Og* ? ^ L - S*O 
 
 Cf> , CJ> 
 
 LIBRARY 
 
 OF THK 
 
 UNIVERSITY OF CALIFORNIA. 
 
 Received.... ..|IOV-18.1891-, 18 .. 
 
 Accessions No. 
 
 Z. , 
 

 STOCK EXCHANGE SECURITIES. 
 
STOCK EXCHANGE SECURITIES: 
 
 ON THE GENERAL CAUSES OF FLUCTUATIONS 
 IN THEIE PRICE. 
 
 BY 
 
 ROBERT GIFFEN. 
 
 LONDON: 
 GEORGE BELL AND SONS, YORK STREET, 
 
 COVENT GARDEN. 
 
 1877. 
 
0/9 
 
 LONDON: 
 
 PRINTED BY JOHN STHANGEWATS, 
 Castle St. Leicester Sq. 
 
ADVERTISEMENT. 
 
 THE origin of the following notes and observa- 
 tions is a very simple one. For eight years, 
 between 1868 and 1876, the writer was connected 
 as editor and contributor with important financial 
 journals, and in that capacity came much in 
 contact with the opinions of those concerned, 
 whether as speculators, investors, or dealers, on 
 the causes of change in the price of securities, 
 principally securities of the Stock Exchange. He 
 could not but be struck with the continual 
 reference to general causes of change which those 
 most familiar with the facts were constantly 
 making, while it was his duty to reflect on the 
 matter, and supply the public daily and weekly 
 with his own explanations of the phenomena. 
 
VI ADVERTISEMENT. 
 
 This reflection has since been continued amidst 
 other avocations, and the result is the present 
 attempt to systematize a little the observations 
 of years. 
 
 The nature of interest-bearing securities and 
 the laws of the changes in their price, are 
 subjects which seem likely to increase in 
 importance, both practically and theoretically. 
 The writer's object will be gained if he assists 
 in any way those concerned with securities, in 
 accounting for the phenomena of their changes 
 of price, and if he attracts the attention of 
 political economists to what he believes will be 
 practically a new field of inquiry and discussion. 
 
 K. GIFFEN. 
 
 44 PEMBROKE ROAD, KENSINGTON ; 
 June, 1877. 
 
CONTENTS. 
 
 CHAPTEK I. 
 
 PAGE 
 
 INTRODUCTORY 1 
 
 CHAPTER II. 
 
 THE CONNEXION BETWEEN PRICES AND THE QUANTITY 
 
 OF MONEY . . . . .7 
 
 CHAPTER III 
 
 THE CAUSES OF VALUE IN SECURITIES, IN RELATION 
 
 TO COMMODITIES . 14 
 
 CHAPTER IV. 
 
 THE EFFECTS OF CHANGES IN THE AMOUNT OF MONEY 
 AND STATE OF CREDIT IN THE PRICE OF SECURI- 
 TIES, AND THE NATURAL LIMITS OF SUCH EFFECTS . 27 
 
 CHAPTER V. 
 
 THE INFLUENCE OF THE STOCK EXCHANGE 37 
 
Vlll CONTENTS. 
 
 CHAPTER VI. 
 
 PAQF 
 
 ON SYNDICATES, RIGS, AND CORNERS . . 44 
 
 CHAPTER VII. 
 
 ON FICTITIOUS SECURITIES . . . .61 
 
 CHAPTER VIII. 
 
 THE MANNER OF STOCK EXCHANGE FLUCTUATIONS-<- 
 
 PANICS 70 
 
 CHAPTER IX. 
 
 THE DIFFERENCE OF THE PRICE OF SECURITIES, 
 
 INTER SE . . . . . .84 
 
 CHAPTER X. 
 
 THE CYCLE OF PRICES IN SECURITIES . . .102 
 
 CHAPTER XL 
 
 ILLUSTRATIONS I HAVE SECURITIES RISEN OR FALLEN 
 
 IN RECENT YEARS ? . .123 
 
 CHAPTER XII. 
 
 SUMMARY AND CONCLUSIONS . . . .144 
 
STOCK EXCHANGE SECURITIES. 
 
 CHAPTER I. 
 
 INTRODUCTORY. 
 
 THERE is a great deal in theoretical books of 
 Political Economy on the general question of 
 supply and demand as regulators of price, and 
 what is meant by the tendency or alleged ten- 
 dency of the one to equal the other. In the 
 following pages I propose as much as possible to 
 keep clear of this discussion, which tends to 
 degenerate into a mere logomachy. There is no 
 doubt that in most markets, and as regards most 
 articles within very wide limits, an excess of 
 demand over the supply at a given price will 
 raise the price, and an excess of supply will lower 
 it. As regards articles also which are capable of 
 being produced in variable quantities, a high price 
 will bring out an increase of supply, and a low 
 price will check it. For some purposes it appears 
 
 B 
 
2 STOCK EXCHANGE SECURITIES : 
 
 unnecessary to define the meaning of supply 
 and demand more exactly ; and the questions 
 regarding price, and supply and demand as con- 
 nected with price, which seem most to require 
 discussion, relate to the nature of the influences 
 which govern the motives of individuals in 
 supplying and demanding particular articles or 
 groups of articles, and so make it possible to 
 trace a certain order in the variations of the 
 prices of such articles. 
 
 That there is such an order in regard to one 
 large group of articles what are known as 
 securities of the Stock Exchange it will be a 
 principal object of this Essay to show. An attempt 
 will also be made to give some account of what 
 this order is, and to demonstrate the necessary 
 relations between the prices of this group and 
 the prices of other articles, including the hire 
 of money. 
 
 It will be convenient to explain at the outset 
 what is meant by securities of the Stock Ex- 
 change. The word ' security ' is a very general 
 one. In the language of the money market, it 
 means the title of almost any kind of property 
 which can be given as ' security ' for a loan. A 
 bill of exchange, a dock- warrant, the titles of 
 
INTRODUCTORY. 3 
 
 land or houses, mortgage deeds, may all be made 
 use of, and are made use of, as securities for 
 money lent. But the securities quoted on the 
 Stock Exchange have certain peculiarities which 
 are not the property of everything which may 
 be a security for money. Their characteristic 
 seems to be the combination of interest-bearing 
 power, either actual, probable, or only potential 
 and contingent, with the division of the article 
 dealt in into equal parts, so as to be capable of 
 exact definition and of being submitted to the 
 speculative manipulation of a great market. It 
 is obvious that other securities possess one or 
 more of these features. Lands and houses, mort- 
 gages, bills of exchange, shares in private part- 
 nerships, capital employed by individuals singly 
 in business, have an interest-bearing power of 
 the same nature as the shares of joint-stock com- 
 panies, or the debts of states, which are dealt 
 in on the Stock Exchange. There are also 
 articles capable of easy definition but without 
 interest-bearing power, such as gold, corn, cotton, 
 copper, pig-iron of certain brands, coffee, and 
 probably others, which are all susceptible of being 
 manipulated in a great market where there are 
 crowds of .dealers of various descriptions. But 
 
4 STOCK EXCHANGE SECURITIES : 
 
 the combination of interest -bearing power with 
 the facility of being handled like gold or cotton 
 makes a Stock Exchange article a thing sui 
 generis, whose fluctuations in price will conform 
 to an order of their own which can be traced, 
 although in doing so it will of course be necessary 
 to bring out much that is common to them 
 with other articles. 
 
 These definitions appear also to involve by 
 implication what the nature of the inquiry must 
 be. In distinguishing a great group of articles, 
 and inquiring as to the laws of their price, what 
 we really inquire into is not merely the nominal 
 money price of the articles, but the relation of 
 their price to that of all others which are the 
 subject of exchange, as well as the money which 
 is the medium of the exchange. We must not 
 think in such matters exclusively of the money 
 price. What goes on at every exchange is that 
 people sell corn, cotton, or other articles for 
 money only in the first instance ; the whole 
 object of the sale is to enable them to purchase 
 something else, and if purchases as a rule did 
 not balance sales, apart from money, the whole 
 machinery of business would come to a dead 
 stop. If actual cash passed for all the articles 
 
INTRODUCTORY. 5 
 
 sold in a country on a given day, it would not 
 take many days for the whole cash of the country 
 to be in the hands of a few sellers, so that the 
 rest of the people would have no money to work 
 with. The exchange for money, therefore, only 
 covers a real exchange which is always going on 
 between the articles which the money from time 
 to time represents. What we may call the 
 ultimate transactions in money, that is, transac- 
 tions in which money in its narrowest sense is 
 actually acquired and kept in the form of coin 
 or bullion, are comparatively few, although such 
 transactions are, no doubt, specially important 
 in al] questions of price. 
 
 The great groups of articles for which Stock 
 Exchange articles are exchangeable may also be 
 simply described. Particular securities must 
 either be sold for other securities of the Stock 
 Exchange ; or in exchange for interest-bearing 
 securities which are not quoted on the Stock 
 Exchange ; or in exchange for other articles, 
 that is, for consumable commodities generally, 
 using the latter word in its widest sense, so as 
 to include such articles as diamonds and valuable 
 pictures which seem little destructible, and also 
 certain articles like corn, cotton, or gold, which 
 
6 STOCK EXCHANGE SECURITIES. 
 
 are capable of being manipulated in a speculative 
 market, but have not the property of bearing 
 interest. 
 
 What are the laws of price then which affect 
 the special article we have defined ? 
 
CHAPTER II. 
 
 THE CONNEXION BETWEEN PRICES AND THE 
 QUANTITY OF MONEY. 
 
 IT is laid down by writers on political economy 
 and currency, though the practical application of 
 the rule must be attended with difficulties, that 
 the quantity of money in a country regulates the 
 aggregate price of all articles. A hundred thou- 
 sand pounds of gold will theoretically serve for 
 the exchanges of a country as well as a million 
 or ten million pounds. The nominal prices will 
 be different, but the smaller nominal sum in one 
 case will be as effective as the larger nominal 
 sum in the other. The rule is correct of course 
 only within certain conditions. To give it 
 validity, it must be assumed that a scarcity of 
 money produces no expedients for economising 
 money, and that an abundance of money does 
 not lead to want of economy, which can hardly 
 ever be the actual conditions of life. It must 
 
8 THE QUANTITY OF MONEY AND PRICES. 
 
 also be assumed that the quantity of commodities 
 to be exchanged remains constantly the same, 
 that the motive power of money is equal at all 
 times, and that exchanges are effected at an 
 unvarying rate of frequency, though in point of 
 fact as we shall see the greatest changes in these 
 respects are constantly taking place. But allow- 
 ing all the conditions in which the rule applies 
 to be fulfilled, we should still have to reckon as 
 causes of change of prices generally the varia- 
 tions in the quantity of money in a country. An 
 addition to the circulation raises all prices, a 
 deduction from it lowers them. But this change 
 is only nominal ; the real prices are all the while 
 unchanged. The same quantity of labour ex- 
 changes for the same quantity of corn that it did 
 before, or the same quantity of corn exchanges 
 for the same Stock Exchange security, and matters 
 are equalised. As we have said, it is most dif- 
 ficult to show this rule, because the economies 
 of money, the quantities of commodities, and 
 credit, are daily changing things, but the theory 
 in the abstract is a mere mathematical expression, 
 and can hardly be disputed. 
 
 It follows then the quantity of money in a 
 country and its effectiveness and the quantity of 
 
THE QUANTITY OF MONEY AND PRICES. 9 
 
 commodities for exchange remaining unaltered 
 that if there is a general fall in money price 
 in one group of articles, this means a rise in 
 money price in all the other groups. And a 
 general rise in one group means an average fall 
 in all the others. If this were not so, a certain 
 part of the money in the country would in the 
 one case be thrown out of circulation, which is 
 contrary to the hypothesis, or a certain quantity 
 of money would be added, which is also opposed 
 to the hypothesis. 
 
 And such changes of money price would on 
 the hypothesis also correspond to real changes in 
 the relation between two groups 'of articles. Say 
 it is a fall in the money price of securities ; this 
 would mean that securities command a smaller 
 quantity of other articles than they did before. 
 On the other hand, a rise in the money price of 
 securities would mean a greater command over 
 other articles given to the holder of securities. 
 The difference would also count both ways. In 
 the first case supposed, that of a fall in securities, 
 there must be, on the assumption made, a rise in 
 the money price of other articles as well ; in the 
 second case there is not only a rise in securities, 
 but a fall in the money price of other articles. 
 
10 THE QUANTITY OF MONEY AND PRICES. 
 
 The real changes in the relations of the two 
 groups of articles are not measured merely by 
 the change in the money price of one, but by 
 the sum of the opposite changes in the money 
 price of the two. 
 
 Of course it is quite- obvious that in the real 
 world the hypothetical change in the relations 
 of two groups of articles here described can 
 hardly ever be traced. As already mentioned, 
 neither does the quantity of articles to be ex- 
 changed, nor the amount of money in circulation, 
 nor the state of credit on which depends the 
 effectiveness of money, ever remain for two days 
 the same. The rule, however, must be laid down 
 as descriptive of a condition underlying the phe- 
 nomena of the markets, and which will always 
 be more or less operative. 
 
 Several corollaries from this principle are 
 likely to be of practical importance. A change 
 in any one of the conditions stated will have a 
 great influence both on the aggregate price of 
 securities and other articles which we may shortly 
 term commodities, and on the relations of the two 
 groups to each other. Thus an increase of the 
 quantity of consumable commodities or of secu- 
 rities will have the same effect on the markets 
 
THE QUANTITY OF MONEY AND PRICES. 1 1 
 
 as a diminution of the quantity of money in, 
 circulation, unless there are simultaneous changes 
 in the state of credit, or economies in the use 
 of money, making the existing quantity more 
 effective ; such an increase of the goods offering 
 for exchange must alter the money level of price. 
 It is possible that the alteration will at first be 
 confined almost exclusively to the group of 
 articles which is increased. The whole fall in 
 the average level of price will be due to a 
 special fall in the group, which will alter its 
 relation to the other groups .very materially. 
 But this does not follow necessarily, and it does 
 not follow that permanently the change will be 
 confined to the group in which the increase of 
 quantity takes place. All that can be affirmed 
 as mathematically certain on the hypothesis 
 assumed is, that an increase of securities or com- 
 modities, like a diminution in the quantity of 
 money, will cause a general fall of prices ; and a 
 diminution of articles, like an addition to the 
 quantity of money, a general rise. 
 
 In the same way a variation in the frequency 
 of exchanges at different times will have an 
 effect on prices which need not be particularly 
 explained. More frequent exchanges, unless 
 
12 THE QUANTITY OF MONEY AND PRICES. 
 
 other circumstances interfere, will require more 
 money to maintain the former level of price, 
 and less frequent exchanges will require less 
 money. 
 
 It is another corollary of the principle that if 
 there are natural limits to the quantities of com- 
 modities or securities which can be produced, 
 and limits also to the changes in the amount 
 arid effectiveness of money, and the frequency or 
 infrequency of exchanges, then there will also 
 be natural limits to the rises or falls in prices 
 which are possible. An indefinite general rise or 
 an indefinite general fall will be an impossibility. 
 As the natural limits on either side are ap- 
 proached, a movement of price which may have 
 seemed uncontrollable will be checked. Whether 
 there are such limits or not, and what they are, 
 will be one of our inquiries. It will also follow 
 from these principles, that any great change in 
 the price of a particular kind of commodity or 
 species of security implies a disturbance of rela- 
 tions among securities and commodities in general ; 
 and this circumstance, according to the known 
 qualities of human nature, will itself contribute 
 to make it unlikely that the change will be of a 
 permanent kind, unless there is some substantial 
 
THE QUANTITY OF MONEY AND PRICES. 13 
 
 change in the motives for the purchase or sale of 
 the article. There must always be continual 
 changes in the estimation in which particular 
 articles are being held by mankind, but the 
 presumption is against violent changes being 
 enduring. 
 
 Another point of practical importance to 
 attend to in consequence of the rule laid down 
 will be, that in looking at a general rise or fall 
 in prices, due to a change in the quantities of 
 articles or money, or in the effectiveness of money, 
 we must never overlook the nature of the real 
 changes which this general rise or fall may con- 
 ceal. Unless everything rises or falls proportion- 
 ately in its money price, there will be an incessant 
 real change in the relations of all articles to each 
 other. If securities fall more than commodities, 
 this will mean a general rise in commodities ; and 
 if commodities fall most, this will mean a real 
 rise in securities. If most commodities and most 
 securities fall, this may mean an important real 
 rise in the exchangeable value of those which 
 remain stationary. It is unnecessary, however, 
 to follow out in detail the points to be thus 
 attended to in consequence of the differences 
 between real price and money price. 
 
CHAPTER III. 
 
 THE CAUSES OF VALUE IN SECURITIES, IN 
 RELATION TO COMMODITIES. 
 
 HAVING described in the previous chapter 
 the abstract theory of the price of securities, and 
 the meaning of a rise or fall, we have now to 
 inquire as to the conditions under which the 
 theory practically operates, and what are the 
 main causes of a general rise or fall in price to 
 be attended to. 
 
 We begin with the most general causes which 
 can affect the value of securities. In a com- 
 munity where there is an economic equilibrium, 
 where production and consumption balance each 
 other, where the investment of fixed capital pro- 
 ceeds pari passu with the increase of population, 
 and where the quantity of money in circulation 
 increases only in proportion to the business done, 
 it is quite clear that an adjustment of some sort 
 will have been effected between the price of 
 
THE CAUSES OF VALUE IN SECURITIES. 15 
 
 securities and that of other commodities. Apart 
 from the changes due to the varying state of 
 credit and other transitory causes, a community 
 in such a state will insensibly have settled down 
 into the acceptance of certain notions which will 
 fix the relative desirability of certain articles and 
 their relations one to the other through the 
 mechanism of exchange. For our present purpose 
 this means that a certain average rate of interest 
 on capital will be accepted, and this will govern 
 the price of securities by which the yield on the 
 capital invested in them to the actual holders of 
 that capital is regulated. If the yield is judged 
 so low by holders of securities that the former 
 rate of saving is checked, or if it is judged so 
 high by the owners of consumable commodities, or 
 the labourers and capitalists who can create them, 
 that there is a constant bounty on the further 
 saving and investment of capital, so far there 
 will be no equilibrium, but conditions will exist 
 which will cause changes in the relative prices of 
 both securities and commodities. 
 
 It is, perhaps, hardly necessary to inquire 
 what are the causes which determine a community 
 at a given period to accept a certain average 
 yield on its capital. It is quite clear that in 
 
16 THE CAUSES OF VALUE IN SECURITIES. 
 
 this respect there is a constant play of opposite 
 motives. A high average yield on capital is a 
 bounty on saving, and a low yield will to a 
 certain extent check saving. Whether it is true, 
 as some hold, that there is in modern communities 
 as actually constituted, a tendency of profits to 
 a minimum which would be a tendency to an 
 almost indefinite rise in the price of securities, 
 it is, perhaps, almost unnecessary for the present 
 to discuss. All we point out now is, that this 
 quality of interest-bearing will be valued in a 
 certain way in a community in equilibrium, and 
 that this is what is meant by the price of the 
 securities of that community. 
 
 We must notice, however, that this quality 
 of interest-bearing is necessarily not the only 
 cause of variation in price amongst securities 
 themselves, and that the rate of yield is not 
 everything, even as regards the relation of 
 securities to other commodities. As all know, 
 the prices of securities relatively to each other 
 vary much, and they are likely, as human nature 
 is constituted, to vary much. Some are in larger 
 bulk, and for that or for other reasons are more 
 marketable. The yield of some is better secured, 
 or thought to be better secured, than others. 
 
THE CAUSES OF VALUE IN SECURITIES. 17 
 
 40 
 
 These are all causes for indefinite variations in 
 the prices of individual securities. To a certain 
 extent also the qualities of the securities which 
 a community possessevS will affect the rate of yield 
 at which the price will be adjusted. If a com* 
 m unity is itself unstable, and capital more or 
 less insecure, the adjustment will probably be 
 made at a higher rate of yield than if the com- 
 munity were stable and capital well protected. 
 The bounty on saving and investment will 
 require to be stronger in one case than in 
 the other, and at a point it may cease to 
 operate. 
 
 It is also noticeable that there will probably 
 be a certain relation between the current rate of 
 yield on fixed investments and the rate for money 
 lent, principally the rate of discount on bills of 
 exchange and the rates for short loans. In both 
 cases the object aimed at is a certain yield for 
 capital, and it makes no substantial difference 
 that this is effected in the one case by the pur- 
 chase of a title to property, and in the other by 
 a loan , which is to be repaid. In buying, an 
 investor or capitalist provides or ought to provide 
 a sinking fund against depreciation, in case he 
 should have to sell at a capital loss; and in lending, 
 
 c 
 
18 THE CAUSES OF VALUE IN SECURITIES. 
 
 he also insures in various ways against a loss of 
 capital ; the provision for the sinking fund or 
 insurance in both cases affecting the net yield. 
 What the exact relation will be between the 
 yield on fixed investments and that on floating 
 capital or money lent will depend on many cir- 
 cumstances on the amount of money which it 
 may be the custom to keep floating, for instance 
 but a relation of some sort must exist, which 
 will teiid to be re-established if it is disturbed 
 from any cause. 
 
 The nature of this relation can, however, only 
 be perceived when long periods of time are taken 
 into account. It must not be supposed that every 
 sudden change in the hire of money in the short 
 loan market will be accompanied by corresponding 
 changes in the price of securities. There is a close 
 connexion indeed between the short loan market 
 and the speculation in securities. The funds of 
 the short loan market are employed partly in 
 holding securities, and where these funds are 
 diminished or increased from any cause, however 
 temporary, there is an immediate effect on the 
 price of some securities. But the great mass of 
 securities will only be affected by more permanent 
 changes in the rates obtainable for money in other 
 
THE CAUSES OF VALUE IN SECURITIES. 1 9 
 
 markets, and it is of this more permanent relation 
 we have here been speaking. 
 
 Applying these rules to the most general 
 causes of the disturbance of economic equilibrium < 
 in a community as far as securities are concerned, i 
 viz., the increase of consumable commodities on 
 the one hand, and the increase of securities on 
 the other, we have to affirm that an increase of 
 consumable commodities, where the rate of yield 
 on capital is not at the minimum, will lead to a 
 real rise in the price of securities, i.e., to a 
 fall in the yield. That such an increase will 
 cause a money fall in all articles on the average 
 (the amount of money and its effectiveness being 
 unchanged), has already been noticed ; but it 
 would also seem certain that ordinarily it will 
 cause the greatest fall in the kind of articles 
 increased, i.e., consumable commodities. Unless 
 there is simultaneously a total change in the 
 estimation of securities as related to commodities, 
 the increased offer of commodities Avill in fact 
 mean that the owners are willing to exchange 
 them for a smaller mass of securities than they 
 did before. The result will also be a stimulus 
 to the creation of securities. The desire for 
 saving arises instantly the profit is made, and 
 
20 THE CAUSES OF VALUE IN SECURITIES. 
 
 those who make the saving having either money 
 or money's worth in their possession, seek an 
 investment for it. The equilibrium is accordingly 
 disturbed. The holders of fixed capital have no 
 motive to part with it, for the necessity for 
 reinvestment would be immediately felt. The 
 money or money's worth, therefore, goes a- 
 begging, the holders constantly offering to buy 
 for a smaller and smaller yield, until in the end 
 the yield is so small that they no longer offer, or 
 some one pays labourers to make something which 
 it is hoped will yield an interest to tempt them. 
 The only limits to the rise in securities, besides 
 the natural one of the command over commodities 
 given to the holders becoming excessive, are the 
 inclination of the holders of commodities to keep 
 in kind or spend rather than invest, and the 
 creation of new securities, which means in fact 
 the absorption of a portion of the capital which 
 is seeking investment. 
 
