THE USES AND ABUSES OF SPECULATION
Somewhere in each one of us lurks Stevenson’s spirit of “divine
unrest,” the parent of speculation. To-day, as in wise old Greece
in the morning of the world, philosophers sit under every tree,
speculating upon the phenomena of the universe, and upon the practical
application of them to the needs of humanity. Thus Archimedes came to
know of things that we now call Copernican, seventeen centuries before
Copernicus was born; thus Columbus and his argosy sailed into the great
unknown, speculating upon an irrational and even shocking exploit; thus
Pasteur saved to France through the meditations of his speculative
mind a sum greater than the cost of the Prussian war and the colossal
indemnity that followed it.
And so the “divine unrest” goes on and on, impelling men to
speculations and explorations of the physical world and of the world
that lies beyond our primitive senses, with here and there a high
achievement, and now and then a miserable failure, but always on and
on. The hypothesis of the spectacled professor blossoms into a boon;
the dream of the inventor becomes a benefaction; the forlorn hope of
the explorer points the way to wealth. Things that were speculations
yesterday become realities to-day. To-morrow?--nobody knows. In a free
field, not bounded by formulæ nor restricted by law of God or man, with
money to encourage it and enterprise to spur it on, what may come from
the speculations of the future passes understanding.
Now speculation is an all-embracing word, overworked, threadbare,
and worn to the bone. Originally it meant “to see”; then “to view,”
“watch,” “spy out”; then “exploration” or “contemplation.” When thrift
came into the language and men ceased burying their gold, it began to
take on a new meaning. The spirit of legitimate adventure, that entered
men’s minds when the Most Christian Kings abandoned brute force and
repudiation, led men to buy things in the hope of selling them at a
profit. It was risky business at first, and capital, then as now, was
timid. The High Finance of the Middle Ages was not easily forgotten.
But little by little channels through which enterprise might flow into
wealth came into being, and confidence came with them. This was called
speculation.
By the time Adam Smith wrote his “Wealth of Nations” (1776) the word
was firmly fixed in the language. “The establishment of any new
manufacture,” he said, “or any new branch of commerce, or of any
new practice in agriculture, is always a speculation from which the
projector promises himself extraordinary profits.” How the early
channels of speculation broadened into great rivers, how confidence
grew as the art of making money and increasing it developed, how credit
became established, how speculation led to the opening of new countries
and the extension of immense advantages, through civilization, to the
people of those countries--all this is a fascinating story. And yet
the speculation of to-day is no different in its elementals from that
of the early Greeks; the same spirit of “divine unrest” that spurs on
the philosopher in his study stimulates the explorer of strange lands,
beckons on the engineer and the builder of railways, and attracts the
capital of the adventurous investor. We cannot stop it if we would,
because hope, ambition, and avarice are fundamentals of human nature.
The police cannot arrest them; they are fixed and immutable.
If there is more speculation in material things to-day than there ever
was before, it is because there are more things to speculate in, more
money to speculate with, more people to speculate, and more machinery,
like telephones and telegraphs, to facilitate speculation. Capital,
credit, and new undertakings grow day by day and open new avenues of
possible profit. The per capita wealth of nations, growing by what it
feeds on, constantly seeks new fields for enterprise and adventure.
The intelligence of the people increases by leaps and bounds, and goes
peering curiously into all the little nooks and crannies of the world
for opportunities of gain--the apotheosis of speculative enterprise.
All forms of human endeavor in material things are, or were at their
beginning, speculations. Every ship that goes to sea carries with it a
speculation, and leaves another one behind it at Lloyds. Every man who
insures his life or his house buys a speculation, and every company
that insures him sells one. The farmer speculates when he fertilizes
his land, again when he plants his seed, and again when he sells his
crop for future delivery, as he often does, before it is planted or
before it has matured. The merchant contracts to fill his shelves long
before spring arrives; he is speculating. The manufacturer sells to
him, speculating on the hope or belief that he will be able to buy
the necessary raw material, and again on the labor, the looms and the
spindles necessary to make the delivery. In the South the grower of
cotton and in Australia the grower of wool are likewise speculating on
the probability of a crop and on the price at which they may sell to
this manufacturer. It sounds like “this is the house that Jack built”
in its endless chain of sequences; a chain, indeed, and one no stronger
than its weakest link. Interfere with any part of it, and the whole
commercial structure which it binds together falls apart. The grower,
the manufacturer, and the merchant _must_ speculate.
