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from time to time by dealers, both those persons known as dealers in the market itself and others who are about the market, and are technically not known as dealers, but who are, in fact, frequently ready to buy and to sell. It is necessary, however, to state the point separately when large masses of securities have come to be in existence without any speculative dealing taking place in them. It may be possible to use the average prices of such securities from time to time to show the general level of interest which prevails; but experience has shown that no such average, however ascertained, can be taken as a real test of market price in the same way that the price of a security fulfilling all the conditions above stated can be taken. In the latter case the market price is a safe guide; in no other case can it be taken as a complete guide, especially as regards any particular stock, when a considerable change is about to occur in the quantity of the stock itself or in the general conditions of the market. Without such a guide, an enormous addition to the supply of any stock implies, in fact, the making of a new market, for which new customers and operators have to be found.
Formerly, and until quite recent years, the above were especially the conditions of the market for Consols. English Government securities in the early years of the century were of very great amount- £900,000,000 sterling after the close of the great war in 1815. They were also almost the whole market for securities at the time, occupying, at any rate, not merely a preeminent but a predominant position. The funds were then something sui generis, spoken of in contrast with land, houses, and other investments not on the Stock Exchange. Even a quarter of a century ago Consols still occupied a leading place. The debt was then still £800,000,000, and the funded debt alone about £740,000,000. No doubt even then Consols were beginning to be thrust aside by other great markets,—the English railway market, the market for American Government and other securities, the market for various foreign loans (Turkish, Egyptian, Italian, Russian, and others, including for a time French Government securities), and other miscellaneous markets gradually growing in importance. Still, Consols occupied a pre-eminent if not a predominant position, and they were the leading market. They still complied with all the conditions of a first-class market.
But in the last quarter of a century, and especially within the last few years, the position has been entirely changed.
1. The Debt is still large, being now about £630,000,000, or
£670,000,000 if we include a stock which has been separated, called the Local Loans Stock ; but the debts of other Governments have come to exceed or to approach the English amount. The Government Debt of France, for instance, is £1,100,000,000, a sum greatly in excess of the present English Debt. Then we have an Austro-Hungarian Debt of nearly £600,000,000 ; Italian, £520,000,000; Russian, £700,000,000; while there are Debts of £100,000,00 and £200,000,000 owing by quite a number of States, for the most part incurred in comparatively recent years. The English Debt accordingly does not hold the place it did in the general markets for securities, and the amount of foreign issues quoted on the London Stock Exchange alone amounts to about £2,000,000,000.
2. The proportion of the Debt itself to the total securities dealt in has enormously diminished, partly, as has been seen, by the redemption of the Debt, though this redemption, while important with reference to the amount of the Debt, does not seem to be of importance as compared with the growth of other securities, which is the main cause of the change in proportion between the English Debt and those other securities. This change in proportion has already been indicated by the facts stated as to foreign Government Debts and issues. But a fuller statement may be useful. Whereas sixty or seventy years ago the English Debt amounted to about one-third or one-fourth of the whole capital of the community, it is now perhaps no more than one-twentieth. Whereas formerly it was almost the sole Stock Exchange security, it is now less than one-tenth of the securities quoted on the London Stock Exchange alone. The exact figure of such stocks quoted in the official list of the London Stock Exchange at 31st December, 1898, is stated to be £7,609,000,000, of which, as already mentioned, about £2,000,000,000 are foreign Government issues. In addition, the markets for securities all over the world (in the United States, in Germany, in France, in Austria, in Italy, in Russia, and in our Australian Colonies and South Africa) have increased in even greater proportion; and as they all form practically one market, the relative importance of Consols has greatly diminished. Many securities are dealt in in more markets than one, especially Government securities; but making all deductions for such double entries, one can hardly be wrong in estimating that the figure above stated for issues dealt in on the London Stock Exchange would at least have to be doubled if we were to include the issues upon all the different markets throughout the world. Of this vast mass, English
Government securities are clearly a very small percentage indeed.
3. While the mass of the English Government Debt with reference to other securities has thus been diminishing, it is also to be noticed that the amount in the hands of the public has diminished even more than the amount of the Debt itself, and this diminution has been very marked in recent years. This is chiefly the consequence of the investment of savings bank money in Government stocks. The total amount of such savings bank money is now about £180,000,000, all of which must be invested in the English Government Debt, while other amounts of stock are held by other departments of the Government. It would seem that admitting the amount of the English Government Debt to be £630,000,000, or £670,000,000 including the Local Loans Stock, nearly the whole of it in excess of £400,000,000 is held by the National Debt Commissioners for the savings banks or by other Government departments. The small amount which can be dealt in is shown in another way. The amount of the leading stock, Consols, actually quoted in the Stock Exchange official list is £522,000,000 ; and if we allow that some part of this amount is held by the savings banks and other Government departments, though their holdings, of course, are not exclusively in Consols, we can easily see that the amount of Consols themselves in the hands of the public is probably not much more than £400,000,000.1 When it is considered, moreover, that the greater part of this sum is locked up, being held by trustees and other holders who are not in a position to sell, or by banks who are not so limited, but who prefer for various reasons to invest in Consols or keep a portion of the reserve in Consols, and who never sell, it can be quite well understood that the amount of the stock available for actual market purposes is so small as to take from it not merely the predominance but the pre-eminence it once had among securities dealt in on the Stock Exchange.