 In the actual world, should there be a change 
 in the amount of money or its effectiveness at the 
 same time that there is capital seeking invest- 
 ment, the apparent money rise in securities may 
 be even greater than the real rise, or it may be 
 less than the real rise, but the real change in 
 
THE CAUSES OF VALUE IN SECURITIES. 21 
 
 the relation between securities and other articles 
 will be what we describe. 
 
 The opposite contingency of an excessive 
 creation of securities, causing a fall in them in 
 relation to commodities, seems at first sight 
 impossible. You cannot make new investments 
 without actually using up new commodities. 
 Confusion may be caused by engagements to 
 invest beyond the savings of a community, but 
 the investments themselves cannot be made. To 
 a certain extent, however, it would seem that 
 they can be made. Unawares, a portion of the 
 means of a community required for consumption 
 may be diverted to fixed investments. To restore 
 the equilibrium, it becomes necessary to create 
 more consumable articles than formerly in a given 
 time ; and while this is being done a certain 
 portion of the invested capital gets to be on offer 
 for the purpose of obtaining articles of consump- 
 tion. In other words, securities fall through the 
 excessive multiplication of them, and the dis- 
 proportion thus brought about between them and 
 consumable commodities. Should there be a 
 decrease of money or its effectiveness at the 
 same time, the fall in money price wi]l be marked, 
 as well as the fall in the price of commodities ; 
 
 UHlVBRSITY 
 
THE CAUSES OF VALUE IN SECURITIES. 
 
 but the money fall will also conceal a real fall in 
 securities in relation to commodities. 
 
 As regards Stock Exchange securities in 
 particular, it must further be noticed that the 
 increase or decrease of consumable commodities 
 seeking investment which can affect their price, 
 must be an increase or decrease in what is offered 
 in the general markets. If people who have a 
 surplus of such commodities use them in extend- 
 ing, say, their business premises, or in some other 
 private manner, or finding a deficiency stop their 
 current rate of outlay in fixed works, securities 
 dealt in on the Stock Exchange cannot be affected. 
 It is only therefore the general surpluses or 
 deficiencies which are in question, and these, it 
 is believed, are often much smaller than would be 
 supposed beforehand. The most natural desti- 
 nation of savings is in their private conversion 
 into fixed capital under the control of their 
 owners. New houses are built, or old houses 
 extended and enlarged ; business premises are 
 enlarged or improved, or better equipment pro- 
 vided ; perhaps a new business of an analogous 
 kind is set on foot ; perhaps additional floating 
 capital is employed in the business, so that it 
 may be conducted with ease and facility. It is 
 
THE CAUSES OF VALUE IN SECURITIES. 23 
 
 only in comparatively small quantities, if we 
 think of it, that savings are available for the 
 creation of new securities of the kind quoted on 
 the Stock Exchange, or that such securities are 
 sold on balance for the purpose of obtaining 
 commodities to be consumed ; were it otherwise, 
 the real disturbance in the relations between 
 securities and commodities would be incessant 
 and tremendous. If a small amount of com- 
 modities offering in excess must cause a consider- 
 able rise in securities, and a small amount of 
 securities on offer in excess a considerable fall, 
 it is plainly most unlikely that the excesses are 
 at any time very great. The changes great 
 excesses would produce would immediately pro- 
 duce reaction. 
 
 As business is now conducted, also there 
 would seem a further condition to the applica- 
 bility of an excess of commodities, other than 
 money in its narrowest sense, in raising the price 
 of securities generally. This is, that transactions 
 must take place in them, so that they can be 
 represented by deposits in a bank, against which 
 cheques can be drawn. So long as they are in 
 the possession of the people who create them, or 
 who have bought them without requiring to 
 
24 THE CAUSES OF VALUE IN SECURITIES. 
 
 borrow for the purpose, they are not in the form 
 of money, into which they must be converted 
 before they can be exchanged for securities in a 
 general market. But how are they to be con- 
 verted into money ? To this the answer must be, 
 that the holders mast either sell them to some 
 one for money, coin, or for a cheque upon a bank 
 by a purchaser, which that purchaser, ex hypothesi, 
 can only have the means of drawing by pre- 
 viously borrowing from a bank, or the owner 
 must himself pledge his excess of commodities 
 with a banker, so that he can buy securities with 
 the money so placed at his command. This is a 
 plain deduction from the nature of the business of 
 banks, the deposits in which must always be re- 
 presented either by actual cash, or by re-deposits 
 in other banks, or by loans or investments. These 
 deposits can only be increased by an actual in- 
 crease of cash, or by a loan upon credit, the 
 amount of which is directly or indirectly re- 
 deposited. Hence we affirm that an excess of 
 commodities likely to affect the general markets 
 for securities must become the subject of an 
 operation by which its value can be drawn 
 against ; some one, in fact, must borrow upon it, 
 so that the deposits in the banks may be in- 
 
THE CAUSES OF VALUE IN SECURITIES. 25 
 
 creased. We shall see afterwards in what various 
 ways the deposits in the banks may vary accord- 
 ing to the state of credit, and how all-important 
 this is in the question of the price of securities ; 
 but we only call attention to the one fact at 
 present, that an excess of commodities offering 
 for investment which appears to be, and which 
 probably is, a very potent natural influence in 
 raising the price of securities, can itself only 
 become operative by an increase of cash in the 
 hands of the public or at the banks, or by a 
 credit operation at the banks. In other words, 
 the condition of savings affecting the markets 
 for investments is itself probably a change in 
 the state of credit which permits an increase of 
 borrowing, so as also to permit an increase in 
 the quantity of commodities held. 
 
 In the same way a diminution of commodities 
 likely to affect markets for securities must be such 
 a diminution as produces a diminution of the 
 deposits the surplus money in banks. A 
 destruction by fire of commodities appropriated 
 privately for consumption where the loss is wholly 
 borne by the immediate sufferers would have no 
 appreciable effect in lowering the price of securities. 
 The commodities consumed were not an offer in 
 
26 THE CAUSES OF VALUE IN SECURITIES. 
 
 the general markets, and the loss is gradually 
 made good by the privation of the people affected. 
 But if the destruction is of an article on which a 
 bank had made advances, the deposits in the 
 bank are, somehow or other, reduced by an 
 equivalent sum. When the advance falls due, it 
 is either not repaid and has to be written off, or 
 it is repaid out of other funds which the borrower 
 from the bank possessed, whose deposits are pro 
 tanto reduced. The money offering in the general 
 markets is accordingly less than it was, and the 
 force to support prices at the former level is 
 weakened. 
 
CHAPTER IV. 
 
 THE EFFECTS OF CHANGES IN THE AMOUNT OF 
 MONEY AND STATE OF CREDIT IN THE PRICE 
 OF SECURITIES, AND THE NATURAL LIMITS OF 
 SUCH EFFECTS. 
 
 WE have discussed in the last chapter the in- 
 fluence of an excess of commodities or securities 
 on the price of the latter, on the assumption that 
 the amount of money and state of credit remain 
 the same. It will be evident from what we have 
 said, however, that the questions of the amount 
 of money and state of credit are themselves 
 perhaps the most important elements in question. 
 We believe that they are the most important, and 
 the two are so inextricably intermixed that we 
 discuss them together. 
 
 First, as to the amount of money. We need 
 add, nothing in general to what we have already 
 said as to the effect of this factor. It is a mathe- 
 matical deduction, that if the amount of articles 
 
28 CREDIT, AND THE PRICE OF SECURITIES. 
 
 and the habits of dealing in them remain un- 
 changed, a deduction from the quantity of money 
 will cause a fall in prices, and an addition to the 
 quantity of money a rise. This is, of course, 
 only a change in money prices ; and if all articles 
 are affected proportionately, there is no change 
 in real relations. But there is a peculiarity in 
 securities which causes them and other commo- 
 dities to be affected disproportionately by what 
 seerns a proportionate rise or fall. The property 
 of the securities with which .we are dealing is to 
 yield an interest. At the same time, therefore, 
 that an increase in the quantity of money causes 
 a rise in prices, it tends to diminish the yield of 
 securities in two ways : more nominal capital 
 is required to procure the same nominal yield, 
 and this nominal yield is less effective as regards 
 commodities than it was before. A decrease of 
 money causing a fall in securities along with 
 other articles would, on the contrary, be accom- 
 panied by an increased nominal yield, which yield 
 would at the same time be necessarily more 
 effective measured by commodities. To a certain 
 extent, if a proper adjustment is to be made between 
 securities and commodities when the quantity of 
 money is increased or diminished, the effect of 
 
CREDIT, AND THE PRICE OF SECURITIES. 29 
 
 the change in the real value of the security itself, 
 by the change in its real yield, must be allowed 
 for. In the actual world this change would alter 
 the point at which there would be a bounty on 
 saving, or a check to it. 
 
 A change in the state of credit, which is 
 equivalent to an increase or decrease in the 
 quantity of money, will have precisely similar 
 effects. The real yield of securities is altered by 
 each general rise or fall in the mass of articles, 
 and this real alteration cannot but have an in- 
 fluence in checking the general movement. When 
 securities rise along with a rise in commodities, 
 the yield from them to the capitalist diminishes in 
 two ways, and there is consequently a smaller 
 bounty on saving, with a greater stimulus to 
 create new securities. When securities fall along 
 with commodities j the bounty on saving is in- 
 creased by the greater nominal yield to be ob- 
 tained, and the greater real value of the same 
 nominal yield. In the latter case, there is at the 
 same time a less temptation in one way to create 
 new securities than when securities are high, 
 because those who create them have to undertake 
 a greater annual burden than at other times ; 
 although in another way the temptation may be 
 
30 CREDIT, AND THE PRICE OF SECURITIES. 
 
 increased, because the prices of all articles used in 
 the fixed investment are lower. 
 
 But while these limitations exist to the effects 
 of a change in the amount of money or state of 
 credit, increasing or diminishing the effectiveness 
 of money, there is a third limitation to the effects 
 of a change in the state of credit in the natural 
 limits of the possible degree of credit itself. On 
 the one side there is usually a minimum amount 
 of good credit, which exists even in the most 
 depressed times. It is now inconceivable that 
 the ordinary agencies of economising money- 
 bank-notes and deposits with bankers, against 
 which cheques are drawn, or such an institution 
 as the clearing-house could pass out of use, or 
 have their effectiveness seriously diminished. 
 What we are chiefly concerned with here is the 
 change from time to time in borrowing power, 
 and even here there is a large minimum of credit. 
 Many firms and institutions are always able to 
 borrow at a price, or what comes to the same 
 thing, to make purchases on credit, and this 
 potential credit is, I believe, so great that the 
 phenomenon of an indefinite fall of prices is 
 inconceivable. When this fall has gone the length 
 of changing greatly the relation of prices to money 
 
CREDIT, AND THE PRICE OF SECURITIES. 31 
 
 in circulation, so that money goes farther than it 
 usually does, the holders of money, and those 
 whose credit remains, are able by their purchases 
 to restore an equilibrium. In actual fact, the 
 ordinary motives of human nature may be relied 
 upon to induce them to purchase. 
 
 But on the other side there is also a maximum 
 amount of good credit. No matter the solidity or 
 reputation of firms or individuals applying for 
 loans, the amount which banks or other inter- 
 mediaries can lend is limited by the amount of 
 real money at command. Say a banker has to 
 keep half the amount of his liabilities in cash, the 
 limit to the credit he can give is measured by this 
 necessity. The moment his deposits are twice the 
 amount of his cash, the amount of his lending 
 must cease. In actual fact, then, the process of 
 extending credit, which seems at first sight inde- 
 finite, because the loan which is made to A. is 
 re-deposited directly or indirectly, and then re- 
 lent to B., is not really indefinite. These re- 
 deposits are constantly increasing the liability of 
 the banker, and at a point he must draw the line. 
 Whether it be a half, a third, a fourth, a tenth, or 
 a twentieth of his liabilities, which he must keep 
 in cash, does not matter. The limit exists, and 
 
32 CREDIT, AND THE PRICE OF SECURITIES. 
 
 every banker knows that as it is approached he 
 must carefully consider what he is doing. Private 
 individuals or firms giving credit to purchasers, 
 are of course limited in the same way as bankers 
 by the extent of their cash resources. 
 
 The limit is also likely to be the sooner felt 
 in this way, that a general rise of prices, which 
 is the effect of credit, tends to disperse cash. It 
 must be accompanied by a rise in wages, and 
 by a greater movement of all kinds in business, 
 and this means the dispersal of cash into the hands 
 of non-banking classes. More money goes into 
 the hands of labourers and annuitants ; there is 
 more travelling even among the classes which keep 
 bank accounts. Thus, the store of cash which is 
 so serviceable as a basis of large credit operations, 
 is apt to melt away as the effect of that credit. 
 
 We see, then, how much actual circumstances 
 are likely to conspire against the continuance of 
 extreme changes in general prices. A general 
 rise of prices means the greatly diminished value 
 of securities to the purchasers of them, and a 
 premium on the creation of new securities ; a 
 general fall, the greatly increased real value of 
 such securities, even if they have nominally fallen. 
 A general rise also requires more money or credit, 
 
CREDIT, AND THE PRICE OF SECURITIES. 33 
 
 .or both, to support it, but creates a state of tilings 
 in which money disappears from the reserves of 
 banks where it is required to support credit, and 
 in which for this and other reasons the maximum 
 .of good credit is likely to be overstepped. Apart, 
 therefore, from the mechanism of markets, and 
 the particular modes in which changes of prices 
 are brought about, there is an inherent difficulty 
 in extreme changes of general prices. They imply 
 a change in so much besides, if they are to be 
 maintained, that we may be morally certain they 
 will not be maintained. 
 
 There is little doubt, we may add, that of the 
 causes of change we have been discussing the 
 change in the state of credit is by far the most 
 important. The excess of commodities offering 
 in the markets and available for raising the price 
 of securities at one time as compared with another 
 is likely to be inconsiderable. The amount of 
 money also in comparison with the great trans- 
 actions of the market does not change rnuch 
 There is no annual addition to its quantity which 
 would not be easily used up by a comparatively 
 small change in the state of credit with its accom- 
 paniment of a rise in wages, greater movement 
 in business, and the dispersal of cash. But credit 
 
 D 
 
34 CREDIT, AND THE PRICE OF SECURITIES. 
 
 is an impalpable element, and may soon cause a 
 change of millions upon millions in the amount of 
 loans and advances. When credit improves, 
 bankers keep lending on the best security, and 
 redeposits keep coming in until it is found that 
 the relations of money to loans and deposits are 
 entirely changed from what they were. The 
 causes of the changes in the state of credit would 
 therefore seem to be the most important to be 
 investigated for our present purpose. 
 
 Of these we notice first the diffused know- 
 ledge of the natural limits to credit, which 
 helps to set in motion the inevitable reaction 
 when any extreme is approached. Apart from 
 all other causes, the knowledge that prices 
 are ' above the average ' will induce a change 
 in the disposition to sell among holders, and 
 a change in the disposition to buy among 
 investors or speculators. Before, therefore, the 
 natural limit which would in any event set- 
 bounds to a rise is reached, another real limit is 
 overpassed with which it is in vain to struggle. 
 No doubt sales by holders who must reinvest 
 can only have a partial and temporary effect ; the 
 disposition to keep money uninvested cannot be 
 reckoned permanent, but occurring as it usually 
 
4 CREDIT, AND THE PRICE OF SECURITIES. 35 
 
 does, when the natural limits to credit rises are 
 being approached, the anticipation has a great 
 effect. In the opposite case of a great fall the 
 anticipation of a reaction is almost equally 
 effective. 
 
 In any case as regards changes in the state 
 of credit, it must also be recognised that, like 
 other great changes of opinion among mankind, 
 they will take place in waves, and swell gradually 
 to a maximum and decline gradually to a mini- 
 mum, without any sufficient reason which can be 
 stated. All that can be said is, that, according 
 to a long experience, credit does change in this 
 way. When it is at a low ebb we may be sure 
 that the stream of tendency will once more be 
 towards a return of the flood ; when it is at the 
 flood the tendency will again be to ebb. It is also 
 to a certain extent intelligible, why the effects of 
 changes in credit should tend to multiply them- 
 selves. Eveiy reduction of credit causes a dis- 
 turbance of relations between securities and 
 commodities which produces a shock on the 
 holders, and so leads to a further reduction of 
 credit. In the same way any improvement of 
 credit diffuses an agreeable feeling among holders 
 of securities and commodities, and makes them 
 
36 CREDIT, AND THE PRICE OF SECURITIES. 
 
 feel richer, so that there is a greater disposition 
 to lend as well as more money actually in 
 hand for that purpose. If at the time when 
 credit is changing, such real changes as the 
 relative increase or decrease of commodities 
 and money should co-operate, it is at once 
 explicable how there should be great cycles 
 of prices, and combinations of circumstances 
 raising prices at one time and depressing them 
 at another. 
 
CHAPTER V. 
 
 THE INFLUENCE OF THE STOCK EXCHANGE. 
 
 WE are dealing with Stock Exchange securities, 
 and we have now to inquire, What special influence 
 is exerted by the organization of the Stock Ex- 
 change or the mode of doing business which has 
 grown up there ? Within what limit does that 
 influence operate in modifying the application of 
 the general laws, applicable to all securities, which 
 have been described ? 
 
 Stock Exchange is merely the name given to 
 a private club, the members of which make it 
 their business to buy and sell securities either on 
 their own account or on commission. Abroad 
 similar associations have been taken cognizance of 
 by the governments which interfere with their 
 internal arrangements ; but in this country the 
 club is free to act within the bounds of the ordi- 
 nary laws. In any case, the circumstance of the 
 club being controlled or not makes little difference 
 
38 THE INFLUENCE OF TEJE STOCK EXCHANGE. 
 
 for our present purpose. The main question we 
 have to answer is, in what way the association of 
 a number of people to deal in securities affects the 
 price of the article dealt in. 
 
 It will be obvious, we think, that no such 
 association can have any effect in altering the 
 more general rules laid down. If prices are re- 
 gulated at all by the quantity of money in a 
 country, no association can prevent their being 
 affected by the quantity of money. In the same 
 way, if the existence of an association raises or 
 depresses the money price of securities, it cannot 
 prevent such consequences from the rise or de- 
 pression as the change in the real return from the 
 securities themselves in proportion to the capital 
 represented by the market price. The association, 
 if it has influence at all, must have influence 
 within narrower limits. 
 
 The tendency of such an association, as with 
 all similar associations, is probably to prevent some 
 of the more extreme and occasional fluctuations. 
 In no market are the sales or purchases by the 
 public, as it is called, likely, at any given time or 
 on any given day, to equalise each other. On the 
 contrary, sales will be attempted on days when 
 there are no purchasers, and purchases when there 
 
THE INFLUENCE OF THE STOCK EXCHANGE. 39 
 
 are no sellers. Hence, and for other reasons, the 
 convenience of a set of dealers, who keep or bor- 
 row a stock of the articles dealt in, to which they 
 add when sales are pressed, and which they 
 diminish when purchases are in excess. The 
 necessary influence of such a body is, as a rule, . 
 to prevent extreme fluctuations. Competition 
 ensures that the seller will not be suffered to offer 
 his commodities at too low a price, or the purchaser 
 to buy at too high, a price. The difference be- 
 tween the two prices is reduced as near as possible 
 to the amount of profit which is necessary to tempt 
 the intermediaries to operate. 
 
 Probably, also, the existence of such a body, 
 disposing of a considerable capital and credit, tends 
 to keep up the level of the prices of securities 
 above what would otherwise be maintained. It 
 is difficult to estimate what the effect of such a 
 fund is, because it, or an equivalent fund, might 
 have been used to keep up the prices of securities 
 by means of permanent investment if it had not 
 been employed in the business of the market. 
 But it is easy to see that the withdrawal of the 
 fund, or any large portion of it, at a given moment, 
 would certainly have an effect in lowering the 
 prices of all securities. It would disturb the 
 
40 THE INFLUENCE OF THE STOCK EXCHANGE, 
 
 ordinary adjustment which other causes had 
 effected. 
 
 Nor can the methods of business followed on 
 the Stock Exchange have any great influence in 
 modifying these effects. The intermediate deal- 
 ings on the Stock Exchange are carried on mainly 
 by what are known as ' time-bargains.' All bar- 
 gains of purchase or sale are arranged to be settled 
 on certain fixed days, instead of for cash at the 
 moment. But such an arrangement is essentially 
 of the same nature as the credit given in any 
 other business. A householder who arranges to 
 settle his household bills fortnightly or monthly, 
 exactly follows in the former case the practice of 
 the Stock Exchange as regards the great bulk of 
 its business ; and in the latter case, the practice 
 of the Stock Exchange as regards account deal- 
 ings in home Government securities. Strange as 
 it may sound, the householder who buys coals, or 
 meat, or bread, to be paid for at the end of a 
 fortnight, or at the end of a month, enters into 
 that very mysterious time-bargain which is often, 
 for reasons we shall explain presently, the oppro- 
 brium of the Stock Exchange. No doubt at the 
 
 o 
 
 end of the fortnight or the month, there are fa- 
 cilities on the Stock Exchange for renewing the 
 
THE INFLUENCE Otf THE STOCK EXCHANGE. 41 
 
 time-bargain, or extending the original credit ; 
 but such facilities are also common in all business, 
 the peculiarity of the Stock Exchange being that 
 the terms for which credit is given on each occa- 
 sion are shorter, as a rule, than what is known in 
 any other business. Essentially, therefore, Stock 
 Exchange bargains are like all others, and can 
 have no unusual effect in raising or depressing 
 prices, apart from the fact that the short terms 
 of credit may have ordinarily a restraining effect 
 on speculative movements, and in some cases may 
 precipitate a panic, on account of the magnitude 
 of the mass of engagements coming due at once. 
 
 In actual fact, however, although there is 
 nothing in the essential nature of Stock Exchange 
 transactions to distinguish them from any other, 
 the impression is well justified that the system 
 conduces to what can only be described as pure 
 gambling. In all speculative markets, where the 
 articles are divisible into like and easily defined 
 qualities, the same phenomenon is seen. The 
 keen study of the causes of price affecting the 
 article, and the application of capital to dealings 
 in it, by limiting the current fluctuations of price, 
 furnish the opportunities for bargains far beyond 
 the means, or which threaten to be far beyond the 
 
42 THE INFLUENCE OF THE STOCK EXCHANGE. 
 
 means of those concerned, should anything unusual 
 occur. People with 5000?. (say), seeing the usual 
 fluctuations in consols within a short period, to 
 range between -g-, , or, at the outside, about ^ 
 per cent, enter into engagements to buy consols 
 for re-sale on the assumption that their risk is only 
 about \ per cent. Consequently, as a \ per cent 
 on 100,000?. is only 500?., they argue with them- 
 selves that if they are prepared for the risk, they 
 may reasonably become practical intermediaries in 
 the consol market to the extent of 100,000?. In 
 other words, the article being one of stable price, 
 a little money goes farther in supporting price 
 than the same money in a more fluctuating article. 
 But this facility and temptation have gone the 
 length of enabling many without even the 5000?. 
 to speculate in large amounts, and whose opera- 
 tions, because they can stand no loss, because 
 every turn upwards or downwards is a fortune 
 or ruin to them, mean sheer gambling, and the 
 gambling of gamesters who are staking every- 
 thing, and more than everything, they have. It 
 is unfortunately to be feared that certain portions 
 of society and the general business world partici- 
 pate in this gambling, and there is a good deal 
 of other business conducted on the gambling 
 
THE INFLUENCE OF THE STOCK EXCHANGE. 43 
 
 principle, which it is impossible to eradicate. 
 The gambling in no case is possible without 
 credit, and where there is credit, while human 
 nature remains as it is, there will always be 
 undue credit. But the Stock Exchange gambling 
 will not, any more than the legitimate Stock 
 Exchange speculation, materially affect general 
 prices. It tends necessarily, as a rule, to equalise 
 prices, like the legitimate speculation it imitates, 
 and it favours a panic when anything .unexpected 
 happens. It would seem, however, that as a 
 counterpart to many evils, it may possibly some- 
 times mitigate a panic after the first stages, on 
 account of the constant opposition there is between 
 opposing sets of speculators, so that when anything 
 unexpected happens there is a large class of people 
 to profit by it, and so provide a market which 
 would not otherwise exist, for all those who wish 
 to buy or sell. 
 
