THE INVESTMENT OF SURPLUS REVENUE AND THE SAVINGS BANKS FUNDS.

In a previous article1 dealing with the difficulties which have arisen in connection with the investment of the Savings Banks Funds and the reduction of the National Debt, I endeavoured to show that the time had come for the Government to purchase home stocks, other than their own, in order to maintain the latter at a reasonable price and so avoid the waste at present incurred in redeeming debt. There is, however, little benefit to be derived from the discussion of a principle of action if its practicability cannot be demonstrated. I shall endeavour accordingly, assuming such a Board of Investment as is referred to in the previous essay to be actually constituted, to discover the nature of the task set before it, the difficulties that would arise, and the best means of grappling with them. It will then be possible to go more fully into the wider financial aspect of the problem than could be done previously to a definite statement of the exact methods to be employed in dealing with it.

The chief impediments to the production of a satisfactory working plan are due to the existence of so immense a variety of choice of investments and the danger of admitting, if not actual corrupt practices, at least the suspicion of such into our financial system. There is a close connection between these two matters. For, if no limit is to be placed to the number of objects to be chosen from, then, since those persons on whom the task of selection devolves could not possibly know the merits of more than a small fraction of the competing stocks, and even in regard to this limited number would have no guiding principle by means of which to make comparisons, no satisfactory reason could be given for any particular choice. The assurance that each decision was made solely from considerations of the public good would be

1 ECONOMIC JOURNAL, September, 1896.

wanting. No man of integrity who united therewith the necessary degree of intelligence would be anxious to join a board occupying so invidious a position. A body possessing an unlimited power of dealing in stocks and shares must eventually include amongst its members some in whom the predatory instinct is uppermost, for where the carrion is thither will the vultures flock. It would appear to follow, therefore, that, before any feasible scheme for eliminating the danger of corruption can be applied, it will be necessary to reduce the field of selection of investments to manageable proportions. It is proposed accordingly to make a primary selection of a class of stocks which, whilst of sufficient extent to allow large transactions to be carried on without prices being materially affected, will yet possess the homogeneity necessary to permit of an easy comparison between the individual stocks composing it. This means, practically, that a decision must be made between investing in corporation stocks and purchasing railway shares.

If a sufficient field can be found without having recourse to corporation loans, the encouragement to borrow which would follow from an increased competition to supply their wants should not be held out to municipalities. As it is, they are already too prone to meet their expenses by means of loans. This phase of finance is only in its infancy as yet; and the great fascination of borrowing has ever lain in the smooth way it provides at the beginning of the journey. That this smoothness is only to be procured by depositing the obstacles in a cumulative fashion further along the route is so obvious a truth, when applied to individual borrowing, that its statement seems superfluous. But when for individuals we substitute corporations or states, and instead of hundreds of pounds millions are in question, the popular notion appears to be that the familiar maxims of experience no longer apply, and that we then enter on the domain of an occult science. Now, the only knowledge we can have of large masses of men and of the conditions affecting their material prosperity must be obtained by inference from the information we possess of the limited number that actually come within our ken. We are able to postulate the general conditions in this smaller sphere under which borrowing will be attended with good or evil to the borrower. We may observe an individual or a business firm borrowing extensively, without present inconvenience and with apparently good results, and still be in entire ignorance of the probability of a successful or a disastrous issue. When, however, we have knowledge of the main principles governing the borrow

ing, we are in a better position to forecast the ultimate results; because we can always carry the mind back to the history of similar cases that have run their full course. But as regards municipal loans, we have not yet had sufficient experience of the system to form a safe judgment as to what its results will be in the long run.

Expenditure is provided for by these means for purposes which are not only strongly objected to by a minority at present, but may be altogether contrary to the desires of a majority of future ratepayers, to whom part of the burden is being transferred without the possibility of their being consulted. Even then it might be justified if the intention were in all cases to exact a fair price for benefits conveyed to the future. But it is not in human nature for the seller to refrain from endeavouring to obtain the best of a bargain where he makes his own price, acceptance of which is compulsory on the part of the buyer. There is not only the general tendency of any body of ratepayers to shirk present payment; but there is also the desire of the sect holding power for the time being to gain as much credit as possible for work performed, whilst leaving the expense as a future burden to be distributed on an average equally between itself and its rival. This is the main cause of unnecessary resort to loans, and we are not without the means of estimating its future power for evil. For from the self-same root springs the reluctance to liquidate liabilities already incurred; and the history of our National Debt during times of peace furnishes a remarkable object-lesson of the strength of this sentiment. It should also be borne in mind that Acts of Parliament establishing compulsory sinking funds are somewhat delusive checks to the increase of municipal debts, so long as they do not prevent the raising of progressively larger loans; and this they cannot do.

