Class, H^ Q^^ Book- '^^^ - Copyrigtit Vi" COFffilGHT DEPOSIT. A Century of Prices An Examination of Economic and Financial Conditions as Reflected in Prices, Money Rates, etc., During the Past 1 00 Years, With a View to E tablishing General Principles Which Mav Aid in Interpreting the Present and Future. By Ex Senator THEODORE E. BURTON, Chairman Board of Directors Merchants National Bank of New YorJc, Author of "Crises and Depressions," etc.; And Ci. G. SELDEN, Managing Editor of "The Magazine of Wall Street," Author of '"The Machinery of Wall Street," etc. The MAGAZINE OF WALL STREET 42 BROADWAY NEW YORK i.: lU'.. Copyright, 1919 By The Magazine of Wall Street St? \^^^ INTEODUCTORY NOTE 'T^ HE chapters and graphs comprised in -■■ this book first appeared in The Maga- zine of Wall Street and were widely commented upon not only for their unnsual originality but for the practical bearing of the principles developed upon the actual work of the business man or investor. History tells what happened, but these graphs, with the keen analyses which ac- company them, show why it happened, and explain the great controlling principles of business and finance in the straightforward fashion of one business man talking to an- other. The authors require no introduction to the American reading public. Ex-Senator A CENTUEY OF PRICES Burton is one of the world's leading author- ities on prices and their relation to econ- omic and financial conditions, and G. C. Selden is internationally known for his keen and thorough analyses of the effects of economic factors on business and invest- ments. The Magazine of Wall Steeet August, 1919 CONTENTS Chaptee I. PRICES AS AN INDEX OF ECONOMIC AND INVESTMENT CONDITIONS Why the study of statistics is called ''dry" — The value of the graphic method of presentation — Interpretation of econ- omic and financial conditions in the light of the past — Importance of prices — Mean- ing of the money rate — Why the commercial paper rate is used — The averaging of prices — Relation hetween hond yields and bond prices — The stock average — What is meant by a ''weighted" average of com- modity prices — The method of interpreta- tion — The permanency of general princi- ples — Inter-relations among the different A CENTUHY OF PRICES factors — The influence of wars — The gen- eral purpose of these chapters. Chaptee II. GREAT ECONOMIC FORCES SINCE 1790 American conditions alone inadequate for a broad view — Why English prices are chosen — ^English commodity prices since 1782— Prices as a relationship — The '* psy- chology" of prices — Pronounced effects of wars on commodity prices — Effect of cheaper production — The supply of money — Gold production — ^World's stocks of gold — ^Increased use of credit — Minor changes in commodity prices now less violent than formerly — ^The supply of capital — Prices and yields of British consols — The two main elements in their price level— Growth in the supply of capital — The **flow" of capital — Effect of the accumulation of liquid capital — ^How more money and 6 A CENTURY OF PRICES credit raise commodity prices — Why bond yields rise and fall with commodity prices — Real income versus money income — Post war price movements — Practical con- clusions. Chapter m. WHAT AMERICAN COMMODITY PRICES SHOW Causes of war prices — Effect of currency inflation in the Civil War — Comparison be- tween the World War and the Civil War — Elements in Civil War currency prices — Difference between depreciated and ex- panded currency — Differing relations with European price level — Commodity prices and our export trade — International ad- justment of price levels — How our export balance depends upon relative price levels — Effect of large exports in stimulating general trade — Pronounced influence of A CENTURY OF PRICES gold imports — The ** major cycle" — ^Inter- balances — Wheat and cotton. Chaptee IV. CAUSES OF CHANGES IN INTEREST YIELDS AND MONEY RATES Relation between demand and supply of capital — Capital is the product of labor — Factors in the supply of capital — Rapidity of circulation of capital— Capital classified according to rapidity of circulation — ^Im- portance of distinguishing between fixed and circulating capital — Rise and fall of bond yields — Why higher commodity prices increase the demand for capital — Diversion of capital into fixed forms — The disposition to save — Money rates — Connection with bond yields — Causes of high rates — How over-extended bank loans arise — Scarcity of credit down to 1874 — 8 A CENTURY OF PRICES High rates of panic years — Is ** tight money" a thing of the past? Chapter V. PRINCIPLES OF STOCK PRICES By G. C. Selden Relations with factors previously dis- cussed — Rising commodities benefit indus- trials — ^How stockholders sometimes profit at the expense of bondholders — Panics af- fect all securities — The ** minor cycle" — Various explanations offered for recurrent declines — The fundamental cause — Action and reaction — Strong and weak buyers — Speculation in trade channels — Mutual in- fluence of stocks and business conditions — Features of the minor cycle — Stocks and the money rate — Bull markets are based on surplus funds — How stocks forecast business conditions. 9 Chapter I. PRICES AS AN INDEX OF ECONOMIC AND INVESTMENT CONDITIONS np HE study of statistics is commonly ■"■ accounted * * dry." Yet it is dry only be- cause dryly presented or imperfectly under- stood. When statistics over a period of years are made quickly intelligible to the eye by graphic charts and diagrams, and when the great vital and controlling in- fluences which cause the rise and fall of these pictured lines are understood and visualized, the subject becomes more fascin- ating to the business man than the most ** gripping" novel of adventure. In these chapters our effort is to present the sub- ject in this intelligible and practical way, 11 A CENTURY OF PRICES as business men talking to business men, and an elaborate series of graphs has been prepared for the purpose. The great practical importance of inter- preting present and future economic and financial conditions in the light of the past can hardly be over-estimated. In this field it is most emphatically true that coming events cast their shadows before. The prime difficulty in the past has been the lack of adequate records, over a sufficiently long period, of prices and other economic and in- dustrial statistics. That difficulty, however, is being gradually overcome. The com- pleteness and accuracy of current statistics are improving year by year as their im- portance comes to be more generally recog- nized; while the painstaking researches of students have shed much additional light on the price levels of the past and their causes. The graphs which accompany 12 A CENTURY OF PRICES these chapters not only bring together in a convenient form the laborious researches of others, but they contain additional mat- ter, which is the result of the patient delv- ing of the statisticians who have assisted us in this work. Comparative statistics of this character afford a means of determining the trend of events. Rightly interpreted, they give a warning of coming changes which is of the highest significance.* * In this coimection it may not be amiss to mention Senator Burton's confident prediction, in an address before the American Investment Bankers' Association at Denver, in September, 1915, that a period of higher money rates and scarcity of capital was approaching — a prediction that was naturally unwelcome, but proved strikingly correct; or Mr. Selden's forecast, in an article published in November, 1916, that the then rising trend of bond prices would culminate early In 1917 and that a considerable decline would follow — also opposed to the views of many bond men at that time, but remarkably fulfilled in the outcome. These instances are mentioned to show that studies of this character, by some dubbed "theoretical," are not with- out a very direct and definite value. 