CHAPTER III.

Influence of Mercantile Speculations on Price—Difference between Speculation and Gambling—Speculations in Corn beneficial to the Public, but dangerous to the Dealers—Imitative Speculations—Influence of Knowledge on Speculation.

The proposition so universally assented to, that market prices depend upon the proportion which the supply of commodities bears to the demand, would be more accurate were it expressed with some modifications. It rarely happens that either the actual supply of any species of produce in extensive demand, or the intensity of that demand, can be exactly measured. Every transaction in which produce is bought that it may be afterwards sold, is, in fact, a speculation. The buyer anticipates that the demand for the article he has purchased will be such, at some future period, either more or less distant, that he will be able to dispose of it with a profit; and the success of the speculation evidently depends on the skill with which he has estimated the circumstances that will determine the future price of the commodity. Hence, in highly commercial countries, where merchants are possessed of large capitals, and employ them according to their own discretion and foresight, the prices of commodities are frequently much influenced, not merely by the occurrence of changes of supply and demand, but by the anticipation of such changes. It is the business of the merchant to acquaint himself with every circumstance influencing the particular description of commodities in which he deals. He endeavours to obtain, by means of an extensive correspondence, the earliest and most authentic information with respect to every thing that is likely to affect their supply or demand, or the cost of their production; and if he learned that the supply Edition: current; Page: [259] of an article had failed, or that, owing to changes of fashion, or the opening of new markets where it was eagerly sought after, the demand for it had increased, he would be disposed to become a buyer, in anticipation of profiting by the rise of price, which, under the circumstances, could hardly fail of taking place; while if he were a holder of the article, he would refuse to part with it unless for a higher price than he would previously have accepted. If the intelligence received by the merchant were of a contrary description—if, for example, he learned that the article was being produced with greater facility, or that there was a falling off in the demand for it, caused by a change of fashion, or by the shutting up of some of the markets to which it had hitherto been admitted—he would act differently: in this case he would anticipate a fall of prices, and would either decline purchasing the article, except at a reduced rate, or endeavour to get rid of it, supposing he were a holder, by offering it at a lower price. In consequence of these operations, the prices of commodities, in different places and periods, are brought comparatively near to equality. All abrupt transitions, from scarcity to abundance, and from abundance to scarcity, are avoided: an excess in one case is made to balance a deficiency in another, and the supply is distributed with a degree of steadiness and regularity that could hardly have been deemed attainable.

It is obvious, from these statements, that those who indiscriminately condemn all sorts of speculative engagements, have never reflected on the circumstances incident to the prosecution of all undertakings. In truth and reality they universally involve some degree of speculation. Their undertakers must look forward to periods more or less distant, and their success depends entirely on the sagacity with which they have estimated the probability of certain events occurring, and the influence which they have ascribed to them. Speculation is, therefore, really only another name for foresight; and though fortunes have sometimes been made by a lucky hit, the character of a successful speculator is due to Edition: current; Page: [260] him only who has skilfully devised the means of effecting the end he had in view, who has excelled his competitors in the judgment with which he has looked into futurity, and appreciated the operation of causes producing distant effects. Even in those businesses, such as agriculture and manufactures, that are apparently the most secure, there is, and must be, a great deal of speculation. Those engaged in the former have to encounter variations of seasons, while those engaged in the latter have to encounter variations of fashion; and each is, besides, liable to be affected by legislative enactments, by discoveries in the arts, and by an endless variety of circumstances which it is always difficult, and sometimes impossible, to foresee. On the whole, indeed, the gains of the undertakers are so adjusted, that they obtain, at an average, ordinary, or nearly ordinary, profits. But the inequality in the gains of individuals is most commonly very great; and while the superior tact, industry, or good fortune of some enable them to realize large fortunes, the want of discernment, the less vigilant attention, or the bad fortune of others, frequently reduce them from the situation of capitalists to that of labourers.1

