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 should desire to oblige), and with this comforting thought we may go on to consider the question how by means of it we can best benefit ourselves. In other words how can we most easily secure the investor's ideal as described above?

It aims at the least possible risk, the largest and most quickly growing income, and the greatest capital appreciation that can be had with due regard to safety. One form of investment, however, and one which should be the first consideration of those who would leave dependents in poverty if they died, does not yield an income but demands periodical payments. Life insurance has to be secured by most of us before we think of putting money into anything else, and it is a process by which we invest little by little, year by year, and receive nothing by way of income until we have reached a certain age or until the receiving is done for us by our executors.

A question was begged and perhaps a heresy was uttered when part of the investor's ideal was said to be expanding income and capital appreciation; it is also possible that the use of this latter term may puzzle the uninstructed. As usually carried out, investment is done through the purchase of securities on a Stock Exchange; there are other methods which will


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 be mentioned later, but this is the kind of investment which will be chiefly considered in this inquiry; and when we speak of "capital appreciation" as part of the investor's ideal, all that is meant is that he wants, if he has to sell the securities that he has bought, to be able to sell them at a higher price than he paid, or if he does not need or want to sell, to have the satisfaction of seeing them stand at higher prices and so feeling richer.

This desire for expansion in income and a rise in value of his securities brings the investor to the borderline which divides him from the speculator and, according to the most austere investment doctrine, takes him over it. The Straitest sect maintains that all that the real investor as such should desire is a safe income, and that as soon as he begins to hanker for either an increasing income or a rise in the price of his holding he becomes a speculator. A safe and sufficient income is better, according to this doctrine, than one which may grow but may also dwindle, and it is not possible to aim at growth without running the risk of dwindling; and there is no need, as long as income is secure, for the investor to bother himself about the price at which he could sell out; in fact, a fall in the prices of his securities may cheer his dying moments with the thought that the Inland

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 Revenue harpies will get so much the less out of him in Estate Duties.

This short and simple creed relieves the business of investment of most of its difficulties and robs it of all of its interest. An ideal which confines itself to amassing a holding of British Government securities or other unimpeachable investments is very wise and safe, and those who follow it will sleep soundly o' nights; but they will have renounced all possibility of adding to their income by intelligent selection of securities, they will have foregone the joys of adventure which the pursuit of wealth through investment affords, and they will have freed themselves as far as possible from the risks which earn and justify its handsomest rewards. In doing so they will have followed the counsels of the safest prudence, and for those who hate to be bothered about money matters this course is undoubtedly the wisest.

Nevertheless the fact remains that if everybody did so the progress of industry and enterprise would be very severely checked. The more sporting ideal that I have set up gives a chance for the introduction into investment of that spice of adventure which is an almost universal craving of the normal human mind, it makes calls on the intelligence and so creates interest in an otherwise very dull business, and


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 it enables those who follow it to feel that they are in chase of a quarry which they will only catch if they have helped to produce something which the demand of consumers has sealed as desirable. It is true that consumers often demand things which make the fastidious shudder, but that is another question. Viewed in this light investment may become a quite interesting hobby, and as I hope to show before I have done, the cultivation of this hobby by a sufficient number of intelligent people might do much to clean out the gutters which bad investment and stupid investors fill with unsavoury refuse.

At the same time the ideal of safety has constantly to be kept before us, and it must never be forgotten that as little risk as possible was put first among the objects that we wish to achieve. Anyone who is investing for his old age and for dependents who rely on his earning power has no right to tread the primrose path of dalliance with speculative risks until he has secured himself and them against all chance of penury. It has been well said that it is man's first duty to be healthy, and his second to be solvent; if he fails in either of these duties he is not pulling his weight in the economic boat but is only a cumbersome passenger, carried by the exertions of others


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 on whom he is a burden. Until the point has been reached at which risk can be afforded, the more austere ideal, which puts safety of income first, second, third and last and renounces all craving after expansion of income and growth in capital value, is unquestionably the one to be cultivated.

After that the spice of adventure and the judicious selection with a view to growing yield may be allowed to come into the picture. But this book will have been written in vain if it has not convinced those of its readers who arrive at the end of it that judicious selection is so difficult a business, owing to the scanty information about securities that is available, that the ordinary individual will be most unwise if he trusts his own knowledge and experience in trying to practise it. He will be well advised if he, by his purchase of securities, hands on the problem of investment to professionals who devote themselves to this business and have access to information which is not to be got at by the general public. By this system, the details of which will be explained later, he will reduce risk and at the same time have an excellent chance of partaking of the joys of expanding income and capital appreciation. And finally, if he finds this system of vicarious investment too humdrum, he can begin when


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 he can really afford it to make a collection of hopeful securities for himself, always remembering that there is no hope without risk, and that anyone is an ass who invests in possibilities, while forgetting that one of the possibilities is loss.

By this method the investor begins with the safety pedal hard down, and keeps it so until he is sure that he is able to afford adventure, after which the pressure on it may gradually be relaxed until, when his financial buckler is stout enough to blunt the edge of fortune's arrows, he can transfer the emphasis to adventure and indulge in the luxury of investing in enterprises of "great pith and moment" which, while full of glittering lure, must frankly be recognized as quite likely to disappoint their supporters.

In order that this method may be pursued the investor must grasp firmly the difference between the position of a creditor and that of a proprietor. Investment was described at the outset as the process by which we hand over money to somebody else, but the terms on which we hand it over make a great deal of difference. When we insure our lives we hand over money periodically in return for a promise to pay an agreed sum, with or without additions by way of bonus, on our death or at a certain date. When we invest in the more usual sense


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 of the word, we buy securities by the ownership of which we become either creditors or proprietors; or if we prefer to eschew the pitfalls of the Stock Exchange and venture among the much more terrifying man-traps (as they seem to me) of investments in house property and "real estate," we can either lend money on mortgage or go straight into property ownership.

In the case of houses the distinction between creditor and proprietor is clear. The creditor lends so much to the owner, the so much being a proportion—usually two-thirds—of the alleged value of the property, and the owner engages to pay him a definite rate of interest and to return his money either at a certain date or, more usually, whenever it is demanded, after due notice. Here there is no chance of increase in income or in capital value; it is creditorship pure and simple, and the creditor is protected by the right to seize the property if the debtor fails to carry out his part of the bargain by the punctual payment of interest.

If the property investment takes the form of ownership the investor buys land or houses, gets what rent from them he can, and receives as income whatever is over after he has met the expenses of maintaining the property. If the land or houses are in an "improving neighbour-


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 hood" the increase in value and in income from rents is his; if otherwise, he pockets the loss. It is evident at once that in this class of investment, comparative safety is on the side of the creditor, while risk and the chance of the profit are the salt and sugar that savour the dish of the proprietor.

The same distinction, but with an important difference, is to be found in the securities that are dealt in on the stock exchanges. They also confer rights of creditorship, or rights of ownership on those who buy them. Creditorship is enjoyed by holders of Government and municipal securities and of the bonds and debenture stocks of companies engaged in all kinds of industry—including primary production (such as the enterprise of land, plantation and mining companies), manufacture, transport and commerce; holders of these securities are promised a fixed rate of interest, and generally payment at par, or perhaps at a slight premium, at a definite date. Failure to meet the interest charge, or the capital sum at the due date, means an act of bankruptcy which the debtor has many urgent reasons for wishing to avoid; and investment in these creditor securities is thus as safe, when they are obligations issued by solvent and honest Governments and companies, as human ingenuity can make it. The


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 bonds and debenture debts of many industrial companies are fortified by mortgage rights giving power of foreclosure to the holders in case of default. How much these rights are worth will be discussed when we come to consider in detail the various kinds of securities.

Proprietorship is acquired by the buyer of ordinary or common shares or stocks, which represent the capital of the concern, the bonds or debentures being its debt, or part of it. Holders of the ordinary rank last for a slice of the profits, but they are entitled to all that is left after the expenses of the business, including wages, salaries, directors' fees, taxation, interest on debt, sinking fund for its redemption, depreciation, provision for bad debts and all other outgoings and charges have been met. The "functionless" shareholder puts down the money that starts the business and waits until all other claimants have been satisfied in full before he sees any return on it; and whatever is over, if anything, is his. His position is thus necessarily speculative, so much so that some people say that he is not an investor at all but a speculator pure and simple. But the degree of uncertainty involved concerning the income that he is likely to receive varies so greatly with the record and standing of the company in which he is interested that he may be either


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 as safe as, or perhaps even safer than, if he held gilt-edged Government debt, or be quaking on the quicksands of an investment in an untried patent or a mine that is still searching for its reef.

