THE STOCK EXCHANGE
FROM WITHIN
THE
STOCK EXCHANGE
FROM WITHIN
BY
W. C. VAN ANTWERP
[Illustration]
GARDEN CITY NEW YORK
DOUBLEDAY, PAGE & COMPANY
1914
_Copyright, 1913, by_
WILLIAM C. VAN ANTWERP
_All rights reserved, including that of
translation into foreign languages,
including the Scandinavian_
31ST THOUSAND
First printing, Jan., 1913.
Second printing, Apr., 1913.
Third printing, June, 1913.
Fourth printing, Feb., 1914.
PREFACE
In so far as these pages reflect the thoughts of a busy stockbroker,
distracted by many duties and lacking in literary skill, they have but
little merit and the writer entertains no illusions regarding them.
But in the many quotations from the writings of the world’s foremost
economists that are here presented, and in the various legal and
historical precedents cited, perhaps it is not too much to hope that
this book possesses some slight value as a contribution to the vexed
and vexing discussion of the Stock Exchange, and that it may serve
in some degree both to dull the sharp edge of uninformed criticism
and to strengthen the hands and hearts of loyal friends of a greatly
misunderstood institution. The public is asked to disregard the
utterances of demagogues and self-seekers and to consider facts. That
done, the American spirit of fair play may be confidently relied upon.
The Stock Exchange authorities have had no hand in the preparation of
the work, nor does it bear their endorsement. I say this lest it be
thought an official _apologia_. Had it been such, the work would have
been much more skillfully done, and its value greatly enhanced.
THE AUTHOR.
CONTENTS
Preface v
CHAPTER PAGE
I. The Functions of the Stock Exchange 3
II. The Uses and Abuses of Speculation 35
III. The Bear and Short Selling 71
IV. The Relationship Between the Banks and the Stock Exchange 99
V. Publicity in Exchange Affairs; Cautions and Precautions 131
VI. Panics, and the Crisis of 1907 183
VII. A Brief History of Legislative Attempts to Restrain or
Suppress Speculation 223
VIII. The Day on ’Change, with Suggestions for Beginners 261
IX. The London Stock Exchange, and Comparisons with Its New
York Prototype 323
X. The Paris Bourse; a Monopoly Under Government 383
Appendix. The Report of the Hughes Commission 415
Index. 447
CHAPTER I
THE FUNCTIONS OF THE STOCK EXCHANGE
Every now and then some one who has not given much thought to the
matter asks the questions, “Of what real use is the Stock Exchange?”
“What does it accomplish?” “Is it a necessary and useful part of our
economic life, or is it merely a means of promoting speculation and
gambling?” These are fair questions, and they are asked in good faith.
To be sure they have been answered many times by writers on economic
subjects, but the trouble is that in our hurried American life we do
not read the economists, preferring to get our impressions from the
hasty utterances of some one who knows no more about it than we do.
The study of any form of economic development, like the study of
sciences and philosophies, requires infinite patience. But the “man
in the street” is bored to death by such methods; he wants to take a
short cut to his conclusions; merely tasting the Pierian spring he
hurries on to judgments that are superficial, haphazard, and often
crude and blundering. And yet at bottom this man, a good citizen with
an open mind, invariably wants the truth. He may be too busy to dig it
up himself, but he knows it when he sees it, and once he has grasped
it he has no patience with those who seek to turn him from it. To this
average man, who holds in his hands the balance of power in America, I
venture to say something about markets.
The first thing a man asks when he wishes to buy is “the price.” Every
minute of the day, all over the world, that question is on men’s lips.
