Monday, December 22, 2008

A Nineteenth Century View of Speculation that May Apply Today (Part II)

This is a continuation of my post from yesterday on a book published in 1887 called "Twenty Eight Years In Wall Street," written by a gentlemen called Henry Clews. He wrote an interesting section on speculation that I wanted to share:

"Speculation for a fall in prices is based upon the presumption of an over-supply. If it succeeds, the production of the particular product is checked until prices recover, and in the meantime production is diverted to articles less abundant. Thus speculation proves a regulator both of values and production. Speculation for a rise in prices is based upon a presumption of scarcity or short supply, and its direct effect is to quicken production and restore the equilibrium of prices."

This one is a perfect explanation for the rise in Oil prices, and the forces that corrected it to where it is today. These same forces will also lead to a recovery sometime in the future.

"Speculation, moreover, makes a market for securities that otherwise would not exist. It enables railroads to be built through the ready sale of their bonds, thus adding materially to the wealth of the whole country, and opening a more profitable market to labor. In this it becomes the forerunner of enterprise and material prosperity in business."

Without the lure and illusion of easy wealth that investing in the Stock Market provides to people, how much capital could American businesses attract?

"I believe the men of most experience, not only in Wall Street, but in other departments of finance and commerce, will bear me out in the statement that a market where even values are considerably inflated by speculation, is more desirable than a period of depression. The result, in the long run, is the greatest good to the greatest number. I don't believe that the ghost of Jeremy Bentham himself could rise up and consistently condemn this statement."

We shall find out of this is true since according to the conventional wisdom we are entering a depression.

Here is a direct link to the book.

No comments: