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LIBRARY
OF THK
UNIVERSITY OF CALIFORNIA.
Received.... ..|IOV-18.1891-, 18 ..
Accessions No.
Z. ,
STOCK EXCHANGE SECURITIES.
STOCK EXCHANGE SECURITIES:
ON THE GENERAL CAUSES OF FLUCTUATIONS
IN THEIE PRICE.
BY
ROBERT GIFFEN.
LONDON:
GEORGE BELL AND SONS, YORK STREET,
COVENT GARDEN.
1877.
0/9
LONDON:
PRINTED BY JOHN STHANGEWATS,
Castle St. Leicester Sq.
ADVERTISEMENT.
THE origin of the following notes and observa-
tions is a very simple one. For eight years,
between 1868 and 1876, the writer was connected
as editor and contributor with important financial
journals, and in that capacity came much in
contact with the opinions of those concerned,
whether as speculators, investors, or dealers, on
the causes of change in the price of securities,
principally securities of the Stock Exchange. He
could not but be struck with the continual
reference to general causes of change which those
most familiar with the facts were constantly
making, while it was his duty to reflect on the
matter, and supply the public daily and weekly
with his own explanations of the phenomena.
VI ADVERTISEMENT.
This reflection has since been continued amidst
other avocations, and the result is the present
attempt to systematize a little the observations
of years.
The nature of interest-bearing securities and
the laws of the changes in their price, are
subjects which seem likely to increase in
importance, both practically and theoretically.
The writer's object will be gained if he assists
in any way those concerned with securities, in
accounting for the phenomena of their changes
of price, and if he attracts the attention of
political economists to what he believes will be
practically a new field of inquiry and discussion.
K. GIFFEN.
44 PEMBROKE ROAD, KENSINGTON ;
June, 1877.
CONTENTS.
CHAPTEK I.
PAGE
INTRODUCTORY 1
CHAPTER II.
THE CONNEXION BETWEEN PRICES AND THE QUANTITY
OF MONEY . . . . .7
CHAPTER III
THE CAUSES OF VALUE IN SECURITIES, IN RELATION
TO COMMODITIES . 14
CHAPTER IV.
THE EFFECTS OF CHANGES IN THE AMOUNT OF MONEY
AND STATE OF CREDIT IN THE PRICE OF SECURI-
TIES, AND THE NATURAL LIMITS OF SUCH EFFECTS . 27
CHAPTER V.
THE INFLUENCE OF THE STOCK EXCHANGE 37
Vlll CONTENTS.
CHAPTER VI.
PAQF
ON SYNDICATES, RIGS, AND CORNERS . . 44
CHAPTER VII.
ON FICTITIOUS SECURITIES . . . .61
CHAPTER VIII.
THE MANNER OF STOCK EXCHANGE FLUCTUATIONS-<-
PANICS 70
CHAPTER IX.
THE DIFFERENCE OF THE PRICE OF SECURITIES,
INTER SE . . . . . .84
CHAPTER X.
THE CYCLE OF PRICES IN SECURITIES . . .102
CHAPTER XL
ILLUSTRATIONS I HAVE SECURITIES RISEN OR FALLEN
IN RECENT YEARS ? . .123
CHAPTER XII.
SUMMARY AND CONCLUSIONS . . . .144
STOCK EXCHANGE SECURITIES.
CHAPTER I.
INTRODUCTORY.
THERE is a great deal in theoretical books of
Political Economy on the general question of
supply and demand as regulators of price, and
what is meant by the tendency or alleged ten-
dency of the one to equal the other. In the
following pages I propose as much as possible to
keep clear of this discussion, which tends to
degenerate into a mere logomachy. There is no
doubt that in most markets, and as regards most
articles within very wide limits, an excess of
demand over the supply at a given price will
raise the price, and an excess of supply will lower
it. As regards articles also which are capable of
being produced in variable quantities, a high price
will bring out an increase of supply, and a low
price will check it. For some purposes it appears
B
2 STOCK EXCHANGE SECURITIES :
unnecessary to define the meaning of supply
and demand more exactly ; and the questions
regarding price, and supply and demand as con-
nected with price, which seem most to require
discussion, relate to the nature of the influences
which govern the motives of individuals in
supplying and demanding particular articles or
groups of articles, and so make it possible to
trace a certain order in the variations of the
prices of such articles.
