you can buy a share and not have to pay for it, or sell a share and
not have to hand over the share certificate, until next settling
day, which may be a fortnight off. You may not see at first what
difference that makes. But a great deal may happen in a fortnight.
Just recollect what you have learnt about the continual fluctuations
in the prices of incomes and of spare subsistence in the Money Market!
Think of the hopes and fears raised by the flourishing and decaying
of the joint stock companies as their business and prospects grow or
shrink according as the harvests are good or bad: rubber harvests, oil
harvests, coal harvests, copper harvests, as well as the agricultural
harvests: all meaning that there will be more or less money to divide
among the shareholders as yearly income, and more or less spare money
available to buy shares with. The prices of shares change not only from
year to year but from day to day, from hour to hour, and, in moments of
excitement on the Stock Exchange, from minute to minute. The share that
was obtained years ago or centuries ago by giving £100 spare money to
start a new company may bring its owner £5000 a year, or it may bring
her thirty shillings, or it may bring her nothing, or it may bring her
all three in succession. Consequently that share, which cost somebody
£100 spare money when it was new, she may be able to sell for £100,000
at one moment, for £30 at another, whilst at yet another she may be
unable to sell it at all, for love or money. As she opens her newspaper
in the morning she looks at the city page, with its list of yesterday’s
prices of stocks and shares, to see how rich she is today; and she
seldom finds that her shares are worth the same price for a week at a
time unless she has been prudent enough to lend it to the Government or
to a municipality (in which case she has communal security) instead of
to private companies.
Now put these two things together: the continual change in the prices
of shares, and the London Stock Exchange rule that they need not be
paid for nor delivered until next settling day. Suppose you have not
a penny of spare cash in your possession, nor a share (carrying an
income) to sell! Suppose you believe for some reason or other that the
price of shares in a certain company (call it company A) is going to
rise in value within the next few days! And suppose you believe that
the price of shares in a certain other company (company B) is going
to fall. If you are right, all you have to do to make some money by
your good guessing is to buy shares in company A and sell shares in
company B. You may say “How am I to buy shares without money or sell
them without the share certificates?” It is very simple: you need not
produce either the money or the certificates until settling day. Before
settling day you sell the A shares for more than you bought them for on
credit; and you buy the B certificates for less than you pretended to
sell them for. On settling day you will get the money from the people
you sold to, and the certificates from the people you bought from; and
when you have paid for the A shares and handed over the B certificates,
you will be in pocket by the difference between their values on the
day you bought and sold them and their values on settling day. Simple
enough, is it not?
This is the game of speculation. Nobody will blame you for engaging in
it; but on the Stock Exchange they will call you a bull for pretending
to buy the A shares, and a bear for pretending to sell the B shares. If
you pay a small sum to get shares allotted to you in a new company on
the chance of selling them at a profit before you have to pay up, they
will call you a stag. If you ask why not a cow or a hind, the reply
is that as the Stock Exchange was founded by men for men its slang is
exclusively masculine.
But, you may say, suppose my guess was wrong! Suppose the price of
the A shares goes down instead of up, and the price of the B shares
up instead of down! Well, that often happens, either through some
unforeseen event affecting the companies, or simply because you guessed
badly. But do not be too terrified by this possibility; for all you can
lose is the difference between the prices; and as this may be only a
matter of five or ten pounds for every hundred you have been dealing
in you can pawn your clothes and furniture and try again. You can
even have your account “carried over” to next settling day by paying
“contango” if you are a bull, or “backwardation” if you are a bear, on
the chance of your luck changing in the extra fortnight.
I must warn you, however, that if a great many other bears have guessed
just as you have, and sold imaginary shares in great numbers, you may
be “cornered”. This means that the bears have sold either more shares
than actually exist, or more than the holders will sell except at a
great advance in price. Bulls who are cunning enough to foresee this
and to buy up the shares which are being beared may make all the money
the bears lose. Cornering the bears is a recognized part of the game of
speculation.