13 A CENTURY OF PRICES IMPORTANCE OF PRICES In viewing economic and investment con- ditions broadly over considerable periods, prices (including the interest rate — the price of capital) are perhaps more impor- tant, and certainly more all-inclusive, than any other class of statistics. Money rates, for example, are the result of a country-wide and, under normal con- ditions, a world-wide demand and supply of capital. Nearly every enterprise is a borrower. Every bank, and many other in- stitutions and individuals, are lenders. Every investor controls some fraction of the available supply of capital. Even the small accumulations of savings bank de- positors indirectly reach and affect the money market. A general fall in the profits of business men is immediately reflected in their necessity for increasing their loans, while a rise in their profits soon brings an 14 A CENTURY OF PRICES increase in bank deposits and thus larger offerings of liquid capital and easier money rates. In short, the movements of money rates, when properly understood, afford a sort of combined index to the whole industrial and investment situation, and similar principles apply to the other factors here discussed. It is important to distinguish between the short term money rate, the longer term rate and the price of investment capital as shown by the average income yield on high- grade bonds. The rate for call money, which is dependent on the immediate sup- ply from day to day, is not broadly indica- tive of fundamental money market condi- tions; and to some extent the same is true of time money. The money rate used in the graph covering that field which ac- companies a succeeding chapter, is the rate for prime commercial paper, usually of 15 A CENTURY OF PRICES about six months' maturity. This term is long enough to afford considerable stability to the rate, and this form of credit is also most closely connected with industrial con- ditions. Moreover, it is possible to compile this rate more accurately and from an earlier date than in the case of call or time money. AVERAGE PRICES In dealing with bonds, stocks, and com- modities the only way to get a general view is to average the prices of a large number. The price of any one bond, stock, or com- modity is likely to be influenced by special causes peculiar to itself. But by averaging a score of the principal bonds or stocks, or a hundred commodities, these minor or ex- ceptional variations are for the most part eliminated, so that the movements of the resulting averages reflect general condi- tions. 16 A CENTURY OF PRICES In the case of bonds, the computation of such an average is embarrassed by the fact that every bond has a date of maturity, when it will be redeemed at par value. Therefore a bond selling at a discount gradually rises to par, while a bond at a premium gradually falls to par, regardless of the demand and supply of capital. So it is necessary to average, not the price of bonds, but their yields to maturity as ob- tained from the bond tables (or from the tables arranged in graph form, which are more convenient for most purposes). This average of bond yields is, in a broad way, the reciprocal of bond prices ; that is, its general movements are exactly opposite to those of bond prices, since the higher the price the lower the yield. A graph showing this average of bond yields over a long period is really illumi- nating, when taken in connection with 17 A CENTUEY OF PRICES similar graphs showing other important economic factors for corresponding times. Since stocks have no date of maturity, a simple average of the prices of 20 to 50 different issues serves to compare the gen- eral level of the market from year to year or month to month. A similar method is followed in compar- ing the relative planes of commodity prices at different times. One widely used aver- age represents the total of the wholesale prices of 96 different important commodi- ties on the first day of each month — ^the average of the twelve months being taken as the average for the year. Another method is to ^^ weight" the prices of the various commodities as nearly as may be in proportion to the different quan- tities of them that enter into consumption. While there is no startling difference be- tween the general movements of a weighted 18 A CENTURY OF PRICES and an unweighted average, the preference should be given to the weighted average as more scientifically compiled, and that form is used in our graph of American commod- ity prices since 1850. METHOD OF INTERPRETATION In general, the method of interpreting price movements must be historical. It is clear that the same causes would produce the same effects upon prices in the future as in the past. Exactly the same conditions will never be repeated, but the effect of each cause taken separately will neverthe- less be the same. Moreover, there is a striking similarity in the sets of conditions which are repeated at different times. The man whom in our childhood we were taught to call the wisest that ever lived, said that there is nothing new under the sun, and as regards princi- ples his statement can still hardly be ques- 19 A CENTURY OF PRICES tioned. The aeroplane is new, but its princ- iples date back to the later carboniferous period, when enormous bats and reptiles swarmed the air. The wireless is new, but only because we have just discovered the principle on which it is based. And the student of economic history, as he watches the interplay of forces which made the prices of the past, is much more surprised at the correspondences he discovers than at the differences. Highly interesting, too, are the inter- relations among the various graphs pre- sented. We ^all find that, within limits, each sheds light on all the others. And this fact is most important in enabling the ob- server to weave the whole into a well-in- formed and balanced view of the broad economic and financial situation. The historical value of these statistics, also, should not be entirely ignored. To the 20 A CENTUEY OF PRICES reader who is of an observant and interpret- ing turn of mind, they give a better com- prehension of the actual business condi- tions of the past than could be obtained by many hours of wading through the prosaic recitation of isolated facts and events. When we see, for example, the extraordi- nary and what would today be called pro- hibitive rates which the business man often had to pay for money in the '40s, '50s and '60s, we get a new and clearer comprehen- sion of the industrial conditions of those times. Among the influences which cause great and lasting changes we shall find that wars have an outstanding importance. This is because nothing else subverts conditions so widely or so radically. We have only to compare the Germany of today with the Germany of 1914 to see how far these changes may go ; and although America has 21 A CENTURY OF PRICES not undergone any such vital or funda- mental disorganization, yet she has experi- enced a transformation far greater than any other in her history except the Civil War. It is highly important to the banker, busi- ness man and investor to appreciate the character of that transformation and its bearing upon our future. It is perhaps unnecessary to add that these chapters deal with broad tendencies and general principles. A minute exami- nation of minor fluctuations and of the iso- lated historical events which caused them would be of little service to the business man, however interesting it might be to the student of history. We shall endeavor to dwell for the most part upon those fac- tors which can be of practical help in the interpretation of the present and the future. 22 CHAPTER II. GREAT ECONOMIC FORCES SINCE 1790 I T is desirable first to view the op- eration of economic and financial forces in as broad a perspective as possible. In that way a better grasp of principles is obtained. For this broad view the records of Amer- ican conditions alone are inadequate. The United States before the Civil War was a new, detached, undeveloped nation. Its banking system was crude. Its supply of capital was trifling compared with its natural resources. Because of its great area, the imperfect means of communica- tion and transportation then existing were entirely insufficient to weld it into an eco- 23 A CENTURY OF PRICES nomic whole. And the business records of that time are fragmentary and incomplete. England was the nation that, in the first half of the last century, had reached the highest industrial and financial develop- ment; and owing to her position as the world market for capital, a position which remained entirely secure until interfered with by the great war, her economic records are more representative of world business than any others available. The two graphs showing the ** Level of English Commodity Prices" since 1782 and the prices and yields of '* British Consols" since 1790, reflect in condensed form Eng- lish money market, investment and business conditions for a century and a quarter. COMMODITY PRICES Taking up first the level of commodity prices, the primary fact must be recalled that a price represents not an absolute or 24 A CENTUEY OF PRICES independent figure but a relationship — ^the relation of the value of the article priced to the value of gold or of whatever may be the standard money of the time. Prices must therefore be viewed from two angles: The value of money on one side, and the value of goods or commodities on the other side. The idea of the money- value of goods is familiar ; but its less fami- liar reciprocal, the goods-value of money, is equally significant. Commodity prices, therefore may rise because commodities become worth more or because money becomes worth less ; and they may fall because goods can be pro- duced or manufactured more cheaply, or because money is growing scarcer in com- parison with the work it has to do, and is therefore becoming more valuable because it is in relatively small supply. Both these factors are in constant opera - 25 A CENTURY OF PRICES tion, sometimes the one being more impor- tant and sometimes the other. So the move- ments of the general level of commodity- prices, like those of a sailboat crossing a river, are