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Title: The Stock Exchange from Within
Author: Antwerp, W. C. van
Language: English
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Copyright Status: Not copyrighted in the United States. If you live elsewhere check the laws of your country before downloading this ebook. See comments about copyright issues at end of book.

*** Start of this Doctrine Publishing Corporation Digital Book "The Stock Exchange from Within" ***

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  _Copyright, 1913, by_

  _All rights reserved, including that of
  translation into foreign languages,
  including the Scandinavian_


             First printing, Jan., 1913.
             Second printing, Apr., 1913.
             Third printing, June, 1913.
             Fourth printing, Feb., 1914.


In so far as these pages reflect the thoughts of a busy stockbroker,
distracted by many duties and lacking in literary skill, they have but
little merit and the writer entertains no illusions regarding them.
But in the many quotations from the writings of the world’s foremost
economists that are here presented, and in the various legal and
historical precedents cited, perhaps it is not too much to hope that
this book possesses some slight value as a contribution to the vexed
and vexing discussion of the Stock Exchange, and that it may serve
in some degree both to dull the sharp edge of uninformed criticism
and to strengthen the hands and hearts of loyal friends of a greatly
misunderstood institution. The public is asked to disregard the
utterances of demagogues and self-seekers and to consider facts. That
done, the American spirit of fair play may be confidently relied upon.

The Stock Exchange authorities have had no hand in the preparation of
the work, nor does it bear their endorsement. I say this lest it be
thought an official _apologia_. Had it been such, the work would have
been much more skillfully done, and its value greatly enhanced.

                        THE AUTHOR.


         Preface                                                       v

  CHAPTER                                                           PAGE
     I.  The Functions of the Stock Exchange                           3

    II.  The Uses and Abuses of Speculation                           35

   III.  The Bear and Short Selling                                   71

    IV.  The Relationship Between the Banks and the Stock Exchange    99

     V.  Publicity in Exchange Affairs; Cautions and Precautions     131

    VI.  Panics, and the Crisis of 1907                              183

   VII.  A Brief History of Legislative Attempts to Restrain or
             Suppress Speculation                                    223

  VIII.  The Day on ’Change, with Suggestions for Beginners          261

    IX.  The London Stock Exchange, and Comparisons with Its New
             York Prototype                                          323

     X.  The Paris Bourse; a Monopoly Under Government               383

         Appendix.  The Report of the Hughes Commission              415

         Index.                                                      447



Every now and then some one who has not given much thought to the
matter asks the questions, “Of what real use is the Stock Exchange?”
“What does it accomplish?” “Is it a necessary and useful part of our
economic life, or is it merely a means of promoting speculation and
gambling?” These are fair questions, and they are asked in good faith.
To be sure they have been answered many times by writers on economic
subjects, but the trouble is that in our hurried American life we do
not read the economists, preferring to get our impressions from the
hasty utterances of some one who knows no more about it than we do.

The study of any form of economic development, like the study of
sciences and philosophies, requires infinite patience. But the “man
in the street” is bored to death by such methods; he wants to take a
short cut to his conclusions; merely tasting the Pierian spring he
hurries on to judgments that are superficial, haphazard, and often
crude and blundering. And yet at bottom this man, a good citizen with
an open mind, invariably wants the truth. He may be too busy to dig it
up himself, but he knows it when he sees it, and once he has grasped
it he has no patience with those who seek to turn him from it. To this
average man, who holds in his hands the balance of power in America, I
venture to say something about markets.

The first thing a man asks when he wishes to buy is “the price.” Every
minute of the day, all over the world, that question is on men’s lips.
As it is a necessary prelude to all forms of trade, it follows that
everything that enters into the making of prices becomes at once of
primary importance. The more scientific the price, and the nicer and
more accurate the making of it, the better the bargain for both buyer
and seller and for trade generally, bearing in mind the distinction
between prices, which are temporary and move rapidly--and values, which
are intrinsic and move slowly. The price of a thing is what you can
get for it; the value is its real worth to you, and hence it cannot be
defined or measured, since a thousand considerations may enter into
it, such as caprice, sentiment or association. If _real_ values could
be determined, they would necessarily be identical with prices, but as
they cannot be ascertained in ordinary commodities of trade, prices
become the really essential considerations and values the subordinate
ones. Let us see, then, how prices are made, for this is one of the
reasons why exchanges exist.

If you want to buy, let us say, a piano, you go to the dealer and ask
the price, and as he is the only person in the neighborhood who deals
in pianos, you must either accept his offer or look elsewhere. But
to look elsewhere takes time and labor; dealers in pianos are widely
separated; moreover, there is no open competition among them such as
you would like, and so finally when you have bought you feel perhaps
you have not secured your money’s worth. You would have secured a much
better bargain, no doubt, had there been twenty dealers in the room
competing with each other, and a still better bargain had their number
been fifty, or a hundred, or two hundred, because that would mean
competition, and the more competition there is, in close contact and
governed by rigid business rules, the more certain the approach to a
perfect price. Everywhere in the world fairs and other gatherings of
merchants are held at periodic intervals because people demand them
in their effort to secure proper prices by competitive bidding and
offering. One of the first travelers to penetrate the heart of Africa
found among the natives this phenomenon of trade, showing that it is
instinctive; indeed, it may be traced to the earliest known period
in the history of any people. If you arise before daybreak in London
and go to Billingsgate and Covent Garden, or in Paris to the _Halles
Centrales_--Zola’s “Ventre de Paris”--you will find there the modern
type of these markets in their utmost perfection.[1]

