EVERY-DAY ETHICS ADDRESSES DELIVERED IN THE PAGE LECTURE SERIES, 1909, BEFORE THE SENIOR CLASS OF THE SHEFFIELD SCIENTIFIC SCHOOL, YALE UNIVERSITY SPECULATION A CHAPTER on the ethics of speculation will prob- ably seem to many people to take inevitably the form of the famous chapter on Snakes in Ireland, viz., that there are no ethics in speculation. And I fear that a lecturer on this subject who takes a different view will be thought to be in the position of a classmate of mine, who, on going into an ex- amination in ethics, remarked that he " didn't know an ethic when he saw one." Nevertheless I feel convinced that one of the chief obstacles to the achievement of a higher moral tone in business is the indiscriminate denunciation of certain business practices, without any careful preliminary analysis of their real nature. When popular writers are con- stantly pouring out invective against things which practical men know to be necessary, there is grave danger that these same practical men will become callous to all criticism, and will refuse to see the moral iniquity of certain forms of business which are not necessary. In order to make moral con- demnation most effective it is important to take pains that it shall not be misapplied, and it may consequently prove as beneficial to show the right- eousness of conduct which was formerly held to be evil, as to prove the iniquity of conduct formerly held to be righteous. Moral improvement does not necessarily consist in increasing the number of pre- scribed practices. In his penetrating book on Ibsenism, Mr. Bernard Shaw divides the pioneers of society into just these two classes, the one made up of those who persuade the community that the practices which they had tolerated in the past are really vile; the other made up of those who persuade the community that the practices which they had tabooed in the past are really without taint. He shrewdly and wittily ascribes the greater weight attached to the teaching of the first order to the fact that society's guilty conscience is always more ready to believe in the evil of its own con- duct. I feel sure that observations such as these will not be understood by you to be meant in any flippant sense; nor to reveal any lack of sympathy with that very genuine improvement in the moral standards of the business world in this country which I sin- cerely believe to be the most important achievement of the first decade of this new century. A moral sense, however, which amounts to anything must be accompanied by an intelligent understanding, and the business of speculation more than any other business, I think, offers peculiar illustrations of two difficulties involved in the discussion of any ethical problem: 1. The necessity of knowing the facts regarding the transactions in question, and not being caught by well-sounding phrases. 2. The necessity after the facts are ascertained of interpreting them broadly in relation to the whole social scheme, that is, of judging any social prac- tice, or arrangement, or institution in the light of its function. As an illustration of my first point, I may take the very prevalent saying, that to "sell short," that is, to sell that which one doesn't own at the time of sale, is "clearly ethically wrong." This sounds reasonable to one not familiar with business because it carries the implication to the uninitiated that the seller has deceived the buyer, that he was pretending to own something which he didn't own. As a matter of fact, of course, the transaction carries no implication of that kind at all. The seller simply agrees to deliver a certain article at a future date, the buyer knowing perfectly well that he hasn't the article at the time of sale but is in a position to get it before the time of contract delivery. The payment is made on delivery. For example, I am at the present moment engaged in the fulfilment of a "short" contract. Director Chittenden some months ago offered me a certain price for one lecture on the Ethics of Speculation, to be delivered May 27, in this room. I had no such lecture and he probably knew it, but I made the contract with no moral qualms. He had con- fidence that I would make delivery according to contract, and I had confidence that he would pay the price. In the same way a contractor agrees to deliver on a certain date a house built according to certain specifications. He of course owns no such house, but can build it in the meantime. It may be urged that in these cases future de- liveries are necessary, but that in the case of com- modities the buyer, if he be engaged in legitimate business, can wait till he wants the goods and then purchase of the so-called "real holder" at that time. Here comes in the element of fluctuating prices which is at the basis of all speculation, but is also closely involved in all business. I shall explain this more fully later, but will simply suggest here in passing that no one would question the propriety of the contractor (for the house just mentioned) buy- ing his stone, bricks, and lumber to be delivered at later dates; nor the propriety of the dealers in selling them for such future deliveries, even if they haven't them in stock at the moment. Manufac- turers are regularly selling goods ahead which they haven't yet produced. This explanation was perhaps unnecessary, but was introduced here to illustrate the first require- ment in such a discussion, viz., that we should avoid subscribing merely to catch phrases without a more careful examination of their meaning. The second requirement suggested was that every social practice that is brought up before the bar of moral judgment must be given a fair trial in the light of the function which it performs. It was suggested at the outset that there is danger in making men callous to criticism when things which they know to be necessary are subjected to continuous con- demnation. To this many people especially, I think, young people promptly