But to return to the fall in Bank stock, which, at the moment of writing, is quoted at 326. The public, so little does it understand the position of the Bank of England, still looks upon it as a Government institution; and, as though to give colour to this illusion, we find its stock quoted in the same division as "British Funds &c." By The Trustee Act, 1893, trustees, where they are not prohibited by the trust deed, may invest in Bank of England stock; and, as a result of this enactment, there is an increased demand for its stock, which consequently yields less to a buyer; yet, strictly speaking, Bank stock cannot be classed with the so-called "gilt-edged" securities, because the interest it returns is variable.
It is true that the holder does not incur any liability, and in this sense Bank stock is a much more desirable investment than shares in a joint stock bank upon which the member is liable for certain stated sums in the shape of uncalled capital; but the Government does not guarantee the dividends of the Bank. Indeed, it is only interested in the Bank of England in the same manner that a large customer is interested in his banker; and, though, in every probability, so long as the Government banks with the Old Lady, it will assist her whenever cause may arise, it is not pledged so to do. Again, the twentieth century may be productive of great change; and, though it seems improbable that a Government would remove its accounts from the Bank, such an event is by no means impossible, for the only tie between the Government and the Bank of England is that the former is the Bank's oldest client.
On the other hand, so long as Government does keep its balances at the Bank of England, it cannot afford to allow the Bank to fail, even were there the risk of it doing so. But holders of Bank stock, like the holders of shares in any other bank, would be paid last should the Bank be wound up, however remote a possibility that may be; and seeing that their capital is not a prior charge upon the assets of the Bank, and that, therefore, £100 of stock is worth £326 only so long as the Bank of England is a going concern, it is difficult to see why Bank stock should be considered a desirable holding for trustees. It seems to me that, valuable though the security undoubtedly is, it does not possess a single one of those characteristics which should distinguish a "trustee" stock, for dividends are fluctuating, and capital is a last charge on the assets of the Bank. In fact, the stock is a kind of guarantee to the customers—and a splendid guarantee too, for it is the Bank's large capital which makes it the safest bank for depositors in the land. But that the holders of a "trustee" stock should, in the event of a company being wound up, get the last look in is surely somewhat odd. However, this is only another illustration of the confidence the public has in the Bank of England, which, people are convinced, will exist as long as the nation.
The Bank, because the public imagines that it is connected more closely with the Government than in reality is the case, naturally suffers in credit when its patron does. Consequently during 1899, when the British reverses in South Africa increased the difficulties of the Government and depressed Consols, Bank stock, although dividends were maintained at ten per cent. per annum, fell in sympathy with Government securities, despite the fact that the shares of the large English banking companies were not appreciably affected. Of course this depreciation, which has proved lasting, was not the result of sound reasoning, for so long as the war continued money was sure to be dear, and dear money plainly indicated that the Bank would support its dividend of ten per cent. Further, the large Government borrowings constantly compelled the outside market to borrow from the Bank, which, had it so decided, could have charged exceptionally high rates, and thereby have added considerably to its profit; but, with its usual moderation, it wisely refrained from exacting excessive rates from those who, when Lombard Street was temporarily denuded of surplus capital, were compelled to apply to it for loans. The Bank, during the trying period in question, certainly did not attempt to make extra profit out of the nation's misfortune, as it assuredly might have done had its directors been actuated by a grasping spirit. Is there another bank in the land that would not have profited by the occasion? There may be; but I am disposed to doubt it, and I certainly should not care to attempt to name the institution.
Here, then, we find two influences at work at the same time, and the result is distinctly curious. The Bank of England, from the nature of its business, pays increased dividends when trade is good, therefore its stock should advance in value during the prosperous portion of a cycle; but, because of its business relation with the Government, its stock is looked upon by the public as a kind of Government security, and, consequently, when any political event causes Consols to fall, Bank stock recedes in sympathy with them. There is no reason for this movement, and if it proves anything it proves how little Finance is understood by the investing public. Here is a stock which pays fluctuating dividends classed with the so-called "gilt-edged" variety of securities; therefore its movements often seem erratic, because at one time it responds to the law that regulates the price of gilt-edged stocks, and at another to the law which decides the price of industrials.
It can be seen from our list that for the decade ended 1901 the Bank of England paid an average dividend of nine-and-a-half per cent. per annum. Based on the said average, a purchaser, if he require a return of three per cent. for his money, will have to buy Bank stock at 316-2/3; but 319¼ in 1901 is the lowest price it has touched since 1888, and it seems highly probable that our would-be purchaser at 316-2/3 would wait in vain for his stock at those figures. Indeed, the present price, 326, looks cheap for Bank stock. Bought at 325, and based on an average dividend of nine-and-a-half per cent., the stock would return about £2 18s. 6d. per cent. So small a return upon one's money is not calculated to make one anxious to buy, and Consols at 93 are perhaps a greater temptation, though neither investment appeals very strongly, so far as interest is concerned, to the imagination.
If purchased during the depressed portion of a cycle, the shares of the large banking companies can be bought at a price which will yield an average dividend of over four-and-a-half per cent. to the investor; but it must be borne in mind that, as a rule, he incurs a certain liability on such shares, whereas Bank stock is free from possible calls, and, consequently, not exposed to the objection which is constantly urged against the majority of bank shares as an investment.
Some of my readers, I dare say, will not agree with all my conclusions; and, perhaps, it may be urged that the information herein contained were better withheld from the general public. But the truth is always worth the telling, and if our banking system will not bear investigation then it must be a bad one. Despite obvious defects in construction, it is apparent, however, that our great credit machine, when skilfully managed, can successfully endure considerable strain; and, if gold be dangerously economised, our present system at least gives us that inestimable blessing—Cheap Money.
