The Italian bourse II

The Motor Crash

«The Economist», 22 Agosto 1908, pp. 346-348.

It must be noted, that though the average loss in the current quotations of shares on the Stock Exchange is equal to the difference between 172.51 (the maximum of March, 1906) and 130.30 (at the end of June, 1908), this loss is rather unequally divided among the different groups of industries. Below we publish a table in which we set side by side the nominal and the actual prices of the shares quoted on the Italian Stock Exchange at different times: At the end of January, 1905 (the beginning of the Stock Exchange boom), at the end of September, 1905 (the first maximum), at the end of March, 1906 (the second maximum), at the end of November, 1906 (the first Stock Exchange crisis), at the end of October, 1907 (the second and more serious crisis on the Stock Exchange), and at the end of June, 1908 (the close of the first six months of 1908, which were six months of liquidation).

Since then, at the July liquidation, there has been a further fall of values to 129.03, which is the lowest point touched since the year 1902. But I have already pointed out in my former article that the present fall is due to the stagnation which is today acute in the Italian exchanges, after they were abandoned by the powerful interests which had given an artificial stimulus to the quotations at the close of 1907. So that we are justified in limiting our observations to the first six months of the year, and neglecting the further fall in the month of July.

Before coming to details we must state that the shares under consideration in the following table are only the principal shares quoted on the Italian Stock Exchanges. We have not reckoned in the shares which are only quoted spasmodically, or have no importance; and, above all, we have not included the shares issued by companies which did not ask for admission to the quotations on the Stock Exchange. These last shares are taken up privately or by the banks, and there are a great many of them, because numerous prosperous companies, chiefly for fiscal reasons, do not care to have their shares quoted on the Stock Exchange.

The companies under consideration are divided into various groups; these numbered 10 in 1905, and grew to 12 in 1906, by the accession of the group of companies producing motor cars, and also because the group of “companies dealing with immovable property”, was taken out of the group of “various industries” on account of its special importance. (See tables at pp. 9, 10, 11).

The story told by these tables varies from group to group. Alone and isolated stands the group of the 15 (afterwards 16) motor car works, which, at the end of March, 1906, had reached the actual price of 162,100,00 lire, or 678.95 per cent, of the nominal price of issue, which was altogether hardly 23,875,000 lire. The period from March, 1906, was that in which the motor car shares enjoyed the greatest favour, specially on the Turin Stock Exchange, and gave rise to unrestrained speculation. The impetus to the follies committed in this industry was given by the celebrated “Fabbrica Italiana Automobili Torino”, known all over the world under the name of “Fiat”. Founded in 1899 with a capital of 800,000 lire, in shares of 200 lire, it led for some years a hard life, so much so, indeed, that its shares could be bought for a little over 100 lire. In 1900 the company lost 18,070 lire, in 1901 another 9,849 lire, in 1902 it began to gain 64,034 lire, in 1903 it gained 91,525 lire. Hitherto, it had not paid any dividend, but in 1904, it paid a dividend of 6 per cent., and in 1905 the net profit rose to 2,136,130 lire, and the dividend paid to 20 per cent. This great prosperity

1905

induced the directors to commit some errors; first of all, to divide the old shares of 200 lire into eight new shares of 25 lire. These new shares, thanks to the splendid dividends that had been paid, and to the still higher dividends that were hoped for in the future, began to rise uninterruptedly, so that at the end of December, 1905, they were worth 1,200 lire, at the end of January, 1906, 1,650 lire, at the end of February 1,700 lire, at the end of March, 1906, at least 2,000 lire. There were even days on which the price rose to 2,300 lire a share (92 times the nominal price of issue!), and many persons at Turin bought these shares in the hope that they would rise to 3,000 lire and over. At this point the directors, thinking that a share of 2,300 lire was too large for the medium and the small capitalist, proceeded to divide it a second time into two and a-half shares, each of 10 lire; to

1906

1907

1908

these, however, they set the nominal value of 100 lire, stating that this was in reality the value of the company’s property. Many persons predicted that the new shares would fly up rapidly; all the more so, because at the end of 1906 the balance-sheet of the “Fiat” showed a net profit of 5,287,083 lire, a colossal figure for a paid-up capital of 800,000 lire which had been inflated to 9,000,000 lire, and a dividend of 40 per cent, was paid on the new shares of 100 lire, which corresponded to 400 per cent, on the paid-up capital. But ruin was already waiting in the pathway of this flourishing company. Its prosperity had provoked the formation of numbers of rival companies; in our abstract we include only 15 which were constantly quoted on the Stock Exchange, but in reality there were as many as 66 companies for the construction of motor cars proper, and 56 works for making the carriage part and other motor car accessories, with a nominal capital of 141,413,000 lire.

Some of these companies were really formed in order to manufacture motors, and motor accessories, but many were launched with the sole object of making their shares go up on the Stock Exchange, and of selling them to the voracious and ignorant public.

But the day of reckoning cound not be put off. Half way through 1907 the manufactories were choked up with unsold motor cars; the Northern United States, great purchasers of motor cars of the “Fiat” and “Itala” make, hard hit by the crisis, abruptly stopped purchasing. The “Fiat” balance-sheet of 1907 showed a loss of 5,922,542 lire, in addition to the loss of considerable reserves accumulated in the past; and not only was the company unable to pay any dividend, but it was forced to confess that the 100 lire shares were now only worth 34.19 lire, and to call on the share-holders to make them up to 100 lire again by paying up 65.85 lire per share.

The bubble was definitely pricked; the latest shares of 100 lire nominally which in November, 1906, stood at 750 lire, had fallen in January, 1907, to 505 lire, in May to 410 lire, in August to 200 lire, in October to 80 lire, in April, 1908, to 40 lire, in May to 34.50 lire, and in June (after the fresh payment of 65.85 lire per share) they stood at about 100 lire. The Turin Tribunal has begun penal proceedings against some of the directors of the “Fiat” for jobbing the shares (spreading fraudulent rumors which make the shares go up), and for falsifying the balance-sheet of 1906, which, as we said above, showed a net profit of 5,287,083 lire. The rival manufactories, which sprang up like mushrooms in the days of the Stock Exchange madness, are in no better plight. Anyone who goes outside the town of Turin sees scattered about in the suburbs great factories which are deserted, though quite new. They are manufactories of motor cars which have had to close for want of work.

We have given this Turin episode of the “Fiat” at some length, because of the world-wide fame of this make of motor car. But in all the big Italian towns there were similar cases; at Milan, at Genoa, at Florence, at Rome. It is the story of all crises which has always repeated itself, specially in countries which are industrially young.