into speculation lacking adequate resources, adequate knowledge, and adequate judgment. For just as gambling is attractive because it holds out glittering hopes of making money without labor, so speculation is attractive because the prizes for the successful are out of all proportion to the effort expended or to the stake put up. The main evil which accompanies speculation lies in this participation in it of the unfit. It is not speculation in itself that is an evil, but the improper and unwise use of the speculative faculties by the ignorant and the unskilled, the insufficiently provided, the weak in judgment. 84. The Ethics of Speculation1 What is speculation? And how does it differ from legitimate business? A miller knows in the fall that next summer he will need a million bushels of wheat. He studies the wheat conditions throughout the world, forms the best judgment he can as to the probable supply and demand, and the prospective market price, then sends out an agent to contract with the farmers to give him next summer the wheat he will need at the price he is willing to pay. This is a legitimate business transaction, advantageous to both miller and farmer. The fact that the miller may miscalculate, and as a result make an unexpected profit or suffer an unexpected loss does not make the transaction a speculation. A broker, who has no mill and has no use for any wheat, makes similar calculation; he sends out his agent, buys in the fall of the farmers at an agreed price to be paid on delivery the next summer, expecting to sell the wheat in turn to the millers. This may be a legitimate business transaction. It is advantageous to farmer and miller. And in modern complicated business the service of the broker is often indispensable. A speculator makes a somewhat similar investigation of probable demand and supply. He knows what the average crop for the last five years has been. He knows that there is an iscreasing demand for wheat as a food product all over the world. He gets together some cash and more credit, and plans to buy up the whole wheat supply in the United States; if necessary, the whole wheat supply of America. If he can succeed in doing this, he will have a monopoly, and can indefinitely increase the price. This is not quite so impossible as it may seem at first sight. He does not have to buy all the wheat; if he owns most of it, he can trust the owners of the rest not greatly to undersell him, and thus can largely determine the market 17Adapted from an editorial in The Outlook, XCII, 14-16. Copyright (1909). price. He does not have to maintain the highest price for any great length of time; he has only to keep up his price until the date at which he has agreed to sell, and can often sell part before that time. at a price sufficient to guard himself against loss. He does not have to pay cash for his wheat. He has only to contract to pay at a future day, and meantime, to raise money enough, called a margin, to save from loss the man of whom he is buying it, in case the price declines below the amount which he has agreed to pay for it. But the speculator is not alone. Others are associated with him in his endeavor to obtain control of the wheat in the United States. There are also speculators who believe that this attempt will fail; and who are leagued together to make it fail. The former, in the jargon of the market, are called bulls; the latter are called bears. The bears agree to sell wheat on the first of May at a fixed price; the bulls agree to buy the wheat at that price. The bulls attempt to make the market price on the first of May as high as possible; the bears attempt to make it as low as possible. But the bears have no wheat to sell and do not expect to have any; and the bulls do not want any wheat and do not expect to buy any. What actually happens is this: Mr. Bear agrees to sell, and Mr. Bull agrees to buy, a thousand bushels of wheat on the first of May at one dollar per bushel. But on the first of May the market price of wheat is $1.10 a bushel. Mr. Bear, therefore, would have to spend $1,100 to buy the thousand bushels of wheat which he had agreed to sell to Mr. Bull for $1,000. Instead of doing so, he pays. Mr. Bull $100. If, on the other hand, the price of wheat has fallen. to ninety cents per bushel, Mr. Bear can buy for $900 the wheat for which Mr. Bull has agreed to pay him $1,000. In that case Mr. Bull pays Mr. Bear $100. No wheat is actually bought and sold; no wheat passes from one to the other. Under guise of the contract to buy and sell, these two men, Mr. Bull and Mr. Bear, have simply made a bet as to the price of wheat on the first of May. The amount of the bet to be paid depends upon the difference between the actual market price on the first of May and the stipulated dollar a bushel. If the reader asks, How can a bet between two dealers affect the price of wheat? The answer is, It cannot. But when hundreds of men are excitedly offering to buy wheat and other hundreds to sell wheat, and these offers to buy and sell include millions of bushels that have no existence, and the bets upon the price of wheat reach millions of dollars, the result is to create an artificial demand and an equally artificial supply, which determine the market price of such wheat as is stored in the warehouses. The transaction is of no benefit to anyone except the successful gambler. It does not benefit the farmers; for they are interested in having a steady price for their wheat, not a fluctuating price, which promises a great gain today and a serious loss tomorrow, and compels them to study the gambler's market if they would get a benefit of the prices, a study for which they have neither the time nor the facility. It does not benefit the millers, who might judge what the prices of next season's wheat will be, if it were dependent on supply and demand as regulated by natural causes, but cannot judge if it is made dependent on the tricks and chances of a great gambling operation. Gambling with breadstuffs is a great deal worse than gambling with cards or dice; the gambling carried on on the Produce Exchange, than that carried on in the gambling hells of New York City or in the Casino at Monte Carlo. Private gambling injures only the gamblers and those immediately connected with them, and it demoralizes the few hundreds of occasional onlookers. The private gambler gets the money of his fellow-gambler for nothing, and, if the game is honestly played, gives his fellow-gamblers in return a chance to get his own money for nothing. But the public gamblers play