This is why Exchanges exist, not only Stock Exchanges, but
market-places of all kinds: Buyers seek the largest market they can get
in order to obtain the lowest prices; sellers, in order to obtain the
highest prices; and so it was learned long ago that economy of time and
labor, as well as a theoretically perfect market, could be best secured
by an organization under one roof of as many dealers in a commodity as
could be found.[2] Bear in mind that this result, moreover, is best
accomplished when the organization is so controlled by rigid rules of
business morality as to insure to every one who does business there,
great and small, rich and poor, an absolutely square deal. In such a
market every purchase is made with the most thorough acquaintance with
the conditions involved. Each dealer, each broker, each speculator,
strives to obtain the best knowledge of the supply and demand, and
the earliest news that may affect it, and each buyer or seller has an
equal and a fair opportunity to profit by the resultant effect on the
market of all these various agencies. The larger the body of brokers
and traders, then, the more accurate the standards of value thus
created. It is a pity you could not have bought your piano under such

Demagogues have set the agricultural classes against Wall Street and
against Exchanges, but producers everywhere, in default of exchanges,
are forming quasi-exchanges of their own. Every day we hear of
combinations, Farmers’ Alliances, rural co-operative movements, etc.,
each designed to regulate the market for eggs, butter, potatoes, and
such things, and each having for its purpose the very functions which
govern a Stock Exchange in its own field--namely, the establishment of
a fair price under the nearest possible approach to ideal conditions.
It is now proposed in Congress that the Department of Agriculture
shall collect and transmit to the agricultural districts by telephone
and telegraph all available information concerning price movements,
markets, and centres of supply and demand, this again embodying the
essential functions performed in its own field by a great exchange.

In practice, of course, there can be no exchange to deal in perishable
products of the farm, and this is a pity, because if such an exchange
were practicable we should hear less of our old friend the cost of
living. Why? Because at present the market for these commodities is
controlled by commission dealers and by middlemen. The producer and the
consumer are alike at the mercy of these people; the price is fixed by
them; the number of bona fide dealers actually bidding against each
other is limited, in many instances there is no competition whatever;
the producer and the commission dealer are, moreover, widely separated;
the man who sells has few sources of information, and it is the
business of the dealer who buys to see that he gets none; the small
producer therefore has to submit to a great inequality in price, and
often to downright cheating. There is no standard. There are no rules
governing the dealer, and no high-minded board to enforce his honesty.
Naturally this sort of thing contributes to the cost of living, since
the commission dealer, on his part, regulates his profits just in
proportion to the ignorance, cupidity or remoteness of the farmer,
while the middlemen, of whom there are sometimes three or four, apply
the same iniquitous processes to the ultimate purchaser--who happens
to be you or me. Every thinking man knows that this is rank economic

A friend of mine owns a thousand-acre farm in the Shenandoah Valley,
where he raised this year 10,000 baskets of peaches. He decided to seek
one buyer, and he found him in the person of a Baltimore canner, who
went down to Virginia, inspected the crop, and contracted for the lot
on a basis of $1 for firsts, 70 cents for seconds, and 40 cents for
thirds, delivered at Baltimore. Shortly after, the market was flooded
with peaches from Georgia, and the Baltimore man, seeing that the
crop would be plentiful, promptly “welched” on his trade, basing his
action on the absurd contention that “firsts” should be three inches in
diameter, although as every one knows peaches of this size are almost
never to be had. This action threw all the grower’s peaches into third
class, which delivered at Baltimore would have netted him about 10
cents a basket.

In desperation he looked elsewhere, West, North, and South, only
to hear the same monotonous answer from commission men, “we won’t
buy, but we will handle your crop on a commission of 10 per cent.”
Meantime the crop was ripening. To make matters worse the railroad
levied a prohibitive price, and refrigerator cars were not to be had.
Finally there was nothing left but to ship by express and trust to the
commission men to treat him honestly. The final accounting showed that
on his first shipment he netted 5½ cents a basket, and on his second,
15 cents, not counting the expense of picking, packing, and hauling.
So much for the producer. The consumer fared no better, for he had to
pay $1.25 per basket for this fruit; one of this producer’s friends
actually purchasing a portion of this very consignment at that rate.
The difference therefore between 15 cents and $1.25 contributes some
food for thought as to the cost of living.[5]

Now contrast this experience of a grower having no exchange facilities
with that of the Western farmer who deals directly with a Grain
Exchange. The farmer can sell his crop, even though it has not been
planted. Whenever he sells, and under whatever conditions, he enjoys
the authoritative establishment of a price, fixed as clearly as matters
are fixed in law. Moreover, the price at which he elects to sell is the
best price, the fairest price, and the most scientific price that human
agencies can arrive at, because it is made by world-wide competitive
bidding at the hands of skilled men in Chicago, in New York, in
Liverpool, in Berlin, in Odessa, and in the Argentine, all competing by
cable and telegraph. Think of the confidence he enjoys, and the liberty
of action; think, too, what it means to him to know that the Exchange
through which he deals is a body of honorable men, governed by rules,
bidding publicly under one roof.

But, you will say, this is all very well in its application to a grain
or cotton exchange, but how does it apply to the Stock Exchange? You
concede that scientific price-making for commodities like grain and
cotton is highly necessary, but you do not see that the same necessity
exists for stocks and bonds. You feel, no doubt, that the one has to
do with food and raiment and is therefore indispensable, while the
other merely serves to stimulate speculation and gambling, and hence
is altogether unnecessary. Now, in order to explain the error in this
point of view, let us first see how bits of paper, called securities,
came into being.