always the resultant of two forces acting at the same time. Another influence of some importance as affecting the temporay and minor move- ments of commodity prices is what might be called **the psychology of prices." Buy- ers are more anxious to buy when other buy- ers are also anxious, and the same is true of sellers. So when a buying or selling move- ment is once well started it often carries prices beyond their natural level. Also, certain prices are so firmly established by custom that they are very slow to respond to actual changes in conditions. But these factors are of minor importance in consid- ering the broad price movements of a cen- tury. 26 A CENTURY OF PRICES With these principles in mind, what are the economic and financial changes reflected by the movements of English commodity prices — ^which, it is to be remembered, broadly represent the prices of the whole commercial world? The first point to strike the eye is the very great effect on prices of the Napoleonic Wars, 1793-1815, and the World War, 1914-1918. The highest price level of 1809 was more than 80 per cent, above that of 1789, the year of the French Revolution, and the English price level at the end of 1918 was approximately 125 per cent, above that of July, 1914. In each case (and also in our own Civil War, as will be seen later) high prices were due to a scarcity of prod- ucts resulting from the great diversion of labor power into actual fighting forces and into war work and from the exceptional demands and wastes of war, together with 27 A CENTUEY OF PRICES a big inflation of currency and credit. No such tremendous advances in prices would be possible without more money, or more credit, or more of both. It takes twice as much money or credit to handle a thous- and bushels of wheat at $2 a bushel, as at $1 a bushel, and the same with other com- modities. If a greater supply of money or credit were not provided, the rise of prices resulting from scarcity of goods would sooii cause ** tight money," a condition which would seriously hamper and disturb the all- important war production. In the late war both England and Amer- ica endeavored to check the upward flight of prices by a policy of price-fixing. The re- sults were not wholly satisfactory — ^notably in the cases of coal and wheat — but on the whole the experiment may perhaps be called a success as compared with what might have happened without such a policy. The only 28 A CENTURY OF PRICES policy which could entirely prevent rising prices in time of war would be a govern- ment control so complete as to amount to the theoretical socialistic state. It will be noted that smaller wars, as the Crimean War and the American Civil War (comparatively small so far as the effects on the world at large were concerned), had a similar though less important effect on prices, and that a small price-boom fol- lowed the Franco-Prussian War. In every case a decline from high war prices soon followed, but the extent and severity of the decline depended on numer- ous other conditions then entering the situ- ation. EFFECT OF CHEAPER PRODUCTION The next point to be noted is that down to 1896 the broad tendency of prices had been downward for 87 years, although this tendency had been interrupted by numer- 29 A CENTURY OF PRICES ous sharp rallies and by advances which, although of great significance at the time, eventually proved to have been temporary. If we take 1820 and 1900 as average years, not much affected by wars and represent- ing neither the highest nor the lowest prices of those times, we note a decline from about 180 to 100, or about 45 per cent, of the high- er figure. The principal cause of this decline was the cheapening of production through im- provements in machinery and in transpor- tation. The machine-made shoe is cheaper than the hand-made shoe because less hu- man labor is necessary to make it. Wheat raised by the aid of the tractor, the harves- ter and the threshing machine, and moved to market over the railroad, is cheaper than wheat sown and reaped by hand or by hand tools and hauled by horses over rough or muddy roads. And this transformation has 30 A CENTUEY OF PRICES extended throughout all industry. But why, it will be asked, in view of this continuously cheaper production, did prices rise from 1850 to 1873, nearly a quarter of a century, and from 1896 to 1914, when large-scale production was reaching its highest development? It is true that both 1850 and 1896 were periods of relative trade depression; but that fact alone does not answer the question. A more comprehen- sive reason must be sought. The answer lies at the other end of the price-relationship — the supply of money. For although the supply of goods may be increasing, if the supply of money increases still faster, prices must soon rise. In 1850 the worlds production of gold was approximately $40,000,000 annually. Through discoveries in California and in Australia, it rose to about $150,000,000 in 1853, fell to $91,000,000 in 1874, and did not 31 A CENTURY OF PRICES again rise above the high point of the '50s until about 1893, when discoveries in the Klondyke and improved methods of mining resulted in another great increase, until $466,000,000 was reached in 1912. Since that date production has been compara- tively stationary. A better view, however, is obtained by considering the world's stock of gold on hand, since but little gold is consumed, in the ordinary sense of that word. This stock is estimated to have been about $2,- 200,000,000 in 1850; to have risen with rea- sonable regularity to about $6,000,000,000 in 1896, and thereafter at a more rapid rate to perhaps $11,000,000,000 in 1916. In addition to this increase in the supply of gold, there has been a constant increase in the amount of credit based upon each dol- lar of gold, and credit serves the same pur- pose as money in the transaction of busi- 32 A CENTURY OF PRICES ness. In the United States, more than 95 per cent, of all payments are made by bank checks, which are a form of credit. We conclude, therefore, that from 1850 to 1873 the increase in the supply of money and credit was, broadly speaking, more rapid than the increase in the supply of commodities through cheaper methods of production, so that prices rose (aided somewhat by three wars) ; that from 1873 to 1896 the increased production of com- modities got the upper hand, causing a gen- eral decline in prices; while after 1896 a further great increase in gold production and in the use of instruments of credit turned the scale and brought higher com- modity prices. The reasons for many of the minor changes in the level of prices are shown upon the graph. It is noticeable that these minor changes have become less violent 83 A CENTURY OF PRICES with the passage of time, a highly desirable development. If some plan could be in- vented to keep the general level of com- modity prices stationary it would be an al- most inestimable boon, but apparently such a plan would have to be world-wide in its application. Several ingenious methods have been suggested, but they seem to re- quire a much higher plane of world-organi- zation than has yet been attained. THE SUPPLY OF CAPITAL The best index to the relative supply of capital over such a long period as is here considered, is to be found in the yield on the British consolidated debt. Consols have no date of maturity and have a longer con- tinuous record than any other security. Both prices and yields (the latter inverted) are shown on the graph for completeness, as the rate of interest has twice been re- duced. 34 A CENTURY OF PRICES There are, of course, two main elements in these prices — the credit of the British nation, and the relation between the de- mand and supply of capital for investment. From 1816 to 1914 British credit stood so high that changes in the yield on consols were due almost entirely to variations in the demand and supply of capital ; but the Napoleonic Warsi and the World War of 1914 caused such a vast increase in the British debt that national credit was some- what affected, and consols fell for that rea- son as well as because of the rapid dissipa- tion of capital in war. But there can be no question that the main cause of changes in the price of consols lies in the relative sup- ply of capital in comparison with demand. We have already noted that the broad downward trend in commodity prices until 1896 was due chiefly to the increase in the productive capacity of labor through im- 35 A CENTUEY OP PRICES provements in machinery and in transporta- tion. The same influence caused an increase in the supply of capital compared with the demand for it which was reflected in rising prices for consols from 1798 until 1896. In fact, after 1825, by which date British credit was thoroughly re-established, the accumu- lation of capital in excess of current needs was the principal cause of the rise in con- sols. This, among other considerations, led to a pretty general belief, in the late '90s, that the interest rate on capital would continue to fall, or at any rate would not rise materi- ally. The reasoning