Herr Forstmann on State Credit

Cologne, July 13. In the session of the Agreement Assembly of the 7th inst., Herr No. 44, Forstmann defeated all doubts of the unscrupulous Left as to the unshakeability of Prussian state credit with the following triumphant argument: “I ask you to decide whether confidence in Prussia’s finances has sunk to zero, when on yesterday’s stock exchange a 3 1/2 per cent government paper stood at 72 per cent, with a discount of 5 1/2 per cent!”

It is evident that Herr Forstmann is neither a stock exchange speculator nor a political economist. If Herr Forstmann’s presupposition were correct, that the price of government securities is always in inverse proportion to the price of money, the Prussian 3 1/2 per cents would certainly stand remarkably favourably. For, with a 5 1/2 per cent discount rate, they would then stand not at 72, but only at 63 7/11. But who told Herr Forstmann that this inverse proportion exists – not in the average of 5 to 10 years – but at the individual moment of a business stagnation?

On what does the price of money depend? On the respective proportion of demand to supply, on the existing lack of money or surplus of money. On what does the lack of money or surplus of money depend? On the respective state of industry, on the stagnation or prosperity of trade as a whole and on a large scale.

On what does the price of government securities depend? Likewise on the respective proportion of demand and supply. But on what does this proportion depend? On very many, particularly in Germany highly complicated, conditions.

In France, England, Spain, in all countries whose government securities come onto the world market, state credit is the decisive factor. In Prussia and the smaller German states, whose papers are quoted only on small local stock exchanges, state credit is decisive only in the second instance. Here the great mass of government securities does not serve for speculation, but for the safe investment of capital, for securing a fixed rente. Only a disproportionately small part comes onto the stock exchanges and into trade. Almost the entire mass of the state debt is in the hands of small rentiers, widows and orphans, guardianship boards, etc. If the quotations fall owing to a decline of state credit, this is all the more reason for this class of state creditors not to sell their securities. For them, their rente is just enough to live on; if they sell it at a heavy loss, they are ruined. The small quantity of paper circulating on the few small local stock exchanges cannot, of course, be exposed to the enormous and rapid fluctuations of demand and supply, of fall and rise, like the enormous mass of French, Spanish, etc., paper which serves mainly for speculation and is turned over in large lots on all the great financial markets of the world.

The case where capitalists, from lack of money, are forced to sell their securities at any price and thereby depress the quotations, therefore occurs only rarely in Prussia, whereas it is the order of the day in Paris, Amsterdam, etc., and particularly after the February revolution influenced the unheard-of rapid fall of French government securities much more than the decline of state credit did.

In addition, fictitious purchases (marchés à terme), which in Paris, Amsterdam, etc., constitute the bulk of stock exchange transactions, are prohibited in Prussia.

By this wholly different commercial position of the Prussian local market securities, and of the French, English, Spanish, etc., world market papers, it is explained that the quotations of Prussian paper in no way reflect the slightest political complications of their state to the same degree as is the case with the French, etc., papers; that state credit by far does not exert the decisive and rapid influence on the quotations of Prussian securities that it does on the papers of other states.

To the same extent to which Prussia and the small German states are dragged into the fluctuations of European politics, as the rule of the bourgeoisie develops, to the same extent government securities, just like landed property, will lose this patriarchal, inalienable character, be drawn into commerce, become an ordinary, often turned-over article of trade, and may perhaps even be allowed to claim a modest existence on the world market.

Let us draw the following conclusions from these facts:

First. It is not disputed that, on the average of a longer epoch and with unchanged state credit, the quotation of government securities everywhere rises in the same proportion as the rate of interest falls, and vice versa.

Second. In France, England, etc., this proportion obtains even in shorter epochs, because here the speculators hold the greater part of the government securities, and because forced sales from lack of money occur frequently, which regulate the proportion between quotation and rate of interest every day. Hence here even in individual moments the proportion is often actually present.

Third. In Prussia, on the contrary, this proportion obtains only on the average of longer epochs, because the quantity of disposable government securities is small and stock exchange business is restricted; because sales from lack of money, the real regulators of the proportion, occur only rarely; because on these local stock exchanges the securities quotations are determined in the first instance by local influences, but the prices of money are determined by the influence of the world market.

Fourth. If, therefore, Herr Forstmann wishes to draw conclusions from the relation of the price of money to the quotation of government securities as to the Prussian state credit, he demonstrates a complete ignorance of the conditions. The quotation of 72 for the 3 1/2 per cents, with a discount of 5 1/2 per cent, proves nothing in favour of; the forced loan proves everything against Prussian state credit.