The Journal of Accountancy

Published monthly under the auspices of The
American Association of Public Accountants

The Case Against Speculation.

Periods of legislation against the stock and produce exchanges recur about every ten years, and the coincidence of these periods with times of industrial depression and crises leads one to suspect a casual connection between the two. It is not necessary to look far in order to discover a relation of this kind. It lies in the fact that the various groups of producers are so related that a feeling of divided interests is created in the process of procuring, preparing, and delivering a commodity to the consumer. Therefore, the farmer regards the transportation agencies and the market organizations with distrust, since it is through them that he must deliver his goods. The railways are attacked as demanding extortionate rates, and the exchanges and systems of warehouses are accused of depressing farm prices for their own advantage.

On the other hand, manufacturing centers declaim against the railways for hauling to competing places at too cheap a rate, and say that their cost of production is unreasonably high through the

efforts of the boards of trade and other commercial organizations to keep prices above what is warranted by the true conditions of demand and supply. This anomalous situation is often exemplified by farmers' meetings in one part of the country voting against speculation in wheat as tending to unduly lower prices, while at the same time, in other conventions, or associations of millers, resolutions are being passed which denounce dealing in futures" as having the effect of unfairly raising the price of wheat.

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Because of the peculiar situation of the organized exchanges at focal points where the numberless influences converge that determine values and register them in quoted prices, it is perhaps natural that the effect be often mistaken for the cause in the matter of price determination. And here arises the close connection between the industrial crises and periods of legislative activity against "speculation." Business depression means a downward movement of the general price level, and the exchanges are the first places to register the change-often in advance. The business world does not immediately realize that underlying conditions of demand and supply have assumed, or are assuming, new relations; perhaps they are even loath to recognize a situation so much the reverse of a time of buoyancy and high and advancing prices. Therefore, from the point of view of the business man, the price changes seem due to manipulation, for is it not evident that the trader wishes to buy as cheaply as possible, and sell as dearly as he can? This sentiment is always present, but only after the strain of a continual downward pull in prices does it become active and find expression in legislative measures for the regulation or suppression of the market organization.

Two other factors become especially evident at such a time, and add impetus and strength to the anti-speculation movement. The first is dependent upon the fact that price movements from one level to another are not uniform, nor is the path downward represented by a smooth inclined plane. Fluctuation in prices is the order of the day, and uncertainty is the breath of life to speculation. Thus with the speculator very active at a time when his motives are being impugned, and public attention directed to his operations, it is easy to imply that increased speculation is the cause of increased business distress. Furthermore, and this leads to the second factor-during such periods of speculative

activity the results of "overtrading" are presented day after day in the numerous failures of those who, through misjudgment, ignorance, or blind gambling, have failed to read the times aright.

With such failures go the frequent disclosures of dishonest practices. These involve not only the business but the moral integrity of large numbers of the business community. Consequently, there is added to the anti-speculation movement the strong support of those who see only danger to society in a market organization, which in order to secure the benefits to trade of an “active market," does not place sufficient obstruction in the way of folly, ignorance and the "passion for gambling.”

Such, in brief, are the underlying reasons and the source of the strength for the movement against speculation. Its supporters, however, argue that such a position on the part of those opposed to speculation is due to a misunderstanding of the economic function of the speculator, and a confusion of ideas which do not discriminate between speculation (the taking of necessary risks) and gambling (the taking of unnecessary risks). As long, says the speculator, as there exist time and space and climate and human nature, there will be risks; and he believes that the business of the world can be more economically conducted with all available knowledge of changes, probable and possible, at hand, than is possible when ignorant uncertainty prevails. In this sense it is true, as Mr. Sereno S. Pratt says, "The speculator is the pioneer of enterprise." Furthermore, if such risks are to be assumed by a special class of men, there must be a return of profits proportionate to the risk involved. It is the possibility of adding largely to the capital employed that calls forth a class of men who devote themselves, according to Mr. Thomas F. Woodlock, "to the science of appraising values of securities, and foreseeing coming changes therein. This process performs an important economic function in continually adjusting prices to changes in value."

In addition to the above, Professor Emery contends that any attempt on the part of governments to interfere with organizations that have the sanction of world-wide commercial practice is attended with much danger. He draws attention to the fact that, historically, state legislation has ever failed to remove the evils connected with speculation, without inflicting an injury upon trade and industry too great to be borne.

With the supporters of speculation arguing that its purpose is legitimate, that the business of the speculator is directed by wisdom and a thorough knowledge of conditions, there can be but one answer to the criticism that the banks in loaning capital to "Wall Street" are diverting it from the productive industries. Money so employed under such conditions must be worthily invested. But the later opponents of speculation are denying the statement that the speculator uses wisdom and intelligence as the basis for his operations. They demand more convincing proof than that presented in the marvelous system of news gathering centering in the various exchanges. They want the proof which rests upon the results of speculation to the trader, who, according to them, knows nothing of conditions and yet on whose account over ninety per cent. of the business is transacted; and it is further claimed that the books of the brokers would disclose the startling fact that these same traders" never win.

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This is the point which needs investigation. It is not enough to show that business risks are inherent in the nature of things, nor is it sufficient to prove that intelligent business men thoroughly equipped with every means of interpreting the signs of the times, and supported by sufficient credit to enable them to employ the funds of banks in their speculative enterprise, would be economically justified in their position. The complaint is made that this is not the case and that this high business ability is chiefly directed to the cultivation of the gambling propensities of the race, and to the persuasion of "lambs" to part with their money. If the accusation can be proven false, it is for the men of Wall Street to break through their accustomed policy of silence under attack and make a serious effort to dispel the delusion. It may be necessary to supply enormous amounts of capital for the support of speculative enterprise. It is estimated that the cotton crop alone demands $200,000,000 per season, and that this capital can only be acquired through the exchanges. But the capital so acquired may be gained at too great a sacrifice. Insurance is needed and is easily justified, but the state found it necessary to check insurance methods which played upon the tontine tendencies of mankind. It is also easy to prove the necessity of money in running a government, but the lotteries of earlier times have been legislated out of existence. If the capital which furnishes the opportunity for "hedging" has it source in the weak

ness of human nature, the system of speculation should be investigated. It is not the capital furnished by the banks to the brokers that the opponents of speculation need to be concerned about, but the capital that supports the credit of those who borrow from the banks.

On another page of THE JOURNAL will be found the text of a lecture, given the other evening to The Philadelphia Institute of Accounts, by George Wilkinson, C. P. A., on a subject of much interest at this time, namely, "The Advantages of Organization to the Accountant."

In his lecture Mr. Wilkinson reviewed most briefly the history of three other institutes, namely, the Institute of Chartered Accountants of England and Wales, the Pennsylvania Institute of Certified Public Accountants, and the Institute of Accounts of New York, and told his hearers of the advantages that had been gained by accountants through these organizations.

In view of the widespread interest that is being taken in the next convention of The American Association of Public Accountants, this lecture will be read with much interest.

An interesting and valuable literary programme has been arranged by the committee for the first annual meeting of The American Association of Public Accountants, to be held next October, at Atlantic City. It will be learned with satisfaction that the papers are to be printed in advance of the meeting and "presented" at the convention. This means that the Essayists will have ten minutes for a speech instead of an hour for a lecture. Good!

Accountants are reminded to make arrangements for their annual vacations so as to fit in with the twenty-first Annual Meeting of The American Association of Public Accountants October 20 to 22, 1908, at Atlantic City.