investigation of the dynamics of a market is in any case very
difficult, and is impossible without a complete analysis of the
statical condition, such as is found at length in the textbooks
of mathematical economics; but it is possible to describe
briefly certain dynamical phenomena of markets which are of
a comparatively simple character, and are also of practical
interest.
Every great market is organized with a view not merely to the purchase and sale of a commodity at once, or “on the spot,” but also with a view to the future requirements of buyers and sellers. This organization arises naturally from the necessities of business, Future Delivery. since modern industry and commerce are carried on continuously, and provision has to be made for the requirements, say, of a spinning-mill, by arranging for the delivery of successive quantities of cotton, wool or silk over a period of months “ahead.” In the case of cotton, “forward deliveries” can be purchased six or seven months in advance, and the person who undertakes to deliver the cotton at the times stated is said in the language of the market to “sell forward.” If the quantity of cotton produced each year were always the same, no very remarkable results would follow from this mode of doing business, except the economy resulting to the spinner from not being compelled to lock up part of his capital in raw material before he could use it. But as the cotton and other crops vary considerably from year to year, some curious consequences follow from the practice of “selling forward.” The seller, of course, makes his bargain in the belief that he will be able to “cover” the sale he has made at a profit—that is, he hopes to be able to buy the cotton he has to deliver at a lower price than he undertook to deliver it at. If so, all is well for both parties, for the buyer has had the advantage of having insured a supply of cotton. But supposing something has happened to raise the price considerably, such as a great “shortage” of the crop, the seller may lose. If a great many other persons have taken the same mistaken view of the probabilities of the market, a condition of things may arise in which they may be “cornered.” (See Cotton.)
A “corner” in an exchangeable article is an abnormal condition of the market for it, in which, owing to a serious miscalculation of probable supply, many traders who have made contracts to deliver at a certain date are unable to fulfil them. In most cases the fact that “Corners.” the market is “oversold” becomes known some time before the date for the completion of the contracts, and other traders take advantage of the position to raise the price against those who are “short” of the article. A corner is therefore usually a result of the failure of a speculation for the fall. Theoretically a trader who has undertaken to deliver 100 tons of an article, but cannot, after every endeavour, obtain more than 90 tons, could be made to pay his whole capital in order to be relieved from the bargain. In practice he gets off more easily than this. Frequently when many traders have sold largely “forward” other traders deliberately try to use that position as a basis for creating a “corner.” Generally, however, they only succeed in causing great inconvenience to all parties, themselves included, for as a rule they are only able to make the “corner” effective by buying up so much of the article that when they have compelled their opponents to pay largely to be relieved of contracts to deliver, they are left with so big a stock of the article that they cannot sell it except at a loss, which is sometimes big enough to absorb the gain previously secured. In the case of very small markets “corners” may be complete, but in big markets they are never complete, something always happening to prevent the full realization of the operators’ plans. The idea of a “corner” is, however, so fascinating to the commercial mind, especially in the United States, that probably no year passes without an attempt at some operation of the kind, though the conditions may in most cases prevent any serious result.
“Corners” have what is called a “moral” aspect. It is curious to note that the indignation of the “market” at the disturbance to prices which results from operations of this kind is generally directed against the speculators for the fall, while that of the public, including trade consumers, is directed against the operator for the rise. The operator for the fall, or “bear,” is denounced for “selling what he has not got,” a very inaccurate description of his action, while the “bull” or operator for the rise is spoken of by a much wider circle as a heartless person who endeavours to make a profit out of the necessities of others. From a strict ethical standpoint there is really nothing to choose between the two.
The Money Market.—There is one market which presents features of so peculiar a character that it is necessary to describe it more particularly than other phenomena of the kind, and that is the money market. The term money is here used to denote “money-market money” or “bankers’ money,” a form of wealth which has existed from early times, but not in great abundance until within the last two or three hundred years. Immense wealth has existed in certain countries at various epochs, owing to the fertility of the soil, success in trade, or the plunder of other communities, and all states which have been great have at the time of their greatness possessed wealth; but the wealth which the countries, or a few fortunate individuals belonging to them, owned consisted largely of what is still called real property—that is, land and buildings—and of the produce of the soil or of mines. The balance consisted partly of merchandise of various kinds and shipping, and to a large extent of the precious metals in the form of coin or bullion, or of precious stones and jewelry. Where no settled government was established no one could become or remain very wealthy who was not in a position to defend himself by the strong hand or allied with those who were; and as a rule the only people who could so defend themselves were possessors of large areas of rich land, who were able to retain the services of those who dwelt on it either through their personal military qualities or in virtue of habit and custom. The inhabitants of wealthy cities were able to protect themselves to some extent, but they nearly always found it necessary to ally themselves with the neighbouring land-owners, whom they aided with money in return for military support.
A money market in the modern sense of the word could only exist in a rudimentary form under these conditions. There was a sort of money market, for there was a changing rate of interest and a whole code of law relating to it (Macleod, Banking, 3rd ed., p. 174) in republican Rome; but although large lending and borrowing transactions were part of the daily life of the Roman business world, as well as of those of the Greek cities and of Carthage and its dependencies, none of these communities presented the phenomena of a highly organised market. Money-lending was also a regular practice in Egypt, Chaldea and other ancient seats of civilization, as recent discoveries show. It was only in comparatively recent times, however, when Europe had formed itself into more or less organized states, with conditions fairly favourable to the steady growth of trade and industry, that organized money markets came into existence in places such as Venice, Genoa, Augsburg, Basel, the Hanse towns, and various cities in the Low Countries, Spain and Portugal, as well as in London. The financial strength of these rudimentary money markets was not very great, and as it depended a good deal on the possession by individuals of actual cash, the existence of these markets was precarious. “Hoarded ducats” were too often an attraction to needy princes, whose unwelcome attentions a rich merchant, even when an influential burgher of a powerful city, was less able to resist than the violence of a housebreaker, against whom strong vaults and well-secured chests situated in defensible mansions were a good protection. The necessitous potentate could often urge his desire for a “loan” by very persuasive methods. Occasionally, if his predecessors had acquired the confidence of the banking class sufficiently to induce them to place their cash reserves in one of his strong places “for safety” an unscrupulous ruler could help himself, as Charles II. helped himself to the stores of the London goldsmiths which were left in the Mint. The power of the banking class continued to grow, however, and a real market for money had come into
