<h2>CHAPTER 36</h2>
<h3>GAMBLING, SPECULATION, AND PROMOTERS' PROFITS</h3>
<h4>§ I. GAMBLING VS. INSURANCE</h4>
<div class="sidenote">Unavoidable chances</div>
<p>1. <i>Many forms of chance are inseparable from the individual
enterprise.</i> There are what may be called natural chances chances,
arising from the uncertainties of the seasons, from rainfall, heat,
hail, storm, flood, lightning, land-slides. Such chances must be taken
both by the small enterpriser and by the large. In an earlier condition
of society natural chance almost dominated industry, and it still
remains and must always remain an important factor to deal with. There
are political chances, as war and riot; as legislation on money,
tariffs, credit, and business relations. These are caused, it is true,
by the action of men, but it is a collective action out of the control,
to a greater or less degree, of the individual—absolutely out of the
control of most individuals. Men of greater political influence can to
some extent control these chances, possibly in their own favor. There
are chances of carelessness causing fire, explosions, wrecks on
misplaced switches, and involving penalties and losses that must be met.
There is the chance of physical or mental collapse, as the sudden
insanity or the sudden death, unforeseen and unpreventable, of one
performing responsible duties. Sickness often wrecks the plans and the
fortune of a whole family. There are economic changes, such as those in
methods of production, in machinery, in methods of transportation; such
as the growth of fashions or the growth of population changing demand in
some directions and for some materials.</p>
<p><span class="pagenum"><SPAN name="Page_334" id="Page_334">[Pg 334]</SPAN></span></p>
<div class="sidenote">Average of chances in each industry</div>
<p>Some of these chances are more connected with money-lending, others with
manufacturing; some with agriculture, others with commerce; but all are
present in some degree in every industry. In the broadest view they are
not chances, for on the basis of experience it can be foretold that they
will occur to some one; but no individual can tell when and how they
will occur to him. A general average of chances in different lines of
business causes some to be called safe, others extra-hazardous. The
chance is averaged and added to the profit or gain of that industry, for
an extra-hazardous industry must in general afford a higher average of
profit in order to induce men to engage in it. It is folly to take a
risk without ascertaining its degree, so far as general experience
enables one to choose. But inasmuch and in as far as the gains and
losses fall unequally upon different individuals, income depends on
chance.</p>
<div class="sidenote">Other chances artificial and avoidable</div>
<p>2. <i>The essence of gambling is the attempt to gain by taking chances
that are not the unavoidable incidents of productive enterprise</i>. The
chances just enumerated are not sought, but avoided as far as possible;
yet they must be borne by some one, and the burden must be distributed
throughout society. There are unquestionably many kinds of chance-taking
which differ from these in economic, and therefore in moral quality; but
it has taxed the ingenuity of philosophers to lay down an abstract
definition of gambling that would permit ready and certain distinction
in practice between gambling and legitimate chance-taking. Typical
gambling is the transfer of wealth on the outcome of events absolutely
unpredictable, so far as the two gamblers are concerned. Examples are
the shaking of unloaded dice or the honest dealing of a pack of cards.
