Stock-Exchange Dealings

632. Notions. 1. The stock exchange (Borse) signifies a place constituted by public authority in which certain businesses are transacted and certain contracts are celebrated. Since the object of these contracts is especially twofold, namely money or securities, such as shares and obligations, and merchandise, such as grain and oil, a twofold exchange is distinguished: money exchange (Geldborse) and commercial exchange (Warenborse).

2. The exchange, which in itself is useful, indeed necessary in a well-ordered republic, especially so that occasion of trading securities may be available, began to have a bad reputation from the time when aleatory contracts were frequently celebrated in it, from which very great damages and dangers arise both for the contracting parties and for others. These contracts are called by the generic name speculations or operations of the exchange; but in species there are distinguished operations for a term (Termingeschafte) and operations for a premium (Pramiengeschafte).

3. Operations for a term are called those in which securities or merchandise are bought in such a way that the price must be paid after a certain time, namely on a day established in the exchanges, for example, the first or fifteenth of the month, which day is called liquidation. But the price to be paid is that which will be in force on the day of liquidation in the exchange. Since price is subject to perpetual changes, it ordinarily happens that the future price obtains an increase or decrease. Now on the change of price which can occur up to the day of liquidation the whole speculation of the contracting parties is founded: for generally they do not intend to hand over securities and merchandise, but only this, that from him whom the change of price disadvantages the difference be paid to the other. If the price has increased, the seller must pay the difference to the buyer; if the price has decreased, the buyer must pay the difference to the seller: for the seller is said to play for depression (a la baisse), the buyer for elevation (a la hausse).

A and B on March 15 enter a contract concerning 100 modii of wheat and 500 florins, in such a way that A is obligated on September 15 to hand over 100 modii and B on the same day is held to pay 500 florins. Now if meanwhile the price of wheat increases so that it is sold for 540 florins, the buyer gains; but if meanwhile the price of wheat decreases so that it is sold for 470 florins, the seller gains. But A and B can also enter the contract in such a way that they are not bound to hand over the merchandise and price, but only to pay the difference between the price established in the contract and the common price which wheat has on the determined day. If the price has increased, therefore A will be held to pay the buyer 40 florins; but if the price has decreased, B will be held to pay the seller 30 florins. This same thing must also be transferred to purchase-sale of securities.

4. Operations for a premium are called those in which the buyer reserves to himself the right of rescinding the contract on a certain day, for example, the day before liquidation. If he does this, he must pay the seller a certain sum, which is called the premium; but if he declares that he wishes to stand by the contract, the purchase, which previously was conditioned, becomes absolute.²

¹ Villada, Casus conscientiae etc.^3 (Brussels: Vromant, 1885), II, p. 272 ss.; Ballerini-Palmieri III, n. 927 ss.; Gury, Casus conscientiae I, n. 947 ss.; Gopfert, Moraltheologie^6 (Paderborn: Schoningh, 1906), II, n. 125.

² Genicot I, n. 664.

633. Their liceity. 1. Operations of the exchange considered in themselves are not unjust: for they are recalled to aleatory contracts and in species to wagering and game. Therefore if the conditions are observed which make these contracts licit, especially if the contracting parties have or hope to have at the established time what they promise, stock-exchange speculations in themselves are licit.

a. In operations for a term each one hopes that he will gain; therefore since on each side there is hope and danger, a wager is in reality entered. Yet the contract is not merely aleatory, since by prudence and sagacity the future price can be foreseen in some way, for which reason this speculation is rightly compared to an industrial or mixed game.

b. In operations for a premium a right is sold which in reality is estimable by price; therefore if the premium is equivalent to this right, the contract is not opposed to justice.

Nor are these speculations to be called illicit for this reason, that they furnish a means of procuring great riches for oneself without labor: for if it is permitted to become rich without labor by other modes, for example, by accepting a great gift or rich inheritance, or by occupying goods which until now belonged to no one, it will also be permitted by means of these speculations, provided injustices are avoided and duties, whether social or religious, owed from another source are fulfilled.

2. But per accidens several vices can be joined with stock-exchange speculations.

a. Because unjust means are employed by which the price of the thing sold is increased or decreased, for example, by spreading false rumors concerning the state of a kingdom or of some society.

b. Because so great a sum is exposed in speculations that there is danger of losing one's entire substance with detriment to family and creditors.

c. Because the price of saleable things is artificially increased or decreased in such a way that many fall into poverty from it: for although this is done by means just in themselves, for example, by buying up a great supply of securities or merchandise and thus constituting something like a monopoly, nevertheless charity forbids anyone to seek riches with the ruin of others.

I. Notion. Stock-exchange games are understood as contracts by which the contracting parties intend to make gain from the diversity of price which monetary values, merchandise, or securities have in the market at different times.

II. Division. The principal ones are: buying-selling for a term, and buying-selling for a premium.

1. In the case of buying-selling for a term, one party buys something from the other at a determined price, to be delivered on an established day, for example after three months. If the price has increased on the established day, the buyer has made a gain and the seller a loss; the former indeed because he must sell the thing more dearly, the latter because he must buy it more dearly. If the price has decreased, the contrary has place.

More often, however, the contracting parties do not intend a true buying-selling, but only that profit and loss be divided between them. That is, if the price has increased on the day of delivery, as it were established, the seller pays the increase of price to the buyer; if it has decreased, the buyer pays the same sum to the seller.

2. In the case of buying-selling for a premium, one party likewise buys something from the other party at a determined price, to be delivered on an established day; but under this condition, that either of the contracting parties can withdraw from the contract, provided he pays some premium to the other party.

III. Morality. Stock-exchange games, as is clear, are not illicit per se. Per accidens they are often to be dissuaded from or even prohibited, namely because of the danger of harming the family or creditors, or of spreading false reports so that prices may be increased or diminished, etc.

As regards the price of shares and bonds, cf. n. 904.

Sinful Contracts.—There is no form of contract that may not be made sinful as to its substance on account of the wicked offer or consideration (e.g., sale may deal with immoral objects, labor may be given to criminal projects), but there are certain forms of contract that are particularly open to abuse and hence are frequently associated with evil circumstances or results. Some contracts are often illicit according to natural law.

(a) Thus, a gift is sinful, on the part of the donor, when it is made by an employer for the purpose of seducing a servant, and on the part of the servant, when it is accepted for the purpose of encouraging the unlawful attentions of the employer; but if the gift is unconditional, there is no obligation in justice to return it.

(b) Borrowing is sinful, when the lender is in greater need, or when one becomes unduly obligated to the lender; lending is sinful when the lender cannot afford to part with the thing loaned, or when the borrower is encouraged in thriftlessness, or when he will make evil use of the thing borrowed, etc.

(c) Wagers are frequently sinful, since many of them are incitements to sin (e.g., a bet that another is afraid to get drunk), or results of sinful motives (e.g., bets made in order to deceive, or to satisfy avarice, or to live without work), or causes of great evils (e.g., destitution of families, frauds, scandal, and corruption).

(d) Gaming is sinful when the form of the sport is objectionable (e.g., the ancient gladiatorial fights in which the combatants killed each other), or when the motives or circumstances are wrong (e.g., to play as a professional gambler so as to avoid work, to play cards all day Sunday, to play for higher stakes than one can afford, to spend time in “gambling hells”).

(e) Lottery is sinful when the object is bad (e.g., the raffle of an important office with the risk that incompetent persons may be chosen), or when the circumstances are bad (e.g., if persons are led into superstition or idleness and prodigality).

(f) Speculation is sinful in many instances, since it often brings on a gambling fever that makes the speculator useless to himself and his dependents, and causes poverty and crime.

(g) Pawning of property is often unjustifiable, since it makes persons deprive themselves of necessary property in order to indulge in some useless or extravagant whim with borrowed money.

Is It Lawful for Clerics to Purchase and Sell Stocks and Bonds?—(a) If this conduct has the character of gambling or trading for profit, it is forbidden by Canon 138 or 142, as the case may be, and is gravely or venially sinful according to the circumstances. Thus, pure speculation or mere betting on the market is a game of chance, and the frequent purchase of stocks with the thought of quick sales and huge profits from sudden changes of the market is lucrative trading.

(b) If the gambling or trading element is absent, the conduct in question is not forbidden by Canon Law. It is generally admitted that bond investments are permissible, since they are only a loan of one’s money at interest. There are two views about stock dealings: the stricter view regards them as always containing the character of forbidden trading (since all the notes of strict negotiation are found in them), or at least as being a game of chance; the milder view, which is common, holds that they are no more an affair of chance than many other business undertakings, and that there is no strict negotiation, if the stockholder is not a member or director of the corporation, since the buying and selling is done neither directly nor indirectly by him. Buying of stocks, then, may be nothing more than a prudent investment of money in a deserving enterprise with the hope of a reasonable return, and selling out the stocks at a large profit may be nothing more than the disposal of superfluous goods which it would be inconvenient to retain. It must be remembered, though, that it is unlawful to cooperate with a company whose purpose is evil or suspect, or to have part in frauds, or to give disedification.

Are other works also prohibited? - This precept, insofar as it is negative, prohibits not only all servile works, but also civil works, namely market-trade and public negotiation of merchandise, and three forensic things: namely suit, judgment unto death, and oath. Thus the common opinion of theologians from C. 1, 3, and ult., de Feriis. And St. Pius V, C. Cum primum, 6 Kal. Apr. 1566, § 7, commanded that all on feast days "abstain from every illicit and servile work, that markets not be held, and that profane negotiations and the noise of judgments be quieted." L. 284.

