II
SPECULATION ON THE STOCK AND PRODUCE
EXCHANGES OF THE UNITED STATES
STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW
EDITED BY
THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA
UNIVERSITY IN THE CITY OF NEW YORK
Volume VII] [Number 2
SPECULATION
OX THE
STOCK AND PRODUCE EXCHANGES
OF THE
UNITED STATES
HEXRY CROSBY EMERY, Ph.D.
r,.
u) IJork
1896
TABLE OF CONTENTS
CHAPTER I
INTRODUCTORY 7
CHAPTER II
THE ORGANIZATION OF THE EXCHANGES
I. Stock Exchanges 13
II. Produce Exchanges 24
CHAPTER III
BUSINESS METHODS ON THE EXCHANGES
I. The Development and Nature of Organized Speculation
in Produce 32
II Method? of Dealing on the Produce Exchanges ... 54
III. Methods of Dealing on the Stock Exchanges .... 74
CHAPTER IV
THE ECONOMIC FUNCTION OF SPECULATION
I. The Theory of Speculation 96
" II. Speculation and Prices 113
III. The Directive Influence of Speculation 143
IV. The Assumption of Risks. Insurance by "Hedging" . 159
CHAPTER V
SOME EVILS OF SPECULATION 171
V
I. Statutes i92
II. Decisions 200
III. Anti-Option Legislation 219
IV. Recent German Reform 223
CHAPTER T.
INTRODUCTORY
THE American people are regarded by foreigners as the
greatest of all speculators. The opportunities for great
accumulation of wealth, the boldness which characterizes
the ventures of the leaders in the business world, and the
brilliant success with which their undertakings are often
carried out, have excited, if not the admiration, at least
the wonder of all observers. Especially has attention
been widely called to the more distinctively speculative
operations of the stock and produce markets. Specula-
tion proper, as well as the speculative spirit of vast in-
dustrial enterprise, has had its most striking development
perhaps in the United States. The greatest speculation
in produce which the world has ever seen has grown up
recently in Chicago, while a speculative market of almost
unequaled magnitude is found in the Stock Exchange of
New York. While, however, in other countries the
Bourse has been a not uncommon field of inquiry and
study, little has been written in this country either to
describe the details of exchange methods, or to estimate
the function of these exchanges in the economic order.
An attempt to make some beginning in this direction
is timely for two reasons. In the first place, the effect of
the speculative market of to-day has come to be a matter
of great practical importance and a subject of some
popular discussion. In recent years several bills have
been introduced in Congress for the suppression of
speculation in produce, and two of these showed suffi-
289] 7
8 SPECULATION IN THE [290
cient strength to pass one branch of that body. There
was undoubtedly considerable public sympathy in sup-
port of these measures, and there is reason to believe
that efforts at legislation in this direction will be renewed
when other questions of greater importance have been
settled. In Germany a still more vigorous attack on the
speculative system has been made. The subject has
given rise to a wide-spread agitation and discussion,
leading to the appointment of an Imperial Commission to
investigate the whole field,1 and culminating in the re-
pressive legislation of 1896, which is to go into effect on
January I, 1897. Other countries also are showing a
tendency to agitate the question of taxing or in some
way regulating the speculative market. The public
opinion which is finally to decide these questions is far
from being founded on an intelligent understanding of
the conditions which exist. Both as to the methods em-
ployed in the business of the exchanges, and as to the
influence of such trading in the economic world, very
inaccurate ideas are prevalent. Consequently from the
purely practical side a study of the speculative market is
of importance.
Another reason for directing attention to speculation is
the question as to what place shall be given to the study
of it in the theory of economics. Speculation has be-
come an increasingly important factor in the economic
world without receiving a corresponding place in econ-
omic science. In the field in which it acts, in the trade
in grain and cotton and securities and the like, specula-
tion is the predominant influence in determining price,
and as such it is one of the chief directive forces in trade
and industry. But treatises in the English language on
general economic theory and conditions have given very
1 This commission made an important report in 1893 which is considered
in the last chapter of this essay.
UNITED STATES g
little space to this influence, which is fundamental in the
world of economic fact. Speculation has been considered
an interesting off-shoot of the competitive regime in bus-
iness ; and, not seeming to fit into a well-ordered system
of economics, has in most works been relegated to chap-
ters which show little vital connection with the general
theory. Mill, for example, takes up the subject of spec-
ulation (his treatment of which is confined to the in-
fluence of corn-dealers) in the fourth book of the Princi-
ples quite apart from his study of production and
exchange.1 This example has been largely followed. A
new departure is made by Professor Hadley in his recent
work, in which he devotes an early chapter to speculation,
and makes it the starting-point in the determination of
the course of industry and trade.2 It is true that forty
years ago speculation was far less important than it is
now, and there was, therefore, more justification for disre-
garding it. Professor Hadley has given due consideration
to the new conditions which prevail in modern busi-
ness. At the same time it should be remembered that
MacCulloch, already in his day, had grasped the true idea
of the function of speculation, a fact shown by the incor-
poration of his treatment of the subject into his chapters
on value.3 Wide as is the influence of speculation, its
force is felt primarily in the field of prices. By making
prices it directs industry and trade, for men produce and
exchange according to comparative prices. Speculation
then is vitally connected with the theory of value.
From the point of view of theory, therefore, it is incor-
rect to attach so little importance to the function of spec-
ulation ; in practice it is impossible to deal intelligently
with the evils of the speculative system without first recog-
1 Principles of Political Economy, Bk. IV, ch. 2.
1 Hadley. Economics, ch. 4. New York, 1896.
* MacCulloch, Principles of Political Economy , Pt. II, ch. 3.
I0 SPECULATION IN THE
nizing its real relation to all business. Both the writer and
the reformer must reckon more than they have yet done
with the fact that speculation in the last half century has
developed as a natural economic institution in response
to the new conditions of industry and commerce. It is
the result of steam transportation and the telegraph on
the one hand, and of vast industrial undertakings on the
other. The attitude of those who would try to crush it
out by legislation, without disturbing any other economic
conditions, is entirely unreasonable. This truth was
recognized long ago by Proudhon,1 who clearly saw the
place of speculation in the modern world. Proudhon
was an unalterable foe of the Bourse, but his position was
consistent. To him the Bourse was the crowning result
of the institutions of private property and free enterprise.
It was the necessary outcome of the evolution of new
forms, concentrating in itself all the qualities which char-
acterized the system as a whole. But to Proudhon the
primary institutions on which it all rested were abhorrent.
To him society itself seemed but a great system of robbery
and exploitation. He would do away with the Bourse
and speculation because he would do away with law and
property. It may be that we need not accept Proudhon's
alternative of the Bourse as it is or anarchy, because we
do not accept his alternative of labor and property and
industry as they are or anarchy. Reform in all fields is
possible, and is nowhere to be hoped for more than in the
field of speculation. But as between those who would
maintain the existing order of society and yet crush out
speculation, and Proudhon who would crush out both,
there is more consistency in the latter.
In attempting to deal, within the limits of an essay, with
matters which have been so little treated as speculation in
this country, it has seemed necessary to fix the discussion
1 See Manuel du Speculateur a la Bourse.
UNITED STATES H
\vithin close limits and to exclude much that is beyond
doubt essential to a complete understanding of the sub-
ject. The missing elements in the following pages will
be only too apparent. In the first place a study of spec-
ulation in produce needs a previous discussion of the
nature of the grain trade and cotton trade in this coun-
try, of their practices and history. Little attention is
here paid to these questions, however interesting and
important they may be, beyond dealing with their rela-
tion to the purely speculative market. Furthermore, no
attempt is made to give an historical account of specula-
tion in this country. It has seemed to the writer that
the first step in the order of investigation is to under-
stand more clearly the practices which prevail to-day.
The attempt to trace their development can be more
profitably made after the practices themselves are under-
stood.
Finally, this essay is presented with much misgiving,
because of the small space devoted to the evils of spec-
ulation. The benefits of speculation in the economic
world are so little appreciated by perhaps the majority
of people, that there is justification for presenting its
more favorable aspects first. It is only fair that an un-
prejudiced expression of the great services of speculation
to trade and industry should be made, and that its place
as a great directive force in business should be clearly
indicated. But because comparatively little attention is
paid to the enormous harm in modern speculation, it
does not follow that this evil has not impressed itself
upon the writer's mind. It is not only want of space,
however, which has excluded a full discussion of these
topics. The evils of speculation, though more widely
appreciated by the public, are by no means so simple of
comprehension or so easy of description as its benefits.
An adequate study of this part of the subject would re-
12 SPECULATION IN THE [294
quire not only a careful historical study of the deals and
manipulations of the speculative market, but a mind
trained by a wide experience of business life to weigh
justly the influences for harm and good. Especially
must one be well equipped for judgment in such matters,
before attempting to estimate the evil that results from
the incentive to gambling which the speculative markjet
affords. These are difficult questions. But whatever
the evils which seem to accompany it, the fact remains
that speculation is not an unnatural device of man's in-
vention, but a normal means of meeting economic needs.
The stock and produce exchanges are the nerve centres
of the industrial body, and are in themselves as neces-
sary institutions as the factory and the bank. If their
evils are great, their advantages are certain. There is
then occasion for a discussion predominantly on the
favorable side.
The fifth chapter of this essay attempts to consider
the evils of speculation, so far as to describe their nature
and to point out what forms are of chief importance.
There are many points which are passed over with the
most meagre reference. So important a question, for
example, as the relation of speculation to crises is little
considered ; but it is believed that enough has been said
to show that the advantages of speculation presented are
not the advantages merely of an idealized speculation,
but are genuine and practical advantages of speculation
to-day, however much off-set by corresponding evils.
Some books are devoted purely to the harmful influence
of speculation,1 some more exclusively to its benefits.
Neither the one nor the other can make any claim to
furnishing a ground of ultimate judgment on the system
as a whole.
1 Cf. the statement of Ehrenberg in the preface to Die Ponds spekula-
tion, p. vi, Berlin, 1883.
CHAPTER II.
THE ORGANIZATION OF THE EXCHANGES
I.
THE stock exchanges of this country are private vol-
untary associations of persons who deal in securities.
They originated like any business association in the organ-
ization of certain persons for their mutual benefit and the
advancement of their business. More especially did they
receive an impetus from the desire to maintain uniform
rates of brokerage. Despite the overshadowing import-
ance which they have come to assume in the business
world as the country has advanced in wealth, they have
preserved their truly private character. They are con-
trolled by no special legislation, and they make their own
rules and carry on dealings subject only to the laws which
regulate such transactions everywhere.
This position of American stock exchanges is very
different from that of the European Bourses. In England
the conditions are the same as here, but the exchanges of
the continent, with scarcely an exception, exist by special
legislation and are subject to more or less stringent con-
trol of government.1 This does not mean merely that they
exist under corporate charters like the produce exchanges
of this country. Their rights, their duties, and to some
extent their methods of business are defined by special
laws or by the regulations of those officials or govern-
mental bodies to whom they are immediately answerable.
Long series of such statutes tell the history of many of
1 Cf. Handworterbuch der Staatswtssenschaften, article " Borse,"
Vol. II, p. 674.
295] 13
SPECULATION IN THE
[2g6
these exchanges, now favored by a liberal government,
now constrained and threatened by an extortionate min-
ister or a prejudiced legislature. To governments which
maintain a paternal attitude toward all business organiza-
tions, so dominant a factor in the commercial world as
the Bourse, with its combined speculative and monopo-
listic features, has naturally seemed an object demand-
ing more than usual care in its regulation. It may be
that this control is a municipal function, as in Belgium,
or an imperial function, as in Austria ; it may be an almost
unexercised right, as in Holland, or it may reach into
minute details, as in France ; but whatever may be the
particular form it takes, some such external control is
recognized, with hardly an exception, by all the leading
exchanges of continental Europe.
In Berlin ' the Bourse, which is a single organization
with two branches, one for securities and one for produce,
is under the control of a corporate body of merchants of
the city acting through its governing board. But this
body, called the Aeltesten-Kollegium derkaufmdnnischen
Corporation , must carry out any directions of the Prus-
sian Minister of Trade, whose ordinances affect all the
exchanges of the kingdom. Thus the Berlin Bourse is
under a double external control, that of the Kaufmann-
schaft and that of the Royal Minister.
1 In Germany there is no uniformity in the legal status of the exchanges,
but some external control is recognized in nearly every case. This may
not be a direct governmental regulation of the exchanges so much as an
external supervision vested in the organized merchant body of the par-
ticular city, under the general legislation fixing the powers of such bodies.
In Prussia the exchanges exist under governmental supervision. In
Saxony and Bavaria there is little control. There is a small stock ex-
change in Dresden which is a purely private association. In Frankfort
and Leipsic and many other cities all such organizations are under the
control of a semi-public Handelskammer. In Hamburg a similar power
is vested in the organized Kaufmartnschaft of the city. (See Bericht der
Borsen-EnquSte Commission, Berlin, 1893.)
29--j UNITED STATES 15
The Vienna exchanges,1 like all those within the Im-
perial jurisdiction, are under the joint control of the
Finance Minister and the Minister of Trade, whose ap-
proval is necessary for all the rules adopted by any
exchange or any change in such rules. They may also,
for cause, close the exchange temporarily or permanently,
or remove the governing body of the exchange and sub-
stitute men of their own choice, whether members of the
exchange or not, to perform the functions of that body.
Moreover a special commissioner is appointed for each
Austrian exchange to see that the ordinances of the au-
thorities are carried out and to report any breach to
the Ministers of Trade and Finance. In performance
of this duty the commissioners are even granted access to
the books of individual brokers. The Budapest exchanges
are under royal control exercised by the Hungarian Min-
ister of Trade and Industry. He is represented by Com-
missioners of the Bourse, who sit at all the meetings of
the Directors of the Bourse, superintend the publication
of quotations, and exercise a general supervision of the
affairs of the Bourse.
The status of the Paris Bourse is well known. The
agents de change of Paris are not so much a commercial
association under public control as an official body. Deal-
ing in securities is theoretically a monopoly put into the
hands of sixty agents de change, and any transfer going
through the hands of any other middleman is illegal.
This number, however, which was fixed in 1816, has
proved entirely inadequate to the enormous amount of
business which has grown up since then, and an outside
body of brokers known as the Coulisse has developed,
which at times has transacted more business than the
original parquet of sixty. This second body, however,
exists only by sufferance and can be suppressed at any
1 See Bericht der Borsen-Enquite Commission.
1 6 SPECULATION IN THE
time. The parquet still maintains a monopoly of many
of the best securities, and the coulissiers are obliged to
connect themselves with members of the parquet, and to
transact much of their business through them. An agent
de change may, like any broker in this country, transfer
his membership ; but besides an election by the chambre
syndicate, or governing body of the parquet, the approval
of the Minister of Finance is required. The appointment
is finally made by a decree of the President of the Repub-
lic and the oath is administered before the Tribunal of
Commerce. The agents de change then are officials
appointed by the government on nominations by the gov-
erning body of the Bourse, and as administrative officers
are responsible to the Minister of Finance.
In striking contrast to the foregoing description of the
legal position of the principal continental exchanges is the
private and independent character of the New York Stock
Exchange. This privacy has been intensified by the
settled policy of the Exchange to keep its affairs as secret
as possible, to attend strictly to its own business, and to
resent any interference from without. It has resisted
every effort toward incorporation. That an association
which dominates the financial market, directs the course
of investment, and settles the value of property for mil-
lions of people has for nearly a century maintained itself
as a purely private organization, and will perhaps con-
tinue to do so for another hundred years, is a striking
example of the confidence of people of the Anglo-Saxon
race that, as fast as public wants develop, private activity
will furnish the best means to satisfy them.
This position of the Stock Exchange, however, is unique
even among the independent business organizations of
this country. " A voluntary association of persons, like
the New York Stock Exchange, by which an individual
broker is enabled to carry on his separate business, under
UNITED STATES !7
regulations made alike for the protection ot himself and
his client or principal, has no technical name or place in
the law. . . . An institution like the New York Stock
Exchange is an anomaly in law. It is amphibious in its
nature ; for without being either a corporation or a part-
nership, it possesses some of the characteristics of both.
Like a corporation it has perpetual being ; and in this
respect it has an advantage over bodies politic, for the
charters of the latter generally limit their existence to
some definite period ; whereas the New York Stock Ex-
change can preserve its organization (as it has done since
1817) until it voluntarily dissolves itself."1 It is not a
partnership, as the business is not a joint business and
profits are not shared ; it is not a corporation, as it does
not exist by statute. But the legal title to personal
property is vested in all the members, as in a partnership,
though no member can maintain a claim for a propor-
tional division of such property. The real estate is held by
a corporation created solely for that purpose (in 1863),
all the stock of which is owned by the Stock Exchange.
The internal organization of the Stock Exchange is
fixed by its constitution, which includes rules for the
transaction of business. The whole government of the
Exchange is vested in the Governing Committee com-
posed of the President, the Treasurer and forty members.
The President and Treasurer are elected annually, and
the forty members are so divided into four classes of ten
members each, that the term of one class expires each
year, necessitating the choice of ten new members at
each annual election. This committee is vested with all
powers necessary to the government of the Exchange.
There are twelve standing committees for various pur-
poses, but these are all appointed and dissolved by the
Governing Committee and exist under its control and
1 Dos Passes, Treatise on the Law of Stock Brokers and Stock Ex-
changes, pp. 13, 14.
1 8 SPECULATION IN THE f™
supervision. The Governing Committee may entertain
an appeal from the decision of any other committee ex-
cept the Committee on Admissions, or the Arbitration
Committee in matters involving less than $2,500. The
other officers of the Exchange are the Secretary and the
Chairman, the latter of whom presides over the Ex-
change and maintains order when it is assembled for busi-
ness on the floor. The qualification for membership in
the New York Stock Exchange is simple. An applicant
must be a citizen of the United States and at least
twenty-one years of age. All applications for member-
ship, and all applications of suspended members for re-
instatement to their privileges, are referred to the Com-
mittee on Admissions. The initiation fee in 1823 was
$25.00, and rose by gradual steps to $20,000, but the
constitution now provides that the present membership
shall not be increased except after such action by the
Governing Committee and ratification of that action by
the Exchange as occurs in the case of an amendment to
the constitution. There can then be no admission to the
Exchange except by transfer of membership. Any mem-
ber may transfer his membership provided the name of
the proposed transferee has been submitted to the Com-
mittee on Admissions and approved by two-thirds of
that body. The revised constitution accordingly says
nothing about an initiation fee, except a comparatively
small fee of $1,000 for admission by transfer. The im-
portant payment is that between the old member and the
transferee. The present number of members is 1,100,
and the value of " seats " varies according to the supply
and demand, rising (othe^ things being equal) with the
activity of business. In the early eighties a " seat " was
worth $32,500,' in 1886 about $25,000, while in 1894 the
value had sunk below $20,000. The figures for the total
Gibson, The Stock Exchanges of London, Paris and New York,
New York, 1889, p. 74.
30 1 ] UNITED STATES 19
number of shares sold in corresponding years shows the
relation of the value of seats to the amount of business —
in 1881, 117,078,167 shares; in 1887,85,821,027 shares;
in 1893, 79,939760 shares.
The effect of a limited membership on the value of
seats, and the enormous value of such a privilege when it
becomes a monopoly, is seen in the case of the Paris
Bourse. Here the membership is limited to sixty agents
de change, who exercise a government monopoly in
dealing in securities. The agent becomes a public func-
tionary.1 He pays a sum of 50,000 f. as a guarantee, but
he can obtain a membership only (as in the New York
Stock Exchange) by transfer, and for this he has often
paid over 2,000,000 francs. This prohibition of all deal-
ings in securities except through a small body. of sixty
men, which to the American mind seems a most unwar-
rantable restriction on trade, has called forth vigorous
protests from the bankers and business men of France.2
As we have seen, the letter of the law is allowed to be
violated by the establishment of the Coulisse, but the
JThe number of agents was first fixed in 1595 at eight, and ever since
the financial needs of the government have brought about changes in the
numbers and in the amount to be paid. Between 1634 and 1708 the
number varied back and forth between 20 and 40. In 1714 it was made
60, and varied between that and 40 until 1791, when membership was
made free. In 1801 it was limited to 80, and finally in 1816 the number
was fixed at 60. (Courtois, Operations de Bourse, p. igSetseq.) Since
that time the number has not changed, but the value of seats has varied
with the activity of business and more especially with the tendency of
political events, as seen from the following table:
1815, 300,000 f. 1857, 2,400,000 f.
1830, 400,000 f. 1871, 1,400,000 f.
1847, 800,000 f. 1880, 1,800,000—2,000,000 f.
1848, 400,000 f. ,3884, 1,000,000—1,700,000 f.
(See Alf. Neymarck. De V Organisation des Marches Financiers, in the
Journal des Economistes , March and June, 1884.)
*Cf. Du Relevement du Marchl Financier Franfais, Paris, 1890, by
Jacques Siegfried and Raphael-Georges Levy. Cf. also, I' Economists
Franfais, Feb. 20, 1892.
20 SPECULATION IN THE [302
self-interest of the parquet keeps this from performing
the functions it would if free from all restraint. On the
other hand there is doubtless a very decided safeguard in
the dignity and responsibility with which the position of
agent is invested.1
There is no division into classes of the members of the
Stock Exchange. In some European exchanges we find
" sworn brokers " and " free brokers ; " in London we
find " dealers " or " jobbers " and " brokers." But in the
exchanges of this country all members are on the same
footing. To be sure many members do nothing but a
strict commission business, and others do no brokerage
business at all, but this is only a matter of individual
choice. A majority of the members do a regular broker-
age business and also buy or sell for their own account,
perhaps through other brokers, whenever a favorable
opportunity presents itself. A broker who wishes to
buy for his customers goes into the open market and
bids for the stock, which he probably gets from a broker
whose customer wants to get rid of that particular stock.
There is no class corresponding to the London " dealer "
who stands ready either to buy or sell any stock accord-
ing to the need of the broker who approaches him. The
London " brokers " ordinarily do not deal for their own
accounts, and the Paris agents are forbidden by law from
so doing ; but in this country neither law nor custom
prohibits a member from acting indiscriminately as
broker or principal.
Of course no one not a member can do business on the
floor of the Exchange. The parties to a transaction,
whether trading for their own account or for the account
of clients, are always members of the Exchange and
almost always trade in their own name. The name of a
1 For the solemnity of the ceremony of installation of an agent de
change, see Neymarck in the articles cited above.
303] UNITED STATES 21
principal may be given up, provided he be a member of
the Exchange, but need not be accepted by the other
party, and in such a case a broker remains personally
liable on the contracts. Though the stock broker is
liable on his contract, his legal relation to his client is
purely that of a broker, or of broker and pledgee. He is
not interested in the transaction except to the extent of his
commission, while all the benefits, liabilities and disadvan-
tages of ownership are attached to the principal. To his
responsibility to his principal as broker is added a respon-
sibility as pledgee where a deposit is made by the principal
to insure the broker from loss, or where, as is commonly
the case, the stock remains in the possession of the broker
until a second transaction completes the speculation.1
The regular rates of commission on the New York
Stock Exchange are fixed by the constitution. The Stock
Exchange originated in an association to keep up com-
missions, and this purpose is still of vital importance.
The rates are one-eighth of one per cent on all business
for parties not members of the Exchange, including joint-
account transactions in which a non-member is interested ;
and one-thirty-second of one per cent on all business for
members of the Exchange, excepting only transactions in
which one member merely buys or sells for another, giv-
ing up a principal, in which case the charge is one-fiftieth
of one per cent. Brokers dealing in this way are called
" two-dollar brokers." The commissions are charged
upon all transactions, both purchases and sales, and are
calculated in all cases upon the par value of the securities.
They are in every case the lowest commissions that can
be charged, free from all allowance or rebate of any kind,
and any member found guilty of offering to do business
at a less rate may be suspended for the first offence and
expelled from the exchange for the second offence.
1 See Dos Passes, op. cit., p. 101, et seq.
22 SPECULATION IN THE [304
Any member who fails to comply with his contracts, or
who is insolvent, is suspended until he has settled with
his creditors, when he may be reinstated by the usual
procedure of application to the Committee on Admission,
provided he can present satisfactory proof to the Com-
mittee of his settlement of all the claims of his creditors.
In case he fails to settle with his creditors within one year
after his suspension, he forfeits his membership.
A member's seat in the Exchange is a species of prop-
erty, and in case of its forfeiture, whether by expulsion
for fraud or other infraction of the constitution, or be-
cause of failure to meet contracts, the Committee of Ad-
mission disposes of the membership, and credits the pro-
ceeds to him after first satisfying therefrom the claims of
all creditors who are members of the Exchange. Simi-
larly in case of death the balance from the sale of the de-
ceased's membership, after satisfaction of all claims, goes
to the heirs. In the case of outside creditors the courts
uphold a lien on the seat of a member of the Stock Ex-
change. An outsider cannot attach a seat, but it is a
right having value and forms a part of the debtor's assets ;
consequently the insolvent member can be made to sell
his seat to a member elect, and the balance of the pro-
ceeds, after settling the claims of all members of the Ex-
change, can be recovered by the assignee in bankruptcy.1
All claims and matters of difference between members
are brought before the Arbitration Committee, whose
decision is final unless an appeal is taken to the Govern-
ing Committee. The former committee may also investi-
gate and decide claims preferred against members by
non-members where such non-members agree to abide
by the rules of the New York Stock Exchange ; though
the committee may at its option dismiss the case and
1 See Dos Passes, op. tit., p. 64 and p. 86. Cf. also Bisbee and Si-
tnonds, Law of the Produce Exchange, ch. 4.
30 r] UNITED STATES 23
refer the parties to their remedies at law. A non-member
making such a claim must execute a full release of his
claim against the member, which he delivers to the chair-
man of the Arbitration Committee, to be delivered by
him to the defendant in case the claim is not presented
within prescribed time or in case judgment is rendered
for the defendant.
There are two other prominent features in the organi-
zation of the New* York Stock Exchange, — the Gratuity
Fund and the Clearing House. The latter will be fully
described in the next chapter. The Gratuity Fund,
though a characteristic of all the stock exchanges and
some of the produce exchanges of the United States, is
merely a provision for the life insurance of the members
and has no relation to the Exchange in its character as a
market for securities.
The organization of the other stock exchanges of the
United States is in all essentials, and for the most part in
detail, the same as that of the New York Stock Exchange.
They are in every case governed by a single Committee
or Board of Directors. This Board appoints the standing
committees, entertains appeals from them, and has all
powers necessary to the government of the Exchange.
The requirements for admission are substantially the
same in all, and memberships are in every case transfer-
able. But the limitation as to members, the initiation
fee, and the value of seats vary considerably. The Con-
solidated Stock and Petroleum Exchange of New York
has the largest membership. It is limited by its consti-
tution to 2,403 members, and at present numbers only
about 2,050. The fee for admission by transfer is only
$25. This ease of admission and the large membership
gives a small market value to the seats. They are quoted
at about $100. On the other hand, exchanges which
transact much less business have memberships of much
24 SPECULATION IN THE [306
greater value. The Philadelphia Stock Exchange limits
its membership to 250, and now has not more than 230
members. The initiation fee for admission by transfer is
$250 and for new members is $10,000 ; but a membership
can be purchased under $3,000. The Boston Stock Ex-
change has a membership limited to 150. The initiation
fee for new members is $10,000. Membership by transfer
has been quoted at from $18,000 to $20,000, but are now
worth a few thousand less than that. The membership
of the Chicago Stock Exchange is limited to 445. The
initiation fee for new members is $2,500, but for member-
ship by transfer is only $25. In 1894 such memberships
were valued at $2,000 or less.
The commissions charged also vary somewhat in the
different exchanges. In the New York Stock Exchange
we saw that the general charge for non-members was
one-eighth of one per cent calculated on the par value of
the shares. On the Consolidated the rate is the same,
one-eighth of one per cent when the securities sell above
five per cent of their face value ; while a similar charge,
but a specific one of twelve and a half cents a share, is
made in the Boston and Philadelphia exchanges, though
in Boston and Philadelphia half-rates are made for stock
selling below ten dollars a share. The Consolidated
makes different rates for mining stocks, and the Boston
and Philadelphia exchanges provide for special rates on
particular securities. The commissions on business for
members vary slightly in the different exchanges, but, as
a rule, are about one-quarter of the regular rates.
II.
The associations which regulate speculation in com-
modities in the United States are as a rule associations
which were organized originally for more general pur-
poses. This speculation is carried on in some of those
Produce Exchanges, Chambers of Commerce, Boards of
-,07 ] UNITED STATES 2$
Trade and like bodies, which have grown up in large
numbers in this country in response to a general desire
for trade organization. In the main these organizations
exist either to advance some particular trade, or to give
expression in general to the best commercial opinion of
the community. With the hundreds of such bodies all
over the country this essay is not concerned, except to
recognize the relation between them and those particular
exchanges which have developed an organized specula-
tion. Many merchants' associations, whether by purpose
or by force of circumstance, came to constitute the most
important markets in their respective fields, while a few
of these, in response to certain external conditions, be-
came speculative markets as well. These have kept the
same names and have maintained the same organization
which they had before speculation appeared, and are still
very largely composed of traders and business men who
have no connection with the speculative market. In any
case the number of exchanges or associations in which
speculation has become the predominating function are
very few. Those for speculation in various commodities,
especially grain and provisions, are the New York Pro-
duce Exchange and the Chicago Board of Trade, each of
which existed as a commercial institution in pre-specula-
tive times. To these should be added the New York
Cotton Exchange and the New York Coffee Exchange,
both of which organizations are devoted to an exclusive
trade in cotton and coffee respectively. The Cotton Ex-
change was organized in 1870, after speculation in cotton
had begun in England and in this country, and the Coffee
Exchange in 1882, so that in these cases a direct purpose
to establish a speculative market seems evident. Less
important than the New York Exchange as a speculative
market, and yet a seat of considerable cotton speculation,
is the New Orleans Cotton Exchange. Other exchanges,
26 SPECULATION IN THE
which are primarily trading markets, have developed a
considerable speculation, which, however, maintains a place
of only secondary importance. Such for example are the
Chamber of Commerce of Minneapolis, the Duluth Board
of Trade, the Merchants' Exchange of St. Louis and the
Toledo Produce Exchange. Minneapolis and Duluth are
primarily wheat markets, and little speculation occurs in
any other commodity on the Boards of those cities.
All of these exchanges exist under charters of incor-
poration or are incorporated under general laws. The
Chicago Board of Trade, organized in 1848, was incor-
porated in 1859. This act grants the usual rights of
holding property, organizing under its own officers, and
under rules and by-laws adopted at will. In addition the
charter makes an important provision for an Arbitration
Committee, as follows :
SEC. 7. Said corporation may constitute and appoint Committees of
Reference and Arbitration, and Committees of Appeals, who shall be
governed by such rules and regulations as may be prescribed in the
Rules, Regulations, or By-Laws for the settlement of such matters of
difference as may be voluntarily submitted for arbitration by members of
the Association, or by other persons not members thereof ; the acting
chairman of either of said committees, when sitting as arbitrators, may
administer oaths to the parties and witnesses, and issue subpoenas and
attachments, compelling the attendance of witnesses, the same as justices
of the peace, and in like manner directed to any constable to execute.
SEC. 8. When any submission shall have been made in writing, and a
final award shall have been tendered, and no appeal taken within the
time fixed by the Rules or By-Laws, then, on filing such award and
submission with the Clerk of the Circuit Court, an execution may issue
upon such award as if it were a judgment rendered in the Circuit Court,
and such award shall thenceforth have the force and effect of such a
judgment, and shall be entered upon the judgment docket of said court.
Power was also given for the appointment of inspectors
to " examine, measure, weigh, gauge or inspect " such
articles of produce or traffic as are commonly dealt in by
members of the exchange, the certificate of said inspectors
to be binding as to, quantity and quality upon the mem-
UNITED STATES 27
bers of the corporation ; but this provision has since been
superseded by a law putting the inspection and grading
of grain into the hands of officials appointed by the State.
The New York Produce Exchange was incorporated
in 1862 under the name of the New York Commercial
Association, having already existed as an unincorporated
association under the name of the Commercial Exchange
since 1850. The name was changed to the New York
Produce Exchange in 1868. In the act of incorporation
the purposes of the organization were declared to be :
" To provide and regulate a suitable room or rooms for
a Produce Exchange in the city of New York, to incul-
cate just and equitable principles in trade, to establish
and maintain uniformity in commercial usages, to acquire,
preserve, and disseminate valuable business information,
to adjust controversies and misunderstandings between
persons engaged in business, and to make provision for
the widows and families of deceased members." The
preamble to the By-Laws of the Chicago Board of Trade
is a substantially similar declaration of the purposes of
that organization.
The charter of the New York Produce Exchange also
makes provision for an Arbitration Committee like that
of the Chicago Board of Trade. It can consider such
controversies, when submitted to it, as might be the sub-
ject of an action in law or equity, may subpoena witnesses
within the Metropolitan Police District, and make an
award which shall be binding upon both parties. Upon
filing such an award, according to the proper legal pro-
cedure, in the office of the Clerk of the Supreme Court
of the City and County of New York, a judgment may
be entered therein, and executions issued thereon, the
same as authorized by law in regard to judgments in the
Supreme Court. The role played by this Arbitration
Committee has been an important one, and the power
2g SPECULA TION IN THE [ 3 1 o
and dignity conferred upon it by the charter is significant
of the high position and great influence in the commer-
cial world of such a corporation as the New York Pro-
duce Exchange. This dignity has been carefully main-
tained, and Jt should be a source of gratification to those
who treasure the reputation of American business life
that foreign merchants have not infrequently resorted
voluntarily to this body for an adjudication of their
claims, without fear of prejudice or discrimination.
The charter of the New York Cotton Exchange, which
was incorporated by an act of 1871, and that of the New
York Coffee Exchange, incorporated in 1885, contain
similar provisions for arbitration committees. The ob-
jects of these exchanges are also plainly expressed and
correspond to the objects of the Produce Exchange and
the Chicago Board of Trade, except that they look
especially to the increase of the cotton and the coffee
trade respectively. The smaller exchanges of St. Louis,
Minneapolis, Duluth and other places exist under chart-
ers, with no arbitration committees, and assert as their
object not so much the facilitation of any particular trade
as the advancement of the material interests of their
respective cities.
The internal organization and the law of the produce
exchanges are not materially different from those of the
stock exchanges.1 The New York Produce Exchange
may be taken as an example. Its charter provides that
the management of the Exchange shall be in the hands
of a President, Vice-President, Treasurer and twelve
managers, who together shall constitute a Board of
Managers. The President, Vice-President and Treasurer
are elected annually, while the managers are so elected
that they serve two years, six new members being chosen
at each annual election. The President appoints, subject
1 See Bisbee and Simonds, The Law of the Produce Exchange.
3II-| UNITED STATES 29
to the approval of the Board of Managers, a Secretary
and a Superintendent, who though nominally appointed
each year are permanent officers, and certain standing
committees for the general management of the Exchange.
The membership of the Exchange is 3,000 and is limited
to that number, membership being obtainable by transfer.
Section 3 of the By-Laws reads :
" Any respectable person, on the proposal of one member, seconded
by another, and on presentation of a certificate of membership duly as-
signed to him, and a written application stating the nature of his busi-
ness, and such other facts as the Board of Managers may require, after
ten days' notice of such application has been conspicuously posted upon
the Exchange, shall be admitted to membership, if approved by the
Committee on Admissions and elected by the Board of Managers, on
the signing of an agreement to abide by the Charter, By-Laws, and
Rules of the Exchange, and all amendments that may be made thereto."
Due notice is given when seats are to be sold, and as
seen in the above section, a purchaser has to be elected by
the Board of Managers before becoming a member, no
qualifications for membership being specified except that
of being a " respectable person." Each member receives
a certificate of membership which is transferable. The
transfer fee is five dollars, and certificates are quoted at a
few hundred dollars.
The produce exchanges are not as strict as the stock
exchanges about excluding non-members from the floor.
The New York Stock Exchange does not permit any out-
sider to go on the floor of the Exchange, but the Floor
Rules of the Produce Exchange and of the Chicago Board
of Trade provide for the admission of visitors, who,
though they are forbidden from doing any business them-
selves, may be on the spot to direct their brokers at
every variation in the market. If any member is unable
to attend at the Exchange, he may appoint a substitute,
not a member, to deal for him for such limited time as he
may be incapacitated.
30 SPECULATION IN THE [312
An important part of the organization of the Produce
Exchange are the standing committees for the various
trades. The Exchange is a market for dealings in many
different commodities, and the members divide them-
selves, according to their business, into the grain trade,
the provision trade, the lard trade, etc. Accordingly the
Board of Managers appoints a committee on provisions,
a committee on grain, a committee on oils, a committee
on cheese, and so on through the list, each committee to
have the management of its particular trade, while each
trade adopts rules of its own to govern all transactions in
its department. Take, for example, the rules regulating
the grain trade. These provide for the inspection and
grading of grain, for its proper warehousing and delivery,
and for all transactions in grain on the floor of the Ex-
change. These provisions, so far as they affect the
speculative market, will be considered later in connection
with the business methods on the exchange.
The organization of the Chicago Board of Trade corre-
sponds to that of the New York Produce Exchange. It
is governed by a president, two vice-presidents and
fifteen directors, who together constitute the Board of
Directors. Membership depends on election by the
Board of Directors ; the initiation fee for new members
being $10,000 and the transfer fee, in case of membership
by transfer, $25, while seats by transfer are quoted be-
tween $500 and $1,000. The rules of the Chicago Board
of Trade are not divided, as are those of the New York
Produce Exchange, into rules for different trades, adopted
by each trade itself, but are all thrown together into one
body of general regulations, a special rule, where neces-
sary, being devoted to any particular trade. Special rules
for the inspection and grading of flour, provisions, flax-
seed, etc., are provided, but the inspection and the grad-
ing of grain are now regulated by the State, through the
Board of Railroad and Warehouse Commissioners.
UNITED STATES 31
The Cotton and Coffee Exchanges of New York are
similarly organized, but, dealing as they do in only one
commodity, they do not have the complication of com-
mittees and rules necessary to meet the exigencies of
several different trades. They have similar provisions
for gaugers, weighers and inspectors, duly licensed and
authorized, and connected with these a highly important
" Quotation Committee " not found in the other ex-
changes, the significance of which will be considered in a
later chapter. The provisions in regard to membership
and the transfer of seats are also the same. The mem-
bership in the Cotton Exchange is about 450. The
initiation fee for new members is $10,000, but the trans-
fer fee is only $25. and seats are valued at about $1,000.
The membership of the New York Coffee Exchange is
limited to 500 and is now about 300. The initiation fee
is $1,000, and seats are transferable at about $150.
Commission rates are fixed by the rules of the ex-
changes. In Chicago they are, " for the purchase or sale
and for the purchase and sale " of all kinds of grain, in
1,000 and 5,000 bushel lots, one-fifth of one cent a bushel
or, " under special arrangement," one-eighth of one cent.
The latter rate is the regular charge. On lard the rates
are five cents a tierce, and on pork five cents a barrel.
Half-rates are charged on transactions for members of
the Board. About the same rates are fixed on the New
York Produce Exchange. The charges on the Cotton
Exchange are twelve and one-half cents per bale, charged
on both the purchase and the sale, with lower rates to
members.
A Gratuity Fund has been established by a good many
of the exchanges. Clearing-Houses exist on the Pro-
duce and Cotton Exchanges of New York, the Chicago
Board of Trade and the Minneapolis Chamber of Com-
merce. The methods of clearing are described in the
following chapter.
CHAPTER III.
BUSINESS METHODS ON THE EXCHANGES
I.
THE foregoing chapter has dealt with the organization
of those speculative markets known as " exchanges."
Speculation, however, may occur in any market. A pur-
chase or sale, to be speculative, does not need to be at a
particular place or under the control of any particular
organization. Nevertheless, speculation in securities
and in a few forms of produce has become of such extent
that it has assumed an organized form with a special
machinery. Such speculation is confined to transactions
of a particular kind made under certain fixed conditions,
all of which matters are regulated by the exchange on
which such trading occurs. It is only with this organ-
ized speculation of the exchanges that the present essay
is concerned. In examining the rules of such trading it
will be convenient to begin with the simplest methods
adopted, namely, those for speculation in produce.
Speculation in produce is to-day always associated with
that particular kind of contract known as a " future."
The future is primarily a contract to be fulfilled at some
future time, and as such is one of a large class of business
transactions. Some contracts by nature require a future
fulfillment. Such are all contracts for services, contracts
for building, and the like. Some contracts, on the other
hand, are entered into long before the period set for ful-
fillment merely because one of the contracting parties
thinks he can secure better terms at the time of contract.
He fears possible changes in the conditions affecting
such a contract. If the changes in question are price
32 [314
3 j 5 J UNITED STA TES 33
changes, and the contract is for the delivery of goods,
the opportunity for speculation appears. All time-deal-
ings arise from a desire to provide in the present for
the events of the future. Speculative time-dealings arise
when an anticipated difference in the present and future
prices of the commodity in question leaves room for a
possible profit.
This method of speculation by means of time-dealings
arose later, and has been much less common, than the
simple speculation of buying property outright and hold-
ing it for a rise. The latter form of speculation is found
everywhere and at all times, and is entirely independent
of any organization or any rules of commercial custom.
Since Thales cornered the olive-presses of Miletus,1 or
Joseph, still earlier, cornered the grain of Egypt, such
speculation has been universal. It is not unreasonable
to believe that time-dealings of some kind also arose wher-
ever commerce was well developed, especially as a highly-
advanced form of such dealings seems to have occurred in
securities, at least, in the days of the Roman Empire.2
It is only, however, in the last few centuries that un-
questioned evidence appears of " future dealings " of a
well-developed kind. In Holland, early in the seven-
teenth century, time transactions took place in the pro-
ducts of the whale fisheries. The great uncertainty of
the industry and the consequent fluctuation of prices led
dealers to sell the products of any particular voyage long
before its result became known. The tulip speculation
of this period, 1634-37, is famous. In 1698 time-deal-
ings in grain were forbidden in Antwerp. Much more
important than this early dealing was the business which
1 See Aristotle, Politics (Jowett's translation, London, 1885), I, 11,
§ 8. It is interesting to note that Thales, being a man of moderate
means, worked his corner by securing options on the use of the presses
at the next harvest season.
' Cf. A. Deloume, Les Manieurs (T Argent a Rome, Paris, 1800.
34 SPECULA TION IN THE [ 3 1 5
had grown up in the first years of the eighteenth cen-
tury, and which was described in 1722, by Ricard, in Le
Nkgoce <? Amsterdam.1 At this time practices almost
identical with those of the modern speculative market
were common in the trade in grain, coffee, cocoa, salt-
petre, and other commodities,2 being particularly ad-
vanced in form in the case of coffee.
It was not until the present century, however, that the
system became widely developed, and not until the great
expansion of foreign trade in the last fifty years that it
became of great importance.3
The beginnings of the development are found in the
case of articles of foreign trade, though these earlier time-
dealings were very different from the improved practices
of to-day. They were sales "for forward delivery," but
for the delivery of some particular lot of goods, and were
made on the basis of samples forwarded or sometimes on
the basis of a fairly recognized standard, with allowance
made in the payment for any variation in quality when
the goods were delivered. These sales arose from the
desire of the dealer to take advantage of a favorable
price before his goods were ready, as was the case in
regard to the whale products in Holland. An importer
1 For the best account of these early dealings see Jacobson, Termin-
handel in Waaren, translated from the Dutch, Rotterdam, 1889. Cf.
also Fuchs, Der Warenterminhandel ', p. 5, reprinted from Schmoller's
Jahrbuch, Vol. XV, Heft i.
Kohn, Der Getreideterminhandel, p. 28, Leipzig, 1895, quoting
Roscher, says that sales of grain before it was threshed, or of herring
before they were caught, were forbidden in the Hanse cities in 1417. Cf.
a similar local ordinance in England, in 1357, Cunningham, English
Industry and Commerce, I, 296.
a See Jacobson, op. cit. foot-notes to pp. 77, 79 for typical forms of
" futures " and of " puts and calls," taken from Ricard.
1 Tooke, for example, writing about 1840, speaks of the speculation
that occurred in certain spices in 1825, which consisted simply of succes-
sive purchases on a rising market without intermediate deliveries, as a
" very rare occurrence in the markets for produce." History of Prices,
III, p. 159-
UNITED STATES 35
of cotton from this country into England, for example,
would fear to await the arrival of his cargo before selling,
and would sell the cotton "in transit," or "to arrive." '
The goods might even be sold abroad before leaving the
Southern ports, in which case the contract would read as
a sale of so much cotton "for shipment/' Closely con-
nected with these methods was the development of the
so-called " ports of call," which are still of importance in
export trade. These are central ports to which goods
are originally shipped, and where orders are received fix-
ing their ultimate destination. Before arrival the con-
signee at the port of call sells the goods in the best
market for the moment, and on its arrival gives orders
for the vessel to proceed to the port where the goods
have been sold.2 Dealings for forward delivery were
practiced in the domestic trade almost as early as in the
export trade. In the case of lake and canal shipments,
grain was largely sold ahead by sample " to arrive " and
" for shipment." These are still regular methods of trad-
ing ; for example, much wheat "' to arrive " is bought by
the miller, or cotton " to arrive " by the spinner ; but to-
day these transactions are merely for the matter of con-
venience of delivery. Their old importance as insurance
against fluctuating prices has disappeared with the advent
of the improved methods of the speculative market.
It was only with the development of the warrant and
grading system, however, that the real future became pos-
sible. The use of warrants began in England in 1733 in
the business of the East India Company.3 Their possi-
1 Cf. Fuchs, Die Organisation des Liverpooler Baumivollhandels, in
Schmoller's Jahrbuch, XIV, p. 115.
1 For example, goods may be consigned " to Cork for orders," with
stipulation in the shipping contract concerning the right of further de-
livery ; thus *' privilege U. K." means that the ship must proceed to any
port in the United Kingdom designated by the consignee. Cf. also
Kohn, op. cit., p. 29.
