On his book Speculation: A History of the Fine Line between Gambling and Investing
Cover Interview of
September 11, 2017
In a nutshell
Speculation is about a dilemma that has troubled the
legal system for a long time. For centuries, there has been a consensus that investment
is necessary and ought to be encouraged. There has also been a near consensus,
one that has weakened recently but is still substantial, that gambling
is dangerous and ought to be discouraged or even prohibited. But what about speculation?
Speculation lies somewhere between investing and gambling.
It has attributes of both. Should speculation be legal? Should it be illegal?
Should some kinds be legal and others illegal? Which kinds? Throughout American
history (and the history of other places too, but this book is just about the
United States), speculation has presented a puzzle to the legal system. To
figure out how to treat speculation, we have always needed to distinguish
between two kinds of risky commerce, a good kind the law should promote and a
bad kind the law should deter. But how should that line be drawn?
My book traces the history of debates on this set of
questions, from the crash of 1792 to the present.
September 11, 2017
The wide angle
In the aftermath of the recent financial crisis, we heard
many critiques of speculation for having contributed to the problem, and many
defenses of speculation as necessary for robust markets. The thing I found most
interesting about this debate was how similar it sounded to the debates that
took place after analogous episodes, such as the stock market crash of 1929-32,
the sharp fall in commodity prices that took place in the early 1890s, and the
recurring panics of the 1800s. The details changed from one era to another, and
some of the arguments for and against speculation changed as well, but much of
our own debate would have been familiar two centuries ago.
For example, consider these common reactions to the
financial crisis: The crisis was caused by overspeculation; the victims
included small investors lured by unscrupulous speculators with promises of
high returns; and the government should have intervened before prices rose too
high. These are familiar sentiments today, but these particular samples are
reactions to the financial crisis of 1792. Similar views have been expressed
after every market downturn up to the present. They have been countered by
equally recurring arguments on the other side.
These continuities suggest that the issue of how the law
should handle speculation is not merely a technical question capable of being
answered with economic reasoning. It is also a deeply moral and political
question. Advances in economics over the past two centuries have narrowed the
scope of disagreement over the technical aspects of the issue, at least among
well-informed people, but the moral and political aspects of the question are
just as open to debate as they ever were.
September 11, 2017
A close-up
The book begins with a story that took place during the
Civil War. In 1862, the cost of the war forced the government to abandon the gold
standard. The “greenback,” the Union paper currency, had previously been fixed
at one paper dollar per gold dollar, but once the greenback floated against
gold, a speculative market in gold quickly sprang into existence, and the value
of the greenback plummeted. By the summer of 1864, a dollar of gold was trading
for nearly $2.50 in greenbacks. The Union currency had lost more than half its
value. Because the government paid for the war in greenbacks, a weaker currency
meant a weaker military.
Abraham Lincoln was just one of many political leaders who
blamed speculators for the depreciation of the greenback. He thought they were
deliberately driving down the value of the dollar in order to sabotage the war
effort. So did Salmon Chase, the Secretary of the Treasury. So did many members
of Congress, who quickly enacted a law that prohibited trading in gold
futures—that is, contracts for the sale of gold to be delivered at a later
date.
The ban on gold futures did nothing to halt the dollar’s
slide. As many bankers pointed out, the price of gold was determined by
worldwide supply and demand. It could not be influenced for long by a small
group of traders in New York. The law’s only effect was to shut down the New
York Gold Exchange, which made it harder even for lawful buyers and sellers of
gold to find one another. A hastily assembled group of New York merchants
traveled to Washington to urge Congress to repeal the gold law. The prohibition
of gold futures lasted only two weeks.
In its details, the controversy over gold futures grew out
of the unique crisis of the Civil War, but the controversy shared a structure
with many other debates that took place in the early republic, and many more
that would arise in later years. It required drawing a line between transactions
thought to be harmful and those thought to be beneficial, a line between
gambling and legitimate commerce. Everyone agreed that gambling was bad and
that commerce was necessary. The difficulty was in telling the two apart.
September 11, 2017
Lastly
One thing I like about learning history is that it forces us
to be a bit more humble about our own points of view. People today express
strong opinions about speculation, without seeming to realize that identical
opinions have been voiced for centuries, and that for centuries others have
found these opinions to be nonsense. The ultimate lesson of Speculation
is that the topic is more complex than people tend to acknowledge. What is the
difference between investing and gambling? Where exactly is the line that
separates good speculation from bad? The point of the book is that these are
questions on which people have always disagreed and probably always will.
September 11, 2017
Stuart Banner
Speculation: A History of the Fine Line between Gambling and Investing
Oxford University Press
352 pages, 61/8 x 91/4 inches
ISBN 978 0190623043
Stuart Banner is the Norman Abrams Professor of Law at UCLA.
Besides Speculation and American Property, featured in his two Rorotoko
interviews, he is the author of several other books, including The
Death Penalty: An American History, How the Indians Lost Their
Land: Law and Power on the Frontier, and Who Owns the Sky? The
Struggle to Control Airspace from the Wright Brothers On.