The recent financial crisis has led to a consensus among policymakers that the speculative bubble and subsequent financial crisis can never happen again and new laws or policies must be formulated to prevent it. Unfortunately for our society, governments have made many previous attempts to control speculation through legislation and failed.

In Pictures: Top 7 Biggest Bank Failures

South Sea Bubble
One of the earliest attempts to control speculation arose in the wake of the South Sea Bubble in England in the early 1700s. The Bubble Act was passed at the height of the speculative frenzy at the time, and the act prohibited the issuance of transferable stock certificates by unincorporated joint stock companies. While some suggest that the act was passed to protect the South Sea Company from competing bubble companies, the fact is that the speculative excess did not slow down. The English government even declared dozens of companies illegal for not following the law, but nothing could stop the greed of man at the time. The South Sea Bubble ended in spectacular fashion a short time later.

Twenty years later, Parliament passed the "Acts To Prevent the Infamous Practice of Stock Jobbing" which is how speculators were referred to in that day. This law, also called Sir John Barnard's Act, tried to ban "time bargains" which referred to a common practice at the time of buying and selling securities without transferring shares or paying cash up front. The trades would be settled by the difference between the purchase and sale price. Think of it as 100% margin trading. The law made little difference as the practice continued to flourish. (Learn more about bubbles and turmoil in our Market Crashes Tutorial.)

Early America
This fruitless attempt to control the excesses of human behavior transferred to the new world. In 1792, New York passed a similar sounding law called "An Act to Prevent the Pernicious Practice of Stock Jobbing, and for Regulating Sales at Public Auction." This law banned time bargains and options unless the party selling held the certificates physically. The law also banned securities trading utilizing public outcry, which is another term for an auction market.

Hughes Commission
Some governments studied the issue and didn't overreact. The Hughes Commission was set up to study the New York Stock Exchange in the wake of the Panic of 1907. The commission resisted strong pressure to ban or restrict short selling, despite the belief that it aggravated volatility. The commission didn't fall for it though, and noted that New York had a law on the books from 1812 to 1858 that banned short selling except for registered owners of the security. The Hughes Commission said that the rule had failed in other countries and was probably in conflict with U.S. Supreme Court rulings. (Learn about what happens when the government gets involved in the economy. Read Economic Meltdowns: Let Them Burn Or Stamp Them Out?)

German Exchange Act of 1896
Germany also saw speculative excesses in the late 19th century that led to multiple bank failures, precipitating the creation of a commission to investigate how to best control future events.

In 1893, the commission delivered its report, and three years later, the German Exchange Act was passed. The law banned futures trading in grain and flour, and required extensive registration requirements for buyers and sellers of other commodities or stock. The law had the opposite effect as it increased volatility in prices as the loss of the short side and its corrective influence on the market led to larger asset price inflation during bull market periods.

Bottom Line
The record of passing legislation to restrict speculation through various means has been tried many times over the last 300 years in many different countries. The attempt usually ends in failure as human behavior is difficult to control or channel with these methods.

Still feeling uninformed? Check out last week's Water Cooler Finance to see what's been happening in financial news.

Related Articles
  1. Investing

    Is it Time to “Buy” Inflation?

    Based on recent data from the Treasury-Inflation Protected Securities (TIPS) market, it would seem that most investors aren’t worried about inflation.
  2. Investing

    What a U.S. - Asia Trade Deal Means For Business

    The U.S. and 11 other countries, comprising 40% of the world’s total economic output, have finally reached agreement on the Trans-Pacific Partnership.
  3. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  4. Economics

    Should the Fed Be More Worried About Asset Bubbles?

    While the Fed should be concerned that assets bubbles might impact economic stability, monetary policy is not the best tool to mitigate this threat.
  5. Stock Analysis

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  6. Investing

    Which GOP Candidate Brings What to the Table?

    What are the major GOP presidential candidates' economic plans and how do they differ?
  7. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  8. Investing

    Hetty Green: Invest Like the Richest Woman in the World

    Investors would be wise to emulate the approach to the markets that Hetty Green used to grow her fortune.
  9. Economics

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  10. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  1. What happens to a 529A account when the beneficiary dies?

    According to the Achieving a Better Life Experience Act of 2014 (ABLE Act), when the designated beneficiary of a 529A account ... Read Full Answer >>
  2. Can you have more than one 529A account?

    According to the Achieving a Better Life Experience Act of 2014 (ABLE Act), a disabled person can generally set up only one ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  5. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  6. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!