As it is a necessary prelude to all forms of trade, it follows that
everything that enters into the making of prices becomes at once of
primary importance. The more scientific the price, and the nicer and
more accurate the making of it, the better the bargain for both buyer
and seller and for trade generally, bearing in mind the distinction
between prices, which are temporary and move rapidly--and values, which
are intrinsic and move slowly. The price of a thing is what you can
get for it; the value is its real worth to you, and hence it cannot be
defined or measured, since a thousand considerations may enter into
it, such as caprice, sentiment or association. If _real_ values could
be determined, they would necessarily be identical with prices, but as
they cannot be ascertained in ordinary commodities of trade, prices
become the really essential considerations and values the subordinate
ones. Let us see, then, how prices are made, for this is one of the
reasons why exchanges exist.
If you want to buy, let us say, a piano, you go to the dealer and ask
the price, and as he is the only person in the neighborhood who deals
in pianos, you must either accept his offer or look elsewhere. But
to look elsewhere takes time and labor; dealers in pianos are widely
separated; moreover, there is no open competition among them such as
you would like, and so finally when you have bought you feel perhaps
you have not secured your money’s worth. You would have secured a much
better bargain, no doubt, had there been twenty dealers in the room
competing with each other, and a still better bargain had their number
been fifty, or a hundred, or two hundred, because that would mean
competition, and the more competition there is, in close contact and
governed by rigid business rules, the more certain the approach to a
perfect price. Everywhere in the world fairs and other gatherings of
merchants are held at periodic intervals because people demand them
in their effort to secure proper prices by competitive bidding and
offering. One of the first travelers to penetrate the heart of Africa
found among the natives this phenomenon of trade, showing that it is
instinctive; indeed, it may be traced to the earliest known period
in the history of any people. If you arise before daybreak in London
and go to Billingsgate and Covent Garden, or in Paris to the _Halles
Centrales_--Zola’s “Ventre de Paris”--you will find there the modern
type of these markets in their utmost perfection.[1]
This is why Exchanges exist, not only Stock Exchanges, but
market-places of all kinds: Buyers seek the largest market they can get
in order to obtain the lowest prices; sellers, in order to obtain the
highest prices; and so it was learned long ago that economy of time and
labor, as well as a theoretically perfect market, could be best secured
by an organization under one roof of as many dealers in a commodity as
could be found.[2] Bear in mind that this result, moreover, is best
accomplished when the organization is so controlled by rigid rules of
business morality as to insure to every one who does business there,
great and small, rich and poor, an absolutely square deal. In such a
market every purchase is made with the most thorough acquaintance with
the conditions involved. Each dealer, each broker, each speculator,
strives to obtain the best knowledge of the supply and demand, and
the earliest news that may affect it, and each buyer or seller has an
equal and a fair opportunity to profit by the resultant effect on the
market of all these various agencies. The larger the body of brokers
and traders, then, the more accurate the standards of value thus
created. It is a pity you could not have bought your piano under such
conditions.[3]
Demagogues have set the agricultural classes against Wall Street and
against Exchanges, but producers everywhere, in default of exchanges,
are forming quasi-exchanges of their own. Every day we hear of
combinations, Farmers’ Alliances, rural co-operative movements, etc.,
each designed to regulate the market for eggs, butter, potatoes, and
such things, and each having for its purpose the very functions which
govern a Stock Exchange in its own field--namely, the establishment of
a fair price under the nearest possible approach to ideal conditions.
It is now proposed in Congress that the Department of Agriculture
shall collect and transmit to the agricultural districts by telephone
and telegraph all available information concerning price movements,
markets, and centres of supply and demand, this again embodying the
essential functions performed in its own field by a great exchange.
In practice, of course, there can be no exchange to deal in perishable
products of the farm, and this is a pity, because if such an exchange
were practicable we should hear less of our old friend the cost of
living. Why? Because at present the market for these commodities is
controlled by commission dealers and by middlemen. The producer and the
consumer are alike at the mercy of these people; the price is fixed by
them; the number of bona fide dealers actually bidding against each
other is limited, in many instances there is no competition whatever;
the producer and the commission dealer are, moreover, widely separated;
the man who sells has few sources of information, and it is the
business of the dealer who buys to see that he gets none; the small
producer therefore has to submit to a great inequality in price, and
often to downright cheating. There is no standard. There are no rules
governing the dealer, and no high-minded board to enforce his honesty.
