PUBLICITY IN EXCHANGE AFFAIRS; CAUTIONS AND PRECAUTIONS
If a list of “don’ts” were compiled for the public that is interested
in the Stock Exchange, the first prohibition would be “don’t believe
all you read in the newspapers”; at least do a little independent
thinking before jumping at conclusions. The relationship between
the Stock Exchange and the metropolitan press is, with perhaps one
exception, cordial in the extreme. The newspaper man is a thinking
person; if he were not he could not hold his job. He knows, for
example, that the Stock Exchange is an indispensable part of the
machinery of modern business; he is aware of the fact that it maintains
a high standard of probity. He would be the last man to attack the
institution unfairly, and he is the first to defend it, editorially,
when misconceptions and unfounded suspicions are rife.
But on the other hand, newspapers want news; their circulation and
the popularity of their advertising columns depend upon the skill
and ability with which they parade before the public everything that
happens. If a politician or a clever and ambitious lawyer makes a
startling charge against an institution that occupies a conspicuous
place in our affairs, that is news, and the newspaper must print it. In
order to make the news attractive to the jaded palate of its readers
the dry-as-dust parts must be skimmed off, and seasoning added in such
peppers and vinegars as the occasion permits, with a final dash of
spice in the shape of pungent headlines that will arrest and hold the
appetite.
Somewhere off in the dim recesses of the editorial page there may
be a sober (and deadly dull) analysis of the matter, revealing the
politician or the notoriety-seeker in his true colors, but this is
often ignored by the reader. What he wants with his morning coffee is
his daily thrill, and he finds it under blatant headlines on the first
page. Because he wants it, and because he won’t be happy till he gets
it, the newspaper gives it to him on a generous scale. Until we arrive
at a Utopian state in which art, religion, and kindred abstractions
satisfy the mind to the exclusion of fires, riots, suffragettes and
Stock Exchanges, we cannot blame the newspapers for giving us what we
want, nor the politicians for helping the good work along.
And yet, as Mr. Bryce pointed out in his lectures at Yale on “The
Hindrances to Good Citizenship,” this willingness to accept as
conclusions the scare-heads in newspapers which are not, and never
were intended to formulate serious opinions, lays us open to the
charge of indolence; “the neglect to think” thus becomes a serious
phase of a deficient sense of civic duty. In countries where men are
imperfectly educated, or in rural districts where means of acquiring
knowledge are small and scant--where men lead isolated lives out of
reach of libraries and learning--they ask advice of the priest or the
village schoolmaster, and thus vicariously discharge the duties of
citizenship without any real knowledge of the problems before them and
without contributing to the solution of those difficulties to which the
ever-increasing complexity of our civilization gives rise.
Now if we apply this line of thought to the study of such economic
problems as arise in our country from time to time, we find that the
same conditions apply. We fancy ourselves immeasurably better off
than the uncultured frontiersman who must rely for his information
upon the priest or the schoolmaster, but in our dumb submission to
the rant of the hustings and the scare of the headlines are we really
discharging the functions of good citizenship? Are we not indolent?
I can have a lively sympathy for the half-breed in the Canadian woods
seeking information as best he may, but for the man in our populous
and cultivated communities who is too lazy to turn to our great public
libraries for light on the vexed and vexing economic problems of the
day, contenting himself with the half-baked opinions of demagogues and
quacks--for such a man it is difficult to say a good word. There is
hope for the one; the other is the most menacing and discouraging type
in our citizenship.
Take up the morning newspaper almost every day and we find the crude
essence of this misinformation paraded in a way that makes us sorry
for a public that cries for such stuff. A custodian of public funds,
collected for the purpose of erecting a monument, is found very
recently to have squandered the money entrusted to him. One of his
co-trustees, who must have been somewhat lax in his duties, bewails the
loss and seeks to enlist sympathy for himself by hazarding the opinion
that “the money _must have been_ lost in speculation in that hell-hole,
the Stock Exchange.”
This from a former army officer and a gentleman, who subsequently
states that he has no idea what became of the funds, but “cannot think
of any other explanation.” “Hell-hole” and the “Stock Exchange”
constitute a good repast; the headline artist contributes his quota
to the feast, and so a portion of the public that feeds on this meat
arises from the table with the satisfying conviction that another awful
indictment has been leveled at the Exchange, notwithstanding an utter
absence of proof or evidence of any kind tending to show that the
delinquent trustee had lost a dollar in Wall Street. And suppose he did
so lose it, what then? Is the Stock Exchange or any other market-place
a “hell-hole” merely because a thief whom nobody suspects squanders his
money there? Suppose he had spent it in automobiles, or in real-estate
speculations, or in campaign contributions, or in foreign missions,
would the same amiable characterization apply?
Another familiar instance of making Wall Street the scapegoat is seen
in the “explanations” of defaulting bank clerks. “When a young bank
employee,” says a financial journal, “with a wife and two children in
Flatbush, and a salary of something less than $2000 a year, takes to
entertaining angels, more or less unawares, in the Great White Way,
and matching his trained financial mind against ‘bankers’ of another
kind, he always blames Wall Street when the inevitable smash comes.
He has been ‘speculating in stocks,’ he says. He thinks, and a great
many people equally silly agree with him, that he thereby shifts the
blame for his extravagance and folly to other shoulders. Entirely
well-meaning people, without the slightest conception of the real
purposes for which the financial centre of a nation exists, say: ‘Here
is another indictment against sinful Wall Street. Let us kiss away
the tears of this misguided young man, who now promises to be good.’
They never think of asking the misguided young man to show documentary
evidence of his losses, which of course every broker must necessarily
provide, and must keep in duplicate as a matter of record.”[46]
A police officer whose salary has never exceeded $3000 a year is
arrested, and it is shown that he possesses a fortune of $100,000.
