Very many of the better class securities such as Colonial Government stocks, Foreign Government securities, and so on, yield from three to five per cent., and when the Bank of England rate is at from two to two and a half, though the margin demanded upon such stocks is wider than that required upon Consols, the difference between the interest received in the shape of dividends and that paid as the price of a loan often makes speculative dealings in them decidedly profitable. As the Bank rate increases, and the speculator's profit margin consequently narrows, the tendency is for stocks and shares so "carried" to fall in value. The holders or gamblers then begin to sell, and as the increased supply of such securities is certain not to be met by an enhanced demand on the part of investors, prices must fall. Seeing the better class securities declining in value, those investors who had previously held aloof are tempted to come in, and the greater the reaction, the stronger is the inducement to buy; consequently, the lower prices recede the larger becomes the number of purchasers, until demand overtakes supply and prices again begin to move upwards.
Broadly speaking, it is evident that, unless the markets are disorganised by panic or by some disquieting political occurrence, the prices of the so-called gilt-edged securities are influenced by the conditions prevailing in the London short loan money market.
CHAPTER XV.
Panic Years.
When in 1667 a Dutch fleet sailed up the Medway, demolished a fort at Sheerness, and, forcing a way into Chatham Docks, burnt all the ships assembled therein, to the consternation of the inhabitants of London, there was a run upon the banks; but a Stuart regarded both events with equanimity, for "Old Rowley" had a mind above trifles of this description, possibly because he had learnt many bitter truths in a world seldom understood by Kings. Cynics are not born—they are made; and Charles II. had drunk from that cup which sharpens the understanding.
France, during 1719 and 1720, was in the throes of the Mississippi scheme, which was engineered by that notorious Scotsman, John Law; and England, in 1720, witnessed the collapse of the South Sea Company, which Sir Robert Walpole, with rare insight and unerring financial instinct, had demonstrated was a mere gamble, that, at the best, could only enjoy a temporary success, which was absolutely dependent upon a rise in the company's stock; but the Government turned a deaf ear to his warning.
Scotland, we have seen, had its Darien venture in 1699; and in 1720 all England went mad over the South Sea Company, which offered to relieve the Government of part of the National Debt, and entered into an insane competition with the Bank of England for that purpose. Then occurred some spirited bidding between the two companies for this privilege; but the directors of the Bank proved themselves the less mad, and left their rival in possession of the incubus and the road to ruin.
The result of the bidding gave the necessary stimulus to the South Sea Company's stock, and, seeing it going up, the public at once rushed in, when the stock rose faster than ever. In a very short space of time the fever for speculation infused itself into the blood of the whole nation. The pace became so furious that the more thoughtful among the gamblers began to see the end and to sell, with the result that, upon a memorable morning, everybody wanted to dispose of his stock—and then the bubble burst.