But the point which distinguishes the income of the ordinary shareholder—the proprietor—from that of the debt holder—the creditor—is that it may grow, and, with it, the value of the holding. This power of growth necessarily carries with it the power of diminution even to the point of being wiped out. But this power to grow less is also inherent in the income from all forms of debt; in the case of some of them the risk of decrease is negligible; but even the impossible happens sometimes. Ten years ago a German holder of Prussian bonds or of a Hamburg municipal loan would have laughed to scorn the suggestion that in any circumstances the interest would not be met. And he would have been right, but there came a time when, owing to the manner in which Germany multiplied her currency, the interest was paid in money the value of which had been divided by so many millions that it was not worth while to cash the coupons.

Creditor and proprietor thus both face the risk of diminution to the point of extinction in their income and consequently in the selling


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 value of their holding, though the risk falls first on the proprietor and wipes him out before the creditor is touched. But the compensating chance of increase which comforts the proprietor never cheers the heart of the creditor. He ranks before the proprietor, though after the wage-earner, the tax-gatherer, the office boy and other expenses essential to the maintenance of the business, but he only ranks before the proprietor for a fixed amount, and if the net income of the enterprise is multiplied by ten, he gets no more interest, though he may see an increase in the selling price of his security.

It thus begins to look as if the prudence of those who will on no account be deluded into the purchase of anything so speculative as an ordinary stock or share may sometimes mislead them. They minimize their risk, but they do not, as the Prussian-Hamburg example shows, eliminate it altogether, and they eliminate altogether all chance of expansion in income.

And this chance of expansion in income from ordinary shares in concerns that are well established, well financed and well and successfully conducted on the business side, is not only a chance but a probability. An American writer, whose work and investigations will be more closely examined in a later chapter, made


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98Rh and people have been duly amazed by it. But what is still more amazing is that such an immense change in knowledge and in way of life should have brought so little change in religion and ethics, and that such change as it has brought in these matters should have been in a direction opposite to that which would have been naturally expected. Science is supposed to tend to rationalism; yet the spread of scientific knowledge in Japan has synchronized with a great intensification of Mikado-Worship, the most anachronistic feature in the Japanese civilization. For sociology, for social psychology, and for political theory, Japan is an extraordinarily interesting country. The synthesis of East and West which has been effected is of a most peculiar kind. There is far more of the East than appears on the surface; but there is everything of the West that tends to national efficiency. How far there is a genuine fusion of Eastern and Western elements may be doubted; the nervous excitability of the people suggests something strained and artificial in their way of life, but this may possibly be a merely temporary phenomenon.

Throughout Japanese politics since the Restoration, there are two separate strands, one analogous to that of Western nations, especially pre-war Germany, the other inherited from the feudal age, which is more analogous to the politics of the Scottish Highlands down to 1745. It is no part of my purpose to give a history of modern Japan; I wish only to give an outline of the forces which control events and movements in that country, with such illustrations as are necessary. There are many good books on Japanese politics; the one that I have found most informative is McLaren's Political History of


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 the interesting discovery, from a series of tests that he applied to a large number of securities, that over a long period the investor in a diversified selection of common stocks, would have fared better in the matter of income than if he bought, instead of common stocks, such high grade bonds as were available at the time of purchase. And he gave the reason, which is beautifully simple and obvious when once it is pointed out.

Everyone who considers these matters has always known that ordinary shares, if one gets the right ones—a considerable "if"—are the pleasantest of all securities to hold because they grow in income and value. But Mr. Smith has first shown us the logic of the matter and why there is a probability that they should do so.

The reason why this increase is probable in the case of well-financed and well-conducted industrial concerns is not only the natural tendency of a good business to grow in activity and profit—which is likely to be checked by competition stimulated by its example, and is subject to the inevitable risks which all forms of industry involve in varying degrees—but by the fact that it is a canon of sound company finance never, except in times of acute depression or exceptional misfortune that is not likely


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 to recur, to distribute to the shareholders in dividend all the profit that has been earned for them. It is the usual practice for part of the profit earned to be held back by the directors and either put to reserve fund or added to the amount carried forward, or used to redeem debt. Redemption of debt evidently, by reducing the amount of interest that has to be met increases the future net income of the company; additions to reserves, or to the amount kept in hand and carried forward, mean that the company has larger funds at its disposal, to be invested either in the expansion of the business, and thereby of the profit, or in the acquisition of interests outside of it, that are thought likely to be profitable.

The consequence of this reserve fund policy, which is normal in well-conducted companies whose business is subject to fluctuation, is that the ordinary shareholder continually has part of his income saved for him, because the directors keep it and reinvest it for him. He is thus not only an investor, but also—generally without being aware of the fact—a chronic reinvestor. Very often he growls at the policy of the Board and considers that it is robbing him of money which might have been paid to him in dividends; in fact the Board is not robbing him at all, but keeping part of his money, which he would have


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 spent, wisely or unwisely, if he had got it, and using it to increase the value of his holding and the probability of a larger income from it in future years. If it is used to pay off debt then a larger part of the company's assets—its land, buildings, machinery, stock-in-trade and so forth—is the unencumbered property of the shareholders, and more of the income derived from them will be theirs; if it is added to reserve or to carry forward it is still owned by the shareholders and is put into assets that will earn more for them. Shareholders are too apt to set up an imaginary distinction between themselves and the company, and to fancy that what the directors keep back is not theirs but the company's. In fact, they are the company, and every increase in its property and income is theirs in proportion to their holdings.

The important difference, referred to on page 10, between proprietorship represented by an investment in real property and proprietorship represented by a holding of stock exchange securities has thus emerged. The investor in house property, who manages his investment personally or through an agent, takes the whole income that comes in after meeting charges, and after, perhaps, making a somewhat sketchy allowance for depreciation. If he is wise enough to adhere steadily to the practice


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 adopted by directors of well-financed companies, and reinvest regularly part of this income that he receives, then he makes his holding, if he reinvests successfully, into a gilt-edged real-property investment, steadily expanding in earning power and value. But human nature being what it is, it is evidently much more difficult for the ordinary investor to carry out this policy for himself, faced as he always must be by manifold and clamorous reasons why any money that he receives should be spent, than to submit to the beneficent despotism of the directors who manage the finances of the companies in which he is interested, and reinvest for him, subject to his confirmation in general meeting which he is too wise or too lazy to withhold.

Why, then, it will naturally be asked, are not industrial companies more uniformly successful, and why is it that financial concerns such as insurance companies, banks and trust companies do not invest a much larger proportion of their funds in the ordinary shares of industrial enter prises which have been shown to have this probability of growth in income and in value on their side? And why should the investor whose ideal involves expansion of income and value in his investments, still be advised to seek the comparative safety granted by creditor-


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 ship up to the point at which he is secured against the chance of penury; and only then be advised to seek the ampler joys that are provided, through a holding of ordinary shares, by ownership? Why should he not go straight to ordinary shares and ownership if probability of increase is involved by their possession?

All these questions are answered if we look back at the sentence on page 14, where the conditions of probability are set forth. It was there stated that the chance of increase is a probability in the case of concerns that are well established, well financed and successfully conducted on the business side. The industrial risk is always there, and can only be met by unceasing energy and vigilance in management and adaptability to every change in conditions that may be brought by the progress of scientific discovery or the variations of demand. Industry of all kinds is necessarily a venture, and the strictest observation of sound finance and the policy of ever-expanding reseryes cannot protect an industrial concern from the consequences of loss in profit-earning due to competition by rivals who are better equipped on the technical side. It will help by placing at the disposal of the management ample funds for making the necessary adjustments, but


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 technical skill is the finally deciding factor; and anyone who invests in industry has to be sure that the companies which he chooses not only possess it now, but are going to possess it as long as he is interested in them.

Moreover, investment in industrials, unless so large a number of them is taken that the average investor's holding would be inconveniently split up, gives the possessor not enough of that distribution of risk which is so essential to safety. The professional man, saving a small amount every year, who began to make a collection of attractive-looking industrial ordinary shares and stocks, might easily be faced by misfortune from his early acquisitions before he had accumulated a sufficient number to secure that average success which is all that can be hoped for from an investment of this kind. It is true that some Boards of industrial directors try to reduce the risk of their shareholders by investing reserve funds outside the business, but there is not much real safeguard in this. It is the business of industrial concerns to engage in their own industry and not to turn themselves into investment companies; and if anything goes wrong on the industrial side it is natural and right that the non-industrial investments should be sold and the proceeds used for the purpose of remedying it.