Long after Europe had emerged from the dark centuries following
the fall of the Roman Empire, the needs of states and governments
impelled their rulers to resort to credit, and it was discovered that
the simplest way to do it was to issue securities, that is to say,
certificates of the debt. Next, it was found that in order to insure
success for these operations, a market was required. Intermittent or
temporary sources from which credit could be obtained was not enough;
constant sources of credit were essential, and, as these _constant_
sources lay in the savings of the people, public markets in which
investors could tell the value of their investments from day to day
followed as a natural course.[6]

As time went on--necessarily the evolution was gradual--it was learned
that companies having to do with all forms of business enterprises
might also be formed on the same basis. The development of the world’s
business outgrew its infancy days of private partnerships, and
corporate organization of necessity took their place, now that the
discovery of credit, through the use of securities, had pointed the
way. This corporate organization, which combines the small savings
of thousands into large sums and gives to the masses an intelligent
directing force at the hands of highly trained experts, depends for its
existence on the sale of its securities.

In order to understand that there can be no industrial progress without
the issue of securities let us consider the locomotive engine. When in
the early 1800’s it became apparent that this contrivance could be used
to operate an entirely new method of transportation, people looked upon
it, at first, as an interesting but quite useless contrivance, because
to build railroads was an expensive undertaking and nobody had enough
money to finance it. The inventor’s genius was not sufficient; another
power was necessary to take it out of purely scientific hands and give
it practical impulse. That power was credit; the way it was obtained
was through the issue of securities, and the way securities were made
popular vehicles of investment lay in providing a daily market for
buyers and sellers.

As a natural result, organization followed. Capital was consolidated,
the rights of owners were established, a great impulse was given
to various new forms of inventive genius and powerful commercial
enterprises of all kinds sprang into being. With this development the
market-places or Stock Exchanges without which capital could not
have been enlisted kept pace. It was found that transactions in the
securities which represented the people’s money should be rendered
easy, quick, and safe, and that the very essence of the Exchange’s
functions consisted in protecting the people who were the actual owners
of the enterprises by rules that would insure this result.

If we look about us to-day we find in all the great centres of the
world Stock Exchanges at work in this important field. We find that
just in proportion to the confidence which a country feels in the
strength and uprightness of such a market, so enterprise goes forward
with vigor, and so the national wealth increases. The success of one
enterprise in its appeal to public credit through the medium of the
Stock Exchange invariably leads to another; thus commerce and industry
develop. Securities in America alone, aggregate the enormous total of
forty-three billion dollars.[7]

Now, as our country’s entire physical properties are valued at one
hundred and thirty billions, it is apparent (after making allowances
for securities that are held by holding companies and hence are
duplicated in the foregoing estimates) that the nation’s securities
represent more than a third of the nation’s wealth. Again, almost two
million people are owners of these securities. The _Journal of Commerce
and Commercial Bulletin_ published Dec. 26, 1912, official statistics
for 247 of the large corporations. This tabulation revealed the fact
that the stock of these 247 corporations alone was owned by more than a
million stockholders, and it is therefore quite safe to infer that the
number of shareholders in all American companies approaches, if it does
not exceed, two million. I think it will not be disputed that where two
million people own a third of the nation’s wealth, they are entitled,
just as the farmer is, to a perfectly constructed price-making
machinery that will enable them to invest their savings, or sell their
holdings. Having learned the difficult lesson of saving their money and
the still more difficult one of increasing their surplus capital by
judicious investments, are not these people entitled to the safeguards
afforded by a Stock Exchange? “There is no other way in which true
prices can be made,” says Mr. Horace White. “If the quotations so
made are not precisely the truth in every case, they are the nearest
approach to it that mankind has yet discovered.”[8]

Think a moment. Until the last century property and trade were so
insecure that, if a man saved money, he had to hide it, or lend it
through money-brokers at such usurious rates as would compensate him
for what he lost in bad debts. When Dr. Samuel Johnson wrote his
dictionary in 1776 no such word as “investor” was known to the English
language in a financial sense. There were pirates by sea in the old
days and brigands on land. “Sovereigns and nobles,” says the editor of
the _Economist_, “extorted loans only to repudiate them; governments
supplied their needs by debasing the coinage, or by issuing worthless
money.”[9] To-day all this is changed by banks and Stock Exchanges.
Yet, despite these great inventions, capital is and always will be
timid, and the small investor particularly must be protected and
safeguarded in every possible way.

These small investors, no less than the large ones, require great
convenience and promptness for their operations; they live in such
widely remote parts of the country as to necessitate the placing of
full reliance on prices made by the Stock Exchange; they must have
the most accurate information; they must know that their brokers are
working to obtain the best knowledge of supply and demand; they want
prices fixed by the most scientific competition and by the largest
possible number of competitors--brokers, speculators, and investors
alike; they require a market in which they can sell and get their money
at once; above all things they must know beyond peradventure that they
are dealing with reputable men who uphold a fine standard of honor.
These are added reasons why the Stock Exchange exists.[10]

If it did not exist, there would be no standard market for a large part
of the country’s material wealth, indeed, as we have seen, a very great
deal of this wealth could not have been created at all. At the risk
of repetition let me say that the investor on the one hand, and the
patent or the railway on the other hand, have nothing in common. Left
to themselves, they would never meet; they would be useless, because
resources and money must be brought together in order to create wealth.
A primary function of the Stock Exchange is to bring them together,
and by standardizing prices, create values. Similarly, the investor,
without the Stock Exchange to guide him, would have nowhere to turn for
a fair price secured by competitive bidding. He might turn to his local
banker, or to individual and unorganized brokers, and trust to their
honesty to invest his savings for him, but the local banker and the
isolated broker would then be in the same position as the commission
dealer and the middleman who played such havoc with that peach crop. It
is painful to conceive such a situation.

