Cyclopædia of Political Science, Political Economy, and the Political History of the United States
SPECULATION, in some form or other, has existed under every commercial system: but the forms under which it is now largely conducted, and the enormous extent of the speculative transactions, are peculiar to the present age. It is with the discussion of these forms—their character, their development, and their more immediate effects—that this article is concerned. (For the more wide-reaching effects of the speculative spirit upon credit, business and production, see articles on COMMERCIAL CRISES, and on OVER-PRODUCTION.)
—Until the present century the chief field for speculative operations was furnished by the difference of price of the same commodity in different places. Mercantile profits were made by buying in a cheap market and selling in a dear one; and with the imperfect means of communicating intelligence, and the slow and generally hazardous means of transportation, such speculations often involved great risks and offered the chance of correspondingly high profits. But the modern development of the postoffice, of steam transportation, and especially of the telegraph, changed all this. Abundance in one market, and scarcity in another, was no longer possible except on a limited scale or through artificial obstructions. The telegraph gives notice of the inequality in its first beginnings; and, long before it can reach an extreme, cargoes have been diverted from the full market to the empty one. Indications which once could be seized only by men of exceptional position and sagacity, are now the common property of the whole business public.
—But the opportunities for men of exceptional position and sagacity have been extended in another direction more than they have been curtailed here. The state of the markets at distant places may be known to every one; but it is still only the few that can foresee their state at distant times. The information that has set narrow limits to speculation in place has furnished the necessary basis to an infinitely more important and wide-reaching speculation in time. The difference in price between New York and Chicago, apart from temporary disturbing causes, can never be greater than the cost of carriage (in its widest sense) between the two places, because we have in the one place telegraphic information concerning the markets of the other. If we had the same certain knowledge of price at future times, the prices of goods to-day and a month hence could not differ by more than the cost of holding those goods for that length of time. It is, of course, impossible to have such knowledge: and the few who have the power to foresee or manipulate the course of the market are enabled to turn these price variations to their own account. Before the invention of the telegraph, such dealing in futures would have been a blind game of chance, now, there is just such a combination of indications and uncertainties as to give scope to business talent of the highest order. Here lies the explanation of what is peculiar in the speculation of the present day.
—In a healthy state of business these variations in price are not very large or rapid; often not large or rapid enough to make speculative dealings pay the interest of the capital required. But such a state of things is almost always disturbed by a sudden rise in the price of certain classes of goods, or perhaps by a general rise of prices. A sudden increase in the demand or decrease in the supply of a particular article will produce the former result; inflation of the currency, increased production of the precious metals, or, sooner or later, the unrestricted extension of business credits, will produce the latter. The holder of goods of the classes affected sees himself nominally the richer for every day that goes by, and with this apparent increase of wealth comes a desire on the part of every one to hold more goods and stocks, even if they have to borrow money to do so. This shows itself, not merely in the operations of the stock and produce exchanges, out in business speculations of every kind; most of all, perhaps, in the extension of speculative production, which lies outside the scope of the present article. This holding for a rise is the form of speculation which presents most attractions for the general public; and a speculative mania is often developed which can only end in a crisis. This mania may attach itself to particular lines of investment, as to tulips in Holland in 1634-8, to South sea bubbles in England in 1720, to manufactures in 1815 and 1825, to the English railways in 1846, or the American railways (among other things) in 1871-3. Often it may be more general in connection with the indiscriminate extension of credit, as in the years preceding 1837 and 1857; or, worse yet, in connection with currency inflation, as seen in France at the time of John Law's bank, 1718-20, in the assignats of the French revolution, or in our own recent experiences; where every exporter or importer, and indirectly, every business man, is obliged to be involved against his will in speculation on gold.
