Movements Of The Price Of Consols In Recent Times Considered

The recent course of Consols which has confused many minds, and has frequently been thoughtlessly accepted as a sign of decaying national credit, may be completely assigned to ascertained causes.

Premature Reduction Of The Rate Of Interest From 3 To 2½ Per Cent

The reduction of the rate upon Consols a few years ago from 3 to 2½ per cent has been regarded by competent financial authorities as a premature act. All vital changes demand a suitable environment and period for their sound and needlessly dislocating introduction. When the abrogation of the 3 per cent stock was made other nations followed suit by the issue of their loans at a reduced rate of interest, and the position was consequently the more pronounced by the less productive character of foreign markets of securities to British investors. A well-known financier recently estimated that, as the net result, the nation had lost more through this diminution in the rate on foreign investments than it had gained by the relief from the ½ per cent. But as an index of national credit, let us make a brief calculation, and for this purpose of comparison we regard Consols as perpetual annuities without the complication of redemption. When Consols stood at 3 per cent and the price was 103, a sum in proportion will show that the return per cent was £2 18s. 3d. Now to obtain the same rate of return when the stock carries interest at 2½ per cent a similar calculation brings out a price of 85 to 86: so that 85 to 86 (or,more accurately, 85 4/8) at 2½ is equivalent in standing to 103 at 3.

A Nation's Credit Not To Be Measured By The Return Afforded By Its Principal Security

The national credit is not in want of repair; but the notion itself of measuring a nation's credit by the mere return afforded by its principal security is quite irrelevant. Its credit resides in its material resources; the enterprising and skilful character of its people; the volume and value of its trade at home and abroad; its command of all markets for the products of its industries; the free and elastic nature of its Government; and, controlling and influencing the whole scope of its activities, the honour and integrity of its mercantile and financial classes. A mass of speculative purchases enhances the value of Consols, and hence diminishes the return. Is this transient and capricious result a mark of augmented national credit at the time? Is it a sign of national discredit when people are enabled to abandon investment in Consols, and thus tend to induce a decline in value and a higher return, by the attraction of their savings to the superior profitableness of trading operations and the loans which they demand, which in themselves afford the sure index of the country's repute?

The Destruction Of Capital In The Boer War

An excessive and disastrous additional cause of the recent fall was the idle destruction of capital in the Boer war. Strange though it be, wiseacres constantly forget that money cannot be wasted without less being left for investment purposes.

Dearness Of Money

Dearness of money in general abstracted surpluses from

Consols. Dearness of money implies increased trading activity, and offers the attraction of a more profitable employment of funds than Consols afford.

Destruction of property by fire and earthquake in San Francisco.

A contributory cause was created by the destruction produced by fire and earthquake at San Francisco, which compelled the sale of securities by insurance companies for that immediate settlement of claims for which they are renowned.

The Great Increase In National Expenditure And Neglect Of National Debt Reduction

A great increase in our national expenditure has accounted for a deficiency of demand for investments, and the neglect of making adequate provision for the reduction of the National Debt tended in the same direction. It is evident that the extinction of debt is a diminution of the supply of stock, and consequently a gradual accession of value. A nation, like an individual, cannot concurrently expend lavishly and recklessly and yet save.

Multiplication Of Colonial Issues And Municipal Securities

The multiplication of issues of Colonial and Municipal securities has materially absorbed savings which Consols and other investments would otherwise have attracted. And until the accumulations of the country overtake this augmented supply of desirable stocks the depreciation of older issues must continue to be felt. It has been estimated that since the passing of the Colonial Stock Act in 1900 (which authorised trustees to place their funds in specified Colonial securities) to the middle of 1907 the nominal amount of trustee investments, available to the public, has thereby been increased by nearly £300,000,000.

Reduced Purchases Of Consols By National Debt Commissioners

Reduced purchases in Consols have been made in recent years by the National Debt commissioners on behalf of the Post Office Savings' Bank and of the trustee savings' banks and friendly societies, in consequence of excessive fluctuations in the value of the capital.