The Stock Exchange from Within. William C. Van Antwerp
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.