John J. (John Joseph) Lalor.

Cyclopædia of political science, political economy, and of the political history of the United States online

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French revolution, or in our own recent experi-
ences; where every exporter or importer, and indi-
rectly, every business man, is obliged to be in-
volved against his will in speculation on gold. —
In such speculative periods, with unsettled and
generally advancing prices, the more prudent busi-
ness men are thus obliged to have recourse to con-
tracts for future delivery of goods at definite prices.
The builder can not safely make a contract for a
fixed sum unless he knows what his materials will
cost a few months hence. The cotton manufact-
urer can not arrange his basis of production and
scale of prices unless he knows what his raw ma-
terial will cost him from time to time. If a planter
or cotton factor agrees to deliver him his material
from time to time at determinate prices, the man-
ufacturer knows where he is likely to stand. Here
is a transaction, speculative in form as far as con-
cerns the broker, but in reality a defense against
the evils of speculation. The manufacturer knows
what he can probably afford to pay, the producer
knows for what he can probably afford to sell.
Of the unavoidable risk, each party takes the part
concerning which he can best judge, and against
which he can best protect himself This is an
exceptionally favorable case; The majority of
those who sell ' ' short, " i.e., who engage to deliver
goods which they do not hold, rely not so much
upon sources of supply which they represent, as
upon their judgment concerning the future move-
ments of the market. Yet even in this case their
influence may be healthful, and their work legiti-
mate. It has been said that the general public is
fond of speculating for a rise. Now, a man of spe-
cial training, and special sources of information,
can often see clearly where the general public
is mistaken, and by selling short at the high prices,
and obtaining the means of meeting his obligations
at the lower ones, may take advantage of the pub-
lic mistakes, and at the same time render a service
to the market in steadying prices. As transac-
tions of this kind multiply, it is inevitable that
they should fall more and more into the hands of
brokers, and that these brokers should organize
exchanges for the purpose of more easily deal-
ing with one another. These last are of modern
growth. The germ of the New York stock ex-
change seems to have existed at the close of the
last century, but its regular organization dates
from 1817. The Chicago produce exchange is
scarcely thirty years old. These means of com-
munication have greatly facilitated bona fide trans-
actions; but, with their growth, gambling trans-
actions have grown up about them to such an ex-



tent as often to hide the bona fide transactions from
view. — The first step in this direction has been
the habit of dealing upo'n margins; that is, of not
making full payment at the time of the first en-
gagement, but of depositing a sufficient sum to
insure the broker against loss by change in the
price. It is hard to draw the line where such
transactions lose their bona fide character; the de-
posit of a margin may simply be a convenient and
perfectly legitimate way of extending business
credit. But where the marginal idea is carried
through the transaction, and settlement is effected,
not by an actual delivery and payment, but by a
payment of the difference in price at the two pe-
riods, with no delivery at all, we have a complete
departure from the original character of the trans-
action. It is now nothing more than a wager on
the change of price of the stocks or goods in ques-
tion, somewhat cloaked under the forms of legit-
imate business. In the next stage of speculation,
by "puts," "calls," and "spreads," even these
forms are cast aside. In the first of these a man
buys of a broker, for a small consideration, the
right to deliver a certain quantity of stock at a
specified price within a specified time; in the sec-
ond, he buys the right to receive it; in the third,
he buys for a considerably larger price the right
of delivering or receiving as he may choose.
They are thus, even in form, simply wagers on
the price movement. — We have spoken of the
outside public as generally speculating for a rise,
and the more practiced operators for a fall. Of
course there are numerous exceptions to the latter;
and it is precisely these exceptions, when they
take the shape of corners, that make the most im-
pression upon the public mind. In its principles
a corner does not differ from any other monopoly.
An individual or a ring who once secure the
whole or nearly the whole marketable stock of a
commodity, have, of course, the power to fix the
price as long as that state of things continues.
But in the case of ordinary attempts at monopoly
the buyers have usually the advantage of being
able to diminish their consumption for the time
being, and to wait for the advent of competing
sources of supply. But the bear, who has sold
short, has neither of these advantages. He must
deliver a fixed quantity, and must do it within a
fixed time. He has no choice but to do that or
fail; and the operator who can control the supply
of a stock in the market for a comparatively short
time can charge any one who has sold that stock
short any price up to what will drive him to abso-
lute failure. Just as it is the public fondness for
speculating for a rise that makes it possible and
profitable for the street to sell futures, so it is the
readiness of the street to sell futures that makes it
possible and profitable for large operators to engi-
neer a corner. — In spite of the strong impression
that they make upon the public imagination, suc-
cessful corners in stocks are by no means so com-
mon as is generally supposed. The important
ones in New York have been the Morris canal cor-
ner of 1835, the Harlem corners of 1863 and 1864,



