SPECULATION (Lat. speculatio, explora tion, contemplation, from speculari, to view, watch, spy out, from specula, watch-tower, from specere, to see). Buying and selling of property chiefly with a view to securing a profit through changes in the price of that property. There is a speculative element in a great variety of busi ness transactions; but the term is usually con fined to those in which the element of risk is relatively important. In former times specula tive activity was largely engaged in seeking to take advantage of differences in price in dis tant markets. Foreign trade 100 years ago was highly speculative. Improvements in transporta tion and in means of communication have re duced such differences to a matter of exact cal culation. Speculative business has, therefore, come to be confined almost exclusively to trans actions involving the time element.
In its simplest form time speculation involved the buying of property outright, and the holding of it in anticipation of a rise in price. This practice is as old as civilization, and until late times has usually been regarded as socially in jurious. Toward the end of the seventeenth century the practice developed in Holland of buying and selling the products of fishing voy ages before the results of the voyage were actu ally known. In the early part of the eighteenth century speculation in grain, coffee, etc., was very active in Amsterdam, developing many of the practices of modern exchanges. In all of these early forms of speculation, however, what was bought and sold was the right to a particular lot of goods.
With the development of warrants and the grading of goods speculation received a new impetus. It thus became possible for a man to sell goods which he did not possess, since he could at any time secure identical goods upon the market if lie could pay the price. It is largely to this principle that the phenomenal develop ment of speculation in recent years is due. For the extent of speculative dealings and the prac tices of modern exchanges, see STOCK EXCHA.NGE.
ECoNOMIC FUNCTION OF SPECULATION. When the supply of any commodity is subject to great uncertainty, as, for example, the products of agriculture, it is manifestly to the advantage of society that it should be properly distributed through a period of considerable length. A class of individuals who study the conditions of de mand and supply endeavoring to buy such com modities when they are abundant and cheap, in order to sell them when they are dear, serve to bring about such a distribution of consumption and thus render an important social service.
Again, some commodities, such as iron, are sub ject to great fluctuations in demand, and hence in price, thus introducing a large element of uncertainty into all of those forms of industry which make extensive use of them. The specu lator, by making contracts to deliver the article at a future date at a fixed price, frees the con sumer from that uncertainty. Legitimate specu lation thus serves as a means of insurance against certain classes of risks.
It may be, however, that the speculator is mistaken in his estimates of future supply and demand. In that case he exaggerates the evil which it is his function to minimize. Thus specu lation may keep prices abnormally high for a period, only to render prices abnormally low for a succeeding period. Speculation may thus bring about a crisis (q.v.) with its attendant indus trial stagnation.
A more serious evil results from the fact that speculation is carried on not only by those who are conversant with market conditions, but by a large class of individuals who engage in it without the proper equipment of technical knowl edge. Unscrupulous operators, through false re ports, or through. their own apparent eagerness to buy or sell, often lead such unsophisticated speculators to their financial ruin. Such influ ences tend to increase business uncertainty, and hence diminish considerably the net social gain from speculation.
Popular sentiment in England and America has generally been hostile to speculation, and laws have frequently been passed to prevent it. An act of Parliament was passed in 1733, "To prevent the infamous practice of stock-jobbing." The act had no effect and was repealed in 1860. In America an act was passed in 1S64 to pre vent speculation in gold, but its operation was so unsatisfactory that it was repealed in two weeks. In several of the States laws have been enacted aiming to prohibit speculation in one form or another. These have proved quite in effective. Bills were introduced in the Fifty first, Fifty-second, and Fifty-third Congresses which were designed to prevent certain forms of speculation in grain, but did not become law.
Consult: Emery, Speculation MI the Stock and Produce Exchanges of the l'nit«1 Slatcs (New York, 1896) ; Hadley, Economim chapter "Spec ulation" (lb., 7S98). See also general treatises on political economy (q.v. for references).