4. What is equally undoubted is that the stock in the hands of dealers, technically or practically so, has so greatly diminished that now the markets for Consols cannot properly be called a great leading market at all. There is no longer a class of large holders interested in the security constantly ready to buy and sell, and consequently in Consols there is no longer that sort of market which has been described above as a free and natural first-rate market on the Stock Exchange. I am assured that as a matter
This is quite confirmed by the last returns as to the holding of Government securities by the different departments of the Government.
of fact the number of capitalists constituting the Consol market, and able to engage in large business, has conspicuously diminished in the last twenty years, till now it is quite obvious that the market is insignificant, to a degree, compared with other markets on the Stock Exchange.
5. Theincrease of savings bank money has taken place very largely since 1895, when the annual addition to the deposits in the savings banks from being about £4,000,000 to £5,000,000 suddenly went up to over £10,000,000. And this change is coincident with a change in the relative prices of Consols and the leading debenture stocks of railways, apparently indicating that Consols during the last two or three years have been subject to especial influences. A few years ago the 3 per cent. Debenture Stock of the London and North-Western Railway stood at 124, while Consols were at 114. Now the 3 per cent. Debenture Stocks of the London and North-Western Railway are at 111, showing a loss of 13 points, while Consols are about 110, showing a loss of four points only. Consols have thus been sustained by a cause not applicable to first-rate securities generally, and the explanation, no doubt, is the application of the savings bank money to investment in Consols.
As the whole result, we may say that Consols during the last quarter of a century, and especially during the last few years, have lost the characteristics of a first-rate market for securities. They are of less amount in themselves than they were; for various reasons the whole amount is not upon the market at all ; and now the market is so small that there is no free dealing in them, such as is necessary for a first-class market. There is, in fact, what one may call a corner in Consols, and as in all corners, the present price is not a real indication of what the market would be when natural conditions are restored.
In the circumstances we may expect, then, that if there are large new issues, this will so alter the general condition of Consols that the premium due to what we may call the present corner must disappear. That premium would seem to be from 5 to 10 per cent. in amount, which may be considered an extra premium not indicating any special credit which the English Government has, but merely the special conditions which have made Consols scarce; when the stocks become abundant again all this premium will disappear, and the price of large new issues will be determined by the circumstances of the issue and the general state of credit. The English Government will still hold a
premier position, but it would not be more than a shade better than other first-class borrowers. In the event of a first-class war, in fact, English Government securities stand to lose not merely the 15 per cent. which is likely to occur in all first-class securities, but the extra premium of 5 or 70 per cent, which has come about in consequence of the corner in Consols.
This being the position, what may be considered, apart from Consols, the general level of credit at the present time? I have to submit the following short table, showing the prices of the leading first-class securities :French 3 per cents...............
......... 101 German United States 4 per cents......
130, equal to 3 per cent.
at 98 Russian
100, equal to 3 per cent.
111, equal to 24 per cent.
at 921 Great Western 21 per cent. Debenture Stock ...... 92
From these figures we may consider that the general level of credit at the present time is represented by the price of the best 21 per cent. Railway Debenture Stocks, viz., 92, or, at most, something intermediate between that and the 2 per cent. stocks of the London County Council, or of the Indian Government, viz., 94 or 95. An easy calculation would thus show that the probable price of the best new issues at 21 per cent. in the event of a great war, allowing for a 15 per cent. fall, will be something a little over 80, or, say, 85; the corresponding price of the 3 per cent. issue would be over par, but there would, of course, be special difficulties in connection with an issue of stock over par. These would also be about the prices, I believe, at which the English Government could borrow, assuming that the present extra premium on Consols due to artificial causes is 5 or 10 per cent. A reduction of 10 per cent. from the present price of Consols would bring them down to about par, and from that a fall of 15 per cent. would give the price of 85. A good deal will, of course, depend upon the exact amount of the present artificial premium on Consols. But whatever we take it to be, some allowance must be made practically for the existence of such a premium when business comes to be done.