their game. with the property of their wholly innocent fellow-citizens. They gamble with the wheat-fields of the farmer, the flour-barrels of the miller, the bread loaves of the baker and the housekeeper. There is not a reader of these lines in America but may have suffered some injury from the gamblers in the Chicago wheat-market; and the whole country looks on at the gigantic game, and hundreds of thousands of fascinated spectators are demoralized by the spectacle. These gamblers are not robbers, for they are not taking our property by violence, but they are taking it without our consent and without giving us any return for it. 85. The Utility of Cotton Futures18 BY ALFRED B. SHEPPERSON The opinion held by many that the transactions in "futures" are almost entirely for speculation is very erroneous. The buying and selling of cotton "futures" is absolutely essential to the successful prosecution of the business of cotton manufacturers and cotton dealers as at present conducted. 18 Adapted from a pamphlet entitled An Exposition of the Methods of Business in Cotton Futures as Conducted in the New York, New Orleans, and Liverpool Markets. Published by Hubbard Brothers & Co., New York (1907). Many cotton mills now sell their product of yarns and cloth for delivery many months in the future. To do this they must know the cost of cotton for months before it is manufactured. Unless the market for cotton "futures" avail, the only way to do this is to buy the actual cotton at the time the sale of yarns or cloth for future delivery is made. This would involve a large outlay of capital with the loss of interest on it, besides the expense of storage and insurance and loss of weight in the cotton. Under the present methods, the cotton manufacturer can safely sell the product of his mills for delivery far into the future by buying "futures" to the extent of the raw material required, and then purchase the actual cotton as it is needed for manufacturing, and selling out his “futures" as he buys cotton of the quality to meet his requirements. If the price of cotton advances between the time of his purchase of "futures" and the date on which he buys the actual cotton, he will make a profit on the transaction in "futures" sufficient to make good the difference. If the price of cotton falls he will make enough on the actual cotton bought to cover the losses on his "futures." Thus, but for the facilities offered for buying "futures" in the manner indicated, the cotton manufacturer, who possesses only moderate capital, would be unable to sell his product except for quick delivery, without taking great risks of loss by an advance in the price of the raw material. 86. Hedging on the Wheat Market1 BY ALBERT C. STEPHENS But A Glasgow miller, in February, desires to purchase 100,000 bushels of California wheat to grind into flour. The price has been tending upward. He purchases this wheat, engages freight room, and arranges to have it shipped to Glasgow. The price and freight will make the wheat cost him in Glasgow about $1.07 per bushel. the wheat will not arrive until September or October, five months away. By that time, following the Atlantic coast harvests, and with the then probable renewal of arrivals of Russian and Indian wheat, the Glasgow price might or might not be lower than $1.07. In order to insure himself against loss, the Glasgow miller sells 100,000 bushels of wheat for October delivery at New York. The California wheat arrives at Glasgow, but the price of wheat the world over has declined, and the miller finds that it has cost him two or three cents "Adapted from "Futures in the Wheat Market," in the Quarterly Journal of Economics, II, 47-51 (1887). a bushel more than the then ruling price. Under strictly old-fashioned methods, had he not sold 100,000 bushels of wheat at New York, he would find himself at a decided disadvantage in competition with millers who had not anticipated their wants as he had. But he is not so placed. When he found the market a few cents lower, he cabled an order to New York to buy 100,000 bushels for October delivery. At the maturity of his New York speculative contracts, he finds a profit about equal to the loss on his California transaction. Thus, owing to his protective future contract, he stands no loss, despite the drop in the price of wheat. Had he found at profit on his California wheat when it arrived-that is, had the price. advanced after the grain left San Francisco-he would have covered his New York sale at a corresponding loss, thus leaving him situated as before. In this way, English millers and importers of wheat, buying in the United States, Russia, or elsewhere, habitually protect such purchases from fluctuations in prices, while in transit, by selling futures against them at New York or Chicago, and later by covering their contracts. When we consider the aggregate of wheat purchases made in this country, and remember that all of these sales are in time covered by corresponding purchases of wheat, and that in all cases these speculative sales and purchases call for the actual delivery of grain, we may gain some conception of the reasons why future sales make so large a total. But these insuring or protecting sales and purchases are by no means confined to foreigners, who buy throughout the world and ship to Europe. One may also find ample illustration at home. A New York merchant buys 100,000 bushels of hard wheat at Duluth, and orders it shipped by vessel to Buffalo, to go thence to New York by canal. He does this, not because he wants the wheat for his own use, but because he believes that, in view of known or apparent market conditions, he will be able to sell the grain in New York at a profit. With a more primitive view, he would ship this grain, wait until it arrived, look for a purchaser, and, finding one, sell the wheat for the price current on the day of arrival--say, three weeks after he bought it. If at a profit, well and good; but if the price had declined, he would sustain a heavy loss, owing to the size of the shipment. But, nowadays, the New York merchant sells 100,000 bushels of spring wheat, September delivery, at Chicago, at the date of his Duluth purchase in August. When the wheat reaches Buffalo, the price has advanced, and the millers there want part of his consignment. He sells them 25,000 bushels, and buys 25,000 bushels of spring wheat at Chicago, September delivery, to make good the original quantity purchased. By this time he has also sold at New York 100,000 bushels, September delivery, to an exporter, and |