Where did he get it? Why, he made it in the course of nine months
of remarkably successful speculation in Wall Street, and one of his
henchmen, too stupid to know that everybody in Wall Street keeps a set
of books, promptly came forward to endorse this explanation. Proofs
were sought by the authorities, and the lie was, of course, exposed,
but the readiness with which the frugal officer sought to fall back
upon this hoary explanation shows that it is a permanent fixture of the
crook’s property-room, and that in the stage-setting for his sordid
accumulations there must be the familiar Wall Street background.
Another notorious pastime, that seems to be well known to every one
but the officers of the courts, consists in the practice of fraudulent
bankrupts in producing in court a mass of worthless securities as
evidence that the bankrupt’s money has been “legitimately” lost in
speculation. The certificates thus exhibited are beautifully engraved
memorials of defunct mining concerns, sold at so much a pound by
well-known dealers. It is related that a person who wished to keep ever
before his eyes a lesson and a warning once papered the walls of his
house with a wagon-load of this junk, which he was able to purchase at
less than the price of ordinary wall paper.
Any scamp who intends to “lie down” on an unprofitable contract can buy
$1,000,000 nominal of the stuff at waste-paper rates. He is assured
of the sympathy of his family and friends, and, if it does not occur
to the lawyers to inquire who his brokers were, and when, where,
and how these purchases were made, he stands a good chance of going
the way of all undetected swindlers, notwithstanding the fact that
documentary evidence of his purchases, if there were any, is always
available. In this way another indictment is framed against Wall Street
in the minds of thoughtless people. They seem to ignore the obviously
improbable nature of the story, preferring rather to make Wall Street
the scapegoat, and by “Wall Street,” in the majority of cases, they
mean the Stock Exchange, yet the Stock Exchange had no more to do with
it than Trinity Church, at one end of Wall Street, has to do with a
stevedore’s crap-game at the other end.
So far as concerns the case of the crooked bank clerk, it is perfectly
well known, or at least it should be, that no member of the New York
Stock Exchange is permitted under its rules to have any speculative
or investment relations whatever with employees of banks or trust
companies, or of other brokerage houses. The Exchange authorities
enforce this rule to the letter. Disgrace and expulsion faces the man
who would attempt it. More than that, members are unusually careful
in investigating customers’ accounts for reasons involving their own
safety in actions that may be brought in the courts; so rigorously is
this care exercised that accounts are repeatedly refused where the bona
fides of the customers are not fully understood by at least one of the
firm’s partners.
Furthermore, any negligence on the member’s part in this important
matter, or in other matters affecting the general welfare of the Stock
Exchange, places him at once within the all-embracing grasp of that
one of the Exchange’s by-laws which has to do with “any act detrimental
to the interests of the Exchange.” This is a large order, and its
importance is well understood by the members. They know, and all those
who so freely criticise the Stock Exchange could find out if they
inquired, that the power of the Board of Governors to supervise every
action of its members is vastly greater than any power that could be
vested in the courts. There are constitutional limits to the authority
of common law; there are no limits whatever to the powers of the
governors in dealing with members.
This leads us to consider another popular criticism of the Stock
Exchange, based on its unwillingness to abandon its present
organization and incorporate under State regulation. The public seems
to feel that this reluctance to submit to State or Federal control
shows that the institution is trying to conceal something, yet nothing
could be further from the fact. The Exchange does not incorporate
because the interests of the public, which it is bound to conserve,
would suffer enormously by such a step. “In its present form,” says the
_Wall Street Journal_, “the Stock Exchange is a private organization.
It can inspect any member’s books at any moment. If it suspects him of
wrongdoing it can tap his telephone wire, and has done so in the past.
It can terminate his membership for conduct which no legislation could
possibly touch. One reason, in fact, for its admittedly high standard
of probity is the power, at once democratic and despotic, exercised by
the Governing Committee elected by all the members.
“But if the Stock Exchange were reorganized under State supervision,
much of this power would be taken away. Members would possess rights
which no governing committee could ignore. They could resort to
practices legally right and ethically wrong, which under the present
system would be visited by swift punishment. Any member of the public,
now, who can show the Stock Exchange committee an act by a broker
toward him legally defensible but morally wrong, can secure that
broker’s expulsion from the Stock Exchange. Under State incorporation
he could only obtain redress by prolonged litigation.... No legislative
safeguards are needed. The Stock Exchange now possesses a power of
supervision over its members which neither Congress nor the State
legislature could give. The only power our lawmakers really possess in
the matter is to limit that supervision; and for this, if for no other
reason, the Stock Exchange should fight incorporation to the last, and
should take every proper means of publicity to range public opinion
behind it.”[47]
An instance in which Wall Street in general, and the Stock Exchange in
particular, occasionally comes under the ban of more or less hysterical
public condemnation, results from the work of company promoters and
swindlers, wholly outside the Exchange’s jurisdiction. In spite of
the vigilance of the postal authorities and the police, every now and
then a swindler finds his way into this forbidden ground, and here he
plies his trade. Sometimes it is a land scheme, sometimes it is timber,
recently it was wireless telegraphy, often it is a gold mine.
The promoter of these enterprises does not permit himself or his
affairs to come under the scrutiny of the banks, the Stock Exchange,
or the Clearing House. He fights shy of the curb market as it is now
organized, and avoids the watchful eye of the metropolitan newspapers
that enjoy the pastime of exposing frauds. His ways are ways of
darkness. His methods are mailing lists; his victims are that numerous
progeny born every minute; the lure is the engraved letter-head with
its “Wall Street,” its list of “Directors,” and its subtle assurance
that this precious property now literally “given away” bears the
endorsement of the elect, and is known and approved by the whole
financial community.
Whenever he can do so, the artful gentleman behind this bait contrives
to have a market for his wares. He cannot do this anywhere in New
York, for the curb market, once the refuge of the swindler, is now
closed to him, thanks to the improved morale of the curb brokers
themselves, and to the recommendations of the Hughes Investigating
Committee. Consequently the dishonest company promoter is forced to
manufacture his market in another city, where fluctuations in the price
of his wares are made to order, usually on a rising scale, without
interference by the authorities.
