that "the marvel is not at all diminished by the fact that
under no other conceivable system, socialistic or other,
could the same results be achieved." In a less complicated
system a depression in business is no marvel. Take an
agricultural community, and one single failure in crops
is sufficient to produce depression, and in olden times a
famine. About forty-eight years ago Ireland had a bad
harvest, which produced a famine of the old style. But
when society is wholly tied together through a varied and
ECONOMICS.
395
complicated industry, a bad harvest, though less radical
in its results, has its effects all along the line of competi-
tive industry. And the slightest decline from the maxi-
mum price sets up an outcry about depression. It has been
stated with some truth, that it frequently occurs that
when people complain the most, times are really the best
when considering the ultimate good to society. Grind-
ing economy, shortened income, loss of property and fail-
ure may not be comfortable things to think of in a per-
sonal way, but society at large is learning the rough lessons
of experience.
References: Max Wirth, Handelnskreisen ; Juglar, A Brief His-
tory of Panics; Walker, Political Economy; Jones, E. D., Economic
Crises.
396
ECONOMICS.
CHAPTER VIII.
SPECULATION.
Compensation for Risk.
Every business enterprise involving capital, labor or
land is accompanied with more or less risk. The modem
system, by which the estimated wants of a community are
determined by business managers, in itself involves risk.
There is an estimate of the kind, quality and amount of
goods demanded by the people. If the manufacturer fails
in his estimate, and produces a kind of goods which has
been superseded by something else or has been superseded
by goods of a different quality, his goods fall upon the
market untouched, and there will be an insufficient amount
of returns to the business to pay the interest on capital
and the wages of labor, and he will get nothing for his
risk. Also, if a manufacturer overestimates the market
and creates more goods than are readily absorbed, he may
for a time feel the depression; and if those goods are in
turn superseded, the market will not be able to absorb the
entire stock.
It is sometimes said that even the farmer takes a risk
when he tills the soil, for he must be dependent upon the
climate for his success in the enterprise. It is true of
every legitimate business involving the various factors of
production. But more especially is this observable in
trade, for the tradesman must make a careful estimate
of the needs of the community, and also of the amount
ECONOMICS.
397
of each kind of goods that it is likely to absorb within
a given time. If he fail in this estimate the tradesman
will find it difficult to satisfy the demands of his own
business, and consequently will not have sufficient income
to pay interest, rent, labor, etc. This principle explains
very clearly why it is that the profits of both the manu-
facturer and tradesman appear to be so high: it is a
reward for risk, and, owing to this, the nominal profits
must be estimated very high.
Now there are two reasons why so many failures occur
in business along this line: first, because business mana-
gers are not capable of estimating the market; and, sec-
ond, they are unable to realize high enough profits to
cover this element of risk, therefore the weak members
of the so-called business fraternity fail while the stronger
survive. It might be said incidentally, that this is one
reason for the great concentration of wealth under our
present system. People see in it the avarice and greed
of certain individuals who seek to destroy others in busi-
ness. In the open market it is to a large extent the sur-
vival of the fittest; and as the number of the unfit to
do business is very large, it is quite in keeping with the
speculative system that thousands should fail in their
enterprises. It will be found, also, that those persons who
do succeed are those who are willing to sacrifice their
own comforts in life by saving to gratify their ambition.
It is ambition for wealth and power that really makes a
very strong element in the creation of their fortunes ; and
this, coupled with the idea of business capacity on the
one hand and the large compensation necessary to be set
398 ECONOMICS.
aside for risk on the other, makes this inequality of
wealth in the community. If it is necessary to have a
large compensation for risk and a certain man succeeds,
then his wealth accumulates rapidly; and if he succeeds
once where others fail, his opportunities for success are
multiplied.
It is idle to argue that because all business is accom-
panied by risk, all speculative enterprises are legiti-
mate, for if too much risk is taken we find a tendency
to create fictitious values; so that when speculation is
carried to an excessive extent it becomes nothing more
than a kind of gambling. E"ow the difference between
gambling and real business is not easy to determine.
