“The Moral Aspects of Speculation”
Taken in its
narrowest sense, the word “speculation” describes transactions that are made
for the sole purpose of getting a profit from changes in price. This is the sense in which it will be used in
this paper. Furthermore, the discussion
will be confined to operations on the stock and produce exchanges. The speculator, then, buys and sells property
because he expects to realize a gain from changes in its price, not because he
expects to be a sharer in its earnings.
The reason that he does not intend to profit by the earnings of the
property that he ostensibly buys and sells is to be found in the fact that his
control of the property will be either too brief to secure the actual earnings
or too indefinite to create earnings.
The former is the usual case of speculation in stock, the latter, of
speculation in produce.
Some
examples will make clearer this distinction between the speculator and the
ordinary investor or trader. The man who
buys railway stocks merely to sell them in a few days at an expected advance is
a speculator; the man who buys them to hold permanently for the sake of the
dividends that they will yield is not a speculator. The former looks to price changes for his
gains, the latter to property earnings.
Again, two men buy wheat to grind on the board of trade: the first is a miller who wants wheat to
grind; the second is a speculator who has no particular use for wheat. He does not intend to change its form in any
way or bring it nearer to the consumer; his interest in it is confined solely
to its fluctuations in price. From these
he expects to make his profit. The
miller, on the other hand, will add utility to the wheat by converting it into
flour. His profit will be in the nature
of a payment for this productive and social service. In like manner, the dividends received by the
genuine investor in railway stocks will be a return for the use of his capital
in a productive business. Both he and
the miller are producers of utility, while the speculative buyer of stocks and
the speculative buyer of wheat add nothing to the utility of any property –
make no contribution to production.
Pure
speculation on the exchange differs, therefore, from ordinary trade and
investment in its effect upon the production of utility and in the source of
its gains. These are, in reality, two
aspects of the same economic fact. It is
also unique in the manner in which its contracts are completed, or
“settled.” I have spoken of the
speculator as ostensibly buying and selling.
In purely speculative purchases and sales there is no genuine transfer
of goods. The stocks bought are not, in
any adequate sense, brought into the possession and control of the purchaser,
but are usually “carried” by his broker until they ae sold. The exceptions to this rule are not of great
importance and need not concern us here.
The produce bought – wheat, cotton, petroleum, etc. – is not moved an
inch in any direction. When the buyer
completes one of these transactions he merely receives or pays out a sum based
on the extent to which the price of the goods in question has risen or
fallen. The mechanism of these
settlements fails outside the scope of this paper. It suffices to point out that speculative
contracts are settled by a payment of price differences instead of by a genuine
delivery of goods. In effect and
intention they are substantially wagers on the course of prices.
Indiscriminate
apologists for speculation and the exchanges are fond of insisting on the
productive services of so-called speculators who gather and store up goods
during a period of plenty and dispose of them during a period of scarcity, or
who carry goods from a place where they are abundant to a place where they are
in great demand. Hence they conclude
that speculation, i.e., all speculation, is useful. Such reasoning betrays confusion of
thought. With speculators in the sense
just mentioned we have nothing to do in this place. Besides, their social worth is obvious. Nor are we concerned with the exchanges, as
such. Their original function was a very
necessary one, namely, to serve as meeting places for those who wished to buy
and sell real goods. They still retain
that function insofar as they constitute a market place for permanent investors
and for manufacturers and productive traders.
These productive transactions, however, have become subordinated to
purely speculative operations, so that, according to conservative estimates,
fully 90% of the business done on the exchanges is of the latter character.
Now this
kind of speculation, as already pointed out, is non-productive. It creates no utility, either of time, place,
or form; that is to say, it neither distributes goods over intervals of time or
space nor puts them through any process of manufacture. Does it perform a social service of any
kind? If it does, there will arise a
presumption that it is morally good.
Professor
Henry C. Emery (“Speculation on the Stock and Produce Exchanges of the United
States,” Macmillan) strongly maintains that organized speculation, of the kind
that we are discussing, is of great service to legitimate trade. Since the market for great staples, like
grain and cotton, so runs his argument, has become a world market, the large
dealers in these goods must not only buy, store, and move them, but also take
extraordinary risks of changing prices.
