitive and morally re- 
 sponsive to the necessity of keeping their assets 
 in such securities only as can be converted into 
 money on the shortest notice, as well as making 
 their advances to customers only on such col- 
 lateral as can be so converted, besides being 
 sufficient in amount. In this way the danger 
 from panics, which rarely arise except from 
 suspicion of carelessness or unscrupulousness, 
 would be reduced to a minimum or altogether 
 averted ; whereas, in insurance companies 
 neither honesty nor industry will probably ever 
 avail to anticipate or prevent destructive fires 
 like those of San Francisco or Messina. These 
 could, of course, be provided against in a measure 
 by special reserves set aside for the purpose, 
 or by greater combinations and shariogs of 
 risks among the different companies ; but all 
 this adds to cost, and so far throws back the 
 advantage in yield, as well as in stability, on to 
 the side of the banks again. It would seem Risks of Banks 
 as if panics lay, as it were, outside the circuit insurance m 
 of a bank's natural risks, and were rather a Com P anies - 
 
Z5 BANKS AND INSURANCE COMPANIES 
 
 matter of personal prudence and character in 
 the administration of them than inherent in 
 their essence ; whereas in insurance companies, 
 especially those providing against accidents from 
 fire or flood or storm, the risks are inherent, 
 natural, and proper to the business itself. 
 
 Again, the investments of Banks are either in 
 gilt-edged securities, the most easily convertible 
 into cash, or in those which run their course 
 in such short periods of time that they can 
 scarcely in the intervals of renewals, with their 
 various endorsements or acceptances, get far 
 out of hand without detection and the prevention 
 of loss ; whereas in the long-time investments 
 of Insurance Companies, the directors may be 
 condemned to stand and look on while their 
 securities slowly become worthless. It is true 
 there are possibilities of gain in the long- 
 time investments of the Insurance Companies 
 Yield of long- wliich are not open to Banks doing a legitimate 
 
 ami short-time -i i 1 • i j» » -i -.i .1 
 
 investments. business, and which are confronted with the 
 dangers of panic on any failure to meet their 
 deposits on demand ; and these may well re- 
 verse the relative status of the Insurance Com- 
 panies and the Banks, inasmuch as they will 
 not only command a greater yield of income, 
 but one which in the future may be expected to 
 rest on a basis of equal stability and security. 
 This, I believe, will eventually be the case if 
 
BANKS AND INSURANCE COMPANIES 29 
 
 the principle of the Geographical Distribution of 
 Capital, which this publication is intended to 
 support, can be worked out into a true scientific 
 demonstration. Any risks which investments 
 on this principle may run, when compared with 
 the gilt-edged securities of the bankers' opera- 
 tions, would be balanced by the advantages 
 possessed by the Insurance Companies in the 
 length of time given them to negotiate the sale 
 of their securities to the best advantage. The 
 element of time enters into the relative status 
 of Banks and Insurance Companies in other 
 ways, but mainly through the effects of the 
 Money Market on profits and stability. 
 
 The profits of Banks vary with the fluctuations How Bank rate 
 of the Bank rate ; when the Bank rate is low, affect^he^ieid 
 and money in consequence is cheaper, the yield of Bank stock ' 
 is less than when it stands at medium rate 
 between high and low. Provided that the state 
 of trade and business in general remains steady, 
 a high Bank rate restricts the demand for bank 
 accommodation, although the profits of the bank 
 are high on each transaction. A low rate, on 
 the other hand, stimulates the demand, but the 
 profits in each transaction are small ; it is the 
 medium, or average, rate which gives, perhaps, 
 the most satisfactory returns. On Insurance 
 Companies, on the other hand, with their 
 investments resting largely on long-time engage- 
 
30 BANKS AND INSURANCE COMPANIES 
 
 Bank rate and mcnts, and with no pressing necessity of pay- 
 on insurance meiit on demand, the temporary fluctuations of 
 
 Companies. 
 
 the Money Market have less influence. It is 
 only long-time or permanent changes in the 
 value of money that can have much influence 
 on the yield from their investments, and this 
 can be largely neutralised and averaged, as we 
 shall see later, by a geographical distribution 
 among the Money Markets of different nations ; 
 and then the yield from the Insurance Com- 
 panies' investments would be larger than those 
 from the Banks. 
 insurance Indeed, it is questionable whether the yield 
 
 Geographical from the Insurance Companies, by their skilful 
 handling of these investments, may not prove 
 in time as steady, safe, and stable a revenue as 
 from their insurance business proper. It ought 
 at least to form a reserve for the greater calamities 
 to which they are subject. A drawback to the 
 advantages of any scheme of investment lies 
 in the fact that their securities, in the event of 
 any great drafts being made on them suddenly, 
 or on their term having run out, are liable to 
 forced sales on ompropitious markets and to the 
 difficulty of finding at the moment other in- 
 vestments equally good to replace (hem; but 
 this difficulty a geographical distribution may 
 be trusted to reduce to a niiniimun. As to the 
 risks, which appertain both to Banks and In- 
 
BANKS AND INSURANCE COMPANIES 31 
 
 surance Companies from unpaid-up Capital, 
 terrible as these risks are, and common as is 
 the practice of our English Banks and Insurance 
 Companies in running them, they may be said 
 to be incidental rather to the proper business 
 of these concerns than natural risks inherent 
 in them, and could be altered by legislation 
 to-morrow. 
 
 To sum up, then, these various considerations Relative safety 
 
 . i . • -, . i • -i of Banks and 
 
 of relative advantages and risks, we may say, insurance 
 perhaps, that up to the present day Banks have Com P ames - 
 a higher natural safety, stability, and yield, 
 than Insurance Companies, owing to the greater 
 closeness with which they lie to their money 
 basis at every stage of their transactions, to the 
 greater reliability with which the Law of Pro- 
 babilities can be applied to them, and to the 
 shorter time in which their cash assets are out 
 of their immediate tangible possession. But in The future of 
 
 . -n • Insurance 
 
 spite of all this, it is still an open question Company 
 whether in the future the freedom which In- 
 surance Companies enjoy in the range and choice 
 of their investments, but which is denied to the 
 Banks, may not result in incomes from that 
 source alone so much larger than those of the 
 Banks (and, under the auspices of the new 
 science of the Geographical Distribution of 
 Capital, equally safe) as to form a second line of 
 reserve, as it were, which will more than cover 
 
32 BANKS AND INSURANCE COMPANIES 
 
 the greater unavoidable risks to which the In- 
 surance Companies must always be exposed. 
 But if this be not enough to transfer the balance 
 of advantage to the Insurance Companies, it will 
 probably be made up by the lessening of risk 
 due to the greater field covered by them in the 
 future, to their greater combination for the 
 sharing of risks, and to the progressive per- 
 fecting of the tables of chances on which the 
 Law of Probabilities will be able to work. 
 From all of which complication of considerations, 
 the reader will see how difficult it is to deter- 
 mine scientifically the relative status for the 
 future of Banks and Insurance Companies re- 
 spectively. At the present time it is probable 
 that Banks, in Great Britain at least, are the 
 more steady, safe, and reliable investments of 
 the two. 
 
CHAPTER II 
 
 ON THE NATURAL VALUE OF DIFFERENT CLASSES 
 OF SECURITIES — INDUSTRIAL MONOPOLIES 
 
 TN the present chapter I propose to begin by 
 considering the natural value of those 
 stocks which rest primarily on Industrial Mono- stocks which 
 poly, complete or partial (and not, like Banks industrial 
 and Insurance Companies, on Money) as a pre- onopo y ' 
 liminary to that large class of securities which, 
 like Corporation Loans, Railway and other De- 
 bentures, rest on a combination of all three — 
 Industry, Monopoly, and Money. As to all 
 ordinary industrial stocks, such as are repre- 
 sented by the Ordinary shares of a Joint Stock 
 Company, they are so subject to all the ups and 
 downs of market prices, of brisk and slack trade, 
 of " goodwill " or the loss of " goodwill," of new 
 inventions, new machinery, new chemical pro- industrial 
 
 .. 1 . , - stocks merely 
 
 cesses, and what not, that the incomes irom a speculation. 
 them, however great they may chance to be, 
 are as uncertain and fluctuating as the rocking 
 foundations on which they rest. In a word, 
 they are as a class the subject-matter of specula- 
 
 33 3 
 
34 
 
 INDUSTRIAL MONOPOLIES 
 
 Insecurity of 
 Joint Stock 
 Companies. 
 
 Natural value 
 Of industrial 
 Monopolies. 
 
 tion and chance, and not of scientific generalisa- 
 tion and prevision ; and their natural rank, in 
 consequence, when compared with investments 
 resting on Money, is as much lower in the scale 
 as the gambling of the outside public on the 
 turf is than that of the scientific bookmakers, 
 or that of the players at the Bank of Monte Carlo 
 than that of the bank itself. 
 
 Indeed, from their natural want of stability 
 and security, the Ordinary shares of Joint Stock 
 Companies may be said to stand at the bottom 
 of the scale of investments. Not that there may 
 not be Golcondas among them, or that the 
 majority of them may not be steady-going con- 
 cerns yielding average dividends, even if there 
 be a large minority that are virtually bankrupt 
 or on the verge of it ; and doubtless to the 
 promoters, who have inner knowledge of these 
 concerns, it is often, though not always, suffi- 
 ciently well known under which of these cate- 
 gories their own particular stock will fall. But 
 this cannot be known to the outside general 
 public, nor, as we shall see later on, will the 
 published audit of the accounts of these com- 
 panies by the methods of bookkeeping in vogue 
 reveal it to them — except to the few who know- 
 how to read between the lines. 
 
 Now, all this is reversed in the case of those 
 industries that have managed to convert them- 
 
INDUSTKIAL MONOPOLIES 35 
 
 selves into Monopolies. For then, instead of 
 being the hangers-on of business chance and 
 fortune, they are able in a measure to defy 
 them ; and their stocks have, in consequence, a 
 natural value on a level with those stocks which 
 rest, like Banks and Insurance Companies, on 
 Money and the mathematical Law of Proba- 
 bilities — and indeed above them, if the monopoly 
 be a complete one, as we shall presently see. For 
 both the stocks that rest on Money and those 
 that rest on Monopoly get their high rank from 
 the power they have of controlling the selling 
 end of their bargains as it were, and of keeping 
 it in correspondence with the buying or cost end. 
 Banks get this power through the quality which 
 money possesses (owing to its being the standard 
 and measure of value) of being practically equal 
 value at both ends of the usually short-time loan 
 transactions in which they deal ; and by the 
 Law of Probabilities which, as we saw in the last 
 chapter, keeps a fairly average level of profit steadiness of 
 throughout. Industrial Monopolies, on the industrial 
 other hand, when they are complete ones, get ono P° es - 
 their steadiness and equability by the power of 
 moving their selling price up and down at a fixed 
 percentage of profit, in correspondence with 
 the variations in their buying price or costs. 
 
 So far, Banks and Industrial Monopolies are on 
 an equality as far as their stability and security 
 
36 
 
 INDUSTRIAL MONOPOLIES 
 
 Industrial 
 Monopolies 
 compared with 
 Banks. 
 
 Advantages 
 enjoyed by 
 Industrial 
 Monopolies. 
 
 are concerned. But the industrial monopolies 
 have this advantage over Banks and Insurance 
 Companies, which rest on Money and depend on 
 the working of the Law of Probabilities to keep 
 them steady, viz., that whereas the Banks and 
 Insurance Companies have no inherent or natural 
 power of drawing away the customers of other 
 banks of equal capital, honesty, or repute, In- 
 dustrial Monopolies, when complete, have by 
 their very nature the capacity of absorbing the 
 customers of all lesser concerns by the power 
 they have of underselling them in the open 
 market. 
 
 There are many reasons why they have this 
 power. In the first place, they all have some 
 differential advantages in their favour which en- 
 able them to produce more cheaply than the rest 
 of their competitors in the same line of business. 
 It may be a new invention, a better process or 
 machine, which is sufficient to give them the 
 lead in the trade before the patent runs out ; 
 and this lead may afterwards be continued by 
 " goodwill," " trade marks," advertisements, 
 and other extraneous influences. But at the 
 present day, with patent rights so short-lived 
 as they are, this is not sufficient to establish 
 a complete monopoly. There must be some 
 natural advantage in the climate, soil, or water 
 of the region in which the monopoly takes its 
 
INDUSTRIAL MONOPOLIES 37 
 
 rise over those of other regions — as is found in 
 the case of certain select brands or descriptions 
 of tobacco, of wine, of ale, or fruit, certain in- 
 dispensables for high-class cutlery or cotton 
 manufacture, the existence of oil wells, diamond 
 mines, and the like. 
 
 Or, again, a Monopoly may take its rise and Beginning of a 
 get its hold from its purely site value as a trading onopo - 
 centre, and this whether in the case of an in- 
 dividual trader, a city, or a nation — as is seen 
 in the historical instances of Constantinople, 
 Venice, Amsterdam, and London, and of Spain, 
 Holland, and England generally. But once 
 securely entrenched by these or other means, 
 the monopoly may afterwards maintain itself 
 indefinitely and make itself absolute, by the 
 mere possession of an amount of free capital 
 sufficient when concentrated on any given point 
 to annihilate its rivals by underselling them — 
 as in the case of the Standard Oil, Beef, Sugar, 
 Soap, and other American Trusts. This it can 
 do either directly by buying them out, or by 
 drawing them into amalgamation with itself ; How a 
 or eventually by the power which the enormous J^wh^ims 
 aggregation of capital in single hands gives its lts nvals - 
 possessor of keeping down costs below the level 
 of his rivals through the advantages he gets in 
 higher rates of discount, or greater rebates in 
 transportation ; in the power his free capital 
 
38 INDUSTRIAL MONOPOLIES 
 
 gives him of buying up the best patents and 
 processes, the best talents and services ; and, 
 we may add, in the power it gives him of 
 corrupting Courts of Justice in countries where 
 corruption has become a recognised business 
 transaction. 
 The effect on But however strongly a Monopoly may be 
 
 a Monopoly of,, -i-ici 
 
 controlling the able to entrench itseli by these or other means, 
 it is rarely that it can make itself complete. 
 To do so, it must have the power of controlling 
 its selling end as well as its cost or buying end ; 
 and this is scarcely possible, except when it 
 deals in one or other of the great necessaries of 
 life — as is the case with the great American 
 Trusts. But should it succeed in thus con- 
 trolling its selling end, as well as sealing up its 
 buying end against all attack, it is evident that 
 it will not only be as stable, secure, and equable 
 as the Banks, but that it will have possibilities 
 within it of a much greater yield of income on 
 an equal amount of capital ; and so will stand 
 higher in the scale of securities than either 
 Banks or Insurance Companies. For, dealing 
 with those ultimate necessaries which all must 
 buy, and not with such comparative luxuries 
 as are involved in the ability to keep a bank 
 account, or to insure your life or your house, 
 it can never want for customers ; nor, indeed, 
 can it if it deals in those collaterals like steel, 
 
INDUSTRIAL MONOPOLIES 39 
 
 iron, and timber, which are everywhere involved 
 in production and transportation. Banks and 
 Insurance Companies have a narrower range of 
 customers than these giant Industrial Monopolies, 
 and, being subject to competition among them- 
 selves, a lower rate of profit ; and so have not 
 only a lower yield on the same amount of capital, 
 but, in consequence, a lower natural rank in 
 the financial scale for stability and security 
 as well. 
 Incomplete or Partial Monopolies, on the incomplete 
 
 * L Monopolies 1 
 
 other hand, stand lower in the scale than Banks secure than 
 or Insurance Companies, inasmuch as, however 
 much they may be able to control their cost 
 end, they are unable as a rule to control their 
 selling end, even when there is no alternative 
 commodity on which their customers can fall 
 back as a substitute. A Diamond Monopoly, for 
 example, even were it absolutely secure against 
 competition, could never fix its sale price with 
 the certainty with which a Standard Oil, Meat, 
 Sugar, or Soap Trust, all of which deal with the 
 necessaries of life, can, inasmuch as, being a 
 luxury, the sale of diamonds falls off of itself in 
 periods of crisis or trade stagnation. And 
 although the sales are almost sure to recover 
 when trade revives, this monopoly, even were 
 it complete in its way, cannot have the calculable 
 stability of monopolies founded on the necessaries 
 
40 INDUSTRIAL MONOPOLIES 
 
 of life ; and so takes a lower rank in the scale of 
 stable, secure, and high-yielding investments. 
 Indeed, Industrial Monopolies which can in any 
 sense be called complete, that is to say, which 
 can control both 'the buying and the selling ends 
 of their transactions, are, as I have said, the 
 rarest of phenomena. 
 
 The land of a country is spoken of as a mono- 
 „ T , . , poly, owing to its scarcity ; but there are few 
 
 How Industrial r J ' , & J ' 
 
 Monopolies may countries that could control the selling price of 
 
 control the . . 
 
 selling end. their own com without Protection. As for the 
 ordinary Industrial Monopolies which do not 
 depend on scarcity values, they will have to be 
 internationalised — as, indeed, some of them are 
 fast becoming — before they can so far control 
 their selling ends as to become complete. But 
 for the great mass of Industrial Monopolies there 
 are so many alternatives to the use of any but 
 the most pressing necessaries of life, and so many 
 difficulties in the way of effective " cornering," 
 that they may safely be put under the category 
 of Incomplete or Partial Monopolies, with a 
 status for stability and security lower than Banks 
 and Insurance Companies — to which indeed they 
 stand in the same relation of inferiority as Ordin- 
 ary Joint Stock shares do to them. 
 Now these Incomplete or Partial Monopolies 
 
 Two classes of ma y k e divided into two classes : those of a 
 
 Incomplete J 
 
 Monopolies. private and those of a semi-public character ; 
 
INDUSTRIAL MONOPOLIES 41 
 
 but they all have this characteristic, that it is 
 only one of their limbs, as it were, on which they 
 can march with safety, the other being shaky 
 and insecure. In semi-public monopolies, as we 
 shall see in the next chapter, some have their 
 selling prices guaranteed to them, but not the 
 cost price or the number of their customers ; 
 others have both a given number of customers 
 and a given price, but not the cost ; and others 
 again, although guaranteed against competition, 
 have no guarantee for their " turnover " or sales. 
 In private incomplete monopolies, on the other 
 hand, it is the buying or cost leg that is reliable 
 and steady, owing to the possession of natural 
 advantages of production which keep down 
 competition ; while the selling one, unless 
 protected by tariff, is weak and insecure, owing 
 to the difficulty of controlling prices in the face 
 of foreign competition, or of controlling sales in 
 the face of alternative substitutes. 
 
 In this connection it is perhaps interesting to 
 note that no man was more alive to the necessity 
 of controlling the selling as well as the buying 
 
 ,. .. , Importance of 
 
 end oi a commodity, if a monopoly were to be Monopolies 
 secured, than the late Mr. Kogers of the Standard selling end. 
 Oil Trust. In one of his numerous altercations 
 with Mr. Lawson, as recorded in Frenzied 
 Finance, he insisted that economists must be 
 taught the lesson that it was essential to a 
 
42 INDUSTRIAL MONOPOLIES 
 
 complete monopoly that it should be able to 
 control its sale end as well as its supply end or 
 cost ; that it should not only have full control 
 over the raw material and its various processes" 
 of manufacture (either by owning them or being 
 able to put sufficient pressure on those who did), 
 but have full control over all the agents and inter- 
 mediaries engaged in its sale. It was a question 
 of the sale of copper, if I remember rightly, 
 and Mr. Rogers proposed that sufficient pressure 
 should be put on some rival selling agents with 
 the view of crushing them and driving them 
 from the field if in their sales of copper they 
 should refuse to hold up their prices to the level 
 
 Monopolies p . 
 
 exercise drastic which he dictated. To Mr. Lawson, himself a 
 
 action with . 
 
 rivals. great operator, all this seemed to come as a 
 
 revelation — if one may judge from the ecstasies 
 of admiration into which, in his recital and com- 
 mentary on the affair, he fell over the genius of 
 Mr. Rogers — but I could not help feeling that 
 it must have been the old Academical Econo- 
 mists whom Mr. Rogers had in his eye when he 
 uttered his gibe ; for precisely the same principle 
 was involved in every doctrine of the New 
 Economy which I had embodied in my Wheel 
 of Wealth. 
 
 Now, it is to be observed that in all these in- 
 complete monopolies, where either the buying 
 or the selling end is so unstable that the two 
 
INDUSTRIAL MONOPOLIES 43 
 
 cannot be brought together and adjusted so as stock rank of 
 
 00 J Incomplete 
 
 to form that closed circuit at which Mr. Rogers Monopolies, 
 aimed, no definite rank can be assigned to the 
 particular stock in the hierarchy of stocks at 
 once stable and safe, but each must " hang by 
 its own head," as it were, and stand on its 
 own particular merits alone. To get at the 
 rank of each, we have to look not only for its 
 positive merits, but for the special risks to which 
 it is liable. Some positive merits, one would 
 think, all monopolies, complete or incomplete, 
 must have, or they could not have got the start 
 which has given them their supremacy ; but, 
 strangely enough, inherent merits are more 
 likely to be found in incomplete monopolies than 
 in practically complete ones where both ends 
 are controlled, like Standard Oil ; inasmuch as 
 the stock-in-trade of the latter being imposed by 
 compulsion and not by preference, may, like 
 dirty water to those dying of thirst, or dough 
 pills to those hypnotised by reports of cures, 
 have little or no positive superiority at all. 
 
 To determine the natural status of an In- How to 
 
 , • n 1 1 j- ascertain the 
 
 complete Monopoly, practically tne question natural status 
 
 , ip', -i "j." *i • of Incomplete 
 
 we have to ask 01 it on its positive side is : Monopolies. 
 To what extent has it merit or superiority 
 enough to exclude competition wholly or in 
 part ; and to what extent could it absorb all 
 its competitors into a combine or trust ? This 
 
44 
 
 INDUSTRIAL MONOPOLIES 
 
 Example of 
 complete 
 natural 
 Monopolies. 
 
 answered, we have next to turn it over on its 
 reverse or negative side, and ask : To what 
 special risks, other than competition, is it liable 
 in itself ? 
 
 As regards the first question, we may take 
 English china clay and English steam coal as 
 examples of natural monopolies in their way 
 complete, both from their positive merits and 
 their freedom from foreign competition. Were 
 they in the hands, therefore, of some great Trust, 
 they could take toll from all the world by the 
 prices they could command ; but at present 
 they are broken up and divided among a 
 number of separate owners, whose competition 
 among themselves for sales gives away to 
 the buyers a large part of the monopoly sell- 
 ing price which they could so easily command. 
 As for the risks that attend them — there arc 
 practically none, either in the mining of the 
 coal or the extraction of the clay, to interfere 
 with the steady amount and regularity of 
 their yield. But not all monopolies are so free 
 from risks as these ; and even were they con- 
 centrated in single hands, or free from competi- 
 tion among themselves, they arc nearly ;ill 
 rendered unstable by unforeseeable risks, which, 
 as we saw with diamonds, must be the case with 
 all high-priced monopoly articles which are not 
 necessaries of life. Special brands of tobacco, 
 
INDUSTRIAL MONOPOLIES 45 
 
 wine, or cigars, again, vary in degrees of risk, 
 owing to vicissitudes of climate, weather, atmo- 
 sphere, soil, insect-pests, and the like ; while 
 other monopolies, especially in the case of 
 luxuries, may be made unstable to a disastrous 
 extent by changes in fashion or taste, especially 
 when dealing in commodities where there are 
 possible substitutes ; as, for example, in a 
 change from silks to woollens or cottons, from 
 diamonds to emeralds or rubies, from port to 
 sherry or claret or spirits, from Irish whisky 
 to Scotch, from gas to electricity, from horse 
 to motor cabs, electric trams, or omnibuses, 
 and so on. 
 
