ANOTHER BLOW TO INVESTORS.
NO class has suffered more severely of late years than middle-class investors,—that is, men who have no fortunes, or small fortunes, but who steadily, through their working lives, invest all they can spare as an in- surance against old age. They were terribly hit by the fall in the rate of interest which preceded and followed Mr. Goschen's conversion scheme, and which stripped the majority of them of from 25 per cent. to 33 percent. of their incomes. All first-class securities were converted alike, and they were driven to the second class, which were again depreciated by the fall in silver, by the im- possibility of foreclosing mortgages, and by the ruinous panic, as well as losses, which followed the Baring liquida- tion. To-day, they are being hit by another and most severe blow. Deterred from the " gilt-edged " securities by their extravagant price, and from cheap securities by the Baring example, they have invested millions in what seems at first sight a most tempting security. The banks doing business in India, Australia, South Africa, and the smaller Colonies, feed an almost unlimited demand for money required for industrial projects at rates varying from 6 to 8 per cent., or in some places even higher figures. They therefore can afford to offer depositors who will give them twelve months' notice from 4 to 5 per cent., and the offer is greedily accepted. The depositor, if he wants his money in a hurry, can always pledge his certificate, and feels as if lie were receiving 4 or 5 per cent. on money at call, an investment which, if it is only safe, is preferable for men still at work, or unfamiliar with industrial under- takings, to anything obtainable. It ought, moreover, to be perfectly safe, The demand for money at the rates mentioned does exist all over the world, the undertakings on which it is spent are generally' sound and profitable--- though sometimes a little too big—and the margin between the interest paid and the interest secured, leaves a profit on bank capital sufficient to tempt both solvent men and competent men into the business of management. The theory of the thing is so perfect, that, as a rule, the men who thus deposit their money are the most cautious of their kind,— hard-headed Scotchmen, Englishmen who understand business, and women who distrust everything that pays more than 5 per cent. The practice, however, is not quite so perfect. In i the first place, there is the personal equation. Everything in a bank depends, and must always depend, on its directors ; and the depositors neither elect the directors, nor control the directors, nor know anything about the directors, except possibly the assurance of some friend " who has been there," that in his time they were the best men conceivable. The directors may have axes of their own to grind, and may lend each other money to do it, with a result that, by some fatality of fortune, is almost invariably disastrous. Then, even if honest, which of course many of them are, directors are under three separate temptations, all of them exceedingly dangerous to depositors. One is to lend in too big lumps, and thus, as it were, commit themselves to the fortunes of firms which, by stopping, can inflict enormous losses on the bank. If the advance gets beyond £100,000, it is held to be better to go on advancing, and to hope for a return from the ultimate outcome, than to stop and acknow- ledge a loss so unpleasant to shareholders' pockets, and to directors' business-pride. This temptation to lend in lumps, we are told, is irresistible, it being far easier with many banks to borrow £100,000 than to borrow £10,000 on security which, amounts being considered, is of the same value. The little loan is no relief to the de- positors account. The second temptation, which has been so ruinous in Australia just now, and was so ruinous in Bombay during the great cotton-craze, is to lend for speculation during a " boom," or upward rush of values, on securities valued as if that rush were sure to be enduring. That temptation is also weighty, because the bank which does it and survives makes fabulous profits, while the bank which refuses is cursed not only by new customers, but by the old ones who have been carried away by the craze. And the third temptation is to lend on " solid" securities instead of "liquid,"—that is, to lock up money in masses where it can neither be lost nor got at, so that if the bank is menaced with a drain, it becomes at once insolvent. It is like a rich man in a famine, with every kind of property around him except something to eat. Why this special temptation should be so severe, it is hard to understand, but we presume that directors chafe under a plethora of deposits bearing interest ; that they know the properties offered to be safe ; and that, not being pessimists, the certainty of a moment occurring when pro- perty will be unsaleable, does not present itself to their imaginations. Anyhow, these are the dangers of banks which lend in " progressive " places ; and they greatly diminish the value of the security which depositors fancy they enjoy. That fact has been roughly brought home to them this week by the suspension of the Commercial Bank of Australia, with deposits estimated at £12,000,000, half of it, perhaps, due to depositors of whose savings their claim on the Bank is a most serious cantle. The money is, of course, not all lost, or possibly even any serious portion of it. The shareholders will be fined, the securities will be " nursed," money will be obtained for some reconstruction scheme, and gradually a portion, possibly the larger portion, will be repaid. The experience of commercial men is, we should say, that banks are never allowed to stop while they can pay 17s. 6d. in the pound ; but still, in this case, matters may be brighter, and the depositors may be repaid in full. But when ? The easy-going commentators on bank failures seem to think that money paid ten years hence is as good as money paid now ; but it is not the same thing at all, either in value, or in comfort, or in relief from anxiety. We venture to predict that this failure, even if all goes fairly right—and, for ourselves, we seldom believe a bank account after it has stopped—will produce a deep impact upon the mind of investors, and will dis- tinctly lower the value of Colonial bank deposits as a method of investment. If it does, there is another door shut for the investment of money by non-business men at any reasonable rate of interest. We wonder what this class of people—the class, we mean, that hopes in a lifetime to save from £10,000 to £50,000—will do if interest should fall to 2 per cent., as Mr. Goschen thought it would, and as, if the great war is postponed for a generation, we still venture to think it will. They can hardly earn more than at present. for competi- tion grows every day more severe, and they can hardly work longer, the age for retiring having been already pushed back ten years. They will not, we think, consent to the comparative penury involved in submitting to the reduc- tion, and we should expect to see one of three courses largely adopted. One is the American method, the dis- tribution of fortunes over multitudes of industrial under- takings, the investor trusting to the average and putting up with occasional small losses of his capital. This in- volves trouble, but it does yield income ; and we do not know that it is more venturesome than going on with a profession or a business which must always involve some risk. Another method, the one we should ad- vise, is to buy life-annuities sufficient to raise the rate of interest to 4 per cent. ; and the third is to expend yearly strictly regulated portions of the capital. It is curious to notice how exceedingly this last practice is now disliked, though it was all but universal in the eighteenth century, and though it is mathematically more profitable than the purchase of life-annuities. Men have lost con- fidence in their own ability to stick to their own rules, and think, if they begin spending capital, they will get rid of it all before they die. They are very likely right ; but their self-distrust shows a decrease in the fibre of their wills, even when their permanent interests are concerned, such as it would be difficult to induce a respectable Hindoo or Russian Jew even to credit. If he made up his mind to take £10 a year out of his hoard, and no more, he would go to prison for the rest of his life before he would touch another penny. Our people have not that tenacity of pur- pose ; but they will be welded into it if the yield of capital continues to sink as it has been doing for some years.
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