There can be no doubt of the entire lack of a productive economic basis
in the betting on prices carried on in so-called bucket-shops by
ignorant persons having no connection with the market of real things,
and seeking to get something for nothing as a result of mere chance.</p>
<p><span class="pagenum"><SPAN name="Page_335" id="Page_335">[Pg 335]</SPAN></span></p>
<div class="sidenote">Cheating and gambling</div>
<p>Cheating is not a necessary mark of gambling, although the cruder kinds
of dishonesty, such as the loading of dice or the collusion of
horse-owners or of horse-jockeys to deceive the betting public, are so
common that they seem often to be its essential feature. Gamblers
recognize fair as opposed to unfair methods. Fair gambling is a kind of
minor morality within the immoral field of gambling, like the honor
found among thieves. Gambling bears somewhat the same relation to
legitimate chance-taking that play does to labor. The chance-taking in
gambling has no useful purpose or result outside itself. The gamblers
constitute themselves a little fictitious economic circle, and they
transfer gains and losses on the turn of events that have no practical
objective result within their circle except to determine the direction
of the transfer.</p>
<div class="sidenote">Various cases of a mixed nature; partisan bets</div>
<p>3. <i>Legitimate forms of chance, or risk-taking, shade off into
illegitimate forms, or gambling.</i> Ranging between the extremes of
legitimate risk-taking and of gambling are a number of cases of a mixed
nature. The bets made on college games, races, and contests differ from
ordinary bets only in the added feature of so-called college loyalty (a
travesty on the real sentiment). These college gambling contracts are
supposed (according to a mode of reasoning found also among primitive
peoples) to exercise a subtle and irresistible influence upon the
result. A crew that enters the race with the odds against it is unnerved
and undone, thinks the patriotic collegian.</p>
<div class="sidenote">Knowledge and skill affecting the result</div>
<p>In nearly all wagers, judgment in some degree influences the choice of
sides. One man bets on a horse whose pedigree and performances he knows
thoroughly; another judges by the horse's appearance as it comes upon
the track. The professional book-makers have the latest possible and
most exact information on which to base their bids.</p>
<p>In the bets made on one's own prowess, as on speed in running or rowing,
or in playing cards (wherein also the element of pure chance is mingled)
the chance-taking is<span class="pagenum"><SPAN name="Page_336" id="Page_336">[Pg 336]</SPAN></span> still far over on the uneconomic side of the
border-line. The running is for the sake of the wager, not for a useful
purpose. A premium won by a runner for speed in delivering a message of
economic importance is in striking contrast to the winnings in a wager.</p>
<p>Finally, the very border-line of difficulty is reached in the purchase
and sale of goods in the market with a view of profiting by chance
changes in price. Land speculation, the purchasing and holding of
lumber, grain, cattle, and other tangible and useful things, must be
judged liberally. The quality of gambling depends somewhat on the motive
as well as on the ability of the actor. The enterpriser dealing with
real wealth, and fitted to take the risks, both because of his resources
and of his exceptional knowledge, needs the motive of gain, and in a
sense can be said to earn socially what he gets. The motive of the
uninformed must be a blind trust in luck, and a hope to gain from a rise
in prices which they are quite unable to foresee or rationally to
explain.</p>
<div class="sidenote">Gambling an economic loss to society</div>
<p>4. <i>In its relation to value, a bet, or wager, is the exchange of the
chance of loss for the chance of gain, involving a social loss.</i> Even
when fairest, the average results of such an exchange must be
unfavorable to society. One person loses a part of his income that
gratifies relatively urgent wants; another gains something that
gratifies only less urgent wants than were represented by the sum he
risked. The area that is subtracted from the loser's psychic income is
larger than the area added to the winner's psychic income. The result
would be different on the impossible condition that it were always the
poorer man that gained and the richer one that lost. Betting, then, does
not produce wealth; it merely transfers ownership in a way that reduces
the total want-gratifying power of wealth.</p>
<p>The effects that gambling and betting have upon character are still more
important and dangerous than their effects upon income. Motives of
economic activity are reduced; energy is diverted from productive
enterprise; society is<span class="pagenum"><SPAN name="Page_337" id="Page_337">[Pg 337]</SPAN></span> demoralized through dishonesty of men
intoxicated by gambling; speculation and embezzlement occur; and there
is a reduction both of production and of enjoyment in society. These
things can be reasoned out with mathematical certainty by means of the
law of marginal utility.</p>
<div class="sidenote">Insurance as a wager</div>
<p>5. <i>Insurance is, in outer form, a bet; but its essential purpose is the
useful one of equalizing and eliminating chance.</i> In its early form
insurance was a bet made by a ship-owner to protect his cargo from loss.