—In such speculative periods, with unsettled and generally advancing prices, the more prudent business men are thus obliged to have recourse to contracts for future delivery of goods at definite prices. The builder can not safely make a contract for a fixed sum unless he knows what his materials will cost a few months hence. The cotton manufacturer can not arrange his basis of production and scale of prices unless he knows what his raw material will cost him from time to time. If a planter or cotton factor agrees to deliver him his material from time to time at determinate prices, the manufacturer knows where he is likely to stand. Here is a transaction, speculative in form as far as concerns the broker, but in reality a defense against the evils of speculation. The manufacturer knows what he can probably afford to pay, the producer knows for what he can probably afford to sell. Of the unavoidable risk, each party takes the part concerning which he can best judge, and against which he can best protect himself. This is an exceptionally favorable case. The majority of those who sell "short," i.e., who engage to deliver goods which they do not hold, rely not so much upon sources of supply which they represent, as upon their judgment concerning the future movements of the market. Yet even in this case their influence may be healthful, and their work legitimate. It has been said that the general public is fond of speculating for a rise. Now, a man of special training, and special sources of information, can often see clearly where the general public is mistaken, and by selling short at the high prices, and obtaining the means of meeting his obligations at the lower ones, may take advantage of the public mistakes, and at the same time render a service to the market in steadying price. As transactions of this kind multiply, it is inevitable that they should fall more and more into the hands of brokers, and that these brokers should organize exchanges for the purpose of more easily dealing with one another. These last are of modern growth. The germ of the New York stock exchange seems to have existed at the close of the last century, but its regular organization dates from 1817. This Chicago produce exchange is scarcely thirty years old. These means of communication have greatly-facilitated bona fide transactions; but, with their growth, gambling transactions have grown up about them to such an extent as often to hide the bona fide transactions from view.
—The first step in this direction has been the habit of dealing upon margins; that is, of not making full payment at the time of the first engagement, but of depositing a sufficient sum to insure the broker against loss by change in the price. It is hard to draw the line where such transactions lose their bona fide character; the deposit of a margin may-simply be a convenient and perfectly legitimate way of extending business credit. But where the marginal idea is carried through the transaction, and settlement is effected, not by an actual delivery and payment, buy by a payment of the difference in price at the two periods, with no delivery at all, we have a complete departure from the original character of the transaction. It is now nothing more than a wager on the change of price of the stocks or goods in question, somewhat cloaked under the forms of legitimate business. In the next stage of speculation, by "puts," "calls," and "spreads," even these forms are cast aside. In the first of these a man buys of a broker, for a small consideration, the right to deliver a certain quantity of stock at a specified price within a specified time; in the second, he buys the right to receive it; in the third, he buys for a considerably larger price the right of delivering or receiving as he may choose. They are thus, even in form, simply wages on the price movement.
—We have spoken of the outside public as generally speculating for a rise, and the more practiced operators for a fall. Of course there are numerous exceptions to the latter; and it is precisely these exceptions, when they take the shape of corners, that make the most impression upon the public mind. In its principles a corner does not differ from any other monopoly. An individual or a ring who once secure the whole or nearly the whole marketable stock of a commodity, have, of course, the power to fix the price as long as that state of things continues. But in the case of ordinary attempts at monopoly the buyers have usually the advantage of being able to diminish their consumption for the time being, and to wait for the advent of competing sources of supply. But the bear, who has sold short, has neither of these advantages. He must deliver a fixed quantity, and must do it within a fixed time. He has no choice but to do that or fail; and the operator who can control the supply of a stock in the market for a comparatively short time can charge any one who has sold that stock short any price up to what will drive him to absolute failure. Just as it is the public fondness for speculating for a rise that makes it possible and profitable for the street to sell futures, so it is the readiness of the street to sell futures that makes it possible and profitable for large operations to engineer a corner.