By market-trade is understood the public exercise of commerce, or a market, with noise, as are annual or weekly fairs, etc. Public sales of merchandise are prohibited by reason of scandal; "hence, as usage bears, goods can be sold behind closed doors," Scav., ed. 12, Mediol. 1874, l. 2, nn. 95, 239. But in this matter custom must be observed, both universal and also particular to places; for this can abrogate a human law in whole or in part, and here has already abrogated the law in great part. Hence, on account of generally received custom, fairs established for a certain day are excepted if they fall on a feast day. Benedict XIV so declared, C. Ab eo tempore, 5 Nov. 1745.

Likewise, from received custom, food, drink, shoes, candles, cloth for making clothes, and other things of this sort are licitly sold and bought in public shops. Yet merchants ought to close their shops, so that they may show that they distinguish Sunday from other days; but here also the custom of places and necessity, varied for various places, claims very much for itself. Public auctions are also tolerated in some places after the divine offices have been performed, because on other days there would be fewer attending, etc. Likewise it is tolerated that merchants of things of small moment carry, show, and sell goods from one place to another.

Houses, horses, oxen, and other merchandise are licitly sold and bought, whether present or absent, whether in small or great quantity, even if a notable time is spent in this, provided these things are done between private persons; both because the usage of the God-fearing so bears, and because the Church prohibited only sales in public shops, by reason of scandal. From the custom of the wise, all contracts are licit if they are made without instruments and the authority of a judge. Indeed St. Alphonsus notes that custom bears that they may be celebrated not only privately, but even through instruments, provided they do not require judicial noise, for example, testaments, instruments of betrothals, sales, etc.; "although," the holy Doctor adds, "notaries in some places are accustomed for this to ask general license from the Ordinary, which for the rest is commonly granted." L. 286, 289; Benedict XIV, de Syn., l. 7, c. 3, nn. 2, 3.

What is commerce? - It is properly when someone procures a thing for himself with the intention that, by selling it entire and unchanged at a higher price, or by exchanging it, he may gain profit. L. 831; St. Thomas, 2. 2, q. 77, a. 4, ad 2; Lugo d. 28, n. 20.

How many kinds of commerce are there? - There are three: economic commerce, artificial commerce or handiwork, and commerce properly and strictly such. Molina, d. 339, n. 2, says this: "A threefold kind of buying and selling is commonly distinguished. For one kind is that by which each person buys those things which are necessary for the sustenance of himself and his family, while superfluous things are sold.... Another is that by which something is bought so that, changed by industry, it may be sold.... To this kind pertains not only if someone buys wool so that from it he may make cloth, which he sells, or iron so that he may sell swords which he makes from it; but also if he buys birds or horses so that, after he has raised them and accustomed them to something, he may sell them. To this kind of commerce also pertains that by which a thing not bought, but from one's own goods or lands, changed into a better form, is sold. Finally, another buying and selling is that by which something is bought so that, unchanged, it may be sold more dearly for profit; and this is commerce in the most proper sense."

Whether commerce is licit? The first species of commerce is licit. "This," says Molina, l.c., "is as it were natural, and of itself is good and licit. Indeed it is ordered not to profit, but to suitable sustenance, and it pertains to householders and statesmen, not to merchants taken strictly." The other species of commerce is also licit. "This," says Molina, l.c., "is not mere commerce, because the thing thus bought is rendered better through industry and art." Wherefore there is sold not only the thing bought, but at the same time one's own industry and one's own work. Men of this kind are called rather workmen and artisans than traders or merchants.

Therefore there is no injustice in it, no illicitness, since it is very useful to private and public good. The third commerce also is of itself licit, since it too is very useful to private and public good, and from no other source does it necessarily, or of itself, contain any injustice or dishonesty. For as regards justice, it suffices that one in buying and selling remain within the limits of the lowest and highest price; and moreover the prices of things are accustomed to be diminished and increased according to the various circumstances of times and places. There is added besides the labor of these merchants, and likewise the enormous expenses to be made by them, so that they may always have necessary goods prepared for all. But the profit which is intended can be intended in an ordered and moderate way for a good and even pious end, and therefore neither from this head is there necessarily and of itself any baseness. St. Thomas, 2. 2, q. 77, a. 4.

Is trade lawful for clerics? - Trade properly so called is interdicted to clerics constituted in sacred orders, and to all religious, so that they sin gravely if they devote much labor to trade. Trent s. 22, c. 1 de R.; C. 15, 16 de Vit. et honest. cler.; C. 1, 3, 6 Ne cler. vel monach.; L. l. 3, n. 381; S. Th. 4, d. 16, q. 4, a. 3, q. 3.

Trade properly so called is when someone buys a thing with the intention that, by selling or exchanging it whole and unchanged at a dearer price, he may gain. Can. 3, caus. 14, q. 4; S. Th. 2. 2. q. 77, a. 4. Properly so called, or lucrative; for there is usually also distinguished economic trade, by which things necessary for sustenance are bought and superfluous things are sold; and artificial trade, by which something is bought so that, changed either naturally or by one's own industry, it may be sold. Neither of these is prohibited in itself. But if things are changed by another's industry, or by hired workers, or if things are sold in a public workshop, this too is unbecoming to the clerical state. For this artificial trade denotes a gain-seeking mind, equally as lucrative trade does, in either case. Cf. Bizzarri ed. 1885, p. 238.

Constituted in sacred orders; for the common opinion is that trade is not prohibited to clerics in minor orders. But it is doubted whether it is forbidden to beneficed clerics in minor orders. Molina, etc., deny it. But the opposite is better to be held with the common opinion, which Lugo, etc., hold. L. l. c.

If they devote much labor to trade; for a cleric does not sin gravely by exercising trade two or three times when it is not shameful and not in a great quantity, because the laws speak of one exercising it. Hence, even if he trades only once or again in grave matter, Cajetan, Salas, etc., probably hold that he does not even sin gravely. L. l. 3, n. 831. For trade to be forbidden to clerics, there is required the mind of buying more cheaply so that it may be sold more dearly; hence it is lawful for them to sell more dearly so that they may buy more cheaply. L. l. c. 336.

Benedict XIV, Bull Apostolicae servitutis, February 25, 1741, established that the penalties inflicted against cleric-traders must also be extended to clerics illicitly trading in any way under the name of a layman, just as if they illicitly exercised those same businesses by themselves and in their own name. These penalties are of ferendae sententiae as regards clerics and monks. But as regards missionaries of the East Indies and of America, to whom trade and commerce are more gravely interdicted, these penalties are incurred by them by the fact itself from the Constitution of Urban VIII Ex debito, February 22, 1633; Clement IX, Sollicitudo pastoralis officii, June 17, 1669; and Resolution of the S. O., March 6, 1817. Cf. 1218.

Clement XIII, Bull Cum primum, September 17, 1759, again prohibited clerics from trading through interposed persons, and especially from exercising active exchange through others, namely from acting the parts of a money-changer; adding that if necessity of the family is present, or if a business comes to him by some title from laymen, a cleric still cannot trade without permission of the Apostolic See in Italy, and outside Italy, without permission of the Bishop. Moreover he adds that if a doubt arises concerning some contract, whether it can licitly be entered by a cleric, "the most expeditious way is to write to the S. Congregation of the Council, which will decide the doubt." L. l. c. 832, 833. But from received customs, if a cleric has succeeded his father in businesses of this kind together with his brothers, he is permitted to exercise them through others. Likewise no permission is needed if someone trades in order to procure the necessities of life for himself, and not only for his state.

It is certain that it is not lawful for clerics or religious to lease the things of laymen for the sake of making gain. The reason is that although this is not properly trade, but only a certain species of trade, nevertheless it is forbidden by the Council of Chalcedon, C. Pervenit 1, caus. 21; C. 1 Ne cler. vel mon. And therefore from another's farms it is not lawful to fatten sheep, swine, etc., so that they may afterward be sold, unless somewhere a contrary custom flourishes. To lease; for he who succeeds to the lessee will be able to retain it. Fagnan on C. 1, n. 81 Ne cler. vel mon.

By no law is it forbidden to clerics to give a loan to others, and consequently to buy obligations of companies, or even shares, provided however that the companies set no illicit end before themselves, that they do not involve themselves in the administration and trade of those companies, and that they abstain from any trade of those obligations and shares. S. O., April 15, 1885.

Neither by an obligation nor by a share can one be said to exercise commerce and trade through an interposed person. For the company itself, whether industrial or even trading, certainly does not exercise industry or trade by mandate or in the name of such a bondholder or shareholder, but altogether independently of him. The bondholder and shareholder only cooperates by helping with his money given. La-Croix l. 3, p. 2, n. 1005, 1006; Molina d. 339, n. 2; Lugo de Inst. d. 26, n. 29; Resp. Mor. l. 3, d. 20; L. l. 3, n. 834, 835; Benedict XIV de Syn. l. 10, c. 6; S. Th. 2. 2. q. 77, a. 4 ad 3; E. M.

The obligation of a company is a title for receiving a certain fixed emolument from money given to the company as a loan. Wherefore through an obligation someone becomes a creditor of the company. A share of some company is a title by which someone, on account of the sum contributed to the company, has a right to receive a variable, proportionate emolument. Through a share someone becomes a partner of the company, but not for that reason an administrator.

It is likewise prohibited to all clerics to exercise the offices of president, moderator, secretary, treasurer, and similar offices in money chests, rural banks, savings banks, and other similar works for the temporal assistance of the faithful. S. C. Consist., November 18, 1910.

An excommunication has accrued to the constitution Apostolicae Sedis, reserved to no one, against missionaries giving work to business and trade, and against their immediate superiors who have not punished delinquents, according to the constitution of Urban VIII Ex debito, February 21, 1633, and Clement IX Sollicitudo, July 17, 1669, from the Declaration of the Supreme Pontiff. Sacred Congregation de Propaganda Fide, March 29, 1873; Holy Office, December 4, 1872.