More often still, this market and its rising prices do not exist at
all; in any case it is only a fraudulent attempt to excite the cupidity
of speculators into the belief that there is active trading in the
particular stock offered for sale. “The mines,” says the Chairman of
the Hughes Committee in discussing these swindling operations, “are
situated in distant places, as Nevada, Alaska, Canada, Mexico, and even
in South America. In proportion as they are remote, inaccessible, and
subterranean, they are attractive to the class whom Tacitus had in
mind when he said: “_Omne ignotum pro magnifico_.”[48]
The halcyon days of these enterprises are now drawing to a close. Their
field of operations is becoming more and more limited, the postal
authorities are redoubling their energies, the newspapers are closing
their advertising columns, and the victims who have birthdays every
minute are, it is hoped, growing wiser. In any case immense losses
have been incurred, and immense harm done. To appreciate the extent of
it, one has but to look over the circle of one’s own acquaintances,
and count the worthless specimens of the engraver’s art that have
found a resting-place--permanently, I fear--in homes ill-prepared to
house them. Each one of these chromos has left its sting--each one has
excited a bitterness and resentment that, in the misdirected anger of
losers who will not see their own folly, is too often flung at Wall
Street and at the Stock Exchange.
The bucket-shop method is better known and easier to detect--hence it
is rapidly being exterminated. “Bucketing,” as it is called, usually
flourishes in small towns at a considerable distance from New York.
Formerly it thrived in the larger cities, even those adjacent to the
Metropolis, but it has now been driven from these places. It professes
to trade in stocks for its customers, and its office windows are
usually decorated with signs that indicate, though they do not always
say so plainly, that the house is identified with “the Stock Exchange.”
It allows its customers to trade on what is called “a two-point
margin,” that is to say, the buyer or seller is “wiped out” when the
market has fluctuated two points against the price at which the trade
is made. The word of the house must be accepted for the veracity of its
prices, which, however, are supplied to it by telegraph from New York.
Bear in mind that these prices are not telegraphed to the customer,
but to the mysterious persons in the rear office of the shop. They
call themselves brokers--this bucket-shop fraternity--but they are not
brokers in any sense by which that elastic term is used. They have not
even the “redeeming vices” of gamblers; they are swindlers.
The trader in such a place starts with all the odds in favor of the
house. To be exact he pays two commissions and the market “turn” is
against him _ab initio_. If the stock is 100 bid, 100¼ asked, he buys
at 100¼ always. If he sells at the same quotation, he sells at 100. He
could not sell in the former case at 100¼, nor buy in the latter case
at 100, so he starts ¼ per cent. “to the bad.” If, then, he bought
at 100¼, when the price is 98¼–½, his two-point margin is exhausted,
although the price has actually declined only 1¾ per cent. Thus he is
required to bet heavy odds on what is really no better than an even
money chance, even allowing that the prices are honest.
But they are not honest, because in the large majority of such
transactions the prices are “rigged,” that is to say, the bandits
who run the shop run it to win and not to lose, and “fix” the prices
accordingly. The player is thus required to give odds by laying 3 to 4
not on what the price of a stock will be, which is ruinous enough in
all conscience, but on what his opponent will choose to make it! Since
we are talking of gambling now and not of any real transaction, we may
as well adopt the vernacular of the fraternity and say plainly that the
bucket-shop man holds the stakes, cuts, shuffles, and deals the cards,
and then telegraphs you what your hand is. And the loser at this joyous
pastime thinks he has been robbed by Wall Street.
The game works against the player in yet another sense, as the _Wall
Street Journal_ points out, for when you buy stock you are entitled
not merely to the stock itself, but to all the privileges which it
carries, and not the least of these privileges is the effect which
your purchase will have on the market. That is to say, if ten thousand
purchasers throughout the country should buy even small amounts of
a certain stock on a given day, the combined effect of all these
purchases would undoubtedly lift its price on the Stock Exchange, and
thus we see that each buyer’s action carries with it a privilege of
no inconsiderable proportions. But the keeper of the bucket-shop does
not buy any stock for you at all; he merely makes a bet with you as to
what the price will be--and so, having robbed you of your money, he now
robs you of the privilege which goes with your money, since the alleged
purchase of a million shares of your stock in bucket-shops would not
have the slightest influence on its price at the Stock Exchange.
The man who has saved money by his own enterprise and thrift is a
fool if he gives his savings to mining “bonanzas” through the itching
palms of promoters, or to bucket-shops through the lure of slender
margins. The very fact that promoters always play upon the theory that
distance will lend enchantment to the view, and solicit their funds
solely by means of prospectuses, should be a sufficient warning to the
most credulous. A word to his banker, or a letter to any responsible
institution in Wall Street, will supply him with the necessary
information and save him from the possibility of loss.
As to the bucket-shops, if he is in doubt, he has but to follow the
same procedure. The New York Stock Exchange authorities will gladly
tell him whether the so-called “banker and broker” is really a member
of the Stock Exchange, and the local bank nearest at hand will expose
any fraud if it is called upon for information. As to the two-point
margin bait, it is a good rule that the smaller the margin asked for,
the less strength there is behind the house that asks it, and just in
proportion as the margin requirement diminishes so a suspicion of the
solvency of the firm should become fixed in the mind of the customer.
This warning applies to stockbrokers no less than to bucket-shoppers.
If the stockbroker takes from you a ten-point margin, and from somebody
else a two-point margin, you may be sure your money is being used to
finance the other customer’s trade, and you should lose no time in
withdrawing your funds from such a house.[49]
I often think that those who so freely criticize the Stock Exchange
would have applauded it could they have witnessed the fight between the
Exchange and the bucket-shops. In England, because telegraphs are a
Government monopoly, the transmission of prices by or to bucket-shops
is effectually barred, and the same is true of the telephone. But in
this country the transmission of prices by wire is not a breach of law,
and the difficulties that have attended the attempt to suppress the
transmission of racing news by wire to poolrooms shows that even if it
were prohibited there would be great difficulty in its enforcement.