* Felix Hecht, Die Warrants, p. 2. Stuttgart, 1884.
36 SPECULA TION IN THE [ 3 j g
bilities so quickly became evident that at an early date
complaints appear of well-developed abuses through
fraudulent issues. The function of the warrant was to
transfer ownership without any actual transfer of the
goods. Secondarily it facilitated advances of capital
against the goods held. Both these advantages gave a
stimulus to trade, and there arose an active business in
warrants of a more or less speculative nature. They
passed easily from hand to hand and frequently bore
many endorsements before finally being presented for the
goods. In these cases, however, the warrants were
special receipts ; that is, they represented specific lots
deposited, and no established grades were fixed in terms
of which sales for forward delivery could be made ; hence
the speculation in them was limited to the kind of specu-
lation that might take place through buying and selling
the goods themselves. It was only in the case of the
metals that a grading system and general warrants came
into use.1 Until this method was adopted no one could
sell goods before purchasing them, so no organized spec-
ulation for future delivery could arise.
In the case of metals, especially iron, the warrant system
received an important extension. The warrant became a
general warrant, that is, a receipt for no particular lot de-
posited, but merely a transferable order for an equal
amount of the given commodity of the same grade. This
was made possible by a fixed system of grading, all the
iron of the same grade being stored in bulk, to be taken
out on presentation of the warrants. Thus the ordinary
warrant for Scotch pig read for 300 Ibs. of No. i and 200
Ibs. of No. 3 pig-iron, and was made good by a delivery
of those amounts and qualities, without reference to the
specific iron deposited.2
In England warrants issued in terms of recognized
1 Hecht, Die Warrants, p. 10. * Jbtd., p. 28.
~ig-| UNITED STATES 37
grades were extended gradually to other commodities.
In the United States they developed independently in the
case of the great agricultural staples. What the import
trade did for England in developing these methods, was
done for this country by the export trade on the one hand
and the internal trade on the other. The striking increase
in the grain and cotton business in the United States
during the last fifty years has been accompanied by the
growth of commercial practices that are of great interest
to the student. Untrammeled by business traditions of
past centuries, or by the tendency to fit new conditions to
old methods, the trade of this country has unconsciously
adopted new and direct means for attaining its ends.
There has been little "history" or "evolution" about
the process, for the practical mind of the business man
has simply seized the most direct method of " facilitating
business," a course forced on him by the constantly in-
creasing size of his transactions.1
Thus in the growth of receipts at export points is found
the cause of the adoption of the warehouse system, while
the extension of the railroads into the vast wheat fields
of the West led to a similar storage system there. Grain
elevators sprang up along the lines for the convenience of
the producers, the dealers and the roads themselves. The
movement of vast crops from such scattered sources was
increasingly difficult under the old method of selling by
sample, and during the fifties the system of grading was
fully adopted.2 As wheat was presented for storage it
was inspected and classified in established grades. Re-
ceipts (warrants) were issued by the elevator or ware-
house according to the grade, and became the equivalent
1 For a contrast of American and continental practice, see Handwdrier-
buch der Staatswissenschaften, article " Getreidehandel."
* There is little available material for a study of the history of the grain
trade. A valuable beginning in this direction is made in two articles by
H. Schumacher, Der Getreidehandel in den Ver. Staatenron Amerika,
in Conrad's Jahrbuchcr for September and December, 1895.
38 SPECULATION IN THE
in the market of the given amount of the given grade.
By 1860 most of the grain in Chicago was duly graded.
These receipts, although made in terms of fixed grades,
were at first specific orders for actual lots deposited.
With the enormous storings of grain in bulk, however,
the difficulties of delivering at any moment the actual
wheat deposited on a warrant became increasingly great.
Consequently a change was made to the system of gen-
eral receipts. Grain received by the railroad or the ware-
house was properly graded and classified, and all the
grain of the same grade was stored in bulk without re-
gard to particular lots. A delivery of the receipt con-
stituted a fulfillment of a contract, and in fact the receipts
themselves might be considered the commodity bought
and sold, since they were rights to receive a certain
amount of the given grade on demand.
This practice of issuing general receipts began early in
the West but was not adopted in New York till 1874.
It has never become established in the cotton trade.
Cotton is not stored in vast quantities in terminal ware-
houses and lacks entirely the flowing quality of wheat,
which makes the storing and " loading out " of that com-
modity so distinctive a process.
The development of the system of grading and of
elevator receipts is the most important step in the his-
tory of the grain trade.1 It is only with such a machin-
ery that an extension of forward sales in the modern
sense is possible, that is, of forward sales of goods hav-
ing no definite existence until the moment of delivery.
The goods may or may not be in the possession of the
seller at the time of the contract. When they are not,
1 " Die Entwicklung des Warrantsystems ist in der Kette der fur das
Gedeihen des Grosswaarenhandels wesentlichen Institutional das letzte
Glied, welches auf den Umsatz im Waarengeschaft fordernd, anregend
und regelnd einwirkt. Es bedeutet einen Kulminationspunkt in der
Entwicklung der fur den Grosshandel erwiinschten Institutionen."
Hecht, Die Warrants, p. 172.
UNITED STATES
39
and when the seller has made no contract to receive them,
such a transaction is called a " short sale." The seller
merely contracts to deliver a certain amount of a certain
grade of the commodity in question. Such transactions
may be made to any extent as soon as a commodity is
regularly graded and classified, and receipts of a stereo-
typed kind are accepted as a good delivery. The future
fulfillment of the contract is assured by the possibility of
getting such receipts. A full-fledged speculation is at
length made possible. Without a system of grades and
receipts there could be no " short-selling," and without
short-selling there could be no operations " for the fall,"
that is, operations in which the dealer seeks to secure
profit by selling for forward delivery at one price and by
making the delivery with goods bought later at a lower
price. Under the old methods " bull " speculation alone
was possible; the speculative market is not complete till
the machinery for " bear" speculation is added.
It is stated ' that the future contract proper, however,
was preceded in the West by a form of dealing which is of
peculiar interest as an early form, because it is both the
form of transaction which now prevails in our stock ex-
changes, and one which has recently been suggested as a
possible substitute for the present method of the produce
exchanges. This dealing was effected through a process
of borrowing which had also sprung up in the trade in
Scotch pig-warrants referred to above.2 When much
wheat had been stored in the elevators and many receipts
had been issued, the holders were glad to loan these re-
ceipts against cash and get the use of the money during
the time of holding. Thus any one looking for a fall in
price could sell wheat which he would deliver by means
1 See evidence taken before Senate Committee on the Judiciary, Feb.,
1892, on Senate bills 685 and 1757, 52d Congress, ist Session, p. 225.
1 Cf. Hecht, op. cit., p. 30.
40
SPECULATION IN THE
of borrowed, transferable receipts properly endorsed by
the holder, expecting to be able to replace these, when
demanded, by purchases of receipts at a lower price.
There was never any obligation to return the identical re-
ceipts, since all receipts for the same goods were equally
good. In this way a single receipt might serve for the
satisfaction of any number of contracts. In such a sys-
tem, however, the extension of short-sales was limited by
existing stocks, that is, by the number of receipts for
borrowing in the market. The possibility of a combina-
tion of the holders of wheat always put a limit to the
number and size of contracts to be settled by such loans.
It was perhaps the hardship of this restraint on trade
which hastened the adoption of the "future" system.
The future once established, transactions for future deliv-
ery increased enormously on those exchanges which
formed the chief markets of the country. The necessity
of uniform and fixed regulations for such contracts, and
the increased complexity of a growing business, led to the
gradual growth of a body of rules on the various exchanges
by which all the details of such contracts are regulated.
It is difficult to say how early dealings in " futures " in
the United States began. As soon as they became of
importance the exchanges adopted rules controlling them.
The first appearance of printed rules for " future " trad-
ing in the reports of the Chicago Board of Trade was in
the report of 1869. Such trading had been more or less
actively carried on for four or five years before. In the
evidence before the Congressional Committee on Agri-
culture, in February, 1892,' it was stated that the govern-
ment contracts for pork during the Civil War were the
beginning of future trading. Cases of such trading,
however, probably occurred in a small way as early as
1 On bills 392, 2699, and 3870, 52d Congress, I Session, p. 161.
UNITED STATES 41
1855.' Trading in futures began in other western mar-
kets, such as St. Louis, Milwaukee and Toledo, at about
the same time, Milwaukee taking the lead as early as 1855.
In New York it appeared some years later, not becoming
of great importance until the later seventies. The first
public call in grain on the New York Produce Exchange
was May 17, 1877, an<^ in pork and lard, January 31, 1876,'
but future sales occurred some years before these dates.3
The first rules were adopted for the petroleum trade,
and " wash sales " in that commodity were already com-
plained of in i873-4 The first future trading of import-
ance in New York was in cotton. It began soon after
the Civil War, and was due to the great uncertainties of
the cotton trade at that time.
It appears that a period of only thirty years covers the
real growth of the vast body of speculative transactions in
this country, and of the code of rules which regulates
them. Without attempting to consider in detail the
changes made in these rules, it remains to examine their
workings as exemplified in the exchange business of to-
day. The importance of the grading and classification
of a commodity thus dealt in has already been empha-
sized. To be sold " short " a commodity must be repre-
sentative, that is, of the same quality throughout. This
1 Future-dealing was adopted considerably earlier in Europe. Futures
were sold in some kinds of grain in Berlin by 1832, and some years
earlier in France and Holland. See Fuchs, Der Warenterminhandel,
p. 6, Jacobson, op. cit., pp. 85, 89.
J See Report of New York Produce Exchange, 1881.
3 Statistics of transactions for early years give an idea of the degree of
importance of such dealing. (From Report of New York Produce Ex-
change, 1881.)
Wheat (bushels). Corn (bushels). Lard (tierces). Margins.
1877 15,061,000 17,862,000 268,OOO $673,776
1879 34,358,000 27,847,000 859,250 2,783,854
1881 44,492,000 41,912,000 782,000 10,716,838
Compare with these figures the sales of wheat and corn in 1893, 1,281,-
811,000 bushels and 239,257,000 bushels.
4 See report of Produce Exchange of that year.
42 SPECULATION IN THE
property is fairly exemplified in grain and cotton and
provisions, but is made complete by means of an estab-
lished classification. For contract purposes each grade
is truly representative. The fixing of grades is then a
factor of the greatest importance in the speculative sys-
tem. The early grading, however, was of an untrust-
worthy kind until the produce exchanges, as preeminently
concerned in the matter, began to adopt rules to control
it. In some cases the exchanges still maintain this con-
trol, but several of the Western States, notably Illinois,
Minnesota and Missouri, containing the important mar-
kets of Chicago, Minneapolis and St. Louis, have removed
the inspection of grain from the exchanges and have made
it a State function. In these States the inspectors are
State officials and the grades are fixed by a State Board
— in Illinois by the Board of Railroad and Warehouse
Commissioners. In the case of provisions, however, in
Chicago grading is still regulated by the Board of Trade.
In New York the Produce Exchange has provided rules
for the inspection and grading of all commodities which
are dealt in on the Board. Warehouses are duly author-
ized, sworn inspectors and gaugers are provided, grades
are established, and receipts of a set form are issued. All
contracts are made in terms of these grades, and all set-
tlements are made by the transfer of these receipts.
There is a lack of uniformity in the grading of grain in
different States and different exchanges, which is a cause
of some confusion to the trade. Each exchange or State
Board can fix its own grades, and can change them at
any time. In Chicago there are about twenty-five grades
of wheat and about ten grades of corn, and about the
same number in New York. The classification in the
two exchanges is, however, not the same. The contracts
on the produce exchanges specify the grade, and only a
delivery of that grade, or some higher grade, constitutes
a settlement of the contract. The provision that a higher
325] UNITED STATES 43
than contract grade constitutes a good delivery was!
adopted comparatively recently with a view to avoid \
" corners." So large a proportion of the transactions are
made for speculation, that in the case of wheat and pork
special " contract grades " are established, which are
understood in all contracts not specifying the contrary.
" Contract wheat " is in Chicago No. 2 wheat, either
Spring or Red Winter ; in New York it may be No. 2 Red
Winter, No. i Northern Spring, or No. I Hard Spring.1
In the case of pork, unless the grade is specified in the
contract, mess-pork is understood. On the cotton and
the coffee exchanges the rules are different. Like the
produce exchanges, the New York Cotton Exchange
provides for a grading and classification of cotton with
sworn inspectors and the like ; but it has an entirely dif-
ferent feature in its quotation and revision committees.
These committees fix the price of the various grades of cot-
ton in terms of one particular grade, Middling Uplands.*
1 The " contract " or " speculative " grades vary considerably in differ-
ent markets. At Minneapolis there is one such grade, No. I Northern;
at Duluth two grades, No. i Hard and No. I Northern, at St. Louis one
grade. No. 2 Red Winter. Further confusion is caused by changing the
contract grades. For example, at St. Louis when there was a scarcity of
No. 2 Red in 1895, a particular variety, known as Turkey Red and grown
chiefly in Kansas, was made a contract wheat, but was abolished after a
year's trial. The contract grade must of course depend upon the local
conditions, and will embrace the variety or varieties constituting the
chief receipts at the market in question.
''The Quotation Committee consists of seven members, and meets
twice a day to fix the official quotation of Middling Uplands and of all
other grades in terms of this one, according to the relative differences
established by the Committee on Revision of Quotations. This latter
committee consists of nine members, who meet nine times a year and
determine the relation of the values of all other grades to the value of
Middling, which becomes the basis of the official quotations until the
next revision. The same is true of the New Orleans Cotton Exchange
and the New York Coffee Exchange. In the latter exchange the Spot
Quotation Committee posts daily the values of all grades in terms or No.
7 (Low Ordinary), and any question of the revision of the comparative
values of the standard is referred to the governing board.
44 SPECULATION IN THE [325
The form of contract, therefore, does not specify the de-
livery of any particular grade, but the price reads for
Middling Uplands, and any grade from Good Ordinary
to Fair, inclusive, may be delivered, with allowance in the
price (as fixed by the Revision Committee) for its varia-
tion from Middling in quality. Some of the effects of
such a provision will be considered in a later chapter.
Besides these fixed stipulations regarding grades that
are uniform for all contracts, there are on all the exchanges
stereotyped conditions regarding the amounts to be de-
livered. Contracts are made in terms of a fixed unit of
amount. On the Chicago Board of Trade the unit in the
case of grain is 5,000 bushels. Contracts are made in mul-
tiples of this unit as a matter of convenience, and all deliv-
eries on contracts are made in lots of 5,000 bushels. The
same unit is used in New York. Where wheat or corn is
sold, however, in " boat-load lots to arrive," 8,000 bushels
is understood. In such cases ten per cent deficiency or ex-
cess from the contract amount does not vitiate the deliv-
ery. In the regular contract a five per cent variation is
allowed in New York, and a one per cent variation in
Chicago. In any case the excess or the deficiency is to be
settled for at the closing price of the day of tender. Similar
units of sale exist for other products, for example, in mess-
pork and lard 250 packages for large sales, 50 packages for
smaller sales ; in cotton 50,000 Ibs. " in about 100 bales ;"
in coffee 32,500 Ibs. " in about 250 bags." In the European
exchanges ' similar rules exist. In the case of wheat in
Berlin, the minimum or Schluss is 1,000 Zollcentner, about
1,900 bushels, in Budapest 1000 Meter -centner, about 3750
bushels, in London 250,000 Ibs. Similar allowances are
also made for deliveries in slight variation of the con-
tract amount.
1 Cf. Kohn, Der Getreideterminhandel, p. 33; also Handworterbuch
der Staatswissenschaften, article, " Borsengeschafte."
327] UNITED STATES 45
Another feature of the time-bargains made on the pro-
duce exchanges is the determination of the time of fulfill-
ment. The products which are sold for future delivery come
into the market continuously, and yet irregularly, and can-
not be promised for delivery on any fixed day. At the same
time, the date of delivery within certain limits is rigidly
fixed in the contract. In this country the universal prac-
tice is to specify the month of delivery and allow the seller
the option of delivering on whatever day of the month he
may prefer. Thus if wheat is sold for May delivery, "seller's
option," the wheat may be delivered on any day of the
month, and must be taken and paid for by the ultimate
purchaser whenever he is served with due notice of inten-
tion to deliver. On the other hand, if it is not delivered
before, the seller is bound to deliver on the last day of the
month. Occasionally the option as to the day of the month
is given to the buyer, and the contract then reads " buy-
er's option ;" but this is unusual, and seller's option is
always understood unless otherwise stated.
There are no regular sales on American exchanges for
which the option for delivery extends beyond a single
month.1 In Europe, however, sales are frequently made for
a longer option — for two months, or even for four or six
months ; in Paris, for example, for the four premiers mois,
January to March, or four chauds mots, May to August.
There are also in Germany and Austria specially fixed per-
iods,March and April, called thefru/im/ir-Termin^nd Sep-
tember and October, called the Herbst-Termin? The de-
livery is effected in a similar way, however, as in American
exchanges, the only difference being the length of option.
1 By this is meant the time within which delivery may be made.
Futures maybe sold six months or more ahead, but the contract specifies
some one month in which delivery is to be made. Although no longer
options than one month are quoted, there are sometimes sales of " year
corn," that is, corn to be delivered (seller's or buyer's option) at any
time within the current year.
1 See Kohn. Der Getreideterminhandel, p. 22.
46 SPECULATION IN THE [328
The foregoing description of the conditions of the con-
tract for future delivery makes it possible to summarize in
the form of definitions the conclusions reached. It is com-
mon experience that commerce cares little for definitions,
and that accuracy in terms is generally secured only after
more or less has been written on a subject of this nature.
The Germans, for example, have arrived at a distinct use of
terms which we can hardly equal unless we go beyond the
familiar language of business. The " future," as distin-
guished from other forms of time dealings, evidently de-
pends upon the existence of warehouse receipts issued in
terms of fixed and accepted grades, by which means a com-
modity is made entirely representative. It also depends
upon an organized market, for without strict regulations
from a central body the grading and classification of com-
modities would be impossible, and the difference in form
of contract would be too confusing to admit of any great
extension of that kind of business. It is then perhaps cor-
rect to define a " future " as a contract for the future de-
livery of some commodity, without reference to specific
lots, made under the rules of some commercial body, in a
set form, by which the conditions as to the unit of amount,
the quality, and the time of delivery are stereotyped, and
only the determination of the total amount and the price
is left open to the contracting parties.1 At least futures
not so made are a rare exception.2
1 Cf. David Kohn, op. cit. , p. 37. ' ' Das Termingeschaft ist ein solcher
mit Riicksicht auf den zuktinftigen Preis geschlossener, in usancemassig
festgestelltem zukiinftigem Zeitraum zu effektuierender, iibertragbarer,
in seinen Bedingungen typsicher Kauf und Verkauf, dessen Objekt nach
Quantitat und Qualitat vertretbar oder durch geschaftliche Usance mit
Hiilfe kaufmannischer Fiktion nach Moglichkeit dazu gemacht ist."
Fuchs, Der Warenterminhandel, p. 4. " Das Termingeschaft ist also
ausserlich nur ein genauer formuliertes, durch Borsenusancen reglemen-
tiertes, Zeit- oder Lieferungsgeschaft."
2 The word "future," however, lacks the etymological significance
which its equivalent in other languages possesses. The German speaks
of a " Zeitgeschaft " as we do of a time-contract, while a " Termin-
2g-| UNITED STATES 47
Another important class of transactions are the deal-
ings " for cash." These " cash " or " spot " contracts are
merely the outright sale and purchase of goods for im-
mediate delivery.1 They do not necessarily imply a cash
payment, as the seller and buyer can make their own ar-
rangements as to the giving of credit. They do, how-
ever, represent actual goods available in the market at
the moment. It is a mistake, nevertheless, to associate
" spot " dealings with " actual business," and " futures "
with speculation. Spot dealings may be purely specula-
tive, as where a person buys and sells in order to profit
by daily fluctuations in the spot market, or buys " spot
stuff " outright to hold for a rise, or, finally, makes cash
purchases to settle on future contracts previously made.
On the other hand, contracts for future delivery are as
much a part of trade contracts as cash sales are a part of
speculative contracts. It may be by futures that the
dealer sells and the miller buys his wheat, or that the
merchant sells and the manufacturer buys his cotton.
The amount of futures sold on the exchanges, however,
far exceeds the amount of cash dealings. The figures for
the Produce and Cotton Exchanges of New York for 1895
are : *
Wheat, Cotton,
" futures," 1,443,875,000 bushels. " futures," 63.828,300 bales,
"spot," 43,405,076 bushels, "spot," 240,456 bales.
When it is remembered that the unprecedented wheat
geschdft" is a transaction based on a fixed period of fulfillment, the
Termin. The same idea is conveyed by the French phrase "operation
& terme."
1 In the midst of the transactions on the board, actual delivery of the
receipts at the moment of contract is evidently impossible, but " spot "
contracts are stereotyped in form, and delivery under the rules is post-
poned until the close of business on that day.
' See Bradstreei ' s , Jan. 4, 1896. It is doubtful if these figures, though
official, include all the transactions made.
48 SPECULATION IN THE [330
crop for 1891 in the United States was little more than
600,000,000 bushels, it will be seen that the annual sales
on the New York Exchange alone far exceed the amount
of the annual crop. Yet the New York market is small
compared with that of Chicago. No comparative figures
of spots and futures are available for the latter market.
The amount of clearings on future contracts, however,
under the method of clearing differences to be described
below, gives some idea of the enormous extent to which
such tradings are carried on in Chicago." '
Clearings. Balances.
1891 $104,083,529 $32,430,827
1893 68,707,668 26,896,677
1895 78,133,437 28,726,400
Though the sales in New York are only a fraction of
those in Chicago, they are far greater than those of any
other grain exchange.
Another important class of contracts are " privileges."
A privilege is a contract whereby one party acquires the
right, but is not thereby obligated, to buy from or sell to
the other party a certain amount of a certain commodity
at a certain price. He has the privilege or option of
completing the contract or not. This differs entirely
from the option allowed the seller in an ordinary future
contract. There the seller is obligated to deliver on the
contract as stipulated, if demand to that effect is made,
but has an option as to the particular day within a cer-
tain month on which to make delivery. In the case of a
privilege the option is whether or not the delivery shall
be made at all. The optional element in both contracts
has caused the word " option " to be applied indiscrimi-
nately to both futures and privileges. The " anti-option "
bills which have been introduced in Congress in recent
years adopted the word " option " to signify those con-
1 See Report of Chicago Board of Trade, 1895, P- «9-
UNITED STATES
49
tracts in which fulfillment is not obligatory, and made the
distinction sharp between "futures"' and " options." Com-
mercial usage, however, often makes the two words syn-
onymous. In view of such ambiguity it will be better not to
use the word "option'' to indicate a particular form of
contract, but to use it only in relation to some particular
time of delivery, as " the May option " or " the September
option." The term "privilege" is more definite in busi-
ness usage, and confusion may be best avoided by making
the division between "futures" and "privileges."
In one sense a privilege is a cash transaction, since a cash
payment (as explained below) is paid for the privilege. In
another sense it may be classed with futures, in opposition
to cash dealings, since, if the transaction is completed, the
privilege fulfills itself in terms of some future delivery.1
Privileges are either " puts " or " calls." The " put " is
a contract made with a view to a fall in price. It enables
the seller to limit his risk of loss to a definite amount. By
paying a fixed sum of money he acquires the right to de-
liver within a fixed period of time, to the party taking the
put-money, a certain amount of a commodity at a stated
price. If the price goes down he purchases and makes
his delivery according to contract ; if the price goes up,
on the other hand, he relinquishes the " put-money " and
exercises the privilege of not delivering. He loses the
amount of the price paid, but can lose no more.
Suppose a " put " is sold in wheat : the price in January
1 According to German usage of 'terms, transactions are distinguished
as Comptant- or Locogeschdfte (spot dealings) and Termingeschafte
(future dealings) , while the Termingeschaft may be either a Fixgeschaft
(the " future " proper as defined above) or a Pramiegeschdft (privilege).
In the same way, in France the marcht & terme embraces both the marcht
ferme, and the marcht & prime. Usage in this country furnishes no dis-
tinct term which includes both a future and a privilege. See Kohn, op.
cit., p. 22, Courtois, Operations de Bourse, ch. 3. Buchere, Operations
de la Bourse, ch. 3, Paris, 1877, or any general account of exchange
operations in Europe.
50 SPECULATION IN THE [332
of wheat for May delivery being seventy cents, A, who is
expecting a fall but is unwilling to run great risk, pays B
ten dollars for the privilege of delivering to him 10,000
bushels at some price, say sixty-nine cents, within the next
twenty-four hours. If the price falls below sixty-nine cents,
A will buy this wheat and deliver. The term " deliver " is
here used to signify that the owner of the privilege can
make the other party contract to receive the wheat. If the
privilege is in wheat for May delivery it cannot of course be
delivered in January. On the other hand, if the price rises,
A will not deliver, and loses only ten dollars. This payment
then is made for the privilege of making delivery or not as
he chooses. He can lose only the ten dollars. He may
make, however, a profit limited only by the amount of fall
in price. On the other hand, B, who is called the " seller
of the put," never makes more than the ten dollars, while
he may lose any amount. For the certainty of the ten dol-
lars he is willing to risk a considerable fall. The name
" put " is derived from the right acquired by A to put
the wheat to B, who is obliged to take it at the contract
price.
A " call " is exactly the reverse of a put. It is a contract
whereby, for a consideration in cash, one party acquires the
right to receive from the other party, within a fixed period
of time, a certain amount of a commodity at a stipulated
price. The loss to the buyer of the call is limited to the
price, and the gain of the seller is limited to the same
amount. It is clear that a " call " is the same in nature as
an option on real estate, a common form of contract
among real-estate dealers. The principle of both contracts
is that a party does not wish to assume the ownership of
any property until he is sure of a good market, and hence
will pay a premium in order to be able to secure the prop-
erty at a stipulated price when a good buyer is found.
A combination of the two forms of privileges makes what
UNITED STATES 5!
is called in England a " put and call option," and on
American exchanges more expressively a " straddle." A
" straddle " is a contract by which one party acquires the
right either to put or to call from another party, within
a fixed period of time, a given amount of a commodity
at a stipulated price. The seller of a straddle evidently
counts on a stagnant market. This form of contract,
however, is used very little in the grain market.
A straddle is generally made "at the market," a put or
call " away from the market; " that is, if the market price
of wheat for May delivery is seventy cents, the seller of a
put will agree to take it. not at seventy cents perhaps, for
the risk is too great, but at something less than that, per-
haps sixty-nine or sixty-nine and a half cents. The seller
of a call, on the other hand, will add something to the
market price and agree to deliver at seventy-one cents : but
the seller of a straddle will make his contract at the mar-
ket price, because for him to make a profit the fluctuation
either way must be less than the price of the privilege.
The amount paid for a privilege depends upon the risk
to the seller. The farther away from the market the
privilege reads, the less the risk to the seller and the
lower the price. The price of a straddle is, of course,
greater than that of a put or a call alone, because when
made at the market ifcreates a much greater risk, a
movement in either direction which would not affect
either a put or call being sufficient to wipe out the seller's
profit. The most important factor, perhaps, in determin-
ing the price of a privilege is the condition of the market.
If the market is fluctuating, a put or a call is either made
at a wide margin from the market, or commands a high
price. On the other hand, in a stagnant market a privi-
lege is sold very near the market at a small price. Evi-
dently on a rising market a put is sold at better terms
than at other times, and on a falling market a call is sold
52 SPECULATION IN THE
at better terms. In the next place, the longer the time
the privilege runs, the greater the risk and the higher the
price. Commonly, privileges in the grain market run for
either one day or one week, though they may run for a
longer time. To sum up, the price of a privilege de-
pends chiefly upon three things : the distance it reads
away from the market, the state of the market, and the
time the privilege runs. As a matter of fact, however, it
is customary to keep the price fixed and to let the other
conditions vary. For example, in wheat a put or a call
generally sells in Chicago at one dollar a thousand
bushels. In a dull market a put or a call for twenty-four
hours, reading one-fourth or three-eighths of a cent from
the market, can be bought at that price, while as the
market becomes more active the price does not change,
but the margin between the privilege and the market is
widened to one cent or any amount more.
A privilege is fulfilled, not by any delivery of grain, but
by making a regular contract for its delivery. It may be
that the man who sold a put stands ready to take the wheat
when due ; if not, he sells the wheat to another party, and
the transaction is now merged into a whole line of similar
futures, and, as will be seen below, profits are perhaps
taken at once by means of "off-sets." In any case, the
moment the buyer of the privilege announces that he will
put or call the property in question, a contract like any
other future exists, and there is no further option of deliv-
ery except as to the particular day within the option month.
It is seen that, as viewed on the exchanges of this
country, the privilege is a right which can be bought and
sold, and which entitles the purchaser of the right to
enter into a certain contract with the other party within
a specified time. The terms of the contract that is to be
made, at the option of the owner of the right, are defi-
nitely fixed in the terms of the sale of right. From an-
^-1 UXITED STATES 53
other point of view, however, the privilege may be con-
sidered as an ordinary contract tor future delivery with a
special stipulation that, in consideration of a cash pay-
ment, one of the parties has the right to withdraw from
the contract within a specified time. This is the German
view of the privilege or Prdmiegeschaft, and is in fact the
prevalent view on the continent.1
Something will be said later in regard to the influence of
these privileges on prices and their function, if any, in
business. Suffice it to say here that they are generally
looked upon with disfavor as gambling devices, and are
forbidden by almost all the exchanges of the country. It
was necessary to describe them as regular transactions, for
they do take place, and no description of the speculative
market would be complete without them. The New York
Produce Exchange adopted the following rule in 1887 :
"Any person who shall buy or sell privileges known as ' puts and calls,'
or who shall, under the rules governing the various trades of the ex-
change, deliver, receive or margin any contracts based upon such privi-
leges, shall be deemed guilty of misconduct and liable to discipline under
Sec. 32 of the By- Laws."
Privileges are sold chiefly after hours and not on the ex-
change floor.2 In Chicago, after the Board closes there is a
1 This is evident from the use of terms. It is said that a Lieferungs-
prdmie, or Vorprdmie, is paid by the buyer for the privilege of with-
drawing from the contract, and an Empfangsprdmie , or Ruckprdmie, by
the seller for a similar privilege. Here the terms buyer and seller refer
to the completed contract. According to American usage, the seller
and the buyer of the privilege are spoken of, and the buyer of the privi-
lege may be either the party to receive or the party to deliver on the final
contract, according to the nature of the privilege. See Fuchs, Dfr
Warenterminhandel , p. n. also Kohn, Der Getreidtterminhandel , p. 22,
and Courtois, Operations de Bourse, p. 75.
1 Vigorous efforts have sometimes been made to get rules passed for-
bidding puts and calls off as well as on the Board. In the spring of
I&J5 a hot fight against privileges was waged in Chicago, with President
Baker as leader of the anti-privilege men. Privileges are forbidden by
statute in Illinois, and there was an attempt to forbid privileges even out-
side of the Board, since statute-breaking was a daily occurrence.
54 SPECULATION IN THE [336
further meeting in the corridors, or in some room of the
same building, where puts and calls are sold without let or
hindrance. They form, however, a very small part of the
total volume of transactions, and perhaps are not dis-
countenanced more than they are because of the legitimate
use to which they are sometimes put by bona fide traders.
Nominally public trading that does not take place within
the regular hours of the Board and on the floor of the Ex-
change is forbidden by most of the exchanges, but little
attempt is made to enforce the rule. Such trading is gen-
erally called " curb-trading," and is used both for specu-
lative and for bona fide business purposes. The quotations
of Chicago prices that appear on the '' tape " begin with
the quotation of the " curb " before regular business hours
and end with the quotation of puts and calls after business
closes. The reason for making rules against curb-trading
seems to be that it is not within the cognizance of the
Board and cannot in any way be controlled. The rule is
merely a question of practical policy among the ex-
changes. Transactions outside the Board are not enforce-
able under the rules, but, since fidelity in meeting engage-
ments is a necessity for any one who wishes to continue
in business, the danger of loss through fraud is not much
greater here than on the Board.
ii. *•
It may be well to examine the way in which an actual
transaction is put through on an exchange, taking as an
example the New York Produce Exchange. Suppose in
March A, who is a speculator and expects a fall in wheat,
sells to B 100,000 bushels of May wheat,1 which he does
1 The designation of wheat by months has nothing to do with the kind
of wheat or the time of harvest. The expressions " May wheat " and
" September wheat," simply refer to wheat which is to be delivered, ac-
cording to the terms of the contract, in those particular months.
UNITED STATES 55
not own, at 70 cents a bushel. The form of contract
adopted by the New York Produce Exchange is as
follows :'
CONTRACT WHEAT.
NEW YORK, , 18
In consideration of one dollar in hand paid, the receipt of which is
hereby acknowledged have this day sold to
or bought of bushels of
CONTRACT WHEAT (which shall be either No. 2 Red Winter Wheat, No. I
Northern Spring Wheat or No. i Hard Spring Wheat), New York
Inspection, at cents per bushel of 60 pounds, deliverable at
seller's (or buyer's) option 18
This contract is trade in view of, and in all respects subject to, the By-Laws and Rules
established by the New York Produce Exchange, in force at this date.
So far it is a simple transaction between A and B.
From this point on until the first of May there will be a
constantly changing market price for May wheat. Sup-
pose that the price rises to 72 cents and that B thinks
that a two-cent profit is better than the chance of more.*
He sells to C 100,000 bushels of May wheat. This is a
separate contract. These sales may continue to any ex-
tent. Frightened by a slight reaction, C perhaps fears a
fall. He sells the same amount at 71 >£ cents, again a
separate transaction. D, the purchaser, has perhaps sold
short before at the same price as A, 72 cents. By the
transaction with C, he secures a profit of half a cent. E,
to whom D formerly sold, has perhaps already sold to F,
and he to G, and so on. Thus two series of transactions
are linked together by the contract between C and D.
Each individual along the line, with the exception of the
first and last, has made two contracts, one to deliver
1 As will be seen below, though every contract is made according to the
above conditions, written contracts are not exchanged.
1 In referring to profits the deductions for commission and interest
charges are omitted for convenience.
56 SPECULATION IN THE [338
100,000 bushels of wheat in May, one to receive the same
amount.1
Those who were trading for the rise, the " bulls," made
their purchases first. Those who were trading for the
fall, the "bears,"2 made their sales first, and their pur-
chases later. In both cases the second or realizing trans-
action was made before the fulfillment of the first one.3
In the example taken the sales of the bears were short-
sales. B, though he did not own the property, did not
sell " short " to C, for he (B) had already contracted for
an equal amount. The purchases of the bears are called
" covering contracts." A bear " covers " a short-sale by
making a purchase of the same amount deliverable at the
same time. If he sells at seventy-two cents and covers
at seventy cents he makes a profit of two cents a bushel,
less commission charges, while if the price in the cover-
ing contract is greater than that of the short-sale, the
bear loses. The opposite of the short-sale is the purchase
by the bull (say B in our example) who, as the saying is,
is " long " on wheat, or is on the " long side of the mar-
ket." His sale always follows his purchase and is called
a " realizing " or " liquidating " sale.
1 The supposition of transactions in equal amount is made for conven-
ience. As a matter of fact perhaps one purchaser in the line has bought
the 100,000 bushels in question at the same time with much more and
has merged the amount into a single sale of several hundred thousand
bushels, or perhaps the original 100,000 gets split up into a number of
smaller transactions.
2 The names "bull" and "bear" originated very early in the jargon of
the exchange. They appear in Mortimer's Every Man his own Broker
(London, 6th ed., 1765), where an explanation of their use is suggested.
See p. 38.
3 It is sometimes said (cf. Michselis, Die wirthschaftUche Rolle des
Spekulationshandels, in Volkswirthschaftliche Schriften, ii, 15), that in
the case of speculative transactions, as distinct from ordinary trading, the
realizing contract always precedes the fulfillment of the original contract.
The distinction is an interesting one as showing the general contrast be-
tween trade and speculation, but it is not universally true. Speculators,
as well as traders for business purposes, may buy outright for a rise.
339] UNITED STATES 57
It is evident that, so far as most of the parties are con-
cerned, their interest in the transaction is at an end long
before the time for delivery arrives. That is, the question
of profit is decided as soon as the bear covers or the bull
liquidates. Each one is responsible for the delivery of his
wheat, but each one has contracted to receive the same
amount and depends on the party who sold to him to
furnish what he needs to fulfill his contract. There are
perhaps two in the line who have made but a single con-
tract ; one who has actual wheat to dispose of and one
who wants actual wheat for use. In the example taken, A
was a short seller under the necessity of covering his sale
by a purchase before the time of delivery. Suppose that
he purchases from a dealer X. who is expecting wheat
from his buyers in the country about May, or that he waits
till May and buys cash wheat of X. X makes only the
single contract, since, having the actual wheat for deliv-
ery, he does not need to cover. A uses this wheat to
make his delivery to B, who delivers it to C, and so on.
In the meantime a purchaser may have appeared who has
made no other sale. Perhaps he is an exporter or a
miller, or he may be a speculator who is ready to hold the
actual wheat. In any case as the wheat is passed along
he becomes the ultimate holder of the 100,000 bushels,
which has settled all the intermediate contracts.
It is ordinarily said that the speculators who execute
both a buying contract and a selling contract before the
time of delivery, and who make their profit (or loss) by
the difference in price in the two contracts, are merely
" trading for differences." It is true that they are merely
trading for differences, if by that is meant that the pur-
pose of their transactions is to secure the difference in
price. They are not concerned with buying from the
farmers, or milling, or exporting. They are after a profit
from a fluctuation in price. The effect of such dealings
58 SPECULATION IN THE [340
and their economic function are matters for consideration
under a different head. Here it is only important to em-
phasize the fact that these dealings are in no way different
in form from any other dealings. What men are after
may be the " differences," what they do is to buy and sell
property. Only one form of future contract is recognized
by the exchanges, and that is essentially the form given
above, adopted by the New York Produce Exchange. No
contract ever reads for the payment of such differences in
price alone ; it reads for the purchase and sale of so much
grain, or pork, or cotton. Nor is a contract ever made on
which delivery cannot be enforced.1 Furthermore, a con-
tract made with one purpose is not necessarily completed
with the same purpose in view. A miller may buy wheat
for grinding, and, before delivery is made, may sell the
wheat he has contracted for because of some change in
the market, and make merely the difference in price. In
this case he can fairly be said to have been trading for
differences. Or a speculator, who has bought with the
idea of selling out before delivery, may after all receive
and hold the actual wheat. In no case would any change
be made in the form of contract.
That some method or machinery for facilitating transfers
must be adopted is evident from the way in which trading
is done. Formerly the dealings took place at the public
" calls," which were a kind of auction where some presid-
ing member called off the commodity by months of deliv-
ery, and those wishing to buy and sell compared their
wants and made their contracts. These calls have been
generally given up, however, except for special purposes.
The immense amount of business to be transacted became
1 The only recorded example of contracts avowedly to be settled with-
out delivery is the form which in former years prevailed in the Paris
Coulisse. Contracts were liquidable suivant reglement, which meant by
the payment of differences only. Courtois, Operations de Bourse, p. 168.
34 1 ] UNITED STATES 59
unmanageable with so slow a process. Now brokers
swarm in the "pit" and all simultaneously make their
offers to buy or sell. In all this confusion it is impossible
to make written contracts. A word, a nod, a snap of the
fingers and a contract is made. The parties make hasty
entries on their pads and continue to offer and bid as
before. This keeps on day after day and thousands of
future contracts are entered into in which hundreds of
brokers and dealers are mixed up in various relations.
Even at the end of the day written contracts are not ex-
changed, but the comparing and settling is done by the
clerks of the trading parties.
It often happens that some of the sales and purchases
of a broker have been made at the same price, and in such
cases arrangement is made for his purchaser and his seller
to now become parties to a new contract at that price,
allowing him to drop out altogether. Even where the
contract prices are different, such an arrangement may
be made by paying differences, but in the main it is more
convenient to settle these contracts through the clearing-
house.1 The next thing then is to arrange for making
such off-sets as the clearing-house can dispose of at once,
which is done by the formation of " rings." Finally,
there is a large mass of transactions left over which are
for the time being to stand. These are settled later
either by " rings " or by deliveries. Some of the parties
perhaps want the real commodity in question, some expect
to have it for delivery, and many intervening parties are
waiting to receive on one contract in order to deliver on
another. It will be best to first examine these settle-
ments by delivery, since the " ring " is really but an ex-
tension of this form of settlement. Furthermore, since
the clearing-house is not essential to this kind of busi-
1 When a broker arranges an off-set for other parties he receives a regu-
lar clearing charge. For the practice in Paris and Marseilles of settling and
clearing through a particular set of brokers, see Jacobson, op. tit., p. 29.
60 SPECULATION IN THE [342
ness, and is in fact a recent development, its description
will be postponed till the settlement in its simplest form
has been explained.
After the clerks have made their off-sets, the remaining
contracts are confirmed by the exchange of so-called
" confirmation slips." These simply stand for the con-
tract in its regular written form,1 which either party may
at any time demand in lieu of the slip. The form used
on the New York Produce Exchange is as follows : 2
CONFIRMATION SLIP.
NEW YORK, 18
We hereby confirm PURCHASES made by us to-day, under
the RULES OF THE NEW YORK PRODUCE EXCHANGE (and either
party may at any time demand a contract in place hereof, as pro-
vided in the BY-LAWS, in lieu of this slip), as follows:
OF.- —JPHN DC)E.
Amount.
Delivery.
Kind of Property.
Price.
RICHARD ROE & CO.
When the time of settlement arrives, it will often be
found that there is a long chain of transactions caused
by so many speculators having bought and sold the same
amount for the same delivery. A has sold to B, B to C,
C to D, and so on. As soon as one person in the chain
makes a delivery of wheat, it is handed on from party to
party. This shows why the sellers are not all after wheat
to deliver. They have contracted for it and can wait till
1 See above, p. 55.
s Exactly the same form is used for confirming sales. The slip is gen-
erally printed on both sides, one side reading purchases, the other sales.
UNITED STATES 6 1
delivery is made to them, the day of the actual delivery
within the month named being at the option of the party
who has sold wheat which he actually owns. If that party
has the wheat in stock, he will ordinarily deliver on the
first day of the month in order to save the cost of storage
expenses for any longer period. If then X, who had sold
the wheat which he actually owned, should deliver elevator
or warehouse receipts, and each party in turn hand them
on, they would finally come into the hands of the party
who wanted the actual wheat for use. In the meantime
they would have constituted a complete delivery on all
the contracts in line.
Exactly the same result can be effected without multi-
plying the endorsements on the receipt and without the
cumbersome repetition of cash payments.
The only two parties directly interested in the actual
wheat are the man who holds it and the man who wishes to
receive it. Between these two there stands a body of spec-
ulators who have both bought and sold. If the holder of
the wheat can find the man who wants it and make deliv-
ery direct to him, the intervening parties settling their own
accounts, the same result as by the first method of delivery
will be obtained. This is accomplished by the issue of a
transferable notice by the party who owns the wheat.
This notice, which is passed to his buyer, states that he is
ready to deliver certain warehouse or elevator receipts in
fulfillment of his contract. Each seller in turn hands it
on with proper indorsement, and the last receiver presents
it to the party issuing it and demands the delivery of the
receipts.1
The difficulty is that the seller and the receiver did not
contract together, and therefore what one has agreed to
pay does not correspond with what the other was to re-
1 An instance of a transferable notice was given as early as 1722 by
Ricard, who stated that he had seen as many as thirty-six indorsements
on a single notice. Quoted by Jacobson, op. cit., p. 79.
62
SPECULATION IN THE
[344
ceive. This is obviated by making the transfer at the
" official market price," that is, the market price at the
close of the previous day's business as determined and
posted by the constituted authorities. This is the pay-
ment made for the actual delivery. The parties in line
then pay, or receive, the differences between this settle-
ment price and the prices in their particular contracts.
The delivery notice in New York takes the form of an
order drawn by the issuer on himself for the delivery on
presentation of the order of the ware-house or elevator
receipts specified in the order. On the New York Cotton
Exchange and the Chicago Board of Trade this notice is
merely a statement of intention to deliver.
The form used on the New York Produce Exchange *
is this :
1 The form adopted by the Chicago Board of Trade is this:
aSP" This notice is deliverable on contracts in the Exchange Hall,
only between the hours of 1:30 and 2:00 o'clock P. M., excepting on the
first business day of each month, on which day also between the hours of
8:30 and 9:15 o'clock A. M., and the property must be called and paid for
at the office of its issuer before 2:45 o' clock P. M. and 11:00 6* clock A.M.
DELIVERY NOTICE.
No.
OFFICE OF.
CHICAGO,
We have on hand ready for delivery the following described Warehouse
Receipts, and hereby make tender to you of the same, in fulfillment of
our contract of sale to you of
DATE.
WAREHOUSE.
QUANTITY.
STORAGE.
Bushels.
Lbs.
Cts.
Amount.
345 ] UNITED STATES 63
NEW YORK PRODUCE EXCHANGE.
Transferable Order for Bushels Settlement price
NEW YORK, 18
M
Deliver to the order of M
Bushels which is to be received by the last
endorser hereon, who must pay for the same at the rate of
cents per bushel CASH, except as provided in Rule 10 of the Grain Rules.
The condition upon which this transferable order is given and received
is that it may be passed by endorsement, under the provisions of Rule 10
of the Grain Rules, in accordance with subjoined contract.
NEW YORK
In consideration of one dollar paid by the drawer of the above
order to each receiver thereof, the receipt of which is hereby acknowl-
edged, it is agreed that the last receiver will, by 2:30 P. M. this day,
present the said order to THE PARTY ISSUING THE SAME, in accordance
with Rule 10 of the Grain Rules, and receive and pay for the Grain de-
livered thereon at the rate of cents per bushel.
It is further agreed that each receiver of this order shall continue
his or their liability to each other for the fulfillment of the contracts re-
ferred to, until the above Grain is delivered and paid for.