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 But it has already been suggested on page 8 that the investor may find a half-way house in which he may enjoy the advantages of ownership while minimizing the risks that are attached to it when he pursues it with the assistance of no better guide than his own knowledge and judgment. These risks are chiefly due first to the mistakes that he is likely to make in the selection of ordinary shares and stocks to be bought, and secondly to the narrow field of distribution to which individual holdings are necessarily subject.

These risks can be avoided by choosing investments in the ordinary shares of concerns whose business it is to select investments over a wide field. By so doing the investor at once secures the services of a body of professionals specially trained in the art and science of selection, and participation in ownership of a mass of assets distributed over a much wider field than he could possibly hope to cover even if he went on investing all his life and split his investments up to the point of inconyenient minuteness.

Such concerns are banks and discount houses, insurance companies and trust companies. It may be objected that banks hold a small proportion of their assets in investments of the kind that are usually described by the


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 name. This is quite true, as will be shown for the benefit of those who are not already aware of the fact, when the question of bank shares as investments is discussed in detail in a later chapter. But the fact that the banks put the greater part of the funds which they handle at the disposal of industry and finance in the form of discounts and adyances does not make their shares any less a doorway through which the possessor may enter straight into the position of ownership, with a body of highly trained experts constantly at work to see that the assets of which he owns a fraction are carefully selected and well distributed, over the immense field that is covered by those whom it is the pride and the profit of the banks to serve.

By taking refuge in this hospitable half-way house the investor will not, by any means, have put away all his risk, and in buying the shares of banks, discount companies and insurance companies he will have to give serious consideration to the question of the heavy liability that is generally carried by them; but the automatic and unconscious saving and reinvestment that we found to be carried out for the shareholder by the directors of well-financed industrial companies will here, especially through investments in insurance companies, be very strongly on his side, while the important position that the


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 trust companies have secured for themselves as part of our financial machinery will give him access to a share in profits and security that are the privilege of first-hand information.

By means of a holding of this kind the investor, who has first through insurance policies and a well-chosen selection of creditor securities protected himself and his dependents against the risk of penury, may seek the ideal of expanding income and rising capital value that may be got from judicious ownership. But he must not by any means suppose that the shares of any and every bank, insurance society or trust company will open this door for him and that he can shut his eyes and buy, or even that he can buy, unassisted by professional advice, after the most patient study of all the information concerning the position of such companies that is produced for the benefit of the public. We shall see as we go on how little real knowledge is conveyed by the balance-sheets and reports that set forth the achievements of all kinds of public companies, and that real understanding of their position and prospects is only vouchsafed to those who can read between the lines and know something about the facts that are behind the figures. To have a good professional adviser and to follow his advice is the best way to safety and satisfaction


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 in investment for the ordinary citizen; but he can help his adviser considerably by applying intelligence himself and knowing something about the difficulties of the problem to be solved.


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is usually undertaken because we want to provide an income for ourselves and our dependents when we have left off earning one by our work, and to have a sum ready in the hands of our executors to pay the cost of burying us and proving our wills and filling the rapacious claw which the Chancellor of the Exchequer holds out whenever an estate passes by inheritance.

Investment for all these purposes can be done by means of a policy, or policies, of life insurance, with the additional and very important advantage that if we happen to die the sum assured is immediately available for those we leave behind.

It therefore follows that anyone who has wife or child or others dependent on him should make his insurance premium the first charge on his income after the barest necessities of life


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99Rh  Japan during the Meiji Era 1867–1912 (Allen and Unwin, 1916). For a picture of Japan as it appeared in the early years of the Meiji era, Lafcadio Hearn is of course invaluable; his book Japan, An Interpretation shows his dawning realization of the grim sides of the Japanese character, after the cherry-blossom business has lost its novelty. I shall not have much to say about cherry-blossom; it was not flowering when I was in Japan.

Before, 1867, Japan was a feudal federation of clans, in which the Central Government was in the hands of the Shogun, who was the head of his own clan, but had by no means undisputed sway over the more powerful of the other clans. There had been various dynasties of Shoguns at various times, but since the seventeenth century the Shogunate had been in the Tokugawa clan. Throughout the Tokugawa Shogunate, except during its first few years, Japan had been closed to foreign intercourse, except for a strictly limited commerce with the Dutch. The modern era was inaugurated by two changes: first, the compulsory opening of the country to Western trade; secondly, the transference of power from the Tokugawa clan to the clans of Satsuma and Choshu, who have governed Japan ever since. It is impossible to understand Japan or its politics and possibilities without realizing the nature of the governing forces and their roots in the feudal system of the former age. I will therefore first outline these internal movements, before coming to the part which Japan has played in international affairs.

What happened, nominally, in 1867 was that the Mikado was restored to power, after having been completely eclipsed by the Shogun since the end of


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 have been paid for. This duty is so obvious that even the Revenue authorities encourage us to perform it, by remitting income tax, within limits, on sums invested in this form of thrift.

Insurance policies are infinite in variety, and it is no part of the purpose of this book to examine their varieties in detail. Their broad divisions are into:—

A with-profit policy carries the right to share in the surplus shown by the company after providing for claims. The share received by the assured is usually called a bonus, and may be taken in the form of a reduction of future premiums, or of an addition to the sum payable when the policy becomes a claim, by death or maturity. One can have a with-profit or a non-profit endowment policy and likewise with whole life.

The advantages of these different kinds of policy have strong advocates. It seems to me that a man who lives by his work and has to face the possibility of a "Saturday afternoon" to his life in which he will be inclined, and probably obliged, to live without working, is well advised to choose the form of an endow-


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 ment policy or policies, payable at the age of sixty or sixty-five.

One argument against the endowment form of policy is the likelihood that the assured, on collecting his policy money, will proceed to dissipate it. If this be really probable it is certainly better to deliver ourselves from temptation by having a whole life policy payable to our executors. But I should have thought that most people who have the sense to insure will be more likely, by the time that they come to the age when the policy matures, to have the sense to take care of the money if it is necessary for them to do so.

An advantage about collecting one's insurance policy oneself is that it saves one from the feeling, which must, I imagine, be unpleasant as one becomes old and a useless consumer, that one's dependents will be better off when one is buried. In the case of a whole life policy-holder this is true. When one is old and helpless, there will be a certain satisfaction in feeling that one is still an earning asset, and this satisfaction one can secure by the acquisition of an annuity which will rather more than cover one's cost of living. This at least wil! give one a material justification for going on living after one has ceased to be an active worker.


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 This may be a selfish, perhaps a morbid, point of view, and of course no one has any right to sink capital in an annuity unless he has already made full provision for anyone that he leaves behind, and preferably, in my view, handed that provision over to them, so that no one may be waiting for monetary advantage from his demise.

As to the non-profit or with-profit division, very shrewd advisers have pointed out to me the disadvantage of paying the higher premium that a with-profit policy requires, when there is a risk that one's company may have no surplus to divide in bonuses. But it seems to me that in normal times this risk is negligible. The companies must work on a margin, and that margin becomes surplus. My feeling is that good insurance companies can invest better than I can—for one, among many other reasons, because they handle much larger funds—and in my youth I took out two with-profit endowment policies, and I see no reason to regret having done so.

But if insurance has all these advantages why should one bother about any other form of investment? Why not put all that one can save into life policies? For those who are going to die young, this would certainly, from the point of view of their heirs, be the far, far


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 better course. But for those who are going to live a normal span, moderation in insurance is counselled by the fact that those who live pay for those who make brilliant insurance investments by dying.

The chairman of the Clerical Medical and General Life Assurance Society cautioned the shareholders at the meeting held last October against inferring, from its fortunate mortality experience, that every claim represents a profit to the society. "This," he said, "is indeed, far from being the case, and the protection afforded by life assurance against the risk of early death is a very real one. The actuary informs me that of the 241 deaths which took place during the year, two—one of which, I may mention, involved a very large amount—occurred in the first year of assurance. Two deaths occurred in the second year of assurance, and five in the third; while over 40 per cent. of the total number of deaths resulted in a financial loss to the society—a tribute to the value of life assurance to the community." This financial loss, of course, was met out of profits made at the expense of the long-lived policy holders.

As we do not know, when we insure, whether we shall be a financial loss or profit to our society, but naturally expect to be a source of


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 profit by surviving, the natural course is evidently to limit our purchase of insurance to the point which makes full and, if possible, generous provision for those whom we shall leave dependent if we die young; and having made this duty the first charge on our saving capacity, to devote the balance of it to investing for ourselves.


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he has protected his old age and his dependents by adequate insurance, the investor according to the scheme that has been sketched out for him proceeds to accumulate a holding of securities that will give him an income if he happens to be afflicted by loss of earning power, by ill-health or any other cause.