Worse than that, without a Stock Exchange to create standards and
define the difference between good and bad investments, very many
simple people would be at the mercy of an army of dishonest promoters
and bucket-shops, for the modern invention of securities has brought
with it dangers and pitfalls. The United States once swarmed with these
bandits--they are now rapidly being driven to cover--but they still
ply their trade in other countries, where they flourish as “banks”
or “investment” companies. These chaps, to quote the editor of the
_Economist_ (London), “have bought a lot of rubbish, usually called
‘bonds,’ from shaky industrial concerns or from half bankrupt states
and municipalities of South America. They have bought, let us say,
the 6 per cent. bonds of the Yoko Silk Company in Japan at 60, which
they sell you at 90, the 5 per cent. bonds of the Brazilian Province
of ---- at 55, which they sell you at 75, and a few other similar
bargains. They tell you that if you spread your risks scientifically
over different countries you will be perfectly safe. You perhaps do
not realize that none of these securities which you are advised to buy
are quoted in the London Stock Exchange. If they were the game would
be impossible.” Which is only another way of saying that if there were
no Stock Exchanges to uphold worthy enterprises and discourage bad
ones, there would be no limit to the frauds practised upon gullible
investors. And if this is true of a tight little island like England,
how doubly true it is in a great country like ours where investors are
so widely scattered.

The foregoing pages will serve to show the inquirer that what is
happening in commerce, is happening in the securities which represent
that commerce. Because commerce goes on expanding, securities must
necessarily keep pace and the Stock Exchange must perforce grow in
importance. That much maligned individual, the speculator, now regards
the whole world as his field and is eager to enter foreign markets
wherever there are opportunities. In 1910 more than three billion
dollars of British capital were invested in American railways alone,
returning one hundred and twenty-five millions annually in interest
and dividends, to say nothing of the English millions in our lands,
mines, and industrial enterprises. We too are large holders of foreign
securities, and the list of such holdings increases yearly. But it may
be accepted as a fact that this enormous mass of corporate securities
would not have found ownership had there been no Stock Exchange to
market them, and standardize them, and establish daily prices for
them, and give them the certificate of character that makes them ideal
collateral for obtaining credit.

Dr. W. Lexis, of Gottingen, like all other economists, recognizes
the fact that Stock Exchanges are economic necessities. Here are his

  “The existence of a broad, continuous market is an economic
  necessity in the modern scheme of widespread investment of capital.
  Even though the market-place is largely filled with speculators, it
  is plain that the greater the number of traders in securities, the
  greater will be the facility for buying and selling any quantity
  of securities. The stock market is a powerful aid in floating
  new issues of public securities. The speculative market takes
  them at once and keeps them in the floating supply until they
  have shown their value. The stock market also renders a useful
  service in giving a continuous guide to the success or failure of
  industrial undertakings, and the worth of their securities. The
  more speculators there are trading in any particular security, the
  greater is the opportunity to learn the real conditions of the
  undertaking. Private investors, from a study of the speculative
  market in the securities they own, receive in this way a continuous
  market opinion on the condition of the corporations in which they
  are shareholders.”[11]

Another great service rendered by the Stock Exchange is the means
it affords of readily transferring securities from hand to hand.
To appreciate the importance of this fact you have but to think of
the difficulties and delays that attend the transfer of other forms
of property that do not enjoy Exchange facilities. Real estate, for
example, is a most excellent form of investment. But suppose the owner
of real estate wants to sell in a hurry, what then? There is no large
organized market, there is no way by which through competitive bidding,
he can place a correct estimate of the importance of current events
upon the price of his land. In the urgency of his needs he may easily
be misled by “smart” or unscrupulous advisers, and this risk increases
in direct proportion to his remoteness from large market centres.

The holder of securities listed on the Stock Exchange is quite
differently situated. He is altogether independent. He knows the price
of his holdings every hour of the day. He is exposed to no fraud, and
at the mercy of no rumor and no unscrupulous dealer. He has positive
assurance that in case of necessity, at a moment’s notice, he can
obtain at the prevailing price the value in cash of every Stock
Exchange security in his box. The ticker gives him instantaneous
quotations. All the newspapers publish authorized prices for his
benefit, and, as we have just seen, these quotations are not a one-man
affair, but the combined judgment of thousands of experts, bulls and
bears, bankers and brokers, speculators and investors, all over the
world, bidding and offering against each other by cable and telegraph
and recording the epitomized result of their bidding in the prices
current on the Stock Exchange. Such a man knows, moreover, that the
price thus established is not merely the opinion of all these minds
as to values to-day, but that it represents a critical look into the
future. He knows, indeed, that financiers everywhere have in mind
prospective values rather than present values, and so he acquires a
double advantage in regulating his own action by the light of the
superior knowledge thus freely given him. The importance of this
“advance information” cannot be overestimated, and furnishes us with
another reason why Stock Exchanges exist.

