Market

Market (Lat. mercatus, trade or place of trade). This term is used in two well-defined senses. (1) It means a definite place where (a) traders who are retail sellers of a specific class of commodity or commodities are in the habit of awaiting buyers every day in shops or stalls; or whither (b) they are in the habit of proceeding on specified days at more or less frequent regular intervals. Covent Garden market for fruit and flowers, and Leadenhall market for meat and poultry, are good examples in London of the kind of institution included in class (a). They are a very ancient economic phenomenon, dating from the earliest period of the development of organized communities of human beings, and in general characteristics have changed little since they began to exist. Markets of the type of class (b) are also of very ancient origin (see Fairs), but inasmuch as they are constituted essentially by the presence of persons, many of whom assemble from various places outside the place of meeting, they were capable of a little more development than those belonging to class (a), owing to increased facilities for locomotion. The nature of an ancient market of class (a), whither a citizen, say of Athens, or his chief slave, proceeded daily to make household purchases, differs little from the group of shops visited by the wives of the less wealthy citizens of modern states. In many places abroad, and not a few in England, actual markets still exist. It may be said that the huge collections of shops, such as the various cooperative stores, are only a revival of the old "market-place," with its shops or booths gathered round a central area, adapted to the needs of modern big cities. (2) The term "market" has come to be used in another and more general sense in modern times. According to Jevons, a market is "any body of persons who are in intimate business relations, and carry on extensive transactions in any commodity." He adds that "these markets may or may not be localized," and he instances the money market as a case in which the term "market" denotes no special locality. As a rule, however, most of the business of a market is transacted at some particular place, such as the London Stock Exchange, the Baltic, the Bourse of Paris, the Chicago "Wheat-pit." Even in the case of the London money market, merchants still meet twice a week at the Royal Exchange to deal in foreign bills, although a considerable part of the dealings in these securities is arranged daily at offices and counting-houses by personal visits or by telegraphic or telephonic communication. The markets in any important article are all closely interconnected. The submarine cable has long ago made Chicago as important an influence on the London corn market as Liverpool, or rather both London and Liverpool affect and are simultaneously affected by Chicago and other foreign markets. In like manner the Liverpool cotton market is influenced by the markets in New Orleans and other American cities separated from it widely in space. In a minor degree the dealers in all places where a cotton market exists affect the bigger markets to some extent. What is true of the cotton market is also true to some extent of all markets, though few markets are so highly organized or show such large transactions as that for cotton. Among other markets of the first class may be mentioned those for pig-iron, wheat, copper, coffee, and sugar. There are many articles the markets for which are of considerable dimensions at times, but are of an intermittent character, such as the London Wool Sales, which take place now in five "series" during the year. Formerly the number of "series" was four. (For "market overt" see Sale Of Goods and Stolen Goods.) Characteristics of Markets. - The conditions required in order that the operations of a trading body may display the fullydeveloped features of a modern market, whether for commodities or securities, are: (1) A large number of parties dealing.

(2) A large amount of the commodities or securities to be dealt with.

(3) An organization by which all persons interested in the commodity or security can rapidly communicate with one another.

(4) Existence and frequent publication of statistical and other information as to the present and probable future supply of the commodity or security.

The movements which take place in prices in any market, whether fully organized or not, depend largely on changes of opinion among buyers and sellers. The changes of opinion may be caused by erroneous as well p y y  as by correct information. They may also be the result of wrong inferences drawn from correct information. In markets for commodities of the first importance, such as wheat, cotton, iron, and other articles which are dealt in daily, the state of opinion may vary much during a few hours. The broad characteristics of markets of this class are similar. There is a tendency in all of them to show phenomena of annual periodicity, due partly to the seasons, the activity of certain months being in normal years greater in the case of any given market than that of other months. This tendency was always liable to be interfered with by the special forces at work in particular years; and the great increase in the facilities of communication between dealers by telegraph, and of transportation of commodities between widely distant points, which was one of the marked features of the development of the economic organism in all actively commercial countries during the last thirty years of the 19th century, has still further interfered with it. Nevertheless, a tendency to annual periodicity is still perceptible, especially in markets for produce of the soil, the supply of which largely depends on the meteorological conditions of the areas where they are grown on a scale sufficient to furnish an appreciable proportion of the total produce.