seemed clear : Improved methods of applying labor caused greater production of wealth, which in turn re- sulted in greater proportional accumulation of capital. This had caused rising bond prices and falling income yields for nearly a century. The presumption was exceed- 36 A CENTURY OF PEICES ingly strong that the same causes would continue to operate and to produce a simi- lar effect. The same causes did continue to operate ; but as we have seen in discussing commod- ity prices, another very powerful influence counteracted and overbalanced them from about 1896 onward — the fact that the sup- ply of money and credit was increasing even more rapidly than the supply of goods, and thus forcing commodity prices upward. THE FLOW OF CAPITAL At first thought it would seem that easier money and credit should cause higher prices for consols and other similar secui'i- ties. Temporarily, they do have that ef- fect, because of the accumulation of de- posits — or liquid capital — ^in the banks. This liquid capital immediately tends to flow into securities and therefore raises their prices. But this is a temporary effect only. Liquid capital very soon flow* 37 A CENTURY OF PRICES through securities, and by means of gov- ernment, municipal, or corporate expendi- tures, into concrete and tangible things. In fact, the securities are issued only for the purpose of securing capital for expenditure upon these concrete and tangible things. The capital which flows into consols, for example, is not held idle by the British Gov- ernment. It is soon spent, for one purpose or another, and the spending means the employment of labor, the purchase of ma- terials and supplies — in short, the prompt turning of liquid capital into tangible prop- erty. Let us suppose that consols are sold in order to erect a big government building. Then the capital which is absorbed into the consols is immediately converted into mar- ble, bricks, structural steel, food, clothing and supplies for workmen, etc. And this is true of the capital which is invested in any and all securities. 38 A CENTURY OF PRICES Thus the offset of increased gold produc- tion and enlargement of credit facilities, although first felt in the money and credit markets, immediately passes through them and finds its more permanent manifestation in rising commodity prices. Bond yields must rise {and bond prices fall) with any prolonged advance in com- modity prices. The bond investor, through long habit, thinks of his interest return in terms of money ; but when he starts to make use of that interest return, what it will buy for him depends upon the level of commod- ity prices. If commodity prices rise while his interest return remains stationary, he soon finds that his real income has shrunk. His money income must rise with advanc- ing commodity prices, for exactly the same reason that the wages of labor must rise. It is equally true that rising commodity prices reduce the supply of investment capi- 39 A CENTURY OF PRICES tal and thus raise its price — that is, the rate of interest return on securities. We have just seen that capital, as it accumulates, flows quickly through securities and into commodities; so when the prices of those connnodities rise, they necessarily absorb more capital. In the example just men- tioned above, if the prices of building ma- terials and labor double, it will take twice as much capital to construct the government building. The connection between bond yields, or the price of investment capital, and the level of commodity prices is therefore very much closer than has been generally ap- preciated. And this is even more evident from the record of history, as shown in these graphs, than it from a priori reason- ing. In comparing the two graphs, we see at once that the graph of consols is, in a broad 40 A CENTURY OF PRICES way, the reverse of the graph of commod- ity prices. Even in the irregularities of the Napoleonic Wars, which are only partly comparable with modem conditions, low consols and high commodities roughly co- incided, and from about 1805 to 1896 the reverse correspondence is very plain. But the clearest demonstration of the principle is seen from 1896 to date, when a sudden turn in commodity prices was followed within two years by an equally sharp change in consols, with an almost perfect reverse correspondence in the two price- lines down to the present time. POST-WAR PRICE MOVEMENTS It will be seen from these graphs that every war which had a direct and important effect upon business conditions in England was preceded or accompanied by a rise in commodity prices and a fall in consols, and that after every such war (except the Boer 41 '^A CENTURY OF PRICES" War) commodity prices fell and consols rose. Even following the Boer War the long upward movement of commodity prices then in progres was checked for half at dozen years, and the yield on consols for some years showed a reactionary tendency, though without any highly significant change. Later graphs will show us that the same tendencies were strongly evident in the United States during and after the Civil War. We are fairly safe, then, in concluding that this is a law of post-war price move- ments, which may be modified, but rarely, if ever, nullified, by other influences, and that there is now a very strong probability of a gradually declining tendency in Eng- lish commodity prices and a rising tendency in consols and similar securities for some years to come. 42 £A3 90 '35 1800 05 '10 '15 'ZO "25 '30 '35 '40 "45 '50 '55 'GO '65 "70 '75 '80 "85 "90 "95 1900 '05 '10 'IS 'II English Comhoditv Prices — This continuous index of English commodity prices since 17iSi is (.with the exception of the la^t two years) from Todd's Mechanism of Exchange. It is based on Je\on's index down to 180(1, SauerlKcU's 1860-70, the British Board of Trade index 1871-1''16, and. the Economist number for 1917 and 1918. the first, third and fourth having been recalculated to fit the third. These substitutions do not seriously alfect the value of the line as a continuous record. fy-^^k- '(ifr\iAfi^^: 1790 1795 1800 1805 1810 1815 1820 I8Z5 1830 1835 1840 1845 1850 1855 I860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 I9Z0 ■w- Brittsu Coxsols afford the lonee-" contimious securitv record obtainable. They have no dale of maturity. The interest rate Jfr down to 18S8. 2.^^^ from 1«» to IW.;. .'■ ,:; from I<)il4 to dale. Since the cbanne in the rate affected the price, we show the Weld througliout the period, tlie *>•"•'''' heini; rever.^j' ^^ -^ 7in ZIO„c ^-c^ -ti" ^ ^ , ^^__l > ?, ^- -t- z- 210 200 2. -.-£...{ - ..r<-0 .. , !2 +1 _ -kj-tS: § .^ - ZOO _ 1, _ — J==> . ■ , :^ _j ^ °~ 190 ^ -^-^ -^ r b - _ -L=_. 1-7 - 130 -=> - ■ — ^- 1 — ^— ' lon^^- [- hH — 1 - k- - 1 44- o 4- • — (r> IP ^ 1_ ^^ -g ^ — hn 180 : - 00 "^ 17(1 H ' V| - - - it 1 i7n l/U - 1 1 M 1 1 1 1 M 1 M j - '/frrrT-l ^ h" icn LEVEL OF ; it ^ z_ bU i.»-»i.t. V. . _ • fOMMODITY PRICES \ ..... 1 M icn -z.:. 1 1 1 1 1 1 1 1 1 1 1 . I?, A : _______ 4^^—.-^^^—^ TT""" '50 \Af\ Z- s: i (^ Mfi 140 tz A :___= z__= zL ii^^ jf; _ ,20 1 in 1 1 1 1 1 1 1 1 1 L»»ri ^X 1 1 ■• A. 1 T iV * 1 1^ rT~ -i ' iNr " 1 in tttrotihW^i \ h l/rrTTnxrr ' "^- Jr^ A4-^\'/0un"5 Index— -: ' ^ ^ t\-^'dU 1 1 1 i 1 1 -/Tf -+ Mill - - -- 100 9o^:ytilEiJEEE==EiE:EE:E=:: ^ww-rnlE^+t-TuI 1 1430 80 --4^--^^ ^-r^— ----- T-- t= ___... -T_ t 1 ^ ■-. 1 .4 \ / - ' ■ '" - - ^" 7o' ' 1 iH^N-^4 ,T 1 1 ^ ^ ITTFI ^ 1 , iTrr ^ ' I"" "' ''''^"' ' ' : ■ 1 i 4 4 H M M Ml l-l H70 •w- I■;lIklRT'^ index of cuniinudiu pricL-?, a-> prcitar cd down to 18{<9. Down lo 1850 tlii; liguris uik wire practically the samv, and from that point I ■ditics. The various indices comjiilcd I dotted line shows prices in the dcprecial' ■! coniiiHK.iKs line sliuws the cqin'valcnt in gold. The gold prices are not strictly comparable with prices prices of many articles coiuini.-cd to be fixed by custom, so that the full eflect of the gold premium r,^ Y^hrt^^ 300 Z50 ZOO 150 545 I8Z0 1825 1830 1835 1840 1845 1850 1855 I860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 I9Z0 300 250 200 150 IQO 50 75 50 25 trT wm rr-5 WHEAT-No.2. AT CHICAGO i| 'I. FTW "<^TTTT •M I' f? 190 120 CASH COTTON AT NEW YORK Calendar Years I8Z0 to 1869 CofhonYcor5l87lffll3l8.; i miii^ TF W ffi .11 ?jiiiifi«i ''lf-lf-i««.f (I.I ll,.>ifl"l m i.ii Win \T ANO Canu.N — There lui been a cuiiiiiiuout m:irkei mr cash coitun at .Sew York iince IHJU. but >'" wheal Ihf price* before the Civil War viri.-d greatly in differrat pari, ot the omntry and there wa« no »uch »)«trm o( standard Krad'* »» "O* >"'" "« •»•"■■ Alter the complefion of the Frie CjnaJ. A!hany rcciipied ihotr the «arnr reblive position in the trade a> Chicago occupiet n»>w, but the price records •" ■''<• '""• »••'■■ ' '' -.n ,r^K .l.-,tr,..