There was twofold speculation on the part of our great financial barons
who built our transcontinental railways, for they had to reckon not
only upon the probability of profit in their undertakings but likewise
upon the willingness of other speculators--you and I--to assist them
by buying a part of the securities which represented the outlay. To
be sure it so happened that many of these vast speculations at first
proved unsound. Some of them were a little premature; others pushed
too far; they brought disaster upon the speculators who had put money
into them. And yet who shall say that our great railways have failed
to enrich the world and spread the comforts of civilization? “But for
a verdant and evergreen faith,” says a recent writer, “salted with the
love of risk and adventure for their own sakes, how could mountains
be bored and waters bridged? If there were not superstition there
could be no religion; if there were not bad speculation there could be
no good investment; if there were no wild ventures there would be no
brilliantly successful enterprises.”
This is not hyperbole; it is fact. The world of business and enterprise
must go on; it cannot stop. As it goes on capital must be enlisted,
which is another way of saying that speculators must be attracted. The
only way that has been devised to attract them is through the medium of
certificates of ownership or evidences of debt, called securities. But
the business does not end there, for, as we have seen in the previous
chapter, the capital of speculators will not take hold unless a market
is provided. They want to know where they stand; before they venture
upon the troubled waters of new enterprises they must be assured of a
public market, a harbor where they can get ashore quickly if storms are
brewing.
The only plan that the ingenuity of man has thus far devised to meet
this emergency is a Stock Exchange. One man, or two, or a hundred
cannot make a market, because the immense volume and variety of these
securities make it impossible for any unorganized handful of brokers
and dealers to determine a fair market price. What is required, and
what the man whose capital is wanted insists upon, is an organized
body of brokers, speculators, and investors competing keenly, seeking
to buy cheap and sell dear, gathering and disseminating all the news,
and so sharpening the judgment and stimulating the higgling of buyers
and sellers as to bring prices to their legitimate level and give
them stability. Ten thousand competitors in this business of bringing
prices and values together are of course better than one thousand; a
hundred thousand would be better still. The Stock Exchange supplies
this want, and will continue to supply it until a better plan is
devised.[16] Meantime, since it has grown to its present stature by
forms of speculation necessary to the maintenance of enterprise, any
serious interruption of the facilities it affords will bring enterprise
to a standstill and cause the whole sensitive structure of credit to
collapse in terror. Let Professor Seligman explain this matter:
“If a railway or other industry, in launching a new enterprise, had
to depend on the chance investors at the time of the issue of the
securities, it would be seriously hampered. The mere knowledge that
at any moment there will be a ready sale on the Exchange greatly
increases the circle of purchasers, many of whom may not intend to
be permanent investors. The Stock Exchange aids the investment of
capital, as the Produce Exchange aids the production of finished
commodities. Business orders and corporate needs are intermittent,
because they depend on temporary exigencies; the risks at one end,
at all events, are eliminated by the unintermittent, continuous
market which regular speculation affords. The Cotton Exchange
was the result of the disorganization of the cotton trade after
the Civil War; speculation in all other staples has in the same
way been the consequence of the efforts of the manufacturer to
avert the risks of intermittent and spasmodic fluctuations in
the raw material. The result of regular speculation is to steady
prices. Speculation tends to equalize demand and supply, and
by concentrating in the present the influences of the future
it intensifies the normal factors and minimizes the market
fluctuation. Speculation so far as it has become the regular
occupation of a class, differentiated from other business men for
this particular purpose, subserves a useful and in modern times an
indispensable function.”[17]
Here we have an authority who tells us that speculation in securities,
no less than in raw materials, is “an indispensable function” if
business is to go ahead. The last census shows that 32½ per cent. of
the population of the United States is composed of laboring men, not
counting agricultural workers. This large army of men is by no means
independent; on the contrary it is strictly dependent on the ability
of others to give it employment. Shut down the factories, curtail the
operations of railways, close the mines and quarries, stop building and
new construction, and in greater or less degree suffering and privation
among these large masses must ensue.
