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§ 533 It is with the public credit as with credit in general ; the employment of credit gives rise to special kinds of transac tions in credit, and the resulting special branches of the credit business in their turn give rise to special organs and organiza tions, which become a necessity to the existence of the business in any highly developed form.

The modern organization of credit in general is represented by two classes of institutions known in the language of modern business life by the names " Bank " and " Bourse " or " Exchange." The distinction between these two kinds of institutions (see vol. i. sec. 423) lies in this, that the bank receives and advances money, so that the bank's business originates the paper with which transactions in credit have to do (such as deposits, bills of exchange, bank notes, drafts, mortgages, public bonds); whereas the bourse is occupied with the circulation of credit-paper already in existence—its business is buying and selling of securities.

The development of both these organs goes hand in hand with the development of business activity. It is only gradu ally that these organs succeed in absorbing the credit busi ness and that, in so doing, they react upon the credit business and increase its volume. The course of development is analo gous to that of productive industry. Productive industry, too, only gradually develops the methods proper to a high division of labor, and so advances from the stage of house hold industry to that of production on a large scale, from the stage of barter to that of money. The market upon which pro ductive industry places its products is at the outset some adjacent center of exchange, which is presently succeeded by a larger market with a wider tributary area, until finally great world markets are established, whose influence extends over many countries and vast areas, and acts to further specialize produc tion.

The case is similar with the business of transfers of the usance of capital. Answering to the stage of production by household industry we have a stage at which credit is entirely absent, any capital which one household may be unable to use productively being hoarded, while other households may suffer for want of bor rowed capital. When the employment of credit begins to develop and the transfer of capital becomes recognized as a usual thing, it is at first simply a transfer between neighbors, burdened with all the annoyance and inconvenience which must always characterize a business relation so entirely local and bound up with such close personal relations. The effort to make the demand and supply of capital correspond in volume, length of term, rate of interest, security, etc., can be only partially suc cessful so long as the effort is not seconded by the presence of a wide-reaching money market and the proper business organization.

Just as the development of trade first establishes an easy, regular and safe exchange of commodities, and thereby relieves the producers and consumers of the trouble of seeking each other out and reaching an adjustment of their mutual needs, so, as regards the exchange of capital, a like purpose is served by the development of independent business organs whose special ized function is trade in the usance of capital. When this devel opment is accomplished the new organs undertake the work previously done by those in need of and those in possession of capital. It is of course true, as in the nature of the case is true of all historical development, that even after this stage has been reached there is still a considerable volume of circulation of capital by the old method ; widespread usage, individual habits and inclinations change only very slowly, and the circumstances and customs, both of social life and of business, vary greatly from place to place. But the tendency in any progressively developing industrial community is constantly toward a growth of these intermediary organs whose logical purpose is a pro gressive centralization of the money market.

§ 534. The public credit partakes of this development in an eminent degree.

The great volume of its demand for capital on the one hand, and the long or unlimited term for which it requires its loans on the other hand, both contribute to make the public debt a very con siderable item in the business done by these great organs of credit, and also to bring the public debt relatively early into the organized money market.

The banks, by their great accumulations of deposits, have, at the outset, a virtual monopoly of the means necessary to raise those great sums which a public loan demands. As a result of the vague and uncertain ideas prevalent in the early, undeveloped stages of banking, the banks often turned over to a borrowing state capital which had not been entrusted to them for such a purpose. The mixing up of the earlier banks of issue with the business of the public debt, and the part which the Marine Com merce of Prussia played in its day as an intermediary between private persons and the administration of the public debt, belong to the stage of undeveloped banking. 'Mature development results in differentiation. Modern usage in England (affording a significant contrast to the usage on the Continent) has for a generation past gone so far as to restrict the term bank to those establishments alone which carry on a trade in short paper. Enter prises which deal in paper of a longer term, with the placing of public loans and the like are known by other names. This sharp distinction of names is an expression of the clear distinction observed between the two kinds of business.

The mature public credit presently outgrows its dependence on the Bank. It applies directly to the Bourse, the second organ of the credit business, by long usage the indispensable interme diary for long loans.

The requirement of perpetuity for its loans develops hand in hand with the demand for very large loans by the state, but it is to be noticed that there has been no corresponding development on the part of the capitalists who furnish the loans to the state. The discrepancy which arises from the presence of these two incompatible requirements may be and has been removed by the establishment of a daily market for securities. This is the meaning of the Stock Exchange. And this function of the stock exchange is performed with increasing efficiency as the sphere of the stock exchange widens and the number and variety of securities dealt in increases, and as the number of buyers and sellers of securities in the daily market increases.

To illustrate these general remarks by facts taken from the actual business life of today, there is given in what follows a survey of the exchanges of Berlin and London and the business which is transacted from day to day in such securities as are quoted on these exchanges.