Notwithstanding these obstacles, however, the Stock Exchange labored
zealously to close bucket-shops long before the officers of the law
became active, and, while the work thus done was not published
broadcast, it was none the less effective. Many a bucket-shop
proprietor doing business a few years ago under a high-sounding company
title probably never knew what hit him when the raid took place. It was
the strong arm of the Stock Exchange working unostentatiously that did
it, and in that good work it saved from further losses a large number
of innocent people who used the establishment with no knowledge of its
real character.
As long ago as 1875, in its contracts with the telegraph company, the
Stock Exchange began restrictive measures to prevent its quotations
from reaching the bucket-shops. In 1878 still more forcible measures
were employed, and in 1882 positive steps were taken by which the
Exchange authorities personally inspected the telegraph company’s
quotation contracts with its patrons. To-day this is carried to such an
extreme in the determination to protect the public from the impositions
of those who might in devious ways convey these quotations to improper
hands that even members of the Exchange may not install wires from
their offices to outsiders until the proper committee of Stock Exchange
authorities has viséd the application.
Meanwhile, a secret-service has been at work, silently ferreting the
hidden, underground channels in which the bucket-shop is forced to
conduct its operations. Thanks to this good work and to that now done
along similar lines by the Federal authorities, this form of rascality
is rapidly disappearing. Is it too much to hope that at least a part
of the unmerited criticism of the Stock Exchange by the victims of
bucket-shops may also disappear?
In heading this chapter “Cautions and Precautions,” my purpose was not
merely to warn the credulous outsider against the news items of the day
as related to the Stock Exchange, nor was it solely to point out to him
the pitfalls and dangers that exist under the Wall Street mask. I had
in mind also a word of caution to Stock Exchange members themselves.
That these gentlemen are more sinned against than sinning is, or it
should be, apparent to anybody who has taken the trouble to learn the
A B C’s of the business. Such a man knows that Stock Exchanges occupy
an important place in the mechanism of modern business; he knows, too,
that just in proportion as their functions enlarge and the scope of
organized markets increases, so persons will be found who foolishly or
dishonestly abuse the facilities there afforded.
“Reflection,” says a recent writer, “seems to have little part in the
intellectual equipment of the assailants of organized markets. The fact
that the stock market is sometimes abused by people who know nothing of
its purposes or are incapable of understanding the mighty influences
which dominate it, is no reason for considering it as a harmful
excrescence on the body politic.”
This fact established, one who has been a member of the Stock Exchange
for many years may, in a spirit of complete loyalty to the institution,
comment freely on some of the mistakes within the Exchange itself,
errors of judgment or sins of omission that have given to the popular
criticism of the day its one supporting prop. Admitting mistakes freely
is the surest way of correcting them; frequent reminders of them serve
to keep one on guard against their recurrence. The history of deposit
banking, for example, has been, like the history of the Stock Exchange,
a story of gradual development to meet growing conditions, and this
is true also of the history of note issues, joint stock companies,
clearing houses, cable transfers and of all the instruments that enter
into that economic structure which gives mobility to capital and
flexibility to credit.
In the very nature of things the development of each part of this
gradually devised machinery has been attended by mistakes, by errors
of judgment, and by occasional wrongdoing, yet we do not condemn the
national banking system because there were once wildcat banks; we do
not utter hasty judgments on stock-companies because in other days they
were badly organized and incompetently managed; we do not withhold
our support from railways because they once erred by pushing too
ambitiously into projects that ruined innocent stockholders; we do not
abandon our form of government because there was once civil war. No,
but we try to keep all these things in view in order to profit by them,
and to see to it that they do not happen again. We say of individuals
that no man’s vices are sufficient reasons for not admiring his
virtues. Why not apply the same code to business?
One of the mistakes of members of the Stock Exchange in the past has
been in trying to do too much business on too little capital. This is
a subject that calls for plain speaking, since it directly caused two
Stock Exchange failures in recent years, failures that were, I am sorry
to say, essentially the result of dishonesty. Every Stock Exchange
house is looking for business, and a house with small capital sometimes
gets more than it should attempt to handle. Such a house borrows from
the bank, as all houses do, and allows its bankers a 20 per cent.
margin; so far so good. But it accepts business from its customers on a
10 per cent. margin, and this means financing the difference out of the
firm’s capital. If the capital is large, the business is safe, but if
it is small, the house finds itself “loaded up,” as the phrase is, and
is then in such a predicament that it must either summon enough moral
courage to refuse business altogether and so advertise its limitations,
or abandon its moral courage, sell its customer’s stocks “short” and
incur the risk of buying them back cheaper.
The latter course is dishonest; it is in fact nothing more or less than
a form of “bucketing,” since the customer must lose for the broker to
save himself, while, if the customer wins, the broker may not be able
to pay. This is not a common practice of course--first, because 99
per cent. of the members are absolutely honest; second, because the
majority of those who carry accounts on the books of Stock Exchange
houses are wise enough to acquaint themselves with the firm’s resources
and to withdraw when too much business becomes apparent, and, third,
even though a broker were not himself essentially honest, he would
not dare expose himself to the expulsion and disgrace that would
attend exposure. Nevertheless, the thing has been done, and it may
conceivably occur again. How then may it be avoided?
As the Stock Exchange is, as we have seen, an unincorporated body with
a set of rules which no legislature and no court could enforce without
depriving a man of his constitutional prerogatives, it is obvious that
this and all other reforms must come from within; all the many reforms
that are constantly lifting the Exchange to a higher level come from
that quarter. There are 1100 members of the Stock Exchange and perhaps
600 of these are engaged in active commission business. A committee of
the governors can enter any member’s office at any time, and demand
every book or record without reserve. It has absolute power to compel
him to do anything that in its wisdom seems desirable. If he is doing
too much business on too little capital, he can be forced to restrict,
or to retire from business altogether. Failure to comply immediately
means expulsion and a peculiarly stinging disgrace. Naturally in
the face of these despotic powers any plan of mutually guaranteeing
brokers’ accounts, such as that employed by Lloyds in London, or by the
_Agents de Change_ on the Paris Bourse, would seem unnecessary.