CHAPTER VI. 
 
 ON SYNDICATES, BIGS, AND CORNERS. 
 
 IN the preceding chapter we have discussed the 
 effect of the ordinary constitution of a Stock Ex- 
 change on the prices of securities. There is no 
 power, as we have seen, in the natural operations 
 of such a body or its members to take them out 
 of the general laws affecting dealings in securities, 
 bat it is well known that on the Stock Exchange 
 there are often combinations by which extra- 
 ordinary effects on the price of particular secu- 
 rities, or groups of securities, are sometimes pro- 
 duced. It will be useful to inquire under what 
 limitations these combinations act, and to what 
 extent they can vary the operations of the natural 
 laws we have described. 
 
 In making this inquiry, we must begin by 
 one or two definitions. A ' syndicate ' may be 
 taken as a general alias for any combination of 
 speculators on the Stock Exchange to force prices 
 
SYNDICATES, RIGS, AND CORNERS. 45 
 
 in one direction or the other. It is oftenest 
 used in the narrower sense of a combination or 
 partnership to introduce and sell a newly-created 
 security to the public, The public have been 
 made familiar with it in connexion with those 
 disgraceful operations in so-called foreign loan$, 
 which were the subject of an inquiry before a 
 Select Committee of the House of Commons in 
 1875. But the term is also used more generally 
 in connexion with operations in all securities ; and 
 its use in regard to new securities is in reference 
 to operations of substantially the same nature as 
 those which take place in old. A syndicate is 
 simply a clubbing together of certain persons to 
 make particular purchases or sales in common. 
 Say it is to buy in order to sell at a higher price : 
 the manager of the syndicate makes the pur- 
 chases and sales for himself and his partners, 
 debiting them with the loss or crediting them 
 with the profit, as the result of the operation 
 may be, and, if necessary, calling on them to 
 divide amongst themselves the balance of stock 
 left unsold when the term for which the syndi- 
 cate has been formed expires. What happens 
 in regard to a new security different from what 
 takes place in regard to an old security, is simply 
 
46 SYNDICATES, BIGS, AND CORNERS. 
 
 that the syndicate make their purchases from 
 the promoters or creators of the new security, 
 instead of buying in the open market, as they 
 might do in the case of an old security. Many 
 syndicates, have, however, been formed in old 
 securities where the purchases are chiefly made 
 wholesale from one or two large holders of the 
 securities, or where these large holders have com- 
 bined to make a syndicate amongst themselves, 
 with power to purchase a certain quantity besides 
 of the floating stock in the market. In the con- 
 trary case, where a syndicate is formed to carry 
 out an operation for the fall, that is, to make 
 pales of stock for the purpose of re-purchasing it 
 at a lower price, the operation is usually in an 
 old security, or in a security of recent creation 
 which has so far passed out of the hands of the 
 original combination that it can be the subject 
 of hostile speculative combinations. 
 
 And the operations of such syndicates are 
 usually accompanied by market manoeuvres which 
 are described generically by the name of ' rigs/ 
 The operation of purchase in order to re-sell begins 
 with an attempt to clear the market of all the 
 stock in the hands of dealers, whether the pro- 
 fessional dealers of the Stock Exchange, or the 
 
SYNDICATES, RIGS, AND CORNERS. 47 
 
 non-professional dealers, including outside specu- 
 lators and members of the general public who 
 hang about the markets and are ready to turn 
 over the securities they hold at a profit. Having 
 possessed themselves of this stock at as low a 
 price as may be, all kinds of manoeuvres, such as 
 fictitious dealings in the Stock Exchange, false 
 reports about the value of the securities, mis- 
 leading articles in newspapers, which are got to 
 be inserted through corruption, fraud, or neg- 
 ligence, and the like, being resorted to for the 
 purpose, the syndicate proceed to make bids for 
 stock which nobody has got to sell, and so the 
 price is raised. Their expectation is that a world 
 of minor speculators, seeing a steady rise in 
 price, will be induced to follow the lead, and 
 that investment money will be turned in the 
 same direction. The syndicate, also, hope that 
 these purchases will be so large as to enable 
 them to get rid of what they have themselves 
 purchased at an average profit. They will not 
 be able to sell all they purchase at the top price 
 of the market ; they may even have to sell a 
 part at a less price than they paid, but on the 
 average they expect a higher price. If they have 
 been able, as they sometimes are, to commence 
 
48 SYNDICATES, RIGS, AND CORNERS, 
 
 the operation by manoeuvres to produce many 
 speculative sales for the fall, that is, sales by 
 speculators who have not the stock they sell, the 
 chances of profit are so much increased ; these 
 speculators for the fall being, in fact, partially 
 subjected to a cornering operation which we shall 
 presently explain. 
 
 On the other hand, the operation of sale in 
 order to re-purchase, when effected by a syndicate, 
 is accompanied by manoeuvres of a similar nature. 
 The market is sustained by a semblance of pur- 
 chases, by extravagant reports of the value of 
 securiti.es spread about the Stock Exchange, by 
 puffs in the newspapers, or merely frequent men- 
 tion, which almost answers the same purpose on 
 the principle of forcing a card in conjuring, and 
 by other arts which it would be useless to de- 
 scribe. Then when sales have been effected on a 
 market thus sustained, which will naturally be 
 most ripe for the operation just after a rise on 
 which a previous syndicate has got quit of a 
 great deal of stock, and left it in the hands of 
 weak and uncombined speculators, the syndicate for 
 the fall commences to offer stock on a market where 
 there is already a disposition to sell, and where 
 no one is inclined to buy. Offers upon offers are 
 
SYNDICATES, RIGS, AND CORNERS. 4D 
 
 made, all kinds of false and true rumours to the 
 prejudice of the stock are circulated, and so the 
 game goes on. There is a ' rig ' downwards, as in 
 the opposite case there had been a ' rig ' upwards. 
 The peculiarity of both operations is that one set 
 of speculators preys upon another, and that the 
 public sometimes is very little concerned, although 
 extreme movements are apt to attract the in- 
 vesting public to buy or sell just when they 
 ought not to do so, and so play into the hands of 
 speculators. 
 
 A ' corner,' again, is an incident in the work- 
 ing of rigs, arising from the constitution of all 
 such speculative markets. It is a counter-rig to 
 which a rig for the fall is liable. In a rig for 
 the fall, sales are made by speculators who have 
 not the stock they are selling. They engage, say 
 on the next settling day, to deliver so many 
 thousands, or millions, of five per cent ' Turks,' or 
 North Western Railway stock, or some other se- 
 curity. If the stock is called for they must borrow 
 it from some holder for a consideration ; or, what 
 conies to the same thing, pay the buyer a consid- 
 eration to postpone taking delivery. Naturally, 
 in a market where operations go on like these, 
 there are many engagements to buy stock entered 
 
 E . 
 
50 SYNDICATES, BIGS, AND CORNERS. 
 
 into by people who are without the means of 
 paying, as well as engagements to deliver by 
 people who have not the stock, so that arrange- 
 ments to postpone delivery are effected usually 
 with ease. Usually it is the buyer who has to 
 pay a consideration, which is then called in Stock 
 Exchange slang a ' contango ;' but in many rigs for 
 the fall, the contrary is the case, and the sellers of 
 stock have to pay, their payment being called a 
 ' backwardation.' It is a very common manoeuvre 
 of the syndicates when they wish to buy or sell, 
 to pretend for a time, in the first case, that they are 
 not able to pay, and so raise the contango ; and in 
 the second, that they are not able to deliver, and 
 so raise the backwardation, so as to induce the un- 
 wary to act in an opposite sense to themselves and 
 facilitate the whole operation. But when ' back- 
 wardations ' increase from real causes, that is, a 
 great excess of speculative sales over speculative 
 purchases, the opportunity for the counter-rig, or 
 corner, begins. It is self-evident that if a -stock 
 is not very big, and it cannot be increased, the 
 speculators for the fall can be placed at the mercy 
 of their opponents. As I have heard it explained, 
 if there are sales of 10,000 curl-papers of a pecu- 
 liar description which cannot be newly fabricated, 
 
SYNDICATES, RIGS, AND CORNERS. 51 
 
 and if there are only 9000 curl-papers of that kind 
 actually in existence, the sellers of the 10,000 are 
 liable to be ' cornered/ To be relieved from their 
 engagement to deliver the 1000 curl-papers, which 
 actually do not exist, they can be made to pay ab- 
 solutely any price which those to whom they have 
 made the engagement may fix. Few corners have 
 been carried to this extreme point, for various 
 reasons, but the theoretical danger of the specu- 
 lator for the fall is manifest. 
 
 In what way, then, are such operations affected 
 by the natural laws governing the price of se- 
 curities, and what are the limits due to such laws 
 or otherwise, of the movements in prices they can 
 affect ? 
 
 It is obvious, to begin with, that no syndicate 
 or syndicates can have much permanent influence 
 on prices or securities generally. They cannot 
 buy up all securities and so raise the level, or go 
 on offering securities and so depress the level, 
 without disturbing the entire relation between 
 miscellaneous commodities and securities. A rise 
 in securities, as we have seen, means a fall in 
 commodities, and vice versa, and the disturbance 
 would make itself felt beyond the power of com- 
 bination to control. For this reason the operations 
 
52 SYNDICATES, RIGS, AND CORNERS. 
 
 of syndicates are confined to small groups of se- 
 curities. Even in a considerable group they are, 
 however, difficult. Any special buying in such a 
 group must use up, pro tanto, the common money 
 of the market, and cause other securities or com- 
 modities to exchange for less than they otherwise 
 would do. In a very small group of securities the 
 effect of this disturbance would not be noticed, 
 owing to the vast resources and elasticity of the 
 money market ; but the limitation in principle 
 exists, and constantly tends to prevent the more 
 ambitious efforts into which riggers might be 
 tempted. 
 
 And in the smallest groups of securities there 
 are always natural limits to a rig or a corner. 
 The condition of profit in either case is, that suf- 
 ficient operations in a contrary sense to those of 
 the syndicate should be induced ; and it is most 
 difficult to secure this condition, so that riggers, 
 for their own interest, avoid extremes. Say the 
 operation is to buy up some stock which has been 
 long in existence. It is very easy, of course, for 
 speculators who possess or can borrow sufficient 
 money to buy up the whole of this stock, which, 
 perhaps, can be done for a million of money or 
 less. But this is not all they have to do. To 
 
SYNDICATES, RIGS, AND CORNERS. 53 
 
 make a profit they have to buy up at an average 
 low price, and then they have to take the risk of 
 other speculators and the public coming in to buy. 
 Unless they can secure themselves by inducing 
 sales for the fall at a low price, it is usually most 
 doubtful whether they can induce purchases after- 
 wards. There is also this difficulty in dealing 
 with old securities. Such securities are held with 
 varying degrees of firmness, but there is a great 
 deal of the worst held which can never be bought 
 at the very low prices, and some of which some- 
 times a good deal is sure to be sold at the high 
 prices. For various reasons sales of securities are 
 always taking place. Estates have to be wound 
 up ; people realise to go abroad, or for purposes of 
 exchange, or to make good losses in business or 
 speculation ; consequently time is always working 
 against a rig for the rise, and the only chance for 
 the operators is that they can induce unusual 
 purchases when they themselves wish to sell. In 
 addition, when a great rise takes place, a strong 
 interest to induce sales and prevent purchases is 
 created. Brokers usually know what stocks their 
 clients possess, and to those whom they have an 
 opportunity of seeing they give advice to sell 
 when there is a rise. Many holders are shrewd 
 
54 SYNDICATES, RIGS, AND CORNERS. 
 
 enough to act without such advice. The syndi- 
 cate, therefore, which has forced a rise has to 
 elect between taking a great deal of stock 
 thus offered, trusting to its power of after-sale, 
 or seeing the market slip away and its hope 
 of profit disappear. On the other hand, if the 
 operation is to force down a particular security, the 
 whole force of the money-market is against the 
 rigger, provided the security has solid value. Its 
 interest-bearing capacity remains unchanged by 
 'what the rigger can do, and a fall beyond a certain 
 point would induce many purchases by solid 
 capitalists who know what they are doing, and 
 are not to be imposed on by the rumours of the 
 market. This and the fears of a corner are always 
 likely to prevent speculators for the fall from 
 carrying their operation to an extreme. 
 
 Where riggers appear most successful is when 
 they anticipate a rise or fall of prices due to real 
 causes ; an operation for the fall in a particular 
 security is likely to go far when the cycle has 
 'turned and almost all securities are discredited ; 
 but such appearances of success are not to be 
 confounded with the effects which are really due to 
 the ' rig ' operations themselves and which are really 
 very limited. Such ' rigs ' cause great local dis 
 
SYNDICATES, BIGS, AND CORNERS. 55 
 
 turbances and individual losses, but they are fully 
 controlled by the greater laws affecting securities. 
 How limited the effect is may perhaps best 
 be shown by reference to one or two conspicuous 
 illustrations, which need not be exclusively from 
 the markets for securities. The { gold ' market 
 in New York has, perhaps, furnished the most 
 dramatic illustrations of a nearly perfect corner. 
 Gold is like a security in its ease of definition 
 and the interchangeability of parts ; and in the 
 United States where gold is a special money 
 largely used in special operations of paying 
 customs-duties, and interest on the Government 
 debt, it has long been a commodity suitable for 
 the manipulation of a great market. Speculators 
 deal in it according to their estimates of whether 
 it will be scarce or not. The result in American 
 experience has been several remarkable 'corners,' 
 which were promoted by the ease of bottling up 
 the small quantity of gold about, the interval of 
 time necessary to attract supplies, and the custom 
 in the American market of daily settlings, which 
 compelled the unhappy speculators who were 
 cornered to pay backwardations daily. But these 
 corners were always broken up whenever they 
 came to a crisis. In the autumn of 1869 the 
 
56 SYNDICATES, RIGS, AND COENEES. 
 
 price was actually forced up from 137^ to 160 in 
 two or three days before the crisis came, and the 
 Government interfered to beat the 'ring/ selling 
 part of the stock of gold it had accumulated for 
 paying its interest, and bringing back the price 
 again in half an hour to 135; but even without 
 this interference a few days would have seen the 
 end of it. Gold was always coming from the 
 mines, and there was practically an unlimited 
 stock in Europe which could be attracted. In 
 any case it is doubtful if the riggers in such 
 cases ever make much profit, owing to the 
 quantities they must buy in forcing up the 
 market and the surpluses thus left on their 
 hands. 
 
 On a smaller scale there have been rigs almost 
 as remarkable on the London Stock Exchange, of 
 which I shall only mention two. One was in 
 Anglo-American Telegraph stock in the spring of 
 1873. The origin of this was a counter rig or 
 partial corner. Certain speculators knowing of the 
 introduction of a new Atlantic Cable Company, 
 the Direct, became ' bears/ or sellers for the fall of 
 the sto'ck of the Anglo-American Company, which 
 had been previously established. The prospect 
 of competition they calculated would weaken the 
 
SYNDICATES, RIGS, AND CORNERS. 57 
 
 dividend -earning power of the Anglo-American 
 Company, and perhaps would cause discredit of 
 all such property. But the time was in one 
 respect unfavourable, as there was much money 
 about, and all securities tended to be at a high 
 level. A good deal of Anglo-American stock was 
 also well held, being distributed through the 
 country in small holdings ; and what was held 
 by speculators for re-sale was mostly in the hands 
 of people interested in keeping up the price of 
 all cable property. The speculators for the fall 
 were consequently in a difficulty about borrowing 
 stock to deliver, and the opportunity was seized 
 by an opposing band of speculators. Purchases 
 were made largely with borrowed money, and in 
 this way the market scarcity increased. The 
 price rose and rose, till from 133 at which it stood 
 about the middle of January, it touched 176 in 
 the early part of March, though the last price 
 only held for a very short time. At the 
 time nothing apparently could stop the rise, 
 because some of the only holders of stock in large 
 quantities were offering to buy, and no one would 
 venture speculative sales. But each rise produced 
 increased pressure on the pa,rt of brokers to 
 induce clients to sell ; there was perhaps treachery 
 
58 SYNDICATES, RIGS, AND CORNERS. 
 
 on the part of some large holders who had only 
 partially combined. At any rate, sales of stock 
 for delivery began and increased, and once the 
 current changed the counter riggers were in daily 
 increased danger. They could venture to take 
 up no more stock, no others would buy, the 
 constant sales rapidly depressed the price ; and 
 as the operation had been supported with bor- 
 rowed money, the fall of price was itself a cause 
 of sales of stock, those who had made the advance 
 being apprehensive of the security. By the middle 
 of May the price was again under 140. The short 
 time of the high price was a mere interlude in 
 the great business of the market. 
 
 The other operation I have to refer to was 
 on a still larger scale, and was not so much 
 perhaps the work of a single syndicate. This was 
 the 'rig' in Midland Railway ordinary stock in 
 the autumn of 1874, its remarkable feature being 
 the long continuance of the period during which 
 speculators for the fall were compelled to pay 
 backwardations. The beginning was the circula- 
 tion of reports that the Midland dividend would 
 be greatly reduced, and it was favoured by the 
 circulation of similar reports respecting other 
 railways. The result was that before the declara- 
 
SYNDICATES, RTGS, AND CORNERS. 59 
 
 tion of the Midland dividend in August 1874, the 
 prices of the stock which had been nearly 140 at 
 the beginning of the year had been forced down 
 to 125, backwardations having been paid each 
 fortnight for nearly three months previous. But 
 speculators had miscalculated two ways. The 
 reduction of dividend was very much less for 
 that half-year than had been anticipated, and 
 against this cause of fall in price was to be set 
 a steady tendency of the public to set a higher 
 value on such securities which had in fact been 
 rising comparatively in value. The result was an 
 ' explosion ' of price upwards, the price quickly 
 rising from 125 cum div. early in July, to 136 ex 
 div. in September, and many incautious specu- 
 lators being ruined. Here all the forcing of 
 speculators for the fall had no appreciable effect, 
 except for a short time, and the extreme fluctua- 
 tions of price were after all as nothing to what 
 often takes place in markets for commodities. 
 The extremes are great for speculators on the 
 Stock Exchange, because values there in all solid 
 securities are brought to a high pitch of stability 
 under the influence of competition, but in them- 
 selves after all they are of moderate extent. 
 
 In general, we conclude that the importance 
 
60 SYNDICATES, REGS, AND CORNERS. 
 
 often attached to these syndicates is greatly 
 exaggerated. At certain times, when securities 
 all tend to rise, the syndicates and speculators 
 have some power to concentrate the force of 
 the upward current on one or two groups of old 
 or newly- created securities. At other times, 
 when securities all tend to fall, they have a 
 certain power of inducing sales of special securities 
 and so precipitating their collapse. But their 
 power is exercised at great risks to themselves, 
 does not upset any general laws, and does not 
 interfere with the general levels of price, which 
 these laws tend to establish at different times. 
 
CHAPTER VII. 
 
 ON FICTITIOUS SECURITIES. 
 
 WE have been describing the operations of syn- 
 dicates on the Stock Exchange, as they may take 
 place in any description of security, whether it 
 is good or bad. There are frequently, however, 
 dealings in a certain class of securities which are 
 wholly sham articles, which possess intrinsically 
 none of the qualities that are supposed to give 
 them value, which are only sustained by mistaken 
 opinions on the part of those who hold them, and 
 by rnanosuvres of designing men, to which these 
 opinions owe their origin. Although, strictly 
 speaking, the dealings of syndicates with such 
 securities are only extreme cases of attempts to 
 force up prices of particular securities to an arti- 
 ficial level and they can hardly be carried to 
 great lengths for a long time, on account of the 
 disturbance they must occasion according to the 
 principles we have laid down it yet seems ex- 
 
62 ON FICTITIOUS SECURITIES. 
 
 pedient to consider separately the various effects 
 upon other securities of these dealings in fictitious 
 articles, and particularly the effects of the de- 
 preciation or total disappearance of such securities 
 from the markets when the cheat is discovered. 
 Along with the last case may also be considered 
 the rarer case of a considerable real change in the 
 interest-earning power of a security which may 
 sometimes amount to its total extinction. 
 
 There is obviously a certain facility for creat- 
 ing fictitious securities on the Stock Exchange at 
 certain times. During periods of high prices for 
 commodities, in addition to the real profits which 
 are made through the increased productiveness of 
 the industrial machine, and which are represented 
 by increased investments of fixed capital, or the 
 increase of the stocks of commodities, or the 
 increase of actual cash held by a community, there 
 is also an immense mass of what we call paper 
 profit, which is merely a swelling of nominal 
 values, whether of commodities in general or of 
 securities. Purchases of all articles and of se- 
 curities are made by means of borrowed money ; 
 the sellers of such articles become consequently 
 the possessors of larger deposits at their bankers, 
 and these deposits in turn seek investment which 
 
ON FICTITIOUS SECURITIES. 63 
 
 would inevitably have the effect of inflating prices 
 still further. At such times the fictitious security 
 makes its appearance, and with the aid of the 
 sanguine feelings of the moment the creators of it 
 find the market ready for their manipulation. The 
 current which is carrying up the general level of 
 prices is in fact diverted for a time into the 
 channel of so-called new securities, the entire price 
 of which in fact constitutes a part of the general 
 inflation. 
 
 But it is equally obvious, as indeed arises 
 from the mere statement of the nature of 
 such fictitious securities, that, pro tanto, they 
 must tend to depress the price of all other se- 
 curities, or of commodities in general. The money 
 in the country being only equal to a certain work, 
 any additional demand upon it takes away a 
 certain quantity from that work, causes the work 
 to be done by a diminished quantity, and so 
 lowers all prices. The effect is not traceable 
 when the new demand is small, and sometimes 
 even when it is large, owing to the great 
 elasticity of credit ; but we cannot doubt its 
 powerful influence if the additional demands are 
 at all on a considerable scale, and if credit for the 
 moment is not proportionally elastic. Apparently 
 
64 ON FICTITIOUS SECURITIES. 
 
 what occurs at a time of inflated prices is that the 
 fictitious security, being a form of additional infla- 
 tion, becomes a source of further general inflation, 
 so long as there is no shock to credit adding to 
 the instability of the money market equilibrium, 
 arising from the smaller and smaller proportion of 
 cash to the total nominal liabilities and banking 
 deposits of the country. But as soon as a shock 
 to credit comes, and general prices tend to 
 dwindle, the competition of the fictitious securities 
 is seriously felt. Other securities will probably 
 fall more in consequence than they would do if 
 there were no such securities. There can be no 
 doubt, I think, if any one will consider the facts, 
 that the presence on the markets of such bogus 
 companies as the Emma Mining Company or the 
 Lisbon Steam Tramways' Company, and many 
 more, and to a far greater extent of such fictitious 
 securities, or partially fictitious securities, as the 
 loans of Honduras, Paraguay, Costa Rica, San 
 Domingo, Peru, Spain, and Turkey, had for many 
 years one year with another a steady influence 
 in lowering the price of the more solid securities 
 with which they competed. If mankind were 
 suddenly to take a fancy to set a value on counters 
 of any sort, such as the curl-papers already re- 
 
ON FICTITIOUS SECTJKITIES. 65 
 
 f erred to, or the tulips in which the Dutch had 
 a mania last century, or the china in which there 
 is a mania at the present day, the effect would 
 be precisely the same. 
 
