An Increasing Trade Means An Increasing Number Of Exchange Transactions

The effect of the vicissitudes of commerce and trade upon the prices of securities on the Stock Exchange has been so fully explained in the various divisions of this book that little more remains to be attempted beyond a brief connected view. Trade being the interchange of material commodities of a useful nature desired by consumers (Commerce being simply trade upon a wider and international scale), a greater number of such exchanges, or sales and purchases, obviously signifies an extended trade; extended trade means that people want more of the articles which are agreeable to them for use in some form than they were able previously to afford; merchants accordingly give larger orders, and tradesmen - the intermediaries between the merchants and the buying public - keep greater and more varied stocks; improved machinery (expediting the production of the manufactured raw material whose finished forms are wanted) involves more labour and wages; by cheapened processes these articles become reduced in price and thus command an ampler circle of consumers; increased wages are spent at the tradesmen's shops and thus enable them to expand their trade; the prosperity of any trade comprises others in its fortunes, for the traders themselves are consumers, and their purchases from each other are enlarged; the export of goods to foreign nations is augmented, and imports, as the payment of their prices, expand; the coal industry is improved, for additional machinery requires more coal, and the vessels which convey the goods abroad and home demand larger coal supplies in proportion to the greater number employed and their more frequent voyages; an increase of exported and imported merchandise provides more work, and more remunerative work, for the railways - the heavy lines, as they are termed; and the enhanced gains which are realised during periods of active and prosperous trade enable holidays to be more readily taken, and the passenger trains (or light lines) ply a busier traffic. So integrally allied are all the branches of the industrial organisation, that a propitious start at any point radiates its stimulating influence throughout the mass; the circle of prosperity which the cast of good fortune creates passes with enlarging circumference beyond the bounds of the nation in which it formed.

Every Interchange Of Goods Involves The Creation Of A Debt

Now every interchange of goods is the creation of a debt from the buyer to the seller; the evidences of these debts are cheques and bills of exchange, home and foreign, and when transactions multiply these modes of settling the indebtedness which they produce multiply in a corresponding ratio. But more bills require more discounting (their reduction into present money) so that the proceeds may be promptly invested in additional operations of trade; and more discounting demands a larger supply of capital with the bill brokers as the means. Merchants and businesses generally require also direct loans on security for the conduct of their expanding engagements, and the banks which make the advances are kept vigorously active in the complete employment of the funds which they hold or can command. As prosperity continues to advance, all apprehension disappears, and credit, or trust in the solvency of each person by the other, attains its climax; cheques and bills in exchange for goods are readily accepted in this state of general assurance that their presentation for payment will at once secure a settlement in money.

The full employment of capital in industrial enterprises tends to depress Stock Exchange prices.

And as a necessary consequence of the full employment of all the loanable capital that London possesses in mercantile transactions and enterprises which yield so high a rate of remuneration - either directly, by traders themselves investing their profits in further extensions, or indirectly, by the owners of money lending it to banks for advances to merchants and traders, or themselves purchasing shares in industrial companies - the tendency of the prices of securities upon the Stock Exchange is towards a progressive fall. For it need not be explained that this competition for capital increases its price or the rate of interest at which it can be lent.

Expanding Trade Diverts Money From Stock Exchange Investments

Thus again to summarise our results of observation during an era of expanding trade: (1) the profits of trading are utilised in the trades themselves; and (2) those who command the control of money employ it in advances (directly or indirectly as explained) at the higher rate of interest, which the competitive demand for capital in commercial transactions produces. These causes divert money from Stock Exchange investments, and hence the demand for those securities is relaxed.

Other Effects Of An Expanding Trade

Auxiliary to these influences come into operation two other sets of action in the same direction: (1) some of the more enterprising or thoughtless investors on the Stock Exchange dispose of their holdings under the seduction of the more advantageous rate of interest obtainable outside - oblivious of the fact that its duration is evanescent; and (2) persons who have purchased stocks with borrowed money, when the rate of interest was low, are subject to intenser strain as the pressure of the rising rate of interest becomes weightier, and the dismal story is speedily ended by failure, and the sale of the securities they can no longer retain. For prices of investments, accordingly, the only fate is fall. If the owner of a commodity which he desires to sell finds buyers few, he must diminish his price to tempt a sale, and each reduction of the area of purchasers compels a corresponding abatement of his gains. And securities are but commodities, obedient to the same power of supply and demand. The wise and vigilant investor finds here an opportunity for profitable use.

The reader has simply to substitute a course of events of an opposite character to that depicted to perceive the influence upon investments of a dwindling and unprosperous volume and state of trade.

How the condition of trade may be estimated.