Question Three: On Stock Exchange Speculations

603. Notions. Exchanges are called both qualified fairs or markets where goods are present only by samples or titles, and the place where they are sold.¹ Hence there is distinguished the monetary Exchange, where securities or titles of public debt, shares, and obligations are sold, and the commercial or mercantile Exchange, where goods are sold, such as wheat, oil, coffee, wool, metals, etc.

¹ In antiquity there already existed at Athens an Emporium, and at Rome a college of merchants. Modern Exchanges were founded in the Middle Ages, in Belgium in the thirteenth century: they are named from the sign of a Bruges inn in which negotiators were accustomed to gather; and from there they were instituted in all regions.

Contracts entered into on the Exchange are of two kinds:

A. A market for the present, if titles or goods are here and now bought and sold for counted money to be paid here and now; concerning this nothing special is to be said, because it is simple buying and selling, not an essentially aleatory contract.

B. A market for a day, that is, on credit, or a contract for a term, when goods or titles are bought and sold, afterward to be paid for and handed over against determined money after a certain time, for example, after three months, or, as is the custom, on the first or fifteenth of the month, but at the price established on the day of purchase, so that the buyer or seller makes gain or suffers damage according as the price on the day of payment has increased or decreased. Hence it is a special aleatory contract of speculation, because it includes wagering. This gave origin to several variations, among which the more customary are:

1. A differential contract, if the preceding contract is made fictitiously, so that the goods or securities are not in reality handed over, indeed so that they are not even present, but the contracting parties only intend that the difference between the foreseen price and the actual price be paid to the other by him whom the change of price disfavors. Then the contract passes into play: thus, if the price has increased, the seller must pay the difference to the buyer, who is said to play "for the rise"; if the price has diminished, the buyer pays the difference to the seller, who plays "for the fall."

2. A contract of relation, if an accessory contract of resale accedes, which virtually contains a mutuum of money or a letting of goods, of which interest is the price, and it is called report or deport, according as the prorogation of payment, for example, for 15 days, is respectively sought by the buyer or by the seller.

3. Finally, a premium market or contract for a premium, if an accessory pact of reservation is attached to the contract, so that one or the other, buyer or seller, reserves to himself the faculty, on a certain day before the time of payment, say the day before, of rescinding the contract after a certain premium has been paid.²

² For the sake of clarity let there be an example: A sells B 100 3% titles for the price 70 fr., that is, 7,000 fr. This can be the matter of diverse operations.

1. If the money is paid immediately, it is a market for the present (au comptant); if this is done by selling a title in order to buy a different one, it is called in French arbitrage.

2. If the price is paid on the fifteenth of the month, and on this day the titles are worth 69.50, B, by paying, loses 50 fr.; if the titles are worth 70.50 fr., A loses 50 fr.: a contract for a day or for a term (marche a terme ou a credit; op termijn of op uitstel).

3. If the titles are lacking (a decouvert), on the fifteenth B, or A, pays the difference, namely, 50 fr.: a differential contract (op verschil van koers of prijs).

4. If on the fifteenth of the month the titles are worth 69.50 and B foresees a rise for the end of the month, he asks X to be willing to take the titles on this condition, that he return them at the end of the month at the same price; for which service furnished he will receive 20 fr. If at the end of the month the titles are worth 7,100 fr., B gains 100 - 20 = 80 fr.: a contract of relation or report (report; verlenging geven).

Or, on the contrary, if on the fifteenth of the month the titles are worth 70.50 and A foresees a fall for the end of the month, he asks titles from X, if he does not have them, but under the condition of returning them at the end of the month at the same price, for which service 30 fr. will be paid to X. If at the end of the month the titles are worth 69.50, A gains 100 - 30 = 70 fr.: deport (deport, verlenging nemen).

But when titles are lacking, these operations can also be made without the intervention of a third party between A and B: A concedes report and takes deport; B concedes deport and seeks report.

5. If the contract is entered into with the reservation of rescinding it against a premium of 0.25 fr. to be paid for each title, and on the fourteenth of the month the titles are worth 69.50, B, by withdrawing from the contract, loses 25 in place of 50 fr.: a premium market (marche a prime; handeling op premie).

All these contracts can be made, with several varieties, in every kind of titles and goods, and indeed for the greatest quantities and enormous sums of money.

Now the Exchange, and the monetary or commercial operations which are carried on there, are not lacking in utility; indeed they are necessary to modern society and the common good. For:

1. They bring about the gathering of merchants, and thus the multiplication of transactions; whence today great businesses are handled on the Exchange.

2. They render easier the determination of price, which proceeds from the true common estimation of experts, and which, easily known by all, contributes to public utility, insofar as it procures security of transactions and turns away the occasion of fraud, provided it is not falsified.

3. Indeed, the very operations for a term are not always mere wagers and speculations, but are as it were necessary, because:

a) Buyers do not always find here and now titles and goods in sufficient quantity, nor do sellers here and now always find good buyers ready to pay the best price immediately; whence there is security for them, because they certainly know that after a time these can be had.

b) Likewise, an anticipated estimation of prices is very useful, for it is most opportune to know the probable price fifteen days before the event;³ for thus insolvencies are guarded against, and negotiators can establish their prices in advance and protect themselves against variations of prices.

