s in the futures ng speculative al knowledge when there is ent too sharp would be the ued that free ator works is o the future. -ity of specu owledge and tent and sucright than the situation stabilizer of on the extent wrong at a opposed to be arket reflectowever, that ority of the would seem, values at a s of supply foresight of nt, involves speculators chants who a prices and e handicap o favor the rant gamblers. If their buying and selling has a benencial effect on prices, that effect is accidental. About the best that can be said for this class is that they do not generally have a large volume of trade and that their trades seldom have a noticeable effect on the trend of prices, though they probably have more effect upon price fluctuations. Presumably they are easily led and easily influenced by others, i. e., they are without independent judgment of the market. If they are also panicky when their expectations are not realized, their influence on fluctuations in price must be presumed to be the opposite of stabilizing. Chicago Board of Trade men are fond of quoting the words of Justice Holmes: "Speculation of this kind by competent men is the self-adjustment of society to the probable." The significance of the phrase depends on the emphasis. The critical point is the phrase "by competent men." It should be noted, also, that the requirement as regards competence, which certainly is exacting, may possibly be so high that a number of competent men sufficient to make a market can not be found. QUESTION OF STABILIZATION.—From the broader economic viewpoint it would not be sufficient to show that speculation serves to stabilize prices, merely in the sense of reducing minor fluctuations.2 The prevention of prices going much too high or much too low under given conditions of supply and demand has more fundamental significance, because the consumer might, without such correcting influence, pay far too much for what he consumes or the producer receive far too little for what he produces. The prompter adjustment of prices to conditions of supply and demand tends to reduce an important sort of waste, which occurs where there is any extreme failure of adjustment between supply and demand such as is reflected in unduly high prices paid by some consumers, or in unduly low prices paid to some producers. The practical grain-trade man in referring to the stabilizing effect of speculation, is likely to have in mind merely commercial advantages, namely, the smoother operation of the machinery of trade. and transportation, rather than underlying utilities. He is also likely to put the principal emphasis on other aspects of future trading, such as the reduction of risk to dealers in the actual grain and narrower trade margins. But the forces of an organized futures market do not, in fact, all work together in the direction of stable prices. It is often said that what the speculators want is price movement. It is still more certainly true that the commission houses like to have their customers get in and out quickly because of commissions, and fluctuations favor this result. The workings of a futures market are more complex than is assumed to hold for speculation in general in the abstract theory of that subject, which theory is that stabilization results from purchases by speculators when prices tend to be too low and from sales when 1 Chicago Board of Trade v. Christie Stock and Grain Co. (198 U. S. 236, 247). 1837-26- 4 not-if the speculators, for example, exercise cool jud face of an undue decline in prices-and if short sellers advancing market at times when producers and deale it by holding off in the expectation of unwarrantedly h then speculators do have a stabilizing influence on pri or so far as they buy when prices are going up and sel are going down, as appears to be largely the case as professionals and outsiders, then the effect of these acts not clearly one of stabilization. But it may, neverthele than speculation under similar circumstances by m through the accumulation or depletion of stocks. Section 4. Unification and broadening of grain markets. DIFFERENCE IN PRICE IN PLACE AND IN TIME.-Futur according to the generally accepted theory of speculatio bring about an equilibrium of prices generally as bet separated in time. Merchandising tends to bring abou equilibrium in prices between different places in the bro of that word. But differences in price associated with differences of l themselves be largely due to the cost and time required portation between localities. In fact prices on the K exchange have usually differed from similar Chicago pric what less than the difference in the cost of freighting b two points, despite the fact that a large part of Ka formerly moved to Chicago. Local conditions can not put the future at Kansa Minneapolis greatly out of line with that at Chicago. class of traders called "spreaders" who specialize in tr reference to obtaining a profit from fluctuations in the am difference between prices for the same option on differen The effect of such dealings is to tie together the prices exchanges. The price differences between markets, of the in which the spreader takes advantage, are not constan affected by crop and other conditions. CONNECTION OF MARKETS BY WAY OF FUTURE QUOTATI central or dominant futures market reflects world-wide