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THE NEW YORK
STOCK EXCHANGE IN
THE CRISIS OF 1914
BY
H. G. S. NOBLE
PRESIDENT
[Illustration]
GARDEN CITY NEW YORK
THE COUNTRY LIFE PRESS
1915
_Copyright, 1915_
THE COUNTRY LIFE PRESS
INTRODUCTION
The year 1914 has no precedent in Stock Exchange history. At the
present time (1915), when the great events that have come to pass are
still close to us, even their details are vivid in our minds and we
need no one to rehearse them. Time, however, is quick to dim even
acute memories, and Wall Street, of all places, is the land of
forgetfulness. The new happenings of all the World crowd upon each
other so fast in the financial district that even the greatest and
most far-reaching of them are soon driven out of sight. This being the
case, it has seemed to the writer of these pages that some record
should be kept among the brokerage fraternity of what was so great an
epoch in their history, and that this record could best be written
down by one who happened to be very favorably placed to know the story
in its entirety.
Of course the archives of the Exchange will always contain the minutes
of Committees and other documentary material embodying the story of
the past, but this dry chronicle is never likely to see the light
except when unearthed by law courts or legislative committees. It
seems worth while, therefore, to disentangle the essential thread of
the tale of 1914 from the mass of unreadable detail in the minute
books, and put it in a shape where those who are interested may look
it over.
This is not an easy task. To differentiate the interesting and the
essential from the mass of routine material is, perhaps, not very
difficult, but to present this segregated matter in a form that will
not be monotonous is much more of a problem. The proceedings of a
Committee that has been in continuous session must, when written down,
partake of the nature of a diary, and to that extent be tiresome
reading. We shall, therefore, have to ask the indulgence of any one
who happens to look into these pages, and beg him to pass over the
form for the sake of the substance. That the substance itself is of
deep interest goes without saying. It was given to the Stock Exchange
to play a great part in a momentous world crisis, and it must be of
profound interest to know how that part was played.
Stock Exchanges are a relatively recent product of modern
civilization, and like new comers in every field they are suspected
and misunderstood. The most complex of all problems are economic
problems, and the functions of Stock Exchanges form a most intricate
part of political economy. It has, consequently, been a noticeable
phenomenon in all contemporary industrial society that the activities
of the stock markets have been a constant subject of agitation and
legislative meddling. Most of this meddling has been based upon
ignorance and misunderstanding, but in a broad view this ignorance and
misunderstanding are excusable owing to the novelty and above all the
great complexity of the factors at work. One of the needs of the time,
therefore, is that the public, and their representatives in the
Legislatures, should be enlightened as fast as possible with regard to
the immensely important uses of these institutions, and to the
operation of their very delicate machinery.
The World crisis of 1914 forced upon us an object lesson on the
question of speculative exchanges in general which ought to be of
lasting profit. For years agitators had been hard at work all over the
country urging the suppression of the Cotton Exchanges, and claiming
that they contained gamblers who depressed the price of the cotton
growers' product. In the summer of 1914 the dreams of these agitators
were realized. The Cotton Exchanges were all closed and the cotton
grower was given an opportunity of testing the benefits of a situation
where there was no reliable agency to appraise the value of cotton.
The result may be summed up in the statement that the reopening of the
Cotton Exchanges met with no opposition. A similar object lesson was
furnished in the case of the Stock Exchanges. They were all closed,
and for a few weeks some profound thinkers in the radical press stated
that the country was showing its ability to dispense with them. When
the time for their reopening came, however, there was no agitation to
prevent it. On the contrary it was hailed as a sign of the resumption
of normal financial conditions in the United States.
This evidence that the experience of 1914 has cast a much needed light
on the public value of speculative exchanges, gives a further excuse
for describing in some detail how the experience was passed through by
that greatest of all these institutions, the New York Stock
Exchange.
THE NEW YORK STOCK EXCHANGE IN THE CRISIS OF 1914
The New York Stock Exchange
CHAPTER I
THE CLOSING OF THE EXCHANGE
The Stock Exchange is in the second century of its existence and in
that long period of time (long relatively to the number of years
during which Stock Exchanges have been known to the world) it has been
forced to close its doors only twice. The first occasion was the great
panic of 1873, the after effect of civil war when trading was
suspended for ten days; the second came with the outbreak of the world
War in the close of July, 1914. These two remarkable events differ
profoundly in the gravity of the circumstances which brought them
about. In 1873, although the financial disturbance was one of the
greatest the United States has ever experienced, the trouble was
mainly local and did not seriously involve the entire world. The
Exchange was not closed in anticipation of a catastrophe but was
obliged to shut down after the crash had taken place, in order to
enable Wall Street to gather up its shattered fragments. The measure
of this crisis was the ten days during which trading was suspended.