„i t,> rt,. ,',,. >, jh, jjm^ Capitol a few year. ago. CHAPTER IV. CAUSES OF CHANGES IN INTEREST YIELDS AND MONEY RATES 'T^ HE fact is obvious that the average ■*■ investment yield obtainable from bonds or loans must depend on the supply of capital as compared with the demand for it. It is essential, therefore, in considering the changes shown on the graphs of bond yields and money rates, to examine the con- ditions atfecting capital during the period coveredo **When people talk to me about money and capital," complained a member of the Stock Exchange, ^^I begin to get a head- ache." To avoid such headaches it is neces- sary to understand thoroughly what capital is, a point in regard to which even bankers of long experience are often hazy. 69 A CENTURY OF PRICES To begin at the beginning, all capital is the product of labor. It is labor-product saved, set aside and stored up to aid in fur- ther production, instead of being used up in current consumption. A farmer, for ex- ample, can spend his yearns surplus income for a new piano, which is not capital unless it can be shown that it will increase the total production of the farm; or he may spend his surplus on a tractor, which is capital because it will increase his product. And if he lends his year's surplus to a neighbor, or turns it over to a bank, or in- vests it in a bond, he is entitled to interest, because in that case he is denying himself both the piano and the tractor. FACTORS IN THE SUPPLY OF CAPITAL The supply of capital available at any time, therefore, will depend on a number of considerations: — (1) The total amount of labor applied. 70 A CENTURY OF PRICES To accumulate capital a nation must be in- dustrious. A sluggish, unambitious popu- lation merely earns its living as it goes along, without piling up any surplus. (2) The efficiency of labor — the amount of the product in comparison with the labor applied. This depends chiefly upon the extent to which machinery is employed, but also upon the energy and faithfulness of the workmen. (3) What is being done with the labor- product; whether it is: (a) Being used up for current consump- tion — for food, clothing, luxuries, pleasure trips, etc. (b) Being invested in tools, equipment, and improvements which will bring an im- mediate return in the form of increased production. (c) Going into improvements of a more permanent character, which will be of public 71 A CENTUEY OF PRICES or private benefit eventually, but will not yield any early returns in the form of greater production. The third consideration above mentioned brings up another very important point, namely, the rapidity with which capital circulates when used in different ways. For very little capital is permanently fixed in one form. The tractor wears itself out in creating an increased product of other things; its value is gradually transferred into those other things ; the capital invested in it cir- culates. The factory depreciates. The rail- road's rails, ties and roadbed have to be constantly renewed. Its stations have to be repaired frequently and finally become antiquated and have to be rebuilt. Even the Eoman viaducts, perhaps the most permanent investment of capital in history, eventually fall into disrepair. The 72 A CENTURY OF PRICES original investment in the Suez Canal, or in New York's water works, might perhaps be mentioned as permanently fixed, al- though additional expenditures are con- stantly necessary for maintenance and betterments. So the extent to which any particular use of capital depletes the general supply de- pends not only on the amount of capital used but also on how long it is used. The farm tractor may, by increasing the far- mer's product, reproduce its value in a year. A new barn might not pay for itself, through increased production due to better facilities, in less than twenty years. Even if the first cost of the two were the same, the barn would eventually require twenty times as much use of capital as the tractor. Capital may be roughly classified accord- ing to the rapidity with which it circulates, as follows; — 73 A CENTURY OF PRICES (1) Capital in the form of commodities. Some of these are luxuries, but most of them contribute toward further production and are therefore capital. In this form capital circulates rapidly. (2) Capital invested in machinery or equipment, or in enterprises which will be immediately productive, circulates less rap- idly, as a rule, than commodities, but more rapidly than in the forms mentioned below. (3) Investments in enterprises which will eventually yield a return, but only after considerable delay. (4) Expenditures for public benefit, such as court houses, schools, playgrounds, baths, etc. These contribute indirectly to the future productive capacity of the people. (5) Investments in enterprises which fail, or expenditures in war. This capital stops circulating. In some cases a small part 74 A CENTURY OF PRICES of it may, however, be salvaged. An increased application of capital to any one of these five divisions will neces- sarily tend to deplete the current supply of capital, and therefore to bring higher in- terest yields; but the effect in this direc- tion will be far greater and more permanent if the capital goes into relatively fixed forms, or into forms where its circulation is slow, than it will be when the capital is ap- plied where it will circulate rapidly. Hence the great importance of distin- guishing between fixed and circulating capital. RISE AND FALL OF BOND YIELDS In Chapter II, in discussing the relation between the level of English commodity prices and the yield on consols, we noted the close correspondence in the general trend of the two. In comparing the graph of U. S. Corporation Bond Yields with that 75 A CENTURY OF PRICES of American Commodity Prices (discussed in Chapter III), we find tlie same broad cor- respondence. We are now in a position, after refresh- ing our memory as to the nature of capital, to define more accurately the reasons for this correspondence. The superficial reason why bond yields rise with rising commod- ity prices is that the investor, finding his real income shrinking although his money income is unchanged, demands a higher rate of interest, but he would not be able to obtain this higher rate if it were not for the fact the supply of capital is smaller in comparison with the demand for it. And the reason why higher commodity prices so greatly increase the demand for capital is that they bring a nearly proportional in- crease in the cost of capital investments in all of the five divisions above enumerated. The capital which, at any one time, exists 76 A CENTURY OF PRICES in the form of commodities, is only a small part of the total capital of the conntr^^ and circulates rapidly. Therefore a rise in the prices of commodities wonld have only a moderate effect toward increasing the de- mand for capital. But all investments of capital (nsnally after passing through the form of securities, as previously explained) are first expended on materials and labor —that is, on commodities and on wages, which roughly follow changes in the price- level of commodities, though usually lag- ging behind somewhat. If, for example, the price-level of com- modities has risen 50 per cent, the cost of a new courthouse, or a new railroad, or a mine, or a subway system, will also be found to have risen nearly 50 per cent; so that the amount of capital required for in- vestment in relatively fixed forms rises in rough proportion with the rise in commod- 77 A CENTURY OF PEICES ity prices. It is this increase in the cost of fixed forms of investment which rapidly depletes the supply of investment capital and therefore raises its price, which is best expressed in the form of the average yield on bonds. During a period of falling commodity prices the situation is, of course, exactly reversed, so that bond yields tend to follow commodity prices downward. DIVERSION OF CAPITAL INTO FIXED FORMS Another important element affecting the demand and supply of capital is the rela- tive extent to which capital is diverted into fixed forms, especially those expenditures which contemplate a somewhat remote public benefit ; or into investments in enter- prises which prove failures, or the cost of wars. The Panama Canal, the New York State 78 A CENTURY OF PRICES barge canal, the New York City subway system, are examples of undertakings that have absorbed great quantities of capital from which only a trifling immediate return can be expected. Municipal and State ex- penditures for varied improvements have increased rapidly in recent years, and how- ever desirable such investments may be with a view to the longer future, immediate cash returns from them are apt to be small. And added to these factors came the tre- mendous depletion of the whole world's capital in the war. It is a question, also, whether the peo- ple's disposition to save has not grown less within the last two decades— whether the average man does not now save a smaller percentage of his income than he saved in the first years of the twentieth century. If so, this tends to cut off the supply of capital at its source. 