reply that if a thing is wrong it is not necessary, that to hint otherwise is to substitute a base standard of expedi- ency for a high standard of righteousness. On the contrary it is the very desire to avoid the easy resort to expediency which makes this consideration important. When we are once convinced that for the welfare of society a certain institution is neces- sary for the performance of a certain function, we cannot then be heard to say that it is inherently wrong from the moral point of view. The thing to be desired is that we shall not afford the man of business the opportunity of identifying whatever is profitable with the things that are necessary; but this is exactly what we shall do if we do not recog- nize what things are necessary. You will see what I mean by considering for a moment the institution on which our whole economic fabric rests, private property. There are certain writers who believe the institution to be profoundly immoral. The Frenchman Proudhon answered the question "What is Property?" with the words "Property is Robbery." What effective answer is there to this criticism? Such an answer must of course rest on the necessity of private property to stimulate that effort and accumulation on which the material welfare of society depends. We can all see certain evil features in a system based on the private pursuit of wealth by individual effort, but if we are convinced that the important function of feed- ing and clothing society is best performed by this institution we cannot morally condemn it. Similarly we must examine the economic func- tion of the Stock Exchange if we wish to understand its ethical nature. And, what is more, we must examine it in the light of the system of private property. That is why I referred to that funda- mental institution at this point. One of the best accounts of the Stock Market was written by that very Proudhon who defined property as robbery. The book may be read in two ways, first, that under a system of private property the stock ex- change is a necessity and hence justified, or, secondj any system which makes the stock exchange necessary is vile, hence the system of private prop- erty is condemned. The second of these is the socialistic position; but obviously it would take us way beyond our theme to discuss such a problem as that. For the purposes of this lecture we may assume that we believe in the morality of a business world in which men seek wealth by their own efforts, own this wealth, and exchange it in the hope of making profits thereby. This at once does away with the early problem of ethics which troubled so many writers of the middle ages, namely, the problem of how far trading for gain is itself morally defensible. It was the generally recognized principle for cen- turies that any profits of a speculative nature were immoral gains. Thomas Aquinas expressed it as follows: Negotiari propter res necessarias vitce consequendas omnibus licet ; propter lucrum vero, nisi id sit ordi- natum ad aliquem honestum finem, negotiari ex se est turpe. That is, trading in order to secure the necessaries of life is permissible; but trading for profit, unless this profit is for some nobler end, is wicked in its very essence. The medieval theory, you see, was that for each article there is a "just price," and this price, on the whole, represents the necessary return to the pro- ducer to enable him to maintain the standard of life of the class among which he was born. Such a price might include all necessary costs, including possibly an element of insurance for the physical danger to the commodity in case of distant trans- port, but any compensation for commercial risk was rigidly excluded in theory. With the growth of commerce and the change in the methods of production, the old ideas broke down. There was no such certain cost of produc- tion and no such certain and hereditary standard of life on which the idea of the just price could be based. All prices became uncertain and fluctuating and all trade came to be for an uncertain gain. In other words, all trade came to be speculative. Traders took great risks and made up for their losses in some cases by high profits in another. The very maxim of trade came to be "to buy as cheaply and to sell as dearly as possible. " To-day this is generally recognized. A man may not cheat by false statements, nor may he oppress the help- less and the ignorant, but no moral opprobrium attaches to the merchant or manufacturer who wisely foresees the demand of the public, secures the goods they want at the most favorable rates, and sells them for what the public will pay. We may fairly say that all business has become specu- lative in the sense that all business involves risk, - the risk of losing money, for which the compensa- tion in the mind of the business man is the corre- sponding chance for profit. The crux of the whole matter lies in this question of risk. In one sense every action of our lives involves a risk; and yet we find that the approval of the public rewards the conservative man who is said "not to take risks"; while it looks askance on the man who is reckless in this regard. Can we find any dividing line? If I rent a house, I take the risk that it may not be well built or easily heated; if I buy a horse, I take the risk that he may not be sound; if I buy a new brand of tobacco, I take the risk that I may not like it; if I buy a theater ticket I take the risk that the play may bore me. To make the case personal again, Dr. Chitten- den, in inviting me here, took the risk that this lecture would bore you without enlightening you. But you will at once see that risks of this kind, on the whole, are necessary risks, and that with due caution and adequate attention to the conditions they are perfectly moral and legitimate. The old adage " Nothing venture, nothing have" holds true, to some extent, in all affairs of life; but it does not follow from this that all venturing is