The Bank of England discount rate remained for a period of two years and four months at the exceptionally low figure of 2 per cent; and the market rate for temporary advances on first-class securities was still lower. This state of affairs generated an artificial condition in the money market. Speculators bought large blocks of gilt-edged securities on credit, and were able to make a profit as long as the low rates of interest on advances continued. The rate of interest on Consols at the price paid by them was, say 2 1/2 per cent. As long as they could borrow the price from banks and other financial institutions at I 3/4 per cent there was a clear profit of £ per cent per annum on the transaction. Whether under any circumstances this profit was sufficient to cover the risk of ultimate loss is open to doubt; but as there was a general impression at the time that the prevalent cheapness of money was likely to continue, speculators were, I presume, prepared to run that risk. It is right to mention that the same form of speculation was not confined to Consols. Numerous gilt-edged securities were bought in the same way, with the result that the prices of these also mounted higher and higher.

Other circumstances helped to swell the price in the case of Consols. As it gives the highest form of security it shared to a larger proportionate extent than others in the increased demand, but the supply was annually being reduced by considerable sums, in consequence of the action of the Government in applying the Government savings in the purchase of Consols. The combined result of these elements was, as I have stated, that in 1896 the price touched 113 7/8.

The height of the maximum price has made the fall to the minimum all the more striking. To a certain extent it has been caused by the alteration in the rate of interest from 2 3/4 to 2 1/2 per cent, which took effect in 1903; for although in 1896 it should have been well understood that the reduction in the rate was to take place, yet doubtless many holders would calculate a return at the rate then current without giving effect to the prospective reduction; but unquestionably the most effective cause has been the destruction of capital and the increase of national indebtedness in the South African war.

The National Debt, including funded and unfunded debt, amounted at 31st March 1903 to

£798,349,000

At 31st March 1899, before the commencement of the war, it amounted to ...

635,040,000

Increase in the four years ....

£163,309,000

In the interval new issues of Consols were made amounting to ....

£92,000,000

A War Loan was created amounting to

30,000,000

Terminable Annuities were increased by

19,317,000

And the other liabilities of the nation were increased by

57,092,000

£198,409,000

On the other hand Consols were purchased by Government to the amount of

35,100,000

Increase in the four years, as before . .

£163,309,000

Now all this money had to be found. You will observe that the new issues of Consols and of the War Loan amounted to £122,000,000. With such a large addition to the supply of Government securities it was inevitable that the price should fall.

The reduction has undoubtedly been accentuated by the fact that financiers took too sanguine a view of the money market at the close of the war. When the Government called for money there was apparently no difficulty in finding it, and each new loan was subscribed for over and over again. The last issue of Consols was made in April 1902, when 16 millions were offered to the public for subscription at 93 1/2. The amount applied for exceeded 300 millions. Now, 300 millions is a large sum, even for a wealthy country like Great Britain and Ireland; and such a result might have led to the impression that there was a superabundance of money in the country waiting for investment in securities like Consols. It might also have been thought that the price should have risen permanently, seeing that the demand was nearly twenty times as great as the supply. It was undoubtedly the expectation that the price of Consols would rise; and if such a large amount of money had been actually free for investment, it would in all probability have had that effect. But because the subscription to the new issue amounted to 300 millions it does not necessarily follow that there were subscribers who in the aggregate really wished to have 300 millions allotted to them, or who could have paid for that sum if their subscriptions had been allotted in full. In fact, in the first place, the bond fide investors knew that the issue would be a popular one, and that in order to obtain the allotment they desired they would have to subscribe for a much larger sum; and in the second, speculators who had no desire to invest in Consols applied for large amounts in order to make a little profit out of the issue by selling to those who were disappointed.

This gives me an opportunity of explaining a common financial practice in connection with new issues of popular stocks, - not only of Consols, but of all kinds, - a practice which I mention merely for the purpose of pointing out its objectionable features.

When a government or municipality or company issues a prospectus for the purpose of raising share or debenture capital, and speculators are of opinion that the investment will be so desirable in the eyes of the public that the amount required will be largely over-subscribed, they reason with themselves that many of the applicants who do not receive the full amount for which they apply will be ready to buy on the Stock Exchange at an enhanced price the stock they desire; and these speculators (who are called in Stock Exchange slang "Stags" or "Premium - Hunters"), though they do not wish to hold the stock, apply for a considerable amount in the hope that a portion may be allotted to them, and that they may sell that portion at a premium to those who really wish the stock. An example of the process may be taken from the issue of Consols to which I have referred. It was, as I have mentioned, applied for nearly twenty times over, and although such an overwhelming amount of applications was not expected, it was known that it would be very much over-subscribed.