That there is such an order in regard to one
large group of articles what are known as
securities of the Stock Exchange it will be a
principal object of this Essay to show. An attempt
will also be made to give some account of what
this order is, and to demonstrate the necessary
relations between the prices of this group and
the prices of other articles, including the hire
of money.
It will be convenient to explain at the outset
what is meant by securities of the Stock Ex-
change. The word ' security ' is a very general
one. In the language of the money market, it
means the title of almost any kind of property
which can be given as ' security ' for a loan. A
bill of exchange, a dock- warrant, the titles of
INTRODUCTORY. 3
land or houses, mortgage deeds, may all be made
use of, and are made use of, as securities for
money lent. But the securities quoted on the
Stock Exchange have certain peculiarities which
are not the property of everything which may
be a security for money. Their characteristic
seems to be the combination of interest-bearing
power, either actual, probable, or only potential
and contingent, with the division of the article
dealt in into equal parts, so as to be capable of
exact definition and of being submitted to the
speculative manipulation of a great market. It
is obvious that other securities possess one or
more of these features. Lands and houses, mort-
gages, bills of exchange, shares in private part-
nerships, capital employed by individuals singly
in business, have an interest-bearing power of
the same nature as the shares of joint-stock com-
panies, or the debts of states, which are dealt
in on the Stock Exchange. There are also
articles capable of easy definition but without
interest-bearing power, such as gold, corn, cotton,
copper, pig-iron of certain brands, coffee, and
probably others, which are all susceptible of being
manipulated in a great market where there are
crowds of .dealers of various descriptions. But
4 STOCK EXCHANGE SECURITIES :
the combination of interest -bearing power with
the facility of being handled like gold or cotton
makes a Stock Exchange article a thing sui
generis, whose fluctuations in price will conform
to an order of their own which can be traced,
although in doing so it will of course be necessary
to bring out much that is common to them
with other articles.
These definitions appear also to involve by
implication what the nature of the inquiry must
be. In distinguishing a great group of articles,
and inquiring as to the laws of their price, what
we really inquire into is not merely the nominal
money price of the articles, but the relation of
their price to that of all others which are the
subject of exchange, as well as the money which
is the medium of the exchange. We must not
think in such matters exclusively of the money
price. What goes on at every exchange is that
people sell corn, cotton, or other articles for
money only in the first instance ; the whole
object of the sale is to enable them to purchase
something else, and if purchases as a rule did
not balance sales, apart from money, the whole
machinery of business would come to a dead
stop. If actual cash passed for all the articles
INTRODUCTORY. 5
sold in a country on a given day, it would not
take many days for the whole cash of the country
to be in the hands of a few sellers, so that the
rest of the people would have no money to work
with. The exchange for money, therefore, only
covers a real exchange which is always going on
between the articles which the money from time
to time represents. What we may call the
ultimate transactions in money, that is, transac-
tions in which money in its narrowest sense is
actually acquired and kept in the form of coin
or bullion, are comparatively few, although such
transactions are, no doubt, specially important
in al] questions of price.
The great groups of articles for which Stock
Exchange articles are exchangeable may also be
simply described. Particular securities must
either be sold for other securities of the Stock
Exchange ; or in exchange for interest-bearing
securities which are not quoted on the Stock
Exchange ; or in exchange for other articles,
that is, for consumable commodities generally,
using the latter word in its widest sense, so as
to include such articles as diamonds and valuable
pictures which seem little destructible, and also
certain articles like corn, cotton, or gold, which
6 STOCK EXCHANGE SECURITIES.
are capable of being manipulated in a speculative
market, but have not the property of bearing
interest.
What are the laws of price then which affect
the special article we have defined ?
CHAPTER II.
THE CONNEXION BETWEEN PRICES AND THE
QUANTITY OF MONEY.
