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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..d7b82bc --- /dev/null +++ b/.gitattributes @@ -0,0 +1,4 @@ +*.txt text eol=lf +*.htm text eol=lf +*.html text eol=lf +*.md text eol=lf diff --git a/75687-0.txt b/75687-0.txt new file mode 100644 index 0000000..ada9aec --- /dev/null +++ b/75687-0.txt @@ -0,0 +1,4409 @@ + +*** START OF THE PROJECT GUTENBERG EBOOK 75687 *** + + + + + +Transcriber’s Notes: + + Underscores “_” before and after a word or phrase indicate _italics_ + in the original text. + Small capitals have been converted to SOLID capitals. + Illustrations have been moved so they do not break up paragraphs. + Typographical and punctuation errors have been silently corrected. + + + + + The Cycles of + Speculation + + BY + Thomas Gibson + + [Illustration] + + + Published by + The Moody Corporation + 35 Nassau Street, New York + 1907 + + Copyright 1907, by + THE MOODY CORPORATION + All rights reserved + + THE MOODY-BARTON PRESS, ELIZABETH, N. J. + + + + +CONTENTS + + + Part I + Chapter Page + I. Introduction 5 + II. The Cycles of Speculation 21 + III. The Gold Supply 37 + IV. Money 59 + V. Political Influences, Crops, Etc. 77 + + Part II + VI. Puts and Calls 89 + VII. The Question of Dividends 101 + Basing Railroad Values 104 + Effects of Business Depression 105 + Undigested Securities 108 + How to Compute the Value of Rights 109 + Barometer of Averages 110 + Best Method of Trading 111 + Indication of Crises 112 + The Ordinary Swing of Prices 113 + The Factor of Safety 114 + Borrowing and Lending Stock 117 + Scalping 120 + Crop Damage 123 + Selection of Securities 124 + The Bank Statement 125 + The Cycles of Stock Speculation 133 + The Cycles of Grain Speculation 145 + The Cycles of Cotton Speculation 155 + Conclusion 163 + Bibliography 176 + + The successful speculator requires four things: + + 1--A knowledge of values. + 2--A knowledge of general conditions. + 3--A knowledge of the machinery of speculation--and + 4--Something besides. + + + + +I + +Introduction + + +The first step in the education of the speculator should be to clear +away the illusions which have grown rank through ignorance, and +flourished through prejudice. We have heard, and continue to hear, a +great deal of ethical talk on this subject, most of which emanates from +people who are not authorities, and who have little real conception +of the subject. It would be pretty safe to assume that a majority of +these same instructors speculate themselves. They place an arbitrary +construction on the word however, and draw a dividing line between +stock or cereal operations, and other forms of speculation, although +the basic principle is the same in all cases, i.e.: to buy what is +cheap and re-sell at a profit. One of the most ridiculous forms which +this pedantry assumes is the warning and preaching against speculation +by very rich men who made their own money speculating and could not +possibly have acquired it in any other way. Such expressions of opinion +are born largely of an exaggerated ego. + +The trouble with these critics and advisers is that they seldom +approach the subject in the right way. With a full knowledge of +the fact that speculation is an inherent part of human nature, and +that a majority of human beings are bound to indulge in it in spite +of everything, these sophists simply rail against the practice +indiscriminately instead of attempting to point out what is foolish +and fallacious. If we attack the practice in a general way little +will be accomplished. If we say, “do not speculate,” our audience +will perchance give us a respectful hearing,--and go on speculating. +If, however, we point out what is dangerous and unreasonable, confine +ourselves to attacking the evils and explaining the delusions, +some good may be done in an educational way. We may, if we show by +simple logic that the education and qualifications necessary to +success are too difficult to acquire, actually deter many people +from speculating in certain lines at all, a thing which could not +possibly be accomplished by mere blanket warnings against the practice. +One of the most serious blunders in the world is the common one of +under-estimating other people’s intelligence. People are ready and +willing to learn, and that they do learn is shown by the decreasing +crop of lambs. It is not nearly so easy for the dishonest promoters and +manipulators to market poor securities at high prices today as it was a +few years ago. And in this regard it may be pointed out that the press +has actually, although in many instances unconsciously, accomplished +a great deal on exactly the lines suggested above. Magazines and +newspapers have, in recent years, taken on an educational character. +Periodicals once devoted to fiction or history now deal largely with +business and social economics, and with the exposure of bad methods in +high places, the ruthless uncovering of false or misleading statistics, +and the simplification of questions hitherto involved; the public has +been gaining rapidly in education and understanding. The fact that much +space in leading periodicals is devoted to these subjects, is in itself +_prima facie_ evidence that the people can and will learn, for with +all due credit to the editors and publishers, it is certain that the +contents of magazines and newspapers are selected in accordance with +what the public demands and likes. + +No one will attempt to deny that a majority of public speculators +lose. In a former volume, the present writer undertook to establish +by analysis of a large number of public accounts, the fact that 80% +of the participators lost money. A number of critics commented on this +statement as a body blow to speculation, asserting that the writer +had shown that there was “80% against the player.” These writers +proceeded to compare this percentage with that existing in games of +pure chance, such as roulette, faro, etc., and wound up by pointing out +the tremendous drawback to the speculator through percentage against +the player. It seems incredible that any sane man should fall into such +laughable confusion of ideas. The percentage of players who lose in any +game has nothing to do with the percentage against the player. If these +critics established anything at all, it was that speculation was not +gambling; for it requires only a moment’s reflection to see that in any +mechanical gambling game where there is _any_ percentage, no matter how +small, in favor of the game, the percentage of players who eventually +lose must be 100. This being the case, the gentlemen mentioned were at +considerable pains to prove that, as 100 per cent. of the players did +not lose, speculation was not a gambling game in the strict sense of +the word. That is to say, it could not be correctly compared with any +mechanical device where the element of skill was absent. + +If we consider the matter in a gambling light, the percentage against +the speculator can be determined by the proportions of commissions, +interest, taxes, etc., to capital invested. Taking commission alone as +our basis, we will find that he who purchases a stock at $100 a share +and pays one-quarter of one per cent. commission, has a percentage +against him of one-quarter of one per cent. If the speculator trades +on limited margins the drawback increases accordingly. If we assume +that 100 shares of stock are purchased in a bucket-shop on a one point +margin, without intention or ability to “re-margin” the transaction, +the mechanical percentage is large (25%); if 10 points margin is +deposited, the mechanical percentage is reduced to 2½%, etc. In the +first instance, $25 or 25% of the $100 involved was lost when the +transaction was recorded, without any change in market price. In the +second instance, $25 was again lost or 2½% of the $1,000 involved. + +There is no doubt that fluctuations in prices of securities, cereals +and staples are frequently used as a basis for mere gambling +transactions. But the most remarkable feature of the whole problem is +the fact that the percentage of loss in transactions is _greater_ than +the mechanical percentage. In the work already mentioned, the writer +undertook to establish this. In 500 accounts examined, there was a loss +of $1,245,000, and profits of $288,000, leaving a deficit of $957,000. +The commission charges and interest amounted to only $275,000. There +thus appeared a loss of $682,000 which could not be attributed to a +gambling percentage. It may be added that the period considered in the +computations was from July, 1901, to March, 1903, and that the price of +the stock considered (U. S. Steel Common) was the same at the beginning +and the end of the period. + +This tends to again refute the theory of mere gambling, with a ruinous +percentage against the player, for no mechanical device could by any +possibility operate against the player to a greater extent than the +fixed percentage in favor of the machine. A gambling machine will stick +to its knitting. If, for example, we take the simplest form of gambling +device--two dice thrown from a cup,--we know that certain numbers +formed by adding the total spots which appear uppermost will show more +frequently than others. Thus the number two can be effected in but one +way, the number three in two ways, the number four in three ways, and +so on up to the number seven, which can be formed by six different +combinations, thus: + + 4 and 3 + 5 and 2 + 6 and 1 + 3 and 4 + 2 and 5 + 1 and 6 + +from which point the chances decrease until the number 12 can be formed +in only one way--two sixes. This proposition applies to all forms of +mechanical gambling, and is so simple in principle, and so distinct in +operation that if we make a fair number of casts, say 1,000, and do not +make more sevens than any other one number, we may be positive that the +dice are defective, or loaded. + +Therefore, if percentages hold true, we must attribute the surplus loss +in speculation to mental operations. In the total results mentioned, +these mental operations were so erroneous as to cause a loss greater +than the percentage itself; but, on the other hand, a certain number of +accounts showed profits; that is to say, the percentage was overcome, +which is again an obvious impossibility in true gambling. + +The conclusion is offered, therefore, that not only can poor methods +and imperfect understanding result in losses far in excess of a +demonstrated drawback, but that this drawback may be overcome by +other and more correct methods. It is difficult to understand why +the opponents of speculation are continually harping on these points +of gambling and percentage as bearing particularly on operations in +stocks or commodities. If a man buys a certain security because it is +cheap, or because he considers it cheap, and pays a certain commission +to a broker for effecting the transaction, he is no more playing a +percentage game than if he purchases a piece of real estate because it +is cheap and pays the real estate broker a commission for his services. + +Marginal trading is another abomination of the anti-speculative +element, but here again the critics do not discriminate between use and +abuse. Trading on insufficient margin is one of the greatest evils in +the speculative world and when, as is frequently the case, this evil +is combined with lack of knowledge as to values and conditions, the +result is certain loss. But what is objected to here is the hazy view +and comprehensive condemnation of _all_ marginal speculation. The line +of demarcation is usually carelessly drawn. If an individual buys 100 +shares of stock for cash, has it registered in his own name and later +borrows funds from his banker with these shares as collateral, he +escapes impeachment as a marginal speculator; but if he buys on margin, +and borrows from his broker the unpaid balance, he is a gambler. And +yet it would be hard to point out the difference in the two methods. +If we wish to go a little further afield, we may reduce a very large +percentage of the commercial structure to marginal trading. We may, in +short, place in this category every merchant who buys goods on credit +and every man who buys real estate on payments, if their object when +buying is to sell at a profit. + +It is highly probable that these contentions will be vigorously +attacked, on the theory that more evil than good results from +speculative ventures, and that therefore the whole structure should +be razed on a “greatest good to the greatest number” basis; but aside +from the intensely unphilosophical character of this view, it is not +at all probable that any such thing can be effected unless human +nature undergoes a radical change. Tear down every stock exchange in +the United States tomorrow, and people will be speculating, a majority +of them foolishly, in another week. The cure lies not in paternalism, +but in evolution and understanding. As has been said, more has been +accomplished in recent years by the educational crusade of the press +than by all the rantings and warnings of a century. We have our +periods of reckless over-indulgence, it is true, but the evil is +dwindling. The South Sea bubble would deceive a much smaller number of +people today than it did in the days of John Law. + +It is the object of the present work to point out, so far as the +abilities of the writer will permit, what essentials are required in +any form of speculation, whether on margins, or masquerading in the +guise of investment. As to this last distinction, it may be stated that +the word “speculation” is herein taken to mean the purchase of any +security or commodity because it is considered cheap, with the ultimate +intention of disposing of the property so purchased at a profit. In the +writer’s opinion this definition is correct. Speculation contemplates +a rise in price, and an accretion in principal. Investment refers to +interest returns on money. + +One of the most flagrant errors in speculation is an entirely mistaken +idea as to the _possibilities_ in this field. Nine men out of ten have +a deep-rooted conviction that if any individual could be right in his +main deductions for, say one or two years, he should make millions on +a small capital. This is a great mistake, and leads to numerous minor +errors which are productive of much loss in actual operations. The +business of speculation never did, and never will result in abnormal +profits. Large returns are sometimes made, it is true, but this fact +is also true of every other line of business. Certain individuals +grow very rich in Wall Street; this again is true of every commercial +branch. We hear now and then of a million dollar coup by a Morgan or a +Rockefeller, and do not stop to consider the great capital behind it. +If an individual makes five thousand dollars in a year’s speculative +ventures on a capital of twenty thousand, he is not considered a +Napoleon of finance, but he has accomplished much more, in proportion +to his capital, than Rockefeller would have accomplished if he had made +five millions on similar operations. + +In a recent conversation with a number of gentlemen who clung +tenaciously to this idea of sudden riches, the writer undertook to +establish his contention. Tapes were secured recording the fluctuations +of sugar stock during a twenty point decline. The skeptics were given a +hypothetical capital of $10,000 each, subjected to the ordinary rules +of trading as to margins, etc., informed that sugar would decline +twenty points before it again touched the first quotation established, +and invited to “get rich quick.” The result was ridiculous in the +extreme. Two of the experimenters lost their imaginary capital trying +to double up and show large returns. The third took an unfair stand, +by selling the maximum amount at the inception of the experiment and +closing it after the 20 point decline had appeared. His operations, +therefore, proved nothing. Here was a case where two traders, possessed +of an absolute fore-knowledge of what was to occur, lost everything +through the fault of over-speculation and the belief that abnormal +returns could be made if the ultimate fate of a market could be +correctly forecasted. Even if we assume that _every_ intermediate +_movement_ were known in advance, that after a ten point decline there +would be a five point advance, and that transactions were conducted to +the full possibilities of both original margin and accrued profits, the +result would not be the millions which dazzle the eyes and imagination +of the unsophisticated. But to assume any such trading is foolish. The +factor of safety would be wholly absent. No wise man will ever attempt +pyramiding, and no foolish man who does, will succeed. + +In order to clear the ground for discussion or study, the first thing +to eliminate is this wholly unsupported and mistaken idea of sudden +riches. No matter how correct the forecast of the future may be, +safety disappears in inverse ratio to the increased possibilities of +abnormal returns; and with the factor of safety continually ignored, +the final results are bound to be disastrous. + +It will also be necessary to dispel another illusion. If the speculator +imagines that he can operate successfully without preliminary hard +work to fit him for the business in hand he is grossly mistaken. It is +necessary to qualify in this field as well as in any other. Knowledge +of monetary conditions, values, interest rates, and in fact, of all +influences bearing directly or indirectly on the future of prices must +be acquired and thoroughly understood. Ignorance on any one point may +mean defeat. On the other hand, a study of such conditions means a +liberal education, valuable in every line of business life. It may be +further stated that the man who attempts to evade necessary labor and +research by placing his dependence on tips or charts, or the opinions +of others, cannot hope to succeed. The gambling idea must be put out of +the question entirely, and means sought whereby intelligent opinions +may be formed by both inductive and deductive reasoning. + +In preparing this work the temptation to enter more extensively into +fundamental principles has been great. It would be impossible to do +more than suggest a line of procedure in a single volume, and only +the most elemental requisites are set forth. And not only do the +prescribed limits of this volume forbid any exhaustive discussion, but +such discussion is unnecessary. On every subject of importance we have +books written by men of soberness and judgment, each a specialist in +his field. A bibliography has been appended to this volume suggesting +such works as are considered helpful. In this bibliography an attempt +has been made to choose such books as are clear and simple, rather than +those which are profound. + +If the task as herein outlined, appears formidable, it may be said +that it is absolutely necessary, and not so difficult as may appear. +Before the student has entered far into the subject, he will find +the matter interesting and will very quickly realize that the well +grounded contentions and discussions of men who examine and diagnose +economical questions correctly, are of more value than the combined +tips, guesses and poorly based opinions of all the professional +speculators and gamblers from one end of Wall Street to the other. This +form of basic knowledge is just as important to the active trader as +it is to the investor. If he can correctly judge of the general trend +of future prices, he may operate safely _with_ that trend instead of +floundering around helplessly in a slough of indecision, or possibly +working directly against the current. If, for example, he has good +solid reasons for expecting ultimately higher prices, he will not be +disturbed by temporary reactions and, instead of being frightened out +of his position through ignorance, he will take advantage of such +reactions to make his purchases or cheapen his holdings. Knowledge, in +this particular line as in all others, is the foundation of successful +ventures. + + + + +II + +The Cycles of Speculation + + +The great upward and downward swings of speculative prices, herein +referred to as cycles, have invariably preceded or accompanied +periods of business inflation or depression. This fact, apparently so +elemental, is often disregarded by that very large class of speculators +which is continually looking for artificial and unpregnant explanations +of price changes. There can be no doubt as to the existence of +manipulation, and, in rare cases, movements of considerable importance +may be traced to this source alone; but manipulation consists, in +its fullest sense, of the tactics resorted to for the purpose of +liquidating shares in anticipation of a decline which the long-distance +thinkers believe to be inevitable; or, per contra, for the accumulation +of shares prior to a great recovery or readjustment. It is seldom +employed as a positive means of enhancing or depressing values. In +fact, to do either by mere manipulation would be an impossibility. +Every observer of great speculative movements knows that at the highest +point of a movement, and during the first half of a decline everything +appears roseate, while at the lowest prices, and during the first half +of an advance, the reverse is true. + +There are several contributory causes which operate to produce these +false appearances. The primary cause is the curtailed perspective +and imperfect logic of the public investor or speculator. The most +difficult thing to drill into the mind of the unsophisticated is +the fact that speculation cannot possibly be successfully based on +appearances which are open and obvious. Such a process is a flat +contradiction of the word itself. It is unseen future developments +or, in some cases, hidden and submerged present truths which must be +consulted. Yet we find a great majority of the public element who +seek riches in the speculative arena, constantly harping on the large +business of certain corporations, and the excellent state of general +trade as a reason for purchasing shares. These factors have, in all +probability, been discounted in current prices. Generally speaking, the +present is of no more use than the past in forming opinions of future +price changes. It is a certainty that sales of stocks could not be made +in great volume to good advantage unless everything _did_ look rosy, +for who would purchase shares at high prices if the future appeared +threatening or unpropitious, and who would sell holdings in the face of +encouraging and inspiriting prospects. + +This brings us to the second phase of the question--the _creation_ +of false appearances, which is, in truth, the highest form of +manipulation. When so-called inside selling is going on, great business +is reported by railroad and producing corporations; dividends are +increased, and public expressions of confidence emanate from men of +high standing in the financial world. The effect of all this expressed +optimism is, market-wise, of a negative character. When it is most +prevalent and most decisive, prices halt or even decline. This period +and action represents selling at the only time when advantageous +selling is possible. In the main the truth only is told about existent +conditions, possibly about the near future. Nothing else is necessary; +but nevertheless the sellers are anticipating, not the events of the +next week or the next month, but of a more remote period where they see +probabilities in regard to which a discreet silence is maintained. + +The constantly recurring cycles of prices, the alternate inflation and +depression, must therefore be traced to something far more important +than the grossly exaggerated potentiality of mere manipulation. + + +Principal Crises of the Last Century. + +That crises in the financial world have occurred at more or less +regular periods is a matter of history. Since the beginning of the +nineteenth century ten of these readjustments have occurred. In 1812, +after ten years of prosperous conditions preceding the war of that +year, business fell off materially. The real panic, however, occurred +in 1814. Washington was taken by the British on August 24th, 1814, and +suspension of specie payments was general in the following two weeks. + +In 1824, the protective tariff enactments were followed by general +inflation in all lines of business. Two years later, in 1826, a general +depression occurred with many failures. The depression at this period +was even greater in England than in the United States, and many writers +attribute the entire trouble to European business reverses, but it is +probable that we had been living beyond our means and that this fact, +to say the least, aggravated the disturbance. + +In 1837, after six years of good times, another crisis occurred. This +depression was attributed to various causes. The great New York fire of +1835, the loss of charter by the United States Bank in 1836, and the +calling in of $37,500,000 of government deposits by President Jackson, +are all given due consideration. The actual panic, however, did not +appear until May 10, 1837. All the banks suspended specie payments, +and securities,--in fact all properties of whatever kind--fell +rapidly in value. The most plausible explanation of this crisis is +over-speculation in land. The other evils mentioned might easily have +been rectified by the recuperative powers of a growing country, had the +more serious element of wild inflation been absent. + +In 1848, after a long period of prosperity, broken only by the war with +Mexico, business inflation and over-speculation again brought about the +logical and inevitable result. Europe also had been over-speculating +again and a crisis in England soon extended to the United States. +Liquidation was drastic and the depression lasted until the discovery +of gold in California began to bear fruit. + +In 1857, one of the most serious, as well as the most short-lived, of +our crises occurred. Again speculation was extreme; December, 1856, +marked the high point in securities, and prices continued to sag for +some months; but it was not until August, 1857, that a panic occurred. + +In 1864, came a crash in speculative prices following tremendous +inflation. Between April, 1864, and April, 1865, leading stocks +declined from $50 to $100 per share. As the inflation of this period +was caused largely by the high prices of commodities and greatly +increased railroad earnings occasioned by the events of the Civil War, +most writers on the subject do not consider it in their theoretical +discussions of crises. + +In 1872, another boom was on, particularly in Iron and Steel. The +Chicago and Boston fires had not been as effective in breaking stock +prices as might have been expected. Prices of stocks began going down +materially in April, 1873, and in fact had been rather “toppy” during +the preceding years. This panic, like most of the others, was preceded +by enormous speculation and high prices. It is interesting to note that +while stocks were declining, general business was booming. The trained +minds of Wall Street were learning to discount the future at longer +range and more accurately. The iron and steel business exceeded all +former records in 1873, both in the matter of normal price and actual +production. + +In January, 1884, numerous failures and suspensions produced a panic +which was in reality the culmination of a long decline. As in 1872, +this panic was preceded by enormous general business. The steel and +iron trade again broke all records in 1882, and other lines were +equally prosperous. + +In 1893, the period of prosperity which followed the enactment of the +McKinley bill was rudely broken. Speculation had been rampant, as +usual. On May 4th, 1893, the National Cordage Company went into the +hands of a receiver. Only a year prior to that date, this corporation +was paying 12% in dividends and the stock was selling well above +par. There were many badly inflated stocks and many rotten spots in +the speculative stock markets. The Distillers and Cattle Feeders +shares fell from $70 to nothing, and were assessed $20 per share. +The aggregate liabilities of business failures in 1893 were almost +$350,000,000, over 20% greater than in 1892. Banks failed right and +left, and several leading railroad companies went into the hands of +receivers. + +In 1903, another period of depression occurred. It is doubtful if this +period can be rightly classed with the other crises already mentioned, +for it was more in the nature of a drastic but orderly retrenchment +than a panic, and the bull stock market of 1902 was again in full swing +early in 1904. + +In thus briefly detailing the crucial points of nineteenth century +financial affairs, there is no intention of entering an economic +discussion, and no pretence of giving anything like a comprehensive +history of the events preceding or following their recurrence. The +subject here discussed is speculation, and the object sought is to +gain knowledge that may be of value in forming opinions as to future +prices. We may gain some information of this character by analyzing the +following points: + + 1--Did price declines in stocks precede, accompany, or follow + panics, crises, or general business depression? + 2--What are the signs which usually precede such periods? + 3--What are the salient causes? + 4--Can any dependence be placed in the regularity + of these recurrences? + +On the first head it will be found that in all cases the top of the +stock market has been reached prior to the actual eruption in general +business. Stock speculation in 1814 and 1826 was not of great volume +nor importance, and cannot be given much consideration. + +Beginning with the panic of 1837 we find that the highest prices for +stocks were made in October, 1836, while panic conditions did not occur +until May, 1837. Preceding the panic of August, 1857, highest prices +were reached in the last months of 1856. Highest figures were recorded +in April, 1872, just one year prior to the panic of 1873. The stock +market anticipated the troubles of 1884 by 17 months of declining +prices. In January, 1892, stocks began declining and continued their +downward course until the panic of 1893 cleared the atmosphere. In our +last period of depression (1903) stocks had reached their pinnacle in +September, 1902, just one year before the market turned for the better. + +We find therefore that in the majority of instances, highest prices for +stocks were reached long before business troubles were openly apparent. +This action represents to a certain extent the selling of stocks by men +who were wise enough to foresee trouble. + +Another interesting fact in regard to crises is that they are usually +preceded by record-breaking business in all directions. As iron and +steel may be considered the best barometer of business conditions, the +following tables are instructive: + +PIG IRON PRODUCTION IN THE UNITED STATES SINCE 1860. + + Year Production + Tons + 1860 919,770 + 1861 731,544 + 1862 787,662 + 1863 947,604 + 1864 (Depression) 1,135,996 + 1865 931,582 + 1866 1,350,344 + 1867 1,461,626 + 1868 1,603,000 + 1869 1,916,641 + 1870 1,865,000 + 1871 1,911,608 + 1872 2,854,558 + 1873 (Depression) 2,560,963 + 1874 2,401,262 + 1875 2,023,733 + 1876 1,868,961 + 1877 2,066,594 + 1878 2,301,215 + 1879 2,741,853 + 1880 3,835,151 + 1881 4,144,254 + 1882 4,623,323 + 1883 4,595,510 + 1884 (Depression) 4,097,868 + 1885 4,044,526 + 1886 5,683,329 + 1887 6,417,148 + 1888 6,489,738 + 1889 7,603,642 + 1890 9,202,703 + 1891 8,279,870 + 1892 9,157,000 + 1893 (Depression) 7,124,502 + 1894 6,657,088 + 1895 9,446,308 + 1896 8,623,127 + 1897 9,652,860 + 1898 11,773,934 + 1899 13,620,703 + 1900 13,789,243 + 1901 15,878,354 + 1902 17,821,307 + 1903 (Depression) 18,009,252 + 1904 16,497,033 + 1905 22,992,380 + 1906 25,307,191 + +It will be observed that the high record of production has been reached +just prior to our greatest periods of depression, or during such +periods. + +The second phase of the question, “what signs usually precede such +periods?” opens a wide field for the student of speculative changes. +Some inspiration may be gained from an examination of the two points +already considered, i.e.: priority of price movements and business +inflation; but it would be extremely difficult to use them as guides +unless many other factors were given consideration. If we eliminate +the element of periodicity, any attempt to determine the turning point +by examination of advances in prices of stocks or volume of production +and consumption of commodities is futile. Using pig iron as a barometer +we might, after production has gradually increased from 8,623,127 tons +in 1896, to 15,878,354 in 1901, argue that a considerable reaction was +due in this line, but we would be out in our calculations two years and +two million tons. Neither can we accept the simple fact of a decline, +or the beginning of a decline in iron or in any other single commodity +as indicating lower prices for stocks; for however accurate iron may +be as a barometer of general business, it is not at all a barometer +of the stock market. It is practically certain that stock prices will +move either to higher or lower prices long before any reasons for such +movements are apparent to the ordinary observer. Future stock market +movements are largely deductive, and are not founded upon ordinary +industrial statistical evidence. + +There is, however, one method by which some light may be thrown upon +the subject of probable movements. A careful study of monetary +conditions and expansion of credits will frequently reveal dangers not +apparent in any other direction. It is scarcely necessary to say that +such examination must not be confined to one quarter, such as New York +City; or to one country, such as the United States. A comprehensive +view of the world’s monetary conditions will be necessary. This subject +is dealt with more fully in another chapter. + +There is much difference of opinion among writers and students of +economics as to the cause of depressions. Bagehot attributes it to +the fact that, “at particular times a great many stupid people have a +great deal of stupid money.” This writer contends that occasionally +money accumulates abnormally and craves an investment outlet. To use +his own words, “This blind capital seeks for some one to devour it, +and there is plethora; it finds some one, and there is speculation; it +is devoured, and there is a panic.” Horace White attributes panics to +over-speculation. Bonamy Price says: “A vast outlay in new enterprises +involving a large consumption of food and materials, whether in the way +of pure waste or temporary unproductiveness, ought always to suggest a +feeling of danger. This excess occurs in seasons of prosperity.” John +B. Clark holds that it is due to an excess of production; or an excess +of production in one line with a deficiency in others. Leone Levi: +“The main cause for the occurrence of crises is the sudden realization +of an insufficiency of capital to meet present demands.” Thorold +Rogers says: “The cause exists in the function of exchange; in the +expectation of unreasonable profits and in incorrect calculation.” It +was the late Henry George’s theory that depressions are brought about +by higher prices of land. He held that workers thrive as they have easy +access to natural opportunities for production, and are impoverished +as they are deprived of such opportunities. All periods of speculation +and inflation end in higher land values. Landlords call for a larger +percentage of the product than workers can afford to pay, and both +labor and capital become idle until there is a readjustment. Prof. W. +S. Jevons, and a host of others, attribute crises to sun spots and +their effects on harvests. And so on through a long line of theories. + +The consensus of opinion appears to favor the theory of +over-speculation, whether in realty, commodities, or the shares of +corporations, and this leads up to the question of periodicity. That +there has been a recurrence of these troubles about once in ten years +is not a debatable question. Nevertheless, many thinkers scout the +idea of this repetition at marked periods being other than fortuitous. +As prominent a student as Thorold Rogers, for example, ridicules the +theory of periodicity. Many hopeful people believe that in time we will +find means to avoid these bad spots; that the United States is a young +and enthusiastic country, and that we will gradually sober down in both +methods and effects. But against this theory lies the cold fact that +these cycles have occurred with as charming regularity in France and +England as they have in our own country, which would indicate that age +and seasoning does not produce any appreciable improvement. + +It is probable that the most acceptable theory as to the causes of +periodicity is the psychological contention. Human nature is much the +same throughout the civilized world. We suffer from a panic and a +period of depression, and we grow wary and conservative. This course +results in sound methods and accumulation. The business structure rests +on a firmer foundation. Gradually the hard lessons of the past are +forgotten by the older generation, and are entirely unlearned by the +new business generation, all of whom are optimists. Again we expand +our enterprises, again fortune favors us; the appetite for gold grows +greater as wealth accumulates; men who were economical and satisfied +on modest incomes now live extravagantly, and some of them dream of +millions. Capital is spread out thinly. Story after story is erected on +one foundation, and that foundation, sound enough at first, eventually +gives way. Then we must begin our careful building once more. The ten +year periods, therefore, may represent with more or less accuracy, +the lapse of time between wisdom and folly,--the yard-stick of human +intellect and experience. + +Many of the writers on this subject seem to strive for tangible reasons +for each depression. They dive into the subject for a cause and emerge +with an effect, or a handful of effects. For example, the depression +following 1893 was not caused by the failures of banks and other +business institutions, but the failures were caused by the depression. +It matters not that the failures ante-dated the bad conditions. Again, +the depression itself was produced by prior inflation. It was the +illness after over-stimulation. And so, in turn, we can ask what caused +the inflation; and the answer is “Human greed and human folly.” This +last analysis brings us around in a circle to the original theory of a +psychological cause. + +It is submitted that a dependence on periodicity of any kind, either in +the ten year cycles or in year to year events is fraught with danger +and cannot be adopted by the speculator. It is chart-playing pure and +simple, and the man who disposes of his stocks for no better reason +than that a depression appeared ten years ago, is liable to find +himself in the position of the chart-enthusiast, who, after tracing +a marked uniformity in movements for a period of years, runs into +reverses and loses all. + +It is not meant to say that a knowledge of the past is without value. +Inductive reasoning is almost as important as deductive reasoning, +when properly employed and applied. If we scrutinize the history of +past crises and great movements with a view to determining the salient +causes therefor, a great deal has been gained, for we may apply this +knowledge to existent elements lying parallel to those which caused +trouble in the past, and thus decide what is probable in the future. +If, on the other hand, we place dependence on mere repetition, we gain +nothing in education and stand in constant danger. + +It may be contended that the active speculator has little to do with +ten year cycles or their causes, but this is not the case. A correct +understanding of the reasons for the great cycles will simplify the +study of smaller intermediate movements. Much knowledge applicable +to year to year movements will be gained. Monetary troubles, for +example, occur almost annually, and their effects on market movements +are usually, (not always), similar to those of more widely separated +periods, but, of course, in a lesser degree. + + + + +III + +The Gold Supply + + +It may be stated without hesitation that the effect of the increasing +supply of gold upon prices of all bonds, shares, or commodities which +may be classed as speculative, is more decided and certain in its +operation than any other single factor. The process of readjustment due +to this cause would be slow and regular if the principles at issue were +universally and clearly understood. Not being generally recognized, +however, the changes wrought by what is naturally an insidious factor +are, at times, spasmodic and feverish. It is a remarkable fact that +whenever a revolution occurs in any economic or financial process +which is, by its nature, concealed or recondite, its existence and +influence are discovered by a number of students simultaneously but +independently. Important reversions or modifications may be submerged +for a long period, and suddenly light is offered from all parts of +the thinking world. It is probable that this intellectual phenomenon +extends to, or is communicated to the financial world, and that marked +and drastic changes in the affected quarters represent a belated +recognition of forces hitherto unknown, and the readjustment of +affairs by those who see first and furthest. That the operations of +this minority will be important goes without saying. The faculty to +grasp fully and quickly anything salient bearing on financial affairs +is the ground-work of riches and consequently the trained minds of +great holders of shares or commodities will respond most readily to +sound basic arguments, and the greatest holders can often make of +their knowledge a two-edged sword. For example, certain large holders +of bonds, recognizing the fact that increasing gold production means +higher interest rates, and consequently lower prices for bonds, would +be able to dispose of bonds to advantage because of the apparent +general prosperity growing out of this same production of gold. It may +be assumed that in pointing out in interviews, etc., this reign of +prosperity, the gentlemen in question would modestly omit to mention +that the same influences which were causing high prices and much +business in some quarters, were working damage in others. + +Something of this kind has been going on in our bond and stock +markets of late. The inevitable influence of gold on prices has made +itself slowly felt for a long period, but it is only in the last year +that a considerable number of individuals whose operations are of +importance in the financial world have come to recognize how powerful +this influence is. Price changes in divers securities and commodities +hitherto unaccounted for, or attributed to wrong influences, have +suddenly been explained to a number of important financiers, and a +correct understanding of the problem has undoubtedly resulted in +radical readjustments in some quarters. With that pertinacity in error +which seems to distinguish the ordinary speculator, he has, however, +gone on attributing these processes of equilibration to causes which +have only a limited bearing on the case. The recent heavy decline in +bonds and stocks, for example, was popularly ascribed to political +and legislative action against railroads. Scarcity of money was given +second place in these deductions, and gold production third place, or +no place at all. If we reverse this order of importance and give gold +production first place, monetary affairs second place, and political +affairs third place, we are nearer the truth. It looks a little +ridiculous that the scope of intelligent perspective should be blocked +by three thousand miles of water, and that the unthinking majority +who ascribe our decline in bonds to local politics should have failed +to recognize so potent a fact as that the decline was world-wide; +but such is the case. The readjustment in bonds was due to excessive +over-production of gold, and it may be safely assumed that so long as +this over-production continues to increase rapidly, bonds will continue +low in price or, what amounts to the same thing, interest rates will +remain high. + +As to the importance of a correct understanding on this subject of gold +supply and its influence on prices, I quote from Mr. Byron W. Holt’s +book “The Gold Supply and Prosperity,” which, I may add, is used as the +text book for this chapter. Mr. Holt says: + + “This is the great problem that now confronts the + financial world and demands solution of every + investor. Not to solve it may mean great loss and + possible failure. To solve it means success and + greatly enhanced wealth for all who now have either a + fair share of this world’s goods or who have credit + and can intelligently go in debt for a large amount.” + +As speculation or investment-speculation, as defined in the +introduction to this book, are the subjects under discussion it is the +intention to take up, in turn, such points as bear particularly upon +price changes of speculative shares and commodities influenced by our +increasing supply of gold. The main points to be considered are as +follows: + + 1--The effect upon bonds and preferred stocks having a fixed + rate of income. + 2--The effect upon common stocks of railroad corporations. + 3--The effect upon stocks of industrial corporations. + 4--The effect upon speculative commodities--wheat, corn, + oats, cotton, etc. + +For the purpose of argument it will be assumed in this discussion that +our supply of gold is rapidly increasing. We know that such has been +the case in recent years, and it is the opinion of most students that +this increase may be confidently expected to continue. To quote again +from the work already mentioned: + +“Both the output and supply of gold are likely to increase for many +years. + +“While the future output of gold is, of necessity, unknown and +uncertain, there is great unanimity of opinion, among mining experts, +on this point. It appears to be generally recognized that, during the +last twenty years, the industry of gold mining, or rather of gold +production, has been established on a very different and much more +certain basis than any previously existing. No longer is the output +of gold dependent mainly, or even largely, upon placer mining and the +chance finds of ‘free’ gold. The supply of gold, in rock, sand, clay, +and water, being inexhaustible, it is now possible, by machinery and +metallurgical processes, to extract gold, in paying quantities, from +many forms of these vast store-houses. To such an extent is this true +that the future supply of gold is even more secure than is that of +coal, iron, lumber, wheat or cotton. + +“Even if prospecting were to stop and attention were to be devoted +only to the gold mines and bodies already discovered, and geologically +in sight, it is probable that the output of gold would continue to +increase for many years. As Mr. Selwyn-Brown, a gold mining expert, +tells us in his very interesting article, ‘as the rich surface deposits +are being worked out, improvements in mining and metallurgical +processes are enabling poorer and poorer deposits to be worked.’ That +is, improvements in ‘stamp mills,’ cyanide mills, dredging machines and +other gold extracting apparatus and processes are being made so rapidly +that it is, every year, becoming profitable to work lower and lower +grades of ore, sand and earth. As the grade declines the quantity in +sight increases rapidly. In fact there are almost literally mountains +of low grade gold ore that can even now be worked profitably. Some of +the largest, most productive and most profitable mines of today contain +ore averaging less than $3 and, in some instances, only $2 of gold per +ton. + +“The supply of such ore being inexhaustible the output depends upon +the number and size of the mills employed to extract the gold. It is +reasonably certain that, for years to come, the improvements in methods +and processes of mining will more than keep pace with both the decline +in the quality of the ore and the increase in the cost of mining due to +rising prices and wages, occasioned by the depreciation of gold. + +“In view of all the facts, Mr. Selwyn-Brown’s conclusion that ‘a +progressive increase each year may confidently be expected’ is +conservative. This conclusion, is almost a certainty. The uncertainty +lies in the possibility, if not probability, either of discovering +many important new mines in the practically unexplored parts of every +continent, or of making improvements that will radically reduce the +cost of extracting gold. In either case the increase in the output of +gold might be not simply arithmetically but geometrically progressive.” + +Admitting that the question of gold production is debatable, it remains +for the future to develop any radical change, and it will be necessary +for the student to decide this point for himself either by the light +of facts as yet not established, or by accepting theories as yet +not convincingly erected. If a change occurs, or may reasonably be +expected, an understanding of the subject from the positive side of +the question loses none of its value. The principles involved could be +as successfully applied in reading the probable future by modifying or +reversing effects, and reconciling them to a modification or reversal +in the cause. If, for example, we accept the theory that increased gold +production means advancing commodity prices, and find reason later +to believe that gold production will cease to maintain its ratio of +increase, we may alter our views accordingly so far as this single +influence is concerned. + +_1--The effect of the increasing gold production on bonds and preferred +stocks having a fixed rate of income._ + +In this division of the question the crux of the whole matter is +interest on money. The question might, in fact, be stated thus: “What +is the effect of increasing gold supply on money interest rates?” and +having solved that problem, the original inquiry is answered. + +To reach a reasonable solution we must first examine the effect of an +unduly increasing supply of gold on commodity prices. Over-production +in any quarter inevitably leads to lower prices. Gold being a fixed +standard cannot decline in figures, but it does so in fact. That is to +say, the flexible prices of things which gold will buy rise to fill +the gap. Thus, since 1896, prices of commodities have risen 50%. The +man who loaned money ten years ago finds its purchasing power impaired +33⅓%, when it is returned to him today, for the reason that commodity +prices having advanced 50% in the interim, his dollar will now buy only +66⅔% of what it would buy in 1897. This impairment of principal will +be covered, in part at least, by interest rates. This effect, if not +recognized and arbitrary would adjust itself automatically, regardless +of whether or not investors recognize the influence of changing values +of gold, for money, finding higher returns in other quarters, would +speedily desert the long-term, fixed-interest investment field, and +prices of such securities would decline through lack of demand. + +On the subject of interest rates Mr. Holt says: + + “But there is another reason why interest rates + should be high when prices are rising. When money + is shrinking in value interest rates should be high + to make up, or partly make up, the losses on the + principals of loans. To illustrate: Suppose that + prices are rising 10% a year. This means that the + purchasing power of money is declining about 10% a + year. Suppose, then, that $100 were loaned for one + year at 5%. At the end of the year the lender would + have $105; but with this $105 he could buy only about + as much as he could have bought with $95, at the + beginning of the year. In reality, he has received + no interest at all but has, instead, paid $5 to the + man for holding his $100. The man with money to + loan cannot afford to do business in this way. He + is usually as wise as are his neighbors, and fully + as able to protect his own interests and to get all + his money is worth, either by buying real property, + investing in bonds and stock or by loaning on notes + or on call.” + +In submitting the above contentions it must be fairly stated that +there is some diversity of opinion as to the effects of gold on +interest rates. A few writers demur to the theory; others hold that +the effect is nil, and one or two openly adopt the negative side +of the discussion, and state that more money means lower rates of +interest. The majority of recent investigators, however, appear to be +accepting the theory as given herein, and it may be added that prices +of the class of securities considered have borne out the hypothesis +faithfully, and that the minority have failed to offer convincing +explanations of this readjustment. It will not do to point to the +fact that money has been fully employed in constructive rather than +investment fields of late; for while this is true enough, it does not +explain why gilt-edged bonds such as British Consols have declined +in value, while stocks and shares which did not bear the onus of +circumscribed returns have advanced. There are, of course, contributory +causes: the Labor-Socialistic Government in England no doubt affects +the prices of consols, but this influence is specific, and loses +most of its force when we consider that not only these particular +securities, but practically all others of their class the world over +have suffered a radical decline. In other words, interest rates have +grown comprehensively higher. The theory appears sound, is borne out +by events, and mere denial does not weaken it. It may well be accepted +until its opponents succeed in giving us something more convincing in +its place. + +In support of the theory, Mr. Holt reproduces the following table of +British bonds from Moody’s Magazine for October, 1906. + +PRICES OF BRITISH INVESTMENT BONDS. + + % 1906 1905 1904 1896 + British Consols 2½ 86½ 89⅛ 88½ 113⅞[1] + Met. Consols 3½ 102 104 104½ 128¾ + London County 3 88½ 94½ 93 128¾ + Leeds 4 108 109 111½ 130½ + Liverpool 3½ 107 109 109 144¼ + Manchester 4 123 128¾ 124¾ 159 + New South Wales 3½ 100½ 100 96 112¼ + Queensland 3½ 99½ 99 96 111½ + Canada 3 98½ 100½ 97 107¼ + Cape 3½ 97 98 95 120 + Lon. & N. Western 3 93 96 95 124¾ + Midland 2½ 76 79 78 124¾[2] + Great Western 4 123 127 123½ 164 + ----- ----- ----- ----- ----- + Average 3.3 100.2 101.8 100.9 128.4 + +[1] Then 2¾%. + +[2] Then 3%. + + “Thus,” comments the writer, “these 13 British bonds, + supposedly the safest and least speculative of all + securities, have declined an average of over 28 + points in ten years. Considering incomes and present + prices, the unfortunate investors in these bonds have + not only received less than 1% on their investments, + during the last ten years, but, should they sell + their bonds, they would find that the proceeds have + lost 30% of the purchasing power of a similar amount + ten years ago. Altogether, they have suffered a net + loss, over incomes, of more than 20%, or over 2% a + year.” + +There are other economic influences affecting interest rates through +gold supply, but the one given appears to the writer the most direct +and forcible when applied to readjustment of prices to income. + +In weighing the influence of increasing gold production and its effect +upon interest rates through the advancing prices of commodities, the +student is liable to fall into one grave error. He may perhaps jump +to the conclusion that gradually advancing prices of commodities +mean gradually advancing rates of interest. This is not at all the +case. A sustained ratio of advance means sustained high rates of +interest--nothing more. In order to make this clear let us go back to +the original principle. + +Increasing prices for commodities mean an impairment of the purchasing +power of money. If the purchasing power of money is impaired 2% per +annum through increasing prices of commodities, and the normal rate +of interest is 4%, we can cover the deficiency by making the interest +rate 6% _and leaving it there as long as this ratio of impairment is +maintained_. In other words the man who loans $1,000 at 6% loses $20.00 +per annum in the impairment of capital and receives normal interest of +$40.00 per annum and $20 extra to cover his loss in capital. Strictly +speaking the extra 2% is not interest at all, but an amortization +payment. It matters not how high prices ultimately go, he receives each +year a bonus sufficient to cover his loss in capital, and the interest +rate remains 6%. + +Therefore, if prices of commodities advanced for ten years and then +ceased to advance, but were maintained at the highest figures reached, +interest rates would fall because there would be no further impairment +of capital, and what was formerly amortization, would become usury. On +the other hand, if a new ratio of increase should occur in commodity +prices and they should advance 4% per annum, interest rates would, if +fully adjusted, reach 8%-4% for normal interest, and 4% for impairment +of capital. + + +_2--The effect upon Common Stocks of Railroad Corporations._ + +Here the effect of high interest rates is, or in time may be, offset +by returns in the form of dividends, undivided profits, improvement of +property, or the fact that income is not limited. But there is another +trouble, and a serious one, for which the gold supply is responsible. + +If the increasing supply of gold is responsible for higher commodity +prices it must be at once apparent that the building, equipment +and maintenance of railway properties costs more and more as all +commodities, including labor, advance in price. This would be all +right if the selling commodity, i.e.: transportation, also advanced +proportionately in price; but it is so difficult to override popular +prejudice and widespread misunderstanding on this point, that we find +continued agitation and legislation not only against advancing rates, +but with a view to reducing those which already obtain. There must, +of course, be a limit to this thing, and if the cost of production +continues to increase, the railroads must be permitted to demand +higher prices for transportation. Otherwise a point would finally +be reached where every railroad in the country would be forced into +bankruptcy. The great danger lies in a belated assimilation of +this truth by the masses, and too much demagoguery on the part of +politicians who do understand, but, being politicians, prefer to +reflect the views of a majority of constituents, rather than to enter +a campaign of proselyting. That evils have been fostered and wrongs +committed by eminent railroad financiers is certain; but there is +considerable confusion of ideas on this head. Over-capitalization, +illegal combinations, manipulation of funds for private gain, and the +swelling of dividends for stock-jobbing purposes, when the funds so +distributed should have gone into improvements or surplus, have all +played their part in arousing the wrath and indignation of the great +majority, and they are, as a class, prone to jump to the conclusion +that any and every railroad corporation is charging unduly high rates +for its services, and making exorbitant returns on invested capital. +This has, no doubt, been more or less true in the past in certain cases +where extremely high rates were made, and the apparent returns on +money attenuated by over-capitalization; but this evil is gradually +decreasing, and the real fight is, or should be, against these abuses. +The railroads are suffering for the sins of the past, and may suffer +still further; but the time is not far distant when, unless conditions +change radically, the railroads must be allowed more latitude in the +adjustment of rates. + +The prevalent opinion, that needed reforms which strike at the root +of the evils mentioned above is a bear argument, is another popular +fallacy. Such reforms intelligently conceived, and unswervingly carried +out, are all in favor of the small shareholder. If laws can be enacted +which will prevent individual interests from plundering or misusing +the funds of corporations, and which will compel these corporations to +issue reports and statements which are not so involved and complex as +to be beyond the ordinary comprehension, the small holder or investor +will have a better show. But, having cured these evils, no laws can +possibly endure which contemplate curtailing fair returns on money, and +fair profits through natural enhancement in values. + +But, however fair or cheering this view may appear, the fact remains +that it will be slow in its acceptance and slower in its operation. We +may therefore summarize the situation thus. Increasing production of +gold brings about increasing cost of operation, and so long as cost of +operation is advanced with no corresponding advance in selling price of +transportation, the ratio of profits will gradually decrease until a +vanishing point is reached. + +In the last analysis, a probable tardy and reluctant recognition of the +true status of the case warrants the belief that for the near future, +the railroads have a hard time ahead of them, and that so far as this +single important influence is concerned, it is decidedly a bearish +factor. + + +_3--The effect upon stocks of industrial corporations._ + +Here we have a different proposition. Rising prices for commodities +do not interfere with the earning power of corporations which produce +and sell commodities, the prices of which are not limited by law. In +fact these corporations are, in many cases, gainers by this influence +which tends to advance prices, not only of what they buy, but of what +they sell. It may be added, parenthetically, that railroad companies +which own valuable coal lands, etc., find the bad influences already +discussed partially offset by the gain from such holdings. The railroad +company, however, may be considered as pre-eminently a seller of +transportation and has been so regarded herein. + +The industrial corporations whose products are subject to regulation +by law, such as gas and electric lighting companies, are subject to +practically the same influences as those which operate against the +prices of railroad stocks. Their cost of production