THE LONDON STOCK EXCHANGE, AND COMPARISONS WITH ITS NEW YORK PROTOTYPE
There were Exchanges in London in the sixteenth century. Merchants from
Lombardy had given their name to a street, and had flourished so well
that they had branched out in the business of money-changing--that is,
of exchanging worn, abrased and clipped coins, foreign and domestic,
for those of standard weight and fineness. As trade increased and the
first faint signs of progress in the matter of wealth began to develop,
it was seen that this business of exchanging money was sufficiently
important to warrant royal recognition; accordingly there was created
the office of Royal Exchanger, and the person entrusted with this
office was given the privilege of exchanging coins in the manner
described. Smaller offices for the purpose were farmed out in other
English towns, and each place where the business was carried on thus
came to be known as “The Exchange,” a name that was ultimately applied
to any covered place where merchants met to buy and sell commodities.
After the money-changers came the money-lenders--Jews, more
Lombards, and finally the Guild of Goldsmiths. The last named,
having long practised the business of money-lending, finally became
money-borrowers, issuing receipts for these borrowings known as
Goldsmiths’ Notes--the earliest form of English bank-notes--and the
first step in the convenient process of translating capital, and debt,
and credit, into bits of interest-bearing paper.[102] This was the
state of English finance until 1694, when the Bank of England was
founded, and stocks and shares came into being since the bank was
a joint-stock affair. That the invention of stock certificates was
a popular one, and that the authorities and the public seized upon
it as a convenient means of directing capital into new and hitherto
untried forms of enterprise is seen by the rapidity with which fresh
undertakings were put forth. In 1698 the New East India Company
loaned its capital to the government; by 1711 there was a funded
debt of £11,750,000 in the shape of bank stock, East India stock, and
annuities. There was also the famous South Sea Company, to be followed
ten years later by a reorganization of the company with its first
subscription of a million in £100 stock at £300, and a second and
third subscription of larger magnitude, each accompanied by prodigious
promises, and each snapped up with avidity by a public saturated with
the new and hazardous pastime of speculation.
“All distinction of party, religion, sex, character, and circumstance,”
writes Smollett, the historian of the time, “were swallowed up in this
universal concern. Exchange Alley was filled with a strange concourse
of statesmen and clergymen, churchmen and dissenters, Whigs and Tories,
physicians, lawyers, tradesmen, and even with multitudes of females.
All other professions and employments were utterly neglected; and
the people’s attention wholly engrossed by this and other chimerical
schemes, which were known by the denomination of bubbles. New companies
started up every day, under the countenance of the prime nobility. The
Prince of Wales was constituted governor of the Welsh Copper Company;
the Duke of Chandos appeared at the head of the York Buildings Company;
the Duke of Bridgewater formed a third, for building houses in London
and Westminster. About a hundred such schemes were projected and put
in execution, to the ruin of many thousands. The sums proposed to be
raised by these expedients amounted to three hundred millions sterling,
which exceeded the value of all the lands in England. The nation was so
intoxicated with the spirit of adventure that people became a prey to
the grossest delusion. An obscure projector pretending to have formed a
very advantageous scheme, which, however, he did not explain, published
proposals for a subscription in which he promised that in one month
the particulars of his project should be disclosed. In the meantime he
declared that every person paying two guineas should be entitled to
a subscription for £100, which would produce that sum yearly. In the
forenoon this adventurer received a thousand of these subscriptions;
and in the evening set out for another kingdom.”
No sooner were there bits of paper to deal in than jobbers or brokers
sprang up to handle them, and by natural gregarious processes these
dealers gathered in one spot. Thus competition was stimulated and
active markets created. The rotunda of the bank and the Royal Exchange
were their first haunts, indeed until Archbishop Laud drove them out
they were to be found bargaining on the wide floors of St. Paul’s
Cathedral. As the business expanded they took to the neighboring
streets and coffee houses, and so Change Alley, Jonathan’s Coffee
House, Cornhill, Lombard Street and Sweeting’s Alley became their
familiar retreats. Old Jonathan’s burned down in 1748 and New
Jonathan’s in Threadneedle Street succeeded it. Here, in July, 1773,
“the brokers and others at New Jonathan’s came to a resolution that,
instead of its being called New Jonathan’s, it should be called ‘The
Stock Exchange,’ which is to be wrote over the door.” Thus while
business in the public funds was still conducted on a large scale at
the bank, and dealings in foreign securities still centred at the Royal
Exchange, London may be said to have had a Stock Exchange in the modern
sense from that day in 1773 when the name was “wrote over the door” at
New Jonathan’s.[103]
We have authority for the early history of the London Stock Exchange in
a report made in 1877 by the officials of the institution to the Royal
Commission. From this report it appears that the Stock Exchange at New
Jonathan’s in 1773 “afforded a ready market for the operations of the
bankers, merchants, and capitalists connected with the floating of the
numerous loans raised at that period for the service of the State.”
The members or frequenters paid a subscription of sixpence to defray
expenses, drew up rules, and placed its control in the hands of a
“Committee for General Purposes.” The functions of this committee were
then, as now, “judicial as regards the settlement of disputed bargains,
and administrative as regards rules for the general conduct of business
and for the liquidation of defaulter’s accounts.” The earliest minutes
on record are dated December, 1798.
War loans and a national debt increasing by leaps and bounds, with
consequent activity in consols, was the principal source of business in
those early days, and as these increased, so also the savings of the
public and a new national spirit led to a steady growth in the business
of dealing in securities. The dim receding voice of those early days
still echoes in Capel Court through the medium of two holidays--May
1st and November 1st. More than a century ago these days marked the
closing of the Bank of England’s books for the transfer of consols, and
as consols were the only things then traded in, there was nothing for
stockbrokers to do on those occasions; hence they took a holiday. And
they still close the Exchange on these days--an eloquent instance of
the Englishman’s adherence to tradition.
By 1801 there was not room enough in the old building, and, moreover,
the report says: “It became apparent that the indiscriminate admission
of the public was calculated to expose the dealers to the loss of
valuable property.” Accordingly a group of Stock Exchange men acquired
a site in Capel Court, close to the bank, raised a capital of £20,000
in four hundred shares of £50 each, and in May, 1801, laid the
foundation of what has become through numerous additions the London
Stock Exchange of to-day. The building was opened in March, 1802, with
a list of five hundred subscribers, and the deed of settlement (March
27, 1802), vested the management in a committee of thirty members,
chosen annually by ballot, with nine trustees and managers, separate
from the committee, to have charge of the treasury and represent the
proprietors. Although the rules and regulations have been amended and
enlarged from time to time to meet new conditions, the constitution of
the London Stock Exchange remains substantially unaltered.
As it stands to-day, there are nine managers who represent the
shareholders or proprietors, and thirty committeemen, who look after
the administration of the Exchange and the well-being of the members.
The managers are elected in threes for terms of five years by the votes
of the shareholders. They fix the admission fees, appoint almost all
the officials, and look after the building and the property in general,
while the thirty committeemen enforce the rules and regulations,
adjudicate differences, and regulate the admission of securities.
