the income tax, because at the end of the six years she would owe
£180, incurring a debt of £30 every year and getting only £5 to pay
it with; so that it would be much better for her to give up her £5 a
year for ever and support herself entirely by work. And the Government
would have to admit that a tax on capital is an impossibility, for the
unanswerable reason that the capital has no existence, having been
eaten up long ago.
There is a tax on capital actually in existence which is often referred
to as proving that such taxes are possible. When we die, taxes called
Death Duties (officially Estate Duties) are levied on the fictitious
capital value of our estates, if we leave any. The reason people manage
to pay them is that we do not all die simultaneously every year on
the 5th April and thus incur death duties payable on the following
31st December. We die seldom and slowly, less than twenty out of every
thousand of us in one year, and out of that twenty not more than two at
the outside have any capital. Their heirs, one would think, would find
it easy to sell part of their income for enough ready money to pay the
duties, the purchasers being capitalists whose fathers or uncles have
not died lately. And yet the Government has to wait for its money often
and long. The tax is a stupid one, not because it confiscates property
by making the State inherit part of it (why not?) but because it
operates cruelly and unfairly. One estate, passing by death from heir
to heir three times in a century, will hardly feel the duties. Another,
passing three times in one year (as happens easily during a war), is
wiped out by them, and the heirs reduced from affluence to destitution.
When you make your will, be careful how you leave valuable objects to
poor people. If they keep them they may have to pay more for them in
death duties than they can afford. Probably they will have to sell them
to pay the duty.
This is so little understood, that men not otherwise mad are found
estimating the capital of the country at sums varying from ten thousand
millions before the war to thirty thousand millions after it (as if
the war had made the country richer instead of poorer), and actually
proposing in the House of Commons to tax that thirty thousand millions
as available existing wealth and to pay off the cost of the war with
it. They all know that you cannot eat your cake and have it too; yet,
because we have spent seven thousand millions on a frightful war, and,
as they calculate, twenty thousand millions more on mines and railways
and factory plant and so on, and because these sums are written down
in the books of the Bank of England and the balance sheets of the
Companies and Trusts, they think they still exist, and that we are
an enormously rich nation instead of being, as anyone can see by the
condition of nine-tenths of the population, a disgracefully poor one.
52
THE MONEY MARKET
And now, still assuming that you are a lady of some means, perhaps I
can be a little useful to you in your private affairs if I explain that
mysterious institution where your investments are made for you, called
the Money Market, with its chronic ailment of Fluctuations that may at
any moment increase your income pleasantly without any trouble to you,
or swallow it up and ruin you in ways that a man can never make a woman
understand because he does not understand them himself.
A market for the purchase and sale of money is nonsense on the face
of it. You can say reasonably “I want five shillingsworth of salmon”;
but it is ridiculous to say “I want five shillingsworth of money”.
Five shillingsworth of money is just five shillings; and who wants to
exchange five shillings for five shillings? Nobody buys money for money
except money changers, who buy foreign coins and notes to sell to you
when you are going abroad.
But though nobody in England wants to buy English money, we often want
to hire it, or, as we say, to borrow it. Borrow and hire, however,
do not always mean the same thing. You may borrow your neighbor’s
frying-pan, and return it to her later on with a thank you kindly. But
in the money market there is no kindness: you pay for what you get,
and charge for what you give, as a matter of business. And it is quite
understood that what you hire you do not give back: you consume it at
once. If you ask your neighbor to lend you, not a frying-pan, but a
loaf of bread and a candle, it is understood that you eat the bread and
burn the candle, and repay her later on by giving her a fresh loaf
and a new candle. Now when you borrow money you are really borrowing
what it will buy: that is, bread and candles and material things of all
sorts for immediate consumption. If you borrow a shilling you borrow it
because you want to buy a shillingsworth of something to use at once.
You cannot pay that something back: all you can do is to make something
new or do some service that you can get paid a shilling for, and pay
with that shilling. (You can, of course, borrow another shilling from
someone else, or beg it or steal it; but that would not be a ladylike
transaction.) At all events, not until you pay can the lender consume
the things that the shilling represents. If you pay her anything
additional for waiting you are really hiring the use of the money from
her.