 On the other hand, there are conditions at- The value of 
 tached to certain Incomplete Monopolies which capital. 
 render them less liable to competition than others. 
 The main condition, perhaps, is the existence 
 of a vast amount of capital at the free disposal 
 of a monopoly in its fight with a rival, especially 
 in those cases where neither can altogether crush 
 out the other by underselling, and yet where to 
 divide the spoil would be to ruin both ; as, 
 for example, in the running of two rival railway 
 lines through the same tract of country when 
 there is only business enough for one ; or in the 
 sale of commodities the demand for which is 
 limited, and is necessarily confined to a particular 
 area, as in the Professions to a certain extent, 
 
46 
 
 INDUSTRIAL MONOPOLIES 
 
 and in the great Retail Houses enjoying partial 
 monopolies in separate towns. 
 Natural rank of Now, in the above and other instances of In- 
 
 Incomplete r .. . . 1 . 
 
 Monopolies. complete Monopolies, it is evident that even 
 when they are fairly secure on their positive side, 
 the degree of risk varies so much in each case 
 that no definite natural rank can be assigned to 
 them as a class, but only in individual instances 
 after careful investigation of the merits and risks 
 peculiar to each. The most that can be said 
 of them as a class is that they stand in the scale 
 at a point below the rank of stocks founded on 
 Money and on the operation of the Law of Proba- 
 bilities, like Banks and Insurance Companies, 
 but higher than all other shares in Industrial 
 Businesses making no pretence to monopoly, and, 
 in consequence, controlling neither the buying 
 nor the selling end of their transactions, but 
 subject in both to all the mutations of business 
 and trade. 
 
 In the next chapter I propose to deal with those 
 partial monopolies which rest exclusively neither 
 on Money nor on an Industrial basis, but on 
 a combination of both, and are liable to the 
 intrusion of Politics and other extraneous in- 
 fluences as well ; and so depend for their natural 
 status on other kinds of security, and are subject 
 to other kinds of risk. But before doing so, Ave 
 may sum up as far as we have gone by saying 
 
 Position of 
 Government 
 Stocks in the 
 scale of 
 natural value. 
 
INDUSTRIAL MONOPOLIES 47 
 
 that at the summit of the pyramid stand Govern- 
 ment stocks as the highest in natural rank, 
 inasmuch as they rest on the broad basis of the 
 entire wealth of the nation itself ; and so have 
 an ultimate security above that of all other 
 stocks in the event of a threatening disaster to 
 the State. But it so happens that one of the 
 characteristics of these gilt-edged Government Government 
 stocks is that they are more sensitive to the susceptible to 
 intrusion of Political and International Com- disturbances, 
 plications than all others ; and are apt, in 
 consequence, to have not only their immediate 
 value, but the supposed stability of their yield, 
 more disturbed than stocks which lie naturally 
 below them in rank ; and that, too, over con- 
 siderable stretches of time, and without any 
 compensation to the investor in a higher yield of 
 interest. In other words, other stocks have 
 often over long periods a degree of practical 
 security as great as that of Government stocks, 
 but with less variation and a greater yield of 
 income. And it is precisely these unnatural in- 
 versions of the best Government stocks, often 
 covering considerable periods, through Political 
 or Money Market influences, that give the 
 Geographical Distribution of Capital, as we shall 
 see presently, its golden opportunity. This we 
 shall explain in detail in due course ; but in the 
 meantime, returning to our scale of natural 
 
48 INDUSTRIAL MONOPOLIES 
 
 values, we may say that immediately below the 
 best Government stocks in natural rank are those 
 stocks which rest primarily on Money and the 
 Law of Probabilities, and are best represented 
 
 Position of 
 
 stocks winch rest on the large scale by Banks and Insurance 
 scale of natural Companies. For stability and security they stand 
 as a class as much above any Industrial concerns 
 as in feudal times landed and entailed estates 
 did, with the one exception which we have just 
 seen of Complete Industrial Monopolies which, 
 like the great American Trusts, have secured a 
 control over both the buying and selling ends 
 of the great staple necessaries of life, and which, 
 while as steady and secure as Banks and Insur- 
 ance Companies, have, by the universal demand 
 for their commodities, a greater yield than they, 
 when confined to a particular country — and a 
 fortiori a still greater yield and a still higher 
 status when internationalised. 
 
 Below these great Trusts again, as well as 
 Relative rank below Banks and Insurances, stand the Incom- 
 
 of Complete and . 
 
 incomplete plete Industrial Monopolies which, as we have 
 seen, have control over only one end or limb 
 of their business, but to which as a class no very 
 definite rank can be assigned, inasmuch as each 
 differs from the rest in the extent to which it 
 can defend itself from competition, or can turn 
 itself into a combine, as well as in the special 
 kind and degree of risks to which it is exposed 
 
INDUSTRIAL MONOPOLIES 49 
 
 — risks, all of them, which render its yield un- 
 stable, and its markets capricious and uncertain. 
 And finally, at the bottom of all securities for 
 stability and safety stand the Ordinary shares 
 of ordinary Joint Stock Companies which enjoy 
 no monopoly either in their power of buying or 
 of selling, but are subject to all the accidents 
 and the ups and downs of trade, both in their 
 costs and their yield, and so are beyond the 
 reach of any scientific generalisation. They are Position of 
 
 . . -.. . j Joint Stock 
 
 the subject-matter, m a word, of speculation and Companies in 
 guess-work, so far as the public are concerned ; value. 
 and it is only to those with inside knowledge, 
 as I have already said, that the actual status 
 of any particular one of them can be known. 
 They need not, therefore, concern us here, for 
 my generalisations, rough as they are, must, I 
 repeat, be confined to the different classes of 
 securities, and not to the stock of any 'particular 
 concern. 
 
CHAPTEE III 
 
 CORPORATION LOANS, RAILWAY DEBENTURES, ETC. 
 
 to political 
 influence. 
 
 TN this chapter I propose to consider the 
 natural rank of those securities which are 
 Loa^subJU subject to the influence of politics and of Govern- 
 ments, local or central, from which, so far, all 
 private businesses, even the most colossal and 
 complete of monopolies, have been practically 
 free. I shall begin with Corporation Loans, 
 and follow my usual plan of first trying to form 
 some general estimate of their possibilities and 
 outlooks on the positive side as it were, and 
 then, turning them over and looking at them 
 from the reverse or negative side, examine 
 them with the view of determining the nature 
 of the special risks to which they are exposed. 
 To begin with, then, we may say in general that, 
 being Loans, they are founded on Money pri- 
 marily, and so participate in the relative stability 
 which, as we have seen, attaches to Money 
 values over Industrial ones. In the second 
 place, these Money values, collected from the 
 rates, rest on tangible property, which also lias 
 
 GO 
 
CORPORATION LOANS 51 
 
 more stability, and over longer periods, than the 
 products of Industry. A third important point 
 about these Corporation Loans is that they are Security of 
 usually sanctioned by the Local Government LoansT* 10n 
 Board before they are issued ; and that, too, 
 after a most careful audit of all the circum- 
 stances and conditions, the assets and liabilities, 
 of the municipalities on whose rates they are 
 founded. Besides this, the Government, before 
 sanctioning a Corporation Loan, sees to it that 
 the loan shall be so small in comparison with 
 the rateable property which lies behind it as 
 security, as to be practically beyond the reach 
 of all foreseeable fluctuations or depreciations 
 in the value of that property. Not only so, but 
 the Government takes care also that the term 
 of years which elapses before the loans are re- 
 deemable shall be strictly limited to the average 
 length of time during which the works on which 
 the loan is spent are likely to last ; and without 
 burdening overmuch future generations of pro- 
 perty holders. In buying land, for example, 
 the Government insists that the loan for the ^^ r ^J n 
 purchase of it shall be repaid in from sixty to repayment, 
 eighty years ; the erection of stone or brick 
 buildings, baths, electric lighting, gasworks, in 
 from twenty to forty years ; footways, steam- 
 rollers, trees for street improvements and the 
 like, five to ten years, and so on. But even 
 
52 CORPORATION LOANS 
 
 this is not all. The Government is also rigorous 
 in insisting that the rate of interest charged 
 shall be adjusted to the length of the loan — 
 3 J per cent if it does not exceed thirty years, 
 and 3 1 per cent if it does not exceed fifty. 
 All this is in the interest of and for the pro- 
 Corporation and tection of the general public who invest in these 
 
 investors ° x 
 
 protected by loans. But the Government looks after the 
 Corporation as well, and prescribes how and 
 when the capital and interest of the loan are to 
 be redeemed : the idea being to make the annual 
 sums as nearly equal as possible throughout the 
 whole period during which the loan has to run. 
 Loans, for example, for periods exceeding thirty 
 years are to be repaid by equal yearly or half- 
 yearly instalments of principal, with interest 
 on the balance of principal from time to time 
 outstanding ; while loans for shorter periods 
 are allowed to be paid in equal yearly or half- 
 yearly instalments of principal and interest 
 combined. By means of these and other ex- 
 pedients, the Government has arranged that 
 everything shall be so smoothed and levelled, 
 so square-cut and measured to rule before the 
 loan is floated, that the interest required to meet 
 it shall be kept, as we have seen, at a point of 
 safety so high above all possible or probable 
 fluctuations in the yield from the rates, that 
 these Corporation Loans, while as Bteady and 
 
CORPORATION LOANS 53 
 
 level in their smaller way as Consols, shall be Corporation 
 
 , . , , , ,, . . . n x Loans as stable 
 
 only just below them in security as well, in- as Consols, 
 deed, the fact that so many of them in the 
 United Kingdom have been made into Trustee 
 Stocks is only an expression of the public recog- 
 nition of their high rank as investments. It is 
 true that the loans are expended as often on 
 financially unremunerative as on productive 
 works. Education, bridges, highways, street 
 improvements, sewerage, and parks, for ex- 
 ample, yield no pecuniary returns ; and as 
 business propositions are apparently nothing 
 but an incubus on the rates. But this is not 
 really so ; for it is precisely works of utility, 
 convenience, ornament, or sanitation, like these, 
 that add to the value of the house property on 
 whose rates a large part of the security of these 
 loans is founded ; so that they are rather an 
 additional security than a detriment. 
 
 If, then, we would sum up the positive merits 
 which the Government in its efforts to protect Corporation 
 
 tt -l 11 • i • Loans 
 
 the public and give it lull security has given compared with 
 
 . , ^ ,. T , -. other stocks. 
 
 to these Corporation Loans, we cannot do 
 better, perhaps, than compare them with the 
 comparatively unsheltered and unprotected con- 
 dition of other stocks. And the first thing that 
 strikes us is, that while other stocks have to 
 depend for their solvency on the limited liability 
 of a limited number of individuals of uncertain 
 
54 CORPORATION LOANS 
 
 means and sources of income, loans to Corpora- 
 tions are secured on the tangible property of 
 whole cities or towns, whose rateable values, 
 besides, can be calculated from year to year 
 almost to a certainty ; and so, like an elastic 
 band, can be made to stretch or contract to the 
 yearly requirements of the loan, with the utmost 
 exactitude. 
 Yield security This rateable property, in the second place, 
 
 ofiCorporation . . 
 
 Loans. has not only an equability of yield and freedom 
 
 from fluctuation far in excess of any other kind 
 of industrial property, but it has a break-up 
 value far above that of any loan or loans that 
 the Government will allow to be founded on it. 
 Now, this absolute levelness and security of 
 yield, which the elasticity of the rates gives to 
 loans to Corporations, is superior to the general 
 levelness and security of yield which characterise 
 Banks and Insurance Companies from their 
 being founded, as we saw in a previous chapter, 
 on Money and the Law of Probabilities. For 
 the Law of Probabilities, unless, indeed, it can 
 act under such ideal conditions as are present 
 in the Bank of Monte Carlo, can only give you 
 a comparatively rough-hewn levelness and 
 equality of yield, owing to the changes in the 
 Bank rate to which the other Bank rates have 
 to keep time and proportion ; while in Insurance 
 Companies the existing tables of chances on 
 
CORPORATION LOANS 55 
 
 which that law has to act are still far from per- 
 fect ; and so the stability of the yield is im- 
 perfect also. But the levelness of the yield of 
 the rates on which the loans to Corporations 
 are founded is guaranteed by the double circum- Yield 
 stance, firstly, that if the existing incumbent corporation 
 of a piece of rateable property drops out from g^Santeed. 
 death, bankruptcy, or removal, another will 
 usually be found to take his place, the house or 
 building having meanwhile lost little or nothing 
 of its rateable value ; and secondly, that if 
 whole regions of streets were deserted in mass, 
 the rest of the Corporation would have to be 
 stretched on the rack until they made good the 
 ensuing deficiency in the rateable yield. Or, 
 to put it differently, we may say that if the 
 fluctuations in the yield of ordinary Industrial 
 and Commercial stock which does not enjoy 
 monopoly may be compared to the troughs and 
 crests of the waves of a gusty sea, and the 
 fluctuations of Banks and Insurance Companies 
 to the ripples on the surface of a calm one, the 
 stability and security of Corporation Loans may 
 be compared to the glassy smoothness of a lake. 
 
 But all this, it must be remembered, applies Corporation 
 only to Corporation Loans as they leave the g iit- e d g ed 
 hands of the Local Government Board which has secunty - 
 sanctioned them ; and thus far at least it may 
 be said of them that they do not depend for their 
 
56 CORPORATION LOANS 
 
 continued security on the prudence, honesty, or 
 ability of their managers, as Banks and Insurance 
 Companies partly do, but have in their action the 
 automatic certainty of a machine, which will 
 toss you the yearly proportion of interest and 
 principal into the Stock Eedemption Fund and 
 the laps of the stockholders with undeviating 
 precision and directness of aim. From all of 
 which we are forced to conclude that on their 
 positive side at least they have a greater equa- 
 bility and security than either Banks or In- 
 surance Companies, and in consequence a higher 
 natural rank than either. In Great Britain, the 
 best of these loans lie just below the rank of 
 Government stocks, and fully deserve their 
 inclusion among the small exclusive circle of 
 gilt-edged Trustee Securities. But before we 
 can finally sum up their natural status, we must 
 look at their reverse or negative side, and con- 
 sider the class and degree of risks to which they 
 are liable either now or in the near or more 
 distant future. 
 Present and Now, these risks, although on the whole slight 
 
 Corporation up to the present, are still definite in character, 
 and make up in the stealth iness of their approach 
 and their potentialities of future growth for 
 their apparent slightness and insignificance. 
 They do not fall suddenly, like the earthquakes 
 or devastating fires to which Insurance Com- 
 
 Loans. 
 
CORPORATION LOANS 57 
 
 panies are occasionally liable ; nor do they come 
 
 with the unexpectedness of Bank panics ; but 
 
 are so slow and insidious in their approach and 
 
 operation that were it not for the publicity of 
 
 the Press, to which the affairs of the Corporations 
 
 lie open, the initial care and discretion exercised 
 
 by the Local Government Board before it 
 
 sanctions these loans would afford but a very 
 
 imperfect protection against the accidents and 
 
 risks to which they are liable before they have 
 
 run their full course. Still, even in this respect Risks to Bankg 
 
 their risks are less than those of Banks, which s reater J han to 
 
 ' Corporation 
 
 in times of crisis or panic have no defence Loans- 
 whatever against calamity, even when they 
 escape ruination. The ordinary reserves of Banks 
 are not in themselves sufficient to be of any 
 avail, and the class of collateral securities to 
 which they are legitimately confined, namely, 
 those which can command instant sale, or con- 
 vertibility into cash at a moment's notice with- 
 out loss, are not of a kind which they can afford 
 to hold in sufficient quantity over a long enough 
 period of time to meet these crises. And when 
 once their reserves are exhausted they have 
 nothing of importance but their unpaid-up 
 capital to fall back upon ; and this can neither 
 be got together quickly enough, nor, if it could, 
 would the call for it in most cases spell anything 
 but ruin to many of the shareholders. 
 
Loans. 
 
 58 CORPORATION LOANS 
 
 But, on the other hand, there are a number 
 of risks to which Corporation Loans are liable, 
 from which both Banks and Insurance Com- 
 panies are altogether free ; and these it is neces- 
 sary to distribute into their respective categories 
 before the net amount of risk attaching to them 
 can be appraised and summed up for the in- 
 vestor's consideration. 
 
 The first and most obvious risk in Corporation 
 in corporation Loans is the danger that the money may be 
 spent in hare-brained, unproductive enterprises 
 which bring in either no return at all, or only 
 after many years, during which time the interest 
 and Redemption Fund have to be punctually 
 paid. This, however, is a risk to which I attach 
 comparatively little importance, especially in 
 this country, where the loan has to run the 
 gauntlet of the inspection and sanction of the 
 Local Government Board before it can be 
 floated. It is only of importance in the case of 
 the Corporation Loans of foreign countries, 
 where neither the Government inspection and 
 sanction can be relied on to prevent disaster, 
 nor yet can the details and circumstances of the 
 Corporation be sufficiently known to outsiders 
 to make the security other than problematical 
 guesswork. On the other hand, many of these 
 foreign Corporation Loans may all the time have 
 all the security of the best English stocks, and 
 
CORPORATION LOANS 59 
 
 with a higher rate of interest as well ; and 
 it is here that, as we shall see later on, the 
 Geographical Distribution of Capital comes 
 to the help of the investor. 
 
 The real risks proceed from quite another Risk of trade 
 quarter, and are not only much more incalculable m 
 but much more insidious in their operation. The 
 first is a purely speculative and, to a large 
 extent, unforeseeable risk ; the second inheres in 
 the very nature of these loans, and it is to be 
 feared will become more and more dangerous in 
 the future. The first may be summed up in 
 the danger of the leading trades and industries 
 of the towns or cities which have contracted 
 these loans (and with them the population 
 dependent on them), stealing away more slowly 
 or rapidly to new and more favoured regions for 
 the exercise of their callings ; especially when 
 the town or city depends for its general pros- 
 perity on the continued prosperity of some 
 special industry for which it has acquired a 
 reputation. This might easily arise, for example, 
 if a tariff which had protected a particular decline in 
 industry from the inroads of foreign competition popu atlon ' 
 were suddenly withdrawn — as in the case of 
 Spitalfields with its silk industry and other well- 
 known instances. But a still more dangerous, 
 because more permanent and irremediable, risk 
 would arise if the population of the town or city 
 
60 CORPOKATION LOANS 
 
 declined, not merely, as sometimes occurs, 
 through changes in fashion, as in watering- 
 places and the like, but through its trade being 
 stolen away by the discovery of a centre in the 
 same country more favourable for its exercise, 
 where trade Now, in old historic nations this is altogether 
 
 is not risked, unlikely, inasmuch as the evolution which has 
 fixed the present great industries in the localities 
 they now occupy is the result of a process of 
 selection and weeding-out of the less favoured 
 regions, continued through generations and 
 centuries. Either the raw materials of the 
 industry exist in the neighbourhood in the most 
 accessible form and the greatest abundance, as 
 in the case of the steel and iron works in the 
 Midlands and the North of England ; or the 
 particular trade centre owes its success to the 
 cheap and easy transmission of its products to 
 the outside world by railway, canal, river, or 
 sea, as in ship-building centres on the Clyde, 
 at Belfast, and elsewhere ; or in virtue of its 
 possessing the peculiar qualities of soil, air, or 
 climate necessary to the highest development 
 of the commodities — as the moisture of the 
 air in the centres of the cotton industry, the 
 quality of the water in the great brewing 
 centres, or what not. 
 
 In all these instances it is quite improbable 
 that the local conditions on which towns or 
 
CORPOKATION LOANS 61 
 
 cities depend for the growth of their population, ™ h ® Te . the 
 and for the continuance of their manufacturing population risk 
 
 .is minimised. 
 
 or commencal prosperity, should ever again be 
 affected by the discovery of more favoured spots 
 in these old countries ; or that their rateable 
 values in consequence should ever fall below 
 the liabilities which these towns and cities have 
 contracted for the repayment of their loans. 
 
 Now, this would not necessarily be so in young where the 
 
 t n • i declining 
 
 countries, still sparsely populated and with population risk 
 hidden resources of all kinds still awaiting 1S 
 development, and where, in consequence, the 
 great future trading centres only twinkle dimly 
 here and there in the twilight. This is especially 
 true in the case of mines as yet unknown. As 
 in the past so in the future of these young and 
 still undeveloped countries ; gold mines like 
 those of California, Australia, South Africa, and 
 Klondike ; silver mines like those of Nevada ; 
 diamond mines as in South Africa ; coal and 
 iron as in Canada ; oil wells as in Eussia or the 
 East, may be suddenly discovered in the most 
 unlikely regions ; with the result that, in their 
 immediate neighbourhood, great trading centres 
 and populations, thus artificially created, may 
 arise like gourds in a night, but on the exhaus- 
 tion of the mines as suddenly wither and dis- 
 appear — and with them the rateable values on 
 which their Corporation Loans were raised. All 
 
62 CORPORATION LOANS 
 
 this is, of course, true but trite, and needs but 
 little further labouring here. 
 The risk of But in the present state of the world there 
 
 local politics. are ot | ier r - s k s o £ a m()re ger i ous an( J insidious 
 
 kind, which, although at present neither immi- 
 nent nor pressing, are not at all unlikely to 
 become increasingly so in the near or more dis- 
 tant future. For in these Corporation Loans 
 we touch on the first intrusion of Local Politics 
 into industrial and business concerns. They 
 lie on those outlying points on the circumference 
 where the worlds of politics and business inter- 
 sect ; and where the virus or virtues of the 
 one can readily interpenetrate the other ; at 
 those points, namely, where the Local self- 
 government of cities and municipalities is the 
 most remote and free from control by the Central 
 Power. It may well be worth our while, there- 
 fore, to glance at them for a moment in this 
 connection, with a view of defining more care- 
 fully the class of Governments that are the most 
 liable to, or most exempt from, this intrusion. 
 Oriental In most of the old Oriental countries, private 
 
 businesses and , , ^^..^ • ■• t j_i 
 
 Local Powers, businesses have little or no immunity Irom the 
 incursions either of the Central or the Local 
 Powers ; as we have seen in countries like 
 Turkey, Egypt, Persia, and India (before the 
 British occupation), where these incursions were 
 the standing curse for ages and worked to the 
 
CORPORATION LOANS 63 
 
 ruin of wealth, credit, and industry alike. Nor, 
 again, in young countries, where neither the 
 security of person nor property has had time to 
 become inviolate through the hardening and 
 consolidating forces of custom and tradition, is 
 there as yet a full immunity from the incursions 
 either of the Central or the Local Powers. It 
 is different in all the old European countries, 
 where law and order, and especially the sacred- 
 ness of private property, are most jealously 
 safeguarded ; for there the security of individual 
 businesses from the intrusions of politicians into 
 their management has up to the present been 
 the last sacred ark to be touched either by the 
 political commotions of the country, by inter- 
 national complications, or by war itself. But 
 it is not in old centralised Administrations like 
 that of France, for example, that danger lies. 
 The dangers to Corporation Loans from the 
 political side are, curiously enough, to be appre- Political danger 
 hended in old democratic Govern ments like Loans* P ° 1 ' 
 those of America and England, where local self- 
 government and laissez-faire have been carried 
 to their most extreme points. For in these 
 countries it is possible — by reason of this very 
 sacredness of local self-government — for Borough 
 Councils or Boards of Guardians to make a raid 
 on the rates through the back door as it were, 
 and to " sweat " them for unproductive pur- 
 
64 
 
 CORPORATION LOANS 
 
 America and 
 local self- 
 government. 
 
