War Involves Increased Taxation

These national borrowings, besides diverting funds from the channels of trading and investment, involve an additional burden upon the resources of the country in the form of taxation for provision of the interest upon the borrowed capital, and the creation (if the nation be then wisely governed) of a sinking-fund for its ultimate redemption. And the imposition of every monetary burden diminishes the demand for investments, and thus tends to reduce their value.

Each Belligerent Power Feels Similar Effects

In the next place, the nation with which we may happen to be in conflict will similarly need to borrow for its corresponding requirements, and with corresponding effects in absorbing the capital usually appropriated to trade. Thus, besides the disorganisation of the internal industrial activity of each nation, the commercial arrangements between nation and nation are both narrowed and rendered more hazardous of completion and settlement.

Merchants in each country cannot count so surely, in this disturbed condition, upon the solvency of those in other countries, and their continued power of meeting their engagements; the steady flow of business from commercial centre to centre, with its prosperous circulation and productive use of money, is thus arrested, and these results, with the apprehension of the incalculable effects of war upon each nation's future - the more effective, the vaguer be its nature - influence in a downward way the prices of securities in each country.

The Danger Of War Spreading Beyond The Original Belligerents

Moreover, as all wars commence with an unpredictable chance of involving others than the original belligerents in the struggle - so intimately interwoven are the territorial obligations and rights of nations - neighbouring States feel compelled to amass increased financial resources for provision against probable contingencies. Hence continental national banks and financial houses seek to fortify their monetary position. As they can always obtain gold from England - the world's centre of finance - by cashing here the commercial bills which they hold upon British merchants in payment for merchandise, a drain of gold from the Bank of England at once ensues - the banknotes received as the proceeds of these bills being presented at the bank for cash. This outflow of gold must, if possible, be checked (in order to preserve the integrity of our own financial obligations), and the current rate of interest accordingly is raised; the expansion of our own trade is thus restricted through the heavier burden of interest upon the capital by which it is carried on.

A Concrete Illustration Of The Effect Of A Foreign Loan For War Purposes On Prices Of British Securities

A concrete illustration will be useful. A foreign banking firm of high standing may desire to subscribe to a new loan proposed to be issued by one of the contending nations for warlike preparations - probably by the Government of that firm's country. Its free local capital is not likely to be adequate for the purpose; but the firm will in all probability possess among its assets substantial sums invested in the securities of other stable Governments - let us restrict the case here to investments in British securities - and with the object of taking up part of the fresh loan of its own Government, the firm will convert its British Government investments into cash, and by withdrawing the proceeds in gold, both depress the prices of those securities, and aid still further in their depression by the influence of the withdrawal from the Bank of England's Reserve, and the necessary augmentation of the bank-rate.

Movements In The Price Of Consols At The Opening Of The Russo-Japanese War

In the recent war between Russia and Japan, Consols declined 1 points,1 as it is termed, in the London market, in practically immediate succession to the first attack upon the Russian fleet. It was shown that this result was due to the action of bankers in Paris and Berlin (who held Consols largely) in selling their holdings at once upon the occurrence of actual hostilities.

A Summary Of The General Effects Of War In Relation To The Prices Of Securities

Apart from the irrecoverable waste of the means of industrial production in war, we may thus summarise the general effects in their relation to the prices of securities:

1 Points: If, for example, a security stood at the price of 98¾, a fall of 1½ points would mean that the price had been reduced to 92¼ (that is, 93$ minus 1½).

(1) External commerce is restricted, in consequence of interrupted communications, uncertain markets, and the difficulty of measuring the solvency of merchants in respect of the discharge of their debts for goods: the savings available for investment are thus reduced;

(2) the activity of internal trade is naturally lessened, if only by reason of diminished exports; (3) the constant foreign demands for gold deplete the National Reserve in the Bank of England, and demand an increase in the rate of discount for its protection and resupply;

(4) this advanced rate reacts, by the onerous charge for borrowed capital, upon home and foreign enterprise alike;

(5) the rate of interest further diminishes and annuls the practicability of speculative purchases upon the Stock Exchange which would have aided the maintenance of prices; and (6) the creation of additional Government indebtedness for warlike preparation and action, adds to the stock of existing securities, while, concurrently, it diminishes the scale of demand for them by abstracting funds in loans, and the imposition of the fresh taxation which new borrowings entail. Moreover, the new Government issues tend in another form to depress the value of the existing issues. In all probability these additional creations of debt will bear, as a necessary attraction, a higher rate of interest than that current upon similar stocks; and since the security for the two is precisely identical, holders of former issues would be tempted to sell (and bring down the value), in order to invest the proceeds in the new stock with its superior yield. If war, for example, should arise between England and Russia, the volume of British and Indian Government Securities would receive the increment of stock, with the resulting effect upon existing prices which has been described.

On the other hand, war would have a tonic effect on the securities of some industries.

On the other hand, it should be noted that many industrial undertakings would show an increased earning capacity, to be reflected in advancing prices of their stocks and shares. War would create an augmented demand upon industrial bodies and firms for the equipment and provisioning of the Army and Navy; the materials for military operations would promote the fuller working of factories and manufactories by which they are produced; an impetus would be given to the shipping trade for the transport of troops and munitions; and the coal trade would be invigorated by the needs of an incessantly active fleet. As labour in certain branches of industry, particularly in those demanding skill, would be extended, wages would tend to rise in money, but their effective value would be counteracted by an increase in the cost of food and necessaries of life.

It was the usual traditional consequence of war that higher prices for wheat and lower prices for cotton prevailed, since an extended range of conflict frequently leads to the blockade of wheat-producing states, and thus tends to reduce the supplies in the market, when the principle of supply and demand causes the price to rise; and similar blockades have frequently in the past forcibly excluded markets of consumers of cotton manufactures, and thus by the abstention of demand by those customers have created a decline in price.