Naturally this sort of thing contributes to the cost of living, since
the commission dealer, on his part, regulates his profits just in
proportion to the ignorance, cupidity or remoteness of the farmer,
while the middlemen, of whom there are sometimes three or four, apply
the same iniquitous processes to the ultimate purchaser--who happens
to be you or me. Every thinking man knows that this is rank economic
error.[4]
A friend of mine owns a thousand-acre farm in the Shenandoah Valley,
where he raised this year 10,000 baskets of peaches. He decided to seek
one buyer, and he found him in the person of a Baltimore canner, who
went down to Virginia, inspected the crop, and contracted for the lot
on a basis of $1 for firsts, 70 cents for seconds, and 40 cents for
thirds, delivered at Baltimore. Shortly after, the market was flooded
with peaches from Georgia, and the Baltimore man, seeing that the
crop would be plentiful, promptly “welched” on his trade, basing his
action on the absurd contention that “firsts” should be three inches in
diameter, although as every one knows peaches of this size are almost
never to be had. This action threw all the grower’s peaches into third
class, which delivered at Baltimore would have netted him about 10
cents a basket.
In desperation he looked elsewhere, West, North, and South, only
to hear the same monotonous answer from commission men, “we won’t
buy, but we will handle your crop on a commission of 10 per cent.”
Meantime the crop was ripening. To make matters worse the railroad
levied a prohibitive price, and refrigerator cars were not to be had.
Finally there was nothing left but to ship by express and trust to the
commission men to treat him honestly. The final accounting showed that
on his first shipment he netted 5½ cents a basket, and on his second,
15 cents, not counting the expense of picking, packing, and hauling.
So much for the producer. The consumer fared no better, for he had to
pay $1.25 per basket for this fruit; one of this producer’s friends
actually purchasing a portion of this very consignment at that rate.
The difference therefore between 15 cents and $1.25 contributes some
food for thought as to the cost of living.[5]
Now contrast this experience of a grower having no exchange facilities
with that of the Western farmer who deals directly with a Grain
Exchange. The farmer can sell his crop, even though it has not been
planted. Whenever he sells, and under whatever conditions, he enjoys
the authoritative establishment of a price, fixed as clearly as matters
are fixed in law. Moreover, the price at which he elects to sell is the
best price, the fairest price, and the most scientific price that human
agencies can arrive at, because it is made by world-wide competitive
bidding at the hands of skilled men in Chicago, in New York, in
Liverpool, in Berlin, in Odessa, and in the Argentine, all competing by
cable and telegraph. Think of the confidence he enjoys, and the liberty
of action; think, too, what it means to him to know that the Exchange
through which he deals is a body of honorable men, governed by rules,
bidding publicly under one roof.
But, you will say, this is all very well in its application to a grain
or cotton exchange, but how does it apply to the Stock Exchange? You
concede that scientific price-making for commodities like grain and
cotton is highly necessary, but you do not see that the same necessity
exists for stocks and bonds. You feel, no doubt, that the one has to
do with food and raiment and is therefore indispensable, while the
other merely serves to stimulate speculation and gambling, and hence
is altogether unnecessary. Now, in order to explain the error in this
point of view, let us first see how bits of paper, called securities,
came into being.
