Stocks Which Rest On Industrial Monopoly. Industrial Stocks Merely A Speculation

IN the present chapter I (On The Natural Value Of Different Stocks: Banks And Insurance Companies) propose to begin by considering the natural value of those stocks which rest primarily on Industrial Monopoly, complete or partial (and not, like Banks and Insurance Companies, on Money) as a preliminary to that large class of securities which, like Corporation Loans, Railway and other Debentures, rest on a combination of all three - Industry, Monopoly, and Money. As to all ordinary industrial stocks, such as are represented by the Ordinary shares of a Joint Stock Company, they are so subject to all the ups and downs of market prices, of brisk and slack trade, of "goodwill" or the loss of "goodwill," of new inventions, new machinery, new chemical processes, and what not, that the incomes from them, however great they may chance to be, are as uncertain and fluctuating as the rocking foundations on which they rest. In a word, they are as a class the subject-matter of speculation and chance, and not of scientific generalisation and prevision; and their natural rank, in consequence, when compared with investments resting on Money, is as much lower in the scale as the gambling of the outside public on the turf is than that of the scientific bookmakers, or that of the players at the Bank of Monte Carlo than that of the bank itself.

Insecurity Of Joint Stock Companies

Indeed, from their natural want of stability and security, the Ordinary shares of Joint Stock Companies may be said to stand at the bottom of the scale of investments. Not that there may not be Golcondas among them, or that the majority of them may not be steady-going concerns yielding average dividends, even if there be a large minority that are virtually bankrupt or on the verge of it; and doubtless to the promoters, who have inner knowledge of these concerns, it is often, though not always, sufficiently well known under which of these categories their own particular stock will fall. But this cannot be known to the outside general public, nor, as we shall see later on, will the published audit of the accounts of these companies by the methods of bookkeeping in vogue reveal it to them - except to the few who know how to read between the lines.

Natural Value Of Industrial Monopolies. Steadiness Of Complete Industrial Monopolies

Now, all this is reversed in the case of those industries that have managed to convert themselves into Monopolies. For then, instead of being the hangers-on of business chance and fortune, they are able in a measure to defy them; and their stocks have, in consequence, a natural value on a level with those stocks which rest, like Banks and Insurance Companies, on Money and the mathematical Law of Probabilities - and indeed above them, if the monopoly be a complete one, as we shall presently see. For both the stocks that rest on Money and those that rest on Monopoly get their high rank from the power they have of controlling the selling end of their bargains as it were, and of keeping it in correspondence with the buying or cost end. Banks get this power through the quality which money possesses (owing to its being the standard and measure of value) of being practically equal value at both ends of the usually short-time loan transactions in which they deal; and by the Law of Probabilities which, as we saw in the last chapter, keeps a fairly average level of profit throughout. Industrial Monopolies, on the other hand, when they are complete ones, get their steadiness and equability by the power of moving their selling price up and down at a fixed percentage of profit, in correspondence with the variations in their buying price or costs.

Industrial Monopolies Compared With Banks

So far, Banks and Industrial Monopolies are on an equality as far as their stability and security are concerned. But the industrial monopolies have this advantage over Banks and Insurance Companies, which rest on Money and depend on the working of the Law of Probabilities to keep them steady, viz., that whereas the Banks and Insurance Companies have no inherent or natural power of drawing away the customers of other banks of equal capital, honesty, or repute, Industrial Monopolies, when complete, have by their very nature the capacity of absorbing the customers of all lesser concerns by the power they have of underselling them in the open market.

Advantages Enjoyed By Industrial Monopolies

There are many reasons why they have this power. In the first place, they all have some differential advantages in their favour which enable them to produce more cheaply than the rest of their competitors in the same line of business. It may be a new invention, a better process or machine, which is sufficient to give them the lead in the trade before the patent runs out; and this lead may afterwards be continued by "goodwill," "trade marks," advertisements, and other extraneous influences. But at the present day, with patent rights so short-lived as they are, this is not sufficient to establish a complete monopoly. There must be some natural advantage in the climate, soil, or water of the region in which the monopoly takes its rise over those of other regions - as is found in the case of certain select brands or descriptions of tobacco, of wine, of ale, or fruit, certain in-dispensables for high-class cutlery or cotton manufacture, the existence of oil wells, diamond mines, and the like.