Transfers of this order, subject to all the foregoing conditions and
obligations, may be made by proper endorsements on the subjoined blank.
Each party to this order shall adjust differences to the contract
price through the Clearing House on the succeeding business day.
TIME
ACCEPTED BY
DELIVERED TO
The transferable order or delivery notice is passed very
rapidly from hand to hand. In New York no party can
hold it more than fifteen minutes, in Chicago more than
five minutes, the time of delivery being endorsed by each
seller on the back of the order.1 The last receiver pre-
sents the order and receives the receipts which it repre-
1 In Chicago each party endorses his contract price. In New York
only the settling price appears on the order. The latter form makes the
individual contracts more secret. Cf. Fuchs, op. cit., p. 15.
64 SPECULATION IN THE [-546
sents. If the order is not presented at the fixed time,
the last receiver is responsible for all charges incident to
the delay in delivery.
This " delivery by transferable order" must occur un-
less the two ends of the line of traders can come together.
It has been stated that some contracts are settled by off-
set among the clerks at the close of the day. The same
method is adopted in a more formal way, and with use of
the clearing-house, in two forms of settlement known as
" direct settlements " and " rings." The two forms are
in nature much the same. The direct settlement occurs
where there are only two parties, each being respectively
buyer from, and seller to, the other. For example, A on
April loth sells to B 10,000 bushels of May wheat at
seventy cents. Both parties are speculators. Suppose
the price falls, and A makes his covering purchase by
buying the same amount from B at sixty-five cents. A
has now bought wheat from B to deliver back to B in ful-
fillment of the original contract. It would be absurd for
either party, even if he had the wheat, to make the deliv-
ery. B in any case has lost five cents a bushel, and he
pays $500 over to A without more ado. This is a direct
settlement. The second contract may be made before
the month for delivery arrives, perhaps even on the day
of the original sale. In this case there is no occasion for
waiting till May for settlement. The question of profit
or loss is already decided. B pays his loss at once and
the account is settled.
A "ringing out" settlement is simply the same thing
between several parties. In such a series as was instanced
before, say from A to G, A and G are both speculators.
A must buy to cover, and G must sell to liquidate or take
the goods offered. If they can arrange it, G will sell to A.
Were A to issue a transferable order against himself, he
himself would be the one to demand delivery. A " ring "
UNITED STATES 65
has been formed. There is nothing to be delivered, for A is
both deliverer and receiver. It only remains to settle or
" ring out " the differences ; that is, for the profit and loss
of each one to be reckoned up. This method differs from
the form of settlement by transferable notice only in that
when the time of settlement comes around, the two ends of
the chain are connected. The parties to a ring may not all
have bought or sold originally with speculative intent or
with the expectation of forming a ring. The contracts of
dealers, of millers and of speculators may all figure in these
settlements. This is also true of direct settlements.
The accounts of all the parties are settled, that is, differ-
ences are paid immediately upon the formation of the ring.
Consequently it is the favorite form of settlement whenever
it proves possible to bring the two ends together, because
profits can be taken at once, while in the case of a delivery
by transferable order it is necessary to wait for the stipu-
lated month of delivery.1 The ring then is particularly
adapted to close out at once the transactions of a single
day. The differences are settled, as in a series of con-
tracts where delivery is made, by the establishment of a
settlement price and the payment among the contracting
parties of the difference between the settlement price and
the price in their particular contracts.
The transferable order with the settlement price enables
deliver}- to be made from the real owner to the last re-
ceiver directly, and obviates the intermediate payments by
providing a means of payment of differences only, accord-
ing to the settlement price. A still further convenience is
secured by the process of clearing these differences.2 The
1 A customer in any case gets his profit at once because he probably
keeps an open account with his broker. The broker, however, has to wait.
1 For the European practices in the matter of the transferable notice,
settlement price, and clearing, see Kohn, op. cit., pp. 30-44; Fuchs, Der
Warenterminhandel, pp. 13-17; Jacobson, op. cit., pp. 23-32.
66 SPECULATION IN THE
clearing-house of the produce exchanges is in principle
like a clearing-house for banks. It is intended " to facili-
tate the payment of the differences on the deliveries, di-
rect settlements and rings of the previous day." ' Since, so
far as differences are concerned, these forms of settlement
are alike, and differ only in the matter of delivery, the
process of clearing is the same for all. The clearing-house
clears the accounts of each of its members for each day.
As delivery can be made on any day of the month at the
choice of the seller, every day is a settlement day. Since,
however, deliveries are generally made on the first day of
the month, the clearings on the day following are the
most important.
The machinery is simple. Whenever a contract for grain
is made and is not settled by direct off-set at the end of
the day, the " confirmation slips," already referred to, must
be sent to the clearing-house,2 directed to the other party
within a specified time ; on the New York Produce Ex-
change before 9:30 A. M. the following day ; in Chicago
before 6 o'clock on the same day. The clearing-house in
this matter acts only as a post-office. This completes the
transaction till the settlement time arrives. Settlement
may be effected either by actual delivery or by the com-
pletion of a ring before the time of delivery. When the
settlement is made, each party to the transferable order or
to the ring, whichever the case may be, sends to the clear-
ing-house " comparison slips," addressed to the same part-
ies as were the confirmation slips. These are statements
of the amount of "difference" to be settled one way or
the other. This amount is evidently the difference between
1 Statement in the rules printed on back of clearing-sheet used on New
York Produce Exchange.
* In the case of the New York Produce Exchange a bank is appointed
to clear the differences and is known as the Clearing-House Bank. All
notices are sent to the bank and checks are made payable to the bank.
UNITED STATES 67
the settlement price and the price in the contract between
the two parties in question. The form of comparison
slip is as follows : *
COMPARISON SLIP.
NEW YORK, 189
JOHN DOE
WE OWE YOU (CLAIM FROM YOU),
Differences to be adjusted through the Clearing-House.
RICHARD ROE & CO.
Besides these slips each party must send to the clearing-
house a report (clearing sheet) of all the balances due to
or from other members of the Exchange arising from
settlements as ascertained by exchange of comparison
slips. This report represents the balance sheet of profits
and losses of the member in question for the day previous
to the clearing. Parties whose reports show a net bal-
ance against them must accompany the report with a
certified check for that amount made payable to the order
of the clearing-house. Parties whose reports show a net
balance in their favor must enclose a draft for the amount
drawn to their own order, which draft they may demand
back duly approved, at such time as is fixed in the Rules.
Thus not only are contracts settled by the payment of
differences, but these differences are themselves cleared
each day, and a single check represents the total loss or
gain of each member on all his settlements of the given
day.
This method of clearing has nothing to do with the
transfer of the goods or the payment for them. The
transfer is made by means of the transferable order, and
1 In Chicago the form reads, ' ' We o\ve you (claim from you) on off-
sets to-day as follows: $ ."
68 SPECULATION IN THE
payment is made at the settlement price between the
original seller and the last buyer. The clearing-house as
it exists in the produce exchanges of Chicago and New
York is solely for the clearing of differences. A new
\ method has been adopted by the Minneapolis Chamber of
1 Commerce. The Clearing Association of that body clears
the grain as well as the differences. It ascertains which
parties are long and which short on their net trans-
actions, and itself directs the deliveries of the grain. The
intervening parties have nothing to do with the delivery.
This is the method adopted by the stock exchanges, and
will be explained more fully below.
What then shall be said to the question so often asked
as to the actual delivery of property under the rules of
the Chicago Board of Trade and the New York Produce
Exchange ? In the first place, it is evident that the prac-
tice of clearing differences makes no change whatsoever
in the nature of delivery. The clearing-house has been
adopted merely to make more simple and convenient
those settlements which were customary before its adop-
tion. On the New York Cotton Exchange, where up to
1896 no clearing took place, there was the same trading
for differences and the same practice of ringing out which
prevailed on other exchanges. In the next place there
can be no question about the real delivery of property by
means of the transferable order or delivery notice. Here
too the existing machinery is used only to afford greater
convenience. By the consent of all the parties, the trans-
ferable order is passed along and represents the actual
receipts ; the man who wants the property gets it, and the
others take their profit or loss. The result is the same
as if the receipts themselves were passed.
But suppose a ring is formed or contracts are off-set by
clerks; does actual delivery occur in such a case? In these
cases no property is transferred at all. There is no " actual
, - j j ( \ITED STA TES 69
delivery," but there is also no pretended delivery. To
admit that there is no delivery in such cases, however, is
not to mark such transactions as " illegitimate." It is
easy to set up a fetich of delivery on all contracts, and to
make that a test of business or gambling, but no such
distinction in the nature of the transactions should be
made. A number of men buy and sell with a view to a
profit from market changes. It may happen that one out
of the lot delivers goods \vhich he is actually holding, and
one receives and holds the goods, and the intervening
parties all made delivery with the same goods. It may
be that the last buyer sells to the tirst party in the line
and so completes a ring. So far as the nature of the
transactions made by all the intervening parties is con-
cerned, it remains the same whether at the end of the
series the last man sells again to the first or not. That
may be a matter of chance and cannot affect the other
transactions. If the transactions were made with a view
to differences, they would have been the same if settle-
ment had been made by a transferable order. On the
other hand, as already pointed out, real trade transactions
may figure in a ring. In all kinds of business outside
the exchanges such settlements of contracts without
delivery are made and are never considered in any way
" illegitimate."
It should be borne in mind that the right to demand
delivery is provided in every contract. No ring can be
formed if any one party insists upon this right. Further-
more, contracts waiving this right are forbidden by the
rules of the exchanges.
The clearing-house was adopted in Chicago in I884.1
In New York a beginning in the matter of clearing was
made in 1879, but the system was not so perfected as to
secure much saving until 1888. In Minneapolis the
1 Fuchs, op. cit., p. 14, states that the first such clearing-house for
produce was adopted for cotton in Liverpool, 1876.
70
SPECULATION IN THE
clearing-house was established in 1891, while the Toledo,
St. Louis and Milwaukee exchanges have no regular
clearing-houses. The delivery itself, however, where the
clearing system does not prevail, is practically the same
as in Chicago or New York. The delivery is made by
the holder of the property to the last receiver by means
of a delivery notice of some kind and at a settlement
price. Off-sets among parties are effected and rings
made wherever possible. The differences are settled be-
tween the parties themselves.
The Cotton Exchange of New York has carried on an
enormous business in the past without the clearing sys-
tem. In 1896, however, it adopted a method of clearing
through the Corn Exchange Bank, which will doubtless
become a permanent and popular feature of the exchange.
The delivery is by the same process of a delivery notice
as on the Produce Exchange. A five days' notice, how-
ever, must be given.1
Reference has already been made to the right of the
seller on a cotton contract to deliver various grades.
The form of contract is as follows :
NEW YORK COTTON EXCHANGE.
CONTRACT.
NEW YORK, .................... 18
In consideration of one dollar in hand paid, receipt of which is hereby
acknowledged, ............ have this day Sold to (or Bought from) ----
........................ 50,000 Ibs. in about 100 square bales of Cotton,
1 The formation of rings is further facilitated by the purchase of so-called
" short notices." If a party receives a five days' delivery notice too late
to pass it to his purchaser the same day, he cannot deliver it the follow-
ing day, since that would be to give but four days' notice. He can issue
a new notice and hold the cotton himself one day, but to avoid the in-
convenience of holding he may prefer to sell his " short notice" cheap.
This he can often do to the original issuer. Thus a holder of cotton may
issue a notice one day at the settlement price and buy it back the follow-
• ing day at a discount, making a profit while still holding the cotton.
UNITED STATES 71
growth of the United States, deliverable from licensed warehouse, in the
port of New York, between theirs/ and last days of next,
inclusive. The delivery within such time to be at seller's option in one
warehouse, upon five days' notice to buyer. The cotton to be of any
grade from Good Ordinary to Fair inclusive, and if Stained, not below
Low Middling (New York Cotton Exchange Inspection and Classifica-
tion) at the price of cents per pound for Middling, with addi-
tions or deductions for other grades, according to the rates of the New
York Cotton Exchange, existing on the afternoon of the day previous to
the date of the Transferable Notice of delivery.
Either party to have the right to call for a margin, as the variations of
the markets for like deliveries may warrant, and which margin shall be
kept good. This contract is made in view of, and in all respects subject
to, the rules and conditions established by the New York Cotton Ex-
change, and in full accordance with Article II, Title IV, Chapter
Second of the By-Laws.
This provision as to delivery has been cited against the
Cotton Exchange as evidence that the contracts are
merely gambling contracts, and are not concerned with
real cotton. But the transferable notice specifies the
actual receipts to be tendered, and actual cotton is deliv-
ered on such contracts. The method is a benefit to the ,
planter if he wishes to sell for forward delivery before |
knowing how his crop is going to grade, while it is also |
a strong safeguard against corners. The more grades are ;
available for delivery, the more difficult is it to squeeze j
the shorts. The same plan of deliver}' prevails on the \
New York Coffee Exchange.
The coffee trade in Europe seems to have developed a
special form of clearing-house known as the caisse de liqui-
dation or Liquidationskasse, which has also been adopted
in a few cases by grain exchanges. The peculiarity of|
this form is that the clearing-house itself becomes respon-1
sible on all contracts. When the parties first make a con-
tract, notice is given to the Liquidationskasse, and a de-
posit made for security. In case of the default of either
party the clearing-house secures the other party to the
contract from loss, and makes its own account good, so
far as possible, from the assets of the defaulting party, and
72
SPECULATION IN THE
any balance from an assessment fund.1 It has been
attempted more than once to introduce such a clearing-
house into the New York Coffee Exchange, but the propo-
sition has never got farther than the Board of Managers.2
In all contracts for future delivery security is provided
by the right to call for a deposit. Each party may be re-
quired to deposit with some duly constituted authority a
sufficient sum of money to secure the other party from loss
in case of failure to fulfill his contract. This is known as
" calling an original margin," and the one who calls is
bound to make the same deposit himself. In New York
the maximum deposit which can be called is for wheat,
rye and barley, ten cents a bushel ; for corn and oats, five
cents a bushel ; for pork, a dollar a barrel, and for all
other meats one cent a pound. The maximum original
deposit on the Cotton Exchange is from one to five dol-
lars per bale, and on the Coffee Exchange from fifty cents
to two dollars per package. In Chicago, St. Louis, Min-
neapolis, Toledo and other exchanges, the maximum de-
posit is ten per cent of the contract price. These deposits
are made by sending to the proper official in the Chicago
Board of Trade, the Secretary, in the New York Produce
Exchange, the Superintendent, checks on the banks where
the deposits are made. These deposits can be withdrawn
only on the order of the said official, acting with the
consent of both parties.
1 The caisse de liquidation is in reality a party to each contract. All
payments are made to it and all deliveries are made by it. See Jacob-
son op. tit., p. 47 et seq.; Jannet, Le Capital, la Speculation, et la
Finance, p. 271, Paris, 1892; Fuchs, Der Warentenninhandel, p. 17.
3 Fuchs erroneously states that such a clearing-house was adopted by
the New York Coffee Exchange in 1882, op. tit., p. 20. The New York
Coffee Exchange was first organized in 1882. See Fuchs also (pp.
39-49) for an interesting account of the controversy waged in 1889 over
the advantages and the evils of the Liquidation skasse. There is little
reason to regret its absence in American exchanges.
355] UNITED STATES 73
More important than the original deposit or margin are
the margins called for after fluctuations in price. If the
market goes against either party, he may be called on to
deposit the full amount of the change in the value of the
property, thus keeping the original margin good. If the
price rises a cent a bushel, the seller can be required to put
up an additional margin of one cent a bushel. If the price
falls, the buyer can be called on for that amount. It is
evident that these additional margins are simply the
amount of profit either way, put up so that the other man
may be sure of it. The call for a margin is optional, and
if a dealer is in good credit he can trade largely without
being called, or, as is frequently done, he may be called
for a deposit less than the maximum. Even where the
original margin, or any part of it, is not called, a party is
generally required to keep the price '* at the market,"
that is, to put up his additional margins as the particular
fluctuations take place.
On the New York Produce Exchange it is common
among some traders to call only margins against fluctua-
tions with one cent a bushel additional. Evidently if an
original deposit is called, and the additional margins are
put up as the market changes, there can be no loss to either
party from the insolvency of the other. It is not the value
of the property that is at stake, for that has been neither
delivered nor paid for. It is only the amount of profit for
which security is sought, and that is amply covered by
the margins. Loss comes when a party is unable to put
up a margin after fluctuations have occurred.
In case of default by either party the other has the right
to close the transaction in open market. On the New York
Produce Exchange if the commodity contracted for (say
grain) is not delivered at maturity of the contract, the pur-
chaser may at once give notice to the Committee on Grain,
which committee immediately holds a public call and buys
74
SPECULATION IN THE
the grain for the account of the parties directing the pur-
chase.1 In case of a failure to receive grain tendered, the
seller must, in order to establish any claim on the buyer,
sell out his holdings on the market within twenty-four
hours. Any loss resulting from either transaction must
be borne by the party in default. It is interesting, how-
ever, to note that the rules provide that " no unreasonable
price shall be paid, arising from manipulated or fictitious
markets, or any unusual detention in transportation."
That the account of a defaulting dealer should be settled
by an open sale or purchase in the market is evidence of
the fact that the right to demand a real delivery is a vital
part of these transactions. This method of action in case
of default is practically the same on all exchanges.
III.
In turning to the conduct of business on the stock ex-
changes, the same general principle is found as prevails
on the produce exchanges, with some marked differences
in the actual methods employed.
Stocks and bonds possess in themselves that quality of
representativeness which is secured for commodities only
by means of classified grades and a warrant system. For
such speculation as depends on future dealings this quality
is the most essential attribute, and consequently such spec-
ulation first developed in securities. It is stated by De-
loume 2 that a regular speculation in the securities of the
sociktes des piiblicains took place in Rome under the Em-
pire. If the companies of those days issued any kind of
transferable certificates of stock, there is every reason to
believe that speculation did arise in them. Ehrenberg3
says that instances of such trading are to be found in the
1 The matter may be settled more informally by agreement of all parties.
2 See les Manieurs d' Argent d Rome.
3 Die Fondsspekulation, p. 3.
,--] UNITED STATES 75
1 4th and 15th centuries in Genoa and Venice, but that the
first well-developed speculation in securities of which we
have any account was in the shares of the Dutch East
India Company, which began soon after its foundation in
1602. The wild speculative manias which followed in the
next century, the " Mississippi Scheme" in France (1716
to 1720), the " Bubble Era" in England in the years fol-
lowing 1720, are too well known to need more than pass-
ing mention. They show that speculation has not be-
come increasingly reckless in recent years. It was not,
however, till the end of the last century that stock specu-
lation became the fixed factor in the financial world which
it has since been, and not till very much later that it be-
came in the United States a controlling force. It was the
great increase in public loans in Europe between 1750 and
1815 which furnished securities suitable for a continued
speculation.1 and for a long period the " public stock " or
*' funds " were the chief securities of the market.2 In this
country also it was the trading in public stock which first
caused brokers in New York in 1792 to form an organ-
ization to maintain rates, while the foundation of the pres-
ent New York Stock Exchange in 1817 was coincident
with the greatest extension of the public debt prior to
the Civil War.3 The Philadelphia Stock Exchange was
established about 1800. While in Europe, however, gov-
ernment securities have maintained a prominent position
in the speculative market, in the United States they have
1 For example, the securities of stock companies listed in 1815 numbered
only 30 in London, 20 in Paris and II in Berlin. Handworterbuch der
Staatszuissensckaften, article, "Borse."
* For an historical account of stock speculation in Europe see Ehrenberg.
Die Fondsspekulation. Cf. also Bender, Der Verkehrmit Staatspapicren ,
Gottingen 1830, for an account of the transition from speculation in shares
to speculation in public stock, p. n et seq., and for a general historical
account, pp. 54-140.
' Gibson, Stock Exchanges of London, Paris and New York, p. 68.
76 SPECULATION IN THE [358
long since lost their place. Our own government securi-
ties have offered little field for speculation in recent years,
while foreign loans have never been taken up by American
speculators, because of a multiplication of home securities
of a private nature already too great for them to handle.
These securities are of various kinds. The great exten-
sion of the joint-stock principle in this country has devel-
oped a mass of securities any of which may become factors
in the speculative market. Most important have been
railroad securities, and until recently these have been the
dominant factor in all speculation. Their development
began just as the government stock became too scarce
and valuable to serve the purposes of speculation, and, had
it not been for this new supply, speculation would have
had nothing to feed upon. More recently the develop-
ment of industrial trusts of great magnitude has provided
another large field, and already the " railroads " are giving
place to the " industrials " as the centers of speculative
activity.
The methods of speculation in stocks, as developed in
Europe and in the United States, were much the same as
those adopted later in produce. Time-dealings were used,
and a form of " future " with a fixed day of delivery was
the regular kind of contract. Speculation arose because
of fluctuating values, and just as those who expected a
rise bought with a view to profit, so those who expected a
fall sold for future delivery.1 This method is still em-
ployed on the stock exchanges of Europe, but in this
country time-dealings have given place to dealings which
are practically for immediate delivery.2
1 Mortimer, Every Man his own Broker, p. 22 (1/65), says time-
dealings arose in order to enable the Dutch capitalists to sell stocks in
London and ship them for delivery.
'For an account of the time-dealings formerly in use, see Trow's
Manual of the Stock Exchange, New York, 1865.
UNITED STATES
77
How then can there be speculation for a fall ? This is
easily secured by a system of borrowing stocks. It will
be remembered that at the beginning of the speculation
in warehouse receipts for grain in the West these receipts
were sometimes sold short, and the contract made good
by borrowing receipts for delivery. The borrower ex-
pected to get his profit by buying equivalent receipts at
a lower price when called on to return them. This is
exactly the system that is used on our stock exchanges
to-day, and it is this method which constitutes the chief
difference between the machinery of stock speculation
and speculation in produce. There is not the same
economic reason for future dealings in stocks as in
produce, for while any kind of produce is something the
supply of which is itself a future thing, and so often can-
not be contracted for except for future delivery, a par-
ticular stock on the other hand is, in the main, fixed in
amount. The stock to be delivered is all in existence at
the time of sale, and there seems to be no reason, except
for speculation, for postponing its delivery.1
As the New York Stock Exchange is far and away the
most important exchange of the United States, it will be
advisable to examine the rules for dealing adopted by
that body. As on the produce exchanges, so here, reg-
ular hours are fixed for trading, and all trading outside
those hours is strictly forbidden. The time fixed is from
10 A. M. till 3 P. M. Loans can be made after three
o'clock, but no purchases or sales.9 Transactions take
place by general bidding on the floor of the exchange, a
special place being assigned to a security which has de-
1 The fact that time-dealings in stock are infrequent on the New York
Stock Exchange is often cited to show how little speculation depends on
a particular form of contract. Cf. Bericht der Borsen-Enqutte Comn::s-
sion, p. 79.
* It may be added, that in the case of stocks as well as of produce, this
rule is at times completely disregarded, and " curb-trading " in active
times is considerable.
78 SPECULATION IN THE [360
veloped dealings of sufficient magnitude. "Calls" are
no longer regularly held for stocks. Even if they were
now held, all the dealings in active stocks would really
be done in the open market. They were discontinued
about 1875.' On the other hand, a public call is desir-
able for quiet securities, especially for bonds. Accord-
ingly a call of bonds and of bank stock is held each day
in the " bond room," where quiet transactions take place,
and the market price for such securities is fixed.
There are several kinds of transactions, " cash," " reg-
ular way," "time-dealings" and "at three." Cash deal-
ing are out-and-out purchases of stock for cash, and need
no further description. Sales made "regular way" are
for delivery the following day. They constitute by far the
greater part (perhaps ninety-five per cent.) of the total
dealings. Time-dealings are exceptional on the stock
exchange. They are of two kinds, according to the
length of the option, those for three days and those for a
longer option (thirty or sixty days). Options for more
than three days carry interest. No sale for a longer
option than sixty days can be made.2 In any case the
option for delivery runs from the time of the contract.
There is no selling for delivery in some future month
(beyond the sixty days), which is the common method
in produce. The option of delivery may be given either
to the buyer or to the seller. Thus there are contracts
" seller-three " and " buyer-three," according to which the
seller (or buyer) can deliver at his option at any time
within three days; and " seller-thirty (sixty)," and "buyer-
thirty (sixty)," in which delivery can be made at any time
within the thirty (sixty) days. In no case is the option
as to the fact of delivery, but merely as to the time.
The sale " at three " is a new form of contract which
Gibson, op. tit., p. 77.
1 For an interesting account of the circumstances which led to this rule,
see Clews, Twenty-Eight Years in Wall Street, p. 10, New York, 1888.
~6jJ UNITED STATES 79
has come in since the adoption of the clearing-house. As
time-dealings cannot go through the clearing, contracts
in clearing-house securities are made, not " seller (buyer)
three," but " at three," which means delivery specifically
at the end of three days.
Of predominant importance are the transactions made
" regular way," that is, for delivery the following day.
This time for delivery is fixed as a matter of convenience,
since evidently immediate delivery (depending in many
cases on borrowed stocks) in the midst of business hours
would be impracticable. The contract, however, is not
intended to be of the nature of a time-transaction, nor the
delivery to be a future delivery. But incidentally " reg-
ular " transactions serve the purpose of time-dealings in
the case of dealings for the fluctuations of a single day. If
the realizing sale is made the same day as the original
purchase, or the covering purchase the same day as the
short sale, the two contracts balance each other before the
time for delivery, and the interest of that particular party
is only concerned with getting the " difference." Thus
there is a similarity in these particular cases between the
sales on the Xew York Stock Exchange and the sales
"for the account" on the European exchanges. The
" account " is only one day ahead. At times these trans-
actions for the fluctuations of the day assume large pro-
portions. " Scalping," as this is called, is especially prom-
inent when the outside public is holding aloof from the
market and the trading is left to the "professionals."
In the main the transactions are not settled in this rapid
fashion. The buyers are holding for a longer period, and
the sellers are selling for a more or less remote fall. De-
livery, however, must be made the next morning, and, if
the short is unprepared to buy in, he must borrow in
order to make his delivery : while, if the purchaser is un-
able to pay for and carry his own stocks, he must arrange
80 SPECULATION IN THE
to lend them before the next morning to some one who
will carry them until he wants them himself. The interest
of a seller does not center in the process of getting stock
to deliver to his purchaser, for he borrows that and with
it completely ends the transaction between the purchaser
and himself. He has sold and delivered, and received his
price. His interest lies in his later purchase, made in
order to return the stocks to the lender. Yet the lender
of securities is not as such a speculator. He lends a cer-
tain property and merely receives back the same, regard-
less of fluctuations in its value. It is true that in most
cases the lender of securities has himself bought them for
speculation, and lends them to save the cost of carrying
them till the time of his sale, but it is his purchase, not
his loan, which is speculative.
In addition to these forms of contract, privileges occur
in the case of stocks as well as in the case of produce.
They are not recognized by the New York Stock Ex-
change, but if the purchaser of the privilege decides to
carry out the contract, it becomes as regular as any other.
In the last few years, however, privileges have been less
common than they formerly were. The trade in privileges
depends chiefly upon a few men of large means. The pub-
lic buy, but seldom sell, privileges, and if the men who
are accustomed to dealing in that way stop selling, the
field for such practices becomes very circumscribed. The
same principles, which control the prices of privileges in
the case of produce, control them also in the case of stocks.
These are, first, the nature of the market, second, the
length of time the privilege holds, third, the nearness of
the price stipulated to the market price for the moment.
In the case of stocks, however, an important additional
element appears in the shape of the nature of the security
itself. Besides the general tendency of the market, there
is the all-important question of the particular security's
363] UNITED STATES gl
position in the market. If the market is dull, a privilege
may be bought in a very stable stock at a low figure; but
if the security is one of wide fluctuations, the price of the
privilege will be very much higher unless the price fixed
for the security itself is at a wide margin from the market.
The wider the margin, the less the danger of loss from the
fluctuations. Furthermore, speculative conditions may
largely affect the price of securities. If, for example, there
is a big short interest in the market, the shorts may wish
to protect themselves by selling puts, and will so reduce
the price. It is consequently impossible to make any gen-
eral statement as to the price of puts and calls in the stock
market. The chances are so different in the different cases
that prices vary much more than in the produce markets.
Privileges also often run for much longer periods in the
stock market than is common in the case of grain, fre-
quently for thirty or sixty days. This of course enhances
the price. A privilege in a fluctuating security, running
for thirty days, may read five points away from the mar-
ket, and yet bear a high price. As a rule the men who
sell puts or calls would rather sell near the market and
get a larger privilege money, while the men who buy, usu-
ally men of small means, would rather buy away from the
market in order to limit their loss to a smaller payment.
A " straddle " is much more common in securities than
in produce. A straddle reading at the market price in a
fluctuating security would rarely be sold, and then only
at a very high price, but in more stable stocks they are
not infrequent.1
With these transactions as described there is little op-
portunity for trading for any particular settlement period.
'A straddle, or rather a combination of put and call, sometimes called
a " spread," may be made not at the market, but at two different figures
on each side of the market price. For some hypothetical instances of
privilege dealings, see Castelli, Theory of Options, London, 1877.
82
The fulfilment of " seller-thirty " and " seller-sixty " con-
tracts is indefinite, while in the case of contracts made
" regular way " and " at three " delivery occurs too quickly
to make a real time speculation for that particular delivery
possible. There is no real correspondence between these
dealings and the English practice of " trading for the ac-
count," that is, for the periodical settlement that comes
monthly in consols and fortnightly in other securities. In
the New York Stock Exchange each day is a settling day
and a clearing day for the transactions of the day before.
It will be remembered that the same is true of produce
exchanges. This is a marked difference from the Euro-
pean practice. The merits of the two systems will be
briefly compared after an account is given of the clearing
process on the New York Stock Exchange.
Comparatively few securities are admitted to clearing
on the New York Stock Exchange,1 and contracts in
those which are not admitted are settled by the old method
of cash payments. No practical difficulty is experienced,
since the only test of the admission of a security to clear-
ing is the amount of trade in it. As soon as it becomes
active enough to make cash payments difficult, it is made
a clearing-house security. In the case of all such securi-
ties the method of settlement is as follows : Both parties
to any transaction at the close of business exchange
" tickets " confirming their transaction. The seller sends
to the office of the buyer a " deliver ticket," stating that
he is to deliver the property through the clearing-house,
and receives in exchange a " receive ticket " for the same
amount. This is the only comparison necessary and the
only written sign of the contract made. These tickets
must be exchanged by 4.15 o'clock of the day of the
transaction. They are in form as follows :
1 Forty-three securities in August, 1896.
365] UNITED STATES 83
No. 448 NEW YORK, 189
CLEARING-HOUSE OF THE NEW YORK STOCK
EXCHANGE,
DELIVER TO (RECEIVE FROM)... „ JOHN [.DOE
shares.. @ $_
for account of the undersigned.
RICHARD ROE.
These are exchanged, whether the securities are sold or
loaned. Loans are made between 3 and 3.30 P. M., and
so can be entered on the same clearing sheet with sales
and purchases. Loans are made at the market price, that
is, the borrower of the stocks pays the cash price for the
securities borrowed, and receives back the money on the
return of the securities.1 He gets, however, an interest
on the money he advances in exchange for the securities.
This is called a " charge for carrying." It is generally
the man who is holding the securities who is glad to pay
some one for carrying them, that is, for advancing him
the money on them while he still retains ownership. It
may be, however, that the demand for a particular stock
by short sellers, who must make deliver}-, is so great that
the interest charge falls to nothing, or is even supplanted
by a " premium for use," which the borrower must pay
beside the cash value to the owner of the securities for
the privilege of borrowing them. Of these payments we
shall speak more fully below. This connection of sales
and loans makes the relations between parties as compli-
cated as on the produce exchange, despite the fact that
there are no long futures. Suppose that A sells 500
shares of St. Paul to B, who sells the same on the same
day to C. It may be that C buys for the rise but is unable
1 This is what the method amounts to in the end. In practice, how-
ever, instead of the original money payment being given back when the
stocks are returned, any change in price, pending the return, is made
good between the parties, that is, the property is " kept at the market,"
and the final payment is the market value at the moment of return. This
evidently results in the original amount being ultimately returned.
84 SPECULATION IN THE
to carry the shares himself. He loans them after the close
of business to D, who has sold short during the day to E
and wants them for delivery. But E himself may not want
to receive them, so loans them to F, who wants them to
make delivery to G. In the meantime, A has borrowed
from X, who has bought during the day from Y. What
will happen ? By the intermixture of loans with sales a
line has been formed, as in the case of a future settle-
ment, and Y can deliver direct to G.
Each party in the above example has not necessarily
sold in turn, but each in turn has contracted to deliver
either by sale or loan. It was seen above that tickets do
not read "sold to" and " bought from," but "deliver to"
and " receive from." Thus they cover equally well the
case of loans and sales. Evidently the distinction between
the two forms of transactions is an important one for the
parties themselves, but for the clearing-house the only
question is as to the fact of delivery and price. Whether
the shares are to be returned or not is immaterial.
Hence loans and sales are both entered on the clearing-
house sheet, and without any sign being given to the
clerks as to which is which.
The clearing-house of the Stock Exchange clears stocks
as well as differences. This is the chief point of differ-
ence from the clearing-houses of most of the produce
exchanges. These clear only differences and take no
part in directing the delivery of the property, which latter
is effected through a transferable notice. In the delivery
of stocks there is no transferable notice, but, by a com-
parison of the sheets sent in to the clearing-house, the
officials discover what parties are " even " on stocks, what
parties must deliver, and what parties must receive. The
clearing-house serves to bring these parties together.
The party that has contracted to deliver a stock (either
by a sale or a loan) , without making any contract to re-
ceive an equivalent amount, receives a notice from the
367] UNITED STATES 85
clearing-house to make such delivery to some specified
party, probably not at all the one with whom he con-
tracted.
The clearing-house, however, does not handle either
stocks or money.1 It simply directs the delivery of stock
between the parties who are not " even," and settles the
differences between all the parties. Each party makes
settlement by a single check. If the balance is against
him, he encloses a certified check in favor of the clearing-
house. If the balance is in his favor, he encloses a draft
drawn to his own order on the banker of the clearing-
house (the Manhattan Company), which is approved by
the clearing-house and is returned the next morning.
The checks received and the drafts approved by the
clearing-house necessarily balance each day.
Every delivery of stock is made at the " delivery price,"
which is the whole number nearest to the closing price of
the day before, and the balances due to a difference be-
tween contract price and delivery price are settled by the
clearing-house. The fixing of this arbitrary delivery
price by the clearing-house is purely for the convenience
of accounts.
The first stock exchange clearing-house in the United
States was that of the Philadelphia Stock Exchange in
1870. It worked successfully there for a considerable per-
iod before being adopted elsewhere. The Consolidated
Exchange of New York established a clearing system in
1886. and the Boston Stock Exchange in January, 1892.
Curiously enough the New York Stock Exchange was the
last exchange of any importance to adopt the clearing sys-
tem. The first trial of the system was made May 16,
1892, the transactions of that day being cleared on the day
following. At first the experiment was confined to four
1 Large clearings in gold took place from 1867 to 1879, when gold
speculation was rife, under the auspices of the Gold Exchange Bank, and,
by the arrangement at that time, both the gold and the cash were
handled by the clearing-house. Cf. Report of the Committee on Clearing-
House, New York Stock Exchange, 1892, p. 5.
86 SPECULATION IN THE
railroad stocks (St. Paul, Reading, Northern Pacific pre-
ferred, and Louisville and Nashville), but it was quickly
extended to all stocks sufficiently active to warrant an
application of the clearing method.
It was the borrowing panic of 1890 and 1891 that
brought forcibly home to the Stock Exchange the impos-
sibility of further continuing the cumbersome method of
cash payments. This method necessitated a vast amount
of borrowing and a cash settlement of all loans. When
the stringency came at that time, many failures resulted
from the impossibility of procuring the necessary loans.
On the other hand, on the Consolidated Stock Exchange
of New York, a young and less important exchange, the
failures were comparatively few. This difference was
ascribed by Bradstreefs solely to the fact that one insti-
tution attempted to carry on its business by old-fashioned
methods, while the other was equipped with a modern
clearing system.1 The explanation is easily accepted in
view of the comparative ease with which the Stock Ex-
change has weathered similar troubles since the clearing-
house was adopted. The demoralization that prevailed in
industrial shares in the spring of 1893, for example, put
the new system to a severe but successful test. It was
stated that the adjustment of losses due to the important
failures incident to the heavy decline in " Cordage,"
" Sugar " and other stocks was effected by stock deliv-
eries involving only $200,000 ; 2 while it was thought by
some that, without the clearing system, the panic of that
summer would have necessitated closing the Exchange.
The difference which such a system of clearing makes
may be seen by an examination of two sample clearing
sheets, with comparison of payments under the old method
and the new. One represents the party as " even " on
stocks with none to receive or deliver, in which case no
delivery price appears ; the other shows a balance to be
delivered.3
1 See Bradstreet' 's , February 13, 1892. 2See Bradstreet' s , May 13. 1893.
"These are taken from the Report of the Committee on Clearing-House.
369]
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The chief objections made to the clearing plan before
its adoption were, (i) that transactions under it would be
illegal, since an intent to deliver is in all cases necessary
to avoid the charge of a gambling contract ; and (2) that
the clearing-house officials would acquire a dangerous
knowledge of the speculations of private parties. The
first of these objections was groundless, for the courts
have generally held that the method of delivery is not an
essential factor in determining intent; and the second was
ultimately overcome. In fact, under no clearing system
can secrecy be so well preserved as under that of the New
York Stock Exchange, where loans and sales are entered
in the same way. "This practice,'' remarks the commit-
tee appointed by the Stock Exchange to consider the
adoption of a clearing-house, " places it in the power of a
member to make his sheet as misleading as he desires."
The practice of borrowing stocks also prevails, though
in a different form, on the exchanges of Europe. As al-
ready said, transactions on the London Stock Exchange1
generally are for " the account," and the same is true for
the most of the continental Bourses. The "account" is
the fortnightly clearing, and the contracts are like
"futures," except that the time of fulfilment is fixed for
a single day. not as in produce with an option through-
out a month. There are no daily settlements as in New
York. The account consists of three days, " contango "
or "continuation day," "ticket day," and " settling" or
" pay day," The " continuation day " is the day fixed for
continuing contracts. A party who enters into a trans-
action for the account may not wish to close out when
; For the methods of business on the London Stock Exchange, see
Report of the Stock Exchange Commission of 1878, with Evidence; Mel-
sheimer & Laurence, Laws and Customs of the Stock Exchange, Lon-
don, 1879. Stutfield & Cautley, The Rules and Usages of the Stock Ex-
change, London, 1893; E. Struck, Die Effektenborse , Leipzig, 1881.
QO SPECULATION IN THE
the account comes round, and, in such case, must proceed
to some method of borrowing. On the New York Stock
Exchange it was seen that in such a case the shares are
loaned or borrowed outright. On the London Exchange,
however, when a loan is based on stocks, the identical
shares must be returned. Hence, in order to avoid this
inconvenience, a method of borrowing and lending is
employed which takes the form of a sale.
Suppose, for example, that A has bought for the ac-
count, but is not prepared to take up the shares and make
payment. He wishes to turn them over to another, B,
who will carry them to the next account. Instead of lend-
ing them against cash he sells the amount to the other
party, B, for the immediate account at the '' making-up
price," and at the same time purchases from B the same
amount at the same price for the following account, two
weeks ahead. This transaction, which gives the day its
name, takes place on " continuation day." In the clear-
ing on settling day the stocks which A bought are turned
over to B, who is said to " take them in," and who be-
comes sole owner of them, subject only to the obligation
to deliver a similar amount on the next account day. The
bull may have to pay something to the " taker in," since
he gets the use of the money for two weeks, and yet gets
back his shares at the same price at which he sold them.
This payment is called a " contango."
The opposite transaction is where a short seller, not
wishing to buy in at the end of the account, practically
borrows by buying for that account at the making-up
price, and selling at the same price for the next account ;
to do this he must advance the money, and he may receive
a " contango " for its use. On the other hand, he may
have to pay not only the making-up price, but an addi-
tional premium in order to secure his shares for that de-
livery. Such a premium is called a " backwardation."
373] UNITED STATES 91
The same method is used on the exchanges of France
and Germany, both in stocks and produce. The trans-
actions on the German exchanges are called " Prolonga-
tionsgeschafte," the bull transaction being a " Report-
geschdft^' and the bear transaction (at least where a
premium is paid), a " Deportgeschaft" That is, the Re-
port is equivalent to a " contango/' and the Deport to a
" backwardation."
It is evident that these methods of " continuation,"
though in the form of a purchase and sale, are really bor-
rowing transactions,1 and are the same in nature as the
transactions which take place regularly on the New York
Stock Exchange. The contango, or Report, is merely
what is paid for the use of money, and corresponds to
what is here called an " interest charge for carrying," and
the backwardation, or Deport, corresponds to the " pre-
mium for use " sometimes paid for borrowed stock.
The interest charge (contango) and the premium
(backwardation) are evidently the opposites of each other.
\Yhat now determines the rate of interest or of premium?
This depends on two factors, the state of the money mar-
ket and the state of the market for the particular security
in question. If the demand for money against a particu-
lar security is greater than the demand for that security
with which to make deliveries, there will be a payment of
interest, and the greater the demand for the money the
greater the interest charge will be. This demand is a part
of the whole demand for money in the market, so that the
current rate of interest is of chief importance in determin-
ing the charge in a loan against a particular stock. It
1 " Das Reportgeschaft ist ein Mittel fur den Handel, sich seine Geld-
vorrathe, deren er ja ebenso gut bedarf, wie der Waarenvorrathe, rent-
abel zu machen, es ist ein Darlehnsgeschaft in einer Form, welche ganz-
lich ausserhalb des Bereichs der Wuchergesetze steht." Michaelis, Die
wirthschaftlichf Rolle des Spekulationshandfls, in Volksw. Schriften,
Vol. II, p. 26. Cf. also Stutfield and Cautley, op. cit., p. 44.
92 SPECULATION IN THE [374
may be more or less than the current rate, according to
the market for the stock itself. Under normal circum-
stances some interest rate is charged, but, if there is a
strong demand for a particular stock, this charge may
become very low, or may be converted into a premium,
before the stock is forthcoming. Hence a strong bull
interest in any stock will increase the demand for money
and raise the interest charge, while a strong bear interest
will increase the demand for the stock and bring about a
premium for use. When the shorts have oversold and
find all the available stock held in a few hands, the pre-
mium may rise to any extent. Such an occurrence is one
form of " corner."
Nothing was said of this kind of transaction in describ-
ing the methods of dealing on the produce exchanges,
because in the United States there are no such ''continua-
tion ".contracts as take place on the European produce
exchanges.1 The regular form of future serves for all pur-
poses. If a party who has sold for May delivery wishes
to continue his transactions to the July delivery, he does
so by buying May wheat at the market price, and selling
July wheat at the market price for that delivery. He does
not buy and sell of the same party at the same price, as on
the European exchanges, but makes both contracts in the
open market at the prevailing prices for the respective
deliveries. In other words, he fulfills his first contract
and makes another. If July wheat is two cents higher
than May wheat, it is said to be at a " premium of two
cents over May," and this to the advantage of the seller ;
1 The transactions for continuation in the continental exchanges are
the same in produce as in stocks. If a man has sold wheat for June de-
livery, and is not ready to deliver on the last day of June, he borrows the
amount by buying in at the market and selling at the same price to the
same party for the next delivery. If he has bought and is unable to re-
ceive at the end of the month, he will loan his wheat by a similar process.
If there is a scarcity of money and an abundance of wheat, a Report will
be paid; if reverse conditions prevail, a Deport may be demanded.
375] UNITED STATES 93
if two cents lower, this is the premium he pays. Opera-
tions of this kind are called " switching contracts."
A proposal was made a few years ago to adopt on the
Chicago Board of Trade such a borrowing system as pre-
vails on the Stock Exchange. This proposal is of par-
ticular interest in view of the early practice in the West
of making deliveries on short contracts by means of bor-
rowed receipts. The discussion was occasioned by the
attempted federal legislation against futures. The so-
called " anti-option " bills sought to prevent all sales of
property without delivery. It was suggested accordingly
that a system of '' dealing in spot stuff '' might be adopted
in the case of grain, which would fulfill the requirements
of the proposed law. This was to consist simply of de-
liveries on the following day made by means of borrowed
receipts, which could be replaced by future receipts for
the incoming grain.
The committee appointed to examine this suggestion
reported that the system was impracticable for the existing
grain trade. That it would be so is not difficult to see.
The transactions of the Board of Trade, determined as they
are by the grain movements throughout the whole world,
cannot be made dependent on the grain stored in Chicago
alone. The power for possible evil in the hands of the
elevator men would check all independent speculation.
The advantage of the European system of fortnightly
settlements is the advantage that comes in any case in
postponing clearings — that there is opportunity for more
off-sets and a smaller use of stocks and cash in the end.
But the American system facilitates clearings sufficiently
and has the important additional advantage of allowing a
continuous and even business without breaks or disturb-
ance. The machinery of trading and clearing runs
smoothly from day to day, each day's transactions being
settled at once, and not left hanging. On the other hand,
on the English and continental Bourses business is sus-
94 SPECULATION IN THE [376
pended every two weeks while an elaborate settlement is
effected, which never fails to be a disturbing influence.
No one wishes to take decided action till the result of the
settlement is known.
A method which combines some of the characteristics
of both the English and the American clearing systems is
that adopted by the Consolidated Stock and Petroleum
Exchange of New York. Under this method stocks are
cleared once a week, each Monday, and trading for the
account, that is, for the weekly settlement, is common.
At the same time money differences are cleared daily.