Clement IX has these things in the place cited, sec. 3: "To all and each ecclesiastical persons, both secular and regular, of whatever state, grade, condition, and quality, and of any Order, Congregation, and Institute... and to any of them who shall have been sent for the time to the islands, provinces, kingdoms of the East Indies... and to the parts of America, both southern and northern, by the Apostolic See, or by the Congregation of Our venerable brothers, Cardinals of the Holy Roman Church, placed over the business of the Propagation of the Faith, or by their Superiors under the name of missionaries, or under any other title, or who in any way shall be staying in those parts, under penalties of excommunication latae sententiae, and deprivation of active and passive voice... and also loss of all goods and profits, to be incurred by that very fact... by the tenor of the present letters We strictly prohibit... that they, under any pretext, title, color, device, cause, occasion, and form, even once, by themselves or through ministers or other subsidiary persons, directly or indirectly, both in their own name and in the name of their respective religions... or of any others whatsoever, and otherwise in any way and however, should thrust themselves into or mix themselves with such secular trades and businesses. And from now... after the case has happened, We apply, by the series of these letters, any goods and profits whatsoever which have proceeded from trades and businesses of this kind... to the use and advantage of the poor, hospitals, seminaries, etc.; delinquents are bound to consign goods and profits of this kind to the Ordinaries of the places... who ought to distribute and spend them as above, and not for other uses.... Sec. 4. Moreover by the same censures and penalties We bind, and declare to be bound, immediate Superiors, and Provincials and Generals of the aforesaid Orders or Congregations, who have not punished their respective subjects committing delicts in the foregoing... in any way even for one single time, at least by removing them from the places of the delict committed by them. But from the sentence of excommunication of this kind no one from the aforesaid delinquents can be absolved by Superiors or another or any others whatsoever, even supported by any authority, except those constituted in the article of death, unless profits of this kind have first been restored."

Kingdoms of the East Indies, parts of America: the praised Declaration of the Holy Office and Sacred Congregation de Propaganda Fide also comprehends Chinese missionaries. Holy Office, January 17, 1883. Or who in any way shall be staying in those parts: "the same prohibition and penalty, according to the mind of Clement IX, affects not only European missionaries, but also any ecclesiastical men whatsoever, who under the name of missionaries or under any other title shall have been sent for the time, or shall in any way be staying in those parts." Holy Office, January 17, 1883. Business is to buy something so that it may be sold dearer unchanged, e.g., oil, grain, books, etc. But trade also comprehends those things which, naturally changed, are customarily resold, e.g., must which, having become wine, calves which, having become oxen, swine which, having been fattened, are resold. Naturally: for if they are resold changed by the art and industry of men, it is craftsmanship, which does not pertain here, e.g., if from bought wool you make garments, from iron arms, from wood vessels. But if these things also are furnished in public workshops, with workers hired, they are something gainful, and differ little from business, nor consequently are they regularly exercised without lethal fault. L., book 3, n. 836. In any way and however they thrust themselves into or mix themselves with it; even once; even giving work to trade and business for others.

No one from the aforesaid delinquents, i.e., from those who give work to business or trades, or thrust and mix themselves into them. Therefore Superiors, even with profits not restored by delinquents, can be absolved, nor does the delay of delinquents harm them. Unless profits, etc. Therefore, with profits of this kind restored, someone can be absolved by another than the Supreme Pontiff. Condonation of profits is to be obtained only from the Holy See. But restitution is to be made "to the Ordinaries of places, or their Vicars in spiritual things, or Officials, or Apostolic Vicars or Pro-vicars." These must "distribute and spend the restored profits for the use and advantage of the poor, hospitals, ecclesiastical seminaries and workers (yet not of the religions... of those who have committed a delict in the foregoing or concerning them, but of other non-delinquents...), and not for other uses." Sec. 3; E.M.

1. “An Apostolic Vicar (Kouytcheou) deposits money sent to him with a certain merchant dwelling in his province, and from time to time takes and spends part of that money as necessities require; and thus at the end of the year more or less money remains in the hands of the merchant, who uses that money in order to exercise his commerce, and receives profit from it, and wonders that the Apostolic Vicar receives no part of the profit accruing.

The Apostolic Vicar asks that it be lawful for him to enter into partnership with that merchant, so that he may be a participant of profit or loss, according to the proportion of the money deposited by the Apostolic Vicar with the aforesaid merchant.

R. As regards entering into partnership, in the negative; and let the Apostolic Vicar of Kouytcheou consult Benedict XIV in his Constitution Apostolicae Servitutis, and de Syn. dioeces., l. 10, c. 3, and let the Decree of 13 Aug. 1834 be given, namely: That missionaries, etc., can consult for the security of subsidies owed to them and for the good of the mission itself by receiving by way of exchange goods bought with money owed to them, and selling the same goods brought to them, and making their own the price to be drawn from the sale of the same.” S. O., 29 Jan. 1851, A. S. S., v. 24, p. 707.

2. Caesar, a priest, gives an immense sum of money to his brother Caesarinus, so that he may open a shop for selling medals, sacred images, rosaries, and other objects of devotion. Caesarinus alone gives his name to the shop and manages the care of the business. But at the end of the year he gives to Caesar an account of receipts and expenditures, and with him divides the profit, the proportion being observed between the money of his brother and his own work. — Does Caesar act licitly?

R. In the negative. For he truly exercises trading through an interposed person, prohibited by Benedict XIV, Const. Apostolicae servitutis, 25 Feb. 1741, and by Clement XIII, Const. Num primum, 27 Sept. 1759. Cf. Benedict XIV, de Syn., l. 9, c. 9, nn. 4, 5.

3. Bernardus, rector of a seminary, buys grain in twice the quantity which he needs for a year. For he says: The price of grain is now, beyond custom, very low; after six months it will be very high, and then I will sell the surplus with profit. But if I foresee that next year the price is to be increased, then I will keep what remains for the future year. — Is this rightly done?

R. If he buys with the direct intention of selling more dearly, he acts illicitly; for it is an act of true trading. But if he buys on account of the danger which can occur next year, so that he may provide for the household affairs of the seminary, and, that danger ceasing, afterwards resells the surplus, he acts licitly; for it is not an act of trading, but of domestic economy. Cf. Lugo, de Iust. et Iure, d. 26, s. 3, n. 32.

4. Olivarius, a priest, seeing that the value in Europe of notes of the banking market of South America is always diminishing greatly day by day, writes to his friend dwelling in South America, who owes him two thousand lire, that he should spend them in buying goods of that region, which afterwards he should send to him. For by selling these goods himself in Europe, he will be able without detriment, and perhaps even with profit, to recover his whole money. — Does Olivarius act licitly?

R. In the affirmative. For he does not intend profit by buying cheaper so that he may afterwards sell dearer, but the recovery of his own money without detriment. Cf. Lugo, de Iust. et Iure, d. 26, s. 4, n. 33.

5. Onuphrius, a priest, lends money to his brother Angelus. Onuphrius receives annual profit according to the legal rate. But Angelus expends it in trading. — Does Onuphrius act licitly?

R. In the affirmative. For he himself is not the trader, but his brother. He himself is a simple lender of money, which is not prohibited to him.

6. “You have set forth to the S. C. de P. F. that entrance into those regions of Tibet, whether subject to the great Lama, is altogether forbidden, under penalty of expulsion, to all foreigners, and especially Europeans, unless for the cause of trading. Your Amplitude understanding this, fearing lest the Apostolic mandate which you have undertaken, namely of evangelizing that savage and superstitious people still sitting in darkness and in the shadow of death, should remain incomplete, since no other means, as you assert, was available: you thought it opportune to enter the borders of that kingdom as a trader, under which pretext you contend that you would propagate the Catholic faith more easily and safely. Wherefore, in order to avert from the minds of the infidels every suspicion concerning the true state and condition of Your Amplitude and of the other companions, you strive to demonstrate to them not only by words that all of you are nothing else than a certain society of merchants devoted to earthly profits; but so that they may be further confirmed in an opinion of this sort, it pleased you to establish here and there some storehouses or shops for keeping and selling goods; and, what is remarkable, to have completed all these things without consulting the Apostolic See, to which at last you had recourse, that you might be instructed concerning the liceity of the aforesaid trading. The Eminent and Reverend Fathers of the Congregation of the Supreme Inquisition, your requests having been seriously and maturely weighed, responded: that it is not lawful under any title for missionaries to exercise commerce.

“And certainly, although it is known to the Eminent Fathers that Your Amplitude was moved from zeal with which you burn for propagating the Catholic faith, nevertheless it ought to be clear to you that the sanctions of the Sacred Canons, the Decrees also of universal Councils, Apostolic Constitutions, and the responses of the Sacred Congregations to the requests of Apostolic Vicars are altogether contrary to your aforesaid manner of acting; nor can the goodness of the end legitimize illicit means for obtaining the same, for evils are not to be done that goods may come. Besides, the divine Religion of Christ must not be propagated by fictions and simulations, as heretics try to propagate their venerated dogmas. For our Lord Savior, about to convert the human race, sending his Apostles and Disciples, said to them: Going into the whole world, preach the Gospel to every creature. Teach all nations, baptizing them in the name of the Father, and of the Son, and of the Holy Spirit. Behold, I send you as lambs among wolves. Be therefore prudent as serpents and simple as doves. These are divine admonitions, for faithfully executing which preachers of the Gospel ought to apply all efforts. Although the pretext of commerce seems to you most apt for propagating the faith, nevertheless it must never be applied in the conversion of souls, as indecent and very unbecoming to apostolic men, after the example of Christ and the Apostles, who never used these fictions, by which they would seem to serve God and mammon at the same time. For examples are not lacking in which infidels, as soon as they see those who say that they are ministers and legates of the Most High God devoted to temporal affairs, despise the same, thinking that they use the pretext of religion in order to emerge from the straits of poverty. In this way they everywhere lose that veneration and love which they need before other things for gaining souls to God, and acquire for themselves the ignoble name rather of merchants of monies than of curators of souls.