 Corporation 
 Loans in 
 America. 
 
 poses, even when they are safeguarded at the 
 front door, as we have seen, by the Central 
 Government whose permission is necessary before 
 most of these Corporation Loans can be issued. 
 Take America, for example, where local self- 
 government is so rigorously safeguarded by the 
 Constitution, and what do we see ? Local 
 political " Bosses " exploiting the rates for the 
 benefit of themselves or their political and busi- 
 ness friends to a degree almost unexampled in 
 any other civilised country. Now, these Bosses 
 and Magnates are intense individualists, and so 
 are the American people themselves as yet ; but 
 how would it fare with the rates, and with the 
 Corporation Loans secured on them, if, instead 
 of Bosses and their henchmen, their Municipal 
 Councils were packed with Socialists who, on 
 their own avowed principles, are determined by 
 inroads into Capital to support great masses of 
 the population out of the rates ? The process 
 has already begun in England, where, as we 
 have seen in the case of West Ham, whole sections 
 of the population have been maintained through 
 this back-door sweating of individual businesses 
 through the rates, with but little power of direct 
 interference by the Central Government after 
 once a loan is floated ; and with the result 
 that old-established businesses employing many 
 workmen are obliged to leave these localities and 
 
CORPORATION LOANi4 65 
 
 to carry their establishments elsewhere, to the 
 greater or less detriment of the rates on which 
 the Corporation Loans are secured. 
 
 Now, if these things are getting a foothold ^ 
 here, what security can there be for the future security of 
 
 Corporation 
 
 of Corporation Loans anywhere ? And especi- Loans in 
 ally in the younger democracies where the 
 security of private property as such has not yet 
 become a sacred tradition. It is true that the 
 leakage of the rates from the intrusion of 
 Socialists into Borough Councils and Boards of 
 Guardians is at present a negligible quantity ; 
 but West Ham is a warning that under local 
 Socialist Administration neither the growth of 
 population nor the rateable value of property 
 would be sufficient to secure adequately against 
 depreciation the existing Corporation Loans, 
 even when the Central Government itself was 
 altogether free from any Socialistic taint. To 
 sum up, then, I take it that in spite of the careful 
 inspection and supervision of these loans by the 
 existing Government before they are issued, in 
 spite of the elasticity of the rates which secure 
 them under legal compulsion, as well as of the 
 remoteness of the chance of Central Govern- 
 ments themselves becoming purely Socialistic in 
 character ; in spite of all this, these Corporation 
 Loans are not as safe, so far as their future out- 
 look is concerned, as the majority of investors 
 
 5 
 
66 
 
 RAILWAY AND OTHER DEBENTURES 
 
 Effect of 
 
 .Socialism on 
 Corporation 
 Loans. 
 
 Railway 
 
 Debenture 
 
 stocks. 
 
 in them imagine them to be. Aggressive 
 Socialism, however much it may profess to attain 
 its end by striking directly at the Central Gov- 
 ernment, can have no chance of success until it 
 has previously secured majorities in its favour 
 in the local Borough Councils, Boards of Guar- 
 dians, and Parliamentary Selection Committees 
 — as, indeed, Mr. Sidney Webb and Mr. Bernard 
 Shaw have, by the propaganda which they 
 carried on for years by way of these back doors, 
 clearly shown. But as Socialism is a growing 
 force in all civilised countries at the present 
 time, and therefore must permeate more and 
 more the composition of these local Councils of 
 all kinds as time goes on, it may be safely pre- 
 dicted that unless Local Government officials, 
 in democratic States at least, are more directly 
 controlled by the Central Power than they are 
 to-day, never again will Corporation Loans 
 possess that high rank for stability and security 
 which they enjoyed in the past, unless, indeed, 
 by direct Government or National guarantee. 
 
 And now a word or two on the security and 
 risks of those stocks which, like Corporation 
 Loans, rest primarily on a Money basis, and this 
 in turn on a definite Industrial one — unlike Banks 
 and Insurances, which rest on that basis more 
 remotely and indefinitely — and which contain, 
 besides, elements of Monopoly, partial or com- 
 
RAILWAY AND OTHER DEBENTURES 67 
 
 plete. Among such stocks the Debentures of 
 Railway Companies take a high natural rank. To 
 begin with, these companies usually enjoy either 
 a full or partial monopoly of traffic to and from 
 the great business centres, whose industries they 
 unite and whose products they transport to the 
 remotest ramifications of their system. Unless, 
 therefore, these great industrial centres them- 
 selves decay, the Railway Debentures ought, 
 when sufficiently secured against the ups and 
 downs of trade, to form one of the safest of 
 securities. This will apply even to small lines 
 with little capital at their back, provided always 
 they are the necessary connecting links between 
 other great lines, and so have even a greater 
 monopoly value than either of the separate lines 
 which they connect. 
 
 In young countries with great potential but 
 as yet undeveloped wealth, these Railway De- Natural value 
 
 . . of Railway 
 
 bentures have a high potential natural value Debenture 
 — even where their income does not as yet 
 yield a dividend on their Ordinary shares — 
 from the mere fact of the large measure of 
 monopoly which, when the country is fully 
 developed, they are almost sure to enjoy over 
 large fields and areas of production. To fix 
 their natural value as securities, then, it is the 
 risks that must mainly be kept in mind. As to 
 these, we may say in general terms that they 
 
68 RAILWAY AND OTHER DEBENTURES 
 
 avoid the great standing risks to which Banks 
 and Insurance Companies are exposed in the 
 shape of crises, panics, earthquakes, and vast 
 destructive fires, while being liable to all those 
 risks which must necessarily inhere in loans 
 based on the ups and downs of Trade and 
 Industry, as distinct from those which, like 
 Banks and Insurances, rest primarily on Money 
 and the level operation over most of their field 
 of the Law of Probabilities. 
 Monopolies ^ s Monopolies, or partial Monopolies, they 
 
 are not as free from risk as those purely Industrial 
 Monopolies which deal in the great necessities of 
 life — Oil, Beef, Soap, Sugar, and the like — inas- 
 much as these can not only fix their selling 
 prices on an even level above their costs, but 
 can coerce, to a great extent, and secure their 
 customers as well — except when the public can 
 slip the noose by the use of some substitute, as 
 they have been doing in America with the Beef 
 Trust; whereas the yield of the Railways on 
 which the Debentures are issued, not only varies 
 according to the state of trade, but the trades 
 on which it depends do not necessarily rest on the 
 supply of articles either of necessity or universal 
 demand. And the consequence is that while the 
 great Industrial Trusts can nearly always hit 
 the mark both of price and profit which they 
 set before themselves, the Railway Companies 
 
RAILWAY AND OTHER DEBENTURES 69 
 
 have to take chances of hitting their target 
 amidst the hills and valleys and the ups and 
 downs of Trade. 
 
 Again, these Railway Debentures being loans Railway 
 — and, therefore, resting primarily on Money — secure than 
 have less security, while subject to the same Loans™ 1100 
 kind of risk as Corporation Loans. For while 
 the Corporation Loans are secured on the 
 property of a whole community, and on rates 
 which not only have all the elasticity required 
 for that security, but are enforced by law with 
 the utmost rigour, Railway Debentures are 
 secured only on the property of their own 
 particular shareholders, and on the wide and 
 deep fluctuations of good and bad trade. They 
 differ, therefore, as much from Corporation Loans 
 in the safety of their securities as the old un- 
 limited liability Banks of years gone by — which 
 made shareholders liable to the full extent of 
 their fortune — do from the Limited Liability 
 Banks of to-day, which make them liable only 
 to the limited amount of their investment. Nor 
 is this lesser security on the part of Railway 
 Debentures made up by the absence of any risk 
 to which Corporation Loans either now or in the 
 future are likely to be exposed. For they, too, 
 like Corporation Loans, lie on the border-line 
 where politics and business intersect and com- 
 mingle, and so can be "sweated " through the 
 
70 
 
 RAILWAY AND OTHER DEBENTURES 
 
 Debentures 
 which rest on 
 partial or 
 complete 
 Monopolies. 
 
 rates by local politicians with Socialistic pro- 
 clivities in the same way, if not to the same 
 extent, as they. On the whole, then, summing 
 up the pros and cons, I should be inclined to 
 say that for investment purposes over equal 
 periods of time, Corporation Loans have less 
 fluctuation, and so occupy, perhaps, a higher 
 natural rank than Railway Debentures ; and a 
 fortiori than all other Industrial Debentures 
 which do not enjoy, like Railway Companies, a 
 full or partial Monopoly. 
 
 And this brings us to those Debentures which 
 rest on partial or complete Monopolies, in the 
 sense, that is to say, that they have certain 
 privileges accorded to them by Municipal or 
 other authorities exempting them from com- 
 petition over the whole or a part of their field 
 of operations. Among these stocks may be 
 mentioned those of Waterworks, Gas or Electric 
 Lighting, Tramways, and the like ; and what 
 we have now to do is to ascertain the general 
 principles which determine their natural rank 
 in the scale of securities. These may be ranged 
 under the following heads : 
 
 1. The amount of natural Monopoly they con- 
 
 tain in themselves, as it wore. 
 
 2. The extent to which they can be kepi free 
 
 from competition. 
 It will be remembered, perhaps, that in a 
 
RAILWAY AND OTHER DEBENTURES 71 
 
 former chapter I defined a complete Industrial 
 Monopoly as one which could control not only 
 its buying end, but its selling end, besides 
 making level the intervening distance as well. 
 It may be remembered, also, that in order to 
 get some ideal standard of comparison for the 
 ranking of those stocks which, like Banks and 
 Insurance Companies, rest primarily on Money, 
 I selected the Bank of Monte Carlo as my ideal 
 of comparison. 
 
 We now have to find some parallel ideal for An ideal stock 
 stocks which, like these Water, Gas, Electricity, industrial &n 
 Trams, and others, rest on an Industrial basis, 
 and possess a quasi-Monopoly in their own 
 sphere. And the ideal I would suggest would 
 be that of a stock which in a forecast would have 
 a predicability along its whole course ; or, to 
 put it differently, of a stock which could be 
 taken out of private hands to-morrow and with 
 a little stoking and oiling could be nationalised 
 or municipalised, and when once set going would 
 run of itself on a track made smooth and level 
 for it from beginning to end. Now, the char- 
 acteristics which an ideal stock of this kind, 
 resting on an Industrial basis, should have, 
 may be summed up in the following particu- 
 lars, namely : that when the cost price of 
 the materials used in its processes is known, the 
 sale price should be fixable, the customers 
 
72 RAILWAY AND OTHER DEBENTURES 
 
 averageable, the reserve needed for repairs 
 calculable, that its freedom from competition 
 should be assured, that there should be no 
 available substitutes for it, no " goodwill " or 
 " water " in its composition, and no chance of 
 political or other outside intrusions making or 
 marring its fortunes. 
 Characteristics Now, these are the constituents of any ideal 
 
 of the ideal J m 
 
 stock. stock which is based on Industry and enjoys a 
 
 Monopoly in its own line. Indeed, for stocks 
 resting on an industrial basis, these conditions 
 are as ideal as those which, on a Money basis, 
 hedge round the Bank of Monte Carlo itself ; and 
 precisely in so far as any stock falls short in any 
 of these particulars in any forecast of its future 
 fortunes, so far will its rank be lower for invest- 
 ment purposes in the scale both of stability and 
 security. In other words, given an Industrial 
 Monopoly, complete or partial, the degree of 
 ease, accuracy, and precision with which fore- 
 casts of its returns can be made, is a measure of 
 the stability of the stock for investment purposes; 
 whereas the opposite will be the measure of its 
 instability and insecurity, inasmuch as all will 
 then depend on the business acumen and pene- 
 tration of its managers — an asset which is as 
 uncertain in its tenure as their individual lives. 
 If we apply these principles, then, to Water, 
 Gas, Electricity, Trams, and other companies 
 
RAILWAY AND OTHER DEBENTURES 73 
 
 which enjoy complete Monopolies as against 
 other companies of the same kind, but which 
 are subject to the competition of companies 
 supplying alternative products, it will be obvious 
 that a Water Debenture Stock ought to hold 
 almost ideal natural rank in point of security — Natural rank 
 a higher rank than Eailway Debentures, as being Debenture 
 freer from the ups and downs of trade on which stock> 
 the railways depend ; higher than Corporation 
 Loans, as avoiding the danger of Capital being ex- 
 pended on unproductive undertakings or squan- 
 dered by " Bosses " and intruding politicians ; 
 higher than all but the closest of those Monopolies 
 which deal in the other necessities of life, inas- 
 much as there is no alternative product that can 
 at all supply its place; higher than Gas or Electric 
 Stocks, which are alternatives to, or substitutes 
 for, one another, and are still engaged in a 
 fighting competition among themselves for supre- 
 macy, and so split the market in a way that 
 makes a forecast of their customers difficult, if 
 not impossible ; higher than Trams, Motors, and 
 Omnibuses, which are also in their transitional 
 fighting stage, and at best have not quite the 
 same necessity attached to their use, and so 
 cannot be assured of any definite division of 
 the spoils. 
 
 And now a word or two on those ordinary 
 Industrial Debentures which have neither Mono- 
 
74 RAILWAY AND OTHER DEBENTURES 
 
 industrial poly, Charter, nor Guarantee at their back. Of 
 which have no these the natural rank is determined in quite 
 a different way ; namely, by the amount and 
 quality of the Capital that lies at the back of 
 the Debentures as their security. Indeed it 
 may be said that they have no natural rank, but 
 may lie anywhere in the gamut from the most 
 gilt-edged of securities down to the fluctuating 
 level of ordinary business shares. All will 
 depend on the amount of tangible, realisable, 
 industrial plant which, in the event of a break-up 
 sale, lies behind them in each individual case. 
 If, for example, the Capital at the back of these 
 industrial Debentures is sunk in tangible property, freehold 
 Ster ntureS or l easen °ld> land, buildings, or plant, with a 
 break-up sale, relatively high break-up value on a forced sale, 
 it is well ; but if half of it, say, is made up of 
 mere goodwill, or patent rights almost time- 
 expired, or depends on the lives of managers of 
 exceptional ability, it is not so well. But if the 
 security of the Debentures rests almost entirely 
 on goodwill, without a Monopoly property site of 
 exceptional attractions to back it, or on busi- 
 nesses which have been paying exceptionally 
 high dividends without exceptional qualifica- 
 tions whereby to limit or prevent competition, 
 it must, in the swift, changing fluctuations of 
 the modern industrial world, U v not weU at all. 
 Mr. Lowcnfeld, in his book (All About hires/- 
 
KAILWAY AND OTHER DEBENTURES 75 
 
 ment), has admirably summed up the whole 
 matter in a passage which runs to the following 
 efiect : " If Money is invested in the Debentures jjgj^gjj^ 1 
 of such concerns as can show twice as much 
 of their Capital in Preference and Ordinary 
 shares as they have in their Debentures ; in con- 
 cerns which have, further, a ten or fifteen years' 
 history of solid business with a narrow range of 
 fluctuation ; and, again, can show profits which 
 will cover the interest of these Debentures at 
 least three times over, and, besides, always keep 
 a good deal more of cash or liquid assets on hand 
 than will meet their current liabilities — then you 
 may consider them as safe over a very consider- 
 able length of time as even the most gilt-edged of 
 securities. For it would indeed go hard with 
 them if, thus amply secured, the break-up value 
 of their assets would not be sufficient to redeem 
 the capital of these Debentures at their original 
 price." Besides, as we shall see later, such 
 Debentures are less subject to the intrusions of 
 the political complications of the outside world, 
 or the intrusions of home and local politics, than 
 Government Securities themselves. 
 
 As for the Ordinary shares of ordinary Joint Joint stock 
 Stock Companies, depending as they do on the a speculation^ 
 ups and downs of commerce and industry at 
 every point in their course, they may be said 
 to be beyond the range of definite forecast, 
 
76 RAILWAY AND OTHER DEBENTURES 
 
 either on their cost side or their selling side, 
 either in the ordinary competition or in the new 
 inventions and processes which they may have to 
 encounter, and so are and must be the subject- 
 matter of speculation rather than of investment 
 for stability and security, and need not concern 
 us further here. Like pariahs, they have no 
 inherent natural rank, but at best have to be 
 taken on trust by all except those who have 
 inside knowledge of their particular character 
 and working. They are, indeed, the standing 
 danger of the investing world, owing to the 
 facility with which they lend themselves to 
 fraud and delusion ; and the only protection 
 the public has against them lies in the know- 
 importance of ledge of how to read their balance-sheets with 
 balance-sheets, penetration and discretion. The law itself has 
 in recent years given the shareholders and the 
 public every facility for forcing a full disclosure 
 of the affairs of all these Limited Joint Stock 
 Companies, whenever their audited balance- 
 sheets are either too abstruse or obscure for 
 adequate comprehension. But the shareholders 
 rarely insist on this, and prefer rather to trust 
 to the reports of their Boards of Directors, under 
 the illusion that the interest of the directors and 
 the shareholders must necessarily be one. It 
 would be both interesting and appropriate at 
 this point to retail some of the methods by which 
 
RAILWAY AND OTHER DEBENTURES 77 
 
 the books of a company are falsified by swindling 
 directors, but as my space is limited I shall be 
 obliged to defer this until some future occasion. 
 And now, having attempted to determine, in 
 a rough kind of way, the relative natural rank Geographical 
 
 . i r • • t Distribution of 
 
 of the various orders of stocks and securities, 1 Capital and 
 shall proceed in the succeeding chapters to deal Insecurity. 
 with a still more important aspect of our problem, 
 and one, too, to which all we have as yet said 
 leads up — namely, those principles, both of 
 Money Markets and of Industrial Exchanges, 
 which cause an inversion of this natural rank 
 among securities, and so make a Geographical 
 Distribution of Capital among the various 
 nations and divisions of the world a source at 
 once of greater revenue, greater stability, and 
 greater security than the most gilt-edged stocks 
 of any single nation. 
 
CHAPTER IV 
 
 THE EFFECT OF POLITICS, STOCK EXCHANGES 
 AND MONEY MARKETS 
 
 TN our previous chapters we endeavoured to 
 get some rough general idea of what may 
 be called the natural ranking of the various 
 classes of stocks in point at once of security, 
 stability, and freedom from fluctuation. But 
 before this knowledge can be of much value for 
 purposes of investment, it is necessary not only 
 to know the natural value and rank of these 
 different classes of securities, but also to ascer- 
 tain in any given case whether it is possible for 
 outside causes to have intervened to throw one 
 or more of them out of their natural order ; and 
 if so, where we are to look for the causes which 
 give rise to such displacements ; just as in 
 prospecting for coal it is necessary not only to 
 know the natural lie of the coal seams in the 
 series of geological strata, but to ascertain 
 whether from upheaval or subsidence this natural 
 order of superposition has been artificially in- 
 verted, and lower rocks have been thrown on 
 
 78 
 
THE EFFECT OF POLITICS, ETC. 79 
 
 the top of those naturally higher in the scale 
 — to the confusion of the unwary prospector. 
 
 Now, it is well known on every Stock Exchange 
 that whole classes of securities are continually Securities 
 changing their natural ranking in one or other changing y 
 part of the world, owing to the intrusion of t eir ran ' 
 outside influences of one kind or another. Our 
 problem, then, in this chapter is to try and 
 ascertain what these perverting and thwarting 
 influences are, and how they operate in changing 
 and inverting the relative values of different 
 securities, often over considerable periods of 
 time. 
 
 In a general way I may say, to begin with, that 
 the key to the whole situation lies in the influence 
 exercised over the values of all other stocks in influence of 
 
 . . Government 
 
 any given country by the rate of interest of stocks over 
 the Government Stocks of that country ; and, ° er secun 
 secondly, in the relative state of the Money 
 Markets of the different countries. For the 
 general effect of these Money Market influences 
 is this, that Government Stocks, which naturally 
 lie at the very top of the pyramid of securities, 
 decline to a point lower in the scale than stocks 
 naturally much inferior to them in status ; and 
 so give the prudent investor an opportunity to 
 select for investment stocks which will give 
 him not only a greater yield of interest, but an 
 equal, if not higher, level of stability than the 
 
80 
 
 THE EFFECT OF POLITICS, ETC. 
 
 An oppor- 
 tunity for 
 the vigilant 
 investor. 
 
 Government Stocks themselves. For it must 
 be remembered that one of the peculiarities of 
 Government Stocks, which separates them off 
 from all other stocks, is that, being secured on 
 all the industries of a nation alike, and having 
 a first mortgage on them all, as it were, they 
 cannot rise in value from any cause without 
 pulling all other stocks up in market value with 
 them, or fall in value without dragging all the 
 rest down ; and this, too, without the real indus- 
 trial value of these other stocks having been in 
 any way altered. And the consequence of this 
 again is, that if the investor can only ascertain 
 which of the Government Stocks of the world 
 happen to be behaving in this abnormal way, 
 he can, with the exercise of a little vigilance, be 
 almost sure of getting a larger yield of income, 
 and with less fluctuation in the yield, than if 
 he invested entirely in the most gilt-edged of 
 Government securities. But this involves that 
 the investor should have at his disposal the 
 stocks of the world from which to make a selec- 
 tion, and not those of any single nation alone. 
 If, for example, he were investing his money in 
 English Government or Trustee Stocks ex- 
 clusively, he would be liable to find that during 
 the ordinary term which a stock held for invest- 
 ment purposes (and not for speculation) has to 
 run, its value might decline very appreciably 
 
THE EFFECT OF POLITICS, ETC. 81 
 
 from the price at which it was bought, as has 
 been seen in the case of Consols during the last 
 twenty years. It is true that it might rise as 
 well as fall ; but that would be as much a case 
 of speculation among stocks of high lineage as 
 ordinary Stock Exchange speculation is among 
 the Ordinary shares of stocks of lower rank. 
 In such a case, indeed, the simple and unsuspect- 
 ing investor who went on the idea that Govern- a fallacy of 
 ment Stocks were not only the safest but the investor^ e 
 most stable of securities, because they had at 
 their back the entire resources of the State, and 
 so could borrow at the lowest rate of interest, 
 would find himself very much disappointed. 
 But our problem here is how to eliminate specula- 
 tion and risk, and to give to our investment list 
 something of the stability and security of the 
 stocks which rest on Money and the application 
 of the Law of Probabilities. I do not mean to 
 say that there are not other causes besides the 
 price of Government Stocks which give rise to 
 a variation in the market value of other Loan 
 Stocks, when no change has occurred in the real 
 intrinsic value of the stocks themselves. Far 
 from it, as we shall presently see ; but the tidal 
 influence of Government Stocks in drawing all 
 other Loan Stocks after them is, like that of the Government 
 
 Stocks a 
 
 moon, a real and absolute one, although counter- magnet to other 
 acted or helped by other influences as well. I 
 
82 THE EFFECT OF POLITICS, ETC. 
 
 have mentioned it here, in passing, in order that 
 the reader may see that, if this be true, the 
 investor who wishes to get the greatest yield 
 for his money with a minimum of instability, 
 and with the greatest practical security for the 
 return of his capital unimpaired, must stretch 
 his view beyond the limits of his own country 
 and be prepared to embrace some scheme of 
 Geographical Distribution among the different 
 nations of the world — if it can be found. But 
 what difference would a geographical distribu- 
 tion make if all Loan Stocks follow the Govern- 
 ment Stocks of their respective countries ? the 
 reader may ask. What better security would 
 there be in them all than in any one in 
 particular ? 
 
