The Small Investor and Debt Conversion
By SIR D. DRUMMOND FRASER, a Vice-President of the Institute -Of Bankers.
THE fundamental problem of British Government finance in the next few years will be, as it has been in the past eight years, that of replacing the high interest bearing War debt with low interest bearing peace debt So far, the results achieved in this direction cannot be described as strikingly successfuL . Since March,. 1919, the Govern- ment has applied £755,000,000 of the _taxpayers' money to redemption of debt ; yet the National Debt has actually increased since that date from £7,434,000,000 to £7,610,000,000. The interest charge, it is true, has fallen, but not by much. In 1919 it was £326,000,000 ; last year it fell to £313,000,000. It should be borne in mind that interest on the American debt was not being paid in .1919, but even allowing for this the fall is much smaller than should have occurred. The rate of interest is subject to the same_ economic forces as prices and wages. Prices of commodities stand to=day at less than one-half the level ruling in 1920, but the price of capital does not show Icorrespondin _decline. The Govern- Ment cannot, of course, direct economic, forceS, but I am convinced that it could have reduce the interest burden of its debt to a greater extent than has actually been achieved if it had paid more attention to the small investor: Of course, the same result would have been gained if the Government had pursued a wiser financial policy—if it had effected substantial economies and had not pledged its credit for the benefit of other people ; but even without these, great benefits would have followed .
un appeal to the small investor, whose numbers have been so, greatly increased by the redistribution of capital brought -about by the- War. - • DAY BY DAY BORROWING. , The amen investor really came* own during the War. It took the ,Government of the day some time to realize his potential valuein the scheme of war finance, but in the end he played a big part in the financing of the War. Money was collected day by day direct from the people. This system has been continued in the Savings Certificates movement, but I am sure that there is a large fund of savings which have not found their way into Savings Certificates: :The joint stock banks are all alive to the importance of the small saver : without exception they now appeal for the deposit of small Sums from £1 upwards, on which they allow interest. Small money is collected in increasing amounts for investment trusts. A feature of the present speculative boom 7 on the Stock Exchange has been the increasing interest taken in it by the small. man. The Manchester Corporation has borrowed for utility purposes over the Counter day by day practically the whole of the money required, apart from one or two Stock Exchange loans. Birmingham's municipal ban,k is 'anotherinstance of the way in which the small man is saving. Take the case Of tile LOndOn, 'Midland and Scottish Railway ; it has been stated that 67;568 people hold front £1 to -E1b0 this company's stock, and 60,626 froth £101 to ':-£200. Together,thilie holdingi represent 34 per eent. of tbilotal stock thave given elseivhere my estimate of the savings of the stnall cipitalisti • as over 14,000,000;000:- All these-are indications that there is a large fund of capital available' for investment in Government securities if only suitable stock can be devised- to -attract it. The -very small investor' :Who.' puts his savings into non- -Government stocks often does. not-do so because a higher -Yield is obtainable on them than on Government He Wishes` kathei to-secure .iitfetY for hiS. Capital thin'n high interest or dividend yield. At the same time he wants something with a longer currency than . Savings Certificates. He' does 'not wish to be' bothered with the question of transferring an investment- from one security to another. One reason—more important than many would think—why a large -proportion of the small savings of the country flows into non-Government securities is just that an offer of one of the latter is made at the precise moment when he has a,ccuinulated the sum necessary for application.
SPECTACULAR CONVERSION OF DEBT TOG COSTLY.
• The Government is not attempting to use this power of the small investor for the conversion of debt. It offers a large conversion loan just before the repayment of maturing obligation, the application lists for which remain open only a few days... No special appeal is made to the small investor ; indeed, iri -the case -of,sOme loans it 'would ,almost appear that the Treasury_ discouraged aPplications from' hiM. a result;-'a' large sum of money having to be raised in a Short time; 'the Govern- ment has to pay a high rate of interest on its new loan. Now if the Government, instead of relying upon one spectacular operation to provide it with the cash, had made itself responsible fOr the issue of POst'Offiee'bOnds day by day, it would have accumulated a certain sum by the time the maturing loan fell due, and, since it would be able to reduce the total of the new loan to be offered in the ordinary new issue market, it would obtain better terms' for ihat loan. Supposing a loan to the amount of £100,000,000 matures on December 31st. It may be taken for granted that only a proportion—probably a large proportion, but nevertheless not . the whole—of the holders of the lean will reinvest their money in the new loan which ,the Government is bound to offer just prior to the maturity of their present holding. We will say £70,000,000 is converted, leavingthe Government to find another £30,000,000. If, however, the Govern- ment had for some time previously made daily sales of bonds, it might have accumulated sufficient capital to pay off that part of the loan which the holders do not intend to convert. Thus, with no necessity to obtain fresh money, the Government need not make its' conversion 'loan so attractive' to the investor and costly to itself. Under the present system, the Government has to ask for a sum of money greatly in excess of the current volume Of savings, at the moment of the issue, and has conse- quently to offer a higher rate of interest to persuade investors to sell other securities and invest in the Govern= ment loan. BONDS ON " TAP."
i! If Post Office-bonds were sold daily,•they would create a continuous flow of money from the small investor for debt conversion. The rate of interest should be fixed, the price of issue being varied from time to time to meet changing conditions. Use should be .made of the Machinery of the National Savings Associations. A bond *similar to Victory Bonds should be offered, for this would Pe a "Popular 'security. The menace 'to "British 'credit inherent in the renewal week by week of the large amount iSf Treasury Bills outstanding could be gradually reduced by the offer of bonds on tap. A Post. Office issue I estt Mate would raise £1,000;000 a week. • * The use of the printiple.Of .tOntintions borrowing need hot, of course, be confined to the small. investor. Indeed day-by-day borrowing would be" brie 'bf the best methods of avoiding the violent disturbances of the credit market Which occur under the present system. _Perhaps it, is enough to remind' the Government that money is being saved continually, and not merely once a year.
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