THE PARIS BOURSE; A MONOPOLY UNDER GOVERNMENT
“Patriotism makes it a duty for us to acknowledge the fact that the
Bourse represents one of the live forces of France,” wrote Anatole
Leroy-Beaulieu in one of the finest tributes ever paid to a Stock
Exchange. “It has been for France an instrument of regeneration after
defeat, and it remains for us a powerful tool in war and in peace.
Let us recall the already remote years of our convalescence, after
the invasion, years at once sorrowful and comforting, when with the
gloom of defeat and the suffering of dismemberment, mingled the joy
of feeling the revival of France. Whence came our first consolation,
our first vindication before the world? Whether glorious or not, it
originated on the Bourse.”
The victorious Prussians were at the door in the humiliating crisis of
1870 and ’71 to which the author refers, France was prostrate. Alsace
and parts of Lorraine were to be ceded to the victors, together with
an indemnity of five billion francs, and Paris was in control of the
Reds. In that dreadful saturnalia of violence and crime which has made
the name of the Commune infamous, the honor of France was threatened,
and the credit of the new Republican government, especially its ability
to maintain its authority and to fulfill its terms with the Prussians,
seemed hopeless and cheerless indeed. How Thiers became the brains of
the rehabilitation of France, with what vigor he entered upon the task
that has handed down his name as the most influential political figure
in French history--with what rigorous measures MacMahon suppressed the
Commune--these are spectacular incidents with which every schoolboy
is familiar. But the work of the Bourse in that episode--silent,
unobtrusive, and lacking the sensational features of which popular
histories are made, is by no means so well known, although upon its
labors devolved the real upbuilding of France. Thiers never ceased to
congratulate himself on the assistance it gave the country at a time
when the liberation of French territory hung in the balance.
“The Paris market came out unscathed from the ruins of the war and
of the Commune,” continues our author, “and straight from the hardly
ratified peace and quelled insurrection it threw itself into the work
for France’s regeneration; because it was, indeed, for France’s
regeneration that the stockbrokers and merchandise brokers worked under
Thiers and MacMahon. In the worst days the Bourse had the uncommon
merit of showing an example of faith in France. When more than one
political skeptic and discouraged thinker allowed themselves to write
down upon the crumbling walls of our burned-down palaces “Finis
Galliae,” the Bourse kept its faith in France and her fortune, and that
faith in France was spread by it all around, at home and abroad.
“Speculation was patriotic in its way; it exhibited a confidence in our
resources which the discretion of many a wise man rated as foolhardy.
Have we already forgotten our great loans for liberation? Without the
Bourse, these colossal loans, the amount of which exceeded the dreams
of financiers, would never have been subscribed for, or, if ever,
it would have been only at rates much more onerous for the country.
Without the Bourse, our French rentes would not have taken such rapid
flight; our credit, restored even more quickly than our armies, would
not have equaled that of our victors, on the very morrow of our defeat.
In that regard, all that justice demanded us to say previously of the
higher banking institutions may with right be repeated concerning the
Bourse.
“To those who lived through that pale dawn of France’s recovery--the
rush of the Bourse and of capitalists to offer us the thousands of
millions which we required exceeded the eagerness and boldness of
speculation. But even if we were to consider it but gambling and
betting for speculation, such speculation was betting for France’s
regeneration; it bravely placed its bet on the vanquished. Those
national and foreign financiers, who have been accused of pouncing upon
her like birds of prey, brought to the noble wounded their dollars and
their credit, and if they reaped a profit thereby, are we to reproach
them for it, when they helped us to reconstruct our armies, our fleet,
and our arsenals?
“If France regained her rank among the nations of the world so quickly,
the credit for it should be mainly given to the Bourse. And to its
services in war, we should, if we wanted to be just, also add its
services in time of peace. Without the extensiveness of the Paris
market, and the stimulus given to our capitalists through speculation,
how many things would have remained unaccomplished in the recklessly
overdriven condition of our finances? We should have been unable to
complete our railroad system, or renew our national stock of tools, or
create beyond the seas a colonial empire which shall cause France to
be again one of the great world powers. When the Bourse is on trial,
such credentials should not be overlooked. Before condemning it in
the name of morality and private interests, a patriot should give due
consideration to its services rendered for the national weal; if all
its defects and misdeeds be heaped up on one scale tray, then services
of like importance will easily counterbalance them.”[119]
Singing the praises of Stock Exchanges is a thankless task, and one
that falls upon deaf ears. The very nature of its functions makes dull
reading. It cannot hope to enlist the lively enthusiasm of the casual
observer, nor has it picturesqueness to brighten the pages of history.
The layman visits the great exchanges as a matter of course; the scene
is animated and diverting; he sees the outward manifestations of energy
and movement, but too often he misses the great silent forces at work.
The eye has a fine time of it, but the intellect comes away empty.
These are reasons why I have ventured to quote the foregoing passages
from M. Leroy-Beaulieu. Somewhere in his earnest tribute to the work of
the Paris Bourse the reader may find food for thought.
The Bourse in Paris differs from all others in that its membership
consists of but seventy. These _Agents de Change_, as they are called,
enjoy an absolute monopoly not only to trade in government and other
officially listed securities, but also to negotiate bills of exchange
and similar instruments of credit. In these circumstances it is
easy to see why the Bourse is an institution of enormous strength,
notwithstanding the fact that, because of the deep-rooted conservatism
of the French in financial matters, it stands a poor second to London
in international business.
It exists by virtue of the decree of October 7, 1900, regulating the
execution of article 90 of the Code du Commerce and of the law of
March 28, 1885, as modified by the decree of January 29, 1898. These
laws provide that _Agents de Change_ of the Paris Bourse must be
French citizens over twenty-five years of age, and in possession of
civil and political rights; they must be nominated by official decree
signed by the President of the Republic. They must have performed
their military service or satisfied the law as to such service, they
must produce a certificate of fitness and good character signed by
the heads of several banking and commercial firms. _Agents de Change_
are, in reality, officers of the government, since the seventy
ministerial appointees are entrusted with the exclusive right of
dealing in government securities; all such dealings, in fact, when not
made directly by private individuals, must be made through _Agents de
Change_.
The enjoyment by stockbrokers of a complete monopoly under government
is sufficiently unique to warrant an inquiry as to the origin of such a
curious privilege. The employment of stockbrokers by persons who wished
to sell certificates, or other negotiable instruments of the period,
was made obligatory by an edict of Louis XIV in 1705. Twenty “offices”
(memberships) of brokers in Paris were then created, and these twenty
were accorded a monopoly similar to that of to-day. Prior to that
period there had been “offices” of exchange brokers, bank brokers, and
merchandise brokers, but the King felt that these were not contributing
enough to the Royal exchequer and swept them all away in the edict of
1705, when the present system had its birth. The wars and the King’s
extravagances had placed the exchequer in a bad way, and between 1691
and 1709, some 40,000 privileges of various kinds were sold for cash,
among them the privilege under which these twenty men were to do the
business of stockbroking in Paris. “Sire,” said Pontchartrain, “every
time Your Majesty creates an office, God creates a fool to buy it.”
But the stockbrokers were not to remain in undisturbed possession of
their new privileges, for, whenever the state of the Royal finances
was low, the King withdrew the old offices in order to grant new ones,
always for cash, to fresh buyers, and this was repeated again and
again. Thus the next King Louis XV, whose personal follies, together
with the schemes of the Scotchman, John Law,[120] brought the country
to the verge of ruin, repealed in 1726 the Edict of 1705 and returned
to it again in 1733. His successor, the weak and incapable Louis XVI,
repeated this performance in 1785, 1786, and in 1787. In 1788, the
stockbrokers having agreed to waive accumulated interest on their
security deposits, were again established in their powerful monopoly.
The critical financial situation that arose in the early days of the
Revolution saw them again legislated out of office (June 27, 1793);
the Bourse was closed, the stockbrokers arrested and their goods
confiscated, because, in the imperfectly understood economics of the
period, the decline in Frenchpaper currency (assignats) was attributed,
_faute de mieux_, to stock-jobbing. Two years later the Bourse was
opened again, and after eight days--the assignat continuing to decline,
it was again closed. Meantime France went into bankruptcy.
In 1801 the modern Bourse was established and firmly fixed by the
legislative work of the Consulate. The law then enacted requires that
stockbrokers be appointed to their public trust by the government,
which shall be guided in its choice by their moral character and
their professional knowledge, and shall, besides, demand the pledging
of a part of their fortune with the State as a guarantee of their
good conduct and of proper expiation for their errors or failures.
The law also emphasizes the principle of the freedom of commerce,
expressly stating that nobody is obliged to have recourse to an
intermediary, if he does not desire it. Further, the stockbrokers were
subjected to several regulations with a view to prevent speculation
and stock-jobbing. Thus, they were obliged to keep a journal; their
books were to be marked and signed by the president of the _Tribunal
de Commerce_; they could not trade nor carry on banking for their own
account; no one who had been in bankruptcy was allowed to assume the
duties of a stockbroker.
The law also makes the stockbroker responsible for the delivery of
the securities sold and for the payment of the sums stipulated, even
before either have been received by him from his clients, his security
being appropriated for this pledge if need be. This responsibility was
intended as a check upon transactions for future delivery, which,
however, were made legal in 1885.[121] This law of 1801, it will be
observed, provided that stockbrokers were to be _appointed by the
government_, and that their commissions were subject to repeal. In 1816
they scored a great advantage by securing the enactment of a measure
by which they were permitted to introduce their successors with the
consent of the government. This “right of introduction,” says M. Vidal,
“is practically an article for sale. The stockbroker, on retiring, does
not sell his office (membership), but he sells to his successor the
right of introduction.”
The price of this right in recent years has varied from 1,500,000
to 2,000,000 francs ($300,000 to $400,000). A candidate, proving
satisfactory to the government, must in addition deposit 250,000 francs
($50,000) as a bond or security to the government, which pays interest
on the deposit, and 120,000 francs ($24,000) as a fee to the _caisse
commune_ of the _chambre syndicale_, which means the treasury funds
of the institution. The variations in the price of the “offices” or
memberships have an interesting history. The first office sold was
valued at 30,000 francs; about 1830 they rose to 850,000 francs; after
the July Revolution they fell to 250,000 francs, and rose again to
950,000 francs before 1848. They declined at that time to 400,000
francs, and in 1857 reached 2,400,000 francs. After the war they fell
to 1,400,000 francs.[122] In 1898, when the number of _Agents de
Change_ was increased from sixty to seventy under the government’s
reorganization, designed to meet the expansion in business, it was
provided that each of the ten new members should purchase the offices
from the old members at 1,372,000 francs each.
While the stockbrokers, as I shall term the _Agents de Change_
henceforth, are placed by law under the disciplinary rule of the
Minister of Finance, they themselves, as an association, choose by
ballot a governing board (_chambre syndicale_) of eight of their
members, to whom, with a chairman (_Syndic_) are entrusted the
maintenance of discipline, the listing of securities, and all general
matters concerning the welfare of the body.
In addition to the exclusive privileges entrusted to stockbrokers
as already cited, they are constituted the sole authority for
the quotations of the securities in which they deal, including
quotations of metals; they alone give the necessary certificates for
transfers of government securities on terms provided by law; they
regulate processes by which lost or stolen certificates are rendered
non-negotiable or restored to owners; they may be commissioned by the
courts to negotiate loans, to liquidate pledged securities, and to
dispose of the property of minors. Settlement days in Paris are similar
to those in London, occurring twice a month. That at the end of the
month lasts five days, and that in the middle of the month four days.