Now go a step further, and we find that the managers of these railways,
mines, and factories, are in turn dependent--wholly dependent upon
capital. They cannot go ahead with the extensions and improvements
necessary to efficiency without borrowing money; and credit, in turn,
will not come to their support unless a broad market is provided,
through the Stock Exchange, for the securities which represent these
obligations. Hence we see that just as every farmer in the West and
every cotton-grower in the South must have a stable market for his
products, so every laborer in our great industrial field is directly
concerned with the maintenance of a stable market for the securities of
the company that employs him. The interests of one are the interests of
all, and speculation, in one form or another, underlies all industrial
progress. “Complaint is made of the evils of speculation,” said the
greatest of French economists, “_but the evils that speculation
prevents are much greater than those it causes_.”[18]
Now that we have reached a point in our discussion that brings us
face to face with the so-called “evils” of speculation on the Stock
Exchange, let us pause and consider the difference between speculation,
which is held by many to be abhorrent, and investment, which is
generally thought right and proper. The first thing we encounter
is the shadowy and indistinct boundary line that separates the one
from the other. Does any one know where the one begins and the other
ends? France has more conservative investors than any other country,
yet, as Mr. Hirst puts it, the most critical and hidebound buyer of
French rentes is a speculator in the sense that he not only wishes his
purchase to yield him interest, but also hopes and expects that sooner
or later he will be able to sell out at a profit, all of which is
legitimate, proper, and human. The first question every man asks when
the time comes to invest is, “Is this a good time for investment?” “Am
I buying cheap?” by which he means “Are these investments likely to
enhance in value?”
He may have bought Spanish bonds at low prices during the war between
Spain and the United States--a somewhat speculative investment--and
in his purchase he believed himself an investor in a strict sense.
Yet, when those bonds recovered to a normal basis and he sold out at
a profit, was it speculation, or investment, or a little of both,
that defined the trade? British consols are low to-day, and there
is of course no safer investment, but the investor who buys them is
influenced by the fact that a long period of peace seems to lie ahead,
with reduced expenditures for armament and hence with diminished
borrowings by the Government leading to a substantial recovery in
the price of these solid securities. Such a man is “speculating” on
England’s abstention from war, on its limitation of military and naval
expenditures, and on the probable effects of these matters on the price
of his consols.[19]
The truth seems to be that all investment is speculation, differing
from it in degree but not in kind. This salient fact was recognized
as long ago as 1825, when, despite the comparatively limited field
for investment enterprise, McCulloch saw what was coming and grasped
the true idea of the part speculation and its handmaiden, investment,
were to play in the industrial renaissance. Coming at a time when
speculation was new, and subjected, as all innovations are, to
widespread criticism and doubt, his words have prophetic significance.
“It is obvious that those who indiscriminately condemn all sorts of
speculative engagements have never reflected on the circumstances
incident to the prosecution of every undertaking. In truth and reality
they are all speculations. Their undertakers must look forward to
periods more or less distant, and their success depends entirely
on the sagacity with which they have estimated the probability of
certain events occurring, and the influence which they have ascribed
to them. _Speculation is, therefore, really only another name for
foresight_; and, though fortunes have sometimes been made by a lucky
hit, the character of a successful speculator is, in the vast majority
of instances, due to him also who has skilfully devised the means
of effecting the end he had in view, and who has outstripped his
competitors in the judgment with which he has looked into futurity, and
appreciated the operation of causes producing distant effects.”[20]
A quarter of a century later we find England’s foremost thinker
sounding the same clear note. John Stuart Mill was by no means a hermit
philosopher feeding on theories. Traveler, sportsman, business man,
statesman, and author, he saw things broadly and wrote for practical
men. “Speculators,” he said--and he was speaking of the “greedy” ones
who buy and sell for gain--“have a highly useful office in the economy
of society. Among persons who have not much considered the subject
there is a notion that the gains of speculators are often made by
causing an artificial scarcity; that they create a high price by their
own purchases and then profit by it. This may easily be shown to be
fallacious.” He then shows, what I have outlined elsewhere, that the
market is larger than any speculator or group of speculators, and, if
this was true in 1848, I think it will not be disputed that it is quite
true to-day.