“Therefore, lest you seem to contradict not only the sanctions of the Sacred Canons, but also the Apostolic Constitutions (of Urban VIII, Ex debito Pastoralis officii, 22 Feb. 1633; of Clement IX, Sollicitudo Pastoralis Officii, 17 June 1669; of Benedict XIV, Apostolicae servitutis, 23 February 1751; of Clement XIII in his Encyclical Cum primum, 16 Sept. 1759; and of Pius VI in the response to the Archbishop of Theodosiopolis, 18 March 1782), it is necessary that you abstain in the future from the exercise of commerce, whether through yourself or through others, directly or under any title or color, lest you remain entangled in the most grave penalties laid down in the Sacred Canons and especially in the above-cited Constitutions.

“These things having been premised, do not wonder if you sometimes understand that the S. C. has more often dispensed with some persons from the prohibition of trading of this sort. For all concessions made by the aforesaid S. C. de P. F. to some Apostolic Vicar, or to Chinese priests lacking ecclesiastical patrimony, regard only certain particular cases, indeed most urgent ones. But concessions of this sort were never made so that missionaries could use the exercise of commerce as a means for propagating the Catholic faith, as Your Amplitude greatly desires to obtain.

“Therefore, any trading whatever being excluded, you are able to permit only medicinal substances, to be furnished for the use of the sick gratuitously, or at least without any profit, by missionaries skilled in this art. In the rest, strive that, in the more prudent and better way that you can, the poor who have chosen a dwelling for themselves around the hospices of the missionaries may be evangelized; and as for their children who attend the schools of the aforesaid missionaries, take care that with human letters they may also be imbued with the rudiments of the Catholic religion. These foundations having been laid beforehand, the edifice of religion, with God helping, will rise to the highest things; for neither he who plants is anything, nor he who waters, but God who gives the increase.” S. C. de P. F., 4 Feb. 1860, to the Apostolic Vicar of Lahassa.

932. 1. The nature of these speculations is briefly set forth. (A) The stock-exchange (Bourse, Borse, Stock-Exchange) is a place in which public revenues, shares and obligations of societies (actions, obligations, stock, bonds) are sold and bought, and also certain goods, such as grain, oil, wools, metals, etc. Whence a twofold Exchange is distinguished: the financial Exchange, where revenues and shares or obligations are sold, and the commercial Exchange, where certain goods are sold.

¹ Carriere, III, n. 1248-1266; Berardi, n. 938-940; Ball. P., n. 927-932; Genicot, n. 664-665; Deville, Les Operations de Bourse devant la conscience, Lyon, 1884; A. Tavernier, Traite elementaire des Operations de Banque et de Bourse, Paris, 1899; Courcelle-Seneuil, Traite theorique et pratique des operations de Banque, 8th ed., Paris, 1899; Courtois, Traite des Operations de Bourse, 12th ed., Paris, 1902. - On this we wrote more fully in French in the Supplement, p. 216*.

Now contracts entered in either Exchange are of two kinds: either for the present, or for a term (au comptant ou a terme). Concerning the former nothing special occurs to be said, since the rules set forth above concerning purchase-sale must be applied to them: for then certain rights or goods are bought or sold for ready money.

(B) Therefore the whole difficulty turns on contracts for a term; in these, securities or goods are bought or sold on this condition, that the price be paid after a certain time, e.g., on the first or fifteenth day of the month (which day is called the liquidation day), and indeed the price which on that day will prevail in the Exchange. Now, since a price of this sort is liable to perpetual changes, the contract is aleatory and is called a certain speculation, because each contracting party can gain or lose something, according as the price will be greater or less on the day of liquidation. But when this day arrives, securities or goods are generally not handed over, but only the difference between the price which prevailed in the Exchange on the day of purchase and that which prevails on the day of liquidation is paid to the victor.

The matter is declared by an example. On May 3, Albert buys from Augustus, for the price of 7000 francs, which he will pay on the fifteenth day of the same month, a revenue of 300 francs, confidently expecting the price at that time to be 7080 fr.; if the matter stands thus, Augustus will pay to Albert the difference, namely 80 fr.; but if the matter shall have stood otherwise, and on May 15 the price is 6950, Albert will hand to Augustus the difference, namely 50 fr.

934. (C) When the buyer sees that he will suffer some damage if he pays the difference, he can seek that the operation be extended, or deferred for fifteen days (se faire reporter a la quinzaine). For this, however, it is required that he find a third contracting party who, at the fixed price, buys the revenue and promises to cede it back at the same price after fifteen days, yet by means of some increase; and thus, if during that time the value of the revenue is increased, the buyer, far from losing anything, can receive some gain.

Thus, to take the same example, on May 15, Albert asks that the operation be extended to the end of the same month; therefore he asks Casimir that, for the current price 6950, he receive the revenue which on the first day of June he will cede back for 7025; for then, if in reality the revenue on the day of liquidation is worth 7080, Albert, far from losing 50 fr., will gain the difference between 7025 and 7080, that is, 55 fr.

935. (D) Sometimes also, so that the damage which the buyer can suffer may be limited, he can contract under the condition that the agreement is rescindable, provided that a certain determined premium be left to the seller (which is called marche a prime).

Thus Albert, in buying for 7000 fr. a revenue of 300 fr., can stipulate that he can renounce this agreement, provided that on the day before liquidation he yield to the seller a determined premium, e.g., 20 fr.; wherefore, if on the day before liquidation he foresees that the revenue will be worth only 6950, he can declare that he wishes the contract to be rescinded; and thus, in place of 50 fr., he will lose only 20 fr.

936. 2. Moral principles concerning stock-exchange speculations. (A) Operations of the Exchange, even for a term, are not of themselves unjust, provided frauds are avoided, and no more money is exposed to the risk of chance than the contracting party can pay.

For the speculations of which the matter concerns are nothing other than certain wagers concerning the increase or decrease of revenues or goods, and at the same time aleatory games, in which the victor receives some prize; therefore they are licit under the conditions set forth above. - Nor should it be said that these operations are illicit because they furnish a means of acquiring great riches without proportionate labor; for, so that someone may be able to enter contracts of this sort with sufficient security, he ought diligently and daily to inspect the state of industry, commerce, and the money market: for the perpetual changes which occur in the price of things arise not from fortuitous chance, but from various causes, which speculators ought excellently to know, unless they wish to rush into certain ruin. - Besides, it concerns the public good that there be certain men who, by the hope of gain, are drawn to investigating things of this sort; for thus the true price of a thing is more easily and safely defined, and provision is better made for the progress of industry and commerce.¹

¹ Concerning the utility of speculation as to goods, Cl. Jannet writes, Le Capital, p. 241-279, where, among other things, he says: "Operations for a term are indispensable to industry; it needs to count on deliveries of raw materials at fixed times and at determined prices in order to establish its cost prices... The market for a term is also in general rule favorable to producers; for it assures a constant outlet for their products. Without it, there would be long periods during which farmers would not find anyone to sell their products to or could do so only to local merchants inclined by the absence of competition to exploit them... Today, on the contrary, in Europe as in the United States, every owner is sure of being able to sell his products on the day he wishes and at a price in relation with the quotation of the regulating market." - He says almost the same concerning revenues, shares, and obligations: "If there were not sellers for a term, that is, speculators who hope at liquidation to procure the titles below the rate at which they sell them today, one would not find anything to buy on certain days. This was seen for the employments of the funds of savings banks, in May, June, and July 1890. Ready money did not suffice to furnish counterparts to the demands for revenue; the term - that is, the great speculators - alone could furnish the quantities demanded." (C. Jannet, op. cit., p. 358.)

937. (B) They are guilty of injustice who by deceit, fear, or fraud strive that the prices of securities be artificially increased or diminished, with their own gain and the damage of others. Thus they act, for example, who scatter false rumors concerning the prosperous or calamitous state of such a kingdom or such a society, so that they may deceive others and induce them to sell securities at a lower price or to buy them at a greater one;¹ likewise those who join together so that by any means, right or wrong, they may oppress societies hateful to themselves. For these are unjust means, of themselves apt to inflict damage on others; and the gain captured from this arises not from chance or prudence, but from fraud; but fraud ought to patronize no one.

¹ "The great players seek to make the event arrive, rise or fall, on which they have wagered: this is what constitutes stock-jobbing, and what makes its character absolutely culpable from the moral point of view. The bulls and the bears are organized into two parties which deliver fierce struggles to one another, by employing the most immoral means. False news spread in a low voice or special financial newspapers were the infancy of the art. - Today recourse is had to false statistics of production to influence prices." (C. Jannet, op. cit., p. 279-280.)

938. Corollaries. (a) Those who knowingly and willingly take upon themselves so many and such great aleatory affairs that they foresee themselves very probably going to be incapable of satisfying all their obligations, by that very fact are guilty of injustice; for they expose themselves to the danger of inflicting damage on others. - Thus also, with greater right, it must be said of those who expose to the risk of chance not only their own money, but also money committed to them by those who do not wish to be mingled in these speculations.

(b) But those who spend upon aleatory affairs resources necessary for feeding the family not only lack prudence, but also sin gravely against the charity owed to children.

(c) Moreover the custom of giving oneself to the games of the Exchange is very dangerous, both because of the excessive anxieties which it brings with it, and because of the danger of temporal ruin which it induces, and because of the acts of injustice to which it easily impels, and other evils which we described where treating gaming, n. 923.

(d) But speculations of this sort are forbidden to clerics, because they assume the nature of trading. Hence the Holy Office, April 15, 1885, declared that "according to the things set forth and with attention to the peculiar circumstances of the time, ecclesiastical persons are not to be disturbed if they bought or buy shares or titles of a money-bank, provided they are prepared to stand by the mandates of the Holy See, and abstain from any trading of the said titles, and especially from every contract which has the appearance, as it is commonly called, of dei giuochi di borsa"¹ (jeux de bourse).

