Those Fellows With Dark Hats; J. Sparks

478 sons who held futures contracts on the New York Sugar Exchange during a typical day were dis closed. Of the nearly 1700 specu lators who owned contracts, only about 12 per cent could be termed professionals, Le. connected with the sugar industry or other pro fessional speculation. The remain ing contract holders were house wi ves, retired persons, engineers, retail proprietors, and members of other occupational groups.1 A re cent survey of traders in frozen orange juice concentrate futures showed that "executives, engi neers, accountants, doctors and the like accounted for some 40 per cent of the long side of the mar ket.":! Admittedly, in terms of business volume, professional speculators outdistance amateurs. But the professional image of the speculator obscures the fact that many ordinary people fall into this category. (An attempt can be 1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 479 made to see every human action from the viewpoint of the uncer tainty inherent in it. Every act could therefore have a speculative dimension; every actor could be said to be a speculator. However, as used hereafter, the word spec ulator refers to the narrower con cept of a promoter, pacemaker, venturesome leader, whose eager ness, drive, initiative compel eco nomic improvements.) Before one sets out to brand speculators as "bad guys," one should be aware that he unknowingly may be out fitting his own friends, neighbors, and, perhaps, himself in black hats.

The Common Image Many are uninformed about who speculators are, but even more people misunderstand w'hat they do. The following picture of spec ulators is a commonly held one: Speculators actually do very little; they do not work for a living in the traditional sense. They keep strange hours. They sit staring at stock ticker tapes, money market quotations, a company's annual report, or the fi nancial page of the newspaper. They operate on the basis of hunches and great doses of luck. They are little better than gamblers. Speculators are not producers of goods. They do not add to the total wealth. Instead, they merely take a cut off the top of what others produce. They are parasitic, enriching themselves at the expense of others. 3 In trying to analyze the preced ing portrait, it becomes clear that many of the assertions are mere gossipy bits of "conventional wis dom." Consider the charge that speculation involves very little work of the traditional kind, un orthodox hours, and peculiar man ners of behavior. Speculators in stocks, bonds and commodities are indistinguishable from other busi nessmen on the basis of their hours. Moreover, one's schedule says nothing very conclusive about whether one "works" or not. What counts is the worker's ability to prod uce the end product, not the regularity of his hours. 4 Are odd business mannerisms really dis played by speculators? The asser tion is little more than a vulgar occupational slur undeserving of recognition or response. After one studies the speculator, it becomes apparent that most of what he does is purposeful, reasonable, and understandable. Only to the un initiated or ignorant do the actions of speculators seem bizarre.

Lucky Guessers or Information Gatherers? Another subtler plaint against speculators is the claim that their unorthodox hunch-playing disqual ifies them as true "workers." Hon est mental effort, say these critics, 480 THE FREEMAN August is work, but, just as certainly, "lucky guessing" is not. The most glaring problem with such a posi tion is its gross inaccuracy. Few, if any speculators rely solely on chance or hunch. Professionals, especially, consult elaborate infor mation sources before making final decisions. Economists often say that they incur "trading costs." There are market indexes to con sult, price-earnings ratios to fig ure, and laboratory findings on new ly developed products to re view. One international speculator illustrated the breadth of his search for information when he said: "One has to know exactly what is going on, whether Mr. Nasser has a cold, or whether Mr.

