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less be called good old-fashioned legitimate dealing. Such dealing is, however, extremely risky. The fluctuations in the wheat market are such that the dealer's expected profit might be wiped out by the fall in price of a single day. To avoid this he may sell his wheat for forward delivery in the speculative market as soon as possible after buying it, and make the delivery at the required time. It may happen that, when the time of delivery arrives, he has another good chance to sell his wheat and prefers not to ship it to the market where it was first sold. Since that was a speculative market, he can easily settle the contract for future delivery there by “buying in ” an equivalent amount in open market, thus reserving the wheat he is holding for a cash sale in a better market. Now what has in this case been done through an after-thought, may be done intentionally. The dealer, as soon as he buys in the interior, may sell an equivalent amount for future delivery on some exchange, not meaning at all to deliver the wheat he has just bought, and then when he does sell his actual holdings, fulfil his exchange contract by covering in open market. The object of the exchange contract is, of course, to avoid risk. If the price falls, the dealer's wheat is worth less to him, but this loss will be made good by the profit on his exchange transaction, where he sold short on a falling market. In the same way he sacrifices all chance of great profit. The increase in the value of his wheat in case of a rise in price will be off-set by the loss on his short sale. 1

This method of insurance by hedging contracts is familiar enough. It may not be so well known, however, to what extent this practice is carried. In the case of wheat, most large millers, dealers, and elevator companies insure themselves regularly in this way. Minneapolis and Duluth are the two great depots of the north-western wheat fields, and of the enormous supplies held at these two points probably more than nine-tenths are protected by hedging sales, partly on the local exchanges, and partly on the Chicago exchange. Hedging has become so common a practice that in the main a dealer or miller who does not hedge, that is, who carries his own risks, is looked upon as extremely reckless. Paradoxical as it may sound, the man who avoids the speculative market is the greatest speculator of them all.2

1 As a matter of fact the exchange transactions are often necessarily distinct from the original purchases, because they are always made in terms of “contract wheat," and the wheat actually bought might not constitute a valid delivery.

2 It would, of course, be absurd to maintain that every failure to adopt the practice of insurance bespeaks recklessness. There are cases where the practice is undesirable. This is particularly true in the case of the manufacturer of a

It may be asked what profit remains to grain and cotton merchants if they make themselves independent of every change in the market price. Speculative profits to be sure have been sacrificed, but trade profits remain. It is sufficiently accurate to say that where organised speculation has arisen in a commodity, speculative profits come from fluctuations in price in the same market, trade profits from the difference in prices in different markets. The trader as a rule buys in one market and sells in another. He buys of the manufacturer and sells to the retailer; or he buys of the wholesaler and sells to the consumer ; or he buys of the grower and sells to the manufacturer. The price differences in these markets are not price fluctuations at all. They are permanent differences that furnish to the trader his reward as middleman. On the other hand, the speculator buys and sells in the same market and makes his profit or loss from fluctuations over a period of time. Though there is a constant tendency for the price of wheat in all central markets to be the same save for the cost of transportation, this condition is never actually reached. The trader's success lies in his ability to take advantage of these local fluctuations, as well as of every change in freight rates, insurance rates, storage rates, and the like. In the same way, whereas the speculator is only concerned with the price of “ contract wheat," the trader is concerned with all the differences in varieties and the changes in the demand for each variety in each market.

In turning to another important result of speculation, its effect upon prices,' we come to a question which has given rise to the most bitter discussion. The most violent attacks on the speculative system have been made by those who are convinced that speculation has altered the course of prices to their detriment. The question is certainly not free from difficulties, owing to the fact that what may be called the natural influence of speculation on prices is partially counteracted at many points by the existence of conditions which are usually found in the speculative market. The first effect of speculation is the determination of prices according to future as well as present conditions. Even

particular grade of raw material, the price of which, for local reasons, does not follow closely the price of contract wheat. Not uncommonly even such dealers and manufacturers as regularly “sell against " their holdings, carry a certain amount of wheat unhedged as a "legitimate risk.” The same men, who as millers or elevator-owners insure their trade holdings, may individually be operators in the speculative markets, but the two kinds of business are kept distinct.

1 The limits of space have made it impossible to consider in this place the important effects of speculation on the nature of price fluctuations. No. 33.– VOL. IX

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before the development of an organised market it was usually stated as a function of speculation that it raised prices in anticipation of small supplies, and so lessened consumption. Under the modern methods this effect is much more marked. The exchanges are markets for future goods, and every indication of a change in supply at once finds expression in increased purchases or sales of these goods. The existing price for future delivery depends on the probable future price; the price of May wheat in December on the expected price of cash wheat in May, while, of course, the price for immediate delivery normally rises and falls with the price of futures. It has been well said that in face of a probable shortage it is not the general fear of depleted supplies, but the individual hope of profit, that sends the price up. On the other hand, the probability of abundant crops starts shortselling, which gives the consumer at once the advantage of the lower prices to come. Without the machinery for short-selling this influence was less directly felt.