The chance of loss in shipping was even greater in the Middle Ages than
now, and it became customary for the ship-owner to bet with a wealthy
man that the ship would not return. If it did come back, the owner could
afford to pay the bet; if it did not, he won his bet and thus recovered
a part of his loss. It was what is called to-day "a hedge," that is, one
bet made to neutralize, or offset, another. This gave to the smaller
merchant the advantage of distributing his losses over a number of
voyages, as was done by the owner of many vessels. Antonio, the wealthy
merchant, is made thus to express his security:</p>
<div class="poem"><div class="stanza">
<span class="i2">"My ventures are not in one bottom trusted<br/></span>
<span class="i2">Nor to one place; nor is my whole estate<br/></span>
<span class="i2">Upon the fortune of this present year.<br/></span>
<span class="i2">Therefore my merchandise makes me not sad."<br/></span></div>
</div>
<p>Gradually there came about a specialization of risk-taking by the men
most able to bear it. They could tell by experience about what was the
degree of uncertainty, and could lay their wagers accordingly. When
several insurers were in the same business, competition forced them to
insure the vessel and cargo of the ordinary trader for something near
the percentage of risk involved. The insurance thus tended to become a
mutual protection to the ship-owners; what had to be paid in premiums to
cover risk came to be counted as part of the cost of carrying on that
business.</p>
<div class="sidenote">Insurance as mutual protection</div>
<p>Modern insurance is mutual in nearly every case: the total<span class="pagenum"><SPAN name="Page_338" id="Page_338">[Pg 338]</SPAN></span> premiums
equal the total losses plus operating expenses, the interest on the
reserve of premiums counting as part of the premium. Each one gets
protection for the loss of his property in return for the payment of a
sum that will cover the losses on others' property. Such an exchange is
a profitable one. The premium comes from marginal income; the loss of
house or property would fall upon the parts of income having higher
marginal utility. The less urgent wants of the present are sacrificed in
order to protect the income that gratifies the more urgent wants of the
future. In insurance each party gives a smaller utility for a greater;
each has a margin of advantage; while the greater certainty in business
stimulates effort and rewards it. This is quite the opposite of the
working of betting and gambling.</p>
<div class="sidenote">Conditions of sound insurance</div>
<p>6. <i>To be economically sound, insurance must have to do with real
productive agents, and with somewhat regular, ascertainable events
beyond the control of the insured.</i> The difficulties that arise in case
of fire-insurance are due largely to the failure to meet these
requirements. When the insured sets fire to his own buildings, fire
insurance ceases to be a legitimate thing. Constant efforts are made by
insurance companies to guard against these "moral risks," the least
calculable of any. Merchants whose stocks have been mysteriously burned
two or three times find difficulty in getting insured. In life-insurance
it was the custom formerly to refuse to pay death-losses in case of
suicide; but now that condition is attached only for the first two or
three years. It being reasonable to suppose that no man would plan
suicide years in advance, death by one's own hand some years after
taking life-insurance is regarded as coming under the ordinary rule of
chance.</p>
<h4>§ II. THE SPECULATOR AS A RISK-TAKER</h4>
<div class="sidenote">An element of speculation in all business</div>
<p>1. <i>Every enterpriser is to some extent specializing as a risk-taker.</i>
This familiar idea may be taken as a starting<span class="pagenum"><SPAN name="Page_339" id="Page_339">[Pg 339]</SPAN></span> point in discussing
speculation. In its broadest sense speculation means to look into
things, to examine attentively, study deeply, contemplate, meditate. In
a business sense the speculator is one who studies carefully the
conditions and the chances of a change of prices; hence arises the
thought that speculation is connected with chance. The enterpriser can
estimate these chances better than most men. He stands on a hilltop
sweeping the horizon, and can see farther than the workingman can. He
relieves the other agents of part of the risk, and he insures both
laborer and capitalist against future fluctuations of prices. Some of
the profits of successful enterprise in countries where no system of
regular insurance has grown up, and in certain lines here where no
insurance is possible, are speculative gains of this sort. Offsetting
them, however, in large measure, are the speculative losses, by which in
many cases the investment has been swept away altogether. The cautious
business man tries to reduce chance as much as possible by insurance,
and to confine his thought and worry to the parts of the productive
process where his ability counts in the result. The wise have found out
that it is better to shift the risk to some specialist who can take it
better than they. For a man who has his thought and effort concentrated
on running a flour-mill, it is foolish to take the risks of fire, of
loss in shipment, of a rise in the price of grain needed to fill
outstanding orders—it is as foolish as it would be for him to make his
own machinery. Insurance being the economical way to cover risk, the
reckless will, in the long run, be eliminated from the ranks of
enterprisers.</p>
<div class="sidenote">Specialization of risk taking</div>
<p>2. <i>In some lines the risk of marketing and carrying large stocks
becomes highly specialized, so that ordinary enterprisers shift it to a
small group of risk-takers.</i> In buying and selling large quantities of
produce there is required the closest and most exclusive attention of a
small group of men. The marketing of some staple products requires the
most minute acquaintance with world conditions. To foretell<span class="pagenum"><SPAN name="Page_340" id="Page_340">[Pg 340]</SPAN></span> the price
of wheat one must know the rainfall in India, the condition of the crop
in Argentina, must be in touch as nearly as possible with every unit of
supply that will come into the market. Such knowledge is sought by the
great produce speculators in the central markets. If all means of
communication—telegraph, cables, mails—are open to all, competition
among these speculators becomes intense, and the result is the extremest
efficiency. Their survival depends on the development of acute insight
into market conditions. It is the testimony of expert witnesses and of
writers in the report of the Industrial Commission that the margin at
which farm produce is sold has fallen greatly in the last few years.