§ 535. The number of securities of which daily quotations are permitted I on the Berlin stock exchange is at present (1889), according to expert computation' 985. This number of course includes items of very various degrees of importance; as e.g., a public loan of a few million marks on the one hand, and a public loan amounting to hundreds of millions on the other. The total number of items appreciably exceeds the corresponding figure for the previous year (883 on May to, 1888). The face value of the entire aggregate of securities quoted is 54,573 millions (as against 52,563 millions on May to, 1888); the market value being 55,669 millions.

This figure of course does not represent the volume of busi ness done on the Berlin exchange ; for it takes no account of what proportion of the total amount of any given securities enters the market of this one center of the traffic in securities.

This is especially true as regards foreign national bonds. But so long as we view this presentation of facts simply as indicating what takes place on a representative stock exchange it answers the purpose satisfactorily. The information it affords is espe cially significant if we take note of the market value and the rate of interest of the various securities, and the relation between the two.

The aggregate market value of all German , imperial, state, and municipal bonds was 9797 millions (toy per cent. of the nominal value) and the aggregate annual interest was 358 millions (3.85 per cent.).

The market value of foreign, state, and municipal bonds amounted to 28,36o million marks ( loo per cent.), the aggregate annual interest being 1218 millions (4.26 per cent.).

Beside public securities (163 altogether) there were 822 others, issued by private concerns. While the aggregate of pub lic securities was 37,653 millions, the private securities amounted to only 16,92o millions, including (as is also true of the state bonds) a considerable number not owned in the country, espe cially foreign railway bonds and railway shares (9624 millions) and foreign mortgage loans (1087 millions).

- The number and diversity of enterprises whose paper is quoted is very great : railways, banks, mines, breweries, sugar factories, gas and water works, machine shops, chemical factor ies, spinning mills and dye works, building societies, and insur ance companies. The papers were partly shares, partly bonds.

• The shares of 107 banks, of a nominal aggregate value of 1449 million marks, paid a dividend of 10o millions and were sold at an average price of 146.25 per cent. The dividend amounts to 7.6 per cent. of the nominal value, or 5.2 per cent, of the actual market value of the stock. The shares of 84 mines, of a nominal value of. 452 millions, with a dividend of 22.7 mil lions, were quoted at 524 millions ; that is to say, the dividends were 5 per cent. of the nominal value, or 4.2 per cent. of the market value of the stock. Shares of 38 breweries, of a nomi nal value of 75 million marks, with a dividend of 6.1 millions, were quoted at 131.2 millions ; that is to say, the dividends amounted to 8.1 per cent. of the nominal value, or 4.6 per cent. of the market value of the stock.

§ 536. The number of securities quoted daily on the London stock exchange' is about twice as great as the number quoted on the Berlin exchange, viz., about 1800.

Of this' number 34o are bonds of states, provinces, colonies and cities. Nearly two-thirds of these belong within the British Empire, and some 140 are from foreign countries. Interest on the greater number of these latter securities is paid in London, only 16 of which this is not true being quoted on the London exchange, and these 16 are for the most part the bonds of great states, such as France, Italy, Prussia and the United States.

The second great class, following the public securities, is made up of railway paper, comprising some 65o different kinds. Of these, 30o belong to railways in the British Empire, including India and the Colonies ; the remainder represent foreign railways.

The third and final class comprises shares and obligations issued by concerns of the most diverse kinds : banks, insurance companies, canals aid docks, mines, gas and water works, street cars, telegraph companies, breweries, and a variety of other industrial and commercial concerns, numbering in all some 800.

There is no computation at hand showing the nominal amount and the market value of these securities. Nor would a com parison of their aggregate value with the corresponding figure for the Berlin exchange yield any valuable results, unless the degree of intensity represented by the figures in both cases were also determined ; that is to say, unless we could also determine to what extent each of the securities that are dealt in on the stock exchange is actually employed as an investment of capi tal and so is an object of purchase and sale.

We may, however, supplement the general figures given above by a few data of a more special character, of undoubted accuracy, and very significant for the purpose in band.

English consols bearing interest at the rate of 2Y$ per cent. until 1903 and 2% per cent. after that date, and redeemable at the option of the government after 1923, were sold at 98 The bonds of the great English railway companies (Great East ern, Great Western, Great Northern, Midland, London and North western, Northeastern), bearing interest at the rate of 4 per cent., are quoted at 130-135.

The shares of the London banks of deposit and the London and Westminster Bank. paying 15 per cent. dividends, are quoted at 355 per cent.; London Joint-Stock Bank, paying 12% per cent. dividends, are quoted at 277 per cent.; London and County Bank, paying 20 per cent. dividends, are quoted at 467% per cent.

On the other hand, the Russian 5 per cent. bonds are quoted at 101-103 ; the Greek loans of 1881 and 1884, paying 5 per cent, interest, at 92 per cent.; Hungarian 5 per cent. bonds at 100-101; Mexican 6 per cent. bonds, at 95; Japanese 7 per cents., at 1 to; Santo Domingo 6 per cent. bonds of 1869, at These figures (July 6, 1889) may be compared with some of the items of the Berlin exchange list (August 1, 1889).