¹ In Nouv. Rev. Theol., t. XXV, p. 604; cf. Ball. P., Tr. IX, n. 478.

(4) We come now to brokerage. A broker is a person who makes it his business to negotiate sales or contracts as an agent, or to make sales and purchases for a commission (venditio per proxenetas). A broker is ordinarily a mere agent, and his sales are private.

There are many kinds of brokers: bill and note brokers, stock brokers, shipping brokers, insurance brokers, real estate brokers, pawn brokers, merchandise brokers, etc. A broker may not appropriate to himself a larger sum than the commission agreed upon between him and his client, or fixed by law, unless indeed he has added considerably to the value of a commodity by extraordinary diligence or with the permission of the owner.³¹

³¹ A. S. Bolles, Putnam’s Handy Law Book, pp. 45–47; Gury, Comp. Theol. Mor., Vol. I, n. 858 sq.; Göpfert, Moraltheol., Vol. II, 6th ed., pp. 191 sq.

Not a few brokers nowadays deal in stocks and bonds and other valuable papers, buying and selling these at a commission, either in the open market or to private customers. If no illicit means (such as the circulation of fictitious reports, the use of illegitimately discovered secrets, etc.) are employed in speculations of this kind, they cannot in themselves be condemned as immoral. Nay, it must even be admitted that, to a certain extent, speculation in stocks and bonds is useful, inasmuch, namely, as it facilitates the purchase of valuable papers for the investment of capital and their sale for the provision of ready cash. It also aids in the placing of government bonds. The great evil of the stock exchange is that it easily advances speculation and gambling beyond all due limits and favors fraudulent undertakings. In the nature of the case, lying and fraud are often applied as means in speculation. The so-called financial crises are for the most part artificial “bull and bear periods” in which the speculators by every imaginable and often dishonest means endeavor to raise or depress the price of certain stocks and bonds.

(5) In this connection a word concerning dealings in “options” and “futures” may not be out of place. One is said to deal in “futures” when the goods contracted for are not in his possession, nay do not even belong to him at the time the sales contract is made. If the terms of the contract leave to the seller the choice either to deliver the stipulated goods at a fixed price or to pay the difference between the price agreed upon and the actual market price when the term of the contract arrives, the contract is called an “option.”

“From such an ‘option’ contract to mere ‘time bargains’ or ‘difference transactions’ or ‘margin’ is but a step. In these transactions real delivery of goods to the buyer is not contemplated by either party; they merely make use of the market price of wheat, or cotton, or stocks and shares, or bacon, or other commodity, as matter for wager. . . . It is a subject of hot debate whether such gambling has a good or bad effect on genuine trade. There is, of course, a great increase of business for commission houses, brokers, and agents generally resulting from fictitious bargains, and it is to be expected that such classes will be loud in defense of time bargains, or ‘options’ and ‘futures,’ as they are often indifferently and loosely called. On the other hand, producers of foodstuffs and manufacturers of raw material into cotton goods seem generally persuaded that their trade is seriously injured by gambling transactions on ‘change. Within the last few years several governments have given serious attention to the problem.”

From the moral point of view dealings in futures must be judged as bets or wagers, for a speculative contract in “futures” is to all intents and purposes nothing but a wager or bet concerning a future and uncertain event. The question whether it is lawful or not depends on the broader question concerning the lawfulness of betting.

Applying the Catholic moral doctrine on betting to the question before us, Fr. Slater, whom we have just quoted, says: “We are compelled to admit that a deal in futures in itself is not wrong if it is accompanied by the conditions laid down [i. e., that the money risked belongs to him who risks it; that the transaction is free from fraud and deceit; and that, finally, the chances are fairly equal on both sides]; but that it is wrong if any of these conditions are wanting. However, even though the requisite conditions may be present, it is a dangerous pastime, and should be discouraged, like any other form of gambling, in the interests of public and private morality.” Passing from the abstract to the concrete, namely, to the form in which betting is actually carried on in the exchanges of the great commercial centres of the world, the same eminent English moralist, after carefully weighing the arguments often adduced in favor of the practice, says: “On the other hand producers and consumers alike seem generally to have made up their minds that gambling in futures has a disastrous effect on trade. Competitors are almost indefinitely multiplied; the area of competition is vastly enlarged; and producers of wheat, for example, in countries where land and labor are dear, where taxes are burdensome and skies unpropitious, find themselves forced to compete with others who live under opposite conditions. Tariffs may remedy the evil to a certain extent, as far as effective contracts which contemplate actual delivery are concerned, but they cannot shut out the subtle influence of gambling transactions. In addition to this, gambling in futures falsifies prices. In a healthy condition of the market, the price of an article will depend on the costs of production and the law of supply and demand. As long as these factors dominate the situation, producer and consumer can satisfy themselves that they have full value for their goods or for their money. But when natural prices are interfered with from without by speculators who do not contemplate effective delivery of commodities, and who are only interested in differences, effective dealers can have no security that they get full value in their transactions. Prices are falsified and markets are reduced to an unnatural condition. . . . There are also some more general considerations which cannot be overlooked by the moralist. Betting, as we have seen, is not in itself unlawful, provided it is accompanied and safeguarded by certain conditions. When, however, it becomes a habit, and degenerates into gambling, our verdict in ordinary cases must be different. . . . If it becomes a passion, if the gambler seeks to make it a substitute for honest toil, and strives to make it support him or bring him wealth, serious harm has already been done. The gambler produces nothing; he adds nothing to the wealth of the community; he soon learns to shun honest work; he becomes a parasite who preys on society, and eventually brings ruin on others as well as on himself. So that dealing in differences, even if regarded merely as a form of gambling and speculation, must fall under the censure of the moralist. . . . But it would be a comparatively small matter if the evil connected with gambling in futures were confined to the parties immediately concerned in the transaction. Unfortunately, too often many good and innocent people, who never dream of speculating on ’change, suffer loss from the operations conducted there. A rise or fall in the price of wheat means for the operator the winning or losing of his bet, but for many a farmer a fall in the price means that he is robbed by the ‘bears’ of the fruit of his toil; it may mean the bankruptcy and ruin of many a respectable family. On the other hand, a rise in prices means an additional hardship on the poor, a greater difficulty in making ends meet, a robbing of many a poor family of the staff of life. On many grounds, therefore, the verdict of the moral theologian on the question of the lawfulness of dealing in futures must be that in practice the transaction is immoral and wrong.”³²

³² T. Slater, S.J., Questions of Moral Theology, N.Y. 1915, Ch. IX, “Deals in Options and Futures,” pp. 145–158.

Preliminary note. In our days stock exchanges have obtained so much power that the welfare of nearly the whole people can depend upon them. For almost all great transactions of commerce are conducted on the Exchange. Moreover, from the malice and cunning of impious men, the so-called "stock-exchange speculations" have brought very many to material ruin. Since these things are so, civil governments have for a long time attempted to enact prudent laws concerning transactions on the Exchange. Experience testifying, however, these laws are not yet sufficient to forestall all abuses. It is very useful for the confessor to know at least the principal heads of stock-exchange speculations, because otherwise, when a case occurs, he cannot judge whether the penitent committed an injustice or not.

321. Notion. The name Exchange is taken in two ways: either for a building established by public authority in which certain transactions are conducted, or for the assembly itself of merchants for conducting those transactions. This twofold acceptation is somewhat similar to the twofold acceptation of the name church, namely, for the building and for the assembly of the faithful. In the present matter we speak of the Exchange insofar as it is an assembly of certain merchants. The Exchange so understood has a sufficiently great similarity to fairs, in which a multitude of men assembles to buy and sell merchandise. Consequently, the Exchange is rightly called a "qualified market."²²⁶ Two kinds of objects are bought and sold on the Exchange, namely: 1. money or securities (shares, bonds, etc.); and 2. merchandise, e.g., grain, oil, wool, wine, etc. Hence a twofold Exchange is distinguished: the securities exchange²²⁷ and the commodities exchange.²²⁸ Now the contracts on each Exchange are principally of two kinds, namely, either for the present or for a future term. Contracts for the present²²⁹ are nothing other than sales and purchases of merchandise, bonds, shares, etc., and consequently the principles set forth above, n. 291ff., concerning sale and purchase are to be applied to them. Contracts for a future term²³⁰ are again of two kinds, namely: 1. for a term freely determined between the contracting parties, e.g., someone buys 1,000 measures of wheat to be delivered, not immediately, but after three months (the same thing holds concerning this contract as concerning a contract for the present); and 2. for a term determined by the laws of the Exchange, namely, for the last day of the month or the middle day of the month (commonly, ultimo or medio); this day is ordinarily called the day of liquidation. These contracts for a future term are aleatory contracts and are wont to be made in many ways, of which the principal ones are the following:

a) A difference contract.²³¹ For example, on March 8 Peter buys from Paul 100 shares of some mine for the price of 120,000 francs. But it is agreed between Peter and Paul that on the last day of the month, i.e., March 31, the shares are not to be delivered, but only the difference in price. Hence, if on this last day those 100 shares are worth 121,000 francs, Paul must render 1,000 francs to Peter; but if the price is only 119,000 francs, Peter must give 1,000 francs to Paul. It not rarely happens that the buyer or seller attempts to evade even the payment of this difference. He then asks that the transaction be deferred or carried over for fifteen days.²³² This extension is commonly lawful; for it is nothing other than asking for a loan with payment of the interest owed. Hence we do not explain it specially here.

b) A premium contract²³³ can be made in many ways, which it would be lengthy to enumerate.²³⁴ In general, a premium contract consists in this, that on the day before the term of liquidation or payment the buyer can withdraw from the contract entered into, provided he pays the premium previously established. For example, Peter buys from Paul 10,000 sacks of wool, which he must receive on March 31 for the price of 100,000 francs. Peter hoped that the price would be higher than 100,000 francs, but on March 30 the price is lower, nor is there hope that it will be higher on the following day; hence, to avoid greater loss, Peter withdraws from the contract entered into and pays the stipulated premium, which is, as it were, a conventional penalty.

