Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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New York: Maynard, Merrill, and Co.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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PRODUCTS ON PAPER.*54. A curious off-shoot of the growth of this century is found in the multiplication of so-called "exchanges." The original idea of an "exchange" was a mart where a man with some definite commodity to sell could always find a buyer at some price, and where a man wanting to buy some definite commodity could always find a seller at some price. Thus, in their origin, "exchanges" were economic blessings, for they brought about between buyer and seller a maximum of nearness, with a minimum of friction. As "exchanges" grew, their original object pretty nearly vanished, and, instead of being marts, where commodities are exchanged, they have become places where bets on prices may be made, recorded and paid.


—In exchange jargon the only term now used, which indicates the original object to "exchanges," is "cash sales;" the rest savor of their degeneration, or, at least, of their change. "Shorts," "longs," "puts," "calls," "straddles," "spreads," "options," "privileges," and the like, are not indicative of commerce, but of speculation pure and simple.


—Taking the annual reports of the leading exchanges of the country, it is manifest that the majority of transactions are only bets; because far greater quantites of cotton, corn, wheat, petroleum, etc., are annually sold than the soil produces. It follows, then, that in our so-called "exchanges," the business of members is not so much to exchange commodities, either for themselves or their constituents, as to exchange opinions, and to fix a pecuniary penalty on the party who happens to be wrong, making it payable to the party who happens to be right. Dealing in these opinions may be very accurately called "trading in products on paper." If the word speculation be preferred, it means, in its nakedness, giving the producer of food, clothing, shelter, etc., the least possible for what he produces, and in making the consumer pay the most possible for what he eats, wears, builds, etc. Speculation produces nothing by itself, neither does it consume anything by itself: hence, the most flattering term we can give it, is to call it the middlemanism of trade. Speculation has never, and can never, benefit any country; the more rampant it has been, is, or may be, the worse its effects. Historically, look at the "South sea bubble," the craze for French assignats, the mania for Dutch tulips, etc., etc.


—Commerce is the exchange of facts; speculation is a chase of phantoms. It follows that the more time people devote to phantom-chasing, the less they have for the securing of facts. Suppose every man, woman and child in this country should to-day turn speculator, or dealer in products on paper, how much corn, wheat, cotton, pork, etc., would be produced? To-day's stock would be the maximum supply, and it would dwindle shortly to the zero point. Reserve the position, and assume that all dealers in products on paper should engage in producing or distributing the products of the soil, would there be any fewer mouths to feed, or backs to clothe? Would we have a bale less cotton, or a bushel less wheat?


—The flimsy argument that speculation affords labor a certain market hardly needs refuting. What sort of a market does speculation cause to exist? It is bound, by the nature of things, to injure labor either in its so-called producing or consuming phase. Has any system of trading any excuse for existence, when the best that can be said of it is, that it necessarily does something bad? The moral effect of dealing in products on paper it always debasing; for such dealings lead to idleness, and the road from idleness to vice is an air-line with a single steel-laid track.—"Quick come, quick go," is a truth as old as the stars; and the winnings made by dealing in products on paper are far more apt to be dissipated than the slower returns of legitimate ventures. A more practical way of regarding trading in products on paper is to examine how the business is done. In a majority of cases the man who promises to deliver what he does not possess, deposits in the hands of a third party some valuable thing, that is, some product of labor, as a guarantee of his sincerity. In exchange jargon this is called a "margin," and is but a fraction of the valuable things he has promised to deliver. Against this deposit, the man who promises to receive what he does not want, deposits a similar "margin." What mean these so-called "margins"? Are they not practically the same as the "stakes" wagered on a horse-race or a cock-fight? The conclusion, then, is forced upon us, that trading in products on paper amounts to gambling, more or less refined, and is as far removed from legitimate commerce as the equator from either pole. By promising to buy and receive that which he does not want, a speculator may make higher prices for producers; so much the worse for consumers. By promising to sell and deliver what he has not, he may make lower prices for consumers: so much the worse for producers.


—All production is the result of labor, capital, and some natural agent. Consumption is the same, for nothing can be consumed unless something equal be produced. Denying this, we must deny the indestructibility of matter. The equation of exchange, then, is P (or production)


—C (or consumption): now, if we add or subtract products on paper from either side of the equation, we get P ± S—C, or C ± S—P, either of which is absurd; for two things equal to one another can not remain equal to one another when either be increased or diminished, while the other remains unchanged. Reducing one and increasing the other makes the equation of exchange still more absurd. Unless it be claimed that production can exist without consumption, or consumption without production, it follows, mathematically, that speculation must injure labor.