IT is laid down by writers on political economy
and currency, though the practical application of
the rule must be attended with difficulties, that
the quantity of money in a country regulates the
aggregate price of all articles. A hundred thou-
sand pounds of gold will theoretically serve for
the exchanges of a country as well as a million
or ten million pounds. The nominal prices will
be different, but the smaller nominal sum in one
case will be as effective as the larger nominal
sum in the other. The rule is correct of course
only within certain conditions. To give it
validity, it must be assumed that a scarcity of
money produces no expedients for economising
money, and that an abundance of money does
not lead to want of economy, which can hardly
ever be the actual conditions of life. It must
8 THE QUANTITY OF MONEY AND PRICES.
also be assumed that the quantity of commodities
to be exchanged remains constantly the same,
that the motive power of money is equal at all
times, and that exchanges are effected at an
unvarying rate of frequency, though in point of
fact as we shall see the greatest changes in these
respects are constantly taking place. But allow-
ing all the conditions in which the rule applies
to be fulfilled, we should still have to reckon as
causes of change of prices generally the varia-
tions in the quantity of money in a country. An
addition to the circulation raises all prices, a
deduction from it lowers them. But this change
is only nominal ; the real prices are all the while
unchanged. The same quantity of labour ex-
changes for the same quantity of corn that it did
before, or the same quantity of corn exchanges
for the same Stock Exchange security, and matters
are equalised. As we have said, it is most dif-
ficult to show this rule, because the economies
of money, the quantities of commodities, and
credit, are daily changing things, but the theory
in the abstract is a mere mathematical expression,
and can hardly be disputed.
It follows then the quantity of money in a
country and its effectiveness and the quantity of
THE QUANTITY OF MONEY AND PRICES. 9
commodities for exchange remaining unaltered
that if there is a general fall in money price
in one group of articles, this means a rise in
money price in all the other groups. And a
general rise in one group means an average fall
in all the others. If this were not so, a certain
part of the money in the country would in the
one case be thrown out of circulation, which is
contrary to the hypothesis, or a certain quantity
of money would be added, which is also opposed
to the hypothesis.
And such changes of money price would on
the hypothesis also correspond to real changes in
the relation between two groups 'of articles. Say
it is a fall in the money price of securities ; this
would mean that securities command a smaller
quantity of other articles than they did before.
On the other hand, a rise in the money price of
securities would mean a greater command over
other articles given to the holder of securities.
The difference would also count both ways. In
the first case supposed, that of a fall in securities,
there must be, on the assumption made, a rise in
the money price of other articles as well ; in the
second case there is not only a rise in securities,
but a fall in the money price of other articles.
10 THE QUANTITY OF MONEY AND PRICES.
The real changes in the relations of the two
groups of articles are not measured merely by
the change in the money price of one, but by
the sum of the opposite changes in the money
price of the two.
Of course it is quite- obvious that in the real
world the hypothetical change in the relations
of two groups of articles here described can
hardly ever be traced. As already mentioned,
neither does the quantity of articles to be ex-
changed, nor the amount of money in circulation,
nor the state of credit on which depends the
effectiveness of money, ever remain for two days
the same. The rule, however, must be laid down
as descriptive of a condition underlying the phe-
nomena of the markets, and which will always
be more or less operative.
Several corollaries from this principle are
likely to be of practical importance. A change
in any one of the conditions stated will have a
great influence both on the aggregate price of
securities and other articles which we may shortly
term commodities, and on the relations of the two
groups to each other. Thus an increase of the
quantity of consumable commodities or of secu-
rities will have the same effect on the markets
THE QUANTITY OF MONEY AND PRICES. 1 1
as a diminution of the quantity of money in,
circulation, unless there are simultaneous changes
in the state of credit, or economies in the use
of money, making the existing quantity more
effective ; such an increase of the goods offering
for exchange must alter the money level of price.
It is possible that the alteration will at first be
confined almost exclusively to the group of
articles which is increased. The whole fall in
the average level of price will be due to a
special fall in the group, which will alter its
relation to the other groups .very materially.
