MR. GLUTEN ON THE STOCK EXCHANGE.* Tim first merit of
Mr. Giffen's book is that he strips the Stock Exchange of all the halo which moralists and rogues and novelists have contrived to spread around it, and describes it as what it is,— a big bazaar, where they sell a particular class of goods, always in very active demand. These goods, Securities," the papers re- presenting shares in foreign loans, home loans, and mercantile enter- prises, differ from other goods only in these facts, that they yield, or are supposed to yield, interest ; that all men want to have them at a price, and that they can be sold without any percepti- ble trouble attendant on delivery. For the rest, they are goods like other goods, varying in value according to quality, affected like other goods, say, corn or coals, by the presence or absence of speculation, and obeying certain fixed and observable laws of commerce. For instance, prices on the Stock Exchange, as in the general markets of the world, rise and fall in cycles. Mr. Giffen completely endorses Mr. Bagehot's belief that there are cycles of prosperity and depression on the Stock Exchange, and also accepts his suggestion as the best explanation of their recurrence. Some one trade, he suggests, of the first class becomes unusually prosperous, and its profits are expended in increasing the demand upon other trades, until all trades are slightly swollen, and the country becomes aware of a "prosperous time,"—which, again, greatly stimulates industry, enterprise, true credit, and false credit, till the entire commercial world is in a whirl. This process is felt first of all, and most strongly of all, on the Stook Exchange ; first, because there is really more money which its owners wish to invest in interest- yielding goods ; secondly, because the bankers have a disposition towards the temporary purchase of such goods ; and thirdly, because the perfect marketability of the goods allows everybody to pursue the rise to the utmost limit, without fear of being left with glutted warehouses. In such a time all solid securities rise to their full value, or beyond it, and all the dangerous securities too, they, more than their rivals, tempting men to use their profits in speculative purchases of goods giving high interest. Mr. Giffen gives tables showing that such cycles certainly exist, but oddly enough, does not remember that years ago his own explanation of their recurrence was accepted as irrefragable. When trades were few, and, people's minds not bewildered by the present complexity of everything, everybody saw that " prosperity " began with the swelling of a
Stock-Exchange Securities. By It Girton. London : (Rnge Bell and Bono. single trade—the trade in food—and stated as an undisputed certainty that " with such a harvest the country must soon be prosperous." The corngrowers made much, therefore all manufacturers, shopkeepers, and dealers made more, and the price of Securities went up. We cannot see where an answer to this statement can be found, and agree with Mr Giffen that as regards the whole volume of Securities dealt in in the big bazaar, he has given us in outline the one governing law, which, if we consider the whole volume of the business, is hardly affected at all by the causes internal to the bazaar about which so much fuss is made. No gambling does or can permanently affect the price of Consols. There is only one rider, as we conceive, to be made to Mr. Giffen's statement, and as this is the only important omission we perceive in his argu- ment, we may as well give it at once. It may at any time happen, and in disorderly States it constantly does happen, that a great fall in the value of most securities, produced by fear, reasonable or unreasonable, is coincident with a considerable rise in the value of two or three securities. They are suddenly and largely bought, not from the usual market motives, but from the single impression that they are safe, that they can be held, whether they yield interest or not, until the crisis is overpast. If a panic Strikes the market for railway shares, or industrial companies' shares, or the stock of foreign loans, careful men who, ex vi natur2e, hold most money, get out of them and go into Consols, which, therefore, are pressed upwards. Precisely the same thing happens in Asia in disturbed times as regards precious stones. Precious stones are portable and saleable anywhere, and therefore just when nothing else will sell diamonds can be sold at a ten. per-cent. advance. With this exception, only partial in this country, though sometimes strongly felt in other countries, Mr. Griffon's law is, we believe, absolutely true, and the main cause of any rise in the gross value of the general volume of Stock-Exchange goods is the prosperity, real or imaginary, of the country. It is most important that this should be recognised as the central law, because there is an idea abroad that the price of Securities is mainly regulated by Stock- Exchange operations, which, though they may have a great effect on a single small stock, have scarcely any effect at all upon the permanent condition of the whole market. The effect of " rigs " and " corners," and the like varieties of artistic swindling, is very great on the fortunes of individuals, but very little on