³ Thus fictitious sales, made when goods are lacking, indicate abundance of things; on the contrary, purchases indicate scarcity. And report is an indication that titles are present in excessive quantity comparatively to money; deport, on the contrary, an indication that titles are sought and money is offered.

c) Hence from that anticipated foresight, it is prevented that prices increase or decrease too suddenly; thus they become more stable and are reduced to a certain tempered equilibrium, and economic crises can be attenuated.

Yet for this it is required that those operations be made by experts, and without frauds. For merely aleatory speculations, on the contrary:

a) Disturb the law of real offerings and demands and impede the determination of the just price;

b) Do not correspond to necessity, and thus provoke fictitious and unreal determinations of the possibilities and necessities of commerce;

c) Multiply and increase variations, and thus harm the stability and regularity of prices;

d) Moreover, although they are not necessarily unjust, they nevertheless easily provide occasion for manifold injustice, such as is had in spreading false news, vehemently recommending works which are near ruin, erecting unjust monopolies, immoderately increasing or depressing the price beyond the real value, etc.⁴

⁴ Concerning the Exchange market, besides the most recent theologians, the following can be consulted: Brants, Les grandes lignes de l'economie politique; Ch. Gide, Cours d'Economie politique, I; Nell-Breuning, Grundzuge der Borsenmoral; E. Janssens, La Bourse et la Conscience in coll. Etudes sociales, I, (1929), n. 3; P. Janssens, Beursspeculatie, in Geestelijke Voordrachten: Moderne Kwalen, 1929.

604. Moral principles. I. Operations of the Exchange are not per se unjust, provided there is no excess of prices, malice, abuse of another's necessity, or other unjust means.

For they are wagers and aleatory games, and therefore they are just, provided: 1. the price or increase is proportioned to the hope of increase or diminution of securities or goods; 2. the contracting parties have ordinary knowledge and one does not abuse the ignorance of the other; 3. he who performs the office of relation does not abuse the impossibility of paying on the part of the debtor, by imposing on him an excessively great increase not proportioned to probable hope; 4. in these things no one uses malice or unjust means, so that the price of the thing sold be increased or diminished with his own gain and the damage of the other contracting party, for example, by false rumors and reports, by contrived evaluations of newspapers, by fictitious statistical computations or telegrams, by fictitious purchases and sales made at a greater or lesser price, by buying together the greatest number of titles so that their price, and therefore the price of deport or report, be increased or diminished as if by monopoly, beyond or short of the real value; etc.

II. They are per se guilty of injustice who by malice, fear, or fraud directly procure that the prices of securities be artificially increased or diminished, with their own gain and the damage of others.

Thus they act: a) who spread false rumors concerning the prosperous or calamitous state of a kingdom or society, in order to deceive others and induce them to sell securities for a lower price or buy them for a higher price;

b) Who make coalitions so that by any means, even fraudulent or violent, they may oppress societies hateful to them;

c) Who by buying together procure a monopoly, by which afterward abuse is made for changing prices more than is fitting, for example, in deport or report.

III. They are guilty of injustice by accident who indirectly expose themselves unduly to the danger of injustice afterward to be inflicted.

1. Thus those who take upon themselves so many and such great businesses that they foresee that they will probably be incapable of satisfying all obligations at the due time: they expose themselves to the danger of inflicting damage, and they make the contract void, unless the other party was conscious of this;

2. A fortiori, those who expose to the danger of the lot not only their own money, but also money committed to them, if this is done against the will of those committing it;

3. Likewise those who thus render themselves unequal to paying other debts of justice; but if they expend their resources necessary for the family, they do not indeed sin by prodigality alone, but gravely offend against charity owed to their own and against piety, although not against justice;

4. Finally, those who, habitually devoting themselves to speculations without necessity, thus expose themselves to the proximate danger of using even frauds and other unjust means, to which such a custom easily impels for obtaining gain more certainly.

IV. Outside these cases, speculations are not unjust, but they are not morally commendable if they are not demanded by the necessity of commerce.

For the speculators themselves expend an economic good ordered to production solely in transfers from one to another, and thus they turn it away from truly useful operations; whence they hold capital immobile in intermediate operations without true utility. And they intend to acquire riches without proportionate labor and without subordination to the common good, indeed with the damage of others, even of those who do not freely expose themselves to fortune, but must conduct business. Hence the custom of devoting oneself to Stock Exchange speculations fosters a predominant cupidity of gain, to which they subordinate all things and their whole activity; it carries with it continual anxieties, and exposes to great danger of prodigality, idleness, and temporal ruin of businesses and families.

605. Observations. 1. To avoid the inconveniences of speculation and to ward off injustices, civil legislation ought to intervene; this for the most part is insufficient in this matter. In Belgium, the law of 18 July 1924 is in force.

2. The faithful are to be turned away from mere speculations, especially the simple and inexperienced, indeed generally all.

3. Clerics and religious are forbidden speculations of this kind, as is clear from the response of the Holy Office, 15 Apr. 1885, and from the Code of Law, can. 142 and 592.

4. Civil law often equates Stock Exchange speculations with games, to which it denies forensic action. Thus in Germany and Switzerland for the market for a day; also in Belgium and France from received jurisprudence. Nevertheless the French law of 28 March 1885 pronounced markets for a day legitimate, even if they ended in the mere payment of a premium; but this is not understood concerning those markets which from the beginning, from the will of the parties, tended to this.⁵ In Italy also they are held as games; yet markets for a day concerning public titles, with a certain form observed, are protected.

⁵ Vermeersch, Th. M. II, n. 498.