Other formats

    Adobe Portable Document Format file (facsimile images)   TEI XML file   ePub eBook file  


    mail icontwitter iconBlogspot iconrss icon

The Pamphlet Collection of Sir Robert Stout: Volume 51

Chapter XVIII. — Commercial and Banking Failures Since 1874, and Ratio of Fall in Prices

Chapter XVIII.

Commercial and Banking Failures Since 1874, and Ratio of Fall in Prices.

It is in the nature of things that, during the period when, from whatever cause, prices are falling, commercial operations should, as a general rule, result in loss. During the transition from high to low values, a purchase made one week is dear the next. At whatever price a merchant may buy an article, he will, in a falling market, be undersold in a few days, or at all events before he can get quit of his merchandise. Under these circumstances, he naturally curtails his operations and buys less from the manufacturer. The latter finds, therefore, that, in spite of his having submitted to gradual reductions in price, his stocks are accumulating; and as he cannot pay wages and meet engagements, without making sales, he is compelled, whatever his loss, to tempt purchasers by still lower and lower prices. To meet this reduction in page 71 the value of his fabric, he has to lower the rate of wages. After a struggle the wage-receiver submits, but as he has less money to spend among the tradespeople, they, in their turn, come in for their share of the bad times. As the process continues each step downward makes matters worse. The depreciation of value extends to all sorts of property. Not only do commodities become cheaper, but factories, mills, mines, machinery, stock, shares in industrial enterprises, houses and even land, all participate in the depreciation. Banking capital that has all along been freely making advances on commercial securities, now takes fright, and seeks to disengage itself from those investments by calling in its advances or contracting their amount. This demand falls heavily on the trader at that moment, for, in declining markets, everything he touches loses money, what stocks he holds have sunk in value, those who owe to him—themselves under pressure from the same cause—defer their payments, the credit by which he was before assisted is now sparingly given or withheld, and he finds difficulty even in discounting his bills. In spite of all this, he must go on, or his business and position will be compromised. Those who have sufficient strength and capital, withstand the pressure and can afford to wait to recoup themselves when good times return; but some have to give way, and one failure leads to another.

Some banks, when deeply involved with one or more large and over-weighted mercantile firms, have tried to prop them up and carry them through the transition period, hoping thus to retrieve the fortunes of both; but in most cases they have themselves sunk under the burden, and the efforts made to avert the catastrophe have only tended to render it doubly disastrous. Thus enormous and unexpected bank failures have contributed their sinister effects to the general loss and depression.

These are the features by which the commercial history of the last few years have been marked, and such features have always more or less accompanied a continuous fall in prices. The brunt of the evil has been borne by the trading and professional (that is the middle) classes; for, page 72 as to the wage-receivers we have before explained that the reduction in the cost of living has nearly coincided with the reduction in wages; and as to the receivers of fixed incomes, they have been, not injured, but positively benefited by the fall in the value of commodities.

We may conclude that while the commercial and banking failures that have occurred of late years are the outcome, and not the cause, of the fall in prices that set in in 1874 and 1875; on the other hand, they undoubtedly contributed to increase the gloom and ruin out of which they sprung.

Since the upward or downward tendency of prices produces so powerful an effect on commercial prosperity, it becomes of the utmost importance to ascertain : (1) at what point of the foil we have now arrived; (2) how far prices have sunk below the level from which they started upwards in 1871; and (3) at what stage we may fairly hope to have reached the turning-point. The first two inquiries we may solve without much difficulty.

By means of tables constructed on the plan of those given at page 58 (the details of which, however, would occupy too much space here) we have arrived at the conclusion that the following are the exponent numbers that represent the comparative average prices of the chief articles of our export trade for the undermentioned eight years, taking 1861 as the standard, and assuming that the average price of our export commodities for that year were represented by the figure 1,000:—
Average prices of exports for 1857 represented by 1,087.
Average prices of exports for 1861 represented by 1,000.
Average prices of exports for 1865 represented by 1,593.
Average prices of exports for 1867 represented by 1,305.
Average prices of exports for 1870 represented by 1,283.
Average prices of exports for 1872 represented by 1,396.
Average prices of exports for 1876 represented by 1,023.
Average prices of exports for 1878 represented by 923.*
page 73
From the above it will be seen:—
1.That average prices rose to a higher point in 1865 than in 1872. This was chiefly owing to the enhanced value of cotton goods in 1865, arising from the scarcity and dearness of the raw material in America.
2.That prices in 1878 sank to a lower point than in any other of the years given, and were 8 per cent, below the average of those of 1861, which was a year of great commercial embarrassment and stagnation.

The latter is a fact of peculiar significance, and we shall shortly advert to it more fully. But it is necessary, in order to take an accurate survey of the course which the average prices of all commodities have taken for some years past to turn to our imports, and examine into the fluctuations of price that have taken place in that branch of our trade.