 It usually happens, however, when there is a 
 shock to credit, that the cheats in various secu- 
 rities, as in other articles, are discovered one after 
 the other. Interest ceases on a loan on which 
 there was high interest to be paid, but which 
 interest was in fact never paid except out of the 
 subscribers' money. A. bogus company is found to 
 have no earning power ; instead of paying divi- 
 dends to its shareholders, it goes into liquidation. 
 Oftentimes the artificial level of price has only 
 been maintained by most culpable loans on the 
 security itself, or by the purchases of a highly spe- 
 culative class whose other adventures come to 
 grief, and who must consequently sell the fictitious 
 security to meet losses. In these various ways 
 the bladder comes to be pricked, and the fictitious 
 security is exposed. What happens in any such 
 event ? 
 
 The first answer would be, of course, that if 
 the fictitious security competes with others in the 
 way described, its removal from the competition 
 will tend to raise the price of the others. And so 
 
 F 
 
66 ON FICTITIOUS SECURITIES, 
 
 it will permanently, and one year with another, 
 we cannot doubt. But in actual fact, the imme- 
 diate effects of the depreciation or disappearance 
 of a particular security are probably very different. 
 They occur at a time when every new exposure is 
 a shock to credit. They consequently provoke 
 further sales of all securities, further discredit, 
 further running off of margins given by weak bor- 
 rowers, and further exposures. 
 
 There is apt, in fact, to be a prolonged period 
 of discredit, during which the apparent influence 
 of the depreciation of sham securities is only da- 
 maging. It seems especially important that by 
 any great fall in securities the dealers in them, 
 including in that word not only the professional 
 dealers on the Stock Exchange, but, as already 
 explained, a vast mass of outsiders, are likely to 
 be impoverished. It is they who hold largely the 
 speculative articles, they suffer accordingly, and a 
 certain fund for supporting the prices of almost all 
 securities is accordingly diminished. The fund 
 only passes perhaps into different hands, but in 
 those hands it may be diverted to securities not 
 quoted on the Stock Exchange, or to some other 
 employment. In time, no doubt, when the special 
 causes of discredit pass aw T ay, the more thorough 
 
ON FICTITIOUS SECURITIES. 67 
 
 the exposure has been the higher will be the 
 recovery in the price of the more solid securities. 
 There will be so much less of the sham article in 
 competition with them. But this is an after, and 
 not necessarily an immediate effect. 
 
 I think it has been observable, however, during 
 the depression of the last few years, and the suc- 
 cessive depreciation of one fictitious security after 
 another, that the improvement in price of many 
 of the higher descriptions of securities was not 
 delayed, but simultaneous. This improvement 
 has not been in all securities, but mainly in the 
 highest class. But such an improvement dots 
 not alter the fact that time after time the 
 successive shocks have depressed temporarily the 
 prices of many securities not of a fictitious kind. 
 Of this there was a conspicuous illustration, I 
 believe in the spring of 1876, when there was a 
 great fall in English Railway Stocks, owing to 
 various causes, one of which will afterwards be 
 noticed (see postea, p. 1 1 8), but another of which 
 was, no doubt, the inability of the Stock Exchange 
 entourage, impoverished by the fall of foreign 
 securities in 1875, to maintain the purchases they 
 had made. This fall in a few months was, how- 
 ever, largely recovered from, these securities 
 
68 ON FICTITIOUS SECURITIES. 
 
 benefiting, like others, from the absence of com- 
 petition, although a fresh cause of temporary 
 depreciation had set in, through the apprehension 
 of war in the East. In the same way, we may be 
 sure, there is a constant opposition of tendencies 
 in a market for securities when the shams are 
 being detected. The shocks cause great discredit, 
 and produce an immediate fall, but the market 
 for the remaining securities is permanently stronger 
 for the exposure. 
 
 The effect is not different in principle when a 
 security formerly of real value becomes a fictitious 
 security, such as when a mine unexpectedly gives 
 out. If such an event happened in a buoyant 
 time, and was not of itself big enough to turn the 
 tide of credit, it would have no appreciable in- 
 fluence. The rise of prices would go on with no 
 perceptible check, and equally without any per- 
 ceptible fresh stimulus, the proportion of any one 
 such security to the whole market being infinit- 
 esimal. But such an event would certainly aggra- 
 vate the general discredit in a period of depres- 
 sion. It would be undistinguishable from the ex- 
 posures of other securities, and would add to the 
 general confusion. 
 
 In all this, however, it must be carefully kept 
 
ON FICTITIOUS SECURITIES. 69 
 
 in mind that we are speaking only of the money 
 price. A temporary and partial depression of the 
 price of securities, due to the shocks occasioned 
 when sham securities are exposed, may be consis- 
 tent with a real increase of value relatively to com- 
 modities, if the commodities are simultaneously 
 falling in price for similar reasons. Such a fall in 
 commodities is qua commodities a rise in the 
 price of securities, and an increase at the same 
 time of the real value of the security itself, as 
 the income from it has a greater purchasing 
 power. 
 
CHAPTER VIII. 
 
 THE MANNER OF STOCK EXCHANGE FLUCTUATIONS- 
 PANICS. 
 
 WE have already pointed out that the organiza- 
 tion of business on the Stock Exchange, and the 
 methods pursued, are conducive to an incessant 
 fluctuation, though within narrow limits, and to 
 great liability to panics. To the outsider nothing 
 can be more bewildering than these incessant ups 
 and downs and great disturbances, for which there 
 is apparently no assignable cause. But there is 
 clearly nothing in them to modify the general 
 rules we have laid down as to the causes of change 
 in the price of securities and their effects. Ex- 
 perience of other affairs familiarises most men with 
 the idea that frequent eddies in a current do not 
 alter its general direction, which remains perfectly 
 traceable, and that after great disturbances there 
 are reactions which make the effect of the disturb- 
 ances only temporary, and which are of little 
 
FLUCTUATIONS ; PANICS. 71 
 
 account when long periods are reckoned. There 
 is so much interest, however, in Stock Exchange 
 movements, that some account of the way in 
 which these eddies and disturbances occur in this 
 instance may perhaps be ventured on. Such 
 an account will only confirm the view that 
 they must operate within narrow limits, and 
 leave the great movements in the prices of 
 securities unaffected. 
 
 The constitution of the Stock Exchange is 
 such that as a rule a great many transactions are 
 entered into with borrowed money. As in most 
 other markets, the dealers employ not only their 
 own capital, but the money they can borrow from 
 the banks in the operations of buying and selling. 
 At the same time the solid nature of many of the 
 securities, their slight liability to any great change 
 in market price within short limits of time, their 
 stable earning power, even if the market price 
 should change, combine to enable the dealers on 
 the Stock Exchange, on occasion, to borrow much 
 more in proportion to their own capital than could 
 be done in any other business A large dealer 
 in consols, to take an extreme illustration, might 
 safely become responsible for an advance of 
 hundreds of thousands on consols, with only a 
 
72 TBE MANNER OF STOCK EXCHANGE 
 
 one or two per cent margin, and almost with no 
 margin at all. A bank could, of course, make the 
 advance with equal safety. As the advances, by 
 the custom of the market, are also for short 
 periods, there is all the more safety in the opera- 
 tions, and the margin of the advance may be the 
 smaller. There is also an additional security in 
 many of the operations from the known fact that 
 the dealer does not run the risk of fluctuation 
 even for the short period of the advance. Say 
 he borrows of a bank to take up a quantity of 
 stock sold to him for cash, he may only want the 
 money for a few days until the usual settlement 
 comes round, for which settlement he may already 
 have sold the stock he has bought for cash. If a 
 dealer is known to conduct his business prudently, 
 BO that the sales he has made are not likely to 
 be the occasion of default by a purchaser, a banker 
 in lending to such a dealer has a veiy perfect 
 security, even if the entire advances are many 
 times in excess of the dealer's own capital. There 
 are, no doubt, many securities where the ad- 
 vances by a prudent banker would be more 
 limited, and where dealers must be treated with 
 more caution ; but it is singular, I believe, with 
 what narrow margins, owing to the custom of 
 
FLUCTUATIONS ; PANICS. 73 
 
 short settlements, advances are often made on 
 very inferior securities. 
 
 This extreme borrowing will naturally have 
 some effect in making markets sensitive. A 
 dealer who may happen to hold a large amount of 
 stock will be likely to start at shadows, and at 
 any rate press sales, if he can do so at a small 
 reduction only, so as to get out. He only borrows 
 in the course of his ordinary business, and in an- 
 ticipation of sales he is about to make ; he does 
 not contemplate a long speculation ; he is there- 
 fore always apprehensive, and if there is a chance 
 of things turning, and of anything happening 
 which may leave stock he only means to deal in 
 on his hand, or realisable only at an extraordinary 
 loss, he hastens to anticipate so disastrous a con- 
 tingency. 
 
 What we have described is in the ordinary- 
 way of a dealer's legitimate business, and might 
 occur even in the absence of those Stock Exchange 
 transactions which are more speculative, or where 
 the gambling element comes in. But the extent 
 of speculation, and the arrangements for it, also 
 contribute to the general sensitiveness. The 
 essence of these speculations is that outsiders, or 
 brokers and dealers not in the ordinary way of 
 
74 THE MANNER OF STOCK EXCHANGE 
 
 dealing but for speculation, enter into vast en- 
 gagements precisely as the good dealer does, but 
 without the favouring conditions which make 
 him a tolerably safe borrower. As we have 
 explained, the usual stability of prices tempts 
 them. The outsiders are also without the dealer's 
 opportunities of turning round promptly, the 
 dealer's opportunity of doing so consisting in fact 
 in the steady stream of business which goes on 
 until an event occurs to change it, and in this 
 event being known sooner in the market than to 
 the multitude outside. The minor arrangements 
 also for this speculative dealing serve to conduce 
 to sensitiveness. Many purchases are made with 
 money which outsiders borrow directly of the 
 banks, but most are effected on the credit of the 
 buyer with his own broker, and on the latter's 
 credit with the dealer. When settling-day comes 
 round, the outside speculator, not being able to 
 pay for what he has bought, and not having 
 borrowed outside, gets his broker, as it is called, 
 to ' continue' the transaction that is, as above 
 explained, to pay what is called a ' contango/ This 
 means that his broker either goes to the original 
 dealer and pays him a consideration for postponing 
 delivery and payment for the stock, or goes to an- 
 
FLUCTUATIONS ; PANICS. 75 
 
 other dealer and pays him a consideration to take 
 the stock if necessary. Sometimes it is said a 
 broker receives such a consideration himself, but this 
 would be contrary to formal rule, and is, moreover, 
 a detail not necessary for our present purpose to 
 be considered. Often also it happens that spe- 
 culative purchases are set off against speculative 
 sales, the rate of ' continuation' varying with the 
 supply of stock, as it is called, as well as with the 
 rate of discoun t ;but to each individual speculator 
 the arrangement is in form, and may be for aught 
 he knows in substance, an arrangement to borrow 
 from some dealer or other to complete a purchase 
 the speculator cannot himself complete. The bor- 
 rowing is only for a short time to the next 
 settling day that is, on the London Stock Ex- 
 change from a fortnight to three weeks ; but it 
 is a real borrowing to the extent that there are 
 no speculative sales to set against the speculative 
 purchases. And the mere form of the borrowing 
 is a perpetual cause of sensitiveness. The in- 
 cessant renewal of loans acts, as a rule, unplea- 
 santly on those who have to pay the charge, and 
 at the approach of every account almost there is 
 a cessation of active purchases, a disposition to 
 sell, so as to avoid the renewal of the loan, and a 
 
76 THE MANNER OF STOCK EXCHANGE 
 
 vague uneasiness which results from comparing 
 notes and the making of financial arrangements. 
 Necessarily, also, each settling day reveals some- 
 thing as to the general state of the engagements 
 whether stock is in good supply or not, and so 
 on ; and in excited times this revelation has a great 
 effect on immediate prices. 
 
 The arrangements by which a supply of stock 
 is kept about the markets seem also to ensure not 
 only that the markets will be sensitive, but that 
 they must be irregular. The essence of the 
 business is that there should be floating stock in 
 the market, unless when a great fall is antici- 
 pated, no matter in whose hands the stock may 
 be. The outside speculation would otherwise 
 have no raw material to work on. The dealers 
 of all kinds will hold this stock when sales have 
 been in excess of the current demand, or when 
 prices from any cause have fallen below the usual 
 average level at a given period. But when bu- 
 siness again is active, and speculators are stirring, 
 they sell the stock, not delivering it, but ' taking 
 it in' that is, receiving from borrowing buyers 
 the ' continuations' we have described, or, in other 
 words, lending the buyer the money represented 
 by the market value of the stock. And as it is 
 
FLUCTUATIONS; PANICS. 77 
 
 uncertain at what point in a rising market the 
 various groups of dealers will sell, the result is 
 that every rise is checked at uncertain intervals 
 by this stock coming forward. The speculators 
 for the rise may have the utmost confidence in 
 their speculation, but they do not wish to be 
 loaded with too much, unless the stock is small 
 enough to be rigged to the degree of a corner ; 
 they prefer when too much comes forward to hang 
 back a little, so as to get the assistance of the 
 usual purchases which can be depended on in 
 a rising market.* The knowledge of these irre- 
 gularities also induces other speculators to realise 
 from time to time, however confident they may be 
 in the ultimate result of the speculation. A 
 movement of prices upwards becomes jerky in 
 consequence, a sudden rise for two or three days 
 or weeks being followed by a decline almost to 
 the point from which a start was made. For 
 similar reasons a movement of prices downwards 
 is also jerky. As stocks fall, the dealers in the 
 floating stock buy in at varying intervals, and 
 speculators also make temporary purchases against 
 
 * And when there is a rig on foot they imitate the course 
 of a regular speculation for the rise. See supra on fictitious 
 securities. 
 
78 THE MANNER OF STOCK EXCHANGE 
 
 their speculative sales, though these sales will be 
 resumed after a short spurt. 
 
 The rates of continuation or backwardation, it 
 will be observed, have nothing to do with the 
 intrinsic value of a security, or even with its 
 position for a rise or fall. A low rate of con- 
 tinuation may sometimes mean only that one or 
 more groups of speculators have not sold their 
 stock, though a point or two's further advance 
 may induce them to sell it. A backwardation may 
 also be quite consistent with a preponderance of 
 sales of stock for delivery. The arrangements are 
 certainly calculated to facilitate deception, because 
 a continuation has primarily the aspect of showing 
 a necessity to borrow money to pay for stock, and 
 a backwardation the aspect of a scarcity of stock, 
 showing the necessity of an advance of price before 
 a supply will come out. 
 
 The liability of such a market to panics will 
 hardly require description. It is sensitive to every 
 breath that blows, and when a whirlwind comes, 
 or even an ordinary gale, there is great ruin. 
 Almost all concerned the dealers, whose trans- 
 actions are regular, as well as the speculators of 
 every description, are under immense engage- 
 ments ; and if any real cause occurs for a fall 
 
FLtTCTUATIONS ; PANICS. 79 
 
 beyond a certain point, there is great loss to be 
 faced even by the most prudent. No matter how 
 confident any one may be in his calculation that 
 a stock must rise in value, an actual fall beyond 
 a certain limit throws him out. He may be wise 
 to sell even on a falKng market if there is a risk 
 of a further fall a risk about which there is 
 often a great difficulty in judging. The question 
 is not altogether one of the strength of a spe- 
 culator. The element of time enters into every 
 business transaction. Although, therefore, he 
 may hope for profit ultimately in his speculation, 
 in spite of the delay caused by a panic, he has 
 to consider that if prices go down, and remain 
 down for any length of time, he is debarred from 
 other transactions in which he might make a 
 profit. He fears, in fact, the temporary lock-up 
 of his capital quite as much as the ultimate failure 
 of the speculation in which he is engaged. A 
 so-called strong speculator besides has often to 
 consider the weakness of others. There may be 
 a danger in many states of the market that, in 
 spite of real circumstances favouring a rise which 
 in time will have their due effect, the panic may be 
 so great as to cause a serious lock-up of money to 
 the strongest. Those who know the market best 
 
80 THE MANNER OF STOCK EXCHANGE 
 
 are aware of the frightful convulsions to which it 
 
 o 
 
 is exposed, and act accordingly. 
 
 The hubbub is also likely to be aggravated up 
 to a certain point by the manoeuvres of the inside 
 operators, who have been the first to get out. 
 The more they have had an opportunity of ope- 
 rating with the current stream before the secret 
 gets out, the weaker is the ; account' when the 
 real causes for the fall disclose themselves up to 
 a point. It is the interest of the very people with 
 whom only the outside speculators can close their 
 transactions to put down the price as low as 
 possible. Competition ensures that they will 
 not go too far in this course, so that the 
 markets are at bottom steadier than if the inside 
 speculators were not prepared for the event, but 
 this strength and steadiness are latent, and 
 could hardly be the basis of action by an outside 
 operator. 
 
 Of course panics are very different according 
 to the circumstances in which they occur, although 
 there is hardly ever a time except just after a 
 panic when the stock-markets are not liable to 
 great disturbance. Their normal condition is that 
 large quantities of stock are held with borrowed 
 money in various ways, and the debacle once set 
 
FLUCTUATIONS; PANICS. 81 
 
 in may go very far. At a point the stock which 
 has been pledged with banks for advances of 
 longer term than those customary on the Stock 
 Exchange itself is likely to be offered, and this 
 renders more hopeless the position of every one 
 who has made purchases with borrowed money. 
 The usual events which are likely to cause a 
 serious panic, the outbreak of a sudden great 
 war, or a panic in the money-market, are also 
 causes of a prolonged real change in the value of 
 securities about which every one may be justly 
 apprehensive. A really first-class war will be cer- 
 tain to cause a creation of securities on a large 
 scale. We know what has taken place in our own 
 great wars, and the more recent experience of the 
 United States and of France will be fresh in peo- 
 ple's recollections. When war breaks out there- 
 fore, or is suddenly threatened, speculators know 
 for certain that an event is at hand which will 
 not only disturb the markets temporarily, but may 
 absolutely defeat their speculation. A large crea- 
 tion of securities, as we have seen, tends to lower 
 the price of every security, sometimes for a long 
 period. The outbreak of a great war is also like 
 the letting out of water of which no one can see 
 the end. We have been accustomed to think 
 
82 THE MANNER OF STOCK EXCHANGE 
 
 from the experience of the last twenty years in 
 Europe, that wars will be short, although the ex- 
 perience of the American civil war was quite of a 
 contrary kind. But speculators will hardly count 
 on this, and with reason. They see that some 
 wars have been very short in which one side has 
 displayed from the beginning a greatly prepon- 
 derating force, and has been able to occupy the 
 central resources of the enemy. It does not follow 
 that a war in which some accident prevents this 
 preponderance of force being felt, or in which a 
 third power suddenly intervenes, will be at all 
 short. If England had interfered in 1870 to pre- 
 vent the final overthrow of France, it is quite 
 possible that all Europe might still have been 
 fighting just because we could have supplied 
 France with an unassailable base. If an Eastern 
 war should also break out in which England should 
 be engaged, Europe might again be subjected to 
 a prolonged struggle. Speculators justly fear, 
 therefore, in every war, an indefinite creation of 
 securities which completely upsets the calculation 
 for the rise in which they are concerned. 
 
 A panic in the money-market is also likely to 
 have the same effect. Such a panic means a great 
 shock to credit which destroys the very condition 
 
FLUCTUATIONS ; PANICS. 83 
 
 of a high level of price such as continued pur- 
 chases with borrowed money bring about. It is 
 also one of those events which put in motion a 
 set of causes giving shock after shock to credit. 
 The speculator justly fears, therefore, that when 
 once such a panic sets in, there will be no quick 
 recovery in the markets for securities, but, on the 
 contrary, a slow decline succeeding the panic even 
 if at first it should be followed by a slight reaction. 
 But it is only in the way thus described that a 
 panic affects the great movements of prices. At 
 the time the depression, however great, usually 
 passes away leaving comparatively little mark. 
 Even in the case of the outbreak of a war there is 
 a recovery when the event is known, from the first 
 speculative depreciation, though not to the full 
 height from which the fall took place. It is only 
 after a time that the successive sales produced by 
 a shock to credit, or the competition of new issues 
 due to a war or other influences, produce their full 
 effect. It is not the panic mainly, but the circum- 
 stances in which it occurs and its indirect conse- 
 quences to which the permanent change in prices 
 is to be traced. 
 
CHAPTEE IX. 
 
 THE DIFFERENCE OF PRICE OF SECURITIES, 
 INTER SE. 
 
 IN a previous chapter we referred momentarily to 
 the causes which make securities differ in price 
 among themselves, although the aggregate price 
 of the whole mass and the average yield obtain- 
 able upon investments are governed by the general 
 causes we have stated. It may be convenient to 
 describe some of the more important causes of 
 difference of price among securities themselves 
 apart from the rate of interest they pay, so that 
 a greater nominal yield is obtainable from one 
 than from another. There is a common impres- 
 sion that the differences are often wholly un- 
 accountable, or are disproportionate to their real 
 causes, which may frequently be the case ; but a 
 proper consideration of the whole question may 
 perhaps explain many apparent anomalies to those 
 who have not fully reflected on the matter. 
 
DIFFERENCE OF SECURITIES, INTER SE. 85 
 
 The first cause of difference we shall thus 
 notice, is the difference in the security and safety 
 of the income yielded by the investment. The 
 obligations of the best governments are generally 
 recognised as holding the first place, and with 
 much good reason. The credit of a State is one 
 of the most essential things to its life. The 
 whole machinery of government in a state, and 
 with that the due protection of its whole industry, 
 must go wrong before the interest on the national 
 obligations of the government, or the principal 
 when due, can go unpaid. The whole fortune and 
 industry of the subjects are in fact mortgaged for 
 the payment of the government's debts. Hence 
 the value of the obligations of stable govern- 
 ments of civilised communities, even when the 
 debts of these governments may seem dangerously 
 large. Whatever the danger they involve to the 
 whole community, they are more secure than any 
 other security possessed by that community. Of 
 course there are various degrees of government 
 credit, and a government which has to borrow from 
 others than its own subjects cannot have the benefit 
 of the preference of its own obligations to all other 
 securities within the country which the govern- 
 ments of countries with much surplus capital 
 
86 DIFFERENCE OF SECURITIES, INTER SE. 
 
 possess, but as regards the governments of first- 
 rate States, such as France, England, Germany, 
 and the United States, and of States like Holland 
 and Belgium, there are manifest reasons for the 
 common estimation of the solidity of their ob- 
 ligations. 
 