As the game is one of knowledge and skill and character (or no
character) as well as of chance, a good guesser, or one with private
(inside) information as to facts likely to affect share prices, can
make a living at it; and some speculators have made and lost princely
fortunes. Some women play at it just as others back horses. Sometimes
they do it intelligently through regular stockbrokers, with a clear
understanding of the game. Sometimes they are blindly tempted by
circulars sent out from Bucket Shops; so I had better enlighten you as
to what a bucket shop is.
You will remember that a speculator does not stand to lose the whole
price she offers for a share, or the whole value of the share she
pretends to buy. If she loses she loses only the difference between
the prices she expected and the prices she has to pay. If she has
a sufficient sum in hand to meet this she escapes bankruptcy. This
sufficient sum is called “cover”. A bucket shop keeper is one who
undertakes to speculate for anyone who will send him cover. His
circulars say, in effect, “Send me ten pounds, and the worst that can
happen to you is to lose it; but I may be able to double it for you or
even double it many times over. I can refer you to clients who have
sent me £10 and got back £50 or £100.” A lady, not understanding the
business in the least, is tempted to send him £10, and very likely
loses it, in which case she usually tries to get it back by risking
another £10 note if she has one left. But she may be lucky and pocket
some winnings; for bucket shops must let their clients win sometimes or
they could hardly exist. But they can generally prevent your winning,
if they choose, by taking advantage of some specially low price of
shares to shew that your cover has disappeared, or even by selling two
or three shares themselves at a low price and quoting it against you.
Besides, if you sue them for your winnings they can escape by pleading
the Gaming Act. They cannot be mulcted or expelled by the Stock
Exchange Committee; for they are not members of the Stock Exchange, and
have given no securities. A bucket shop keeper is not necessarily a
swindler any more than a bookmaker is necessarily a welsher; but if he
fleeces you you have no remedy, whereas if a stockbroker cheats you it
may cost him his livelihood.
If you speculate through a regular stockbroker you must bear in mind
that he is supposed to deal in genuine investments only: that is, in
the buying of shares by clients who have the money to pay for them,
and the sale of shares by those who really possess them and wish to
exchange them for a lump sum of spare money. The difference is that
if you go into a bucket shop and say frankly “Here is a five pound
note, which is all I have in the world. Will you take it as cover, and
speculate with it for me in stocks of ten times its value”, the bucket
shop will oblige you; but if you say this to a stockbroker he must have
you shewn out. You must allow him to believe, or pretend to believe,
that you really have the spare money or the shares in which you want to
deal.
You will now understand what gambling on the London Stock Exchange
means. The game can be played with certain variations, called options
and double options and so on, which are as easily picked up as the
different hazards of the roulette table; and the foreign stock
exchanges have rules which are not so convenient for the bears as our
rules; but these differences do not change the nature of the game.
Every day speculative business is done in Capel Court in London, on
Wall Street in New York, in the Bourses on the Continent, to the tune
of millions of pounds; and it is literally only a tune: the buyers have
no money and the sellers no goods; and their countries are no richer
for it all than they are for the gaming tables at Monte Carlo or the
bookmakers’ settlements at the end of a horse race. Yet the human
energy, audacity, and cunning wasted on it would, if rightly directed,
make an end of our slums and epidemics and most of our prisons in fewer
hours than it has taken days of Capitalism to produce them.
54
BANKING
The Stock Exchange is only a department of the money market. The
commonest way of hiring money for business purposes is to keep an
account at a bank, and hire spare money there when you want it. The
bank manager will lend it to you if he feels reasonably sure that
you will be able to repay him: in fact that is his real business, as
we shall see presently. He may do it by letting you overdraw your
account. Or if somebody with whom you are doing business has given you
a written promise to pay you a sum of money at some future time (this
written promise is called a bill of exchange) and the bank manager
thinks the promise will be kept, he will give you the money at once,
only deducting enough to pay him for its hire until your customer pays
it. This is called discounting the bill. All such transactions are
forms of hiring spare money; and when you read in the city articles
in the papers that money is cheap or money is dear, it means that the
price you have to pay your banker for the hire of spare money is low or
high as the case may be.
