diff options
Diffstat (limited to 'old/60082-0.txt')
| -rw-r--r-- | old/60082-0.txt | 12200 |
1 files changed, 0 insertions, 12200 deletions
diff --git a/old/60082-0.txt b/old/60082-0.txt deleted file mode 100644 index 3711f27..0000000 --- a/old/60082-0.txt +++ /dev/null @@ -1,12200 +0,0 @@ -Project Gutenberg's The Stock Exchange from Within, by W. C. van Antwerp - -This eBook is for the use of anyone anywhere in the United States and -most other parts of the world at no cost and with almost no restrictions -whatsoever. You may copy it, give it away or re-use it under the terms -of the Project Gutenberg License included with this eBook or online at -www.gutenberg.org. If you are not located in the United States, you'll -have to check the laws of the country where you are located before using -this ebook. - - - -Title: The Stock Exchange from Within - -Author: W. C. van Antwerp - -Release Date: August 9, 2019 [EBook #60082] - -Language: English - -Character set encoding: UTF-8 - -*** START OF THIS PROJECT GUTENBERG EBOOK THE STOCK EXCHANGE FROM WITHIN *** - - - - -Produced by Charlie Howard and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - - - - - THE STOCK EXCHANGE - FROM WITHIN - - - - - THE - STOCK EXCHANGE - FROM WITHIN - - BY - W. C. VAN ANTWERP - - [Illustration] - - GARDEN CITY NEW YORK - DOUBLEDAY, PAGE & COMPANY - 1914 - - - - - _Copyright, 1913, by_ - WILLIAM C. VAN ANTWERP - - _All rights reserved, including that of - translation into foreign languages, - including the Scandinavian_ - - - 31ST THOUSAND - - First printing, Jan., 1913. - Second printing, Apr., 1913. - Third printing, June, 1913. - Fourth printing, Feb., 1914. - - - - -PREFACE - - -In so far as these pages reflect the thoughts of a busy stockbroker, -distracted by many duties and lacking in literary skill, they have but -little merit and the writer entertains no illusions regarding them. -But in the many quotations from the writings of the world’s foremost -economists that are here presented, and in the various legal and -historical precedents cited, perhaps it is not too much to hope that -this book possesses some slight value as a contribution to the vexed -and vexing discussion of the Stock Exchange, and that it may serve -in some degree both to dull the sharp edge of uninformed criticism -and to strengthen the hands and hearts of loyal friends of a greatly -misunderstood institution. The public is asked to disregard the -utterances of demagogues and self-seekers and to consider facts. That -done, the American spirit of fair play may be confidently relied upon. - -The Stock Exchange authorities have had no hand in the preparation of -the work, nor does it bear their endorsement. I say this lest it be -thought an official _apologia_. Had it been such, the work would have -been much more skillfully done, and its value greatly enhanced. - - THE AUTHOR. - - - - -CONTENTS - - - Preface v - - CHAPTER PAGE - I. The Functions of the Stock Exchange 3 - - II. The Uses and Abuses of Speculation 35 - - III. The Bear and Short Selling 71 - - IV. The Relationship Between the Banks and the Stock Exchange 99 - - V. Publicity in Exchange Affairs; Cautions and Precautions 131 - - VI. Panics, and the Crisis of 1907 183 - - VII. A Brief History of Legislative Attempts to Restrain or - Suppress Speculation 223 - - VIII. The Day on ’Change, with Suggestions for Beginners 261 - - IX. The London Stock Exchange, and Comparisons with Its New - York Prototype 323 - - X. The Paris Bourse; a Monopoly Under Government 383 - - Appendix. The Report of the Hughes Commission 415 - - Index. 447 - - - - -CHAPTER I - -THE FUNCTIONS OF THE STOCK EXCHANGE - - -Every now and then some one who has not given much thought to the -matter asks the questions, “Of what real use is the Stock Exchange?” -“What does it accomplish?” “Is it a necessary and useful part of our -economic life, or is it merely a means of promoting speculation and -gambling?” These are fair questions, and they are asked in good faith. -To be sure they have been answered many times by writers on economic -subjects, but the trouble is that in our hurried American life we do -not read the economists, preferring to get our impressions from the -hasty utterances of some one who knows no more about it than we do. - -The study of any form of economic development, like the study of -sciences and philosophies, requires infinite patience. But the “man -in the street” is bored to death by such methods; he wants to take a -short cut to his conclusions; merely tasting the Pierian spring he -hurries on to judgments that are superficial, haphazard, and often -crude and blundering. And yet at bottom this man, a good citizen with -an open mind, invariably wants the truth. He may be too busy to dig it -up himself, but he knows it when he sees it, and once he has grasped -it he has no patience with those who seek to turn him from it. To this -average man, who holds in his hands the balance of power in America, I -venture to say something about markets. - -The first thing a man asks when he wishes to buy is “the price.” Every -minute of the day, all over the world, that question is on men’s lips. -As it is a necessary prelude to all forms of trade, it follows that -everything that enters into the making of prices becomes at once of -primary importance. The more scientific the price, and the nicer and -more accurate the making of it, the better the bargain for both buyer -and seller and for trade generally, bearing in mind the distinction -between prices, which are temporary and move rapidly--and values, which -are intrinsic and move slowly. The price of a thing is what you can -get for it; the value is its real worth to you, and hence it cannot be -defined or measured, since a thousand considerations may enter into -it, such as caprice, sentiment or association. If _real_ values could -be determined, they would necessarily be identical with prices, but as -they cannot be ascertained in ordinary commodities of trade, prices -become the really essential considerations and values the subordinate -ones. Let us see, then, how prices are made, for this is one of the -reasons why exchanges exist. - -If you want to buy, let us say, a piano, you go to the dealer and ask -the price, and as he is the only person in the neighborhood who deals -in pianos, you must either accept his offer or look elsewhere. But -to look elsewhere takes time and labor; dealers in pianos are widely -separated; moreover, there is no open competition among them such as -you would like, and so finally when you have bought you feel perhaps -you have not secured your money’s worth. You would have secured a much -better bargain, no doubt, had there been twenty dealers in the room -competing with each other, and a still better bargain had their number -been fifty, or a hundred, or two hundred, because that would mean -competition, and the more competition there is, in close contact and -governed by rigid business rules, the more certain the approach to a -perfect price. Everywhere in the world fairs and other gatherings of -merchants are held at periodic intervals because people demand them -in their effort to secure proper prices by competitive bidding and -offering. One of the first travelers to penetrate the heart of Africa -found among the natives this phenomenon of trade, showing that it is -instinctive; indeed, it may be traced to the earliest known period -in the history of any people. If you arise before daybreak in London -and go to Billingsgate and Covent Garden, or in Paris to the _Halles -Centrales_--Zola’s “Ventre de Paris”--you will find there the modern -type of these markets in their utmost perfection.[1] - -This is why Exchanges exist, not only Stock Exchanges, but -market-places of all kinds: Buyers seek the largest market they can get -in order to obtain the lowest prices; sellers, in order to obtain the -highest prices; and so it was learned long ago that economy of time and -labor, as well as a theoretically perfect market, could be best secured -by an organization under one roof of as many dealers in a commodity as -could be found.[2] Bear in mind that this result, moreover, is best -accomplished when the organization is so controlled by rigid rules of -business morality as to insure to every one who does business there, -great and small, rich and poor, an absolutely square deal. In such a -market every purchase is made with the most thorough acquaintance with -the conditions involved. Each dealer, each broker, each speculator, -strives to obtain the best knowledge of the supply and demand, and -the earliest news that may affect it, and each buyer or seller has an -equal and a fair opportunity to profit by the resultant effect on the -market of all these various agencies. The larger the body of brokers -and traders, then, the more accurate the standards of value thus -created. It is a pity you could not have bought your piano under such -conditions.[3] - -Demagogues have set the agricultural classes against Wall Street and -against Exchanges, but producers everywhere, in default of exchanges, -are forming quasi-exchanges of their own. Every day we hear of -combinations, Farmers’ Alliances, rural co-operative movements, etc., -each designed to regulate the market for eggs, butter, potatoes, and -such things, and each having for its purpose the very functions which -govern a Stock Exchange in its own field--namely, the establishment of -a fair price under the nearest possible approach to ideal conditions. -It is now proposed in Congress that the Department of Agriculture -shall collect and transmit to the agricultural districts by telephone -and telegraph all available information concerning price movements, -markets, and centres of supply and demand, this again embodying the -essential functions performed in its own field by a great exchange. - -In practice, of course, there can be no exchange to deal in perishable -products of the farm, and this is a pity, because if such an exchange -were practicable we should hear less of our old friend the cost of -living. Why? Because at present the market for these commodities is -controlled by commission dealers and by middlemen. The producer and the -consumer are alike at the mercy of these people; the price is fixed by -them; the number of bona fide dealers actually bidding against each -other is limited, in many instances there is no competition whatever; -the producer and the commission dealer are, moreover, widely separated; -the man who sells has few sources of information, and it is the -business of the dealer who buys to see that he gets none; the small -producer therefore has to submit to a great inequality in price, and -often to downright cheating. There is no standard. There are no rules -governing the dealer, and no high-minded board to enforce his honesty. -Naturally this sort of thing contributes to the cost of living, since -the commission dealer, on his part, regulates his profits just in -proportion to the ignorance, cupidity or remoteness of the farmer, -while the middlemen, of whom there are sometimes three or four, apply -the same iniquitous processes to the ultimate purchaser--who happens -to be you or me. Every thinking man knows that this is rank economic -error.[4] - -A friend of mine owns a thousand-acre farm in the Shenandoah Valley, -where he raised this year 10,000 baskets of peaches. He decided to seek -one buyer, and he found him in the person of a Baltimore canner, who -went down to Virginia, inspected the crop, and contracted for the lot -on a basis of $1 for firsts, 70 cents for seconds, and 40 cents for -thirds, delivered at Baltimore. Shortly after, the market was flooded -with peaches from Georgia, and the Baltimore man, seeing that the -crop would be plentiful, promptly “welched” on his trade, basing his -action on the absurd contention that “firsts” should be three inches in -diameter, although as every one knows peaches of this size are almost -never to be had. This action threw all the grower’s peaches into third -class, which delivered at Baltimore would have netted him about 10 -cents a basket. - -In desperation he looked elsewhere, West, North, and South, only -to hear the same monotonous answer from commission men, “we won’t -buy, but we will handle your crop on a commission of 10 per cent.” -Meantime the crop was ripening. To make matters worse the railroad -levied a prohibitive price, and refrigerator cars were not to be had. -Finally there was nothing left but to ship by express and trust to the -commission men to treat him honestly. The final accounting showed that -on his first shipment he netted 5½ cents a basket, and on his second, -15 cents, not counting the expense of picking, packing, and hauling. -So much for the producer. The consumer fared no better, for he had to -pay $1.25 per basket for this fruit; one of this producer’s friends -actually purchasing a portion of this very consignment at that rate. -The difference therefore between 15 cents and $1.25 contributes some -food for thought as to the cost of living.[5] - -Now contrast this experience of a grower having no exchange facilities -with that of the Western farmer who deals directly with a Grain -Exchange. The farmer can sell his crop, even though it has not been -planted. Whenever he sells, and under whatever conditions, he enjoys -the authoritative establishment of a price, fixed as clearly as matters -are fixed in law. Moreover, the price at which he elects to sell is the -best price, the fairest price, and the most scientific price that human -agencies can arrive at, because it is made by world-wide competitive -bidding at the hands of skilled men in Chicago, in New York, in -Liverpool, in Berlin, in Odessa, and in the Argentine, all competing by -cable and telegraph. Think of the confidence he enjoys, and the liberty -of action; think, too, what it means to him to know that the Exchange -through which he deals is a body of honorable men, governed by rules, -bidding publicly under one roof. - -But, you will say, this is all very well in its application to a grain -or cotton exchange, but how does it apply to the Stock Exchange? You -concede that scientific price-making for commodities like grain and -cotton is highly necessary, but you do not see that the same necessity -exists for stocks and bonds. You feel, no doubt, that the one has to -do with food and raiment and is therefore indispensable, while the -other merely serves to stimulate speculation and gambling, and hence -is altogether unnecessary. Now, in order to explain the error in this -point of view, let us first see how bits of paper, called securities, -came into being. - -Long after Europe had emerged from the dark centuries following -the fall of the Roman Empire, the needs of states and governments -impelled their rulers to resort to credit, and it was discovered that -the simplest way to do it was to issue securities, that is to say, -certificates of the debt. Next, it was found that in order to insure -success for these operations, a market was required. Intermittent or -temporary sources from which credit could be obtained was not enough; -constant sources of credit were essential, and, as these _constant_ -sources lay in the savings of the people, public markets in which -investors could tell the value of their investments from day to day -followed as a natural course.[6] - -As time went on--necessarily the evolution was gradual--it was learned -that companies having to do with all forms of business enterprises -might also be formed on the same basis. The development of the world’s -business outgrew its infancy days of private partnerships, and -corporate organization of necessity took their place, now that the -discovery of credit, through the use of securities, had pointed the -way. This corporate organization, which combines the small savings -of thousands into large sums and gives to the masses an intelligent -directing force at the hands of highly trained experts, depends for its -existence on the sale of its securities. - -In order to understand that there can be no industrial progress without -the issue of securities let us consider the locomotive engine. When in -the early 1800’s it became apparent that this contrivance could be used -to operate an entirely new method of transportation, people looked upon -it, at first, as an interesting but quite useless contrivance, because -to build railroads was an expensive undertaking and nobody had enough -money to finance it. The inventor’s genius was not sufficient; another -power was necessary to take it out of purely scientific hands and give -it practical impulse. That power was credit; the way it was obtained -was through the issue of securities, and the way securities were made -popular vehicles of investment lay in providing a daily market for -buyers and sellers. - -As a natural result, organization followed. Capital was consolidated, -the rights of owners were established, a great impulse was given -to various new forms of inventive genius and powerful commercial -enterprises of all kinds sprang into being. With this development the -market-places or Stock Exchanges without which capital could not -have been enlisted kept pace. It was found that transactions in the -securities which represented the people’s money should be rendered -easy, quick, and safe, and that the very essence of the Exchange’s -functions consisted in protecting the people who were the actual owners -of the enterprises by rules that would insure this result. - -If we look about us to-day we find in all the great centres of the -world Stock Exchanges at work in this important field. We find that -just in proportion to the confidence which a country feels in the -strength and uprightness of such a market, so enterprise goes forward -with vigor, and so the national wealth increases. The success of one -enterprise in its appeal to public credit through the medium of the -Stock Exchange invariably leads to another; thus commerce and industry -develop. Securities in America alone, aggregate the enormous total of -forty-three billion dollars.[7] - -Now, as our country’s entire physical properties are valued at one -hundred and thirty billions, it is apparent (after making allowances -for securities that are held by holding companies and hence are -duplicated in the foregoing estimates) that the nation’s securities -represent more than a third of the nation’s wealth. Again, almost two -million people are owners of these securities. The _Journal of Commerce -and Commercial Bulletin_ published Dec. 26, 1912, official statistics -for 247 of the large corporations. This tabulation revealed the fact -that the stock of these 247 corporations alone was owned by more than a -million stockholders, and it is therefore quite safe to infer that the -number of shareholders in all American companies approaches, if it does -not exceed, two million. I think it will not be disputed that where two -million people own a third of the nation’s wealth, they are entitled, -just as the farmer is, to a perfectly constructed price-making -machinery that will enable them to invest their savings, or sell their -holdings. Having learned the difficult lesson of saving their money and -the still more difficult one of increasing their surplus capital by -judicious investments, are not these people entitled to the safeguards -afforded by a Stock Exchange? “There is no other way in which true -prices can be made,” says Mr. Horace White. “If the quotations so -made are not precisely the truth in every case, they are the nearest -approach to it that mankind has yet discovered.”[8] - -Think a moment. Until the last century property and trade were so -insecure that, if a man saved money, he had to hide it, or lend it -through money-brokers at such usurious rates as would compensate him -for what he lost in bad debts. When Dr. Samuel Johnson wrote his -dictionary in 1776 no such word as “investor” was known to the English -language in a financial sense. There were pirates by sea in the old -days and brigands on land. “Sovereigns and nobles,” says the editor of -the _Economist_, “extorted loans only to repudiate them; governments -supplied their needs by debasing the coinage, or by issuing worthless -money.”[9] To-day all this is changed by banks and Stock Exchanges. -Yet, despite these great inventions, capital is and always will be -timid, and the small investor particularly must be protected and -safeguarded in every possible way. - -These small investors, no less than the large ones, require great -convenience and promptness for their operations; they live in such -widely remote parts of the country as to necessitate the placing of -full reliance on prices made by the Stock Exchange; they must have -the most accurate information; they must know that their brokers are -working to obtain the best knowledge of supply and demand; they want -prices fixed by the most scientific competition and by the largest -possible number of competitors--brokers, speculators, and investors -alike; they require a market in which they can sell and get their money -at once; above all things they must know beyond peradventure that they -are dealing with reputable men who uphold a fine standard of honor. -These are added reasons why the Stock Exchange exists.[10] - -If it did not exist, there would be no standard market for a large part -of the country’s material wealth, indeed, as we have seen, a very great -deal of this wealth could not have been created at all. At the risk -of repetition let me say that the investor on the one hand, and the -patent or the railway on the other hand, have nothing in common. Left -to themselves, they would never meet; they would be useless, because -resources and money must be brought together in order to create wealth. -A primary function of the Stock Exchange is to bring them together, -and by standardizing prices, create values. Similarly, the investor, -without the Stock Exchange to guide him, would have nowhere to turn for -a fair price secured by competitive bidding. He might turn to his local -banker, or to individual and unorganized brokers, and trust to their -honesty to invest his savings for him, but the local banker and the -isolated broker would then be in the same position as the commission -dealer and the middleman who played such havoc with that peach crop. It -is painful to conceive such a situation. - -Worse than that, without a Stock Exchange to create standards and -define the difference between good and bad investments, very many -simple people would be at the mercy of an army of dishonest promoters -and bucket-shops, for the modern invention of securities has brought -with it dangers and pitfalls. The United States once swarmed with these -bandits--they are now rapidly being driven to cover--but they still -ply their trade in other countries, where they flourish as “banks” -or “investment” companies. These chaps, to quote the editor of the -_Economist_ (London), “have bought a lot of rubbish, usually called -‘bonds,’ from shaky industrial concerns or from half bankrupt states -and municipalities of South America. They have bought, let us say, -the 6 per cent. bonds of the Yoko Silk Company in Japan at 60, which -they sell you at 90, the 5 per cent. bonds of the Brazilian Province -of ---- at 55, which they sell you at 75, and a few other similar -bargains. They tell you that if you spread your risks scientifically -over different countries you will be perfectly safe. You perhaps do -not realize that none of these securities which you are advised to buy -are quoted in the London Stock Exchange. If they were the game would -be impossible.” Which is only another way of saying that if there were -no Stock Exchanges to uphold worthy enterprises and discourage bad -ones, there would be no limit to the frauds practised upon gullible -investors. And if this is true of a tight little island like England, -how doubly true it is in a great country like ours where investors are -so widely scattered. - -The foregoing pages will serve to show the inquirer that what is -happening in commerce, is happening in the securities which represent -that commerce. Because commerce goes on expanding, securities must -necessarily keep pace and the Stock Exchange must perforce grow in -importance. That much maligned individual, the speculator, now regards -the whole world as his field and is eager to enter foreign markets -wherever there are opportunities. In 1910 more than three billion -dollars of British capital were invested in American railways alone, -returning one hundred and twenty-five millions annually in interest -and dividends, to say nothing of the English millions in our lands, -mines, and industrial enterprises. We too are large holders of foreign -securities, and the list of such holdings increases yearly. But it may -be accepted as a fact that this enormous mass of corporate securities -would not have found ownership had there been no Stock Exchange to -market them, and standardize them, and establish daily prices for -them, and give them the certificate of character that makes them ideal -collateral for obtaining credit. - -Dr. W. Lexis, of Gottingen, like all other economists, recognizes -the fact that Stock Exchanges are economic necessities. Here are his -opinions: - - “The existence of a broad, continuous market is an economic - necessity in the modern scheme of widespread investment of capital. - Even though the market-place is largely filled with speculators, it - is plain that the greater the number of traders in securities, the - greater will be the facility for buying and selling any quantity - of securities. The stock market is a powerful aid in floating - new issues of public securities. The speculative market takes - them at once and keeps them in the floating supply until they - have shown their value. The stock market also renders a useful - service in giving a continuous guide to the success or failure of - industrial undertakings, and the worth of their securities. The - more speculators there are trading in any particular security, the - greater is the opportunity to learn the real conditions of the - undertaking. Private investors, from a study of the speculative - market in the securities they own, receive in this way a continuous - market opinion on the condition of the corporations in which they - are shareholders.”[11] - -Another great service rendered by the Stock Exchange is the means -it affords of readily transferring securities from hand to hand. -To appreciate the importance of this fact you have but to think of -the difficulties and delays that attend the transfer of other forms -of property that do not enjoy Exchange facilities. Real estate, for -example, is a most excellent form of investment. But suppose the owner -of real estate wants to sell in a hurry, what then? There is no large -organized market, there is no way by which through competitive bidding, -he can place a correct estimate of the importance of current events -upon the price of his land. In the urgency of his needs he may easily -be misled by “smart” or unscrupulous advisers, and this risk increases -in direct proportion to his remoteness from large market centres. - -The holder of securities listed on the Stock Exchange is quite -differently situated. He is altogether independent. He knows the price -of his holdings every hour of the day. He is exposed to no fraud, and -at the mercy of no rumor and no unscrupulous dealer. He has positive -assurance that in case of necessity, at a moment’s notice, he can -obtain at the prevailing price the value in cash of every Stock -Exchange security in his box. The ticker gives him instantaneous -quotations. All the newspapers publish authorized prices for his -benefit, and, as we have just seen, these quotations are not a one-man -affair, but the combined judgment of thousands of experts, bulls and -bears, bankers and brokers, speculators and investors, all over the -world, bidding and offering against each other by cable and telegraph -and recording the epitomized result of their bidding in the prices -current on the Stock Exchange. Such a man knows, moreover, that the -price thus established is not merely the opinion of all these minds -as to values to-day, but that it represents a critical look into the -future. He knows, indeed, that financiers everywhere have in mind -prospective values rather than present values, and so he acquires a -double advantage in regulating his own action by the light of the -superior knowledge thus freely given him. The importance of this -“advance information” cannot be overestimated, and furnishes us with -another reason why Stock Exchanges exist. - -In 1906, for example, business conditions in this country were the best -ever known. Good crops, big earnings, and general optimism prevailed. -But Stock Exchange securities did not advance in the last half of the -year, because trained financiers began to foresee the first signs of -trouble ahead. In the early months of 1907 this knowledge became more -general, and a severe decline took place, notwithstanding the fact -that the business of the country at large continued to be excellent. -“What is the matter with Wall Street?” was the question in the press -and on the lips of the uninformed, but Wall Street, or rather the -Stock Exchange, was merely fulfilling its function as a barometer and -foretelling the coming storm. - -At the height of the autumn panic, on the other hand, when the -press was filled with dire forebodings and the ignorant layman was -frightened out of his wits, securities stopped declining and began to -rise because the Stock Exchange mind saw that the worst was over. The -brightest financial students in the world then began another process -of discounting the future; the barometer plainly foretold the end of -the disturbance. And all this information--a fundamental law of price -movements which indicated clearly when the trouble was coming and when -it had ended--was given gratis to the world in the daily published -quotations of Stock Exchange securities. - -In another chapter I shall describe the method by which the Stock -Exchange protects its patrons, the public. As this is of particular -importance in connection with the matters just cited, I call the -reader’s attention to the remarks of Prof. S. S. Huebner, Ph.D., of the -University of Pennsylvania. - - “Importance must be attached to the protection and safeguards - which organized Stock Exchanges give the stock and bond holder, in - regulating brokerage transactions and maintaining a standard of - commercial honor among brokers.... In this connection it should be - remembered that the constitution of nearly every Stock Exchange - defines the object of the Exchange as follows: ‘Its object shall be - to furnish Exchanges, rooms and other facilities for the convenient - transaction of business by its members, as brokers; to maintain - high standards of commercial honor and integrity among its members, - and to promote and inculcate just and equitable principles of trade - and business.’ No person can be elected to membership until he has - signed the constitution of the Exchange, and by such signature - he obligates himself to abide by the same, and by all subsequent - amendments thereto. The value of this organization becomes - apparent when we take account of the gigantic frauds perpetrated - upon innocent investors through advertising campaigns by persons - unaffiliated with any recognized Exchange, or by certain members of - unorganized curb markets.... - - “All Stock Exchanges provide for the arbitration of disputes which - may occur between members, and if both parties are willing, between - members and their customers. They also prescribe rules governing - the nature of contracts, the making of all offers and bids, the - registry and transfer of securities on the transfer books of the - corporations, and the conditions upon which securities may be - listed upon the Exchange for trading purposes. Practically all - stock Exchanges also require that all transactions must be real, - and that no fictitious or unreal transactions shall be permitted; - that discretionary orders cannot be accepted by brokers; and - that every member of the Exchange must keep complete accounts, - subject at all times to examination by the governing committee - or any standing or special committee of the Exchange, and under - penalty of suspension, no member may refuse or neglect to submit - such accounts, or wilfully destroy the same. Nor may any member, - under pain of suspension (a serious penalty, involving not merely - the loss of the rights and privileges of membership, but also - the stigma attaching to the member as a factor in the business - community), be guilty of ‘any conduct or proceeding inconsistent - with just and equitable principles of trade.’”[12] - -One of the most important functions of the Stock Exchange is, as we -have seen, the almost automatic ease with which it directs reservoirs -of capital into channels of usefulness in the world’s industry and -commerce. The layman may feel that this use of the Stock Exchange -does not affect him as an individual, but it does, and vitally. Every -merchant and every manufacturer, great and small, all over the world, -is directly benefited by it. One may see, for example, securities of -railway equipment companies quoted for weeks at a low level. This shows -that the business of these companies is not profitable, and it serves -to discourage owners of capital from undertaking new enterprises in -that direction, because the securities of such companies cannot be -sold. Moreover, it shows investors, as plainly as words can tell, that -this is an unsafe and unprofitable form of investment. - -Reverse the situation, and lines of industry are revealed where -high and advancing prices of securities indicate a rising tide of -business, with an outlook for large profits in the future. Capital -then takes hold cheerfully; there is a market for the new securities -and a proper basis for fresh commercial development, because investors -and speculators have learned from the published daily quotations of -these Stock Exchange securities that there is good warrant for the -flow of capital into such channels, and that a reasonably safe return -will follow an investment in them. In commenting upon these functions -of the Stock Exchange, Mr. Conant says: “Through the publicity of -knowledge and prices, the bringing of a multitude of fallible judgments -upon this common ground, to an average, there is afforded to capital -throughout the world an almost unfailing index of the course in which -new production should be directed.” Through the mechanism of the Stock -Exchange, therefore, the public determines the direction in which new -capital shall be applied to new undertakings. In this way our great -railways were built, our Western country opened to progress, and our -vast industrial undertakings made possible. - - “The stock market acts as a reservoir and distributor of capital, - with something of the same efficiency with which a series of - well-regulated locks and dams operates to equalize the irregular - current of a river. The hand of man is being stretched out in - the valley of the Nile to build great storage basins and locks, - and the waters which flow down the great river may be husbanded - until they are needed, when they are released in small but - sufficient quantities to fertilize the country and tide over the - periods of drought. Something of the same service is performed - for accumulation of capital by the delicate series of reservoirs, - sluice gates, and locks provided by the mechanism of the stock - market. The rate of interest measures the rise and fall of the - supply of capital, as the locks determine the ebb and flow of the - life-giving water. The existence of negotiable securities is in - the nature of a great reservoir, obviating the disastrous effects - of demands which might drain away the supply of actual coin, and - preventing the panic and disaster, which, without such a safeguard, - would frequently occur in the market for capital.”[13] - -Some day, no doubt, the United States will become a great creditor -nation, as England is, and then the field of these operations will be -extended to other countries. When that time comes we shall take a hand, -through the machinery of the Stock Exchange, in the development of -new and immense fields of human endeavor just as London does to-day. -To what extent could capital exports of such tremendous economic -significance continue if so useful and so indispensable an institution -as the Stock Exchange were abolished or interrupted? It was Burke who -said that “great empires and little minds go ill together,” and so -it is with great markets and little critics. There can be no worthier -purpose in the commercial world than the upbuilding of a great centre -of credit designed to finance material enterprise, enrich the world, -and extend the benefits of civilization to new lands and new people, -based upon the credit supplied by the banker, the money provided -by the speculator and investor, and the safeguards afforded by the -Stock Exchange. And yet, curiously, the greater the effort in these -directions, the greater the criticism. Just in proportion to the -perfection with which all these agencies equalize prices, economize -time and effort, and protect the public, so they seem to attract -attention, comment, and attack.[14] - -In Wall Street, according to this viewpoint, everything is tainted, -sinister, reprehensible, covetous and unscrupulous, just as it follows -the onward march of invention, science, and progress. This sort of -criticism will not, of course, continue. The man in the street--the -average layman to whom I have ventured to address this chapter will -learn sooner or later--in point of fact he is learning now--that the -questionable practices in Wall Street which started all this hubbub, -and which were a natural and a human accompaniment of the slowly -developed technique of this or any other business, have now been -effectually stopped. It has been a very long time, for example, since -Jay Gould ran his printing-press for Erie certificates, and that -incident cannot possibly happen again. The Keene type of manipulator -has gone, never to return. “Corners,” too, have seen their last day -on ’Change, and so also have other artificial impediments in the way -of natural supply and demand. It has been years since the Cordage -scandal, and the Hocking Coal incident marked the end of that form of -manipulation. Yet there are persons who talk of these things as though -they were daily occurrences, overlooking the fact that the New York -Stock Exchange, by its own efforts put a stop to the evils complained -of, and will never tolerate their return. - -McMaster in his “History of the People of the United States” tells us -that in the early days in New England public sentiment was so aroused -against the legal profession that lawyers “were denounced as banditti, -as blood-suckers, pick-pockets, windbags and smooth-tongued rogues.” -At that period in our history feeling ran so high against banks and -bankers that Aaron Burr was only able to procure a charter for the -Manhattan (Banking) Company by resorting to the subterfuge of naming -it, in the Act, “a Company to furnish the City with water.” No doubt -all this rancor and hostility seemed a very serious matter to the -lawyers and bankers of those days, just as the criticism of to-day -strikes home to members and friends of the Stock Exchange. - -The lawyers made many mistakes a century and a half ago when the code -and its practice were imperfectly understood in this country; so it -was with the early history of banking; and so in our time Wall Street -and the Stock Exchange have made the mistakes which any gradually -developing form of enterprise must make. But these mistakes are dead -or dying, and, in their place, no doubt, there will come a better -understanding all around. When that day dawns the thoughtful American -will realize that the particular rôle which the Stock Exchange plays in -promoting all forms of commercial endeavor is a boon such as no country -in the history of earlier days ever enjoyed. He will contemplate his -country’s progress with pride; he will rejoice in its capacity to -outstrip other countries; he will acclaim its advancement toward the -proud position now held by England, the banker and the clearing-house -of the world. And he will learn--this thoughtful citizen--that material -achievements like these cannot be attained without a market for capital -and a market for securities.[15] - - - - -CHAPTER II - -THE USES AND ABUSES OF SPECULATION - - -Somewhere in each one of us lurks Stevenson’s spirit of “divine -unrest,” the parent of speculation. To-day, as in wise old Greece -in the morning of the world, philosophers sit under every tree, -speculating upon the phenomena of the universe, and upon the practical -application of them to the needs of humanity. Thus Archimedes came to -know of things that we now call Copernican, seventeen centuries before -Copernicus was born; thus Columbus and his argosy sailed into the great -unknown, speculating upon an irrational and even shocking exploit; thus -Pasteur saved to France through the meditations of his speculative -mind a sum greater than the cost of the Prussian war and the colossal -indemnity that followed it. - -And so the “divine unrest” goes on and on, impelling men to -speculations and explorations of the physical world and of the world -that lies beyond our primitive senses, with here and there a high -achievement, and now and then a miserable failure, but always on and -on. The hypothesis of the spectacled professor blossoms into a boon; -the dream of the inventor becomes a benefaction; the forlorn hope of -the explorer points the way to wealth. Things that were speculations -yesterday become realities to-day. To-morrow?--nobody knows. In a free -field, not bounded by formulæ nor restricted by law of God or man, with -money to encourage it and enterprise to spur it on, what may come from -the speculations of the future passes understanding. - -Now speculation is an all-embracing word, overworked, threadbare, -and worn to the bone. Originally it meant “to see”; then “to view,” -“watch,” “spy out”; then “exploration” or “contemplation.” When thrift -came into the language and men ceased burying their gold, it began to -take on a new meaning. The spirit of legitimate adventure, that entered -men’s minds when the Most Christian Kings abandoned brute force and -repudiation, led men to buy things in the hope of selling them at a -profit. It was risky business at first, and capital, then as now, was -timid. The High Finance of the Middle Ages was not easily forgotten. -But little by little channels through which enterprise might flow into -wealth came into being, and confidence came with them. This was called -speculation. - -By the time Adam Smith wrote his “Wealth of Nations” (1776) the word -was firmly fixed in the language. “The establishment of any new -manufacture,” he said, “or any new branch of commerce, or of any -new practice in agriculture, is always a speculation from which the -projector promises himself extraordinary profits.” How the early -channels of speculation broadened into great rivers, how confidence -grew as the art of making money and increasing it developed, how credit -became established, how speculation led to the opening of new countries -and the extension of immense advantages, through civilization, to the -people of those countries--all this is a fascinating story. And yet -the speculation of to-day is no different in its elementals from that -of the early Greeks; the same spirit of “divine unrest” that spurs on -the philosopher in his study stimulates the explorer of strange lands, -beckons on the engineer and the builder of railways, and attracts the -capital of the adventurous investor. We cannot stop it if we would, -because hope, ambition, and avarice are fundamentals of human nature. -The police cannot arrest them; they are fixed and immutable. - -If there is more speculation in material things to-day than there ever -was before, it is because there are more things to speculate in, more -money to speculate with, more people to speculate, and more machinery, -like telephones and telegraphs, to facilitate speculation. Capital, -credit, and new undertakings grow day by day and open new avenues of -possible profit. The per capita wealth of nations, growing by what it -feeds on, constantly seeks new fields for enterprise and adventure. -The intelligence of the people increases by leaps and bounds, and goes -peering curiously into all the little nooks and crannies of the world -for opportunities of gain--the apotheosis of speculative enterprise. - -All forms of human endeavor in material things are, or were at their -beginning, speculations. Every ship that goes to sea carries with it a -speculation, and leaves another one behind it at Lloyds. Every man who -insures his life or his house buys a speculation, and every company -that insures him sells one. The farmer speculates when he fertilizes -his land, again when he plants his seed, and again when he sells his -crop for future delivery, as he often does, before it is planted or -before it has matured. The merchant contracts to fill his shelves long -before spring arrives; he is speculating. The manufacturer sells to -him, speculating on the hope or belief that he will be able to buy -the necessary raw material, and again on the labor, the looms and the -spindles necessary to make the delivery. In the South the grower of -cotton and in Australia the grower of wool are likewise speculating on -the probability of a crop and on the price at which they may sell to -this manufacturer. It sounds like “this is the house that Jack built” -in its endless chain of sequences; a chain, indeed, and one no stronger -than its weakest link. Interfere with any part of it, and the whole -commercial structure which it binds together falls apart. The grower, -the manufacturer, and the merchant _must_ speculate. - -There was twofold speculation on the part of our great financial barons -who built our transcontinental railways, for they had to reckon not -only upon the probability of profit in their undertakings but likewise -upon the willingness of other speculators--you and I--to assist them -by buying a part of the securities which represented the outlay. To -be sure it so happened that many of these vast speculations at first -proved unsound. Some of them were a little premature; others pushed -too far; they brought disaster upon the speculators who had put money -into them. And yet who shall say that our great railways have failed -to enrich the world and spread the comforts of civilization? “But for -a verdant and evergreen faith,” says a recent writer, “salted with the -love of risk and adventure for their own sakes, how could mountains -be bored and waters bridged? If there were not superstition there -could be no religion; if there were not bad speculation there could be -no good investment; if there were no wild ventures there would be no -brilliantly successful enterprises.” - -This is not hyperbole; it is fact. The world of business and enterprise -must go on; it cannot stop. As it goes on capital must be enlisted, -which is another way of saying that speculators must be attracted. The -only way that has been devised to attract them is through the medium of -certificates of ownership or evidences of debt, called securities. But -the business does not end there, for, as we have seen in the previous -chapter, the capital of speculators will not take hold unless a market -is provided. They want to know where they stand; before they venture -upon the troubled waters of new enterprises they must be assured of a -public market, a harbor where they can get ashore quickly if storms are -brewing. - -The only plan that the ingenuity of man has thus far devised to meet -this emergency is a Stock Exchange. One man, or two, or a hundred -cannot make a market, because the immense volume and variety of these -securities make it impossible for any unorganized handful of brokers -and dealers to determine a fair market price. What is required, and -what the man whose capital is wanted insists upon, is an organized -body of brokers, speculators, and investors competing keenly, seeking -to buy cheap and sell dear, gathering and disseminating all the news, -and so sharpening the judgment and stimulating the higgling of buyers -and sellers as to bring prices to their legitimate level and give -them stability. Ten thousand competitors in this business of bringing -prices and values together are of course better than one thousand; a -hundred thousand would be better still. The Stock Exchange supplies -this want, and will continue to supply it until a better plan is -devised.[16] Meantime, since it has grown to its present stature by -forms of speculation necessary to the maintenance of enterprise, any -serious interruption of the facilities it affords will bring enterprise -to a standstill and cause the whole sensitive structure of credit to -collapse in terror. Let Professor Seligman explain this matter: - - “If a railway or other industry, in launching a new enterprise, had - to depend on the chance investors at the time of the issue of the - securities, it would be seriously hampered. The mere knowledge that - at any moment there will be a ready sale on the Exchange greatly - increases the circle of purchasers, many of whom may not intend to - be permanent investors. The Stock Exchange aids the investment of - capital, as the Produce Exchange aids the production of finished - commodities. Business orders and corporate needs are intermittent, - because they depend on temporary exigencies; the risks at one end, - at all events, are eliminated by the unintermittent, continuous - market which regular speculation affords. The Cotton Exchange - was the result of the disorganization of the cotton trade after - the Civil War; speculation in all other staples has in the same - way been the consequence of the efforts of the manufacturer to - avert the risks of intermittent and spasmodic fluctuations in - the raw material. The result of regular speculation is to steady - prices. Speculation tends to equalize demand and supply, and - by concentrating in the present the influences of the future - it intensifies the normal factors and minimizes the market - fluctuation. Speculation so far as it has become the regular - occupation of a class, differentiated from other business men for - this particular purpose, subserves a useful and in modern times an - indispensable function.”[17] - -Here we have an authority who tells us that speculation in securities, -no less than in raw materials, is “an indispensable function” if -business is to go ahead. The last census shows that 32½ per cent. of -the population of the United States is composed of laboring men, not -counting agricultural workers. This large army of men is by no means -independent; on the contrary it is strictly dependent on the ability -of others to give it employment. Shut down the factories, curtail the -operations of railways, close the mines and quarries, stop building and -new construction, and in greater or less degree suffering and privation -among these large masses must ensue. - -Now go a step further, and we find that the managers of these railways, -mines, and factories, are in turn dependent--wholly dependent upon -capital. They cannot go ahead with the extensions and improvements -necessary to efficiency without borrowing money; and credit, in turn, -will not come to their support unless a broad market is provided, -through the Stock Exchange, for the securities which represent these -obligations. Hence we see that just as every farmer in the West and -every cotton-grower in the South must have a stable market for his -products, so every laborer in our great industrial field is directly -concerned with the maintenance of a stable market for the securities of -the company that employs him. The interests of one are the interests of -all, and speculation, in one form or another, underlies all industrial -progress. “Complaint is made of the evils of speculation,” said the -greatest of French economists, “_but the evils that speculation -prevents are much greater than those it causes_.”[18] - -Now that we have reached a point in our discussion that brings us -face to face with the so-called “evils” of speculation on the Stock -Exchange, let us pause and consider the difference between speculation, -which is held by many to be abhorrent, and investment, which is -generally thought right and proper. The first thing we encounter -is the shadowy and indistinct boundary line that separates the one -from the other. Does any one know where the one begins and the other -ends? France has more conservative investors than any other country, -yet, as Mr. Hirst puts it, the most critical and hidebound buyer of -French rentes is a speculator in the sense that he not only wishes his -purchase to yield him interest, but also hopes and expects that sooner -or later he will be able to sell out at a profit, all of which is -legitimate, proper, and human. The first question every man asks when -the time comes to invest is, “Is this a good time for investment?” “Am -I buying cheap?” by which he means “Are these investments likely to -enhance in value?” - -He may have bought Spanish bonds at low prices during the war between -Spain and the United States--a somewhat speculative investment--and -in his purchase he believed himself an investor in a strict sense. -Yet, when those bonds recovered to a normal basis and he sold out at -a profit, was it speculation, or investment, or a little of both, -that defined the trade? British consols are low to-day, and there -is of course no safer investment, but the investor who buys them is -influenced by the fact that a long period of peace seems to lie ahead, -with reduced expenditures for armament and hence with diminished -borrowings by the Government leading to a substantial recovery in -the price of these solid securities. Such a man is “speculating” on -England’s abstention from war, on its limitation of military and naval -expenditures, and on the probable effects of these matters on the price -of his consols.[19] - -The truth seems to be that all investment is speculation, differing -from it in degree but not in kind. This salient fact was recognized -as long ago as 1825, when, despite the comparatively limited field -for investment enterprise, McCulloch saw what was coming and grasped -the true idea of the part speculation and its handmaiden, investment, -were to play in the industrial renaissance. Coming at a time when -speculation was new, and subjected, as all innovations are, to -widespread criticism and doubt, his words have prophetic significance. - -“It is obvious that those who indiscriminately condemn all sorts of -speculative engagements have never reflected on the circumstances -incident to the prosecution of every undertaking. In truth and reality -they are all speculations. Their undertakers must look forward to -periods more or less distant, and their success depends entirely -on the sagacity with which they have estimated the probability of -certain events occurring, and the influence which they have ascribed -to them. _Speculation is, therefore, really only another name for -foresight_; and, though fortunes have sometimes been made by a lucky -hit, the character of a successful speculator is, in the vast majority -of instances, due to him also who has skilfully devised the means -of effecting the end he had in view, and who has outstripped his -competitors in the judgment with which he has looked into futurity, and -appreciated the operation of causes producing distant effects.”[20] - -A quarter of a century later we find England’s foremost thinker -sounding the same clear note. John Stuart Mill was by no means a hermit -philosopher feeding on theories. Traveler, sportsman, business man, -statesman, and author, he saw things broadly and wrote for practical -men. “Speculators,” he said--and he was speaking of the “greedy” ones -who buy and sell for gain--“have a highly useful office in the economy -of society. Among persons who have not much considered the subject -there is a notion that the gains of speculators are often made by -causing an artificial scarcity; that they create a high price by their -own purchases and then profit by it. This may easily be shown to be -fallacious.” He then shows, what I have outlined elsewhere, that the -market is larger than any speculator or group of speculators, and, if -this was true in 1848, I think it will not be disputed that it is quite -true to-day. - -Continuing, Mill says: “The operations of speculative dealers are -useful to the public whenever profitable to themselves. The interest of -the speculators as a body coincide with the interests of the public; -and as they can only fail to serve the public interest in proportion as -they miss their own, _the best way to promote the one is to leave them -to pursue the other in perfect freedom. Neither law nor opinion should -prevent an operation, beneficial to the public, from being attended -with as much private advantage as is compatible with full and free -competition_.” Mill makes no distinction here between investors and -speculators; they are one and the same. In any case it is conceded that -speculation is what makes the markets to-day, since 90 per cent. of -the transactions that take place daily on the world’s Stock Exchanges -are speculations pure and simple. And this is a good thing. Before we -go on with our subject, let Professor Emery explain why, and bring the -teachings of McCulloch and Mill down to our own day: - - “Speculation has become an increasingly important factor in the - economic world without receiving a corresponding place in economic - science. In the field in which it acts, in the trade in grain and - cotton and securities and the like, speculation is the predominant - influence in determining price, and, as such, is one of the chief - directive forces in trade and industry. But treatises in the - English language on general economic theory and conditions have - given very little space to this influence, which is fundamental in - the world of economic fact.... - - “It is true that forty years ago speculation was far less important - than it is now, and there was, therefore, more justification for - disregarding it. Professor Hadley has given due consideration to - the new conditions which prevail in modern business. At the same - time it should be remembered that McCulloch, already in his day, - had grasped the true idea of the function of speculation, a fact - shown by the incorporation of his treatment of the subject into his - chapters on Value. Wide as is the influence of speculation, its - force is felt primarily in the field of prices. By making prices it - directs industry and trade, for men produce and exchange according - to comparative prices. Speculation then is vitally connected with - the theory of value. - - “From the point of view of theory, therefore, it is incorrect to - attach so little importance to the function of speculation; in - practice it is impossible to deal intelligently with the evils of - the speculative system without first recognizing its real relation - to business. Both the writer and the reformer must reckon more than - they have yet done with the fact that speculation in the last half - century has developed as a natural economic institution in response - to the new conditions of industry and commerce. It is the result of - steam transportation and the telegraph on the one hand, and of vast - industrial undertakings on the other. The attitude of those who - would try to crush it out by legislation, without disturbing any - other economic conditions, is entirely unreasonable.”[21] - -Now we come to the evils of the business. That there are evils, really -serious ones, no one will deny. To be sure many of the phases of -speculation that are called evils are not evils at all; the statements -made concerning them have what Oscar Wilde termed “all the vitality of -error, and all the tediousness of an old friend,” and yet, although -the prevalent criticism is often stupid and superficial, there are -undeniably offensive forms of speculation that one would like to see -suppressed. Speculation is a comparatively new phenomenon, and it -has brought with it dangers and pitfalls. So also have automobiles, -electricity, and steam engines. But while the Stock Exchange has -created the arena for the display of these abuses, it has not -originated them “except,” as a recent writer puts it, “in the sense in -which one may say that private property has originated robbery.” - -The great evil of speculation consists in the buying of securities -or real estate or anything else with borrowed money, by uninformed -people who cannot afford to lose. Its commonest form in speculation -in securities is what is known as “margin” trading, this name being -derived from the fact that the buyer, instead of paying cash in full -for his purchase, deposits only a fractional amount of its cost, which -is intended to serve as a margin to protect the broker from loss, while -the broker pays the remaining sum necessary to complete the actual -purchase. Thus the speculator may deposit $1000 on securities costing -$10,000, while the broker furnishes the additional $9000. It is a -system in use everywhere; on the London Stock Exchange it is called -“Cover,” on the Paris Bourse, “La Couverture.” - -There is no fixed amount of margin called for by brokers, as -circumstances differ widely with the character of the securities dealt -in, the standing of the buyer, and the condition of the market; but in -a broad way it may be said that members of the New York Stock Exchange -exact a margin equivalent to ten points on middle-grade speculative -issues, twenty points on high-priced and erratic securities, and five -points on very low-priced shares that move slowly. There are, of -course, certain securities on which no payment short of actual outright -purchase in full would be accepted by reputable brokers, while on the -other hand, in the case of securities that fluctuate but slightly, -such as our government, state, or municipal bonds, a 5 per cent. -margin would be ample. This is also the practice in London and Paris, -generally speaking. In Paris the _Agents de Change_ always insist upon -a greater margin than the _Coulissiers_, or outside brokers, and here -members of the New York Stock Exchange invariably pursue the same -policy. - -This affords an opportunity to say that the local evil of stock -speculation arising from insufficient margins is one that may be laid -at the door of outside Exchanges rather than the “Big” Exchange, as it -is called, because, in the minor Exchanges, margins are notoriously -small, and the smaller the margin the greater the number of “victims.” -Indeed, if it were not for this practice it would be difficult for -members of smaller Exchanges to exist at all. In so far as speculation -in securities may merit criticism, this tendency to attract poor people -by the bait of slim margins is undeniably a very real evil, and one -which can only be corrected by the brokers themselves. The Hughes -Committee, after devoting much time and labor to this matter, put its -conclusions in these words: - -“We urge upon all brokers to discourage speculation upon small margins, -and upon the Exchange to use its influence, and if necessary its power, -to prevent members from soliciting and generally accepting business on -a less margin than 20 per cent.”[22] - -Every one connected with the New York Stock Exchange knows that this -suggestion, like all the others made by the Commission, was received -with approval by all hands, and, if a hard and fast rule could have -been devised to meet not merely the spirit but the letter of the -recommendation, the Governors of the Exchange would have put it into -instant operation. But there are difficulties in the way, and one of -the duties of the Governors is to consider very carefully all sides -of each perplexing question that comes before them, not merely in the -interests of the Stock Exchange, but with due regard to the common -law and the interests of the public. Margin trading is a matter of -contract, and “the right of one private person to extend credit to -another,” as the Chairman of the Hughes Commission himself points out, -“is simply the right to make a contract, which, under the Federal -Constitution, cannot be impaired by any State Legislature.”[23] - -Here is a very considerable difficulty in the way of restricting margin -trading, and one that is not fully understood by the outsider. He is -prone to speak of contracts thus made as “gambling transactions,” -missing altogether the essential point that there is a vast difference -between a transaction with a contract behind it, enforceable at law, -and one that has to do with bucket-shops and roulette, in which there -is no contract, and is expressly prohibited by law. No matter what -his intent may have been when he bought, and no matter what margin -the broker accepted--the buyer has the right to demand his securities -at any time, and the broker must always be prepared to deliver them; -conversely, the broker may compel the buyer to pay for and to receive -the securities he has bought. Motives and methods have nothing whatever -to do with the transaction. - -The broker who buys for a client to-day does not know, and sometimes -the client himself does not know, whether the securities are “bought to -keep,” or are to be sold to-morrow; similarly the broker has no means -of knowing whether the client, who deposited a ten-point margin at -the time of his purchase, will or will not deposit another ten points -to-morrow, and continue such payments until his securities are wholly -paid for. In the large majority of cases the intent of the speculative -buyer is to sell as soon as he can get a satisfactory profit, but -that does not make him a gambler by any means. Why? Because, if he -bets $1000 on a horse race, one party to the transaction wins and the -other loses; whereas, if he deposits $1000 as margin against a stock -speculation and makes a profit of say $500, the broker loses nothing -by paying him that profit when the account is closed. No property -changes hands in the one case, while, in the other, actual property is -purchased and held ready for delivery on demand. The law is clear in -classifying the operations of bucket-shops with gambling transactions, -because in a large majority of instances no actual purchase is made; -the “buyer” merely bets in that case as to what subsequent quotations -will be; the “trade” is between two principals, one of whom must lose -if the other wins. - -The Hughes Commission, as I have said, went very fully into all -these matters. It was in session six months, and many witnesses were -examined. After considering all the pros and cons of margin trading, -the experience of England and Germany in dealing with speculation, the -three-years’ debate in Congress on the Hatch Anti-Option Bill, and -the voluminous reports of the Industrial Commission, the conclusion -was reached “to urge upon all brokers,” as shown in the paragraph -cited, a general agreement on margins of not less than 20 per cent. -It must be borne in mind that this was not in the nature of a formal -recommendation, but rather as the expression of a hope that some -measure of reform might be accomplished if such concerted action by -brokers were feasible. - -That members of the New York Stock Exchange endorse this view goes -without saying. They realize more fully than is generally known by -the public that indiscriminate and reckless speculation by uninformed -people who are beguiled into it by the lure of small margins is an -undoubted evil that should be checked, and they are doing what they -can to check it by discouraging such operations. For example, it would -be very difficult to-day for a woman to open a speculative account -with any reputable firm of brokers on the major exchange unless she -were well known, peculiarly qualified for such transactions, and -abundantly able to support them. Accounts will not be accepted from -clerks or employees of other brokerage houses or of banks and other -corporations in the Wall Street district; indeed, such transactions -are expressly forbidden by the rules of the Exchange. No accounts -will be accepted from any one who is not personally known to one of -the firm’s partners--and the practice resorted to in earlier years of -employing agents to solicit business under the nominal title of “office -managers,” “bond department managers,” and all that sort of technical -subterfuge, is likewise forbidden. - -Members of the Exchange are not permitted to advertise in any way save -that defined as of “a strictly legitimate business character,” and -the governors are the judges of what is legitimate. The layman has -but to glance at the bare and colorless announcements made by Stock -Exchange houses in the advertising columns of our newspapers to see -how rigidly this rule is enforced; indeed 90 per cent. of the members -do not advertise at all. Best of all, speculation on “shoe-string” -margins is now almost eliminated from the major exchange. The houses -that notoriously offended in this respect ten and fifteen years ago are -to-day inconspicuous in the day’s dealings. Their business is gone--in -its very nature it could not last long--and if rumor be credited its -demise carried with it a part of the capital of the firms involved. -It was a lesson and a warning. All these instances serve to show that -the Stock Exchange is doing what it can to remedy this evil, and, -if circumstances arise in which more can be done, the governors and -members will be found a unit in enforcing whatever restrictions are -necessary. - -At the moment it is difficult to see how an inflexible rule of 20 per -cent. margins could be put in practice without seriously interfering -with really sound business. A telegraphic order may be received from a -customer of the utmost responsibility who may happen to be in Europe. -Any stockbroker, and any business man in mercantile trade, would be -glad to execute for such a person all the orders he chose to entrust, -regardless of margins. In such a case no question of motive enters into -the transaction; it may ultimately prove to be a speculation pure and -simple, or the buyer may cable instructions to deliver the securities -to his bank, in which case it would seem to be an investment; but, -regardless of that, an insistence by the broker on a 20 per cent. -margin would be silly, and would merely drive the business elsewhere or -prevent it altogether. - -Numerous instances of a similar sort might be cited to show how -difficult it would be to enforce margin prohibitions in all these -perfectly legal contracts. Germany tried it in the law of 1896, with -disastrous consequences, which I have described elsewhere. It is a -matter that will always be a fruitful topic of discussion, yet it -differs in no essential respect from the practice of a speculator in -real estate who pays down a small percentage of a purchase price and -borrows the balance on mortgage. It is similar to what the merchant -does when he fills his shelves with goods bought with a fractional -payment in cash and the balance at some future date. In all these cases -involving property let me repeat that the deposit of a specified sum -by the principal and an agreement or contract with the broker is a -perfectly valid transaction.[24] - -That newspaper criticism and attacks by social mentors should go to -extreme lengths in deprecating stock speculation by crude, greedy, -and unsophisticated people is perhaps, after all, a perfectly useful -function, and if such critics err in going to great extremes, that too -may be set down as right and proper, for it is perhaps better to go -too far than not to go far enough. The interests of the Stock Exchange -are the interests of the whole country; its welfare depends upon an -intelligent and thrifty people; its aims are public-spirited and -patriotic. Whatever it may lose in the way of business from ignorant -and silly people who are driven out of blind speculative undertakings -leading to losses which they can ill afford, it will gain tenfold -in imparting sound information through candor and publicity. On the -other hand, unless we are prepared to abolish property altogether, -do away with the instruments of credit, and suppress all forms of -trading designed to supply our future requirements, we may as well -reconcile ourselves to the inevitable and take what comfort we may -in the reflection that prudence, thrift, and foresight are not to be -eliminated, merely because the proletariat below stairs sometimes -indulges in speculation and suffers the consequences of its folly. - -“Finally,” writes Professor Emery, “the question must be faced of the -effect of eliminating the public from the speculative market even -if it could be accomplished. It is supposed sometimes that such a -result would be all benefit and no injury. On the contrary, the real -and important function of speculation in the field of business can -only be performed by a broad and open market. Though no one would -defend individual cases of recklessness or fail to lament the disaster -and crime sometimes engendered, the fact remains that a ‘purely -professional market’ is not the kind of market which best fulfils the -services of speculation. _A broad market with the participation of an -intelligent and responsible public is necessary. A narrow professional -market is less serviceable to legitimate investment and trade and much -more susceptible of manipulation._”[25] - -One of the difficulties with which men have to contend in a big country -like this is the apparent inability of large masses of the people to -understand other large masses. Distances are so great, occupations -so diverse, and enterprise so confining, that one whole section of -the country may not and often does not know what another section is -doing. Men are too busy to learn by travel and reading that which, in -the interest of the whole country, they should thoroughly understand. -Thus it happens that a section of the country given over, let us -say, to agricultural pursuits, having first acquired the notion that -speculation in securities is only a form of legalized robbery, assumes -that to New York City and the New York Stock Exchange is confined a -greater part of the stock speculation of the world. We have seen the -fallacy in the first of these hasty conclusions; the second may easily -be explained away. - -Yankee speculation in securities is not a marker to speculation -in London, where the day to day trading vastly exceeds ours, and -where the “Kaffir Circus” of 1894–5 and the “Rubber Boom” of 1909–10 -exceeded any similar outburst ever known in America. France is the most -prudent and thrifty of nations, yet the Panama mania which collapsed -in 1894, although followed by a period of the utmost repentance and -conservatism, found a parallel in the crazy French speculation in -Russian industrials which crashed in 1912. There was an extraordinary -speculation in Egyptian land and financial companies in Cairo in -1905–6, which, in proportion to the number of participants, greatly -exceeded any boom in New York. China awakens slowly, but, once its -political reforms are effected, a field of extraordinary speculation -will open there without a parallel in history. The Chinaman is not -only a shrewd and competent business man, but he is, Mr. Hirst tells -us, “a confirmed and incurable” speculator. “From time to time,” says -this writer, “the Shanghai Stock Exchange becomes a scene of the -wildest speculation, and it is safe to predict that, when a new China -is evolved, Stock Exchanges will spring up in all the large towns. Of -this, a foretaste was afforded in the spring and summer of 1910, when -Shanghai caught the rubber infection from London. All classes and races -took part, but the native Chinaman plunged deepest. When the break -in prices came, one Chinese operator was so heavily involved that, on -his failure, many of the native banks had to suspend payment, with the -result that for months the trade and credit of this great shipping and -business centre were disorganized.”[26] - -I mention these incidents to show that speculation is not confined -to geographical limits. It is all a part of the “divine unrest” -inherent in each of us, and it develops and grows intense just in -proportion with the march of the civilization it serves to benefit. -In new countries, as in China, it may often go too far; sometimes in -old countries it oversteps the bounds of prudence, but any student of -these phenomena knows that, as economic processes become understood by -the masses, the intervals of time between the panics that result from -over-speculation grow wider and wider. - -Another mistake of those sections of the country that do not understand -the Stock Exchange results from the indiscriminate blending of that -institution with Wall Street. Let us hear from Mr. Horace White on this -point. He was the chairman of the last committee that investigated the -Stock Exchange; he is one of our foremost economists, and he may be -assumed to understand his subject: - - “There is a widespread belief that Wall Street and the Stock - Exchange are one and the same thing, and that all the fluctuations - on the Exchange are caused by Wall Street. This is an error as - glaring as it would be to suppose that all the water in the - Mississippi River comes from the adjacent banks, ignoring the - innumerable streams and rills that contribute their quota from - countless unseen sources. Wall Street and the Stock Exchange are - two different things. The men on the floor of the Exchange are the - agents of others, executing the orders which they receive both from - Wall Street and from other parts of the habitable globe. Some of - them speculate on their own account, but the speculating members - of the Exchange are divided into bulls and bears. They do not all - push in the same direction at any one time. They simply aim to - anticipate, each for himself, the drift of financial public opinion - in order to take advantage of it. - - “This is what Wall Street outside of the Exchange does; and the - only advantage which speculators in Wall Street have over those in - other parts of the country is derived from larger capital, more - direct and ample sources of information, and greater skill and - promptness in the use of it. Wall Street speculators are likewise - divided into bulls and bears pushing against each other; and all - their advantages do not save them from making mistakes, which often - result in losses proportioned to the magnitude of their operations. - The ‘rich men’s panic’ of 1903 was such an instance. The panic of - 1907 was another. It is sometimes said that Wall Street can put - prices on the Stock Exchange up or down at its own pleasure. This - is a delusion.”[27] - -Members and friends of the New York Stock Exchange view with -apprehension the periodic attacks upon their great institution made -by those who, for reasons not to be discussed here, wish to attract -popular attention. But there is no reason why these matters should -excite alarm. The Exchange purified itself long ago of the old abuses, -new ones as they occur meet with severe disciplinary measures, and it -has a certificate of good character in the report made to the sovereign -State of New York by the Hughes Commission. This commission has stated -explicitly that margin trading is a matter of contract guaranteed by -the Federal Constitution. It is not conceivable that any legislature -can ignore such a report, by such a commission, nor is it possible -that, in such event, any court could be found to uphold legislation -directed at random against an institution that bears the endorsement of -all students of economics. - -One has but to read the decisions of the courts to see that the -matter of non-interference with the great Exchanges, on technical -grounds, has become a fixture in our jurisprudence. “The Exchanges,” -said Judge Grosscup of the United States Circuit Court, “balance -like the governor of an engine the otherwise erratic course of -prices. They focus intelligence from all lands, and the prospects -for the whole year, by bringing together minds trained to weigh such -intelligence and to forecast the prospects. They tend to steady the -markets more nearly to their right level than if left to chance or -unhindered manipulation.”[28] In somewhat similar vein Justice Holmes -of the United States Supreme Court, said: “Speculation ... is the -self-adjustment of society to the probable. Its value is well known -as a means of avoiding or mitigating catastrophes, equalizing prices, -and providing for periods of want. _It is true that the success of the -strong induces imitation by the weak, and that incompetent persons -bring themselves to ruin by undertaking to speculate in their turn. -But legislatures and courts generally have recognized that the natural -evolutions of a complex society are to be touched only with a very -cautious hand, and that such coarse attempts at a remedy for the waste -incident to every social function as a simple prohibition and laws to -stop its being, are harmful and vain._”[29] - -With these opinions before them, so long as the governors of the Stock -Exchange continue their policy of a wise and dignified administration -in the interest of the public they serve, there is nothing to fear. -Corrections, remedies, improvements, and reforms will be found to -be necessary from time to time--some of them are necessary at this -moment, and the governors are hard at work on the task. To accuse -them of indifference or neglect of duty is to deny them that form -of intelligence which enables a man to protect his property. Their -splendid institution has grown to its present importance and power -through economic development that could not have been foreseen nor -prevented. Speculation on a large scale has accompanied its growth, -and contributed to it; and speculation, as we have seen, is a highly -desirable and useful part of all business. This speculation numbers -among its adherents people in all parts of the world who have a perfect -right to speculate, and who do vastly more good than harm in their -operations. - -It has also attracted a great many people who have no business to -speculate, and who would be prevented from doing so if it were -possible. The ignorance and cupidity of these people is so great, -and the pitfalls provided them by unscrupulous, methods outside the -Exchange are so many and various that something has to be done to -protect them. The Stock Exchange does not encourage them, but it -recognizes that they have legal if not moral rights, and it stands -ready to help them. It gives to such people the same information that -it gives to the richest investor in the land. The securities in which -it deals are known to be free from taint; all forms of crookedness -are prohibited; every transaction within its walls is made openly, as -a result of free competitive bidding, and published broadcast to the -world. What more, and what less, can be done? Has there ever been a -time in the world’s history when property and trade were so secure, -and when speculation, which makes property and trade, was so jealously -safeguarded?