The remedy lies, first with the members themselves in striving to attain continually to a higher standard of business morality, and second with increased watchfulness by the committee having this matter in charge. In point of fact it is apparent that both these solutions are now being employed to a greater extent than ever before. The two failures that occurred some years ago as a result of this iniquitous practice hurt the Exchange, and stung the members to the quick. It can never happen again if the vigilance of the governors can prevent it, and yet every now and then a bank fails even under the watchful eye of the bank examiner. No committee and no group of committees can watch the books of 600 houses engaged in a business in which the dividing line between sound and unsound business may be crossed and recrossed with surprising suddenness many times a day. The members themselves must look to this, and that is what they are doing to-day, as never before, with an earnestness begotten of real pride in their great organization.
If they do not do it, if they relax in any degree the vigilance upon which the proper conduct of their business depends in this important respect, they will be forced sooner or later to resort to the plan of guaranteeing the accounts of their fellow members, or to submit to that form of government incorporation or regulation which must impair, if it does not actually destroy, their usefulness. Members must also see to it that manipulation in its improper forms is driven out of the Exchange, and that every conceivable precaution is taken in the listing of new securities. These matters I shall discuss elsewhere. Meantime it is cheering to note that Stock Exchange failures, whether arising from this or any other cause, are diminishing in number. In London, at the account day immediately following the failure of the house of Baring, thirty Stock Exchange houses announced their inability to meet their obligations. Certainly the New York Stock Exchange has not witnessed so many failures in ten years.
One of the many excellent results of the work of the Hughes Committee from the standpoint of the Stock Exchange was the publicity that came of it. Critics of the institution had long found fault with it because of its atmosphere of aloofness, the air of mystery that seemed to surround it, its silence under attack, and its apparent unwillingness to defend itself from adverse comment. This reticence, however, while it did harm, was more apparent than real. In so far as the Stock Exchange is concerned the advantages of publicity have long been recognized. The difficulty has been in having its purposes and its methods properly attested by competent authority in a way that would enlighten the public and carry conviction. Members and friends of the Exchange feel very strongly that in this day and age, when the spirit of publicity is in the air, the Stock Exchange should fall in line with a resolute determination to assert itself and make itself heard on all proper occasions.
If a sub-committee of Congress retains as counsel a shrewd lawyer who by devious ex-parte methods reads into the record and thence into the newspapers only such biased and prejudiced information as will do harm to the Exchange, while rigidly excluding all that properly belongs there by way of refutation and explanation, energetic steps should be taken to remedy this obvious injustice by invoking that spirit of fair play which is essential to any judicial inquiry. These are not the days of the Inquisition. We have progressed beyond the point of the Star Chamber. Members of the Stock Exchange know that they will receive fair play from the newspapers whenever they seek it, but they cannot expect to find their side of the case stated unless they themselves take the necessary steps to secure its presentation. And the way to do this is to proceed with energy and determination against every avenue from which the malicious slander or the insidious suggestion emanates.
The time has passed to sit supinely under every sinister attack and imagine that a consciousness of rectitude will suffice as an answer. Let the Exchange bestir itself. If, as happened very recently, a judge on the bench can so lose his poise as to say to a common thief at the bar, “You have committed a petty theft and you must go to jail--but had you gone down to the Stock Exchange and stolen a million you would go free”--such an unworthy utterance should be handled promptly and without gloves by the Exchange authorities, and the same course of treatment should be applied vigorously to every thoughtless minister of the gospel and every cheap politician who, because the Exchange has so long remained silent, may think that such silence entitles him to utter any libel that comes to mind. The newspaper that publishes the original utterance of this judge or that preacher will publish also the steps taken by the Exchange to bring him to book, and even though the slanderer may escape the consequences of his act through the technicalities of the law, or otherwise, the knowledge that the Exchange is at last aroused from its lethargy and in a fighting mood will serve to deter others from similar indiscretions. I violate no confidence when I say that henceforth the Stock Exchange will be found defending itself manfully, and I venture to remind all noisy seekers of notoriety that “thrice is he armed who hath his quarrel just.”