it is claimed, and not merely local influences and condition and prospective, and this connection is maintained largel the continuous publication of quotations of futures. together of markets by spreading and by shipments could efficiently accomplished without such future quotations, bec though the cash quotations would in a general way serve th difficulties in their interpretation in the absence of paral tions of futures would be greatly increased. The prices reflect general conditions, and are comparatively abstrac the problem of trading upon the differences between n largely a question of deciding whether the differences bet 3 The theory is expressed with little variation in the quotations from va sors of economics in the Appendix to the Brief for Appellants in the case Board of Trade v. Clyne. Supreme Court of the United States, October te 4 See Chapter III, sec. 5, of this volume. s will check an ure trading- etween points roadest sense location may ed for transKansas City ices by somebetween the ansas wheat sas City or There is a rading with mount of the ent markets. s on various e variations nt, but are TIONS.-The conditions, ons, present ely through The tying d not be so cause, even The purpose, allel quotaof futures ct, so that markets is etween the arious profes Term, 1922. too little, in the judgment of the spreader or intermarket trade and which market is out of line. Futures, with their washing ou of differences due to grade and quality and to local influences ten to be the standard of reference in such trading as constituting a index of what the price in general ought to be. Prices in futures markets will partly determine the flow of grai from the country to the various terminal markets as well as betwee the terminals themselves. The farmers and the country grain dea ers, because of the widely disseminated future quotations, may kno better when to sell and such quotations may be a factor in holdin in check any tendency to sharp bargaining on the part of countr grain dealers. But it is not true that the wide dissemination o quotations is made possible only through the operation of future markets, because cash quotations (though largely for varying specif qualities) might serve the purpose nearly as well. The unification of markets through futures, it is argued, shoul naturally tend to give the outlying producer the benefit of the bes price for his products that can be obtained anywhere, and similarl as regards the consumer. In other words, the trading margin between producers and consumers should be reduced by reason futures markets. This theory, however, takes no account of the pos sible disturbing influence of the development of "technical tions in which future trading operates as an added factor in pric making or unmaking. situa FUTURES AS A WORLD MARKET.--Crop estimates, visible-supply re ports, and similar factors in prices operate mainly through publishe statistics. Students of grain statistics, so far as such study is factor in the market, exercise their judgment through the use o the futures market. This is supposed to make futures a better inde of world-wide conditions and relatively permanent prospects tha any other sort of market. By such means there is concentrated i the principal futures market, at a single point, the influence of th various factors in prices. That there is a "world market" for wheat, however, is true i only a rather qualified sense. The connection between Liverpoo and Chicago, for instance, is subject to varying conditions affectin the possibility of competition between dealers in these differen markets; and is dependent especially upon whether Great Britai is drawing her needed supplies of wheat to a large extent or to negligible extent from the United States. But the central marke for a country or for the world, whether that be Chicago or Liver pool, may be expected to register the effects of world-wide cond tions and influences in a way that constitutes the future prices o such a market an easily read index of the sum of the active factors i demand and supply for the world as a whole. One reason why the futures market helps so largely toward th creation of a world market is the fact that trading in all kinds o quantities from comparatively small to very large is facilitated. A contract to sell 500,000 bushels for export, for example, may b closed at once, notwithstanding the fact that the seller does not know where he can get so much grain in time for shipment. He can imme up the grain from terminal merchandisers or even have of it shipped to him from country elevators. The futur chased is a hedge, and the future contracts will be grad dated more or less in step with the acquisition of the a Similarly the miller who gets a 10,000-barrel order for fl wait to pick up the wheat here and there; he buys 45,000 futures for protection until he does get it. For present purposes the significant fact is that it wou be possible to trade in such volume in a very short time aid of a broad futures market. An order to buy or sell 1,000,000 bushels would not b even at Chicago as a single transaction, though it is said things have occurred. But the purchase or sale of 100,0 in one lot is not infrequent. And as high as 5,000,000 bu under favorable conditions, be disposed of at Chicago in a minutes, or at most a minor fraction of an hour, without market to go much against the trader. BROADENING EFFECT OF DEFERRED DELIVERY.