Long after Europe had emerged from the dark centuries following
the fall of the Roman Empire, the needs of states and governments
impelled their rulers to resort to credit, and it was discovered that
the simplest way to do it was to issue securities, that is to say,
certificates of the debt. Next, it was found that in order to insure
success for these operations, a market was required. Intermittent or
temporary sources from which credit could be obtained was not enough;
constant sources of credit were essential, and, as these _constant_
sources lay in the savings of the people, public markets in which
investors could tell the value of their investments from day to day
followed as a natural course.[6]
As time went on--necessarily the evolution was gradual--it was learned
that companies having to do with all forms of business enterprises
might also be formed on the same basis. The development of the world’s
business outgrew its infancy days of private partnerships, and
corporate organization of necessity took their place, now that the
discovery of credit, through the use of securities, had pointed the
way. This corporate organization, which combines the small savings
of thousands into large sums and gives to the masses an intelligent
directing force at the hands of highly trained experts, depends for its
existence on the sale of its securities.
In order to understand that there can be no industrial progress without
the issue of securities let us consider the locomotive engine. When in
the early 1800’s it became apparent that this contrivance could be used
to operate an entirely new method of transportation, people looked upon
it, at first, as an interesting but quite useless contrivance, because
to build railroads was an expensive undertaking and nobody had enough
money to finance it. The inventor’s genius was not sufficient; another
power was necessary to take it out of purely scientific hands and give
it practical impulse. That power was credit; the way it was obtained
was through the issue of securities, and the way securities were made
popular vehicles of investment lay in providing a daily market for
buyers and sellers.
As a natural result, organization followed. Capital was consolidated,
the rights of owners were established, a great impulse was given
to various new forms of inventive genius and powerful commercial
enterprises of all kinds sprang into being. With this development the
market-places or Stock Exchanges without which capital could not
have been enlisted kept pace. It was found that transactions in the
securities which represented the people’s money should be rendered
easy, quick, and safe, and that the very essence of the Exchange’s
functions consisted in protecting the people who were the actual owners
of the enterprises by rules that would insure this result.
If we look about us to-day we find in all the great centres of the
world Stock Exchanges at work in this important field. We find that
just in proportion to the confidence which a country feels in the
strength and uprightness of such a market, so enterprise goes forward
with vigor, and so the national wealth increases. The success of one
enterprise in its appeal to public credit through the medium of the
Stock Exchange invariably leads to another; thus commerce and industry
develop. Securities in America alone, aggregate the enormous total of
forty-three billion dollars.[7]
Now, as our country’s entire physical properties are valued at one
hundred and thirty billions, it is apparent (after making allowances
for securities that are held by holding companies and hence are
duplicated in the foregoing estimates) that the nation’s securities
represent more than a third of the nation’s wealth. Again, almost two
million people are owners of these securities. The _Journal of Commerce
and Commercial Bulletin_ published Dec. 26, 1912, official statistics
for 247 of the large corporations. This tabulation revealed the fact
that the stock of these 247 corporations alone was owned by more than a
million stockholders, and it is therefore quite safe to infer that the
number of shareholders in all American companies approaches, if it does
not exceed, two million. I think it will not be disputed that where two
million people own a third of the nation’s wealth, they are entitled,
just as the farmer is, to a perfectly constructed price-making
machinery that will enable them to invest their savings, or sell their
holdings. Having learned the difficult lesson of saving their money and
the still more difficult one of increasing their surplus capital by
judicious investments, are not these people entitled to the safeguards
afforded by a Stock Exchange? “There is no other way in which true
prices can be made,” says Mr. Horace White. “If the quotations so
made are not precisely the truth in every case, they are the nearest
approach to it that mankind has yet discovered.”[8]
Think a moment. Until the last century property and trade were so
insecure that, if a man saved money, he had to hide it, or lend it
through money-brokers at such usurious rates as would compensate him
for what he lost in bad debts. When Dr. Samuel Johnson wrote his
dictionary in 1776 no such word as “investor” was known to the English
language in a financial sense. There were pirates by sea in the old
days and brigands on land. “Sovereigns and nobles,” says the editor of
the _Economist_, “extorted loans only to repudiate them; governments
supplied their needs by debasing the coinage, or by issuing worthless
money.”[9] To-day all this is changed by banks and Stock Exchanges.
Yet, despite these great inventions, capital is and always will be
timid, and the small investor particularly must be protected and
safeguarded in every possible way.