The remedy lies, first with the members themselves in striving to
attain continually to a higher standard of business morality, and
second with increased watchfulness by the committee having this matter
in charge. In point of fact it is apparent that both these solutions
are now being employed to a greater extent than ever before. The two
failures that occurred some years ago as a result of this iniquitous
practice hurt the Exchange, and stung the members to the quick. It can
never happen again if the vigilance of the governors can prevent it,
and yet every now and then a bank fails even under the watchful eye of
the bank examiner. No committee and no group of committees can watch
the books of 600 houses engaged in a business in which the dividing
line between sound and unsound business may be crossed and recrossed
with surprising suddenness many times a day. The members themselves
must look to this, and that is what they are doing to-day, as never
before, with an earnestness begotten of real pride in their great
organization.
If they do not do it, if they relax in any degree the vigilance upon
which the proper conduct of their business depends in this important
respect, they will be forced sooner or later to resort to the plan of
guaranteeing the accounts of their fellow members, or to submit to
that form of government incorporation or regulation which must impair,
if it does not actually destroy, their usefulness. Members must also
see to it that manipulation in its improper forms is driven out of the
Exchange, and that every conceivable precaution is taken in the listing
of new securities. These matters I shall discuss elsewhere. Meantime it
is cheering to note that Stock Exchange failures, whether arising from
this or any other cause, are diminishing in number. In London, at the
account day immediately following the failure of the house of Baring,
thirty Stock Exchange houses announced their inability to meet their
obligations. Certainly the New York Stock Exchange has not witnessed so
many failures in ten years.
One of the many excellent results of the work of the Hughes Committee
from the standpoint of the Stock Exchange was the publicity that came
of it. Critics of the institution had long found fault with it because
of its atmosphere of aloofness, the air of mystery that seemed to
surround it, its silence under attack, and its apparent unwillingness
to defend itself from adverse comment. This reticence, however, while
it did harm, was more apparent than real. In so far as the Stock
Exchange is concerned the advantages of publicity have long been
recognized. The difficulty has been in having its purposes and its
methods properly attested by competent authority in a way that would
enlighten the public and carry conviction. Members and friends of the
Exchange feel very strongly that in this day and age, when the spirit
of publicity is in the air, the Stock Exchange should fall in line with
a resolute determination to assert itself and make itself heard on all
proper occasions.
If a sub-committee of Congress retains as counsel a shrewd lawyer who
by devious ex-parte methods reads into the record and thence into the
newspapers only such biased and prejudiced information as will do harm
to the Exchange, while rigidly excluding all that properly belongs
there by way of refutation and explanation, energetic steps should be
taken to remedy this obvious injustice by invoking that spirit of fair
play which is essential to any judicial inquiry. These are not the days
of the Inquisition. We have progressed beyond the point of the Star
Chamber. Members of the Stock Exchange know that they will receive fair
play from the newspapers whenever they seek it, but they cannot expect
to find their side of the case stated unless they themselves take the
necessary steps to secure its presentation. And the way to do this is
to proceed with energy and determination against every avenue from
which the malicious slander or the insidious suggestion emanates.
The time has passed to sit supinely under every sinister attack and
imagine that a consciousness of rectitude will suffice as an answer.
Let the Exchange bestir itself. If, as happened very recently, a judge
on the bench can so lose his poise as to say to a common thief at the
bar, “You have committed a petty theft and you must go to jail--but
had you gone down to the Stock Exchange and stolen a million you would
go free”--such an unworthy utterance should be handled promptly and
without gloves by the Exchange authorities, and the same course of
treatment should be applied vigorously to every thoughtless minister
of the gospel and every cheap politician who, because the Exchange
has so long remained silent, may think that such silence entitles him
to utter any libel that comes to mind. The newspaper that publishes
the original utterance of this judge or that preacher will publish
also the steps taken by the Exchange to bring him to book, and even
though the slanderer may escape the consequences of his act through
the technicalities of the law, or otherwise, the knowledge that the
Exchange is at last aroused from its lethargy and in a fighting mood
will serve to deter others from similar indiscretions. I violate no
confidence when I say that henceforth the Stock Exchange will be found
defending itself manfully, and I venture to remind all noisy seekers
of notoriety that “thrice is he armed who hath his quarrel just.”
The Stock Exchange has felt, since the report of the Hughes Commission
in 1909, that such a report, by such a body of men, would inevitably
stay the hand of many of its detractors by showing them just what
the Exchange is trying to do, and just how the work is done. “The
committee,” says its chairman, “was in session about six months. Its
expenses were paid by the members themselves, and since frugality was
a necessity the services of the stenographers were dispensed with, the
members taking only such notes of the testimony of witnesses as each
one deemed important to the matter in hand. The officers of all the
Exchanges in New York City were invited to appear before the committee
and answer questions both orally and in writing, and all of them
responded promptly and courteously, as often as they were asked to do
so. Many volunteer witnesses, citizens of the State, were heard. None
such was refused a hearing. Citizens of other States were not called,
or accepted, as witnesses unless they had given evidence, by published
writings or otherwise, that they had something of value to contribute
to the discussion.”[50] This committee was composed of Horace White,
Chairman; Charles A. Schieren, David Leventritt, Clark Williams, John
B. Clark, Willard V. King, Samuel H. Ordway, Edward D. Page, Charles
Sprague Smith, Maurice L. Muhleman.
Nobody who read these names doubted the independence and public spirit
of its members. It was precisely the sort of committee that all
fair-minded men welcomed. The high character of the members carried
assurance of their good faith; their wisdom and practical experience
meant a critical analysis of the subject; their independence of
spirit made a whitewash impossible. Here then was the long looked for
solution.[51] If there were abuses, nobody was more anxious to know of
them and of the remedies for them than the members of the Exchange;
if indefensible conditions existed nobody stood readier to correct
them. It was felt that this was the first and greatest step toward
publicity under the right conditions, and that a valuable contribution
to the popular knowledge of an intricate and greatly misunderstood
subject would result. There was nothing ex-parte or one-sided about
the committee’s deliberations; everybody with a grievance might state
it, and both sides were accorded fair play. But, _mirabile dictu_,
the very fact of its fairness is found, three years later, to afford
a reason for flouting it at the hands of counsel for a congressional
sub-committee that will not hear both sides! Is there anything just
or equitable in the proceedings of such a body, or in the prejudiced
emanations of its precious lawyer? Is it conceivable that the
law-making branch of our government will give serious heed to a report
thus conceived in bias and born in inquisition? I think not.