therefore moral. The test would seem to lie in the two points of how far the risk is necessary, and how far it is well considered. This test probably could be applied to all the manifold risks of life. For our purposes, however, it is enough to restrict our attention to those risks which are properly finan- cial in nature, that is, where a man risks his money in the hope of increasing it. Indeed, it would savor of immorality for me to take the unnecessary risk of losing my path altogether in this lecture through wandering among the tangled byways of general ethics. Coming back then to our topic, we have seen that all business involves risk, and so, in the broad sense, may be called speculative. If men are allowed to own property at all, a risk is involved in the owner- ship. The property may be destroyed, or deterio- rate, or most important for our purposes, it may fall in value. The term speculative risk, strictly applied, refers to this last risk of changing values. In proportion as a business is dependent on fluctu- ating values it is speculative business. Speculation pure and simple is the name applied to that kind of business which is solely concerned in securing a profit from uncertain price fluctuations over a period of tune. Thus we can mark it off both from the trade of the merchant in the case of commodities, or from investment in the case of securities. What is the difference between a wheat merchant and a wheat speculator? The wheat merchant is a man who buys wheat of the farmer or in the primary markets and sells it to the miller or for export. That is, he buys in one market and sells in another, just as the grocer who sells you a barrel of flour buys of the wholesaler and sells to you. There is a normal difference of price between these two markets and from that difference come what may be called strict mercantile profits. If the price of flour at the Minneapolis mills remained uniform for a year, there would still be reason for the activities of the grocers, both wholesale and retail. In the same way, if the price of wheat on the Chicago Board of Trade remained uniform there would still be occa- sion for the merchants to get the wheat of Dakota into the markets of England, and in both cases the regular profits of the middleman might be expected. There would be certain risks involved, but they would not be risks of wide-spread price fluctuation. But, as a matter of fact, prices of wheat do not remain uniform for any length of time. They are affected by the changing conditions of supply and demand over the whole world; and their fluc- tuations are entirely beyond control and, in large measure, even beyond prediction. Here, you see, entirely new risks arise. Large extra gains may be secured if the price goes up, or severe loss may be met if the price goes down. The merchant himself is largely helpless before the speculative risks of this kind. It is just here that the speculator comes in. He trades purely on these fluctuations which occur in a single market (or in all markets at the same time). If he is a speculator on the Chicago Board of Trade, he buys wheat in Chicago for delivery at some future time in Chicago, if he expects the price to rise, or he sells short for delivery at some future time if he expects the price to fall. It is not the difference between the price of wheat in Chicago and Liverpool that interests him, so much as the difference in price between May and September. Now the question is whether this is a moral or justifiable thing for him to do. Does he do any good to anyone, or perform any service to the busi- ness world by such transactions; or is he merely a parasite who has arisen because of these dangerous fluctuations? To answer that, you must first recognize that he is at least a product of these conditions; that is, speculation of a professional kind is the result of very actual risks of price fluc- tuation in the markets of the world. Some people think that speculation is the chief cause of fluctu- ation prices, but the fact is just the opposite. It is the fluctuation which causes the speculation. If this were not so, speculation could be started in any commodity at will. Such attempts to create speculation artificially have, however, always failed. When the price of any commodity is relatively stable over any considerable period of time specula- tion does not arise. You can see this at a glance by considering what commodities are dealt in on the speculative exchanges, wheat, corn, coffee, cotton, i.e., the commodities in which the con- ditions of demand or supply, or both, are very un- certain, of a world-wide nature, and beyond the control of any single group of men. The speculators, then, are, in the first place, tak- ing real risks arising from real business. By doing so, are they relieving any one else of risk, or are they simply adding to risks already existing? If the latter is the case I could make no moral or economic argument in favor of speculation. But what happens is that through this assumption of risks the merchant and miller are in large part relieved of the risks which otherwise they would have to run. The risks are there; some one must take them. As they have increased through the widening of the market into a world market, there has been a differentiation of dealers into two classes, merchants and speculators. Instead of all merchants being obliged to speculate to some extent, a new class has arisen to speculate on a large scale. Let me explain briefly how this special class of speculators is enabled to carry the risks which otherwise would have to be carried by regular merchants in the case of such a commodity as wheat. A merchant whose function consists in getting wheat from the hands of the producer into the hands of the consumer wishes to make a regular mercantile profit from the difference in prices between the two markets. If he is a conservative dealer, he wishes to avoid so far as possible the risks which arise from fluctuation hi prices over a period of time. By the practice known as " hedging" he is now enabled to avoid these risks nearly altogether. Suppose a wheat merchant wishes to buy wheat in Dakota for export to Liverpool. Under the old practice he would have bought outright, shipped it to Liverpool, and have sold it there perhaps two or three months later. In the meantime the market might have changed so completely that the trans- action would involve a great loss. On account of this possibility the wheat merchant was formerly obliged to buy of the farmer at five or ten cents a bushel under the regular market price. Now a mer- chant can buy wheat in Dakota and instantaneously sell on the Chicago Board of Trade an equivalent amount of wheat for future delivery. He does not intend to deliver his Dakota wheat in Chicago under this contract, but as before wishes to ship it to Liverpool. This he can now do with a sense of security, and the moment he sells his actual wheat in Liverpool he covers his short contract on the Chicago Board of Trade. If, in the meantime, the price of wheat has fallen five cents a bushel, he will lose that much on his original transaction, but will make as much more to offset it through his deals in futures on the Board of Trade. So far as the merchant is concerned this is not speculation at all, although he uses the machinery of the speculative market; it is merely protection against loss. It also, of course, eliminates the possibility of specula- tive gain. In other words, the risks of fluctuating values are avoided by him and are thrown upon the shoulders of the Chicago speculators who make a business of carrying such risks and prefer specula- tion to ordinary mercantile pursuits. The risks were there in any case. By the old method the merchant was obliged to carry them. By the new method he gets the speculators to carry them for him. A similar distinction may be drawn between the investor and the speculator in the case of capital. The investor uses his money to buy securities in the hope of an annual income. The speculator buys in the hope of making speculative profit from a rise in price. Does the investor gain anything from this body of speculators? Obviously his risks are reduced in much the same way. Modern busi- ness requires the investment of thousands of millions of capital in great enterprises of which the average investor can never know much through any investi- gation of his own. In order to reduce the risk enough to entice capital into these fields, we have been obliged to introduce the principle of limited liability of stockholders. But even with this pro- vision, it is hardly to be supposed that adequate capital would be forthcoming unless there were an open market for the securities of such companies, or if it were, the hardship to investors would be great. The Stock Exchange of New York provides that open market. On its list are securities aggregating billions of dollars, held by more than a million investors. The prices which prevail there represent the opinion of the market as to the real values of these securities. They are the guide which the investor has and without them he would be very much in the dark. But this is not the main point. These are the prices at which he may buy or sell at any moment. The instant he wishes to shift his risk he can find a purchaser in the open market ready to take over his property at the market price. I hope I have made clear the real function of the professional speculator. It is he who maintains an open market in which the merchant, the manu- facturer, and the investor may find some one to carry his risks for him at any time. Without such specu- lative markets many lines of business and invest- ment would be much more risky than they now are. I think I have answered the question propounded as to whether the speculator performs a service to business or is merely a parasite upon it. Without the great speculative market the distribution of commodities and the investment of capital would be greatly hampered. I have devoted so much attention to the function of speculation because it happens to be about the only line of business of great size which is widely thought to be immoral in its very essence. One lecturing on the Ethics of Manufacturing or the Ethics of Publishing does not need to explain that these lines of business are in themselves necessary or legitimate. But if I have succeeded in showing that specu- lation may be perfectly moral in some cases, the problem still remains of the moral evils which it incurs. In the first place it may be asked, are not the methods of speculation ethically indefensible? It is not possible to go into the details of the technical methods and rules of the exchanges, but a word may be said on three objections raised. 1. Short-selling. I spoke of that at the outset and need only remind you again that it is not necessarily ethically wrong to sell goods for future delivery which you do not own at the moment. If specu- lation is permissible for the rise, it is permissible for the fall, and in fact, if there were no short-selling, there would be no speculative market. The hedg- ing in the wheat market which I described before would be impossible without it. In fact, the short- seller is a most valuable man in the market. It is he who checks the reckless plungers who would drive prices to the panic point, and who, if a crisis does come, supports the market by his covering purchases. 