79 A CENTURY OF PRICES These several influences tend to act in harmony. Rising commodity prices in- crease profits — as measured in money — and infuse the public in general with a spirit of liberality in expenditure, so that costly im- provements are more readily undertaken, living expenses grow at the expense of sav- ings, and the people are more prone to in- vest in doubtful speculations or fake stocks. In time of war, also, great expenditures of capital coincide with a rapid rise in com- modity prices. The great fall in bond yields from the period of the 70s to 1900 was partly due to the better standing and stronger protection of our corporation bonds as a whole in the later years ; but it was also largely due to the great increase in production of goods as a result of improvements in machinery and transportation. When labor produces more goods it is naturally easier to accumu- late capital. 80 A CENTURY OF PRICES MONEY RATES Money rates and bond yields mutually in- fluence each other, since both represent the return on the use of capital; but since the term ^* money rates'^ is applied only to loans for short periods, changes in these rates are chiefly dependent upon temporary conditions, while changes in bond yields are chiefly dependent upon conditions of a more permanent character. A comparison of the two graphs shows that sharp changes in money rates are sym- pathetically reflected in the minor move- ments of bond yields, but that money rates have very little to do with the broad sweep of the bond market. Rates on call money and 30 or 60-day loans have in the past fluctuated so quickly as a result of temporary conditions that they are of little value for comparison over long periods. Commercial paper affords the 81 A CENTUEY OF PEICES true that commercial paper affords the broadest and best index to general money conditions. Unusually high money rates and the minor and temporary upward swings in bond yields are commonly due to an over- extended condition of bank loans — ^that is, a scarcity of credit accommodation. Scar- city of credit means that borrowers must pay a higher price for it, so money rates rise. And if a higher rate of interest is ob- tainable from short loans than from bonds, capital is temporarily attracted away from the bond market, and owners of bonds are tempted to switch into commercial paper or time loans, so that bond prices fall and yields rise. This condition of overextended bank loans may be due to too great optimism in business circles, which leads business men to branch out too widely and too rapidly. 82 A CENTURY OF PRICES and thus to use up an undue proportion of the credit available; or it may be due to events which arouse a widespread feeling of fear as to the future, so that there is a general desire to call in loans and contract credits. Before long the first condition is very apt to precipitate the second, but the second does not necessarily imply the first. Thus in 1857, 1873, 1893 and 1907 the pri- mary cause of high rates was overexpan- sion. But in 1861 fear was aroused by the beginning of the Civil War ; in 1890 by the Baring failure; in 1896 by danger to the gold standard; in 1914 by the outbreak of the World War ; and in none of these cases was any special overexpansion in evidence. The high money rates reached in most of the years previous to 1874 reflect in a very interesting way the scarcity of credit and liquid capital in those times. The high figures were usually reached in the fall, 83 A CENTURY OF PRICES when the crops were being moved. Condi- tions of doing business when an average rate of 10 per cent must be paid for money are entirely different from those when the average rate is 5 per cent. Before and dur- ing the Civil War any firm had to earn large profits in order to stay in business, and the constant wide fluctuations in rates intro- duced an element of uncertainty now hap- pily absent. The extreme high rates of panic years, as in 1857, 1861 and 1873, simply mean that during the panic periods money was prac- tically unobtainable. Failures were so nu- merous that even the highest class two- name commercial paper was subject to sus- picion. Yet that suspicion was not the chief cause of the high rates. The real reason was the absolute lack of loanable funds. We have today very little conception of conditions such as those of the panic of 84 A CENTURY OF PRICES 1857, for example. Tlie newspapers at that time reported that in some instances 2% per cent a day was bid for call loans. Lead- ing banks and old, conservative business houses were falling right and left like nine- pins. For loans of four to six months on prime commercial paper 3 per cent a month was offered, and doubtless higher rates would have been paid if there had been a prospect of bringing out the money. One of the market reports stated that the money market was in a state of ** anarchy." Gold commanded 8 per cent premium at Balti- more, and the general disorganization of business was far beyond anything known to the present generation. Under the improved banking methods now in use it is to be expected that fluctua- tions in money rates will be much nar- rower than in even the recent past. Com- mercial paper rates during the war were 85 A CENTURY OF PRICES successfully stabilized at or below 6 per cent, and while it is possible that periods of rapid expansion may sometimes carry them temporarily over that figure, it is highly probable that extremely high rates for time money and commercial paper will no longer be a recurrent feature of the mar- kets. 86 J By t.uS eerrpy^^^^^^f^-^t I8G5 1870 1875 1885 1890 1895 1900 1905 1910 1915 I9Z0 I; NM VitiDs— This graph is drawn iruin 'ujr :..::..._; . ■.., ..^.,,..^. .-.;^;.,:„,: < j,-<.i..;*i,..ii. I ;,<: i„,ii.), .i.tiuJ.il *iri Mi-v-rssarily chanRcd from time to time, hit: the n -t rr*'i!t i? a prct'o iaithiul rcric<:ii..n i.i cor|x>raiiun bond pricct in ihc United Slalr». It IS necessary to show the yield rather than an average of bond pric-* tecaiue price* are affected b> the maturity of the varioua hond». / (ZcJ(Jh /^rt«c*<. Cieti^ .. -^f^A^J' the cntic r«'>r of capital and .he h..h obtained previous t" I'*"- *l"-'l ^" m > carry the graph back to the monev was unobtainable light on our financial hi«iory. CHAPTER V. PRINCIPLES OF STOCK PRICES By Gr. C. Selden A T first glance the accompanying graph "^"^ of stock prices since 1860 presents an appearance of lawless irregularity. But on further examination it proves to be one of the most interesting of the various graphs we have discussed. First, what is the relation of stock prices to the other main factors discussed in pre- ceding chapters? Comparison with commodity prices (Chapter III) shows at once that there is no such general correspondence between stocks and commodities as we found to exist between bond yields and commodities. 91 A CENTUEY OF PRICES Nevertheless a sharp rise in commodity prices has a strongly bullish influence on the stocks of companies which are free to advance the prices of their products in ac- cordance with demand. In recent year^ this has not included railroads and public utilities; for while those companies have been granted advances in rates, the ad- vances have not been sufficient to keep up with rising costs of operation. RISING COMMODITIES BENEFIT INDUSTRIALS But owners of industrial stocks have benefited not only from the general infla- tionary effect of rising commodity prices, but they have also benefited further and very greatly at the expense of bondholders. Suppose, for example, that an industrial company is capitalized at $300,000, of which $100,000 consists of 6 per cent bonds — ^mak- ing the annual interest charge $6,000 — and 92 A CENTURY OF PRICES $200,000 is in the form of stock on which 6 per cent, or $12,000, is being earned an- nually. Now let us suppose that a great rise in commodity prices occurs, which doubles this company^s cost of production and also doubles the selling price of its products. It is evident that its profits — in dollars — ^will also be doubled. The bondholders do not share in this in- creased profit. Their return is fixed at $6,000. But the company's profits appli- cable to its securities have increased from $18,000 to $36,000. So $30,000 is now left for the stock, or 15 per cent on the $200,000 outstanding. And this without any change in the company's per cent of profit on its output. This shows us one of the principal causes of the growth in the profits of industrial companies during the period of rising com- modity prices which began with 1898, and 93 A CENTURY OF PRICES wMch from 1915- to 1918 was such a con- trolling factor in our whole economic life. The same principle must necessarily oper- ate in any great advance in commodities, while a sharp decline in commodities will cut down the earnings on stocks with cor- responding rapidity. In the case of a company which, in addi- tion to bonds, has preferred stocks on which the dividend return is limited to a fixed per cent, the effect on the earnings for the common stock is even more marked. If, as is sometimes the case, three-quarters of a company^s earnings on a low-price basis were required for bonds and pre- ferred stocks, a doubling of commodity prices should multiply the earnings for the common stock by five. PANICS AFFECT ALL SECURITIES In comparing bond yields and money rates with stock prices, we see that panics. 