Passing to more agreeable topics, the late Addison Cammack is said to
have remarked on one occasion that publicity was ruining the business
of Wall Street and the Stock Exchange and would ultimately drive it all
away. Those were the days of inadequate and unreliable balance sheets,
of suppressed reports of earnings and assets, of accounts that were
never subjected to independent audits, and of a general atmosphere of
mystery that led to financial abuses of all kinds. As a result of those
conditions there was created in the public mind another vague aversion
toward the Stock Exchange, and a popular prejudice which has been
hard to dispel. Cammack had been brought up in the old school; he saw
what was coming, but he mistook causes for effects. He would probably
turn in his grave could he see the new conditions and contrast them
with the old. As a matter of fact nothing could be more democratic
in principle than the way the business is conducted nowadays. The
rights of stockholders to information, the reports and balance
sheets submitted to them, the mass of Wall Street financial material
in the magazines and journals, the stock ticker, the news ticker,
the printed news bulletins, the card index system, the statistical
manuals and the quotation lists published in the morning and evening
newspapers, together with the market letters constantly circulated by
brokerage houses, these are evidences that the public is entitled to
full information and that many avenues by which it may safeguard its
interests are always open.[52]
It has long been known that investors and speculators in America enjoy
vastly more safety in their market operations through these various
avenues of publicity than do investors and speculators abroad. There
are no tickers worthy of the name across the water, and the daily list
of business done, as published in our newspapers, with bid and asked
prices and total transactions in detail, is unheard of among all the
Bourses of Europe. The eminent French economist, Paul Leroy-Beaulieu,
speaks very earnestly of the superiority of our New York Stock Exchange
system in this matter; he says the need for a similar method in France
is “very urgent,” that the information thus spread broadcast is “very
instructive,” that the pledge of publicity “is better assured in the
United States than in any other country of the world,” and that an
immediate reform along these lines is “absolutely necessary” in Paris
in the interest of the public.[53]
This leads to another word of caution suggested by the fact that the
public, despite what is done for it, does not always avail itself of
these safeguards. Men buy worthless mining stocks without bothering
to inquire into their bona fides. They put their savings into new
and untried enterprises and they neither read the balance sheets nor
attend the meetings. A thousand stockholders will attend a meeting in
London and they will have their questions answered whether the majority
in control likes it or not. In New York almost nobody attends these
meetings. The stockholder’s right to information is absolute, but he
does not go and get it, and so finally when something goes wrong he
writes angry letters to the newspapers and damns both Wall Street
and the Stock Exchange because he has been burned, although the fire
escape and the extinguisher were always at his hand. “It is all very
well” says the _Wall Street Journal_, “to talk about what the law,
the newspaper press, and the Stock Exchange can do to protect the
investor, but the investor himself can do more than all his protectors
put together. His investment, however conservative and secure, carries
responsibilities as well as privileges, and it is his duty to discharge
the one in order to safeguard the other.”[54]
He must learn to make inquiries, to discriminate, to use his wits, to
read mortgages, to study sinking funds and operating ratios. He must
eschew the financial columns of questionable newspapers and confine
his attention to those of established probity. He must not put all his
investment eggs into one basket. The Stock Exchange cannot do all this
for him, but it is always ready to help him, and the information he
requires may be had for the asking.
In a recent public address the president of a great American railway
sounded an encouraging note. “We railway men,” he said, “have been in a
practical school, having taken a thorough course in working economics.
We have learned that a railway can thrive only as a result of the
prosperity of the community it serves, and that the best policy, from
the viewpoint of permanent railway interests, is one of co-operative
helpfulness.”[55] The New York Stock Exchange has learned the same
lesson, in a similar school. As an institution it realizes that if it
is to grow in prosperity the public must grow, and that as the public
is attracted to investment and speculation by the soundness of the
institution through which it deals so it requires and must receive full
information and an assurance of fair play. “Co-operative helpfulness”
is the only way. Members of the Exchange who become discouraged now and
then must bear this in mind. In the face of every harassing annoyance
they must never cease their work of keeping their house in order, and
of inviting that portion of the public that is open-minded to lend
a hand. Their labors resemble the task of Sisyphus; like him they
must cultivate the spirit of “everlasting hope,” and when unworthy
assailants seek to prejudice the popular mind, they must stand forth,
give blow for blow, and never say die.
Pessimists may blind their eyes to the manifold evidences of material
progress on every hand, but just as the workshop, the farm, the
school, the hospital, and the bank, each supplies proof of continuing
improvement, so also in its sphere of usefulness does the Stock
Exchange. Within a few years, for example, it has rid itself of the
unlisted department, and this may very properly be mentioned as
a distinct progression. Under the old system a limited number of
industrial corporations were permitted to obtain a market on the
Exchange for their securities, although they furnished but few figures
to the Listing Committee in return. This was a practice wholly at
variance with the duty of the Exchange to protect the investor, since
it practically assures him that corporations admitted to the Exchange
have demonstrated their worth to the authorities. That character and
countenance should be given to the so-called “unlisted department” was
a mistake, and it has been abolished.
In this reform the Listing Committee accomplished a twofold blessing in
setting the Exchange right with the public by ridding their institution
of anything approaching the blind pools of early days and at the same
time forcing certain wealthy corporations to abandon their policy
of concealment or lose the privilege of the floor. Certainly if the
country’s leading steel corporation can afford to take its 150,000
stockholders and its 250,000 employees into its confidence and treat
the whole public, including its competitors, with entire frankness,
there is no insuperable difficulty about the others. In any case the
desire to protect the investor, which is the controlling motive of
the elaborate restrictions imposed by French and English laws in new
security offerings, has advanced far in this country within the last
few years, and the farther it goes the more popular it becomes.