The German imperial loan, bearing interest at per cent., is quoted at 104; the Prussian national loan, bearing interest at per cent., is quoted at 105.

The bonds of the East-Prussian Southern railway, bearing per cent. interest, are quoted at 102 per cent.; the shares of the same road, which in 1887 and 1888 paid 6 per cent. dividends, are quoted at The shares of the bank of the Berlin Kassenverein (5S per cent. dividends) are quoted at 129 ; the shares of the German Bank (9 per cent.), at 172 per cent. ; the shares of the Discount Company (12 per cent.), at ; the shares of the Tivoli Brewing Company (7 per cent.), at 145 ; the shares of the Patzenhofer Brewing Company (55 per cent.), at 738.

Taking all the securities together which are quoted on the Berlin exchange, it appears on computation (as already indicated above) that in the course of the last year (May to, 1888 to May to, 1889) there has been an advance in the market value in the proportion of 48 to 53 ; i. e., about 10 per cent.

§ 537 The few figures here given from these two great money markets are intended to show two things.

In the first place, the figures of aggregates are intended to give some idea of the extent to which this form of investment affects the body of investments taken as a whole.

In the second place, the juxtaposition of securities selected as types of different classes, together with the variation of mar ket value between these different types, may serve to suggest what are the determining causes of the market value of securi ties, and consequently of the rate of interest. It is intended to bring out the manner and the causes by which the price of securi ties, or what is the same thing the rate of interest, is determined in the modern developed money market through the medium of the great stock exchange,—how this rate of interest is deter mined for the great multitude and variety of investments, not only within the limits of a single industrial community, but within the wider limits of the world-market. It is therefore intended to bring out for our special purpose what are the deter mining factors that decide the conditions on which public loans are obtained.

Let us now take a look at the exchange list of the London exchange, with a view to comparing the quotations of the vari ous securities which it names.

Consols pay an income of 23 , and this is paid for at a capi talized value of 98%. The annual amount of this income is to remain unchanged until 1903, after which date it falls to 254 per cent., and may then,, after another twenty years, in case a fur ther reduction of interest should make the transaction profitable for the government, be redeemed at its nominal value of too. The rate of 2 per cent. paid on consols is an expression of the value in use of capital under the conditions prevalent in a wealthy country with a high tax-paying capacity and a highly developed public credit.

The loans of the great English railway companies are obtained on conditions closely approximating the low rate of interest achieved by the public debt. Having been issued many years ago, when the rate of interest for this class of securities stood at 4 per cent., these railway bonds have appreciated by about one-third, for the reason that, as shown by later loans issued by the same railway companies, the present rate of interest for securities of this class is only 3 per cent., whereas these bonds secure the continued receipt for the future of the 4 per cent. originally stipulated. It appears, therefore, that the difference in rate of interest on English consols and that on English rail way bonds is only one-quarter of one per cent. ; the general situation of the English money market is very much the same for both classes of obligations, while the peculiar circumstances affecting the standing of one class and of the other are pretty evenly balanced, the security offered by a flourishing railway business (6-8 per cent dividends) on the one side nearly balanc ing the security offered by the English public credit on the other.

Dividends range higher among the London banks of deposit. A share of their stock brings a yearly profit of 12%, 15 or 20 per cent. The price of the shares is consequently much higher than it was at the outset-277, 355 and 467% per cent. But even at these prices the shares still yield interest at about 45 per cent. The difference in price between these shares and the securities enumerated above is due to the fact that while the same abundance of capital is available for these enterprises, and while the banks enjoy the highest degree of confidence and do a flourishing business, the rate of the annual profits is uncertain, because these shares represent not a loan, as in the case of the railway bonds, but a share in the business, The fact of this uncertainty affects the value of the securities all the more sensibly where, as in this case, the profits are very high, and where, con sequently, the chance of a decline in the rate of profits is rela tively great as compared with an investment yielding a low rate of profits.

Lastly, there are the foreign public loans. Russian and Hungarian loans pay, nominally and actually, 5 per cent. interest. The nominal 5 per cent. Greek loan is quoted at 92, and conse quently yields an actual interest on the investment of 5% per cent.; the Mexican loan of nominally 6 per cent. sells at 95, and accordingly yields an actual interest of 6X per cent. on the investment ; the Japanese 7 per cent. loan sells at i i o, the actual interest on the investment being consequently 6X per cent.; the 6 per cent. loan of Santo Domingo, finally, is quoted at 17%, which goes to say that in this case there is no regular payment of interest. If we compare them with the case of the English debt, the varying rate of interest at which the Russian, Greek, Mexican and Japanese obligations are capitalized argues, that in each and all of these countries the financial and political con ditions requisite to a high national credit are not present in the same degree as in England, and, further, that the transfer of surplus capital from a country possessed of a large accumulation of capital, such as England, to a very distant country meets with a certain peculiar element of distrust on the part .of the owners, which hinders a free and uniform distribution of capital.

