lite Eleiiiiiis S]piitititiii\ WtSLtt QfoUegR nf Agriculture J^t atarnell Inlneratta 2Itbratg Cornell Mmrslty Library HG 6021.G5 The elements of speculation, 3 1924 013 779 438 ,A-^-^ ^j/is^-^-'^ Cornell University Library The original of tliis bool< is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013779438 The Elements of Speculation BY THOMAS GIBSON Author of "Pitfalls of Speculation", "Cycles of Speculation", etc. With a Suggestion as to a Measure for Relief from Periodical Money Stringency. BY CHARLES F. M'ELROY. The Gibson Publishing Company, 29 Broadway, New York 1913 Q5r Copyright, 1913, by The Gibson Publishing Company. All Eights Reserved. (a^ (^J53^ CONTENTS Chapter Page I. Introduction 3 II. The Anteriority of Security Prices 6 III. Crops 11 IV. Security Prices and Crop Prospects 35 V. Money 44 VI. The Currency Question SS VII. Our Foreign Trade 89 VIII. Bank Clearings 98 IX. Charts and Stop Loss Orders 102 X. Mental Characteristics 113 XI. The Future of Our Railroad and Indus- trial Securities 122 XII. Speculation in Commodities 134 XIII. Conclusion 142 CHAPTER I. Introduction. For the sake of a clear understanding it may be well to define the meaning of the word "Speculation" as employed in this volume. There has been a widespread corruption of the term, particularly when applied to operations in securities. The popular understanding is that a speculator is one who gambles on mar- gin, who buys what he cannot pay for, or sells what he does not own. The man who buys out- right and pays for what he buys is called an investor. In both cases the terms are fre- quently misused. Any purchase of securities made because the stock or bond purchased is considered cheap and in hope of an advance in value and price, is a speculative purchase. It matters not whether the property so acquired is paid for in cash or a partial payment made in the form of a margin. Yet so hazy is the general opinion on this subject that the man who buys on margin and borrows the balance from his broker is called a speculator, while the man who buys outright and then hypothe- cates his certificates with his banker for a loan is called an investor. The process is exactly the same in both cases. The distinction is without a difference. If a purchase is made through a broker on margin, the broker must at once pay for the purchase in full, charging the unpaid balance to the customer as a loan. The actual certifictes are the broker's security just as they would become a bank's security in case they are made the basis of a loan. If we wish to draw a knife edge between the two terms "speculation" and "investment," we 4 Elements of Speculation. must look upon everything purchased in the belief that higher prices will be realized later as a speculative venture, and confine the word "investment" to purchases made for income return alone, without reference to possible profits through accretion in value or price. We are continually hearing warnings against speculation from rich men who have made their own fortunes in speculation — fortunes which could have been made in no other way — and Lorn self-appointed public educators who have not the slightest conception of what they are talking about. They accomplish nothing. They could accomplish a great deal if, instead of issuing blanket warnings against all forms of speculation, they would point out the hopeless- ness of gambling on inadequate margins or fol- lowing tips, charts or other ignis fatuui which lure the speculator to his undoing. If these mentors would impress their audiences with the fact that all the get-rich-quick devices masquerading as speculative opportunities are traps or dreams ; that speculation means a cor- rect forecasting of the future progress of a cer- tain territory, or of the entire general business situation, or of a specific security, and that the accuracy of such forecasting was wholly depen- dent upon personal toil and study, they would confer a greater boon on society than by bawl- ing to their followers to abjure speculation in any form and get rich saving their wages. Speculation, whether it is in securities, real estate, groceries or whatever, must be conduct- ed as a business, and when a man enters that business he must equip himself with intimate knowledge of its character and possibilities. I do not hesitate, after many years of observa- tion and experience, to state that no large for- Introduction. 5 tune can be made in a brief period of time in the speculative world, and that no fortune of any kind can be made in any period of time by speculating blindly on tips or information. People have grown suddenly rich by discover- ing gold mines, etc., but that is accident rather than speculation. If any large fortune is ever made in speculation in a brief period, it is mere- ly an exception which proves a rule. In former works I have pointed out in a general way the errors and the possibilities of speculative ventures and offered suggestions as to correct methods. In this volume I will take up in more detail the principal fundamental factors governing security price movements and endeavor to show how such factors may be examined and weighed expeditiously and accurately. It is realized that the subject is too broad for a complete discussion in the limits of a single volume, but it is hoped that what is suggested will be found helpful and will act as an incentive to further personal ex- amination and study. Elements of Speculation. CHAPTER II. The Anteriority of Security Prices. In conducting speculative ventures intelli- gently, one of the most, common errors is the failure to understand or give due considera- tion to the anteriority of security prices. Be- cause of this neglect, or lack of understanding, many people become disgusted and claim that the wide swings of security prices cannot be reasonably forecasted; that price movements are irrational, and that study is of no avail. This is all wrong. There are frequently inter- mediate spasms which carry prices above or be- low values, but these are always temporary and such artificial disturbances are quickly fol- lowed by a return of prices to their proper re- lation with values. It appears rather anoma- lous that so many people should rail against these periods of undue depression or inflation when we reflect that our greatest speculative opportunities are present when prices and val- ues are temporarily divorced. The hiatus may be due to manipulation, to scarcity or plethora of money, or to other causes ; but when these influences are removed, prices will seek values as surely as water seeks its own level. The stock market moves ahead of actual events. It is pushed either up or down by the force of buying or selling Iby the impor- tant interests which foresee coming pros- perity or depression. In 1905 we had an ad- vancing market in anticipation of good times ahead. In 1907 we had a great decline in stock prices and a boom year in business. In 1908 and 1909 we had poor business and an advanc- The Anteriority of Security Prices, 7 vag stock market. Wise and farsighted men bought in 1905 and sold in 1906. They sold to the large class of operators who grow excited at the sight of activity marketwise, who are encouraged by tangible evidences of business prosperity and who do not stop to reflect that all that is good has already been discounted by the high prices of securities. These buyers do not understand the precession of security prices, or if they do understand it, they do not properly employ their knowledge. We must, therefore, begin our study with the assumption that it is impossible to specu- late on what is known; that security prices al- ways move ahead of events, and that in order to succeed we must give our attention to the correct forecasting of future happenings. The man who attempts to speculative on "tips", or "inside information", or "tape reading", or in any other way without a special study of the more important basic factors might as well throw his money away and be done with it. It may be contended that it is impossible to study or correctly foresee great fundamental factors which are as yet unknown, but not so. By a careful study of precedent and of future pros- pects as indicated by present conditions, we may arrive at correct conclusions with a sur- prising degree of accuracy. It is not meant to say that we cannot gain anything from certain forms of open information, or from a scrutiny of the technical position of stocks, or the char- acter of buying and selling. All these may be of use as our education progresses, but they are of minor importance. If our basic views are correct, and if we operate reasonably without asking or expecting too much from the market. 8 Elements of Speculation. no intermediate reversals can injure us and our hopes of profit will eventually be realized. If, on the other hand, we ignore the basic factors or form careless and incorrect conclusions, nothing can save us. There are certain important fundamentals bearing on security prices which are respon- sible for all great advances or declines. What these factors are and how we may examine and read them with the greatest facility and accur- acy, I will endeavor to explain in this volume. One important suggestion may be offered. In conducting examinations it will be found that our greatest aid is derived from precedent. It goes without saying that a normal growth must be allowed for in many cases. Production of minerals, agricultural products, railway earn- ings, etc., should gradually keep pace with in- creased population and it is important that we determine whether such growth is normal, subnormal or abnormal, either generally or in specific instances. This is not a difficult task. The greatest danger in consulting precedent lies in the very common practice of examining too brief a period and forming conclusions on en- tirely insufficient grounds. Comparisons of one month with a preceding month are usually ridiculous. There are certain seasons of the year when prices of money naturally rise and fall, certain seasons when railroad traffic is light or heavy, and so through a long line of factors. And comparisons of one year with an- other are not much better. An abnormal year of production of wheat, or of railroad earnings, or whatever, may be followed by a recession as compared with that abnormal year, and by this careless method of reckoning odious compari- The Anteriority of Security Prices. 9 sons are frequently drawn. The railroad earn- ings of a certain year may appear unfavorable by contrast with the preceding year, but may appear just the reverse by comparisons with all other preceding years. As the value of prece- dent is largely dependent on history repeating itself when similar conditions exist, we should, whenever an abnormal deviation from the line of natural growth or accretion is apparent, seek the reason for such departure, and when that reason is found, it will be easy to determine whether such causes are existent or non-exist- ent now, and so our deductions will be cor- rectly based. There is a tendency on the part of students of speculative probabilities to try to make their examinations too exhaustive. This is com- mendable when applied to the statistical ex- amination of a specific property, but in deter- mining the long swings of security prices in general, we may concentrate our attention on a few important fundamentals and give only sec- ondary consideration to minor factors. Stu- dents who wish to make their examinations and deductions very thorough are frequently found wandering about in a bewildering jungle of figures and precedents, some of which contra- dict others, and the efforts to reconcile the whole only result in confusion. This form of study also leads very frequently to the attach- ing of undue importance to insignificant or in- terdependent factors. The course of the se- curity markets is dependent largely upon the general prosperity of the country or, more broadly speaking, the general prosperity of the civilized world. The two most important basic factors making for prosperity are good crops 10 Elements of Speculation. and satisfactory money conditions. Satisfac- tory money conditions are dependent to a great extent on the crops and our foreign trade. If we scrutinize these dominant influences carefully we will find that our time is employed to the greatest advantage. Almost all other influences are merely offshoots of one or all the three factors mentioned. It is found that in twenty-five years only one instance occurred where the stock market did not reflect good or bad crops in its movements. We cannot, how- ever, wait until the outcome of the harvests is a known quantity, for the market, moving ahead of events, will have discounted the good or bad results before they are apparent. Thus, in our year of greatest cereal and cotton pro- duction (1906) a very large advance occurred during July and August. When the large crops became a matter of history their effect had been duly measured and discounted. The same thing has been true in almost all similar cases. The speculative rewards go to those who, by assiduous study and intelligent deduction, ob- tain a clear perspective of the probable future Crops. 11 CHAPTER III. Crops. So many other things are dependent on the products of the soil that the crops may easily be classed as the greatest of our fundamentals. The products of mines and forests are im- portant and require examination from time to time in order to ascertain if the supply is keep- ing pace with demand, or if we aire over or un- der-producing in certain quarters, but mines and forests do not require the same attention and investigation as do the agricultural pro- ducts, as they are not subject to severe annual fluctuations through climatic conditions, insect ravages or the other ills that plant life is heir to. Each year we draw from the soil through farm products from eight to nine bil- lion dollars more or less. If the amount is dis- tinctly less because of small crops, we are seri- ously affected in numerous ways; commodity prices may be higher because of the shortage, but higher prices will not cure the troubles aris- ing from short crops. Our exportable surplus is smaller; the high prices between consumers and producers at home is merely swapping dol- lars; railroad traffic is reduced; labor is not fully employed; the masses suffer because of high prices. Large yields at low prices are very much to be preferred to small yields at high prices. A good many observers are apt to fall into the error of thinking that the ideal condition is a large yield at high prices, but guch cpnditjop? ^Tf. usually due to very short 12 Elements of Speculation. crops in other parts of the world and such a state of affairs acts as a boomerang, for the purchasing power of the world is reduced by the payment of high prices for the necessities of life, and our securities and manufactures suffer accordingly. Normal conditions, the world over, is the ideal state of affairs. The man who undertakes to study crop con- ditions and prospects will find a world of in- formation at his command. There are several good trade organs which gather and distribute the news of progress and probabilities ; the gov- ernment furnishes frequent reports during the season and much other valuable literature from time to time. Railroads and large business con- cerns gather statistics annually, many of which are available to the public, while brokerage houses and grain dealers employ their own experts for the benefit of their clients. There are also good books of a technical character which clear up many perplexing questions. Exhaustive statistical records can be had for little or nothing. Unfortunately there is also a great deal of misinformation on the subject. People who are interested in advancing or depressing the prices of securities or commodities circulate misleading or false reports and even go so far as to employ experts who bias their reports according to a dictated policy. A good many farmers and planters who allow their cupidity to override their integrity make a practice of exploiting disaster and claiming crop damage on the theory that this will influence prices and benefit them accordingly. The false reports are not convincing, however, if proper atten- tion is given to the study of the subject, and it Crops. 13 is seldom the case that conscientious students who make theif examinations compreheinsive, are far out of the way in their estimates. It will not do to take much for granted, as we will quickly discover when we look at the great va- riations between two or more estimates of the same crop, published simultaneously. One may be extravagantly high and another ex- travagantly low. The most widely used estimates and reports are those issued by the Department of Agricul- ture. The most important of these documents are a weekly weather report issued on Tues- day of each week and monthly reports of acre- age and condition of all important crops. These exhibits are published in the following months : April — Condition of winter wheat and rye. May — Acreage and condition of winter wheat and rye, condition of meadows and spring pastures, spring ploughing and abandoned winter wheat acreage. June — Condition of winter wheat, spring wheat, rye, barley, oats, clover and rice ; aver- age condition of spring pastures, apples and peaches. July — Acreage and condition of corn; con- dition of winter and spring wheat, winter and spring rye, oats and barley, potatoes and to- bacco, clover, timothy, apples and peaches. August — Condition of spring wheat, corn, rye, oats, barley, tobacco, and acreage and condition of hay. September — Condition of spring wheat, corn, tobacco and fruits. Also condition of winter wheat, rye, oats and barley at harvest. October — Yield per acre of wheat, rye, oats and barley. Average condition of corn. 14 Elements of Speculation. November — ^Average yield of corn, tobacco, etc., as compared with preceding year. December — Acreage and condition of winter wheat and rye. Other reports are issued in January and February giving general miscellaneous crop statistics. The reports on cereals are customarily issued on the eighth day of the month, showing acre- age or condition or both, as of the last day of the preceding month. It is frequently necessary to give consideration to changed conditions in the interval which elapses between the date of compilation and the date of publication. For example, a low condition may be shown be- cause of drought, and this may be improved by several days of precipitation. It will be ob- served that the three months from June first to September first, is the most important period for our growing crops; In the three months of June, July and August, the greatest damage occurs from dry weather or excessive rainfall. Corn and cotton are also affected by the date of the first killing frost. No fixed line can be drawn as to the approximate date of danger from frost, as an early spring may bring the crop out of danger at an earlier date, or vice versa. Late spring planting and an early kill- ing frost would almost certainly work serious injury. The principal cereal crops which are to be considered as to their bearing on business con- ditions and security prices are wheat, corn and oats. Let us first examine the condition, acre- age and production of these products for the last ten years as shown by the reports of the Department of Agriculture. Crops. 