Far different from these were the circumstances surrounding July 31st,
1914. On that eventful date a financial earthquake of a violence
absolutely without precedent shook every great center of the
civilized world, closing their markets one by one until New York, the
last of all, finally suspended in order to forestall what would have
surely been a ruinous collapse. The four and a half months during
which this suspension continued stand to the ten days closing of 1873
in a proportion which fitly illustrates the relative gravity of the
two historic upheavals.
In the light of these facts we are justified in asserting that the
events of 1914 are the most momentous that have so far constituted the
life and history of the New York Stock Exchange, and consequently that
some record of, and commentary upon, these facts may be of value to
the present members of that body and of interest and profit to its
future members.
It is in the nature of panics to be unforeseen, but the statement may
be truly made that some of them can be more unforeseen than others.
The panic of 1907 was preceded by anxious forebodings in the minds of
many well informed people, whereas the Venezuela panic in 1895, being
due to the sudden act of an individual, came out of a clear sky. To
the latter class distinctively belongs the great convulsion of 1914.
While the standing armies of Europe were a constant reminder of
possible war, and the frequent diplomatic tension between the Great
Powers cast repeated war shadows over the financial markets, the
American public, at least, was entirely unprepared for a world
conflagration. Up to the final moment of the launching of ultimata
between the European governments no one thought it possible that all
our boasted bonds of civilization were to burst over night and plunge
us back into mediaeval barbarism. Wall Street was therefore taken
unaware, and so terrific was the rapidity with which the world passed,
in the period of about a week, from the confidence of long enduring
peace to the frightful realization of strife, that no time was given
for men to collect their thoughts and decide how to meet the
on-rushing disaster.
Added to the paralyzing effect of this unheard of speed of action,
there came the disconcerting thought that the conditions produced were
absolutely without precedent. Experience, the chart on which we rely
to guide ourselves through troubled waters, did not exist. No world
war had ever been fought under the complex conditions of modern
industry and finance, and no one could, for the moment, form any
reliable idea of what would happen or of what immediate action should
be taken. These circumstances should be kept clearly in mind by all
who wish to form a clear conception of this great emergency, and to
estimate fairly the conduct of the financial community in its efforts
to save the day.
The conditions on the Stock Exchange, when the storm burst, were in
some respects very helpful. Speculation for several years had been at
a low ebb, so that values were not inflated nor commitments extended.
Had such a war broken out in 1906, with the level of prices then
existing, one recoils at the thought of what might have happened.
Furthermore, the unsettled business outlook due to new and untried
legislation had fostered a heavy short interest in the market, thereby
furnishing the best safeguard against a sudden and disastrous drop.
This short interest was a leading factor in producing the
extraordinary resistance of prices in New York which caused so much
favorable comment during the few days before the closing. It were well
if ill-informed people who deprecate short selling would note this
fact.
During the week preceding July 31st, therefore, in the face of a
practical suspension of dealings in the other world markets, the New
York market stood its ground wonderfully. The decline in prices,
though it became violent on July 30th, showed no evidence of collapse.
There was a continuous market everywhere up to the last moment, and
call money was obtainable at reasonable prices. Here was a perplexing
problem when the closing of foreign Bourses raised the question of how
long we should strive to keep our own Exchange open.
To close the recognized public market for securities, the market which
is organized and safeguarded and depended upon as a standard of
values, is an undertaking of great responsibility in any community. To
take this step in New York, which is one of the four preeminent
financial centers of the world, involved a responsibility of a
magnitude difficult adequately to estimate. Upon the continuity of
this market rest the vast money loans secured by the pledge of listed
securities; numberless individuals depend upon it in times of crisis
to enable them to raise money rapidly by realizing on security
investments and thus safeguarding other property that may be
unsaleable; the possessor of ready money looks to it as the quickest
and safest field in which to obtain an interest return on his funds;
and the business world as a whole depends upon it as a barometer of
general conditions.