On the plan of the table given on page 59 of the comparative quantities and values of certain articles of import, we have constructed a series of others by which we have arrived at a number which represents the comparative average price of all the articles of import comprised in that table for each year. The articles which we have selected as bases of calculation are 21 in number, out of about 100 which appear in the Board of Trade list, but they are by far the largest and most important, for they constitute nearly two-thirds of the entire amount of the imports, leaving only one-third to be represented by the remaining 79 articles. These latter, it may be assumed, fluctuate in nearly the same lines as the larger items, and if there are any small deviations in one direction or the other, they are pretty sure, in obedience to the law of averages, to neutralise each other.

The following are the results which these investigations have yielded. Giving that the average prices of our imports for the year 1861 shall be represented by the figure 1,000, then
The average price of imports for 1861 is indicated by 1,000.
The average price of imports for 1867 is indicated by 935.
The average price of imports for 1870 is indicated by 887.
The average price of imports for 1872 is indicated by 871.
The average price of imports for 1876 is indicated by 745.
The average price of imports for 1878 is indicated by 678.
page 74
From these remarkable deductions let us draw a few inferences:—
1.While our exports have generally ruled at higher (sometimes much higher) prices than those of the year 1861, the prices of our imports have since that year been continuously declining.
2.While the articles which we sell now (end of 1878) command within 8 per cent, of the prices of 1861, the articles which we buy are 32 per cent, cheaper than they were at that period.
3.The articles of which the prices remain nearly the same as in 1861 (those we export) consist in great measure of manufactures. The articles of which the prices have fallen largely since 1861 (those we import) consist almost exclusively of raw materials of agricultural produce.
4.For the same quantity of our exported goods for which we got £1,000 in 1861, we got £1,396 in 1872. For the same quantity of imported goods for which we paid £1,000 in 1861, we only paid £871 in 1872. Thus the brisk trade of the latter year did not raise the prices of foreign commodities, but only, for a time, checked the rapidity of their fall.
5.The prices of our export goods which had in 1872 advanced 39 2/3 per cent, from those of 1861, fell in 1878 to 7 2/3 per cent, below those of 1861. This is a fall of 47 1/3 per cent., taking 1861 as the standard, and is equivalent to a fall of 34 per cent, on the increased prices of 1872. On the other hand, the prices of our foreign importations, which in 1872 had fallen 13 per cent, below those of 1861, fell in 1878 to 32 per cent, below them, which is equivalent to a fall of 22 per cent, on the diminished prices of 1872. In other words, the fall on our goods of 34 per cent, between 1872 and 1878 was upon a great rise; that on foreign goods of 22 per cent, during the same period was upon prices already reduced.
6.The alteration that has steadily been going on in the relative, or exchangeable, values of the two great classes of commodities, viz., the agricultural and the manufactured, is page 75 very suggestive, and leads to some interesting considerations, for which, however, we cannot find place here.

It is easy enough to trace the course which the price of each separate article takes from year to year because you have to deal with single factors; but the result is of no use in an inquiry as to the march of prices generally. The difficulty is to trace the course from year to year of the total average price of all commodities. Not only is their variety immense, but their relative quantities must also enter into the calculation. In the table which follows we have averaged the price-exponents of our exports and of our imports, making due allowance for the relative quantities of each. It will therefore show the relative average prices of one year to another of the entire volume of commodities that constitute the import and export trade of the United Kingdom, assuming that the leading articles (in value and bulk) fairly represent the rest. Indeed, as our trade embraces nearly every article of any importance which the world produces, and as the variations in price that occur in our markets are rapidly responded to in every part of the globe, our table may be said, in a rough way, to represent the relative average prices of all the world's commodities. Given that the average prices of all the articles both of export and import for the year 1861 shall be represented by the figure 1,000, then

The average price of all articles for 1861 is indicated by 1,000.
The average price of all articles for 1867 is indicated by 1,102.
The average price of all articles for 1870 is indicated by 1,064.
The average price of all articles for 1872 is indicated by 1,118.
The average price of all articles for 1876 is indicated by 858.
The average price of all articles for 1878 is indicated by 776.

We arrive, then, at the conclusion that since 1861 the average price of commodities, after rising for some years, has again fallen, and is now 22½ per cent, below the average of that year, and 30½ per cent, below the high figure which it had reached in 1872.

If reaction from the high prices of 1872-1873 had been the sole origin of the existing depression of trade, we must page 76 by this time have more than reached the turning-point, for prices have receded much beyond the level from which they started. But another cause is at work. We have already adverted to the influence exercised over prices by the decreased production of gold, and the increased volume of commodities which gold has to represent. The combined operation of these two agencies, while it has no effect on exchangeable value, has produced, is producing, and will continue to produce, a reduction more or less rapid in the money value of commodities. The strain on gold is the heavier on account of the demonetisation of silver in some countries, so that gold has to do additional work. But this is far too large a subject to be treated in a cursory manner, and is fully entitled to a separate and careful inquiry.

At all events, we have seen that, from whatever combination of causes, prices have descended to a lower level than mere reaction warranted, and that the fall since 1861 has been considerably greater on foreign goods than on those of our own production.

* Thus, supposing the average prices of 1861 to be represented by the figure 1,000, the higher or lower figures appended to the other years indicate the relative rise or fall in the average prices of those years as compared with 1861. Hence 1865 shows the highest and 1878 the lowest prices of the series.