Thursday, May 12, 2011

Speculation: A Path to Ultimate Ruin

"Money is so far useful to the public as it promoteth industry, and credit having the same effect is of the same value with money; but money or credit circulating through a nation from hand to hand without producing labour and industry in the inhabitants, is direct gaming." (Berkeley, 1721, 71) Private capitalism allows individuals and nations to gain great wealth if they work hard enough to earn it; however, it can collapse into ruins if corrupted through imprudent business practices. One such practice, investment speculation, should be scrupulously avoided because it endangers the stability of our economy as well as the financial and spiritual well-being of individuals.

In order to assess the harmful effects of investment speculation, it is necessary first to differentiate speculation from other forms of investing. Charles H. Brandes (1998, xv), in his book Value Investing Today, references the following definitions of both investing and speculation given by Sereno S. Pratt in The Work of Wall Street: "when a 'security is bought and paid for in full, put away in a place of safe keeping, and held for the income it produces—that is called an investment.' But, when it 'is held for sale as soon as the price advances—that is speculation.' [Brandes] would add: (1) any contemplated holding period shorter than a normal business cycle (three to five years) is speculation, and (2) any purchase based on anticipated market movements or forecasting is also speculation."

The most obvious reason to avoid investment speculation is the personal ramifications of the motivations and practices involved and the results that they produce. Greed is the first motivation involved in speculation. Every person seeking to make a large profit is not necessarily greedy, but greed does lead people to seek investments promising "something for nothing." Another motivation toward investment speculation is the wish to harm others or the economy as a whole. Investors who have extensive capital are capable of driving consumer prices to extremes. By predicting downtimes it is possible to influence investors to pull their money out of the market and cause a financial crisis. It is also possible to invest enough in a particular commodity to drive its price higher or to predict a good future, influence others to invest, and sell stocks back to those same investors for a much higher pricer than one originally paid for them. This is a practice which very rich investors can sometimes use to rob the entire economy and stick the profits in their own pockets.

Multiple practices relating to investment speculation also have undesirable consequences. First, the practice of financing investments is unethical. When one does this, he is risking someone else's money, in effect, and has dishonestly promised to repay something that he is not currently able to repay. The apostle Paul admonished the Romans, "Owe no man any thing. . . ." (Rom. 13:8 KJV) Therefore, it is not only unethical, but also unscriptural to finance one's investments. This practice is also unsound financially because if an individuals investments do perform well, he will still be responsible to repay the loan. Second, buying or selling multi-level marketing products in order to collect enormous gains from consumers is an unethical practice. Some people are enticed to invest in such deceptive marketing schemes by greed and some for more ethical reasons, but this type of investment practice is always potentially illegal no matter the motivation. This practice is unwise since it is possible that one may not sell the product and will be out the amount he has invested.

Finally, there are some distressing results that come from investment speculation. Addiction to such forms of speculation as gambling is one possible result. Gambling includes a variety of practices. Playing the lottery is one that is obviously habit-forming, but others that may seem innocent can be addictive as well. Being under the force of addiction is unethical because one becomes the servant of the habit, making it a sort of idol. As Jesus said in the Sermon on the Mount, "Ye cannot serve God and mammon." (Matt. 6:24) Another unpleasant result of investment speculation is bankruptcy. Though not directly causative, speculation and the debt in which speculators often find themselves could be a factor in the bankruptcies that are so common today. Bankruptcy not only has great financial consequences, but it also results in effectively stealing from one's creditors. The consideration of these unwise and unethical motivations, practices, and results must surely force all reasonable persons to avoid investment speculation for conscience's sake, regardless of all other considerations.

However, a second reason why investors should avoid investment speculation is because it serves as the first step toward the economic failure of a nation. Most speculators quickly accumulate debt, which is the second step toward a financial crisis, because they are no longer content to speculate with money that they can honestly spare and maintain their present standard of living. Once this debt becomes unmanageable, they begin to fall behind and cause financial difficulties within the companies that they owe. Unrealized gains may cause those who are deeply indebted to call for pay raises. As a result, businesses fail due to the lack of capital and their employees' cries for higher wages to repay their individual debts.

If enough businesses fail, the government often increases the amount of money in circulation. Thus, the consumer debt feeds inflation. This inflation, which is in fact the third step toward an economic downturn, at first appears to be beneficial because it increases the worth of money while leaving the amount of debts that were previously accrued stationary. If one truly analyzes the situation, however, he will soon find that the cost of living does not remain stationary. Increased wages may throw some workers into a higher tax bracket, while forcing employers to raise their prices in order to cover expenses and still make a profit. This, in effect, negates any assistance that inflation might otherwise yield to the common man regarding his debt; and "as long as households, corporations, and governments borrow and spend excessively, we remain on course for more inflation. . . ." (Brandes, 1998, 178-179) The brighter side of inflation is that as wages and the cost of living rise, the stock market and the value of any investments one might have rise along with them.

