SPECULATION IN GRAIN HAS SOME ADVANTAGES

I take pleasure in accepting the invitation of the CRIMSON to discuss the problems of grain speculation and food control, to which the attention of the country is now so much directed. Unprecedented wheat prices have appeared in the quotations of the boards of trade, and a great many people, including not a few members of Congress, have not unnaturally blamed the grain speculator for them. Most people look askance at speculation anyhow, and not everyone realizes that speculative prices are commonly a symptom, rather than a cause, of disagreeable facts.

On June 17, 1864, the Federal Congress passed an act designed to stop "speculation in the Government's money." The value of greenbacks had been very unstable, and that fact had been manifesting itself in a rising price of gold in terms of greenbacks in "futures" in the gold exchange in New York. Congress, therefore, by law closed the gold exchange, and forbade "futures" in gold and foreign exchange. Buying and selling went on--in small, demoralized markets. Gold was worth 198 in green-backs on the day the law passed. The next day it went to 208; the next day to 230, and by the end of the month 250. Prices fluctuated wildly. On July 2, without debate, the Congress repealed the act! The trouble lay deeper than the evil designs of parasitic gamblers. Nobody is speculating in greenbacks today.

Performs Vital Functions.

Economists are generally agreed that speculation normally performs some very vital functions. The economist does not defend monopolistic speculation--the effort to "corner" the market. Such efforts--more likely to be successful in the stock market than in the grain market, because the capital required to control a corporation is vastly less than that required to control the world's stock of a great staple grain--have been made, and have at times had demoralizing effects. When made, they should be punished mercilessly. It does not appear, however, that monopolistic combinations by speculators dealing in "futures" is the cause of the rise in wheat. One clear point is that "cash" wheat has been pretty steadily higher than the nearest "future" since last fall--indicating that buying by those who want the actual wheat, to use or to store away, has been the proximate cause of the rise. Back of this, in the judgment of good students of the market, lies buying by the Governments of England and France, and frantic buying by housewives, enormous in the aggregate, which has forced the millers to unprecedented buying of cash wheat. Back of this are many factors, not the least the alarms spread by the Government and the newspapers, especially since the shortage of winter wheat became known. A shortage of winter wheat should not logically affect the price of wheat for May delivery, when "July wheat" is cheaper than "May wheat," but the sentimental effect has been very great.

Aid to Certain Classes.

I cannot take space for details regarding the services of ordinary competitive speculation. The manuals on economics explain them. Usually listed are the following: (1) Speculators create time values, carrying wheat over from a period of abundance to a period of scarcity; (2) Speculators level prices through the year, giving higher prices to farmers at harvest time, and lower prices to consumers later. (That this second point is not a matter of closet theory is abundantly shown by J. E. Pope, in an article in the Harvard Quarterly Journal of Economics of August, 1916). The speculator has failed to do it during the current crop year, for reasons above indicated, in part: (3) The speculator is a risk-bearer. Millers and grain buyers in the country "hedge" by short sales on the exchanges when they buy to grind or to ship. If the wheat the miller buys to grind goes down, and with it the price of flour, his loss is offset by a profit on the short sale, and vice versa. When "futures" at Winnipeg were forbidden recently, grain ceased to come in from the farms, as buyers were afraid to buy from the farmers unless they could "hedge" by a "future" at Winnipeg. The prohibition had to be removed. (4) By collecting information of worldwide conditions of supply and demand, and expressing them in prices, the speculators make it safe for farmers, millers, and others to rely on the prices as guides for further production. This "directive function" of speculation is perhaps most important of all. A fifth point, which should receive greater stress than is usually given it, is that speculators, by making an active market, make it safe for banks to lend on goods that are being carried over to a later season--make bank loans "liquid." The speculator also, by putting up a "margin," protects the banks from risk in financing such operations.

A Man-Sized Job.

If we are to abolish the grain exchanges for the period of the war, we cannot stop with that. No mere legislative prohibition will solve the problem. Something of constructive character, which will do what the exchanges have been doing, is called for. That is a man-sized job! The first step should be to call leading experts in the grain trade together. For patriotic reasons, as well as to protect the trade from disaster, they would respond. If a committee of grain experts, under Government auspices, should use their wonderful machinery for collecting information, they could probably in a short time find out the existing stocks of grain and flour and the probable future demands for various purposes at various prices. With these data, they could perhaps estimate the prices needed to bring supply and demand together. Such estimated prices might tell the truth better than the present prices in a demoralized market are doing. Such a report might clear the air. We should stop the use of grain for whiskey and beer during the war. For the rest, I am inclined to the view that the Government should move cautiously, and always in co-operation with the leaders in the grain and flour trade, who alone have the knowledge required to make any Governmental action do more good than harm. It is not as easy to handle the food supply of America as it was to distribute a known supply of food to the Belgians--and that was no easy problem