It is by no means an easy task to draw a distinct line of demarcation between speculation and gambling. The truth is, that they run into one another by almost imperceptible degrees. Practically, however, that may be termed a safe, Edition: current; Page: [261] and, therefore, a legitimate speculation, in which, on a fair and careful estimate of the favourable and unfavourable contingencies, the former preponderate; while that may be termed a gambling adventure in which the contingencies are unknown, or in which they are nearly equal. Suppose a race-horse and a dray-horse were matched to run against each other; an individual who betted that the race-horse would win, could not be deemed a gambler; for he, it is plain, would encounter little or no risk. But if two race-horses, each in high estimation, were matched against each other, the risk would become very great; and the success of either would, most likely, depend on so many accidental and almost inappreciable circumstances, that those who betted on the event might fairly be denominated gamblers.

Among the various speculations carried on by merchants, there are few that have exposed them more to the public odium, while, at the same time, there are few more really beneficial, than those of the dealers in corn. Not only do they distribute the produce of the harvest equally throughout the country, according to the wants of different districts, but they manage their operations so as to reserve a portion of the surplus produce of plentiful years as a resource against future emergencies; and when a scarcity occurs, they distribute its pressure equally over the year, and prevent society from ever actually feeling the extremity of want. We shall briefly endeavour to show how speculation produces these effects.

Were the harvests always equally productive, nothing would be gained by storing up supplies of corn; and all that would be necessary would be to distribute the crop equally throughout the country, and throughout the year. But such is not the order of nature. The variations in the aggregate produce of a country in different seasons, though not, perhaps, so great as are commonly supposed, are still very considerable; and experience has shown, that two or Edition: current; Page: [262] three unusually luxuriant harvests seldom take place in succession; or that when they do, they are invariably followed by those that are deficient. The speculators in corn anticipate this result. Whenever prices begin to give way, in consequence of an unusually luxuriant harvest, speculation is at work. The more opulent farmers withhold either the whole or a part of their produce from market; and the more opulent dealers purchase largely of the corn brought to market, and store it up in expectation of a future advance. And thus, without intending to promote any one’s interest but their own, speculators in corn become benefactors of the public. They provide a reserve stock against those years of scarcity which are sure, at no distant period, to recur; while, by withdrawing a portion of the redundant supply from immediate consumption, prices are prevented from falling so low as to be injurious to the farmers, or at least are maintained at a higher level than they would otherwise have reached; provident habits are maintained amongst the people; and that waste and extravagance are checked which always take place in plentiful years, but which would be carried to a much greater extent were the whole produce of an abundant crop consumed within the season.