538. We may now proceed to compare the selected securi ties of the London exchange, one by one, with the correspond ing securities on the Berlin exchange.

Relatively to one another the various classes of paper on the Berlin exchange range in much the same fashion as those on the London exchange. In the one case as in the other the price of a railway obligation bearing the same rate of interest is approx imately the same as that of the corresponding state paper. The difference between the market value of shares in dividend-pay ing business enterprises and that of a state or railway bond bear ing interest at the same rate, recurs in Berlin as in London, but in this case as in the former the difference is quite moderate so long as the stock in question is that of non-speculative under takings doing a steady and unhazardous business ; such, e. g., as the bank of the Berlin Kassenverein, whose shares, when counted at their market price, yield a dividend of about 4 per cent., that is to say, only some one-half per cent. more than the national bonds. In the case of speculative banking enterprises with less invariable dividends the market price is lower relatively to the dividends ; that is to say, the interest on the investment in these securities is higher. Investments in the German Bank and in the Discount Company pay more than 5 per cent. interest. In case the divi dends are uncommonly high, as in the case of the Patzenhofer Brewery, the risk of a decline in the dividends reacts on the market price of the stock, with the consequence that investments in such securities are made at an unusually high rate of interest (7% per cent.). All the cases cited are fair typical examples of what occurs in both the markets in question.

The great difference between the London exchange and that of Berlin lies in this, that the normal level of the rate of inter est in London is a little lower. This normal level is indicated by the market value of consols in London and of the Prussian bonds in Berlin. Consols bear interest at 2 per cent., and may be bought at ; the Prussian bonds bear interest at per cent. and are sold at 105. The English government, conse quently, pays its creditors interest at a rate some two-thirds of one per cent. lower than the Prussian government pays its creditors.

The ground of this cannot be sought in the different degree of credit enjoyed by the governments of the two countries ; for the other securities which we have cited as typical examples from the two countries in both cases stand in somewhat the same rela tion to the state paper of their respective countries. The reason must therefore be sought in general causes which decisively affect the general money market of Germany as distinct from the English money market.

These grounds are to be sought in peculiar circumstances affecting the money market of each of the two countries ; pecu liarities which may be expected gradually to disappear with the progressive development of an international money market, in a manner similar to that in which discrepancies of price in other commodities between one country and another are disappearing. The limit to the discrepancy in question is determined by the obstacles, physical and psychological, in the way of a transfer of capital from one country to another.

§ 539. The foregoing remarks are intended to show that the course of prices of securities, or what is the same thing, the rate of interest on securities, depends on two factors ; first, the general condition of the money market, which will vary with the pecu liarities of the industrial development from which it results, and second, the peculiar circumstances affecting the standing of each particular investment in detail.

Both these factors are in constant process of change and growth. If we compare the situation today in the money mar ket of London or Berlin with the condition and circumstances of the same market ten or twenty years ago, we find a difference between the present and the past which is common to both mar kets, and which runs as a characteristic feature through the money markets of all countries ; this characteristic feature is the higher average rate of interest paid at the earlier period. What we have already taken note of as a difference existing between England and Germany reappears as a difference in time between the money market of today and that of earlier years. The rate of interest on English consols twenty years ago was 3 per cent. ; the rate of interest on Prussian state paper was 4 per cent. The rate of dividends or interest on railway bonds, bank stock and railway stock, relatively to the rates obtained on pub lic securities, was the same then as now. On an average for the years 1830-1875 the interest on English consols was 3 per cent. ; on an average for the years 1839-1876 the income from the shares of the banks of deposit (London and Westminster Bank, London and County Bank) was 5 per cent,' and the divi dends on the shares of the great railway companies averaged about the same. The income from these securities today is 3 % 33 per cent.' The highest rate on investments being yielded by those railways which declare high dividends.

As is true of the money market in general, so also with respect to each particular class of securities in detail ; the con ditions have changed in the course of years. At any rate it is impossible to prove conclusively in any particular case that the standing of any one has remained entirely unchanged, while the presumption always is that the current of time wherein all living things lie will have had its effect at every point.

It might be a very difficult matter to ascertain whether the last few decades have brought fresh developments that have affected the credit of Great Britain. On the other hand, there is every presumption in favor of the position that the progres sive consolidation of the German Empire and of Prussia during this period has affected their credit favorably. It is a fact which no one will question that Great Britain or the German Empire will be able to obtain credit on better terms during an era when they are making but slight use of their credit than at a time when the contrary is true. It is likewise beyond question that the extended credit operations carried through by the Prus sian state for the eminently productive purposes of its state railway system must make quite a different impression on the money market than that produced by loans of the same amount for war purposes, especially by loans issued during the war. It is certain that the credit of the French nation was lower during and immediately after the last great war, when large loans were placed at a rate of about 6 per cent. interest, than at present, when France pays 354 per cent. interest ( 3 per cent. relates being quoted at 85).