 There are other securities which tend to ap- 
 proach in value those of governments. As a State 
 advances materially, and the proportion of govern- 
 ment securities to the resources of a country and 
 its other securities diminishes, there grows up a 
 mass of dividend-yielding investments which are 
 practically indistinguishahle in point of solidity 
 from those of the government itself. Of these 
 we may instance especially, among securities not 
 negotiable on the Stock Exchange, mortgages on 
 land or unimproved ground-rents, and some of the 
 obligations of local authorities which are based on 
 the security of rates ; and among securities which 
 are negotiable on the Stock Exchange, the deben- 
 ture stocks of industrial undertakings, like the 
 chief English railways, where there is a very large 
 margin of net earnings. Theoretically these 
 things are not quite so solid as the obligations of 
 the English government itself. They are not the 
 first charge on the fortune and industry of the. 
 
DIFFERENCE OF SECURITIES, INTER SE. 87 
 
 country, or any part of it. Railway debenture 
 stocks, again, are theoretically exposed to indus- 
 trial fluctuations ; railways may become antiquated 
 or fall into a second place, like turnpike roads or 
 canals. But the security of property in England 
 is so great, that even second and third charges on 
 the whole fortune and industry of the country are 
 practically as good as the first. The English 
 government must borrow hundreds and thousands 
 of millions before the weight of the first charge 
 would become such as materially to affect the 
 security of the income of any other property in 
 the country. The theoretical possibility of extreme 
 fluctuations in industrial enterprises which would 
 affect articles like railway debenture stocks may 
 also be such as to have only an infinitesimal 
 effect on market price. Still the theoretical notion 
 being &jirst charge will probably have a powerful 
 effect always in keeping a certain distance between 
 government securities and others, even in the 
 securest countries, other causes, as we shall see, 
 being also likely to co-operate. 
 
 After the best securities come the obligations; 
 of all but the first-rate governments ; the shares > 
 whether preference or ordinary, in railways, gas- 
 companies, banks, ships, and other undertakings, 
 
88 DIFFERENCE OF SECURITIES, INTER SE. 
 
 the variety being endless and the estimation most 
 various. The only point to notice here is, perhaps, 
 that some securities are affected by a positive 
 drawback in the shape of an obligation contingent 
 or otherwise. We refer to the shares of com- 
 panies on which there is an uncalled liability. 
 The consequent obligation is a most serious matter 
 in almost every case, as may be seen in the price 
 of the shares of the best Joint Stock Banks as 
 compared with the leading railways, but the effect 
 may vary from the comparatively slight degree in 
 which it is manifested in such cases to the degree 
 of giving a wholly negative price to the security, 
 which the seller then pays something to be rid of. 
 In the time of the 1866 collapse such payments to 
 be rid of an investment were very common, and the 
 risk at all times is never to be lost sight of. The pre- 
 valence of a form of securities on which there was 
 a possible liability in a given country would pro- 
 bably have the effect of keeping the range of 
 aggregcate prices at a lower level than would other- 
 wise be the case. 
 
 We may remark, however, generally, that it is 
 very often the inferior security which is apt to be 
 overvalued, and not the better security. The 
 anxiety to enjoy a good income leads people to 
 
DIFFERENCE OF SECURITIES, INTER SE. 89 
 
 under-estimate the risks of an inferior security. 
 When the account is taken after a period it will 
 often be. found that the investor in consols has 
 really done better than an investor in a security 
 yielding nominally a much higher interest, if 
 the latter takes into account temporary losses 
 or interruption of interest, and loss of capital, to 
 which all investments are exposed. At the present 
 time the investing public is in a position to be 
 very sensible of this by their losses in Turkish, 
 Egyptian, Peruvian, and similar securities. 
 
 A second cause of difference is the difference 
 of marketability arising mainly from the greater 
 mass of some securities than others, though it 
 may be assisted by other causes. We have seen 
 already that Stock Exchange securities are pro- 
 bably higher than others relatively, because of 
 their susceptibility to accurate definition and 
 subdivision, which makes them suitable for the 
 handling of a great market. And what makes 
 the mass of some Stock Exchange securities high 
 in price will also make some of them higher than 
 others ; some of them will be far more marketable 
 than others. That this is so is familiar on the 
 Stock Exchange, many securities being, in fact, 
 nominally quoted there which from various causes 
 
90 DIFFERENCE OF SECURITIES, INTER SE. 
 
 remain pretty much in the position of outside 
 securities, owing to their possessing in so low a 
 degree- the marketable qualities. And the most 
 valuable additional quality fitting an article for 
 a good market, besides the capability of easy 
 definition and subdivision, appears to be mass. A 
 stock to be highly marketable, and even to make 
 it safe to have dealings in it, must be large enough 
 to make it worth the while of a great number 
 of people to be interested in it. A dealer 
 in a small stock can never be quite sure against 
 being cornered ; while as the market must be 
 limited it is equally unsafe to calculate on being 
 able to borrow on it. Hence the suitability of a 
 great mass of stock like consols or French rentes 
 for the operations of a great market. Ceteris 
 paribus such stocks will stand higher than very 
 similar stocks which are not in such masses. No 
 doubt very small stocks may sometimes be subject 
 to considerable dealings on the Stock Exchange, 
 especially where such stocks are in. close relation 
 with larger masses of stock of a similar description. 
 There are, for instance, several railway stocks 
 such as the deferred ordinary stocks of the Great 
 Northern, South Eastern, Brighton, and Sheffield 
 Railway Companies, which are in close relation 
 
DIFFERENCE OF SECURITIES, INTER SE. 91 
 
 with other stocks of the same companies, and 
 whose price will always be affected by comparison 
 with that of the other stocks of these railways, 
 or with the stocks of English railways generally. 
 But it is recognised in the market, we believe, 
 that the smallness of these stocks makes dealing 
 far less safe in them than in the ordinary stock 
 of the London and North Western Company 
 for instance. Dealing is, in fact, only made pos- 
 sible by a disproportionate quantity of the stocks 
 getting into the hands of dealers ; and for this 
 and other reasons they are subject to greater 
 fluctuations than other stocks, and probably stand 
 at a permanently lower level than if they could 
 be held in great masses, although they may be 
 occasionally higher in times of speculative in- 
 flation. 
 
 The above two are, we believe, the most im- 
 portant of the causes which make securities differ 
 in price inter se, but they are not the only ones. 
 There are other causes which may be occasionally 
 important. We have to notice, 
 
 Third, the effect of extrinsic regulations, such 
 as those of law courts, which direct the invest- 
 ment and re-investment of funds in a particular 
 manner, and so cause some stocks to be directly 
 
92 DIFFERENCE OF SECURITIES, INTER SE. 
 
 more in demand besides giving them a certain 
 prestige. Consols, English railway debentures, 
 and other stocks, are undoubtedly favoured by our 
 law courts in various degrees, with some effect 
 on the level of price of such securities. The voice 
 of the courts of law makes them in effect articles 
 of luxury and monopoly to a certain extent, and 
 as compared with other securities the price is 
 likely to be raised accordingly. It is just possible 
 that the judgment of the law courts may only an- 
 ticipate the judgment of the public, nor is their 
 power unlimited, because while they divert some 
 capital in a particular direction they have not 
 power over all capital ; but it is more probable 
 that an artificial cause of this sort will divert to 
 some extent, and in the direction of raising some 
 securities more than others, the natural currents 
 of investment. 
 
 Lastly, the estimation of .the public may be 
 guided to some extent in favouring some securities 
 more than others by qualities unconnected with 
 the solidity of the income or mere marketability. 
 Securities, for instance, may be used, and are 
 used, as a quasi money, or in place of foreign bills 
 of exchange. A merchant or banker in London 
 having money to pay in Paris may effect his 
 
DIFFERENCE OF SECURITIES, INTER SE. 93 
 
 purpose quite as well by buying in London French 
 Rentes or some other security negotiable on the 
 Paris Bourse, and then reselling what he has 
 bought in Paris. Instead of sending a bill of 
 exchange to Paris he sends a bond of the French 
 or some other government, or the obligations or 
 shares of a railway company, like the Lom- 
 bardo- Venetian railway. At times very consider- 
 able transactions of this nature do in fact take 
 place. An exchange dealer who wants to send 
 money from one capital to another, when there 
 are no bills to be had, will buy securities 
 in the one and send them to the other. The 
 operation will probably be that he has sold 
 drafts of his own to people who have inquired 
 for them, and he finds the money to meet those 
 drafts by the purchase and transmission of secu- 
 rities. One result is that when exchange is 
 favourable to a country the demand is liable to 
 be met by an exportation of securities to it, and 
 vice versd, and thus securities come to play an 
 important part in regulating the exchanges, as it 
 is called, and in equalising the rates for money 
 in different monetary centres. But this secondary 
 use of securities as money, like the secondary use 
 of the precious metals themselves originally as 
 
94 DIFFERENCE OF SECURITIES, INTER SE. 
 
 money, tends to make more in demand the securities 
 which are most suited for international transmission 
 than probably they would otherwise be, or than 
 securities which are not international. The bonds 
 and shares of the Lombardo-Venetian Railway, 
 to take a case already mentioned, probably en- 
 joyed a special favour at one time, if not at 
 present, for no other reason than the number of 
 markets where they have been effectually domiciled, 
 and the use for remittance which can thus be made 
 of them. 
 
 Of the same nature is the extraneous value 
 some securities come to acquire through their 
 giving a status or some such advantage. It is, 
 for instance, ' respectable ' to hold bank stock, 
 as giving an ownership in the national bank, and 
 the list of holders being published as an indication 
 of the wealth of the holder. No poor man can 
 afford to hold bank stock: and important city firms 
 who wish to have a partner in the bank direction, or 
 to be in a certain kind of credit, will accordingly 
 invest in bank stock when they would not other- 
 wise do so. To a certain extent, I know, the better 
 classes of railway and bank stocks are sought 
 after for extrinsic advantages they are supposed 
 to confer and will no doubt assist in conferring. 
 
DIFFERENCE OF SECURITIES, INTER SE. 95 
 
 In addition, there is no doubt, I should think, 
 from the peculiar value of some stocks, that there 
 grows up at times a species of customary appre- 
 ciation of which a distinct account can hardly be 
 given. Custom, for instance, keeps Consols a 
 half or three quarters per cent higher than New 
 and Reduced Three per cents, although they pay 
 exactly the same rate of interest and are indis- 
 tinguishable in their legal conditions of value. 
 The speculative ' account ' is in consols by virtue 
 of ancient custom, and for this and for no other 
 reason, I am assured, Consols are always fractionally 
 higher than New and Reduced. To take another 
 illustration : A certain railway or bank comes to 
 be a 'favourite.' It is first in the field or the 
 first to be in Very good credit ; all the best people 
 go into it, and so it conies to enjoy a special 
 repute and favour. This may sometimes be based 
 at starting on a substantial reason. London and 
 North Western Railway stock, for instance, has 
 got to its present credit in part by the diffused 
 belief in the rigour of the auditing, which has 
 had for result that there would be a large real 
 surplus if the Company were to relax the rigour 
 it displays, as compared with other companies, in 
 charging items of expense to revenue. But the 
 
96 DIFFERENCE OF SECURITIES, INTER SE. 
 
 benefit is participated in by many people who 
 could not themselves appreciate all the reasons, 
 and who simply follow the leader. It is the same 
 to some extent with bank stock and other 
 securities a certain custom has attracted atten- 
 tion to them, and the opinion that they are 
 generally thought well of keeps them in high 
 credit. 
 
 These appear to be among the prominent causes 
 of securities differing in value among themselves, 
 and which may also modify a little the strictness 
 of the relation between the price of securities and 
 that of other commodities or the hire of money. 
 Obviously, however, none of them are of a nature 
 seriously to modify the rule that the expectation 
 of income, as measured by what the income purchases 
 that is, the price of other commodities primarily 
 governs the estimation in which securities are held, 
 or to modify the rules which make the fluctuations 
 of price in the aggregate depend on the quantity 
 of money on one side and the quantity of securities 
 and commodities on the other, and also on the 
 state of credit. The secondary qualities, such as 
 the use of securities as money, could not be per- 
 ceived or appreciated unless securities had first 
 gained consideration from their primary qualities. 
 
DIFFERENCE OF SECURITIES, INTER SE. 97 
 
 These causes of difference may seem so 
 powerful as to be sufficient to isolate the 
 different groups of securities to put them, as 
 it were, into water-tight compartments so that 
 what affects one should not much or quickly 
 affect the others, and the general causes we have 
 described should not be quickly or generally 
 operative throughout the whole market. But 
 reflection will make it clear that what is in 
 fact the experience of the market the sympathy 
 between securities is indeed quite reasonable. 
 We have partly explained this already in con- 
 nexion with the more speculative securities by a 
 reference to the fact of speculators being banded 
 together so that any loss to a part of the speculative 
 class affects all the securities which the whole class 
 holds. But there is another reason for the quick 
 sympathy between securities, viz. what may be 
 called the displacement of capital. It is not 
 necessary that all the holders or possible holders 
 of a particular security, or even all those who are 
 about to buy or sell, should be affected by one or 
 other of the influences favourable or adverse in 
 order to produce a change in the level of price. If 
 any of the holders are so affected, an apparently 
 most disproportionate effect may be produced, so 
 
 H 
 
98 DIFFERENCE OF SECURITIES, INTER SE. 
 
 that it will be the variable or optional capital 
 which governs the price in the long run. It must 
 be considered that there are constant operations of 
 buying and selling in progress. Estates have to 
 be realised, and for this and other reasons securities 
 must be sold, although the sums realised have 
 often to be immediately re-invested. In the same 
 way money is always or almost always seeking 
 investment. Consequently if a particular security 
 or group of securities falls or rises in price, the 
 optional capital will be attracted or repelled as the 
 case may be ; and the repulsion may sometimes go 
 so far as to induce a certain part of the optional 
 capital invested in a particular security to be 
 realised. The diverted capital in turn seeking 
 the securities to which it would be less naturally 
 directed raises them to a price which diverts from 
 them in a similar manner a part of their optional 
 capital. And so it goes all through the market, 
 this optional capital all through being the real 
 harmoniser and adjuster of relative prices. Thus 
 Consols may be usually sustained by the reinvest- 
 ments of trustees, by the reinvestment of Savings 
 Bank funds, and by a certain amount of customary 
 purchasing ; but if the price becomes higher than 
 before relatively to other securities and the value 
 
DIFFERENCE OF SECURITIES, INTER SE. 99 
 
 of money, a portion of the capital set free by daily 
 realisations, or by special realisations in view of the 
 high price, will go elsewhere, and new capital which 
 would otherwise have been destined for Consols will 
 also go elsewhere. A certain support will thus be 
 taken from the consol market at a relatively 
 high price which will only return to it when the 
 diverted capital has exerted a disproportionate 
 effect in raising other prices. This is what we 
 mean by the displacement of capital, which is 
 obviously a marvellous agency in the adjustment 
 of prices. 
 
 One important result of this displacement may 
 be noticed viz., that certain special causes tending 
 to raise the price of a security, instead of having 
 all the effect they would have if other things 
 remained the same, have mainly for effect to change 
 the character of the holding. A particular security 
 instead of being held by classes of capitalists in 
 certain proportions will come to be held by other 
 classes or by a portion of the former holders mixed 
 with others in different proportions. Just as 
 suddenly arrested motion evolves a certain amount 
 of heat, so the force of the causes tending to raise 
 prices being neutralised by other causes operates a 
 change in the character of the holding. In the 
 
100 DIFFERENCE OF SECURITIES, INTER SE. 
 
 case of Consols supposed the diminution of the 
 optional capital invested will leave a larger pro- 
 portion than before held by trustees and others 
 who are bound to reinvest. In the case of inferior 
 securities it is believed this probable change in the 
 character of the holding with every great change 
 of price must often be an important matter. The 
 change may be so great as often to make the entire 
 difference between a security which is well held 
 and one which is badly held, or vice versd. Its 
 whole relation to other securities, and its charac- 
 teristics of marketability and stability, may be 
 profoundly altered for good as well as for evil in 
 an investing point of view; as the result of a 
 change in the level of price. The sympathy 
 between securities, notwithstanding the distinc- 
 tions between them, appears thus the more ex- 
 tended and to have more and more important 
 consequences the more we look into their relations. 
 They are acted on by special influences of every 
 description, but there are constant forces at work 
 to restore an equilibrium based on a clear appre- 
 ciation of their relative intrinsic qualities. There 
 can be no doubt also that where general causes 
 affect first a particular security or group of secu- 
 rities, the ready sympathy between all secures the 
 
DIFFERENCE OF SECURITIES, INTER SE. 101 
 
 quickly diffused operation of such general causes. 
 Hence in part the simultaneous movements in 
 many securities which cannot but strike observers 
 as one of the remarkable characteristics of the 
 Stock Exchange. 
 
CHAPTER X. 
 
 THE CYCLE OF PRICES IN SECURITIES. 
 
 IN a previous chapter we have referred to the 
 probability that the prices of securities will tend 
 to move in great waves that they will in the 
 aggregate be constantly advancing for a long 
 period, and then for another long period will be 
 almost constantly declining. This effect results 
 from the constitution of human nature dealing 
 with such articles as we have described in the 
 actual conditions of business. Although at first 
 sight a rise in one security would mean a depre- 
 ciation of all others, if the quantity of money was 
 not simultaneously increased, yet the effect of 
 credit and of other causes is such as to make other 
 securities in the first instance rise in sympathy 
 with the movement, and continue rising, the 
 competition for the limited amount of money 
 being only felt at a later stage in the advance. 
 
THE CYCLE OF PRICES IN SECURITIES. 103 
 
 The point is so important that a more ample 
 discussion of it may be useful. 
 
 That there is ordinarily a cycle in all prices 
 such as we have described may now be considered 
 an established doctrine in Political Economy. 
 Several acknowledged authorities have given their 
 opinion to this effect, and have also collected a 
 mass of substantial evidence in its favour. I 
 would instance especially Mr. Tooke in Tiis History 
 of Prices. In the long discussions of that book, 
 which were so ably continued dow T n to 1856 by 
 Mr. Newmarch, and have since been continued 
 in the Annual Commercial History and Keview of 
 the Economist, nothing is more striking than the 
 periodicity of prices. At one period the range of 
 prices of all or of the majority of the principal 
 articles is much lower than it was a year or two 
 before. This lasts for a few years, or a longer or 
 shorter interval as the case may be, loud complaints 
 of dulness and depression being heard all the while 
 from the mercantile classes. Then all the prices 
 begin to rise one after another and quickly par- 
 ticipate in a general ascending movement, now 
 most marked in one article and now in another, 
 till finally a high range of prices is established, 
 coupled with a feeling of great cheerfulness in 
 
104 THE CYCLE OF PRICES IN SECURITIES. 
 
 trade and an impression of general prosperity. 
 This high range of prices lasts for a certain period, 
 and then comes a re-descent to the level or some- 
 thing like the level from which they rose, accom- 
 panied probably by successive failures, great ex- 
 citement in the money market, and the collapse 
 on all sides of every species of financing. All this 
 Mr. Tooke and his successors have shown during 
 a period extending from the close of last century 
 to .the present time, the evidence being the more 
 valuable from its being adduced at first incidentally 
 to support conclusions as to the effect of bank-note 
 circulation on prices, and vice versa. There is also 
 a French authority on the subject of very great 
 weight M. Clement Juglar, whose able book on 
 Crises Commerciales deals not only with the com- 
 mercial cycle in England, but extends our range 
 of view to other Continental countries and the 
 United States, showing the universality of the 
 causes at work and their deep root in human 
 nature. Another authority is Professor Stanley 
 Jevons, who shows in his book on the gold dis- 
 coveries and their effect on prices the necessity of 
 disregarding or allowing for the cyclical changes so 
 as to bring out the more permanent changes which 
 may be considered attributable to the gold dis- 
 
THE CYCLE OF PRICES IN SECURITIES. 105 
 
 coveries. More recently Mr. Bagehot in his Lom- 
 bard Street has given his suffrage for the same 
 view, supporting it by a special reference to the re- 
 m arkable rise of prices in 1869-71. Mr. Bage hot 's 
 special object was to explain the periodical excite- 
 ment of the money market, but his evidence 
 consists mainly of the great movement of prices. 
 
 Mr. Bagehot 's explanation of the reason of 
 the cycle generally appears also a sufficient one. 
 His theory is, that a cycle of prosperity begins by 
 something happening to favour a particular trade. 
 Something occurs to make the products of that 
 trade greatly in demand ; all those who are in it 
 make greater profits than before ; these profits 
 make them stronger' and larger purchasers from 
 other trades, which in turn become more profit- 
 able, and so by action and reaction trades A, B, C, 
 and D, and so on, all through the letters of 
 the alphabet, are stimulated and re-stimulated. 
 Usually, Mr. Bagehot thought, it is the great 
 textile trades which feel the stimulus first, that 
 stimulus coming to them from a long period of 
 cheap food, which enables the masses of labourers 
 to spend more on other articles than food ; but 
 probably this element has for many years in Eng- 
 land been less important than it used to be in 
 
106 THE CYCLE OF PRICES IN SECURITIES. 
 
 the commencement of a cycle of prosperity, 
 because the masses of our workmen have usually 
 a much larger margin than formerly for other 
 articles than food, and the changes in the price 
 of wheat, since the free-trade period began, have 
 been much less extreme than they were when the 
 dependence of commercial prosperity on cheap 
 food was noticed. Still there is no doubt that a 
 cycle of prosperity does seem to arise out of a 
 period of generally low prices, and its foundations 
 are laid in these prices which cannot but have the 
 effect, as we have seen, of raising the real yield of 
 securities, and of increasing the command of the 
 capitalists who hold securities over commodities. 
 I should be inclined also to add to Mr. Bagehot's 
 explanation of trades becoming successively profit- 
 able, the fact that these profits are very often 
 merely paper profits, and are thus the direct 
 creation of a changed state of credit. Mr. Bagehot 
 was too well aware of the effect of credit on 
 business to overlook its effects, but he seemed 
 to consider most the influence it had in stimu- 
 lating production, and so increasing the quantity 
 of things produced ; that is, the real wealth of 
 a community. But its effect in raising nominal 
 prices, and so making profits appear large, seems 
 
THE CYCLE OF PRICES IN SECURITIES. 107 
 
 to me quite as important, and to explain most 
 the facility with which a change from a low to 
 a high level of prices is effected. The increase 
 of production is, pro tanto, an influence acting 
 in the direction opposite to a rise of prices, and 
 when a really large increase begins, or the means 
 for that production are greatly increased, which is 
 the final result of a rise of prices, the influence 
 is at once manifest in a quick fall. It is the rise 
 in nominal prices, therefore, causing merely paper 
 profits and an appearance of wealth, which is for 
 the present purpose the most remarkable cha- 
 racteristic of the prosperity period in a com- 
 mercial cycle. In other words, people have more 
 courage then than at other times, and trade A, 
 say, is made good, because B, C, D, and all the 
 other letters of the alphabet, speculate more, 
 begin to hold stocks of larger nominal value, and 
 so swell the deposits in the banks without any 
 proportionate increase in the quantity of articles. 
 In the same way the characteristic of the de- 
 pressed period is a failure of this credit element, 
 and a reduction of prices, consequently a reduc- 
 tion of the apparent wealth of many people, 
 without any corresponding reduction of the real 
 wealth of the communitv. 
 
108 THE CYCLE OF PRICES IN SECURITIES. 
 
 Such is the cause and explanation of a cycle 
 of prices generally. D ealing m ore particularly wi bh 
 securities, we should say there are various reasons 
 deducible from the general principles set forth in 
 previous chapters why they should be among the 
 things specially and strongly acted upon, first in 
 the upward, and then in the downward direction. 
 
