Cheap Money Induces An Extension Of Stock Exchange Speculation

The reversed story is told when money is cheap or the rate of interest exacted from borrowers is low - loanable resources being then in excess of the demand for trading purposes, speculation and investments. The implication of this condition proves that commerce and trade are dull; that in consequence of the fewer transactions less money is required to conduct them: the diminished creation of debts incurred in the purchase of commodities is necessarily reflected in a sparser number of bills and cheques; and loans and discounts consequently, so far as trading operations are concerned, attest the attenuated state of competition. But when trade and trading loans thus cease to attract capital by reason of the small return, owners of money find that investments on the Stock Exchange, carefully selected, form a more profitable venture; and speculators, particularly, are stimulated to try their fortune there with money borrowed at a rate inferior to that which can thus be realised. They are tempted further by the expectation that, as all conditions of business change and revolve, the values of securities may rise (to their profit on selling) as the public withdraw their money from deposits and other sources and seek the more remunerative yield of stocks and shares. The values of securities become thus favourably affected; but as has elsewhere been shown, the opportunity which benefits investments is precisely that which introduces a depressing element in the form of new industrial undertakings, attractively organised, which prevent, so far as the public respond to their inducements, part of the fund of savings and comparatively idle money from proceeding to enhance prices by purchases on the Exchange.

The reader will frequently meet with the remark that "the rise in the bank rate produced a fall in the prices of securities." The preceding explanations will enable him to interpret the statement; and although the relation between the two facts has already been generally described, it may be serviceable again to point out their connection. When the rate of interest advances or money becomes dearer, those who have purchased stocks on borrowed capital when money was cheap, sooner or later find that the rate they have now to pay on their loans exceeds the rate realised from the investment; their power of holding the stocks consequently diminishes (a man cannot afford to give 4½ per cent for a loan and only receive 3½ per cent from the security which it brought); their bargains then must be closed by a sale of the stocks, with a resulting depression of values. The same cause - the advance in the price of money - prevents speculators from borrowing for investment on the Exchange, and thus reduces the extent of demand by the diminution of possible buyers. And, tending in the same direction, investors who would have purchased stocks are attracted by the higher rate of interest to lend their savings to better advantage by depositing the money with banks at the increased return, or making advances directly on the current terms. They thus obtain a larger income than investments on the Exchange would yield. Hence, in consequence of sales on the one hand and the dearth of buyers on the other, the demand grows inferior to the supply, and prices decline as the effect of these combined causes. The contrary result is produced by a low rate of money; capital is borrowed for Stock Exchange investment on account of the superior yield from stocks, and loans at such a period securing but a small remuneration, savings are naturally directed to more productive sources on the Exchange.

Courses of events and their results here considered must he regarded as general tendencies. On particular occasions these general tendencies, though operative, may he obscured.

It is an observation generally applicable to the conditions and effects considered in this book that the various courses of events and their results must rather be regarded as tendencies - which the history of financial and commercial experience has disclosed - than procedures and consequences which are competent of exact measurement and the assignment of mathematical relationships. They are entirely valid and reasonably predictable on the whole, but on any particular occasion they may be obscured and masked by the introduction of causes peculiar to the occasion itself.