The case is much the same with other securities. English railway shares approach the level of consols much more nearly at present ; the interval twenty or thirty years ago was I per cent., it is now scarcely I per cent. It is safe to assume that the ground of this lies in the increasing consolidation of these great enterprises, and in their continued productivity and a con viction of their permanence. The bonds of the railway com panies, as well as the shares, have approached nearer to the rate of interest received on investments in consols ; the figures were formerly 4 and 3X per cent, respectively, while they are now 3 and 2U per cent. respectively.

In all this no notice has been taken of. the obvious fact that any alteration in the productivity of industry will have its influ ence on the rise and fall of the market values of securities, espe cially of such securities (shares) as derive their returns directly from the earnings of the business which they represent. It is also to be remarked that we have here been comparing the income yielded by securities simply as interest on an hypothetically invariable amount of capital, and computed at so much per hundred of nominal capital, whereas on the stock exchange the basis of operation is always the actual value of the securities and not the nominal value.

§ 540. The relation of capitalists to the stock exchange is determined, ins a general way, by the degree of attractiveness of the securities offered for investment, and secondarily by the degree of centralization attained, in virtue of which the exchange governs, to a greater or less extent, the entire field of invest ment. Their relation to the exchange is governed, as regards details, by special circumstances affecting each particular class of securities.

It is only through the centralizing force of the trade in securities that the business community has reached the point of affixing a single market value to any given investment, and of correcting any aberrations by a revision from day to day. So long as investment has not developed into the form of securities the centralizing force of the trade in investments either fails of its effect, or works out its results slowly and painfully through intermediate steps. The obligations of a German railway enjoy a credit equal to that of German state paper and are therefore only obliged to pay 3S per cent. interest, but it will take years before equally secure mortgage loans on urban real estate can be brought below per cent. interest. these loans can be thrown into the form of securities of the ordinary kind, as has been the aim for more than a hundred years past of the Prussian Mort gage Loan Associations, by the formation of a corporation com petent to issue such securities, then this interval between mort gage loans and railway obligations in point of the rate of interest will vanish. But if it hereby appears that the interests of the persons in need of capital are on the side of securities of a marketable form, it is also true that the adoption of such a mar ketable form for mortgage securities is also very attractive to capitalists. Through the progressive division of labor, this form of securities will relieve the capitalists of all the trouble of selecting investments ; all the details of this process of selec tion being shifted to those specially engaged in the business, leaving the investor nothing beyond the decision as to the kind and price of securities desired. Instead of partnership in dis tant enterprises we shall have joint-stock shares ; instead of mortgage loans, debenture bonds ; instead of all private loans whatever, state paper.

The question as to the character of each of the securities, as compared with its price and as compared with the price and character of all other securities, taken in conjunction with the effect produced by the influx and withdrawal of capital from stock exchange investments, offers capitalists a world-wide field for speculation ; and this speculative activity in its turn, by a further specialization and division of labor, comes to the aid of the traffic in securities in making the requisite adjustments.

§ 541. The activity of the stock exchange in its present developed form effects, for one thing, a most painstaking scru tiny of those classes of investments that can be thrown into the form of marketable securities. This scrutiny, which is, in the first place, effected within the field of a particular stock exchange, is immediately and constantly made available for all the various exchanges in all countries by the help of the modern developed means of communication (telegraph, telephone).

The decision reached by means of this complex and wide reaching scrutiny expresses itself in the quotations of the vari ous securities on change. The incessant fluctuations to which these quotations are subject, and the growing minuteness of the fluctuations, increasing with the increasing rapidity of fluctua tion, are consequences of an ever-increasing nicety, of discrimi nation. Instead of strong and sudden perturbations we have (here as in the case of any developed trade) a gentle but inces sant ripple. And this result is possible only in so far as an ever watchful anticipation of coming events ( speculation) comes in to retard the action of causes that make for a sudden rise or fall.

The moral indignation with which this phase of modern busi ness life is looked upon by so many, and which must perforce serve in lieu of a knowledge of the facts for large portions of the public, can never be satisfied until the truth is generally accepted, that any highly developed technical process in business life is sure to be accompanied by phenomena that are questionable on moral grounds and call for efforts at reform.' The quotations which embody the judgment of the trade on the marketable securities express: ( 1) the aggregate of the features which go to make up the character of each particular security, such as the rate, degree of permanence and certainty of the interest payment, and therefore of the investment itself ; (2) the rank of the individual securities relatively to all other securities, and finally (3) the relation of the particular invest ments in question to the general condition of the money market. The selected figures from the Berlin and London exchanges given above express the influence exerted by all these factors upon the securities in question. The relation existing between the market value of any given security and the rate of interest paid by it depends in part on the varying reliability of the invest ment, in part on the varying circumstances affecting each, and in part on the degree of general development of the money market ; this relation varies incessantly, but the fluctuations are always the outcome of a close scrutiny of facts.