It is, however, in scarce years that the speculations of the corn-merchants are principally advantageous. Even in the richest countries, a very large proportion of the individuals engaged in agriculture are comparatively poor, and are totally without the means of withholding their produce from market, in order to speculate upon any future advance. In consequence, the markets are always most abundantly supplied with produce immediately after harvest; and in countries where the merchants engaged in the corn trade are not possessed of large capitals, or where their proceedings are restricted, or regarded with suspicion, there is then, almost invariably, a heavy fall of prices. But as the vast majority of the people buy their food in small quantities, or from day to day as they want it, their consumption is necessarily Edition: current; Page: [263] extended or contracted according to its price at the time. Their views do not extend to the future; they have no means of judging whether the crop is or is not deficient; they live, as the phrase is, from hand to mouth, and are satisfied if, in the meantime, they obtain abundant supplies at a cheap rate. But it is obvious that, were there nothing to control or counteract this improvidence, the consequences would, very often, be fatal. The crop of one harvest must support the population till the crop of the succeeding harvest has been gathered in; and if that crop should be deficient—if, for instance, it should only be adequate to afford, at the usual rate of consumption, a supply of nine or ten months’ provision instead of twelve—it is plain, that unless the price were so raised immediately after harvest as to enforce economy, and put, as it were, the whole nation upon short allowance, the most dreadful famine would be experienced previously to the ensuing harvest. Those who examine the accounts of the prices of wheat and other grain in England, from the Conquest downwards, collected by Bishop Fleetwood, Sir F. M. Eden, and others, will meet with abundant proofs of what has now been stated. In those remote periods, when the farmers were generally without the means of withholding their crops from market, and when the trade of a corn-dealer was proscribed, the utmost improvidence was exhibited in the consumption of grain. There were then, indeed, but few years in which a considerable scarcity was not experienced immediately before harvest, and many in which there was an absolute famine. The fluctuations of price exceeded every thing of which we can now form an idea; the price of wheat and other grain being often four and five times as high in June and July as in September and October. Thanks, however, to the increase of capital in the hands of the large farmers and dealers, and to the freedom given to the operations of the corn-merchants, we are no longer exposed to such ruinous vicissitudes. Whenever the dealers, who, in consequence of their superior means of information, are better acquainted Edition: current; Page: [264] with the real state of the crops than any other class of persons, find the harvest likely to be deficient, they raise the price of the corn they have warehoused, and bid against each other for the corn which the farmers are bringing to market. In consequence of this rise of prices, all ranks and orders, but especially the lower, who are the principal consumers of corn, are obliged to use greater economy, and to check all improvident and wasteful consumption. Every class being thus immediately put upon short allowance, the pressure of the scarcity is distributed equally over the year; and instead of indulging, as was formerly the case, in the same scale of consumption as in seasons of plenty, until the supply became altogether deficient, and then being exposed without resource to the attacks of famine and pestilence, the speculations of the corn-merchants warn us of our danger, and compel us to provide against it.

It is not easy to suppose that these proceedings of the corn-merchants should ever be injurious to the public. It is said, indeed, that in scarce years they are not disposed to bring the corn they have purchased to market until it has attained an exorbitant price, and that the pressure of the scarcity is thus very much aggravated; but there is no real ground for any such statement. The immense amount of capital required to store up any considerable quantity of corn, and the waste to which it is liable, render most holders disposed to sell as soon as they can realise a fair profit. In every extensive country in which the corn trade is free, there are infinitely too many persons engaged in it to enable any sort of combination or concert to be formed amongst them; and though it were formed, it could not be maintained for an instant. A large proportion of the farmers and other small holders of corn are always in straightened circumstances, more particularly if a scarce year has not occurred so soon as they expected; and they are, consequently, anxious to relieve themselves, as soon as prices rise, of a portion of the stock on their hands. Occasionally, Edition: current; Page: [265] indeed, individuals are found who retain their stocks for too long a period, or until a reaction takes place, and prices begin to decline. But, instead of joining in the popular cry against such persons, every one who takes a dispassionate view of the matter will immediately perceive that, inasmuch as their miscalculation must, under the circumstances supposed, be exceedingly injurious to themselves, we have the best security against its being carried to such an extent as to be productive of any material injury, or even inconvenience, to the public. It should also be borne in mind, that it is rarely, if ever, possible to determine beforehand when a scarcity is to abate in consequence of new supplies being brought to market; and had it continued a little longer, there would have been no miscalculation on the part of the holders. At all events, it is plain that, by declining to bring their corn to market, they preserved a resource on which, in the event of the harvest being longer delayed than usual, or of any unfavourable contingency taking place, the public could have fallen back; so that, instead of deserving abuse, these speculators are justly entitled to every fair encouragement and protection. A country in which there is no considerable stock of grain in the barn-yards of the farmers, and the warehouses of the merchants, is in a most perilous situation, and may be exposed to the severest privations, or even famine. But so long as the sagacity, the miscalculation, or the avarice of merchants and dealers, retain a stock of grain in the warehouses, this last extremity cannot take place. By refusing to sell till it has reached a very high price, they put an effectual stop to all sorts of waste, and husband for the public those supplies which they could not have so frugally husbanded for themselves.