This practice doubtless presents some advantages in the
greater ease of borrowing and continuing to the next
account. The daily clearing of stocks probably hampers
speculation somewhat and narrows the market. The daily
settling of differences, however, is a great safeguard
against over-trading, and perhaps is sufficient, without
the additional clearing of stocks, to obviate the difficulties
of the London method. Experiments in trading for the
account have been made on the New York Stock Ex-
change, but the method was made optional and never be-
came popular.1 The Chicago Stock Exchange has adopted
a monthly clearing of stocks with trading for the account.
Another thing which distinguishes the methods of trad-
ing on the London Stock Exchange from those of this
country, and of the continent equally, is the separate class
of " dealers." There are two classes on the London Ex-
change, the brokers proper, and the ''dealers" or "job-
bers." These latter always deal for their own account, the
brokers always for others, and the dealers always serve as
intermediaries between brokers.2 A broker who wishes
to buy, or sell, never makes his bid among other brokers,
as is our custom, but seeks out some dealer and asks him
1 Cf. Bradstreet's, July 30, and October 8, 1887.
2 Jobbers and brokers can never form partnerships with each other.
See Rules of the Stock Exchange, Rule 43.
UNITED STATES 95
to make a price on the given stock.' This the dealer does
by fixing one price at which he will buy and another at
which he will sell. Then the broker announces which he
will do, and the transaction is made.
It is hard for an American broker to see any advantage
in such a plan, and many doubts as to its advantages are
expressed by the London traders themselves. It is claimed
that, in this way, a ready market is always secured, which
would not be provided if broker were to deal directly with
broker, because of the difficulty of finding a broker who
wanted the particular stock in the particular amount. But
no such difficulty exists in the case of an active stock, where
there is active bidding among brokers in open market ; and
in the case where the English method would doubtless be of
advantage, that is, where the stock is a specialty or the
market is one-sided, the jobbers usually refuse to trade,
and brokers have to fill their orders in some other way.2
It sometimes might be an advantage to be able to make a
single sale or purchase on a customer's order, instead of
placing part with one broker and part with another, and
yet in the case of active securities this inconvenience is
not great. On the other hand, it is true that there is a
distinct advantage in being able to place a large order at
a single price. Nevertheless, in the long run, the English
jobbing method seems to the American mind a cumber-
some and unnecessary duplication of middlemen with a
corresponding extra charge on the public.3
1 The jobbers or dealers are divided into different markets as " Ameri-
cans " or " Home Railways." It is not necessary, but it is customary,
for a dealer to confine himself to a single market.
*Stutfield & Cautley, op. cit., p. 26.
3 The jobbing system abroad, however, even on the continent where it
does not prevail, is looked upon with considerable favor. Cf. Struck,
Die Effektenborse , pp. 6-12, where, however, approval is expressed in
comparison chiefly to German conditions which do not exist here. Cf.
also Stutfield & Cautley, pp. 22-25, and the Report of the Commission of
1878, p. 9, and, for a criticism of the system, the Economist, Sept. 30,
1893.
CHAPTER IV.
THE ECONOMIC FUNCTION OF SPECULATION
I.
FROM the account of the forms of exchange speculation
presented in the foregoing chapter, the nature of modern
speculation becomes evident. It consists in buying and
selling commodities or securities, or other property, in
the hope of a profit from anticipated changes of value. The
word is, however, sometimes used in a more comprehen-
sive way. Professor Hadley says : " Speculation, in the
narrowest sense of the word, is the attempt to make money
out of fluctuations in the value of property, as distinct
from its earnings. In a wider sense, speculative business
is that business which involves large risks for the chance
of large gains." * It is with speculation in the narrower
sense, and with that only so far as it occurs on organized
exchanges, that the present essay is concerned.
Few things have called forth greater extremes of praise
and blame than modern organized speculation. On one side
it is strongly denounced, either as being morally wrong in
itself, or as being in addition to this a disastrous influence
in business. This view is, perhaps, that of a large majority
of respectable persons outside of business life, and of the
greater part of the newspaper press.2 On the other side the
1 Railroad Transportation, p. 48.
2 For example, so conservative a publication as the London Speaker,
in its financial column of October 12, 1895, makes the general statement,
as if self-evident, that "dealing in options — that is, in stocks (of com-
modities) which may or may not be held by the nominal seller — is clearly
ethically wronrr."
96 [378
.,-Q-I UNITED STATES 97
system is as strongly upheld. Its assailants, however, are
not confined to those without, nor its defenders to those
within, the speculative circle. It is often attacked most bit-
terly by those who have been in close connection with it,
and defended most vigorously by disinterested scholars and
publicists. An English writer, who was for many years a
broker in Liverpool, has recently published an almost sav-
age arraignment1 of "the option, future, and settlement
systems which have been introduced into various forms of
produce and food products, with the result that gradual
misery and ruin have been entailed on all classes." Simi-
larly, a broker writing in the United States says,a "The
New York Stock Exchange, which is the soul, the motive
power of Wall Street, is an evil in the land, a danger to
private wealth, a disturbing force in general business, and
a foe to public morals. . . . The Chicago Board of Trade
is a den of speculators whose operations are even more
pernicious."
On the other hand, the distinguished French economist,
Leroy-Beaulieu, defends speculation with equal vigor :
"On se plaint des maux qu'elle entraine mais ceux qu'elle
epargne seraint beaucoup plus grands que ceux qu'elle
cause. On s'est souvent demande comment sans inter-
vention du gouvernement, sans injonctions des adminis-
trations publiques, des pays de quarante ou cinquante mil-
lions d'habitants, des villes de deux, trois, ou quatre mil-
lions peuvent etre regulierement approvisionnees chaque
matin, sans aucune defaillance de tout ce qu'il leur faut.
C'est a la speculation qu' en revient le merite ; ce sont les
variations de prix qui constituent ses moyens d'action." 3
A countryman of Leroy-Beaulieu exclaims with enthus-
'C. W. Smith, Commercial Gambling, London, 1893.
*J. F. Hume, Art of Investing, ch. 2, New York, 1888.
'Quoted in the article "Speculation," Nouveau Dictionnaire <f Econ-
omic Politique.
98 SPECULATION IN THE [380
iasm : ' " Et pour ces desavantages exceptionnels, ces rares
infractions a la loi generate, que de bienfaits la speculation
engendre, que de richesses elle cree !" And again, " elles
(les Bourses) diminueront les ecarts de la folie humaine, si
elles ne les rendent pas impossibles ; elles eleveront le
niveau de la moralite, si elles ne rendent par les hommes
parfaits, .... elles amelioront a 1'etat de liberte le sort
de rhomme ici-bas."
The criticism directed against speculation is made from
two somewhat conflicting points of view. The first is that
speculation is merely gambling and has no reference to
actual trade, except that it consists in betting on the course
of prices. The secojiiLis that speculation is all-powerful in
trade, which has become completely demoralized by its sub-
jection to fictitious speculative conditions. The former view
is utterly beside the mark. However the gaming instinct
may control it, the fact must be recognized that specula-
tion is an important factor in the commercial world, and
dominates trade in the field in which it acts. Speculation
in any case is not mere gambling. Whether it is better or
worse than gambling is a question on which opinions will
long differ.
The close resemblance in many ways between gambling
and speculation has obscured the essential point of differ-
ence. Both depend upon uncertainties. Both involve the
risk of present possession for the sake of future gain. In
speculation, as in gambling, the occurrence of a certain
event results in gain for one party, while an occurrence
of a different kind results in loss. What distinctions can
be made between them ? It has been suggested that
speculation and gambling differ in that in gambling. a fixed
sum is staked, while in speculation the amount varies. But
a fixed stake is not an essential of gambling, and in any
case the suggested difference is superficial. Another dis-
1 Courtois, Operations de Bourse, pp. 45, 54.
UNITED STATES 99
tinction often suggested is the comparative degree of
judgment or pure chance in the transaction.1 But jt can-
not be claimed that a careful study of probabilities is for-
eign to the nature of gambling. An opinion as to the
next day's weather may be based on the most careful
observation, yet one can bet on, but cannot speculate in,
the weather. Much betting, whether on cards or horse-
racing, is based on a careful consideration and previous
study of the conditions determining the result, while much
speculation is based on the wildest chance.2 Professor
Hadley makes a somewhat similar distinction.3 The dis-
tinction, he says, between legitimate speculation and
gambling is one of intent and purpose. Legitimate spec-
ulation "involves anticipation of the needs of the market."
At the same time he introduces the criterion of public
benefit as a test of the gambling nature of business. This
test cannot be applied to any particular transaction at the
same time with the test of " intent and purpose," since
with mere luck a m^an may sometimes anticipate future
conditions and perform a public service, while with the
best intentions another may make great mistakes. In the
field of speculation more public benefit comes from a
good guess than from a bad judgment.
It is true that, if transactions are to be classified by
some test according to which they may be approved or dis-
approved, it is necessary to adopt the somewhat shadowy
distinction of "intent and purpose/' in other words, the
spirit pervading them. Such classification of transactions
must be made, but it is not necessary that the words
speculation and gambling be given their meanings with
this end in view. It is allowable to make a distinction in
1 Cf. MacCulloch, Principles, p. 261.
'' MacCulloch, however, is consistent, and classes betting after careful
study of probabilities, not as gambling, but as speculation.
3 Economics, p. no.
100 SPECULATION IN THE [382
these terms based on some objective difference of a fund-
amental nature, even if it disregards the question of moral
judgment. This distinction was brought out in the last
chapter, where it was seen that, whatever the intention of
the speculator may be, what he actually does is to buy
and sell goods. In every transaction on an exchange, the
speculator incurs the duties and acquires the rights of a
holder of property. He may not handle the goods him-
self, or he may pass to another his agreement to receive,
but the nature of the transaction is the same. Even where
a ring is formed later, the original contract fixes definite
property rights.1 Gambling is a transaction in which one
party pays over a sum of money from his own wealth be-
cause of the occurrence of a chance event. Speculation is
a transaction in which one acquires by purchase the right
to a certain property (not specifically designated per-
haps), and gains (or loses) for himself the difference be-
tween the value of the property at the time of the sale and
its value at the time of purchase. The difference is a
significant one. In gambling one party must lose just
what the other wins. In speculation this is not neces-
sarily so. A dealer in wheat may buy of a farmer and sell
to a speculator, and the wheat be sold at a constantly
rising price through a line of speculators, till bought by a
miller for grinding at the highest price of all. Neither
the dealer nor the miller loses by the transaction, which
is not speculative on their part, yet each speculator in turn
wins. The reason is that there has been an actual increase
in value. The gains of the speculators result from the
division among them of this increase. The charge is made
against speculation, that it is like gambling, because it is
unproductive, and consists in the transfer of money from
1 The form of a sale is not sufficient to mark the distinction. A bucket-
shop " contract " reads in terms of a sale and purchase, but is gambling
because it cannot be enforced.
,$3] UNITED STATES IOI
one pocket to another. The charge is misleading, if not
false. Speculation does not directly produce wealth, but
there is a real increase or decrease in the value of property
due to outside causes, and this gain or loss in value is
shared by the speculators. It is true that speculative
gains and losses far exceed the ultimate increase or de-
crease in the value of the aggregate of the commodities
dealt in, but this is because new rights of property are
created at every speculation, with a corresponding enor-
mous accumulation of speculative " differences " to be set-
tled. How much of such business is desirable, how far it is
marked by the same spirit as gambling, are questions not
raised at this point. We shall not hesitate to speak of
some transactions in general terms as of a gambling
nature, and yet it is well to keep clear this objective and
economic distinction between gambling and speculation.
Both depend on uncertainties, but, whereas gambling
consists in placing money on artificially created risks of
some fortuitous event, speculation consists in assuming
the inevitable economic risks of changes in value.
It is in this element of risk that we have the key to the
f function of speculation. It is often said that all business is
to a certain extent speculative ; in other words, there is an
uncertainty as to the ultimate profits. These risks are in-
herent in all business, and are no more artificial than the
whole commercial order under which we live. They are
risks which thrust themselves upon business men and
which business men must meet. Especially are these
risks dependent on changes in value, and it is the assump-
tion of such risks that constitutes speculation.
The central feature in the economic organization of
modern society is the market. From the point of view of
the individual, the production and distribution of commodi-
ties are carried on with a view to their exchange. The reg-
ulator of exchange, and therefore of production, is value.
102 SPECULATION IN THE [384
Consequently the producer will expend his energies on
such commodities as will have the greatest market value
as compared with the expenses of production, just as the
merchant will take them to the market where they will
command the highest price. But this adjustment of pro-
duction and distribution according to values will be ac-
curate only in proportion to the success of the producer
and consumer in ascertaining such values. The producer
produces only when he thinks he can get a return greater
than his outlay. The merchant buys only when he thinks
he can sell at a higher price. In both cases there is always
the risk that before the production is completed, or the
sale made, the value of the commodity may fall. Simi-
larly, there is a chance that it may rise. In the one case
there is a loss ; in the other a gain, to the producer or the
merchant. Hence it may fairly be said that the test of the
perfection of the organization of trade is the promptness
with which such changes are learned and the accuracy
with which they are predicted. It is by a due apprecia-
tion of this fact that one comes to a realization of the im-
portance of organized speculation. If it is found to be
the means of making the needed prediction, it will also
prove itself the chief directive influence in the economic
field in which it prevails. In such event, the idea of its
being an artificial device for gambling purposes will give
way to a conception of speculation as a natural growth to
meet an actual want.
Organized speculation, that is, such speculation as was
described in the last chapter, is a comparatively recent
development, and a consequence of new economic condi-
tions. Nothing will so clearly show its real nature as a
glance at the economic changes which have made it
necessary.
Changes of value become important only where the
system of exchange is already developed. When every
38 r] UNITED STATES IC>3
man produced for himself alone, he was forced to undergo
risks of production, but only when he began to produce
more than he wanted for his own use, did he become sub-
ject to uncertainty in finding a market for his goods. The
primitive man who started on a hunt, or who planted corn,
necessarily took a risk of failure. The game might be
scarce, or the crop might fail. These were risks of pro-
duction, and were borne necessarily by the producer. But
as soon as our primitive man began to kill more game or
raise more corn than was needed for individual use, in the
hope of bartering his surplus for more desired commodi-
ties, he began to incur a risk of quite another kind. How-
ever successful his production, it would profit him nothing
unless he found others who wanted his commodities and
had other commodities to exchange, that is, unless there
was a demand for his goods. In other words, as soon as
exchange set in, trade risks began. The things which he
produced could not be of certain value, and, in so far as
he took these risks of value, he might be said to speculate.
In such a system the functions of the producer and
trader were combined in one person, who bore both the
risks of production and of trade. In the case of many
commodities this condition prevailed during a consider-
able period of development. In the course of time, how-
ever, the extension of exchanges brought out a distinctly
trading class. Trade, as distinct from exchange, means
buying in order to sell again with a view to gain from the
transaction. Evidently the exchange of goods does not
necessitate a trading class, and much exchange takes place
to-day without the intervention of the trader. But any
great extension of exchanges is impossible without such
a class, and it is only when the producer and the trader
are differentiated that real commerce begins.1
1 It hardly needs to be said that, historically, different lines of produc-
tion developed a special trading class at different periods. Doubtless the
trader found his first field in luxuries, while the grain trade was among
104 SPECULATION IN THE [-586
This trading class stood ready at any time to take over
the extra product of the individual producer and assume
the responsibility of its exchange. Thus the trading risks,
the risks, that is, of a change in value, were shifted to the
shoulders of the new class, and the members of this class
in turn, so far as they assumed such risks, became the
speculators for the community.1
With the development of trade and the growth of inter-
course among traders, these risks tended to become less.
The more that men gave up the idea of producing goods
mainly for their own consumption, the more steady be-
came the market for articles of ordinary use. The func-
tions of merchant and of transporter of goods, at first
united, became separated to a considerable extent, and the
traveling merchant, who still survives in our pedlar, gave
way more and more to the stationary trader, especially in
the cities of any size.2 The growth of great centers of
trade and of special markets (the earlier counterpart of
modern "exchanges"), the constant meeting of traders,
their great gatherings in the important fairs and yearly
markets, all tended to increase the knowledge of market
conditions and so to diminish the risks of fluctuations in
value. Of great importance, too, were the merchants'
organizations, which are represented, in a sense, to-day by
chambers of commerce, produce exchanges, and similar
institutions. Such organizations brought the most intel-
ligent traders together and diffused information through
a wider group.
the last to extensively differentiate the trader from the producer. Cf.
Schmoller, Die Epochen der Getreidehandelsverfassung und -politik, in
the Jahrbuch fur Gesetzgebung , Verwaltung und Volkswirthschaft, 1896,
p. 695.
1 For a line of argument similar to that of this section, see the pam-
phlet, Der Terminhandel, 1889, reprinted from the Hamburgischer
Sorsen-Halle, and the unrivalled essay of Fuchs, Der Waren-Termin-
handel, Pt. III.
1 Cf. Lexis, in Schonberg's Handbuch, Vol. II, article, " Handel."
387] UNITED STATES IC>5
By all these means the risk which the ordinary trader
ran became lessened. Many of the local influences no
longer affected his profits, and, as knowledge increased,
the uncertainties of one age became the certainties of the
next. The slight losses due to unforseen circumstances
were perhaps in the long run offset by similar gains, so
that a moderate profit became assured to the average
trader under average circumstances.
There still remained, however, at the basis of all trade,
the possibility of unexpected gain or loss. Especially was
this so in regard to agricultural products, the supply of
which is dependent on uncontrollable conditions of
weather and climate, and also in regard to goods from
distant sources of supply. In so far as traders assumed
these risks they became speculators.1 But the great mass
of traders were not greatly affected. In the course of the
history of trade, a tendency toward a multiplication of the
grades of middlemen appeared, and a distinction between
wholesale and retail trade was made. When this occurred
the risks fell chiefly on the wholesale merchants.2 The
retailers, dealing in small quantities and observant of the
local demand, had little to fear from sudden changes in
supply. It was, then, through the large merchants that
the chief economic functions of trade were fulfilled. Their
business necessitated the development of large centres of
supply with ample means for storage,3 a detailed knowl-
edge of the demand and supply in every locality, and the
1 See Prof. Schmoller's article (as cited above) for some suggestions as
to the general transition from the early conditions of municipal grain
supply and distribution to the system of private traders. The growth of
cities was an influential factor in the change. " Die Versorgung der
Stadte war eine dauernd, die Abwendung der Hungersnot eine nur peri-
odisch wirkende Ursache," p. 704. See also Ashley, Economic History,
Vol. I, §28, 29.
1 Cf. Lexis, " Handel," in Schonberg's Handb-uch.
3Cf. Cunningham, English Industry and Commerce, Vol. II, pp. 189,
356.
106 SPECULATION IN THE
best estimate possible of future conditions. In this stage
of trade the prediction of the future is the uncertain and
all-important element. Such a system of great merchants
carrying large stocks, assuming the important risks, and
thus regulating the supply, is evidently the existing sys-
tem of trade in many commodities, and was, not long ago,
the uniform system in nearly all trade of large extent.
It is often hardly realized what a complete transforma-
tion in trade conditions this century has brought about,
especially in the case of agricultural staples. Indeed, one
may say the last half-century, for the new movement had
but begun before 1850.' The transformation has been
from many local markets to one world market. The cause
of the transformation is found in the development of
steam transportation and telegraphic communication.2 It
is hardly too much to say that the Industrial Revolution,
of a hundred years ago has been matched in later years
by a Commercial Revolution of equal importance.
Before this change the important markets were in the
main independent of each other. To be sure, in all arti-
cles of international trade the conditions at all the sources
of supply had their ultimate effect on distant values, and
yet, even in these cases communications were so slow
that the conditions might change entirely before their
effect could be felt. Even the amount of international
trade in such staples as cotton and wool, which for the
earlier period was considerable, seems comparatively in-
significant by the side of the enormous trade in those com-
modities to-day. In the main then it is true that the earl-
1 In the case of grain for instance, before 1850 only from one to nine
per cent., at the most, of the crop of the agricultural nations, or of the
consumption of manufacturing nations, figured in international trade. -
Schmoller, op. tit., p. 737.
2 The aspect of the " world-market " on which emphasis is here laid is
not the fact of large international shipments, but the resulting fact of the
effect of distant occurrences on prices.
UNITED STATES 107
ier markets were of a circumscribed area ; that, save over
long periods, the supply and demand within this limited
area were the regulators of price, and that these local con-
ditions were consequently the chief concern of even those
merchants who dealt on a large scale.1 Under such cir-
cumstances these merchants bore the speculative risks as
a part of their business, and were perhaps fully competent
to cope with such risks as might arise.
All this was changed by the commercial revolution. The
facilities of instantaneous communication and of rapid
transportation from one end of the world to the other soon
tore down the barriers about the local market. The stores
of a given city, even the crop of a given country, could no
longer control the price in any market. To-day the wheat
of Russia and of the United States can be turned into the
Liverpool market as quickly as could the supplies of the
inland counties a hundred years ago : while long before its
arrival, the Liverpool merchant knows just how much
wheat has been shipped and when it may be expected.
The Liverpool price is as quickly affected by a cable from
India, or Argentine, or Dakota, as formerly by the news
of a bad crop in the surrounding country. The same is
true in regard to cotton and coffee, and many of the other
articles of international trade.
With this change the market for all the great staples be-
came a world market, and the total demand and total
supply began to determine a single price for all places.
The chances of local fluctuations in price became greatly
lessened, for the local scarcity or abundance might be off-
set by opposite conditions elsewhere. At the same time
the fluctuations possible because of these distant condi-
tions became of much more importance. Formerly the
1 In the case of grain this was particularly true. Schmoller, op. tit.,
p. 722, says that till the building of railroads, " jede Stadt blieb mit ihrer
Umgebung fur den Getreidehandel ein isoliertes Wirthschaftsgebiet fur
sich."
108 SPECULATION IN THE
merchant, from a thorough knowledge of his own market,
was well-prepared to assume its speculative risks. Now
he was called on to face a wider Konjunktur, and to
assume the risk of changing values dependent on world-
wide conditions.
This was a burden which the merchant body was hardly
prepared to bear. With the advance in knowledge, the
trading element and the speculative element in their bus-
iness had come to be more sharply distinguished, and the
more important the speculative element became, the
greater was the burden on those who pursued their busi-
ness for its trading profit. As merchants they were pri-
marily concerned with buying, storing, and moving their
actual commodities, and had little time to watch the ever-
shifting conditions of the world market. What was now
needed by the trader was a distinct body of men prepared
to relieve him of the speculative element of his business,
that is, of the risks of distant and future changes, just as
he had formerly relieved the producer of his distinctly
trading risks. A new body was wanted to cope with the
Konjunktur. And as the need grew, the speculative class
became differentiated from the trading body as the latter
had been differentiated from the producing body.1 The
speculator was to assume these risks by standing ready at
any moment to take over the commodity of the merchant,
or to agree to deliver to him, at an established market
price. The importance of this development can hardly be
overestimated. The peculiar feature is, not that speculation
has increased, for that is but a necessary accompaniment of
increased trade, but that speculation has become the busi-
ness of a special class. Previously the speculators had been
'Bruckner, Der Differenzhandel an der Borse, p. 59, Berlin, 1894,
criticises Fuchs for tracing the growth of a class of capitalistic speculators
to these new conditions of trade, on the ground that dealing in futures
took place in the I7th century. But the Dutch trade of that time was
insignificant by contrast, and was itself due to similar causes working on
a smaller scale.
UNITED STATES iog
traders seeking their own markets and moving their own
goods. Now they became a third class, distinct from
both producers and exchangers. Whereas formerly each
man bore his own risks, the new class has arisen to
relieve him of these risks ; ' instead of all traders specu-
lating a little, a special class speculates much.2
The machinery of a speculation which assumes such a
task has been examined, and it has been seen that such
speculation is limited to certain kinds of goods. In the
first place it is limited to commodities of an uncertain
production. Such are preeminently the raw products of
the soil. If there were a steady output of these products
which was well under control, no speculation could arise.
In general it may be said that where a quick increase of
supply in response to a rise in price is possible, specula-
tion is impracticable. This is the case with most manu-
factured goods. The New York Cotton Exchange, for
example, provides rules for trading in print cloths, but
little such trading ever takes place, or ever can. An
exception is to be made in the case of half-manufactured
1 That this need is historically the cause of a speculative class is shown
by a comparative study of its origin in different trades. Pfleger sum-
marizes his investigation in this direction thus: ' ' Aber da wo der Termin-
handel in einem Artikel zuerst und originar entsteht, ist der innere Grand
seines Entstehens uberall der Gleiche, namlich das Bedurfnis der beteil-
igten Kreise, das Risiko der Preisschwankungen auf andre Schultern
abzuwalzen." Bdrscnreform in Deutschland, Pt. II, p. 112.
* It will be seen that the theory of speculation suggested above bears -3.
certain relation to the recent discussion concerning the reward for risk as
one of the shares in distribution. (See especially the articles by Mr.
Hawleyand Professor Clark, Quarterly Journal of Economics . Vol. VI,
p. 280, Vol. VII, pp. 40 and 459.) It is true that what is risked is capital,
as urged by Professor Clark, and hence that the reward accrues to a cer-
tain type of capitalist. At the same time a new class has developed which
is primarily speculative, secondarily capitalistic. Besides recognizing
four functions in production and four rewards, it may be well to recognize
5our classes also to receive the rewards. That is, \htsptculator, with his
-eward for risk, may be added to the capitalist, the laborer, and the en-
trepreneur.
! i o SPECULA TION IN THE [ -592
goods of foreign trade, because of the greater uncertain-
ties of demand.1 The speculation already referred to in
" Scotch pig " warrants is an illustration in point. A
similar trade in this country is impracticable, because the
business is predominantly domestic and in a few hands.
There has also been some speculation, based on this fluctu-
ation of foreign trade, in copper and tin. Provisions
(pork, lard, etc.) are also manufactured products, but since
they are dependent upon an uncertain supply of hogs, which
cannot themselves be kept long, the supply is uncertain.
Another condition of supply and demand which may
throw out speculation is that of monopoly control. If
either the demand or the supply is controlled by a single
organization, the price is too much in their hands to allow
any scope for speculation. Crude petroleum some years
ago was a favorite article for speculative trade, and
numerous flourishing oil exchanges were established.
These exchanges now do no speculative business com-
parable to that of their prosperous days. Probably more
than one cause can be given for this decline, but it is
evident that so long as a single trust dictates the price of
crude oil through its control of the demand for refining
purposes, and, to a considerable extent, of the supply, no
speculation will be possible, or at least safe. Similarly
the New York Coffee Exchange has attempted to stimu-
late a speculation in sugar, and provides rules for trading
in that article. But nothing comes of it while a single
body controls the demand for raw sugar and the supply
of the refined article. In Europe, however, where no
such monopoly conditions prevail, sugar is one of the
most prominent features of the speculative markets.2
1 Cf. Lexis, Handel, in Schonberg, Vol. II., p. 879.
1 For a critical discussion of speculation in sugar, see Bayerdorffer, Der
Zuckertenninhandel, Conrad's Jahrbucher, LIX, 586 (1892). Cf. also
Pfleger, op. tit., Pt. II, ch. 4. In general the work of Pfleger gives
some interesting material as to the conditions which favor speculation,
see chs. 1-5.
UNITED STATES IXI
This brings out another general condition of specula-
tion. An article must be the subject of a general world-
wide demand before extensive speculation in that article
is possible. A more limited demand may allow of a limited
amount of speculative trade, but, in general, speculation
will arise only where the commodity is one of the staples
of the world market. In this connection it is evident that
any quickly perishable commodity is entirely unsuited to
such trade. No futures can be sold in an article which
will not keep at moderate expense for an indefinite period.
Finally reference may again be made to the important
limitation of organized speculation to what are called
representative goods. Securities are the best illustration
of this quality, since every share is of equal value with
every other of same issue. Wheat, cotton, coffee, etc.,
are fairly representative, and are made completely so by
the system of warehouse receipts already described. No
extension of speculation is possible to articles which do
not possess this quality. For example, land can never be
subject to organized speculation. We see at times a
fever of speculative land buying, but that is quite a differ-
ent thing from the organized speculation of the ex-
changes. Each particular parcel of land is a unit in itself,
and takes its value from characteristics peculiar to itself
alone. In real estate dealings short-selling, and so com-
plete speculation, is of course impossible.
So far reference has been made only to commodities.
Securities also afford a field of great speculation because
of their fluctuating values. They differ from speculative
commodities in that they are of a fixed, not an uncertain,
supply. Their values, however, are uncertain, since they
depend on a fluctuating demand. The demand itself is
determined by the market estimate of their earning
capacity.1 In other respects, securities fulfill the require-
^ l For a discussion of the values of securities, see Giffen, Stock Exchange
Securities, London, 1879.
1 1 2 SPECULA TION IN THE
ments of speculative commodities. They are perfectly
representative ; and those in which speculation occurs are
not under monopoly control.
The growth of modern stock speculation is not a result
of the commercial revolution as such, and yet is closely
connected with it. It began among capitalists naturally
with the first appearance of stock companies, and was con-
tinued in the public funds, when these offered a field of
large but uncertain investment. It was not, however, till
the enormous increase in private securities, which came
with the building of railroads and the following advance
in industrial undertakings, that speculation assumed the
great proportions of to-day. Steam transportation, while
together with the telegraph it was revolutionizing the
market for commodities, was also producing a great
change in the method of investment. Private investment,
no longer confined to participation in local concerns,
came to be made, in a large measure, by small contribu-
tions to government loans or to vast industrial enterprises.
Under these conditions an organized stock market be-
came indispensable. Its place in the financial world will
be more fully considered in another section. Suffice it to
say here that the purchase of securities (that is, invest-
ment), in the face eft the many distant and hidden causes
affecting values, involved the same uncertainties as the
purchase of commodities under the new conditions of a
world market. The small investor, like the merchant,
could hardly take such chances ; and, like the merchant,
he found a class ready to assume all the risk of buying or
selling his security, and a market that fixed prices by
which he could intelligently invest.
The function of an organized speculation, then, is limited
to certain classes of goods. But within these limits are
found great classes of securities, and many of the most
important staples in international trade. This function of
39rJ UNITED STATES
speculation may be finally summed up as follows : To re-
lieve trade of the risks of fluctuating values, by providing
a class always ready to take or deliver a property at the
market price ; and, in so doing, to direct commodities to
their most advantageous uses, and the investment of
capital into the most profitable channels, by fixing for
commodities and securities comparative prices for delivery
at different times and places.
II.
The directive influence of speculation is its service to
society in general, and its risk-bearing function its service
to trade as such. Since its directive control is exerted
through prices, it will be well first to examine the influ-
ence of speculation on prices, and return in another place
to the assumption of speculative risks. *1
In the first place, it is desirable to dispose of a more or
less prevalent idea that speculative prices are determined
" regardless of the law of demand and supply." Such an
idea is based on a complete misconception of the nature of
value. The more free the competition between buyers and
sellers, the more minutely is price regulated by demand
and supply, and nowhere is competition more free than on
the exchange. It is especially strange to hear this charge
brought forward as if an infraction of the law of supply
and demand was cause for criminal indictment. Even if
it were true, that under complete competition on the ex-
changes prices were determined in some other way. it
would only remain to modify the statement of the law of
value, not necessarily to disturb the facts. There are
plenty of instances outside the exchanges where prices
are determined by other factors than demand and supply.
This notion is probably due to what may be called the
objective idea of value, that is, the idea that value may be
determined by certain physical facts independently of indi-
1 1 4 SPECULA TION IN THE [306
vidual feelings. Thus it is supposed that there is a phys-
ical supply of any commodity of an ascertainable amount,
and at the same time a sufficiently definite demand on the
part of the consumers of the commodity, and that these
two factors must determine the value of the commodity.1
It should be necessary only to state this proposition to
show its error, and yet there are many who cannot grasp
the idea of a subjective determination of value. They can-
not see that the total physical supply has nothing to do
with the value at the moment, but only that part of it
which is available for the market under prevailing condi-
tions. That part of the supply which does affect value
varies according to the temporary opinions of the holders,
as to the market prospects for some later time. So, too,
the demand for commodities is just as little an objective,
definite affair. It is something purely subjective, depend-
ent in the same way on the opinions of the persons con-
cerned, regarding not only present but future conditions.2
Prices on the exchanges, however, are (and must be)
determined by the existing demand and supply. But the
* existing demand and supply are both speculative, and de-
pend for their strength on the conditions in other markets
1 It would be possible to cite many instances of this feeling in regard
to value. The reports and speeches of the advocates of "anti-option"
legislation in Congress are full of it. Even writers of standing are not
free from confusion on this point. Eschenbach (Zur Borsenreform, p.
33, Berlin, 1892) complains that speculative prices are determined, not by
Vorrath und Bedarf, but by Angebot und Nachfrage. Cohn, Ueber das
Borsenspiel, Schmoller's Jahrbuch, xix, p. 44, says of this idea: " Diese
vermeintlich neue Weisheit kommt darauf hinaus, dass sie an die Stelle
des denkenden Menschen die todte Sache setzt, an die Stelle des Schiitzen
das Geschoss."
* Compare the trenchant remarks of Prof. Cohn, in the article just cited,
on this idea of value, p. 44 et seq. Cohn points out that the price of pota-
toes or any other commodity in which there is no speculation is equally
affected by the anticipation of future conditions of demand and supply,
so far as these are known. Cf. also Bruckner, Der Differcnzhandel , p. 52.
UNITED STATES
and on the expected conditions of the future. It is in
this wray that distant and future demand and supply affect
prices, by affecting the speculative demand and supply
here and now, and it is only in so far as they do deter-
mine the speculative market of the moment that they
have any influence on price.
The speculative demand and supply are just as real as
any other, and are expressed in genuine offers to buy and
sell goods. It may be to buy or sell either present goods
or future goods, or, in other words, goods either for im-
mediate delivery or for future delivery. They are at the
same time estimates of what the future market is to be.
It may be expressed by saying that the existing market
for future goods is an attempt to forecast the future mar-
ket for (then) existing goods. If a distinction is made
between utility and value by considering the value of a
commodity as an estimate of what its utility will be.1 a
further distinction. may perhaps be made by considering
the price of a " future " as an estimate of what the value
of the commodity will be. It is an estimate of an esti-
mate. The speculator makes his offers to buy and sell
entirely on that estimate of future values. To be more
specific, he trades at the moment in May wheat, or July
wheat, or September wheat, according to his estimate of
spot prices in the following May. or July, or September.2
Seen in this light, it is entirely natural that men should
" make " prices according to their opinions, and the charge
that the exchanges are "price factories" loses all its odium.
1 Cf. Giddings, Publications of the American Economic Association
VI. p. 43.
1 This must be true in the long run even where the speculator expects
to complete his operation before the month of delivery. If he expects
the price of a given option to rise or fall within a given time, it will or-
dinarily be because of conditions which would advance or depress the.
spot price of that particular future month.
Il6 SPECULATION IN THE
It should always be borne in mind that the service of
speculation comes in its " price-making power." '
Under these conditions the closest scrutiny of all the
factors that may influence future prices is of essential im-
portance. The success of a speculator depends on the
accuracy of his estimates, and it follows that where we
find organized speculation we find the best perfected
facilities for securing early and accurate information. This
is one of the striking merits of the speculative system. In
any business, knowledge and foresight are the chief requi-
sites of success.2 Nowhere do we find such strenuous
efforts in this direction as among large speculators. It
may be said with scarcely an exception that every suc-
cessful operator in the stock or grain market has been
distinguished by his unusual success in securing accurate
information in advance of his competitors. The old story
of how Rothschild watched the battle of Waterloo and
reached London in time to make large purchases in the
funds before the news became public, is typical of the suc-
cessful operator everywhere.3 It is also true that the spec-
ulator has often been equally marked by his ability to mis-
lead his rivals in regard to what he has learned. His real
1 Cf. Fuchs, Der Waren-Terminhandel , 2.7 . Kohn, Der Getreideter-
minhandel, § 4.
2 As Professor -Hadley well says (Economics, p. 113) : "The success or
failure of a man engaged in manufacturing, in transportation, or in agri-
culture, depends more upon his skill as a prophet than upon his industry
as a producer."
3 Even the earliest speculation gave rise to remarkable efforts in this
direction. It is related of Sir Henry Furnese at the beginning of the
last century that " throughout Holland, Flanders, France and Germany,
he maintained a complete and perfect train of intelligence . . . the fall
of Namur added to his profits, owing to his early intelligence." A He-
brew, Medina, accompanied Marlborough on his campaigns, and " Rami-
lies, Oudenarde and Blenheim administered as much to the purse of the
Hebrew as they did to the glory of England." Francis, Chronicles and
Characters of the Stock Exchange, p. 1 1 . (American ed. , Boston, 1850. )
UNITED STATES 117
opinion, however, is registered on prices by his purchases
or sales. In the meantime it should be borne in mind
that every increase in knowledge of future events is, in so
far, a gain to the public as well as to the individual.1
Every event of any nature whatsoever is eagerly watched
for and its effects discounted. Drouths in Kansas or rains
in Argentina are noted at once in the markets of New
York and Liverpool. New inventions, new discoveries,
changes in freight rates, economic legislation, political
complications, business failures, strikes, riots, storms, in
any part of the world, are quick to affect prices on both
stock and produce exchanges.2
Events are anticipated and exert their influence before
they arrive. It is often surprising to see how absolutely
without effect is the final occurrence of an event of im-
portance, provided it has been expected. It is all epit-
omized in the familiar saying that " Wall Street discounts
everything."
With this body of keen experts, striving by the use of
private wires, special agents and every other means, to dis-
cover and foresee every event bearing on values, specula-
tion has been well defined as the struggle of well-equipped
intelligence against the rough power of chance.3 Just in
1 "Erkenntniss der Zukunft ist Werth fur den Handel, Werth und
segensreicher Nutzen fur das Gemeinwesen. Diesen Werth und Nutzen
zu schaffen, ist die Spekulation thatig." (Michaelis, op. cit., p. 50.)
"This is humorously illustrated by Mr. C. D. Warner in a passage in
A Little Journey in the World (p. 83): " What induced the beardless
young man to make the ' investment ' in ' three-eighths,' who can tell ?
Perhaps he heard, as he came into the room, that the Secretary of the
Treasury was going to make a call of Fives; perhaps he had heard that
Bismarck had said that the French blood was too thin and needed a little
more iron ; perhaps he had heard that a Norther in Texas had killed a herd
of cattle, or that two grasshoppers had been seen in the neighborhood
of Fargo, or that J. Hawker had been observed that morning hurrying to
his brokers with a scowl on his face and his hat pulled over his eyes."
" Sie [die Spekulation] ist der Kampf der mit Kenntniss der wiss-
baren Umstanden ausgerusteten Intelligenz gegen die rohe Naturmacht
des Zufalls." Cohn, Finanzwissenschaft ', p. 463.
SPECULATION IN THE [4OO
so far as it meets and predicts changes of value it is suc-
cessful for the individual and fulfills its function in busi-
ness life. But its power is strictly limited. It may pro-
vide a special class to assume the risks, but it cannot do
away with risks altogether. There are physical and social
changes which are impossible of prediction and must re-
\jtpain so. Speculation tends to reduce these to a minimum,
( and perfect speculation would succeed in predicting all fu-
*2 ture conditions, that is, would destroy its own raison d'etre.
tn the meantime it is the many chances of gain from un-
certain developments that maintain the speculative class.1
It is customary to attribute any price which is unfavor-
able to a particular class to the machinations of specula-
tors. In this country speculation is charged with the
responsibility for a large part of the fall in prices of agricul-
tural products since the complete adoption of speculative
methods a quarter of a century ago. Its tendency is sup-
posed to be always towards a depression of price. Under
other circumstances, however, it is blamed for always
enhancing prices above the "natural" rate.2 To the per-
son making either of these claims it is perhaps a sufficient
answer to oppose the other claim, and probably the same
person who will insist that speculation reduces the price
of wheat will be ready on another occasion to applaud the
1 " Der Sporn des Ungewissen mit der Lockung des Gewinns ist es,
welcher das Getriebe der Spekulation im Gange halt. Und doch eines
Ungewissen, welches zu iiberwinden Tausende von imternehmenden
Kopfen sich anstrengen." Cohn, Ueber das Borsenspiel, loc. tit., p. 46.
2 " It is not so many years ago since a large and representative meeting
of western American farmers passed a resolution against options on the
score that they tended to unfairly reduce the price of wheat, and it was
just three weeks after that meeting that a convention of the National
Association of American Millers, attended by some 500 members, was
held in Minneapolis, and passed a resolution condemning options, on the
ground that they unfairly raised the price of wheat. " Quoted in Brad-
street's, Aug. 22, 1896, p. 542. Cf. also Cohn, Zur Borsenrcform, in
Deutsche Rundschau, Nov., 1891, p. 211 ft seq., reprinted in Beitrdge
zur deutschen Borsenrefonn, Leipzig, 1895.
40I] UNITED STATES I jg
critic who asserts that speculation gives a "high fictitious
value " to " intrinsically worthless " stocks. The one view
is a contradiction of the other. If any tendency is inherent
in the system, it must show itself equally whether the sub-
ject of speculation is stock or produce. The methods on
the stock exchange and on the produce exchange are not
essentially different. Short selling is rife on both.
This question as to the effect of speculation in depress-
ing prices, which has been the chief argument of the anti-
optionists in Congress, has been treated somewhat fully
by the writer in another place,1 and calls for only a brief
summary here. The familiar argument is, that short sell-
ing is a selling of products that do not exist, in addition
to those that do, and so furnishes a corresponding increase
of supply, which necessarily depresses prices ; and fig-
ures representing enormous sales are brought forward
as statistical proof. These sales, however, are also pur-
chases, and the question of their amount is of no import-
ance. They represent a speculative demand as well as a'
speculative supply, and the real question is whether the
speculative forces on the short side are stronger than those
on the long side of the market, and whether the specula-
tive supply or demand is warranted by actual conditions.
It is the fact that they sometimes are not, which gives
rise to the idea that speculative prices are " independent
of demand and supply.'' The question of the depressing]
effects of speculation on prices cannot be decided by a'
comparison of prices before and after the advent of spec-
ulation; for the causes influencing prices are too many to
permit of tracing the effects of a single cause easily. That '
there has been a great fall in prices in the past few years
no one will deny, but there has been cheapening of trans-
portation and entirely new competition in the markets of
the world, due to the exports of Russia and Argentina, j
" Legislation against Futures," Political Science Quarterly, March, / ;
1895. //
120 SPECULATION IN THE
Furthermore, since speculation began thirty years ago,
there are several periods of high prices which may as justly
be attributed to it as the low prices at other times. A
comparison of the degree of depression with the amount
of future sales shows that increased speculation has always
accompanied higher prices. That is what any one familiar
with the market would expect. In this case, the increase
in speculation is rather the effect than the cause of ad-
vancing price ; but the fact is damaging to the argument
that falling prices are due to speculation.1 The same facts
apply in the case of the opposite theory that speculation
necessarily raises prices. It may raise or lower prices; but
so long as there is strong speculation on both sides of the
market (and there always will be) there is no necessary
tendency for it to do either.2 Furthermore, any effect on
price in either direction, which is not based on actual
conditions, is necessarily temporary for the same reason.
What then is the effect of speculation on prices ? Pri-
marily, as has been shown, it acts to concentrate in a
single market all the factors influencing prices. In this
way a single price is fixed for the whole world. By
means of arbitrage transactions former differences of
price in different markets have been leveled. Of this
there can be no doubt. The same should be true in re-
gard to differences of time as well as of place. Since a
great change in either the demand or supply of any com-
modity is less unexpected, it has far less influence on
price, when it finally arrives, than it would have under a
non-speculative system. This is both because an excited
1 In view of the claim that agriculturists are all in favor of anti-option
legislation, it is interesting to note that of the sixty-two letters by " prom-
inent cotton growers " printed in the recent Report of the Senate Com-
mittee on Agriculture and Forestry, on Cotton Production and Consump-
tion, only eighteen instanced speculation as the cause of the fall in prices.
(S3d Congress, 3d Session, S. Rep., 986.)
* Cf. the remarks of Mr. G. F. Stone, Secretary of the Chicago Board
of Trade, in his annual report for 1891, pp. xvii et seq.
403] UNITED STATES I2i
market due to unexpected events always registers extreme
prices, and also because the anticipation of changes in the
market affects the immediate price. On the other hand,
every slight change in the demand or supply of a commod-
ity has more influence than ever before. The more perfect
the speculative market becomes, the more sensitive it is to
every change in conditions. An "active" stock, for ex-
ample, changes prices many times in an hour. The re-
sultant of these two tendencies of the speculative market
would seem to be a state of less violent but more frequent
fluctuations of price. This is the ordinary statement in re-
gard to the matter. The contrast between the two systems
has been likened to the difference between the countless
waves of the sea in fair weather and its billows in a storm.
Perhaps the most potent influence in preventing wide \
fluctuations is the much maligned short-seller. It is he '
who keeps prices down by his short sales, and then keeps
them strong by his covering purchases. This is especially
true in the case of inflation followed by panic. If it were\
not for strong short selling when the market becomes
inflated, prices might rise to almost any extent before the
final crash. Now the rise tends to be checked by the
efforts of shrewd operators to take advantage of the infla-
tion. On the other hand, when prices begin to tumble,
they are kept from going as low as they otherwise would
by the purchases which the shorts have to make to cover
their contracts. Thus prices at both ends of a panic are
less extreme than they would be without short selling.
Under organized speculation both the sanguine and the
skeptical elements are duly represented. Every decided
rise or fall in values is fought by one party or the other.
Compare the situation during a real estate boom. Here
only the sanguine affect the price on the rise, and only
the gloomy on the fall. At one end prices are more reck-
lessly inflated, and at the other more needlessly depressed,
than would be possible in an organized speculative market.
122 SPECULATION IN THE [404
/These are strong factors making for a condition of more
steady prices. Against them must in fairness be set the
possibility of increased fluctuation by reason of specula-
tion. While the participation of speculators in the market
increases the chances of an intelligent forecast of coming
events, it also affords the opportunity for panic influence.