Sometimes you will see a fuss made because the Bank of England has
raised or lowered the Bank Rate. This means that the Bank of England is
going to charge more or less, as the case may be, for discounting bills
of exchange, because spare money has become dearer or cheaper: that is
to say, because spare subsistence has become scarcer or more plentiful.
If you are overdrawn at your bank, the announcement that the Bank Rate
is raised may bring you a letter from the manager to say that you must
not overdraw any more, and that he will be obliged to you if you will
pay off your overdraft as soon as possible. What he means is that as
spare subsistence has become scarce and dear he cannot go on supplying
you with it, and would like you to replace what he has already
supplied. This may be very inconvenient to you, and may prevent you
from extending your business. That is why there is great consternation
and lamentation among business people when the Bank Rate goes up, and
jubilation when it goes down. For when the terms on which spare money
can be hired at the Bank of England go up, they go up everywhere;
so that the Bank Rate is an index to the cost of hiring spare money
generally.
And now comes the question, where on earth do the banks get all the
spare money they deal in? To the Intelligent Woman who is not engaged
in business, or who, if she has a bank account, never overdraws it
or brings a bill to be discounted, a bank seems only a place where
they very kindly pay her cheques and keep her money safe for her for
nothing, as if she were paying them a compliment by allowing them to do
it. They will even hire money from her when she has more than enough to
go on with, provided she will agree not to draw it out without giving
them some days’ notice (they call this placing it on deposit). She must
ask herself sometimes how they can possibly afford to keep up a big
handsomely fitted building and a staff of respectably dressed clerks
with a most polite and sympathetic manager to do a lot of her private
business for her and charge her nothing for it.
The explanation is that people hardly ever draw as much money from the
bank as they put in; and even when they do, it remains in the bank for
some time. Suppose you lodge a hundred pounds in the bank on Monday to
keep it safe because you will have to draw a cheque for it on Saturday!
That cheque will not be presented for payment until the following
Monday. Consequently the bank has your hundred pounds in its hands
for a week, and can therefore hire it out for a week for a couple of
shillings.
But very few bank transactions are as unprofitable as this. Most people
keep their bank accounts open all the year round; and instead of paying
in every week exactly what they want to spend and drawing it out again
by their cheques as they spend it, they keep a round sum always at
their call so as to be ready when they may happen to want it. The
poorest woman who ever dreams of keeping a bank account at all is not
often driven to draw the last half crown out: when her balance falls
as low as that, she knows it is time to put in another pound or two.
Indeed it is not every bank that will do business on so small a scale
as this: the Governor of the Bank of England would turn blue and order
the porters to remove you if you offered him an account of that sort.
Bank customers are people some of whom keep £20 continually at call,
some £100, some £1000, and some many thousands, according to the extent
of their business or the rate at which they are living. This means that
no matter how much money they may put into the bank or take out, there
always remains in the bank a balance that they never draw out; and when
all these balances are added up they come to a huge amount of spare
money in the hands of the bank. It is by hiring out this money that the
banks make their enormous profits. They can well afford to be polite to
you.
And now the Intelligent Woman who keeps a bank account, and most
conscientiously never lets her balance fall below a certain figure, may
ask in some alarm whether her bank, instead of keeping her balance
always in the bank ready for her to draw out if she should need it,
actually lends it to other people. The reply is, Yes: that is not only
what the bank does, but what it was founded to do. But, the Intelligent
Woman will exclaim, that means that if I were to draw a cheque for
my balance there would be no money in the bank to pay it with. And
certainly that would happen if all the other customers of the bank drew
cheques for their balances on the same day. But they never do. “Still”,
you urge, “they might.” Never mind: the bank does not trouble about
what might happen. It is concerned only with what does happen; and what
does happen is that if out of every pound lodged with them the bankers
keep about three shillings in the till to pay their customers’ cheques
it will be quite sufficient.