That there is still work for the Listing Committee to do goes without
saying. One of the most promising improvements that comes to mind at
the moment is the one employed in London, where shares of new companies
are not admitted to the Board unless a sufficiently large allotment
has been made to the public. This is also the rule in New York, but
perhaps we may add to its effectiveness by increasing the size of the
public allotments. Another praiseworthy feature of the London system is
that which has to do with vendor’s shares, which are not listed until
six months after the admission of the company’s securities. Under this
plan if one or more individuals secure a block of stock in payment for
properties in the concern, they are prevented from unloading those
shares on the public until a sufficient time has elapsed to determine
the merit of the property.
Another instance of progress made in recent years in the internal
mechanism of the Exchange, is the abolition of fictitious transactions
or “wash sales,” utterly indefensible transactions not enforceable
at law. These were always prohibited under the rules, yet despite
this a flagrant instance of a violation was discovered in which the
guilty were made to suffer. So far as I am aware it was the only case
on record in which obvious collusion between buyer and seller in a
Stock Exchange transaction was shown. The broker in this instance must
have known that the Committee would demand his books and that it would
appear that no genuine bargain had taken place. If he did not know
it, he knows it now. The example made of him will, I fancy, prevent a
recurrence of the episode.
This leads to the subject of “manipulation,” as it is termed, or the
uses to which the facilities of the Exchange are sometimes put to give
certain stocks an appearance of activity out of proportion to their
normal movement. Now we must assume as our major premise in discussing
this matter that any artificial interference with the natural operation
of supply and demand is pernicious; from the standpoint of economics
it is harmful. The Stock Exchange has nothing to conceal, and it
recognizes not only that manipulation exists, but that at times it
assumes the proportions of a real evil. Therefore it is doing what
it can to stop it, and it will continue to do so. Whenever unwonted
activity arises nowadays in a security long dormant, as happened very
recently in the stock of a certain gas company, the governors of the
Exchange entrusted with such things take the matter in hand and put a
stop to it if obvious manipulation can be shown after investigation.
The public and the newspapers know nothing about it; the vial of their
criticism is poured forth only when something escapes the watchful
eye of the Exchange authorities, as must inevitably happen now and
then. But if these critics could know how indignant the members of the
Exchange became when the Hocking Coal episode occurred, and if they
could see the resolute determination of all hands to prevent another
such occurrence, they would at least give the Exchange credit for
faithfully attempting to suppress manipulation of the flagrant sort.
The fact is that all forms of manipulation are by no means improper;
some of it performs a useful service and is a necessary and legitimate
part of the functions of the Exchange. To understand how true this is
let us consider, for example, the case of a corporation that has been
organized, let us say, to develop a group of recently discovered coal
properties in new territory. This is legitimate endeavor as applied to
American enterprise; in a broad sense it is the spirit of adventure and
speculation that has made our country commercially rich and powerful.
Now, in order to develop this enterprise, it is necessary to ask the
public to buy its shares or its certificates of debt and thus become
partners in the undertaking. In that way our great railways were built
and our Western country opened to progress. But the public will not
support the new enterprise until it knows something of its merits, and
accordingly the company introduces its property through the medium of
that great central market-place--the Stock Exchange--furnishing the
Exchange authorities with its credentials in minute detail.
At this point the so-called manipulation takes place. The securities
are new, the company may wish to advertise them, attract attention to
them, and solicit a public interest in the laudable enterprise that
lies behind them, all of which is as right and proper as it is for any
merchant to establish a market for any new article on his shelves. To
accomplish his purpose the merchant must first fix an arbitrary price;
if the public will not buy at that price he must “manipulate” a lower
price, and in all his subsequent dealings there must be manipulation
of one form or another designed to conform to the supply and demand in
that particular article.
The men behind the coal company in question must do the same
thing. They fix a price at which their shares are introduced in
the market-place; let us say this price is $100 per share. This is
manipulation. It may happen that the public will not buy at that price,
in which case the price is lowered, let us say, to 80. This also is
manipulation. But is it improper? Is it subversive of good morals? Is
it an unhealthy interference with natural laws of supply and demand? Is
it anything less than a legitimate method of attracting capital into
worthy enterprises?
Critics are invited to remember that the Stock Exchange does not buy
or sell anything; it merely acts as a market-place through which,
among other things, capital may be directed from channels where it
is least needed into those where it may be most beneficially and
profitably employed. If, therefore, an oil company or a coal company
or any other enterprise whose ultimate success cannot fail to enrich
the community seeks to market its wares--i. e., its securities--and
thereby enable itself to do business, where else is it to turn save to
the Stock Exchange, and how is it to fix an attractive market price at
the outset save by what is termed manipulation? Nobody is compelled to
buy; as for selling, any holder of 100 shares or any other number of
shares can sell them at will, and no amount of manipulation can prevent
him from a free exercise of this privilege. You may depend upon it,
Mr. Critic, that the Stock Exchange will take pains to suppress all
forms of manipulation that are unsound and harmful, but until you or
some other gifted student of economics can devise a method by which
capital may be attracted to excellent channels other than through the
medium of an Exchange, manipulation of the sort just described must
continue or enterprise must stop. Strike out the word “manipulation,”
and substitute “establishment of values” in transactions of this sort,
and the practice seems to become, as it really is, in keeping with the
finest traditions of the market-place.[56]
It is a difficult matter for the Stock Exchange authorities to suppress
all forms of manipulation that are plainly and admittedly improper.
Such things do exist; the difficulty is in devising ways and means
of preventing them. Mr. Smith, a non-member of the Exchange, may
be interested in a certain security to which he wishes to give an
appearance of activity. He calls Brown, a stockbroker, and instructs
him to buy 5000 shares “at the market.” Then he telephones Jones,
another stockbroker, to sell 5000 shares. Brown and Jones are each
in ignorance of the other’s order, but they meet in the crowd where
this stock is dealt in, and their orders combine to give the market an
appearance of animation. The governors are as determined to stop this
sort of thing as the most energetic critic could wish; they send for
the two brokers and the facts are revealed. But as each was entirely
innocent of wrongdoing, and as no rule of the Exchange and no law of
the land has been violated, what is to be done?