The ease with which business is done, and especially the
facility for trading on insufficient capital, occasionally
precipitate movements in price which are due solely to
the unreasoning excitement of a crowd. There are also
occasional movements of a different kind, due to well-
planned and executed " manipulation." Most striking of
these is the successful corner. So, too, any temporary
difficulty of either the bulls or the bears, due perhaps to
the necessity of immediate delivery, or perhaps to a con-
centration of orders in the market of one particular kind,
may create a sudden fluctuation one way or the other.1
r^It is of the greatest importance, however, to distinguish
the frequency of fluctuation from its extent.2 It is the
whole tendency of speculation to cause a ceaseless fluctua-
' tion within certain limits, but it is no less a tendency of
.< ^speculation to narrow those limits. Those cases which
result in extreme prices of a fictitious kind are rare and
in any case of short duration.
Statistics regarding the influence of speculation on
prices must be regarded with due caution. We may com-
pare the prices of some commodity during a speculative
and a non-speculative period, or we may compare the
course to-day of prices of a speculative and non-specula-
1 For example, on March 6, 1894, the price of the Sugar Trust certifi-
cates advanced twelve points in less than an hour, and almost at once re-
acted ten points. Such fluctuations have no relation to actual conditions.
Probably the flurry was due to a concentration of buying orders, increased
by " stop loss orders " as the price rose, with no selling orders for the
moment. This at least was the interpretation of the press.
*Cf. Cohn, Ueber das Borsenspiel, Schmoller's Jahrbuch, xix, p. 52.
405] UNITED STATES
tive commodity or security. In the first case it is never
quite possible to tell what other changes besides the intro-
duction of speculation may have been of influence ; in the
second case it is difficult to weigh the various influences,
other than the presence or absence of speculation, which
affect the prices of the two commodities. For example, it
is sometimes said that wheat fluctuates in value more than
many non-speculative commodities ; but this is not be-
cause of speculation, but because of the inherent uncer-
tainty of its supply. On the other hand, corn, in the long
run, fluctuates more than wheat,1 but this is not due to
the smaller degree of speculation in the case of corn. It
is grown in fewer countries than wheat, and is not in such
steady demand for human food. The stocks which are
chiefly speculated in are often most irregular in their
price movements, but it is the natural fluctuation in value
which induces the speculation, not the speculation which
causes the fluctuation.
For these reasons statistics can hardly be used to furnish
either proof or disproof of the foregoing estimate of the
effect of speculation. Any general opinion on the subject
must rest rather upon its own reasonableness than upon
statistical verification. With the necessity of caution in
interpretation duly recognized, it is possible to make some
statistical comparisons which, if not of complete signifi-
cance, are at least of interest. A comparison not infre-
quently made is that of the wide fluctuation in the price of
grain in the middle ages with similar fluctuations to-day.
For example, wheat in London sold in 1335 at 10 s. per
bushel, and in 1336 at 10 d* Such figures, however,
throw little light on the subject in hand. More interest-
1 The fluctuations of corn and wheat prices for a series of years are given
each year by the secretary of the Chicago Board of Trade in his annual
report.
1 Marshall, Principles of Economics, p. 165.
124
SPECULATION IN THE
[406
ing is a comparison between periods in this country.
Speculation in cotton began about 1870. Following are
the highest and lowest prices of cotton per pound in New
York for the decades 1821-30, 1851-60, and 1885-94,
with the percentage of fluctuation from the highest price.1
The grade quoted is the same throughout each decade,
and a change of grade between the decades does not
affect the comparison of fluctuation.
Year
1821
1822
1823
1824
1825
1826
1827
1828
1829
1830
Low. High.
1 1 Cts. 2O cts.
10 18
.?*
17
30
8* 13
8 nl/2
8 12%
Per
Cent
45-
44.4
47-
36.1
60.
48.6
23-9
36.5
30.4
36.
Year i Low.
1851
1852
1853! 9*
185410
High.
1856
1857
1858
1859
186010^
Per
Cent
cts. 15 cts. '41. 7
"H S25-3
17-
14.9
34-6
22.6
26.1
43-6
17-7
10.6
13
IS*
15*
II*
Year
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
Low.
9-7 cts.
High.
10.7 cts.
ii
8*
Per
Cent
9-3
8.8
19.8
13.6
15-7
18.8
25-3
19.6
The above figures show constantly diminishing fluctua-
tions. The average per cent, of fluctuation for the three
periods is, for 1821-30, 40.79 per cent.; for 1851-60,
25.41 per cent.; for 1885-94, 18.83 Per cent. The ex-
treme fluctuations for any one year in the three decades
were respectively 48.6 per cent., 43.6 per cent., and 29.3
per cent. The average annual fluctuation was lessened
more between the first and second periods taken (37.7
per cent.) than between the second and third (25.9 per
cent). That is, while the speculative period (1885-94)
shows narrower fluctuations than the period 1851-60,
there was even greater improvement between this period
and the decade 1821-30.
For grain such accurate statistics for early periods are
not available. A comparison, however, may be made of
1 These figures (with the exception of the percentages, which are sepa-
rately calculated) are taken from Production and Prices of Cotton for 100
Years, U. S. Dep't of Agriculture, 1895, Miscellaneous Bulletin, No. 9.
The decade 1821-30 is the first for which highest and lowest quotations
are given.
40?]
UNITED STATES
125
the annual fluctuations since the adoption of the " future "
system (say1 1865). Following are the highest and low-
est prices of wheat at Chicago for thirty-one years, with
per cent, of fluctuation from the highest price : *
Year.
1865
1866
Low. High.
8
9
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
i 55
i 04^
76^
73*
99^
I 01
89
1 55
2 03
285
2 2O
2 47
83*
83
77
86^
32
61
46
28
30^
26;4
76^
14 x
33^
32
Per Cent.
45-1
61.5
45-6
52-5
69.
44-7
24.6
37-3
32'
36.3
36.2
34-5
42-5
32.5
36.2
35-2
Year. Low. High.
1881
1882
1883
1884
1885
1886
1887
1890
1891
1892
1893
1894
1895
oo
69
73H
I 43 tf
I 40
i I3#
96
75/2
74X
2 OO
i 16
54*
85
63Ji
Per Cent.
33-4
34-9
20.7
28.1
20.
18.3
29.7
64.4
30.6
31-4
26.9
24-5
39-7
21.
40.
Dividing the whole time into two periods of sixteen and
fifteen years respectively, as in the table, it appears at once
that the fluctuation was decidedly less in the second period.
From 1865 to 1880 the annual fluctuation was less than 35
per cent, in only three cases, while from 1881-1895 the
annual fluctuation was less than 35 per cent, in all but
three years. In the first period the fluctuation was less
than 30 per cent, in one year only ; in the second period
it was less than 30 per cent, in eight years.
Nevertheless the fluctuations under a speculative sys-
tem are still large. Wide fluctuations from year to year
are inevitable, whether speculation prevails or not, because
crops vary greatly, and in the end this variation of supply
must have its effect.2 Within the limits of a single year.
1 Figures from the Report of the Chicago Board of Trade, 1895, p. xxxvi.
'According to the medieval conception of value a just price was, in the
main, unvarying. In this view natural and continuous fluctuations found
no place. (Cunningham, op. tit.. Vol. I, pp. 405-407: Ashley, op. tit.,
Pt. II, p. 391.) Under a system of competition, however, prices should
fluctuate in response to different conditions of supply and demand. It is
126 SPECULATION IN THE [4Og
however, speculation should show a leveling influence.
Figures of the highest and lowest prices in each year may
fail to show the general tendency of speculation in this
direction because of the temporary extreme quotations
which arise from abnormal speculation. In the above table
it will be seen that the fluctuation in 1888 was 64.4 per
cent., the price rising to $2.00 per bushel. This was due
to the corner at the end of September of that year. Sim-
ilar occurrences on a smaller scale account for the degree
of fluctuation in some other years. Such price movements
are of short duration, and their presence in a price table
may give a false appearance of similarity between the
fluctuations of earlier and of recent years. A fairer method
perhaps would be that of monthly averages. Professor
Bemis has made some tables of interest in this connec-
tion,1 one of which he summarizes as follows :
MONTHLY AVERAGE, PER BUSHEL, No. 2, SPRING WHEAT, AT CHICAGO,
1885-1892.
Sept., 83.Qcts. Jan., 82.8 cts. May, 89.2 cts.
Oct., 87.6 " Feb., 83.4 " June, 86.6 "
Nov., 88.2 " March, 82.7 " July, 82.7 "
Dec., 85.4 " April, 84.5 " Aug., 83.8 "
"The figures tell their own story. They not only show
that there is no fall in prices at harvest, when we should
most expect it, but they reveal a remarkable evenness of
prices between all the months over a series of years."
The following table is a comparison of average monthly
prices of winter wheat in New York 2 for four years be-
fore and four years after the advent of speculation.
not to be assumed as desirable that the price of grain should be constant
under different sized crops. (Cf. Pfleger, op. tit., p. 109.) Pfleger,
however, gives too little credit to the advantage of a reduction of fluctua-
tions by means of anticipation of future conditions.
1 See "The Discontent of the Farmer," Journal of Political Economy,
March, 1893.
1 For the earlier period figures are taken from the reports of the New
York Chamber of Commerce, 1857^1859, and for the later period from
the annual reports of the Produce Exchange.
409]
UNITED STATES
127
July
Aug.
Sept.
Oct.
Nov.
Dec.
Jan.-
Feb.
March
April
May.
June
1855-
56
i857-
1858- I!
! 1890
1891
• 1892
a
80
85
2 05
I 95
i 70
i 64
I 60
i 45
57
55
56
55
57
57
3
45
65
70
75 $i 04
55
40
17
19
17
12
17
IS
17
04
02
18
uX
18
i8X
25/2
36/2'
48 i
43#;
65
Jan..
Feb.
Marc!
April
May.
June
July.
Aug.
Sept.
Oct.
Nov.
Dec.
$o
93n?
93rV
i 04^
i ioH i 04^
07ii
99%
05#
04X
05H
86,"
82
68
&B8
7o>t c»^
An examination of these tables shows the marked differ-
ences in the amount of annual fluctuations in earlier years ;
but reveals in the main a smaller amount of fluctuation in
the second period. For eight months in 1856-57, a very
unusual year, the average monthly price varied only from
$1.55 to $1.57, and then from April to June changed from
$1.45 to $1.70. The range in average monthly prices for
each year, measured in per cent, of the highest price, was :
1855-56 30 per cent.
1856-57 14-7
1857-58 41-7
1858-59 37- "
1890 19.6 per cent.
1891 16.3 "
1892 27.4 "
1893 15-7 "
The widest margins between any two successive months
were :
1855-56- . 13.2 percent. (July-August) . 1890- • 10.4 percent. (July-August) .
1856-57- -12. i " (April-May). 1891.. 7.36 " (June-July).
185 7-58 --16.4 " (Sept.-Oct.). 1892-. 6.13 " (June-July).
1858-59.- 12.9 " (April-May). 1893- • 6.86 " (May- June).
The foregoing figures of price variations cannot, how-
ever, be accepted as an entirely accurate indication of the
influence of speculation. In the first place they are sum-
marized in the rough form of averages, and do not pretend
to be more than fragmentary. Incomplete as they are in
this respect, however, they do show a pretty uniform
tendency toward a lessening of price fluctuations. In the
128 SPECULATION IN THE
second place, it is impossible to attribute a change of this
nature unmistakably to speculation. The course of the
price movements of to-day is a joint result of a joint de-
I velopment. The increased facilities of transportation and
communication, the improvements in trade methods, and
f the speculative system, have all developed together. There-
I suit of all these forces working in concert is toward smaller
variations in prices, but how much of the result can be
attributed to any one cause it is perhaps fruitless to discuss.1
Some statistics of fluctuation were given in the report
of the German Commission of 1893, which have been cited
by Professor Colin 2 as of significance in regard to this
question. In the matter of produce, however, compar-
isons were not made. In the case of securities, two
speculative and three non-speculative stocks were taken
for comparison, and the securities in which speculation
did not occur showed greater ups and downs of price
than even the extreme speculative stock (Spielpapier)
taken for comparison. Such a comparison, however, is
of doubtful value even if made by one who is perfectly
familiar with the conditions affecting the value of each
stock. It would be impracticable to attempt any such
contrast in this place. Accurate figures of the real value
of unlisted securities in the United States from time to
time would require the most careful inquiry as to actual
sales. Even then the complex conditions affecting the
value of each security would make the results worthless
as an indication of the effect of speculation on prices.
Strong evidence of smaller fluctuations under the spec-
ilative system is found in the smaller margin of profits of
traders, and still more in the existing method of quotation.
1 For an illustration of the different conditions affecting prices sixty
years ago, see Tooke, History of Prices, Vol. V, p. 85.
5 Zinn fiorsenspiel, loc. tit., p. 53.
4 j j j UNITED STA TES ! 29
Before the war, cotton was quoted only within a quarter
or possibly an eighth of a cent per pound. To-day cot-
ton quotations are in hundredths of a cent. Wheat, form-
erly quoted in quarters of a cent per bushel, is now quoted
in sixteenths. This is clearly seen from a glance at the
table of average monthly prices given above.
There is one important change in price phenomena
which may be traced directly to speculation as such, be-
cause no other cause could be equally influential in this
direction. This change is not the greater stability of
prices, but the greater graduation in price fluctuations.
EverTifTf were to be admitted (for the sake of argument)
that prices in the long run show as wide fluctuations as
formerly, it is important to notice whether or not these
extreme points are registered suddenly or by steady grada-
tions. It needs little more than the mere statement to
show the advantage of a speculative system in this matter.
There are always some shorts ready to buy in as prices
first fall, and some bulls ready to sell out as prices first
rise, and these forces are very effective in graduating
prices. So perfectly does the system work that a suddenj
change in price, of any importance, is very rare. The fact*
is so apparent from a glance at the daily market news as
to render statistical illustration unnecessary.1 This is
almost entirely the work of speculation.2
The practical benefit of this effect of speculation is great./
One of the chief advantages of speculation to the public is
the early warning of the change in values. The course of
' No better illustration of this influence on a large scale can be given
than the fall of prices on the New York Stock Exchange in 1893. Tak-
ing twenty representative securities, the fall in prices averaged forty-five
points, more than fifty per cent, between January and July, but the real
force ot the panic was disguised by the gradual decline through the five
months. See Bradstreet' s , July 29th, 1893.
1 Sec Michaelis, op. tit., pp. 96-07.
130 SPECULATION IN THE [4I2
the prices that each day registers is of importance to in-
vestors all over the country who have no desire to specu-
late, and the losses which the great mass of investors are
able to avoid by unloading their stock on a gradually fall-
ing market are incalculable.1 Consider the case of a
single security, such as Atchison stock. A large amount
of that stock found its way into the hands of small in-
vestors in New England at comparatively high prices.
Without speculation the fall in the value of the secur-
ities would have been sudden, coming only with the
Atchison bankruptcy. As it was, the market opinion of
the value of that stock was registered from day to day,
and a chance given the holder to unload at each new
quotation.
There is a similar practical value to merchants, planters,
manufacturers and others in the graduated price move-
ments of speculative commodities.
Another question of interest in regard to the effects of
speculation on prices is that of the relation between spot
prices and prices of futures. In the main, the price of
spot goods and the price of future goods are determined
by the same factors, viz., the aggregate of the present and
anticipated future conditions of the market. It is not true
that spot prices are determined by immediate conditions
and futures by anticipated conditions. The amount offered
and bid for at any particular time, which fixes the spot
price, itself depends upon the anticipations of the future.
Hence the prices for cash and future goods will generally
vary together. When the option runs forward to the time
of incoming receipts from the new crops, the price for that
delivery tends to stand below the price for deliveries when
the supply is small. Except for this influence of the new
supply, futures normally stand higher than spot prices by
lCf. Struck, Die Effektenborse , p. 92.
UNITED STATES I3!
the cost of storage, including interest, insurance, etc., that
is, prices for different times are much the same, just as
for different places, varying with the cost of storage in the
one case and of transportation in the other.1 But some-
times causes act upon one price alone and make that change
independently.2 This may be the case under certain specu-
lative conditions. For example, if a large number of shorts
have delayed covering until the close of the month for
delivery, their efforts to cover will send the spot price
well above the prices for later deliveries. Their need is
an immediate one. A sharp covering movement before
the month of delivery may have a similar effect.
More important than speculative conditions in this re-
gard is the trade situation at certain times of the year.
When, for example, mills need the wheat for grinding, and
elevators have unused capacity on which they want to earn
storage, they will bid up wheat for immediate delivery,
because they cannot afford to postpone receiving it. Thus,
in Minneapolis for example, in the early spring the immedi-
ate demands of the millers and the elevators, together with
the fact that the future needs will be met by the new crops,
sometimes put the price of cash wheat above the price of
1 For example, in Chicago the May option normally rules high and
stands well above cash wheat early in the year. In July the receipts be-
gin to increase, and that option is often below the price of May wheat.
The price of September wheat is relatively low during thje summer, but
by the time trading in the December option has begun prices of futures
again rule high, in some measure according to the distance of the option.
7 Even the modified statement in the text is only roughly true. It is
not uncommonly stated that in the last few years futures in the wheat
market have not, in the long run, stood enough above spots to coverall
the expenses of carrying. Some suggested reasons for this are: cut
charges for storage; the failure of outside speculation to maintain the
market against hedging sales; the fact that the great elevators will buy
wheat and carry it for what they can get, and perform the functions of
both carrier and" trader for the commission of one. In any case, the
tendency is strongly to bring all prices together.
132 SPECULA TION IN THE [ 4 1 4
the July or even of the May option. Various other par-
ticular causes of this kind may affect either the grain or
cotton markets, and cause considerable variation in the
relation between spot and future prices.
A rather more interesting question is that of the agree-
ment of present prices of futures with future cash prices.
Whether the price of the future is but the cash price plus
carrying charges, or is determined independently by antic-
ipated future conditions, it stands as an estimate of the
actual cash price at the future time. The question of the
agreement of these prices is then a fairly adequate test of
the accuracy of the speculative judgment, and, in so far, of
the desirability of the speculative market. Professor
Cohn, about thirty years ago, made a collection of statis-
tics to show this relation in the case of rye in Berlin, which
have been brought down to 1890, with additional figures
for wheat, by Dr. Kantorowicz.1 These figures show the
prices of rye in May and June for future delivery in Sep-
tember-October, compared with spot prices in the latter
months, and also the September-October prices for de-
livery at the May- June Termin with like comparison. The
results of the figures for forty years (1850-1890) give one
case in which the predicted (speculative) price exactly
agreed with the spot price, 43 cases in which it was below
the spot price by an average of 8.75 per cent., and 36 cases
in which it was above by an average of 9.28 per cent.
For decennial periods the results were :
i85O-'6o average error of 13.81 per cent,
i86i-';o " " " 8.50
i87i-'8o " " " 6.56
i88i-'go " ' 7-90
'Cohn's figures first appeared in the Zeitschrift des konigl. preuss.
stat. Bureaus, 1868, and those of Kantorowicz in Schmoller's Jahrbuch,
xv, p. 220. Both are reprinted in the Statistische Anlagen (p. 317)
of the Borsen-Enquete Kommission, 1893. Cf. also the sugar prices
given by Bayerdorffer in Conrad's Jahrbiicher, lix, p. 586.
UNITED STATES
The increase in the last ten years was due to the fluc-
tuations from 1885 to 1890, ascribed by the compiler to
tariff changes and other political causes. The error for the
period iSSi to 1884 was only 5.8 per cent. It will be seen
that, save for the change in the last few years, there has
been a steady progress toward increased accuracy of pre-
diction. The \videst divergences of prices in any one year
for the four periods respectively, were 30 per cent., 28 per
cent., 19.11 per cent., 15.78 per cent., showing here also
the same tendency to improvement.1
It may be of interest to see what results are obtained by
a study of similar statistics in this country. The material
is not so complete as might be desired, but some tabula-
tion of interest can be made. In the case of cotton, col-
lections have been made of prices of futures from 1870 to
1877, and from 1880 to 1892. 2 These unfortunately give
quotations for futures only four months ahead. The
future quotations selected are January and August. The
October price of the January option is compared with the
January price, and the May price of the August option
1 The figures of Cohn and Kar.torowicz have been severely criticised
by F. J. Pfleger in Borsenreform in Deutschland II, p. no. The criti-
cism is just in the main contention that the figures furnish little ground
for a judgment on speculation, especially since an arrangement of the re-
sults in five or eight year periods does not show any very steady improve-
ment. It is also true that price averages, which do not include the
amount of sales, may lead to errors of judgment; but if they are not per-
fect, neither are they valueless. The further criticism as to the signifi-
cance of the speculative " error " is verbal and unimportant. The amount
of " error " was never intended by the compilers to serve as a test of the
wisdom of the speculators (in the face of diverse problems to solve) in
any particular instance.
•'The prices' Trom 1870 to 1877 are found in Mr. Wm. B. Dana's Cotton
from Seed to Loom, New York, 1878, and for the later period in the Re-
port of the Com. on Agric. and Forestry on Cotton Consumption and
Production, 53d Congress, 2d Sess., Sen. R. No. 986, Pt. II.
SPECULATION IN THE
with the August price.1
lowing table :
[4i6
The results are given in the fol-
Year.
Average
Oct. price
of Jan.
Cotton,
cents per
ft.
Average
Jan.
price,
cents per
ft.
Diff.
Per Cent,
of
Error.
Average
May
price of
Aug
Cotton,
cents per
ft.
Average
Aug.
price,
cents per
ft.
Diff.
Per Cent,
of
Error.
i870-'7i.
15-55
14.90
0.65
+ 4.36
15.70
17.66
1.96
—II. I
1871-72-
19.60
21.50
1.90
— 8.79
23.97
20.50
3-47
+ 16.92
i872-'73.
18.76
19.87
I. II
— 5.58
18.60
19.65
1.05
— 5-34
i873-'74-
16.39
15-54
0.85
+ 5-47
18.12
l6.07
2.05
+ 12-75
i874-'75.
15-43
14-95
1-52
+ 10.77
16.40
I4.I
2-39
+ 16.24
i875-'76.
13-31
13.08
0.23
+ 1.76
12.62
12.24
0.38
+ 3-i8
l876-;77-
H-37
13.15
1.78
—13-18
11.23
11.42
0.19
- 1.66
i88o-'8i.
10.98
II.80
0.92
— 7-88
10.70
12.33
1.63
— 13-22
l88i-'82.
11.81
II.OS
0.17
- 1.42
12.45
12.49
0.04
— 0.32
i882-'83.
10.76
10.05
0.71
+ 7-06
10.89
10. II
0.78
+ 7-71
:883-'84.
10.81
10.63
0.18
+ 1.69
11.90
10.82
1. 08
+ 9-98
i884-'8s.
10.02
11.15
1-13
— 10. 1
10.91
9-59
1.32
+ 13-76
i885-'86.
9//0
9-15
0.55
+ 6.01
9-44
9.22
O.22
+ 2.26
i886-'87.
9.20
9.42
0.22
— 2.34
II. 01
9-74
1.27
+ 13-04
i887-'88.
9-45
10.44
0.99
-9.48
10.12
II. OI
0.89 — 8.08
i888-'89.
9.69
9.60
O.09
+ 0.00
10.84
10.68
0.16
+ 1-49
iSSo-'go.
10.04
10.52
0.48
— 4.57
12.01
11-55
0.46
+ 3.98
i8go-'gi.
10.07
9.14
0-93
+10.17
8.84
7.48
1.36
+ 18.18
iSgi-'pa.
8.33
7-21
1. 12
-1-15.53
7-43
7-13
0.30
+ 4-21
i8g2-'g3. 8.12
9-47
1-35
— 14.26
7-59
7.63
0.04
— 0.52
The smallest error in the above table is thirty-two
hundredths of one per cent., and the greatest 18.18 per
cent. The comparison between the ten years, 1870-77 and
1880-83, and the ten years, 1883-93, shows no particular
tendency towards greater accuracy in the later decade.
The actual variation is somewhat less, but reckoned in per-
1 The prices calculated are only approximately average prices. The
quotations given by Mr. Dana are the highest and lowest "for each week.
These prices have been averaged to get the price for the month. In the
case of the later statistics the average of four days, the first quotation, the
tenth, the twentieth and the last have been taken as an average for the
month. It is believed that any error in such a method would not be
sufficient to affect the result. The quotations given by Mr. Dana are in
eighths and sixteenths, but are changed into decimals for convenience of
comparison.
UNITED STATES
135
centages little improvement is shown. Using the rough
method of averages it appears that the average error in
the October price was for the first period 6.647 Per cent.,
for the second 7.496 per cent., and in the May price for
the first period 8.845 per cent., for the second 7.25 per
cent. It may be added that out of the forty cases seven-
teen show an error on the minus side, and twenty-three
on the plus side.
For wheat similar figures are available only for a shorter
period, from 1884 to 1895. These hardly give opportun-
ity for comparison by years, though it may be noted that
the later years show no more accurate prediction. The
comparison is made, as in the former table, between the
price of May wheat in January and the spot price in May,
and between the price of September wheat in June and
the spot price in September.1
|
Average
Average Average Per Cent.l
June Average
Per Cent.
Year. Jan. price Spot Diff. of
price of Spot
Diff.
of
of May
Price in
Error.
Sept. Price in
Error.
Wheat. ! May.
Wheat. Sept.
cts.
cts.
1884- ioo. i 104.
3-9
— 3-75
90.2 79-5
10.7
+ 13.46
1885-
85.4
88.6
3-2
— 3.61
93-2 : 8l.4
1 1. 8 +14-49
1886.
86.
76.2
9.8
+12.86
76.8 i 74-6
2.2
+ 2.95
1887-
85.1
85.
O.I
+ O.I2
79-5 69.3
10.2 -r-14-70
l888-
83.5
84-
0.5 — 0.60
83-
93 o7
10.5 —11.23
1889-
102.2
80.9
21.3 +26.32
75-5
78.
2.5 — 3.20
1890- 81.
92.8
ii. 8 — 12.71
89.9
99-5
9.6 — 9.64
1891- 96.9
104.6
7-7 — 7.36
92.6
96.2
3-6 — 3.74
1892- 92.4 83. 9-4
-f-II.32
81.3
72.2
9.1 +12.43
1893- 78.2 ; 71.2
7.0
+ 9.83
71-7
65-4
6.3 + 9.63
1894- 64.9
56.5 8.4
+ 14.86
60.3
53-5
6.8 +12.59
I895- 56.7
68. iii.3
— 16.62
77-3 59-5
17.8 +29.90
1 These figures are compiled from the yearly quotations of futures in the
reports of the Chicago Board of Trade. They go back only to 1884. The
average prices are reckoned from the average prices for four dates, as in
the case of cotton, and the quotations are changed into decimals for con-
venience.
1 For 1888 the September price in the table is calculated on the basis of
the first three weeks. In a test of the accuracy of prediction the corner
prices of the last week of September may be fairly omitted.
136 SPECULATION IN THE
The prices of the different qualities of grain, and of grain
for delivery in different months, are usually expressed in
terms of the ruling option. Thus in August, when the
sales are chiefly for September delivery, the price of wheat
to be delivered in November will be quoted as perhaps
" seven-eighths over." In the same way a superior grade
may be quoted at " three cents over," or a poorer grade at
" one and seven-eighths under," meaning in each case over
or under the price of " contract wheat " for the ruling
option.
It is sometimes maintained that the effect of speculation
is to lower the price of other grades in comparison with
the contract grade. This was strongly urged before the
German Imperial Commission as an evil effect of the grade
system.1 Similarly Bradstreefs (Nov. 19, 1892) in dis-
cussing the anti-option bill said : " Instead of depressing
prices speculation tends to hold them up. Illustrative of
this is the fact, that No. 2 hard wheat, which is worth
nearly as much as the speculative grade, has been selling
at five cents to six cents below it." It was stated by
President Baker, of the Chicago Board of Trade, in his
inaugural address of i895,2 that prices were kept apart in
another way by " most brazen manipulation " on the part
of the elevator interests : "A year ago they were selling
Spring wheat at 5 or 6 cents premium ; now they are sell-
ing Winter wheat at a like premium." On the other
hand, any such influence is denied by many traders. In
the case just cited, for example, there was an actual lack
of Spring wheat in one year, and of Winter wheat the
next. It is probable that any premium of one grade over
another is due to an actual difference of milling or ex-
porting demand ; in other words, that the spot price of
all grades is determined by their quality.
It is interesting to note in this connection, that Gres-
1 See Bericht der Borsen-Enqu&le-Kommission, p. 120.
s See Report of the Board of Trade, 1895, p. LXXI.
UNITED STATES 137
ham's law and the action of a double standard are well
illustrated in the case of wheat contracts. In Chicago,
No. 2 Spring and No. 2 Red Winter are legal-tender
delivery on all contracts not specifying the contrary.
The result is that the grade which is most abundant and
cheapest in any one year always becomes the contract
grade, and the other is only delivered at a premium.
Reference has been made thus far only to the effect of
time-speculation on prices. As already shown, time-
dealings were preceded by a form of speculative trade
which aimed to secure a profit from the differences in price
in different places. Such business is to-day known as
"arbitrage."1 To buy where goods were cheap, and to
sell where goods were dear, was of course an essential
part of the trader's business. This place-speculation,
however, was not separable from ordinary trade under
the earlier conditions of imperfect and uncertain means
of communication.
Modern arbitrage business is a far different thing from
this earlier form of trade. The great point of difference
is that the prices in both the selling and the buying mar-
kets are known at the same moment. Consequently prices
in different localities can vary but little before being at once
equalized by purchases in the lower, and sales in the
higher, market. This equalization is more difficult in
grain or cotton than in stocks, since to really alter the
price may involve all the trouble of making actual ship-
ments. In the case of securities the cost of transporta-
tion is so small that there is to-day but one price for any
active stock in all markets.
Arbitrage between international markets, as, for ex-
" Les operations d'arbitrage reposent toutes sur le principe suivant;
acheter une marchandise, une lettre de change, une valeur de Bourse,
une monnaie, etc., sur un marche ou le prix actuel offre un benefice con-
tre le cours d'une autre place, sur laquelle on se propose de realiser la
transaction." Ottomar Haupt. Arbitrages et Pantos, p. i, Paris, 1887.
SPECULATION IN THE [420
ample, between London and New York, is very closely
connected with the whole business of foreign exchange.1
Securities are a familiar means of making international pay-
ments, and a foreign exchange-house must know at every
moment whether the greatest profit conies from the remis-
sion of gold, or bills, or securities.2 The moment a secur-
ity in London, for example, is higher than in New York
by a sufficient amount, an exchange dealer, who wishes to
remit, may sell that security in London, buying at the
same time here, and using the debt of the London pur-
chaser to settle the account for which he desires to remit.
International arbitrage dealings may be carried on by any
one, but in New York the business is chiefly in the hands
of a few houses, since the greatest profit in it comes from
its use in connection with foreign exchange, a subject be-
yond the limits of the present discussion.3 The ordinary
speculator does not figure in this field.
The extremely narrow differences in price which prevail
between different markets well illustrate the suggestion
made above, that perfect speculation destroys itself. Arbi-
trage business can probably never greatly increase (except
as international payments increase) , and can never be more
than an adjunct to the great mass of time-dealings. It has
found its limits in its success. Indeed arbitrage, at least
in the case of securities, is not speculation at all.4 If both
prices are actually known at the same moment, to buy at
one price and sell at another is not to take a risk, and so
is not speculation. It is trade. Transatlantic arbitrage
has scarcely reached this point as yet, and in any case the
1 See Lexis, in Schonberg's Handbuch, Vol. II, pp. 850-855.
3 Ehrenberg says such dealings began among the bankers of Genoa and
Florence in the I4th century. See Handworterbuch der Staatswissen-
schaften, article, Arbitrage.
3 The standard work on the practical workings of arbitrage is that of
Haupt, Arbitrages et Parties.
4 Cf. Handworterbuch der Staatswissenschaften, article, Arbitrage.
UNITED STATES
nice questions of exchange made the calculation of profits
uncertain except to the expert. But the old form of arbi-
trage dealings between the New York Stock Exchange
and the Stock Exchanges of Boston and Philadelphia was
a perfect case of non-speculative trading of a quick kind.
Private wires between the cities, telephones in the ex-
changes, and operators quick to translate and transmit
the signals of the brokers on the floor, constituted an ef-
fective machinery for operations of a very interesting kind.
By means of these devices the same man was practically
trading in Boston and in New York at the same time. A
change in price in either place was known by the broker
on the floor of the other within less than thirty seconds.
This was trade reduced to its finest point. It is not neces-
sary to point out how completely such dealings bring
about a uniformity of price. The New York Stock Ex-
change in 1894, however, put an end to such dealings by
requiring communications from the floor to the telephone
to be sent by a messenger. This made the two markets
no longer identical, because of the longer time for com-
munication. This action was taken solely for the practical
purpose of bringing the business of other centres to the
New York market, and to maintain commission rates
more strictly. It was a backward step from the econ-
omic point of view, and, on the practical side as well,
the opinion is not uncommon that it diminished rather
than increased business.
Practices of a very similar kind occur in the case of pro-
duce. The simplest transaction is that of buying grain in
the market where it is low, selling it at the same time for
forward delivery in a high market, and then making a ship-
ment to fulfill the contract. But advantage may be taken
of variations between markets without the use of actual
transfers. The speculator may buy futures in one market
and sell futures in the other, and, instead of making ship-
ment, may close out each contract in the market where it
I4o SPECULATION IN THE [422
was made. The opinion of the speculator may have no
reference to the question of whether the prices of his com-
modity in general are either too high or too low. What-
ever his opinion on this point, he believes that the width
of the margin between the two markets is excessive. If
his judgment is correct, and the markets come nearer to-
gether, he will cover his short contracts and sell out his
long holdings, and will make a profit from one set of trans-
actions greater than the loss from the other. The prices
in both markets may move up or down without affecting
his position so long as they move in a way to narrow the
margin between the two. Thus, if the Minneapolis price
of September wheat in July is 58 cents and the Chicago
price is 6 1 cents, suppose the transaction begun by a pur-
chase in Minneapolis and a sale in Chicago. If in three
days the Minneapolis price is 60 cents and the Chicago price
is 62^ cents, then suppose the contracts to be closed out.
Two cents a bushel is the profit in Minneapolis, and a cent
and three-quarters the loss in Chicago, netting one-quarter
cent profit, disregarding charges. If, on the other hand,
the prices fall to 56 cents in Minneapolis, and to 58%^ in
Chicago, the margin between them is still narrowed, and
a quarter of a cent profit secured. All such transactions
exert a regular arbitrage influence, the purchases in
Minneapolis raising the price there and the sales in Chi-
cago reducing the price there, thus bringing the two
markets together.1 This practice is sometimes called
" spreading " or " straddling " the markets.
1 The same kind of dealings can be made in the case of different de-
livery months. If the width of the margin between different options
seems temporarily great, a speculator can in the same way buy one and
sell the other exactly as in the case of a divergence of markets. Or
an undue divergence between two grades of a commodity may lead
to dealings of this kind. A still more exact arbitrage can be under-
taken in the case of two securities of the same government (say a 3 per
cent, and 4 per cent, bond) which in the long run must sell in proportion
to the interest rate. Cf. Raphael-Georges Levy, Melanges FmanciZres,
p. 16, Paris, 1894.
UNITED STATES I4!
The theory of uniform prices by means of arbitrage deal- ^
ings is, however, never completely illustrated in practice. •
Even in the case of those commodities in which speculation
is most common, small divergences are sometimes surpris-
ingly constant. The complaint is heard in New York that
the Chicago market is "out of line" for considerable per-
iods of time. The same complaint is made in Western
markets. In theory we should expect this to be corrected
by an increased shipment to Chicago, the higher market,
and a consequent fall in price there. But it is said that
such results do not follow, that in fact the difference be-
tween Xew York and Chicago may continue for some time
to be Jess than the cost of transportation. At such times
to buy grain in Chicago, sell ahead in New York and make
shipment accordingly, is to incur loss. This divergence
must be due to some kind of economic friction which keeps
goods from accumulating at that particular center in suffi-
cient quantity to reduce the price.1 Furthermore the con-
ditions may not always be as they seem. When it is said
that Chicago is " out of line with the seaboard," it may be
that the statement is true as based on nominal freight
rates, but that cut-rates to some particular ports make
shipment profitable. In any case the amount of comment
and complaint which is brought out by a market's being
slightly out of line, and the fact that the condition is so
widely recognized, are striking evidence of the tendency
shown by speculative markets to come to uniform prices.
If the rule were not very general in its application, the
occasional exception would not cause so much comment.
Goods follow prices, says Kohn,2 by a kind of economic
gravitation. But the economic gravitation does not mean
1 It will be seen that in case of a divergence in markets, which is ex-
pected to last any considerable time, the method of "spreading" de-
scribed above is impracticable.
1 Der Getreidetcrminhandel, p. 137.
SPECULATION IN THE
[424
that goods always go to the highest market, any more
than physical gravitation means that bodies always fall to
the ground. In both cases there may be resisting forces.
In both cases the law states only a tendency.
The failure of arbitrage transactions to control extreme
prices at critical times is due to the fact that transporta-
tion is still far from instantaneous. Sales can be made by
telegraph, but the contract can be met only by shipment.
In consequence the price of some article occasionally
reaches an abnormal point in a single market without
much effect being felt in other markets. If, for example,
there is a short interest in May wheat still out at the very
end of the month, the contracts must be covered before
the last day, and a squeeze may put the price up to a
point limited only by speculative conditions. In this
case arbitrage transactions between exchanges are impos-
sible, because no one dares to sell short, and because
shipment cannot be made from other points in time to
meet the May delivery. The high price is entirely ab-
normal, and has no relation to the supply of the wheat
outside of the single market and the immediate move-
ment. The morning of the first of June the price drops
back, and after the usual convulsion of reaction the nor-
mal course is resumed. In the famous Chicago corner
at the end of September, 1888, while the price in Chicago
rose more than a dollar in few days, in New York the
rise was only a few cents.
Just the opposite of this order of things is an abnormal
and curious example of arbitrage on the floor of a single
exchange. At certain times different prices are made on
the same floor at the same instant. The point has a pe-
culiar interest in the question it raises as to what consti-
tutes a market. It is repeatedly said that the effect of
improved communication and of the speculative system is
to create a world market, since a market includes all buyers
425] UNITED STATES
and sellers who are in communication, affected by the same
conditions, and fixing a single price. And yet in the very
center of this great market there occur at times two dis-
tinct markets for the same security or commodity. It
sometimes happens that in the excitement of a "flurry " in
some security two or more prices are quoted at the same
time. This is of course due to the same cause which makes
two markets of two places miles apart, lack of communi-
cation. Brokers on one side of the crowd are ignorant of
the offers made on the other side, which they can neither
see nor hear. A good illustration of this was given in the
peculiar flurry in Sugar on the New York Stock Exchange
in March, 1894, already referred to, when the stock jumped
eight points in three minutes, and sales were made at con-
flicting figures at the same instant. To take advantage of
such a divergence in price is as much arbitrage in nature as
though the markets were separated by an ocean between.1
III.
The foregoing somewhat detailed account of the influ-
ence of speculation upon prices was undertaken, it will be
remembered, in order to show the directive force of spec-
ulation in commerce and industry. It is because produc-
tion, consumption and investment are controlled by spec-
ulation only in so far as speculation controls prices anc
the markets, that the subject of speculative prices has
occupied so large a portion of this chapter.
1 For a specific example, the writer was told by a Wall Street operator
of an experience of his during a flurry in the stock of a big Western rail-
road a number of years ago. Meaning only to watch the excitement, he
mounted a chair on the outskirts of the crowd just in time to hear a thou-
sand shares offered at 67 on his right hand, and 69 bid at the same in-
stant on his left. Crying "taken" and "sold" almost in a single
breath, to his right and his left, he had made his double transaction with
a profit of two thousand dollars. In this case the operator's profit was
due to a knowledge of different prices in different places, which is of the
essence of all arbitrage.
SPECULATION IN THE [426
Thus ia the field of consumption, if there is a probabil-
ity of a shortage of some particular crop, it is the part of
a prudent people to husband its supply. How will it do
so? Until the socialistic dream is realized, the ultimate
interest of the community is not necessarily the immediate
interest of the individual, and a prevalent impression in re-
gard to the shortness of the future supply will cause no
concerted economy of consumption. The speculator is
sometimes supposed to come in at this point (as Joseph
did), accumulate large stores because of his greater fore-
sight, and furnish the people with the required commodity
at a later day, while securing a fortune for himself. In
these days, however, the speculators may, and generally
do, produce this result without storing large quantities
themselves. If the supply is to be small, the price is to
be high, consequently the commodity is a "good buy."
rrhis is the sole reasoning of the speculator. The bulls
fire active in the market, and the commodity rises in price
now, because the decrease in supply is expected later.
What the speculators have done, is to raise the price, and
by raising the price to stop consumption.1 Owners of sup-
plies, in a rising market, also hold on for a probable profit.
It is the effort of the speculator to make a profit which
makes the rest of us husband our resources. As Lexis has
admirably expressed it, in the time of a scarcity it is the
individual hope, not the general fear, that causes contrac-
tion.2 Large purchases from a present surplus on the part
of the speculators act in the same way. In the case of the
cotton crop of 1891-92, for example, which was the largest
for years, and far in excess of the consumptive demand, the
1 If, as is perhaps the fact, no considerable lessening of consumption is
noticed in this country as wheat and flour go up in price, the same result
is brought about by the decrease of exports. As prices go up foreign
consumption is lessened, exports diminish, more wheat and flour are
kept on the home market and are carried over at lower prices than would
otherwise prevail.
'"Handel," in Schonberg's Handbuch, Vol. II, p. 876.
UNITED STATES
outside speculators bought enormous quantities and car-
ried a good deal of it for a considerable period. If it had
not been for this speculative buying, the price would have
fallen even lower than it did. In this case it was not the
work of speculation to force economy in the face of a com-
ing scarcity, but to prevent needless waste in the midst of
unprecedented abundance. It was done in the same way,
however, by raising the price. On the other hand, if in-
dications point to an increased supply, the action of the
operator is to sell, since the present price is in advance of
the anticipated price of the future. This reduces the pres-
ent price,- and, with a lower price, consumption is pre-
sumably increased. Speculation, then, tends to equalize^
consumption over a long period by causing economy in
anticipation of a shortage, and free use in anticipation oi
bountiful crops. In the same way the purchases each
year at time of harvest, which maintain prices, depend
upon the speculative market.
It may be that the knowledge regarding future con-
ditions is the property of a very few. In this case the
profits coming to the few are perhaps large, but, if they
put the price at the most advantageous point for the com-
munity, their profit should not be grudged them. In 1892,
for example, it was the general opinion that crop news
regarding wheat was " bullish/' and that a rise of price
v\as due. In the face of this opinion a single large specu-
lator in Chicago sold enormous quantities of wheat short,
and kept the price below what was generally thought to
be its fair value. When the operator came to settle, how-
ever, it was found that there was plenty of wheat, and he
had no difficulty in making good his contracts. Doubt-
less he delivered actual wheat on very few of them, but it
was only because there was enough wheat on hand for him
to make easy delivery that he was able to settle on such
good terms to himself. In other words, the prediction of
\
146 SPECULATION IN THE [428
the operator, whether it was due to real foresignt or to the
most reckless luck, proved to be more accurate than that of
most statisticians. There was more wheat than had been
generally anticipated, and the price had been put where
it should have been in order to equalize consumption.1
The grinding of wheat, the spinning of cotton, the im-
portation of coffee, and many other lines of business, are
all directed to a certain extent by the speculative market.
The miller and the manufacturer are the chief direct con-
sumers of the raw products. The extent of their pur-
chases, and more particularly the times at which they are
made, are determined by the course of prices. In the
main, of course, the price of the raw material is reflected
in the price of the finished product, and the real control
of consumption is that exercised by the consumers of the
manufactured article.
The speculative markets regulate the consumption of
goods in place as well as in time. If the need of a com-
modity for use in different places is measured by the com-
parative prices in the different markets, then arbitrage
dealings with the consequent shipments result in a satis-
faction of these needs according to the degree of urgency.
Under the attraction of prices the supply rapidly flows to
meet the different demands. This is the test of an effi-
cient economic organization.
Theoretically the same influence of speculation would
be looked for in the field of production. From this point
of view an ideal use of the speculative system would be an
intelligent arrangement of production in response to an-
ticipated prices. In the case of the production of raw
materials, however, this is far less feasible than in the case
of manufacture or of trade. The farmer does not plant his
crops. according to the prices of futures. Such prediction
as speculation is able to make is little heeded by him, and
1 See Stevens' " Utility of Speculation," Political Science Quarterly,
vii, p. 425-
UNITED STATES
in most cases is perhaps useless to him. In the first place,
in the case of grain it is not to be supposed that he can get
any very direct information from the speculative market.
The growth of grain is a slow process, and the quotations
of futures, at the time of planting, do not reach ahead to
the period of harvest. Furthermore the accuracy of the
speculative prediction is in inverse ratio to the length of
the future period. In the next place, agricultural pro-
duction in this country is still in the hands of small holders
who are slow to take quick advantage of market condi-
tions, while they are led by force of custom to plant the
same crops in the same proportion year after year. Under
these conditions the speculative market neither does nor
can furnish a direct guide to production.1
The case of cotton is a little different from that of grain.
The futures are quoted farther ahead, regularly for ten or
eleven months, and a certain amount of the growing is in
the hands of large planters, a few of whom are said to be
guided somewhat by the prices of futures. At the same
time, the mass of Southern planters are as much held in
the ruts of custom as the grain producers. Nothing that
has been said above is meant to imply that the production
of either grain or cotton is not ultimately guided by
prices. Any such statement would be very inaccurate.
But the prices which do guide such producers are the
prevailing prices over a period of years, or else the spot
prices of the moment, and have little to do with the pre-
dictions of the speculative market.
