The Theory of Stock Exchange Speculation

by Arthur Crump

Before the invention of the telegraph, a house of straw could paint up its name, make a show with a few thousand pounds, and enter into very large commitments for good or for bad, as it might turn out. Shipments to a large extent could be made, and if all turned out well, a house might thus, by a stroke of luck, be established to occupy, perhaps, an eminent position. On the other hand, if the first operations resulted in ruin, it was worth the risk, and a fresh start was made probably somewhere else under a new title. Such instances being multiplied in all the great commercial centres, it is easy to understand how markets could be glutted, prices raised to a fictitious level, and all the links forged into the chain which snaps at once, when the tension upon credit has gone beyond a certain point. Matters however are changed in this respect, and are changing from day to day. So small is the expense of obtaining information, compared with the risk of signing a contract with a house of straw, or of doubtful respectability, that the electric wire serves accurately enough for the purpose of ascertaining the position of a new customer who may present himself at a large establishment to do business. A most salutary effect is thus in process of being worked out. The great thing in commercial affairs is to keep out the weak speculative element, and to drive them into subordinate positions to work their way up in a legitimate manner, to become principals. The means of obtaining information now is so considerable, that if a man signally fails, almost the only hope for him is to change his name. In some instances this has been done, and followed by astonishing success, although the way it was achieved would, perhaps, hardly bear close investigation.

So far, we have referred more particularly to the altered character of modern influences upon commercial markets, and we have done so because the changed conditions which affect the value of one commodity in the markets of the world more or less affect all; but, as we are specially writing with reference to Stock markets, we only propose to touch upon other markets in passing.

The Extension of Long Wire Telegraphy.

The net work of telegraphic communication, in Europe at least, is now, in the year 1874, so far complete that, when a pressure of business is felt by the sub-marine telegraphic companies, the complaints of delay are not frequent. The long wires are also multiplying rapidly. The progress that has been made in telegraphy was made known to many for the first time by the circumstances being published, that the Shah of Persia’s first minister at Teheran was aroused out of his sleep early one morning, during the visit of his royal master to England, to reply to a message which, to the minister’s astonishment, he discovered had a few minutes previously been dispatched by Dr. Siemens, an operator who had been expressly established for the use of the Shah in Buckingham Palace.

Money Famines should henceforth be as improbable of Occurrence as Corn Famines.

Advantages derived from Opening Up Communications with the Corn-growing Provinces of Russia.

We are of opinion that the complete communication that is now established between the commercial and monetary markets of Europe will tend gradually, if not rapidly, which is very probable, to diminish the effects of what we understand by commercial crises. The opinion embodied in this sentence which was written before the American financial crisis of 1873 broke out, has been corroborated by the great assistance afforded by the Atlantic cable in mitigating the immediate effects of the first symptoms upon the public mind, and in at once confining the disorder within limits which would probably have been impossible in the absence of telegraphic communication. The main reason why we have suffered from monetary panics so severely during the first three quarters of the present century has been from the absence of rapid communication with other monetary and commercial centres, as well as from the absence of large auxiliary monetary centres holding a good average supply of cash, to be lent out on good security to the highest bidder for the time. The facilities which now exist for applying the over-plus of grain at one centre of population to satisfy the deficiency at another, has done away with famines. The late exception of Persia proves the rule. Corn is a commodity, and money is a commodity. What applies to one, as regards demand and supply, applies also to the other. A strange nervousness still exists in some quarters about the amount of the Bank reserve, fears being entertained that it will be found too small when the time of pressure comes. Persons who are so loud in their protests at reductions in the Bank rate can never have been buyers of money themselves, or, in other words, sellers of bills. To keep the value of money the smallest fraction above what is actually necessary at the time, by the capricious exercise of a brief authority, is to commit an act of unwarrantable injustice, and to rob the needy. We say if the Bank directors maintain a higher rate of discount than is necessary, they rob the needy, and compel holders of bills to pay an illegitimately high rate of discount. It is urged in defence of this nervousness, that the attractive power of a higher rate is slow, and that the till may be exhausted before the required supply arrives. As and when it may be necessary the Bank should raise or lower its rate, maintaining a reserve which is sufficient at all times if it be about one-third of the liabilities. To speculate upon the future, is to attempt to discount influences which may never be felt. To maintain for a day a higher rate than is necessary, is to tax the public for private ends, to reinstate Protection, and to disregard sound economic principles. To illustrate what we mean, take the case of bread famines. Almost the only nation that has suffered from the worst kind of bread famine of late years, has been one altogether outside the pale of civilization. At the period referred to, the telegraph was only seen in Persia, because it was necessary to use the territory for putting up telegraph-poles to carry a through wire to India. As we write, there is not a steam-whistle to be heard in that country, which is somewhat astonishing, considering that it is so near to us and that it is twice as big as France; although it must be said, in justice to His Majesty the Shah, that he has already seen the benefits to be derived from coming out of his dominions himself, and by letting civilizers in, with carte blanche powers, to transform his dominions from a condition, as regards production, which may well shame the representative of an ancient line of kings. With the exception of countries situated as Persia is, with reference to obtaining supplies from other nations, no considerable centre of population need suffer from bread famine in our time, unless under circumstances which no human foresight can prevent. This very important fact was recognized when the first great foreign railway loans were offered for subscription in England. It was seen that by enabling Russia to make railways from the great corn-growing districts of her Baltic provinces to ports to which vessels could gain access during the winter, we should, in case of need, be able to supply ourselves from this source. We have not yet had special occasion to prove the inestimable value of those lines of railway, but one thing is quite certain that, whatever some authorities may say as to the impolicy of lending largely to foreign powers to assist them in constructing strategic railways, for reasons beyond the one given, England never made a better business than by lending Russia some of her surplus capital. Whether or not we have now lent sufficient is another matter.

A hunger crisis arises from a scarcity of bread, and a monetary crisis from a scarcity of money, or what represents it perhaps too largely at some centres, credit. There are stores of corn kept in larger or smaller quantities by all civilized nations, and famines have arisen in former times, not only from the absence of sufficiently rapid communication making the surplus supply of one centre available for the deficiency of another, but from the failure of production. It is tolerably certain, however, that at all times while human beings have existed there has always been enough food grown for every living creature, if it could have been distributed according to the varying wants of different populations. Now that this can be effectually done, famines are unknown except in lands whose people are such lie-a-bed tories that they prefer to sit in the sackcloth and ashes of barbarism and want, to humanising the body and soul by the regenerating influence of modern civilization.

Money is as much a necessity as bread in the world. Indeed, it is of more; for bread alone carries a man a very little way, according to modern notions, whereas money is the lever that lifts every obstacle from the path. It would seem quite reasonable, therefore, to infer that when the same means have been established for making the surplus at one monetary centre available to supply the deficiency at another, with the rapidity which is proportioned to the more sudden pecuniary requirements that are developed than is the case with corn, the very serious and prolonged disturbances which have been experienced in the past from such a cause would gradually be prevented in the future.

The Growth of Wealthy Monetary Centres.