In that case you are under no obligation to her whatever, because you
are doing her as great a service as she is doing you. You may not see
this at first; but just consider. All money that is lent is necessarily
spare money, because people cannot afford to lend money until they have
spent enough of it to support themselves. Now this spare money is only
a sort of handy title deed to spare things, mostly food, which will rot
and perish unless they are consumed immediately. If your neighbor has
a loaf left over from her week’s household supply you are doing her a
service in eating it for her and promising to give her a fresh loaf
next week. In fact a woman who found herself with a tenpenny loaf on
her hands over and above what her family needed to eat, might, sooner
than throw the loaf into the dustbin, say to her neighbor, “You can
have this loaf if you will give me half a fresh loaf for it next week”:
that is to say, she might offer half the loaf for the service of saving
her from the total loss of it by natural decay.
The economists call this paying negative interest. What it means is
that you pay people to keep your spare money for you until you want
it instead of making them pay you for allowing them to keep it, which
the economists call paying positive interest. One is just as natural
as the other; and the sole reason why nobody at present will pay you
to borrow from them, whereas everyone will pay you to lend to them, is
that under our system of unequal division of income there are so very
few of us with spare money to lend, and so very many with less than
they need for immediate consumption, that there are always plenty
of people offering not only to spend the spare money at once, but to
replace it later on in full with fresh goods and pay the lenders for
waiting into the bargain. The economists used to call this payment the
reward of abstinence, which was silly, as people do not need to be
rewarded for abstaining from eating a second dinner, or from wearing
six suits of clothes at a time, or living in a dozen houses: on the
contrary, they ought to be extremely obliged to anyone who will use
these superfluities for them and pay them something as well. If instead
of having a few rich amid a great many poor, we had a great many rich,
the bankers would charge you a high price for keeping your money; and
the epitaph of the dead knight in Watts’s picture, “What I saved I
lost”, would be true materially as well as spiritually. If you then had
£100 to spare, and wanted to save it until next year, and took it to
the manager of your bank to keep it for you, he would say “I am sorry,
madam; but your hundred pounds will not keep. The best I can do for
you is to promise you seventy pounds next year (or fifty, or twenty,
or five, as the case might be); and you are very fortunate to be able
to get that with so much spare money lying about. You had really much
better not save. Increase your expenditure; and enjoy your money before
what it represents goes rotten. Banking is not what it was.”
This cannot happen under Capitalism, because Capitalism distributes
the national income in such a way that the many are poor and the few
enormously rich. Therefore for the present you may count on being able
to lend (invest) all your spare money, and on being paid so much a year
for waiting until the borrower replaces what you have lent. The payment
for waiting is called interest, or, in the Bible, usury. Interest is
the polite word. The borrower, in short, hires the use of your spare
money from you; and there is nothing dishonest nor dishonorable in the
transaction. You hand over your spare ready money (your capital) to the
borrower; and the borrower binds herself to pay you a certain yearly or
monthly or weekly income until she repays it to you in full.
The money market is the place in the city where yearly incomes are
bought for lump sums of spare ready money. The income you can buy for
£100 (which is the measuring figure) varies from day to day, according
to the plenty or scarcity of spare money offered for hire and of
incomes offered for sale. It varies also according to the security of
the income and the chances of its fluctuating from year to year. When
you take your spare £100 to your stockbroker to invest for you (that
is, to hire out for an income in the money market) he can, at the
moment when I write these lines (1926) get you £4: 10s. a year certain,
£6 a year with the chance of its rising or falling, or £10 a year and
upwards if you will take a sporting chance of never receiving anything
at all.
The poor do not meddle with this official money market, because the
only security they can give when borrowing ready money from anyone but
the pawnbroker is their promise to pay so much a week out of their
earnings. This being much more uncertain than a share certificate or a
lease of land, they have to pay comparatively prodigious prices. For
instance, a poor working woman can hire a shilling for a penny a week.
This is the usual rate; and it seems quite reasonable to very poor
people; but it is more than eighty-six times as much as the Government
pays for the hire of money. It means paying at the rate of £433: 10s. a
year for the use of £100, or, as we say, interest at 433½ per cent:
a rate no rich man would dream of paying. The poorer you are the more
you pay, because the risk of your failing to pay is greater. Therefore
when you see in the paper that the price of hiring money has been fixed
by the Bank of England (that is why it is called the Bank Rate) at five
per cent, or reduced to four-and-a-half per cent, or raised to six per
cent, or what not, you must not suppose that you or anyone else can
hire money at that rate: it means only that those who are practically
certain to be able to pay, like the Government or the great financiers
and business houses, can borrow from the banks at that rate. In their
case the rate changes not according to any risk of their being unable
to pay, but according to the quantity of spare money available for
lending. And no matter how low the rate falls, the charwoman still has
to pay 433½ per cent, partly because the risk of her being unable to
pay is great, partly because the expense of lending money by shillings
and collecting the interest every week is much greater than the expense
of lending it by millions and collecting the interest every six months,
and partly because the charwoman is ignorant and helpless and does not
know that the slum usurer, whom she regards as her best friend in need,
is charging her anything more than a millionaire is charged.