French rentes are settled only at the end of the month.
In forming partnerships, only one person in the firm is entitled
to act as stockbroker; the other partners must be simply financial
partners, responsible for losses, as “special” partners are in New
York, to the extent of the capital contributed. The holder of the
membership must be the owner, in his own name, of at least one quarter
of the sum representing the purchase price of his membership, plus
the amount of the bond or security given. Stockbrokers are forbidden
by law to disclose the name of any person for whom they buy or sell;
for this reason all dealings are made in the broker’s own names, as
are also transfers. They must not, under any circumstances, carry on
trading or banking operations for their own account, under penalty of
expulsion. The bankruptcy of a stockbroker is prima facie a fraudulent
bankruptcy, rendering him liable to arrest and other penalties, even
under circumstances where an outsider would be immune.
While the impression prevails in many quarters that members of the
Bourse are made responsible by law for any liabilities that may be
incurred by their colleagues, such is not the case. The practice is,
however, that the _chambre syndicale_, or governing body, voluntarily
meets the liabilities of defaulting members from the general funds,
although not compelled to do so. The nature of the monopoly which
stockbrokers enjoy in Paris, and their position as officers of the
French Executive government, renders this a thoroughly wise method,
for, as we shall presently see, there is grave opposition to the
exclusive rights entrusted to them, and it would not be good policy
to fan the flames of this hostility by anything less than a mutual
guarantee of solvency.
Rates of commission to be charged by stockbrokers on the Paris Bourse
are fixed by the decree of the Minister of Finance (July 22, 1901).
These are the minimum charges, and no stockbroker is allowed to reduce
them under any circumstances. He may, however, and usually does, share
them with intermediates who bring him business.
If a client gives, say, an order to buy “at the average price” (_cours
moyen_), the transaction takes place in this way: Before the opening of
the session the stockbrokers and their clerks meet in a special room,
where bids and offers are made “at the average price,” which is as yet
undetermined; it will be decided during the session. When an offer and
a bid coincide, the transaction is closed; only the price is missing.
When the bell rings to announce the opening of the market, the brokers
and their clerks leave the special room and proceed to the public hall
around the railed enclosure (_corbeille_) whereupon the day’s business
begins.
As orders are executed the dealer gives the price to a marker, whose
entries establish the prices for the official quotation list, and,
when this has been made up, those who have traded on the basis of “the
average price” ascertain it by striking a mean between the high and low
level. If only one price is quoted, that, of course, takes the place
of the average price. If orders are given at fixed prices, or “at the
market,” they are executed as elsewhere. It is important to note in
this connection, that the market in Paris enjoys an intimate connection
with many banks and credit institutions that act as intermediates
in procuring business. Orders transmitted to the Bourse by the Bank
of France in 1908, for account of its clients, amounted to 98,721,
involving 500,000,000 francs capital.
While, as we have seen, stockbrokers alone have the right to deal in
government and other listed securities, there are very many securities
dealt in, in Paris, that have not been admitted to the Official
List, either because the stockbrokers did not care to adopt them or
because the securities did not fulfill the very rigorous statutory
conditions. These may, however, be dealt in outside the Bourse, and
the law recognizes and protects such transactions. In what I have
written heretofore, I have confined myself to the operations of the
parquet, meaning the stockbrokers market, and so called because of
the parquet floor on which they stand; we come now to the dealings on
the coulisse, or curb, named from the narrow passageway, la coulisse,
in which these curb brokers congregate. This market is called “the
banker’s market” (_marche en banque_), but for our purpose we may call
these dealers curb brokers, as distinguished from the stockbrokers of
the parquet.[123] The number of curb brokers is not limited; any one
may become a coulissier if he is a French subject. He must have a
capital of 100,000 francs in order to do business in the cash market
for rentes, and of 500,000 francs for the settlement market. The curb
is governed, as is the parquet, by two _chambres syndicale_, one for
the account, and one for the cash market.
Although the French law provides that dealings in French rentes are
the sole prerogative of the monopoly of stockbrokers, and fixes
punishment for any intrusion into that field, the curb brokers, as a
matter of fact, deal extensively and openly in rentes, and are powerful
competitors of the stockbrokers. Their operations are not valid,
strictly speaking, but they are tolerated by the government for the
reason that the credit of the State is benefited by making the market
for rentes as free and extensive as possible. This tacit recognition
by the government, of the fundamental law of economics that wide and
unrestricted markets are the best markets, would seem on its face to
raise a point as to the wisdom of a system that perpetuates a monopoly
of seventy stockbrokers. The question is not a new one; it has been
agitating financial Paris for years. Monopolies of any kind are not
considered beneficial in this enlightened age; monopolies that make
markets and establish values and prices are peculiarly abhorrent. On
this point we may quote M. Vidal, the author of a brilliant study on
this subject:
“The actual financial power of the Paris stockbroker is put forward as
an argument,” he says, speaking of the argument in favor of continuing
the monopoly, “and it is affirmed that our financial market is the
first in the world. In our opinion, even granting that this is true,
which is far from having been proven, the cause is confounded with
the effect. When a country, owing to its geographical location, its
climate, and the character of its inhabitants, possesses numerous
natural riches, and even moral riches, they co-operate in increasing
its wealth; when it has the advantage of certain political and economic
conditions, when it enjoys a monetary and commercial organization
which promotes, instead of paralyzing, human activity in most of its
manifestations, then that country is rich and deserves to be rich.
And it may then happen that some organization, defective in itself,
and the source of manifold vexations, is nevertheless prosperous, as
much on account of certain facts of adaption as because it unavoidably
lies within the reach of the rays of national wealth. It reflects that
wealth.
“But the Paris Bourse does not owe its prosperity to its organization.
Seventy ministerial appointees entrusted with the negotiation of
one hundred and thirty billions of transferable securities are
powerful personalities. They would be more powerful if they were but
thirty-five. They would be more powerful if there were but twenty of
them, or ten, or five, or even one, if there were in the market but
one autocrat, a single arbiter of securities, centralizing bids and
offers, and the king of the Bourse, just as we see in America an oil
king and a steel king. In such a case the soundness of a market is more
seeming than real. If that system had been applied to provisions and
merchandise, infinitely more necessary for consumption than rentes or
shares in companies, the market for wine, bread, and meat, appropriated
by a few barons, might, perhaps, be stupendously high, but in this
respect experience speaks in favor of freedom of trade only.
“It seems, therefore, necessary that public and private credit should
enjoy the benefit of an organization more pliable and more in harmony
with the general condition of a country’s commerce. Let us therefore
beware of mistaking the appearance of force for force itself--a
deception that should impress us no more than the sight of the effigies
of iron-clad warriors, standing on rich trappings in a military
museum. If our financial market were opened to all who have funds and
understand the profession, it would be stronger still. If the market’s
favorable situation were distributed among several hundred individuals,
the division of risks would render the market more stable, competition
would secure for our market the desired elasticity, and, if wanted,
regulation under the supervision of the Minister of Finance would
create a condition halfway between unlimited freedom, which, with more
or less reason, scares so many people, and monopoly, which is an old
outfit, in no way suiting our customs, and disturbing the harmony of
our laws without rendering the services expected from it.”[124]
From the point of view of an American this would seem to be an
unanswerable argument. If seventy men are constituted sole managers of
a market for 130,000,000,000 francs of transferable securities, one of
two things is sure to happen; either a public market will establish
itself outside these seventy men, or the seventy will prevent the
establishment of the public market. The first of these alternatives has
occurred in the establishment of the coulisse; the second would have
occurred if the stockbrokers could have accomplished it.
While the government took no hand in the matter, it was recognized
that the coulisse gave to the public market a breadth and activity
that did great good; as a matter of fact it benefited the stockbrokers
themselves in a large way, for it enabled them to obtain from the
government liberties not formerly enjoyed, but practised freely by the
coulissiers, such as transactions in time bargains, dealings in foreign
securities, and similar concessions. This grant of a right to do
business on time, or as we term it “future delivery,” was a tremendous
step forward, since it removed an obstacle in the way of large
speculative markets that had long been abolished in other financial
centres. It put a stop to the “welching” of speculators on the plea
of the gambling act, it legalized short sales, and it established a
distinct advance in economic progress. To that extent the stockbrokers
are indebted to their neighbors on the curb.[125]
Meanwhile, the opposition to the monopoly of the stockbrokers
continues. “At all times,” says M. Vidal, “whenever there have been
privileges, some men have been found to oppose them. Of course, these
men are not theorists or pedants; they are simply men whom this
or that privilege prevents from working freely, and who represent
the manifestation of that mysterious force of things which tends
toward freedom of trade. Commercial law owes its birth only to these
protestations of practical men in apparent revolt against the laws,
which become the unconscious shapers of future legislation. From the
day when there was an _Agent de Change_ there was a “coulissier.”
The first called the second a thief, because he encroached upon his
privilege. The second hurled back the compliment, because the privilege
robbed him of his natural right.”[126]
This has a familiar American ring. In 1843 a voluminous report to the
Minister of Justice by the stockbrokers asked that the coulisse be
destroyed. Nothing came of it, but in 1859 another attempt succeeded;
the coulisse was suppressed. But the level of public credit which,
it was hoped, would be raised by the suppression, actually sank. The
business of the coulisse, and the market it created, disappeared with
the coulisse itself. The government was very sensitive then as now in
the matter of market prices for its rentes, and after the laborious
process of hoisting them to 71, it was distressing to find that,
coincident with the abolition of the curb market, they had fallen to
69. So, in 1861, the coulisse was permitted to reappear, and I fancy
the days of its suppression are now at an end.
But the old hostility will break out again when business slackens, for
the French have a saying that “horses fight when there is no more hay
in the manger.” The problem is a pretty one from any angle, especially
from the standpoint of American stockbrokers. It would seem plain that
the monopoly, as such, cannot forever continue, yet the government
faces a financial power of tremendous strength--a Frankenstein which
the State itself has created--“and of which,” to quote M. Vidal, “it
can rid itself only by indemnifying it.” At the present time the 70
memberships are worth 96,000,000 francs as a grand total; meantime, the
longer the problem is postponed the more valuable they will become as
the size and importance of the Paris market increases.
“But the French government does not seem inclined to study the
question seriously; first, because the stockbrokers would have to be
indemnified; and, secondly, because the stockbrokers themselves are
desirous of holding on to their present monopoly. As time passes,
the securities, continually on the increase, tend to increase their
profits. A financial power has been created whose existence, whose ever
spreading influence, forms the subject of a serious economic problem,
which some day may turn out to be an even more serious political
problem.”[127]
It is interesting to note, in passing from this subject, that a much
larger business is done in the coulisse than in the parquet, due to the
fact that the curb brokers are not restricted in their securities as
are the stockbrokers. The market for foreign securities alone, on the
curb, has made wealthy men of many of the coulissiers. They publish
a special quotation list, and while they have no officially fixed
commission rates, these are established by custom and in practical
operation they work satisfactorily. As might be expected, the curb
brokers require from their customers smaller margins than those
exacted by the stockbrokers--another reason why their business is
large; again, the clients of the curb broker may attend the Bourse with
him, be present and confer with him while he buys or sells for them,
and in this way get into close touch with the market, a privilege not
so easily enjoyed by the client of the stockbroker.
The Official Paris Bourse is open from 12 noon to 3 P.M.; the coulisse
from 11:45 A.M. to 4 P.M. The Official List is published daily, and
is divided into two parts, the first containing a full list of all
the officially listed securities and of the dealings in them, and the
second part a list of the dealings in what we used to call in New
York “the unlisted department.” Rates of Exchange, prices of gold and
silver bullion, quotations of treasury bonds, and the rates of the Bank
of France for discounts, interest, and loans, are also included. The
coulisse also issues a list.