 The extreme marketability of securities is one 
 reason and a principal one why they should be 
 quickly affected. When all prices are liable to be 
 affected from certain causes, that is, when certain 
 common motives of mankind are likely to cause 
 an excess of demand over the supply of all articles 
 on the one side, or an excess of supply over 
 demand on the other, it is articles subject to 
 speculative manipulation of which the offer or 
 demand is likely to be most in excess, and in 
 which therefore there will be the readiest move- 
 ment in prices. The disposition to buy or sell, 
 which is, ex hypothe&i, a general one, and not 
 specially appropriated to particular articles, moves 
 like other forces along the lines of least resistance, 
 and there is obviously less resistance in the 
 speculative markets than in others. The markets 
 are speculative, because of the facilities they afford 
 to buying and selling, their adaptability to spe- 
 
THE CYCLE OF PRICES IN SECURITIES. 109 
 
 culation in turn largely making the facilities. 
 Transactions in them can be entered into at once 
 on a large scale, and every one who buys and 
 sells is assured of being able to effect the counter 
 operation, in which his hope of profit, or of avoid- 
 ing great loss, rests. Markets where buyers have 
 to find sellers, and sellers to find buyers, or where 
 from the nature of the articles dealt in there is 
 only a hand-to-mouth trade, have 'no chance 
 against the more refined ones, and prices in them 
 accordingly move less orderly, although they are 
 subject to greater extremes. 
 
 The above is a general reason, applicable to 
 all speculative articles, why securities should par- 
 ticipate greatly in the upward and downward 
 movements of prices, but there are also special 
 causes peculiar to securities some helping to 
 raise them in good times, and others helping to 
 depress them in bad times. Of the former 
 we notice, first, that the creation of surplus 
 profits, which is the characteristic of a period of 
 prosperity, produces a demand for investments. 
 The profits may be only paper profits, still a 
 certain number of those who have made them 
 immediately wish to invest, so as to earn an 
 interest on their new capital. Partly in conse- 
 
110 THE CYCLE OF PRICES IN SECURITIES. 
 
 quence of this the speculation of the period is 
 specially attracted to securities. That the fact is 
 so is peculiarly shown by another feature of a 
 prosperity period the great demand for such 
 articles as coal and iron. To meet the demand 
 for investments, new works are embarked on, and 
 in these new works iron plays a principal part, 
 so that iron, and with it coal, come largely into 
 demand. The resulting revival of the coal and 
 iron industries in turn swells the general pros- 
 perity, though the enhancement of price ensuing 
 becomes again a primary cause of the general un- 
 profitableness of industry and of a reaction 
 towards a low level of prices. But the fact of 
 an increased demand for coal and iron from the 
 cause we have stated is unquestionable, and is the 
 sign of a special cause at work operating to raise 
 the price of securities. 
 
 Secondly, the surplus profits created in a 
 period of prosperity are of a kind likely to take 
 the shape of deposits in banks. They are profits 
 rather in excess of the normal or average 
 rate of profit. It must not be supposed that 
 in what are called bad years there are losses in 
 every trade. On the contrary, profits are made 
 in many trades, perhaps not much in excess of 
 
THE CYCLE OF PRICES IN SECURITIES. Ill 
 
 what is needed to reward the skill and industry 
 applied in the conduct of the trade, but still 
 sufficient to provide a fund for extensions and 
 improvements ; and even it may be to a moderate 
 extent for other new' investments. But when 
 good times come, there is immediately an excess 
 of profit, for which there is no immediate outlet 
 through the usual channels. It is probably the 
 result of the purchases of speculators who have 
 borrowed of a bank for the purpose, and there 
 is not likely to be any large excess of profit 
 without such borrowing. But whatever the 
 origin, as there is no outlet for it, it remains 
 deposited with the banks until an outlet can 
 be found. In this shape it will be sure to 
 act in two ways on securities ; first, directly by 
 providing a fund which comes into the Stock 
 Exchange for direct investment ; and secondly, a 
 fund which may be, and is, lent to speculators in 
 various ways through the medium of banks. 
 There is a special connexion between banks and 
 the markets for securities which diverts banking 
 money to the Stock Exchange. Bankers are 
 accustomed to handle securities which bear in- 
 terest, and they form judgments of their own about 
 the more prominent in the market. They also 
 
112 THE CYCLE OF PRICES IN SECURITIES. 
 
 prefer them as pledges to warrants for cotton, 
 corn, and the like, because of their bearing in- 
 terest. The want of this quality in ordinary 
 commodities which have been pledged as security 
 for an advance will often cause bankers to pre- 
 cipitate their realisation, when a security bearing 
 interest would be held for a more suitable time to 
 realise. 
 
 Thirdly, in a time of prosperity, when spe- 
 culators make money, and are on the outlook for 
 new speculations, they are apt to be tempted by 
 securities of an inferior description nominally 
 yielding a high interest. On these they borrow 
 at a low rate of interest, and pocket the difference 
 between that and the high rate yielded by the 
 security itself, while also profiting, or hoping to 
 profit, by the rise in price which they anticipate 
 at such a time. There is a double profit, as it 
 were. Hence speculators are as eager to use the 
 facilities offered by bankers, as bankers are 
 tempted, from the causes above mentioned, to 
 afford them. It is well known that in the period 
 preceding the foreign loan collapse, securities like 
 Turkish, Peruvian, and Egyptian, were largely 
 held for long periods by speculators, who counted 
 on the difference of interest. The game is a 
 
THE CYCLE OF PRICES IN SECURITIES. 113 
 
 most risky one, as the event has proved, but we 
 have only to deal here with the fact that this 
 cause, among others, tends to raise securities 
 disproportionately when all prices are going up. 
 
 Fourthly, the fact that securities in a time of 
 low prices generally really yield more than at 
 other times is no doubt a cause for bringing them 
 quickly into favour at such times, and diverting to 
 them both purchases for investment and specula- 
 tion. We should not say that it is a very im- 
 portant cause, as it must work obscurely, and does 
 not supply a direct and palpable motive for ordi- 
 nary people to act upon ; but it can hardly fail to 
 have some effect. 
 
 These are all reasons in the nature of securities 
 why they should specially advance in an upward 
 movement of prices ; and just because they have 
 specially advanced, they will decline when the 
 current turns. The reaction will naturally be 
 manifest where the previous action has been most 
 felt. Other special reasons for securities sharing 
 in the decline may, however, be given, such 
 reasons being mainly the reverse of those which 
 we have assigned specially for the rise of securities 
 in good times. 
 
 First. There is not only, when prices fall, a 
 
 i 
 
114 THE CYCLE OF PRICES IN SECURITIES. 
 
 disappearance of the paper profits which seek the 
 markets for investment, but there is a substitution 
 for them of paper losses which in various ways 
 forces the realisation of investments. Prices gene- 
 rally having reached a maximum, the changes 
 which occur begin to be downwards, and this 
 means a loss to all holders. Were there no bor- 
 rowers in the world, such losses might have no 
 'very serious consequences. To a large extent 
 they would mean that capitalists had to write 
 themselves nominally poorer than before, but their 
 real wealth, that is, the exchangeability of what 
 they possessed for other things, would be un- 
 affected. But the rise of prices, as we have seen, 
 having been due to borrowing, and the stocks of 
 articles being held by people who have only an 
 interest in the margin of value above what they 
 have borrowed, a great fall of prices means a 
 change of conditions forcing them to realise their 
 loss. They have to sell the articles pledged to 
 pay their creditor, or the creditor sometimes forces 
 a sale, if the debtor does not voluntarily act. 
 Instead of a surplus of profits, therefore, seeking 
 investment, which is the characteristic of a period 
 of prosperity, there is a positive loss, which rather 
 takes the direction of a realisation of the articles 
 
THE CYCLE OF PRICES IN SECURITIES. 115 
 
 in which investment is made, that is, of securities. 
 In course of time there is a large class of people 
 who have losses to meet, and if they have secu- 
 rities to sell they sell them. Many of the class, it 
 is plain, must have securities to sell. They have 
 been swayed by the attractions to speculate in 
 securities offered in the prosperous period, and 
 securities are consequently among the things they 
 can realise. 
 
 The real wealth of a community as a whole 
 will not, of course, be changed proportionally by 
 the realisation of such paper losses, although 
 perhaps there can be no large realisation of paper 
 losses without the pre-existence of conditions 
 diminishing real profits. But the paper losses 
 so called are of course material to those who 
 suffer them, and contribute much to that change 
 in the state of credit which accompanies and pro- 
 motes a change from a high to a low level of 
 prices. 
 
 Secondly. Securities are specially affected by 
 the diminution of the deposits of banks, which 
 contribute so much, as we have seen, to the rise in 
 prices. These deposits are themselves in part the 
 creation of speculation of every sort, and parti- 
 cularly speculation in securities. Profits being 
 
116 THE CYCLE OF PRICES IN SECURITIES. 
 
 above the normal amount, those who. realised 
 them, not being able to employ them in the usual 
 outlets, left them at the banks, who have a strong 
 disposition and many motives to employ them on 
 the Stock Exchange. But when surplus profits 
 are not made, and losses have to be met, these 
 deposits in the bank must diminish. There is no 
 other fund out of which to meet the losses. To 
 take the most favourable, case of a solvent specu- 
 lator whose margin has run off, and more than run 
 off. What happens, when his security is realised, 
 is, that having borrowed say 8000 1. on what was 
 supposed to be worth 10,000/., on which there- 
 fore there was a margin of 200 O/., and the security 
 in fact realising only 60 OOL, he has to find 200 0., 
 besides losing all his margin. If he has 2000Z. 
 deposited with the banker of whom he borrowed, 
 his individual deposit would be diminished by so 
 much, and there would be no increase of deposits 
 in any other direction. The amount realised by 
 the security and the 20 OO/. would all go to meet 
 the debt due to the bank, which would be extin- 
 guished the result of the operation as regards 
 the 2000?. being in fact a diminution of the loans 
 of the banks on one side, and of their deposits on 
 the other. The result would be the same if the 
 
THE CYCLE OF PRICES IN SECURITIES. 117 
 
 speculator had been insolvent, and the bank had 
 had to meet the loss it would have had so much 
 to write off the credit to profit and loss, which 
 counts as part of the deposits, instead of to the 
 credit of an individual customer. Operations like 
 this going on with a great mass of speculation, it 
 is quite intelligible how the deposits in the banks 
 may steadily diminish for a time merely through 
 a fall in the nominal price of articles. It is not 
 that the community as a whole is poorer, but 
 some people are, and the poverty takes the shape 
 of diminishing a fund which helps much, as we 
 have seen, to inflate securities when all prices are 
 rising. 
 
 We need not point out how the withdrawal of 
 such a fund must affect securities. At the very 
 time speculators are suffering from their own 
 losses, and the temptations to speculate are other- 
 wise diminished, the fund upon which the whole 
 speculation rests is curtailed or disappears. 
 Bankers, it is found, throw the pawned stock 
 they have on the markets, and call in the ad- 
 vances they have made on the Stock Exchange. 
 They have no option. Their deposits are being 
 drawn on to meet losses, and they have no longer 
 a surplus to lend. 
 
118 THE CYCLE OF PRICES IN SECURITIES. 
 
 A very good illustration of the peculiar effect 
 of this withdrawal from the Stock Exchange in 
 consequence of the diminution of banking deposits 
 was given, I think, at the close of 1875 and the 
 spring of 1876. The year 1875 had witnessed 
 a great commercial collapse succeeding a great fail 
 in the prices of almost all articles, and accom- 
 panied by a great fall in securities, especially 
 those of foreign governments, which culminated 
 in the autumn of 1875. Nothing seemed more 
 remarkable for a long period than the way in 
 which the Stock Exchange securities not directly 
 affected by this collapse bore up and even ad- 
 vanced. But the events had been such as to 
 cause a diminution of banking deposits ; the banks 
 throughout the country became poor instead of 
 having a surplus ; and early in 1876 the result 
 was manifest in extensive realisations of English 
 railway securities, which had at first rather bene- 
 fited by the great collapse of the competing 
 foreign securities. The diminution of banking 
 deposits was thus found to be powerful enough 
 to neutralise other influences promoting a rise 
 in some securities. No doubt the consequent fall 
 in English railway securities illustrates to some 
 extent as well the underlying sympathy between 
 
THE CYCLE OF PRICES IN SECURITIES. 119 
 
 great groups of securities, as has been already 
 noticed in the chapter on fictitious securities. 
 But the poverty of the banks was so much spoken 
 of at the time, as contributing to the withdrawals 
 of money from the Stock Exchange, that the facts 
 seem worthy of notice also in the present con- 
 nexion. 
 
 Thirdly. The fall in securities from a high 
 level is of course promoted by the opposite of 
 what promotes their rise from a low level, viz. 
 the diminished yield of the security at the high 
 price. As in the case of a rise through the in- 
 creased yield of securities when prices are low, we 
 doubt if this cause is ever conspicuously opera- 
 tive ; but it cannot but govern men's motives to 
 some extent. It is one among other reasons which 
 make people distrust the maintenance of prices 
 which have recently advanced greatly. So far 
 as it goes, it furnishes a special reason for the 
 decline of the price of securities when the period 
 of adversity in the commercial cycle and of the 
 return to low prices begins. 
 
 Fourthly. The depreciation or collapse of many 
 fictitious securities, when discredit sets in, will 
 naturally affect almost all the markets for secu- 
 rities. The creation of such securities is one of 
 
120 THE CYCLE OF PRICES IN SECURITIES. 
 
 the forms of inflation in prosperous times, and in 
 the long run checks the rise which would other- 
 wise take place in the better securities ; but their 
 having been called into existence undoubtedly 
 assists the reaction which afterwards comes. No- 
 thing is so apt to create distrust than the dis- 
 covery that many so-called securities are rubbish, 
 and have no real value. In the end the removal 
 of these bad securities out of the way will help 
 the other markets ; but the first effect of the re- 
 moval is to make the whole market more sensitive, 
 and to hasten the change from a high to a low level. 
 We conclude, then, that securities are among 
 the articles which will be specially acted upon 
 by the causes promoting a general upward move- 
 ment of prices, and also by the causes promoting 
 a general downward movement. As a rule they 
 will be quick to move, and within the limits imposed 
 by the nature of the securities themselves the 
 movements will be extreme. The opposite sets 
 of causes being put in motion, there will be no 
 rest in the movement until the extremes are 
 touched. It will be understood, however, that 
 this liability to movement will be quite consistent 
 with comparatively narrow limits of variation in 
 many cases as compared with other articles. The 
 
THE CYCLE OF PRICES IN SECURITIES. 121 
 
 value of securities being governed so largely by 
 the value of money, and many of them, especially 
 of the steady class, being only affected in a minor 
 degree by speculation and changes in the state 
 of credit, the extremes of high and low price 
 between which such securities will oscillate will 
 not be wide. It is obvious indeed, that while we 
 have spoken of the aggregate of securities as 
 being liable to great change in the level of price, 
 there must be a considerable class in which, with 
 great sensitiveness to causes of variation, there is 
 really great stability of price. The great variation 
 in the aggregate must, therefore, be due to exces- 
 sive variations in other securities not of the better 
 class. 
 
 This last conclusion quite confirms the obser- 
 vations of the market. It is in the inferior secu- 
 rities that the causes of variation we have described 
 operate most. It is to them that speculation is 
 attracted when times are good, and to which 
 surplus profits, whether paper or genuine, are 
 diverted. Not only are fictitious securities created 
 ad hoc to use up the loose money about, but 
 (doubtful enterprises are embarked in, resulting 
 in the creation of inferior securities which are 
 only not wholly fictitious. For special reasons- 
 
122 THE CYCLE OF PRICES IN SECURITIES. 
 
 also securities bearing high interest are sought 
 after by investors and speculators. It is again 
 among such securities that there is collapse from 
 real causes when the tide turns, and from which 
 speculation is then withdrawn. Hence there is 
 a large group of securities in which the move- 
 ment from a low to a high level, and vice versd, 
 is not only rapid but enormous, so that the 
 changes in a rise seem almost from no value at 
 all to an immense sum, and then, when the 
 opposite changes occur, the appearances are like 
 the complete destruction of an immense mass of 
 property. As we have explained, it is almost all 
 a paper change : it is only nominal values that 
 are in question ; but these considerations are not 
 felt at the time. The impression is made on the 
 public mind that there is something specially 
 intangible in securities, and that they are unlike 
 all other articles, whereas in reality nothing is 
 steadier than the better security, and it is in the 
 inferior and sham article that excessive fluctua- 
 tions occur. Great changes are to be looked for 
 in the cycle of prices in securities, and even the 
 best are sensitive, but the difference in the 
 intrinsic qualities of the securities themselves is 
 in this respect all-important. 
 
CHAPTER XL 
 
 ILLUSTRATIONS : HAVE SECURITIES RISEN OR 
 FALLEN IN RECENT YEARS ? 
 
 THE inquiry in some of the preceding chapters has 
 led us to results for the most part of a negative 
 character. However important Stock Exchange 
 practices may be, however much they may affect 
 particular securities or groups of securities for a 
 time, and whatever indirect consequences panics 
 may have as producing or aggravating that dis- 
 credit which we have described as one of the most 
 powerful influences on prices, they do not disturb 
 the general relations of the price of Stock Exchange 
 securities to that of other securities, or other arti- 
 cles, or to the value of money. They alter mainly, 
 and for a time, the relations of particular groups of 
 securities among themselves, but they are of such 
 a nature that they can have no further influence. 
 The only permanent effect the Stock Exchange 
 
124 THE RECENT HISTORY OF SECURITIES. 
 
 appears to have, is that of making Stock Ex-change 
 securities higher in price than others through their 
 being more saleable, and their suitability to per- 
 form the functions of money, and this effect is 
 always operative. There is also a cyclical change 
 of aggregate price both of securities and of other 
 articles from one period to another, which must 
 be distinguished from changes due to more 
 permanent causes. If we would appreciate the 
 lasting variations in securities, therefore, that is 
 allowing for minor changes of a temporary charac- 
 ter, and for changes in the relations of securities 
 inter se, as well as the cyclical changes from a 
 credit to a non-credit level of prices, and vice 
 versd, we must endeavour to deal with the 
 facts in such a way as to eliminate these minor 
 and cyclical changes ; embrace the ranges of 
 price over a long period of time ; and compare 
 the changes which may then be made apparent 
 with similar changes in the price of commodi- 
 ties, and of other securities, and in the value 
 of money. 
 
 We propose to deal, by way of illustration, with 
 the changes of price in England since the free- 
 trade period. Have securities as a mass risen or 
 fallen in price in that period ? and to which of the 
 
THE RECENT HISTORY OF SECURITIES. 125 
 
 main causes influencing price is the change, if any, 
 due? 
 
 To answer such questions exactly, it would 
 be necessary to take account of many things 
 of which, it is plain, no exact account is possible. 
 It would be, for instance, impossible to state 
 exactly at any given time the exchangeable 
 value of the mass of Stock Exchange securities 
 in existence. The obstacles to such an account 
 would not only be the mere difficulty of ascer- 
 taining and counting the different sorts of 
 securities, but there would also be the diffi- 
 culty of reckoning at certain times the masses 
 of securities which were afterwards discovered to 
 be fictitious, and of estimating at all times the 
 real yield of many securities, such as the shares in 
 public companies on which there are fluctuating 
 dividends. In addition, even if such an account 
 could be framed for this country, there would fall 
 to be considered the case of those international 
 securities which are dealt in on many markets, and 
 whose presence in greater or less quantity on the 
 home market will variously affect prices. All this 
 makes an account of quantities of securities and 
 their yield all but, if not quite, impossible ; but yet 
 it could only be shown by such an account what is 
 
126 THE KECENT HISTORY OF SECURITIES. 
 
 the average yield on securities at different times, 
 which would be the only real test of a difference of 
 aggregate prices. And even if the average yield 
 at different times could be stated, this would only 
 be a test of nominal price. There would remain 
 the further question of whether there was, or was 
 not, a corresponding change in real prices, in con- 
 sequence of the average fall or rise in articles of 
 general consumption. All these difficulties make 
 an exact answer to the question put impossible, 
 and we must be content with a rough approxima- 
 tion. "We assume that the course of prices in 
 certain leading securities will be a sufficient test 
 of the general course of the market ; and if this 
 course agrees with the changes we should expect 
 in accordance with it in the value of money or the 
 price of other securities, we may be tolerably con- 
 fident that a more exact account of securities and 
 their yield from time to time would have led to a 
 very similar conclusion. 
 
 The most familiar masses of securities are the 
 obligations of governments, and the debentures 
 and shares of the great railway companies, the 
 latter being mainly the creation of the last 
 thirty years. Of the former we propose to take as 
 our type Consols, which have not increased in quan- 
 
Table showing the average annual price of Consols in each year 
 since 1844, as given in the Statistical Abstract, and the price of 
 London and North Western Ordinary Stock in the last week of 
 December in each year since 1848, and of Debenture and Pre- 
 ference Stocks of the same Railway since 1866 ; together with the 
 yield to the investor at each price, the yield on North Western 
 Ordinary Stock being calculated on the mean of the two nearest 
 annual dividends. 
 
 Year. 
 
 Consols; 
 
 London and 
 STorth Western 
 4 per cent. De- 
 oenture Stock. 
 
 London&Nth. 
 Wstn. Eailwy. 
 5 per cent. Pre- 
 ? erence Stock. 
 
 London and North 
 Western Railway 
 Ordinary Shares. 
 
 Price. 
 
 Yield to 
 Investor. 
 
 Price. 
 
 Yield to 
 Investor. 
 
 Price. 
 
 Yield to 
 Investor. 
 
 Average 
 Price. 
 
 Dividend 
 For Year. 
 
 Yield to 
 Investor. 
 
 1846 
 
 95 
 
 3* 
 
 
 
 
 
 
 
 
 1847 
 
 
 3* 
 
 
 
 
 
 
 
 
 1848 
 
 85! 
 
 3* 
 
 
 
 
 
 127 
 
 7 
 
 5* 
 
 1849 
 
 9 2 i 
 
 
 
 
 
 
 124 
 
 6 
 
 
 1850 
 
 961 
 
 3l 
 
 
 
 
 
 ."4 
 
 Si 
 
 4iF 
 
 1851 
 
 9 6 f 3i 
 
 
 
 
 
 123 
 
 Si 
 
 4f 
 
 1852 
 
 99i 3 
 
 
 
 
 
 125 
 
 si 
 
 4t ? 6' 
 
 1853 
 
 9l 3-rV 
 
 
 
 
 
 1 12 
 
 5 
 
 4TV 
 
 1854 
 
 9'*; 3* 
 
 
 
 
 
 984 
 
 5 
 
 5iV 
 
 1855 
 
 9i 34 
 
 
 
 
 
 9 8 
 
 5 
 
 5TV 
 
 1856 
 
 93i 3i 
 
 
 
 
 
 I O2 
 
 
 54 
 
 I8 57 
 
 9'f 3i 
 
 
 
 
 
 101 
 
 5' 
 
 5 
 
 1858 
 
 9 6 i 3i 
 
 
 
 
 
 95 
 
 4 
 
 4A 
 
 1859 
 
 9Sr 3l 
 
 
 
 
 
 9 1 
 
 41 
 
 5 
 
 1860 
 
 94 1 
 
 3f 
 
 
 
 
 
 IOI 
 
 5f 
 
 5-iV 
 
 1861 
 
 
 
 
 
 
 
 96 
 
 
 
 1862 
 
 93 
 
 3l 
 
 
 
 
 
 95 
 
 4i 
 
 5 
 
 1863 
 
 92| 3i 
 
 
 
 
 
 102 
 
 5t 
 
 5 
 
 1864 
 
 9i 3* 
 
 
 
 
 
 114 
 
 6| 
 
 5 T 9 g- 
 
 1865 89*! 3 j 
 
 97 
 
 4* 
 
 
 
 121 
 
 6* 
 
 5~rV 
 
 1866 
 1867 
 
 88 
 93 
 
 3l 
 
 93 
 
 961 
 
 \l 
 4* 
 
 1 06 
 109 
 
 4i 
 
 120 
 
 117 
 
 j* 
 
 5f ff 
 
 5-8 
 
 1868 
 
 93| 3i 
 
 98^ 
 
 4lV 
 
 109^ 
 
 4l L 
 
 116 
 
 6 
 
 5 T 3 g- 
 
 1869 
 
 
 3i 
 
 101 
 
 4 
 
 nil 
 
 4* 
 
 118 
 
 6| 
 
 5i 
 
 187? 
 
