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.