Periodicity of. another kind known as "cyclic," and due to a different set of causes, is believed to exist by many persons competent to form a judgment; but although the evidence for this view is very strong, the theory expounding it is not yet in a sufficiently advanced state to admit of its being regarded as established.

## Phenomena of Markets

Bagehot said of the money market that it is "often very dull and sometimes extremely excited." This classical description of the market for "money" applies to a large extent to all markets.

Every market is at every moment tending to an equilibrium between the quantity of commodities offered and that of commodities desired; supposing equilibrium to have been attained in a given market, and that for some appreciable period it is not disturbed, the price for the commodity dealt in, in the market, will remain practically unchanged during that period. Not that there will be no transactions going on, but that the amounts offered daily will be approximately equal to the amounts demanded daily.

We have briefly described the statical condition of a market; we must now briefly examine its dynamics. Disturbance may take place through a change in - (1) Supply, or opinion as to future probable supply.

(2) Demand, or opinion as to future probable demand.

(3) In both simultaneously, but such a change that demand is increased or decreased more than the supply, or vice versa. A moderate disturbance caused by one of the above changes, or a combination of them, will produce an immediate effect on the price of the commodity, which again will tend to react on both the supply and the demand by altering the opinions of sellers and buyers. If no further change tending to disturb the market takes place, the market will' gradually settle down again to a state of equilibrium. But if the disturbance has been considerable, a relatively long time may elapse before the market becomes quiet; and very likely the level of price at which the new equilibrium is established will be very different from that ruling before the disturbance set in. Further scientific 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 require- Future ments of buyers and sellers. This organization Delivery. }' g arises naturally from the necessities of business, 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 corners." 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 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 loo 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. Moneylending 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 existence in many cities of Europe by the middle of the 17th century. (See Banks And Banking.) In the 18th century the "money market" consisted of the Bank of England and various banks and merchants, and distinction between the two being still not complete. Towards the end of that century arose an important class of dealers in credit, the bill brokers, and with their appearance the modern money market of London may be said to have assumed its present form, for though the process of development has The Early not ceased, the changes have been of the nature Money Market. of growth and not of the acquisition of new organs.

The formation of joint-stock banks and discount companies, however, and the reconstitution of the Bank of England by the Act of 1844, exercised an important influence on the way in which the money market of London has developed. It must be explained that in the every-day talk of the City "the market" has a special meaning, by which only the banks and discount houses, of even only the latter in some cases, are denoted, as in the phrases constantly seen in the daily reports published in the newspapers towards the end of a quarter, "the market has to-day borrowed largely from the Bank of England," or, "the market was obliged to renew part of the loans which fell due to the Bank to-day." But this use of the term in a special sense, thoroughly understood by those to whom it is habitual, Modern and resulting in no ambiguity in practice, is not in The Money accord with the requirements of economic analysis.

Market of The working organs of the money market of London. London at the beginning of the 20th century were: A. (I) The Bank of England.

(2) Banks, joint-stock and private, including several great foreign banks.

(3) Discount houses and bill-brokers.

B. (4) Certain members of the Stock Exchange.

(5) Certain great merchants and finance houses.

The institutions included in group A are the most constantly active organs of the money market; those included in group B are intermittently active, but in the case of section (4), though their activity is greater at some times than others, they are never wholly outside the market. Even in the case of (5) a certain amount of qualification is needed, which is indicated by the fact that most of the great merchant houses are "registered" as bankers, though they do not perform the functions usually associated with that term in the United Kingdom. Several of the great houses were originally and still are nominally merchants, but are largely concerned with finance business - that is, with the making of loans to foreign governments and the issue of capital on behalf of companies. These powerful capitalists often have large amounts of money temporarily in their hands, and lend it in the money market or on the Stock Exchange; one or two of them are large buyers of bills from time to time, and generally the members of this group may be said to be in sufficiently close touch with the active organs of the money market to form part of it.