[30] - - - - -CHAPTER III - -THE BEAR AND SHORT SELLING - - -The operations of “bears” in the great speculative markets and the -practice of “short selling” are riddles which the layman but dimly -comprehends. Buying in the hope of selling at a profit, and if need -be, “holding the baby” for a long time and “nursing” it until the -profit appears, is simple enough; but an Oedipus is required to solve -the enigma of selling what one does not possess, and of buying it at a -profit after the price has cheapened. It is the most complicated of all -ordinary commercial transactions. How the thing can be done at all is -a mystery; how such a man can serve a really useful economic purpose -by this process is unfathomable. The layman who tries to figure it out -thinks there is an Ethiopian somewhere in the wood-pile; the thing is -unreal and fictitious. The only way he can understand it is to turn -bear himself and learn by experience. - -Why there should be so many bulls and so few bears can only be -explained on the ground that optimism is the basis of speculation, and -hope the essence of it. Yet the market can only go two ways: it is -quite as likely to go down as up. Since sentiment should have no place -in speculation one would think there should be as many bears as bulls, -more of them, in fact, because the market almost always goes down -faster than it goes up, and because nine out of ten of the unforeseen -things that occur result in lower prices. - -Accidents like diplomatic entanglements, rumors of war, earthquakes, -and drought are constantly occurring to upset the plans of bulls and -bring fat profits to bears in a hurry, while matters that bring about -higher markets are generally things long anticipated, in which the -profits that accrue to the bulls come about slowly and laboriously, -and always with the attendant risk that a disturbance in any corner of -the globe may bring on a sudden smash that will undo the upbuilding of -months. In theory, therefore, there should be at least as many bears -as bulls in all active markets, but in practice the large majority are -always bulls, to whose sanguine and credulous natures the bear is a -thing apart--a gloomy and misanthropic person hovering about like a -vulture awaiting the carrion of a misfortune in the hope of a profit. -Naturally the layman cannot understand him, and would like to suppress -him. - -Despite the fact that the odds seem to favor the bears, there is an -old and true saying that no Ursa Major ever retired with a fortune. -Wall Street has seen many of them, and with perhaps one exception the -records agree that the chronic pessimists have not succeeded. Fortune -seems to have smiled on them at intervals; in the country’s early days -of construction and development mistakes were made that brought about -disaster, but in the long run such tremendous progress has resulted -in America as to defeat the aspirations of any man or group of men -who stood in its way. The big bears, as a rule, have “over-stayed -the market.” Imbued with the hope that worse things were in store, -they have been swept away by the forces they sought to oppose. One of -them, a power in his day, was so obsessed with the notion that all -prices were inflated, that he has been known to sell stocks short -“for investment.” One night when a lady at his side remarked on the -beauty of the moon, he is said to have replied with that absent-minded -mechanical skepticim inherent in the bear, “yes, but it’s too high; it -must come down.” - -One would think the ideal temperament for a speculator would be -absolute impartiality, with an open mind uninfluenced by sentiment, -ever ready to take advantage of all fluctuations as they occur. The -ups and downs of a stock market always show, on average long periods, -a practically equivalent swing each way, so it would seem that the -speculator most likely to profit by these fluctuations would be one -without preconceived prejudices, ready at all times to turn bull or -bear as the occasion required. As a matter of fact, this type is the -rarest of all, being confined, generally speaking, to the professional -“traders” on the large exchanges, necessarily a very small minority -of the speculative group, yet withal perhaps the most uniformly -successful. These men, it must be understood, are not speculators, but -traders, a nice distinction involving “catching a turn,” as opposed to -the speculative habit of “taking a position.” - -In active times I have known one of them to operate simultaneously -in the New York Stock market, in the cotton market, and in the wheat -market, trading at the same time in London and Paris, “shifting his -position,” or “switching” from the bull to the bear side twice in a -single day, and closing all his trades at three o’clock with a total -net profit of less than a thousand dollars on a turnover of 30,000 -shares, to say nothing of the transactions in cotton and grain. It -goes without saying that to do all these things in one day requires -a curiously mercurial temperament, and calls for nerve and celerity -altogether foreign to the average speculator. Such a man, moreover, -contributes but little to the making of prices and values, which is the -function of large markets; his chief economic usefulness lies rather in -the enormous revenues he pays to the State. The man whose operations I -have just described contributed in a single year $75,000 to the State -Government in stock-transfer taxes. - -The scientific way to measure the value of speculators in wide markets -is to consider the bull as one whose purchases in times of falling -prices serve to minimize the decline, and the bear as one who serves a -doubly useful purpose in minimizing the advance by his short sales and -in checking the decline by covering those sales. All these operations -serve useful economic purposes, since the more buyers and sellers there -are, the greater the stability of prices and the nearer the approach of -prices to values. - -This, as I have said, is the scientific way to look at it, and the -correct way, but the popular way is something quite different. From -this point of view the man who sells property he does not immediately -possess is thought to be a menace, who depresses prices artificially -and works a disadvantage to the investor or, in the produce markets, -to the producer. Nothing could be more fallacious than this, because -of the fact that just as every routine sale of actual stock requires -a buyer, so every short sale by a bear requires a purchase by him of -equal magnitude. And it is precisely these repurchasing or “covering” -operations of the bears that do the utmost good in the way of checking -declines in times of panic or distress. - -When there are no bears, or when their position is so slight as to be -inconsequential, declines are apt to run to extreme lengths and play -havoc with bulls. One often hears among acute and clever speculators -the expression “the bears are the market’s best friends,” and, though -this may seem incongruous, it is quite true. In the month in which -these lines are written there has occurred, for example, a really -severe break in prices on the Stock Exchanges at London, Paris, and -Berlin, arising from the periodic Balkan crisis. This decline ran to -disproportionate extremes, and, in fact, approached such demoralization -that more than 300,000 shares of American securities held abroad -were thrown on the New York market for what they would bring. The -reason for the severity of this decline was easily explained. The -outstanding speculative account at all European centres, while not -actually unwieldy, was almost entirely in the nature of commitments -for the rise. There was no bear account. Therefore all Stock Exchanges -were supersensitive since they lacked the steadying influence which -covering by the bears invariably brings about. The bears are then, in -truth the market’s best friends, and the more there are of them, the -better for all concerned when trouble comes. - -Throughout all the political agitation in Germany which culminated -in that disastrous failure, the Bourse Law of 1896, there appears to -have been very little opposition to the bear and the practice of short -selling; nevertheless in that section of the law which prohibited -dealings for future delivery the bears found their activities -restricted. The law has now been amended, having proved a wretched -fiasco, but in the decade which attended its enforcement it was curious -to note the unanimous cry that went up in Germany for the restoration -of the bear. His usefulness in the stock market no less than in the -commodity market was recognized; his suppression was deplored. It was -found that just as his activities were restricted so the tendency -toward inflated advance and ultimate collapse was increased. The market -became one-sided, and hence lop-sided; quotations thus established were -unreal and fictitious. Moreover there was an incentive to dishonesty, -for unscrupulous persons could open a short account in one office and a -long account in another, and if the bear side lost they could refuse -to settle on the ground customarily resorted to by welchers. - -“The prices of all industrial securities have fallen,” said the -Deutsche Bank in 1900, “and this decline has been felt all the -more because by reason of the ill-conceived Bourse Law, it struck -the public with full force without being softened through covering -purchases”--i. e., by the bears. Again, four years later, when the law -was still in force, the same authority states “a serious political -surprise would cause the worst panic, because there are no longer any -dealers (shorts) to take up the securities which at such times are -thrown on the market.” The Dresdner Bank in 1899 reported that the -dangers arising from this prohibition cannot be overestimated “if with -a change of economic conditions the unavoidable selling force cannot be -met by dealers willing and able to buy.” - -“Short sellers do not determine prices,” says Professor Huebner. “By -selling they simply express judgment as to what prices will be in the -future. If their judgment is wrong they will suffer the penalty of -being obliged to go into the market and buy the securities at higher -prices. Nine tenths of the people are by nature ‘bulls,’ and the higher -prices go, the more optimistic and elated they become. If it were not -for a group of ‘short sellers,’ who resist an excessive inflation, it -would be much easier than now to raise prices through the roof; and -then, when the inflation became apparent to all, the descent would -be abrupt and likely unchecked until the basement was reached. The -operations of the ‘bear,’ however, make excessive inflation extremely -expensive, and similarly tend to prevent a violent smash because the -‘bear,’ to realize his profits, must become a buyer. The writer has -been told by several members of the New York Stock Exchange that they -have seen days of panic when practically the only buyers, who were -taking the vast volume of securities dumped on the exchange, were those -who had sold ‘short,’ and who now turned buyers as the only way of -closing their transactions. They were curious to know what would have -happened in those panic days, when everybody wished to sell and few -cared to invest, if the buying power had depended solely upon the real -investment demand of the outside public. - -“In reply also to the prevalent opinion that ‘short selling’ unduly -depresses security values, it should be stated that ‘short sellers’ are -frequently the most powerful support which the market possesses. It is -an ordinary affair to read in the press that the market is sustained -or ‘put up’ at the expense of the ‘shorts’ who, having contracted -to deliver at a certain price can frequently easily be driven to -‘cover.’ Short selling is thus a beneficial factor in steadying prices -and obviating extreme fluctuations. Largely through its action, the -discounting of serious depressions does not take the form of a sudden -shock or convulsion, but instead is spread out over a period of time, -giving the actual holder of securities ample time to observe the -situation and limit his loss before ruin results. In fact, there could -be no organized market for securities worthy of the name, if there did -not exist two sides, the ‘bull’ and the ‘bear.’ The constant contest -between their judgments is sure to give a much saner and truer level of -prices than could otherwise exist. ‘No other means,’ reports the Hughes -Committee, ‘of restraining unwarranted marking up and down of prices -has been suggested to us.’”[31] - -So much for the functions of the bear in markets that deal in invested -capital. In the commodity markets he becomes of even greater value, -indeed, he is well-nigh indispensable. Mr. Horace White, who was the -Chairman of the Hughes Investigating Committee, cites this instance: -“A manufacturer of cotton goods, in order to keep his mill running all -the year round, must make contracts ahead for his material, before -the crop of any particular year is picked. The cotton must be of a -particular grade. He wishes to be insured against fluctuations in both -price and quality; for such insurance he can afford to pay. In fact he -cannot afford to be without it. There are also men in the cotton trade, -of large capital and experience, who keep themselves informed of all -the facts touching the crops and the demand and supply of cotton in the -world, and who find their profit in making contracts for its future -delivery. They do not possess the article when they sell it. To them -the contract is a matter of speculation and short selling, but it is a -perfectly legitimate transaction. - -“To the manufacturer it is virtually a policy of insurance. It enables -him to keep his mills running and his hands employed, regardless -of bad weather or insect pests or other uncertainties. The same -principles apply to the miller who wants wheat, to the distiller, the -cattle-feeder, and the starch-maker who wants corn, to the brewer -who wants hops and barley, to the brass founder who wants copper, -and so on indefinitely. Insurance is one of two redeeming features -of such speculation; and the other, which is even more important, is -the steadying effect which it has on market prices. If no speculative -buying of produce ever took place, it would be impossible for a -grower of wheat or cotton to realize a fair price at once on his crop. -He would have to deal it out little by little to merchants who, in -turn, would pass it on, in the same piecemeal way, to consumers. It is -speculative buying which not only enables farmers to realize on their -entire crops as soon as they are harvested, but enables them to do so -with no disastrous sacrifice of price. When buyers who have future -sales in view compete actively with each other, farmers get fair prices -for their produce.”[32] - -And, it may be added, the same satisfactory result is attained when -bears who have sold the farmer’s crop short come to cover their short -sales by buying in the open market; their buying steadies the market if -there is a tendency to decline; if the market is strong, their buying -helps make it stronger. In either case they are the farmer’s best -friends, because the farmer profits as prices advance. - -Speaking of farmers, it is well known that much of the opposition -to short selling and dealing in futures in the large markets finds -its chief advocates among the Western and Southern politicians whose -constituents are the agricultural classes. These gentlemen fulminate -strongly against the New York Stock Exchange and the grain and cotton -exchanges, and in currying favor with their bucolic supporters they do -not hesitate to condemn margin trading, short selling and every other -phase of speculative markets. Yet it does not occur to them, or, if it -does, they dare not refer to it, that in forming pools and combinations -to hold back their wheat and cotton their constituents are doing the -very thing which they so strongly condemn in speculative centres. The -farmer is, of course, richer than he ever was before, but nevertheless -he grows his wheat to sell, and only a few can carry it for any length -of time without borrowing from the banks. The farmer who goes into -one of these pools with wheat valued at $10,000 and who borrows $8000 -on it from his local bank, is nothing more nor less than a speculator -in wheat on a 20 per cent. margin, and the same horrid appellation -describes the cotton-planter who resorts to similar practices.[33] - -Now, of course, there is no moral reason why a farmer should not -speculate if he chooses, but what touches us on the raw is his -Phariseeism in doing for himself what he professes to abhor and condemn -in others. One is tempted to say unkind things to the farmer at such -times, to remind him, for example, that he is to-day the most backward -and unprogressive factor in American business life. Despite the fact -that the Department of Agriculture has spent $100,000,000 on his -education in the last twenty years, he has not yet begun to learn what -the German, Dutch, and French farmers learned years ago in intensive -farming, nor has he mastered the art of cattle-raising in anything like -the degree it is understood in the Argentine. Nature has smiled on him; -he waxes fat with her bounty, but he does not keep pace with the growth -of the country. Although enhancing prices are paid him for his product, -he is unable to raise a crop proportionate in any degree to the -facilities put at his disposal in the way of fertilizers and machinery. -One would like to “rub it in” on the farmer, but one doesn’t, “because” -as a recent writer puts it, “the farmer is a farmer, and therefore not -a person to be lectured like a mere banker or broker in Wall Street.” - -To the farmer, the politician, and the layman generally, short sales -of cotton or grain are understood, approved, in fact, if the grower -happens to be the one who profits by them. But substitute stocks and -shares for wheat and cotton, and talk of “operations for a fall,” and -the layman thinks he smells a rat. He sees the bale of cotton or the -carload of wheat actually moving; it is a concrete thing; it appeals -to his senses, it is comprehensible. But talk to him of bits of paper -called stock certificates, and by a curious process he concludes -that a short sale has no basis of reality and is therefore menacing -and improper. He persuades himself that short selling ought to be -prohibited by law, and, since Wall Street harbors the chief offenders, -he finds in the nearest politician a handy ally to assist him. These -gentlemen, who obstinately refuse every other medicament, could be -cured of their ailment by a strong diet of economics. They become -subjects of medical, rather than financial, interest. They should dip -themselves into Conant and Leroy-Beaulieu; they should cool off in the -pages of Bagehot and Emery; and, by the time they have got into the -soothing columns of the Hughes Commission’s report, they will be ready -for new points of view. - -As a preparatory lesson: suppose a speculator buys from a commission -merchant a carload of coal of a specified grade. The coal is not in -the possession of the commission merchant, but he knows where he can -get it, and he knows that he can deliver it on the date agreed upon. -Accordingly he sells it short, and enters into a binding contract -which, happily, the courts construe to be perfectly legal. Now suppose -the same purchaser wishes to buy 100 shares of Pennsylvania Railroad -stock. All Pennsylvania stock is the same, that is to say any 100 -shares of it is just as good as any other 100 shares of the same -property--the number on the certificate is of no importance whatever. - -The dealer to whom he applies does not happen to have 100 Pennsylvania -on hand, but he knows where he can get it, and he knows that he can -deliver it to the purchaser on the following day. So he sells it -short, and all that remains to complete his part of the contract is -the actual delivery. He is then a bear on Pennsylvania stock. He may, -if he chooses, go into the open market and buy the stock at once, so -that he will be able to deliver it in the easiest and most direct way. -Or he may feel that by waiting he may be able to buy at a lower price -than that at which he has sold it, hence, in order to make the delivery -promptly, he borrows the hundred shares from one of his colleagues, to -whom he pays the market price as security for the temporary loan of -the certificate.[34] In a day or two the price of the stock may have -declined, whereupon the bear goes into the market and buys the 100 -shares of Pennsylvania at a price, say, 1 per cent. lower than that at -which he sold it. - -When this certificate is delivered to him next day, he delivers it in -turn to the man from whom he borrowed the original 100 shares; his -security money is then returned to him, and the transaction is closed. -It is just as real a transaction as any other, and just as legal. -Moreover, since it is always possible to buy, but not always possible -to sell, the active presence in the market of large numbers of bears -who _must_ buy, whether they want to or not, is the very best policy of -insurance that a holder of securities could have. - -Many years ago there was a law on the French Statute books, -subsequently repealed, prohibiting short sales. M. Boscary de -Villeplaine, a deputy chairman of the association of stockbrokers, was -conversing with Napoleon regarding a pending discussion in the Council -of State looking to the repeal of the law. “Your Majesty,” said de -Villeplaine, “when my water carrier is at the door, would he be guilty -of selling property he did not own if he sold me two casks of water -instead of only one, which he has?” “Certainly not,” replied Napoleon, -“because he is always sure of finding in the river what he lacks.” -“Well, your Majesty, there is on the Bourse a river of Rentes.”[35] - -Napoleon felt, no doubt, that there was something inherently wrong -in selling short; even as these lines are written, counsel for a -Congressional committee is attempting to make witnesses admit that the -practice is “immoral.” But why, where, how is it immoral? It pervades -all business; no question of morals or ethics enters into it at all. -The man who sells you a motor-car has not got it; he accepts your money -and enters into an agreement to deliver the car next spring because he -knows or believes that he can make it and have it ready for delivery at -that time. Meanwhile he has sold short. A gentleman of my acquaintance -has sold thousands of storage-batteries on the same basis, although -plans for them have not yet been designed to meet the specifications. -At Cape Cod the cranberry-growers sell their crop before it has begun -to mature; all over the land contractors and builders are “going -short” of the labor and materials which, at some time in the future, -they hope to obtain to fulfil the terms of their agreements. Are all -these worthy people “immoral”? - -If it is immoral to _sell_ for a purpose, it is equally immoral to -_buy_ for a purpose; in each case the purpose is the hope of a profit. -Buying for a profit is approved by every one; why not selling? In -both instances you have bought or sold for a difference in price; the -_sequence_ of the events in no way involves a question of morals, since -there is no ethical difference and no economic difference between -buying first and selling last, and selling first and buying last. -Moreover, in selling short you do no injury, since you sell to a buyer, -at his price, only what he wants and is willing to pay for.[36] - -All suggestions of impropriety in short selling are grotesque in -their absurdity. But suppose, for purposes of argument, that economic -errors of some sort were actually involved in this practice. How could -it be regulated or controlled? As the governors of the Stock Exchange -stated to the Hughes Commission in 1909, short selling is of different -descriptions. There is the short sale where the security is held in -another country and sold to arrive pending transportation. There is -the short sale where an individual sells against securities which he -expects to have later, but which are not in deliverable form; and in -this connection I call your attention to the recent sale of $50,000,000 -of Corporate Stock of the City of New York where deliveries were not -made for a period of about three months, and which stock was dealt in -enormously, long before it was issued. - -“If a market had not been provided for it under those conditions,” -said the governors, “the loan could not have been placed. Then, again, -there is the short selling of stock against which different and new -securities are to be issued; the vendor knowing that he is to receive -certain securities at a distant date, but desiring to realize upon them -_at this time_. Beyond this, there is the regular selling of short -stock, either by parties who do so to hedge a dangerous position upon -the long side of the market, or the sale purely and simply with the -intention of rebuying at a profit, should circumstances favor it.” - -Finally, there is the investor with stock in his strong-box actually -paid for and owned outright. He may wish to sell in a strong market -with the hope of repurchasing at lower prices, but for reasons of -his own he may borrow the stock for delivery rather than deliver the -securities bearing his own name. Technically he is short; he is a bear. -But in his case, as in that of the others here cited, how can this -perfectly proper method of doing business be “regulated” or interfered -with in any way? I do not think it necessary to pursue so palpable an -absurdity. - -It has been said that the bears often resort to unfair methods to bring -about declines in prices, circulating rumors designed to alarm timid -owners of securities and thus frighten them into selling. That this -is done every now and then is undeniable, but the opportunity of the -bear in these matters is very limited, and may be easily and speedily -investigated, whereas similar practices, by the bulls in inflating -values by all sorts of grotesque assertions and promises are by no -means so easily run to earth, and do incalculably more harm. - -The bear who drags a red-herring across the trail now and then -interrupts the chase, but he cannot stop it; the genial optimist who -has a doubtful concern on his hands, with a pack of enthusiastic -buyers in full cry at his heels, is a much more serious matter. Good -times and bull markets engender many questionable practices of this -sort. “All people are most credulous when they are most happy,” says -Walter Bagehot; “and when much money has just been made, when some -people are really making it, when most people think they are making it, -there is a happy opportunity for ingenious mendacity. Almost everything -will be believed for a little while, and long before discovery the -worst and most adroit deceivers are geographically or legally beyond -the reach of punishment. But the harm they have done diffuses harm, for -it weakens credit still further.”[37] - -If this book were written for people instructed in economic matters -there would be no occasion to dilate upon the usefulness of bears and -the value of short selling, but since we are addressing laymen who do -not understand how the bear can be a useful factor, we may venture to -say once more that insurance is the chief advantage in his operations. -Ex-Governor White’s contribution to the subject, which I have quoted -in this chapter, is strongly supported by Mr. Conant, who shows -that valuable progress in opening new countries and developing new -industries is often made possible by “bearish” operations designed to -“hedge” or insure the new undertaking against loss. - -“The broker who has a new security which he desires to place from time -to time in the future, making possible, for instance, the opening of a -new country to railway traffic, protects himself against loss resulting -from future changes in market conditions by selling other securities -for future delivery at current prices. These securities will realize -a profit when the date arrives for delivery if the market has in the -meantime become unfavorable, and will offset the loss upon his new -securities. They will have to be bought at a loss if the movement of -prices has been upward, but the upward movement will afford a profit -upon the new securities which he is seeking to place upon the market. -Thus, to quote Georges-Levy, ‘there is a genuine insurance, which the -broker will have himself organized and on which he will willingly pay -the premium for protection against any accident.’”[38] - -An instance such as this serves to show the difference between gambling -and speculating, terms that are often misapplied by critics of stock -markets. A gambler seeks and makes risks which it is not necessary -to assume, and which, in their assumption, contribute nothing to the -general uplift. But the speculator--in the instance just cited, a bear -who sells short--volunteers to assume those risks of business which -must inevitably fall somewhere, and without which the mine, or the -factory, or the railroad could not be undertaken. His profession, and -the daily risks he assumes, call for special knowledge and superior -foresight, so that the probability of loss is less than it would be to -others. If he did not do it--if there were no bear speculators--the -same risks would have to be borne by others less fitted to assume them -or the useful projects in question would not be undertaken at all. - -So general is the employment of these hedging or insurance operations -that in the case of cotton--to cite but one instance--the business is -regarded by practically all cotton merchants as an absolute necessity -under modern methods of conducting business. “An idea of the value -of the hedging function may be obtained,” says Herbert Knox Smith, -Commissioner of Corporations, “when it is stated that in Great Britain -banks very generally refuse to loan money on cotton that is not -hedged. Moreover, it is almost universally conceded that, since the -introduction of hedging, failures in the cotton trade, which had -previously been frequent, have been materially reduced as a direct -result of the greater stability with which transactions in spot cotton -can be conducted.”[39] - -In conclusion it may be noted that as early as 1732 an attempt was made -in England to prevent short sales by law, that the law was recognized -a mistake and subsequently repealed. To-day there is no law on the -English Statute books restricting speculation in any form. In America -the New York State Legislature enacted a law in 1812 and the Federal -Government in 1864, both designed to prevent short selling. These laws -have also been repealed and they will not be revived. The bear has -come to stay. As a spectre to frighten amateurs, he may continue for a -time to stalk abroad o’ nights; as a necessary and useful part of all -business he is a substantial reality. And he is not “immoral.”[40] - - - - -CHAPTER IV - -THE RELATIONSHIP BETWEEN THE BANKS AND THE STOCK EXCHANGE - - -“A million in the hands of a single banker is a great power,” said -Walter Bagehot; “he can at once lend it where he will, and borrowers -can come to him because they know or believe that he has it. But the -same sum scattered in tens and fifties through a whole nation is no -power at all; no one knows where to find it or whom to ask for it.” -This explains the power of Wall Street. Money flows there for the same -reason that water flows downhill. The great agricultural districts -of the West, for example, will gather from their crops this year -several hundred millions of dollars. They have no real economic use -for all this money in the farming districts; the large commercial and -industrial undertakings that help to make America rich and powerful are -not in that neighborhood. - -Particular trades settle in particular districts, and the money they -require must be sent to them from other districts. “Commerce is -curiously conservative in its homes;” the steel trade concentrates in -and around Pittsburg, the grain trade at Chicago, wholesale merchants -in special lines are always to be found huddled together in our big -cities in neighborly intimacy; and once a trade has settled in one spot -it remains there. The millions that go West to pay the farmer must -therefore go elsewhere to pay others as fast as a demand for money -arises, because the price that will be paid for it elsewhere is greater -than the price it will bring in the farmer’s pockets. This is doubly -true because, as we have said, there are no imperious demands for money -for commercial undertakings in the farmer’s neighborhood, and, even if -there were, home enterprises are seldom attractive; curiously enough -there is a familiarity about them and their local promoters that breeds -contempt. Besides, these millions are scattered in small sums all over -the agricultural States; there is no cohesion, no concentration. - -What then becomes of these vast sums? They are deposited in the local -banks, and the local bankers, who are wisely permitted by law to -deposit three fifths of their legal reserves in a city bank, promptly -transfer the funds that are not required at home to the bank that will -pay interest on them. In this way large capital accumulates, and when -we say this is a wise provision of the law we mean that scattered -reserves in local country banks are of no more avail in emergencies -than the five-dollar bills in the people’s pockets; but, gathered -into one great central fund that will aggregate a sum large enough to -provide every solvent bank and business house with ample support in -times of distress, they accomplish a purpose worth talking about. - -This is the way they do in Europe, but say “Central Bank” in America, -and people are frightened out of their wits. They say politics would -dominate it; “the interests” would control it. The bigness of things -seems to paralyze them. But to attack a thing merely because it is big -and powerful is no argument. In a country full of big things it does -not ring true; it is un-American, and, as for the bogy of a centralized -banking control, there is infinitely more of it in New York to-day, -under the existing system, than there could possibly be under the plan -proposed by the original Aldrich measure. However, the idea of a great -Central Bank is not the subject under discussion. - -When money flows into the New York banks the popular notion seems to be -that it is used to facilitate speculation on the Stock Exchange. But -this is only one of its many sources of employment. It will supply the -payroll at Pittsburg, it will ship grain to Europe, it will discount -the bills of merchants, it will return to the West and South when they -call for it to move the next crop. If Canada or Europe wants it, and -bids high enough for it, they will get a share of it. Wherever capital -is most profitable, there it will turn; it will rapidly leave any -country that cannot pay for it. It is the old simile of water finding -its own level. The first step consists in gathering the idle hoards -of individuals into banks; the next consists in centralizing these -deposits where they will be available for other sections of the country -that have use for them. - -In order to attract these funds and so facilitate the business of the -country smoothly and economically, the New York banks are accustomed -to paying 2 per cent. interest on such deposits. Critics who seem to -feel that there is something objectionable in the laws of gravitation, -would prevent country banks from depositing in the cities by forbidding -the payment of interest on deposits by national banks. But the laws -that govern national banks, as Mr. Horace White suggests, are not the -laws that govern State banks and trust companies, and, as these would -gladly pay the 2 per cent. interest on deposits, they would be given -an unfair advantage.[41] Critics also say that country banks should -not be allowed to keep three fifths of their reserves in city banks, -but then they would be at a disadvantage with the State banks in their -neighborhood, since the prohibition would not apply to them. Moreover, -if country banks were not thus permitted to deposit three fifths of -their reserves, what would they do with their funds? For long periods -the money would remain idle, and idle funds are as unhealthy for the -community as they are for the banks. - -There is no other way but for the country banker to take care of -his customers first, and then send as much of his surplus as the -law permits to the centre that will pay him the best return and the -safest return. This is good business; it makes money; it is sound -economics. And before the critic goes into a paroxysm over the fear -that speculation in stocks will absorb all this wealth once it finds -its way to New York, let me remind him, to cite but one instance, that -short-time commercial paper, representing actual commodities moving to -market, has the first call. The Minneapolis miller’s ninety-day bill, -accepted by a reliable merchant and based on an actual carload of -flour, has in all normal times a preferred claim on the banker’s funds. - -This discounting of commercial paper is the ideal function of banking, -to quote Mr. White, and if there were always a sufficient supply of -good bills to absorb all the bank’s loanable credit, with an inflow -of cash from maturing bills equal to the outgo of new ones, there -would be no occasion for bankers to look elsewhere to keep their funds -mobile--and the critic would be out of work.[42] But this does not -often happen, because the bank’s loanable funds normally exceed the -amount of acceptable paper, and at such times the banker makes advances -on goods or securities, and, if goods and securities are not pressing -for loans, he will place his funds elsewhere, where a demand exists. -But securities for which there is always a ready market are such -thoroughly good collateral for loans that bankers are glad to get them. - -The stockbroker is, in a way, a dealer in merchandise. Whether he buys -for investment or for speculation--and remember that the boundary line -between investment and speculation is often shadowy and indistinct--he -pays cash for everything he buys. He then seeks advances of credit upon -his wares just as the merchant does, supplementing his own capital and -the deposits (margins) of his customers with call or time money from -the banks. To deny him these facilities is exactly the same as to deny -credit to a merchant; both are doing a perfectly legal business, and -both contribute to the economic welfare of the community. - -The popular idea is that loanable funds thus borrowed by Stock Exchange -houses constitute a diversion of money from the merchants who need -it. Not so. Even if the banks were disposed to use all their loanable -funds in mercantile loans and discounts they could not do so, because -a part of these funds may be called for at any time, and it is not -good banking to lend too large a proportion of call money on time. The -merchant wants 30, 60, and 90 day money, and he wants it at a rate not -to exceed 6 per cent.; the stockbroker is compelled by the nature of -his business to borrow a large part of his money on call, and he pays -whatever the banks choose to charge for it. Incidentally it may be -said that no usury law is violated, even if 100 per cent. is charged, -because the New York law legalizes any rate of interest on call loans -of $5000 and upward, secured by collateral.[43] - -As a matter of fact, far from being put at a disadvantage by the -banking methods that provide call loans to Stock Exchange houses, -the merchant or manufacturer enjoys banking facilities which the -Stock Exchange may never hope to enjoy. The merchant is able to -secure banking accommodations upon his personal credit, that is, by -discounting his own promissory notes or single-name paper unsecured by -pledge of collateral. But the stockbroker, however ample his resources -and his credit, can only obtain loans upon collateral securities. Any -attempt to resort to his personal credit or his personal paper would be -construed as a confession of weakness, and his good name at the banks -would suffer accordingly. - -Persons who conjure nightmares over the practice of the banks in -loaning surplus funds to stockbrokers are deceiving themselves. Instead -of losing by this system, every merchant and manufacturer in the land -profits by it in greater or less degree. The stockbroker deals in the -bonds and shares of great railway and industrial companies, which, -in order to succeed, must be able to sell their certificates to the -public and so raise the money necessary to provide the extensions and -new construction that are constantly demanded by the public. If fresh -capital could not be enlisted in this way, additions and improvements -would cease. The merchant who requires the railroads to ship his goods, -and the manufacturer whose demands for new side-tracks, cars, and other -equipment are unceasing, are therefore directly interested in the -maintenance of a broad and stable speculative market for securities -at all times, because in that way only are funds to be raised for the -requirements of trade and industry. There would have been no railroads -in this country had there not been speculators to build them, nor could -the money have been raised had there not been other speculators to buy -the shares with the aid of the banks. - -Prevent the banks from lending money to facilitate stock-market -operations and business ceases; interfere with it or hamper it and -confidence is impaired, and when these things happen the industrial -system collapses in terror. Such has been the experience of modern -times. Until a system is devised whereby large undertakings may enlist -public support in other ways than by offering securities in our great -Exchanges and by maintaining a market for them there, it is useless -to talk of interfering with that necessary relationship which exists -between the banks and the stock market. On the one hand we have the -cobwebs and windy sophistries of politicians and doctrinaires; on the -other hand the test of proved effectiveness in the conduct of business. -And the country’s business cannot stop; it must go ahead. - -In the last six years more than a billion shares of stock have changed -hands on the New York Stock Exchange, together with bonds of a market -valuation exceeding five billions of dollars, and, under the rules, -each purchase made was paid for in full by 2:15 P.M. of the day -following the transaction. If all these purchases had been made for -cash--i. e., if every customer of every brokerage house paid in full -for his purchases, there would be no use for bank loans to brokers; -there would be no speculation, and hence no progress. Securities -purchased in the six-year period quoted were, in the majority of -instances, bought on margin, that is, they were only partially paid for -by the purchasers, the balance required being furnished by the broker -from his capital and by the banks from their loanable funds. - -There is a popular fallacy as to the amount of actual cash required to -finance these enormous Stock Exchange transactions; persons who are not -well informed often entertain the impression that it is much larger -than it really is. As a matter of fact considerably more than 90 per -cent. of the business of the banks is done through the Clearing House, -an institution designed, as every one knows, to minimize the transfer -of actual cash and to simplify the payment of balances. If these -clearings seem large--they are, in fact, twice as large in New York as -in all the other cities of the Union added together--it is not alone -because more speculation in securities takes place in New York, but -because this happens to be the centre where many other cities balance -their claims against each other. - -Furthermore, when critics who do not understand the subject look -askance at the volume of loans of the New York banks, they must -remember that the lending power of such institutions is always four -times greater than the supply of money in its vaults. The reserve of -25 per cent. which the banks are required to maintain means that every -million dollars of actual cash added to their funds renders possible -an expansion of four million in loans, and every withdrawal of funds -involves a proportionate reduction of these loans. These matters are -self-evident. The point to bear in mind is that through this expansion -and contraction of loans stock-market operations are increased or -diminished by almost automatic processes. “Money talks” is an old -aphorism. In this case it is not money that talks, but credit, and the -credit extended to stockbrokers by the banks is always wisely regulated -to meet conditions as they arise. - -The customer of a brokerage house buys, let us say, 1000 shares of -St. Paul at 120, on which he deposits a partial payment or margin of -$15,000. The bank will loan to the broker 80 per cent. of the market -value of the stock, or $96,000, which, added to the $15,000 deposited -by the customer, leaves $9000 which the broker supplies from his -firm’s capital. The broker gives to the bank, with the securities, a -note on one of the bank’s printed forms, which gives the bank absolute -authority to sell the collateral whenever the margin shall have -declined to less than 20 per cent. This note is so sweeping in its -terms, and gives the bank such complete power, that a reproduction of -it, in small type, would fill two pages of this book. - -It empowers the bank to sell as it pleases--if the broker fails to pay -the loan on demand, or to keep the margin at 20 per cent.--all the -securities in the loan; it authorizes the bank to seize any deposit the -broker may have in the institution; the bank may itself purchase all -or any part of the securities thus sold, and all right of redemption -by the broker is waived and released. This instrument would seem, _per -se_, a pretty strong hold on the broker, but the bank’s security does -not end there. In making the loan the bank knows that the borrower is -a member of the New York Stock Exchange, and that presupposes capital, -with at least one Stock Exchange membership, worth to-day about -$60,000. It knows, too, that a fundamental rule of all Stock Exchange -brokers is to protect the bank at all hazards, not merely because the -personal honor of the broker is involved, but because the business -could not be conducted otherwise. - -It is apparent from a consideration of all these elaborate precautions -that the lending of funds to stockbrokers is a safe business, indeed -in all the criticism directed against Wall Street methods I have not -yet heard it questioned. The department of the bank entrusted with -such matters watches the tape with vigilance to see that the 20 per -cent. margin is not impaired; if it should happen to be impaired, the -broker’s messenger is almost always on hand anticipating with his -additional collateral the call that the banker will make. So excellent -is Stock Exchange collateral, thus secured and thus protected, that the -losses resulting from this class of business are infinitesimal. I am -not a banker, but I hazard the opinion that it constitutes, in fact, -the minimum risk in all the departments of the bank’s business. - -In any case, when trouble comes and panic conditions prevail, it -requires no stretch of the imagination to say that the stockbroker’s -loan is a better loan than that of, let us say, the silk merchant, for -he, perhaps, cannot easily repay. He is under immense liabilities in -various directions and he has many obligations; whereas the stockbroker -feels every minute of the day that his first duty is to the bank; -the customer who owns the securities in the loan must either deposit -sufficient margin or the broker will sell him out, in which case the -loan at the bank is paid off. Finally, it may be added that in the -October panic of 1907, when merchants’ failures were announced daily, -and when certain banks and trust companies closed their doors, not a -single failure was announced on the New York Stock Exchange. - -Another objection often lodged by critics of present-day banking -conditions, has to do with the practice of New York banks in the -over-certification of brokers’ checks. These over-certifications are -held to be objectionable because the National Banks are forbidden by -law to certify for a sum greater than the drawer has on deposit. In -practice it works out this way: The broker’s clearing-house sheet of -to-day tells him what payments he has to make, so on the following -morning he acquaints his bank with the fact that payments are to be -made necessitating certifications beyond the amount of his deposit. -He then sends to the bank the promissory note of his firm, payable on -demand, and the bank credits his account with the proceeds. As the day -advances the broker’s checks come in and are credited to the account, -which is always balanced and the note paid off before the close of the -day’s business. The risk is nominal. - -Of course a few hours elapse between the certification and the receipt -of the broker’s checks, and in this brief interval it would be possible -for a dishonest man to abuse the privilege extended him, but the fact -that such a thing does not happen affords tenable ground for the belief -that it will not happen. The bank does not deal with an individual, but -with a firm, and it knows that the firm has a membership in the Stock -Exchange, with a cash balance on deposit in the bank that extends the -accommodation. Any banker will bear witness that the business is quite -satisfactory and that it involves no loss. Moreover, this certification -of stockbrokers’ checks is essential to the maintenance of broad -speculative markets, and, whether that portion of the public that -criticises the practice likes it or not, speculation is a necessary -part of our business life. - -It may be pertinent to remark in this connection that the law -prohibiting these certifications by National Banks is unnecessary -and unwise, as is evidenced by the facility and safety with which it -is honored in the breach. State Banks in New York are under no such -restriction, nor has it occurred to our lawmakers that a necessity for -the prohibition exists. The experience of these banks in the matter -of certifications, like that of the National Banks, shows that the -business is safe and sound. If the merchant discounts his paper for -thirty, sixty, or ninety days, why prevent a similar accommodation -to stockbrokers for an hour or two? Both are engaged in a strictly -legitimate business upon which the welfare of the community in greater -or less degree depends, and the fundamental purpose of a bank is to -promote and encourage such business. That is what banks are for, and -bank officers are supposed to know something about how, when, and where -accommodations may be extended with safety to all concerned. - -Mr. Horace White cites the year 1909 as an illustration of the -employment of loanable bank funds by brokers which brings up another -point. For long periods in that year, money loaned on call on the floor -of the New York Stock Exchange at 1½ per cent., while our banks were -paying 2 per cent. to the interior banks to which the money belonged. -This does not necessarily mean that the banks were losing money; -because the greater part of these funds was employed in time loans and -in commercial discounts at 3 and 4 per cent., thus raising the average -income rate. There is also to be considered the unearned increment -which the bank gains by “holding” its depositor, even though no large -profit accrues from the funds thus deposited.[44] - -As the ratio of reserves to liabilities at that time was much above -the legal requirement, it might be inferred from this and from the 1½ -per cent. rate that money was easy; but it was not, as many persons in -commercial pursuits learned when they tried to borrow it. There was a -great deal of money that was not being used in daily business, and one -of the reasons was that the period was one of distrust. Stockbrokers -got funds at 1½ per cent. while many other borrowers were required -to pay stiffer rates, because the banks that controlled the money -market--i. e., the loanable funds--were unwilling to part with them -except for short periods and on instantly marketable security, and -this state of mind on the part of the New York bankers was shared by -the bankers of Europe. It was good banking, because it was prudent -and conservative. In other words, at a time when danger threatened, -bankers in all important centres of the world regarded Stock Exchange -collateral as ideal security, and, as we have seen, the aggregate of -their loanable funds pressing on the market kept call rates down to 1½. -If in times of doubt and distrust this form of collateral proves its -safety, is it not a fair hypothesis that it is safe at _all_ times? - -If the critics are correct in their contention that pressure of easy -money in the New York market holds out inducements for foolhardy -speculation on the Stock Exchange, the year 1909, just cited, should -have witnessed a great boom in securities. If speculators could -borrow at 1½ per cent. on securities that netted 5 and 6 per cent., -the theory of our adversaries is that this disproportion entices a -large number of people into such speculative ventures that inflation -takes place, followed by collapse. That nothing of the sort occurred -shows that critics, like other less gifted persons, may err; it -shows, too, what every thoughtful person knows, that booms are not -created on the Stock Exchange, which merely reflects in its dealings -external conditions of all sorts, among them psychological processes -which neither brokers nor money markets may hope to control. As a -matter of record, 1909 showed but little increase in the volume of -business transacted on the Stock Exchange as compared with 1908, and -the increase, such as it was, represented nothing more than a natural -recovery from the paralysis following the débacle of 1907, plus an -investment of funds at attractive levels. The same state of affairs -prevailed in 1910. From June to December of that year call money rates -almost never exceeded 3 per cent., and time money might be had at from -3½ to 5, yet far from stimulating speculation--far from revealing an -excessive employment of bank funds by stockbrokers--transactions both -in shares and bonds dwindled to insignificant proportions. - -Cheap money is by no means a “bull argument” from the Stock Exchange -point of view, because it arises from dull conditions in commerce and -industry, and there can be no boom in the securities which represent -the nation’s business unless mills and factories and railroads are -prosperous. There have been more bull markets with tight money, or with -money in the neighborhood of 6 per cent., than in cheap money markets -of the sort just described. This is not equivalent to saying that a -prolonged rise can be conducted through a period of dear money. As a -matter of Stock Exchange experience such a condition seldom arises, -because the Stock Exchange discounts the future, foresees those -economic conditions that spell prosperity for the country, and advances -the prices of securities on a money market that has not yet felt the -demands of improved conditions. - -In June, July, and August, for example, conditions may warrant a hope -of bountiful harvests, while general business is dull and idle money -abundant. Such a prospect is always discounted, other things being -equal, by a rise in securities, and money that is not yet required -to market the crops thus finds employment as loans on Stock Exchange -collateral. Later on, when reviving business leads the interior banks -to call their New York balances, the depository banks meet the demand -by calling loans and by advancing rates. The speculative movement on -’Change is then checked or reversed just in proportion to the demand -for money elsewhere. It may continue for a while if the discounting -process has not been complete, or if there remains a wide disparity -between interest rates for money and net returns on securities; or if -the independent resources of the city banks are large enough to furnish -comfortable interest rates even after the westward drain has commenced, -but, generally speaking, “the move is over,” to quote the vernacular, -by the time business men want their money. Nine times out of ten any -monetary strain that results thereafter is not due to speculative -operations in securities nor to any other cause attributable to the -Stock Exchange. - -A word should be said here concerning the Stock Exchange Clearing -House, because just as the Clearing House of the associated banks -ascertains and pays the balances of its members with a minimum outlay -of coin and legal tender notes and with great economy of time and -labor, so the Stock Exchange Clearing House stands the strain of an -enormous business, reduces the volume of checks and deliveries, and -relieves both the banks and the stockbrokers of an amount of risk and -confusion that would be well-nigh intolerable. - -In order that the layman, for whom these pages are written, may -understand what this means, it may be said that if 500,000 shares of -stock are sold in a day on the Stock Exchange, and if we assume the -average price of these stocks to be 50, the checks paid out on that -day would be $25,000,000, and in a year at that rate certifications -would be necessary involving the stupendous total of $7,500,000,000. -This clumsy if not impossible method the Clearing House was designed -to avoid. Moreover, the actual daily transfer of such a volume of -securities is largely obviated by the Clearing House system, and thus -another and highly important economy is effected. - -The Stock Exchange Clearing House is managed by a committee of five -members of the Board of Governors of the Exchange. Each day the seller -of stocks sends to the office of the buyer his “deliver” ticket, and -the buyer sends to the seller his “receive” ticket, this transaction -constituting a “comparison” by both parties, and an evidence that the -transaction has been entered on their books. Before 7 P.M. of that day -these tickets, and the sheet comprising the record, are sent to the -Clearing House. This sheet contains a “receive” and “deliver” column, -with all the transactions in each security grouped together, and with a -balance--i. e., a debit or credit, struck at the bottom. If there is a -credit, a draft on the Clearing House bank is attached; if a debit, a -check for the balance accompanies the sheet. - -When the Clearing House receives this sheet a simple and a very -ingenious process ensues which relieves the broker of a great deal -of trouble, risk, and labor. If he has bought and sold, let us say, -an equal amount of stock, comprising numerous transactions, instead -of having to draw checks for all these separate trades, the Clearing -House settles the whole day’s transactions by a single check for the -actual balance. If his numerous purchases and sales do not balance, -and if there are various lots of stock to receive and deliver, the -Clearing House eliminates a host of intermediaries and puts him into -direct touch with one firm to whom he delivers, and with one from -whom he receives. He may have had no transaction with the firms thus -arbitrarily assigned to him; that makes no difference. The books of -the Clearing House always balance; somewhere a firm is entitled to a -receipt of stock, and somewhere another firm will be found to deliver -it to him. - -Nothing could be simpler and more economical than the manner in which -the two are brought together. In such a system, the number of shares -actually delivered is reduced by the Clearing House to one third of -the number represented by the broker’s actual transactions, while the -amount of money which he must command to meet his daily engagements -represents, on an average, only 25 per cent. of the actual capital -that would be required were it not for the excellent system thus -afforded him. Persons who wonder at the magnitude of Stock Exchange -transactions, and who jump to hasty conclusions as to the actual -capital involved, may well reflect upon the manner in which this method -reduces to a minimum the stockbroker’s drafts upon the banks. - -In a larger sense, if the critic in these matters affecting the -relationship of banks to stockbrokers feels aggrieved at what he -thinks is an improper diversion of funds, he must remember that the -comparative scarcity of capital to-day--which is at the bottom of his -complaint--is not due in any sense to Stock Exchange speculation, -for there has been almost no extensive speculation in this quarter -from 1907 down to November, 1912. To find the cause of the scarcity -of capital--and it is unquestionably scarce--he must consider the -immense destruction of tangible wealth in the last decade, and the -extraordinary tendency to convert floating forms of capital into fixed -and immobile forms. - -The amount of money expended in State roads since automobiles came -into popularity is probably ten times more than it was before; at the -election in November, 1912, a fresh total of $50,000,000 was voted for -“good roads” by the electorate in New York State. The building of the -Panama Canal has cost or will cost about $365,000,000; all over the -country large municipal or state works are under construction; here -in New York the contract for the Erie Canal calls for $150,000,000, -and for the city’s new water-supply system--the Ashokan basin and the -Kensico reservoir--$177,000,000, each contributing a share to the -depletion of the normal supply of working capital. Meantime, to cite -another instance, Congress appropriates $160,000,000 to pensions in a -single year, and $40,000,000, as a recent writer puts it, “for that -particular form of graft which consists in giving a $30,000 post office -to a thirty-cent village.” The railroads of the country alone require -to-day sums of money equivalent to the working capital represented by -all our bountiful harvests of 1912. - -Aside from these matters the critic should remember, in fair play, that -the currency famines which occur with periodic frequency in our country -are due in large measure to the non-elastic nature of the currency, -to its persistent absorption by the Treasury, and to the rigid -restrictions which these abnormalities impose on the volume of banking -credit. Conditions such as these contributed in no small measure to -our last great panic, and led to a premium on currency that made us a -laughing-stock among the nations. There has been no such money delirium -in England since the Napoleonic wars; no such condition in Germany -since the empire was founded, and nothing approaching it in France, -even in the commune and the war with Prussia. Yet in America we go on -wobbling uncertainly under the makeshift act of 1908, with its currency -associations and its emergency measures, and with the added fear of -what may come when the Act expires in 1914. - -The situation in America is substantially this: Business drives ahead -at a tremendous pace, with perils on every side, chiefly anxious to be -undisturbed. Matters run along smoothly for a while; then something -happens--there is too much optimism or too much confidence--and a -smash. It is not due to speculation in securities, because, as in 1907, -the stock markets are the first to see what is coming and to discount -it. But speculation in lands, or in manufacture, or in railroad -construction go on and on; there is too much work for the dollar -to do; the currency system breaks down; here and there a financial -institution closes its doors; public confidence is shattered, and the -whole credit system is disturbed. - -Then there arises a noble army of critics who, with the best intentions -but with insufficient knowledge and study, set to work to remedy -conditions they do not understand by methods untried and unpractical, -that only add to the general confusion. More harm than good results -when the physician, brusquely entering the sick-room, tells the -patient he is a very sick man, denounces the lobster that poisoned -him, and departs with a general condemnation of shellfish, but without -prescribing suitable remedies. Persons who denounce the relationship -existing between banks and stockbrokers are in most instances upright -citizens of high character, but until a little patient study of -conditions has enabled them to speak with authority upon matters that -are necessarily complex and delicate, they cannot accomplish any really -useful purpose. “The wicked are wicked, no doubt,” said Thackeray, “and -they go astray, and they fall, and they come by their deserts; but who -can tell the harm that the very virtuous may do?” - -The three leading groups of banking interests in Wall Street are said -to represent $500,000,000 of available capital each; the deposits in -what are called the “trust banks” amount to between $700,000,000 and -$800,000,000, while the banks of the whole country hold deposits of -$16,000,000,000. The savings banks now hold $4,450,822,522 which is -owned by 10,009,804 depositors.[45] - -As we have not yet reached the point of abolishing property altogether, -we may concede that these great combinations can do for individual -business and for the country at large what cannot be done without -them. They furnish the large sums which, from time to time, are -required by the Government, the State, the town, the manufacturer, -the tradesman, and the speculator, and to each of these--especially -the speculator--the tremendous development of this country is due. -Because of speculation in securities, the 26,000 million dollars’ worth -of capital represented on the New York Stock Exchange by the stocks -and bonds of railroad and industrial corporations have found a public -market through which necessary capital has been raised, and the total -increases yearly by about one billion dollars. This is “big” business, -to be sure, but it is the bigness of the whole people, for the welfare -of each is the welfare of all. - -Such large affairs naturally set people thinking; men want light; they -want to know, entirely aside from the doctrines of political platforms -and stump orators, to what extent the relation of capital to business -meets the test of proved effectiveness and economic worth. Especially -do they seek information in this oft-discussed matter of speculation in -securities and of the bank’s relationship to it; and here, fortunately, -there is no lack of results by which that relationship may be tested. - -Pragmatism tells us that as phenomena appear, become mighty, and -persist in accordance with natural processes, so they demonstrate their -ultimate good and their obvious usefulness. In its especial application -to the matters we have discussed, pragmatism teaches us to wait for -results in estimating a particular business method, and then to study -it in its relation to _all_ business. Applying this test to the use of -loanable bank funds by those who deal or speculate in the things that -represent American enterprise, we find that the very existence of these -enterprises depends upon the maintenance of these methods. Finally, -both the banks and the Stock Exchange are the trustees of the property -of others, and in that capacity their reciprocal relations are certain -to be attended by greater caution than if they dealt in a freehanded -way with their own property. The magnitude of their undertakings spells -responsibility, and responsibility breeds sobriety. - - - - -CHAPTER V - -PUBLICITY IN EXCHANGE AFFAIRS; CAUTIONS AND PRECAUTIONS - - -If a list of “don’ts” were compiled for the public that is interested -in the Stock Exchange, the first prohibition would be “don’t believe -all you read in the newspapers”; at least do a little independent -thinking before jumping at conclusions. The relationship between -the Stock Exchange and the metropolitan press is, with perhaps one -exception, cordial in the extreme. The newspaper man is a thinking -person; if he were not he could not hold his job. He knows, for -example, that the Stock Exchange is an indispensable part of the -machinery of modern business; he is aware of the fact that it maintains -a high standard of probity. He would be the last man to attack the -institution unfairly, and he is the first to defend it, editorially, -when misconceptions and unfounded suspicions are rife. - -But on the other hand, newspapers want news; their circulation and -the popularity of their advertising columns depend upon the skill -and ability with which they parade before the public everything that -happens. If a politician or a clever and ambitious lawyer makes a -startling charge against an institution that occupies a conspicuous -place in our affairs, that is news, and the newspaper must print it. In -order to make the news attractive to the jaded palate of its readers -the dry-as-dust parts must be skimmed off, and seasoning added in such -peppers and vinegars as the occasion permits, with a final dash of -spice in the shape of pungent headlines that will arrest and hold the -appetite. - -Somewhere off in the dim recesses of the editorial page there may -be a sober (and deadly dull) analysis of the matter, revealing the -politician or the notoriety-seeker in his true colors, but this is -often ignored by the reader. What he wants with his morning coffee is -his daily thrill, and he finds it under blatant headlines on the first -page. Because he wants it, and because he won’t be happy till he gets -it, the newspaper gives it to him on a generous scale. Until we arrive -at a Utopian state in which art, religion, and kindred abstractions -satisfy the mind to the exclusion of fires, riots, suffragettes and -Stock Exchanges, we cannot blame the newspapers for giving us what we -want, nor the politicians for helping the good work along. - -And yet, as Mr. Bryce pointed out in his lectures at Yale on “The -Hindrances to Good Citizenship,” this willingness to accept as -conclusions the scare-heads in newspapers which are not, and never -were intended to formulate serious opinions, lays us open to the -charge of indolence; “the neglect to think” thus becomes a serious -phase of a deficient sense of civic duty. In countries where men are -imperfectly educated, or in rural districts where means of acquiring -knowledge are small and scant--where men lead isolated lives out of -reach of libraries and learning--they ask advice of the priest or the -village schoolmaster, and thus vicariously discharge the duties of -citizenship without any real knowledge of the problems before them and -without contributing to the solution of those difficulties to which the -ever-increasing complexity of our civilization gives rise. - -Now if we apply this line of thought to the study of such economic -problems as arise in our country from time to time, we find that the -same conditions apply. We fancy ourselves immeasurably better off -than the uncultured frontiersman who must rely for his information -upon the priest or the schoolmaster, but in our dumb submission to -the rant of the hustings and the scare of the headlines are we really -discharging the functions of good citizenship? Are we not indolent? -I can have a lively sympathy for the half-breed in the Canadian woods -seeking information as best he may, but for the man in our populous -and cultivated communities who is too lazy to turn to our great public -libraries for light on the vexed and vexing economic problems of the -day, contenting himself with the half-baked opinions of demagogues and -quacks--for such a man it is difficult to say a good word. There is -hope for the one; the other is the most menacing and discouraging type -in our citizenship. - -Take up the morning newspaper almost every day and we find the crude -essence of this misinformation paraded in a way that makes us sorry -for a public that cries for such stuff. A custodian of public funds, -collected for the purpose of erecting a monument, is found very -recently to have squandered the money entrusted to him. One of his -co-trustees, who must have been somewhat lax in his duties, bewails the -loss and seeks to enlist sympathy for himself by hazarding the opinion -that “the money _must have been_ lost in speculation in that hell-hole, -the Stock Exchange.” - -This from a former army officer and a gentleman, who subsequently -states that he has no idea what became of the funds, but “cannot think -of any other explanation.” “Hell-hole” and the “Stock Exchange” -constitute a good repast; the headline artist contributes his quota -to the feast, and so a portion of the public that feeds on this meat -arises from the table with the satisfying conviction that another awful -indictment has been leveled at the Exchange, notwithstanding an utter -absence of proof or evidence of any kind tending to show that the -delinquent trustee had lost a dollar in Wall Street. And suppose he did -so lose it, what then? Is the Stock Exchange or any other market-place -a “hell-hole” merely because a thief whom nobody suspects squanders his -money there? Suppose he had spent it in automobiles, or in real-estate -speculations, or in campaign contributions, or in foreign missions, -would the same amiable characterization apply? - -Another familiar instance of making Wall Street the scapegoat is seen -in the “explanations” of defaulting bank clerks. “When a young bank -employee,” says a financial journal, “with a wife and two children in -Flatbush, and a salary of something less than $2000 a year, takes to -entertaining angels, more or less unawares, in the Great White Way, -and matching his trained financial mind against ‘bankers’ of another -kind, he always blames Wall Street when the inevitable smash comes. -He has been ‘speculating in stocks,’ he says. He thinks, and a great -many people equally silly agree with him, that he thereby shifts the -blame for his extravagance and folly to other shoulders. Entirely -well-meaning people, without the slightest conception of the real -purposes for which the financial centre of a nation exists, say: ‘Here -is another indictment against sinful Wall Street. Let us kiss away -the tears of this misguided young man, who now promises to be good.’ -They never think of asking the misguided young man to show documentary -evidence of his losses, which of course every broker must necessarily -provide, and must keep in duplicate as a matter of record.”[46] - -A police officer whose salary has never exceeded $3000 a year is -arrested, and it is shown that he possesses a fortune of $100,000. -Where did he get it? Why, he made it in the course of nine months -of remarkably successful speculation in Wall Street, and one of his -henchmen, too stupid to know that everybody in Wall Street keeps a set -of books, promptly came forward to endorse this explanation. Proofs -were sought by the authorities, and the lie was, of course, exposed, -but the readiness with which the frugal officer sought to fall back -upon this hoary explanation shows that it is a permanent fixture of the -crook’s property-room, and that in the stage-setting for his sordid -accumulations there must be the familiar Wall Street background. - -Another notorious pastime, that seems to be well known to every one -but the officers of the courts, consists in the practice of fraudulent -bankrupts in producing in court a mass of worthless securities as -evidence that the bankrupt’s money has been “legitimately” lost in -speculation. The certificates thus exhibited are beautifully engraved -memorials of defunct mining concerns, sold at so much a pound by -well-known dealers. It is related that a person who wished to keep ever -before his eyes a lesson and a warning once papered the walls of his -house with a wagon-load of this junk, which he was able to purchase at -less than the price of ordinary wall paper. - -Any scamp who intends to “lie down” on an unprofitable contract can buy -$1,000,000 nominal of the stuff at waste-paper rates. He is assured -of the sympathy of his family and friends, and, if it does not occur -to the lawyers to inquire who his brokers were, and when, where, -and how these purchases were made, he stands a good chance of going -the way of all undetected swindlers, notwithstanding the fact that -documentary evidence of his purchases, if there were any, is always -available. In this way another indictment is framed against Wall Street -in the minds of thoughtless people. They seem to ignore the obviously -improbable nature of the story, preferring rather to make Wall Street -the scapegoat, and by “Wall Street,” in the majority of cases, they -mean the Stock Exchange, yet the Stock Exchange had no more to do with -it than Trinity Church, at one end of Wall Street, has to do with a -stevedore’s crap-game at the other end. - -So far as concerns the case of the crooked bank clerk, it is perfectly -well known, or at least it should be, that no member of the New York -Stock Exchange is permitted under its rules to have any speculative -or investment relations whatever with employees of banks or trust -companies, or of other brokerage houses. The Exchange authorities -enforce this rule to the letter. Disgrace and expulsion faces the man -who would attempt it. More than that, members are unusually careful -in investigating customers’ accounts for reasons involving their own -safety in actions that may be brought in the courts; so rigorously is -this care exercised that accounts are repeatedly refused where the bona -fides of the customers are not fully understood by at least one of the -firm’s partners. - -Furthermore, any negligence on the member’s part in this important -matter, or in other matters affecting the general welfare of the Stock -Exchange, places him at once within the all-embracing grasp of that -one of the Exchange’s by-laws which has to do with “any act detrimental -to the interests of the Exchange.” This is a large order, and its -importance is well understood by the members. They know, and all those -who so freely criticise the Stock Exchange could find out if they -inquired, that the power of the Board of Governors to supervise every -action of its members is vastly greater than any power that could be -vested in the courts. There are constitutional limits to the authority -of common law; there are no limits whatever to the powers of the -governors in dealing with members. - -This leads us to consider another popular criticism of the Stock -Exchange, based on its unwillingness to abandon its present -organization and incorporate under State regulation. The public seems -to feel that this reluctance to submit to State or Federal control -shows that the institution is trying to conceal something, yet nothing -could be further from the fact. The Exchange does not incorporate -because the interests of the public, which it is bound to conserve, -would suffer enormously by such a step. “In its present form,” says the -_Wall Street Journal_, “the Stock Exchange is a private organization. -It can inspect any member’s books at any moment. If it suspects him of -wrongdoing it can tap his telephone wire, and has done so in the past. -It can terminate his membership for conduct which no legislation could -possibly touch. One reason, in fact, for its admittedly high standard -of probity is the power, at once democratic and despotic, exercised by -the Governing Committee elected by all the members. - -“But if the Stock Exchange were reorganized under State supervision, -much of this power would be taken away. Members would possess rights -which no governing committee could ignore. They could resort to -practices legally right and ethically wrong, which under the present -system would be visited by swift punishment. Any member of the public, -now, who can show the Stock Exchange committee an act by a broker -toward him legally defensible but morally wrong, can secure that -broker’s expulsion from the Stock Exchange. Under State incorporation -he could only obtain redress by prolonged litigation.... No legislative -safeguards are needed. The Stock Exchange now possesses a power of -supervision over its members which neither Congress nor the State -legislature could give. The only power our lawmakers really possess in -the matter is to limit that supervision; and for this, if for no other -reason, the Stock Exchange should fight incorporation to the last, and -should take every proper means of publicity to range public opinion -behind it.”[47] - -An instance in which Wall Street in general, and the Stock Exchange in -particular, occasionally comes under the ban of more or less hysterical -public condemnation, results from the work of company promoters and -swindlers, wholly outside the Exchange’s jurisdiction. In spite of -the vigilance of the postal authorities and the police, every now and -then a swindler finds his way into this forbidden ground, and here he -plies his trade. Sometimes it is a land scheme, sometimes it is timber, -recently it was wireless telegraphy, often it is a gold mine. - -The promoter of these enterprises does not permit himself or his -affairs to come under the scrutiny of the banks, the Stock Exchange, -or the Clearing House. He fights shy of the curb market as it is now -organized, and avoids the watchful eye of the metropolitan newspapers -that enjoy the pastime of exposing frauds. His ways are ways of -darkness. His methods are mailing lists; his victims are that numerous -progeny born every minute; the lure is the engraved letter-head with -its “Wall Street,” its list of “Directors,” and its subtle assurance -that this precious property now literally “given away” bears the -endorsement of the elect, and is known and approved by the whole -financial community. - -Whenever he can do so, the artful gentleman behind this bait contrives -to have a market for his wares. He cannot do this anywhere in New -York, for the curb market, once the refuge of the swindler, is now -closed to him, thanks to the improved morale of the curb brokers -themselves, and to the recommendations of the Hughes Investigating -Committee. Consequently the dishonest company promoter is forced to -manufacture his market in another city, where fluctuations in the price -of his wares are made to order, usually on a rising scale, without -interference by the authorities. - -More often still, this market and its rising prices do not exist at -all; in any case it is only a fraudulent attempt to excite the cupidity -of speculators into the belief that there is active trading in the -particular stock offered for sale. “The mines,” says the Chairman of -the Hughes Committee in discussing these swindling operations, “are -situated in distant places, as Nevada, Alaska, Canada, Mexico, and even -in South America. In proportion as they are remote, inaccessible, and -subterranean, they are attractive to the class whom Tacitus had in -mind when he said: “_Omne ignotum pro magnifico_.”