Continuing, Mill says: “The operations of speculative dealers are
useful to the public whenever profitable to themselves. The interest of
the speculators as a body coincide with the interests of the public;
and as they can only fail to serve the public interest in proportion as
they miss their own, _the best way to promote the one is to leave them
to pursue the other in perfect freedom. Neither law nor opinion should
prevent an operation, beneficial to the public, from being attended
with as much private advantage as is compatible with full and free
competition_.” Mill makes no distinction here between investors and
speculators; they are one and the same. In any case it is conceded that
speculation is what makes the markets to-day, since 90 per cent. of
the transactions that take place daily on the world’s Stock Exchanges
are speculations pure and simple. And this is a good thing. Before we
go on with our subject, let Professor Emery explain why, and bring the
teachings of McCulloch and Mill down to our own day:
“Speculation has become an increasingly important factor in the
economic world without receiving a corresponding place in economic
science. In the field in which it acts, in the trade in grain and
cotton and securities and the like, speculation is the predominant
influence in determining price, and, as such, 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 little space to this influence, which is fundamental in
the world of economic fact....
“It is true that forty years ago speculation was far less important
than it is now, and there was, therefore, more justification for
disregarding it. Professor Hadley has given due consideration to
the new conditions which prevail in modern business. At the same
time it should be remembered that McCulloch, already in his day,
had grasped the true idea of the function of speculation, a fact
shown by the incorporation of his treatment of the subject into his
chapters on Value. 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 incorrect to
attach so little importance to the function of speculation; in
practice it is impossible to deal intelligently with the evils of
the speculative system without first recognizing its real relation
to 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.”[21]
Now we come to the evils of the business. That there are evils, really
serious ones, no one will deny. To be sure many of the phases of
speculation that are called evils are not evils at all; the statements
made concerning them have what Oscar Wilde termed “all the vitality of
error, and all the tediousness of an old friend,” and yet, although
the prevalent criticism is often stupid and superficial, there are
undeniably offensive forms of speculation that one would like to see
suppressed. Speculation is a comparatively new phenomenon, and it
has brought with it dangers and pitfalls. So also have automobiles,
electricity, and steam engines. But while the Stock Exchange has
created the arena for the display of these abuses, it has not
originated them “except,” as a recent writer puts it, “in the sense in
which one may say that private property has originated robbery.”
The great evil of speculation consists in the buying of securities
or real estate or anything else with borrowed money, by uninformed
people who cannot afford to lose. Its commonest form in speculation
in securities is what is known as “margin” trading, this name being
derived from the fact that the buyer, instead of paying cash in full
for his purchase, deposits only a fractional amount of its cost, which
is intended to serve as a margin to protect the broker from loss, while
the broker pays the remaining sum necessary to complete the actual
purchase. Thus the speculator may deposit $1000 on securities costing
$10,000, while the broker furnishes the additional $9000. It is a
system in use everywhere; on the London Stock Exchange it is called
“Cover,” on the Paris Bourse, “La Couverture.”
There is no fixed amount of margin called for by brokers, as
circumstances differ widely with the character of the securities dealt
in, the standing of the buyer, and the condition of the market; but in
a broad way it may be said that members of the New York Stock Exchange
exact a margin equivalent to ten points on middle-grade speculative
issues, twenty points on high-priced and erratic securities, and five
points on very low-priced shares that move slowly. There are, of
course, certain securities on which no payment short of actual outright
purchase in full would be accepted by reputable brokers, while on the
other hand, in the case of securities that fluctuate but slightly,
such as our government, state, or municipal bonds, a 5 per cent.
margin would be ample. This is also the practice in London and Paris,
generally speaking. In Paris the _Agents de Change_ always insist upon
a greater margin than the _Coulissiers_, or outside brokers, and here
members of the New York Stock Exchange invariably pursue the same
policy.