The actual working of the money market has been described by Walter Bagehot in his Lombard Street, a work which has The Work- attained the rank of a classic. Most of what he said ing of the in 1873 is true now, but in certain minor respects Money developments have taken place, the most important Market. being the greater extent to which money is "used up" every day, or rather every night. In Bagehot's time the discount houses only quoted "allowance" rates for "loans at call and short notice," based on the rate "allowed" by the banks for loans at seven days' notice; but since then the bill-brokers have been obliged - (1) occasionally to fix their terms independently of the banks, and (2) to "allow" a rate for "money for the night." This latter practice became usual about 1888 or 1889. The change it introduced was not a vital one, but has some importance from the point of view of the historian. A good deal of the "money" thus dealt with is derived from the group of traders included in class (5). It is (a) money which is temporarily in the hands of houses or institutions which have just received subscriptions to loans or other capital offered to the public; (b) balances left temporarily with finance houses or banks on behalf of foreign governments or other parties who have payments to make in London. In the former case the "money" is almost invariably only available for a short time, probably only for a few days; in the latter case also it probably will be only available for a few days, but may be available for months. Money derived from either of these sources is usually to be had cheap, but is not, in the slang of the City, "good," because it is uncertain how long loans at call obtained from either of them will remain undisturbed. Nevertheless, there has been at times so much "money" of this fugitive character, and derived from such varied sources since about 1888, that its cheapness has been an attraction to the less wealthy bill-brokers, who have occasionally been able to go on using it profitably for many continuous weeks, or even months, in their business. The risk run by employing it is, of course, the certainty that it will be "called" from the borrower sooner or later, and probably at a time when it is very inconvenient to repay it. The more wealthy houses take money of this kind when it suits them, but never rely on it as a basis for business.

Since Bagehot wrote the growth of the big joint-stock banks has been enormous, not so much through the increased business done by banks generally, though the expansion in banking has been considerable, as by the absorption The Great Banks.  of a great number of small banks by three or four large institutions (see Banks And Banking). The growth of these large institutions tends to facilitate combination for purposes of common concern among banks generally - e.g. to support the Bank of England in maintaining its reserve, which is the sole reserve of all the banks, at a proper level, and thus render the money market more stable. Two or three of the banks have for a long time, owing to their large holding of bills, had much more influence than the Bank of England over the foreign exchanges, on which the foreign bullion movements chiefly depend; and since 1890 persons of weight in the jointstock banking body have implicitly, though not explicitly, admitted a certain degree of responsibility in the matter on behalf of their institutions. It is, however, characteristic of British business arrangements that the question of the responsibility for the reserve of the Bank of England, the ultimate reserve of the whole country, is still in as nebulous a condition, so far as explicit acceptance of responsibility by any institution is concerned, as it was in 1870. There has been no improvement in theory, though in practice there has been real improvement, since Bagehot's time. The tendency is, indeed, decidedly in the direction of closer combination between the Bank and the banks. On more than one occasion the Bank has, not merely by borrowing "in the market," but by more or less private negotiations with the big banks, obtained temporary control of large sums belonging to the banks in order to take cash off the market. This proceeding, and its concomitants, did not meet with universal approval; but the results were satisfactory on the whole, and on the later occasions when the measure was carried out there was little or no friction.