They are elected every year by the members, and they choose from
their number a chairman and vice-chairman. In March of each year,
before retiring from office, the committee elects all the old Stock
Exchange members who wish to be re-elected, membership on the London
Exchange being granted for one year only. Any member may object to the
re-election of any other member, but this is a very unusual incident.
“The great principle upon which the committee acts,” says Mr. Francis
W. Hirst, “and to which most of its regulations are directed, is the
inviolability of contracts. It has power to suspend or expel any member
for violating its rules, or for non-compliance with its decisions,
or for dishonorable conduct. A member of the London Stock Exchange
is prohibited from advertising or from sending circulars to any but
his own clients. He is also forbidden to belong to any other Stock
Exchange, or ‘bucket-shop,’ or other competing institution. New members
are now compelled to become proprietors by acquiring at least one Stock
Exchange share, paying a heavy entrance fee and an annual subscription
of forty guineas. Yet the precautions against impecuniosity are
inadequate. Defaults are far too common.”[104]
In such a dual form of control as that of these managers and
committeemen it is obvious that causes of friction must of necessity
arise from time to time, and that jarring and discord are inevitable.
The owners or proprietors are, of course, a minority of the members,
and their decisions on matters that come before them are necessarily
biased in favor of a course that will increase the dividends on their
shares. Naturally they would favor a practically unlimited membership,
since the dividends are largely acquired from this source.
The plan of compelling each new member to become a shareholder or
proprietor was devised to meet this difficulty, and in a measure it
has succeeded. “Within the course of the next half century,” says the
_Quarterly Review_, “it is pretty certain that the Stock Exchange, as
a company, will belong to the members, of whom each will have a stake
in the enterprise; and that happy consummation, when it arrives, will
put an end to a good many minor problems which still harass the House
in its workings, and possibly check those bolder plans for reform which
are advocated by many of the members.”[105] The difficulties arising
from these causes had their origin, as we have seen, as far back as the
year 1801, when the new building was erected. As only the wealthier
members of the association had provided the capital for the Capel Court
structure, in order to protect their investment, they demanded control
of its financial affairs; thus the Stock Exchange thenceforth consisted
of two distinct bodies, proprietors and subscribers.
While there is but one way by which a man may become a member of the
New York Stock Exchange, in the London Exchange there are various
ways. The most direct way, and the easiest but most expensive way,
is to pay an entrance fee of 500 guineas, and find three members who
will stand surety for four years for the sum of £500 each, this £500
being forfeited to the estate if the member is “hammered”--i. e., if he
fails during the period. The candidate must in addition buy three Stock
Exchange shares, the price of which at present is about £190 each.[106]
He must also purchase from a retiring member a nomination, which can
be bought at present for £40, although they have sold as high as £700.
Candidates who wish to join the Exchange under easier conditions may
have their entrance fees reduced to 250 guineas if they have served for
four years in the Stock Exchange as a clerk; and for these candidates
concessions are also made in respect to sureties, of which they need
provide but two, and to shares, of which they are required to buy but
one instead of three. The committee is also empowered to elect each
year a few candidates without nomination.
This is a rather curious practice which requires a word of explanation.
In England, as elsewhere, there is a latent objection to monopolies of
all forms, and the foresighted governors of the Exchange, with an eye
to the possibility of difficulties that might be raised against their
institution at some time in the future on the ground of monopoly, hit
upon this expedient as a precautionary measure. Should such objection
be raised, the governors have only to admit a few more members without
nomination. The door is thus thrown open; and there is no _de facto_
monopoly. It is very simple and very ingenious.
In all these cases the annual subscription, or dues, is the same.
These, which were originally 10 guineas, then 20 and 30, are now 40 for
all new members, while old members pay, of course, the subscription
prevailing at the time of their election. As a condition precedent to
election, a candidate must present himself before the committee with
his sureties, and each of them must give satisfactory answers to the
questions put to him.
From this it will be seen that a man who wants to become a member of
the London Stock Exchange without first serving an apprenticeship of
four years as clerk must pay for his entrance fee 500 guineas, his
shares £570, his nomination £40, and his annual dues 40 guineas, or a
total of about £1150, of which £570, the price of his shares, yields
him a return in Stock Exchange dividends. These shares are, of course,
excellent investments, and the managers may be relied upon to see to
it that their value is not impaired. During the first seventy-five
years of its existence Stock Exchange shares paid an average dividend
of 20 per cent.; for the last completed year the dividend was 100 per
cent. No one person may hold more than 200 shares, and holders must be
members of the Exchange in all cases except those where representatives
of proprietors acquired their shares before December 31, 1875. When
a proprietor dies, his shares must be sold to a member within twelve
months. The membership is not limited, strictly speaking, and whereas
in 1802 there were 500 members, in 1845 there were 800, in 1877, 2000,
and in 1910, 5019.
I say the membership is not limited, but when the time arrives, as
it probably will within this generation, that the 20,000 shares are
divided at the ratio of three shares for each member, 6666 members will
then own all the shares and the membership will be full. Hence there
is, in a way, a limit to the total membership.
One important respect in which the London Stock Exchange differs from
all others--American, Continental, or Provincial--is the division of
its members into two classes, jobbers and brokers, a division that
appears to be as old as the Exchange itself. As to which of these
classes it is better to belong there are differences of opinion, but
the wise men in the business seem to be a unit in recommending a few
years’ experience as a broker to be followed by the business of the
jobber. The broker, under the London system, deals with the outside
public and acts merely as agent between the public and the jobber,
with whom he trades on the floor of the Exchange. The jobber, on his
part, is not allowed to deal with the public at all, but must confine
his activities to the brokers and to his fellow jobbers. “Thus the
broker,” as Mr. Hirst puts it, “feeds the jobber much as the solicitor
feeds the barrister,” or, continuing the metaphor, we may say that
like the barrister the jobber gets the _cause célêbre_ and all the
great prizes, and like the solicitor the broker hunts up the business
and must be content with small returns. The broker works for his
commission; the jobber for what he can get out of the trade in the way
of a profit.
The system in vogue in the New York Stock Exchange would seem to
possess many advantages over this curious division of functions between
the two classes. Here, as every one knows, brokers are not restricted
in their operations; the field is alike open to all members, and the
market is not limited by placing it in the hands of any one man or
any group of men. On the London Exchange the attempt to define strict
dividing lines between brokers and jobbers has not been successful; for
years there has been a strong undercurrent of resentment between them
because of acts which each regards as encroachments by the other upon
its especial domain.
The quarrel reached an acute stage in the paralysis that hit the Stock
Exchange after the South African war; there were too many members and
too little business. Brokers took it upon themselves to make prices and
to deal directly with other brokers and with outsiders, disregarding
the jobbers altogether; and jobbers in turn sought in self-defence
to establish connections of their own, outside the Stock Exchange,
and with non-members. Both parties have violated the spirit, if not
the letter of the Stock Exchange rules, and even at the present time,
when much stricter rules have been passed defining the limitations of
each division, the same unfortunate feeling of resentment is heard
daily. Violations of the rule, however technical, are bound to create
friction, and friction among the members of a Stock Exchange is not a
good thing for the members nor for the business. Fortunately, there is
nothing of that sort in the New York Exchange.
