THE RELATIONSHIP BETWEEN THE BANKS AND THE STOCK EXCHANGE
“A million in the hands of a single banker is a great power,” said
Walter Bagehot; “he can at once lend it where he will, and borrowers
can come to him because they know or believe that he has it. But the
same sum scattered in tens and fifties through a whole nation is no
power at all; no one knows where to find it or whom to ask for it.”
This explains the power of Wall Street. Money flows there for the same
reason that water flows downhill. The great agricultural districts
of the West, for example, will gather from their crops this year
several hundred millions of dollars. They have no real economic use
for all this money in the farming districts; the large commercial and
industrial undertakings that help to make America rich and powerful are
not in that neighborhood.
Particular trades settle in particular districts, and the money they
require must be sent to them from other districts. “Commerce is
curiously conservative in its homes;” the steel trade concentrates in
and around Pittsburg, the grain trade at Chicago, wholesale merchants
in special lines are always to be found huddled together in our big
cities in neighborly intimacy; and once a trade has settled in one spot
it remains there. The millions that go West to pay the farmer must
therefore go elsewhere to pay others as fast as a demand for money
arises, because the price that will be paid for it elsewhere is greater
than the price it will bring in the farmer’s pockets. This is doubly
true because, as we have said, there are no imperious demands for money
for commercial undertakings in the farmer’s neighborhood, and, even if
there were, home enterprises are seldom attractive; curiously enough
there is a familiarity about them and their local promoters that breeds
contempt. Besides, these millions are scattered in small sums all over
the agricultural States; there is no cohesion, no concentration.
What then becomes of these vast sums? They are deposited in the local
banks, and the local bankers, who are wisely permitted by law to
deposit three fifths of their legal reserves in a city bank, promptly
transfer the funds that are not required at home to the bank that will
pay interest on them. In this way large capital accumulates, and when
we say this is a wise provision of the law we mean that scattered
reserves in local country banks are of no more avail in emergencies
than the five-dollar bills in the people’s pockets; but, gathered
into one great central fund that will aggregate a sum large enough to
provide every solvent bank and business house with ample support in
times of distress, they accomplish a purpose worth talking about.
This is the way they do in Europe, but say “Central Bank” in America,
and people are frightened out of their wits. They say politics would
dominate it; “the interests” would control it. The bigness of things
seems to paralyze them. But to attack a thing merely because it is big
and powerful is no argument. In a country full of big things it does
not ring true; it is un-American, and, as for the bogy of a centralized
banking control, there is infinitely more of it in New York to-day,
under the existing system, than there could possibly be under the plan
proposed by the original Aldrich measure. However, the idea of a great
Central Bank is not the subject under discussion.
When money flows into the New York banks the popular notion seems to be
that it is used to facilitate speculation on the Stock Exchange. But
this is only one of its many sources of employment. It will supply the
payroll at Pittsburg, it will ship grain to Europe, it will discount
the bills of merchants, it will return to the West and South when they
call for it to move the next crop. If Canada or Europe wants it, and
bids high enough for it, they will get a share of it. Wherever capital
is most profitable, there it will turn; it will rapidly leave any
country that cannot pay for it. It is the old simile of water finding
its own level. The first step consists in gathering the idle hoards
of individuals into banks; the next consists in centralizing these
deposits where they will be available for other sections of the country
that have use for them.
In order to attract these funds and so facilitate the business of the
country smoothly and economically, the New York banks are accustomed
to paying 2 per cent. interest on such deposits. Critics who seem to
feel that there is something objectionable in the laws of gravitation,
would prevent country banks from depositing in the cities by forbidding
the payment of interest on deposits by national banks. But the laws
that govern national banks, as Mr. Horace White suggests, are not the
laws that govern State banks and trust companies, and, as these would
gladly pay the 2 per cent. interest on deposits, they would be given
an unfair advantage.[41] Critics also say that country banks should
not be allowed to keep three fifths of their reserves in city banks,
but then they would be at a disadvantage with the State banks in their
neighborhood, since the prohibition would not apply to them. Moreover,
if country banks were not thus permitted to deposit three fifths of
their reserves, what would they do with their funds? For long periods
the money would remain idle, and idle funds are as unhealthy for the
community as they are for the banks.
