Bank Stock.
When the trade of the country is prosperous, we expect to see banking
companies paying high dividends, because rising prices stimulate
borrowing on the part of the public; and, consequently, as the
resources of the banks are limited, the increased demand for loanable
capital sends up rates, with the result that distributions are
enhanced, and that the prices of bank shares advance in sympathy with
improving dividends.
We all know that there is a link which binds industries together, and
that a depression in one trade, if it prove lasting, must communicate
itself to the rest. Nor is this movement confined to any one nation.
Therefore, when we hear that a depression exists in Germany or in any
other great manufacturing country, it is a matter for regret rather
than otherwise, because the goods of that country are almost certain to
be exported here in large quantities.
If there be stagnation in Germany, then money will be cheap in that
country, and commodities will be cheap too. Manufacturers, therefore,
will be able to obtain better prices in foreign markets; consequently,
German exports will increase, and prices will soon begin to fall in
England. Again, depression in the States speedily makes itself felt in
the English markets, which become glutted with American goods, with the
result that production lessens at home, and times gradually become, as
we colloquially say, "bad."
But there is one factor with which we have not reckoned, and that is
time; for though after a period of prosperity prices generally fall
suddenly--as, for instance, during 1901--it usually takes two or three
years before production is again in full swing. In these days, when
commercial ties bind the whole world so closely together, one nation
cannot afford to rejoice at the misfortune of another; and when this
fact is more clearly seen and is better understood, possibly large
standing armies will become an unnecessary evil, for the secret of
true progress is the fact that commerce and civilisation always advance
together.
The Bank of England, which deals in money and credit like every other
bank, is exposed to the same influences as the rest of its kind;
consequently, when trade is brisk and loanable capital dear, it pays
larger dividends than during the depressed portion of a cycle. The
following table will illustrate the fact:--
========================================================================
£14,553,000 STOCK.
---------------------+---------+---------+---------+---------+---------+
| 1892. | 1893. | 1894. | 1895. | 1896. |
---------------------+---------+---------+---------+---------+---------+
| | | | | |
Highest | 344 | 343 | 338 | 336 | 345 |
| | | | | |
Lowest | 325 | 325 | 322 | 322½ | 322 |
| | | | | |
Dividend % per annum | | | | | |
5th April | 10 | 10 | 8 | 8 | 8½ |
| | | | | |
Dividend % per annum | | | | | |
5th October | 9½ | 9 | 8½ | 8½ | 10 |
| | | | | |
---------------------+---------+---------+---------+---------+---------+
Average Distribution, 9½ per cent.
========================================================================
======================================================================
£14,553,000 STOCK.
---------------------+---------+---------+---------+---------+--------
| 1897. | 1898. | 1899. | 1900. | 1901.
---------------------+---------+---------+---------+---------+--------
| | | | |
Highest | 351½ | 367 | 36½ | 349 | 342
| | | | |
Lowest | 326 | 341 | 325 | 326 | 319¼
| | | | |
Dividend % per annum | | | | |
5th April | 10 | 10 | 10 | 10 | 10
| | | | |
Dividend % per annum | | | | |
5th October | 10 | 10 | 10 | 10 | 10
| | | | |
---------------------+---------+---------+---------+---------+--------
Average Distribution, 9½ per cent.
======================================================================
It is at once evident that when its distributions are compared with
those of the large banking companies, the Bank does not excel as
a dividend-payer, and the reason, of course, is because it has to
distribute its earnings over so large an amount of stock or capital;
but, although it pays fluctuating dividends--which are regulated
by the average rate capital may earn during any half-year--it is
noticeable that, since 1899, despite the fact of dividends being
maintained at ten per cent. per annum, the price of Bank stock touched
lower figures than any recorded during the decade, when, according
to every financial rule, prices ought to have been well maintained.
Further, the shares of the joint stock banks did not exhibit this
tendency to any marked extent. Why, then, should Bank stock be an
exception to the rule?