The volume of transferable securities in negotiation through the
medium of the Paris stock markets was estimated by M. Alfred Neymarck
in his report to the Institut International de Statistique, session
of 1907, at 155,000,000,000 francs, an amount slightly in excess of
the listed securities on the New York Stock Exchange. Of this total,
which has been increased somewhat since 1907 through the admission
of various Russian industrial securities, 65,000,000,000 francs
were in French securities, 67,000,000,000 in foreign securities on
the official (parquet) market, and 18,000,000,000 on the coulisse.
Of home securities, the value of French rentes is here estimated
at 24,000,000,000 francs, of bonds of the City of Paris, of
treasury bonds, including those of the department and colonies, at
3,069,000,000; insurance securities at 702,000,000; those of the
Crédit Foncier at 4,447,000,000; of banks and credit companies at
3,101,000,000; of railroad and navigation companies at 24,268,000,000;
of railways and tramways at 2,200,000,000; of electricity, iron mills,
foundries, and coal mines, at 2,463,000,000.
Of the foreign securities in the French market, Russian securities
were valued at 10,000,000,000 francs in 1907, although they are to-day
considerably in excess of that sum; divers foreign government funds at
47,000,000,000 and foreign railway securities at 6,000,000,000.[128]
Next to London, Paris easily leads the markets of the world from the
standpoint of power and resources in an international sense. It is the
great market for Russian bonds and for Russian industrials, speculation
in the latter having reached such volume in 1912 as to lay the French
public open to the charge of having lost its head, something that
has not occurred in France since the Panama frenzy of 1894. France
also holds most of the Spanish and Portuguese (3,500,000,000 francs)
debt and has large capital invested in Egypt and the Suez Canal
(3,500,000,000 francs). Capital investments in Roumania and Greece,
Argentine, Brazil and Mexico, Tunis and the French colonies, Austria
and Hungary, Italy, China and Japan, United States and Canada, Great
Britain, Belgium and Holland, Germany, Turkey, Servia and Bulgaria, and
Switzerland, aggregate 16,150,000,000 francs, distributed in value in
the order named.
The caution of French investors is proverbial; notwithstanding the two
outbursts of imprudence that have occurred in this generation, it is
difficult to induce the Frenchman to place his money in anything not a
safe interest-yielding security under French laws. In no other country
is investment raised to a higher plane, and speculation confined to
a lower one. The political nature of the relationship between France
and Russia has resulted from time to time, in patriotic subscription
of French funds to Russian government loans, and thence to Russian
industrials of all kinds, but the latter have suffered so severely in
the demoralization of the autumn of 1912 as to justify the prediction
that their popularity with the French has been seriously impaired.
As to Russian government loans, the French investor is in a secure
position, most of these issues having been endorsed by such powerful
banks as the Bank of France, the Credit Lyonnais, the Comptoir
d’Escompte, and the Société Génerale, and, indeed, it is to banks such
as these and to the myriad smaller institutions throughout the country
that investors of the peasantry and the middle classes are accustomed
to turn for advice in financial matters. The large speculative
clientele, as we know it in America, in England, and in Germany, is a
decided minority in France, and those who indulge freely in speculation
are canny and shrewd beyond their fellows in other lands. The foresight
with which they diagnosed the events of the Boer War in 1899, and the
celerity with which they disposed of their large speculative holdings
of South African mining shares at top prices, is said by those who
witnessed it to have been a prodigy of speculative skill.
Like all other careful observers French economists realize in a
large sense that the creation of negotiable instruments and their
distribution throughout all the countries of the world through the
medium of the Stock Exchange is a very real cause of the wealth of
nations; indeed, this point seems to be more thoroughly understood
and appreciated by the mass of the French people than by the public
elsewhere. When, in 1885, the government legalized transactions for
future delivery and thus placed transactions in securities in the same
category, under common law, with all other commercial transactions,
it established a free market in France that has done wonders for the
credit expansion of the Republic--an expansion likewise due, in no
small measure, to the growth and development of the coulisse and to
the consequent enlargement of a market that must have been restricted,
of necessity, by a too rigorous strengthening of the stockbroker’s
monopoly. In a word, the government, by France, of credit in its higher
forms, clearly recognizes that as states, railways, and industrial
enterprises have need to resort to credit through issues of securities,
a wide market in constant contact with sources of wealth is required,
and that nothing should be done by the government to interfere with the
ebb and flow of these essential forces.
“The creating and successive issuing of this mass of securities,” to
quote M. Neymarck, “always easy to purchase and to sell on the Bourse,
have been the real cause of credit expansion. They were instrumental in
accomplishing real marvels in France and abroad. As personal property
has increased, endeavors have been made to render exchanges easy,
and to make transfers as little expensive as possible; transferable
securities, owing to their denomination, their form, their mode of
maturity for the payment of interest, their conditions for redemption,
and the ease with which they are negotiated, have been brought within
the reach of all purses, and have thus developed the spirit of saving.
The consolidation of capital, under the form of stock companies,
issuing shares and bonds that everybody can obtain, encompasses on all
sides the civilized nations of the world.
“We may say, with Paul Leroy-Beaulieu, that now, owing to capital being
accumulated in the shape of negotiable instruments, it is the stock
company which takes us on a journey; often it provides us with food and
lodging, sells us coal and light, makes up our clothing, and even sells
it to us; it procures news for us and inspires our newspapers. Further,
it insures our lives and our dwellings; it feeds the unassuming
Parisian in the ‘Bouillons’ (cheap cook-shops), and feasts the stylish
Parisian in the fashionable wine taverns.
“The distribution of all these securities has materially contributed to
the formation of small inheritances. It has influenced the development
of savings institutions, mutual benefit societies, pension funds, and
insurance; it has thus rendered invaluable service in the public rôle
it has fulfilled. Thanks to it, these companies multiply and increase
as the capitalization of their funds is made easier.
“It has also had another result. It has shown that there is no
longer a plutocracy, but a veritable financial democracy; when these
thousands of millions of certificates are minutely segregated, there
are only found atoms of certificates of stocks and bonds, and atoms
of income--so great is the number of capitalists and independent
individuals who divide these securities and these incomes among
themselves.”[129]
APPENDIX
REPORT
OF THE GOVERNOR’S COMMITTEE ON SPECULATION IN SECURITIES AND COMMODITIES
1909
NEW YORK, June 7, 1909
_Hon. Charles E. Hughes,
Governor, Albany, N. Y._:
_Dear Sir_: The committee appointed by you on December 14, 1908, to
endeavor to ascertain
“what changes, if any, are advisable in the laws of the State bearing
upon speculation in securities and commodities, or relating to the
protection of investors, or with regard to the instrumentalities and
organizations used in dealings in securities and commodities which are
the subject of speculation,”
beg leave to submit the following report:
We have invited statements from those engaged in speculation and
qualified to discuss its phases; we have taken testimony offered from
various sources as to its objectionable features; we have considered
the experience of American States and of foreign countries in their
efforts to regulate speculative operations. In our inquiry we have been
aided by the officials of the various exchanges, who have expressed
their views both orally and in writing, and have afforded us access to
their records.
THE SUBJECT IN GENERAL
Markets have sprung into being wherever buying and selling have been
conducted on a large scale. Taken in charge by regular organizations
and controlled by rules, such markets become exchanges. In New York
City there are two exchanges dealing in securities and seven in
commodities. In addition there is a security market, without fixed
membership or regular officers, known as the “Curb.” The exchanges
dealing in commodities are incorporated, while those dealing in
securities are not.
Commodities are not held for permanent investment, but are bought
and sold primarily for the purpose of commercial distribution; on
the other hand, securities are primarily held for investment; but
both are subject of speculation. Speculation consists in forecasting
changes of value and buying or selling in order to take advantage
of them; it may be wholly legitimate, pure gambling, or something
partaking of the qualities of both. In some form it is a necessary
incident of productive operations. When carried on in connection with
either commodities or securities it tends to steady their prices.
Where speculation is free, fluctuations in prices, otherwise violent
and disastrous, ordinarily become gradual and comparatively harmless.
Moreover, so far as commodities are concerned, in the absence of
speculation, merchants and manufacturers would themselves be forced to
carry the risks involved in changes of prices and to bear them in the
intensified condition resulting from sudden and violent fluctuations in
value. Risks of this kind which merchants and manufacturers still have
to assume are reduced in amount, because of the speculation prevailing;
and many of these milder risks they are enabled, by “hedging,” to
transfer to others. For the merchant or manufacturer the speculator
performs a service which has the effect of insurance.
In law, speculation becomes gambling when the trading which it involves
does not lead, and is not intended to lead, to the actual passing from
hand to hand of the property that is dealt in. Thus, in the recent case
of Hurd vs. Taylor (181 N. Y., 231), the Court of Appeals of New York
said:
“The law of this State as to the purchase and sale of stocks is
well settled. The purchase of stocks through a broker, though the
party ordering such purchase does not intend to hold the stocks as
an investment, but expects the broker to carry them for him with
the design on the part of the purchaser to sell again the stocks
when their market value has enhanced is, however, speculative,
entirely legal. Equally so is a ‘short sale,’ where the seller has
not the stock he assumes to sell, but borrows it and expects to
replace it when the market value has declined. But to make such
transactions legal, they must contemplate an actual purchase or
an actual sale of stocks by the broker, or through him. If the
intention is that the so-called broker shall pay his customer
the difference between the market price at which the stocks were
ordered purchased and that at which they were ordered sold, in
case fluctuation is in favor of the customer, or that in case it
is against the customer, the customer shall pay the broker that
difference, no purchases or sales being made, the transaction is
a wager and therefore illegal. Such business is merely gambling,
in which the so-called commission for purchases and sales that are
never made is simply the percentage which in other gambling games
is reserved in favor of the keeper of the establishment.”
This is also the law respecting commodity transactions.
The rules of all the exchanges forbid gambling as defined by this
opinion; but they make so easy a technical delivery of the property
contracted for, that the practical effect of much speculation, in point
of form legitimate, is not greatly different from that of gambling.
Contracts to buy may be privately offset by contracts to sell. The
offsetting may be done, in a systematic way, by clearing houses, or by
“ring settlements.” Where deliveries are actually made, property may
be temporarily borrowed for the purpose. In these ways, speculation
which has the legal traits of legitimate dealing may go on almost as
freely as mere wagering, and may have most of the pecuniary and immoral
effects of gambling on a large scale.
A real distinction exists between speculation which is carried on by
persons of means and experience, and based on an intelligent forecast,
and that which is carried on by persons without these qualifications.
The former is closely connected with regular business. While not
unaccompanied by waste and loss, this speculation accomplishes an
amount of good which offsets much of its cost. The latter does but a
small amount of good and an almost incalculable amount of evil. In
its nature it is in the same class with gambling upon the race-track
or at the roulette table, but is practised on a vastly larger scale.
Its ramifications extend to all parts of the country. It involves a
practical certainty of loss to those who engage in it. A continuous
stream of wealth, taken from the actual capital of innumerable persons
of relatively small means, swells the income of brokers and operators
dependent on this class of business; and in so far as it is consumed
like most income, it represents a waste of capital. The total amount
of this waste is rudely indicated by the obvious cost of the vast
mechanism of brokerage and by manipulators’ gains, of both of which
it is a large constituent element. But for a continuous influx of new
customers, replacing those whose losses force them out of the “street,”
this costly mechanism of speculation could not be maintained on
anything like its present scale.
