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Saturday, 24 June 2017

Rates of Interest 3

Once upon a time, between 1820 and 1914, a person who had legitimately acquired some money could invest it in any one of a wide range of opportunities; each of which offered a return to the investor in the form of interest or dividends. Dividends are the reward for handing your money over to some other agency, usually a company, which will pay you a share of the profit from the venture if it is successful. The amount of the dividend that any shareholder gets is proportional to the portion of the capital in the enterprise that the individual shareholder has provided.

Throughout that long period, shares in various sectors of the economy rose and fell in price according to the honesty and effectiveness of the managers of businesses and the success of the firms they ran. There were periods when share prices were driven up by speculators, as in the 'railway booms' of the early-mid-nineteenth-century and when the economic development of various countries reached a stage where the bright prospects for that region became widely known. Some such booms were based on myths or gross exaggerations, which resulted in unsuspecting greedy would-be investors loosing their money.

Underpinning all markets, however, were 'the Funds', government bonds, usually offering a return of 2%. The government was regarded as an absolutely secure vehicle to invest in: after all, they could take the money with which to pay the interest from everybody in taxation. Any investor who wanted to build up a secure portfolio of investments to leave to their widow or children would buy some state stocks, then add to them a mix of other investments, some of which brought in low returns but were regarded as secure, and some less steadily-remunerative stocks on which greater dividends could be hoped for with less assurance that this would consistently be delivered. Provided company law was adequate, and properly enforced, investors could expect to be fairly treated. The greater risk they were prepared to take that the companies they invested in would fail, they could hope for greater rewards arising from the speculative nature of their investments.

Provided the government also issued the necessary basis of steadily but modestly remunerative investments, in the Funds, there was a 'floor' to the whole market.

It was as necessary that the Funds existed as that the stock market existed; enabling investors to buy and sell shares. George Osborne's ambition to abolish the government deficit would [if it were achievable] would remove the opportunity [going forward] for the Funds to perform their traditional role. That would be more disastrous than selling too much government debt and thus increasing too far the amount that future taxpayers would have to pay to support that debt.

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