—In spite of the strong impression that they make upon the public imagination, successful corners in stocks are by no means so common as is generally supposed. The important ones in New York have been the Morris canal corner of 1835, the Harlem corners of 1863 and 1864, Prairie du Chien of 1865, North-Western of 1867, and Hannibal & St. Joseph of 1881. Even in these it is not always certain that the bulls make the profits they appear to. For the time being they extort enormous sums; but after the settlement they find themselves holders of masses of stocks, which they have usually bought somewhat above its normal figures; and the price at which they can ultimately dispose of this stock is an important element in the question of their success. But it is extremely difficult to carry a stock corner forward to its completion. The Michigan Southern corner of 1865—apparently a very safe operation, since the cornerer was buying property which he really wanted—was broken by an issue of construction stock. So also in an attempt to corner Milwaukee & St. Paul, and so twice in the history of Erie. The substitution of preferred for common stock has had the same effect. A still commoner source of failure, which it is impossible to guard against, is the treachery of individual members of a cornering pool.
—Corners in produce are a growth of the most recent years; yet they already exceed stock corners in frequency, and still more in economic importance. It is but a short time since writers regarded corners in a commodity like wheat as almost an impossibility; so varied are the sources of supply, so apparently impossible is it for one man to control them. But these writers had not foreseen the development of short sales and paper contracts which should make a temporary control of a particular market so thoroughly effective toward securing this end. The extent to which speculative sales of produce have grown is almost inconceivable. The statistician of the New York produce exchange testified that nine-tenths of its dealings were purely speculative. The same fact is more strikingly brought out by a comparison of the quantities of produce actually brought to New York in 1882 with those nominally sold.
As compared with 1881 the increase in these speculative sales is probably more than one-third , while the actual quantity of products delivered has, on the whole, diminished. In fact, flour seems to be the only produce of first-rate importance which still maintains its non-speculative character. The pretended sales of wheat for 1882, as our table shows, were more than fourteen times the quantity received. The sales of cotton were five times the entire crop, fifty times the whole quantity received in New York, and two hundred times the actual deliveries in the New York market. In the oil business it has been even worse. The recorded sales in November alone amounted to nine times the entire stock in the country , or to 135 times the production for the month. (For a fuller exhibit of these facts, see "Public," Jan. 4, 1883.) In Chicago matters are almost the same—three thousand millions of sales on less than four hundred millions of produce in 1882. In Liverpool they are no better, in spite of more apparent compliance with the forms of delivery. A single consignment of a hundred bales of cotton has nominally changed hands one hundred and fifty times before sale for bona fide consumption. When the whole amount available for the year's use in Europe and America has been less than 7,000,000 bales, the year's contracts for future delivery have amounted to 80,000,000 bales. Thus Liverpool has been the centre of cotton corners in the latter half of successive years beginning in 1879, and seriously disturbing legitimate business. Meantime, we have had in America (usually centring in Chicago), the wheat corners of 1879, 1881 and 1882, the pork corner of 1879 and 1880, and more or less successful attempts at many others, scarcely less wide-reaching than these in their effects.
—The attempts to meet these evils by legislation have had little success. Legislative inquires, like that of the New York committee on corners, have proved abortive; enactments like those of Illinois in 1874 have been inoperative. Only to a limited extent have the courts been able or willing to interfere, by making it impossible for speculators to sue on their contracts. It was indeed held, in a few English cases in the early part of the country, that a contract of sale for future delivery of what a person does not now hold, was void; but in the business development and necessities of the time it was of course impossible to maintain that doctrine. It is now held, that such a contract is valid if, at the time it was made, either party intended it should be fulfilled. In order that the court should regard it as a gambling contract, it must be proved that neither party regarded it as more than a wager on price variations. But practically the courts do not do much even within these narrow limits. Unless they are supported by the public opinion of the boards of trade and similar organizations, it is in the power of these last to inflict upon any dealer who may have recourse to the courts, penalties in the way of loss of business facilities for which he can obtain no adequate compensation. Add to this, that the courts, as in a recent case in Illinois, have often shown unwillingness to enter upon the consideration of matters of this kind, and we see how inadequate are the legal defenses against the present state of things.
