The Economic Function of Speculation
WE ARE WITNESSING A NEW KIND OF WARFARE
By W. H. JASSPON, President, Memphis Chamber of Commerce, Memphis, Tennessee
Delivered at Commodity Club Dinner, New York City, January 18, 1940
Vital Speeches of the Day, Vol. VI, pp. 364-367.
WHEN I accepted your invitation to speak here tonite, I decided that this is no time to indulge in pleasantries, or vague platitudes. This occasion affords an opportunity to discuss with you the effect of the current trend towards a more rigid control by the State over the lives and fortunes of its citizens and their established institutions.
Many of our highly organized and integrated commercial practices, as well as some manifestations of human behaviorism, are being examined today in the light of a new social philosophy which is predicated upon the theoretical assumption that the public welfare should be protected under the influence and direction of a paternalistic government, rather than thru the intelligent and practical self-regulation of already organized and experienced groups.
I do not deny either the demand or the need for Government supervision wherever the public interest is concerned. Surely we all believe that the rights of individuals to engage freely in commercial enterprise must be safe-guarded and encouraged, if our competitive system is to endure. We realize that all tendencies toward monopoly or manipulation must be voided by penalty legislation and regulation. Industrial fascism must be prevented here thru enforcement of the right of individual initiative, and by removing structural defects in our economic system which permit special privilege and unwarranted preferentials. These are logical functions of Government which only Government can perform. At the same time, there is danger in this very beneficence. It must be remembered that any law or regulation which restricts the full exercise of individual judgment in ordinary trade practices, to that degree narrows the gulf which divides the democratic from the totalitarian doctrines of State management.
The responsible businessman of today recognizes that he has a definite obligation to society. He has discovered that good ethics have been proved to be good business! This attitude is the rule rather than the exception, not only of the present leadership of commerce and industry, but it has extended to the great majority engaged therein. There is a distinct awareness or sensitivity to the value of favorable public opinion and a readiness for desirable and necessary reforms. "Let the buyer beware" has no place in the pattern of modern business policy. We have come to know that success in competitive and unrestricted trade depends upon the good will and the continued welfare of those from whom we buy and of those to whom we sell. In a democracy, organized business and government should have the same objective:— to perfect and strengthen the sensitive and delicate mechanism that have been developed and improved over the years to facilitate the free and continuous movement of commodities. Too often this remains only an ideal . . . with suspicion, prejudice and lack of faith the actuality. To go forward, both groups must have open and understanding minds. Any progressive program must depend on tolerance for honest differences of opinion, a cherished heritage of a free country. And may I add parenthetically—this difference of opinion is what produces buyers and sellers at the same time, and therefore business for brokers.
Anyone bold enough to speak of speculation as an economic factor assumes the risk of being labelled as an anti-social being. The public has received scant education in the science
and application of commodity future trading. You have been better technicians than public relation counsellors. A publicity program, as I see it, is your joint and immediate obligation to yourselves and the public.
By way of illustration, I doubt if it is generally known that every purchase contract executed on any exchange covers the purchase of the actual commodity specified and that simultaneously someone somewhere has contracted to sell the identical description. I do not believe, for example, that all traders themselves understand they can demand physical delivery on purchase contracts, or that a seller can likewise deliver the merchandise his contract calls for, receiving cash reimbursement exactly as if he had made that particular transaction with a particular purchaser. While all of this may be elementary to you, it is so much Greek to most people.
To many, a future market is still looked upon as merely a legalized gambling place. Because people are uninformed, it becomes easy for exchanges to be unjustly condemned, and they often are, as subversive devices designed by the crafty to extract profit from the gullible and innocent. Exchanges become a sort of scapegoat for those who sometimes guess wrong, and because of the impersonal and public character of trading markets, they serve as a ready-made issue for the demagogue who desires or requires an emotional appeal against business.
I do not believe it is even generally understood that an Exchange is simply a central market place, conceived and fashioned by the mind of man to give full play to, and for the convenience of, more flexible buying and selling. It is nothing more than the old-fashioned trading center brought up to date on a vast, streamlined scale to meet the requirements of modern business technique in an age of specialization and rapid turn-over, where buyers and sellers are often separated by great distances.