Add to this the fact that speculative commitments by individuals from
all over the world, which have been based upon the expectation of an
uninterrupted market, are left in hopeless and critical suspense if
this market is suddenly removed, and it becomes apparent that to close
the Exchange is manifestly to inflict far-reaching hardship upon vast
numbers of people. It is also sure to be productive of much injustice.
In bad times sound and solvent firms are anxious to enforce all their
contracts promptly so as to protect themselves against those that are
overextended; an obligatory suspension of business compels these
solvent firms, in many cases, to help carry the risks of the insecure
ones and deprives the provident man of the safety to which he is
entitled.
When such facts as these are duly weighed by the agencies having the
authority to close the stock market, it becomes clear that duty
dictates a policy of hands off as long as a continuous market persists
and purchasers continue to buy as the decline proceeds. This was well
illustrated in the acute panic of 1907 when an enormous open market
never ceased to furnish the means by which needy sellers constantly
liquidated, and the possessors of savings made most profitable
investments. To have closed the Exchange during that crisis--assuming
it to have been possible--would have been an unmixed evil. The violent
decline in prices was the natural and only remedy for a long period of
over-speculation, and it would have been worse had it been
artificially postponed.
Considerations of this general character, up to July 30th, caused the
authorities of the New York Stock Exchange to take no action, although
the other world markets had all virtually suspended dealings. On July
30th, the evidences of approaching panic showed themselves. An
enormous business was done accompanied by very violent declines in
prices, and, although money was still obtainable throughout the day,
at the close of business profound uneasiness prevailed.
* * * * *
On the afternoon of July 30th, the officers of the Stock Exchange met
in consultation with a number of prominent bankers and bank
presidents, and the question of closing the Exchange was anxiously
discussed. While the news from abroad was most critical, and the day's
decline in prices was alarming, it was also true that no collapse had
taken place and no money panic had yet appeared. The bankers' opinion
was unanimous that while closing was a step that might become
necessary at any time, it was not clear that it would be wise to take
it that afternoon, and it was agreed to await the events of the
following day. Meanwhile, several members of the Governing Committee
of the Exchange had become convinced that closing was inevitable and,
in opposition to the opinion of the bankers, urged that immediate
steps be taken to bring it about. It may seem strange to people
outside of Wall Street that the night before the Exchange closed such
apparent indecision and difference of opinion existed. It was,
however, a perfectly natural outcome of an unprecedented situation.
The crisis had developed so suddenly, and the conditions were so
utterly without historic parallel, that the best informed men found
themselves at a loss for guidance.
During the evening of July 30th the conviction that closing was
imperative spread with great speed among the large brokerage firms. Up
to a late hour of the night the President of the Exchange was the
recipient of many messages and telegrams from houses not only in New
York, but all over the country, urging immediate action. The paralysis
of the world's Stock Exchanges had meanwhile become general. The
Bourses at Montreal, Toronto and Madrid had closed on July 28th; those
at Vienna, Budapest, Brussels, Antwerp, Berlin, and Rome on July 29th;
St. Petersburg and all South American countries on July 30th, and on
this same day the Paris Bourse was likewise forced to suspend
dealings, first on the Coulisse and then on the Bourse itself. On
Friday morning, July 31st, the London Stock Exchange officially
closed, so that the resumption of business on that morning would have
made New York the only market in which a world panic could vent
itself.
The Governing Committee of the Exchange were called to meet at nine
o'clock (the earliest hour at which they could all be reached, for it
was summer and many were out of town) and at that hour they assembled
in the Secretary's office ready to consider what action should be
taken. In addition to the Committee many members of prominent firms
appeared in the room to report that orders to sell stocks at ruinous
prices were pouring in upon them from all over the world and that
security holders throughout the country were in a state of panic. It
would be hopeless to try to describe the nervous tension and
excitement of the group of perhaps fifty men who consulted together
under the oppressive consciousness that within forty-five minutes (it
was then a quarter past nine) an unheard of disaster might overtake
them. It was determined that the Governing Committee should go into
session at once as there was so little time to spare. Just as they
started for their official meeting room a telephone message was
received from a prominent banking house stating that the bankers and
bank presidents were holding a consultation and suggesting that the
Exchange authorities await the conclusion of their deliberations.
There is an employee of the Exchange whose duty it is to ring a gong
upon the floor of the big board room at ten o'clock in the morning.