 92! 
 
 si 
 
 100 
 
 4 
 
 112 
 
 4 y 
 
 126 
 
 6| 
 
 5iV 
 
 1871 
 
 92^ 
 
 3l 
 
 101$ 
 
 3il 
 
 116 
 
 
 142 
 
 7l 
 
 5T 3 ! 
 
 1872 
 
 9 2 i 
 
 
 103* 
 
 3f 
 
 116 
 
 4 } 4 
 
 151 
 
 7i 
 
 5* 
 
 i873 
 
 9 2-i 
 
 3i 
 
 103 
 
 3* 
 
 117 
 
 
 148 
 
 7i 
 
 5TV 
 
 i874 
 
 92^- 
 
 3i 
 
 104 
 
 3* 
 
 120 
 
 4! 
 
 149 
 
 6f 
 
 4* 
 
 i875 
 
 93! 
 
 3i 
 
 1 06 
 
 3i 
 
 I22| 
 
 
 146 
 
 6| 
 
 4f 
 
 1876 
 
 95i 
 
 
 io7i 
 
 
 126 
 
 4 
 
 142 
 
 64 
 
 4 
 
128 THE RECENT HISTORY OF SECURITIES. 
 
 tity in the period, and of the latter we select the 
 debentures preference stocks, and ordinary shares 
 of the London and North Western Railway which is 
 a typical English railway. On the previous page 
 (p. 127) is a table showing the price of Consols and 
 average yield to investors in each year since 1846 
 inclusive ; the price of London and North Western 
 Railway shares and average yield to investors in 
 each year since 1848 inclusive ; and the price and 
 average yield to investors of certain debenture 
 stocks and preference shares of the latter company 
 since 1866. I should have liked in the case of 
 the debenture stocks and preference shares to go 
 back to some date before 1850, but debenture 
 stocks are of comparatively recent origin, and the 
 changes in the amount and position of different 
 classes of preference shares are such that I found 
 this course impracticable. Still the figures as far 
 as they go appear to tell a consistent tale. 
 
 Summarising the results as regards Consols and 
 London and North Western Ordinary Stock for 
 periods of five years as near as possible, we obtain 
 the following comparison : 
 
THE RECENT HISTORY OF SECURITIES. 129 
 
 Average yield of Consols and London and North Western Railway 
 Ordinary Stock, in the following periods. 
 
 Period. 
 
 Yield of Consols. 
 
 Yield of London and 
 North Western 
 Ordinary Stock. 
 
 
 s. d. 
 
 s. d. 
 
 1846-50 
 
 360 
 
 500 
 
 1851-55 
 
 3 3 4 
 
 4 13 4 
 
 1856-60 
 
 3 3 4 
 
 4 18 6 
 
 1861-65 
 
 360 
 
 5 2 6 
 
 1868-70 
 
 3 5 
 
 5 3 9 
 
 1871-75 
 
 3 5 
 
 4 19 6 
 
 1876 
 
 3 * 6 
 
 4 12 6 
 
 From this table it is evident that if the 
 movements in securities generally have at all 
 corresponded with these examples, there was 
 first a low price giving a large nominal yield 
 immediately after the beginning of the free-trade 
 period, then a rise in price accompanied by a less 
 nominal yield lasting during the following decade, 
 then a fall in price in 1861-65 since which 
 period there has been a steady rise to a point al- 
 ready higher, or about as high as any touched 
 since 1846. Since 1866 also the movements in the 
 debenture stocks and preference shares of the 
 
130 THE KECENT HISTORY OF SECURITIES. 
 
 railway have fully corresponded. The average 
 yield of the debenture stock in 1866-70 was 
 51. Is. 9d, in 1871-5 it was 31. Us. 6d., and in 
 1876 it is only 3l. 1 5s. The average yield of the 
 preference shares in 1866-70 was 4Z. 10s. 6d. ; in 
 1871-5 it was 41. 4s. 3d. ; and in 1876 it is only 
 4 per cent. The suggestion lies on the surface 
 that the high yield of securities at the commence- 
 ment of this period corresponded to the great 
 creation of securities in 1845 and 1846 as the 
 result of the railway mania ; that the low yield in 
 1851-55 corresponded to the gold discoveries, but 
 there was a tendency in the latter part of the 
 decade 1851-60 to a higher yield, as is shown 
 especially in the yield of London and North 
 Western Ordinary Stock ; that the high yield of 
 1861-65 corresponded to another large creation of 
 securities in connexion with limited companies and 
 contractors' railways ; and that the falling yield 
 since 1865 probably indicates a period of less ac- 
 tive creation of securities in comparison with the 
 capital seeking investment. It is obvious from an 
 inspection of the table that no such illustrations 
 can be perfect, for the non-increase in quantity of 
 Consols is a special causa for their improvement in 
 value of the first magnitude, while the improve- 
 
THE RECENT HISTORY OF SECURITIES. 131 
 
 inent in railway quotations may arise largely from 
 a special improvement of the credit of railway 
 companies, by which other securities have pro- 
 portionally suffered. The masses dealt with are, 
 however, so large that the illustration may perhaps 
 pass as the best attainable. 
 
 It would complete the illustration if we could 
 add a similar account of the chief foreign govern- 
 ment securities, but to do so it would be needful to 
 take account of so many complicated circumstances 
 and changes in the stocks themselves, that we 
 must limit ourselves to one or two stocks, whose 
 history can be followed for a long period. The 
 stocks we find most convenient are the French 3 
 per cents, and Russian 5 per cent 1822, whose 
 history is detailed in the table on the following 
 page (p. 132). 
 
 Here there have been greater fluctuations than 
 in the first case, no doubt for political reasons. 
 The high yield of French rentes in 1848-50 was 
 partly a result of the political insecurity of those 
 years, while the high yield of Russian stock in 
 1876 is of course the direct effect of the war on 
 which Russia has embarked, and Russian stocks 
 have also been affected all through, first, by the 
 Crimean war, and its direct and indirect effects, 
 
132 
 
 THE RECENT HISTORY OF SECURITIES. 
 
 Table showing t/ie annual price of the undermentioned Foreign 
 Stocks, the last week of December in each year since 1844, 
 together with the yield to the investor at each price. 
 
 Year. 
 
 French 3 per cent. 
 
 Kussian 5 per cent 
 
 Price. 
 
 Yield to 
 Investor. 
 
 Price. 
 
 Yield to 
 Investor. 
 
 1846 
 
 8o| 
 
 3l 
 
 I 1 1 
 
 4i 
 
 1847 
 
 75i 
 
 4 
 
 I0 7 
 
 4l 
 
 1848 
 
 46* 
 
 
 102 
 
 4* 
 
 1849 
 
 56^ 
 
 5 T 5 g- 
 
 no 
 
 4i 
 
 1850 
 
 57! 
 
 5tV 
 
 uoj 
 
 4i 
 
 1851 
 
 66 
 
 4i 
 
 "3 
 
 4 T 7 g- 
 
 1852 
 
 82! 
 
 3* 
 
 120 
 
 4 
 
 1853 
 
 74i 
 
 4 
 
 I 12 
 
 4rV 
 
 1854 
 
 68 
 
 4i 
 
 9 8 
 
 
 1855 
 
 64! 
 
 4* 
 
 96 , 
 
 
 1856 
 
 66J 
 
 
 
 
 1857 
 
 66J 
 
 4i 
 
 104 
 
 K 
 
 1858 
 
 73 
 
 4f 
 
 I13i 
 
 
 1859 
 
 70 
 
 4i 
 
 I 10 
 
 4* 
 
 1860 
 
 68} 
 
 4* 
 
 lOj} 
 
 4"T<5_~ 
 
 1861 
 
 67* 
 
 
 98i 
 
 5 
 
 1862 
 
 %i 
 
 4t 
 
 97 
 
 Jj 
 
 1863 
 
 66$ 
 
 4* 
 
 921 
 
 51 
 
 1864 
 
 66 
 
 
 89 
 
 5i 
 
 1865 
 
 68 
 
 4f 
 
 90 
 
 5* 
 
 1866 
 
 70 
 
 4f 
 
 86i 
 
 5! 
 
 1867 
 
 68J 
 
 4f 
 
 86" 
 
 5f 
 
 1868 
 
 70 
 
 4l 
 
 8 7 J 
 
 
 1869 
 
 73 
 
 4* 
 
 86 
 
 5* 
 
 1870 
 
 54 
 
 5* 
 
 85 
 
 si 
 
 1871 
 
 54 ? 
 
 5~rk 
 
 9 1 
 
 Si 
 
 1872 
 
 
 5T6" 
 
 95 
 
 5! 
 
 1873 
 
 57i j 
 
 
 97 
 
 
 1874 
 
 
 4f 
 
 102 
 
 4i^ 
 
 1875 
 
 66 2 
 
 
 102 
 
 4f 
 
 1876 
 
 7i 
 
 M 
 
 79 
 
 
THE RECENT HISTORY OF SECURITIES. 133 
 
 and more recently by a large creation of securities 
 for railway purposes. Still the history is singu- 
 larly on all-fours with that of Consols and the 
 railway stocks selected for comparison, the same 
 tendency to rise in value, that is to a diminished 
 yield, in recent years being especially noticeable. 
 The rise in French securities since the Franco- 
 German war is in every way a remarkable 
 fact. 
 
 Such have been the changes in the yield of 
 Stock Exchange securities, and we have now to 
 see whether the changes in the value of money, 
 and in the yield of other securities, would be such 
 as we should expect if what has happened in the 
 securities mentioned fairly represents the general 
 course of prices in them. To begin with money 
 it would be expedient to take into account the 
 various descriptions of it dealt in, but to take only 
 the most familiar test, that of the Bank of England 
 rate of discount, there is obviously, we think, a 
 history resembling the above history in securities. 
 The average rates in each of the above periods we 
 have selected for comparison have been 1846-50, 
 31 per cent ; 1851-55, 31. 13s. per cent ; 1856-60, 
 4:1 6s. per cent; 1861-65, 4t 18s per cent; 
 1866-70, 31 Us. 6d. per cent; 1870-75, 3l. 16s. 
 
134 THE RECENT HISTORY OF SECURITIES. 
 
 per cent; and 1876, 2| per cent. Thus the rates 
 were comparatively high just before 1850 ; com- 
 paratively low in the following decade especially 
 in the first half of it; high in 1861-65; and 
 since the latter date comparatively low, cor- 
 responding to the general tendency of securities 
 to rise in the latter period. The movements do 
 not exactly correspond, but there appears to 
 be sufficient nearness to show the working of 
 the same general causes both in securities and 
 money. 
 
 There have been similar changes in the rates 
 for money employed in mortgages ; a principal 
 species of security not quoted on the Stock Ex- 
 change. There is a difficulty in quoting any 
 general rates for English mortgages, although these 
 are believed to have fallen greatly, but there 
 happen to be means in Scotland for ascertaining 
 general rates. In Edinburgh there are ' com- 
 missioners on the rate of interest/ who meet half 
 yearly to fix the rate of interest on. mortgages, 
 and there is a similar body in Glasgow, whose 
 proceedings supply us with interesting data on 
 the subject. An Edinburgh friend has been 
 good enough to send me the following memo- 
 randum : 
 
THE RECENT HISTORY OF SECURITIES. 135 
 
 MEMORANDUM ON RATES OF INTEREST ON 
 MORTGAGES IN SCOTLAND. 
 
 The Commissioners at Edinburgh are a body repre- 
 senting the Writers to the Signet, Solicitors before the 
 Supreme Courts of Scotland, Chartered Accountants, and 
 Ministers of Scotland Widows' Fund. Perhaps there 
 may, from the constitution of this body be rather a lean- 
 ing towards borrowers, as the interest of the Lawyers is 
 to cultivate that connexion. The Insurance Companies 
 were at one time parties in fixing the rate, but from some 
 cause or other ceased to be so. They, however, do 
 lend on the terms fixed by the Commissioners, though 
 wherever there is any specialty in the nature of the loan 
 (such, for instance, as loans for drainage, farm-buildings, 
 &c. &c.) , a somewhat higher rate is charged. It may also 
 be mentioned that the large monied bodies, especially the 
 Insurance Companies, now lend to Poor-Law Boards, 
 School-Boards, Municipal Corporations, &c. &c. a good 
 deal of money which formerly would have been invested 
 in loans on land. These loans are negotiated at higher 
 rates. 
 
 The Glasgow body came into existence in the year 
 1864, and the rates, since then with the exception of a 
 very short period are the same as those fixed in 
 Edinburgh. 
 
 The list subjoined may be considered as a correct 
 statement of the rate at which money was lent on first- 
 class Landed Security for the time specified : 
 
136 
 
 THE RECENT HISTORY OF SECURITIES. 
 
 EDINBURGH COMMISSIONERS. 
 
 Interest received by the Widows' Fund of the Writers to the 
 Signet, and other Incorporated Bodies, for sums invested on 
 Landed Security. 
 
 From 
 
 To 
 
 Rate. 
 
 From 
 
 To 
 
 Rate. 
 
 Whits. 1817 
 
 Marts. 1822 
 
 c per cent. 
 
 Whits. 1866 
 
 Marts. 1866 
 
 4^ per cent. 
 
 Marts. 1822 
 
 Whits. 1824 
 
 4f 
 
 Marts. 1866 
 
 Whits. 1867 
 
 5 
 
 Whits. 1824. 
 
 Whits. 1826 
 
 4 
 
 Whits. 1867 
 
 Mart*. 1867 
 
 4 > 
 
 Whits. 1826 
 
 Whits. 1828 
 
 5 
 
 Marts. 1867 
 
 Whits. 1868 
 
 4 ii 
 
 Whits. 1828 
 
 Whits. 1829 
 
 4l 
 
 Whits. r868 
 
 Marts. 1868 
 
 4 ! 
 
 Whits. 1829 
 
 Marts. 1830 
 
 4 
 
 Marts. 1868 
 
 Whits. 1869 
 
 4 
 
 Marts. 1830 
 
 Lams. 1831 
 
 3* " 
 
 Whits. 1869 
 
 Marts. 1869 
 
 4 i? 
 
 Lams. 1831 
 
 Whits. 1834 
 
 4 
 
 Marts. 1869 
 
 Whits. 1870 
 
 4 
 
 Whits. 1834 
 
 Whits. 1837 
 
 3* 
 
 Whits. 1870 
 
 Marts. 1870 
 
 4 
 
 Whits. 1837 
 
 Marts. 1838 
 
 4 !> 
 
 Marts. 1870 
 
 Whits. 1871 
 
 4 
 
 Marts. 1838 
 
 Marts. 1839 
 
 ,1 
 
 3 2, " 
 
 Whits. 1871 
 
 Marts. ^871 
 
 4 
 
 Marts. 1839 
 
 Whits. 1843 
 
 4 5' 
 
 Marts. 1871 
 
 Whits. 1872 
 
 4 
 
 Whits. 1843 
 
 Whits. 1846 
 
 3$ #,- 
 
 Whits. 1871 
 
 Marts. 1872 
 
 4 
 
 Whits. 1846 
 
 Marts. 1847 
 
 4 
 
 Marts. 1872 
 
 Whits. 1873 
 
 4 
 
 Marts. 1847 
 
 Whits. 1849 
 
 5 II 
 
 Whits. 1873 
 
 Marts. 1873 
 
 4 
 
 Whits. 1849 
 
 Marts. 1849 
 
 4i 
 
 Marts. 1873 
 
 Whits. 1874 
 
 4 
 
 Marts. 1849 
 
 Whits. 1850 
 
 4 ii 
 
 Whits. 1874 
 
 Marts. 1874 
 
 4 
 
 Whits. 1850 
 
 Whits. 1854 
 
 3* .1 
 
 Marts. 1874 
 
 Whits. 1875 
 
 4 n 
 
 Whits. 1854 
 
 Marts. 1859 
 
 4 i, 
 
 Whits. 1875 
 
 Marts. 1875 
 
 4 
 
 Marts, 1 8 159 
 
 Whits. 1 86 1 
 
 3$ 
 
 Marts. 1875 
 
 Whits. 1877 
 
 4 >i 
 
 Whits. 1 86 1 
 
 Whits. 1866 
 
 4 ,i 
 
 Whits. 1877 
 
 Marts. 1877 
 
 4 
 
 GLASGOW BODY. 
 
 Land. Houses. 
 
 Marts. 1864 to Whits. 1867, both inclusive 4^ per cent. 5 per cent. 
 Marts. 1867 to Whits. 1877, both inclusive 4 4^ 
 
 Analysing the above figures we find that 
 while the rate on mortgages fixed by the Edin- 
 burgh Commissioners was as low as 3^ per cent 
 from 1843 to 1846, it rose in the latter year to 4 
 per cent, and in 1847 to 5 per cent, which is the 
 starting-point for our present comparison. This 
 
THE RECENT HISTORY OF SECURITIES. 137 
 
 rate was only maintained till 1849, when there 
 was a fall first to 4^- and then to 4 per cent, which 
 was succeeded in the following year by a further 
 decline to 3^ per cent, which continued for four 
 years. This was succeeded in 1854 by a 4 per 
 cent' period, lasting five years ; a 3^ per cent 
 period, beginning 1859, lasting two years; a 4 per 
 cent period beginning 1861, lasting five years ; and 
 a short interval of 4^ and 5 per cent in 1866 and 
 1867; since which latter there has been a steady 
 rate of 4 per cent. The history has, therefore, 
 been that immediately after the beginning of the 
 free-trade period there was a comparatively high 
 rate, but this was followed between 1850 and 1868 
 by a long period of 3^ and 4 per cent rates to be 
 succeeded in turn by a short interval of dear 
 money, ending in another long period of low rates, 
 though not quite so low as in part of the period 
 between 1850 and 1866. The history of the 
 Glasgow body shows a corresponding movement 
 so far as the history extends, the last period of 
 high rates extending, however, from 1864 to 1867, 
 and being then followed by the low rates, which 
 corresponds still more closely to the course of rates 
 in the discount market in the period. 
 
 Money was cheap, and interest on securities 
 
138 THE RECENT HISTORY OF SECURITIES. 
 
 low, for a long period after 1850, but then there 
 was a short period of dear money and cheap se- 
 curities, arising no doubt from the great waste of 
 capital prior to 1866, which has been succeeded 
 by cheap money on the average, and high prices of 
 securities, both those of the Stock Exchange and 
 not of the Stock Exchange. 
 
 To conclude, the rates for money on mort- 
 gage have changed with the average rates in 
 the short loan market, and in a direction con- 
 formable to that we should expect from a rise in 
 securities. What has been the cause of this gen- 
 eral fall recently in the rates obtainable by capit- 
 alists in the employment of their capital ? of this 
 general competition which has raised the price and 
 diminished the yield obtainable from securities ? 
 
 On the principles laid down in previous chap- 
 ters, the answer must be that there has been one 
 year with another no destruction of fixed capita] 
 lately, but on the contrary a steady increase of it, 
 coupled with an increase of the surplus, whether 
 of cash or consumable commodities, available to be 
 lent or to be used for the purchase of securities. 
 The only other cause assignable would be an in- 
 crease of the quantity of money in proportion to 
 transactions, but during the last ten years in 
 
THE RECENT HISTORY OF SECURITIES. 139 
 
 which the rise in securities has mainly taken place 
 the indications are that there has been no such 
 increase in the quantity of money in the world. 
 The annual supply of gold, which is the only money 
 we need here speak of, has rather fallen off in 
 recent years ; there has simultaneously been an 
 increased demand for it for Germany ; and the 
 price of commodities has not increased since 1868. 
 On the contrary, the average price of commodities 
 is believed to be now 10 per cent lower than in 
 1868, and to be almost at the level of 1861.* 
 The only cause of the low value of money and high 
 price, which means a low yield for investments, 
 must therefore be the pressure of a surplus for 
 investment. On the principles we have explained 
 the surplus need not be a very large one, for a 
 small quantity would have a great effect on price ; 
 but that it has existed can hardly be doubted. 
 There is no other way of accounting for the phe- 
 nomena of the last thirty years. 
 
 In point of fact, as far as cash is concerned 
 there has been a manifest increase of this surplus. 
 
 * To prove this would require an elaborate statistical 
 examination of the facts, which would hardly be in place in 
 the present volume. I hope to communicate to the public 
 the results of such an examination in another form. 
 
140 THE RECENT HISTORY OF SECURITIES. 
 
 Leaving out Germany, which is a new competitor, 
 the great commercial countries have all been accu- 
 mulating larger and larger amounts of cash, the 
 most remarkable accumulation, as is well known, 
 being in the Bank of France. It may be said, 
 of course, that this does not prove a surplus, be- 
 cause transactions may have increased propor- 
 tionately, and the Banks really require the in- 
 creased amount for their new liabilities. But the 
 answer to this is, that at least in France, we know 
 there has been no such increase of transactions, 
 while in England the facilities for economising 
 money are such that hardly any increase of trans- 
 actions would count, so that the increase of the 
 surplus cannot be explained in this way. On the 
 other hand, it may be suggested that such an 
 increase of money would raise prices as a mere 
 increase of the quantity of money would, but to 
 this the answer is that for such a purpose the 
 increase seems to be altogether insignificant, 
 while, as we have already suggested, there has 
 been no general rise of prices but only a rise 
 in securities, commodities having lately fallen 
 in price. 
 
 An important conclusion may, we think, be 
 drawn from this spectacle of a general fall in 
 
THE RECENT HISTORY OF SECURITIES. 141 
 
 money and rise in securities. This is the un- 
 mistakable tendency there is for investment- 
 capital to increase without finding an adequate 
 outlet. The great rise since 1870 especially ap- 
 pears to show that there is hardly any limit to 
 the force of saving in the great communities of 
 modern times, and that the creation of good solid 
 securities cannot keep pace with it. People lay 
 past every year more than they can employ profit- 
 ably in a reproductive mariner, although every year 
 new reproductive employments are created. And 
 it does not seem unnatural that this should be so. 
 Pending the discovery of wants in society, for which 
 fixed capital is required, there is no way of convert- 
 ing circulating into fixed capital profitably, and 
 the means available for this conversion may also 
 be increased so rapidly that if a new way is found 
 the void is at once filled up. Consequently there 
 is almost always a surplus pressing for investment, 
 which appears never to be destroyed except in the 
 rare case of a great war like the Civil War in the 
 United States, or the perhaps rarer case of an 
 enormous destruction of capital on unproductive 
 works of a peaceful kind. But the reproductive 
 forces of modern communities are so great that 
 such voids are easily filled up. It is only six 
 
142 THE RECENT HISTORY OF SECURITIES. 
 
 years since the close of the Franco- German war, 
 but the capital loss of the French people is already 
 far more than covered, and the price of 3 per cent 
 rentes, notwithstanding all the new creations, is 
 not far short of what it was before the war. 
 