15 TABLE I. Showing Condition of Wheat, Corn and Oats on the First of the Months Named— 1902 *° ^Wb^.'Jf'^lV -WINTKl' ■WTFTWAT Mg |U^H, 4p^- ^H June July Sept.* June July Aug. 89.7 Sept." 1902... 78.7 76.4 76.1 77.0 80.0 95.4 92.4 1903... 97.3 92.6 82.2 78.8 74.7 95.9 82.5 77.1 1904... 76.5 76.5 77.7 78.7 93.4 93.7 87.5 66.2 1905... 91.6 92.5 85.5 82.7 93.7 91.0 89.7 87.3 1906... 89.1 91.0 82.7 85.6 93.4 91.4 86.9 83.4 1907... 89.9 82.9 77.4 78.3 88.7 87.2 79.4 77.1 1908... 91.3 89.0 86.0 80.6 95.0 89.4 80.7 77.6 1909... 82.2 83.5 80.7 82.4 95.2 82.7 91.6 83.6 1910... 80.8 82.1 80.0 81.5 92.8 61.6 61.0 63.1 1911... 83.3 86.1 «%R^-« ct. 94.6 73.8 59.8 OATS 56.7 ^__J| HHBI H^^^^H I'jl? h^'^; Sept^T June July Aug. Sept.' 1902... B7.S 86.5 84.3 79.6 90.6 92.1 89.4 87.2 1903... 79.4 78.7 80.1 80.8 85.5 84.3 79.5 75.7 1904... 86.4 87.3 84.6 83.9 89.2 89.8 86.6 85.6 1905... 87.3 89.0 89.5 89.2 92.9 92.1 90.8 90.3 1906... 87.5 88.1 90.2 90.1 85.9 84.0 82.8 81.9^ 1907... 80.2 82.8 80.2 78.0 81.6 81.0 75.6 65.5 1908... 82.8 82.5 79.4 77.8 92.9 85.7 76.8 69.7 1909... 89.3 84.4 74.6 73.8 98.7 88.3 85.5 83.8 1910... 85.4 79.3 78.2 80.3 91.0 82.2 81.5 83.3 1911... 80.1 69.6 70.3 70.4 85.7 68.8 65.7 64.5 'Includes winter and spring. TABLE IL Showing Acreage of Wheat, Corn and Oats — 1902 to 1911 Inclusive. Spring Acres 1902—17,620,998 1903—16,954,457 1904—17,209,020 1905—17,990,061 1906—17,705,868 1907—17,079,000 1908—17,208,000 1909—18,393,000 1910—19,778,000 1911—20,381,000 -Wheat- Winter Acres 28,581,426 32,510,510 26,865,855 29,864,018 29,599,961 28,132,000 30,349,000 28,330,000 29,427,000 29,162,000 Corn Acres 94,043,613 88,091,993 92,231,581 94,011,369 96,737,581 99,031,000 101,788,000 108,771,000 114,002,000 105,825,000 Oats Acres 28,653,144 27,638,126 27,842,669 28,046,746 30,958,768 31,837,000 32,344,000 33,204,000 35,288,000 37,763,000 16 Elements of Speculation. TABLE III, Showing Production of Wheat, Corn and Oats — 1902 to 1911 Inclusive (Bushels) Year Wheat 1902-670,063,000 1903—637,822,000 1904—522,400,000 1905—692,979,000 1906-735,261,000 1907—634,087,000 1908—664,602,000 1909—737,189,000 1910—695,443,000 1911-^21,338,000 Corn 2,523,648,000 2,244,177,000 2,467,481,000 2,707,994,000 2,927,416,000 2,592,320,000 2,668,651,000 2,772,376,000 3,125,713,000 2,531,458,000 Oats 987,843,000 784,094,000 894,596,000 953,216,000 964,904,000 754,443,000 807,156,000 1,007,353,000 1,126,765,000 922,298,000 In examining Table 1, the iirst noticeable fact is that there is normal deterioration in condi- tion after the first report. This is particularly pronounced in spring wheat. Until very re- cently the disregarding of this normal dete- rioration has caused much confusion and varia- tion in estimates of final production. One statistician would take the condition as shown in the first report, arrive at the indicated pro- duction per acre, subtract the abandoned acre- age, when given, and multiply by the remain- ing acreage. It is plain that this would, in a majority of cases, indicate a much larger yield than would be harvested. Others attempted to allow for deterioration according to their own ideas, and each estimate was different from the others. In 1911 the government, for the first time, adopted a method of expressing quan- titative estimates which will no doubt come into more or less universal use in a short time. This method is to take the deterioration from the date of each report to the end of the grow- ing season, average it for a number of preced- ing years and allow for the average amount of Crops. 17 falling off in the estimate of final yield. Such estimates can never be reduced to an exact science but the plan employed is as good as any so far suggested. Hereafter we will arrive at a quantitative estimate each month which will not be reduced if normal deterioration occurs. The crop indicated will be shown each month until it is harvested. An explanation of the form and meaning of the monthly reports is given as follows by the Department of Agriculture. INTERPRETATION OF ESTIMATES OF CON- DITION AS EXPRESSED IN PER- CENTAGES OF THE NORMAL. The conditions of various crops is estimated period- ically during the growing season by the Department of Agriculture. These estimates are expressed in the form of a percentage, the base, or 100 per cent, being termed a "NORMAL" CONDITION. Three inquiries are often made as to such condition reports, namely: (1) What is a NORMAL CONDI- TION! (2) What yield is indicated by a normal con- dition? and (i) What is the method or formula for in- terpreting a given estimate of condition in terms of indicated production; in other words, with a given con- dition, how is the indicated production determined? A NORMAL CONDITION may be defined as a con- dition that will produce A NORMAL YIELD, if such condition is maintained until harvest. BUT WHAT IS A NORMAL YIELD? Most farmers know from experience approximately what their fields ought to produce, with the usual mode of farming, with normal weather conditions, and with- out unusual loss, disease, insects, or other mjurious fli- fluences. A yield under such favorable, though not ex- traordinary conditions would be a normal yield, which is more than an average yield but less than a maximum possible yield. A condition which may produce a normal yield, as thus described, is a nor- mal, or 100 per cent condition. 18 Elements of Speculation. A normal yield for one farm or section may vary from that for another. On one field a normal yield per acre of corn might be 80 bushels, and on another field 12 bushels. A normal yield of com for one State is more than 40 bushels per acre, for another State it is less than 14 bushels. THE CONDITION OF A CROP at a given date is expressed by the percentage of a normal yield which may be produced if no change in the condition or status of the crop occur from the given date to the time of harvest. For example, if the condition of the wheat crop on June 1 were such that, with no change in condition — ^that is, normal influences from that date to harvest — only three-fourths ai a normal yield could be expected, the condition would be reported as 75 per cent; if only one-half a normal crop could be expected, the condition would be reported as 50 per cent; if 10 per cent more than a normal yield could be expected, the condition would be reported as 110. THE NORMAL YIELD OF A CROP FOR A STATE OR FOR THE UNITED STATES MAY BE DETERMINED approximately in a practical way by multiplying the average yield per acre for any number of years by 100 and dividing the product by the average, for the same years, of the condition of the crop at or near the time of harvest. For example, the condition of corn is reported the last time as of October 1 ; if the average condition of the crop on October 1 for the ten years 1899-1908 was 80 per cent, and if the average yield per acre in the ten years 1899-1908 was 28 bushels per acre, it may be assumed that 80 per cent of normal con- dition will produce 28 bushels ; therefore, by proportion, 100 per cent will be 35 bushels ; that is, 28 X 100 -T- 80 = 35. An average for five years, instead of ten, or any number of years, may be used for this comparison, but with slightly varying results. This method cannot give a precise equivalent of 100 per cent, because a change sometimes occurs m a crop after the date of the last condition report and before harvest, and also because the data used are estimates and subjects to errors of judgment. But for practical purposes the method is valid for obtaining approxi- mations. A normal yield being known, it is a simple process TO REDUCE ANY GIVEN CONDITION FIGURE TO ITS YIELD EQUIVALENT; that is, multiply Crops. 19 the normal yield by the condition figure, and divide by 100. For example, if the condition of corn is 80 per cent, where a normal or 100 yield is 35 bushels, the indicated yield would be 80 per cent of 35 bushels, or 28 bushels (80X35-7-100). The yield obtained by the method thus described is the yield which may be expected providing the condition of the crop does not decline or improve after the date of the estimate. But as a crop advances to maturity some por- tion of it usually suffers from some damaging influences, causing a decline in condition. TO FORECAST THE PROBABLE OUTCOME OF A CROP ON THE BASIS OF THE CONDI- TION AT A GIVEN DATE. ACCOUNT IS TAKEN OF THE AVERAGE CHANGE (USUALLY DE- CLINE) IN CONDITION FROM THE GIVEN DATE TO THE TIME OF HARVEST, it is assumed that the change in condition to the time of harvest will be the same as an average change. In other words, it is assumed that the probable yield will be in the same ratio to the average yield as the condition of the crop on a given date is to the average condition on that date. For example, on the basis of a ten-year average, S'up- pose the average condition of com in the United States on July 1 is 87 per cent, the average yield is 27 bushels. Suppose the condition on July 1 is 7Sj it is then assumed that the probable yield (?) will be to 27 bushels as 75 is to 87, which is -?^-^^ =23.3 (bushels) That is, multiply the average yield by the indicated condition at the given date and divide by the average condition on the same date. The "normal" yield per acre (decade 1899-1908) of various crops for the United States (based upon the ten- year average of the percentage of normal condition of crop at or near the time of harvest and the average yield per acre in the same years) is found to be approximately as follows: Winter wheat, 17.5 bushels; spring wheat, 17.5 bushels; corn, 32.6; oats, 36.8; barley, 30.8; rye, 18.1; buckwheat, 21.8; potatoes, 118.1 bushels tobacco, 968.8 pounds; cotton, 280.1 pounds; rice, 3S.S bushels; flaxseed (five-year average), 11.9 bushels. THE "NORMAL" YIELD OF CROPS PER ACRE, THAT IS, THE YIELD PER ACRE WHICH IS EXPECTED UNDER NORMAL CONDITIONS. IS GRADUALLY INCREASING. 20 Elements of Speculation. It will be noted from the condition tables that a high or low condition in the early months does not always insure a large or small crop. This may be due to weather conditions, insect, rust or smut damage, small initial acre- age or abandoned acreage, all of which must be watched and taken into consideration. In making allowance for abandoned acreage, it is necessary to reflect that there is always some abandonment and that such acreage does not represent a total loss, as in most cases it is util- ized for the production of other cereals which require later planting. After the initial reports of acreage, condition, abandoned acreage, etc., are published, the daily progress of crops may be followed more satis- factorily by reference to climatic cnanges, and the published reports of precipitation and temp- erature, than by attention to crop-killing stories from different isolated localities. There is no such thing as a perfect crop season. There is always some spotted damage, and this so im- presses the man who reports it that its import- ance is exaggerated. Hail storms can cut a field all to pieces, but hail storms are always local. Insect damage has been vigorously exploited al- most every year, but the fact remains that the loss in cereals from this cause is only trifling. Serious damage seldom occurs from late frosts in the spring of the year. Floods have at times caused serious damage, but very rarely — only once in recent years (1904). The greatest and most widespread losses are due to weather condi- tions, and it is by a study of these changes that we can arrive at the safest and most accurate conclusions. The most important states in the production of wheat, corn and oats are shown in the follow- Crops. 21 ing tables in the order of their importance. I have taken the year 1910 for the illustrations in- stead of 1911 for two reasons — ^first, that 1910 was more nearly a normal year than 1911; second, the production figures of 1911 are still subject to revision. The object sought in these four tables is to show the relative im- portance of leading states as to acreage. The casual observer is apt to be misled by crop- killing advices unless he is conversant with the. facts. He may hear, for example, that the spring wheat crop of Iowa is a failure and be impressed by that statement, but when he ob- serves that Iowa raises about 7,000,000 bushels of spring wheat, while Minnesota raises about 94,000,000 bushels, the matter is viewed in an- other light. Table IV. WINTER WHEAT. (States raising 10,000,000 bushels or more.) Production Acreage 1910 State 1910 (Bushels) Kansas 4,300,000 61,060,000 Indiana 2,627,000 40,981,000 Nebraska 2,100,000 34,650,000 Illinois 2,100,000 31,500,000 Ohio 1,944,000 31,493,000 Pennsylvania 1,556,000 27,697,000 Oklahoma 1,556,000 25,363,000 Missouri 1,821,000 25,130,000 Texas 1,252,000 18,780,000 California 950,000 17,100,000 Michigan 869,000 15.642,000 22 Elements of SpectUation. Production Acreage 1910 State 1910 (Bushels) Washington 676,000 13,858,000 Maryland 794,000 13,816,000 Oregon 467,000 11,068,000 Tennessee 910,000 10,647,000 New York 444,000 10,523,000 Virginia 795,000 10,176,000 Other States 4,266,000 64,560,000 Total 29,427,000 464,044,000 Table V. SPRING WHEAT. (States raising over 5,000,000 bushels.) Production Acreage 1910 State 1910 (Bushels) Minnesota 5,880,000 94,080,000 South Dakota 3,650,000 46,720,000 North Dakota 7,221,000 36,105,000 Washington 810,000 11,745,000 Iowa 350,000 7,315,000 Colorado 289,000 6,329,000 Oregon 297,000 5,346,000 Other States 1,281,000 23,759,000 Total 19,778,000 231,399,000 Crops. 23 Table VI. CORN. (States raising over 10,000,000 bushels.) Production Acreage 1910 State 1910 (Bushels) Illinois 10,609,000 414,812,000 Iowa 9,473,000 343,870,000 Missouri 8,300,000 273,900,000 Nebraska 8,000,000 206,400,000 Indiana 5,120,000 201,216,000 Texas 8,800,000 181,280,000 Kansas 8,900,000 169,100,000 Ohio 3,960,000 144,540,000 Kentucky 3,630,000 105,270,000 Tennessee 3,720,000 96,348,000 Oklahoma 5,772,000 92,352,000 Arkansas 2,884,000 69,216,000 Michigan 2,100,000 68,040,000 Mississippi 3,232,000 66,256,000 Georgia 4,532,000 65,714,000 Pennsylvania 1,586,000 65,026,000 Alabama 3,524,000 63,432,000 Louisiana 2,493,000 58,835,000 North Carolina 3,072,000 57,139,000 Minnesota 1,724,000 56,375,000 Virginia 2,142,000 54,621,000 South Dakota 2,162,000 54,050,000 Wisconsin 1,575,000 51,188,000 South Carolina 2,418,000 44,733,000 New York 680,000 26,044,000 West Virginia 920,000 23,920,000 Maryland 710,000 23,785,000 New Jersey 290,000 10,440,000 Other States 1,674,000 37,811,000 Total 114,002,000 3,125,713,000 24 Elements of Speculation. Table VII. OATS. (States raising over 10,000,000 bushels.) Production Acreage 1910 State 1910 (Bushels) Iowa 4,800,000 181,440,000 Illinois 4,500,000^ 171,000,000 Minnesota 2,736,000 78,523,000 Nebraska 2,650,000 74,200,000 Wisconsin 2,320,000 69,136,000 Ohio 1,765,000 65,658,000 Indiana 1,850,000 65,490,000 Michigan 1,505,000 51,170,000 Kansas 1,400,000 46,620,000 New York 1,338,000 46,161,000 Pennsylvania 998,000 35,130,000 South Dakota 1,525,000 35,075,000 Missouri 780,000 26,208,000 Texas 695,000 24,325,000 Oklahoma 632,000 23,068,000 Montana 350,000 13,300,000 North Dakota 1,628,000 1 1,396,000 Oregon 302,000 10,419,000 Other States 3,514,000 98,446,000 Total 35,288,000 1,126,765,000 Abnormal or subnormal temperatures or precipitation in certain months of the growing season do not always indicate probable dam- age. A great deal depends upon what follows or what has preceded such conditions. A dry fall followed by only normal rainfall during the growing season may work havoc with spring wheat and other cereals. The soil has Crops. 25 not stored up its usual amount of moisture, and abnormally heavy rainfall will be necessary for a large crop. A dry spring followed by co- pious rains sometimes produces the best gen- eral crops, as the roots go down seeking for water and the stand is firm and good. On the other hand, a wet spring followed by insuffi- cient moisture is very bad, as the roots spread out laterally and when the dry weather comes they have only a coating of dust to protect- them. Cool weather in a period of drought is always helpful, as it greatly reduces evapora- tion. A wet fall and a heavy snow covering in the winter months is always a most promis- ing condition, unless there is too much alter- nate freezing and thawing in February" and March. A fair knowledge of soil conditions and a constant and intelligent examination of precipitation and temperatures will be found essential to correct estimates of probable pro- duction. It has been stated that some improvement has been made in the methods of calculation offered by the Government, but there is much to be desired. The trouble lies in the necessity of adopting some system of averages on which to base estimates. It is impossible to do this satisfactorily in a case where each year's re- sults are subject to irregular fluctuations and specific changes. It is also impossible to make anything more than machines out of the ac- countants and statisticians who handle the figures, and this leads at times to results which do not square with reason. Estimates founded either on average production per acre or aver- age condition, frequently turn out very badly. Two illustrations of this may be offered. 26 Elements of Speculation. In estimating the spring wheat crop of 1911 the Department of Agriculture based the prob- able crop on production of 13.7 bushels per acre, simply multiplying the acreage by 13.7. This figure, 13.7, was obtained by adding the production per acre for the preceding five years and dividing by 5. But the spring wheat crop of 1910 was a failure (only 11.7 bushels per acre) and this single figure, the lowest in years, brought down the general average too much. The average production for the five years preceding 1910 was 14.1 bushels per acre. If we go back for ten years and eliminate two years of absolute crop failure and one year of unusually large production, we still have over 14 bushels per acre. Even more misleading is the method of averaging condition and subtracting for so- called normal deterioration. Under this meth- od we find that in the last ten years the condi- tion of winter wheat has averaged slightly lower on July 1 than on June 1 ; but in seven years out of the ten conditions improved, and in three years there was enough deterioration to offset all the improvement. But that is not the worst of it. The deterioration is traceable to a specific cause, about the only cause, in fact, which could cause deterioration in winter wheat in a harvest month. The cause is a late spring. Harvest is deferred and the standing grain suffers. How absurd it appears to apply this law of averages to a year where the spe- cific cause is absent and possibility of damage in June cancelled by an early harvest. There is only one way to employ the figures given by the Government or private statisti- cians, and that is to make each! report a law Crops. 