Legitimate and Illegitimate Speculation.
It is difficult to say where speculation passes into
gambling, for the reason that a line cannot be drawn
determining how much risk should be taken in business.
There is, however, a clearly marked species of specula-
tion which can be classified as gambling. Gambling is
in itself a process of distribution ; it is an economic
category of fortune. Two men sit down at a table before
a pile of gold. By the manipulation of cards with skill
or trickery or fraud, one obtains the gold and the other
loses it. All that trade which tries to get a share of the
product of industry without rendering any definite service
to human society may be called illegitimate speculation,
and is analogous to gambling. Where people attempt to
manipulate the market by forcing prices up or forcing
them down, where they attempt to make "corners" in the
market or by monopoly power seize excessive margins,
ECONOMICS.
399
it is nothing more than the exploitation of humanity,
forcing it to contribute to a superior skill in distribution.
Why Gambling is Detrimental.
The chief objection to gambling is not an economical
but a moral consideration, for from a directly economic
standpoint the detriment to economic society is not great.
Inasmuch as it encourages idleness and vice and destroys
a large proportion of the productive power of the com-
munity, its economic influence is bad. Even the moral
influence caused by the attempt to get something for
nothing leads to a breaking-down of the economic system.
In so far as gambling interferes with legitimate trade, it
creates an uncertainty to economic life. But if a group
of men on Wall Street struggle with one another for cer-
tain margins in the buying and selling of stocks, if some
gain and others lose, the business world is not greatly in-
fluenced thereby, any more than when a large number of
men play poker in which some gain and others lose.
The difference is plainly that in gambling no service is
rendered to the community, while in legitimate business,
though some gain and others lose, the losses are even more
disastrous than the losses of gamblers; but still, by the
process of legitimate trade or manufacture, some service
is rendered to the community, even though certain indi-
viduals lose.
The moral effects of gambling are far-reaching. The
development of that idea of expectancy destroys the nor-
mal condition of the individual. It is far different from
that hope of reward founded on service to the community.
But speculative trade may be serviceable. If people buy
400
ECONOMICS.
grain at a low price with the hope of selling at a high
one, they are anticipating the wants of the people and
intending to supply them. If individuals buy lands to
hold until there is a rise in value, it is also along the
legitimate process of trade; in fact, they are bought and
sold with the idea of a margin of profit. If large quan-
tities of mining stock are bought with the expectation of
a rise in value without actual development of the mining
property, the rise must be determined by some fictitious
manipulation in the market, and this speculation must be
disastrous.
But this buying and selling of goods on the market and
satisfying future delivery has a tendency to make the
market stable, and thus renders a great service. Suppose
one man should anticipate a large shortage in wheat and
he should buy a large amount of wheat, hoping to hold
it till that time. No one else discovering this, he would
buy at a very low price, and when the shortage came he
would sell at a very high price. But the tendency is for
all business men to- observe the same causes and effects
in business; and instead of one man, suppose a thousand
men anticipate this shortage in wheat and attempt to buy
the surplus. Two things will happen: first, in any pur-
chase of wheat there will be competition of buyers, and the
present price will rise; second, when delivery-time comes
there will be competition in selling, and prices will tend
to fall. In other words, there is a stability of values fixed
in this delivery of future goods. This very fact that the
brightest business men of the country estimate the amount
of available goods at present and in the future, and the
ECONOMICS.
401
extent of the normal demand at present and in the future^
tends to regulate prices, and that estimated price regulates
to a large extent the amount of production. Hence it is
that the laws of supply and demand are carefully esti-
mated, and stability given to production and distribution,
and consequently to prices.
Trade in "Futures."