94 A CENTURY OF PEICES even of a relatively minor character, affect all three. Bond and stock prices fall and money rates rise. The effect on bonds is temporary and in the case of minor panics unimportant. The years of high money rates — 1860, 1865, 1873, 1882, 1890, 1893, 1896, 1907, 1914 — ^have also included a sharp fall in stocks, with the single exception of 1882. In that year the high rates were due to the constant absorption of money by the U. S. Treasury, rather than to general economic conditions. On the other hand, there were consider- able declines in stocks in 1884 and 1903 without much effect on commercial paper rates. In both cases the panicky conditions were practically confined to Wall Street, and call money was sharply affected — reaching 3 per cent a day in 1884* — ^but since commercial conditions were good, *A few loans were reported as haying been made at 5 per cent a day. 95 A CENTURY OF PRICES mercantile borrowers were able to postpone their requirements until tbe pinch in Wall Street was over. THE MINOR CYCLE From the standpoint of general prin- ciples, the most interesting point connected with stock prices is the comparatively reg- ular swing noticeable since 1884, which has come to be called **the minor cycle." An examination of the graph shows that low prices for stocks, accompanied in most cases (but not all) by relatively high money rates, have occurred every three or four years with an astonishing degree of reg- ularity. These years have been as follows : 1884, 1887, 1890, 1893, 1896, 1900, 1903, 1907, 1910, 1914, 1917. In between these low points there has been in each case an upward surge in stock prices. In most instances there have been about two years of rising prices and one 96 A CENTURY OF PRICES year of decline. The reason for this will appear later. A regular swing of this character, oc- curring throughout such a long period, in- dicates the strong probability of some gen- eral law. And this probability is increased by the great variety of explanations ad- vanced for the recurrent declines. The panic of 1884 was alleged to be due to the Grrant & Ward failure, accompanied by the collapse of the Marine Bank and fol- lowed by a few other bank failures. For the decline of 1887 only the most general reasons could be assigned, such as over- expansion, over-extension of mercantile credits, etc. The drop of 1890 was assumed to be the reflection on this side of the Baring failure in London. The panic of 1893 was a mystery to cur- rent commentators. Later judgments have attributed it to a variety of reasons, of 97 A CENTURY OF PRICES which the Government's continued heavy coinage of silver and dwindling supply of gold perhaps carry the weight of the most authority. The decline of 1896 was imme- diately due to the fear that the pending election would result in a silver basis for our currency. The low prices of 1900 were mostly con- fined to railroad stocks. The industrials were then feeling the benefit of rising com- modity prices. The movement was gener- ally considered a reaction from excessive speculation. The bear market of 1903 was labeled the ** undigested securities panic," and thought to be due to the over-issue of industrial stocks. In 1907 came a ** money panic," again due to over-expansion. For the moderate de- cline of 1910 falling railroad earnings and the Government's intention to prosecute leading corporations under the Sherman 98 A CENTURY OF PRICES anti-trust law were assigned as reasons. The low prices of 1913 were due to general depression and were followed by the war panic in 1914. The great decline of 1917 was in part due to our entrance into the war and the prospective great demands for capital for war purposes. In nearly every instance over-expansion, over-extension of loans, over-speculation, or over-something-else, has been mentioned as one of the causes contributing to the de- cline. Is it not at least probable that these *' overs" are the main cause of the minor cycle, and that the special events of the time are contributing factors which make greater or smaller a decline which would have occurred in any case! THE FUNDAMENTAL CAUSE The fundamental cause of the minor cycle is the law of action and reaction, the build- ing up process and the falling down process. 99 A CENTURY OF PRICES At low prices, stocks are mostly in the hands of courageous, outright investors, who cannot easily be frightened into sell- ing. As prices rise, more and more stocks pass into the hands of buyers for profit only. The higher quotations go, the more the public comes into the market. Nothing so strongly stimulates speculative purchases as the spectacle of rising prices. Buyers at high prices are necessarily of a weaker class — weaker in judgment and therefore weaker in resources — ^than buyers at low prices. After a prolonged and exten- sive advance, a great volume of stocks be- comes lodged in the hands of these weak holders, while many of the stronger class of investors have realized at the high prices and transferred their funds into more stable securities, such as bonds or short term notes. Eventually these weak speculative hold- 100 A CENTUEY OF PRICES ers have bought all they want, or some of them become discouraged, or some unfavor- able event dampens their ardor. They then begin to sell out on each other — since prices are too high to attract the genuine investor for income. For such a situation there is no cure ex- cept a decline to a level which will attract the stronger class of buyers. So we next have the downward swing of the cycle. How far the fall must go depends mostly on the supply of liquid capital, which is roughly indicated by money rates. During the rise, with the public active in the market, there is a great deal of shifting from one holder to another, accompanied by reactions, temporary slackening of ac- tivity, and renewed advances. Investors part with their holdings gradually, as each becomes satisfied with the prices to be ob- tained. But the decline consists mostly of 101 A CENTURY OF PEICES weak holders letting go to other weak hold- ers. For that reason the fall is more rapid than the advance. In the meantime much the same thing is occurring in many lines of industry. Specu- lation is by no means confined to stocks — ^*the instinct of anticipation" is general. Buyers of goods try to purchase not only at the cheapest place but very often at the cheapest time also. The bargain sale at- tracts the housewife because she believes the goods are cheaper than they were last week or may be next week. She is a specu- lator, though she doesn't realize it. The morning newspaper would seem to be something which no one would try to buy at the cheapest time. Yet some com- muters who have to pay an extra cent for a paper at their station buy only one to read on the train, waiting to buy another at the regular price in the city. 102 A CENTURY OF PRICES In the larger affairs of business, almost every purchaser tries to buy as far ahead as possible when he thinks prices will rise, and to delay buying as long as possible when he thinks they will fall. Rising prices, unless already very high, bring increased orders, but buying falls off on declining prices until it is believed that the bottom has been reached. In this way the spirit of speculation, unrecognized, or at any rate not called by that name, permeates all business, and the minor cycle in a modified form is a feature of industry as well as of the stock market. Any chart of steel prices, unfilled steel or- ders, pig iron production, or bank clear- ings plainly shows the modifying effect of the cycle. The importance of this in the present discussion lies in the mutual influence which the stock market and general busi- 103 A CENTURY OF PRICES ness conditions exert upon each other. A widespread willingness to buy in any in- dustry tends to increase its prosperity, for the time being. Its prosperity tends to- ward higher prices for the stocks of com- panies in the industry. And rising prices for the stocks tend to encourage business men to extend their undertakings — since many of them realize that the stock market, properly interpreted, is a valuable indica- ion as to future conditions. Each dog in a pack of hounds runs faster and longer because he sees the others run- ning ; and with all our intellectual develop- ment, this primary instinct remains. We catch each other^s enthusiasm or depres- sion. In any market where the spirit of speculation exists — and it would be hard to name any where it is wholly absent — rising prices once started tend to continue rising until they are obviously too high, and 104 A CENTURY OF PEICES falling prices tend to fall until they are obviously low. And that is the main part of the story of the minor cycle. FEATURES OF THE MINOR CYCLE The relation of money rates to the swing of stocks in the minor cycle is of interest,, but is not so direct or decisive as might at first be thought. It has usually been the case after a bull movement in stocks, that when prime commercial paper at New York, after a period of lower rates, advanced to a 6 per cent basis, the advance in stock prices proved to be practically over. Then money has remained around the 6 per cent basis, or in some cases higher, during the downward swing of the stock cycle. After the completion of the liquidation in stocks, the money rate has usually dropped, within a few months, to around a 4 per cent, basis, or in some instances lower. The highest money rate has corresponded 105 A CENTURY OF PRICES rather closely with the lowest prices for stocks, falling gradually as stocks began to rally, remaining for a time near a 4 per cent level, and then rising to 6 per cent as stocks reached their top. Theoretically, it might seem that the lowest money rate should correspond with the highest prices for stocks; but that is not the case, for speculation, once under way, carries stock prices upward even though the money rate rises at the same time. Another reason why money rates and stock prices do not move more in harmony is because, so far as the demand for money is concerned, stock speculation is the tail to the kite — ^the kite being the money re- quirements of general business. When business really needs money, it takes it away from the stock market. A bull mar- ket in stocks is based on surplus funds, which at the time are not needed for other lines of business. 