This affords an opportunity to say that the local evil of stock
speculation arising from insufficient margins is one that may be laid
at the door of outside Exchanges rather than the “Big” Exchange, as it
is called, because, in the minor Exchanges, margins are notoriously
small, and the smaller the margin the greater the number of “victims.”
Indeed, if it were not for this practice it would be difficult for
members of smaller Exchanges to exist at all. In so far as speculation
in securities may merit criticism, this tendency to attract poor people
by the bait of slim margins is undeniably a very real evil, and one
which can only be corrected by the brokers themselves. The Hughes
Committee, after devoting much time and labor to this matter, put its
conclusions in these words:
“We urge upon all brokers to discourage speculation upon small margins,
and upon the Exchange to use its influence, and if necessary its power,
to prevent members from soliciting and generally accepting business on
a less margin than 20 per cent.”[22]
Every one connected with the New York Stock Exchange knows that this
suggestion, like all the others made by the Commission, was received
with approval by all hands, and, if a hard and fast rule could have
been devised to meet not merely the spirit but the letter of the
recommendation, the Governors of the Exchange would have put it into
instant operation. But there are difficulties in the way, and one of
the duties of the Governors is to consider very carefully all sides
of each perplexing question that comes before them, not merely in the
interests of the Stock Exchange, but with due regard to the common
law and the interests of the public. Margin trading is a matter of
contract, and “the right of one private person to extend credit to
another,” as the Chairman of the Hughes Commission himself points out,
“is simply the right to make a contract, which, under the Federal
Constitution, cannot be impaired by any State Legislature.”[23]
Here is a very considerable difficulty in the way of restricting margin
trading, and one that is not fully understood by the outsider. He is
prone to speak of contracts thus made as “gambling transactions,”
missing altogether the essential point that there is a vast difference
between a transaction with a contract behind it, enforceable at law,
and one that has to do with bucket-shops and roulette, in which there
is no contract, and is expressly prohibited by law. No matter what
his intent may have been when he bought, and no matter what margin
the broker accepted--the buyer has the right to demand his securities
at any time, and the broker must always be prepared to deliver them;
conversely, the broker may compel the buyer to pay for and to receive
the securities he has bought. Motives and methods have nothing whatever
to do with the transaction.
The broker who buys for a client to-day does not know, and sometimes
the client himself does not know, whether the securities are “bought to
keep,” or are to be sold to-morrow; similarly the broker has no means
of knowing whether the client, who deposited a ten-point margin at
the time of his purchase, will or will not deposit another ten points
to-morrow, and continue such payments until his securities are wholly
paid for. In the large majority of cases the intent of the speculative
buyer is to sell as soon as he can get a satisfactory profit, but
that does not make him a gambler by any means. Why? Because, if he
bets $1000 on a horse race, one party to the transaction wins and the
other loses; whereas, if he deposits $1000 as margin against a stock
speculation and makes a profit of say $500, the broker loses nothing
by paying him that profit when the account is closed. No property
changes hands in the one case, while, in the other, actual property is
purchased and held ready for delivery on demand. The law is clear in
classifying the operations of bucket-shops with gambling transactions,
because in a large majority of instances no actual purchase is made;
the “buyer” merely bets in that case as to what subsequent quotations
will be; the “trade” is between two principals, one of whom must lose
if the other wins.
The Hughes Commission, as I have said, went very fully into all
these matters. It was in session six months, and many witnesses were
examined. After considering all the pros and cons of margin trading,
the experience of England and Germany in dealing with speculation, the
three-years’ debate in Congress on the Hatch Anti-Option Bill, and
the voluminous reports of the Industrial Commission, the conclusion
was reached “to urge upon all brokers,” as shown in the paragraph
cited, a general agreement on margins of not less than 20 per cent.
It must be borne in mind that this was not in the nature of a formal
recommendation, but rather as the expression of a hope that some
measure of reform might be accomplished if such concerted action by
brokers were feasible.