The Stock Exchange has felt, since the report of the Hughes Commission in 1909, that such a report, by such a body of men, would inevitably stay the hand of many of its detractors by showing them just what the Exchange is trying to do, and just how the work is done. “The committee,” says its chairman, “was in session about six months. Its expenses were paid by the members themselves, and since frugality was a necessity the services of the stenographers were dispensed with, the members taking only such notes of the testimony of witnesses as each one deemed important to the matter in hand. The officers of all the Exchanges in New York City were invited to appear before the committee and answer questions both orally and in writing, and all of them responded promptly and courteously, as often as they were asked to do so. Many volunteer witnesses, citizens of the State, were heard. None such was refused a hearing. Citizens of other States were not called, or accepted, as witnesses unless they had given evidence, by published writings or otherwise, that they had something of value to contribute to the discussion.”[50] This committee was composed of Horace White, Chairman; Charles A. Schieren, David Leventritt, Clark Williams, John B. Clark, Willard V. King, Samuel H. Ordway, Edward D. Page, Charles Sprague Smith, Maurice L. Muhleman.
Nobody who read these names doubted the independence and public spirit of its members. It was precisely the sort of committee that all fair-minded men welcomed. The high character of the members carried assurance of their good faith; their wisdom and practical experience meant a critical analysis of the subject; their independence of spirit made a whitewash impossible. Here then was the long looked for solution.[51] If there were abuses, nobody was more anxious to know of them and of the remedies for them than the members of the Exchange; if indefensible conditions existed nobody stood readier to correct them. It was felt that this was the first and greatest step toward publicity under the right conditions, and that a valuable contribution to the popular knowledge of an intricate and greatly misunderstood subject would result. There was nothing ex-parte or one-sided about the committee’s deliberations; everybody with a grievance might state it, and both sides were accorded fair play. But, _mirabile dictu_, the very fact of its fairness is found, three years later, to afford a reason for flouting it at the hands of counsel for a congressional sub-committee that will not hear both sides! Is there anything just or equitable in the proceedings of such a body, or in the prejudiced emanations of its precious lawyer? Is it conceivable that the law-making branch of our government will give serious heed to a report thus conceived in bias and born in inquisition? I think not.
Passing to more agreeable topics, the late Addison Cammack is said to have remarked on one occasion that publicity was ruining the business of Wall Street and the Stock Exchange and would ultimately drive it all away. Those were the days of inadequate and unreliable balance sheets, of suppressed reports of earnings and assets, of accounts that were never subjected to independent audits, and of a general atmosphere of mystery that led to financial abuses of all kinds. As a result of those conditions there was created in the public mind another vague aversion toward the Stock Exchange, and a popular prejudice which has been hard to dispel. Cammack had been brought up in the old school; he saw what was coming, but he mistook causes for effects. He would probably turn in his grave could he see the new conditions and contrast them with the old. As a matter of fact nothing could be more democratic in principle than the way the business is conducted nowadays. The rights of stockholders to information, the reports and balance sheets submitted to them, the mass of Wall Street financial material in the magazines and journals, the stock ticker, the news ticker, the printed news bulletins, the card index system, the statistical manuals and the quotation lists published in the morning and evening newspapers, together with the market letters constantly circulated by brokerage houses, these are evidences that the public is entitled to full information and that many avenues by which it may safeguard its interests are always open.[52]
It has long been known that investors and speculators in America enjoy vastly more safety in their market operations through these various avenues of publicity than do investors and speculators abroad. There are no tickers worthy of the name across the water, and the daily list of business done, as published in our newspapers, with bid and asked prices and total transactions in detail, is unheard of among all the Bourses of Europe. The eminent French economist, Paul Leroy-Beaulieu, speaks very earnestly of the superiority of our New York Stock Exchange system in this matter; he says the need for a similar method in France is “very urgent,” that the information thus spread broadcast is “very instructive,” that the pledge of publicity “is better assured in the United States than in any other country of the world,” and that an immediate reform along these lines is “absolutely necessary” in Paris in the interest of the public.[53]
This leads to another word of caution suggested by the fact that the public, despite what is done for it, does not always avail itself of these safeguards. Men buy worthless mining stocks without bothering to inquire into their bona fides. They put their savings into new and untried enterprises and they neither read the balance sheets nor attend the meetings. A thousand stockholders will attend a meeting in London and they will have their questions answered whether the majority in control likes it or not. In New York almost nobody attends these meetings. The stockholder’s right to information is absolute, but he does not go and get it, and so finally when something goes wrong he writes angry letters to the newspapers and damns both Wall Street and the Stock Exchange because he has been burned, although the fire escape and the extinguisher were always at his hand. “It is all very well” says the _Wall Street Journal_, “to talk about what the law, the newspaper press, and the Stock Exchange can do to protect the investor, but the investor himself can do more than all his protectors put together. His investment, however conservative and secure, carries responsibilities as well as privileges, and it is his duty to discharge the one in order to safeguard the other.”[54]
He must learn to make inquiries, to discriminate, to use his wits, to read mortgages, to study sinking funds and operating ratios. He must eschew the financial columns of questionable newspapers and confine his attention to those of established probity. He must not put all his investment eggs into one basket. The Stock Exchange cannot do all this for him, but it is always ready to help him, and the information he requires may be had for the asking.
