Virtue, Fortune, and Faith: A Genealogy of Finance

3. Finance, Gambling, and Speculation

47 3 Finance,฀Gambling,฀and฀Speculation Muse฀rise!฀With฀satire฀cloath’d฀in฀verse฀so฀glib assist฀to฀lash฀the฀speculating tribe; To฀them฀in฀honest฀verity฀declare What฀common฀sense฀and฀reason฀say฀they฀are฀.฀.฀. A฀set฀of฀chaps,฀that฀Fortune’s฀goods฀engross, And฀draw฀their฀happiness฀from฀other’s฀woes. ฀,฀,฀:฀฀,฀1791 He฀who฀sells฀what฀isn’t฀his’n Must฀dig฀it฀up฀or฀go฀to฀prison. nineteenth - century฀u.s.฀saying CASINO฀CAPITALISM In April 1998 a Moscow Court declared certain financial instruments in breach of Russian antigambling laws. The court argued that a certain type of derivative, called a “nondeliverable forward contract,” was best viewed as a betting contract as it did not lead to any exchange of underlying assets and was therefore not enforceable under the Russian Civil Code. Afraid that this court decision would deter foreign investors, the Russian Central Bank hurried to defend derivatives trading to Russia’s supreme arbitration court. The Central Bank argued that forward contracts were a legitimate part of the banking system and made it known that a breach of this kind of contract could lead to the revocation of banking licenses. 48฀ ฀ ·฀ ฀ finance,฀gambling,฀and฀speculation Still, the exact basis for the legitimacy of nondeliverable forwards remained unclear in the bank’s argument. A Western lawyer working in Moscow admitted, “You can see the court’s decision that forward contracts are a . . . gamble. But they are done all over the world and they should be done in Russia. The central bank is absolutely right” (Thornhill 1998, 2). The ambiguity between credit practices and gambling is not unique to the Moscow court’s decision but is a recurrent historical debate that has shaped the laws and institutions of modern finance. In the eighteenth and nineteenth centuries, the lack of a conceptual distinction between “finance,” “gambling,” and “speculation” increasingly became an obstacle to the respectability of trading in stocks, shares, and credit certificates. A separation between gambling and finance became thinkable only through a prolonged political , cultural, and legal struggle surrounding the meanings and boundaries of “the financial sphere” and the character and behavior of “financial man.” This chapter presents a detailed account of these debates, in which, I argue, the increasing denunciation and demonization of gambling served to accord legitimacy to its discursive double: speculation. Of particular importance in this regard is the U.S. “bucketshop debate,” which took place in the second half of the nineteenth century . This was a public debate over the legitimacy of the trading on financial exchanges in general, and futures and options in particular , fought in the pages of newspapers and popular magazines. The existence of so-called bucketshops, small-scale betting shops in which the public could bet on the movement of stock prices without actually purchasing stock, complicated the articulation of a dividing line between gambling and speculation. The bucketshop debate was also a legal debate, and numerous court cases on state and federal levels were decided on the enforceability of futures contracts between , roughly, 1850 and 1930. These cases are important because they legally inscribed, objectified, and reinscribed the boundaries between gambling and finance. In some cases, the courts thus enshrined financial concepts as they are still used today. The separation between gambling and finance, then—with speculation as uneasy middle ground—is directly related to social and moral questions concerning the legitimate bases for making profit. To some extent, financial globalization and liberalization have revived finance,฀gambling,฀and฀speculation฀ ฀ ·฀ ฀ 49 these questions. In Japan, for instance, recent financial liberalization has meant relaxation of its strict gambling laws as well as financial deregulation. Until Japan’s “Big Bang” program of financial deregulation , over-the-counter options as well as some sophisticated financial derivatives were prohibited by the country’s criminal code for breaking gambling laws (Robinson 1997b, 34; Robinson 1997a, IV). Although there have been no actual lawsuits with regard to the breach of gambling laws by derivatives trading in Japan, the Financial฀Times has argued that these “regulatory irritants” have forced Japan to remain in the “derivatives second league” and have moved Japanese derivative trading offshore, particularly to Singapore (Tett 1998, 6). In Britain, derivatives contracts entered into by the London borough Hammersmith and Fulham were declared null and void by a ruling of the High Court in January 1991 on the grounds that trading for speculative purposes was beyond the powers invested in local governments...