²²⁶ Qualified market (qualifizierter Markt); cf. Staatslexikon, s.v. "Börse."

²²⁷ Securities or stock exchange (Effekten- oder Fonds-Börse, Stock-Exchange).

²²⁸ Produce or commodities exchange (Produkten- oder Waren-Börse, Produce-Exchange).

²²⁹ Called au comptant, Tagesgeschäfte, Kassageschäfte, Comptantgeschäfte, Locogeschäfte, Effektivgeschäfte, and by other very similar names.

²³⁰ Börsentermingeschäft, à terme.

²³¹ Difference transaction (Differenzgeschäft, opération à crédit).

²³² Se faire reporter à la quinzaine, Report- und Deportgeschäft, or Kost geben und Kost nehmen, Prolongation, etc.

²³³ Premium transactions (Prämiengeschäfte, marché à prime).

²³⁴ Stellgeschäft or Stellage, Nochgeschäft, Wandelgeschäft, Escompte, etc.

322. Principle. All stock-exchange transactions, even those for a future term, are lawful of themselves; accidentally, however, difference contracts are very often illicit and unjust.

The first part is proved. All stock-exchange transactions are reduced to a contract of purchase and sale or to aleatory contracts. But these contracts are lawful of themselves. Therefore stock-exchange transactions also are lawful of themselves.

The second part is proved. Difference contracts accidentally very often bring the material ruin of the contracting party, inordinately incite the accursed hunger for gold, and excite all the human passions. Therefore accidentally they are illicit. Moreover, those who contract in this manner often have recourse to the most cunning frauds,²³⁵ e.g., they spread false rumors, corrupt newspapers to give false reports, vehemently recommend enterprises which are already near ruin, create unjust monopolies,²³⁶ etc. Therefore these difference contracts accidentally are very often unjust. Hence modern laws also endeavor to impede them by establishing that they be regarded as games and consequently produce no civil action.²³⁷ Nevertheless, even today modern laws have not been able to eliminate all the abuses of difference contracts. The confessor should prudently avert his penitents from these difference contracts, because they are rarely lawful and always full of dangers of many kinds. But these contracts and other speculations on the Exchange are altogether prohibited to clerics.²³⁸ For they are entirely unbecoming to the clerical state.

²³⁵ Commonly, stock-exchange swindle (Börsenschwindel).

²³⁶ Commonly, corner, "Schwänze."

²³⁷ Cf. German Civil Code § 764; Swiss Code of Obligations art. 513.

²³⁸ Holy Office, April 15, 1885.

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.

Caius, the procurator of a certain religious Order, proposed to Julius, his confessor, certain scruples of conscience to be resolved. For since the Order needed money to build new monasteries, and the government stock which it possessed was not very profitable, Caius, having found an opportunity when its price had risen modestly, sold it and bought more remunerative shares, some in railways and others in a certain recently established company for providing all things (General Stores). Afterwards, however, he doubted whether these things were lawful for religious. Hence it is asked:

1. What is trading?

2. What kind of trading does ecclesiastical law prohibit, and to whom?

3. What is to be said of the case?

Trading in the strict sense is buying commodities with the intention of selling them at a higher price without changing their nature. Buying commodities for use or for consumption is not trading, nor is selling the produce of one’s own land or labor.

2. What sort of trading is forbidden by ecclesiastical law and to whom?

Ecclesiastics in sacred Orders and all religious are forbidden to trade in the strict sense. They are also forbidden to buy material and change it by hired labor for sale at a profit, and to buy animals and fatten them for sale on hired land, for such actions have the appearance of trading. Benedict XIV also declared that they are forbidden to trade by means of agents.

3. The case. Caius did nothing reprehensible in selling government stock at a profit when it rose in price, provided that it was not bought cheaper with the intention of selling afterwards at a profit when it should rise. Nor did he do wrong in investing part of the proceeds in railway stock which brought in a higher interest. There is more difficulty about his buying shares in the company which owned the stores. Most authors would say that this is not lawful, inasmuch as Caius thereby became a member of a trading company and traded by means of the servants of the company. However, unless he is a director of the company or otherwise takes an active part in managing its affairs, it is probable that he does not do wrong here either. Practically all that he does is to buy the right to receive a dividend on his shares if the company succeeds in business; there is no scandal, and no interference with his spiritual avocations. This is the opinion of several recent authors, quoted and followed by Génicot (II, n. 41), and others. We suppose of course that Caius has no reason to suspect that the company does business dishonestly.

If a corn-merchant buys 100 quarters of wheat from a farmer who has just harvested them, he concludes with him a contract of sale “on the spot,” the farmer undertakes to deliver the corn and the merchant undertakes to pay the price agreed upon. The corn-merchant may wish to make sure of being able to obtain for his customers a constant supply of corn for the future, and so he approaches the farmer some months before harvest time, and enters into a bargain with him by which the latter binds himself to sell the merchant 100 quarters of wheat before the end of next September; the parties then conclude a future contract. More specifically one is said to deal in “futures” when the goods contracted for are not at the time of making the contract in the possession or ownership of the seller. And should the terms of the contract leave the choice to the seller either to deliver the stipulated quantity of wheat at a fixed price, or to pay the difference between the price agreed on and the actual market price when the term of the contract arrives, the contract is an “ option.”

From such an “option” contract to mere “ time bargains,” or “difference transactions,” or “ margins,” is but a step. In these transactions real delivery of goods to the buyer is not contemplated by either party ; they merely make use of the market price of wheat, or cotton, or stocks and shares, or bacon, or other commodity, as matter for a wager. The parties to the contract enter into a speculation about the price of the article at a future date. A agrees to buy 100 quarters of wheat from B three months hence at seven dollars the quarter. If at the date in question the price is higher than that agreed upon, the seller pays the difference; if on the other hand it is lower, the buyer pays. Such gambling transactions in wheat, cotton, securities, and various other commodities are far more numerous on the world’s Exchanges than are ordinary contracts in which effective delivery of what is bought and sold is contemplated. It is a subject of hot debate in the commercial world whether such gambling has a good or bad effect on genuine trade. There is, of course, a great increase of business for commission houses, brokers, and agents generally, resulting from fictitious bargains, and it is to be expected that such classes will be loud in defense of time bargains, or “ options ” and “ futures,” as they are often indifferently and loosely called. On the other hand, producers of foodstuffs and manufacturers of raw material into cotton goods seem generally persuaded that their trade is seriously injured by gambling transactions on ’Change.

Within the last few years several Governments have given serious attention to the question. Thus on July 8, 1897, Mr. Bankhead introduced into-Congress a Bill regulating the sale of certain agricultural products, and imposing taxes on “options” and “ futures,” and on dealers in them. Another Bill with similar scope was introduced into Congress on December 4, 1899, by Mr. Terry. Bills for preventing and penalizing dealings in cotton “futures” and future contracts in agricultural products have still more recently been submitted to Congress.

Among the nations of the Eastern Hemisphere special laws against gambling in “futures” have been passed within the last few years by Austria, Norway, and Germany. The history of this legislation in Germany is specially interesting. The financiers of Berlin had incurred the enmity of the conservative elements in the German Reichstag. The Agrarians attributed the fall of prices in agricultural products to the dealings in futures on the Berlin Exchanges; the Anti-Semites supported the Agrarians because the leading financiers were Jews; the Centre party gave its support because it feared the moral effects of unbridled speculation. The result was the Exchange law of June, 1896. One clause of this law forbade dealings in options and futures in agricultural produce. The financiers refused to submit to the law and attempted to open a private Exchange, where they might conduct their operations unfettered by any legal restraints. Litigation ensued with varying success, but after a struggle which lasted two years the Government gained the day, and the members of the Exchange submitted. The present state of the question is summed up in a report prepared by Dr. Schwabach, His Britannic Majesty’s Consul-General at Berlin, which is printed in a British Parliamentary Paper issued at the beginning of this year on Legislative measures respecting gambling in “ Option” and “ Future” contracts as regards foodstuffs, p. 24.

The Exchange Law of June 22, 1896, prohibiting gambling in options and futures of agricultural produce in Germany remains still in force. Opinions differ widely as to the effects of the prohibition. Produce dealers, Chambers of Commerce, and other organizations of interests solely or chiefly commercial denounce the prohibition as the direct cause of the increased dependence of the German produce markets on foreign, especially American Produce Exchanges in the matter of prices, of the considerable fluctuations of corn prices in German markets, and of the comparatively low prices for German produce. They maintain that these effects of the prohibition do not, however, affect exclusively, or even principally, the produce dealer, but that they constitute a danger to German agriculture itself. They try to persuade their agrarian opponents that the re-establishment of the trade in options and futures would benefit the producer quite as much as the dealer. The Agrarians on their part deny that agricultural interests have suffered from the prohibition, while they express their satisfaction at the loss of business and influence inflicted through the prohibition upon the German Produce Exchanges, more especially the Berlin Produce Exchange, which, in times previous to the Exchange Law, owed its great power to the very large business in options and futures. The advocates of the landed interest expressly devised and carried the prohibition as a means of breaking the powerful influence the Produce Exchange was able to exercise upon the price of agricultural produce to the detriment, they maintain, of the producer. That the prohibition has proved a disadvantage to the producer himself, has been repeatedly and strongly denied by agrarian members of the Imperial Diet. They have, on the contrary, declared themselves completely satisfied with the effect of the prohibition. They maintain that since gambling in options and futures had been prohibited, corn prices in Germany were remarkably free from the fluctuations experienced in foreign markets gambling in options and futures, that prices in Germany were much steadier than in such markets, that prices for German corn were by no means lower than in other countries or for foreign produce, and that producers did not experience any difficulty in disposing of their corn. Statistics are freely used on both sides to support these widely divergent views, and it would be hard to say where truth lies.