In a recent public address the president of a great American railway sounded an encouraging note. “We railway men,” he said, “have been in a practical school, having taken a thorough course in working economics. We have learned that a railway can thrive only as a result of the prosperity of the community it serves, and that the best policy, from the viewpoint of permanent railway interests, is one of co-operative helpfulness.”[55] The New York Stock Exchange has learned the same lesson, in a similar school. As an institution it realizes that if it is to grow in prosperity the public must grow, and that as the public is attracted to investment and speculation by the soundness of the institution through which it deals so it requires and must receive full information and an assurance of fair play. “Co-operative helpfulness” is the only way. Members of the Exchange who become discouraged now and then must bear this in mind. In the face of every harassing annoyance they must never cease their work of keeping their house in order, and of inviting that portion of the public that is open-minded to lend a hand. Their labors resemble the task of Sisyphus; like him they must cultivate the spirit of “everlasting hope,” and when unworthy assailants seek to prejudice the popular mind, they must stand forth, give blow for blow, and never say die.
Pessimists may blind their eyes to the manifold evidences of material progress on every hand, but just as the workshop, the farm, the school, the hospital, and the bank, each supplies proof of continuing improvement, so also in its sphere of usefulness does the Stock Exchange. Within a few years, for example, it has rid itself of the unlisted department, and this may very properly be mentioned as a distinct progression. Under the old system a limited number of industrial corporations were permitted to obtain a market on the Exchange for their securities, although they furnished but few figures to the Listing Committee in return. This was a practice wholly at variance with the duty of the Exchange to protect the investor, since it practically assures him that corporations admitted to the Exchange have demonstrated their worth to the authorities. That character and countenance should be given to the so-called “unlisted department” was a mistake, and it has been abolished.
In this reform the Listing Committee accomplished a twofold blessing in setting the Exchange right with the public by ridding their institution of anything approaching the blind pools of early days and at the same time forcing certain wealthy corporations to abandon their policy of concealment or lose the privilege of the floor. Certainly if the country’s leading steel corporation can afford to take its 150,000 stockholders and its 250,000 employees into its confidence and treat the whole public, including its competitors, with entire frankness, there is no insuperable difficulty about the others. In any case the desire to protect the investor, which is the controlling motive of the elaborate restrictions imposed by French and English laws in new security offerings, has advanced far in this country within the last few years, and the farther it goes the more popular it becomes.
That there is still work for the Listing Committee to do goes without saying. One of the most promising improvements that comes to mind at the moment is the one employed in London, where shares of new companies are not admitted to the Board unless a sufficiently large allotment has been made to the public. This is also the rule in New York, but perhaps we may add to its effectiveness by increasing the size of the public allotments. Another praiseworthy feature of the London system is that which has to do with vendor’s shares, which are not listed until six months after the admission of the company’s securities. Under this plan if one or more individuals secure a block of stock in payment for properties in the concern, they are prevented from unloading those shares on the public until a sufficient time has elapsed to determine the merit of the property.
Another instance of progress made in recent years in the internal mechanism of the Exchange, is the abolition of fictitious transactions or “wash sales,” utterly indefensible transactions not enforceable at law. These were always prohibited under the rules, yet despite this a flagrant instance of a violation was discovered in which the guilty were made to suffer. So far as I am aware it was the only case on record in which obvious collusion between buyer and seller in a Stock Exchange transaction was shown. The broker in this instance must have known that the Committee would demand his books and that it would appear that no genuine bargain had taken place. If he did not know it, he knows it now. The example made of him will, I fancy, prevent a recurrence of the episode.