SPECULATION.



781



!^ Prairie du Chien of 1865, North-Western of 1867,

^ and Hannibal & St. Joseph of 1881. Even in these

it is not always certain that the bulls make the

profits they appear to. For the time being they

• extort enormous sums; but after the settlement
■■' they find themselves holders of masses of stocks,
^' which they have usually bought somewhat above

its normal figures; and the price at which they can
ultimately dispose of this stock is an important

* dement in the question of their success. But
< it is extremely diflBcult to carry a stock corner
- forward to its completion. The Michigan South-
" em corner of 1865 — apparently a very safe opera-
tion, since the cornerer was buying property which
he really wanted — was broken by an issue of con-

■; struction stock. So also in an attempt to corner
Milwaukee & St. Paul, and so twice in the history
of Erie. The substitution of preferred for com-
mon stock has had the same effect. A still com-
moner source of failure, which it is impossible to
guard against, is the treachery of individual mem-
bers of a cornering pool. — Corners in produce
are a growth of the most recent years; yet they

I already exceed stock corners in frequency, and
still more in economic importance. It is but a
short time since writers regarded corners in a
commodity like wheat as almost an impossibility;

1 so varied are the sources of supply, so apparently

I impassible is it for one man to control them. But
these writers had not foreseen the development of
short sales and paper contracts which should make
a temporary control of a particular market so
thoroughly effective toward securing this end.
The extent to which speculative sales of produce
have grown is almost inconceivable. The statis-
tician of the New York produce exchange testified
that nine-tenths of its dealings were purely spec-
ulative. The same fact Is more strikingly brought
out by a comparison of the quantities of produce
actually brought to New York in 1883 with those
nominally sold.



PRODUCE.


Sales.


Receipts.


Wheat

Com




.- bushels


647,147,000
443,091,000
150,524,000
30.049,000
1,524,887,000


44,736,000
16,399,000
15,905,000
600,000
10,500,000


OatB




ti


Cotton....
Petroleum.


...J


bales

- -barrels



As compared with 1881 the increase in these spec-
ulative sales is probably more than one-third,
while the actual quantity of products delivered
has, on the whole, diminished. In fact, flour
seems to he the only produce of first-rate impor-
tance which still maintains its non-speculative
character. The pretended sales of wheat for
1882, as our table shows, were more than fourteen
times the quantity received. The sales of cotton
were five times the entire crop,fif ty times the whole
quantity received in New York, and two hundred
times the actual deliveries in the New York mar-
ket. In the oil business it has been even worse.
The recorded sales in November alone amounted
to nine times the entire stock in the country, or to