 The suggestion will be very natural that this 
 view confirms the economic doctrine of the ten- 
 dency of profits to a minimum. To avoid con- 
 troversial matter I have endeavoured to state the 
 facts so as merely to prove the points more directly 
 connected with the object of the present essay. 
 But the suggestion that the facts prove more than 
 this, appears to be well founded. If there is a 
 surplus pressing for investment, it seems obvious 
 that it will not only help to diminish the rate 
 obtainable by investors in purchasing old securities, 
 it will also by competition help to lower the yield 
 obtainable by all capital in securities. This is 
 visibly so in the employment of capital on mort- 
 gages and short loans ; and although in monopoly 
 business new capital cannot operate to reduce 
 profits, it must operate as regards all other in- 
 vestments as it does on the short loan market. 
 Many of these other investments are in reality 
 permanent loans, the rates for which are lower 
 than they would otherwise be in consequence of 
 
THE RECENT HISTORY OF SECURITIES. 143 
 
 this competition that being the meaning of the 
 high price at which they are issued. In all cases 
 besides, where the securities created are the shares 
 of new companies, whose business is not a mo- 
 nopoly, their competition will clearly tend to keep 
 down the rate of profit in the trade. The facts 
 we have stated therefore, are really, as well as 
 apparently, in conformity with the economic doc- 
 trine, and the explanation we have given would 
 be unintelligible if that doctrine were untrue. In 
 ordinary circumstances there is a tendency to a 
 minimum in the profits of capital, and this tendency 
 is only reversed either when there has been a 
 large destruction of capital as in a great war, or 
 when the need for new fixed capital of a produc- 
 tive kind is so great as to exceed the actual means 
 of a community to supply it cases of rare occur- 
 rence, while a great gap in capital may be filled 
 up with surprising rapidity. 
 
CHAPTER XII. 
 
 SUMMARY AND CONCLUSIONS. 
 
 IT may be convenient now to sum up the more 
 important of the results which have been arrived 
 at in the course of this inquiry. Having done 
 so, we propose to add some practical reflections 
 for the guidance of investors and dealers in 
 securities. 
 
 The first conclusion we shall thus state is, that 
 there is a natural limit in the amount of money 
 to the aggregate price of all securities and com- 
 modities, and consequently a necessity is involved 
 that a rise in commodities generally should pro- 
 duce a fall in securities, and vice versa ; in other 
 words, that a rise or fall in any one article should 
 tend to produce an opposite movement in all other 
 articles. The operation of this limit is modified 
 or obscured in actual life by changes in the state 
 of credit, which enables the same amount of 
 money at different times to sustain prices of 
 
SUMMARY AND CONCLUSIONS. 145 
 
 securities and commodities together at different 
 levels, and also by changes in the amount of 
 commodities themselves ; but the natural limit 
 must always exist, though we do not see it in 
 operation. 
 
 2nd. An equal simultaneous nominal rise in the 
 price of securities and commodities would mean 
 a greater real rise in the securities, supposing 
 the nominal income from the latter to remain 
 unchanged, because the income would be less 
 effective in purchasing than it was before. On 
 the other hand, an equal simultaneous nominal 
 fall might mean a greater real fall in the secu- 
 rities than in commodities, the income from the 
 security becoming more effective with each fall 
 in the commodities, so that it is a more valuable 
 article than before. Consequently a fall in com- 
 modities and a rise in securities at the same time 
 might be coincident with no real change in the 
 effect of the same amount of money in procuring 
 an income from investment at the time. A 
 yield of four per cent, for instance, might be 
 worth as much to an investor at one period as a 
 yield of four and a half per cent at another. 
 
 3rd. The most important factor in the changes 
 in the price of securities, as in the price of com- 
 
 L 
 
146 SUMMARY AND CONCLUSIONS. 
 
 modities apart from changes in the income from 
 the securities themselves is the cyclical change 
 in the state of credit which is now an established 
 law of business. There is an ebb and flow in 
 prices, and the general level is much higher at 
 one time than another. At times of high price 
 also, as part of the same general inflation, there 
 is likely to be a large manufacture of fictitious 
 securities, and a greater proportionate inflation 
 of inferior securities as compared with the more 
 solid article. It also follows that as securities 
 and commodities rise and fall together in the 
 cycle, the great nominal rise in securities at such 
 times means a most excessive real rise. The 
 nominal yield of investments is reduced, and the 
 real value of the same nominal yield is less than 
 it would be in times of low price for commodities. 
 Per contra, in the times of low price, securities 
 may not only exchange for a time at a lower 
 nominal value than formerly, giving an increased 
 nominal yield to the investor, but the same 
 nominal yield would be more valuable than before, 
 so that the real fall is greater than it appears, 
 and tends immediately to produce a reaction in 
 the price of the more solid securities. 
 
 4th. The manipulation of the stock markets, 
 
SUMMARY AND CONCLUSIONS. 147 
 
 through the processes of cornering and the like, 
 though it may have a great effect on particular 
 stocks, and at times may seem to have a consider- 
 able general effect when operators are fortunate 
 enough to anticipate the working of real general 
 causes, amounts by itself to very little. The 
 movements resulting from any such manipulation 
 are necessarily limited by the quantity of money ; 
 by the state of credit, and consequently the 
 amount of illusion it is possible to create ; by the 
 calculation of the operators as to how they are 
 to make a profit, profit being their object and not 
 a mere desire to produce a great effect on prices ; 
 and by the ' conspiracy ' of sensible men, who hold 
 money or stocks, against any extreme which they 
 know cannot be lasting, so that they enter into 
 counter-operations long before the natural possi- 
 bilities of the first unsound operation against 
 which they work are exhausted. The incidents 
 of the stock markets cannot, therefore, greatly 
 modify or divert even for a time the working of 
 the great natural laws. 
 
 Lastly, there is a permanent tendency to a rise 
 in the price of securities through the want of 
 suitable new outlets for accumulating surplus 
 capital. This surplus may at no time be very 
 
148 SUMMARY AND CONCLUSIONS. 
 
 great, because new wants grow with the increase 
 of wealth, and fixed investments are always in- 
 creasing ; but a small surplus may have a great 
 effect on price. The effect of this accumulating 
 surplus is constantly operating through all the 
 cyclical changes of credit, and probably helps to 
 intensify the reaction in the price of solid securities 
 immediately after a general fall, through the dis- 
 position to make new investments being less then 
 than at other times. A great and protracted war, 
 or a similar event, will counteract for a time this 
 permanent tendency for a surplus to accumulate, 
 by causing a large creation of new securities ; but 
 even an event like the Franco- German war has 
 been found to be of very limited and temporary 
 influence. During the last ten or fifteen years, it 
 is possible to draw the conclusion from the actual 
 facts of the rate of discount and the price of 
 securities, both those quoted on the Stock Ex- 
 change and others, that the price of securities has 
 risen, and the rate of yield obtainable on invest- 
 ments has declined. 
 
 The reflections which should occur to an in- 
 vestor upon these conclusions appear to be very 
 obvious. It is plain, first of all, that there is always 
 a danger of a partial loss of capital by any invest- 
 ment, apart from any question of its intrinsic un- 
 
SUMMARY AND CONCLUSIONS. 149 
 
 soundness or the security of the income derived 
 from it. Prices are constantly fluctuating from 
 the state of the money market, the manipulations 
 of the Stock Exchange, and a thousand causes ; 
 and although there are natural limits to the 
 fluctuations, and they conform to general laws, 
 which wise people may speculate upon, the great 
 mass who have not the requisite data for speculating 
 may lose by this incessant movement. By buying 
 at a high price and being forced or induced for 
 some reason to realise at a low price, their capital 
 may dwindle away. It is no consolation to a 
 particular investor that things right themselves 
 in the aggregate ; the difference of nominal 
 capital is always most important, although the 
 real yield of the reduced capital, i.e., the amount of 
 commodities which the income procures, may be as 
 much or greater than it was when unreduced. 
 
 An investor, therefore, should in my opinion, 
 no matter how solid the security may be or how 
 trustworthy the income, always set aside a certain 
 proportion of the income as sinking fund to guard 
 against the danger of a loss of capital. There may 
 be cases where it is of no consequence to do this, 
 where capitals are large and are widely distributed 
 among solid investments, so that the investor may 
 trust to the permanent tendencies towards a rise 
 
150 SUMMARY AND CONCLUSIONS. 
 
 in securities which we have described ; but I 
 should doubt whether the majority of investors 
 are in this happy condition. For the sake of 
 income they may consider it desirable to invest in 
 securities not quite of the first class, or they may 
 have only a small sum to invest in a few securities. 
 As occasional realisations are unavoidable in the 
 course of human affairs, there is consequently an 
 unavoidable risk of loss of nominal capital, which 
 must always be material to the mass of investors, 
 and the only way to avoid it is to set aside a 
 portion of the income for the express purpose of 
 meeting this loss. Practically in fact, from an 
 investor's point of view, the apparent yield of an 
 investment should always be looked on as more 
 than the real yield, because a deduction has to 
 be made from it for this important purpose. 
 
 Considering how low the yield of good invest- 
 ments is, the advice given may seem hard ; but 
 saving money, and what is still more difficult 
 keeping it, are matters lying outside the range 
 of sentiment, and however desirable investors 
 may think it to have an income secure against 
 risk whether of principal or interest, it ' is 
 impossible to alter the facts for their benefit. 
 Hard as the recommendation is, it is accepted, 
 
SUMMARY AND CONCLUSIONS. 151 
 
 I believe, and acted upon by soundly conducted 
 banks and other institutions which have reserves 
 invested in the most solid and easily realisable 
 securities, although in fact such institutions are 
 no more likely to be forced to realise, are perhaps 
 less likely to be so forced, than ordinary investors. 
 What they do when they make a purchase of 
 Consols, say, is to write off out of the income for 
 a year or two a certain part of the price. One 
 great joint -stock bank some time ago told its 
 shareholders that its Consols stood in their books 
 at 90, so that realising at any price above 90 
 would more than replace the capital invested to 
 the bank. It is precisely this course which I 
 recommend all investors to follow. They must 
 not treat ah 1 the income they receive as income 
 or profit, to spend or to save, but a portion must 
 be treated as sinking fund to guard against the 
 loss of original capital. 
 
 This leads me to suggest that in one particular 
 the practice of the law courts and of trustees in 
 dealing with trust moneys where the capital be- 
 longs to one cestui que trust, and the income to 
 another, should be amended. A sharp line is 
 now drawn between income and capital, and if a 
 purchase of something yielding an income is made 
 
152 SUMMARY AND CONCLUSIONS. 
 
 with the capital, the whole gross income is given to 
 the owners of the income. If a change of invest- 
 ment is made, the loss, if any, falls upon the owner 
 of the capital. But if there is a constant risk of 
 a diminution of capital, the practice would seem to 
 be erroneous. Out of the income a certain sum 
 should always be set aside to replace the capital, 
 if that capital is to remain intact. To apply a 
 good and perfectly sound principle would no doubt 
 be difficult for lawyers, but the point is one, con- 
 sidering the danger of loss there is, which ought 
 not to be wholly ignored. 
 
 Another reflection which should be made by 
 the investor is, that if he meddles only with the 
 most solid securities and sets aside a moderate 
 sinking fund, he runs little risk of losing his 
 capital, especially as there is a permanent ten- 
 dency to rise in price ; but at the same time he 
 should endeavour, if possible, not to invest when 
 the pendulum has swung upwards, and to invest 
 by preference when it has swung downwards. The 
 higher the yield of a security and the lower its 
 status, the more useful it will be to bear the 
 maxim in mind. To a certain extent the endea- 
 vour to act on this rule will be a speculation 
 on the part of an investor. He may confuse a 
 
SUMMARY AND CONCLUSIONS. 153 
 
 rise in some particular security due to special and 
 permanent causes, with a mere upward swing of 
 the pendulum, which will come back again, and 
 BO may lose for ever the chance of a good invest- 
 ment. He may, on the contrary, confuse a fall 
 from real causes w r hich will also be permanent and 
 increase with the mere downward swing of the 
 pendulum. But there is no possibility of getting 
 rid of some risk in the business of investing, and 
 those concerned must make the best of it. It is still 
 important to point out that there is an upward 
 and downward swing, as of a pendulum, in the 
 prices of securities, and that, other things being 
 equal, an investor should choose his time. The 
 times of inflation unfortunately mean that there is 
 then a great deal of 'excited buying when people 
 do not judge calmly, when they are led astray by 
 illusions, when there is no visible sign of a possible 
 or probable change in the state of credit. The 
 ordinary investor must find it difficult to resist the 
 influences of the moral atmosphere of such periods. 
 All that can be done is to give the warning for 
 those who care to profit by it. Probably few 
 investors have suffered, however little they 
 have been able to choose a cheap time to invest, 
 if they have been careful to meddle only with the 
 
154 SUMMARY AND CONCLUSIONS. 
 
 more solid securities, and have also been careful 
 to set aside a sinking fund. 
 
 It must also be recognised that for ordinary 
 investors a practical choice must often be made 
 between buying at a high price or foregoing an 
 income for the time. It does not always answer to 
 wait, for there is a loss of interest in waiting. But 
 I believe that almost always there would be little 
 loss of interest by waiting at those times when the 
 high prices are most dangerous. This is when the 
 prices of commodities as well as of securities are at 
 a high level. At such times, as a rule, the average 
 rate of discount and the average allowances by 
 bankers for money on deposit are temporarily high. 
 Consequently the investor who waits can obtain 
 for a time a fairly good rate for his money, with 
 a practical certainty of keeping his capital intact, 
 and if he can get about 3 to 4 per cent in this 
 way, he has little occasion to hurry into per- 
 manent investments. It is seldom possible to 
 obtain such rates for any length of time unless 
 things have got to a high level, when a swing of 
 the pendulum in the opposite direction may be 
 looked for. 
 
 It is another most obvious reflection indeed 
 that an investor must especially avoid touching 
 
SUMMARY AND CONCLUSIONS. 155 
 
 securities which have evidently been the subject 
 of Stock Exchange manipulation. He must not 
 buy after Stock Exchange speculators have bought; 
 and the greater and more persistent the rise, the 
 more careful he must be. The extreme brings strong 
 forces against it, and it is not infrequently a sign 
 of desperate speculation on the part of really in- 
 solvent operators. In the same way the investor 
 should be more careful than usual about selling, 
 when the Stock Exchange manipulators have sold, 
 If there has been an extreme rig downwards, the 
 probability, at least as regards securities of any 
 solidity, is that the causes of the fall are fully dis- 
 counted. This rule must not, however, be under- 
 . stood to mean that the investor is in no case to 
 buy or sell in the cases mentioned. The great 
 movement which has taken place may possibly be 
 deserving of his attention. Especially in the case 
 of an organized attack upon a particular security, 
 before a general depression has come, it frequently 
 happens that the Stock Exchange speculator is 
 unable to discount fully, owing to the danger of 
 the operation, the real causes of depreciation at 
 work. The higher the yield of interest on any 
 such attacked security, the more disposed should 
 an investor be to accept the warning given by the 
 
156 SUMMARY AND CONCLUSIONS. 
 
 Stock Exchange operator. But the warning or 
 hints are likely to be most useful, if at all, in 
 stocks with which ordinary investors should have 
 little to do. In the more solid stocks it remains the 
 rule of prudence not to buy or sell after the Stock 
 Exchange operators, but to hold back, or even to 
 act in an opposite sense to these operators. 
 
 It is not perhaps, strictly speaking, a deduc- 
 tion from anything laid down or demonstrated in 
 the present book, but it may be permissible for 
 the writer nevertheless to add an opinion he has 
 formed as to what should be the conduct of 
 investors in another particular. This opinion is, 
 that investors should form judgments for them- 
 selves in buying and selling, based on a careful 
 examination of the facts which determine the 
 value of the securities, and should jiot be guided 
 by the opinions of bankers, brokers, solicitors, or 
 other friends whom they may consult in the 
 matter. Their knowledge of the nature of secu- 
 rities may be limited, and the rule may appa- 
 rently shut them out altogether from securities 
 which yield more than the lowest rate of interest ; 
 but the reasons for it seem to me absolutely con- 
 clusive. It is quite plain that advice in such 
 matters can only be given and received at parti- 
 
SUMMARY AND CONCLUSIONS. 157 
 
 cular moments, whereas to avoid loss constant 
 attention must be paid to the subject. A friend, 
 for instance, may think that a particular joint - 
 stock company is not only admirably managed at 
 the time his opinion is asked for, but that it is so 
 conditioned that a change to bad management is 
 hardly conceivable. The directorate may be large 
 and wealthy, and composed of men who give 
 ample time to the management of a business in 
 which they are deeply interested. The friend- 
 accordingly advises the would-be investor who 
 consults him that shares in such a company, in all 
 human probability, would be a good investment. 
 But a year cr two passes. The directorate does 
 in fact change, through a slight infusion of new 
 blood ; accidents happen ; the wealthy proprietors 
 and directors sell their shares ; what seemed a 
 good investment becomes a very bad one. Pro- 
 bably the keen-judging adviser is not himself hurt 
 by this, because he knows the real nature of such 
 securities, and being constantly mixed up in busi- 
 ness with them has accepted a timely warning. 
 But the investor whom he advised momentarily 
 knows nothing and hears nothing, and is involved 
 in the adversity which his original adviser escapes. 
 In the nature of things it is not to be expected 
 
158 SUMMARY AND CONCLUSIONS. 
 
 that the adviser would remember gratuitous 
 opinions and advice he had given years before ; 
 and not being consulted again at the right 
 moment, his newer knowledge, without any fault 
 of his, is of no value to the man whom he ad- 
 vised. It is the same with state loans, prefer- 
 ence shares, debentures, everything in the nature 
 of a security. In this changing world no security 
 continues for a long period in precisely the same 
 conditions, and therefore no occasional advice by 
 friends can be of much value to investors. This 
 would be the case if the advice were always 
 well considered, and given by people who fully 
 realised the situation of those inquiring. But the 
 readiest to advise are most frequently the san- 
 guine and buoyant, who have no fear for them- 
 selves and others, who take great risks themselves, 
 and think that others may do the same. There is 
 also no small danger of corrupt or biassed advice, 
 though I am here arguing mainly on the supposi- 
 tion that the experts, or supposed experts, whom 
 investors consult are really trustworthy in inten- 
 tion. In any case gratuitous advice would be 
 little trusted by wise men in any other important 
 affair ; and all I maintain is, that it is not to be 
 trusted, but rather to be specially distrusted, in 
 
SUMMARY AND CONCLUSIONS. 159 
 
 securities. And not taking advice, there is 
 nothing of course for investors but to follow their 
 own judgment, and keep to what they under- 
 stand. Be it bonds, or mortgages, or consols, or 
 the debentures and preference shares of joint- 
 stock companies, let them keep to what they 
 know something about, and take all the risks 
 themselves. There is no outside judgment which 
 can really be made available for them. 
 
 The difficulty of investors would not perhaps 
 be so great if they could avail themselves of the 
 same good outside help without any change if 
 they had an acute friend always at their elbow to 
 advise them. It appears to me a great stretch of 
 friendship to try the good-nature of a friend to 
 the extent that the hypothesis supposes to 
 expect him to keep in mind all your investments 
 as well as his own, and give you all the benefit 
 of his skill and experience to think for you as 
 well as himself, when he may be really puzzled 
 about his own line of action. Still, this is the 
 only condition upon which it will be safe to rely 
 on outside help ; you must have one continuous 
 adviser with whom, if necessary, you periodically 
 consult. In fact, however, investors who lean on 
 outsiders wiJl probably run from one to another ; 
 
160 SUMMARY AND CONCLUSIONS. 
 
 and although any one might have been a safe 
 guide, single mistakes being rectified by general 
 good sense, yet the multiplicity of advisers will 
 be ruin. Now one, now another opinion, will be 
 followed, and sometimes, out of sheer distraction, 
 a wrong course, which was not really advised by 
 any one consulted, will be taken. Investors have 
 thus no means of escaping from the necessity of 
 judging for themselves. 
 
 Some readers may perhaps think that what I 
 have written is such obvious common sense that 
 there was no occasion to write it. But those who,, 
 like myself, have often been asked to give opinions, 
 will know best how utterly devoid of common 
 sense the average investor is on this subject. 
 Scores and hundreds of times I have been asked 
 questions whether such and such a security, pay- 
 ing six or seven per cent, or perhaps even a higher 
 rate of interest, was 'safe' a question which 
 could not be answered without a knowledge of 
 the affairs of the applicant you could not always 
 possess, and without a long examination of the 
 applicant as to what he meant by safety, and an 
 exposition to him of the most disagreeable doc- 
 trine, that no security could be absolutely safe. 
 But in many cases, while avoiding giving opinions 
 
SUMMARY AND CONCLUSIONS. 161 
 
 as much as possible, I have often had reason 
 to know that the applicants were ready to 
 construe the slightest glimpse of an opinion, 
 the slightest hint that ' good people ' were buy- 
 ing or selling the security in question, into an 
 opinion that they might go and do likewise, 
 the conviction on their part being invincible 
 that prudence prevented one from giving direct 
 advice, but that they had got to the bottom of 
 one's mind for all that. People believe that they 
 are entitled to a high rate of interest, and they 
 are so infatuated as to think any good opinion, 
 however slight, will be an excuse for their taking 
 up an investment paying a high rate. When the 
 ruin comes they are loud in bewailing their luck, 
 or censuring the judgment they suppose they 
 have followed ; they do not recognise that their 
 own greed or folly had blinded them to the actual 
 facts of the world, and that they had merely been 
 beaten in the game of chess, having made an un- 
 sound move, by the inexorable chess-player. In 
 my semi-public capacity as a City editor I have 
 come across the most curious illustrations of the 
 strength and persistency of the belief that in- 
 vestors have a right to high interest, and that 
 they are to be taken care of. More than once I 
 
 M 
 
162 SUMMARY AND CONCLUSIONS. 
 
 have received protests against publishing news 
 affecting a particular security, because it de- 
 pressed the price. The news in one case I have 
 in my mind was of the utmost value, as fore- 
 shadowing a collapse in the security itself, al- 
 though it could only be published at the time 
 for what it was worth, and for the benefit of the 
 whole public interested, i.e., the possible investors 
 as well as the present holders. But I was in- 
 formed that my duty as City editor was, not to 
 give news or information, but to keep stocks at 
 their proper prices that I was to be the provi- 
 dence of investors, and give them opinions to go 
 by, and not give them data on which to found 
 judgments of their own. Such letters, and 
 other facts which have come to my knowledge, 
 have given me a deep conviction of the utter 
 unreasonableness of many of the public about 
 securities, and of the necessity of more education 
 on the subject. There can be no doubt that the 
 whole fabric of bubble companies and bubble loans 
 in prosperous times has its foundation in this 
 diffused insanity of the public on a matter of vital 
 interest. Advertisements and prospectuses are 
 circulated, because the public will believe any- 
 thing, and City editors and other experts, or sup- 
 
SUMMARY AND CONCLUSIONS. 163 
 
 posed experts, are followed in their slightest hints 
 of opinion, however carefully they may protest 
 against being supposed to give an opinion, how- 
 ever little the public may sometimes know of their 
 qualifications to have an opinion in a given case, 
 and however impossible it may be for any man to 
 give opinions which could be safely used by a 
 mixed multitude, whose conditions and objects 
 in a particular investment cannot but vary inde- 
 finitely. There is no remedy but to preach in- 
 cessantly the necessity which is laid upon investors 
 to judge for themselves, in the hope that here and 
 there some one or two may be the better for the 
 preaching. 
 
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