The price of money varies also according to the purpose for which it is
borrowed. You are, I hope, concerned with the money market as a lender
rather than as a borrower. Do not be startled at the notion of being
a moneylender (not, I repeat, that there is anything dishonorable in
it): nobody will call your investments loans. But they are loans for
all that. Only, they are loans made, not to individuals, but to joint
stock companies on special conditions. The business people in the city
are always forming these companies and asking you to lend them money
to start some big business undertaking, which may be a shop in the
next street, or a motor bus service along it, or a tunnel through the
Andes, or a harbor in the Pacific, or a gold mine in Peru, or a rubber
plantation in Malaya, or any mortal enterprise out of which they think
they can make money. But they do not borrow on the simple condition
that they pay you for the hire of the money until they pay it back.
Their offer is that when the business is set up it shall belong to you
and to all your fellow lenders (called shareholders); so that when it
begins to make money the profits will be distributed among you all in
proportion to the amount each of you has lent. On the other hand, if it
makes no profits you lose your money. Your only consolation is that you
can lose no more. You cannot be called on to pay the Company’s debts if
it has spent more than you lent it. Your liability is limited, as they
say.
This is a chancy business; and to encourage you if you are timid (or
shall we say cautious?) these companies may ask you to lend your spare
money to them at the fixed rate of, say, six or seven per cent, on
the understanding that this is to be paid before any of the ordinary
lenders get anything, but that you will get nothing more no matter how
big the profits may be. If you accept this offer you are said to have
debentures or preference shares in the company; and the others are said
to have ordinary shares. There are a few varieties both of preference
and ordinary shares; but they are all ways of hiring spare money:
the only difference is in the conditions on which you are invited to
provide it.
When you have taken a share, and it is bringing you in an income,
you can at any time, if you are pressed for ready money, sell your
share for what it may be worth in the money market to somebody who has
spare money and wants to “save” it by exchanging it for an income. The
department of the money market in which shares are bought and sold in
this way is called the Stock Exchange. To sell a share you have to
employ an agent (called a stockbroker), who takes your share to the
Exchange and asks another agent (called a stockjobber) to “make him a
price”: It is the jobber’s business to know what the share is worth,
according to the prospects of the company, the quantity of spare money
being offered for incomes, and the number of income producing shares
being offered for sale. Never speak disrespectfully of stockjobbers:
they are very important people, and consider themselves greater masters
of the money business than the stockbrokers.
The legitimate business of the Stock Exchange is this selling and
buying of shares in companies already established. It is largely
occupied also with a curious game called speculation, in which
phantom prices are offered for imaginary shares; but for the moment
let us keep to the point that the shares dealt in are practically
all in established companies, because what is nationally important
is the application of spare money, not to the purchase of shares in
old companies, but to the foundation of new ones, or at least to
the extension of the plant and operations of the old ones. Now the
business done on the Stock Exchange is no index to this, and indeed
may have nothing to do with it. Suppose, for example, that you have
£50,000 to spare, and you invest it all in railway shares! You will
not by doing so create a single yard of railway, nor cause a single
additional train to be run, nor even supply an existing train with
an extra footwarmer. Your money will have no effect whatever on the
railways. All that will happen is that your name will be substituted
for some other name or names in the list of shareholders, and that for
the future you will get the income the owners of those names would get
if they had not sold their shares to you. Also, of course, that they
will get your £50,000 to do what they like with. They may spend it on
the gambling tables at Monte Carlo, or on the British turf; or they
may present it to the funds of the Labor Party. You may disapprove
strongly of gambling; and you may have a horror of the Labor Party.
You may say “If I had thought this was going to happen to my money, I
would have bought shares privately from some persons whose principles
were well known to me and whom I could trust not to spend it foolishly
instead of from that wicked stockjobber who has no more conscience
than a cash register, and does not care what becomes of my money”. But
your protest will be vain. In practice you will find that you must buy
your shares in established companies on the Stock Exchange; that your
money will never go into the company whose shares you buy; and that its
real destination will be entirely beyond your control. A day’s work on
the Stock Exchange, nominally a most gratifying addition of hundreds
of thousands of pounds of spare money to the industrial capital of
the country, may be really a waste of them in extravagant luxury, or
ruinous vice, to say nothing of the possibility of their being sent
abroad to establish some foreign business which will capture the
business of the company whose shares you have bought, and thus reduce
you to indigence.