The commercial interests in and outside the Imperial Diet continually urge the revision of the Exchange Law and the repeal of the gambling prohibition, while their opponents strictly preserve their uncompromising attitude, and as they are in a majority, the Government does not seem to consider an attempt at revision possible or expedient. Neither the deliberations of the Exchange Committee which was convened by the Imperial Chancellor in June, 1901, nor a conference which took place in September, 1901, between the Prussian Minister of Commerce and delegates of the commercial and agricultural interests to consider certain amendments of the Exchange Law, have led to further action on the part of the Government.

It may safely be presumed that while without any doubt the ’cute brethren of the Berlin Exchange know what is for their advantage, the no less well-informed members of the German Diet, who succeeded in passing this law and maintaining it, in spite of powerful and vigorous opposition, know what is for the interest of the agriculturists of the country.

However, besides the political and financial aspects of the question, there is also the moral aspect. Is dealing in futures morally wrong? Let us study this question from the point of view of moral theology.

There is no theological difficulty about a bona fide contract for future delivery of goods, even though the seller has not present possession of them. He knows that he can get the goods before the time arrives when he will be bound by his contract to deliver them to the buyer; he hopes to be able to get them at a cheaper rate than he charges. All this is lawful trade; there is nothing in the transaction that need cause him any qualms of conscience. But if there is question of a mere speculative contract in futures, and the intention of the parties is merely to bind themselves to pay differences, one may well hesitate before giving a definite solution of the problem.

Such a contract is merely a wager, as we have seen ; it is in itself to all intents and purposes a bet concerning a future and uncertain event, and the question as to whether it is lawful or not depends on the broader question concerning the lawfulness of betting. An action may be lawful in itself, in the abstract, apart from special circumstances, and yet in the concrete, in certain circumstances, it may become wrong. It will be advisable to consider the lawfulness of difference transactions first of all in themselves, and subsequently as they are met with in practice. The question resolves itself, as we have seen, into the broader one of the lawfulness of betting.

Now, it is commonly taught that it is not wrong to make a bet, provided certain conditions are fulfilled. Among those conditions the principal are: —

1. That the money risked belongs to him who bets, and that he has the free disposal of it.

A lawyer must not bet or speculate with the money of his client; if he does so, he exposes the property of his client to risk, and sins against justice. The money risked in betting must also be at the free and unfettered disposal of him who bets. He must not bet with what is necessary to fulfil his obligations, otherwise he exposes himself to the danger of not being able to meet them. A father of a family must not bet with what is required for the support of his children, else he runs the risk of not being able to fulfil his natural duty of bringing them up in a manner suitable to their condition in life.

2. Betting, to be lawful, must be free from fraud and deceit.

The event on which the wager is ventured must be uncertain to both parties. If the uncertainty exists only on one side, if it is brought about by means of false rumors and news, if by dexterous manipulation one of the parties intends to decide the event in his own favor, the wager is a dishonest contract.

3. Finally, the chances must be fairly equal on both sides. The sharper who abuses the ignorance and simplicity of the countryman, can make no claim to have come by his gains honestly. He is a rogue and a vagabond.

A wager that fulfils the above conditions is not a sinful transaction. But though this may be true, yet, as is well known, a habit of gambling is easily contracted ; and when such a habit has once been formed, it is very difficult to shake it off. There may be a certain amount of temporary success; the excitement and fascination which gambling has for many minds; the ease and rapidity with which large sums of money may sometimes be acquired by this means,— all lend their attraction, and combine to make what in itself, if indulged in occasionally, may be a legitimate form of recreation, a most dangerous temptation, and the sure road to ruin.

If we apply this doctrine to the question before us, we are compelled to admit that a deal in futures in itself is not wrong if it is accompanied by the conditions laid down above, but that it is wrong if any of those conditions is wanting. However, even though the requisite conditions may be present, it is a dangerous pastime, and should be discouraged, like any other form of gambling, in the interests of public and private morality.

But what is to be said of dealing in futures not in itself and in the abstract, but in the concrete, as it is carried on in the Exchanges of the great commercial centers of the world?

As we have partly seen already, many men of experience maintain that difference transactions exert a beneficial effect on trade. It is claimed for them that they equalize prices and steady them, so that they are not exposed to such great and rapid fluctuations as they would be if left to the law of real supply and demand. There must of course be a close relation between actual prices at which a commodity is sold and the fictitious price which formed the basis of the “futures” contract. The parties to such a contract must be presumed to know something about the probabilities of the case; we must suppose that they are acquainted, for example, with the world’s consumption of wheat, if they intend to speculate in that commodity; they know approximately too the yield of wheat for the year; they are acquainted with the elaborate statistics on the subject, which have been drawn up by economists for past years, and so they have before them the main elements which are required to enable them to form a good estimate of the price of wheat at a given future time in any particular market. That estimated price will have a great effect in fixing the actual price, for selling prices depend not only on actual supply and demand; they are also largely influenced by prospective considerations as to what is likely to be the supply and demand in the future.

Moreover, the market for futures is practically world-wide. The telegraph puts all the great centers of commerce in close communication with each other throughout the Old and the New World, and makes one universal market of Exchange dealers in securities, corn, cotton, and other commodities. The lowest rate at which an article is sold will fix the market price, and so the lowest price at which wheat is sold in any of the markets of the world, will have its effect in lowering the prices elsewhere. Especially will this be the case as buyers and sellers in futures do not contemplate actual delivery, and so they can afford to disregard costs of transport, custom dues, and similar charges. Thus the contention that dealing in futures equalizes and steadies prices seems reasonable; and, furthermore, it is claimed that this contention is borne out by experience.

Again, it is also contended that futures are a useful and ready means of insuring buyers against loss, and so help trade. A dealer, for example, contracts to supply 100 quarters of wheat to a customer of his on such a day at seven dollars the quarter. If when the date arrives wheat sells at eight dollars the quarter, the dealer loses on his bargain. He desires to insure himself against such loss, and he has the opportunity afforded him by the market in futures. By buying a similar quantity of futures to be delivered on the same date, he will gain on this transaction what he loses on the other by the rise in price.

All this may be true, and if taken together with the fact that futures add enormously to the volume of business transactions, there is abundant explanation of the favor shown to futures by commercial men, and especially by those connected with the Exchanges.

On the other hand, producers and consumers alike seem generally to have made up their minds that gambling in futures has a disastrous effect on trade. Competitors are almost indefinitely multiplied; the area of competition is vastly enlarged; and producers of wheat, for example, in countries where land and labor are dear, where taxes are burdensome and skies unpropitious, find themselves forced to compete with others who live under opposite conditions. Tariffs may remedy the evil to a certain extent as far as effective contracts which contemplate actual delivery are concerned, but they cannot shut out the subtle influences of gambling transactions.

In addition to this, gambling in futures falsifies prices. In a healthy condition of the market, the price of an article will depend on the costs of production and the law of supply and demand. As long as these factors dominate the situation, producer and consumer can satisfy themselves that they have full value for their goods or for their money. But when natural prices are interfered with from without by speculators who do not contemplate effective delivery of commodities, and who are only interested in differences, effective dealers can have no security that they get full value in their transactions. Prices are falsified and markets are reduced to an unnatural condition.

It is sometimes argued in answer to this that the fictitious demand and supply of the speculators balance one another, and so leave the market of effective supply and demand unaltered. This, however, is notoriously not the case; the frequent “corners” in wheat, cotton, and other commodities, whether they succeed or not to the satisfaction of those to whose operations they are generally due, show at least that the “ bears ” and the “ bulls ” are not evenly matched, but that one party has secured a temporary advantage, with the result that great loss and suffering is caused to others. These considerations seem fully to justify the Agrarian party in Germany in their determined opposition to gambling transactions in agricultural produce. In practice those transactions have a deleterious effect on genuine trade, and so they do harm to the prosperity of the country.

There are also some more general considerations which cannot be overlooked by the moralist. Betting, as we have seen, is not in itself unlawful, provided it is accompanied and safeguarded by certain conditions. When, however, it becomes a habit and degenerates into gambling, our verdict in ordinary cases must be different. The question bears some analogy to that of drink. Provided strong drink be taken at the proper time, and in moderation, with due care to ensure our being able to keep control over our appetite, it will not do the ordinary healthy subject any harm. But if strong drink is indulged in too freely, if it is taken at all times and begins to usurp the place of solid food, harm more or less serious is the consequence. So too with gambling; if it becomes a passion, if the gambler seeks to make it a substitute for honest toil, and strives to make it support him or bring him wealth, serious harm has already been done. The gambler produces nothing; he adds nothing to the wealth of the community ; he soon learns to shun honest work; he becomes a parasite who preys on society, and eventually brings ruin on others as well as on himself. So that dealing in differences, even if regarded merely as a form of gambling and speculation, must fall under the censure of the moralist.