2. The method of delivery. It is thought by many that the speculative exchanges adopt immoral practices in this regard because they provide a method which makes settlement of contracts pos- sible without specific delivery in each case. It is claimed that this is therefore not real business, but mere betting on prices. There is, however, so far as I can see, nothing inherently wrong in the method itself. It is no more than a system of clearing. Every contract requires actual delivery of the goods or securities, and no one can avoid making the delivery save by contracting with another party to do it for him. Neither can a man avoid receiving the property except by selling or lending it to another party. Such a series of contracts may go through a long line and all be settled by a delivery by the first man to the last, but that is not inherently wrong. It is nothing more than what takes place among the banks. I give my check to you for $100 for goods delivered. It requires the payment of cash by the bank. You prefer to deposit it with your bank and the two banks arrange an offset because of a similar claim which my bank holds against yours. No cash passes at all, and yet no one would venture to say that this is not actual business. Cash is paid only on the necessary bal- ances, and the same is true as to commodities or securities on the exchanges. 3. Margin speculation. Much evil arises from this, but in itself there is no moral taint to it. So far as the rules of the exchange for the brokers are concerned, they simply provide for the deposit of a certain guarantee against loss, which is common enough in all business. When he deals on margin he is dealing on borrowed capital, i.e., he supplies say ten per cent of the purchase price and hypothe- cates the stock for the other ninety per cent. This is dangerous, perhaps, but it is not necessarily ethically wrong. I may buy a piece of real estate for $10, 000 and pay only $2000, giving a mortgage for the bal- ance. This is not necessarily immoral, though it may be reckless, or not, according to the conditions. It is, however, the same principle as buying on a margin. To conclude this very brief statement as to methods, it appears that a contract made by a broker in regular manner on a reputable exchange is a bona-fide contract, which cannot, because modern credit and clearing methods are used, be called immoral in itself. It begins to look to you, I fancy, as if the opening remarks regarding the chapter on Snakes in Ireland were going to be reversed, and that instead of show- ing that there are no ethics in speculation, I was trying to prove that there is nothing in the whole system contrary to ethics. Let us see where we have arrived. Speculation we have seen to be an inherent part of modern business. It is an inevitable result of the fluctuations in the prices of private property. Somebody must bear these risks. A class of specu- lators has arisen ready to assume them. Specula- tive markets with organized machinery are the result. The forms of contract and methods of settlement are in themselves not wrong, nor are they as a matter of fact different in their essence from the ordinary transactions of business. It is obvious then that the final ethical question is, Who are these speculators and how far are they morally justified in their transactions? There are three types in the speculative market. First there are the men who, possessed of large capital, devote themselves to it professionally. It is their function in the economic system to buy and sell solely with an eye to these fluctuating values. They assume the risks which other men do not care to assume. Such business seems to me entirely legitimate, provided it is carried on according to the ordinary rules of business honesty. The un- fortunate thing is that the temptation to adopt devious methods is very strong. The point lies just here: It is profitable under the present con- ditions of business to use all the shrewdness one has in forecasting conditions and buying or selling on a large scale in anticipation of them. Indeed, a big speculative deal, if successful, is likely to be beneficial, and if unsuccessful is likely to be harm- ful to the community. But of course the profit comes in in being the only one to be right. This may be done honestly by superior intelligence and information. On the other hand it may be done by manufacturing false news, by bribing the financial columns of the press, by starting fake rumors and the like. The history of speculation is unquestionably rife with instances of this kind. It is questionable if anything has been learned in this regard in two hundred years. A curious book published in 1719, "The Anatomy of Exchange Alley, " gives many illustrations of the practice. There is little to be said about it, save that it is wholesale deception, condemned by the moral sense of all honest men. It would be as need- less to show its iniquity as to show the iniquity of lying and bribery in general. All business can show instances of evil methods, and just as there are dis- honest merchants and manufacturers, so there are dishonest speculators. Unfortunately in both cases the dishonest sometimes rise to wealth and power. It is, however, I think, customary to exaggerate this side of the picture, and though we are far from having risen to a state of perfection, I am confident that a higher standard prevails now than formerly. We see frequent scandals in these days, but many of them would have passed as normal episodes of business in earlier times. The stock exchange, obviously, offers one source of evil which is impossible on the produce exchanges. The extent of so-called manipulation is less than is commonly supposed in any case. This is not because of the wickedness of it but because of its difficulty. Some brokers will tell you that all prices are manipulated, but this is not true. If it were, the making of fortunes would be too easy to be amusing. As a matter of fact the record of failures far exceeds the record of successes, and many a great manipulator has gone down to ruin from the mistaken idea that he could do what he pleased with his rival speculators or with the public at large. A young and foolish speculator will tell you that the big men can do anything. An old and wise one will tell you that in nine cases out of ten the man who underrates the public will meet his Waterloo. All this is especially true of the produce