Dayan is aggressive, or whether the discount rate in Holland is about to be raised .... So one has to watch everything, even if it is unimportant at first glance."5 Alertness to information is the speculator's lifeblood. G About two years ago there were times when soybean speculators anxiously awaited news from such unlikely sources as Peruvian fishing vil lages. The reason? Shortages of soybeans had developed. Fishmeal competes with soybean meal as animal feed. The fish "crop" has to be assessed in order to give speculators some idea of the value of existing stores of soybeans. 7 Speculators demand all sorts of data, from evanescent market ru mors, to sophisticated professional analyses - all in an effort to make their evaluations of the future more "scientific." Despite ambitious information gathering, the "good guess" and the "right hunch" play an im portant part in speculation. Ama teurs and professionals alike ac knowledge the influence of intu ition on their actions. In numerous instances "cold hard facts" are hard to come by, if they exist at all. Take for instance just two questions to which speculators must try to give answers: What will low temperatures do to the Florida citrus crop? Will the Wankel engine replace the conven tional piston engine? Informative data are slim. The answers exist in the realm of the highly un certain. It is in just such circum stances that the speculator must rely on his sensitivity to the fu ture. As others possess musical ability, a way with words, or athletic prowess, the successful speculator is likely to be the own er of a keen intuitive sense. Uti lized, this intuitive ability per forms a profound service to all members of the economic com munity. Intuitively guided judg ments help to allocate, conserve, and distribute scarce economic re sources, so that consumer satis faction is maximized. The specu1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 481 II lator should be recognized for his significant role as a "future-shock absorber" or even a kind of eco nomic sage. (The word "speculate"

is derived from the Latin word "spec ere" meaning "see.") One would expect high regard for the gift of intuition. On the contrary, an undercurrent of disrespect for this part of the speculative de cision is widespread. Respectable Gamblers? A related but slightly different charge is that the speculator is little more than a gambler. What is the difference, it is said, be tween putting money on the run of a horse and putting money on the future price of wheat? Are not speculators merely respectable gamesters? That both gambling and speculation contain elements of uncertainty cannot be denied. But, the similarity ends there. The gambler risks his money on arti ficially contrived uncertainty. He does not transact his business with real-world hazards. The unknowns which he confronts are the crea tions of the casino, the slot ma chine, and the gaming table. They are brought into existence to di vert and entertain.

The speculator, on the other hand, operates in the world of naturally existing uncertainty. While the enig~as of the dimly lit future hold his fellows immobile, the speculator clearly discerns un noticed opportunities for profits and alertly exploits them. 8 Where as the gambler is attentive to the world of artificial indeterminacy, the speculator keeps an economic vigil over the real, uncontrived future. Therefore, to use gambling terminology to describe specula tion is confusing and inaccurate. Yet, even a noted financial review encourages the continuation of such a practice when it illustrates an article about orange juice spec ulation with the picture of dice being rolled out. of an overturned orange juice can. 9 Do Speculators Provide Useful Services? The gnawing question which un derlies many of the complaints already mentioned remains: What useful service do speculators pro vide? One well-known defender of the speculator's activities, Frank H. Knight, has described him as an uncertainty bearer .10 According to this view, the speculator bears unmeasurable risks, that is, un certainties, while the insurer bears measurable risks. The distinction can be shown by an example. Sup pose that a businessman opens a retail clothing store. An insurance company will be able to provide him with fire insurance on his building, for the likelihood of a fire disaster is a measurable risk.

482 THE FREEMAN August The distribution of the outcome in a group of instances is known. The premiums paid by the cloth ing store owner and other busi nessmen are calculated to cover losses which occur. However, if the retailer seeks ins urance against his inability to sell the store's merchandise to customers, he will find the insurance company unable to write the policy. The possibility of a business loss is an uncertainty because its occurrence is so unique as to be unmeasur able. It is "risk" which the insurer cannot calculate and therefore can not bear. This is exactly the sort of burden which the speculator shoulders. Returning to our ex ample, if the retailer wants to avoid bearing the uncertainty of profitable resale, he may be able to convince the distributor to "sell" him the goods on consign ment. If the distributor consents to consign the merchandise, he becomes a speculator. By agreeing to take back the items which re main on the retailer's rack at the season's end, he bears an uncer tainty. More commonly, of course, the retailer will not rely upon an other to bear the uncertainty of whether or not his goods will sell.