[48] - -The halcyon days of these enterprises are now drawing to a close. Their -field of operations is becoming more and more limited, the postal -authorities are redoubling their energies, the newspapers are closing -their advertising columns, and the victims who have birthdays every -minute are, it is hoped, growing wiser. In any case immense losses -have been incurred, and immense harm done. To appreciate the extent of -it, one has but to look over the circle of one’s own acquaintances, -and count the worthless specimens of the engraver’s art that have -found a resting-place--permanently, I fear--in homes ill-prepared to -house them. Each one of these chromos has left its sting--each one has -excited a bitterness and resentment that, in the misdirected anger of -losers who will not see their own folly, is too often flung at Wall -Street and at the Stock Exchange. - -The bucket-shop method is better known and easier to detect--hence it -is rapidly being exterminated. “Bucketing,” as it is called, usually -flourishes in small towns at a considerable distance from New York. -Formerly it thrived in the larger cities, even those adjacent to the -Metropolis, but it has now been driven from these places. It professes -to trade in stocks for its customers, and its office windows are -usually decorated with signs that indicate, though they do not always -say so plainly, that the house is identified with “the Stock Exchange.” - -It allows its customers to trade on what is called “a two-point -margin,” that is to say, the buyer or seller is “wiped out” when the -market has fluctuated two points against the price at which the trade -is made. The word of the house must be accepted for the veracity of its -prices, which, however, are supplied to it by telegraph from New York. -Bear in mind that these prices are not telegraphed to the customer, -but to the mysterious persons in the rear office of the shop. They -call themselves brokers--this bucket-shop fraternity--but they are not -brokers in any sense by which that elastic term is used. They have not -even the “redeeming vices” of gamblers; they are swindlers. - -The trader in such a place starts with all the odds in favor of the -house. To be exact he pays two commissions and the market “turn” is -against him _ab initio_. If the stock is 100 bid, 100¼ asked, he buys -at 100¼ always. If he sells at the same quotation, he sells at 100. He -could not sell in the former case at 100¼, nor buy in the latter case -at 100, so he starts ¼ per cent. “to the bad.” If, then, he bought -at 100¼, when the price is 98¼–½, his two-point margin is exhausted, -although the price has actually declined only 1¾ per cent. Thus he is -required to bet heavy odds on what is really no better than an even -money chance, even allowing that the prices are honest. - -But they are not honest, because in the large majority of such -transactions the prices are “rigged,” that is to say, the bandits -who run the shop run it to win and not to lose, and “fix” the prices -accordingly. The player is thus required to give odds by laying 3 to 4 -not on what the price of a stock will be, which is ruinous enough in -all conscience, but on what his opponent will choose to make it! Since -we are talking of gambling now and not of any real transaction, we may -as well adopt the vernacular of the fraternity and say plainly that the -bucket-shop man holds the stakes, cuts, shuffles, and deals the cards, -and then telegraphs you what your hand is. And the loser at this joyous -pastime thinks he has been robbed by Wall Street. - -The game works against the player in yet another sense, as the _Wall -Street Journal_ points out, for when you buy stock you are entitled -not merely to the stock itself, but to all the privileges which it -carries, and not the least of these privileges is the effect which -your purchase will have on the market. That is to say, if ten thousand -purchasers throughout the country should buy even small amounts of -a certain stock on a given day, the combined effect of all these -purchases would undoubtedly lift its price on the Stock Exchange, and -thus we see that each buyer’s action carries with it a privilege of -no inconsiderable proportions. But the keeper of the bucket-shop does -not buy any stock for you at all; he merely makes a bet with you as to -what the price will be--and so, having robbed you of your money, he now -robs you of the privilege which goes with your money, since the alleged -purchase of a million shares of your stock in bucket-shops would not -have the slightest influence on its price at the Stock Exchange. - -The man who has saved money by his own enterprise and thrift is a -fool if he gives his savings to mining “bonanzas” through the itching -palms of promoters, or to bucket-shops through the lure of slender -margins. The very fact that promoters always play upon the theory that -distance will lend enchantment to the view, and solicit their funds -solely by means of prospectuses, should be a sufficient warning to the -most credulous. A word to his banker, or a letter to any responsible -institution in Wall Street, will supply him with the necessary -information and save him from the possibility of loss. - -As to the bucket-shops, if he is in doubt, he has but to follow the -same procedure. The New York Stock Exchange authorities will gladly -tell him whether the so-called “banker and broker” is really a member -of the Stock Exchange, and the local bank nearest at hand will expose -any fraud if it is called upon for information. As to the two-point -margin bait, it is a good rule that the smaller the margin asked for, -the less strength there is behind the house that asks it, and just in -proportion as the margin requirement diminishes so a suspicion of the -solvency of the firm should become fixed in the mind of the customer. -This warning applies to stockbrokers no less than to bucket-shoppers. -If the stockbroker takes from you a ten-point margin, and from somebody -else a two-point margin, you may be sure your money is being used to -finance the other customer’s trade, and you should lose no time in -withdrawing your funds from such a house.[49] - -I often think that those who so freely criticize the Stock Exchange -would have applauded it could they have witnessed the fight between the -Exchange and the bucket-shops. In England, because telegraphs are a -Government monopoly, the transmission of prices by or to bucket-shops -is effectually barred, and the same is true of the telephone. But in -this country the transmission of prices by wire is not a breach of law, -and the difficulties that have attended the attempt to suppress the -transmission of racing news by wire to poolrooms shows that even if it -were prohibited there would be great difficulty in its enforcement. - -Notwithstanding these obstacles, however, the Stock Exchange labored -zealously to close bucket-shops long before the officers of the law -became active, and, while the work thus done was not published -broadcast, it was none the less effective. Many a bucket-shop -proprietor doing business a few years ago under a high-sounding company -title probably never knew what hit him when the raid took place. It was -the strong arm of the Stock Exchange working unostentatiously that did -it, and in that good work it saved from further losses a large number -of innocent people who used the establishment with no knowledge of its -real character. - -As long ago as 1875, in its contracts with the telegraph company, the -Stock Exchange began restrictive measures to prevent its quotations -from reaching the bucket-shops. In 1878 still more forcible measures -were employed, and in 1882 positive steps were taken by which the -Exchange authorities personally inspected the telegraph company’s -quotation contracts with its patrons. To-day this is carried to such an -extreme in the determination to protect the public from the impositions -of those who might in devious ways convey these quotations to improper -hands that even members of the Exchange may not install wires from -their offices to outsiders until the proper committee of Stock Exchange -authorities has viséd the application. - -Meanwhile, a secret-service has been at work, silently ferreting the -hidden, underground channels in which the bucket-shop is forced to -conduct its operations. Thanks to this good work and to that now done -along similar lines by the Federal authorities, this form of rascality -is rapidly disappearing. Is it too much to hope that at least a part -of the unmerited criticism of the Stock Exchange by the victims of -bucket-shops may also disappear? - -In heading this chapter “Cautions and Precautions,” my purpose was not -merely to warn the credulous outsider against the news items of the day -as related to the Stock Exchange, nor was it solely to point out to him -the pitfalls and dangers that exist under the Wall Street mask. I had -in mind also a word of caution to Stock Exchange members themselves. -That these gentlemen are more sinned against than sinning is, or it -should be, apparent to anybody who has taken the trouble to learn the -A B C’s of the business. Such a man knows that Stock Exchanges occupy -an important place in the mechanism of modern business; he knows, too, -that just in proportion as their functions enlarge and the scope of -organized markets increases, so persons will be found who foolishly or -dishonestly abuse the facilities there afforded. - -“Reflection,” says a recent writer, “seems to have little part in the -intellectual equipment of the assailants of organized markets. The fact -that the stock market is sometimes abused by people who know nothing of -its purposes or are incapable of understanding the mighty influences -which dominate it, is no reason for considering it as a harmful -excrescence on the body politic.” - -This fact established, one who has been a member of the Stock Exchange -for many years may, in a spirit of complete loyalty to the institution, -comment freely on some of the mistakes within the Exchange itself, -errors of judgment or sins of omission that have given to the popular -criticism of the day its one supporting prop. Admitting mistakes freely -is the surest way of correcting them; frequent reminders of them serve -to keep one on guard against their recurrence. The history of deposit -banking, for example, has been, like the history of the Stock Exchange, -a story of gradual development to meet growing conditions, and this -is true also of the history of note issues, joint stock companies, -clearing houses, cable transfers and of all the instruments that enter -into that economic structure which gives mobility to capital and -flexibility to credit. - -In the very nature of things the development of each part of this -gradually devised machinery has been attended by mistakes, by errors -of judgment, and by occasional wrongdoing, yet we do not condemn the -national banking system because there were once wildcat banks; we do -not utter hasty judgments on stock-companies because in other days they -were badly organized and incompetently managed; we do not withhold -our support from railways because they once erred by pushing too -ambitiously into projects that ruined innocent stockholders; we do not -abandon our form of government because there was once civil war. No, -but we try to keep all these things in view in order to profit by them, -and to see to it that they do not happen again. We say of individuals -that no man’s vices are sufficient reasons for not admiring his -virtues. Why not apply the same code to business? - -One of the mistakes of members of the Stock Exchange in the past has -been in trying to do too much business on too little capital. This is -a subject that calls for plain speaking, since it directly caused two -Stock Exchange failures in recent years, failures that were, I am sorry -to say, essentially the result of dishonesty. Every Stock Exchange -house is looking for business, and a house with small capital sometimes -gets more than it should attempt to handle. Such a house borrows from -the bank, as all houses do, and allows its bankers a 20 per cent. -margin; so far so good. But it accepts business from its customers on a -10 per cent. margin, and this means financing the difference out of the -firm’s capital. If the capital is large, the business is safe, but if -it is small, the house finds itself “loaded up,” as the phrase is, and -is then in such a predicament that it must either summon enough moral -courage to refuse business altogether and so advertise its limitations, -or abandon its moral courage, sell its customer’s stocks “short” and -incur the risk of buying them back cheaper. - -The latter course is dishonest; it is in fact nothing more or less than -a form of “bucketing,” since the customer must lose for the broker to -save himself, while, if the customer wins, the broker may not be able -to pay. This is not a common practice of course--first, because 99 -per cent. of the members are absolutely honest; second, because the -majority of those who carry accounts on the books of Stock Exchange -houses are wise enough to acquaint themselves with the firm’s resources -and to withdraw when too much business becomes apparent, and, third, -even though a broker were not himself essentially honest, he would -not dare expose himself to the expulsion and disgrace that would -attend exposure. Nevertheless, the thing has been done, and it may -conceivably occur again. How then may it be avoided? - -As the Stock Exchange is, as we have seen, an unincorporated body with -a set of rules which no legislature and no court could enforce without -depriving a man of his constitutional prerogatives, it is obvious that -this and all other reforms must come from within; all the many reforms -that are constantly lifting the Exchange to a higher level come from -that quarter. There are 1100 members of the Stock Exchange and perhaps -600 of these are engaged in active commission business. A committee of -the governors can enter any member’s office at any time, and demand -every book or record without reserve. It has absolute power to compel -him to do anything that in its wisdom seems desirable. If he is doing -too much business on too little capital, he can be forced to restrict, -or to retire from business altogether. Failure to comply immediately -means expulsion and a peculiarly stinging disgrace. Naturally in -the face of these despotic powers any plan of mutually guaranteeing -brokers’ accounts, such as that employed by Lloyds in London, or by the -_Agents de Change_ on the Paris Bourse, would seem unnecessary. - -The remedy lies, first with the members themselves in striving to -attain continually to a higher standard of business morality, and -second with increased watchfulness by the committee having this matter -in charge. In point of fact it is apparent that both these solutions -are now being employed to a greater extent than ever before. The two -failures that occurred some years ago as a result of this iniquitous -practice hurt the Exchange, and stung the members to the quick. It can -never happen again if the vigilance of the governors can prevent it, -and yet every now and then a bank fails even under the watchful eye of -the bank examiner. No committee and no group of committees can watch -the books of 600 houses engaged in a business in which the dividing -line between sound and unsound business may be crossed and recrossed -with surprising suddenness many times a day. The members themselves -must look to this, and that is what they are doing to-day, as never -before, with an earnestness begotten of real pride in their great -organization. - -If they do not do it, if they relax in any degree the vigilance upon -which the proper conduct of their business depends in this important -respect, they will be forced sooner or later to resort to the plan of -guaranteeing the accounts of their fellow members, or to submit to -that form of government incorporation or regulation which must impair, -if it does not actually destroy, their usefulness. Members must also -see to it that manipulation in its improper forms is driven out of the -Exchange, and that every conceivable precaution is taken in the listing -of new securities. These matters I shall discuss elsewhere. Meantime it -is cheering to note that Stock Exchange failures, whether arising from -this or any other cause, are diminishing in number. In London, at the -account day immediately following the failure of the house of Baring, -thirty Stock Exchange houses announced their inability to meet their -obligations. Certainly the New York Stock Exchange has not witnessed so -many failures in ten years. - -One of the many excellent results of the work of the Hughes Committee -from the standpoint of the Stock Exchange was the publicity that came -of it. Critics of the institution had long found fault with it because -of its atmosphere of aloofness, the air of mystery that seemed to -surround it, its silence under attack, and its apparent unwillingness -to defend itself from adverse comment. This reticence, however, while -it did harm, was more apparent than real. In so far as the Stock -Exchange is concerned the advantages of publicity have long been -recognized. The difficulty has been in having its purposes and its -methods properly attested by competent authority in a way that would -enlighten the public and carry conviction. Members and friends of the -Exchange feel very strongly that in this day and age, when the spirit -of publicity is in the air, the Stock Exchange should fall in line with -a resolute determination to assert itself and make itself heard on all -proper occasions. - -If a sub-committee of Congress retains as counsel a shrewd lawyer who -by devious ex-parte methods reads into the record and thence into the -newspapers only such biased and prejudiced information as will do harm -to the Exchange, while rigidly excluding all that properly belongs -there by way of refutation and explanation, energetic steps should be -taken to remedy this obvious injustice by invoking that spirit of fair -play which is essential to any judicial inquiry. These are not the days -of the Inquisition. We have progressed beyond the point of the Star -Chamber. Members of the Stock Exchange know that they will receive fair -play from the newspapers whenever they seek it, but they cannot expect -to find their side of the case stated unless they themselves take the -necessary steps to secure its presentation. And the way to do this is -to proceed with energy and determination against every avenue from -which the malicious slander or the insidious suggestion emanates. - -The time has passed to sit supinely under every sinister attack and -imagine that a consciousness of rectitude will suffice as an answer. -Let the Exchange bestir itself. If, as happened very recently, a judge -on the bench can so lose his poise as to say to a common thief at the -bar, “You have committed a petty theft and you must go to jail--but -had you gone down to the Stock Exchange and stolen a million you would -go free”--such an unworthy utterance should be handled promptly and -without gloves by the Exchange authorities, and the same course of -treatment should be applied vigorously to every thoughtless minister -of the gospel and every cheap politician who, because the Exchange -has so long remained silent, may think that such silence entitles him -to utter any libel that comes to mind. The newspaper that publishes -the original utterance of this judge or that preacher will publish -also the steps taken by the Exchange to bring him to book, and even -though the slanderer may escape the consequences of his act through -the technicalities of the law, or otherwise, the knowledge that the -Exchange is at last aroused from its lethargy and in a fighting mood -will serve to deter others from similar indiscretions. I violate no -confidence when I say that henceforth the Stock Exchange will be found -defending itself manfully, and I venture to remind all noisy seekers -of notoriety that “thrice is he armed who hath his quarrel just.” - -The Stock Exchange has felt, since the report of the Hughes Commission -in 1909, that such a report, by such a body of men, would inevitably -stay the hand of many of its detractors by showing them just what -the Exchange is trying to do, and just how the work is done. “The -committee,” says its chairman, “was in session about six months. Its -expenses were paid by the members themselves, and since frugality was -a necessity the services of the stenographers were dispensed with, the -members taking only such notes of the testimony of witnesses as each -one deemed important to the matter in hand. The officers of all the -Exchanges in New York City were invited to appear before the committee -and answer questions both orally and in writing, and all of them -responded promptly and courteously, as often as they were asked to do -so. Many volunteer witnesses, citizens of the State, were heard. None -such was refused a hearing. Citizens of other States were not called, -or accepted, as witnesses unless they had given evidence, by published -writings or otherwise, that they had something of value to contribute -to the discussion.”[50] This committee was composed of Horace White, -Chairman; Charles A. Schieren, David Leventritt, Clark Williams, John -B. Clark, Willard V. King, Samuel H. Ordway, Edward D. Page, Charles -Sprague Smith, Maurice L. Muhleman. - -Nobody who read these names doubted the independence and public spirit -of its members. It was precisely the sort of committee that all -fair-minded men welcomed. The high character of the members carried -assurance of their good faith; their wisdom and practical experience -meant a critical analysis of the subject; their independence of -spirit made a whitewash impossible. Here then was the long looked for -solution.[51] If there were abuses, nobody was more anxious to know of -them and of the remedies for them than the members of the Exchange; -if indefensible conditions existed nobody stood readier to correct -them. It was felt that this was the first and greatest step toward -publicity under the right conditions, and that a valuable contribution -to the popular knowledge of an intricate and greatly misunderstood -subject would result. There was nothing ex-parte or one-sided about -the committee’s deliberations; everybody with a grievance might state -it, and both sides were accorded fair play. But, _mirabile dictu_, -the very fact of its fairness is found, three years later, to afford -a reason for flouting it at the hands of counsel for a congressional -sub-committee that will not hear both sides! Is there anything just -or equitable in the proceedings of such a body, or in the prejudiced -emanations of its precious lawyer? Is it conceivable that the -law-making branch of our government will give serious heed to a report -thus conceived in bias and born in inquisition? I think not. - -Passing to more agreeable topics, the late Addison Cammack is said to -have remarked on one occasion that publicity was ruining the business -of Wall Street and the Stock Exchange and would ultimately drive it all -away. Those were the days of inadequate and unreliable balance sheets, -of suppressed reports of earnings and assets, of accounts that were -never subjected to independent audits, and of a general atmosphere of -mystery that led to financial abuses of all kinds. As a result of those -conditions there was created in the public mind another vague aversion -toward the Stock Exchange, and a popular prejudice which has been -hard to dispel. Cammack had been brought up in the old school; he saw -what was coming, but he mistook causes for effects. He would probably -turn in his grave could he see the new conditions and contrast them -with the old. As a matter of fact nothing could be more democratic -in principle than the way the business is conducted nowadays. The -rights of stockholders to information, the reports and balance -sheets submitted to them, the mass of Wall Street financial material -in the magazines and journals, the stock ticker, the news ticker, -the printed news bulletins, the card index system, the statistical -manuals and the quotation lists published in the morning and evening -newspapers, together with the market letters constantly circulated by -brokerage houses, these are evidences that the public is entitled to -full information and that many avenues by which it may safeguard its -interests are always open.[52] - -It has long been known that investors and speculators in America enjoy -vastly more safety in their market operations through these various -avenues of publicity than do investors and speculators abroad. There -are no tickers worthy of the name across the water, and the daily list -of business done, as published in our newspapers, with bid and asked -prices and total transactions in detail, is unheard of among all the -Bourses of Europe. The eminent French economist, Paul Leroy-Beaulieu, -speaks very earnestly of the superiority of our New York Stock Exchange -system in this matter; he says the need for a similar method in France -is “very urgent,” that the information thus spread broadcast is “very -instructive,” that the pledge of publicity “is better assured in the -United States than in any other country of the world,” and that an -immediate reform along these lines is “absolutely necessary” in Paris -in the interest of the public.[53] - -This leads to another word of caution suggested by the fact that the -public, despite what is done for it, does not always avail itself of -these safeguards. Men buy worthless mining stocks without bothering -to inquire into their bona fides. They put their savings into new -and untried enterprises and they neither read the balance sheets nor -attend the meetings. A thousand stockholders will attend a meeting in -London and they will have their questions answered whether the majority -in control likes it or not. In New York almost nobody attends these -meetings. The stockholder’s right to information is absolute, but he -does not go and get it, and so finally when something goes wrong he -writes angry letters to the newspapers and damns both Wall Street -and the Stock Exchange because he has been burned, although the fire -escape and the extinguisher were always at his hand. “It is all very -well” says the _Wall Street Journal_, “to talk about what the law, -the newspaper press, and the Stock Exchange can do to protect the -investor, but the investor himself can do more than all his protectors -put together. His investment, however conservative and secure, carries -responsibilities as well as privileges, and it is his duty to discharge -the one in order to safeguard the other.”[54] - -He must learn to make inquiries, to discriminate, to use his wits, to -read mortgages, to study sinking funds and operating ratios. He must -eschew the financial columns of questionable newspapers and confine -his attention to those of established probity. He must not put all his -investment eggs into one basket. The Stock Exchange cannot do all this -for him, but it is always ready to help him, and the information he -requires may be had for the asking. - -In a recent public address the president of a great American railway -sounded an encouraging note. “We railway men,” he said, “have been in a -practical school, having taken a thorough course in working economics. -We have learned that a railway can thrive only as a result of the -prosperity of the community it serves, and that the best policy, from -the viewpoint of permanent railway interests, is one of co-operative -helpfulness.”[55] The New York Stock Exchange has learned the same -lesson, in a similar school. As an institution it realizes that if it -is to grow in prosperity the public must grow, and that as the public -is attracted to investment and speculation by the soundness of the -institution through which it deals so it requires and must receive full -information and an assurance of fair play. “Co-operative helpfulness” -is the only way. Members of the Exchange who become discouraged now and -then must bear this in mind. In the face of every harassing annoyance -they must never cease their work of keeping their house in order, and -of inviting that portion of the public that is open-minded to lend -a hand. Their labors resemble the task of Sisyphus; like him they -must cultivate the spirit of “everlasting hope,” and when unworthy -assailants seek to prejudice the popular mind, they must stand forth, -give blow for blow, and never say die. - -Pessimists may blind their eyes to the manifold evidences of material -progress on every hand, but just as the workshop, the farm, the -school, the hospital, and the bank, each supplies proof of continuing -improvement, so also in its sphere of usefulness does the Stock -Exchange. Within a few years, for example, it has rid itself of the -unlisted department, and this may very properly be mentioned as -a distinct progression. Under the old system a limited number of -industrial corporations were permitted to obtain a market on the -Exchange for their securities, although they furnished but few figures -to the Listing Committee in return. This was a practice wholly at -variance with the duty of the Exchange to protect the investor, since -it practically assures him that corporations admitted to the Exchange -have demonstrated their worth to the authorities. That character and -countenance should be given to the so-called “unlisted department” was -a mistake, and it has been abolished. - -In this reform the Listing Committee accomplished a twofold blessing in -setting the Exchange right with the public by ridding their institution -of anything approaching the blind pools of early days and at the same -time forcing certain wealthy corporations to abandon their policy -of concealment or lose the privilege of the floor. Certainly if the -country’s leading steel corporation can afford to take its 150,000 -stockholders and its 250,000 employees into its confidence and treat -the whole public, including its competitors, with entire frankness, -there is no insuperable difficulty about the others. In any case the -desire to protect the investor, which is the controlling motive of -the elaborate restrictions imposed by French and English laws in new -security offerings, has advanced far in this country within the last -few years, and the farther it goes the more popular it becomes. - -That there is still work for the Listing Committee to do goes without -saying. One of the most promising improvements that comes to mind at -the moment is the one employed in London, where shares of new companies -are not admitted to the Board unless a sufficiently large allotment -has been made to the public. This is also the rule in New York, but -perhaps we may add to its effectiveness by increasing the size of the -public allotments. Another praiseworthy feature of the London system is -that which has to do with vendor’s shares, which are not listed until -six months after the admission of the company’s securities. Under this -plan if one or more individuals secure a block of stock in payment for -properties in the concern, they are prevented from unloading those -shares on the public until a sufficient time has elapsed to determine -the merit of the property. - -Another instance of progress made in recent years in the internal -mechanism of the Exchange, is the abolition of fictitious transactions -or “wash sales,” utterly indefensible transactions not enforceable -at law. These were always prohibited under the rules, yet despite -this a flagrant instance of a violation was discovered in which the -guilty were made to suffer. So far as I am aware it was the only case -on record in which obvious collusion between buyer and seller in a -Stock Exchange transaction was shown. The broker in this instance must -have known that the Committee would demand his books and that it would -appear that no genuine bargain had taken place. If he did not know -it, he knows it now. The example made of him will, I fancy, prevent a -recurrence of the episode. - -This leads to the subject of “manipulation,” as it is termed, or the -uses to which the facilities of the Exchange are sometimes put to give -certain stocks an appearance of activity out of proportion to their -normal movement. Now we must assume as our major premise in discussing -this matter that any artificial interference with the natural operation -of supply and demand is pernicious; from the standpoint of economics -it is harmful. The Stock Exchange has nothing to conceal, and it -recognizes not only that manipulation exists, but that at times it -assumes the proportions of a real evil. Therefore it is doing what -it can to stop it, and it will continue to do so. Whenever unwonted -activity arises nowadays in a security long dormant, as happened very -recently in the stock of a certain gas company, the governors of the -Exchange entrusted with such things take the matter in hand and put a -stop to it if obvious manipulation can be shown after investigation. -The public and the newspapers know nothing about it; the vial of their -criticism is poured forth only when something escapes the watchful -eye of the Exchange authorities, as must inevitably happen now and -then. But if these critics could know how indignant the members of the -Exchange became when the Hocking Coal episode occurred, and if they -could see the resolute determination of all hands to prevent another -such occurrence, they would at least give the Exchange credit for -faithfully attempting to suppress manipulation of the flagrant sort. - -The fact is that all forms of manipulation are by no means improper; -some of it performs a useful service and is a necessary and legitimate -part of the functions of the Exchange. To understand how true this is -let us consider, for example, the case of a corporation that has been -organized, let us say, to develop a group of recently discovered coal -properties in new territory. This is legitimate endeavor as applied to -American enterprise; in a broad sense it is the spirit of adventure and -speculation that has made our country commercially rich and powerful. - -Now, in order to develop this enterprise, it is necessary to ask the -public to buy its shares or its certificates of debt and thus become -partners in the undertaking. In that way our great railways were built -and our Western country opened to progress. But the public will not -support the new enterprise until it knows something of its merits, and -accordingly the company introduces its property through the medium of -that great central market-place--the Stock Exchange--furnishing the -Exchange authorities with its credentials in minute detail. - -At this point the so-called manipulation takes place. The securities -are new, the company may wish to advertise them, attract attention to -them, and solicit a public interest in the laudable enterprise that -lies behind them, all of which is as right and proper as it is for any -merchant to establish a market for any new article on his shelves. To -accomplish his purpose the merchant must first fix an arbitrary price; -if the public will not buy at that price he must “manipulate” a lower -price, and in all his subsequent dealings there must be manipulation -of one form or another designed to conform to the supply and demand in -that particular article. - -The men behind the coal company in question must do the same -thing. They fix a price at which their shares are introduced in -the market-place; let us say this price is $100 per share. This is -manipulation. It may happen that the public will not buy at that price, -in which case the price is lowered, let us say, to 80. This also is -manipulation. But is it improper? Is it subversive of good morals? Is -it an unhealthy interference with natural laws of supply and demand? Is -it anything less than a legitimate method of attracting capital into -worthy enterprises? - -Critics are invited to remember that the Stock Exchange does not buy -or sell anything; it merely acts as a market-place through which, -among other things, capital may be directed from channels where it -is least needed into those where it may be most beneficially and -profitably employed. If, therefore, an oil company or a coal company -or any other enterprise whose ultimate success cannot fail to enrich -the community seeks to market its wares--i. e., its securities--and -thereby enable itself to do business, where else is it to turn save to -the Stock Exchange, and how is it to fix an attractive market price at -the outset save by what is termed manipulation? Nobody is compelled to -buy; as for selling, any holder of 100 shares or any other number of -shares can sell them at will, and no amount of manipulation can prevent -him from a free exercise of this privilege. You may depend upon it, -Mr. Critic, that the Stock Exchange will take pains to suppress all -forms of manipulation that are unsound and harmful, but until you or -some other gifted student of economics can devise a method by which -capital may be attracted to excellent channels other than through the -medium of an Exchange, manipulation of the sort just described must -continue or enterprise must stop. Strike out the word “manipulation,” -and substitute “establishment of values” in transactions of this sort, -and the practice seems to become, as it really is, in keeping with the -finest traditions of the market-place.[56] - -It is a difficult matter for the Stock Exchange authorities to suppress -all forms of manipulation that are plainly and admittedly improper. -Such things do exist; the difficulty is in devising ways and means -of preventing them. Mr. Smith, a non-member of the Exchange, may -be interested in a certain security to which he wishes to give an -appearance of activity. He calls Brown, a stockbroker, and instructs -him to buy 5000 shares “at the market.” Then he telephones Jones, -another stockbroker, to sell 5000 shares. Brown and Jones are each -in ignorance of the other’s order, but they meet in the crowd where -this stock is dealt in, and their orders combine to give the market an -appearance of animation. The governors are as determined to stop this -sort of thing as the most energetic critic could wish; they send for -the two brokers and the facts are revealed. But as each was entirely -innocent of wrongdoing, and as no rule of the Exchange and no law of -the land has been violated, what is to be done? - -They may caution both brokers against accepting any more business from -Smith, but Smith is not a member of the Exchange, and hence he is not -amenable to its discipline. When his next orders are refused he gives -them to some one else, and if the entire Stock Exchange refused to -accept business from him he would and could with perfect propriety ask -his bank, or a trust company, or an individual to give out the orders -under their own names. Finally, if the Exchange authorities were so -sagacious as to be able to close to this man every conceivable avenue -by which he might approach the Stock Exchange in New York, there -would still be left open to him the market in Boston, or Montreal, or -London, or any other centre in which the security was listed, and the -pernicious effect of his manipulation in these cities would be felt -in New York just as promptly and just as harmfully as if they had -originated here. I mention this case, a purely hypothetical one, to -show how easy it is for manipulation of this sort to find employment, -despite all that may be done to suppress it. Perhaps somewhere in -the noble army of critics there may be one who can devise a means of -meeting this issue. If so, let him stand forth and speak. The Stock -Exchange, root, stock, and branch, will be glad to hear from him.[57] - -Counsel for the Congressional Committee that is in session as these -lines are written seeks to raise another dreadful ghost with which to -frighten ignorant people in his alleged “discovery” that a great part -of the business done on the Stock Exchange is speculation. He parades -through the newspapers the fact that the number of shares bought and -sold often largely exceeds the number transferred on the companies’ -books. In a chapter on “The Uses and Abuses of Speculation,” I have -attempted to show that the more speculators there are in a market, the -better and safer the market, and I rest this dictum on the authority of -every student of modern markets. In this connection let us consider the -opinion of a thoughtful newspaper writer. “There is no doubt,” he says, -“that the committee will find that there is speculation in Wall Street, -just as there is speculation elsewhere, and in commodities other than -in stocks and bonds. The instinct has always been a pronounced human -characteristic, being a part of human progress, and the manifestation -of it is one sign of the difference between man and the lower sorts -of creatures. It is doubtful whether the general gambling impulse can -be entirely wiped out, even if the mighty power of an act of Congress -be called into requisition. If Mr. Pujo and his committee can abolish -speculation in Wall Street (to say nothing of gambling, which is not -the same thing), they may be asked to abolish every commodity market -throughout the land, for there is plentiful speculation in all of them. - -“What seems to bother some representatives of the Pujo Committee is -that the number of shares traded in on the Stock Exchange exceeds -largely the number actually transferred. It is true, for example, -that the number of shares of United States Steel common sold during -last year were largely in excess of the number of shares outstanding, -the sales amounting to 31,266,208 shares, while the entire number -outstanding was only 5,084,952. The ratio of six to one suggests -healthy activity in the market for steel stocks. It is conceivable that -a block of stocks may pass through many hands before it arrives at -its ultimate owner, just as a crop of potatoes passes through a long -chain of handlers and buyers and dealers before it reaches the ultimate -consumer. Meantime, the number of potatoes has neither increased nor -diminished. - -“But the potato crop, which easily changes hands six times in a year, -is finally eaten. The stocks go on forever. The legitimate holder is -not injured if they change hands not six, but sixty times, provided -he is secured by proper publicity, which the Stock Exchange assures. -The free speculative market is in itself an element of value, and -if it were destroyed the investor would be chiefly injured, while -future capitalization for the development of the country would be -paralyzed.”[58] - -At the outset I began by cautioning the reader not to cry out in alarm -over the utterances of newspaper statesmen bent on justifying their -existence, and determined to make the punishment fit the crime. Stocks -will always be bought and sold, they will pass from hand to hand just -as horses are traded and lands are exchanged. The modest dollar, too, -will continue to pass from pocket to pocket, having a thousand owners -and performing a thousand functions many of which may alarm a timid and -unsuspecting lawmaker, but which to you and me may seem natural enough. - -When you read that a great Congressman is determined to put the Steel -corporation into bankruptcy and throw its 250,000 employees out of -business, depend upon it he is only trying to justify his job for the -benefit of this constituents. When somebody else seeks to mend his -fences by the noisy announcement that the Stock Exchange reeks with -improper manipulation, that speculation is wrongful, and that the -criminal nature of an institution is directly proportionate to its -size, remember that the votes of your fellow-citizens put this man -in office and that you and they must foot the bill, since it is your -money that pays for all these junkets, all these investigations, and -all these political excursions. More than that, you must pay your share -of the $160,000,000 for pensions, of the $40,000,000 for post-offices, -and of the countless millions for rivers and harbors, and these, too, -are voted with amiable frugality by the gentlemen who see nightmares in -banks, Clearing Houses, and Stock Exchanges. - -Finally, try to investigate and study all these matters for yourself. -Read the men who have spent their lives in the study of economics. -Compare the results attained by our great financial institutions with -those reached in similar lines abroad. In the particular application -of these studies to the New York Stock Exchange, you will find that -charges such as we have been considering could be brought against any -institution that has stood the test of time and made the mistakes -that fallible human beings must make. You will find that if changes -and improvements seem to come about slowly it is not because of the -unwillingness of the Exchange to remedy these conditions, but because -of the gravity and deliberation with which they must be considered in -the light of the future as well as the present. - -The management and control of a great public business, especially -one that has long survived public criticism, is no light matter. It -requires more than common industry, and more than common ability. What -the Stock Exchange asks of you and of every thoughtful citizen in the -land is a recognition of these matters, and a patient survey of all -that enters into them. The critic in “The Vicar of Wakefield” laid it -down as a good rule that you should _always_ say the picture would have -been a better one if the artist had taken more time. Criticism offered -in this spirit the members of the Stock Exchange can bear with good -humor. What hurts them on the raw is the critic’s failure to study and -investigate, or, getting back to the text of Mr. Bryce’s sermon, “the -neglect to think.” - - - - -CHAPTER VI - -PANICS, AND THE CRISIS OF 1907 - - -A panic is a state of mind. It cannot be regulated by statute law -nor preached down by press or pulpit. At such times, suspicion, -apprehension, and alarm take possession; reflection and sobriety -are crowded out; men do and say irrational and unreasoning things; -incidents trifling in themselves are exaggerated into undue -proportions; all kinds of difficulties are conjured into the -imagination. The best that can be said of such a phenomenon is that it -is of brief duration.[59] - -In Wall Street, where men are accustomed to looking forward at all -times, the question is ever in mind as to the next panic. The last one -left its sting; we are interested now in knowing about the future. -Have we learned how to avoid these difficulties? May we hope to -diminish their force and mitigate their terrors? May we rely upon the -superior organization of business and the greater quantity and quality -of capital to soften the effect of the next shock? I think not. We -may lull ourselves into a coma of fancied security as we reflect upon -experience and its expensive lessons, but we deceive ourselves if we -think that we shall finally arrive at a point where these convulsions -shall cease. - -Nothing of that sort can come about among people strong with health -and vigor, confident and full of energy, and impatient for action. -With such a people life is incessantly mobile; a constantly increasing -volume of creative activity impels them onward. Panics are unknown -in dead countries and in countries that have not yet heard the call -of progress; in all other countries the violence of these shocks is -directly proportionate to the enterprise of the people. The more -civilization there is, the greater the creation of wealth; the more -wealth there is, the greater the volume of speculation that creates -wealth. In such circumstances it is idle to talk of a time when panics -shall cease, because confidence and enterprise must ever push onward, -speculation in material things must accompany them, supply must -overtake demand, and human nature with its moods and caprices must -finally pay toll. - -Vast industrial, commercial, and credit expansions lie somewhere -ahead, and somewhere ahead excesses and indiscretions the world over -must play their part and exact their penalties. We should cease to be -surprised at these vicissitudes, for, “paradoxical as it may seem, the -riches of nations can be measured by the violence of the crises which -they experience.”[60] Moreover, panics are rarely such unmitigated -calamities as they are pictured by those who experience them. At least -they serve to place automatic checks upon extravagance and inflation, -restoring prices to proper levels and chastening the spirit of -over-optimism. In a world of swift changes they are soon forgotten. - -We may seem to be prepared for these periodic set-backs, and there -may be men amongst us of sober reflection who are really wise enough -to foresee the top to a normal movement, yet the accidents that have -happened will happen again,--bad harvests, war, sudden failures, -earthquakes,--these are not easily discerned in advance. Sanguine and -ardent merchants will make the same old mistakes; good times will -engender the same old hallucinations; people who see, or think they -see, wealth being created all around them, will always rush in and buy -at the top; there will be too much work for the dollar to do--and after -that the deluge. Finally, in order that we may not become pessimists, -let us remember the words of the greatest of American philosophers: -“The changes that break up at short intervals the prosperity of man are -but advertisements of a nature whose law is growth.” - -Another phenomenon quite as curious as that of panics, and one that is -similarly psychological, is the unhesitating, slam-bang zeal with which -we place the responsibility for these misfortunes on the shoulders -of others. We, as a people, have brought the disaster upon ourselves -by reason of our indiscretions. We have lost our heads and entangled -ourselves in a mesh of follies. But we do not admit such reproaches, -even in our communings with self. Not at all. The fault lies elsewhere, -and it is balm to our bruises to place it elsewhere with indignant -energy. It will not do to preach at such times about currency systems, -laws of supply and demand and kindred generalities, for these are -abstract and vague to a mind inflamed by losses. What such a man wants -is a head to hit; something concrete, a target for his exploding wrath. -And he never hesitates. He says Wall Street did it. His fathers said -the same thing, and his children will follow suit. - -Now here is a strange thing. After a man has said, “Wall Street did it” -over and over again, he believes it, just as he believes or takes for -granted a similar tedious reiteration by the humble katydid. To such a -man, the thing he _wants_ to believe, when stated over and over again, -comes by repetition to fix itself in the mind as a demonstrated truth, -notwithstanding an utter absence of proof or of reasoning. He says -“Wall Street,” or “the Stock Exchange,” until he can think of nothing -else. It is a catch-phrase, short and sweet, which he hammers home to -his own ineffable satisfaction, and he thinks it and broods over it to -his heart’s content. The politician then comes along with his cures for -all the ills of society, and, finding Wall Street a convenient means of -perpetuating his accidental notoriety, his voice joins the harmony. The -indictment is then complete. - -Take the panic of 1907 as the last and most conspicuous example. The -financial losses involved, and the extent of the disturbance of the -machinery of credit, made it the worst panic of this generation. As it -burst upon the country at a period when to the outward eye prosperity -reigned throughout the land, men were at a loss to explain it. They -could not understand how such appalling conditions could occur in -such apparently cheerful surroundings. As everybody was affected by it -in greater or less degree the whole country was full of people with -a grievance. They were themselves directly to blame for it, but they -looked elsewhere for the responsibility for their folly. - -That sinister influences were at work was, in the popular mind, -undeniable; and by that same token we are pretty close to “Wall -Street” when we talk of things sinister. At about that time a member -of Congress made a speech in which he asserted, with all the art of -katydid repetition so dear to the heart of the true believer, that -the Stock Exchange was the cause of the panic. Rich men broke the -market and “held the bag,” he said, while panic-stricken owners of -property poured the invested savings of a lifetime into that capacious -receptacle. Nothing could be simpler. Newspapers must print such -things, and the public found what it wanted on the first page. Even -to-day, five years after the fact, this delightful explanation of the -1907 panic blossoms like the rose as a political campaign progresses. -The voice of the hustings “knows its business.” - -Mr. John Burroughs warns us that it is one thing to treat your facts -with imagination, but quite another thing to imagine your facts. -Sufficient time has elapsed since 1907 to soften, somewhat, the bias -and prejudice created by the events of that year, and perhaps there -may be among us minds open to reason. The New York Stock Exchange -feels, honestly, that a great injustice was done it by the criticism -and abuse so generously poured out in the first shock of that event. -Far from causing the crisis, its members assert that the institution -fulfilled one of its most useful functions in giving ample warning -of its approach, and that, when those warnings were disregarded, it -concentrated all its machinery on the task of restoring order from -chaos. They speak feelingly when they say that never in its history has -the Stock Exchange been called upon to deal with so great an emergency, -and never has it demonstrated so admirably its fundamental purposes. -When they make these statements they offer to prove them. Let us -examine the proofs. - -The panic of 1907 was not unlike many preceding financial disturbances. -The opening months of the year had witnessed a general liquidation -on the Stock Exchange, brought about naturally, and in simple, -automatic compliance with economic laws and precedents. There had -been over-expansion in all lines of business; careful students saw -the portent; able men of power and influence heeded its warning -and set corrective forces in motion months before the shock came. -Total transactions in shares sold on the Stock Exchange had risen -from 187 millions in 1904 to 284 millions in 1906, while the value -of the securities thus sold increased from 12,061 to 23,393 millions -of dollars respectively. This was too rapid growth, and the general -liquidation that had been under way for months effectually corrected -it, since New York City bank loans secured by Stock Exchange collateral -declined, as shown by the Comptroller’s report, from $385,652,014 in -August, 1905, to $251,867,158 in August, 1907--a corrective force -represented by $133,784,856. - -The Stock Exchange has been defined as “a barometer of future business -conditions,” and never did a barometer give clearer warning. It said in -effect to all the banks of the country and to business men generally: -“There has been a widespread over-expansion of credit; it must stop; -we are doing our share here in New York to correct it; you must do -likewise.” And, in order that there might be no failure to understand -what was meant, New York City bank loans were reduced with drastic -emphasis, months before the panic came, by nearly 35 per cent. “Without -an exception,” writes Prof. S. S. Huebner, “every business depression -in this country has been discounted in our security markets from -six months to two years before the depression became a reality.”[61] -Senator Burton, another authority, emphasizes the point further: “In -addition to other influences which promote an earlier rise and fall, -there must be mentioned the more careful study and attention to the -financial situation which is given by dealers in the stock markets -and in great financial centres. They often forecast the grounds for -a rise or fall in prices before the general public is awake to the -situation.”[62] This, then, was the situation in the summer of 1907. -The Stock Exchange had “cleaned house,” and had liquidated thoroughly, -warning the country to go slow. - -Why was not this warning heeded? I recall vividly the daily expression -of surprise, on the floor of the Exchange, and throughout the financial -district, in the months that elapsed between our March liquidation -and the outbreak of the October panic, that the country should pay so -little attention to “Wall Street’s” admonition; that it should continue -its unprecedented boom despite the plain intimation that the funds to -support it were exhausted, and despite the general knowledge of every -tyro in business that future conditions are discounted in Wall Street -as freely as promissory notes. - -Had the business interests of the country so much as inquired into that -warning they would have found by turning to the Comptroller’s reports -of the loans of national banks for the entire country that such loans -had expanded from $3,726 millions in 1904 to $4,679 millions in 1907. -They would have seen that whereas the New York City banks _contracted_ -their loans by nearly $134,000,000 from August, 1905, to August, 1907, -loans and discounts by the banks of the whole country in that period -actually _expanded_ $700,000,000. Surely it will not be urged that -Wall Street or the Stock Exchange had anything to do with bringing -about this expansion. On the contrary, it shows that speculation in -commercial lines, in new enterprises, in lands and in all the various -forms that “out-of-town” banks are expected to finance, went on and -on in vastly increasing volume long after the danger signal had been -hoisted on the Stock Exchange, and in utter disregard of the warnings -those signals conveyed.[63] - -As the summer of 1907 advanced, speculation throughout the country -continued in rapidly increasing volume, while on the Stock Exchange -there was an almost complete cessation of activity. Business men of -the West and South seemed to feel that as there had been no serious -failures, and as the decline in the stock market had restored values -to an attractively low basis, there would be a normal recovery similar -to that which followed the panic of 1893. They felt that the trouble, -whatever it was, had now been corrected, and in this fancied security -they went about with further expansion of their business enterprises, -confident that no serious difficulties were in store. The Stock -Exchange was often cynically referred to in that period as “the only -blue spot on the map.” Its members were cheerfully invited by a Western -newspaper to “shake off their torpor and join the Sunshine movement.” - -It is only fair to say that there was some force in the buoyant if -superficial viewpoint of the country at large, for in the autumn -of 1907 we were blessed with all the kindly fruits of the earth in -abundance. The average crop of our agricultural products gathered -that year was enormous, and behind it lay large reserves of wealth -that had accumulated from a series of good crops in the years just -preceding. There was, moreover, a partial failure of foreign crops that -brought about heavy foreign requirements, thus assuring rich returns -to American producers. Our railroads, which in the previous panic of -1893 were so affected by declining traffic and by the unproductiveness -of new territory into which they had ventured that bankruptcies -became general, were early in 1907 in better physical condition than -ever before. Their gross earnings were at a maximum; their surpluses -fat with the profits of recent years; their credit high. A long -accumulation of foreign-trade balances had made the inherent strength -of the nation greater than ever before. Finally there was the great -essential difference between 1907 and former years in that we were now, -by statute law as well as in fact, on a gold-standard basis. - -And yet, without one unsound basic factor visible to superficial -observers, we were suddenly plunged into a grave disaster--a panic -which in actual money losses surpassed any of its predecessors. It -came, this cataclysm (as the Stock Exchange had vainly predicted six -months earlier), at the worst time it could possibly come, just when -the banks were called upon to furnish $200,000,000 to transport and -market the crops. Small wonder that in the face of such an optimistic -outlook men stood aghast at the violence of the panic. As they had -not understood the warning, so they could not understand its swift -fulfilment. In all the long processions of panic-stricken people who -stood in line at the banks in those trying days, not one in a hundred -could understand how an institution could be solvent and yet be forced -to suspend. Later on, smarting from losses, this bewilderment gave way -to distrust and suspicion, as is often the case, humanly speaking, when -men look elsewhere than to their own folly for the sources of their -misfortunes. They were in a receptive mood when the charge was made -that “Wall Street and the Stock Exchange” had brought about all this -misery; they believed it to be true, and many still believe it. - -The charge was so widely circulated and was fraught with such -possibilities of mischief that there was danger of ill-considered -legislation directed against the Stock Exchange and supported by -ill-advised public opinion. Thus it happened that Governor Hughes of -New York, doubtless moved to forestall hasty law-making, appointed a -committee to investigate the Stock Exchange. In another chapter we -have reviewed the work of this commission; meantime, the words of its -chairman are quoted, in passing, as a sort of _ex post facto_ reply to -the outcry that “Wall Street did it.” - -“The immediate cause of the panic,” he says, “was a simultaneous rush -to sell securities, by holders who perceived that there was trouble in -the money market, and who wanted cash to meet maturing obligations. -These holders were not Wall Street men merely, but people in all parts -of the country who had invested some of their savings in stocks and -bonds. The very _raison d’être_ of the Stock Exchange is to supply a -market where invested capital can be quickly turned into cash, and vice -versa. The remoter cause of the panic was a long course of speculation -in all kinds of property, real and personal, that had pervaded all -parts of the country, and many parts of the Old World, and had now -reached its climax.” Mr. White here adds in a footnote that it has been -“_shown conclusively that speculation on the Stock Exchange was not the -chief contributor to the collapse of 1907, but that speculation on a -much wider scale, through the length and breadth of the land, was the -exciting cause_.”[64] - -I have said it was not surprising that the public failed to observe -signs of disturbance in the happy conditions that seemed to prevail -before the panic. The blindness of the mass of the people to these -impending catastrophes is, indeed, a marked characteristic of all -similar epochs. Let us digress for a moment and consider the history of -other great disturbances. In 1825 the King’s Speech as read by the Lord -Chancellor dwells on “that general and increasing prosperity ... which, -by the blessing of Providence, continues to pervade every part of the -Kingdom.” This was in July; in December of that year the whole country -was torn by a devastating financial crisis. The London _Economist_, -in 1873, dwelt at length on the “astounding” progress of the Austrian -States, and said, “All over the rich countries of the Danube, capital -and labor are vigorously at work in the discovering and turning to -profit the amazing resources which have been lying unheeded for -centuries.” This was written in March; the Bourse at Vienna closed its -doors May 9th, and a panic of exceptional severity was followed by long -and continued depression. On December 31, 1892, R. G. Dun & Company’s -_Weekly Review of Trade_ said: “The most prosperous year ever known -in business closes to-day with strongly favorable indications for the -future,” and yet four months later the storm burst.[65] - -These instances go to show how the elect may err in estimating -conditions, despite the fact that in two of these three memorable -crises ample warnings of an impending catastrophe were proclaimed in -the stock market long before these prophecies of continued expansion -were printed. In each instance the portent was ignored; in each the -ultimate penalty was paid. So it was in our own great crisis of 1907, -and so it will always be. - -There was a panic throughout the United Kingdom in April and October -of 1847, yet the early response to changing conditions took place two -years before, when stocks began to fail in July and August, 1845. In -the year 1857 commerce and industry expanded throughout America in -increasing volume up to the very eve of the August crisis, yet the -stock market in the summer of the preceding year gave clear warning of -what was to occur. One year before the panic of 1873 a similar “slump” -foretold what was coming, and the same was true of the year preceding -the panic of ’93.[66] Previous to the last-mentioned crisis stocks -began to fall, with unmistakable emphasis, early in 1892. Of seventeen -of the most active, five reached their maximum price in January, -1892, three in February, four in March, two--Lake Shore and Michigan -Central--in April. And as we have seen, identical preliminary warnings -developed on the Stock Exchange from one year to six months before the -last great panic of 1907.[67] - -The panic that hit the Paris Bourse in October, 1912, causing a -disturbance not equaled in violence since 1870, was brought about -by sowing the wind through an immense public speculation based on -two fine harvests in Russia and a feverish revival of commercial and -industrial activity all over Europe. Up to this point all the indicia -of the movement--such as bank loans, building operations, public and -private extravagance, and a blind infatuation for speculation by a -normally prudent nation that had not speculated on a large scale since -the Panama débacle of 1894--corresponds exactly with conditions in -America just preceding the 1907 crisis. The similarity between the two -incidents goes even farther, for early in September of 1912 the French -bankers and _Agents de Change_, recognizing the strained condition of -credit, had deliberately put in motion corrective agencies designed to -stop the rise with the least possible derangement of confidence. - -They would have succeeded, no doubt, and the situation would have -exactly paralleled our own discounting processes of March, 1907, but -for the unforeseen Balkan difficulty which, coming out of a clear sky, -upset the plans of the conservative financial forces and precipitated -a panic. It came, as a French banker explained, a week too soon--by -which he meant that, given a little more time, the worst phases of -the disturbance would have been avoided through gradual and orderly -liquidation. As it stands, the panic will no doubt go down into French -financial history as “the Balkan panic,” just as our disturbance of -1907 is ascribed, _faute de mieux_, to Wall Street wickedness; but -in reality both the French and American crises had their origin in -precisely similar causes. The Balkan news in Paris only precipitated -what the French Bourse had planned to accomplish in an orderly manner, -just as Wall Street and the Stock Exchange had done five years earlier -in a similar emergency. The essential lesson of both instances is that -the same causes which generate prosperity will, if pushed far, generate -an equivalent adversity. - -The details of the panic of 1907 are still fresh in mind, and need be -but briefly referred to. Banks and trust companies closed their doors -and suspended payments to depositors. Cash and credit became almost -unobtainable; we were face to face with demoralization. Clearing-house -certificates were resorted to at practically all banking centres -throughout the country; there was a general requirement of time notices -for withdrawal of savings bank deposits; all normal credit instruments -were impaired. The Secretary of the Treasury was forced to exercise -heroic discretion in the matter of security for government deposits and -for the very necessary increase of a note circulation that was then -suffering from a spasm of contraction. There was an immense hoarding -of funds and a consequent drying up of fluid capital, while from one -end of the country to the other, there was liquidation, business -contraction, retrenchment, panic, and ruin. “Wall Street” and the Stock -Exchange had foreseen that the chain was only as strong as its weakest -link, and had done what it could to prepare the public for the break. -To assert at this late day that it did aught but its full duty is -humbug _in excelsis_. - -I have already cited one instance, the country’s expanding bank loans -as contrasted with “Wall Street’s” contraction, to show how plainly the -warning was conveyed. As another instance, take the immobilization of -capital tied up in the enormous real-estate speculation then prevalent. -In New York City alone the increase in mortgages recorded jumped from -455 millions in 1904 to 755 millions in 1905, an increase over the -previous years of 32.7 per cent, and 66 per cent, respectively.[68] -The figures showing the increase in building permits are similarly -significant, revealing the fact that in 1905, 1906, and the early -months of 1907, money was pouring into new construction at a rate -without precedent. In Greater New York alone, not including Queens -County, building permits granted in 1904 amounted to $153,300,000, -and in 1905 to $229,500,000, and in the face of disaster this rate of -increase continued up to the very eve of the panic.[69] - -Outside of New York the expansion in building operations was equally -rapid and equally ominous, showing an _increase_ in twenty-five -cities alone from $201,300,000 in 1903 to $234,200,000 in 1904, -to $280,400,000 in 1905 and to $307,800,000 in 1906--all this but -a small part of the actual funds thus locked up throughout the -whole country.[70] We thus find that one of the most important and -inevitable causes of the panic was the absorption of exceptionally -large amounts of capital in enterprises that required a considerable -time for completion, or which, when completed, were not immediately -profitable; and to them may be added factories and extensive public and -private works of every kind. This form of expansion, as Senator Burton -points out, when carried to extremes almost invariably brings about a -disturbance. - -Now let us consider. Does all this expansion of bank loans outside of -New York and all this tremendous increase of building operations show -that the Samsons of “Wall Street” were pulling down the temple on their -own heads in order to slaughter the Philistines, as alleged, or does it -show an indifference and lack of readjustment to the growing stringency -of money, as revealed by the Stock Exchange in its liquidation of -March and April? “As a rule,” said John Mill, “panics do not destroy -capital; they merely reveal the extent to which it has been previously -destroyed by its betrayal into hopelessly unproductive works.”[71] -There would have been no such “betrayal” had judicious reflection and a -measurement of facts followed Wall Street’s warnings. - -A shrewd man, one of the old school of New York City wholesale -merchants, who has nothing whatever to do with Wall Street or the Stock -Exchange, yet whose trade arteries extend to many parts of the country, -has long governed his business by the published reports of Stock -Exchange transactions. If he sees there revealed a wholesome, normal, -and conservative expansion in all lines of business and a money market -that betrays no uneasiness as to the future, he presses on into new -lines of endeavor, confident that the immediate future is serene. If he -finds an urgent liquidation on ’Change, with the coincident phenomena -of impaired credit instruments, he draws in his lines and waits. It -makes no difference to him who is rocking the boat, nor why; experience -has taught him that if it rocks, the time has arrived to go ashore. And -this steady old merchant, I have no doubt, is but one of a numerous -type. - -Those who ignore the economic tides that ebb and flow through the -medium of the Stock Exchange as they did in 1907, do so because they -do not understand that these great market movements are really but -expressions of natural laws. If there is a rising tide--a boom--it is -attributed by thoughtless people to speculation and gambling. If there -is a bad break, it is caused by panic-stricken repentant sinners, or -by the activities of the bears. The essential point that is missed -here lies in the fact that, while bulls and bears alike may have their -brief hour, sooner or later, regardless of them, the market responds to -actual conditions and discounts the future of those conditions. - -Booms are not made on the Stock Exchange; they are made in the -country’s fields and forests and workshops. Panics are not created -there; they have their origin in mistakes and excesses throughout the -world, and in psychologic conditions which stock markets cannot hope -to control. The pendulum may swing far, but it comes back. Sooner or -later the movement of prices tells the exact story of future business, -and of credit, and of all the economic agencies that enter into them. -This was not well understood in 1907, and, as I said at the beginning, -I doubt if it will ever be understood in the sense that it will avoid -a recurrence of panics. All that we may hope for is that periods of -depression, which are inevitable, may not be attended in future by -such a loss of the reasoning faculties as that which brought about the -affair of 1907. - -Now let us consider another cause of the panic--the currency system, -always bearing in mind the fact that the first and greatest cause of -the panic was the over-expansion outside of New York that has just -been described. The causes which we are now to consider were of minor -importance when measured by this overshadowing matter; nevertheless -they played their part and must be considered accordingly. - -Not all panics, to be sure, can be prevented by a perfect currency -system, yet this one could have been measurably prevented, and “Wall -Street” and the Stock Exchange had labored for years so to prevent it. -At the gatherings of the Chamber of Commerce, at the bank meetings, at -all the meetings of merchants and manufacturers for years preceding -1907, the mischievous effects of our currency system were proclaimed -and the ultimate outcome predicted. Congress was petitioned again and -again to remedy those intolerable conditions, and to permit national -banks to expand their circulation under proper safeguards, but without -avail. - -When the storm burst, a most impressive object lesson in practical -finance resulted. What was at worst but a normal stringency of the -circulating medium developed, when added to abnormal demands from the -country at large, into conditions that created great alarm. There was -no way by which the banks of the country could use the resources which -they actually possessed to meet the urgent requirements of the hour. -A great nation of enterprising people found itself--and still finds -itself--compelled to do a banking business differing in degree, but not -in kind, from the old-woman-and-her-stocking system of finance. The -way our bankers got down on their knees to London and Paris in that -emergency, frankly admitting their inability, under our old flint-lock -laws, to handle a situation which foreign bankers meet without -difficulty, is a subject at once painful and humiliating. Literally our -bankers begged for help and got it. Some day we shall have to beg again. - -Had the national banks of New York City enjoyed the right to expand -their circulation in the manner provided by the plan of the American -Bankers’ Association, at least a part of the débacle would have been -avoided. “The banks and trust companies of this city have in their -vaults the largest store of good credit that can be found in any -city in the world,” said one of America’s foremost economists as the -panic raged, “but much of it is utterly unavailable because of our -currency system. One of the trust companies that closed its doors -has in its possession live assets amounting to over $50,000,000. All -this credit is dead. It cannot do the work of a single dollar in the -paying-teller’s cage. What is wanted in a time like this is freedom to -convert the credit of banks into a medium of payment that will satisfy -the people.”[72] - -True enough, and just what the whole financial community, including the -Stock Exchange, had been repeating for years. Currency issues which do -not provide for _all_ situations, including not only ordinary demands, -but also such exceptional cases of shrinkage as this one was, can never -be called perfect, nor even safe. There is no health in them.[73] The -most effective and the most rapid means of regulating and protecting -the general credit situation is by increasing or diminishing the volume -of outstanding bank-note currency not covered by a reserve of gold -or other lawful money. This method is employed successfully both in -France and in Germany. The Bank of France and the Imperial Bank of -Germany to some extent regulate credit conditions by acting as central -banks of discount; but their most effective action is by increasing -or diminishing the uncovered amount of their outstanding notes. When -additional currency is needed as a circulating medium they supply -this currency by issuing notes. When contraction of currency, or a -check upon the further expansion of bank credits is desirable, they -accomplish the result by diminishing the volume of their outstanding -notes and by raising the discount rate. This system is as nearly -perfect as any yet devised.[74] - -Whether we shall ever succeed in adopting it, or something like it, in -America, is the burning question in our banking offices to-day. Until -something is done, the layman who distrusts the plan of a central bank -and looks upon Wall Street with abhorrence, may find satisfaction -in knowing that the average New York banker is the most worried and -harassed man in American business life. With millions of other people’s -money in his possession subject to withdrawal by check at sight, and -with millions of the best security in the world in his vaults lying -absolutely idle and worthless so far as raising currency is concerned, -he stands between the devil and the deep-blue sea. Anything that -frightens his depositors, or even remotely suggests panic, gives him -a cold chill. People who talk of manipulation by New York bankers as -a cause of the panic of 1907 or any other panic are blind to the fact -that any disturbance of normal conditions is the one thing that bankers -would avoid as they would avoid the plague. - -There was a third cause of the panic in the course pursued by the -President. In some quarters it is still termed “the Roosevelt panic,” -and there exists a belief that the President by his actions and -speeches played a large part in bringing about the crisis. Personally, -I feel that this has been exaggerated. There had been, unquestionably, -wrongdoing by certain corporation managers. The President, with a -characteristic vigor not unknown to politicians, seized upon it as -a theme for his speeches, and the “evils,” the “malefactors,” the -“corruption” and “dishonesty” with which he bruised the air, raised a -suspicion in many quarters as to the status and security of the whole -financial situation and undoubtedly contributed to the frightened -liquidation of the day. The impression these utterances produced -abroad, where American securities were popular, was painful, and led -one returning tourist to remark that Europe was acquiring the idea that -we were “a nation of swindlers.” - -All panics are largely psychological, and this was no exception. The -President’s public speeches came at a time when emotion, apprehension, -and alarm filled men’s minds; and at a time when those irrational moods -were most likely to exaggerate the difficulties that existed, and to -conjure up difficulties that did not exist. Panics _seem_ to come from -lack of money, the real difficulty is lack of confidence, and it was to -this that the President’s course directly contributed. - -I am of the opinion that, judged by his public utterances, especially -his October speech at Nashville, Tenn., the President had not the -remotest idea that such an awful shock as the panic of 1907 was -imminent. He was not a student of economic conditions; he had no -familiarity with crisis-producing phenomena; he had never seen a -panic at close quarters. His speeches did not cause the panic, for -that disturbance was foreordained; they served, however, to hasten -it, to intensify it, and to keep it alive. Perhaps I may add that the -sparks beaten by him from the anvil of political expediency at that -unfortunate moment threw more light upon the President himself than -upon the evils he condemned. Perhaps, too, that was what the President -most desired. In any case, the fact remains that just as there is too -much confidence in times of excessive expansion, so there is too little -in times of unreasoning depression; and that the President’s attitude -aggravated the latter situations is undeniable. - -But by what stretch of the imagination can the Stock Exchange be -credited with playing any part in this third cause of the panic? -If temporary depression results from exposure of wrongdoing among -railroad, industrial, or financial institutions, nowhere in the land -is execration poured forth upon the evil-doers more vigorously than -within its four walls. Far from complaining, the Stock Exchange and the -whole investment community welcome such exposures, despite their effect -on the market, for the precise reason that their own protection and -benefit, if nothing else, is promoted by it. - -There was yet another reason for the panic, closely related to the -attitude of the President. I refer to the predicament of the railways -of the country as 1906 passed into 1907. Staggering under a load of -traffic which sorely taxed their equipment, the managers of these -properties cried aloud to the investing public for funds. But capital -was not to be had. Tied up in real-estate speculation and in quarters -whence it could not be easily recovered, the normal supply of capital -was immobile and inert. What was worse, encouraged by the attitude of -the President, an epidemic of radical anti-railroad legislation became -manifest in the several States, new and onerous burdens of taxation -were imposed, and a wave of distrust and suspicion regarding railway -investments was created. Simultaneously the cost of wages and materials -advanced--both characteristic phenomena indicating trouble--and, as -a consequence of all this blockade, the ratio of net to gross in the -matter of increased earnings fell from the normal proportion of about -40 per cent. in the first nine months of 1906, to less than 10 per -cent. in the same months of 1907. - -Railroads are public utilities that must continue to handle business -offered them no matter what happens, and so, to meet all these abnormal -demands, but one course was left open to them, and that was to raise -funds by issues of new stock. This, of course, amounted practically -to an assessment of stockholders; as an expedient it failed because -“Wall Street” had already recognized the symptoms of disease. It was -too late. Money and credit attract money and credit, and confidence -attracts both. There was a shocking absence of confidence in the -emergency of 1907, and the railroads suffered enormously by it. - -With this matter certainly Wall Street had nothing to do; it could not -in fact do more than it had just done in pointing out to the country -at large, through a drastic process of liquidation, the obvious -withdrawal of far-sighted investors from a situation that had become -tense. Nor can the railroads be censured, because the great volume of -business that confronted them was not created by them, and yet had to -be transported by them. The fault lay, of course, in the wholesale -and reckless expansion of all lines of industry, and in the immensely -increased extravagance of public and private life. - -I venture the prediction that when these conditions again prevail, as -they must in a great and vigorous country like ours, the Stock Exchange -will still be found sounding its warnings, but it will not do to hope -that those who learned the bitter lesson of 1907 will profit by that -experience, because the condition of _mental_ disturbance which is a -part of every panic cannot be regulated by the will, nor kept within -bounds by the statute law. The one lesson we have learned from the -predicament of the railroads in 1907 is that there is a tendency toward -disturbance in large accessions either of business or of capital. “At -intervals,” says Walter Bagehot, “the blind capital of a country is -particularly large and craving; it seeks for some one to devour it, and -there is ‘plethora’; it finds some one, and there is ‘speculation’; it -is devoured, and there is ‘panic.’”