Until that gong has rung the market is not open and contracts are not
recognized. This employee was instructed not to ring the gong until he
had received personal orders to do so from the President; a permanent
telephone connection was established with the office in which the
bankers were conferring, and amid a horrible suspense the outcome of
their conference was awaited. For twenty minutes this strain
continued. It was a quarter before ten and only fifteen minutes
remained in which to act. Meanwhile the brokers were fast assembling
upon the board room floor, orders were piling in upon them to sell at
panic prices, ten o'clock was approaching, and although all felt that
the opening should not be permitted no one had a word from the
Governing Committee as to what was going to be done.
* * * * *
At a quarter of ten, no word having come from the bankers, the
receiver of the telephone which had been connected with their meeting
place was hung up, and the Governing Committee were called in session
to take action. As they took their seats two messages reached them.
One was brought by a prominent member of their body who had gone to
the office of the President of the bank Clearing House and had been
told by him, after consulting with some of his fellow officers, "We
concur; under no circumstances is it our suggestion, but if the
Exchange desires to close, we concur." The other was sent, through a
member of the Exchange, from one of the leading bank Presidents who
stated that closing would be a grave mistake and that he was opposed
to it.
The roll was called and thirty-six out of the forty-two members
answered to their names. The Chair having announced the purpose of the
meeting, Mr. Ernest Groesbeck moved that the Exchange be closed until
further notice. This motion was carried, not unanimously but by a
large majority. Mr. Groesbeck then moved that the delivery of
securities be suspended until further notice, and, this being carried
unanimously, made a third motion that a special Committee consisting
of four members of the Governing Committee and the President be
appointed to consider all questions relating to the suspension of
deliveries and report to the Governing Committee at the earliest
possible moment. The third motion, like the second was carried
unanimously and the Committee adjourned. It was then four minutes of
ten. On the instant that the first motion closing the Exchange was
passed, word was sent to the ticker operators to publish the news on
the tape. In this way the seething crowd of anxious brokers on the
floor got word of the decision before ten o'clock struck. Immediately
upon the adjournment of the Committee Mr. George W. Ely the Secretary
of the Exchange ascended the Chairman's desk in the board room and
made the formal announcement, which was greeted with cheers of
approbation. The President promptly appointed Messrs. H. K. Pomroy,
Ernest Groesbeck, Donald G. Geddes, and Samuel F. Streit to
constitute, with himself, the Committee of Five, and the long suspense
and anxiety of four months and a half began.
These events, which were crowded into a few feverish hours, and which
seemed to those who participated in them more like a nightmare than
like a reality, present some aspects that are especially worthy of
detailed description. It is noticeable that the vote to close the
Exchange was not unanimous. This shows the immense complexity of a
situation, which, even at the last moment, left some two or three
conscientious men undecided. It is a fact of profound importance, and
one that never should be forgotten by stock brokers or by the public,
that the Exchange closed itself on its own responsibility and without
either assistance or compulsion from any outside influence. Many false
assertions by professional enemies of the institution have been made
to the effect that the banks forced the closing, or that its members
were unwillingly coerced by outside pressure. The facts are that the
influential part of the membership, the heads of the big commission
houses, made up their minds on the evening of July 30th that closing
was imperative, and that on the morning of July 31st their
representatives in the Governing Committee took the responsibility
into their own hands, the bankers having been unable as yet to reach a
conclusion.
Immediately after the closing the President of the Exchange visited
the prominent bank president who had served notice at the last moment
of his disapproval of this procedure. He was found in his office in
consultation with a member of one of the great private banking houses.
Both the bank president and the private banker agreed that, in their
opinion, the closing had been a most unfortunate mistake. It was an
opportunity thrown away to make New York the financial center of the
world. The damage was done and would have to be made the best of, but
had the market been allowed to open the banks would have come to the
rescue and all would have gone well. These gentlemen admitted that the
Exchange was to some extent excusable owing to the negligence of the
bankers in not notifying them that they were ready to protect the
money market.