They may caution both brokers against accepting any more business from
Smith, but Smith is not a member of the Exchange, and hence he is not
amenable to its discipline. When his next orders are refused he gives
them to some one else, and if the entire Stock Exchange refused to
accept business from him he would and could with perfect propriety ask
his bank, or a trust company, or an individual to give out the orders
under their own names. Finally, if the Exchange authorities were so
sagacious as to be able to close to this man every conceivable avenue
by which he might approach the Stock Exchange in New York, there
would still be left open to him the market in Boston, or Montreal, or
London, or any other centre in which the security was listed, and the
pernicious effect of his manipulation in these cities would be felt
in New York just as promptly and just as harmfully as if they had
originated here. I mention this case, a purely hypothetical one, to
show how easy it is for manipulation of this sort to find employment,
despite all that may be done to suppress it. Perhaps somewhere in
the noble army of critics there may be one who can devise a means of
meeting this issue. If so, let him stand forth and speak. The Stock
Exchange, root, stock, and branch, will be glad to hear from him.[57]
Counsel for the Congressional Committee that is in session as these
lines are written seeks to raise another dreadful ghost with which to
frighten ignorant people in his alleged “discovery” that a great part
of the business done on the Stock Exchange is speculation. He parades
through the newspapers the fact that the number of shares bought and
sold often largely exceeds the number transferred on the companies’
books. In a chapter on “The Uses and Abuses of Speculation,” I have
attempted to show that the more speculators there are in a market, the
better and safer the market, and I rest this dictum on the authority of
every student of modern markets. In this connection let us consider the
opinion of a thoughtful newspaper writer. “There is no doubt,” he says,
“that the committee will find that there is speculation in Wall Street,
just as there is speculation elsewhere, and in commodities other than
in stocks and bonds. The instinct has always been a pronounced human
characteristic, being a part of human progress, and the manifestation
of it is one sign of the difference between man and the lower sorts
of creatures. It is doubtful whether the general gambling impulse can
be entirely wiped out, even if the mighty power of an act of Congress
be called into requisition. If Mr. Pujo and his committee can abolish
speculation in Wall Street (to say nothing of gambling, which is not
the same thing), they may be asked to abolish every commodity market
throughout the land, for there is plentiful speculation in all of them.
“What seems to bother some representatives of the Pujo Committee is
that the number of shares traded in on the Stock Exchange exceeds
largely the number actually transferred. It is true, for example,
that the number of shares of United States Steel common sold during
last year were largely in excess of the number of shares outstanding,
the sales amounting to 31,266,208 shares, while the entire number
outstanding was only 5,084,952. The ratio of six to one suggests
healthy activity in the market for steel stocks. It is conceivable that
a block of stocks may pass through many hands before it arrives at
its ultimate owner, just as a crop of potatoes passes through a long
chain of handlers and buyers and dealers before it reaches the ultimate
consumer. Meantime, the number of potatoes has neither increased nor
diminished.
“But the potato crop, which easily changes hands six times in a year,
is finally eaten. The stocks go on forever. The legitimate holder is
not injured if they change hands not six, but sixty times, provided
he is secured by proper publicity, which the Stock Exchange assures.
The free speculative market is in itself an element of value, and
if it were destroyed the investor would be chiefly injured, while
future capitalization for the development of the country would be
paralyzed.”[58]
At the outset I began by cautioning the reader not to cry out in alarm
over the utterances of newspaper statesmen bent on justifying their
existence, and determined to make the punishment fit the crime. Stocks
will always be bought and sold, they will pass from hand to hand just
as horses are traded and lands are exchanged. The modest dollar, too,
will continue to pass from pocket to pocket, having a thousand owners
and performing a thousand functions many of which may alarm a timid and
unsuspecting lawmaker, but which to you and me may seem natural enough.
When you read that a great Congressman is determined to put the Steel
corporation into bankruptcy and throw its 250,000 employees out of
business, depend upon it he is only trying to justify his job for the
benefit of this constituents. When somebody else seeks to mend his
fences by the noisy announcement that the Stock Exchange reeks with
improper manipulation, that speculation is wrongful, and that the
criminal nature of an institution is directly proportionate to its
size, remember that the votes of your fellow-citizens put this man
in office and that you and they must foot the bill, since it is your
money that pays for all these junkets, all these investigations, and
all these political excursions. More than that, you must pay your share
of the $160,000,000 for pensions, of the $40,000,000 for post-offices,
and of the countless millions for rivers and harbors, and these, too,
are voted with amiable frugality by the gentlemen who see nightmares in
banks, Clearing Houses, and Stock Exchanges.
Finally, try to investigate and study all these matters for yourself.
Read the men who have spent their lives in the study of economics.
Compare the results attained by our great financial institutions with
those reached in similar lines abroad. In the particular application
of these studies to the New York Stock Exchange, you will find that
charges such as we have been considering could be brought against any
institution that has stood the test of time and made the mistakes
that fallible human beings must make. You will find that if changes
and improvements seem to come about slowly it is not because of the
unwillingness of the Exchange to remedy these conditions, but because
of the gravity and deliberation with which they must be considered in
the light of the future as well as the present.
The management and control of a great public business, especially
one that has long survived public criticism, is no light matter. It
requires more than common industry, and more than common ability. What
the Stock Exchange asks of you and of every thoughtful citizen in the
land is a recognition of these matters, and a patient survey of all
that enters into them. The critic in “The Vicar of Wakefield” laid it
down as a good rule that you should _always_ say the picture would have
been a better one if the artist had taken more time. Criticism offered
in this spirit the members of the Stock Exchange can bear with good
humor. What hurts them on the raw is the critic’s failure to study and
investigate, or, getting back to the text of Mr. Bryce’s sermon, “the
neglect to think.”