§ 9. Produce speculators as insurers. Many of the speculators in staples, wheat, corn, wool, rarely handle the material things, the real products. They make it their business to study the world conditions and to buy or sell for future delivery. Regular merchants buy and sell "futures" from or to these men; that is, they promise to deliver or take the produce or pay the difference between the contract and the actual price at the time of maturity. Mere speculators on the produce markets may and do at times thus perform service as risk takers. When a miller buys ten thousand bushels of wheat that will remain in the mill three months before they are marketed as actual flour, he "hedges"; that is, he at the same time sells that number of bushels to a speculator for future delivery. If wheat goes down in price the loss on the actual wheat is balanced by the gain on the "future," and vice versa. Or selling flour for future delivery the miller buys a future in wheat; if wheat goes up in price, the miller's loss on his contract for flour is offset by the gain on the "future." In either case he cancels the chance of loss or gain, giving up the chance of profit in the rise of wheat in exchange for protection from the loss of the product on his hands. To him this is legitimate insurance, for he is striving not to create an artificial risk, but to neutralize one that is inseparable from the ordinary conditions of his business.

How can the speculator profit if the miller in the long run benefits? There are unsuccessful speculators and at any rate their losses go to the successful as a sort of gambling profit. But, further, the sales to legitimate purchasers should net again to the abler speculator. In proportion as his estimates are correct, there will remain a regular slight margin of profit to him. If he sells wheat at eighty-five cents to be delivered in three months, he expects it to be a little less at that time; if he buys a future he expects the price to be a little more at that time. In the long run the speculator to be successful must buy at a little less and sell at a little more than the price really proves to be. This means that the merchants in the long run pay something for protection against changes in prices, just as they pay something for insurance. And yet this is the cheapest way to reduce risk, and a man engaged in milling is, it is said, at a disadvantage if he neglects this method of insurance.

§ 10. Ignorant and dishonest speculation. What has just been described is the more legitimate phase of buying on margin, not its darker aspect. One who, having no special opportunities to know the market, buys or sells wheat, or other commodities or securities, on margin, is called a "lamb." He is simply betting. He has no unusual skill; he can not foresee the result. The commission paid to brokers "loads the dice" slightly; the opportunities of the larger dealer of anticipating information load the dice heavily against the "lambs." Secret combinations and all kinds of false rumors cause fluctuations large enough to use up the margins of the small speculator. At times a number of powerful dealers unite to cause an artificially high or low price, a situation called "a corner," in which both other professional speculators and the outsiders are made to pay heavily. But this is little other than gambling between bettors.

§11. Fraudulent and illicit profits. Interwoven with profits in many cases is a dark thread of fraud. Caveat emptor is by law the rule of the market, and the salesman often uses the subtle arts of misrepresentation. Undoubtedly honesty is the best policy, but it is not always the most profitable policy in a pecuniary sense. Cheating, lying, breaking of contracts, bribery of public officials, and many similar acts may increase individual incomes. One man gains a temporary success by acts that are later punished as crimes; another, guilty of like deeds, escapes conviction for lack of evidence or on technicalities, and enjoys ill-gotten wealth. More fortunes, however, are due to actions on the border-line of law which society is not yet wise enough to condemn or efficient enough to prevent. No code of laws can be framed that will make possible the punishment of all evil acts in trade. Any law that would catch all the guilty would injure many of the innocent. The efforts of social reformers are being directed toward detecting and preventing the fraud, intimidation, and extortion that still make up no inconsiderable part of private profits. It may be noted that under the English common law, for centuries past, monopoly has been tainted with illegality, so that all monopoly profits that are not legally protected (such as incomes from patents, copyrights, fairly obtained franchises, etc.) must be classed under this heading.