The 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 business transactions; but the term is usually confined to those in which the element of risk is relatively important. In former times speculative activity was largely engaged in seeking to take advantage of differences in price in distant markets. Foreign trade 100 years ago was highly speculative. Improvements in transportation and in means of communication have reduced such differences to a matter of exact calculation. Speculative business has, therefore, come to be confined almost exclusively to transactions 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 injurious. Toward the end of the seventeenth century the practice developed in Holland of buying and selling the products of fishing voyages before the results of the voyage were actually 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 he could pay the price. It is largely to this principle that the phenomenal development of speculation in recent years is due. For the extent of speculative dealings and the practices of modern exchanges, see STOCK EXCHANGE.

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 demand and supply endeavoring to buy such commodities 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 subject 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 speculator, by making contracts to deliver the article at a future date at a fixed price, frees the consumer from that uncertainty. Legitimate speculation 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 speculation 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 with its attendant industrial 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 knowledge. Unscrupulous operators, through false reports, or through their own apparent eagerness to buy or sell, often lead such unsophisticated speculators to their financial ruin. Such influences 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 1864 to prevent 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 ineffective. 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.