In active securities where there are very many transactions, Mr. Hirst
is disposed to think that the separate existence of jobbers makes
for a free market and close prices the very essence of an Exchange’s
functions. This may be true, since the jobber is a host in himself,
specialist, speculator, trader and jobber--all in one. Where there is
a free market, the presence of such a participant undoubtedly adds to
it, as any one knows who has dealt with him in lots of from 5,000 to
10,000 shares, at a difference of only a sixteenth. Such a market is
a close market _in excelsis_. But in the New York Stock Exchange the
same result is obtained far more openly and above-board by the presence
in all active securities of a host of such jobbers--brokers, traders,
specialists, and speculators--each actively bidding and offering by
voice and gesture, and without collusion, and each thereby contributing
to the making of the freest possible market and the closest possible
price. In New York no middleman stands between the public and the
market.
It is a fact recognized by all economists that the larger the number
of dealers and the freer the competitive bidding, the more accurate
the resultant price and the nearer its approach to true value; hence
it would seem to follow that in this highly desirable attainment the
New York system is superior to that of London. The same comment applies
to the market for inactive securities. In London, notwithstanding the
quotations printed in the Official List, the public has no assurance
that jobbers can be found to deal at those prices, or at prices
approaching them. “And when there is a slump in the market and a rush
of selling orders with no support,” as Mr. Hirst candidly admits, “as
happened in rubber shares in the months of June and July, 1910, the
jobbers are apt to be away at lunch all day, and the brokers have to
report to their clients that they simply cannot find a purchaser.”[107]
Such things do not happen in the New York Exchange, for when there is
a slump in any group of shares, instantly there gathers a number of
individuals who are there for the very purpose of making a market. It
may be a “soft” market, with wide fluctuations, but it is a market for
all that, and the timely absence at an all-day luncheon of any one
man or any group of men cannot possibly affect it. There have been
occasions on the New York Stock Exchange, no doubt, where a broker
with a “hurry” order in a very inactive security has not found a
market awaiting him, but there are various ways by which he may seek
the desired market and ultimately he is sure to find it. In any case
such an incident is the exception that proves the rule that a free
market, affording all the advantages which excellent markets possess,
is nowhere to be found more easily and more quickly than on the floor
of the New York Stock Exchange. “American securities,” says the Paris
correspondent of the _Journal of Commerce_ in his cabled despatches
of October 23, 1912--referring to the Balkan crisis in that city--“may
with complete conservatism be regarded as having received a splendid
advertisement in the French market by reason of their recent remarkable
instantaneous conversion into cash.”
In the course of many years of active experience as broker, trader,
and speculator, I do not now recall an instance in which I was unable
to find a market on the New York Exchange for any security, however
inactive, which I wished to buy or sell. If the specialist in this
particular stock cannot satisfy me with his quotation, there are
always room traders to whom I may submit my offer; there are also
arbitrageurs, wire houses, and banking houses interested in this
particular security. Somewhere among all these agencies the New York
broker must inevitably find or create a market. But I fancy he would
have a sorry time of it were he restricted, under the rules, to dealing
with a jobber who “is apt to be away at lunch all day,” when trouble
comes and risks are involved.
Such a system, it would seem, is all very well for the jobber, but
quite unfair to the outsider and to the conscientious broker who is
striving all the while to protect the interests of the public and
maintain the welfare of the Exchange. Indeed, as it works out in
London, the broker has all the worst of it in many ways. Even though
the jobber “runs a book,” as the phrase is, his work is done at 4
P.M.--when the market closes--and if he is not doing a large business
he may then follow his inclinations. Unless his business involves
dealing in South Africans or Americans, his work is substantially
completed with the official closing of the Exchange. But the broker, on
the other hand, enjoys no such freedom. After the closing he must go
to his office--for in the nature of things he must have one--and there
he will find correspondence awaiting him, orders to be executed in the
“Street markets,” and telephone messages to send to his customers.
The mere fact that a London broker must use the London telephone is
in itself a curse, for nowhere under the canopy is there a telephone
service so dreadful and so exasperating.
Even in the ebb-tide of a dwindling summer business the London broker,
who cannot begin his day’s correspondence until four, finds it
difficult to leave his office until an hour long after his American
colleague has played his eighteen holes or dressed for dinner. Aside
from the horrors of the telephone service, this is due in a measure
to the fact that they have no ticker in London and the mechanical
efficiency with which this machine faithfully records all over America
each fluctuation of the market, finds no counterpart in England. The
broker in London has therefore to perform, in a measure, the work of
the ticker in New York. Perhaps I should not say they have no tickers
in London. In point of fact there is such an instrument, identical with
our own, which four or five times a day, at stated intervals, reels
off with mechanical monotony a list of quotations in certain active
securities--the same group every day. They are limited in number,
almost nobody looks at them, and many really enterprising houses do not
install them at all.
Worst of all, the London broker until very recently was not properly
paid for his work; he was not protected by a rigorous commission law,
as we are in the New York Exchange. In New York a broker charges ⅛ per
cent. commission on the par value of every hundred shares in which he
deals for a non-member, each way, and the rules of the Exchange compel
him to collect it in all cases. The slightest departure from this rule,
however technical it may be, is severely punished, and no statute of
limitations or other expedient will save him from the consequences of
it. Thus all the brokers are insured an equal footing; competition for
business is prevented, and the public which the Exchange seeks to serve
is assured of equally fair dealing in every quarter. So rigorously
is this rule enforced that the large and important branch of the
Exchange’s business which has to do with joint-account trading between
New York and foreign centres has recently been seriously restricted
because, in the judgment of the governors, it involved an infraction of
this important commission law.
On May 22nd of this year (1912) the London Stock Exchange put into
effect an official scale of commissions, which was designed to remedy
the unfortunate conditions that had prevailed, and this scale is now
enforced. It provides for a charge of ⅛ per cent. on British government
securities, Indian government stocks and foreign government bonds; ¼
per cent. on certain other special cases, ⅛ in railroad ordinary and
deferred ordinary stocks at prices of £50 or under, and a sliding scale
on shares transferable by deed, ranging from commissions of 1½d. per
share to 2s. 6d. per share. On American shares the commission to be
charged is 6d. per share on a price of $25 or under, 9d. on prices from
$25 to $50, 1s. on prices from $50 to $100, 1s. 6d. on prices from $100
to $150; and 2s. on prices over $200.
In many other transactions the commission to be charged is left to the
discretion of the broker who may, if he is doing a large business with
a client in high-priced and low-priced shares on which the official
scale of commission varies, arrange to charge ⅛ on all transactions,
regardless of the rules. Whatever the London broker may lose in the
quality of his commissions as compared with the New York broker
appears, however, to be compensated by their quantity. A firm of
jobbers of my acquaintance once handled in a single day 262,000 shares
of “Americans” alone, and when it is borne in mind that this was but
one of perhaps 150 firms doing a similar business, an idea may be
gained as to how London brokers and jobbers contrive to keep the wolf
from the door.