But in practice the transaction is not a mere speculation. When large gains or losses depend on future market prices, there is a very great temptation for all whose fortunes are at stake to take means to influence the market in their own favor. Great financiers, who have immense resources at their command, or combinations of smaller moneyed men have means at their disposal by which they can raise or lower the market price of a commodity to suit their own interest. “ Rigging the market,” as the process is called, has been reduced to a fine art, and by this art dealers in futures strive to influence in their own favor the future event on which the bet depends. This is against the rules laid down above, whose observance is necessary if betting is to be an honest transaction. It is like backing my horse against yours in a race, and then bribing your jockey to hold back your horse, or to drug him when the race becomes due. It is a dishonest trick and against the fundamental laws of the game. The sober and well-weighed words used by Sir R. Finlay, the Attorney-General of England, in the House of Commons, when commenting on the Whitaker Wright case, deserve to be quoted in this connection. As reported in The Times (London), February 3, 1904, he said: —

Whitaker Wright was, as is well known to the House, the managing director of the Globe Company. The Globe Company was a company which carried on a highly speculative business. In the year 1900 it had got into very great difficulties, and Whitaker Wright, on behalf of the company, engaged in an enterprise which was intended to restore its fortunes. That enterprise was this—he endeavored to establish what is called a corner on a very large scale in the shares of a company called the Lake View, a corner in Lake View Consols; and the particular operation that he was engaged upon was this—he entered into contracts for the purchase of Lake View Consols on a very large scale, and at the same time he was taking measures to secure that the very shares which he was buying should be under his control, so that many of the sellers to him would have to go to him when the day for delivery came and give him any terms he chose to ask for in order that they might be in a position to fulfil the purchase. That was the operation. If that operation had succeeded, as it very nearly did succeed, the fortunes of the Globe Company would have been, to a very great extent, retrieved. It failed. The enterprise in itself was, in my view, contrary to every sound code of commercial morality. I believe that it is an absolutely immoral thing for a man to enter into a transaction of that kind when he is buying and at the same time is taking steps to prevent those from whom he is buying from being able to fulfil their contracts, except by submitting to any terms he may choose to dictate. Further than that, I have no doubt whatever that such an enterprise falls within the range of the criminal law if it is carried out by several persons in combination, at least if any circumstances of misrepresentation attend it.

This deliberate judgment pronounced by one fully cognizant of the nature of such transactions is only that of common sense and common honesty.

But it would be a comparatively small matter if the evil connected with gambling in futures were confined to the parties immediately concerned in the transaction. Unfortunately, too often many good and innocent people, who never dream of speculating on ’Change, suffer loss from the operations conducted there. A rise or fall in the price of wheat means for the operator the winning or the losing of his bet, but for many a farmer a fall in the price means that he is robbed by the “ bears ” of the fruit of his toil; it may mean the bankruptcy and ruin of many a respectable family. On the other hand, a rise in prices means an additional hardship on the poor, a greater difficulty in many a household in making ends meet, a robbing of many a poor family of the staff of life.-

On many grounds therefore the verdict of the moral theologian on the question of the lawfulness of dealing in futures must be that in practice the transaction is immoral and wrong.

In the number of The American Ecclesiastical Review for December, 1907, the Rev. J. A. Ryan complained that the ethics of business did not receive adequate treatment in the current manuals of Moral Theology. Among the questions which he singled out as either receiving no attention at all or not sufficient attention he instanced “ stockwatering, and its manifold causes, characteristics, and effects.”¹ I propose in this paper to make an attempt to supply the deficiency of the text-books in this particular respect.

¹ Page 653.

It seems to me that the main difficulty in these questions for the moralist is to get a clear idea of the operation in question. If he can do this, his knowledge of the general principles of justice and charity will enable him to decide whether the operation is morally wrong or not. However, the difficulty is a real one, for the ordinary student of moral theology is not a business man, and he cannot be expected to know all the latest devices by which rogues and swindlers strive to attain their ends. By the time that any particular device is sufficiently well known to be inserted in a text-book of moral theology it will of course so far be useless for the purposes of the swindler, who will abandon it for less obvious and more efficient methods. In spite of this, however, it may be worth while to discuss the morality of stockwatering, for even devices that are hoary with age are often successful still, and the borderland between the operation that may be permitted and what must be forbidden is not always obvious.

To water stock then is, as the Century Dictionary tells us, to increase the nominal capital of a corporation or company by the issue of new shares without a corresponding increase of actual capital. Stockwatering then is an operation connected with the working of joint-stock companies. Most modern States have what are called in England Company Acts, and in the United States Corporation Laws, which enable a number of people who conform to the regulations laid down to constitute themselves into a corporate body for some definite object, with definite legal rights and obligations distinct from those of the individual members of the corporation. A joint-stock company usually owes its existence to the enterprise of the promoter. He hears of a mining property or of a printing business which is for sale, and obtains a contract or an option from the owner. He procures the requisite number of persons to sign the Memorandum and Articles of Association and registers the documents with the Registrar of Joint-stock Companies. After these preliminaries have been duly executed, the certificate of incorporation is issued and the new company is born to work the mine or to manage the printing business. A prospectus may then be issued describing the objects of the new company and inviting the public to subscribe for shares and become partakers of its fortunes. The Memorandum of Association is the charter of the new company and, besides other matters, it must contain a statement of the amount of capital with which the company is registered divided into shares of a certain fixed amount. The amount of capital mentioned in the memorandum is the nominal capital of the company and may be widely different in amount from its actual capital. Thus the promoter of a banking business who wishes to impress the public with the idea of the vast scale on which it is proposed to transact business, may put down $10,000,000 as the capital of the company, divided into shares of $50 each. It may happen that only ten shares are issued and that these are only half paid up. Thus although the nominal capital of the company is $10,000,000, its actual capital is only $250.

We have described in rough outline the formation of a joint-stock company according to English law and although the details of American law differ somewhat from the above, still the broad features are similar, and what has been said will suffice for our purpose. This much concerning the flotation of companies had to be premised, for it is precisely in this matter of nominal capitalization that stockwatering and over-capitalization takes place. Authorities are not quite agreed as to what should be the norm for regulating the amount of a company’s capital. The question is of special importance in those States which have legislated against over-capitalization ; there especially it is necessary to have a recognized standard for the legal capitalization of corporations. But what is that standard to be? Is it to be the total original cost of the undertaking and actual investment from the outset; or what it would cost to replace the plant under present conditions; or the structural value, value, that is, for service and wear; or the market value of the enterprise if it were sold in open market; or, finally, its earning capacity? To show how widely estimates may vary according as one or other of these standards is taken as the basis of reckoning, we quote from Mr. W. Z. Ripley, Professor of Political Economy at Harvard, the leading case of the Interstate Consolidated Railroad Company. Professor Ripley says:

Operating both in Rhode Island and Massachusetts, it had obtained a charter from the former State with the right to issue stock and bonds to the amount of $650,000. It then applied to the Railroad Commission for authority to issue this amount under the Massachusetts charter as well. The original capitalization of a defunct predecessor had been $875,000, of which only about $470,000 represented the actual investment, the remainder being water. Owing to the fall in prices of electrical equipment, it was established that the plant could be duplicated for about $400,000. Its present structural value was estimated to be not over $255,000, while the price paid for it at public auction by its then present holders was $152,000. Excluding the possible basis of capitalization upon earning capacity, which ranged upon estimate from nothing to $900,000, which of these other standards, between $470,000 and $152,000, ought rightly to be applied?³ German Company Law adopts the first of these, the original and total cost, as the legal standard of capitalization. At first, as Mr. Ripley shows, Massachusetts adopted the same standard. It was felt, however, that there were grave objections against this method. Large sums of money were sometimes spent foolishly or even dishonestly in floating companies; large expenditure was often incurred in “kissing” bills through legislatures. Sometimes fancy prices have to be paid for vested interests, or in the consolidation of companies — become necessary for effective working — small local undertakings have to be bought out at exorbitant rates. As Mr. Ripley says:

³ Trusts, Pools, and Corporations, p. 130 (1905).

These fundamental objections against original investment as a basis for capitalization have led to general acceptance of the cost of present reproduction in its place. This is the norm usually accepted by judicial appraisers, as in the recent case still pending in the courts, concerning purchase by the city in 1895 of the Newburyport waterworks. It seems to have been adopted also in appraisal of the Milwaukee street railroads in 1898 as well as in Detroit. It is the one recognized by the Massachusetts Railroad commissioners in their regulation of capitalization. The Gas and Electric Light commissioners in the same State also adhere to it closely in fixing the price of product.³

³ Loc. cit., p. 133.

English opinion favors the estimated earning capacity of the undertaking as a basis for capitalization. If the undertaking will give a fair and reasonable interest on the money sunk in it so that the reasonable expectations of the shareholders who bought shares are not disappointed, it is thought that there can be no question of over-capitalization. A moralist would have no difficulty in approving any one of these recognized standards as a basis for capitalizing a company. Provided that the shareholders get fair value for what they contribute according to their reasonable expectations, and the creditors of the company, if there are any, are not wronged, and no harm is done to others, it is a matter of indifference to the moralist what may be the basis of capitalization. The moralist of course cannot tolerate over-capitalization, or capitalization largely in excess of what is right and proper according to any fair standard whatever. The practical evils of over-capitalization which make it necessary for the moralist to condemn the practice may be summed up in the words of Professor Ripley. He says:

Over-capitalization is one of the most frequent, time-honored and persistent charges brought against industrial combinations and against corporations particularly as distinct from other forms of business organization. The general public avers, in behalf of its interest as consumer, that while of course there is no direct relation between capitalization and prices, an excess of securities craving dividends is in itself an indirect incentive to unreasonable charges. An even more cogent objection than this is that the absence of any direct relation between investment value and the volume of stocks and bonds confuses all parties concerned. This was an underlying motive in the enactment of the Massachusetts Anti-Stock-Watering Laws of 1894. For a divergence between the actual property value and capitalization may lead to exorbitant prices and dividends at the expense of the public. It invites unearned profits on the part of promoters leading to corporate organization or financial readjustment in unnecessary or unmerited instances. It stimulates extravagance on the part of banking syndicates in the prices offered or paid for constituent companies. It facilitates internal mismanagement, even promotes actual fraud, by the ease with which the most alert stockholders may be confused as to the real standing of their own company. And finally it invites speculation and stock market jobbery among the public by the relatively small capital necessary to deal in, or acquire control of, considerable blocks of stock.⁴

⁴ Loc. cit., p. xxiii,