There is no other way but for the country banker to take care of
his customers first, and then send as much of his surplus as the
law permits to the centre that will pay him the best return and the
safest return. This is good business; it makes money; it is sound
economics. And before the critic goes into a paroxysm over the fear
that speculation in stocks will absorb all this wealth once it finds
its way to New York, let me remind him, to cite but one instance, that
short-time commercial paper, representing actual commodities moving to
market, has the first call. The Minneapolis miller’s ninety-day bill,
accepted by a reliable merchant and based on an actual carload of
flour, has in all normal times a preferred claim on the banker’s funds.
This discounting of commercial paper is the ideal function of banking,
to quote Mr. White, and if there were always a sufficient supply of
good bills to absorb all the bank’s loanable credit, with an inflow
of cash from maturing bills equal to the outgo of new ones, there
would be no occasion for bankers to look elsewhere to keep their funds
mobile--and the critic would be out of work.[42] But this does not
often happen, because the bank’s loanable funds normally exceed the
amount of acceptable paper, and at such times the banker makes advances
on goods or securities, and, if goods and securities are not pressing
for loans, he will place his funds elsewhere, where a demand exists.
But securities for which there is always a ready market are such
thoroughly good collateral for loans that bankers are glad to get them.
The stockbroker is, in a way, a dealer in merchandise. Whether he buys
for investment or for speculation--and remember that the boundary line
between investment and speculation is often shadowy and indistinct--he
pays cash for everything he buys. He then seeks advances of credit upon
his wares just as the merchant does, supplementing his own capital and
the deposits (margins) of his customers with call or time money from
the banks. To deny him these facilities is exactly the same as to deny
credit to a merchant; both are doing a perfectly legal business, and
both contribute to the economic welfare of the community.
The popular idea is that loanable funds thus borrowed by Stock Exchange
houses constitute a diversion of money from the merchants who need
it. Not so. Even if the banks were disposed to use all their loanable
funds in mercantile loans and discounts they could not do so, because
a part of these funds may be called for at any time, and it is not
good banking to lend too large a proportion of call money on time. The
merchant wants 30, 60, and 90 day money, and he wants it at a rate not
to exceed 6 per cent.; the stockbroker is compelled by the nature of
his business to borrow a large part of his money on call, and he pays
whatever the banks choose to charge for it. Incidentally it may be
said that no usury law is violated, even if 100 per cent. is charged,
because the New York law legalizes any rate of interest on call loans
of $5000 and upward, secured by collateral.[43]
As a matter of fact, far from being put at a disadvantage by the
banking methods that provide call loans to Stock Exchange houses,
the merchant or manufacturer enjoys banking facilities which the
Stock Exchange may never hope to enjoy. The merchant is able to
secure banking accommodations upon his personal credit, that is, by
discounting his own promissory notes or single-name paper unsecured by
pledge of collateral. But the stockbroker, however ample his resources
and his credit, can only obtain loans upon collateral securities. Any
attempt to resort to his personal credit or his personal paper would be
construed as a confession of weakness, and his good name at the banks
would suffer accordingly.
Persons who conjure nightmares over the practice of the banks in
loaning surplus funds to stockbrokers are deceiving themselves. Instead
of losing by this system, every merchant and manufacturer in the land
profits by it in greater or less degree. The stockbroker deals in the
bonds and shares of great railway and industrial companies, which,
in order to succeed, must be able to sell their certificates to the
public and so raise the money necessary to provide the extensions and
new construction that are constantly demanded by the public. If fresh
capital could not be enlisted in this way, additions and improvements
would cease. The merchant who requires the railroads to ship his goods,
and the manufacturer whose demands for new side-tracks, cars, and other
equipment are unceasing, are therefore directly interested in the
maintenance of a broad and stable speculative market for securities
at all times, because in that way only are funds to be raised for the
requirements of trade and industry. There would have been no railroads
in this country had there not been speculators to build them, nor could
the money have been raised had there not been other speculators to buy
the shares with the aid of the banks.
