2. In some lines the risk of marketing and carrying large stocks becomes highly specialized, so that ordinary enterprisers shift it to a small group of risk-takers. In buying and selling large quantities of produce there is required the closest and most exclusive attention of a small group of men. The marketing of some staple products requires the most minute acquaintance with world conditions. To foretell the price of wheat one must know the rainfall in India, the condition of the crop in Argentina, must be in touch as nearly as possible with every unit of supply that will come into the market. Such knowledge is sought by the great produce speculators in the central markets. If all means of communication—telegraph, cables, mails—are open to all, competition among these speculators becomes intense, and the result is the extremest efficiency. Their survival depends on the development of acute insight into market conditions. It is the testimony of expert witnesses and of writers in the report of the Industrial Commission that the margin at which farm produce is sold has fallen greatly in the last few years. These products are marketed along the lines of the least resistance, that is, of the greatest economy. The function of the commercial specialists is to foresee the markets, and to ship to the best place, at the right time, in the right quantities. If a product shipped to Liverpool will, by the time it arrives there, be worth more in Hamburg, there is a loss. Such difficult decisions can be made best by a small group of men selected by competition. When handling actual products they perform a real economic service.
Produce speculators as insurers
Source of legitimate speculators' gain
3. Even some mere speculators on the produce markets may and do at times perform a productive service as risk-takers. 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, to foresee prices, and in a sense to bet upon them. Regular merchants buy and sell fictitious products of these men. 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 at the same time sells that number of bushels to a speculator for future delivery; or selling flour for future delivery the miller buys a future in wheat. 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 like the medieval ship-owners, to neutralize one that is inseparable from the ordinary conditions of his business.
One may ask, How, if the miller in the long run benefits, can the speculator gain? He does not intend to perform this service for nothing. Yet as the sales in the whole market equal the purchases, some say that there can be no profits to the speculator. There are unsuccessful speculators and at any rate their losses go to the successful as a sort of gambling profit. Speculators do not dine entirely on "lambs"; they are anthropophagous. But, further, the sales to legitimate purchasers should net a gain to the abler speculator. In proportion as his estimates are correct, there will remain a regular slight margin of profit to him. If he agrees to sell wheat at eighty-five cents to be delivered in three months, he expects it to be a little less at that time. In the long run the ablest speculator probably buys at a little less and sells 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 eliminate risk, and a man engaged on a large scale in milling is, it is said, at a disadvantage if he neglects this method of marginal buying.
Ignorant and dishonest speculation
4. The buying of margins by the "lambs" is simple betting, and much manipulation of the market is dishonest. What has just been described is the more legitimate phase of marginal buying, 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 cannot 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." But this is little other than gambling between betters. The general public gains and loses little if any by these operations, except in the evil effects they entail socially.
§ III. PROMOTER'S AND TRUSTEE'S PROFITS
The promoter's service to the owners
1. The promoter of trusts performs in some ways a substantial economic service. A promoter is one who undertakes to convert a number of unrelated factories, or establishments, into a trust, or combination. He gets options on different factories, that is, the right to buy them at an agreed price within certain time limits. He gets some banking house to underwrite the combination, that is, to agree to dispose of a number of shares to the investing public. A certain number of shares go to the owners, a certain number to the banking house for its services in underwriting, and a substantial number, it may be ten or twenty per cent, of the enormous capitalization, to the promoter himself. This is payment for his ability to water the stock successfully, to capitalize it for more than its former value. Evidently the owners think he earns the money or they would not pay him. So far as there are economic advantages in large production, and inasmuch as there is always friction in the forming of new industrial arrangements, there is a real social service performed by the promoter. The gains of the promoter are in part the legitimate price of progress.