But this does not follow necessarily, and it does
not follow that permanently the change will be
confined to the group in which the increase of
quantity takes place. All that can be affirmed
as mathematically certain on the hypothesis
assumed is, that an increase of securities or com-
modities, like a diminution in the quantity of
money, will cause a general fall of prices ; and a
diminution of articles, like an addition to the
quantity of money, a general rise.
In the same way a variation in the frequency
of exchanges at different times will have an
effect on prices which need not be particularly
explained. More frequent exchanges, unless
12 THE QUANTITY OF MONEY AND PRICES.
other circumstances interfere, will require more
money to maintain the former level of price,
and less frequent exchanges will require less
money.
It is another corollary of the principle that if
there are natural limits to the quantities of com-
modities or securities which can be produced,
and limits also to the changes in the amount
arid effectiveness of money, and the frequency or
infrequency of exchanges, then there will also
be natural limits to the rises or falls in prices
which are possible. An indefinite general rise or
an indefinite general fall will be an impossibility.
As the natural limits on either side are ap-
proached, a movement of price which may have
seemed uncontrollable will be checked. Whether
there are such limits or not, and what they are,
will be one of our inquiries. It will also follow
from these principles, that any great change in
the price of a particular kind of commodity or
species of security implies a disturbance of rela-
tions among securities and commodities in general ;
and this circumstance, according to the known
qualities of human nature, will itself contribute
to make it unlikely that the change will be of a
permanent kind, unless there is some substantial
THE QUANTITY OF MONEY AND PRICES. 13
change in the motives for the purchase or sale of
the article. There must always be continual
changes in the estimation in which particular
articles are being held by mankind, but the
presumption is against violent changes being
enduring.
Another point of practical importance to
attend to in consequence of the rule laid down
will be, that in looking at a general rise or fall
in prices, due to a change in the quantities of
articles or money, or in the effectiveness of money,
we must never overlook the nature of the real
changes which this general rise or fall may con-
ceal. Unless everything rises or falls proportion-
ately in its money price, there will be an incessant
real change in the relations of all articles to each
other. If securities fall more than commodities,
this will mean a general rise in commodities ; and
if commodities fall most, this will mean a real
rise in securities. If most commodities and most
securities fall, this may mean an important real
rise in the exchangeable value of those which
remain stationary. It is unnecessary, however,
to follow out in detail the points to be thus
attended to in consequence of the differences
between real price and money price.
CHAPTER III.
THE CAUSES OF VALUE IN SECURITIES, IN
RELATION TO COMMODITIES.
HAVING described in the previous chapter
the abstract theory of the price of securities, and
the meaning of a rise or fall, we have now to
inquire as to the conditions under which the
theory practically operates, and what are the
main causes of a general rise or fall in price to
be attended to.
We begin with the most general causes which
can affect the value of securities. In a com-
munity where there is an economic equilibrium,
where production and consumption balance each
other, where the investment of fixed capital pro-
ceeds pari passu with the increase of population,
and where the quantity of money in circulation
increases only in proportion to the business done,
it is quite clear that an adjustment of some sort
will have been effected between the price of
THE CAUSES OF VALUE IN SECURITIES. 15
securities and that of other commodities. Apart
from the changes due to the varying state of
credit and other transitory causes, a community
in such a state will insensibly have settled down
into the acceptance of certain notions which will
fix the relative desirability of certain articles and
their relations one to the other through the
mechanism of exchange. For our present purpose
this means that a certain average rate of interest
on capital will be accepted, and this will govern
the price of securities by which the yield on the
capital invested in them to the actual holders of
that capital is regulated. If the yield is judged
so low by holders of securities that the former
rate of saving is checked, or if it is judged so
high by the owners of consumable commodities, or
the labourers and capitalists who can create them,
that there is a constant bounty on the further
saving and investment of capital, so far there
will be no equilibrium, but conditions will exist
which will cause changes in the relative prices of
both securities and commodities.