Prevent the banks from lending money to facilitate stock-market
operations and business ceases; interfere with it or hamper it and
confidence is impaired, and when these things happen the industrial
system collapses in terror. Such has been the experience of modern
times. Until a system is devised whereby large undertakings may enlist
public support in other ways than by offering securities in our great
Exchanges and by maintaining a market for them there, it is useless
to talk of interfering with that necessary relationship which exists
between the banks and the stock market. On the one hand we have the
cobwebs and windy sophistries of politicians and doctrinaires; on the
other hand the test of proved effectiveness in the conduct of business.
And the country’s business cannot stop; it must go ahead.
In the last six years more than a billion shares of stock have changed
hands on the New York Stock Exchange, together with bonds of a market
valuation exceeding five billions of dollars, and, under the rules,
each purchase made was paid for in full by 2:15 P.M. of the day
following the transaction. If all these purchases had been made for
cash--i. e., if every customer of every brokerage house paid in full
for his purchases, there would be no use for bank loans to brokers;
there would be no speculation, and hence no progress. Securities
purchased in the six-year period quoted were, in the majority of
instances, bought on margin, that is, they were only partially paid for
by the purchasers, the balance required being furnished by the broker
from his capital and by the banks from their loanable funds.
There is a popular fallacy as to the amount of actual cash required to
finance these enormous Stock Exchange transactions; persons who are not
well informed often entertain the impression that it is much larger
than it really is. As a matter of fact considerably more than 90 per
cent. of the business of the banks is done through the Clearing House,
an institution designed, as every one knows, to minimize the transfer
of actual cash and to simplify the payment of balances. If these
clearings seem large--they are, in fact, twice as large in New York as
in all the other cities of the Union added together--it is not alone
because more speculation in securities takes place in New York, but
because this happens to be the centre where many other cities balance
their claims against each other.
Furthermore, when critics who do not understand the subject look
askance at the volume of loans of the New York banks, they must
remember that the lending power of such institutions is always four
times greater than the supply of money in its vaults. The reserve of
25 per cent. which the banks are required to maintain means that every
million dollars of actual cash added to their funds renders possible
an expansion of four million in loans, and every withdrawal of funds
involves a proportionate reduction of these loans. These matters are
self-evident. The point to bear in mind is that through this expansion
and contraction of loans stock-market operations are increased or
diminished by almost automatic processes. “Money talks” is an old
aphorism. In this case it is not money that talks, but credit, and the
credit extended to stockbrokers by the banks is always wisely regulated
to meet conditions as they arise.
The customer of a brokerage house buys, let us say, 1000 shares of
St. Paul at 120, on which he deposits a partial payment or margin of
$15,000. The bank will loan to the broker 80 per cent. of the market
value of the stock, or $96,000, which, added to the $15,000 deposited
by the customer, leaves $9000 which the broker supplies from his
firm’s capital. The broker gives to the bank, with the securities, a
note on one of the bank’s printed forms, which gives the bank absolute
authority to sell the collateral whenever the margin shall have
declined to less than 20 per cent. This note is so sweeping in its
terms, and gives the bank such complete power, that a reproduction of
it, in small type, would fill two pages of this book.
It empowers the bank to sell as it pleases--if the broker fails to pay
the loan on demand, or to keep the margin at 20 per cent.--all the
securities in the loan; it authorizes the bank to seize any deposit the
broker may have in the institution; the bank may itself purchase all
or any part of the securities thus sold, and all right of redemption
by the broker is waived and released. This instrument would seem, _per
se_, a pretty strong hold on the broker, but the bank’s security does
not end there. In making the loan the bank knows that the borrower is
a member of the New York Stock Exchange, and that presupposes capital,
with at least one Stock Exchange membership, worth to-day about
$60,000. It knows, too, that a fundamental rule of all Stock Exchange
brokers is to protect the bank at all hazards, not merely because the
personal honor of the broker is involved, but because the business
could not be conducted otherwise.
