Speaking of farmers, it is well known that much of the opposition to short selling and dealing in futures in the large markets finds its chief advocates among the Western and Southern politicians whose constituents are the agricultural classes. These gentlemen fulminate strongly against the New York Stock Exchange and the grain and cotton exchanges, and in currying favor with their bucolic supporters they do not hesitate to condemn margin trading, short selling and every other phase of speculative markets. Yet it does not occur to them, or, if it does, they dare not refer to it, that in forming pools and combinations to hold back their wheat and cotton their constituents are doing the very thing which they so strongly condemn in speculative centres. The farmer is, of course, richer than he ever was before, but nevertheless he grows his wheat to sell, and only a few can carry it for any length of time without borrowing from the banks. The farmer who goes into one of these pools with wheat valued at $10,000 and who borrows $8000 on it from his local bank, is nothing more nor less than a speculator in wheat on a 20 per cent. margin, and the same horrid appellation describes the cotton-planter who resorts to similar practices.[33]
Now, of course, there is no moral reason why a farmer should not speculate if he chooses, but what touches us on the raw is his Phariseeism in doing for himself what he professes to abhor and condemn in others. One is tempted to say unkind things to the farmer at such times, to remind him, for example, that he is to-day the most backward and unprogressive factor in American business life. Despite the fact that the Department of Agriculture has spent $100,000,000 on his education in the last twenty years, he has not yet begun to learn what the German, Dutch, and French farmers learned years ago in intensive farming, nor has he mastered the art of cattle-raising in anything like the degree it is understood in the Argentine. Nature has smiled on him; he waxes fat with her bounty, but he does not keep pace with the growth of the country. Although enhancing prices are paid him for his product, he is unable to raise a crop proportionate in any degree to the facilities put at his disposal in the way of fertilizers and machinery. One would like to “rub it in” on the farmer, but one doesn’t, “because” as a recent writer puts it, “the farmer is a farmer, and therefore not a person to be lectured like a mere banker or broker in Wall Street.”
To the farmer, the politician, and the layman generally, short sales of cotton or grain are understood, approved, in fact, if the grower happens to be the one who profits by them. But substitute stocks and shares for wheat and cotton, and talk of “operations for a fall,” and the layman thinks he smells a rat. He sees the bale of cotton or the carload of wheat actually moving; it is a concrete thing; it appeals to his senses, it is comprehensible. But talk to him of bits of paper called stock certificates, and by a curious process he concludes that a short sale has no basis of reality and is therefore menacing and improper. He persuades himself that short selling ought to be prohibited by law, and, since Wall Street harbors the chief offenders, he finds in the nearest politician a handy ally to assist him. These gentlemen, who obstinately refuse every other medicament, could be cured of their ailment by a strong diet of economics. They become subjects of medical, rather than financial, interest. They should dip themselves into Conant and Leroy-Beaulieu; they should cool off in the pages of Bagehot and Emery; and, by the time they have got into the soothing columns of the Hughes Commission’s report, they will be ready for new points of view.
As a preparatory lesson: suppose a speculator buys from a commission merchant a carload of coal of a specified grade. The coal is not in the possession of the commission merchant, but he knows where he can get it, and he knows that he can deliver it on the date agreed upon. Accordingly he sells it short, and enters into a binding contract which, happily, the courts construe to be perfectly legal. Now suppose the same purchaser wishes to buy 100 shares of Pennsylvania Railroad stock. All Pennsylvania stock is the same, that is to say any 100 shares of it is just as good as any other 100 shares of the same property—the number on the certificate is of no importance whatever.
The dealer to whom he applies does not happen to have 100 Pennsylvania on hand, but he knows where he can get it, and he knows that he can deliver it to the purchaser on the following day. So he sells it short, and all that remains to complete his part of the contract is the actual delivery. He is then a bear on Pennsylvania stock. He may, if he chooses, go into the open market and buy the stock at once, so that he will be able to deliver it in the easiest and most direct way. Or he may feel that by waiting he may be able to buy at a lower price than that at which he has sold it, hence, in order to make the delivery promptly, he borrows the hundred shares from one of his colleagues, to whom he pays the market price as security for the temporary loan of the certificate.[34] In a day or two the price of the stock may have declined, whereupon the bear goes into the market and buys the 100 shares of Pennsylvania at a price, say, 1 per cent. lower than that at which he sold it.
When this certificate is delivered to him next day, he delivers it in turn to the man from whom he borrowed the original 100 shares; his security money is then returned to him, and the transaction is closed. It is just as real a transaction as any other, and just as legal. Moreover, since it is always possible to buy, but not always possible to sell, the active presence in the market of large numbers of bears who must buy, whether they want to or not, is the very best policy of insurance that a holder of securities could have.
Many years ago there was a law on the French Statute books, subsequently repealed, prohibiting short sales. M. Boscary de Villeplaine, a deputy chairman of the association of stockbrokers, was conversing with Napoleon regarding a pending discussion in the Council of State looking to the repeal of the law. “Your Majesty,” said de Villeplaine, “when my water carrier is at the door, would he be guilty of selling property he did not own if he sold me two casks of water instead of only one, which he has?” “Certainly not,” replied Napoleon, “because he is always sure of finding in the river what he lacks.” “Well, your Majesty, there is on the Bourse a river of Rentes.”[35]
Napoleon felt, no doubt, that there was something inherently wrong in selling short; even as these lines are written, counsel for a Congressional committee is attempting to make witnesses admit that the practice is “immoral.” But why, where, how is it immoral? It pervades all business; no question of morals or ethics enters into it at all. The man who sells you a motor-car has not got it; he accepts your money and enters into an agreement to deliver the car next spring because he knows or believes that he can make it and have it ready for delivery at that time. Meanwhile he has sold short. A gentleman of my acquaintance has sold thousands of storage-batteries on the same basis, although plans for them have not yet been designed to meet the specifications. At Cape Cod the cranberry-growers sell their crop before it has begun to mature; all over the land contractors and builders are “going short” of the labor and materials which, at some time in the future, they hope to obtain to fulfil the terms of their agreements. Are all these worthy people “immoral”?
If it is immoral to sell for a purpose, it is equally immoral to buy for a purpose; in each case the purpose is the hope of a profit. Buying for a profit is approved by every one; why not selling? In both instances you have bought or sold for a difference in price; the sequence of the events in no way involves a question of morals, since there is no ethical difference and no economic difference between buying first and selling last, and selling first and buying last. Moreover, in selling short you do no injury, since you sell to a buyer, at his price, only what he wants and is willing to pay for.[36]
All suggestions of impropriety in short selling are grotesque in their absurdity. But suppose, for purposes of argument, that economic errors of some sort were actually involved in this practice. How could it be regulated or controlled? As the governors of the Stock Exchange stated to the Hughes Commission in 1909, short selling is of different descriptions. There is the short sale where the security is held in another country and sold to arrive pending transportation. There is the short sale where an individual sells against securities which he expects to have later, but which are not in deliverable form; and in this connection I call your attention to the recent sale of $50,000,000 of Corporate Stock of the City of New York where deliveries were not made for a period of about three months, and which stock was dealt in enormously, long before it was issued.