It may safely be stated that within twenty-four hours after this
interview neither the two bankers in question nor any one else in Wall
Street entertained these opinions. The rise of exchange on London to
$7--a rate never before witnessed; the marking of the Bank of
England's official discount rate to 10%, accompanied by a run on that
institution which resulted in a loss of gold in one week of
$52,500,000; the decline of the Bank's ratio of reserve from the low
figure of 40% to the paralyzing figure of 14-5/8%; together with the
fact that the surplus reserves of our New York Clearing House banks
fell $50,000,000 below their legal requirements, were reasons enough
in themselves to convince the most skeptical of the necessity of what
had been done.
The frightful gravity of the situation which had arisen became clearer
and more defined in people's minds a few days after the first of
August than it was on the morning of July 31st. European selling had
been proceeding for some time before the outbreak of War and in the
last few days before closing had been temporarily arrested by the
prohibitive level of exchange and the risk of shipment at sea. The
American public itself, however, was seized with panic on the evening
of July 30th, and on the morning of July 31st brokers' offices were
flooded with orders to sell securities for what they would bring and
without reference to values. Had the market been permitted to open on
that Friday morning the familiar Wall Street tradition of "Black
Friday" would have had a meaning more sinister than ever had been
dreamed of before.
In all previous American panics the foreign world markets were counted
upon to come to the rescue and break the fall. Imports of gold,
foreign loans, and foreign buying were safeguards which in past crises
had been counted upon to prevent utter disaster. On this occasion our
market stood by itself unaided; an unthinkable convulsion had seized
the world; panic had spread; even the bargain hunter was chilled by
the unprecedented conditions; there were practically no buyers. A half
hour's session of the Exchange that morning would have brought on a
complete collapse in prices; a general insolvency of brokerage houses
would have forced the suspension of all business; the banks, holding
millions of unsaleable collateral, would have become involved; many
big institutions would have failed and a run on savings banks would
have begun. It is idle to speculate upon what the final outcome might
have been. Suffice it to say that these grave consequences were
prevented in the nick of time by the prompt and determined action of
the Stock Exchange, and by that alone.
* * * * *
Any decisive step whether right or wrong always finds its critics.
There were a few people who criticised the Exchange for closing too
soon and thought that the feeling of panic was increased by this
action. These few were mostly converted from their opinions as the
situation became clearer. There was a larger number who took the
ground that the Exchange had not closed soon enough, and urged that
had the step been taken a few days sooner a considerable decline in
values would have been prevented. It is strange that the latter
critics did not stop to reflect on how great an advantage it was, all
through the anxious days of August, to have had the New York market
liquidated as far as it could be without disaster, and the level of
closing prices relatively low. How vastly greater would have been the
task of safeguarding the situation in the face of declining prices in
the "New Street Market" had the closing prices on the Exchange been
ten or fifteen points higher. The truth is that the Exchange was
closed at the very best possible moment. The market was kept open as
long as liquidation could safely be carried on (thus immensely
diminishing the pressure to be withstood during the suspension) and it
was closed at the very instant that a collapse was threatened.
The above facts suggest some reflections with regard to the agitation
for governmental interference with or control of the Exchange. The act
of closing necessitated the prompt decision of men thoroughly familiar
with the circumstances in a period of time actually measured by
minutes. If it had been necessary to reach government officials
unfamiliar with details, convince them of the necessity of action, and
overcome the invariable friction of public machinery, the financial
world would have been prostrated before the first move had been made.
If the Exchange had been an incorporated body, and had been closed in
the face of the difference of opinion and possible conflict of
interests that existed at the time, it would have been possible for a
temporary injunction to have been brought against its management
restraining its freedom to meet the emergency. Long before the merits
of such an injunction could have been argued in court the harm would
have been done, and ruin would have overtaken many innocent people.
The full power of a group of individuals thoroughly familiar with the
conditions to act without delay or restraint prevented a calamity
which can safely be described as national.
It is a fact, which will probably never be appreciated outside of the
immediate confines of Wall Street, that the Exchange was unexpectedly
thrown into a position where the interests of the whole country were
put in its hands, and that through the prompt and energetic action of
the thirty-six men who faced the awful responsibility on July 31st
financial America was saved. It is true that in saving the community
they saved themselves, but so do the soldiers who win upon the
battle-field, and in neither case is the obligation cancelled by the
selfish considerations involved. When in future the perennial outcry
against the Exchange is being fostered by those whose minds are
exclusively occupied with the evils that are inseparable from every
human institution, let us hope that once in a while some friendly
voice may be raised to remind the world of July thirty-first, nineteen
hundred and fourteen.