You and I know Exchanges neither make nor control prices. They simply register individual transactions in a public market place, and make the information immediately available to all within range of a newspaper and radio. But this function of Exchange performance needs to be further interpreted to the public. Understanding dispels fear.
In the past, perhaps, Exchange management has not always anticipated public reactions or revised rules quickly enough to reflect changed conditions. These are insufficient reasons, however, to condemn these institutions themselves, or to apply punitive regulations as corrective measures. The men who have brought future trading to its present high state of efficiency have been merchants primarily, not precision engineers, but they have been constantly improving the trading machine they have created. Highly competitive conditions have compelled the development of finer commercial ethics, so that many old-fashioned and traditional hang-overs of the horse-swapping era are no longer condoned or tolerated.
It should be obvious to anyone that you have a selfish interest in promoting reasonable and equitable contracts. These conditions are mandatory if you are to command wide and warranted public participation. After all, you have to be fair to your customers if you expect to hold their trade. Exchange management and Government, acting together in joint and sympathetic council, will help to maintain public confidence in the fairness and equity of your trading institutions. It will bring about a feeling of security in the equality
of opportunity and execution of orders, so necessary to secure greater market support. There is no question of the many advantages in the proper sort of cooperation! But administrative agencies need to temper their zeal with your experience and judgment so that no restrictions will be imposed that would narrow your markets and render them less useful. It should also be remembered that future markets already exist beyond our borders, and we do not want to expand their operations at the expense of our own exchanges. The fact that future trading as a marketing medium is more firmly intrenched in the American business system than ever before, would seem to indicate that an economic need is being met by the system.
The high standards of ethical conduct required of your members is not generally understood. The Clearing House operation, by which brokers' accounts are financially protected against daily fluctuations, is as mysterious to the uninitiated as an intricate mathematical formula.
1 have tried to imagine what the effect on our economic processes would be if our Exchange machinery was suddenly stopped. Undoubtedly, one definite consequence would be to throw a large burden back on the original producers. A lower average price for those commodities would result, and the whole process of merchandising would slow up.
For the crops and commodities where Exchanges offer price protection, the merchant, processor and warehouseman are able to supply a more stable and constant market and the merchandising spread is, therefore, lowered by reason of the reduced risk involved. We know too that Exchange operations enable banks to make large loans at minimum rates for the same reason. Exchanges have provided convenient additional market places where consumers everywhere may cover future requirements without investing in extensive and sometimes unavailable warehouse and financial facilities.
Of far-reaching importance, as I have already indicated, is the pitiless publicity of all Exchange transactions. The whole world has available a continuous record of prices, so that no buyer or seller now has to trade in the dark, as in the days of "rugged individualism". Hedging, as it is commonly termed, is only another commercial safeguard. It has become an accepted practice of prudent business policy, as are fee, credit, and liability insurance.
Commodity trading plays no favorites. It is equally available to big and little business, producer or processor, on the same terms and conditions, regardless of size or influence. To my mind, the value of an institution which plays such an important role in fostering a wholesome competitive economy is beyond debate.
I do not intend to dodge the specific factor of speculation. In the first place, man is by nature a chance-taking animal. He has always been, and he will no doubt always be, wherever society is free. It is a form of human behaviorism that we must acknowledge and accept. Sometimes we call it the exercise of judgment, mobilizing past experience to make a prognosis. However we may think of it, experience shows that the element of risk is one which enters into every phase of life; motivated by a desire to better a financial position, improve our social status, or for pride of accomplishment. In their present state of development most human beings will wager on something—a race, a game, a commodity or stock— often furtively and illegally. If one avenue is closed, other routes will be worked overtime, or new channels invented. Most people who are allowed to think and act for themselves will back their judgment in some manner. In the purchase or sale of commodities, the motive of gain naturally exists. But we have never succeeded in achieving morality thru law alone. You cannot enforce moral codes before the people are ready to accept them. The slow process of education comes first. The abortive attempt to legalize prohibition with its
concomitants of legal and moral evasions is too recent a memory to all of us. There is no real difference between trading or investing stocks or in other chattels. The question of safety or security is a matter of individual judgment. Not even the Government would presume to limit investment only to its bonds, as long as this is still a Democracy, and even United States bonds are not above declining. So where can you logically or even ethically draw the line of distribution? And who is to draw it without stifling the right of free choice?