27 unto itself. Determine whether or not planting has been early or late, the condition of the soil, etc., and keep track of precipitation and tem- peratures from week to week. Use the figures of acreage and condition only as a tentative basis and do what the accountants cannot be expected to do, i. e., modify arithmetical calcu- lations by employing reason and common sense. One of the greatest aids to correct conclu- sions in the periods between Government crop reports is a daily examination of temperatures and precipitation. This receives too little attention ; and, strang'e as it may ap- pear, no compilation has ever been arranged showing normal precipitation and temperatures in all important States by months. This omis- sion is supplied by the following tables : jioOojpincNi«-H\OMO\ioo»ooo*»-<.'*t>;0\oq'*otsN.mN.«-'5000\vo©ioN>oo>nc-;ooi^cvioq>--;oq'l;i-;t>.C>0\p>-;o>-< ^P •* p (» \0 00 00 »x eg N rf »*• CO •-< to Tt- 'J- ^ 00 ^5 00 p <0 « 00 0\ •-<. lO vp "-^ N »-; in N [/5l^I^vo»otxvo\OvovoKtxvovSiot^vO»o\ovo\5t^«nvot^m<£)WCt%t^voiovD>0 bb^^w>o>'>^^^^'--|00'-;Mto^ovo^qto^^O;o^o^vp•n'--;l>.c^fOc^^CM'^lnrl;^^p^^op 30^0^c^i^O\coco•-^^>^vd•--*<*5^vDovOfOf^i1-JvD^d^^c5lnc^O\C5^0c4^vdc^^^ .w^s.^^oo»^>Ov5oot^vot^t^vo^^vot^oovo^v^^^^^»oot^vo^v^o ^rHT~t\oeo»-ivovp^00fO\O^Tf\O00pOjO\Ov'-;eofO0qfopcaO;\O<*3intx*-;Np p . "a c5 O in i'^ c5 w^ ij^ fo t^; ^C ^ lo 00 00 o vd iH fo eo o\ t>^ In! *o Q vd csi On •-< »^ cj totC ro o\ M )-»oo 00 rx NO 00 1>. t^ t^ t^ t^ 00 «^ S vo 00 o. \o 1^ tN vD »^ vo t> 00 vo t^ t>. r>. w 00 1^ NO t^ NO >•''-' i*^ >^ "-"^ 0,1— »tX tN. VO H tOCONOCOON O cQ^ln^4oNO\^o^^'-*o^popod*-^"^odNd«oONOPrJ ^NONO»o^fNOiom^mmNO»nm^NOio^Tf'nTt-^^Tf«9'^'^m\o»'>«*m^ >^ON«CNit^NTfrtpoocj.-Hoqo»-'t>j>npJ'^0'-;«po0'-<>oOp'*cSt>.'*''-;oqoo^O>op»-:ON>n<^ 0^«ONONt^ odod>£JCNirf Tt ro Tt- CO CO CO »-H tj CM (Nl -"^ i^ 00 m li^ Ov Omo ^O m ON ON 00 *-< O^ t^ fo ro co oo tv m CO tx CM t^ tx i-t t«* vo J;f<,o\'-;0.cocvioo.--;oo*«otO'Hcotx'l-'--iio»xc»500>ritxp'5'd;mvo»nNOoq'-;>o>OTr 5pvo^_oqts.vo\ocoooix'*o\-*CM>o'*"-ivoiors.oo\oooo>oON^coocomoqo\N. ♦jCMQ'-HiQTj-.-iCVltnONCM'-i— otxO\"5tx_^>OCjrOCO^>0 yin\qvo^\Or-i^Ovocoo\»--H •-< to CO CO ,4 c^i CM cvi CO M --H c*i ■S00CM0NVOCM^vO'-i00tM-n 'T vo '^ tx Tf 00 ^» ^ CM "-H o CO vo «x CM 00 CO in Tl- ^.. 00 1>. ■* 00 VC3 O «>. rt- •-; vq CM t/2CMcoovO'*iotxC3\oomco>ncMtxoo CM tmOtor^NOQ .-iQ\iotxcor>iCMCM 3■*pp0^t^•-^coo^pCM^^.CM■*.CM>o^^O\0^^9S;^00\-^oBvq^qco•*vq^o»OM ^"^coOi-^iocococococO'<^'»^CMco^cooCM^coinCMcocMO^ir)CocoCM^O^co txOOt-sVOtxCM'*^coCM»otX'-i --I lO -^t CO O ^ op CM CO lO Tt C3\ rt CM ^ vOvgNg o\0'-"-ioo^^'H^'^txcovooO'*Tfvooococo^.-icocMTrtxr>.>0'-itxtxooo ^t>! J t— ^-^ coocMlOcoco■^■OCM00cOiOVO'-i_0\»£lO\ptxVO_^VOIXTHVgt-»CM CMcocMln^^Olo»ococoppc^^vp^^.^>Joq^xpplno^CM»5»-HCM'*CMC^^cocc3lno •^0»-HTtcOTl-'^'^Tt-uS^co'*eo^CMcocO'^iococo^»-<^io^^co^*-^'*".voONOOp^^CMC irj .-; .-H CO 'l^ CO '^^ ^' CO Ti^ co' CO CO CO Tf cm' CO CO cm' 'l^ CM CO to cm" CO CO CO co' CO Tf cm' Tf CO iocMCMCMO\»-;CM^incM ■^CM'--^COCMcoCMCMCO-^COCMCM'^'co»-icMCo'cvicO»-H'cMCOCM'coco'»-I^*CMcoCMCOCM tJ00rNrs.CM*«fv0 0\CMc0'-^v0"^CMCM^HOc0lx»ritxtxOCM^0^c0S0V0tx^^C0O5 c«T-^OC^coe^■-^00<>lOp^5^^;r-;■^C^CMp0^p'-;^DC3^lOCM^O^<.oq ^vd«^co^Tj-coco»-HrHiri-^"coCM»--;0-*po«3oq'*oowtv.oqoB>nt>.^ ""^^ coto^eoCje0C0»O0\^'-i0N'^CM t!*cocoO^<-<'cot1-cO'-< rt-Si3 : • C.5 .2 e> c s?g||gr?ii^^ O m J3J3 lU _ - 6 b," « 30 Elements of Speculation. Cotton. Cotton is one of the greatest factors in our export trade and is growing in importance from year to year. In 1901 cotton made up, in dol- lars, about 18% of our total exports of mer- chandise; in 1903, 22%; in 1905, 25%; in 1907, 27%; in 1909, 27%, and in 1910, 29%. This was partly due to larger exports and partly to higher prices. The condition, acreage and production of cotton in the growing season for a period of years has been as follows : Condition of Cotton in Growing Season on the First of Month Named. Period 1901 to 1911 Inclusive. Year June July Aug. Sept. Oct. 1901 81.5 81.1 77.2 71.4 61.4 1902 95.1 84.7 81.9 64.0 58.3 1903 74.1 77.1 79.7 81.2 65.1 1904 83.0 88.0 91.6 84.1 75.8 1905 77.2 77.0 74.9 72.1 71.2 1906 84.6 83.3 82.9 77.3 71.6 1907 70.5 72.0 75.0 72.7 67.7 1908 79.7 81.2 83.0 76.1 69.7 1909 81.1 74.6 71.9 63.7 58.5 1910 82.0 87.0 63.7 72.1 65.9 1911 87.8 88.2 89.1 73.2 71.1 Acreage and Production of Cotton 1901 to 1911 ' Inclusive. (Production in bales 500 pounds to the bale.) Years Acreage Production 1901-2 27,950,000 9,675,771 1902-3 27,874,000 10,827, 168 Crops. 31 Years Acreage Production 1903-4 28,907,000 10,045,615 1904-5 3 1,730,000 13,679,954 1905-6 26,1 17,000 10,804,556 1906-7 31,347,000 13,595,498 1907-8 31,311,000 11,375,461 1908-9 32,444,000 13,587,306 1909-10 31,918,000 10,290,395 1910-1 1 33,196,000 1 1,426,000 191 1-12 35,000,000 16,050,000 In the above tables the progress of the crop in August is represented by the condition fig- ures of September 1, etc. In the table of acre- age and production, the years are separated as they are because the picking of cotton is not completed or the total crop known until the following year. In comparing the condition and production figures, the last figure in "years" may be disregarded. Thus condition of 1904 applies to production of 1904-5, etc. It will be observed that either a high or low condition of cotton in the early months fre- quently ends in a disappointing crop. This is more pronounced in cotton than in cereals. Only twice in twenty years have we had a June condition above 90 (1896, 97.2; 1902, 95.1) and on both occasions the crop was a failure. In 1896 the condition fell from 92.5 on July 1 to 64.2 on September 1, and 60.7 on October 1. In 1902 the final condition was 58.3. On the other hand, a low June condition frequently ends in a good crop, as may be seen by refer- ence to the foregoing tables. August is usually the crucial month. While it is well to keep track of acreage and condition in the early months, the daily study of weather and precipi- 32 Elements of Speculation. tation during the latter part of July and the en- tire month of August will give us our first de- pendable line on probable production. The cotton producing states are given below in the order of their importance. Cotton Producing States and Yield of 1910. (In bales, 500 pounds to the bale.) Yield 1910 State (bales) Texas 3,140,000 Georgia 1,750,000 Alabama 1,174,000 Mississippi 1,160,000 South Carolina 1,116,000 Oklahoma 900,000 Arkansas 815,000 North Carolina 675,000 Tennessee 305,000 Louisiana 260,000 Florida 58,000 Missouri 48,000 Virginia 13,000 California 12,000 Total 11,426,000 Cotton is more subject to damage by frost than is any other important crop. This is be- cause the plant is more or less perennial. That is to say, it continues to put out new bolls late into the fall, until stopped by frost. The following table shows the date of the first killing frost in the principal cotton growing states for a period of years. ^ i-i eg lO fvj >-H (>q (M (\| ■>4- fO cvi 0,„ ^ T-Hrt r-H-H MCq T-H OvlO>l lO fO T|- O O N oiA > > > > u > +J > y > +J a o >■ o >■ >■ > -l.-l OVO,.,.' •• «. .•• ^2 uyuoouoooouO(ut)(uoot3 t^'"oooo;z;ooo:z;;z;o;2;ooQ^;2;o o ''t- 00 og (^^ ^ ON ■<:|- Tl- rl- ro ■* lO VO rj- to e<0 r|- CCp , ^ . ... . V tag OOOoOOyoOOouuoOoOu ^2:z;;z;00:2;00;z;gg;00Q^:H;^;2;0 tn ■a o bo C O V Id Povr-^ lo in lo ^s, VO VO u^ 0\ vn >o lO c n > o o o vn cv) o^ "-H T-( eg V . . C > > jj O O O y eP . . . . y . . . . . Ooo >>>>C>>>y>> -M>u+j+Jyu+J u y o yoyyyyy _ yyyyyoydyyyyyyyoou 2gOO0OQ:2;O!z;PO00QO0:2i:z;O w y ^ o s^s c; o rt o Tl w •-■ J2 "71 H C 03 ^ OS -M C S 10 e a 3 O 3 •? J3qrtg430^3rt0qyy300.Ji£: u p:^ fij o uu <; <; c5^ u PKi ^^oh w ;^ § > o • •••••••••••••••a* c o = u o" a "o- u u as o 'bo u „ o- y o '*H s '9- O nl ex .0- M- lo O ro -^Os O 0\ O CM C^ »-i O O O CO CM rOCM CO 0^ ^CJ CM CM C5 ■ 2 . ■ So (OOOiu(UOOOO. CM CM CM CM CO T-i ^ T-H CO CO i-i cP Ovi • 2o c d o o to o bo .•a .1) rtS (uooooooooooooo J^2Q^;z;:z;:z;:zi;z;0:z;0000:? CO o 00 CO Eli CM CM CO »-H CM T-i i-i 0\ CO O CM CM »— t 1— It— )t-Hi-Hi-H»-HCM*-Hi— <»— (T-H (U . tu „_ oooooooooyoooo XH tJ- tJ--*C0CMCMCMV0\0'4-'*-* .; O ,-1 ^ ,_( rt ^ T_i ,-1 CM CM CM S So O) . vVO -2 . (U K* OJ "*^ 'jj ■*-" oJxinirtrtO.tio ;5_ cq o P-, c/3 fii t-1 fe en ^ a, > CD s at '3 o h-l nl • o o u ni O ti a u •O £ 2 g ^ !3 !*^ S V O -I s "« s 3 -ti 03 nl u a. u < tn u C V H CD S O O 3 Efi *-t ' 4) CO V s .« ? *» c - 'C'" •> *• t •* coj a O^ Si " § 3 t; ?S r:' S § 6 4) ji ba a o 01 cd 4> •o IH o V u c R) Cd V bo CM 00 ■CJ\'-<0\ l^ -OnCM vo txcvi 00 o\ vOrJ- 3 < Q • o •O -rH •00 -o ■00 > «s. 0\ 'H o O 10 00 CM '^ 10 -O -CM •bf^in-^OOOO-^VOOONt^ -CM -ts, ^fltOCM* cOi-I.-I-^cO'rf ^c^i -co "3 p •VO •0\ •CM > .— I T-H o i^ -00 'O O "^ CO VO • T-i <^ CO .-< •ooQiovp^oo ■^^: ■ ON On CO ■^ 00 VO -CM ON CO a 3 :^ m -CMCMt^ VOco • •— I • t>v -ON • U-) . 1-1 . VO •CM -VO o CM T-i ' CM ui ;s CM t^005?\0'-iCMCO-^iovOtjOOC3NO'-i 0\0\0NOOOOOOOOOO'-ir' OOOOOOOnONOnOnOnONOnOnOnOnOnOn 38 Elements of Speculation. Taking up the years seriatim, we find the following facts: 1897. — Very large crops — Wheat and cotton broke all previous records. Prospects excellent in June, July and August. Stock market made great advance. 1898. — The June decline followed a very rap- id advance of over ten points in May. In this year, we again broke all previous records for wheat and cotton. After September the mar- ket continued rapidly upward until the end of the year. 1899. — Combined production of wheat, com and oats was larger than in 1898, and the June prospects were excellent. Cotton, however, fell off 2,000,000 bales as compared with the pre- ceding year, and final production of wheat was smaller by about 130,000,000 bushels. The rea- son for the June enthusiasm was due to good initial crop prospects which dwindled rapidly. The early condition of winter wheat was given as 77.9, but at harvest was 65.6. June condition of spring wheat was 91.4, and August condi- tion 83.6. June cotton condition was 85.7 and at harvest 62.4. Corn and oats made large yields and the June advances in security prices was maintained, but did not continue rapidly. 1900. — Total cereal production exceeded that of the preceding year by only a narrow margin and wheat production again fell off — 25,000,^0 bushels less than 1899 and over 150,000,000 less than 1898. Cotton was a fair crop, but this was not indicated in the early reports, June 1 condi- tion being 82.5 and July 1. 75.8. During the month of June the condition of spring wheat dropped from 87.3 on the first of the month to 55.2 at the end of the month. This terrific slump Security Prices and Crop Prospects. 39 in prospects was the greatest specific cause of the June break. 1901. — We started off with excellent crop prospects in June and finally made the largest wheat crop in history. But in July it became apparent that a great falling off would occur in corn and oats. Later, cotton prospects became poorer. The July break was the most severe shown in any declining month in the period con- sidered, and a glance at the total cereal produc- tion given in the table above will show that these fears were well based and accurately reflected in security prices. The greatest damage was to corn. So severe was the drought of 1901, that prayers for rain were offered in many Western states by official proclamation of the governors. One peculiarity of this scare in 1901, was that for some reason the Government greatly erred in their calculations of total cereal yield. The first figures given for wheat, corn, oats, rye and barley, by the Department of Agriculture were 2,791,346,000 bushels, and the census figures is- sued later gave 3,157,066,000 bushels. 1902. — In 1902 we broke all records for cereal production. Wheat production was smaller than the revised figures of 1901, but corn was greater by more than one billion bushels, and the cotton crop was the largest on record, with the excep- tion of 1898. This was all reflected in the stock market. 1903. — ^This was one of our panic years, and in July, we had a hard time with the elements. In the West, tremendous damage occurred from excessive rainfall and floods; in the East, we suffered from extensive forest fires in the Adirondacks. The floods caused great damage to railroads and to farm work. Damage to crops was considerably over-estimated, particu- 40 Elements of Speculation. larly tiie flood damage, and while cereal produc- tion fell off, the decrease was nothing like what was expected in July. Cotton also turned out better than expected. 1904. — The same argument may be adduced here as was the case in 1897 — i. e., that we were recovering from a period of depression. But, as in the former case, that recovery had gone a long way before crop prospects became a market factor. Cereal production was not so large as in 1902, but was larger than in any preceding year with that exception. The cotton crop was the largest ever made either before that year or since, the current crop excepted. 1905. — All records for cereal production were broken. Cotton was a fair crop by comparison with all preceding years except 1904. It is a strange fact that the most sensational attempts at crop killing for years were made in July. Wheat advanced 7 cents a bushel between July 18 and July 21 on talk of drouth and black rust. The damage was, in truth, comparatively noth- ing. This was also the month of the scandal in the cotton bureau which resulted in the resigna- tion of the chief statistician. The juggling of the cotton report resulted in issuing figures which carried cotton up 100 points in a few minutes. These figures were afterwards revised by the Government. The crop scares were so obviously wrong, that they were refuted by well posted people, and only a moderate decline oc- curred, which was quickly recovered. 1906. — ^June of this year was filled with politi- cal scares. Congress was in session until the end of the month. The Hepburn rate bill be- came a law, President Roosevelt transmitted several reports to Congress which were con- sidered inimical to corporate enterprise, and the Security Prices and Crop Prospects. 41 pure food bill became a law. There was some apprehension about crops wliich was largely due to the June Government report on winter wheat, showing a falling off of over 6 points as com- pared with the preceding year. The Govern- ment again badly underestimated one of our leading cereal crops, indicating that oats would fall off about 150,000,000 bushels as compared with 1905. The crop turned out larger than 1905. The acreage devoted to oats was under- estimated by about 3,000,000 acres. After the July flurry, crop prospects steadily improved and total cereal production again made a record. The cotton crop was very large, al- most equalling the high figures of 1904. 1907. — Another panic year, but crop prospects had some market effect. Condition of winter and spring wheat was satisfactory early in the season, but both crops went backward consider- ably before harvest. Cotton condition was low in June. After the Government reports of June 10, the crop news improved throughout the month, but this news was not borne out by the Government reports of July 10. The total cereal crop fell off sharply as compared with both 1905 and 1906. The cotton crop was a good one except by comparison with the very large years 1904 and 1906. Crops did not dominate movements in this particular year so much as is usually the case, as money conditions were causing great confusion and irregularity. The August decline does not appear to be justified by crop prospects. It was in August, 1907, that the State of Ala- bama revoked the charter of the Southern Pa- cific to do business in Alabama.and close on the heels of this came the hysterical $29,000,000 Standard Oil fine. The State of Arkansas at- 42 Elements of Speculation. tempted to declare forfeited the property of the Rock Island road in that state, and numerous other state measures were agitated. This add- ed to an already over-strained condition of af- fairs, and it is doubtful if even the most glowing crop prospects could have done more than cancel a portion of the decline. 1908. — Cereal production turned out well in 1908 and we made another bumper crop of cotton. The June decline in security prices followed a rapid advance of 16 points on the average in April and May, and may be consid- ered as partly due to reaction. The progress of the cotton crop was the principal incentive to prices, the July 1 report of condition of 83 on August 1 was the highest in that month for ten years with one exception (1904). 1909. — Cereal production largest on record, with one exception. The season started with glowing prospects, but later on cotton reports showed up badly, condition falling 17 points be- tween June 1 and September 1. This stopped the advance promptly. 1910. — Cereal production in 1910 turned out very satisfactorily, the total yield being the larg- est on record. The June decline was largely due to very bad conditions in spring wheat. The report of July 1 showed a condition of 61.6 as compared with 92.8 on June 1. Cotton was also acting badly, condition falling from 82.0 on June 1 to 63.7 on August 1. This was a double blow, but in the middle of July it was figured that in spite of the bad conditions, our general cereal crop would be the largest on record and that cotton would make a fair crop. The mar- ket began recovering and advanced until September. Security Prices and Crop Prospects. 43 It is clear from the above that the three- month period from June 1 to September 1 is one in which crop prospects make the market. It is also shown that while this period offers some of the greatest speculative opportunities, we can never be sure we are out of the woods before August 1 at the earliest. June has been the month of greatest uncertainty, as advances or declines in that month are more nearly equal in number. July shows a large majority of advances simply because crop prospects have been good in a majority of years. July breaks, when they do come, are rather severe. August shows only one insignificant decline, aside from the break of 1907, which, as has been explained, was not due to crop prospects. The reason for the large number of advances in August can be attributed to the fact that by that time prospects are pretty satisfactorily determined, and damage, if severe, has already been discounted in security prices. 