In 1906, for example, business conditions in this country were the best
ever known. Good crops, big earnings, and general optimism prevailed.
But Stock Exchange securities did not advance in the last half of the
year, because trained financiers began to foresee the first signs of
trouble ahead. In the early months of 1907 this knowledge became more
general, and a severe decline took place, notwithstanding the fact
that the business of the country at large continued to be excellent.
“What is the matter with Wall Street?” was the question in the press
and on the lips of the uninformed, but Wall Street, or rather the
Stock Exchange, was merely fulfilling its function as a barometer and
foretelling the coming storm.

At the height of the autumn panic, on the other hand, when the
press was filled with dire forebodings and the ignorant layman was
frightened out of his wits, securities stopped declining and began to
rise because the Stock Exchange mind saw that the worst was over. The
brightest financial students in the world then began another process
of discounting the future; the barometer plainly foretold the end of
the disturbance. And all this information--a fundamental law of price
movements which indicated clearly when the trouble was coming and when
it had ended--was given gratis to the world in the daily published
quotations of Stock Exchange securities.

In another chapter I shall describe the method by which the Stock
Exchange protects its patrons, the public. As this is of particular
importance in connection with the matters just cited, I call the
reader’s attention to the remarks of Prof. S. S. Huebner, Ph.D., of the
University of Pennsylvania.

  “Importance must be attached to the protection and safeguards
  which organized Stock Exchanges give the stock and bond holder, in
  regulating brokerage transactions and maintaining a standard of
  commercial honor among brokers.... In this connection it should be
  remembered that the constitution of nearly every Stock Exchange
  defines the object of the Exchange as follows: ‘Its object shall be
  to furnish Exchanges, rooms and other facilities for the convenient
  transaction of business by its members, as brokers; to maintain
  high standards of commercial honor and integrity among its members,
  and to promote and inculcate just and equitable principles of trade
  and business.’ No person can be elected to membership until he has
  signed the constitution of the Exchange, and by such signature
  he obligates himself to abide by the same, and by all subsequent
  amendments thereto. The value of this organization becomes
  apparent when we take account of the gigantic frauds perpetrated
  upon innocent investors through advertising campaigns by persons
  unaffiliated with any recognized Exchange, or by certain members of
  unorganized curb markets....

  “All Stock Exchanges provide for the arbitration of disputes which
  may occur between members, and if both parties are willing, between
  members and their customers. They also prescribe rules governing
  the nature of contracts, the making of all offers and bids, the
  registry and transfer of securities on the transfer books of the
  corporations, and the conditions upon which securities may be
  listed upon the Exchange for trading purposes. Practically all
  stock Exchanges also require that all transactions must be real,
  and that no fictitious or unreal transactions shall be permitted;
  that discretionary orders cannot be accepted by brokers; and
  that every member of the Exchange must keep complete accounts,
  subject at all times to examination by the governing committee
  or any standing or special committee of the Exchange, and under
  penalty of suspension, no member may refuse or neglect to submit
  such accounts, or wilfully destroy the same. Nor may any member,
  under pain of suspension (a serious penalty, involving not merely
  the loss of the rights and privileges of membership, but also
  the stigma attaching to the member as a factor in the business
  community), be guilty of ‘any conduct or proceeding inconsistent
  with just and equitable principles of trade.’”[12]

One of the most important functions of the Stock Exchange is, as we
have seen, the almost automatic ease with which it directs reservoirs
of capital into channels of usefulness in the world’s industry and
commerce. The layman may feel that this use of the Stock Exchange
does not affect him as an individual, but it does, and vitally. Every
merchant and every manufacturer, great and small, all over the world,
is directly benefited by it. One may see, for example, securities of
railway equipment companies quoted for weeks at a low level. This shows
that the business of these companies is not profitable, and it serves
to discourage owners of capital from undertaking new enterprises in
that direction, because the securities of such companies cannot be
sold. Moreover, it shows investors, as plainly as words can tell, that
this is an unsafe and unprofitable form of investment.

Reverse the situation, and lines of industry are revealed where
high and advancing prices of securities indicate a rising tide of
business, with an outlook for large profits in the future. Capital
then takes hold cheerfully; there is a market for the new securities
and a proper basis for fresh commercial development, because investors
and speculators have learned from the published daily quotations of
these Stock Exchange securities that there is good warrant for the
flow of capital into such channels, and that a reasonably safe return
will follow an investment in them. In commenting upon these functions
of the Stock Exchange, Mr. Conant says: “Through the publicity of
knowledge and prices, the bringing of a multitude of fallible judgments
upon this common ground, to an average, there is afforded to capital
throughout the world an almost unfailing index of the course in which
new production should be directed.” Through the mechanism of the Stock
Exchange, therefore, the public determines the direction in which new
capital shall be applied to new undertakings. In this way our great
railways were built, our Western country opened to progress, and our
vast industrial undertakings made possible.