A considerable indirect influence of speculation on pro-
duction, however, is perhaps felt. In the first place, if
speculative prices guide any portion of the producers in
their planting, the effect is felt by all. In the production
1 Kohn (Der Getreideterminhandel , p. 131) goes so far as to instance
this direction of the farmer's production as one of the benefits of the
quotation of " futures." It is only in theory that such benefit appears.
148 SPECULATION IN THE [430
cf staples there must be under all circumstances great
supplies to meet certain fixed needs, while to meet other
iess certain needs only a small portion of the production
needs to be elastic. It is this surplus in the case of grain
or cotton which fixes the price of the whole, and even the
guidance of a small number of producers in the amount
of their acreage by speculative prices would have its effect
on all. This consideration, however, is of slight import-
ance. In the next place, future conditions do determine
the spot prices fixed in the speculative market, and these
to a considerable extent, perhaps, are influential in regu-
lating production. If a farmer changes his crop from
wheat to corn because the spot price of wheat is low, he
is acting upon the speculative prediction which helps
determine the spot price. It may be said, therefore, that
while speculative prices largely determine the direction of
commerce and of manufacture, they also influence to
some extent the production of the raw material.
The directive influence of speculation is felt in the same
way in the investment of capital. This, however, is denied
Iby some students of the subject who readily admit the
speculative control of the use of commodities. In Ger-
many, for example, such men as Lexis and Eschenbach,
after a careful study of the influence of the Bourse, have
declared the produce exchange to be a necessary institu-
tion, but the stock exchange, all things considered, an
unnecessary and injurious one.
That the evils of speculation in stocks are sometimes as
great as such critics maintain, can hardly be denied. It is
unscientific, however, to emphasize one's disapproval of
such conditions by minimizing the true service of the stock
exchange. The critic often considers only the speculation
that takes place in a few notorious securities, which form in
every exchange the basis for reckless and sometimes scan-
dalous dealings. Waiving for the moment a discussion of
UNITED STATES
these dealings, a fair consideration should be given to the
role of the speculative market in the matter of ordinary
investment.
Since the exchanges of this country do not deal in for-
eign securities, the question of speculation in government
securities of a doubtful nature may be disregarded in this
inquiry. United States bonds are dealt in on the New
York Stock Exchange, but more largely perhaps in the
outside market, and recently a more active speculation
has occurred in them than for a long time. If our credit
is a matter of doubt, our bonds will be a subject of spec-
ulation, and it is significant evidence in support of the
claim that speculation is a result, not a cause, of fluctuat-
ing prices, that speculation in United States securities only
arises when their real value is questioned by the business
world. With this exception and that of a few State
securities, the stock exchanges of this country deal only
in the stock and bonds of private corporations.
The development of the resources of this country has
been largely the work of the corporation. Little needs
to be said in illustration of so familiar a fact. The con-
struction of great railroads, and the building up of vast
industrial undertakings, depend upon contributions of
capital from a wide public. The individual capital of a
small group of organizers is no longer adequate for the
great enterprises which they carry on. The savings of
the whole country have first to be collected into various
organizations and then employed under the management
of the few. This is effected by transferable bonds and
shares of stock, which in this way have come to be a very
common form of investment. Under such conditions the
problem is, what fields of enterprise shall be exploited,
into what channels shall all this capital be turned ? This
question is answered by the individual investor, each for
himself, and his decision takes effect in his purchases.
SPECULATION IN THE [432
Securities are goods which may be bought and sold, and
the demand for a particular security marks the amount of
capital which seeks investment in any particular enterprise.
Capital to-day finds countless chances for employment, of
every degree of safety. Securities of all kinds are avail-
able to the purchaser. What is his guide ? Prices, of
course, as much as in the case of commodities. He wrill
buy that security which, for the price, assures the largest
return and the greatest degree of certainty. Hence the
market that fixes the prices for securities has become the
controlling influence in the matter of investment.
The stock exchange provides this market in an organ-
ized form. Most of the important securities which come
into the market at all are here dealt in under the rules de-
scribed in the previous chapter. Prices are here made
by the transactions of professional speculators, who make
it their business to know the industrial conditions which
affect the value, that is, the earning capacity of each
security. Lassalle J maintained that, whatever investiga-
tion was made, the sum of the unknowable circumstances
bearing on price would always exceed the sum of the
knowable conditions. Whether the statement is true or
not, and it is greatly exaggerated in the case of most in-
vestments,2 the importance of knowing as much as possi-
ble is no whit lessened. Eschenbach,3 on the other hand,
gives as one reason why speculation in stocks is less
necessary than in produce the fact that stocks are not of
(the same uncertain supply. It is, however, as important
to guide the flow of capital from industry to industry, as
to guide the distribution of commodities in time and
1 Kapital und Arbeit, p. 28, Berlin, 1865.
*Ehrenberg, Die^Fondsspekulation, p. i, endorses Lassalle's state-
ment, so far as Spekulationspapiere are concerned, perhaps with justice.
Such securities, however, are a small minority.
'Conrad's Handworterbuch, article " Zeitgeschafte."
UNITED STA TES
i5i
place. And though they are fixed in amount, the earning
capacity of securities is in many cases as uncertain as the
conditions of harvest. The same keen investigation is
necessary to foresee all possible industrial or political
events that may affect this earning power, and so the value
of the security. The conditions affecting the safety of an
investment, as well as its immediate profitableness, are
equally complex, and equally need the most careful watch.
The profits of the speculators depend upon their securing
the best information concerning all these factors. New
undertakings and old undertakings are alike the object of
expert investigation.1 This intelligent examination of the
prosperity of a great corporation is utterly beyond the
power of the small investor. If there were no registration
of prices by the transactions of professional speculators,
the investor would have no knowledge of the safety of any
money placed in a great undertaking. Not only would hi
investment be less intelligent, but the necessary capital for
new enterprises might not be forthcoming at all. Lexis
says that in the case of Spielpapiere there is little study of
real conditions, but that the market follows the manipula-
tion of the big operators. This is only partly true. Some
of the most active stocks follow actual external conditions
in their fluctuations, and the extensive operations in them
are the result of a genuine criticism. Others, it is very
true, are manipulated by speculative managers, and price
fluctuations mean little or nothing in their cases. Lexis
seems to think these the most important, for he says that
the genuine fluctuations of a small kind in safe securities
are of no importance as a guide to investment, and that
the speculative market is of little use to the mass of
steady investments.2 This is the attitude also of Eschen-
1 Cf. Michaelis, op. cit., p. 63.
'Lexis, in Schonberg'sffandbuch, Vol. II, p. 880. Elsewhere, however
(Handwdrterbuch der Staatswisse nschaften , article, "Speculation "),
1 5 2 SPECULA TION"IN' THE [434
bach,1 whose chief criticism is directed against the dis-
honest operations of the banking-houses which " pro-
mote " enterprises for the speculative profits. It is wrong,
however, to interpret the part played by speculation by
reference to its connection with the most risky securities.
It is easy in considering these doubtless great evils to
forget the mass of steady securities which fluctuate little.
There are millions of dollars in securities listed on the
stock exchanges of which nothing disreputable is ever
heard. Some idea of the vast amount of property repre-
sented on the New York Stock Exchange may be
gathered from the following figures of the listings for
recent years (including both re-issues and new issues) :2
Stocks.
Bonds.
Stocks.
Bonds.
1885.-
••$56,913,116-
.$197,259,000.
1800-.
••$437,992,330-.:
^684,867,879.
1886..
• •329,469,350-
. 238,097,690.
1891--
.- 188,914,954- •
287,645,700.
1887..
• •270,053,550-
• 343,477,321.
1892..
•• 237,036,105-.
317,866,000.
1888..
.. 248, 228, 275.
• 511,002,218.
1893 ••
.. 198,245,261-.
288,803,400.
1889 — 259,649,774.. 389,720,000. 1894 — 251,193,003.. 259,804,600.
The nominal value of the shares quoted each week by
Bradstreef s under the heading " Active Shares on the
New York Stock Exchange," is over three and a half bil-
lion dollars. The total stocks and bonds of the railroads
of the United States were, in 1895, $9,6o3,oi4,2O4.3 The
great majority of these are listed on some exchange.
Lexis, in speaking of speculation and prices in general, says that the
chances are in favor of a correct fixing of prices, for if there are no indi-
cations to go on, the bulls and bears will probably maintain an even bal-
ance, while if there are any indications, the chances are that they will be
rightly interpreted. If we except Spielpapiere, there is no reason for
not applying this reasoning to securities.
1 See the article on "Zeitgeschafte " cited above, and Zur Borsenre-
form, Berlin, 1892.
'*• Figures from the Commercial and Financial Chronicle, Jan. 4, 1890
and Jan. 12, 1895.
3 Statistics of Railways in the United States, 1895, Interstate Com-
merce Commission, Report of the Statistician, p. 43.
435] UNITED STATES
It is a great mistake to think that the steady securities
are independent of the speculative market. It is true
enough, as often urged, that there is little speculation in
the securities of many first-rate corporations that are listed
on the exchanges. But this is no evidence of their listing
being merely nominal. The very lack of activity in those
securities shows their character. If there were great
chances for gain from the fluctuations, the ticker would
tell a different tale. But the opinion of the exchange is
none the less important because it is to the effect that
these securities form a good steady investment at an un-
varying price, that they offer no chances of either great
gain or great loss. It is inconsistent to maintain that a
good security does not need the speculative market, and
then to assert that we know it to be a good security be-
cause it is not an object of speculation. If these securities
were not listed their values would be by no means so cer-
tain. Under such condition the management might adopt
any policy and the investor be none the wiser. But let an
inactive listed stock become subject to any extraordinary
developments, and it quickly jumps into speculative prom-
inence.
Furthermore many of the quiet securities of to-day have
been active enough in the past. Each new enterprise must I
stand the test of criticism, and unless unusually sound will!
be the subject of active speculation. Its ups and downs
follow the changes of opinion, until gradually a continuous
flow of dividends of moderate amount show the stability of
the real value (or lack of dividends show the valuelessness)
of the security, and speculation ceases. The particular in-
vestment has been put through the ordeal and come out
whole. It then becomes a field for the private investor.
Many of the more active stocks of to-day may run the same
course, and fall into the honorable obscurity of certainty.1
1 The statement made by Lexis (see Schonberg's Handbuch, n, p. 880),
154 SPECULATION IN THE [436
Even the stability of governments is brought to the test
in the same markets. On the Stock Exchange the effect
of government action on wealth, regardless of other and
perhaps more patriotic motives, is inexorably registered.
A recent wave of belligerent feeling which swept the coun-
try in response to a presidential message was met by a
regarding the benefit of stock speculation, is so admirable that, in
view of his different final conclusions, it is worth quoting in full. He
says: " Bei der enormen Ausdehnung und Verbreitung, welche die re-
ellen Kapitalanlagen in Effekten in der neueren Zeit erhalten haben, ist
die Existenz eines stets offenen Marktes fur dieselben ohne Zweifel
volkswirtschaftlich zweckmassig. Dieser Markt aber wird um so leist-
ungsfahiger sein, um so leichter und bequemer die Moglichkeit des Kaufs
und Verkaufs jeder beliebigen Quantitat irgend eines Papieres darbieten,
je grosser das auf demselben stets verkehrende Publikum ist, mag das-
selbe auch hauptsachlich aus Spekulanten bestehen. Auch zur Unter-
bringung neuer Staatspapiere und Aktien leistet ein Markt, wie ihn die
Effektenborse darbietet, eine wirksame Beihilfe. Die Spekulation nimmt
das neue Papier vorlaufig auf und halt es so lange in einem flottierenden
Zustande, bis es gelungen ist, dasselbe mehr oder weniger vollstandig
zu klassieren, d. h. in die wirkliche Anlage uberzufiihren. Als einen
niitzlichen Dienst der Borse fuhrt man auch an, dass sie eine unausge-
setzte Kontrole iiber die Kurse der Papiere im Verhaltniss zu ihrem
inneren Werte ausiibe und dabei auch die Aussichten der Zukunft so weit
wie irgend moglich abschatze. Je mehr Spekulanten sich mit einem
Papier befassten, um so mehr Personen hatten ein Interesse daran, die
wirkliche Lage des betreffenden Unternehmens oder Staates zu ermitteln
und alle in Betracht kommenden Chancen abzuwagen. Die Privatper-
sonen aber, die ihr Geld in Effekten angelegt hatten oder anlegen
wollten, erhielten auf diese Art eine wertvolle Aufklarung iiber den wirk-
lichen Zustand und iiber die richtige Verwaltung ihres Vermogens."
So clear a statement of the argument in behalf of speculation on the
part of Dr. Lexis, makes his conclusion that despite these advantages,
speculation in securities does more harm than good, carry only the more
weight. At least, he is not blind to the strength of the opposite opinion.
Some dissent from the conclusions of Lexis has been expressed in the
text in anticipation of a discussion of speculative evils. The main point
which it is desired to emphasize is that regarding the utility of the specu-
lative market in the case of good securities. Lexis says: " Ebenso ist
unzweifelhaft, dass wirklich aussichtsvolle Aktienunternehmungen der
Beihilfe der Spekulation nicht bediirfen." The argument of the text, on
the other hand, is that it is the stability of such securities in an organ-
ized speculative market that proves their character to the investor. This
is too frequently overlooked.
43"] UNITED STATES
quick fall of prices in the stock market, just as a similar
wave of national enthusiasm in November, 1861, was met
by a fall in stocks then.1 Proudhon, in a brilliant passage,
traces the course of prices during the later Napoleonic
days and the Restoration, and shows how, in the midst of
enthusiastic patriotism on the part of the people, the
Bourse felt a rise of prices with every victory of the allies.
In the judgment of the Bourse, the success of Napoleon
did not make for the material prosperity of France.2
Finally; it should be remembered that the most uncer-
tain and risky security is always the favorite of the spec-
ulator. The wider the fluctuations the greater his oppor-
tunities. This is the essence of speculation, to seize
upon the uncertainties of value. It is easy, however, in
observing the course of such securities, to make the mis-
take of confusing cause and effect. The security does
not fluctuate wildly because of the great amount of spec-
ulation, but it gives rise to this active trading, because of
the complete uncertainty regarding its soundness. Spec-
ulation is a result, not a cause, of fluctuation.
That this directive influence of speculative prices is of \
genuine importance follows from the fact of the wide- 5
spread ownership of stock-exchange securities among the \
1 The New York Evening Post (semi-weekly ed., Dec. 23, 1895) , com-
menting on the Venezuelan incident, said: " It is the stock market which
at moments of popular delirium tells the truth. Plenty of men are alive
to-day who will recall the wild decline in values in the dreary December
market of 1861. That inexorable judgment followed swiftly on the out-
burst of jubilation at Faneuil Hall, at Cooper Union, and at Tammany
Hall, over Capt. Wilkes' shots at the English steamer. What the stock
market meant then was what sober history now records as the meaning
of the situation; that we were face to face with the most fearful crisis in
the history of the nineteenth century. Last week's stock market, with
its eye, as always, on the possibilities of the distant future, meant little
else."
* " Vingt francs de hausse ou de baisse font la legitimite ou 1'illegiti-
mite des pouvoirs, determinent leur stabilite ou leur chute. Qu'aurait
Pense de cela Blaise Pascal?" Manuel du Speculateur & la Bourse,
p. 25, sth ed., Paris. 1857.
1 56 SPECULATION IN THE [438
classes of moderate means. In thousands of cases the
total savings of an artisan, or a professional man of small
income, take the form of one or two bonds or a few shares
of stock. So active a stock in the speculative market as
that of the Western Union Telegraph Company some-
times proves to be was held in August, 1896, by 8,120
investors, while there were 4,085 shareholders of com-
panies whose lines are leased to the Western Union Co.,
in all 12,205 joint-owners of the Western Union property,
exclusive of the bondholders. The transfer books of the
New York Central, June 30, 1896, showed 12,680 stock-
holders of that company. Such figures as these show
how widely representative stocks are distributed among
small holders In view of them the idea that only the rich
capitalist is concerned with the prices of the stock ex-
change becomes untenable. The .price-list is of import-
ance to every small holder of a listed security, and is care-
fully watched by thousands who have no desire to
speculate. Stock-exchange securities furnish the best
available investment for a large portion of these holders.
Other classes of investors find an even greater benefit
in the stock exchange. These are particularly banks
trust companies, insurance companies, and the like. To
these may be added the whole class of trustees, who wish
above all else a safe investment. Much of the investment
of these companies takes a form different from the pur-
chase of stock-exchange securities, but there is always a
surplus to be invested according to the prices of the
speculative market. However much of the deposits of a
savings bank or the funds of an insurance company may
be put into mortgages or loans outside the stock exchange,
they must have some emergency investments which can
at any moment be turned into cash. Such are found
chiefly in securities of the stock exchange. Essential to
national banks especially is this quality of immediate con-
vertibility in the securities held. All of these investors
UNITED STATES
know that there is a continuous market for these proper-
ties, and a class of speculators ready to buy at the market
price. The value of one's property under such circum-
stances is always known. This makes all sacrifice sales
unnecessary.1 This is equally true of the individual as of
the bank. Any one who has tried to realize suddenly on a
security not dealt in on any exchange has experienced the
difference which such a market makes in the value of his
shares. However good they may be in themselves, there
is no certain price for them. Hence he can sell them to a
banker or broker only at a heavy discount from their real
value, and the reason almost invariably given is that, since
the stock is not listed, a large allowance must be made
for risk.
For the same reason stock-exchange securities form an
ideal collateral. Their importance in this connection is
very great. Indeed, it is hard to conceive of the credit
system and the money market of to-day existing without
the stock exchange. That they would undergo decided
modifications and be greatly hampered in their operations
without its existence, is beyond question. The whole
financial system which centers in Wall Street has become
dependent upon the easy flow of capital and quick con-
vertibility of securities, and both of these are largely the
result of the speculative market.2 The advantage to the
ordinary investor is of the same kind. His property is a
basis for easy borrowing, and enables him to get eighty
per cent, of his property, or even more, in a loan, while
on real estate, in which there is no speculation, he is glad
to get half its real value.3
1 Reierence is here made to sales by the investor. The most disastrous
sacrifice sales of all are those of the manipulator who has gone beyond
the limit of his capital.
« Cf. Struck, Die Effektenborse , p. 106.
3 The advantage of the Stock Exchange in making a ready market for
" call " money is important to the " street," if not more specifically to
society as a whole. The daily borrowings of money against stocks and
158 SPECULATION IN THE [440
In closing this section it may be repeated that this guid-/
ing principle which speculation affords in the economic
world is its response to new conditions of production. A*
hundred years ago the individual traders and producers
were the directors of the course of production and of the
employment of capital. The industrial revolution of the
last century began the change which the commercial revo-
lution of this century has completed. The risks are too
great, the conditions too complex, the Konjtinktur too
powerful, to be met by the old guides. The answer to the
change is the new guide in the speculative market. The
fact is sufficiently striking in connection with socialistic
criticism. It was the standing and doubtless powerful
charge of Lassalle, that modern industry is without order,
anarchistic, that production is carried on independently of
the consumer's demand, that it has become an end and not
a means ; hence the periodical awakening to the vast and
useless expenditure and the consequent crisis and panic.
The truth contained in this charge is perhaps, more than
any other thing, responsible for the intelligent converts to
the theory of socialism. The solution offered by socialism
is production in response to needs through control by the
State, which is itself to be sure of industrial harmony by
means of elaborate statistics. But theorizing apart, it is
to be expected on the ground of experience, that some
tendency toward correcting these evils of modern in-
dustry will show itself. Is it not appearing in the guise of
organized speculation? To the socialists from Lassalle
down, the Bourse has been the object of extreme vituper-
ation, and yet the socialist has been nearer right than many
individualists in recognizing the Bourse as a symbol of
modern commerce, as the center of the vast industrial
stocks against money in the settlements on the New York Stock Ex-
change, and the continuation dealings of London and the continent,
create an active market for a vast amount of capital that would otherwise
lie idle.
UNITED STATES
system which he denounces. It is there that he finds the
essence and consummation of all the commercial evils.
And it is there that he would also find, were he not
blinded, the essence of all the advantages of the modern
system. The good as well as the evil is here brought to
focus, and the cure as well as the malady is perhaps here
disclosed. It would be a dramatic reply to the socialist
if the object of his special horror, the Exchange, were to
perform in part the important directive function of his
economic state.
IV.'
IT remains to examine briefly the particular way in
which the speculative market performs its second function,
the assumption of risks. The trader is primarily con-
cerned with getting a profit from differences of price in
different markets. He buys in the producer's market and
sells in the consumer's. In a sense the same is true of the\
manufacturer. He buys material and labor, and attempts
to sell his product for something more than the cost of
production. This difference between markets is constant
and normal, and constitutes the reward for the services
of the middleman and manufacturer. To ensure such
normal profits, their desire is to escape the risks of fluct-
uation within the same market. This, to a large extent,
the speculative market enables them to do. In the first
place, the holder of any commodity may sell it to a spec-
ulator, if he fears a coming fall in value, or a buyer can buy
of a speculator for future delivery the actual commodity
he needs, if he fears a rise. But the speculative market
affords a better method of insurance by means of "hedg-
1 A large amount of heterogeneous information regarding the relation
of the speculative market to actual trade has been collected in the testi-
mony in regard to " options and futures " taken before the Senate Com-
mittee on the Judiciary, and the House Committee on Agriculture in
February, 1892, and in the Report of the Committee on Agriculture and
Forestry on Cotton Production and Consumption, 1895, 53d Congress,
3d Session, Sen. Rep., 986.
l6o SPECULATION IN THE
ing " transactions. Under this method, for every trade
transaction a corresponding transaction of the opposite
kind is made in the speculative market. If a man buys for
trade purposes, he sells short on the exchange an equal
amount, and covers this short line as soon as be disposes
of his first purchase. He has made two equal and oppo-
site transactions, and if the price moves either way he loses
on one and gains on the other. In this way he makes him-
self largely independent of speculative fluctuations. The
details of this practice may be seen from a hypothetical
case, which, though simpler than many actual trans-
actions, admirably illustrates the principle involved : '
"A New York merchant buys 100,000 bushels of No. I 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 as a merchant who believes that the Duluth price and the
cost of getting the grain to New York, in view of known or apparent
market conditions or of anticipated requirements abroad, will enable him
to sell the grain in New York at a profit. With a more primitive view,
he would ship his grain, wait until it arrived, look for a purchaser and,
finding one, sell the wheat at the price current at date 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. Thus, when the world's requirements are for large available
stocks, and the movement of grain must be in large lots, the future con-
tract comes in to protect the handler. The New York merchant, there-
fore, sells 100,000 No. 2 spring, September delivery, at Chicago at the
date of his Duluth purchase, in August. When the wheat reaches
Buffalo the price has advanced and millers there want some No. i hard
wheat. He sells them 25,000 bushels and buys 25,000 bushels of No. 2
spring wheat at Chicago, September delivery, to make good the origi-
nal quantity purchased. By this time he has also sold at New York
100,000 bushels, September delivery, to an exporter and bought 100,000
bushels more at Chicago, relying on the 75,000 bushels on the way and
his ability to get 25,000 bushels more before it is demanded, to keep his
engagement. When the 75,000 bushels of No. i hard spring wheat
reaches New York the price has declined fractionally, and the owner is
enabled, in consequence, to purchase 25,000 at a slightly better price,
relatively, than he had paid in Duluth, selling 25,000 bushels coincidently
at Chicago foi September delivery. He lost on his Duluth purchase and
1 Quoted from "Futures in the Wheat Market," by A. C. Stevens,
Quarterly Journal of Economics, Vol. II, p. 50.
UNITED STATES j6i
on the 25.000 and 100,000 bushel purchases at Chicago, and on the
25,000 bushel purchase at New York. But he made rather more than
corresponding gains through his sale, spot delivery, of 25,000 bushels at
Buffalo, including profits on his sales of 225,000 bushels for September
delivery at Chicago and New York, so that he gains on sales of 250,000
bushels and loses on the purchases of 250,000. The transaction as a
whole is not very profitable, but millers at home and abroad get wheat
at the lowest market prices at dates of purchases, the grain is moved
from Minnesota elevators to Buffalo and New York and the Glasgow
mill, and the merchant whose sagacity, energy and foresight led him to
aid in the undertaking, even when price conditions were unfavorable, is
able to protect himself from excessive loss without depressing the price
to the original holder, who represents the grower, and without having
an incentive (not to mention the ability) to unduly advance the price to
the consumer, as represented by the miller.''
The same method is adopted by the elevator men, the
exporters and the manufacturers. The big elevator com-
panies in the central markets are among the largest pur-
chasers of wheat. Curiously enough, the development of
the elevator system, which began as a separation of the
functions of trading and storing and looked toward a more
complete division of labor, has resulted in an opposite
tendency. The big elevators once constructed could not
remain empty, and their owners perforce turned buyers in
order to utilize their capacity and earn storage. It is clear
that these enormous holdings, for long periods, would
under the old method involve tremendous risks. Imagine
an elevator company holding 5,000,000 bushels of wheat
against the fluctuations of the market for several months.
Conservative business would be impossible. Now, how-
ever, these risks are all thrown on the speculative class.
The same is true of the millers. Millers own large
stores of wheat in country and terminal elevators, which are
insured by the same process. As soon as the miller buys
in the country, or elsewhere, for grinding purposes, he
sells an equivalent amount by telegraph on some exchange.
Then when he disposes of his flour, he covers at the same
moment his hedging sales by corresponding purchases.
Since flour in the main fluctuates with the value of wheat,
1 62 SPECULATION IN THE
this affords nearly complete protection. The manufac-
turer of cotton, on the other hand, usually protects him-
self by purchases. Spinners do not hold su-ch large stocks
of their raw material as do the large millers/ and often sell
their product for delivery at home or abroad at some
future time, while not in possession of any cotton at the
moment. Immediately on placing such an order, pur-
chases of the required amount of cotton may be made on
the Cotton Exchange, and as soon as the spot cotton for
manufacture is secured, the long interest on the exchange
is sold out. The spinner is insured by his purchases, as
the miller by his sales.
This practice of hedging is now universal in the trade in
grain and cotton. Not to hedge, is considered the most
reckless kind of business among large dealers and millers.
That is, the man who keeps out of the speculative market
is said to be a speculator. The spinner, however, uses
the " future " market much less than the dealer or miller.
Dealers and exporters hedge all their purchases. Nine-
tenths of the cotton shipped to Liverpool is hedged there
or in New York. Probably over ninety per cent, of the
great wheat holdings in the elevators of Duluth and Min-
neapolis are sold against in this way. Some of the most
prominent elevator men of Chicago claim that every bushel
which they buy for storage is invariably protected by a
hedging sale. It may be that the men who control the
elevator companies are independently " plungers " in the
market, but this has nothing to do with their regular ele-
vator business. Some millers or elevators may also carry
a small amount, as a legitimate speculation ; but in the
main the rule of the trade is, to insure everything at all
times and under all circumstances. It may be that in ex-
1 Some millers, especially those with insufficient capital, carry little
wheat and buy from day to day. If they sell flour ahead they insure in
the same way as the spinner.
44-j UNITED STATES 163
ceptional cases insurance is impracticable. For example,
a miller who grinds an unlisted quality of wheat grown in
so small an area that it fluctuates independently of contract
wheat, may not be willing to insure for fear of losing at both
ends of the transaction. This is perhaps still more true of
the spinner using particular qualities of staple. For such
persons the speculative market is of doubtful advantage.
Under these conditions the ultimate profits of the dealer
or exporter depend both upon the prices in his hedging
transactions and the prices in his trade transactions. In
the first place he finds he can buy his wheat or cotton at
a certain price: then he must choose the best market in
which to hedge. This is his first calculation. In the case
of cotton, it may be in Xew Orleans or New York or
Liverpool. In the case of wheat it may be in New York
or Chicago or St. Louis, or the Northwestern markets, or
even in Liverpool.1 When now he comes to sell his real
commodity, he must cover his short sale in the market
where it was made, but he may sell his commodity in any
market at home or abroad entirely apart from any ex-
change. Here comes in his second calculation. Spot
markets are always varying a little in price, due to differ-
ences of local demand, changing freight rates and so forth.
These factors all determine the place of ultimate sale and
the amount of profit. In any case this profit is now purely
a trader's profit. The chance of speculative gains or
losses from wide fluctuations has disappeared. It may be
that instead of making more on one transaction than he
1 This possibility of hedging in distant markets shows the futility of
comparing the amount of sales in a single market with the stock held
there. The sales in Chicago represent wheat transfers all over the world.
It is the great hedging market, the world's clearing-house for grain. An
exporter sending wheat from Odessa to Liverpool may protect himself in
Chicago. The same is true of the New York Cotton Exchange. The
actual buyers, domestic and foreign, are more and more going directly
into the Southern markets, and every transfer may be represented by a
sale in New York.
164 SPECULATION IN THE [446
loses on the other, the reverse may be true, in which case,
however, the loss is a trader's, not a speculator's loss.
A difference of quality may be important in determin-
ing profits. An exporter may buy cotton for delivery at
Memphis, and hedge in New York. If he meets with a
demand from some European spinner for that particular
grade, he may sell to him at a good figure, while perhaps
covering his New York contract at a low price for Mid-
dling. If there is no good market for his grade at the
Southern ports, or abroad, he may find it better to ship
to New York and deliver on what were originally in-
tended for hedging contracts. Particularly is this true
when his cotton proves to be of an inferior quality.1 In
the same way, when elevator companies have sold against
their wheat in the market where it is stored, they will
either deliver on their sales, or cover and sell later for
cash, according to the conditions of spot and future
prices at the moment.2
The transfer of hedges from market to market, according
to the particular advantages offered at the moment, re-
sults in a genuine arbitrage with a strong leveling ten-
dency. This is an important part of the arbitrage business
in produce, while "scalping the markets" in this way fur-
nishes at times a considerable part of the profit of the great
holders of wheat, especially the elevators. The same kind
of business goes on in cotton between New York and New
Orleans. Hedges are constantly renewed, and every fluct-
uation taken advantage of. This renewal of hedges is
1 In the classification of cotton for futures the character of the staple is
disregarded. In spot prices it is important. Hence whatever grades
come to New York, the cotton is generally of indifferent staple.
'Their action in this regard is also largely determined by the nearness
of the delivery time to the crop movement. For example, Northwestern
elevators usually switch their December contracts into some other month,
but may meet May and July contracts by delivery.
UNITED STATES 165
necessary if wheat, or cotton, is long held. The way the
miller or dealer avoids the danger of being squeezed on
his short sales is by always keeping his hedge in a distant
option. If as the option approaches he is still holding
his wheat, he shifts his hedge to some other month.
With the complete shifting of risks of violent fluctua-
tions to the shoulders of the speculative class, the margin •
of profit between producer and consumer has become very
much narrowed. Under the old methods of forty years
ago the trader had to allow a margin of five or ten cents
or more a bushel on wheat to cover a possible fallin value.
To-day traders will carry wheat on a margin of a fraction
of a cent, and the allowance for risk is practically nothing.
Indeed sometimes a dealer will buy wheat in the country
at the same relative price at which he makes his simulta-
neous sale on the exchange, trusting to the later transac-
tion for his profit. In the same way the margin between
wheat and flour has been reduced from more than fifty
cents to less than ten cents a barrel. The cotton dealer
and the exporter will now buy within fifty cents per bale
of the price in the central market where formerly a margin
of $2.50 or $3.00 per bale was required. Sometimes
cotton is even bought in the South and hedged in Liver- j
pool at the same relative price. This reduction of the!
middleman's margin inures to the direct advantage off
either the producer or consumer, or of both.
It may be said then that the broad result of the specula- 1
tive system to the manufacturer, the trader and the ex-
porter, who insure themselves in this way, is to minimize
their risks, and at the same time to diminish their profits.
No line of business can long maintain big profits without
taking big risks. Under this method of insurance, the
grain and the cotton trade, together with the manufac-
turing of these raw products, have become far less sub-
ject to risk of great loss than almost any business of equal
1 66 SPECULATION IN THE [44g
magnitude.1 In calculating profits to-day, however,
every fraction must be counted and every possible saving
made. The smaller fractions in the quotations for cotton
and wheat are significant of this condition.
In view of such considerations it is the declared opinion
of some traders and millers that the future system is an
injury to trade, and that the old method were better
adopted anew. The forces, however, which have brought
about the existing system are far too strong to be turned
aside by any desire for greater profits. And in any case
it is the success with which the future market has per-
formed its function that is the cause of the complaint. It
is a choice between safety and profits, and there are some
who believe that the reduction of profits is too high a
price to pay for the increased safety. It should not be
overlooked, however, that, under the new conditions of a
world market, the fluctuations and uncertainties of trade
without the future system would be far greater than ever
before. All trade in these commodities would be spec-
ulation.2
./^Finally, the effect of the speculative market on the facili-
ties for borrowing may be noted. The value of wheat re-
ceipts, if margins for fluctuations are kept good, is a prac-
tical certainty. Consequently they are the best collateral
1 Henry Hentz, Esq., of New York, in a communication to the Senate
Committee on Cotton (op. tit., vol. I, p. 475), writes: "Before the
' future ' system was inaugurated the credit of cotton people was gener-
ally poor, in consequence of the violent fluctuations and losses. There
has not been an important failure in cotton in New York or Liverpool,
barring those of Morris Ranger and Mr. Steenstrand, of Liverpool, for
many years past, simply because people can ' hedge ' their operations by
futures and stop their losses."
2 Kohn, curiously, asserts that without speculation the merchant would
be a mere transmitter of goods, while under speculation he is the director
of commerce (op. tit. , p. 162) . The facts are exactly the reverse,— with-
out the guidance furnished him by the speculative market, the directive
functions of the merchant would be increased.
UNITED STATES 167
in the market. Warehouses are bonded, which insures the
holder against fraud ; while the desire to maintain the
reputation of their receipts at times leads elevator com-
panies to assume all loss from shrinkage. Hence credit
is greatly facilitated by the speculative market, and money
can be secured on wheat receipts, when all other collateral
is doubted. It is hard to see how the crops could be
moved to-day without this system. The great purchases
by the elevators, for example, require large amounts of
capital, and the first receipts are used to get money for the
next purchases, and so on. A dealer can borrow within
ninety per cent, of the value of his receipts.
An interesting question in this connection is the extent
to which the farmer uses the speculative market to avoid
risks of changes in value. It has been seen that as the
trading class took over much of the risk of the producer,
the speculative class arose in turn to relieve the trader of
his most dangerous risks. Hence it is not to be expected
that the direct advantage of the speculative system to the
producer will be as great as to the trader. Theoretically,
however, he may make use of it in the same way, that is,
he may sell his crops ahead (while still growing) when-
ever a good price offers, and thus free himself from the
danger of falling prices. Doubtless some such selling
takes place. Figures were presented before the Senate
Committee on the Judiciary in the evidence concerning
" options and futures " in 1892.' showing the answers re-
ceived to a circular letter, sent to representative farmers
and grain men in various sections, in which letter this
question was asked, ;> What proportion of the farming
community sell their grain for future delivery? " Of 413
answers, 156 answered none; 210, one-fourth ; 27, one-
half ; and 20, three-quarters.
Too much weight should not be attached to such fig-
'P. 84.
1 68 SPECULATION IN THE [450
ures, since even so simple a question as that in the above
letter is variously interpreted by different correspondents.
Assuming them to be correct, however, it is not to be
supposed that the selling for future delivery referred to
there means selling on the exchanges. Only a few large
farmers can sell their crops in the speculative market.
The difficulty of trading at a distance and through brokers,
the impossibility of predicting the size of the crop or the
grade which it will attain, all these things make it difficult
for the average farmer to make any such transactions.
Furthermore, the sales on the Chicago Board of Trade
are in 5ooo-bushel lots, and the majority of the farmers
are unable to command such quantities for a single sale.
So far then as the farmer sells for future delivery, except-
ing a few large farmers perhaps, it is by an informal ar-
rangement with his local dealer to take the crop at a
certain price, with due allowance for grade and the like.
Such dealings, however, cannot attain very large propor-
tions, since the dealer runs the risk of a non-fulfilment
on the part of the farmer in case of an advance in price.
Although these sales are not made in the speculative
market, it should not be forgotten (as is so frequently
done) that they depend on that market and could not be
made without it. It is only because the dealer knows for
just what price he can himself sell to the speculators for
future delivery, that he is able to make a price- for the
farmers. In the main, however, these sales are not of very
great importance. It is fair to say that, as a class, the
farmers do not sell for future delivery. The most com-
mon practice is to bring the wheat when harvested to the
nearest elevator and sell for cash and at once. The far-
mer is as little likely to pay storage charges as to sell for
future delivery.
In the case of cotton a better opportunity for using the
future market is afforded the producer. He may sell on
the exchange without specifying any grade, while the large
4c j J UNITED STA TES 1 69
planter finds it possible to sell in the prescribed quanti-
ties. So far as such sales are made by the large grower,
and they do occur to a considerable extent, they are not
as a rule fulfilled by delivery, but are used, as by the
trader, only for insurance. The actual cotton is sold in
the local market. The majority, of cotton growers, how-
ever, do not use the future system at all.
The farmer sometimes comes into the speculative mar-
ket in quite another way. He always hopes for better
prices for wheat, or cotton, or whatever his crops may
be, and an advancing market often tempts him, not only
to hold his stock, but to buy on margin. This is purely
speculation and is utterly bad for the farmer. It is gen-
erally believed that the Southern cotton growers lose
large amounts in this way. The farmer is entirely in-
capable of judging wisely concerning the future price of
his own products, a price determined by world-wide con-
ditions. That he is foolish enough to try, like any other
little speculator, to " play the market." should not be
charged against the future system. As a farmer he has
no business to buy wheat or cotton. If he is able to sell
ahead on a good market to insure his actual crop against
a fall in price, he makes a legitimate use of the specula-
tive market.
If, however, the producer derives little direct benefit
from the future system, he derives much indirect benefit.
The lessening of the charges of the middlemen, gives him
a price much nearer to the consumer's market, in fact
nearly identical with it, except for cost of transportation.
Furthermore, speculation increases the activity of the
market, and an active market increases the demand.
There must be a large basis of actual wheat in the spec-
ulative centers, while the increased safety of the trader's
business makes him a much more confident buyer.
Without the possibility of hedging, the uncertain condi-
SPECULATION IN THE [452
tions of wheat and cotton buying would at times cause a
^complete cessation of actual traders' demand. Nothing
is so effective in doing away with gluts as the continuous
market in which the dealer may always dispose of his
holdings to speculators if he fears a fall. In fact, it is be-
cause they believe that without the speculative market
they could buy, during harvest, at better rates, that some
millers and spinners are opposed to the future system.
But better rates to the manufacturer mean poorer rates
to the producer. It is also true that the chance of tem-
porary high prices from a local scarcity has gone, but
this is not so much the work of speculation as of the rail-
road and telegraph.
X" Finally, the speculative market is the cause of the ease
(with which the farmer gets credit. He does not own
warehouse receipts for collateral, but the existence of the
continuous market for his product enables him to borrow
readily against his crop. The trader advances money
freely against the crops, but only because he can keep
himself hedged. With the shiftless farmer, especially the
small grower in the South, this form of borrowing has
proved ruinous. But in this case, as in many others,
what is an evil for the incompetent, is a boon to the
industrious.
CHAPTER V.
SOME EVILS OF SPECULATION
THE tendency of speculation is to lessen market fluctua-
tions and to establish prices which correspond to actual
conditions of demand and supply in all places. On the
other hand its activity depends upon the existence and
continuance of fluctuations. The personal interest of the
speculative class is not advanced by the increasing steadi-
ness of the market. In the case of each speculator at
any particular moment, the movement of price in one.
direction, regardless of the ultimate value of the prop-
erty, is essential to his success. Consequently there are
in the speculative market counteracting forces which
sometimes seriously obstruct its normal influence on
price. The evils of speculation which receive the largest)
amount of comment center about this fact.
If a speculator has sold property short he wishes the
price to go down ; if he has bought, he wishes the price
to go up. It is popularly supposed that he can make the
price go in the direction he chooses by means of "manip-
ulation." Manipulation, however, is not a mysterious
process, but rests on intelligible economic laws. Confin-
ing the discussion now to the market for produce, it may
be said that a speculator can influence price in only two
ways. He must either buy or sell the commodity him-
self, or he must persuade others to buy or sell. In the
committee hearings on the recent anti-option bills a dis-
tinguished senator attempted to prove the depressing in-
fluence of short-selling on prices by reiterating the ques-
tions : (i) If a man has sold short, will he not wish the
453] 171
172 SPECULATION IN THE [454
price to fall, and (2) if so, will he not use all his power
in this direction ? But the short-seller has already exerted
his influence by his sales. If he wishes the price to fall
further, he must still continue to sell at constantly lower
prices, or must start a selling movement among others.
It is true, however, that with sufficient capital a spec-
ulator may be able to bring about such a result. He may
at times sell a commodity in such enormous quantities as
to reduce the price. The question is whether he will be
likely to attempt it. The first difficulty is that his cover-
ing purchases are the same in amount as his original sales,
and that they exert the same influence in raising the price
which the sales exerted in depressing it. In this case the
average of his purchasing and of his selling prices may
about agree, and his risk have been taken for nothing. The
same is of course true of the attempt to raise the price by
heavy purchases and then to liquidate with profit. But it
may be that the action of the operator brings about a
general movement in the desired direction. If a decline is
started by heavy sales, the public may become excited and
enter the market to sell. Most effective of all, those who
are already long in the market may get panic-stricken in
view of the fall, and unload their holdings at almost any
price. In this case, too, the attempt to cover later may
frighten the short-sellers in turn, and an upward move-
ment may result, as abnormal as the earlier decline. Never-
theless it sometimes may occur that a big operator, or
group of operators, temporarily succeed in putting the
market down and in making the covering purchases so
quietly and skilfully that the price is not materially raised.
The mistake is in thinking that a successful operation of
this kind can be easily or frequently accomplished. It
requires immense capital, coolness and courage, and the
greatest practical skill. To put out an enormous short
line and cover it without causing a " bulge," is a remark-
UNITED STATES 173
able feat of manipulation. Indeed it may be doubted if
such an operation can ever be successful without the favor
of luck, such as the appearance of unexpected crop con-
ditions, to support the manipulator at the end.
This element of crop conditions introduces the second
great difficulty in the way of such manipulations. Not
only is it difficult to cover successfully after a factitious
fall, or to liquidate after a factitious rise, but the original
movement is equally difficult. There are both bulls and
bears in the market, and any attempt to force the price
one way or the other will be at once opposed by the sales
or purchases of those who believe that the incipient move-
ment is contrary to the actual conditions of crop or of
consumptive demand. Speculators are equally ready to
profit from a rising or a falling market. They know that
in the end the conditions of actual demand and supply
determine the price, and are not induced to forego acting
on their opinions because of large transactions on the
other side. A price movement may prove to be incorrect,
because the speculative judgment is fallible, but such a
movement must, in the main, represent the real market
opinion on the condition of demand and supply.1
A particular form of manipulation, which has excited
far more adverse comment than, from the economic point
of view, it deserves, is the " corner." The indignation
which it arouses is a part of that deep-rooted feeling
against any combination to raise prices which has come
down from the time of the old statutes against engrossing
and regrating. The modern corner results from an
" oversold " market. If a syndicate is formed to buy all
the offerings of the short-sellers, and can so control the
supply that the sales of the shorts exceed the amount of
the commodity available for delivery, it is evident that
the price can be put up to almost any extent. The shorts
1 Cf. Report of th? Chicago Board of Trade, 1891, p. xvii.
174 SPECULATION IN THE [456
are forced to purchase from the syndicate. This kind of
corner is much more effective than the old method of en-
grossing the actual supply and raising the price to the
consumer. The consumer can postpone his purchase; the
short-seller must buy to deliver within the stipulated time,
or default. At the same time the speculative corner is
temporary and, so to speak, incorporeal. In the specula-
tive market it is not wheat that is cornered, but " Sep-
tember wheat " or " May wheat.'' It is necessary only to
control the supply till the short-contracts mature. Con-
sequently the price remains high only for the last few days
of the delivery month, while in other markets the price is
little affected. It has already been noted that during the
September wheat corner in Chicago in 1888, the New
York price rose only a few cents. The consumer, then,
is not perceptibly injured. The only direct loser is the
speculator, but indirectly trade is temporarily disarranged
by the abnormal condition of the market.
A successful corner is of very rare occurrence. Most
attempts in this direction have miserably failed. Further-
more, such attempts are becoming more and more infre-
quent, and success more difficult. It is a common saying
in both the grain and cotton markets that the corner is
a thing of the past. The difficulties of getting hold of
the wheat supply or the cotton supply even in a single
market, for a few days, are enormous. The invisible
supply always proves larger than was anticipated. It
pours out from small holders in all quarters, while enor-
mous shipments can be made from central points. If it
be known a week or ten days before the end of the month
that a corner is on at Chicago, the wheat of Minneapolis
and Duluth and St. Louis can be poured into that mar-
ket with astonishing rapidity.1 At least two attempted
1 The way in which the actual commodity accumulates in the market
where a corner is attempted, is sufficient answer to the charge that these
UNITED STATES
corners in Chicago have been broken by the sales of the
North-western millers. Furthermore, if the heroic remedy
of short-selling is adopted, the cornerers will be obliged
to take not only the real supply, but the "fictitious " supply
as well. This, of course, is dangerous for the shorts, but it
may prove the only way of breaking the corner. Under
these conditions it becomes a contest of capital and nerve.
Besides all these difficulties besetting any attempt to
control the supply for purposes of a corner, the lessons
of the past have made the short-seller more wary about
getting caught in an oversold market.
In the case of cotton, a corner is made more difficult by
the fact that on short contracts several grades are deliver-
able. In the case of wheat, grades higher than the con-
tract grade may usually be delivered, but only at the con-
tract price. It has been suggested that other grades be
made deliverable, with allowance in the price for differ-
ences in quality. This might cause great inconvenience
to millers and traders wanting a particular quality of
wheat, unless allowances were so fixed as to permit of
such deliveries only in case of a speculative "squeeze."
It is not in the big movements, but in the half corners
or " squeezes," that manipulation is most effective, and the
same is true of bear manipulation on the other side of the
market. \Yhen such manipulations do take place, it is
due to the force of capital on one side, and a temporary
lack of courage or of capital on the other.1 The cure for
manipulation in either direction is manipulation in the
other. The more active the market is, the more probably
an operator will find himself opposed by vigorous trading
movements involve nothing but " wind " or "contracts." In the at-
tempted wheat corner of 1887, in Chicago, the storage capacity of Chicago
was utterly inadequate for the supply. Cf. A. C. Stevens, Quarterly
Journal of Economics, II, p. 56 et seq.
1 Cf. Eschenbach, Zur Borsenreform, p. 5. Eschenbach, however,
greatly exaggerates the power of capital in this direction.
1^6 SPECULATION IN THE [ , -g
the other way. The fact that so few cliques have ir.arie
money in attempting to force the market in one way or
the other shows the difficulty of the undertaking.
It may be said that, if big manipulations are seldom
successful, there is a countless succession of small move-
ments up or down due solely to speculative conditions.
This is true enough. In a sense all speculation is manip-
ulation. There is always more or less effort to affect prices
by purchases or sales, but the equilibrium of all these
forces registers the opinion of the market as a whole.
So far reference has been made only to the employment
of honest methods in the attempts to turn the market.
Other methods of a far different nature are not unknown.
Among the most common of these is the spreading of false
intelligence. In the desire to start the public buying or
selling, false rumors of events affecting values may be cir-
culated. Such conditions are not unknown in the produce
market, but the stock exchange affords an easier field for
this and other evil practices. This is due to the fact that
in the place of a half-dozen products of wide production
and universal demand, the stock exchange presents a
large number of securities of different kinds. The facts
of crop supply, though they may be more accurately
known by a few, are yet to some degree open to the
scrutiny of all. But many of the numerous events that
may change the value of a particular security can be
known only to the insiders. Hence the temptation to
spread false rumors is very great.1 The very sensitive-
ness of the market to every event which really affects
values makes it equally sensitive to every rumor. Every
1 Probably nothing new has been learned in the art of spreading false
intelligence since the earliest days of speculation. Those were the days,
above all, of the political rumor. See the instances cited in The Anatomy
cf Exchange Alley '(1719) . Cf, also Francis, Chronicles of the Stock
Exchange, chs. ii and iii.
UNITED STATES
possible occurrence is seized upon as an excuse to stim-
ulate a new movement on the part of the public. Perhaps
the evil is inseparable from the good, and in the main the
stock exchange discriminates between false and true
rumors more quickly and effectively than any other body.
Nevertheless the power of such operators to deceive the
public is productive of much harm. Bradstreefs, writing
of the stock market, says:1 "All of its votaries are not
equally skilled in discovering the quality of any piece of
news, or supposed news, nor are the rules of the game so
stringent that the operator who can mislead his fellows or
opponents without resorting to downright falsehood, is
frowned upon with any severity . . . Something of the
same kind might be said about every successful operator
who ever graced Capel Court, Wall Street, or the Frank-
fort or Paris Bourses. These examples, however, refer
to the misuse of intelligence on a large scale — wholesale
deception it might be termed." It may be added that the
operator does not stop at " resorting to downright false-
hood.'' The fact that the financial columns of some news-
papers are purchasable for the insertion of such " news,"
blackens still more the nature of these operations.
Another method that may be resorted to is that of
" wash sales," or "washed sales." If an operator wishes
to make false prices on the floor, he may employ one
broker to sell to another broker at prearranged prices.
The price stands as a quotation, though the transaction
is entirely fictitious. Such conduct, it is needless to say,
is economically and morally indefensible. Wash sales are
forbidden by all the exchanges, but, except in flagrant
cases, it is very difficult to detect them. In the case of a
clique operating together, some members may sell to
others and accomplish the same result. Similar practices
occur without the collusion of brokers, that is, one set of
1 " Rumor Mongering in the Stock Market," Bradstreef ' s , Jan. 29,
1893-
1 78 SPECULA TION IN THE
brokers may be employed to sell and one to buy the same
security in open market. The chances are that they will
make their transactions together, in which case the
operator has accomplished the same result as before. This
is also a convenient method of giving a false appearance
of activity to the trading in new securities in order to
induce speculation or investment by the public.1 In such
cases the conduct of the broker may be blameless, despite
the tricky device in which he is made to take part.
There is one evil of stock speculation which is impossible
in the case of produce. The value of wheat, or of cotton,
depends upon conditions which are entirely beyond the
control of a few men. The value of a security, on the
other hand, depends largely upon the policy of a group of
directors. If they wish to speculate in the shares of their
own companies, they are in a position of extraordinary
advantage. By means of one line of policy or another, com-
bined with the use of false information to the public, they
may move the price to suit their private purposes. It may
be that they will wreck the company in order to secure a
permanent control of the property at a low price ; or that
they will destroy its credit in order to cover their own
short sales ; or that generally they will manipulate the
price back and forth with a view to alternate profits.
Speculations of this order constitute the worst evil and
the most flagrant scandals of the stock exchange. They
have occurred in various securities, most openly in recent
years in some of the industrials of the " unlisted depart-
ment." The New York Stock Exchange admits to its
" list " the stocks and bonds of a corporation, after an
examination of its nature and status. The examination
is fair, but it aims only to prove the legality of the organ-
ization, that it has a basis in fact, that the securities are
legal and properly guarded against fraud, etc. Once
1 Cf. Bradstreef s , April 4, 1896.
46jJ UNITED STATES 179
listed, no further examination is required. The fact of
listing is in no sense evidence that a company is financially
sound. Not content with this easy method of getting
securities on its list, the New York Stock Exchange has
established an " Unlisted Securities Department." Secu-
rities may be admitted to this department without being
subjected to any examination at all. They may, however,
be bought and sold, be quoted, and admitted to clearing
like any other security. If the Stock Exchange is to
make any pretense of examining securities for " listing,"
its unlisted department is utterly anomalous. It can hardly
be said, however, that any practices are possible in un-
listed securities which have not been used in the case of
those of the regular list. The " industrials " on the
regular list have not all been above reproach, while the
scandalous operations in %' Erie " in past years, show what
may be done in the way of railroad " financiering." But
whether or not the unlisted department affords a greater
chance for dishonorable promoters and managers to prey
upon the public, it has helped to bring the Stock Ex-
change itself into disrepute.1 This is most regrettable.
An institution which is the center of the financial life of the
country, and which fixes the value of properties for many
thousands of innocent investors, should stand high in the
public estimation. The members of the Exchange cannot
now be heard to say that the public has no concern with
its practices or position. It has become a quasi-public
institution, and as such it has public duties and is a proper
object of public criticism, perhaps even of corrective
legislation. Referring to the earlier nature of the Stock
1 The avowed purpose of the establishment of this department was to
afford a market for ''Trust Co. receipts " of securities lodged with them
pending reorganization. This process was then comparatively new, and
experience was necessary to determine the best means of affording a
market to the holders of securities of roads in default. In view of the
subsequent history of the department, many members regret its original
introduction.
l8o SPECULATION IN THE
Exchange as a private association of small importance,
Bradstreefs says : '
"All these conditions have now changed, but though the business in
which the Exchange engages has an enormous and direct effect upon the
general financial prosperity of the country, the institution steadily adheres
to its old-time position in many things where a more liberal view of the
inherent obligations to the public would certainly strengthen the stand-
ing of the Exchange itself.
" In nothing does this appear more clearly than in the admission of
corporation securities to the ' lists ' of the Exchange, or their retention
thereon. At present, as in the past, the board assumes no responsibility
for the character of the concerns in whose stock or bonds it deals. It
simply requires that when a stock is listed its officers shall show that the
company is duly organized, has a proper transfer office, and that the
certificates are engraved and issued under restrictions which prevent
forgery or over-issue. Beyond this it refuses to go, leaving it to the pub-
lic to decide whether it will deal in the securities or not, and what degree
of misfortune or positive misdoing will destroy the market for a corpora-
tion's stock or bonds.
" It is of course impossible for the Exchange or for any other body to
charge itself with the supervision of a multitude of ' companies,' or to
maintain a close watch upon the doings of their managements. Never-
theless it would certainly have the support of public opinion if it required
every corporation whose securities were on the lists (either railroads or
industrial concerns) to furnish to the Exchange and the public periodical
statements of their financial operations and condition. Public sentiment
has already exacted this from nearly all the railroads, but the lesson of
the Cordage Company's collapse is that if the Exchange had done its
duty and adopted regulations which would have forced such concerns to
periodically exhibit their balance sheets, it would have been known in
time that one of the apparently most prosperous organizations did not
possess an adequate working capital.
' ' Even more obviously is it the duty of bodies of this character to take
care that the facilities which they present are not misused to the detri-
ment of the public. A recent occurrence in connection with the man-
ipulation of the stock of the Distilling and Cattle Feeding Company
(usually called the ' Whiskey Trust') gives point to this. The stock of
that concern has been the occasion of more or less scandal ever since it
appeared in Wall Street, and was admitted to dealings on the board.
When, however, as in the present instance, it is alleged that ' insiders
are ' short ' of the stock, and alleged news that the concern is to be dis-
rupted is put forth — the inference which the whole street draws being
that it was done to facilitate the covering of these ' short ' contracts— it
is certainly time for interference from somebody. In this or similar
cases the duty seems to rest on the New York Stock Exchange to ascer-
1 " Stock Exchange Duties," Brads f reel's, May 27, 1893.
UNITED STATES l8l
tain whether the management of such a corporation is governed by
methods or morals which justify the Stock Exchange in allowing the
Suock to remain upon its lists." '
Nothing is more needed in the speculative market than
that the highest standard of honor and good faith in the
membership of the Stock Exchange should find expres-
sion in its policy, and that the duty of the Exchange to
the investing public should be recognized as more im-
portant than the volume of commissions.2 It is interest-
ing to note in this connection a recent experience of the
New York Stock Exchange in its attempt to force a
prominent industrial trust to make a statement of its
condition. The request was refused by the directors, and
the matter was quickly allowed to drop. At the time the
securities of the trust in question furnished to the mem-
bers a large part of their business. To have removed
these securities from the board would have seriously cut
commissions, while other exchanges might have profited '
by the change. Such considerations were more powerful
than the desire to maintain the dignity of the Exchange.
It would, doubtless, be very undesirable for the Stock
Exchange to take such a stand regarding securities listed
as to lead the public to consider the fact of listing as in
any way a guarantee of their safety for investment.3 It
1 Cf. The London Economist, Nov. i. 1800.
* The London Economist (March 5, 1892,) says: " The position which
the Stock Exchange Committee have persistently maintained in regard
to the rules they have to enforce, is, in our opinion, wholly indefensible.
They hold that the ' Rules and Regulations ' which have been drawn up
for the ; conduct of business' in the ' House ' affect the members alone,
and the public practically have no more to do with them than they have,
say, with the regulations of a private club. But the Stock Exchange is
something very different from a club, for it not only enjoys a species of /
monopoly, but holds, in consequence of its relations with the public, a
position of an almost quasi-official nature." Cf. Economist, Nov. 30,
1889.
•"• Cohn ( Britrage zur deutschtn Borsenrefonn, p. 21) suggests some
kind of oft:cial examination of the condition of certain companies for the
benefit of the public. Some such scheme is in fact carried out in the new
1 82 SPECULATION IN THE
is the business of the speculators themselves to determine
values. But however poor a security is admitted to trad-
ing, the Exchange should at least make greater efforts to
protect the public against dishonesty and fraud.
Even where no use of dishonorable methods is made,
there is greater opportunity for manipulation by means of
capital in the case of securities than in the case of pro-
duce. The market for a single security is so much nar-
rower than for one of the great staples that determined
buying or selling by one operator is much more effective.
It is easy, however, to exaggerate conditions here. Many
of the most active securities represent a capital of such
enormous proportions, and so widely distributed, as to
make individual control (without speculative manage-
ment) practically impossible. No corner, for example,
could occur in such securities. On the other hand, the
experience of the past has taught bears to be wary about
selling any security of small amount. In fact, a corner on
the stock exchange is about as improbable an occurrence
as on the produce exchange. Even in the past, success-
ful corners have been very few. The difficulty of making
them successful is that even if the " cornerers " catch the
shorts they are left with a vast amount of stock bought
at high figures which they seldom can unload without
loss. It is too dangerous an experiment to lead many to
attempt it.1
In the case of floating new enterprises of a fictitious
nature, by which a few promoters profit at the expense of
German statute, following the recommendation of the Commission of
1893. For any state official to undertake such a task would be extremely
dangerous. The public does not discriminate between an opinion and a
guarantee.
1 " In general we conclude that the importance often attached to these
syndicates is greatly exaggerated. . . . Their power is exercised at great
risks to themselves, does not upset any general laws, and does not inter-
fere with the general levels of price which these laws tend to establish at
different times." Giffen, Stock Exchange Securities, p. 59.
465] UNITED STATES ^3
the public, it is believed that conditions are also improving.
" Such operations can be successful," says the Commercial
and Financial Chronicle,1 " only so long as the public
stands ready to take the securities emitted. In other words,
the co-operation of the public is necessary to carry out
such schemes. Twelve or fifteen years ago it was possible
to float almost anything. . . . But the situation has now
completely changed. In the interval since then the public
has had some bitter experience and has learned some pain-
ful lessons. . . . Therefore the undertakings for the issue
of fictitious capital now lack one of the main elements to
their success. As a matter of fact the operation described
has not been carried on to any important extent in recent
years. It belongs to a past era."2
In the matter of new enterprises the conditions in the
United States have always been better than in England,
both because of different legislation regarding organiza-
tion, and because of the different methods of introducing
the securities to the stock exchange. On the London
Stock Exchange this is done by means of " dealings be-
fore allotment." 3 The stock of a new company may be
bought and sold for future delivery before it is distributed
to the subscribers at all. This is a prolific source of evil.
The promoters may bid up their own shares and cause a
premium in the market in order to induce the investor to
subscribe more readily. On the other hand, a rival con-
cern may bear the stock of a new company and keep it
from getting the necessary subscription to provide capi-
tal. If the promoters can catch a considerable short line
out they may allot the shares in such a way that the
shorts cannot secure them, and thus effect a corner.
'June 29, 1895.
; Cf. the London Economist, Sept. 30, 1893.
3 The subject of dealings before allotment formed the chief point of
inquiry ot the Stock Exchange Commission of 1878, and is very fully
treated in the Report and Evidence.
1 84 SPECULATION IN THE [455
These dealings have been the cause of great scandals on
the London Exchange, and their abolition was recom-
mended by the Stock Exchange Commission of 1878.' A
special settlement is granted for new securities after a cer-
tain amount of such dealing ; and by its right to refuse
such a settlement, and thereby to annul all outstanding
trades, the Stock Exchange Committee has some power
over the most flagrant cases. But in some instances this
remedy merely aggravates the evil it was meant to cure.
The evils which have been above enumerated are con-
fined to a few securities. At one time they are prevalent
in one group, at another time in another group. Some-
times it seems as if most of the active securities were open
to some such charges. But as compared with the great
mass of securities dealt in on the exchange, they are very
few. Doubtless any benefit that comes from speculation
in these stocks is much more than offset by its evils. It
is wrong, however, to take these as a basis for judgment
on stock speculation as a whole. Disregarding these
stocks, it may be truly said that the prices of the stock
market represent the opinion of the market on the real
value of the property in question. Even in the case of
" gambling stocks " there is no need for the bona fide
investor to be injured. His investment may be made
elsewhere. The direct losses in the matter of these secu-
rities are borne by those speculators among the public
who are foolish enough to tamper with such fraudulent
schemes. Hence1 the economic evil is not great. The
moral evil which results from the fact that such operators
go unrebuked is of far greater consequence.
The attempt is often made to separate transactions ac-
cording to their form as " legitimate " or " illegitimate,"
1 The Stock Exchange Committee itself passed a rule in 1864 forbidding
them, but this was repealed. (Report of 1878, p. 17.) It must be ad-
mitted, however, that there are some decided benefits in dealings before
allotment in the matter of starting new enterprises. Cf. Struck, Die
Effektenborse , p. 64 et seg.
467] UNITED STATES ^5
as if a definite meaning could be given those words apart
from the preconceptions of the individual. In the hear-
ings on the " anti-option " bills a few years ago, not a few
representatives of the produce exchanges stated that they
had no objection to that part of the bills which applied to
'• options," or what in this essay have been called " privi-
leges." A " put " 'or " call is in itself, however, entirely
defensible. Just as a real estate dealer secures a bond on
a piece of property for a certain period, so a wheat dealer
may secure the right to a certain amount of wheat. The
privilege is sometimes used in this way for insurance. If,
for example, an order comes after the close of exchange
hours, the dealer may insure himself against an unfavor-
able opening on the following day by buying a call for
twenty-four hours. The speculator may use privileges
for the same purposes. Protection may also be secured
by selling privileges. If, for example, an operator is
short to a large extent he may sell puts ; if the price falls
he will receive the commodity to cover his short contracts ;
if the price rises he receives the " put-money," at least.
The influence of privileges on price is slight because of
their small amount. They may serve to indicate the
course of the market, and may have their influence the
following day on option. On the other hand, the fact of
a large amount of privileges having been sold may lead to
some attempt at manipulation. It will be for the interest
of those who have sold puts, for example, to keep the
price from falling low enough for delivery to be made ;
consequently active buying may come in for this purpose
at the end of the day. So far as it goes, it is a leveling
influence on price.
In the main, however, privileges are used for the pur-
poses of those speculators who have not sufficient means
to carry the risks of ordinary trading. That is, they are
used by the least desirable element in the market and
1 86 SPECULATION IN THE [468
largely for " gambling " purposes. For this reason they
are generally denounced, despite their possibilities for
better purposes. Business opinion is not framed on nice
distinctions regarding the nature of transactions ; but in
such a case business opinion may be relied on. The
privilege may safely be regarded as an unnecessary and
undesirable form of contract. It is forbidden by the
chief exchanges, and the more stringent enforcement of
such rules is greatly to be desired.
Another distinction sometimes attempted is that be-
tween bona fide trading, and trading for differences.1
The latter are supposed to be " illegitimate." It has al-
ready been shown that the form of contract is the same in
both cases, and that the settlement by difference is merely
a matter of convenience after the contract is made. Al-
most all exchange transactions are so settled.2 The whole
account of the function of speculation in the previous
chapter refers to speculation for differences. To do away
with this is to do away with the speculative market alto-
gether.3 It is not that these dealings are an adjunct to
real speculation ; it is not that they influence or, as is
1 For a suggestive discussion of difference dealings, see Bruckner, Der
Differenzhandel.
* It is impossible to say to what extent the different forms of settlement
are used. Mr. Alfred Shepperson of the New York Cotton Exchange
makes the following interesting calculation: Taking the amount of cot-
ton for which certificates were issued by the inspection department of
the New York Cotton Exchange for the six years ending August 31,
1893, 644,026 bales, and comparing it with the volume of futures sold in
the same period, 177,090,000, he says: "As the transferable orders for
the cotton actually delivered upon ' future ' contracts passed through
many hands (by transfer), probably averaging fully 25 transfers upon
each order, it follows that during the six years mentioned, contracts to
the extent of 16,100,600 bales were settled through the delivery of cotton,
while contracts for 160,089,400 bales were liquidated by ' direct settle-
ments ' and ' ring settlements.' " (Report of Senate Committee on Cot-
ton, above cited, Vol. I, p. 459.) This calculation, however, assumes
that the same cotton figures in only one transferable order.
8 Cf. Bruckner, op. cit., pp. 48-49, 53. " Sonach bildet der Differenz-
handel die Seele des Terminmarktes."
469]
UNITED STATES
sometimes said, that they intensify, or magnify prices.1
They make prices. They are bo n a fide offers to buy or
sell, and their original nature is not affected by the man-
ner of their settlement. Furthermore, the methods of
insurance used by the dealer and the manufacturer would
be utterly impossible without the continuous market and
settlement by differences.
Are all such difference-dealings, however, desirable?
Is it desirable that speculation should be so wide-spread ?
Here appears the greatest evil of speculation, the moral
evil of a reckless participation in the market by the
outside public. The possibilities of making quick and
large gains from fluctuations in prices lead thousands into
the speculative market, who have no knowledge as to its
condition, and no real opinion as to the course of prices.
They depend chiefly upon chance for their success. Such
speculation is the merest gambling in spirit. The evil is
still further increased by the " margin " system. The
speculator need not have capital enough to make his pur-
chase, but only enough to " put up a margin " of five or
ten per cent, with his broker. Thus with a capital of
$10,000, he can buy, or sell, $100,000 of securities (one
thousand shares), and win or lose the amount of fluctua-
tion in the value of the whole one thousand shares. The
danger is correspondingly increased, since an unfavorable
movement may " wipe out " his margin altogether. In
other words he is playing for higher stakes.2 Added to
the natural tendency to gambling, are all the attractive
and alluring circulars and advertisements put out by com-
mission houses which are regardless of how many men
they may lead to ruin, so long as commissions are forth-
coming.3 The amateur speculator, moreover, often goes
1 Cf. Lexis, in Schonberg's Handbuch, II, p. 878
' Cf. Hadley, Economics, p. 107.
* Members of the London Stock Exchange are not allowed to advertise.
There can be no doubt that the methods of advertising employed by some
1 88 SPECULATION IN THE [470
in beyond his means, and resorts to credit to retrieve his
position. The money of others is drawn into the reck-
less trading ; embezzlement and ruin too often follow.
It is unnecessary to dwell here upon the disastrous
moral results of such practices. In one sense, the economic
and the moral effects cannot be separated. Moral evil has
its economic result. The fostering of the gambling spirit
is always at the expense of industry. The lowering of the
moral standard injures all trade relations. The instability
of fortunes discourages perseverance and economy. Such
indirect economic losses it is hard to estimate. There are,
however, direct ecomomic effects of speculation by the
outside public of a somewhat different kind. The most
apparent of these is the unsteadiness of the market in
times of speculative excitement. The larger the number
of irresponsible persons involved, the more does trading
at such times partake of the unreasoning nature of all
crowd action. Furthermore, where so many are " mar-
gined " to the full extent of their available capital, any
sudden movement in price may threaten their solvency
and necessitate a rush to cover or to liquidate. Hence
prices rise rapidly tinder the force of enthusiasm, and then
fall suddenly under the fear of panic.
It is wrong, however, to attribute these results entirely
to organized speculation. Periods of inflation and panic
are due to more far-reaching causes than the stock ex-
change. At such times stocks and produce go up or
down in price together with all other property. In the
case of stocks, the speculative mania is almost universally
a result of new industrial conditions. As confidence in
prosperity rises, new industries are undertaken and new
companies are formed, regardless of their real chances of
brokers in the United States, by which the most preposterous statements
are made regarding the chances ot speculative profit, are prolific of much
harm. Similar conditions are causing much complaint in Germany.
47I] UNITED STATES jgg
success. The speculative activity of the stock market fol-
lows after the speculative increase of securities. The
periods of extreme speculation in railroad shares have
nearly always followed the periods of most rapid and ex-
cessive building.1 Nor is the rapid increase of speculative
enterprises only possible because of the stock exchange.
The investing public take up, outside the exchange, with
hundreds of companies which are more skilfully advertised
than managed. Even those cases which are most purely
speculative are often independent of the exchanges. The
Panama mania in France has been cited as a result of the
participation of the public in speculation,2 but it is wrong
to attribute such a movement to the exchange. Panama
speculation was chiefly outside the Bourse, and, as said
by Leroy-Beaulieu, it was the Bourse which throughout
was most skeptical of the soundness of the enterprise.3
It is true that the exchanges afford every facility for in-
creasing the inflation. Whatever makes purchasing easy
at such a time increases the force of the movement, and in
this matter the exchange plays much the same role as the
whole credit system.4 Furthermore, these opportunities
occasionally lead to speculative crises that are little con-
nected with industrial conditions, and the effect of which
is more closely confined to the market for securities.5 At
the same time it. should be remembered that in times of
inflation the exchange is first to call a halt, and that at
the end of a panic the market receives strong support
from the necessary covering by the shorts.
1 Cf. Ehrenberg, Die Fondsspeku lotion, pp. 65-69.
* Cf. Lexis, op. tit., p. 881.
3L' Economiste Fran fats, Jan. 28, 1893.
4 " The gambling in no case is possible without credit, and where there
is credit, while human nature remains as it is. there will always be undue
credit." Giffen, Stock Exchange Securities, p. 43.
' Cf. Lexis, op. at., p. 882.
190 SPECULATION IN THE [472
In the long run, however, the influence of the public in
speculation is not that of inflation or of panic. It cannot
be said, as is sometimes done, that the public bring any
great degree of intelligence or fitness for investigation to
the market, and so increase the chances of a foreseeing of
all conditions which may affect values. The participation
of the public, however, does increase numbers, and in
normal times numbers themselves are a steadying influence
in the market.1 The more buyers and sellers the less
likelihood, in the long run, of wide fluctuations. Every
movement of price has a more powerful body of opinion
to resist. Furthermore, manipulation in a wide and
active market is probably more difficult than in a narrow
market.2 The public learns little by experience in these
markets, but it furnishes capital and courage against
fictitious movements, not because of its knowledge, but
because in an active market the two sides will be of more
nearly equal strength.3 It is often said that the outside
public forms no independent opinion as to the course of
prices, but tamely follows the lead of the big operator.
It is this theory which in the past has brought some of
the greatest to ruin. The public may be unintelligent ;
but the stock exchange can boast but few who have been
able to oppose it with impunity.
More than this, the speculation of the big operators de-
pends upon the speculation of the public. Those hopes
'"But the Stock Exchange gambling will not, any more than the
legitimate Stock Exchange speculation, materially affect general prices.
It tends necessarily to equalize prices, like the legitimate trading it imi-
tates, and it favors a panic whenever anything unexpected happens."
Giffen, op. cit., p. 43.
2 Ehrenberg's claim, op. cit., 206-8, that the influence of outside specu-
lation is bad because of the lack of knowledge on the part of the public,
overlooks the power of mere numbers to steady values.
3 If it be said that some of the most daring and successful cases of man-
ipulation took place when speculation was more active than now, it may
be said that industrial conditions were not then entirely normal, and sec-
ondly, " there were giants in those days."
UNITED STATES
for reform are chimerical which look to a system in which
only large speculators, of wide experience and knowledge,
shall carefully investigate all price-determining factors,
and fight out the battle of prices among themselves, while
the public refrains from speculation altogether.1 Such a
condition of things is highly desirable, but the big spec-
ulators are not prepared to maintain a market of this
nature. If it be said that the price-making benefits of
speculation come, not from the number of outsiders, but
from the activity of those best qualified for speculation, it
may be answered that the activity of this latter class de-
pends upon the participation of the former. Further-
more, the opportunity of the trader and the manufacturer
for advantageous hedging is greatly curtailed in a narrow
market. Profitable trade depends largely upon active
speculation. Indeed, the opinion is expressed among
grain merchants that their difficulties in recent years
have been partly due to the absence of the public from
the market ; that for their purposes, there has been not
too much, but too little speculation.
It will be seen then that speculation by a wide public
has its advantages, but that these advantages are secured
at an enormous cost. The widening market is simulta-
neously the cure of some evils and the cause of others.
The former are mainly economic, the latter moral.
Neither should be disregarded nor minimized. The dif-
ference in the nature of these evils makes comparison
difficult. Professor Cohn begins a recent essay 2 on spec-
ulation with the assertion that business methods cannot
escape the test of moral judgment. No one to-day will
question the truth of such a statement. Yet one may well
pause before the difficult problem of determining at just
what point the evil of public speculation becomes too high
a price to pay for the advantages of the active market.
1 Cf. Eschenbach, Zur Borsenreform, pp. 12, 52.
- Zur Borsenreform.
CHAPTER VI.
SPECULATION AND THE LAW
I.
IN the middle ages speculation, if the word may be
used for the transactions of that time, was always for a
rise in price. This, as already seen, was because specula-
tion for a fall in prices is only possible with the modern
machinery of classified grades and transferable warrants.
Hence the earliest effort at legislative control of specula-
tion is to be found in the ordinances and statutes against
all attempts to enhance prices. To the minds of the
middle ages high prices, especially for food products,
seemed an unmixed evil and, furthermore, were usually
regarded as the result of some conspiracy or unfair com-
bination of merchants.1 The attempts to prevent such
fictitious prices took the form of the familiar statutes
against forestalling, engrossing and regrating. The first
general statute of this nature for the benefit of the sub-
jects at large, as distinct from the king, was one of the
reign of Edward I, though local ordinances in this direc-
tion were common before.2 Under Edward III, and
later under Edward VI, such statutes were frequently
enacted ; but in the reign of Elizabeth legislative activity
in this direction began to decline.
It is impossible in the limits of the present discussion to
1 Cunningham, English Industry and Commerce, Vol. I, p. 484; Vol.
II, p. 497-
-See Cunningham, op. cit., Vol. I, pp. 243, 295; Vol. II, p. 91; and
Ashley, Economic History, Vol. I, § 20.
192 [474
L'XITED STATES
consider this early legislation in detail, and. in any case, it
bears only an indirect relation to the attempts to control
the organized speculation of to-day. The real successors
to the early enactments against engrossing are found in
modern statutes against combinations in restraint of trade,
against monopolies and trusts. It may be noted in pass-
ing, however, that the idea of value, which was at the
basis of much of the early struggle to control prices by
law, is entirely inconsistent with the conception of value
which gives speculation its sole justification. The returns
which come to the legitimate speculator constitute a re-
ward for risk. No such claim was admitted in earlier
times. Cunningham says : ' " English merchants were
not to forestall wine in Gascony. or buy it up before the
vintage, and the time of the common passages ; nor were
they to charge high for the wine on the pretense that
they ran risks. Cost of carriage was a charge that could
be checked, and this might, doubtless, be allowed for
when sale was made in London : but remuneration for risk
was obviously regarded as a mere excuse for arbitrary
demands on the part of the merchant, and these were not
to be permitted at all."2
Such legislation as was enacted in later years, after the ad-
vent of stock speculation, was not due to the theory which
underlay the enactments against engrossing, but. in part,
to the opposite idea that speculation reduced prices.
Every fall in the funds was attributed to the machinations of
lOp. tit., Vol. I, p. 294.
* In view of the instances in recent years where, in the matter of actual
trade, the speculative market has given one city an advantage over an-
other without such a market, it is interesting to note the case of a local
ordinance given by Cunningham (Vol. I, p. 296), which was directed
against the hostelers of Yarmouth in 1357^ to prohibit their forestalling
the goods of the fishermen before they came into port. The ordinance
naturally put upon the fishermen the burden of disposing of their own
fish as well as the burden of catching them, with the result that "the
fishers were thus prevented from bringing their fish to that port at all."
A repeal was necessary within four years.
194 SPECULATION IN THE [476
the short-sellers, and the necessity of preserving the public
credit seemed to demand their suppression. Still more
strong in many cases was the moral motive to stop public
gambling. The first act in England affecting the Stock
Exchange was in 1697, an act to restrain the numbers and
ill practices of brokers and stock-jobbers.1 It was due to
the speculative mania which broke out after the Revolution,
and it was allowed to lapse after ten years. In 1733 was
passed the famous Sir John Barnard's Act "To prevent the
infamous practice of stock jobbing."2 This act forbade
bargains for "putts or refusals ;" also " the evil practice of
compounding or making up differences ;" and furthermore
prohibited all sales of stock by parties not owning the same,
under penalty of $500 for each such transaction. This act
had absolutely no effect in stopping speculation, and was
repealed in 1860 by 23 Viet. c. 28. Leeman's Act of 1867
declared all sales of bank-stock, without a specification of
the share numbers in the contract, void. This has also
proved a dead letter.3
Only one attempt has been made by Congress to suppress
speculation. As soon as the paper currency of the Civil
War became depreciated, speculation in gold became active,
and the ups and downs in the price of gold, in other words
the fluctuations in the amount of discount on the green-
backs, were regarded with the same indignation with which
European governments had in former years viewed the fluc-
tuations in the value of the public stock. In both cases the
evil was attributed solely to the machinations of the specu-
lator. In 1863 an act4 was passed which placed a tax of
one-half per cent, on all sales of gold for delivery after a
period exceeding three days ; and provided that any loan
1 8 and 9 Will. Ill, ch. 32. * 7 Geo. II, ch. 8.
3 For an account of these English acts see Report of the Stock Ex-
change Commission, 1878, App. I.
4 Statutes at Large, 1863, ch. 74.
UNITED STATES
—
coin should be void. The Anti-Gold Act of 1864,' was
passed June 17. It was entitled " An Act to prohibit cer-
tain Sales of Gold and Foreign Exchange." It forbade
all contracts for the sale or purchase of gold coin or bullion
for delivery on any day subsequent to the day of the con-
tract, also all contracts for the sale of gold which was not |
actually in the possession of the seller at the time of con-
tract. Contracts in violation of these provisions were de-
clared void ; and such violation was made a misdemeanor
with a penalty of fine or imprisonment. The act also for-
bade all sales not made at the ordinary place of business
of one of the contracting parties. This provision was in
order to close up the Gold Room where this trading was
done. The expectation of Secretary Chase and of Con- |
gress, that this act would abolish the premium on gold, was
not fulfilled. Gold jumped from 198 to 250. 2 On July 2d,
two weeks after its enactment, the statute was repealed.3
In New York an act was passed in 1812 4 declaring all con-
tracts for the sale of stocks or bonds void, unless the seller
at the time was actual owner or assignee thereof, or author-
ized by such owner or assignee to sell the same. All con-
tracts for a wager on prices were void, and money paid on
any such contracts was recoverable. This statute was re-
pealed in 1858,5 the act of that year providing that no con-
tract should be void because the property sold was not at
the time in possession of the seller. This affirmatively
legalized short-sales. A similar act was passed in Massa-
chusetts in 1836, and a recent act, 1890, provides for the
recovery of money on contracts where there is no intention
1 Statutes at Large, 1864, ch. 127.
1 See White, Money and Banking, p. 161, Boston, 1806.
* Statutes at Large, 1864, ch. 209.
* Revised Statutes of New York, 1829, ch. xx, Title 19, sees. 6-8.
5 Laws 0/1858, ch. 134.
196 SPECULATION IN THE [478
to deliver, and admits short-selling as p rim a facie evidence
that no such intention exists.1 In Pennsylvania, by the
act 2 of 1841, short-selling, for delivery after five days, was
made a misdemeanor, with a fine of from $100 to $1,000.
This law was repealed in i862.3
In Illinois there is a statute4 to the following effect:
" Whoever contracts to have or give himself or another
the option5 to sell or buy at a future time any grain or other
lActs and Resolves, 1890, ch. 437. * Laws of 1841, p. 396.
3 17 P. L., 540. 4 Statutes of Illinois, ch. 38, sec. 130.
5 It is difficult to tell just what is meant by the word "option " in the
Illinois statute. The act reads at first glance as if it referred to a "privi-
lege," in the sense in which the word has been used in the foregoing
chapters. It was so held in Pixley vs. Boynton (79 111., 351), where the
Court referred distinctly to "puts and calls;" and in Schneider vs. Turner
(130 111., 28), where the question is treated with admirable clearness.
The statute also applies to such optional contracts outside the exchange.
A bona fide purchase of 150 cars of coal with a clause in the contract giv-
ing the purchaser the privilege of taking 250 cars more at the same price,
was held illegal, as to the second clause, under the statute, Osgood vs.
Bauder (82 Iowa, 171). This is evidently in line with Pixley vs. Boyn-
ton, and is a natural interpretation of the statute; for as the Court said
in a similar case (Corcoran vs. Lehigh Coal Co., 37 111. App., 577): "A
statute radical as this cannot fail to uproot many transactions, but for the
law, customary, usual, and innocent." But in a number of recent cases,
where the question of wager has been involved, the regular future has
been held an " illegal optional contract," when the understanding has
been that it should be settled by differences. [See Pearce vs. Foote (113
111., 228), Carroll vs. Holmes (24 111. App., 453), Miles vs. Andrews
(40 111. App., 155) , and others.] These rulings have been on the ground
that the party had an option of either delivering or settling by differences.
If the statute is to receive this broad interpretation, nothing is gained by
confusing it with the conception of an option contract which appears in
Pixley vs. Boynton, and Osgood vs. Bauder. These cases interpreted
the statute to refer to "privileges." According to the later cases an
" option " exists where the party may elect to deliver or may elect to pay
differences. The strict option, or privilege, is where the party may elect
to deliver or not to deliver. But if he elects not to deliver there is no
transaction and no payment of differences. Should he elect to deliver he
may either pass the property or settle otherwise according to the subse-
quent arrangement with the other party. It is probable that some of the
interpretations of the statute are due to a lack of knowledge of the real
nature of exchange transactions. At least, if an " option " is held to be
479J UNITED STATES
commodity, stock of any railroad or other company, or
gold, or forestalls the market by spreading false rumors
to influence the price of commodities therein, or corners
the market, or attempts to do so in relation to any of
such commodities, shall be fined not less than $10 nor
more than $1,000, or confined in the county jail not ex-
ceeding one year, or both ; and all contracts made in vio-
lation of this section shall be considered gambling con-
tracts and shall be void."
A law passed in Ohio in 1882 is almost identical in lan-
guage with the Illinois statute, but adds a clause that the
provision in the statute applies only to such contracts
where the intent is not to deliver the commodity sold,
but to settle by differences.1 A very stringent law " to
prevent gambling in grain, stocks, petroleum, wool and
provisions," was passed in 1885, making it a criminal
offense to buy or sell futures, or on margin, where either
party meant not to deliver. But this provision did not
apply to transactions on regular stock and produce ex-
changes. The law was repealed in 1889.
In California a clause has even been put in the constitu-
tion in prohibition of futures. Article IV, Sec. 26, reads :
"All contracts for the sale of shares of the capital stock of
any corporation or association on margin, or to be deliv-
ered at a future day, shall be void, and any money paid on
such contract may be recovered. ..." This provision was
the result of the wild speculation in securities which oc-
curred just before the adoption of the constitution.2
a contract by which the parties have the option of making actual delivery
or of settling merely by the payment of differences, the statute in that
case (as suggested by the Court in Schneider vs. Turner) is superfluous,
since such transactions are void at common law.
1 Revised Statutes of Ohio (1896) , sec. 3934 a.
2 For recent cases under this section of the constitution, see Cashman
vs. Root (89 Cal., 595); Kullman vs. Simmens (104 Cal., 595).
198 SPECULATION IN THE [4go
Futures are prohibited by statute in Georgia, and a
curious reason is embodied in the statute itself :
"A bare contingency or possibility cannot be the subject
of sale, unless there exists a present right, in the person
selling, to a future benefit ; so a contract for the sale of
goods to be delivered at a future day, where both parties
are aware that the seller expects to purchase himself to
fulfill his contract, and no skill or labor and expense enters
into the consideration, but the same is a pure speculation
upon chances, is contrary to the policy of the law and can
be enforced by neither party." '
Mississippi enacted a law in 1882, providing that "if
any person shall deal in contracts commonly called futures,
or shall, by himself or his agent, directly or indirectly, buy
or sell any future contract, he shall be guilty of a misde-
meanor," the penalty being fine or imprisonment. The
following section makes the same declaration regarding
any person who buys or sells commodities without intend-
ing to deliver them.2 A Tennessee statute 3 declares all
futures in stocks, grain, or any produce, " where either
of the contracting parties, buyer or seller," is dealing
simply on margin with no intention of making actual
delivery, gambling ; and fixes a punishment of fine or
imprisonment for any such contract.4 The Arkansas law
of 1883 is still more direct: "The buying or selling, or
otherwise dealing in futures, either in cotton, grain, or any-
thing whatsoever, with a view to profit, is hereby declared
1 Georgia Code, sec. 2638. Certain clauses of the statute might make
one hesitate as to its true meaning, but the courts hold that an ordinary
exchange " future " is void under the statute. Augusta National Bank
vs. Cunningham, 75 Ga., 366; Lawton vs. Blitch, 83 Ga., 663.
2 Laws of 1882, p. 140; also Miss. Code, sees. 1120, 1121. A mutual
agreement of non-delivery on the part of both parties is, however, neces-
sary to invalidate the contract (Clay vs. Allen, 63 Miss., 426.)
3 Acts 0/1883, ch. 251.
4 See under this act Snoddy vs. Bank (88 Tenn., 573).
48!] UNITED STATES 199
to be gambling/' Such dealing is made a misdemeanor,
punishable by fine or imprisonment.1 Texas passed a law
in 1885 making it a misdemeanor to deal in futures or to
" keep a produce exchange," or bucket-shop, for such
dealings, where no actual delivery is intended.2 In South
Carolina all sales of stocks or produce not owned by the
seller are void unless there is a bona fide intention of both
parties that there shall be actual delivery.3 Michigan4
and Iowa5 have made sales of commodities without in-
tention of delivery a misdemeanor.
The Missouri law6 of 1899 applies to shares of stock or
bonds of any corporation, petroleum or provisions, grain,
or agricultural products whatsoever, and makes unlawful all
sales of such commodities "without intention of receiving
and paying for the property, or delivering property so sold;"
also options made with similar intention. A fine is fixed for
such offences of from $300 to $3,000. The act furthermore
provides that " it shall not be necessary, in order to commit
the offense defined in the preceding section, that both the
buyer and seller shall agree to do any of the acts above
prohibited." A mere offer to buy or sell in such way,
whether accepted or not, constitutes the offense.7
5 Mansf. Digest, sees. 1848, 1849.
2 Laws of the Nineteenth Legislature, ch. 94.
3 Statutes of 1883, No. 306.
4 Public Acts of 1887, ch. 199.
5 Rev. Code of 1886, p. 959 a.
* Missouri Rev. St., sees. 3931-3939.
' This clause in the statute is due to certain decisions, which, following
the leading case of Kent vs. Miltenberger (13 Mo. App., 505), held that
a mutual intention between principals was necessary to constitute wager.
Even before the act was passed the courts had begun to move away from
this position, as is shown by Crawford vs. Spencer (92 Mo., 498) and
Hill vs. Johnson (38 Mo. App.. 383) . As between broker and principal,
however, the broker may recover commissions, etc., even under the
statute, where he is not cognizant of the unlawful intention of his princi-
pal, Mulford vs. Caesar (53 Mo. App., 263).
200 SPECULATION IN THE
II.
In turning to the law of exchange transactions as de-
veloped by the courts, only one of the many problems which
arise in regard to such transactions will be considered at
this point, the question as to the validity of the speculative
contracts made on the exchanges, from the point of view
of both principal and broker. This question, together with
many others relating to brokers and exchanges, has been
discussed in several learned treatises.1 In view of the
material there found, the treatment here is confined chiefly
to recent cases, only certain leading cases of the earlier
years being referred to by way of comparison.
In the first place it may be said that contracts for future
delivery are now very generally accepted as valid.2 " It
is well settled that contracts for future delivery of merchan-
dise or tangible property are not void, whether such
property is in existence in the hands of the seller, or to
be subsequently acquired." (Bibb vs. Allen, 149 U. S.
481). Since the ruling of Lord Tenterden in Bryan vs.
Lewis, (Ryan & Moody, 386), in 1826, was set aside in
Hibblewhite vs. McMorine, (5 M. & W. 462), in 1839,
this proposition has been generally admitted and is affirm-
atively stated in most cases.
The conditions under which such a contract is held to be
void are thus stated in Irwin vs. Williar (no U. S. 499):
"A contract for the sale of personal property, which the
vendor does not own or possess, but expects to obtain by
purchase or otherwise, is binding if an actual transfer of
property is contemplated. ... If, however, at the time of
entering into a contract for the sale of personal property
1 See Dos Passes, Law of Stock Brokers and Stock Exchanges, New
York, 1882; Diddle, Law of Stock Brokers, Philadelphia, 1882; Dewey,
Future Contracts, New York, 1886; Simonds and Bisbee, Law of the
Produce Exchange, Chicago, 1884.
2 See Dos Passos, op. tit., pp. 440, 452.
UNITED STATES 2OI
for future delivery, it be contemplated by both parties
that, at the time fixed for delivery, the purchaser shall
merely receive or pay the difference between the contract
and the market price, the contract is a wager and nothing
more." In Flagg vs. Baldwin (38 N. J. Eq., 219) the
court in holding that actual buying of such a kind is legal,
but that a contract to pay differences is not, said : " This
proposition is sustained by all the cases, without an ex-
ception, that I can discover. The only disagreement re-
lates to the application of the doctrine."
The principal question is as to a previous mutual under-
standing between two parties regarding a settlement with-
out deliver}*. Such understanding doubtless makes a con-
tract void, but the decisions show a disagreement as to
who constitute the parties, what constitutes a mutual
understanding, and what constitutes delivery. This dis-
agreement is due partly to the fragmentary nature of the
evidence on crucial points in many cases, and to the pecu-
liar interpretation often given to the evidence because of
the lack of knowledge on the part of the judiciary regard-
ing exchange transactions. In the leading case of Clark
vs. Foss (7 Biss., 540) the court truly observes : " I can-
not help thinking, in looking through the cases on the
subject, that more discrepancy and confusion have crept
into them, from a failure to determine precisely the facts,
than from any essential difference of opinion upon the
abstract propositions of law applicable to them."
If it be the fact that two principals contract together and
agree not to deliver, the contract is void. This principle is
not questioned. In a suit between principals this under-
standing must be mutual to invalidate the contract. If |
either party intended a bona fide contract, he can recover. •
This, in the absence of any statute, is recognized in all I
the cases. Very few cases, however, are actions between
principals. Most of them are between brokers and princi-
202 SPECULATION IN THE
pals, and many of them are the suits of brokers to recover
commissions or losses due to the transactions made in
behalf of the principals, or suits on notes given for such
commissions or losses. The actual trading contracts are
made on the floor of the exchange, under the rules of the
exchange, and by members ; and suits between the buyer
and seller seldom arise. Consequently the proposition that
an agreement between the principals (by themselves or
their agents) not to deliver on the contract invalidates
it, is based on an assumption of facts which, so far as
exchange dealings are concerned, almost never occur.
