In the City
Looking back and forward
Nicholas Davenport
The Editor has been making timely allusions to the amazing fact that this month the SPectator is one hundred and fifty years old. Perhaps I may be allowed to add that this year I celebrate the twenty-fifth jubilee of this financial column. But what is so magical about 1828? I have just been looking in my library at six volumes of Addison and Steele's Spectator dated 1711, in the style of our present Notebook and dedicated to the Right Honourable John Lord Sommers, Baron of Evesham. The author begins by saying that a reader seldom peruses a book With pleasure until he knows `whether the writer of it be a black or fair man, of a mild or choleric disposition, married or a bachelor'. He describes himself as a man about town, a club man, a friend of important people. He drops often into the Royal exchange and into Jonathan's, a coffee house, for a chat with his knowledgeable friends. Lord, how little customs have changed in the City.
The Stock Exchange actually started in the courtyard of the Royal Exchange where traders used to have their 'walks' dealing in various commodities and stocks and shares (one of the first was Hudson's Bay, still an active stock). William III, the first patron of modern capitalism, had discovered that long-term money could be raised in the City of London if interest payments were Promptly made and the titles to the bonds were transferable by deed. When the Bank of England was incorporated in 1694 for the Purpose of making such loans the would-be jobbers went to the `walks' in the Royal Exchange to make a market in them. And very unscrupulous they became. They did not hesitate to spread adverse rumours if they wanted to buy and invent good news when they wanted to sell. They became so unpopular on the Royal Exchage `walks' because of the noise and commotion they created that they were asked to move out and do their jobbing elsewhere. So they went to `Change Alley', the passage way which leads from Cornhill, where they could drop into one of the many coffee houses when it was cold outside. And the one they favoured was Jonathan's where they stayed for seventy-five years. The Stock Exchange still calls its messengers 'waiters'.
The first `strike', strangely similar to the recent refusal of the City institutions to buy the Bank's `tap' stocks in the gilt-edged market, occurred in 1716. The then government had issued a 4 per cent loan of £600,000 and only £45,000 was subscribed by the jobbers at Jonathan's. An angry Sir Robert Walpole declared in the House of Commons: `I know that members of the Stock Exchange have combined not to advance money on this loan. Every one is aware how the administration of this country has been distressed by stockjobbers'.
Everyone is now aware how the administration of the country can be and often is distressed by the politicians. For the onetime jobbers at Jonathan's have become an honest and reliable public service. In 1773 they formed a club with a select membership to organise a market in securities and moved to .a building off Threadneedle Street with the inscription 'The Stock Exchange' over the door. Strict rules have been drawn up over the years to secure a free, fair and active market in securities — still functionally divided into jobbers and brokers — where the savings of the nation can be converted into investment. Every socialist ought to be aware that his pet fullemployment and investment policy would be impossible if the subscribers to investment were not assured that they could convert back into cash on the Stock Exchange if the investment went wrong. Thank heaven the Stock Exchange is still a private club, albeit with a now advanced social conscience. A government stock market would freeze private enterprise and perpetuate a slump. The Spectator of 1710 wrote: `I am wonderfully delighted to see such a body of men thriving in their own private fortunes and at the same time promoting the public stock' — But I must not anticipate Mrs Thatchers election manifesto.
The election may be only three months away and I expect to see higher prices in the equity share market before it comes. The recovery in fact started this week when the first day of a new account saw the index nearly 10 points up. From its high of 549 the market had drifted down to 433, a fall of nearly 20 per cent. I remarked in this column on 25 March, when it had dropped 17 per cent, that I did not regard the fall as indicating a major bear market. It seemed to me at the time that the shares of well managed industrial companies, that is,
companies with a manageable work force not addicted to perpetual strikes, were intrinsically and historically cheap on the basis of both dividend yields and priceearnings ratios. Most of them were paying in effect little or no corporation tax, as a Sunday paper has at last discovered, because of stock reliefs and investment allowances. With direct tax relief in the budget the consumer trades were bound to have a recovery and most brokers were estimating a further rise in company profits. As long as the index stayed above 400 I said that the market could be described as behaving bearishly but not actually wearing a bear's coat. So it has turned out.
The real reason for the temporary drop was, of course, the non-committal attitude of the big investment institutions. There is no longer a private investor market as there was in the 1950s when the then editor of the Spectator asked his financial correspondent to produce six new shares each week. The private investor disappeared when, having been taken for a ride by Bernie Corfield of the IOS and other speculative 'managements', he retired into building societies and our own respectable unit trusts. The big institutions now command the market and when they withhold their buying it must fall. They committed a lot to the market on the 1977 rise — investment in equities by members of the British Insurance Association went up last year by £2,774 million to £10,435 million, which was nearly 3 per cent of their total invested funds— and it was obvious.that they would have to go slower this year. But they may be beginning to come back into the market as favourable developments turn up on the dividend front. Boots and Thorn Electrical have both boosted their dividends by raising new money in Euro-bonds. GEC might have done the same but profits were well up and the dividend income increased by the scrip issue last year. If the Government ends dividend restriction, now 10 percent, at the end of this month, as it should, the big institutions will be well back in the market.
The new money accruing to the life and pension funds each year is now over £8,000 million which can take care of both the giltedged and equity markets. But the Old Boys Brigade who run them are as sensitive to politics as they were in 1716 and the market today in this election year is bound to be extra politically conscious. And we must not get bullish over Bonn.
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