advances easily +and inevitably, and the selling price remains fixed, or advances with +difficulty and under protest. + + +_4--The effect on speculative commodities--Wheat, Corn, Oats, Cotton, +etc._ + +This phase of the subject will be dismissed with a few words. If the +contentions already made are accepted, it is apparent that all such +commodities will gradually seek a higher level. A brief examination +of statistics will show that this readjustment has been going on for +years. The gradually ascending pivotal point, or average price, is +particularly marked in the cheaper cereals,--corn and oats, and also in +cotton. This is probably due to the fact that wages have not advanced +as rapidly as have prices of living. It is found that in periods of +hard times consumption of cheaper foodstuffs and textile fabrics +is increased, while the consumption of higher priced commodities +and luxuries are curtailed. The wage-earner, therefore, has been +in reality living in a regime of hard times, although this fact is +easily submerged by steadier employment, by a fictitious appearance +of general prosperity, and the ability to spend a larger number of +dollars, without realizing fully the loss of purchasing power in the +dollars. + +It would be out of the question to attempt to enter anything like +a comprehensive study of the question of gold production and its +effects in a single chapter, or even in a single volume; neither is it +necessary to the purposes of this work, for the student who desires +a comprehensive education in this regard will find ample means and +material ready to his hand. From the standpoint of investment and +speculation alone, it is submitted that increasing production of gold +is, to use the phraseology of the street, bearish on long time bonds +and other securities yielding a limited rate of interest or income, +temporarily bearish on railroad stocks, bullish on industrial shares, +except as noted, and bullish on speculative commodities. + +At the risk of indulging in undue reiteration, attention will again be +called to the fallacy of considering such subjects as the one of gold +production too remote in concrete effects, or too sluggish in operation +to be of importance to the speculator. A thorough understanding of +cause and effect bears upon the operations of today, in that it +anticipates the results of tomorrow. Through knowledge of influences of +this character, serious error may be avoided. For example, one of the +profound axioms of the speculative world is that bonds advance first +and stocks afterwards. If we understand _why_ bonds have been, and are +at present, declining we may be justified in modifying this view and +considering the axiom more or less obsolete. He who operates an engine +without a clear understanding of its motive power is likely to get into +trouble, or perhaps be blown up. + +It may be pointed out also, that a too literal acceptance of the +suggested effects of this or any other great price influence is highly +dangerous. Even while gold production continues to increase rapidly, +prices, not only of shares, but of all things, will overleap themselves +and will also swing backwards to the other extreme. The cycles are +not completed, until both zenith and nadir have been touched. Changes +in gold production will not prevent declines in prices; they will, +however, interfere with the regularity of the cycles. + +This chapter may be fittingly closed with the following list of +conclusions reached by Mr. Holt, in the work already mentioned. These +conclusions cover all the points herein presented, and others which are +of interest and value: + + “1--That both the output and supply of gold are + likely to increase rapidly for many years. + + “2--That, therefore, the value of gold will + depreciate as the quantity increases. + + “3--That this depreciation will be measured by the + rise in the average price level. + + “4--That a rising price level, if long continued, is + accompanied by rising or high interest rates. + + “5--That high interest rates mean lower prices for + bonds and all other long-time obligations drawing + fixed rates of interest, dividends, or income. + + “6--Rising prices increase the cost of materials and + of operation and tend to decrease the net profits + of all concerns, the prices of whose products or + services either cannot be advanced at all, or are not + free to advance rapidly. + + “7--Rising prices tend to increase the net profits of + all concerns that own their own sources of materials + and supplies. + + “8--Rising prices of commodities tend to cause + the prices of all tangible property to rise. This + includes lands, mines, forests, buildings and + improvements. + + “9--Rising prices of commodities and property tend to + increase the value of the securities of corporations + holding commodities or property. + + “10--Rising prices and cost of living necessitate + higher money wages, though the rise of wages will + follow, at some distance, behind the rise of prices. + + “11--As rising prices do not mean increased profits + to all concerns, many employers will not concede + higher wages without strikes. + + “12--Rising prices and wages, therefore, mean + dwindling profits and troublous times in many + industries, with complete ruin as the final goal. + + “13--Because wages will not rise as fast or as much + as prices and the cost of living, there will be + dissatisfaction and unrest among wage and salary + earners. + + “14--Rising prices of commodities and property + encourage speculation in commodities, stocks and real + estate and discourage honest industry. + + “15--Thus, rising prices, by diminishing the + incomes of ‘safe’ investments in ‘gilt-edged’ + bonds and stocks and by increasing the profits of + speculators encourage extravagance, recklessness and + thriftlessness. + + “16--As rising prices decrease the purchasing power + of debts, and thus aid debtors at the expense of + creditors, they discourage saving and thrift. + + “17--Rising prices, then, by promoting speculation + and extravagance, increase consumption, especially of + luxuries, and, therefore, stimulate production. + + “18--Rising prices, then, result in what is real + prosperity for many industries; but what is for a + nation as a whole, artificial or sham prosperity--the + result of marking up prices rather than of increasing + production. + + “19--With prices, wages, rates and industries always + imperfectly adjusted to the ever depreciating value + of gold, and with instability and uncertainty + throughout the financial world, there cannot but be + a great shifting around of values and of titles to + property. + + “20--As this shifting is to the advantage of the + debtors--the rich--and to the disadvantage of the + creditors--the great middle class--it results in + rapidly concentrating wealth in the hands of a + comparatively few. + + “21--For all of these reasons a prolonged period of + rapidly rising prices is reasonably certain to + become a period of unrest, discontent, agitation, + strikes, riots, rebellions and wars. + + “22--A rapidly depreciating standard of value then, + if long continued, not only produces most important + results in the financial, industrial and commercial + world, but is likely to result in changes of great + consequence in the political, social, and religious + world. + + “In view of all the facts, results and possible + consequences connected with the increasing output + and supply of gold, The Wall Street Journal was + right when, on December 4, 1906, it said that ‘No + other economic force is at present in operation in + the world of more stupendous power than that of gold + production.’” + + + + +IV + +Money + + +From the viewpoint of the speculator, money conditions require constant +consideration. It goes without saying that no sustained bull market is +possible unless money conditions favor such a movement. We find that +at the end of a period of inflation, the credit situation is always +strained, while a general recession in business will usually cure the +evil. + +The student may enter this large and important branch of the subject +as deeply as he likes. There are many excellent works dealing with the +various phases of the subject, and the question has been so long and +carefully studied by writers, that many important points have been +established so definitely as to admit of little diversity of opinion. + +The bank statement which is issued weekly by the New York Clearing +House, is eagerly scanned by traders, but it is not always the case +that this scrutiny is thorough or enlightening. The statement at its +best, cannot be considered more than a barometer, and its showings are +by no means exact, as it is based on a system of daily averages. That +is to say, the banks figure their loans, deposits, etc., for each day +of the week, and report the averages to the Clearing House. This method +often leads to a false showing. Commenting on this fact, Mr. S. S. +Pratt in his book, “The Work of Wall Street,” says: + +“A striking illustration of the effect of the law of averages upon +the Bank Statement was given in September, 1902. The statement of +September 20 reported a loss in cash of $7,300,000, while the actual +loss, so far as it could be estimated, was only $3,600,000. The +statement of September 27th, on the other hand, reported a gain in +cash of $1,790,000, while the apparent loss was $4,000,000. The former +statement reported a deficit in reserve; the latter a surplus.” + +It is the practice of many speculators to examine the bank statement +merely as regards the changes made from week to week, without reference +to the more important totals. A decrease in reserves is considered an +evil, etc. There is something in this of course, but such methods and +deductions are incomplete and insufficient. A decrease in reserves when +the surplus is very large may be practically meaningless, while the +same amount of decrease when reserves are small may be significant. It +is a good deal like the difference between a man spending a dollar when +he has a hundred, and spending his last dollar. + +The most important general information to be gained from the bank +statement, is by a comparison of loans with deposits, and specie with +loans. We may thus arrive at a fairly correct idea of the state of +trade and the expansion of credits. If we find that loans are in excess +of deposits, and the percentage of specie small, we may, with certain +qualifications, deduce inflation; while on the other hand, the extent +of liquidation may be judged in case these conditions are reversed. As +an example of this process, the following historical facts are given. + +In 1890, twenty stocks listed on the New York Exchange were selling +at an average price of about $87 per share. The percentage of loans +to deposits was about 95% and the percentage of specie to loans about +20%. In November of that year, loans advanced to 102% as compared +with deposits, and specie declined to about 18% of loans. The stocks +mentioned declined to an average price of $64 per share, and later in +1901 to about $61 per share. From 1891 to 1893 there was some alternate +improvement and retrogression in money conditions, all of which was +accurately reflected in stock prices. + +In 1893, the proportion of loans to deposits rose to about 109%, and +proportion of specie to loans declined to 13%. The average price of the +twenty stocks reached about $47 per share. (The panic of 1893). + +In 1894, the proportion of loans to deposits fell to 80%, and specie +to loans rose to 30%. This was due to the liquidation of 1893. Stock +prices showed some betterment, rising to about $57 per share. The +severe drubbing of 1893 had made public investors nervous, and had in +many cases incapacitated them for stock market operations. That was to +come later. + +In 1896, the proportion of loans to deposits rose to 102%, and specie +to loans fell to 10%. Stocks reached their lowest level in July of this +year ($42 per share for the twenty stocks mentioned). + +From 1896 to 1898, a gradual improvement was apparent. Through all +this period stock prices faithfully reflected money conditions. In +July, 1898, the proportion of specie to loans rose to 30% and loans to +deposits fell to 83%. Stocks began advancing and in March, 1899, the +average price of the twenty stocks considered, was about $85 per share. + +In June, 1900, the average price of the twenty stocks considered, was +about $75 per share. The proportion of specie to loans was about 22%, +and the proportion of loans to deposits was about 90%. From January, +1901, until September, 1902, money conditions did not improve, but +stocks continued to advance. There were large crops and a general wave +of expansion and prosperity swept the country. In September, 1902, the +proportion of loans to deposits was 99%, and the proportion of specie +to loans about 17%. Meanwhile stocks were high--$128 per share for +our twenty stocks. Conditions, though temporarily ignored, asserted +themselves in 1903, and in September of that year, the average price +of the twenty stocks was about $88 per share; the percentage of loans +to deposits 101% and specie to loans 19%. The money situation had not +changed materially, but the stock market was making a deferred payment. + +In August, 1904, the proportion of loans to deposits had fallen to 90% +and specie to loans had risen to 25%. The stock market was steadily +advancing, and in January, 1906, stocks reached their pinnacle--$138 +per share for the twenty securities considered. + +It will be observed that while stock market movements do not always +immediately reflect good or bad conditions in the financial world, +the effect is ultimately felt. We are pretty safe in assuming that +whenever loans are unduly expanded and the percentage of specie is +small, these conditions must be corrected either by a halt in business +or by liquidation; and the word liquidation here means a cleaning +up in other lines, as well as in the stock market. It is sometimes +the case that after the stock market has suffered a severe decline, +there is little improvement in the monetary situation as shown in +the bank statement. In January, 1907, for example, the percentage of +loans to deposits was about 102%, and specie to loans about 17½%. The +average price of twenty active stocks at that time, was about 130. At +the present writing (June, 1907) those same shares have fallen to an +average price of about 101, and there is no appreciable change in the +relation of loans to deposits, or specie to loans. On June 8th, 1907, +the bank statement showed loans to deposits 102%, and specie to loans +a little below 19%. This state of affairs would naturally lead to the +belief that unless we are vigorously assisted by some powerful factor, +such as good crops, we now face a period where either a decided slowing +up or an actual recession in general business is imperative. On this +theory, fortified or modified by a study of extraneous effects, the +speculator or investor may gain a valuable knowledge of probable future +movements in the stock market. If he decides that the case is a bad one +and that a set-back in business will occur, he may argue that, even if +stocks are low in price, there is little hope of a material upward +movement in any quarter. It would also be evident that the industrial +shares would suffer more in price than the railroad shares; for, under +present conditions, a decline in the price of products generally helps +the railroad corporations to some extent by permitting advantageous +purchases. For instance, if finished steel and iron products decline in +price, the railroads might be enabled to carry out projected extensions +to better advantage than otherwise, while the manufacturing companies +would suffer a considerable loss of profits. It is, of course, true +that a recession in business is felt in all lines, but as the selling +rate of transportation is more fixed than prices of commodities, and as +the producing companies gain less by a recession in the prices of the +commodities they _buy_ than do the railroads, the industrial stocks are +more adversely affected. This may appear as a sort of compensation for +the fact that while rates for transportation do not advance as easily +as prices of commodities, neither do they fall as rapidly in periods of +depression. + +In examining the bank statement as a barometrical showing of money +conditions, it should be remembered that an increase in deposits does +not mean an increase in cash. The bank statement may show an increase +in loans of $1,000,000 and an increase in deposits based on these +loans. That is to say, $1,000,000 may have been borrowed on commercial +paper, and the proceeds passed to the credit of the borrowers. +Commenting on this fact, Theodore Burton says: + + “But in the modern development of banking the actual + money deposited is much less important in determining + the amount of deposits, because so large a share + of them represents credits obtained by loans, etc. + These credits are transferred upon orders executed by + depositors, and furnish a substitute for currency. + In proportion as payments and settlements are made + by checks, drafts, and bills of exchange, deposits + maintain an increased proportion to the amount of + currency in circulation. This class of deposits + increases prior to a crisis rather than diminishes, + because loans increase. + + “In the reports of national banks, there is a + striking correspondence from year to year in the + volume of deposits and that of loans and discounts. + Deposits show more frequent fluctuations, but rise + and fall in general accord with loans and discounts. + This correspondence is easily explained. Another + distinction should be noted. Some deposits are the + result of completed transactions, and are based upon + the proceeds of sales made, amounts realized from + investments, etc. Others merely represent loans or + discounts the proceeds of which are entered to the + credit of the borrower. Before every crisis there is + an unusual proportion of deposits which are based + upon loans. If in bank statements there could be + separate columns for these two kinds of deposits, the + information afforded by their increase or decrease + would be much more valuable.” + +This point shows the necessity of considering not only the proportion +of loans to deposits but of specie to loans. On this point Mr. Burton +says: + + “A continuous decrease of specie attended by an + increase in outstanding discounts is always a danger + signal. The gap between the two may widen for months, + and even for years, and may fluctuate from time to + time, but a sudden change of large proportions, or + a steady decrease of the percentage of specie is an + unfailing indication of danger. The reason for this + is not hard to discover. The quantity of metallic + money in a country shows what part of its capital is + available as money for the payment of its obligations + to foreign countries, the final test of availability. + For this last named purpose credit money cannot be + used, but only money having intrinsic value--money + of the Mercantile Republic, as it is called by Adam + Smith.” + +The conclusion reached therefore, is that an increase in loans and +discounts with no corresponding increase in cash or with an actual +decrease in cash, reflects a bad state of affairs, even when the +advance in loans and discounts appears to be fully offset by deposits. + +There is one feature which should not be overlooked. The very worst +state of affairs may be shown in the bank statement during a period of +great commercial activity and inflation in all lines. The reverse is +also true. In 1894, following the panic of 1893, the percentage of +loans to deposits fell to 80% and the percentage of specie to loans +rose to 30%; but no bull market occurred. This was due to stagnation in +all lines of business, a period of timidity and conservatism. In 1895, +there were signs of a great improvement and the stock market started +upward. This improvement, however, proved illusory and premature. Loans +rose quickly to 95% of deposits and specie fell below 15% of loans. +Then followed, in 1896, the new record of low prices. + +In studying the bank statement for its effects on speculative prices, +surplus reserves will frequently suggest danger or safety. If surplus +reserves dwindle too near the vanishing point, the possibility of +necessary retiring of call loans is apparent. (See “Bank Statement,” +page 125). + +It is possible to gain valuable knowledge by a careful examination of +the bank statement. The points made above are, of course, only of a +simple and elemental character. We may go on with our examination as +far as we like and scrutinize not only totals, but the position of +individual banks. Also, in order to gain a comprehensive perspective, +it will be expedient to examine, not only the barometer of the New York +situation, but the condition of interior banks. However, it is a pretty +good idea to begin with the A, B, C’s. + +High rates for call money and the calling of loans are responsible for +many sharp market movements. A large class of speculators figure that +when dividend returns are high and call money cheap and plentiful, they +have a tangible influence working in their favor while they are long +of stocks. If rates for call money are 2% and a stock returns 6% there +is, eliminating speculation, an advantage of 4% per annum in favor of +the marginal speculator. This advantage is not so great in carrying +stocks on time loans, as rates for fixed periods are materially higher. +There is always danger of a flurry in call money, however, and in +the event of a wholesale calling of loans there arises the necessity +of selling stocks, and a decline occurs. There is also present the +element of manipulation in this quarter, and it cannot be gainsaid that +many instances have occurred where funds have been suddenly withdrawn +for the purpose of “shaking out” an undesirable following or of +accumulating securities to advantage; and on the other hand, call money +has frequently been made cheap in order to encourage purchases. + +There are two periods of the year when the stock market is affected +by disbursements of money in the form of interest and dividends. The +two dates at which heavy disbursements occur, are January 1st and +July 1st. It is a popular belief that just prior to each of these +dates, money will grow “tight” because of the necessary provisions +made by banks and other corporations to meet such payments. Following +the actual distribution of funds, it is the theory that a part of +this money will seek reinvestment in bonds and shares. A great many +speculators argue that this would naturally produce stringency, the +possible calling of loans, and consequently lower security prices in +the latter half of December and June and an advance early in January +and July. While this reasoning looks sound enough on its face, it is +not at all dependable. It is certain that everything is discounted in +advance of actual events in speculative circles, and the more widely +such theories as the one mentioned are disseminated, the more dangerous +and inoperative they become. Instances are not lacking in recent +years, where the technical situation growing out of this reasoning, +has not only nullified the theoretical action, but has resulted in +actual reversal, i.e.: an advance just preceding disbursements and a +decline at the time the distributed funds were presumably returning to +investment channels. Numerous shrewd people, anticipating an advance +in January and July, have attempted to take time by the fore-lock by +effecting purchases in December and June. Their buying, being of a +competitive character, not only carries prices upward prematurely, but +creates a weak speculative long interest, subject to disappointment if +funds do not reappear in the volume expected, or susceptible to attack +by great manipulators. + +There is another objection to this theory of periodicity. If the +market is dull and stagnant, with little public interest, it behooves +the large interests which have stocks for sale to bid up prices and +create activity prior to the heavy distributions of funds. They may +accomplish two things by this process. They make not only a higher +level of prices at which to sell their wares, but create what is of +even greater importance, an appearance of activity, prosperity and a +newspaper market. It is strangely illogical, but unquestionably true, +that people who would flatly refuse to enter a market at a low level of +prices will rush in to buy ten points higher if the factors of bustle +and excitement are present. Both the doctrine of common-sense and the +calculus of probabilities would establish the fact that each advance +brings us nearer the top, and each decline brings us nearer the bottom; +but few men can train themselves away from the idea that an upturn +already established does not indicate higher prices and vice versa. It +is a sort of enthusiasm which a minority understand, however, and make +good use of. The psychological effect of mere excitement is one of the +explanations of the incontrovertible fact that the public usually buys +at high prices and sells at low prices. + +The acceptance of certain periods or seasons as a guide to either +purchases or sales of stocks is, in the last analysis, merely a form +of chart-playing. It is natural to evade a studious examination +of the general business and monetary situation and to resort to a +simple, albeit a superficial diagnosis, which, being insufficient and +incomplete, is dangerous. It is suggested that while the double effects +of contraction prior to distribution should be understood and examined, +the only safe method is to go behind these temporary and periodical +changes and study the whole basic structure comprehensively. We may +find that money is in demand for the purpose of propping and sustaining +an unsound business condition, and that it will in all probability +fail to return in volume to the security markets. This occurred in +January, 1907, and the believers in a “January rise,” were badly +disappointed. Interest rates on money must also be given consideration. +If the commercial world is striving to secure funds at a higher rate +of interest than is offered on shares, money, or a good portion of it, +will go where interest returns are greatest. And in this regard it +may be said, that merely local interest rates are not always a good +indication of money affairs in the business world. Not long ago, the +writer, being suspicious of the claims of plentiful money and low rates +in New York, investigated the matter through Western bankers and found +that prime paper was being offered west of the Missouri River at much +higher rates. This was made particularly significant by the fact that +previously the borrowers had always been able to supply their needs at +home, and that the loans, being offered through brokers, really cost +about ½% more than was apparent on their face. + +It is frequently interesting and instructive to examine the character +of collateral behind loans, and find out how large a percentage of this +collateral consists of stocks and like securities. Our stock market +might appear to be in a sold out condition, when, in reality, a very +bad technical condition obtained. The purely marginal speculative +account in New York City, or other important centers, is carried on +under certain flexible rules or customs as to the amount of money +loaned on certificates; but in cases where securities have been widely +purchased for cash by small holders, and, in the event of general +tightness in money or depression in business, made the basis of loans +in country banks, but we have, in fact, a very weak _marginal_ public +account. The home banker will loan more liberally to his townsmen and +will scrutinize the movements of prices or the stages of the market +less closely than the city banker, and the certificates owned by small +holders and deposited as collateral may, in the aggregate, represent +an enormous line of shares. It would be quibbling to say that this +situation represented anything less serious than a weakly margined +public line. If the market declined materially, the bankers would be +forced, in self-protection, to call for more collateral, and the result +would depend, as in all other cases, on the ability of the individual +holder to take care of himself. Such a condition existed in U. S. +Steel stocks in the depression of 1903, and was pointed out at the +time by the writer. The knowledge obtained was based barometrically on +information obtained from a number of bankers in different localities. + +While interest rates for both time and call money are frequently +fictitious, or of a temporary and artificial nature, and no set rules +can be laid down as to certain conditions in money and their immediate +effects upon security values, it is not difficult to gain a general +idea of underlying conditions. We have always at hand statistics which +will reflect faithfully the fundamental basis of the entire world +structure. But in this important division, as in most other branches of +speculation, we often find that what is really important is absolutely +ignored, while matters of little moment are harped upon, or even made +the basis of operations. Thus, every habitue of brokerage offices +eagerly watches the bank statement or the rates on call money, and +knows nothing about the expansion of credits, even when such expansion +has reached a point that would make a crisis appear inevitable. No +better proof of this can be offered than the fact that our heaviest +business and greatest inflation, have frequently gone merrily forward +for a year or more under suicidal conditions. These conditions have +sometimes been so obvious, so forcible, that it would appear impossible +to view them with equanimity. In a majority of cases they were probably +not viewed at all, and the thoughtful men who pointed out the danger +have been called calamity howlers or pessimists. There is one great +check to education in this direction: great financiers who are most +conversant with actual conditions, seldom find it expedient to point +out the facts. Sometimes they, themselves, wish to dispose of their +holdings because of the obvious peril ahead and this process would not +be facilitated by gloomy predictions. On the other hand, it is too +often the case that these same gentlemen, finding it to their great +advantage to disperse sunshine until their goods are sold, point +assiduously to the excellent business of the present, and neglect +to touch on the irrepressible future, which, after all, is the most +important question to the investor or speculator. + + + + +V + +Political Influences, Crops, Etc. + + +The possibility of legislation adverse to corporations is always +present as a market factor, and at times severe declines have been +recorded through such action. It is not always the case that such +legislation is truly a bear factor, although it is fashionable to so +interpret anything in the nature of legislative interference with +corporate affairs. It is the writer’s opinion that a great deal of +misunderstanding has recently arisen in regard to the attitude of +certain party leaders toward the heads of great railroad corporations. +The opinion has been widely fostered by opposing politicians and others +that the credit of railroad corporations was being badly impaired, and +the interests of stockholders jeopardized because investigations were +ordered as to the methods of individuals or directorates. + +It does not appear that any reasonable man could, as the stockholder of +a corporation, or as a private citizen, object to having dishonest or +sharp practices on the part of the active management of the property in +question exposed and prevented. Where it is shown that an individual, +in his capacity as the head of a business, has employed his office as a +means of juggling stocks or reaping enormous personal gains, it cannot +but be to the interest of stockholders to have such practices stopped. +If the means at issue are honest and legitimate, the benefits reaped +should go to the stockholders. It is impossible to reconcile any other +plan with equity and common honesty. Let us look at the matter without +the mystery that obscures the affairs of a great corporation. + +Suppose a member of a certain firm, its manager, finding the firm +in need of funds, secures money at a high rate, and at great profit +to himself--is that right? Or is it the manager’s business to work +entirely in the interest of the partners he represents? Is it possible +for him to legitimately acquire personal profit of any kind in +administering the affairs of the firm? It is not sufficient to point +out that the manager’s action in securing funds redounded to the great +benefit of the business concern, or that his capability and shrewdness +were reflected in enormous partnership profits. His associates in +business are entitled to all, not a portion, of the gains secured in +the management of its affairs. + +It is submitted that much of our recent legislation which is popularly +supposed to have injured stock values has, in reality, aimed to protect +the small holder and throttle the unscrupulous men who, while actually +in their employ, were milking their business of millions. Legislation +which effects publicity and simplicity in the affairs of corporations +is an unmixed benefit to the small investors. + +It is almost invariably the case that when a great decline in stock +prices occurs, the set-back is popularly attributed to some factor +which, in reality, had little to do with the reversal. In the decline +of 1907, thousands of people attributed the inability of railroads +to borrow money at low rates of interest almost entirely to hostile +legislation. Apparently these rapid-fire thinkers did not know or +realize that interest rates had risen the world over, that there was +not a free money market in the world, and that money, instead of being +withheld from 4% issues, was fully employed in other lines. Such, +however, was the case; British Consols, French Rentes,--all the choice +securities of civilized countries had kept pace with the declines in +our own bonds and stocks; but these facts seem to be unappreciated. + +It is true that adverse legislation sometimes seriously impairs the +value of a security. A public utilities company, for example, which +is forced to reduce its selling rate, is unquestionably injured +from an investment point of view. Such legislation, however, may be +weighed correctly by a little calm consideration, and it may be said +that action of this nature is usually for the purpose of correcting +abuses, rather than as a revengeful and confiscatory attack on vested +interests. Measures which prevent a fair return on capital will perish +of their own iniquity. So far as measures which are formed to prevent +extortion are concerned, it is impossible to criticize them. + +In order to correctly weigh the effects of legislative measures on +security values and prices, we must therefore examine fairly what +the legislation seeks to accomplish, taking care not to allow a +contemporaneous price movement which may be due to other causes, to act +as a verification of a false view. This error occurs very frequently; +in fact, one of the most remarkable things about speculation is that +the true causes of great movements are fully appreciated by the +majority _only in retrospect_. + +The probable market effect of legislative and political affairs can be +correctly gauged only by examining the nature and importance of the +issue in question. This is true not only of state and municipal action, +but in regard to presidential elections. There is a popular idea +that it is dangerous to buy stocks on the eve of a new presidential +campaign, but there is not much in history to uphold the view. True, in +a majority of cases, a decline has preceded such a contest, but there +have been frequent reversals of this action, and we have had too few +elections to attempt any chart-playing on this influence. Such a guide +would be empirical. + +The issues involved in a presidential contest, however, may sometimes +influence prices. Here again a careful examination of facts and +probabilities will generally uncover the truth. If the nominee of one +party stands on a dangerous platform and the outcome of the contest is +in doubt, we may well dispose of shares if for no better reason than +that the element of danger is present. Danger, whether or not it is +finally realized, is a bear factor, just as safety is a bull factor. + +Tariff agitation should be accorded careful consideration by the +speculator. This is particularly true as regards the effect on +industrial corporations. A reduction of the present tariff on Iron and +Steel, for instance, would materially lower, if not destroy, the value +of many of the common stocks of steel manufacturing corporations. A +very clear and comprehensive work on this subject is mentioned in the +bibliography on page 183. + +No cut and dried rules or suggestions can be offered as to the +effects of political or legislative issues on prices. Each point +must be scrutinized as it arises, and judgment formed thereon. +Sympathetic movements will sometimes occur because of apprehension or +misunderstanding, but such effects will be short-lived. + + +_Crops and Crop Failures._ + +The question of crop failures is of great importance. It is not +difficult to form a fairly correct idea as to the ultimate yield. The +estimates of the Government sometimes go wide of the mark, but it +must be remembered that they are _estimates_ and nothing more, and +that conditions may change somewhat after the figures are compiled. +The speculator is frequently confused by the conflicting opinions +of private experts. It is probably safer to disregard the various +authorities and pin one’s faith to the computations of the bureau at +Washington. These official documents have been criticized at times, +and no doubt the criticism has been warranted, but they form our most +dependable source of information and will improve as time rolls on. + +A crop failure, or a short crop, invariably brings forth much +fallacious vaporing from the rooters of Wall Street. They are as bad in +their efforts to obscure the truth as are the crop-killers with their +fabrications. A crop failure is a serious thing and must be faced as +such. The contention which is always heard in lean seasons, that the +evil has been counter-acted because of the large reserves of Wheat, +Corn or Cotton in farmers’ hands is ridiculous. Farm reserves are +wealth. They have already found their place in the business structure. +In many cases the money they represent has already been spent in the +form of credits. Nor do high prices for cereals or cotton overcome the +evils of short production. Small crops mean decreased employment for +laborers; a diminution of per capita purchasing power, and increased +cost of living. They also mean smaller tonnage for the railroads, and +consequently decreased earnings. + +And in examining crop prospects, we should consider the fact that each +year’s normal crop should be larger than the one preceding it. This is +distinctly shown by tracing production back for a term of years. + +There will, of course, be fluctuations in this gradual increase, but +the tendency is certain. We may also consider that as railroads are +constantly extending their lines and increasing their facilities, it +follows that increased production in the commodities they transport is +necessary to their well being. + +And short crops the world over in the same year have the same elements +of economic evil. The purchasing power of the world is reduced, and +even if we ourselves make fair crops and export them at high prices, +the world’s poverty is felt in lack of demand for other exportable +surplus. The civilized world is too closely knit together in its +affairs to permit of the entire localization of the effects of a +serious property loss. + +A lean crop year can probably do more to temporarily injure the +actual _value_ of railroad shares than can any other single influence +bearing on prices. Tonnage is affected both ways, so is passenger +traffic. There is less grain or cotton to haul to the markets, and, as +purchasing power has been reduced in the affected localities, there is +less freight to haul back to the producers. In the last analysis, the +products of a community represent to a great extent the mere exchange +of these products for other luxuries and necessities, and the effect of +decreased production is a two-edged sword, so far as the transporting +companies are concerned. + + +_Accidents._ + +The effect of accidents on stock prices has been fully discussed +in a former work, and the contention offered that accidents could +no more be provided against, or considered, in the investment or +speculative world than in any other walk of life. It is also thought +that accidents are more frequently the _excuse_ for movements than +the _cause_ of them. If a market is in a bad technical or general +condition, the slightest adverse happening may create panic; while +if the foundation is sound, even a great calamity, such as the San +Francisco earthquake, will cause only a temporary halt. The man who +speculates correctly has little to fear from accidents. + + In the following section of this work, the writer + has undertaken to touch on such features as appear + of most interest and benefit to the speculator or + investor. Some of the matter presented, such as the + question of dividend dates, will appear to many + readers so simple as to be unnecessary, but it is + true, nevertheless, that many very elementary facts + are misunderstood or unappreciated by a large class + of public participators. + + + + +VI + +Puts and Calls + + +Puts and Calls, or “privileges,” have long been popular with a certain +trading element, either as a protection against loss in commitments +already made, or as a positive method of trading. + +The theory and operation of privileges may be easily understood by +considering them in the light of insurance, the money paid for them as +a premium, and the funds received in case the privilege is exercised, +as a loss paid by the insurance company. It will be understood, that +in speaking of the _seller_ of puts or calls, the insurance company is +referred to, and that the _buyer_ represents the insured party. + +The _buyer_ of a call has the right to _call_ for his shares or +commodity, at the price named in the contract at any time before its +maturity. The _seller_ of a call fixes a certain price at which he +agrees to _deliver_ stock, specifies the duration or time limit of the +contract, and receives from the buyer a certain sum or premium. + +For example: United States Steel Common is selling at $40 per share; +A, the seller, offers a call on 100 shares at 43, good for ten days, at +a price of say, $100. B, the purchaser, pays the $100 and receives a +contract from A as specified above. Now suppose that at any time before +the expiration of the period named, Steel Common advances to 50. B can +call for the delivery of 100 shares of Steel at 43, and by selling it, +reaps a profit of $700, less the cost of the privilege, ($100), and +the brokerage. Used as a protective measure on short sales, the result +would be the same, as $700 would have been saved. That is to say, if A +is short of Steel at 40 and it advances to 50, his call has acted as +insurance against any loss over and above the $300 represented by the +rise from 40 to 43. + +The “put” is exactly the reverse of the “call,” and is insurance +against a decline; or, in other words, an agreement to receive shares +at a specified price on or before a certain date. + +Using the same illustration as before, let us assume that the price of +Steel Common is 40, and that A, the seller, offers a put at 37, good +for 10 days, at a price of $100. B, the buyer, is now insured against +any loss which may accrue through a decline below 37 in the ensuing +ten days. If he is long of the stock and it declines to 30, he may +deliver his shares to A at 37, or if he has purchased the “put” as a +speculation, he may buy 100 shares in the market at 30 and deliver to +B at 37, netting a profit of $700, less the price paid for “put” and +brokerage. + +One of the favorite methods of trading in privileges is to buy or +sell against them when the price named is reached. For example, say B +holds a ten day “put” on Steel Common at 37, and the market for the +stock declines to 36 in five days. He may now buy 100 shares at 36 on +the theory that he has regained his original outlay of $100 and has +a possibility of profit through market action in the remaining five +days, while there is no possibility of loss. If the market advances +to, say 38, he may sell the one hundred shares purchased, and on +another decline to 37 or 36 may again purchase, repeating the operation +indefinitely during the life of his put. The “Call” is, of course, made +the basis of short sales on an exact reversal of this process. This +fashionable form of exercising privileges is facilitated by the fact +that “puts and calls” issued by members of the New York Stock Exchange, +are generally accepted by brokers as “margins”; B having paid A $100 +for a “put,” as illustrated above, could, if Steel declined to 37 or +below that figure, buy 100 Steel and give his broker the privilege +issued by A, in lieu of a marginal deposit. The broker is satisfied, +as he gains a commission, and in the event of a further decline in the +price of Steel can call on A to receive the stock at 37 when the option +expires. + +Another popular form of trading in privileges is to buy or sell half +the amount named in the privilege when it becomes “good” through market +action. If B holds a “put” on 100 Steel at 37, he may, at that price +or below, buy 50 shares. He is now in a position to profit by either +an advance or a decline. If the price advances to 40 he has three +points profit in the 50 shares purchased. If, on the other hand, the +market declines to 34, he still gains 3 points on 50 shares, for his +“put” protects him against a loss in the 50 shares purchased and he can +purchase another 50 shares at 34 and deliver to A at 37. In short, when +he makes his 50 share purchase at 37, he is both short and long of the +stock and must gain on a movement either way in the market price. + +A “Straddle,” as the term is applied to privileges, is a combined “put +and call”. The purchaser gains on a movement in either direction. The +general rule is that the gain is to be represented by a market change +representing an excess of the amount paid for the “Straddle.” Thus if +A sells to B for $250, a straddle on 100 shares of Steel, when the +current market for the stock is 40, B is in a position to gain by +either an advance above 42½ or a decline below 37½. + +The purchasers of privileges are sometimes perplexed by market changes +which are brought about by dividend payments. The rule is that the +dividend always goes with the stock. The simplest way to arrive at +correct figures is, to mentally lower the price of either the “put” or +“call,” by the exact amount of the dividend payment. Thus, if B holds +a “call” on Steel at 43 and a dividend of 2% is paid on the stock +during the life of his option, his “call” becomes operative at 41 as +the dividend goes to him. If he holds a “put” at 37, and 2% dividend is +paid on the stock, his “put” is not operative until 35 is reached, as +the dividend goes to the maker of the “put.” + +Privileges in grain or other commodities are based on the same general +rules and principles as those on stocks. These privileges are heavily +dealt in on wheat and corn in Chicago. They are designated, however, as +“ups” and “downs” in order to evade local laws prohibiting transactions +in “puts and calls.” The “ups” are calls; the “downs” are puts. Most of +the grain privileges handled in Chicago, or based on Chicago prices, +are of a day to day character, insuring only for the next day’s price +changes. The ordinary charge is $1 per thousand bushels. For $1, +therefore, the small gambler, or speculator, may purchase, say a call +on 1,000 bushels of wheat at 90½ when the last price recorded was 90. +If wheat reaches 91½ during the next day’s session, he has a gain of +$10 less the cost of the “call” and brokerage. + +The small capital required for this form of trading, the fact that +loss is limited to the original cost of the privilege, and the great +possibilities in case of extreme movements, make “puts and calls” +very popular. It may be said, however, that they are, as a rule, poor +property. The writer kept account of the transactions in “puts and +calls” handled through a large concern for almost two years and found +that only about 35% of the money paid for these privileges returned +to the purchasers. That is to say, the profit shown to purchasers of +“puts,” “calls,” and “straddles,” was only about $350 out of each +$1,000 received by the sellers. After deducting the item of commission +charges, it was found that the sellers of privileges reaped over +50% profit each year. The experiment referred to was based on grain +privileges, but would probably hold good in stocks. The _sellers_ of +these “puts and calls” are among the brightest men in the street, and +when they make prices they do so on the absolute basis that they have +the best of the bargain and the buyers are usually a public element. +In the test referred to, there were never three consecutive days when +either “puts” or “calls” were good. There was on one occasion in the +period consulted, an advance of over 20 cents a bushel in wheat in +three days, but “calls” were good only on the first day of the advance. +On this occasion the “calls” were good for about 2 cents per bushel on +the first day’s rise, but the sellers offered nothing for the second +day, except at prices far above the market, and although the market +advanced 6 cents per bushel, wheat was not “called.” On the third day, +prices for “calls” were prohibitive, ranging from ten to twenty cents +above the closing price and again wheat was not called, although the +market advanced 8½ cents. + +In the accounts examined, one seller of privileges on wheat had an open +order to sell 100 puts and 100 calls every day at the ruling price. He +thus received $200 daily and invariably “took his loss” whenever the +privileges operated against him. That is to say, if wheat closed one +cent per bushel above the call price, he would be called for 100,000 +bushels on his privileges, making him short that amount of wheat. This +he bought in at once and pocketed a loss of $1,000 less the $200 +received. Although he accepted some severe losses now and then, his +account showed over $30,000 profit on a year’s business. + +Another account was operated on a different principle by the seller of +privileges and resulted in even larger profits. This individual would +sell ten “puts” and ten “calls” on wheat each day. In the event of his +being called, i.e., short of the wheat, he would, on the next day sell +no “calls,” but 20 “puts.” In the event of a decline below the “put” +price, he had enough short wheat to protect ten of his “puts” and in +reality automatically close out his ten thousand short, frequently at +a profit. As has been stated, his profits were greater than in the +first instance quoted. There was, of course, a more highly speculative +element in his form of operating than in the other method, but the +operator was never either long or short more than 10,000 bushels, +and received about $6,000 a year or 60 cents per bushel from his +privileges, in addition to the accruing of profit or the curtailing of +loss by his mechanical method. + +In the accounts examined the persistent purchasers of privileges all +finally lost money, except in a few cases where lines acquired on +“puts or calls” were carried to a successful conclusion in the course +of time. That is, a purchaser of “calls,” finding a profit in his +privilege, would call the wheat and _keep_ it. This, however, resolved +the matter into pure speculation, as the maximum benefits derived from +this form of trading can only be correctly measured by the profit shown +at the expiration of the “put” or “call.” That is to say, the seller +need suffer no greater loss than that shown when the contract he has +given matures, and consequently the profit to the buyer cannot be +greater except through speculation. + +It would appear from these facts, that the purchasing of privileges +is a poor business proposition, while the selling of privileges is a +money making affair. This is true. We need only compare the kind of men +who _buy_ “puts and calls” and those who sell them to have this truth +made apparent. The late Russell Sage was a persistent writer of these +instruments and made a great deal of money by the process. The late +Edward Partridge also made a good deal of money in this manner in the +Chicago Wheat Market. He also used privileges to aid his manipulative +campaigns. On several occasions, he sold “calls” heavily through the +day, then suddenly bid wheat up just at the close of the market, +effecting a closing just above the call price. The scattered purchasers +would call the wheat and put Mr. Partridge short several millions at +a high price, which was just what he wanted. He could not have sold +as much wheat in the open market without breaking the price several +cents. On the same principle, he used sometimes to sell a great many +“puts” when he wished to cover a line of short wheat and rush the +price downward at the close, thus enabling him to purchase a great +line without disturbing the market by bidding for it. The process only +worked a few times, however. As soon as it was discovered it failed, as +the call price, when reached, met with such a wave of selling that it +was impossible to break through it, and the manipulator was “hoist with +his own petard.” + +There is another drawback to the habit of buying privileges--a mental +one. They are frequently made the basis of positive trading with +disastrous results. The man who believes in an advance in certain +shares or commodities, frequently purchases privileges instead of +following out his own convictions by actual trading. Thus the man +who had good reasons for expecting an advance in wheat at the time +of the 20 cent advance mentioned above, and who used either “puts” +or “calls” or both, as a means of operating on his opinions, would +have reaped less than two cents a bushel during an advance of twenty +cents. He might, of course, have called the wheat on the first day +of the advance and remained long, but in that case he would merely +have been speculating with equal chance of loss or profit in ensuing +transactions. Aside from the initial two cent gain, he would have been +in no different position than if he had purchased and held the cereal +on margin. + +It is the writer’s opinion, founded on the experience set forth above, +that it is much better to effect transactions in the ordinary manner, +than to depend on privileges. If “puts and calls” are dealt in at all, +they should be sold, not purchased. The insurance companies make more +money than is paid out in losses; so do the sellers of privileges. It +may be well to add, however, that the man who runs an insurance company +is in danger if he does not understand his business and his risks, +or if he enters the field without sufficient capital to provide for +possible initial losses. All this applies to the seller of privileges. + + + + +VII + +The Question of Dividends + + +It is a certainty that the short seller of dividend-paying stocks +suffers a drawback from dividends, except in the rare cases where +interest is allowed on short stocks. If we sell short a 6% stock at par +and at the end of a year find the stock still selling at par, we have +lost 6% without adverse market action. This onus cannot be escaped by +short-time commitments; it is merely a matter of degree. The chronic +short seller is swimming constantly against the current. + +There is one point about dividends which is widely misunderstood +by ordinary traders. It appears impossible to make a great many +individuals understand that short sales may be as intelligently made +the day before a stock sells “ex-dividend” as at any other time. Even +when good reasons for a decline exist, traders fight shy of “swallowing +the dividend,” or retire commitments just before dividend payment for +no other reason than that such distribution is to be made, which is, in +fact, no reason at all. + +The disadvantage to the seller of stocks through the earning +capacity or increment is the same on the day or the week preceding +a disbursement as at any other time. The earnings of the company +are a steady day to day affair, and are, as they accrue, constantly +considered in the price of the stock. In other words, the prices of +listed shares are at all times “flat.” At a point midway between two +dividend days, the stock reflects in its current price half the amount +of the undistributed dividend, or other increment. For example, if a +certain stock sells normally at par and pays 6% per annum (3 per cent. +in January and 3 per cent. in July) the price of the stock in March, +eliminating speculative influences, would be 101½ and in July 103. +When on July 1st, the 3 per cent. is distributed, the amount is simply +taken away from the company and from the price of the stock also. It +now returns to its normal price, 100, and whether it will go up or down +from that point is a question for speculation. The factor which made +the price 103 has been eliminated and it remains for the corporation in +question to again earn 3% available for distribution before the next +dividend day. + +Perhaps this point may be made clearer by assuming that a certain +stock is not handled on the “flat” basis, but is dealt in “and +interest” after the method sometimes employed in bond transactions. Let +us again eliminate speculation and take for example a stock selling +at 100 and paying 6%. Assuming that a dividend had been paid on this +stock on January 1st, the purchaser of the stock on February 1st +would pay 100 for his shares, and would also pay to the seller the +accrued dividend for one month, or ½ of 1% which is exactly the same +proposition as if the stock had been quoted flat on the Stock Exchange +at 100½. On March 1st, the purchaser would pay 100 for his shares and +1% accrued dividend or 101, etc. + +It appears, therefore, that the widespread idea that it is dangerous +to sell a stock just before a dividend day is not sound. In fact, the +whole matter may be dismissed by saying that if there was any good +or logical reason for expecting a premature recovery of the price +of dividend-paying shares, or an advance founded on any reason in +connection with dividends other than the gradual accumulation from one +date of disbursement to the next, the whole problem of making profits +in Wall Street would be solved. The rule must necessarily work both +ways, and if it is dangerous to sell at certain periods, it must be, +in inverse ratio, safe to purchase. All we would need to do therefore, +would be to await the dates on which shares sold “ex-dividend” and make +purchases. Here then, is exploited a patent way of getting the best of +the market without study or effort. In truth, there is nothing whatever +in the theory any more than there would be in buying Government bonds +for a rise just after the interest had been paid on them. If good +reasons exist for sales, they may be made as confidently at one time as +another. The disadvantage of being short of dividend-paying stocks is +always present, and it cannot be escaped, but the operation is a day to +day affair not a matter of certain dates. + + +_Basing Railroad Values._ + + “The problem of railway valuation is comparatively + simple, and beyond the reach of but few. A railway is + primarily a carrier, a carter, a drayman. Obviously + then, in considering an investment, we shall ask, + What sort of a road has it? What sort of vans, and + what sort of horses? What sort of trade? A teamster + doing business on a fine level macadamized road, with + big, heavy vans, and heavy draft horse, can work at + a profit and underbid a carrier with old vans and + poor horses, working on roads of heavy grade. So, + for example, a railroad, other things being equal, + with a water grade like the New York Central, has a + tremendous advantage over an up and down grade like + that of the Erie. The Illinois Central can do + business much more cheaply than the Missouri Pacific. + A road with a magnificent equipment like the Lake + Shore can undercut a poorly equipped road like the + Nickel Plate. + + “The initial facts that we wish to know of a railway + then are, What sort of a road has it, what is its + traffic, does it get good rates? When we know what + business it does, what its earnings are, then we + shall ask, how is it capitalized, what are the fixed + charges these earnings have to bear, what is there + left, and what is the amount of stock which has to + share the surplus? We shall ask if its earnings are + stable, if the maintenance is adequate, if the policy + of the road is conservative, if its management is + good or bad. When we have done all this, then we + shall go into the market, ask the prevalent rate + of money, and by a simple rule of thumb, we shall + know, in a broad way, whether the stock is cheap or + dear.”