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his product for something more than the cost of production. This difference between markets is constant and normal and constitutes the reward for the services of the middleman and manufacturer. To ensure such normal profits, their desire is to escape the risks of fluctuations within the same market. This, to a large extent, the speculative market enables them to do. In the first place, the holder of any commodity may sell it to a speculator if he fears a coming fall in value, or a buyer can buy of a speculator for future delivery the actual commodity he needs, if he fears a rise. But the speculative market affords a better method of insurance by means of "hedging" transactions.

Under this method, for every trade transaction a corresponding transaction of the opposite kind is made in the speculative market. If a man buys for trade purposes, he sells short on the exchange an equal amount, and covers his short line as soon as he disposes of his first purchase. He has made two equal and opposite transactions, and if the price moves either way he loses on one and gains on the other. In this way he makes himself largely independent of speculative fluctuations.

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The same method is adopted by the elevator men, the exporters and the manufacturers. The big elevator companies, in the central markets are among the largest purchasers of wheat. Curiously enough, the development of the elevator system, which began as a separation of the functions of trading and storing and looked toward a more complete division of labor, has resulted in an opposite tendency. The big elevators once constructed, could not remain empty, and their owners perforce turned buyers in order to utilize their capacity and earn storage. It is clear that these enormous holdings, for long periods, would under the old method involve tremendous risks. Imagine an elevator company holding 5,000,000 bushels of wheat against the fluctuations of the market for several months. Conservative business would be impossible. Now, however, these risks are all thrown on the speculative class.

The same is true of the millers. Millers own large stores of wheat in country and terminal elevators, which is

insured by the same process. As soon as the miller buys in the country, or elsewhere, for grinding purposes, he sells an equivalent amount by telegraph on some exchange. Then when he disposes of his flour, he covers at the same moment his hedging sales by corresponding purchases. Since flour in the main fluctuates with the value of wheat, this affords nearly complete protection. The manufacturer of cotton, on the other hand, usually protects himself by purchases. Spinners do not hold such large stocks of their raw material as do the large millers, and often sell their product for delivery at home or abroad at some future time, while not in possession of any cotton at the moment. Immediately on placing such an order, purchases of the required amount of cotton may be made on the Cotton Exchange, and as soon as the spot cotton for manufacture is secured, the long interest on the exchange is sold out. He is insured by his purchases, as the miller by his sales.

This practice of hedging is now universal in the trade in grain and cotton. Not to hedge, is considered the most reckless kind of business among large dealers and millers That is, the man who keeps out of the speculative market is said to be a speculator. The spinner, however, uses the "future" market much less than the dealer or miller. Dealers and exporters hedge all their purchases. Nine-tenths of the cotton shipped to Liverpool is hedged there or in New York. Probably over ninety per cent of the great wheat holdings in the elevators of Duluth and Minneapolis are sold against in this way. Some of the most prominent elevator men of Chicago claim that every bushel which they buy for storage is invariably protected by a hedging sale. It may be that the men who control the elevator companies are independently "plungers" in the market, but this has nothing to do with their regular elevator business. Some millers or elevators may also carry a small amount, as a legitimate speculation; but in the main the rule of the trade is, to insure everything at all times and under all circumstances. It may be that in exceptional cases insurance is impracticable. For example a miller, who finds an unlisted quality of wheat grown in so small an area that it fluctuates independently of contract wheat, may not be willing to

insure for fear of losing at both ends of the transaction. This is perhaps still more true of the spinner using particular qualities of staple. For such persons the speculative market is of doubtful advantage.

Under these conditions the ultimate profits of the dealer or exporter depend both upon the prices in his hedging transactions and the prices in his trade transactions. In the first place he finds he can buy his wheat or cotton at a certain price; then he must choose the best market in which to hedge. This is his first calculation. In the case of cotton, it may be in New Orleans or New York or Liverpool. In the case of wheat it may be in New York or Chicago or St. Louis or the Northwestern markets, or even in Liverpool. When now he comes to sell his real commodity, he must cover his short sale in the market where it was made, but he may sell his commodity in any market at home or abroad entirely apart from any exchange. Here comes in his second calculation. Spot markets are always varying a little in price due to differences of local demand, changing freight rates and so forth. These factors all determine the place of ultimate sale and the amount of profit. In any case this profit is now purely a trader's profit. The chance of speculative gains or losses from wide fluctuations has disappeared. It may be that instead of making more on one transaction, than he loses on the other, the reverse may be true, in which case, however, the loss is a trader's, not a speculator's loss.

A difference of quality may be important in determining profits. An exporter may buy cotton for delivery at Memphis, and hedge in New York. If he meets with a demand from some European spinner for that particular grade, he may sell to him at a good figure, while perhaps covering his New York contract at a low price for middling. If there is no good market for his grade at the Southern ports, or abroad, he may find it better to ship to New York and deliver on what were originally intended for hedging contracts. Particularly is this true when his cotton proves to be of an inferior quality. In the same way when elevator companies have sold against their wheat in the market where it is stored, they will either deliver on their sales, or cover

and sell later for cash, according to the conditions of spot and future prices at the moment.

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With the complete shifting of risks of violent fluctuations to the shoulders of the speculative class, the margin of profit between producer and consumer has become very much narrowed. Under the old methods of forty years ago the trader had to allow a margin of five or ten cents or more a bushel on wheat to cover a possible fall in value. Today traders will carry wheat on a margin of a fraction of a cent, and the allowance for risk is practically nothing. Indeed sometimes a dealer will buy wheat in the country at the same price at which he makes his simultaneous sale on the exchange, trusting to the later transaction for his profit. In the same way the margin between wheat and flour has been reduced from more than fifty cents to less than ten cents a barrel. The cotton dealer and the exporter will now buy within fifty cents per bale of the price in the central market where formerly a margin of $2.50 or $3.00 per bale was required. Sometimes cotton is even bought in the South and hedged in Liverpool at the same price. The reduction of the middle-man's margin inures to the direct advantage of either the producer or consumer, or of both.



A principle of much importance in dealing with various popular fallacies is that which affirms that the real demand for goods is determined by the total amount of goods produced and offered for sale. We can increase our demand for goods only by increasing our production of goods. What we shall be able to buy is determined by what we have to sell. The total stock of goods is Janus-faced, constituting at once the total supply of goods and the total demand for goods. This principle, with several important applications, is well brought out in the extracts which follow.

*It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices. But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so; that they treat doubtful points as matter

* Say A Treatise on Political Economy (1803). 6th Am. Ed. Book I, Chapter XV, pp. 132-139.

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