44 Elements of Speculation. CHAPTER V. Money. Much benefit may be derived from the study of money conditions. At times indications in this quarter are so plainly evident that they cannot be misunderstood, and it is remarkable that such signals are frequently disregarded or their purport misinterpreted or contorted. In the latter part of 1906 and early in 1907 the ex- pansion of credits was so serious that even a perfunctory knowledge of the functions of money and credits should have shown the dan- ger of panic conditions in the very near future. We were trying to finance a business boom and a stock market boom simultaneously, and it could not be done. One or the other had to suf- fer at once, and the lot fell to the stock market. The great decline in stocks in 1907 was partly due to the fact that the stock market had fully discounted the prosperity of 1907 and had 'be- gun discountinig a period of depression; but the fact that the market underwent a spasm of de- moralization instead of an orderly readjust- ment of prices was largely due to our expan- sion of credits. The best barometer of contraction or expan- sion of credits is the percentage of loans to de- posits; but the percentage of specie to loans should be considered in connection with loans and deposits, as a high percentage of loans to deposits might not be serious if the percentage of specie to loans is also high, and vice versa. It is when the two spread apart; when loans are high and specie low, that the greatest dan- Money. 45 ger exists. It is not always the case that a very low percentage of loans to deposits, accom- panied by a high percentage of specie, is en- couraging. This condition may arise from stagnation, as was the case in 1894 and 1895. During the last ten years we have witnessed two stttck market panics, one in 1903 and one in 1907. Both were indicated by a high con- dition of loans to deposits and a low condition of specie to loans. In the early part of 1903 loans reached 102% of deposits. This was the first time loans had exceeded deposits since 1896. Specie simultaneously fell below 18% of loans. The stock market suffered a serious de- cline. In August, 1904, this condition was fully corrected, loans to deposits falling to 91% and specie to loans rising to about 25j^%. A great upward movement followed in the stock mar- ket. In July, 1906, loans began expanding and reached about 107% in December of that year, specie falling at the same time to 17% of loans. The decline of 1907 followed. This condition was rapidly corrected in 1908, and by April of that year loans to deposits were be- low 96 and specie to loans above 26. The stock market advanced rapidly. We may find the same parallel for many years back, both as re- gards the great swings of prices and the smaller intermediate swings. In consulting such records, however, due allowance must be made for even worse conditions near the end of a panic than at its beginning. In December, 1903, loans to deposits rose to almost 105%, with specie to loans down to 18%, and in No- vember, 1907, loans to deposits rose to 110%, while specie dropped below 15%. This bad state of affairs had already been discounted in 46 Elements of Speculation. security prices and was not due to over-expan- sion of credits, but to the hoarding of money and general lack of confidence. It was the final spasm of a panic period. It is the initial and insidious growth before the decline that must be watched for danger signals, not the final convulsion. In the early stages, the high rate of loans represents over-confidence, wildcat en- terprises and extravagance; in the latter stages, nothing but temporary fright. In consulting the figures of percentage of loans to deposits some allowance must be made for the growing loanable surplus of banks, par- ticularly as the associated banks of New York furnish our only convenient barometer from week to week. This is not a great factor, how- ever. It is also occasionally the case that bet- ter or worse conditions obtain in the west than in New York. An examination of the occa- sional calls of the Comptroller will keep us reasonably well posted on the condition of all national banks. It is found that the uniformity is not often nor seriously disturbed, and the figures of the New York banks constitute a fairly accurate guide. No cut and dried figures as to just what con- stitutes the proper percentage of loans to de- posits or specie to loans can be given, but we may say, as a rough rule of thumb, that a per- centage of loans to deposits of from 95 to 100, together with a percentage of specie to loans of 20 to 23, is a normal state of affairs. These figures will vary a little at times. The tables which follow, showing percent- age of specie to loans and loans to deposits for a period of years will be found convenient in examining this phase of money conditions. o o i? ^.; ^.; o ^^; ^^ o\ .-; 0\ ^C «-H r>; «W ui cv) \d ^^.■ ^^ ^" O On 00 ts.' o\ t< t>.' ■*' T-i' o\ 0\ M«~<*-<.' o 00 1>.' 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S ^ !d :;:f ^ S id S '=.t^cv] iiOOcoOQOcO^^^^'^r "~ — "^ "* "^^ — '' ^ ^..«^ B-ov'd^' -t-icovoi^c^Oviocofor^oo<^ot^Ovtoa\to''4'vO'-< J70v 0'-i"T*cogvtvOv0\0v0vC300A0v0000000v0\0\O0v0vOO0\0\O ovO'^coO\vocovO'^a\co*^»-0'=roOOVO<-H":);c»3CMO\OV'-HtOC^t^Opoqrtir) fi rr " <^ "o " '^ t^' ■* <^ ■* •" ov f^' «3 ov ^' ^>^ vd ■*' ^>^ ov .-i 00 ^^; rj ov c>i o! vo" 00 M ftoO0\00000\0\0\O\0\000vJ^000v00000000000\0\0v0v0\O0v0v0\ .■*Cv)-rf-QoO»0000-*C^l'*coOr^'*vo.-ir«50^00>OfOVpcr!VOcOM-^ CiOOO-^^'-i^^OvOvlOt^pOvi^Cv3t^voOvcOiO'^OOCVlin-^»-HOvoqOvvO rt vo' -i' Q K d -^ vd 10 K ov -sH vd o 0\ "* r4 06 vd p N ro Q^i vd cv) ^ i ■*.-<' OvONOvOOOOOvOvoOOOaiONOvOOOvOOOOvO ►-->o oSodovcSvovovdv Money. A9 The seasonal movements of money are natu- ral and inevitable and interest rates may rise or fall in certain months without materially disturbing the course of the security markets. Interest rates usually begin rising early in De- cember, and continue to rise during the first week or ten days in January. This is princi- pally due to preparation for the large January disbursements in the form of interest on bonds and notes and dividends on stocks. The holi- day trade is also a factor. After the first week or ten days of January, the funds which have been distributed begin to be redeposited or re- invested, and money becomes more plentiful. Interest rates ordinarily fall until the end of January and remain low until the middle of February, when the demand for funds in pre- paration for the spring trade again causes rates to harden. April, May and June are usually months of declining interest rates, but near the middle of June large fiscal institutions begin providing for the July disbursements. This causes an upward trend in interest rates. There is, however, no following decline as is the case after the January rise. This is due to the fact that the crop moving period is at hand and the demand for money will be greater for several months to come than at any time during the year. Near the middle of August funds begin to flow westward and are fully employed until the end of October. The highest prices for money ordinarily occur in October, after which there is a slow decline until the prepara- tions for the January disbursements of the fol- lowing year bring a hardening of rates. It is found that in a majority of cases there has been an advance in the stock market dur- so Elements of Speculation. ing December and January. This advance has anally started near the middle of December and culminated early in February. This repre- sents the forehanded buying by speculators who anticipate and discount the return flow of funds into the security markets in January. There is also, in a majority of cases, an advance in the stock market in the latter part of July and throughout the month of August. This up- ward movement, simultaneously with advanc- ing money rates, is due to crop prospects which are pretty well known in August and which are much more frequently favorable than un- favorable. The month of September shows a decline in stock prices in most cases, as the crops are then no longer in much doubt and the favorable effects have been fully dis- counted. The incentive to buy on good crop prospects has been great enough in August to overcome the advancing trend of money rates, but the acute stages in money begin in Sep- tember and this influence makes itself apparent. It would be ridiculous to assume that a safe mechanical plan for buying and selling in cer- tain seasons can be formulated. Nevertheless the price of money always has its effect on speculative operations, and it is essential that we know what is natural in different periods of the year, so that we may not be deterred from operations because of a misunderstanding of the seasonal changes. It is frequently the case that people who are satisfied with business or crop prospects become alarmed at rapidly ad- vancing prices for money and abandon their plans. Their fears are increased by the warn- ings of writers or prophets who either do not Money. 51 know what they are talking about or are in- terested in promulgating fallacious views. In considering the effect of money rates on speculative investments we will also find it wise to give attention to the occasional hiatus between call and time funds. During most of the year the prices of call and time money rise and fall together, but July and August are or- dinarily exceptions to this rule. In July, par- ticularly, we find a declining trend in call money in the face of an advancing trend in commercial paper because, while the banks are storing up funds for the drain in the crop moving period, they can employ such funds from day to day and still hold them available by loaning on call. This affects only the larger speculators, as most brokerage houses have a rate of interest to clients which remains practically unchanged the year round. However, the advantage gained by the large operators encourages them to make ventures, and the general market is helped accordingly. One of the simplest and most reliable meth- ods of determining when the general average of security prices is too high or too low is to measure the average yield, at the market price, on seasoned dividend payers, and compare that yield with the price of money. It is shown that in the last ten years the lowest aver- age yield on ten selected dividend paying railroad stocks was slightly over 3% in the latter part of 1906 and the highest yield on the same stocks for the same period of years was 7J4% in November, 1907. In other words, the prices of these securities went so high in 1906 that the return on money invested at the market price would only be about 3% and so 52 Elements of Speculation. low in 1907 that they returned over 7% on the market price. Looking backward now it is very easy to see that in one case prices were ridiculously high, and in the other ridiculously low; but how many people took advantage of such knowledge ? They were carried away by the speculative debauch late in 1906 and were unduly repressed and apprehensive in the panic period late in 1907. In the latter part of 1906, when these stocks were yielding only3%, tirne money ruled steadily at 6% or above. True, in 1907, time money got as high as 8% while the stocks were returning 7%, but everyone knew, or should have known, that such rates were only temporary. In January, 1908, time money was down to 5%%, and in May, 1908, 3j/^%. The yield on a specific stock may at times appear unduly low and at the same time the stock may be a good purchase, because of forth- coming rights or extra distributions or because of the probability of an increase in the dividend rate. All these things must be considered, but when the average rate of return rises above or falls below the fair value of money, a readjust- ment is inevitable. Money will go where it can get the highest wages. As in many other cases which confront us in forecasting security prices, no fixed rule as to when stocks are too low or too high as com- pared with money can be offered. The value of money not only fluctuates considerably, but there is, sometimes, a definite trend to higher or lower interest rates over a period of years. Under existing circumstances, we may reason- ably adopt the rough rule that when seasoned stocks with a good dividend record yield mate- rially more than 5% they are cheap; and when Money. 53 they yield materially less than 5% they are dear. After each period of panic or depression, when money begins to come back into the se- curity markets and prices begin rising, we find a period of rotation. The bond and note mar- kets first show strength and activity, then pre- ferred stocks and high grade dividend payers are taken up, and finally the more speculative issues have their turn. In the final stages of a 'bull market, when speculation is rampant and inflation is present, there is not much discrimi- nation ; the excited public buys the wildcats as freely as it does the seasoned issues; more freely at times, for they present more golden opportunities to the imaginative buyer. The observer of the first stages of a bull period will frequently find his views disturbed by writers who will admit that in all former periods an advance in the general market has been preceded by activity in bonds and high grade stocks ; but, say these writers, "the conditions are different now. Money is going into high grade securities because the owners of money have no confidence in the general run of stocks." This argument is in- evitable at the beginning of every period of re- habilitation. It appears extraordinary that any thinking man should consider it seriously. What the writers say is true as far as it goes but it does not go far. The reason which they give for the precedence of a certain class of securities has always been the reason for such precedence. Timidity is a personal character- istic of money, if the term is permissible. When money is sober, it is always cautious and 54 Elements of Speculation. discriminative ; it is only when it is intoxicated that it becomes foolishly bold. The state of our foreign credits is an elusive factor in money, and no statistics are obtain- able on the subject. We may, however, make a fair estimate of our credits and the growth of credits abroad by watching exports and im- ports of merchandise and gold and other fac- tors affecting our balances. Our currency system is unquestionably a poor one, and many corrective suggestions have been offered, but none of them appear to solve the problem. In the following chapter Mr. C. F. McElroy has offered a plan which appears feasible, and which is worthy of seri- ous consideration. '^ 1fl9f ThetCurrency Question. 55 '^ * CHAPTER VI. Relation of Inflexible Reserve Requirements to the Currency Question. By C. F. McElroy. Seasonal Stringency. Of all the phenomena peculiar to the money market, the most remarkable is the wide fluc- tuation in interest rates in the New York mar- ket, due to the wide variations in the supply of loanable funds. These fluctuations are wid- est in the call loan market, but they are also in evidence in the time money market, al- though in a lesser degree. The recurrence of high rates is so regular that, by taking into consideration the state of general business throughout the country, farm production, etc., one may predict with a reasonable degree of certainty what course interest rates will take at any given period of the year, particularly as regards the last half of the year. In order to show these changes at a glance, I have taken the high and low rates for call money and four months' loans for the past twenty years, and averaged each month separately and brought the result together in the following table: In examining these changes, it will be ob- served that, in the call money market, the average fluctuations in any month are quite wide, due to local causes; but it will also be observed that the tendency is toward a higher level during the last four months of the year. The tendency is not quite so marked in the time money market, but it is there. It should 56 Elements of Speculation. AVERAGE HIGH AND LOW MONEY RATES ON CALL AND FOUR MONTHS. On call Four months January Ij4@13j^% 3^@ 4H% February 1^@ 3^4 3H@ 4H March iyi® yyi 3j4@ 4§^ April m@ eyi SVb® ^Vi May iy2@8H 3j^@ 4ji June 1^@ 7j5 3Ji@ 4J^ July l}i@8U 3^@ 4}^ August 1^@ 6 4 @S September \V%@ &^ 454@ Sfg October 1?4@18J4 4J^@ 554 November 2 @17J4 4J4@ S December 2J4@30 4}4@ 5J^ be stated in parenthesis, that in producing these averages, some abnormally high rates have had to be taken into the calculations; for instance, in December, 1892, call rates reached 40% ; December, 1895, 100% ; December, 1899, 186%; December, 1905, 125%; November, 1896, 96%; November, 1907, 75%; October, 1896, 127%; October, 1907, 125%. It may be argued that these abnormal instances unduly raise the average and, therefore, should be eliminated, but I think that a little reflection will convince anyone that they should stay in, as they form a part of the effects produced from the causes which I shall attempt to make clear in the course of this article. The primary cause for the rise in interest rates during the last four months of the year, of course, is the demand for currency on the part of the interior banks for the purpose of moving the crops. This demand will be affect- ed one way or the other by the varying state of general business throughout the country. If business is good, more currency will 'be needed by the outside banks ; if poor, less will The Currency Question. 57 be needed. But, always, there are the crops, and they must be moved. The necessities for currency in that direction will also vary with the volume of farm production and the ruling level of prices, but they are always so large that they form one of the knottiest problems with which the New York banks have to deal. Why, you ask, should this problem concern the New York banks in particular? It all arises from the attempt to impart some degree of elasticity to our currency system. The fram- ers of the laws governing the reserves of na- tional banks recognized the fact that, at cer- tain periods of the year, country banks do not need to carry as large a reserve as at other periods, and that to compel them to do so would be a hardship. In other words, the de- mands for currency, which the reserve is in- tended to provide for, is less at times than it is at other times. They met the objection against country banks carrying reserves in cash equal at all times to a stated percentage of their deposits by giving them the privilege of car- rying a portion of such reserves in the form of deposits with other designated "reserve" banks, and these "reserve" banks were, in ad- dition, given the privilege of carrying a por- tion of their reserves in designated "central reserve" banks. The result is that, after the crops have been moved, the banks in the forty- seven "reserve" cities are flooded with cash, and they, in turn flood the "central reserve" cities. New York, Chicago and St. Louis. And a further result is that New York must find profitable employment for the bulk of this golden flood, for, obviously, it would not do 58 Elements of Speculation. to tie up very much of this sort of money in long time loans, and the market for call and other short time loans outside of New York being somewhat limited, Chicago and St. Louis banks compete with New York banks in the New York money market. When the crop- moving season arrives once more and the country banks begin to need currency, this money is withdrawn from New York, and New York banks are compelled to call in their de- mand and short time loans in order to keep their required reserves intact. Thus, while the system works admirably in imparting elastic- ity to the currency, so far as the country banks are concerned, it does not always work out so well for New York banks and their cus- tomers. In fact, more often than otherwise, in spite of all reasonable precautions. New York bankers are not always wholly prepared for this crop-moving demand when it arises; loans have to be called precipitately and gold imports resorted to, and when, as often hap- pens, we are not in a position to import gold or are actually exporting it, the situation is greatly accentuated. Sometimes the Govern- ment assists by making deposits, but it is not always in a position to do that. Almost in- variably between September 1 and the end of December, New York banks lose enormous sums of cash to the interior, and, in order to bring down their deposits proportionately with their diminished reserves, loans are called right and left. For the purpose of showing the ex- tent of this movement of cash and its effect upon loans of the New York banks, the tables and chart on the pages following have been prepared : B '-I O t^ ■* vooo tM On tM M CM c^i 00 ■* CO ■* ■* On — 1 ri «; rt CM 'H .