In the last sentence above we have the key to the source of profits. Price fluctuations - in wages, interest, rent, raw materials, and finished products - are at the bottom of all profits or losses. If the prices of everything entering into the product of any particular enterprise were absolutely fixed, and the price of the finished product itself known in advance, there would be little room for profits. Usually there is no way to guard against price fluctuation, and it is not certain that enterprisers in general would welcome any change that might threaten the existence of their profits. Often a house-builder, when he agrees to erect a structure at a certain price, protects himself by contracting at the same time for the building material to be used in its construction. Clothing manufacturers, also, when they sell men's suits for future delivery often base their prices on a previously arranged price for cloth.

The highest development in this respect has been in the flour industry. To protect themselves from possible loss, millers usually are willing to forego possible gains by buying wheat for future delivery. We can best understand how this is done if we consider a concrete case. Miller A is asked in December to make a price on flour to be delivered in June. Not wishing to take chances he looks up the quotation of May wheat and finds, let us say, that it is $1.00 per bushel. With this information he can as easily fix the price of flour to be delivered in June as he could if he were selling out of his present supply. Miller A then buys on the Board of Trade at $1.00 a bushel enough May-wheat to fill his flour contract. Let us suppose that when the time for the delivery of the wheat has arrived (May) the market price is 99 cents a bushel instead of $1.00. Miller A can compel delivery at the contract price, which is $1.00. Or he can, if it is possible, buy his wheat in the local market at 99 cents and sell out his Board of Trade contract at one cent per bushel loss. Suppose, however, that the market price in May was $1.01 instead of 99 cents. In that case he could compel delivery of wheat at $1.00 a bushel, or go into the local market and buy it at $1.01, selling out his Board of Trade contract at one cent per bushel profit. The important thing to notice is that our miller has protected himself from fluctuation in the price of wheat, preferring security to possible profit. In any case his wheat costs him $1.00 a bushel irrespective of the market price. This illustration is stripped of the numerous complications which arise in such transactions, but it contains in essence the principle of what we may call industrial insurance - that is, insurance against loss by price fluctuation.

Courtesy of Mr. Leslie F. Gates, Chicago.

Scene on the Chicago Board of Trade.