Instead, he will assume a specu lative role by purchasing the mer chandise himself. Perhaps the most lucid analysis of the speculator's activities has been advanced by Mises ll and ex panded by Kirzner.l~ The specu lator, according to this view, is an entrepreneur who is alert to hith erto unnoticed profit opportuni ties.l:~ He is attentive, watchful, vigilant. He "anticipates better than other people the future de mand of the consumers"14 and acts accordingly. When the price which the consumer will pay for the end product promises to be higher than the total factor costs, then latent profits exist. The speculator per cei ves these unrecognized oppor tunities and exploits them. Using the Austrian approach, one can re-analyze the earlier ex ample of the clothing retailer. If he an ticipa tes that the prices which customers will pay for suits, ties, and shirts will be great er than his factor costs, and acts upon that belief, he becomes a speculator. Others are free to pur chase the factors and reap the profits, but they are not entre preneurially alert to the opportun ities which are apparent to the retailer-specula tor.

The Austrian explanation points out that the speculator profits only when he correctly anticipates future constellations of demand and supply in the market. 15 His activities reorient production toward those goods and services for which consumer demand is more intense and away from less 1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 483 intense demands. In essence, the speculator is an untiring expediter of desired economic production. It is clear that while the Knightians emphasize uncertainty bearing, the Misesians emphasize entrepreneurial alertness. How ever, both positions cast the spec ulator in a favorable light. Both view him as beneficial. Both con clude that his contributions to the economy would be sorely missed if he suddenly failed to function. So far the speculator has been discussed in general. He has been found to have an important and benevolent economic role to play.

The bulk of modern anti specula tive opprobrium, however, has been directed at specific kinds of speculative activity, especially, money speculation, land specula tion, and commodity speculation. They therefore deserve separate consideration. Money Speculation Money speculators, in the opin ion of many, are the worst of the black-hatted ones. Their treatment during the German hyperinflation is .typical. Government officials and the press villified speculators who fled from the mark to other currencies. These pecunious ones, warned the newspapers, had gained a vested interest in the mark's continued depreciation. They were beseiging the foreign exchange mar kets, claimed the state bank president. They put personal interests above country, offered another source. 16 But, attacks on speculators have not been limited to foreign soils or other times. In response to the August, 1971, "monetary crisis,"

our own President said: ". . . the speculators have been waging an all-out war on the American dol lar .... Accordingly, I have di rected the Secretary of the Treas ury to take the action necessary to defend the dollar against the speculator. I am determined that the American dollar must never be a hostage in the hands of the international speculators."17 What activities would inspire such sen timents? What do money specu lators do? Essentially they buy and sell the currencies of different coun tries. When the speculator expects the value of a currency to go up, he purchases it - goes "long" in it. On the other hand, if he expects the exchange rate (value) of a currency to fall, he will go "short" in the currency by selling it in the forward market (futures mar ket) , or exchanging it immediately for other more promising cur rencies. How does such rational trading qualify speculators for black hats? Actually in untroubled times, when only moderate changes in currency values are called for, 484 THE FREEMAN August speculators are largely able to avoid criticism. Their activities are regarded as tending to dimin ish the gap between the highest and lowest exchange prices. Dur ing these times, observers do not lose sight of the fact that ex change rates are determined as much by the "bulls" of the market as by the "bears."IS Even those inclined to view speculators with distrust consider mild speculative activities as benign and "stabiliz ing." However, if monetary poli cies of rapid inflation are em barked upon and, consequently, speculators' positions become in creasingly pessimistic, then their denunciation can be expected.