-I —I .-I (M .1 CM CM cv) C4 N CM N rvin N n n 01 H > o O •-" 00 —< lo m 00 o 00 CM * rh •-> 0\ lo ^ r* 1^ O o ■* j2 ^ ^ CM -^.-1'-' CM •-< CM CM CM CM CM CM CM CM CO CO CO to . ^evO'-'vpoOO^^ON<^fMOOOcO^Oto^sto^-lOOlO *■ rtm.-i^c5tx<-'ON'^mco^'i"--iNNO>oO\incO'*txiococONpo^<2 >~, J? lO On -^ tvt O CM CM ■* ■* >o ■* lO .-1 00 00 W S> O NO in 3 -^ CM -<-< CM CM CM CM CM CM CM CO to CM CM to CO to to Q c5 On ^tx NO NO 00 NO CM 1-1 -H —I 00 too 't- to t^ NO On V e ioo<-<»^^ON'*>n'«J->n«ocMCMONt^{NNOoocMC iM S -4 i-H CM 'H rH t-i CM CM CM CM CM CM to CM CM CM CO CO CO -« S >, oOrtr^ONNOONNOint^cO'-ooooiNOcocoTtCM' 13 ff -SCMCMt^^oOCMNOCOmrt-coooONOONOOt^CNlC g ^ -H -^ CM Ti rt rH CM CM CM CM CM (M CM CO CM CM to CO CO t t— * j! cMON.-i'*cMCJi9eoooNg\tMTf--iQooogr-"^>Cf S in'-'tMvn^ONOtocMia-'tCM'-iONiroot^iogt S'.-i'-iCM'-i— "-HCMCMCMCNIC^CMCOCMCMCMCOCOCOC •S S^Mtj-no-toOnocoSno^c ," i-H-^CM-Hi-iCMCMCMCMCMCNCMC rf NO >* t~ —I On >-" On inio to NO i-H 00 N CM CM CO CO to to )!»» NO NO lO ■* CO O JOt^NOCMmcOOO I CO CM CM to CO CO CO I? ca < J CMiOvOioON2iNO'*cO'*'-;QQ'*NOca00totO^ S CO-*Tf00loON.-llOCMNONOvi5S0CM'*90-4 00'«rNS rt ,-1 rt CM "-i -H T-< CM CM CM CM CM CM N CO CM p3 CO to CO CO fMCO'*>nNei^OOgNOggtO'*gg^ggO»;- OOOOOOOOOOOOOOWOnOnOnOnOnOvOnOnOnOnOnOn > OS' CO H > O o *^ g" g^c^ -^ w -* lO \0 1^ 00 W CO OS -H C^CSOtO eo c^co 1^ o CO o 1-1 0) Tt*Tr'^"^'^lO\Ot^t^O\ONONO\i-rOO'-tfOC^CO . ooioO\0\t^'^iovooQ^HQ\'^f %^ sg 0§i Cci I Oto- ^g go H Hi is Hg fUm x< Hm Tl- o\ N ^ O ■-' CJ tM \0 CM N 0\ 00 Oi 0\ >" 00O\ 0\ t^ -^ to ^ M S "-"^ ii "*■ '^ *> !2 00 ;^ N » N <^ <» S <^ - cQ <^ P,ca <^ 0.c3 ~ ^^5^5 " « ?S « --.^ CO rs,J5 to « jq CO m ^ J3 3 fHttlHN *;0'*^0\i^<»ooQt>.vo^O\o»oo\ooogoo,-HNtoiovo ivi O ■* >ri ^'^ «i ^ *^ ^ CO r2 2K tvj \0 ^O f^ ti TT □; 00 ^ 00 J; g; f. ^ ^St/^* * ,-1 ,-H .-H T-l ,-H »-i 1-H ^H T-( »*«»♦«««« 3 B « 2 3S VOO cocq CO to ^s.00 coo tN»0\ 00 *Oi-H mt^* COC^l CO'^ coco H M(H «i-HCO OOco covO !rt©0^ "^Q e»oo\ NO fvico 2K® t^>o Scvioo cvio\ coo °MO c>ao rv.{M 'oc 1 wa<:' < '-' Oo'^g tU^dtPQ mKqO ■-<' (NO to SfogS* Wits,cj 2'«5.'S f?CNO\S rt®© rtOOgj St^oo ScM^i S(MO^ c . ■ c • ■ o • • o ■ : 3 m 60 a 3 m 2^ bDirj'" 3 a y.'Mco:;'mto5?'S'*jr' «N —• nloo3; nl-*r! rt«3fc nl'-' "t^ CO CO_ 5 S N « CO ft JD ■* ,-( »^ *"* ^ ■ B • o : o w m rt CO rt o Ok eS ' -I CO _■ • 13 o ■ c : o K s 2rt -aS -Srt -"rt -"oj A o -^ A 0\ n a*' 1 76 Elements of Speculation. and still we would have had left a fair margin over the 15% suggested for the month of No- vember. And, looking at the psychological aspect of the matter, the moral effect of such an amend- ment to the national banking law as has been suggested would have been of incalculable value during those troublous days, particularly if it had been in existence for a few years and its practi- cability fully demonstrated. If such a law had been on the statutes, no one would have felt alarmed when they saw reserves falling below 25% of deposits, and they would not have ac- centuated the acuteness of the situajtion by with- drawing cash and hiding it away in safe deposit boxes and under carpets and mattresses, as was the case in the latter part of 1907. In the year 1907 the maximum cash holdings of New York Clearing House banks reached $288,000,000 in round numbers in May. In July they were $283,000,000. In August, they had dwindled to $270,000,000 and held rather close to that figure during September and October. The big drop came in November, when the mini- mum $215,000,000 was reached. This latter figure by no means represents the full drain upon New York Clearing House banks at that time. If we deduct the importations of gold during November, which amounted to $62,000,000, the decrease in cash from the July figures amounts to $130,000,000. As the figures stand, the de- crease was $68,000,000. In December, an addi- tional $43,000,000 gold was imported. New York bankers began early in the year to prepare for an enormous fall and winter business. The whole of the preceding year was one of full em- ployment of money in general business and in speculation. The 25% reserves were maintained with great difficulty during the last four months The Currency Question. 77 of 1906, and the fluctuations in the loans were violent. In the early part of 1907, although cash holdings rose rapidly, there was a slump in them during February and March, and, in order to strengjthen their position, liquidation was en- forced during March which reduced loans $50,000,000. After that, cash holdings again rose to above the former levels of the year, and fluctuated within comparativ^y niarrow limits until the pinch came in November. The panic of 1907, which reached its height (or depth) in November, was essentially a bank- ing panic and was due wholly to loss of confi- dence on the part of the frightened depositors. It would have been mitigated or might possibly have been avoided altogether if the "central re- serve" banks could have had the moral backing of a law permitting a more free use of their re- serves in meeting the withdrawals of depositors. The average depositor gives very little consid- eration to the volume or percentage of reserves his bank may be carrying, so long as he is able to draw his cash without difiSculty. Innumer- able instances could be cited where, during the course of a run on a bank, depositors have drawn their money at one window and immedia,tely re- deposited it at another. In Chicaigo a good many years ago, when a run started on the banks, the sight of the money handed out to a depositor upon presentation of his pass book, impressed him so deeply that he asked the paying teller to take the money back. He was told that he must take the money and see the receiving teller about redepositing it. The institution, a savings bank, not only saved a lot of interest by that action, but also started thereby a wave of confidence which resulted in an aibrupt ending of the threat- 78 Elements of Speculation. en'ed disastrous run on that bank and other banks in the city. The trouble in 1907 was accentuated by the bad practices and subsequent failure of several bank- ing institutions, but even these failures and the effects thereof could have been minimized if the amendment suggested had been in force. The bank official no less than the depositor becomes timid when he faces the alternative of running counter to the letter of the law or taking a tighter grip on the hard cash in order to maintain the lawful reserve. And, if he cannot manage to retain the cash, he calls in loans, which is one more means of inspiring fear in the minds of the public. A large part of the loss of confidence in that year was due to the slashes in the loans which were made necessary by the rigid reserve requirements. If these reserve requirments had been more flexible and, consequently, little or no distuAance of the loans had been necessary, ap- prehension over the situation would have been lessened proportionately, and the chances are the banks would not have been compelled to refuse payment in currency or to resort to the use of Clearing House certificates. It is my firm belief that we give too little con- sideration to the importance of maintaining bank loans on a fairly stable level, taking into consid- eration the gradual upward climb in the volume of the business of the country. In conversation with one of the active heads of a great New York bank, a few days ago, I was told (what every- body knows) that big banks do not hesitate to go below 25% when necessary, and he added that his bank at that m|oment was down to 22j4%. He admitted, however, that they would not dare take advantage of the 30 days' limit or re- The Currency Question. 79 main in that condition for even one week. But bis concluding remark -was quite significant, "We drop below 25% — for a day or two when neces- sary rather than frighten people by calling a lot of loans in one day." When the average man sees the banks calling loans and interest rates going uip, his first and most natural thought is that they are losing cash, and that would usually be correct. If it is car- ried very far or too precipitately, he begins to wonder if his little account is safe, and it needs but little more to cause the uneasiness to develop into positive panic which leads him to the paying teller's window. Multiply this individual state of mind by thousands or tens of thousands and you have liie making of another 1907 experience. If this proposed amendment providing for a sliding scale of reserve requirements, during the definitely known annual crop-moving period of strain, will eliminate the lanxiety over loans, and, consequently, lessen the danger of loss of confi- dence, a great deal will have been acconjiplished by its enactment. Possible Objections to the Measure. It may be argued that it would be dangerous to reduce present reserve requirements at any time, and that our "central reserve" banks ought to carry as large a percentage of re- serves as the Bank of England or the Bank of France, 40 or 50% or even as high as 60%. The answer to that objection is that, in the cases cited, the responsibility is centralized in one bank, whereas in this country, the responsi- bility is divided among 55 institutions. These 55 banks have a capitalization of about $185,- 000,000; surplus of about $163,000,000, and, ac- cording to the current Comptroller's report. 80 Elements of Speculation. undivided profits of about $48,000,000. The fact that the responsibility is thus divided is in one sense an element of strength, for, while the absence of unanimity of action is some- times to be deplored, the policy of these banks is not subject to the judgment of one man or set of men, and their affiliations are sufficiently close to be a guarantee that danger in any single quarter will be met with practically united action from other quarters. Further- more, the functions of the Bank of England and the Bank of France are of a more interna- tional character than is the case with the American banks. They are also Government banks and hold the Treasury gold stock. It may also be argued that the plan is not sufficiently broad ; that it does not provide for unexpected calls upon the resources of the banks that may be made outside of the crop- moving period. That is true, but the objec- tion does not alter the value of its application to the period when we know we are most likely to encounter rough weather. We now have some of the bad spots charted and it will not do to disregard them because of uncharted rocks that may exist in the financial seas. In the tables and charts already submitted, it will be noted that the month of March is usually a month of strain, and it might be well to extend the application of the plan to that month also. A little further along in this article, another proposition will be advanced which will assist in taking care of any sudden or unexpected strain, or demand for currency outside of the regularly recurring seasonal demands. The objection to the general application of The Currency Question. 81 this plan to all months of the year, in my opinion, is the absence of regularity and the consequent bad effect upon confidence. The records do not show the presence of any regu- larly recurring period of strain outside the crop-moving time, excepting the month of March. The strain in March does not last long and loans are not seriously disturbed thereby. The value of this plan, as I see it, lies in its application to a regularly recurring period when its purpose would be fully under- stood by everybody, and when its application would be accepted with perfect confidence. Still another objection to the plan that might be made, is the fear that during the period when the plan is in operation, it may turn out that the call for money from the outside banks is considerably less insistent than usual, and, as a consequence speculators would be tempted to utilize the increased loaning facilities cre- ated by the operation of the plan. This ob- jection could be met by inserting a clause in the law prohibiting the "central reserve" banks and "reserve banks" from expanding their loans beyond a certain percentage during the period when the plan was in operation. That would prevent the banks from fostering unwise and reckless speculation and from taking ad- vantage of the law for purposes other than which it was intended. This clause, however, should be so worded that, if the "central re- serve" and "reserve banks" should see fit to import gold for the purpose of increasing their credit facilities, the prohibition with regard to expansion of loans would be modified in ac- cordance with the extent of the importations. In other words, so long as the banks could 82 Elements of Speculation. show reserves in excess of 25%, the prohibition would not be considered as in force. But as soon as their reserves fall below 25% in taking advantage of the law, the loan expansion must stop or at least be restricted within certain limits. That would also provide for shipments of- currency from the country during the pre- scribed period. A further objection that might be offered hinges on the proposition that usually the country banks draw upon the reserve centers for the purpose of increasing their credit fa- cilities as much if not more than they do for the purpose of obtaining an additional supply of circulating medium; that if additional cir- culation was all that was needed, they could utilize their privilege of increasing their na- tional bank note circulation, or, for that mat- ter, while the Aldrich-Vreeland law is in force, they could make use of the emergency cur- rency. In answer to this, I would respect- fully call attention to the fact that the coun- try banks have been exercising their privi- lege in the matter of United States bond se- cured circulation, otherwise known as nation- al bank notes, for a good many years, and that the volume of this sort of circulating medium has steadily expanded from about $200,000,000 in 1896 to over $700,000,000 at the present time ; yet, we are subjected with ever- recurring regularity to the same old money strain, in varying degrees of intensity accord- ing as business is good or bad or crops heavy or light, year after year. The trouble with this sort of currency is that, once it is issued, it seldom comes in for redemption until it is worn out, and in the end, after making due al- The Currency Question. 83 lowance for the natural growth of the country, it spells inflation. If this sort of currency could be recalled promptly when the necessity for it had passed, the evil effects of inflation would be obviated, but that is a measure that has not yet been devised to the entire satisfaction of all the interests concerned. Besides, the limit of circulation based on the Government bonds now in existence has been about reached, and emergency currency is not available except at prohibitive rates. So far as the need of ad- ditional credit facilities is concerned, when the country banks call for shipments of cur- rency, they are almost invariably supplied with the real article — money that is eligible for their reserves if it is needed for that purpose. While we are on this subject of national bank notes, let us see what a little examination will bring to light. National Bank Notes. It probably never will be definitely known to whom the credit for the first conception of a government bond secured currency is due. Neither is it entirely clear from the records what was the ruling motive or purpose of those who were responsible for its creation through act of Congress. Salmon P. Chase, who was Secretary of the Treasury in those troublous times, is generally credited with being the father of the measure which brought into being the present national banking system and its accom- panying bank note currency system. It is cer- tain that without his great activity in the mat- ter, our present comparatively satisfactory banking system would never have seen the light of day. It would either have died'in the horn- ing or its birth delayed for many years. In a 84 Elements of Speculation. space of time, which, though it must have seemed inordinately long at that time, was in- credibly short when we consider the flight of time since then and the opposition to the meas- ure, he accomplished what might easily have taken decades of slow evolution to bring forth. The idea itself was not altogether new. It was, to some extent, an adaptation of the sys- tem then in vogue in some of the States, no- tably New York State, whereby banks operat- ing under State charters were given bank note issuing privileges based upon security in the shape of State bonds deposited with the State Treasurer. The novelty of the idea was in its nation-wide application. For State bonds. Sec- retary Chase proposed the substitution of United States Government bonds, and the re- placement of State supervision by national su- pervision. The measure was thus subjected to more or less hostility from State authorities because of the possible derangement of the market for State bond issues. The State banks themselves bitterly opposed the measure on these and other grounds. But, the necessity for the measure was very great, and Secretary Chase eventually suc- ceeded in enlisting the invincible Sherman in the cause, and the thing was accomplished. The necessity which furnished the motive for Secretary Chase's efforts was two-fold — that of providing a market for government bonds for the purpose of securing money with which to carry on the war against the secessionists, and the correction of the intolerable evils con- nected with the then existing currency which was circulating in the guise of money. Which of the two considerations were the more impor- The Currency Question. 