bought 100,000 bushels more at Chicago, relying on the 75,000 bushels on its way and his ability to get 25,000 bushels more, before it is demanded, to keep his engagement. When the 75,000 bushels hard wheat reach New York, the price has declined fractionally; and the owner is enabled, in consequence, to purchase 25,000 bushels at a slightly better price, relatively, than he paid in Duluth, selling 25,000 coincidentally at Chicago for September delivery. He lost on his Duluth purchase and on the 25,000 and 100,000 bushel purchases at Chicago, and on the 25,000 bushel purchase at New York. But he made rather more than corresponding gains through his sale, spot delivery, of 25,000 bushels at Buffalo, including profits on his sales of 225,000 bushels for September delivery at Chicago and New York, so that he gains on sales of 250,000 bushels, and loses on the purchases of 250,000 bushels. The transaction, as a whole, is not very profitable; but millers at home and abroad get wheat at the lowest market price on the dates of purchase, and the merchant whose sagacity, energy, and foresight led him to make a purchase, even when price conditions were unfavorable, is able to protect himself from excessive loss, without depressing the price to the original holder, and without having an incentive unduly to advance the price to the consumer.

87. The Ups and Downs of Securities 20

BY FRANCIS W. HIRST

In the first place the value of a security depends mainly upon a quality which a bale of cotton or a ton of coal does not possess. It is either actually or potentially interest-bearing. This quality is visible in a bond with coupons attached. A bond like that bought by subscribers to a Prussian state loan will have attached to it quarterly or half-yearly coupons, which can be cashed in almost any great centre of finance. If the government promises to redeem the bond at the end of a definite period at par, at its maturity the bond will be worth par. In the meantime it will rise and fall according to the conditions, first of German credit, secondly of the international rate of interest. But these tendencies may be wholly or in part counteracted by antagonistic movements of an international character, for instance, a great war which destroys a vast amount of capital and absorbs vast quantities of savings. But the Prussian bond is not likely to fluctuate much, and the limits of its fluctuations will be the more restricted the more nearly it approaches its maturity. Thus

Adapted from The Stock Exchange, 199-210. Copyright by Henry Holt & Co. (1911).

the value of a security depends mainly upon (1) the rate of interest, (2) the safety of the principal, and (3) the likelihood of the principal or the rate of interest either rising or falling. These are the main causes of a rise or fall in securities.

But the business of the Stock Exchange operators is to endeavor to forecast and discount in advance the natural fluctuations of intrinsic value. In the old days before the telegraph, fortunes were made by getting early information, or spreading false information of victories and defeats, which would enhance or depress the price of stocks. The first Rothschild laid the foundations of his immense. fortune by getting early news of important events. Nowadays the principle is still the same, but the art of anticipation has been made. much more doubtful and complicated. Telegraphs and telephones are open to all. What everybody reads in his morning paper is of no particular use to anybody in a speculative sense. Besides, many foreign governments keep large funds in London and Paris for the express purpose of supporting the market. Hence in the market for Government bonds, big movements are rare.

When we come to the prices of railroad and industrial stocks the causes of movement are much more difficult to detect, and the possibilities of making large profits by inside knowledge is much greater. The newspapers may be the conscious or unconscious tools of the manipulators. In new countries the banks are likely to be a working part of the speculative machinery. Thus in the United States those who use great fortunes in finance frequently have a controlling interest in a bank. What is called a "community of interest" may be established which will control important railroads and huge industrial corporations, as well as a number of banks and trust companies. The various ways in which such a community may manipulate a susceptible market like Wall Street might be made the subject of a long and fascinating volume.

Suppose that a powerful group wishes to create the appearance of a general trade depression in the United States. To do so is not at all impossible. The controlled railways may announce and even partially carry out a policy of reduced orders for rails, equipment, and repairs. They may ostentatiously proclaim an addition to the number of idle cars. Well-disciplined combinations of steel and textile mills may declare a curtailment of production. Banks may suddenly become ultra-conservative; the open accounts and credits of small speculative customers may be closed. In this way a general feeling of despondency can be created. Stocks will fall, partly in consequence of the action of the banks, causing a compulsory liquidation of speculative accounts, partly through the voluntary action

of speculators who think that trade, earnings, profits, and dividends are likely to decline. Thus a bear market is created. The syndicate can now employ huge funds to advantage in profitable purchases of those stocks and shares which fall most and are most responsive to ups and downs. Such a policy of course represents great difficulties and dangers. It must be carried out very cautiously and very secretly, and very honorably as between the members. And if it is too successful it may create a slump, or a panic, in which the community of interests may itself be seriously involved. For these and other reasons American operators and manipulators do not frequently enter upon a concerted plan for colossal bear operations. Such a scheme is unpopular. It offends public sentiment. A long bearish movement, accompanied by unemployment, reduced earnings, and economies in expenditure, produce all manner of unpleasant consequences, economic, social, and political. In fact big men often boast that they never operate upon the short side, never play for a fall.