It is apparent from a consideration of all these elaborate precautions
that the lending of funds to stockbrokers is a safe business, indeed
in all the criticism directed against Wall Street methods I have not
yet heard it questioned. The department of the bank entrusted with
such matters watches the tape with vigilance to see that the 20 per
cent. margin is not impaired; if it should happen to be impaired, the
broker’s messenger is almost always on hand anticipating with his
additional collateral the call that the banker will make. So excellent
is Stock Exchange collateral, thus secured and thus protected, that the
losses resulting from this class of business are infinitesimal. I am
not a banker, but I hazard the opinion that it constitutes, in fact,
the minimum risk in all the departments of the bank’s business.
In any case, when trouble comes and panic conditions prevail, it
requires no stretch of the imagination to say that the stockbroker’s
loan is a better loan than that of, let us say, the silk merchant, for
he, perhaps, cannot easily repay. He is under immense liabilities in
various directions and he has many obligations; whereas the stockbroker
feels every minute of the day that his first duty is to the bank;
the customer who owns the securities in the loan must either deposit
sufficient margin or the broker will sell him out, in which case the
loan at the bank is paid off. Finally, it may be added that in the
October panic of 1907, when merchants’ failures were announced daily,
and when certain banks and trust companies closed their doors, not a
single failure was announced on the New York Stock Exchange.
Another objection often lodged by critics of present-day banking
conditions, has to do with the practice of New York banks in the
over-certification of brokers’ checks. These over-certifications are
held to be objectionable because the National Banks are forbidden by
law to certify for a sum greater than the drawer has on deposit. In
practice it works out this way: The broker’s clearing-house sheet of
to-day tells him what payments he has to make, so on the following
morning he acquaints his bank with the fact that payments are to be
made necessitating certifications beyond the amount of his deposit.
He then sends to the bank the promissory note of his firm, payable on
demand, and the bank credits his account with the proceeds. As the day
advances the broker’s checks come in and are credited to the account,
which is always balanced and the note paid off before the close of the
day’s business. The risk is nominal.
Of course a few hours elapse between the certification and the receipt
of the broker’s checks, and in this brief interval it would be possible
for a dishonest man to abuse the privilege extended him, but the fact
that such a thing does not happen affords tenable ground for the belief
that it will not happen. The bank does not deal with an individual, but
with a firm, and it knows that the firm has a membership in the Stock
Exchange, with a cash balance on deposit in the bank that extends the
accommodation. Any banker will bear witness that the business is quite
satisfactory and that it involves no loss. Moreover, this certification
of stockbrokers’ checks is essential to the maintenance of broad
speculative markets, and, whether that portion of the public that
criticises the practice likes it or not, speculation is a necessary
part of our business life.
It may be pertinent to remark in this connection that the law
prohibiting these certifications by National Banks is unnecessary
and unwise, as is evidenced by the facility and safety with which it
is honored in the breach. State Banks in New York are under no such
restriction, nor has it occurred to our lawmakers that a necessity for
the prohibition exists. The experience of these banks in the matter
of certifications, like that of the National Banks, shows that the
business is safe and sound. If the merchant discounts his paper for
thirty, sixty, or ninety days, why prevent a similar accommodation
to stockbrokers for an hour or two? Both are engaged in a strictly
legitimate business upon which the welfare of the community in greater
or less degree depends, and the fundamental purpose of a bank is to
promote and encourage such business. That is what banks are for, and
bank officers are supposed to know something about how, when, and where
accommodations may be extended with safety to all concerned.
Mr. Horace White cites the year 1909 as an illustration of the
employment of loanable bank funds by brokers which brings up another
point. For long periods in that year, money loaned on call on the floor
of the New York Stock Exchange at 1½ per cent., while our banks were
paying 2 per cent. to the interior banks to which the money belonged.