These risks are extraordinary because they extend over a long period of
time and are subject to worldwide trade conditions. What the dealers need, then, is “a distinct
body of men to relieve them of the speculative element of their business.” The professional operators on the produce
exchanges constitute just such a class.
The wheat merchant buys a quantity of wheat in the northwest for
shipment to Liverpool, where he intends to sell it sometime later. But the price of wheat may fall before that
time arrives. Here arises the element of
risk. To avoid it, he immediately sells
to a speculator, for future delivery, an equal quantity of “paper” wheat. The delivery of this “paper” wheat, or,
rather, the settlement contract, is to take place about the same time that his
cargo of actual wheat is to be delivered and sold in Liverpool. If, in the meantime, the price of wheat falls
he will lose on his actual wheat, but he will gain on his “paper” wheat. For, when a man sells nay commodity in the
speculative market for future delivery, his interest is to have the price of
that commodity fall. Thus he gains the difference
between the price of the article when he sold it and its price at the time of
delivery, or settlement. Hence, by means
of this “hedge” sale the wheat merchant is secured against loss on his cargo of
actual wheat. Sales of this kind are a
sort of insurance that lessen both the possibilities of great profit and the
risks of great loss. It is said that
9/10 of wheat stored in the elevators of the northwest is “sold against” in
this way (“Proceedings of Twelfth Annual Meeting of American Economic
Association,” p. 110).
So much for
speculation in produce: speculation in
stocks, it is maintained, enables the small investor to have within reach a
class of men “ready to assume all the risk of buying and selling his security,
and a market that fixes prices by which he can intelligently invest.” The army of professional speculators stand
prepared at any time to buy or sell any kind of stocks that are at all
marketable, while their incessant buying and selling keeps the market active
and the quotations of the different securities at their proper level. The whole function of organized speculation
is summed up to be: taking the great
risks of fluctuating values, reducing these fluctuations to a minimum, and
providing an active market for produce and securities.
The obvious
answer to the above argument is that traders in produces should take the risks
of fluctuating prices themselves. At
present, indeed, they seem unwilling to do so, because the speculators stand
ready to do it for them. But it is
difficult to see how the public would suffer if traders, importers, and
manufacturers were compelled to take all the risks incident to their business,
instead of handing them over to a special class. Under such an arrangement many of them would
doubtless go to the wall, but the community would be the gainer through the
elimination of the unfit. Besides, there
is reason to believe that the superior knowledge of market conditions possessed
by the professional speculators, and their work in reducing the range of price
fluctuations, is very much overestimated.
At any rate, there seems to be no good reason why the capable dealer or
manufacturer could not acquire a sufficient amount of this same knowledge and
foresight. To set apart a body of men
for the sole purpose of dealing in risks seems to be carrying the principle of
division of labor unnecessarily far, especially when these men manage to charge
the high price for their services that are obtained by the professional
speculators of our produce exchanges.
As to stock
speculators, it may be reasonably admitted that they know the true value of the
various securities more accurately than the small investors, and that they are
able to fix more correct prices than would be possible without their
activity. Yet if there were no dealing
in stocks, except for permanent investment, there would still be a stock
market. That is to say, if there were no
speculators, and if stocks were bought solely for the sake of their dividends,
it would still be possible for an investor to buy them at quotations
sufficiently correct and stable. This
fact is exemplified today in the case of numerous securities that are not dealt
in by speculators nor listed on the exchanges.
It is worthy of note that two prominent German economists, who maintain
that the produce exchange is a necessary institution, declare that the stock
exchange is “an unnecessary and injurious one.”
The
institution of organized speculation is not only of doubtful benefit to the
community, but produces serious public evils.
Only those who have expert knowledge of market conditions can, in the
long run, make money on the exchanges.
These are the prominent professional speculators, the “big operators,”
as they are often called. The great
majority of all the others who speculate, namely, the outside public, either
know nothing of the intricacies of the market, or rely on “inside information”
that is worse than useless because misleading.