The advantage of the speculative purchases of corn made by merchants in plentiful years, and of the immediate rise of price which their operations occasion in years when a scarcity is apprehended, have been very clearly stated in a Report by the Lords of the Privy Council, in 1790, on Edition: current; Page: [266] the Corn Laws.—“In other countries,” say their lordships, “magazines of corn are formed by their respective governments, or by the principal magistrates of great cities, as a resource in times of scarcity. This country has no such institution. The stores of corn are here deposited in the barns and stacks of weathly farmers, and in magazines of merchants and dealers in corn, who ought by no means to be restrained, but rather encouraged in laying up stores of this nature; as, after a deficient crop, they are thereby enabled to divide the inconvenience arising from it as equally as possible through every part of the year; and by checking improvident consumption in the beginning of scarcity prevent famine, which might otherwise happen before the next harvest. The inland trade of corn ought, therefore, to be perfectly free. This freedom can never be abused. To suppose that there can be a monopoly of so bulky and perishable an article, dispersed through so many hands, over every part of the country, is an idle and vain apprehension.”

The regulations once so prevalent with respect to the assize of bread, were originally devised and intended as measures of security, lest, owing to the small number of bakers in most towns, they should combine together, and artificially raise the price of bread. According, however, as sounder notions upon these subjects were diffused throughout the country, these regulations fell gradually into disuse; and we are not aware that any ill effects have, in any instance, been found to result from their neglect. The assize of bread in London was abolished by an act of the legislature in 1815; and it is well known, that no such thing as a combination amongst the bakers has ever since been thought of, and that the public have always had an ample supply of bread, at the lowest prices, all things considered, that the state of the corn-market would admit. And when such has been the case, when no combination has ever been even so much as attempted amongst the bakers of a single town, can Edition: current; Page: [267] any thing be more perfectly visionary, than to suppose that it should be attempted among the vast multitudes of farmers and corn-dealers dispersed over an extensive country! “The unlimited, unrestrained freedom of the corn trade,” says Adam Smith, “as it is the only effectual preventive of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth. No trade deserves more the full protection of the law, and none requires it so much, because none is so much exposed to undeserved popular odium.”1

But though the speculations of the corn-merchants be in every case beneficial to the public, they are often injurious to themselves. The corn trade is, indeed, one of the most hazardous businesses in which it is possible to engage. This arises partly and principally from the extreme difficulty of procuring correct information with respect to the productiveness of the harvests in different countries and districts, and of the supplies of corn that may be made available in case of deficiency; partly from the difficulty of estimating the effect of weather on the crops; and partly from the difficulty of estimating how much any given rise of price may affect consumption. When the elements of speculation are so very uncertain, or when, at least, they are so difficult to disentangle and appreciate, it requires no ordinary prudence for a merchant to avoid very heavy losses; and how cautious soever, he can never be secure against unfavourable chances. A few days’ rain, immediately before or during harvest, have often, by exciting what were apparently the best-founded apprehensions with respect to the safety of the crop, occasioned a sudden rise of prices, which have again as suddenly fallen back to their former level when the weather improved. It is idle to suppose that these causes of risk and uncertainty should ever be completely obviated; but it is pretty evident that nothing could have tended so much to weaken their frequency and force, as the establishment of a free corn trade with other Edition: current; Page: [268] countries. Such is the wise arrangement of Providence, that the seasons most unfavourable to the crops in one country or district, are generally the most favourable to those in countries or districts having a different soil or climate.1 There is no reason, indeed, for supposing that the harvests throughout the commercial world, differ materially in different years; and since 1849, when the external corn trade was freed from restrictions, the facility of importing additional supplies from foreign countries when the home supply happens to be unusually deficient, and of exporting to them in unusually abundant years, has given greater steadiness to prices, so that the hazard to which the dealers was formerly exposed, has been considerably lessened.