In speculation, or investment in commodity futures, if you prefer, we see a paradox—a risk which someone is willing to initiate and assume makes it possible for another to limit his risk to exactly the same degree. So it follows that speculation assists in protecting necessary commercial commitments. It is this willingness of man to take a chance that increases buying power in a market during periods of seasonal crop movement, when the volume of goods is greater than open inventory accounts warrant. Speculation acts as a cushion to absorb the shock of surplus marketing. Instead of being a social hazard, speculation, under judicious control, is a very positive stabilizer. In one form or another it plays some part throughout the entire range of commercial transfers. Nor is there anything immoral, illegitimate, or anti-social involved. The cases of manipulation, restraint of trade, of illegal or immoral conduct are comparatively few—nor are they limited to trading in exchange futures. Both public opinion and the law are available for action in specific cases. And these should be dealt with uncompromisingly to preserve the integrity of, and faith in, our entire business mechanism. The question of whether an individual gains or loses has no bearing whatever on the validity of the system itself.
Low prices are often attributed to Exchange speculation, and then there are howls for reform, demands for the abolition of future trading, and for straight-jacket regulation. We have the stated conclusion of the Commodity Exchange Administration in its report of September 25, 1939, that during this last low-price cycle, there was "no apparent foundation in fact for such statements," but that on the contrary "large operators have been quite uniformly on the long side of the market." I think it is interesting to observe that our farming groups practice speculation, though they would very likely deny this intention. By reason of traditional marketing inhibitions, however, seldom does an agricultural producer seek the advantages of hedging even part of his prospective crop, during periods of satisfactory prices, to insure against a possible price decline. I am of the opinion this is largely due to a complete lack of knowledge of hedging procedure. Future trading is to many, who might advantageously use it to lessen risk, a vague, uncertain and dangerous instrument invented by the city to exploit the country. I once heard an Exchange defined as a place where "they cut, shuffle and deal; then telegraph you your hand." As I said before, here is a job for business and educational promotion. Good will on the part of the public will grow with a better understanding of your operations.
In looking over various commission house circulars, which seem to arrive with every mail. I am impressed by the preponderance of opinion (as if one could always be sure) as contrasted with statements of facts. Which is true that the lethargy of some people is stirred into action only thru the power of positive suggestion of expressed opinions, I wonder if, in the long run, this policy really works in your favor. This kind of trade promotion overlooks the psychology of the average man, who assumes full credit when he wins, but blames his counsellor or the Exchange when he loses. You know, it is a great comfort to have a straw-man to hold responsible for mistakes.
I know that you too disapprove of the tactics of certain
so-called commodity counsellors and I am glad to record that you are studying the problem to put a stop to a kind of malpractice for which you are not responsible) but which brings exchange trading into disrepute.
Progress in this complex age is retarded by the amount of disorderly thinking that prevails. There is too much thinking motivated by fear and defeatism; common sense becomes increasingly uncommon. Certainly reforms in the interest of a sound and workable economy are always desirable. But reform must grow out of need as a result of changed conditions. A business economy is never static nor is its course always predictable. Organizations, such as you represent, cannot afford to permit either chiselers or unscrupulous traders to remain in your midst. You have high standards of integrity among yourselves as is evidenced by the fact that millions of dollars change hands daily with only a mere nod or sign to acknowledge and confirm a trade. A means to a better understanding of your activities might be brought about by adding non-members or paid managements of capable and experienced men to your governing boards as the Stock Exchange has done. You cannot ignore your position as a political and bureaucratic football, and you will be kicked around until you have convinced public opinion that you are a vital spoke in the wheel of commerce.
We hear a great deal about protecting the public interest. Too much of it unfortunately is an expression of political emotionalism, not realism, or even sincere idealism. The truth is, we all desire to protect the public interest, because after all we are the public. We can and should be protected against inequality of opportunity and all forms of racketeering, but, unfortunately, we cannot be protected by edict against our own folly.