These products are marketed along the lines of the least resistance,
that is, of the greatest economy. The function of the commercial
specialists is to foresee the markets, and to ship to the best place, at
the right time, in the right quantities. If a product shipped to
Liverpool will, by the time it arrives there, be worth more in Hamburg,
there is a loss. Such difficult decisions can be made best by a small
group of men selected by competition. When handling actual products they
perform a real economic service.</p>
<div class="sidenote">Produce speculators as insurers</div>
<div class="sidenote">Source of legitimate speculators' gain</div>
<p>3. <i>Even some mere speculators on the produce markets may and do at
times perform a productive service as risk-takers.</i> Many of the
speculators in staples, wheat, corn, wool, rarely handle the material
things, the real products. They make it their business to study the
world conditions, to foresee prices, and in a sense to bet upon them.
Regular merchants buy and sell fictitious products of these men. When a
miller buys ten thousand bushels of wheat that will remain in the mill
three months before they are marketed as actual flour, he at the same
time sells that number of bushels to a speculator for future delivery;
or selling flour for future delivery the miller buys a future in wheat.
In either case he cancels the chance of loss or gain, giving up the
chance of profit in the rise of wheat in exchange for<span class="pagenum"><SPAN name="Page_341" id="Page_341">[Pg 341]</SPAN></span> protection from
the loss of the product on his hands. To him this is legitimate
insurance, for he is striving not to create an artificial risk, but like
the medieval ship-owners, to neutralize one that is inseparable from the
ordinary conditions of his business.</p>
<p>One may ask, How, if the miller in the long run benefits, can the
speculator gain? He does not intend to perform this service for nothing.
Yet as the sales in the whole market equal the purchases, some say that
there can be no profits to the speculator. There are unsuccessful
speculators and at any rate their losses go to the successful as a sort
of gambling profit. Speculators do not dine entirely on "lambs"; they
are anthropophagous. But, further, the sales to legitimate purchasers
should net a gain to the abler speculator. In proportion as his
estimates are correct, there will remain a regular slight margin of
profit to him. If he agrees to sell wheat at eighty-five cents to be
delivered in three months, he expects it to be a little less at that
time. In the long run the ablest speculator probably buys at a little
less and sells at a little more than the price really proves to be. This
means that the merchants in the long run pay something for protection
against changes in prices, just as they pay something for insurance. And
yet this is the cheapest way to eliminate risk, and a man engaged on a
large scale in milling is, it is said, at a disadvantage if he neglects
this method of marginal buying.</p>
<div class="sidenote">Ignorant and dishonest speculation</div>
<p>4. <i>The buying of margins by the "lambs" is simple betting, and much
manipulation of the market is dishonest.</i> What has just been described
is the more legitimate phase of marginal buying, not its darker aspect.
One who, having no special opportunities to know the market, buys or
sells wheat, or other commodities or securities, on margin, is called a
lamb. He is simply betting. He has no unusual skill; he cannot foresee
the result. The commission paid to brokers "loads the dice" slightly;
the opportunities of the larger dealer of anticipating information load
the dice heavily<span class="pagenum"><SPAN name="Page_342" id="Page_342">[Pg 342]</SPAN></span> against the lambs. Secret combinations and all kinds
of false rumors cause fluctuations large enough to use up the margins of
the small speculator. At times a number of powerful dealers unite to
cause an artificially high or low price, a situation called "a corner."
