Thursday, December 29, 2016
Stuart Banner, in Speculation: A History of the Fine Line between Gambling and Investing (Oxford University Press, 2017), traces how American ambivalence toward speculation, especially as reflected in regulatory and legal decisions, tips one way and then the other. Is the speculator engaged in unsavory conduct or is he performing a service? Is he anti-American or the quintessential American?
Speculation has had its harsh critics since early in the history of this country. And much of the criticism gets repeated generation after generation. For instance, in 1835 a New Hampshire newspaper warned: “In our rising manufacturing villages this speculating mania rages to a great extent, and is laying a foundation for that poverty, dependence and wretchedness which characterizes the population of similar places in Europe. The few are becoming immensely rich, the middling interest poor, and the poor abject.” That has a familiar ring to it, doesn’t it?
Support for speculation is usually more muted. Alexander Hamilton argued that (in Banner’s rephrasing) “the buying and selling of paper did not remove capital from the productive economy … but added capital to the economy.” Elbridge Gerry defended speculators at the Constitutional Convention, saying that “They keep up the value of the paper. Without them there would be no market.” Another justification for speculators, common in the first half of the nineteenth century, is that they stabilize prices, buying when prices are low and selling when prices are high.
Legal attitudes to insider trading, to which Banner devotes a chapter, have followed a different trajectory. In a 1933 ruling, the Massachusetts Supreme Court found that Rodolphe Agassiz, president of Cliff Mining, had not broken the law when he made well over a million dollars in today’s money by trading on favorable inside information. The law, the opinion read, “cannot undertake to put all parties to every contract on an equality as to knowledge, experience, skill and shrewdness.” Seventy years later Sam Waksal sought to take advantage of his advance knowledge of bad news—that the FDA would not permit ImClone’s cancer treatment Erbitux to be sold. But the court no longer thought that exploiting one’s superior access to knowledge was at worst inevitable, at best good: Waksal was sentenced to seven years in prison.
Banner’s history is carefully researched and well documented. It shows just how difficult, and probably impossible, it is to find “the” proper place for speculation in the financial markets. Just when regulators think they have reined in speculators and made the financial world “safe,” allowing good risk and forbidding bad risk (gambling), financial engineers and traders will redefine those boundaries and send regulators scrambling again.