In any orderly national economy the obligations of the state will ordinarily stand for a normally perfect security, as well as for the lowest normal rate of interest.

§ The administration of the public debt is aware that the price of securities, or the rate of interest at which a given loan contracted for a given purpose can be placed, depends on all the factors which we have enumerated : the condition of the national credit for the time being, the extent of its demand for loans, the situation of the general money market, the amount, of available capital, and other circumstances affecting invest ments at home and abroad.

In issuing a public loan, therefore, the effort is to place it in such a way as to best allow for the fluctuations in the rate of interest and the price of securities which result from the action of these various factors. The points to be considered in this con nection in issuing a loan are-( I) the nominal rate of interest, (2) the term for which the loan is negotiated, or in other words the question as to whether it is to be terminable on the motion of the creditors, and if so, after how long a time.

The nominal rate of interest coincides with the real rate in the case of short loans, where the loan is terminable at the option of either party, so that the rate of interest originally agreed upon can readily be adjusted to the fluctuations of the market. The fluctuations of the rate of discount in such cases lead to readjustment between the creditor and debtor by a sim ple direct alteration of the terms of the contract, just as happens in all analogous contracts (lease) when one of the parties, on dish covering an alteration in current prices favorable to himself, brings on a raising or lowering of the price previously agreed upon by terminating the old contract.

The process is more complicated in cases where this direct means of adjustment is wanting, where the agreement is either not terminable or terminable only at the option of one party, or at least not terminable until after a period of years. In such cases, inasmuch as the original agreement continues in force for a long time, the necessity of an adjustment to the altered condi tions of the money market is constrained to find some other way. The market value of the loan rises or falls according as the rate of interest originally agreed upon exceeds or falls short of the rate obtainable for the time being. It is the office of a developed stock exchange to insure that these fluctuations in value find the most exact possible expression in the market quotations from day to day.

Since the length of time for which the loan is negotiated affects the course of the state's' obligations, it clearly follows that the terms of the loan, as to whether it is to be terminable, and how soon it is terminable, and whether it may be terminated on the motion of one or of both parties,— all these considerations will influence the rate of interest at which public loans can be placed. It is for the interest of the creditors to secure the privilege of terminating the loan at their own option, while the interest of the debtor state, on the other hand, is to secure for itself the fullest discretion with regard to terminating any of its obliga tions. But, as we have already seen, the creditor's right to terminate a loan tends on independent grounds to vanish with the development of the public credit ; this leaves no other pro tection for the interests of the creditor than such measures as will limit the right of the state to terminate its obligations.

The state for its part will find itself obliged to make certain concessions in this direction, for the reason that without these concessions the terms on which it could place its loans would be still more disadvantageous. All this holds with added force during a season of distress, when loans can in any case be obtained only on less favorable terms, and when the great amount of loans required may itself give rise to additional difficulty.

§ 543 The outcome of all these considerations is almost always a compromise. The creditors are assured a given rate of interest for a series of years, which implies the chance of a rise in market value wherever the national credit improves or money gets "easier." But the state sets certain limits to these advan tages granted the creditors by reserving the right of redemption after the lapse of a series of years.

One method by which this result is accomplished is that which was employed in the great French loans of 1872. The state engaged to pay its creditors interest at the rate of 6 per cent. in point of fact, but this was accomplished by issuing obligations bearing a nominal interest of 5 per cent. and selling them at 83. Since these obligations have a face value of 100 the state can not pay less than too when it comes to redeem them. That is to say, the creditors can be deprived of their 6 per cent. rate of interest only at the cost of 17 per cent. increase of the principal of the debt. This provision was sufficiently attractive to the cap italists to bring a superabundance of offers for the state securi ties ; while if the French government had reserved the right of redemption after a year's time a good share of the readiness manifested by the capitalists would have disappeared. But the concession made by the government also lies entirely within the limits set by this discount of 17 per cent. The government can not be held to pay more in discharge of the debt than 100. Consequently as soon as it can place loans of less than 5 per cent. (when this loan will rise above loo) the government is able to redeem it at 100.

The meaning of the so-called low rate loans is that a rela tively long time will elapse before the state can exercise its right Of redemption. If, e.g., the French loan of 1872 had been issued at a nominal rate of interest of three per cent. and obligations of a face value of 100 had been disposed of at 5o, then these obli gations would today stand at 85 instead of the so per cent. discount at which they were issued. The state would therefore, after a lapse of seventeen years, and in spite of a great reduction in the normal rate of interest on government paper, not be able to discharge the debt without suffering a loss, while as regards the creditors they would still have a chance of gaining a further 15 per cent. after having already made a profit of 35 per cent.