-The " worl development is not the only aspect of the broadening of t associated with future trading. The market is greatly also by facilitating trading for future delivery on the par who do not possess the commodity in question and may no possess it. These are especially the short sellers. It is sai greater proportion of professional speculators are habitu sellers. It might be asserted that it is contrary to the purpose of an organization maintaining such a market possessors of the commodity to be delivered at some specif time should have an advantage in an unquestioned right o In effect the competition of all who have an opinion on fut is invited. Hedging, in effect, brings about the distribution of ulti more evenly over the entire year, although the farmers' sal concentrated at about harvest time. If it may be presu speculative buying of futures is more pronounced at th season and that the closing of such trades is scattered th rest of the year, it is easy to see that the result is, in effe stretching out of the process of marketing, through the int of speculators between the farmers' sales and sales to conve consumers, that it more nearly matches the more regular d consumers. The term "open market" is often used in describing th market, with an implication that there is freer competition i than elsewhere. The element of truth contained in this sta that a well-established futures market is by nature broad and of all influences that may properly have some degree of det effect on prices as well as some that should not have any such Section 5. Speculation described and defined. SPECULATION AS AN OPEN COMMITMENT IN FUTURES-Publi in grain exchanges, as organized markets for future tradin in large measure to the identification of future trading wit lation. But, since there is speculation in commodities in wh is no provision for future trading, it is evident that this ident means of speculation to any other known device, and so much so that speculation in such an article will naturally be concentrated upon the futures. Speculation can be effected by storing or hoard ing produce, but there is no reason why a speculator in grain should bother himself with the ownership and storage of the physical com modity. He operates in futures. The measure of his speculation is the extent of his net long or short future trades. HOLDING OF UNHEDGED GRAIN AS SPECULATION.-The grain trad has developed an argumentatively convenient notion that the cash grain dealer who does not use the futures market by way of hedging is reprehensibly indulging in the hazards of speculation. A carefu examination of the implications of this idea may lead to a more ade quate conception of what speculation is. The same notion is further developed to an extreme degree wher it is alleged that the farmer who holds his marketable crop into the winter or spring in the expectation of getting a better price is specu lating. The element of truth in this idea is small, although it is a fact that the owner of a marketable commodity, which he does no need, who holds it for an advance in price-especially if the property is undeveloped and yields no appreciable income-is speculating. If the person's proprietary or similar interest in an article ha exclusive reference to price changes, he is doubtless speculating. Bu the mere fact that an owner may be somewhat interested in change of market value, among other things, certainly does not make him speculator. Most ownership is for the sake of use or income, though there may be also some interest in price changes. The dealer is, of course, directly interested in price changes affecting his profits But it would hardly be claimed that all unhedged holding by dealer in commodities was speculation. And the producer is in a differen situation from the dealer. The latter buys and sells; the former pro duces and sells. The producer, who may not sell all he produces, is to that extent less affected by price changes than the dealer. THE GENERAL SITUATION AND ITS RELATION ΤΟ THE PRODUCER', POSITION. The incidence of risk upon the owner of a particula commodity due to changes in its value is affected by the variety and extent of the property of which it is a part and by the degree to which the values owned are mortgaged or otherwise covered by debts. In both aspects of the matter, degree of risk on account of the ownership of a particular commodity is a question of relativ quantities. Modern business methods involve so much use of credit that the ratio of debts to assets is considerable in all lines of production Such developments greatly affect the extent to which the risks o ownership become speculative. The speculative risk is due primarily to the violence of price changes or to their relative magnitude a compared with the value of the property affected. But if the prop erty is so mortgaged that the legal owner has only a small margina interest or equity, his speculative risk is magnified by this condition The wholesale dealer is in a position different from the produce because the former has a comparatively small fixed investment and 5 5 Because of the varied stock of the retail dealer and the nature of his outlet it is no necessary to consider his position in relation to hedging. |