It is, perhaps, hardly necessary to inquire
what are the causes which determine a community
at a given period to accept a certain average
yield on its capital. It is quite clear that in
16 THE CAUSES OF VALUE IN SECURITIES.
this respect there is a constant play of opposite
motives. A high average yield on capital is a
bounty on saving, and a low yield will to a
certain extent check saving. Whether it is true,
as some hold, that there is in modern communities
as actually constituted, a tendency of profits to
a minimum which would be a tendency to an
almost indefinite rise in the price of securities,
it is, perhaps, almost unnecessary for the present
to discuss. All we point out now is, that this
quality of interest-bearing will be valued in a
certain way in a community in equilibrium, and
that this is what is meant by the price of the
securities of that community.
We must notice, however, that this quality
of interest-bearing is necessarily not the only
cause of variation in price amongst securities
themselves, and that the rate of yield is not
everything, even as regards the relation of
securities to other commodities. As all know,
the prices of securities relatively to each other
vary much, and they are likely, as human nature
is constituted, to vary much. Some are in larger
bulk, and for that or for other reasons are more
marketable. The yield of some is better secured,
or thought to be better secured, than others.
THE CAUSES OF VALUE IN SECURITIES. 17
40
These are all causes for indefinite variations in
the prices of individual securities. To a certain
extent also the qualities of the securities which
a community possessevS will affect the rate of yield
at which the price will be adjusted. If a com*
m unity is itself unstable, and capital more or
less insecure, the adjustment will probably be
made at a higher rate of yield than if the com-
munity were stable and capital well protected.
The bounty on saving and investment will
require to be stronger in one case than in
the other, and at a point it may cease to
operate.
It is also noticeable that there will probably
be a certain relation between the current rate of
yield on fixed investments and the rate for money
lent, principally the rate of discount on bills of
exchange and the rates for short loans. In both
cases the object aimed at is a certain yield for
capital, and it makes no substantial difference
that this is effected in the one case by the pur-
chase of a title to property, and in the other by
a loan , which is to be repaid. In buying, an
investor or capitalist provides or ought to provide
a sinking fund against depreciation, in case he
should have to sell at a capital loss; and in lending,
c
18 THE CAUSES OF VALUE IN SECURITIES.
he also insures in various ways against a loss of
capital ; the provision for the sinking fund or
insurance in both cases affecting the net yield.
What the exact relation will be between the
yield on fixed investments and that on floating
capital or money lent will depend on many cir-
cumstances on the amount of money which it
may be the custom to keep floating, for instance
but a relation of some sort must exist, which
will teiid to be re-established if it is disturbed
from any cause.
The nature of this relation can, however, only
be perceived when long periods of time are taken
into account. It must not be supposed that every
sudden change in the hire of money in the short
loan market will be accompanied by corresponding
changes in the price of securities. There is a close
connexion indeed between the short loan market
and the speculation in securities. The funds of
the short loan market are employed partly in
holding securities, and where these funds are
diminished or increased from any cause, however
temporary, there is an immediate effect on the
price of some securities. But the great mass of
securities will only be affected by more permanent
changes in the rates obtainable for money in other
THE CAUSES OF VALUE IN SECURITIES. 1 9
markets, and it is of this more permanent relation
we have here been speaking.
Applying these rules to the most general
causes of the disturbance of economic equilibrium <
in a community as far as securities are concerned, i
viz., the increase of consumable commodities on
the one hand, and the increase of securities on
the other, we have to affirm that an increase of
consumable commodities, where the rate of yield
on capital is not at the minimum, will lead to a
real rise in the price of securities, i.e., to a
fall in the yield. That such an increase will
cause a money fall in all articles on the average
(the amount of money and its effectiveness being
unchanged), has already been noticed ; but it
would also seem certain that ordinarily it will
cause the greatest fall in the kind of articles
increased, i.e., consumable commodities. Unless
there is simultaneously a total change in the
estimation of securities as related to commodities,
the increased offer of commodities Avill in fact
mean that the owners are willing to exchange
them for a smaller mass of securities than they
did before. The result will also be a stimulus
to the creation of securities. The desire for
saving arises instantly the profit is made, and
20 THE CAUSES OF VALUE IN SECURITIES.
those who make the saving having either money
or money's worth in their possession, seek an