The Bank Rate and Stock Exchange Securities.
At the present time large advances are made by the banking companies to
members of the Stock Exchange, and it is supposed that at the beginning
of 1894, when the Bank rate fell to two per cent., and an investment
of surplus funds in the London short loan market brought in very poor
returns, the banks, tempted by higher rates, largely increased their
loans to the Stock Exchange. In 1890 rumour had it that a few of the
banks made rather heavy losses in connection with the South American
gamble, which brought down the firm of Barings; and the unanimity
they displayed, under the leadership of the late Mr. Lidderdale, in
supporting the tottering structure, certainly lends force to the
suggestion; for philanthropists are not to be found either in Lombard
Street or in Gorgonzola Hall.
The same rumour was circulated after the Kaffir boom in 1895, and
a little later it was whispered that some of the banks intended
curtailing their loans to the Stock Exchange, and that in future mining
shares would be received with the greatest circumspection. So close
is the connection between the banks and the "House" that the utmost
consternation prevailed when it was feared that the banks would not
touch certain stocks and shares of a fluctuating character. The mere
rumour created almost a panic among those dealers whose books were full
of the tabooed securities.
But 1895 was a bad year for the banking companies, and, from a dividend
point of view, 1896 was little better, for the Bank rate did not touch
two-and-a-half per cent. until September of that year. The short loan
market, therefore, was not a tempting place into which to pour surplus
deposits, so the banks apparently thought better of their decision (if
it were a decision), and continued their loans to the Stock Exchange on
the same liberal scale, because such loans yielded a much better return
than those to the bill brokers.
The very rumour that the banks intended increasing their margin on,
say, American Rails, would cause those securities to fall, and were
the threat actually executed, then, unless strong support came either
from the public or from New York, the result would be failures of weak
jobbers in that particular market, and a heavy fall in the prices of
American Railway securities. There is the same link between the other
markets of the Stock Exchange and the banks, and, such being the case,
it naturally follows that the prices of securities are influenced by
the abundance or scarcity of loanable capital, and that, therefore,
continuation rates fluctuate with the Bank rate.
But a very considerable proportion of the transactions conducted on the
Stock Exchange is of a speculative or gambling nature, in which those
mysterious persons called "bulls" and "bears" figure largely, and whose
object it is, not to invest savings in particular stocks and shares,
but to receive a cheque from their broker representing differences
due to them on the rise or fall of the securities in which they are
temporarily interested.
The "bull" buys stock because he believes that it will rise, and
that he will be able to sell it at a profit before the fortnightly
settlement comes round, but he does not pay for it; and if his sanguine
anticipation is not realised, so human and hopeful is he, that he
endeavours to obtain a loan on his stock through his broker in order
to carry it over to the next settlement, trusting that he will be able
to sell at a profit before contango day again comes round. The broker
sometimes obtains an advance on the stock through his banker, and so is
enabled to accommodate his client, whom he charges both interest and
commission. Again, the broker may carry over the stock through a jobber
or with a money broker who is a member of the "House," as the Stock
Exchange is colloquially called.
It has been suggested that some of these money brokers are in reality
agents of the banks--that, in short, they are the middlemen between the
banks and those who want to borrow on the Stock Exchange, just as the
bill broker is the middleman between the banks and those persons who
possess bills. The bill broker deposits the bills he has discounted for
his customers as security against a loan from the banker, and the money
broker deposits the stocks and shares against which he has advanced to
members of the Stock Exchange as security for a loan from the banker to
himself. His profit, therefore, like that of the bill broker, would be
the difference between the rate at which he borrows from the banker
and the rate at which he lends in the House. When large sums are
advanced in this manner the prices of stocks and shares are forced up
to fictitious figures in the hope that the public will come in and buy.
Yet the Stock Exchange Committee preaches about the iniquities of the
outside broker! Far be it from me to defend the possibly questionable
methods of the latter; but, to an unbiased observer, it sounds somewhat
like the pot calling the kettle black.
Huge sums of money are advanced every fortnight by the banks to the
money brokers and jobbers, principally against sold stocks and shares,
which are awaiting the arrival of _bonâ fide_ investors. The banks, of
course, require a good margin in order to cover themselves against loss
through any possible depreciation in the hypothecated securities, and
when the settlement or day of reckoning arrives, fresh loans are made,
or old advances are renewed, and the securities carried over to the
end of the account. A high rate of interest naturally makes "carrying
over" from account to account a very expensive operation, whilst an
abnormally high rate renders the process prohibitive.
When, therefore, the Bank rate is high and money is dear, a check is
immediately given to speculation on the Stock Exchange, because those
persons who have bought securities for a rise prefer to sell at a loss
before the settlement rather than pay excessive contango rates. It
follows, then, that dear money greatly reduces the dimensions of the
accounts open for the rise.
The banks, too, often become alarmed by the magnitude of the account,
and having demands upon them for capital elsewhere, they grow nervous
and lend less freely, at greatly enhanced rates, and then jobbers and
money brokers have to refuse a large number of applicants. The result
may be either a fall in the securities dealt in by a particular market
or a general depression throughout the House. Then the "bears" come in
and buy, take their profits, and are jubilant.
Conversely, a plethora of money and a low Bank rate encourage
speculation, as was the case before the boom of 1895. Continuation
rates are low, and capital comes out of trade into the better-class
securities, which begin to rise in consequence. Then, for a little
while, the "bulls" have it all their own way. But why does the
Committee pose as the friend of the _bonâ fide_ investor? It is a
little difficult to see where he comes in, unless it be in at the top
and out at the bottom. As a matter of fact, there is so much gambling
in securities taking place in the House that the genuine investor, if
he do not understand the market, falls an easy prey to the "bulls"
and "bears," who, by studying the habits of his kind, anticipate
their requirements, and, after taking a large bite, pass on their
hypothecated shares. On the other hand, the investor who studies the
markets sometimes waits patiently for exhausted "bulls" or sells to
frightened "bears." So, to those who know the game it is about as broad
as it is long.