[75] - -Summarized briefly, I have attempted to show in the foregoing pages -that the Stock Exchange for many months prior to the panic had been -steadily liquidating and contracting, and had served notice on the -country at large that the time had come to put a stop to the prevalent -over-expansion. It has been demonstrated that instead of heeding these -warnings the general business of the country, as evidenced by the -increases in loans and commercial discounts and by an over-speculation -in real estate and in public and private extravagances, continued to -expand up to the very eve of the panic, and was stopped then and there -only by sheer lack of capital. Nothing can be of greater importance -in any consideration of the 1907 crisis than that its overshadowing -cause was the attempt to do too much business on too little capital, -and compared with this all other aspects of that situation are of minor -importance. - -I have shown that an antiquated currency system played a conspicuous -part in the crisis, through contributory negligence on the part of our -law-makers. The part played by the President has been cited as a third, -though somewhat negligible, factor in sowing the seed of distrust, and -also the trying position in which the great common carriers of the -country found themselves after the seeds of distrust had been sown. -These were the four causes of the panic of 1907.[76] - -How well the Stock Exchange did its work in that great emergency is a -matter of record. It did not close its doors; there were no failures; -no relaxation of the protection afforded the public; no departure -from the high standard of morality which is ever its goal. In one -week, ending October 25th, 5,166,560 shares passed through its hands, -representing, with the transactions in bonds, a par valuation exceeding -$483,000,000. - -Now, in the very nature of things, a financial panic is the inability -of many debtors to meet their obligations, plus the fear that many -others may be in the same plight. At such a time men hasten to sell -for cash that for which there is the readiest market. Thus they sell -securities because securities are immediately convertible; thus they -turn to the Stock Exchange, because that is what Stock Exchanges are -for. Hence it follows that in a crisis such as that of 1907 the ruinous -decline manifests itself more sharply, and is felt more keenly, on the -Stock Exchange than on the Cotton Exchange or the Produce Exchange. Men -turn to it for first aid to the injured, and the greater the casualty -list, the more marked is the disturbance of values. That this is not -well understood by the public often unfortunately leads to suggestions -of improper methods where none exist. - -Finally, where do we stand? Orthodox economists like Wells talk of -over-production as a cause of panics; currency experts bewail a lack -of circulating media; theorists of the school of Jevons are driven to -seek in sun-spots the potent force of all our harvests; Levi and Mill -dwell upon the periodicity of panics and would fix their appearance by -schedules of time; politicians and thinkers-in-embryo point the finger -at Wall Street, and yet, with all that has been written, thirteen great -crises at home and abroad within the last century show that we have -not begun to get at these disturbances. Drought has been a cause of -mischief, yet we have learned to irrigate and to conserve; epidemics -have smitten us, yet we have mastered sanitation; floods have ruined -whole territories, yet we have built dikes and levees. But every now -and then, when business seems to be at its best, when merchants are -dividing large profits, and when labor is best rewarded, a panic occurs -and the whole structure collapses. - -To say that Wall Street or Lombard Street or any group of men -anywhere can bring such conditions to pass is to deny all the facts -of experience. Depressions may come from any of a hundred causes, but -panics originate in the mind; they are manias. Walter Bagehot gave up -trying to prescribe for them because he realized that sudden frenzy -is not an ailment to be foreseen and prevented. “But one thing is -certain,” he said, “that at particular times a great many stupid people -have a great deal of stupid money;” to which he adds, “our scheme is -not to allow any man to have a hundred pounds who cannot prove to the -Lord Chancellor that he knows what to do with a hundred pounds.” When -thousands of people ignore all the warnings of experience, as they -always will do; when with a blind misdirection of energy they sink -borrowed capital in quagmires at fancy prices, as they always have -done; and when, shorn of their all, they are simultaneously seized with -a mania to denounce others for the consequences of their own folly, -as they always must do, one cannot avoid the thought that perhaps -Bagehot’s humorous solution is the best that has been devised.[77] - - - - -CHAPTER VII - -A BRIEF HISTORY OF LEGISLATIVE ATTEMPTS TO RESTRAIN OR SUPPRESS -SPECULATION - - -In the Middle Ages the notion prevailed that there was a just and -equitable price for everything, and that any person who tried to obtain -more than this price was a sinner. Trade for gain was anathema; the -man who bought the principal commodities of that time, such as corn -or herrings, with a view to selling them at a profit, was guilty of -“craft and sublety”--as the old English statutes read--that infallibly -cost him his goods and brought him to the pillory. Thus in the year -1311 one Thomas Lespicer of Portsmouth was caught red-handed in London -with six pots of Nantes lampreys stored in a fishmonger’s cellar in -the hope of a rising market. The law required that when he arrived in -London from Portsmouth with his lampreys he should proceed to the open -market under the wall of St. Margaret’s Church in Bridge Street, and -stand there four days selling at current prices to any one who cared to -buy. His failure to do so, and his wickedness in attempting to “bull” -the lamprey market by hiding them in the fishmonger’s cellar, resulted -in the arrest of himself and the fishmonger, and their trial and -punishment at the hands of the Mayor and Alderman. - -Professor W. T. Ashley, who cites this incident in his “Introduction to -English Economic History and Theory” (London 1892), also gives another -instance in which our modern theories of natural rights and freedom -of contract seem to be in hopeless conflict. John-at-Wood, a baker, -was arrested in 1364 charged with the profane practice of “bulling” -wheat. “Whereas one Robert de Cawode,” the indictment reads, “had two -quarters of wheat for sale in common market on the pavement within -Newgate; he, the said John, cunningly and by secret words whispering -in his ear, fraudulently withdrew Cawode out of the common market, and -they went together into the Church of the Friars Minor, and there John -bought the two quarters at 15½d per bushel, being 2½d over the common -selling price at that time in the market, to the great loss and deceit -of the common people, and to the increase of the dearness of wheat.” -At-Wood denied this heinous offence and “put himself on the country,” -whereupon a jury was empanelled, which gave a verdict that At-Wood had -not only thus bought the grain, but that he had afterward returned -to the market and boasted of his crime, and “this he said and did to -increase the dearness of wheat.” Accordingly he was sentenced to be put -in the pillory for three hours, and one of the sheriffs was directed -to see the sentence executed and proclamation made of the cause of the -punishment. - -So far as I am aware the Statutes of Henry III and Edward I, under -which these culprits were punished, constitute the earliest official -attempts to repress speculation by law. After the Revolution, the Bank -of England having been organized and bank shares created, a speculative -outburst occurred that led to the enactment of fresh legislation -entitled “An act to restrain the numbers and ill practices of brokers -and stock-jobbers,”[78] but this law lapsed or was repealed ten years -later. In 1707 a law was passed licensing brokers and making it -unlawful for unlicensed brokers to do business,[79] and in 1708 City -rules were established for brokers, obliging them to give bonds for the -proper performance of their duties. In 1711, 1713, and 1719, laws were -enacted similar to the Act of 1707. - -Then came the speculative schemes of 1720, of which the most famous or -infamous was the South Sea Company, designed to make fortunes for its -shareholders in the slave-trade and in whale fishing. It was followed -by many other projects almost fantastic in their wildness to each of -which the public subscribed liberally. Where all the money came from -that kept this disastrous speculative mania alive is something one -would like to know. There seems to have been no limit to it. South Sea -shares stood at 120 in April of 1720; in July they had reached 1020, -and, after that, the collapse. The company became a “bubble,” and a -burst one at that--and a great popular outcry followed. It resulted, in -1734, in the passage of Sir John Barnard’s “Act to Prevent the Infamous -Practice of Stock-Jobbing,” the preamble reciting: - - “Whereas, great inconveniences have arisen, and do daily arise, by - the wicked, pernicious, and destructive practice of stock-jobbing, - whereby many of His Majesty’s good subjects have been and are - diverted from pursuing and exercising their lawful trades and - vocations to the utter ruin of themselves and their families, to - the great discouragement of industry, and to the manifest detriment - of trade and commerce.” - -This act forbade bargains for puts and calls, and also “the evil -practice of compounding or making up differences”; but its principal -provision was the prohibition of short selling under penalty of £100 -for each transaction. There was, of course, an appeal to the courts, -which held that the statute did not apply to foreign stocks nor to -shares in companies, but only to English public stocks, a decision that -effectually put an end to the usefulness of the law. It remained on the -statute books, however, and it was occasionally resorted to by persons -who sought to evade the fulfillment of their speculative contracts--a -class of persons known to-day as “welchers.” - -Finally, in 1860, the law was repealed altogether, the repeal act -reciting that Sir John Barnard’s Act “imposed unnecessary restrictions -on the making of contracts for sale, and transfer of public stocks and -securities.” Thus the first serious attempt to regulate speculation in -securities by law, and specifically to prohibit short selling, came to -be recognized as a failure by the frank admission of government. In -1867 the so-called Leeman Act became law, prohibiting all sales of bank -stock unless the numbers of the certificates sold were specified--an -attempt to prevent short selling of bank stock. Even this law was -subsequently repealed, and England, to-day, has no law on the statute -books restricting speculation. - -As the London Stock Exchange grew in influence and importance, -reflecting England’s development as the world’s banker, popular attack -and criticism continued to assail it. It may be frankly admitted that -the legitimate functions of the institution had been abused by foolish -or unscrupulous persons, just as every important branch of business and -politics has been misused, the world over, since civilization began. -The question therefore arose whether these occasional sharp practices -proved the Exchange to be an excrescence on the body politic, or -whether, on the other hand, its importance in the mechanism of modern -business merely required improvements and reforms. In this situation, -which occurred in 1877, and which caused considerable agitation on -the part of both parties to the controversy, a royal commission was -appointed “to inquire into the origin, objects, present constitution, -customs, and usages of the London Stock Exchange.” The Exchange and its -critics thus reached the parting of the ways. A year was spent by the -commission in examining witnesses and conducting investigations along -special lines, and in 1878 its report, with the evidence, was published -in a Parliamentary Blue Book. - -The report absolutely upheld the purposes and functions of the Stock -Exchange and the legitimacy of speculation in securities, and it went -further in pointing out the danger of attempting to force any form -of external control on the institution. The evils of that form of -Stock Exchange speculation which closely approaches mere gambling were -plainly stated, and the report suggested that the Exchange authorities -restrain such practice in so far as was possible. - -As the conclusions of the royal commission are of very great -importance, marking as they do the first serious official study in -modern times of the Stock Exchange theory, I quote from the Blue Book -in the hope that Stock Exchange critics of to-day may understand how -these conclusions were reached. “In the main,” reads the report, “the -existence of the Stock Exchange and the coercive action of the rules -which it enforces upon the transaction of business and upon the conduct -of its members has been salutary to the interests of the public. We -wish to express our conviction that any external control which might -be introduced by such a change should be exercised with a sparing -hand. The existing body of rules and regulations have been formed with -much care, and are the result of the long experience and vigilant -attention of a body of persons intimately acquainted with the needs -and exigencies of the community for whom they have legislated. Any -attempt to reduce this rule to the limits of the ordinary laws of the -land, or to abolish all checks and safeguards not to be found in that -law, would, in our opinion, be detrimental to the honest and efficient -control of business.” - -In 1909 similar criticism in New York having led to the appointment of -the Hughes Commission to inquire “what changes, if any, are advisable -in the laws of the State bearing upon speculation in securities and -commodities, or relating to the protection of investors, or with -regard to the instrumentalities and organizations used in dealings in -securities and commodities, which are the subject of speculation,” the -commission reported to the Governor, after six months of laborious -investigation, in these words: - - “Speculation in some form is a necessary incident of productive - operation. When carried on in connection with either commodities - or securities it tends to steady their prices. Where speculation - is free, fluctuations in prices, otherwise violent and disastrous, - ordinarily become gradual and comparatively harmless. For the - merchant or manufacturer speculation performs a service which has - the effect of insurance. The most fruitful policy will be found in - measures which will lessen speculation by persons not qualified - to engage in it. In carrying out such a policy exchanges can - accomplish more than legislation. We are unable to see how a State - could distinguish by law between proper and improper transactions, - since the forms and the mechanisms used are identical. Rigid - statutes directed against the latter would seriously interfere - with the former. Purchasing securities on margin is as legitimate - a transaction as the purchase of any property in which part - payment is deferred. We, therefore, see no reason whatsoever for - recommending the radical change suggested that margin trading be - prohibited.” - -Here are two reports at an interval of thirty-one years, made by -independent investigators of high character, concerning the two -foremost Stock Exchanges in the world. Both of these reports recommend -changes and improvements, and each is firmly of opinion that the -changes recommended are such as can be carried out by the Stock -Exchanges themselves without the assistance or interference of the -legislature. - -As the London Stock Exchange is a voluntary association similar to -that in New York, it was inevitable that the question of incorporation -should have been brought before the royal commission of 1877, and that -the question as to whether the public interest would be promoted by -such incorporation should be given careful attention. As a result of -these deliberations, a majority of the commission recommended that the -London Stock Exchange should voluntarily apply for a royal charter or -act of incorporation, but the reasons upon which this recommendation -were based had to do with the temporary or shifting character of the -membership, which gave very little assurance to the public of the -permanence and stability of the rules, since members of the London -Stock Exchange are only elected for one year. It need scarcely be added -that such an argument would not apply to the New York Stock Exchange. - -Now it so happened that, despite this opinion by the royal commission, -the London Exchange was not compelled to incorporate, and remains -to-day a purely voluntary association or club. The reason for this -lies, in large measure, in the very intelligent minority opinions filed -with the Board’s report by those of its members who dissented from the -recommendation. As this is a matter of interest to members and friends -of the New York Stock Exchange, I give herewith the substance of these -dissenting opinions, calling the reader’s attention to the fact that -the Hughes Commission of 1909 rejected similar proposals regarding the -New York Stock Exchange.[80] The Hon. Edward Stanhope, M. P., said, -regarding the proposed application for a charter: - - “Supposing such an application to be made, and Parliament to be - prepared to incorporate the Stock Exchange on the terms which are - embodied in the report, the consequence would be that rules so - established would be stereotyped, and could only be altered, even - in the minutest details, with the approval of a department of the - State. In my opinion this requirement would be either mischievous - or nugatory. To attempt to regulate the manner in which business - is conducted in the great money market of England is going far - beyond the province of the State, nor is any government department - in any way qualified to undertake it. The report, indeed, - recommends that external control should be exercised with a sparing - hand. But experience seems to show that the first commercial - crisis, or the discovery of any gigantic fraud, would cause a - pressure for further restrictions which the department entrusted - with these duties could not possibly withstand. If incorporation - is to be anything more than a theory, it seems to me that it must - either be imposed compulsory upon the Stock Exchange, or it must be - offered to them on terms which will make it worth their while to - accept it. The first alternative I reject, for the reason given by - the select committee on foreign loans, that it would destroy that - freedom which is the life and soul of the institution. If, however, - any voluntary scheme commends itself to the opinion of the Stock - Exchange, its primary condition should be to reserve to that body - absolute liberty in the transaction of their ordinary business (as - to which we are all of opinion that, speaking generally, no just - fault can reasonably be found), and also the power of adapting - their rules, with the utmost ease and freedom, to the varying wants - of the time.” - -Mr. S. R. Scott of the dissenting minority was even more emphatic in -his objections to incorporation. He said: - - “In fixing my name to this report, I desire to make the - reservations following: 1. With regard to incorporation, I object - to recommend it for the following reasons: Hitherto, the Stock - Exchange has been carried on with great success as a voluntary - association, and has had a vigorous growth. It has not enjoyed a - single legal privilege, yet it has thriven and the public have - neglected more than one effort to establish an open market to - resort to it for business, and to give it exclusive confidence. - This royal commission has been sitting more than twelve months, - yet no important or reliable evidence has been volunteered of a - character adverse to the general practices or conduct of business - on the Stock Exchange. If proof be required that the internal - legislation and administration of the Stock Exchange enforce a - higher standard of morality than the law can reach or enacts for - the regulation of other trades, such proof is to be found in - the fact that recently the committee of the Stock Exchange were - assailed at law by a member whom they expelled on a charge of - dishonorable conduct, the lawsuit being based on the ground that - the action of the committee was not justified in law. The trial - lasted seven days and proved abortive, the distinction between the - standard enforced by the committee and the statutory provisions of - the law not being appreciated by the special jury promiscuously - selected from various trades, although quite intelligible to - the judge. In maintaining this high standard the committee are - compelled to go beyond the common law, binding their members to - the observance of their rules and practices, even though not - enforceable in a court of law. If, however, they should submit to - incorporation, their rules would have to be assimilated to the - law, and their freedom of action would be curtailed--results which - might tend to cripple them in sustaining the standard alluded - to, and operate in many ways as a hindrance to that rapidity of - action which is an absolute necessity in critical times. Further, - incorporation implies, in some sort, monopoly, and it remains to be - proved that the public would gain by any restriction of the freedom - of trade, even in stocks and shares. I adhere to the opinion - expressed in 1875 by the Committee on Foreign Loans, on page 47 of - their report, as follows: ‘That such a body (the Stock Exchange) - can be hardly interfered with by Parliament without losing that - freedom of self-government which is the only life and soul of - business.’” - -As I have outlined elsewhere in this volume the cogent objections -to incorporation of the New York Stock Exchange, it only remains to -say here that the great argument against such a step consists in the -Governing Committee’s absolute power of summary discipline over the -members, a power that greatly exceeds the authority of the common law, -and one that protects the patrons of the Exchange to an extent that -would not be possible if, under incorporation, members could invoke -their constitutional prerogatives.[81] Said the governors in reply -to a question of the Hughes Commission: “Appeals to the courts have -been rare, considering the number of cases in which such power of -discipline has been exercised, but we may well cite as substantiating -in an extraordinary degree the fairness and right-mindedness with -which members have been held to their obligations, the fact that, -although in a number of instances appeals have been made to the courts -for reinstatement by members who have been expelled or suspended for -infraction of the rules, or for conduct which, although it might not -be in violation of any express rule or regulation, or in violation of -any law or legal obligation, the committee have held to be inconsistent -with the maintenance and exercise of those standards of honorable -dealing which it is the function of the Exchange to inculcate and -maintain; nevertheless, in the last twenty-eight years there has not -been a single instance of the judgment of the Governing Committee being -reversed by the courts.” - -The distinction between the expulsion of a member of such a voluntary -unincorporated association and the expulsion or removal of a member -of a corporation is very important. The moment the body receives a -charter a different set of principles comes into play as regulating the -relations between the member and the body.[82] - -Germany dealt with a similar situation in very different fashion. In -the autumn of 1891 there were disastrous failures of certain German -banking houses, resulting from criminal misuse of bank deposits and -from an undue participation in speculative transactions by the general -public. The outcry that followed was no new thing in Germany, for as -early as 1888 conditions that had arisen in the Berlin market and the -Hamburg coffee market had led to petitions to the Reichstag demanding -remedies for speculative evils. The cumulative effect of these -difficulties was such that, as related by Doctor Loeb, bills directed -against speculation on the Exchanges were introduced in November, -1891. “As early as February 16, 1892,” according to this authority, -“the Chancellor of the Empire appointed a commission of inquiry of -twenty-eight members, most of them lawyers, but with representation -also of landed proprietors, economists, and merchants. The chairman was -the President of the Directorate of the Reichbank, Doctor Koch. The -commission began its inquiries in April, 1892, held 93 sessions, and -summoned 115 witnesses, of whom the great majority were persons engaged -in the transactions which it was proposed to regulate. The commission -also made inquiries as to the state of legislation and trade usages in -the several states of the Empire and in foreign countries. - -“The commission presented a majority report on November 11, 1893, -recommending certain statutory and administrative changes. The -principles on which these recommendations rested was that, in view -of the importance of the interests which were represented at the -Exchanges, modifications should be made with caution, and the existing -complicated trade usages and methods should not be disregarded; while, -on the other hand, there was no occasion for regarding with mistrust, -still less with hostility, interference in the free working of -industrial forces.”[83] - -Up to this point, it will be observed, the German investigators -followed precisely the same lines as the English Commission of 1877 -and the Hughes Commission of 1909. Mistakes are recognized, but -modifications are to be made “with caution.” But it so happened that -the recommendations in this respect were not followed. German politics -at that time were in a state of turmoil in consequence of the Agrarian -agitation, and in the various phases of political expediency that -attended the uproar, first the government and then the Reichstag -insisted upon more and more stringent enactments concerning legislation -against the Exchange, until finally a hostile law was enacted quite out -of line with the original recommendations of the committee of inquiry. -In other words, the politicians ignored the labors of the committee and -took matters into their own hands. The three important provisions of -this law were these: - - (1) All exchange dealings for future delivery in grain and flour - were forbidden. - - (2) All exchange dealings for “the account” in the shares of mining - and industrial companies forbidden. - - (3) An “Exchange Register” was established in which was to be - entered the name of every person who wished to engage in exchange - transactions for future delivery. Contracts made by two persons - entered in the register were declared binding and exempt from the - defence of wager. - -The immediate effect of this law on the German grain market was -disastrous. Futures were not suppressed. The grain trade was simply -forced by the law to give up the modern machinery that experience -had developed, and go back to antiquated forms of dealing. “It was -like taking machinery out of a mill,” says Frank Fayant, “and putting -manufacture back to hand labor.” As to trading in securities “for the -account,” here, too, the law failed utterly. Even the government--at -that time most unfriendly to the Exchanges--admitted in its official -reports that the law had “proved injurious to the public,” and that -“the dangers of speculation have increased.” We have high authority for -a detailed examination of the disaster attending this costly experiment -in the remarks of Professor Emery, who tells us not merely _how_ the -German law failed, but _why_: - - (1) Fluctuations in prices have been increased rather than - diminished. The corrective influence of the bear side of the - market having been restricted, the tendency to an inflated bull - movement was increased in times of prosperity. This in turn made - the danger of radical collapse all the greater in proportion as - the bull movement was abnormal. The greater funds needed to carry - stocks on a cash basis further increased the danger when collapse - was threatened. The result was an increased incentive to reckless - speculation and manipulation. Says the report of 1907, “The dangers - of speculation have been increased, the power of the market to - resist one-sided movements has been weakened, and the possibilities - of misusing inside information have been enlarged.” - - (2) The money market has been increasingly demoralized through - the greater fluctuations in demand for funds to carry speculative - cash accounts. The New York method is held in abhorrence by - German financiers, who attribute to it, in large part, the wild - fluctuations in New York call rates, the frequent “money panics” - and the tendency to reckless “jobbery.” In proportion as the new - Berlin methods approached the cash delivery system of New York, - these evils have appeared there. - - (3) The business of the great banks has been increased at the - expense of their smaller rivals. The prohibition of trading for the - account made it difficult for the latter to carry out customer’s - orders because the new methods required large supplies of both - cash and securities. Furthermore, an increasing share of the - business of the large banks came to be settled by offsets among - their customers, and the actual exchange transactions became a - proportionally small part of the total transfers. - - (4) This has a twofold effect. Business within the banks is done on - the basis of exchange prices, but these became more fluctuating and - subject to manipulation as the quantity of exchange dealings were - diminished and were concentrated in a few hands. The advantages of - a broad open market were lost. The object of the act had been to - lessen the speculative influence over industrial undertakings. Its - effect was to increase it. - - (5) Finally, the effect of interference, increased cost, and legal - uncertainty was to drive business to foreign exchanges and diminish - the power of the Berlin Exchange in the field of international - finance. The number of agencies of foreign houses increased four - or five fold and much German capital flowed into other centres, - especially London, for investment or speculation. This in turn - weakened the power of the Berlin money market, so that even the - Reichbank has at times felt its serious effects.[84] - -Concerning the “Exchange Register” (which the government has now -abolished as a complete failure) and the effort to keep the public out -of the speculative markets, Professor Emery says: - - In one sense the fate of the famous exchange register is laughable, - but in a deeper sense it is genuinely sad, for the object was a - worthy one and the new scheme was adopted with high hopes. Its - failure was inevitable, since it did not remove the temptation - to speculate. The men who felt this temptation most, and whose - position least warranted their yielding to it, were of course the - very last men to have themselves registered. In fact the whole - public revolted. The number of registrations never reached four - hundred, which number would not begin to cover the banking and - brokerage concerns. The number of “Outsiders” registered never - reached forty. Even the conservative banks had to choose between - giving up all such business and dealing with non-registered parties. - - (1) The uncertainties of the new situation were most likely to - exclude the cautious and well-to-do from participation in the - market. The reckless gambler of small means was less likely to be - disturbed in his practices. - - (2) The act aimed to establish legal certainty by means of - registration. It proved a direct incentive to fraud. The customer - was not legally liable on his contracts; therefore, every reckless - and dishonest little plunger, who could get a broker to trust - him, could take a “flyer” with everything to gain and nothing to - lose. Cases increased rapidly in the courts and the worst element - of the public was active to the relative exclusion of the better. - Instances even occurred where a man would play both sides of the - market at the offices of two different brokers and simply refuse to - settle on the losing contract. - - (3) As affecting this phase of the question, references should - be made again to the transfer of business to foreign exchanges. - Morally and socially it is as bad for the German public to - speculate in cheap mining stocks on the London Exchange as to do so - at home. The flow of German funds into the market for South African - securities would indicate a further way in which the purposes of - the act were defeated. - - (4) Finally, the question must be faced of the effect of - eliminating the public from the speculative market even if it - could be accomplished. It is supposed sometimes that such a result - would be all benefit and no injury. On the contrary, the real and - important function of speculation in the field of business can only - be performed by a broad and open market. Though no one would defend - individual cases of recklessness or fail to lament the disaster - and crime sometimes engendered, the fact remains that a “purely - professional market” is not the kind of market which best fulfills - the service of speculation. A broad market with the participation - of an intelligent and responsible public is necessary. A narrow - professional market is less serviceable to legitimate investment - and trade and much more susceptible of manipulation.[85] - -It is not surprising that such a law, enacted to meet political -clamor, in defiance of the recommendations of the committee, and in -the face of all the economic experiences of the century, should have -proved a fiasco in a double sense. Not only did it fail to accomplish -its purpose, but, as we have seen, it brought about a new chain of -evils vastly more distressing to German commercial development than -all the evils that gave it birth. The report of the Deutsche Bank for -1900 said: “The prices of all industrial securities have fallen. This -decline has been felt all the more as, by reason of the ill-conceived -Bourse Law, it struck the public with full force without being softened -through covering purchases of speculative interests.” Four years later -the same bank reported: “A serious political surprise would cause the -worst panic, because there are no longer any dealers to take up the -securities which, at such times, are thrown upon the market by the -speculating public.” In 1905 the bank again forcibly urged the revision -of the law in these words: - -“In our last report we referred to the great danger which may be -brought about through delaying the revision of the Bourse Laws, and we -are now pointing to it again because we consider it our duty to impress -again and again a wider circle of the public with the economic value -of the Stock Exchange and its important relation to our financial -preparedness in times of war.” - -Again, the following year the bank kept pounding away on the same -theme: “If it had still been necessary to furnish proof of the -regrettable fact that the German Bourses are no longer able to -accomplish their task--equally important to the welfare of the people -as to the standing of the Empire--the trend of events during the past -financial year in general, and the result of the last German Government -issues in particular, would have furnished that proof.” - -Meanwhile, other leading financial institutions took up the same cry. -Thus the Dresdner Bank in its report in 1899 said: “The danger which -lies in the ban put on speculation, especially in the prohibition -of trading for future delivery in mining and industrial securities, -will become manifest to the public, if, with a change of economic -conditions, the unavoidable selling force cannot be met by dealers -willing and able to buy. It will then be too late to recognize the -harmful effects of the Bourse Law.” In 1902 the Disconto-Gesellschaft -reports: “The unfortunate Bourse Laws continue to be a grave obstacle -to business activity.” And again in 1903: “The Bourse will not be able -to resume its important economic functions until the restrictions upon -trading for future delivery have been removed.”[86] - -The lesson to be learned from the failure of the German Bourse Law of -1896, and from the frank recognition of that failure as evidenced by -the repeal of 1908, cannot be overestimated in its importance. It is -inconceivable that law-makers of to-day may ignore such a warning. I -have quoted freely from Professor Emery of Yale University in pointing -out the deplorable results of that legislation because his study of -the subject has made him the foremost authority. The remonstrances of -the German banks and business men have also been cited because they -were on the spot; they saw and felt the prostration of German business -that followed swiftly on the heels of this law; they were a unit in -pronouncing it a wretched failure. In the appendix to this work will be -found the report of the Hughes Commission in which the ten experts on -that board unanimously reported “the evil consequences” of Germany’s -experiment, its “grotesque” operation in practice, and its utter -failure. - -It is a simple matter for the querulous and discontented element of a -community to reason along the lines of least resistance and demand the -enactment of laws to right every fancied wrong. But the patient study -of such matters, the nice balancing of probabilities, the penetrating -investigation of similar experiments elsewhere and the analysis of -their bearing on the larger affairs affected by them--all this requires -critical judgment of a high order. When such an issue is evolved -laymen stand aside for a while, until the evidence of experts has been -submitted to minds competent to decide in accordance with evidence. - -Applying this principle to the ever-present menace of legislation in -America directed against the Stock Exchange, we find each witness -testifying to the fact that the German law of 1896, far from benefiting -the public, injured it immeasurably. It put a premium on reckless -speculation and offensive manipulation; it demoralized the money -market; it choked the small banks and made virtual monopolies of the -large ones; just in proportion as it stifled speculation it put an -end to industrial undertakings that depend for their success upon the -spirit of adventure and risk; it drove money and credit out of Germany -and into London and Paris; it removed from the Berlin market the -support of the bears, thus exposing the whole investment structure to -violent collapse. The layman must consider this and the men who make -our laws must look before they leap. - -Speculators in the region of criticism, whether of theology or -economics, who find themselves face to face with a fact too stubborn to -fit in with their opinions or conclusions, have but two courses open to -them: either to reconsider in the light of testimony the conclusions -they have reached, or to denounce and discredit the inconvenient -witness. In this instance the inconvenient witness cannot be denounced; -his name is legion. Every merchant in Germany will tell you the Bourse -Law was a sad mistake and will deplore its enactment. Nor can such -witnesses be discredited; therefore the advocate who believes that in -legislation lies the remedy for what he conceives to be the evils of -speculation must perforce choose the other horn of the dilemma; he must -reconsider. - -It is a gratifying fact that in America, where law-makers are prone to -enact a hodge-podge of laws on every conceivable subject, there has -been no such serious mistake made by the Federal Government as that -which occurred in Germany. In 1812, five years before the New York -Stock Exchange was organized, an act was passed by the New York State -Legislature entitled “An act to regulate sales at public auction and to -prevent stock-jobbing,” its essential purpose being the prevention of -short selling--the bête-noir of all the early amateurs in economics. -This was the only anti-speculation act ever placed on the New York -Statute books. The act read: - - That all contracts, written or verbal, hereafter to be made, for - the sale or transfer, and all wagers concerning the prices, present - or future, of any certificate or evidence of debt due by or from - the United States or any separate State, or any share or shares of - stock of any bank, or any share or shares of stock of any company, - established or to be established by any law of the United States, - or any individual State, shall be, and such contracts are hereby - declared to be, absolutely void, and both parties are hereby - discharged from the lien and obligation of such contract or wager; - unless the party contracting to sell and transfer the same shall - at the time of making such contract be in actual possession of - the certificate or other evidence of such debt or debts, share - or shares, or to be otherwise entitled in his own right, or duly - authorized or empowered by some person so entitled to transfer - said certificate, evidence, debt or debts, share or shares so to - be contracted for. And the party or parties who may have paid any - premium, differences or sums of money in pursuance of any contract, - hereby declared to be void, shall and may recover all such sums of - money, together with damages and costs, by action on the case, in - assumpsit for money had and received for the use of the plaintiff - to be brought in any court of record.[87] - -The effect of this law was precisely the same as that which followed -the enactment of Sir John Barnard’s Law of 1734 in England; it did -not prevent short selling, it accomplished no useful purpose, and -it merely served to enable unscrupulous speculators to “welch” on -their contracts. In 1858 it was repealed, and short selling, having -demonstrated its usefulness in many ways, was thenceforth declared to -be legal in a statute which read as follows: - - No contract, written or verbal, hereafter made for the purchase, - sale, transfer, or delivery of any certificate or other evidence - of debt due by or from the United States, or any separate State, - or of any share or interest in the stock of any bank, or of any - company incorporated under the laws of the United States, or - of any individual State, shall be void or voidable for want of - consideration, or because of the non-payment of any consideration, - or because the vendor, at the time of making such contract, is not - the owner or possessor of the certificate or certificates, or other - evidence of such debt, share or interest.[88] - -The United States Government’s attempt to regulate or restrict -speculation is confined to a single instance, the Gold Speculation -Act of 1864, a law which enjoyed a brief existence of but fifteen -days.[89] In 1864 there were large issues of paper currency that drove -gold out of circulation and caused it to be bought and sold as any -other commodity. Thus a large supply of gold fell into the hands of -speculators, and as its price rose more than 100 per cent., the public -jumped to the conclusion that this portentous increase was due to -the operations of speculators, and that the rise could be stopped by -prohibiting such practices, hence all gold speculation was forbidden by -statute. As a fallacy this was monumental. Professor Hadley tells the -story in this way: - - The effect was precisely the opposite of what had been anticipated. - Every man who was engaged in foreign trade had to provide security - for being able to make gold payments in the immediate future, - if called upon to do so. Being prevented from dealing with - speculators, he now had to accumulate a reserve of his own. This - caused an increased demand for gold at a time when it was unusually - difficult to maintain an adequate supply. Under two weeks’ - operation of the act the price of a hundred gold dollars rose from - about two hundred paper dollars to very nearly three hundred. So - obvious was its evil effect that it was hurriedly repealed as a - means of preventing further commercial disasters. - - Again, in the early part of 1866, there was a rise in the price of - gold, which was attributed by public opinion to the speculators. - Their machinations were defeated, not by legislation, but by the - issue to the market of a part of the gold lying in the Treasury of - the United States. For the moment the price of gold fell and people - rejoiced that the plans of the speculators had been defeated. - But a short time later, when the war between Prussia and Austria - caused a demand for gold in Europe, there were large exports of the - metal, and its price arose by natural causes. The United States was - obliged to buy back, at a decided loss, a part of the gold which - the Treasury had so unwisely issued. - - It turned out in the end that the operations of the speculators in - anticipating the wants of the future would have prevented a loss to - the country, and that the attempt of the Treasury to defeat those - operations was attended with expense both to the government and to - the mercantile community.[90] - -Mr. Horace White deals with the gold speculation of the ’60’s as -follows: - - During seventeen years the business of the country was regulated - by the quotations of the Gold Exchange. The export trade of - the country necessitated the selling of gold in advance of its - delivery. A buyer of wheat or cotton for export would make his - purchase according to the current price of gold, but he would not - get his returns from abroad in some weeks. If the price of gold - should fall, meanwhile, he would be a loser. So, he would sell at - once the gold he expected to receive later.... Black Friday and its - evil consequences were due to the existence of a bad currency and - a fluctuating standard of value. The Gold Room was at that time - a necessity. Business could not be carried on without it, but it - offered temptations and facilities for gambling which could not be - resisted.[91] - -In the various States of the Union, where law-making goes on all the -time with surprising zeal, there is, of course, a bewildering array -of crazy-quilt laws on the statute books dealing with speculation, -but these are relatively unimportant. Some of the States, Wisconsin, -Louisiana, California, Montana, North Dakota, and South Dakota, have -laws similar to those of New York State, legalizing short sales of -commodities and securities. Other States prohibit dealing in futures, -short sales, corners, forestalling and speculation in general, and two -States actually license bucket-shops.[92] - -It by no means follows because of the failure of the German Bourse -Law of 1896 and of all similar earlier attempts to regulate or -restrict speculation, that the issue has become moribund and that -nothing more will be heard of it. On the contrary, just as each one -of these abortive attempts at legislation; and each of the Government -Commissions we have described grew out of excess in speculation and -consequent losses to the public, so, no doubt, future extravagance -in the world of speculative undertakings will be attended by similar -outcries and similar results. There were debates in Congress for three -years over the Hatch Anti-Option Bill, and while this measure failed of -enactment into law, something akin to it will no doubt come up again -one day when the public is in the mood. - -It is probably true that in such event the lessons taught by earlier -legislative experiments, and particularly by the German fiasco, will -have their effect in checking hasty legislation; in any event it would -seem impossible that the teachings of all the economists--scientific -contributions to literature that to-day comprise a large library--can -be ignored in any future discussion of this subject. Meantime, -accepting as our major premise the enduring presence of speculation -as a fixed and immutable characteristic of human nature the world -over--there remains the plain warning to Stock Exchanges and their -governors that fences must be mended as gaps occur, and that the -control of the business in the interest of the public must be the loyal -motive of all these institutions. It will not suffice to whitewash -indefensible conditions, nor to hide from public scrutiny any detail of -a business which that public is asked to support. Conversely, it may -be pertinent to say that in the effort to remedy some of the evils of -speculation the private citizen has his responsibilities as well as the -stockbroker. - -Looking forward toward the great questions of the future having to -do with State regulation of industry and commerce of which the Stock -Exchange is a part, the student finds no solution so satisfactory as -the doctrine of _laissez faire_, assuming always that those in control -of the business under scrutiny shall do their full duty. Under the -policy England has risen to unexampled commercial supremacy, while -America, because serious mistakes have been made, finds its advocates -of State regulation growing daily in number, with consequent danger to -all its delicate commercial machinery. - -In these circumstances how has the Exchange met its duties and its -responsibilities? The answer is to be found in its records for the year -1913. Prior to that time there was undeniably a careless acceptance of -old standards without inquiring too closely into them; letting things -drift was the rule. But it is never too late to mend, and in 1913 the -Exchange met the issues squarely. - -Manipulation was stopped, in so far as it can be stopped, by the famous -resolution of February 5, 1913, reading as follows: - -“At a meeting of the Governing Committee held this day, the following -resolution was adopted: - - “_Resolved_: That no Stock Exchange member, or member of a Stock - Exchange firm, shall give, or with knowledge execute, orders for - the purchase or sale of securities which would involve no change of - ownership. - - “The punishment for this offense shall be as prescribed in Section - 8 of Article XXIII of the Constitution regarding fictitious - transactions.” - -Trading on insufficient margins was stopped by the resolution of -February 13, 1913, as follows: - - “At a meeting of the Governing Committee held this day, the - following resolutions were adopted: - - “That the acceptance and carrying of an account for a customer, - either a member or a non-member, without proper and adequate - margin, may constitute an act detrimental to the interest and - welfare of the Exchange, and the offending member may be proceeded - against under Section 8 of Article XVII of the Constitution. - - “That the improper use of a customer’s securities by a member - or his firm is an act not in accordance with just and equitable - principles of trade, and the offending member shall be subject - to the penalties provided in Section 6 of Article XVII of the - Constitution. - - “That reckless or unbusinesslike dealing is contrary to just and - equitable principles of trade, and the offending member shall be - subject to the penalties provided in Section 6 of Article XVII of - the Constitution, in every case in which the offense does not come - within the provisions of Section 5 of Article XVI thereof.” - -It is one thing to adopt a rule, but it is quite another to enforce it. -In order that there might be no miscarriage on this point, the Exchange -on March 5, 1913, took the one necessary step to make these reforms -effective by the appointment of a Committee on Business Conduct, as -follows: - - “Fourth: A Committee on Business Conduct, to consist of five - Members. - - “It shall be the duty of this Committee to consider matters - relating to the business conduct of members with respect to - customers’ accounts. - - “It shall also be the duty of this Committee to keep in touch - with the course of prices of securities listed on the Exchange, - with the view of determining when improper transactions are being - resorted to. - - “It shall have power to examine into the dealings of any members - with respect to the above subjects, and report its findings to the - Governing Committee.” - -This Committee is composed of Governors of the Exchange in actual -business on the floor. Members call it “The Police Committee,” which -is correct. Its members are constantly on the watch for evidences of -wrongdoing, and the broad powers entrusted to them under the resolution -above quoted give them ample authority to act summarily. I have watched -them at their work and I have no hesitation in saying that this -Committee is the most important influence for good that has ever been -made a part of the machinery of any stock exchange in the world. The -most prejudiced critic of the Exchange will I think admit the truth of -this statement. - -These three important additions to the Stock Exchange machinery have -met all the objections thus far encountered. They are broad and -sweeping; they are rigidly enforced and they have come to stay. Sooner -or later they must be adopted and enforced by all exchanges elsewhere. -I think it may be said that having gone so far, the Exchange has tasted -the fruits of a great moral victory and finds it good. It follows that -new problems as they arise will be met in the same spirit. All plans -can be improved, all work can be better done. The main thing is to -get started on the right path. After that the task is easy. And it is -immensely satisfying to feel that the Exchange has definitely chosen to -hew its path along new lines of business ethics. - -A few years must pass no doubt before the public recognizes the -importance of these reforms, but in the end they must be recognized -and appraised at their real value. Is it too much to hope, when that -day dawns, that public sentiment will force the demagogue and the -notoriety-seeking critic into the background, and cheerfully give the -Stock Exchange a hand? Is it unreasonable to predict that if we keep -our house in order, talk of incorporation and supervision by Albany -and Washington must cease? I feel strongly that this is to happen. I -know it ought to happen, and those of my colleagues who have worked so -loyally to bring about these reforms will be mighty proud and happy -when it does happen. - - - - -CHAPTER VIII - -THE DAY ON ’CHANGE, WITH SUGGESTIONS FOR BEGINNERS - - -The stockbroker’s praises are never sung; if he has good qualities, one -seldom hears of them. Doctor Parker once defined the Stock Exchange as -the “bottomless pit”: Doctor Johnson said a broker was “a low wretch”; -politicians vie one with another in painting him a parasite and a -social excrescence. Impatient idealists who would take a short cut -to perfection assert that he is of no real economic value, and would -enact laws to restrain him. In the novels and on the stage he becomes -sleek, cunning, convivial, and slippery, while there is ever about him -a rank smell of money and a Machiavellian sublety that enables him -to get something for nothing. Without understanding him and without -comprehending his devious ways, we feel somehow that he lacks what Lord -Morley calls “original moral impetus,” and that in some mysterious way -there is a stratagem lurking in all his actions. When he enters the -stage or the story we say: - - “By the pricking of my thumbs, - Something wicked this way comes.” - -Members of the Stock Exchange are more or less familiar with Baron -Munchausen and Mother Goose--for if rumor be credited both these -characters live in Wall Street--so they accept with good humor the epic -touch of playwright and novelist who thus take poetic liberties with -them and their profession. But the iron enters into their souls when -you term them non-producers and parasites, and long into the night they -will debate it with heat, bringing down the lath and plaster on their -detractors with the heavy artillery of all the orthodox economists, and -painting in gloomy colors the picture of a commercial world without its -great Exchanges. - -At such times they become very earnest, and the listener, who perhaps -never thought of it before, comes away at least partially persuaded -that society as it is constituted to-day will have to undergo a very -decided transformation before it can get along without the machinery of -which these maligned persons are so important a part. It has stood the -test of time; it has come to stay; its fundamental idea, economy and -utility in trade, began with the Agora of ancient Greece and the Forum -of Rome. If there is something apocryphal, then, in the tradition that -derides the profession, here at least is evidence of its early origin, -its growth, and its power of endurance. In any case, membership in the -Stock Exchange is to-day the ambition of good citizens everywhere, and -affords to many a father a solution of the question at once difficult -and important, “What shall we do with our sons?” - -There are arguments against such a career, of course, just as there -are against all roads that lead anywhere this side Utopia, but -nevertheless, a man with capital, average intelligence, and good -health, daily contributing by his labor to the silent forces that ebb -and flow within these walls, can do well on ’Change without sacrificing -anything that makes for self-respect and without diminishing in any -degree his value as a useful member of the community. Moreover, he -is free from things sedentary and is brought into daily contact with -men and affairs that broaden and instruct him. He becomes a thinking -and observing person, one whose mind never becomes atrophied for want -of material on which to feed. He must be equipped with patience and -philosophy to enable him to endure, without losing his nerve, the -long periods of dulness that are a sorry part of the business, but -he will not complain of wasted days if he learns to know that waste -time, like waste material, may be converted into valuable by-products; -that just as manufacturers are vigilant in turning their scrap-heaps -into commercial utilities, so, in his daily economy the Stock Exchange -member may, if he has the right stuff in him, turn the ashes, slag, and -refuse of the hour into things of practical value. Once he has learned -to do this, the novitiate has surmounted the most serious obstacle in -his profession. - -His days on “the floor,” as it is commonly termed, will bring him in -contact with many different types. He will find here all that is finest -in human character, and many withering things that are most fatal to -it; these he may find anywhere, because there will always be men who -carry all sail and no ballast, “men who cannot believe life real until -they make it fantastic.” But the Stock Exchange is a great leveler; -infallibly its swift analysis of character will search him out, weigh -him and measure him, and place him just where he deserves to be. -Nowhere else among business men does this silent and sure appraisal of -worth find a more perfect result. It has nothing to do with the size of -one’s purse nor the blue in one’s veins; it takes no account of what a -man has been nor of what his ancestors were. Commercial honor is what -counts, and within these four walls it is raised to a high plane and -maintained with reverence. They live a touch-and-go life, with quick -changes and nerves all in action, but they make no mistakes when they -analyze character in their great crucible. - -Those brutal aphorisms, “money talks,” “might makes right,” “whatever -is, is right,” and all similar phrases, become meaningless in the -matter-of-fact subordination of externals that one witnesses daily on -’Change, where life is stripped of all save elementals. It is character -that “talks” here, not money; if might makes right, it is the might of -decency and not of brute force or “pull”; whatever is, is “right” only -so far as it conforms to the code of gentlemen and exalts the square -deal. Unless a candidate understands this in its fullest sense, and is -determined to make it his goal, he had better avoid the Stock Exchange. -Conversely, we find in this critical atmosphere another reason why -honorable men are ambitious to become members, for it is something -inspiriting to have won the discriminating approval of a critical -assembly abounding in experience and guided by good traditions. - -The New York Stock Exchange is an association and not an incorporated -body. It resembles a club in its organization, and hence through its -governing board it exercises a control over its members that could not -be maintained by differently constituted authority. From the moment -a man signs that Ark of the Covenant, the constitution, and thereby -becomes a member, he places himself, his partners, his customers, -his employees, his books and all his business affairs unreservedly -in the hands of the Board of Governors. This body, which is composed -of members of the Exchange, is chosen in classes of ten, by the full -Board at an annual election. It consists of forty members, divided -into eleven standing committees, of some of which the President, -Vice-President, and Treasurer are also members. - -It has been urged in times past, by those who have not understood -the peculiar powers of this Governing Board, that the Stock Exchange -should incorporate in the manner provided by law, and thus place -its affairs within the control of the State authorities, so that if -mistakes occur and wrongdoing becomes evident offenders may be dealt -with by the legal authority vested in the Courts. But the essential -point altogether missed in this suggestion lies in the fact that the -absolute power vested in the Board of Governors, by the existing plan, -gives the Stock Exchange authorities vastly greater control over its -members than any law on the statute books could possibly give. The -Hughes Commission, which went thoroughly into the affairs of the Stock -Exchange in 1909, recognized this fact, and its report emphasized the -point that if changes were necessary they should come from within the -Exchange itself, because of the broad control vested in it by its -constitution.[93] - -The manner in which the Board of Governors handles offences as -they occur, and the way punishment is meted out, would not have a -constitutional leg to stand on if, as an incorporated body, offenders -could invoke their legal privileges. Under its present organization, -for example, the Board may, if it sees fit, intercept and cut off a -member’s telephone connection; it may dictate with whom he may or may -not do business, and in its wisdom it may determine how, when, and -where that business shall be conducted. If it were an incorporated -body and each offender could resort to the courts in instances such -as I have cited, what would become of its rules, and how could the -Exchange authorities maintain its absolute determination to protect the -public at all hazards? Under the existing system, which true friends -of the Exchange and of the public may well wish to see maintained, the -governors are enabled to find the direct way and the common-sense way, -without being blocked by a jungle of legal technicality. They are not -to be delayed or restricted by alibis, by pleas of immunity, or by -States’ evidence, nor are they to be interfered with by the rain of -legal writs through which an accused man, in the courts, may twist and -double and block and delay the punishment for his sins, if sins there -be. - -Wonderment is often expressed by men in other lines of business at the -severity of the punishment sometimes inflicted by the governors in this -autocratic control. To expel or even to suspend a member, and thus -bring upon him great pecuniary loss as well as disgrace, all because of -an offence which might go unpunished in other professions, naturally -seems to an outsider to be unnecessarily severe. The answer to this is, -of course, that the governors, recognizing their great duty, accept -as a public trust the power and the ability to maintain it. No matter -whose head is hit, the rules will always be vigorously enforced because -they are designed to protect the public--a public, I am sorry to say, -that has not always tried to understand what the Exchange stands for. -That is why no statute of limitations can interfere to protect any -one of its members from the penalties that attend a departure from -the straight line of business morality. A rigid enforcement _from -within_ is the only efficient way, and no one who knows the governors -and their arduous labors on behalf of the principle for which the -Exchange stands can ever doubt it. The members themselves, no matter -who is punished, are a unit, and an enthusiastic unit, in upholding the -disciplinary action of the governors every time. - -The best course for a young man to pursue who wishes to become a member -is first to spend a year or more as clerk in a well-regulated broker’s -office. The business is by no means intricate, and there are details -with which he should familiarize himself. If in future years his -partners are absent, he can then go over his firm’s books and acquaint -himself, as he should, with all its affairs. A dishonest partner could -ruin him, or, what is worse, disgrace him, for the governors recognize -no distinctions as between partners, nor is ignorance accepted as an -excuse. Office partners who are not members of the Exchange do not -always understand the rules, nor the rigorous spirit in which they are -enforced, and just as the Board member is held accountable for his -partners, so he must pay the penalty for their misconduct. - -This means that a member must choose his partners carefully, must -familiarize himself with what they are doing, and must know how to -read every entry on the firm’s books. Then, too, it is immensely -satisfactory to one who has been on the floor all day and more or less -out of touch with his office details to learn of his own knowledge each -day, before he goes home, just where the firm stands. He looks over the -customers’ accounts, the loans, and the nature and amount of the firm’s -unemployed resources, including its balances at the banks. Such a man -sleeps well, and reduces to a minimum the anxieties that, at critical -times, make of this a nerve-racking occupation. It is all simple -enough, and in the modern methods of office economy in bookkeeping he -can do it without loss of time. Above all other considerations, such a -man knows his business thoroughly from top to bottom, and he should not -think of investing his capital on any other basis. - -Perhaps a word will not be amiss regarding partnership agreements. A -Stock Exchange commission business is one that should be conducted like -any other business--that is to say, reserves should be laid aside and -surplus balances created for the inevitable rainy day. That this is not -done by all brokerage houses in the way it should be done is due to -the curious habit that has grown with the years, whereby stockbrokers -spend their money, uptown and down, with a lavish hand. Too many men of -the younger generation thus give hostages to fortune in their private -extravagances by “drawing down” their credit balances as fast as they -accrue. “Easy come, easy go,” seems to be the guiding principle, and -when hard times come, as come they must, debit balances are created -that soon eat into capital account. - -No hard and fast rule can be laid down to meet conditions like these, -but the best method I have seen, and the one most wisely designed -to avoid mishaps for beginners, consists in a partnership agreement -by which each member of the firm may draw a monthly sum, worked out -to meet his normal requirements, _and no more_. All that remains is -then turned into capital account, where it draws interest, becomes a -producer, and grows by what it feeds on. I have in mind a firm of young -men who some years ago resorted to this method of compulsory saving, -with such success that, despite the vicissitudes of the passing years, -the members comprising it are now all wealthy, attributing their good -fortune wholly to this wise and provident copartnership agreement. - -New York Stock Exchange memberships are obtained in only one way. -Having assured himself that he can meet the requirements of the -Committee on Admissions, and having provided himself with two -sponsors, the candidate enters into negotiations with the secretary -of the Exchange for the purchase of a “seat,” as it is termed. As -there are only 1100 members, and as the membership is always full, -he must either purchase the seat of a deceased member, or make a bid -sufficiently high to attract a seller. He may, of course, subject to -approval by the committee, inherit a seat or acquire it by private -transfer, but the customary process is to buy openly through the -secretary, a salaried officer of the Exchange, whose authority in -matters of infinite detail is such as to make him a mighty power in -executive affairs. Thereupon he pays over the purchase price, together -with an initiation fee of $2000, and presents himself and his sponsors -before the Committee on Admissions. - -This committee first calls his proposer, and then his seconder, -and they are subjected to a careful inquiry as to how long they -have known the candidate, and whether in a business or social way; -his qualifications for membership, his health, his character and -reputation, and his previous business experiences are all subjected to -a microscopic scrutiny. His sponsors are also asked if in the ordinary -course of business they would accept his check for $20,000.[94] If the -answers to these questions prove satisfactory, the candidate himself -is summoned and put through a similar examination. As his name has -been publicly posted on the bulletin board for two weeks, anything -detrimental concerning him will probably have been communicated to -the authorities before he is examined, but if not, provided he proves -satisfactory and the particular department of Stock Exchange work which -he proposes to undertake meets with the approval of his inquisitors, -and provided also his partners are not objectionable, he is elected -to membership after he signs his name to that _magnum opus_, the -constitution. - -The price paid for memberships in recent years has varied widely with -the condition of the times and the state of the stock market. In the -halcyon days of December, 1905, and the opening months of 1906, there -were several transfers at $95,000, the high-water mark. Following -the panic of 1907 seats declined in December of that year to $51,000 -and rose again in 1909 to $94,000. The only dues are $100 annually, -together with $10 voluntarily paid by members to the heirs of each of -their deceased colleagues, but this amount is, under the regulations -of the Exchange, limited to $150 annually, the balance, if more than -fifteen members die in any one year, being paid out of reserve -funds. The sum of $10,000 which thus accrues to the heirs of deceased -members is, of course, much cheaper than any other form of insurance. -The Exchange is enabled to maintain it by the $10 contribution as -described, and the general fund is kept intact because the 1100 members -actually contribute $11,000, of which the extra $1000 is set aside as a -reserve, which is prudently invested. - -If we accept the fallacious argument that a thing is worth just what -one can get for it, there can be no argument as to the value of Stock -Exchange memberships, but that is not the way to approach the subject. -It may be said with certainty that no matter how much has been paid -in the past, or how much may conceivably be paid in the future, a -purchaser who devotes to his business the same time and labor that -he would devote to any other business in which a similar capital was -invested will always be able to earn a good return. Those awful periods -of stagnation will appear now and then, and accidents in the shape of -losses will occur and return again to plague him, but, nevertheless, -the hard worker will find no cause for complaint when he sums up, -let us say, a five-year average. This is demonstrated by the fact -that it is only on rare occasions a Stock Exchange member changes his -vocation, which is another way of saying that memberships are held at -high prices because holders are prosperous and will not sell. - -In considering the value of Stock Exchange memberships it is important -to include the “unearned increment” that goes with them. Despite all -that may be said against it by members themselves, who in dull times -denounce their calling with cynical extravagance, membership carries -with it certain undefined advantages. It is a centre of the financial -world in America; the business is one that quickens enterprise and -encourages adventure; it undeniably gives a man a certain standing -and character among his fellows; he is always abreast of the times, -his hours are not long, he acquires habits of deduction, analysis, -and observation that sharpen his wits and give zest to life; he is -surrounded at all times by a great storehouse of wit, wisdom, and -experience, and from the very nature of his business he is often -brought into contact with important news of which he can take advantage -and which may lead to highly profitable opportunities for investment or -speculation. He would be less than human if he did not avail himself of -such opportunities, and the business would lose much of its enjoyment; -indeed “the tranquillity of dispassionate prudence” of which Goldsmith -speaks may easily be carried too far on ’Change. - -When a newly elected member makes his appearance on the floor he is -taken to the rostrum by one of his sponsors, who introduces him to -the Chairman. That formality concluded, he is greeted by shouts of -“New Tennessee,” and is instantly surrounded by a howling mob of young -members bent on initiating him. The origin of this war-cry, “New -Tennessee,” is an enigma one would like to solve, but it is lost in -obscurity. Even the board-room antiquarians have no clue. One of the -members tells me that his grandfather, who was a member of the old -Exchange that stood at the corner of Wall and William streets in the -early 1830’s, often told him that the phrase was in use then, just as -it is to-day. Its early origin, at least, is thus established, and -one’s curiosity concerning it is proportionately increased. However it -originated, it remains the popular slogan, and when a shrill-voiced -member in any part of the room cries out above the din, “New -Tennessee,” there a crowd of the boisterous younger element gathers to -welcome a new member.[95] - -To-day, thanks to the prudence of the Committee of Arrangements (which -has charge of the board-room discipline), the hazing of new members -is confined to harmless pranks, but up to a year ago the process was -a severe one. Newspapers rolled into clubs were used to beat the -novitiate over the head; he was pelted with everything within reach; -his collar and tie were torn off, and after a hundred strong young men -had thus jostled and mauled and pounded him all over the room, he was a -sorry sight. It began to be felt, after a peculiarly severe hazing of -this sort, that something might happen one day to bring reproach upon -the Exchange and sorrow to the members themselves, so the committee -wisely put a stop to the practice. - -When the new member settles down to serious work he will find open to -him several different methods of doing a brokerage business, and in -this respect the New York Exchange differs widely from those abroad. In -London, for example, there are but two classes, jobbers and brokers, -to only one of which a member may belong. Until very recently the -distinctions between the two classes were but vaguely defined, and -even now frequent undercurrents of resentment are aroused between them -because of the alleged encroachments of one class upon the domain -of the other. In Paris, where the seventy _Agents de Change_ enjoy -an absolute monopoly by government authority, there is very decided -opposition by the less fortunate members of the fraternity, and there -are many who predict that the friction and dissatisfaction which -monopolies arouse in this day and age will sooner or later bring about -a reformation of the French system. - -Here there are no such distinctions, and no friction. A member may be -any one of several different kinds of brokers, or he may be all of -them at once, if his arms and legs will stand the strain, and if his -financial resources will enable him to meet the losses arising from -mistakes. These mistakes are a sorry part of the business, and they are -bound to occur every now and then, no matter how careful a man may be, -but I have observed that they come about most frequently in the case of -men who try to do too much. - -A man may, if he chooses, become a partner in a commission house, and -confine his time to the execution of orders for his firm’s customers. -For these services his firm receives and is compelled to collect, by -the rules, a commission of one eighth of 1 per cent.--that is to say, -$12.50 per hundred shares. Or he may be a “specialist,” and establish -his headquarters at some one spot in the room, and do nothing but -execute orders entrusted to him by his fellow-members in the one stock -or group of stocks situated at that particular spot. For his services -in these transactions he receives a commission of two dollars per -hundred shares, to which is added $1.13 if he is required to “clear” -the trade--that is, to receive or deliver the stock. The latter is -called “three-and-a-shilling business,” or “clearance business.” - -The vocation of the specialist is one that causes frequent comment and -ill-merited abuse. It has been charged that he sometimes exercises -arbitrary power in executing his orders, and complaint is heard that -the price at which he deals is not always a fair price. My observation -is that four times out of five the fault lies, not with the specialist, -but with the broker who gives him the order. The latter has been trying -to do too much, he has held the order in his hand whilst engaged -elsewhere in the hope of saving the commission for himself, and then, -when he has “missed his market,” turns the order over to the specialist -and shifts the responsibility to his shoulders. This is scarcely fair, -and it simply should not happen. The customer protests at the delay and -at the price; he is told the specialist is responsible, and straightway -another voice joins the chorus that holds the specialist in abhorrence. - -Like the chairman of the House Committee of a club, the specialist -is made to bear everybody’s burdens; he is the target for all the -criticism that any one chooses to hurl at him. And yet he is one of -the most useful and indispensable features of the Exchange machinery. -Without him there would be no market whatever in very many securities; -like the London jobber, he is constantly on the spot, ready to take -chances by creating at his personal risk a market where none may have -existed. If it be urged that the specialist should not speculate, but -should confine himself solely to executing the orders on his books, it -may be answered that in such a case he would often be useless, for in -many instances the orders on his books are insufficient in volume to -establish a close market or anything approaching it. By reason of his -speculations a market is created; without them it may not exist. He -speculates, therefore, for the same reason that jobbers in the London -market speculate, and dealers in wheat, cotton, and wool. Like them, he -must have goods on hand to supply the demand, and in the purchase of -these goods (securities) he speculates, legitimately, on the hope or -belief that buyers will appear. - -If the new member chooses, he may become what is known as a “two-dollar -broker,” with a roving commission, executing orders for members in -any part of the room at $2 per hundred shares. The “two-dollar man,” -as he is termed, is a hard worker above his fellows. He labors for a -minimum wage; he must work every day or forego his revenues, for he -cannot delegate his orders to any one else and receive a commission -for these vicarious services. He takes big risks, because he has many -orders from many different houses; the least inattention means loss. -I have known one of these two-dollar men to lose $10,000 on a mistake -on a 500-share order from which his commission was but $10. He is -supposed to be a mine of information concerning floor gossip; his value -to the houses that employ him lies quite as much in his ability as -a newsgatherer as in his skill as a broker. He is on the jump every -minute. The one redeeming feature of his business is that he has no -office responsibilities, and none of the burdensome--and sometimes -painful--duties that attend the stockbroker’s relations to his clients. - -There are perhaps fifty “odd-lot” brokers on the floor, and a member -may, if he pleases, take up this branch of the business. It has to do -with the buying and selling of fractional lots of securities, on which -no commission is charged because the peculiar nature of this business -enables the broker to trade against his commitments as they arise, -and thus obtain compensation for his services in the resultant profit. -In a small way the odd-lot broker, like the specialist, resembles the -London jobber. One of the houses that confines its operations to this -“odd-lot” business has nine partners, seven of whom are members of -the Exchange; another has seven partners with six board-members. The -fact that two such houses should have a million dollars invested in -memberships, to say nothing of the large sums employed as capital, -speaks eloquently for the volume of business they are called upon to -handle. - -This business, which includes fractional lots of securities from one to -a hundred shares, is one of the most important on the floor, since it -represents, very largely, the purchases and sales of an army of small -investors all over the world. To such customers, very properly, the -Stock Exchange gives the best it has, safeguarding their interests with -quite as much care as it bestows on the greatest of market operators. -The handling of all the odd-lot orders that accumulate in a busy day, -the skill required in the office-machinery, the vigilance of the floor -expert, and the foresight necessary to conduct the trading operations -of the firm make this a most fascinating business. - -Another field to which a member may turn is that which has to do with -transactions in bonds. The “bond-crowd,” as it is called, makes its -headquarters on a platform under the east gallery. There are about -fifty of these “bond-men,” and the compensation paid them for their -service is the same as that paid on stocks, ten thousand dollars in -bonds being reckoned equivalent to 100 shares. As there are twice as -many bonds as stocks listed on the Exchange, one would think a larger -number of brokers than this little coterie would be required to handle -the transactions, but, despite this disparity in the relative size of -the lists, it so happens that very many of the listed bond issues are -rarely dealt in, and hence there is no surplus business. Moreover, -brokers from all parts of the room are constantly executing their own -bond orders without having recourse to the assistance of brokers who -make this department a specialty. - -Still another opportunity presents itself in the business of -arbitraging. The arbitrageurs stick closely to the rail along the south -wall, where there are pneumatic tubes connecting with the cable offices -downstairs. Their business is one that calls for the utmost speed, -since it involves taking advantage of fractional differences that arise -from time to time in the prices of stocks that are listed on foreign -Bourses as well as on the New York Stock Exchange. Thus Canadian -Pacific may sell at 270 in London and at the same time at 269½ in -New York, and as an excellent cable service keeps pace with these -fractional differences, the arbitrageur may buy in New York and sell in -London and receive a confirmation, all within three minutes.