The modern credit system, it will be seen, places a very large part of the safe or investment business in the hands of a minority of brokers, who, like the bankers, much prefer to do a good commission business, and to leave speculation to the smaller brokers, who have less to lose than they. These favoured brokers have grown accustomed to sleeping comfortably o' nights, undisturbed by the vision of settling day on the morrow; and, quite blind to the cause of their enviable freedom from care, they are disposed to be loud in their abuse of the risky manner in which some of the smaller brokers conduct their business. But, seeing that the non-speculative orders flow from the banks to themselves, it would be interesting if they would attempt to explain how the army of small brokers can live unless they cater for the wants of the speculator. As a rule their capital is small, consequently they cannot afford to wait years while they slowly build up a connection; so, as the safe business is cornered, they accept the risky. This they do, not from choice, but from necessity; and the Stock Exchange Committee, in order to prevent additions to the ranks of these undesirables, should take steps to reduce the number of members of the Stock Exchange very considerably. Already the investors of this country have to support a small army of over four thousand of them.
Of course, after every period of excitement, numerous weak members of the Stock Exchange are weeded out, and, in a sense, the bonâ fide investor is the pigeon that is plucked by the speculator. The bulls buy in the fond hope that the investor will come in and relieve them of their stock; and the bears sell securities which they do not possess, trusting that investors will also sell, thereby enabling them to buy at a low figure and to pass on their securities at a profit to those to whom they have previously sold. The position is therefore often an artificial one, created by operators for the rise or fall, and the investor, unless he thoroughly understands the markets, is like a pigeon among hawks.
The larger the number of members of the House, the greater is the risk run by the investor who deals with a small broker; and as the investment business of the country flows largely in a particular channel, it is more than probable that, unless the Committee decides to admit new members sparingly, a large number of small brokers will one day be "hammered" after a period of intense excitement.
CHAPTER XIV.
The Short Loan Fund and the Price of Securities.
A certain proportion of the capital which flows into the London short loan fund is invested in securities by the bill brokers and the discount houses, and, as the said securities are deposited with the bankers from time to time against temporary advances, it follows that their choice is largely restricted to those of and guaranteed by the British Government, because the margin exacted on the so-called gilt-edged varieties is considerably less than that demanded upon the more fluctuating stocks and shares.
The bankers themselves invest largely in the same class, and they also employ vast sums in the short loan market; so that when the market rate for bills is higher than the interest received upon, say, Consols, the bankers are disposed to sell some of their Consols in order to obtain the higher rates ruling in the outside market. Obviously, then, any accretion or diminution in the short loan fund at once affects the prices of gilt-edged securities. If the Bank rate be high, and also representative, Consols ought to fall, and, conversely, if the Bank of England's rate be low, trade dull, and the market rate of discount smaller than the return on Consols, gilt-edged securities should rise.
If this be the case, a low Bank rate must give an immediate incentive to speculation in securities, and, therefore, the condition of the short loan fund is intimately connected with the prices of stocks and shares, but more particularly with those securities in which lenders in the money market largely invest. The banks—let the condition of the money market be what it may—must, of course, always invest a certain proportion of their resources in Consols, but the sum so invested is not constant.