How speculation became respectable: early theories on financial and commodity markets

Around the 1860s, technological advancements in transport, communication and warehousing, contributed to the emergence of world markets for many staple commodities (e.g., cotton, wheat). At the same time, the economic needs of the companies involved in this commercial revolution stimulated the growth of markets for securities and shares. The growing complexity of global markets created propitious conditions for the emergence of a class of professional speculators. Initially, the frenzy that accompanied this process seemed to confirm traditional views, which identified speculation with gambling. With time, however, a new scientific literature emerged. Focussing on the last decade of the nineteenth century up to the early 1920s in the UK and US, our analysis brings to light how contributors to this new literature made the case for speculation against conventional wisdom. In so doing, they were not blind to the downside effects of speculation as a possible source of resource misallocation. Nevertheless, they chose to emphasise its constructive side, basing their arguments on the case of commodity markets, where the idea of a long-run equilibrium price to be attained by speculation appeared plausible. They employed the same arguments in the case of the stock exchange, downplaying differences between the two markets although they were well aware of them. Thus economists played a crucial role in convincing policymakers of the beneficial effects of the new speculative instruments, against the hostility of a large part of public opinion. Futures and their use for the purpose of short selling, the most controversial of the new trading practices, were gradually accepted and regarded as legitimate commercial transactions. On the other hand, options continued to attract suspicion for a long time and to be kept in a limbo between disreputable and acceptable operations. The paper expands the existing literature on the subject by providing the first systematic reconstruction of the shared analytical arguments that, in spite of differences between authors and contexts, contributed to making speculation gradually accepted in the UK and US.