This leads to the subject of “manipulation,” as it is termed, or the uses to which the facilities of the Exchange are sometimes put to give certain stocks an appearance of activity out of proportion to their normal movement. Now we must assume as our major premise in discussing this matter that any artificial interference with the natural operation of supply and demand is pernicious; from the standpoint of economics it is harmful. The Stock Exchange has nothing to conceal, and it recognizes not only that manipulation exists, but that at times it assumes the proportions of a real evil. Therefore it is doing what it can to stop it, and it will continue to do so. Whenever unwonted activity arises nowadays in a security long dormant, as happened very recently in the stock of a certain gas company, the governors of the Exchange entrusted with such things take the matter in hand and put a stop to it if obvious manipulation can be shown after investigation. The public and the newspapers know nothing about it; the vial of their criticism is poured forth only when something escapes the watchful eye of the Exchange authorities, as must inevitably happen now and then. But if these critics could know how indignant the members of the Exchange became when the Hocking Coal episode occurred, and if they could see the resolute determination of all hands to prevent another such occurrence, they would at least give the Exchange credit for faithfully attempting to suppress manipulation of the flagrant sort.
The fact is that all forms of manipulation are by no means improper; some of it performs a useful service and is a necessary and legitimate part of the functions of the Exchange. To understand how true this is let us consider, for example, the case of a corporation that has been organized, let us say, to develop a group of recently discovered coal properties in new territory. This is legitimate endeavor as applied to American enterprise; in a broad sense it is the spirit of adventure and speculation that has made our country commercially rich and powerful.
Now, in order to develop this enterprise, it is necessary to ask the public to buy its shares or its certificates of debt and thus become partners in the undertaking. In that way our great railways were built and our Western country opened to progress. But the public will not support the new enterprise until it knows something of its merits, and accordingly the company introduces its property through the medium of that great central market-place--the Stock Exchange--furnishing the Exchange authorities with its credentials in minute detail.
At this point the so-called manipulation takes place. The securities are new, the company may wish to advertise them, attract attention to them, and solicit a public interest in the laudable enterprise that lies behind them, all of which is as right and proper as it is for any merchant to establish a market for any new article on his shelves. To accomplish his purpose the merchant must first fix an arbitrary price; if the public will not buy at that price he must “manipulate” a lower price, and in all his subsequent dealings there must be manipulation of one form or another designed to conform to the supply and demand in that particular article.
The men behind the coal company in question must do the same thing. They fix a price at which their shares are introduced in the market-place; let us say this price is $100 per share. This is manipulation. It may happen that the public will not buy at that price, in which case the price is lowered, let us say, to 80. This also is manipulation. But is it improper? Is it subversive of good morals? Is it an unhealthy interference with natural laws of supply and demand? Is it anything less than a legitimate method of attracting capital into worthy enterprises?
Critics are invited to remember that the Stock Exchange does not buy or sell anything; it merely acts as a market-place through which, among other things, capital may be directed from channels where it is least needed into those where it may be most beneficially and profitably employed. If, therefore, an oil company or a coal company or any other enterprise whose ultimate success cannot fail to enrich the community seeks to market its wares--i. e., its securities--and thereby enable itself to do business, where else is it to turn save to the Stock Exchange, and how is it to fix an attractive market price at the outset save by what is termed manipulation? Nobody is compelled to buy; as for selling, any holder of 100 shares or any other number of shares can sell them at will, and no amount of manipulation can prevent him from a free exercise of this privilege. You may depend upon it, Mr. Critic, that the Stock Exchange will take pains to suppress all forms of manipulation that are unsound and harmful, but until you or some other gifted student of economics can devise a method by which capital may be attracted to excellent channels other than through the medium of an Exchange, manipulation of the sort just described must continue or enterprise must stop. Strike out the word “manipulation,” and substitute “establishment of values” in transactions of this sort, and the practice seems to become, as it really is, in keeping with the finest traditions of the market-place.[56]
It is a difficult matter for the Stock Exchange authorities to suppress all forms of manipulation that are plainly and admittedly improper. Such things do exist; the difficulty is in devising ways and means of preventing them. Mr. Smith, a non-member of the Exchange, may be interested in a certain security to which he wishes to give an appearance of activity. He calls Brown, a stockbroker, and instructs him to buy 5000 shares “at the market.” Then he telephones Jones, another stockbroker, to sell 5000 shares. Brown and Jones are each in ignorance of the other’s order, but they meet in the crowd where this stock is dealt in, and their orders combine to give the market an appearance of animation. The governors are as determined to stop this sort of thing as the most energetic critic could wish; they send for the two brokers and the facts are revealed. But as each was entirely innocent of wrongdoing, and as no rule of the Exchange and no law of the land has been violated, what is to be done?