THE PROBLEM TO BE SOLVED
The problem, wherever speculation is strongly rooted, is to eliminate
that which is wasteful and morally destructive, while retaining and
allowing free play to that which is beneficial. The difficulty in
the solution of the problem lies in the practical impossibility of
distinguishing what is virtually gambling from legitimate speculation.
The most fruitful policy will be found in measures which will lessen
speculation by persons not qualified to engage in it. In carrying
out such a policy exchanges can accomplish more than legislatures.
In connection with our reports on the different exchanges, as well
as on the field of investment and speculation which lies outside of
the exchanges, we hall make recommendations directed to the removal
of various evils now existing and to the reduction of the volume of
speculation of the gambling type.
THE NEW YORK STOCK EXCHANGE
The New York Stock Exchange is a voluntary association, limited to 1100
members, of whom about 700 are active, some of them residents of other
cities. Memberships are sold for about $80,000. The Exchange as such
does no business, merely providing facilities to members and regulating
their conduct. The governing power is in an elected committee of forty
members and is plenary in scope. The business transacted on the floor
is the purchase and sale of stocks and bonds of corporations and
governments. Practically all transactions must be completed by delivery
and payment on the following day.
The mechanism of the Exchange provided by its constitution and
rules, is the evolution of more than a century. An organization of
stockbrokers existed here in 1792, acquiring more definite form in
1817. It seems certain that for a long period the members were brokers
or agents only; at the present time many are principles as well as
agents, trading for themselves as well as for their customers. A number
of prominent capitalists hold memberships merely for the purpose of
availing themselves of the reduced commission charge which the rules
authorize between members.
The volume of transactions indicates that the Exchange is to-day
probably the most important financial institution in the world. In the
past decade the average annual sales of shares have been 196,500,000 at
prices involving an annual average turnover of nearly $15,500,000,000;
bond transactions averaged about $800,000,000. This enormous business
affects the financial and credit interests of the country in so large
a measure that its proper regulation is a matter of transcendent
importance. While radical changes in the mechanism, which is now so
nicely adjusted that the transactions are carried on with the minimum
of friction, might prove disastrous to the whole country, nevertheless
measures should be adopted to correct existing abuses.
PATRONS OF THE EXCHANGE
The patrons of the Exchange may be divided into the following groups:
(1.) Investors, who personally examine the facts relating to the
value of securities or act on the advice of reputable and experienced
financiers, and pay in full for what they buy.
(2.) Manipulators, whose connection with corporations issuing
or controlling particular securities enables them under certain
circumstances to move the prices up or down, and who are thus in some
degree protected from dangers encountered by other speculators.
(3.) Floor traders, who keenly study the markets and the general
conditions of business, and acquire early information concerning the
changes which affect the values of securities. From their familiarity
with the technique of dealings on the Exchange, and ability to act in
concert with others, and thus manipulate values, they are supposed to
have special advantages over other traders.
(4.) Outside operators having capital, experience, and knowledge of the
general conditions of business. Testimony is clear as to the result
which, in the long run, attends their operations; commissions and
interest charges constitute a factor always working against them. Since
good luck and bad luck alternate in time, the gains only stimulate
these men to larger ventures, and they persist in them till a serious
or ruinous loss forces them out of the “Street.”
(5.) Inexperienced persons, who act on interested advice, “tips,”
advertisements in newspapers, or circulars sent by mail, or “take
flyers” in absolute ignorance, and with blind confidence in their luck.
Almost without exception they eventually lose.
CHARACTER OF TRANSACTIONS
It is unquestionable that only a small part of the transactions upon
the Exchange is of an investment character; a substantial part may
be characterized as virtually gambling. Yet we are unable to see
how the State could distinguish by law between proper and improper
transactions, since the forms and the mechanisms used are identical.
Rigid statutes directed against the latter would seriously interfere
with the former. The experience of Germany with similar legislation is
illuminating. But the Exchange, with the plenary power over members and
their operations, could provide correctives, as we shall show.
MARGIN TRADING
Purchasing securities on margin is as legitimate a transaction as a
purchase of any other property in which part payment is deferred. We
therefore see no reason whatsoever for recommending the radical change
suggested, that margin trading be prohibited.
Two practices are prolific of losses--namely, buying active securities
on small margins and buying unsound securities, paying for them in
full. The losses in the former case are due to the quick turns in the
market, to which active stocks are subject; these exhaust the margins
and call for more money than the purchasers can supply. The losses in
the latter case are largely due to misrepresentations of interested
parties and unscrupulous manipulations.
To correct the evils of misrepresentation and manipulation, we shall
offer in another part of this report certain recommendations. In so far
as losses are due to insufficient margins, they would be materially
reduced if the customary percentage of margins were increased. The
amount of margin which a broker requires from a speculative buyer of
stocks depends, in each case, on the credit of the buyer; and the
amount of credit which one person may extend to another is a dangerous
subject on which to legislate. Upon the other hand, a rule made by the
Exchange could safely deal with the prevalent rate of margins required
from customers. In preference, therefore, to recommending legislation,
we urge upon all brokers to discourage speculation upon small margins
and upon the Exchange to use its influence, and, if necessary, its
power, to prevent members from soliciting and generally accepting
business on a less margin than 20 per cent.
PYRAMIDING
“Pyramiding,” which is the use of paper profits in stock transactions
as a margin for further commitments, should be discouraged. The
practice tends to produce more extreme fluctuations and more rapid
wiping out of margins. If the stockbrokers and the banks would make it
a rule to value securities for the purpose of margin or collateral, not
at the current price of the moment, but at the average price of, say,
the previous two or three months (provided that such average price were
not higher than the price of the moment), the dangers of pyramiding
would be largely prevented.
SHORT SELLING
We have been strongly urged to advise the prohibition or limitation
of short sales, not only on the theory that it is wrong to agree to
sell that what one does not possess, but that such sales reduce the
market price of the securities involved. We do not think that it is
wrong to agree to sell something that one does not now possess, but
expects to obtain later. Contracts and agreements to sell, and deliver
in the future, property which one does not possess at the time of the
contract, are common in all kinds of business. The man who has “sold
short” must some day buy in order to return the stock which he has
borrowed to make the short sale. Short sellings endeavor to select
times when prices seem high in order to sell, and times when prices
seem low in order to buy, their action in both cases serving to lessen
advances and diminish declines of price. In other words, short selling
tends to produce steadiness in prices, which is an advantage to the
community. No other means of restraining unwarranted marking up and
down of prices has been suggested to us.
The legislation of the State of New York on the subject of short
selling is significant. In 1812 the Legislature passed a law declaring
all contracts for the sale of stocks and bonds void, unless the seller
at the time was the actual owner or assignee thereof or authorized by
such owner or assignee to sell the same. In 1858 this act was repealed
by a statute now in force, which reads as follows:
“An agreement for the purchase, sale, transfer, or delivery of a
certificate or other evidence of debt, issued by the United States
or by any State, or municipal or other corporation, or any share
or interest in the stock of any bank, corporation or joint-stock
association, incorporated or organized under the laws of the United
States or of any State, is not void, or voidable, because the
vendor, at the time of making such contract, is not the owner or
possessor of the certificate, or certificates, or other evidence of
debt, share or interest.”
It has been urged that this statute “specifically legalizes stock
gambling.” As a matter of fact, however, the law would be precisely the
same if that statute were repealed, for it is the well-settled common
law of this country, as established by the decisions of the Supreme
Court of the United States and of the State courts, that all contracts,
other than mere wagering contracts, for the future purchase or sale
of securities or commodities are valid, whether the vendor is, or is
not, at the time of making such contract, the owner or possessor of the
securities or commodities involved, in the absence of a statute making
such contracts illegal. So far as any of these transactions are mere
wagering transactions, they are illegal, and not enforceable, as the
law now stands.
It has been suggested to us that there should be a requirement either
by law or by rule of the Stock Exchange, that no one should sell any
security without identifying it by a number or otherwise. Such a rule
would cause great practical difficulties in the case of securities
not present in New York at the time when the owner desires to sell
them, and would increase the labor and cost of doing business. But
even if this were not the effect, the plan contemplates a restriction
upon short sales, which, for the reasons set forth above, seems to us
undesirable. It is true that this identification plan exists in England
as to sales of bank shares (Leeman act of 1867); but it has proved a
dead letter. It has also been used in times of apprehended panic upon
the French Bourse, but opinions in regard to its effect there are
conflicting. While some contend that it has been useful in preventing
panics, others affirm that it has been used simply for the purpose of
protecting bankers who are loaded down with certain securities which
they were trying to distribute, and who, through political influence,
procured the adoption of the rule for their special benefit.
MANIPULATION OF PRICES
A subject to which we have devoted much time and thought is that of the
manipulation of prices by large interests. This falls into two general
classes:
(1.) That which is resorted to for the purpose of making a market for
issues of new securities.
(2.) That which is designed to serve merely speculative purposes in the
endeavor to make a profit as the result of fluctuations which have been
planned in advance.
The first kind of manipulation has certain advantages, and when not
accompanied by “matched orders” is unobjectionable _per se_. It is
essential to the organization and carrying through of important
enterprises, such as large corporations, that the organizers should be
able to raise the money necessary to complete them. This can be done
only by the sale of securities. Large blocks of securities, such as
are frequently issued by railroad and other companies, cannot be sold
over the counter or directly to the ultimate investor, whose confidence
in them can, as a rule, be only gradually established. They must
therefore, if sold at all, be disposed of to some syndicate, who will
in turn pass them on to middlemen or speculators, until, in the course
of time, they find their way into the boxes of investors. But prudent
investors are not likely to be induced to buy securities which are not
regularly quoted on some exchange, and which they cannot sell, or on
which they cannot borrow money at their pleasure. If the securities
are really good and bids and offers bona fide, open to all sellers and
buyers, the operation is harmless. It is merely a method of bringing
new investments into public notice.
The second kind of manipulation mentioned is undoubtedly open to
serious criticism. It has for its object either the creation of high
prices for particular stocks, in order to draw in the public as buyers
and to unload upon them the holdings of the operators, or to depress
the prices and induce the public to sell. There have been instances
of gross and unjustifiable manipulation of securities, as in the case
of American Ice stock. While we have been unable to discover any
complete remedy short of abolishing the Stock Exchange itself, we are
convinced that the Exchange can prevent the worst forms of this evil
by exercising its influence and authority over the members to prevent
them. When continued manipulation exists it is patent to experienced
observers.
“WASH SALES” AND “MATCHED ORDERS”
In the foregoing discussion we have confined ourselves to bona fide
sales. So far as manipulation of either class is based upon fictitious
so-called “wash sales,” it is open to the severest condemnation, and
should be prevented by all possible means. These fictitious sales
are forbidden by the rules of all the regular exchanges, and are not
enforceable at law. They are less frequent than many persons suppose.
A transaction must take place upon the floor of the Exchange to be
reported, and if not reported does not serve the purpose of those who
engage in it. If it takes place on the floor of the Exchange, but is
purely a pretence, the brokers involved run the risk of detection and
expulsion, which is to them a sentence of financial death. There is,
however, another class of transactions called “matched orders,” which
differ materially from those already mentioned, in that they are actual
and enforceable contracts. We refer to that class of transactions,
engineered by some manipulator, who sends a number of orders
simultaneously to different brokers, some to buy and some to sell.
These brokers, without knowing that other brokers have countervailing
orders from the same principal, execute their orders upon the floor
of the Exchange, and the transactions become binding contracts; they
cause an appearance of activity in a certain security which is unreal.
