Other Indications Of The State Of Trade

Another indicative feature is presented in the amount of the "other deposits" with the Bank of England, and the "official minimum" rate of interest which the Bank charges for making advances, and discounting its customers' bills. If the deposits be enlarged the rate of interest is low, and the sign furnished is that the elasticity and energy of trade are diminished so that less capital is required to be borrowed for its conduct, and the competition for that capital being reduced, the terms charged for its use are small.

The Change From Healthy To Feverish Trade Expansion

But a sound condition of trade - a condition, that is to say, which is genuine and embodies the exchanges of goods which are really needed, and within the means of those who buy - passes by graduated stages, and with inevitableness, into one which is termed a feverish or unhealthy state.

A Trade Cycle Summarised

And a brief summary of a recurrent cycle (a revolving round) of industry is not less interesting than fruitful of teachings to investors.

The influence of favourable external conditions upon the mental activity of man.

The operations of men in business (I cannot too insistently impress), as in other forms, are the outward expression of the activities of feeling: the desires to attain certain objects or ends, intensified or depressed by the greater or less facility afforded by external events to that attainment. These external influences - such as abundant harvests, profitable trading, the absence of the alarms of war, or political or social troubles, the opening of fresh markets, - induce the hopeful state of mind which impels energy towards ends; or it may possibly be, as some suggest, that buoyancy of spirits at any period occurs, - in the universal rhythm of nature, as the natural reaction from a prior languid condition induced by misadventures in commerce and business generally. Moreover, like sleep, there appears to bo some element of periodicity in human consciousness, tending to restore and preserve a level of mental equilibrium, whose cause has not been deciphered.

Under the inspiration of exceptional hopefulness trade expansion and speculation proceed apace.

As a fact of observation and experience, at all events, men generally at some time become inspired by exceptional hope in the future which stimulates unwonted enterprise. Every event at such a period is interpreted as a premonition of prosperity. Money becomes invested in the modes through which this prosperity is to be secured; existing manufactures and trades are extended; the creation of new ventures in industry forms an outlet for redundant energy; and incessant speculation in stocks and shares is a signal mark of this incipient stage. The prevalence of a low rate of interest on borrowed capital at the outset of this industrial course, incites the struggle to grow promptly rich; and although the competition for loans causes a gradual advance in the rate, the confident expectation of a profit far surpassing the price paid for the means of its acquisition neutralises for a time the deterring effect of dearer money.

The Contagion Of Hopefulness

This vigour of hopefulness, whether it originate in one prominent trade or a class of trades, speedily embraces all by the contagion of sympathy; the vision of prosperity in one direction conjures up the probability of success in others: and the realisation of unusual profits in one branch of trade naturally overflows, in prof user expenditure, into other branches, and adds a material impetus to the anticipations of hope. Buoyant speculation, especially in the purchase of the shares in industries which seem endowed with perennial good fortune, aids the growing inflation, and a lengthened and propitious day appears to have dawned. The opportune promoter submits his novel schemes with blatant and profuse advertisement to a credulous public which, in a saner condition of the general mind, would have remained hidden in their proper obscurity.

The Nemesis

This incessant overtrading - beyond the genuine needs and means of the community - is speedily followed by its Nemesis: it is now discovered (as overtrading signifies) that, in this period of commercial insanity and fictitious wealth, commodities have been produced in excess of the power of payment, in supplies surpassing the requirements of the people, and now lying cumbrously idle in the stores, but yet disastrously active in the owner's ruin through growing waste and decay, and the attendant burden of interest upon the capital which they embody and destroy. Financial institutions, infected by the apparent prosperity, have advanced largely to promote these extensions: apprehension compels them to call in, often hopelessly, their loans; money grows scarce and dearer; and without money the baseless commercial fabric which impatient hands have built must fall; bankruptcy succeeds bankruptcy with fatal iteration; and hope merges into dismay and despair. The only remedy, besides a return of common-sense and prudence, is the free utilisation of whatever money is left available to sustain the industries and businesses which remain intrinsically stable, by enabling the owners to discharge their debts and continue, for at such a time credit or trust has vanished: paper documents are merely paper void of the confidence in the gold which constituted their worth. The burden of redemption of public confidence - on which the retrieval of a sound and normal system of business essentially depends - falls upon the Bank of England's reserve.

Commercial Crises Are Periodic

The occurrence of these commercial crises, as the concluding stage is termed, is periodic: in other words, trade passes through a cycle of recurrent changes in about every eleven years, and Professor Jevons has tabulated the succession approximately as three years of genuine trade, two of excited trade; then in the next year the bubble or maximum of inflation and fictitious values, succeeded by the year in which the inevitable collapse occurs; and finally about three years of depressed trade, when, the cycle having been completed, the series of variations which has marked its course is regularly repeated.

Lord Overstone, the banker, presented the procession in a closely similar form: quiescence, improvement, growing confidence, prosperity, excitement, overtrading, convulsion, pressure, stagnation, distress, quiescence once more.

A well-known banker has stated that "no one is likely to forget the temporary effects of a panic if he has lived through one." The predominant characteristics are mutual distrust and personal fear, and as the crisis proceeds to culmination, every physical and mental form of terror into which the emotion has been analysed by psychologists is exhibited, intensified by its participation by a multitude, with action and reaction in incessant play and force; the concentration of the entire nervous energy upon the organs of perception, the fixation of the mind upon a particular class of ideas on which perception is exclusively centred, and upon the physical movements which are correlated with those ideas; the abolition of the activity of volition except in the direction dictated by the dominant feeling; the complete depression of spirit and hope by the intrusion of intense foreboding of evil; the sense of repellent suspicion individually and collectively generated; and the final submergence of the intellect, and signally its power of judgment, under the flood of the single emotion which sweeps away all barriers of control.

Commercial Cycles Not Universally Identical In Duration

The cycle or circle of occurrences is not universally identical in its exact duration, either as regards the partial periods of which it is composed, or the precise term of its completed round; but it is remarkable to observe how closely and punctually the more important collapses of credit (a synonym for commercial crises) tend to revolve in the specific and recurrent space of about eleven years.

I have collected in an appendix all the available information within my reach upon the subject, and to this the reader's attention is particularly directed as an indication (in addition to its practical teaching upon the stability, in the long run, of investments) of the uniformities of action which connect the phenomena of nature and of men into an organic whole.