Influence of Credit on Prices 23 



the accommodations given to speculators. The proof of this is 

 strikingly shown at such times by the great increase of clearings 

 in New York City as compared with other sections of the country. 

 The steps in the fall of prices may be summarized as follows : 

 ( I ) The order of decline may be the same as the order of rise. 

 The decline in the subjective value of goods is evidenced by less 

 loan credit being offered for securities. That is, the decline in 

 the subjective value of goods is due to the belief that industries 

 are not going to be as productive as had been expected. If in- 

 dustries are less prosperous smaller dividends will be paid. Since 

 stock exchange prices are based upon expected dividends the 

 prices of securities now fall, thus automatically decreasing 

 the collateral for securing loans. This enforced contraction of 

 loans in turn diminishes the purchasing power offered on the 

 goods market, causing commodity prices to fall. The order of 

 decline in this case is stock exchange prices, loans, commodity 

 prices. (2) The subjective value of goods may have so de- 

 creased that although the machinery for securing credit may be 

 intact, i. e. the collateral may be as large in amount as ever 

 through siistained stock prices and the banks may be willing 

 to loan, yet this machinery is not made use of. In this case the 

 order of decline would be a contraction of loans, followed by a 

 fall in stock and commodity prices. By consulting table XIII, it 

 will be seen that in no case does the absolute contraction of loans 

 rank first. Yet this order may conceivably occur. Preceding 

 the reaction of 1900 in the United States, loans reached their 

 maximum point in July, 1899, stock exchange prices in Novem- 

 ber, 1899, and commodity prices in April, 1900.^ (3) The third 

 case is similar to the second. The decline in the subjective value 

 of goods decreases the desire to secure loans, but in this case the 



^See JVholcsalc Prices 1896 to igoo. in Quarterly Bulletin of the Bureau 

 of Economic Research, October, 1900:38. The stocks used in the prep- 

 aration of diagram III in the article just cited are twenty-six transporta- 

 tion stocks. It is quite possible that if more comprehensive stock prices 

 were at hand it would be found that stock prices as a whole fell before 

 the contraction of loans, because prices of industrials at this time fell be- 

 fore railroad stocks. Cf. charts 6 and 7 in appendix of the writer's article 

 on Speculation in Relation to the World's Prosperity i8g~-igo2, in Uni- 

 versity Studies, January, 1906. 



63 