Out of the losses of this class comes the greater part of the gains of
the big operators. One proof of this is
seen in the fact that, when the general public and the small operators desert
the exchanges after being fleeced, speculative activity is checked until such
time as the “small fry” begin operations anew.
And yet the general public continues to patronize the centers of speculation
in ever increasing numbers, notwithstanding the lessons of the past. Thus the chief losses of speculation are
borne by those who can least afford to bear them.
Speculation
absorbs a considerable amount of the community’s capital and directive
energy. It diverts money from productive
enterprises and engages the activity of men who, if removed from the unhealthy
atmosphere of the exchanges, would be of great service to the world of
industry. By holding out to is votaries
the hope of getting rich quickly, it discourages industry and thrift and makes
men worshippers of the goddess of chance.
It imbues thousands with the persuasion that acquiring wealth is a
colossal game in which they are to be fortune’s favorites. The career of the “Franklin Syndicate” in
Brooklyn, in 1899, is a typical insurance of the way in which those who have
caught the speculative fever disregard the laws of probability and the laws of
wealth. The promoters of this company
agreed to pay 10% per week on all deposits, pretending that they were enabled
to do so through their “inside information” of the stock market. Within a few weeks they took in nearly one
million dollars, showing how large is the number of people who regard the stock
exchange as an institution that creates wealth without labor.
To the
question that was asked above – Does speculation perform any social service? –
the correct answer, then, would seem to be in the negative. At any rate, its good features, which are
problematic, are more than offset by its bad features, which are grave and
unmistakable. Hence there is no reason
to regard organized speculation as morally good because of any economic or
social function that it exercises.
If the
institution of speculation is at best of doubtful moral and social worth, what
are we to say concerning the moral character of the individual act of
speculating in stocks or produce?
According to Funck-Brentano, speculation on the exchanges, although not
highway robbery, is “robbery according to the rules of an art so refined that
the keenest lawyer cannot exactly determine the point where fraud begins and
legality ceases.” This condemnation,
however, seems too sweeping; for many of the transactions on the exchanges are
made by men who have no intention of acting dishonestly. At the worst, they are actuated merely by the
spirit of the gambler. But it is true
that moral and immoral operations are often inextricably mingled, so that it is
extremely difficult, no less for the moralist than the lawyer, to separate the
good from the bad. For our purpose it
will be best, perhaps, to point out the dishonesty of some of the more
notorious practices and the extent to which they are followed, and then discuss
the morality of speculative transactions that are entered into with the most
upright intentions.
A favorite
method of manipulating values is to disseminate false reports concerning
property or market conditions. A
description of the various ways in which this scheme is practiced is not
possible nor necessary here, but a typical instance may be given. In the spring of 1900 a prominent
manufacturing company, having its headquarters in New York, sent out a report
that a dividend was to be immediately declared on its stock. This caused the stock to rise several points,
and the directors and their friends then “sold for a fall.” Next the report concerning the dividend was
denounced as false, and official announcement was made that the company’s
condition did not warrant the payment of a dividend. Immediately values began to fall, and those
who had sold “short” bought in at a profit, while the small holders of stock
became panic-stricken and sold their holdings to the larger ones. This last phase of manipulation, which
consists in depressing values for the purpose of getting possession of the
stock of the small holders, is expressively termed “shaking out.”
The
industrious circulation of false reports is an essential part of the process
known as “supporting.” The owners of
some stock that is worth little send out glowing accounts of its desirability
as an investment, and of the earning capacity of the property that it
represents. At the same time they begin
to make purely speculative purchases on a large scale. The intention is to deceive the public into
the belief that the owners have confidence in the future of their
property. The result is that the price
of the stock rises. When it has reached
what the conspirators regard as its maximum, they sell both their cash stock
and their purely speculative purchases to a confiding public. Then the stock rapidly sinks to its proper
level.
Another way
of manipulating is by “wash sales.” One
or more operators scheme to depress the quotations of a particular stock by
making a show of enormous sales. The
natural effect of such wholesale selling when reported on the stock market is
to cause a fall, but the peculiarity of these transactions is that they are not
sales at all, for the same person is both buyer and seller. He employs two brokers, one of whom sells to
the other. Thus the supposed sales are
all counterfeit, since the supposed buyers have no existence. The same principle can be carried out in
attempts to inflate values, and in the case of produce as well as stock.