 To begin with, there would be much, if it 
 The need for should be found that the different Government 
 DistSbutlon Stocks of the world could be arranged like 
 apita. flowers in a circlet, where some stood erect at 
 the top of the stem, each with its own country's 
 other stocks ranged below it in natural rank 
 and gradation, and others again so drooped that 
 they lay lower down in the hierarchy than stocks 
 which, like the best Corporation Loans or In- 
 dustrial Debentures, naturally lie below them 
 in the scale. If this fact can be established, 
 would it not be possible for a wary investor to 
 pick out the best secured of these Debentures 
 
THE EFFECT OF POLITICS, ETC. 83 
 
 and Corporation Stocks in the particular coun- 
 tries where the Government Stocks had lost 
 their position at the head of the list, and so 
 get not only as much practical security, but 
 a greater yield of interest and a less width of 
 fluctuation than if he had invested entirely in 
 Government Stocks ? I believe it would be 
 possible, for several reasons. 
 
 In the first place, the interest would be Advantages 
 
 L m derived from 
 
 higher, because in every country the rate Geographical 
 
 » ' n i i-i Distribution of 
 
 of interest from all other stocks is always Capital. 
 fixed higher than the rate of interest on the 
 Government Stocks. 
 
 In the second place, the stability of the 
 other stocks would be greater and their range 
 of fluctuations less than that of the Govern- 
 ment Stocks, inasmuch as most of the political 
 and other causes which depress the value of 
 Government Stocks affect the best secured In- 
 dustrial Loans, as we shall see, comparatively 
 slightly. 
 
 In the third place, by taking the whole world 
 as our field of investment, the different Money 
 Market influences and Trade currents of the 
 particular nations can be balanced against each 
 other under categories so definite as to permit 
 of the principle of Insurance being applied to 
 them ; and with a degree of certainty, too, not 
 to be found in the stocks of any one country, 
 
84 THE EFFECT OF POLITICS, ETC. 
 
 which, under the same Money Market and 
 Trade influences, necessarily all move up and 
 down together. 
 
 With these preliminaries the reader will have 
 some vague general idea of what it is I wish to 
 prove ; and I shall now ask him to accompany 
 me while I attempt to make good in detail the 
 several positions I have raised. The evidence 
 I have collected comes from various quarters 
 of the financial field ; but as it is made up of a 
 mixture of facts and principles, I shall be obliged 
 to take them separately, with the understanding 
 that it is only when we have got them all to- 
 gether that the part played by any one of them 
 in the final conclusion which I shall attempt to 
 draw, can be clearly seen. 
 Reasons for the I shall begin with the first paradox of which 
 fluctuations of I imagine the reader will wish to see a definite 
 
 Government i , • • , i i 1 r 
 
 stocks. explanation given — the paradox, namely, ot 
 
 why it is that Government Stocks, which stand 
 naturally at the head of all other stocks in point 
 of security (as shown by the low rate of interest 
 which they yield the investor in them), should 
 be subject to fluctuations in market value more 
 violent than those of stocks much lower in the 
 scale? The reasons are various, but the most 
 general one is that, in the first place, the stability 
 of Government Stocks is based primarily on 
 folitioal causes, that of all other stocks on 
 
THE EFFECT OF POLITICS, ETC. 85 
 
 industrial ones. Not that both causes, as we 
 have seen in a former chapter, do not enter more 
 or less into all securities, but rather that Govern- 
 ment Stocks lie more open to, and are also more 
 sensitive to, political influences than all other 
 stocks whatever. They lie more open to them, 
 because they occupy, as in battle, the firing 
 line ; for as a result of a war to-morrow, in which 
 a whole nation might change its masters, while 
 private business might remain untouched except 
 in a fro rata increase of taxation, Government 
 Stocks would be struck to the heart through 
 the depressing effects of vague financial fear 
 alone. 
 
 A private Industrial Debenture Stock in an industrial 
 
 ■*• m t Debenture 
 
 old-standing business which has, say, twice stocks and 
 
 r\ t • • Government 
 
 as much Ordinary capital at the back of its stocks 
 Debenture loan as the amount of the loan itself, compare * 
 and which has earned, say, three times as much 
 dividend over a period of ten to fifteen years as 
 is necessary to pay the interest on the loan, is 
 generally regarded as a thoroughly reliable 
 stock for investment purposes, both in point of 
 security and stability. But a Government Stock, 
 on the other hand, that was based on a national 
 income of the same amount, i.e. of not more 
 than three times the yield of its taxes, would 
 fall from its high estate and sink to a point as 
 low as that of Turkey in the olden days. But 
 
86 
 
 THE EFFECT OF POLITICS, ETC. 
 
 Government 
 Stocks affected 
 by political 
 complications. 
 
 Public 
 
 conscience an 
 unreliable 
 
 asset. 
 
 why this difference between the amount of 
 security required to give a first-class gilt-edged 
 character to a private stock and that required 
 for a Government Stock ? Clearly there must 
 be some elements or factors concerned, apart 
 from Industry and its products and values. 
 
 What, then, are they ? To begin with, it is 
 evident that as Government Stocks do not vary 
 mainly with the ups and downs of business as 
 all other stocks do, they must vary with what 
 must fall under the head of Political complica- 
 tions in one shape or another. But this can only 
 be because in some way the financial security 
 of the National Stock is affected by the political 
 complications ; for investors will not lose their 
 sleep over political complications that are not 
 likely to touch their pockets. And, indeed, 
 when we look closely, we see that there are several 
 ways, short of the expropriation of territory, in 
 which political troubles may affect a nation's 
 financial security and stability. 
 
 In the first place, we have the somewhat 
 far-fetched, but nevertheless real, moral, and 
 psychological fact, viz., that the Public Con- 
 science, which is ultimately responsible for a 
 Government Loan, is not as reliable an asset 
 as is the private conscience of a private firm 
 in the discharge of private business debts, as 
 the income tax returns would show ; nor , 
 
THE EFFECT OF POLITICS, ETC. 87 
 
 what is more important, is there any law 
 enforceable against a nation that refuses to 
 pay its public debts, as there is in the case 
 of private firms. 
 
 In the second place, in most civilised 
 countries, even those of uncertain political increased 
 
 taxation borne 
 
 stability, national debts are spread fairly equally by property- 
 over all classes of the people ; and to them employers, 
 all classes contribute either through direct or 
 indirect taxation. But it is to be observed 
 that it is only the Property-holders and the 
 Employers of Labour on whom in a national 
 emergency the Government could rely to make 
 good any such large increase of taxation as 
 would be involved in a great and unsuccessful 
 war ; the rest of the population being, like 
 the proverbial Highlander, without anything 
 on which an additional levy can be made 
 with assurance of success ; as would be seen, 
 for example, if it were attempted to throw the 
 increased taxation of a large and unsuccessful 
 war on the rent or salt-tax of the Hindu 
 taxpayers, swarming in their millions though 
 they be. 
 
 The Capitalist Classes stand in the fighting 
 
 i • i • -, -, , , n • i i The Capitalist 
 
 line, as we nave said, and are the first to bear a nd political 
 the brunt of taxation caused by Political com- com P EoationB - 
 plications. And although in the end the in- 
 creased tax is usually fairly enough distributed 
 
88 THE EFFECT OF POLITICS, ETC. 
 
 among all classes of the population, still the 
 fewness in number of the employing and property- 
 holding classes, and the magnitude of the 
 financial risks they run in proportion to their 
 numbers in the event of an adverse issue, so 
 affect the imagination, that they throw the 
 Government Stocks into a state of commotion 
 and fluctuation more violent than that of any 
 other stocks whatever. For most businesses, 
 ministering as they do to the necessaries and 
 conveniences of everyday life, would go on more 
 or less as usual in face of any but the most 
 imminent and pressing political complications ; 
 and the capitalists and property-holders are 
 quite well aware of the fact. 
 Yield and And when we remember that it is these 
 
 fluctuations of . in i 
 
 Government capitalists and property-holders almost ex- 
 
 Stocks 
 
 clusively who regulate the Money Market ; 
 and, further, that it is the Money Market, 
 with Government Stocks at the top, that 
 regulates the price of all the stocks below 
 them in the scale which, like Debentures and 
 Corporation Stocks, are founded on Money ; 
 when we remember that this rise or fall is quite 
 independent of any change in the industrial or 
 business bases of these stocks — the loans all 
 falling in value with the fall of Government 
 Stocks and rising with their rise— when we re- 
 member all this, we can see how it is that Govern- 
 
THE EFFECT OF POLITICS, ETC. 89 
 
 ment Stocks, which always stand in point of 
 ultimate security at the head of all other stocks 
 in a nation, may not only have a less yield of 
 interest, but a greater fluctuation and less 
 value over periods of time sufficiently long for 
 investment purposes, than stocks like Corpora- 
 tion Loans and Industrial Debentures, naturally 
 much lower in the scale of securities. In a 
 word, the best stocks of a country, the Govern- 
 ment Stocks, while always paying less interest 
 than other stocks, are often less stable for 
 purposes of investment as well. 
 
 But there are other reasons equally important 
 for the more violent fluctuations of Government jjjjjjjj fop 
 Stocks over other Loans, not only in times of qJJJJJJJ^ in 
 political uncertainty but of industrial or business stocks. 
 uncertainty ; and these may all be summed up 
 in the conditions of the Money Market, strictly 
 so called, which permanently mark off Govern- 
 ment Stocks from all others. 
 
 The first is the relation between the state of 
 the Money Market and the state of Trade. If and the 
 
 , .,., -i-i.L-1 x- state of Trade. 
 
 trade is brisk and industrial operations ex- 
 panding, capital is withdrawn from Government 
 Stocks and invested in Industrial operations 
 for the sake of their greater yield ; and 
 Government Stocks in consequence remain 
 depressed. On the other hand, if credit is slack 
 and trade depressed from any cause, Government 
 
90 
 
 THE EFFECT OF POLITICS, ETC. 
 
 Stocks become a haven of refuge until the danger 
 passes by, and so far rise ; but it is the passage 
 upwards of a sick and wounded, not a healthy, 
 activity. 
 
 Again, if the Money Market is depleted 
 Market a causT f rom an y cause — new Loans to Government, 
 
 of depression. 
 
 Government 
 Stocks as 
 Trustee 
 investments. 
 
 Foreign Loans, etc. — Government Stocks still 
 remain depressed from the difficulty of finding 
 customers at their low rate of interest, and from 
 the temptation to the investor to rush into mere 
 Stock Exchange speculation in consequence. 
 It is true they are always in request as collateral 
 for Bank advances, and as taking the place of 
 cash itself at a sufficient discount ; but as they 
 enter at one door they quickly pass out by the 
 other ; and so in jog-trot times the purchases 
 and sales of Government Stocks pretty well 
 balance each other, and their market quotations 
 still remain practically where they were. 
 
 It is the same, too, with the large demand that 
 always exists for Government Stocks as Trustee 
 investments, as well as for their use as collateral 
 to meet the lighter temporary exigencies of the 
 Government itself ; so that, in ordinary times, 
 and -for all temporary fluctuations of business 
 credit, Government Stocks swing lazily back- 
 wards and forwards in a state of moving equi- 
 librium, with even less demand when trade is 
 brisk, credit good, and money plentiful, than 
 
THE EFFECT OF POLITICS, ETC. 91 
 
 when trade is depressed, credit shaky, and money- 
 scarce. The only permanent condition which 
 can cause a steady rise in the value of Govern- 
 ment Stocks is such an increase of the real 
 productive wealth of a country as will give it 
 both the increased power of paying its debts 
 and the increased willingness to do so — a state 
 of things which registers itself on the financial 
 barometer by a fall in the rate of interest, and 
 a lessened yield of income to investors. 
 
 On the other hand, as a set-off against this suddenness of 
 necessarily slow rise of Government Stocks in Government 
 the best of times, we have the sudden pre- stocks - 
 cipitation with which they plunge down in 
 times of International trouble, Political crises, 
 or Internal revolution ; or in times of great 
 and sudden withdrawals of money from the 
 Money Market for loans to which the ordinary 
 requirements of business continuity and de- 
 velopment have not had time to adapt them- 
 selves. 
 
 So that, summing up these various con- 
 siderations as a whole, it WOuld appear that Government 
 
 in Government Stocks we have a species of c*™p^ ed with 
 security which, affected as it is so much more by Corporation 
 
 . J Loans and 
 
 Political events than other stocks, has a tendency industrial 
 
 J Debentures. 
 
 always to run down on the slightest provocation, 
 but to rise slowly and tentatively only on the 
 most potent and real demonstrations of increased 
 
92 THE EFFECT OF POLITICS, ETC. 
 
 national wealth. From all of which it is evident 
 that, however superior in ultimate security 
 Government stocks may be over all other stocks 
 in the same country, they are not 'practically as 
 sound for investment purposes as the best 
 Corporation Loans or Industrial Debentures, 
 when regard is had at once to the lower yield 
 of interest of Government Stocks, to their 
 greater range of fluctuation, and to their greater 
 tendency to fall on the least provocation rather 
 than rise on the strongest inducement. 
 _. , Then there is the fact that while other 
 
 Little 
 
 possibility of loans have their range of fluctuation determined 
 
 Consols rising to " 
 
 any extent. mainly by general Money Market influences, 
 the speculations in them on the Stock Ex- 
 change, as well as by the prosperity of the 
 Industries on which they rest, Government 
 Stocks vary not only with all these influences, 
 but with the state of the Political sky as 
 well ; and so their range of fluctuation is 
 greater. And as they do not rise like other 
 stocks in periods when Trade is booming, but 
 only after long periods during which the per- 
 manent wealth of the country has steadily in- 
 creased, their unnatural depressions are not only 
 deeper but more abiding. And when we have 
 added to this again the fact that the best of 
 the other stocks have in Britain now been made 
 Trustee Stocks, we can have but little hope that 
 
THE EFFECT OF POLITICS, ETC. VO 
 
 English Consols, at least, will rise appreciably for 
 a long time. 
 
 But there are other countries that have 
 Government Stocks besides Great Britain, and Government 
 before we can see the way in which a Geographical 
 Distribution of Capital among these other nations 
 can advantage the investor, we must ascertain 
 what relation these Foreign Government Stocks 
 bear to our own Consols and to each other, as 
 well as to the other stocks of their respective 
 countries. 
 
 To begin with, then, we may say that just as 
 there is a hierarchy in the natural rank of the ^fj" c y 
 various stocks of the same country, so, too, is f t °J^J ent 
 there a hierarchy among the Government Stocks different 
 
 J ° countries. 
 
 of different countries, Great Britain standing 
 at the head of the list, and being able to borrow 
 at the present time at a 3 per cent interest ; 
 while the United States, France, and Germany 
 have to pay somewhere nearer 4 per cent ; 
 Italy and Austria still more ; Japan and Russia 
 over 5 per cent, and so on ; and to this we may 
 add that in each of these countries all other 
 bonds whatever take their cue and point of 
 departure in the rate of interest they will be 
 expected to pay, from the Government Stock of 
 that particular country, having to pay more 
 and more interest as they descend the scale ; 
 and, further, that each nation in the main 
 
94 
 
 THE EFFECT OF POLITICS, ETC. 
 
 Relative 
 security of 
 Foreign 
 Government 
 Stocks. 
 
 The business of 
 the world- 
 fin ancer. 
 
 considers that its own Government Securities 
 are the best. 
 
 Now, it may be freely admitted that it is not 
 likely that the above rates of interest will be 
 found to do more than approximately represent 
 the real relative security in the future of these 
 Foreign Government Stocks in their relation to 
 each other ; but this we may affirm with cer- 
 tainty, that they are as near the existing truth 
 as human calculation and foresight can make 
 them. For, like the relative positions and 
 distances of the stars, they have been fixed by 
 the great world-financers who, like astronomers 
 with their telescopes, are stationed at different 
 points on the axle of the great revolving wheel 
 of World Industry and Finance ; and, as nation 
 after nation passes successively before them, 
 fix the meridian points, as it were, of the 
 financial stability and security of each, before 
 passing them over to the public and the Stock 
 Exchange for Money Market and other influ- 
 ences to work their will on them in their 
 future rise or fall. 
 
 It is these world-financers who float, under- 
 write, or otherwise by their influence finance the 
 loans of Foreign Governments ; they bear the full 
 brunt and risk of the loans in the first instance ; 
 and as they may at any moment be called upon 
 to send in estimates for them, it is their business 
 
THE EFFECT OF POLITICS, ETC. 95 
 
 to know all that can be practically known of 
 the financial status and of the industrial re- 
 sources of foreign countries, as well as what may 
 be legitimately hazarded by way of prediction 
 in the matter of their future prospects. They 
 can speak with authority on the fast financial 
 history of these countries, their previous loans, 
 and on what they have been spent — whether 
 on productive labour on the one hand, and the 
 opening up of new sources of industry which will 
 add to the country's wealth ; or in military 
 expenses and armaments, in corruption, in the 
 payment of old debts, or in fruitless internal 
 revolutions or foreign wars, on the other. And 
 when in relation to all this they have taken into 
 consideration the existing industrial resources 
 of the country in question, and its power of 
 development in the near or immediate future, 
 they are then able to compare these total re- 
 sources and drawbacks with the weight of 
 taxation which the country is able to bear, either 
 at the present time or later ; and as the result 
 of it all to fix what may be called the natural 
 rate of interest on a loan to that particular 
 country. 
 
 But before we can see clearly how it is that Component 
 
 •i i i t -, i . n parts of 
 
 capital may be distributed and invested among natural rate of 
 these foreign countries with a greater scientific Foreign 
 certainty and security and stability than in the stociS! ment 
 
96 THE EFFECT OF POLITICS, ETC. 
 
 home investments of any particular country, 
 it is necessary that we should resolve this natural 
 rate of interest of these Government Loans into 
 its component parts, with the view of exhibiting 
 the part played in it by each of these parts 
 respectively. The first part consists of what 
 may be termed the Political factor ; the second 
 of the Money Market factor ; and the third of the 
 Industrial factor. Of these the Political factor 
 is the most uncertain and the least scientific 
 in character, but, like a dangerous object seen 
 through a haze, it has, through its influence on 
 the imagination, and the anxiety to ensure a 
 sufficient margin of safety under any contingency, 
 a greater effect in raising the rate of interest 
 to be paid on Government Loans (and, in con- 
 sequence, in raising the rate that has to be paid 
 on every Corporation Loan, Railway Debenture, 
 or Joint Stock Industrial Debenture in the 
 country, however well-secured, industrially 
 speaking, these latter may be) than it ought 
 legitimately to have. 
 Causes of high Should there be any elements of political 
 
 rates of interest t • , t -i-, ,1 <• r n 
 
 on Covomment danger or instability in the torm oi Government 
 of the country ; any elements of corruption 
 in its habitual administration ; any danger 
 of insurrection ; any tendency to plunder the 
 capitalist classes by exorbitant or capricious 
 taxation, by badly laid tariffs oi the absence 
 
THE EFFECT OF POLITICS, ETC. 97 
 
 of tariffs, or by direct taxation laid on the 
 instruments of production ; any tampering with 
 the currency ; any danger of war with neigh- 
 bouring Powers, and the like — should any, or 
 most, of these conditions be present in a country, 
 it is only natural that the rate of interest it has 
 to pay for loans should rise to a point higher 
 than it ought to be, or than it would be were 
 there any possibility of treating these separate 
 loans to Foreign Powers by a distribution of 
 the risks among them as in an insurance com- 
 pany ; or as would be the case, most probably, if 
 there were only a single great financial house 
 in the world which had the exclusive patronage 
 of them all. 
 
 But although Governments have to pay for 
 their vagaries by having the rate of interest joint stock 
 
 t ,i-i ,i • i Companies 
 
 raised on their loans, there is no reason why unaffected by 
 private businesses or Joint Stock Industrial disturbances. 
 Companies should have their rates of interest 
 also raised in proportion, provided they are 
 sufficiently secured otherwise ; for, as we saw 
 in a former chapter, private business concerns 
 dealing with the manufacture, transportation, 
 or sale of the staple and customary necessaries 
 and luxuries of life, are comparatively safe 
 in times of political disturbance, and would 
 hardly be more depreciated in value by a 
 revolution than Government Stocks, in times 
 
 7 
 
98 THE EFFECT OF POLITICS, ETC. 
 
 of threatened insurrection, would be by a 
 street riot. 
 
 Now, the part played by this Political factor 
 in the composition of the rate of interest of 
 MaS a Government Loan, great as it is, is usually 
 
 LnZre e s°t n o r f ate absorbed and embodied in the second factor, 
 St™" 16 " 1 viz -> tnat of the Monev Market which reflects it, 
 but which has, besides, a distinct status and in- 
 dividuality of its own apart from the influence of 
 Politics and political movements as such. That 
 the Money Market factor in a Government Loan 
 embodies and absorbs into itself the Political 
 factor is evident from the fact that the tightness 
 of money, which raises the rate of interest, is 
 not so much due to the relation between the 
 amount of money as such and the amount of 
 products it distributes, as it is to the degree of 
 general credit which exists at the time in relation 
 to these products — as is proved by the fact that 
 when markets are buoyant and general credit 
 good, little money is necessary to effect the 
 ordinary transactions of business, whereas when 
 markets are suspicious and credit is bad much 
 more money is required ; and when, as in a panic, 
 credit is for the time absolutely shattered, there 
 is often not money enough in a whole country 
 to carry out its necessary business transactions. 
 And as it is the credit of a conn try which political 
 troubles and complications affect, it is evident 
 
THE EFFECT OF POLITICS, ETC. 99 
 
 that the Political element is included in the 
 Money Market element in any and every altera- 
 tion of the rate of interest of a Government 
 Loan. 
 
 But that the amount of money itself in the 
 market is, in spite of this, a separate element Money 
 in the total make-up of the market rate of ofTigh interest 
 interest, is seen in the fact that if the money on loan9 * 
 floating in the market, or lying in the banks 
 waiting for investment, has from any cause 
 become depleted, and ready money in conse- 
 quence is scarce, not only is the ordinary rate 
 of discount high, but the interest demanded 
 for the flotation of loans, Government or other, 
 will be higher than it otherwise would be. 
 And hence it is usual for the projectors of all 
 large industrial enterprises, as well as of all 
 new loans, to wait until these temporary periods 
 of money depletion have passed. 
 
 But when a conjunction of circumstances 
 
 . Permanent high 
 
 has conspired to give this period of money rate of interest 
 
 , , i j i • on loans. 
 
 depletion a permanent rather than a passing 
 charaoter, as when a destructive and barren war 
 has absorbed many millions of a nation's money 
 without reproductive return, then the rate of 
 interest for loans remains high over long periods 
 of years together ; and while it lasts there is 
 not a Corporation or Debenture Stock in the 
 country which does not fall in value, however 
 
100 THE EFFECT OF POLITICS, ETC. 
 
 strongly it may be secured from an industrial 
 point of view. 
 