The years 1894 and 1895 were distinguished by cheap money and
indifferent trade, therefore we should expect to see the Bank's
dividends decrease, and its stock fall in sympathy with diminishing
distributions. If we glance at the table we shall see that our
deductions were realised. In 1896 trade began to improve. Rising prices
lessened the purchasing power of money; consequently the industrial
machine required more capital _after_ the rise, because a given sum
would then purchase _less_. The result was an increased demand for
loanable capital, which at once became dearer; and the Bank of England,
together with the other banks in the country, earned more. Again, as
one would have expected, dividends and stock moved up together. During
1897 the same movements were witnessed; but in 1899 Bank stock began to
fall, although distributions were maintained. This deviation from rule
evidently calls for explanation. Compare, for instance, the prices of
the shares of the undermentioned banks during the period in question:--
===============================================================
| | | |
| 1895. | 1899. | 1900. |
| | | |
| | | |
---------------------------------+--------+---------+---------+
| | | |
London and County--_Highest_ | 95½ | 109½ | 107 |
| | | |
" " " _Lowest_ | 89½ | 103 | 101½ |
| | | |
London and Provincial--_Highest_ | 21¾ | 22½ | 22¾ |
| | | |
" " " _Lowest_ | 19¼ | 21 | 21½ |
| | | |
London Joint Stock-_Highest_ | 34¼ | 39 | 37⅞ |
| | | |
" " " _Lowest_ | 30⅞ | 33¼ | 34 |
| | | |
===============================================================
========================================================
| | Dividend %
| 1901. | per annum
| | each year
| | since 1898.
---------------------------------+---------+------------
| |
London and County--_Highest_ | 107 | 22
| |
" " " _Lowest_ | 100¼ |
| |
London and Provincial--_Highest_ | 23⅜ | 18
| |
" " " _Lowest_ | 20½ |
| |
London Joint Stock-_Highest_ | 37¾ | 12
| |
" " " _Lowest_ | 34½ | 1900 & 1901
| |
========================================================
We can see, in the above instances, that where dividends were
maintained, prices moved between much the same figures, whilst in every
case a marked advance is shown on the quotations of 1895, whereas Bank
stock receded further in 1901, when the dividend was ten per cent.
per annum, than it did during 1895, when the distribution for the
year was only eight-and-a-quarter per cent. It is this anomaly which
we have to discuss. The trade of the country from 1896 to the end of
1900 was progressive, and though in 1901 a reaction set in, the large
requirements of the Government, and the state of uncertainty created
by the war, kept loanable capital dear. The banks, consequently, were
enabled to support their huge dividends during 1901, though their being
able to declare the same rates for the last half of the present year
seems doubtful.
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
316⅔; but 319¼ in 1901 is the lowest price it has touched since
1888, and it seems highly probable that our would-be purchaser at
316⅔ 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.
[Illustration]
_Sixth Edition._ _Price 1s. net._
BANKS AND THEIR CUSTOMERS.
By HENRY WARREN,
Author of "The Story of the Bank of England." and "Your Bankers'
Position at a Glance."
"The book is amusing as well as instructive, and at the price we may
reasonably say that no one who has a banking account should omit to
read and store it in his library. More especially he who is in the
habit of keeping a large balance, as also he who is in the habit of
negotiating for an overdraft, should study what is revealed in this
book."--_Field._
"Contains a vast mass of useful information intelligently discussed. To
educate the public on a technical subject calls for more than ordinary
knowledge. It needs what Mr. Warren undoubtedly possesses, and
that is a sound practical understanding, and a thorough common-sense
way of setting forth his knowledge in simple form. This our Author
succeeds admirably in doing."--_Financial News._
"Masterly."--_Drapers' Record._
"Invaluable."--_Birmingham Daily Gazette._
"Cannot be too strongly recommended."--_Scotsman._
"His revelations are startling."--_Morning Post._
"Especially we commend the chapter 'How to check your bankers'
charges.'"--_Investors' Review._
* * * * *
_The Author's two most flattering testimonials are_--
"Bank Manager" in _Investors' Review_ says: "The book is not worth the
paper upon which it is written."
Strangely enough, a Bank Customer writes: "Your little book has saved
me £40 a year."
EFFINGHAM WILSON, Publisher, Royal Exchange, London.
End of Project Gutenberg's The Story of the Bank of England, by Henry Warren