In the previous lecture I dealt with the British funds. The next classifications are those of "Corporation and County Stocks in the United Kingdom "; "Colonial and Provincial Government Securities"; and "Corporation Stocks - Colonial and Foreign." I purpose, however, in the meantime to pass these over, and to take up the list of "Foreign Government Stocks, Bonds, etc."

It is true that this class is not so likely to come under your notice in future as colonial government or home municipal securities; but there are some points in connection with foreign government securities to which, before going farther, I would like to direct your attention.

In the first place, there is the question of currency. It may be given as a general rule that bonds payable in silver currency should be avoided on account of the fluctuating value of silver. The only silver security which, as far as I know, should be excepted from this general rule is the rupee obligations of the Indian Government. I have already explained the method by which in that case fixity of value is secured; but in countries where the value of the silver coinage bears no fixed relation to that of gold the risk of a fall in silver is too great to be taken by the ordinary investor.

In 1893 the average price of silver was 35 5/8 pence per ounce, and in 1902 it was 24 1/8 pence per ounce. You may perhaps say that it has fallen so low that it cannot fall lower; but this prediction has been made so often, and has been so often falsified, that the only real limit to the price is the sum at which silver can be produced.

The next point with reference to bonds payable in a foreign coinage which I wish to bring under your notice is that of the rate of exchange. As bonds payable in silver are unsuitable for investment it is not necessary to discuss the exchange value of silver, and I propose to limit our inquiry to bonds payable in gold: for the exchange value of gold between the different countries has also a bearing on the value. The fluctuations are within narrow limits and are small compared with those in the value of silver, which, as you have seen, has fallen by one-third in ten years; but they are of sufficient importance to be taken into account. They arise, however, from the course of trade between the different countries and not from the value of gold, which practically does not vary.

The coinage of this country is fixed on the basis that 20 lb. of gold are coined into 934 1/2 sovereigns, so that each sovereign contains 123.27 grains of gold. The gold, however, in a sovereign is not pure, two twenty-fourths being alloy, or in other words the sovereign is eleven-twelfths pure. An ounce of standard gold is therefore worth £3, 17s. l0 1/2d. and an ounce of pure gold £4, 4s. 11 1/2d.

The standard of gold in foreign countries is different, the alloy consisting of one-tenth instead of one-twelfth as in this country. The German gold coin, value 10 marks, contains 61.4 grains of gold, and making allowance for the difference in the standard, the sovereign is equal to 20.45 marks, which is what one may call the par of exchange on Germany. The United States dollar contains 25.8 grains of gold; the French 10-franc piece 49.78 grains; and the Danish 10-kroner piece 69.14 grains. Making the same allowance for the difference in the standard, the par value of the sovereign in each of these countries is: United States, 4.86 dollars; France, 25.22 francs; and Denmark, 18.16 kroner. The above values are, however, merely the par values, which fluctuate according to various causes, of which probably the state of trade with the country in question is the most important. Assuming that other elements do not interfere, then if the aggregate amount of the sums we are sending to France is equal to the aggregate amount that France is sending to us, the rate of exchange will remain at par; but when the amount we have to remit there is greater than the French liability to us, the rate of exchange - that is, the value of our sovereign - falls; and when the amount of our remittances is less the rate of exchange rises.

A more important point, however, than these fluctuations in exchange - which, as I have stated, are generally kept within comparatively narrow limits, and which, taking one year with another, neutralise each other - is the Stock Exchange practice by which the quotation of foreign moneys is calculated not at the actual rate of exchange, but at the nearest round figure. Take, for instance, a German security for 20,000 marks. The Stock Exchange values the mark at 20 to the £1 or Is. each; and you would therefore imagine that a security amounting to 20,000 shillings would be equivalent to £1000; but, as I have mentioned, the value of the mark is fractionally less. The value varies with the rate of exchange on Germany from 20.37 to 20.53; but taking it at the figure on 28th December - namely 20.43 1/2 to the £1, 20,000 marks would be worth only £978, 14s.; and consequently if the purchase was made at par you would pay, if the sale is carried out through a Stock Exchange in this country, £1000 for what really only amounted to £978, 14s. If the rate of interest on the bond were 4 per cent you would be entitled to 800 marks per annum, and when you came to cash your coupons you would find that instead of getting 4 per cent on £1000, or £40, you would only be paid 4 per cent on £978, or about £39.