 Carrying with us then the fact that a certain 
 
 Value of ready 
 
 money. customary amount of money always on hand 
 
 for loanable purposes is necessary as a basis or 
 support for the credit on which a money market 
 has been in the habit of conducting its trans- 
 actions ; and that if any considerable amount 
 of this loan money is suddenly withdrawn from 
 any cause, the national credit will suffer, and 
 the rate of interest to be paid for loans will rise ; 
 we are led to the third factor which enters into 
 the rate of interest to be paid for a Government 
 Loan, viz., the Industrial Factor. 
 
 And this brings us to the point which we must 
 Money Market now determine, namely, as to what relation the 
 ELS?" Money Market element (embodying and reflecting 
 Loins™ 116111 in itself > as lt does ' the Political element) bears 
 to the Industrial or wealth-producing element 
 in a Government Loan ; or, to put it into other 
 words, which has the greater effect on the rise 
 or fall of the rate of interest of a Government 
 Loan, and indirectly through that of all other 
 Debentures and loans whether of Industries or 
 Corporations — the Money Market factor, or the 
 strictly Industrial and wealth-producing one. 
 importance of To begin with, we may say that the Industrial 
 autua 1 ""' status of a country — the amount of its accumu- 
 
 lated wealth and the extent of its wealth- 
 
THE EFFECT OF POLITICS, ETC. 101 
 
 producing power — must ultimately determine 
 its credit and the rate of interest it will have to 
 pay for its loans ; and so in the end must domi- 
 nate all Money Market influences, precisely as 
 does the amount of credit that will be given to an 
 individual ; excepting, perhaps, amid the chances 
 of war. 
 But for all ordinary purposes of investment 
 
 . \ T •»»- , • Money Market 
 
 for stability and security, Money Market in- and industrial 
 fluences prevail over Industrial. But to get compared. 
 a general idea of the degree to which this is so, 
 we must draw a line of division athwart the 
 various stocks, a line which in a rough way will 
 separate those of a public nature from those 
 which are purely private concerns. The former, 
 which comprise Government Stocks, have their 
 fluctuations mainly determined by Politics and 
 the Money Market, as we have already seen, 
 as well as by the activity or otherwise of the 
 dealings in them on the Stock Exchange, into 
 which a large element of speculation must 
 necessarily enter. 
 
 But it is precisely the same, it is to be Interesfc on 
 observed, with all Loans and Debentures gSKSjwd 
 whatever ; for however well secured their In- ™<i h , . . 
 
 ' Industrial. 
 
 dustrial basis may be, their rates of interest 
 take their points of departure from the Govern- 
 ment Loans ; and if these have to pay a high 
 rate of interest for any reason, the Industrial 
 
102 THE EFFECT OF POLITICS, ETC. 
 
 loans have to pay a still higher — higher, indeed, 
 than would be justified by the actual Industrial 
 element on which they rest, and higher than if 
 they were located in countries whose Government 
 loans could be floated on a lower rate of interest. 
 An Industrial Debenture in Japan, for ex- 
 Rate of interest am ple, would have to pay a higher rate of in- 
 
 higher in Japan L * J ° 
 
 than in England, terest on precisely the same Industrial security 
 than it would have to pay on the same security 
 if situated in England ; and that for no better 
 reason than that the Government Loans of 
 Japan have to pay a higher rate of interest than 
 English Consols. And hence it is that in this 
 margin of difference between the rates of interest 
 on the Government Loans of the two countries, 
 the prudent investor will find an opening to 
 plant his capital in Industrial concerns of equal 
 stability and security, but yielding a higher rate 
 of interest in the one country than in the other. 
 Practically, we may say that the only stocks 
 where the Industrial factor plays a more import- 
 are dependent ant part than the Money Market one, and where 
 elements. " the ups and downs of their quotations follow more 
 closely the published returns of the business 
 done than they do the oscillations of the Money 
 Market, are the Ordinary shares of private or 
 Limited Liability Industrial and Commercial 
 concerns; and then only when they are largely 
 left to themselves, and not made the endless 
 
THE EFFECT OF POLITICS, ETC. 103 
 
 subject-matter of speculation by the public on 
 the Stock Exchange. 
 
 Speaking generally, and in the large, we may st °°ks which 
 say, too, that the stocks of all private com- dependent on 
 
 . ! .-. , . , . ,. . the Money 
 
 panies whose industries have rich potentialities Market. 
 in them, but which are still undeveloped, 
 are more dependent on the Money Market 
 than on their actual Industrial and productive 
 powers for their quotations on the Stock 
 Exchange ; whereas all industries that have 
 reached their normal Industrial development 
 will follow the Money Market influences as 
 regards their loans, but (except when Stock 
 Exchange speculation is busy with them) will 
 follow the published yields of their Industrial 
 returns as regards their Ordinary shares. 
 
 From all the foregoing considerations taken Foundation of 
 together, then, we are obliged to conclude that stability"* 
 as the Industrial and productive powers of a f t ° ^ ment 
 country are at bottom the only solid foundation 
 for the permanent stability and security of its 
 stocks, there are a number of nations in the 
 world where the conditions are such that capital 
 can be invested with equal practical stability and 
 security, but with a greater yield of interest, than 
 either in the stocks of any particular nation, or in 
 the Government Stocks of all nations. 
 
 These conditions are found (1) in those nations 
 where, owing to the high rate of interest which, 
 
104 
 
 THE EFFECT OF POLITICS, ETC. 
 
 Security with 
 higher yield. 
 
 The need for 
 a practical 
 scheme of 
 investment 
 
 from Political or Money Market causes, the 
 Government Loans have to pay, many Corpora- 
 tion and private Industrial Loans of unimpeach- 
 able Industrial security are paying rates of 
 interest far and away above those of loans no 
 better secured in other countries ; or (2) in the 
 loans of innumerable private Industrial con- 
 cerns, in all countries, which also are amply 
 secured, but which change hands seldom, and 
 are little quoted in Stock Exchange reports ; 
 or (3) in the loans of private or Corporation 
 concerns in countries of great potential wealth, 
 like Brazil or Argentina, still largely unde- 
 veloped, and where rates of interest, owing to 
 the actual scarcity of money, are unusually 
 high ; or (4) in the loans, whether Corporation, 
 Railway, or Industrial, of any country where 
 law and order and the enforced payment of debts 
 prevail ; where the capital at the back of a loan 
 is not largely " goodwill," but tangible property 
 which in the event of a break-up of the business 
 will in a forced sale repay both the capital and 
 interest of the loan ; and where solid business, 
 and not Stock Exchange speculation, is the main 
 basis for the fluctuations of its rise or fall. But 
 all these principles require a definite practical 
 scheme in which to give them a setting ; and it 
 is to a scheme of this kind that I would invite 
 the reader's attention in the next chapter. 
 
CHAPTEB V 
 
 GEOGRAPHICAL DISTRIBUTION V6TSUS INSURANCE 
 
 TN this chapter I have now to sum up this 
 somewhat lengthy dissertation on Stocks, 
 Money Markets, Exchanges, etc., with the object 
 of ascertaining, if possible, whether some sound 
 practical scheme of investment, with a definite 
 code of guiding rules and principles as its em- 
 bodiment, may not be constructed out of it all. 
 I am aware, of course, that amid so hetero- _ . ., 
 
 ' Concerning the 
 
 geneous a diversity of principles, positions, and possibility of 
 points of view as we have already discussed, investment. 
 it is impossible to find any one principle so 
 central and commanding as to form the nucleus 
 of a scientific scheme of investment, especially 
 as so many of these principles are bound up with 
 the risks and contingencies of a future which at 
 best, especially in matters of business, can only 
 be imperfectly foreseen. But this very im- 
 possibility itself suggests the hope that perhaps 
 the opposite method may be more successful, 
 viz., of leaving the separate heterogeneous prin- 
 ciples standing as they are, each on its own 
 
 105 
 
106 GEOGRAPHICAL DISTRIBUTION 
 
 independent footing and with its own special 
 risks attached to it, and then treating the whole 
 after the manner of an Insurance Company, 
 where, by the application of the Law of Proba- 
 bilities, the risks attaching to each can be made 
 so to neutralise and balance each other that a 
 solid deposit will be left over to the good. It is 
 at bottom the old familiar method of getting 
 rid of the business risks of any special concern 
 by putting your investment eggs into different 
 baskets ; like the bookmakers who, by balancing 
 a certain number of horses against each other 
 and laying their bets accordingly, manage to 
 make almost a scientific certainty out of a 
 business where the most expert judgment of 
 form and running is likely in the end to lead 
 its possessor, if he relies on it entirely, into 
 bankruptcy. 
 Geographical Now, I venture to believe that in some scheme 
 
 Distribution and .,.,., .,, - , . 
 
 the problem of of this kind will be found the solution of the 
 Problem of Investment, provided always that 
 you can either make the principles, methods, 
 and conditions of your scheme of investment 
 run on " all fours," as it were, with the con- 
 dition of things which obtains in, and makes the 
 success of, Insurance Companies ; or, if this i< 
 not possible, that you can supply what is missing 
 by something of equal if not greater precision 
 and certainty. And, accordingly, it is to the 
 
GEOGRAPHICAL DISTRIBUTION 107 
 
 resemblances and differences between the prin- 
 ciples on which an Insurance Company is based, 
 and those on which a Geographical Distribution 
 of Capital relies, that I would now direct the 
 reader's attention. 
 
 To begin with, then, I may remark that the 
 different categories of risks into which the indi- 
 vidual stocks and shares of a Geographical Dis- Geographical 
 
 Distribution 
 
 tnbution of Capital are thrown, are not only of Capital 
 
 ■t n • . i . . compared 
 
 as definite m character as the categories ot risks with Life 
 into which the miscellaneous lives of individual 
 men are poured in a Life Insurance Com- 
 pany, but are more in number. Let us take 
 them in order and follow them from point to 
 point ; bearing in mind always that it is the 
 degree of defmiteness and limitation that can 
 be imposed on the separate factors of any com- 
 plex problem that marks the extent to which 
 our conclusions can be reduced to a scientific 
 probability or certainty. 
 
 Now, the first and supreme limitation of all insurance 
 Insurance Companies, and the one which domi- dominated by 
 nates all the rest, is the limitation in the length human°iife. 
 of human life in general. Were this two 
 hundred years, or onwards to the age of 
 Methuselah himself, instead of practically some 
 eighty or ninety years, the table of risks on 
 which the law of averages and probabilities 
 has to operate, and on which the success of 
 
108 GEOGRAPHICAL DISTRIBUTION 
 
 Insurance Companies depends, would have to 
 be reconstituted from top to bottom. Is there, 
 then, anything corresponding to this, and having 
 a parallel precision and definite ness, in any 
 possible scheme of Geographical Distribution 
 of Capital among the different nations of the 
 world ? Yes ; and it is to be found in the steady 
 amount of trade which is always being transacted 
 in the world as a whole and which is continually 
 being redistributed among the different nations. 
 This trade not only remains ste ady as a whole, 
 but, owing to the gradual increase of the popula- 
 tion of the world, is, as statistics show, steadily 
 rising in amount, giving the investor assurance 
 that if it is declining in one region of the globe 
 universal it will, like the atmosphere, be correspondingly 
 
 depreciation . -. . , , , , 
 
 impossible in heaped up m another ; and so makes a universal 
 DisSbStion of depreciation or slump at any time in all the 
 Capital. securities embraced in a Geographical Distri- 
 
 bution of Capital impossible. 
 
 In this way the prudent investor gets the 
 same kind of solid support for the balancing of 
 his risks against each other in a Geographical 
 Distribution of his Capital as is given in In- 
 surance Companies by the general equality in 
 the length of human life ; and from this supreme 
 certainty as we come down the scale, all the other 
 categories of risks hang suspended, and have to 
 be estimated in reference to it as their fixed 
 
GEOGRAPHICAL DISTRIBUTION 109 
 
 point. But these other categories can not only 
 be as strictly limited and denned in a Geo- 
 graphical Distribution of Capital as in a Life 
 Insurance Company ; there are also more of 
 them for the investor to catch hold of, as it were, 
 and so help himself to a more accurate forecast 
 of the future of his investments. 
 
 In Life Insurance Companies, for example, 
 there are a number of categories or divisions, Distribution of 
 into which the risks are distributed before the insurance 
 innumerable lives to be insured are poured into Com P anies - 
 them wholesale. There are divisions into good, 
 medium, indifferent, and bad " lives/' and these 
 are represented in the reports of the medical 
 examiners of the Company by such complex 
 conditions as the hereditary predisposition to 
 disease of the applicant, his family longevity, 
 his existing constitution, the nature of his 
 business, whether dangerous or otherwise, the 
 climate of the country he inhabits, and the 
 like. 
 
 Now, corresponding to these definite divisions Different 
 in Insurance risks, we have in a Geographical gj^fs he 
 Distribution of Capital the parallel fact that the in a hie ™rch y . 
 different classes of stocks — Government Stocks, 
 Corporation Loans, Industrial Monopolies, 
 Banks and Insurance Companies, Railway De- 
 bentures, Industrial Debentures, and the like — 
 also lie in a hierarchy, and have, as we saw in 
 
110 GEOGRAPHICAL DISTRIBUTION 
 
 former chapters, different natural values attached 
 to them. In themselves these natural divisions 
 are quite as definite as the good, medium, bad, 
 or indifferent categories of lives in Insurance 
 Companies ; but over and above these, we have 
 in a Geographical Distribution of Capital a 
 number of definite joints of principle, which play 
 through the natural values of the different 
 stocks, and make their future course still more 
 amenable to scientific calculation. 
 Definite points One of these is the definite effect which the 
 Geographical" Government Stocks of any given country have 
 CapTtai Utl ° n ° f m ra i sm g or depressing the market value of all 
 other stocks in the same country. Another, 
 as we have seen in a former chapter, is the effect 
 of the state of the Money Market of the country 
 over the rise or fall of all the shares and stocks 
 of that country, especially of those which, like 
 Debentures, come into it for loans. Of the same 
 nature, again, is the calculable effect on the 
 present and future of these stocks, of the activity 
 or slackness of the Stock Exchanges which control 
 particular descriptions of stocks in the country 
 in which they are mostly dealt in. Besides 
 these, there are the definite effect of the state of 
 Trade in one country on that of a country with 
 which it directly deals, and the like. 
 
 Now, these all help to give definiteness to the 
 elements of the problem involved in a Geo- 
 
GEOGRAPHICAL DISTRIBUTION 111 
 
 graphical Distribution of Capital among the Advantage of 
 stocks of different nations ; and, so far, have a Distnbution of 
 scientific advantage over the fewer, rougher, in& P umnce Ver 
 and vaguer categories of risks in Insurance Com- Com P anies - 
 panies. But by themselves they are not enough 
 to give Geographical Distribution an all-round 
 advantage over Insurance Companies ; and some- 
 thing more therefore is necessary. For Insur- 
 ance Companies, as we have seen in a former 
 chapter, rest frankly on the impersonal Law of 
 Probabilities, and this is itself a tremendous 
 asset in their favour. For, however crude and 
 vague their divisions of risks may be, there can 
 be no doubt that such as they are, when in- 
 numerable lives of men are flung into them pell- 
 mell, as it were, the risks will work out in pro- 
 portion to the numbers thrown in, with a great 
 measure of scientific accuracy. Geographical 
 Distribution of Capital, on the other hand, 
 although a form of insurance, has none of that 
 impersonal character which in Insurance Com- „ , . , 
 
 Geographical 
 
 panies works out its scientific averages quite Distribution of 
 
 7 .. 7 Capital a form 
 
 independently of the discretion and judgment of insurance. 
 of men in the selection or rejection of its indi- 
 vidual units. Its separate lists would, even in 
 the largest single investments, not comprise 
 more than twenty or thirty separate items in 
 different parts of the world ; and these are not 
 sufficient in number in any given case to allow 
 
A rival in 
 steadiness to 
 Insurance 
 
 112 GEOGRAPHICAL DISTRIBUTION 
 
 the Law of Probabilities scope for exercise. It 
 would require something nearer 2,000 different 
 investments than twenty or thirty, to give the 
 law a chance ; and that is, of course, practically 
 an impossibility. Besides, these few investments 
 have, in the last resort, to be selected by some 
 one individual's judgment ; and this is to 
 infringe the cardinal principle on which all 
 Insurance Companies are based — the purely 
 impersonal Law of Averages and Probabilities. 
 It is evident, therefore, that if the Geographical 
 Distribution of Capital is to rival the steadiness 
 insurance an( j surene ss of Insurance Companies as a prin- 
 
 Companies. x r 
 
 ciple of investment, it will have to make good 
 its deficiency in this respect by some principle 
 as good, if not better, to take its place ; and the 
 question is whether such a substitute is any- 
 where to be found. I think it is ; but it is not 
 a single principle, but rather the resultant of a 
 complex of several separate but all-important 
 facts and principles. 
 
 The first is the fact that whereas in Insurance 
 Companies the lives when once assigned to their 
 appropriate categories of risk cannot afterwards 
 be thrown aside and replaced by others should 
 they prove to be bad ones ; in an ordinary 
 investment list, although it may not consist of 
 more than half a dozen or a dozen separate 
 risks distributed among the whole number of 
 
GEOGRAPHICAL DISTRIBUTION 113 
 
 geographical divisions, the stocks can be changed 
 
 in each division for other stocks of the same 
 
 character and status as often as there is any ^^JE^ 1 " 
 
 reason to suppose that any particular stock held Distribution of 
 
 has from misfortune, accident, new inventions, 
 
 and discoveries, or what not, been threatened 
 
 with the loss of its former status. This fact is 
 
 reinforced by two principles of great importance 
 
 which reduce the risks attaching to the small 
 
 number of separate investments to a minimum, 
 
 and so give to the investor not only equal 
 
 stability and security, but a higher yield than 
 
 the Insurance Companies will give him. 
 
 The first of these principles is that a Geo- 
 graphical Distribution of Capital will deal in DiSSbution of 
 nothing but the choicest cuts, as it were, of the investments/ S 
 shares in any investment, viz., in Loans, Deben- 
 tures, and Preference shares only, all of which 
 bear a fixed rate of interest and take precedence 
 of the great mass of Ordinary shares. Indeed, 
 in any scheme of Geographical Distribution 
 aiming at stability and security, and professing 
 at all to be scientific, all Ordinary shares (the 
 characteristic of which is that they go up and 
 down with the ever-changing caprices of the 
 market) must be ruthlessly ruled out from the 
 investment list. So that it comes virtually to 
 this, that instead of dealing with what is prac- 
 tically impossible for any single investor, viz., 
 
 8 
 
114 GEOGRAPHICAL DISTRIBUTION 
 
 a vast miscellany of shares of every description, 
 chosen haphazard on the chance that, as in an 
 Insurance Company, the law of averages will be 
 able to bring out of them a stable and equable 
 result ; a Geographical Distribution of capital 
 would allot to each investor only a comparatively 
 small variety of stocks at any one time ; but then 
 these would be of the very highest value in 
 point of stability and security, and by being 
 distributed among those nations of the world 
 which follow different Money Markets, are sub- 
 ject to different Trade Currents, and yield 
 different rates of interest on practically equally 
 good security, would be made to balance each 
 other's fluctuations. 
 
 But how, it will be asked, are we to know that 
 Selected stocks the stability and security of each of the few stocks 
 security. 1 selected are in themselves, as industrial business 
 
 concerns — and quite apart from the Money 
 Markets, the Trade Currents, and the Stock 
 Exchanges which form the separate environment 
 in which they function — how do we know that 
 these are above reproach ? The answer is, that 
 we look to the published and audited balance- 
 sheets of the industrial business concerns on 
 which our investment list of Loans, Debentures, 
 and Preference shares is based ; and if we find 
 that they have twice as much capital behind 
 them as the amount of the debenture or loan ; 
 
GEOGRAPHICAL DISTRIBUTION 115 
 
 that they have had for a period of five or eight 
 years, say, a steady income averaging three 
 times as much as is necessary to pay the interest 
 on the loan ; that they have habitually in hand 
 more liquid assets than are necessary to pay Determining 
 
 tit i t ■ i i the s e curit y of 
 
 their current trade debts ; and, besides, can show stocks. 
 that in the event of a break-up sale there is 
 sufficient tangible property left (and not merely 
 goodwill) to repay the loan with interest in full ; 
 — then we can safely say that that Debenture 
 stock, in any country where private property is 
 fully protected by law, is a first-class investment 
 stock, so far, that is to say, as its ultimate 
 security is concerned. 
 
 With the real solidity of our investment list soundness of 
 thus assured by the unimpeachable security of n s t. 
 the Industrial basis on which each of the Loans, 
 Debentures, and Preference shares rests, we can 
 then proceed to place each of these solid securities 
 in the special environment in which it functions ; 
 i.e., in the particular country in which it is 
 situated ; with the special rate of interest which 
 that country has to pay on its Government 
 Loans ; in the particular Stock Exchange in 
 which the bulk of its stock is held ; and in the 
 particular Trade Currents, as between country 
 and country, in which its business is carried on. 
 
 This done, we can then divide the World up 
 into sections, and group the different countries 
 
116 GEOGRAPHICAL DISTRIBUTION 
 
 Grouping according to the kind of products which form 
 
 according to the mainstay of their prosperity ; keeping those 
 their products. ^-^ ^i mam iy j n agricultural produce, fruit, 
 
 raw materials, or what not, separate from each 
 other and from those which are engaged in manu- 
 facturing and working up these products. These 
 countries are then suspended in a circlet, as it 
 were, around the circumference of the great 
 wheel of World-industry, but so regrouped and 
 rearranged on it by lines of cross-division as to 
 keep the factors which we have to balance 
 against each other in our investment list separate 
 and independent of each other. 
 Sub-dividing ^he nrs t f these cross-divisions connects the 
 
 the group. 
 
 countries which trade with each other and supply 
 one another's wants, and so are reciprocally 
 affected by one another's prosperity or adversity. 
 The second of the cross-divisions connects the 
 countries the bulk of whose shares are dealt with 
 on the same Stock Exchange, as, for example, 
 our Colonies and India, which have the London 
 Stock Exchange for their centre, thus marking 
 the effect of the Money Market on the loans and 
 debentures of our investment list when these 
 latter are otherwise adequately secured on their 
 industrial side. The third of these cross-divisions 
 connects the countries whose natural resources, 
 like those, for instance, of Brazil and Argentina, 
 are rich, but where the capital necessary for their 
 
GEOGRAPHICAL DISTRIBUTION 117 
 
 development is insufficient, with others, like 
 England, where capital is overflowing, but fresh g™j*°7 n o£ 
 openings for it at home are not forthcoming ; England, 
 thus marking the parts of the earth where loans 
 on private industries — as distinct from Govern- 
 ment or Corporation Loans — can be planted with 
 the assurance of a high yield of interest. And 
 the last cross-division, the one with the most 
 universal and all-pervading importance, is be- 
 tween those countries whose Government Loans 
 pay a high rate of interest and those which pay 
 a medium or a low rate ; for the Government 
 rate of any particular country, like a higher or 
 lower pitched key, will raise or depress the value 
 of all stocks whatever in that country, even 
 after Money Markets, Stock Exchanges, Trade 
 Currents, and purely Industrial Security have 
 produced each its own proper effect, and done its 
 best or worst with them. 
 