The liberal and progressive membership of any exchange subscribes to these principles as wholeheartedly as does any group of Governmental officials. Why then, is it necessary to put commodity Exchanges periodically on the spot? Where is it to the interest of any group to break down confidence in these agencies, which depend on public respect for their best service? Punish the rascals? By all means, but do not impeach the institution itself because some individuals misuse their privileges or abuse their public trust. I believe, with Edmund Burke, that you cannot indict a whole people because a few short-sighted and selfish men temporarily occupy high places. We do not destroy a building because a few termites have eaten away some of the timbers. We must steer a narrow course between the power of pressure groups on the one hand, and the tendency of Government, on the other, to arrogate unto itself the right to determine a proper social and economic order. Unfortunately, the former is often the cause of the latter. Government, in our society should be the colleague and not the competitor of individual activity. It should adopt the role of umpire, not player or high commissioner in the competitive game of Commerce. Above all we need to practice more adult thinking in dealing with our basic problems.
It is not my purpose to be destructively critical of the Commodity Exchange Administration, or to minimize their efforts to place trading in commodity futures on a high plane. I have already said that within proper spheres of action cooperation between the Exchanges and the Government is desirable and valuable to all. But when I read the concluding paragraph of their recent report to the Secretary of Agriculture, I can understand your apprehension over future policy. I quote:— "Of considerably broader character is the whole question of the economic utility of the futures trading system. Despite the fact that trading in commodity futures has been a recognized marketing practice for nearly a hundred years, during which time it has developed into a trade
having an average annual value of more than $23,000,000,000, there has been no comprehensive study made of its value in the social structure. Such a fundamental study would not only prove interesting and illuminating but might reveal important facts not now known or appreciated." It appears quite possible that most of your friction with this important agency arises from their implied doubt as to the efficacy of the whole practice of future trading, while your objective is to improve it—to make it work more efficiently and equitably. This should be the sole aim of the Commodity Exchange Administration as well.
I would meet the challenge squarely. The issue is clear. You are justified in protesting such vague generalities. The only effect of such statements is to weaken the vitality of your institution by undermining public confidence which you seek to cultivate. Our doubt it: that reform will ever be achieved by changing our business pattern thru Government mandate alone. This tendency was commented upon by former Justice Brandeis in the following words:— "Experience should teach us to be more on our guard to protect our liberties when the government's purposes are beneficent . . . The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning, but without understanding."
I do not believe Congress intended to delegate authority to any agency of the State to remodel our economic system. Nor am I prepared to accept the statement I have cited as an expression of forthright Government policy. I prefer to think that the language was merely the over-enthusiastic outburst of some zealot burning with an ambition to be the hero of a new social order. Yet in view of the recent exposures within the National Labor Relations Board, it would be unnatural if we failed to view with alarm any expansion of bureaucratic domination.
While I am aware that pressure and social groups are making increased demands upon Government, we cannot remain indifferent to the consequences of the State's willingness to share increasingly the burdens of the people. We are gradually abrogating fundamental principles of a Democratic Nation, that Government was designed to be the servant, not the master of its people, and the concept that those who are least governed are best governed.
I desire to refer briefly to the Reciprocal Trade Agreement Act. This is not an issue than can be judicially decided under the influence of petty politics, sectional claims, and the clamor of selfish interests who have been the beneficiaries of a vicious and indefensible tariff system. These biased groups cannot conceivably be expected to think or advise in terras of all the people. Here is an issue that tests the merit of our whole democratic legislative process.
We are sometimes too harsh in our criticism of politicians. We forget that they strive more often to reflect the wishes or their immediate constituencies, rather than to register their own judgment. We find one large farm organization in favor ot the Act, another opposed to it; exporting industries largely pro, other special interests against the present methods. But the considered conclusion of the more liberal-minded and economically experienced public, the men and women who have given objective study to the question—both Republicans and Democrats—is that this Reciprocal Trade Agreements Act is the only effective piece of tariff legislation we have enacted since we passed the "for revenue only" stage in our national tariff history.
When the arguments all boil down, I fear that opposition strategy will center chiefly around a provision that Congress must approve all agreements, because in Congress there will always be an opportunity to defeat ratification by the same log-rolling tactics with which all tariff legislation
has always been associated. If this problem of tariff and trade is ever to be resolved scientifically and from a broad National outlook, the political factor has to be eliminated. Decisions will have to rest with a disinterested group, who are motivated solely by a desire to assist in the maintenance of a better domestic industrial and agricultural economy thru the medium of exports. Regardless of what we may think of it in principle, no one would abolish our tariff system at this time under present world trade conditions. The State Department has proved its understanding of a desirable domestic trade policy, despite some minor flaws in some of the agreements.