That members of the New York Stock Exchange endorse this view goes
without saying. They realize more fully than is generally known by
the public that indiscriminate and reckless speculation by uninformed
people who are beguiled into it by the lure of small margins is an
undoubted evil that should be checked, and they are doing what they
can to check it by discouraging such operations. For example, it would
be very difficult to-day for a woman to open a speculative account
with any reputable firm of brokers on the major exchange unless she
were well known, peculiarly qualified for such transactions, and
abundantly able to support them. Accounts will not be accepted from
clerks or employees of other brokerage houses or of banks and other
corporations in the Wall Street district; indeed, such transactions
are expressly forbidden by the rules of the Exchange. No accounts
will be accepted from any one who is not personally known to one of
the firm’s partners--and the practice resorted to in earlier years of
employing agents to solicit business under the nominal title of “office
managers,” “bond department managers,” and all that sort of technical
subterfuge, is likewise forbidden.
Members of the Exchange are not permitted to advertise in any way save
that defined as of “a strictly legitimate business character,” and
the governors are the judges of what is legitimate. The layman has
but to glance at the bare and colorless announcements made by Stock
Exchange houses in the advertising columns of our newspapers to see
how rigidly this rule is enforced; indeed 90 per cent. of the members
do not advertise at all. Best of all, speculation on “shoe-string”
margins is now almost eliminated from the major exchange. The houses
that notoriously offended in this respect ten and fifteen years ago are
to-day inconspicuous in the day’s dealings. Their business is gone--in
its very nature it could not last long--and if rumor be credited its
demise carried with it a part of the capital of the firms involved.
It was a lesson and a warning. All these instances serve to show that
the Stock Exchange is doing what it can to remedy this evil, and,
if circumstances arise in which more can be done, the governors and
members will be found a unit in enforcing whatever restrictions are
necessary.
At the moment it is difficult to see how an inflexible rule of 20 per
cent. margins could be put in practice without seriously interfering
with really sound business. A telegraphic order may be received from a
customer of the utmost responsibility who may happen to be in Europe.
Any stockbroker, and any business man in mercantile trade, would be
glad to execute for such a person all the orders he chose to entrust,
regardless of margins. In such a case no question of motive enters into
the transaction; it may ultimately prove to be a speculation pure and
simple, or the buyer may cable instructions to deliver the securities
to his bank, in which case it would seem to be an investment; but,
regardless of that, an insistence by the broker on a 20 per cent.
margin would be silly, and would merely drive the business elsewhere or
prevent it altogether.
Numerous instances of a similar sort might be cited to show how
difficult it would be to enforce margin prohibitions in all these
perfectly legal contracts. Germany tried it in the law of 1896, with
disastrous consequences, which I have described elsewhere. It is a
matter that will always be a fruitful topic of discussion, yet it
differs in no essential respect from the practice of a speculator in
real estate who pays down a small percentage of a purchase price and
borrows the balance on mortgage. It is similar to what the merchant
does when he fills his shelves with goods bought with a fractional
payment in cash and the balance at some future date. In all these cases
involving property let me repeat that the deposit of a specified sum
by the principal and an agreement or contract with the broker is a
perfectly valid transaction.[24]
That newspaper criticism and attacks by social mentors should go to
extreme lengths in deprecating stock speculation by crude, greedy,
and unsophisticated people is perhaps, after all, a perfectly useful
function, and if such critics err in going to great extremes, that too
may be set down as right and proper, for it is perhaps better to go
too far than not to go far enough. The interests of the Stock Exchange
are the interests of the whole country; its welfare depends upon an
intelligent and thrifty people; its aims are public-spirited and
patriotic. Whatever it may lose in the way of business from ignorant
and silly people who are driven out of blind speculative undertakings
leading to losses which they can ill afford, it will gain tenfold
in imparting sound information through candor and publicity. On the
other hand, unless we are prepared to abolish property altogether,
do away with the instruments of credit, and suppress all forms of
trading designed to supply our future requirements, we may as well
reconcile ourselves to the inevitable and take what comfort we may
in the reflection that prudence, thrift, and foresight are not to be
eliminated, merely because the proletariat below stairs sometimes
indulges in speculation and suffers the consequences of its folly.