[96] - -Because of its complexity and its risks, arbitraging is not a business -that appeals to beginners on the floor. One must have reliable -colleagues on the foreign Exchanges who are constantly watchful and -alert, and who are moreover possessed of sufficient capital to finance -large transactions. In addition, there are labyrinthine difficulties -to surmount in the way of commissions, interest charges, insurance of -securities in transit, fluctuations in the money markets abroad and at -home, cable tolls, letters of confirmation, rates of foreign exchange, -settlement days, contangoes, and many other matters. Unless a man has -had a long experience in the difficult art of arbitraging, he had -better shun it or prepare for trouble. - -Finally, in determining what branch of the Stock Exchange business -he will undertake, a member must consider that numerous and shifty -contingent known as “floor traders.” These gentlemen afford an -interesting study. They do not accept orders; each man is in business -for himself. They entertain no illusions, and they recognize no -alliances with each other. Each one follows his own inclinations, and -does not permit himself to be moved by tips, or rumors, or gossip, or -sentiment. He scoffs brazenly at all forms of “inside information.” His -power of observation is keen, and his habit of analysis and deduction -is wonderfully developed. In the surging crowd around an active -stock he sees things with microscopic eye, and acts with surprising -promptness; once his conclusions are reached, speed and agility are -relied upon to do the rest. Age cannot wither, nor custom stale, his -infinite variety. He is a bull one minute, and a bear the next. He is -intent, resourceful, suspicious, vigilant, and ubiquitous. He asks no -quarter, and gives none. Now he is sphinx-like, deaf, inscrutable and -impenetrable; now exploding with the frenzy of battle. You may stand -and chat with him, and he may seem to listen to you. In reality he does -not hear you at all. His roving eye is elsewhere, his mind is intent on -other things. In the middle of a sentence he may leave you abruptly and -go tearing from crowd to crowd like a thing possessed, the incarnation -of energy. - -Visitors in the gallery who look down upon the scene on the floor in -active markets, when all the Stock Exchange elements just described are -striving at their utmost, come away in wonderment. The scene is one -they do not understand. Such tumult is foreign to anything in their -experience, and in their failure to recognize the economic forces at -work in the animated panorama before their eyes they are prone to -form superficial and erroneous opinions. The disorderly nature of the -work seems to impress the visitor forcibly, yet the Stock Exchange is -perfectly orderly; transactions involving millions come and go without -the slightest friction. Nothing could work more smoothly. - -It does not occur to the uninstructed spectator that mighty forces -are here at work in establishing values; that the object of the Stock -Exchange is to safeguard investors; that it is the one unobstructed -channel through which capital may flow from sources where it is -least needed into those where it may be most beneficially employed. -The casual onlooker often gives no thought to the high standard of -commercial honor that is maintained here; he does not realize that his -own affairs, whatever they may be, would face a serious situation were -this very important part of the modern mechanism of business to suffer -interruption. And so it sometimes happens, in his hazy and nebulous -impressions of the Stock Exchange as gathered from the visitors’ -gallery, that this man’s mind is fertile ground for the seed which may -be sowed there by every genteel humbug, demagogue, or quack whom he -chances to meet. - -It may be admitted freely that the facilities afforded by Stock -Exchanges, like all other great public utilities, are sometimes -foolishly or dishonestly abused, but by no stretch of the imagination -can such abuses attain to the mischief done by those who would deceive -people into the belief that the Stock Exchange, because it deals with -large affairs in a large way, has some improper quality about it. Many -minds, many hands, and many hours of patient labor have been bestowed -on the making of the chronometer which is a vital part of a great -ship; yet a child may “put it out of business,” and destroy the ship’s -company. - -That these observations apply to the New York Stock Exchange need not -be elaborated when we consider that one third of our nation’s wealth -is represented by its securities; that there are two million owners -of them; and that, through the widespread publicity of Stock Exchange -quotations the world over, all these owners are given gratis the -epitomized judgment of experts as to the value of those securities -each day and their prospective value in the future.[97] - -The Stock Exchange is open for business from 10 A.M., to 3 P.M., and -on Saturdays from 10 to 12 noon. The broker reaches his office between -9 and 9:30 A.M., looks over his correspondence, makes a mental note of -the general status of the firm’s affairs, glances at the morning’s news -that is rapidly reeling off the ticker, reads the prices cabled over -from the London Stock Exchange which has been in session four hours, -and thus in a general way acquaints himself with what may be expected -at the opening of the New York market. The two-dollar broker and the -specialist do not concern themselves greatly with such matters, and -frequently they go directly to the floor without stopping at their -offices. - -By 9:45 A.M. the Board is beginning to present a scene of animation. -Of the 1100 members not more than 600 are in attendance, and often not -more than 400; indeed, there are members who have never once entered -the room. But the attendance is increased by the presence of some 230 -pages in uniform, wearing five-year service stripes, of which the -sleeve of the superintendent is adorned with eight; 30 telegraph -operators, whose business it is to hurry from place to place gathering -quotations as they occur, and sending them out over the ticker, and by -550 telephone clerks who occupy the long booths on the west wall, where -private lines connect members with their offices. - -These clerks are not permitted to go on the floor. Their employers, -who rent the telephones from the Exchange, pay $50 annually to the -institution as a fee for each clerk. As their duties are extremely -important, involving the transmission by ’phone of orders and reports -that often run into millions, it will be seen that this small army of -private line operators is of necessity highly trained. An instant’s -relaxation or inattention, or a failure to transmit promptly and -correctly the verbal messages entrusted to them, may conceivably lead -to confusion and losses of great importance. - -At each of the sixteen posts in the room, from twenty to forty stocks -are situated, and another group covers the north wall. Once a position -is assigned to any security by the committee in charge, it is seldom -moved elsewhere, and thus, although there are nearly six hundred -different issues of securities, the broker soon learns the location -of each one and turns automatically in that direction when an order -reaches him. At each of the posts, and along the north wall, the -specialists in these various groups of stocks are at work before the -opening of the market, entering the day’s orders in their books, some -with the rapid energy that betokens an active opening, others with an -indifference that spells dulness in their particular line. - -At Post 4, in the northeast corner, there is also an ante-market -gathering, for this is the spot where stocks and money are borrowed and -loaned. This “loan crowd,” as it is called, was formerly the gathering -to which one turned to gauge the market position of the bear party, -since the borrowing of stocks by “shorts,” as done here, furnished an -index of the strength or weakness of that interesting element. But -of late it has lost its ancient prestige as a guide in such matters, -because in order to hide the information sought, borrowing of stocks on -a large scale is now done privately. This “crowd” has been the scene of -some tremendous excitement, as in the Northern Pacific corner of May -9, 1901, when the price soared to $1000 per share and the shorts were -trapped, and on that day in October, 1907, when money, after loaning at -125 per cent., was not to be had, for a time, at any price, although -brokers with the best collateral would have paid 200 or 300 per cent. -for accommodation, and ruin stared every one in the face. - -As the hour of ten draws near, activities increase. On the south -wall the arbitrageurs are busy deciphering their code messages and -distributing orders, many hundred telephone bells are ringing in the -long booths where clerks are hastily writing their messages; crowds -of visitors gather in the gallery, while beneath it the bond-brokers -prepare for their labors; indicator boards on the north and south -walls, like great kaleidoscopes, display and hide their number with -the same electric suddenness that seems to characterize everything and -everybody--then bang! the gong rings, the chairman’s gavel falls, and -another day begins. Yesterday is embalmed with the Pharaohs; they never -speak here of what _has_ happened, but only of what _will_ happen--and -this is a new day. - -Naturally, certain securities are more active than others, and -here there are the largest crowds. As the limits surrounding the -trading-posts are but vaguely defined, one crowd will sometimes get -mixed up with another, whereupon confusion results, and good-natured -if earnest appeals are heard to “get out,” and “get over.” Into one -of these struggling masses a broker with an order or a trader with -an inspiration literally hurls himself; each sound in the jargon of -voices, which means only Bedlam and Babel to the visitor, is to him -perfectly understood. He may be pushed this way and that, or tossed -aside, or hidden altogether by bigger men who surround him, yet he has -no difficulty in determining the price and in doing what he came there -to do; all this with surprising celerity and accuracy. The business -done, he hastens to his telephone, makes his report, and is ready for -the next order. The manner in which some of these transactions take -place between brokers has long been a subject of praise. A word, or -a nod, or an upraised finger, or a tap on the arm, and hundreds of -thousands of dollars change hands without a scrap of writing or a -witness. A magazine writer thus describes it: - - One pastime of the American public is the manly sport of throwing - mud. A shovelful of scandalous mud--a clean white target, and many - a reputable and disreputable citizen is having the time of his - life. We bespatter our philanthropists, our statesmen, merchants, - lawyers, and divines. We vilify our art, our architecture (I take - a hand in that sometimes myself), our literature, or anything else - about which some one has spoken a good word. - - One of the time-honored institutions of our land--one which has - never ceased to be the centre of abuse--is the New York Stock - Exchange. Here conspiracies are organized for robbing the poor - and grinding the rich; so despicable and damnable that Society is - appalled. Here plots are hatched which will eventually destroy - the nation, and here the Gold Barons defraud the innocent and - the unwary, by stock issues based solely on hot air and diluted - water. Here Senators are made, Congressmen debauched, and judges - instructed--even plans consummated for the seduction and capture of - the Supreme Court. All this is true--absolutely true--you have only - to read the daily papers to be convinced of it. - - There is one thing, however, which you will not find in the - daily papers. It is not sufficiently interesting to the average - reader who needs his hourly thrill; and this one thing is the - unimpeachable, clear, limpid honesty of its members. - - When you buy a house even if both parties sign, the agreement is - worthless unless you put up one American dollar and get the other - fellow’s receipt for it in writing. If you buy a horse or a cow, or - anything else of value, the same precaution is necessary. So too if - you sign a will. Your own word is not good enough. You must get two - others to sign with you before the Surrogate is satisfied. - - None of this in the Stock Exchange. A wink, or two fingers held up, - is enough. Often in the thick of the fight when the floor of the - Exchange is a howling mob, when frenzied brokers shout themselves - hoarse and stocks are going up and down by leaps and bounds, and - ruin or fortune is measured by minutes, the lifting of a man’s hand - over the heads of the crowd is all that binds the bargain. - - What may have happened in the half hour’s interim, before the - buyer and seller can compare and confirm, makes no difference in - the bargain. It may be ruin--possibly is--to one or the other, - but there is no crawling--no equivocation--no saying you didn’t - understand, or “I was waving to the man behind you.” Just this - plain, straight, unvarnished truth, “Yes, that’s right--send it in.” - - If it be ruin, the loser empties out on the table everything he - has in his pockets; everything he has in his bank; all his houses, - lots, and securities--often his wife’s jewels, and pays 30, 40, or - 70 per cent., as the case may be. - - What he has saved from the wreck are his integrity and his good - name. In this salvage lies the respect with which his fellows hold - him. - - Every hand is now held out. He has stood the test, he has made - good. Let him have swerved by a hair’s breadth and his career in - the Street would have been ended.[98] - -Of course mistakes and misunderstandings do sometimes occur, and these -are the banes of the broker’s life. He will lose $500 with equanimity -on a personal venture, but he will howl in distress over a loss of -$25 on a mistake, and apply to himself a lurid mosaic of epithets -because of it. The one merely shows bad judgment and is one of the -little amenities; the other he feels is stupidity. At such times the -stockbroker adopts Talleyrand’s bold hyperbole when he heard of the -death of the Duc d’Enghien, “It is worse than a crime; it is a blunder.” - -When a “mix-up” occurs in a crowd, as when four or five men make claim -to having supplied a bid simultaneously, everybody produces a coin and -“matches” on the instant. It is a case of “odd man wins,” and no time -to lose. The market may be active and differences of seconds may spell -losses of thousands. In less time than it takes to tell it, everything -is adjusted and forgotten. But sometimes a mistake occurs which is not -discovered by either party until after the market has closed. A man may -think he sold 500 shares, for example, whereas the buyer has only 400 -on his book. In a case of this sort, the discrepancy is covered “at the -market” next morning and the loss or profit is divided. Differences -between members are seldom irreconcilable, and when they assume serious -proportions any third man will act as arbiter and speedily settle them. -It is a significant fact that the Committee of Governors selected -to arbitrate disputes is rarely called upon. Rarely, too, is there -acrimony or hard feeling. The use of epithets is forbidden; to call a -man a liar means prompt suspension. And so they live on raw nerves, -with incidents occurring daily that add to the strain, yet ever with -good-humored acquiescence toward whatever fortune deals out to them, -and with generous camaraderie one to another. - -As the day advances on ’Change, news and gossip and rumors of all kinds -pour in, and to these the active broker must devote a large part of -his time. It is astonishing to what extent the public, or that part of -it that lingers in brokerage offices, calls for news from the floor. -The demand is insatiable. “What do you see over there?” “Who is buying -Steel?” “Who is selling Union?” “What’s the news in Copper?” “What do -you think of the market?” These are the messages that come over the -wires all day long, not merely from the New York offices, but from -Montreal, Boston, Chicago, St. Louis, and many other points. And no -matter how busy the floor broker may be, time must be found, somehow, -to reply to every question as best he may, for at the other end of the -line there is a customer waiting to hear from him. - -Just why this customer yearns for news from the floor has always been -a mystery to me. What does he expect to learn? What value attaches to -a list of names of brokers who buy or sell Steel, when everybody knows -that really important principals in these matters invariably hide their -hands? All the significant news of the day is printed on the news -tickers and reaches the customer’s eye before the broker or the floor -knows anything about it, yet never an hour passes but he is importuned -to “say something” about what is happening on ’Change, although half -the time nothing whatever is happening. The climax of this sort of -thing is reached when the floor man is asked to predict the future -course of the market, a request that reaches him a dozen times a day. -Now, in the name of common sense, what does he know about whether the -market is going up or down? How can a man who is swimming with the -current tell how fast he is going? If he were a seer who could foretell -such things he would have all the money in Wall Street, in which case -he wouldn’t remain a broker very long. - -Just watch him; he is as busy as a man can be; his hands are full of -orders, his head is occupied with many anxieties, his eye is on the -indicator board, or scanning the room; arms and legs are working as -fast as nature will permit; he must concentrate at all times. His -ears ring with the strife of the room; all sorts of rumors, many of -them ridiculous, are hastily whispered to him; “boos” and groans from -the bears, shrieks and yells from the bulls--this is the sort of -thing he hears all the day long. How can he form an opinion when thus -distracted? He stands too close to the picture; he lacks perspective. -What such a man thinks of the market isn’t worth anything; indeed, he -does not “think” at all except about executing his orders, and heaven -knows that is enough to engross him. - -Answering all the questions that come to him over the wires is the -hardest task, and the most distasteful thing the floor man is called -on to do. He knows that he doesn’t know anything; from his point of -view no information is better than misinformation. He feels with Josh -Billings, “It’s a mitey site better not 2 no so mutch than 2 no so -mutch that ain’t so,” but nevertheless he must continue to express -views and theories and opinions and predictions, whether he likes it -or not. Some of his oracular utterances are illuminating. “Market is -going down,” he replies, “because there are more sellers than buyers.” -Inexorable logic. - -There was old Y----, who used to talk to his customers sitting near -his office window, which faced Battery Park. He was a shifty professor -of finance who never was known to hold the same opinion of the stock -market two days running. “This market,” he said one day, “is going away -up, crops are good, money is easy, railroads are rolling in wealth, -and--look over there”--pointing to a line of immigrants walking through -the park from the landing place--“the brawn and sinew of old Europe -coming over here to develop our resources.” The very next day the -market had what is called a “healthy reaction.” Quite unmindful of his -consoling prophecies of yesterday, old Y---- looked at the tape and -said, “This market is going away down. Crops are poor, money is tight, -railroads are in a bad way, and--look over there”--pointing to another -procession of immigrants--“the scum of Europe coming over here to rob -our American laborers.” - -If that portion of the public which buys and sells stocks often has its -little joke at the expense of brokers, so also brokers in their turn -frequently have cause to laugh at their clients. “Cheer up,” was the -message sent over the wire by a hopeful broker to a despondent client; -“cheer up, the market can only go two ways.” “Yes,” was the reply, -“but it has so damn many ways of going those two ways.” During the -rubber boom of 1910 on the London Stock Exchange, a broker wired to a -client in Ireland, “Rise in bank rate considered likely,” to which he -received a prompt reply, “Buy me five hundred.” A telegram came over a -private line one day last summer from a customer in Montreal. It was -a deadly dull period, when, owing to the indifference of the public, -stockbrokers were not making expenses. “What are you chaps doing over -there?” said the telegram. “Why don’t you start something?” to which -the floor member replied, “Read St. Luke 7:32.”[99] This must have been -the same member who, when customers were few and far between, hastily -’phoned his office partner, “Put all our customers into copper,” to -which his partner replied with grim resignation, “He won’t be down -to-day.” - -When the gong rings at three, the day’s work on ’Change is at an end, -and the shouting and the tumult dies. It is then 8 P.M. in London, -and there in the Street hard by the Exchange, even at that ungodly -hour, brokers and jobbers in the “Yankee” market are still at work -in all kinds of weather. “The American market,” says the (London) -_Quarterly Review_, “continues, as a rule, to deal up to 8 P.M. (5 P.M. -on Saturdays), when the cable offices on this side close down. Up to -that time wires are coming in continually from New York with orders -and prices; and a man would be ill advised to undertake jobbing in the -American market unless he has a splendid constitution and lives within -easy reach of town. Every year the Yankee market levies a death-tax -upon its members through the medium of pneumonia and other complaints -brought on by long exposure in the Street after official hours; and -very little is done to provide these late dealers with adequate -accommodations or shelter.”[100] - -Before leaving the Board after the official close, the broker will -stop for a moment at the loan crowd to borrow or lend his stocks, -after which he spends a half hour or so in his office, going over the -events of the day with his partners and customers, and familiarizing -himself with the day’s doings. The specialists, floor traders, and -two-dollar men, many of whom have no partners and no office staff, will -go directly home, loitering perhaps for a late luncheon, or something -stronger, at the club upstairs, or at a famous café across New Street. -When times are brisk it is not an uncommon thing for partners to remain -at their offices until a late hour, and clerks are often on duty until -the small hours of the morning, spending what is left of the night at a -nearby hotel in order to save time. - -Holidays are not numerous on the Stock Exchange, being limited -to the days set apart by law, and to very rare occasions in dull -times when by petition of a majority of the members a Saturday half -holiday is granted by the governors. It is felt, very properly, that -special holidays should be granted but rarely, because the intimate -relationship of the banks to brokerage houses is such that whenever -the banks are doing business large borrowers should always be prepared -to meet calls that may be made upon them. On the London Exchange, what -with bank holidays and the festival seasons of the Church of England, -the stockbroker has many more holidays than his American colleague. - -Life on the Stock Exchange is by no means unpleasant. It is not the -idle pastime that many writers picture it, with easy hours and long -intervals for luncheon, nor is it the depressing and nerve-destroying -centre that many of the members would have us believe. One may -certainly linger over the midday meal for hours--for that matter one -may absent one’s self altogether--and conversely, one may worry and -fret over the day’s vexations until life becomes unpleasant for him and -for every one near him. But by far the larger number find their work as -congenial as earning the daily bread may be, and vastly more diverting -than many of the sedentary occupations in other lines of business. -Elsewhere I have said that the long periods of dulness on the floor -constitute the most serious obstacle the broker has to meet. Accustomed -to physical activity and with a mind inured to occupation, he chafes -under a stagnation that is foreign to his habits and desires, until -worry--the disease of the age--claims him for its own. Almost every -broker’s wife knows what I mean. It becomes a habit with such a man; -unconsciously he grows “bearish” on his business, on himself, and on -his associates, and at such times he is an awful bore. - -The essential thing for a man to bear in mind who finds himself growing -into this mood is that nature abhors a vacuum. His mind is empty -because there is nothing to do; he must therefore _find_ something to -do--some mental occupation that will banish from his mind the worries -that beset him. In order to do this many members of the Exchange -carry some light reading in their pockets for use in an idle hour; -at the spot where the National Lead Company’s securities are dealt -in the specialists maintain a compact circulating library of all the -magazines and periodicals; others spend idle moments pouring over a -pocket chessboard; the Reading Railway post has a constantly increasing -collection of all kinds of puzzles, riddles, problems--anything to keep -the mind active on the principle of _similia similibus curantur_. - -The newcomer on the Stock Exchange will do well to fortify himself -in some such way, for it may be accepted as gospel truth that the -paralyzing effect of worry in this peculiar environment will inevitably -lead to hasty actions, mistakes, and errors of judgment, unless the -victim learns early in the game how to arm himself against these -misfortunes. One word more: When the day’s work is done, the young -member must learn Doctor Saleeby’s great lesson, that a round of the -links, or a set at tennis, or any other form of outdoor diversions so -dear to the youngster’s heart, will not of themselves suffice to banish -cares. - -He has now become a thinking animal; he lives by his wits, and he -suffers from the worries incidental to brain work coupled with -responsibility. I have just said that nature abhors a vacuum--in his -case this especially applies to his mind. Care and worry are not -driven away merely because he has made his “round” in 80 strokes--they -must be pushed out by something else, something more than mere play -or sport _per se_. What he requires is a new _mental_ interest, not -merely to serve as a counter-irritant for the worries of to-day, but -as an investment for all the years that are before him. He must have -a “hobby” of some sort, no matter what, so long as it is a mental -occupation which he does for the love of it--books, pictures, music, -postage stamps--anything will do the trick so long as it occupies the -mind and is done _for fun_. We old timers have only to look about us on -the Board to see who the really happy men are, the men who are never -nuisances. They are the men whose minds are not content with doing -nothing.[101] - -In the matter of creature comforts, members of the New York Stock -Exchange have provided themselves with everything that gentlemen -require. Their beautiful building, an architectural masterpiece and -one of the city’s ornaments, has often been described; here it is -sufficient to say that nothing is lacking in the way of conveniences -necessary to the physical ease of the members. Barbers, valets, -messengers, and attendants of every description are on duty; a -well-equipped hospital room is ready for emergencies; showers and -needle-baths, smoking-rooms, lounges, writing-rooms, reading-rooms, -coffee-rooms, and a spacious luncheon club, contribute their share -to the refreshment of the outer and inner man. The luncheon club, -which occupies the whole upper floor, is the last word in culinary -perfection. In the lounging-rooms adjoining are all the magazines -and periodicals, and the walls are covered with a collection of rare -prints of old New York, together with mounted trophies of the hunt -presented by sportsmen members. In other days before the Exchange built -its present structure the club was housed in modest quarters across -New Street and a few non-members of the Exchange were admitted to -membership, but now its facilities are taxed to meet the demand, and -membership is restricted to the Stock Exchange, although guests are -admitted at all hours. - -The atmosphere in the city is often trying in the summer months because -of the excessive humidity, and extraordinary measures were resorted to -in the construction of the building to minimize this unpleasantness -on the crowded floor, where the presence of a large number of men -in a greater or less degree of physical animation but adds to the -general discomfort. To meet this condition an air-cooling plant was -provided--the first and the foremost example of its kind in existence, -both in point of magnitude and in the exacting demands involved. -By means of this remarkable triumph of mechanical skill, outer air -at a temperature of say 90° is taken into the basement, eighteen -hundred pounds of water (humidity) are squeezed out of it per hour, -it is purified and cleansed through many walls of cheesecloth, the -temperature is refrigerated down to 60°, and then, after again raising -it to a point at which no dangerous results may affect a member passing -in and out of the room, it is finally supplied to the great floor and -again exhausted by methods that obviate drafts or dangerous currents -of any kind. Aside from the members and attendants, the only person -having access to the floor is the chief engineer who controls this -remarkable air-cooling plant. A wizard in a way, it is curious to watch -him threading in and out of the busy crowds, tasting and feeling the -air which, under the black art of his necromancy, turns intolerable -conditions into others quite delightful. - -The history of the New York Stock Exchange has been written many times, -and need be but briefly referred to here. Something approaching an -organization was effected May 17, 1792, when, under a tree which -stood opposite what is now 60 Wall Street, twenty-four “Brokers for -the Purchase and Sale of Public Stocks” signed an agreement to charge -not less than a commission of ¼ per cent. It was a day of small -things; the national debt was but $17,993,000; there was but one -bank in the town. Through the fragmentary data that has survived, we -learn that occasional meetings of the brokers were held during the -next twenty-five years at the old Tontine Coffee House, at Wall and -Water streets. In 1817 the formal organization was effected and the -meeting-place fixed at the Merchants’ Exchange, later the site of the -Custom House, and now the property of the National City Bank. In 1853 -the Stock Exchange moved to Beaver Street and in 1865 to its present -situation. The “Open Board of Brokers,” a rival organization, was -absorbed in 1869, and ten years later the “Gold Board” also joined -forces with the parent body. - -The development of the New York Stock Exchange in its early days was -but a record of the country’s growth, and this in turn depended upon -speculation. It was, indeed, speculation such as the world had never -witnessed. How our western borders were extended as the railroads -pushed onward; how trade was stimulated throughout christendom by the -discovery of gold in California; how the national debt expanded at the -time of the Civil War; and how, after the war, construction went ahead -at tremendous pace--all these served to fan the flames of adventure -and enterprise, which are the bases of speculation. The panics of -1837, 1857, and 1873, severe enough to give pause to another and less -vigorous nation, seem in the retrospect to have been but starting -points for a fresh development of the national spirit--a spirit which -owes to speculation the extension of frontiers, the bridging of waters, -the unlocking of mountains, and the transportation of wealth. In this -splendid work of conquering a continent the Stock Exchange has kept -pace with the march of industry. It has supplied the one great central -market for the expression of the country’s progress as measured by -the country’s securities, and it will continue to do so as long as an -evergreen faith in America exists among its people. - -The Stock Exchange is often defined as the nerve-centre of the world, -and, just as every happening of importance finds an instant effect on -the market, so members instinctively apply to current events habits of -close analysis and nice discrimination. A failure at Amsterdam may -result in liquidation in Atchisons, long a favorite of Dutch investors; -prolonged drought in the Argentine may increase our foreign shipments -of grain; a great engineering project, like the Assouan Dam, may lead -to handsome contracts for American steel-makers; any fluctuation in -rates of foreign exchange must be watched carefully to see if exports -or imports of gold are impending; if a rich man dies possessed of large -amounts of certain securities, sellers must be critically observed -for evidences of liquidation by the heirs; speeches in Congress or in -Parliament, or the unguarded utterances of statesmen, must be weighed -and measured for their effect on the public mind; a great fire may -lead to selling of investments by insurance companies; a revolution in -Mexico may imperil American investments there; if there are political -disturbances in the Balkans, the continental Bourses may be frightened; -every move of the great foreign banks must then be watched closely, for -the bankers to-day are the war-lords of creation, and so every event of -importance the world over makes its impression on the Stock Exchange -barometer. - -What is going on in the Transvaal or in Alaska, the latest outbreak -in China, the areas of barometric pressure in the grain country, -the ravages of the boll-weevil, the market in pig iron, the latest -labor difficulty, the tendencies of Socialism, the cost of living, -the outgivings of our law-makers--a knowledge of all these and many -similar matters is a necessary part of the stockbroker’s trade, and -serves to keep his mental activities considerably above the dull level -of mediocrity. Naturally this sort of occupation gives a zest to -life, and makes impossible the sedentary dry-rot which the impatient -broker sometimes thinks is upon him. At any rate no Sherman Law can be -invoked to prevent him from learning all there is to know about men -and affairs; and just as he becomes trained in habits of inquiry, and -proficient in using facts as stepping-stones to conclusions, so he -becomes a valuable and useful member of the community. - -Critics in what may be termed the impressionist school--accustomed -to a free, instantaneous, and often meaningless handling of their -subject--are prone to condemn the Exchange because the action of the -market when large reforms in business are impending seems to imply -hostility to those reforms on the part of members. This may be typical -modern impressionism, but it is all wrong. If the market declines -when, for example, a large corporation finds itself at odds with the -law, the downward tendency of the securities affected is the result -of natural laws with which stockbrokers have nothing to do. They are -but agents. Ten thousand owners of securities throughout the land -may simultaneously become alarmed and sell--a familiar psychologic -phenomenon which depresses prices--but to say that this result -expresses the hostility of the Stock Exchange to the enforcement of the -Anti-Trust Law is nothing less than an evidence of critical strabismus. - -The men for whom I presume to speak, far from being hostile or -indifferent to the call of revitalized business morality, are quite -as deeply imbued with the potent spirit of business reform as are the -men who make the country’s laws. Careful, well-considered legislation -that broadens and deepens the channels of American development, that -provides adequate supervision and such publicity as will guard against -selfish perversion, is welcomed with gratitude by the Stock Exchange. -Any thinking man ought to see at a glance that the very object of the -Exchange’s existence is benefited by such laws, and prospers with their -enforcement. The Cordage Trust, the Salt Trust, the Bicycle combination -and the Hocking Coal episode are still bitter memories on ’Change; any -law that will prevent a recurrence of these and kindred calamities is -a law that strengthens the hands of every member and gives him fresh -courage. - -It would be difficult to find anywhere a more intelligent and -interesting group of men than the members of the New York Stock -Exchange. Some of them are men of peculiar personal charm, others are -distinguished for especial ability in various ways, others are men with -hobbies, nearly every one knows something that is worth knowing, and, -what is better, talks of what he knows in the manner of culture. Given -an idle hour with a wish to learn, and every dip of the net into the -intellectual waters of this gathering brings up some new and delightful -specimen to amuse and instruct. - -The dean of the Stock Exchange, for example, who has been an active -member for fifty-five years, and who is now eighty, spends several -months of each year in exploring all the little nooks and crannies of -the globe, remote and inaccessible places that are _terra incognita_ to -your casual tourist. He is a mine of information; to know him means, -in a way, a liberal education. If you are fortunate enough to have an -hour’s chat with him (for when at work on the floor he is quite as -active as any other youngster), you will find yourself in contact with -a traveler of rare charm and culture, who will take you into strange -lands of which the mere existence is but a faint recollection of your -schoolboy studies. - -He will tell you, with all his delightfully fresh and buoyant -enthusiasm, of Agra and its Pearl Mosque, and of the surpassing beauty -of the world’s architectural masterpiece--the Taj Mahal--with its -marbles, its mosaics, and its lapis-lazuli. He will take you into -Thibet, the Forbidden Land, through the jungles of the faraway Celebes, -into the least-known corners of the Straits Settlements, and to the -lonely isle of Robinson Crusoe. On his vacation next year he is going -to the Falkland Islands, somewhere down Patagonia way, and the year -after a letter may come from him sent out from the headwaters of the -Yukon, or ferried down the Congo from Stanley Falls. Wherever his fancy -roams, there this adventurer goes; no thought of sickness or danger or -difficulty is permitted to interfere with his delightful hobby. - -Naturally, in the cosmopolitan atmosphere of the Stock Exchange tastes -are catholic and run to wide extremes. One of the members is a student -of Russian literature in all its phases; he can tell you of its -folklore, its peasantism, its liberal thought and its ethical ideals -of society; Dostoyevski is his hobby and Melshin the poet. Beside him -stands a man who has mastered the culinary art; the joy of his life -is to prepare with his own hands, for the palates of his fastidious -guests, dainty dishes and wonderful sauces that make an invitation to -his table something worth having. One of the members is an animated -concordance of Shelley, whom he studies with almost fanatical zeal; -another is a disciple of Heine, whom he adores. There stands a man who -went into the heart of Africa as no white man had ever done--through -Somaliland into Abyssinia, thence to Lake Rudolph to hunt elephants, -south to Victoria Nyanza, and finally, after hunting all the wild game -of the district, on foot to the West Coast. - -Near by is a traveler fresh from Mukden, the scene of the world’s -greatest battle; he can tell you, too, some curious and little-known -details of the awful engagement at 203-Metre Hill. Our Civil War has -its survivors in a dozen Board members of to-day. One of them was shot -twice at Shiloh and lived to fight the Sioux; another was a captain -under Burnside at Antietam, charged the bridge at the head of all that -was left of his company, and was rewarded for conspicuous gallantry; -another was shot through the lungs at the second battle of Bull Run and -lived through the carnage at Gettysburg; another was thrice wounded at -Gettysburg and again in the Wilderness. - -Here are some who charged up Kettle Hill and San Juan Hill in Cuba, -and there are men who served in the navy throughout that war. Officers -of high rank in the National Guard and the Naval Reserve, members of -important public bodies, such as the Municipal Art Commission, the -Palisades Commission, the Public School Board and the various hospital -boards; mayors and other officers of suburban communities, sheriffs -and deputy-sheriffs, presidents of clubs, wardens and vestrymen of -churches, men beloved for their philanthropies, Oxford men, Cambridge -men, Heidelberg men, graduates of all the American universities--with -these and very many more like them, one is brought into intimate daily -contact. - -There is a legion of collectors, and these are always interesting -people. One of them “goes in” for old silver, of which he has gathered -a valuable display; many others collect prints, etchings, or paintings; -another takes pardonable pride in his Elizabethan early editions, -particularly his First Folio; another has published a standard work on -the portraits of Lincoln, of which he possesses nine original negatives -and many rare copies of negatives; others devote leisure hours to -collecting porcelains and ceramics of all kinds, postage-stamps, coins, -rugs, and tapestries. You will find here men of bucolic tastes, with -hobbies in farms and extensive country estates, where one grows rare -orchids and another breeds highly prized cattle, or sheep, or horses, -or dogs, or poultry. - -As you pause in the day’s work to listen to these interesting people -talking of their pet diversions, you see why it is that hobbies are so -necessary to the modern mind, and particularly to the worried mind of -the Stock Exchange man. You see that the man who has nothing to divert -him in leisure hours is becoming a really rare type, whereas the man of -curious, busy, and active brain, who must have a hobby to be happy, is -becoming more and more common. In this very marked tendency among the -members of the Exchange there has been a great improvement within the -last decade, and one, as I have said, that not only serves to banish -the cares of to-day, but promises to become a valuable investment for -the years that lie ahead. - -There are some talented musicians on the floor, men who are not only -proficient themselves, but who by their liberal support of all forms -of music do much to encourage and maintain New York’s supremacy as a -musical centre. Grand opera, the Philharmonic Society, the symphony -orchestras, the choral organizations, and the army of virtuosi from -abroad who have earned applause and money on these shores--all are -accorded cordial support by Stock Exchange members. One of them gives -rein to his altruistic tendencies by providing free concerts once a -week for the submerged tenth in a crowded foreign quarter of the East -Side. - -In the realm of amateur sport and sportsmanship the Exchange has -many enthusiastic devotees. There are several tennis champions, one -of them holding a title in singles for seven years, and another a -title in doubles for five years. Famous university oarsmen, football -and baseball players, American golf champions, expert yachtsmen and -commodores of fleets, four-in-hand drivers, polo players, horse-show -judges, breeders and owners of famous stables, racquet, court-tennis, -and squash champions, deep-sea fishermen and disciples of the placid -Izaak, who lure their game from cowslip banks; hunters in every quarter -of the world, motor-boat racers, swimmers, men of muscle and mind, men -of brain and brawn, these are types that keep ever in mind the _joie -de vivre_, the blue sky above, and all the stimulating enthusiasms of -youth. - -There is little need to speak of the New York Stock Exchange’s -charities and benefactions, because these are well known. Scarcely a -day passes that some one of the members does not ask of his fellows -a contribution, however small, for a worthy charity with which he or -the ladies of his family have come in contact, and invariably the mite -is freely given, although there may not be time to spare to hear the -story. The private and unostentatious benefactions of members go on at -all times, and cannot be discussed here. - -When the _Titanic_ went down, a fund of $25,000 was raised in a day, -and a committee of members of the Exchange was on the pier when the -survivors arrived to do what could be done. The Mississippi floods -met with a similar response; indeed, every great calamity that spells -suffering and sorrow and need finds an instant expression of sympathy -and practical assistance from the floor. In times of national gravity, -such as an outbreak of war, the Exchange will always be heard from -with its volunteers and its funds for equipping a regiment; hospitals, -churches, and all worthy charities well know that appeals are responded -to with a zeal that is alike nonsectarian and generous. - -Never in my experience on the floor have I heard a complaint from a -deserving employee of the Stock Exchange. Salaries are wisely increased -with length of service, pensions are given by the governors to aged -servants; hospitals, medical treatment, nurses, and sanitariums are -provided for the sick, and funds are supplied to families of deceased -employees. A spirit of helpfulness, sympathy, and generosity is in the -very air of the Stock Exchange, an absolutely fine spirit that takes -pride, too, in caring for its own members who have been unfortunate. - -Finally, let it be said that the Stock Exchange man is human. He knows -the “rub of the green,” he suffers as all men suffer, but he does not -complain, nor solicit odds. All he asks is fair play; a little patient -study of what the Exchange stands for; a little better understanding -of its usefulness in our commercial life; a little recognition of each -man’s effort to uphold a high standard of business honor; a little of -the cordial support which he himself, with stout optimism, extends to -every worthy thing. - - - - -CHAPTER IX - -THE LONDON STOCK EXCHANGE, AND COMPARISONS WITH ITS NEW YORK PROTOTYPE - - -There were Exchanges in London in the sixteenth century. Merchants from -Lombardy had given their name to a street, and had flourished so well -that they had branched out in the business of money-changing--that is, -of exchanging worn, abrased and clipped coins, foreign and domestic, -for those of standard weight and fineness. As trade increased and the -first faint signs of progress in the matter of wealth began to develop, -it was seen that this business of exchanging money was sufficiently -important to warrant royal recognition; accordingly there was created -the office of Royal Exchanger, and the person entrusted with this -office was given the privilege of exchanging coins in the manner -described. Smaller offices for the purpose were farmed out in other -English towns, and each place where the business was carried on thus -came to be known as “The Exchange,” a name that was ultimately applied -to any covered place where merchants met to buy and sell commodities. - -After the money-changers came the money-lenders--Jews, more -Lombards, and finally the Guild of Goldsmiths. The last named, -having long practised the business of money-lending, finally became -money-borrowers, issuing receipts for these borrowings known as -Goldsmiths’ Notes--the earliest form of English bank-notes--and the -first step in the convenient process of translating capital, and debt, -and credit, into bits of interest-bearing paper.[102] This was the -state of English finance until 1694, when the Bank of England was -founded, and stocks and shares came into being since the bank was -a joint-stock affair. That the invention of stock certificates was -a popular one, and that the authorities and the public seized upon -it as a convenient means of directing capital into new and hitherto -untried forms of enterprise is seen by the rapidity with which fresh -undertakings were put forth. In 1698 the New East India Company -loaned its capital to the government; by 1711 there was a funded -debt of £11,750,000 in the shape of bank stock, East India stock, and -annuities. There was also the famous South Sea Company, to be followed -ten years later by a reorganization of the company with its first -subscription of a million in £100 stock at £300, and a second and -third subscription of larger magnitude, each accompanied by prodigious -promises, and each snapped up with avidity by a public saturated with -the new and hazardous pastime of speculation. - -“All distinction of party, religion, sex, character, and circumstance,” -writes Smollett, the historian of the time, “were swallowed up in this -universal concern. Exchange Alley was filled with a strange concourse -of statesmen and clergymen, churchmen and dissenters, Whigs and Tories, -physicians, lawyers, tradesmen, and even with multitudes of females. -All other professions and employments were utterly neglected; and -the people’s attention wholly engrossed by this and other chimerical -schemes, which were known by the denomination of bubbles. New companies -started up every day, under the countenance of the prime nobility. The -Prince of Wales was constituted governor of the Welsh Copper Company; -the Duke of Chandos appeared at the head of the York Buildings Company; -the Duke of Bridgewater formed a third, for building houses in London -and Westminster. About a hundred such schemes were projected and put -in execution, to the ruin of many thousands. The sums proposed to be -raised by these expedients amounted to three hundred millions sterling, -which exceeded the value of all the lands in England. The nation was so -intoxicated with the spirit of adventure that people became a prey to -the grossest delusion. An obscure projector pretending to have formed a -very advantageous scheme, which, however, he did not explain, published -proposals for a subscription in which he promised that in one month -the particulars of his project should be disclosed. In the meantime he -declared that every person paying two guineas should be entitled to -a subscription for £100, which would produce that sum yearly. In the -forenoon this adventurer received a thousand of these subscriptions; -and in the evening set out for another kingdom.” - -No sooner were there bits of paper to deal in than jobbers or brokers -sprang up to handle them, and by natural gregarious processes these -dealers gathered in one spot. Thus competition was stimulated and -active markets created. The rotunda of the bank and the Royal Exchange -were their first haunts, indeed until Archbishop Laud drove them out -they were to be found bargaining on the wide floors of St. Paul’s -Cathedral. As the business expanded they took to the neighboring -streets and coffee houses, and so Change Alley, Jonathan’s Coffee -House, Cornhill, Lombard Street and Sweeting’s Alley became their -familiar retreats. Old Jonathan’s burned down in 1748 and New -Jonathan’s in Threadneedle Street succeeded it. Here, in July, 1773, -“the brokers and others at New Jonathan’s came to a resolution that, -instead of its being called New Jonathan’s, it should be called ‘The -Stock Exchange,’ which is to be wrote over the door.” Thus while -business in the public funds was still conducted on a large scale at -the bank, and dealings in foreign securities still centred at the Royal -Exchange, London may be said to have had a Stock Exchange in the modern -sense from that day in 1773 when the name was “wrote over the door” at -New Jonathan’s.[103] - -We have authority for the early history of the London Stock Exchange in -a report made in 1877 by the officials of the institution to the Royal -Commission. From this report it appears that the Stock Exchange at New -Jonathan’s in 1773 “afforded a ready market for the operations of the -bankers, merchants, and capitalists connected with the floating of the -numerous loans raised at that period for the service of the State.” -The members or frequenters paid a subscription of sixpence to defray -expenses, drew up rules, and placed its control in the hands of a -“Committee for General Purposes.” The functions of this committee were -then, as now, “judicial as regards the settlement of disputed bargains, -and administrative as regards rules for the general conduct of business -and for the liquidation of defaulter’s accounts.” The earliest minutes -on record are dated December, 1798. - -War loans and a national debt increasing by leaps and bounds, with -consequent activity in consols, was the principal source of business in -those early days, and as these increased, so also the savings of the -public and a new national spirit led to a steady growth in the business -of dealing in securities. The dim receding voice of those early days -still echoes in Capel Court through the medium of two holidays--May -1st and November 1st. More than a century ago these days marked the -closing of the Bank of England’s books for the transfer of consols, and -as consols were the only things then traded in, there was nothing for -stockbrokers to do on those occasions; hence they took a holiday. And -they still close the Exchange on these days--an eloquent instance of -the Englishman’s adherence to tradition. - -By 1801 there was not room enough in the old building, and, moreover, -the report says: “It became apparent that the indiscriminate admission -of the public was calculated to expose the dealers to the loss of -valuable property.” Accordingly a group of Stock Exchange men acquired -a site in Capel Court, close to the bank, raised a capital of £20,000 -in four hundred shares of £50 each, and in May, 1801, laid the -foundation of what has become through numerous additions the London -Stock Exchange of to-day. The building was opened in March, 1802, with -a list of five hundred subscribers, and the deed of settlement (March -27, 1802), vested the management in a committee of thirty members, -chosen annually by ballot, with nine trustees and managers, separate -from the committee, to have charge of the treasury and represent the -proprietors. Although the rules and regulations have been amended and -enlarged from time to time to meet new conditions, the constitution of -the London Stock Exchange remains substantially unaltered. - -As it stands to-day, there are nine managers who represent the -shareholders or proprietors, and thirty committeemen, who look after -the administration of the Exchange and the well-being of the members. -The managers are elected in threes for terms of five years by the votes -of the shareholders. They fix the admission fees, appoint almost all -the officials, and look after the building and the property in general, -while the thirty committeemen enforce the rules and regulations, -adjudicate differences, and regulate the admission of securities. -They are elected every year by the members, and they choose from -their number a chairman and vice-chairman. In March of each year, -before retiring from office, the committee elects all the old Stock -Exchange members who wish to be re-elected, membership on the London -Exchange being granted for one year only. Any member may object to the -re-election of any other member, but this is a very unusual incident. - -“The great principle upon which the committee acts,” says Mr. Francis -W. Hirst, “and to which most of its regulations are directed, is the -inviolability of contracts. It has power to suspend or expel any member -for violating its rules, or for non-compliance with its decisions, -or for dishonorable conduct. A member of the London Stock Exchange -is prohibited from advertising or from sending circulars to any but -his own clients. He is also forbidden to belong to any other Stock -Exchange, or ‘bucket-shop,’ or other competing institution. New members -are now compelled to become proprietors by acquiring at least one Stock -Exchange share, paying a heavy entrance fee and an annual subscription -of forty guineas. Yet the precautions against impecuniosity are -inadequate. Defaults are far too common.”[104] - -In such a dual form of control as that of these managers and -committeemen it is obvious that causes of friction must of necessity -arise from time to time, and that jarring and discord are inevitable. -The owners or proprietors are, of course, a minority of the members, -and their decisions on matters that come before them are necessarily -biased in favor of a course that will increase the dividends on their -shares. Naturally they would favor a practically unlimited membership, -since the dividends are largely acquired from this source. - -The plan of compelling each new member to become a shareholder or -proprietor was devised to meet this difficulty, and in a measure it -has succeeded. “Within the course of the next half century,” says the -_Quarterly Review_, “it is pretty certain that the Stock Exchange, as -a company, will belong to the members, of whom each will have a stake -in the enterprise; and that happy consummation, when it arrives, will -put an end to a good many minor problems which still harass the House -in its workings, and possibly check those bolder plans for reform which -are advocated by many of the members.”[105] The difficulties arising -from these causes had their origin, as we have seen, as far back as the -year 1801, when the new building was erected. As only the wealthier -members of the association had provided the capital for the Capel Court -structure, in order to protect their investment, they demanded control -of its financial affairs; thus the Stock Exchange thenceforth consisted -of two distinct bodies, proprietors and subscribers. - -While there is but one way by which a man may become a member of the -New York Stock Exchange, in the London Exchange there are various -ways. The most direct way, and the easiest but most expensive way, -is to pay an entrance fee of 500 guineas, and find three members who -will stand surety for four years for the sum of £500 each, this £500 -being forfeited to the estate if the member is “hammered”--i. e., if he -fails during the period. The candidate must in addition buy three Stock -Exchange shares, the price of which at present is about £190 each.[106] -He must also purchase from a retiring member a nomination, which can -be bought at present for £40, although they have sold as high as £700. -Candidates who wish to join the Exchange under easier conditions may -have their entrance fees reduced to 250 guineas if they have served for -four years in the Stock Exchange as a clerk; and for these candidates -concessions are also made in respect to sureties, of which they need -provide but two, and to shares, of which they are required to buy but -one instead of three. The committee is also empowered to elect each -year a few candidates without nomination. - -This is a rather curious practice which requires a word of explanation. -In England, as elsewhere, there is a latent objection to monopolies of -all forms, and the foresighted governors of the Exchange, with an eye -to the possibility of difficulties that might be raised against their -institution at some time in the future on the ground of monopoly, hit -upon this expedient as a precautionary measure. Should such objection -be raised, the governors have only to admit a few more members without -nomination. The door is thus thrown open; and there is no _de facto_ -monopoly. It is very simple and very ingenious. - -In all these cases the annual subscription, or dues, is the same. -These, which were originally 10 guineas, then 20 and 30, are now 40 for -all new members, while old members pay, of course, the subscription -prevailing at the time of their election. As a condition precedent to -election, a candidate must present himself before the committee with -his sureties, and each of them must give satisfactory answers to the -questions put to him. - -From this it will be seen that a man who wants to become a member of -the London Stock Exchange without first serving an apprenticeship of -four years as clerk must pay for his entrance fee 500 guineas, his -shares £570, his nomination £40, and his annual dues 40 guineas, or a -total of about £1150, of which £570, the price of his shares, yields -him a return in Stock Exchange dividends. These shares are, of course, -excellent investments, and the managers may be relied upon to see to -it that their value is not impaired. During the first seventy-five -years of its existence Stock Exchange shares paid an average dividend -of 20 per cent.; for the last completed year the dividend was 100 per -cent. No one person may hold more than 200 shares, and holders must be -members of the Exchange in all cases except those where representatives -of proprietors acquired their shares before December 31, 1875. When -a proprietor dies, his shares must be sold to a member within twelve -months. The membership is not limited, strictly speaking, and whereas -in 1802 there were 500 members, in 1845 there were 800, in 1877, 2000, -and in 1910, 5019. - -I say the membership is not limited, but when the time arrives, as -it probably will within this generation, that the 20,000 shares are -divided at the ratio of three shares for each member, 6666 members will -then own all the shares and the membership will be full. Hence there -is, in a way, a limit to the total membership. - -One important respect in which the London Stock Exchange differs from -all others--American, Continental, or Provincial--is the division of -its members into two classes, jobbers and brokers, a division that -appears to be as old as the Exchange itself. As to which of these -classes it is better to belong there are differences of opinion, but -the wise men in the business seem to be a unit in recommending a few -years’ experience as a broker to be followed by the business of the -jobber. The broker, under the London system, deals with the outside -public and acts merely as agent between the public and the jobber, -with whom he trades on the floor of the Exchange. The jobber, on his -part, is not allowed to deal with the public at all, but must confine -his activities to the brokers and to his fellow jobbers. “Thus the -broker,” as Mr. Hirst puts it, “feeds the jobber much as the solicitor -feeds the barrister,” or, continuing the metaphor, we may say that -like the barrister the jobber gets the _cause célêbre_ and all the -great prizes, and like the solicitor the broker hunts up the business -and must be content with small returns. The broker works for his -commission; the jobber for what he can get out of the trade in the way -of a profit. - -The system in vogue in the New York Stock Exchange would seem to -possess many advantages over this curious division of functions between -the two classes. Here, as every one knows, brokers are not restricted -in their operations; the field is alike open to all members, and the -market is not limited by placing it in the hands of any one man or -any group of men. On the London Exchange the attempt to define strict -dividing lines between brokers and jobbers has not been successful; for -years there has been a strong undercurrent of resentment between them -because of acts which each regards as encroachments by the other upon -its especial domain. - -The quarrel reached an acute stage in the paralysis that hit the Stock -Exchange after the South African war; there were too many members and -too little business. Brokers took it upon themselves to make prices and -to deal directly with other brokers and with outsiders, disregarding -the jobbers altogether; and jobbers in turn sought in self-defence -to establish connections of their own, outside the Stock Exchange, -and with non-members. Both parties have violated the spirit, if not -the letter of the Stock Exchange rules, and even at the present time, -when much stricter rules have been passed defining the limitations of -each division, the same unfortunate feeling of resentment is heard -daily. Violations of the rule, however technical, are bound to create -friction, and friction among the members of a Stock Exchange is not a -good thing for the members nor for the business. Fortunately, there is -nothing of that sort in the New York Exchange. - -In active securities where there are very many transactions, Mr. Hirst -is disposed to think that the separate existence of jobbers makes -for a free market and close prices the very essence of an Exchange’s -functions. This may be true, since the jobber is a host in himself, -specialist, speculator, trader and jobber--all in one. Where there is -a free market, the presence of such a participant undoubtedly adds to -it, as any one knows who has dealt with him in lots of from 5,000 to -10,000 shares, at a difference of only a sixteenth. Such a market is -a close market _in excelsis_. But in the New York Stock Exchange the -same result is obtained far more openly and above-board by the presence -in all active securities of a host of such jobbers--brokers, traders, -specialists, and speculators--each actively bidding and offering by -voice and gesture, and without collusion, and each thereby contributing -to the making of the freest possible market and the closest possible -price. In New York no middleman stands between the public and the -market. - -It is a fact recognized by all economists that the larger the number -of dealers and the freer the competitive bidding, the more accurate -the resultant price and the nearer its approach to true value; hence -it would seem to follow that in this highly desirable attainment the -New York system is superior to that of London. The same comment applies -to the market for inactive securities. In London, notwithstanding the -quotations printed in the Official List, the public has no assurance -that jobbers can be found to deal at those prices, or at prices -approaching them. “And when there is a slump in the market and a rush -of selling orders with no support,” as Mr. Hirst candidly admits, “as -happened in rubber shares in the months of June and July, 1910, the -jobbers are apt to be away at lunch all day, and the brokers have to -report to their clients that they simply cannot find a purchaser.”[107] - -Such things do not happen in the New York Exchange, for when there is -a slump in any group of shares, instantly there gathers a number of -individuals who are there for the very purpose of making a market. It -may be a “soft” market, with wide fluctuations, but it is a market for -all that, and the timely absence at an all-day luncheon of any one -man or any group of men cannot possibly affect it. There have been -occasions on the New York Stock Exchange, no doubt, where a broker -with a “hurry” order in a very inactive security has not found a -market awaiting him, but there are various ways by which he may seek -the desired market and ultimately he is sure to find it. In any case -such an incident is the exception that proves the rule that a free -market, affording all the advantages which excellent markets possess, -is nowhere to be found more easily and more quickly than on the floor -of the New York Stock Exchange. “American securities,” says the Paris -correspondent of the _Journal of Commerce_ in his cabled despatches -of October 23, 1912--referring to the Balkan crisis in that city--“may -with complete conservatism be regarded as having received a splendid -advertisement in the French market by reason of their recent remarkable -instantaneous conversion into cash.” - -In the course of many years of active experience as broker, trader, -and speculator, I do not now recall an instance in which I was unable -to find a market on the New York Exchange for any security, however -inactive, which I wished to buy or sell. If the specialist in this -particular stock cannot satisfy me with his quotation, there are -always room traders to whom I may submit my offer; there are also -arbitrageurs, wire houses, and banking houses interested in this -particular security. Somewhere among all these agencies the New York -broker must inevitably find or create a market. But I fancy he would -have a sorry time of it were he restricted, under the rules, to dealing -with a jobber who “is apt to be away at lunch all day,” when trouble -comes and risks are involved. - -Such a system, it would seem, is all very well for the jobber, but -quite unfair to the outsider and to the conscientious broker who is -striving all the while to protect the interests of the public and -maintain the welfare of the Exchange. Indeed, as it works out in -London, the broker has all the worst of it in many ways. Even though -the jobber “runs a book,” as the phrase is, his work is done at 4 -P.M.--when the market closes--and if he is not doing a large business -he may then follow his inclinations. Unless his business involves -dealing in South Africans or Americans, his work is substantially -completed with the official closing of the Exchange. But the broker, on -the other hand, enjoys no such freedom. After the closing he must go -to his office--for in the nature of things he must have one--and there -he will find correspondence awaiting him, orders to be executed in the -“Street markets,” and telephone messages to send to his customers. -The mere fact that a London broker must use the London telephone is -in itself a curse, for nowhere under the canopy is there a telephone -service so dreadful and so exasperating. - -Even in the ebb-tide of a dwindling summer business the London broker, -who cannot begin his day’s correspondence until four, finds it -difficult to leave his office until an hour long after his American -colleague has played his eighteen holes or dressed for dinner. Aside -from the horrors of the telephone service, this is due in a measure -to the fact that they have no ticker in London and the mechanical -efficiency with which this machine faithfully records all over America -each fluctuation of the market, finds no counterpart in England. The -broker in London has therefore to perform, in a measure, the work of -the ticker in New York. Perhaps I should not say they have no tickers -in London. In point of fact there is such an instrument, identical with -our own, which four or five times a day, at stated intervals, reels -off with mechanical monotony a list of quotations in certain active -securities--the same group every day. They are limited in number, -almost nobody looks at them, and many really enterprising houses do not -install them at all. - -Worst of all, the London broker until very recently was not properly -paid for his work; he was not protected by a rigorous commission law, -as we are in the New York Exchange. In New York a broker charges ⅛ per -cent. commission on the par value of every hundred shares in which he -deals for a non-member, each way, and the rules of the Exchange compel -him to collect it in all cases. The slightest departure from this rule, -however technical it may be, is severely punished, and no statute of -limitations or other expedient will save him from the consequences of -it. Thus all the brokers are insured an equal footing; competition for -business is prevented, and the public which the Exchange seeks to serve -is assured of equally fair dealing in every quarter. So rigorously -is this rule enforced that the large and important branch of the -Exchange’s business which has to do with joint-account trading between -New York and foreign centres has recently been seriously restricted -because, in the judgment of the governors, it involved an infraction of -this important commission law. - -On May 22nd of this year (1912) the London Stock Exchange put into -effect an official scale of commissions, which was designed to remedy -the unfortunate conditions that had prevailed, and this scale is now -enforced. It provides for a charge of ⅛ per cent. on British government -securities, Indian government stocks and foreign government bonds; ¼ -per cent. on certain other special cases, ⅛ in railroad ordinary and -deferred ordinary stocks at prices of £50 or under, and a sliding scale -on shares transferable by deed, ranging from commissions of 1½d. per -share to 2s. 6d. per share. On American shares the commission to be -charged is 6d. per share on a price of $25 or under, 9d. on prices from -$25 to $50, 1s. on prices from $50 to $100, 1s. 6d. on prices from $100 -to $150; and 2s. on prices over $200. - -In many other transactions the commission to be charged is left to the -discretion of the broker who may, if he is doing a large business with -a client in high-priced and low-priced shares on which the official -scale of commission varies, arrange to charge ⅛ on all transactions, -regardless of the rules. Whatever the London broker may lose in the -quality of his commissions as compared with the New York broker -appears, however, to be compensated by their quantity. A firm of -jobbers of my acquaintance once handled in a single day 262,000 shares -of “Americans” alone, and when it is borne in mind that this was but -one of perhaps 150 firms doing a similar business, an idea may be -gained as to how London brokers and jobbers contrive to keep the wolf -from the door. - -The system of settlements twice a month as employed in London is -another method quite different from that employed in New York, and -one, too, that seems to suffer by comparison with our system. On the -New York Stock Exchange everything is settled on the day following the -transaction. Each broker and each customer knows just where he stands, -and every trade is settled in full when the next day ends. Tell an -English broker that on a single day our Clearing-House settled and -balanced transactions in more than 3,000,000 shares of an approximate -value of 50,000,000 sterling and he gasps. He says that such a thing -would be impossible in London, and he is right, it would be impossible -indeed. Clearings in London vastly exceed ours, but they do not -occur daily; indeed our system would not do at all in a centre that -transacts, as London does, a large international business in which -transfers must be sent hourly to Egypt and India and to all quarters -of the globe. Daily clearings in such circumstances would be very -troublesome and vexatious. - -The New York system, however, makes failures and defaults commendably -rare, while the London system, by postponing the day of reckoning, -actually invites over-extensions in speculation leading to failures -that could not possibly occur here. To make this point clear to the -layman it may be said concisely that the man who settles daily is in a -safer position both toward himself and his creditors than is the man -who postpones his settlement. The daily settlement protects the public, -as well, by putting limits on speculative commitments. These matters -are self-evident. - -A gentleman who was for many years identified with a London firm of -jobbers, and who is now a member of the New York Stock Exchange and, -therefore, quite familiar with the different methods employed in these -Exchanges, tells me that the London system of brokers and jobbers, -commission laws, and fortnightly settlements, is the best possible -system for the London Exchange, while the very different methods -employed in New York seem to him to be the best that can be devised for -the New York Exchange. This may be true, since conditions governing the -two markets are widely different. In New York the whole system is cash; -in London, credit. Here brokers may accept business with considerable -freedom, knowing that but a single day elapses before the reckoning; in -London brokers exercise greater caution because they must trust their -clients until settlement day. - -Another point of difference between the methods of the two Exchanges -lies in the phlegmatic deliberation of the Englishman. Here in New York -there is a slap dash, touch-and-go system that is greatly facilitated -by the use of the telephone and the private telegraph lines; a single -commission house has 10,000 miles of leased lines. In London, where -telephones and private lines are but sparingly used by brokers and -clients, a broker often finds on his desk in the morning three or -four hundred letters and telegrams. The care and attention required -to handle an enormous lot of orders given in this deliberate manner -is something with which New York stockbrokers are quite unfamiliar; -indeed it may be doubted if they could meet such an emergency with -their present facilities. - -Publicity, as we are learning in the New York Stock Exchange, is -a prime requisite of the business, and the advantages that thus -accrue through the use of the ticker and the published summary of -each transaction in the day’s work cannot be overestimated in its -importance to the public and to the banks. In London, where a jobber -may buy or sell large quantities of securities, the business is done -quietly. Outside of the active participants in a transaction, nobody is -permitted to know anything about it. There is no ticker service worthy -of the name, nor is there a list of transactions published at the end -of the day. - -This, it seems obvious, would not do at all in America. We have here -not only the ticker-tape, which prints an almost instantaneous report -of prices all over the country, together with the volume of business -done at those prices, but there are similar reports of the day’s -business printed in all the morning and evening papers--one of the -last-named going so far as to reproduce on its financial page a copy -of the day’s tape from beginning to end. All the newspapers, moreover, -print opening, high, low, and closing prices, together with the bid -and offered price of each security at the market’s close. - -In the course of the two days in which these lines are written, for -example, 257,000 shares of Reading Railroad stock have changed hands -within a range of 1⅜ per cent. The public is enabled, through the -medium of the news-ticker, to learn who the buyers and sellers were -that engaged in these transactions; the tape shows the specific volume -of business done at each fraction, the various news agencies contain -all the information and gossip that throws any light on the matter, and -the financial columns of the morning and evening newspapers comment -freely for the public benefit. - -The total amount of information that is thus laid before the public is -as complete and as instructive as could be desired, and yet in London -and on the Continent such information is never published, although the -two leading financial newspapers in London, because of the immense -field covered, actually publish a mass of miscellaneous news and gossip -that exceeds any similar American effort. They make it pay, too; -dividends declared by these newspapers are altogether unapproached -by the American financial press. The essential information lacking, -however, is the number of shares dealt in, and at what prices; even if -they had a thoroughly good ticker system I doubt if this information -could be recorded, because the volume of business done is too great. It -is encouraging in this connection to note that so eminent an economist -as M. Leroy-Beaulieu frankly concedes our superiority in these matters -over the practice of the foreign Exchanges and urges their immediate -adoption abroad.