  “The stock market acts as a reservoir and distributor of capital,
  with something of the same efficiency with which a series of
  well-regulated locks and dams operates to equalize the irregular
  current of a river. The hand of man is being stretched out in
  the valley of the Nile to build great storage basins and locks,
  and the waters which flow down the great river may be husbanded
  until they are needed, when they are released in small but
  sufficient quantities to fertilize the country and tide over the
  periods of drought. Something of the same service is performed
  for accumulation of capital by the delicate series of reservoirs,
  sluice gates, and locks provided by the mechanism of the stock
  market. The rate of interest measures the rise and fall of the
  supply of capital, as the locks determine the ebb and flow of the
  life-giving water. The existence of negotiable securities is in
  the nature of a great reservoir, obviating the disastrous effects
  of demands which might drain away the supply of actual coin, and
  preventing the panic and disaster, which, without such a safeguard,
  would frequently occur in the market for capital.”[13]

Some day, no doubt, the United States will become a great creditor
nation, as England is, and then the field of these operations will be
extended to other countries. When that time comes we shall take a hand,
through the machinery of the Stock Exchange, in the development of
new and immense fields of human endeavor just as London does to-day.
To what extent could capital exports of such tremendous economic
significance continue if so useful and so indispensable an institution
as the Stock Exchange were abolished or interrupted? It was Burke who
said that “great empires and little minds go ill together,” and so
it is with great markets and little critics. There can be no worthier
purpose in the commercial world than the upbuilding of a great centre
of credit designed to finance material enterprise, enrich the world,
and extend the benefits of civilization to new lands and new people,
based upon the credit supplied by the banker, the money provided
by the speculator and investor, and the safeguards afforded by the
Stock Exchange. And yet, curiously, the greater the effort in these
directions, the greater the criticism. Just in proportion to the
perfection with which all these agencies equalize prices, economize
time and effort, and protect the public, so they seem to attract
attention, comment, and attack.[14]

In Wall Street, according to this viewpoint, everything is tainted,
sinister, reprehensible, covetous and unscrupulous, just as it follows
the onward march of invention, science, and progress. This sort of
criticism will not, of course, continue. The man in the street--the
average layman to whom I have ventured to address this chapter will
learn sooner or later--in point of fact he is learning now--that the
questionable practices in Wall Street which started all this hubbub,
and which were a natural and a human accompaniment of the slowly
developed technique of this or any other business, have now been
effectually stopped. It has been a very long time, for example, since
Jay Gould ran his printing-press for Erie certificates, and that
incident cannot possibly happen again. The Keene type of manipulator
has gone, never to return. “Corners,” too, have seen their last day
on ’Change, and so also have other artificial impediments in the way
of natural supply and demand. It has been years since the Cordage
scandal, and the Hocking Coal incident marked the end of that form of
manipulation. Yet there are persons who talk of these things as though
they were daily occurrences, overlooking the fact that the New York
Stock Exchange, by its own efforts put a stop to the evils complained
of, and will never tolerate their return.

McMaster in his “History of the People of the United States” tells us
that in the early days in New England public sentiment was so aroused
against the legal profession that lawyers “were denounced as banditti,
as blood-suckers, pick-pockets, windbags and smooth-tongued rogues.”
At that period in our history feeling ran so high against banks and
bankers that Aaron Burr was only able to procure a charter for the
Manhattan (Banking) Company by resorting to the subterfuge of naming
it, in the Act, “a Company to furnish the City with water.” No doubt
all this rancor and hostility seemed a very serious matter to the
lawyers and bankers of those days, just as the criticism of to-day
strikes home to members and friends of the Stock Exchange.

The lawyers made many mistakes a century and a half ago when the code
and its practice were imperfectly understood in this country; so it
was with the early history of banking; and so in our time Wall Street
and the Stock Exchange have made the mistakes which any gradually
developing form of enterprise must make. But these mistakes are dead
or dying, and, in their place, no doubt, there will come a better
understanding all around. When that day dawns the thoughtful American
will realize that the particular rôle which the Stock Exchange plays in
promoting all forms of commercial endeavor is a boon such as no country
in the history of earlier days ever enjoyed. He will contemplate his
country’s progress with pride; he will rejoice in its capacity to
outstrip other countries; he will acclaim its advancement toward the
proud position now held by England, the banker and the clearing-house
of the world. And he will learn--this thoughtful citizen--that material
achievements like these cannot be attained without a market for capital
and a market for securities.[15]



Somewhere in each one of us lurks Stevenson’s spirit of “divine
unrest,” the parent of speculation. To-day, as in wise old Greece
in the morning of the world, philosophers sit under every tree,
speculating upon the phenomena of the universe, and upon the practical
application of them to the needs of humanity. Thus Archimedes came to
know of things that we now call Copernican, seventeen centuries before
Copernicus was born; thus Columbus and his argosy sailed into the great
unknown, speculating upon an irrational and even shocking exploit; thus
Pasteur saved to France through the meditations of his speculative
mind a sum greater than the cost of the Prussian war and the colossal
indemnity that followed it.

And so the “divine unrest” goes on and on, impelling men to
speculations and explorations of the physical world and of the world
that lies beyond our primitive senses, with here and there a high
achievement, and now and then a miserable failure, but always on and
on. The hypothesis of the spectacled professor blossoms into a boon;
the dream of the inventor becomes a benefaction; the forlorn hope of
the explorer points the way to wealth. Things that were speculations
yesterday become realities to-day. To-morrow?--nobody knows. In a free
field, not bounded by formulæ nor restricted by law of God or man, with
money to encourage it and enterprise to spur it on, what may come from
the speculations of the future passes understanding.