But this is little other than gambling between betters. The general
public gains and loses little if any by these operations, except in the
evil effects they entail socially.</p>
<h4>§ III. PROMOTER'S AND TRUSTEE'S PROFITS</h4>
<div class="sidenote">The promoter's service to the owners</div>
<p>1. <i>The promoter of trusts performs in some ways a substantial economic
service.</i> A promoter is one who undertakes to convert a number of
unrelated factories, or establishments, into a trust, or combination. He
gets options on different factories, that is, the right to buy them at
an agreed price within certain time limits. He gets some banking house
to underwrite the combination, that is, to agree to dispose of a number
of shares to the investing public. A certain number of shares go to the
owners, a certain number to the banking house for its services in
underwriting, and a substantial number, it may be ten or twenty per
cent, of the enormous capitalization, to the promoter himself. This is
payment for his ability to water the stock successfully, to capitalize
it for more than its former value. Evidently the owners think he earns
the money or they would not pay him. So far as there are economic
advantages in large production, and inasmuch as there is always friction
in the forming of new industrial arrangements, there is a real social
service performed by the promoter. The gains of the promoter are in part
the legitimate price of progress.</p>
<div class="sidenote">The loss of the investors</div>
<p>2. <i>A large part of the profits of promoter and of owners is unfairly
taken from the investor.</i> The larger modern business is less and less
attached to particular neighborhoods. A much smaller proportion of
investments is made in industries which the investor himself can control
or even see in<span class="pagenum"><SPAN name="Page_343" id="Page_343">[Pg 343]</SPAN></span> operation. Business, therefore, in these days is done
largely on faith in other men. Especially the investor takes great
chances. The prospectus announcing a reorganization is frequently
misleading. It frequently misrepresents the sources of income and the
probable dividends, conceals essential facts, and makes misleading
statements. The capitalization often is absurdly high, compared with the
value of the different establishments. In one case eight million dollars
of stock were issued to represent factories whose combined value had
been five hundred thousand dollars. So far as the capitalization is
based on the increased profits due to the monopoly power, the profits of
reorganization are taken out of the pockets of the public. But in fact
even monopoly earnings cannot support such valuations, and from the
outset if fair dividends are paid, they are falsely paid out of capital,
not out of earnings. With the approach of bad times there must be a
suspension of dividends, a fall in the value of securities, and a loss
falling upon the investors. Such practices are a serious evil, for the
stability of industry depends on the opening up of opportunities for
safe investment to the average man.</p>
<div class="sidenote">The speculating trustee</div>
<p>3. <i>Corporation officers and trustees, speculating in the stocks of
their own companies, are reaping illegitimate gains.</i> It is recognized
by public sentiment and in law that for public officials to let
contracts to themselves is bad morals and bad public policy. It is the
duty of legislators not to make laws for companies in which they are
interested. One of the greatest scandals in American public life, "the
Credit Mobilier affair," was caused by the acceptance by members of
Congress, virtually as a gift, of shares in a company that was seeking
favoring legislation. Such action must be looked upon as a sort of
industrial treason, comparable to the old form of political treason.
Corporation officers are in a position of public trust toward the
investors quite comparable to that of government officers toward the
citizens. The power of directors and of other officers to manipulate<span class="pagenum"><SPAN name="Page_344" id="Page_344">[Pg 344]</SPAN></span>
earnings and dividends, and thus to affect the market value of the
stock, leaves the investing public helpless. The practice by officials
in great corporations of speculating in their own stocks, whose prices
they can manipulate, is so common as scarcely to attract comment. Large
fortunes result from this betrayal of the trust imposed by the
shareholders. This is not legitimate speculation; it is like loading the
dice, pulling the horse, drugging the pugilist—things despised and
condemned even in gambling and sporting circles.</p>
<div class="sidenote">Two types of speculation</div>
<p>It appears, therefore, that in the complex conditions of modern business
there is a legitimate concentration of risk in the more capable hands,
but also a growth of opportunities for illegitimate speculation and for
large dishonest gains that were not possible before. These two types of
speculation should be distinguished, as far as possible, in thought and
in practice; but this it not easy in concrete instances, which vary
almost indistinguishably from the clear case of honest earnings to the
other extreme of illegitimate gains.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_345" id="Page_345">[Pg 345]</SPAN></span></p>
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