A simpler
form of manipulation is the attempt to raise or depress the value of a stock by
extensive genuine buying or selling.
Where several operators act together the operation is called a
“pool.” An extreme instance of continued
buying for a rise is the “corner.” If it
is successful, the result is that one or a few men get control of sufficient of
the available supply of a certain produce or stock to create what is
practically a monopoly, and thus force up prices almost at will. The corner, however, is rarely successful.
The schemes
above described are some of the more common forms of manipulation. Clearly they are all immoral, and the gains
for accruing from them dishonest.
Closely allied to false rumors as a source of unjust profit is the
special and secret information that is so often turned to account on the
exchanges. When this special information
concerns a movement of prices that will come about naturally, not artificially,
and when the information is acquired by the expenditure of some labor, either
intellectual or physical, or when the information is not entirely certain –
there would seem to be nothing wrong in making use of it for profit. But it is difficult to see how the profit
will be honest if any of these conditions be wanting. Suppose that a certain stock is about to be
manipulated upward. Now if an “outsider”
is apprised of this fact, and buys some of the stock to sell at the advance, he
is simply realizing unique possibilities of stealing. He defrauds the other party to the contract;
for artificially produced gains for one man, mean, in the long run,
artificially produced losses for another.
But suppose that an advance in the price of a certain property is due to
the natural laws and conditions of trade.
In that case a man who foresees the advance, by reason of exceptional
skill and diligence in studying the conditions of the market, may rightfully
invest in the property and reap a profit, that will be in some sense the reward
of ability. Again, if a man without
exercising labor or skill obtains special information that is not entirely trustworthy,
his gains from a speculation made on this basis might be regarded as the reward
of risk-taking. But if the information
is practically certain, and got without any personal expenditure of any kind,
the morality of gains coming even from a natural movement in prices will
usually be very questionable. Obtained
as they are from differences in price, their source will, in most cases, be the
pocket of someone who is not possessed of this special knowledge. The transaction is substantially a wager in
which one party takes the other at a disadvantage. These are the principles: in practice it would seem that most of the
profits arising from secret information on the exchanges are unlawful.
To what
extent do manipulation and the various other forms of immoral speculation
prevail? A precise and definite answer
to this question is, of course, not obtainable, but it is safe to say that on
the more prominent exchanges of the country questionable methods are in very
common use. “Schaeffle, who is not only an
eminent political economist, but has been minister of commerce to one of the
great political powers of Europe, says that when he became acquainted with the
bourse he gave up believing any longer in the economic harmonies, and declared
theft to be the principle of modern European commerce” (John Rae, “Contemporary
Socialism,” p. 326). A member of the New
York Stock Exchange declared a few years ago that 50% of the operations in that
institution were attempts to manipulate prices.
The maneuvers of the great operators have often been compared to a game
in which the successful players use loaded dice or marked cards. Indeed, many close observers of the
speculative market assert that, in the long run, money is made only by those
who resort to questionable devices. This
is probably an exaggeration, but we can readily see that when men having great
power, the big operators, are engaged in operations whose success depends
solely on the movement of prices, they will be strongly tempted to use their
power in order to influence this movement.
It is impossible to watch their tactics for any length of time without
concluding that they regard manipulation in some form as an essential feature
of speculative operations. The stock
market columns of almost any morning newspaper will show that on the preceding
day there was “an assault by the bears” on this or that stock, and that under
“constant hammering” the stock fell one or more points. Or, we are informed that, “after a rally by
the bulls,” such a stock “went skyward.”
So far, at
least, as the big operators are concerned, the exchange is a battlefield on
which two opposing armies, the bulls and the bears, are constantly engaged at
close range. “All is fair in love and
war,’ and it is not surprising that in the speculators’ warfare nice ethical
discriminations as to the methods should be overlooked. Manipulation is regarded as lawful, since it
is merely fighting the enemy with his own weapons. The intellectual atmosphere of the bourse is
so befogged that the moral vision of its habitues becomes easily dulled. The mental qualities that are most frequently
called into play among professional speculators are those that characterize the
activities of the professional gambler.
