'How are markets influenced?' is a question it is not easy to answer, as the financial journalist and the professional dealer will acknowledge. The market is influenced by a complexity of causes and circumstances, which causes and circumstances repeat themselves from time to time under various aspects and in different guises; and though an observer may predict the effects of them, in accordance with the teachings of experience, still, his predictions may frequently be falsified, for the law of cause and effect on the Stock Exchange is not so fixed and rigid as in other of Nature's phenomena. For one thing, temperament undoubtedly exercises a most potent influence, and what is there that is less dependable than the temperament of man? Moreover, to make the problem still more complex and difficult of analysis and solution, it is not dependent upon the temperaments of a nation, but often upon the temperaments of many nations; for though we may be able to foresee how we ourselves are likely to act under given conditions and circumstances, those conditions and circumstances may be affected and modified to a very considerable degree by the actions of our neighbours, the French, or by an unexpected movement on the part of our cousins on the other side of the Atlantic. It is impossible, therefore, for any man, however experienced he might be, to draw up a code of laws to which speculation, in its manifold phases, will invariably conform, for, as I have said, the complex temperaments of man will ride rough-shod over them, and make them utterly impotent in their workings.
Let us for a moment, therefore, attempt an analysis of what I mean by temperament. There are times in our individual lives when we feel exceptionally hopeful and optimistic, when our circumstances look particularly rosy and cheerful, and when the future looms bright with promise. We are in a buoyant and light-hearted mood, there is no anxiety weighing upon us, and none seems likely to. We are lavish and prodigal, and we do not allow undue caution to restrain our exuberance and repress the flow of our animal spirits. We have plenty of money; there is more to be got whence it came, and it is not our intention to let it lie idle merely to be gazed at. We will do a little speculating with it. There is no reason why we shouldn't. Everybody else is speculating and making a fortune, and why should we be out of it? This may be the mood of the individual and of the nation, too, for moods of this kind are undoubtedly contagious. Trade is brisk and flourishing; everybody is making money, and this strengthens the desire to make more, and especially to make it while the good time lasts. There is no easier and more effective way of increasing it than by speculating on the Stock Exchange. What shall we speculate in? Everybody appears to be speculating in mining shares, so we will speculate in mining shares. But we know nothing about mining - don't know a good share from a bad one. Never mind; all are good enough to speculate in. We will write to the editor of the Financial Daily, and ask him what shares to buy. If anybody ought to know he did. So in this way the speculation grows. The public are like sheep: they follow the leader, without troubling to exercise their reason or common-sense. There is a boom in mining shares, and the latter are sent up to inflated prices, without the least regard being paid to their intrinsic merits.
French speculators, anxious not to be left out of it, also buy, and prices go up and up. Promoters, dealers, brokers, and even financial editors and proprietors, are happy. These are the good times they are always delighted to witness. But suddenly the French speculators get nervous. Perhaps it is due to some social disorder or some scandal that is likely to lead to unpleasant consequences. Or it may be brought forcibly home to them that they are buying shares at inflated prices, that the perfidious English are loading them up with all kinds of rubbish, and they get frightened. They are advised to sell and make their profits whilst they can. And so they take the advice. Shares of all kinds are then thrown upon the market, and the sudden deluge simply destroys the frail edifice, causing quite a panic amongst those who are overwhelmed by the debris. Prices come tumbling down. Everybody is scared and anxious to save himself. No one cares for his neighbour, but each one in his mad fear tramples upon the other. All are panic-stricken. Thousands are crushed, and thousands more are ruined. The building of inflation has vanished magically and tragically from the gaze of man, and left with us, as the evidence of its existence, only the saddest and bitterest of memories. And all the result of an unforeseen and uncalculated emotion, the outbreak of a fear for which no provision was made. A calm and keen observer might have foreseen it; but speculators, especially at such times, are not calm observers. And so they pay the penalty of their weak vision, their restricted outlook.
This, then, is the effect of one cause, which cause in itself is generated in the temperament of a volatile and emotional nation. Nevertheless, it does not follow that when the cause repeats itself at a future time it will be followed by a like effect. French speculators, moved by fear or by a desire to save themselves from a threatening danger, may again throw their holdings on the market, but instead of breaking that market and precipitating a collapse, it may actually strengthen it. English speculators may be only too ready to absorb all the shares. For the moment, of course, it would undoubtedly bring about a reaction in prices. But that was only to be expected. Prices will go up again, as sure as fate, so that we have only to hold on until the taking of these shares off the market strengthens it. It is just like those emotional, impulsive French, we argue. It was to be expected of them. They will be sorry for their foolishness presently, when they see we are only too ready to take all they offer. Presently they'll be eager to buy again, but they'll have to buy at higher prices, and so if we hold on we shall be able to sell their shares back to them at greatly enhanced values. The French do, indeed, repent of their impetuosity. They see their shares absorbed by the English speculators, and evidently, therefore, the boom must be built upon more solid foundations than they had imagined. Their cupidity compels them to buy back, in the hope, of course, that they will be able to sell again at higher prices still. So we give them all they want. This demand naturally of itself enhances prices, and therefore they see the shares go up and up, making them the more eager to buy, and ourselves to sell. But the buying ceases at last. Their cupidity is satisfied. So many shares taken off the market has temporarily strengthened it, and therefore they watch it, ready to sell whenever they see the first signs of weakening.