In England we generally prefer to deal in stocks and shares that are registered or inscribed, while securities to bearer are usually preferred abroad. Under the English system the buyer of a security has his name enrolled by the debtor (or by the company in which he is part proprietor in the case of ownership securities) and his interest or dividends are sent by post either to him or to his bank, as he may direct. If the security is "registered" he receives a certificate stating that he is the registered owner, but this certificate has no


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 value as title to ownership, which is transferred by means of a deed of transfer signed by the seller and the purchaser. In the case of "inscribed" stock there is no certificate and ownership is transferred by the attendance, in person or by attorney, of the seller. Bearer securities, as their name implies, are represented by a document which is in itself evidence of ownership—a bond or share certificate—and interest or dividends are paid against the delivery of coupons—pieces of the bond or share—that are cut off it and presented. Safe custody of bearer securities is thus essential and they are generally left by their owners in the charge of their bankers, who cut off and present the coupons. Victory Bonds are an example of bearer securities issued by the British Government, but the greater part of the British debt is in the form of inscribed and registered stocks.

It was agreed that in laying his foundations he is to consider safety first, second, third and last with no thought of increase in income except by addition to his investments and little hankering after a rise in the prices of his securities. Naturally he will not want to see them fall, and he may endeavour to secure himself against this contingency by selecting obligations that are redeemable at a definite


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 date ahead. But steadiness of income is the first and last consideration, and to the continuous investor who is saving and investing periodically, a fall in the prices of well-secured stocks enables him to invest to greater advantage. If the stocks that he has chosen fall for some special reason that has made them less safe, that will be a reason for getting out of them, but if the fall only reflects a rise in the general rate of interest and affects all high-class investments alike and is not significant of any weakening in real security, it is an accident that may be ignored by the genuine investor who is first concerned to provide himself with an income that he may feel sure of receiving.

There is, however, a school of investment doctrine which tells us that we ought to watch the fluctuations in the rate of interest and anticipate them, and make a profit from them by changing over from long-dated or perpetual securities to those which are due for redemption at an early date, and back again; and the possibility of engaging in this interesting system may appeal to some investors.

The idea, as far as I understand it, is something like this. Changes in the rate of interest on investments—that is in their yield to the investor at current prices—are due in normal times chiefly to the quickening or slackening of


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 the tide of trade. When trade is active and prices of goods are rising, money is wanted by manufacturers for financing enterprise, and there is thus less available for investment and for financing speculation in securities. When Manchester, Huddersfield, Sheffield, Glasgow, and the other great centres of industry and commerce are so busy that they want every penny that they can raise to pay for materials and other current expenses, they are then likely in the first place to sell securities and so depress their prices and, further, by their clamorous demands on their banks for assistance, to reduce the amount that the banks can lend to the financial firms which use it in carrying the floating mass of securities which is the stock-in-trade of the investment market; and so some of it has to be sold and prices are further depressed. As they say on the Stock Exchange, trade and securities cannot boom together.

When money thus becomes scarce and dear, the securities that are most severely affected in price are the fixed rate creditor securities that are perpetual, or are not redeemable until a remote date. Those that have to be redeemed comparatively soon are naturally kept steady by that fact. Evidently a stock representing the obligation of a solvent debtor


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 to pay 5 per cent. interest and £100 per cent. in capital in two years' time is less likely to fall far below par than the obligation of the same debtor to pay 5 per cent. interest with no obligation to pay the principal ever, or before, say, 1965.

And vice versa, when money is plentiful and cheap because trade is slack and commodities are low in price, and consequently need less money to finance those that have not yet found their final purchaser, then securities rise because the spare money is invested in them; and the long-dated or perpetual variety will rise faster than those which must, or may, be redeemed shortly.

Consequently, those who can make accurate forecasts concerning the future movements of trade, which expands and contracts, or has hitherto done so, in more or less regular cycles, can make profits by jobbing in and out of fixed-rate investments, from the long-debts to the short ones; or from fixed-rate investments which rise in time of slack trade, to industrial shares and other owner-securities which rise in time of active trade owing to the larger profits that their holders then expect to earn.

For the ordinary investor it is very doubtful whether it is advisable to take part in this form of speculation, for it is nothing else. It is


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 simply backing one's view concerning the probable course of trade, a matter which requires an amount of study and information that the average citizen can rarely bring to bear on it. The expense of changing from one investment to another is considerable by the time that brokers, jobbers and tax-gatherers have all taken their toll of the process. If you work out the commissions, transfer stamps and fees, contract stamps and jobbers' "turns" on a sale and repurchase of registered stocks or shares, you will find that they may come to something like a half year's income on the securities. In this way a large part of the profit, if any, is gone before it is garnered; and the loss is pro tanto increased, if calculations concerning the course of the trade cycle should happen to be upset by some prank of Nature's in the shape of good or bad harvests, earthquakes or pestilence, or by some human aberration, such as war or revolution or widespread industrial unrest.

This being so it seems much better for the ordinary investor to choose for the foundation of his holding good creditor securities that can be relied on not to fall because of any special deterioration affecting the probability of the interest on them being paid; and, having got them, to keep them as long as they remain


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 within that class, unless some special reason arises for changing them.

As long as he has a sufficient holding of such securities he is sure of an income payable in the legal tender money of his own country, or in some other country's which can be relied on (a point which will have to be discussed more fully later) not to vary widely in value when it is converted into sterling. But so much has been said lately—and with good reason—concerning the violent changes that have taken place in the last twelve years in the power of English and other monies to give their holders command over the goods that they want to buy and the need for a careful investor to protect himself against depreciation of the money in which his interest is paid, that this subject cannot be left out of any manual of investment. We have to ask ourselves, is it enough to secure an income in money, or ought we to remember the case quoted in Chapter I of the holder of gilt-edged German securities whose money income was secure, but was worthless, having been divided by a thousand millions or so by depreciation due to the pace at which the marks in which it was paid were multiplied?

The same thing happened, on a much smaller scale, in England and everywhere else.


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 According to the calculations on which the Economist "Index Number" is based—an Index Number is an attempt to arrive at the aggregate wholesale price of important representative commodities—prices in July 1925 were just double their average level in the first five years of the present century, having been in the meantime, in March 1920 when the zenith of the after-war rise was reached, nearly four times as high. So that anyone who bought Consols in the early years of the century and hoped to receive a steady income from them, got the income but found that when he turned it into goods its power to purchase them was not much more than a quarter, in March 1920, of what it had been when he bought; and finds now that it is only about half as potent in supplying him with the good things of life.

He feels, probably, that he has been somehow infernally swindled, but that it was all owing to the war and could not be helped, as to which he may or may not be right. But we are not concerned with his feelings, but only with the fact that the same depreciation of money by over-issue, which has applied those "abhorred shears" to the real value of his income, has had


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 the same effect on all fixed incomes from securities, annuities, pensions, or any other source; and we have to grope our way to a decision as to whether the investor is bound, for his own safety, to consider the risk of further depreciation on anything like the scale that has lately been witnessed.

If he is, then he should eschew creditor securities altogether, because they are only promises to pay so much in money, and confine himself, in so far as he invests at all on the stock exchange, to ordinary shares and stocks which carry with them ownership of the assets of the companies selected, which will rise in price as the currency depreciates and will return a larger money income owing to the higher prices of the products that are sold. Moreover, he will be tempted to invest less and to spend more upon real property and goods such as can be held as a reserve fund. He will be careful to own his own house, and if he foresees extreme depreciation, a piece of ground on which he can grow as much as possible of his family's food, vegetable and animal; and he will learn to do many things for himself, so as to meet the rising cost of service; also he will be tempted to spend freely on imperishable articles, such as jewellery, which will rise in price if currency depreciates; they are also desirable, as a


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 disgusted super-tax payer once observed to me, because "things like pearls can always be sold easily and are a good liquid reserve, and in the meantime they don't bring in any income for the Chancellor of the Exchequer to rob you of."