--From “American Railways as Investments,” by + Carl Snyder. + +_The Effects of Business Depression on Rails and Industrials._ + +“There is apparently a popular belief that the general market always +moves together in a considerable swing, and that any advance in one set +of stocks would be accompanied by a corresponding advance in others. So +far as the general tone of a day’s market is concerned this is true; +but, nevertheless, individual stocks or groups of stocks can easily +and gradually change their selling basis in a brief period of time. In +1901, for example, the industrial stocks reached their high levels, +and suffered a considerable decline in 1902. Meanwhile the rails were +advancing. To illustrate and confirm this statement the highest prices +of both Rails and Industrials in July, 1901, and July, 1902, are set +forth in the following tables. There can be no unfairness in choosing +this particular period. What is to be demonstrated is that it is +possible for the groups to cross each other in price in a given time. +The ten most active stocks have been chosen in each group as fairly +representative of the entire market: + +RAILROAD STOCKS. + + High in High in + Stock July, 1901 July, 1902 + Atchison 89⅜ 95¾ + B. & O. 108¾ 112⅛ + Can. Pac. 108¼ 139¾ + St. Paul 177¼ 189⅜ + Erie 43⅝ 39½ + L. & N. 111 145⅞ + Mo. Pac. 121⅞ 119½ + Penna 151¾ 161¾ + Reading 47 69⅞ + Union Pacific 110⅞ 110⅝ + ------- ------- + Average price 102.97 118.41 + + +INDUSTRIAL STOCKS. + + High in High in + Stock July, 1901 July, 1902 + Amalgamated 124¼ 68¾ + American Smelting 58 47½ + American Sugar 145⅝ 134½ + Anaconda 48⅞ 27 + Col. Fuel & Iron. 116⅛ 102¼ + National Lead 23 22¼ + Tenn. Coal & Iron 72½ 69½ + Rubber 21¼ 17 + U. S. Steel 48⅞ 41 + U. S. Steel, Pfd. 99½ 92⅛ + ------- ------- + Average price 75.80 62.18 + +“These tables show that during the fiscal year used, railroad stocks +advanced an average of over 15 points, while industrials declined +almost 14 points. In other words, the spread was 29 points. The man who +bought rails and sold industrials would have made on the average 29 +points. This exhibit entirely overthrows any argument that the market +moves one way or the other homogeneously. + +“There was a reason for the spread illustrated above. There always is +a reason. We had big crops in 1902, which helped the railroads. The +industrials, on the other hand, were busily discounting the business +depression of 1903. + +“Precedent shows that in a period of general depression Industrial +stocks suffer about 33% more than rails. That is to say, in the high +and low prices covering a long period, industrial securities should +show a distinctly greater pro-rata of decline. Let me illustrate, using +the stocks employed in the former table and covering the period of our +last great cycle, 1901-02-03. As most of the high prices in rails were +made in 1902, the highest prices of both 1901 and 1902 will be used, +and the lowest of 1903: + +RAILROAD STOCKS + + High in Low in + 1901-1902 1903 + Atchison 96⅝ 54 + B. & O. 118½ 71⅝ + Can. Pac. 145¼ 115⅝ + St. Paul 198¾ 133¼ + Erie 45½ 23 + L. & N. 159½ 95 + Mo. Pac. 125½ 85¾ + Penna 170 110¾ + Reading 78½ 37½ + Union Pac. 133 65¾ + ------- ------- + Average price 127.11 79.22 + +INDUSTRIAL STOCKS. + + High in Low in + 1901-1902 1903 + Amalgamated 130 33⅝ + Am. Smelter 69 36¾ + Am. Sugar 153 107⅛ + Anaconda 54¼ 25½ + Col. F. & I. 136½ 24 + Nat’l Lead 32 10½ + Tenn. Coal & I. 76⅝ 25⅞ + U. S. Rubber 34 7 + U. S. Steel 55 10 + U. S. Steel, Pfd. 101⅞ 49¾ + ------- ------- + Average price 84.22 33.01 + +“It will be observed from the above table that Industrials declined +about 51 points while rails declined about 48 points. But the decline +cannot be figured in points. The higher range of railroad shares must +be considered. A decline of two points in a stock selling at 100 is +only equivalent to a decline of one point in a stock selling at 50. +Therefore, in order to get a correct view of the matter, we must reduce +the decline to percentages. On this basis, railroad stocks lost about +38% of their value, and industrial stocks lost about 60% of their +value.”--From Thomas Gibson’s Market Letter, May 4th, 1907. + + +_Undigested Securities._ + +“The new methods and the new projects are going through the test of +fire today, and some of them are being consumed. The tests which weeded +out the badly organized and incompetent of the early stock companies, +which drove to the wall the “wildcat” banks of ante-bellum days, and +which wiped out dividends and stock rights in badly managed railways, +are now being applied to the new forms of organization which have been +the growth of the past decade. But the stronger and better organized +of these new corporations are likely to meet these trials without +disaster, or to modify their methods to conform to the teachings of +experience, until there remains to the financial world a valuable +residuum of new methods for giving flexibility to capital and promoting +its transfer promptly and efficiently from the industries where it is +not needed to those where it will render its highest service.”--From +“Wall Street and the Country,” by Chas. A. Conant. + + +_How to Compute the Value of Rights._ + +“Inasmuch as the method of computing the value of rights is slightly +complicated, an illustration may be given. Let us take the instance +of St. Paul again, where the stockholders were allowed to subscribe +to 23% of their holdings to new stock at par. The common stock was at +that time selling a little below $200 per share. Let us take the round +figure, and the operation is as follows: + + One hundred shares at $200 per share equals $20,000 + Twenty-three shares at $100 equals 2,300 + ------- + Total cost of 123 shares $22,300 + +“Average cost, $181 per share. + +“Deducting $181 from the market quotation leaves $19, the value of +the rights on each share of St. Paul stock. As a matter of fact, the +selling price was a little below $200, and the highest price of the +rights fell a little below $19 per share. + +“In other words the process is simply to take the number of new shares +per hundred shares of the original holding to be subscribed for, and +add the value of these new shares at the subscription price to the cost +of one hundred shares at the market price; then divide the total cost +of both old and new shares by the total number of shares, and deduct +the average price from the market quotations. This gives the selling +value of the rights.”--From “American Railways as Investments,” by Carl +Snyder. + + +_Barometer of Averages._ + +“In order to facilitate the examination of properties and their +comparative condition, the following table has been prepared. The +figures were arrived at by averaging the operating expenses, fixed +charges, margin of safety, and dividends of principal properties for +the last fiscal year. The stock prices are based upon the closing +figures of June 6, 1907. The margin of safety shown, is the margin over +common dividends. Results were as follows: + + Average operating expenses 69.01% + Average fixed charges 54.70% + Average margin of safety 5.28% + Average dividend common 6.03% + Average price of stock 1.09⅝ + +“As in all computations of this kind the figures are comparative +and not basic. The fact that one stock is in a much better position +than others does not necessarily mark that stock as a purchase, for +_all_stocks may be too high, and underlying conditions may not warrant +purchases in any quarter. Again, we must always consider the fact +that important elements which cannot be tabulated in figures may be +present. However, the table possesses value as a rough barometer, and +after it has been broadly applied, specific influences may be given +due consideration. If, for example, we find a common stock selling +well below 109⅝, with operating expenses below 69.01; fixed charges +below 54.70; margin of safety above 5.28 and the dividend rate above +6%, we have a remarkable combination of facts favoring the shares and +investigation will be stimulated. The figures vary widely at times in +different corporations and cannot always be considered either bullish +or bearish, as the good or bad features may be already discounted +in the current price of the shares. It may also be found that one +property is going backward gradually while another is improving its +position.--From Thomas Gibson’s Market Letter, June 8th, 1907. + + +_The Best Method of Trading._ + +“It may appear that if the market is to sway back and forth, sales +on advances, and purchases on declines would offer the maximum of +opportunity to the shrewd trader. But not so. To illustrate this, +a market movement from high to low prices as shown by a chart is +presented on the following page. + + “As simple as this illustration may appear, it is + worthy of most earnest consideration. True, the + upward and downward movements show opportunities + on both sides, but if the _purchaser_ makes a + mistake, as all speculators will, he is hopelessly + involved. If he buys at the wrong point he will + never see daylight during the progress of the + movement. Look at the other side of the matter. + The _seller_ cannot make a mistake. No matter + at what point he sells a profit lies before him. A + little reflection will show what a tremendous + difference exists here.”--From Thomas Gibson’s Market + Letter, Feb. 2nd, 1907. + +[Illustration] + + +_Indications of Crises._ + +“Preceding Indications.--This preceding period is characterized by +well-defined indications, some of which develop contemporaneously, but +which, so far as they are distinct in time, occur in approximately the +following order: + + “1--An increase in prices, first, of special + commodities, then, in a less degree, of commodities + generally, and later of real estate, both improved + and unimproved. + + “2--Increased activity of established enterprises, + and the formation of many new ones, especially those + which provide for increased production or improved + methods, such as factories and furnaces, railways + and ships, all requiring the change of circulating to + fixed capital. + + “3--An active demand for loans at slightly higher + rates of interest. + + “4--The general employment of labor at increasing or + well-sustained wages. + + “5--Increasing extravagance in private and public + expenditure. + + “6--The development of a mania for speculation, + attended by dishonest methods in business and the + gullibility of many investors. + + “7--Lastly, a great expansion of discounts and loans, + and a resulting rise in the rate of interest; also + a material increase in wages, attended by frequent + strikes and by difficulty in obtaining a sufficient + number of laborers to meet the demand.”--From “Crises + and Depression,” by Theodore Burton. + +_The Ordinary Swing of Prices During a Cycle of Speculation._ + + UPWARD SWING. + EXTREME | A long period of backing + HIGHEST. | and filling; public buying, and + 100 | inside liquidation. + 90 | Excitement and inflation + | 75% of general buying done here. + 80 | Good buying all around. + | Public interested. + NORMAL | Opinions mixed. Public beginning + VALUE. | to buy, but professionals + 65 | rather bearish. + 45 | Insiders still bidding prices up. + | Professionals bearish. + 30 | Insiders bidding for stocks, + | public skeptical. + 20 | A dull market. Insiders + EXTREME | accept all offerings. + LOWEST. | + + DOWNWARD SWING. + EXTREME | A long period of backing + HIGHEST. | and filling; public getting + 100 | tired and insiders selling. + 90 | Insiders selling. Much bull + | talk, dividend increases, etc. + | Some averaging by people + | who loaded up at the top. + 80 | More bull talk. More averaging. + | Insiders still selling. + NORMAL | Many weak accounts forced out. + VALUE. | A temporary halt and probably + 65 | a big rally. + 45 | Insiders pretty well out. + | The wise speculative element + | consider this the bottom and + | load up. + 30 | General blueness and pessimism. + 20 | A dull market. Insiders + EXTREME | accept all offerings. + LOWEST. | + --From Thomas Gibson’s Market Letter, + May 11th, 1907. + + +_The Factor of Safety._ + +“There remains but one point to which, in view of the conditions +roughly sketched above, the writer would call especial attention. +That is, that the investor should look well, always, to the factor of +safety. Before he puts his money into any road, no matter if it be on +the recommendation of the greatest banker in the United States, let +him consider how far that company is prepared to weather a storm. Few +roads ever prospered under receivership, no matter how honest or how +able. The receivership itself is a handicap. No matter how high the +yield, no investor whose primary regard should be the safety of his +money will put it into a road whose fixed charges, after ample charges +for maintenance, consume much more than 50% of the total net income +available for interest, dividends and improvements--that is, save in +exceptional cases like the New York Central--and until he has satisfied +himself thoroughly that the property is sound. + +“For the convenience of those not well acquainted, the following list +of the principal roads is given, with the percentage of total net +income consumed by fixed charges in the highly prosperous fiscal year +of 1905: + +TABLE OF FIXED CHARGES. + + Atch., Top. & S. Fe 42% Chi. & East. Illinois 68% + Atlantic Coast Line 57% Chi. & N’western 39% + Baltimore & Ohio 39% Chi., Bur. & Quincy 45% + Boston & Maine 78% Chicago Gt. Western 67% + Canadian Pacific 33% Chi., Mil. & St. Paul 32% + Central of Georgia 47% C., St. P., M. & O. 42% + Cen. R. R. of N. J. 50% C., C., C. & St. Louis 69% + Chesapeake & Ohio 53% Col. & Southern 55% + Chicago & Alton 73% Delaware & Hudson 40% + Del., Lack. & West 38% N. Y., Chi. & St. L. 41% + Denver & Rio Grande 52% N. Y., N. H. & H. 48% + Det., Tol. & Ironton 87% N. Y., O. & Western 53% + Du., S. S. & Atlantic 115% Norfolk & Western 37% + Erie 66% Northern Central 28% + Gr. Rap. & Indiana 76% Northern Pacific 29% + Grand Trunk 65% Pennsylvania 38% + Great Northern 26% Pitts. & Lake Erie 11% + Hocking Valley 31% P., C., C. & St. L. 54% + Illinois Central 47% Reading 45% + Iowa Central 79% Rock Island 83% + Kansas City South’n 54% Rutland 69% + L. Erie & Western 69% St. L. & S. Fran. 82% + Lehigh Valley 46% St. L. & S’western 76% + Long Island 101% Seaboard Air Line 78% + L. S. & M. S. 38% Sou. Pacific 49% + Louis. & Nash. 54% Southern 69% + Maine Central 46% Texas & Pacific 40% + Michigan Central 57% Tol., St. L. & S’w’n 61% + Minn. & St. Louis 77% Union Pacific 31% + M., St. P. & S. S. M. 44% Vandalia 54% + M., K. & T. 75% Wabash 80% + Missouri Pacific 60% Wheel. & Lake Erie 90% + N. Y. C. & H. R. 64% Wisconsin Central 69% + + +_Importance of Fixed Charges to the Investor._ + +“The high degree of stability imparted to interest payments and +dividends by a low percentage of fixed charges, and the high degree +of instability imparted by a large percentage, is so elementary that +it would seem to need no emphasis. And yet this item is habitually +disregarded by perhaps 90% of bond and stock buyers. On this account it +may be worth while to illustrate by simple comparison the effect of a +20% decline in gross or net earnings. We will compare the conditions of +two roads whose fixed charges are respectively 75% and 25% of the total +net income. The operation would be as follows: + + Suppose a 20% Decline + Say Earnings $1,000,000 $800,000 + Exp. (70%) 700,000 560,000 + ---------- -------- + Net $300,000 $240,000 + If F. C. 75% = 225,000 225,000 + ---------- -------- + Surplus for div. $75,000 $15,000 (Case I) + Decrease 80% + If F. C. 25% = 75,000 75,000 + ---------- -------- + Surplus $225,000 $165,000 + Decrease 26% (Case II) + +“It will be seen from the above that a 20% decline in the net earnings +would, in the first instance, mean a decrease of 80% in the surplus; +while in the second case, the same decline would mean a decrease of +only 26% in the surplus--figures which sufficiently indicate what a +high percentage of fixed charges means. + +“In this connection it may be further noted that in the large holding +companies, like the Pennsylvania, the New York Central, the Union +Pacific, and others, the factor of safety and the surplus shown tends +to be relatively more stable than in companies largely or exclusively +dependent upon the earnings of their own roads. This is due to the +general custom of American Railways of paying out in dividends only a +part of the actual surplus earned. From this it results that dividends +are much more stable than earnings, and that the income of the +holding companies from this source will correspondingly show smaller +fluctuations than earnings. When, therefore, as in the case of some +of the large holding companies named, the income from investments +represents a considerable portion of the total net income shown, the +surplus, other things being equal, will be much more stable than in +other companies. + +“It is needless to add that this stability is still further heightened +when, as in the case of the Pennsylvania, Union Pacific and some other +roads, the percentage of fixed charges is at the same time low.”--From +“American Railways as Investments,” by Carl Snyder. + + +_Borrowing and Lending Stocks._ + +“When a speculator sells stock which he does not possess (when he sells +it short) he (or what is the same thing, the broker who acts for him) +has to borrow the stock to make delivery to the purchaser. The one who +possesses stock (who is long of it) is, in ordinary circumstances, +as anxious to lend it as the one who has sold it short is anxious to +borrow it. + +“The lender of stock receives from the borrower the market value of it +in money, but except when the stock is lending flat (without interest) +or at a premium, the lender of the stock pays to the borrower of it +interest on the money paid for the stock by the borrower. The rate of +interest is determined by bid and offer. + +“On the New York Stock Exchange, brokers who have stocks to borrow and +brokers who have stocks to lend assemble immediately after the close +of business on the exchange and those who need stocks borrow amounts +necessary to make deliveries the next day. Those who neglect to borrow +at this time must do so the next morning, or some time in the day +before the delivery hour, 2.15 p. m. There is no loan crowd in the +morning, but borrowers seek lenders at the posts on the floor of the +exchange around which the particular stocks that they require are dealt +in. + +“The same rules govern the receipt and delivery of stocks borrowed and +loaned as govern stocks bought and sold. In returning borrowed stock +the borrower must notify the lender before 1 o’clock on the day of +delivery; the lender in calling or demanding the return of stock must +do likewise. + +“When a stock is loaned flat, the owner is relieved from the cost of +carrying the stock. If loaned at a premium he is still better off, for +the premium is so much gain. When a stock is loaned at a premium, the +premium applies in the absence of a renewal of the loan only to the day +on which the stock is loaned. + +“If a stock that has been borrowed advances in market price the lender +may require the borrower to pay to him the difference between the +price at which the stock was loaned and the new higher price. On the +other hand, if the stock declines in price the borrower may require +the lender of the stock to return to him the difference between the +price at which the stock was borrowed and the new lower price. These +differences are called market differences. + +“When a corner is being worked up in a stock it is the practice of +those engineering it freely to loan the stock in order to encourage the +creation of a short interest in it. When this short interest has become +large enough, or in other words, when the stock has become sufficiently +oversold, a demand for the return of the stock brings the corner to a +culmination. + +“An apparent borrowing demand for stocks is sometimes created by the +efforts of money lenders to obtain higher interest on their money than +is obtainable in lending it in the money market. If the lending rate +for a particular stock is, say, 6 per cent. when money is lending at 4½ +per cent. in the money market the money lenders will borrow the stock +in order to obtain the extra interest. + +“When a seller of long stock (stock actually owned) desires to create +the impression that he is selling short stock (stock not owned or +possessed) he has his broker borrow stock for delivery to purchasers. +Then when he has completed his sales he delivers his own stock to the +ones from whom his broker borrowed. + +“Also, when a seller of stock desires to conceal his identity, he has +his stock transferred or made out in the name of his broker, or a +clerk, or some other person previous to its delivery to purchasers. + +“Arbitrage dealers often sell stock held abroad which will not be +received for some time. They borrow for delivery to purchasers and when +their own stock arrives they make returns to the ones from whom they +borrowed. + +“Corporations intending to issue new stock have been known to sell +the stock in advance of its issuance and to borrow to make delivery +to purchasers. Then when the new stock was issued it was used to make +return to the ones from whom stock had been borrowed.”--From Smith’s +Financial Dictionary, by Howard Irving Smith. + + +_Scalping._ + +“There are many different methods and degrees of scalping. The word is +supposed to express all the forms of trading between the “Chaser of +eighths” and the man who operates for a profit of several points. + +“Scalping operations are more common than any other form of trading. +There are several reasons for this. Many people consider the market a +machine, and base operations on pictures of the past, i.e., charts. +These misused and mischievous instruments show so many opportunities +of profit in movements both ways, that the unsophisticated trader sees +what was _possible_, while the _probable_ is overlooked. + +“Again, the desire to scalp is helped by impatience and greed. The +small trader will grow disgusted if there is the slightest delay. +Dullness is unbearable to him. Also, he will frequently close good +commitments merely for the sake of ‘seeing the money.’ I have seen many +traders ‘clean up,’ receive a check which was of absolutely no present +use to them, gloat over it for a while, and pay another commission to +replace the trades. Ridiculous, but true. + +“I may say, as a general principle, that I consider scalping the +poorest form of trading. It involves the continued multiplication of +commissions, and constant personal attention. I know of but two men who +have made any considerable amount of money by scalping methods. They +are exceptionally fitted for this form of trading, and have the ability +to take a small loss quickly. This is a trait which is very rare among +public traders. A man will usually accept a small profit for no other +reason than that it _is_ a profit, and will sit stubbornly on a loss +for no other reason than that it is a loss. + +“The man who has reason to believe that a stock will advance or decline +ten points, will, in nine cases out of ten, realize more profit by +merely making his trade in the stock and going about his business until +he considers it wise to terminate the contract. I will say decidedly +that more traders will do better, make more money, and suffer less loss +of time, and less annoyance by abandoning scalping tactics altogether. + +“This view will no doubt cause my friends in the brokerage business +much wrath and indignation. They naturally prefer to have ten +commissions rather than one, and I fear that in many cases they +recommend scalping tactics for no better reason than the one mentioned. + +“That constant and repeated operations are disastrous, is pretty well +shown by the remark of a successful ‘Bucket-Shop’ man: ‘I don’t care +what they do, or what the market does, if I can only keep them coming +up to the order windows every few hours,’ said this gentleman. And he +was right; for the ordinary scalper is no more than a gambler, basing +his operations on possible variations, and paying a great percentage. + +“But if one will insist on scalping, it may be well to examine the +subject from the other side and see how the least of the evils may be +chosen. Without recommending the practice, or qualifying the views +expressed above, I will therefore give my idea of the safest methods of +scalping. + +“The man who attempts to operate on both sides of the market during the +same period, is the most deluded individual in the speculative world. I +have already stated, that I have only seen two traders out of thousands +I have observed, who could do this with any degree of success. These +hybrid Bull-bears are certainly not working on any definitely formed +opinion of the future. They are worse off than even the traders who are +unchangeably and constitutionally wedded to one side of the market the +year round. These latter prejudiced and inflexible individuals will +occasionally have a turn in their direction, whatever their position +may be, but the Bull-bear will go from one month to another, never +seeing anything more than a temporary gain. + +“It is important, therefore, that the active trader should form his +ideas, base his views on something, and, if he wishes to entertain +himself with repeated operations, map out a plan of campaign which +shall be, at least, intelligent in its original conception. + +“Just how successfully the plan suggested will result, depends largely +upon the alertness and understanding of the individual who engineers +it. If the active participant is easily moved from his position by +changes of a point or two against him; if he is easily frightened by +wild rumors and inspired talk; if he expects to gain thousands in a +few days by venturing hundreds; or if he believes that he can operate +in stocks so shrewdly as to guess high or low points within a dollar +or two a share, he will meet with disappointment and loss. If he can +overcome these drawbacks, he may do very well as an active trader, but +I wish to reiterate my views that the man who takes a position on the +market and retains it, will make more money than the scalper. + +“As a test question, let me put this inquiry to the active traders who +read this letter: + +“When you have been correct on a certain movement of say ten points, +and have made repeated operations, did you make any more money, or as +much, as you would have realized on a single trade showing a ten point +profit?”--From Thomas Gibson’s Market Letter, February 14th, 1907. + + +_Crop Damage._ + +As to the crops, we find many over-optimistic people trying to belittle +positive crop damage. It cannot be belittled. It is dangerous and +foolish to evade an issue instead of facing it. The argument that our +surplus from last year will carry us through a shortage is puerile. +That surplus has already been considered. Wheat in the bin is money; +some of that money has already been spent and all of it has been given +due consideration in the basing of our wealth. A number of writers +attempt to make a probable crop of 2,500,000,000 bushels of corn a +“bumper crop.” Their methods of arriving at this conclusion are not +sound. It is certain that we should, in the natural course of events, +raise more and more wheat and corn each year as the population of the +world, and the uses of the cereals increase. To compare one year with +another will not do. Particularly in Corn and Cotton must we steadily +increase in acreage and production, for we supply the world with those +commodities. To illustrate this point, let us go back a few years and +see what has occurred. + +COTTON AND CORN PRODUCTION OF THE UNITED STATES FOR TWENTY-FIVE YEARS. + + Bushels Bales + Year Corn Cotton + 1880 1,717,434,543 5,789,329 + 1885 1,936,176,000 6,550,215 + 1890 1,568,874,000 8,655,000 + 1895 2,151,139,000 7,157,340 + 1900 2,105,102,516 10,383,422 + 1905 2,707,993,542 11,345,988 + 1906 2,927,416,091 13,000,000 + +The time is very near at hand, when anything less than 3,000,000,000 +bushels of corn will be a crop failure; and high prices cannot be +considered a great compensation in lean years. Short crops mean +decreased demand for labor and loss of purchasing power by the common +people, who are after all the best spenders.--From Thomas Gibson’s +Market Letter, July 13th, 1907. + + +_The Selection of Securities._ + +When so many seductive baits are offered, so many nets and traps +contrived and constructed by clever brains and cunning fingers are +spread for the capture of those having money, is it surprising that +the careless and credulous are victimized, and even that the sagacious +and prudent should sometimes be taken in? Nevertheless, for the losses +they have sustained, investors, as a rule, have themselves chiefly +to blame. The mistakes made, in nine cases out of ten, have been the +purchase of “cheap” securities. The hope of realizing a little more +than ordinary interest, by buying paper at a discount, has proved to +be the rock on which unnumbered capitalists have split. In addition to +their money’s worth, they have endeavored to get something for nothing, +with the result of most generally getting nothing for something. It +is remarkable how blind are people, ordinarily sagacious enough to +make money, to the fact that property cannot pay a revenue beyond its +producing capacity. For instance, how can a trolley company, whose line +is wholly or mainly built from the proceeds of mortgage bonds, sell +them at a heavy discount, besides allowing large commissions for the +selling, and then pay both this interest and dividends on a large issue +of watered stocks? Or how can a poor agriculturist, occupying a half +improved farm out on the frontier, with a family to support and grain +selling barely above the cost of production, pay ten or twelve per +cent. upon the capital with which he does business?--From “The Art of +Wall Street Investing,” by John Moody. + + +_The Bank Statement._ + +“A statement or exhibit of the condition of banks. + +“In New York the Bank Statement is issued from the clearing house +on Saturday. The consolidated statement (or as it is officially +designated, the “summary of the weekly statement of the associated +banks”) is the collective showing by the banks belonging to the +clearing house--the showing when the returns of the individual banks +have been consolidated (put together). + +“The consolidated bank statement shows the average deposits, loans, +specie, legal tenders, circulation, reserve and surplus reserve of the +banks for the week ending with and including Friday. + +“The term deposits includes the net deposits (credit balances) of +persons and concerns (designated as individual deposits), balances +to the credit of other banks and all money and credits subject to +withdrawal. Loans include money loaned and likewise paper (promissory +notes, drafts, etc.) bought. Specie includes not only gold and silver +coins, but also gold certificates, which are redeemable in gold or +silver, as the case may be. Legal tenders as the term is used in the +bank statement, means, United States notes (greenbacks) and Treasury +notes (notes issued for silver bullion purchased under the so-called +Sherman act). + +“Note.--As defined by the statutes, legal tenders include United States +notes, Treasury notes, gold and silver coins and minor coins, but not +gold certificates, nor silver certificates. + +“Circulation means the notes issued by national banks, to secure the +redemption of which Government bonds have to be purchased by the banks +and deposited with the Treasurer of the United States. A bank cannot +count circulation in its reserve; whether it is its own circulation or +the circulation of some other bank, makes no difference. Reserve means +the total amount of specie and legal tenders held. Surplus reserve +means the total amount held in excess of legal requirement. A national +bank (in New York City) must, by law, maintain a reserve equal to +25 per cent. of its deposits; a state bank must, by law, maintain a +reserve of 15 per cent. In compiling the bank statement a reserve of +25 per cent. is allowed or figured for state banks as well as for +national banks. + +“The consolidated statement formerly was issued from the clearing house +in the following form, the changes (increases and decreases) resulting +from comparison with the preceding statement (the statement issued the +week before): + + Loans $874,647,900 $2,344,000 Increase + Specie 152,338,200 1,068,300 Increase + Legal Tenders 67,274,300 1,319,000 Decrease + Deposits 872,340,600 164,600 Increase + Circulation 36,072,500 411,600 Increase + Decrease of reserve, $291,850 + +“The (final) item reserve in the statement as issued from the clearing +house, meant surplus reserve, although not specifically so stated. + +“In the newspapers the statement appeared as follows; being elucidated +so as to show the reserve held (that is, specie and legal tenders which +are generally referred to as cash holdings), the reserve required and +the surplus reserve with the changes in these items: + + Current Preceding + Week Week Changes + + Loans $874,647,900 $872,303,700 In. $2,344,200 + Deposits 872,340,600 872,176,000 In. 164,600 + Circulation 36,072,500 35,660,900 In. 411,400 + Legal Tends. 67,274,300 68,593,300 De. 1,319,000 + Specie 152,338,200 151,269,900 In. 1,068,300 + -------------------------------------------- + Reserve held $219,612,500 $219,863,200 De. $250,700 + Res. req’r’d 218,085,150 218,044,000 In. 41,150 + -------------------------------------------- + Surplus $1,527,350 $1,819,200 De. $291,850 + +“In 1902 the Secretary of the Treasury (Leslie M. Shaw) suspended the +requirement to keep a reserve against government funds on deposit in +national banks upon the ground that these funds were special deposits +which were fully secured by pledge of bonds with the Treasurer of the +United States. This action by the Secretary of the Treasury caused a +change in the make-up of the bank statement by the addition to it of +figures showing the average amount of government funds on deposit. The +consolidated statement was thereafter issued from the clearing house in +the following form: + + Loans $874,647,900 $2,344,200 Increase + Specie 152,338,200 1,068,300 Increase + Legal Tenders 67,274,300 1,319,000 Decrease + [3]Deposits 872,340,600 164,600 Increase + Circulation 36,072,500 411,600 Increase + Reserve on all deposits 291,850 Decrease + Reserve on all deposits + other than United States 325,825 Decrease + +[3] United States deposits included, $40,633,400. + +“In the newspapers the statement was made up in both the old and the +new forms as follows: + + Current Preceding + Week Week Changes + + Loans $874,674,900 $872,303,700 In. $2,344,200 + Deposits 872,340,600 872,176,000 In. 164,600 + Circulation 36,072,500 35,660,900 In. 411,400 + Legal Tends. 67,274,300 68,593,300 De. 1,319,000 + Specie 152,338,200 151,269,900 In. 1,068,300 + ------------------------------------------- + Reserve held $219,612,500 $219,863,200 De. $250,700 + Res. req’r’d 218,085,150 218,044,000 In. 41,150 + ------------------------------------------- + Surplus $1,527,350 $1,819,200 De. $291,850 + +Deducting the United States deposits held by the banks from the +aggregate deposits the bank statement compares as follows: + + Current Preceding + Week Week Changes + + Tot. deposits $872,340,600 $872,176,000 In. $164,600 + U.S. deposits 40,633,400 40,769,300 De. 135,900 + ---------------------------------------- + Dep’s 25% $831,707,200 $831,406,700 In. $300,500 + Reserve held 219,612,500 219,863,200 De. 250,700 + Res. req’r’d 207,926,800 207,851,675 In. 75,125 + ---------------------------------------- + Surplus $11,685,700 $12,011,525 De. $325,825 + +“The detailed bank statement, which is issued simultaneously with the +consolidated statement, contains first the number of each bank (each +bank has a number by which it is known at the clearing house) and then +the name of the bank, after which follow the amounts of its capital, +net profits (surplus and undivided profits), specie, legal tenders, +deposits and circulation. + +“The bank statement is said to have been made up on rising averages +when the items in it have been increasing in amount during the week, or +the statement is said to have been made up on falling averages when the +items in it have been decreasing in amount during the week. + +“Generally speaking, the bank statement is favorable or good when it +shows that the position of the banks has been strengthened, as by an +increase in the surplus reserve through, or by means of an increase in +their cash holdings rather than by a decrease in their deposits, which +often is effected by the calling of loans--by demanding and obtaining +the payment of money loaned on call. As money loaned is credited to +borrowers on their deposit accounts and increases the total deposits +of the bank, so the payment of loans by borrowers takes from and +decreases deposits. As will be seen, the calling and consequent payment +of loans does not increase cash holdings but merely changes balances +in individual accounts. A reduction in deposits reduces the amount +of cash required to be held as a legal reserve and correspondingly +expands (increases) the surplus reserve. Generally speaking, also, the +bank statement is unfavorable or, if particularly unfavorable, is bad +when the position of the banks has been weakened, as by a decrease in +the surplus reserve through a decrease in their cash holdings rather +than by an increase in their deposits, which often is effected by an +expansion in (increase in amount of) their loans, which correspondingly +expands (increases) their deposits and correspondingly increases the +amount of cash required to be held as a legal reserve. This additional +amount is deducted from and correspondingly reduces the surplus reserve. + +“The bank statement may be said to be favorable or good, however, if +an increase in loans is reported when the banks are surfeited with +money: also the bank statement may be said to be unfavorable or rather +not good (but hardly bad) when it shows that money is accumulating in +idleness in the banks--when deposits are increasing, not as a result of +increasing loans, but in the absence of a borrowing demand for money. + +“There are other circumstances which make the bank statement favorable +or unfavorable as disclosed in the circumstances themselves. + +“There is also a non-member bank statement, which is a statement of the +conditions of banks which are not members of the clearing house but +clear through members. This statement is issued from the clearing house +on Monday and shows the average condition of the banks for the week +ending with and including the preceding Friday. + +“The non-member bank statement contains the name of each bank, followed +by its capital, net profits, average amount of loans and discounts and +investments, average amount of specie, average amount of legal tender +notes and (national) bank notes, average amount on deposit with its +clearing house agent (the bank through which it clears at the clearing +house), average amount on deposit with other New York City banks and +trust companies, average amount of net deposits and average amount of +circulation.”--From Smith’s Financial Dictionary. + + + + +_The Cycles of Stock Speculation._[4] + + +All speculators, and most investors, possess a general idea of the +range and trend of prices for a considerable period. This knowledge is +more frequently based upon impressions gained during their own years +of activity in the speculative world than upon research. The knowledge +gained by active participation is certainly the most forcible and +lasting, but is frequently productive of erroneous ideas, as will be +set forth hereafter. + +[4] Reprinted from MOODY’S MAGAZINE of August 1906. + +For the purpose of giving a clear idea of the movements in stocks +during recent years, the accompanying chart has been arranged. The +use of circles in lieu of the customary straight lines was hit upon +as presenting more clearly to the eye the comparative extent of each +year’s movement, and more plainly distinguishing one year from another. +These advantages are gained without obscuring from view the general +trend of prices for the period considered. + +For the purpose of establishing a single hypothetical stock whose +movements should be representative of the course of all other active +securities, the fluctuations of twenty stocks were welded together. +That is to say, the high points of these stocks for the year 1896 +were added and divided by 20. The same course was followed with the +low points, and each year considered was treated in like manner. By +drawing a circle upon a numbered chart with the upper rim resting +upon the figures representing the high point, and the lower rim upon +those representing the low point, an average price for the year is +necessarily established at the axis. + +The size of the circles shows the actual and comparative extent of the +movements, and the position of consecutive years on the diagram shows +the general trend of prices. + +In selecting the twenty stocks to be used in forming a composite +security, care was taken to eliminate the shares of such corporations +as have undergone radical changes during the period considered, 1896 +to 1905, inclusive. The Rock Island Company, for example, is in itself +an important system, but owing to the conversion of $75,000,000 Common +stock into $200,000,000 of mixed securities in 1902, the tracing +of its subsequent movements would involve unnecessary computations +and explanations. It may be added that experimental tests show that +the hypothetical stock, call it “Composite Common” for the sake of +convenient reference, was faithfully representative of almost all +movements from 1896 to 1906, and that the selection of other stocks +would have made only insignificant variations in the general result. +The original intention was to extend the investigation for a longer +period than ten years, but so many readjustments, assessments, and +other changes occurred in listed securities prior to 1896 as to make a +clear showing difficult. + +Common stocks of railroads only were considered. Few Industrials have +reached their tenth birthday, and aside from this, their introduction +would make a false showing by increasing the dividend rate with no +corresponding increase in the selling price of the stock. + +The twenty stocks chosen for amalgamation were as follows: + +Atchison, Topeka & Santa Fe, Baltimore and Ohio, Canadian Pacific, +Canada Southern, Chesapeake & Ohio, Chicago & Great Western, Chicago, +Milwaukee & St. Paul, Chicago & Northwestern, Chicago, St. Paul, +Minneapolis & Omaha, Erie, Illinois Central, Louisville & Nashville, +Missouri Pacific, New York Central & Hudson River RR., Pennsylvania, +Reading, Southern Pacific, Southern Railway, Union Pacific, and Wabash +RR. + +PRICES OF COMPOSITE BY YEARS FROM 1896 TO 1906, INCLUSIVE. + + Year High Average Low Fluctuation + 1896 44 37½ 31 13 + 1897 53¼ 43⅞ 34½ 18¾ + 1898 62½ 53¼ 44 18½ + 1899 72½ 64¼ 56 16½ + 1900 80½ 70½ 60⅜ 20⅛ + 1901 106½ 89⅞ 73¼ 33¼ + 1902 119¼ 105½ 91⅝ 27⅝ + 1903 106½ 89⅞ 73¼ 33¼ + 1904 105½ 91 76½ 29 + 1905 122¾ 109⅝ 96½ 26¼ + 1906 125¾ 111⅞ 98⅛ 27⅝ + +Fractions were necessarily omitted from the totals employed in charting +the movements. They are, however, unimportant. Dividends on Composite +Common were as follows: + + 1896 1⅖ % + 1897 1½ % + 1898 1⅝ % + 1899 1⁹/₁₀ % + 1900 2½ % + 1901 3 % + 1902 3½ % + 1903 3⅜ % + 1904 3⁷/₁₀ % + 1905 3⅞ % + 1906 4¾ % + +[Illustration: FLUCTUATIONS OF STOCKS FOR TEN YEARS. + +(The rims of the circles touch the average high and low points of 20 +railroad stocks, each year for 10 years.) + +Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.] + +It has been the frequent contention of the writer that a chart as a +basis for speculative ventures is ridiculous, but a diagram framed for +the purpose of pointing out certain facts, or inciting the student of +speculative affairs to investigation of causes is a different matter. +No interested person can look at the accompanying chart without being +struck at once with the decline of 1903 following the steady advance +of the preceding years. If this observation incites intelligent +investigations as to the reasons for the reversal, much good may +result. On the other hand, the fallacy of operating on mere mechanical +records of the past is shown by the same diagram. If the chart had +been handed to one of the mechanical traders in 1902 he would have +argued that the average price of each year marked the approximate low +point of each succeeding year. It certainly does look convincing, +but what follows? The infallible system not only fails to work, but +reverses itself, and the average price of 1902 becomes the approximate +high price of 1903 and 1904. At about the time the system player has +gathered enough figures to go on, a change occurs. No intrinsic merit +attaches to any kind of diagram, they being merely convenient forms for +tabulating history. + +Some interesting coincidences occur in the chart; most remarkable is +the exactly similar size and position of the circles representing the +years 1901 and 1903. In no instance did the high or low points of any +integral stock correspond in these years, but the total footings were +identical in each case. + +The speculator may extract some value from the diagram by observing +that opportunities for profits of forty or fifty points did not +occur during the entire period. The extreme possibilities in any one +year were 33 points, and much less on the average. If the trader had +purchased or sold Composite at an average price, his possibilities of +profit would have been limited to about 15 points in any one year. This +does not accord with accepted theories. The ordinary speculator who +pursues his operations for ten or fifteen points successfully is almost +certain to believe that much more profit lies before him, that he is +only getting started. There is a reason for this; the public trader +takes for his barometer some security which has been conspicuous for +its extended fluctuations; he naturally notices and remembers it to the +exclusion of the rank and file of stocks. For example, every active +participant in speculative affairs knows that Copper had a range of +75 points in a single year, 1901. He bases possibilities too much on +this sort of knowledge without reflecting that Copper was a cardinal +exception, and that in order to participate in such movements he must +throw caution to the winds, and deal in stocks which offer no degree of +safety. + +Another point established is the lapse of time required in a +readjustment of values. It took Composite Common seven years to +advance from an average price of 37 to an average price of 105, 68 +points. This again falls short of the speculator’s ideas. He expects +to buy a stock at 50 today, and sell it at par six months hence, an +operation which is shown by the movements of a representative stock to +require a period of six years. Again his expectations are founded on +exceptions. The same line of reasoning applies to one case as to the +other. The speculator unconsciously magnifies everything connected with +speculation. + +In reviewing the movements of prices from 1896 to 1905, the most +important question is, what caused the reversal of form in 1903? A +complete answer to this question would be highly educational. There +was no panic, nothing faintly resembling one; business suffered some +stagnation, it is true; there was a falling off in the iron and steel +business, but crops were good, and wheat, corn, oats, and cotton +brought good prices in both 1903 and 1904. Serious business depression +was more in anticipation than in realization, but 1904 witnessed no +material recovery in prices. These causes do not fully explain so +radical a change. If conditions had been such as to cause a reduction +of dividends, or a scarcity of money in 1903, the decline would +be explained, but money was plentiful enough, and dividends were +unchanged. The ratio of dividends as compared with prices was also +fairly maintained from 1896 to 1902, and it would appear that prices +should merely stop advancing when dividends became stationary; but +prices did not merely stand still, they went materially backward. + +Without pretending to enter into a full discussion of the causes for +the change, one or two points may assist in forming a conclusion. The +steady advance in prices from 1896 to 1902 represented two things--a +recovery from the great depression of 1893, and the natural advances +of property values in a prosperous and growing country. The latter +point is the more important, and as there has been no cessation of the +growth of population or prosperity, other causes for the reversion +must be sought. It is not sufficient to merely say that the recovery +over-leaped itself, for such an event would have plainly mirrored +itself in a reduction in the rate of dividend returns. + +Capitalization of railroads in 1903 increased about 14% as compared +with an average increase of 6% in the preceding seven years. Add to +this the tremendous increase in the capitalization of industrial +corporations, and an over-supply of stocks appears as one of the +contributary causes--undigested securities. + +Dividend rates were maintained, but were not increased. This +particularly affects the simon pure speculator. Nothing will drive him +into a panic quicker than a decreased dividend, and nothing makes him +so sanguine of higher prices as an increase in the rate of payment. He +is always basing his operations on rumors of higher dividends, and when +one of these rumors fails of verification, it is almost as bad as a +decrease. + +And dividends did decrease in one important quarter; United States +Steel, the speculative favorite, capitalized more heavily than a +dozen ordinary corporations, cut its rate from 4 to 3½%, with every +promise of a further reduction. This had a far reaching effect, both on +speculators and small investors. + +It is certain that fundamental conditions have more to do in shaping +prices than has speculation, but the speculator helps, and in 1903 +he was particularly potent because of the excesses engendered by the +unusual speculative advances of 1901 and 1902. He helped to make the +prices and he helped to break them, so he may be considered a factor in +the reversal. + +The small investor helped. He, too, is a dividend man; he seldom looks +at earnings, improvements, or extensions--he wants dividends. United +States Steel was a body blow to him; it not only affected his purse, +but it frightened him. + +And it is probable that an army of small investors sold their holdings +for another reason--they discovered that they could make a higher rate +of income in other channels. So long as both dividends and prices +advanced they were satisfied. They were speculating, not investing, but +you cannot convince the ordinary man that buying a stock outright, in +the hope of an advance in price, is speculation pure and simple. + +Much of the money diverted from the stock market in 1903 by the class +last mentioned, has never returned to Wall Street. This bears out +the theory that higher rates of interest are being found elsewhere. +Never before has the public refused to enter the stock market during +a period of great prosperity. They are absent now, and furthermore, +they show no intention of returning. Possibly they are wrong. The same +influences which are operating to give them better returns may be +operating to greatly enhance the value of the shares they ignore,--but +the small investors want dividends. Their failure to enter the stock +market would seem to be strong evidence that they are finding other +investment-speculations more attractive than listed shares. If this +is the case, the influences leading to higher interest rates are +already at work, although not clearly discernible. Diversification of +investments would tend to obscure the truth for a time. + +But whatever the causes for the stock market relapse of 1903 may have +been, the recovery has been complete. The average prices of 1906 were +the highest on record. + + +_Cycles of Grain Speculation._[5] + +In examining the price movements of wheat and corn for the last ten +years, a gradually advancing trend is apparent. That such would be +the case was a foregone conclusion; we naturally expect to find wheat +and corn in the foremost ranks of a universal movement towards higher +prices. The underlying causes for this general appreciation have +already been extensively and clearly discussed in Moody’s Magazine. + +[5] Reprinted from MOODY’S MAGAZINE of May, 1906. + + +_All Prices Advancing._ + +The price appreciation of wheat and corn is merely confirmatory of +the theory that all prices are advancing, and that they will continue +to advance until the balance between gold and other commodities is +readjusted. + +But there is something else written between the lines of the statistics +of price changes in wheat and corn. The _relative_ advance of the two +cereals is all out of proportion. + +This fact leads us to seek for some specific cause operating either to +depress one cereal or enhance the other, irrespective of the influence +already named. + +The figures for the last ten years are as follows: + + +WHEAT. + + Year High Average Low + 1896 94⅜ 73¹¹/₁₆ 53 + 1897 109 86⁹/₁₆ 64⅛ + 1898 185 123½ 62 + 1899 79½ 71¾ 64 + 1900 87½ 74½ 61½ + 1901 79½ 71⁵/₁₆ 63⅛ + 1902 95 81¼ 67½ + 1903 93 81¾ 70¼ + 1904 122 101¹⁰/₁₆ 81¼ + 1905 124 100¹⁵/₁₆ 77⅞ + 1906 94¾ 81⅞ 69⅛ + + +CORN. + + Year High Average Low + 1896 30⅝ 25¹/₁₆ 19½ + 1897 32⅝ 27³/₁₆ 21¾ + 1898 38 32 26 + 1899 38⅛ 34¹/₁₆ 30 + 1900 49½ 40 30½ + 1901 67½ 51¾ 36 + 1902 88 65⅞ 43¾ + 1903 53 47 41 + 1904 58⅛ 50⁷/₁₆ 42¾ + 1905 64½ 53¼ 42 + 1906 54¾ 46¾ 39 + +The average price of wheat in the first year (1896) was 73 ¹¹/₁₆ in +standard format, in the two following years very high prices were +established, and the average may be considered abnormal, as the years +1897 and 1898 cover the rise and fall of Joseph Leiter. + +[Illustration: FLUCTUATIONS OF WHEAT PRICES FOR TEN YEARS. + +(The rims of the circles touch the high and low prices of wheat each +year for 10 years.) + +Reproduced, by permission, from MOODY’S MAGAZINE of August, 1906.] + +To digress for a moment, it may be interesting to note that efforts +to carry prices beyond reasonable limits almost invariably result in +disaster to the promoters, no matter how far they may be successful +in establishing black-board quotations. With the exception of “Old +Hutch” wheat corner in 1888, all the numerous attempts to speculate +successfully on wholly artificial prices in commodities, have failed. +The Sully cotton campaign, the Leiter wheat deal, the Phillips corn +deal, the Coster-Martin corn deal, all ended in ruin for their sponsors. + +From 1899 to 1901 inclusive, the average price of wheat was a little +above 70 cents, in 1902 and 1903 it rose to 80 cents, and in 1904 and +1905 to $1.00. + +In the latter years, allowance must again be made for unusual +influences, the Russo-Japanese war naturally helping wheat prices; +making due allowance for this, it may be fairly considered that wheat +has in the last ten years increased its average selling price from +about 70 cents to 90 cents, or approximately 30%. + + +_Why Corn Has Risen More Than Wheat._ + +Corn prices in the same period have advanced 100%; the comparatively +large number of uses to which corn is put may partly account for the +disproportionate enhancement of its price, but the discrepancy is too +great to be entirely explained away on this account. It is necessary to +seek some additional and more powerful reason. + +[Illustration: FLUCTUATIONS OF CORN PRICES FOR TEN YEARS. + +(The rims of the circles touch the high and low prices of corn each +year for 10 years.) + +Reproduced, by permission, from MOODY’S MAGAZINE of May, 1906.] + +The following statistical facts will make it clear that corn and wheat +are in wholly different positions. + +The United States raised, in 1905, 693,000,000 bushels of wheat. +The world’s wheat crop in the same year was 3,275,200,000 bushels. +Therefore, we raised approximately 21% of the world’s wheat crop. The +year 1905 is fairly indicative of the proportions for the last ten +years. + +The acreage of wheat in the United States in 1896 was 43,618,646; in +1905 it was 47,854,079, an increase of 38%. + +The world’s wheat acreage as indicated by production, is increasing at +about the same rate as is the acreage of the United States. + +The United States raised, in 1905, 2,708,000,000 bushels of corn. The +world’s corn crop was 3,396,800,000; therefore, we raised 80% of the +world’s corn. + +The corn acreage of the United States in 1896 was 81,027,156; in 1905 +it was 94,011,369, an increase of 16%. The world’s corn acreage, as +shown by production, did not keep pace with our own ratio of increase, +but remained almost stationary. + +These figures show that the world is depending on the United States +for only 21% of its wheat, and that wheat acreage the world over has +increased about 38% in ten years; but the world is depending on the +United States for 80% of its corn, and the world’s corn acreage has +increased less than 16%. + +In order to grasp the full significance of these figures, our practical +monopoly of corn production must be appreciated. Even if we admit an +equal ratio of increase in corn acreage the world over, it remains for +the United States to provide 80% of the increase. + + +_Corn Area Limited._ + +The probability of any considerable area of new corn land being +exploited, either at home or abroad, is very small. A recent circular +letter by a man prominent in the cash corn trade, states that there is +not an uncultivated acre of available corn land in the United States. +This is a radical statement, and does not allow for the fact that with +a sufficient price stimulus, considerable wheat, or even cotton land, +would be diverted to corn. But whatever allowances are made for an +increased corn production, it must be admitted that the possibilities +are largely confined to the United States. + +Wheat acreage is not thus circumscribed; in fact, the case is +practically reversed; almost 80% of the natural increase in wheat +production will come from outside our boundaries. Of the principal +wheat producing countries,--France, Germany, Russia, Poland and +Caucasus, Italy, Hungary, Spain, Roumania and Argentine Republic--the +two first named alone fail to keep pace with the United States in ratio +of increased production, and others have made up the deficit of these +two laggards. + +In a nutshell, the difference between the relative positions of wheat +and corn is this: The world’s supply of wheat will be furnished by the +world, while the world’s supply of corn must be furnished by the United +States. + +It appears, therefore, that while wheat and corn may both be expected +to gradually seek a higher average price in sympathy with the general +upward trend, corn is affected by a specific influence, the effects of +which must be added to the homogeneous advance. + +It is not possible that the supply of corn should increase as rapidly +as the demand, under the circumscribed conditions herein set forth. As +has already been suggested, the price of corn may become attractive +enough to cause the diversion of wheat and cotton lands to corn +growing. The possibilities of such a course, however, are not only +limited by nature, but such action would stop itself at a certain +point by decreasing the supply of wheat or cotton, and again restoring +them to favor with the planter. + +The speculator may, therefore, reasonably believe that corn is +destined, eventually, to reach much higher prices. He must, of course, +allow for the temporary influences of large and small crops, and the +numerous other actual and technical conditions which cause intermediate +fluctuations, and must furthermore bear steadily in mind the fact that +there is a limit beyond which the price of corn can never be sustained. + +When a given commodity goes beyond a price where it can be replaced by +another commodity, it has gone too far; and when necessities become +luxuries, they take their places as such, and demand slackens. + +[Illustration: FLUCTUATIONS OF COTTON PRICES FOR TEN YEARS. + +(The rims of the circles touch the average high and low price of cotton +each year for 10 years.) + +Reproduced, by permission, from MOODY’S MAGAZINE of June, 1906.] + + +_Cycles of Cotton Speculation._[6] + +The accompanying chart, formed on the same plan as the diagram +illustrating the movements of stocks in Moody’s Magazine for May, +develops some interesting features in the movements of Cotton for the +last ten years. + +[6] Reprinted from MOODY’S MAGAZINE of June, 1906. + +For the benefit of those readers who did not follow the stock chart, it +may be said that each circle represents the fluctuations for a single +year. The bottom rim of the circle rests on the lowest price during the +period, and the top rim on the highest price. The average price is, of +course, established at the axis. + +The chart illustrates speculative extremes in cotton, the figures on +which it is based are not the prices of Spot cotton, but extreme high +or low prices for all options. The result, however, would have been +only slightly changed had Spot cotton prices been employed. + +The diagram is based on fluctuations of 25 points, or ¼ cent per +pound; the prices shown, therefore, are not exact, but they serve to +illustrate comparative movements with sufficient accuracy. The high +and low figures are not those of a calendar year, but of a fiscal, or +crop year, ending August 31 of the years named; thus the prices for +1896 represent the fluctuations of the season 1896-1897. As production +is necessarily a vital factor in making prices, this method was adopted +to prevent confusion in examining the price effects of lean or abundant +production. The range of prices for the period considered (1896 to 1906 +inclusive), was as follows: + + Season High Average Low Fluctuation + 1896-97 8.50 7.59 6.69 1.81 + 1897-98 7.50 6.50 5.62 1.88 + 1898-99 6.73 5.84 4.96 1.77 + 1899-00 10.00 8.38 6.76 3.24 + 1900-01 10.60 8.80 7.01 3.59 + 1901-02 9.67 8.51 7.35 2.32 + 1902-03 13.75 10.81 7.87 5.88 + 1903-04 17.46 13.23 9.01 8.45 + 1904-05 11.15 8.77 6.39 4.76 + 1905-06 12.54 10.93 9.32 3.22 + 1906-07 11.30 9.95 8.60 2.70 + +In the first three years considered we find low prices, and naturally +restricted speculation. The speculative price range for the entire +three year period is only a shade more than 3½ cents per pound. This +was occasioned by two things; first, the general depression following +the panic of 1893, and second, over-production. An examination of the +prices of staples shows that unusually low figures prevailed in 1898 +and 1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents +in 1898. Wheat shows high average prices, but the showing is a result +of fictitious speculative figures established by the Leiter deal, and +cannot be considered a fair criterion. It may be added, however, that +wheat sold as low as 64 cents in 1897, and 62 cents in 1898. + +The question of over-production will be made apparent by reference to +the following table: + + Season Crops in Bales + 1896-97 8,714,000 + 1897-98 11,180,000 + 1898-99 11,235,000 + 1899-00 9,439,000 + 1900-01 10,425,000 + 1901-02 10,701,000 + 1902-03 10,758,000 + 1903-04 10,123,000 + 1904-05 13,556,000 + 1905-06 10,697,000 + 1906-07 13,000,000 + +Prior to 1897 no crop of over 10,000,000 bales had ever been made; +the two bumper crops, 1897-98 and 1898-99 coming together, naturally +brought about very low prices, particularly as they occurred in a +period of general depression. + +In the season next following, 1899-1900, there is a marked falling off +in production, which is again reflected in a higher average price. But +from that time on, we do not find prices and production in such perfect +accord. + +It is generally considered now that 10,500,000 bales is a fair crop. In +the four seasons from 1900-01 to 1903-04 inclusive, we raised normal +crops, while prices advanced. It would be manifestly unfair to consider +the year 1903-04 as reflecting with any degree of accuracy the normal +price of cotton, for in that period occurred the disastrous Sully +campaign. Making due allowance for this, however, it may be assumed +that prices would have advanced if no such deal had occurred. This +statement is supported by the fact that the bursting of the bubble did +not put prices below 9 cents at any time. + +Now the most important part of the period is reached, the seasons of +1904-05 and 1905-06. + +In 1904-05, in the face of an unprecedented crop of 13,600,000 bales, +and in spite of the depressing influence of a speculative debauch in +the previous year, the average price of cotton was 8¾ cents. + +Still later, in 1905-06, a crop only a little below normal was raised +and sold at an average price of 10.93. + +Eliminating speculative extremes, and the temporary effects of large or +small crops, it appears that the price of cotton is steadily advancing. +This is the principal fact for the speculator to consider. + +No one pretends to dispute the fact that the prices of all staple-food +stuffs, metals and other commodities, as well as labor, have advanced +materially in the last ten years. Yet the ordinary speculator ignores +this broad general principle, and seeks specific causes for the +readjustment in cotton prices. And even this research is seldom +conducted intelligently. The investigator attempts to explain higher +cotton prices by pointing to reduction of acreage, diversification of +crops and organizations formed for the purpose of withholding supplies +from the market. He disregards the fact that while these influences +play some small part in the matter, cotton is also seeking a higher +level in common with every commodity that is bought and sold. + +The contention is frequently heard that 10,500,000 bales, or even +11,000,000 bales of cotton can no longer be considered an average crop; +that the supply should steadily increase in order to keep pace with +consumptive demand, and that the crop of 1904-05 was therefore small, +and the crop of 1903-04 not so large as it would appear. As this is the +most common of the numerous explanations offered as to the recent high +prices of cotton, it will be briefly discussed. + +In order to arrive at a clear view of the ratio of increase in +production, a considerable period must be consulted. The statistics of +crops from year to year, or even from two or three years, will not do. +Let us cover a long period, jumping ten years at a time. + + Season Crops in Bales + 1860-61 3,849,469 + 1870-71 4,352,317 + 1880-81 6,605,750 + 1890-91 8,652,597 + 1900-01 10,383,432 + +This exhibit shows that if a sufficiently long period is consulted, +a steady increase in production is shown; the average production is +also well maintained in the five years from 1901-02 to 1905-06, if the +bumper crop of 1904-05 is distributed over the entire period. + +The contention is all right, but its formulators do not take the pains +to ascertain that what they claim _should_ occur, is exactly what _has_ +occurred. + +The gist of the whole matter is this: regardless of all temporary or +artificial influences, some powerful force, not related to supply and +demand, is shouldering prices steadily upward. + +To the speculator this fact recognized, analyzed, and properly applied +should be of incalculable benefit. If he understands _why_ prices +have been advancing, he will be able to determine with facility how +long the influence will probably endure. Instead of being misled, or +rendered over-cautious by obsolete records of the past, he will be able +to calculate from these obsolete records the reasonable expectations +of the future. Temporary changes will, of course, be brought about by +temporary causes. Fundamental values will still be influenced by supply +and demand, but if an independent and submerged force is also at work, +due allowance must be made for its operation. + +That such a force _is_ at work is written large between the lines of +compiled statistics; to ignore its existence is an error rank with +mischief. The speculator who does not consult this influence may easily +make the mistake of selling at low prices because they are high by +comparison with prices which obtained a few years ago. + +On the other hand, a clear understanding of the matter will enable the +trader to decide with more or less accuracy what now constitutes a low +price for cotton, and what will be the probable price for the future. + + +_Conclusion._ + +The questions most frequently asked by inexperienced people are as +follows: + + 1--What margins are necessary to reasonable safety? + 2--Is it better to study the entire list or make a + specialty of one stock? + 3--What class of securities is the safest? + 4--What may be considered a fair rally or reaction in + stock prices under ordinary circumstances? + 5--What is the best general method of trading? + +Some of these questions have been answered in the preceding chapters, +but they will be taken up here in turn and the writer’s views submitted +on each head. + +1--What margins are necessary to reasonable safety? + +There is no unqualified answer to this question. The price of the +shares operated in must be considered. All other things being equal, a +stock selling at $50 would require only half the margin employed in +operating in a security selling at $100. If the $50 stock declines +25 points, it has suffered a quoted loss of half its value. The $100 +stock, however, must decline 50 points to suffer an equal loss. This +percentage of advance or decline is established with remarkable +fidelity in every considerable movement. + +If the scale order is employed as a method of accumulating shares, +extraordinary marginal provisions must be made, for even as the line +acquired increases, the original margin dwindles. The scale order +is, or should be, based on the assumption that a temporary decline +below the first purchase price is desirable and is necessary to the +best results. This fact, however, should never be contorted in such a +manner as to instigate purchases at high prices. If the operator who +employs the scale order will try to make the first purchase at what +he considers a bargain price, or in other words at what he calculates +to be the very bottom of a movement, he will surely find that in nine +cases out of ten, his own errors or the velocity which frequently +carries prices to ridiculously low or high points will enable him to +accumulate his line to advantage. The scale order should never be used +on its mechanical merits alone, but merely as a method of averaging. + +It goes without saying that marginal necessities will be principally +gauged by the correctness of the speculator’s general views. It is the +writer’s opinion, that if care and intelligence is used in judging +values, conditions, and the stages of the market, a margin of 20% will +be sufficient in almost all cases. That is to say, 20 points on a +stock selling at par and 10 points on a stock selling at 50. It must +be distinctly understood, however, that this opinion contemplates +purchases at low prices after a decline has occurred; and when both the +technical and general conditions warrant purchases. + +The late Charles H. Dow fixed the sum of $2,500 as the minimum amount +necessary to safe operating in ten share lots, but this sum, or any +other for that matter, is an arbitrary estimate. Mr. Dow’s figure was +founded on the necessity of averaging and also upon a most laudable +caution and conservatism which, however, might at times result in +unnecessary restriction of operations at a most favorable period. +There are times when $500 might be safely made the basis of trading in +certain stocks; there are other times and other stocks where $2,500 +would be wholly insufficient. + +While no rule of thumb is possible in this regard, it is the writer’s +opinion that there is no necessity for being out in calculations more +than 20%, provided always that due care has been exercised in basing +such calculations. + +2--Is it better to study the entire list or make a specialty of one +security? + +It is better to examine the conditions and prices of all the leading +securities. This is the only method by which _comparative_ values +may be arrived at. It is frequently the case, particularly after +a comprehensive decline or a panic, that certain excellent shares +have suffered almost as much as the more questionable securities. +At such times, what we want is not only a good bargain but the best +bargain obtainable, and this may be secured more readily by a careful +comparison of prices, values and income return than by any other method. + +Again, in an upward movement stocks generally advance, not +homogeneously, but one at a time or in closely related groups. Certain +shares may have a reasonable advance while others hang fire. If we have +good reason to believe we are on the eve of a great bull movement, the +best results may be attained by a process of rotation in trading. + +3--What class of securities is the safest? + +Railroad stocks are the soundest securities. The danger of competition +is not so great; the assets are more tangible and when once the +specific influences which are now working against them have been cured +or eliminated, as they certainly will be in time, these shares will +show a steady improvement both in value and price. At times the very +best stock will suffer severely and much pessimistic talk will be +heard of receiverships, etc. That is the time to buy. Lord Rothschild +once advised a friend to buy French rentes. “But the streets of Paris +are running with blood,” replied the recipient of the advice. “That,” +responded Rothschild, “is the reason you can buy rentes so cheaply.” +The man who purchases the shares of railroads when they are greatly +depressed may rest serenely in the consciousness that the future of +American railroads is assured and that measures seeking to obstruct +progress or prevent fair returns on investments, either in the way of +income on money or the natural accretion of values cannot possibly +endure. + +4--What may be considered a fair rally or reaction in stock prices? + +Here again the question of ruling prices of a certain stock are to be +considered. Low-priced stocks always move in a narrower range than do +higher priced ones. The extent of a probable comparative movement may +be gauged by percentages with a fair degree of accuracy. This method of +measuring a comparative advance or decline, however, will be frequently +disturbed by specific influences bearing on a certain stock or group of +stocks. + +It is useless to undertake to establish even a rough rule for ordinary +movements by a system of averages culled from history. We find that in +the course of ten years the rallies and reactions which appeared were +so varied in character both as to the extent in points and the duration +in days, that a barometrical average founded on such investigation +would be empirical. However, the results of this inductive reasoning +will be given for what they are worth. + +The principal movements for ten years have been as follows: + +_1.--The Bull Market of 1897 to 1899._ + +This advance began in April, 1897, and terminated in April, 1899--two +years of advancing prices. The average advance in Industrial shares was +38.79 points, or about 100%. Railroads advanced 38.92 points, or about +80%. + +The intermediate reactions were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Reaction Points Points Days + Sept. 10 to Nov. 8, ’97 10.17 9.78 59 + Jan. 7 to Mar. 25, ’98 8.67 10.43 78 + Jun. 10 to Jun. 16, ’98 2.84 2.93 7 + Aug. 26 to Oct. 19, ’98 9.41 4.41 54 + Jan. 30 to Feb. 7, ’99 3.07 3.38 8 + +_2.--The Bear Market of 1899-1900._ + +This decline began May 1st, 1899, and culminated Sept. 24, 1900--17 +months. The average gross decline in Industrial shares was 24.32 +points, or about 32%, and in Rails, 13.27 points, or about 18%. + +Intermediate rallies were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Rally Points Points Days + May 31 to Sep. 5, ’99 10.10 8.17 97 + Dec. 18, ’99, to Jan. 2, ’00 9.86 6.38 16 + Jan. 11 to Feb. 5, ’00 5.09 4.56 26 + Mar. 9 to Apr. 6, ’00 5.04 5.22 29 + May 15 to June 1, ’00 2.76 3.42 17 + June 23 to July 23, ’00 5.34 4.56 31 + July 31 to Aug. 15 2.10 2.31 16 + +_3.--The Bull Market of 1901._ + +The advance began Oct. 1, 1900, and culminated Aug. 26, 1901, 11 +months. The average advance in Industrial shares was 20.87 points, or +about 39%. The average advance in Rails was 37.92 points, or about 51%. + +Intermediate reactions were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Reaction Points Points Days + Nov. 20 to Dec. 8, ’00 5.09 1.67 19 + Dec. 27, ’00, to Jan. 19, ’01 6.29 4.39 24 + May 1 to May 9 7.55 14.49 9 + June 17 to July 15 8.80 11.30 29 + July 29 to Aug 6 3.89 6.64 9 + +_4.--The Movement of 1902._ + +The year 1902 is particularly interesting, as it shows what occurred in +the market the year prior to a period of industrial relaxation. This +year cannot be called either a bull or bear year, as while railroad +stocks advanced and closed the year with net gains, the Industrial +stocks suffered material declines. As the declines in Industrial stocks +was greater than the advance in Rails, we will arbitrarily designate +the year as a bear period and examine the homogeneous movement for +rallies, instead of reactions. + +From Dec. 12, 1901, to Dec. 15, 1902, Industrial shares declined 5.74 +points and rails advanced 3 points. + +Intermediate rallies were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Rally Points Points Days + Feb. 20 to Mar. 21, ’02 2.84 3.45 30 + Apr. 10 to Apr. 24 2.49 4.91 15 + May 19 to May 24 2.09 3.99 6 + June 24 to July 28 3.61 7.44 35 + Aug. 21 to Sept. 19 2.44 4.05 30 + Sept. 29 to Oct. 3 2.51 4.37 5 + Oct. 11 to Oct. 17 2.73 4.96 7 + Nov. 14 to Nov. 21 2.32 4.80 8 + +_5.--The Bear Market of 1903._ + +This decline began Jan. 8, 1903, and culminated Nov. 9th, of the year, +10 months. The average gross decline in Industrial shares was 24.18 +points, or about 36½%. The decline in Rails was 32.48 points, or about +27%. + +The intermediate rallies were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Rally Points Points Days + Jan. 20 to Feb. 16, ’03 3.51 1.38 28 + Mar. 10 to Mar. 20 1.85 3.11 11 + Apr. 13 to Apr. 30 3.77 5.07 9 + June 10 to June 12 2.60 4.48 3 + Aug. 8 to Aug. 17 6.50 8.14 10 + +_6.--The Bull Market of 1904 and 1905._ + +The advance began Jan. 6, 1904, and culminated Jan. 22, 1906--a little +over two years. The average advance in Industrial shares was 55.93 +points, or about 119%. The average advance in Rails was 49.56 points, +or about 55%. + +The intermediate reactions were as follows: + + Extent in Extent in + Industrials Rails Duration + Date of Reaction Points Points Days + Jan. 27 to Feb. 24, ’04 3.79 4.17 29 + Apr. 7 to May 18 2.55 4.03 42 + Dec. 5 to Dec. 12 7.46 5.93 8 + Apr. 14, ’05, to May 8, ’05 9.23 9.81 25 + May 12 to May 22 6.68 5.50 11 + Aug. 23 to Sept. 7 4.22 4.82 16 + Nov. 1 to Nov. 13 3.31 4.74 13 + +The year 1906 was a neutral year. Prices for Industrials declined +only slightly during the year and average prices of railroad stocks +were the same in December as in January. Money could have been made +throughout the period, either by sales on rallies, or purchases on +declines. As a consideration of a neutral year would add little to this +exhibit, it will be omitted. + +5.--What is the best general method of trading? + +The writer’s reply to this question consists principally of a summing +up of points already covered in other portions of this work. It is +necessary to study and understand the subject thoroughly, to know +values, general conditions, the technical position of shares, and +above all things to consult future probabilities rather than past +performances. Study of the past has its educational value and this is +also true of the present, but the future is the all-important thing. +Retrospective speculation is one of the commonest and most flagrant +of the numerous errors made by public participators. Get whatever of +experience and information you can from history, but _speculate_ on the +_future_. + +The man who enters the market with insufficient capital, who expects +to get rich quick or who allows success to lead him into excesses and +over-speculation will lose. It is as certain as death. He may succeed +for a time but not for long. + +Operations based on “tips” or “charts” will lead to final disaster. +This thing of trying to attribute habits to a market is, in the +writer’s opinion, ridiculous. The movements of prices are caused +by events. We know that in periods of financial stringency or +business depression prices fall, and in periods of inflation and +good times prices rise. It is possible to formulate a system founded +on repetitions applicable to every game of chance, and laid out on +paper, that system will appear infallible. You can find the exponents +of machine-made riches in every pool-room and gambling house in the +country. They all eventually lose and there is nothing to show that +the advocates of charts as a basis for stock trading ever fared any +better. Imagine James R. Keene, or J. P. Morgan poring over a chart and +operating thereon. Even if the market did have habits, as soon as these +habits were recognized and followed by a sufficient number of people, +the technical position would be rendered so rotten that the charts +would fail from that influence alone. Charts, employed as a convenient +method of picturing the past, may have a certain value, but used as +a basis for trading they are an evidence of laziness or incapacity, +or both. It requires hard work to be successful in any line. Thinking +is hard work, study is hard work, research is hard work; and it is +infinitely easier to bet on repetitions all nicely laid out in crooked +lines on a sheet of paper than to laboriously erect sound deductions; +but the difference in the two methods is that one will succeed and the +other will fail. + +We may also resort to the ultimatum employed by those eminent +citizens who punch each other’s noses in a prize-ring, i.e., tell the +chart-players to “go and get a reputation.” When they can show even one +instance of a fortune accumulated by this method their cause will be +greatly strengthened. + +In the exception taken to Mr. Dow’s theory of $2,500 being the minimum +amount necessary for operations in small lots, nothing could be further +from the present writer’s intentions than to recommend transactions on +insufficient margin. What is sought is merely the truth. The contention +that it is wise to stimulate extreme conservatism will not hold. If the +naming of a certain sum far in excess of real needs is praiseworthy, we +may expand the matter indefinitely and name $5,000 or even $10,000, as +the limit. + +But on the other hand, errors on the side of prudence are vastly +preferable to errors on the side of rashness. In this as in all other +things, the golden mean is the really desirable factor. + +As to the best side of the market for operations, it is thought that +the long side offers the greatest opportunities. The long side is +healthier, it is constructive, and almost all the great fortunes made +in the market have been founded on discreet and well-timed purchases. +To adhere to this plan, however, frequently requires long periods of +non-participation, and speculators are not, as a class, very patient. +The man who can so school himself as to await opportunities to purchase +good securities at low prices has by far the best of the bargain. Few +men can do it. + +It is fully realized that a work which defends stock speculation in +any degree, will meet with much criticism. Nevertheless, people _will_ +speculate and if you are one of those who will--do it right. + +It is submitted in concluding this work that if the advice here given +is heeded, i.e., to know _what_ you are buying and _why_; to buy only +_good_ properties when prices are depressed; to exercise patience and +provide sufficient capital; to eliminate first and forever the idea +that correct deductions mean sudden riches; to use brains instead +of charts, and common-sense instead of tips; in short, to apply +to speculative ventures the same degree of business foresight and +understanding as would be employed in any other business, the evils and +losses which have always been a part of speculative history, would be +diminished if not eliminated. + + + + +BIBLIOGRAPHY. + + +The books named on the following pages have been chosen as the nucleus +of a reference library particularly adapted to the needs of the +speculator. These works have been selected because of their clearness, +soundness and simplicity. There are many other excellent works bearing +directly or indirectly on the subject but these latter will be +suggested as the student progresses and it has been thought best not to +name a large number of books, which might result in confusion as to the +character of the subject matter. The possessor of the works named will +find that he has a very compact, comprehensive and inexpensive little +library, both from an informative and statistical standpoint. + +A B C Series. (The Wall Street Library.) + +This collection of six small volumes will be found useful to the +student. The subjects are arranged as follows: + + Vol. 1--A B C of Wall Street. By S. A. Nelson. + Vol. 2--Anatomy of a Railroad Report. By Thomas F. Woodlock. + Vol. 3--A B C of Banks and Banking. By Geo. M. Coffin. + Vol. 4--A B C of Stock Speculation. By S. A. Nelson. + Vol. 5--A B C of Options and Arbitrages. By S. A. Nelson. + Vol. 6--Theory of Stock Exchange Speculation. + +The volumes can be procured singly at $1.00 per volume ($1.10 +delivered) or in set of six at $5.00 per set. Volume five is not so +necessary to the speculator as the other five named. + + +THE INVESTORS’ LIBRARY. + +This series of five practical handbooks will be found to cover the +several fields of stock, bond and security investments. The books are +arranged as follows: + + Art of Wall Street Investing. By John Moody. + Mr. Moody possesses the gift of saying things with + clearness and directness, and while this work is + addressed rather to investors than speculators, the + two branches are so closely allied that what is of + educational value to the investor cannot but assist + the speculator. The book is No. 1 of the Investors’ + Library but is sold separately at $1.00; delivered, + $1.10. + + The Pitfalls of Speculation. By Thomas Gibson. + Price, $1.00; delivered, $1.10. + + The Investors’ Primer. By John Moody. + A thoroughly practical description and explanation of + the methods and rules followed by bankers and brokers + in judging and dealing in securities. Price, $1.50; + delivered, $1.62. + + Mining Investments and How to Judge Them. By Francis C. Nicholas. + This book is No. 5 of the Investors’ Library and is + an essential to the investor in mining shares. The + price is $1.00; delivered, $1.10. + +These four books, with The Cycles of Speculation, constituting the +Investors’ Library are supplied in a box and sent to any address in the +United States, Canada or Mexico for $5.00, delivered. + + American Railways as Investments. By Carl Snyder. + This is the simplest and most accurate book of its + kind. It is recommended to the student of values + as indispensable. The matter contained is not only + comprehensive in scope but is stripped of the + technicalities and involved verbiage which confuses + us in most works of this character. The price is + $3.20; delivered, $3.52. + + Copper Handbook. Compiled by Horace J. Stevens. + This volume is indispensable to the operator who + handles Copper stocks, either listed or unlisted. It + contains a history and frank expression of opinion of + even the very small corporations. The book also gives + a practical and scientific history of production, + manufacture and distribution of the metal. It is the + best work of its kind. The price is $5.00 in cloth; + $7.50 in full morocco, delivered. + + Corporation Finance. By Thomas L. Greene. + This work deals with the methods employed by + Corporations in managing their finances. It is + clearly and simply written. The price is $1.25; + delivered, $1.35. + + Cotton. By Charles A. Burkett and Clarence H. Poe. + This is about the only work which covers in a + practical way the cultivation, marketing and + manufacture of cotton. Price, $2.00; delivered, $2.20. + + Earning Power of Railroads. By Floyd W. Mundy. + This little volume is published annually and is a + handy guide to Earnings, Capitalization, Mileage, + etc. Price, $2.00; delivered, $2.12. + + Essays in Finance. By Robert Giffen. + This work is clear and readable. It presents in a + colloquial style many valuable facts and suggestions. + Price, $3.50; delivered, $3.73. + + Financial Crises. By Theodore E. Burton. + This is a very valuable and necessary work to the + student of price changes. It should be in every + speculator’s library. Price, $1.40; delivered, $1.52. + + Gold Supply and Prosperity. By Byron W. Holt. + A correct understanding of the effects of gold on + prices of shares and commodities is of primary + importance to either the investor or speculator. + The book contains papers by Horace White, Maurice + L. Muhleman, Ellis H. Roberts and others of high + standing in the commercial world and Mr. Holt’s own + theories and conclusions are clearly expressed. + Price, $1.00; delivered, $1.10. + + How Money is Made in Security Investments. By Henry Hall. + This work contains much that is of value to the + speculator. Price, $1.50; delivered, $1.65. + + Manual of Statistics. + This book is very useful to the speculator. It + contains tables of past prices of stocks, cereals, + cotton, etc., a brief history of all leading + corporations and much other valuable statistical + matter. The price is $5.00 delivered. + + Money and Currency. By Prof. Joseph French Johnson. + This work is mentioned because of its intelligible + nature. No one can fail to understand the subject as + treated by the writer. Price, $1.75; delivered, $1.93. + + Moody’s Classified Investments. + This book is extremely valuable to the investor. It + classifies securities according to their ownership + and we may thus form a quick judgment of the merits + of certain bonds or shares. Price, $10.00 delivered. + + Moody’s Magazine. Edited by Byron W. Holt. + A national financial monthly. Studies the underlying + causes of market movements in the broad light of + world-wide developments, its finance and economics. + Subscription $3.00 per year. + + Moody’s Manual of Railroads and Corporation Securities. + This work stands alone in its class and is the + accepted standard for both investors and speculators. + It is a library in itself and should be the basic + volume of the student’s collection. Price, $10.00 in + cloth; $12 in full Russia leather, delivered. + + Smith’s Financial Dictionary. By Howard Irving Smith. + This is another work which should be in every + library. All the knotty points and technicalities + which perplex the speculator at times are clearly and + fully explained. Price, $4.50; delivered, $4.75. + + Speculation, a Science. By George McLean Irwin. + A small volume containing some interesting points. + Price, 30 cents; by mail, 34 cents. + + Story of Wall Street. (In preparation). By John Moody. + A most interesting history of Wall Street from + its inception to the present day. Price, $3.00; + delivered, $3.20. + + The Tariff and the Trusts. By Franklin Pierce. + This is a review of tariff history in various + countries with especial reference to its operation + in the United States to protect trusts and special + interests. Price, $1.50; delivered, $1.62. + + The Truth About the Trusts. By John Moody. + A description and analysis of the American trust + movement. No other work on this subject has attracted + the widespread attention which has been given Mr. + Moody’s description of all the phenomena which go + under the general name of “the trust movement.” + Price, $5.00; delivered, $5.27. + + Wall Street and the Country. By Charles A. Conant. + This book deals with the higher phases of Wall Street + ethics and affairs, Undigested Securities, etc. + Price, $1.25; delivered, $1.37. + + Work of Wall Street. By Sereno S. Pratt, + Editor The Wall Street Journal. + One of the very best books on the subject. The matter + is clearly and intelligently discussed by a man of + soberness and judgment. Price, $1.25; delivered, + $1.37. + +ANNOUNCEMENT + + Any of the books enumerated + in this Bibliography + will be supplied + for the price indicated. + + THE MOODY CORPORATION, + 35 Nassau Street, N. Y. City. + + + + +INDEX + + + Page + Accidents: effect of on stock prices, 84 + Averages: Barometer of, 110 + + Bank Statement, 59, 125 + British investment bonds: Prices of, 45 + Business Depression: Effects of on rails and industrials, 105 + + “Calls,” explained, 89 + Charts: “Composite Common”, 137 + corn prices, 149 + cotton prices, 154 + wheat prices, 147 + “Composite common”: range of, 133 + Corn: Area limited, 151 + chart, 149 + prices, 146 + risen more than wheat, 148 + Cotton: Chart, 154 + crops in bales, 157 + cycles of speculation in, 155 + prices, 156 + Credits: Expansion of ignored, 75 + Crises: Indications of, 112 + principal in last century, 24 + Crops and Crop Failures: + damage issue not to be ignored, 123 + importance of, 82 + + Dividends: adverse effect on the short seller, 101 + Dow, Charles H.: + rule as to margins necessary, 165 + Fixed Charges: As factor of safety, 114 + important to investor, 116 + percentage of in various railroads, 115 + + Gambling transactions: Percentage against the speculator, 9 + Gold production: + effect in speculative commodities, 53 + effect on common stocks of railroads, 49 + effect on securities having a fixed rate of income, 43 + effect on stocks of industrials, 52 + influence of on prices, 39 + Grain: Cycles of speculation in, 145 + + Legislation: As a market factor, 77 + + Manipulation: By creation of false appearances, 22 + Margins: Necessary to reasonable safety, 163 + required by scale order operations, 164 + use and abuse of, 12 + Market Movements: principal for ten years, 168 + Money conditions: as a factor of speculation, 59 + + Periodicity: unreliable as basis of speculation, 35, 69 + Pig Iron: Production in U. S., 29 + Prices: + “Composite” stock, 136 + corn, 146 + cotton, 156 + ordinary swing of in speculative cycle, 113 + wheat, 146 + Presidential contest: Influence on prices, 81 + Privileges, 89 + “Puts,” explained, 90 + + Railroad: Basic values of, 104 + Rights: How to compute value of, 109 + + Securities: Entire list should be studied, 166 + railroad stocks the soundest, 166 + selection of, 124 + undigested, 108 + Speculation: Cycles of, 21 + possibilities of, 14 + preliminary hard work needed, 17 + Stocks: Borrowing and lending, 117 + cycles of Speculation in, 133 + “Straddles,” explained, 92 + + Tariff agitation: effect on speculation, 81 + “Tips”: Operations based on them disastrous, 172 + Trading: Best method of, 111, 172 + hypothetical, 15 + scalping, 120 + + Wheat: Chart, 147 + prices, 146 + + + +*** END OF THE PROJECT GUTENBERG EBOOK 75687 *** diff --git a/75687-h/75687-h.htm b/75687-h/75687-h.htm new file mode 100644 index 0000000..6567952 --- /dev/null +++ b/75687-h/75687-h.htm @@ -0,0 +1,6107 @@ +<!DOCTYPE html> +<html lang="en"> + <head> + <meta charset="UTF-8"> + <title>The Cycles of Speculation | Project Gutenberg</title> + <link rel="icon" href="images/cover.jpg" type="image/x-cover"> + <style> + +body { margin-left: 10%; 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+ color: black; + font-size:smaller; + padding:0.5em; + margin-bottom:5em; + font-family:sans-serif, serif; } + +.ws2 {display: inline; margin-left: 0em; padding-left: 2em;} +.ws3 {display: inline; margin-left: 0em; padding-left: 3em;} + + </style> + </head> +<body> +<div style='text-align:center'>*** START OF THE PROJECT GUTENBERG EBOOK 75687 ***</div> +<hr class="chap x-ebookmaker-drop"> + +<h1>The Cycles of<br>Speculation</h1> + +<p class="f120 spa2 spb3"><b><span class="fs_80">BY</span><br>Thomas Gibson</b></p> + +<div class="figcenter"> + <img src="images/illo.jpg" alt="" width="150" height="115" > +</div> + +<p class="f90 spa3">Published by</p> +<p class="f120">The Moody Corporation</p> +<p class="center">35 Nassau Street, New York<br>1907</p> + +<p class="center">Copyright 1907, by<br> +THE MOODY CORPORATION<br>All rights reserved</p> + +<p class="center">THE MOODY-BARTON PRESS, ELIZABETH, N. J.</p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p class="f150"><b>CONTENTS</b></p> +</div> + +<table class="spb1"> + <tbody><tr> + <td class="tdc fs_120" colspan="3"><b>Part I</b></td> + </tr><tr> + <td class="tdc"><span class="smcap">Chapter</span></td> + <td class="tdl_wsp"> </td> + <td class="tdr">Page</td> + </tr><tr> + <td class="tdr_wsp">I.</td> + <td class="tdl_wsp">Introduction</td> + <td class="tdr"><a href="#Page_5"> 5</a></td> + </tr><tr> + <td class="tdr_wsp">II.</td> + <td class="tdl_wsp">The Cycles of Speculation</td> + <td class="tdr"><a href="#Page_21">21</a></td> + </tr><tr> + <td class="tdr_wsp">III.</td> + <td class="tdl_wsp">The Gold Supply</td> + <td class="tdr"><a href="#Page_37">37</a></td> + </tr><tr> + <td class="tdr_wsp">IV.</td> + <td class="tdl_wsp">Money</td> + <td class="tdr"><a href="#Page_59">59</a></td> + </tr><tr> + <td class="tdc fs_120" colspan="3"> <br><b>Part II</b></td> + </tr><tr> + <td class="tdr_wsp">VI.</td> + <td class="tdl_wsp">Puts and Calls</td> + <td class="tdr"><a href="#Page_89">89</a></td> + </tr><tr> + <td class="tdr_wsp">VII.</td> + <td class="tdl_wsp">The Question of Dividends</td> + <td class="tdr"><a href="#Page_101">101</a></td> + </tr><tr> + <td class="tdc" rowspan="19"> </td> + <td class="tdl_wsp">Basing Railroad Values</td> + <td class="tdr"><a href="#BRV">104</a></td> + </tr><tr> + <td class="tdl_wsp">Effects of Business Depression</td> + <td class="tdr"><a href="#EFFECTS">105</a></td> + </tr><tr> + <td class="tdl_wsp">Undigested Securities</td> + <td class="tdr"><a href="#UNDIG">108</a></td> + </tr><tr> + <td class="tdl_wsp">How to Compute the Value of Rights<span class="ws2"> </span></td> + <td class="tdr"><a href="#COMPUTE">109</a></td> + </tr><tr> + <td class="tdl_wsp">Barometer of Averages</td> + <td class="tdr"><a href="#BAROMETER">110</a></td> + </tr><tr> + <td class="tdl_wsp">Best Method of Trading</td> + <td class="tdr"><a href="#METHOD">111</a></td> + </tr><tr> + <td class="tdl_wsp">Indication of Crises</td> + <td class="tdr"><a href="#CRISES">112</a></td> + </tr><tr> + <td class="tdl_wsp">The Ordinary Swing of Prices</td> + <td class="tdr"><a href="#SWING">113</a></td> + </tr><tr> + <td class="tdl_wsp">The Factor of Safety</td> + <td class="tdr"><a href="#SAFETY">114</a></td> + </tr><tr> + <td class="tdl_wsp">Borrowing and Lending Stock</td> + <td class="tdr"><a href="#BORROW">117</a></td> + </tr><tr> + <td class="tdl_wsp">Scalping</td> + <td class="tdr"><a href="#SCALP">120</a></td> + </tr><tr> + <td class="tdl_wsp">Crop Damage</td> + <td class="tdr"><a href="#CROP">123</a></td> + </tr><tr> + <td class="tdl_wsp">Selection of Securities</td> + <td class="tdr"><a href="#SELECT">124</a></td> + </tr><tr> + <td class="tdl_wsp">The Bank Statement</td> + <td class="tdr"><a href="#BANK">125</a></td> + </tr><tr> + <td class="tdl_wsp">The Cycles of Stock Speculation</td> + <td class="tdr"><a href="#STOCK">133</a></td> + </tr><tr> + <td class="tdl_wsp">The Cycles of Grain Speculation</td> + <td class="tdr"><a href="#GRAIN">145</a></td> + </tr><tr> + <td class="tdl_wsp">The Cycles of Cotton Speculation</td> + <td class="tdr"><a href="#COTTON">155</a></td> + </tr><tr> + <td class="tdl_wsp">Conclusion</td> + <td class="tdr"><a href="#Page_163">163</a></td> + </tr><tr> + <td class="tdl_wsp">Bibliography</td> + <td class="tdr"><a href="#Page_176">176</a></td> + </tr> + </tbody> +</table> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p>The successful speculator requires four things:</p> + +<ul class="index fs_110"> +<li class="isub2">1—A knowledge of values.</li> +<li class="isub2">2—A knowledge of general conditions.</li> +<li class="isub2">3—A knowledge of the machinery of speculation—and</li> +<li class="isub2">4—Something besides.</li> +</ul></div> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_5">[Pg 5]</span></p> +<h2 class="nobreak">I<br>Introduction</h2> +</div> + +<p>The first step in the education of the speculator should be to clear +away the illusions which have grown rank through ignorance, and +flourished through prejudice. We have heard, and continue to hear, a +great deal of ethical talk on this subject, most of which emanates from +people who are not authorities, and who have little real conception +of the subject. It would be pretty safe to assume that a majority of +these same instructors speculate themselves. They place an arbitrary +construction on the word however, and draw a dividing line between +stock or cereal operations, and other forms of speculation, although +the basic principle is the same in all cases, i.e.: to buy what is +cheap and re-sell at a profit. One of the most ridiculous forms which +this pedantry assumes is the warning and preaching against speculation +by very rich men who made their own money speculating and could not +<span class="pagenum" id="Page_6">[Pg 6]</span> +possibly have acquired it in any other way. Such expressions of opinion +are born largely of an exaggerated ego.</p> + +<p>The trouble with these critics and advisers is that they seldom +approach the subject in the right way. With a full knowledge of +the fact that speculation is an inherent part of human nature, and +that a majority of human beings are bound to indulge in it in spite +of everything, these sophists simply rail against the practice +indiscriminately instead of attempting to point out what is foolish +and fallacious. If we attack the practice in a general way little +will be accomplished. If we say, “do not speculate,” our audience +will perchance give us a respectful hearing,—and go on speculating. +If, however, we point out what is dangerous and unreasonable, confine +ourselves to attacking the evils and explaining the delusions, +some good may be done in an educational way. We may, if we show by +simple logic that the education and qualifications necessary to +success are too difficult to acquire, actually deter many people +from speculating in certain lines at all, a thing which could not +possibly be accomplished by mere blanket warnings against the practice. +One of the most serious blunders in the world is the common one of +under-estimating other people’s intelligence. People are ready and +<span class="pagenum" id="Page_7">[Pg 7]</span> +willing to learn, and that they do learn is shown by the decreasing +crop of lambs. It is not nearly so easy for the dishonest promoters and +manipulators to market poor securities at high prices today as it was a +few years ago. And in this regard it may be pointed out that the press +has actually, although in many instances unconsciously, accomplished +a great deal on exactly the lines suggested above. Magazines and +newspapers have, in recent years, taken on an educational character. +Periodicals once devoted to fiction or history now deal largely with +business and social economics, and with the exposure of bad methods in +high places, the ruthless uncovering of false or misleading statistics, +and the simplification of questions hitherto involved; the public has +been gaining rapidly in education and understanding. The fact that much +space in leading periodicals is devoted to these subjects, is in itself +<i>prima facie</i> evidence that the people can and will learn, for +with all due credit to the editors and publishers, it is certain that +the contents of magazines and newspapers are selected in accordance +with what the public demands and likes.</p> + +<p>No one will attempt to deny that a majority of public speculators lose. +In a former volume, the present writer undertook to establish by +analysis of a large number of public accounts, the fact that 80% of +<span class="pagenum" id="Page_8">[Pg 8]</span> +the participators lost money. A number of critics commented on this +statement as a body blow to speculation, asserting that the writer +had shown that there was “80% against the player.” These writers +proceeded to compare this percentage with that existing in games of +pure chance, such as roulette, faro, etc., and wound up by pointing out +the tremendous drawback to the speculator through percentage against +the player. It seems incredible that any sane man should fall into such +laughable confusion of ideas. The percentage of players who lose in +any game has nothing to do with the percentage against the player. If +these critics established anything at all, it was that speculation was +not gambling; for it requires only a moment’s reflection to see that +in any mechanical gambling game where there is <i>any</i> percentage, +no matter how small, in favor of the game, the percentage of players +who eventually lose must be 100. This being the case, the gentlemen +mentioned were at considerable pains to prove that, as 100 per cent. of +the players did not lose, speculation was not a gambling game in the +strict sense of the word. That is to say, it could not be correctly +compared with any mechanical device where the element of skill was absent.</p> + +<p><span class="pagenum" id="Page_9">[Pg 9]</span> +If we consider the matter in a gambling light, the percentage against +the speculator can be determined by the proportions of commissions, +interest, taxes, etc., to capital invested. Taking commission alone as +our basis, we will find that he who purchases a stock at $100 a share +and pays one-quarter of one per cent. commission, has a percentage +against him of one-quarter of one per cent. If the speculator trades +on limited margins the drawback increases accordingly. If we assume +that 100 shares of stock are purchased in a bucket-shop on a one point +margin, without intention or ability to “re-margin” the transaction, +the mechanical percentage is large (25%); if 10 points margin is +deposited, the mechanical percentage is reduced to 2½%, etc. In the +first instance, $25 or 25% of the $100 involved was lost when the +transaction was recorded, without any change in market price. In the +second instance, $25 was again lost or 2½% of the $1,000 involved.</p> + +<p>There is no doubt that fluctuations in prices of securities, cereals +and staples are frequently used as a basis for mere gambling +transactions. But the most remarkable feature of the whole problem is +the fact that the percentage of loss in transactions is <i>greater</i> +than the mechanical percentage. In the work already mentioned, the +<span class="pagenum" id="Page_10">[Pg 10]</span> +writer undertook to establish this. In 500 accounts examined, there +was a loss of $1,245,000, and profits of $288,000, leaving a deficit +of $957,000. The commission charges and interest amounted to only +$275,000. There thus appeared a loss of $682,000 which could not be +attributed to a gambling percentage. It may be added that the period +considered in the computations was from July, 1901, to March, 1903, and +that the price of the stock considered (U. S. Steel Common) was the +same at the beginning and the end of the period.</p> + +<p>This tends to again refute the theory of mere gambling, with a ruinous +percentage against the player, for no mechanical device could by any +possibility operate against the player to a greater extent than the +fixed percentage in favor of the machine. A gambling machine will stick +to its knitting. If, for example, we take the simplest form of gambling +device—two dice thrown from a cup,—we know that certain numbers +formed by adding the total spots which appear uppermost will show more +frequently than others. Thus the number two can be effected in but one +way, the number three in two ways, the number four in three ways, and +so on up to the number seven, which can be formed by six different +combinations, thus: +<span class="pagenum" id="Page_11">[Pg 11]</span></p> + +<table class="spb1 fs_110"> + <tbody><tr> + <td class="tdc">4</td> + <td class="tdc"> and </td> + <td class="tdc">3</td> + </tr><tr> + <td class="tdc">5</td> + <td class="tdc">and</td> + <td class="tdc">2</td> + </tr><tr> + <td class="tdc">6</td> + <td class="tdc">and</td> + <td class="tdc">1</td> + </tr><tr> + <td class="tdc">3</td> + <td class="tdc">and</td> + <td class="tdc">4</td> + </tr><tr> + <td class="tdc">2</td> + <td class="tdc">and</td> + <td class="tdc">5</td> + </tr><tr> + <td class="tdc">1</td> + <td class="tdc">and</td> + <td class="tdc">6</td> + </tr> + </tbody> +</table> + +<p class="no-indent">from which point the chances decrease until the +number 12 can be formed in only one way—two sixes. This proposition +applies to all forms of mechanical gambling, and is so simple in +principle, and so distinct in operation that if we make a fair number +of casts, say 1,000, and do not make more sevens than any other one +number, we may be positive that the dice are defective, or loaded.</p> + +<p>Therefore, if percentages hold true, we must attribute the surplus loss +in speculation to mental operations. In the total results mentioned, +these mental operations were so erroneous as to cause a loss greater +than the percentage itself; but, on the other hand, a certain number of +accounts showed profits; that is to say, the percentage was overcome, +which is again an obvious impossibility in true gambling.</p> + +<p>The conclusion is offered, therefore, that not only can poor methods +and imperfect understanding result in losses far in excess of a +demonstrated drawback, but that this drawback may be overcome by +<span class="pagenum" id="Page_12">[Pg 12]</span> +other and more correct methods. It is difficult to understand why +the opponents of speculation are continually harping on these points +of gambling and percentage as bearing particularly on operations in +stocks or commodities. If a man buys a certain security because it is +cheap, or because he considers it cheap, and pays a certain commission +to a broker for effecting the transaction, he is no more playing a +percentage game than if he purchases a piece of real estate because it +is cheap and pays the real estate broker a commission for his services.</p> + +<p>Marginal trading is another abomination of the anti-speculative +element, but here again the critics do not discriminate between use and +abuse. Trading on insufficient margin is one of the greatest evils in +the speculative world and when, as is frequently the case, this evil +is combined with lack of knowledge as to values and conditions, the +result is certain loss. But what is objected to here is the hazy view +and comprehensive condemnation of <i>all</i> marginal speculation. The +line of demarcation is usually carelessly drawn. If an individual buys +100 shares of stock for cash, has it registered in his own name and +later borrows funds from his banker with these shares as collateral, he +escapes impeachment as a marginal speculator; but if he buys on margin, +<span class="pagenum" id="Page_13">[Pg 13]</span> +and borrows from his broker the unpaid balance, he is a gambler. And +yet it would be hard to point out the difference in the two methods. +If we wish to go a little further afield, we may reduce a very large +percentage of the commercial structure to marginal trading. We may, in +short, place in this category every merchant who buys goods on credit +and every man who buys real estate on payments, if their object when +buying is to sell at a profit.</p> + +<p>It is highly probable that these contentions will be vigorously +attacked, on the theory that more evil than good results from +speculative ventures, and that therefore the whole structure should +be razed on a “greatest good to the greatest number” basis; but aside +from the intensely unphilosophical character of this view, it is not +at all probable that any such thing can be effected unless human +nature undergoes a radical change. Tear down every stock exchange in +the United States tomorrow, and people will be speculating, a majority +of them foolishly, in another week. The cure lies not in paternalism, +but in evolution and understanding. As has been said, more has been +accomplished in recent years by the educational crusade of the press +than by all the rantings and warnings of a century. We have our periods +<span class="pagenum" id="Page_14">[Pg 14]</span> +of reckless over-indulgence, it is true, but the evil is dwindling. The +South Sea bubble would deceive a much smaller number of people today +than it did in the days of John Law.</p> + +<p>It is the object of the present work to point out, so far as the +abilities of the writer will permit, what essentials are required in +any form of speculation, whether on margins, or masquerading in the +guise of investment. As to this last distinction, it may be stated that +the word “speculation” is herein taken to mean the purchase of any +security or commodity because it is considered cheap, with the ultimate +intention of disposing of the property so purchased at a profit. In the +writer’s opinion this definition is correct. Speculation contemplates +a rise in price, and an accretion in principal. Investment refers to +interest returns on money.</p> + +<p>One of the most flagrant errors in speculation is an entirely mistaken +idea as to the <i>possibilities</i> in this field. Nine men out of ten +have a deep-rooted conviction that if any individual could be right in +his main deductions for, say one or two years, he should make millions +on a small capital. This is a great mistake, and leads to numerous +minor errors which are productive of much loss in actual operations. +The business of speculation never did, and never will result in +<span class="pagenum" id="Page_15">[Pg 15]</span> +abnormal profits. Large returns are sometimes made, it is true, but +this fact is also true of every other line of business. Certain +individuals grow very rich in Wall Street; this again is true of every +commercial branch. We hear now and then of a million dollar coup by +a Morgan or a Rockefeller, and do not stop to consider the great +capital behind it. If an individual makes five thousand dollars in a +year’s speculative ventures on a capital of twenty thousand, he is not +considered a Napoleon of finance, but he has accomplished much more, in +proportion to his capital, than Rockefeller would have accomplished if +he had made five millions on similar operations.</p> + +<p>In a recent conversation with a number of gentlemen who clung +tenaciously to this idea of sudden riches, the writer undertook to +establish his contention. Tapes were secured recording the fluctuations +of sugar stock during a twenty point decline. The skeptics were given a +hypothetical capital of $10,000 each, subjected to the ordinary rules +of trading as to margins, etc., informed that sugar would decline +twenty points before it again touched the first quotation established, +and invited to “get rich quick.” The result was ridiculous in the +extreme. Two of the experimenters lost their imaginary capital trying +<span class="pagenum" id="Page_16">[Pg 16]</span> +to double up and show large returns. The third took an unfair stand, +by selling the maximum amount at the inception of the experiment and +closing it after the 20 point decline had appeared. His operations, +therefore, proved nothing. Here was a case where two traders, possessed +of an absolute fore-knowledge of what was to occur, lost everything +through the fault of over-speculation and the belief that abnormal +returns could be made if the ultimate fate of a market could be +correctly forecasted. Even if we assume that <i>every</i> intermediate +<i>movement</i> were known in advance, that after a ten point decline +there would be a five point advance, and that transactions were +conducted to the full possibilities of both original margin and accrued +profits, the result would not be the millions which dazzle the eyes and +imagination of the unsophisticated. But to assume any such trading is +foolish. The factor of safety would be wholly absent. No wise man will +ever attempt pyramiding, and no foolish man who does, will succeed.</p> + +<p>In order to clear the ground for discussion or study, the first thing +to eliminate is this wholly unsupported and mistaken idea of sudden +riches. No matter how correct the forecast of the future may be, safety +<span class="pagenum" id="Page_17">[Pg 17]</span> +disappears in inverse ratio to the increased possibilities of abnormal +returns; and with the factor of safety continually ignored, the final +results are bound to be disastrous.</p> + +<p>It will also be necessary to dispel another illusion. If the speculator +imagines that he can operate successfully without preliminary hard +work to fit him for the business in hand he is grossly mistaken. It is +necessary to qualify in this field as well as in any other. Knowledge +of monetary conditions, values, interest rates, and in fact, of all +influences bearing directly or indirectly on the future of prices must +be acquired and thoroughly understood. Ignorance on any one point may +mean defeat. On the other hand, a study of such conditions means a +liberal education, valuable in every line of business life. It may be +further stated that the man who attempts to evade necessary labor and +research by placing his dependence on tips or charts, or the opinions +of others, cannot hope to succeed. The gambling idea must be put out of +the question entirely, and means sought whereby intelligent opinions +may be formed by both inductive and deductive reasoning.</p> + +<p>In preparing this work the temptation to enter more extensively into +fundamental principles has been great. It would be impossible to do more +<span class="pagenum" id="Page_18">[Pg 18]</span> +than suggest a line of procedure in a single volume, and only the most +elemental requisites are set forth. And not only do the prescribed +limits of this volume forbid any exhaustive discussion, but such +discussion is unnecessary. On every subject of importance we have books +written by men of soberness and judgment, each a specialist in his +field. A bibliography has been appended to this volume suggesting such +works as are considered helpful. In this bibliography an attempt has +been made to choose such books as are clear and simple, rather than +those which are profound.</p> + +<p>If the task as herein outlined, appears formidable, it may be said +that it is absolutely necessary, and not so difficult as may appear. +Before the student has entered far into the subject, he will find the +matter interesting and will very quickly realize that the well grounded +contentions and discussions of men who examine and diagnose economical +questions correctly, are of more value than the combined tips, guesses +and poorly based opinions of all the professional speculators and +gamblers from one end of Wall Street to the other. This form of basic +knowledge is just as important to the active trader as it is to the +investor. If he can correctly judge of the general trend of future +prices, he may operate safely <i>with</i> that trend instead of +<span class="pagenum" id="Page_19">[Pg 19]</span> +floundering around helplessly in a slough of indecision, or possibly +working directly against the current. If, for example, he has good +solid reasons for expecting ultimately higher prices, he will not be +disturbed by temporary reactions and, instead of being frightened out +of his position through ignorance, he will take advantage of such +reactions to make his purchases or cheapen his holdings. Knowledge, in +this particular line as in all others, is the foundation of successful ventures. +<span class="pagenum" id="Page_20">[Pg 20]</span></p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_21">[Pg 21]</span></p> +<h2 class="nobreak">II<br>The Cycles of Speculation</h2> +</div> + +<p>The great upward and downward swings of speculative prices, herein +referred to as cycles, have invariably preceded or accompanied +periods of business inflation or depression. This fact, apparently so +elemental, is often disregarded by that very large class of speculators +which is continually looking for artificial and unpregnant explanations +of price changes. There can be no doubt as to the existence of +manipulation, and, in rare cases, movements of considerable importance +may be traced to this source alone; but manipulation consists, in +its fullest sense, of the tactics resorted to for the purpose of +liquidating shares in anticipation of a decline which the long-distance +thinkers believe to be inevitable; or, per contra, for the accumulation +of shares prior to a great recovery or readjustment. It is seldom +employed as a positive means of enhancing or depressing values. In +fact, to do either by mere manipulation would be an impossibility. +Every observer of great speculative movements knows that at the highest +<span class="pagenum" id="Page_22">[Pg 22]</span> +point of a movement, and during the first half of a decline everything +appears roseate, while at the lowest prices, and during the first half +of an advance, the reverse is true.</p> + +<p>There are several contributory causes which operate to produce these +false appearances. The primary cause is the curtailed perspective +and imperfect logic of the public investor or speculator. The most +difficult thing to drill into the mind of the unsophisticated is +the fact that speculation cannot possibly be successfully based on +appearances which are open and obvious. Such a process is a flat +contradiction of the word itself. It is unseen future developments +or, in some cases, hidden and submerged present truths which must be +consulted. Yet we find a great majority of the public element who +seek riches in the speculative arena, constantly harping on the large +business of certain corporations, and the excellent state of general +trade as a reason for purchasing shares. These factors have, in all +probability, been discounted in current prices. Generally speaking, the +present is of no more use than the past in forming opinions of future +price changes. It is a certainty that sales of stocks could not be made +in great volume to good advantage unless everything <i>did</i> look +<span class="pagenum" id="Page_23">[Pg 23]</span> +rosy, for who would purchase shares at high prices if the future +appeared threatening or unpropitious, and who would sell holdings in +the face of encouraging and inspiriting prospects.</p> + +<p>This brings us to the second phase of the question—the <i>creation</i> +of false appearances, which is, in truth, the highest form of +manipulation. When so-called inside selling is going on, great business +is reported by railroad and producing corporations; dividends are +increased, and public expressions of confidence emanate from men of +high standing in the financial world. The effect of all this expressed +optimism is, market-wise, of a negative character. When it is most +prevalent and most decisive, prices halt or even decline. This period +and action represents selling at the only time when advantageous +selling is possible. In the main the truth only is told about existent +conditions, possibly about the near future. Nothing else is necessary; +but nevertheless the sellers are anticipating, not the events of the +next week or the next month, but of a more remote period where they see +probabilities in regard to which a discreet silence is maintained.</p> + +<p>The constantly recurring cycles of prices, the alternate inflation and +depression, must therefore be traced to something far more important +than the grossly exaggerated potentiality of mere manipulation. +<span class="pagenum" id="Page_24">[Pg 24]</span></p> + +<h3>Principal Crises of the Last Century.</h3> + +<p>That crises in the financial world have occurred at more or less +regular periods is a matter of history. Since the beginning of the +nineteenth century ten of these readjustments have occurred. In 1812, +after ten years of prosperous conditions preceding the war of that +year, business fell off materially. The real panic, however, occurred +in 1814. Washington was taken by the British on August 24th, 1814, and +suspension of specie payments was general in the following two weeks.</p> + +<p>In 1824, the protective tariff enactments were followed by general +inflation in all lines of business. Two years later, in 1826, a general +depression occurred with many failures. The depression at this period +was even greater in England than in the United States, and many writers +attribute the entire trouble to European business reverses, but it is +probable that we had been living beyond our means and that this fact, +to say the least, aggravated the disturbance.</p> + +<p>In 1837, after six years of good times, another crisis occurred. This +depression was attributed to various causes. The great New York fire of +1835, the loss of charter by the United States Bank in 1836, and the +calling in of $37,500,000 of government deposits by President Jackson, +<span class="pagenum" id="Page_25">[Pg 25]</span> +are all given due consideration. The actual panic, however, did not +appear until May 10, 1837. All the banks suspended specie payments, and +securities,—in fact all properties of whatever kind—fell rapidly in +value. The most plausible explanation of this crisis is over-speculation +in land. The other evils mentioned might easily have been rectified +by the recuperative powers of a growing country, had the more serious +element of wild inflation been absent.