Such a movement as that sketched above is comparatively rare, cautious, and temporary. Wall Street has of course to wait upon circumstances. Sometimes it is caught by the circumstances. But it must always try to adjust itself to economic and political conditions. A political assassination, a war, a movement against the trusts, unfavorable decisions in the courts, an unexpected downfall of the favourite political party, a catastrophe like the San Francisco earthquake such events as these may produce an irresistible flood. of liquidation against which the strongest combination of bankers. and corporation men will struggle in vain. In a general scramble produced by some unexpected event there is more likely to be a general loss than a general profit. For in the history of speculation the unexpected event is usually a calamity.

Real prosperity is built up gradually. The Stock Exchange anticipates and exaggerates it, until the speculative fabric has been reared so high above the real foundation that a crash is seen to be inevitable. Generally speaking, because of superior knowledge, the insiders are able to unload at high levels, just as they have been able to load at low levels. So, by speculating in stocks of a national size and significance, the outside public loses more than it gains. It begins to buy when they are dear, and it begins to sell when they are cheap.

For purposes of scientific analysis we may rest the theory of Stock Exchange quotations upon a distinction between prices and values. Prices are temporary; values are intrinsic; they move slowly. The price represents the momentary market value of a stock

the value of a security depends mainly upon (1) the rate of interest, (2) the safety of the principal, and (3) the likelihood of the principal or the rate of interest either rising or falling. These are the main causes of a rise or fall in securities.

But the business of the Stock Exchange operators is to endeavor to forecast and discount in advance the natural fluctuations of intrinsic value. In the old days before the telegraph, fortunes were made by getting early information, or spreading false information of victories and defeats, which would enhance or depress the price of stocks. The first Rothschild laid the foundations of his immense fortune by getting early news of important events. Nowadays the principle is still the same, but the art of anticipation has been made much more doubtful and complicated. Telegraphs and telephones are open to all. What everybody reads in his morning paper is of no particular use to anybody in a speculative sense. Besides, many foreign governments keep large funds in London and Paris for the express purpose of supporting the market. Hence in the market for Government bonds, big movements are rare.

When we come to the prices of railroad and industrial stocks the causes of movement are much more difficult to detect, and the possibilities of making large profits by inside knowledge is much greater. The newspapers may be the conscious or unconscious tools of the manipulators. In new countries the banks are likely to be a working part of the speculative machinery. Thus in the United States those who use great fortunes in finance frequently have a controlling interest in a bank. What is called a "community of interest" may be established which will control important railroads and huge industrial corporations, as well as a number of banks and trust companies. The various ways in which such a community may manipulate a susceptible market like Wall Street might be made the subject of a long and fascinating volume.

Suppose that a powerful group wishes to create the appearance of a general trade depression in the United States. To do so is not at all impossible. The controlled railways may announce and even partially carry out a policy of reduced orders for rails, equipment, and repairs. They may ostentatiously proclaim an addition to the number of idle cars. Well-disciplined combinations of steel and textile mills may declare a curtailment of production. Banks may suddenly become ultra-conservative; the open accounts and credits of small speculative customers may be closed. In this way a general feeling of despondency can be created. Stocks will fall, partly in consequence of the action of the banks, causing a compulsory liquidation of speculative accounts, partly through the voluntary action

of speculators who think that trade, earnings, profits, and dividends are likely to decline. Thus a bear market is created. The syndicate can now employ huge funds to advantage in profitable purchases of those stocks and shares which fall most and are most responsive to ups and downs. Such a policy of course represents great difficulties and dangers. It must be carried out very cautiously and very secretly, and very honorably as between the members. And if it is too successful it may create a slump, or a panic, in which the community of interests may itself be seriously involved. For these and other reasons American operators and manipulators do not frequently enter upon a concerted plan for colossal bear operations. Such a scheme is unpopular. It offends public sentiment. A long bearish movement, accompanied by unemployment, reduced earnings, and economies in expenditure, produce all manner of unpleasant consequences, economic, social, and political. In fact big men often boast that they never operate upon the short side, never play for a fall.

Such a movement as that sketched above is comparatively rare, cautious, and temporary. Wall Street has of course to wait upon circumstances. Sometimes it is caught by the circumstances. But it must always try to adjust itself to economic and political conditions. A political assassination, a war, a movement against the trusts, unfavorable decisions in the courts, an unexpected downfall of the favourite political party, a catastrophe like the San Francisco earthquake such events as these may produce an irresistible flood of liquidation against which the strongest combination of bankers and corporation men will struggle in vain. In a general scramble produced by some unexpected event there is more likely to be a general loss than a general profit. For in the history of speculation the unexpected event is usually a calamity.

Real prosperity is built up gradually. The Stock Exchange anticipates and exaggerates it, until the speculative fabric has been reared so high above the real foundation that a crash is seen to be inevitable. Generally speaking, because of superior knowledge, the insiders are able to unload at high levels, just as they have been able to load at low levels. So, by speculating in stocks of a national size and significance, the outside public loses more than it gains. It begins to buy when they are dear, and it begins to sell when they are cheap.

entific analysis we may rest the theory of ns upon a distinction between prices and rary; values are intrinsic; they move slowthe momentary market value of a stock