The trade in " futures/' that people talk so much about,
is, when carried on properly, a blessing to both the
producer and the consumer. Formerly, people in trade
made their margins largely on account of the difficulties of
transportation on the one hand and the lack of informa-
tion on the other. Great caravans started across the con-
tinent, involving a great risk in reaching their destination.
When they did succeed, goods were sold at enormous
profits. The ancient merchant ships that plowed the waves
under great difficulties and dangers, running great risk
from freebooters, pirates, storms and stress of sea, finally
obtained enormous prices for goods; but cheap transpor-
tation has destroyed all this. A large amount of goods
can now be readily thrown from one part of the country
to the other, or from continent to continent, with little
expense. Quick communication by telegraph accompany-
ing cheap transportation enables merchants to estimate
prices in London and New York, so that people will not
pay high prices through ignorance of the market value of
goods. The result is, that a stability of value is fixed the
world over, varying only on account of the cost of trans-
portation ; and margins in business in both manufacturing
and trading grow smaller each year, and more stable.
26
402
ECONOMICS.
These margins are reduced largely to the actual service
rendered humanity in the production and exchange of
goods.
The evil results of this exchange in futures are found
largely where people trade without any intention of de-
livering the goods, hence without any intention of ren-
dering any direct service. It has developed two groups
of traders, known in the market as "bulls" and a bears."
The former hope by excessive buying to create a demand
for goods and thus increase the price. While the regular
investor buys with the expectation that the property will
become more productive, the bull buys with the expecta-
tion of forcing prices higher, or that by means of certain
financial organizations values may be enhanced. The
bears, on the other hand, seek to depress prices by organ-
ized speculation. They sell for future delivery without
owning or even possessing, at the time of the sale, the
goods which they sell. This trading leads to an attempt to
corner the market for illegitimate gains. People simply
pay the cash balances without any intention of handling
the goods. There can be no gain in turning goods over
and over in the market before the delivery, that certain
bulls, by advancing prices, may make a margin, or certain
bears, by depressing it, can ultimately realize a margin.
The illegitimate form of trading called "cornering the
market" is nothing but a trick of the gambling process.
By it buyers seek to obtain control of the entire market
and force prices higher after obtaining control, hence
those persons who have to deliver goods are short in their
delivery and in danger of ruin. Large numbers having
ECONOMICS. 403
agreed to deliver goods on a margin are thus unable to
make their purchases, and are consequently short on de-
livery. The result is, that many are forced to go out of
business. It also has the bad effect of raising the prices
to consumers, and frequently causing great distress ; for
such gambling is applied to the necessaries of life, such as
coal, wood, corn, wheat, petroleum, etc.
Speculation in Productive Industry.
In the world of production there is a vast deal of specu-
lation. Companies are formed for the manufacturing of
certain lines of goods, for the exploitation of mines, for
the building of railroads and other means of transporta-
tion. No one can tell just what will be the result of any
enterprise of this kind, and people put their money into
such concerns with a good deal of risk. The speculative
element enters largely into mining, and into some manu-
factures. The essential business principle to be observed
is always to reduce this risk to a minimum. Here, as
elsewhere, the greater the prospect of large gains the
greater the risk that will be taken. There are now passing
up and down the country men called promoters, who per-
suade capitalists and business men to go into certain enter-
prises with a prospect of large gains. This is a peculiar
form of speculation, and the last great result of this kind
of speculation is found in the modern trust and the pur-
chase and sale of certain forms of stock. As the trust is
discussed in another place in this work, it is not neces-
ary to elaborate this form of speculation. It will suffice
to say, that this is a special organization of productive
forces with the hope of great gain, and involves to a large
404
ECONOMICS.
extent the principle of monopoly. Many of these specu-
lative organizations will fail because of the overestimated
power of earning pictured to the investors by the pro-
moters. The speculative market will be infested with this
species of stock, which will fail to yield a return to the
investors, and sooner or later there will be a collapse in
the business. Over-organization industrially has a tend-
ency to destroy some forms of manufacturing, but it has,
as in trading, a tendency to create stable values for manu-
factured articles because it more clearly estimates the
wants of the people and can more exactly supply them.