Only, please remember that the woman who has a bank account should
never frighten the others by letting them know this. They would all
rush to the bank and draw out their balances; and when the bankers had
paid to the first comers all the three shillingses they had kept, they
would stop payment and put up the shutters. This sometimes actually
happens when a report is spread that some particular bank is not to be
trusted. Something or somebody starts a panic; there is “a run on the
bank”; the bank is broken; and its customers are very angry with the
directors, clamoring to have them prosecuted and sent to prison, which
is unreasonable; for they ought to have known that banks, with all the
services they give for nothing, can exist only on condition that their
customers do not draw out their balances all on the same day.
Perhaps, by the way, you know some woman who not only always draws her
full balance, but overdraws it; so that she is always in debt to the
bank. Her case is very simple. The bank lends her the other customers’
money to go on with, and charges her for the hire of it. That sort of
business pays them very well.
And now that you know what banking is from the inside, and how the
bankers get all the spare money they let on hire, may I remind you
again, if I am not too tiresome, that this spare money is really spare
subsistence, mainly perishable stuff that must be used at once. One of
the greatest public dangers of our day is that the bankers do not know
this, because they never handle or store the stuff themselves; and the
right to take it away and use it which they sell on the hire system
is disguised under the name of Credit. Consequently they come to think
that credit is something that can be eaten and drunk and worn and made
into houses and railways and factories and so on, whereas real credit
is only the lender’s opinion that the borrower will be able to pay him.
Now you cannot feed workmen or build houses or butter parsnips with
opinions. When you hear of a woman living on credit or building a house
on credit or having a car on credit you may rest assured that she is
not doing anything of the kind: she is living on real victuals; having
her house built of bricks and mortar by men who are eating substantial
meals; and driving about in a steel car full of highly explosive
petrol. If she has not made them nor paid for them somebody else has;
and all that her having them on credit means is that the bank manager
believes that at some future time she will replace them with equally
substantial equivalent goods of the same value after paying the bank
for waiting meanwhile. But when she goes to the bank manager she does
not ask for food and bricks and cars: she says she wants credit. And
when the bank manager allows her to draw the money that is really an
order for so much food and so many bricks and a car, he says nothing
about these things. He says, and thinks, that he is giving her credit.
And so at last all the bankers and the practical business men come to
believe that credit is something eatable, drinkable, and substantial,
and that bank managers can increase or diminish the harvest by becoming
more credulous or more sceptical as to whether the people to whom they
lend money will pay them or not (issuing or restricting credit, as
they call it). The city articles in the papers, the addresses of bank
chairmen at the annual shareholders’ meetings, the financial debates
in Parliament, are full of nonsensical phrases about issuing credit,
destroying credit, restricting credit, as if somebody were shovelling
credit about with a spade. Clever men put forward wonderful schemes
based on the calculation that when a banker lends five thousand pounds
worth of spare subsistence he also gives the borrower credit for five
thousand pounds, the five thousand credit added to the five thousand
spare subsistence making ten thousand altogether! Instead of being
immediately rushed into the nearest lunatic asylum, these clever ones
find disciples both in Parliament and in the city. They propose to
extend our industries (that is, build ships and factories and railway
engines and the like) with credit. They believe that you can double
the quantity of goods in the country by changing the cipher 2 into the
cipher 4. Whenever a scarcity of spare subsistence forces the Bank of
England to raise the Bank Rate they accuse the directors of playing
them a dirty trick and preventing them from extending their business,
as if the Governor and Company of the Bank of England could keep the
rate down any more than the barometer can keep the mercury down in fair
weather. They think they know, because they are “practical business
men”. But for national purposes they are maniacs with dangerous
delusions; and the Governments who take their advice soon find
themselves on the rocks.
What is it, then, that really fixes the price you have to pay if you
hire ready money from your bank, or that you receive for lending it to
the bank (on deposit), or to trading companies by buying shares, or to
the Government or the Municipalities? In other words, what fixes the
so-called price of money, meaning the cost of hiring it? And what fixes
the price of incomes when their owners sell them for ready money in the
Stock Exchange?