The system of settlements twice a month as employed in London is
another method quite different from that employed in New York, and
one, too, that seems to suffer by comparison with our system. On the
New York Stock Exchange everything is settled on the day following the
transaction. Each broker and each customer knows just where he stands,
and every trade is settled in full when the next day ends. Tell an
English broker that on a single day our Clearing-House settled and
balanced transactions in more than 3,000,000 shares of an approximate
value of 50,000,000 sterling and he gasps. He says that such a thing
would be impossible in London, and he is right, it would be impossible
indeed. Clearings in London vastly exceed ours, but they do not
occur daily; indeed our system would not do at all in a centre that
transacts, as London does, a large international business in which
transfers must be sent hourly to Egypt and India and to all quarters
of the globe. Daily clearings in such circumstances would be very
troublesome and vexatious.
The New York system, however, makes failures and defaults commendably
rare, while the London system, by postponing the day of reckoning,
actually invites over-extensions in speculation leading to failures
that could not possibly occur here. To make this point clear to the
layman it may be said concisely that the man who settles daily is in a
safer position both toward himself and his creditors than is the man
who postpones his settlement. The daily settlement protects the public,
as well, by putting limits on speculative commitments. These matters
are self-evident.
A gentleman who was for many years identified with a London firm of
jobbers, and who is now a member of the New York Stock Exchange and,
therefore, quite familiar with the different methods employed in these
Exchanges, tells me that the London system of brokers and jobbers,
commission laws, and fortnightly settlements, is the best possible
system for the London Exchange, while the very different methods
employed in New York seem to him to be the best that can be devised for
the New York Exchange. This may be true, since conditions governing the
two markets are widely different. In New York the whole system is cash;
in London, credit. Here brokers may accept business with considerable
freedom, knowing that but a single day elapses before the reckoning; in
London brokers exercise greater caution because they must trust their
clients until settlement day.
Another point of difference between the methods of the two Exchanges
lies in the phlegmatic deliberation of the Englishman. Here in New York
there is a slap dash, touch-and-go system that is greatly facilitated
by the use of the telephone and the private telegraph lines; a single
commission house has 10,000 miles of leased lines. In London, where
telephones and private lines are but sparingly used by brokers and
clients, a broker often finds on his desk in the morning three or
four hundred letters and telegrams. The care and attention required
to handle an enormous lot of orders given in this deliberate manner
is something with which New York stockbrokers are quite unfamiliar;
indeed it may be doubted if they could meet such an emergency with
their present facilities.
Publicity, as we are learning in the New York Stock Exchange, is
a prime requisite of the business, and the advantages that thus
accrue through the use of the ticker and the published summary of
each transaction in the day’s work cannot be overestimated in its
importance to the public and to the banks. In London, where a jobber
may buy or sell large quantities of securities, the business is done
quietly. Outside of the active participants in a transaction, nobody is
permitted to know anything about it. There is no ticker service worthy
of the name, nor is there a list of transactions published at the end
of the day.
This, it seems obvious, would not do at all in America. We have here
not only the ticker-tape, which prints an almost instantaneous report
of prices all over the country, together with the volume of business
done at those prices, but there are similar reports of the day’s
business printed in all the morning and evening papers--one of the
last-named going so far as to reproduce on its financial page a copy
of the day’s tape from beginning to end. All the newspapers, moreover,
print opening, high, low, and closing prices, together with the bid
and offered price of each security at the market’s close.
In the course of the two days in which these lines are written, for
example, 257,000 shares of Reading Railroad stock have changed hands
within a range of 1⅜ per cent. The public is enabled, through the
medium of the news-ticker, to learn who the buyers and sellers were
that engaged in these transactions; the tape shows the specific volume
of business done at each fraction, the various news agencies contain
all the information and gossip that throws any light on the matter, and
the financial columns of the morning and evening newspapers comment
freely for the public benefit.
The total amount of information that is thus laid before the public is
as complete and as instructive as could be desired, and yet in London
and on the Continent such information is never published, although the
two leading financial newspapers in London, because of the immense
field covered, actually publish a mass of miscellaneous news and gossip
that exceeds any similar American effort. They make it pay, too;
dividends declared by these newspapers are altogether unapproached
by the American financial press. The essential information lacking,
however, is the number of shares dealt in, and at what prices; even if
they had a thoroughly good ticker system I doubt if this information
could be recorded, because the volume of business done is too great. It
is encouraging in this connection to note that so eminent an economist
as M. Leroy-Beaulieu frankly concedes our superiority in these matters
over the practice of the foreign Exchanges and urges their immediate
adoption abroad.[108]
The second serious objection that may fairly be lodged against the
London system applies, as I have said, to the increased inducements
offered to foolhardy and reckless speculation by the plan of deferred
settlements. Whether members of the various Stock Exchanges in the
world’s capitals like it or not, they must recognize the fact that
there are evils in speculation just as there are benefits, and that
these evils are becoming a subject of increasing comment. The recent
attempt to repress speculation in Germany and the conditions which led
to the appointment of the Hughes Committee in New York are signs of an
aroused public sentiment that cannot be ignored.
With these examples before them, members of Exchanges everywhere must
realize that if it lies within their power to discountenance and
discourage foolhardy ventures into speculation by persons ill-equipped
to undertake them it is their plain duty to do so. The London Stock
Exchange’s system of fortnightly settlements clearly does not aim
at this highly desirable object as well as the method of daily
settlements employed in New York, for it requires no student to see
that by postponing the settlement risks will be incurred that would be
impossible if a reckoning were called for each day. Moreover, the fact
that there are ten failures on the London Stock Exchange to one in New
York furnishes ample proof that the precautionary restriction imposed
by daily settlements is quite as important to the welfare of brokers as
it is to the protection of the public.
As a matter of fact, failures of brokerage houses are peculiarly
abhorrent to every one concerned. In the Paris Bourse a broker must
give security at $50,000, and his bankruptcy in all cases is considered
a fraudulent one, rendering him liable to arrest. The French _Agents
de Change_ enjoy an absolute government monopoly, and naturally in
the circumstances they are held to the strictest accountability; but
aside from that a tendency is plainly discernible nowadays in all large
financial centres to demand of stockbrokers on the Exchange a rigid
adherence to such business methods as will prevent bankruptcies of
dealers to whom the public entrusts its money.
The danger of the London fortnightly settlement system lies not in the
deferred delivery of securities, but in the fortnightly settlement of
“differences.” A London broker may be actually bankrupt, yet if he is
desperate or unscrupulous, knowing that his differences will not have
to be settled for a fortnight, he may plunge into speculative risks
fraught with the utmost danger. If the market goes his way he is saved;
if it goes against him, he is still no more than bankrupt. But in his
fall, as a result of this dishonest venture, he may conceivably ruin
many others, and a chain of disasters may follow his excesses. It
should be said in this connection that London jobbers and brokers keep
a sharp watch on each other; it is extraordinary how quickly the news
gets about if this man or that is over-extended. Again, either broker
or jobber may discriminate in his dealings, taking care to avoid those
against whom there is a suspicion.