But is this sort of thing worth doing in present circumstances? It does not seem to me to be so, though now that currency matters are once more the subject matter of politics, no one has any right to feel certain about them. For many centuries the tendency has been in favour of gradual currency depreciation, or a gradual rise in the prices of commodities, with occasional reactions. In the days of King Henry the Fourth, as Master Silence tells us, "a score of good ewes may be worth ten pounds." This rise in prices has been one of the methods by which Fortune has carried out a "Seisachtheia," or relief of burdens, such as was deliberately introduced by Solon at Athens, and has loosened the grip of the creditor on the productive power of the world. But it has been so gradual that the creditor has not been afflicted by it to the point of giving up the habit of being a creditor and an investor. During the nineteenth century something approaching stability was achieved. The output of commodities was enormously


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 quickened, but so also was that of money by discoveries of gold and the development and expansion of the use of credit instruments in the shape of bank notes, bills of exchange and cheques. During the first quarter of the nineteenth century, as Mr. Keynes tells us, "The very high prices of the Napoleonic Wars were followed by somewhat rapid improvement in the value of money. For the next seventy years, with some temporary fluctuations, the tendency of prices continued to be downwards, the lowest point being reached in 1896. While this was the tendency as regards direction, the remarkable feature of this long period was the relative stability of the price level. Approximately the same level of price ruled in or about the years 1826, 1841, 1855, 1862, 1867, 1871 and 1915. Prices were also level in the years 1844, 1881 and 1914. If we call the Index Number of these latter years 100, we find that, for the period of close on a century, from 1826 to the outbreak of war, the maximum fluctuation in either direction was 30 points, the Index Number never rising above 130 and never falling below 70. No wonder that we came to believe in the stability of money contracts over a long period. The metal gold might not possess all the theoretical advantages


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 of an artificially regulated standard, but it could not be tampered with and had proved reliable in practice."

Since his tract on Monetary Reform was published by Mr. Keynes, England, against his advice, has gone back to the gold standard under which, on his showing, so near an approach to price stability was secured in the century before the war. The reasons that he brought forward for proposing to establish what he calls an artificially regulated standard are highly interesting and ingenious, but did not convince the great body of banking and business opinion. Nevertheless the work that he and many others have done in calling attention to the evil effects of violent price fluctuations on our economic and social life has by no means been without effect. The working of the gold standard will be watched from this point of view in a new spirit of criticism by the public and will be guided with the help of a revised chart by the authorities of the central banks. It is thus fairly safe to assume that the era of wide fluctuations in the prices of goods is over for the time being and perhaps even to hope that it may never return. If this be so, then the task of the careful investor need not be complicated by the effort to provide against reduction in real income by a rise in prices


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 sufficiently marked to defeat the steadiness of the money income that he receives from a holding of creditor securities, and we can go on to consider the principles on which he should guide his selection.


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Creditor Securities the best known and most popular are the debts of Governments, States and municipalities, the first named of which enjoy a prestige that has only been slightly dimmed by experience of the political risk attached to them, as proved by the war. In some countries, among which England stands pre-eminent, it may be doubted whether the prestige of Government stocks has been dimmed at all. The pre-war holder of Consols who has seen about 45 per cent. knocked off the capital value of his holding and the real value of his income divided by something like two, may still feel sore and surprised, but he is none the less convinced that he cannot be wrong if he buys British Government securities to-day, for safety of capital and certainty of income. The determined rapidity with which England teturned to the task of redeeming debt and meeting expenditure out of revenue, at a time


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 when all kinds of specious arguments could be and were put forward for a policy more comfortable to the tax-payer, has raised her financial reputation higher than it ever was before; and it is interesting to note that when a Labour Government was in office, its Chancellor of the Exchequer, Mr. Philip Snowden, talked with all the earnestness of a bank chairman about the importance of maintaining British credit, and brought in a sound Whig Budget which might have been opened by Mr. Gladstone. It is, however, also important to remember that the Labour Government was in office but not in power, since it had not a majority of the House of Commons behind it.

When we come to look at British or any other Government debt or any other security, with that coldly sceptical eye that should be turned upon it by the investor, the real question that we have to ask about it is what is the income behind it, out of which we can rely on the debtor's being able to meet the interest and pay the debt when and if due for redemption. And it is rather disconcerting to find how much uncertainty there always is, though the degree of uncertainty varies, in answering this question.

Concerning the British Government, for example, we know that during the last com-


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 pleted financial year it collected a revenue of £799½ millions, and paid in expenditure £795¾ millions, of which £312 millions went in interest on debt and £45 millions in debt redemption. But if we want to know what is the real margin of security—how many times over our interest is covered, as an industrial prospectus would put it—we very soon find ourselves in the region of.

Statisticians are most ready to oblige with estimates of the aggregate income of the citizens of the country, the whole of which, according to the principle of jurisprudence laid down by Austin, the Government has the right to appropriate for the public purse. But we know very well that there are limits beyond which no Government can go in taxation, and we also know that nobody can say with any approach to exactitude what those limits really are, because they vary according to the mood of the tax-payer and his willingness to part with his income to meet a national emergency.

All that we know or think that we know on this point about England is that:—

1. Owing to a certain blind commonsense which is the priceless asset of her public finance, there never, unless the whole character of the nation changes, will come a time when her statesmen will lay on her back a debt that she


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 cannot face, or when they, or the public opinion of the nation, would begin to think about considering the question of doing anything else but meeting the interest punctually and in full.

2. If the proposal for a levy on capital should ever be revived, we may be sure that the Government, in order to maintain its own credit and borrowing power, will see that holders of Government debt will not be worse, but if anything better, treated than owners of any other kind of property.

3. England has shown and still shows that she possesses stores of economic strength that escape calculation and only appear when an emergency arises.

4. In the summer of 1925, when our trade had been suffering from severe depression and we were supporting over a million and a quarter of unemployed and their families, and when we were repeatedly told that the country was groaning under the weight of taxation, the spending power of all classes of the community appeared to be quite unaffected; sleeping-cars to Scotland for the opening of the grouse season were booked in advance by the railways to an unprecedented extent; and Lancashire operatives, after years of depression and short time in the cotton trade, spent more than twice


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 as much (though in depreciated currency) as in 1913 on the August "wakes," or holidays, for which they save all through the year.

5. The present industrial difficulties, of which the state of the coal trade is the extreme example, will be settled, whether amicably or after deplorable conflict, by a recognition of the fact that British trade can only live if it can compete abroad, and that all concerned in it have to work together to that end.

And on these facts and beliefs we think that British Government security is just as good as it can be. But we have to admit that the data on which we base this sentiment are far from being capable of exact calculation, and that the sentiment may be coloured by the popular prejudice known as patriotism.

Having arrived at this conclusion concerning the solvency of the debtor we go on to decide what sort of a contract we are prepared to conclude with him, that is, which of the varieties of the British Government stocks now in the market, or on continuous offer, we think most suitable to the ordinary investor.

There is one rather serious objection to them all, which is that they are a "fancy article "with a special demand for them, because to many important financial institutions they are as necessary as office furniture, since custom


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 and the exigencies of financial respectability make a holding of them essential; and when a security or any other article is one that has to be bought by a certain number of people, the consequence is that the price is to a certain extent artificial, and that it should, as a general rule, be avoided for that reason by those who are not obliged to have it. This principle also applies to all the other stocks that are known as "trustee securities," as to which more will have to be said later.

Nevertheless, there are certain British Government securities with special privileges attached to them, which outweigh the objection above noted. Apart from safety of income, the pleasantest feature about a security is the power of its holder to demand his money back in full and at once, and the National Savings Certificates that are on continuous sale at our banks and post offices confer this privilege on the holder, and the still more important one—to those whose incomes are large enough to be taxed and supertaxed—that the interest from them, which is not paid but accumulates to the holder's credit, need not be included in any statement of income made for purposes of taxation. The interest on these certificates has been drastically reduced, and to those who buy the Third Series and hold them for ten


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100Rh the twelfth century. During this long period, the Mikado seems to have been regarded by the common people with reverence as a holy personage, but he was allowed no voice in affairs, was treated with contempt by the Shogun, was sometimes deposed if he misbehaved, and was often kept in great poverty.

What happened, in outline, seems to have been a combination of very different forces. There were antiquarians who observed that the Mikado had had real power in the tenth century, and who wished to revert to the ancient customs. There were patriots


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 years, the yield works out at about 4⅛ per cent; but their freedom from income tax makes them, to those liable to it, the highest yielding Government security, and a very solid foundation for every investor's collection. The fact that they yield no present income but accumulate at compound interest is not altogether a disadvantage since it means that they are not only an investment but a form of continual saving. The drawback to them is that no one can hold more than five hundred one pound certificates, now to be bought at sixteen shillings, and growing to their face value in five years' time. They are an ideal form of saving, in safety, rate of interest, freedom from taxation and prompt convertibility into cash with accrued interest, if need for cash should arise.