Well, it depends on the proportion between the quantity of spare
subsistence (“saved” money) there may be in the market to be hired, and
how much the people who want to use it up are able and willing to pay
for the hire of it. On the one hand you have the property owners who
are living on less than their incomes and therefore want to dispose of
their spare stuff before it goes rotten. On the other are the business
men who want what the property owners have not consumed to feed the
proletarians whose labor they need to start new businesses or extend
old ones. Beside these, you have the spendthrift property owners who
have lived beyond their incomes, and must therefore sell the incomes
(or part of them) for ready money to pay their debts. Between them all,
you get a Supply and Demand according to which spare money and incomes
are cheap or dear. The price runs up when the supply runs short or the
demand becomes more pressing. It runs down when the supply increases or
the demand slackens.
By the way, now that we are picking up the terms Supply and Demand,
remember that Demand in the money market sense does not mean want
alone: it means only the want that the wanter can afford to satisfy.
The demand of a hungry child for food is very strong and very loud; but
it does not count in business unless the mother has money to buy food
for the child. But with this rather inhuman qualification supply and
demand (called “effective demand”) settle the price of everything that
has a price.
Banks are safe when they lend their money (or rather yours)
judiciously. If they make bad investments, or trust the wrong people,
or speculate, they may ruin themselves and their customers. This
happened occasionally when there were many banks. But now that the
big ones have swallowed up the little ones they are so few and so big
that they could not afford to let one another break, nor indeed could
the Government. So you are fairly safe in keeping your money at a big
bank, and need have no scruple about availing yourself of its readiness
to oblige you in many ways, including acting as your stockbroker,
borrowing from you at interest (on deposit account), and lending you,
though at a considerably higher rate, any ready money for the repayment
of which you can offer reasonably satisfactory security.
As we now see why the hiring terms for money vary from time to time,
sometimes from hour to hour, let us amuse ourselves by working out what
would happen at the banks if the Government, misled by the practical
business men, or by the millennial amateurs, were to attempt to raise
say £30,000 millions by a tax on capital, and another £30,000 millions
by a tax on credit.
The announcement of the tax on credit would make an end of that part of
the business at once by destroying all credit. The financial magnate
who the day before could raise a million at six or seven per cent by
raising his finger would not be able to borrow five shillings from his
butler unless the butler let him have it for the sake of old times
without the least hope of ever seeing it again.
To pay the tax the capitalists would have to draw out every farthing
they had in the bank, and instruct their stockbrokers to sell out all
their shares and debentures and Government and municipal stock. There
would be such a prodigious demand for ready money that the Governor
and Company of the Bank of England would meet at eleven o’clock and
resolve, after some hesitation, to raise the Bank Rate boldly to ten
per cent. After lunch they would be summoned hurriedly to raise it
to a hundred per cent; and before they could send out this staggering
announcement they would learn that they might save themselves the
trouble, as all the banks, after paying out three shillings in the
pound, had stopped payment and stuck up a notice on their closed doors
that they hoped to be able to pay their customers the rest when they
had realized their investments: that is, called in their loans and sold
their stocks and shares. But the stockbrokers would report only one
price for all stocks, that price being no pounds, no shillings, and
no pence, not even farthings. For that is the price in a market where
there are all sellers and no buyers.
When the tax collector called for his money, the taxpayer would have
to say “I can get no money for you; so instead of paying the tax on
my capital, here is the capital itself for you. Here is a bundle of
share certificates which you can sell to the waste paper dealer for
a halfpenny. Here is a bundle of bonds payable to bearer which you
can try your luck with, and a sheet of coupons which in a few years’
time will be as valuable as rare and obsolete postage stamps. Here is
a transfer which will authorize the Bank of England to run its pen
through my name in the War Loan register and substitute your own.
And much good may they all do you! I must shew you out myself, as my
servants are in the streets starving because I have no money to pay
their wages: in fact, I should not have had anything to eat myself
today if I had not pawned my evening clothes; and precious little the
pawnbroker would give me on them, as he is short of money and piled up
to the ceiling with evening suits. Good morning.”