Importance Of Industrial Status

To begin with, we may say that the Industrial status of a country - the amount of its accumulated wealth and the extent of its wealthproducing power - must ultimately determine its credit and the rate of interest it will have to pay for its loans; and so in the end must dominate all Money Market influences, precisely as does the amount of credit that will be given to an individual; excepting, perhaps, amid the chances of war.

Money Market And Industrial Influences Compared

But for all ordinary purposes of investment for stability and security, Money Market influences prevail over Industrial. But to get a general idea of the degree to which this is so, we must draw a line of division athwart the various stocks, a line which in a rough way will separate those of a public nature from those which are purely private concerns. The former, which comprise Government Stocks, have their fluctuations mainly determined by Politics and the Money Market, as we have already seen, as well as by the activity or otherwise of the dealings in them on the Stock Exchange, into which a large element of speculation must necessarily enter.

Interest On Government Loans Compared With Industrial

But it is precisely the same, it is to be observed, with all Loans and Debentures whatever; for however well secured their Industrial basis may be, their rates of interest take their points of departure from the Government Loans; and if these have to pay a high rate of interest for any reason, the Industrial loans have to pay a still higher - higher, indeed, than would be justified by the actual Industrial element on which they rest, and higher than if they were located in countries whose Government loans could be floated on a lower rate of interest.

Rate Of Interest Higher In Japan Than In England

An Industrial Debenture in Japan, for example, would have to pay a higher rate of interest on precisely the same Industrial security than it would have to pay on the same security if situated in England; and that for no better reason than that the Government Loans of Japan have to pay a higher rate of interest than English Consols. And hence it is that in this margin of difference between the rates of interest on the Government Loans of the two countries, the prudent investor will find an opening to plant his capital in Industrial concerns of equal stability and security, but yielding a higher rate of interest in the one country than in the other.

Stocks Which Are Dependent On Industrial Elements

Practically, we may say that the only stocks where the Industrial factor plays a more important part than the Money Market one, and where the ups and downs of their quotations follow more closely the published returns of the business done than they do the oscillations of the Money Market, are the Ordinary shares of private or Limited Liability Industrial and Commercial concerns; and then only when they are largely left to themselves, and not made the endless subject-matter of speculation by the public on the Stock Exchange.

Stocks Which Are Mostly Dependent On The Money Market

Speaking generally, and in the large, we may say, too, that the stocks of all private companies whose industries have rich potentialities in them, but which are still undeveloped, are more dependent on the Money Market than on their actual Industrial and productive powers for their quotations on the Stock Exchange; whereas all industries that have reached their normal Industrial development will follow the Money Market influences as regards their loans, but (except when Stock Exchange speculation is busy with them) will follow the published yields of their Industrial returns as regards their Ordinary shares.

Foundation Of Permanent Stability Of Government Stocks

From all the foregoing considerations taken together, then, we are obliged to conclude that as the Industrial and productive powers of a country are at bottom the only solid foundation for the permanent stability and security of its stocks, there arc a number of nations in the world where the conditions are such that capital can be invested with equal practical stability and security, but with a greater yield of interest, than either in the stocks of any particular nation, or in the Government Stocks of all nations.

These conditions are found (1) in those nations where, owing to the high rate of interest which,

Security With Higher Yield

The need for a practical scheme of investment from Political or Money Market causes, the Government Loans have to pay, many Corporation and private Industrial Loans of unimpeachable Industrial security are paying rates of interest far and away above those of loans no better secured in other countries; or (2) in the loans of innumerable private Industrial concerns, in all countries, which also are amply secured, but which change hands seldom, and are little quoted in Stock Exchange reports; or (3) in the loans of private or Corporation concerns in countries of great potential wealth, like Brazil or Argentina, still largely undeveloped, and where rates of interest, owing to the actual scarcity of money, are unusually high; or (4) in the loans, whether Corporation, Railway, or Industrial, of any country where law and order and the enforced payment of debts prevail; where the capital at the back of a loan is not largely "goodwill," but tangible property which in the event of a break-up of the business will in a forced sale repay both the capital and interest of the loan; and where solid business, and not Stock Exchange speculation, is the main basis for the fluctuations of its rise or fall. But all these principles require a definite practical scheme in which to give them a setting; and it is to a scheme of this kind that I would invite the reader's attention in the next chapter.