exchanges, because nobody can long control the price of any great staple. In the case of the stock exchange, however, a man may be at once the guiding manager of a corporation and a speculator in its securities. In this case he has a divided interest, his duty to his stockholders and his desire to make stock-jobbing profits. His obvious duty is to manage the prop- erty as well as he knows how and to be scrupulous that the stockholders get the benefit of his manage- ment. He may choose instead to manage it in such a way as to make the price fluctuate wildly, and under his control, while making big personal profits on the exchange from his knowledge of what he is going to do. There have been cases where a corporation president has wantonly wrecked a great enterprise, and thereby ruined or crippled thousands of stockholders because he was short of the stock of his own company. This is about the most dastardly form of dishonesty known to man. Compared with such a manipulator a safe-breaker is a respectable and courageous citizen. Such men are rare, and no one had a good word to say for them. But there are other great managers who, while building up the property they control, use the speculative market as a means of securing for their own pockets the gains that should go to the stockholders. Sup- pose a man keeps secret the results of his own management, covers up the increased earnings, and is thus enabled to secure at low prices the stock of many shareholders. Then when he is ready for the coup, he reveals the conditions, declares a big dividend, and on the great rise on price sells out again at high profits. He has not caused any posi- tive loss; he has built up instead of tearing down; but he has none the less, by the devious use of the stock market, put into his own pocket the increased value, which morally belonged to the owners of the property. This may be high finance and some people admire it, but it is contrary not only to morals, but to the simplest legal principles of trusteeship. The moment a company director speculates in his own shares, he is in grave moral danger and legal danger as well. His business is to make money for his stockholders and not for himself. To those of you who are destined to become industrial leaders of the future, I can give no more earnest injunction than on this point. The danger is all the greater because such conduct often wins the enthusiastic applause of the " speculative crowd 7 ' and of an unthinking public. Some of our greatest financial geniuses have been guilty of it. Regarding inside speculation, I can only say again that I am optimistic enough to believe that the market to-day shows fewer and less flagrant cases than formerly and that a higher moral standard of the duties of directors is slowly but surely making itself felt. It is not conceivable that the scandals of the old Erie speculation should reappear to-day, and it is not too much to hope that some of the manipulation that has recently taken place in a great transcontinental line would be looked upon by our new generation, when they come to deal with busi- ness affairs, as beneath the standard of a thoroughly honorable operator. You have read probably a good deal in the press about so-called " washed sales" which is one of the devices sometimes resorted to by manipulators to create a fictitious price for securities. The practice is thoroughly dishonorable and is absolutely con- trary to the rules of the exchange. In fact, these rules state that any member found guilty of such conduct shall be expelled. The practice, however, is not so common as is sometimes supposed and can only be successfully carried out in the case of inac- tive securities. It consists of employing one set of brokers to buy and one set of brokers to sell the same security. If the brokers on both sides are acting for the same principle, obviously it makes no differ- ence what the terms of the transaction are, and orders can be so given that the price may be put either up or down for the time being before independent dealers come into the market. This may be done by entirely innocent brokers or may be done by actual collusion on the part of the brokers who understand what they are being used for. In the latter case of course the brokers are as guilty as the original operator. A second class of speculators consists of men of some means and some judgment who, while regularly concerned with some other business or profession, are inclined to use a small part of their means in the attempt to make a good turn in the market. That is, they are not content with mere investment, but wish a speculative profit from changing values. The question of the morality of these is a question of circumstances, that is, it is primarily a ques- tion of how far they act sanely and within their means, and how far they are hindered in doing their full duty to their major calling. Suppose, for instance, that a physician who has an extra $2000 at his disposal, which he does not especially need, and the loss of which would not be greatly felt, sees a railroad about to be built in his neighborhood and thinks that the price of near-by timber land will surely rise. A tract is offered him for $8000, which he buys, paying $2000 down and giving a mortgage for the balance. He buys it purely for the specu- lative turn. The venture may prove to be success- ful or disastrous, but in itself can scarcely be called immoral conduct according to accepted business standards. Obviously what he is doing, however, is speculating in real estate on a margin, and it is not necessarily immoral for him to speculate in the same way in securities. The real question as to specula- tion by men of this class and by men of this class I do not mean simply physicians, but business men or professional men who at times have surplus funds with which they can afford to take risks is what are the ultimate effects of speculation by such peo- ple? If a man can afford some