The great risk to which all classes of merchants are exposed, who offer an unusually high price for any description of commodities, in anticipation of a future advance of price, is a consequence, principally, of the difficulty of truly appreciating the grounds on which a deficient supply or an increased demand is expected.2 This, however, is entirely Edition: current; Page: [269] a practical question, for the solution of the merchant, whose success depends on the sagacity he evinces in conducting his speculations under such circumstances. The great cotton speculation of 1825 took its rise partly and chiefly from a supposed decrease in the supply of cotton, originating in the previous low prices, and partly from an idea that there was a greatly increased demand for raw cotton in this country and the Continent, and that the stocks on hand were unusually low. Now it is obvious, that the success of those who embarked in this speculation depended entirely on two circumstances: viz. first, that they were right in the fundamental supposition on which the speculation rested, that the supply of cotton was no longer commensurate with the demand; and second, that their competition did not raise the price so high as to diminish the consumption by the manufacturers in too great a degree to enable them to take off the quantity actually brought to market. If the merchants had been well founded in their suppositions, and if their competition had not raised the price of cotton too high, the speculation would have been successful. But, instead of being well founded, the hypothesis on which they proceeded was all but visionary. There was no decrease in the supply of cotton, but, on the contrary, a considerable increase; and though there had been a decrease, the excess to which the price was carried must have checked consumption so as to occasion a serious revulsion.1

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When a few leading merchants purchase, in anticipation of an advance, or sell, in anticipation of a fall, the speculation is often pushed beyond all reasonable limits, by the operations of those who are influenced by imitation only, and who have never, perhaps, reflected for a moment on the grounds on which a variation of price is anticipated. In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has any peculiar or accurate information in regard to the state of the demand and supply, but because some one else has done so before him. The original impulse is thus rapidly extended; and even those who are satisfied that a speculation, in anticipation of a rise of prices, is unsafe, and that there will be a recoil, not unfrequently adventure, in the expectation that they will be able to withdraw before the recoil has begun.

The only guarantee against the spread of imitative speculations, if we may so term them, must be sought for in the diffusion of sounder information, and of a more searching spirit of analysis, amongst the mercantile class. The crowd who engage in speculative adventures, once set on foot, consist partly, of determined gamblers, who having, for the most part, nothing to lose, are at all times ready to embark in any adventure, however hazardous, by which they imagine they have a chance of making a fortune; but the far greater number of those who quit their ordinary employments to enter into such speculations, though partly, no doubt, actuated by a spirit of gambling, are mainly influenced Edition: current; Page: [271] by the principle of imitation; and it is difficult to see how this dangerous tendency can be lessened otherwise than by the better education of merchants, and by impressing on every one who may be tempted to speculate either on a rise or fall of prices, the necessity, if he would provide any security against extreme risk, of carefully investigating the causes of any anticipated variation, and estimating for himself the probability of success in the adventure, instead of embarking in it in imitation of others.

It may, speaking generally, be laid down as a sound practical rule, to avoid having anything to do with speculations in which many have already engaged. The competition of the speculators seldom fails speedily to render an adventure that might have been originally safe, extremely hazardous. If a commodity happen to be at an unusually reduced price in any particular market, it will rise the moment that different buyers appear in the field; and supposing, on the other hand, that it is fetching an unusually high price, it will fall, perhaps far below the cost of production, as soon as supplies begin to be poured in by different merchants. Whatever, therefore, may be the success of those who originate a speculation, those who enter into it at an advanced period are almost sure to lose. To have been preceded by others should not, in such matters, inspire confidence; on the contrary, it should, unless there be something special in the case, induce every considerate person to decline interfering with it.