Speculators are causing the de cline, it will be charged, or if they are not the cause, at least spec ulators are sending exchange rates to unwarrantedly low levels. No Coercive Power To the first charge - that the short-selling speculator causes a decline - it can only be said that short sales are the short seller's forecast of the demand for a cur rency. However, the short-selling speculator has no power to coerce the agreement of others who are buying and selling in the market. 19 "Speculation does not determine prices; it has to accept the prices that are determined in the market. I ts efforts are directed to correctly estimating future price-situations, and to acting accordingly."2o What of the assertion that spec ulators "pile on" to falling prices, thereby driving them to low lev els? When depreciation becomes so clear that many amateurs enter the market, exchange rates may be temporarily depressed to a point that is not found to be justified when subjected to the seasoned reflection of the profes sional. Readjustment upward will be aided by the actions of experi enced speculators who will help to return the currency to a realistic value. 21 I t has been noted that during severe currency declines the ranks of speculators will be swelled by amateurs. A portion of these neo phytes will be businessmen who seek a haven for their capital, safe from the ravages of paper money depreciation. Capital con version of this sort is also attacked by the government as harmful to the nation. But, the avoidance of capital destruction, even when it involves deserting the currency of the realm, is a. benefit to the nation's capital fund, not a detri ment. Those who take precautions to conserve capital are not the foes of their fellow citizens, but their benefactors. 22 Recriminations against money speculators are "side shows" pre sented to divert attention from 1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 485 real causes. The speculative activi ties of the black-hatted ones come under attack because they are irri tating thorns in the sides of gov ernmental money managers. These officials wish to continue their pa per money profligacy without being called to account by the forces of depreciation. It is pre cisely because the speculator ex poses the bankruptcy of their shal low schemes that he is labeled the "cause" of the decline. Conven iently ignored by the authorities are their own inflationary excesses which actually precipitate the downward revaluation of the na tional currency. The arbitrary, fickle activities of the state bank, including the artificial "bull" ma neuvers to support its own cur rency's value, are the prime causes of decline and depreciation.

Land Speculation Land speculators have always managed to inspire a great deal of invective. Undoubtedly, some distrust is due to the notoriety which fraudulent land schemes have received. To the fair-minded it should be obvious that legiti mate land speculation and land fraud are entirely different things. But, if the aura of fraud which often surrounds land transactions is dispelled, there nevertheless re mains a residue of suspicion about land speculators. No small amount of this lingering distrust is at tributable to the prevailing view of western land sales in the United States during the eighteenth and nineteenth centuries. One of the themes emphasized by the most widely read authority on the subject of the western lands is the detrimental impact of "spec ulation" and "land monopoliza tion." According to his writing, large scale speculators "preyed" upon the land, "engrossed" land, outbid settlers, and so forth. They preceded the settlers to the Amer ican frontier, purchased the "best lands," virtually forcing settlers to buy at their prices. Moreover, the black-hatted ones were the per petrators of fraudulent schemes designed to add blocks of land to their already monopolistic hold ings. 23 Fortunately, interpretations which oppose the prevailing anti speculative position are being ad vanced by such economic histor ians as Douglas C. North. He points out several things. First, speculators should not be regarded as having been primarily large scale dealers. "Many a farmer bought more land than he could possibly cultivate, with the idea of holding it for a rise in value-."24 Speculators should not be regarded as having been members of a separate entrepreneurial class in conflict with an agrarian class as 486 THE FREEMAN August is implied by the prevailing view.

Instead, entrepreneur and agra rian were often one. Next, even though land specula tors themselves were far from "public spirited," their actions were economically beneficial. The reason for this is relatively simple. The speculator purchased what he believed would become productive land. The price he offered was higher than prices offered by other bidders who failed to see its high yield potenbial. His purchase re moved the land from commitment to inferior productive uses con templated by the other bidders. If the speculator were correct in his forward-looking valuation, other purchasers would soon appear who would be willing to pay a higher price for the parcel precisely be cause they expected to use the land in a highly productive way. Un intentionally, the land speculator helped to shift land resources to their most fruitful uses and away from less fruitful ones. 25 The charge of "land monopoliza tion" by speculators is an un founded one. "There is no mean ingful sense in which a monopoly of land existed at any time in the nineteenth century. In fact, avail ability is the one clearly evident characteristic of the opening up of the public domain. There were immense amounts of land continu ously available from a large number of different sources."26 How ever, large tracts of land were put beyond the reach of settlers by Congress. Of the public lands ap propriated between 1789 and 1904, over half of the acreage was re served either to the Federal gov ernment or granted to the states and railroads. 27 The policies of the national legislature, not the ac tions of speculators, came the closest to creating large land hold ings in the hands of a few. For tunately, the railroads and the states sold off tracts of land into private hands, thus assuring their economic use.