chance and prefers to put his money into risky undertakings with a chance of greater profit rather than invest hi the most conservative securities, there is nothing in- herently wrong in such individual action. The danger lies in his being led more and more into speculations of this kind which he cannot properly afford. As a rough test of the morality or im- morality of such conduct, I suggest that you watch the effect of such a course on a man's attitude toward his regular occupation. If his mind is so much on his speculative ventures that he does not put his full time, energy, and devotion into doing the very best work in his chosen profession, he has overstepped the limits both of wisdom and of the highest standard of right. If, when he comes into his home or into his office at the end of the day and is more concerned to get the market report to see whether stocks have closed up or down than he is to see what work there may be for him to attend to in his regular business, he is then in grave danger of falling into the third class of speculators, to whom I will briefly refer now. This third class is made up of the men who have neither the character nor the means to take chances of this kind. It is the great class of small gamblers who are feverishly trying to get rich quick. In this class we find the most damnable indictment of the whole system. The very perfection of the ma- chinery which has been adopted to facilitate trade also operates as a keen incentive to the gambling spirit. I have always contended that from the economic point of view there is a very sharp distinc- tion to be made between speculation and gambling in the ordinary sense of the word; but when specu- lation is carried on by men who have not the means to afford the loss without serious injury to them- selves and their families, and who have not the judg- ment which is necessary for this most dangerous of all business practices, such speculation becomes gambling from the moral point of view. Unfortu- nately, because it assumes the form of legitimate trade, it offers an opportunity under the cover of respectability for men who would be ashamed to take such risks in any of the ordinary forms of betting. The evil is greatly intensified by the exist- tence of the so-called bucket shops, where the trans- actions are gambling pure and simple. In bucket shops there is no buying and selling of actual prop- erty, such as takes place on the exchanges, but by holding out great inducements and accepting trans- actions on the smallest margins, these parasites on the legitimate stock exchange are responsible for untold evil. But even a large part of speculation on the stock exchange itself partakes in some measure of this character. The long list of ruined reputa- tions, the long line of convictions for embezzlement, are a tragic witness to this fact. Let me at this point give you a warning, which, although it may seem to you entirely unnecessary, is I am convinced one which every man should seriously consider. You, young gentlemen, what- ever you may think of your abilities, are perfectly confident of your own honesty. You cannot imagine a case arising in which you would make a misappro- priation of funds, and yet I have known men who started in life with chances equal to yours, with ambitions like your own, with the same confidence in their own integrity, who have been ruined and even been criminally convicted under this tempta- tion. No man who occupies a position of trust should ever take the risk which comes from once yielding to the stock-gambling temptation. I have known cashiers and treasurers who started out with perfect honesty, but thought that they were justified in "playing the market" with their own means. The terrible result has been that when all of their own means have been put up in margins, and the market for the moment had gone against them, they were so confident that, if they could tide over a few weeks more, everything would turn out favor- ably, that under the pressure they were tempted to "borrow" money that was not theirs, being sure that they could make it good (without any one being the wiser) the moment the market changed. At first, even in taking this step, they have convinced themselves that they were not stealing but simply making a temporary loan. The inevitable crash fol- lowed, and the men who had started out with such promise found themselves convicted criminals. You may laugh at the idea of my asking you to take such cases to heart, but I assure you in all serious- ness that no young man who holds a position of trust of this kind and begins to speculate in stocks on margin is free from this terrible possi- bility. I wish to recall to your minds at this point what I said at the outset regarding the relation between immoral practices and the necessary functions to be performed by the business world. You will see that speculation of this third class, apart from the moral opprobrium attaching to the individual, falls under the condemnation of this broader point of view, since it is destructive of standards of work and snaps the very spirit of industry on which economic welfare depends. Such are the three classes of speculators and the problems which each has to face. It would be hard to draw the line in any particular case in passing judgment upon another person, but I am sure if you keep these facts and principles in mind, that your own consciences will be able to tell when you individually overstep the danger line. It is not possible within the limits of this lecture to go far into a somewhat different problem, namely, into the ethics of brokerage rather than the ethics of speculation. The brokers on the exchanges, although they may also speculate on their own accounts, are primarily agents acting for other people. A man may be an active broker and never indulge in speculation himself. One reason why the discussion of ethics of brokerage is less important is because in this case the