This does not necessarily mean that the banks were losing money;
because the greater part of these funds was employed in time loans and
in commercial discounts at 3 and 4 per cent., thus raising the average
income rate. There is also to be considered the unearned increment
which the bank gains by “holding” its depositor, even though no large
profit accrues from the funds thus deposited.[44]
As the ratio of reserves to liabilities at that time was much above
the legal requirement, it might be inferred from this and from the 1½
per cent. rate that money was easy; but it was not, as many persons in
commercial pursuits learned when they tried to borrow it. There was a
great deal of money that was not being used in daily business, and one
of the reasons was that the period was one of distrust. Stockbrokers
got funds at 1½ per cent. while many other borrowers were required
to pay stiffer rates, because the banks that controlled the money
market--i. e., the loanable funds--were unwilling to part with them
except for short periods and on instantly marketable security, and
this state of mind on the part of the New York bankers was shared by
the bankers of Europe. It was good banking, because it was prudent
and conservative. In other words, at a time when danger threatened,
bankers in all important centres of the world regarded Stock Exchange
collateral as ideal security, and, as we have seen, the aggregate of
their loanable funds pressing on the market kept call rates down to 1½.
If in times of doubt and distrust this form of collateral proves its
safety, is it not a fair hypothesis that it is safe at _all_ times?
If the critics are correct in their contention that pressure of easy
money in the New York market holds out inducements for foolhardy
speculation on the Stock Exchange, the year 1909, just cited, should
have witnessed a great boom in securities. If speculators could
borrow at 1½ per cent. on securities that netted 5 and 6 per cent.,
the theory of our adversaries is that this disproportion entices a
large number of people into such speculative ventures that inflation
takes place, followed by collapse. That nothing of the sort occurred
shows that critics, like other less gifted persons, may err; it
shows, too, what every thoughtful person knows, that booms are not
created on the Stock Exchange, which merely reflects in its dealings
external conditions of all sorts, among them psychological processes
which neither brokers nor money markets may hope to control. As a
matter of record, 1909 showed but little increase in the volume of
business transacted on the Stock Exchange as compared with 1908, and
the increase, such as it was, represented nothing more than a natural
recovery from the paralysis following the débacle of 1907, plus an
investment of funds at attractive levels. The same state of affairs
prevailed in 1910. From June to December of that year call money rates
almost never exceeded 3 per cent., and time money might be had at from
3½ to 5, yet far from stimulating speculation--far from revealing an
excessive employment of bank funds by stockbrokers--transactions both
in shares and bonds dwindled to insignificant proportions.
Cheap money is by no means a “bull argument” from the Stock Exchange
point of view, because it arises from dull conditions in commerce and
industry, and there can be no boom in the securities which represent
the nation’s business unless mills and factories and railroads are
prosperous. There have been more bull markets with tight money, or with
money in the neighborhood of 6 per cent., than in cheap money markets
of the sort just described. This is not equivalent to saying that a
prolonged rise can be conducted through a period of dear money. As a
matter of Stock Exchange experience such a condition seldom arises,
because the Stock Exchange discounts the future, foresees those
economic conditions that spell prosperity for the country, and advances
the prices of securities on a money market that has not yet felt the
demands of improved conditions.
In June, July, and August, for example, conditions may warrant a hope
of bountiful harvests, while general business is dull and idle money
abundant. Such a prospect is always discounted, other things being
equal, by a rise in securities, and money that is not yet required
to market the crops thus finds employment as loans on Stock Exchange
collateral. Later on, when reviving business leads the interior banks
to call their New York balances, the depository banks meet the demand
by calling loans and by advancing rates. The speculative movement on
’Change is then checked or reversed just in proportion to the demand
for money elsewhere. It may continue for a while if the discounting
process has not been complete, or if there remains a wide disparity
between interest rates for money and net returns on securities; or if
the independent resources of the city banks are large enough to furnish
comfortable interest rates even after the westward drain has commenced,
but, generally speaking, “the move is over,” to quote the vernacular,
by the time business men want their money. Nine times out of ten any
monetary strain that results thereafter is not due to speculative
operations in securities nor to any other cause attributable to the
Stock Exchange.
A word should be said here concerning the Stock Exchange Clearing
House, because just as the Clearing House of the associated banks
ascertains and pays the balances of its members with a minimum outlay
of coin and legal tender notes and with great economy of time and
labor, so the Stock Exchange Clearing House stands the strain of an
enormous business, reduces the volume of checks and deliveries, and
relieves both the banks and the stockbrokers of an amount of risk and
confusion that would be well-nigh intolerable.