These small investors, no less than the large ones, require great
convenience and promptness for their operations; they live in such
widely remote parts of the country as to necessitate the placing of
full reliance on prices made by the Stock Exchange; they must have
the most accurate information; they must know that their brokers are
working to obtain the best knowledge of supply and demand; they want
prices fixed by the most scientific competition and by the largest
possible number of competitors--brokers, speculators, and investors
alike; they require a market in which they can sell and get their money
at once; above all things they must know beyond peradventure that they
are dealing with reputable men who uphold a fine standard of honor.
These are added reasons why the Stock Exchange exists.[10]
If it did not exist, there would be no standard market for a large part
of the country’s material wealth, indeed, as we have seen, a very great
deal of this wealth could not have been created at all. At the risk
of repetition let me say that the investor on the one hand, and the
patent or the railway on the other hand, have nothing in common. Left
to themselves, they would never meet; they would be useless, because
resources and money must be brought together in order to create wealth.
A primary function of the Stock Exchange is to bring them together,
and by standardizing prices, create values. Similarly, the investor,
without the Stock Exchange to guide him, would have nowhere to turn for
a fair price secured by competitive bidding. He might turn to his local
banker, or to individual and unorganized brokers, and trust to their
honesty to invest his savings for him, but the local banker and the
isolated broker would then be in the same position as the commission
dealer and the middleman who played such havoc with that peach crop. It
is painful to conceive such a situation.
Worse than that, without a Stock Exchange to create standards and
define the difference between good and bad investments, very many
simple people would be at the mercy of an army of dishonest promoters
and bucket-shops, for the modern invention of securities has brought
with it dangers and pitfalls. The United States once swarmed with these
bandits--they are now rapidly being driven to cover--but they still
ply their trade in other countries, where they flourish as “banks”
or “investment” companies. These chaps, to quote the editor of the
_Economist_ (London), “have bought a lot of rubbish, usually called
‘bonds,’ from shaky industrial concerns or from half bankrupt states
and municipalities of South America. They have bought, let us say,
the 6 per cent. bonds of the Yoko Silk Company in Japan at 60, which
they sell you at 90, the 5 per cent. bonds of the Brazilian Province
of ---- at 55, which they sell you at 75, and a few other similar
bargains. They tell you that if you spread your risks scientifically
over different countries you will be perfectly safe. You perhaps do
not realize that none of these securities which you are advised to buy
are quoted in the London Stock Exchange. If they were the game would
be impossible.” Which is only another way of saying that if there were
no Stock Exchanges to uphold worthy enterprises and discourage bad
ones, there would be no limit to the frauds practised upon gullible
investors. And if this is true of a tight little island like England,
how doubly true it is in a great country like ours where investors are
so widely scattered.
The foregoing pages will serve to show the inquirer that what is
happening in commerce, is happening in the securities which represent
that commerce. Because commerce goes on expanding, securities must
necessarily keep pace and the Stock Exchange must perforce grow in
importance. That much maligned individual, the speculator, now regards
the whole world as his field and is eager to enter foreign markets
wherever there are opportunities. In 1910 more than three billion
dollars of British capital were invested in American railways alone,
returning one hundred and twenty-five millions annually in interest
and dividends, to say nothing of the English millions in our lands,
mines, and industrial enterprises. We too are large holders of foreign
securities, and the list of such holdings increases yearly. But it may
be accepted as a fact that this enormous mass of corporate securities
would not have found ownership had there been no Stock Exchange to
market them, and standardize them, and establish daily prices for
them, and give them the certificate of character that makes them ideal
collateral for obtaining credit.
Dr. W. Lexis, of Gottingen, like all other economists, recognizes
the fact that Stock Exchanges are economic necessities. Here are his
opinions:
“The existence of a broad, continuous market is an economic
necessity in the modern scheme of widespread investment of capital.
