PATERS CHATS WITH THE BOYS.

Otago Witness, Issue 3316, 3 October 1917, Page 62

PATERS CHATS WITH THE BOYS.

IV.—THE NATIONAL DEBT

What I intended to be one Chat has expanded into four, and then I have not put in all I wanted to.

Last week I gave a few figures showing the growth of the National Debt, and finished by a reference to fluctuation in prices.

Pound notes, or sovereigns, do not appear to change in value, whereas, as 1 showed by quoting prices of mutton, a pound note at the present time is worth less than three shillings in purchasing power in terms of mutton than it was when I was a boy—how long ago is that? The same with loans. A Government wants to borrow, say, £5,000,000 at 5 per cent.'; so it issues 50,000 debentures, face value £IOO. These may be sold at £IOO cash, or above or below that amount. If sold at face value, they are said to be at. par; if below, below par, or at a discount ; if above, above par, or at a premium. Take a case or two. In 1898 2§ per cent, consols were at 111; that is, a bond or debenture was at a premium of 11—that is, 11 above par. But in 1902 it had gone down to 92^ —that is, it had gone below par, and was at a discount of although it gave the same amount of interest as in 1898. Now, you can do a stock sum : If I must pay £lll to get a £IOO bond (face value), what rate per cent, is ,that"on £IOO spent?. Again : If I pay £92£ to get a £IOO bond, what rate is that? In each case take £2£ as accompanying the bond. Again : Supposing the first answer is represented by A, and the second by B, how much per cent, is the second the better investment? Subtract A from B and call the answer C; then express C as a fraction of B and multiply by 100, and you get the answer/ Try it. Perhaps you are a budding financier! And remember the distinction between the face value and the cash, that the' interest accompanies the face value, and that, as a general rule, when redeemable, they are redeemable at par. So it doesn't matter what it is quoted at, whether 111 or when the debenture falls due the Government pays £IOO for it. Our £12,000,000 4£ per cent. War Loan was issued at par, and is redeemable in November, 1938; and it will be interesting to watch progress and see if our debentures will go above par after the war, and what the premium will be at any time. The 4g- per cents, just issued are free of income tax, an. inequitable provision, I think, for it enables investors to escape war tax, and to the extent that it does that throws additional taxation upon others not so fortunately situated, and causes inflation in price. But that is another story. Our loan, as I have said, was issued at par, and will be payable at par. Sometimes, however, loans are issued at a discount or at a premium. The Government may say : Here are 5 per cent, debentures, but as British 2£ per cent, consols are at 111, we offer them for sale by tender, but will not accept less than 120 for each debenture. As consols giving half of 5 per cent, are at 111, then, all other things being equal, each 5 per cent, debenture ought to bring £222 : and a Government for a £1,000,000 loan ought to get £2,220.000, though paying back only £1,000,000 when the loan falls due. SOME EXAMPLES. In 1793 a £4,500,000 3 per cent, loan was offered at 72—that is, the Government was willing to give a £IOO bond for £72 cash, making the rate of interest really 4£ per cent., and at the same time paying back when the loan became due £4,500,000 for the £3,240,000 it had received. Check my figures, and work out what percentage the Government paid back more than it received. In 1797 a 3 per cent, loan of £1,620,000 was issued, and so frantic was the Government to get money that it agreed to the most unusual condition of returning £219 for every £IOO lent; so lenders received 3 per cent, on their money and a gift of £ll9 on every bond, when it became due. About this time, owing to the mutiny at the Nore, the 3 per c?nts. fell to 47-f. whereas the 2| per cents, in 1 1896 reached 114 ! Work out how much per cent, was obtained by investing in each, and what per cent, the latter was a better or worse investment than the former. I have known children to be quite interested in stocks, and the present time is one to draw their attention to them. But go further. If tho loaf were Is in 1797 and was 8d in 1896, to what extent fier cent, had the income got by investing an equal sum in each increased or decreased in purchasing power. I think that every MP. should pass an exam, in such sums before he should become n candidate.

Here are a few figures showing how, for various reasons, consols have depreciated since 1898. Remember that in 1903 the 2f ' per cents. were converted into 2J per cents. :—IB9B, 111; July, 1899, 1003-; July, 97|; March. 1901,' 95f} June, 93.?- 5 December, 1902. 92* ; June, 1903, 91i; Sept-ember, 88A ; March, 1904, 86; December, 105, 79^; -July, 1914, 75 ; December 1915, 58i, ; March, 1917, 53.

Tabulate these, and ring the changes on percentages. In 1898 £lll gave £2J. What rate per cent, is that? Which is the better investment— 2% per cents, at 97| or per cents, at What per cent, does a man get who invests in the 2h per cents, at 53? And so on.

AUSTRALASIAN DEBENTURES. Here is another set of figures making interesting reading. A column does not take in more than the one Commonwealth Stato, so I take the oldest. Again make comparisons and strike percentages:

If I had had time an dspace I should extend this table and give more details of movements in 1915 and 1916, though, for the second time, I think, in the history of the Stock Exchange, quotations were not published for a year or more, and the Government fixed the price of consols arbitrarily at about 74. The Bank of England, too, had its notes made legal tender, and it was forbidden to issue gold ; and the same practically applied to our Dominion. Do not forget, too, that in 1905 stocks were converted from 2| per cents, to 2£ Note, too, how Australasian stocks are approximating consols in value. Again, if we take New Zealand 4 per cents, to be worth 84£, then 4£ per cents, are not worth par, all other things being equal. I should have mentioned that the figures for 1914 are for March and June. There are many more points I should like to touch upon —the administration of the Bank of England and its issue and banking departments; the difference between the funded and unfunded debt; a further reference to the power of capital; how stocks are the happy hunting grounds for financiers, and how fortunes are made —and lost. Again, long-dated debentures fetch a better price tind are steadier than short-dated ones. But, interesting and important' as the subject is', I must not spend any more time upon it. Next week, all being well, I'll give my deferred Chat upon parties in the Reichstag.

NT.S.Y,' x.z. Con Year. 3 3jj 1 8 31 4 eola 1900 . . 100 1032 115J 97 104| 1101 972 1901 . . 9SJ 102| 1142 97 10S 1141 953 1002 . . 95 105 115 94 J 106J 115 »4i 1903 . . 85 96 107 89 100 1081 881 1905 . . Sl-J 96 105J 87 1001 106 791 1914 . . 8C 991 103 8-2 92 102 75 1914 . . 84 99 J 100 80 89 991 75 1915 . . 78 95s 85 76 83J 95 58 i 1917 . . 68 — 804 6-2 71 84?, 53