And now you will say that if this is so, you will take particular care
to buy nothing but new shares in new companies, sending the money
directly to their bankers according to the form enclosed with the
prospectus, without allowing any stockbroker or stockjobber to know
anything about it, thus making sure that your money will be used to
create a new business and add it to the productive resources of your
country’s industry. My dear lady, you will lose it all unless you are
very careful, very well informed as to the risks involved, and very
intelligent in money matters. Company promotion, I am sorry to say,
is a most rascally business in its shadier corners. Act after Act of
Parliament has been passed, without much effect, to prevent swindlers
from forming companies for some excellent object, and, when they have
collected as much money as they can by selling shares in it, making no
serious attempt to carry out that object, but simply taking offices,
ordering goods, appointing themselves directors and managers and
secretaries and anything else that carries a salary, taking commissions
on all their orders, and, when they have divided all the plunder in
this way (which is perfectly legal), winding up the company as a
failure. All you can do in that case is to go to the shareholders’
meeting and make a row, being very careful not to tell the swindlers
that they are swindlers, because if you do they will immediately take
an action against you for slander and get damages out of you. But
making a row will not save your money. The amount that is stolen from
innocent women every year in this way is appalling; and it has been
done as much by sham motor bus companies, which if genuine would have
been very sensible and publicly useful investments, as by companies to
work bogus gold mines, which are suspect on the face of them.
Even if you escape this swindling by blackguards who know what they
are doing, and would be as much disconcerted by the success of their
companies as a burglar if he found himself politely received and
invited to dinner in a house he had broken into, you may be tempted
by the companies founded by genuine enthusiasts who believe in their
scheme, who are quite right in believing in it, who are finally
justified by its success, and who put all their own spare money and a
great deal of hard work into it. But they almost always underestimate
its cost. Because it is new, they have no experience to guide them;
and they have their own enthusiasm to mislead them. When they are half
way to success the share money is all used up; and they are forced to
sell out all they have done for an old song to a new company formed
expressly to take advantage of them. Sometimes this second company
shares the fate of the first, and is bought out by a third. The company
which finally succeeds may be built on the money and work of three
or four successive sets of pioneers who have run short of the cash
needed for completion of the plant. The experienced men of the city
know this, and lie in wait until the moment has come for the final
success. As one of them has put it “the money is made by coming in on
the third reconstruction”. For them it may be a splendid investment;
but the original shareholders, who had the intelligence to foresee the
successful future of the business, and the enterprise to start it,
are cleaned out. They see their hopes fulfilled and their judgment
justified; but as they have to look through the workhouse windows, they
are a warning rather than an example to later investors.
You can avoid these risks by never meddling with a new company, but
calling in your stockbroker to buy shares in a well established old
one. You will not do it any good; but at all events you will know that
it is neither a bogus company nor one which has started with too little
capital and will presently have to sell out at a heavy or total loss.
Beware of enterprise: beware of public spirit: beware of conscience and
visions of the future. Play for safety. Lend to the Government or the
Municipalities if you can, though the income may be less; for there is
no investment so safe and useful as a communal investment. And when
you find journalists glorifying the Capitalist system as a splendid
stimulus to all these qualities against which I have just warned
you, restrain the unladylike impulse to imitate the sacristan in the
Ingoldsby Legends, who said no word to indicate a doubt, but put his
thumb unto his nose, and spread his fingers out.
53
SPECULATION
In the preceding chapter I have been assuming that you are a
capitalist. I am now going to assume that you are perhaps a bit of a
gambler. Even if you abhor gambling it is a necessary part of your
education in modern social conditions to know how most of it is done.
Without such knowledge you might, for instance, marry a gambler after
having taken the greatest pains to assure yourself that he had never
touched a playing card, sat at a roulette table, or backed a horse in
his life, and was engaged solely in financial operations on the Stock
Exchange. You might find him encouraging you to spend money like water
in one week, and in the next protesting that he could not possibly
afford you a new hat. In short, you might find yourself that tragic
figure, the gambler’s wife who is not by temperament a gambler.
A page or two ago I dropped a remark about a game played on the Stock
Exchange and called Speculation, at which phantom prices are offered
for imaginary shares. I will explain this game to you, leaving it to
your taste and conscience to decide whether you will shun it or plunge
into it. It is by far the most widely practised and exciting form of
gambling produced by Capitalism.