135 times the production for the month. (For a
fuller exhibit of these facts, see "Public," Jan. 4,
1883.) In Chicago matters are almost the same
— three thousand millions of sales on less than
four hundred millionj of produce in 1883. In
Liverpool they are no better, in spite of more
apparent compliance with the forms of delivery.
A single consignment of a hundred bales of cotton
has nominally changed hands one hundred and
fifty times before sale for bona fide consumption.
When the whole amount available for the year's
use in Europe and America has been less than
7,000,000 bales, the year's contracts for future de-
livery have amounted to 80,000,000 bales. Thus
Liverpool has been the centre of cotton corners
in the latter half of successive years beginning in
1879, and seriously disturbing legitimate business.
Meantime we have had in America (usually cen-
tring in Chicago), the wheat corners of 1879,
1881 and 1882, the pork corner of 1879 and 1880,
and more or less successful attempts at many
others, scarcely less wide-reaching than these in
their effects. — The attempts to meet these evils
by legislation have had little success. Legislative
inquiries, like that of the New York committee on
corners, have proved abortive ; enactments like
those of Illinois in 1874 have been inoperative.
Only to a limited extent have the courts been able
or willing to interfere, by making it impossible for
speculators to sue on their contracts. It was in-
deed held, in a few English cases in the early part
of the century, that a contract of sale for future
delivery of what a person does not now hold, was
void ; iDut in the business developments and ne-
cessities of the time it was of course impossible
to maintain that doctrine. It is now held, that
such a contract is valid if, at the time it was
made, either party intended it should be fulfilled. •
In order that the court should regard it as a
gambling contract, it must be proved that neither
party regarded it as more than a wager on price
variations. But practically the courts do not
do much even within these narrow limits. Un-
less -they are supported by the public opinion
of the boards of trade and similar organizations,
it is in the power of these last to inflict upon any
dealer who may have recourse to the courts, pen-
alties in the way of loss of business facilities for
which he can obtain no adequate coihpensation.
Add to this, that the courts, as in a recent case in
Illinois, have often shown unwillingness to enter
upon the consideration of matters of this kind,
and we see how inadequate are the legal defenses
against the present state of things. — The difficul-
ty of dealing with the evils of the system is en-
hanced by popular ignorance as to just what the
evils are, and where they really lie; and by a pop-
ular prejudice, too often embodied in legislation,
against operations which are sometimes necessary,
sometimes beneficial, and at the worst only indi-
rectly responsible for the evils which have grown
up in connection with them. Of such mistaken
legislation a striking instance was offered in the
year 1864, when speculation in gold was forbidden.



782



SPOILS SYSTEM.



The law, under the pressure of public sentiment
at that time, was obeyed; but its results were the
very reverse of what the public had anticipated.
The event proved that gold speculation had been
a means of steadying the market; without it, gold
rose 100 per cent, in two weeks, and then dropped
50 per cent, at the hurried repeal of the prohibi-
tion. "What the speculators did for the gold mar-
ket was again seen in 1866, when they attempted
to keep the necessary stock of gold in the country
in view of the increasing European demand; but
the treasury department, with less foresight, ex-
erted itself to counteract the rise in the gold pre-
mium which these speculators seemed to be pro-
ducing. It succeeded at the time, but at the cost
of a greater subsequent rise, which these specula-
tions would have largely enabled us to avoid. So
of the cotton speculators of 1888, who seeing the
mistake of public judgment, bought up the cot-
ton which we were exporting to Liverpool at a
very low figure, and, a few months later, sold at a
high figure to the manufacturers, who would other-
wise have had to reimport. They made fortunes
by so doing, and thus excited public prejudice ;
but the American public was in every way better
off for their operations. The planter obtained a
higher price than he could otherwise have done,
the manufacturer paid a lower price; the expense
of double transportation was saved; the specula-
tive difference of price remained in American
hands instead of going to Liverpopl ; and the
chief mistake made by the speculators, in point
of serving public interest, was in not carrying
their operations still further. ("N. Y. Nation,"
vol. vii., p. 85.) — That is a typical case. If a
speculator is simply aiming to forestall the move-
ment of the market, and not to manipulate it, he
undoubtedly confers a public benefit in so far as
he is himself successful ; and so great a public
benefit that no one need grudge him his profit.
His work tends to steady prices, to diminish the
difference between producers' and consumers'
prices in a rising market, to break the shock of a
falling market. But it is almost impossible for a
speculator to resist the temptation to manipulate
as well as forestall price changes; and when he
succeeds in so doing, he increases just those evils
which he would otherwise diminish. If he works
on a small Scale, it may be by the circulation of
false rumors or the show of false appearances, per-
haps even by securing false management of the
property; if he works on a large scale, it may be
by securing a corner. — Corners in stocks can
hardly be a direct source of evil to the general
public. With produce corners it is different.
The investor can easily do without a particular
stock; he may be glad to take advantage of the
high price to sell it. But the consumer can not
even for a short time do without his food; and
a corner in wheat or pork may become a seri-
ous matter to him. A speculative monopoly of
this kind is probably no worse than any other
monopoly. Permanent monopoly of coal or oil
may work more lasting injury than a temporary