Another British Government security with a special privilege attached is Victory Bonds, which are accepted at their face value in payment of Estate Duties. As long as they can be bought at a considerable discount they thus make death a profitable transaction to the holder to the extent of his liability for Estate Duties, which are the toll that the State takes of his possessions on their transfer to his heirs. Moreover, bonds that are handed to the State in payment of Estate Duties are held by the


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 National Debt Commissioners, so that what may be described as a special Sinking Fund is continually in operation to reduce the amount, and raise the price of those that are left in the market. These advantages, however, that are attached to Victory Bonds are, to a certain extent, "in the price." At the present moment the yield from them is less than that to be got from the 3½ per cent. Conversion Loan, now the most popular of British Government Securities, and perhaps the most suitable, after Savings Certificates, for the investor who wants one with no probability of early redemption.

Consideration of the beauties of these securities has revealed to us the qualities that we need in a desirable investment of the creditor class. By far the most important point is certainty of income out of which interest can be paid, and certainty of getting back our money if we want it is a pleasant and convenient addition. In the case of Savings Certificates, return of our money on demand with interest accrued is part of the contract with the debtor, and is an almost unique feature shared only by Savings Bank deposits which carry a much lower rate of interest. In that of Victory Bonds we get our money back plus a considerable premium, as long as they have been bought


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 below par, when our executors pay Estate Duty, and they thus only carry this special advantage when held by investors whose estate is large enough to be taxed. In the case of all other securities dealt in in the stock markets, the investor can only get his money back by waiting for the date of redemption, if any, or for the chance of having his bond drawn for repayment, if the security is redeemed by a sinking fund operating in this manner, or by selling in the market at the current price.

And so we arrive at the terms of debt redemption, which are the next question to be considered, after the certainty of the interest payment. Those investors whose circumstances are such that a need to turn their holdings into cash is a highly improbable contingency and only want a collection of stocks that they can sleep on soundly, can take securities with a very remote date of redemption or perpetual securities which are definitely labelled as irredeemable. To such an investor, however, it is very important to be sure that the debtor has not got an option of redeeming if it suits him to do so. For example, the 5 per cent. War Loan can be paid off at par at any time after 1929, so that after that date its holders will be in danger of having their money, or the face value of their stock, returned to them


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 if the Government is at any time able to borrow at a rate of interest lower than the one which it is paying on the stock. The fact that it is able so to borrow necessarily means that stock prices are relatively high and the yield to the buyer is consequently low, so that the investor will have his money thrown back at him at a time when it is difficult for him to reinvest to his own satisfaction.

A large number of creditor securities has lately been issued with this option in favour of the borrower—stocks with a life of thirty years or so with an option to the debtor to redeem at any time aftenafter [sic] ten years from the date of issue. Obviously such stocks are not so pleasant to hold as those which are definitely redeemable either at the end of thirty years or at the end of ten years. In the first case the investor has the certainty of a comfortable rate of interest for a long time; in the second the short life of the security helps to keep its price steady. With a ten-thirty year stock the borrower is made comfortable at the expense of the investor, who stands to lose whether the ruling rate of interest rises or falls.

With regard to all creditor securities that are redeemable at a date it is important that the debtor should not only engage to repay but to make annual provision during the life of the


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 loan for its extinction on or by that date. Debtors with very high credit have been able in times past to dispense with this obligation, but the financial exigencies of the war and after-war period have obliged the Governments of the highest standing to spread the jam thick on securities that they offer to the public, and the British 5 per cent. War Loan carries with it an obligation on the part of the Government, wheneven the market price of the stock is below 95 to set aside one-eighth per cent. of the outstanding amount of the loan each month to be used in the purchase of stock in the market; with the result that if the stock stood below 95 for a year there would be in effect a 1½ per cent. Sinking Fund, operating by purchase in the market. It is now some time since this provision has been effective, but it was at one time a valuable prop to the price of the stock. The 3½ per cent. Conversion Loan has a still more effective Sinking Fund clause in its contract which obliges the Government whenever the stock is below 90 to redeem each year 2 per cent. of its outstanding amount. Owing to the low rate of interest and consequent low price of the stock in the market, the effectiveness of this Sinking Fund, which is calculated, of course, on the face value of the stock, is all the greater. When the stock can be bought at


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 75 a nominally 2 per cent. Sinking Fund actually buys 2⅔ per cent. of the outstanding issue.

For investment in Home Public Debts the buyer's range is practically confined to the obligations of the British Government and those of the municipalities and counties. We saw, when we considered our reasons for the belief that our Government securities are as safe and sound as any securities can be, that these reasons are to a great extent based on considerations which are not capable of exact calculation, that there is a good deal of sentiment behind them, and that this sentiment may be prejudiced by patriotism. When we come to investigate the security behind municipal and county debts, we find the same thing only rather more so, with, however, one advantage in their favour, that they are not debts that have been raised purely for the purpose of waging war.

With them, as with all securities, the most important consideration for the buyer is the income out of which the debtor can meet interest and provide for repayment. This income is derived from the power of the municipal and county authorities to levy and collect the local taxes known as rates from the inhabitants of the area; and any attempt to arrive at an exact estimate of the extent of this power is at least


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 as difficult, if not more so, in the case of a local body than in that of the Government.

It is unthinkable, in the belief of most of us, that the British Government would ever incur debts that the nation could not meet; but one does not feel quite so certain about the local authorities, especially as the basis on which they assess their sheep for the shearing process is not nearly so sound. The Government, as we all know, taxes us on our incomes, on our purchases of certain goods, such as drink, tobacco and tea, and on the value of our estates when we die. The local authorities tax us according to the alleged value of the houses that we inhabit or the premises that we occupy for business purposes.

The difference between the two systems of assessment, and the advantage in favour of that which is employed by the Government is at once evident. Anyone who is receiving an income, spending money on articles which are not—though we may have come to regard them as such—necessaries of life, or leaving an estate, evidently has money out of which he can pay taxes. But the mere fact of living in a house or occupying premises for business by no means necessarily implies capacity to pay rates; on the contrary, if misfortune falls on the rate-payer his house or factory is a source of


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 expense. A man whose income is a minus quantity and lives in a house on which he pays a rent of £100 a year is not a satisfactory subject of taxation.

You may say that he ought not to be living in such a house, and he will quite agree, but will point out that when he signed a contract by which he became its tenant for seven years he was making a good income which he did not expect to disappear; that he would be delighted to sub-let if he could find someone who would take the house, but that owing to bad times and the fact of the high rates charged by the municipality it is impossible for him to do so. A big shop or a great factory employing large numbers of workers and having to pay rates based on the value of the premises, whether it is earning nothing, little or a fortune in the way of net profit, is also evidently being taxed on a wholly unscientific basis, which lays a devastating burden, in bad times, on production and commerce.

It may be said, as a rough generalization not to be examined too critically, that the Government taxes us according to our assets, and the local authorities according to our liabilities. From such a system there is danger of evil consequences for the rate-payer and for the municipality and so ultimately for the investor who


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 buys the municipality's debts. If rates rise too high—and every rate-payer is inclined to regard his rates as too high—they tend to cause a lowering of rents and consequently of valuations for rates, and so the municipality has to impose a still higher rate on a lower valuation, and so increase the evil, or else reduce its expenditure which, like most public bodies that spend other people's money, it finds a very difficult task and highly unpopular with those on whom the expenditure is spent. If the evil becomes too acute, it may drive the inhabitants, residential, commercial and industrial, out of the area. Short of that it stops growth and makes anyone, who can do so, live or work anywhere else. Witness the tendency, already evident, of factories to be built outside urban areas in England; a tendency that may be a good deal quickened if and when any practical result comes from the schemes of electrical power distribution, about which much has lately been said.

Nevertheless, most of us believe that there never can be a question of the solvency of any of the great English towns, and have no hesitation in regarding their debts as almost as gilt-edged as those of the British Government. The fact remains, however, that the much narrower area of taxable capacity that they


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101Rh who were annoyed with the Shogun for yielding to the pressure of the white men and concluding commercial treaties with them. And there were the western clans, which had never willingly submitted to the authority of the Shogun. To quote McLaren once more (p. 33):—

This passage gives the key to the spirit which has animated modern Japan down to the present day.

The Restoration was, to a greater extent than is usually realized in the West, a conservative and even reactionary movement. Professor Murdoch, in his authoritative History of Japan, says:—

In the interpretation of this sudden and startling development most European writers and critics show themselves seriously at fault. Even some of the more intelligent among them find the solution of this portentous enigma in the very


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 cover, the power of that taxable capacity to shift from one centre to another owing to changes of trade conditions, and the unsound basis on which local rates are collected are disadvantages that cannot be altogether forgotten by the prudent investor.

