Speculation and the growing instability of stock prices

The author is indebted to Professor W. L. Crum, who read this manuscript and offered many helpful suggestions. There are circumstances under which the famillar reasoning regarding the stabilis ing influence of speculation on commodity price variations does not hold. The broad generalizations of commonly accepted theory concerning the sensitive Interactions of supply and demand as a price stabilizing force apply even less to securlties than to commodities. Despite the increasing refinement of speculative facilities in general and the growing resort to short selling in particular, fluctuations in stock prices have be come progressively greater over the period from 1872 to 1927. Arguments to the cop trary fail to give full weight to the combination of factors tending in the opposite direction. Among the more important of these may be mentioned the growing par ticipation of inexpert traders in stock market transactions; the added difficulty of appraising the true market valuations of the securities of concerns which have been in an increasing state of flux; and the possible relative lack of physical facilities for handling the huge volume of market transactions which have become an almost regu lar occurrence on the various stock exchanges. There are, to be sure, circumstances under which speculation or short selling may be said to exert a steadying influence on security price variations, but the value of the stabilizing force under such conditions is scriously to be questioned.