In a suit by a broker against his principal in which the
defence of wager is made, that is, that there was a mu-
tual agreement not to deliver, the preliminary question
is, who are the parties between whom such agreement, if
any, was made? Since the suit concerns contracts of buy-
ing and selling, the natural inference might seem to be
that such an agreement must be shown between the par-
ties to those contracts.
This view finds strong support in certain leading cases of
a comparatively early date ; see Lehman vs. Strassberger
(2 Woods, 554), Clark vs. Foss (7 Biss., 540), Sawyer vs.
Taggart (14 Bush, 727) , and Kent vs. Miltenberger (13 Mo.
App., 505). In Clark vs. Foss, the court said : "The sub-
stance of the contract itself is what must control. The intent
that it should be a mere betting upon the market without
any expectation of actual performance must be mutual and
constitute an integral part of the real contract, in order to
vitiate it. Furthermore, supposing it had been the mutual
intention of S. D. Foss & Co. (brokers) and the bankrupts
(principals), that these contracts were not to be performed,
I do not see that that would make them illegal, so long as
the other parties to the contract did not participate in that
illegal intention. S. D. Foss & Co. and C. B. Stevens &
Sons (principals) did not constitute the parties to the con-
4gc] UNITED STATES 203
tract. As between them the relation existed of principal
and agent, and there is no evidence whatever to show
that those other parties had any notice or knowledge of
the gambling intent."
The case of Lehman vs. Strassberger was an action
brought by the broker to recover from his principal, and
the defendant pleaded that it was the understanding be-
tween him and his broker that he was not to receive or
deliver except where he should so elect. The court said:
*' If he reserved the option to receive or deliver, the con-
tract was legal in all respects, even though he might have
had a purpose in his own mind not to receive or deliver,
and had communicated that purpose to his agents. The
question is, did he communicate that purpose to the
parties not named with whom he contracted? There is
no evidence that he did. On the face of his contract, he
binds himself to deliver cotton, and the other party binds
himself to receive it. Now what effect can the mental pur-
pose of Strassberger to pay or to demand differences
instead of delivering the cotton, have upon the contract,
when that purpose is unknown to the other contracting
party? Here is no bet or wager."
The rules here stated have been followed in other cases,
and Dewey lays down the general proposition that where a
broker on the order of his principal makes contracts in his
own name which may be enforced against him, he is entitled
to his commissions and disbursements and may maintain an
action therefor.1 Recent cases between broker and princi-
pal, however, show an increasing tendency to treat the
nature of the contracts made by the brokers on the exchange
as immaterial. In many cases this question is not directly
presented : the nature of the contract between brokers not
being distinguished from the mutual expectation of broker
1 See Dewey, Future Contracts, p 232, and cases there cited; and Dos
Passes, op. cit., p. 478.
204
SPECULATION IN THE
and principal that delivery will not be made. But in some
cases the court has expressly noticed and considered the
relation of the one contract to the other.
One mode of solution of the question is by assuming the
doctrine that where an understanding exists between
broker and principal a new contract is constituted, in
which the "broker" and "principal" are vendor and
vendee, and the "principal" is really not a party to the
contract on the exchange. This seems to be the ruling
in Flagg vs. Baldwin (38 N. J. Eq., 219), and Beadles vs.
McElrath (85 Ky., 230). Where the understanding is
sufficient to permit the court to find the contract between
broker and principal one of sale without intention to de-
liver, the law is as clear as in the cases of such a contract
between any two principals.
In most cases, however, either the facts or their interpre-
tation by the court have not allowed of such finding. But
even where the relation existing is that of broker and princi-
pal, the contracts made on the principal's account have
often been held to be immaterial in determining the
question of wager as between the broker and his principal.
The Pennsylvania courts have generally taken this posi-
tion.1 In Fareira vs. Gabell (89 Pa. St., 89) it was held that
" it does not necessarily vary the legal aspect of the case, that
some, or the greater number, of the persons with whom Fa-
reira[the broker]dealtonGabell's account were actual buy-
ers and sellers and did not intend to gamble." In a more re-
cent case, Phelps vs. Holderness (56 Ark., 300) Phelps, a
commission merchant, brought suit against his principal,
Holderness, for disbursements made on certain cotton
transactions in the New York market. The plaintiff claimed
that the contracts he had made on defendant's account were
valid and enforceable against him. The court ruled that the
" the assumption that there is no proof of the vendor's par-
1 See infra, p. 214, foot-note.
4g7J UNITED STATES 205
ticipation in Holderness' illegal design, and the conclu-
sions deduced therefrom, are foreign to the controversy.
The controversy does not arise between the supposed ven-
dor and Holderness, but between the latter and Phelps."
The court, however, said that it would not go so far as
Flagg vs. Baldwin (supra) , and declare Phelps the vendor.
The same is held in Wheeler vs. McDermid (36 111. App.,
179), Scott vs. Brown (54 Mo. App.. 606) (in which case
an instruction that an understanding between principals
was necessary to constitute wager was refused) , Mohr vs.
Miesen (47 Minn., 228), Miles vs. Andrews (40 111. App.,
155), Griswold vs. Gregg (24 111. App., 384), Dows vs.
Glaspel (4 N. D., 251), Beadles vs. Ownby (16 Tenn.,
424), Dwight vs. Badgley (75 Hun., 174), Sprague vs.
Warren (26 Neb., 326).
In the case of Conner & Hare vs. Robertson (37 La.
An., 814) the opinion contains a very clear statement of
the nature of the contracts made on the New Orleans
Cotton Exchange, and holds that, in the absence of evi-
dence showing that both parties to the exchange contract
were agreed on a settlement by differences, the knowl-
edge on the part of the broker that his principal was to
settle in this way did not invalidate his claim against him.
In a recent case in the Supreme Court of New York.
Dwight vs. Badgley (75 Hun., 174), it was held that the
understanding by the agent of the principal's intent so to
make his contracts that they could be settled by differences
showed a mutual understanding to wager. The court did
not expressly rule out the contracts made between the
brokers (which in themselves appear valid), but that this is
implied is shown by the fact that the validity of the contracts
on the exchange is made the basis of Judge O'Brien's dissent.
In his dissenting opinion he said that if the question had
been solely as to defendant's (the principal's) intent, the evi-
dence showed the case should have gone to the jury ; that it
206 SPECULATION IX THE [488
was necessary, however, to show the intent of both parties,
but plaintiff and defendant were not parties to any contract.
In most of the above cases no attempt was made to show
a separate and definite contract between broker and' princi-
pal as the real contract in suit. Such a contract may make a
decided difference in the ruling. The point is expressly dis-
cussed in a recent Massachusetts case, Harvey vs. Merrill
(150 Mass., i). This case was referred to an auditor, whose
report showed two facts here in point. In the first place,
the broker, as directed by his principal, made bona fide and
valid contracts on the Chicago Board of Trade for the pur-
chase and sale of pork. In the second place the broker
made a contract with his principal that the principal should
in no case be obliged to receive or deliver the goods.
The suit was brought by the broker to recover commis-
sions and disbursements made in the course of the ex-
change contracts. In the trial court, Mr. Justice Holmes
declined to submit the case to the jury, and instructed the
jury that the plaintiff was entitled to a verdict upon the
auditor's report. The case being carried up on excep-
tions, the exceptions were sustained. In the opinion of
the court the facts were stated thus : " The peculiarity of
this case, according to the findings of the auditor, is that,
while the contracts which the plaintiffs made on the board
of trade must be taken to be legal, the plaintiffs have
undertaken to agree with the defendants that these con-
tracts should not be enforced by or against them, except
by settlement according to differences in prices. If such
an agreement seems improbable, it is enough to say that
the auditor has found that it was made." The court held
that in the contracts made on the board of trade the
plaintiffs acted as brokers, but that in the agreement with
the principals they acted for themselves as principals, and
that this contract between plaintiff and defendant was
" open to all the objections which lie against wagering
UNITED STATES 207
contracts." "The position of the plaintiffs towards the
defendants is no better than it would have been if the
plaintiffs had been employed to make wagering contracts."
Embrey vs. Jemison (131 U. S., 336) is cited and is in
point. That case was an action brought by a broker to
recover the amount of certain notes given for commissions
and disbursements made in transactions conducted for
the defendant on the Cotton Exchange. The defendant
filed a plea of wager, alleging a distinct agreement between
the parties, the broker and the principal, that the princi-
pal should not be called on to deliver or receive actual
cotton. To this plea the plaintiff demurred, and the de-
murrer being sustained below, the judgment was reversed
by the Supreme Court, which thus held that such an
agreement between broker and principal would bar a suit
for commissions, etc.
In these cases the problem is illumined by the appearance
of the theory of a peculiar contract between the broker and
his principal, distinct from the contracts upon the exchange.
The suit is held to be on this contract and hence to be decided
by the nature of this contract, whatever the nature of the
exchange contracts. This seems a simple solution, but
there may be doubts of its correctness. The only ground
upon which these decisions are placed is the wagering nature
of the contract between broker and principal. No other
fault is found with it. The only parties to this wagering
contract are the principal and his own broker. The parties
to the contracts made on the floor of the exchange by this
broker for his principal, are not parties to any wager, for
the validity of those contracts is not denied.
But a wager or wagering contract presupposes two gamb-
lers. Here, assuming the good faith of the parties inter sese,
there is only one, the principal. The other party (the
broker) can neither win nor lose. In neither case was it
found that the broker was trading in stocks or grain with
208 SPECULATION IN THE [490
his principal. Assuming his good faith, he was trading
solely for his principal. He was only to receive the usual
commissions. Under the decisions, however, the gambling
party avoids his debts and losses, while the other party
is said to have no claim even for his commissions.1
Where it does not appear that a binding agreement ex-
isted between broker and principal, that the latter should
not be bound on the contracts made in his behalf, but
merely a mutual understanding, on the part of both parties,
that they meant to make the contracts so as to enable
offsets and settlement by differences; and where this is
held to constitute wager, regardless of the intention of
the other parties to the contracts made on the exchange ;
in such case not only does the difficulty regarding a wager
by one party appear, but it also follows that what is law-
ful for a party to do himself may become unlawful when
performed by an agent. If A, as member of an exchange,
makes valid contracts on the exchange, fully intending to
arrange them so as to avoid any " actual delivery" on his
own part, by setting one against the other, he is making
valid contracts, because the other parties are not privy to
his plan. But if he employs a broker to make these con-
tracts for him, and tells the broker the plan he has been
following and intends to pursue, the transactions become
invalid. In Kent vs. Miltenberger (supra], this point
was made in order to show that the agreement between
principal and broker was immaterial. Referring to the
validity of a contract made by the principal himself, if the
other party was a bona fide purchaser, the court said:
"What he may do by himself in this respect he may
obviously do by the agency of another."
1 The case of Peck vs. Doran (46 Hun, 454) , was similar to Embrey vs.
Jemison, in that an allegation of an agreement between broker and prin-
cipal that there should be no delivery was demurred to, and the demurrer
being overruled below, the judgment was affirmed. In his dissenting
opinion, Landon, J., pointed out that the broker was not a party to a
wager unless he could win or lose on it.
49 1 ] UNITED STATES 2CK)
In some cases the rulings concerning the necessity of an
understanding between principals or between broker and
principal depend upon the statute. For instance, in
Missouri the statute, as cited above, declares that the in-
tention of one party alone is sufficient to constitute wager.
This statute, however, has been held not to apply to a
broker not cognizant of the illegal intent (Mulford vs.
Caesar, 53 Mo., App. 263). Before the enactment of
the statute, leading cases held that the mutual intention
must exist between the two principals.1
Another point on which there is divergence in the de-
cisions is that as to what constitutes an understanding
between the parties that there shall be no fulfilment by
delivery. The decision of this point leaves play for all the
individual differences among judges in the interpretation
of the evidence presented. As said in Wharton's note to
Melchert vs. Am. Union Tel. Co. (n Fed. Rep., 193), the
decisions in this matter reflect very largely the particular
economic theories of the judge in question. In view of
the nature of the evidence on which such decisions are
based, it will be well to repeat once more certain matters
of fact stated in the foregoing chapters, reference being
made only to such dealings as occur on regular stock and
produce exchanges of good standing. In the first place,
except for " puts and calls " which constitute a very small
part of the total dealings, all contracts read for the abso-
lute delivery of property at some particular time. The
fact that this time of delivery extends over a considerable
period, the precise moment of delivery therein being at
the option of one party, does not alter the nature of the
transaction either in fact or in law. Either party may de-
mand the delivery of the property under the terms of the
contract, and failure to deliver or receive under such
circumstances constitutes default.
1 See cases cited above, p. 199, foot-note.
210 SPECULATION IN THE
No contracts are made which in their terms stipulate or
imply that settlement can be made only by differences.
On the other hand, if a broker has made two contracts for
the same delivery, one to sell and one to buy, he can ful-
fill both contracts at the same time by arranging for his
vendor to deliver to his vendee; but the only reason why
he can thus settle the one contract without himself receiv-
ing or delivering the property is because he has made the
other contract. In the case of each contract he acquired
actual property rights and incurred actual property duties.
But the obligation which he incurred on one contract is
taken over by another party under the terms of the second
contract. This practice, which is in itself thoroughly
legitimate, affords every facility for carrying on extensive
speculations for differences in prices without the necessity
of handling the actual property. The greater the number of
transactions, the easier it becomes to arrange offsets. The
clearing process, with payment of differences to and from
the clearing-house, comes in to complete the machinery.
The result of the whole matter is, that, if any one wishes
to so arrange his contracts as seldom to have actual re-
ceipts, or securities, come into his hands, he can do so.
So far as the transactions themselves are concerned, the
vast majority of them are thus settled by differences.
Under these conditions it is beyond question that the great
mass of these dealings are entered into with the expecta-
tion of so settling, and brokers are entirely aware, not,
perhaps, of the intention of the individual customer, but
of the fact that most of their customers have this intention.
To a mind familiar with modern commercial methods
there is nothing in this inconsistent with the fact that all
these contracts are actual contracts for the purchase or
sale of property, are all enforceable according to their
strict terms, and are all based on the final right of actual
delivery. The peculiar nature of these methods of settle-
UNITED STATES 211
merit, together with various outside arrangements of an-
other sort between broker and principal, furnish, however,
an occasion for conflicting interpretation of evidence.
Some of the circumstances which appear as perhaps
showing cognizance on the part of the broker that his
principal means to conduct his transactions without de-
livery are : the occupation of the principal, his financial
means compared with the amount of his transactions, the
general policy pursued in his contracts, etc. These
matters have been more or less exhaustively treated in
the works already referred to. It only remains to
examine some of the recent cases on these points.
Some of these take radical ground. In almost every
case the form of contract implies validity, the question
being as to what attendant circumstances may make it
void. In Miles vs. Andrews (40 111., App. 155) it ap-
peared that " in every instance the direction or order
given to appellants (the commission house) was in form
for the purchase of the quantity and for the delivery
stated unconditionally ; " and it also appeared that " in all
cases the purchase was transferred by sale, also through
them, of the same amount for the same delivery before
the time appointed for its deliver}-." Apparently these
were cases of ordinary exchange speculation. But it ap-
peared that, though the principals were small grain deal-
ers, they were not in a position to want the grain bought
themselves, that they lived at a long distance from Chicago
where the purchases and sales were made, that they merely
advanced margins, and that their purchases were always
offset by sales before delivery time. On one occasion
when May wheat had been bought, the broker came to
the principal and said : " May is coming along and I don't
want this wheat delivered to me.'r The principal was
equally unwilling to receive it, and ordered it to be sold.
Such evidence was held to prove the principal's intention
212 SPECULATION IN THE
to gamble and the broker's knowledge of it, which made
the contract void. In Carroll vs. Holmes (24 111., App.
453) the fact that large transactions were made by a prin-
cipal who had small means, and was only able to advance
a margin, and the fact that these contracts were all closed
out by contra transactions before the time of delivery, so
that the principal (or his broker) was not obliged to take
in the property in any case, were held as evidence of
gambling intent on the part of the principal, which must
have been apparent to the broker. Other cases in line
with these in Illinois, in which state the decisions are
most numerous, are Griswold -vs. Gregg (24 111., App.
384), Brown vs. Alexander (29 111., App. 626), Watte vs.
Costello (40 111., App. 307). In Wheeler vs. McDermid
(36 111., App. 179) the language of the court was espe-
cially vigorous, and reads more like an anti-option speech
than a judicial opinion. Here a clergyman of moderate
means carried on some large transactions through his
broker. The instruction of the lower court was that if
sales and purchases, by agreement of the broker and the
principal, were always made to balance before delivery,
and were yet lawful contracts in themselves, the whole
series were lawful. In the upper court this instruction
was disallowed and was criticised as self-contradictory,
since these contracts could not, with the cognizance of
the broker, be made to balance and yet be lawful. In
Mohr vs. Miesen (47 Minn., 228) the statement of facts
showed ordinary dealings on the Milwaukee Chamber of
Commerce, contracts being closed out by counter orders
and settled by differences. The lower court refused to
instruct that to constitute wager it was not necessary for
the principal to state distinctly to his broker his intention
to close out his sales without delivery. The appellate
court ruled that such instruction should have been given,
and admitted the matter of the residence, the business
UNITED STATES
213
and the financial standing of the principal as evidence
of the real nature of the transactions he was mak-
ing, and as sufficient notice to the broker of his illegal
intent. In Sprague vs. Warren (26 Neb., 326) the court
quotes at length from the deposition of one of the mem-
bers of the brokers' firm, where it appeared that, in the
matter of certain wheat receipts which he had held, he did
not remember in what elevators the wheat had been stored,
and that, when he bought May wheat for defendant and
sold it before delivery, no receipt came into his hands.
The court said, " if the grain had been purchased bona
fide as being in one of the elevators in Chicago, a warehouse
receipt, or some written evidence issued by the warehouse
company, would have been delivered to the purchaser."
And yet the court had stated that the May wheat had
been sold out before May arrived. These facts, together
with the testimony that losses were settled through a ring,
and the fact that the principals were young clerks of small
means, were accepted as evidence proving that the con-
tract was a wager and void. This case was followed by
Watte vs. Wickersham (27 Neb., 457). In Phelps vs.
Holderness {supra], the willingness of the broker to deal
for the principal without knowing much about his finan-
cial status, so long as margins were forthcoming, and the
fact that, when margins failed, the broker, instead of
making offer of delivery, sold out the principal's long
line, were held to be evidence of gambling intent sufficient
to invalidate the contracts. Dows vs. Glaspel (4 N. D.,
251) is very radical in the same direction.
See also Scott vs. Brown (54 Mo.. App. 606); Beadles
vs. McElrath (85 Ky., 230); Lester vs. Buel (49 Ohio,
240); Gaw vs. Bennett (153 Pa. St., 249); Billingslea vs.
Smith (77 Md., 504); Floyd vs. Patterson (72 Tex., 202);
McGrew vs. City Produce Exchange (85 Tenn., 572).
These cases follow more or less closely the rules estab-
214 SPECULATION IN THE [496
lished in some of the early cases, for example Beveridge vs.
Hewitt (8 Bradw., 467); Lyon vs. Culbertson (83 111., 33);
Ex parte Young (6 Biss., 53); Melchert vs. Am. Un. Tel.
Co. (n Fed. Rep., 193). This ground has been taken
by the Pennsylvania court in many decisions.1
Many of the decisions above cited are based on a miscon-
ception of the real nature of exchange dealings. The fact
that the principal and his broker intend to settle by differ-
ences the contracts made on the exchange, is confused with
the idea that the contracts were not meant to be fulfilled.
Some of the earlier opinions show a much clearer under-
standing of these matters. In Sawyer vs. Taggart (supra) ,
it was said by the court: "Although the Hamiltons did
not intend to receive the goods, they intended to resell them,
and having done this, their vendees became bound in their
stead to receive the goods and pay for them." The fact
that in no case were the goods received by the defendant
was held immaterial, since in every case they were resold
before delivery. And it should be evident that the fulfil-
ment of the first contract is provided for by the making of
the second. In Kent vs. Miltenberger (su^ra), the court
said : " It appears that delivery is always contemplated, not
as a thing which will be necessarily insisted upon, but as
a thing which the purchaser may insist upon. It suffi-
ciently appears that this is the one thing that gives vitality
to such contracts." In Sawyer vs. Taggart, again, it was
said, " the material matter is that the contract shall be
1 In view of the sharp criticism which has been made upon the Penn-
sylvania decisions (see Dos Passes, p. 423; Dewey, p. 109; Biddle, pp.
305, 317), it is of interest to notice a recent Pennsylvania case, Peters
vs. Grim (149 Pa. St., 163), in which Mitchell, J., who dissented in
Gaw vs. Bennett (supra), said: "In dealing with stock transactions
falling within, or in any way connected with, wagering contracts, the
law of Pennsylvania is of exceptional, and for myself I would say of
illogical and untenable, severity in its interference with the business con-
tracts of parties who are sui juris, and entirely competent to manage
their own affairs." See also Hopkins vs. O'Kane, 32 Atl., 421.
UNITED STA TES
2 1 5
such that its performance can be enforced." See also
Clark vs. Foss (supra).
Under these rulings, the facts of large transactions on
small margins, of a whole series of contracts off-set with-
out the party in question himself receiving or delivering,
the incapacity of the principal to pay for his purchases,
and the omission of the broker ever to call for money ex-
cept as margin, and other similar items of evidence, be-
come immaterial. In many recent cases specific reference
is not made to the instances cited in other cases, and,
hence, it is impossible to say how far such evidence was
allowed. Where the court's preconceptions are in the
line of holding constant settling by differences and the
like to be evidence of wager, much weight is given in the
opinion to such occurrences. In other cases the court
fails to find the existence of a. wagering contract, without
considering at all the validity of the lines of evidence dis-
cussed above. In Whitesides vs. Hunt (97 Ind., 191), the
evidence showed that the principal intended to gamble,
that his transactions were carried on a small margin, that
the broker knew little about the principal, and never called
on him to receive or deliver, but only to keep his margins
up. On his failure to do so the broker sold him out, with-
out waiting for orders. The court affirmed the judgment
below for the broker. In Edwards vs. Hoeffinghoff (38
Fed. Rep.. 635) the court said that the fact of large trans-
actions on a small margin was no sign that the transactions
were not bona fide, and that, " When it comes to a pur-
chase upon speculation, it is of no sort of consequence in
determining upon the validity of the transactions, whether
the purchase be large or small ; whether the speculator be
keeping within moderate bounds, or whether he is running
wild, actuated by his hopes and fancies." ' See also Hatch
1 Neither the mere fact of a subsequent settlement by differences, nor
that of the deposit of a margin, are evidence of wager in themselves. (See
2l6 SPECULATION IN THE
vs. Douglas (48 Conn., 116); Bibb vs. Allen (149 U. S.,
481); Conner & Hare vs. Robertson (37 La. An., 814).
The effect of the clearing system has been distinctly
noted in a recent case, Dillaway vs. Alden (88 Me., 230).
Some earlier decisions, especially those of the Pennsyl-
vania courts, admitted the process of clearing as evidence
of gambling ; and in Dickson vs. Thomas (97 Pa. St., 278)
the court refused to let the case go to the jury, on the
ground that the defendant's own account of the settlement
through the clearing-house of the Philadelphia Stock
Exchange was proof of the wagering nature of the trans-
actions. In Sprague vs. Warren (supra) the process of
settling by " ringing up " (sic) was admitted as evidence
of wager. But Dillaway vs. Alden shows a clearer under-
standing of the real nature of exchange transactions, and
seems to state the true theory. After describing the
methods by which transfers are made and differences are
settled, the court said : " These devices of the brokers to
facilitate their transactions may bear to the superficial
observer the appearance of jugglery rather than of regular
buying, selling and delivering ; but a deeper and longer
look will discover that they are appropriate means for the
quick and economic transaction of large volumes of legiti-
mate business. All through the various deals is the in-
tention to finally strike a balance, and liquidate it by an
actual transfer of stock certificates. At the end, when
the deals or transactions are finally closed and the balance
is struck, the broker is ready to deliver the requisite stock
certificates on his principal's order." This case accent-
uates the important fact that the outcome of all these off-
sets is a final delivery of the balance.
Dewey, pp. 108, 170, and citations; also, in connection with Illinois
decisions above, Benson vs. Morgan (26 111. App., 22) and Ware
vs. Jordan (25 111. App., 534). The question raised in the text is as to
the evidence afforded by the extent of the transactions compared with
the amount of margin and by the fact of a continuous settlement by
differences.
UNITED STATES 217
Inasmuch as all contracts upon an exchange go through
the same clearing-house where nothing is known of indi-
vidual parties, or of their intentions, but where contracts
are interpreted as they read, and actual off-sets are made,
how can it be determined which were bona fide, and which
were wagers? In the case of produce exchanges such off-
sets are made outside the clearing-house without altering
their real nature. It should also be borne in mind that
under the modern clearing methods, differences are paid on
actual delivery as well as on off-sets. Delivery and a pay-
ment of differences are regarded as antithetical in many de-
cisions: whereas, in fact, every party who receives or de-
livers the property gets or pays a difference to the
clearing-house.
It will be seen that there is considerable divergence in the
application of the general principle that a transaction in the
form of a contract to buy or sell, where a mutual agreement
exists that there shall be no delivery of the property, is
wagering and void. The principle not being questioned,
the attempt is often made to reconcile one opinion with
another on the ground of a different finding of facts. The
facts of course must be accepted as found by the court.
But, given the same testimony verbatim, different courts
will interpret such testimony as evidence of different facts.
If it be held that the intention of the principal to settle in
every case by differences and a knowledge of this intention
on the part of the broker constitute wagering, then a large
number of the contracts on all the important exchanges
must be declared void. Under such a ruling most "hedg-
ing " sales may be illegal. The Southern planter who
plans to sell his cotton in the local market, and merely to
hedge on the exchange, settling differences in the quick-
est way, and so informs his broker, may find the transac-
tion condemned by the courts.1
'Two recent cases held hedging sales valid, but only on the ground
2i8 SPECULATION IN THE
In regard to those contracts in which there is no absolute
agreement by words or in writing between either the two
principals, or between one principal and his broker, that in
no case will delivery be made to, or demanded of, the prin-
cipal, and yet, according to the mutual expectation of the
parties, settlement is made by " ringing out," the courts
must either hold them all valid, or all invalid, or assume the
difficult task of saying in each particular case how far the
means and position of the principal justified his being en-
gaged in speculation. As said by the court in Kent vs.
Miltenberger, any other rule than that, to show wager, there
must be a binding agreement that no delivery shall take
place, "remits the whole subject to the loose discretion
of juries, and puts it entirely at sea."
The same difficulties have presented themselves in the
courts of other countries. Evidence of settlement by off-
sets, of excessive trading on margins, etc., was interpreted
now in one way, now in another. The confusion result-
ing has led to the enactment of statutes which put the
whole matter at rest. The new German statute, discussed
below, makes provision for the registration of all persons
dealing in futures under the rules of the Exchange, and
declares that, in the case of contracts so made, the defense
of wager shall not be allowed. Futures of this nature
made by other parties are more easily invalidated on the
ground that the parties are not registered. In Austria a
statute of 1875 excluded the defense of wager in the case
of contracts duly executed on an exchange, and a similar
law was enacted in France in 1885.'
that the principal meant to ship the goods sold against for delivery on
the hedging sales, but for some reason changed his mind. (Morissey
vs. Broomal. 37 Neb., 766; Douglas vs. Smith, 74 la., 468.)
1 Cf. Handworterbuch der Staatswissenschaften, article, " Borsen-
spiel," and Courtois, op. tit., p. 296.
cOI] UNITED STATES 2 19
III.
The statutes of the various states, as given in the first
section of this chapter, have failed to reduce in any material
degree the speculation in stocks and produce, or to improve
its nature; and no sufficient remedy for its evils has been
found in the common law. The desire to secure more strin-
gent control over these operations has led in recent years
to some determined efforts at federal legislation. In the
last three Congresses bills known popularly as the " anti-
option bills," have been introduced for such purpose. In
the 5 1 st Congress a bill J was introduced by Mr. Butterworth
of Ohio and is known by his name.2 The bill, however,
never came to a vote. Since the more important bill of
the next Congress included its important features, it is
not necessary to discuss the measures which it proposed.
In the 52d Congress bills were introduced by Messrs. ;
Hatch3 of Missouri, Alexander4 of North Carolina, and •
Brosius 5 of Pennsylvania. These were all referred to the
Committee on Agriculture, which committee reported 6
back a new bill as substitute,7 April 4, 1892. This was
the important bill on which the discussion in both House
and Senate centered.
The bill was entitled, " A Bill defining ' options ' and
' futures,' imposing special taxes on dealers therein, and
requiring such dealers and persons engaged in selling cer-
tain products to obtain license, and for other purposes."
The first of the objects of the proposed legislation as
enumerated in the report of the committee was " to obtain
^ist Congress, ist Session, H. R. 5353.
"The bill was introduced in the House January 20, 1890, was referred
to the Committee on Agriculture, and was reported back April 8, 1890.
H. Rep., No. 1321.
352d Congress, ist Session, H. R. 2699 and 6012.
*H. R. 3870. 5H. R. 394.
652d Congress, ist Session, H. R. No. 969. 7H. R. 7845.
220 SPECULATION IN THE [502
revenue." This designation of the bill as a revenue
measure was not even pretended to be more than a cover
to its real object. The first section of the bill defined
" options," the word being applied to the forms of con-
tract called in this essay " privileges." The second section
defined " futures," as contracts for future delivery where
the seller was not at the time in possession of the property
contracted to be sold, and had not acquired a right to the
same. It also provided that no provision of the act should
apply to any contract made with the government of the
United States or the government of any state or munici-
pality, or to a contract made by a farmer or planter to
deliver the specified commodities at a future time, such
commodities being in his possession or in process of
growing at the time of contract. Section three specified
the commodities to which the foregoing sections related,
" raw or unmanufactured cotton, hops, wheat, corn, oats,
rye, barley, grass-seeds, flax-seed, pork, lard, bacon, and
other edible product of swine." Section four imposed
taxes as follows : an annual license fee of $1000 on every
dealer in options or futures (that is, on every person or
association making such contracts for self or others); a
tax of 5 cents per pound on every pound of cotton, hops,
pork, lard or bacon, and 20 cents per bushel on every
bushel of the other commodities specified, sold under such
contracts. The remainder of the bill, which covered
twenty-one pages, was made up chiefly of the details of
regulation to ensure the collection of such taxes. Since
the taxes were on their face prohibitory and were never
meant to be collected, it would be useless to recount these
provisions. It may be noted that every dealer was to
make application to the collector of internal revenue for
a license, and every application was to be registered and
a book containing such applications to be kept by the
collector ; the dealer was to give a bond to the amount
UNITED STATES 221
of $40,000; every " options " or " futures " contract to be
in writing, and entered in a book kept by the dealer, and
sworn returns of all such contracts to be made to the col-
lector each week. The aim of the act may be expressed
briefly as the suppression of professional speculation
through a suppression of short-selling. The second sec-
tion defining " futures " did not include sales for future
delivery where the seller possessed, or had a right to, the
property ; and, somewhat inconsistently, provision was
made later for dealers to be authorized to make such con-
tracts, under a license fee of two dollars.
The bill was fully debated in the House, and finally
passed that body June 6, 1892, by a vote of 167 to 46.
In the Senate two bills of a very similar nature had already
been introduced by Senator Washburn of Minnesota,1 and
one by Senator Peffer of Kansas.2 These, however, were
allowed to drop when the Hatch bill came up from the
House. This bill was referred to the Committee on the
Judiciary. The committee reported it back with a majority
report, doubting its constitutionality, and a minority re-
port in its favor.3 Senator Washburn stood sponsor for
the bill in the Senate. It was debated with much ability
on both sides, and passed with amendments, January 31,
1893, by a vote of 40 to 29. From the point of view of
the real issue involved, the amendments were of slight
importance, with the possible exception of the inclusion
of flour in the articles enumerated in section three. The
bill was returned to the House and referred to the Com-
mittee on Agriculture, which reported it again the follow-
ing day.4 On the motion (by Mr. Hatch, March ist) to
suspend the rules and take up the bill and concur in the
'52d Congress, ist Session, Sen. Bills 685 and 1757.
'Sen. Bill 1268.
S52d Congress, ist Session, Sen. Rep. No. 893.
452d Congress, 2d Session, H. Rep. No. 2421.
222 SPECULATION IN THE [504
Senate amendments, the vote was 172 to 124, less than the
two-thirds necessary for the suspension of the rules.
Congress expired March 4th, before the bill could be
reached in order.
In the 53d Congress a bill was again introduced by Mr.
Hatch,1 and referred to the Committee on Agriculture,
which reported2 back a substitute, entitled "A bill regu-
lating the sale of certain agricultural products, defining
' options ' and ' futures,' and imposing taxes thereon and
upon dealers therein." 3 In this bill some decided changes
were made in order to meet the criticism urged against
the former bill, that short-selling was often a necessity in
bona fide business. The new bill defined the "future "
merely as a contract for the delivery of the specified pro-
ducts (about the same as in the Hatch bill of the previous
Congress)4 at some future time. Possession by the seller
was not considered in the definition. It was then provided
that the original contracts were to be made in writing ;
that, when terminated by the " absolute sale and actual
delivery" of the property, a bill of sale was to be executed,
specifying all conditions ; and that, when the contracts
were otherwise terminated, " the cancellation, clearance,
settlement, acquittance, contango, backwardation, privi-
lege, waiver, ringing out, or other agreement or arrange-
ment," by which this was done was to be executed in
writing. All of these instruments were to be in duplicate.
Taxes were then laid as follows by means of stamps to be
attached to these various instruments : on every contract
and its duplicate one cent for every 1,000 bushels of grain,
and for every 10.000 pounds of the other commodities
*53d Congress, 2d Session, H. R. 5653.
2H. Rep. No. 845.
3 53d Congress, 2d Session, H. R. 7007.
4 In the amended bill of the Senate, the word " flour " appears in the
section defining options, but nowhere else in the bill.
UNITED STATES
specified; the same on every transfer of such contract ;
on every bill of sale and its duplicate two cents ; and on
the original and duplicate of the instrument of every
" cancellation, clearance," etc., by which the contract was
terminated otherwise than by " absolute sale and actual
delivery/' for every bushel of wheat three cents, of all
other grain two cents, and for every pound of other speci-
fied commodities one cent.
The bill passed the House June 2.2., 1894, by a vote of
150 to 89. not voting 114. It was sent to the Senate and
referred to the Committee on Agriculture and Forestry,
and was reported back, but never came to a vote. The
debate on the bill was not so vigorous or extended as in
the case of the earlier bill.
It is unnecessary to discuss here the advisability of the
measures proposed. To do so would be but to repeat the
main points of the earlier chapters. If the bill of 1894 had
passed, the whole question as to what constitutes " absolute
sale and actual delivery," would necessarily have gone to
the courts, and the phrase might have been so construed as
to defeat the purpose for which the measure was framed.
It was avowedly meant to stop the process of " ringing
out," and was intended to reach the great mass of dealing
for differences as described above. The taxes, though
lower than before, were made prohibitory.
The more specific arguments of the advocates of anti-
option legislation have been elsewhere discussed.1
IV.
The statutes enacted in the various states, and the recent
suggested legislation by Congress, show the American ten-
dency to interfere with business only so far as it may appear
desirable to forbid outright, or to destroy by taxation, par-
1 See "Legislation Against Futures," Political Science Quarterly,
March, 1895.
224
SPECULATION IN THE
ticular practices. No attempt has been made to correct the
evils of the speculative market through governmental
supervision and control of the exchanges. The legislation
of continental countries, on the other hand, though some-
times aimed at an outright supression of speculation, has
in the main looked rather toward a far-reaching regulation
of exchange transactions. Here it is necessary only to
consider briefly the most recent and ambitious effort in
this direction, the new German statute of 1896.*
The large failures of 1891, which followed the speculative
activity of the two previous years (some of which were
attended by circumstances of fraud and dishonor), led to a
vigorous agitation among the public and in the Reichstag
for some legislative interference with the Bourse. The
upshot of this agitation was the appointment of an im-
perial commission in 1891 to investigate the whole ques-
tion of exchange business, and to evolve some method of
reform. The appointment of this commission was a new
departure in German parliamentary methods, being the
first important attempt to adopt the English practice of
commissions of inquiry. The commission as finally con-
stituted had twenty-eight members, including bankers,
merchants, manufacturers, state officials, land proprietors,
economists and jurists.
The work of the commission began in April, 1 892, and was
concluded in November, 1893. Ninety-three sittings were
held and a large number of witnesses examined, including
representatives of all the lines of trade and manufacture
directly connected with the speculative market. The com-
mission published a report, four volumes of evidence, a
volume of statistical investigation, and some other matter.2
1 For European legislation in regard to speculation, see the works of
Ehrenberg, Jacobson and Courtois, cited above.
2 See Bericht der Borsen-EnquSte-Kommission, and the accompanying
documents, Berlin, 1893. The proposals of the commission are given
CQ-] UNITED STATES
In the report of the commission the important questions
in the whole field of inquiry are discussed at length, and the
arguments on both sides of each question fairly presented.
The results are given in the long list of proposals for leg-
islative reform supported by the majority of the commis-
sion. Since these formed the basis for the legislation which
followed, the most important of them may be best con-
sidered in connection with the la\v as passed. In general
it may be said that, though not a few of the recommenda-
tions were of a very stringent nature, the report of the
commission as a whole showed an appreciation of the real
importance of organized speculation, and a desire to cor-
rect its evils without destroying its benefits. When it
came to legislation, the bill which was presented to the
Reichstag went farther in its proposals for governmental
interference than did the report of the commission : while
the amendments adopted by the Reichstag itself were
more extreme. The result is, that, though the law as it
stands follows the report of the commission in many de-
tails of the proposed regulation, its most important and
far-reaching sections are utterly opposed to the views of
the majority of the commission.1
The bill framed by the representatives of the Federal
States, on the basis of the commission's report, was pre-
sented to the Reichstag, December 3, 1895, and \vith
amendments became law, June 22, 1896. With the excep-
by Cohnstaedt, Die Vorschlage der Bdrsen-Enqu£te-Kommission , Berlin,
1894. An admirable discussion of the results of the testimony taken
may be found in Pfleger and Geschwindt, Borsenreform in Deutschland.
See also Prof. Cohn's essays in Beiirdge zur deutschen Borsenreform.
!The text of the law, with notes and introduction, has been edited by
Dr. Max Apt, Das Borsengesetz, Berlin, 1896. The text is also given,
with a critical discussion, in Conrad's Jakrbucfter, September, 1896, "Das
Borsengesetz." by Dr. Adolph Endermann. See also the Bericht der
Reichstags-Kommission zur Vorberathung des Entwurfs eines Bdrsen-
gesetzes, Berlin. 1896, and Tiessen, Der Borsengesetzentuwrf, Berlin,
1895.
226 SPECULATION IN THE
tion of a few clauses which were to become of force
earlier, the law is to go into effect January i, 1897.
The first part of the law contains the general provisions
regarding the exchanges and their organizations. The
exchanges are to be under the control of the governments
of their respective States, which may put the immediate
supervision in the hands of local commercial organizations
(Handelskammern, kaufmdnnische Korporationen, etc.)*
These bodies may in turn appoint particular officers for
this purpose. Regulations for each exchange are to be
established by the different governments, which are to
prescribe rules for the organization and conduct of the
exchange, for the admission to exchange privileges,2 etc.
Some of these rules are provided in the act itself, espe-
cially a provision that in the governing bodies of produce
exchanges the agricultural interest and the milling inter-
est shall be represented.3 In the main, however, the
formation of rules is left to the government in each state.
These governments appoint state commissioners to rep-
resent them in control of the exchanges. This official is
a new institution so far as German exchanges are con-
cerned. His duties are to keep watch of the whole course
of business on the exchange, to inform its officers of any
evils to be corrected, and to keep the government fully
cognizant of the conduct of the exchange.4 He is em-
powered to sit at the meetings of the governing committee.
'As seen above, p. 14, the Prussian exchanges, as they exist to-day,
are under such governmental control, while the exchanges of Hamburg
and Bremen are under the control of the merchant corporations of their
respective cities. The more power is assumed by these bodies under the
new law, the more will the control be left in the same hands.
2 In this matter the law goes only to the extent of excluding certain
classes, especially bankrupts. Some positive recommendations were
made by the commission of 1893, looking in the direction of a close
membership, as in the stock exchanges of New York and London.
s§4- 4§2.
UNITED STATES 227
This commissioner is closely associated with another
new institution, a special court (Ehrengerichi) composed
of members of the exchange, which sits in judgment upon
members accused of irregular business conduct. The
commissioner can initiate proceedings before this court,
take part in all hearings, and no case can be dropped
without his approval. The commissioner or the accused
can take an appeal to a higher tribunal appointed by the
Bourse Commission described below.1
The foregoing provisions are along the lines laid down
in the report of the commission of 1893, though there are
differences in some respects. The state commissioner,
for example, was intended by the commission to be
merely a government representative to see that the law
was carried out by the special court, but he has become
instead an inquisitorial police officer.
Besides the powers of the different governments and
their representatives, more general powers are vested in
the Bundesrat of the Empire to secure uniformity among
the exchanges where uniformity is necessary. The Bun-
desrat may establish rules for the official determination of
prices and for the admission of securities to trading. It
may forbid entirely exchange trading (Borsentermtn-
handef) in particular securities or commodities. In pur-
suance of these duties the Bundesrat has the appointment
of a Bourse Commission (Bbrsenausschuss} , which prac-
tically is its representative and makes reports to the
Imperial Chancellor. This Bourse Commission is to con-
sist of at least thirty members, one half elected on the
nomination of the particular local bodies, or officials,
which have supervision of the exchanges, and the other
half from representatives of agriculture and industry.2
The second article of the statute provides an elaborate
machinery for the official registration of prices. A special
'§§9-28. '§3.
228 SPECULATION IN THE [-IO
class of sworn brokers for quotation purposes (Kurs-
makler) is established, and only their dealings are neces-
sarily considered in making up the prices of the day.1
These brokers can deal for their own account only so far
as necessary to the performance of this function. This
official registration of price, however, is optional on the
part of the individual exchange, except in the case of an
order to the contrary from the Bundesrat.2
The third article of the statute contains stringent rules
in regard to the admission of securities to trading on the
board. They are to be first submitted to examination by
a committee, one-half of whom must be persons not en-
tered in the Borsenregister, that is, not professionally
connected with the trade in securities.3 The Bundesrat
may make special rules at any time in regard to listing,
and may specially forbid the listing of particular securities.
Promoters are made liable for any false statement in the
prospectus, and for the omission of any statement neces-
sary for a correct understanding of the nature and condi-
tion of the enterprise, when such omission is the result
of wilfulness or gross negligence. This liability is to all
holders of the securities issued under the prospectus in
question, and may be discharged by a re-purchase from
the holder at the price of his purchase or at the price at
the time of listing.4
The most radical and important article is the fourth.
This defines the " future dealings " referred to in the
statute {Bbrsenterminhandef) as dealings for future de-
livery made under conditions fixed by the exchange, and
for which there is an official determination of prices.
Before a commodity can be dealt in on any exchange, a
hearing must be given to representatives of all branches
of industry directly interested ; and admission is finally
granted only on the approval of the Imperial Chancellor.
'§30. 2§29. 3§36. 4§§ 43-47.
- ! j 1 UNITED STA TES 22Q
So far this article is in accord with the proposals of the
commission of 1893. The next section of the article for-
bids future dealing in the securities of all mining and in-
dustrial companies, and in grain.1 This clause evidently
overshadows all the rest in importance. It is utterly
opposed to the commission report, and was fought by
the sponsors of the original bill. It was adopted as an
amendment in the Reichstag, and represented a victory
for the agrarian party. The agrarian attitude is that of
the anti-optionist, and at the bottom of this provision
was the same belief in the depressive influence of short-
selling on price.
Two more provisions may be noted. Future dealings
are forbidden in the securities of all companies with a
capital of less than twenty million marks2 — a clause in-
corporated in the statute in the belief that the chances for
fraud and manipulation in the case of small issues out-
weigh any possible advantage of the speculative market
in regard to them. Secondly, all persons who desire to
carry on exchange dealings must be registered in the
Bbrsenregister and pay a small license fee.3 Contracts
between parties, either of whom is not so registered, are
void. As already said, contracts between registered
parties, made under the rules, do not permit of the de-
fense of wager. The provision for a register of all per-
sons buying or selling futures was recommended by the
commission of 1893, but to apply only to the market for
produce. The Reichstag here, as elsewhere, took the
more radical ground. The motive for the enactment of
this section was the desire in some way to restrict the
participation of the public in reckless speculative trading.
It is unnecessary to discuss the arguments for and
against the particular provisions of the law here recited.
This minute regulation of Bourse affairs by the govern-
'§50. '§50. 3§§54, 55-
230 SPECULA TION IN THE [c)l2
ment, and the presence of government officials on the
board to watch all proceedings, are utterly foreign to
American conceptions. In Germany also there is much
doubt as to the practicability of these regulations. It has
been pointed out that hitherto state control has in no
way lessened speculative evils. Berlin is not freer from
them than Hamburg, nor Paris than Berlin.1 The pro-
vision for the registration of all persons who trade or
speculate in futures cannot fail to prove most difficult of
enforcement. Of chief interest, however, is the action
against futures in grain. Will such speculation cease ?
If so, will the grain trade of Germany dwindle as specula-
tion moves to other markets ? Will the law in this regard
be simply disregarded ? These are some of the questions
which the workings of this act will answer. However
disastrous such legislation may prove within the country
where it is in force, it cannot fail to be of great value as
an object-lesson to all other countries in showing two
things — the effect of stringent governmental control of
exchanges, and the effect of a law forbidding all ex-
change speculation in grain. Each attempt has been
made before ; never, however, with such show of force as
here.
1 Cf. Thorwart, Zum Eorsengesetz , Berlin, 1896.
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