Since they are legal and binding, we find a difficulty in suggesting a
legislative remedy. But where the activities of two or more brokers in
certain securities become so extreme as to indicate manipulation rather
than genuine transactions, the officers of the Exchange would be remiss
unless they exercised their influence and authority upon such members
in a way to cause them to desist from such suspicious and undesirable
activity. As already stated, instances of continuous manipulation of
particular securities are patent to every experienced observer, and
could without difficulty be discouraged, if not prevented, by prompt
action on the part of the Exchange authorities.
CORNERS
The subject of corners in the stock market has engaged our attention.
The Stock Exchange might properly adopt a rule providing that the
governors shall have power to decide when a corner exists and to fix
a settlement price, so as to relieve innocent persons from the injury
or ruin which may result therefrom. The mere existence of such a rule
would tend to prevent corners.
FAILURES AND EXAMINATION OF BOOKS
We have taken testimony on the subject of recent failures of brokers,
where it has been discovered that they were insolvent for a long
period prior to their public declaration of failure, and where their
activities after the insolvency not only caused great loss to their
customers, but also, owing to their efforts to save themselves from
bankruptcy, worked great injury to innocent outsiders. For cases of
this character, there should be a law analogous to that forbidding
banks to accept deposits after insolvency is known; and we recommend a
statute making it a misdemeanor for a broker to receive any securities
or cash from any customer (except in liquidating or fortifying an
existing account), or to make any further purchases or sales for his
own account, after he has become insolvent; with the provision that a
broker shall be deemed insolvent when he has on his books an account or
accounts which, if liquidated, would exhaust his assets, unless he can
show that he had reasonable ground to believe that such accounts were
good.
The advisability of requiring by State authority an examination of
the books of all members of the Exchange, analogous to that required
of banks, has been urged upon us. Doubtless some failures would be
prevented by such a system rigidly enforced, although bank failures
do occur in spite of the scrutiny of the examiners. Yet the relations
between brokers and their customers are of so confidential a nature
that we do not recommend an examination of their books by any public
authority. The books and accounts of the members of the Exchange,
should, however, be subjected to periodic examination and inspection
pursuant to rules and regulations to be prescribed by the Exchange, and
the result should be promptly reported to the governors thereof.
* * * * *
It is vain to say that a body possessing the powers of the board of
governors of the Exchange, familiar with every detail of the mechanism,
generally acquainted with the characteristics of members, cannot
improve present conditions. It is a deplorable fact that with all
their power and ability to be informed, it is generally only after
a member or a firm is overtaken by disaster, involving scores or
hundreds of innocent persons, and causing serious disturbances, that
the Exchange authorities take action. No complaint can be registered
against the severity of the punishment then meted out; but in most
cases the wrongdoing thus atoned for, which has been going on for a
considerable period, might have been discovered under a proper system
of supervision, and the vastly preponderant value of prevention over
cure demonstrated.
REHYPOTHECATION OF SECURITIES
We have also considered the subject of rehypothecating, loaning, and
other use of securities by brokers who hold them for customers. So
far as any broker applies to his own use any securities belonging to
a customer, or hypothecates them for a greater amount than the unpaid
balance of the purchase price, without the customer’s consent, he is
undoubtedly guilty of a conversion under the law as it exists to-day,
and we call this fact to the attention of brokers and the public. When
a broker sells the securities purchased for a customer who has paid
therefor in whole or in part, except upon the customer’s default, or
disposes of them for his own benefit, he should be held guilty of
larceny, and we recommend a statute to that effect.
DEALING FOR CLERKS
The Exchange now has a rule forbidding any member to deal or carry an
account for a clerk or employee of any other member. This rule should
be extended so as to prevent dealing for account of any clerk or
subordinate employee of any bank, trust company, insurance company, or
other moneyed corporation or banker.
LISTING REQUIREMENTS
Before securities can be bought and sold on the Exchange, they must
be examined. The committee on Stock List is one of the most important
parts of the organization, since public confidence depends upon the
honesty, impartiality, and thoroughness of its work. While the
Exchange does not guarantee the character of any securities, or affirm
that the statements filed by the promoters are true, it certifies
that due diligence and caution have been used by experienced men
in examining them. Admission to the list, therefore, establishes a
presumption in favor of the soundness of the security so admitted. Any
securities authorized to be bought and sold on the Exchange, which have
not been subjected to such scrutiny, are said to be in the unlisted
department, and traders who deal in them do so at their own risk. We
have given consideration to the subject of verifying the statements of
fact contained in the papers filed with the applications for listing,
but we do not recommend that either the State or the Exchange take
such responsibility. Any attempt to do so would undoubtedly give
the securities a standing in the eyes of the public which would not
in all cases be justified. In our judgment, the Exchange, should,
however, adopt methods to compel the filing of frequent statements of
the financial condition of the companies whose securities are listed,
including balance sheets, income and expense accounts, etc., and should
notify the public that these are open to examination under proper rules
and regulations. The Exchange should also require that there be filed
with future applications for listing a statement of what the capital
stock of the company has been issued for, showing how much has been
issued for cash, how much for property, with a description of the
property, etc., and also showing what commission, if any, has been paid
to the promoters or vendors. Furthermore, means should be adopted for
holding those making the statements responsible for the truth thereof.
The unlisted department, except for temporary issues, should be
abolished.
FICTITIOUS TRADES
Complaint is made that orders given by customers are sometimes not
actually executed, although so reported by the broker. We recommend the
passage of a statute providing that, in case it is pleaded in any suit
by or against a broker that the purchase or sale was fictitious, or was
not an actual bona fide purchase or sale by the broker as agent for
the customer, the court or jury shall make a special finding upon that
fact. In case it is found that the purchase or sale was not actual and
bona fide the customer shall recover three times the amount of the loss
which he sustained thereby; and copies of the finding shall be sent to
the district attorney of the county and to the Exchange, if the broker
be a member.
UNIT OF TRADING
The Exchange should insist that all trading be done on the basis of a
reasonably small unit (say 100 shares of stock or $1000 of bonds), and
should not permit the offers of such lots, or bids for such lots, to be
ignored by traders offering or bidding for larger amounts. The practice
now permitted of allowing bids and offers for large amounts, all or
none, assists the manipulation of prices. Thus a customer may send an
order to sell 100 shares of a particular stock at par, and a broker may
offer to buy 1000 shares, all or none, at 101, and yet no transaction
take place. The bidder in such a case should be required to take all
the shares offered at the lower price before bidding for a larger lot
at a higher price. This would tend to prevent matched orders.
STOCK CLEARING HOUSE
We have also considered the subject of the Stock Exchange Clearing
House. While it is undoubtedly true that the clearing of stocks
facilitates transactions which may be deemed purely manipulative, or
virtually gambling transactions, nevertheless we are of the opinion
that the Exchange could not do its necessary and legitimate business
but for the existence of the clearing system, and, therefore, that it
is not wise to abolish it.
The transactions in stocks which are cleared are transcribed each day
on what are called “clearing sheets,” and these sheets are passed into
the Clearing House and there filed for one week only. In view of the
value of these sheets as proving the transactions and the prices, they
should be preserved by the Exchange for at least six years, and should
be at the disposal of the courts, in case of any dispute.
SPECIALISTS
We have received complaints that specialists on the floor of the
Exchange, dealing in inactive securities, sometimes buy or sell for
their own account while acting as brokers. Such acts without the
principal’s consent are illegal. In every such case recourse may be had
to the courts.
Notwithstanding that the system of dealing in specialties is subject to
abuses, we are not convinced that the English method of distinguishing
between brokers and jobbers serves any better purpose than our own
practice, while its introduction here would complicate business. It
should also be noted that the practice of specialists in buying and
selling for their own account often serves to create a market where
otherwise one would not exist.
BRANCH OFFICES
Complaint has been made of branch offices in the city of New York,
often luxuriously furnished and sometimes equipped with lunch rooms,
cards, and liquor. The tendency of many of them is to increase the lure
of the ticker by the temptation of creature comforts, appealing thus to
many who would not otherwise speculate. The governors of the Exchange
inform us that they realize that some of these offices have brought
discredit on the Exchange, and that on certain occasions they have used
their powers to suppress objectionable features. It seems to us that
legitimate investors and speculators might, without much hardship, be
compelled to do business at the main offices, and that a hard-and-fast
rule against all branch offices in the city of New York might well be
adopted by the Exchange. In any event, we are convinced that a serious
and effective regulation of these branch offices is desirable.
INCORPORATION OF EXCHANGE
We have been strongly urged to recommend that the Exchange be
incorporated in order to bring it more completely under the authority
and supervision of the State and the process of the courts. Under
existing conditions, being a voluntary organization, it has almost
unlimited power over the conduct of its members, and it can subject
them to instant discipline for wrongdoing, which it could not exercise
in a summary manner if it were an incorporated body. We think that
such power residing in a properly chosen committee is distinctly
advantageous. The submission of such questions to the courts would
involve delays and technical obstacles which would impair discipline
without securing any greater measure of substantial justice. While this
committee is not entirely in accord on this point, no member is yet
prepared to advocate the incorporation of the Exchange and a majority
of us advise against it, upon the ground that the advantages to be
gained by incorporation may be accomplished by rules of the Exchange
and by statutes aimed directly at the evils which need correction.
The Stock Exchange in the past, although frequently punishing
infractions of its rules with great severity, has, in our opinion, at
times failed to take proper measures to prevent wrongdoing. This has
been probably due not only to a conservative unwillingness to interfere
in the business of others, but also to a spirit of comradeship which
is very marked among brokers, and frequently leads them to overlook
misconduct on the part of fellow-members, although at the same time it
is a matter of cynical gossip and comment in the street. The public has
a right to expect something more than this from the Exchange and its
members. This committee, in refraining from advising the incorporation
of the Exchange, does so in the expectation that the Exchange will in
the future take full advantage of the powers conferred upon it by its
voluntary organization, and will be active in preventing wrongdoing
such as has occurred in the past. Then we believe that there will be
no serious criticism of the fact that it is not incorporated. If,
however, wrongdoing recurs, and it should appear to the public at
large that the Exchange has been derelict in exerting its powers and
authority to prevent it, we believe that the public will insist upon
the incorporation of the Exchange and its subjection to State authority
and supervision.
WALL STREET AS A FACTOR
There is a tendency on the part of the public to consider Wall Street
and the New York Stock Exchange as one and the same thing. This is an
error arising from their location. We have taken pains to ascertain
what proportion of the business transacted on the Exchange is furnished
by New York City. The only reliable sources of information are the
books of the commission houses. An investigation was made of the
transactions on the Exchange for a given day, when the sales were
1,500,000 shares. The returns showed that on that day 52 per cent. of
the total transactions on the Exchange apparently originated in New
York City, and 48 per cent. in other localities.
THE CONSOLIDATED STOCK EXCHANGE
The Consolidated Exchange was organized as a mining stock exchange in
1875, altering its name and business in 1886. Although of far less
importance than the Stock Exchange, it is nevertheless a _secondary
market_ of no mean proportions; by far the greater part of the trading
is in securities listed upon the main exchange, and the prices
are based upon the quotations made there. The sales average about
45,000,000 shares per annum. The fact that its members make a specialty
of “broken lots,” i. e., transactions in shares less than the 100 unit,
is used as a ground for the claim that it is a serviceable institution
for investors of relatively small means. But it is obvious that its
utility as a provider of capital for enterprises is exceedingly
limited; and that it affords facilities for the most injurious form of
speculation--that which attracts persons of small means.