85 tant at that time is difficult to determine off- hand. It seems, however, that successful flo- tation of Government bonds depended no less upon the standardization of the currency than the standardization of the currency depended upon its divorce from State supervision. It was almost impossible to raise anything but depreciated money for use by the Government except by going abroad for it. The reason for this was that the State laws were so lax and so uncertain, and so lacking in uniformity that it was possible in a great many States for abso- lutely irresponsible persons to obtain charters and issue currency at their own sweet will and put it into circulation in other localities — money which even lacked the saving grace of good printing and engraving, to say nothing of value. Consequently, the people, who would have aided the Government with their money, had nothing but worthless money to offer, as the redundancy of worthless or depreciated currency had forced specie out of the country to a point of practical depletion. And, under the then prevailing conditions, the banks could not afford to extend aid except at rates which were ruinous to the Government. The act creating the present national banking system and a standardized national bank note Govern- ment bond secured currency was passed on June 3, 1864, and there it has stood ever since, with some modifications, up to the present time. It was admirably conceived to meet the exigencies of the day, but, in so far as the privi- lege of issuing bank notes produces inflation of the currency, we are still paying the penalty of the civil war. But, as an offset, we got rid of the war, and one of the most abominable cur- rency systems ever experienced by any mod- 86 Elements of Speculation. ern country, and established banking upon a sound basis. Bank Note Redemption Fund. A recital of the various changes in the law regarding the volume of bank notes which may be issued, the geographical distribution of the same, the terms on which they may be issued and the reserve fund to be kept on hand for their redemption, would consume more space than is available. As the law now reads, the banks are required to keep on deposit with the Treasurer of the United States a fund equal to 5% of their national bank note issue, the amount so deposited to be counted in their re- serves. According to the current report of the Comptroller of the Currency this fund amount- ed to over $35,000,000, of which $23,000,000 comes from the country banks, $8,000,000 from the "reserve" banks and about $4,000,000 from the "central reserve" banks. Thus, it will be seen that whatever advantage accrues from the privilege of counting this redemption fund in the reserves is more largely enjoyed by the country banks than all the rest of the banks together. Inasmuch as the bulk of the redemp- tion of these notes is between banks, there is no great necessity for a redemption fund, and, furthermore, the notes are backed by deposits of Government bonds which ought to be suffi- cient. However, I will not argue that point. The important point to be considered is that this fund is in the hands of the Treasurer of the United States and is doing only a portion of the work that it might accomplish. Reserves against deposits, to a certain extent, may be passed along from one class of banks to the next highest, thereby being made available for The Currency Question. 87 additional work. If this redemption fund was treated in the same manner as reserves against deposits, 60% of the $23,0(X),CX)0 belonging to the country banks could be passed along to the "reserve" banks, and 50% of that $13,800,000, together with 50% of the $8,000,000 belonging to the "reserve" banks, a total of over $10,000,- 000, could be utilized by the "central reserve" banks. As the matter now stands, we are em- ploying $31,000,000 of this money in the re- demption fund in a most un-economical man- ner. Perhaps the easiest and most satisfactory method of dealing with this fund would be to leave it in the hands of the Treasurer of the United States and endow him with the power to mobilize the fund for use in any quarter where a stringency is threatened at any time. This vast sum judicially used at the right time and in the right place, and withdrawn at the proper time would provide us with a means of maintaining an equilibrium that would be of great service during out-of-season periods of strain. It will be remembered that $25,000,000 poured into the money market in 1907 was the means of turning the tide, and stopped the panic which threatened to pass beyond all hu- man control The Government, of course, did a great deal more than that in the way of de- posits with the banks, but the efificiency of these deposits was lessened by the hesitating manner in which they were made. The strin- gency was allowed to become too acute before the corrective was administered. If the Secre- tary of the Treasury or some other public offi- cial or committee of officials had had the au- thority and a definite sum of money to work with in 1907, much of the loss of confidence 88 Elements of Speculation. would have been avoided. The Government is in more or less active partnership with the banks, for it has reaped a great many benefits from the present system of banking and cur- rency, and it ought to put a representative, or a committee representing it, in a position to per- form prompt and active service at all times. It should extend aid at the inception of trouble, not at its crisis. If there is stringency in Ho- boken, there is the place to apply the remedy; it takes too long for the medicine to reach Ho- boken if it is applied in Kalamazoo or Podunk. With a sliding scale of reserves in the "re- serve" and "central reserve" cities and a mob- ilized fund in the hands of a competent Gov- ernment official, much of the inconvenience and the danger attendant upon a rigid, inelastic currency would be avoided, and the chances of a recurrence of another 1907 would be greatly lessened. Our Foreign Trade. 89 CHAPTER VII. Our Foreign Trade. The condition of our foreign tradb and the balance created abroad by our shipments of mer- chandise, specie and securities is an important factor bearing on security prices. It is ordinarily the case tihat our exports of merchandise receive attention to the exclusion of the other items men- tioned, but it is important that all should be con- sidered. One point which is often misunderstood and which causes undue apprehension in examining the record of exports is the gradual falling off in our sales of foodlstuffs. Our foreign sales of grain have fallen' off rapidly and will probably continue to do so, but that is nothing to be alarmed about. It is the history of all new countries that in their infancy they have sold what they produced from the soil and purchased manufactured goods. Gradually this changes until in time the process is reversed. In many cases lawmakers have fool- ishly attempted to change these conditions by leg- islation. England had a stormy career in this diirection and flopped around helplessly for years before a clear understanding was obtained. In the decade from 1851 to 1860, 51.2 per cent, of our total imports was in manufactures and only 21.3 per cent in raw materials for use in manu- factures. In 1901 24.9% of our total imports was manufactured goods and 45.6% raw ma- terials and ,partly manufactured goods. During the same period our imports of foodstuffs de- clined somewhat and our exports of fooidistuffs increased. This was due to the great increase in farming during the half century, but that in- 90 Elements of Speculation. crease has come nearer to reaching its limitations now and we may expect to see our exports of manufactures rise indefinitely with some fluctua- tions from time to time. The percentages follow- ing s'how the changes in imports and exports dur- ing the last decade : Table Showing Imports of Merchandise 1901 to 1910 Inclusive in Percentages. Manufactures Raw Materials & Un- Foodstuffs finished Manufactures 1901 24.9^0 45.6% 28.7% 1902 25.6% 49.97o 23.8% 1903 25.1% 51.2% 23.0% 1904 25.5 % 48.5 % 25.2% 1905 22.6% 50.7% 26.0% 1906 25.1% 51.7% 22.4% 1907 25.4% 52.3% 21.5% 1908 27.8% 46.8% 24.5% 1909 22.8% 51.3% 25.1% 1910 23.9% 55.3% 20.0% Table Showing Exports of Merchandise 1901 to 1910 Inclusive in Percentages. Manufactures Raw Materials & Un- Foodstuffs finished Manufactures 1901 31.8% 27.2% 39.9% 1902 33.4% 27.5 % 37.9% 1903 33.6% 29.3% 36.5% 1904 36.4% 32.2% 31.0% 1905 41.0% 31.7% 26.9% 1906 39.9% 29.1 % 30.5 % 1907 39.9% 32.0% 27.7% 1908 40.9% 30.3% 28.4% 1909 41.0% 31.8% 26.7% 1910 43.0% 34.4% 22.0% We are rapidly aipproaching the point when we will no longer be exporters of foodstuffs on Omt Foreign Trade. 91 balance, but our manufactures will make up for that. Cotton is the principal item in our exports of other than manufactured goods. It is called our "money" crop and so great is the revenue from the staple that it now makes up almost 30% (in dollars) of our total merchandise balance. The money received for our exports of cotton has in- creased rapidly in late years, partly because of an increase in production and exports, and partly because of a gradual upward trend in prices in common with all other commodities. In 1871 we exported less than 2,000,000 bales of cotton; in 1881 over 3,000,000 bales; in 1891 almost 6,000,000 bales ; in 1901 almost 7,000,000 bales, and in 1908 over 9,000,000 bales. In twenty years the average price received for exported cot- ton has risen from about 8 cents per pound to about 11 cents per potmd. It is probable that in- crease in production will continue for some time to come, but in a slower ratio. Scientific farming will 'be adided and further increase in acreage and larger crops will follow. As the world is largely dependent on us for her cotton, and as population is increasing more rapidly than production, it is not reasonable to expect any material decline in the price level except in the way of fluctuations. The trend of all commodity prices is also up- ward and will so continue as long as gold pro- duction continues to increase. One of the most surprising things about cotton and one of ithe greatest sources of economic waste is the practice of shipping raw cotton abroad and importing the goods manufactured! therefrom. This error will be cured in time. There are already evidences of an understanding of the situation and an attempt to rectify it. 92 Elements of Speculation. Our exports of specie do not enter very largely into our trade balances as compared with mer- chandise exports. Since 1873 we have sold abroad on balance about 9 billion dollars of merchandise and $500,000,000 of specie. Our sales of securities abroad present a differ- ent aspect from that of merchandise and specie. Merchandise goes into consumption, and the same may be said in a modified way of specie. The se- curities, however, must be repaid at maturity and in addition to this we pay interest and dividends on such rented capital between the dlates of issue and maturity. There are no dependable statistics as to the amounts of our securities held abroad, but some of the estimates should come pretty close to the truth. "The London Statist" recently esti- mated England's holdings of our securities at about three billion dollars and interest thereon at the rate of 4.5%, or about $130,000,000 per an- num. The editor's estimate of the total foreign capital in this country is about six billion dollars. It is frequently the case that this large indebt- edhess to foreigners and the consequent drain in the form of interest and dividends is viewed with alarm, and the apprehension is fostered by pessi- mists or radicals who have only a hazy idea of what such indebtedness represents. The money so borrowed merely represents capital employed in the development of our industries and resources. It is reasonable to assume that when a railroad or other great corporation places $50,000,000 of bondte abroad, it is because tiiey expect to employ that sum to adv^tage, to reap enough from its use to pay the interest and make a profit for them- selves before the loan matures. In this regard it may be noted that we hear much talk about the large sums we expend annually for freights in Our Foreign Trade. 93 foreign ibottoms. To hear these agitators harp on the fact that we have no merchant marine and no laws to encourage such entenprises, one would think the freights paid to foreign vessel owners was a dead loss. An examination of the earn- ings of ocean transportation companies will show that the return on such investments is not large, and that under present conditions our money can be more profitably employed in other directions. When the time comes that ocean f reig'hts show a great enough return as compared with other en- terprises, we will soon have both the ships andl the laws. We may classify the different items which op- erate against our trade balance under four im- portant heads : Interest and dividends, freights in foreign bottoms, remittances of aliens and ex- penditures of tourists. Estimates vary consider- ably, but the latest estimate at hand, that com- piled by Frank Fayant, is as follows : Interest and dividendte, about $200,000,000 Remittances of aliens, about 150,000,000 Freights in foreign bottoms 57,000,000 Tourist expenditures 140,000,000 The following tables show our imports, ex- ports, and trade balances of merchandise and specie for a period of years. Merchandise Exports, Imports and Balances 1901 to 1910 Inclusive. Years. Exports. Imports. Balance. 1901... $1,487,764,991 $823,172,165 Exp. $664,592,826 1902... 1,381,719,401 903,320,948 Exp. 478,398,453 1903... 1,420,141,679 1,025,719,237 Exp. 394,422,442 1904... 1,460,827,271 991,087,371 Exp. 469,739,900 1905... 1,518,561,666 1,117,513,071 Exp. 401,048,595 1906... 1,743,864,500 1,226,562,446 Exp. 517,302,054 1907... 1,880,851,078 1,434,421,425 Exp. 446,429,653 1908... 1,860,773,346 1,194,341,792 Exp. 666,431,554 1909... 1,663,011,104 1,311,920,224 Exp. 351,090,880 1910. . . 1,744,984,720 1,557,819,988 Exp. 187,164,732 94 Elements of Speculation. Gold Exports, Imports and Balances 1901 to 1910 Inclusive. Exports. Imports. Balance. Gold coin Gold coin ( jold coin and bullion. and bullion. & bullion excess. 1901.. $53,185,177 $66,051,187 Imp. $12,866,010 1902.. 48,568,950 52,021,254 Imp. 3,452,304 1903.. 47,090,595 44,982,027 Exp. 2,108,568 1904.. 81,459,986 99,055,368 Imp. 17,595,382 1905.. 92,594,024 53,648,961 Exp. 38,945,063 1906.. 38,573,591 96,221,730 Imp. 57,648,139 1907.. 51,399,176 114,510,249 Imp. 63,111,073 1908. . 72,432,924 148,337,321 Imp. 75,904,397 1909.. 91,531,818 44,033,989 Exp. 47,527,829 1910.. 118,563,215 43,339,905 Exp. 75,223,310 There is no intention to attempt in this chap- ter a long discussion of the numerous influ- ences bearing on our foreign trade, but the foregoing paragraphs are presented so that the reader may not be deceived from time to time by the numerous scareheads about our dwind- ling wheat exports, our payment of ocean freights, our annual rentals for capital, etc. What is particularly considered is the more im- mediate effects on prices from year to year, or even from month to month, rather than the economic changes of decades or generations. By examining the monthly documents issued by the Bureau of Statistics of the Department of Commerce and Labor, we may frequently get some interesting side lights on our financial posi- tion and tlhe tendency to extravagance or econ- omy. It is found that after a long period of un- usual prosperity or adversity a nation does not dliffer much from the ordinary individual. If we see an individual who has rapidly built up a profitable business spending money freely, buying wines and diamonds or whatever, we are not slow to predict disaster, and our predictions are usu- ally verified. If, after such excesses and mis- Our Foreign Trade. 95 takes, 'we see the same individual economizing and mendiing his ways, we are ready to predict a bet- ter future, and again we are usually right. The same thing is true of a nation. I may say, in pass- ing, that I have often found this habit of con- tracting a large question to individual propor- tions, or of considering one share of the stock of a great corporation by itself instead of as a member of a large family, to be very helpful. We often become confused and amazed by an exhibit of figures which stagger us, while the proposition appears simple enough if resolved into smaller proportions. This process of diminution is purely a mental phase, but the contracted fact fits the head better. So let us look at the personal habits of Uncle Sam during one of his prosperous periods, and one of his perio'dis of rehabilitation. A simple ex- ample, and the most recent, is that of the period between 1905 and 1908. In 1906 andi 1907 our exports of merchandise were larger than at any time in history, but imiports expanded so rapidly that our trade balance did not keep step with the increase in exports. In July and August of 1907 our exports only exceeded imports by a slight margin. Looking at the character of the imports, extravagance, incited by prosperity, is immediate- ly apparent. Let us take two luxuries for ex- ample, precious stones andi champagne. Imports of Precious Stones and Champagne for a Period of Years. Precious stones. Champagne. 1904 . .$23,626,608 $4,969,635 1905 . . 33,761,506 5,723,764 1906 . . 40,380,762 6,127,062 1907 . . 42,468,022 6,228,280 1908 . . 16,714,137 5,221.070 96 Elements of Speculation. It was so in almost all lines representing lux- uries. Even in perfumed soaps we saved over a quarter of a million in 1908 as compared with 1907. Although our exports in 1908 were not so large as in 1907 by $170,000,000, our trade bal- ances broke all records, being $136,000,000 in ex- cess of 1907. If these exhibits are examined by months in- stead of by years, the figures are even more strik- ing, for it was in the latter part of 1906 and the early part of 1907 that extravagance reached its height, and improvement began to show long be- fore the end of 1907. The nation acted just like our hypothetical individual, with the same results. Exports and imports of gold are not so impor- tant as those of merchandise, and the movements are as a general rule seasonal. We may naturally expect to ship some gold in the first half of the year, and import in the latter half. Danger is in- dicated when we are parting with our gold or borrowing gold abroad in a period of high prices and extravagance. In the panics which have fol- lowed such conditions we have always managed to get gold to relieve us, but we have always had to pay a high price for it. In 1906 we im.ported $108,000,000 more gold than we exported, ankll in 1907, at the time when such imports should naturally have ceased and a return flow set in, we were in such a pickle that it was imperative that we import largely again. In that year we received $88,182,000 gold more than we exported, but we gained this gold by great sacrifices in our prices of merchandise and securities. We sold things for less than they were worth because we bad to have the money. In 1908 and 1909 we ex- ported about $120,000,000 more goM than we im- ported, as the need for it had ended. The same Our Foreign Trade. 