corner in wheat. The former settles things on a
wrong basis. The latter unsettles things from
their right basis. By preventing regular trans-
portation, it prevents cheap transportation; by
preventing regular export, it spoils our foreign
market. How far it actually disturbs the prices
paid by consumers remains an open question.
Witnesses before the New York committee, ap-
parently well informed and candid, differed di-
rectly on this point. The Liverpool cotton comers
are estimated to have temporarily raised the prices
paid by manufacturers more than -10 per cent.
An able article by H. D. Lloyd in the " North
American Review " for August, 1883, shows how,
in recent corners, flour, a non-speculative article,
has varied more than 50 per cent., in sympathy
with the variations of wheat. It is not probable
that this affects the consumer quite as badly as
would at first sight appear; the quantities sold
at the highest price are probably comparatively
small, and the shock is so slowly distributed among
the middlemen that before it reaches the mass of
consumers the reaction has already begun. With
our present incomplete statistics of retail sales,
we must reserve judgment on this point. The
gist of the matter is, not tliat a corner is worse
than any other kind of monopoly; not necessarily
that it is as bad as any other kind of monopoly; but
that, under the present system, men will undertake
a corner who could not undertake any other kind
of monopoly. If there are ten times as many con- ,
tracts on a small wheat supply, operators can af-
ford to make ten times the effort to control that
supply. If those contracts must be fulfilled within
a limited time, the operator has only to control
the supply for that time. A system of short sales
makes such a temporary monopoly possible. Each
additional speculative contract is so much addition
to its possible profits. — Besides the articles al-
ready referred to, see International Bmew, vol.
ii., p. 818; Bankers' Magaeine^N. Y.), vol. xxxvl.,
p. 308; Nineteenth Century, vol, x., p. 632.

Akthub T. Hadlbt.

SPOILS SYSTEM, The. This phrase desig-
nates a theory of politics and a use of official au-
thority — more especially that of appointment and
removal — according to which the merits of can-
didates and the general welfare are subordinated
to the selfish interests of individuals, factions or
parties. The range of this subordination is very
great. It extends all the way from the case of a
party which, honestly hplding none but its fol-
lowers to be fit for a clerkship, selects the best of
them, but bars the gates of office against all others,
down to the faction leaders, who, excluding all
but their own henchmen, corruptly make promo-
tions for money, and promise places for votes; all
the way from the great officer who, hardly con-
scious of wrong, accepts for the party the offer-
ings of his subordinates, down to the official robber
who mercilessly demands the places or the money
of those serving under him; all the way from the
head of a bureau or a department who requests



SPOILS SYSTEM.



783



more clerks, that they may work for his party, or
serve as ■waiters or coachmen in his own family,
down to the legislators who vote appropriations
in aid of their re-election, and city aldermen who
bribe electors by corrupt contracts, and conciliate
thieves, gamblers and grog-shop keepers by wink-
ing at their offenses. — It is doubtless vain to ex-
pect that in politics there will ever be such unsel-
ish regard for merit and duty as to exclude every
shade of that system, and perhaps there will al-
ways be various questions as to the moral aspects
of which honest men will disagree. The limits of
the spoils system in its practical application at
any time can not, therefore, be precisely stated;
nor can we any more precisely state where the
merit system begins.* But it is, nevertheless, a
great advantage to have convenient phrases, which,
like the^apoils system, and the merit system, distinct-
ly mark those extreme and incompatible theories
and methods in politics and administration of
which the people readily take notice for approval
or rebuke. In reference to these systems, all of-
ficers and politicians may be readily and usefully
classified. Which system does a great politician
or oificer defend or practice? must always be an
important question. — The phrase ' ' spoils system"
appears to have had its origin in a speech made in
January, 1832, by Mr. Marcy, of New York, in
the senate of the United States, in which (in speak-
ing of the politicians of his day, and especially of
New York politicians) he said, "When they are
contending for victory, they avow the intention of
enjoying the fruits of it. If they are defeated,
they expect to retire from oflBce. If they are suc-
cessful, they claim, as matter of right, the ad-
vantages of success. They see nothing wrong in the
rule that to the victor belong the spoils of the enemy. "
(6ale& Seaton's Congressional Debates, vol. viii.,
parti, p. 1335.) — The system of the pirate and
the highwayman, thus defended, had been for
some years growing in and poisoning our politics.
It was only this open and shameless avowal of it
which was original with Mr. Marcy. In the arti-
cle on Teem and Tbntire of Office some facts
are given tending to show that the earliest prac-
tice according to that system was in New York.
It was not unnatural that the first unblushing
avowal of it, at Washington, should be made by
a senator from that state. Among the maxims of
Col. Burr for the guidance of politicians, one of the
most prominent was, that the people at elections
were to be managed iy the same rules of discipline
as the soldiers of an army; that a few leaders were
to think for the masses, and tliat the latter were to
obey vmpliaiUy tlwir leaders. * * He had, there-