In order that the layman, for whom these pages are written, may
understand what this means, it may be said that if 500,000 shares of
stock are sold in a day on the Stock Exchange, and if we assume the
average price of these stocks to be 50, the checks paid out on that
day would be $25,000,000, and in a year at that rate certifications
would be necessary involving the stupendous total of $7,500,000,000.
This clumsy if not impossible method the Clearing House was designed
to avoid. Moreover, the actual daily transfer of such a volume of
securities is largely obviated by the Clearing House system, and thus
another and highly important economy is effected.
The Stock Exchange Clearing House is managed by a committee of five
members of the Board of Governors of the Exchange. Each day the seller
of stocks sends to the office of the buyer his “deliver” ticket, and
the buyer sends to the seller his “receive” ticket, this transaction
constituting a “comparison” by both parties, and an evidence that the
transaction has been entered on their books. Before 7 P.M. of that day
these tickets, and the sheet comprising the record, are sent to the
Clearing House. This sheet contains a “receive” and “deliver” column,
with all the transactions in each security grouped together, and with a
balance--i. e., a debit or credit, struck at the bottom. If there is a
credit, a draft on the Clearing House bank is attached; if a debit, a
check for the balance accompanies the sheet.
When the Clearing House receives this sheet a simple and a very
ingenious process ensues which relieves the broker of a great deal
of trouble, risk, and labor. If he has bought and sold, let us say,
an equal amount of stock, comprising numerous transactions, instead
of having to draw checks for all these separate trades, the Clearing
House settles the whole day’s transactions by a single check for the
actual balance. If his numerous purchases and sales do not balance,
and if there are various lots of stock to receive and deliver, the
Clearing House eliminates a host of intermediaries and puts him into
direct touch with one firm to whom he delivers, and with one from
whom he receives. He may have had no transaction with the firms thus
arbitrarily assigned to him; that makes no difference. The books of
the Clearing House always balance; somewhere a firm is entitled to a
receipt of stock, and somewhere another firm will be found to deliver
it to him.
Nothing could be simpler and more economical than the manner in which
the two are brought together. In such a system, the number of shares
actually delivered is reduced by the Clearing House to one third of
the number represented by the broker’s actual transactions, while the
amount of money which he must command to meet his daily engagements
represents, on an average, only 25 per cent. of the actual capital
that would be required were it not for the excellent system thus
afforded him. Persons who wonder at the magnitude of Stock Exchange
transactions, and who jump to hasty conclusions as to the actual
capital involved, may well reflect upon the manner in which this method
reduces to a minimum the stockbroker’s drafts upon the banks.
In a larger sense, if the critic in these matters affecting the
relationship of banks to stockbrokers feels aggrieved at what he
thinks is an improper diversion of funds, he must remember that the
comparative scarcity of capital to-day--which is at the bottom of his
complaint--is not due in any sense to Stock Exchange speculation,
for there has been almost no extensive speculation in this quarter
from 1907 down to November, 1912. To find the cause of the scarcity
of capital--and it is unquestionably scarce--he must consider the
immense destruction of tangible wealth in the last decade, and the
extraordinary tendency to convert floating forms of capital into fixed
and immobile forms.
The amount of money expended in State roads since automobiles came
into popularity is probably ten times more than it was before; at the
election in November, 1912, a fresh total of $50,000,000 was voted for
“good roads” by the electorate in New York State. The building of the
Panama Canal has cost or will cost about $365,000,000; all over the
country large municipal or state works are under construction; here
in New York the contract for the Erie Canal calls for $150,000,000,
and for the city’s new water-supply system--the Ashokan basin and the
Kensico reservoir--$177,000,000, each contributing a share to the
depletion of the normal supply of working capital. Meantime, to cite
another instance, Congress appropriates $160,000,000 to pensions in a
single year, and $40,000,000, as a recent writer puts it, “for that
particular form of graft which consists in giving a $30,000 post office
to a thirty-cent village.” The railroads of the country alone require
to-day sums of money equivalent to the working capital represented by
all our bountiful harvests of 1912.