Notwithstanding the points of merit in the New York system, at some
time in the future when local Stock Exchange business has expanded to
proportions approaching those of the London Exchange, modifications
must be made. If banks and brokerage houses are given a week or ten
days to settle transactions, everybody will have a tolerably clear
idea of what money will be required, and lenders will be enabled to
make provision. London passed through the 1907 panic, under this
arrangement, with a maximum rate of 7 per cent., while we in New York
would have been glad to pay 200 per cent., and this, despite our
deplorable currency system, could not have occurred had there been
ample time for the banks to make preparations.
From these observations it may be suggested that perhaps the time
will come when the governors of the New York Stock Exchange may find
it necessary to put in force a combination of daily settlement of
differences, such as we have at present, with a periodical delivery
of stock such as they have in London. Transactions for cash need not
be affected by this arrangement, nor would the public lose any of the
protection it now enjoys. In any case, if such a plan resulted in
minimizing those violent fluctuations in our call-money market which
have so long afflicted us, it would prove a permanent blessing.
As there is no currency system anywhere in the civilized world so crude
and inadequate as that of the United States, it is unnecessary to say
that London jobbers and brokers experience none of the difficulties
with money markets that occur periodically on this side. The carry-over
on the other side of the water is frequently a matter involving immense
sums of money, but rates fluctuate normally and are in large measures
governed by automatic processes both simple and sane. Perhaps the less
said about similar conditions here the better. The spectacle presented
by strong and solvent houses ransacking the street for funds secured
by prime collateral and bidding 25, 50, and even 100 per cent. for
accommodation--something that has occurred within the last decade and
may conceivably occur again--is one upon which the candid American
observer does not care to dwell; such a man may well look with longing
and envy to London, where capital, credit, and currency are so firmly
established that the Bank of England dominates and controls all the
money markets and gold movements of the world, lending freely at home
and abroad whenever funds are needed, and acting as a civilizing
force in supplying with British funds the commercial needs of all new
countries.
In this connection we may point out the method of borrowing from the
banks the funds required to carry speculative commitments in London. It
was formerly the practice for the banks to lend large sums to brokers,
who employed the money inside the house in carrying over the accounts
of their clients. This class of business is still large, but nowadays
clients are not always satisfied to borrow through brokers, and not
infrequently they go direct to the banks and borrow from them. This has
the effect of disguising the real character of the business. To all
appearances the securities have been bought and paid for, and the trade
seems to be an investment, but the client has, as a matter of fact,
“pawned” the security with a bank.
This practice is inconvenient in a way, because where the jobbers
in important markets formerly compared notes at each settlement and
were thus enabled to form a pretty good idea of the condition of the
speculative account, it is less easy to do so nowadays, when so many
clients carry on their own borrowing. A similar tendency on the part
of the public is noticeable in New York, although, of course, the
daily settlement on this side obviates the necessity for arriving at
conclusions in advance as to the requirements of funds.
A word should be said about the methods of London stockbrokers in
carrying stocks for their customers, because this also is quite
different from the practice in New York. Here the strongest houses
rarely loan stocks, unless attracted by unusual rates of interest; in
London it is the common practice of even the best houses to carry-over,
or as we term it, loan, a great part of the commitments entered into
during the account. One reason for this is that in London customers buy
their stocks outright more frequently than is done here. Scalping small
profits is not practised on anything like the New York scale. Most of
the stocks dealt in do not pass from hand to hand like American stocks,
but must have a transfer form with the name and address of the buyer
and seller attached to the certificate. There is also a government
stamp-tax of ½ per cent. on the money involved, which tax must be paid
by the buyer when the stock is transferred to him. When the buyer sells
this stock he may not have immediate use for the proceeds, and so,
instead of delivering the stock standing in his name, he instructs his
broker to borrow it from account to account, thus receiving interest on
his money. The tax is a heavy one--figured in American money it amounts
to $50 per hundred shares at par--and the Englishman very naturally
resorts to methods such as these to recoup at least a part of it.
Again, from the stockbroker’s point of view, if he buys securities on
margin for a customer, he (the broker) must either carry them with the
jobber or with another broker, or he will have to pay the government
tax himself. Naturally he hastens to loan them, because, should the
client sell the securities in the course of the next account when
they would have to be delivered, the broker would lose the tax. He
avoids this loss by instructing a jobber to contango or carry-over the
securities until the following account day. On the other hand, if the
broker is certain that his client has purchased his securities for a
long pull on a margin basis, he will often pay for the stock himself,
transfer it to his own name, and willingly submit to the government
tax, knowing that he can recover the outlay from the handsome rate of
interest charged the client.
Another vital point of difference between the London and the New York
Stock Exchange lies in the nature and volume of the business done.
Americans are prone to think of their foremost Exchange as one which,
in the volume and extent of its transactions, compares favorably with
the great Bourses of the world; they like to think of New York as
the financial centre of the universe, and they paint rosy pictures
of America as a great creditor nation. But they err in each of these
ambitious dreams. The New York Stock Exchange, with all its magnitude,
cannot compare with its London prototype; New York is by no means the
financial centre of the world, and America is not a creditor, but a
debtor nation.
Perhaps in time America’s relationship to England and to the rest of
the world may change in these matters--certainly its increase in per
capita wealth and real property is such as to justify the hope--but
at present the day when we may speak of American financial supremacy
seems a long way off. We have not yet forgotten, for example, the
panic of 1907, and our helpless situation as revealed by our demand
for gold, nor are we likely soon to forget the funds that were then
promptly supplied us by London without any dangerous depletion of the
Bank of England’s reserve. So smoothly, so automatically are these
large affairs conducted by the Bank that the outflow of gold to New
York found a prompt response in the inflow from twenty-four countries,
including the Colonies. Within six weeks after the American drain
began, the bank’s stock of bullion actually exceeded its original
store. Small wonder that Englishmen are proud of their bank; and that
London should have become the world’s centre for the investment of
capital and the diffusion of credit.
The New York Stock Exchange business differs radically from that of
all other great Exchanges in the one respect that its dealings are
practically confined to home corporations, whereas the Bourses in
Paris and Berlin, and more particularly the Stock Exchange in London,
embrace in their daily lists securities representing many different
countries all over the world. Here we have Canadian Pacific Railway
shares, and various Mexican Railway securities, together with some
issues of Japanese and German bonds, London Underground Railway bonds,
and a few others. But these, with the exception of Canadians, are dealt
in sparingly and with a rather nominal market. Our list of securities
is composed almost entirely of home rails and industrials companies,
representing, to be sure, an enormous total of capital investment and
signifying the tremendous growth of a comparatively new country backed
by the energies of a thrifty and enterprising people, but compared with
the London Stock Exchange’s Daily Official List ours is meagre in the
extreme.