“Finally,” writes Professor Emery, “the question must be faced of the
effect of eliminating the public from the speculative market even
if it could be accomplished. It is supposed sometimes that such a
result would be all benefit and no injury. On the contrary, the real
and important function of speculation in the field of business can
only be performed by a broad and open market. Though no one would
defend individual cases of recklessness or fail to lament the disaster
and crime sometimes engendered, the fact remains that a ‘purely
professional market’ is not the kind of market which best fulfils the
services of speculation. _A broad market with the participation of an
intelligent and responsible public is necessary. A narrow professional
market is less serviceable to legitimate investment and trade and much
more susceptible of manipulation._”[25]
One of the difficulties with which men have to contend in a big country
like this is the apparent inability of large masses of the people to
understand other large masses. Distances are so great, occupations
so diverse, and enterprise so confining, that one whole section of
the country may not and often does not know what another section is
doing. Men are too busy to learn by travel and reading that which, in
the interest of the whole country, they should thoroughly understand.
Thus it happens that a section of the country given over, let us
say, to agricultural pursuits, having first acquired the notion that
speculation in securities is only a form of legalized robbery, assumes
that to New York City and the New York Stock Exchange is confined a
greater part of the stock speculation of the world. We have seen the
fallacy in the first of these hasty conclusions; the second may easily
be explained away.
Yankee speculation in securities is not a marker to speculation
in London, where the day to day trading vastly exceeds ours, and
where the “Kaffir Circus” of 1894–5 and the “Rubber Boom” of 1909–10
exceeded any similar outburst ever known in America. France is the most
prudent and thrifty of nations, yet the Panama mania which collapsed
in 1894, although followed by a period of the utmost repentance and
conservatism, found a parallel in the crazy French speculation in
Russian industrials which crashed in 1912. There was an extraordinary
speculation in Egyptian land and financial companies in Cairo in
1905–6, which, in proportion to the number of participants, greatly
exceeded any boom in New York. China awakens slowly, but, once its
political reforms are effected, a field of extraordinary speculation
will open there without a parallel in history. The Chinaman is not
only a shrewd and competent business man, but he is, Mr. Hirst tells
us, “a confirmed and incurable” speculator. “From time to time,” says
this writer, “the Shanghai Stock Exchange becomes a scene of the
wildest speculation, and it is safe to predict that, when a new China
is evolved, Stock Exchanges will spring up in all the large towns. Of
this, a foretaste was afforded in the spring and summer of 1910, when
Shanghai caught the rubber infection from London. All classes and races
took part, but the native Chinaman plunged deepest. When the break
in prices came, one Chinese operator was so heavily involved that, on
his failure, many of the native banks had to suspend payment, with the
result that for months the trade and credit of this great shipping and
business centre were disorganized.”[26]
I mention these incidents to show that speculation is not confined
to geographical limits. It is all a part of the “divine unrest”
inherent in each of us, and it develops and grows intense just in
proportion with the march of the civilization it serves to benefit.
In new countries, as in China, it may often go too far; sometimes in
old countries it oversteps the bounds of prudence, but any student of
these phenomena knows that, as economic processes become understood by
the masses, the intervals of time between the panics that result from
over-speculation grow wider and wider.
Another mistake of those sections of the country that do not understand
the Stock Exchange results from the indiscriminate blending of that
institution with Wall Street. Let us hear from Mr. Horace White on this
point. He was the chairman of the last committee that investigated the
Stock Exchange; he is one of our foremost economists, and he may be
assumed to understand his subject:
“There is a widespread belief that Wall Street and the Stock
Exchange are one and the same thing, and that all the fluctuations
on the Exchange are caused by Wall Street. This is an error as
glaring as it would be to suppose that all the water in the
Mississippi River comes from the adjacent banks, ignoring the
innumerable streams and rills that contribute their quota from
countless unseen sources. Wall Street and the Stock Exchange are
two different things. The men on the floor of the Exchange are the
agents of others, executing the orders which they receive both from
Wall Street and from other parts of the habitable globe. Some of
them speculate on their own account, but the speculating members
of the Exchange are divided into bulls and bears. They do not all
push in the same direction at any one time. They simply aim to
anticipate, each for himself, the drift of financial public opinion
in order to take advantage of it.