Even though the market-place is largely filled with speculators, it
is plain that the greater the number of traders in securities, the
greater will be the facility for buying and selling any quantity
of securities. The stock market is a powerful aid in floating
new issues of public securities. The speculative market takes
them at once and keeps them in the floating supply until they
have shown their value. The stock market also renders a useful
service in giving a continuous guide to the success or failure of
industrial undertakings, and the worth of their securities. The
more speculators there are trading in any particular security, the
greater is the opportunity to learn the real conditions of the
undertaking. Private investors, from a study of the speculative
market in the securities they own, receive in this way a continuous
market opinion on the condition of the corporations in which they
are shareholders.”[11]
Another great service rendered by the Stock Exchange is the means
it affords of readily transferring securities from hand to hand.
To appreciate the importance of this fact you have but to think of
the difficulties and delays that attend the transfer of other forms
of property that do not enjoy Exchange facilities. Real estate, for
example, is a most excellent form of investment. But suppose the owner
of real estate wants to sell in a hurry, what then? There is no large
organized market, there is no way by which through competitive bidding,
he can place a correct estimate of the importance of current events
upon the price of his land. In the urgency of his needs he may easily
be misled by “smart” or unscrupulous advisers, and this risk increases
in direct proportion to his remoteness from large market centres.
The holder of securities listed on the Stock Exchange is quite
differently situated. He is altogether independent. He knows the price
of his holdings every hour of the day. He is exposed to no fraud, and
at the mercy of no rumor and no unscrupulous dealer. He has positive
assurance that in case of necessity, at a moment’s notice, he can
obtain at the prevailing price the value in cash of every Stock
Exchange security in his box. The ticker gives him instantaneous
quotations. All the newspapers publish authorized prices for his
benefit, and, as we have just seen, these quotations are not a one-man
affair, but the combined judgment of thousands of experts, bulls and
bears, bankers and brokers, speculators and investors, all over the
world, bidding and offering against each other by cable and telegraph
and recording the epitomized result of their bidding in the prices
current on the Stock Exchange. Such a man knows, moreover, that the
price thus established is not merely the opinion of all these minds
as to values to-day, but that it represents a critical look into the
future. He knows, indeed, that financiers everywhere have in mind
prospective values rather than present values, and so he acquires a
double advantage in regulating his own action by the light of the
superior knowledge thus freely given him. The importance of this
“advance information” cannot be overestimated, and furnishes us with
another reason why Stock Exchanges exist.
In 1906, for example, business conditions in this country were the best
ever known. Good crops, big earnings, and general optimism prevailed.
But Stock Exchange securities did not advance in the last half of the
year, because trained financiers began to foresee the first signs of
trouble ahead. In the early months of 1907 this knowledge became more
general, and a severe decline took place, notwithstanding the fact
that the business of the country at large continued to be excellent.
“What is the matter with Wall Street?” was the question in the press
and on the lips of the uninformed, but Wall Street, or rather the
Stock Exchange, was merely fulfilling its function as a barometer and
foretelling the coming storm.
At the height of the autumn panic, on the other hand, when the
press was filled with dire forebodings and the ignorant layman was
frightened out of his wits, securities stopped declining and began to
rise because the Stock Exchange mind saw that the worst was over. The
brightest financial students in the world then began another process
of discounting the future; the barometer plainly foretold the end of
the disturbance. And all this information--a fundamental law of price
movements which indicated clearly when the trouble was coming and when
it had ended--was given gratis to the world in the daily published
quotations of Stock Exchange securities.
In another chapter I shall describe the method by which the Stock
Exchange protects its patrons, the public. As this is of particular
importance in connection with the matters just cited, I call the
reader’s attention to the remarks of Prof. S. S. Huebner, Ph.D., of the
University of Pennsylvania.
