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.