It also permits dealing in shares not listed in the main exchange, and
in certain mining shares, generally excluded from the other. In these
cases it prescribed a form of listing requirements, but the original
listing of securities is very rarely availed of. The rules also provide
for dealing in grain, petroleum, and other products. Wheat is, however,
at present the only commodity actively dealt in, and this is due solely
to the permission to trade in smaller lots than the Produce Exchange
unit of 5000 bushels.
There are 1225 members, about 450 active, and memberships have sold
in recent years at from $650 to $2000. In general the methods of
conducting business are similar to those of the larger exchange, and
subject to the same abuses.
Very strained relations have existed between the two security exchanges
since the lesser one undertook in 1886 to deal in stocks. The tension
has been increased by the methods by which the Consolidated obtains the
quotations of the other, through the use of the “tickers” conveying
them. It is probable that without the use of these instruments the
business of the Consolidated Exchange would be paralyzed; yet the right
to use them rests solely upon a technical point in a judicial decision
which enjoins their removal.
COGNATE SUBJECTS
HOLDING COMPANIES
Connected with operations on the Stock Exchange are a class of
manipulations originating elsewhere. The values of railway securities,
for example, depend upon the management of the companies issuing them,
the directors of which may use their power to increase, diminish,
or even extinguish them, while they make gains for themselves by
operations on the Exchange. They may advance the price of a stock by
an unexpected dividend, or depress it by passing an expected one. They
may water a stock by issuing new shares, with no proportionate addition
to the productive assets of the company, or load it with indebtedness,
putting an unexpected lien on the shareholders’ property. Such
transactions affect not only the fortunes of the shareholders, who are
designedly kept in ignorance of what is transpiring, but also the value
of investments in other similar companies the securities of which are
affected sympathetically. Railroad wrecking was more common in the last
half-century than it is now, but we have some glaring examples of it in
the débris of our street railways to-day.
The existence and misuse of such powers on the part of directors are
a menace to corporate property and a temptation to officials who are
inclined to speculate, leading them to manage the property so as to
fill their own pockets by indirect and secret methods.
A holding company represents the greatest concentration of power in
a body of directors and the extreme of helplessness on the part of
shareholders. A corporation may be so organized that its bonds and
preferred stock represent the greater part of its capital, while the
common stock represents the actual control. Then, if a second company
acquires a majority of the common stock, or a majority of the shares
that are likely to be voted at elections, it may control the former
company, and as many other companies as it can secure. The shareholders
of the subsidiary companies may be thus practically deprived of power
to protect themselves against injurious measures and even to obtain
information of what the holding company is doing, or intends to do,
with their property.
As a first step toward mitigating this evil we suggest that the
shareholders of subsidiary companies, which are dominated by holding
companies, or voting trusts, shall have the same right to examine the
books, records, and accounts of such holding companies, or voting
trusts, that they have in respect of the companies whose shares they
hold, and that the shareholders of holding companies have the same
right as regards the books, records, and accounts of the subsidiary
companies. The accounts of companies not merged should be separately
kept and separately stated to their individual stockholders, however
few they may be.
We may point out the fact that the powers which holding companies
now exercise were never contemplated, or imagined, when joint stock
corporations were first legalized. If Parliament and Legislatures had
foreseen their growth they would have erected barriers against it.
RECEIVERSHIPS
Our attention has been directed to the well-known abuses frequently
accompanying receiverships of large corporations, and more especially
public service corporations, and the issue of receivers’ certificates.
We feel that the numerous cases of long-drawn-out receiverships, in
some instances lasting more than ten years, and of the issue of large
amounts of receivers’ certificates, which take precedence over even
first mortgage bonds, are deserving of most serious consideration.
Legislation providing for a short-time limitation on receiverships or
for a limitation of receivers’ certificates to a small percentage of
the mortgage liens on the property, could be rendered unnecessary,
however, by the action of the courts themselves along these lines,
so as to make impossible in the future the abuses which have been so
common in the past.
EFFECT OF THE MONEY MARKET ON SPECULATION
It has been urged that your committee consider the influence of the
money market upon security speculation.
As a result of conditions to which the defects of our monetary and
banking systems chiefly contribute, there is frequently a congestion
of funds in New York City, when the supply is in excess of business
needs and the accumulated surplus from the entire country generally is
thereby set free for use in the speculative market. Thus there almost
annually occurs an inordinately low rate for “call loans,” at times
less than 1 per cent. During the prevalence of this abnormally low rate
speculation is unduly incited, and speculative loans are very largely
expanded.
On the other hand, occasional extraordinary industrial activity,
coupled with the annually recurring demands for money during the
crop-moving season, causes money stringency, and the calling of loans
made to the stock market; an abnormally high interest rate results,
attended by violent reaction in speculation and abrupt fall in prices.
The pressure to retain funds in the speculative field at these
excessively high interest rates tends to a curtailment of reasonable
accommodation to commercial and manufacturing interests, frequently
causing embarrassment and at times menacing a crisis.
The economic questions involved in these conditions are the subject
of present consideration by the Federal authorities and the National
Monetary Commission. They could not be adjusted or adequately
controlled either through Exchange regulation or State legislation.
THE USURY LAW
The usury law of this State prohibits the taking of more than 6 per
cent. interest for the loan of money, but by an amendment adopted in
1882 an exception is made in the case of loans of $5000, or more,
payable on demand and secured by collateral. It is claimed by some
that, since this exception enables stock speculators, in times of
great stringency, to borrow money by paying excessively high rates
of interest, to the exclusion of other borrowers, a repeal of this
provision would check inordinate speculation. We direct attention,
however, to the fact that the statute in question excepts such loans as
are secured by warehouse receipts, bills of lading, bills of exchange,
and other negotiable instruments. Hence its operation is not limited
to Stock Exchange transactions, or to speculative loans in general.
Moreover, the repeal of the statute would affect only the conditions
when high rates of interest are exacted, and not those of abnormally
low rates, which really promote excessive speculation. Finally, our
examination indicates that prior to the enactment of the statute of
1882 such loans were negotiated at the maximum (6 per cent.), plus
a commission, which made it equivalent to the higher rate; and a
repeal of the statute would lead to the resumption of this practice.
Therefore, as the repeal would not be beneficial, we cannot recommend
any legislation bearing upon the interest laws of the State, unless it
be the repeal of the usury law altogether, as we believe that money
will inevitably seek the point of highest return for its use. In nine
States of the Union there are at present no usury laws.
THE CURB MARKET
There is an unorganized stock market held in the open air during
exchange hours. It occupies a section of Broad Street. An enclosure in
the centre of the roadway is made by means of a rope, within which the
traders are supposed to confine themselves, leaving space on either
side for the passage of street traffic; but during days of active
trading the crowd often extends from curb to curb.
There are about 200 subscribers, of whom probably 150 appear on the
curb each day, and the machinery of the operations requires the
presence of as many messenger boys and clerks. Such obstruction of a
public thoroughfare is obviously illegal, but no attempt has been made
by the city authorities to disperse the crowd that habitually assembles
there.
This open-air market, we understand, is dependent for the great bulk
of its business upon members of the Stock Exchange, approximately 85
per cent. of the orders executed on the curb coming from Stock Exchange
houses. The Exchange itself keeps the curb market in the street, since
it forbids its own members engaging in any transaction in any other
security exchange in New York. If the curb were put under a roof and
organized, this trading could not be maintained.
ITS UTILITY
The curb market has existed for upward of thirty years, but only since
the great development of trading in securities began, about the year
1897, has it become really important. It affords a public market-place
where all persons can buy and sell securities which are not listed
on any organized exchange. Such rules and regulations as exist are
agreed to by common consent, and the expenses of maintenance are paid
by voluntary subscription. An agency has been established by common
consent through which the rules and regulations are prescribed.
This agency consists solely of an individual who, through his long
association with the curb, is tacitly accepted as arbiter. From this
source we learn that sales recorded during the year 1908 were roughly
as follows:
Bonds $66,000,000
Stocks, industrials, shares 4,770,000
Stocks, mining, shares 41,825,000
Official quotations are issued daily by the agency and appear in the
public press. Corporations desiring their securities to be thus quoted
are required to afford the agency certain information, which is,
however, superficial and incomplete. There is nothing on the curb which
corresponds to the listing process of the Stock Exchange. The latter,
while not guaranteeing the soundness of the securities, gives a _prima
facie_ character to those on the list, since the stock list committee
takes some pains to learn the truth. The decision of the agent of the
curb are based on insufficient data, and since much of the work relates
to mining schemes in distant States and Territories, and foreign
countries, the mere fact that a security is quoted on the curb should
create no presumption in its favor; quotations frequently represent
“wash sales,” thus facilitating swindling enterprises.
EVILS OF UNORGANIZED STATUS
Bitter complaints have reached us of frauds perpetrated upon confiding
persons, who have been induced to purchase mining shares because they
are quoted on the curb; these are frequently advertised in newspapers
and circulars sent through the mails as so quoted. Some of these
swindles have been traced to their fountainheads by the Post Office
Department, to which complaint has been made; but usually the swindler,
when cornered, has settled privately with the individual complainant,
and then the prosecution has failed for want of testimony. Meanwhile
the same operations may continue in many other places, till the swindle
becomes too notorious to be profitable.
Notwithstanding the lack of proper supervision and control over the
admission of securities to the privilege of quotation, some of them
are meritorious, and in this particular the curb performs a useful
function. The existence of the cited abuses does not, in our judgment,
demand the abolition of the curb market. Regulation is, however,
imperative. To require an elaborate organization similar to that
existing in the Exchanges would result in the formation of another curb
free from such restraint.
As has been stated, about 85 per cent. of the business of the curb
comes through the offices of members of the New York Stock Exchange,
but a provision of the constitution of that Exchange prohibits its
members from becoming members of, or dealing, on, any other _organized_
Stock Exchange in New York. Accordingly, operators on the curb market
have not attempted to form an organization. The attitude of the Stock
Exchange is therefore largely responsible for the existence of such
abuses as result from the want of organization of the curb market. The
brokers dealing on the latter do not wish to lose their best customers,
and hence they submit to these irregularities and inconveniences.
Some of the members of the Exchange dealing on the curb have apparently
been satisfied with the prevailing conditions, and in their own selfish
interests have maintained an attitude of indifference toward abuses.
We are informed that some of the most flagrant cases of discreditable
enterprises finding dealings on the curb were promoted by members of
the New York Stock Exchange.
REFORMATION OF THE CURB
The present apparent attitude of the Exchange toward the curb seems to
us clearly inconsistent with its moral obligations to the community
at large. Its governors have frequently avowed before this committee
a purpose to co-operate to the greatest extent for the remedy of any
evils found to exist in stock speculation. The curb market as at
present constituted affords ample opportunity for the exercise of such
helpfulness.
The Stock Exchange should compel the formulation and enforcement of
such rules as may seem proper for the regulation of business on the
curb, the conduct of those dealing thereon, and, particularly, for the
admission of securities to quotation.
If the curb brokers were notified that failure to comply with such
requirements would be followed by an application of the rule of
non-intercourse, there is little doubt that the orders of the Exchange
would be obeyed. The existing connection of the Exchange gives it ample
power to accomplish this, and we do not suggest anything implying a
more intimate connection.
Under such regulation, the curb market might be decently housed to the
relief of its members and the general public.
THE ABUSE OF ADVERTISING
A large part of the discredit in the public mind attaching to “Wall
Street” is due to frauds perpetrated on the small investor throughout
the country in the sale of worthless securities by means of alluring
circulars and advertisements in the newspapers. To the success of such
swindling enterprises a portion of the press contributes.