</p> + +<p>In 1848, after a long period of prosperity, broken only by the war with +Mexico, business inflation and over-speculation again brought about the +logical and inevitable result. Europe also had been over-speculating +again and a crisis in England soon extended to the United States. +Liquidation was drastic and the depression lasted until the discovery +of gold in California began to bear fruit.</p> + +<p>In 1857, one of the most serious, as well as the most short-lived, of +our crises occurred. Again speculation was extreme; December, 1856, +marked the high point in securities, and prices continued to sag for +some months; but it was not until August, 1857, that a panic occurred.</p> + +<p>In 1864, came a crash in speculative prices following tremendous +inflation. Between April, 1864, and April, 1865, leading stocks declined +<span class="pagenum" id="Page_26">[Pg 26]</span> +from $50 to $100 per share. As the inflation of this period was caused +largely by the high prices of commodities and greatly increased +railroad earnings occasioned by the events of the Civil War, most +writers on the subject do not consider it in their theoretical +discussions of crises.</p> + +<p>In 1872, another boom was on, particularly in Iron and Steel. The +Chicago and Boston fires had not been as effective in breaking stock +prices as might have been expected. Prices of stocks began going down +materially in April, 1873, and in fact had been rather “toppy” during +the preceding years. This panic, like most of the others, was preceded +by enormous speculation and high prices. It is interesting to note that +while stocks were declining, general business was booming. The trained +minds of Wall Street were learning to discount the future at longer +range and more accurately. The iron and steel business exceeded all +former records in 1873, both in the matter of normal price and actual +production.</p> + +<p>In January, 1884, numerous failures and suspensions produced a panic +which was in reality the culmination of a long decline. As in 1872, +this panic was preceded by enormous general business. The steel and +iron trade again broke all records in 1882, and other lines were +equally prosperous. +<span class="pagenum" id="Page_27">[Pg 27]</span></p> + +<p>In 1893, the period of prosperity which followed the enactment of the +McKinley bill was rudely broken. Speculation had been rampant, as +usual. On May 4th, 1893, the National Cordage Company went into the +hands of a receiver. Only a year prior to that date, this corporation +was paying 12% in dividends and the stock was selling well above +par. There were many badly inflated stocks and many rotten spots in +the speculative stock markets. The Distillers and Cattle Feeders +shares fell from $70 to nothing, and were assessed $20 per share. +The aggregate liabilities of business failures in 1893 were almost +$350,000,000, over 20% greater than in 1892. Banks failed right and +left, and several leading railroad companies went into the hands of +receivers.</p> + +<p>In 1903, another period of depression occurred. It is doubtful if this +period can be rightly classed with the other crises already mentioned, +for it was more in the nature of a drastic but orderly retrenchment +than a panic, and the bull stock market of 1902 was again in full swing +early in 1904.</p> + +<p>In thus briefly detailing the crucial points of nineteenth century +financial affairs, there is no intention of entering an economic +discussion, and no pretence of giving anything like a comprehensive +history of the events preceding or following their recurrence. The +<span class="pagenum" id="Page_28">[Pg 28]</span> +subject here discussed is speculation, and the object sought is to +gain knowledge that may be of value in forming opinions as to future +prices. We may gain some information of this character by analyzing the +following points:</p> + +<ul class="index"> +<li class="isub2">1—Did price declines in stocks precede, accompany, or follow</li> +<li class="isub4">panics, crises, or general business depression?</li> +<li class="isub2">2—What are the signs which usually precede such periods?</li> +<li class="isub2">3—What are the salient causes?</li> +<li class="isub2">4—Can any dependence be placed in the regularity</li> +<li class="isub4">of these recurrences?</li> +</ul> + +<p>On the first head it will be found that in all cases the top of the +stock market has been reached prior to the actual eruption in general +business. Stock speculation in 1814 and 1826 was not of great volume +nor importance, and cannot be given much consideration.</p> + +<p>Beginning with the panic of 1837 we find that the highest prices for +stocks were made in October, 1836, while panic conditions did not occur +until May, 1837. Preceding the panic of August, 1857, highest prices +were reached in the last months of 1856. Highest figures were recorded +in April, 1872, just one year prior to the panic of 1873. The stock +market anticipated the troubles of 1884 by 17 months of declining +prices. In January, 1892, stocks began declining and continued their +downward course until the panic of 1893 cleared the atmosphere. In our +<span class="pagenum" id="Page_29">[Pg 29]</span> +last period of depression (1903) stocks had reached their pinnacle in +September, 1902, just one year before the market turned for the better.</p> + +<p>We find therefore that in the majority of instances, highest prices for +stocks were reached long before business troubles were openly apparent. +This action represents to a certain extent the selling of stocks by men +who were wise enough to foresee trouble.</p> + +<p>Another interesting fact in regard to crises is that they are usually +preceded by record-breaking business in all directions. As iron and +steel may be considered the best barometer of business conditions, the +following tables are instructive:</p> + +<p class="f110 spa1"><b>PIG IRON PRODUCTION<br> IN THE UNITED STATES<br> SINCE 1860.</b></p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl_bott bb"><b>Year</b></td> + <td class="tdl_ws1"> </td> + <td class="tdc bb"><b>Production<br>Tons</b></td> + </tr><tr> + <td class="tdl">1860</td> + <td class="tdl_ws1" rowspan="4"> </td> + <td class="tdr">919,770</td> + </tr><tr> + <td class="tdl">1861</td> + <td class="tdr">731,544</td> + </tr><tr> + <td class="tdl">1862</td> + <td class="tdr">787,662</td> + </tr><tr> + <td class="tdl">1863</td> + <td class="tdr">947,604</td> + </tr><tr class="bb"> + <td class="tdl">1864</td> + <td class="tdl_ws1">(Depression)</td> + <td class="tdr">1,135,996</td> + </tr><tr> + <td class="tdl">1865</td> + <td class="tdl_ws1" rowspan="8"> </td> + <td class="tdr">931,582</td> + </tr><tr> + <td class="tdl">1866</td> + <td class="tdr">1,350,344</td> + </tr><tr> + <td class="tdl">1867</td> + <td class="tdr">1,461,626</td> + </tr><tr> + <td class="tdl">1868</td> + <td class="tdr">1,603,000</td> + </tr><tr> + <td class="tdl">1869</td> + <td class="tdr">1,916,641</td> + </tr><tr> + <td class="tdl">1870</td> + <td class="tdr">1,865,000</td> + </tr><tr> + <td class="tdl">1871</td> + <td class="tdr">1,911,608</td> + </tr><tr> + <td class="tdl">1872</td> + <td class="tdr">2,854,558</td> + </tr><tr class="bb"> + <td class="tdl">1873</td> + <td class="tdl_ws1">(Depression)</td> + <td class="tdr">2,560,963</td> + </tr><tr> + <td class="tdl">1874</td> + <td class="tdc" rowspan="10"> </td> + <td class="tdr">2,401,262</td> + </tr><tr> + <td class="tdl">1875</td> + <td class="tdr">2,023,733</td> + </tr><tr> + <td class="tdl">1876</td> + <td class="tdr">1,868,961</td> + </tr><tr> + <td class="tdl">1877</td> + <td class="tdr">2,066,594 + <span class="pagenum" id="Page_30">[Pg 30]</span></td> + </tr><tr> + <td class="tdl">1878</td> + <td class="tdr">2,301,215</td> + </tr><tr> + <td class="tdl">1879</td> + <td class="tdr">2,741,853</td> + </tr><tr> + <td class="tdl">1880</td> + <td class="tdr">3,835,151</td> + </tr><tr> + <td class="tdl">1881</td> + <td class="tdr">4,144,254</td> + </tr><tr> + <td class="tdl">1882</td> + <td class="tdr">4,623,323</td> + </tr><tr> + <td class="tdl">1883</td> + <td class="tdr">4,595,510</td> + </tr><tr class="bb"> + <td class="tdl">1884</td> + <td class="tdl_ws1">(Depression)</td> + <td class="tdr">4,097,868</td> + </tr><tr> + <td class="tdl">1885</td> + <td class="tdc" rowspan="8"> </td> + <td class="tdr">4,044,526</td> + </tr><tr> + <td class="tdl">1886</td> + <td class="tdr">5,683,329</td> + </tr><tr> + <td class="tdl">1887</td> + <td class="tdr">6,417,148</td> + </tr><tr> + <td class="tdl">1888</td> + <td class="tdr">6,489,738</td> + </tr><tr> + <td class="tdl">1889</td> + <td class="tdr">7,603,642</td> + </tr><tr> + <td class="tdl">1890</td> + <td class="tdr">9,202,703</td> + </tr><tr> + <td class="tdl">1891</td> + <td class="tdr">8,279,870</td> + </tr><tr> + <td class="tdl">1892</td> + <td class="tdr">9,157,000</td> + </tr><tr> + <td class="tdl"></td> + <td class="tdl_ws1"></td> + <td class="tdr"></td> + </tr><tr class="bb"> + <td class="tdl">1893</td> + <td class="tdl_ws1">(Depression)</td> + <td class="tdr">7,124,502</td> + </tr><tr> + <td class="tdl">1894</td> + <td class="tdc" rowspan="9"> </td> + <td class="tdr">6,657,088</td> + </tr><tr> + <td class="tdl">1895</td> + <td class="tdr">9,446,308</td> + </tr><tr> + <td class="tdl">1896</td> + <td class="tdr">8,623,127</td> + </tr><tr> + <td class="tdl">1897</td> + <td class="tdr">9,652,860</td> + </tr><tr> + <td class="tdl">1898</td> + <td class="tdr">11,773,934</td> + </tr><tr> + <td class="tdl">1899</td> + <td class="tdr">13,620,703</td> + </tr><tr> + <td class="tdl">1900</td> + <td class="tdr">13,789,243</td> + </tr><tr> + <td class="tdl">1901</td> + <td class="tdr">15,878,354</td> + </tr><tr> + <td class="tdl">1902</td> + <td class="tdr">17,821,307</td> + </tr><tr class="bb"> + <td class="tdl">1903</td> + <td class="tdl_ws1">(Depression)<span class="ws3"> </span></td> + <td class="tdr">18,009,252</td> + </tr><tr> + <td class="tdl">1904</td> + <td class="tdc" rowspan="3"> </td> + <td class="tdr">16,497,033</td> + </tr><tr> + <td class="tdl">1905</td> + <td class="tdr">22,992,380</td> + </tr><tr> + <td class="tdl">1906</td> + <td class="tdr">25,307,191</td> + </tr> + </tbody> +</table> + +<p>It will be observed that the high record of production has been reached +just prior to our greatest periods of depression, or during such periods.</p> + +<p>The second phase of the question, “what signs usually precede such +periods?” opens a wide field for the student of speculative changes. +Some inspiration may be gained from an examination of the two points +already considered, i.e.: priority of price movements and business +<span class="pagenum" id="Page_31">[Pg 31]</span> +inflation; but it would be extremely difficult to use them as guides +unless many other factors were given consideration. If we eliminate +the element of periodicity, any attempt to determine the turning point +by examination of advances in prices of stocks or volume of production +and consumption of commodities is futile. Using pig iron as a barometer +we might, after production has gradually increased from 8,623,127 tons +in 1896, to 15,878,354 in 1901, argue that a considerable reaction was +due in this line, but we would be out in our calculations two years and +two million tons. Neither can we accept the simple fact of a decline, +or the beginning of a decline in iron or in any other single commodity +as indicating lower prices for stocks; for however accurate iron may +be as a barometer of general business, it is not at all a barometer +of the stock market. It is practically certain that stock prices will +move either to higher or lower prices long before any reasons for such +movements are apparent to the ordinary observer. Future stock market +movements are largely deductive, and are not founded upon ordinary +industrial statistical evidence.</p> + +<p>There is, however, one method by which some light may be thrown +upon the subject of probable movements. A careful study of monetary +conditions and expansion of credits will frequently reveal dangers not +<span class="pagenum" id="Page_32">[Pg 32]</span> +apparent in any other direction. It is scarcely necessary to say that +such examination must not be confined to one quarter, such as New York +City; or to one country, such as the United States. A comprehensive +view of the world’s monetary conditions will be necessary. This subject +is dealt with more fully in another chapter.</p> + +<p>There is much difference of opinion among writers and students of +economics as to the cause of depressions. Bagehot attributes it to +the fact that, “at particular times a great many stupid people have a +great deal of stupid money.” This writer contends that occasionally +money accumulates abnormally and craves an investment outlet. To use +his own words, “This blind capital seeks for some one to devour it, +and there is plethora; it finds some one, and there is speculation; it +is devoured, and there is a panic.” Horace White attributes panics to +over-speculation. Bonamy Price says: “A vast outlay in new enterprises +involving a large consumption of food and materials, whether in the way +of pure waste or temporary unproductiveness, ought always to suggest a +feeling of danger. This excess occurs in seasons of prosperity.” John +B. Clark holds that it is due to an excess of production; or an excess +of production in one line with a deficiency in others. Leone Levi: “The +<span class="pagenum" id="Page_33">[Pg 33]</span> +main cause for the occurrence of crises is the sudden realization of +an insufficiency of capital to meet present demands.” Thorold Rogers +says: “The cause exists in the function of exchange; in the expectation +of unreasonable profits and in incorrect calculation.” It was the late +Henry George’s theory that depressions are brought about by higher +prices of land. He held that workers thrive as they have easy access +to natural opportunities for production, and are impoverished as +they are deprived of such opportunities. All periods of speculation +and inflation end in higher land values. Landlords call for a larger +percentage of the product than workers can afford to pay, and both +labor and capital become idle until there is a readjustment. Prof. W. +S. Jevons, and a host of others, attribute crises to sun spots and +their effects on harvests. And so on through a long line of theories.</p> + +<p>The consensus of opinion appears to favor the theory of +over-speculation, whether in realty, commodities, or the shares of +corporations, and this leads up to the question of periodicity. That +there has been a recurrence of these troubles about once in ten years +is not a debatable question. Nevertheless, many thinkers scout the idea +of this repetition at marked periods being other than fortuitous. As +prominent a student as Thorold Rogers, for example, ridicules the +<span class="pagenum" id="Page_34">[Pg 34]</span> +theory of periodicity. Many hopeful people believe that in time we will +find means to avoid these bad spots; that the United States is a young +and enthusiastic country, and that we will gradually sober down in both +methods and effects. But against this theory lies the cold fact that +these cycles have occurred with as charming regularity in France and +England as they have in our own country, which would indicate that age +and seasoning does not produce any appreciable improvement.</p> + +<p>It is probable that the most acceptable theory as to the causes of +periodicity is the psychological contention. Human nature is much the +same throughout the civilized world. We suffer from a panic and a +period of depression, and we grow wary and conservative. This course +results in sound methods and accumulation. The business structure rests +on a firmer foundation. Gradually the hard lessons of the past are +forgotten by the older generation, and are entirely unlearned by the +new business generation, all of whom are optimists. Again we expand +our enterprises, again fortune favors us; the appetite for gold grows +greater as wealth accumulates; men who were economical and satisfied +on modest incomes now live extravagantly, and some of them dream of +millions. Capital is spread out thinly. Story after story is erected on +<span class="pagenum" id="Page_35">[Pg 35]</span> +one foundation, and that foundation, sound enough at first, eventually +gives way. Then we must begin our careful building once more. The ten +year periods, therefore, may represent with more or less accuracy, +the lapse of time between wisdom and folly,—the yard-stick of human +intellect and experience.</p> + +<p>Many of the writers on this subject seem to strive for tangible reasons +for each depression. They dive into the subject for a cause and emerge +with an effect, or a handful of effects. For example, the depression +following 1893 was not caused by the failures of banks and other +business institutions, but the failures were caused by the depression. +It matters not that the failures ante-dated the bad conditions. Again, +the depression itself was produced by prior inflation. It was the +illness after over-stimulation. And so, in turn, we can ask what caused +the inflation; and the answer is “Human greed and human folly.” This +last analysis brings us around in a circle to the original theory of a +psychological cause.</p> + +<p>It is submitted that a dependence on periodicity of any kind, either in +the ten year cycles or in year to year events is fraught with danger +and cannot be adopted by the speculator. It is chart-playing pure and +simple, and the man who disposes of his stocks for no better reason than +<span class="pagenum" id="Page_36">[Pg 36]</span> +that a depression appeared ten years ago, is liable to find himself +in the position of the chart-enthusiast, who, after tracing a marked +uniformity in movements for a period of years, runs into reverses and +loses all.</p> + +<p>It is not meant to say that a knowledge of the past is without value. +Inductive reasoning is almost as important as deductive reasoning, +when properly employed and applied. If we scrutinize the history of +past crises and great movements with a view to determining the salient +causes therefor, a great deal has been gained, for we may apply this +knowledge to existent elements lying parallel to those which caused +trouble in the past, and thus decide what is probable in the future. +If, on the other hand, we place dependence on mere repetition, we gain +nothing in education and stand in constant danger.</p> + +<p>It may be contended that the active speculator has little to do with +ten year cycles or their causes, but this is not the case. A correct +understanding of the reasons for the great cycles will simplify the +study of smaller intermediate movements. Much knowledge applicable +to year to year movements will be gained. Monetary troubles, for +example, occur almost annually, and their effects on market movements +are usually, (not always), similar to those of more widely separated +periods, but, of course, in a lesser degree.</p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_37">[Pg 37]</span></p> +<h2 class="nobreak">III<br>The Gold Supply</h2> +</div> + +<p>It may be stated without hesitation that the effect of the increasing +supply of gold upon prices of all bonds, shares, or commodities which +may be classed as speculative, is more decided and certain in its +operation than any other single factor. The process of readjustment due +to this cause would be slow and regular if the principles at issue were +universally and clearly understood. Not being generally recognized, +however, the changes wrought by what is naturally an insidious factor +are, at times, spasmodic and feverish. It is a remarkable fact that +whenever a revolution occurs in any economic or financial process +which is, by its nature, concealed or recondite, its existence and +influence are discovered by a number of students simultaneously but +independently. Important reversions or modifications may be submerged +for a long period, and suddenly light is offered from all parts of +the thinking world. It is probable that this intellectual phenomenon +<span class="pagenum" id="Page_38">[Pg 38]</span> +extends to, or is communicated to the financial world, and that marked +and drastic changes in the affected quarters represent a belated +recognition of forces hitherto unknown, and the readjustment of +affairs by those who see first and furthest. That the operations of +this minority will be important goes without saying. The faculty to +grasp fully and quickly anything salient bearing on financial affairs +is the ground-work of riches and consequently the trained minds of +great holders of shares or commodities will respond most readily to +sound basic arguments, and the greatest holders can often make of +their knowledge a two-edged sword. For example, certain large holders +of bonds, recognizing the fact that increasing gold production means +higher interest rates, and consequently lower prices for bonds, would +be able to dispose of bonds to advantage because of the apparent +general prosperity growing out of this same production of gold. It may +be assumed that in pointing out in interviews, etc., this reign of +prosperity, the gentlemen in question would modestly omit to mention +that the same influences which were causing high prices and much +business in some quarters, were working damage in others.</p> + +<p>Something of this kind has been going on in our bond and stock markets +of late. The inevitable influence of gold on prices has made itself +<span class="pagenum" id="Page_39">[Pg 39]</span> +slowly felt for a long period, but it is only in the last year that a +considerable number of individuals whose operations are of importance +in the financial world have come to recognize how powerful this +influence is. Price changes in divers securities and commodities +hitherto unaccounted for, or attributed to wrong influences, have +suddenly been explained to a number of important financiers, and a +correct understanding of the problem has undoubtedly resulted in +radical readjustments in some quarters. With that pertinacity in error +which seems to distinguish the ordinary speculator, he has, however, +gone on attributing these processes of equilibration to causes which +have only a limited bearing on the case. The recent heavy decline in +bonds and stocks, for example, was popularly ascribed to political +and legislative action against railroads. Scarcity of money was given +second place in these deductions, and gold production third place, or +no place at all. If we reverse this order of importance and give gold +production first place, monetary affairs second place, and political +affairs third place, we are nearer the truth. It looks a little +ridiculous that the scope of intelligent perspective should be blocked +by three thousand miles of water, and that the unthinking majority who +ascribe our decline in bonds to local politics should have failed to +<span class="pagenum" id="Page_40">[Pg 40]</span> +recognize so potent a fact as that the decline was world-wide; but +such is the case. The readjustment in bonds was due to excessive +over-production of gold, and it may be safely assumed that so long as +this over-production continues to increase rapidly, bonds will continue +low in price or, what amounts to the same thing, interest rates will +remain high.</p> + +<p>As to the importance of a correct understanding on this subject of gold +supply and its influence on prices, I quote from Mr. Byron W. Holt’s +book “The Gold Supply and Prosperity,” which, I may add, is used as the +text book for this chapter. Mr. Holt says:</p> + +<p class="blockquot">“This is the great problem that now confronts the +financial world and demands solution of every investor. Not to solve +it may mean great loss and possible failure. To solve it means success +and greatly enhanced wealth for all who now have either a fair share of +this world’s goods or who have credit and can intelligently go in debt +for a large amount.”</p> + +<p>As speculation or investment-speculation, as defined in the +introduction to this book, are the subjects under discussion it is the +intention to take up, in turn, such points as bear particularly upon +price changes of speculative shares and commodities influenced by our +increasing supply of gold. The main points to be considered are as follows: +<span class="pagenum" id="Page_41">[Pg 41]</span></p> + +<ul class="index"> +<li class="isub2">1—The effect upon bonds and preferred stocks having a fixed</li> +<li class="isub4">rate of income.</li> +<li class="isub2">2—The effect upon common stocks of railroad corporations.</li> +<li class="isub2">3—The effect upon stocks of industrial corporations.</li> +<li class="isub2">4—The effect upon speculative commodities—wheat, corn,</li> +<li class="isub4">oats, cotton, etc.</li> +</ul> + +<p>For the purpose of argument it will be assumed in this discussion that +our supply of gold is rapidly increasing. We know that such has been +the case in recent years, and it is the opinion of most students that +this increase may be confidently expected to continue. To quote again +from the work already mentioned:</p> + +<p>“Both the output and supply of gold are likely to increase for many +years.</p> + +<p>“While the future output of gold is, of necessity, unknown and +uncertain, there is great unanimity of opinion, among mining experts, +on this point. It appears to be generally recognized that, during the +last twenty years, the industry of gold mining, or rather of gold +production, has been established on a very different and much more +certain basis than any previously existing. No longer is the output +of gold dependent mainly, or even largely, upon placer mining and the +chance finds of ‘free’ gold. The supply of gold, in rock, sand, clay, +and water, being inexhaustible, it is now possible, by machinery and +metallurgical processes, to extract gold, in paying quantities, from +many forms of these vast store-houses. To such an extent is this true +that the future supply of gold is even more secure than is that of +coal, iron, lumber, wheat or cotton. +<span class="pagenum" id="Page_42">[Pg 42]</span></p> + +<p>“Even if prospecting were to stop and attention were to be devoted +only to the gold mines and bodies already discovered, and geologically +in sight, it is probable that the output of gold would continue to +increase for many years. As Mr. Selwyn-Brown, a gold mining expert, +tells us in his very interesting article, ‘as the rich surface deposits +are being worked out, improvements in mining and metallurgical +processes are enabling poorer and poorer deposits to be worked.’ That +is, improvements in ‘stamp mills,’ cyanide mills, dredging machines and +other gold extracting apparatus and processes are being made so rapidly +that it is, every year, becoming profitable to work lower and lower +grades of ore, sand and earth. As the grade declines the quantity in +sight increases rapidly. In fact there are almost literally mountains +of low grade gold ore that can even now be worked profitably. Some of +the largest, most productive and most profitable mines of today contain +ore averaging less than $3 and, in some instances, only $2 of gold per ton.</p> + +<p>“The supply of such ore being inexhaustible the output depends upon +the number and size of the mills employed to extract the gold. It is +reasonably certain that, for years to come, the improvements in methods +and processes of mining will more than keep pace with both the decline +in the quality of the ore and the increase in the cost of mining due to +rising prices and wages, occasioned by the depreciation of gold.</p> + +<p>“In view of all the facts, Mr. Selwyn-Brown’s conclusion that ‘a +progressive increase each year may confidently be expected’ is +conservative. This conclusion, is almost a certainty. The uncertainty +lies in the possibility, if not probability, either of discovering +many important new mines in the practically unexplored parts of every +<span class="pagenum" id="Page_43">[Pg 43]</span> +continent, or of making improvements that will radically reduce the +cost of extracting gold. In either case the increase in the output of +gold might be not simply arithmetically but geometrically progressive.”</p> + +<p>Admitting that the question of gold production is debatable, it remains +for the future to develop any radical change, and it will be necessary +for the student to decide this point for himself either by the light +of facts as yet not established, or by accepting theories as yet +not convincingly erected. If a change occurs, or may reasonably be +expected, an understanding of the subject from the positive side of +the question loses none of its value. The principles involved could be +as successfully applied in reading the probable future by modifying or +reversing effects, and reconciling them to a modification or reversal +in the cause. If, for example, we accept the theory that increased gold +production means advancing commodity prices, and find reason later +to believe that gold production will cease to maintain its ratio of +increase, we may alter our views accordingly so far as this single +influence is concerned.</p> + +<h3><i>1—The effect of the increasing gold production on bonds<br> + and preferred stocks having a fixed rate of income.</i></h3> + +<p>In this division of the question the crux of the whole matter is +interest on money. The question might, in fact, be stated thus: “What is +<span class="pagenum" id="Page_44">[Pg 44]</span> +the effect of increasing gold supply on money interest rates?” and +having solved that problem, the original inquiry is answered.</p> + +<p>To reach a reasonable solution we must first examine the effect of an +unduly increasing supply of gold on commodity prices. Over-production +in any quarter inevitably leads to lower prices. Gold being a fixed +standard cannot decline in figures, but it does so in fact. That is to +say, the flexible prices of things which gold will buy rise to fill +the gap. Thus, since 1896, prices of commodities have risen 50%. The +man who loaned money ten years ago finds its purchasing power impaired +33⅓%, when it is returned to him today, for the reason that commodity +prices having advanced 50% in the interim, his dollar will now buy only +66⅔% of what it would buy in 1897. This impairment of principal will +be covered, in part at least, by interest rates. This effect, if not +recognized and arbitrary would adjust itself automatically, regardless +of whether or not investors recognize the influence of changing values +of gold, for money, finding higher returns in other quarters, would +speedily desert the long-term, fixed-interest investment field, and +prices of such securities would decline through lack of demand.</p> + +<p>On the subject of interest rates Mr. Holt says: +<span class="pagenum" id="Page_45">[Pg 45]</span></p> + +<p class="blockquot">“But there is another reason why interest rates +should be high when prices are rising. When money is shrinking in value +interest rates should be high to make up, or partly make up, the losses +on the principals of loans. To illustrate: Suppose that prices are +rising 10% a year. This means that the purchasing power of money is +declining about 10% a year. Suppose, then, that $100 were loaned for +one year at 5%. At the end of the year the lender would have $105; but +with this $105 he could buy only about as much as he could have bought +with $95, at the beginning of the year. In reality, he has received no +interest at all but has, instead, paid $5 to the man for holding his +$100. The man with money to loan cannot afford to do business in this +way. He is usually as wise as are his neighbors, and fully as able to +protect his own interests and to get all his money is worth, either by +buying real property, investing in bonds and stock or by loaning on +notes or on call.”</p> + +<p>In submitting the above contentions it must be fairly stated that +there is some diversity of opinion as to the effects of gold on +interest rates. A few writers demur to the theory; others hold that +the effect is nil, and one or two openly adopt the negative side +of the discussion, and state that more money means lower rates of +interest. The majority of recent investigators, however, appear to be +accepting the theory as given herein, and it may be added that prices +of the class of securities considered have borne out the hypothesis +faithfully, and that the minority have failed to offer convincing +<span class="pagenum" id="Page_46">[Pg 46]</span> +explanations of this readjustment. It will not do to point to the +fact that money has been fully employed in constructive rather than +investment fields of late; for while this is true enough, it does not +explain why gilt-edged bonds such as British Consols have declined +in value, while stocks and shares which did not bear the onus of +circumscribed returns have advanced. There are, of course, contributory +causes: the Labor-Socialistic Government in England no doubt affects +the prices of consols, but this influence is specific, and loses +most of its force when we consider that not only these particular +securities, but practically all others of their class the world over +have suffered a radical decline. In other words, interest rates have +grown comprehensively higher. The theory appears sound, is borne out +by events, and mere denial does not weaken it. It may well be accepted +until its opponents succeed in giving us something more convincing in +its place.</p> + +<p>In support of the theory, Mr. Holt reproduces the following table of +British bonds from Moody’s Magazine for October, 1906. +<span class="pagenum" id="Page_47">[Pg 47]</span></p> + +<p class="f110 spa1"><b>PRICES OF BRITISH INVESTMENT BONDS.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> </th> + <th class="tdc"> % </th> + <th class="tdc"> 1906 </th> + <th class="tdc"> 1905 </th> + <th class="tdc"> 1904 </th> + <th class="tdc"> 1896 </th> + <th class="tdc"> </th> + </tr></thead> + <tbody><tr> + <td class="tdl">British Consols</td> + <td class="tdr">2½</td> + <td class="tdr">86½</td> + <td class="tdr">89⅛</td> + <td class="tdr">88½</td> + <td class="tdr">113⅞</td> + <td class="tdc"><a id="FNanchor_1" href="#Footnote_1" class="fnanchor">[1]</a></td> + </tr><tr> + <td class="tdl">Met. Consols</td> + <td class="tdr">3½</td> + <td class="tdr_wsp">102 </td> + <td class="tdr_wsp">104 </td> + <td class="tdr">104½</td> + <td class="tdr">128¾</td> + <th class="tdc" rowspan="10"> </th> + </tr><tr> + <td class="tdl">London County</td> + <td class="tdr_wsp">3 </td> + <td class="tdr">88½</td> + <td class="tdr">94½</td> + <td class="tdr_wsp">93 </td> + <td class="tdr">128¾</td> + </tr><tr> + <td class="tdl">Leeds</td> + <td class="tdr_wsp">4 </td> + <td class="tdr_wsp">108 </td> + <td class="tdr_wsp">109 </td> + <td class="tdr">111½</td> + <td class="tdr">130½</td> + </tr><tr> + <td class="tdl">Liverpool</td> + <td class="tdr">3½</td> + <td class="tdr_wsp">107 </td> + <td class="tdr_wsp">109 </td> + <td class="tdr_wsp">109 </td> + <td class="tdr">144¼</td> + </tr><tr> + <td class="tdl">Manchester</td> + <td class="tdr_wsp">4 </td> + <td class="tdr_wsp">123 </td> + <td class="tdr">128¾</td> + <td class="tdr">124¾</td> + <td class="tdr_wsp">159 </td> + </tr><tr> + <td class="tdl">New South Wales</td> + <td class="tdr">3½</td> + <td class="tdr">100½</td> + <td class="tdr_wsp">100 </td> + <td class="tdr_wsp">96 </td> + <td class="tdr">112¼</td> + </tr><tr> + <td class="tdl">Queensland</td> + <td class="tdr">3½</td> + <td class="tdr">99½</td> + <td class="tdr_wsp">99 </td> + <td class="tdr_wsp">96 </td> + <td class="tdr">111½</td> + </tr><tr> + <td class="tdl">Canada</td> + <td class="tdr_wsp">3 </td> + <td class="tdr">98½</td> + <td class="tdr">100½</td> + <td class="tdr_wsp">97 </td> + <td class="tdr">107¼</td> + </tr><tr> + <td class="tdl">Cape</td> + <td class="tdr">3½</td> + <td class="tdr_wsp">97 </td> + <td class="tdr_wsp">98 </td> + <td class="tdr_wsp">95 </td> + <td class="tdr_wsp">120 </td> + </tr><tr> + <td class="tdl">Lon. & N. Western</td> + <td class="tdr_wsp">3 </td> + <td class="tdr_wsp">93 </td> + <td class="tdr_wsp">96 </td> + <td class="tdr_wsp">95 </td> + <td class="tdr">124¾</td> + </tr><tr> + <td class="tdl">Midland</td> + <td class="tdr">2½</td> + <td class="tdr_wsp">76 </td> + <td class="tdr_wsp">79 </td> + <td class="tdr_wsp">78 </td> + <td class="tdr">124¾</td> + <td class="tdc"><a id="FNanchor_2" href="#Footnote_2" class="fnanchor">[2]</a></td> + </tr><tr> + <td class="tdl">Great Western</td> + <td class="tdr_wsp">4 </td> + <td class="tdr_wsp">123 </td> + <td class="tdr_wsp">127 </td> + <td class="tdr">123½</td> + <td class="tdr_wsp">164 </td> + <td class="tdc"> </td> + </tr><tr> + <td class="tdl">Average</td> + <td class="tdr over">3.3</td> + <td class="tdr over">100.2</td> + <td class="tdr over">101.8</td> + <td class="tdr over">100.9</td> + <td class="tdr over">128.4</td> + <td class="tdc"> </td> + </tr> + </tbody> +</table> + +<p class="blockquot">“Thus,” comments the writer, “these 13 British +bonds, supposedly the safest and least speculative of all securities, +have declined an average of over 28 points in ten years. Considering +incomes and present prices, the unfortunate investors in these bonds +have not only received less than 1% on their investments, during the +last ten years, but, should they sell their bonds, they would find that +the proceeds have lost 30% of the purchasing power of a similar amount +ten years ago. Altogether, they have suffered a net loss, over incomes, +of more than 20%, or over 2% a year.”</p> + +<p>There are other economic influences affecting interest rates through +gold supply, but the one given appears to the writer the most direct +and forcible when applied to readjustment of prices to income.</p> + +<p>In weighing the influence of increasing gold production and its effect +upon interest rates through the advancing prices of commodities, the +<span class="pagenum" id="Page_48">[Pg 48]</span> +student is liable to fall into one grave error. He may perhaps jump + +to the conclusion that gradually advancing prices of commodities +mean gradually advancing rates of interest. This is not at all the +case. A sustained ratio of advance means sustained high rates of +interest—nothing more. In order to make this clear let us go back to +the original principle.</p> + +<p>Increasing prices for commodities mean an impairment of the purchasing +power of money. If the purchasing power of money is impaired 2% per +annum through increasing prices of commodities, and the normal rate +of interest is 4%, we can cover the deficiency by making the interest +rate 6% <i>and leaving it there as long as this ratio of impairment +is maintained</i>. In other words the man who loans $1,000 at 6% +loses $20.00 per annum in the impairment of capital and receives +normal interest of $40.00 per annum and $20 extra to cover his loss in +capital. Strictly speaking the extra 2% is not interest at all, but an +amortization payment. It matters not how high prices ultimately go, he +receives each year a bonus sufficient to cover his loss in capital, and +the interest rate remains 6%.</p> + +<p>Therefore, if prices of commodities advanced for ten years and then +ceased to advance, but were maintained at the highest figures reached, +interest rates would fall because there would be no further impairment +<span class="pagenum" id="Page_49">[Pg 49]</span> +of capital, and what was formerly amortization, would become usury. On +the other hand, if a new ratio of increase should occur in commodity +prices and they should advance 4% per annum, interest rates would, if +fully adjusted, reach 8%-4% for normal interest, and 4% for impairment +of capital.</p> + +<h3><i>2—The effect upon Common Stocks<br>of Railroad Corporations.</i></h3> + +<p>Here the effect of high interest rates is, or in time may be, offset +by returns in the form of dividends, undivided profits, improvement of +property, or the fact that income is not limited. But there is another +trouble, and a serious one, for which the gold supply is responsible.</p> + +<p>If the increasing supply of gold is responsible for higher commodity +prices it must be at once apparent that the building, equipment +and maintenance of railway properties costs more and more as all +commodities, including labor, advance in price. This would be all +right if the selling commodity, i. e.: transportation, also advanced +proportionately in price; but it is so difficult to override popular +prejudice and widespread misunderstanding on this point, that we find +continued agitation and legislation not only against advancing rates, +but with a view to reducing those which already obtain. There must, of +<span class="pagenum" id="Page_50">[Pg 50]</span> +course, be a limit to this thing, and if the cost of production +continues to increase, the railroads must be permitted to demand +higher prices for transportation. Otherwise a point would finally +be reached where every railroad in the country would be forced into +bankruptcy. The great danger lies in a belated assimilation of +this truth by the masses, and too much demagoguery on the part of +politicians who do understand, but, being politicians, prefer to +reflect the views of a majority of constituents, rather than to enter +a campaign of proselyting. That evils have been fostered and wrongs +committed by eminent railroad financiers is certain; but there is +considerable confusion of ideas on this head. Over-capitalization, +illegal combinations, manipulation of funds for private gain, and the +swelling of dividends for stock-jobbing purposes, when the funds so +distributed should have gone into improvements or surplus, have all +played their part in arousing the wrath and indignation of the great +majority, and they are, as a class, prone to jump to the conclusion +that any and every railroad corporation is charging unduly high rates +for its services, and making exorbitant returns on invested capital. +This has, no doubt, been more or less true in the past in certain cases +where extremely high rates were made, and the apparent returns on money +attenuated by over-capitalization; but this evil is gradually +<span class="pagenum" id="Page_51">[Pg 51]</span> +decreasing, and the real fight is, or should be, against these abuses. +The railroads are suffering for the sins of the past, and may suffer +still further; but the time is not far distant when, unless conditions +change radically, the railroads must be allowed more latitude in the +adjustment of rates.</p> + +<p>The prevalent opinion, that needed reforms which strike at the root +of the evils mentioned above is a bear argument, is another popular +fallacy. Such reforms intelligently conceived, and unswervingly carried +out, are all in favor of the small shareholder. If laws can be enacted +which will prevent individual interests from plundering or misusing +the funds of corporations, and which will compel these corporations to +issue reports and statements which are not so involved and complex as +to be beyond the ordinary comprehension, the small holder or investor +will have a better show. But, having cured these evils, no laws can +possibly endure which contemplate curtailing fair returns on money, and +fair profits through natural enhancement in values.</p> + +<p>But, however fair or cheering this view may appear, the fact remains +that it will be slow in its acceptance and slower in its operation. We +may therefore summarize the situation thus. Increasing production of +gold brings about increasing cost of operation, and so long as cost of +<span class="pagenum" id="Page_52">[Pg 52]</span> +operation is advanced with no corresponding advance in selling price of +transportation, the ratio of profits will gradually decrease until a +vanishing point is reached.</p> + +<p>In the last analysis, a probable tardy and reluctant recognition of the +true status of the case warrants the belief that for the near future, +the railroads have a hard time ahead of them, and that so far as this +single important influence is concerned, it is decidedly a bearish factor.</p> + +<h3><i>3—The effect upon stocks of<br> industrial corporations.</i></h3> + +<p>Here we have a different proposition. Rising prices for commodities +do not interfere with the earning power of corporations which produce +and sell commodities, the prices of which are not limited by law. In +fact these corporations are, in many cases, gainers by this influence +which tends to advance prices, not only of what they buy, but of what +they sell. It may be added, parenthetically, that railroad companies +which own valuable coal lands, etc., find the bad influences already +discussed partially offset by the gain from such holdings. The railroad +company, however, may be considered as pre-eminently a seller of +transportation and has been so regarded herein. +<span class="pagenum" id="Page_53">[Pg 53]</span></p> + +<p>The industrial corporations whose products are subject to regulation +by law, such as gas and electric lighting companies, are subject to +practically the same influences as those which operate against the +prices of railroad stocks. Their cost of production advances easily +and inevitably, and the selling price remains fixed, or advances with +difficulty and under protest.</p> + +<h3><i>4—The effect on speculative commodities—<br>Wheat, Corn, Oats, +Cotton, etc.</i></h3> + +<p>This phase of the subject will be dismissed with a few words. If the +contentions already made are accepted, it is apparent that all such +commodities will gradually seek a higher level. A brief examination +of statistics will show that this readjustment has been going on for +years. The gradually ascending pivotal point, or average price, is +particularly marked in the cheaper cereals,—corn and oats, and also in +cotton. This is probably due to the fact that wages have not advanced +as rapidly as have prices of living. It is found that in periods of +hard times consumption of cheaper foodstuffs and textile fabrics +is increased, while the consumption of higher priced commodities +and luxuries are curtailed. The wage-earner, therefore, has been in +reality living in a regime of hard times, although this fact is easily +submerged by steadier employment, by a fictitious appearance of general +<span class="pagenum" id="Page_54">[Pg 54]</span> +prosperity, and the ability to spend a larger number of dollars, +without realizing fully the loss of purchasing power in the dollars.</p> + +<p>It would be out of the question to attempt to enter anything like +a comprehensive study of the question of gold production and its +effects in a single chapter, or even in a single volume; neither is it +necessary to the purposes of this work, for the student who desires +a comprehensive education in this regard will find ample means and +material ready to his hand. From the standpoint of investment and +speculation alone, it is submitted that increasing production of gold +is, to use the phraseology of the street, bearish on long time bonds +and other securities yielding a limited rate of interest or income, +temporarily bearish on railroad stocks, bullish on industrial shares, +except as noted, and bullish on speculative commodities.</p> + +<p>At the risk of indulging in undue reiteration, attention will again be +called to the fallacy of considering such subjects as the one of gold +production too remote in concrete effects, or too sluggish in operation +to be of importance to the speculator. A thorough understanding of +cause and effect bears upon the operations of today, in that it +anticipates the results of tomorrow. Through knowledge of influences of +this character, serious error may be avoided. For example, one of the +<span class="pagenum" id="Page_55">[Pg 55]</span> +profound axioms of the speculative world is that bonds advance first +and stocks afterwards. If we understand <i>why</i> bonds have been, and +are at present, declining we may be justified in modifying this view +and considering the axiom more or less obsolete. He who operates an +engine without a clear understanding of its motive power is likely to +get into trouble, or perhaps be blown up.</p> + +<p>It may be pointed out also, that a too literal acceptance of the +suggested effects of this or any other great price influence is highly +dangerous. Even while gold production continues to increase rapidly, +prices, not only of shares, but of all things, will overleap themselves +and will also swing backwards to the other extreme. The cycles are +not completed, until both zenith and nadir have been touched. Changes +in gold production will not prevent declines in prices; they will, +however, interfere with the regularity of the cycles.</p> + +<p>This chapter may be fittingly closed with the following list of +conclusions reached by Mr. Holt, in the work already mentioned. These +conclusions cover all the points herein presented, and others which are +of interest and value: +<span class="pagenum" id="Page_56">[Pg 56]</span></p> + +<div class="blockquot"> +<p class="neg-indent">“1—That both the output and supply of gold are +likely to increase rapidly for many years.</p> + +<p class="neg-indent">“2—That, therefore, the value of gold will +depreciate as the quantity increases.</p> + +<p class="neg-indent">“3—That this depreciation will be measured by the +rise in the average price level.</p> + +<p class="neg-indent">“4—That a rising price level, if long continued, is +accompanied by rising or high interest rates.</p> + +<p class="neg-indent">“5—That high interest rates mean lower prices for +bonds and all other long-time obligations drawing +fixed rates of interest, dividends, or income.</p> + +<p class="neg-indent">“6—Rising prices increase the cost of materials and +of operation and tend to decrease the net profits +of all concerns, the prices of whose products or +services either cannot be advanced at all, or are not +free to advance rapidly.</p> + +<p class="neg-indent">“7—Rising prices tend to increase the net profits of +all concerns that own their own sources of materials +and supplies.</p> + +<p class="neg-indent">“8—Rising prices of commodities tend to cause +the prices of all tangible property to rise. This +includes lands, mines, forests, buildings and +improvements.</p> + +<p class="neg-indent">“9—Rising prices of commodities and property tend to +increase the value of the securities of corporations +holding commodities or property.</p> + +<p class="neg-indent">“10—Rising prices and cost of living necessitate +higher money wages, though the rise of wages will +follow, at some distance, behind the rise of prices.</p> + +<p class="neg-indent">“11—As rising prices do not mean increased profits +to all concerns, many employers will not concede +higher wages without strikes.</p> + +<p class="neg-indent">“12—Rising prices and wages, therefore, mean +dwindling profits and troublous times in many +industries, with complete ruin as the final goal. +<span class="pagenum" id="Page_57">[Pg 57]</span></p> + +<p class="neg-indent">“13—Because wages will not rise as fast or as +much as prices and the cost of living, there will be dissatisfaction +and unrest among wage and salary earners.</p> + +<p class="neg-indent">“14—Rising prices of commodities and property +encourage speculation in commodities, stocks and real estate and +discourage honest industry.</p> + +<p class="neg-indent">“15—Thus, rising prices, by diminishing the +incomes of ‘safe’ investments in ‘gilt-edged’ bonds and stocks and +by increasing the profits of speculators encourage extravagance, +recklessness and thriftlessness.</p> + +<p class="neg-indent">“16—As rising prices decrease the purchasing +power of debts, and thus aid debtors at the expense of creditors, they +discourage saving and thrift.</p> + +<p class="neg-indent">“17—Rising prices, then, by promoting speculation +and extravagance, increase consumption, especially of luxuries, and, +therefore, stimulate production.</p> + +<p class="neg-indent">“18—Rising prices, then, result in what is real +prosperity for many industries; but what is for a nation as a whole, +artificial or sham prosperity—the result of marking up prices rather +than of increasing production.</p> + +<p class="neg-indent">“19—With prices, wages, rates and industries +always imperfectly adjusted to the ever depreciating value of gold, +and with instability and uncertainty throughout the financial world, +there cannot but be a great shifting around of values and of titles to +property.</p> + +<p class="neg-indent">“20—As this shifting is to the advantage of the +debtors—the rich—and to the disadvantage of the creditors—the great +middle class—it results in rapidly concentrating wealth in the hands of +a comparatively few. +<span class="pagenum" id="Page_58">[Pg 58]</span></p> + +<p class="neg-indent">“21—For all of these reasons a prolonged period +of rapidly rising prices is reasonably certain to become a period of +unrest, discontent, agitation, strikes, riots, rebellions and wars.</p> + +<p class="neg-indent">“22—A rapidly depreciating standard of value +then, if long continued, not only produces most important results in +the financial, industrial and commercial world, but is likely to result +in changes of great consequence in the political, social, and religious world.</p> +</div> + +<p>“In view of all the facts, results and possible +consequences connected with the increasing output and supply of gold, +The Wall Street Journal was right when, on December 4, 1906, it said +that ‘No other economic force is at present in operation in the world +of more stupendous power than that of gold production.’”</p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_59">[Pg 59]</span></p> +<h2 class="nobreak">IV<br>Money</h2> +</div> + +<p>From the viewpoint of the speculator, money conditions require constant +consideration. It goes without saying that no sustained bull market is +possible unless money conditions favor such a movement. We find that +at the end of a period of inflation, the credit situation is always +strained, while a general recession in business will usually cure the +evil.</p> + +<p>The student may enter this large and important branch of the subject +as deeply as he likes. There are many excellent works dealing with the +various phases of the subject, and the question has been so long and +carefully studied by writers, that many important points have been +established so definitely as to admit of little diversity of opinion.</p> + +<p>The bank statement which is issued weekly by the New York Clearing +House, is eagerly scanned by traders, but it is not always the case +that this scrutiny is thorough or enlightening. The statement at its +<span class="pagenum" id="Page_60">[Pg 60]</span> +best, cannot be considered more than a barometer, and its showings are +by no means exact, as it is based on a system of daily averages. That +is to say, the banks figure their loans, deposits, etc., for each day +of the week, and report the averages to the Clearing House. This method +often leads to a false showing. Commenting on this fact, Mr. S. S. +Pratt in his book, “The Work of Wall Street,” says:</p> + +<p>“A striking illustration of the effect of the law of averages upon +the Bank Statement was given in September, 1902. The statement of +September 20 reported a loss in cash of $7,300,000, while the actual +loss, so far as it could be estimated, was only $3,600,000. The +statement of September 27th, on the other hand, reported a gain in +cash of $1,790,000, while the apparent loss was $4,000,000. The former +statement reported a deficit in reserve; the latter a surplus.”</p> + +<p>It is the practice of many speculators to examine the bank statement +merely as regards the changes made from week to week, without reference +to the more important totals. A decrease in reserves is considered an +evil, etc. There is something in this of course, but such methods and +deductions are incomplete and insufficient. A decrease in reserves when +the surplus is very large may be practically meaningless, while the +same amount of decrease when reserves are small may be significant. It +<span class="pagenum" id="Page_61">[Pg 61]</span> +is a good deal like the difference between a man spending a dollar when +he has a hundred, and spending his last dollar.</p> + +<p>The most important general information to be gained from the bank +statement, is by a comparison of loans with deposits, and specie with +loans. We may thus arrive at a fairly correct idea of the state of +trade and the expansion of credits. If we find that loans are in excess +of deposits, and the percentage of specie small, we may, with certain +qualifications, deduce inflation; while on the other hand, the extent +of liquidation may be judged in case these conditions are reversed. As +an example of this process, the following historical facts are given.</p> + +<p>In 1890, twenty stocks listed on the New York Exchange were selling +at an average price of about $87 per share. The percentage of loans +to deposits was about 95% and the percentage of specie to loans about +20%. In November of that year, loans advanced to 102% as compared +with deposits, and specie declined to about 18% of loans. The stocks +mentioned declined to an average price of $64 per share, and later in +1901 to about $61 per share. From 1891 to 1893 there was some alternate +improvement and retrogression in money conditions, all of which was +accurately reflected in stock prices. +<span class="pagenum" id="Page_62">[Pg 62]</span></p> + +<p>In 1893, the proportion of loans to deposits rose to about 109%, and +proportion of specie to loans declined to 13%. The average price of the +twenty stocks reached about $47 per share. (The panic of 1893).</p> + +<p>In 1894, the proportion of loans to deposits fell to 80%, and specie +to loans rose to 30%. This was due to the liquidation of 1893. Stock +prices showed some betterment, rising to about $57 per share. The +severe drubbing of 1893 had made public investors nervous, and had in +many cases incapacitated them for stock market operations. That was to +come later.</p> + +<p>In 1896, the proportion of loans to deposits rose to 102%, and specie +to loans fell to 10%. Stocks reached their lowest level in July of this +year ($42 per share for the twenty stocks mentioned).</p> + +<p>From 1896 to 1898, a gradual improvement was apparent. Through all +this period stock prices faithfully reflected money conditions. In +July, 1898, the proportion of specie to loans rose to 30% and loans to +deposits fell to 83%. Stocks began advancing and in March, 1899, the +average price of the twenty stocks considered, was about $85 per share.</p> +<span class="pagenum" id="Page_63">[Pg 63]</span> +<p>In June, 1900, the average price of the twenty stocks considered, was +about $75 per share. The proportion of specie to loans was about 22%, +and the proportion of loans to deposits was about 90%. From January, + +1901, until September, 1902, money conditions did not improve, but +stocks continued to advance. There were large crops and a general wave +of expansion and prosperity swept the country. In September, 1902, the +proportion of loans to deposits was 99%, and the proportion of specie +to loans about 17%. Meanwhile stocks were high—$128 per share for +our twenty stocks. Conditions, though temporarily ignored, asserted +themselves in 1903, and in September of that year, the average price +of the twenty stocks was about $88 per share; the percentage of loans +to deposits 101% and specie to loans 19%. The money situation had not +changed materially, but the stock market was making a deferred payment.</p> + +<p>In August, 1904, the proportion of loans to deposits had fallen to 90% +and specie to loans had risen to 25%. The stock market was steadily +advancing, and in January, 1906, stocks reached their pinnacle—$138 +per share for the twenty securities considered.</p> + +<p>It will be observed that while stock market movements do not always +immediately reflect good or bad conditions in the financial world, the +effect is ultimately felt. We are pretty safe in assuming that whenever +loans are unduly expanded and the percentage of specie is small, these +<span class="pagenum" id="Page_64">[Pg 64]</span> +conditions must be corrected either by a halt in business or by +liquidation; and the word liquidation here means a cleaning up in other +lines, as well as in the stock market. It is sometimes the case that +after the stock market has suffered a severe decline, there is little +improvement in the monetary situation as shown in the bank statement. +In January, 1907, for example, the percentage of loans to deposits +was about 102%, and specie to loans about 17½%. The average price +of twenty active stocks at that time, was about 130. At the present +writing (June, 1907) those same shares have fallen to an average price +of about 101, and there is no appreciable change in the relation of +loans to deposits, or specie to loans. On June 8th, 1907, the bank +statement showed loans to deposits 102%, and specie to loans a little +below 19%. This state of affairs would naturally lead to the belief +that unless we are vigorously assisted by some powerful factor, such as +good crops, we now face a period where either a decided slowing up or +an actual recession in general business is imperative. On this theory, +fortified or modified by a study of extraneous effects, the speculator +or investor may gain a valuable knowledge of probable future movements +in the stock market. If he decides that the case is a bad one and that +a set-back in business will occur, he may argue that, even if stocks +<span class="pagenum" id="Page_65">[Pg 65]</span> +are low in price, there is little hope of a material upward movement +in any quarter. It would also be evident that the industrial shares +would suffer more in price than the railroad shares; for, under +present conditions, a decline in the price of products generally helps +the railroad corporations to some extent by permitting advantageous +purchases. For instance, if finished steel and iron products decline in +price, the railroads might be enabled to carry out projected extensions +to better advantage than otherwise, while the manufacturing companies +would suffer a considerable loss of profits. It is, of course, true +that a recession in business is felt in all lines, but as the selling +rate of transportation is more fixed than prices of commodities, and +as the producing companies gain less by a recession in the prices of +the commodities they <i>buy</i> than do the railroads, the industrial +stocks are more adversely affected. This may appear as a sort of +compensation for the fact that while rates for transportation do not +advance as easily as prices of commodities, neither do they fall as +rapidly in periods of depression.