 Here, then, is a complex of separate definite Security of 
 
 ., , -.... ■,. • , -i industrial 
 
 principles and conditions, playing into and basis for loans. 
 around each particular stock of each and every 
 country, and modifying the natural industrial 
 or commercial value of each stock on an invest- 
 ment list. If, then, the industrial basis for the 
 loans and debentures of our investment list is 
 so fully secured as to be above suspicion or re- 
 proach, it is evident that we must depend for 
 our average yield of income from them on the 
 
118 
 
 GEOGRAPHICAL DISTRIBUTION 
 
 Larger yield 
 and equal 
 security. 
 
 way in which we balance the influence of these 
 various Trade Currents, Money Markets, Stock 
 Exchanges, and Government Securities of the 
 different countries against each other. 
 
 If this be accurately and skilfully done, there 
 is no reason why the prudent investor should 
 not be certain of getting a larger yield of income, 
 with equal stability and security, from a Geo- 
 graphical Distribution of Capital than from any 
 other mode of investment. It is thoroughly 
 scientific in character, inasmuch as there is 
 nothing haphazard in the selection of its list of 
 stocks ; and, besides, all the factors that enter 
 into the problem can be sufficiently well known 
 from day to day, month to month, and year to 
 year, from the reports of Money Markets, Stock 
 Exchanges, Trade Statistics, and Government 
 Loans. For in the art with which it balances 
 these factors of a few stocks against each other, 
 it resembles rather, as I have said, the hedging 
 of the scientific bookmaker than the averaging 
 of the ordinary Insurance Companies. 
 
 Like the horses in a race, the number of stocks 
 in an investment list are few in number ; while 
 the 6 seioctYon of the qualities of the horses, their past records and 
 present form, the jockeys that ride them, the 
 length of the course, the nature of the ground, 
 etc., correspond to the past history and present 
 quotations of the stocks, and to the Money 
 
 Personal 
 judgment in 
 the sel< 
 stocks. 
 
GEOGRAPHICAL DISTRIBUTION 119 
 
 Markets, Stock Exchanges, and Trade Currents 
 which ride and dominate them. The weighing 
 and combining of the points for or against the 
 horses in order to determine the odds given or 
 taken, and so to give balance and symmetry, 
 stability and security to a book, depend on 
 personal judgment and penetration ; so, too, do 
 the weighing and combining of the points for or 
 against a stock, and the giving to this stock its 
 proper place in the balance and symmetry of the 
 investment list as a whole. 
 
 The problem of a scientific Geographical Dis- 
 
 ., . » ~ . , . . , The problem of 
 
 tribution of Capital, in a word, is the problem Geographical 
 of the scientific selection, by means of personal Capital, 
 discretion and judgment, of a small number of 
 stocks which, under conditions of great com- 
 plexity, and an immense number of possible 
 combinations, will balance each other's risks. 
 In an ordinary Insurance Company, on the other 
 hand, the problem is, how to pack into a small 
 number of generalised categories of risks such 
 a large number of miscellaneous lives, thrown 
 helter-skelter in, as will neutralise each other's 
 risks by their numbers alone, without the inter- 
 vention of any further personal discretion or 
 judgment in the matter. Of course, the more 
 definite and accurate the categories of any 
 classified risks, even of an Insurance Company, 
 the better. 
 
120 GEOGRAPHICAL DISTRIBUTION 
 
 Success My point is that while Insurance Companies 
 
 the^doSst " C0ll ld almost dispense with all distinctions of 
 analysis. risks whatever, provided they had mere gross 
 
 numbers enough of lives to pour into them ; a 
 Geographical Distribution of Capital can only 
 succeed in proportion to the discrimination, 
 accuracy, and completeness with which each 
 factor or element involved in the problem is 
 separately analysed and grasped in relation to 
 every other and to the whole. 
 
 Such, in bald outline, is a brief summary of 
 the principles which, in my judgment, ought to 
 The only preside over a Geographical Distribution of 
 
 So^apS Capital ; and before closing this already too 
 Ca S ?tS Ution ° f l en g tn y dissertation it would be well to consider 
 to what extent they have been embodied in any 
 detailed existing scheme. The only one of which 
 I have any cognisance is that of Mr. Henry 
 Lowenfeld, as unfolded in his various books 
 on Investments ; a scheme the essentials of 
 which were subsequently carried out by the late 
 Sir Edward Law, when engaged in his capacity 
 as director, in investing the huge surplus funds 
 of one of our most important Insurance Com- 
 panies. Personally, I am much indebted to 
 Mr. Lowenfeld for being the first to suggest to 
 me the various elements which, as a practical 
 investor, he had found entering into the com- 
 position of share values, as well as into their 
 
GEOGRAPHICAL DISTRIBUTION 121 
 
 mode of action ; and for suggesting them to me 
 as a proper subject for the Science of Finance. 
 
 I propose, therefore, to wind up this disserta- 
 tion by giving an outline of his scheme ; but 
 before doing so I shall sum up Sir Edward Law's 
 leading maxims in his own words, in order that 
 the reader may have the opportunity of com- 
 paring the relative positions occupied on this 
 problem of investment by a speculative econo- 
 mist like myself, on the one hand, and a practical 
 financier on the other, and of observing how 
 closely their conclusions coincide. 
 
 The first of Sir Edward Law's principles is sir Edward 
 
 • t Law on 
 
 that the stocks selected for an investment list Geographical 
 
 should not all be confined to one market ; the 
 second is that the group of stocks selected should 
 be distributed among different countries ; the 
 third, that they should belong to different cate- 
 gories ; the fourth, that the total sum invested 
 should be fairly equally divided among the 
 various classes of stocks selected ; the fifth, 
 that the number of stocks selected should vary 
 in proportion to the sum to be invested, and 
 that the small investments should comprise at 
 least four or five different categories of stock, 
 the more ordinary of these categories comprising 
 Government, Municipal, Railway, Shipping, 
 Banks, and Industrial, the latter including in 
 general terms not only Manufacturing Industries, 
 
122 GEOGRAPHICAL DISTRIBUTION 
 
 but also Gas and Water Stocks, Harbour Trusts, 
 Telegraphs and Telephones, etc. ; the sixth, 
 that each individual stock should offer good 
 security in itself ; and the seventh, that the 
 past history of the stocks selected should show 
 that the fluctuations of the individual securities 
 have all kept approximately within the same 
 limits of width of variation. And his con- 
 clusion is that " if all these conditions be fulfilled, 
 whilst no guarantee can be given for the future 
 of any particular stock, it is fairly certain that 
 if some prove bad bargains, others will increase 
 Law of averages i n value, and that the law of averages will assure 
 
 and Geo- , m 
 
 graphical a far more reliable collective result than any 
 
 Distribution of 
 
 Capital. likely to be attained by the most careful selection 
 
 of securities, based solely on apparent respective 
 individual worth." 
 
 To these first principles of Sir Edward Law I 
 can only add — what indeed must be evident 
 from all I have already said on my own account 
 — that I unhesitatiDgly subscribe. In the 
 next chapter we will consider Mr. Lowenfeld's 
 scheme. 
 
CHAPTER VI 
 
 MR. LOWENFELD's SCHEME 
 
 A FTER what I have already said in former 
 "^^ chapters, the principles, maxims, and 
 detailed application of Mr. Lowenfeld's scheme S/ 1 ^™ 60 * 
 for the Geographical Distribution of Capital credit for the 
 need not detain us long ; for although his 
 detailed exposition of them extends through 
 several volumes, his leading principles are con- 
 fined mainly to those I have discussed in my 
 last chapter. I have thought, therefore, that it 
 would simplify matters for the reader, as well 
 as avoid needless repetition, if I arranged his 
 materials in my own way, and kept as close as 
 possible to the order of my own exposition in the 
 last chapter. But I wish to say frankly at the 
 outset that the credit of the scheme belongs to 
 Mr. Lowenfeld and not to me ; and that it was 
 only when it had been submitted to me for an 
 opinion, and after I had found myself essentially 
 in agreement with it, that I undertook to take 
 up the whole question from my own separate 
 and independent point of view. 
 
 123 
 
124 MR. lowenfeld's scheme 
 
 Generalisations To be g in with > t-hen, 1 ma y remark that Mr. 
 
 tr a a S ns i actio a ns tUaI Lowenfeld approaches his problem in a strictly 
 scientific spirit, and from the true Baconian 
 standpoint, founding his generalisation on a wide 
 induction from the particulars of actual trans- 
 actions ; and these generalisations he applies to 
 the infinite complexities of trade through the 
 medium of a large number of business maxims. 
 I am aware that the late Sir Edward Law 
 
 maxi ? ms te of a the enunciated the same principles as being those 
 
 propounder. which guided him in his capacity as investor for 
 a large Insurance Company, but Sir Edward 
 Law's publications are subsequent to those of 
 Mr. Lowenfeld and based upon what was already 
 in print. In the meantime we may extract a 
 few of Mr. Lowenf eld's principles and maxims 
 with the view of giving the reader a taste of his 
 quality as a financial expert. His principles 
 are few in number. The largest in scope of these, 
 and the one which, if scientifically established, 
 forms the presupposition, axiom, or postulate 
 of the rest, which hang on it and draw their 
 vitality from it, is that the great trading countries 
 of the world form themselves into different 
 groups, each of which has an organising financial 
 centre which, like the brain, dominates and 
 controls the separate markets as well as the 
 trading hopes, fears, and possibilities of the 
 whole group. London, for example, as we saw 
 
MR. LOWENFELD's SCHEME 125 
 
 in the last chapter, is the brain and Money 
 Market centre for all British Trustee stocks ; London the 
 and although these have been lately extended British Trustee 
 to certain Indian and Canadian stocks, to the 
 stocks of great Corporations, like the City of 
 London, the London County Council, Belfast, 
 Birmingham, and so on, as well as to the In- 
 scribed stocks of our widely separated Colonies, 
 they all rise or fall in value together — and quite 
 independent of their intrinsic, ultimate, individual 
 merits — according to the freedom or stringency of 
 money in the London Money Market. 
 
 It is the same, too, with the Trade Currents as 
 with the Money Markets of the world. They 
 each have their separate geographical divisions, divlSons 1C& 
 routes, and connections ; and Mr. Lowenfeld's enumerated - 
 first object, accordingly, is to ascertain precisely 
 what these geographical divisions are. He has 
 succeeded in reducing them to ten, all told, viz., 
 British, Colonial, North Europe, South Europe, 
 Asia, Africa, North America, South America, 
 and an International division representing Inter- 
 national Trusts, Shipping, Telegraph, and Marine 
 Insurance, etc. These major divisions he splits 
 up, in turn, into subdivisions, with the object of 
 more accurately marking out and separating the 
 Money Market connections from the connections 
 of the Trade Currents and of the Stock Ex- 
 changes. This done, he has then to show two 
 
126 MR. lowenfeld's scheme 
 
 things before he can launch his scheme. The 
 first is, that the relative amount of trade done 
 by these different divisions of the world collec- 
 tively may be divided into two halves, as it were, 
 which are complementary to one another ; so 
 that when the trade and monetary conditions 
 of the one half are known, those of the other 
 half may be roughly inferred. But that, again, 
 can only hold good provided it can be shown 
 that the trade of the world as a whole is a steady 
 or slowly progressive one, and not capricious and 
 variable. And this position Mr. Lowenfeld finds 
 verified in the statistics compiled with much 
 care and accuracy by Mr. Holt Schooling. 
 It will be as well therefore, if we are to rightly 
 Progresa of the a PP renen d Mr. Lowenfeld's position, to pause 
 world's trade. f or a moment to consider what these conclusions 
 of Mr. Schooling specially are, and what further 
 conclusions can logically be drawn from them. 
 They may be summed up, then, in the following 
 propositions : (1) That the trade of the world as 
 a whole, owing to the increase of population and 
 the mouths that have to be fed, is steadily in- 
 creasing ; (2) that it has compensatory fluctua- 
 tions as between Europe and the rest of the world; 
 (3) that the exports of Europe are two-thirds of 
 those of the whole world ; (4) that the share of 
 European exports is gradually falling ; (5) that 
 as far as Europe and 1 ho whole of America is 
 
ME. LOWENFELE-'s SCHEME 127 
 
 concerned, the share of exports is falling in the 
 former and rising in the latter ; (6) that Europe 
 as a whole has largely increased her export trade, 
 but that the United Kingdom has not kept up to 
 the rest of the world in this respect ; and lastly, 
 and as conclusion and summary of the whole, 
 that although fluctuation in the amount of trade 
 characterises the different farts of the world, the 
 world as a whole is free from fluctuation. 
 
 NOW, if these propositions be true, tWO things Consequences 
 
 must follow. The first is that the price paid for propositions. 
 
 loans of capital will vary according to the wealth 
 
 and credit of the different countries of the world ; 
 
 the second is embodied in a maxim of Mr. Lowen- 
 
 f eld's, viz., that " no circumstances can cause all 
 
 the stocks of a Geographical Distribution to 
 
 show a simultaneous depreciation below cost 
 
 price " ; and putting these two propositions 
 
 together, he concludes that if an investor will 
 
 take the pains to separate the parts played in 
 
 the price of the stocks in different countries by 
 
 the Money Markets that dominate them, and by 
 
 the Trade Currents that blow through them and 
 
 stimulate or depress them, he will be able to 
 
 hold with safety stocks yielding a larger income 
 
 than he otherwise could do. And in testing 
 
 this on a typical all-British list of investments, 
 
 and a typical geographically distributed one 
 
 respectively, it was found (1) that the geo- 
 
128 
 
 MR. LOWENFELD S SCHEME 
 
 All-British 
 
 versus 
 
 distributed 
 investments. 
 
 graphically distributed one produced twenty 
 geographically P er cen ^ mor ^ income than the all-British one 
 from the beginning ; (2) that the all-British 
 one improved in value £2,902 during the first 
 five years, but ended in a loss of £137 ; (3) that 
 the geographically distributed one rose gradu- 
 ally in volume but maintained its value, and 
 finally increased it by £1,524 ; and lastly, that 
 while the annual income froni both lists followed 
 the rise of capital, the £2,902 rise in the all-British 
 capital ended only in an increase of income of 
 £54, whereas in the rise of £1,524 in the geo- 
 graphically distributed one the rise in capital 
 value was attended by a proportionate rise of 
 income. 
 
 But not to depend upon particular figures or 
 particular selections of stocks for our com- 
 parison, it would be as well, perhaps, if we 
 could find in Mr. Holt Schooling's statistics of 
 World-trade some inherent reason why, at the 
 present stage of industrial development, a 
 Geographical Distribution of Capital will secure 
 a larger yield of income, with equal stability and 
 security, than any mode of investment in the 
 stocks of any single country. The principle of 
 averaging, or not putting all your eggs in one 
 basket, might of course account for a large 
 measure of stability and security, but it could 
 not account for the greater yield, except on the 
 
 The principle 
 of averaging. 
 
MR. LOWENFELD'S SCHEME 129 
 
 condition that money must essentially yield a 
 higher rate of interest, on equal security, in some 
 countries than in others ; whereas, to invest 
 entirely in the stocks of the particular country 
 which pays the highest rate of interest on its 
 loans, would be to sacrifice the stability and 
 security of our investments to the pretensions 
 of their face value. If, on the other hand, we go 
 to the opposite extreme, and put all our capital 
 into Consols and other British Government 
 Stocks paying the lowest rate of interest, for the 
 sake of ultimate security, we sacrifice a larger 
 possible yield and an equal practical security ; 
 and without attaining to any higher degree of 
 stability, owing to the greater dependence of 
 Government Stocks on political and international 
 complications than other stocks ; as, indeed, the 
 fluctuations of Consols during the last twenty 
 years have abundantly shown. 
 
 Or, again, it may be suggested that if we Amistaken 
 limited our capital for investment entirely to im P resslon - 
 the Government Stocks of the different countries, 
 it would meet all the conditions of our problem, 
 viz., a higher average yield, owing to the differ- 
 ence in the rates of interest in these various 
 Government Stocks ; and a greater stability and 
 security, owing to the eggs not being all in the 
 same basket. But in this it is forgotten that 
 there are not sufficient Government Stocks in 
 
 9 
 
130 mr. lowenfeld's scheme 
 
 the world to give the law of averages and proba- 
 bilities a chance to operate, inasmuch as all the 
 Government Stocks of a particular country 
 count only as one stock, owing to their all having 
 the same security. But Mr. Lowenfeld's scheme 
 avoids this difficulty by means of two devices. 
 
 In the first place he limits severely the amount 
 
 of money appropriated to Government Stocks in 
 
 Limit of money any single investment list — not more than a 
 
 Government ° fourth of the whole, if I remember rightly, and 
 
 stocks. even t ^ at on jy because in the event of any 
 
 necessity arising when ready money must be 
 had immediately, they can be converted into it 
 with both cheapness and ease. Indeed, were it 
 not for the necessity of having some part of an 
 investment list in a fluid, quickly convertible 
 form, it is probable that, owing to the instability 
 which political and international complications 
 are apt to produce in Government Stocks (but 
 from which Industrial Debentures and Loans, 
 as we saw in a former chapter, are comparatively 
 free), he would confine his investment lists to 
 . Corporation Loans, Railway and Industrial 
 
 Composition of x • 1 i 
 
 investment Debentures and Preference Stocks entirely, and 
 eschew Government Stocks almost as much as 
 he does Ordinary shares. For these Debentures 
 and Industrial shares, as we saw, are the last 
 to be disturbed by political or social commo- 
 tions ; and, what is more important in this 
 
MR. LOWENFELD'S SCHEME 131 
 
 connection, there are hundreds or thousands of 
 them, and of the most unimpeachable security, 
 from which to make a choice, in every country 
 of the world. And the consequence of this is, 
 that should any one or more of them fail through 
 accident or unforeseeable misfortune, there always 
 remains any number of them to draw from, with 
 which to fill the gap in an investment list ; thus 
 giving a sufficient number and variety for the 
 law of averages to take effect in. 
 
 Besides, no inherently weak or risky Industrial Extreme 
 
 caution in 
 
 stocks are admitted into Mr. Lowenfeld's lists, selection of 
 In his scheme, on the contrary, each stock 
 selected is in itself of unimpeachable security, and 
 if it cannot pass his test is not admitted. These 
 stocks consist, as I have said, mainly of Loans 
 and Debentures and Preference shares ; and the 
 conditions which he has laid down as essential 
 before they can be admitted to his lists, are 
 (1) that they shall be based on the security of 
 business concerns which have had for five or 
 more years a steady income averaging three 
 times as much as is necessary to pay the interest 
 on the Debenture or Loan ; (2) that they shall 
 have twice as much capital behind them as the 
 amount of this Debenture or Loan ; (3) that 
 they shall have habitually on hand more liquid 
 assets than are necessary to pay the current 
 trade debts ; and (4) that in the event of a 
 
interest. 
 
 132 MR. lowenfeld's scheme 
 
 break-up sale from accident or misfortune, they 
 shall have sufficient actual tangible property left 
 to pay the loan with interest in full. 
 
 In my last chapter I accepted these conditions 
 of Mr. Lowenfeld's as sufficient to justify an 
 investor in holding a stock as a permanent in- 
 vestment and embodied them in my own rough 
 outline of what an investment scheme on the 
 lines of Geographical Distribution should be. 
 Causes of Now, with all the stocks in his investment lists 
 
 differentiation . _ . _ 
 
 in yield of equally well secured on the Industrial side, it 
 is natural that Mr. Lowenfeld should look to 
 the other factors that enter into the value of 
 stocks for the differentiation necessary to give 
 him that high average of yield, with equal security 
 and stability, which he claims for his scheme. 
 And, indeed, this is precisely what he does. He 
 argues that the main causes of this differentiation 
 in yield are the prices of the Government Stocks 
 of the different countries on the one hand, and 
 the influence of the different Stock Exchanges 
 in which particular classes of stock are dealt 
 in ; the separate and distinct Trade Currents 
 that flow between different countries ; and the 
 stringency or ease of their Money Markets on 
 the other. But of all these the influence of the 
 price of Government Stock is paramount, inas- 
 much as it affects all the stocks of a country, 
 and is more permanent, whereas that of Stock 
 
ME. LOWENFELD'S SCHEME 133 
 
 Exchanges, Trade Currents, and Money Markets, 
 is more partial, more casual, more transient, and 
 more fluctuating. 
 
 Now, it will have been observed that, although Particular 
 
 ' _ . stocks 
 
 Mr. Lowenfeld has relied mainly on the difference selected by 
 
 ~ n i r • • ^ r - Lowenfeld. 
 
 m price of Government Stocks tor giving him in 
 his scheme of Geographical Distribution the 
 different rates of yield from which to get a higher 
 average on equally good security than from other 
 modes of investment, he makes his selection not 
 from the Government Stocks themselves of the 
 different countries, but from the Loans, Railway 
 and Industrial Debentures or Preference shares 
 of these countries. The reason is that as the 
 latter are all equally affected by the prices of £25S£ W the 
 their respective Government Stocks they offer 
 the same differentiations from which to strike 
 an average as the Government Stocks themselves; 
 but have these further advantages over Govern- 
 ment Stocks, that they return a greater yield of 
 interest ; enjoy equal practical security ; and 
 (what is equally important for an investor) are 
 freer from fluctuation. They yield a greater 
 percentage of interest, not so much because 
 Government Stocks are more ideally secure, and 
 so have to pay less for a loan, but because, like 
 money in one's pocket or on deposit in a bank, 
 you can turn them into cash at any time, or at 
 any place in their own country, with the least 
 
134 
 
 MR. LOWENFELD S SCHEME 
 
 Disparity in 
 security of 
 Government 
 Stocks in 
 various 
 countries. 
 
 expense, the least delay, and the greatest ease. 
 They are more free from fluctuation because, 
 as we have already seen, they are less influenced 
 by political or international complications and 
 disturbances than Government Stocks neces- 
 sarily are. 
 
 Later on I will present the reader with some of 
 the maxims Mr. Lowenfeld lays down in refer- 
 ence to the effects of Stock Exchanges, Trade 
 Currents, and Money Markets, on the current 
 prices, if not the inherent ultimate value, of 
 different geographical securities ; but before 
 doing so we may pause for a moment to consider 
 some of the causes which have made the Govern- 
 ment Stocks of some countries of so much lower 
 credit for stability and security than those of 
 others ; and, in consequence, make it necessary 
 for the industrial enterprises of these countries, 
 however safely secured, to pay a higher rate of 
 interest for loans. The causes, of course, arc 
 political and social as well as industrial in char- 
 acter. They include such considerations as the 
 political stability or instability of the country in 
 question ; its freedom or not from either the 
 dangers of internal revolutions or of external 
 complications with other Powers ; the stability 
 of its Money standard, and of the laws of 
 property and taxation; the honour of the 
 country as a whole, or of its Municipalities 
 
MK. LOWENFELD'S SCHEME 135 
 
 and Corporations, in meeting or repudiating 
 their debts, etc. 
 
