The English Capital Market
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The English Capital Market

Frederick Lavington

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The English Capital Market

Frederick Lavington

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First Published in 1968. If this book aimed at a descriptive account of the detailed phenomena of the Money Market, it would necessarily be concerned mainly with the manner in which the market was adjusting its operations to the special disturbances arising from the war, and would deal principally with such matters as the abolition of time dealings on the Stock Exchanges, the influence of public finance on monetary conditions and the prospects of a return to an effective gold standard. But that is not its object. Its main purpose is one not of description but of interpretation. It attempts to trace the nature of the economies which the market effects as part of the organization of production, and to express those economies in terms of economic welfare.

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Information

Publisher
Routledge
Year
2013
ISBN
9781136266072
Edition
1

THE ENGLISH CAPITAL MARKET

PART I.—LEADING IDEAS

CHAPTER I

INTRODUCTORY

MODERN industrial communities may have much to learn from older civilizations with regard to the art of living; but they have at least this great quality, that they are unsurpassed in industrial efficiency. There is nothing in the past to parallel a productivity like that of England, where an inconsiderable island is made to yield annually products valued in 1914 at more than £2000 m., and to support a population of over 40 millions of people.
The great growth in the industrial power of modern communities has been accompanied by a change in their social structure, or more exactly by a much higher development of characteristics which have always been present. The great branches of production have grown more distinct; the trades within them have moved apart and become more clearly defined, and the complex operation undertaken by each trade has, as it were, been taken to pieces and separated into its elementary processes.
The incentive to this change arises from the great productive efficiency which accompanies specialization ; for this separation of processes makes it possible to employ each human and mechanical agent uninterruptedly on a narrow range of work of a kind adapted to its highest productive capacity.
The term “ Division of Labour ” describes this general tendency of specialization in so far as it affects one of the agents of production —human beings; but it does not bring out clearly the fact that the tendency affects also the other agents—capital and land. When an operation is broken up into separate processes, it is evidently an economy of the first importance to group these simpler processes together and to engage continuously on each the class of workpeople (or managers) whose abilities and training are specially adapted to the purpose. But what is true of Labour is true also of Capital and Land. It is economical in exactly the same way to apply to each process its appropriate specialized machinery and to allocate each group of processes to the site which offers the greatest natural advantages, whether of soil, of climate or of position. The more general statement of this tendency is, therefore, that the growth of industrial power is associated with an increased ability to break up industrial operations into their elementary parts, to group together the similar parts and to redistribute these groups in such a way as to concentrate upon each the human skill, mechanical arrangements and natural advantages most suitable for their performance.
But the ability to break up and separate the parts of an operation in this way is itself dependent upon another condition ; such subdivision can obviously be carried out only if there is a corresponding development of communications, by means of which the dissociated parts are co-ordinated and inter-connected. The system of communications falls naturally into three parts : the transport of intelligence, of material things and of value. Their effects may be briefly considered in that order.
It is evident that the separation of cotton marketing from cotton manufacture and its concentration in Liverpool and Manchester has been greatly facilitated by the development of the telephone, the telegraph and the postal system. Similarly, if a factory operation hitherto carried out by one man is to be subdivided between two, this can be done only by introducing some co-ordinating mechanism such as a foreman, who takes over a part of the mental processes and acts, as it were, as a bridge regulating and co-ordinating the operations of the two workpeople.
In the same way, the development of means for transporting material goods is a most important condition in the separation of processes. Just as the mechanical carrier in the large shop facilitates a more complete separation between the selling and accounting branches of the business; so the railway and the steamship release factories from the sources of their raw materials and enable them to settle on distant sites more suited to their particular operations. It was the growth of railways which liberated cotton-growing in India from the outskirts of each village and enabled it to move to more remote areas of greater natural advantages.
Finally, this ability to concentrate each producing agent on a narrow range of services is dependent on the growth of the system by which value, or general purchasing power, is readily transferred from one person to another. It is dependent on the provision of means and facilities for making payments, i.e. on the provision of means for effecting payments in general and on the provision of facilities for effecting those particular payments by which capital is transferred from the control of one party to another.
It is evidently possible for individual producers to concentrate their energies on the output of a single kind of service or product only in so far as means are provided by which these products may be quickly and conveniently exchanged by way of purchase and sale ; their specialization is limited by the efficiency of the money system—by the ease and safety with which the community can make the payments by means of which these products are redistributed ;. and each improvement in the form of the currency enables this specialization to be carried out more completely than before. The development of the cheque currency in England marks a great increase in the efficiency of this kind of communication. A return even to a sound gold coinage would be equivalent to a heavy tax on all distant dealings ; for the purchase of goods from a distance would involve the expenses and risks of sending coin in payment. In such conditions, therefore, many of these purchases would no longer be made, and production would be concentrated to a less extent at the most suitable sites; in other words specialization would be checked, and productive capacity would be appreciably impaired.