[108] - -The second serious objection that may fairly be lodged against the -London system applies, as I have said, to the increased inducements -offered to foolhardy and reckless speculation by the plan of deferred -settlements. Whether members of the various Stock Exchanges in the -world’s capitals like it or not, they must recognize the fact that -there are evils in speculation just as there are benefits, and that -these evils are becoming a subject of increasing comment. The recent -attempt to repress speculation in Germany and the conditions which led -to the appointment of the Hughes Committee in New York are signs of an -aroused public sentiment that cannot be ignored. - -With these examples before them, members of Exchanges everywhere must -realize that if it lies within their power to discountenance and -discourage foolhardy ventures into speculation by persons ill-equipped -to undertake them it is their plain duty to do so. The London Stock -Exchange’s system of fortnightly settlements clearly does not aim -at this highly desirable object as well as the method of daily -settlements employed in New York, for it requires no student to see -that by postponing the settlement risks will be incurred that would be -impossible if a reckoning were called for each day. Moreover, the fact -that there are ten failures on the London Stock Exchange to one in New -York furnishes ample proof that the precautionary restriction imposed -by daily settlements is quite as important to the welfare of brokers as -it is to the protection of the public. - -As a matter of fact, failures of brokerage houses are peculiarly -abhorrent to every one concerned. In the Paris Bourse a broker must -give security at $50,000, and his bankruptcy in all cases is considered -a fraudulent one, rendering him liable to arrest. The French _Agents -de Change_ enjoy an absolute government monopoly, and naturally in -the circumstances they are held to the strictest accountability; but -aside from that a tendency is plainly discernible nowadays in all large -financial centres to demand of stockbrokers on the Exchange a rigid -adherence to such business methods as will prevent bankruptcies of -dealers to whom the public entrusts its money. - -The danger of the London fortnightly settlement system lies not in the -deferred delivery of securities, but in the fortnightly settlement of -“differences.” A London broker may be actually bankrupt, yet if he is -desperate or unscrupulous, knowing that his differences will not have -to be settled for a fortnight, he may plunge into speculative risks -fraught with the utmost danger. If the market goes his way he is saved; -if it goes against him, he is still no more than bankrupt. But in his -fall, as a result of this dishonest venture, he may conceivably ruin -many others, and a chain of disasters may follow his excesses. It -should be said in this connection that London jobbers and brokers keep -a sharp watch on each other; it is extraordinary how quickly the news -gets about if this man or that is over-extended. Again, either broker -or jobber may discriminate in his dealings, taking care to avoid those -against whom there is a suspicion. - -Notwithstanding the points of merit in the New York system, at some -time in the future when local Stock Exchange business has expanded to -proportions approaching those of the London Exchange, modifications -must be made. If banks and brokerage houses are given a week or ten -days to settle transactions, everybody will have a tolerably clear -idea of what money will be required, and lenders will be enabled to -make provision. London passed through the 1907 panic, under this -arrangement, with a maximum rate of 7 per cent., while we in New York -would have been glad to pay 200 per cent., and this, despite our -deplorable currency system, could not have occurred had there been -ample time for the banks to make preparations. - -From these observations it may be suggested that perhaps the time -will come when the governors of the New York Stock Exchange may find -it necessary to put in force a combination of daily settlement of -differences, such as we have at present, with a periodical delivery -of stock such as they have in London. Transactions for cash need not -be affected by this arrangement, nor would the public lose any of the -protection it now enjoys. In any case, if such a plan resulted in -minimizing those violent fluctuations in our call-money market which -have so long afflicted us, it would prove a permanent blessing. - -As there is no currency system anywhere in the civilized world so crude -and inadequate as that of the United States, it is unnecessary to say -that London jobbers and brokers experience none of the difficulties -with money markets that occur periodically on this side. The carry-over -on the other side of the water is frequently a matter involving immense -sums of money, but rates fluctuate normally and are in large measures -governed by automatic processes both simple and sane. Perhaps the less -said about similar conditions here the better. The spectacle presented -by strong and solvent houses ransacking the street for funds secured -by prime collateral and bidding 25, 50, and even 100 per cent. for -accommodation--something that has occurred within the last decade and -may conceivably occur again--is one upon which the candid American -observer does not care to dwell; such a man may well look with longing -and envy to London, where capital, credit, and currency are so firmly -established that the Bank of England dominates and controls all the -money markets and gold movements of the world, lending freely at home -and abroad whenever funds are needed, and acting as a civilizing -force in supplying with British funds the commercial needs of all new -countries. - -In this connection we may point out the method of borrowing from the -banks the funds required to carry speculative commitments in London. It -was formerly the practice for the banks to lend large sums to brokers, -who employed the money inside the house in carrying over the accounts -of their clients. This class of business is still large, but nowadays -clients are not always satisfied to borrow through brokers, and not -infrequently they go direct to the banks and borrow from them. This has -the effect of disguising the real character of the business. To all -appearances the securities have been bought and paid for, and the trade -seems to be an investment, but the client has, as a matter of fact, -“pawned” the security with a bank. - -This practice is inconvenient in a way, because where the jobbers -in important markets formerly compared notes at each settlement and -were thus enabled to form a pretty good idea of the condition of the -speculative account, it is less easy to do so nowadays, when so many -clients carry on their own borrowing. A similar tendency on the part -of the public is noticeable in New York, although, of course, the -daily settlement on this side obviates the necessity for arriving at -conclusions in advance as to the requirements of funds. - -A word should be said about the methods of London stockbrokers in -carrying stocks for their customers, because this also is quite -different from the practice in New York. Here the strongest houses -rarely loan stocks, unless attracted by unusual rates of interest; in -London it is the common practice of even the best houses to carry-over, -or as we term it, loan, a great part of the commitments entered into -during the account. One reason for this is that in London customers buy -their stocks outright more frequently than is done here. Scalping small -profits is not practised on anything like the New York scale. Most of -the stocks dealt in do not pass from hand to hand like American stocks, -but must have a transfer form with the name and address of the buyer -and seller attached to the certificate. There is also a government -stamp-tax of ½ per cent. on the money involved, which tax must be paid -by the buyer when the stock is transferred to him. When the buyer sells -this stock he may not have immediate use for the proceeds, and so, -instead of delivering the stock standing in his name, he instructs his -broker to borrow it from account to account, thus receiving interest on -his money. The tax is a heavy one--figured in American money it amounts -to $50 per hundred shares at par--and the Englishman very naturally -resorts to methods such as these to recoup at least a part of it. - -Again, from the stockbroker’s point of view, if he buys securities on -margin for a customer, he (the broker) must either carry them with the -jobber or with another broker, or he will have to pay the government -tax himself. Naturally he hastens to loan them, because, should the -client sell the securities in the course of the next account when -they would have to be delivered, the broker would lose the tax. He -avoids this loss by instructing a jobber to contango or carry-over the -securities until the following account day. On the other hand, if the -broker is certain that his client has purchased his securities for a -long pull on a margin basis, he will often pay for the stock himself, -transfer it to his own name, and willingly submit to the government -tax, knowing that he can recover the outlay from the handsome rate of -interest charged the client. - -Another vital point of difference between the London and the New York -Stock Exchange lies in the nature and volume of the business done. -Americans are prone to think of their foremost Exchange as one which, -in the volume and extent of its transactions, compares favorably with -the great Bourses of the world; they like to think of New York as -the financial centre of the universe, and they paint rosy pictures -of America as a great creditor nation. But they err in each of these -ambitious dreams. The New York Stock Exchange, with all its magnitude, -cannot compare with its London prototype; New York is by no means the -financial centre of the world, and America is not a creditor, but a -debtor nation. - -Perhaps in time America’s relationship to England and to the rest of -the world may change in these matters--certainly its increase in per -capita wealth and real property is such as to justify the hope--but -at present the day when we may speak of American financial supremacy -seems a long way off. We have not yet forgotten, for example, the -panic of 1907, and our helpless situation as revealed by our demand -for gold, nor are we likely soon to forget the funds that were then -promptly supplied us by London without any dangerous depletion of the -Bank of England’s reserve. So smoothly, so automatically are these -large affairs conducted by the Bank that the outflow of gold to New -York found a prompt response in the inflow from twenty-four countries, -including the Colonies. Within six weeks after the American drain -began, the bank’s stock of bullion actually exceeded its original -store. Small wonder that Englishmen are proud of their bank; and that -London should have become the world’s centre for the investment of -capital and the diffusion of credit. - -The New York Stock Exchange business differs radically from that of -all other great Exchanges in the one respect that its dealings are -practically confined to home corporations, whereas the Bourses in -Paris and Berlin, and more particularly the Stock Exchange in London, -embrace in their daily lists securities representing many different -countries all over the world. Here we have Canadian Pacific Railway -shares, and various Mexican Railway securities, together with some -issues of Japanese and German bonds, London Underground Railway bonds, -and a few others. But these, with the exception of Canadians, are dealt -in sparingly and with a rather nominal market. Our list of securities -is composed almost entirely of home rails and industrials companies, -representing, to be sure, an enormous total of capital investment and -signifying the tremendous growth of a comparatively new country backed -by the energies of a thrifty and enterprising people, but compared with -the London Stock Exchange’s Daily Official List ours is meagre in the -extreme. - -The London Daily List covers sixteen pages as large as our daily -newspapers, each page printed closely in small type, and containing -the names, amounts, interest dates, rates of dividend, and occasional -quotations of approximately 4700 different listed securities. This long -list, moreover, contains the names only of the securities that have -received an official settlement and an official quotation as well. -There are certainly as many more securities dealt in that have not -received an official quotation and hence are not permitted to appear in -the List, so that the total number of different securities represented -on the London Exchange in one or both of these ways probably exceeds -9000, half of them occupying a position somewhat similar to the -Unlisted Department which once had a place on the New York Stock -Exchange, but which is now abolished. - -It is the largest and most varied list of securities in the world. The -price of a single copy is sixpence; it is published by the trustees -and managers, under the authority of the committee. Not the least -interesting feature of the List is its continued expansion in the -last half-century. Up to the year 1867 one page sufficed, then four -till 1889, eight till 1900, twelve till 1902, and sixteen thereafter, -this expansion closely following the nominal value of the securities -quoted, which were £5,480,000,000 in 1885 and £10,200,000,000 in 1909. -The latter figure is about equal to the combined nominal capital value -of the securities quoted on the Paris Bourse and the New York Stock -Exchange. In 1907 the total number of bonds then listed on the New York -Stock Exchange was 1100, and the total number of stocks 502, these -together representing a total par value of $21,079,620,430. In 1912 -this total amounted to 1,028 bonds and 555 stocks, with an aggregate -par value of $26,243,291,803. - -The London List is conveniently divided into thirty-eight different -classes, among them British Funds, Corporation and County Stocks of -the United Kingdom, Public Boards, Colonial and Provincial Government -Securities, Indian and Colonial and Provincial Government Securities, -Indian and Colonial Corporation Stocks, Foreign Corporation Stocks and -Bonds, Ordinary Shares and Stocks of English Railways, Railways leased -at fixed rentals, Railway Debenture Stocks and Guaranteed Stocks and -Shares, together with preference shares, Indian Railways, Indian Native -Raj and Zemindary loans, Railways in British possessions, American -Railroad Stocks and Bonds, Securities of Foreign Railways, Banks and -Discount Companies, Breweries and Distilleries, Canals and Docks, -Miscellaneous Commercial and Industrial Companies, Electric Lighting -and Power Companies, Financial, Land, and Investment Companies, -Financial Trusts, Gas Companies, Insurance Companies, Iron, Coal, and -Steel Companies, Mines, Nitrates, Shipping, Tea, Coffee and Rubber, -Telegraphs and Telephones, Tramways and Omnibus, and Water Works. -Of these the Commercial and Industrial Companies List is by far the -largest, covering three pages. - -A cursory glance over this really formidable Official List brings -forcibly to mind London’s supreme position as banker, broker, and -clearing house for the wide world, while it emphasizes the constantly -increasing overflow of British capital into channels that make for -enterprise and development even in the most remote quarters of the -globe. Here we find set forth Ceylon, Fiji, Tasmania, and Cape of -Good Hope debentures; Stocks of Saskatchewan, Antigua, Johannesburg -and the Straits Settlements; Harbor Board Mortgages of Oamaru and -Wanganui; Rangoon Sterling Loans; Municipal Stocks of Pernambuco; -Budapest, St. Louis, Tokio, Lima and Aarhus; Ecuador salt bonds and -bonds of the Grand Duchy of Finland; securities of the Greek Piraeus -Larissa Railway, Honduras 10 per cent. loans, loans of Liberia, Persia -and Siam, and certificates of the Venezuela Diplomatic Debt. There -are securities of the Ionian Bank, the Natal Bank and the Bank of -Abyssinia. The Terra del Fuego Development Company is represented, -and likewise Amazon Telegraphs, Malacca Rubbers, Singapore Electrics, -Rangoon Tramways, Montevideo Water Works, and Sao Paulo Match -Factories. Soda and newspapers, theatres and sawmills, hotels and -clothiers, sponges and molasses, soaps and cereals, these are some -of the items that catch the eye as one glances over the List. What -would be found there if all the securities admitted to the House were -published in the List may be left to conjecture; and what will this -eloquent array of enterprise in figures look like a century hence, if -the List continues its present rate of growth? - -As Great Britain is a country where there is never any difficulty about -raising capital for the creation or extension of any business which -offers a reasonable probability of large profits, it is natural that -new countries where capital is scarce and credit scarcer should turn -to London. Thus governments, municipalities, company promoters and -manufacturers from all over the world are constantly making application -for funds with which to supply their needs. Greek railways, Abyssinian -banks, Ceylon tea and Malay rubbers hasten to register themselves at -the world’s centre of capital and offer their shares to a public whose -taste for all kinds of world-wide industrial and commercial ventures -seems never likely to be satiated, since the really good and profitable -home enterprises are seldom open to public subscription. The insiders -in those bonanzas naturally keep their treasures to themselves and -their friends, unless after a time the concern is turned into a -limited liability company with good-will as a conspicuous asset and -over-capitalization as the dominating motive; then, as elsewhere, the -market is invited to assist. But that is another story. - -What is of especial interest to a Wall Street man who looks over the -enormous list of London’s Stock Exchange securities is the function and -method of the Listing Committee that has to pass on all these concerns -before admitting them to the House. In New York the Stock Exchange’s -“Committee on Stock List” insists that the applicant company must be -able to show at least one year’s earnings--a most important condition. -In London somewhat different conditions prevail. The committee looks -into the bona fides of an applicant company and makes inquiries -concerning the people behind it, but it does not require that it shall -have done business for at least a year and show a year’s earnings, -because if that were insisted upon as a condition precedent, the banks -would not finance it, nor the public support it. They have no “curb -market” in London where a new company may pass through a seasoning or -preparatory period while awaiting admission to the Stock Exchange, -and as a settlement day with Stock Exchange authority is rigorously -insisted upon by those who provide the funds, it follows that -companies must be admitted at least to “official settlement” privileges -as soon as they are organized. - -One point upon which the London Exchange authorities lay great -weight in the admission of new securities, consists in obtaining -assurances that a sufficient number of shares has been allotted to -the public before admission is granted. This is a thoroughly wise -precaution, designed to prevent corners and, as far as possible, -improper manipulation. Another very interesting, and I may say, a -very wise precautionary measure of the London method of listing, is -the prohibition placed upon vendor’s shares--a plan that might well -be adopted in New York. In London, for example, a vendor--i. e., a -seller of the property--who receives shares in consideration of the -sale, cannot have his shares listed until six months have elapsed after -shares of the company have been offered to the public. The protection -afforded the public by this plan is obvious, and requires no further -comment.[109] - -If the London share certificates required, as in New York, only a -simple endorsement for transfer, much of the annoyance and confusion -that sometimes takes place would be avoided. The market for mining -shares, for example, had until 1888 only a very small place in the -London Stock Exchange, but the discovery of gold in the Witwatersrand -changed all that, and by 1894 the number of brokers engaged in handling -mining shares actually exceeded those in any other department. It was -found necessary to provide a special day--one day before the regular -settlement commenced--for carrying over bargains in mines, but owing to -the fact that mining shares, like nearly all securities in London, were -“registered” and not “to bearer,” the clearing house was taxed beyond -its powers by the immense volume of work thrown upon it, and once or -twice it broke down completely. - -An extraordinary number of small investors bought fractional shares; -the offices of the companies were not prepared for the rush and could -not handle the large carry-over, hence for a time the “Kaffir Circus,” -as the speculative mania of the day was called, promised to embarrass -seriously the whole Exchange machinery. All this could have been -avoided by making the shares “to bearer.” Yet the London authorities -feel--and not without reason when we consider the volume of their -business and the remoteness of their clientele in many instances--that -bearer certificates are not safe, and that what is lost in the time -spent in transferring certificates is amply compensated in the -resultant security against fraud and forgery. - -It is interesting to note in connection with the enormous business done -on the London Exchange--a business which makes New York’s high totals -seem insignificant--on what a vast scale London’s exports of capital -are conducted. This may properly be noticed here, since these capital -exports have great economic significance and bear close relationship -to the transactions on the Stock Exchange; indeed were it not for the -work done by the Exchange in providing markets and settlements and all -the details of the security business, it is fair to say there could be -no such public issues of capital. In 1910, for example, new capital -expenditures amounted to the extraordinary figure of £267,439,000, of -which £60,296,500 was expended in the United Kingdom, £92,378,100 in -the various British possessions, and £114,764,500 in foreign countries. -Of the grand total £49,974,000 went into foreign railways, £10,096,000 -into Indian and Colonial railways, £35,631,600 into Colonial government -loans, £18,431,000 into foreign government loans, £18,343,100 into -explorations, and £19,143,800 into rubber.[110] The year 1910 was, -of course, a year of great prosperity in England, and it was a year -made famous by speculative activity in various directions, especially -in rubber, so that the totals given above are larger than they had -ever been before. But the point for us in America to bear in mind in -considering these figures is their immense significance as showing -England’s complete supremacy in capital, credit, and the art of banking. - -The immense number of securities dealt in, coupled with the speculative -propensities of the people and the ramifications of British finance, -naturally go to make that Exchange a peculiarly sensitive and -vulnerable spot, and the American visitor may well wonder what would -happen there if the ancient bogy of war between England and any -other first-rate power should some day become a reality. War is, as -every one knows, the greatest destroyer of capital. England’s little -Transvaal war cost $1,000,000 a day, and by the Chancellor of the -Exchequer’s report resulted in a total expenditure of $1,085,000,000. -The war between Russia and Japan cost upward of $3,000,000 daily and -$2,000,000,000 all told. What a great war would cost England if that -country were to cross swords with one of the powers may be conjectured; -what would happen in the Stock Exchange taxes the imagination. - -In the month in which these lines are written the London Stock -Exchange and all the continental Bourses are having their periodic -scare over a war in the Balkans. British consols have fallen almost -seven points from the high price of the year; French rentes seven, -German 3s. six, and Russian 4s. seven.[111] These are very severe -declines for government securities of that class, and if they can fall -abruptly over difficulties in the Balkans, what would happen were -these countries themselves involved in war with foemen of their own -class? Russian consolidated 4s. fell eleven points and Japanese 5s. -twelve in the first month of the Manchurian war, and in our war with -Spain, Spanish 4s. fell from 61 to 29¾. If such things can happen to -government securities, what would happen to all the 9000 odd industrial -and kindred securities dealt in on the London Exchange should England -take up the sword with, let us say, Germany? We are not left to -conjecture on this point, for in the week that has just witnessed -the Balkan scare there have been some really tremendous slumps in -securities--collapses out of proportion, it would seem at this -distance, to the magnitude of the political issues threatened. - -In Paris, for example, there has just been witnessed a two-day break of -185 points in Sosnoviche Collieries, a one-day break of 165 points in -Bakou Naphtha, a decline within a few hours of 115 points in Russian -Naphtha and overwhelming breaks of from 50 to 150 francs in Paris Light -and Transport shares, Rio Tintos, and Electrics. No such demoralization -has been seen in any foreign financial market within twenty-five years. -This slump was no doubt due in large part to a top-heavy speculative -position and to consequent financial congestion, but it was the -Balkan war-cloud that caused the real difficulty none the less, and -it supplies an outsider with an idea of what may happen in a real -emergency. - -Foreigners are prone to speak of Yankee speculation as foolhardy and -reckless, as no doubt it is at times, but never in American history -has there been a panic with anything like the severe declines, in so -brief a period, as those just recorded. For that matter, we in America -have never experienced a boom in any sense commensurate with London’s -rubber boom of 1909–10, nor a collapse as sudden and as thoroughly -deserved as that which followed it. Again, London’s Kaffir Circus of -1894–5, and the furious speculation in Panama shares in Paris in the -early nineties, have had no parallel in American stock markets. This is -only another way of saying that the speculative mania which seizes upon -nations at periodic intervals is not a matter of latitude and longitude -in any sense.[112] - -In trying to picture what would happen in the London Stock market -should such a war as that which Englishmen are always discussing really -occur, we must take into account not only the mass of securities that -would be directly affected, but also the great burden borne by London -banks and bankers in security issues all over the world. On another -page we have seen that London’s capital expenditures on new issues in -various quarters of the globe in a single year exceeded £267,000,000; -in the quarter just closed (September, 1912), these disbursements ran -£25,000,000 above the previous year. - -That they will continue so to increase is open to no doubt as long as -England’s abstention from war is assured; but if there should arise -even the possibility of war, it would result in an embarrassment of -credit with terribly serious results, such as have never been dreamed -of in the world’s history. The many years of peace between the great -powers, the many new countries that have been opened to commercial -development, and the countless new fields of industrial endeavor that -have come into being while this peace has lasted, have served to create -a British credit situation huge and complicated beyond all precedent. -Any serious interruption or derangement of so vast a system would find -a very different situation from that which existed on the Continent in -1870. It would be appalling. - -And yet, ere we go too far afield in search of the shivers, the -observer must bear in mind that this great credit system of which -London is the banker and clearing house, in reality knits together -in its international web all the great powers, and binds them so -closely together as to guarantee, in some measure, the preservation of -peace. That peace hath her victories, and that the creation of wealth -through industrial pursuits may serve in this way to prevent armed -strife--these are, after all, encouraging indications quite as strong -as treaties. To-day the bankers of London and Paris are the war lords -of creation. Both these centres loan money, on early maturing bills, -to all the world. Stop London’s discounts through an outbreak of war, -and gold would pour into that centre at the rate of $200,000,000 a -month. “It might be possible to starve her population,” says a recent -writer, “but no combination of the Powers could bankrupt London. In -the event of war Paris could bankrupt Germany in a week. No war could -disturb the credit of the Bank of France; but the German Reichsbank -would inevitably go down in the smash. All Germany’s capital is in her -own shop. She is doing a great business, and, quite properly, a great -part of it on borrowed money. But if her loans were called, she must -put up the shutters.”[113] - -Let us now observe the London broker at his work. The Stock Exchange, -as has been described, settles nearly all of its transactions twice -a month, upon officially appointed “account days,” which fall about -the middle and the end of every month. Smith, a broker, receives an -order to buy, let us say, 500 East Rands, and goes to a jobber who -makes a specialty of that department. The jobber, Jones, is a wise -man and a clever trader, who knows all there is to know about supply -and demand and regulation of prices to meet them, otherwise he would -soon be out of business. Smith does not tell him what he proposes -to do, but asks for a price, which in normal markets Jones quotes at -3½ to 3-9/16, this being the method of implying, in pounds sterling, -that he is prepared to buy at 70s., or to sell at 71s. 3d. The broker -will probably say that the price is too wide, whereupon Jones quotes a -figure “close to close,” reducing the quotation 1/64 each way, at which -figure the transaction is closed.[114] Smith enters in his book that -he has bought of Jones 500 East Rands at the price stated, and Jones, -that he has sold at this price to Smith. The customer is then advised -of the transaction, and next day he receives his stamped contract, -with details covering the cost of the shares together with brokerage -and other expenses, if any, and informing him of the date of the next -account day, when payment will fall due. - -Beneath the main floor of the Exchange is the settling room, and here -the clerks of broker and jobber check the transaction that has taken -place. Two days before the account the name of the person for whom the -East Rands were bought is written on a ticket--hence “ticket day”--and -handed to the Stock Exchange Clearing House, which, after the manner -of the Stock Exchange Clearing House in New York, eliminates all -the intermediaries through whose hands the shares may have passed ad -interim, and puts the selling broker into direct communication, by -passing him the ticket, with the broker of the buyer. This done, the -seller receives the ticket with the buyer’s name on it, and prepares -a transfer deed as the law requires.[115] Had the client bought the -shares of an American railway instead of East Rands, the procedure -following the purchase would have been somewhat different, because -American shares bear a form of transfer on the back which requires the -signature of the seller only, and which becomes, by reason of this -fact, almost as readily negotiable as bank-notes. - -In London consols can be dealt in in this way, but the customary -form of conveyance of the funds, and of Indian and Colonial stocks, -consists of a brief transfer on the books of the bank acting as agent -for the particular issue. Thus the Bank of England keeps the books for -consols and India government stocks, and sellers or their attorneys -must attend personally at the bank and sign the transfer. The bank -insists that every seller must be identified by a member of the Stock -Exchange, whose signature must be registered there, and it places full -responsibility upon these members for correct identifications. This -was long a sore point with the Stock Exchange, and it was fought to a -finish in the courts, but the Bank won “in a walk.” - -The transaction just cited in the case of East Rands is based on the -supposition that the original buyer proposed to “take up,” or pay for -his shares in full. If he is merely a speculator, hoping to sell at a -profit before the settling day and pocket the difference, a somewhat -different procedure is involved, especially if at the approach of -settling day the hoped-for rise has not appeared. In that case he asks -his broker to “carry-over,” “contango,” or “give on,” the shares he has -bought, and the broker, to whom this is an hourly occurrence, naturally -has at his finger tips ample facilities for doing what is required. - -Going to the jobber, he says he wants to “give on” five hundred East -Rands. The jobber says he will “take them in,” which means that he -will lend the money until next following settlement, charging interest -at, say, 5 per cent., while the broker in turn charges his client -5½ per cent. and takes the interest difference as compensation for -the service. The buyer’s speculation is thus extended to the next -settlement, and the statement given him shows that he has been -debited with the interest upon the “making-up price,” at which the -transaction is arranged. The rate of interest is called the “contango,” -and “contango days” are the two days during the settlement when these -arrangements are in effect:[116] - - “The Stock Exchange has witnessed many periods of wild - excitement and speculation, reminding one of the famous South - Sea Bubble--perhaps the most remarkable “boom” on record--the - story of which, however, has been so often and so vividly told by - Smollett and later writers that we need only refer to it here. - Just before the middle of the last century came the great railway - boom. It began about 1834, and within one year more than six - hundred propositions for railway lines in the United Kingdom were - placed before the public, the nominal capital required being over - 600,000,000 pounds sterling. Panic, of course, followed the boom; - and, as an example of the rapidity with which prices moved, it may - be mentioned that the Great Western Railway stock rose to 236 in - 1845, and fell back to 55½ within three years, while Midland stock - rose to 183 and fell to 64. After the railway boom and panic came - several banking crises, of which the worst were those identified - with the names of Overend, Gurney, & Co. in 1866, and of Baring - Brothers in 1890. For five years after the latter, the Stock - Exchange lay fallow, with business and credit worn to a shadow. - Then came the famous Kaffir boom, of which it may be said that - Cecil Rhodes stood out as the colossus. The madness of that boom - has rarely been equaled, even in the history of the Yankee market. - It makes one hot even on a cold day to think of the time when, as - a clerk, one tore off coat, waistcoat, collar, and tie in order to - run the faster in the settling room beneath the Stock Exchange, - “passing names” (as it is technically called) in connection with - that gamble. A Rugby football scrum was child’s play to the - continued struggles; and, after the most violent excitement had - subsided, there were always fights to be settled before one went - upstairs to work the whole night through. - - “A period of collapse followed this episode. After various minor - upheavals there came in 1910 the rubber boom, which, perhaps with - the Kaffir Gamble, more nearly recalls the excitement of 1720 than - any other. The rubber boom had not, indeed, the same noble backing - which the South Sea Company boasted; but clergymen and ladies were - prominent operators as ‘bulls,’ ‘stags,’ or both.”[117] - -The thought will no doubt occur to an American who reads these pages, -whether the day will come when American banking will extend, as in -England, to every quarter of the globe, and whether the New York -Exchange, like its London prototype, will become a centre of the -world’s commercial activities. This is a far cry, of course, and the -answer will not be known in our generation. But it may be said without -fear of contradiction that when a great nation like ours, in which the -spirit of enterprise is manifest, has reached the point where its own -domain has been developed, when it has perfected a sound banking and -currency system, when it has recovered its lost shipping and mastered -those economic lessons that the future has in store, it may confidently -be expected to push out into new lands and supply their demands for -capital. - -Already we have in America a world’s storehouse of necessary -commodities, with wealth and intelligence that increases by leaps and -bounds. No nation stands a better chance of escaping the horrors of war -and its ruinous losses. China remains a fertile field for commercial -endeavor in the years to come, and our neighbors on the south may -one day know us more intimately. The retrospective eye, surveying -commercial and financial America in the sixties and contrasting it with -America of to-day, sees clearly that progress has been made, and looks -beyond toward progress to come. In any case civilization must advance -and trade expand, and American energy must advance and expand with -them. I wish I might visit Wall Street and the Stock Exchange a century -hence.[118] - - - - -CHAPTER X - -THE PARIS BOURSE; A MONOPOLY UNDER GOVERNMENT - - -“Patriotism makes it a duty for us to acknowledge the fact that the -Bourse represents one of the live forces of France,” wrote Anatole -Leroy-Beaulieu in one of the finest tributes ever paid to a Stock -Exchange. “It has been for France an instrument of regeneration after -defeat, and it remains for us a powerful tool in war and in peace. -Let us recall the already remote years of our convalescence, after -the invasion, years at once sorrowful and comforting, when with the -gloom of defeat and the suffering of dismemberment, mingled the joy -of feeling the revival of France. Whence came our first consolation, -our first vindication before the world? Whether glorious or not, it -originated on the Bourse.” - -The victorious Prussians were at the door in the humiliating crisis of -1870 and ’71 to which the author refers, France was prostrate. Alsace -and parts of Lorraine were to be ceded to the victors, together with -an indemnity of five billion francs, and Paris was in control of the -Reds. In that dreadful saturnalia of violence and crime which has made -the name of the Commune infamous, the honor of France was threatened, -and the credit of the new Republican government, especially its ability -to maintain its authority and to fulfill its terms with the Prussians, -seemed hopeless and cheerless indeed. How Thiers became the brains of -the rehabilitation of France, with what vigor he entered upon the task -that has handed down his name as the most influential political figure -in French history--with what rigorous measures MacMahon suppressed the -Commune--these are spectacular incidents with which every schoolboy -is familiar. But the work of the Bourse in that episode--silent, -unobtrusive, and lacking the sensational features of which popular -histories are made, is by no means so well known, although upon its -labors devolved the real upbuilding of France. Thiers never ceased to -congratulate himself on the assistance it gave the country at a time -when the liberation of French territory hung in the balance. - -“The Paris market came out unscathed from the ruins of the war and -of the Commune,” continues our author, “and straight from the hardly -ratified peace and quelled insurrection it threw itself into the work -for France’s regeneration; because it was, indeed, for France’s -regeneration that the stockbrokers and merchandise brokers worked under -Thiers and MacMahon. In the worst days the Bourse had the uncommon -merit of showing an example of faith in France. When more than one -political skeptic and discouraged thinker allowed themselves to write -down upon the crumbling walls of our burned-down palaces “Finis -Galliae,” the Bourse kept its faith in France and her fortune, and that -faith in France was spread by it all around, at home and abroad. - -“Speculation was patriotic in its way; it exhibited a confidence in our -resources which the discretion of many a wise man rated as foolhardy. -Have we already forgotten our great loans for liberation? Without the -Bourse, these colossal loans, the amount of which exceeded the dreams -of financiers, would never have been subscribed for, or, if ever, -it would have been only at rates much more onerous for the country. -Without the Bourse, our French rentes would not have taken such rapid -flight; our credit, restored even more quickly than our armies, would -not have equaled that of our victors, on the very morrow of our defeat. -In that regard, all that justice demanded us to say previously of the -higher banking institutions may with right be repeated concerning the -Bourse. - -“To those who lived through that pale dawn of France’s recovery--the -rush of the Bourse and of capitalists to offer us the thousands of -millions which we required exceeded the eagerness and boldness of -speculation. But even if we were to consider it but gambling and -betting for speculation, such speculation was betting for France’s -regeneration; it bravely placed its bet on the vanquished. Those -national and foreign financiers, who have been accused of pouncing upon -her like birds of prey, brought to the noble wounded their dollars and -their credit, and if they reaped a profit thereby, are we to reproach -them for it, when they helped us to reconstruct our armies, our fleet, -and our arsenals? - -“If France regained her rank among the nations of the world so quickly, -the credit for it should be mainly given to the Bourse. And to its -services in war, we should, if we wanted to be just, also add its -services in time of peace. Without the extensiveness of the Paris -market, and the stimulus given to our capitalists through speculation, -how many things would have remained unaccomplished in the recklessly -overdriven condition of our finances? We should have been unable to -complete our railroad system, or renew our national stock of tools, or -create beyond the seas a colonial empire which shall cause France to -be again one of the great world powers. When the Bourse is on trial, -such credentials should not be overlooked. Before condemning it in -the name of morality and private interests, a patriot should give due -consideration to its services rendered for the national weal; if all -its defects and misdeeds be heaped up on one scale tray, then services -of like importance will easily counterbalance them.”[119] - -Singing the praises of Stock Exchanges is a thankless task, and one -that falls upon deaf ears. The very nature of its functions makes dull -reading. It cannot hope to enlist the lively enthusiasm of the casual -observer, nor has it picturesqueness to brighten the pages of history. -The layman visits the great exchanges as a matter of course; the scene -is animated and diverting; he sees the outward manifestations of energy -and movement, but too often he misses the great silent forces at work. -The eye has a fine time of it, but the intellect comes away empty. -These are reasons why I have ventured to quote the foregoing passages -from M. Leroy-Beaulieu. Somewhere in his earnest tribute to the work of -the Paris Bourse the reader may find food for thought. - -The Bourse in Paris differs from all others in that its membership -consists of but seventy. These _Agents de Change_, as they are called, -enjoy an absolute monopoly not only to trade in government and other -officially listed securities, but also to negotiate bills of exchange -and similar instruments of credit. In these circumstances it is -easy to see why the Bourse is an institution of enormous strength, -notwithstanding the fact that, because of the deep-rooted conservatism -of the French in financial matters, it stands a poor second to London -in international business. - -It exists by virtue of the decree of October 7, 1900, regulating the -execution of article 90 of the Code du Commerce and of the law of -March 28, 1885, as modified by the decree of January 29, 1898. These -laws provide that _Agents de Change_ of the Paris Bourse must be -French citizens over twenty-five years of age, and in possession of -civil and political rights; they must be nominated by official decree -signed by the President of the Republic. They must have performed -their military service or satisfied the law as to such service, they -must produce a certificate of fitness and good character signed by -the heads of several banking and commercial firms. _Agents de Change_ -are, in reality, officers of the government, since the seventy -ministerial appointees are entrusted with the exclusive right of -dealing in government securities; all such dealings, in fact, when not -made directly by private individuals, must be made through _Agents de -Change_. - -The enjoyment by stockbrokers of a complete monopoly under government -is sufficiently unique to warrant an inquiry as to the origin of such a -curious privilege. The employment of stockbrokers by persons who wished -to sell certificates, or other negotiable instruments of the period, -was made obligatory by an edict of Louis XIV in 1705. Twenty “offices” -(memberships) of brokers in Paris were then created, and these twenty -were accorded a monopoly similar to that of to-day. Prior to that -period there had been “offices” of exchange brokers, bank brokers, and -merchandise brokers, but the King felt that these were not contributing -enough to the Royal exchequer and swept them all away in the edict of -1705, when the present system had its birth. The wars and the King’s -extravagances had placed the exchequer in a bad way, and between 1691 -and 1709, some 40,000 privileges of various kinds were sold for cash, -among them the privilege under which these twenty men were to do the -business of stockbroking in Paris. “Sire,” said Pontchartrain, “every -time Your Majesty creates an office, God creates a fool to buy it.” - -But the stockbrokers were not to remain in undisturbed possession of -their new privileges, for, whenever the state of the Royal finances -was low, the King withdrew the old offices in order to grant new ones, -always for cash, to fresh buyers, and this was repeated again and -again. Thus the next King Louis XV, whose personal follies, together -with the schemes of the Scotchman, John Law,[120] brought the country -to the verge of ruin, repealed in 1726 the Edict of 1705 and returned -to it again in 1733. His successor, the weak and incapable Louis XVI, -repeated this performance in 1785, 1786, and in 1787. In 1788, the -stockbrokers having agreed to waive accumulated interest on their -security deposits, were again established in their powerful monopoly. -The critical financial situation that arose in the early days of the -Revolution saw them again legislated out of office (June 27, 1793); -the Bourse was closed, the stockbrokers arrested and their goods -confiscated, because, in the imperfectly understood economics of the -period, the decline in Frenchpaper currency (assignats) was attributed, -_faute de mieux_, to stock-jobbing. Two years later the Bourse was -opened again, and after eight days--the assignat continuing to decline, -it was again closed. Meantime France went into bankruptcy. - -In 1801 the modern Bourse was established and firmly fixed by the -legislative work of the Consulate. The law then enacted requires that -stockbrokers be appointed to their public trust by the government, -which shall be guided in its choice by their moral character and -their professional knowledge, and shall, besides, demand the pledging -of a part of their fortune with the State as a guarantee of their -good conduct and of proper expiation for their errors or failures. -The law also emphasizes the principle of the freedom of commerce, -expressly stating that nobody is obliged to have recourse to an -intermediary, if he does not desire it. Further, the stockbrokers were -subjected to several regulations with a view to prevent speculation -and stock-jobbing. Thus, they were obliged to keep a journal; their -books were to be marked and signed by the president of the _Tribunal -de Commerce_; they could not trade nor carry on banking for their own -account; no one who had been in bankruptcy was allowed to assume the -duties of a stockbroker. - -The law also makes the stockbroker responsible for the delivery of -the securities sold and for the payment of the sums stipulated, even -before either have been received by him from his clients, his security -being appropriated for this pledge if need be. This responsibility was -intended as a check upon transactions for future delivery, which, -however, were made legal in 1885.[121] This law of 1801, it will be -observed, provided that stockbrokers were to be _appointed by the -government_, and that their commissions were subject to repeal. In 1816 -they scored a great advantage by securing the enactment of a measure -by which they were permitted to introduce their successors with the -consent of the government. This “right of introduction,” says M. Vidal, -“is practically an article for sale. The stockbroker, on retiring, does -not sell his office (membership), but he sells to his successor the -right of introduction.” - -The price of this right in recent years has varied from 1,500,000 -to 2,000,000 francs ($300,000 to $400,000). A candidate, proving -satisfactory to the government, must in addition deposit 250,000 francs -($50,000) as a bond or security to the government, which pays interest -on the deposit, and 120,000 francs ($24,000) as a fee to the _caisse -commune_ of the _chambre syndicale_, which means the treasury funds -of the institution. The variations in the price of the “offices” or -memberships have an interesting history. The first office sold was -valued at 30,000 francs; about 1830 they rose to 850,000 francs; after -the July Revolution they fell to 250,000 francs, and rose again to -950,000 francs before 1848. They declined at that time to 400,000 -francs, and in 1857 reached 2,400,000 francs. After the war they fell -to 1,400,000 francs.[122] In 1898, when the number of _Agents de -Change_ was increased from sixty to seventy under the government’s -reorganization, designed to meet the expansion in business, it was -provided that each of the ten new members should purchase the offices -from the old members at 1,372,000 francs each. - -While the stockbrokers, as I shall term the _Agents de Change_ -henceforth, are placed by law under the disciplinary rule of the -Minister of Finance, they themselves, as an association, choose by -ballot a governing board (_chambre syndicale_) of eight of their -members, to whom, with a chairman (_Syndic_) are entrusted the -maintenance of discipline, the listing of securities, and all general -matters concerning the welfare of the body. - -In addition to the exclusive privileges entrusted to stockbrokers -as already cited, they are constituted the sole authority for -the quotations of the securities in which they deal, including -quotations of metals; they alone give the necessary certificates for -transfers of government securities on terms provided by law; they -regulate processes by which lost or stolen certificates are rendered -non-negotiable or restored to owners; they may be commissioned by the -courts to negotiate loans, to liquidate pledged securities, and to -dispose of the property of minors. Settlement days in Paris are similar -to those in London, occurring twice a month. That at the end of the -month lasts five days, and that in the middle of the month four days. -French rentes are settled only at the end of the month. - -In forming partnerships, only one person in the firm is entitled -to act as stockbroker; the other partners must be simply financial -partners, responsible for losses, as “special” partners are in New -York, to the extent of the capital contributed. The holder of the -membership must be the owner, in his own name, of at least one quarter -of the sum representing the purchase price of his membership, plus -the amount of the bond or security given. Stockbrokers are forbidden -by law to disclose the name of any person for whom they buy or sell; -for this reason all dealings are made in the broker’s own names, as -are also transfers. They must not, under any circumstances, carry on -trading or banking operations for their own account, under penalty of -expulsion. The bankruptcy of a stockbroker is prima facie a fraudulent -bankruptcy, rendering him liable to arrest and other penalties, even -under circumstances where an outsider would be immune. - -While the impression prevails in many quarters that members of the -Bourse are made responsible by law for any liabilities that may be -incurred by their colleagues, such is not the case. The practice is, -however, that the _chambre syndicale_, or governing body, voluntarily -meets the liabilities of defaulting members from the general funds, -although not compelled to do so. The nature of the monopoly which -stockbrokers enjoy in Paris, and their position as officers of the -French Executive government, renders this a thoroughly wise method, -for, as we shall presently see, there is grave opposition to the -exclusive rights entrusted to them, and it would not be good policy -to fan the flames of this hostility by anything less than a mutual -guarantee of solvency. - -Rates of commission to be charged by stockbrokers on the Paris Bourse -are fixed by the decree of the Minister of Finance (July 22, 1901). -These are the minimum charges, and no stockbroker is allowed to reduce -them under any circumstances. He may, however, and usually does, share -them with intermediates who bring him business. - -If a client gives, say, an order to buy “at the average price” (_cours -moyen_), the transaction takes place in this way: Before the opening of -the session the stockbrokers and their clerks meet in a special room, -where bids and offers are made “at the average price,” which is as yet -undetermined; it will be decided during the session. When an offer and -a bid coincide, the transaction is closed; only the price is missing. -When the bell rings to announce the opening of the market, the brokers -and their clerks leave the special room and proceed to the public hall -around the railed enclosure (_corbeille_) whereupon the day’s business -begins. - -As orders are executed the dealer gives the price to a marker, whose -entries establish the prices for the official quotation list, and, -when this has been made up, those who have traded on the basis of “the -average price” ascertain it by striking a mean between the high and low -level. If only one price is quoted, that, of course, takes the place -of the average price. If orders are given at fixed prices, or “at the -market,” they are executed as elsewhere. It is important to note in -this connection, that the market in Paris enjoys an intimate connection -with many banks and credit institutions that act as intermediates -in procuring business. Orders transmitted to the Bourse by the Bank -of France in 1908, for account of its clients, amounted to 98,721, -involving 500,000,000 francs capital. - -While, as we have seen, stockbrokers alone have the right to deal in -government and other listed securities, there are very many securities -dealt in, in Paris, that have not been admitted to the Official -List, either because the stockbrokers did not care to adopt them or -because the securities did not fulfill the very rigorous statutory -conditions. These may, however, be dealt in outside the Bourse, and -the law recognizes and protects such transactions. In what I have -written heretofore, I have confined myself to the operations of the -parquet, meaning the stockbrokers market, and so called because of -the parquet floor on which they stand; we come now to the dealings on -the coulisse, or curb, named from the narrow passageway, la coulisse, -in which these curb brokers congregate. This market is called “the -banker’s market” (_marche en banque_), but for our purpose we may call -these dealers curb brokers, as distinguished from the stockbrokers of -the parquet.[123] The number of curb brokers is not limited; any one -may become a coulissier if he is a French subject. He must have a -capital of 100,000 francs in order to do business in the cash market -for rentes, and of 500,000 francs for the settlement market. The curb -is governed, as is the parquet, by two _chambres syndicale_, one for -the account, and one for the cash market. - -Although the French law provides that dealings in French rentes are -the sole prerogative of the monopoly of stockbrokers, and fixes -punishment for any intrusion into that field, the curb brokers, as a -matter of fact, deal extensively and openly in rentes, and are powerful -competitors of the stockbrokers. Their operations are not valid, -strictly speaking, but they are tolerated by the government for the -reason that the credit of the State is benefited by making the market -for rentes as free and extensive as possible. This tacit recognition -by the government, of the fundamental law of economics that wide and -unrestricted markets are the best markets, would seem on its face to -raise a point as to the wisdom of a system that perpetuates a monopoly -of seventy stockbrokers. The question is not a new one; it has been -agitating financial Paris for years. Monopolies of any kind are not -considered beneficial in this enlightened age; monopolies that make -markets and establish values and prices are peculiarly abhorrent. On -this point we may quote M. Vidal, the author of a brilliant study on -this subject: - -“The actual financial power of the Paris stockbroker is put forward as -an argument,” he says, speaking of the argument in favor of continuing -the monopoly, “and it is affirmed that our financial market is the -first in the world. In our opinion, even granting that this is true, -which is far from having been proven, the cause is confounded with -the effect. When a country, owing to its geographical location, its -climate, and the character of its inhabitants, possesses numerous -natural riches, and even moral riches, they co-operate in increasing -its wealth; when it has the advantage of certain political and economic -conditions, when it enjoys a monetary and commercial organization -which promotes, instead of paralyzing, human activity in most of its -manifestations, then that country is rich and deserves to be rich. -And it may then happen that some organization, defective in itself, -and the source of manifold vexations, is nevertheless prosperous, as -much on account of certain facts of adaption as because it unavoidably -lies within the reach of the rays of national wealth. It reflects that -wealth. - -“But the Paris Bourse does not owe its prosperity to its organization. -Seventy ministerial appointees entrusted with the negotiation of -one hundred and thirty billions of transferable securities are -powerful personalities. They would be more powerful if they were but -thirty-five. They would be more powerful if there were but twenty of -them, or ten, or five, or even one, if there were in the market but -one autocrat, a single arbiter of securities, centralizing bids and -offers, and the king of the Bourse, just as we see in America an oil -king and a steel king. In such a case the soundness of a market is more -seeming than real. If that system had been applied to provisions and -merchandise, infinitely more necessary for consumption than rentes or -shares in companies, the market for wine, bread, and meat, appropriated -by a few barons, might, perhaps, be stupendously high, but in this -respect experience speaks in favor of freedom of trade only. - -“It seems, therefore, necessary that public and private credit should -enjoy the benefit of an organization more pliable and more in harmony -with the general condition of a country’s commerce. Let us therefore -beware of mistaking the appearance of force for force itself--a -deception that should impress us no more than the sight of the effigies -of iron-clad warriors, standing on rich trappings in a military -museum. If our financial market were opened to all who have funds and -understand the profession, it would be stronger still. If the market’s -favorable situation were distributed among several hundred individuals, -the division of risks would render the market more stable, competition -would secure for our market the desired elasticity, and, if wanted, -regulation under the supervision of the Minister of Finance would -create a condition halfway between unlimited freedom, which, with more -or less reason, scares so many people, and monopoly, which is an old -outfit, in no way suiting our customs, and disturbing the harmony of -our laws without rendering the services expected from it.”[124] - -From the point of view of an American this would seem to be an -unanswerable argument. If seventy men are constituted sole managers of -a market for 130,000,000,000 francs of transferable securities, one of -two things is sure to happen; either a public market will establish -itself outside these seventy men, or the seventy will prevent the -establishment of the public market. The first of these alternatives has -occurred in the establishment of the coulisse; the second would have -occurred if the stockbrokers could have accomplished it. - -While the government took no hand in the matter, it was recognized -that the coulisse gave to the public market a breadth and activity -that did great good; as a matter of fact it benefited the stockbrokers -themselves in a large way, for it enabled them to obtain from the -government liberties not formerly enjoyed, but practised freely by the -coulissiers, such as transactions in time bargains, dealings in foreign -securities, and similar concessions. This grant of a right to do -business on time, or as we term it “future delivery,” was a tremendous -step forward, since it removed an obstacle in the way of large -speculative markets that had long been abolished in other financial -centres. It put a stop to the “welching” of speculators on the plea -of the gambling act, it legalized short sales, and it established a -distinct advance in economic progress. To that extent the stockbrokers -are indebted to their neighbors on the curb.[125] - -Meanwhile, the opposition to the monopoly of the stockbrokers -continues. “At all times,” says M. Vidal, “whenever there have been -privileges, some men have been found to oppose them. Of course, these -men are not theorists or pedants; they are simply men whom this -or that privilege prevents from working freely, and who represent -the manifestation of that mysterious force of things which tends -toward freedom of trade. Commercial law owes its birth only to these -protestations of practical men in apparent revolt against the laws, -which become the unconscious shapers of future legislation. From the -day when there was an _Agent de Change_ there was a “coulissier.” -The first called the second a thief, because he encroached upon his -privilege. The second hurled back the compliment, because the privilege -robbed him of his natural right.”[126] - -This has a familiar American ring. In 1843 a voluminous report to the -Minister of Justice by the stockbrokers asked that the coulisse be -destroyed. Nothing came of it, but in 1859 another attempt succeeded; -the coulisse was suppressed. But the level of public credit which, -it was hoped, would be raised by the suppression, actually sank. The -business of the coulisse, and the market it created, disappeared with -the coulisse itself. The government was very sensitive then as now in -the matter of market prices for its rentes, and after the laborious -process of hoisting them to 71, it was distressing to find that, -coincident with the abolition of the curb market, they had fallen to -69. So, in 1861, the coulisse was permitted to reappear, and I fancy -the days of its suppression are now at an end. - -But the old hostility will break out again when business slackens, for -the French have a saying that “horses fight when there is no more hay -in the manger.” The problem is a pretty one from any angle, especially -from the standpoint of American stockbrokers. It would seem plain that -the monopoly, as such, cannot forever continue, yet the government -faces a financial power of tremendous strength--a Frankenstein which -the State itself has created--“and of which,” to quote M. Vidal, “it -can rid itself only by indemnifying it.” At the present time the 70 -memberships are worth 96,000,000 francs as a grand total; meantime, the -longer the problem is postponed the more valuable they will become as -the size and importance of the Paris market increases. - -“But the French government does not seem inclined to study the -question seriously; first, because the stockbrokers would have to be -indemnified; and, secondly, because the stockbrokers themselves are -desirous of holding on to their present monopoly. As time passes, -the securities, continually on the increase, tend to increase their -profits. A financial power has been created whose existence, whose ever -spreading influence, forms the subject of a serious economic problem, -which some day may turn out to be an even more serious political -problem.”[127] - -It is interesting to note, in passing from this subject, that a much -larger business is done in the coulisse than in the parquet, due to the -fact that the curb brokers are not restricted in their securities as -are the stockbrokers. The market for foreign securities alone, on the -curb, has made wealthy men of many of the coulissiers. They publish -a special quotation list, and while they have no officially fixed -commission rates, these are established by custom and in practical -operation they work satisfactorily. As might be expected, the curb -brokers require from their customers smaller margins than those -exacted by the stockbrokers--another reason why their business is -large; again, the clients of the curb broker may attend the Bourse with -him, be present and confer with him while he buys or sells for them, -and in this way get into close touch with the market, a privilege not -so easily enjoyed by the client of the stockbroker. - -The Official Paris Bourse is open from 12 noon to 3 P.M.; the coulisse -from 11:45 A.M. to 4 P.M. The Official List is published daily, and -is divided into two parts, the first containing a full list of all -the officially listed securities and of the dealings in them, and the -second part a list of the dealings in what we used to call in New -York “the unlisted department.” Rates of Exchange, prices of gold and -silver bullion, quotations of treasury bonds, and the rates of the Bank -of France for discounts, interest, and loans, are also included. The -coulisse also issues a list. - -The volume of transferable securities in negotiation through the -medium of the Paris stock markets was estimated by M. Alfred Neymarck -in his report to the Institut International de Statistique, session -of 1907, at 155,000,000,000 francs, an amount slightly in excess of -the listed securities on the New York Stock Exchange. Of this total, -which has been increased somewhat since 1907 through the admission -of various Russian industrial securities, 65,000,000,000 francs -were in French securities, 67,000,000,000 in foreign securities on -the official (parquet) market, and 18,000,000,000 on the coulisse. -Of home securities, the value of French rentes is here estimated -at 24,000,000,000 francs, of bonds of the City of Paris, of -treasury bonds, including those of the department and colonies, at -3,069,000,000; insurance securities at 702,000,000; those of the -Crédit Foncier at 4,447,000,000; of banks and credit companies at -3,101,000,000; of railroad and navigation companies at 24,268,000,000; -of railways and tramways at 2,200,000,000; of electricity, iron mills, -foundries, and coal mines, at 2,463,000,000. - -Of the foreign securities in the French market, Russian securities -were valued at 10,000,000,000 francs in 1907, although they are to-day -considerably in excess of that sum; divers foreign government funds at -47,000,000,000 and foreign railway securities at 6,000,000,000.[128] - -Next to London, Paris easily leads the markets of the world from the -standpoint of power and resources in an international sense. It is the -great market for Russian bonds and for Russian industrials, speculation -in the latter having reached such volume in 1912 as to lay the French -public open to the charge of having lost its head, something that -has not occurred in France since the Panama frenzy of 1894. France -also holds most of the Spanish and Portuguese (3,500,000,000 francs) -debt and has large capital invested in Egypt and the Suez Canal -(3,500,000,000 francs). Capital investments in Roumania and Greece, -Argentine, Brazil and Mexico, Tunis and the French colonies, Austria -and Hungary, Italy, China and Japan, United States and Canada, Great -Britain, Belgium and Holland, Germany, Turkey, Servia and Bulgaria, and -Switzerland, aggregate 16,150,000,000 francs, distributed in value in -the order named. - -The caution of French investors is proverbial; notwithstanding the two -outbursts of imprudence that have occurred in this generation, it is -difficult to induce the Frenchman to place his money in anything not a -safe interest-yielding security under French laws. In no other country -is investment raised to a higher plane, and speculation confined to -a lower one. The political nature of the relationship between France -and Russia has resulted from time to time, in patriotic subscription -of French funds to Russian government loans, and thence to Russian -industrials of all kinds, but the latter have suffered so severely in -the demoralization of the autumn of 1912 as to justify the prediction -that their popularity with the French has been seriously impaired. - -As to Russian government loans, the French investor is in a secure -position, most of these issues having been endorsed by such powerful -banks as the Bank of France, the Credit Lyonnais, the Comptoir -d’Escompte, and the Société Génerale, and, indeed, it is to banks such -as these and to the myriad smaller institutions throughout the country -that investors of the peasantry and the middle classes are accustomed -to turn for advice in financial matters. The large speculative -clientele, as we know it in America, in England, and in Germany, is a -decided minority in France, and those who indulge freely in speculation -are canny and shrewd beyond their fellows in other lands. The foresight -with which they diagnosed the events of the Boer War in 1899, and the -celerity with which they disposed of their large speculative holdings -of South African mining shares at top prices, is said by those who -witnessed it to have been a prodigy of speculative skill. - -Like all other careful observers French economists realize in a -large sense that the creation of negotiable instruments and their -distribution throughout all the countries of the world through the -medium of the Stock Exchange is a very real cause of the wealth of -nations; indeed, this point seems to be more thoroughly understood -and appreciated by the mass of the French people than by the public -elsewhere. When, in 1885, the government legalized transactions for -future delivery and thus placed transactions in securities in the same -category, under common law, with all other commercial transactions, -it established a free market in France that has done wonders for the -credit expansion of the Republic--an expansion likewise due, in no -small measure, to the growth and development of the coulisse and to -the consequent enlargement of a market that must have been restricted, -of necessity, by a too rigorous strengthening of the stockbroker’s -monopoly. In a word, the government, by France, of credit in its higher -forms, clearly recognizes that as states, railways, and industrial -enterprises have need to resort to credit through issues of securities, -a wide market in constant contact with sources of wealth is required, -and that nothing should be done by the government to interfere with the -ebb and flow of these essential forces. - -“The creating and successive issuing of this mass of securities,” to -quote M. Neymarck, “always easy to purchase and to sell on the Bourse, -have been the real cause of credit expansion. They were instrumental in -accomplishing real marvels in France and abroad. As personal property -has increased, endeavors have been made to render exchanges easy, -and to make transfers as little expensive as possible; transferable -securities, owing to their denomination, their form, their mode of -maturity for the payment of interest, their conditions for redemption, -and the ease with which they are negotiated, have been brought within -the reach of all purses, and have thus developed the spirit of saving. -The consolidation of capital, under the form of stock companies, -issuing shares and bonds that everybody can obtain, encompasses on all -sides the civilized nations of the world. - -“We may say, with Paul Leroy-Beaulieu, that now, owing to capital being -accumulated in the shape of negotiable instruments, it is the stock -company which takes us on a journey; often it provides us with food and -lodging, sells us coal and light, makes up our clothing, and even sells -it to us; it procures news for us and inspires our newspapers. Further, -it insures our lives and our dwellings; it feeds the unassuming -Parisian in the ‘Bouillons’ (cheap cook-shops), and feasts the stylish -Parisian in the fashionable wine taverns. - -“The distribution of all these securities has materially contributed to -the formation of small inheritances. It has influenced the development -of savings institutions, mutual benefit societies, pension funds, and -insurance; it has thus rendered invaluable service in the public rôle -it has fulfilled. Thanks to it, these companies multiply and increase -as the capitalization of their funds is made easier. - -“It has also had another result. It has shown that there is no -longer a plutocracy, but a veritable financial democracy; when these -thousands of millions of certificates are minutely segregated, there -are only found atoms of certificates of stocks and bonds, and atoms -of income--so great is the number of capitalists and independent -individuals who divide these securities and these incomes among -themselves.”