Papers which honestly try to distinguish between swindling
advertisements and others may not in every instance succeed in doing
so; but readiness to accept advertisements which are obviously traps
for the unwary is evidence of a moral delinquency which should draw out
the severest public condemnation.
So far as the press in the large cities is concerned the correction of
the evil lies, in some measure, in the hands of the reputable bankers
and brokers; who, by refusing their advertising patronage to newspapers
notoriously guilty in this respect, could compel them to mend their
ways, and at the same time prevent fraudulent schemes from deriving an
appearance of merit by association with reputable names.
Another serious evil is committed by men who give standing to
promotions by serving as directors without full knowledge of the
affairs of the companies, and by allowing their names to appear in
prospectuses without knowing the accuracy and good faith of the
statements contained therein. Investors naturally and properly pay
great regard to the element of personal character, both in the offering
of securities and in the management of corporations, and can therefore
be deceived by the names used in unsound promotions.
BRITISH SYSTEM CONSIDERED
We have given much attention to proposals for compelling registration,
by a bureau of the State government, of all corporations whose
securities are offered for public sale in this State, accompanied by
information regarding their financial responsibility and prospects,
and prohibiting the public advertisements or sale of such securities
without a certificate from the bureau that the issuing company has been
so registered. The object of such registration would be to identify
the promoters, so that they might be readily prosecuted in case of
fraud. Such a system exists in Great Britain. The British “Companies
Act” provides for such registration, and the “Directors’ Liability
Act” regulates the other evil referred to above. Some members of your
committee are of the opinion that these laws should be adopted in this
country, so far as they will fit conditions here.
This would meet with some difficulties, due in part to our multiple
system of State government. If the law were in force only in this
State, the advertisement and sale of the securities in question would
be unhindered in other markets, and companies would be incorporated
in other States, in order that their directors and promoters should
escape liability. The certificate of registration might be accepted
by inexperienced persons as an approval by State authority of the
enterprise in question. For these reasons the majority of your
committee does not recommend the regulation of such advertising and
sale by State registration.
In so far as the misuse of the post-office for the distribution of
swindling circulars could be regulated by the Federal authorities the
officials have been active in checking it. They inform us that vendors
of worthless securities are aided materially by the opportunity to
obtain fictitious price quotations for them on the New York Curb market.
LEGISLATION RECOMMENDED
For the regulation of the advertising evils, including the vicious
“tipster’s” cards, we recommend an amendment to the Penal Code to
provide that any person who advertises, in the public press, or
otherwise, or publishes, distributes or mails, any prospectus,
circular, or other statement in regard to the value of any stock,
bonds, or other securities, or in regard to the business affairs,
property, or financial condition of any corporation, joint stock
association, copartnership or individual issuing stock, bonds, or
other similar securities, which contains any statement of fact which
is known to such person to be false, or as to which such person has
no reasonable grounds for believing it to be true, or any promises or
predictions which he cannot reasonably justify, shall be guilty of a
misdemeanor; and, further, that every newspaper or other publication
printing or publishing such an advertisement, prospectus, circular, or
other statement, shall, before printing or publishing the same, obtain
from the person responsible for the same, and retain, a written and
signed statement to the effect that such person accepts responsibility
for the same, and for the statements of fact contained therein, which
statement shall give the address, with street number, of such person;
and that the publisher of any such newspaper or other publication which
shall fail to obtain and retain such statement shall be guilty of a
misdemeanor.
BUCKET-SHOPS
Bucket-shops are ostensibly brokerage offices, where, however,
commodities and securities are neither bought nor sold in pursuance
of customers’ orders, the transactions being closed by the payment of
gains or losses, as determined by price quotations. In other words,
they are merely places for the registration of bets or wagers; their
machinery is generally controlled by the keepers, who can delay or
manipulate the quotations at will.
The law of this State, which took effect September 1, 1908, makes
the keeping of a bucket-shop a felony, punishable by fine and
imprisonment, and in the case of corporations, on second offences by
dissolution or expulsion from the State. In the case of individuals
the penalty for a second offence is the same as for the first. These
penalties are imposed upon the theory that the practice is gambling;
but in order to establish the fact of gambling it is necessary, under
the New York law, to show that _both_ parties to the trade intended
that it should be settled by the payment of differences, and not by
delivery of property. Under the law of Massachusetts it is necessary to
show only that the bucket-shop keeper so intended. The Massachusetts
law provides heavier penalties for the second offence than for the
first, and makes it a second offence if a bucket-shop is kept open
after the first conviction.
AMENDMENT OF LAW RECOMMENDED
We recommend that the foregoing features of the Massachusetts law be
adopted in this State; also that section 355 of the act of 1908 be
amended so as to require brokers to furnish to their customers _in all
cases_, and not merely on demand, the names of brokers from whom shares
were bought and to whom they were sold, and that the following section
be added to the act:
Witness’s privilege:
No person shall be excused from attending and testifying, or
producing any books, papers, or other documents before any court
or magistrate, upon any trial, investigation, or proceeding
initiated by the district attorney for a violation of any of the
provisions of this chapter, upon the ground or for the reason that
the testimony or evidence, documentary or otherwise, required
of him may tend to convict him of a crime or to subject him to
a penalty or forfeiture; but no person shall be prosecuted or
subjected to any penalty or forfeiture for or on account of any
transaction, matter, or thing concerning which he may so testify
or produce evidence, documentary or otherwise, and no testimony so
given or produced shall be received against him upon any criminal
investigation or proceeding.
There has been a sensible diminution in the number of bucket-shops in
New York since the act of 1908 took effect, but there is still much
room for improvement.
Continuous quotations of prices from an exchange are indispensable to a
bucket-shop, and when such quotations are cut off this gambling ends;
therefore every means should be employed to cut them off.
SALES OF QUOTATIONS
The quotations of exchanges have been judicially determined to be
their own property, which may be sold under contracts limiting their
use. In addition to supplying its own members in New York City with
its quotations, the Stock Exchange sells them to the telegraph
companies, under contracts restricting the delivery of the service in
New York City to subscribers approved by a committee of the Exchange;
the contracts are terminable at its option. This restriction would
imply a purpose on the part of the Exchange to prevent the use of the
quotations by bucket-shop keepers. But the contracts are manifestly
insufficient, in that they fail to cover the use of the service in
places other than New York City; if corroboration were needed it could
be found in the fact that the quotations are the basis for bucket-shop
transactions in other cities. In such effort as has been made to
control these quotations the Exchange has been hampered to some extent
by the claim that telegraph companies are common carriers, and that
as such they must render equal service to all persons offering to pay
the regular charge therefor. This claim has been made in other States
as well as in New York, and the telegraph companies have in the past
invoked it as an excuse for furnishing quotations to people who were
under suspicion, although it was not possible to prove that they were
operating bucket-shops. Recent decisions seem to hold that this claim
is not well-founded. We advise that a law be passed providing that,
so far as the transmission of continuous quotations is concerned,
telegraph companies shall not be deemed common carriers, or be
compelled against their volition to transmit such quotations to any
person; also a law providing that if a telegraph company has reasonable
ground for believing that it is supplying quotations to a bucket-shop,
it be criminally liable equally with the keeper of the bucket-shop.
Such laws would enable these companies to refuse to furnish quotations
upon mere suspicion that parties are seeking them for an unlawful
business, and would compel them to refuse such service wherever there
was a reasonable ground for believing that a bucket-shop was being
conducted.
LICENSING TICKERS
Tickers carrying the quotations should be licensed and bear a plate
whereon should appear the name of the corporation, firm, or individual
furnishing the service or installing the ticker, and a license number.
Telegraph companies buying or transmitting quotations from the
exchanges should be required to publish semi-annually the names of all
subscribers to the service furnished, and the number and location of
the tickers, in a newspaper of general circulation published in the
city or town in which such tickers are installed. In case the service
is furnished to a corporation, firm, or person, in turn supplying the
quotations to others, like particulars should be published. A record,
open to public inspection, should be kept by the installing company
showing the numbers and location of the tickers. Doubtless local boards
of trade, civic societies, and private individuals would, if such
information were within their reach, lend their aid to the authorities
in the enforcement of the law.
Measures should be taken also to control the direct wire service for
the transmission of quotations, and for the prompt discontinuance of
such service in case of improper use thereof. In short, every possible
means should be employed to prevent bucket-shops from obtaining the
continuous quotations, without which their depredations could not be
carried on a single day.
THE COMMODITY EXCHANGES
Of the seven commodity exchanges in the city of New York, three dealing
with Produce, Cotton, and Coffee, are classed as of major importance;
two organized by dealers in Fruit and Hay, are classed as minor; and
two others, the Mercantile (concerned with dairy and poultry products)
and the Metal (concerned with mining products) are somewhat difficult
of classification, as will appear hereafter.
THE MAJOR EXCHANGES
The business transacted on the three major exchanges is mainly
speculative, consisting of purchases and sales for future delivery
either by those who wish to eliminate risks or by those who seek to
profit by fluctuations in the value of products. “Cash” or “spot”
transactions are insignificant in volume.
The objects, as set forth in the charters, are to provide places for
trading, establish equitable trade principles and usages, obtain and
disseminate useful information, adjust controversies, and fix by-laws
and rules for these purposes.
Trading in differences of price and “wash sales” are strictly
prohibited under penalty of expulsion. All contracts of sale call for
delivery, and unless balanced and canceled by equivalent contracts of
purchase, must be finally settled by a delivery of the merchandise
against cash payment of its value as specified in the terms of the
contract; but the actual delivery may be waived by the consent of both
parties. Possession is for the most part transferred from the seller
to the purchaser by warehouse receipts entitling the holder to the
ownership of the goods described.
DEALING IN “FUTURES”
The selling of agricultural products for future delivery has been the
subject of much controversy in recent years. A measure to prohibit such
selling, known as the Hatch Anti-Option bill, was debated at great
length in Congress during the years 1892, 1893, and 1894. Although
it passed both House and Senate in different forms, it was finally
abandoned by common consent. As shown hereafter, similar legislation
in Germany has proved injurious; and when attempted by our States it
has either resulted detrimentally or been inoperative. The subject was
exhaustively considered by the Industrial Commission of Congress which
in 1901 made an elaborate report (Vol. VI), showing that selling for
future delivery, based upon a forecast of future conditions of supply
and demand, is an indispensable part of the world’s commercial future
delivery has been the subject of machinery, by which prices are, as far
as possible, equalized throughout the year to the advantage of both
producer and consumer. The subject is also treated with clearness and
impartiality in the Cyclopedia of American Agriculture, in an article
on “Speculation and Farm Prices”; where it is shown that since, the
yearly supply of wheat, for example, matures within a comparatively
short period of time somebody must handle and store the great bulk of
it during the interval between production and consumption. Otherwise
the price will be unduly depressed at the end of one harvest and
correspondingly advanced before the beginning of another.
Buying for future delivery causes advances in prices; selling short
tends to restrain inordinate advances. In each case there must be
a buyer and a seller and the interaction of their trading steadies
prices. Speculation thus brings into the market a distinct class of
people possessing capital and special training who assume the risks of
holding and distributing the proceeds of the crops from one season to
another with the minimum of cost to producer and consumer.
HEDGING
A considerable part of the business done by these exchanges consists of
“hedging.” This term is applied to the act of a miller, for example,
who is under contract to supply a given quantity of flour monthly
throughout the year. In order to insure himself against loss he makes
a contract with anybody whom he considers financially responsible, to
supply him wheat at times and in the quantities needed. He “hedges”
against a possible scarcity and consequent rise in the price of wheat.
