speculation definition us history

speculation definition us history

The Role of Speculation in U.S. History

1. Introduction to Speculation in U.S. History

Speculation is a central part of human nature and has always been involved in the formation of markets. In an economic sense, speculation on the future is how reserves or inventories are formed. Further, the flexibility for plans to change underlies the adjustments to prices possible leads to the central marketplace. Indeed, without constant speculation, it is doubtful that all the markets needed to communicate supply and demand fully would exist. Therefore, without speculation, the modern economy would resemble the Soviet experience in which a central authority attempted to use arbitrary rules to adjust supplies and prices. Such an economy never produced the information, wealth, and political freedom that a market economy has. However, while speculation is a valuable attribute, it can create many benefits and problems. The current account deficit of the U.S. is a classic result of the value of speculation. The 1990s dot-com bubble is an example of speculation gone amuck. The dramatic boom and bust of the U.S. housing market is another recent example of how high levels of speculation can create significant problems upon the economy.

Throughout U.S. history, speculation has been a major force in the economy. At times, such as 1929, speculation has created problems. At other times, such as the dot-com bubble of the late 1990s, speculation has pushed the economy upwards. The history of speculation has, therefore, much to offer the student of economics. Furthermore, it also offers a wide range of teaching tools and examples that can be used to enliven our teaching. Consequently, it would seem appropriate that we take some time to highlight some of the more dramatic historic economic events in U.S. economic history. These events were underwritten by the human nature of speculation. Then, we will investigate this subject further for numerous examples that are readily drawn from U.S. history.

2. Key Historical Events Shaped by Speculation

The American Revolution. Despite an estimated $12 million invested in public and private banks, personal loans, or commercial contracts, rich colonists could not meet the requested underwriting of Revolutionary War bonds. Only one-third of the $200 million dollars worth of public bonds issued were taken with convertible paper money. It was difficult to collect bills maturing in interest-bearing bank notes in taxes or loan billholders a coin equivalent to specie-strengthened money in circulation. Inventive control methods such as embargo checks, arming tax collectors, and impressing investors with patriotism failed. Symbolic Congressional underwriting was a ready but artful fiction whose enforcement tends to legitimize worst kind of despotism. The inflation resulting from recourse to these paper inflationary devices greatly eroded their value, affecting perception of Federal, Territory, and county financial obligations. Intervening demand-targeted professional re/funding issuing and trading restored price hegemony. Only the Federal bond market survived the debt repudiation or restructuring of the 1790s without undermining property rights governing the structure of transactions underlying securities. The private credit supply was re-centered on this market, reversing its wartime commercial banking cartel reliance. The shift to private broker underwriting and discount grew from the subsequent rapid growth and mobility of hypothecated wealth that it both reflected and promoted.

Although associated with manias and crashes, speculation served a number of useful purposes in U.S. history. Here are the ones considered most important:

3. Impact of Speculation on U.S. Economy and Society

The critical period: the late 18th and early 19th centuries. The role of speculation in American political and economic life became an overriding social issue in the last decades of the 18th century. The immediate crisis was the issue of federalism. Did the people and the representatives have the right to organize a federal government, leaving certain matters to the discretion of the members and minimizing its functions respecting the other matters? Or was the federal organization peripheral to the primary and independent authority of the individual states, merely exercising a function with their consent supports and prohibited by its broad charter from engaging in a constructive role in the areas heretofore reserved to the sovereignty of the individual states?

The role of speculation in society and the economy was a subject of much debate in the United States from the late eighteenth century through the early decades of the nineteenth century and into the present.

4. Regulation and Control of Speculation in U.S. History

The Commodity Futures Trading Commission (CFTC) assumed the market regulations of the federal government. The commission is the successor to the Commodity Exchange Authority, which was founded in 1936. Since then, speculation has become a much more important force in the commodity futures market. The U.S. Congress, sensitive to the complaints of producers, processors, and wholesalers that speculative influences supplemented the havoc caused by the “pure” hedgers’ demands for spot trading for the transfer of pricing risks, has repeatedly strengthened and extended the regulations designed to prevent the objective and subjective consequences of speculative transactions. This was not enough, of course, so additional limitations restricting trading in exchanges were imposed.

From U.S. history, we find that the benefits of speculation can sometimes outweigh the negative consequences, and regulations often run the risk of impeding its positive effects. Early in our history, the states, cities, and even the private conference association exercised varying degrees of direct and indirect control over speculation and speculators. The controls ranged from issuing specific guidelines to licensing traders to impeaching government officers who violated the controls. During the colonial and national periods, laws were enacted to control speculation in almost every commodity. The growth of securities trading in the United States during the early 19th century led to extensive manipulation and related abuses. As a result, securities trading shifted from a period of relative freedom and self-regulation by the groups of professional traders (until 1884) to a more formal and regulatory type of operation.

5. Conclusion: Lessons Learned and Future Implications

A consequence of the empirical success in explaining commodity price movements is that speculation should be formally incorporated into models gauging price determination in commodities. This is not to insist that models become formalized into explicit operational cases. On the contrary, the successes of these cases tend to rest on close contact with the economic problems and anomalies. Indeed, it has been the failure of simple academic models to recognize the special character of economic forces behind speculative behavior that has led to a propensity to dismiss speculation as a central force in economic history. By identifying speculation with the sharp narrow fluctuations that grab headlines, we overlook more subtle forces attempting to foster economic stability. The flexibility, scope, and empirically rooted success of our speculative model thus might point the way toward some efforts to incorporate speculation into models of corporate finance, inventory cycles, foreign exchange markets, and other areas of business cycle theory.

In conclusion, what have we learned about the role of speculation in American history? The evidence drawn from the milieus of American economic history suggests that markets move in partial response to a speculative component from time to time throughout history. Hence, despite the non-deterministic elements, speculation should enjoy a respectable place in our theoretical and historical discussions of price movements. The findings for commodities administer a warning to those analysts who believe they can perform a priori deductions about market behavior without examining the empirical evidence.