THIRD APPROXIMATION

cation. The principle of insurance 9 of any kind is bypooling those risks virtually to reduce them. This raisesthe value of the aggregate capital subject in detail tothese risks.

It is in this way that investment trusts and investmentcounsel tend to dimmish the risk to the common stockinvestor. This new movement has created a new demandfor such stocks and raised their prices; at the same time ithas tended to decrease the demand for, and to lower theprice of, bonds.

Again, speculation in grain, for example by settingaside a certain class of persons to assume the risks oftrade, has the effect of reducing these risks by puttingthem in the hands of those who have most knowledge,for, as we have seen, risk varies inversely with knowledge.In this way, the whole plane of business is put morenearly on a uniform basis so far as the rate of interest isconcerned.

Risk is especially conspicuous in the financing of newinventions or discoveries where past experience is a poorguide. When new inventions are made, uncertainty isintroduced, speculation follows, and then comes greatwealth or great ruin according to the success or failureof the ventures. The history of gold and silver discoveries,of the invention of rubber, of steel, and of electrical ap-pliances is filled with tales of wrecked fortunes, by theside of which stand the stories of the fortunes of thosefew who drew the lucky cards, and who are among today’smulti-millionaires.

The rates of interest are always based upon expecta-tion, however little this hope may later be justified byrealization. Man makes his guess of the future and stakes

• See The Nature of Capital and Income, Chapter XVI.

[ 221 ]