106 A CENTURY OF PRICES It would, however, be a mistake to sup- pose that the structure of a bull market will not topple over until the money rate rises sharply. It sometimes falls of its own weight, so to speak, while money re- mains cheap. This occurred in the autumn of 1916, when the highest prices for stocks were made on a 3 3-4 per cent rate for com- mercial paper, and the rate did not rise to 6 per cent until after the low prices of De- cember, 1917, were past. The Federal Reserve System, with its easy rediscounting, will prevent extremely high money rates and may have the effect of reducing the general average of rates some- what. It will not, however, seriously reduce the supply of money available for stock market purposes as compared with the past. Nothing else is so mobile as credit. Loan- able funds will seek the best rates as surely as water seeks its level. The minor cycle in industry is more 107 A CENTURY OF PRICES clearly and promptly reflected in the un- filled orders of the U. S. Steel Corporation than in any other statistics now available. These follow the swings of the stock mar- ket quite regularly, keeping three to six months behind stocks at the high and low turns. For that reason the minor cycle in stocks is decidedly helpful in forecasting coming conditions in the steel industry, with which other trades also strongly sym- pathize. 108 nil .,1 lalkutr', iiiJt.x ul tuiii.iiucJiU i.riti.-.-.. as l-rti.a lurt ii,g.i down to iiSiS). Down to 1850 Hic figuro uik.ii vmicii ii « frasnicnlary. In ISW Dun s anil 1 alkncr's indices wire practically the same, and from that point to date- Uun , avcraKc of wliolcsalc prices of all important commodities. The various indices compiled l.y different aiilhorilic^ ,ho»» only mmor varia- tions in tlie general trend. Dnrinn and after the Civil War the dotted line show.* prices in the depreciated currency of the ijiriwl, anjl •he continuous line shows the equivalent in gold. The gold prices are not siricllj comiarable with prices before and alter this |>«rio^i::f::pi ■^-^£sr;rr^~l:;:;?:;^"^5:''°'• This is the age of caution a. man must not specu- 20 ^V^ !<»«• i d.y. oJ g.Ke .re .llowed. late, for he has all to lose and nothing to gtin. ThUUilie /^VJ He looks lor secu.ily. vJhea Ih. .on ihi.l. h. knowt more lh>D hi< »S,^^ 40 3oV„^^ NOW OR; NEVER not high rates o! inte.esl. At 65, 85% of the men (.Ihtr. Thii ipace tep- ^ SwD.ngeriLlne 45 .till living are Jepeoden, leKOUlhfJon'iegoliim. The boy i. on children, relative, or DOW chang- 35 ^**^^ charity. ing hi. mind •nd con- The «o .e- ^N^^ 50 1 elude, he alize. that doe.n-|know l.fe U * teal- ^^^^^ Age of wild O.I.. .. much .. ily and he i. At 45, ^^*,. he inugined. 16% ate dead; ^ „.^^ 65 He now con- °°he*Vn"e 65% are kK .uppotting: sidei. his thought. The 15% a.e dependent wholly Alto'V^ (•iher a father wa. a or in part; only 4% hare 50, not one*>S^ n»n oi (air manolcicel- accumulated anything— inlelligence. lentjudgmen. and kept it. his lioaocial foollng.^N,^ How Much Money Did You Make in 1918? How Much Money Did You Save in 1918? FINANCIAL. INDEPENDENCE Not how much you EARN — but how much you ACCUMUI.ATE FlNANCIAIi DEPENDENCE The result of losses through injudicious investments. THE MAGAZINE OF WALL STREET is built to help YOU attain financial independence. It fully covers the field of finance. It shows you how to invest successfully and keeps you posted on the conditions and outlook of all important industries as well as securities and what is still more import- ant, it gives you expert advice on when to buy and sell. That we are succeeding is proved by the hundreds of letters of appreciation received from subscribers. The Personal Inquiry Service, The Investment Digest, Analytical and Educational Articles furnish you authoritative information that you, as an investor or trader, cannot afford to be without. One idea or helpful suggestion may make or save thousands of dollars for YOU. The annual sub- scription price is $5, a trifling sum to pay for the service that we give you. Mail your request to The MAGAZINE of WALL STREET America's largest financial Magazine 42 Broadway, New York City Twelve Handbooks for Investors se- lected by our experts to help Investors make their money grow. Read Them In This Order: 1. The Machinery of Wall Street. Why Wall Street exists — how it works — what it accomplishes. (Price $1.06). 2. How to Bead the Financial Page. Correct interpretation of the financial page in the Daily Newspapers. (Price $1.06). 3. Financial Statements Made Plain. A conservative, solid foundation for the analy- sis of financial statements. (Price $1.06). 4. What Every Investor Ought to Know. A handy volume answering hundreds of ques- tions on every form of investment. (Price $1.06) . 5. How to Select Investments. A symposium of the best ideas of five men who have made a life study of sound investing. (Price $1.06). 6. Tidal Swings of the Stock Market. The Rise and Fall of the stock market as a whole is dependent on the certain general laws outlined in this book. (Price $1.06). 7. Bond Yields at a Glance. Seven simple diagrams which show instantly the yield to' maturity of any bond. (Price $1.06). 8. You and Your Broker. Your duties and rights as customer. His obli- gations to you as agent. (Price $1.06), 9. Practical Points on Stock Trading. A book of. special service to traders who watch the market thru the newspapers daily. (Price $2.10). 10. Studies in Tape Beading. Why the ticker tape is a better guide than the news or fundamentals. (Leather, Price $3.10). 11. Fourteen Methods of Operating in the Stock Market. The rules and methods used by most success- ful traders and investors. (Price $1.06). 12. Psychology of the Stock Market. A study of the science of the market and its operations. (Price $1.06). The Set Complete $15.00 The MAGAZINE of WALL STREET «^i- 42 BROADWAY. NBW YORK Send for Your Copy of Our New Investment Booklet We will send to you without charge a copy of this valueable booklet and a complimentary copy of our new "Investment Letter." AS an important step in broadening its usefulness, the Analytical Service Bureau of The Magazine of Wall Street now issues an "Investment Letter," which includes : (1) A regular weekly letter issued every Saturday. (2) Special letters issued the day impor- tant changes occur, or for the purpose of an- alyzing individual securities more carefully. (3) Suggestions in regard to your present holdings. (4) Personal answers to inquiries regard- ing securities in which you may be interested. The cost of this service has been placed so low that no one in any way interested in secu- rity markets can afford to be without it. We will be glad to send you a sample of the Investment Letter and our new booklet showing how it will help YOU to increase both your income and your profits. ADDRESS The MAGAZINE of WALL STREET analytical service bureau 42 Broadway, New York City The Latest Books On FINANCE INVESTMENT BUSINESS together with a description of each are in our Weekly Book Letter This Service is Gratis Write us now and put your name on the list THE MAGAZINE OF WALL STREET Weekly Book Letter Service 42 Broadway New York City Other Publications What Every Investor Ought to Know Bobt. li. Smitley Cloth, 173 pp., $1.06 postpaid Tidal Swings of the Stock Market By Scribner Browne Cloth, 113 pagres. Price $1.06 postpaid Practical Points on Stock Trading By Scribner Browne Cloth, Pocket Size, .$1.06 postpaid 14 Methods of Operating in the Stock Market A Collection of Practical Ideas Leather, $1.06 postpaid How to Read the Financial Page By Scribner Browne Leather, Pocket Size, Price, $1.06 postpaid Studies in Tape Reading By Bollo Tape Leather, 189 pp., with tables and diagrams, $3.06 postpaid The MAGAZINE of WALL STREET 42 Broadway, New York.