The opposite. extreme to this method would have been the placing of a six per cent. loan at par ; this would have conceded to the creditors no chance of making a profit above the interest and no chance of permanently drawing interest at the rate agreed on in case the normal rate of interest should decline, unless, indeed, the state had bound itself in some other way to suspend its right to redeem.! 544 At a season when there is an abundance of capital, when the public credit is gaining, and when the present has in addition the advantage of being compared with a recently pre ceding period of war loans (France in 1870-1873, the United States in 1862-1865) such as we have witnessed of late, the advantages to be gained through a reduction of the rate of interest brings on an era of interest reduction,' the result is a lightening of the burden of the nation and a reduction of the income of the capitalists.

This process of reduction of the rate of interest may be viewed from three distinct points of view : of legality, of equity, and of expediency.

As to the question of legality, it is to be accepted as a matter of course that any modern state must reserve to itself, in the terms on which the loan is issued, all the rights and privileges which it wishes to exercise at all. The state can exercise no right of redemption, and therefore effect no reduction of interest, unless on the basis of the terms of the contract.

The question of equity is somewhat more difficult. It is a matter of experience that, even in the case of loans in which the state has no interest, considerations of fairness and equity will modify the tendency to a reduction of interest in special cases. This serves to illustrate the truth that the determining factors in business life are not mechanical but moral forces. An exam ple of this is afforded by the funds which have been loaned out by benevolent institutions and have afterwards not been repaid by the benevolent debtors of the institution when the normal rate of interest has declined. The fact may be cited as a case in point that the Professors' Widows' Fund of Gottingen has been able to draw interest at 4% per cent. on a good share of its capital because the debtors, out of a regard for the benevolent purpose of the loan, have declined to take advantage of the reduction that has occurred in the normal rate of interest and so insist on a reduction or a discharge of the debt. There is all the more urgent reason for the demand that the state shall, in a sim ilar manner, have regard to other considerations than the course of the market ; for we are accustomed to measure the doings of the state by a higher standard than that which governs the rela tions of the market-place.

But even if we concede the justice of this view, or rather if we lay stress on it, we shall by no means come to the conclusion that attention to the financial advantage of a reduction of interest is incompatible with the higher considerations of equity or of benev olence in short the social-political bearing of the question.

In all the activity which the state (or the commune) puts forth in the field of financial and industrial policy, the decision that has to be made does not concern the question what is right or equitable absolutely, but rather what is the aggregate of inter ests to be taken into consideration. on one side and on the other.

An improvement of the conditions on which the state obtains its loans means a lightening of the burdens of the taxpayers ; any regard for the public creditors is only a regard for one part of the taxpayers, if it is not, as is sometimes the case, a regard for interests lying entirely outside the compass of the state. Now, the constitution of the tax-paying body of citizens being what it is, and the tax burdens being distributed in the manner in which they are distributed under existing systems of taxation, a very considerable portion of the tax burden falls on the shoulders of people who never, or, at the best, very seldom, are in position to hold any share in the national securities.

Relatively speaking, the most favorably situated with respect to such participation are the lower classes of the population in France ; but even as concerns that country the fact does not admit of question that the preponderant body of interests con cerned in the question of taxation is not to be sought in the holdings of renies among the lower classes.' But even under an imaginary condition of things, where par ticipation in the ownership of the public debt among the lower classes prevails to the very greatest possible extent, it is impos sible to comprehend why we should disregard the plain dictates of jus' ice, which demand that the burden of the debt and of tax payment should be reduced to the lowest figure that the state of the money market and of the public credit will admit. Regard for the great number of households in moderate circumstances which depend entirely or mainly on income from the public funds, must not blind us to the fact that there is always a much greater number of households that have to contribute out of the product of their labor in order to pay interest on the funds.' It may be added that the familiar catch-words about "widows and orphans" are very frequently nothing but a cloak to the selfish greed of great capitalists.

§ 545. The question of expediency, as regards any reduction of interest on the public debt, depends chiefly on the considera tion that in order to a successful move in this direction the state of the money market and of the public credit must be such as to enable the state to raise the funds required at the lower rate of interest aimed at. A conversion is not an unmixed success if the previous holders of the public securities arc not content to con tinue holding the government paper at the lower rate of interest; that is to say, if the funds offered by the state in payment of the debt are, in whole or in part, actually paid over to the creditors and so have to be replaced out of loans from a new set of cred itors. It has been estimated, e. g., that the sum paid over in the conversion of the Russian public debt to the German creditors alone, amounts to 260 million marks.' The more highly the public credit of any community is devel oped, the more plentiful the supply of capital, and, especially, the greater the influence of the owners of capital and public funds upon the national administration, the more rarely will a mistake of this kind be made, and the more frequently will a mistake of the opposite character be made. The reduction of interest in such cases is apt to follow the state of the money market only tardily. Apart from certain very striking examples of this (such as the long postponed reduction of the interest on the French 5 per cent. loan, which, when finally effected in reduced the inter est only by the inadequate figure of one-half per cent.), this meas ure has been resorted to with extreme caution also in Germany.

