The Birmingham age-herald., 1909-04-04
TRUTH ABOUT SPECULATION

Most of the attacks on Wall street have been directed against the forms of specu- lation rather than speculation itself. The three features of organized speculation that have inspired all the legislative eff forts to restrict the exchanges are:
 1. Buying and selling securities and commodities on borrowed money-margln speculation.
 2. Buying and selling for future deliv- cry.
 8. Selling what one does not own at the time of sale-"short'' selling.
 Margins, futures, and short sales are the very framework of our whole modern bus mess structure, says a writer in the April Appleton's. Without the free use of them we would revert to the Middle Ages. We are enabled to do business on margins. whether buying securities or building a house, because of the universal use of the credit system The use of margins in creases the risk of loss and the extent of possible gain. The whole banking system every bank in every town in the coun- try-is an institution run to enable men to do business on margins. This is the great service the banks perform in the CO., operative scheme.
 The manufacturer with S100000 capital, by obtaining Tine of credit at the banks of S200, ,00o, increases his gains. If he makes 10 per cent on this $OO,U0O capl- tai, or S3O,000. and pays sl0,0oo interest d the banks, leaving s20,000 net, he has a profit of 20 per cent on his own margin capital, or double the actual profit of the ,,afn nr1 Wh0la HaDital. Similarly the merchant, with a comparatively small margin obtains credit from the Jobbers, and turns a small profit on the business into a large profit on his margin capital. The builder uses s20.00 margin and SS0- GOO borrowed money and puts up flat house. His net rental. after payment of taxes insurance. repairs and mainteh- ance is $S000, or per cent on the money. He pays S4O00 interest on the mortgage, leaving for his own profit s4O0o which is % per cent on his S20,0o0 investment. A builder. therefore, with $10o,000 to invest, can build one fiat house, making profit of SSOOO or, by borrowing money, build five fiat houses, yielding a profit of $2O,OoD on his investment. A railroad company takes $500O0.00o of shareholders money and S1OO,O0o, 900 of bondholders per cent money and builds road that earns $l5, GOO 600 net or 10 per cent on the money. After paying s4O00, 600 interest to the bond holders there is left E9, 600, 900 for the share holders, or IS per cent on their invest [ ment, nearly double their profits. An in- vestor. in a period of industrial depres- sion, finds good railroad stocks selling on per cent basis He invests s10,000 In the best stocks. using ss00O of money bor- rowed from the bank at per cent and 5000 margin. If, in the boom that follows the depression, these stocks advance 50 per cent in market price, he makes 5000, or 25O per cent profit on his venture.
 The smaller the margin the greater the risk of loss and the greater the possible gain. Slender margins are as unwise as overextended credits in business. The careful speculators use very large mar gins, while the plungers trade on the smallest possible margins. All through our modern industrial life, credit Is the lever of all business, and the use of cheap