If these forecasts of future conditions are in the main correct, this service of speculation is an important one. In that case speculation may be said to direct commodities to their most advantageous uses by fixing comparative prices for their delivery at different times and places. The critics of speculation, however, deny that these speculative prices are real forecasts, or that they are determined by the real supplies of, or need for, the commodities in question.

The charge sometimes takes the form of a complaint that these prices are no longer determined by demand and supply.

The statement is meaningless in itself. Prices must be determined by demand and supply in a competitive market, whether it be a speculative market or not. In this case, however, the demand and supply are themselves speculative, and what the critics really desire to say is that the speculative demand and supply are determined without regard to actual conditions of crop and actual needs for consumption. This idea is not infrequently supported by a false conception of price as an objective something, which results mechanically from a given stock of a commodity and a given rate of consumption. It is scarcely necessary to point out that, whereas all prices in a market are determined largely by the opinions of buyers and sellers regarding the future, this is particularly true of speculative prices. Injury to the crops at one end of the world increases almost instantly the speculative demand in another corner of the world. And it may be observed in passing that the professional speculators are far better equipped than any other persons to secure early news of such changes and to interpret their significance. The divergence in the estimates of supply of the best statistical agencies shows how helpless the ordinary producer or small dealer is in the face of these market changes. But whatever direction the transactions of the speculative market may take, prices must ultimately accommodate themselves to the real quantities of a commodity available for use and to the real uses to which it may be put. So far as speculation may permanently change the conditions of the production or the consumption of a commodity it may have a permanent influence on its price, but in no other way is this possible. Even if this were not seen to be necessarily true from the conditions of market competition, an investigation of the course of prices since the development of speculation would show it beyond a doubt.

It would be absurd to reiterate so axiomatic a truth were it not for the constant denial of it by the anti-optionists and other critics of modern speculation. The idea that the practice of short-selling, for example, can permanently lower the price of speculative commodities has been cherished by many people in recent years, though it is probable that the latest occurrences in the wheat market have modified this theory. It is in any case too extreme a view to need detailed examination in this place.

What does lend to the anti-optionists the strength of their argument is the fact that for a considerable period of time the price may be determined by artificial conditions, that there may be a temporary manipulation of the market. This is a consideration of great importance. That any one possessed of sufficient capital may raise prices or lower them by persistent buying or selling of futures is not only true, it is self-evident. Short-selling in anticipation of a fall always reduces prices, as buying for a rise advances them. Furthermore, if an operator sell enough he may temporarily depress the price even when all indications point to a rise; similarly he may raise the price in face of apparent abundance. Now a successful manipulation on the bear side consists in selling a commodity short in sufficient quantities to reduce the price, and then to cover these contracts at the low price which they have brought about. A successful bull manipulation is to send the price up by free buying and then to sell out at the higher prices. On a very small scale such manipulation is frequent. Much of it is unsuccessful, but there are at least constant attempts to bring about slight changes in price within a single day and then to profit from them before a genuine competition can be started. This causes occasional quotations that are " artificial” in the sense that they are due to these attempts at manipulation. So far as they go they are a disturbing element in trade. They are, however, less common in the produce market than in the stock market; they are confined within very narrow limits; they continue but a short time; the volume of transactions is small; and they have little effect on the general course of prices. The attempt to carry out the same kind of manipulation over a longer period, to actually keep the regular market price down (or up) for a considerable time, and to make the covering (or liquidating) transactions at the new prices, is a very different matter. It is true that it is a possible performance, it is true that such a thing has occasionally occurred; but it is utterly wrong to suppose that such practices are easy or common. Mr. W. E. Bear, for example, gives the impression that with a large capital and a small conscience, any one may confidently undertake such a manipulation. The very fact that every one does not adopt so easy a road to fortune would seem to indicate that there is some difficulty of which account has not been taken. Despite certain ideas to the contrary, the professional speculator takes no special delight in disorganising trade, except when he can make money by so doing; and the reason why he so seldom tries a big manipulation is because it does not pay. It is almost impossible to make such a manipulation successful. A sufficient body of short sales will depress the price, but, if all conditions remain the same, the price will at once react when the operator begins to cover. His purchases send the price up as his sales brought it down, and he is obliged to cover a considerable amount at a high price, while in order to depress the market he had been forced to sell a good deal at a low price. The dangers are so great that a big bear manipulation is seldom successful, and indeed is seldom attempted. Moreover, added to the inherent difficulty of the undertaking is the probability of bitter and active opposition from persons equally well equipped for the contest. The biggest operations on the short side of the wheat market in recent years were those of Mr. Pardridge in Chicago in 1891-92. This operator persistently sold wheat in the face of predictions from

1 The arguments of the anti-optionists are considered at length in an article by the present writer, “ Legislation against Futures," in the Political Science Quarterly, March, 1895.

1 “Market Gambling," in the Contemporary Review, June, 1894, and “Market Wrecking,Fortnightly Review, April, 1897.

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