“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.