 On the other hand, the credit of a country and Natural 
 
 products 
 
 the price it has to pay on its loans may be mainly affecting 
 
 • 7 • 7 • i it i i National 
 
 industrial in character, and depend on such credit. 
 
 causes as the natural productive powers of the 
 
 country, whether in its soil, its mines, or its 
 
 facilities of communication and transport, the 
 
 number of natural monopolies it possesses, 
 
 either in the quality of the foodstuffs or fruits, 
 
 in its metals or precious stones, its furs or timber, 
 
 its rubber or ivory, or what not ; or, again, on 
 
 the inventive or energising ability of the people, 
 
 their scientific knowledge and its application to 
 
 machinery and to all the arts that minister either 
 
 to the necessities or luxuries of life. Or again, 
 
 the credit of a country (as reflected in the 
 
 rate of interest of its loans) may depend on the 
 
 amount of the existing indebtedness of the National credit 
 
 ° may be affected 
 
 country as a whole, and of its municipalities and b y existing 
 
 ' . indebtedness. 
 
 corporations ; the proportion of these loans 
 which has been spent on reproductive works, 
 and the proportion which has been either blown 
 away in fruitless military expenditure or in 
 paying off old debts, in political corruption, etc. 
 Summing up, then, these various causes which 
 in their combination determine the relative 
 rates of interest which different Governments 
 have to pay on their loans, and dividing them 
 
136 MR. lowenfeld's scheme 
 
 broadly into the relative amount of productive 
 industrial power which they possess, on the 
 one hand, and the relative amount of debt which 
 these industrial powers have to carry, on the 
 other, we may tarry for a moment on our way 
 with the object of considering their modus 
 operandi as preliminary to the maxims of Mr. 
 Lowenfeld in regard to them, which are to follow. 
 The first point I would mention is, that the 
 National debt mere gross amount of a nation's debt will by itself 
 beneficial 6 gi ye us n0 true or final indication of its credit, 
 but only when taken in relation to its productive 
 powers, present or prospective — to its present 
 productive powers in the case of short-period 
 investments, and to its prospective productive 
 powers in the case of the long-period ones with 
 which Mr. Lowenfeld's scheme deals. It is not 
 every debt that benumbs or strangles either 
 the individuals of a nation or the nation itself. 
 Some debts are the sole means of opening up the 
 hidden resources of a country or of developing 
 them still further, and so are a blessing in 
 disguise. It is only when the capital borrowed 
 is sown on a stony, barren soil, productively 
 speaking, that the debt becomes an incubus on 
 production; if it falls on a rich soil, it waters 
 and increases it like a fertilising rain. If the 
 debt then, however great in itself, is light com- 
 pared with the wealth-producing Powers of 
 
MR. LOWENFELD'S SCHEME 137 
 
 Nature which the capital of the debt can evoke, 
 whether from the soil, as in the improvements 
 of agriculture, or from the use of machinery in 
 manufactures — it adds to wealth production ; if , . 
 
 National debt 
 
 on the contrary, the weight of the floating balloon and the path to 
 of debt, like a hydrocephalic head, is too heavy 
 for the wealth-producing Powers of Nature which 
 have to carry it as a going concern, when its pro- 
 ducts are put on the market at the existing 
 market price, then it becomes top-heavy — 
 " over-capitalised " as they say — and staggers 
 and tumbles into bankruptcy, with the loss 
 of all the stored-up human labour which the 
 capital of the debt represented. 
 
 It is precisely the same with National Debts 
 as it is with the debts contracted by individual Employment of 
 traders, Joint Stock Industrial Companies, or Capital. 
 Corporations ; but with this difference, that 
 whereas the chances are that individual traders 
 will employ the capital of their debt productively; 
 and with Joint Stock Companies, as things at 
 present go, it is perhaps about even chances as 
 to whether it is productively or unproductively 
 spent ; and while Corporations, again, will spend 
 their borrowed capital productively on the whole, 
 even when they are paying more for the work on 
 which they employ it than is necessary, or than 
 would be paid for it were it in private hands ; 
 Governments, it is most probable (except, perhaps, 
 
138 MR. lowenfeld's scheme 
 
 in the case of a fight for their very existence), 
 will spend most of their borrowed capital nn- 
 productively, in military establishments, in 
 wars, etc. ; while they are only beginning to 
 learn the importance of spending it in industrial 
 enterprises which are beyond the resources of 
 any individual or Joint Stock Company. 
 
 Again, very few nations, as such, have any 
 National debt, public property at all as security for their debts 
 (except, perhaps, Germany, whose debts are 
 secured on a network of railways and canals 
 owned by the State), but have to depend almost 
 entirely on the taxes which they can squeeze out 
 of their subjects. And however equally these 
 taxes may be laid on the different classes of a 
 nation, it is evident that if they exceed a certain 
 amount, and the capitalist class cannot shift their 
 share on to the shoulders of the general public, 
 the nation itself in its industrial rivalry with 
 other nations must go under in the struggle for 
 existence ; so long, that is to say, as the present 
 industrial organisation of society lasts. 
 
 All this is, of course, trite, but it leads up to a 
 point of more importance, viz., why it is that 
 the fortunes of the capitalist class should be so 
 much more bound up and identified with the 
 fortunes of the nation as a whole than those of 
 the other classes. The answer is, that it is from 
 the Powers of Nature that the accumulating 
 
 Capitalists and 
 
 National 
 
 prosperity. 
 
MR. LOWENTELD'S SCHEME 139 
 
 surplus of wealth which gives nations their status 
 and credit comes — and not from the hands, 
 backs, and shoulders of men. And it is the 
 capitalist class, it must be remembered, which 
 owns the machines and processes which make 
 this surplus — not the working classes. Without 
 the machines, indeed, these would, if left to rely 
 on their own resources, " eat their heads off," 
 however great their numbers might be ; and, 
 moreover, not one in ten thousand of them could 
 invent a machine, or part of one, if they tried. 
 
 It is true that the Capitalist for the most The power of 
 
 Capital over 
 
 part exploits and skins the Inventor on whom National credit. 
 
 he is dependent for the machines and processes 
 
 by which he is enabled to add to the surplus 
 
 of wealth of the world ; and that the greatly 
 
 successful inventor, who is one in a million, may 
 
 come from any class. Still, as things are at 
 
 present, it is the capitalist class which represents 
 
 the new inventions and processes, without which 
 
 no nation can hold its own in the race for wealth ; 
 
 and hence it is that Capital, which brings to both 
 
 the machines, which in turn capture and enchain 
 
 the Powers of Nature, which in their turn, again, 
 
 give a surplus of wealth to a nation over and 
 
 above the labour spent on them ; it is Capital 
 
 that in the end, through this accumulating 
 
 surplus, gives a nation its financial credit and 
 
 status among the other nations. In other words, 
 
140 mr. lowenfeld's scheme 
 
 Capital it is its Capital— and not the number of its 
 
 inhabitants, nor the natural riches of its unde- 
 veloped soil or mines — which gives a nation the 
 power of exploiting the wealth of other nations 
 in every deal between them. For just as gold 
 is the crown and ultimate object of all hearts, 
 as being the sole final representative of wealth, 
 and so discounts all other commodities in any- 
 exchange between them ; so, too, does Capital, 
 the representative of gold, take a share off all 
 other commodities in building up the wealth of 
 nations. It can command the ownership and 
 services of every wealth-producing machine, 
 but no wealth-producing machine can be sure 
 of commanding it. 
 
 If, then, we take Mr. Schooling's estimate that 
 
 Europe's share two-thirds of the trade of the world is done by 
 
 of the world s 
 
 trade. Europe, while only one-third is done by all the 
 
 world beside — and that, too, in spite of the fact 
 that from time immemorial neither the number 
 of its inhabitants nor the potential riches either 
 of its soil or mines are a tithe of that of the rest 
 of the world — we shall not go wrong if we con- 
 clude that it is the Capital of Europe which has 
 done it, under the guidance of science, invention, 
 and knowledge applied to the arts of life. But 
 this Capital had to be accumulated by Europe 
 first ; and how this was done we have now 
 to see. 
 
MR. LOWENFELD'S SCHEME 141 
 
 In general terms we may say that it was be- conquest of 
 cause they had got the gods— the Machines, viz., '^chinery. 
 which evoke the wealth-producing Powers of 
 Nature — on their side ; for these are the big 
 battalions which in the end conquer in Trade, 
 as in War ; the mere Workers, like the opposing 
 camps of Greeks and Trojans, being " much of 
 a muchness " without their aid. It is not be- 
 cause the Eastern and Southern nations of the 
 world have been denied the wealth-producing 
 Powers of Nature which characterise its Northern 
 and Western divisions, that little Europe has 
 managed to capture two-thirds of the trade of 
 the world. On the contrary, as I have said, 
 they have been more richly endowed by Nature 
 with mines, and fruits, and fertile soils, than Reasons for 
 Europe. It is rather because men are led by monopoly of 
 their imaginations the world over, and not by the West * 
 their mere stomachs, that they will sacrifice all 
 they have above what is necessary for the mere 
 sustenance of life for what will give them those 
 symbols of distinction, honour, and prestige 
 among their fellows, which they so dearly prize ; 
 and that among rude tribes, primitive peoples, 
 and the great mass of mankind everywhere, 
 these symbols are the products of Machinery — 
 cheap gewgaws, ornaments for the person, 
 coloured calicoes, flashy jewellery, and what 
 not — turned out by the gross with the smallest 
 
142 MR, lowenfeld's scheme 
 
 expenditure of labour ; and for which whole 
 cargoes of natural products — corn, wine, figs, 
 bananas, oranges, tea, coffee, and all that 
 ministers to the bodily appetite — will be given, 
 to feed the starving, swelling millions of the 
 European slums. 
 
 On the other hand, the most God-forsaken 
 
 regions of the other continents will erect them- 
 
 „ „ . selves into wealthy States on the basis of the 
 
 How Europe has J 
 
 built up its luxuries with which they feed the ostentation 
 
 huge share % _ J 
 
 of the world's and vanities of the European rich — in one 
 geographical division, sunburnt ostrich farms, 
 or gold and diamond mines in barren ravines or 
 dried-up water-courses and rocky hillsides, in 
 another snow-covered wastes and the fur-yielding 
 animals that roam over them. And the conse- 
 quence is, that when objects of imaginative desire 
 and luxury are pitted for exchange against mere 
 bodily necessities, the nations that own the 
 former, and the machinery which turns them out, 
 as well as the nations that have a monopoly of 
 the luxuries of the rich, will take the cream in 
 every bargain between themselves and the nations 
 that produce the mere gross raw materials which 
 minister only to the bodily necessities of life. 
 And it is because Europeans have all along 
 supplied the world with the artificial products 
 which minister to the imaginations of men, 
 rather than with the food or fruit necessary 
 
MR. LOWENFELD'S SCHEME 143 
 
 for bodily sustenance, that they have got the 
 best of the bargain hi every exchange ; and 
 so have been enabled to accumulate that pre- 
 ponderating share in the capital, wealth, and 
 trade of the world on which Mr. Schooling 
 dwells. 
 
 In the Middle Ages, Venice, Florence, Genoa, 
 and the other great trading cities of Italy, 
 got it by being the middlemen through whose Trade changes 
 hands the produce both of the East and West fro^imSisevai 
 had to pass before it could find its customers ; timeB - 
 and so were able to retain the lion's share of 
 the profits for themselves. In later times, the 
 European nations in turn — Spain, Portugal, 
 Holland, and England — exploited the wealth of 
 the East and West on their own account ; 
 and by their swords made themselves not only 
 the distributing middlemen, but the owners as 
 well of a great part of the lands of the 
 East ; thus still further adding to the capital, 
 wealth, credit, and trade, of Europe as against 
 the rest of the world. In the present day. the 
 exploiting of the Eastern and Southern nations 
 by the Western and Northern is no longer 
 mainly done in their capacity as middlemen 
 taking toll, nor yet as conquerors by expro- 
 priation, but chiefly by loaning them the 
 capital back again which their trading positions 
 and swords had been the means originally of 
 
144 MR. lowenfeld's scheme 
 
 extracting from them. Now, while Europe 
 acted as middleman and took toll from the East, 
 the East always got something in return ; and 
 when she acted as conqueror, and expropriated 
 the wealth of the East, the latter got little or 
 nothing in return ; but now that she is acting 
 as capital-supplier mainly, what is likely to be 
 the result ? 
 The trade This is the question, bearing on Mr. Lowen- 
 
 future of the 
 
 East. tela s scheme, to which 1 have all along been 
 
 leading up. And the first thing that occurs to 
 one is that in being freely supplied by European 
 capital, the Eastern countries are gradually 
 being equipped on their own soil with all the 
 machinery and processes for the production, 
 transmission, and distribution of all the wealth 
 of which they are capable ; and that although 
 at first most of the profits of these concerns go to 
 the European, still, with the instruments of pro- 
 duction planted on their own soils, it needs must 
 be that sufficient of this wealth created in their 
 midst must in time filter through to themselves ; 
 and so in the end enable them to pay of! their 
 indebtedness, and own their railways, machinery, 
 and plant themselves — precisely as happened 
 with the United States of America under similar 
 circumstances. And what this means in plain 
 English is simply this — that as the rest of the 
 world is richer in the natural instruments of 
 
MR. LOWENFELD'S SCHEME 145 
 
 wealth than Europe — in corn- and fruit-lands, in Europe's 
 
 . i • i ,■ -n m prospects of 
 
 mines, etc., and in no long time will either own declining trade. 
 the artificial instruments of production in the 
 shape of machinery and processes necessary to 
 extract this wealth, or will have been taught 
 how to make these instruments themselves, it is 
 evident that in a comparatively few years, at 
 the rate at which things are now going, Europe 
 and the rest of the world will change places in the 
 relative amount of trade and wealth-production 
 with which they are credited by Mr. Schooling ; 
 and that instead of Europe doing two-thirds of 
 the trade of the world and the rest of the world 
 one-third, she will more likely do only the one- 
 third while the rest of the world takes the 
 two-thirds. 
 
 Now, Mr. Lowenfeld has in his scheme of the Geographical 
 
 Distribution of 
 
 Geographical Distribution of Capital provided Capital and 
 
 . . , . . , movement of 
 
 lor its keeping step with this steady movement trade, 
 of the balance of trade from Europe and the 
 West to the South and East, by confining his 
 investment list not only to such stocks in each 
 division of the world as are of unexceptionable 
 security, but by insisting that the permanency 
 not only of any particular investment in its own 
 geographical division, but that of any particular 
 geographical division itself, shall be only relative 
 — in the sense, that is to say, that it shall keep 
 time, as it were, to this general movement of 
 
 10 
 
146 MR. lowenfeld's scheme 
 
 wealth and trade from West to East, and be 
 altered and rearranged at intervals accordingly. 
 But the fact that the evolution is so slow and 
 its stages so well marked gives the periodical 
 changes in his investment list — changes which 
 are made neither at too long intervals nor at 
 too short ones — a "peculiar appropriateness, differ- 
 ing in this markedly from a Life Insurance Com- 
 pany, for example, which when it once takes a 
 risk has to carry it through to the end, even 
 were all its clients to die on the morrow. 
 Geographical Summing up, then, this part of Mr. Lowen- 
 SpTtKnd ° f feld's scheme dealing with the effects on a 
 yield of income. (^^^^1 Distribution of Capital of its most 
 potent and important regulator, viz., the different 
 rates of interest paid by the different Govern- 
 ment Loans of the different nations, and the 
 different yields of income that may be got from 
 investments in them according to the skill with 
 which, as on a chess-board, they are played off 
 against each other ; we may say (1) that it is 
 the difference in the yields of the Government 
 Stocks of different nations that enables him to 
 get a higher average interest, with equal practical 
 security, and greater stability, than he could 
 otherwise do ; (2) that this average yield is 
 raised still higher by the investments being 
 made, not in Government Stocks themselves, 
 but in Loans, Debentures, and Preference shares 
 
MR. LOWENFELD'S SCHEME ] / "J 147 
 
 of the different nations instead, all of which 
 pay higher rates of interest than their own 
 Government Stocks, and, being more free from 
 political and international influences, are more 
 steady and less fluctuating ; while, of course, 
 preserving all the while the same relative posi- 
 tion to each other as the different Government 
 Stocks themselves do, and thus keeping the 
 harmony of the whole unimpaired ; and (3) that 
 by permitting of periodical changes in the stocks 
 held — whether these changes are from one stock 
 to another in the same geographical division, 
 or from one geographical division to another — 
 the investment list can keep time, measure, and 
 pace with the more permanent fluctuations of 
 wealth and trade in the different divisions of 
 the world. 
 
 Turning from the part played in Mr. Lowen- The influence of 
 feld's scheme of Geographical Investment by Exchanges, 
 the rate of interest of Government Loans, and £5^™ nte » 
 their effect on all the other stocks in the same Markets - 
 country, we have now to say something on that 
 part of his scheme which deals with the influence 
 of Stock Exchanges, Trade Currents, and Money 
 Markets, all of which, although exercising in their 
 aggregate a continuous, unceasing influence on 
 the value of stocks, have, when each is taken 
 separately, a transient and intermittent influence 
 only on the changes that take place in their 
 
148 MR. lowenfeld's scheme 
 
 quotations ; each when it has exhausted itself 
 being taken up by one of the others, like that 
 torch of learning which the ancients figured as 
 being passed on without a break from hand to 
 hand continuously. I have said so much on my 
 own account in the previous chapters as to the 
 effects of Money Markets, Stock Exchanges, and 
 Trade Currents on the value of stocks, that it 
 would be a supererogation to repeat it again 
 here. It will be sufficient if I say, in general 
 fluctuations ^ terms > tnat tra ^ e currents between particular 
 countries affect the price of their stocks, inas- 
 much as a blow to the trade of one reacts on the 
 trade of the others that deal with it, and so they 
 suffer all alike. The temporary ease or strin- 
 gency of the Money Market of a particular country 
 again raises or depresses for the time being all 
 the stocks of that country ; so, too, the Stock 
 Exchange in which a particular stock is mainly 
 dealt in, whether situated at home or abroad, 
 necessarily dominates the price of that stock, 
 and for the time being elevates it above or 
 depresses it below its inherent natural worth ; 
 while an Industrial stock that does not often 
 change hands, but is far removed from the 
 haunts of Stock Exchange operators, and is 
 rarely quoted in the Stock Markets, is, if other- 
 wise sufficiently secured, freer from fluctuation, 
 and sounder fur an investment which is to be 
 
MR. LOWENFELD'S SCHEME 149 
 
 permanent, than many a gilt-edged security with 
 loftier pretensions. And I am given to under- 
 stand by those who are in the business — what I 
 otherwise should have doubted — viz., that a 
 sound stock of this kind need never want for a 
 ready purchaser. 
 
 Now, the way in which these Stock Exchange, 
 Money Market, and Trade influences override Relative 
 
 importance of 
 
 the natural and intrinsic values of stocks is known industrial 
 
 i t t- t i productivity 
 
 to no one better than to Mr. Lowenfeld ; and he and the Money 
 
 IVIarkst 
 
 has digested it into two leading maxims or 
 aphorisms which bring out his sense of its deep 
 importance. The first is, that "it is the value 
 of the money which purchases stocks that 
 varies " ; and the second is, " that it is on the 
 value of money that the international standard 
 of investments depends." He is aware, of course, 
 that a nation's industrial productivity or barren- 
 ness determines in the long run the relative 
 position which its Money Market will take among 
 the nations of the world ; but he sees equally 
 clearly that, for the comparatively limited term 
 of years during which a stock held for invest- 
 ment may be expected to run, the state of the 
 National Money Market overrides the Industrial 
 productivity of the National resources. For it 
 will be remembered that he limits his scheme 
 of investment to jealously safeguarding the 
 security of the capital invested, and confining 
 
150 mr. lowenfeld's scheme 
 
 its investment to the highest rate of interest 
 
 compatible with that (viz., 4| per cent or 
 
 Value of money 54, p er ce nt, according to the amount of it which 
 
 the primary " x 
 
 factorin can be realised at any moment when it may be 
 
 Distribution of wanted, without loss) ; and, further, that it is only 
 Bonds, Debentures, and Preference shares that 
 can fulfil these conditions of capital security 
 with the greatest possible income. And as 
 these (unlike Ordinary shares, which are mainly 
 the subject-matter for speculation on their 
 probable industrial yield) make their appeal in 
 the first instance to the Money Market for loans, 
 it is evident that he is right in making the value 
 of money the primary and immediate, if not the 
 ultimate controlling factor, in his scheme of 
 Geographical Distribution. 
 Exclusion of As for Ordinary and Deferred shares, it is one 
 
 Ordinary 
 
 shares. of his maxims that these, in a case of permanent 
 
 investment, should be eschewed altogether. But 
 if the investor is determined to have a " flutter " 
 in them on his own account, Mr. Lowcnfeld 
 hedges him round with all kinds of safeguards. 
 He tells him to " watch the history of a stock 
 and its fluctuations over a period of years " ; 
 to " avoid all stocks with a wide range of fluctua- 
 tion, except Preference shares " ; to select 
 those stocks that are little knuwn, and so are 
 not influenced by newspaper and Stock Ex- 
 change rumour " ; to see to it that the balance- 
 
MR. LOWENFELD'S SCHEME 151 
 
 sheet of the stock in question shows, what I 
 have already quoted, " three times as much 
 capital behind a stock as in front of it ; three 
 times as much earnings as the interest which 
 it has to pay on its Debentures " ; and that p oin t 3 f or the 
 " its liquid assets are greater than its current JJ^e^stor. 
 liabilities " ; that " for capital stability the 
 present value ought to be the basis of all reckon- 
 ing " ; and (for the novice) that " the yield 
 of the stock should not be calculated on the 
 cost." He points out, too, to all and sundry, 
 whether they are speculators or investors, that 
 " solid new issues never get their proper value " ; 
 and that, " irrespective of income, stocks with a 
 minimum range of fluctuation and which rarely 
 change hands are preferable." As for high rates 
 of interest, he insists that " they do not neces- 
 sarily mean insecurity, but only that most 
 failures have been connected with them " ; and 
 that " it is only in the case of loan money that a 
 high rate of interest is insecure, not in that of 
 well-grounded working concerns." Indeed, he 
 goes so far as to say that " in a country where 
 money is dear, even a first-class 6 per cent 
 Debenture is good for ordinary investment 
 purposes." 
 
 After preparing the reader with general maxims stability of the 
 like the above, and starting with the precon- Zlvld! ° f the 
 ception established by Mr. Schooling that the 
 
152 MR. lowenfeld's scheme 
 
 wealth of the world as a whole is steady, indeed 
 is gradually increasing, and that it is only that 
 of the parts which fluctuates — a preconception 
 from which Mr. Lowenfeld draws the conclusion 
 that " no set of circumstances can cause all the 
 stocks of a Geographical Distribution to show 
 a simultaneous depression below cost price " — 
 he ushers his scheme on the stage by boldly 
 applying what he calls the three " golden rules" 
 of his system of investment to the ten geo- 
 graphical regions (with their various subdivisions) 
 into which, for investment purposes, he has 
 divided up the world. 
 The first of these rules is, to put the same 
 distribution amount of capital into each of the ten geo- 
 of Capital. graphical divisions when the amount of the 
 capital to be invested reaches, say, £1,000, and 
 into fewer if the amount is less ; while if the sum 
 to be invested is a very large one, say £20,000 
 or £30,000, to put into subdivisions up to the 
 extent of twenty or more. 
 The second rule is, to confine these equally 
 investment of divided amounts, thus distributed over different 
 geographical areas, mainly to Corporation Loans, 
 Railway and Industrial Debentures, and Pre- 
 ference Shares, showing the same width of fluc- 
 tuation (and the narrower the better) over a 
 considerable number of years. This is an 
 important rule, and he hedges it round with a 
 
 the divided 
 Capital. 
 