97 thing 'happened in a modified manner preceding and following the panic of 1903, and has been in evidence in all former panic periods. In regard to gold exports, we can again bring in the hypothetical individual who bought diamonds and wine. When he is receiving gold for what he has to sell in excess of his expenditures, he is all right, but if thsi money is only temporar- ily in his hands, and instead of being able to repay it the next year, he is forced to borrow more, he will do so at a sacrifice. When he does manage to settle up, he will do better. That is what occurred to the nation in 1906 to 1909. 98 Elements of Speculation. CHAPTER VIII. Bank Clearings. In determining the progress of general busi- ness our bank clearings furnish the most sat- isfactory barometer. In ordinary times in- creases and decreases in clearings are seasonal, closely following the interest rates on money. The natural period of advancing volume of clearings is the latter half of the year, and they usually fall off during the first half of the year. Com- parisons with a preceding year or years will show correctly therefore, while comparisons of one month with the preceding month are often misleading. A comparison of October or November, 1907, with the same months in 1906 and other preceding years, would show a great falling off in business activity, and that instead of advancing in volume in these months, clearings had fallen off. This represented stagnation in business in the last stages of the 1907 panic. It was noticeable, however, that the improvement in business as represented by volume of clear- ings in 1908 began much earlier than might or- dinarily be expected. This recuperation began in February, 1908, and continued to the end of the year without a seasonal midyear reaction of any importance. The same thing was true in 1909, and by January, 1910, volume of clear- ings had reached the highest point in history. All through the years 1908 and 1909 it was plain that the lost ground of 1907 was being rapidly recovered and this was faithfully reflected in the course of security prices. Clearings outside of New York frequently Bank Clearings. 99 fall, while New York clearings are rising, and vice versa; but this is usually due to natural causes, such as the activity during the crop sea- sons, etc. The best plan is to consult total clear- ings which are published weekly and monthly. By so doing we may determine whether or not the stories of business depression or activity are true. It is invariably the case, after a period of depression, that many people cannot and will not admit that business is fair and is improv- ing steadily and healthily. They do not rec- ognize the truth until the recovery is at its height and is so plain that it cannot be refuted. These people draw mental comparisons of the orderly betterment of the present with the un- due inflation of the past, or allow their views to be circumscribed by personal experience. An intelligent examination of the volume of clearings from time to time will show with remarkable accuracy the state and progress of business. In the panic of 1893 the volume of clearings fell oif badly, as was to be expected. There was some desultory recovery in 1894 and 1895, but it was below normal and entirely unsatis- factory. The recovery of security prices was also slow. In 1896 clearings fell almost as low as in 1893, a very bad state of affairs as the volume of money employed should, of course, grow gradually greater from year to year. Se- curity prices reflected these conditions and reached a lower level than in 1893. It was en- tirely different after the panics of 1903 and 1907. In both cases rapid recuperation in gen- eral business was shown by steadily increasing clearings and the stock market advanced in both cases. 100 Elements of Speculation. The course of security prices and bank clear- ings follow or accompany each other so faith- fully that they may, in charted form, be super- imposed without any radical variations one from the other. The security prices show a moderate precession. It would be folly, there- fore, to buy stocks merely because clearings are very large, as they may have reached the pinnacle, in which case security prices would have reached their apex ahead of business con- ditions. What can be determined is the pres- ent state of general business and the stability and character of the growth. Improvement is sometimes entirely too rapid for safety — a mushroom growth. Sometimes a seasonal re- covery is only perfunctory and does not come up to what might reasonably be expected. On the other hand a seasonable decline will not be so great as it would be under ordinary circum- stances, which would show an improving trend sufficient to absorb a portion of the natural re- action. That was the case in 1908 and 1909. It is sometimes the case that bank clearings make a somewhat false showing because of ac- tivity or dulness on the stock exchanges. Gen- eral business may be slowly improving, but a period of stagnation in stock exchange transac- tions will reduce the total amount of clearings. On the other hand general business may have halted or be receding slowly, and large specu- lative transactions on the exchanges will ar- tificially swell the volume of clearings. This fact can be easily discovered and estimated by consulting the record of sales on the New York Stock Exchange and other prominent bourses. The total bank clearings by months for a se- ries of years are given herewith : Q ^ lO \o or oT N" •*■ ■* a eo »5 t«. M cs 00 NO 59 •* c.000» ocTp^'cocooCcvf'^fo' VO *>o VO 3 ■* o\ ^ VO 1-H IV !C . " CO tx CM CM CO J> 00 •* ** to 1-H VO lO 1-H 00 rx lO o ^ o a 1-H o\ 1-H 1-H i-( l-H CO 1-H CM- l-H in •-H CO «-H co" 1-H t-H \o to 5 "O tx CO CM (M 1-H o rx NO tx 00 Ov r». 1-H •* VO 00 a 0\ »— « VO 00 00 ■* ■". 1-1 U1 CO lO v tC o" t>r oo" cT cvf o CO 1-H cm" w «9- *-H •~* 1-H 1-H *"• l-( i-H *^ ^ »-l •4-i CQ Q M r~* M 23 1-H 00 ^ O 00 VO o\ rC lO S3 o CO lO 1-H ■* ^-1 1 S- Ov 00- o 1-H to »o CM 1« CO «- VO CM- o y— V <«■ 1-H 1-H 1-H 1-H 1-H 1 1 >) s g 8 o VO vg Ov CO s 1-H IS. o\ 00 CM ji to »-♦ t^ VO ^. ro o_ CM o 1 B o A a oT 00- o- 1-7 S3 i-T CO- t-H CO 1-H CO- 1-H V 8 t^ M 00 m o o\ I/? lO 1-H CM 1^ OJ *-H CM lo 1-H CO \n lO s. c *--i (N ■^ o 00 CM «— 1 »-M 00 00 >. ^ o" 00- oT OQ- o- 1-H CM- r-t »— 1 oC CO co- rn .a **3 ^ 01 X bo >S f-H fM 00 lO 0\ 00 \Q 00 \o tx to •c CO CO o\ 1-* 1-H "£3 1-H "3 •* >> 00 to *-H CM O CM 00 1-H ■M CO 1 of o" o\ 00- CM- CO \ lo IV — tn CO Ov Ov VO tv oT oQ- CM cvf ■*■ oC to 1-H Ov CM CM :* vO_ O ■* Cvf lo to 00 to O CM CO VO CO CO VO VO VO 1-H CO to ■* tv VO O- CM" rH" lO (^ og; 06- 00- VO CM »0 ■* 00 - s - ? CM l-H CM —T to cm" OvoOOVOOOrHTtOvCMtOii • CMVO00CO^CM>i>>«H3'*'i Bt>.VOO-*OOCOOcoO_-Hi*^ - tinual source of needless worry and actual loss, but the fact that it is so, is incontrovertible. The mental attitude of speculators during panic periods is responsiible for about as much loss, in a negative sense of the word, as is the lack of funds. People who see great bargains litter- ing the Wall Street counters, and who have every reason to know that they are bargains, become confused and frightened by the d^ining prices, the bank failures and the words of pessimists, and fail to take advantage of unprecedented or unusual opportunities. They become obsessed with the idea that the whole business structure is going to pieces ; that the mills, factories and rail- roads will cease to operalte, and they look back through ihistory for the worst precedtents they can find and draw comparisons regardless of the fact that basic factors miay be entirely different. It is a well-known fact that public venturers or investors seldom buy near the bottom. The stocks are accumulated by the wise minority at such times and are resold to the pubHc later on at much higher prices. Per contra, when prices are high and business is booming, there is a spirit of mental exhilaration in the air and ill-advised purchases are numerous. So strong is the human tendency to become depressed when prices of securities are depressed, and to become stimulated when prices are high, that the majority of operators find it impossible 114 Elements of Speculation. to carry out their preconceived plans, no matter how reasonable and correct such plans may be. An individual, looking over the history of secu- rity movements, will sometimes make up his mind quite correctly that in every period of panic won- derful opportunities occur in the securities mar- kets and that when business is good and prices are high, we may expect another reversal sooner or later. Realizing all this, he makes up his mind to await such an opportunity — to buy when no one else wants to buy and) sell when no one else wants to sell. A very wise plan. But when he is confronted by the actual conditions for which he has waited, he will in nine cases out of ten abandon his plans. And this indecision is not confined' to the long swing operators. It is even more prevalent and pronounced in .the case of active speculators or investors who enter the market frequently. Sev- enty-five per cent of the orders placed by specu- lators to buy or sell if certain prices are reached, are cancelled whenever the market approaches their prices. Let me again refer to ithe recent American Tobacco decision as an illustration of this propensity. In the few weeks preceding that decision there were marked evidlences of basic improvement in the general situation. Crop pros- pects were excellent, and the only bar to advanc- ing prices was the uncertainty over Uie Supreme Court's construction of the Sherman law. A great many people reasoned about as follows : If the construction placed on the Sherman law in this case is not revolutionary and confiscatory, the uncertainty will be removed, and even if the American Tobacco. Company is found guilty, good corporations will not suffer. Fundamental conditions are such that we should have a better Mental Characteristics. 115 market and higher stock prices. If tihe decisdon is against the company we may expect an initial decline of a few points, as the purport of the dte^ cdsion will not be fully understood at once, and some frightened selling will ensue. On such a de- cline, stocks will be an excellent purchase. That is the way they reasoned and they were absolutely right. A great many orders to buy a few points under the market were placed with brokers. The next morning the market began rapidly declining and many of these buying limits were reached But at the first sign of demoraMzation market- wise, cancellations began pouring in and only a small percentage of the or&rs wais executed. In short, these people figured out what might natur- ally be expected to happen, and hiow it might be used to the greatest advantage; that very thing did happen exactly as expected, and they would have none of it. This kind of vacillation is very bald. It is largely due to too close attention to the tidcer. Ordinary fluctuataons are greatly magnified in importance when every little change is watched. As has been stated, the market al- ways "looks weak" wfhen it is dieclining, and "looks strong" when it is advancing. Consequent- ly it alternately looks weak or strong half a dozen times a day. Propinquity of this charac- ter is seldom an advantage except to professional scalpers, and is a fertile source of confusion and loss to €ie rank and file. It is the same way with the scale order. A man makes up his mind that a security is cheap and that its prospects are bright. He wishes to make some allowance for errors in calculation or natural market action, so he dieddes to intro- duce a scale order, to buy say every two points 116 Elements of Speculation. down uiiitil his intended! line is accumulated. Now the only way the full line can be accumulated is by a decline. That is the basic theory of the method, and a decline is necessary and desirable. If we start buying on a scale at, say, lOO, with orders to buy at 98, 96, 94, 92 and 90, and these orders are all filled, iflhe average price would be 95 for the entire line. When the price returns to the original point ( 100) there is a five-point profit, while if the whole had been purchased at 100, no profit would) be sihown. But knowing and ap- preciating all this, the plan mapped out originally is seldom' pursued to a conclusion. The spectacle of falling prices (which were anticipated as being possible or probable, and also desirable) is too much for the venturer. He cancels his orders in the fear that the bottom will fall out of the mar- ket or he doubles his purchases in the belief that he will not get his desired line. If the mairket ad- vances from the original purchase he is not con- tented to reflect that he has acted in the interests of safety and to be thankful for moderate gains, but is incensed because he has not made more, andl ithis often leads to increasing purchases on an advance which is just the reverse of what he set out to do. Speculators and investors are almost certain to exaggerate the im,portance of events or news items bearing on security prices, and on the other hand to ignore or underestimate the importance of fundamental factors. The development of basic conditions is slow and requires constant at- tention, therefore the study is usually neglected. If the dividend on a security is reduced or passed) for an)r reason, we are bound to hear pre- didtions of similar forthcoming reductions in many quarters. The action may be for a specific Mental Characteristics. 117 reason in no way affecting other sdcurities or may be a good business move, but that does not matter to the traders. They do not stop to an- alyze or segregate the case. Visions of wholesale reductions appear, and the visions are soon con- verted into verbal expressions of opinion; the verbal utterances grow into predictions and pre- dictions develop into "information." A dividend reduction for a good and specific reason affecting no other corporation usually winds up indde of twenty-four hours in "We hear on good author- ity" statements attacking the stability of other corporations. In reading crop reports, earnings, statements or whatever, this same slipshod superficial rea- soning or apprehension is constantly in evidence. The only way this evil influence can be avoided is by keeping so weiU posted' that we may know what to expect or be able to intelligently weigh the purport of unexpected news. A day's miar- ket gossip would fill a volume, and all that is of value in it would not ordinarily fill a page. Political issues are constantly made a source of agitation land worry in the speculative world. In nine cases out of ten the results of important changes in laws or methods are beneficial to the country as a whole and to the stockholder or speculator. It is hard to find a flaw in the actions of the Interstate Commerce Commission since that body was onganized. We have better and more tuiiform reports of railway earnings and operations than ever before, and' the only time the railroad's have been refused a request, it has been found that such request was unreasonable or that the necessity for the demands was misrep- resented. It did appear a few years ago that with the prices of commodities and labor advancing 118 Elements of Speculation. without corresponding advances in the price of transportation, the railroads were in a bad posi- tion, but when it came down to an actual test of the facts as brought out by the recent rate case, it was shown that the only material increase was in the cost of labor, and that materials used in construction and price were in most cases lower than in the past. Great savings had also been effected through increased car and train load ca- pacity, improved grades and more efficient man- agement. The railroads made a strong case, but it was not strong enough. After all was said and done it was found that they were in a better gen- eral position than at any time in history, and that the return on railroad securities was larger, dollar for dollar, than it had ever been before. Therefore, the demands were justly refused. We may be sure that if the time ever comes when an advance in rates is necessary to a fair return on investments, the advance will be granted. There is always some kind of political agitation going on and when a decline in securities or gen- eral business occurs, it is popular to attribute it to politics. A case in point was the panic of 1907. People who did not foresee or recognize the over- strained credit conditions, our extravagance, and a dozen other fundiamental factors which broug'ht about that panic, cast about for something tangi- ble on which to lay the blame. They found it in the political agitation. Such agitation ha!d been going on for years and had no power to either make or prevent the crash of 1907. It is true that unwise ranting somewhat aggravated the trouble in its last stages, as such strictures were ill-timed and increased the apprehension of a mul- titude which was already badly frightened, but this was at best only a contributory reason, even Mental Characteristics. 119 as applied' to the final spasm. The last throes of the panic were due more to money conditions than to anything else. It is only when some great issue is pending that politics have power to radically change the natural course of security prices for any length of time. The silver agitation was a 'serio^ .50y2 .37 1905 1.01 .50 .30 1906 79y2 .46 .32y2 1907 91 .53 .45 1908 97J4 .68y2 .50y2 1909 1.20J^ .66y2 .48 1910 1.10 .58 .38y2 Allowing for all the influences of large or small crops, it is evident that there is a decided upward trend to prices. A year of abnormally large production following a previous big year will bring the price level down materially, but the trend upward is soon resumed. 1906 is an example of this. Taking the last five years as a basis and throw- ing oflf 20 cents a bushel on the average price established in 1909, which was artificially too high, we find that the average price of wheat has been above 95 cents, corn above 58 cents and the 138 Elements of Speculation. average price of oats about 43 cents. Allowing for the fact that this average covers a five-year period and that the trend has been upward from year to year, barring temporary reversals, it is safe to say that the nominal price of wheat under normal conditions is about $1, corn about 62 cents and oats about 45 cents. Of course higher or lower prices are established from year to year. These movements give us the specula- tive opportunities we are looking for. In cotton we find that the upward trend has been even more pronounced. This is partly due to the fact that in addition to the natural forces making for a higher level in prices of commodi- ties, production of cotton is not keeping pace with increased consumption. The progress of prices during the last ten years has been as fol- lows: Average Price of Cotton. (Seasons of 1900 to 1910 inclusive) 1900-01 7.89 cents per pound 1901-02 7.40 1902-03 9.99 1903-04 12.42 1904-05 8.66 1905-06 10.83 1906-07 10.68 1907-08 11.11 1908-09 10.01 1909-10 14.45 Eliminating artificial prices made temporarily in 1903-04 and 1909-10, and allowing for in- crease due to natural causes and the excess of demand over production, we may reasonably fix the nominal price of cotton at about 12 cents per pound. speculation in Commodities. 