These considerations should not lie beyond the purview of the
economist. But they must be relegated to their right perspective.
If I may be allowed to appropriate the term speculation
for the activity of forecasting the psychology of the market, and
the term enterprise for the activity of forecasting the
prospective yield of assets over their whole life, it is by no
means always the case that speculation predominates over
enterprise. As the organisation of investment markets improves, the
risk of the predominance of speculation does, however, increase. In
one of the greatest investment markets in the world, namely, New
York, the influence of speculation (in the above sense) is
enormous. Even outside the field of finance, Americans are apt to
be unduly interested in discovering what average opinion believes
average opinion to be; and this national weakness finds its nemesis
in the stock market. It is rare, one is told, for an American to
invest, as many Englishmen still do, 'for income'; and he will not
readily purchase an investment except in the hope of capital
appreciation. This is only another way of saying that, when he
purchases an investment, the American is attaching his hopes, not
so much to its prospective yield, as to 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
the capital development of a country becomes a by-product of the
activities of a casino, the job is likely to be ill-done. The
measure of success attained by Wall Street, regarded as an
institution of which the proper social purpose is to direct new
investment into the most profitable channels in terms of future
yield, cannot be claimed as one of the outstanding triumphs of
laissez-faire capitalism - which is not surprising, if
I am right in thinking that the best brains of Wall Street have
been in fact directed towards a different object.
These tendencies are a scarcely avoidable outcome of our having
successfully organised 'liquid' investment markets. It is usually
agreed that casinos should, in the public interest, be inaccessible
and expensive. And perhaps the same is true of stock exchanges.
That the sins of the London Stock Exchange are less than those of
Wall Street may be due, not so much to differences in national
character, as to the fact that to the average Englishman
Throgmorton Street is, compared with Wall Street to the average
American, inaccessible and very expensive. The jobber's 'turn', the
high brokerage charges and the heavy transfer tax payable to the
Exchequer, which attend dealings on the London Stock Exchange,
sufficiently diminish the liquidity of the market (although the
practice of fortnightly accounts operates the other way) to rule
out a large proportion of the trinsaction characteristic of Wall
Street. The introduction of a substantial government transfer tax
on all transactions might prove the most serviceable reform
available, with a view to mitigating the predominance of
speculation over enterprise in the United States.
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true for all investors collectively) 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.