Finally, the claim is made that speculators regularly engaged in fraud to obtain land. Though there is no justification for fraud, it is a fact that many of the illegal transactions were encouraged by the gross unworkability of the government land laws. The basic theory underlying the laws was that ownership should be awarded only to actual occupiers of land parcels and even then there was a limit on the parcel size. 28 In many instances continuous occupancy required by law was not econom ically justified. Consequently, spec ulators, settlers, and others par ticipated in fraudulent schemes which appeared to comply with the land laws in order to obtain larger parcels than would be allowed to a single "occupier."

1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 487 By prior agreement, some set tlers made -homestead "entries" and then sold immediately to spec ulators. With the cooperation of land officials, "dummy entries" were often made for homesteaders who did not exist. The land was then assigned to speculators. 29 In Nebraska a house on wheels was moved from claim to claim to ful fill the house building require ment. 30 One need not condone fraud to appreciate the economic benefit which resulted from the creation, by speculators, of land units which were a productive size. Whenever land is able to be owned by people and wherever there are changes in land values, there will be speculative profits and losses made. Nothing short of destroying the right to buy and to sell will deter men from alertly purchasing parcels which they consider underpriced or selling those which they consider over priced. Ultimately, opponents of land speculation must favor re strictions on the very rights which are the essence of ownership.

Commodity Speculators In ever-increasing numbers ob servers are blaming speculators in commodities - those raw products which are traded on organized markets-for the increasing prices. About fifty different commodities are traded worldwide today, rang ing from Idaho potatoes to soy bean meal from platinum to ply WOOd.31 The modus operandi of a commodity speculator is similar to that of other speculators. He evaluates the likelihood that fu ture prices will. be different from current prices and buys or sells accordingly. His buying and selling generally accomplish several benefits. First, he bears the uncertainty of future prices so that others who do not wish to shoulder such a burden may escape it. For example, a wheat farmer may decide to sell his wheat crop to the grain eleva tor owner. By so doing the farmer makes a decision to allow the grain elevator owner to take on the un certainty of future grain prices.

Though the farmer's investment in labor, land, and capital contains a genuine element of speculation it self, nevertheless, at the harvest he may wish to allow another to take up the speculative burden. On the other side of the sale, the grain elevator owner buys because he is alert to what he believes will be higher future prices. Secondly, if a catastrophe re duces the expected supply of a commodity, the speculator may re move from the market a portion of the commodity in anticipation of higher prices. By speculating, he is helping to moderate the current 488 THE FREEMAN August use of the good and to allocate the reduced supply into the grain scarce future. His trading helps to mitigate the effects of commod ity shortfalls on the consumer. Perplexingly, commodity traders draw criticism from the very groups which they benefit - con sumers and primary producers. The consumers of products which contain raw commodities often ir rationally blame the speculator for being the primary cause of the reduced supplies. The truth is that being merely a buyer or seller, he neither increases nor decreases the total amount of the commodity.

He merely spreads the good over time. 32 Primary producers, such as far mers, who sell to the speculator, often begrudge him the profits which he receives when the price of the commodity rises. Such a position is grossly unfair. The original sale was presumably con summated because the producer and the speculator perceived the future configuration of prices dif ferently. As the future became the present, the speculator's view was borne out. However, that is surely no proper reason to deprive the speculator of his profits. The pro ducer's brazen covetousness is re vealed by his unwillingness to support the logical converse of his position. He is not found to advo cate his own indemnification of the speculator who experiences losses when commodity prices dip. Recently the prices of commod ities have been more volatile than usual. Predictably this behavior has been ascribed to the evil ma chinationsof speculators. In real ity, several factors have influenced commodity prices. (1) New inter ests, foreign and domestic, have sought commodity futures con tracts as hedges against the shaky state of national currencies. (2) Gigantic government to govern ment commodity deals have helped to send markets into gyrations which would be the envy of any private "manipulator." (3) infla tionary monetary policies have compounded the uncertainty of fu ture commodity prices. Character istically, instead of seeking to stabilize the purchasing power of the domestic currency, instead of trying to encourage the adoption of a sound international money, congressional committees are seek ing to create a new Federal agency similar to the Securities and Ex change Commission to police com modity trading. 33 Controlling the black-hatted ones is seen as a sig nificant part of the answer to commodity market fluctuations.