MR. LOWENFELD'S SCHEME 153 
 
 number of special observations bearing on the 
 subject. One of them gives us the hint as to 
 why he rules out Government Stocks largely 
 from his lists ; it is, that they fluctuate more 
 violently than any other stocks, owing to the 
 freedom and ease with which they change hands, 
 as well as to their liability to become depressed 
 in every political crisis whether of a temporary 
 or a permanent nature ; and he adds, quite 
 justly, that they are also apt to remain depressed, 
 owing to their low rate of interest, even when 
 trade and enterprise are booming. And from 
 this we see the reason of a remark he makes in 
 another place, viz., that " the best Industrial 
 Debentures are, as a rule, stable compared with 
 Government Stocks." 
 
 Besides, it is a fallacy, he contends, to re- 
 quire a market as free for all your list of Good stocks 
 stocks as is the market for Government Stocks, saleable^ 8 
 inasmuch as good stocks, " as every stockbroker 
 can tell you," are always saleable. Indeed, 
 not more than a fourth of your investment 
 list need be in Government Stocks, and that 
 " only where prompt realisation for some pass- 
 ing emergency is required." And the upshot 
 of it all is, that if you keep your eye on the 
 past history of a stock, " it were better to select 
 little-known securities not influenced by news- 
 paper publicity and the consequent fluctuation 
 
154 MR. lowenfeld's scheme 
 
 of a free market." As for the rest, " it matters 
 not which Money Market of the world controls 
 a stock, so long as it pays to hold it at net cost, 
 including all charges." 
 
 As regards the width of -fluctuation that is 
 
 avera2ng C permissible among the stocks in an investment 
 list, he insists on two points ; the first is 
 " never to mix a 3 per cent fluctuation of 
 yield with a 20 per cent one," and the second, 
 " not to hold on to any stock which is already 
 too high for safety." And to mark off his own 
 Insurance scheme for the averaging of risks from 
 all others professing to have the same object, 
 he says that " by choosing a list of investments 
 in which high and low yields, wide and narrow 
 ranges of fluctuation, sound Debentures and 
 speculative Ordinary shares are all mixed to- 
 gether, you do not get a true average, in the 
 proper sense of the term, but only a false one, 
 however wide a geographical distribution you 
 make of them." 
 
 The third and last of Mr. Lowenfeld's rules for 
 investment is, that each stock in a scientifically 
 distributed list should be located in a country 
 which follows entirely distinct Trade movements 
 and influences, and is dominated by different 
 Money Markets and Stock Exchanges from 
 
 investor. * every other. This obliges the investor to keep 
 his eye, like a skilful conjurer with his balls* 
 
MR. LOWENFELD'S SCHEME 155 
 
 on many Countries, Money Markets, Stock Ex- 
 changes, and Industrial conditions, at once ; 
 on the country where the majority of the stock 
 is held, and whose Money Market, in consequence, 
 is the dominant influence in its price quotations ; 
 on the price of Government Stocks in the country 
 in which this particular stock is held, as that 
 affects all the stocks ; as well as on the balance- 
 sheets of the concern, in which can be read the 
 industrial basis for the loan if it is a private 
 concern, or the rateable value of a municipality 
 if it is a Corporation Loan. For were the in- 
 vestor to keep his eye only on the Money Market 
 which controls the stock in question, he would 
 be liable to see the property depreciate by 
 political causes over which his Money Market 
 has no control ; on the other hand, were he to 
 keep it only on the Industrial side of his invest- 
 ment, he would be apt to find it raided and 
 depressed either from the influence of a distant 
 Money Market, or from pure Stock Exchange 
 speculation on his own market, however pros- 
 perous the concern in itself might be on its 
 Industrial side. 
 
 So that if we picture Mr. Lowenfeld's scheme 
 of investment as a kind of tape measure in which The three 
 
 i v • • -,. . , . n . . maxims in 
 
 eacn division, according to his first maxim, con- Geographical 
 tains the same length, or amount, of capital as Cap?tai Utl ° n ° f 
 every other ; and, according to his second 
 
156 MR. lowenfeld's scheme 
 
 maxim, is of the same width as every other in 
 its capital security and range of fluctuation, 
 we can now, according to his third maxim, 
 represent each division as being of a different 
 colour from all the rest, inasmuch as it repre- 
 sents an entirely different Money Market, Stock 
 Exchange, or Trade influence ; these three con- 
 stituting his " golden rule," and being summed 
 up by himself in the dictum, that " safety of 
 capital is obtained by its even division over a 
 number of sound stocks identical in fluctuation, 
 and every stock held subject to an entirely 
 different Market influence." And with this 
 he ends his dissertation, in the conviction that his 
 The true scheme scheme of Geographical Distribution on the 
 Distribution of principle of Insurance is the true one, and that 
 api a * he has scientifically solved the problem with 
 
 which he set out, viz., of how to get the greatest 
 income possible from investments compatible 
 with the least range of fluctuation, and the com- 
 plete security of the capital involved. 
 
 In the smaller complications that arise he has 
 always some principle or maxim at hand with 
 which to meet them. As regards British Trustee 
 British Trustee Stocks, he says frankly that "as they are all 
 stagnaticm of ' controlled by the same Money Market, and 
 fluctuate greatly, they have not that capital 
 stability which Trust funds should possess, 
 owing to their being too much under the in- 
 
MR. LOWENFELD'S SCHEME 157 
 
 fluence of the trade stagnation or prosperity of 
 a single country." And hence if he had to make 
 a choice between a Canadian Government 
 3 per cent Stock which as a Trustee Stock follows 
 the low Money Market for loans in Britain, and 
 a Canadian Local Stock adequately secured, but 
 which follows the higher Money Market or 
 different Trade influences of Canada herself — as 
 indeed many first-class private or Corporation 
 Stocks, Canadian Railroads, Hudson's Bay, and General 
 others do — and so have a higher yield, he would i n value of 
 choose the latter for one division of his invest- money - 
 ment list, and not the former. And the 
 difference in the value of money in the two 
 countries leads him to the general observation 
 that when reading the Money Article in the news- 
 papers we should read it mainly to find out the 
 " general movement in the value of money." Or, 
 in other words, " The Money Article is a general 
 indication of the rates of interest stocks should 
 produce, and not of the fluctuations of individual 
 investments." 
 " If, for example, Japanese Government People's 
 
 m *- L spending power 
 
 Securities have risen five points, that means controls the 
 
 realisable values 
 
 that Japanese Government Docks and Water- of stocks. 
 works are likely to rise to a similar extent ; 
 or if the general rate of discount in Brazil 
 has gone back, then local investments have 
 gone up in value " ; on the ground, I pre- 
 
158 MR. lowenfeld's scheme 
 
 sume, as he elsewhere expresses it, that " the 
 spending power of the people of a country is 
 the dominating force which controls the realis- 
 able values of all stocks principally held in any 
 one country." And he instances, in this con- 
 nection, the case of the Taff Vale Railway, 
 " whose dividends steadily increased, while the 
 price of its stock declined." 
 
 So much, then, for the relative yield of differ- 
 ent stocks. As for their relative width of fluctua- 
 more&tabie 8 tion, he says that " in England few stocks are 
 than British. &tMe . but [r j^^ Germany, Holland, 
 
 Sweden, Norway, and even the United States, 
 there are many. The fluctuation of first-class 
 stocks in England ranges between twenty-five 
 and forty points, in the other countries only 
 between five and ten." This is important, and 
 personally, on this ground, I should prefer to 
 see more stocks invested in the European divi- 
 sion perhaps than Mr. Lowenfeld is disposed to 
 allow ; but it is questionable whether they 
 would not follow too closely the general Euro- 
 pean trade influence to get the advantage of 
 an Insurance average, and whether the income 
 from them would be sufficiently large, in spite 
 of their otherwise greater security, to justify 
 it. Incidentally, he remarks, apropos of the 
 effect of different Money Markets on the price 
 of stock, that a 4 per cent Debenture in 
 
MR. LOWENFELD'S SCHEME 159 
 
 England would yield 5 per cent in Africa on 
 the same security. 
 
 On the other hand, as an example of the effect 
 of different Trade movements on the price of 
 stocks, he points out that Canada and India are 
 unlike Australia (although they are all alike 
 dominated by the same British Money Market) ; 
 and that Belgium and Switzerland are also un- 
 like, although they lie so close together. 
 
 Again, as bearing on his advice to sell out 
 any stock when its price has risen too high for Causes of stocks 
 security, he says that there are two causes for a to be secure. 
 rise in stocks. The first is their improved intrinsic 
 merits : this is a legitimate cause ; but another 
 cause equally potent is when some individual 
 or group of individuals of great financial in- 
 fluence and authority announce that the future 
 of the stock is bright : this is an illegitimate 
 cause, and is the reason why many stocks go 
 up too high for security. 
 
 As for downright bad stocks, he says that internal and 
 
 u ,i i ,i i ,i in ,i external causes 
 
 the loss through them would pay the „f stock 
 National Debt in four years, in spite of the affection - 
 work given to builders and their workmen, 
 which cannot compensate to any degree for 
 the loss of the capital involved." He makes 
 also a very necessary distinction between the 
 internal causes that affect a stock and the 
 external ones : and he affirms that of all the 
 
160 MR. lowenfeld's scheme 
 
 internal causes, which consist either of com- 
 petition, mismanagement, or bad organisation 
 (and which are four times as strong as the 
 external causes in all old well-tried investments), 
 the holders of the stock get ample warning. It 
 is only in new ventures that the alterations in 
 capital safety, in management, and in dividend- 
 earning power, have a great influence on a 
 stock ; but even then, after the stock has settled 
 down, the internal influences, he repeats, again 
 prevail. 
 
 I might extend these remarks of Mr. Lowen- 
 feld indefinitely had I the space, but enough 
 will have been given to send the reader to his 
 various books on Investment themselves. But 
 I may perhaps add, before closing, that Mr. 
 DiaTribuS'of Lowenfeld asks the investors who have accepted 
 Capital. his scheme to " carry it into effect by spreading 
 
 out the map of the World before them and putting 
 a pin in at 1, London ; 2, San Francisco ; 3, 
 Tokio ; 4, Cape Town ; 5, Melbourne ; 6, Mid- 
 Atlantic (for shipping insurance, cables, etc.) ; 
 7, Europe (Italy, say) ; 8, North America ; 
 9, South America (Buenos Ayres) ; 10, Europe 
 North and South, with a pin at Berlin ; 11, 
 Central America (with the pin in the centre of 
 Mexico)." He then advises them " if the stock 
 of the Italy pin, say, is above cost price the in- 
 vestor should sell it out and put it in an Austrian 
 
 Advice to 
 converts to 
 
MR. LOWENFELD'S SCHEME 161 
 
 stock instead, if that country has credit below 
 the normal. Or if the stock of Buenos Ayres is 
 too high he should put it into that of Valparaiso, 
 Rio Janeiro, or Para. But if not, then look out 
 for a geographical division as far removed from 
 these as possible." 
 
 On the other hand, to those investors who are Advice to the 
 
 . . investors who 
 
 still afraid of risking their capital m foreign prefer home 
 countries, and will only consent to invest in their 
 own, he has two pieces of advice to give. The 
 first is that they can invest entirely in their 
 own country " (1) if they will watch the varia- 
 tions of exports and imports ; (2) the gold 
 market ; (3) the Board of Trade Returns ; and 
 (4) if they will realise their holdings during each 
 cycle of prosperity, and wait for the cycle of 
 depression to reinvest." His second piece of 
 advice is addressed to the solid investor who 
 makes the security of his capital his main object. 
 He declares that the best substitute for Geo- 
 graphical Distribution is " (1) careful choice of 
 varied local enterprises, with no two companies 
 identical in their objects or trade interests ; 
 (2) all of them as far as possible removed from 
 general trade fluctuations ; (3) where the busi- 
 ness is for the general population, and not for a 
 few chosen individuals with whom the company 
 does business." 
 
 With the above excellent advice we may now 
 
 11 
 
162 MR. lowenfeld's scheme 
 
 close our consideration of Mr. Lowenfeld's 
 scheme of investment by the Geographical Dis- 
 tribution of Capital — a scheme which I can 
 commend to the reader for its financial insight, 
 penetration, originality, and, as I believe, essen- 
 tial truth. If not absolutely complete, other 
 financial observers have now only to improve on 
 it ; but as a first and already well-tried scheme, 
 and as developing, as Professor Bramer says, 
 the " principles of a new science, Comparative 
 Trade Statistics," it is beyond all praise. 
 
 I have neither experience nor authority to 
 speak of the correctness or otherwise of its 
 statistical details, but I agree entirely with its 
 principles, and that frankly, because they run 
 in harmony with my own system of Political 
 Economy as embodied in my Wheel of Wealth. 
 
INDEX 
 
 American Corporation Stocks — 
 
 and local self-government, 64 
 Averaging, The Principle of, 128 
 
 Balance Sheets, Importance of reading, 76 
 Bank and Insurance Stocks, 24 
 Bank Rate — 
 
 effect on Insurance Companies, 30 
 
 fluctuations affect yield of Bank stock, 29 
 Bank Stock Risks, 22, 27 
 Banks — 
 
 and Insurance Companies, Relative safety of, 31 
 
 and the Law of Probabilities, 22 
 British Trustee Stocks and trade stagnation, 156 
 
 Capital — 
 
 How it is affected by Consols, 8 
 
 omnipotent, 140 
 
 Overflow in Europe, 117 
 
 Power over national credit, 139 
 
 Value of unlimited supply, 45 
 Capital, Borrowed — 
 
 Employment of, 137 
 Capital, Geographical Distribution of — 
 
 a form of insurance, 111 
 
 Advantages of, 83, 111 
 
 Advice to converts to, 160 
 
 An essential preliminary to, 10 
 
 Author of the scheme of, 123 
 
 compared with Life Insurance, 107 
 
 Definite points of principle in, 110 
 
 Equal apportionment of capital, 152 
 
 False impression of, 7, 129 
 
 Generalisations based on actual transactions, 124 
 
 Geographical divisions, 125 
 
 Greater revenue and security, 77 
 
 Grouping countries according to products, 116 
 
 Groups subdivided, 116 
 
 Investment list, 115, 130 
 
 Investments, 113, 152 
 
 Larger yield and equal security, 118 
 
 Law of averages, 122 
 
 163 
 
164 
 
 INDEX 
 
 Capital, Geographical Distribution of (continucd)- 
 
 Limit of money apportioned to Government 
 Stocks, 130 
 
 Meaning of, 5 
 
 Movement of trade, 145 
 
 Need for the scheme, 84 
 
 Object of, 16 
 
 Only existing soheme of, 120, 156 
 
 Opinions on, 9 
 
 Ordinary shares excluded, 151 
 
 Principles and maxims, 124 
 
 Problem of, 119 
 
 Problem of investment and, 106 
 
 Reasons for the scheme, 14 
 
 Rival to Insurance Company investment, 112 
 
 Safeguard in, 113 
 
 Safety of the investor, 6 
 
 secure against universal depreciation, 108 
 
 Security of Industrial basis, 117 
 
 Selected stocks and their security, 114 
 
 Selection of stocks, Extreme caution in, 131 
 
 Sir Edward Law's principles, 121 
 
 Stocks selected by the author of the scheme, 133 
 
 Success dependent on the closest analysis, 120 
 
 Three maxims of, 155 
 
 Value of money the primary factor of, 150 
 
 Yield of income, 146 
 Capitalists — 
 
 and national prosperit}', 138 
 
 and political complications, 87 
 
 bear the brunt of increased taxation, 87 
 Consols — 
 
 and loss of capital, 8 
 
 Little prospect of an appreciable rise in, 92 
 Corporation Stocks — 
 
 compared with other stocks, 53 
 
 Declining population risk, 59, 61 
 
 Gilt-edged security, 55 
 
 Government protection of, 52 
 
 in America, 64 
 
 Repayment of, 51 
 
 Risks, 56, 57, 58, 62 
 
 Security of, 51, 65 
 
 Socialism's effect on, 66 
 
 Stability of, 53 
 
 subject to political influence, 50, 62, 63 
 
 Trade migration risk, 59, 60 
 
 Yield, 54, 55 
 
 Debentures 
 which re 
 
 TR1BUTIOJ 
 
 See Capital, Geographical Distribution of 
 
 which rest on partial or complete monopolies, 70 
 Distribution, Geographical — 
 
INDEX 165 
 
 Free Trade — 
 
 and its effects, 2 
 Hamburg's gain Genoa's 
 
 Geographical Distribution of Capital — 
 See Capital, Geographical Distribution of 
 
 Government Stocks — 
 
 a magnet to other loan stocks, 81 
 
 affected by political complications, 86 
 
 as Trustee investments, 90 
 
 Causes of high rates of interest, 96 
 
 compared with Corporation Stocks, 91 
 
 compared with Industrial Debentures, 85 
 
 Fluctuations in, 84, 88, 89 
 
 Foundation of permanent stability of, 103 
 
 Hierarchy of different countries, 93 
 
 Influence over other securities, 79 
 
 Money Market and Industrial elements, 100 
 
 Money Market depletion, 90 
 
 of various countries, Security of, 134 
 
 Position in scale of natural rank, 46 
 
 Rate of interest influenced by Money 
 
 Market, 98 
 Security of, 15 
 
 subject to sudden falls in priee, 91 
 susceptible to International disturbances, 47 
 Yield, 88 
 
 Government Stocks, Foreign, 93, 94, 95 
 
 Industrial Debentures — 
 
 after a break-up sale, 74 
 
 compared with Government Stocks, 85 
 
 Safety of money invested in, 75 
 
 which have no natural rank, 74 
 Industrial Monopolies — 
 
 Advantages, 36 
 
 compared with Banks, 36 
 
 Control of the selling end, 40 
 
 natural value, 34 
 Industrial Productivity — 
 
 and the Money Market, 149 
 Industrial Status, Importance of, 100 
 Industrial Stocks a speculation, 33 
 Insurance and Bank Stocks, 24 
 Insurance Companies — 
 
 and Banks, Relative safety of, 31 
 
 and Geographical Distribution, 30 
 
 and the Law of Probabilities, 25 
 
 compared with Banks, 24 
 
 dominated by length of human life, 107 
 
 investments, Future of, 31 
 
 risks, 26, 27, 109 
 
166 INDEX 
 
 Interest — 
 
 High rate caused by money scarcity, 99 
 
 Higher rate in Japan than in England, 102 
 
 on Government Loans compared with Indus- 
 trial, 101 
 
 Permanent high rate on loans, 99 
 Investment — 
 
 All-British versus Geographically Distributed, 128 
 
 Industrial and Money Market influences on, 101 
 
 on scientific principles, Possibility of, 105 
 
 Practical scheme needed, 104 
 
 problem and Geographical Distribution, 106 
 
 security with higher yield, 104 
 Investment Lists — 
 
 and systematic averaging, 1 54 
 Investor — 
 
 Duty of the, 154 
 
 Fallacy of the simple, 81 
 
 Opportunity for the vigilant, 80 
 
 Points for the consideration of the, 151 
 Investor's — 
 
 problem of security versus yield, 16 
 
 safety under Geographical Distribution, 6 
 Investors — 
 
 in Corporation Stocks protected by Government, 52 
 
 in home securities, Advice to, 161 
 
 Joint Stock Companies — 
 Insecurity of, 34 
 
 Position in scale of natural value, 49 
 unaffected by Government disturbances, 97 
 
 Joint Stock Ordinary Shares a speculation, 75 
 
 Loans — 
 
 Money scarcity a cause of high interest on, 99 
 Permanent high rate of interest on, 99 
 
 Machinery — 
 
 Conquest of trade by, 141 
 Money — 
 
 changes its value, 19 
 
 Movement in value of, 157 
 
 scarcity a cause of high interest on loans, '.tit 
 
 stability, 18 
 Money Market — 
 
 depletion causes depression in Government 
 Stocks, 90 
 
 relation to state of trade, 89 
 Money, Ready — 
 
 Value of, 100 
 Monopolies — 
 
 and their foundation, 37 
 
 and the control of the Belling end, 38, 41 
 
 Complete and incomplete, Relative rank of, 48 
 
INDEX 167 
 
 Monopolies (continued) — 
 
 Effect on smaller rivals, 37 
 
 Treatment of rivals, 42 
 
 which run risks, 44 
 Monopolies, Complete — 
 
 A natural example, 44 
 
 Steadiness of, 35 
 Monopolies, Incomplete — 
 
 Classification of, 40 
 
 How to ascertain the natural status of, 43 
 
 less secure than Banks, 39 
 
 Natural rank of, 46 
 
 Stock rank of, 43 
 
 Value of unlimited capital to, 45 
 Monte Carlo Bank — 
 
 a money business, 20 
 
 Security of, 20 
 
 National Credit — 
 
 and existing indebtedness, 135 
 
 and natural products, 135 
 National Debt — 
 
 and the path to bankruptcy, 137 
 
 may prove to be beneficial, 136 
 
 Security for, 138 
 New Economy — 
 
 rapidly advancing, 5 
 
 versus Old Economy, 3 
 
 Old Economy — 
 
 principles, 4 
 
 versus New Economy, 3 
 Oriental Businesses and Local Powers, 62 
 
 Panics — 
 
 and their cause, 23 
 
 may be averted, 27 
 Public Conscience an unreliable asset, 86 
 
 Railway Debentures — 
 
 less secure than Corporation Stocks, 69 
 
 Natural value of, 66, 67 
 Railway Monopolies, 68 
 
 Securities continually changing their rank, 79 
 
 Stocks — 
 
 Advantages classified, 12 
 
 are always saleable if good, 153 
 
 Bank and Insurance, 17 
 
 Causes of fluctuations in, 148 
 
 Determining the security of, 115 
 
 Difference in rank of, 12 
 
 Foreign more stable than British, 158 
 
 Hierarchy of different classes of, 109 
 
168 INDEX 
 
 Stocks (continued) — 
 
 influenced by Stock and Money Market and Trade 
 
 Currents, 147 
 Insurance Companies compared with Banks, 24 
 Internal and external causes of affection, 159 
 Natural value defined, 1 1 
 
 Personal judgment necessary in selection of, 118 
 Realisable values controlled by people's spending 
 
 power, 157 
 Risks, 13, 17 
 
 which are chiefly dependent on the Money Market, 103 
 which are dependent on Industrial elements, 102 
 which rest on an Industrial basis, 71, 72 
 which rest on Industrial monopoly, 33 
 which rest on Money, 18, 20, 21, 48 
 which rise too high to be secure, 159 
 
 Trade — 
 
 changes since the mediaeval age, 143 
 
 decline in Europe predicted, 145 
 
 future of the East, 144 
 
 of the world, Europe's share of the, 140, 142 
 
 progress of the world, 126 
 
 The West's monopoly of, 141 
 
 Water Debentures — 
 Natural rank of, 73 
 
 WORLD-FlNANCER 
 
 Business of the, 94 
 World's Wealth Stability, 151 
 
 Yield — 
 
 differentiation, its causes, 132 
 
 of long- and short-time investments, 28 
 
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 UNIVERSITY OF CALIFORNIA LIBRARY 
 
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