Eventually, however, the stock market stops growing and the thousands that quickly remove their earnings to protect them from the imminent drop in prices actually precipitate the collapse. That drop can lead into a recession, depression, or even, in the most severe cases, complete economic failure. This is the final step in the process of financial ruin—speculation, debt, inflation, and economic crisis.

Finally, one should review several incidents in American history that serve as proof of the correlation between investment speculation and economic instability—the Panic of 1819, the Panic of 1837, the Panic of 1873, and the Great Depression. According to the authors of United States History: Heritage of Freedom (1996, 182), early speculators saw an opportunity for profit when the United States acquired some Western lands from Britain after the War of 1812. Since pioneers were eager for new land, speculators could borrow large amounts, buy land, and sell it to others with enough profit to pay for their debts. The fact that both speculators and farmers were competing for the land and that the speculators needed to repay their loans inflated land prices far above the actual demand. Upon assessing its risk, the Bank of the United States decided to make fewer loans, causing fewer people to buy the land. The prices dropped immediately, and the Panic of 1819 had begun. Thus, the speculators' practice of buying land on credit led directly to financial crisis.

According to a latter portion of the same book, speculation on Western lands also caused the Panic of 1837, though under slightly different circumstances. When speculation had caused extensive inflation of land prices between 1832 and 1836, President Andrew Jackson became concerned about risky loans being made by unstable banks. Consequently, he approved the passage of the Specie Circular, which stipulated that Western lands could only be purchased with gold or silver. This limitation of the number who could buy land from speculators lowered the land's worth and left investors with huge debts in the midst of the Panic of 1837 and an ensuing depression ending in 1843. Investment speculation had again resulted in financial crisis. (Lowman, Thompson, & Grussendorf, 1996, 201-203)

After the Civil War, the federal government began a massive expansion of the railroads. The first transcontinental railroad was finished on the tenth of May, 1869 (Lowman, Thompson, & Grussendorf, 1996, 332); soon another one was under construction. Multiple web sites mentioned that financing for the Union war effort and both transcontinental railroads had been obtained through a European firm called Jay Cooke and Company, but speculators had also invested heavily in these ventures. On September 18, 1873, Jay Cooke and Company announced its bankruptcy and terminated its funding of the Northern Pacific Railroad. Suddenly, many speculators removed their capital from the project, causing the prices of railroad stock to drop suddenly, thereby initiating the Panic of 1873. This panic soon deepened into a depression which lasted into 1878. For a third time in American history, speculation had caused a downturn in the economy. (Medina, 2000-2009, "The Panic of 1873") (NWTravel, 2009, "Panic of 1873—Social Issues")

In the early 1920s, speculation was quite common, as mentioned in the book United States History (Lowman, Thompson, & Grussendorf, 1996, 534-535). The only difference was that speculators of this period invested in the stock market rather than in land or railroads. These investors incurred even more risk than previous ones by purchasing stock "on margin," driving inflation up again. Eventually, when the market prices stopped rising, investors sold huge numbers of shares at once, causing such a drastic drop in prices that the stock market crashed on Black Tuesday, October 29, 1929. This is another incident in which speculation led to economic instability within the nation and ultimately initiated the Great Depression.

An investigation of investment speculation and its objectionable effects proves that it endangers individual spirituality and personal financial gain along with the capitalist economic system. Investment speculation is detrimental to the free market because it always leads to national debt, inflation, and economic crisis; to personal gain because it raises consumer debt and increases bankruptcy levels; and to individual spiritual growth through greed, dishonesty, addiction, and thievery.

Note: The above essay was written as part of a college application for Patrick Henry College in 2010, by Leticia Ash.


Berkeley, G. (1721): 71: "An Essay Towards Preventing the Ruin of Great Britain." McCann, C. R. (Ed.). (2003). The Elgar Dictionary of Economic Quotations, 14-15. Book on-line. Northampton, MA: Edward Elgar Publishing. Internet. Accessed 3 November 2009.

Lowman, M. R., Thompson, G., & Grussendorf, K. (1996). United States History: Heritage of Freedom, 2d ed. Pensacola, FL: Pensacola Christian College.

Medina, Miriam. (2000-2009). The History Box. "The Panic of 1873." http:// Accessed 2 October 2009.

NWtravel. "Panic of 1873—Social Issues" Magazine on-line. Internet. Accessed 2 October 2009.

Pratt, S. S. (1903). The Work of Wall Street. New York: Appleton, 1903. Quoted in Brandes, C. H. (1998). Value Investing Today, 2d ed. New York: McGraw-Hill.

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