[129] - - - - -APPENDIX - -REPORT - -OF THE GOVERNOR’S COMMITTEE ON SPECULATION IN SECURITIES AND COMMODITIES - -1909 - - - NEW YORK, June 7, 1909 - - _Hon. Charles E. Hughes, - Governor, Albany, N. Y._: - -_Dear Sir_: The committee appointed by you on December 14, 1908, to -endeavor to ascertain - -“what changes, if any, are advisable in the laws of the State bearing -upon speculation in securities and commodities, or relating to the -protection of investors, or with regard to the instrumentalities and -organizations used in dealings in securities and commodities which are -the subject of speculation,” - -beg leave to submit the following report: - -We have invited statements from those engaged in speculation and -qualified to discuss its phases; we have taken testimony offered from -various sources as to its objectionable features; we have considered -the experience of American States and of foreign countries in their -efforts to regulate speculative operations. In our inquiry we have been -aided by the officials of the various exchanges, who have expressed -their views both orally and in writing, and have afforded us access to -their records. - - -THE SUBJECT IN GENERAL - -Markets have sprung into being wherever buying and selling have been -conducted on a large scale. Taken in charge by regular organizations -and controlled by rules, such markets become exchanges. In New York -City there are two exchanges dealing in securities and seven in -commodities. In addition there is a security market, without fixed -membership or regular officers, known as the “Curb.” The exchanges -dealing in commodities are incorporated, while those dealing in -securities are not. - -Commodities are not held for permanent investment, but are bought -and sold primarily for the purpose of commercial distribution; on -the other hand, securities are primarily held for investment; but -both are subject of speculation. Speculation consists in forecasting -changes of value and buying or selling in order to take advantage -of them; it may be wholly legitimate, pure gambling, or something -partaking of the qualities of both. In some form it is a necessary -incident of productive operations. When carried on in connection with -either commodities or securities it tends to steady their prices. -Where speculation is free, fluctuations in prices, otherwise violent -and disastrous, ordinarily become gradual and comparatively harmless. -Moreover, so far as commodities are concerned, in the absence of -speculation, merchants and manufacturers would themselves be forced to -carry the risks involved in changes of prices and to bear them in the -intensified condition resulting from sudden and violent fluctuations in -value. Risks of this kind which merchants and manufacturers still have -to assume are reduced in amount, because of the speculation prevailing; -and many of these milder risks they are enabled, by “hedging,” to -transfer to others. For the merchant or manufacturer the speculator -performs a service which has the effect of insurance. - -In law, speculation becomes gambling when the trading which it involves -does not lead, and is not intended to lead, to the actual passing from -hand to hand of the property that is dealt in. Thus, in the recent case -of Hurd vs. Taylor (181 N. Y., 231), the Court of Appeals of New York -said: - - “The law of this State as to the purchase and sale of stocks is - well settled. The purchase of stocks through a broker, though the - party ordering such purchase does not intend to hold the stocks as - an investment, but expects the broker to carry them for him with - the design on the part of the purchaser to sell again the stocks - when their market value has enhanced is, however, speculative, - entirely legal. Equally so is a ‘short sale,’ where the seller has - not the stock he assumes to sell, but borrows it and expects to - replace it when the market value has declined. But to make such - transactions legal, they must contemplate an actual purchase or - an actual sale of stocks by the broker, or through him. If the - intention is that the so-called broker shall pay his customer - the difference between the market price at which the stocks were - ordered purchased and that at which they were ordered sold, in - case fluctuation is in favor of the customer, or that in case it - is against the customer, the customer shall pay the broker that - difference, no purchases or sales being made, the transaction is - a wager and therefore illegal. Such business is merely gambling, - in which the so-called commission for purchases and sales that are - never made is simply the percentage which in other gambling games - is reserved in favor of the keeper of the establishment.” - -This is also the law respecting commodity transactions. - -The rules of all the exchanges forbid gambling as defined by this -opinion; but they make so easy a technical delivery of the property -contracted for, that the practical effect of much speculation, in point -of form legitimate, is not greatly different from that of gambling. -Contracts to buy may be privately offset by contracts to sell. The -offsetting may be done, in a systematic way, by clearing houses, or by -“ring settlements.” Where deliveries are actually made, property may -be temporarily borrowed for the purpose. In these ways, speculation -which has the legal traits of legitimate dealing may go on almost as -freely as mere wagering, and may have most of the pecuniary and immoral -effects of gambling on a large scale. - -A real distinction exists between speculation which is carried on by -persons of means and experience, and based on an intelligent forecast, -and that which is carried on by persons without these qualifications. -The former is closely connected with regular business. While not -unaccompanied by waste and loss, this speculation accomplishes an -amount of good which offsets much of its cost. The latter does but a -small amount of good and an almost incalculable amount of evil. In -its nature it is in the same class with gambling upon the race-track -or at the roulette table, but is practised on a vastly larger scale. -Its ramifications extend to all parts of the country. It involves a -practical certainty of loss to those who engage in it. A continuous -stream of wealth, taken from the actual capital of innumerable persons -of relatively small means, swells the income of brokers and operators -dependent on this class of business; and in so far as it is consumed -like most income, it represents a waste of capital. The total amount -of this waste is rudely indicated by the obvious cost of the vast -mechanism of brokerage and by manipulators’ gains, of both of which -it is a large constituent element. But for a continuous influx of new -customers, replacing those whose losses force them out of the “street,” -this costly mechanism of speculation could not be maintained on -anything like its present scale. - - -THE PROBLEM TO BE SOLVED - -The problem, wherever speculation is strongly rooted, is to eliminate -that which is wasteful and morally destructive, while retaining and -allowing free play to that which is beneficial. The difficulty in -the solution of the problem lies in the practical impossibility of -distinguishing what is virtually gambling from legitimate speculation. -The most fruitful policy will be found in measures which will lessen -speculation by persons not qualified to engage in it. In carrying -out such a policy exchanges can accomplish more than legislatures. -In connection with our reports on the different exchanges, as well -as on the field of investment and speculation which lies outside of -the exchanges, we hall make recommendations directed to the removal -of various evils now existing and to the reduction of the volume of -speculation of the gambling type. - - -THE NEW YORK STOCK EXCHANGE - -The New York Stock Exchange is a voluntary association, limited to 1100 -members, of whom about 700 are active, some of them residents of other -cities. Memberships are sold for about $80,000. The Exchange as such -does no business, merely providing facilities to members and regulating -their conduct. The governing power is in an elected committee of forty -members and is plenary in scope. The business transacted on the floor -is the purchase and sale of stocks and bonds of corporations and -governments. Practically all transactions must be completed by delivery -and payment on the following day. - -The mechanism of the Exchange provided by its constitution and -rules, is the evolution of more than a century. An organization of -stockbrokers existed here in 1792, acquiring more definite form in -1817. It seems certain that for a long period the members were brokers -or agents only; at the present time many are principles as well as -agents, trading for themselves as well as for their customers. A number -of prominent capitalists hold memberships merely for the purpose of -availing themselves of the reduced commission charge which the rules -authorize between members. - -The volume of transactions indicates that the Exchange is to-day -probably the most important financial institution in the world. In the -past decade the average annual sales of shares have been 196,500,000 at -prices involving an annual average turnover of nearly $15,500,000,000; -bond transactions averaged about $800,000,000. This enormous business -affects the financial and credit interests of the country in so large -a measure that its proper regulation is a matter of transcendent -importance. While radical changes in the mechanism, which is now so -nicely adjusted that the transactions are carried on with the minimum -of friction, might prove disastrous to the whole country, nevertheless -measures should be adopted to correct existing abuses. - - -PATRONS OF THE EXCHANGE - -The patrons of the Exchange may be divided into the following groups: - -(1.) Investors, who personally examine the facts relating to the -value of securities or act on the advice of reputable and experienced -financiers, and pay in full for what they buy. - -(2.) Manipulators, whose connection with corporations issuing -or controlling particular securities enables them under certain -circumstances to move the prices up or down, and who are thus in some -degree protected from dangers encountered by other speculators. - -(3.) Floor traders, who keenly study the markets and the general -conditions of business, and acquire early information concerning the -changes which affect the values of securities. From their familiarity -with the technique of dealings on the Exchange, and ability to act in -concert with others, and thus manipulate values, they are supposed to -have special advantages over other traders. - -(4.) Outside operators having capital, experience, and knowledge of the -general conditions of business. Testimony is clear as to the result -which, in the long run, attends their operations; commissions and -interest charges constitute a factor always working against them. Since -good luck and bad luck alternate in time, the gains only stimulate -these men to larger ventures, and they persist in them till a serious -or ruinous loss forces them out of the “Street.” - -(5.) Inexperienced persons, who act on interested advice, “tips,” -advertisements in newspapers, or circulars sent by mail, or “take -flyers” in absolute ignorance, and with blind confidence in their luck. -Almost without exception they eventually lose. - - -CHARACTER OF TRANSACTIONS - -It is unquestionable that only a small part of the transactions upon -the Exchange is of an investment character; a substantial part may -be characterized as virtually gambling. Yet we are unable to see -how the State could distinguish by law between proper and improper -transactions, since the forms and the mechanisms used are identical. -Rigid statutes directed against the latter would seriously interfere -with the former. The experience of Germany with similar legislation is -illuminating. But the Exchange, with the plenary power over members and -their operations, could provide correctives, as we shall show. - - -MARGIN TRADING - -Purchasing securities on margin is as legitimate a transaction as a -purchase of any other property in which part payment is deferred. We -therefore see no reason whatsoever for recommending the radical change -suggested, that margin trading be prohibited. - -Two practices are prolific of losses--namely, buying active securities -on small margins and buying unsound securities, paying for them in -full. The losses in the former case are due to the quick turns in the -market, to which active stocks are subject; these exhaust the margins -and call for more money than the purchasers can supply. The losses in -the latter case are largely due to misrepresentations of interested -parties and unscrupulous manipulations. - -To correct the evils of misrepresentation and manipulation, we shall -offer in another part of this report certain recommendations. In so far -as losses are due to insufficient margins, they would be materially -reduced if the customary percentage of margins were increased. The -amount of margin which a broker requires from a speculative buyer of -stocks depends, in each case, on the credit of the buyer; and the -amount of credit which one person may extend to another is a dangerous -subject on which to legislate. Upon the other hand, a rule made by the -Exchange could safely deal with the prevalent rate of margins required -from customers. In preference, therefore, to recommending legislation, -we urge upon all brokers to discourage speculation upon small margins -and upon the Exchange to use its influence, and, if necessary, its -power, to prevent members from soliciting and generally accepting -business on a less margin than 20 per cent. - - -PYRAMIDING - -“Pyramiding,” which is the use of paper profits in stock transactions -as a margin for further commitments, should be discouraged. The -practice tends to produce more extreme fluctuations and more rapid -wiping out of margins. If the stockbrokers and the banks would make it -a rule to value securities for the purpose of margin or collateral, not -at the current price of the moment, but at the average price of, say, -the previous two or three months (provided that such average price were -not higher than the price of the moment), the dangers of pyramiding -would be largely prevented. - - -SHORT SELLING - -We have been strongly urged to advise the prohibition or limitation -of short sales, not only on the theory that it is wrong to agree to -sell that what one does not possess, but that such sales reduce the -market price of the securities involved. We do not think that it is -wrong to agree to sell something that one does not now possess, but -expects to obtain later. Contracts and agreements to sell, and deliver -in the future, property which one does not possess at the time of the -contract, are common in all kinds of business. The man who has “sold -short” must some day buy in order to return the stock which he has -borrowed to make the short sale. Short sellings endeavor to select -times when prices seem high in order to sell, and times when prices -seem low in order to buy, their action in both cases serving to lessen -advances and diminish declines of price. In other words, short selling -tends to produce steadiness in prices, which is an advantage to the -community. No other means of restraining unwarranted marking up and -down of prices has been suggested to us. - -The legislation of the State of New York on the subject of short -selling is significant. In 1812 the Legislature passed a law declaring -all contracts for the sale of stocks and bonds void, unless the seller -at the time was the actual owner or assignee thereof or authorized by -such owner or assignee to sell the same. In 1858 this act was repealed -by a statute now in force, which reads as follows: - - “An agreement for the purchase, sale, transfer, or delivery of a - certificate or other evidence of debt, issued by the United States - or by any State, or municipal or other corporation, or any share - or interest in the stock of any bank, corporation or joint-stock - association, incorporated or organized under the laws of the United - States or of any State, is not void, or voidable, because the - vendor, at the time of making such contract, is not the owner or - possessor of the certificate, or certificates, or other evidence of - debt, share or interest.” - -It has been urged that this statute “specifically legalizes stock -gambling.” As a matter of fact, however, the law would be precisely the -same if that statute were repealed, for it is the well-settled common -law of this country, as established by the decisions of the Supreme -Court of the United States and of the State courts, that all contracts, -other than mere wagering contracts, for the future purchase or sale -of securities or commodities are valid, whether the vendor is, or is -not, at the time of making such contract, the owner or possessor of the -securities or commodities involved, in the absence of a statute making -such contracts illegal. So far as any of these transactions are mere -wagering transactions, they are illegal, and not enforceable, as the -law now stands. - -It has been suggested to us that there should be a requirement either -by law or by rule of the Stock Exchange, that no one should sell any -security without identifying it by a number or otherwise. Such a rule -would cause great practical difficulties in the case of securities -not present in New York at the time when the owner desires to sell -them, and would increase the labor and cost of doing business. But -even if this were not the effect, the plan contemplates a restriction -upon short sales, which, for the reasons set forth above, seems to us -undesirable. It is true that this identification plan exists in England -as to sales of bank shares (Leeman act of 1867); but it has proved a -dead letter. It has also been used in times of apprehended panic upon -the French Bourse, but opinions in regard to its effect there are -conflicting. While some contend that it has been useful in preventing -panics, others affirm that it has been used simply for the purpose of -protecting bankers who are loaded down with certain securities which -they were trying to distribute, and who, through political influence, -procured the adoption of the rule for their special benefit. - - -MANIPULATION OF PRICES - -A subject to which we have devoted much time and thought is that of the -manipulation of prices by large interests. This falls into two general -classes: - -(1.) That which is resorted to for the purpose of making a market for -issues of new securities. - -(2.) That which is designed to serve merely speculative purposes in the -endeavor to make a profit as the result of fluctuations which have been -planned in advance. - -The first kind of manipulation has certain advantages, and when not -accompanied by “matched orders” is unobjectionable _per se_. It is -essential to the organization and carrying through of important -enterprises, such as large corporations, that the organizers should be -able to raise the money necessary to complete them. This can be done -only by the sale of securities. Large blocks of securities, such as -are frequently issued by railroad and other companies, cannot be sold -over the counter or directly to the ultimate investor, whose confidence -in them can, as a rule, be only gradually established. They must -therefore, if sold at all, be disposed of to some syndicate, who will -in turn pass them on to middlemen or speculators, until, in the course -of time, they find their way into the boxes of investors. But prudent -investors are not likely to be induced to buy securities which are not -regularly quoted on some exchange, and which they cannot sell, or on -which they cannot borrow money at their pleasure. If the securities -are really good and bids and offers bona fide, open to all sellers and -buyers, the operation is harmless. It is merely a method of bringing -new investments into public notice. - -The second kind of manipulation mentioned is undoubtedly open to -serious criticism. It has for its object either the creation of high -prices for particular stocks, in order to draw in the public as buyers -and to unload upon them the holdings of the operators, or to depress -the prices and induce the public to sell. There have been instances -of gross and unjustifiable manipulation of securities, as in the case -of American Ice stock. While we have been unable to discover any -complete remedy short of abolishing the Stock Exchange itself, we are -convinced that the Exchange can prevent the worst forms of this evil -by exercising its influence and authority over the members to prevent -them. When continued manipulation exists it is patent to experienced -observers. - - -“WASH SALES” AND “MATCHED ORDERS” - -In the foregoing discussion we have confined ourselves to bona fide -sales. So far as manipulation of either class is based upon fictitious -so-called “wash sales,” it is open to the severest condemnation, and -should be prevented by all possible means. These fictitious sales -are forbidden by the rules of all the regular exchanges, and are not -enforceable at law. They are less frequent than many persons suppose. -A transaction must take place upon the floor of the Exchange to be -reported, and if not reported does not serve the purpose of those who -engage in it. If it takes place on the floor of the Exchange, but is -purely a pretence, the brokers involved run the risk of detection and -expulsion, which is to them a sentence of financial death. There is, -however, another class of transactions called “matched orders,” which -differ materially from those already mentioned, in that they are actual -and enforceable contracts. We refer to that class of transactions, -engineered by some manipulator, who sends a number of orders -simultaneously to different brokers, some to buy and some to sell. -These brokers, without knowing that other brokers have countervailing -orders from the same principal, execute their orders upon the floor -of the Exchange, and the transactions become binding contracts; they -cause an appearance of activity in a certain security which is unreal. -Since they are legal and binding, we find a difficulty in suggesting a -legislative remedy. But where the activities of two or more brokers in -certain securities become so extreme as to indicate manipulation rather -than genuine transactions, the officers of the Exchange would be remiss -unless they exercised their influence and authority upon such members -in a way to cause them to desist from such suspicious and undesirable -activity. As already stated, instances of continuous manipulation of -particular securities are patent to every experienced observer, and -could without difficulty be discouraged, if not prevented, by prompt -action on the part of the Exchange authorities. - - -CORNERS - -The subject of corners in the stock market has engaged our attention. -The Stock Exchange might properly adopt a rule providing that the -governors shall have power to decide when a corner exists and to fix -a settlement price, so as to relieve innocent persons from the injury -or ruin which may result therefrom. The mere existence of such a rule -would tend to prevent corners. - - -FAILURES AND EXAMINATION OF BOOKS - -We have taken testimony on the subject of recent failures of brokers, -where it has been discovered that they were insolvent for a long -period prior to their public declaration of failure, and where their -activities after the insolvency not only caused great loss to their -customers, but also, owing to their efforts to save themselves from -bankruptcy, worked great injury to innocent outsiders. For cases of -this character, there should be a law analogous to that forbidding -banks to accept deposits after insolvency is known; and we recommend a -statute making it a misdemeanor for a broker to receive any securities -or cash from any customer (except in liquidating or fortifying an -existing account), or to make any further purchases or sales for his -own account, after he has become insolvent; with the provision that a -broker shall be deemed insolvent when he has on his books an account or -accounts which, if liquidated, would exhaust his assets, unless he can -show that he had reasonable ground to believe that such accounts were -good. - -The advisability of requiring by State authority an examination of -the books of all members of the Exchange, analogous to that required -of banks, has been urged upon us. Doubtless some failures would be -prevented by such a system rigidly enforced, although bank failures -do occur in spite of the scrutiny of the examiners. Yet the relations -between brokers and their customers are of so confidential a nature -that we do not recommend an examination of their books by any public -authority. The books and accounts of the members of the Exchange, -should, however, be subjected to periodic examination and inspection -pursuant to rules and regulations to be prescribed by the Exchange, and -the result should be promptly reported to the governors thereof. - - * * * * * - -It is vain to say that a body possessing the powers of the board of -governors of the Exchange, familiar with every detail of the mechanism, -generally acquainted with the characteristics of members, cannot -improve present conditions. It is a deplorable fact that with all -their power and ability to be informed, it is generally only after -a member or a firm is overtaken by disaster, involving scores or -hundreds of innocent persons, and causing serious disturbances, that -the Exchange authorities take action. No complaint can be registered -against the severity of the punishment then meted out; but in most -cases the wrongdoing thus atoned for, which has been going on for a -considerable period, might have been discovered under a proper system -of supervision, and the vastly preponderant value of prevention over -cure demonstrated. - - -REHYPOTHECATION OF SECURITIES - -We have also considered the subject of rehypothecating, loaning, and -other use of securities by brokers who hold them for customers. So -far as any broker applies to his own use any securities belonging to -a customer, or hypothecates them for a greater amount than the unpaid -balance of the purchase price, without the customer’s consent, he is -undoubtedly guilty of a conversion under the law as it exists to-day, -and we call this fact to the attention of brokers and the public. When -a broker sells the securities purchased for a customer who has paid -therefor in whole or in part, except upon the customer’s default, or -disposes of them for his own benefit, he should be held guilty of -larceny, and we recommend a statute to that effect. - - -DEALING FOR CLERKS - -The Exchange now has a rule forbidding any member to deal or carry an -account for a clerk or employee of any other member. This rule should -be extended so as to prevent dealing for account of any clerk or -subordinate employee of any bank, trust company, insurance company, or -other moneyed corporation or banker. - - -LISTING REQUIREMENTS - -Before securities can be bought and sold on the Exchange, they must -be examined. The committee on Stock List is one of the most important -parts of the organization, since public confidence depends upon the -honesty, impartiality, and thoroughness of its work. While the -Exchange does not guarantee the character of any securities, or affirm -that the statements filed by the promoters are true, it certifies -that due diligence and caution have been used by experienced men -in examining them. Admission to the list, therefore, establishes a -presumption in favor of the soundness of the security so admitted. Any -securities authorized to be bought and sold on the Exchange, which have -not been subjected to such scrutiny, are said to be in the unlisted -department, and traders who deal in them do so at their own risk. We -have given consideration to the subject of verifying the statements of -fact contained in the papers filed with the applications for listing, -but we do not recommend that either the State or the Exchange take -such responsibility. Any attempt to do so would undoubtedly give -the securities a standing in the eyes of the public which would not -in all cases be justified. In our judgment, the Exchange, should, -however, adopt methods to compel the filing of frequent statements of -the financial condition of the companies whose securities are listed, -including balance sheets, income and expense accounts, etc., and should -notify the public that these are open to examination under proper rules -and regulations. The Exchange should also require that there be filed -with future applications for listing a statement of what the capital -stock of the company has been issued for, showing how much has been -issued for cash, how much for property, with a description of the -property, etc., and also showing what commission, if any, has been paid -to the promoters or vendors. Furthermore, means should be adopted for -holding those making the statements responsible for the truth thereof. -The unlisted department, except for temporary issues, should be -abolished. - - -FICTITIOUS TRADES - -Complaint is made that orders given by customers are sometimes not -actually executed, although so reported by the broker. We recommend the -passage of a statute providing that, in case it is pleaded in any suit -by or against a broker that the purchase or sale was fictitious, or was -not an actual bona fide purchase or sale by the broker as agent for -the customer, the court or jury shall make a special finding upon that -fact. In case it is found that the purchase or sale was not actual and -bona fide the customer shall recover three times the amount of the loss -which he sustained thereby; and copies of the finding shall be sent to -the district attorney of the county and to the Exchange, if the broker -be a member. - - -UNIT OF TRADING - -The Exchange should insist that all trading be done on the basis of a -reasonably small unit (say 100 shares of stock or $1000 of bonds), and -should not permit the offers of such lots, or bids for such lots, to be -ignored by traders offering or bidding for larger amounts. The practice -now permitted of allowing bids and offers for large amounts, all or -none, assists the manipulation of prices. Thus a customer may send an -order to sell 100 shares of a particular stock at par, and a broker may -offer to buy 1000 shares, all or none, at 101, and yet no transaction -take place. The bidder in such a case should be required to take all -the shares offered at the lower price before bidding for a larger lot -at a higher price. This would tend to prevent matched orders. - - -STOCK CLEARING HOUSE - -We have also considered the subject of the Stock Exchange Clearing -House. While it is undoubtedly true that the clearing of stocks -facilitates transactions which may be deemed purely manipulative, or -virtually gambling transactions, nevertheless we are of the opinion -that the Exchange could not do its necessary and legitimate business -but for the existence of the clearing system, and, therefore, that it -is not wise to abolish it. - -The transactions in stocks which are cleared are transcribed each day -on what are called “clearing sheets,” and these sheets are passed into -the Clearing House and there filed for one week only. In view of the -value of these sheets as proving the transactions and the prices, they -should be preserved by the Exchange for at least six years, and should -be at the disposal of the courts, in case of any dispute. - - -SPECIALISTS - -We have received complaints that specialists on the floor of the -Exchange, dealing in inactive securities, sometimes buy or sell for -their own account while acting as brokers. Such acts without the -principal’s consent are illegal. In every such case recourse may be had -to the courts. - -Notwithstanding that the system of dealing in specialties is subject to -abuses, we are not convinced that the English method of distinguishing -between brokers and jobbers serves any better purpose than our own -practice, while its introduction here would complicate business. It -should also be noted that the practice of specialists in buying and -selling for their own account often serves to create a market where -otherwise one would not exist. - - -BRANCH OFFICES - -Complaint has been made of branch offices in the city of New York, -often luxuriously furnished and sometimes equipped with lunch rooms, -cards, and liquor. The tendency of many of them is to increase the lure -of the ticker by the temptation of creature comforts, appealing thus to -many who would not otherwise speculate. The governors of the Exchange -inform us that they realize that some of these offices have brought -discredit on the Exchange, and that on certain occasions they have used -their powers to suppress objectionable features. It seems to us that -legitimate investors and speculators might, without much hardship, be -compelled to do business at the main offices, and that a hard-and-fast -rule against all branch offices in the city of New York might well be -adopted by the Exchange. In any event, we are convinced that a serious -and effective regulation of these branch offices is desirable. - - -INCORPORATION OF EXCHANGE - -We have been strongly urged to recommend that the Exchange be -incorporated in order to bring it more completely under the authority -and supervision of the State and the process of the courts. Under -existing conditions, being a voluntary organization, it has almost -unlimited power over the conduct of its members, and it can subject -them to instant discipline for wrongdoing, which it could not exercise -in a summary manner if it were an incorporated body. We think that -such power residing in a properly chosen committee is distinctly -advantageous. The submission of such questions to the courts would -involve delays and technical obstacles which would impair discipline -without securing any greater measure of substantial justice. While this -committee is not entirely in accord on this point, no member is yet -prepared to advocate the incorporation of the Exchange and a majority -of us advise against it, upon the ground that the advantages to be -gained by incorporation may be accomplished by rules of the Exchange -and by statutes aimed directly at the evils which need correction. - -The Stock Exchange in the past, although frequently punishing -infractions of its rules with great severity, has, in our opinion, at -times failed to take proper measures to prevent wrongdoing. This has -been probably due not only to a conservative unwillingness to interfere -in the business of others, but also to a spirit of comradeship which -is very marked among brokers, and frequently leads them to overlook -misconduct on the part of fellow-members, although at the same time it -is a matter of cynical gossip and comment in the street. The public has -a right to expect something more than this from the Exchange and its -members. This committee, in refraining from advising the incorporation -of the Exchange, does so in the expectation that the Exchange will in -the future take full advantage of the powers conferred upon it by its -voluntary organization, and will be active in preventing wrongdoing -such as has occurred in the past. Then we believe that there will be -no serious criticism of the fact that it is not incorporated. If, -however, wrongdoing recurs, and it should appear to the public at -large that the Exchange has been derelict in exerting its powers and -authority to prevent it, we believe that the public will insist upon -the incorporation of the Exchange and its subjection to State authority -and supervision. - - -WALL STREET AS A FACTOR - -There is a tendency on the part of the public to consider Wall Street -and the New York Stock Exchange as one and the same thing. This is an -error arising from their location. We have taken pains to ascertain -what proportion of the business transacted on the Exchange is furnished -by New York City. The only reliable sources of information are the -books of the commission houses. An investigation was made of the -transactions on the Exchange for a given day, when the sales were -1,500,000 shares. The returns showed that on that day 52 per cent. of -the total transactions on the Exchange apparently originated in New -York City, and 48 per cent. in other localities. - - -THE CONSOLIDATED STOCK EXCHANGE - -The Consolidated Exchange was organized as a mining stock exchange in -1875, altering its name and business in 1886. Although of far less -importance than the Stock Exchange, it is nevertheless a _secondary -market_ of no mean proportions; by far the greater part of the trading -is in securities listed upon the main exchange, and the prices -are based upon the quotations made there. The sales average about -45,000,000 shares per annum. The fact that its members make a specialty -of “broken lots,” i. e., transactions in shares less than the 100 unit, -is used as a ground for the claim that it is a serviceable institution -for investors of relatively small means. But it is obvious that its -utility as a provider of capital for enterprises is exceedingly -limited; and that it affords facilities for the most injurious form of -speculation--that which attracts persons of small means. - -It also permits dealing in shares not listed in the main exchange, and -in certain mining shares, generally excluded from the other. In these -cases it prescribed a form of listing requirements, but the original -listing of securities is very rarely availed of. The rules also provide -for dealing in grain, petroleum, and other products. Wheat is, however, -at present the only commodity actively dealt in, and this is due solely -to the permission to trade in smaller lots than the Produce Exchange -unit of 5000 bushels. - -There are 1225 members, about 450 active, and memberships have sold -in recent years at from $650 to $2000. In general the methods of -conducting business are similar to those of the larger exchange, and -subject to the same abuses. - -Very strained relations have existed between the two security exchanges -since the lesser one undertook in 1886 to deal in stocks. The tension -has been increased by the methods by which the Consolidated obtains the -quotations of the other, through the use of the “tickers” conveying -them. It is probable that without the use of these instruments the -business of the Consolidated Exchange would be paralyzed; yet the right -to use them rests solely upon a technical point in a judicial decision -which enjoins their removal. - - -COGNATE SUBJECTS - - -HOLDING COMPANIES - -Connected with operations on the Stock Exchange are a class of -manipulations originating elsewhere. The values of railway securities, -for example, depend upon the management of the companies issuing them, -the directors of which may use their power to increase, diminish, -or even extinguish them, while they make gains for themselves by -operations on the Exchange. They may advance the price of a stock by -an unexpected dividend, or depress it by passing an expected one. They -may water a stock by issuing new shares, with no proportionate addition -to the productive assets of the company, or load it with indebtedness, -putting an unexpected lien on the shareholders’ property. Such -transactions affect not only the fortunes of the shareholders, who are -designedly kept in ignorance of what is transpiring, but also the value -of investments in other similar companies the securities of which are -affected sympathetically. Railroad wrecking was more common in the last -half-century than it is now, but we have some glaring examples of it in -the débris of our street railways to-day. - -The existence and misuse of such powers on the part of directors are -a menace to corporate property and a temptation to officials who are -inclined to speculate, leading them to manage the property so as to -fill their own pockets by indirect and secret methods. - -A holding company represents the greatest concentration of power in -a body of directors and the extreme of helplessness on the part of -shareholders. A corporation may be so organized that its bonds and -preferred stock represent the greater part of its capital, while the -common stock represents the actual control. Then, if a second company -acquires a majority of the common stock, or a majority of the shares -that are likely to be voted at elections, it may control the former -company, and as many other companies as it can secure. The shareholders -of the subsidiary companies may be thus practically deprived of power -to protect themselves against injurious measures and even to obtain -information of what the holding company is doing, or intends to do, -with their property. - -As a first step toward mitigating this evil we suggest that the -shareholders of subsidiary companies, which are dominated by holding -companies, or voting trusts, shall have the same right to examine the -books, records, and accounts of such holding companies, or voting -trusts, that they have in respect of the companies whose shares they -hold, and that the shareholders of holding companies have the same -right as regards the books, records, and accounts of the subsidiary -companies. The accounts of companies not merged should be separately -kept and separately stated to their individual stockholders, however -few they may be. - -We may point out the fact that the powers which holding companies -now exercise were never contemplated, or imagined, when joint stock -corporations were first legalized. If Parliament and Legislatures had -foreseen their growth they would have erected barriers against it. - - -RECEIVERSHIPS - -Our attention has been directed to the well-known abuses frequently -accompanying receiverships of large corporations, and more especially -public service corporations, and the issue of receivers’ certificates. -We feel that the numerous cases of long-drawn-out receiverships, in -some instances lasting more than ten years, and of the issue of large -amounts of receivers’ certificates, which take precedence over even -first mortgage bonds, are deserving of most serious consideration. - -Legislation providing for a short-time limitation on receiverships or -for a limitation of receivers’ certificates to a small percentage of -the mortgage liens on the property, could be rendered unnecessary, -however, by the action of the courts themselves along these lines, -so as to make impossible in the future the abuses which have been so -common in the past. - - -EFFECT OF THE MONEY MARKET ON SPECULATION - -It has been urged that your committee consider the influence of the -money market upon security speculation. - -As a result of conditions to which the defects of our monetary and -banking systems chiefly contribute, there is frequently a congestion -of funds in New York City, when the supply is in excess of business -needs and the accumulated surplus from the entire country generally is -thereby set free for use in the speculative market. Thus there almost -annually occurs an inordinately low rate for “call loans,” at times -less than 1 per cent. During the prevalence of this abnormally low rate -speculation is unduly incited, and speculative loans are very largely -expanded. - -On the other hand, occasional extraordinary industrial activity, -coupled with the annually recurring demands for money during the -crop-moving season, causes money stringency, and the calling of loans -made to the stock market; an abnormally high interest rate results, -attended by violent reaction in speculation and abrupt fall in prices. -The pressure to retain funds in the speculative field at these -excessively high interest rates tends to a curtailment of reasonable -accommodation to commercial and manufacturing interests, frequently -causing embarrassment and at times menacing a crisis. - -The economic questions involved in these conditions are the subject -of present consideration by the Federal authorities and the National -Monetary Commission. They could not be adjusted or adequately -controlled either through Exchange regulation or State legislation. - - -THE USURY LAW - -The usury law of this State prohibits the taking of more than 6 per -cent. interest for the loan of money, but by an amendment adopted in -1882 an exception is made in the case of loans of $5000, or more, -payable on demand and secured by collateral. It is claimed by some -that, since this exception enables stock speculators, in times of -great stringency, to borrow money by paying excessively high rates -of interest, to the exclusion of other borrowers, a repeal of this -provision would check inordinate speculation. We direct attention, -however, to the fact that the statute in question excepts such loans as -are secured by warehouse receipts, bills of lading, bills of exchange, -and other negotiable instruments. Hence its operation is not limited -to Stock Exchange transactions, or to speculative loans in general. -Moreover, the repeal of the statute would affect only the conditions -when high rates of interest are exacted, and not those of abnormally -low rates, which really promote excessive speculation. Finally, our -examination indicates that prior to the enactment of the statute of -1882 such loans were negotiated at the maximum (6 per cent.), plus -a commission, which made it equivalent to the higher rate; and a -repeal of the statute would lead to the resumption of this practice. -Therefore, as the repeal would not be beneficial, we cannot recommend -any legislation bearing upon the interest laws of the State, unless it -be the repeal of the usury law altogether, as we believe that money -will inevitably seek the point of highest return for its use. In nine -States of the Union there are at present no usury laws. - - -THE CURB MARKET - -There is an unorganized stock market held in the open air during -exchange hours. It occupies a section of Broad Street. An enclosure in -the centre of the roadway is made by means of a rope, within which the -traders are supposed to confine themselves, leaving space on either -side for the passage of street traffic; but during days of active -trading the crowd often extends from curb to curb. - -There are about 200 subscribers, of whom probably 150 appear on the -curb each day, and the machinery of the operations requires the -presence of as many messenger boys and clerks. Such obstruction of a -public thoroughfare is obviously illegal, but no attempt has been made -by the city authorities to disperse the crowd that habitually assembles -there. - -This open-air market, we understand, is dependent for the great bulk -of its business upon members of the Stock Exchange, approximately 85 -per cent. of the orders executed on the curb coming from Stock Exchange -houses. The Exchange itself keeps the curb market in the street, since -it forbids its own members engaging in any transaction in any other -security exchange in New York. If the curb were put under a roof and -organized, this trading could not be maintained. - - -ITS UTILITY - -The curb market has existed for upward of thirty years, but only since -the great development of trading in securities began, about the year -1897, has it become really important. It affords a public market-place -where all persons can buy and sell securities which are not listed -on any organized exchange. Such rules and regulations as exist are -agreed to by common consent, and the expenses of maintenance are paid -by voluntary subscription. An agency has been established by common -consent through which the rules and regulations are prescribed. - -This agency consists solely of an individual who, through his long -association with the curb, is tacitly accepted as arbiter. From this -source we learn that sales recorded during the year 1908 were roughly -as follows: - - Bonds $66,000,000 - Stocks, industrials, shares 4,770,000 - Stocks, mining, shares 41,825,000 - -Official quotations are issued daily by the agency and appear in the -public press. Corporations desiring their securities to be thus quoted -are required to afford the agency certain information, which is, -however, superficial and incomplete. There is nothing on the curb which -corresponds to the listing process of the Stock Exchange. The latter, -while not guaranteeing the soundness of the securities, gives a _prima -facie_ character to those on the list, since the stock list committee -takes some pains to learn the truth. The decision of the agent of the -curb are based on insufficient data, and since much of the work relates -to mining schemes in distant States and Territories, and foreign -countries, the mere fact that a security is quoted on the curb should -create no presumption in its favor; quotations frequently represent -“wash sales,” thus facilitating swindling enterprises. - - -EVILS OF UNORGANIZED STATUS - -Bitter complaints have reached us of frauds perpetrated upon confiding -persons, who have been induced to purchase mining shares because they -are quoted on the curb; these are frequently advertised in newspapers -and circulars sent through the mails as so quoted. Some of these -swindles have been traced to their fountainheads by the Post Office -Department, to which complaint has been made; but usually the swindler, -when cornered, has settled privately with the individual complainant, -and then the prosecution has failed for want of testimony. Meanwhile -the same operations may continue in many other places, till the swindle -becomes too notorious to be profitable. - -Notwithstanding the lack of proper supervision and control over the -admission of securities to the privilege of quotation, some of them -are meritorious, and in this particular the curb performs a useful -function. The existence of the cited abuses does not, in our judgment, -demand the abolition of the curb market. Regulation is, however, -imperative. To require an elaborate organization similar to that -existing in the Exchanges would result in the formation of another curb -free from such restraint. - -As has been stated, about 85 per cent. of the business of the curb -comes through the offices of members of the New York Stock Exchange, -but a provision of the constitution of that Exchange prohibits its -members from becoming members of, or dealing, on, any other _organized_ -Stock Exchange in New York. Accordingly, operators on the curb market -have not attempted to form an organization. The attitude of the Stock -Exchange is therefore largely responsible for the existence of such -abuses as result from the want of organization of the curb market. The -brokers dealing on the latter do not wish to lose their best customers, -and hence they submit to these irregularities and inconveniences. - -Some of the members of the Exchange dealing on the curb have apparently -been satisfied with the prevailing conditions, and in their own selfish -interests have maintained an attitude of indifference toward abuses. -We are informed that some of the most flagrant cases of discreditable -enterprises finding dealings on the curb were promoted by members of -the New York Stock Exchange. - - -REFORMATION OF THE CURB - -The present apparent attitude of the Exchange toward the curb seems to -us clearly inconsistent with its moral obligations to the community -at large. Its governors have frequently avowed before this committee -a purpose to co-operate to the greatest extent for the remedy of any -evils found to exist in stock speculation. The curb market as at -present constituted affords ample opportunity for the exercise of such -helpfulness. - -The Stock Exchange should compel the formulation and enforcement of -such rules as may seem proper for the regulation of business on the -curb, the conduct of those dealing thereon, and, particularly, for the -admission of securities to quotation. - -If the curb brokers were notified that failure to comply with such -requirements would be followed by an application of the rule of -non-intercourse, there is little doubt that the orders of the Exchange -would be obeyed. The existing connection of the Exchange gives it ample -power to accomplish this, and we do not suggest anything implying a -more intimate connection. - -Under such regulation, the curb market might be decently housed to the -relief of its members and the general public. - - -THE ABUSE OF ADVERTISING - -A large part of the discredit in the public mind attaching to “Wall -Street” is due to frauds perpetrated on the small investor throughout -the country in the sale of worthless securities by means of alluring -circulars and advertisements in the newspapers. To the success of such -swindling enterprises a portion of the press contributes. - -Papers which honestly try to distinguish between swindling -advertisements and others may not in every instance succeed in doing -so; but readiness to accept advertisements which are obviously traps -for the unwary is evidence of a moral delinquency which should draw out -the severest public condemnation. - -So far as the press in the large cities is concerned the correction of -the evil lies, in some measure, in the hands of the reputable bankers -and brokers; who, by refusing their advertising patronage to newspapers -notoriously guilty in this respect, could compel them to mend their -ways, and at the same time prevent fraudulent schemes from deriving an -appearance of merit by association with reputable names. - -Another serious evil is committed by men who give standing to -promotions by serving as directors without full knowledge of the -affairs of the companies, and by allowing their names to appear in -prospectuses without knowing the accuracy and good faith of the -statements contained therein. Investors naturally and properly pay -great regard to the element of personal character, both in the offering -of securities and in the management of corporations, and can therefore -be deceived by the names used in unsound promotions. - - -BRITISH SYSTEM CONSIDERED - -We have given much attention to proposals for compelling registration, -by a bureau of the State government, of all corporations whose -securities are offered for public sale in this State, accompanied by -information regarding their financial responsibility and prospects, -and prohibiting the public advertisements or sale of such securities -without a certificate from the bureau that the issuing company has been -so registered. The object of such registration would be to identify -the promoters, so that they might be readily prosecuted in case of -fraud. Such a system exists in Great Britain. The British “Companies -Act” provides for such registration, and the “Directors’ Liability -Act” regulates the other evil referred to above. Some members of your -committee are of the opinion that these laws should be adopted in this -country, so far as they will fit conditions here. - -This would meet with some difficulties, due in part to our multiple -system of State government. If the law were in force only in this -State, the advertisement and sale of the securities in question would -be unhindered in other markets, and companies would be incorporated -in other States, in order that their directors and promoters should -escape liability. The certificate of registration might be accepted -by inexperienced persons as an approval by State authority of the -enterprise in question. For these reasons the majority of your -committee does not recommend the regulation of such advertising and -sale by State registration. - -In so far as the misuse of the post-office for the distribution of -swindling circulars could be regulated by the Federal authorities the -officials have been active in checking it. They inform us that vendors -of worthless securities are aided materially by the opportunity to -obtain fictitious price quotations for them on the New York Curb market. - - -LEGISLATION RECOMMENDED - -For the regulation of the advertising evils, including the vicious -“tipster’s” cards, we recommend an amendment to the Penal Code to -provide that any person who advertises, in the public press, or -otherwise, or publishes, distributes or mails, any prospectus, -circular, or other statement in regard to the value of any stock, -bonds, or other securities, or in regard to the business affairs, -property, or financial condition of any corporation, joint stock -association, copartnership or individual issuing stock, bonds, or -other similar securities, which contains any statement of fact which -is known to such person to be false, or as to which such person has -no reasonable grounds for believing it to be true, or any promises or -predictions which he cannot reasonably justify, shall be guilty of a -misdemeanor; and, further, that every newspaper or other publication -printing or publishing such an advertisement, prospectus, circular, or -other statement, shall, before printing or publishing the same, obtain -from the person responsible for the same, and retain, a written and -signed statement to the effect that such person accepts responsibility -for the same, and for the statements of fact contained therein, which -statement shall give the address, with street number, of such person; -and that the publisher of any such newspaper or other publication which -shall fail to obtain and retain such statement shall be guilty of a -misdemeanor. - - -BUCKET-SHOPS - -Bucket-shops are ostensibly brokerage offices, where, however, -commodities and securities are neither bought nor sold in pursuance -of customers’ orders, the transactions being closed by the payment of -gains or losses, as determined by price quotations. In other words, -they are merely places for the registration of bets or wagers; their -machinery is generally controlled by the keepers, who can delay or -manipulate the quotations at will. - -The law of this State, which took effect September 1, 1908, makes -the keeping of a bucket-shop a felony, punishable by fine and -imprisonment, and in the case of corporations, on second offences by -dissolution or expulsion from the State. In the case of individuals -the penalty for a second offence is the same as for the first. These -penalties are imposed upon the theory that the practice is gambling; -but in order to establish the fact of gambling it is necessary, under -the New York law, to show that _both_ parties to the trade intended -that it should be settled by the payment of differences, and not by -delivery of property. Under the law of Massachusetts it is necessary to -show only that the bucket-shop keeper so intended. The Massachusetts -law provides heavier penalties for the second offence than for the -first, and makes it a second offence if a bucket-shop is kept open -after the first conviction. - - -AMENDMENT OF LAW RECOMMENDED - -We recommend that the foregoing features of the Massachusetts law be -adopted in this State; also that section 355 of the act of 1908 be -amended so as to require brokers to furnish to their customers _in all -cases_, and not merely on demand, the names of brokers from whom shares -were bought and to whom they were sold, and that the following section -be added to the act: - - Witness’s privilege: - - No person shall be excused from attending and testifying, or - producing any books, papers, or other documents before any court - or magistrate, upon any trial, investigation, or proceeding - initiated by the district attorney for a violation of any of the - provisions of this chapter, upon the ground or for the reason that - the testimony or evidence, documentary or otherwise, required - of him may tend to convict him of a crime or to subject him to - a penalty or forfeiture; but no person shall be prosecuted or - subjected to any penalty or forfeiture for or on account of any - transaction, matter, or thing concerning which he may so testify - or produce evidence, documentary or otherwise, and no testimony so - given or produced shall be received against him upon any criminal - investigation or proceeding. - -There has been a sensible diminution in the number of bucket-shops in -New York since the act of 1908 took effect, but there is still much -room for improvement. - -Continuous quotations of prices from an exchange are indispensable to a -bucket-shop, and when such quotations are cut off this gambling ends; -therefore every means should be employed to cut them off. - - -SALES OF QUOTATIONS - -The quotations of exchanges have been judicially determined to be -their own property, which may be sold under contracts limiting their -use. In addition to supplying its own members in New York City with -its quotations, the Stock Exchange sells them to the telegraph -companies, under contracts restricting the delivery of the service in -New York City to subscribers approved by a committee of the Exchange; -the contracts are terminable at its option. This restriction would -imply a purpose on the part of the Exchange to prevent the use of the -quotations by bucket-shop keepers. But the contracts are manifestly -insufficient, in that they fail to cover the use of the service in -places other than New York City; if corroboration were needed it could -be found in the fact that the quotations are the basis for bucket-shop -transactions in other cities. In such effort as has been made to -control these quotations the Exchange has been hampered to some extent -by the claim that telegraph companies are common carriers, and that -as such they must render equal service to all persons offering to pay -the regular charge therefor. This claim has been made in other States -as well as in New York, and the telegraph companies have in the past -invoked it as an excuse for furnishing quotations to people who were -under suspicion, although it was not possible to prove that they were -operating bucket-shops. Recent decisions seem to hold that this claim -is not well-founded. We advise that a law be passed providing that, -so far as the transmission of continuous quotations is concerned, -telegraph companies shall not be deemed common carriers, or be -compelled against their volition to transmit such quotations to any -person; also a law providing that if a telegraph company has reasonable -ground for believing that it is supplying quotations to a bucket-shop, -it be criminally liable equally with the keeper of the bucket-shop. -Such laws would enable these companies to refuse to furnish quotations -upon mere suspicion that parties are seeking them for an unlawful -business, and would compel them to refuse such service wherever there -was a reasonable ground for believing that a bucket-shop was being -conducted. - - -LICENSING TICKERS - -Tickers carrying the quotations should be licensed and bear a plate -whereon should appear the name of the corporation, firm, or individual -furnishing the service or installing the ticker, and a license number. -Telegraph companies buying or transmitting quotations from the -exchanges should be required to publish semi-annually the names of all -subscribers to the service furnished, and the number and location of -the tickers, in a newspaper of general circulation published in the -city or town in which such tickers are installed. In case the service -is furnished to a corporation, firm, or person, in turn supplying the -quotations to others, like particulars should be published. A record, -open to public inspection, should be kept by the installing company -showing the numbers and location of the tickers. Doubtless local boards -of trade, civic societies, and private individuals would, if such -information were within their reach, lend their aid to the authorities -in the enforcement of the law. - -Measures should be taken also to control the direct wire service for -the transmission of quotations, and for the prompt discontinuance of -such service in case of improper use thereof. In short, every possible -means should be employed to prevent bucket-shops from obtaining the -continuous quotations, without which their depredations could not be -carried on a single day. - - -THE COMMODITY EXCHANGES - -Of the seven commodity exchanges in the city of New York, three dealing -with Produce, Cotton, and Coffee, are classed as of major importance; -two organized by dealers in Fruit and Hay, are classed as minor; and -two others, the Mercantile (concerned with dairy and poultry products) -and the Metal (concerned with mining products) are somewhat difficult -of classification, as will appear hereafter. - - -THE MAJOR EXCHANGES - -The business transacted on the three major exchanges is mainly -speculative, consisting of purchases and sales for future delivery -either by those who wish to eliminate risks or by those who seek to -profit by fluctuations in the value of products. “Cash” or “spot” -transactions are insignificant in volume. - -The objects, as set forth in the charters, are to provide places for -trading, establish equitable trade principles and usages, obtain and -disseminate useful information, adjust controversies, and fix by-laws -and rules for these purposes. - -Trading in differences of price and “wash sales” are strictly -prohibited under penalty of expulsion. All contracts of sale call for -delivery, and unless balanced and canceled by equivalent contracts of -purchase, must be finally settled by a delivery of the merchandise -against cash payment of its value as specified in the terms of the -contract; but the actual delivery may be waived by the consent of both -parties. Possession is for the most part transferred from the seller -to the purchaser by warehouse receipts entitling the holder to the -ownership of the goods described. - - -DEALING IN “FUTURES” - -The selling of agricultural products for future delivery has been the -subject of much controversy in recent years. A measure to prohibit such -selling, known as the Hatch Anti-Option bill, was debated at great -length in Congress during the years 1892, 1893, and 1894. Although -it passed both House and Senate in different forms, it was finally -abandoned by common consent. As shown hereafter, similar legislation -in Germany has proved injurious; and when attempted by our States it -has either resulted detrimentally or been inoperative. The subject was -exhaustively considered by the Industrial Commission of Congress which -in 1901 made an elaborate report (Vol. VI), showing that selling for -future delivery, based upon a forecast of future conditions of supply -and demand, is an indispensable part of the world’s commercial future -delivery has been the subject of machinery, by which prices are, as far -as possible, equalized throughout the year to the advantage of both -producer and consumer. The subject is also treated with clearness and -impartiality in the Cyclopedia of American Agriculture, in an article -on “Speculation and Farm Prices”; where it is shown that since, the -yearly supply of wheat, for example, matures within a comparatively -short period of time somebody must handle and store the great bulk of -it during the interval between production and consumption. Otherwise -the price will be unduly depressed at the end of one harvest and -correspondingly advanced before the beginning of another. - -Buying for future delivery causes advances in prices; selling short -tends to restrain inordinate advances. In each case there must be -a buyer and a seller and the interaction of their trading steadies -prices. Speculation thus brings into the market a distinct class of -people possessing capital and special training who assume the risks of -holding and distributing the proceeds of the crops from one season to -another with the minimum of cost to producer and consumer. - - -HEDGING - -A considerable part of the business done by these exchanges consists of -“hedging.” This term is applied to the act of a miller, for example, -who is under contract to supply a given quantity of flour monthly -throughout the year. In order to insure himself against loss he makes -a contract with anybody whom he considers financially responsible, to -supply him wheat at times and in the quantities needed. He “hedges” -against a possible scarcity and consequent rise in the price of wheat. -If the miller were restricted in his purchases to persons in the actual -possession of wheat at the time of making the contract he would be -exposed to monopoly prices. If the wheat producer were limited in his -possibilities of sale to consumers only, he would be subjected to the -depressing effects of a glut in the market in June and September, at -times of harvest. - -To the trader, manufacturer, or exporter, the act of transferring the -risk of price fluctuations to other persons who are willing to assume -it, has the effect of an insurance. It enables him to use all of his -time and capital in the management of his own business instead of -devoting some part of them to contingencies arising from unforeseen -crop conditions. - - -ALTERNATIVE CONTRACTS - -In order to eliminate the risk of a shortage of specific grades of the -merchandise thus traded in, contracts generally permit the delivery of -alternative grades, within certain limits, at differential prices; and -if the grade to be delivered be not suitable for the ultimate needs of -the purchaser, it can under ordinary circumstances be exchanged for the -grade needed, by the payment of the differential. It is true that in -this exchange of grades there is sometimes a loss or a profit, owing to -some unexpected diminution or excess of supply of the particular grade -wanted, due to the weather or other natural causes. - -Deposits of cash margins may be required mutually by members at the -time of making contracts, and subsequent additional ones if market -fluctuations justify. - -Dealings for outsiders are usually upon a 10 per cent. margin; -obviously, if this margin were increased generally, say to 20 -per cent., a considerable part of the criticism due to losses in -speculation, particularly as to the Cotton Exchange, would be -eliminated. - -The major part of the transactions are adjusted by clearing systems, -the method most prevalent being “ring settlements,” by which groups of -members having buying and selling contracts for identical quantities, -offset them against each other, canceling them upon the payment of the -differences in prices. - - -THE PRODUCE EXCHANGE - -The New York Produce Exchange was chartered by the Legislature in -1862, under the style of the “New York Commercial Association.” The -charter has been amended several times; in 1907 dealing in securities, -as well as in produce, was authorized. There are over 2000 members, -but a larger number are inactive. Some members are also connected -with the Stock and Cotton Exchanges. The business includes dealing in -all grains, cottonseed oil, and a dozen or more other products; wheat -is, however, the chief subject of trading, and part thereof consists -of hedging by and for millers, exporters, and importers, both here -and abroad. The quantity of wheat received in New York in the five -years 1904–1908 averaged 21,000,000 bushels annually. No record of -“cash” sales is kept. The reported sales of “futures” show in five -years an annual average of 480,000,000 bushels, the year 1907 showing -610,000,000. Although some of these sales were virtually bets on price -differences, all of them were contracts enforceable at law. - - -CLEARING SYSTEM - -The greater part of the transactions are settled by a clearing system. -The Clearing Association is a separate organization, duly incorporated, -with a capital of $25,000. All members of the association must settle -daily by the clearing system; other members of the Exchange may do -so. The Clearing Association assumes responsibility for the trades -of all its members, and accordingly controls the exaction of margins -from members to each other, and may increase them at any time if the -fluctuations require it. The records of the clearings show day by day -the status of each member’s trading--how much he may be “long” or -“short” in the aggregate. Thus the members have a system of protection -against each other; the welfare of all depends upon keeping the -commitments of each within safe limits. The official margin system -operates as a commendable restraint upon over-speculation. - -From our examination of the trading in mining stocks recently -introduced, we conclude that the lack of experience of this body in -this class of business has resulted in a neglect of proper safeguards -to the investor and an undue incitement to speculative transactions of -a gambling nature, and should not be tolerated on the Produce Exchange. - - -THE COTTON EXCHANGE - -The New York Cotton Exchange was incorporated by a special charter in -1871. Its membership is limited to 450. It is now the most important -cotton market in the world, as it provides the means for financing -about 80 per cent. of the crop of the United States, and is the -intermediary for facilitating its distribution. In fact, it is the -world’s clearing house for the staple. Traders and manufacturers in -Japan, India, Egypt, Great Britain, Germany, France, and Spain, as well -as the United States, buy and sell here daily and the business is still -increasing. - -Cotton is the basis of the largest textile industry in the world. The -business is conducted on a gigantic scale in many countries by means -of vast capital, complicated machinery, and varied processes involving -considerable periods of time between the raw material and the finished -product. Selling for future delivery is necessary to the harmonious and -uninterrupted movement of the staple from producer to consumer. Nearly -all the trading, beginning with that of the planter, involves short -selling. The planter sells to the dealer, the dealer to the spinner, -the spinner to the weaver, the weaver to the cloth merchant, before the -cotton of any crop year is picked. Dealers who take the risk of price -fluctuations insure all the other members of this trading chain against -losses arising therefrom and spare them the necessity of themselves -being speculators in cotton. The risks connected with raising and -marketing cotton must be borne by some one, and this is now done -chiefly by a class who can give their undivided attention to it. - - -GRADING OF COTTON - -The grading of cotton is the vital feature of the trade. When no grade -is specified in the contract, it is construed to be middling. There -are now eighteen grades, ranging from middling stained up to fair. -This classification differs somewhat from that of other markets, and -last January the Department of Agriculture at Washington took up the -subject of standardizing the various grades for all American markets. -The New York Cotton Exchange participated in this work; a standard was -thus adopted, the types of which were supplied by its classification -committee. It varies but little from the one previously in use here. -The samples chosen to represent the several types are now sealed, in -possession of the Department of Agriculture, awaiting the action of -Congress. - -The cotton plant is much exposed to vicissitudes of the weather. A -single storm may change the grade of the crop in large sections of the -country. It becomes necessary therefore to provide some protection -for traders who have made contracts to deliver a particular grade -which has become scarce by an accident which could not be foreseen. -For this purpose alternative deliveries are allowed by the payment of -corresponding price differentials, fixed by a committee of the Exchange -twice annually, in the months of September and November. - -Settlements of trades may be made individually, or by groups of -members, or through a clearing system, the agency of which is -a designated bank near the Exchange. No record is kept of the -transactions, but it is probable that for a series of years the sales -have averaged fully 50,000,000 bales annually. - - -INORDINATE SPECULATION - -There have been in the past instances of excessive and unreasonable -speculation upon the Cotton Exchange, notably the Sully speculation -of 1904. We believe that there is also a great deal of speculation of -the gambling type mentioned in the introduction to this report. In -our opinion, the Cotton Exchange should take measures to restrain and -so, far as possible, prevent these practices, by disciplining members -who engage in them. The officers of the Exchange must in many cases -be aware of these practices, and could, in our opinion, do much to -discourage them. - - -THE COFFEE EXCHANGE - -The Coffee Exchange was incorporated by special charter in 1885. It has -320 members, about 80 per cent. active. - -It was established in order to supply a daily market where coffee could -be bought and sold and to fix quotations therefor, in distinction from -the former method of alternate glut and scarcity, with wide variations -in price--in short, to create stability and certainty in trading in an -important article of commerce. This it has accomplished; and it has -made New York the most important primary coffee market in the United -States. But there has been recently introduced a non-commercial factor -known as “valorization,” a governmental scheme of Brazil, by which the -public treasury has assumed to purchase and hold a certain percentage -of the coffee grown there, in order to prevent a decline of the price. -This has created abnormal conditions in the coffee trade. - -All transactions must be reported by the seller to the superintendent -of the Exchange with an exact statement of the time and terms of -delivery. The record shows that the average annual sales in the past -five years have been in excess of 16,000,000 bags of 250 pounds each. - -Contracts may be transferred or offset by voluntary clearings by groups -of members. There is no general clearing system. There is a commendable -rule providing that, in case of a “corner,” the officials may fix a -settlement price for contracts to avoid disastrous failures. - - -THE OTHER EXCHANGES - -Of the exchanges which we have classed as minor, those dealing with -Fruit and Hay, appear to be in nowise concerned with speculation. -No sales whatever are conducted on them, all transactions being -consummated either in the places of business of the members or at -public auction to the highest bidder. No quotations are made or -published. - -In the case of the other two commodity exchanges, the Mercantile and -the Metal, new problems arise. Although quotations of the products -appertaining to these exchanges are printed daily in the public press, -they are not a record of actual transactions amongst members, either -for immediate or future delivery. - -It is true that on the Mercantile Exchange there are some desultory -operations in so-called future contracts in butter and eggs, the -character of which is, however, revealed by the fact that neither -delivery by the seller nor acceptance by the buyer is obligatory; the -contract may be voided by either party by payment of a maximum penalty -of 5 per cent. There are nominal “calls,” but trading is confessedly -rare. The published quotations are made by a committee, the membership -of which is changed periodically. That committee is actually a close -corporation of the buyers of butter and eggs, and the prices really -represent their views as to the rates at which the trade generally -should be ready to buy from the farmers and country dealers. - -Similar, but equally deceptive, is the method of making quotations on -the Metal Exchange. In spite of the apparent activity of dealings in -this organization in published market reports, there are no actual -sales on the floor of the Metal Exchange, and we are assured that there -have been none for several years. Prices are, however, manipulated -up and down by a quotation committee of three, chosen annually, who -represent the great metal-selling agencies as their interest may -appear, affording facilities for fixing prices on large contracts, -mainly for the profit of a small clique, embracing, however, some of -the largest interests in the metal trade. - -These practices result in deceiving buyers and sellers. The making and -publishing of quotations for commodities or securities by groups of men -calling themselves an exchange, or by any other similar title, whether -incorporated or not, should be prohibited by law, where such quotations -do not fairly and truthfully represent any bona fide transactions on -such exchanges. Under present conditions, we are of the opinion that -the Mercantile and Metal Exchanges do actual harm to producers and -consumers, and that their charters should be repealed. - - -THE EXPERIENCE OF GERMANY - -In 1892 a commission was appointed by the German Government to -investigate the methods of the Berlin Exchange. The regular business -of this exchange embraced both securities and commodities; it was an -open board where anybody by paying a small fee could trade either for -his own account, or as a broker. The broker could make such charge as -he pleased for his services, there being no fixed rate of commission. -Settlements took place monthly. Margins were not always required. Under -these circumstances many undesirable elements gained entrance to the -Exchange and some glaring frauds resulted. - -The commission was composed of government officials, merchants, -bankers, manufacturers, professors of political economy, and -journalists. It was in session one year and seven months. Its report -was completed in November, 1893. Although there had been a widespread -popular demand that all short selling should be prohibited, the -commission became satisfied that such a policy would be harmful to -German trade and industry, and they so reported. They were willing, -however, to prohibit speculation in industrial stocks. In general the -report was conservative in tone. - - -THE LAW OF 1896 - -The Reichstag, however, rejected the bill recommended by the commission -and in 1896 enacted a law much more drastic. The landowners, -constituting the powerful Agrarian party, contended that short -selling lowered the price of agricultural products, and demanded that -contracts on the Exchange for the future delivery of wheat and flour be -prohibited. The Reichstag assented to this demand. It yielded also to -demands for an abatement of stock speculation, and prohibited trading -on the Exchange in industrial and mining shares for future delivery. -It enacted also that every person desiring to carry on speculative -transactions be required to enter his name in a public register, and -that speculative trades by persons not so registered should be deemed -gambling contracts and void. The object of the registry was to deter -the small speculators from stock gambling and restrict speculation to -men of capital and character. - -The results were quite different from the intention of the legislators. -Very few persons registered. Men of capital and character declined to -advertise themselves as speculators. The small fry found no difficulty -in evading the law. Foreign brokers seeing a new field of activity -opened to them in Germany, flocked to Berlin and established agencies -for the purchase and sale of stocks in London, Paris, Amsterdam, and -New York. Seventy such offices were opened in Berlin within one year -after the law was passed, and did a flourishing business. German -capital was thus transferred to foreign markets. The Berlin Exchange -became insignificant and the financial standing of Germany as a whole -was impaired. - - -DETRIMENTAL CONSEQUENCES - -This, however, was not the most serious consequence of the new law. -While bankers and brokers, in order to do any business at all, were -required to register, their customers were not compelled to do so. -Consequently the latter could speculate through different brokers on -both sides of the market, pocketing their profits and welching on their -losses as gambling contracts. Numerous cases of this kind arose, and in -some the plea of wagering was entered by men who had previously borne a -good reputation. They had yielded to the temptation which the new law -held out to them. - -Another consequence was to turn over to the large banks much of the -business previously done by independent houses. Persons who desired to -make speculative investments in home securities applied directly to the -banks, depositing with them satisfactory security for the purchases. As -the German banks were largely promoters of new enterprises, they could -sell the securities to their depositors and finance the enterprises -with the deposits. This was a profitable and safe business in good -times, but attended by dangers in periods of stringency, since the -claims of depositors were payable on demand. Here again the law worked -grotesquely, since customers whose names were not on the public -register could, if the speculation turned out badly, reclaim the -collateral or the cash that they had deposited as security. - - -MODIFICATION OF LAW IN 1908 - -The evil consequences of the law of 1896 brought about its partial -repeal in 1908. By a law then passed the government may, in its -discretion, authorize speculative transactions in industrial and mining -securities of companies capitalized at not less than $5,000,000; the -Stock Exchange Register was abolished; all persons whose names were in -the “Handels-register” (commercial directory), and all persons whose -business was that of dealing in securities, was declared legally bound -by contracts made by them on the Exchange. It provided that other -persons were not legally bound by such contracts, but if such persons -made deposits of cash or collateral security for speculative contracts, -they could not reclaim them on the plea that the contract was illegal. - -In so far as the Reichstag in 1896 had aimed to prevent small -speculators from wasting their substance on the Exchange, it not only -failed, but, as we have seen, it added a darker hue to evils previously -existing. - -Germany is now seeking to recover the legitimate business thrown away -twelve years ago. She still prohibits short selling of grain and flour, -although the effects of the prohibition have been quite different from -those which its supporters anticipated. As there are no open markets -for those products, and no continuous quotations, both buyers and -sellers are at a disadvantage; prices are more fluctuating than they -were before the passage of the law against short selling. - - -THANKS TO THE CHAMBER OF COMMERCE - -Our cordial thanks are due to the Chamber of Commerce of the State of -New York for the free use of rooms in its building for our sessions, -and of its library, and other facilities. - - Respectfully submitted, HORACE WHITE, Chairman, - CHARLES A. SCHIEREN, - DAVID LEVENTRITT, - CLARK WILLIAMS, - JOHN B. CLARK, - WILLARD V. KING, - SAMUEL H. ORDWAY, - EDWARD D. PAGE, - CHARLES SPRAGUE SMITH, - - MAURICE L. MUHLEMAN, Secretary. - - -THE END - - - - -FOOTNOTES - - -[1] Principles of the Economic Philosophy of Society, Government and -Industry, by Van Buren Denslow, LL.D., New York, 1888, p. 99. - -[2] _Ibid._, p. 107. - -[3] _Ibid._, p. 101. Consult also “Theory of Political Economy,” by -W. S. Jevons, p. 92, and “A History of Prices,” by Thomas Tooke, Part -II, p. 46. - -[4] Consult Report of the New York State Food Investigating Commission, -September, 1912. - -[5] A detailed account of this incident was published in _Country -Life in America_, July 1, 1912, from the pen of Graham F. Blandy, the -producer. - -[6] Bourses or Exchanges, as we know them to-day, undoubtedly owe -their origin to the Jews. M. Vidal’s scholarly work explains that the -persecutions which those untiring and courageous merchants experienced -in Spain after the expulsion of the Moors caused them to emigrate -to Holland, where the market-place was called _Change_ (Exchange) -and where in later years there was to be established, as a result of -their labors, the famous Bank of Amsterdam, which was for a century -the foremost institution of its kind in the world. The modern use of -the word Change or Exchange is thus plainly traced. The word Bourse -originated at Bruges, where, according to one authority, merchants -gathered at the house of one of their number known as van der Burse. -Other historians state that the word originated from the three purses -(bourses) carved on the gable of the house in which the meetings were -held. - -[7] Charles A. Conant, “The World’s Wealth in Negotiable Securities,” -_Atlantic Monthly_, January, 1908, estimated the total American -securities as of 1905, at $34,514,351,382. Since that time there has -been added to the securities listed on the New York Stock Exchange -alone, a total averaging about one billion dollars per annum. The total -given above is, therefore, a conservative one, since I have added to -Mr. Conant’s 1905 estimate only Stock Exchange additions, and have -taken no account of the millions added by small corporations. - -[8] “The Stock Exchange and the Money Market,” “Annals of the American -Academy of Political and Social Science,” Vol. XXXVI, No. 3, November, -1910, p. 567. - -[9] If the discovery had then been made that bits of paper could be -used as a medium of giving mobility to capital, there would have been -a Stock Exchange at Rome eleven centuries before Christ. M. Edmond -Guillard’s study of the subject shows that the _argentarii_ (bankers) -were then doing business at the imperial city, and that in addition -to their central offices they had established branch offices at the -Forum, where they gathered daily at a specified hour, together with the -merchants, manufacturers, and capitalists, carrying on a business of -money-changing in a public market that was, in its essentials, similar -to our public financial markets of to-day (“Les Banquiers Atheniens et -Romains, trapézites et argentarii,” Paris, 1875 Guillaumin). As the -business was introduced into Rome by freed Greek slaves, it is perhaps -safe to say that the practice of dealing in public money markets is -in reality of still earlier origin. Plautus alludes to the crowd of -merchants and bankers in the public square, and many chroniclers record -the fact that at the time of Appius Claudius and Publius Sevilius, that -is to say, five centuries before Christ, there was a public market in -Rome known as the Assembly of Merchants (Collegium mercatorum). - -[10] “A hundred years ago the use of the cheque was hardly known even -in London, and an English country gentleman would have had infinitely -more trouble in making a small investment than would nowadays a remote -Australian squatter, or a wheat-grower in the wildest West of Canada. -A letter posted to London from a distant village of Saskatchewan -in 1910 would arrive with far more certainty, and perhaps not less -speed than a letter posted in 1810 from a village in Sutherland or -Argyllshire. A penny stamp with a cheque enclosed in a brief letter -of instructions to the banker, and the thing is done. But the thrifty -Scot of 1810 would have had the utmost difficulty, and great expense -as well as risk, in converting a similar amount of cash savings into -an interest-bearing security. In 1710 the thing would have been -practically impossible. The Bank of England had only just been called -into existence, and, in fact, there were no bankers, no brokers, and -no Stock Exchange in the modern sense of the word. A man who wished to -invest, without personally employing his capital, had practically no -choice but to buy property and let it out at a rent, or lend his money -on mortgage. Bank of England Stock or National Debt had just begun to -be a political speculation for the moneyed Whigs in London. Merchant -venturers might risk a large sum in a joint-stock voyage. Otherwise the -average Englishman at the beginning of the eighteenth century A. D. was -hardly better off for investment than the average Athenian in the age -of Pericles, or the average Roman in the days of Cicero.”--“The Stock -Exchange,” by Francis W. Hirst, editor of the _Economist_, Williams and -Norgate, London. - -[11] Article on “Speculation” in Schonberg’s “_Handbuch der Politischen -Oekonomie_” (Tubingen, 1896–98). - -[12] “Scope and Functions of the Stock Market.”--“The Annals of the -American Academy of Political and Social Science,” Vol. XXXV, No. 3. -May, 1910. - -[13] Charles A. Conant, “The Uses of Speculation,” _Forum_ (August, -1901). - -[14] Suppose for a moment that the stock markets of the world were -closed, that it was no longer possible to learn what railways were -paying dividends, what their stocks were worth, how industrial -enterprises were faring--whether they were loaded up with surplus goods -or had orders ahead. Suppose that the information afforded by public -quotations on the stock and produce exchanges were wiped from the slate -of human knowledge. How would the average man, how even would a man -with the intelligence and foresight of a Pierpont Morgan, determine -how new capital should be invested? He would have no guides except -the most isolated facts gathered here and there at great trouble and -expense. A greater misdirection of capital and energy would result than -has been possible since the organization of modern economic machinery. -“Wall Street and the Country,” by Charles A. Conant, pp. 92–93.