</p> + +<p>In examining the bank statement as a barometrical showing of money +conditions, it should be remembered that an increase in deposits does +not mean an increase in cash. The bank statement may show an increase +in loans of $1,000,000 and an increase in deposits based on these +<span class="pagenum" id="Page_66">[Pg 66]</span> +loans. That is to say, $1,000,000 may have been borrowed on commercial +paper, and the proceeds passed to the credit of the borrowers. +Commenting on this fact, Theodore Burton says:</p> + +<div class="blockquot"> +<p>“But in the modern development of banking the actual money deposited +is much less important in determining the amount of deposits, because +so large a share of them represents credits obtained by loans, etc. +These credits are transferred upon orders executed by depositors, +and furnish a substitute for currency. In proportion as payments +and settlements are made by checks, drafts, and bills of exchange, +deposits maintain an increased proportion to the amount of currency in +circulation. This class of deposits increases prior to a crisis rather +than diminishes, because loans increase.</p> + +<p>“In the reports of national banks, there is a striking +correspondence from year to year in the volume of deposits and that +of loans and discounts. Deposits show more frequent fluctuations, +but rise and fall in general accord with loans and discounts. This +correspondence is easily explained. Another distinction should be +noted. Some deposits are the result of completed transactions, and +are based upon the proceeds of sales made, amounts realized from +investments, etc. Others merely represent loans or discounts the +proceeds of which are entered to the credit of the borrower. Before +every crisis there is an unusual proportion of deposits which are based +upon loans. If in bank statements there could be separate columns for +these two kinds of deposits, the information afforded by their increase +or decrease would be much more valuable.”</p> +</div> + +<p><span class="pagenum" id="Page_67">[Pg 67]</span> +This point shows the necessity of considering not only the proportion of +loans to deposits but of specie to loans. On this point Mr. Burton says:</p> + +<p class="blockquot">“A continuous decrease of specie attended by an +increase in outstanding discounts is always a danger signal. The gap +between the two may widen for months, and even for years, and may +fluctuate from time to time, but a sudden change of large proportions, +or a steady decrease of the percentage of specie is an unfailing +indication of danger. The reason for this is not hard to discover. +The quantity of metallic money in a country shows what part of its +capital is available as money for the payment of its obligations to +foreign countries, the final test of availability. For this last named +purpose credit money cannot be used, but only money having intrinsic +value—money of the Mercantile Republic, as it is called by Adam Smith.”</p> + +<p>The conclusion reached therefore, is that an increase in loans and +discounts with no corresponding increase in cash or with an actual +decrease in cash, reflects a bad state of affairs, even when the +advance in loans and discounts appears to be fully offset by deposits.</p> + +<p>There is one feature which should not be overlooked. The very worst +state of affairs may be shown in the bank statement during a period +of great commercial activity and inflation in all lines. The reverse +is also true. In 1894, following the panic of 1893, the percentage of +loans to deposits fell to 80% and the percentage of specie to loans +<span class="pagenum" id="Page_68">[Pg 68]</span> +rose to 30%; but no bull market occurred. This was due to stagnation in +all lines of business, a period of timidity and conservatism. In 1895, +there were signs of a great improvement and the stock market started +upward. This improvement, however, proved illusory and premature. Loans +rose quickly to 95% of deposits and specie fell below 15% of loans. +Then followed, in 1896, the new record of low prices.</p> + +<p>In studying the bank statement for its effects on speculative prices, +surplus reserves will frequently suggest danger or safety. If surplus +reserves dwindle too near the vanishing point, the possibility of +necessary retiring of call loans is apparent. +(<a href="#BANK">See “Bank Statement,” page 125</a>).</p> + +<p>It is possible to gain valuable knowledge by a careful examination of +the bank statement. The points made above are, of course, only of a +simple and elemental character. We may go on with our examination as +far as we like and scrutinize not only totals, but the position of +individual banks. Also, in order to gain a comprehensive perspective, +it will be expedient to examine, not only the barometer of the New York +situation, but the condition of interior banks. However, it is a pretty +good idea to begin with the A, B, C’s. +<span class="pagenum" id="Page_69">[Pg 69]</span></p> + +<p>High rates for call money and the calling of loans are responsible for +many sharp market movements. A large class of speculators figure that +when dividend returns are high and call money cheap and plentiful, they +have a tangible influence working in their favor while they are long +of stocks. If rates for call money are 2% and a stock returns 6% there +is, eliminating speculation, an advantage of 4% per annum in favor of +the marginal speculator. This advantage is not so great in carrying +stocks on time loans, as rates for fixed periods are materially higher. +There is always danger of a flurry in call money, however, and in +the event of a wholesale calling of loans there arises the necessity +of selling stocks, and a decline occurs. There is also present the +element of manipulation in this quarter, and it cannot be gainsaid that +many instances have occurred where funds have been suddenly withdrawn +for the purpose of “shaking out” an undesirable following or of +accumulating securities to advantage; and on the other hand, call money +has frequently been made cheap in order to encourage purchases.</p> + +<p>There are two periods of the year when the stock market is affected by +disbursements of money in the form of interest and dividends. The two +dates at which heavy disbursements occur, are January 1st and July 1st. +It is a popular belief that just prior to each of these dates, money +<span class="pagenum" id="Page_70">[Pg 70]</span> +will grow “tight” because of the necessary provisions made by banks +and other corporations to meet such payments. Following the actual +distribution of funds, it is the theory that a part of this money will +seek reinvestment in bonds and shares. A great many speculators argue +that this would naturally produce stringency, the possible calling of +loans, and consequently lower security prices in the latter half of +December and June and an advance early in January and July. While this +reasoning looks sound enough on its face, it is not at all dependable. +It is certain that everything is discounted in advance of actual events +in speculative circles, and the more widely such theories as the one +mentioned are disseminated, the more dangerous and inoperative they +become. Instances are not lacking in recent years, where the technical +situation growing out of this reasoning, has not only nullified the +theoretical action, but has resulted in actual reversal, i.e.: an +advance just preceding disbursements and a decline at the time the +distributed funds were presumably returning to investment channels. +Numerous shrewd people, anticipating an advance in January and July, +have attempted to take time by the fore-lock by effecting purchases in +December and June. Their buying, being of a competitive character, not +only carries prices upward prematurely, but creates a weak speculative +<span class="pagenum" id="Page_71">[Pg 71]</span> +long interest, subject to disappointment if funds do not reappear in +the volume expected, or susceptible to attack by great manipulators.</p> + +<p>There is another objection to this theory of periodicity. If the +market is dull and stagnant, with little public interest, it behooves +the large interests which have stocks for sale to bid up prices and +create activity prior to the heavy distributions of funds. They may +accomplish two things by this process. They make not only a higher +level of prices at which to sell their wares, but create what is of +even greater importance, an appearance of activity, prosperity and a +newspaper market. It is strangely illogical, but unquestionably true, +that people who would flatly refuse to enter a market at a low level of +prices will rush in to buy ten points higher if the factors of bustle +and excitement are present. Both the doctrine of common-sense and the +calculus of probabilities would establish the fact that each advance +brings us nearer the top, and each decline brings us nearer the bottom; +but few men can train themselves away from the idea that an upturn +already established does not indicate higher prices and vice versa. It +is a sort of enthusiasm which a minority understand, however, and make +good use of. The psychological effect of mere excitement is one of the +<span class="pagenum" id="Page_72">[Pg 72]</span> +explanations of the incontrovertible fact that the public usually buys +at high prices and sells at low prices.</p> + +<p>The acceptance of certain periods or seasons as a guide to either +purchases or sales of stocks is, in the last analysis, merely a form +of chart-playing. It is natural to evade a studious examination +of the general business and monetary situation and to resort to a +simple, albeit a superficial diagnosis, which, being insufficient and +incomplete, is dangerous. It is suggested that while the double effects +of contraction prior to distribution should be understood and examined, +the only safe method is to go behind these temporary and periodical +changes and study the whole basic structure comprehensively. We may +find that money is in demand for the purpose of propping and sustaining +an unsound business condition, and that it will in all probability +fail to return in volume to the security markets. This occurred in +January, 1907, and the believers in a “January rise,” were badly +disappointed. Interest rates on money must also be given consideration. +If the commercial world is striving to secure funds at a higher rate +of interest than is offered on shares, money, or a good portion of it, +will go where interest returns are greatest. And in this regard it may +be said, that merely local interest rates are not always a good +<span class="pagenum" id="Page_73">[Pg 73]</span> +indication of money affairs in the business world. Not long ago, the +writer, being suspicious of the claims of plentiful money and low rates +in New York, investigated the matter through Western bankers and found +that prime paper was being offered west of the Missouri River at much +higher rates. This was made particularly significant by the fact that +previously the borrowers had always been able to supply their needs at +home, and that the loans, being offered through brokers, really cost +about ½% more than was apparent on their face.</p> + +<p>It is frequently interesting and instructive to examine the character +of collateral behind loans, and find out how large a percentage of this +collateral consists of stocks and like securities. Our stock market +might appear to be in a sold out condition, when, in reality, a very +bad technical condition obtained. The purely marginal speculative +account in New York City, or other important centers, is carried on +under certain flexible rules or customs as to the amount of money +loaned on certificates; but in cases where securities have been widely +purchased for cash by small holders, and, in the event of general +tightness in money or depression in business, made the basis of loans +in country banks, but we have, in fact, a very weak <i>marginal</i> +<span class="pagenum" id="Page_74">[Pg 74]</span> +public account. The home banker will loan more liberally to his +townsmen and will scrutinize the movements of prices or the stages of +the market less closely than the city banker, and the certificates +owned by small holders and deposited as collateral may, in the +aggregate, represent an enormous line of shares. It would be quibbling +to say that this situation represented anything less serious than +a weakly margined public line. If the market declined materially, +the bankers would be forced, in self-protection, to call for more +collateral, and the result would depend, as in all other cases, on +the ability of the individual holder to take care of himself. Such a +condition existed in U. S. Steel stocks in the depression of 1903, and +was pointed out at the time by the writer. The knowledge obtained was +based barometrically on information obtained from a number of bankers +in different localities.</p> + +<p>While interest rates for both time and call money are frequently +fictitious, or of a temporary and artificial nature, and no set rules +can be laid down as to certain conditions in money and their immediate +effects upon security values, it is not difficult to gain a general +idea of underlying conditions. We have always at hand statistics which +will reflect faithfully the fundamental basis of the entire world +structure. But in this important division, as in most other branches of +<span class="pagenum" id="Page_75">[Pg 75]</span> +speculation, we often find that what is really important is absolutely +ignored, while matters of little moment are harped upon, or even made +the basis of operations. Thus, every habitue of brokerage offices +eagerly watches the bank statement or the rates on call money, and +knows nothing about the expansion of credits, even when such expansion +has reached a point that would make a crisis appear inevitable. No +better proof of this can be offered than the fact that our heaviest +business and greatest inflation, have frequently gone merrily forward +for a year or more under suicidal conditions. These conditions have +sometimes been so obvious, so forcible, that it would appear impossible +to view them with equanimity. In a majority of cases they were probably +not viewed at all, and the thoughtful men who pointed out the danger +have been called calamity howlers or pessimists. There is one great +check to education in this direction: great financiers who are most +conversant with actual conditions, seldom find it expedient to point +out the facts. Sometimes they, themselves, wish to dispose of their +holdings because of the obvious peril ahead and this process would not +be facilitated by gloomy predictions. On the other hand, it is too +often the case that these same gentlemen, finding it to their great +<span class="pagenum" id="Page_76">[Pg 76]</span> +advantage to disperse sunshine until their goods are sold, point +assiduously to the excellent business of the present, and neglect +to touch on the irrepressible future, which, after all, is the most +important question to the investor or speculator.</p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_77">[Pg 77]</span></p> +<h2 class="nobreak">V<br>Political Influences, Crops, Etc.</h2> +</div> + +<p>The possibility of legislation adverse to corporations is always +present as a market factor, and at times severe declines have been +recorded through such action. It is not always the case that such +legislation is truly a bear factor, although it is fashionable to so +interpret anything in the nature of legislative interference with +corporate affairs. It is the writer’s opinion that a great deal of +misunderstanding has recently arisen in regard to the attitude of +certain party leaders toward the heads of great railroad corporations. +The opinion has been widely fostered by opposing politicians and others +that the credit of railroad corporations was being badly impaired, and +the interests of stockholders jeopardized because investigations were +ordered as to the methods of individuals or directorates.</p> + +<p>It does not appear that any reasonable man could, as the stockholder of +a corporation, or as a private citizen, object to having dishonest or +sharp practices on the part of the active management of the property in +<span class="pagenum" id="Page_78">[Pg 78]</span> +question exposed and prevented. Where it is shown that an individual, +in his capacity as the head of a business, has employed his office as a +means of juggling stocks or reaping enormous personal gains, it cannot +but be to the interest of stockholders to have such practices stopped. +If the means at issue are honest and legitimate, the benefits reaped +should go to the stockholders. It is impossible to reconcile any other +plan with equity and common honesty. Let us look at the matter without +the mystery that obscures the affairs of a great corporation.</p> + +<p>Suppose a member of a certain firm, its manager, finding the firm +in need of funds, secures money at a high rate, and at great profit +to himself—is that right? Or is it the manager’s business to work +entirely in the interest of the partners he represents? Is it possible +for him to legitimately acquire personal profit of any kind in +administering the affairs of the firm? It is not sufficient to point +out that the manager’s action in securing funds redounded to the great +benefit of the business concern, or that his capability and shrewdness +were reflected in enormous partnership profits. His associates in +business are entitled to all, not a portion, of the gains secured in +the management of its affairs.</p> + +<p><span class="pagenum" id="Page_79">[Pg 79]</span> +It is submitted that much of our recent legislation which is popularly +supposed to have injured stock values has, in reality, aimed to protect +the small holder and throttle the unscrupulous men who, while actually +in their employ, were milking their business of millions. Legislation +which effects publicity and simplicity in the affairs of corporations +is an unmixed benefit to the small investors.</p> + +<p>It is almost invariably the case that when a great decline in stock +prices occurs, the set-back is popularly attributed to some factor +which, in reality, had little to do with the reversal. In the decline +of 1907, thousands of people attributed the inability of railroads +to borrow money at low rates of interest almost entirely to hostile +legislation. Apparently these rapid-fire thinkers did not know or +realize that interest rates had risen the world over, that there was +not a free money market in the world, and that money, instead of being +withheld from 4% issues, was fully employed in other lines. Such, +however, was the case; British Consols, French Rentes,—all the choice +securities of civilized countries had kept pace with the declines in +our own bonds and stocks; but these facts seem to be unappreciated.</p> + +<p>It is true that adverse legislation sometimes seriously impairs the +value of a security. A public utilities company, for example, which is +forced to reduce its selling rate, is unquestionably injured from an +<span class="pagenum" id="Page_80">[Pg 80]</span> +investment point of view. Such legislation, however, may be weighed +correctly by a little calm consideration, and it may be said that +action of this nature is usually for the purpose of correcting +abuses, rather than as a revengeful and confiscatory attack on vested +interests. Measures which prevent a fair return on capital will perish +of their own iniquity. So far as measures which are formed to prevent +extortion are concerned, it is impossible to criticize them.</p> + +<p>In order to correctly weigh the effects of legislative measures on +security values and prices, we must therefore examine fairly what +the legislation seeks to accomplish, taking care not to allow a +contemporaneous price movement which may be due to other causes, to act +as a verification of a false view. This error occurs very frequently; +in fact, one of the most remarkable things about speculation is that +the true causes of great movements are fully appreciated by the +majority <i>only in retrospect</i>.</p> + +<p>The probable market effect of legislative and political affairs can be +correctly gauged only by examining the nature and importance of the +issue in question. This is true not only of state and municipal action, +but in regard to presidential elections. There is a popular idea +that it is dangerous to buy stocks on the eve of a new presidential +campaign, but there is not much in history to uphold the view. True, in +<span class="pagenum" id="Page_81">[Pg 81]</span> +a majority of cases, a decline has preceded such a contest, but there +have been frequent reversals of this action, and we have had too few +elections to attempt any chart-playing on this influence. Such a guide +would be empirical.</p> + +<p>The issues involved in a presidential contest, however, may sometimes +influence prices. Here again a careful examination of facts and +probabilities will generally uncover the truth. If the nominee of one +party stands on a dangerous platform and the outcome of the contest is +in doubt, we may well dispose of shares if for no better reason than +that the element of danger is present. Danger, whether or not it is +finally realized, is a bear factor, just as safety is a bull factor.</p> + +<p>Tariff agitation should be accorded careful consideration by the +speculator. This is particularly true as regards the effect on +industrial corporations. A reduction of the present tariff on Iron and +Steel, for instance, would materially lower, if not destroy, the value +of many of the common stocks of steel manufacturing corporations. A +very clear and comprehensive work on this subject is mentioned in the +bibliography on page 183.</p> + +<p>No cut and dried rules or suggestions can be offered as to the effects +of political or legislative issues on prices. Each point must be +<span class="pagenum" id="Page_82">[Pg 82]</span> +scrutinized as it arises, and judgment formed thereon. Sympathetic +movements will sometimes occur because of apprehension or +misunderstanding, but such effects will be short-lived.</p> + +<h3><i>Crops and Crop Failures.</i></h3> + +<p>The question of crop failures is of great importance. It is not +difficult to form a fairly correct idea as to the ultimate yield. The +estimates of the Government sometimes go wide of the mark, but it must +be remembered that they are <i>estimates</i> and nothing more, and +that conditions may change somewhat after the figures are compiled. +The speculator is frequently confused by the conflicting opinions +of private experts. It is probably safer to disregard the various +authorities and pin one’s faith to the computations of the bureau at +Washington. These official documents have been criticized at times, +and no doubt the criticism has been warranted, but they form our most +dependable source of information and will improve as time rolls on.</p> + +<p>A crop failure, or a short crop, invariably brings forth much +fallacious vaporing from the rooters of Wall Street. They are as bad in +their efforts to obscure the truth as are the crop-killers with their +fabrications. A crop failure is a serious thing and must be faced as +<span class="pagenum" id="Page_83">[Pg 83]</span> +such. The contention which is always heard in lean seasons, that the +evil has been counter-acted because of the large reserves of Wheat, +Corn or Cotton in farmers’ hands is ridiculous. Farm reserves are +wealth. They have already found their place in the business structure. +In many cases the money they represent has already been spent in the +form of credits. Nor do high prices for cereals or cotton overcome the +evils of short production. Small crops mean decreased employment for +laborers; a diminution of per capita purchasing power, and increased +cost of living. They also mean smaller tonnage for the railroads, and +consequently decreased earnings.</p> + +<p>And in examining crop prospects, we should consider the fact that each +year’s normal crop should be larger than the one preceding it. This is +distinctly shown by tracing production back for a term of years.</p> + +<p>There will, of course, be fluctuations in this gradual increase, but +the tendency is certain. We may also consider that as railroads are +constantly extending their lines and increasing their facilities, it +follows that increased production in the commodities they transport is +necessary to their well being.</p> + +<p>And short crops the world over in the same year have the same elements +of economic evil. The purchasing power of the world is reduced, and +<span class="pagenum" id="Page_84">[Pg 84]</span> +even if we ourselves make fair crops and export them at high prices, +the world’s poverty is felt in lack of demand for other exportable +surplus. The civilized world is too closely knit together in its +affairs to permit of the entire localization of the effects of a +serious property loss.</p> + +<p>A lean crop year can probably do more to temporarily injure the actual +<i>value</i> of railroad shares than can any other single influence +bearing on prices. Tonnage is affected both ways, so is passenger +traffic. There is less grain or cotton to haul to the markets, and, as +purchasing power has been reduced in the affected localities, there is +less freight to haul back to the producers. In the last analysis, the +products of a community represent to a great extent the mere exchange +of these products for other luxuries and necessities, and the effect of +decreased production is a two-edged sword, so far as the transporting +companies are concerned.</p> + +<h3><i>Accidents.</i></h3> + +<p>The effect of accidents on stock prices has been fully discussed in a +former work, and the contention offered that accidents could no more be +provided against, or considered, in the investment or speculative world +<span class="pagenum" id="Page_85">[Pg 85]</span> +than in any other walk of life. It is also thought that accidents are +more frequently the <i>excuse</i> for movements than the <i>cause</i> +of them. If a market is in a bad technical or general condition, the +slightest adverse happening may create panic; while if the foundation +is sound, even a great calamity, such as the San Francisco earthquake, +will cause only a temporary halt. The man who speculates correctly has +little to fear from accidents. +<span class="pagenum" id="Page_86">[Pg 86]</span></p> + +<p class="blockquot">In the following section of this work, the writer +has undertaken to touch on such features as appear of most interest and +benefit to the speculator or investor. Some of the matter presented, +such as the question of dividend dates, will appear to many readers so +simple as to be unnecessary, but it is true, nevertheless, that many +very elementary facts are misunderstood or unappreciated by a large +class of public participators.</p> + +<p><span class="pagenum" id="Page_87">[Pg 87]</span></p> +<hr class="chap x-ebookmaker-drop"> +<p><span class="pagenum" id="Page_88">[Pg 88]</span> </p> + +<div class="chapter"> +<p><span class="pagenum" id="Page_89">[Pg 89]</span></p> +<h2 class="nobreak">VI<br>Puts and Calls</h2> +</div> + +<p>Puts and Calls, or “privileges,” have long been popular with a certain +trading element, either as a protection against loss in commitments +already made, or as a positive method of trading.</p> + +<p>The theory and operation of privileges may be easily understood by +considering them in the light of insurance, the money paid for them as +a premium, and the funds received in case the privilege is exercised, +as a loss paid by the insurance company. It will be understood, that in +speaking of the <i>seller</i> of puts or calls, the insurance company +is referred to, and that the <i>buyer</i> represents the insured party.</p> + +<p>The <i>buyer</i> of a call has the right to <i>call</i> for his shares +or commodity, at the price named in the contract at any time before its +maturity. The <i>seller</i> of a call fixes a certain price at which he +agrees to <i>deliver</i> stock, specifies the duration or time limit of +the contract, and receives from the buyer a certain sum or premium. +<span class="pagenum" id="Page_90">[Pg 90]</span></p> + +<p>For example: United States Steel Common is selling at $40 per share; A, +the seller, offers a call on 100 shares at 43, good for ten days, at +a price of say, $100. B, the purchaser, pays the $100 and receives a +contract from A as specified above. Now suppose that at any time before +the expiration of the period named, Steel Common advances to 50. B can +call for the delivery of 100 shares of Steel at 43, and by selling it, +reaps a profit of $700, less the cost of the privilege, ($100), and +the brokerage. Used as a protective measure on short sales, the result +would be the same, as $700 would have been saved. That is to say, if A +is short of Steel at 40 and it advances to 50, his call has acted as +insurance against any loss over and above the $300 represented by the +rise from 40 to 43.</p> + +<p>The “put” is exactly the reverse of the “call,” and is insurance +against a decline; or, in other words, an agreement to receive shares +at a specified price on or before a certain date.</p> + +<p>Using the same illustration as before, let us assume that the price of +Steel Common is 40, and that A, the seller, offers a put at 37, good +for 10 days, at a price of $100. B, the buyer, is now insured against +any loss which may accrue through a decline below 37 in the ensuing ten +days. If he is long of the stock and it declines to 30, he may deliver +his shares to A at 37, or if he has purchased the “put” as a +<span class="pagenum" id="Page_91">[Pg 91]</span> +speculation, he may buy 100 shares in the market at 30 and deliver to +B at 37, netting a profit of $700, less the price paid for “put” and +brokerage.</p> + +<p>One of the favorite methods of trading in privileges is to buy or +sell against them when the price named is reached. For example, say B +holds a ten day “put” on Steel Common at 37, and the market for the +stock declines to 36 in five days. He may now buy 100 shares at 36 on +the theory that he has regained his original outlay of $100 and has +a possibility of profit through market action in the remaining five +days, while there is no possibility of loss. If the market advances +to, say 38, he may sell the one hundred shares purchased, and on +another decline to 37 or 36 may again purchase, repeating the operation +indefinitely during the life of his put. The “Call” is, of course, made +the basis of short sales on an exact reversal of this process. This +fashionable form of exercising privileges is facilitated by the fact +that “puts and calls” issued by members of the New York Stock Exchange, +are generally accepted by brokers as “margins”; B having paid A $100 +for a “put,” as illustrated above, could, if Steel declined to 37 or +below that figure, buy 100 Steel and give his broker the privilege +issued by A, in lieu of a marginal deposit. The broker is satisfied, as +he gains a commission, and in the event of a further decline in the +<span class="pagenum" id="Page_92">[Pg 92]</span> +price of Steel can call on A to receive the stock at 37 when the option +expires.</p> + +<p>Another popular form of trading in privileges is to buy or sell half +the amount named in the privilege when it becomes “good” through market +action. If B holds a “put” on 100 Steel at 37, he may, at that price +or below, buy 50 shares. He is now in a position to profit by either +an advance or a decline. If the price advances to 40 he has three +points profit in the 50 shares purchased. If, on the other hand, the +market declines to 34, he still gains 3 points on 50 shares, for his +“put” protects him against a loss in the 50 shares purchased and he can +purchase another 50 shares at 34 and deliver to A at 37. In short, when +he makes his 50 share purchase at 37, he is both short and long of the +stock and must gain on a movement either way in the market price.</p> + +<p>A “Straddle,” as the term is applied to privileges, is a combined “put +and call”. The purchaser gains on a movement in either direction. The +general rule is that the gain is to be represented by a market change +representing an excess of the amount paid for the “Straddle.” Thus if +A sells to B for $250, a straddle on 100 shares of Steel, when the +current market for the stock is 40, B is in a position to gain by +<span class="pagenum" id="Page_93">[Pg 93]</span> +either an advance above 42½ or a decline below 37½.</p> + +<p>The purchasers of privileges are sometimes perplexed by market changes +which are brought about by dividend payments. The rule is that the +dividend always goes with the stock. The simplest way to arrive at +correct figures is, to mentally lower the price of either the “put” or +“call,” by the exact amount of the dividend payment. Thus, if B holds +a “call” on Steel at 43 and a dividend of 2% is paid on the stock +during the life of his option, his “call” becomes operative at 41 as +the dividend goes to him. If he holds a “put” at 37, and 2% dividend is +paid on the stock, his “put” is not operative until 35 is reached, as +the dividend goes to the maker of the “put.”</p> + +<p>Privileges in grain or other commodities are based on the same general +rules and principles as those on stocks. These privileges are heavily +dealt in on wheat and corn in Chicago. They are designated, however, as +“ups” and “downs” in order to evade local laws prohibiting transactions +in “puts and calls.” The “ups” are calls; the “downs” are puts. Most of +the grain privileges handled in Chicago, or based on Chicago prices, +are of a day to day character, insuring only for the next day’s price +changes. The ordinary charge is $1 per thousand bushels. For $1, +<span class="pagenum" id="Page_94">[Pg 94]</span> +therefore, the small gambler, or speculator, may purchase, say a call +on 1,000 bushels of wheat at 90½ when the last price recorded was 90. +If wheat reaches 91½ during the next day’s session, he has a gain of +$10 less the cost of the “call” and brokerage.</p> + +<p>The small capital required for this form of trading, the fact that +loss is limited to the original cost of the privilege, and the great +possibilities in case of extreme movements, make “puts and calls” +very popular. It may be said, however, that they are, as a rule, poor +property. The writer kept account of the transactions in “puts and +calls” handled through a large concern for almost two years and found +that only about 35% of the money paid for these privileges returned +to the purchasers. That is to say, the profit shown to purchasers of +“puts,” “calls,” and “straddles,” was only about $350 out of each +$1,000 received by the sellers. After deducting the item of commission +charges, it was found that the sellers of privileges reaped over +50% profit each year. The experiment referred to was based on grain +privileges, but would probably hold good in stocks. The <i>sellers</i> +of these “puts and calls” are among the brightest men in the street, +and when they make prices they do so on the absolute basis that they +have the best of the bargain and the buyers are usually a public +<span class="pagenum" id="Page_95">[Pg 95]</span> +element. In the test referred to, there were never three consecutive +days when either “puts” or “calls” were good. There was on one occasion +in the period consulted, an advance of over 20 cents a bushel in wheat +in three days, but “calls” were good only on the first day of the +advance. On this occasion the “calls” were good for about 2 cents per +bushel on the first day’s rise, but the sellers offered nothing for +the second day, except at prices far above the market, and although +the market advanced 6 cents per bushel, wheat was not “called.” On the +third day, prices for “calls” were prohibitive, ranging from ten to +twenty cents above the closing price and again wheat was not called, +although the market advanced 8½ cents.</p> + +<p>In the accounts examined, one seller of privileges on wheat had an open +order to sell 100 puts and 100 calls every day at the ruling price. He +thus received $200 daily and invariably “took his loss” whenever the +privileges operated against him. That is to say, if wheat closed one +cent per bushel above the call price, he would be called for 100,000 +bushels on his privileges, making him short that amount of wheat. +This he bought in at once and pocketed a loss of $1,000 less the $200 +<span class="pagenum" id="Page_96">[Pg 96]</span> +received. Although he accepted some severe losses now and then, his +account showed over $30,000 profit on a year’s business.</p> + +<p>Another account was operated on a different principle by the seller of +privileges and resulted in even larger profits. This individual would +sell ten “puts” and ten “calls” on wheat each day. In the event of his +being called, i.e., short of the wheat, he would, on the next day sell +no “calls,” but 20 “puts.” In the event of a decline below the “put” +price, he had enough short wheat to protect ten of his “puts” and in +reality automatically close out his ten thousand short, frequently at +a profit. As has been stated, his profits were greater than in the +first instance quoted. There was, of course, a more highly speculative +element in his form of operating than in the other method, but the +operator was never either long or short more than 10,000 bushels, +and received about $6,000 a year or 60 cents per bushel from his +privileges, in addition to the accruing of profit or the curtailing of +loss by his mechanical method.</p> + +<p>In the accounts examined the persistent purchasers of privileges all +finally lost money, except in a few cases where lines acquired on +“puts or calls” were carried to a successful conclusion in the course +of time. That is, a purchaser of “calls,” finding a profit in his +privilege, would call the wheat and <i>keep</i> it. This, however, +resolved the matter into pure speculation, as the maximum benefits +<span class="pagenum" id="Page_97">[Pg 97]</span> +derived from this form of trading can only be correctly measured by +the profit shown at the expiration of the “put” or “call.” That is to +say, the seller need suffer no greater loss than that shown when the +contract he has given matures, and consequently the profit to the buyer +cannot be greater except through speculation.</p> + +<p>It would appear from these facts, that the purchasing of privileges is +a poor business proposition, while the selling of privileges is a money +making affair. This is true. We need only compare the kind of men who +<i>buy</i> “puts and calls” and those who sell them to have this truth +made apparent. The late Russell Sage was a persistent writer of these +instruments and made a great deal of money by the process. The late +Edward Partridge also made a good deal of money in this manner in the +Chicago Wheat Market. He also used privileges to aid his manipulative +campaigns. On several occasions, he sold “calls” heavily through the +day, then suddenly bid wheat up just at the close of the market, +effecting a closing just above the call price. The scattered purchasers +would call the wheat and put Mr. Partridge short several millions at a +high price, which was just what he wanted. He could not have sold as +much wheat in the open market without breaking the price several cents. +<span class="pagenum" id="Page_98">[Pg 98]</span> +On the same principle, he used sometimes to sell a great many “puts” +when he wished to cover a line of short wheat and rush the price +downward at the close, thus enabling him to purchase a great line +without disturbing the market by bidding for it. The process only +worked a few times, however. As soon as it was discovered it failed, as +the call price, when reached, met with such a wave of selling that it +was impossible to break through it, and the manipulator was “hoist with +his own petard.”</p> + +<p>There is another drawback to the habit of buying privileges—a mental +one. They are frequently made the basis of positive trading with +disastrous results. The man who believes in an advance in certain +shares or commodities, frequently purchases privileges instead of +following out his own convictions by actual trading. Thus the man +who had good reasons for expecting an advance in wheat at the time +of the 20 cent advance mentioned above, and who used either “puts” +or “calls” or both, as a means of operating on his opinions, would +have reaped less than two cents a bushel during an advance of twenty +cents. He might, of course, have called the wheat on the first day +of the advance and remained long, but in that case he would merely +have been speculating with equal chance of loss or profit in ensuing +transactions. Aside from the initial two cent gain, he would have been +<span class="pagenum" id="Page_99">[Pg 99]</span> +in no different position than if he had purchased and held the cereal +on margin.</p> + +<p>It is the writer’s opinion, founded on the experience set forth above, +that it is much better to effect transactions in the ordinary manner, +than to depend on privileges. If “puts and calls” are dealt in at all, +they should be sold, not purchased. The insurance companies make more +money than is paid out in losses; so do the sellers of privileges. It +may be well to add, however, that the man who runs an insurance company +is in danger if he does not understand his business and his risks, +or if he enters the field without sufficient capital to provide for +possible initial losses. All this applies to the seller of privileges. +<span class="pagenum" id="Page_100">[Pg 100]</span></p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_101">[Pg 101]</span></p> +<h2 class="nobreak">VII<br>The Question of Dividends</h2> +</div> + +<p>It is a certainty that the short seller of dividend-paying stocks +suffers a drawback from dividends, except in the rare cases where +interest is allowed on short stocks. If we sell short a 6% stock at par +and at the end of a year find the stock still selling at par, we have +lost 6% without adverse market action. This onus cannot be escaped by +short-time commitments; it is merely a matter of degree. The chronic +short seller is swimming constantly against the current.</p> + +<p>There is one point about dividends which is widely misunderstood +by ordinary traders. It appears impossible to make a great many +individuals understand that short sales may be as intelligently made +the day before a stock sells “ex-dividend” as at any other time. Even +when good reasons for a decline exist, traders fight shy of “swallowing +the dividend,” or retire commitments just before dividend payment for +<span class="pagenum" id="Page_102">[Pg 102]</span> +no other reason than that such distribution is to be made, which is, in +fact, no reason at all.</p> + +<p>The disadvantage to the seller of stocks through the earning +capacity or increment is the same on the day or the week preceding +a disbursement as at any other time. The earnings of the company +are a steady day to day affair, and are, as they accrue, constantly +considered in the price of the stock. In other words, the prices of +listed shares are at all times “flat.” At a point midway between two +dividend days, the stock reflects in its current price half the amount +of the undistributed dividend, or other increment. For example, if a +certain stock sells normally at par and pays 6% per annum (3 per cent. +in January and 3 per cent. in July) the price of the stock in March, +eliminating speculative influences, would be 101½ and in July 103. +When on July 1st, the 3 per cent. is distributed, the amount is simply +taken away from the company and from the price of the stock also. It +now returns to its normal price, 100, and whether it will go up or down +from that point is a question for speculation. The factor which made +the price 103 has been eliminated and it remains for the corporation in +question to again earn 3% available for distribution before the next +dividend day.</p> + +<p>Perhaps this point may be made clearer by assuming that a certain stock +is not handled on the “flat” basis, but is dealt in “and interest” +<span class="pagenum" id="Page_103">[Pg 103]</span> +after the method sometimes employed in bond transactions. Let us again +eliminate speculation and take for example a stock selling at 100 and +paying 6%. Assuming that a dividend had been paid on this stock on +January 1st, the purchaser of the stock on February 1st would pay 100 +for his shares, and would also pay to the seller the accrued dividend +for one month, or ½ of 1% which is exactly the same proposition as if +the stock had been quoted flat on the Stock Exchange at 100½. On March +1st, the purchaser would pay 100 for his shares and 1% accrued dividend +or 101, etc.</p> + +<p>It appears, therefore, that the widespread idea that it is dangerous +to sell a stock just before a dividend day is not sound. In fact, the +whole matter may be dismissed by saying that if there was any good +or logical reason for expecting a premature recovery of the price +of dividend-paying shares, or an advance founded on any reason in +connection with dividends other than the gradual accumulation from one +date of disbursement to the next, the whole problem of making profits +in Wall Street would be solved. The rule must necessarily work both +ways, and if it is dangerous to sell at certain periods, it must be, in +inverse ratio, safe to purchase. All we would need to do therefore, +<span class="pagenum" id="Page_104">[Pg 104]</span> +would be to await the dates on which shares sold “ex-dividend” and make +purchases. Here then, is exploited a patent way of getting the best of +the market without study or effort. In truth, there is nothing whatever +in the theory any more than there would be in buying Government bonds +for a rise just after the interest had been paid on them. If good +reasons exist for sales, they may be made as confidently at one time as +another. The disadvantage of being short of dividend-paying stocks is +always present, and it cannot be escaped, but the operation is a day to +day affair not a matter of certain dates.</p> + +<h3 id="BRV"><i>Basing Railroad Values.</i></h3> + +<p>“The problem of railway valuation is comparatively simple, and +beyond the reach of but few. A railway is primarily a carrier, a +carter, a drayman. Obviously then, in considering an investment, we +shall ask, What sort of a road has it? What sort of vans, and what sort +of horses? What sort of trade? A teamster doing business on a fine +level macadamized road, with big, heavy vans, and heavy draft horse, +can work at a profit and underbid a carrier with old vans and poor +horses, working on roads of heavy grade. So, for example, a railroad, +other things being equal, with a water grade like the New York Central, +has a tremendous advantage over an up and down grade like that of the +Erie. The Illinois Central can do business much more cheaply than the +Missouri Pacific. A road with a magnificent equipment like the Lake +Shore can undercut a poorly equipped road like the Nickel Plate. +<span class="pagenum" id="Page_105">[Pg 105]</span></p> + +<p>“The initial facts that we wish to know of a railway then are, What +sort of a road has it, what is its traffic, does it get good rates? +When we know what business it does, what its earnings are, then we +shall ask, how is it capitalized, what are the fixed charges these +earnings have to bear, what is there left, and what is the amount of +stock which has to share the surplus? We shall ask if its earnings +are stable, if the maintenance is adequate, if the policy of the road +is conservative, if its management is good or bad. When we have done +all this, then we shall go into the market, ask the prevalent rate +of money, and by a simple rule of thumb, we shall know, in a broad +way, whether the stock is cheap or dear.”—From “American Railways as +Investments,” by Carl Snyder.</p> + +<h3 id="EFFECTS"><i>The Effects of Business Depression<br> on Rails and Industrials.</i></h3> + +<p>“There is apparently a popular belief that the general market always +moves together in a considerable swing, and that any advance in one set +of stocks would be accompanied by a corresponding advance in others. So +far as the general tone of a day’s market is concerned this is true; +but, nevertheless, individual stocks or groups of stocks can easily +and gradually change their selling basis in a brief period of time. In +1901, for example, the industrial stocks reached their high levels, and +<span class="pagenum" id="Page_106">[Pg 106]</span> +suffered a considerable decline in 1902. Meanwhile the rails were +advancing. To illustrate and confirm this statement the highest prices +of both Rails and Industrials in July, 1901, and July, 1902, are set +forth in the following tables. There can be no unfairness in choosing +this particular period. What is to be demonstrated is that it is +possible for the groups to cross each other in price in a given time. +The ten most active stocks have been chosen in each group as fairly +representative of the entire market:</p> + +<p class="f110 spa1"><b>RAILROAD STOCKS.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc">Stock</th> + <th class="tdc">High in<br>  July, 1901  </th> + <th class="tdc">High in<br> July, 1902 </th> + </tr></thead> + <tbody><tr> + <td class="tdl">Atchison</td> + <td class="tdc"> 89⅜</td> + <td class="tdc"> 95¾</td> + </tr><tr> + <td class="tdl">B. & O.</td> + <td class="tdc">108¾</td> + <td class="tdc">112⅛</td> + </tr><tr> + <td class="tdl">Can. Pac.</td> + <td class="tdc">108¼</td> + <td class="tdc">139¾</td> + </tr><tr> + <td class="tdl">St. Paul</td> + <td class="tdc">177¼</td> + <td class="tdc">189⅜</td> + </tr><tr> + <td class="tdl">Erie</td> + <td class="tdc"> 43⅝</td> + <td class="tdc"> 39½</td> + </tr><tr> + <td class="tdl">L. & N.</td> + <td class="tdc">111  </td> + <td class="tdc">145⅞</td> + </tr><tr> + <td class="tdl">Mo. Pac.</td> + <td class="tdc">121⅞</td> + <td class="tdc">119½</td> + </tr><tr> + <td class="tdl">Penna</td> + <td class="tdc">151¾</td> + <td class="tdc">161¾</td> + </tr><tr> + <td class="tdl">Reading</td> + <td class="tdc">47  </td> + <td class="tdc"> 69⅞</td> + </tr><tr> + <td class="tdl">Union Pacific</td> + <td class="tdc">110⅞</td> + <td class="tdc">110⅝</td> + </tr><tr> + <td class="tdl_ws1">Average price</td> + <td class="tdc over">102.97</td> + <td class="tdc over">118.41</td> + </tr> + </tbody> +</table> + +<p class="f110 spa1"><b>INDUSTRIAL STOCKS.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc">Stock</th> + <th class="tdc">High in<br>  July, 1901  </th> + <th class="tdc">High in<br> July, 1902 </th> + </tr></thead> + <tbody><tr> + <td class="tdl">Amalgamated</td> + <td class="tdc">124¼</td> + <td class="tdc"> 68¾</td> + </tr><tr> + <td class="tdl">American Smelting</td> + <td class="tdc">58 </td> + <td class="tdc"> 47½</td> + </tr><tr> + <td class="tdl">American Sugar</td> + <td class="tdc">145⅝</td> + <td class="tdc">134½</td> + </tr><tr> + <td class="tdl">Anaconda</td> + <td class="tdc"> 48⅞</td> + <td class="tdc">27 </td> + </tr><tr> + <td class="tdl">Col. Fuel & Iron.</td> + <td class="tdc">116⅛</td> + <td class="tdc">102¼</td> + </tr><tr> + <td class="tdl">National Lead</td> + <td class="tdc">23 </td> + <td class="tdc"> 22¼</td> + </tr><tr> + <td class="tdl">Tenn. Coal & Iron</td> + <td class="tdc"> 72½</td> + <td class="tdc"> 69½</td> + </tr><tr> + <td class="tdl">Rubber</td> + <td class="tdc"> 21¼</td> + <td class="tdc">17 </td> + </tr><tr> + <td class="tdl">U. S. Steel</td> + <td class="tdc"> 48⅞</td> + <td class="tdc">41 </td> + </tr><tr> + <td class="tdl">U. S. Steel, Pfd.</td> + <td class="tdc"> 99½</td> + <td class="tdc"> 92⅛</td> + </tr><tr> + <td class="tdl_ws1">Average price</td> + <td class="tdc over">75.80</td> + <td class="tdc over">62.18</td> + </tr> + </tbody> +</table> + +<p><span class="pagenum" id="Page_107">[Pg 107]</span> +“These tables show that during the fiscal year used, railroad stocks +advanced an average of over 15 points, while industrials declined +almost 14 points. In other words, the spread was 29 points. The man who +bought rails and sold industrials would have made on the average 29 +points. This exhibit entirely overthrows any argument that the market +moves one way or the other homogeneously.</p> + +<p>“There was a reason for the spread illustrated above. There always is +a reason. We had big crops in 1902, which helped the railroads. The +industrials, on the other hand, were busily discounting the business +depression of 1903.</p> + +<p>“Precedent shows that in a period of general depression Industrial +stocks suffer about 33% more than rails. That is to say, in the high +and low prices covering a long period, industrial securities should +show a distinctly greater pro-rata of decline. Let me illustrate, using +the stocks employed in the former table and covering the period of our +last great cycle, 1901-02-03. As most of the high prices in rails were +made in 1902, the highest prices of both 1901 and 1902 will be used, +and the lowest of 1903:</p> + +<p class="f110 spa1"><b>RAILROAD STOCKS.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc">Stock</th> + <th class="tdc">High in<br>  1901-1902  </th> + <th class="tdc">Low in<br>1903</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Atchison</td> + <td class="tdc"> 96⅝</td> + <td class="tdc">54 </td> + </tr><tr> + <td class="tdl">B. & O</td> + <td class="tdc">118½</td> + <td class="tdc">71⅝</td> + </tr><tr> + <td class="tdl">Can. Pac.</td> + <td class="tdc">145¼</td> + <td class="tdc">115⅝</td> + </tr><tr> + <td class="tdl">St. Paul</td> + <td class="tdc">198¾</td> + <td class="tdc">133¼</td> + </tr><tr> + <td class="tdl">Erie</td> + <td class="tdc"> 45½</td> + <td class="tdc">23 </td> + </tr><tr> + <td class="tdl">L. & N.</td> + <td class="tdc">159½</td> + <td class="tdc">95 </td> + </tr><tr> + <td class="tdl">Mo. Pac.</td> + <td class="tdc">125½</td> + <td class="tdc"> 85¾</td> + </tr><tr> + <td class="tdl">Penna</td> + <td class="tdc">170</td> + <td class="tdc">110¾</td> + </tr><tr> + <td class="tdl">Reading</td> + <td class="tdc"> 78½</td> + <td class="tdc"> 37½</td> + </tr><tr> + <td class="tdl">Union Pac.</td> + <td class="tdc">133 </td> + <td class="tdc"> 65¾</td> + </tr><tr> + <td class="tdl_ws1">Average price</td> + <td class="tdc over">127.11</td> + <td class="tdc over">79.22 + <span class="pagenum" id="Page_108">[Pg 108]</span></td> + </tr> + </tbody> +</table> + +<p class="f110 spa1"><b>INDUSTRIAL STOCKS.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc">Stock</th> + <th class="tdc">High in<br>  1901-1902  </th> + <th class="tdc">Low in<br>1903</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Amalgamated</td> + <td class="tdc">130 </td> + <td class="tdc"> 33⅝</td> + </tr><tr> + <td class="tdl">Am. Smelter</td> + <td class="tdc">69 </td> + <td class="tdc"> 36¾</td> + </tr><tr> + <td class="tdl">Am. Sugar</td> + <td class="tdc">153 </td> + <td class="tdc">107⅛</td> + </tr><tr> + <td class="tdl">Anaconda</td> + <td class="tdc"> 54¼</td> + <td class="tdc"> 25½</td> + </tr><tr> + <td class="tdl">Col. F. & I.</td> + <td class="tdc">136½</td> + <td class="tdc">24 </td> + </tr><tr> + <td class="tdl">Nat’l Lead</td> + <td class="tdc">32 </td> + <td class="tdc"> 10½</td> + </tr><tr> + <td class="tdl">Tenn. Coal & I.</td> + <td class="tdc"> 76⅝</td> + <td class="tdc"> 25⅞</td> + </tr><tr> + <td class="tdl">U. S. Rubber</td> + <td class="tdc">34 </td> + <td class="tdc">7 </td> + </tr><tr> + <td class="tdl">U. S. Steel</td> + <td class="tdc">55 </td> + <td class="tdc">10 </td> + </tr><tr> + <td class="tdl">U. S. Steel, Pfd.</td> + <td class="tdc">101⅞</td> + <td class="tdc"> 49¾</td> + </tr><tr> + <td class="tdl_ws1">Average price</td> + <td class="tdc over">84.22</td> + <td class="tdc over">33.01</td> + </tr> + </tbody> +</table> + +<p>“It will be observed from the above table that Industrials declined +about 51 points while rails declined about 48 points. But the decline +cannot be figured in points. The higher range of railroad shares must +be considered. A decline of two points in a stock selling at 100 is +only equivalent to a decline of one point in a stock selling at 50. +Therefore, in order to get a correct view of the matter, we must reduce +the decline to percentages. On this basis, railroad stocks lost about +38% of their value, and industrial stocks lost about 60% of their +value.”—From Thomas Gibson’s Market Letter, May 4th, 1907.</p> + +<h3 id="UNDIG"><i>Undigested Securities.</i></h3> + +<p>“The new methods and the new projects are going through the test of +fire today, and some of them are being consumed. The tests which weeded +out the badly organized and incompetent of the early stock companies, +which drove to the wall the “wildcat” banks of ante-bellum days, and +which wiped out dividends and stock rights in badly managed railways, +<span class="pagenum" id="Page_109">[Pg 109]</span> +are now being applied to the new forms of organization which have been +the growth of the past decade. But the stronger and better organized +of these new corporations are likely to meet these trials without +disaster, or to modify their methods to conform to the teachings of +experience, until there remains to the financial world a valuable +residuum of new methods for giving flexibility to capital and promoting +its transfer promptly and efficiently from the industries where it is +not needed to those where it will render its highest service.”—From +“Wall Street and the Country,” by Chas. A. Conant.</p> + +<h3 id="COMPUTE"><i>How to Compute the Value of Rights.</i></h3> + +<p>“Inasmuch as the method of computing the value of rights is slightly +complicated, an illustration may be given. Let us take the instance +of St. Paul again, where the stockholders were allowed to subscribe +to 23% of their holdings to new stock at par. The common stock was at +that time selling a little below $200 per share. Let us take the round +figure, and the operation is as follows:</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">One hundred shares at $200 per share equals  </td> + <td class="tdr">$20,000</td> + </tr><tr> + <td class="tdl">Twenty-three shares at $100 equals</td> + <td class="tdr bb">2,300</td> + </tr><tr> + <td class="tdl">Total cost of 123 shares</td> + <td class="tdr">$22,300</td> + </tr><tr> + <td class="tdc">“Average cost, $181 per share.</td> + <td class="tdr"> </td> + </tr> + </tbody> +</table> + +<p>“Deducting $181 from the market quotation leaves $19, the value of +the rights on each share of St. Paul stock. As a matter of fact, the +selling price was a little below $200, and the highest price of the +rights fell a little below $19 per share.</p> + +<p>“In other words the process is simply to take the number of new shares +<span class="pagenum" id="Page_110">[Pg 110]</span> +per hundred shares of the original holding to be subscribed for, and +add the value of these new shares at the subscription price to the cost +of one hundred shares at the market price; then divide the total cost +of both old and new shares by the total number of shares, and deduct +the average price from the market quotations. This gives the selling value +of the rights.”—From “American Railways as Investments,” by Carl Snyder.</p> + +<h3 id="BAROMETER"><i>Barometer of Averages.</i></h3> + +<p>“In order to facilitate the examination of properties and their +comparative condition, the following table has been prepared. The +figures were arrived at by averaging the operating expenses, fixed +charges, margin of safety, and dividends of principal properties for +the last fiscal year. The stock prices are based upon the closing +figures of June 6, 1907. The margin of safety shown, is the margin over +common dividends. Results were as follows:</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">Average operating expenses  </td> + <td class="tdr">69.01%</td> + </tr><tr> + <td class="tdl">Average fixed charges</td> + <td class="tdr">54.70%</td> + </tr><tr> + <td class="tdl">Average margin of safety</td> + <td class="tdr">5.28%</td> + </tr><tr> + <td class="tdl">Average dividend common</td> + <td class="tdr">6.03%</td> + </tr><tr> + <td class="tdl">Average price of stock</td> + <td class="tdr">1.09⅝</td> + </tr> + </tbody> +</table> + +<p>“As in all computations of this kind the figures are comparative +and not basic. The fact that one stock is in a much better position +than others does not necessarily mark that stock as a purchase, for +<i>all</i>stocks may be too high, and underlying conditions may not +warrant purchases in any quarter. Again, we must always consider the +fact that important elements which cannot be tabulated in figures may +be present. However, the table possesses value as a rough barometer, +<span class="pagenum" id="Page_111">[Pg 111]</span> +and after it has been broadly applied, specific influences may be given +due consideration. If, for example, we find a common stock selling +well below 109⅝, with operating expenses below 69.01; fixed charges +below 54.70; margin of safety above 5.28 and the dividend rate above +6%, we have a remarkable combination of facts favoring the shares and +investigation will be stimulated. The figures vary widely at times in +different corporations and cannot always be considered either bullish +or bearish, as the good or bad features may be already discounted +in the current price of the shares. It may also be found that one +property is going backward gradually while another is improving its +position.—From Thomas Gibson’s Market Letter, June 8th, 1907.</p> + +<h3 id="METHOD"><i>The Best Method of Trading.</i></h3> + +<p>“It may appear that if the market is to sway back and forth, sales +on advances, and purchases on declines would offer the maximum of +opportunity to the shrewd trader. But not so. To illustrate this, +a market movement from high to low prices as shown by a chart is +presented on the following page.