The London Daily List covers sixteen pages as large as our daily
newspapers, each page printed closely in small type, and containing
the names, amounts, interest dates, rates of dividend, and occasional
quotations of approximately 4700 different listed securities. This long
list, moreover, contains the names only of the securities that have
received an official settlement and an official quotation as well.
There are certainly as many more securities dealt in that have not
received an official quotation and hence are not permitted to appear in
the List, so that the total number of different securities represented
on the London Exchange in one or both of these ways probably exceeds
9000, half of them occupying a position somewhat similar to the
Unlisted Department which once had a place on the New York Stock
Exchange, but which is now abolished.
It is the largest and most varied list of securities in the world. The
price of a single copy is sixpence; it is published by the trustees
and managers, under the authority of the committee. Not the least
interesting feature of the List is its continued expansion in the
last half-century. Up to the year 1867 one page sufficed, then four
till 1889, eight till 1900, twelve till 1902, and sixteen thereafter,
this expansion closely following the nominal value of the securities
quoted, which were £5,480,000,000 in 1885 and £10,200,000,000 in 1909.
The latter figure is about equal to the combined nominal capital value
of the securities quoted on the Paris Bourse and the New York Stock
Exchange. In 1907 the total number of bonds then listed on the New York
Stock Exchange was 1100, and the total number of stocks 502, these
together representing a total par value of $21,079,620,430. In 1912
this total amounted to 1,028 bonds and 555 stocks, with an aggregate
par value of $26,243,291,803.
The London List is conveniently divided into thirty-eight different
classes, among them British Funds, Corporation and County Stocks of
the United Kingdom, Public Boards, Colonial and Provincial Government
Securities, Indian and Colonial and Provincial Government Securities,
Indian and Colonial Corporation Stocks, Foreign Corporation Stocks and
Bonds, Ordinary Shares and Stocks of English Railways, Railways leased
at fixed rentals, Railway Debenture Stocks and Guaranteed Stocks and
Shares, together with preference shares, Indian Railways, Indian Native
Raj and Zemindary loans, Railways in British possessions, American
Railroad Stocks and Bonds, Securities of Foreign Railways, Banks and
Discount Companies, Breweries and Distilleries, Canals and Docks,
Miscellaneous Commercial and Industrial Companies, Electric Lighting
and Power Companies, Financial, Land, and Investment Companies,
Financial Trusts, Gas Companies, Insurance Companies, Iron, Coal, and
Steel Companies, Mines, Nitrates, Shipping, Tea, Coffee and Rubber,
Telegraphs and Telephones, Tramways and Omnibus, and Water Works.
Of these the Commercial and Industrial Companies List is by far the
largest, covering three pages.
A cursory glance over this really formidable Official List brings
forcibly to mind London’s supreme position as banker, broker, and
clearing house for the wide world, while it emphasizes the constantly
increasing overflow of British capital into channels that make for
enterprise and development even in the most remote quarters of the
globe. Here we find set forth Ceylon, Fiji, Tasmania, and Cape of
Good Hope debentures; Stocks of Saskatchewan, Antigua, Johannesburg
and the Straits Settlements; Harbor Board Mortgages of Oamaru and
Wanganui; Rangoon Sterling Loans; Municipal Stocks of Pernambuco;
Budapest, St. Louis, Tokio, Lima and Aarhus; Ecuador salt bonds and
bonds of the Grand Duchy of Finland; securities of the Greek Piraeus
Larissa Railway, Honduras 10 per cent. loans, loans of Liberia, Persia
and Siam, and certificates of the Venezuela Diplomatic Debt. There
are securities of the Ionian Bank, the Natal Bank and the Bank of
Abyssinia. The Terra del Fuego Development Company is represented,
and likewise Amazon Telegraphs, Malacca Rubbers, Singapore Electrics,
Rangoon Tramways, Montevideo Water Works, and Sao Paulo Match
Factories. Soda and newspapers, theatres and sawmills, hotels and
clothiers, sponges and molasses, soaps and cereals, these are some
of the items that catch the eye as one glances over the List. What
would be found there if all the securities admitted to the House were
published in the List may be left to conjecture; and what will this
eloquent array of enterprise in figures look like a century hence, if
the List continues its present rate of growth?
As Great Britain is a country where there is never any difficulty about
raising capital for the creation or extension of any business which
offers a reasonable probability of large profits, it is natural that
new countries where capital is scarce and credit scarcer should turn
to London. Thus governments, municipalities, company promoters and
manufacturers from all over the world are constantly making application
for funds with which to supply their needs. Greek railways, Abyssinian
banks, Ceylon tea and Malay rubbers hasten to register themselves at
the world’s centre of capital and offer their shares to a public whose
taste for all kinds of world-wide industrial and commercial ventures
seems never likely to be satiated, since the really good and profitable
home enterprises are seldom open to public subscription. The insiders
in those bonanzas naturally keep their treasures to themselves and
their friends, unless after a time the concern is turned into a
limited liability company with good-will as a conspicuous asset and
over-capitalization as the dominating motive; then, as elsewhere, the
market is invited to assist. But that is another story.
What is of especial interest to a Wall Street man who looks over the
enormous list of London’s Stock Exchange securities is the function and
method of the Listing Committee that has to pass on all these concerns
before admitting them to the House. In New York the Stock Exchange’s
“Committee on Stock List” insists that the applicant company must be
able to show at least one year’s earnings--a most important condition.
In London somewhat different conditions prevail. The committee looks
into the bona fides of an applicant company and makes inquiries
concerning the people behind it, but it does not require that it shall
have done business for at least a year and show a year’s earnings,
because if that were insisted upon as a condition precedent, the banks
would not finance it, nor the public support it. They have no “curb
market” in London where a new company may pass through a seasoning or
preparatory period while awaiting admission to the Stock Exchange,
and as a settlement day with Stock Exchange authority is rigorously
insisted upon by those who provide the funds, it follows that
companies must be admitted at least to “official settlement” privileges
as soon as they are organized.
One point upon which the London Exchange authorities lay great
weight in the admission of new securities, consists in obtaining
assurances that a sufficient number of shares has been allotted to
the public before admission is granted. This is a thoroughly wise
precaution, designed to prevent corners and, as far as possible,
improper manipulation. Another very interesting, and I may say, a
very wise precautionary measure of the London method of listing, is
the prohibition placed upon vendor’s shares--a plan that might well
be adopted in New York. In London, for example, a vendor--i. e., a
seller of the property--who receives shares in consideration of the
sale, cannot have his shares listed until six months have elapsed after
shares of the company have been offered to the public. The protection
afforded the public by this plan is obvious, and requires no further
comment.[109]
If the London share certificates required, as in New York, only a
simple endorsement for transfer, much of the annoyance and confusion
that sometimes takes place would be avoided. The market for mining
shares, for example, had until 1888 only a very small place in the
London Stock Exchange, but the discovery of gold in the Witwatersrand
changed all that, and by 1894 the number of brokers engaged in handling
mining shares actually exceeded those in any other department. It was
found necessary to provide a special day--one day before the regular
settlement commenced--for carrying over bargains in mines, but owing to
the fact that mining shares, like nearly all securities in London, were
“registered” and not “to bearer,” the clearing house was taxed beyond
its powers by the immense volume of work thrown upon it, and once or
twice it broke down completely.