On the other hand, there is this to be said of municipal debts, that they usually represent something more solid than the long series of wars more or less successfully waged, which are by far the largest asset that we can find to put into the balance-sheet against the seven thousand millions of British debt. But assets are of little advantage to the creditor if from their nature they are unsaleable and if they are not producers of net revenue. And the kind of assets that municipalities own—public parks, tramway systems, sewers, water supply and so forth—are not the sort of article that can be put up to auction and sold if the municipal area has fallen on such evil days that the municipality's power to meet its debt charges is doubtful. They are revenue producing, if at all, only as part of a going concern, and their "old iron" value is practically nil, if extravagance and bad finance on the part of the local authority should result in a level of local rates, high enough to check and reverse the progress of the area covered. We come back to revenue, as we


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 always shall in looking at all kinds of securities, as the real test on which the desirability of municipal debts is based, and though comparisons may be made of the rates in the pound charged by the different municipalities, they have little meaning unless the investor who studies them is fully informed concerning local conditions and the prosperity and prospects of the industries and trades of the place.

In considering individual securities offered by the local authorities, we have to make sure of the same points that were indicated as essential with regard to Home Government stocks. That is, we want to be sure that the stock is either definitely redeemable at a date or definitely irredeemable, and that redeemable means that it must be paid off, and not that the debtor has the right to redeem if it suits him. Also that there is no option in his favour of redemption if it suits him, at any time after such and such a date. And that the debtor is bound under the terms of the issue to set aside each year a sum that will suffice to provide for redemption of the debt on maturity. Rateable value has been shown to be a not wholly impregnable foundation on which to raise a skyscraping erection of debt; and there is all the more reason for preferring the debts of a municipality whose total debt is small as com-


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 pared with the estimated rateable value of its area. But most investors are content with the fact that the debts of municipalities with a certain population are "trustee securities" and may, therefore, be assumed to be immaculate. It is high time to deal with this assumption.


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1889 the only stock that a trustee might buy, unless otherwise instructed by the Trust Deed, was Consols. By the Trustee Act, 1893 (which did not extend to Scotland), his choice was extended to:

1. Other British Government securities.

2. Real or heritable securities in Great Britain or Ireland.

3. Stock of the Banks of England or Ireland.

4. India Government stocks.

5. Any securities with interest guaranteed by Parliament.

6. Metropolitan Board of Works or London County stocks, or Debenture stock created by the Receiver for the London Police District.

7. Debenture Guaranteed and Preference stocks of any railway company in Great Britain or Ireland that has paid 3 per cent. on its ordinary stock in each of the ten years before the investment.


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 8. The stocks of railways and canals in Great Britain or Ireland leased for not less than two hundred years at a fixed rental to any railway included under 7, g. Debenture stocks of Indian Railways sterling paid or guaranteed by the Secretary of State in Council of India.

9. Debenture stocks of Indian Railways sterling paid or guaranteed by the Secretary of State in Council of India.

10. Certain Indian Railway Annuities.

11. Indian Railway ordinary stocks with a dividend guaranteed by the Government.

12. Debenture guaranteed or preference stocks of British water companies which have paid 5 per cent. during each of the ten years before the investment.

13. The stocks of municipal boroughs with a population exceeding 50,000 or of any County Council.

14. Stocks issued by Commissioners incorporated by Parliament to supply water and having compulsory power to levy rates over an area with a population of 50,000, provided that during the previous ten years the rates levied have not exceeded 80 per cent. of the rates authorized.

15. Any securities authorized for the investment of cash under the control or subject to the order of the High Court. Its list includes mortgages of freehold and copyhold estates in England and Wales and debenture guaranteed


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 rent-charge preference stocks of railways in Great Britain or Northern Ireland that have in ten previous years paid a dividend on ordinary.

By the Colonial Stock Act, 1900, the Act of 1893 was made to include Colonial Stocks, if the colony:

The Metropolis Water Act, 1902, made Metropolitan Water Stock a trustee security, under the 1893 Act.

The Housing Act, 1919, included local bonds under that Act and mortgages of rates granted by local authorities authorized to issue local bonds under it.

The rough summary given above is a shortened version of the particulars given by


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 the Stock Exchange Official Intelligence. It is not, of course, intended as a complete guide to trustees, who will always be well advised to invest, as such, only with the assistance of legal instruction. The Trustee Act of 1925 has consolidated previous legislation on the subject, but as far as a layman can understand its meaning, has made only two important alterations. It has restricted investments in Indian loans and guarantees to those that have interest payable in sterling and it has permitted investments in (otherwise suitable) bearer securities as long as they are deposited for safe custody and collection in the hands of a banker. Changes made with regard to investments in real property do not concern us here.

The principles on which the securities permitted as investments to trustees were selected under the Act of 1893 are evident and reasonable. They aimed at including debts of the British Government or of bodies which were subject to its control or at least could be watched by it at close quarters. Even so, the inclusion of the ordinary stocks of the Banks of England and Ireland was a curious anomaly, since one would have expected that Parliament would have aimed above all at securing a certain income for beneficiaries


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 under trusts, and the stocks of these great banks have been liable to fluctuation in dividend.

The inclusion of colonial stocks merely with the condition that the borrowing colonies should go through certain formalities that (inevitably) imply no Imperial control over their finances, was a departure which sent British trust funds over seas to countries of abounding economic promise, with a tendency to experiment, that might develop along lines which would not be in accordance with the canons of British financial statesmanship. It was a departure dictated by political sentiment, which, as French holders of Russian debt have discovered to their cost, is an untrustworthy guide in the selection of securities as investments. The sequel was an enormously rapid expansion in the debts of the Dominions quoted on the London Stock Exchange.

Any Act of Parliament which says that certain securities may be taken is bound to produce anomalies because it at once becomes possible to point to investments which are left out but are quite as good as some which are officially approved. In such matters it is impossible to draw a line which will not lay the drawer open to criticism of this kind. The wealth that was poured into the laps of the


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102Rh superficial and facile formula of "imitation." But the Japanese still retain their own unit of social organization, which is not the individual, as with us, but the family. Furthermore, the resemblance of the Japanese administrative system, both central and local, to certain European systems is not the result of imitation, or borrowing, or adaptation. Such resemblance is merely an odd and fortuitous resemblance. When the statesmen who overthrew the Tokugawa régime in 1868, and abolished the feudal system in 1871, were called upon to provide the nation with a new equipment of administrative machinery, they did not go to Europe for their models. They simply harked back for some eleven or twelve centuries in their own history and resuscitated the administrative machinery that had first been installed in Japan by the genius of Fujiwara Kamatari and his coadjutors in 645, and more fully supplemented and organized in the succeeding fifty or sixty years. The present Imperial Cabinet of ten Ministers, with their departments and departmental staff of officials, is a modified revival of the Eight Boards adapted from China and established in the seventh century.…The present administrative system is indeed of alien provenance; but it was neither borrowed nor adapted a generation ago, nor borrowed nor adapted from Europe. It was really a system of hoary antiquity that was revived to cope with pressing modern exigencies.

The outcome was that the clans of Satsuma and Choshu acquired control of the Mikado, made his exaltation the symbol of resistance to the foreigner (with whom the Shogun had concluded unpopular treaties), and secured the support of the country by being the champions of nationalism. Under extraordinarily able leaders, a policy was adopted which has been pursued consistently ever since, and has raised Japan from being the helpless victim of Western greed to being one of the greatest Powers in the world. Feudalism was abolished, the Central Government was made omnipotent, a powerful army and navy were created, China and Russia were successively


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 Dominions by the high prices at which they sold, during and after the war, the food and materials that are their staple products has done something to put solid assets behind the debts that they built up so fast, but the pace of debt creation, especially by the Australasian States, has nevertheless hardly slackened. And political developments in India and the measure of self-government accorded to her population has given a different aspect to the obligations issued in its name.

These considerations make it very important for investors not to be misled by a belief that because a stock is a trustee security it is, therefore, absolutely safe. As far as a trustee is concerned it is safe, from the point of view of his own pocket—if the debtor should default, the beneficiaries under the trust would: have no case against the trustee, who had invested according to the Act. But the trustee is the only party to the transaction to whom safety is secured. He is fully entitled to this safety, for he performs a difficult, responsible, and generally thankless task, and is apt to be looked on by the beneficiaries, whose interests he protects, as a tiresome nuisance.

It is often argued, sometimes even by stockbrokers who ought to know what security means, that "the British Government could


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 never let a debtor default whose debts were included among trustee investments." But what if the debtor could not or would not pay? The contingency may be, and is, most remote, but if it happened, does it seem probable that the Treasury would take over the liability? Trustee securities ought to be judged as severely, on their own merits, as if the Trustee Acts did not exist, by anyone except trustees who considers an investment in any of them. A trustee, seeing that the Acts have been specially passed for his guidance, may well consider that his conscience is as safe as his pocket in following their instructions, but for anyone else to think that he cannot go wrong with a trustee security is a very unsafe assumption.

