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How far is the present price of Consols due to special and transitory causes, irrespective of the Government credit, and at what price could a large amount of the stock be issued if a great emergency should arise ?

A QUESTION like what is here proposed is obviously rather a speculative one. No one can tell beforehand what the circumstances of a great emergency, in which new borrowing by the English Government may become necessary, will be. We can conceive of a possibility such as the sudden outbreak of war with a great military power and the defeat of the English fleet by such power. In the case of such an emergency there will perhaps be no price or regular market for securities at all. We have also to consider that the general level of the rates of interest changes from time to time; and possibly in the next few years the general level for first-class securities, instead of being at a point for 2 per cent. stocks between 90 and 100, exclusive of Consols themselves, which are about 110, might be such that the general level of even 3 per cent. stocks would be under what 24's now are. It is conceived, however, that the discussion of a question like the above can proceed upon two assumptions—the first, that there is a great emergency, but stopping short of a great calamity and disaster such as one that would threaten the very existence of the British Empire itself; and second, that the rate of interest

1 This paper was prepared for the purpose of a discussion on the question stated early in June. Prices have changed a little since then, not only for Consols but for other securities. But it appears best to leave all figures as they stand, and not to attempt bringing the paper up to date.-R. G. No. 35.–VOL IX.


before the emergency comes about has not changed from the present level, apart from the usual oscillations between times of good and bad credit. Such a discussion may bring up interesting points as to the conditions of national credit, and the use of a sinking fund for the redemption of debt, or for the provision in some other way of a reserve against emergencies, by a Government in the position of that of the United Kingdom.

The high price of Consols at the present time naturally suggests that in time of stress the rate at which new loans could be raised would be correspondingly high. The rate would be less of course than the present, because any new issue tends to lower the price for the time of existing issues, and still more a new issue in circumstances like those suggested, but the rate would still be high. It is the assumption that the rate would be correspondingly high, which I propose to dispute. On the contrary, the market for Consols for some years has been an artificial one. When it becomes a natural market again, as it must do when large new issues take place, and when practically a new market would have to be found, the price would be considerably lower than it is now.

Passing over for the moment the fact of the artificial character of the market for Consols at the present time, there are plenty of precedents to show that if the market were natural the price will probably not fall very much at first in the circumstances described. In the Franco-German war in 1870 the drop in French 3 per

cents, on the declaration of war was from 73 to 66. A fortnight before the declaration of war in this case everything was peaceful, and there was no sign whatsoever of any such outbreak being at hand. Consequently, the price after the declaration of war and the price a fortnight before measure the difference caused by the war itself, and by the apprehensions immediately excited as to what new issues would be. The event was not discounted beforehand. This difference, then, was from 73 to 66, or about 10 per cent. In the case of Germany the fall in Government stocks was even greater; but that is hardly a good precedent, on account of the small amount of the stocks themselves, and the absence of a first-class market for securities at that time in Germany. The fall in other stocks at the same time, especially the fall in the weaker foreign stocks, such as Italian, was much greater than what has been stated, partly owing to the suddenness of the panic which broke out on the Paris Bourse and on the London Stock Exchange; but in such emergencies, for obvious reasons, the change in the value of Stock Exchange securities may be greatest, not in the securities of the Governments themselves who are directly concerned, but in those securities in which at the time there happens to be most speculation and which happen to be weakly held. In the first-class securities of the Governments themselves, the change is much less, and the case of what happened in France when the war of 1870 broke out is accordingly very much to the point. Similarly at the time of the Penjdeh incident, when there was great apprehension of an immediate war between this country and Russia, the drop in Consols in one day was about five points, or more than 5 per cent. At the time of the recent Fashoda incident, threatening as matters looked for a few days, the drop in Consols was even less, and was very quickly recovered.

There is no reason in substance, if we think of the matter, why the fall in such a case should be very great, assuming all the present prices to be natural prices. Apart from panic the appearance of great States as borrowers for a few hundred millions is not calculated really to disturb the markets very much, as these issues to a large extent would do no more than absorb new savings which now go into all sorts of other new issues. I should say, however, that in the event of an actual outbreak of war between this country and one or two great powers such as France, Germany, and Russia, the commotion at first would probably be somewhat greater than anything that was indicated even by what happened in France at the time of the Franco-German war. At that time all the markets were steadied by the neutrality of England, in which lay far and away the biggest market for securities at the time. A war in which England would itself be engaged would be one in which the same equanimity could not prevail in the general markets for securities, because it is the country of the chief market which would be concerned.

I should be inclined to assume, then, following the precedent of 1870, that the outbreak of a great war in which England itself would be engaged, would depress the price of first-class securities even more than the 10 per cent. which was the measure of the difference to France at the beginning of its war with Germany. The difference perhaps would be not less than about 15 per cent.

In support of the latter view it may be pointed out that as the war between France and Germany progressed, and indicated a greater danger for France than had been at first anticipated, the 3 per cents. quickly fell to the price of 53, which was the price just after Sedan and the beginning of the Siege of Paris. Just for the reason that there would be no outside market to support. prices, such as there was in England in 1870 when the FrancoGerman War broke out, any great calamity happening to England must have a greater effect on the market for English stocks than the calamities which happened to France in 1870 had upon French stocks.

On the outbreak of war, then, between England and other countries, there is fair reason to expect in this view that the price of first-class securities all round would fall something like 15 per cent.; and my special contention now is that in English Government securities in particular, owing to the market at the present time being artificial, the fall would probably be greater. The artificial premium in fact would disappear, and then the English Government securities would share in the general fall which the outbreak of war occasions.

Before showing in detail the reasons for thinking that at. present the price of English Government securities is artificial, it will be expedient to discuss generally what are the conditions of a natural market for securities of the best kind ; that is, a firstrate market.

These conditions appear to be as follows: (1) There must. be a large quantity of the security itself; the security, in fact, must be large enough for many people to be interested in it, and for large dealings to take place. (2) There must also be a large quantity of the security relatively to the general business of the market. It is a help to such a security if it is the leading security in the market, because in that character it attracts a great deal of speculative interest, and speculative dealings take place accordingly in that security almost to the exclusion of others. It was noticed at the time when English Government securities were divided into two large classes, one Consols and the other New and Reduced, that although these two stocks were identical in every respect in their conditions, yet the fact of the speculative dealings being in Consols permanently raised the price about a half to 1 per cent. above that of the New and Reduced stock, which was identical in every respect except that of being called by the same name. (3) There must be a large quantity of the security in the hands of dealers and other holders about the market who study the security and are always ready to buy and sell. This last condition almost follows of necessity from the other two; in the case of the leading security in any market, it. could not be leading unless a considerable amount of it was held

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

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