An extraordinary number of small investors bought fractional shares;
the offices of the companies were not prepared for the rush and could
not handle the large carry-over, hence for a time the “Kaffir Circus,”
as the speculative mania of the day was called, promised to embarrass
seriously the whole Exchange machinery. All this could have been
avoided by making the shares “to bearer.” Yet the London authorities
feel--and not without reason when we consider the volume of their
business and the remoteness of their clientele in many instances--that
bearer certificates are not safe, and that what is lost in the time
spent in transferring certificates is amply compensated in the
resultant security against fraud and forgery.
It is interesting to note in connection with the enormous business done
on the London Exchange--a business which makes New York’s high totals
seem insignificant--on what a vast scale London’s exports of capital
are conducted. This may properly be noticed here, since these capital
exports have great economic significance and bear close relationship
to the transactions on the Stock Exchange; indeed were it not for the
work done by the Exchange in providing markets and settlements and all
the details of the security business, it is fair to say there could be
no such public issues of capital. In 1910, for example, new capital
expenditures amounted to the extraordinary figure of £267,439,000, of
which £60,296,500 was expended in the United Kingdom, £92,378,100 in
the various British possessions, and £114,764,500 in foreign countries.
Of the grand total £49,974,000 went into foreign railways, £10,096,000
into Indian and Colonial railways, £35,631,600 into Colonial government
loans, £18,431,000 into foreign government loans, £18,343,100 into
explorations, and £19,143,800 into rubber.[110] The year 1910 was,
of course, a year of great prosperity in England, and it was a year
made famous by speculative activity in various directions, especially
in rubber, so that the totals given above are larger than they had
ever been before. But the point for us in America to bear in mind in
considering these figures is their immense significance as showing
England’s complete supremacy in capital, credit, and the art of banking.
The immense number of securities dealt in, coupled with the speculative
propensities of the people and the ramifications of British finance,
naturally go to make that Exchange a peculiarly sensitive and
vulnerable spot, and the American visitor may well wonder what would
happen there if the ancient bogy of war between England and any
other first-rate power should some day become a reality. War is, as
every one knows, the greatest destroyer of capital. England’s little
Transvaal war cost $1,000,000 a day, and by the Chancellor of the
Exchequer’s report resulted in a total expenditure of $1,085,000,000.
The war between Russia and Japan cost upward of $3,000,000 daily and
$2,000,000,000 all told. What a great war would cost England if that
country were to cross swords with one of the powers may be conjectured;
what would happen in the Stock Exchange taxes the imagination.
In the month in which these lines are written the London Stock
Exchange and all the continental Bourses are having their periodic
scare over a war in the Balkans. British consols have fallen almost
seven points from the high price of the year; French rentes seven,
German 3s. six, and Russian 4s. seven.[111] These are very severe
declines for government securities of that class, and if they can fall
abruptly over difficulties in the Balkans, what would happen were
these countries themselves involved in war with foemen of their own
class? Russian consolidated 4s. fell eleven points and Japanese 5s.
twelve in the first month of the Manchurian war, and in our war with
Spain, Spanish 4s. fell from 61 to 29¾. If such things can happen to
government securities, what would happen to all the 9000 odd industrial
and kindred securities dealt in on the London Exchange should England
take up the sword with, let us say, Germany? We are not left to
conjecture on this point, for in the week that has just witnessed
the Balkan scare there have been some really tremendous slumps in
securities--collapses out of proportion, it would seem at this
distance, to the magnitude of the political issues threatened.
In Paris, for example, there has just been witnessed a two-day break of
185 points in Sosnoviche Collieries, a one-day break of 165 points in
Bakou Naphtha, a decline within a few hours of 115 points in Russian
Naphtha and overwhelming breaks of from 50 to 150 francs in Paris Light
and Transport shares, Rio Tintos, and Electrics. No such demoralization
has been seen in any foreign financial market within twenty-five years.
This slump was no doubt due in large part to a top-heavy speculative
position and to consequent financial congestion, but it was the
Balkan war-cloud that caused the real difficulty none the less, and
it supplies an outsider with an idea of what may happen in a real
emergency.
Foreigners are prone to speak of Yankee speculation as foolhardy and
reckless, as no doubt it is at times, but never in American history
has there been a panic with anything like the severe declines, in so
brief a period, as those just recorded. For that matter, we in America
have never experienced a boom in any sense commensurate with London’s
rubber boom of 1909–10, nor a collapse as sudden and as thoroughly
deserved as that which followed it. Again, London’s Kaffir Circus of
1894–5, and the furious speculation in Panama shares in Paris in the
early nineties, have had no parallel in American stock markets. This is
only another way of saying that the speculative mania which seizes upon
nations at periodic intervals is not a matter of latitude and longitude
in any sense.[112]
In trying to picture what would happen in the London Stock market
should such a war as that which Englishmen are always discussing really
occur, we must take into account not only the mass of securities that
would be directly affected, but also the great burden borne by London
banks and bankers in security issues all over the world. On another
page we have seen that London’s capital expenditures on new issues in
various quarters of the globe in a single year exceeded £267,000,000;
in the quarter just closed (September, 1912), these disbursements ran
£25,000,000 above the previous year.
That they will continue so to increase is open to no doubt as long as
England’s abstention from war is assured; but if there should arise
even the possibility of war, it would result in an embarrassment of
credit with terribly serious results, such as have never been dreamed
of in the world’s history. The many years of peace between the great
powers, the many new countries that have been opened to commercial
development, and the countless new fields of industrial endeavor that
have come into being while this peace has lasted, have served to create
a British credit situation huge and complicated beyond all precedent.