Apart from the danger of increasing debt generally, it is too readily assumed, by those who support this method of municipal finance, that the present rate of industrial progress will be maintained in the future, and that there will be no great dislocations of trade and prosperity, such as have so frequently occurred in past times and such as are not unlikely to be occasioned in the future by the increased cost of living in towns which have overborrowed.

Attention is not drawn to these considerations from any desire to disparage such stocks, but in order to show that a participation by the Government in lending to corporations might be harmful rather than beneficial to the community. It is the

more important that these points should be carefully considered in that the evils, from their nature, would not become manifest perhaps for many years, and it would then have become. exceedingly difficult to retrace our steps. The local debt of the country forms a more threatening phenomenon than does the imperial; and it is open to grave doubt whether a convenience gained in dealing with the latter can justify encouragement of the former.

Railways, on the other hand, besides being free from any of the above objections, possess many advantages which we should look for in vain in any other class of stocks. The enormous amount of capital they represent, the extent to which they are already interfered with by Parliament, their quasi-national character and the desirability of having the public interests represented on their boards, point them out as the fittest undertakings for our purpose. The question whether the Government should purchase and control the railway system of the country has been much debated in times past. The principal objects which those who have argued for their purchase have had in view would be attained were the Government to become an important shareholder; whilst the objection, fatal in the absence of extreme urgency, of making so heavy an addition to the functions of Government as the control of the railways would entail, would be obviated. But let it be understood that there is no intention of ultimately purchasing the railways right out, or even of acquiring a majority of votes in their management. That is an altogether different matter, in regard to which the prudent course would appear to be to await the result of the numerous experiments of the kind at present in progress in other countries—experiments, the results of which have so far been far from encouraging.

There is a prevalent opinion that the money of the Savings Bank depositor is safer when invested as at present than it would be were the Government to use it in the purchase of any other securities. It is, indeed, true that for individuals or private bodies no better security than consols can be obtained. The reason is, however, that their money is lent to Government; and this is the only reason. Practically they hold a mortgage on the taxation of the country; and their position remains unchanged, no matter to what purpose the money is devoted by the Government, so long as the credit of the latter is not endangered. There would appear to be a sort of magic to many minds in the word. "consols." But what does their possession mean? Simply that the holder's name is inscribed in the books of the Bank of

England as creditor for a certain sum in respect of an advance made to the Government; and beyond this he does not look and does not require to look. The sum may represent part of what has been destroyed by war, or it may be considered as a portion of the Suez Canal. This does not concern the lender; and neither would it concern him if it represented part of our railway system.

It cannot be too clearly pointed out that a board appointed by, and empowered to pledge the credit of, the Government occupies an essentially different position from that of ordinary trustees. The latter are placed under certain limitations by the Trust Investment Act; an Act which assumes that the trustee's personal security is not to be relied upon, and accordingly points out the various stocks in which trust money must be invested. In the case before us, however, the security lies in the trustees, that is to say, the nation; and this circumstance of itself constitutes a higher form of guarantee than any restrictions as to the manner of dealing with trust funds can furnish. Given, then, the promise of the Government to repay in full, it may be left to a great extent free to choose its own methods of laying out the money lent to the best possible advantage. The sole interest of the savings bank depositor would then be to see that the Government did not act in the matter so as to endanger its power of prompt repayment; and this is a contingency so remote that we may consider the depositor, as such, entirely unaffected by the proposition.

The more general interest in the soundness and profitableness of the investments would not extend to each individual act of the board, but only to the probable and actual outcome of its policy in its entirety. There would, accordingly, appear to be no valid objection to investing in any particular variety of railway shares; and less disturbance of the market would be involved if " Ordinary stocks were taken up in their due proportion. We are not under the obligation to avoid occasional losses against which an at least equally probable series of gains may be set, when we have so strong a presumption, from a long experience, that the railways as a whole form a safe and profitable investment. The investments should as far as possible represent an actual share of the railways if the scheme is to work without friction; and difficulties must inevitably arise if, by Government action, stocks having certain preferential conditions attaching to them are unduly raised in price. Whilst the effect of investments covering every variety of railway stock could, from the greater simplicity of action involved, be approximately gauged, it would be impossible