139 The greatest opportunities in commodtty speculation come at such times as prices are un- duly depressed because of large supplies or good crop prospects, or through manipulative tactics. Occasionally it is possible to buy wheat at 75 or 80 cents a bushel, corn at 40 or 45 cents per bushel, oats around 30 cents per bushel, and cot- ton around 9 cents per pound. Purchases made at such prices are almost certain to bring hand- some profits in a reasonable length of time, re- gardless of what conditions may be at the time of purchase. Of course conditions will fre- quently Qiake it inadvisable to wait for such low prices as this, but when they do appear they may be used as a confident basis of purchases. Under normal conditions, with crop prospects fair, supplies on hand about an average and ex- ports keeping along at about the usual pace, it is safe to buy wheat around 90 cents, corn around 50 cents and cotton below 12 cents. Such pur- chases will almost certainly turn out well if pa- tience is exercised. The scale order metjiod is well adapted to trad- ing in commodities, as fluctuations are wider and more frequent than in stocks, and the means of computing values of grain or cotton are not so extensive or accurate as in securities. As stated heretofore, in deciding as to the probability of this upward trend being continued, we must first determine the cause that has brought about the higher prices during the past decade or more. Several theories have been ad- vanced by economists, but all have been found faulty or unconvincing except one — ^the increas- ing gold supply of the world. A majority of the earnest students of the subject have adopted this theory, gojrif of them quickly and others 140 Elements of Speculation. grudgingly. Not only is the consensus of com- petent opinion in favor of the theory, but the few writers and thinkers who promulgated it years ago have proven their case by correct pre- dictions of what might be expected to happen to the prices of both securities and commodities, so long as the increasing supply of gold con- tinues. These writers, for example, contended that securities having a fixed rate of interest must fall in price unless the rate of interest was advanced. They did not except such premier investment securities as British Consols. They contended tl\at the price of commodities gener- ally would continue to rise. Both these things have happened just as was predicted. There have been temporary reversals, of course, but these proved to be fluctuations and nothing more. The theory of the increasing gold supply and its effect on prices cannot here be discussed in detail. There are many ramifications and off- shoots, and a comprehensive discussion of the subject would require a volume in itself. Simply stated, the theory is as follows : The world's gold supply has continued to in- crease more rapidly than population for years. It is an inexorable law of supply and demand that when any commodity is over-produced it must fall in price. Gold, being a fixed standard, can- not fall in actual figures, but it does fall through a rise in the prices of the things for which gold can be exchanged. The reason bonds fall in price is that when capital invested in bonds is returned at the maturity of the issue, the pur- chasing power of that capital has been impaired. It will not buy so much food or machinery or clothing. We have no way to measure the value of money except by its purchasing power. Com- speculation in Commodities. 141 modities rise in price because gold cannot fall in price, although it can and does in value. It appears to me idle to attempt to refute the state- ment that an oversupply of gold will necessarily advance the price of all that gold will buy. Let us assume, for the sake of argument, that to- morrow a mountain of pure gold is discovered containing ten times as much of the metal as is now in existence. Does any one pretend to be- lieve that this vast mass of gold could be ex- changed for the same amount of anything else on the same basis as that of the present? The value of gold would fall as surely as the price of wheat would fall if production was increased tenfold. This is an extravagant supposition, but only ex- travagant as a matter of degree. The changes due to over-production of gold are slow and in- sidious, but they are certain. There is no indication at present that the over- supply of gold will cease in the near future, and, so long as the increase continues, jjrices of com- modities will seek a constantly higher normal price. 142 Elements of Speculation. CHAPTER XIII. Conclusion. There is absolutely no hope of success for the speculator who attempts to operate with- out a good working knowledge of his subject. Any hope of making money by speculative ven- tures based on tips, inside information, tape reading, chart playing or any of the various methods so frequently employed may as well be set down as an impossible phantom. The man who cannot devote some portion of his time to a study of conditions and the machi- nery of the market would better let specula- tion alone entirely. Nor will it be found feas- ible to merely follow the advice or opinions of some one who makes a study of the subject. Such guidance is valuable provided the recipi- ent understands what is under consideration, what is to be expected marketwise and why suoh expectations are warranted. A competent adviser may frequently offer suggestions which would have been overlooked, but he should al- ways accompany such advice with the reasons. The adviser may be wrong. No matter how careful he is, every man will fall into error oc- casionally, and every man who receives advice should examine its merits and foundation be- fore accepting it. I regret to state that a great deal of ignorance is shown by many brokers, letter writers, financial editors and others who pose as advisers. This is in nine cases out of ten due to a lack of study of their subject; an effort to evade hard work and exhaustive exam- ination and supply the omission by alleged in- Conclusion. 143 side information or snapshot judgment. They are doing just the thing they should strenuous- ly warn their followers against doing. It is the blind leading the blind. I do not mean to say that financial writers, brokers or editors are ig- norant or careless as a class, but there is enough fallacious writing and incompetent opinion from day to day to mislead credulous people and cause considerable loss to those who are not able or willing to judge for themselves the value of the opinions offered. A good many of the newspapers in the smaller cities, and some of them in large cities, make the very serious error of assuming that anybody can fill up a fi- nancial page, and if the regular editor is absent or incapacitated, his place is frequently filled by a man with no knowledge or special training for his position. The result would be funny, were it not for the damage done to readers who know no more than the writer and who accept the printed pages of a daily paper or market letter at a greater value than they are entitled to. The financial organs are indispensable ad- juncts to a comprehensive knowledge of finan- cial affairs and probabilities and we cannot have too many of them or patronize them too liberally, but we should be at all times in a po- sition to understand what they are talking about and to reject or disagree with what is un- sound in logic or incorrect in statement. It is not, as many people would have us be- lieve, necessary to devote the entire time to a study of speculation if one is to succeed in such ventures. Thousands of successful merchants, artisans and professional men invest or em- ploy their surplus from time to time in ven- tures which are either purely speculative or 144 Elements of Speculation. semi-speculative and some of our greatest Wall Street speculators have their fingers on the key-buttons of other enterprises. The idea that a man cannot do more than one thing suc- cessfully in this world is a mouldy old maxim which is daily refuted by facts. The study and research necessary to form correct conclusions as to book values, pros- pects and the general business outlook is not nearly so staggering or impossible as it might appear at first blush. As has been suggested heretofore, there is frequently a tendency to de^ vote time and study to factors of minor im- portance which have no power to create or prevent the greater swings of prices. There are so many such factors that an attempt to weigh or study them all results in bewilder- ment. A great deal of this work is about as valuable as the courses of study in some of our public schools and colleges. Many of these courses of study are about 25 per cent, neces- sary to an education which will carry an intel- ligent man or woman creditably through life in any social or business line. The other 75 per cent, is either forgotten or discarded in a few years or is merely embroidery. It is so with the study of finance and probable secur- ity movements. A clear understanding of money conditions, crops and our foreign trade, together with a working knowledge of the ma- chinery of the Stock Exchange, constitutes the most important part of such an education. If we start out with these factors as the basis of our curriculum the other necessary branches will be suggested naturally and examination and understanding will follow as a matter of course. Once a clear and comprehensive view Conclusion. 145 of the factors mentioned is obtained the work is reduced to keeping track of progress from day to day or from year to year and supplying oneself continually with the ample and accur- ate information which James J. Hill says is the first step towards success. There is another point about this special edu- cation which is necessary to successful specu- lation. Such education broadens the whole scope of knowledge and is valuable in any walk of business life or social intercourse. It is worth having, even if taken up academically and with no intention of ever speculating in securities. For a young man, such a course opens a broader field in any line of business he may undertake. A knowledge of money con- ditions and the workings of money are neces- sarry in every line of business and many large concerns gather information as to crop pros- pects and other important data yearly at con- siderable expense. Fortunately, the advan- tages of such knowledge is being more fully recognized by educational institutions, and good periodicals and the sources of information and assistance have been greatly improved and ex- tended in the last few years. It is astonishing, not to say exasperating, to note the number of people who go about reck- lessly stating that no amount of study or prep- aration is useful or necessary in making specu- lative ventures. They state that the stock mar- ket is all a fixed game and that prices do not respond to conditions. Such statements are wholly disproved by precedent. The swings of security prices always have been and always will be based primarily upon fundamentals, and even if misunderstandings, false statements or 146 Elements of Speculation. manipulation should inflate or depress prices noticeably at times, such inflation or depres- sion is always temporary. The people who rashly promulgate the theory of a "fixed-up game," etc., never succeed for any length of time themselves and they do not realize that in following their expressed theory they are elim- inating the only possible means of success. But their personal losses are not so much to be deplored as the evil effects of their ful- minations in influencing other people to abjure proper investigation and study, and go blindly to loss and possible ruin by the fatal roads of ignorance and prejudice. Any retailer or pub- lisher of financial works will confirm the state- ment that the greatest percentage of his books go to well-to-do and successful men or to young men with a promising future, and the tendency to read and study such works is growing so rapidly that we may hope in time to see the old idea dispelled that, of all the forms of speculation, that in securities is the only one universally stigmatized as gambling. The only reason for this special characterization is that for years people have gambled in securities and called their gambling speculation. The term is abused by reversing this process and calling speculation gambling. A large number of people constantly "take flyers" in securities on some word of advice or whispered tip. Sometimes they make money on such a venture, which is unfortunate, as it leads to further transactions and final loss. It is all right to take advice — ^all you can get of it — but get the reasons and be sure they are logical and based on correct statements. No man on earth can build up a fortune for you in Conclusion. 147 speculation if you do not know what you are about. Even if the advice offered is sincere and correct, if its recipient is ignorant of the pos- sibilities and vagaries of the market, he will se- cretly over-extend himself, or be frightened from his position by events, the importance of which he cannot judge, or will become confused by the conflicting advice he is sure to receive from other sources at times. He cannot be free from such dangers except through a per- sonal understanding of the subject. A man who cannot read the salient points of a rail- road report, or who has no clear conception of the forces which make and break security prices, has no business in the stock market. If he makes a profit at first he will keep on specu- lating in an attempt to get rich and if he loses he will keep on speculating in an attempt to get even. The outcome will be the same in every case. Speculation is a business, with certain rules and laws, and it is necessary to understand the business if we are to succeed at it. It is not a get-rich-quick business. The rewards are some- times very large, but no larger than in other lines of business. The losses are greater and more numerous than in other lines simply be- cause it is the only business on earth an intel- ligent man would ever consider entering with no knowledge, special equipment or natural ability in that direction. No truer statement was ever made than that many a man has come to Wall Street to get rich and has been ruined, while on the other hand many a man has come to Wall Street to make a fair return on capital and become rich. 148 Elements of Speculation. Nothing will more greatly and pleasantly surprise the man who studies speculation cor- rectly than the accuracy and facility with which he will find himself arriving at correct conclu- sions and profitable results. Nothing will more surprise the man who does not approach the business properly than the rapidity with which he will lose his money. Yet in either case the outcome is quite according to natural laws and would be really surprising if it turned out otherwise. The speculator should keep in mind and rigidly adhere to the following spec- ulative don'ts. Don't speculate on tips or alleged inside in- formation. Tips are too frequently guesswork and when "information" is distributed to peo- ple gratuitously it has either ceased to be "in- side information," in which case the market ef- fects have been discounted, or the news is dis- tributed for an ulterior purpose. Don't speculate on advice unless it is accom- panied by the reasons on which the advice is based, and then only if you are capable of weighing such reasons competently. Don't be either credulous or prejudiced. One is about as bad as the other. Don't over-speculate. This is the biggest don't of all. Take what you can safely carry through a decUne occasioned by accident or manipulation; or better still, be prepared to take advantage of such a decline by increasing holdings. Don't expect to get rich quick. You will be disappointed. Accept returns when it appears best to sell, whether they are large or small. Don't sell merely because you have a profit. Conditions may be such that further profits are Conclusion. 149 more certain than at the time of the initial com- mitment. Don't hang on to a losing proposition in the hope that something will occur to pull you out. If you find your original reasons for buy- ing to have been erroneous or if conditions change and upset the original calculation, take your loss at once and await another oppportu- nity. Don't take a loss simply because the market does not at once favor you or because of a de- cline which occurs without any change in prospects or conditions. If your original de- ductions are correct the market will come back to you in time. Don't sell as soon as you "get even," after a long period of reversal and waiting. That may be just the time to hold on. Be governed by present conditions and prospects, not by the in- tangible and unimportant fact that you are "even." Don't gamble on stop loss orders, chart sys- tems or tape appearances. Don't gamble at all — speculate. Don't hang over a ticker or spend your time watching the blackboard. It does no good at all and frequently results in confusion and apprehension by magnifying the importance of the inevitable and insignificant fluctuations which are a daily component of every market. Don't speculate at all unless you are willing to devote a reasonable amount of time to the study of prospects and conditions. Nothing else will do. The Pitfalls of Speculation BY THOMAS GIBSON In this volume the author has endeavored to discuss as simply as is possible, the salient factors of speculation and investment. The Table of Contents, following the introduction, treats of : Ignorance. Over-Speculation, etc. Manipulation. Accidents. Business Methods in Speculation. Market Technicalities. Tips. Mechanical Speculation. Short Selling. What 500 Speculative Accoimts Showed. Grain Speculation. Suggestions as to Intelligent Methods. Conclusion. BOUND IN CLOTH, 146 PAGES. PRICE, $1. THE GIBSON PUBLISHING CO. 29 Broadway, New York The Cycles of Speculation BY THOMAS GIBSON This book enters a little further into the influ- ences bearing on price changes, than does the "Pitfalls of Speculation," described on the preceding page. The Table of Contents introduces as bearing upon the subject: The Cycles of Speculation. The Gold Supply and Its Effect on Prices. Money. Political Influences. Crops, etc. Puts and Calls. The Question of Dividends. Basing Railroad Values. Effect of Business Depression. Undigested Securities. How to Compute the Value of Rights. Barometer of Averages. Best Method of Trading. Indication of Crises. The Ordinary Swing of Prices. The Factor of Safety. Borrowing and Lending Stock. Scalping. Crop Damage. Selection of Securities. The Bank Statement. The Cycles of Stock Speculation. The Cycles of Grain Speculation. The Cycles of Cotton Speculation. Conclusion. Bibliography. Bound in cloth, 183 pages; uniform size and bind- ing with "Pitfalls of Speculation." Price, $1.50. THE GIBSON PUBLISHING CO. 29 Broadway, New York