To my mind our people do not realize the fact that the degree to which we may have to adjust our domestic economy depends entirely on the extent to which we may be able to sustain exports. We have both agricultural and industrial surpluses, and the buying power of Americans is indelibly linked with our ability to produce more and sell more abroad as well as here.
We have high-tariffed ourselves out of world markets, and created the incentive and demand for new production elsewhere among nations who are able to maintain the essential two-way trade. We price-pegged certain commodities above their world value and added to our trade difficulties and confusion. Nor is synthetic pricing an invention of the Roosevelt administration. It was invoked during the Hoover regime. So you see that pressure groups, or a disordered economy, know no party lines. We neither preached nor practiced self-containment here even in the horse and buggy era — it is even less possible today, and yet those who oppose the Agreement Act would have you believe we can live within our own limits; or, they do not know that we cannot increase exports unless we are prepared to accept increased imports. As most of us know, the so-called Hull formula is based upon obtaining specific contractual commitments in exchange for carefully adjusted tariff concessions. "Reciprocal" in name and fact is the essence of every agreement.
There is no question in my mind of the far-reaching value of these treaties under normal, or peace-time, conditions. But I am of the firm conviction that reciprocal trading is desperately urgent at this very time. It is a matter of regret that the element of legislative uncertainty caused the deferment of prospective treaties with Argentine and Uruguay and perhaps other countries.
We are witnessing a new kind of warfare. This is not a war of guns and men. It is a war whose offensive weapon is economic starvation. We are already advised that England is negotiating for the surplus cotton crops of the world, the meat and hides of South America, the wools of Australia, and so on, payable in Sterling or goods. They hope to deprive Germany of necessary supplies, and at the same time
to keep their trade routes open. But we must reckon on the effect of this new war policy to the United States. It will certainly curtail our direct exports of basic commodities to the Allies. It will also seriously impair our commercial relations with other countries. As their sales to the Allies increase, their need for more two-way trade will be proportionally greater. Our only hope is to quit our bickering quickly, awake to the implications of the times, and announce to the world that we too will carry on with reciprocal trade. At this critical hour, with our national economy unwillingly involved, we cannot afford the possible penalty of special-interest legislation. And I know of no wiser or more flexible means of meeting these rapidly shifting movements of world trade than by the extension of the Reciprocal Trade program. We have to see the situation in terms of National Welfare, and be willing, if need be, to make some individual sacrifice for the greater good of the nation as a whole, without which no one can prosper.
In these days of a war-wrecked world where National necessity and our own lack of foresight have conspired to imprison world trade behind retaliatory tariffs, quotas, exchange control, and forced self-service, the Reciprocal Trade Act stands out not only as a monument to the wisdom and capacity of our Secretary of State, Cordell Hull, but as a beacon light in a world of economic darkness.
"Peace thru trade" is no mere idle slogan of commercial idealism. It is a practical plan to avoid war. It was the loss of trade, thru a policy of militaristic waste, that finally forced Germany to take up arms. It can be a disordered internal economy that might crystallize a war psychology here —as a way out. We will stay out of this conflict, as far as Allied pressure is concerned; but we may succumb to our own folly. To you who deal in international commerce, it would be presumptuous on my part to enlarge further on this subject. So, I urge you, who believe as I do, to use every influence at your command to support this Reciprocal program, and to convey your sentiments to Congress individually and collectively when the issue comes up for debate.
I am deeply appreciative of your invitation and your forbearance. We are living in a time of crisis—our future is in doubt. There never was greater need for taking counsel together for mutual understanding. In times of war we forget our petty jealousies, our differences, and our personal ambitions in a common cause. Isn't it possible to do as much while we are yet at peace, to maintain peace? Let us strive for good will, for a better society among men, for the preservation of our American character. Let us by precept and example point the way to a shackled world; how free men can work together so that they may remain free. There is nothing more important—there is nothing more difficult to achieve, but in the words of James Hilton, "Miracles have happened, miracles can happen."