Speculators Versus Enterprise

If I call:

• “speculation” the activity of forecasting the psychology of the market
• “enterprise” the activity of forecasting the prospective yield of assets over their whole life

Then speculation does not always predominates over enterprise.

As the organisation of investment markets improves, the risk of the predominance of speculation increases.

New York is one of the greatest investment markets in the world. There the influence of speculation (in the above sense) is enormous.

Even outside of finance, Americans tend to be unduly interested in discovering what average opinion believes the average opinion is.

This national weakness finds its nemesis in the stock market.

It is rare for an American to invest, as many Englishmen still do, “for income”.

The American will only purchase an investment in the hope of capital appreciation.

When an American purchases an investment, he is hoping, not so much to its prospective yield, for a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator.

Speculators may do no harm as bubbles on a steady stream of enterprise.

But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.

When a country’s capital development becomes a by-product of a casino’s activities, the job is likely to be ill-done.

The success attained by Wall Street cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism.

This is because that triumph requires an institution with the proper social purpose of directing new investments into the most profitable channels in terms of future yield.

But the best brains of Wall Street have been directed towards a different object.

These tendencies are an unavoidable outcome of organised “liquid” investment markets.

It is usually agreed that casinos should, in the public interest, be inaccessible and expensive.

Perhaps the same is true of Stock Exchanges.

The sins of the London Stock Exchange are less than those of Wall Street.

This is not so much due to differences in national character.

It is because Throgmorton Street is more inaccessible and very expensive to the average Englishman than Wall Street is to the average American.

The jobber’s “turn” is the high brokerage charges and the heavy transfer tax payable to the Exchequer which attend dealings on the London Stock Exchange.

This reduces the market’s liquidity (although the practice of fortnightly accounts operates the other way).

This rules out a large proportion of the transactions characteristic of Wall Street.[5]

The most serviceable reform would be to introduce a substantial Government transfer tax on all transactions.

It would mitigate the predominance of speculation over enterprise in the United States.

The spectacle of modern investment markets has made me conclude to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause.

This might be a useful remedy for our contemporary evils.

This would force the investor to direct his mind only to long-term prospects.

But this creates a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment.

Each individual investor thinks that his commitment is “liquid” (though this cannot be true for all investors collectively). This calms his nerves and makes him much more willing to run a risk.

If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual.

This is the dilemma.

So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.

The only radical cure for the crises of confidence would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset.

Even though it is on precarious evidence, it impresses him as the most promising investment available.

It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment.

But that would avoid the disastrous, cumulative and far-reaching repercussions of its being open to him, when thus assailed by doubts, to spend his income neither on the one nor on the other.

Some people have emphasised the social dangers of hoarding money. They have thought of something similar to the above.

But they have overlooked the possibility that the phenomenon can occur without any change in the hoarding of money.