law regulating the relation between broker and customer is on such a high moral plane that it may almost be said that a broker who obeys the law can feel pretty safe as to the morality of his conduct. The standard which the law requires of agents acting for principals is a higher standard than many self-appointed moralists are able to set for themselves. Let me, however, briefly suggest four points: First. It is hardly necessary to tell you that the strictest obedience to the rules of the exchange and to the rules of law on the part of the broker is the first essential from the ethical point of view. It may be well, however, to add to this injunction that a broker has the moral responsibility of keeping free from the slightest suspicion in his own mind even where he may seem to be technically correct. I have already referred, for instance, to the prac- tice of washed sales. No honest broker would consciously engage in such a practice. On the other hand, it is possible that he may be an innocent party to it through not being informed by his prin- cipal as to what is in the wind. But it frequently happens that without knowing definitely that some such operation is being carried out, the very move- ment of the market is an indication that there is something suspicious in the situation. An honest broker, under these circumstances, cannot be satis- fied in saying that he knows nothing about it and is simply there to carry out his orders. He cannot continue to do business when even the slightest suspicion of such an arrangement rests in his own mind. Second. The law is perfectly clear on the point that where a broker deals for a customer he is to receive nothing but his commissions and interest on money advanced. Every bit of the risk of the transaction falls upon the customer and every jot of the profit is morally and legally his due. Some brokers think that it is entirely proper, when they have received an order to sell at a certain price, and are able to carry out a transaction by which a higher price is secured, if they split this extra profit with the customer. It seems so reasonable for them to argue that when they might have satisfied the cus- tomer by simply fulfilling the letter of his instruc- tions, and then by special intelligence or exertion have done better than the customer expected, that part of the profit is their due. Such an argument is equally fallacious in law and morals. The broker would never expect to share loss, if the case were reversed, and he is not entitled to a single penny of additional remuneration for having used his very best ability in the service of his client. Third. Every broker should recognize the grave danger of engaging in speculation himself. I will not say that it is necessarily wrong for a broker to speculate on his own account, but I remind you again of what I have just said regarding the danger to any one in a position of financial trust. A broker is in such position. He is responsible for large sums of money put in his hands by his customers to carry out their business. Without doing anything strictly illegal for the time being, the broker may become so involved in his own speculations as to seriously endanger the clients who have trusted him. Some- times this comes to a crisis which offers a very severe temptation. Suppose a brokerage concern finds itself in a position where it fears for its own solvency, and at this juncture large sums come in from customers, which the firm thinks may be adequate to pull them through and establish them on a solid basis once more. It seems so desirable to take the money of the customers under these cir- cumstances, and it is so easy to convince themselves that the customer is not being endangered thereby. The law is not as yet sufficiently stringent in the matter of prohibiting the receipt of further deposits by a concern which cannot at the moment make good its own obligations. But even an elementary sense of morality should make a broker prefer the disgrace of insolvency to the abuse of a customer's confidence. Fourth. This suggests that, strict as the law is in these regards, there are certain matters where the only safeguard of the business public is the adoption of the strictest ethical standard on the part of the members of exchanges and their governing bodies. There are some things which cannot be regulated by law and there are some evils which never can be adequately reached by legal process. Most of these can be eliminated by the recognition of a duty toward the public on the part of all persons engaged in transactions of this kind. I think the one thing most needed at the present time, to lessen the evils of stock exchange gambling, is a resolve on the part of the brokerage fraternity that they will not simply take the business of any customer who comes, in order to swell their own commissions, but that they will recognize it to be immoral conduct to accept accounts from persons whom they well know to be running serious danger by their indulgence in specu- lation. The evils of speculation on a small margin are such that I think the stock exchange might properly pass rules requiring a larger margin than is now given, and in any case the individual members should, so far as is possible, make themselves familiar with the condition of their customers, and even at the expense of losing some commissions themselves, refuse to be a party to the reckless gambling which in many cases leads to such utter disaster. I hope that you young gentlemen will carefully consider the propositions which I have given you. If you become brokers yourselves, above all do not take upon your consciences the burden of having acted as an agent for men who were engaged in ruining themselves; and if you become speculators, keep always before your mind the awful spectacle of that third class which I have described, and the danger that would threaten each one of you that you may in turn become a member of its tragic ranks.