The pernicious effects of miscalculation and ignorance are strikingly exhibited in the overstocking of such new markets as are occasionally opened, and in filling them with articles wholly unsuited to the wants and habits of the people. When the continental markets were opened in 1814 and 1815, the first shippers of colonial and other produce made large profits; but in consequence of the crowding of fresh speculators, many of whom were strangers to commercial affairs, into the field, the markets were quite overloaded; and such a recoil took place, that Leith, and some other towns, did not for some Edition: current; Page: [272] years recover from the bankruptcy and ruin of which it was productive. But the exportations consequent upon the first opening of the trade to Buenos Ayres, Brazil, and the Caraccas, were, in this respect, still more extraordinary. Speculation was then carried beyond the boundaries within which even gambling is usually confined; and was pushed to an extent and into channels that could hardly have been deemed practicable. We are informed by Mr. Mawe, an intelligent traveller, resident in Rio Janeiro at the period in question, that more Manchester goods were sent out in the course of a few weeks than had been consumed in the twenty years preceding; and the quantity of English goods of all sorts poured into the city was so very great, that warehouses could not be found to contain them, and that the most valuable merchandise was actually exposed for weeks on the beach, to the weather, and to every sort of depredation! But the folly and ignorance of those who crowded into this speculation was still more strikingly evinced in the selection of the articles sent to South America. Elegant services of cut-glass and china-ware were offered to persons whose most splendid drinking vessels consisted of a horn or the shell of a cocoa-nut; tools were sent out having a hammer on the one side and a hatchet on the other, as if the inhabitants had had nothing more to do than to break the first stone they met with, and then cut the gold and diamonds from it; and some speculators actually went so far as to send skates to Rio Janeiro!1

The distress and ruin which followed these exportations is plainly to be ascribed to the almost inconceivable folly of those by whom they were made. If there be one species of knowledge more essential to those who embark in mercantile speculations than another, it is that they should be acquainted with the various products of the different commercial countries of the world, and with those which are in Edition: current; Page: [273] demand in them. And when ships are freighted and commodities sent abroad by persons so entirely destitute of this elementary instruction as to send skates to Rio, the wonder is, not that they should sometimes calculate wrong, but that they ever calculate right.

But, as has been before observed, the maintenance of a free intercourse amongst different countries, and the more general diffusion of sound instruction, seem to be the only means by which these miscalculations can be either obviated or mitigated. The effects consequent on improvident speculations being always far more injurious to the parties engaged in them than to any other class, the presumption is, that they will diminish both in frequency and force, according as the true principles of commerce come to be better understood. But whatever inconvenience may occasionally flow from them, it is abundantly plain, that instead of being lessened, it would be very much increased, were any restraints imposed on the freedom of adventure. When the attention of many individuals is directed to the same line of speculation; when they prosecute it as a business, and are responsible in their own private fortunes for any errors they may commit, they acquire a knowledge of the various circumstances influencing prices, and give them, by their combinations, a steadiness not attainable by any other means. It is material, too, to bear in mind, as was previously stated, that many, perhaps it might be said most, of those who press so eagerly into the market, when any new channel of commerce is opened, or when any considerable rise of price is anticipated, are not merchants, but persons engaged in other businesses, or living, perhaps, on fixed incomes, who speculate in the hope of suddenly increasing their fortune. This tendency to gambling seldom fails to break out upon such occasions; but fortunately, these are of rather rare occurrence; and in the ordinary course of affairs, mercantile speculations are left to be conducted by those who are familiar with business, and who, in exerting Edition: current; Page: [274] themselves to equalise the variations of price caused by variations of climate and of seasons, and to distribute the supply of produce proportionally to the effective demand, and with so much providence that it may not at any time be wholly exhausted, perform functions that are in the highest degree important and beneficial. They are, it is true, actuated only by a desire to advance their own interests; but the results of their operations are not less advantageous than those of the agriculturists who give greater fertility to the soil, or of the mechanists who invent new and more powerful machines.1

In the first chapter of this Part, we endeavoured to show that the quantity of labour required for the production of commodities forms the grand principle which determines their exchangeable worth, or the proportion in which commodities exchange for each other; and in the second chapter, and the present, we have endeavoured to trace the influence of variations of demand and supply, and of speculation, on prices. These seem to exhaust all the really important practical questions involved in this part of the science. But as it is necessary, in order fully to understand the various questions involved in the theory of value, that the precise influence of variations in the rates of wages and profits, and in the species of capitals employed, should be appreciated, we shall devote the following chapter to an investigation of these matters. Being principally, however, intended for the use of the scientific reader, it may, without impropriety, be passed over by others.

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