“Importance must be attached to the protection and safeguards
which organized Stock Exchanges give the stock and bond holder, in
regulating brokerage transactions and maintaining a standard of
commercial honor among brokers.... In this connection it should be
remembered that the constitution of nearly every Stock Exchange
defines the object of the Exchange as follows: ‘Its object shall be
to furnish Exchanges, rooms and other facilities for the convenient
transaction of business by its members, as brokers; to maintain
high standards of commercial honor and integrity among its members,
and to promote and inculcate just and equitable principles of trade
and business.’ No person can be elected to membership until he has
signed the constitution of the Exchange, and by such signature
he obligates himself to abide by the same, and by all subsequent
amendments thereto. The value of this organization becomes
apparent when we take account of the gigantic frauds perpetrated
upon innocent investors through advertising campaigns by persons
unaffiliated with any recognized Exchange, or by certain members of
unorganized curb markets....
“All Stock Exchanges provide for the arbitration of disputes which
may occur between members, and if both parties are willing, between
members and their customers. They also prescribe rules governing
the nature of contracts, the making of all offers and bids, the
registry and transfer of securities on the transfer books of the
corporations, and the conditions upon which securities may be
listed upon the Exchange for trading purposes. Practically all
stock Exchanges also require that all transactions must be real,
and that no fictitious or unreal transactions shall be permitted;
that discretionary orders cannot be accepted by brokers; and
that every member of the Exchange must keep complete accounts,
subject at all times to examination by the governing committee
or any standing or special committee of the Exchange, and under
penalty of suspension, no member may refuse or neglect to submit
such accounts, or wilfully destroy the same. Nor may any member,
under pain of suspension (a serious penalty, involving not merely
the loss of the rights and privileges of membership, but also
the stigma attaching to the member as a factor in the business
community), be guilty of ‘any conduct or proceeding inconsistent
with just and equitable principles of trade.’”[12]
One of the most important functions of the Stock Exchange is, as we
have seen, the almost automatic ease with which it directs reservoirs
of capital into channels of usefulness in the world’s industry and
commerce. The layman may feel that this use of the Stock Exchange
does not affect him as an individual, but it does, and vitally. Every
merchant and every manufacturer, great and small, all over the world,
is directly benefited by it. One may see, for example, securities of
railway equipment companies quoted for weeks at a low level. This shows
that the business of these companies is not profitable, and it serves
to discourage owners of capital from undertaking new enterprises in
that direction, because the securities of such companies cannot be
sold. Moreover, it shows investors, as plainly as words can tell, that
this is an unsafe and unprofitable form of investment.
Reverse the situation, and lines of industry are revealed where
high and advancing prices of securities indicate a rising tide of
business, with an outlook for large profits in the future. Capital
then takes hold cheerfully; there is a market for the new securities
and a proper basis for fresh commercial development, because investors
and speculators have learned from the published daily quotations of
these Stock Exchange securities that there is good warrant for the
flow of capital into such channels, and that a reasonably safe return
will follow an investment in them. In commenting upon these functions
of the Stock Exchange, Mr. Conant says: “Through the publicity of
knowledge and prices, the bringing of a multitude of fallible judgments
upon this common ground, to an average, there is afforded to capital
throughout the world an almost unfailing index of the course in which
new production should be directed.” Through the mechanism of the Stock
Exchange, therefore, the public determines the direction in which new
capital shall be applied to new undertakings. In this way our great
railways were built, our Western country opened to progress, and our
vast industrial undertakings made possible.