Conclusion It is not necessary to attribute personal goodness to the indi vid ual speculators of the past and 1974 THOSE FELLOWS WITH BLACK HATS - THE SPECULATORS 489 the present. Their motivation was and is self-gain. However, by their efforts as alert entrepreneurs, they have continually perfected the operations of the market; they have borne the burdens of the uncertain future. In essence, they have constituted the very sen sitive fingers of the invisible hand. It is time that they be allowed to escape the moral stigma under which they have labored, to with draw from the dark shadow of obloquy, and to don white hats! ~ - Footnotes 1 Example referred to in Armen A. AI chian & William R. Allen, University Eco nomics (Belmont, California: Wadsworth Publishing Inc., 1969), pp. 160-161. 2 Arlene Hershman, "The OJ Play: Tough and Tangy," Dun's, April 1971, p.55. 3 This layman's concept of a speculator is a composite of student comments, news paper accounts and conversations of the author with noneconomists about specu lation.

4 John C. Sparks, "Production Unlim·, ited," IX Essays on Liberty (Irvington on-Hudson, New York: Foundation for Economic Education, Inc. 1962), pp. 257 271. ' 5 "The Arcane of Arbitrage," Business Week, November 22, 1969, p. 140. 6 Israel Kirzner, Competition and En trepreneurship (Chicago: University of Chicago Press, 1973), p. 68. 7 "Speculators Whet Their Appetites," Business Week, July 11, 1970, p. 19. 8 Kirzner, p. 39. 9 Hershman, p. 55. 10 Frank H. Knight, Risk, Uncertainty and Profit (Boston: Houghton and Mifflin, 1921), Chpt. VIII, "Structures and Meth ods for Meeting Uncertainty." 11 Ludwig Mises, Human Action (New Haven: Yale University Press, 1949), pp. 286-297. 12 Kirzner, pp. 30-87. 13 Kirzner, p. 39. 14 Mises, p. 288. 15 Ibid., p. 29l. 16 Hans F. Sennholz, "Hyperinflation in Germany," Freeman, October, 1970. 17 Richard M. Nixon, "Executive order No. 11615 and Related Documents," Spe cial Report, Bureau of National Affairs, August 15, 1971.

18 Ludwig Mises, The Theory of Money and Credit (New Haven: Yale University Press, 1953), p. 253. 19 Richard A. Posner, Economic Anal ysis of Law (Boston: Little, Brown and Company, 1972), p. 200. 20 Mises, The Theory of Money and Credit, p. 253. 21 Ibid., p. 255. 22 Sennholz. 23 Paul W. Gates, "The Homestead Law in an Incongruous Land System," XLI American Historical Review (July, 1939), pp. 652-68l. 24 Douglas C. North, Growth and Wel fare in the American Past (Englewood Cliffs, N.J.: Prentice-Hall, 1966), p. 125. 25 Murray N.Rothbard, Man,Economy and State II (Princeton, N.J.: D. Van Nostrand Company, Inc., 1962) pp. 512 513). 26 North, p. 132. 27 Ross M. Robertson, History of the American Economy (New York: Har court, W orId, 1955), p. 217. 28 Rothbard, I. p. 151. 29 Robertson, p. 218. 30 Gilbert C. Fite and Jim E. Reese, An Economic History of the United States (Boston: Houghton-Mifflin Company, 1965), p. 316.

31 Stanley W. Angrist, Sensible Specu lation in Commodities (New York: Simon and Schuster, 1972), p. 26. 32 Alchian & Allen, pp. 149-158. 33 "A Governor for Those Volatile Commodities," Business Week, February 23, 1974, p. 32.