A history of commerce

by Clive Day

397. More efficient utilization of capital in modern trade.—The middleman, therefore, cannot as a rule secure the capital which he needs for carrying on his business by offering securities for public subscription through the stock exchange. He seems, in this respect, at a disadvantage in comparison with the manufacturer, the railroad, or the steamship operator. He is, however, better off in at least two respects than his predecessors of an earlier time. First, he can do much more business with the same amount of capital than was possible under the old conditions. The great technical improvements have resulted in a much more rapid “turn-over” of capital, and a merchant now sells out and replenishes his stock far more rapidly than he could formerly do. The instance of the India trade, given in a section above, illustrates this fact. The “merchant princes” who once ruled this trade by their great capital have given place to many smaller merchants, who can make less capital suffice by its rapid turn-over.

398. Benefit of banks to trade.—Second, the deserving merchant can manage with a smaller capital than formerly, because he can borrow more easily and to much better advantage. The reader must be content with a summary of the results of the development of banking in the course of the century, for there is no space in which to treat the details of its history. Banks have followed business throughout the world. They have attracted the unused capital of the community until they control now a fund of enormous dimensions, available for mercantile loans. On the security of business paper (bills of exchange, bills of lading, drafts, notes, etc.), merchants secure the use of this capital, and find their means limited now only by the extent of their business. It is the function of the banker to judge of the soundness of this business, and to accord or withhold the use of the bank’s money according to the promise of the enterprise. Mistakes are made, of course, but they are comparatively rare because a mistake in either direction compromises the bank’s success. Special institutions, the commercial and credit agencies, have grown up since 1841, to aid bankers and merchants in this delicate task of judging the credit of individuals.

399. Criticism of the present organization; crises.—Of the general power and efficiency of the present organization there can be no question. It meets the supreme test of maintaining a population greater than in any previous period of the world’s history, on a scale of comfort formerly unknown. That it is perfect, however, no sensible man believes. We cannot discuss the many criticisms directed against it from various points of view, but must not omit the consideration of one confessed weakness. The organization is wonderfully efficient in normal times, but it is unsteady. It passes, at intervals, through periods of feverish activity, culminating in a crisis and followed by dull stagnation. A curve showing the course of the world’s trade during the century would not present a steady rise, but a series of waves, with distinctly marked crest and trough. There is a waste of labor and capital in all periods of a crisis. In the good times men strain themselves to build railroads where they are not needed, or to make machines for which there is no profitable use. Sooner or later they come to their senses with a shock, and realize that they have been wasting their time; then they are as depressed as they formerly were sanguine, and are too timid for a time to make good use of the capital which the crisis has left on their hands.

400. Crises before 1850.—The tendency of the commercial organization to these interruptions in its regularity of operation, which was apparent in advanced countries before 1800, has grown more marked in the nineteenth century; and, with the spread of the modern organization, crises now affect the whole world. Crises have occurred at intervals of about eleven years since 1800. A crisis marked the end of the Napoleonic wars in 1815. Another followed in 1825, occasioned, in England, by speculation in banks, turnpikes, and canals, and by unwise investments in South America. Commerce recovered from its depression only to decline again after the crisis of 1836-39, which was felt with particular severity in the United States in 1837. The last of the crises in the first half of the century, and the first crisis for which railroad speculation can be held largely responsible, followed in 1847, and was the more severe on the Continent because it coincided with a period of political revolution.

401. Crises since 1850.—Toward the middle of the century the new instruments of steam transportation began to work their great changes. At just this time, moreover, the discovery of gold in California (1848) and in Australia (1851) led to an immense increase in the world’s stock of gold, which is said to have doubled in little more than ten years. The results, inflation and speculation, were as marked as though the new money had been of paper, and a period of over-trading ceased only with the outbreak of the crisis of 1857, which spread quickly from the United States to England and thence to the Continent.

A longer period than usual intervened, broken only by local disturbances (failure of a great English banking firm in 1866, “Black Friday” in the United States, 1869). The crisis of 1873 was, perhaps, on this account, more serious; it led to a depression of many years, affecting all branches of trade, and even distant countries like Australia and South America. Beginning, this time, on the Continent, where the outcome of the Franco-Prussian war and the payment of the great war indemnity had led to unprecedented speculation, it found a ready field in the United States, where there had been an active speculation in land and stocks, and proved to be the greatest international crisis which the world has known. As though the air had been cleared by this great storm, succeeding disturbances have been far more restricted in their action. A banking crisis in France in 1882 and a railroad crisis in the United States in 1884 were the chief events of the next period of danger; and in more recent times have followed the American currency crisis of 1893, and the German industrial crisis of 1901.

402. Rise in the price level since 1896.—Toward the close of the nineteenth century a change became apparent in the very basis of business, namely in the world’s money in which prices are expressed. The prices of different commodities never rise or fall exactly in unison, but it is possible by statistics to show the change in the average of prices or the price level, as it is called; and a study of recent statistics shows a rise in prices so extensive and so rapid as to make it clearly a topic deserving serious attention from the student of commercial development.

Taking for the basis of comparison the average of prices in the decade 1890-1899, the price of staple raw commodities in the United States had risen in 1910 by almost 40%; or, comparing 1910 with 1896, when prices were lowest, by 66.3%, almost two-thirds. The change has been less marked in manufactured wares, for it has been offset to a certain extent by improvements in methods of production, but still it is very great: nearly 30% compared with the decade before 1900, and over 40% compared with 1896.

403. Effects of increase in the world’s gold production.—Countless factors have contributed to this result, in one way or another, but economists are generally agreed that the one cause overshadowing all others is the increase in the world’s output of gold. The metal which is the basis of the world’s currency system has become so plentiful that it has cheapened; and the purchaser of wares has now to give more gold for them, that is, prices have risen.

From the time of the Californian and the Australian gold discoveries, for almost half a century, the world’s annual gold output was curiously constant, at a figure somewhat over one hundred million dollars. The discovery of new gold fields and the perfection of new processes effected a revolution. The output of 1896 first exceeded the figure of two hundred million, in 1899 it passed the mark of three hundred, in 1906 and in succeeding years past 1910 it never fell below four hundred million.