—If a man have 100 bushels of wheat, the product of his labor, and I have ten gold cagles, the product of my labor, and we exchange each for each, the equation of exchange is labor—labor; if, however, I bet the man owing the wheat that within sixty days my money will buy 110 bushels of wheat instead of 100, and he bets to the contrary, the only exchange is one of opinion. At the end of the sixty days either I have some of his wheat and have given nothing for it, or he has some of my money and has no return to make. In either case something has been sliced from somebody's labor. Philosophically speaking, then, trading in products on paper benefits labor in no respect.


—And now let us see how it affects capital. Many speculators borrow money (which is capital in its most active form), but they borrow it on the products of others' labor, not on labor of their own. If the dealer in products on paper had not "middlemanized," the same amount of labor's product would call for the aid of capital to move it from a point of abundance to one of scarcity. If a thousand bushels of wheat passed through a thousand hands, it would never be but a thousand bushels of wheat.


—Speculation has for its vade mecum the doctrine of chances. Commerce seeks to actually have those things which people actually want. The hinges of speculation are two ifs; the hinges of commerce are two facts. Speculation is the subjunctive mood of the verb "to trade"; commerce is the indicative.


—A lighted lamp during a summer's night draws countless moths and other insects; the brighter it burns the more there are drawn: so it is with speculation; its lurid light attracts only to destroy, and its most certain victims are those who, in their first flight around it, feel only an exhilarating warmth. The smallest of the hovering unfortunates generally burn first, but, sooner or later, a common cremation furnace is the end of all.


—As speculators neither produce anything, nor consume anything, and, like all others, must live, it follows that they must either live on outsiders, or, like fishes, on one another.


—The world has no record of a speculator who died happy and respected. All one trader in products on paper wins, another must lose; the grand law of commerce, the law of mutual benefit, can not exist between traders in product on paper; the knife of every one is against the throat of every other; to take all, and give nothing, is the object of all.


—If, then, no one can gain without somebody losing in trading in products on paper, it seems fair to conclude that such trading will never add a whit to the wealth of nations.


Notes for this chapter

With the principles, moral and politico-economical, which this article implies, no one will disagree. Yet, while there is much that is only too true in the views of the writer, more than enough to warrant its publication in a strictly scientific work, there are some things in which no economist can agree with him. The two exaggerations into which the writer has fallen, are, first, his apparently wholesale condemnation of "exchanges"; and, then, his seemingly equally wholesale condemnation of speculation. He plainly confounds the use of both with their abuse. "Exchanges," though abused, are far from having departed entirely from their original purpose. They are still real markets, with some who deal in them, like all other markets; with this difference, however, that commodities are not carried thither in kind, and that transactions are closed in them, for goods previously examined or supposed to have been examined or represented by samples.

—It is by means of "exchanges" that brokers are enabled to bring buyers and sellers together, which, after all, constitutes the whole of business. The utility of these meetings can not be denied, spite of the abuses with which they are almost inevitably connected; They enable merchants to save the time which they would otherwise have to employ in journeys, to an fro, to meet each other. Then, they obviate, in certain cases, for the buyer or seller, the disadvantage it might be to him, to be the first to take steps to meet the other. Business men will appreciate this practically; better, perhaps, than political economists, theoretically. And so with, speculation. A speculator, in the non-abused sense of the term, is nothing more or less than a person who buys commodities or other exchangeable things, when he thinks that their prices have fallen before their real value, and has reason to believe that at a future time he will be able to sell them at a higher rate than that at which he bought them. The difference between the price which he buys them at, and the price at which he sells them again, should cover the interest on the sum invested, the costs of storage, etc.; it should, further, cover the risk incurred in the purchase, and pay a just compensation for the personal labor of the man making the operation. When this care is taken, speculation is entirely legitimate: but in all cases of speculation, there should be, to render it legitimate, an actual and not an entirely fictitious investment of capital. Speculation acts like the governor is a steam engine; it prevents the too great fluctuation of prices, in which respect it serves both producers and consumers. It intervenes in favor of producers by increasing the demand, when prices go below the cost of production; in favor of consumers, it prevents too great a rise in prices by throwing the products of producers on the market when there is a scarcity of them. (See EXCHANGE, AN; SPECULATION.)—ED.

Footnotes for PROPERTY

End of Notes

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