Influence of Credit on Prices 1 1 



Loans do not usually show an actual increase in amount until 

 after stock exchange prices have risen. In fact, at the time the 

 rise in stock exchange prices occurs, loans are contracting. How- 

 ever, the absolute amount of loan credit offered for securities at 

 the stock exchange is greater than before, and the loan credit 

 offered for commodities is less in amount, since the total amount 

 of credit in use is the sajne or less} Therefore as stock exchange 

 prices rise, commodity prices fall still lower. 



The rise in the price of securities is an announcement to the 

 public that men of experience and judgment believe that the 

 earning power of the companies represented in the rise will be 

 increased. This rise has a vital and immediate connection with 

 commodity prices. Because of the practice of the ba)iks of ac- 

 cepting stock exchange securities as collateral for loans, the rise 

 in the price of securities has immediately and to the amount of 

 the rise increased the power of the community at large to secure 

 loans. This is rendered the more significant when it is remem- 

 bered that the rise in the price of securities pertains not only to 

 the shares being actually bought and sold on the stock exchange, 

 but also to securities that are held by investors throughout the 

 entire country. 



The extent of the loan inflation which the rise in prices on the 

 stock exchange renders possible is brought out by considering 

 the amount of the rise in security prices during boom times. The 

 following data are suggestive: 



^The importance of the distribution of credit between the securities 

 market (stock exchange) and the commodity market is further shown in 

 the discussion of the fall of prices. 



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