</p> + +<p class="blockquot">“As simple as this illustration may appear, it is +worthy of most earnest consideration. True, the upward and downward +movements show opportunities on both sides, but if the <i>purchaser</i> +makes a mistake, as all speculators will, he is hopelessly involved. +If he buys at the wrong point he will never see daylight during the +progress of the movement. Look at the other side of the matter. The +<i>seller</i> cannot make a mistake. No matter at what point he sells a +profit lies before him. A little reflection will show what a tremendous +difference exists here.”—From Thomas Gibson’s Market Letter, Feb. 2nd, 1907. +<span class="pagenum" id="Page_112">[Pg 112]</span></p> + +<div class="figcenter"> + <img src="images/i_112.jpg" alt="" width="500" height="491" > +</div> + +<h3 id="CRISES"><i>Indications of Crises.</i></h3> + +<p>“Preceding Indications.—This preceding period is +characterized by well-defined indications, some of +which develop contemporaneously, but which, so far +as they are distinct in time, occur in approximately +the following order:</p> + +<div class="blockquot"> +<p class="neg-indent">“1—An increase in prices, first, of special +commodities, then, in a less degree, of commodities generally, and +later of real estate, both improved and unimproved.</p> + +<p class="neg-indent">“2—Increased activity of established enterprises, +and the formation of many new ones, especially those which provide +for increased production or improved methods, such as factories and +furnaces, railways and ships, all requiring the change of circulating +to fixed capital. +<span class="pagenum" id="Page_113">[Pg 113]</span></p> + +<p class="neg-indent">“3—An active demand for loans at slightly higher +rates of interest.</p> + +<p class="neg-indent">“4—The general employment of labor at increasing +or well-sustained wages.</p> + +<p class="neg-indent">“5—Increasing extravagance in private and public +expenditure.</p> + +<p class="neg-indent">“6—The development of a mania for speculation, +attended by dishonest methods in business and the gullibility of many +investors.</p> + +<p class="neg-indent">“7—Lastly, a great expansion of discounts and +loans, and a resulting rise in the rate of interest; also a material +increase in wages, attended by frequent strikes and by difficulty in +obtaining a sufficient number of laborers to meet the demand.”—From +“Crises and Depression,” by Theodore Burton.</p> +</div> + +<h3 id="SWING"><i>The Ordinary Swing of Prices<br> +During a Cycle of Speculation.</i></h3> + +<p class="f110 spa1"><b>UPWARD SWING.</b></p> +<table class="spb1"> + <tbody><tr> + <td class="tdl">EXTREME </td> + <td class="tdl_wsp bl">A long period of backing</td> + </tr><tr> + <td class="tdl">HIGHEST.</td> + <td class="tdl_ws1 bl">and filling; public buying,</td> + </tr><tr> + <td class="tdr_wsp">100</td> + <td class="tdl_ws1 bl">and inside liquidation.</td> + </tr><tr> + <td class="tdr_wsp">90</td> + <td class="tdl_wsp bl">Excitement and inflation</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">75% of general buying done here.</td> + </tr><tr> + <td class="tdr_wsp">80</td> + <td class="tdl_wsp bl">Good buying all around.</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_wsp bl">Public interested.</td> + </tr><tr> + <td class="tdl">NORMAL</td> + <td class="tdl_wsp bl">Opinions mixed. Public beginning</td> + </tr><tr> + <td class="tdl">VALUE.</td> + <td class="tdl_ws1 bl">to buy, but professionals</td> + </tr><tr> + <td class="tdr_wsp">65</td> + <td class="tdl_ws1 bl">rather bearish.</td> + </tr><tr> + <td class="tdr_wsp">45</td> + <td class="tdl_wsp bl">Insiders still bidding prices up.</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">Professionals bearish.</td> + </tr><tr> + <td class="tdr_wsp">30</td> + <td class="tdl_wsp bl">Insiders bidding for stocks,</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">public skeptical.</td> + </tr><tr> + <td class="tdr_wsp">20</td> + <td class="tdl_wsp bl">A dull market. Insiders</td> + </tr><tr> + <td class="tdl">EXTREME</td> + <td class="tdl_ws1 bl">accept all offerings.</td> + </tr><tr> + <td class="tdl">LOWEST.</td> + <td class="tdl_wsp bl"> </td> + </tr> + </tbody> +</table> +<p><span class="pagenum" id="Page_114">[Pg 114]</span></p> + +<p class="f110 spa1"><b>DOWNWARD SWING.</b></p> +<table class="spb1"> + <tbody><tr> + <td class="tdl">EXTREME </td> + <td class="tdl_wsp bl">A long period of backing</td> + </tr><tr> + <td class="tdl">HIGHEST.</td> + <td class="tdl_ws1 bl">and filling; public getting</td> + </tr><tr> + <td class="tdr_wsp">100</td> + <td class="tdl_ws1 bl">tired and insiders selling.</td> + </tr><tr> + <td class="tdr_wsp">90</td> + <td class="tdl_wsp bl">Insiders selling. Much bull</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">talk, dividend increases, etc.</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_wsp bl">Some averaging by people</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">who loaded up at the top.</td> + </tr><tr> + <td class="tdr_wsp">80</td> + <td class="tdl_wsp bl">More bull talk. More averaging.</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">Insiders still selling.</td> + </tr><tr> + <td class="tdl">NORMAL</td> + <td class="tdl_wsp bl">Many weak accounts forced out.</td> + </tr><tr> + <td class="tdl">VALUE.</td> + <td class="tdl_wsp bl">A temporary halt and probably</td> + </tr><tr> + <td class="tdr_wsp">65</td> + <td class="tdl_ws1 bl">a big rally.</td> + </tr><tr> + <td class="tdr_wsp">45</td> + <td class="tdl_wsp bl">Insiders pretty well out.</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_wsp bl">The wise speculative element</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">consider this the bottom and</td> + </tr><tr> + <td class="tdr_wsp"> </td> + <td class="tdl_ws1 bl">load up.</td> + </tr><tr> + <td class="tdr_wsp">30</td> + <td class="tdl_wsp bl">General blueness and pessimism. </td> + </tr><tr> + <td class="tdr_wsp">20</td> + <td class="tdl_wsp bl">A dull market. Insiders</td> + </tr><tr> + <td class="tdl">EXTREME</td> + <td class="tdl_ws1 bl">accept all offerings.</td> + </tr><tr> + <td class="tdl">LOWEST.</td> + <td class="tdl_wsp bl"> </td> + </tr> + </tbody> +</table> + +<p class="center">—From Thomas Gibson’s Market Letter,<br> +May 11th, 1907.</p> + +<h3 id="SAFETY"><i>The Factor of Safety.</i></h3> + +<p>“There remains but one point to which, in view of the conditions +roughly sketched above, the writer would call especial attention. +That is, that the investor should look well, always, to the factor of +safety. Before he puts his money into any road, no matter if it be on +the recommendation of the greatest banker in the United States, let him +consider how far that company is prepared to weather a storm. Few roads +ever prospered under receivership, no matter how honest or how able. +The receivership itself is a handicap. No matter how high the yield, no +<span class="pagenum" id="Page_115">[Pg 115]</span> +investor whose primary regard should be the safety of his money +will put it into a road whose fixed charges, after ample charges +for maintenance, consume much more than 50% of the total net income +available for interest, dividends and improvements—that is, save in +exceptional cases like the New York Central—and until he has satisfied +himself thoroughly that the property is sound.</p> + +<p>“For the convenience of those not well acquainted, the following list +of the principal roads is given, with the percentage of total net +income consumed by fixed charges in the highly prosperous fiscal year +of 1905:</p> + +<p class="f110 spa1"><b>TABLE OF FIXED CHARGES.</b></p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">Atch., Top. & S. Fe</td> + <td class="tdr">42%</td> + <td class="tdl_ws1">Chi. & East. Illinois</td> + <td class="tdr">68%</td> + </tr><tr> + <td class="tdl">Atlantic Coast Line</td> + <td class="tdr">57%</td> + <td class="tdl_ws1">Chi. & N’western</td> + <td class="tdr">39%</td> + </tr><tr> + <td class="tdl">Baltimore & Ohio</td> + <td class="tdr">39%</td> + <td class="tdl_ws1">Chi., Bur. & Quincy</td> + <td class="tdr">45%</td> + </tr><tr> + <td class="tdl">Boston & Maine</td> + <td class="tdr">78%</td> + <td class="tdl_ws1">Chicago Gt. Western</td> + <td class="tdr">67%</td> + </tr><tr> + <td class="tdl">Canadian Pacific</td> + <td class="tdr">33%</td> + <td class="tdl_ws1">Chi., Mil. & St. Paul</td> + <td class="tdr">32%</td> + </tr><tr> + <td class="tdl">Central of Georgia</td> + <td class="tdr">47%</td> + <td class="tdl_ws1">C., St. P., M. & O.</td> + <td class="tdr">42%</td> + </tr><tr> + <td class="tdl">Cen. R. R. of N. J.</td> + <td class="tdr">50%</td> + <td class="tdl_ws1">C., C., C. & St. Louis </td> + <td class="tdr">69%</td> + </tr><tr> + <td class="tdl">Chesapeake & Ohio</td> + <td class="tdr">53%</td> + <td class="tdl_ws1">Col. & Southern</td> + <td class="tdr">55%</td> + </tr><tr> + <td class="tdl">Chicago & Alton</td> + <td class="tdr">73%</td> + <td class="tdl_ws1">Delaware & Hudson</td> + <td class="tdr">40%</td> + </tr><tr> + <td class="tdl">Del., Lack. & West</td> + <td class="tdr">38%</td> + <td class="tdl_ws1">N. Y., Chi. & St. L.</td> + <td class="tdr">41%</td> + </tr><tr> + <td class="tdl">Denver & Rio Grande </td> + <td class="tdr">52%</td> + <td class="tdl_ws1">N. Y., N. H. & H.</td> + <td class="tdr">48%</td> + </tr><tr> + <td class="tdl">Det., Tol. & Ironton</td> + <td class="tdr">87%</td> + <td class="tdl_ws1">N. Y., O. & Western</td> + <td class="tdr">53%</td> + </tr><tr> + <td class="tdl">Du., S. S. & Atlantic</td> + <td class="tdr">115%</td> + <td class="tdl_ws1">Norfolk & Western</td> + <td class="tdr">37%</td> + </tr><tr> + <td class="tdl">Erie</td> + <td class="tdr">66%</td> + <td class="tdl_ws1">Northern Central</td> + <td class="tdr">28%</td> + </tr><tr> + <td class="tdl">Gr. Rap. & Indiana</td> + <td class="tdr">76%</td> + <td class="tdl_ws1">Northern Pacific</td> + <td class="tdr">29%</td> + </tr><tr> + <td class="tdl">Grand Trunk</td> + <td class="tdr">65%</td> + <td class="tdl_ws1">Pennsylvania</td> + <td class="tdr">38%</td> + </tr><tr> + <td class="tdl">Great Northern</td> + <td class="tdr">26%</td> + <td class="tdl_ws1">Pitts. & Lake Erie</td> + <td class="tdr">11%</td> + </tr><tr> + <td class="tdl">Hocking Valley</td> + <td class="tdr">31%</td> + <td class="tdl_ws1">P., C., C. & St. L.</td> + <td class="tdr">54%</td> + </tr><tr> + <td class="tdl">Illinois Central</td> + <td class="tdr">47%</td> + <td class="tdl_ws1">Reading</td> + <td class="tdr">45%</td> + </tr><tr> + <td class="tdl">Iowa Central</td> + <td class="tdr">79%</td> + <td class="tdl_ws1">Rock Island</td> + <td class="tdr">83%</td> + </tr><tr> + <td class="tdl">Kansas City South’n</td> + <td class="tdr">54%</td> + <td class="tdl_ws1">Rutland</td> + <td class="tdr">69%</td> + </tr><tr> + <td class="tdl">L. Erie & Western</td> + <td class="tdr">69%</td> + <td class="tdl_ws1">St. L. & S. Fran.</td> + <td class="tdr">82%</td> + </tr><tr> + <td class="tdl">Lehigh Valley</td> + <td class="tdr">46%</td> + <td class="tdl_ws1">St. L. & S’western</td> + <td class="tdr">76%</td> + </tr><tr> + <td class="tdl">Long Island</td> + <td class="tdr">101%</td> + <td class="tdl_ws1">Seaboard Air Line</td> + <td class="tdr">78%</td> + </tr><tr> + <td class="tdl">L. S. & M. S.</td> + <td class="tdr">38%</td> + <td class="tdl_ws1">Sou. Pacific</td> + <td class="tdr">49%</td> + </tr><tr> + <td class="tdl">Louis. & Nash.</td> + <td class="tdr">54%</td> + <td class="tdl_ws1">Southern</td> + <td class="tdr">69%</td> + </tr><tr> + <td class="tdl">Maine Central</td> + <td class="tdr">46%</td> + <td class="tdl_ws1">Texas & Pacific</td> + <td class="tdr">40%</td> + </tr><tr> + <td class="tdl">Michigan Central</td> + <td class="tdr">57%</td> + <td class="tdl_ws1">Tol., St. L. & S’w’n</td> + <td class="tdr">61%</td> + </tr><tr> + <td class="tdl">Minn. & St. Louis</td> + <td class="tdr">77%</td> + <td class="tdl_ws1">Union Pacific</td> + <td class="tdr">31%</td> + </tr><tr> + <td class="tdl">M., St. P. & S. S. M.</td> + <td class="tdr">44%</td> + <td class="tdl_ws1">Vandalia</td> + <td class="tdr">54%</td> + </tr><tr> + <td class="tdl">M., K. & T.</td> + <td class="tdr">75%</td> + <td class="tdl_ws1">Wabash</td> + <td class="tdr">80%</td> + </tr><tr> + <td class="tdl">Missouri Pacific</td> + <td class="tdr">60%</td> + <td class="tdl_ws1">Wheel. & Lake Erie</td> + <td class="tdr">90%</td> + </tr><tr> + <td class="tdl">N. Y. C. & H. R.</td> + <td class="tdr">64%</td> + <td class="tdl_ws1">Wisconsin Central</td> + <td class="tdr">69% + <span class="pagenum" id="Page_116">[Pg 116]</span></td> + </tr> + </tbody> +</table> + +<p class="center"><i>Importance of Fixed Charges<br> to the Investor.</i></p> + +<p>“The high degree of stability imparted to interest payments and +dividends by a low percentage of fixed charges, and the high degree +of instability imparted by a large percentage, is so elementary that +it would seem to need no emphasis. And yet this item is habitually +disregarded by perhaps 90% of bond and stock buyers. On this account it +may be worth while to illustrate by simple comparison the effect of a +20% decline in gross or net earnings. We will compare the conditions of +two roads whose fixed charges are respectively 75% and 25% of the total +net income. The operation would be as follows:</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdr" colspan="4">Suppose a 20% Decline</td> + </tr><tr> + <td class="tdl">Say Earnings</td> + <td class="tdr">$1,000,000</td> + <td class="tdr">  $800,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdl_ws1">Exp. (70%)</td> + <td class="tdr">700,000</td> + <td class="tdr">560,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdl_ws1">Net</td> + <td class="tdr over">$300,000</td> + <td class="tdr over">$240,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdr" colspan="4"> </td> + </tr><tr> + <td class="tdl">If F. C. 75% =</td> + <td class="tdr u">225,000</td> + <td class="tdr u">225,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdl">Surplus for div.</td> + <td class="tdr">$75,000</td> + <td class="tdr">$15,000</td> + <td class="tdl_wsp">(Case I)</td> + </tr><tr> + <td class="tdl_ws1">Decrease</td> + <td class="tdr"> </td> + <td class="tdr">80%</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdr" colspan="4"> </td> + </tr><tr> + <td class="tdl">If F. C. 25% =</td> + <td class="tdr u">75,000</td> + <td class="tdr u">75,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdl_ws1">Surplus</td> + <td class="tdr">$225,000</td> + <td class="tdr">$165,000</td> + <td class="tdl_wsp"> </td> + </tr><tr> + <td class="tdl_ws1">Decrease</td> + <td class="tdr"> </td> + <td class="tdr">26%</td> + <td class="tdl_wsp">(Case II)</td> + </tr> + </tbody> +</table> + +<p>“It will be seen from the above that a 20% decline in the net earnings +would, in the first instance, mean a decrease of 80% in the surplus; +while in the second case, the same decline would mean a decrease of +<span class="pagenum" id="Page_117">[Pg 117]</span> +only 26% in the surplus—figures which sufficiently indicate what a +high percentage of fixed charges means.</p> + +<p>“In this connection it may be further noted that in the large holding +companies, like the Pennsylvania, the New York Central, the Union +Pacific, and others, the factor of safety and the surplus shown tends +to be relatively more stable than in companies largely or exclusively +dependent upon the earnings of their own roads. This is due to the +general custom of American Railways of paying out in dividends only a +part of the actual surplus earned. From this it results that dividends +are much more stable than earnings, and that the income of the +holding companies from this source will correspondingly show smaller +fluctuations than earnings. When, therefore, as in the case of some +of the large holding companies named, the income from investments +represents a considerable portion of the total net income shown, the +surplus, other things being equal, will be much more stable than in +other companies.</p> + +<p>“It is needless to add that this stability is still further heightened +when, as in the case of the Pennsylvania, Union Pacific and some other +roads, the percentage of fixed charges is at the same time low.”—From +“American Railways as Investments,” by Carl Snyder.</p> + +<h3 id="BORROW"><i>Borrowing and Lending Stocks.</i></h3> + +<p>“When a speculator sells stock which he does not possess (when he sells +it short) he (or what is the same thing, the broker who acts for him) +has to borrow the stock to make delivery to the purchaser. The one who +possesses stock (who is long of it) is, in ordinary circumstances, +<span class="pagenum" id="Page_118">[Pg 118]</span> +as anxious to lend it as the one who has sold it short is anxious to +borrow it.</p> + +<p>“The lender of stock receives from the borrower the market value of it +in money, but except when the stock is lending flat (without interest) +or at a premium, the lender of the stock pays to the borrower of it +interest on the money paid for the stock by the borrower. The rate of +interest is determined by bid and offer.</p> + +<p>“On the New York Stock Exchange, brokers who have stocks to borrow and +brokers who have stocks to lend assemble immediately after the close +of business on the exchange and those who need stocks borrow amounts +necessary to make deliveries the next day. Those who neglect to borrow +at this time must do so the next morning, or some time in the day +before the delivery hour, 2.15 p. m. There is no loan crowd in the +morning, but borrowers seek lenders at the posts on the floor of the +exchange around which the particular stocks that they require are dealt in.</p> + +<p>“The same rules govern the receipt and delivery of stocks borrowed and +loaned as govern stocks bought and sold. In returning borrowed stock +the borrower must notify the lender before 1 o’clock on the day of +delivery; the lender in calling or demanding the return of stock must +do likewise.</p> + +<p>“When a stock is loaned flat, the owner is relieved from the cost of +carrying the stock. If loaned at a premium he is still better off, for +the premium is so much gain. When a stock is loaned at a premium, the +premium applies in the absence of a renewal of the loan only to the day +on which the stock is loaned.</p> + +<p><span class="pagenum" id="Page_119">[Pg 119]</span> +“If a stock that has been borrowed advances in market price the lender +may require the borrower to pay to him the difference between the +price at which the stock was loaned and the new higher price. On the +other hand, if the stock declines in price the borrower may require +the lender of the stock to return to him the difference between the +price at which the stock was borrowed and the new lower price. These +differences are called market differences.</p> + +<p>“When a corner is being worked up in a stock it is the practice of +those engineering it freely to loan the stock in order to encourage the +creation of a short interest in it. When this short interest has become +large enough, or in other words, when the stock has become sufficiently +oversold, a demand for the return of the stock brings the corner to a +culmination.</p> + +<p>“An apparent borrowing demand for stocks is sometimes created by the +efforts of money lenders to obtain higher interest on their money than +is obtainable in lending it in the money market. If the lending rate +for a particular stock is, say, 6 per cent. when money is lending at 4½ +per cent. in the money market the money lenders will borrow the stock +in order to obtain the extra interest.</p> + +<p>“When a seller of long stock (stock actually owned) desires to create +the impression that he is selling short stock (stock not owned or +possessed) he has his broker borrow stock for delivery to purchasers. +Then when he has completed his sales he delivers his own stock to the +ones from whom his broker borrowed.</p> + +<p>“Also, when a seller of stock desires to conceal his identity, he has +his stock transferred or made out in the name of his broker, or a +clerk, or some other person previous to its delivery to purchasers. +<span class="pagenum" id="Page_120">[Pg 120]</span></p> + +<p>“Arbitrage dealers often sell stock held abroad which will not be +received for some time. They borrow for delivery to purchasers and when +their own stock arrives they make returns to the ones from whom they +borrowed.</p> + +<p>“Corporations intending to issue new stock have been known to sell +the stock in advance of its issuance and to borrow to make delivery +to purchasers. Then when the new stock was issued it was used to make +return to the ones from whom stock had been borrowed.”—From Smith’s +Financial Dictionary, by Howard Irving Smith.</p> + +<h3 id="SCALP"><i>Scalping.</i></h3> + +<p>“There are many different methods and degrees of scalping. The word is +supposed to express all the forms of trading between the “Chaser of +eighths” and the man who operates for a profit of several points.</p> + +<p>“Scalping operations are more common than any other form of trading. +There are several reasons for this. Many people consider the market a +machine, and base operations on pictures of the past, i. e., charts. +These misused and mischievous instruments show so many opportunities +of profit in movements both ways, that the unsophisticated trader sees +what was <i>possible</i>, while the <i>probable</i> is overlooked.</p> + +<p>“Again, the desire to scalp is helped by impatience and greed. The +small trader will grow disgusted if there is the slightest delay. +Dullness is unbearable to him. Also, he will frequently close good +commitments merely for the sake of ‘seeing the money.’ I have seen many +traders ‘clean up,’ receive a check which was of absolutely no present +<span class="pagenum" id="Page_121">[Pg 121]</span> +use to them, gloat over it for a while, and pay another commission to +replace the trades. Ridiculous, but true.</p> + +<p>“I may say, as a general principle, that I consider scalping the +poorest form of trading. It involves the continued multiplication of +commissions, and constant personal attention. I know of but two men who +have made any considerable amount of money by scalping methods. They +are exceptionally fitted for this form of trading, and have the ability +to take a small loss quickly. This is a trait which is very rare among +public traders. A man will usually accept a small profit for no other +reason than that it <i>is</i> a profit, and will sit stubbornly on a +loss for no other reason than that it is a loss.</p> + +<p>“The man who has reason to believe that a stock will advance or decline +ten points, will, in nine cases out of ten, realize more profit by +merely making his trade in the stock and going about his business until +he considers it wise to terminate the contract. I will say decidedly +that more traders will do better, make more money, and suffer less loss +of time, and less annoyance by abandoning scalping tactics altogether.</p> + +<p>“This view will no doubt cause my friends in the brokerage business +much wrath and indignation. They naturally prefer to have ten +commissions rather than one, and I fear that in many cases they +recommend scalping tactics for no better reason than the one mentioned.</p> + +<p>“That constant and repeated operations are disastrous, is pretty well +shown by the remark of a successful ‘Bucket-Shop’ man: ‘I don’t care +what they do, or what the market does, if I can only keep them coming +up to the order windows every few hours,’ said this gentleman. And he +<span class="pagenum" id="Page_122">[Pg 122]</span> +was right; for the ordinary scalper is no more than a gambler, basing +his operations on possible variations, and paying a great percentage.</p> + +<p>“But if one will insist on scalping, it may be well to examine the +subject from the other side and see how the least of the evils may be +chosen. Without recommending the practice, or qualifying the views +expressed above, I will therefore give my idea of the safest methods of +scalping.</p> + +<p>“The man who attempts to operate on both sides of the market during the +same period, is the most deluded individual in the speculative world. I +have already stated, that I have only seen two traders out of thousands +I have observed, who could do this with any degree of success. These +hybrid Bull-bears are certainly not working on any definitely formed +opinion of the future. They are worse off than even the traders who are +unchangeably and constitutionally wedded to one side of the market the +year round. These latter prejudiced and inflexible individuals will +occasionally have a turn in their direction, whatever their position +may be, but the Bull-bear will go from one month to another, never +seeing anything more than a temporary gain.</p> + +<p>“It is important, therefore, that the active trader should form his +ideas, base his views on something, and, if he wishes to entertain +himself with repeated operations, map out a plan of campaign which +shall be, at least, intelligent in its original conception.</p> + +<p>“Just how successfully the plan suggested will result, depends largely +upon the alertness and understanding of the individual who engineers +it. If the active participant is easily moved from his position by +changes of a point or two against him; if he is easily frightened by +<span class="pagenum" id="Page_123">[Pg 123]</span> +wild rumors and inspired talk; if he expects to gain thousands in a +few days by venturing hundreds; or if he believes that he can operate +in stocks so shrewdly as to guess high or low points within a dollar +or two a share, he will meet with disappointment and loss. If he can +overcome these drawbacks, he may do very well as an active trader, but +I wish to reiterate my views that the man who takes a position on the +market and retains it, will make more money than the scalper.</p> + +<p>“As a test question, let me put this inquiry to the active traders who +read this letter:</p> + +<p>“When you have been correct on a certain movement of say ten points, +and have made repeated operations, did you make any more money, or as +much, as you would have realized on a single trade showing a ten point +profit?”—From Thomas Gibson’s Market Letter, February 14th, 1907.</p> + +<h3 id="CROP"><i>Crop Damage.</i></h3> + +<p>As to the crops, we find many over-optimistic people trying to belittle +positive crop damage. It cannot be belittled. It is dangerous and +foolish to evade an issue instead of facing it. The argument that our +surplus from last year will carry us through a shortage is puerile. +That surplus has already been considered. Wheat in the bin is money; +some of that money has already been spent and all of it has been given +due consideration in the basing of our wealth. A number of writers +attempt to make a probable crop of 2,500,000,000 bushels of corn a +“bumper crop.” Their methods of arriving at this conclusion are not +sound. It is certain that we should, in the natural course of events, +raise more and more wheat and corn each year as the population of the +<span class="pagenum" id="Page_124">[Pg 124]</span> +world, and the uses of the cereals increase. To compare one year with +another will not do. Particularly in Corn and Cotton must we steadily +increase in acreage and production, for we supply the world with those +commodities. To illustrate this point, let us go back a few years and +see what has occurred.</p> + +<p class="f110 spa1"><b>COTTON AND CORN PRODUCTION<br> +OF THE UNITED STATES FOR<br> TWENTY-FIVE YEARS.</b></p> + +<table class="spb1"> + <tbody><tr> + <td class="tdc">Year</td> + <td class="tdc">Bushels<br>Corn</td> + <td class="tdc">Bales<br>Cotton</td> + </tr><tr> + <td class="tdl">1880</td> + <td class="tdr_ws1">  1,717,434,543</td> + <td class="tdr">5,789,329</td> + </tr><tr> + <td class="tdl">1885</td> + <td class="tdr_ws1">1,936,176,000</td> + <td class="tdr">6,550,215</td> + </tr><tr> + <td class="tdl">1890</td> + <td class="tdr_ws1">1,568,874,000</td> + <td class="tdr">8,655,000</td> + </tr><tr> + <td class="tdl">1895</td> + <td class="tdr_ws1">2,151,139,000</td> + <td class="tdr">7,157,340</td> + </tr><tr> + <td class="tdl">1900</td> + <td class="tdr_ws1">2,105,102,516</td> + <td class="tdr">10,383,422</td> + </tr><tr> + <td class="tdl">1905</td> + <td class="tdr_ws1">2,707,993,542</td> + <td class="tdr">11,345,988</td> + </tr><tr> + <td class="tdl">1906</td> + <td class="tdr_ws1">2,927,416,091</td> + <td class="tdr">13,000,000</td> + </tr> + </tbody> +</table> + +<p>The time is very near at hand, when anything less than 3,000,000,000 +bushels of corn will be a crop failure; and high prices cannot be +considered a great compensation in lean years. Short crops mean +decreased demand for labor and loss of purchasing power by the common +people, who are after all the best spenders.—From Thomas Gibson’s +Market Letter, July 13th, 1907.</p> + +<h3 id="SELECT"><i>The Selection of Securities.</i></h3> + +<p>When so many seductive baits are offered, so many nets and traps +contrived and constructed by clever brains and cunning fingers are +spread for the capture of those having money, is it surprising that the +careless and credulous are victimized, and even that the sagacious and +prudent should sometimes be taken in? Nevertheless, for the losses they +have sustained, investors, as a rule, have themselves chiefly to +<span class="pagenum" id="Page_125">[Pg 125]</span> +blame. The mistakes made, in nine cases out of ten, have been the +purchase of “cheap” securities. The hope of realizing a little more +than ordinary interest, by buying paper at a discount, has proved to +be the rock on which unnumbered capitalists have split. In addition to +their money’s worth, they have endeavored to get something for nothing, +with the result of most generally getting nothing for something. It +is remarkable how blind are people, ordinarily sagacious enough to +make money, to the fact that property cannot pay a revenue beyond its +producing capacity. For instance, how can a trolley company, whose line +is wholly or mainly built from the proceeds of mortgage bonds, sell +them at a heavy discount, besides allowing large commissions for the +selling, and then pay both this interest and dividends on a large issue +of watered stocks? Or how can a poor agriculturist, occupying a half +improved farm out on the frontier, with a family to support and grain +selling barely above the cost of production, pay ten or twelve per +cent. upon the capital with which he does business?—From “The Art of +Wall Street Investing,” by John Moody.</p> + +<h3 id="BANK"><i>The Bank Statement.</i></h3> + +<p>“A statement or exhibit of the condition of banks.</p> + +<p>“In New York the Bank Statement is issued from the clearing house +on Saturday. The consolidated statement (or as it is officially +designated, the “summary of the weekly statement of the associated +banks”) is the collective showing by the banks belonging to the +clearing house—the showing when the returns of the individual banks +have been consolidated (put together). +<span class="pagenum" id="Page_126">[Pg 126]</span></p> + +<p>“The consolidated bank statement shows the average deposits, loans, +specie, legal tenders, circulation, reserve and surplus reserve of the +banks for the week ending with and including Friday.</p> + +<p>“The term deposits includes the net deposits (credit balances) of +persons and concerns (designated as individual deposits), balances +to the credit of other banks and all money and credits subject to +withdrawal. Loans include money loaned and likewise paper (promissory +notes, drafts, etc.) bought. Specie includes not only gold and silver +coins, but also gold certificates, which are redeemable in gold or +silver, as the case may be. Legal tenders as the term is used in the +bank statement, means, United States notes (greenbacks) and Treasury +notes (notes issued for silver bullion purchased under the so-called +Sherman act).</p> + +<p>“Note.—As defined by the statutes, legal tenders include United States +notes, Treasury notes, gold and silver coins and minor coins, but not +gold certificates, nor silver certificates.</p> + +<p>“Circulation means the notes issued by national banks, to secure the +redemption of which Government bonds have to be purchased by the banks +and deposited with the Treasurer of the United States. A bank cannot +count circulation in its reserve; whether it is its own circulation or +the circulation of some other bank, makes no difference. Reserve means +the total amount of specie and legal tenders held. Surplus reserve +means the total amount held in excess of legal requirement. A national +bank (in New York City) must, by law, maintain a reserve equal to +25 per cent. of its deposits; a state bank must, by law, maintain a +reserve of 15 per cent. In compiling the bank statement a reserve of 25 +<span class="pagenum" id="Page_127">[Pg 127]</span> +per cent. is allowed or figured for state banks as well as for national +banks.</p> + +<p>“The consolidated statement formerly was issued from the clearing house +in the following form, the changes (increases and decreases) resulting +from comparison with the preceding statement (the statement issued the +week before):</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">Loans</td> + <td class="tdr_ws1">$874,647,900</td> + <td class="tdr">$2,344,000</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Specie</td> + <td class="tdr_ws1">152,338,200</td> + <td class="tdr">1,068,300</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Legal Tenders  </td> + <td class="tdr_ws1">67,274,300</td> + <td class="tdr">1,319,000</td> + <td class="tdl_wsp">Decrease</td> + </tr><tr> + <td class="tdl">Deposits</td> + <td class="tdr_ws1">872,340,600</td> + <td class="tdr">164,600</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Circulation</td> + <td class="tdr_ws1">36,072,500</td> + <td class="tdr">411,600</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdc" colspan="3">Decrease of reserve, $291,850</td> + <td class="tdc"> </td> + </tr> + </tbody> +</table> + +<p>“The (final) item reserve in the statement as issued from the clearing +house, meant surplus reserve, although not specifically so stated.</p> + +<p>“In the newspapers the statement appeared as follows; being elucidated +so as to show the reserve held (that is, specie and legal tenders which +are generally referred to as cash holdings), the reserve required and +the surplus reserve with the changes in these items:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> </th> + <th class="tdc">Current<br>Week</th> + <th class="tdc">Preceding<br>Week</th> + <th class="tdc">Changes</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Loans</td> + <td class="tdr_ws1">$874,647,900</td> + <td class="tdr_ws1">$872,303,700 In.</td> + <td class="tdr">$2,344,200</td> + </tr><tr> + <td class="tdl">Deposits</td> + <td class="tdr_ws1">872,340,600</td> + <td class="tdr_ws1">872,176,000 In.</td> + <td class="tdr">164,600</td> + </tr><tr> + <td class="tdl">Circulation</td> + <td class="tdr_ws1">36,072,500</td> + <td class="tdr_ws1">35,660,900 In.</td> + <td class="tdr">411,400</td> + </tr><tr> + <td class="tdl">Legal Tends.</td> + <td class="tdr_ws1">67,274,300</td> + <td class="tdr_wsp">68,593,300 De.</td> + <td class="tdr">1,319,000</td> + </tr><tr> + <td class="tdl">Specie</td> + <td class="tdr_ws1 bb">152,338,200</td> + <td class="tdr_ws1 bb">151,269,900 In.</td> + <td class="tdr bb">1,068,300</td> + </tr><tr> + <td class="tdl">Reserve held  </td> + <td class="tdr_ws1">$219,612,500</td> + <td class="tdr_wsp">$219,863,200 De.</td> + <td class="tdr">$250,700</td> + </tr><tr> + <td class="tdl">Res. req’r’d</td> + <td class="tdr_ws1 bb">218,085,150</td> + <td class="tdr_ws1 bb">218,044,000 In.</td> + <td class="tdr bb">41,150</td> + </tr><tr> + <td class="tdl_ws1">Surplus</td> + <td class="tdr_ws1">$1,527,350</td> + <td class="tdr_wsp">$1,819,200 De.</td> + <td class="tdr">$291,850</td> + </tr> + </tbody> +</table> + +<p>“In 1902 the Secretary of the Treasury (Leslie M. Shaw) suspended the +requirement to keep a reserve against government funds on deposit in +national banks upon the ground that these funds were special deposits +<span class="pagenum" id="Page_128">[Pg 128]</span> +which were fully secured by pledge of bonds with the Treasurer of the +United States. This action by the Secretary of the Treasury caused a +change in the make-up of the bank statement by the addition to it of +figures showing the average amount of government funds on deposit. The +consolidated statement was thereafter issued from the clearing house in +the following form:</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">Loans</td> + <td class="tdr_ws1">$874,647,900</td> + <td class="tdr">$2,344,200</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Specie</td> + <td class="tdr_ws1">152,338,200</td> + <td class="tdr">1,068,300</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Legal Tenders</td> + <td class="tdr_ws1">67,274,300</td> + <td class="tdr">1,319,000</td> + <td class="tdl_wsp">Decrease</td> + </tr><tr> + <td class="tdl"><a id="FNanchor_3" href="#Footnote_3" class="fnanchor">[3]</a>Deposits</td> + <td class="tdr_ws1">872,340,600</td> + <td class="tdr">164,600</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Circulation</td> + <td class="tdr_ws1">36,072,500</td> + <td class="tdr">411,600</td> + <td class="tdl_wsp">Increase</td> + </tr><tr> + <td class="tdl">Reserve on all deposits</td> + <td class="tdr_ws1"> </td> + <td class="tdr">291,850</td> + <td class="tdl_wsp">Decrease</td> + </tr><tr> + <td class="tdl">Reserve on all deposits other than United States</td> + <td class="tdr_ws1"> </td> + <td class="tdr">325,825</td> + <td class="tdl_wsp">Decrease</td> + </tr> + </tbody> +</table> + +<p>“In the newspapers the statement was made up in both the old and the +new forms as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> </th> + <th class="tdc">Current<br>Week</th> + <th class="tdc">Preceding<br>Week</th> + <th class="tdc"> </th> + <th class="tdc">Changes</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Loans</td> + <td class="tdr_ws1">$874,674,900</td> + <td class="tdr_wsp">$872,303,700</td> + <td class="tdl">In.</td> + <td class="tdr">$2,344,200</td> + </tr><tr> + <td class="tdl">Deposits</td> + <td class="tdr_ws1">872,340,600</td> + <td class="tdr_wsp">872,176,000</td> + <td class="tdl">In.</td> + <td class="tdr">164,600</td> + </tr><tr> + <td class="tdl">Circulation</td> + <td class="tdr_ws1">36,072,500</td> + <td class="tdr_wsp">35,660,900</td> + <td class="tdl">In.</td> + <td class="tdr">411,400</td> + </tr><tr> + <td class="tdl">Legal Tends.</td> + <td class="tdr_ws1">67,274,300</td> + <td class="tdr_wsp">68,593,300</td> + <td class="tdl">De.</td> + <td class="tdr">1,319,000</td> + </tr><tr> + <td class="tdl">Specie</td> + <td class="tdr_ws1 bb">152,338,200</td> + <td class="tdr_wsp bb">151,269,900</td> + <td class="tdl bb">In.</td> + <td class="tdr bb">1,068,300</td> + </tr><tr> + <td class="tdl">Reserve held  </td> + <td class="tdr_ws1">$219,612,500</td> + <td class="tdr_wsp">$219,863,200</td> + <td class="tdl">De.</td> + <td class="tdr">$250,700</td> + </tr><tr> + <td class="tdl">Res. req’r’d</td> + <td class="tdr_ws1 bb">218,085,150</td> + <td class="tdr_wsp bb">218,044,000</td> + <td class="tdl bb">In.</td> + <td class="tdr bb">41,150</td> + </tr><tr> + <td class="tdl">Surplus</td> + <td class="tdr_ws1">$1,527,350</td> + <td class="tdr_wsp">$1,819,200</td> + <td class="tdl">De.</td> + <td class="tdr">$291,850</td> + </tr> + </tbody> +</table> + +<p>Deducting the United States deposits held by the banks from the +aggregate deposits the bank statement compares as follows: +<span class="pagenum" id="Page_129">[Pg 129]</span></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> </th> + <th class="tdc">Current<br>Week</th> + <th class="tdc">Preceding<br>Week</th> + <th class="tdc"> </th> + <th class="tdc">Changes</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Tot. deposits</td> + <td class="tdr_ws1">$872,340,600</td> + <td class="tdr_wsp">$872,176,000</td> + <td class="tdl">In.</td> + <td class="tdr">$164,600</td> + </tr><tr> + <td class="tdl">U.S. deposits</td> + <td class="tdr_ws1 bb">40,633,400</td> + <td class="tdr_wsp bb">40,769,300</td> + <td class="tdl bb">De.</td> + <td class="tdr bb">135,900</td> + </tr><tr> + <td class="tdl">Dep’s 25%</td> + <td class="tdr_ws1">$831,707,200</td> + <td class="tdr_wsp">$831,406,700</td> + <td class="tdl">In.</td> + <td class="tdr">$300,500</td> + </tr><tr> + <td class="tdl">Reserve held  </td> + <td class="tdr_ws1">219,612,500</td> + <td class="tdr_wsp">219,863,200</td> + <td class="tdl">De.</td> + <td class="tdr">250,700</td> + </tr><tr> + <td class="tdl">Res. req’r’d</td> + <td class="tdr_ws1 bb">207,926,800</td> + <td class="tdr_wsp bb">207,851,675</td> + <td class="tdl bb">In.</td> + <td class="tdr bb">75,125</td> + </tr><tr> + <td class="tdl">Surplus</td> + <td class="tdr_ws1">$11,685,700</td> + <td class="tdr_wsp">$12,011,525</td> + <td class="tdl">De.</td> + <td class="tdr"> $325,825</td> + </tr> + </tbody> +</table> + +<p>“The detailed bank statement, which is issued simultaneously with the +consolidated statement, contains first the number of each bank (each +bank has a number by which it is known at the clearing house) and then +the name of the bank, after which follow the amounts of its capital, +net profits (surplus and undivided profits), specie, legal tenders, +deposits and circulation.</p> + +<p>“The bank statement is said to have been made up on rising averages +when the items in it have been increasing in amount during the week, or +the statement is said to have been made up on falling averages when the +items in it have been decreasing in amount during the week.</p> + +<p>“Generally speaking, the bank statement is favorable or good when it +shows that the position of the banks has been strengthened, as by an +increase in the surplus reserve through, or by means of an increase in +their cash holdings rather than by a decrease in their deposits, which +often is effected by the calling of loans—by demanding and obtaining +the payment of money loaned on call. As money loaned is credited to +borrowers on their deposit accounts and increases the total deposits of +the bank, so the payment of loans by borrowers takes from and decreases +deposits. As will be seen, the calling and consequent payment of loans +<span class="pagenum" id="Page_130">[Pg 130]</span> +does not increase cash holdings but merely changes balances in +individual accounts. A reduction in deposits reduces the amount of cash +required to be held as a legal reserve and correspondingly expands +(increases) the surplus reserve. Generally speaking, also, the bank +statement is unfavorable or, if particularly unfavorable, is bad when +the position of the banks has been weakened, as by a decrease in the +surplus reserve through a decrease in their cash holdings rather +than by an increase in their deposits, which often is effected by an +expansion in (increase in amount of) their loans, which correspondingly +expands (increases) their deposits and correspondingly increases the +amount of cash required to be held as a legal reserve. This additional +amount is deducted from and correspondingly reduces the surplus reserve.</p> + +<p>“The bank statement may be said to be favorable or good, however, if +an increase in loans is reported when the banks are surfeited with +money: also the bank statement may be said to be unfavorable or rather +not good (but hardly bad) when it shows that money is accumulating in +idleness in the banks—when deposits are increasing, not as a result of +increasing loans, but in the absence of a borrowing demand for money.</p> + +<p>“There are other circumstances which make the bank statement favorable +or unfavorable as disclosed in the circumstances themselves.</p> + +<p>“There is also a non-member bank statement, which is a statement of the +conditions of banks which are not members of the clearing house but +clear through members. This statement is issued from the clearing house +on Monday and shows the average condition of the banks for the week +ending with and including the preceding Friday. +<span class="pagenum" id="Page_131">[Pg 131]</span></p> + +<p>“The non-member bank statement contains the name of each bank, followed +by its capital, net profits, average amount of loans and discounts and +investments, average amount of specie, average amount of legal tender +notes and (national) bank notes, average amount on deposit with its +clearing house agent (the bank through which it clears at the clearing +house), average amount on deposit with other New York City banks and +trust companies, average amount of net deposits and average amount of +circulation.”—From Smith’s Financial Dictionary. +<span class="pagenum" id="Page_132">[Pg 132]</span></p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_133">[Pg 133]</span></p> +<h3 id="STOCK"><i>The Cycles of Stock Speculation.</i><a id="FNanchor_4" href="#Footnote_4" class="fnanchor">[4]</a></h3> +</div> + +<p>All speculators, and most investors, possess a general idea of the +range and trend of prices for a considerable period. This knowledge is +more frequently based upon impressions gained during their own years +of activity in the speculative world than upon research. The knowledge +gained by active participation is certainly the most forcible and +lasting, but is frequently productive of erroneous ideas, as will be +set forth hereafter.</p> + +<p>For the purpose of giving a clear idea of the movements in stocks +during recent years, the accompanying chart has been arranged. The +use of circles in lieu of the customary straight lines was hit upon +as presenting more clearly to the eye the comparative extent of each +year’s movement, and more plainly distinguishing one year from another. +These advantages are gained without obscuring from view the general +trend of prices for the period considered.</p> + +<p>For the purpose of establishing a single hypothetical stock whose +movements should be representative of the course of all other active +<span class="pagenum" id="Page_134">[Pg 134]</span> +securities, the fluctuations of twenty stocks were welded together. +That is to say, the high points of these stocks for the year 1896 +were added and divided by 20. The same course was followed with the +low points, and each year considered was treated in like manner. By +drawing a circle upon a numbered chart with the upper rim resting +upon the figures representing the high point, and the lower rim upon +those representing the low point, an average price for the year is +necessarily established at the axis.</p> + +<p>The size of the circles shows the actual and comparative extent of the +movements, and the position of consecutive years on the diagram shows +the general trend of prices.</p> + +<p>In selecting the twenty stocks to be used in forming a composite +security, care was taken to eliminate the shares of such corporations +as have undergone radical changes during the period considered, 1896 +to 1905, inclusive. The Rock Island Company, for example, is in itself +an important system, but owing to the conversion of $75,000,000 Common +stock into $200,000,000 of mixed securities in 1902, the tracing of +its subsequent movements would involve unnecessary computations and +explanations. It may be added that experimental tests show that the +hypothetical stock, call it “Composite Common” for the sake of +<span class="pagenum" id="Page_135">[Pg 135]</span> +convenient reference, was faithfully representative of almost all +movements from 1896 to 1906, and that the selection of other stocks +would have made only insignificant variations in the general result. +The original intention was to extend the investigation for a longer +period than ten years, but so many readjustments, assessments, and +other changes occurred in listed securities prior to 1896 as to make a +clear showing difficult.</p> + +<p>Common stocks of railroads only were considered. Few Industrials have +reached their tenth birthday, and aside from this, their introduction +would make a false showing by increasing the dividend rate with no +corresponding increase in the selling price of the stock.</p> + +<p>The twenty stocks chosen for amalgamation were as follows:</p> + +<p>Atchison, Topeka & Santa Fe, Baltimore and Ohio, Canadian Pacific, +Canada Southern, Chesapeake & Ohio, Chicago & Great Western, Chicago, +Milwaukee & St. Paul, Chicago & Northwestern, Chicago, St. Paul, +Minneapolis & Omaha, Erie, Illinois Central, Louisville & Nashville, +Missouri Pacific, New York Central & Hudson River RR., Pennsylvania, +Reading, Southern Pacific, Southern Railway, Union Pacific, and Wabash RR. +<span class="pagenum" id="Page_136">[Pg 136]</span></p> + +<p class="f110 spa1"><b>PRICES OF COMPOSITE BY YEARS<br> +FROM 1896 TO 1906, INCLUSIVE.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdl">Year </th> + <th class="tdc"> High </th> + <th class="tdc"> Average </th> + <th class="tdc"> Low </th> + <th class="tdc"> Fluctuation</th> + </tr></thead> + <tbody><tr> + <td class="tdl">1896</td> + <td class="tdr_ws1">44  </td> + <td class="tdr_ws1">37½</td> + <td class="tdr_ws1">31  </td> + <td class="tdc">13  </td> + </tr><tr> + <td class="tdl">1897</td> + <td class="tdr_ws1">53¼</td> + <td class="tdr_ws1">43⅞</td> + <td class="tdr_ws1">34½</td> + <td class="tdc">18¾</td> + </tr><tr> + <td class="tdl">1898</td> + <td class="tdr_ws1">62½</td> + <td class="tdr_ws1">53¼</td> + <td class="tdr_ws1">44  </td> + <td class="tdc">18½</td> + </tr><tr> + <td class="tdl">1899</td> + <td class="tdr_ws1">72½</td> + <td class="tdr_ws1">64¼</td> + <td class="tdr_ws1">56  </td> + <td class="tdc">16½</td> + </tr><tr> + <td class="tdl">1900</td> + <td class="tdr_ws1">80½</td> + <td class="tdr_ws1">70½</td> + <td class="tdr_ws1">60⅜</td> + <td class="tdc">20⅛</td> + </tr><tr> + <td class="tdl">1901</td> + <td class="tdr_ws1">106½</td> + <td class="tdr_ws1">89⅞</td> + <td class="tdr_ws1">73¼</td> + <td class="tdc">33¼</td> + </tr><tr> + <td class="tdl">1902</td> + <td class="tdr_ws1">119¼</td> + <td class="tdr_ws1">105½</td> + <td class="tdr_ws1">91⅝</td> + <td class="tdc">27⅝</td> + </tr><tr> + <td class="tdl">1903</td> + <td class="tdr_ws1">106½</td> + <td class="tdr_ws1">89⅞</td> + <td class="tdr_ws1">73¼</td> + <td class="tdc">33¼</td> + </tr><tr> + <td class="tdl">1904</td> + <td class="tdr_ws1">105½</td> + <td class="tdr_ws1">91  </td> + <td class="tdr_ws1">76½</td> + <td class="tdc">29  </td> + </tr><tr> + <td class="tdl">1905</td> + <td class="tdr_ws1">122¾</td> + <td class="tdr_ws1">109⅝</td> + <td class="tdr_ws1">96½</td> + <td class="tdc">26¼</td> + </tr><tr> + <td class="tdl">1906</td> + <td class="tdr_ws1">125¾</td> + <td class="tdr_ws1">111⅞</td> + <td class="tdr_ws1">98⅛</td> + <td class="tdc">27⅝</td> + </tr> + </tbody> +</table> + +<p>Fractions were necessarily omitted from the totals employed in charting +the movements. They are, however, unimportant. Dividends on Composite +Common were as follows:</p> + +<table class="spb1"> + <tbody><tr> + <td class="tdl">1896</td> + <td class="tdr">1⅖</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1897</td> + <td class="tdr">1½</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1898</td> + <td class="tdr">1⅝</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1899<span class="ws3"> </span></td> + <td class="tdr">1⁹/₁₀</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1900</td> + <td class="tdr">2½</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1901</td> + <td class="tdr">3  </td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1902</td> + <td class="tdr">3½</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1903</td> + <td class="tdr">3⅜</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1904</td> + <td class="tdr">3⁷/₁₀</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1905</td> + <td class="tdr">3⅞</td> + <td class="tdl_wsp">%</td> + </tr><tr> + <td class="tdl">1906</td> + <td class="tdr">4¾</td> + <td class="tdl_wsp">%</td> + </tr> + </tbody> +</table> + +<p><span class="pagenum" id="Page_137">[Pg 137]</span></p> + +<div class="figcenter"> + <p class="f110"><b>FLUCTUATIONS OF STOCKS FOR TEN YEARS.</b></p> + <p class="center">(The rims of the circles touch the average high and low<br> + points of 20 railroad stocks, each year for 10 years.)</p> + <img src="images/i_137.jpg" alt="" width="500" height="725" > + <p>Reproduced, by permission, from <span class="smcap">Moody’s Magazine</span> of August, 1906.</p> +</div> + +<p><span class="pagenum" id="Page_138">[Pg 138]</span> +It has been the frequent contention of the writer that a chart as a +basis for speculative ventures is ridiculous, but a diagram framed for +the purpose of pointing out certain facts, or inciting the student of +speculative affairs to investigation of causes is a different matter. +No interested person can look at the accompanying chart without being +struck at once with the decline of 1903 following the steady advance +of the preceding years. If this observation incites intelligent +investigations as to the reasons for the reversal, much good may +result. On the other hand, the fallacy of operating on mere mechanical +records of the past is shown by the same diagram. If the chart had +been handed to one of the mechanical traders in 1902 he would have +argued that the average price of each year marked the approximate low +point of each succeeding year. It certainly does look convincing, +but what follows? The infallible system not only fails to work, but +reverses itself, and the average price of 1902 becomes the approximate +high price of 1903 and 1904. At about the time the system player has +gathered enough figures to go on, a change occurs. No intrinsic merit +attaches to any kind of diagram, they being merely convenient forms for +tabulating history.</p> + +<p>Some interesting coincidences occur in the chart; most remarkable is +the exactly similar size and position of the circles representing the +years 1901 and 1903. In no instance did the high or low points of any +integral stock correspond in these years, but the total footings were +identical in each case.</p> + +<p>The speculator may extract some value from the diagram by observing +that opportunities for profits of forty or fifty points did not +<span class="pagenum" id="Page_139">[Pg 139]</span> +occur during the entire period. The extreme possibilities in any one +year were 33 points, and much less on the average. If the trader had +purchased or sold Composite at an average price, his possibilities of +profit would have been limited to about 15 points in any one year. This +does not accord with accepted theories. The ordinary speculator who +pursues his operations for ten or fifteen points successfully is almost +certain to believe that much more profit lies before him, that he is +only getting started. There is a reason for this; the public trader +takes for his barometer some security which has been conspicuous for +its extended fluctuations; he naturally notices and remembers it to the +exclusion of the rank and file of stocks. For example, every active +participant in speculative affairs knows that Copper had a range of +75 points in a single year, 1901. He bases possibilities too much on +this sort of knowledge without reflecting that Copper was a cardinal +exception, and that in order to participate in such movements he must throw +caution to the winds, and deal in stocks which offer no degree of safety.</p> + +<p>Another point established is the lapse of time required in a +readjustment of values. It took Composite Common seven years to advance +from an average price of 37 to an average price of 105, 68 points. This +<span class="pagenum" id="Page_140">[Pg 140]</span> +again falls short of the speculator’s ideas. He expects to buy a stock +at 50 today, and sell it at par six months hence, an operation which is +shown by the movements of a representative stock to require a period of +six years. Again his expectations are founded on exceptions. The same +line of reasoning applies to one case as to the other. The speculator +unconsciously magnifies everything connected with speculation.</p> + +<p>In reviewing the movements of prices from 1896 to 1905, the most +important question is, what caused the reversal of form in 1903? A +complete answer to this question would be highly educational. There +was no panic, nothing faintly resembling one; business suffered +some stagnation, it is true; there was a falling off in the iron +and steel business, but crops were good, and wheat, corn, oats, and +cotton brought good prices in both 1903 and 1904. Serious business +depression was more in anticipation than in realization, but 1904 +witnessed no material recovery in prices. These causes do not fully +explain so radical a change. If conditions had been such as to cause +a reduction of dividends, or a scarcity of money in 1903, the decline +would be explained, but money was plentiful enough, and dividends were +unchanged. The ratio of dividends as compared with prices was also +<span class="pagenum" id="Page_141">[Pg 141]</span> +fairly maintained from 1896 to 1902, and it would appear that prices +should merely stop advancing when dividends became stationary; but +prices did not merely stand still, they went materially backward.</p> + +<p>Without pretending to enter into a full discussion of the causes for +the change, one or two points may assist in forming a conclusion. The +steady advance in prices from 1896 to 1902 represented two things—a +recovery from the great depression of 1893, and the natural advances +of property values in a prosperous and growing country. The latter +point is the more important, and as there has been no cessation of the +growth of population or prosperity, other causes for the reversion +must be sought. It is not sufficient to merely say that the recovery +over-leaped itself, for such an event would have plainly mirrored +itself in a reduction in the rate of dividend returns.</p> + +<p>Capitalization of railroads in 1903 increased about 14% as compared +with an average increase of 6% in the preceding seven years. Add to +this the tremendous increase in the capitalization of industrial +corporations, and an over-supply of stocks appears as one of the +contributary causes—undigested securities.</p> + +<p>Dividend rates were maintained, but were not increased. This +particularly affects the simon pure speculator. Nothing will drive him +<span class="pagenum" id="Page_142">[Pg 142]</span> +into a panic quicker than a decreased dividend, and nothing makes him +so sanguine of higher prices as an increase in the rate of payment. He +is always basing his operations on rumors of higher dividends, and when +one of these rumors fails of verification, it is almost as bad as a decrease.</p> + +<p>And dividends did decrease in one important quarter; United States +Steel, the speculative favorite, capitalized more heavily than a +dozen ordinary corporations, cut its rate from 4 to 3½%, with every +promise of a further reduction. This had a far reaching effect, both on +speculators and small investors.</p> + +<p>It is certain that fundamental conditions have more to do in shaping +prices than has speculation, but the speculator helps, and in 1903 +he was particularly potent because of the excesses engendered by the +unusual speculative advances of 1901 and 1902. He helped to make the +prices and he helped to break them, so he may be considered a factor in +the reversal.</p> + +<p>The small investor helped. He, too, is a dividend man; he seldom looks +at earnings, improvements, or extensions—he wants dividends. United +States Steel was a body blow to him; it not only affected his purse, +but it frightened him. +<span class="pagenum" id="Page_143">[Pg 143]</span></p> + +<p>And it is probable that an army of small investors sold their holdings +for another reason—they discovered that they could make a higher rate +of income in other channels. So long as both dividends and prices +advanced they were satisfied. They were speculating, not investing, but +you cannot convince the ordinary man that buying a stock outright, in +the hope of an advance in price, is speculation pure and simple.</p> + +<p>Much of the money diverted from the stock market in 1903 by the class +last mentioned, has never returned to Wall Street. This bears out +the theory that higher rates of interest are being found elsewhere. +Never before has the public refused to enter the stock market during +a period of great prosperity. They are absent now, and furthermore, +they show no intention of returning. Possibly they are wrong. The same +influences which are operating to give them better returns may be +operating to greatly enhance the value of the shares they ignore,—but +the small investors want dividends. Their failure to enter the stock +market would seem to be strong evidence that they are finding other +investment-speculations more attractive than listed shares. If this is +the case, the influences leading to higher interest rates are already +<span class="pagenum" id="Page_144">[Pg 144]</span> +at work, although not clearly discernible. Diversification of +investments would tend to obscure the truth for a time.</p> + +<p>But whatever the causes for the stock market relapse of 1903 may have +been, the recovery has been complete. The average prices of 1906 were +the highest on record. +<span class="pagenum" id="Page_145">[Pg 145]</span></p> + +<h3 id="GRAIN"><i>Cycles of Grain Speculation.</i><a id="FNanchor_5" href="#Footnote_5" class="fnanchor">[5]</a></h3> + +<p>In examining the price movements of wheat and corn for the last ten +years, a gradually advancing trend is apparent. That such would be the +case was a foregone conclusion; we naturally expect to find wheat and +corn in the foremost ranks of a universal movement towards higher +prices. The underlying causes for this general appreciation have +already been extensively and clearly discussed in Moody’s Magazine.</p> + +<p class="center"><i>All Prices Advancing.</i></p> + +<p>The price appreciation of wheat and corn is merely confirmatory of +the theory that all prices are advancing, and that they will continue +to advance until the balance between gold and other commodities is +readjusted.</p> + +<p>But there is something else written between the lines of the statistics +of price changes in wheat and corn. The <i>relative</i> advance of the +two cereals is all out of proportion.