“A man’s nerve is put to the highest tensions; his mind is always on the
stretch; not guiding the policy of a great commercial venture, but bearing up
under, and watching over, the fluctuations of some stock, in the opinion of the
majority, and by virtue of what has been paid for it at the outset, is worth
only so much, and which he has estimated at a different value. The trade is not a noble one, and there are
few noble men engaged in it” (Fraser’s Magazine, vol. 94, p. 84).
So much for
practices of speculation that are certainly dishonest; what about the acts of a
speculator who has no desire to take advantage of any unlawful practice? Is it wrong to make a purchase or sale on the
exchange solely for the purpose of realizing a profit out of a change in
prices? The purchaser or seller, we will
suppose, seeks no dishonest advantage, but is willing to take all the risks of
an unfavorable turn in prices. We cannot
say that such a transaction is, in itself, wrong. At the worst it is merely a wager on prices, and
wagers are not immoral, provided:
1. That those who take part in
them have the right to dispose of the property that they hazard; 2. That neither fraud nor violence be used;
3. That the chances for winning be
approximately equal, so far as the knowledge of the participants in concerned;
4. That the parties risk no more than
they can afford consistently with the duties of their condition and calling;
and 5. That the transaction in question
is not forbidden by the positive law.
All of these conditions may easily be present in a speculative deal;
consequently, there may be nothing in it contrary to the moral law. This statement applies to an act of
speculation in the abstract, not in the actual conditions of today.
For we have
seen that from the side of economic welfare the whole institution of
non-productive speculation is in all probability useless; that from the side of
social welfare it involves many grave evils; and that from the side of morality
its transactions are to an alarming extent carried on by dishonest
methods. In the light of these facts, we
may safely conclude that, so far as the principal exchanges of the country are
concerned, it is morally impossible for a man who spends al or the greater part
of his time speculating, to avoid all the dishonest practices of
speculation. Secondly, we would seem to
be justified in asserting that men who, even without any intention to be
dishonest, participate to any extent in speculative transactions on these
exchanges, are engaging in actions that may easily be morally
questionable. As we said above, the
isolated act of speculation may in itself be without censure – may be no worse
than the placing of a wager – but because of its connection with a questionable
institution, and because of its grave danger to the individual himself, it can
never be pronounced licit in the sense that the transactions of ordinary trade
are licit. The shadow of immorality is
over it always. Every speculative deal
is a participation, remote and insignificant, perhaps, in what can without
exaggeration be regarded as a social and moral evil, namely, the institution of
organized speculation.[1] Every anticipated profit, almost, is in
danger of being promoted by illicit manipulation; for the well-meaning outsider
can seldom be certain, even if he tries, that movements of price by which he is
the gainer have not been artificially produced.
Every man who yields to the seductive temptation to speculate feeds the
passion of avarice, strengthens the ignoble desire to profit by the losses of
his fellows, cultivates a dislike for honest, productive labor, and exposes
himself to financial ruin. Hence, no man
who is fully acquainted with the character and effects of speculation, and who
is possessed of a fine moral nature, will ever participate in the purely
speculative operations of either the stock or the produce exchanges of our
largest cities.
The question
– “Is speculation wrong? – cannot, therefore, be answered categorically. The phenomena with which it deals are too
complex. But, with the help of the
distinctions above drawn, an answer may be obtained that is fairly
definite. To resume, then: speculation as an institution is economically
of doubtful utility; socially, it is productive of great and widespread evils;
and morally, it is vitiated by a very considerable amount of dishonest “deals”
and practices.
Msgr.
John Ryan, The Church and Socialism, pp. 163-179, The Univeristy Press,
Washington, D.C. As in J.F. Leibell,
Readings in Ethics, p. 517-528.
[1]
For a strong confirmation of this view, see A. Crump’s well known work, The
Theory of Stock Speculation.
Self-Interest
is Inadequate 
