The Need For Geographical Distribution Of Capital

To begin with, there would be much, if it should be found that the different Government Stocks of the world could be arranged like flowers in a circlet, where some stood erect at the top of the stem, each with its own country's other stocks ranged below it in natural rank and gradation, and others again so drooped that they lay lower down in the hierarchy than stocks which, like the best Corporation Loans or Industrial Debentures, naturally lie below them in the scale. If this fact can be established, would it not be possible for a wary investor to pick out the best secured of these Debentures and Corporation Stocks in the particular countries where the Government Stocks had lost their position at the head of the list, and so get not only as much practical security, but a greater yield of interest and a less width of fluctuation than if he had invested entirely in Government Stocks? I believe it would be possible, for several reasons.

Advantages Derived From Geographical Distribution Of Capital

In the first place, the interest would be higher, because in every country the rate of interest from all other stocks is always fixed higher than the rate of interest on the Government Stocks.

In the second place, the stability of the other stocks would be greater and their range of fluctuations less than that of the Government Stocks, inasmuch as most of the political and other causes which depress the value of Government Stocks affect the best secured Industrial Loans, as we shall see, comparatively slightly.

In the third place, by taking the whole world as our field of investment, the different Money Market influences and Trade currents of the particular nations can be balanced against each other under categories so definite as to permit of the principle of Insurance being applied to them; and with a degree of certainty, too, not to be found in the stocks of any one country, which, under the same Money Market and Trade influences, necessarily all move up and down together.

With these preliminaries the reader will have some vague general idea of what it is I wish to prove; and I shall now ask him to accompany me while I attempt to make good in detail the several positions I have raised. The evidence I have collected comes from various quarters of the financial field; but as it is made up of a mixture of facts and principles, I shall be obliged to take them separately, with the understanding that it is only when we have got them all together that the part played by any one of them in the final conclusion which I shall attempt to draw, can be clearly seen.

Reasons For The Greater Fluctuations Of Government Stocks

I shall begin with the first paradox of which I imagine the reader will wish to see a definite explanation given - the paradox, namely, of why it is that Government Stocks, which stand naturally at the head of all other stocks in point of security (as shown by the low rate of interest which they yield the investor in them), should be subject to fluctuations in market value more violent than those of stocks much lower in the scale? The reasons are various, but the most general one is that, in the first place, the stability of Government Stocks is based primarily on 'political causes, that of all other stocks on industrial ones. Not that both causes, as we have seen in a former chapter, do not enter more or less into all securities, but rather that Government Stocks lie more open to, and are also more sensitive to, political influences than all other stocks whatever. They lie more open to them, because they occupy, as in battle, the firing line; for as a result of a war to-morrow, in which a whole nation might change its masters, while private business might remain untouched except in a pro rata increase of taxation, Government Stocks would be struck to the heart through the depressing effects of vague financial fear alone.

Industrial Debenture Stocks And Government Stocks Compared

A private Industrial Debenture Stock in an old-standing business which has, say, twice as much Ordinary capital at the back of its Debenture loan as the amount of the loan itself, and which has earned, say, three times as much dividend over a period of ten to fifteen years as is necessary to pay the interest on the loan, is generally regarded as a thoroughly reliable stock for investment purposes, both in point of security and stability. But a Government Stock, on the other hand, that was based on a national income of the same amount, i.e. of not more than three times the yield of its taxes, would fall from its high estate and sink to a point as low as that of Turkey in the olden days. But why this difference between the amount of security required to give a first-class gilt-edged character to a private stock and that required for a Government Stock? Clearly there must be some elements or factors concerned, apart from Industry and its products and values.