Investments and Securities - Finance FAQs

Section III

INVESTMENTS AND SECURITIES

So far we have only considered what happens to the money of those who
save as long as it is left in the hands of their bankers, and we have
seen that it is only likely to be employed internationally, if invested
by bankers in bills of exchange which form a comparatively small part of
their assets. It is true that bankers also invest money in securities,
and that some of these are foreign, but here again the proportion
invested abroad is so small that we may be reasonably sure that any
money left by us in the hands of our bankers will be employed at home.

But in actual practice those who save do not pile up a large balance at
their banks. They keep what is called a current account, consisting of
amounts paid in in cash or in cheques on other banks or their own bank,
and against this account they draw what is needed for their weekly and
monthly payments; sometimes, also, they keep a certain amount on deposit
account, that is an account on which they can only draw after giving a
week's notice or more. On their deposit account they receive interest,
on their current account they may in some parts of the country receive
interest on the average balance kept. But the deposit account is most
often kept by people who have to have a reserve of cash quickly
available for business purposes. The ordinary private investor, when he
has got a balance at his bank big enough to make him feel comfortable
about being able to meet all probable outgoings, puts any money that he
may have to spare into some security dealt in on the Stock Exchange, and
so securities and the Stock Exchange have to be described and examined
next. They are very much to the point, because it is through them that
international finance has done most of its work.

Securities, then, are the stocks, shares and bonds which are given to
those who put money into companies, or into loans issued by
Governments, municipalities and other public bodies. Let us take the
Governments and public bodies first, because the securities issued by
them are in some ways simpler than those created by companies.

When a Government wants to borrow, it does so because it needs money.
The purpose for which it needs it may be to build a railway or canal, or
make a harbour, or carry out a land improvement or irrigation scheme, or
otherwise work some enterprise by which the power of the country to grow
and make things may be increased. Enterprises of this kind are usually
called reproductive, and in many cases the actual return from them in
cash more than suffices to meet the interest on the debt raised to carry
them out, to say nothing of the direct benefit to the country in
increasing its output of wealth. In England the Government has
practically no debt that is represented by reproductive assets. Our
Government has left the development of the country's resources to
private enterprise, and the only assets from which it derives a revenue
are the Post Office buildings, the Crown lands and some shares in the
Suez Canal which were bought for a political purpose. Governments also
borrow money because their revenue from taxes is less than the sums that
they are spending. This happens most often and most markedly when they
are carrying on war, or when nations are engaged in a competition in
armaments, building navies or raising armies against one another so as
to be ready for war if it happens. This kind of debt is called
dead-weight debt, because there is no direct or indirect increase, in
consequence of it, in the country's power to produce things that are
wanted. This kind of borrowing is generally excused on the ground that
provision for the national safety is a matter which concerns posterity
quite as much as the present generation, and that it is, therefore, fair
to leave posterity to pay part of the bill.