Another similar case of the unexpected, but this time not from the death of a great financial captain, was the memorable flurry in Northern Pacific stock as a result of the titanic struggle for control of this important railroad system between E. H. Harriman and his banking ally, the great banking house of Kuhn, Loeb & Co., on one side, and James J. Hill, backed by no less a banker than J. Pierpont Morgan, on the other. Northern Pacific shot up to $1,000 a share. Were it not for a private settlement on the price after peace was again restored between the two rival factions, the financial district would have been a mass of wreckage, since but little of the stock sold under contract to deliver next day was obtainable, as the control was held tightly by Hill and Morgan.

Jay Gould's efforts to corner gold, when gold in Wall Street was still something of a speculative commodity and there was a room in the stock exchange set aside for traders in it and known as the Gold Room, brought Black Friday, one of the blackest days in our financial annals.

These illustrations will confirm the contention I make that it is the unexpected which changes the course of speculation. It is the unexpected against which no precaution can be taken. To the lay mind it will be somewhat puzzling how the effect can be so ruinous. With a little clearer knowledge in the rough of how speculation is carried on it will be more readily understood.

Influence Of Panics On Margin Trading

Most speculators do not buy outright, that is, with their own money. They usually operate on margins. That is, they buy a block of stock, it may be wheat, cotton, or something else, through a broker, paying a certain percentage of the purchase price and leaving it to the broker to arrange a loan with his bank for the balance. On this balance the speculator pays interest.

As the stock declines he is forced to protect his equity in the stock by putting up more money or margin, and if he has not the capital or comes to the conclusion that the decline will continue and does not care to run the risk of further loss, he sells out or is sold out, the bank liquidates its loan, the broker deducts his commission, and if there is anything left, the speculator gets the balance. If he is in debt beyond his margin he must make the difference good. But it seldom reaches this point, as the loans made are carefully watched and closed before the lender's margin is exhausted.

In panics, or when the unexpected happens, the change in prices occurs so swiftly and suddenly that often the speculator has no time to protect himself before his loans are liquidated. As for the outright holders of securities, they are driven by fear to unload to prevent further losses. In such times securities are recklessly thrown upon the market from all sides, and prices smash.

The Science Of Speculation. Test Questions

1. What is the economic foundation of modern organized speculation?

2. Can speculation be eliminated from the world's business by mere agitation against it? Why?

3. Show how speculation is a strong factor in international diplomacy and war.

4. Give some examples showing the prevalence of speculation in early historical times.

5. Why is it impossible for statistical charts to predict future events to a certainty?

6. To what extent are such charts valuable?

7. Give examples of some unexpected events which even the shrewdest speculators had not allowed for in their calculations.