Nevertheless this assumption is so general that there is a strong argument for the abolition of the dangerous delusion on which it is based by a revision of the Trustee Acts and a return to the old restriction to British Government securities. If people will insist on believing that the Government hall-marks a security as unimpeachable by including it among trustee investments, it is only reasonable for the Government to confine this hall-mark to the only debts over which it has real control, namely its own.


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 There is another very good reason for doing so, which is the imperative need for reducing the burden of taxation by conversion of the British debt on to a lower interest basis. If investments by trustees were confined in future to British debt, this restriction would evidently tend to raise the prices of the securities in which British debt is expressed and so would hasten the process by which the largest item in our national expenditure, and the only one which cannot be touched by any ordinary measures of economy, can be brought down by a rise in the market value of British credit.

It need hardly be said that the restriction could not be made retrospective, obliging all trustees who held securities other than those of the British Government to dispose of them. It is only suggested that future investments by trustees should be confined to the stocks which really give the assurance which is now so often assumed where it does not in fact exist. If this were done it would be very many years before any real difficulty would be experienced by trustees in supplying themselves with stock. In 1889 when they were confined to Consols, the, whole amount of Consols in existence was £552 millions. The British debt, other than Treasury bills and


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 other forms of "floating" debt, amounted on December 31, 1925, to £7,016 millions.

It is true that beneficiaries under trusts would receive a slightly smaller income than their trustees would otherwise have been able to earn for them; but this is no great hardship to inflict on them, in view of the greater security that would be given to them, the privileged position that they enjoy in having their property taken care of for them under the eye of State regulation and the great advantage to the nation as a whole that would be secured by a reduction of the debt charge. Moreover, it would always be in the power of anyone who was leaving funds in trust and disliked the limitation on trustees' power of investment, to confer greater freedom on them by the terms of the trust deed. At the time when trustee securities were so dear—in the middle nineties—that it was difficult to get a yield of 2½ per cent. on them, a fashion was introduced of drawing trust deeds with wide investment powers, and there is no reason why this tendency should not be extended.

India and the Dominions would have no legitimate cause to feel aggrieved, in view of the much greater burden of war debt and after-war depression that the British tax-payer has had to shoulder; and the fact that the


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 Australian Commonwealth and one of the Australian States have lately borrowed in New York has weakened still further the already weak power of supervision that was exercised over Dominion borrowing by the London market. Moreover, our Dominions have a very definite advantage over all other oversea borrowers, which will be made clear when we come to consider the question of Public Debts Abroad.

In the meantime, trustee securities have a certain prestige as such, and consequently are, like British Government stocks, a "fancy article" which many investors must have and many others think that they ought to have, because of the halo of sanctity which is believed to surround them. To the practical investor who wants to buy securities for intrinsic value only, the fact that a fancy price is put on an article by a law or convention which does not add one half-pennyworth to their security, is a reason for not buying trustee securities, unless overwhelming arguments can be produced in favour of doing so, in any particular case.


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debts as investments are very much the same problem whatever be the country from which they are issued. All over the world the income that is behind them, on which the soundness and value of the security ultimately depend, comes from the taxable capacity of the inhabitants of the area involved, whether the borrower be a Government or a State or a municipality. The only difference is that the difficulty of arriving at anything like an exact estimate of the extent of that taxable capacity—which we found to be considerable at hone—becomes much greater when we have to send our minds on a sea voyage, and try to imagine how the average Pole or Brazilian or Chinaman regards the question of the sanctity of financial contracts entered into by his Government or his municipality. The war showed us that a nation which is ready to pay taxes for a cause that it thinks to be worth the sacrifice can draw on its resources to an extent which would have


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 been thought to be incredible until it was tried. But we are still in the dark as to whether any body of tax-payers would make sacrifices in order to preserve its country's solvency, to anything like the same extent as for securing victory in war; and it is upon the temper of the tax-payer that taxable capacity in the last resort depends. We are also profoundly ignorant about political conditions in other countries. There was a time when Mexican securities were thought to be first rate, of their class. But they depended on the maintenance of the dictatorship established by President Diaz. When he went the country fell back into anarchy and bankruptcy.

Though the basis of security be the same, however, a very important difference between home and foreign investments has been introduced by the war, and the ungentlemanly manner in which it was waged. Some of us are old enough to remember the confidence that used, in the remote Victorian age, to be felt by British investors in Russian Government securities because of a tradition which told them that all through the Crimean War British investors in Russian bonds punctually received the interest due to them. But in the late war the Governments fought with every possible weapon, and among them the financial one was


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 perhaps the most important, after the naval and military. They not only did not pay their own debts to belligerents, but did not allow their citizens to do so; and under modern conditions they were evidently quite right. And so anyone who buys the securities of any foreign Government or public body does so with the certainty that if we should go to war with the debtor he would not pay us a shilling's worth of interest as long as the war lasted. The "war risk" attached to all foreign investments is thus a very real factor, as long as the possibility of war lasts; and it is obviously one which is extremely difficult to calculate.

This is the consideration which gives to investments in our own Dominions an advantage over those in all other countries, though the degree of war risk varies very greatly between one foreign country and another.

Apart from it, we have a feeling that the countries of our own race and language are likely to think and act more or less as we should in making sacrifices if necessary to defend their Government and public authorities against default. And the fact that they, nearly all of them, use currencies identical with ours, not only eliminates an element of possible difficulty in making payments, but makes it easier for the conscientious investor to study with intelligence


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103Rh defeated, Korea was annexed and a protectorate established over Manchuria and Inner Mongolia, industry and commerce were developed, universal compulsory education instituted; and worship of the Mikado firmly established by teaching in the schools and by professorial patronage of historical myths.

The artificial creation of Mikado-worship is one of the most interesting features of modern Japan, and a model to all other States as regards the method of preventing the growth of rationalism. There is a very instructive little pamphlet by Professor B. H. Chamberlain, who was Professor of Japanese and philosophy at Tokyo, and had a knowledge of Japanese which few Europeans had equalled. His pamphlet is called The Invention of a New Religion, and is published by the Rationalist Press Association. He points out that, until recent times, the religion of Japan was Buddhism, to the practical exclusion of every other. There had been, in very ancient times, a native religion called Shinto, and it had lingered on obscurely. But it is only during the last forty years or so that Shinto has been erected into a State religion, and has been reconstructed so as to suit modern requirements. It is, of course, preferable to Buddhism because it is native and national; it is a tribal religion, not one which aims at appealing to all mankind. Its whole purpose, as it has been developed by modern statesmen, is to glorify Japan and the Mikado.


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 any official statements that may be published concerning the financial position of the borrower.

Debts of some Dominion and Foreign Governments have one advantage over that of ours, in the shape of tangible assets, some of which produce a revenue and some even a revenue that more than suffices to meet the interest on the money spent on them. This is the retort that is always, and most rightly, hurled by the Australians at anyone who hints that Australia has borrowed rather rapidly in London. Nearly the whole of the British debt, as was shown above, represents money shot away in the course of wars, some of which have only happened because, as subsequent statesmen have told us, we "put our money on the wrong horse." Australia's debt is offset by the possession of a railway system, and national ownership of railways may be said to be the general rule, except in the United States, England and Argentina. So it happens by a curious paradox that the two countries whose credit stands highest have least to show as revenue producing assets to set off against their debts.

This fact seems to indicate that it is easy to attach too much importance to the possession of such assets, and it is clear that a creditor, who


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 relied on them to come to his rescue if the general revenue of a country failed to supply his interest, might be uncomfortably disappointed, even if the railways or State forests or whatever the asset might be were definitely pledged to the service of the loan. State management of railways is often extravagant and bad, but even if the Government were willing to sell or lease its transport system to a body representing foreign creditors, and give it power to carry out reforms in order to produce a larger revenue, it would be extremely difficult to make such reforms effective.

The real advantage, from the point of view of the investor, of Government debts is the fact that behind them is the whole wealth of all the inhabitants of the country, in so far as the said inhabitants can be induced to part with it for public purposes; and the existence of particular assets and sources of revenue, even if definitely pledged and assigned to the service of debt, is a certain protection to the investor and makes a loan look safer, and may even sometimes make the borrower more careful in expenditure; but if the worst happens, Government has to be carried on, or thinks so, and the first charge on every item in every country's revenue, whatever arrangements may be made to the contrary, is ultimately the amount that, in its opinion, is