The Prussian 4% per cent. public loan created by the Consol idation Act of December 19, 1869, was, by the terms of the Act, redeemable after January 1, 1885. The 412 per cent. consols had by 1883 advanced to 106, and had then declined in view of the approaching redemption. The 4 per cent. consols had gone above par as early as 1880, and had advanced to 102 in 1883 and to in 1884. Due regard for the aggregate of taxpay ers demanded (such is the language of the Begriindung of the government's bill) a reduction of the rate of interest. Of the per cent. consols 545.78 million marks were outstanding at the beginning of 1885, requiring a yearly interest payment of 24.56 million marks. A reduction of the rate of interest by % per cent. would mean a relief of 2.73 million marks for the tax payers. The government was content to effect this much of a reduction, although the rate at which the 4 per cent. bonds were quoted was proof that a further reduction could have been success fully carried out. The reason for this course was, partly, "consid eration for the creditors," partly a solicitude lest capital should be transferred to more alluring but less secure speculative investments.

These were the considerations upon which the law of March 4, 1885, was based. A majority of the Landtag sided with the gov ernment. There was a scattering opposition' (on part of the Ultra montanes and the Conservatives) which even went the length of denouncing convertible public loans as vicious in principle. But this position was deprecated by the government as an "altogether infelicitous idea" [iiberaus unglucklicher Gedanke]. On the other hand, the upper house advocated a more sweeping reduction of interest on the ground that a gift to the state's creditors, such as was implied in offering them the 4 per cent. bonds (then quoted at 104.70) was entirely unjustifiable. This view was advocated more especially by the former Finance Minister Camphausen.

The fact is that the 3 per cent. Prussian public funds which were nearly at par in 1885 have since then advanced to 105 and even over that figure.' By October 1886 a reduction from 4 per cent. paper to 3% per cent. (and even in part to 3 per cent.) had been effected in other German securities, especially in mortgage bonds, railway securities and railway bonds ; the entire amount of securities converted being not less than 145o million It is of course evident that in the case of these securities the motives of everyday business life would act with less hindrance or scruple than in the case of the public securities.

The great body of 4 per cent. paper is made up of loans issued by the Empire and the individual states. Of these secu rities there were outstanding at the end of 1886 about 6200 mil lion marks, which were still awaiting conversion to 3 per cent.; that is to say, relief might be afforded the German taxpayers by this means to an amount of 3o million marks annually. But the question of a transition from 4 to 3% per cent. is evidently the same as the earlier question of a transition from 4% to 4 per cent.

§ 546. The fiscal measure of a reduction of the rate of interest is more frequently spoken of by the name of "conversion" or "refunding," because of the change by which paper bearing inter est at a higher rate is replaced by paper bearing interest at a lower rate. This measure comprises both of the operations which bring the public credit of today into relation with the money market, viz., the negotiation and the discharge of debt.

The more thoroughly centralized and organized the money market is, the more unavoidably is every considerable transaction in credit dependent on this central organ, whether in borrowing' or in repaying borrowed capital.

The reason for this is very simple. In proportion to the efficiency with which the market for securities performs its work will it become the focus both of the demand and of the supply of capital. The market gathers, as it were into a central reservoir, all manner of securities, varying in point of the rate of interest, the degree of security of the paper, domestic or foreign, in point of kind, etc. By this means it offers an opportunity to choose between forms of investment, and consequently an opportunity to withdraw from any one and transfer the invest ment to any other. The result is that any new demand for cap ital or for an opportunity to invest capital on entering the mar ket is confronted with a great body of material from which it can pick and choose, and on which it can work out its own effect.

The latest fashion in the redemption of' public debts, which has long since left obligatory redemption behind it as obsolete, and which redeems or not, or redeems more or less from year to year according to the general situation of the finances—this latest method of redemption can in no way effect its purpose better than by a purchase of the securities in the open market.

In placing the public loans, choice may be made either of this method, or of a direct application of the public administration to the investing public. Of this latter kind was the employment of the Grand Livre in France, above referred to, and the ramifi cation of that institution through the provinces ; the like is true of all those forms of public debt which are of the nature of a savings-bank for the people. But these forms of public debt afford no adequate reliance for the public finances on account of their irregularity and uncertainty ; the stock exchange, on the other hand, in proportion to the degree of its development, offers an effective means of obtaining large amounts of capital in a consolidated form. All this holds true with added force if the magnitude of the sums demanded, or any other circumstance affecting the situation, makes it necessary for the state to go out side its own boundaries for a loan. In such a case the exchange is the only organ possessed by the world's money market by which to obtain control of the funds required. A striking example of this is afforded by the great French loan negotiated after the late war.

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