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:—

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:—

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 316-2/3; but 319¼ in 1901 is the lowest price it has touched since 1888, and it seems highly probable that our would-be purchaser at 316-2/3 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.

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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.

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