Moral and Economic Effects.
The moral and economic effects here are the same as in
trade. Wherever the risk is taken ordinarily for the pur-
pose of supplying the legitimate demands of the industrial
world, industrial speculation is legitimate. Wherever it
exceeds this for the purpose of creating goods which may
not be demanded, it has gone into exploitation of the
property already existing, and is simply a new process
of distribution. The economic effect of the former is to
give stability to wholesale prices and to more carefully esti-
mate the demands of the people. It will also be a means
of progressive development in manufacturing. The specu-
lative enterprise trying this form of manufacture, then,
making a careful study of what goods will satisfy human
desire and seeking at all times to reach a more perfect
satisfaction of the wants of the individuals, will tend to
develop more rapidly the industrial pursuits and to en-
courage industrial progress.
ECONOMICS. 405
Insurance.
The question of insurance for risk is very important.
Every business man must set aside enough surplus to
insure against bad years or bad ventures in either trade
or production. Companies are formed for insurance
against losses. This has nothing to do with gambling, or
illegitimate speculation of any kind. It is merely a legiti-
mate business insurance against risk. It becomes a source
of security to business men, and tends to create industry,
permanency, and efficiency. Insurance thus renders a
public service, while the lottery, the pool, the policy-shop
or the bookmaking enterprise is an attempt to obtain gains
through the process of illegitimate speculation.
Remedies.
It is easy to make laws against gambling of all forms,
but difficult to enforce them. It is quite easy to define
certain forms of gambling, and thus to determine whether
persons are violating the laws, but to apprehend and con-
vict the same, meting out to them the penalty of the law,
is more difficult. But it is very difficult to distinguish be-
tween legitimate and illegitimate speculation; hence it is
difficult to establish a law which will properly regulate it.
Therefore all legislation against the speculative market
is liable to prove disastrous, for it may interfere with that
legitimate trade in securities or produce which has ren-
dered stability to the market. The only hope is to edu-
cate the business sense which will guard alike against ille-
gitimate speculation in trade or industry, and will cause
people to enter only those enterprises which are rendering
a distinct service to humanity in production or transporta-
406 ECONOMICS.
tion or exchange, and for which an ordinary and legitimate
return may be expected. But society may be protected
by certain laws which shall insist that neither individual
nor corporation nor trust shall exploit humanity by a
process of refined robbery, but that the business enter-
prise shall seek to develop the resources of the country, to
manufacture necessary goods, or to engage in legitimate
trade, or to perform such services of transportation and
other enterprises as shall yield a definite benefit to human
society. This may be done by educating the business
sense of the community, and by creating certain restrictive
laws which shall be regulative, preventive, and educative
in their nature.
References : Hadley, A. T., Economics ; Divine, E. T., Econom-
ics ; American Investor ; Bradstreet's Reports, etc. ; Duguid, The
Story of the Stock Exchange.
ECONOMICS. 407
CHAPTEE IX.
TRANSPORTATION.
Effects of Transportation.
While the great original sources of wealth are found
in the resources of nature and in the application of labor
to raw material, the means of transportation affect values
in exchange quite as much as the cost of production itself,
for the means of supplying the demand in the market fre-
quently determine the price of goods. As society becomes
more complex we depend more and more upon the facility
with which the goods are brought to the market ; or by
which we may be carried to the goods. In former times,
when people wanted anything they went where it was;
now, they bring it to them or go to it as they please.
Wealth is greatly enhanced by transportation. The
gold in the heart of the mountains is of no practical value
until it is brought to the light and carried to a place of
use. The expenses of transportation must in general be
added to the original price of the goods. Kansas corn,
having supplied the home needs, is of little value until
transported to a place of use. Should transportation sud-
denly be stopped a month in some localities, commodities
would reach fabulous prices, while in others they would
command no value at all. Thus in modern life are we
dependent upon transportation for both necessaries and
luxuries of life.