“The stock market acts as a reservoir and distributor of capital,
with something of the same efficiency with which a series of
well-regulated locks and dams operates to equalize the irregular
current of a river. The hand of man is being stretched out in
the valley of the Nile to build great storage basins and locks,
and the waters which flow down the great river may be husbanded
until they are needed, when they are released in small but
sufficient quantities to fertilize the country and tide over the
periods of drought. Something of the same service is performed
for accumulation of capital by the delicate series of reservoirs,
sluice gates, and locks provided by the mechanism of the stock
market. The rate of interest measures the rise and fall of the
supply of capital, as the locks determine the ebb and flow of the
life-giving water. The existence of negotiable securities is in
the nature of a great reservoir, obviating the disastrous effects
of demands which might drain away the supply of actual coin, and
preventing the panic and disaster, which, without such a safeguard,
would frequently occur in the market for capital.”[13]
Some day, no doubt, the United States will become a great creditor
nation, as England is, and then the field of these operations will be
extended to other countries. When that time comes we shall take a hand,
through the machinery of the Stock Exchange, in the development of
new and immense fields of human endeavor just as London does to-day.
To what extent could capital exports of such tremendous economic
significance continue if so useful and so indispensable an institution
as the Stock Exchange were abolished or interrupted? It was Burke who
said that “great empires and little minds go ill together,” and so
it is with great markets and little critics. There can be no worthier
purpose in the commercial world than the upbuilding of a great centre
of credit designed to finance material enterprise, enrich the world,
and extend the benefits of civilization to new lands and new people,
based upon the credit supplied by the banker, the money provided
by the speculator and investor, and the safeguards afforded by the
Stock Exchange. And yet, curiously, the greater the effort in these
directions, the greater the criticism. Just in proportion to the
perfection with which all these agencies equalize prices, economize
time and effort, and protect the public, so they seem to attract
attention, comment, and attack.[14]
In Wall Street, according to this viewpoint, everything is tainted,
sinister, reprehensible, covetous and unscrupulous, just as it follows
the onward march of invention, science, and progress. This sort of
criticism will not, of course, continue. The man in the street--the
average layman to whom I have ventured to address this chapter will
learn sooner or later--in point of fact he is learning now--that the
questionable practices in Wall Street which started all this hubbub,
and which were a natural and a human accompaniment of the slowly
developed technique of this or any other business, have now been
effectually stopped. It has been a very long time, for example, since
Jay Gould ran his printing-press for Erie certificates, and that
incident cannot possibly happen again. The Keene type of manipulator
has gone, never to return. “Corners,” too, have seen their last day
on ’Change, and so also have other artificial impediments in the way
of natural supply and demand. It has been years since the Cordage
scandal, and the Hocking Coal incident marked the end of that form of
manipulation. Yet there are persons who talk of these things as though
they were daily occurrences, overlooking the fact that the New York
Stock Exchange, by its own efforts put a stop to the evils complained
of, and will never tolerate their return.
McMaster in his “History of the People of the United States” tells us
that in the early days in New England public sentiment was so aroused
against the legal profession that lawyers “were denounced as banditti,
as blood-suckers, pick-pockets, windbags and smooth-tongued rogues.”
At that period in our history feeling ran so high against banks and
bankers that Aaron Burr was only able to procure a charter for the
Manhattan (Banking) Company by resorting to the subterfuge of naming
it, in the Act, “a Company to furnish the City with water.” No doubt
all this rancor and hostility seemed a very serious matter to the
lawyers and bankers of those days, just as the criticism of to-day
strikes home to members and friends of the Stock Exchange.
The lawyers made many mistakes a century and a half ago when the code
and its practice were imperfectly understood in this country; so it
was with the early history of banking; and so in our time Wall Street
and the Stock Exchange have made the mistakes which any gradually
developing form of enterprise must make. But these mistakes are dead
or dying, and, in their place, no doubt, there will come a better
understanding all around. When that day dawns the thoughtful American
will realize that the particular rôle which the Stock Exchange plays in
promoting all forms of commercial endeavor is a boon such as no country
in the history of earlier days ever enjoyed. He will contemplate his
country’s progress with pride; he will rejoice in its capacity to
outstrip other countries; he will acclaim its advancement toward the
proud position now held by England, the banker and the clearing-house
of the world. And he will learn--this thoughtful citizen--that material
achievements like these cannot be attained without a market for capital
and a market for securities.[15]