If the miller were restricted in his purchases to persons in the actual
possession of wheat at the time of making the contract he would be
exposed to monopoly prices. If the wheat producer were limited in his
possibilities of sale to consumers only, he would be subjected to the
depressing effects of a glut in the market in June and September, at
times of harvest.
To the trader, manufacturer, or exporter, the act of transferring the
risk of price fluctuations to other persons who are willing to assume
it, has the effect of an insurance. It enables him to use all of his
time and capital in the management of his own business instead of
devoting some part of them to contingencies arising from unforeseen
crop conditions.
ALTERNATIVE CONTRACTS
In order to eliminate the risk of a shortage of specific grades of the
merchandise thus traded in, contracts generally permit the delivery of
alternative grades, within certain limits, at differential prices; and
if the grade to be delivered be not suitable for the ultimate needs of
the purchaser, it can under ordinary circumstances be exchanged for the
grade needed, by the payment of the differential. It is true that in
this exchange of grades there is sometimes a loss or a profit, owing to
some unexpected diminution or excess of supply of the particular grade
wanted, due to the weather or other natural causes.
Deposits of cash margins may be required mutually by members at the
time of making contracts, and subsequent additional ones if market
fluctuations justify.
Dealings for outsiders are usually upon a 10 per cent. margin;
obviously, if this margin were increased generally, say to 20
per cent., a considerable part of the criticism due to losses in
speculation, particularly as to the Cotton Exchange, would be
eliminated.
The major part of the transactions are adjusted by clearing systems,
the method most prevalent being “ring settlements,” by which groups of
members having buying and selling contracts for identical quantities,
offset them against each other, canceling them upon the payment of the
differences in prices.
THE PRODUCE EXCHANGE
The New York Produce Exchange was chartered by the Legislature in
1862, under the style of the “New York Commercial Association.” The
charter has been amended several times; in 1907 dealing in securities,
as well as in produce, was authorized. There are over 2000 members,
but a larger number are inactive. Some members are also connected
with the Stock and Cotton Exchanges. The business includes dealing in
all grains, cottonseed oil, and a dozen or more other products; wheat
is, however, the chief subject of trading, and part thereof consists
of hedging by and for millers, exporters, and importers, both here
and abroad. The quantity of wheat received in New York in the five
years 1904–1908 averaged 21,000,000 bushels annually. No record of
“cash” sales is kept. The reported sales of “futures” show in five
years an annual average of 480,000,000 bushels, the year 1907 showing
610,000,000. Although some of these sales were virtually bets on price
differences, all of them were contracts enforceable at law.
CLEARING SYSTEM
The greater part of the transactions are settled by a clearing system.
The Clearing Association is a separate organization, duly incorporated,
with a capital of $25,000. All members of the association must settle
daily by the clearing system; other members of the Exchange may do
so. The Clearing Association assumes responsibility for the trades
of all its members, and accordingly controls the exaction of margins
from members to each other, and may increase them at any time if the
fluctuations require it. The records of the clearings show day by day
the status of each member’s trading--how much he may be “long” or
“short” in the aggregate. Thus the members have a system of protection
against each other; the welfare of all depends upon keeping the
commitments of each within safe limits. The official margin system
operates as a commendable restraint upon over-speculation.
From our examination of the trading in mining stocks recently
introduced, we conclude that the lack of experience of this body in
this class of business has resulted in a neglect of proper safeguards
to the investor and an undue incitement to speculative transactions of
a gambling nature, and should not be tolerated on the Produce Exchange.
THE COTTON EXCHANGE
The New York Cotton Exchange was incorporated by a special charter in
1871. Its membership is limited to 450. It is now the most important
cotton market in the world, as it provides the means for financing
about 80 per cent. of the crop of the United States, and is the
intermediary for facilitating its distribution. In fact, it is the
world’s clearing house for the staple. Traders and manufacturers in
Japan, India, Egypt, Great Britain, Germany, France, and Spain, as well
as the United States, buy and sell here daily and the business is still
increasing.
Cotton is the basis of the largest textile industry in the world. The
business is conducted on a gigantic scale in many countries by means
of vast capital, complicated machinery, and varied processes involving
considerable periods of time between the raw material and the finished
product. Selling for future delivery is necessary to the harmonious and
uninterrupted movement of the staple from producer to consumer. Nearly
all the trading, beginning with that of the planter, involves short
selling. The planter sells to the dealer, the dealer to the spinner,
the spinner to the weaver, the weaver to the cloth merchant, before the
cotton of any crop year is picked. Dealers who take the risk of price
fluctuations insure all the other members of this trading chain against
losses arising therefrom and spare them the necessity of themselves
being speculators in cotton. The risks connected with raising and
marketing cotton must be borne by some one, and this is now done
chiefly by a class who can give their undivided attention to it.
GRADING OF COTTON
The grading of cotton is the vital feature of the trade. When no grade
is specified in the contract, it is construed to be middling. There
are now eighteen grades, ranging from middling stained up to fair.
This classification differs somewhat from that of other markets, and
last January the Department of Agriculture at Washington took up the
subject of standardizing the various grades for all American markets.
The New York Cotton Exchange participated in this work; a standard was
thus adopted, the types of which were supplied by its classification
committee. It varies but little from the one previously in use here.
The samples chosen to represent the several types are now sealed, in
possession of the Department of Agriculture, awaiting the action of
Congress.
The cotton plant is much exposed to vicissitudes of the weather. A
single storm may change the grade of the crop in large sections of the
country. It becomes necessary therefore to provide some protection
for traders who have made contracts to deliver a particular grade
which has become scarce by an accident which could not be foreseen.
For this purpose alternative deliveries are allowed by the payment of
corresponding price differentials, fixed by a committee of the Exchange
twice annually, in the months of September and November.
Settlements of trades may be made individually, or by groups of
members, or through a clearing system, the agency of which is
a designated bank near the Exchange. No record is kept of the
transactions, but it is probable that for a series of years the sales
have averaged fully 50,000,000 bales annually.
INORDINATE SPECULATION
There have been in the past instances of excessive and unreasonable
speculation upon the Cotton Exchange, notably the Sully speculation
of 1904. We believe that there is also a great deal of speculation of
the gambling type mentioned in the introduction to this report. In
our opinion, the Cotton Exchange should take measures to restrain and
so, far as possible, prevent these practices, by disciplining members
who engage in them. The officers of the Exchange must in many cases
be aware of these practices, and could, in our opinion, do much to
discourage them.
THE COFFEE EXCHANGE
The Coffee Exchange was incorporated by special charter in 1885. It has
320 members, about 80 per cent. active.
It was established in order to supply a daily market where coffee could
be bought and sold and to fix quotations therefor, in distinction from
the former method of alternate glut and scarcity, with wide variations
in price--in short, to create stability and certainty in trading in an
important article of commerce. This it has accomplished; and it has
made New York the most important primary coffee market in the United
States. But there has been recently introduced a non-commercial factor
known as “valorization,” a governmental scheme of Brazil, by which the
public treasury has assumed to purchase and hold a certain percentage
of the coffee grown there, in order to prevent a decline of the price.
This has created abnormal conditions in the coffee trade.
All transactions must be reported by the seller to the superintendent
of the Exchange with an exact statement of the time and terms of
delivery. The record shows that the average annual sales in the past
five years have been in excess of 16,000,000 bags of 250 pounds each.
Contracts may be transferred or offset by voluntary clearings by groups
of members. There is no general clearing system. There is a commendable
rule providing that, in case of a “corner,” the officials may fix a
settlement price for contracts to avoid disastrous failures.
THE OTHER EXCHANGES
Of the exchanges which we have classed as minor, those dealing with
Fruit and Hay, appear to be in nowise concerned with speculation.
No sales whatever are conducted on them, all transactions being
consummated either in the places of business of the members or at
public auction to the highest bidder. No quotations are made or
published.
In the case of the other two commodity exchanges, the Mercantile and
the Metal, new problems arise. Although quotations of the products
appertaining to these exchanges are printed daily in the public press,
they are not a record of actual transactions amongst members, either
for immediate or future delivery.
It is true that on the Mercantile Exchange there are some desultory
operations in so-called future contracts in butter and eggs, the
character of which is, however, revealed by the fact that neither
delivery by the seller nor acceptance by the buyer is obligatory; the
contract may be voided by either party by payment of a maximum penalty
of 5 per cent. There are nominal “calls,” but trading is confessedly
rare. The published quotations are made by a committee, the membership
of which is changed periodically. That committee is actually a close
corporation of the buyers of butter and eggs, and the prices really
represent their views as to the rates at which the trade generally
should be ready to buy from the farmers and country dealers.
Similar, but equally deceptive, is the method of making quotations on
the Metal Exchange. In spite of the apparent activity of dealings in
this organization in published market reports, there are no actual
sales on the floor of the Metal Exchange, and we are assured that there
have been none for several years. Prices are, however, manipulated
up and down by a quotation committee of three, chosen annually, who
represent the great metal-selling agencies as their interest may
appear, affording facilities for fixing prices on large contracts,
mainly for the profit of a small clique, embracing, however, some of
the largest interests in the metal trade.
These practices result in deceiving buyers and sellers. The making and
publishing of quotations for commodities or securities by groups of men
calling themselves an exchange, or by any other similar title, whether
incorporated or not, should be prohibited by law, where such quotations
do not fairly and truthfully represent any bona fide transactions on
such exchanges. Under present conditions, we are of the opinion that
the Mercantile and Metal Exchanges do actual harm to producers and
consumers, and that their charters should be repealed.
THE EXPERIENCE OF GERMANY
In 1892 a commission was appointed by the German Government to
investigate the methods of the Berlin Exchange. The regular business
of this exchange embraced both securities and commodities; it was an
open board where anybody by paying a small fee could trade either for
his own account, or as a broker. The broker could make such charge as
he pleased for his services, there being no fixed rate of commission.
Settlements took place monthly. Margins were not always required. Under
these circumstances many undesirable elements gained entrance to the
Exchange and some glaring frauds resulted.
The commission was composed of government officials, merchants,
bankers, manufacturers, professors of political economy, and
journalists. It was in session one year and seven months. Its report
was completed in November, 1893. Although there had been a widespread
popular demand that all short selling should be prohibited, the
commission became satisfied that such a policy would be harmful to
German trade and industry, and they so reported. They were willing,
however, to prohibit speculation in industrial stocks. In general the
report was conservative in tone.
THE LAW OF 1896
The Reichstag, however, rejected the bill recommended by the commission
and in 1896 enacted a law much more drastic. The landowners,
constituting the powerful Agrarian party, contended that short
selling lowered the price of agricultural products, and demanded that
contracts on the Exchange for the future delivery of wheat and flour be
prohibited. The Reichstag assented to this demand. It yielded also to
demands for an abatement of stock speculation, and prohibited trading
on the Exchange in industrial and mining shares for future delivery.
It enacted also that every person desiring to carry on speculative
transactions be required to enter his name in a public register, and
that speculative trades by persons not so registered should be deemed
gambling contracts and void. The object of the registry was to deter
the small speculators from stock gambling and restrict speculation to
men of capital and character.
The results were quite different from the intention of the legislators.
Very few persons registered. Men of capital and character declined to
advertise themselves as speculators. The small fry found no difficulty
in evading the law. Foreign brokers seeing a new field of activity
opened to them in Germany, flocked to Berlin and established agencies
for the purchase and sale of stocks in London, Paris, Amsterdam, and
New York. Seventy such offices were opened in Berlin within one year
after the law was passed, and did a flourishing business. German
capital was thus transferred to foreign markets. The Berlin Exchange
became insignificant and the financial standing of Germany as a whole
was impaired.
DETRIMENTAL CONSEQUENCES