—The difficulty of dealing with the evils of the system is enhanced by popular ignorance as to just what the evils are, and where they really lie; and by a popular prejudice, too often embodied in legislation, against operations which are sometimes necessary, sometimes beneficial, and at the worst only indirectly responsible for the evils which have grown up in connection with them. Of such mistaken legislation a striking instance was offered in the year 1864, when speculation in gold was forbidden. The law, under the pressure of public sentiment at that time, was obeyed; but its results were the very reverse of what the public had anticipated. The event proved that gold speculation had been a means of steadying the market; without it, gold rose 100 per cent. in two weeks, and then dropped 50 per cent. at the hurried repeal of the prohibition. What the speculators did for the gold market was again seen in 1866, when they attempted to keep the necessary stock of gold in the country in view of the increasing European demand; but the treasury department, with less foresight, exerted itself to counteract the rise in the gold premium which these speculators seemed to be producing. It succeeded at the time, but at the cost of a greater subsequent rise, which these speculations would have largely enabled us to avoid. So of the cotton speculators of 1868, who setting the mistake of public judgment, bought up the cotton which we were exporting in Liverpool at a very low figure, and, a few months later, sold at a high figure to the manufacturers, who would otherwise have had to reimport. They made fortunes by so doing, and thus excited public prejudice; but the American public was in every way better off for their operations. The planter obtained a higher price than he could otherwise have done, the manufacturer paid a lower price; the expense of double transportation was saved; the speculative difference of price remained in American hands instead of going to Liverpool; and the chief mistake made by the speculators, in point of serving public interest, was in not carrying their operations still further. ("N. Y. Nation," vol. vii., p. 85.)
—That is a typical case. If a speculator is simply aiming to forestall the movement of the market, and not to manipulate it, he undoubtedly confers a public benefit in so far as he is himself successful; and so great a public benefit that no one grudge him his profit. His work tends to steady prices, to diminish the difference between producers' and consumers' prices in a rising market, to break the shock of a falling market. But it is almost impossible for a speculator to resist the temptation to manipulate as well as forestall price changes; and when he succeeds in so doing, he increase just those evils which he would otherwise diminish. If he works on a small scale, it may be by the circulation of false rumors or the show of false appearances, perhaps even by securing false management of the property; if he works on a large scale, it may be by securing a corner.
—Corners in stocks can hardly be a direct source of evil to the general public. With produce corners it is different. The investor can easily do without a particular stock; he may be glad to take advantage of the high price to sell it. But the consumer can not even for a short time do without his food; and a corner in wheat or pork may become a serious matter to him. A speculative monopoly of this kind is probably no worse than any other monopoly. Permanent monopoly of coal or oil may work more lasting injury than a temporary corner in wheat. The former settles things on a wrong basis. The latter unsettles things from their rights basis. By preventing regular transportation, it prevents cheap transportation; by preventing regular export, it spoils our foreign market. How far it actually disturbs the price paid by consumers remains an open question Witnesses before the New York committee, apparently well informed and candid, differed directly on this point. The Liverpool cotton corners are estimated to have temporarily raised the price paid by manufacturers more than 10 per cent. An able article by H. D. Lloyd in the "North American Review" for August, 1883, shows how in recent corners, flour, a non-specultative article, has varied more than 50 per cent., in sympathy with the variations of wheat. It is not probable that this affects the consumer quite as badly as would at first sight appear; the quantities sold at the highest price are probably comparatively small, and the shock is so slowly distributed among the middlemen that before it reaches the mass of consumers the reaction has already begun. With our present incomplete statistics of retail sales, we must reserve judgment on this point. The gist of the matter is, not that a corner is worse than any other kind of monopoly; not necessarily that it is as bad as any other kind of monopoly; but that, under the present system, men will undertake a corner who could not undertake any other kind of monopoly. If there are ten times as many contracts on a small wheat supply, operators can afford to make ten times the effort to control that supply. If those contracts must be fulfilled within a limited time, the operator has only to control the supply for that time. A system, of short sales makes such a temporary monopoly possible. Each additional speculative contract is so much addition to its possible profits.
—Besides the articles already referred to, see International Review, vol ii., p. 818; Bankers' Magazine(N. Y.), vol. xxxvi. p. 308; Nineteenth Century, vol. x., p. 532
ARTHUR T. HADLEY.
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