</p> + +<p>This fact leads us to seek for some specific cause operating either to +<span class="pagenum" id="Page_146">[Pg 146]</span> +depress one cereal or enhance the other, irrespective of the influence +already named.</p> + +<p>The figures for the last ten years are as follows:</p> + +<p class="f110 spa1"><b>WHEAT.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> Year </th> + <th class="tdc"> High </th> + <th class="tdc"> Average </th> + <th class="tdc"> Low </th> + </tr></thead> + <tbody><tr> + <td class="tdc">1896</td> + <td class="tdr">94⅜</td> + <td class="tdl_ws1"> 73¹¹/₁₆</td> + <td class="tdr">53  </td> + </tr><tr> + <td class="tdc">1897</td> + <td class="tdr">109  </td> + <td class="tdl_ws1"> 86⁹/₁₆</td> + <td class="tdr">64⅛</td> + </tr><tr> + <td class="tdc">1898</td> + <td class="tdr">185  </td> + <td class="tdl_ws1">123½</td> + <td class="tdr">62  </td> + </tr><tr> + <td class="tdc">1899</td> + <td class="tdr">79½</td> + <td class="tdl_ws1"> 71¾</td> + <td class="tdr">64  </td> + </tr><tr> + <td class="tdc">1900</td> + <td class="tdr">87½</td> + <td class="tdl_ws1"> 74½</td> + <td class="tdr">61½</td> + </tr><tr> + <td class="tdc">1901</td> + <td class="tdr">79½</td> + <td class="tdl_ws1"> 71⁵/₁₆</td> + <td class="tdr">63⅛</td> + </tr><tr> + <td class="tdc">1902</td> + <td class="tdr">95  </td> + <td class="tdl_ws1"> 81¼</td> + <td class="tdr">67½</td> + </tr><tr> + <td class="tdc">1903</td> + <td class="tdr">93  </td> + <td class="tdl_ws1"> 81¾</td> + <td class="tdr">70¼</td> + </tr><tr> + <td class="tdc">1904</td> + <td class="tdr">122  </td> + <td class="tdl_ws1">101¹⁰/₁₆</td> + <td class="tdr">81¼</td> + </tr><tr> + <td class="tdc">1905</td> + <td class="tdr">124  </td> + <td class="tdl_ws1">100¹⁵/₁₆</td> + <td class="tdr">77⅞</td> + </tr><tr> + <td class="tdc">1906</td> + <td class="tdr">94¾</td> + <td class="tdl_ws1"> 81⅞</td> + <td class="tdr">69⅛</td> + </tr> + </tbody> +</table> + +<p class="f110 spa1"><b>CORN.</b></p> + +<table class="spb1"> + <thead><tr> + <th class="tdc"> Year </th> + <th class="tdc"> High </th> + <th class="tdc"> Average </th> + <th class="tdc"> Low </th> + </tr></thead> + <tbody><tr> + <td class="tdc">1896</td> + <td class="tdr">30⅝</td> + <td class="tdl_ws1">25¹/₁₆</td> + <td class="tdr">19½</td> + </tr><tr> + <td class="tdc">1897</td> + <td class="tdr">32⅝</td> + <td class="tdl_ws1">27³/₁₆</td> + <td class="tdr">21¾</td> + </tr><tr> + <td class="tdc">1898</td> + <td class="tdr">38  </td> + <td class="tdl_ws1">32</td> + <td class="tdr">26  </td> + </tr><tr> + <td class="tdc">1899</td> + <td class="tdr">38⅛</td> + <td class="tdl_ws1">34¹/₁₆</td> + <td class="tdr">30  </td> + </tr><tr> + <td class="tdc">1900</td> + <td class="tdr">49½</td> + <td class="tdl_ws1">40</td> + <td class="tdr">30½</td> + </tr><tr> + <td class="tdc">1901</td> + <td class="tdr">67½</td> + <td class="tdl_ws1">51¾</td> + <td class="tdr">36  </td> + </tr><tr> + <td class="tdc">1902</td> + <td class="tdr">88  </td> + <td class="tdl_ws1">65⅞</td> + <td class="tdr">43¾</td> + </tr><tr> + <td class="tdc">1903</td> + <td class="tdr">53  </td> + <td class="tdl_ws1">47</td> + <td class="tdr">41  </td> + </tr><tr> + <td class="tdc">1904</td> + <td class="tdr">58⅛</td> + <td class="tdl_ws1">50⁷/₁₆</td> + <td class="tdr">42¾</td> + </tr><tr> + <td class="tdc">1905</td> + <td class="tdr">64½</td> + <td class="tdl_ws1">53¼</td> + <td class="tdr">42  </td> + </tr><tr> + <td class="tdc">1906</td> + <td class="tdr">54¾</td> + <td class="tdl_ws1">46¾</td> + <td class="tdr">39  </td> + </tr> + </tbody> +</table> + +<p>The average price of wheat in the first year (1896) was 73 ¹¹/₁₆ in +standard format, in the two following years very high prices were +established, and the average may be considered abnormal, as the years +1897 and 1898 cover the rise and fall of Joseph Leiter. +<span class="pagenum" id="Page_147">[Pg 147]</span></p> + +<div class="figcenter"> + <p class="f110 spa1"><b>FLUCTUATIONS OF WHEAT PRICES<br> FOR TEN YEARS.</b></p> + <p class="center">(The rims of the circles touch the high and<br> + low prices of wheat each year for 10 years.)</p> + <img src="images/i_147.jpg" alt="" width="500" height="513" > + <p class="spb2">Reproduced, by permission, from <span class="smcap">Moody’s Magazine</span> + of August, 1906.</p> +</div> + +<p><span class="pagenum" id="Page_148">[Pg 148]</span> +To digress for a moment, it may be interesting to note that efforts +to carry prices beyond reasonable limits almost invariably result in +disaster to the promoters, no matter how far they may be successful +in establishing black-board quotations. With the exception of “Old +Hutch” wheat corner in 1888, all the numerous attempts to speculate +successfully on wholly artificial prices in commodities, have failed. +The Sully cotton campaign, the Leiter wheat deal, the Phillips corn +deal, the Coster-Martin corn deal, all ended in ruin for their sponsors.</p> + +<p>From 1899 to 1901 inclusive, the average price of wheat was a little +above 70 cents, in 1902 and 1903 it rose to 80 cents, and in 1904 and +1905 to $1.00.</p> + +<p>In the latter years, allowance must again be made for unusual +influences, the Russo-Japanese war naturally helping wheat prices; +making due allowance for this, it may be fairly considered that wheat +has in the last ten years increased its average selling price from +about 70 cents to 90 cents, or approximately 30%.</p> + +<p class="center"><i>Why Corn Has Risen More Than Wheat.</i></p> + +<p>Corn prices in the same period have advanced 100%; the comparatively +large number of uses to which corn is put may partly account for the +disproportionate enhancement of its price, but the discrepancy is too +great to be entirely explained away on this account. It is necessary to +seek some additional and more powerful reason. +<span class="pagenum" id="Page_149">[Pg 149]</span></p> + +<div class="figcenter"> + <p class="f110 spa1"><b>FLUCTUATIONS OF CORN PRICES<br> FOR TEN YEARS.</b></p> + <p class="center">(The rims of the circles touch the high and<br> + low prices of corn each year for 10 years.)</p> + <img src="images/i_149.jpg" alt="" width="500" height="550" > + <p class="spb2">Reproduced, by permission, from <span class="smcap">Moody’s Magazine</span> + of May, 1906.</p> +</div> + +<p><span class="pagenum" id="Page_150">[Pg 150]</span> +The following statistical facts will make it clear that corn and wheat +are in wholly different positions.</p> + +<p>The United States raised, in 1905, 693,000,000 bushels of wheat. +The world’s wheat crop in the same year was 3,275,200,000 bushels. +Therefore, we raised approximately 21% of the world’s wheat crop. The +year 1905 is fairly indicative of the proportions for the last ten +years.</p> + +<p>The acreage of wheat in the United States in 1896 was 43,618,646; in +1905 it was 47,854,079, an increase of 38%.</p> + +<p>The world’s wheat acreage as indicated by production, is increasing at +about the same rate as is the acreage of the United States.</p> + +<p>The United States raised, in 1905, 2,708,000,000 bushels of corn. The +world’s corn crop was 3,396,800,000; therefore, we raised 80% of the +world’s corn.</p> + +<p>The corn acreage of the United States in 1896 was 81,027,156; in 1905 +it was 94,011,369, an increase of 16%. The world’s corn acreage, as +shown by production, did not keep pace with our own ratio of increase, +but remained almost stationary. +<span class="pagenum" id="Page_151">[Pg 151]</span></p> + +<p>These figures show that the world is depending on the United States +for only 21% of its wheat, and that wheat acreage the world over has +increased about 38% in ten years; but the world is depending on the +United States for 80% of its corn, and the world’s corn acreage has +increased less than 16%.</p> + +<p>In order to grasp the full significance of these figures, our practical +monopoly of corn production must be appreciated. Even if we admit an +equal ratio of increase in corn acreage the world over, it remains for +the United States to provide 80% of the increase.</p> + +<p class="center"><i>Corn Area Limited.</i></p> + +<p>The probability of any considerable area of new corn land being +exploited, either at home or abroad, is very small. A recent circular +letter by a man prominent in the cash corn trade, states that there is +not an uncultivated acre of available corn land in the United States. +This is a radical statement, and does not allow for the fact that with +a sufficient price stimulus, considerable wheat, or even cotton land, +would be diverted to corn. But whatever allowances are made for an +increased corn production, it must be admitted that the possibilities +are largely confined to the United States. +<span class="pagenum" id="Page_152">[Pg 152]</span></p> + +<p>Wheat acreage is not thus circumscribed; in fact, the case is +practically reversed; almost 80% of the natural increase in wheat +production will come from outside our boundaries. Of the principal +wheat producing countries,—France, Germany, Russia, Poland and +Caucasus, Italy, Hungary, Spain, Roumania and Argentine Republic—the +two first named alone fail to keep pace with the United States in ratio +of increased production, and others have made up the deficit of these +two laggards.</p> + +<p>In a nutshell, the difference between the relative positions of wheat +and corn is this: The world’s supply of wheat will be furnished by the +world, while the world’s supply of corn must be furnished by the United +States.</p> + +<p>It appears, therefore, that while wheat and corn may both be expected +to gradually seek a higher average price in sympathy with the general +upward trend, corn is affected by a specific influence, the effects of +which must be added to the homogeneous advance.</p> + +<p>It is not possible that the supply of corn should increase as rapidly +as the demand, under the circumscribed conditions herein set forth. As +has already been suggested, the price of corn may become attractive +enough to cause the diversion of wheat and cotton lands to corn +growing. The possibilities of such a course, however, are not only +limited by nature, but such action would stop itself at a certain point +<span class="pagenum" id="Page_153">[Pg 153]</span> +by decreasing the supply of wheat or cotton, and again restoring them +to favor with the planter.</p> + +<p>The speculator may, therefore, reasonably believe that corn is +destined, eventually, to reach much higher prices. He must, of course, +allow for the temporary influences of large and small crops, and the +numerous other actual and technical conditions which cause intermediate +fluctuations, and must furthermore bear steadily in mind the fact that +there is a limit beyond which the price of corn can never be sustained.</p> + +<p>When a given commodity goes beyond a price where it can be replaced by +another commodity, it has gone too far; and when necessities become +luxuries, they take their places as such, and demand slackens. +<span class="pagenum" id="Page_154">[Pg 154]</span></p> + +<div class="figcenter"> + <p class="f110 spa1"><b>FLUCTUATIONS OF COTTON PRICES<br> FOR TEN YEARS.</b></p> + <p class="center">(The rims of the circles touch the average high and<br> + low price of cotton each year for 10 years.)</p> + <img src="images/i_154.jpg" alt="" width="500" height="681" > + <p class="spb2">Reproduced, by permission, from <span class="smcap">Moody’s Magazine</span> + of June, 1906.</p> +</div> + +<p><span class="pagenum" id="Page_155">[Pg 155]</span></p> +<h3 id="COTTON"><i>Cycles of Cotton Speculation.</i><a id="FNanchor_6" href="#Footnote_6" class="fnanchor">[6]</a></h3> + +<p>The accompanying chart, formed on the same plan as the diagram +illustrating the movements of stocks in Moody’s Magazine for May, +develops some interesting features in the movements of Cotton for the +last ten years.</p> + +<p>For the benefit of those readers who did not follow the stock chart, it +may be said that each circle represents the fluctuations for a single +year. The bottom rim of the circle rests on the lowest price during the +period, and the top rim on the highest price. The average price is, of +course, established at the axis.</p> + +<p>The chart illustrates speculative extremes in cotton, the figures on +which it is based are not the prices of Spot cotton, but extreme high +or low prices for all options. The result, however, would have been +only slightly changed had Spot cotton prices been employed.</p> + +<p>The diagram is based on fluctuations of 25 points, or ¼ cent per +pound; the prices shown, therefore, are not exact, but they serve to +illustrate comparative movements with sufficient accuracy. The high and +<span class="pagenum" id="Page_156">[Pg 156]</span> +low figures are not those of a calendar year, but of a fiscal, or crop +year, ending August 31 of the years named; thus the prices for 1896 +represent the fluctuations of the season 1896-1897. As production is +necessarily a vital factor in making prices, this method was adopted to +prevent confusion in examining the price effects of lean or abundant +production. The range of prices for the period considered (1896 to 1906 +inclusive), was as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdl">Season </th> + <th class="tdc"> High </th> + <th class="tdc"> Average </th> + <th class="tdc"> Low </th> + <th class="tdc"> Fluctuation</th> + </tr></thead> + <tbody><tr> + <td class="tdl">1896-97</td> + <td class="tdc"> 8.50</td> + <td class="tdc">7.59</td> + <td class="tdc">6.69</td> + <td class="tdc">1.81</td> + </tr><tr> + <td class="tdl">1897-98</td> + <td class="tdc"> 7.50</td> + <td class="tdc">6.50</td> + <td class="tdc">5.62</td> + <td class="tdc">1.88</td> + </tr><tr> + <td class="tdl">1898-99</td> + <td class="tdc"> 6.73</td> + <td class="tdc">5.84</td> + <td class="tdc">4.96</td> + <td class="tdc">1.77</td> + </tr><tr> + <td class="tdl">1899-00</td> + <td class="tdc">10.00</td> + <td class="tdc">8.38</td> + <td class="tdc">6.76</td> + <td class="tdc">3.24</td> + </tr><tr> + <td class="tdl">1900-01</td> + <td class="tdc">10.60</td> + <td class="tdc">8.80</td> + <td class="tdc">7.01</td> + <td class="tdc">3.59</td> + </tr><tr> + <td class="tdl">1901-02</td> + <td class="tdc"> 9.67</td> + <td class="tdc">8.51</td> + <td class="tdc">7.35</td> + <td class="tdc">2.32</td> + </tr><tr> + <td class="tdl">1902-03</td> + <td class="tdc">13.75</td> + <td class="tdc">10.81 </td> + <td class="tdc">7.87</td> + <td class="tdc">5.88</td> + </tr><tr> + <td class="tdl">1903-04</td> + <td class="tdc">17.46</td> + <td class="tdc">13.23 </td> + <td class="tdc">9.01</td> + <td class="tdc">8.45</td> + </tr><tr> + <td class="tdl">1904-05</td> + <td class="tdc">11.15</td> + <td class="tdc">8.77</td> + <td class="tdc">6.39</td> + <td class="tdc">4.76</td> + </tr><tr> + <td class="tdl">1905-06</td> + <td class="tdc">12.54</td> + <td class="tdc">10.93 </td> + <td class="tdc">9.32</td> + <td class="tdc">3.22</td> + </tr><tr> + <td class="tdl">1906-07</td> + <td class="tdc">11.30</td> + <td class="tdc">9.95</td> + <td class="tdc">8.60</td> + <td class="tdc">2.70</td> + </tr> + </tbody> +</table> + +<p>In the first three years considered we find low prices, and naturally +restricted speculation. The speculative price range for the entire +three year period is only a shade more than 3½ cents per pound. This +was occasioned by two things; first, the general depression following +the panic of 1893, and second, over-production. An examination of the +prices of staples shows that unusually low figures prevailed in 1898 and +1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents in +<span class="pagenum" id="Page_157">[Pg 157]</span> +1898. Wheat shows high average prices, but the showing is a result of +fictitious speculative figures established by the Leiter deal, and +cannot be considered a fair criterion. It may be added, however, that +wheat sold as low as 64 cents in 1897, and 62 cents in 1898.</p> + +<p>The question of over-production will be made apparent by reference to +the following table:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdl">Season</th> + <th class="tdr">  Crops in Bales</th> + </tr></thead> + <tbody><tr> + <td class="tdl">1896-97</td> + <td class="tdr">8,714,000</td> + </tr><tr> + <td class="tdl">1897-98</td> + <td class="tdr">11,180,000</td> + </tr><tr> + <td class="tdl">1898-99</td> + <td class="tdr">11,235,000</td> + </tr><tr> + <td class="tdl">1899-00</td> + <td class="tdr">9,439,000</td> + </tr><tr> + <td class="tdl">1900-01</td> + <td class="tdr">10,425,000</td> + </tr><tr> + <td class="tdl">1901-02</td> + <td class="tdr">10,701,000</td> + </tr><tr> + <td class="tdl">1902-03</td> + <td class="tdr">10,758,000</td> + </tr><tr> + <td class="tdl">1903-04</td> + <td class="tdr">10,123,000</td> + </tr><tr> + <td class="tdl">1904-05</td> + <td class="tdr">13,556,000</td> + </tr><tr> + <td class="tdl">1905-06</td> + <td class="tdr">10,697,000</td> + </tr><tr> + <td class="tdl">1906-07</td> + <td class="tdr">13,000,000</td> + </tr> + </tbody> +</table> + +<p>Prior to 1897 no crop of over 10,000,000 bales had ever been made; +the two bumper crops, 1897-98 and 1898-99 coming together, naturally +brought about very low prices, particularly as they occurred in a +period of general depression.</p> + +<p>In the season next following, 1899-1900, there is a marked falling off +in production, which is again reflected in a higher average price. But +from that time on, we do not find prices and production in such perfect accord. +<span class="pagenum" id="Page_158">[Pg 158]</span></p> + +<p>It is generally considered now that 10,500,000 bales is a fair crop. In +the four seasons from 1900-01 to 1903-04 inclusive, we raised normal +crops, while prices advanced. It would be manifestly unfair to consider +the year 1903-04 as reflecting with any degree of accuracy the normal +price of cotton, for in that period occurred the disastrous Sully +campaign. Making due allowance for this, however, it may be assumed +that prices would have advanced if no such deal had occurred. This +statement is supported by the fact that the bursting of the bubble did +not put prices below 9 cents at any time.</p> + +<p>Now the most important part of the period is reached, the seasons of +1904-05 and 1905-06.</p> + +<p>In 1904-05, in the face of an unprecedented crop of 13,600,000 bales, +and in spite of the depressing influence of a speculative debauch in +the previous year, the average price of cotton was 8¾ cents.</p> + +<p>Still later, in 1905-06, a crop only a little below normal was raised +and sold at an average price of 10.93.</p> + +<p>Eliminating speculative extremes, and the temporary effects of large or +small crops, it appears that the price of cotton is steadily advancing. +This is the principal fact for the speculator to consider.</p> + +<p>No one pretends to dispute the fact that the prices of all staple-food +<span class="pagenum" id="Page_159">[Pg 159]</span> +stuffs, metals and other commodities, as well as labor, have advanced +materially in the last ten years. Yet the ordinary speculator ignores +this broad general principle, and seeks specific causes for the +readjustment in cotton prices. And even this research is seldom +conducted intelligently. The investigator attempts to explain higher +cotton prices by pointing to reduction of acreage, diversification of +crops and organizations formed for the purpose of withholding supplies +from the market. He disregards the fact that while these influences +play some small part in the matter, cotton is also seeking a higher +level in common with every commodity that is bought and sold.</p> + +<p>The contention is frequently heard that 10,500,000 bales, or even +11,000,000 bales of cotton can no longer be considered an average crop; +that the supply should steadily increase in order to keep pace with +consumptive demand, and that the crop of 1904-05 was therefore small, +and the crop of 1903-04 not so large as it would appear. As this is the +most common of the numerous explanations offered as to the recent high +prices of cotton, it will be briefly discussed.</p> + +<p>In order to arrive at a clear view of the ratio of increase in +production, a considerable period must be consulted. The statistics of +<span class="pagenum" id="Page_160">[Pg 160]</span> +crops from year to year, or even from two or three years, will not do. +Let us cover a long period, jumping ten years at a time.</p> + +<table class="spb1"> + <thead><tr> + <th class="tdl">Season</th> + <th class="tdr">  Crops in Bales</th> + </tr></thead> + <tbody><tr> + <td class="tdl">1860-61</td> + <td class="tdr">3,849,469</td> + </tr><tr> + <td class="tdl">1870-71</td> + <td class="tdr">4,352,317</td> + </tr><tr> + <td class="tdl">1880-81</td> + <td class="tdr">6,605,750</td> + </tr><tr> + <td class="tdl">1890-91</td> + <td class="tdr">8,652,597</td> + </tr><tr> + <td class="tdl">1900-01</td> + <td class="tdr">10,383,432</td> + </tr> + </tbody> +</table> + +<p>This exhibit shows that if a sufficiently long period is consulted, +a steady increase in production is shown; the average production is +also well maintained in the five years from 1901-02 to 1905-06, if the +bumper crop of 1904-05 is distributed over the entire period.</p> + +<p>The contention is all right, but its formulators do not take the pains +to ascertain that what they claim <i>should</i> occur, is exactly what +<i>has</i> occurred.</p> + +<p>The gist of the whole matter is this: regardless of all temporary or +artificial influences, some powerful force, not related to supply and +demand, is shouldering prices steadily upward.</p> + +<p>To the speculator this fact recognized, analyzed, and properly applied +should be of incalculable benefit. If he understands <i>why</i> prices +have been advancing, he will be able to determine with facility how +long the influence will probably endure. Instead of being misled, or +rendered over-cautious by obsolete records of the past, he will be able +<span class="pagenum" id="Page_161">[Pg 161]</span> +to calculate from these obsolete records the reasonable expectations of +the future. Temporary changes will, of course, be brought about by +temporary causes. Fundamental values will still be influenced by supply +and demand, but if an independent and submerged force is also at work, +due allowance must be made for its operation.</p> + +<p>That such a force <i>is</i> at work is written large between the lines +of compiled statistics; to ignore its existence is an error rank with +mischief. The speculator who does not consult this influence may easily +make the mistake of selling at low prices because they are high by +comparison with prices which obtained a few years ago.</p> + +<p>On the other hand, a clear understanding of the matter will enable the +trader to decide with more or less accuracy what now constitutes a low +price for cotton, and what will be the probable price for the future. +<span class="pagenum" id="Page_162">[Pg 162]</span></p> + +<p><span class="pagenum" id="Page_163">[Pg 163]</span></p> +<h3><i>Conclusion.</i></h3> + +<p>The questions most frequently asked by inexperienced people are as +follows:</p> + +<div class="blockquot"> +<p class="neg-indent">1—What margins are necessary to reasonable safety?</p> +<p class="neg-indent">2—Is it better to study the entire list or make a + specialty of one stock?</p> +<p class="neg-indent">3—What class of securities is the safest?</p> +<p class="neg-indent">4—What may be considered a fair rally or reaction in + stock prices under ordinary circumstances?</p> +<p class="neg-indent">5—What is the best general method of trading?</p> +</div> + +<p>Some of these questions have been answered in the preceding chapters, +but they will be taken up here in turn and the writer’s views submitted +on each head.</p> + +<p>1—What margins are necessary to reasonable safety?</p> + +<p>There is no unqualified answer to this question. The price of the +shares operated in must be considered. All other things being equal, +a stock selling at $50 would require only half the margin employed in +operating in a security selling at $100. If the $50 stock declines +<span class="pagenum" id="Page_164">[Pg 164]</span> +25 points, it has suffered a quoted loss of half its value. The $100 +stock, however, must decline 50 points to suffer an equal loss. This +percentage of advance or decline is established with remarkable +fidelity in every considerable movement.</p> + +<p>If the scale order is employed as a method of accumulating shares, +extraordinary marginal provisions must be made, for even as the line +acquired increases, the original margin dwindles. The scale order +is, or should be, based on the assumption that a temporary decline +below the first purchase price is desirable and is necessary to the +best results. This fact, however, should never be contorted in such a +manner as to instigate purchases at high prices. If the operator who +employs the scale order will try to make the first purchase at what +he considers a bargain price, or in other words at what he calculates +to be the very bottom of a movement, he will surely find that in nine +cases out of ten, his own errors or the velocity which frequently +carries prices to ridiculously low or high points will enable him to +accumulate his line to advantage. The scale order should never be used +on its mechanical merits alone, but merely as a method of averaging.</p> + +<p>It goes without saying that marginal necessities will be principally +<span class="pagenum" id="Page_165">[Pg 165]</span> +gauged by the correctness of the speculator’s general views. It is the +writer’s opinion, that if care and intelligence is used in judging +values, conditions, and the stages of the market, a margin of 20% will +be sufficient in almost all cases. That is to say, 20 points on a +stock selling at par and 10 points on a stock selling at 50. It must +be distinctly understood, however, that this opinion contemplates +purchases at low prices after a decline has occurred; and when both the +technical and general conditions warrant purchases.</p> + +<p>The late Charles H. Dow fixed the sum of $2,500 as the minimum amount +necessary to safe operating in ten share lots, but this sum, or any +other for that matter, is an arbitrary estimate. Mr. Dow’s figure was +founded on the necessity of averaging and also upon a most laudable +caution and conservatism which, however, might at times result in +unnecessary restriction of operations at a most favorable period. +There are times when $500 might be safely made the basis of trading in +certain stocks; there are other times and other stocks where $2,500 +would be wholly insufficient.</p> + +<p>While no rule of thumb is possible in this regard, it is the writer’s +opinion that there is no necessity for being out in calculations more +than 20%, provided always that due care has been exercised in basing +such calculations. +<span class="pagenum" id="Page_166">[Pg 166]</span></p> + +<p>2—Is it better to study the entire list or make a specialty of one +security?</p> + +<p>It is better to examine the conditions and prices of all the leading +securities. This is the only method by which <i>comparative</i> values +may be arrived at. It is frequently the case, particularly after +a comprehensive decline or a panic, that certain excellent shares +have suffered almost as much as the more questionable securities. +At such times, what we want is not only a good bargain but the best +bargain obtainable, and this may be secured more readily by a careful +comparison of prices, values and income return than by any other method.</p> + +<p>Again, in an upward movement stocks generally advance, not +homogeneously, but one at a time or in closely related groups. Certain +shares may have a reasonable advance while others hang fire. If we have +good reason to believe we are on the eve of a great bull movement, the +best results may be attained by a process of rotation in trading.</p> + +<p>3—What class of securities is the safest?</p> + +<p>Railroad stocks are the soundest securities. The danger of competition +is not so great; the assets are more tangible and when once the +specific influences which are now working against them have been cured +or eliminated, as they certainly will be in time, these shares will +show a steady improvement both in value and price. At times the very +<span class="pagenum" id="Page_167">[Pg 167]</span> +best stock will suffer severely and much pessimistic talk will be +heard of receiverships, etc. That is the time to buy. Lord Rothschild +once advised a friend to buy French rentes. “But the streets of Paris +are running with blood,” replied the recipient of the advice. “That,” +responded Rothschild, “is the reason you can buy rentes so cheaply.” +The man who purchases the shares of railroads when they are greatly +depressed may rest serenely in the consciousness that the future of +American railroads is assured and that measures seeking to obstruct +progress or prevent fair returns on investments, either in the way of +income on money or the natural accretion of values cannot possibly endure.</p> + +<p>4—What may be considered a fair rally or reaction in stock prices?</p> + +<p>Here again the question of ruling prices of a certain stock are to be +considered. Low-priced stocks always move in a narrower range than do +higher priced ones. The extent of a probable comparative movement may +be gauged by percentages with a fair degree of accuracy. This method of +measuring a comparative advance or decline, however, will be frequently +disturbed by specific influences bearing on a certain stock or group of stocks. +<span class="pagenum" id="Page_168">[Pg 168]</span></p> + +<p>It is useless to undertake to establish even a rough rule for ordinary +movements by a system of averages culled from history. We find that in +the course of ten years the rallies and reactions which appeared were +so varied in character both as to the extent in points and the duration +in days, that a barometrical average founded on such investigation +would be empirical. However, the results of this inductive reasoning +will be given for what they are worth.</p> + +<p>The principal movements for ten years have been as follows:</p> + +<p class="f110"><b><i>1.—The Bull Market of 1897 to 1899.</i></b></p> + +<p>This advance began in April, 1897, and terminated in April, 1899—two +years of advancing prices. The average advance in Industrial shares was +38.79 points, or about 100%. Railroads advanced 38.92 points, or about 80%.</p> + +<p>The intermediate reactions were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Reaction</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Sept. 10 to Nov. 8, ’97</td> + <td class="tdc">10.17 </td> + <td class="tdc">9.78</td> + <td class="tdc">59</td> + </tr><tr> + <td class="tdl">Jan. 7 to Mar. 25, ’98</td> + <td class="tdc">8.67</td> + <td class="tdc">10.43 </td> + <td class="tdc">78</td> + </tr><tr> + <td class="tdl">Jun. 10 to Jun. 16, ’98</td> + <td class="tdc">2.84</td> + <td class="tdc">2.93</td> + <td class="tdc"> 7</td> + </tr><tr> + <td class="tdl">Aug. 26 to Oct. 19, ’98</td> + <td class="tdc">9.41</td> + <td class="tdc">4.41</td> + <td class="tdc">54</td> + </tr><tr> + <td class="tdl">Jan. 30 to Feb. 7, ’99</td> + <td class="tdc">3.07</td> + <td class="tdc">3.38</td> + <td class="tdc"> 8</td> + </tr> + </tbody> +</table> + +<p class="f110 spa2"><b><i>2.—The Bear Market of 1899-1900.</i></b></p> + +<p>This decline began May 1st, 1899, and culminated Sept. 24, 1900—17 +<span class="pagenum" id="Page_169">[Pg 169]</span> +months. The average gross decline in Industrial shares was 24.32 +points, or about 32%, and in Rails, 13.27 points, or about 18%.</p> + +<p>Intermediate rallies were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Rally</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">May 31 to Sep. 5, ’99</td> + <td class="tdc">10.10 </td> + <td class="tdc">8.17</td> + <td class="tdc">97</td> + </tr><tr> + <td class="tdl">Dec. 18, ’99, to Jan. 2, ’00</td> + <td class="tdc">9.86</td> + <td class="tdc">6.38</td> + <td class="tdc">16</td> + </tr><tr> + <td class="tdl">Jan. 11 to Feb. 5, ’00</td> + <td class="tdc">5.09</td> + <td class="tdc">4.56</td> + <td class="tdc">26</td> + </tr><tr> + <td class="tdl">Mar. 9 to Apr. 6, ’00</td> + <td class="tdc">5.04</td> + <td class="tdc">5.22</td> + <td class="tdc">29</td> + </tr><tr> + <td class="tdl">May 15 to June 1, ’00</td> + <td class="tdc">2.76</td> + <td class="tdc">3.42</td> + <td class="tdc">17</td> + </tr><tr> + <td class="tdl">June 23 to July 23, ’00</td> + <td class="tdc">5.34</td> + <td class="tdc">4.56</td> + <td class="tdc">31</td> + </tr><tr> + <td class="tdl">July 31 to Aug. 15</td> + <td class="tdc">2.10</td> + <td class="tdc">2.31</td> + <td class="tdc">16</td> + </tr> + </tbody> +</table> + +<p class="f110 spa2"><b><i>3.—The Bull Market of 1901.</i></b></p> + +<p>The advance began Oct. 1, 1900, and culminated Aug. 26, 1901, 11 +months. The average advance in Industrial shares was 20.87 points, or +about 39%. The average advance in Rails was 37.92 points, or about 51%.</p> + +<p>Intermediate reactions were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Reaction</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Nov. 20 to Dec. 8, ’00</td> + <td class="tdc">5.09</td> + <td class="tdc">1.67</td> + <td class="tdc">19</td> + </tr><tr> + <td class="tdl">Dec. 27, ’00, to Jan. 19, ’01</td> + <td class="tdc">6.29</td> + <td class="tdc">4.39</td> + <td class="tdc">24</td> + </tr><tr> + <td class="tdl">May 1 to May 9</td> + <td class="tdc">7.55</td> + <td class="tdc">14.49 </td> + <td class="tdc"> 9</td> + </tr><tr> + <td class="tdl">June 17 to July 15</td> + <td class="tdc">8.80</td> + <td class="tdc">11.30 </td> + <td class="tdc">29</td> + </tr><tr> + <td class="tdl">July 29 to Aug 6</td> + <td class="tdc">3.89</td> + <td class="tdc">6.64</td> + <td class="tdc"> 9</td> + </tr> + </tbody> +</table> + +<p><span class="pagenum" id="Page_170">[Pg 170]</span></p> + +<p class="f110 spa2"><b><i>4.—The Movement of 1902.</i></b></p> + +<p>The year 1902 is particularly interesting, as it shows what occurred in +the market the year prior to a period of industrial relaxation. This +year cannot be called either a bull or bear year, as while railroad +stocks advanced and closed the year with net gains, the Industrial +stocks suffered material declines. As the declines in Industrial stocks +was greater than the advance in Rails, we will arbitrarily designate +the year as a bear period and examine the homogeneous movement for +rallies, instead of reactions.</p> + +<p>From Dec. 12, 1901, to Dec. 15, 1902, Industrial shares declined 5.74 +points and rails advanced 3 points.</p> + +<p>Intermediate rallies were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Rally</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Feb. 20 to Mar. 21, ’02</td> + <td class="tdc">2.84</td> + <td class="tdc">3.45</td> + <td class="tdc">30</td> + </tr><tr> + <td class="tdl">Apr. 10 to Apr. 24</td> + <td class="tdc">2.49</td> + <td class="tdc">4.91</td> + <td class="tdc">15</td> + </tr><tr> + <td class="tdl">May 19 to May 24</td> + <td class="tdc">2.09</td> + <td class="tdc">3.99</td> + <td class="tdc"> 6</td> + </tr><tr> + <td class="tdl">June 24 to July 28</td> + <td class="tdc">3.61</td> + <td class="tdc">7.44</td> + <td class="tdc">35</td> + </tr><tr> + <td class="tdl">Aug. 21 to Sept. 19</td> + <td class="tdc">2.44</td> + <td class="tdc">4.05</td> + <td class="tdc">30</td> + </tr><tr> + <td class="tdl">Sept. 29 to Oct. 3</td> + <td class="tdc">2.51</td> + <td class="tdc">4.37</td> + <td class="tdc"> 5</td> + </tr><tr> + <td class="tdl">Oct. 11 to Oct. 17</td> + <td class="tdc">2.73</td> + <td class="tdc">4.96</td> + <td class="tdc"> 7</td> + </tr><tr> + <td class="tdl">Nov. 14 to Nov. 21</td> + <td class="tdc">2.32</td> + <td class="tdc">4.80</td> + <td class="tdc"> 8</td> + </tr> + </tbody> +</table> + +<p class="f110 spa2"><b><i>5.—The Bear Market of 1903.</i></b></p> + +<p>This decline began Jan. 8, 1903, and culminated Nov. 9th, of the year, +10 months. The average gross decline in Industrial shares was 24.18 +<span class="pagenum" id="Page_171">[Pg 171]</span> +points, or about 36½%. The decline in Rails was 32.48 points, or about 27%.</p> + +<p>The intermediate rallies were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Rally</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Jan. 20 to Feb. 16, ’03</td> + <td class="tdc">3.51</td> + <td class="tdc">1.38</td> + <td class="tdc">28</td> + </tr><tr> + <td class="tdl">Mar. 10 to Mar. 20</td> + <td class="tdc">1.85</td> + <td class="tdc">3.11</td> + <td class="tdc">11</td> + </tr><tr> + <td class="tdl">Apr. 13 to Apr. 30</td> + <td class="tdc">3.77</td> + <td class="tdc">5.07</td> + <td class="tdc"> 9</td> + </tr><tr> + <td class="tdl">June 10 to June 12</td> + <td class="tdc">2.60</td> + <td class="tdc">4.48</td> + <td class="tdc"> 3</td> + </tr><tr> + <td class="tdl">Aug. 8 to Aug. 17</td> + <td class="tdc">6.50</td> + <td class="tdc">8.14</td> + <td class="tdc">10</td> + </tr> + </tbody> +</table> + +<p class="f110 spa2"><b><i>6.—The Bull Market of 1904 and 1905.</i></b></p> + +<p>The advance began Jan. 6, 1904, and culminated Jan. 22, 1906—a little +over two years. The average advance in Industrial shares was 55.93 +points, or about 119%. The average advance in Rails was 49.56 points, +or about 55%.</p> + +<p>The intermediate reactions were as follows:</p> + +<table class="spb1"> + <thead><tr> + <th class="tdc_bott">Date of Reaction</th> + <th class="tdc">Extent in<br> Industrials <br>Points</th> + <th class="tdc"> Extent in <br>Rails<br>Points</th> + <th class="tdc_bott"> Duration<br>Days</th> + </tr></thead> + <tbody><tr> + <td class="tdl">Jan. 27 to Feb. 24, ’04</td> + <td class="tdc">3.79</td> + <td class="tdc">4.17</td> + <td class="tdc">29</td> + </tr><tr> + <td class="tdl">Apr. 7 to May 18</td> + <td class="tdc">2.55</td> + <td class="tdc">4.03</td> + <td class="tdc">42</td> + </tr><tr> + <td class="tdl">Dec. 5 to Dec. 12</td> + <td class="tdc">7.46</td> + <td class="tdc">5.93</td> + <td class="tdc"> 8</td> + </tr><tr> + <td class="tdl">Apr. 14, ’05, to May 8, ’05</td> + <td class="tdc">9.23</td> + <td class="tdc">9.81</td> + <td class="tdc">25</td> + </tr><tr> + <td class="tdl">May 12 to May 22</td> + <td class="tdc">6.68</td> + <td class="tdc">5.50</td> + <td class="tdc">11</td> + </tr><tr> + <td class="tdl">Aug. 23 to Sept. 7</td> + <td class="tdc">4.22</td> + <td class="tdc">4.82</td> + <td class="tdc">16</td> + </tr><tr> + <td class="tdl">Nov. 1 to Nov. 13</td> + <td class="tdc">3.31</td> + <td class="tdc">4.74</td> + <td class="tdc">13</td> + </tr> + </tbody> +</table> + +<p>The year 1906 was a neutral year. Prices for Industrials declined only +slightly during the year and average prices of railroad stocks were the +same in December as in January. Money could have been made throughout +<span class="pagenum" id="Page_172">[Pg 172]</span> +the period, either by sales on rallies, or purchases on declines. As a +consideration of a neutral year would add little to this exhibit, it +will be omitted.</p> + +<p>5.—What is the best general method of trading?</p> + +<p>The writer’s reply to this question consists principally of a summing +up of points already covered in other portions of this work. It is +necessary to study and understand the subject thoroughly, to know +values, general conditions, the technical position of shares, and +above all things to consult future probabilities rather than past +performances. Study of the past has its educational value and this is +also true of the present, but the future is the all-important thing. +Retrospective speculation is one of the commonest and most flagrant +of the numerous errors made by public participators. Get whatever of +experience and information you can from history, but <i>speculate</i> +on the <i>future</i>.</p> + +<p>The man who enters the market with insufficient capital, who expects +to get rich quick or who allows success to lead him into excesses and +over-speculation will lose. It is as certain as death. He may succeed +for a time but not for long.</p> + +<p>Operations based on “tips” or “charts” will lead to final disaster. +This thing of trying to attribute habits to a market is, in the +<span class="pagenum" id="Page_173">[Pg 173]</span> +writer’s opinion, ridiculous. The movements of prices are caused +by events. We know that in periods of financial stringency or +business depression prices fall, and in periods of inflation and +good times prices rise. It is possible to formulate a system founded +on repetitions applicable to every game of chance, and laid out on +paper, that system will appear infallible. You can find the exponents +of machine-made riches in every pool-room and gambling house in the +country. They all eventually lose and there is nothing to show that +the advocates of charts as a basis for stock trading ever fared any +better. Imagine James R. Keene, or J. P. Morgan poring over a chart and +operating thereon. Even if the market did have habits, as soon as these +habits were recognized and followed by a sufficient number of people, +the technical position would be rendered so rotten that the charts +would fail from that influence alone. Charts, employed as a convenient +method of picturing the past, may have a certain value, but used as +a basis for trading they are an evidence of laziness or incapacity, +or both. It requires hard work to be successful in any line. Thinking +is hard work, study is hard work, research is hard work; and it is +infinitely easier to bet on repetitions all nicely laid out in crooked +lines on a sheet of paper than to laboriously erect sound deductions; +<span class="pagenum" id="Page_174">[Pg 174]</span> +but the difference in the two methods is that one will succeed and the +other will fail.</p> + +<p>We may also resort to the ultimatum employed by those eminent +citizens who punch each other’s noses in a prize-ring, i.e., tell the +chart-players to “go and get a reputation.” When they can show even one +instance of a fortune accumulated by this method their cause will be +greatly strengthened.</p> + +<p>In the exception taken to Mr. Dow’s theory of $2,500 being the minimum +amount necessary for operations in small lots, nothing could be further +from the present writer’s intentions than to recommend transactions on +insufficient margin. What is sought is merely the truth. The contention +that it is wise to stimulate extreme conservatism will not hold. If the +naming of a certain sum far in excess of real needs is praiseworthy, we +may expand the matter indefinitely and name $5,000 or even $10,000, as +the limit.</p> + +<p>But on the other hand, errors on the side of prudence are vastly +preferable to errors on the side of rashness. In this as in all other +things, the golden mean is the really desirable factor.</p> + +<p>As to the best side of the market for operations, it is thought that +the long side offers the greatest opportunities. The long side is +healthier, it is constructive, and almost all the great fortunes made +<span class="pagenum" id="Page_175">[Pg 175]</span> +in the market have been founded on discreet and well-timed purchases. +To adhere to this plan, however, frequently requires long periods of +non-participation, and speculators are not, as a class, very patient. +The man who can so school himself as to await opportunities to purchase +good securities at low prices has by far the best of the bargain. Few +men can do it.</p> + +<p>It is fully realized that a work which defends stock speculation in any +degree, will meet with much criticism. Nevertheless, people <i>will</i> +speculate and if you are one of those who will—do it right.</p> + +<p>It is submitted in concluding this work that if the advice here given +is heeded, i. e., to know <i>what</i> you are buying and <i>why</i>; +to buy only <i>good</i> properties when prices are depressed; to +exercise patience and provide sufficient capital; to eliminate first +and forever the idea that correct deductions mean sudden riches; to use +brains instead of charts, and common-sense instead of tips; in short, +to apply to speculative ventures the same degree of business foresight +and understanding as would be employed in any other business, the evils +and losses which have always been a part of speculative history, would +be diminished if not eliminated.</p> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_176">[Pg 176]</span></p> +<h2 class="nobreak">BIBLIOGRAPHY.</h2> +</div> + +<p>The books named on the following pages have been chosen as the nucleus +of a reference library particularly adapted to the needs of the +speculator. These works have been selected because of their clearness, +soundness and simplicity. There are many other excellent works bearing +directly or indirectly on the subject but these latter will be +suggested as the student progresses and it has been thought best not to +name a large number of books, which might result in confusion as to the +character of the subject matter. The possessor of the works named will +find that he has a very compact, comprehensive and inexpensive little +library, both from an informative and statistical standpoint. +<span class="pagenum" id="Page_177">[Pg 177]</span></p> + +<p class="f110"><b>A B C Series.<br> (The Wall Street Library.)</b></p> + +<p>This collection of six small volumes will be found useful to the +student. The subjects are arranged as follows:</p> + +<ul class="index"> +<li class="isub3">Vol. 1—A B C of Wall Street. By S. A. Nelson.</li> +<li class="isub3">Vol. 2—Anatomy of a Railroad Report. By Thomas F. Woodlock.</li> +<li class="isub3">Vol. 3—A B C of Banks and Banking. By Geo. M. Coffin.</li> +<li class="isub3">Vol. 4—A B C of Stock Speculation. By S. A. Nelson.</li> +<li class="isub3">Vol. 5—A B C of Options and Arbitrages. By S. A. Nelson.</li> +<li class="isub3">Vol. 6—Theory of Stock Exchange Speculation.</li> +</ul> + +<p>The volumes can be procured singly at $1.00 per volume ($1.10 +delivered) or in set of six at $5.00 per set. Volume five is not so +necessary to the speculator as the other five named.</p> + +<p class="f110"><b>THE INVESTORS’ LIBRARY.</b></p> + +<p>This series of five practical handbooks will be found to cover the +several fields of stock, bond and security investments. The books are +arranged as follows: +<span class="pagenum" id="Page_178">[Pg 178]</span></p> + +<div class="blockquot"> +<p class="center"><b>Art of Wall Street Investing.<br> By John Moody.</b></p> + +<p>Mr. Moody possesses the gift of saying things with clearness and +directness, and while this work is addressed rather to investors than +speculators, the two branches are so closely allied that what is of +educational value to the investor cannot but assist the speculator. +The book is No. 1 of the Investors’ Library but is sold separately at +$1.00; delivered, $1.10.</p> + +<p class="center spa1"><b>The Pitfalls of Speculation.<br> By Thomas Gibson.</b></p> +<p class="center">Price, $1.00; delivered, $1.10.</p> + +<p class="center spa1"><b>The Investors’ Primer.<br> By John Moody.</b></p> + +<p>A thoroughly practical description and explanation of the methods +and rules followed by bankers and brokers in judging and dealing in +securities. Price, $1.50; delivered, $1.62.</p> + +<p class="center spa1"><b>Mining Investments and How to Judge Them.<br> By Francis C. Nicholas.</b></p> + +<p>This book is No. 5 of the Investors’ Library and is +an essential to the investor in mining shares. The +price is $1.00; delivered, $1.10.</p> +</div> + +<p>These four books, with The Cycles of Speculation, constituting the +Investors’ Library are supplied in a box and sent to any address in the +United States, Canada or Mexico for $5.00, delivered. +<span class="pagenum" id="Page_179">[Pg 179]</span></p> +<hr class="r10"> + +<div class="blockquot"> +<p class="center spa1"><b>American Railways as Investments.<br> By Carl Snyder.</b></p> + +<p>This is the simplest and most accurate book of its kind. It is +recommended to the student of values as indispensable. The matter +contained is not only comprehensive in scope but is stripped of the +technicalities and involved verbiage which confuses us in most works of +this character. The price is $3.20; delivered, $3.52.</p> + +<p class="center spa1"><b>Copper Handbook.<br> Compiled by Horace J. Stevens.</b></p> + +<p>This volume is indispensable to the operator who handles Copper +stocks, either listed or unlisted. It contains a history and frank +expression of opinion of even the very small corporations. The +book also gives a practical and scientific history of production, +manufacture and distribution of the metal. It is the best work of its +kind. The price is $5.00 in cloth; $7.50 in full morocco, delivered.</p> + +<p class="center spa1"><b>Corporation Finance.<br> By Thomas L. Greene.</b></p> + +<p>This work deals with the methods employed by Corporations in +managing their finances. It is clearly and simply written. The price is +$1.25; delivered, $1.35. +<span class="pagenum" id="Page_180">[Pg 180]</span></p> + +<p class="center spa1"><b>Cotton.<br> By Charles A. Burkett and<br> Clarence H. Poe.</b></p> + +<p>This is about the only work which covers in a practical way the +cultivation, marketing and manufacture of cotton. Price, $2.00; +delivered, $2.20.</p> + +<p class="center spa1"><b>Earning Power of Railroads.<br> By Floyd W. Mundy.</b></p> + +<p>This little volume is published annually and is a handy guide to +Earnings, Capitalization, Mileage, etc. Price, $2.00; delivered, +$2.12.</p> + +<p class="center spa1"><b>Essays in Finance.<br> By Robert Giffen.</b></p> + +<p>This work is clear and readable. It presents in a colloquial style +many valuable facts and suggestions. Price, $3.50; delivered, $3.73.</p> + +<p class="center spa1"><b>Financial Crises.<br> By Theodore E. Burton.</b></p> + +<p>This is a very valuable and necessary work to the student of price +changes. It should be in every speculator’s library. Price, $1.40; +delivered, $1.52.</p> + +<p class="center spa1"><b>Gold Supply and Prosperity.<br> By Byron W. Holt.</b></p> + +<p>A correct understanding of the effects of gold on prices of shares +and commodities is of primary importance to either the investor +or speculator. The book contains papers by Horace White, Maurice +L. Muhleman, Ellis H. Roberts and others of high standing in the +commercial world and Mr. Holt’s own theories and conclusions are +clearly expressed. Price, $1.00; delivered, $1.10. +<span class="pagenum" id="Page_181">[Pg 181]</span></p> + +<p class="center spa1"><b>How Money is Made in Security Investments.<br> By Henry Hall.</b></p> + +<p>This work contains much that is of value to the speculator. Price, +$1.50; delivered, $1.65.</p> + +<p class="center spa1"><b>Manual of Statistics.</b></p> + +<p>This book is very useful to the speculator. It contains tables of +past prices of stocks, cereals, cotton, etc., a brief history of all +leading corporations and much other valuable statistical matter. The +price is $5.00 delivered.</p> + +<p class="center spa1"><b>Money and Currency.<br> By Prof. Joseph French Johnson.</b></p> + +<p>This work is mentioned because of its intelligible nature. No one +can fail to understand the subject as treated by the writer. Price, +$1.75; delivered, $1.93.</p> + +<p class="center spa1"><b>Moody’s Classified Investments.</b></p> + +<p>This book is extremely valuable to the investor. It classifies +securities according to their ownership and we may thus form a quick +judgment of the merits of certain bonds or shares. Price, $10.00 +delivered.</p> + +<p class="center spa1"><b>Moody’s Magazine.<br> Edited by Byron W. Holt.</b></p> + +<p>A national financial monthly. Studies the underlying causes of +market movements in the broad light of world-wide developments, its +finance and economics. Subscription $3.00 per year. +<span class="pagenum" id="Page_182">[Pg 182]</span></p> + +<p class="center spa1"><b>Moody’s Manual of Railroads<br> and Corporation Securities.</b></p> + +<p>This work stands alone in its class and is the accepted standard for +both investors and speculators. It is a library in itself and should be +the basic volume of the student’s collection. Price, $10.00 in cloth; +$12 in full Russia leather, delivered.</p> + +<p class="center spa1"><b>Smith’s Financial Dictionary.<br> By Howard Irving Smith.</b></p> + +<p>This is another work which should be in every library. All the +knotty points and technicalities which perplex the speculator at times +are clearly and fully explained. Price, $4.50; delivered, $4.75.</p> + +<p class="center spa1"><b>Speculation, a Science.<br> By George McLean Irwin.</b></p> + +<p>A small volume containing some interesting points. Price, 30 cents; +by mail, 34 cents.</p> + +<p class="center spa1"><b>Story of Wall Street. (In preparation).<br> By John Moody.</b></p> + +<p>A most interesting history of Wall Street from its inception to the +present day. Price, $3.00; delivered, $3.20.</p> + +<p class="center spa1"><b>The Tariff and the Trusts.<br> By Franklin Pierce.</b></p> + +<p>This is a review of tariff history in various countries with +especial reference to its operation in the United States to protect +trusts and special interests. Price, $1.50; delivered, $1.62.</p> +<span class="pagenum" id="Page_183">[Pg 183]</span> + +<p class="center spa1"><b>The Truth About the Trusts.<br> By John Moody.</b></p> + +<p>A description and analysis of the American trust movement. No other +work on this subject has attracted the widespread attention which has +been given Mr. Moody’s description of all the phenomena which go under +the general name of “the trust movement.” Price, $5.00; delivered, +$5.27.</p> + +<p class="center spa1"><b>Wall Street and the Country.<br> By Charles A. Conant.</b></p> + +<p>This book deals with the higher phases of Wall Street ethics and +affairs, Undigested Securities, etc. Price, $1.25; delivered, $1.37.</p> + +<p class="center spa1"><b>Work of Wall Street.<br> By Sereno S. Pratt,<br> +Editor The Wall Street Journal.</b></p> + +<p>One of the very best books on the subject. The matter is clearly +and intelligently discussed by a man of soberness and judgment. Price, +$1.25; delivered, $1.37. +<span class="pagenum" id="Page_184">[Pg 184]</span></p> + +<p class="f150 spa2"><b>ANNOUNCEMENT</b></p> + +<p class="center"> +Any of the books enumerated<br> +in this Bibliography will be<br> +supplied for the price indicated</p> + +<p class="center spa2">THE MOODY CORPORATION,<br> +35 Nassau Street, N. Y. City.</p> +</div> + +<hr class="chap x-ebookmaker-drop"> +<p><span class="pagenum" id="Page_185">[Pg 185]</span></p> +<div class="chapter"> +<h2 class="nobreak">INDEX</h2> +</div> + +<ul class="index"> +<li class="isub15">  Page</li> +<li class="isub2">Accidents: effect of on stock prices, <a href="#Page_84">84</a></li> +<li class="isub2">Averages: Barometer of, <a href="#Page_110">110</a></li> + +<li class="isub2 ifrst">Bank Statement, <a href="#Page_59">59</a>, <a href="#Page_125">125</a></li> +<li class="isub2">British investment bonds: Prices of, <a href="#Page_45">45</a></li> +<li class="isub2">Business Depression: Effects of on rails and industrials, <a href="#Page_105">105</a></li> + +<li class="isub2 ifrst">“Calls,” explained, <a href="#Page_89">89</a></li> +<li class="isub2">Charts: “Composite Common”, <a href="#Page_137">137</a></li> +<li class="isub4">corn prices, <a href="#Page_149">149</a></li> +<li class="isub4">cotton prices, <a href="#Page_154">154</a></li> +<li class="isub4">wheat prices, <a href="#Page_147">147</a></li> +<li class="isub2">“Composite common”: range of, <a href="#Page_133">133</a></li> +<li class="isub2">Corn: Area limited, <a href="#Page_151">151</a></li> +<li class="isub4">chart, <a href="#Page_149">149</a></li> +<li class="isub4">prices, <a href="#Page_146">146</a></li> +<li class="isub4">risen more than wheat, <a href="#Page_148">148</a></li> +<li class="isub2">Cotton: Chart, <a href="#Page_154">154</a></li> +<li class="isub4">crops in bales, <a href="#Page_157">157</a></li> +<li class="isub4">cycles of speculation in, <a href="#Page_155">155</a></li> +<li class="isub4">prices, <a href="#Page_156">156</a></li> +<li class="isub2">Credits: Expansion of ignored, <a href="#Page_75">75</a></li> +<li class="isub2">Crises: Indications of, <a href="#Page_112">112</a></li> +<li class="isub4">principal in last century, <a href="#Page_24">24</a></li> +<li class="isub2">Crops and Crop Failures:</li> +<li class="isub4">damage issue not to be ignored, <a href="#Page_123">123</a></li> +<li class="isub4">importance of, <a href="#Page_82">82</a></li> + +<li class="isub2 ifrst">Dividends: adverse effect on the short seller, <a href="#Page_101">101</a></li> +<li class="isub2">Dow, Charles H.:</li> +<li class="isub4">rule as to margins necessary, <a href="#Page_165">165</a> + <span class="pagenum" id="Page_186">[Pg 186]</span></li> + +<li class="isub2 ifrst">Fixed Charges: As factor of safety, <a href="#Page_114">114</a></li> +<li class="isub4">important to investor, <a href="#Page_116">116</a></li> +<li class="isub4">percentage of in various railroads, <a href="#Page_115">115</a></li> + +<li class="isub2 ifrst">Gambling transactions: Percentage against the speculator, <a href="#Page_9">9</a></li> +<li class="isub2">Gold production:</li> +<li class="isub4">effect in speculative commodities, <a href="#Page_53">53</a></li> +<li class="isub4">effect on common stocks of railroads, <a href="#Page_49">49</a></li> +<li class="isub4">effect on securities having a fixed rate of income, <a href="#Page_43">43</a></li> +<li class="isub4">effect on stocks of industrials, <a href="#Page_52">52</a></li> +<li class="isub4">influence of on prices, <a href="#Page_39">39</a></li> +<li class="isub2">Grain: Cycles of speculation in, <a href="#Page_145">145</a></li> + +<li class="isub2 ifrst">Legislation: As a market factor, <a href="#Page_77">77</a></li> + +<li class="isub2 ifrst">Manipulation: By creation of false appearances, <a href="#Page_22">22</a></li> +<li class="isub2">Margins: Necessary to reasonable safety, <a href="#Page_163">163</a></li> +<li class="isub4">required by scale order operations, <a href="#Page_164">164</a></li> +<li class="isub4">use and abuse of, <a href="#Page_12">12</a></li> +<li class="isub2">Market Movements: principal for ten years, <a href="#Page_168">168</a></li> +<li class="isub2">Money conditions: as a factor of speculation, <a href="#Page_59">59</a></li> + +<li class="isub2 ifrst">Periodicity: unreliable as basis of speculation, <a href="#Page_35">35</a>, <a href="#Page_69">69</a></li> +<li class="isub2">Pig Iron: Production in U. S., <a href="#Page_29">29</a></li> +<li class="isub2">Prices:</li> +<li class="isub4">“Composite” stock, <a href="#Page_136">136</a></li> +<li class="isub4">corn, <a href="#Page_146">146</a></li> +<li class="isub4">cotton, <a href="#Page_156">156</a></li> +<li class="isub4">ordinary swing of in speculative cycle, <a href="#Page_113">113</a></li> +<li class="isub4">wheat, <a href="#Page_146">146</a></li> +<li class="isub2">Presidential contest: Influence on prices, <a href="#Page_81">81</a></li> +<li class="isub2">Privileges, <a href="#Page_89">89</a></li> +<li class="isub2">“Puts,” explained, <a href="#Page_90">90</a> + <span class="pagenum" id="Page_187">[Pg 187]</span></li> + +<li class="isub2 ifrst">Railroad: Basic values of, <a href="#Page_104">104</a></li> +<li class="isub2">Rights: How to compute value of, <a href="#Page_109">109</a></li> + +<li class="isub2 ifrst">Securities: Entire list should be studied, <a href="#Page_166">166</a></li> +<li class="isub4">railroad stocks the soundest, <a href="#Page_166">166</a></li> +<li class="isub4">selection of, <a href="#Page_124">124</a></li> +<li class="isub4">undigested, <a href="#Page_108">108</a></li> +<li class="isub2">Speculation: Cycles of, <a href="#Page_21">21</a></li> +<li class="isub4">possibilities of, <a href="#Page_14">14</a></li> +<li class="isub4">preliminary hard work needed, <a href="#Page_17">17</a></li> +<li class="isub2">Stocks: Borrowing and lending, <a href="#Page_117">117</a></li> +<li class="isub4">cycles of Speculation in, <a href="#Page_133">133</a></li> +<li class="isub2">“Straddles,” explained, <a href="#Page_92">92</a></li> + +<li class="isub2 ifrst">Tariff agitation: effect on speculation, <a href="#Page_81">81</a></li> +<li class="isub2">“Tips”: Operations based on them disastrous, <a href="#Page_172">172</a></li> +<li class="isub2">Trading: Best method of, <a href="#Page_111">111</a>, <a href="#Page_172">172</a></li> +<li class="isub4">hypothetical, <a href="#Page_15">15</a></li> +<li class="isub4">scalping, <a href="#Page_120">120</a></li> + +<li class="isub2 ifrst">Wheat: Chart, <a href="#Page_147">147</a></li> +<li class="isub4">prices, <a href="#Page_146">146</a></li> +</ul> + +<div class="footnotes"> +<p class="f150"><b>Footnotes:</b></p> +<div class="footnote"><p class="no-indent"> +<a id="Footnote_1" href="#FNanchor_1" class="label">[1]</a> +Then 2¾%.</p> +</div> + +<div class="footnote"><p class="no-indent"> +<a id="Footnote_2" href="#FNanchor_2" class="label">[2]</a> +Then 3%.</p> +</div> + +<div class="footnote"><p class="no-indent"> +<a id="Footnote_3" href="#FNanchor_3" class="label">[3]</a> +United States deposits included, $40,633,400.</p> +</div> + +<div class="footnote"><p class="no-indent"> +<a id="Footnote_4" href="#FNanchor_4" class="label">[4]</a> +Reprinted from <span class="smcap">Moody’s Magazine</span> of August 1906.</p> +</div> + +<div class="footnote"><p class="no-indent"> +<a id="Footnote_5" href="#FNanchor_5" class="label">[5]</a> +Reprinted from <span class="smcap">Moody’s Magazine</span> of May, 1906.</p> +</div> + +<div class="footnote"><p class="no-indent"> +<a id="Footnote_6" href="#FNanchor_6" class="label">[6]</a> +Reprinted from <span class="smcap">Moody’s Magazine</span> of June, 1906.</p> +</div> +</div> + +<div class="chapter"> +<div class="transnote bbox spa2"> +<p class="f120 spa1">Transcriber’s Notes:</p> +<hr class="r10"> +<p>The illustrations have been moved so that they do not break up + paragraphs and so that they are next to the text they illustrate.</p> +<p>Typographical and punctuation errors have been silently corrected.</p> +</div></div> + + +<div style='text-align:center'>*** END OF THE PROJECT GUTENBERG EBOOK 75687 ***</div> +</body> +</html> + diff --git a/75687-h/images/cover.jpg b/75687-h/images/cover.jpg Binary files differnew file mode 100644 index 0000000..19f4165 --- /dev/null +++ b/75687-h/images/cover.jpg diff --git a/75687-h/images/i_112.jpg b/75687-h/images/i_112.jpg Binary 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