Any serious interruption or derangement of so vast a system would find
a very different situation from that which existed on the Continent in
1870. It would be appalling.
And yet, ere we go too far afield in search of the shivers, the
observer must bear in mind that this great credit system of which
London is the banker and clearing house, in reality knits together
in its international web all the great powers, and binds them so
closely together as to guarantee, in some measure, the preservation of
peace. That peace hath her victories, and that the creation of wealth
through industrial pursuits may serve in this way to prevent armed
strife--these are, after all, encouraging indications quite as strong
as treaties. To-day the bankers of London and Paris are the war lords
of creation. Both these centres loan money, on early maturing bills,
to all the world. Stop London’s discounts through an outbreak of war,
and gold would pour into that centre at the rate of $200,000,000 a
month. “It might be possible to starve her population,” says a recent
writer, “but no combination of the Powers could bankrupt London. In
the event of war Paris could bankrupt Germany in a week. No war could
disturb the credit of the Bank of France; but the German Reichsbank
would inevitably go down in the smash. All Germany’s capital is in her
own shop. She is doing a great business, and, quite properly, a great
part of it on borrowed money. But if her loans were called, she must
put up the shutters.”[113]
Let us now observe the London broker at his work. The Stock Exchange,
as has been described, settles nearly all of its transactions twice
a month, upon officially appointed “account days,” which fall about
the middle and the end of every month. Smith, a broker, receives an
order to buy, let us say, 500 East Rands, and goes to a jobber who
makes a specialty of that department. The jobber, Jones, is a wise
man and a clever trader, who knows all there is to know about supply
and demand and regulation of prices to meet them, otherwise he would
soon be out of business. Smith does not tell him what he proposes
to do, but asks for a price, which in normal markets Jones quotes at
3½ to 3-9/16, this being the method of implying, in pounds sterling,
that he is prepared to buy at 70s., or to sell at 71s. 3d. The broker
will probably say that the price is too wide, whereupon Jones quotes a
figure “close to close,” reducing the quotation 1/64 each way, at which
figure the transaction is closed.[114] Smith enters in his book that
he has bought of Jones 500 East Rands at the price stated, and Jones,
that he has sold at this price to Smith. The customer is then advised
of the transaction, and next day he receives his stamped contract,
with details covering the cost of the shares together with brokerage
and other expenses, if any, and informing him of the date of the next
account day, when payment will fall due.
Beneath the main floor of the Exchange is the settling room, and here
the clerks of broker and jobber check the transaction that has taken
place. Two days before the account the name of the person for whom the
East Rands were bought is written on a ticket--hence “ticket day”--and
handed to the Stock Exchange Clearing House, which, after the manner
of the Stock Exchange Clearing House in New York, eliminates all
the intermediaries through whose hands the shares may have passed ad
interim, and puts the selling broker into direct communication, by
passing him the ticket, with the broker of the buyer. This done, the
seller receives the ticket with the buyer’s name on it, and prepares
a transfer deed as the law requires.[115] Had the client bought the
shares of an American railway instead of East Rands, the procedure
following the purchase would have been somewhat different, because
American shares bear a form of transfer on the back which requires the
signature of the seller only, and which becomes, by reason of this
fact, almost as readily negotiable as bank-notes.
In London consols can be dealt in in this way, but the customary
form of conveyance of the funds, and of Indian and Colonial stocks,
consists of a brief transfer on the books of the bank acting as agent
for the particular issue. Thus the Bank of England keeps the books for
consols and India government stocks, and sellers or their attorneys
must attend personally at the bank and sign the transfer. The bank
insists that every seller must be identified by a member of the Stock
Exchange, whose signature must be registered there, and it places full
responsibility upon these members for correct identifications. This
was long a sore point with the Stock Exchange, and it was fought to a
finish in the courts, but the Bank won “in a walk.”
The transaction just cited in the case of East Rands is based on the
supposition that the original buyer proposed to “take up,” or pay for
his shares in full. If he is merely a speculator, hoping to sell at a
profit before the settling day and pocket the difference, a somewhat
different procedure is involved, especially if at the approach of
settling day the hoped-for rise has not appeared. In that case he asks
his broker to “carry-over,” “contango,” or “give on,” the shares he has
bought, and the broker, to whom this is an hourly occurrence, naturally
has at his finger tips ample facilities for doing what is required.
Going to the jobber, he says he wants to “give on” five hundred East
Rands. The jobber says he will “take them in,” which means that he
will lend the money until next following settlement, charging interest
at, say, 5 per cent., while the broker in turn charges his client
5½ per cent. and takes the interest difference as compensation for
the service. The buyer’s speculation is thus extended to the next
settlement, and the statement given him shows that he has been
debited with the interest upon the “making-up price,” at which the
transaction is arranged. The rate of interest is called the “contango,”
and “contango days” are the two days during the settlement when these
arrangements are in effect:[116]
“The Stock Exchange has witnessed many periods of wild
excitement and speculation, reminding one of the famous South
Sea Bubble--perhaps the most remarkable “boom” on record--the
story of which, however, has been so often and so vividly told by
Smollett and later writers that we need only refer to it here.
Just before the middle of the last century came the great railway
boom. It began about 1834, and within one year more than six
hundred propositions for railway lines in the United Kingdom were
placed before the public, the nominal capital required being over
600,000,000 pounds sterling. Panic, of course, followed the boom;
and, as an example of the rapidity with which prices moved, it may
be mentioned that the Great Western Railway stock rose to 236 in
1845, and fell back to 55½ within three years, while Midland stock
rose to 183 and fell to 64. After the railway boom and panic came
several banking crises, of which the worst were those identified
with the names of Overend, Gurney, & Co. in 1866, and of Baring
Brothers in 1890. For five years after the latter, the Stock
Exchange lay fallow, with business and credit worn to a shadow.
Then came the famous Kaffir boom, of which it may be said that
Cecil Rhodes stood out as the colossus. The madness of that boom
has rarely been equaled, even in the history of the Yankee market.
It makes one hot even on a cold day to think of the time when, as
a clerk, one tore off coat, waistcoat, collar, and tie in order to
run the faster in the settling room beneath the Stock Exchange,
“passing names” (as it is technically called) in connection with
that gamble. A Rugby football scrum was child’s play to the
continued struggles; and, after the most violent excitement had
subsided, there were always fights to be settled before one went
upstairs to work the whole night through.
“A period of collapse followed this episode. After various minor
upheavals there came in 1910 the rubber boom, which, perhaps with
the Kaffir Gamble, more nearly recalls the excitement of 1720 than
any other. The rubber boom had not, indeed, the same noble backing
which the South Sea Company boasted; but clergymen and ladies were
prominent operators as ‘bulls,’ ‘stags,’ or both.”[117]
The thought will no doubt occur to an American who reads these pages,
whether the day will come when American banking will extend, as in
England, to every quarter of the globe, and whether the New York
Exchange, like its London prototype, will become a centre of the
world’s commercial activities. This is a far cry, of course, and the
answer will not be known in our generation. But it may be said without
fear of contradiction that when a great nation like ours, in which the
spirit of enterprise is manifest, has reached the point where its own
domain has been developed, when it has perfected a sound banking and
currency system, when it has recovered its lost shipping and mastered
those economic lessons that the future has in store, it may confidently
be expected to push out into new lands and supply their demands for
capital.
Already we have in America a world’s storehouse of necessary
commodities, with wealth and intelligence that increases by leaps and
bounds. No nation stands a better chance of escaping the horrors of war
and its ruinous losses. China remains a fertile field for commercial
endeavor in the years to come, and our neighbors on the south may
one day know us more intimately. The retrospective eye, surveying
commercial and financial America in the sixties and contrasting it with
America of to-day, sees clearly that progress has been made, and looks
beyond toward progress to come. In any case civilization must advance
and trade expand, and American energy must advance and expand with
them. I wish I might visit Wall Street and the Stock Exchange a century
hence.[118]