--G. P. -Putnam’s Sons, New York, 1904. - -[15] The student who wishes to go more thoroughly into the subject of -Stock Exchange usefulness is referred to “The Annals of the American -Academy of Political and Social Science,” Vol. XXXV, No. 3, May, 1910, -Philadelphia. “Some Thoughts on Speculation,” by Frank Fayant, New -York, 1909; “The Stock Exchange,” by Francis W. Hirst, London, Williams -& Norgate, 1911; “Wall Street and the Country,” by Chas. A. Conant, -New York, G. P. Putnam’s Sons, 1904; “Story of the Stock Exchange,” by -Chas. Duguid, London, New York, E. P. Dutton & Co., 1902; “The Stock -Exchange, London,” Methuen & Co., 1904; “The New York Stock Exchange,” -by Francis L. Eames, New York, 1894; “Der Deutsche Kapitalmarkt,” -by Rudolph Eberstadt, Leipzig, Duncker & Humbolt, 1901; “The Stock -Exchange,” (London), by C. D. Ingall & G. Withers, Longmans, Green -& Co., 1904; “A Simple Purchase and Sale Through a Stockbroker,” by -Eliot Norton, _Harvard Law Review_, Vol. VIII, No. 8; “Stock Exchange -Investments; History, Practice, and Results,” London, Simpkin, -Marshall, Hamilton, Kent & Co., 1900. - -[16] The Stock Exchange is an organization of individuals formed for -the purpose of listing securities and for facilitating the sale and -delivery of stocks.... Through its agency corporations are enabled to -sell their shares and get the money capital to conduct their business. -The Stock Exchange has come into existence because of a demand for -trade facilities that will adjust differences of opinion in reference -to future values of corporation securities and give the purchaser some -idea of values. (“Modern Industrialism,” by Frank L. McVey, Professor -of Political Economy in the University of Minnesota. N. Y., 1904.) - -[17] “Principles of Economics,” by Edwin R. A. Seligman, Professor of -Political Economy in Columbia University (N. Y., 1905). - -[18] “Nouveau Dictionnaire d’Economie Politique,” by Paul -Leroy-Beaulieu, Paris, 1892. - -[19] Consult “The (London) Stock Exchange,” Francis W. Hirst, London, -Chap. VI, p. 164, Williams & Norgate, 1911. - -[20] “Principles of Economics,” by J. R. McCulloch, London, 1825. - -[21] “Speculation on the Stock and Produce Exchanges of the United -States,” by Henry Crosby Emery, Professor of Political Economy at Yale -University. New York, 1896. - -[22] In its effort to study all possible remedial methods affecting -speculation on margins, the Hughes Commissioners in 1909 put this -question to the Governors of the Stock Exchange: - -“_Would taxation of loans made on margin transactions tend to -discourage margin speculation? If so, would it be desirable to graduate -the tax in accordance with the margin ratio?_” - -To which the Governors replied: - -“In our opinion the taxation of loans could not be made upon margin -transactions, as the lender of the money would be absolutely ignorant -as to whether the securities pledged with him were carried on margin -or whether they were owned absolutely. Any species of taxation upon -loans would work a great injury to the money prosperity of the banking -institutions of the City of New York. Loans are made to individuals and -institutions upon bona fide property; they are also made to borrowers -of money upon stocks and bonds offered to the institution, which are -marginal in their nature; further, they are made upon securities only -in part marginal, and any effort to distinguish would be practically -impossible and would retard the entire business of the community. The -effect of taxation upon loans would be to drive capital instantly from -the city, and would force a species of financial institution to arise -in every State which would profit by our inquisitorial laws, should -such be enacted, to their own advantage and to our serious detriment. -Such a restriction upon the free lending of money is not only unsound, -impossible of enforcement, but could not help resulting in a constant -evasion of the law.” - -[23] “The Hughes Investigation,” by Horace White, _Journal of Political -Economy_, October, 1909, p. 537. - -[24] The governors of the Stock Exchange, when asked by the Hughes -Commission, “Would a change in the practice of dealing on margins be -desirable?” replied as follows: - -“The practice of dealing on margins is absolutely essential to the -conduct of many transactions, whether in stocks or bonds. To prohibit -it would be to deny to a man the right to invest his funds and to -purchase property upon such terms as he pleases. As well might the -purchase of real estate, where a portion of the consideration is left -on mortgage, be prohibited. The responsibility of the individual enters -so largely into these transactions that it will be impossible to define -specific instances where the margin would be too small or unnecessarily -great. It is to be left to the discretion of the bankers, as well -as to the judgment of those who furnish the money upon which these -transactions are based. There may be certain classes of securities, -like city bonds or government bonds, where a very small margin is -ample. There may be other transactions in stocks selling at very -high prices where a very strong margin should be required. Like many -other details of a banking and brokerage business, these matters are -frequently subjects of arrangement, whereby the broker protects himself -and a satisfactory protection is given to him by his client. It would -be manifestly impossible for the enactment of rules or regulations -suitable to every case, and, in conclusion, we would say that it is -almost unknown for an institution, bank, or trust company, to lose -money upon any loans made on margins to members of the Stock Exchange -in good standing.” - -[25] “Ten Years’ Regulation of the Stock Exchange in Germany.” _Yale -Review_, May 1908, _q. v._, _post_. - -[26] “The Stock Exchange,” by Francis W. Hirst, London, 1911, p. 101. - -[27] “The Hughes Investigation,” by Horace White, _Journal of Political -Economy_, October, 1909, pp. 532–3. - -[28] “Board of Trade Case,” 88 Fed. 868. - -[29] “Chicago Board of Trade Case,” May 8, 1905. - -[30] Several authorities among those quoted in this chapter have been -taken from Mr. Frank Fayant’s pamphlet, “Some Thoughts on Speculation,” -N. Y.., 1909. It would be difficult to compress in small space a more -instructive array of data than that presented in Mr. Fayant’s work. - -[31] “Scope and Functions of the Stock Market,” by Prof. S. S. Huebner, -Ph. D., University of Pennsylvania. “Annals of the American Academy of -Political and Social Science,” Vol. XXXV, No. 3, May, 1910. - -[32] _Journal of Political Economy_, October, 1909, pp. 531–2. - -[33] Consult the _Wall Street Journal_, February 18, 1909. - -[34] “The borrower is also bound to pay the lender whatever interest by -way of coupons or dividends or otherwise and all bonuses and accretions -that would have been paid to the lender on the securities he has lent -had he kept them. These are in practice treated as increases to the -market price of the borrowed securities. The reason for this provision -is that the lender is the actual owner of the securities and as such -owner he is entitled to whatever they may earn by way of interest or -in any other way. He has simply temporarily let another have the use -of them, and, since the securities can be and are disposed of by the -borrower, the lender would lose the interest, etc., which is paid on -the borrowed securities between the date that they are borrowed and -the date when they are returned and the loan cancelled, unless the -borrower paid an equivalent amount to him. On the other hand, any -assessment the lender would have had to pay on the borrowed securities -during the continuance of the loan is a charge against him; for such an -assessment is a burden adherent to ownership. In practice it is treated -as a reduction of the market price.”--Eliot Norton “On Short Sales of -Securities through a Stockbroker.” The John McBride Co., New York, 1907. - -[35] (Memorial of the stockbrokers addressed to the Minister of -Finance, 1843, p. 44, footnote. Quoted by Vidal, _q. v._, p. 46.) - -[36] Some of those who admit the value of the stock market have -subjected to severe criticism those who speculate for the fall of -stocks. One reads constantly of the “bears” trying to accomplish such -and such results by depressing securities. Napoleon had a long talk -with Mollien, his Minister of Finance, in seeking to demonstrate that -those who sold “short,” in the belief that national securities would -fall, were traitors to their country. He argued that if these men were -selling national securities for future delivery at less than their -present value they were guilty of treason to the State. But Mollien -replied in substance: “These men are not the ones who determine the -price; they are only expressing their judgment upon what it will be. -If they are wrong, if the credit of our State is to be maintained in -the future at its former high standard, in spite of your military -preparations, these men will suffer the penalty by having to make -delivery at the price for which they sold, for they must go into the -market and buy at the price then prevailing. It is their judgment, not -their wish, that they express.”--“Wall Street and the Country,” by -Charles A. Conant, pp. 111–112, G. P. Putnam’s Sons, New York, 1904. - -[37] “Lombard Street,” p. 158. - -[38] Charles A. Conant, “Principles of Money and Banking” (New York, -1905). The reader is invited to consult, in this connection, that -portion of the Report of the Hughes Commission, (see Appendix) having -to do with short selling. - -[39] Report of the Commissioner, Washington, 1908. - -[40] Despite the effort to avoid technical terms in these pages, the -value of the bear should be considered from still another angle. Smith, -a bear, sells short to Jones, a bull. The economic usefulness of Jones -then becomes problematical, since he may sell out at any moment. His -permanence as a holder or owner is merely optional, and his usefulness -in the economic scheme of things is impaired. As a market factor he may -be ignored. But there is nothing optional about Smith’s position, for -he is now a _compulsory_ buyer; his economic status is fixed; he has -become a very real potential force. - -[41] “The Stock Exchange and the Money Market,” by Horace White, -“Annals of the American Society of Political and Social Science,” Vol. -XXXVI, No. 3, Nov., 1910, pp. 563–573. - -[42] _Ibid._, p. 564. - -[43] The Stock Exchange authorities were asked by the Hughes -Commissioners in 1909 what effect would result if this law were -repealed. An interesting historical summary is involved in the reply to -this question. - -“In our opinion the repeal of such a law would simply lead to constant -evasions, which would cause the law to be practically a dead letter, -and it is far better to leave it as it is, and to allow the supply and -demand to regulate the rate for money. - -“It is reasonable to assume that the repeal of this law would result in -a recurrence of the conditions which existed prior to its enactment. -Prior to 1882, when this Act was passed, such loans were subject to the -drastic provisions of the Usury Law, which imposes the forfeiture of -the principal as a penalty for violation. The Usury Law, however, as -to this class of loans, had for years been a dead letter, and whatever -risks were incurred through its penalties were taken by lenders without -hesitation. Demand loans were made at interest plus a commission, and -in times of money stringency the interest rate represented by the -so-called commission attained proportions which have been unknown since -the passage of the Act of 1882. Extreme instances are to be found of a -rate as high as 700 per cent. per annum. - -“Such violent fluctuations in the rate have been unknown since the -passage of the Act of 1882. Since that time all quotations of interest -on call loans have been at so much per cent. per annum, not, as was -formerly the case, at ⅛ or ¼ of 1 per cent. per day. Through the -extreme stringency which existed in the autumn of 1907, the rate ran -from 12 to 30 per cent., with the exception, perhaps, of one or two -days when practically no money was procurable at any price, when the -quotation ran up to 100 or 110 per cent. per annum. It would seem -demonstrated by experience that the law of 1882 has been a most potent -factor in reducing the interest rate in times of stringency and in -rendering it at all times more stable and equable.” - -[44] Cf. Mr. White’s article _supra_, p. 570. - -[45] Report of the Comptroller of the Currency, October, 30, 1912. - -[46] The _Wall Street Journal_, August 31, 1912. - -[47] December 7, 1912. Consult also p. 235. - -[48] “The Hughes Investigation,” by Horace White, _Journal of Political -Economy_, October, 1909, pp. 537–8. - -[49] In his article on “The Hughes Investigation” (_Journal of -Political Economy_, October, 1909, p. 539), Mr. Horace White refers -to the attempt of the Hughes Commission to devise a means whereby -the company-promoter’s activities might be curbed. He says: “The -British ‘Companies Act’ forbids the public advertisement or sale of -any securities unless the issuing company has been registered in a -bureau of the government with information regarding the business to be -transacted, the names of the officers and other persons responsible for -the statements of fact, etc. Much time was spent by the committee in -discussing the advisability of adopting the English system, regardless -of the fact that it would be operative in only one state of the union, -and that it would serve as an obstacle to all securities, sound and -unsound, alike. Thus, if the Pennsylvania Railroad Company desired to -issue a new lot of bonds it could advertise and sell them everywhere -except in New York, without the trouble and expense of registration. -Would it be worth while to give to other markets such an advantage over -that of New York? The opinion of the governors of the Stock Exchange -was sought and was given orally, to the effect that it would be unwise -to take the risk unless the benefits to be derived from registration -were preponderating and reasonably certain. It was their belief, -however, that a certificate from state officials that a company was -registered at Albany would be interpreted by the class of investors, -who are most liable to deception, as a certificate of the soundness of -the securities, in which case the act of registration would do more -harm than good. The latter consideration prevailed in the committee, -but recommendations as to advertising were made, which, if adopted by -the legislature, will add something to the responsibilities of greedy -and unscrupulous newspapers, while not going upon the doubtful ground -of a censorship of the press.” - -[50] “The Hughes Investigation,” by Horace White, _Journal of Political -Economy_, October, 1909, p. 529. - -[51] The report of the Hughes Investigating Committee is published in -full in the appendix to this volume. - -[52] One of the witnesses before the Hughes Committee actually -recommended that the stock ticker be suppressed. Such a suggestion -is silly and would lead to great confusion and many complaints from -the public. The ticker is essential to publicity and offers the very -protection which the Stock Exchange seeks to extend. Speculation was -never so unscrupulous and wrongdoing never so abundant as in the days -before this instrument was invented. - -[53] _L’Economiste Français_, Paris, October 5th. - -[54] When the first issue of Union Pacific convertible bonds matured, -so many people had failed to notice that their bonds could be exchanged -dollar for dollar against the stock, selling at much higher price with -greater yield, that the company extended the time for conversion. It -would have been entirely warranted in paying off such bondholders at -par, but it spent considerable sums in advertising them of a privilege -they should have known all about. In the face of all this, bonds -came in for conversion many months after the extended time, and the -bondholder sincerely believed that he had a grievance because his bond -was redeemed at par. - -The same thing happened in the case of the old St. Paul 7’s, which -were convertible into preferred stock. Bondholders allowed themselves -to be paid off at par for a bond which had been standing at 170 and -apparently had never read the terms of their own mortgage. What can the -law, the press, or the banker do against such criminal negligence as -this? And if bondholders are remiss, what shall be said of the average -stockholder? He is improving undoubtedly, but he has still a great deal -to learn. His right to information is unquestionable, but he fails to -exercise it in anything like the degree he should. It is to be feared -also that he does not take a great deal of trouble in learning to -analyze such reports and balance sheets as may be submitted to him. - -A stockholder should never hesitate to write to the officers of his -company for information. He should do it often, and he should get other -stockholders to do the same thing. One stockholder writing frequently -may be regarded as a nuisance. Ten will be treated with respect, -and it will be a very autocratic control which will venture to deny -information to a hundred stockholders, taking a legitimate step to -protect their own proper interests. The newspapers are glad to furnish -any information in their power, but if the stockholder would write to -the company first and the newspaper afterward, he would probably derive -more ultimate advantage.--_Wall Street Journal_, September 22, 1909. - -[55] Address by President Finlay of the Southern Railway, before the -Transportation Club of Indianapolis, October, 1912. - -[56] “If there is one man who really understands the nature of the -transactions in the New York Stock Exchange from day to day, it -is Robert L. Doremus, the chairman of the Stock Exchange Clearing -House Committee, which has the power to lay bare the character of -any broker’s business. His reputation for veracity is of that high -character which Wall Street demands from the men in its responsible -positions. When he says that the main influence in any day’s trading is -a legitimate and widespread demand for sound securities, in lots small -enough to be within reach of the investor of moderate means, he is -talking facts and not theories. - -“Our politicians, however, are legislating for a Wall Street of twenty -years ago. The stock market is not controlled by large speculators -creating deceptive prices by manipulative orders. That kind of business -is passing away, and it may be said that another kind, that of the -purely gambling accounts carried on the lightest of margins, has -practically gone, and is not likely to return. The few houses whose -business is still of this character are dying of dry-rot; while the -active houses who are doing the real business of the stock market -report their speculative accounts so broadly margined as to be of a -semi-investment character. - -“What is still more satisfactory is the wide diffusion in the -ownership of industrial and railroad stocks. This is not new. The -Illinois Central’s great strength for forty years was in the small -stockholder, who made his voice heard to some purpose when “strike” -legislation developed in his State legislature or in Congress. But -the ever-widening character of the investment area, the recognition -of the convenience and convertibility of Stock Exchange securities, -safeguarded by sound management and full publicity, is a growth of -the most hopeful character. It indicates a force of enlightened -conservatism of the greatest value to the country.”--The _Wall Street -Journal_, October 22, 1912. - -[57] It is truthfully declared by Courtois, in his _Traité des -Opérations de Bourse et de Change_, that a fictitious movement, even on -the part of the most powerful operators, cannot overcome the natural -tendencies of values, and that the most that can be accomplished is -sometimes to hasten or retard slightly the certain effect of a foreseen -event. “Wall Street and the Country,” by Charles A. Conant, p. 88, -G. P. Putnam’s Sons, New York, 1904. - -[58] The _Wall Street Journal_, December 7, 1912. - -[59] The distinction between “panics,” “crises,” and “depressions,” are -clearly stated in the opening chapter of “Financial Crises and Periods -of Industrial and Commercial Depression,” by Theodore E. Burton, D. -Appleton & Co., N. Y., 1902. In the following pages, I use the terms as -they are commonly applied in Wall Street, although this application is -not always governed by sound etymology. Thus in Wall Street we speak of -“the panic of 1907,” meaning broadly the events of that entire year. -Strictly speaking a “panic” is the brief period of a day or an hour of -unreasoning fear, brought about by the “crisis” of a money scarcity -which preceded it. The period of commercial and financial suffering, -which continues after the panic and the crisis have passed, is the -“depression.” - -[60] “Des Crises Commerciales,” Clément Juglar, Paris, 1889, pp. 44–5. - -[61] “Annals of the American Academy of Political and Social Science,” -Vol. XXXV, No. 3, May, 1910, p. 13. - -[62] “Financial Crises and Periods of Industrial and Commercial -Depression,” Theodore E. Burton, New York, 1902, p. 234. - -[63] The report of the New York State Superintendent of Banks for the -same period emphasizes this point by showing a steady _contraction_ of -loans by State banks and trust companies of New York City during the -period quoted, while all other authorities reveal a steady _expansion_ -in loans by similar institutions outside the city. - -[64] “The Hughes Investigation,” by Horace White, _Journal of Political -Economy_ October, 1909, pp. 528–540. Mr. White quotes in this -connection an article on “The Panic of 1907,” by Eugene Meyer, Jr., -_Yale Review_, May, 1909, from which many facts in this chapter have -been taken. - -[65] _Cf._ Burton, _supra_, pp. 49–50–51. - -[66] _Ibid._, pp. 227–8–9. - -[67] The panic of 1837 was caused by a great expansion of banking -and bank credits, and an intense speculation in real estate. In 1830 -there were 329 banks in the country with a capital of $110,000,000. In -1857 there were 788 with a capital of $290,000,000. When the crisis -was subsequently examined it was found that there had been an actual -shrinkage of $2,000,000,000 in the value of the assets of the country, -and that $600,000,000 of indebtedness had been wiped out by bankruptcy. - -The panic of 1857 was due primarily to the influx of gold from -California after its discovery in 1848, and to the intense passion -for speculative gain which attended it. Suspension of specie payments -by the banks lasted fifty-nine days. Complete recovery to the normal -standard did not take place until 1860, when it was again interrupted -by the events antecedent to the Civil War of 1861. - -The antecedents of the crisis of 1873 were identical with every other -commercial crisis--namely, speculation--the act of buying with a view -to selling at a higher price, and overtrading, or the act of buying and -selling too much on a given capital. Most commonly these two elements -are accompanied by two others, viz.--the destruction or loss of -previously accumulated capital, and the rapid conversion of circulating -into fixed capital. Speculation and destruction of capital usually go -together in preparing the way for a crisis.--Horace White, _Fortnightly -Review_, Vol. XXV, p. 819. - -The panic of 1893 was distinctly a currency panic. By a curious paradox -it came at a time when the volume of currency was unprecedentedly -large and constantly increasing. But the inception of the disaster had -to do with its quality rather than its quantity. The repeal of the -silver purchasing clause of the Sherman Law, November 1, 1893, restored -confidence by assuring the commercial world that the existing volume of -silver coin would be maintained on a parity with gold. - -[68] _Real Estate Record and Guide_, 1906–7. - -[69] Consult _Bradstreet’s_, 1907; the _Construction News_, Chicago, -1907; the _Engineering News_, 1907. - -[70] “The New York Stock Exchange and the Panic of 1907,” by Eugene -Meyer, Jr., _Yale Review_, May, 1909. - -[71] “Credit Cycles and the Origin of Commercial Panics,” Manchester -Statistical Society, December 11, 1867. - -[72] Remarks of Joseph French Johnson, dean of the New York University -School of Commerce, at the American Institute of Banking, October 25, -1907. - -[73] Consult Burton, _supra_, pp. 109–110; Muhleman. “Monetary Systems -of the World,” pp. 128, 130, 135, 140. - -[74] “The Banking and Currency Problem in the United States,” Victor -Morawetz, New York, _North American Review_ Publishing Company, 1909, -pp. 87, _et. seq._ - -[75] “Collected Works,” Vol II, p. 2. - -[76] Senator Burton “Crises and Depressions,” pp. 51, 52, enumerates -the important indicia of crisis-producing conditions as follows: - - (_a_) An increase in prices of commodities and later of real estate. - - (_b_) Increased activity of established enterprises and the - formation of many new ones, especially those which provide for - increased production and improved methods, all requiring the change - of circulating to fixed capital. - - (_c_) An active demand for loans at higher rates of interest. - - (_d_) The general employment of labor at increasing or - well-sustained wages. - - (_e_) Increasing extravagance in private and public expenditure. - - (_f_) The development of a mania for speculation, attended by - dishonest methods in business and the gullibility of investors. - - (_g_) A great expansion of discounts and loans and a resulting - rise in the rate of interest; also a material increase in wages, - attended by frequent strikes and by difficulty in obtaining a - sufficient number of laborers to meet the demand. - -Not one of these indications of trouble was lacking in the period -preceding the panic of 1907. - -[77] The student who wishes to inquire at length into the subject -of panics, crises, and depressions will find useful aids in the -authorities already quoted, and in the following additional works: - -A. Allard, La Crise Agricole et manufacturiere devant la Conference -monetaire de Bruxelles; Brussels, 1893. - -A. Baring (Lord Ashburton), The Financial and Commercial Crises -Considered; London, Murray, 1847. - -C. W. Smith, Commercial gambling, the principal cause of depression in -agriculture and trade; London, Low, 1893. - -C. Wooley, Phases of Panics; a brief historical review; London, Good, -1897. - -C. Juglar, A brief history of panics and their periodical occurrences -in the United States; New York, Putnam, 1893. - -E. Goodby & W. Watt, The present depression in trade, its causes and -remedies. - -Henry Wood, The Political Economy of Natural Law, Boston, Lee & -Sheppard, 1894. - -H. M. Hyndman, Commercial Crises of the Nineteenth Century; London, -Swan Sonnenschein & Co., 1892. - -H. Denis, La Dépression Économique et Sociale et l’histoire des prix; -Brussels, 1895. - -J. Eadie, Panics in the money market, etc.; New York, 1893. - -Michael G. Mulhall, History of Prices Since 1850; London, Longmans, -Green & Co., 1885. - -R. Browning, The Currency considered with a view to the effectual -prevention of panics; London, 1869. - -The Pears prize essays. London, Chatto, 1885. - -W. W. Lloyd, Panics and their panaceas; London, Harrison, 1869. - -W. H. Crocker, The cause of hard times; Boston, Little, Brown & Co., -1896. - -[78] (8 and 9 Will, III, Ch. 32.) - -[79] (6 Anne, Ch. 16.) - -[80] See appendix. - -[81] See p. 140. - -[82] For a legal opinion concerning the rights of plaintiffs arising -from memberships in a _corporation_ as contrasted with those arising -from memberships in a _voluntarily unincorporated association_ the -reader is referred to White vs. Brownell (2 Daly at p. 337), opinion at -Special Term by Justice Van Vorst; and the same case at General Term, -opinion by Justice Daly. The courts of New York State have on a number -of occasions expressed their approval of the manner in which the Stock -Exchange has discharged its functions under this form of organization. -The reader’s attention is called to Belton vs. Hatch, 109, New York, -597, Court of Appeals. - -[83] “The German Exchange Act of 1896,” by Dr. Ernst Loeb, in the -_Quarterly Journal of Economics_, July, 1897. - -[84] “Ten Years Regulation of the Stock Exchange in Germany,” by Henry -Crosby Emery in the _Yale Review_, May, 1908. - -[85] _Ibid._ - -[86] “The German Bourse Law,” by G. Plochmann, _North American Review_, -May, 1908. - -[87] “An act to regulate sales at public auction and to prevent -stock-jobbing,” New York State Legislature, 1812. - -[88] “An act to regulate sales at public auction and to prevent -stock-jobbing,” New York State Legislature, 1858, repealing act of 1812. - -[89] “Statutes at Large,” Ch. 127 and Ch. 209, repealing Ch. 127. - -[90] “Economics,” by Arthur T. Hadley, New York, 1896. - -[91] “Money and Banking,” by Horace White, New York, 1895. - -[92] In the appendix to his work, “Some Thoughts on Speculation,” New -York, 1909, Mr. Frank Fayant gives a summary of the laws of all the -States, pp. 57–58. I am greatly indebted to this pamphlet for many -authorities quoted in this chapter. - -[93] The London Stock Exchange is also an unincorporated body. See pp. -231 _et seq._ for the report of the royal commission bearing on this -matter. - -[94] The question put to sureties on the London Stock Exchange is, -“Would you take this man’s cheque for £3000 in the ordinary way of -business?” to which an unprepared sponsor once replied, “Well, I should -not pick it out.” - -A similar question by the governors of the New York Stock Exchange once -met with the reply, “Yes, but I would have it certified as quickly as -possible.” - -[95] A similar cry, “Fourteen hundred,” was long used for the same -purpose on the London Stock Exchange. For a time there were but 1399 -members, and each stranger who appeared was thought to be number 1400. -Hence, the words came to be applied to all new members, long after the -membership exceeded that figure. - -[96] The celerity and accuracy of the cable service between New York -and foreign centres, as perfected in arbitraging, has no parallel -elsewhere. Twenty minutes are often required to complete a cable -transaction between the London Stock Exchange and the Paris Bourse, -and so it frequently happens, where speed is required, that messages -between those two centres are cabled by way of New York. - -[97] Consult “The World’s Wealth in Negotiable Securities,” by Charles -A. Conant, _Atlantic Monthly_, (July, 1908). - -[98] Hopkinson Smith, in the _World’s Work_ (August, 1912). - -[99] “They are like unto children sitting in the market-place and -calling one to another, and saying, ‘We have piped unto you, and ye -have not danced; we have mourned to you, and ye have not wept.’” - -[100] July, 1912, p. 94. - -[101] “Worry, the Disease of the Age,” by C. W. Saleeby, M. D., F. A. -Stokes Co. (New York, 1907). - -[102] The English Exchequer has left a permanent impression on the -language no less than on the world’s finance. Such words as “cheque,” -“tally,” and “stocks,” in the sense of securities, possess an -interesting history easy to trace. If one lent money to the Bank of -England down to so comparatively recent a period as one hundred years -ago, tallies for the amount were cut on willow sticks just as they -were cut at the Exchequer in the time of the Crusades; the bank kept -the “foil,” and the lender the “stock”--the earliest “bank-stock” on -record. Very recently a bag of Exchequer tallies was found in a chapel -of Westminster Abbey. - -[103] The first Stock Exchange book was published in 1761--“Every -Man His Own Broker, or a Guide to Exchange Alley,” by J. Mortimer. -Mortimer, Mr. Hirst tells us, had been British Consul in Holland, -and had seen the workings of the Amsterdam Bourse and the arbitrage -business between London and Amsterdam, which was considerable in the -middle of the eighteenth century. The book shows that many phases -of speculation were already in vogue before the Stock Exchange was -formally organized. - -[104] “The (London) Stock Exchange,” Francis W. Hirst, London, Williams -and Norgate, 1910. The attention of the reader is invited to this -book. As a short study of investment and speculation in England it is -exceedingly instructive, doubly so in that it comes from the pen of the -editor of the _Economist_. - -[105] The _Quarterly Review_, July, 1912. - -[106] There are 20,000 shares (£13 paid) and £416,700 debentures -outstanding. - -[107] It should be said, in fairness to the London jobber, that the -incident here mentioned by Mr. Hirst is a rare exception. - -[108] _L’Economiste Français_, Paris, October 5, 1912. - -[109] Rule 150 reads as follows: “The committee will not fix a -special settling day for bargains in shares or securities issued -to the vendors, credited as full or partly paid, until six months -after the date fixed for the special settlement in the shares or -securities of the same class subscribed for by the public, but this -does not necessarily apply to reorganizations or amalgamations of -existing companies, or to cases where no public shares are issued for -cash.”--Rules and Regulations of the Stock Exchange. London, June 3, -1911, pp. 64–5. - -[110] These figures are taken from Mr. Hirst’s Chapter VIII on “The -Creation of New Debt and Capital,” pp. 212–241. - -[111] It should be said that at least a part of the decline in these -securities had taken place before the Balkan scare became a reality. -A foreknowledge of what was impending may have influenced the earlier -decline; certainly the event itself accentuated and hastened it. - -[112] London jobbers were, in a way, instrumental in checking the -furious speculation in “rubbers” toward the culmination of the boom of -1909–10. Their absolute refusal to carry rubber shares for brokers, and -their concerted insistence that such shares should be paid for in full -on the ensuing account day, undoubtedly put the brakes on a furious -speculation, and prevented many failures. - -[113] The _Wall Street Journal_, November 13, 1912. - -[114] On the New York Stock Exchange the minimum difference between -prices is one eighth and splitting of this fraction is prohibited save -in the case of “rights” to subscribe or similar instances. - -[115] In the settling room on ticket day stocks that are not cleared -pass by ticket from broker to broker in much the same way as that -provided by the Clearing House. - -[116] Although an effort has been made in these pages to avoid -complicated Stock Exchange technique, the contango, which is not fully -understood in America, requires technical explanation. It may be -defined as a double-bargain, in that it consists of a sale for cash of -the stock previously bought which the broker does not wish to carry, -and a repurchase for the new settlement two weeks ahead, of the same -stock at the same price as the sale, plus interest agreed upon up to -the date of that settlement. - -[117] The methods of transacting business on the London Stock Exchange -are admirably stated in condensed form in an article by Walter Landells -in the _Quarterly Review_, July, 1912, pp. 88–109, and I am indebted to -his article for many of the foregoing facts, and for this brief summary -of London’s booms and crises. - -[118] In addition to the authorities quoted in the foregoing chapter, -the attention of the reader is directed to the following works having -to do with the London Stock Exchange: - -Lombard Street, by Walter Bagehot, New York, Chas. Scribner’s, and Sons. - -Stocks and Shares, by Hartley Withers, London, Smith Elder, 1910. - -Stock Exchange Law and Practice, by W. A. Bewes, London, Sweet & -Maxwell, 1910. - -Rise of the London Money Market, 1640–1826, by W. R. Bisschop, London, -King, 1910. - -The Mechanism of the City, by Ellis T. Powell, London, King, 1910. - -[119] Anatole Leroy-Beaulieu, La Régence de l’argent, “Revue des Deux -Mondes.” February 25, 1897, pp. 894 and 895. - -(M. Leroy-Beaulieu is the elder brother of Paul, the French economist. -In 1881 he became professor of modern history at the Ecole Libre des -Sciences Politiques, and in 1887 was made a member of the Academy of -Moral and Political Sciences. His fame as a publicist is established.) - -[120] John Law was the inventor of “bearer” certificates. - -[121] “The History and Methods of the Paris Bourse,” by E. Vidal, -Senate Document No. 573, Sixty-first Congress (Second session), pp. -161–2. - -[122] “Opérations de Bourse et de Change,” Courtois, 13th ed., p. 239. - -[123] Provincial bourses in France are divided into two classes--those -with parquets, and those without them. Bourses with parquets are those -at Lyons, Bordeaux, Marseilles, Nantes, Toulouse, and Lille. The -Minister of Finance is in control of these parquet bourses, while the -Minister of Commerce controls those that have no parquet. - -[124] “History and Methods of the Paris Bourse,” by E. Vidal, published -by the National Monetary Commission, Washington, 1910, pp. 262–3–4. - -[125] The report of the Paris Chamber of Commerce, February 8, 1882, -which paved the way for this reform, is interesting reading: - -“An administration of justice which would permit a speculator to carry -on two deals of equal importance with two different brokers, one for -a rise and the other for a fall, and, while collecting from one the -profit he had made to advance the plea of gambling toward the other, -in order to avoid paying the loss which the operation showed--such an -administration, I say, could not hold any longer; that fact alone would -condemn it. - -“Experience shows that the plea of gambling has never protected -anybody but those of bad faith, and has only encouraged the excess -of speculation, as was stated by M. Andrieux in his report presented -to the Chamber in 1877, in the name of the Seventh Commission of -Initiative. - -“Prompted by these reasons, and, considering that the present -legislation, far from preventing gambling, encourages it; considering -that bad faith finds protection in the jurisprudence sanctioned; and, -further considering that in commercial affairs, as in any other, it -behooves to allow every one his full freedom, as well as to hold him -responsible for his actions--I beg to suggest that an address be sent -to the Minister of Commerce, confirming the letter of the Chamber -of Commerce of November 25, 1877, and requesting the Government to -introduce a bill in the Chambers, declaring that article 1965 of the -Code civil does not apply to debts resulting from dealings for future -delivery, and that articles 421 and 422 of the Code penal are repealed.” - -The law legalizing dealings for future delivery was enacted March 28, -1885, and formally promulgated April 8, 1885. - -[126] Vidal, p. 217, _supra_. - -[127] Ibid, p. 276. - -[128] _Ibid_, pp. 192–3. - -[129] Remarks of M. Alfred Neymarck, at the International Congress of -Securities, 1900, quoted by Vidal, pp. 166–7. - - - - -INDEX - -_Asterisks indicate foot-notes_ - - - Account Day, in London, 372. - - Advertising, Abuse of, 434. - - Advertising, by members prohibited, 56. - - Agents de Change, 51. - - Agents de Change (see Paris Bourse). - - Agora, of Greece, 262. - - Aldrich, plan, 101. - - Allard A., Crises in France, 219*. - - _American Acad. of Polit. and Social Science_, 16*, 26*, 32*, - 80*, 102*, 191*. - - American Bankers’ Association, 207. - - American, finance of future, 377. - - American Institute of Banking, 208*. - - Arbitrage brokers, duties of, 283. - - Ashley, W. T., on Economic History, 224. - - Assignats, 390. - - _Atlantic Monthly_, 288*. - - - Bagehot, Walter, on Credulity of Speculators, 92. - - Bagehot, Walter, on Banking, 99. - - Bagehot, Walter, on Panics, 215–218; - _Lombard Street_, 378*. - - Balkan Crisis of 1912, 76, 340, 368, 369. - - _Banking and Currency Problem in U. S._, by Victor Morawetz, 209*. - - Banking facilities in London, 362. - - Bank loans, N. Y. (1904–1907), 190; - in the U. S. (1904–1907), 192; - in London, 362. - - Bank of England, 324, 328, 357. - - Bank of England, Origin of, 18*. - - Bank of France and currency, 209; - and Bourse, 396; - and Germany, 209. - - Banks, certifications of checks, 113; - borrowings by London brokers, 353. - - Bank, deposits in N. Y., 125. - - Bankers as peacemakers, 371. - - Bank stock, earliest form of, 324.* - - Baring, A., on Financial Crises, 219*. - - Baring failure, 156, 376. - - Barnard, Sir John, Act to prevent stock-jobbing, 226. - - Barometer, The Stock Exchange as a, 23, 190, 308, 309. - - Bearer certificates, 365, 374. - - Bears, Value of, 76; - in Germany, 77. (See short selling). - - Benefactions and charities of members, 317. - - Bewes, W. A., _Stock Exchange Law and Practice_, 379*. - - Bisschop, W. R., _Rise of the London Money Market_, 379*. - - Black Friday, 251. - - Blackmar, Frank W. on Legislation against Speculation, 255. - - Bond brokers on ’Change, 282. - - Borrowing and lending stocks in N. Y.. and London, 353–4. - - Bourse, Origin of, 12*. - - Bourse, Paris. (See Paris). - - Bradstreet’s, 202*. - - Branch offices, 426. - - Brokers in London, relation to jobbers, 335, 339; - methods, 372 et seq. (See London Stock Exchange). - - Browning, R., on Currency, 219*. - - Bryce, James, on Good Citizenship, 133. - - Bucket-shops, 55, 143, 252, 435. - - Bucket-shops, War against, 149. - - Burr, Aaron, 31. - - Burton, Theodore E., on Financial Crises, 183*; - on Forecasting, 191, 197, 198. - - Burton, Theodore E., on Crisis-producing conditions, 216*. - - Burton, Theodore E., on Currency, 208. - - Business Conduct Committee, 255 - - Business on ’Change, how conducted, 288, _et seq._ - - - Cable service, Excellence of, 284*. - - Cammack, Addison, on publicity, 161. - - Capital of brokerage houses, 152. - - Capital, reasons for scarcity of, 122; - exports of in London, 366. - - Carry-over, contango, 375–6*. - - Central Bank in America, 101. - - Certificates, registered and bearer, 365, 374. - - Certifications of stockbroker’s checks, 113. - - Chamber of Commerce, N. Y., 206. - - Chambre Syndicale, of Paris Bourse, 393. - - Change Alley, 327. - - Charities and benefactions of members, 317. - - Chicago Board of Trade Case in U. S. Circuit Court, 65; - in U. S. Supreme Court, 66*. - - China, Speculative possibilities in, 62. - - Clearance Orders, 279. - - Clearing House, N. Y. Banks, 109. - - Clearing House, N. Y. Stock Exchange, 119, 426; - London, 365, 373. - - Clearings, volume of, in N. Y. and London, 344. - - Coffee Exchange, 442. - - Colbert, and the French manufacturers, 254. - - Collectors, on ’Change, 315. - - Collegium mercatorum at Rome, 16*. - - Commercial honor on ’Change, 264. - - Commission dealers in markets for produce, 8. - - Commissions, rate of, N. Y., 278, 281; - in London, 342; - in Paris, 395. - - Committee of Arrangements, 277. - - Committee on Stock List, requirements of, 363. - - Companies Act, in England, 147*. - - “Comparisons” by stockbrokers, 120. - - Competition, essential to freedom of trade, 5. - - Comptroller of Currency, Report of, 126*. - - Conant, Charles A., on Establishment of prices, 28. - - Conant, Charles A., on Short-sales, 89*, 93*; - on manipulation, 175*. - - Conant, Charles A., on Stock Exchange Quotations, 29*. - - Conant, Charles A., on Value of American Securities, 14*. - - Consolidated Stock Exchange, 428. - - Consols, as affected by war, 368; - dealings in, 374. - - _Construction News_ (Chicago), 202*. - - Contango, 375–6*. - - Control of members by governors, 265. - - Conveniences for members, 304. - - Cordage Trust, 30, 311. - - Corner in Northern Pacific stock, 290. - - Corners, 30; - opinions of Hughes Commission, 423. - - _Corn Laws, History of the_, J. Shield Nicholson, 255. - - Cost of Living, 8. - - Cotton Exchange, 441. - - Coulisse, in Paris, 397, _et seq._; - membership, 398; - origin, 401; - progress, 402; - history, 404; - volume of business, 405. - - Coulissiers, 51. - - Courtois, A., on manipulation, 175*; - _Opérations de Bourse_, 393*. - - _Credit Cycles and Origin of Panics_, John Mill, 204*. - - Crises and depressions, 183*. - - Criticism of the Stock Exchange, 29. - - Crocker, W. H., on depressions, 219*. - - Curb market, 141, 431–2–3. - - Currency and the panic of 1907, 206, 210. - - Currency, famines in America, 123; - inadequate laws, 352, 357; - contrasts with London, 353. - - Currency, panic of 1893, 199*. - - - Daily settlements in N. Y., 349. - - Daly, Justice, opinion, 236*. - - Denis, H., depressions, 219*. - - Denslow, Van Buren, on Prices and Values, 6*. - - Depositors in banks, number of, 126. - - Depressions, in relation to panics, 183*. - - Deutsche Bank, opinion on Bourse Law, 78, 243. - - _Deutsche Kapitalmarkt_, by Rudolph Eberstadt, 32*. - - _Dictionnaire d’Economie Politique_, by Paul Leroy-Beaulieu, 44*. - - Discipline, as maintained on ’Change, 266–7, 277. - - Disconto-Gesellschaft, opinion on Bourse Law, 244. - - Discounting the future, 23. - - Disputes and differences, adjustment of, 294. - - Diversions of members, 313. - - Doremus, Robert L., on transactions, 173*. - - Dresdner Bank, opinion on Bourse Law, 78, 244. - - Duguid, Chas., _Story of the Stock Exchange_, 32*. - - - Eadie, J, on panics, 219*. - - Eames, Francis L., on The N. Y. Stock Exchange, 32*. - - East India Company, 325. - - Eberstadt, Rudolph, _Der Deutsche Kapitalmarkt_, 32*. - - _Economics_, by Francis W. Blackmar, 255. - - _Economiste Français_, 163*, 349*. - - Economist, London, 16, 18*, 19, 197. (See Hirst, Francis W.). - - Egyptian Speculation, 62. - - Emery, Henry Crosby, on Advantages of broad speculative markets, 61. - - Emery, Henry Crosby, on German Bourse Law, 239, _et seq._; - on control of speculation, 256–7–8. - - Emery, Henry Crosby, on Speculation on the Stock Exchange and Produce - Exchanges of the U. S., 49*. - - Employes on ’Change, 289, 318. - - _Engineering News_, 202*. - - England, capital exports, 28. - - England, Laws of, affecting company organizations, 147. - - England, Laws, of affecting short sales, 95. - - English capital in America, 20. - - _English Corn Laws_, History of, by J. Shield Nicholson 255. - - _English Economic History, Introduction to_, by W. T. Ashley, 224. - - Exchange, Origin of, 12*. - - Exchange Register, in Germany, 241. - - Exchanges, in London in early days, 323. - - Exchequer, English, 324*. - - Exports of capital by London, 366. - - - Failures, of stockbrokers, 112, 152, 156; - in London, 331; - in Paris, 350, 395; - opinion of Hughes Commission, 423. - - Fairs, in primitive countries, 5. - - Farmers’ Alliance, 7. - - Farmers, Speculation by, 83. - - Fayant, Frank, _Some Thoughts on Speculation_, 32*, 68*, 239, 252*. - - Fictitious transactions, 425. - - _Financial Crises_, etc., by Theo. E. Burton, 183*, 191*. - - Financial press in London, 348. - - _Fortnightly Review_, on panics, 199*. - - Forum, at Rome, 262. - - France, Volumes of Securities in, 406. - - French Government, attitude toward stockbrokers’ monopoly, 401. - - Future delivery, transactions for, in France, 402, 410; - in America, 438. - - - Gambling as distinguished from speculating, 53–54, 417, 419, 421. - - Gambling in bucket-shops, 144. - - Georges-Levy, on short sales, 93. - - _German Bourse Law, The_, by Geo. Plochmann, 245*. - - German Bourse Law of 1896, 77, 236 _et seq._, 254; - opinion of Hughes Commission, 444. - - German credit in 1912, 372. - - _German Exchange Act of 1896_, by Dr. Ernst Loeb, 238*. - - German Government bonds, decline in, 368. - - Germany, Regulation of the Stock Exchange in, 61*. - - Gold Room, 251, 307. - - Goldsmiths’ Notes, in England, 324. - - Gold Speculation Act of 1864, 249. - - Gossip and news on ’Change, 295. - - Gould, Jay, 30. - - Government bonds, as affected by war, 368. - - Governors of the Stock Exchange on Freedom of Margin transactions, 59*; - on Margin transactions, 52*; - on Short sales, 90; - on Usury law, 105*; - on Incorporation, 235. - - Governors of the Stock Exchange, their power over members, 139, 154; - method of choosing, 266. - - Grain Exchanges, 10. - - Grosscup, Judge, on Value of Stock Exchange, 65. - - Guarantee of stockbrokers, 154; - in Paris, 395. - - Guild of Goldsmiths, 324. - - Guillard, Edmond, on Origin of Stock Exchanges, 16*. - - - Hadley, Arthur T., _Economics_, 250. - - _Harvard Law Review_, 32*. - - Hatch Anti-Option Bill, 55, 252. - - Hazing of new members, 276. - - Hedging in cotton futures, 81, 94, 416, 439. - - Hirst, Francis W., on Early Exchange in London, 327*; - on Stock Exchange rules, 330; - on functions of jobbers, 336; - on creation of new debt, 365*; - on Chinese Speculation, 63; - Early English Speculation, 18*; - _The Stock Exchange_, 32*, 45*, 63*. - - History of N. Y. Stock Exchange, 306. - - _History of the People of the U. S._, by McMaster, 30. - - Hobbies of members, 312. - - Hocking Coal & Iron Company, 30, 311. - - Holding Companies, 429. - - Holidays on ’Change, 301. - - Holmes, Justice, of the U. S. Supreme Court, on speculation, 66. - - Honor and character on ’Change, 264. - - Huebner, S. S. on Stock Exchange safeguards, 25; - on Usefulness of bears, 78; - on discounting future, 190. - - Hughes Commission on German Bourse Law, 245; - on Margins, 52; - on Short selling, 80; - on Curb market 142. (See also Appendix.) - - _Hughes Investigation, The_, by Horace White, 64*. - - Hyndman, H. M., Commercial Crises, 219. - - - Incorporation of Stock Exchange (London), 231–5. - - Incorporation of Stock Exchange, N. Y., 139, 235, 265; - opinion of Hughes Commission, 427. - - Ingall, C. D., _The Stock Exchange_ (London), 32*. - - Insurance, as effected by hedging, 81. - - Interest, rates of, in 1909–10, 116. - - Investors in France, caution of, 408. - - Inventor, dependent upon capital, 13. - - Investment, its relation to speculation, 44. - - Investor, Origin of word, 16. - - - Jevons, W. S., on prices, 7*. - - Jevons, W. S., on sun-spots, 217. - - Jobbers, in London, 277, 335; - relation to brokers, 336, 340; - methods, 372 _et seq._ - - Johnson, Joseph F., on panic of 1907, 208*. - - Jonathan’s Coffee House, 327. - - _Journal of Accountancy_, regulation of speculation, 258*. - - _Journal of Commerce and Commercial Bulletin_, on Volume of Securities - in America, 15, 339. - - _Journal of Political Economy_ 53*, 64*, 82*, 143*, 147*, 159*, 196*. - - Juglar, Clément, _Des Crises Commerciales_, 185*, 219*. - - - Kaffir Circus in London, 62, 365, 370, 376. - - Keene, James R., 30. - - - Labor, Dependence on the Stock Exchange, 43. - - Labor, Percentage of, in America, 42. - - _Laissez faire_, theory of, 253. - - Landells, Walter, on London Stock Exchange, 376–7*. - - Law in England affecting companies, 147, 434. - - Law in England, affecting short sales, 95; - affecting speculation, 225. - - Law in N. Y. regulating speculation, 247; - repealed 248. - - Law, John, 390*. - - Laws affecting short sales in U. S., 95, 246; - repealed, 247; - decision of court, 416, 420. - - Laws of France, short sales, 404, 410. - - Laws of various states, affecting speculation, 251. - - Law, Usury, in N. Y., 105*. - - Leeman Act of 1867, 227. - - Legislation recommended by Hughes Commission, 435. - - Lending and borrowing stocks, N. Y. and London, 354–5. - - Leroy-Beaulieu, Anatole, on Paris Bourse, 383 _et seq._, 387*. - - Leroy-Beaulieu, Paul, _Nouveau Dictionnaire d’Economie Politique_, 44*; - on Publicity, 163, 349; - on Speculation, 44. - - Lexis, Dr. W., on Necessity for Stock Exchanges, 21. - - Liability of stockbrokers in Paris, 395. - - Listing of new securities, 168; - N. Y. and London 363; - vendor’s shares, 364; - opinion of Hughes Commission, 424. - - _Lloyds_, 38. - - Lloyd, W. W., on Panics, 219*. - - “Loan Crowd,” 290. - - Loans by banks to stockbrokers, 110, 190. - - _Lombard Street_, by Walter Bagehot, 92*, 379*. - - London Exchanges in XVI Century, 323. - - _London Money Market, Rise of the_, by W. R. Bisschop, 379*. - - London Stock Exchange, history of, 326, _et seq._; - management of, 329; - rules, 330, 364*; - membership, 332, 335; - stockbrokers, 332; - admission, 332–3; - entrance fees, etc., 333; - capital stock, 333*; - precautions against monopoly, 333; - jobbers, 336–7–8; - commissions, 342; - settlement days, 344; - publicity, 347; - borrowings from banks, 353; - transfers, 355; - volume of business, 356–7; - official list, 358 _et seq._; - securities as affected by war, 368; - the day’s work, 372. - - London Stock Exchange, unincorporated, 267*. - - London, The world’s banker, 366. - - Luncheon Club, The, 305. - - - Manhattan Banking Company, 31. - - Manipulation, efforts of governors to suppress, 169, 174. - - Manipulation, opinions of Courtois and Conant,175*. - - Manipulation, opinion of Emery, 257; - comment of Hughes Commission, 421. - - Manipulation prohibited, 254 - - Manipulation, value of, 170. - - Margin, speculation on, 50, 51, 52. - - Margins, insufficient margins prohibited, 255 and 256 - - Margins required by stockbrokers, 147. - - Margin Trading a feature of all business, 58. - - Margin Trading a matter of contract, 53. - - Margin Trading defined by Hughes Commission, 419. - - Market in N. Y. compared with London, 340. - - Market in Paris as affected by stockbrokers’ monopoly, 397 _et seq._ - - Markets, defined by Hughes Commission, 415. - - Markets for produce, 6. - - Marshall, Alfred, on legislation, 255. - - Matched orders, 422. - - McCulloch, J. R., _Principles of Economics_, 46*. - - McMaster on Public Sentiment in Early Days, 30. - - McVey, Frank L., on Stock Exchange Usefulness, 41*. - - _Mechanism of the City, The_, by Ellis T. Powell, 379*. - - Memberships, how obtained, 271; - prices of, 273; - value of, 274. - - Members of Stock Exchange, interesting personalities, 312 _et seq._ - - Memorial of Paris stockbrokers, 88*. - - Metal Exchange, 443. - - Meyer, Eugene, Jr., on Panic of 1907, 196*, 203*. - - Middlemen in markets for produce, 8. - - Mills, John, on panics, 204. - - Mining shares in London, 365. - - Mississippi Bubble, 390. - - Mistakes in executing orders, 278, 293–4. - - _Modern Industrialism_, by Frank L. McVey, 41*. - - Mollien, on short sales in Paris, 89*. - - _Monetary Systems of the World_, by Maurice M. Muhleman, 208*. - - _Money and Banking_, by Horace White, 251*. - - Money, high rates for, 106*, 116, 290, 353. - - Money, rates for, as affecting speculation, 118, 430; - as affected by deferred deliveries, 352. - - Monopoly, on London Stock Exchange, precaution against, 333; - of Paris Bourse, 388 _et seq._, 399. - - Morawetz, Victor, on currency, 209*. - - Mortimer, J., _Every man his own broker_, 327*. - - Muhleman, Maurice, M., 208*. - - Mulhall, Michael G., on Prices, 219*. - - Musicians on ’Change, 316. - - - Napoleon, on short selling, 87, 89*. - - National Banks contrasted with State Banks, 103. - - National Banks of U. S., loans (1904–1907), 192. - - National Monetary Commission, 426. - - New Joanthan’s, 327. - - News and gossip on ’Change, 295. - - Newspapers, attitude toward Stock Exchange, 132. - - “New Tennessee,” 276. - - New York State Food Investigation Committee’s report, 9*. - - Neymarck, Alfred, on volume of French securities, 406, 410. - - Nicholson, J. Shield, on Corn Laws. 255. - - _North American Review_, 209*, 245*. - - Norton, Eliot, on Purchase and sales of securities, 32*. - - Norton, Eliot, on short selling, 86*. - - Notes, of stockbrokers, 111. - - - Odd-lot brokers, duties of 281; - extent of business, 282. - - Open Board of Brokers, 307. - - Opinions of floor-brokers as to market, 297. - - Overend, Gurney & Co., failure of, 376. - - - Panama mania in France, 62, 370, 408. - - Panic of 1907, conditions antecedent to, 24. - - Panic of 1873, in Austria, 197; - in America, 199*, 308. - - Panic of 1825, in England, 197; - of 1847, in England, 376. - - Panic of 1912, in Paris, 199, 200, 369. - - Panic of 1837, in U. S., 199*, 308. - - Panic of 1857, in U. S., 198–9, 308. - - Panic of 1893, in U. S., 197–8–9*. - - Panic of 1907, its origin, 189; - effect, 201. - - Panics, crises and depressions, 183*. - - Panics of the future, 184; - opinion of Mills, 204, 377. - - Paris Bourse, Balkan Crisis, 369; - after war with Germany, 383–87; - Agents de Change, 388 _et seq._; - history, 388–9; - the form of monopoly, 389; - origin of monopoly, 389–390; - regulations, 391; - “right of introduction,” 392; - exclusive privileges, 393; - settlements 394; - prohibitions, 394; - liabilities, 395; - rates of commission, 395; - methods and transactions, 396 (see coulisse); - objections to monopoly, 398 _et seq._; - differences with the coulisse, 404; - volume of business, 405; - caution of public, 408. - - _Paris Bourse, History and Methods of_, by E. Vidal, 392*. - - Parquet, in Paris, 397 _et seq._ - - Partners of members, and partnership agreements, 270–1. - - _Pears Prize Essays_, 219*. - - Personalities on ’Change, 312 _et seq._ - - Plochmann, George, on German Bourse Law, 245*. - - Powell, Ellis T., _The Mechanism of the City_, 379*. - - Pragmatism, in economic phenomena, 127. - - Prices, Relation to value, 4. - - _Principles of Economics_, by Alfred Marshall, 255. - - _Principles of Economics_, by Edwin R. A. Seligman, 42*, 254. - - _Principles of Economics_, by J. R. McCulloch, 46*. - - _Principles of Money and Banking_, by Chas. A. Conant, 93*. - - Produce Exchange, 440. - - Promoters, swindles of, 141. - - Publicity in N. Y. contrasted with London, 347. - - Pujo Committee, 176. - - Punishment of members, 267. - - Pyramiding, opinion of Hughes Commission, 420. - - - _Quarterly Review_, London, 300, 332, 377*. - - Quotations, the property of the Exchange, 436. - - - Railroads in U. S., in 1906–7, 212. - - Real Estate, Market for, 22. - - _Real Estate Record and Guide_, 202*. - - Real Estate Speculation, in N. Y., 202; - in other cities, 203. - - Receiverships, 430. - - Reforms, attitude of members toward, 311; - in listing new securities, 364. - - _Regulation of Stock Exchange in Germany_, Henry Crosby Emery, 241*. - - Rentes, as affected by war, 368; - settlement days, 394; - market for, 398, 404. - - Resolutions adopted by the Exchange; - against manipulation, 254 - against light margins, 255 - on business conduct, 255 - - Rhodes, Cecil, 377. - - _Rise of the London Money Market_, by W. R. Bisschop, 379*. - - Roosevelt, Theodore, and the panic of 1907, 210–212. - - Royal Commission of 1877, 238–9, 231–2. - - Rubber boom, in London, 62, 369. - - Russian government bonds, as affected by war, 368. - - Russian industrial securities in France, 62. - - - Salaries of employees, 318. - - “Scalping,” 355. - - Scapegoat, making the Stock Exchange a, 137. - - Schonberg, “Handbuch” on Speculation, 21*. - - Scott, S. R., on incorporation of London Stock Exchange, 233. - - Securities, Origin of, 11. - - Securities, Owners of in America, 14–15. - - Securities, Volume of in America, 14–15. - - Securities, Volume of in London, 360; - in Paris, 406, _et seq._; - in N. Y., 359–60. - - Seligman, Edwin R. A., on Legislation, 254. - - Seligman, Edwin R. A., on Principles of Economics, 42*. - - Settlement days, London Stock Exchange, 344, 349; - N. Y. Stock Exchange, 345; - comparisons, 351. - - Settling Room, in London, 372. - - Shanghai Stock Exchange, 62. - - Sherman Law, 199*. - - Short selling, opinion of Prof. Huebner, 78; - legalized in Paris, 402*; - opinion of Court, 416; - opinion of Hughes Commission, 420. - - Silver purchasing clause, repeal of, 199*. - - Smith, Adam, on Speculation, 37. - - Smith, Adam, _The Wealth of Nations_, 37. - - Smith, C. W., on depressions 219*. - - Smith Herbert Knox, on hedging cotton, 94. - - Smith, Hopkinson, on methods of brokers, 292. - - Smollett, on South Sea Bubble, 325–6. - - South Sea Bubble, 226, 325. - - Spanish government bonds, as affected by war, 368. - - Specialists, duties of, 278; - vindications of, 279; - opinion of Hughes Commission, 426. - - Speculation, a feature of all enterprise, 38. - - Speculation, in America contrasted with that abroad, 62. - - Speculation, in American development, 307; - contrasted with England, 366; - in France, 408–9. - - Speculation, in China, 62. - - Speculation, in Egypt, 62. - - Speculation, in France, 62. - - Speculation, in Gold, (1864, 1866), 250. - - Speculation, in London, 62. - - Speculation, in relation to investment, 44. - - Speculation, J. S. Mill, 47. - - Speculation not gambling, 53, 54, 416, 417, 419, 421. - - _Speculation on the Stock & Produce Exchanges of the U. S._, by Henry - Crosby Emery, 49*. - - Speculation, opinion by Judge Grosscup, 65. - - Speculation, opinion by U. S. Supreme Court, 66. - - Speculation, origin of the word, 36. - - _Speculation, Some Thoughts on_, by Frank Fayant, 32*, 68*, 239, 252*. - - Speculation, as distinguished from trading, 74. - - Sponsors of candidates for memberships, 272. - - Sportsmen on ’Change, 317. - - Stamp Tax, N. Y., 75; - in London, 355. - - Stanhope, Edward, on incorporation of London Stock Exchange, 232. - - State Banks contrasted with National Banks, 103. - - _Statist, The_ (London) on Hughes Investigation, 256. - - Stockbrokers in London (See London Stock Exchange); - in Paris, (Paris Bourse). - - Stock certificates, registered and bearer, 365. - - Stock companies in France, 410–11. - - _Stock Exchange and The Money Market_, by Horace White, 102. - - Stock Exchange, Distinction between Wall Street and, 64. - - _Stock Exchange Law and Practice_, by W. A. Bewes, 379*. - - _Stock Exchange_ (London), by C. D. Ingall & G. Withers, 32*. - - Stock Exchange, N. Y., Rules governing brokers, 138; - the day’s work 288 _et seq._ - - Stock Exchange, N. Y., the building, 304–5; - history, 307; - mechanism, 418. - - _Stock Exchange, Story of the_, by Chas. Duguid, 32*. - - _Stock Exchange, The_, by Francis W. Hirst, 32*, 45*. - - _Stock Exchange, The_ (London) Francis W. Hirst, 327*, 330*, 338, 367*. - - _Stock Exchange, The N. Y._, by Francis L. Eames, 32*. - - Stockholders, Rights of, 162, 164, 173*. - - _Stocks and Shares_, by Hartley Withers, 379*. - - “Switching,” 74. - - - Telephone clerks, on ’Change, their duties, 289. - - Temperature of air on ’Change, how regulated, 305. - - _Ten years regulation of the Stock Exchange in Germany_, by Henry - Crosby Emery, 61*. - - Ticker, value of, 162*; - in London, 341–2; - in N. Y., 347, 437. - - Ticket Day in London, 373. - - Timidity of capital, 17. - - Tontine Coffee House, 307. - - Tooke, Thos., on Prices, 7*. - - Traders, as distinguished from speculators, 74; - operations of, 285. - - Trading posts, on ’Change, 289. - - Transactions in securities, panic of 1907, 216. - - Transactions on ’Change, how conducted, 288, _et seq._ - - Transfer of certificates, in London, 355, 365, 374. - - Transfer Tax, in N. Y., 75, in London, 355. - - Trust Laws, attitude of brokers toward, 311. - - - Unlisted Department of Stock Exchange, 166. - - Usury Law, in N. Y., 105, 431. - - - Values, Relation to prices, 4. - - Van Vorst, Justice, opinion, 236*. - - Vendors’ shares, in London, 364. - - Vidal, E., _History and methods of Paris Bourse_, 392; - monopoly of Bourse, 399, 401*, 403, 404. - - Vidal, E., on Origin of Bourse and Exchanges, 12*. - - Villeplaine, Boscary de, on short selling, 88. - - Visitors’ Gallery, 286. - - - _Wall Street and the Country_, by Chas. A. Conant, 29*, 175*. - - Wall Street, distinction between the Stock Exchange and, 64. - - _Wall Street Journal_, 83*, 136, 139, 145, 165*, 173*, 178*, 372*. - - Wall Street not the Stock Exchange, 428. - - War, between England and a first-rate power, 367, _et seq._ - - War, cost of, 367. - - War, Franco-German, 383, _et seq._ - - “Wash Sales,” 168, 422. - - “Welchers,” 227, 249; in Paris, 402. - - _Wealth of Nations, The_, 37. - - White, Horace, on banking laws, 102, 104; - on company promoters, 142, 147*; - on gold speculation, 251; - on margin transactions, 53*; - on money rates, 115; - on short selling, 80; - on Stock market quotations, 15; - on the distinction between Wall Street and the Stock Exchange, 64; - on the Hughes Commission, 159; - on the panic of 1907, 196; - on the panics of 1837, 1857 & 1873, 199*. - - Withers, G., _The Stock Exchange_ (London), 32*. - - Withers, Hartley, _Stocks and Shares_, 379*. - - Witwatersrand, discovery of gold in, 365. - - Wood, Henry, _Political Economy_, 219*. - - Woolley, C., _Phases of Panics_, 219*. - - _World’s Wealth in Securities_, by Chas. A. Conant, 288*. - - _World’s Work, The_, 294*. - - Worry on Change, 302 _et seq._ - - _Worry the Disease of the Age_, by Dr. C. W. Saleeby 304*. - - - _Yale Review_, 61*. - - _Yale Review_, on German Stock Exchange Law, 241*. - - _Yale Review_, on panic of 1907, 196*. - - “Yankee market,” in London, 300. - - -[Illustration] - - THE COUNTRY LIFE PRESS - GARDEN CITY, N. Y. - - - - -Transcriber’s Notes - - -Punctuation, hyphenation, and spelling were made consistent when a -predominant preference was found in the original book; otherwise they -were not changed. - -Questionable accent marks in non-English words were neither added nor -removed by Transcriber. - -Simple typographical errors were corrected; unbalanced quotation -marks were remedied when the change was obvious, and otherwise left -unbalanced. - -Duplicate chapter title pages were removed by Transcriber. - -The index was not systematically checked for proper alphabetization or -correct page references. The original book contained a supplement of -omissions to the Index; in this eBook, those omissions have been merged -into the Index. - -Footnotes, originally at the bottoms of pages, have been collected, -sequentially renumbered, and moved to follow the Appendix. - -The two illustrations are the publisher’s and printer’s logos. - -Footnote 30, originally on page 68, was not referenced in the text. -Transcriber added a reference at the end of the text on that page. - -Page 255: “Section 5 of Article XVI” was printed imperfectly, so the -“5” may be a “3”. - -Page 408: Transcriber added “to” in “from time to time”. - -Page 452: The Index reference to a footnote on page 258 is not -correct. - - - - - -End of the Project Gutenberg EBook of The Stock Exchange from Within, by -W. C. van Antwerp - -*** END OF THIS PROJECT GUTENBERG EBOOK THE STOCK EXCHANGE FROM WITHIN *** - -***** This file should be named 60082-0.txt or 60082-0.zip ***** -This and all associated files of various formats will be found in: - http://www.gutenberg.org/6/0/0/8/60082/ - -Produced by Charlie Howard and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - -Updated editions will replace the previous one--the old editions will -be renamed. - -Creating the works from print editions not protected by U.S. copyright -law means that no one owns a United States copyright in these works, -so the Foundation (and you!) can copy and distribute it in the United -States without permission and without paying copyright -royalties. Special rules, set forth in the General Terms of Use part -of this license, apply to copying and distributing Project -Gutenberg-tm electronic works to protect the PROJECT GUTENBERG-tm -concept and trademark. Project Gutenberg is a registered trademark, -and may not be used if you charge for the eBooks, unless you receive -specific permission. If you do not charge anything for copies of this -eBook, complying with the rules is very easy. You may use this eBook -for nearly any purpose such as creation of derivative works, reports, -performances and research. They may be modified and printed and given -away--you may do practically ANYTHING in the United States with eBooks -not protected by U.S. copyright law. Redistribution is subject to the -trademark license, especially commercial redistribution. - -START: FULL LICENSE - -THE FULL PROJECT GUTENBERG LICENSE -PLEASE READ THIS BEFORE YOU DISTRIBUTE OR USE THIS WORK - -To protect the Project Gutenberg-tm mission of promoting the free -distribution of electronic works, by using or distributing this work -(or any other work associated in any way with the phrase "Project -Gutenberg"), you agree to comply with all the terms of the Full -Project Gutenberg-tm License available with this file or online at -www.gutenberg.org/license. - -Section 1. General Terms of Use and Redistributing Project -Gutenberg-tm electronic works - -1.A. By reading or using any part of this Project Gutenberg-tm -electronic work, you indicate that you have read, understand, agree to -and accept all the terms of this license and intellectual property -(trademark/copyright) agreement. If you do not agree to abide by all -the terms of this agreement, you must cease using and return or -destroy all copies of Project Gutenberg-tm electronic works in your -possession. If you paid a fee for obtaining a copy of or access to a -Project Gutenberg-tm electronic work and you do not agree to be bound -by the terms of this agreement, you may obtain a refund from the -person or entity to whom you paid the fee as set forth in paragraph -1.E.8. - -1.B. "Project Gutenberg" is a registered trademark. It may only be -used on or associated in any way with an electronic work by people who -agree to be bound by the terms of this agreement. There are a few -things that you can do with most Project Gutenberg-tm electronic works -even without complying with the full terms of this agreement. See -paragraph 1.C below. There are a lot of things you can do with Project -Gutenberg-tm electronic works if you follow the terms of this -agreement and help preserve free future access to Project Gutenberg-tm -electronic works. See paragraph 1.E below. - -1.C. The Project Gutenberg Literary Archive Foundation ("the -Foundation" or PGLAF), owns a compilation copyright in the collection -of Project Gutenberg-tm electronic works. Nearly all the individual -works in the collection are in the public domain in the United -States. If an individual work is unprotected by copyright law in the -United States and you are located in the United States, we do not -claim a right to prevent you from copying, distributing, performing, -displaying or creating derivative works based on the work as long as -all references to Project Gutenberg are removed. Of course, we hope -that you will support the Project Gutenberg-tm mission of promoting -free access to electronic works by freely sharing Project Gutenberg-tm -works in compliance with the terms of this agreement for keeping the -Project Gutenberg-tm name associated with the work. You can easily -comply with the terms of this agreement by keeping this work in the -same format with its attached full Project Gutenberg-tm License when -you share it without charge with others. - -1.D. The copyright laws of the place where you are located also govern -what you can do with this work. Copyright laws in most countries are -in a constant state of change. If you are outside the United States, -check the laws of your country in addition to the terms of this -agreement before downloading, copying, displaying, performing, -distributing or creating derivative works based on this work or any -other Project Gutenberg-tm work. The Foundation makes no -representations concerning the copyright status of any work in any -country outside the United States. - -1.E. Unless you have removed all references to Project Gutenberg: - -1.E.1. The following sentence, with active links to, or other -immediate access to, the full Project Gutenberg-tm License must appear -prominently whenever any copy of a Project Gutenberg-tm work (any work -on which the phrase "Project Gutenberg" appears, or with which the -phrase "Project Gutenberg" is associated) is accessed, displayed, -performed, viewed, copied or distributed: - - This eBook is for the use of anyone anywhere in the United States and - most other parts of the world at no cost and with almost no - restrictions whatsoever. You may copy it, give it away or re-use it - under the terms of the Project Gutenberg License included with this - eBook or online at www.gutenberg.org. If you are not located in the - United States, you'll have to check the laws of the country where you - are located before using this ebook. - -1.E.2. If an individual Project Gutenberg-tm electronic work is -derived from texts not protected by U.S. copyright law (does not -contain a notice indicating that it is posted with permission of the -copyright holder), the work can be copied and distributed to anyone in -the United States without paying any fees or charges. If you are -redistributing or providing access to a work with the phrase "Project -Gutenberg" associated with or appearing on the work, you must comply -either with the requirements of paragraphs 1.E.1 through 1.E.7 or -obtain permission for the use of the work and the Project Gutenberg-tm -trademark as set forth in paragraphs 1.E.8 or 1.E.9. - -1.E.3. If an individual Project Gutenberg-tm electronic work is posted -with the permission of the copyright holder, your use and distribution -must comply with both paragraphs 1.E.1 through 1.E.7 and any -additional terms imposed by the copyright holder. Additional terms -will be linked to the Project Gutenberg-tm License for all works -posted with the permission of the copyright holder found at the -beginning of this work. - -1.E.4. Do not unlink or detach or remove the full Project Gutenberg-tm -License terms from this work, or any files containing a part of this -work or any other work associated with Project Gutenberg-tm. - -1.E.5. Do not copy, display, perform, distribute or redistribute this -electronic work, or any part of this electronic work, without -prominently displaying the sentence set forth in paragraph 1.E.1 with -active links or immediate access to the full terms of the Project -Gutenberg-tm License. - -1.E.6. You may convert to and distribute this work in any binary, -compressed, marked up, nonproprietary or proprietary form, including -any word processing or hypertext form. However, if you provide access -to or distribute copies of a Project Gutenberg-tm work in a format -other than "Plain Vanilla ASCII" or other format used in the official -version posted on the official Project Gutenberg-tm web site -(www.gutenberg.org), you must, at no additional cost, fee or expense -to the user, provide a copy, a means of exporting a copy, or a means -of obtaining a copy upon request, of the work in its original "Plain -Vanilla ASCII" or other form. Any alternate format must include the -full Project Gutenberg-tm License as specified in paragraph 1.E.1. - -1.E.7. Do not charge a fee for access to, viewing, displaying, -performing, copying or distributing any Project Gutenberg-tm works -unless you comply with paragraph 1.E.8 or 1.E.9. - -1.E.8. You may charge a reasonable fee for copies of or providing -access to or distributing Project Gutenberg-tm electronic works -provided that - -* You pay a royalty fee of 20% of the gross profits you derive from - the use of Project Gutenberg-tm works calculated using the method - you already use to calculate your applicable taxes. The fee is owed - to the owner of the Project Gutenberg-tm trademark, but he has - agreed to donate royalties under this paragraph to the Project - Gutenberg Literary Archive Foundation. Royalty payments must be paid - within 60 days following each date on which you prepare (or are - legally required to prepare) your periodic tax returns. Royalty - payments should be clearly marked as such and sent to the Project - Gutenberg Literary Archive Foundation at the address specified in - Section 4, "Information about donations to the Project Gutenberg - Literary Archive Foundation." - -* You provide a full refund of any money paid by a user who notifies - you in writing (or by e-mail) within 30 days of receipt that s/he - does not agree to the terms of the full Project Gutenberg-tm - License. You must require such a user to return or destroy all - copies of the works possessed in a physical medium and discontinue - all use of and all access to other copies of Project Gutenberg-tm - works. - -* You provide, in accordance with paragraph 1.F.3, a full refund of - any money paid for a work or a replacement copy, if a defect in the - electronic work is discovered and reported to you within 90 days of - receipt of the work. - -* You comply with all other terms of this agreement for free - distribution of Project Gutenberg-tm works. - -1.E.9. If you wish to charge a fee or distribute a Project -Gutenberg-tm electronic work or group of works on different terms than -are set forth in this agreement, you must obtain permission in writing -from both the Project Gutenberg Literary Archive Foundation and The -Project Gutenberg Trademark LLC, the owner of the Project Gutenberg-tm -trademark. Contact the Foundation as set forth in Section 3 below. - -1.F. - -1.F.1. Project Gutenberg volunteers and employees expend considerable -effort to identify, do copyright research on, transcribe and proofread -works not protected by U.S. copyright law in creating the Project -Gutenberg-tm collection. Despite these efforts, Project Gutenberg-tm -electronic works, and the medium on which they may be stored, may -contain "Defects," such as, but not limited to, incomplete, inaccurate -or corrupt data, transcription errors, a copyright or other -intellectual property infringement, a defective or damaged disk or -other medium, a computer virus, or computer codes that damage or -cannot be read by your equipment. - -1.F.2. LIMITED WARRANTY, DISCLAIMER OF DAMAGES - Except for the "Right -of Replacement or Refund" described in paragraph 1.F.3, the Project -Gutenberg Literary Archive Foundation, the owner of the Project -Gutenberg-tm trademark, and any other party distributing a Project -Gutenberg-tm electronic work under this agreement, disclaim all -liability to you for damages, costs and expenses, including legal -fees. YOU AGREE THAT YOU HAVE NO REMEDIES FOR NEGLIGENCE, STRICT -LIABILITY, BREACH OF WARRANTY OR BREACH OF CONTRACT EXCEPT THOSE -PROVIDED IN PARAGRAPH 1.F.3. YOU AGREE THAT THE FOUNDATION, THE -TRADEMARK OWNER, AND ANY DISTRIBUTOR UNDER THIS AGREEMENT WILL NOT BE -LIABLE TO YOU FOR ACTUAL, DIRECT, INDIRECT, CONSEQUENTIAL, PUNITIVE OR -INCIDENTAL DAMAGES EVEN IF YOU GIVE NOTICE OF THE POSSIBILITY OF SUCH -DAMAGE. - -1.F.3. LIMITED RIGHT OF REPLACEMENT OR REFUND - If you discover a -defect in this electronic work within 90 days of receiving it, you can -receive a refund of the money (if any) you paid for it by sending a -written explanation to the person you received the work from. If you -received the work on a physical medium, you must return the medium -with your written explanation. The person or entity that provided you -with the defective work may elect to provide a replacement copy in -lieu of a refund. If you received the work electronically, the person -or entity providing it to you may choose to give you a second -opportunity to receive the work electronically in lieu of a refund. If -the second copy is also defective, you may demand a refund in writing -without further opportunities to fix the problem. - -1.F.4. Except for the limited right of replacement or refund set forth -in paragraph 1.F.3, this work is provided to you 'AS-IS', WITH NO -OTHER WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT -LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE. - -1.F.5. Some states do not allow disclaimers of certain implied -warranties or the exclusion or limitation of certain types of -damages. If any disclaimer or limitation set forth in this agreement -violates the law of the state applicable to this agreement, the -agreement shall be interpreted to make the maximum disclaimer or -limitation permitted by the applicable state law. The invalidity or -unenforceability of any provision of this agreement shall not void the -remaining provisions. - -1.F.6. INDEMNITY - You agree to indemnify and hold the Foundation, the -trademark owner, any agent or employee of the Foundation, anyone -providing copies of Project Gutenberg-tm electronic works in -accordance with this agreement, and any volunteers associated with the -production, promotion and distribution of Project Gutenberg-tm -electronic works, harmless from all liability, costs and expenses, -including legal fees, that arise directly or indirectly from any of -the following which you do or cause to occur: (a) distribution of this -or any Project Gutenberg-tm work, (b) alteration, modification, or -additions or deletions to any Project Gutenberg-tm work, and (c) any -Defect you cause. - -Section 2. Information about the Mission of Project Gutenberg-tm - -Project Gutenberg-tm is synonymous with the free distribution of -electronic works in formats readable by the widest variety of -computers including obsolete, old, middle-aged and new computers. It -exists because of the efforts of hundreds of volunteers and donations -from people in all walks of life. - -Volunteers and financial support to provide volunteers with the -assistance they need are critical to reaching Project Gutenberg-tm's -goals and ensuring that the Project Gutenberg-tm collection will -remain freely available for generations to come. In 2001, the Project -Gutenberg Literary Archive Foundation was created to provide a secure -and permanent future for Project Gutenberg-tm and future -generations. To learn more about the Project Gutenberg Literary -Archive Foundation and how your efforts and donations can help, see -Sections 3 and 4 and the Foundation information page at -www.gutenberg.org Section 3. Information about the Project Gutenberg -Literary Archive Foundation - -The Project Gutenberg Literary Archive Foundation is a non profit -501(c)(3) educational corporation organized under the laws of the -state of Mississippi and granted tax exempt status by the Internal -Revenue Service. The Foundation's EIN or federal tax identification -number is 64-6221541. Contributions to the Project Gutenberg Literary -Archive Foundation are tax deductible to the full extent permitted by -U.S. federal laws and your state's laws. - -The Foundation's principal office is in Fairbanks, Alaska, with the -mailing address: PO Box 750175, Fairbanks, AK 99775, but its -volunteers and employees are scattered throughout numerous -locations. Its business office is located at 809 North 1500 West, Salt -Lake City, UT 84116, (801) 596-1887. Email contact links and up to -date contact information can be found at the Foundation's web site and -official page at www.gutenberg.org/contact - -For additional contact information: - - Dr. Gregory B. Newby - Chief Executive and Director - gbnewby@pglaf.org - -Section 4. Information about Donations to the Project Gutenberg -Literary Archive Foundation - -Project Gutenberg-tm depends upon and cannot survive without wide -spread public support and donations to carry out its mission of -increasing the number of public domain and licensed works that can be -freely distributed in machine readable form accessible by the widest -array of equipment including outdated equipment. Many small donations -($1 to $5,000) are particularly important to maintaining tax exempt -status with the IRS. - -The Foundation is committed to complying with the laws regulating -charities and charitable donations in all 50 states of the United -States. Compliance requirements are not uniform and it takes a -considerable effort, much paperwork and many fees to meet and keep up -with these requirements. We do not solicit donations in locations -where we have not received written confirmation of compliance. To SEND -DONATIONS or determine the status of compliance for any particular -state visit www.gutenberg.org/donate - -While we cannot and do not solicit contributions from states where we -have not met the solicitation requirements, we know of no prohibition -against accepting unsolicited donations from donors in such states who -approach us with offers to donate. - -International donations are gratefully accepted, but we cannot make -any statements concerning tax treatment of donations received from -outside the United States. U.S. laws alone swamp our small staff. - -Please check the Project Gutenberg Web pages for current donation -methods and addresses. Donations are accepted in a number of other -ways including checks, online payments and credit card donations. To -donate, please visit: www.gutenberg.org/donate - -Section 5. General Information About Project Gutenberg-tm electronic works. - -Professor Michael S. Hart was the originator of the Project -Gutenberg-tm concept of a library of electronic works that could be -freely shared with anyone. For forty years, he produced and -distributed Project Gutenberg-tm eBooks with only a loose network of -volunteer support. - -Project Gutenberg-tm eBooks are often created from several printed -editions, all of which are confirmed as not protected by copyright in -the U.S. unless a copyright notice is included. Thus, we do not -necessarily keep eBooks in compliance with any particular paper -edition. - -Most people start at our Web site which has the main PG search -facility: www.gutenberg.org - -This Web site includes information about Project Gutenberg-tm, -including how to make donations to the Project Gutenberg Literary -Archive Foundation, how to help produce our new eBooks, and how to -subscribe to our email newsletter to hear about new eBooks. - |