“This is what Wall Street outside of the Exchange does; and the
only advantage which speculators in Wall Street have over those in
other parts of the country is derived from larger capital, more
direct and ample sources of information, and greater skill and
promptness in the use of it. Wall Street speculators are likewise
divided into bulls and bears pushing against each other; and all
their advantages do not save them from making mistakes, which often
result in losses proportioned to the magnitude of their operations.
The ‘rich men’s panic’ of 1903 was such an instance. The panic of
1907 was another. It is sometimes said that Wall Street can put
prices on the Stock Exchange up or down at its own pleasure. This
is a delusion.”[27]
Members and friends of the New York Stock Exchange view with
apprehension the periodic attacks upon their great institution made
by those who, for reasons not to be discussed here, wish to attract
popular attention. But there is no reason why these matters should
excite alarm. The Exchange purified itself long ago of the old abuses,
new ones as they occur meet with severe disciplinary measures, and it
has a certificate of good character in the report made to the sovereign
State of New York by the Hughes Commission. This commission has stated
explicitly that margin trading is a matter of contract guaranteed by
the Federal Constitution. It is not conceivable that any legislature
can ignore such a report, by such a commission, nor is it possible
that, in such event, any court could be found to uphold legislation
directed at random against an institution that bears the endorsement of
all students of economics.
One has but to read the decisions of the courts to see that the
matter of non-interference with the great Exchanges, on technical
grounds, has become a fixture in our jurisprudence. “The Exchanges,”
said Judge Grosscup of the United States Circuit Court, “balance
like the governor of an engine the otherwise erratic course of
prices. They focus intelligence from all lands, and the prospects
for the whole year, by bringing together minds trained to weigh such
intelligence and to forecast the prospects. They tend to steady the
markets more nearly to their right level than if left to chance or
unhindered manipulation.”[28] In somewhat similar vein Justice Holmes
of the United States Supreme Court, said: “Speculation ... is the
self-adjustment of society to the probable. Its value is well known
as a means of avoiding or mitigating catastrophes, equalizing prices,
and providing for periods of want. _It is true that the success of the
strong induces imitation by the weak, and that incompetent persons
bring themselves to ruin by undertaking to speculate in their turn.
But legislatures and courts generally have recognized that the natural
evolutions of a complex society are to be touched only with a very
cautious hand, and that such coarse attempts at a remedy for the waste
incident to every social function as a simple prohibition and laws to
stop its being, are harmful and vain._”[29]
With these opinions before them, so long as the governors of the Stock
Exchange continue their policy of a wise and dignified administration
in the interest of the public they serve, there is nothing to fear.
Corrections, remedies, improvements, and reforms will be found to
be necessary from time to time--some of them are necessary at this
moment, and the governors are hard at work on the task. To accuse
them of indifference or neglect of duty is to deny them that form
of intelligence which enables a man to protect his property. Their
splendid institution has grown to its present importance and power
through economic development that could not have been foreseen nor
prevented. Speculation on a large scale has accompanied its growth,
and contributed to it; and speculation, as we have seen, is a highly
desirable and useful part of all business. This speculation numbers
among its adherents people in all parts of the world who have a perfect
right to speculate, and who do vastly more good than harm in their
operations.
It has also attracted a great many people who have no business to
speculate, and who would be prevented from doing so if it were
possible. The ignorance and cupidity of these people is so great,
and the pitfalls provided them by unscrupulous, methods outside the
Exchange are so many and various that something has to be done to
protect them. The Stock Exchange does not encourage them, but it
recognizes that they have legal if not moral rights, and it stands
ready to help them. It gives to such people the same information that
it gives to the richest investor in the land. The securities in which
it deals are known to be free from taint; all forms of crookedness
are prohibited; every transaction within its walls is made openly, as
a result of free competitive bidding, and published broadcast to the
world. What more, and what less, can be done? Has there ever been a
time in the world’s history when property and trade were so secure,
and when speculation, which makes property and trade, was so jealously
safeguarded?[30]