A Manufacturer Buying A Larger Stock Of Raw Material Than Usual

Consider, further, the position of a manufacturer whose business is the conversion of raw materials into finished products. Let this manufacturer be a type of the honourable and energetic men of enterprise who have always formed the justified boast of England. If, utilising his ripened experience and judgment, he can purchase his materials - cotton, wool or iron - at a reduced price, the completed goods can be manufactured at a diminished cost, and thus command a readier and wider sale - appealing, as they will do, by their cheapness to a larger market. The supply of materials which he buys will be greater or more restricted according to his practised estimate of future prices (or speculative forecast of the future), and if he feel reasonably assured, on a careful computation of the prospects, that prices will advance, he obviously contracts more extensive purchases than he would have done had this anticipation not been suggested by his specialised skill. Should values increase he realises a superior rate of profit than do his competitors, who, gifted with less natural and acquired acumen, simply laid in a sufficient stock for ordinary demands, and are thus compelled to procure their additional supplies at the augmented cost. This, again, is legitimate speculation, and in no conceivable mode is it allied to gambling. Nor, it may be added parenthetically, does the element of personal gain assist the definition of the boundaries, since the investor, equally with the most inordinate buyer and seller, is actuated by the desire and aim of profit.

The Jobber, Or Dealer In Stocks And Shares

I proceed now to the consideration of the jobber or dealer. He quotes a buying and selling price, and the price depends upon his estimate of the probability of adjusting his account by selling what he has purchased or buying what he has sold, and effecting this at a profit. This, again, is an act of speculative dealing with the future. What would be the condition of the investing public were the functions of the jobber abolished? For in the existence of the jobbers, and the competition between their quotations, the public not simply possess an authoritative and constant standard of prices to guide their decisions, but also the additional distinctive advantage is conferred upon them of a readier and freer market for their transactions, and the completion of purchases and sales at better and closer prices. A person wishes to buy or dispose of a railway stock. Consider the time wastefully consumed, the energy spent, the anxiety experienced if speedy action were requisite, the grave hindrance to dealings in the stocks of our various undertakings, the impediment to the rapidity and certainty of general business, had the intending seller or buyer to make a casual and precarious search among friends, acquaintances and the public generally until he had discovered a person who desired to purchase the precise security of which he himself was anxious to dispose. But the presence of the jobber completely obviates this difficulty, and provides a prompt and permanent market for all. And, as it has been remarked, the jobber, from the nature of his business, and by reason of the serviceable function which he performs to the public benefit, must - to use the common term - engage in speculation. He must measure the chances of the future in respect of the probability of hereafter purchasing the stock he has sold, or disposing of the stock he has bought. But it is objected that the jobber, when he enters into a contract of sale, does not actually possess the stock he has engaged to deliver. If this retort involved even the feeblest validity, the merchant in any description of goods might abandon his business at once, since certainly he does not, when contracting, possess in a warehouse the entire stock of commodities which he has pledged himself to sell. His bargain is founded upon his sagacious foresight of the probability of acquiring the goods elsewhere at a profit when the time for delivery arrives.

All Trading Essentially Speculation

It has been pointed out - indeed it must be universally admitted even by the most censorious critics - that all trading, whether in commerce, financial business, or in stocks and shares, is essentially and necessarily speculative, more or less, in forming a prevision of the future course of events and basing judgment and decision, not so much upon the present aspect and conditions of the commodities dealt in (though of course these facts enter into the calculation as part of the data) as upon their probable conditions in the future, and the fluctuations of quantity and value to which they may become liable.

The Bull And The Bear

Examine, then, the proceedings of the person who is par excellence termed the speculator - in the form of bull or bear - whether he be a member of the House or one of the general public. If it be urged that his operations are to be condemned on the ground that they constitute the business or habitual occupation of his life, the reply is obvious that the most scrupulous merchant is equally engaged in his affairs as the employment of his life, and that the conduct, whether successful or unfortunate, of those affairs hinges on the justness or inexactitude of his measurements of future events and contingencies - both in respect of the chances of their occurrence, and their extent and direction when they occur.

This view accordingly affords us no evidence in the slightest degree of the precipitate confusion of speculation with gambling. The professed speculator deals with the future, so do we all in every act: he is impelled by the desire for profit, and who is exempt? He employs his alertness of intellect, steadiness of courage, and vigilant resource in his operations, and I have not yet discovered the censor who can impugn the integrity of reward for this activity and use of power. But what he gains another loses: equally what he loses another acquires; and when, for example, he is what is termed a speculator for the rise, and prices of a particular stock ascend, the public who then secure a propitious opportunity for selling participate in the success; while if he be a speculator for the fall, the watchful public again possess the chance of a profitable purchase. And all gains in business generally - the most cautious and legitimate - might be equally denounced, since a financial success to one implies a diminished success, at all events, to others.

Let us judicially discriminate. Assume that some common article of food falls considerably in price as the effect of some passing cause. Speculators would at once purchase large quantities and retain them in anticipation of a revival of value. Hence, in consequence of this reduction of supply (in proportion to the demand), the price would be maintained at a higher level than would have occurred had speculators been absent, and numberless persons (quite apart from the speculators) who would have suffered heavily by the uncontrolled decline of value are thus protected. In a similar manner, the price of another article of food may be temporarily forced to a greatly enhanced and abnormal value: speculators would then be tempted to sell in the expectation of a fall of price succeeding, and making a subsequent purchase at an advantageous rate.

Now if it be desirable - as it undoubtedly is for the public convenience - that a reasonable and fairly uniform price for all commodities - as a stable basis of purchase and disposal - should generally prevail rather than extravagant dearness at one time and an inordinate cheapness at another (so that in the latter event it becomes hardly worth while to produce), it would seem that sound reason can be urged in the public service for speculative operations which thus control the excessive upward or downward motion, and retain prices at a level, on the whole, upon which consumers may reasonably depend in regulating the extent of the provision they should make for their needs.

In this mode, also, extreme inflation and depression in the values of Stock Exchange securities are counteracted by speculative bargains in the one direction and the other, with resulting advantage to the public, on the whole, in the maintenance of a reasonably stable level of values. Speculation of this description is allied to the nature of legitimate and beneficial transactions.