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.