The Speculation Economy: How Finance Triumphed Over Industry (review)

Whether the United States is unique in being a speculation economy, as Lawrence Mitchell claims, is questionable. (Great Britain comes to mind. Its economy is composed even more heavily of financial services, including those involved in speculative investments.) What he does show convincingly is that the U.S. is the world's oldest speculation economy, where investing in common stocks for price appreciation rather than just dividends is a central feature of the economic culture.

Mitchell traces the roots of this phenomenon to the great merger wave of 1897-1903, when J.P. Morgan and his ilk created the modern corporation and released a flood of industrial company stocks—specifically, common stocks—into the marketplace. Policy makers, courts, and economists assumed that these stocks were overvalued, or "watered." They could never definitively prove it, but the very fact that stock promoters were behind the investments seemed to them to be proof enough.

Mitchell's account is fascinating because he documents what historians often fail to capture: how a phenomenon can take root while the governing classes are busy obsessing about other things. At the turn of the twentieth century, the problem of monopoly monopolized the attention of policy makers and academics. Concerned about its effects on consumer prices and competition, and distracted by the related issue of stock watering, the policy elites of the day barely noticed how the increased availability of common stocks was subtly changing how people viewed speculation.

By the 1920s, ordinary investors accepted the proposition that common stocks could be bought for price appreciation as well as dividends, and that they could be valued according to future profits. The seeds of this new attitude, Mitchell shows, were sown in the previous two-and-a-half decades, yet the regulation of securities appeared on the federal government's agenda only as a side issue. Even when regulators began to pay more attention to speculation during the Panic of 1907, they did so with the aim of keeping the economy stable rather than protecting investors. Only in 1919, after the government itself had enticed millions of Americans into the securities markets with its issuance of wartime Liberty Bonds, did the first substantive regulations aimed at protecting investors appear. These would culminate in the full-fledged securities regulations of the New Deal, by which time regulators took for granted the fundamentally speculative nature of the American economy. True to the spirit of the previous era, however, the protection of investors consisted of requiring companies to improve their financial disclosure, a conservative solution that upheld the spirit of caveat emptor.

Mitchell's book adds further nuance to the works of Alfred Chandler, as well as Naomi Lamoreaux's The Great Merger Movement in American Business, 1895-1904 (1988) and William Roy's Socializing Capital: The Rise of the Large Industrial Corporation in America (1997), which all examine how and why the modern corporation was created. His book should also be read in conjunction with Steven Fraser's Every Man a Speculator: A History of Wall Street in American Life (2006) to understand how investments that had once been viewed as speculative are now considered prudent components of every American investor's portfolio.