The development of a specialized class of entrepreneurs undertaking the management of business is dependent in a similar way on the transport of capital; it is facilitated by every increase in the efficiency of the machinery by which purchasing power devoted to capital uses is carried into the hands of business men. In the absence of the banks and other machinery for the transport of capital, business undertakings would be formed only when the ownership of capital and business ability happened to coincide ; but with the development of this machinery for joining together capital and business ability each can be separately produced ; the resources of the capitalists who have no aptitude for business management are joined to the ability of the entrepreneurs who lack capital; consequently the supply of each of the two agents becomes increasingly specialized with great advantage to the productive capacity of society. Just as the cost of production of a factory is reduced by the development of railways, steamships and similar transport facilities which enable its constituent parts to be produced at the most efficient sources, so the cost of production of a business undertaking is lessened by the work of the Money Market in transporting capital and thereby giving scope for the separate supply of the two elements, capital and business power, of which the undertaking is composed. Striking evidence of the organic changes introduced by the development of the Money Market is seen in the growing separation of the investor and the entrepreneur which accompanies the rapid increase in public joint-stock companies.
The machinery for the transport of value consists therefore of two distinct parts ; each of these parts is concerned ultimately with facilitating payments; each exercises an influence on the specialization of productive resources analogous to that of the railway and the telegraph. The influence of the first part depends on the efficiency of the money system, that is to say, on the ease and safety with which payments in general can be effected. The influence of the second part depends on the efficiency of the machinery for transporting capital, that is to say, on the economy with which money available for capital uses is carried from those in whose hands it accumulates to those by whom it is applied to its various uses.
There is then this triple system of communications dealing with intelligence, material things and value. Every improvement in this system not only introduces its own immediate economies but operates as a solvent, enabling processes naturally allied to be separated and regrouped in such a way that more highly specialized agents of production may be brought to bear on them and a further set of economies realized. And this specialization in its turn reacts on the efficiency of the means of communication.
These economies stated in an abstract form do not greatly impress the mind, and it is adding little to point out that they form the main basis of the economic argument for Free Trade. In the concrete they are perhaps most clearly seen in the conditions of large towns. Evidently the essential economic circumstance of a large town is simply the physical proximity of the people congregated there. This proximity implies an enormous economy in the cost of communications; speech is substituted for the written letter ; material goods need to be carried much shorter distances ; exchanges are facilitated and the risks of loans are greatly reduced. These economies in communications mean large accessible markets ; and large markets, in their turn, lead directly to more highly specialized forms of production and yet further economies. These twofold economies are reflected in the huge site rents of densely populated areas, and indeed, if allowance is made for non-economic considerations and for such purely physical site advantages as climate and water power, are measured by those site rents.
The lines of this argument are old and familiar. They are restated with the view of bringing out as clearly as possible the fact that more efficient means of communication have results beyond the direct economies which they introduce; for, over and above these immediate economies, they enable society to attain greater productive efficiency by breaking its work into more elementary parts, regrouping these parts and applying to each group a more highly specialized form of the services of human beings, mechanical appliances and land.
This book is concerned only with that part of this system of communications which has been distinguished as the transport of value, a part which may be roughly identified with what is known as the Money Market. Its object is to bring out the social significance of the market as a coherent part of the organization by which resources are adjusted to needs : to connect market phenomena with economic welfare. The market, like the telegraph and the railway, forms part of the general means of communication ; accordingly every increase in its efficiency encourages an organic development of society and gives scope for a higher productive capacity. These effects must be noticed if the significance of its work is to be suggested. It is, however, impossible to do more than notice them. The influences operating in the market are very complex, and its consideration as an organic thing, i.e. as a part of a living and developing industrial system, is quite beyond the scope of this book. Even as a dynamic thing its consideration must be very incomplete, for in its continuous process of readjustment to disturbing influences the organization sets up movements whose final consequences it is hardly possible to trace and express in any simple way until the machinery of economic analysis has been greatly improved. If, therefore, the argument is to be intelligible, it can do no more than touch on organic changes and consider dynamic movements when their effects are important and easily traced; it must in the main be confined to a problem rather static than dynamic in character; it must attempt to express the social economies which arise from the more important permanent forces entering into the composition of the market, those forces being regarded as in that equilibrium which they would attain if time were given them to work out their full effects without interruption.

