4.2 A high-risk trade
Activity 9 (optional)
Why was there so much turnover in the stock of companies? You will recall the peaks and troughs in Plate 1. ‘The Dundee local trade in 1892’ (from the Rachel Gibbons book referred to in the Introduction to this course) is a look back on a year that included one of the downturns; read the document now. What happened in 1892?
In the early part of the year, fears concerning the supply of raw jute from Bengal pushed up prices; this was made worse by a ‘bull market’ in which every rumour raised expectations – and prices – further. When more accurate information about the size of the jute crop reached Dundee, it became clear that there would be plenty of jute available and prices fell. The whole process was made worse, in the opinion of the writer, by speculation: the buying and selling of raw jute, not for manufacture, but because it was hoped that a profit could be made on trading.
This is not an easy text to follow and this is, in itself, interesting. It was obviously felt that readers would have a certain understanding of local markets. The passage brings out two important constraints on the jute industry. First, raw jute was an agricultural commodity and supply depended on harvests. The fact that nearly all jute was produced in just one region of the world, and one subject to extreme weather conditions, meant that the supply could vary dramatically from year to year. Secondly, the nature of the trade meant that information was often poor. With so many peasant producers, it was difficult to find out in advance how good the harvest would be. The distances involved, and the number of market participants, meant that rumours abounded and could not easily be checked. The result was ‘violent fluctuations’ and ‘rash speculation’. At one point in 1892, prices fell so far that it was not worth shipping jute and supplies threatened to dry up. Buying and selling at the right price often made the difference between success and failure. Looking back on the interwar years, a businessman could recall:
Going each day to the market at the Merchant’s Shelter and attempting to buy yarn one ninety-sixth of a penny cheaper than it was offered because efficiency of production hardly affected profits – all depended on the price of the raw material.
These were tough conditions for manufacturers, and the risks were high. Remember that partners in an unincorporated partnership were fully liable for the debts of their firm. You might expect that entrepreneurs would be cautious about entering such an industry and that many firms would fail. Yet, as we have seen, there continued to be new entrants into the jute industry and some firms, including small ones, survived. In the following example we will explore how this was achieved.