They may caution both brokers against accepting any more business from Smith, but Smith is not a member of the Exchange, and hence he is not amenable to its discipline. When his next orders are refused he gives them to some one else, and if the entire Stock Exchange refused to accept business from him he would and could with perfect propriety ask his bank, or a trust company, or an individual to give out the orders under their own names. Finally, if the Exchange authorities were so sagacious as to be able to close to this man every conceivable avenue by which he might approach the Stock Exchange in New York, there would still be left open to him the market in Boston, or Montreal, or London, or any other centre in which the security was listed, and the pernicious effect of his manipulation in these cities would be felt in New York just as promptly and just as harmfully as if they had originated here. I mention this case, a purely hypothetical one, to show how easy it is for manipulation of this sort to find employment, despite all that may be done to suppress it. Perhaps somewhere in the noble army of critics there may be one who can devise a means of meeting this issue. If so, let him stand forth and speak. The Stock Exchange, root, stock, and branch, will be glad to hear from him.[57]
Counsel for the Congressional Committee that is in session as these lines are written seeks to raise another dreadful ghost with which to frighten ignorant people in his alleged “discovery” that a great part of the business done on the Stock Exchange is speculation. He parades through the newspapers the fact that the number of shares bought and sold often largely exceeds the number transferred on the companies’ books. In a chapter on “The Uses and Abuses of Speculation,” I have attempted to show that the more speculators there are in a market, the better and safer the market, and I rest this dictum on the authority of every student of modern markets. In this connection let us consider the opinion of a thoughtful newspaper writer. “There is no doubt,” he says, “that the committee will find that there is speculation in Wall Street, just as there is speculation elsewhere, and in commodities other than in stocks and bonds. The instinct has always been a pronounced human characteristic, being a part of human progress, and the manifestation of it is one sign of the difference between man and the lower sorts of creatures. It is doubtful whether the general gambling impulse can be entirely wiped out, even if the mighty power of an act of Congress be called into requisition. If Mr. Pujo and his committee can abolish speculation in Wall Street (to say nothing of gambling, which is not the same thing), they may be asked to abolish every commodity market throughout the land, for there is plentiful speculation in all of them.
“What seems to bother some representatives of the Pujo Committee is that the number of shares traded in on the Stock Exchange exceeds largely the number actually transferred. It is true, for example, that the number of shares of United States Steel common sold during last year were largely in excess of the number of shares outstanding, the sales amounting to 31,266,208 shares, while the entire number outstanding was only 5,084,952. The ratio of six to one suggests healthy activity in the market for steel stocks. It is conceivable that a block of stocks may pass through many hands before it arrives at its ultimate owner, just as a crop of potatoes passes through a long chain of handlers and buyers and dealers before it reaches the ultimate consumer. Meantime, the number of potatoes has neither increased nor diminished.
“But the potato crop, which easily changes hands six times in a year, is finally eaten. The stocks go on forever. The legitimate holder is not injured if they change hands not six, but sixty times, provided he is secured by proper publicity, which the Stock Exchange assures. The free speculative market is in itself an element of value, and if it were destroyed the investor would be chiefly injured, while future capitalization for the development of the country would be paralyzed.”[58]
At the outset I began by cautioning the reader not to cry out in alarm over the utterances of newspaper statesmen bent on justifying their existence, and determined to make the punishment fit the crime. Stocks will always be bought and sold, they will pass from hand to hand just as horses are traded and lands are exchanged. The modest dollar, too, will continue to pass from pocket to pocket, having a thousand owners and performing a thousand functions many of which may alarm a timid and unsuspecting lawmaker, but which to you and me may seem natural enough.
When you read that a great Congressman is determined to put the Steel corporation into bankruptcy and throw its 250,000 employees out of business, depend upon it he is only trying to justify his job for the benefit of this constituents. When somebody else seeks to mend his fences by the noisy announcement that the Stock Exchange reeks with improper manipulation, that speculation is wrongful, and that the criminal nature of an institution is directly proportionate to its size, remember that the votes of your fellow-citizens put this man in office and that you and they must foot the bill, since it is your money that pays for all these junkets, all these investigations, and all these political excursions. More than that, you must pay your share of the $160,000,000 for pensions, of the $40,000,000 for post-offices, and of the countless millions for rivers and harbors, and these, too, are voted with amiable frugality by the gentlemen who see nightmares in banks, Clearing Houses, and Stock Exchanges.