the broad market, which is protected by the immense amount of money such arrangements require, by the desire of the operators to make immediate profit—recollect, the object of a dishonest speculator on 'Change is never to send a security up or down permanently, he caring nothing about that, but to send it up or down long enough to pocket certain differences—and as Mr. Giffen has epi- grammatically put it, by the silent "conspiracy of the sensible," who are not going to sell or buy at extreme prices without a reason. Perhaps the most conclusive proof of the law is that the value of old and understood securities tends to rise ; that all the tricks and fluctuations, and panics of the Stock Exchange not- withstanding, the increase of wealth makes interest-yielding goods—i.e., the general body of subjects of bargain on the Stock Exchange—slightly dearer. Mr. Giffen has put this very well, and for the investor, as distinguished from the speculator, we do not know a more valuable paragraph in his book :— " Lastly, there is a permanent tendency to a rise in the price of Securities through the want of suitable now outlets for accumulating surplus capital. This surplus may at no time be very great, because new wants grow with the increase of wealth, and fixed investments are always increasing ; 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 in- tensify the reaction in the price of solid securities immediately after a general fall, through the disposition to make now 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-Gorman war has been found to ho of very limited and temporary influence. Daring the last ton 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 Exchange and others, that the price of Securities has risen, and the rate of yield obtainable on investments has declined."
So absolutely true is this, that it is doubtful whether in investing family property, say, property to be kept in trust for two generations, the investor will not receive as much money in interest and increment of value from an investment in Consols, as. from any other security, however tempting. Mr. Giffen himself is obviously of this opinion, and he might, we conceive, have stated it more strongly, without doing an injury to the healthy practice of industrial investment.
We have dwelt upon Mr. Giffen's view of the cycle of prices,
because it is the central idea of his book, and the one which he has worked out most completely. In all the other chapters„
interesting as most of them are, there is a want of expansion, a deficiency of prolixity which rather injures their intended effect. The chapter, for example, on the causes of value in Securities is full of valuable suggestions, such as that the heavy mass of any security, by making it easier to deal in, is apt to make it dearer, and that there will always be a certain relation between the yield on fixed or safe investments and the rate for money lent ; but the first. paragraph, on the causes which induce a community to accept certain rates of interest, requires to be largely expanded. One of those reasons, and a very powerful one—the delusion in each country that a certain rate of interest is the " natural" yield of money—is never mentioned ; nor does Mr. Giffen attempt to
measure the effect of a second delusion, though ho, like all other- experienced observers, is well aware of it, and describes its admirably:— "Some readers may perhaps think that what I have written is such obvious common-souse 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, paying six or seven per cent., or perhaps oven 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 along examination of the applicant as to what he meant by safety, and an exposition to. him of the most disagreeable doctrine, that no security could be abso- lutely safe. But in many eases, while avoiding giving opinions as much as possible, I have often had reason to knew that the applicants wore ready to construe the slightest glimpse of an opinion, the slightest hint that good people' were buying 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 bad 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 he an excuse for their taking up an investment paying a high rate. When the ruin comes, they are loud in bewailing their lack, 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 obese,. having made an unsound move, by the inexorable chess-player."
The sentence we have italicised notes an impression which, with an enormous number of investors—we should ourselves say, with a majority of small investors—rises to the height of a faith, and materially affects the value of all securities other than Consols. In any future edition of this book the effect of this craving ought to be calculated, and so ought another strong influence on values,.
—the interest obtainable for money invested in the purchase oil fixed property. In spite, however, of over-condensation, Mr.. Giffen's book will be found valuable to all who have occasion to consider the subject ; while his method—that of considering Securities as articles of commerce—helps to dissipate the twilight in which many men, otherwise shrewd, habitually find themselves when prosperity forces them to consider in what they shall invest.
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