CHAPTER II

THE MARKET IN RELATION TO MONEY AND CAPITAL

THE object of the preceding chapter was to place the organization with which this book is concerned in its general relations with the industrial system and to indicate the indirect economies to which it gives rise by its influence on the organic growth of the system. We have now to come to closer quarters with the subject in order to show what agencies and institutions are included in this organization; to express more definitely the nature of those direct economies which it produces, and with which alone we are henceforward concerned; and, finally, to establish leading ideas in the light of which these economies are to be examined.
This organization has already been roughly identified with the Money Market. It consists of a nucleus of specialized institutions, such as the banks, the market for negotiable securities, the bill brokers and the trust and finance companies, which form the inner market, or Money Market proper. But it extends beyond this centre forming an outer market which includes the work of the solicitor who arranges for the transfer of capital on mortgage, of the provincial broker who promotes the sale of new and old securities, of building societies which facilitate investment in houses, of the system of trade credit and of those less definite arrangements for facilitating the movement of capital which, as the market is extended outwards, become more and more closely bound up with the ordinary processes of trade and industry. The organization cannot, however, be accurately described by mere enumeration; it must be defined in terms of its typical services, and must be taken to be co-extensive with all the operations by means of which these services are performed.
What, then, are the essential services of the organization? In what way does it enable social resources to be adjusted more effectively to meet social needs? What is the nature of the social economy which it effects?
The answer to this question is a simple one. All the complex and highly specialized processes which form the organization of the market are tributary to two functions: they are an elaboration of two elementary services: the first is that of supplying a stock of money; the second is that of facilitating the transport of capital.
The English banks perform both services simultaneously: Issue houses, floating loans, transfer capital from the control of the public to that of the borrower; Accepting houses do similar work by guaranteeing the payment of bills and so reducing the risks of those who supply capital against this form of security; foreign exchange departments of banks provide means of payment between one country and another; the working of the Bank rate contributes to the making of payments by regulating the volume of the currency; the real meaning of every market operation is to be found in its effects in facilitating the making of payments, the transfer of capital, or in both together.
The market is defined in terms of these two services: every process devised to perform these services forms part of the market; conversely, the market includes only those processes by which these services are performed.
Although these two services are fundamentally different in nature, they are closely bound up together in practice, and are in consequence frequently confused with one another. If the subsequent argument of this book is to be intelligible it is essential that they should be distinguished as clearly as possible. It will be as well, therefore, to consider briefly the conditions in which the demand for these services arises and the nature of each. We may do so most conveniently by considering the case of a single individual, whom we take to be broadly representative of society as a whole.
In simple conditions where each individual devoted his energies directly and solely to the satisfaction of his own needs, the products that he required for his existence would emerge directly from his efforts into his own possession and he would experience no need for the means of acquiring products by way of exchange from other people; he would have no need for money. Further, as he would himself employ for his own purposes any implements and stores of raw material in his possession, he would not desire to lend them to other people, and he would consequently need no assistance in lending them with ease and security; he would have no need for any agency which facilitated the transport of capital. The need for the use of money and for facilities in transporting capital arises when people become interdependent; when means of communication become necessary in order to give scope to the growth of specialization.
In modern conditions this interdependence is very highly developed. In the typical case, each individual confines himself to the supply of some specialized service, and these separate services are co-ordinated into a stream of services which gives rise to the flow of products constituting the National Output. There follows an elaborate process of exchange, and this National Output reappears as the National Income or Dividend, the whole of it being divided among the parties producing it in proportion to the market value of the service supplied by each. Each party to production then, whether capitalist (or landlord), business manager, or labourer, obtains a title to a fraction of the total output, a title whose size is measured by the market value of the service which he contributes. This title represents a control over social resources and constitutes his real income. From these conditions there arise a demand for money and for facilities in transporting capital.
In these circumstances, in contrast with the simple conditions previously considered, each individual finds himself in possession, not of the various products he needs for his existence, but of a claim to a share in the general flow of products emerging in the hands of private owners. The value of his service gives him a right to a fraction of this flow, but not the means by which this right can readily be exercised. He needs some convenient means of administering his resources; some means of transferring portions of his property to other parties by way of payment for the various products he needs to acquire from them, by way of dues to the State, or by way of loan. He needs therefore to convert his title into some intermediate product which, being readily marketable, divisible, transferable and so on, serves as general purchasing power, and so may conveniently be employed as a means of payment. Many commodities possess these properties in greater or less degree; but the highest efficiency is attained when this interme...

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