Aside from these matters the critic should remember, in fair play, that
the currency famines which occur with periodic frequency in our country
are due in large measure to the non-elastic nature of the currency,
to its persistent absorption by the Treasury, and to the rigid
restrictions which these abnormalities impose on the volume of banking
credit. Conditions such as these contributed in no small measure to
our last great panic, and led to a premium on currency that made us a
laughing-stock among the nations. There has been no such money delirium
in England since the Napoleonic wars; no such condition in Germany
since the empire was founded, and nothing approaching it in France,
even in the commune and the war with Prussia. Yet in America we go on
wobbling uncertainly under the makeshift act of 1908, with its currency
associations and its emergency measures, and with the added fear of
what may come when the Act expires in 1914.
The situation in America is substantially this: Business drives ahead
at a tremendous pace, with perils on every side, chiefly anxious to be
undisturbed. Matters run along smoothly for a while; then something
happens--there is too much optimism or too much confidence--and a
smash. It is not due to speculation in securities, because, as in 1907,
the stock markets are the first to see what is coming and to discount
it. But speculation in lands, or in manufacture, or in railroad
construction go on and on; there is too much work for the dollar
to do; the currency system breaks down; here and there a financial
institution closes its doors; public confidence is shattered, and the
whole credit system is disturbed.
Then there arises a noble army of critics who, with the best intentions
but with insufficient knowledge and study, set to work to remedy
conditions they do not understand by methods untried and unpractical,
that only add to the general confusion. More harm than good results
when the physician, brusquely entering the sick-room, tells the
patient he is a very sick man, denounces the lobster that poisoned
him, and departs with a general condemnation of shellfish, but without
prescribing suitable remedies. Persons who denounce the relationship
existing between banks and stockbrokers are in most instances upright
citizens of high character, but until a little patient study of
conditions has enabled them to speak with authority upon matters that
are necessarily complex and delicate, they cannot accomplish any really
useful purpose. “The wicked are wicked, no doubt,” said Thackeray, “and
they go astray, and they fall, and they come by their deserts; but who
can tell the harm that the very virtuous may do?”
The three leading groups of banking interests in Wall Street are said
to represent $500,000,000 of available capital each; the deposits in
what are called the “trust banks” amount to between $700,000,000 and
$800,000,000, while the banks of the whole country hold deposits of
$16,000,000,000. The savings banks now hold $4,450,822,522 which is
owned by 10,009,804 depositors.[45]
As we have not yet reached the point of abolishing property altogether,
we may concede that these great combinations can do for individual
business and for the country at large what cannot be done without
them. They furnish the large sums which, from time to time, are
required by the Government, the State, the town, the manufacturer,
the tradesman, and the speculator, and to each of these--especially
the speculator--the tremendous development of this country is due.
Because of speculation in securities, the 26,000 million dollars’ worth
of capital represented on the New York Stock Exchange by the stocks
and bonds of railroad and industrial corporations have found a public
market through which necessary capital has been raised, and the total
increases yearly by about one billion dollars. This is “big” business,
to be sure, but it is the bigness of the whole people, for the welfare
of each is the welfare of all.
Such large affairs naturally set people thinking; men want light; they
want to know, entirely aside from the doctrines of political platforms
and stump orators, to what extent the relation of capital to business
meets the test of proved effectiveness and economic worth. Especially
do they seek information in this oft-discussed matter of speculation in
securities and of the bank’s relationship to it; and here, fortunately,
there is no lack of results by which that relationship may be tested.
Pragmatism tells us that as phenomena appear, become mighty, and
persist in accordance with natural processes, so they demonstrate their
ultimate good and their obvious usefulness. In its especial application
to the matters we have discussed, pragmatism teaches us to wait for
results in estimating a particular business method, and then to study
it in its relation to _all_ business. Applying this test to the use of
loanable bank funds by those who deal or speculate in the things that
represent American enterprise, we find that the very existence of these
enterprises depends upon the maintenance of these methods. Finally,
both the banks and the Stock Exchange are the trustees of the property
of others, and in that capacity their reciprocal relations are certain
to be attended by greater caution than if they dealt in a freehanded
way with their own property. The magnitude of their undertakings spells
responsibility, and responsibility breeds sobriety.