The facilities for transportation tend to increase the
408 ECONOMICS.
division of labor. Living alone, man must produce alone
food, clothing, and all articles of use and luxury; while
by means of transportation he may apply his whole time
to one thing and receive the benefits of the combined
labor of the world. The poorest workman in one of our
cities lives on the products of the world. It takes the
products of both hemispheres to supply his needs. The
wool that makes his coat comes from one place, the coat
from another; the leather that makes his boots from one
section, and the manufactured articles from another. His
tea is from China, his coffee from Brazil, and so for every-
thing he uses. Hides are shipped from Kansas City to
New York and from New York to North Carolina to be
tanned, then back again to New York or Boston to be made
into boots or shoes, which are again reshipped to Kansas
City to be consumed by wear. By this double transporta-
tion and repeated combinations of labor the price of the
manufactured article is greatly increased above the cost
of the raw material.
Prices Equalized.
Rapid transportation of goods tends to equalize prices,
while, as was stated above, the price of the goods in the
market is regulated by the relation of the supply to the
demand. With our facilities for exchange and transpor-
tation the price of staple articles always tends to reach
the cost of production. The prices of dry goods in Eastern
and Western cities tend to be the same as transportation is
cheapened. So, likewise, the prices of Western products
will be less in the markets of the East as transportation
is quickened and cheapened.
ECONOMICS. 409
What advantages are there, then, in cheapening trans-
portation? First, any increased demand for goods will
give the seller the advantage and not the transporter ; and
secondly, goods received in exchange can be laid at your
door at less expense. This is the same as receiving a higher
price for the articles sold in exchange.
Equalizing Industry.
One of the greatest effects of cheap transportation is
the opening up of new lands and the extension of agri-
culture. The rapid development of the Mississippi Valley
and the far West could have been made possible only by
the magnificent system of railroads which brought home-
seekers to the uncultivated fertile lands. This process of
agricultural extension has without doubt been carried on
too rapidly to be conducive to the highest development of
agricultural production. The opposite is also true, that
a system of cheap transportation tends to concentrate
manufactures in cities and in the most favorable localities.
Truly, it has often been said, the railroad is a city-builder
or a city-destroyer, as the case may be. The effect of rapid
transit on population is especially observable in our mod-
ern cities, where the residence portion of the city is widely
scattered for miles from the center of business. On the
other hand, in the business portion of the city population
becomes compact or concentrated.
Economic Value of Cheap Transportation.
All of the foregoing propositions tend to show us what
a great wealth-producer commerce is, and how rapid and
cheap transportation affects every department of economic
life. Consider the limitations that would be set upon a
410 ECONOMICS.
country isolated from other countries in modern economic
life, and it will be seen that the value of cheap transporta-
tion cannot be overestimated. In looking back at the de-
velopment of the West, because of the railroads which
opened and developed its fertile valleys and its mines, the
power of transportation is readily seen; but the question
is as important to-day as ever. We are still seeking the
cheapest transportation possible for the goods we have to
sell, and also for those we must import from other places.
Those countries which are fortunate enough to have
water-ways find thereby a great saving in transportation.
By this means heavy freight, such as stone, iron, and
grain, can readily and cheaply be moved, while lighter
articles of freight can be left for railroad transportation.
Advantages of Water Transportation.
In all cases where heavy freight is to be moved and
rapid transit is not absolutely demanded, water communi-
cation is much cheaper and better than railway. No
mechanical constructions have yet been invented which
can compete in the matter of cheapness with transporta-
tion over or through deep waters of lake or ocean. The
friction caused on a dry road-bed cannot compete with it
in respect to expense, and the deeper the water the cheaper
the transit, other things being equal.
Thus, freight can be carried on the ocean by means of