The enormous war loans raised by Japan in 1904, 1905, 1906 exemplified aptly the more modern methods of dealing with the disturbance to the money market which such oper ations produce. The loans were issued by three Effec  banks, one of which was a Japanese institution and Loans.  represented the Japanese government in the oper ations connected with the various loans. Of the other two, one was a leading London bank and the other the principal British bank doing business in China. These large loans were issued with the minimum of disturbance to the London money market. The very large amounts of cash which were suddenly withdrawn from other banks, and deposited with the institutions issuing the loan as "application money," were lent out again in the short loan market as soon as possible, usually on the afternoon of the day of issue. The work involved was very heavy, as a great number of cheques had to be cleared in a brief space of time, but by skilful organization this was done. Similar promptitude was displayed when the successive instalments on the loans became due and were paid, most of the cash being available for borrowers a few hours after it was paid in by the holders of the scrip which represented the loans until the definitive bonds were ready. The task of dealing with cash forming instalments of the loans was not, however, the only problem before the banks which issued them. As the scrip of each loan gradually became "fully paid" the proceeds of the loan in the hands of the banks became a very large sum. The Japanese government held the whole of it at its disposal, and might have seriously embarrassed the London money market if it had not dealt with its huge balances considerately. The Japanese government had promised not to withdraw any portion of the loans raised in London in gold, but it was under no restrictions as to how it should employ the money lying to its account. It might have kept it locked up until it had a bill for ships or clothing to pay. As might be expected, the government from the outset transferred a portion of what was deposited with the banks to the Bank of England, finding it advantageous on various grounds to do so. The remainder was lent for short periods by the banks, but for some time no means were available for lending for any considerable length of time, though the Japanese government had no immediate use for the whole of it. It was suggested to the government by its advisers that it would be a convenience to the money market, and no inconvenience to Japanese policy, if any balances which were not likely to be wanted for some months were invested in British treasury bills, and the government, after fully acquainting itself with the nature of the operation, agreed to it. The plan was found to work well; it released for definite periods money that would otherwise have been of little use to the money market, and it was of pecuniary benefit to the Japanese exchequer to the extent of the interest earned by the portion of the balances so employed. Incidentally it suited the British treasury; the Japanese demand, which became a constant feature in connexion with treasury bill issues, lowered the discount rates at which "sixes" were placed. The Japanese not only applied for treasury bills and bought them in the market, but they also took up some of the exchequer bonds issued in connexion with the South African war towards the end of their currency, thus relieving the money market of a further part of the weight of British government paper which it would otherwise have had to take on itself. A further important development of Japanese management of its London balances took place in 1906, when a portion of these balances was 'placed under the control of agents of the Bank of England, to be lent, or not lent, in the market as suited the Bank's policy, which was at that time directed to raising the value of money in order to protect and increase its reserve. The plan worked very well on the whole. It was merely an adaptation of a practice initiated some years before, whereby the Bank sometimes obtained temporary control of moneys belonging to the India Council. The same idea, that of "intercepting" market funds, which were beating down the discount rate, depressing the foreign exchanges and depleting the Bank's reserve, has been employed in regard to the clearing banks themselves, the banks having on more than one occasion agreed to lend the Bank of England a certain portion of their balances.

The discount houses, though an important body of institutions, are not of so much importance as they were before 1866, when they suffered a serious blow through the failure of The " Overend's," from which as a body they have never House s. . fully recovered. The five large concerns which still House ?' g exist are, however, very powerful and exercise considerable influence on the market. They hold considerable quantities of bills at all times; occasionally their holdings are very large, but they turn out the contents of their bill cases readily if they think fit. Their business is different in practice from that of the smaller "bill-brokers," who usually are what their name suggests, namely, persons who do not hold many bills, but find them for banks who need them, charging a small commission. The small bill-brokers borrow from the Bank of England much more freely than the big discount houses. The latter only "go to the bank" in ordinary times perhaps once or twice a year. During the South African War, which disturbed the money market very much, they obtained accommodation from the Bank more frequently than usual. The small brokers almost always have to borrow from the Bank at the end of every quarter, when money is scarce owing to the regular quarterly requirements of business, and also, to some extent, because certain of the banks make it a practice to call in loans at the end of each month in order to show a satisfactory cash reserve in their monthly balance-sheet. This practice is not approved by the best authorities, for although it does no great harm in quiet times, the banks who follow it might find it difficult, or even impossible, to call in their loans in times of severe stringency.

Au'rnoRITIEs. - Walter Bagehot, Lombard Street (1873); Arthur Ellis, Rationale of Market Fluctations; Robert Giffen, Stock Exchange Securities (1879); W. Stanley Jevons, Theory of Political Economy  (2nd ed., 1879), pp. 91 seq., and Investigations in Currency and Finance;  Henry Sidgwick, Principles of Political Economy, book ii. ch. ii.; Augustin Cournot, Theory of Wealth (1838), translated by Nathaniel T. Bacon; George Clare, A Money Market Primer and Key to the Exchanges; John Stuart Mill, Principles of Political Economy, book iii. ch. i. - vi.; John Shield Nicholson, Bankers' Money; Hartley Withers, The Meaning of Money (1909). (W. Ho.).