• The phrase " merit system " was first used in Baton's
"Civil Service in Great Britain," and it is sufHclently defined
hy saying that it is everywhere the very opposite of the spoils
system, in both theory and method. The merit of a candi-
date, the merit of a bill or the merit of a policy are equally
the basis of all just claim for support. A system which,
everywhere, in politics and official life, holds merit to be a
decisive test, must everywhere recognize the public interests
as paramount. Such a system is as thoroughly democratic
and republican as it is thoroughly just.



fore, great confidence in the macJiinery of a pwrty, "
etc. (Statesman's Manual, vol. ii., p. 1139.) New
York has never lost the art, so aptly and early
taught by Burr, of making and running party
machines. Jenkins, in his " History of Parties in
New York," (p. 337), tells us, that " before 1830
the spoils system had been so far matured |in that
state, that Gov. Clinton, in that year, complained
in a message ' of an organized and disciplined corps
of federal oflBcers interfering in state elections.' "
Mr. Hammond, in his " Political History of New
York," and speaking of its early politics, declares,
" that party spirit had raged in this more than in
any other state of the Union." Mr. Van Buren's
relation to the system appears in the article last
cited. The unparalleled abuses in past years at
the New York postofflce and custom house, and
the municipal, judicial and other corruptions as-
sociated with the names of Barnard, McCunn,
Tweed and Pisk, at the city of New York, have
made the consequences of a long and general tol-
eration of that system a part of our familiar his-
tory. But it is due to New York to add, that, dur-
ing the past decade, her citizens have done more
than those of any other state to arrest such abuses
and to substitute a ' ' merit system " for a " spoils
system," both in her own administration and in
that of the federal government. — The politicians
and the office seekers readily comprehended the
spirit and opportunities of the new system which
Marcy announced The era had not long been
closed, even among the enlightened nations, dur-
ing which the hope of plunder and spoils from
captured ships and cities had been regarded as
essential alike for securing enlistments and for
achieving victories on sea or land. Intense and
vindictive partisans, accustomed to treat their po-
litical opponents as both personal and public en-
emies, adopted with equal facility the reasoning of
Marcy and the war code of pillage and spoils.
Either in the heat of victory or the hope of gain,
they forgot or disregarded the fact, that the places,
the salaries, the promotions, the profitable con-
tracts which they sought, did not belong to the
party they had conquered, but to the people, of
which they were only a part. A new force, com-
pounded in about equal proportions of corruption
and savagery, was soon made potential, alike in the
battle fields of politics, in the methodslof elections,
and in the processes of administration. The proc-
lamation of the spoils system in the senate great-
ly shocked the better minds of both parties, and
alarmed the country at large. Nevertheless the
theory of the system (of which " rotation in of-
fice," in order to increase the spoils, was an im-
portant part) was, even by men in high places,
largely and rapidly accepted. In the debate in
the senate in 1885, upon the bill for repealing the
four years term of oflBce act of 1830, Senator Shep-



Online LibraryJohn J. (John Joseph) LalorCyclopædia of political science, political economy, and of the political history of the United States → online text (page 202 of 290)