Now speculation is an all-embracing word, overworked, threadbare,
and worn to the bone. Originally it meant “to see”; then “to view,”
“watch,” “spy out”; then “exploration” or “contemplation.” When thrift
came into the language and men ceased burying their gold, it began to
take on a new meaning. The spirit of legitimate adventure, that entered
men’s minds when the Most Christian Kings abandoned brute force and
repudiation, led men to buy things in the hope of selling them at a
profit. It was risky business at first, and capital, then as now, was
timid. The High Finance of the Middle Ages was not easily forgotten.
But little by little channels through which enterprise might flow into
wealth came into being, and confidence came with them. This was called

By the time Adam Smith wrote his “Wealth of Nations” (1776) the word
was firmly fixed in the language. “The establishment of any new
manufacture,” he said, “or any new branch of commerce, or of any
new practice in agriculture, is always a speculation from which the
projector promises himself extraordinary profits.” How the early
channels of speculation broadened into great rivers, how confidence
grew as the art of making money and increasing it developed, how credit
became established, how speculation led to the opening of new countries
and the extension of immense advantages, through civilization, to the
people of those countries--all this is a fascinating story. And yet
the speculation of to-day is no different in its elementals from that
of the early Greeks; the same spirit of “divine unrest” that spurs on
the philosopher in his study stimulates the explorer of strange lands,
beckons on the engineer and the builder of railways, and attracts the
capital of the adventurous investor. We cannot stop it if we would,
because hope, ambition, and avarice are fundamentals of human nature.
The police cannot arrest them; they are fixed and immutable.

If there is more speculation in material things to-day than there ever
was before, it is because there are more things to speculate in, more
money to speculate with, more people to speculate, and more machinery,
like telephones and telegraphs, to facilitate speculation. Capital,
credit, and new undertakings grow day by day and open new avenues of
possible profit. The per capita wealth of nations, growing by what it
feeds on, constantly seeks new fields for enterprise and adventure.
The intelligence of the people increases by leaps and bounds, and goes
peering curiously into all the little nooks and crannies of the world
for opportunities of gain--the apotheosis of speculative enterprise.

All forms of human endeavor in material things are, or were at their
beginning, speculations. Every ship that goes to sea carries with it a
speculation, and leaves another one behind it at Lloyds. Every man who
insures his life or his house buys a speculation, and every company
that insures him sells one. The farmer speculates when he fertilizes
his land, again when he plants his seed, and again when he sells his
crop for future delivery, as he often does, before it is planted or
before it has matured. The merchant contracts to fill his shelves long
before spring arrives; he is speculating. The manufacturer sells to
him, speculating on the hope or belief that he will be able to buy
the necessary raw material, and again on the labor, the looms and the
spindles necessary to make the delivery. In the South the grower of
cotton and in Australia the grower of wool are likewise speculating on
the probability of a crop and on the price at which they may sell to
this manufacturer. It sounds like “this is the house that Jack built”
in its endless chain of sequences; a chain, indeed, and one no stronger
than its weakest link. Interfere with any part of it, and the whole
commercial structure which it binds together falls apart. The grower,
the manufacturer, and the merchant _must_ speculate.

There was twofold speculation on the part of our great financial barons
who built our transcontinental railways, for they had to reckon not
only upon the probability of profit in their undertakings but likewise
upon the willingness of other speculators--you and I--to assist them
by buying a part of the securities which represented the outlay. To
be sure it so happened that many of these vast speculations at first
proved unsound. Some of them were a little premature; others pushed
too far; they brought disaster upon the speculators who had put money
into them. And yet who shall say that our great railways have failed
to enrich the world and spread the comforts of civilization? “But for
a verdant and evergreen faith,” says a recent writer, “salted with the
love of risk and adventure for their own sakes, how could mountains
be bored and waters bridged? If there were not superstition there
could be no religion; if there were not bad speculation there could be
no good investment; if there were no wild ventures there would be no
brilliantly successful enterprises.”

This is not hyperbole; it is fact. The world of business and enterprise
must go on; it cannot stop. As it goes on capital must be enlisted,
which is another way of saying that speculators must be attracted. The
only way that has been devised to attract them is through the medium of
certificates of ownership or evidences of debt, called securities. But
the business does not end there, for, as we have seen in the previous
chapter, the capital of speculators will not take hold unless a market
is provided. They want to know where they stand; before they venture
upon the troubled waters of new enterprises they must be assured of a
public market, a harbor where they can get ashore quickly if storms are

The only plan that the ingenuity of man has thus far devised to meet
this emergency is a Stock Exchange. One man, or two, or a hundred
cannot make a market, because the immense volume and variety of these
securities make it impossible for any unorganized handful of brokers
and dealers to determine a fair market price. What is required, and
what the man whose capital is wanted insists upon, is an organized
body of brokers, speculators, and investors competing keenly, seeking
to buy cheap and sell dear, gathering and disseminating all the news,
and so sharpening the judgment and stimulating the higgling of buyers
and sellers as to bring prices to their legitimate level and give
them stability. Ten thousand competitors in this business of bringing
prices and values together are of course better than one thousand; a
hundred thousand would be better still. The Stock Exchange supplies
this want, and will continue to supply it until a better plan is
devised.[16] Meantime, since it has grown to its present stature by
forms of speculation necessary to the maintenance of enterprise, any
serious interruption of the facilities it affords will bring enterprise
to a standstill and cause the whole sensitive structure of credit to
collapse in terror. Let Professor Seligman explain this matter:

  “If a railway or other industry, in launching a new enterprise, had
  to depend on the chance investors at the time of the issue of the
  securities, it would be seriously hampered. The mere knowledge that
  at any moment there will be a ready sale on the Exchange greatly
  increases the circle of purchasers, many of whom may not intend to
  be permanent investors. The Stock Exchange aids the investment of
  capital, as the Produce Exchange aids the production of finished
  commodities. Business orders and corporate needs are intermittent,
  because they depend on temporary exigencies; the risks at one end,
  at all events, are eliminated by the unintermittent, continuous
  market which regular speculation affords. The Cotton Exchange
  was the result of the disorganization of the cotton trade after
  the Civil War; speculation in all other staples has in the same
  way been the consequence of the efforts of the manufacturer to
  avert the risks of intermittent and spasmodic fluctuations in
  the raw material. The result of regular speculation is to steady
  prices. Speculation tends to equalize demand and supply, and
  by concentrating in the present the influences of the future
  it intensifies the normal factors and minimizes the market
  fluctuation. Speculation so far as it has become the regular
  occupation of a class, differentiated from other business men for
  this particular purpose, subserves a useful and in modern times an
  indispensable function.”[17]

Here we have an authority who tells us that speculation in securities,
no less than in raw materials, is “an indispensable function” if
business is to go ahead. The last census shows that 32½ per cent. of
the population of the United States is composed of laboring men, not
counting agricultural workers. This large army of men is by no means
independent; on the contrary it is strictly dependent on the ability
of others to give it employment. Shut down the factories, curtail the
operations of railways, close the mines and quarries, stop building and
new construction, and in greater or less degree suffering and privation
among these large masses must ensue.

Now go a step further, and we find that the managers of these railways,
mines, and factories, are in turn dependent--wholly dependent upon
capital. They cannot go ahead with the extensions and improvements
necessary to efficiency without borrowing money; and credit, in turn,
will not come to their support unless a broad market is provided,
through the Stock Exchange, for the securities which represent these
obligations. Hence we see that just as every farmer in the West and
every cotton-grower in the South must have a stable market for his
products, so every laborer in our great industrial field is directly
concerned with the maintenance of a stable market for the securities of
the company that employs him. The interests of one are the interests of
all, and speculation, in one form or another, underlies all industrial
progress. “Complaint is made of the evils of speculation,” said the
greatest of French economists, “_but the evils that speculation
prevents are much greater than those it causes_.”[18]

Now that we have reached a point in our discussion that brings us
face to face with the so-called “evils” of speculation on the Stock
Exchange, let us pause and consider the difference between speculation,
which is held by many to be abhorrent, and investment, which is
generally thought right and proper. The first thing we encounter
is the shadowy and indistinct boundary line that separates the one
from the other. Does any one know where the one begins and the other
ends? France has more conservative investors than any other country,
yet, as Mr. Hirst puts it, the most critical and hidebound buyer of
French rentes is a speculator in the sense that he not only wishes his
purchase to yield him interest, but also hopes and expects that sooner
or later he will be able to sell out at a profit, all of which is
legitimate, proper, and human. The first question every man asks when
the time comes to invest is, “Is this a good time for investment?” “Am
I buying cheap?” by which he means “Are these investments likely to
enhance in value?”

He may have bought Spanish bonds at low prices during the war between
Spain and the United States--a somewhat speculative investment--and
in his purchase he believed himself an investor in a strict sense.
Yet, when those bonds recovered to a normal basis and he sold out at
a profit, was it speculation, or investment, or a little of both,
that defined the trade? British consols are low to-day, and there
is of course no safer investment, but the investor who buys them is
influenced by the fact that a long period of peace seems to lie ahead,
with reduced expenditures for armament and hence with diminished
borrowings by the Government leading to a substantial recovery in
the price of these solid securities. Such a man is “speculating” on
England’s abstention from war, on its limitation of military and naval
expenditures, and on the probable effects of these matters on the price
of his consols.[19]

The truth seems to be that all investment is speculation, differing
from it in degree but not in kind. This salient fact was recognized
as long ago as 1825, when, despite the comparatively limited field
for investment enterprise, McCulloch saw what was coming and grasped
the true idea of the part speculation and its handmaiden, investment,
were to play in the industrial renaissance. Coming at a time when
speculation was new, and subjected, as all innovations are, to
widespread criticism and doubt, his words have prophetic significance.

“It is obvious that those who indiscriminately condemn all sorts of
speculative engagements have never reflected on the circumstances
incident to the prosecution of every undertaking. In truth and reality
they are all speculations. Their undertakers must look forward to
periods more or less distant, and their success depends entirely
on the sagacity with which they have estimated the probability of
certain events occurring, and the influence which they have ascribed
to them. _Speculation is, therefore, really only another name for
foresight_; and, though fortunes have sometimes been made by a lucky
hit, the character of a successful speculator is, in the vast majority
of instances, due to him also who has skilfully devised the means
of effecting the end he had in view, and who has outstripped his
competitors in the judgment with which he has looked into futurity, and
appreciated the operation of causes producing distant effects.”[20]

A quarter of a century later we find England’s foremost thinker
sounding the same clear note. John Stuart Mill was by no means a hermit
philosopher feeding on theories. Traveler, sportsman, business man,
statesman, and author, he saw things broadly and wrote for practical
men. “Speculators,” he said--and he was speaking of the “greedy” ones
who buy and sell for gain--“have a highly useful office in the economy
of society. Among persons who have not much considered the subject
there is a notion that the gains of speculators are often made by
causing an artificial scarcity; that they create a high price by their
own purchases and then profit by it. This may easily be shown to be
fallacious.” He then shows, what I have outlined elsewhere, that the
market is larger than any speculator or group of speculators, and, if
this was true in 1848, I think it will not be disputed that it is quite
true to-day.

Continuing, Mill says: “The operations of speculative dealers are
useful to the public whenever profitable to themselves. The interest of
the speculators as a body coincide with the interests of the public;
and as they can only fail to serve the public interest in proportion as
they miss their own, _the best way to promote the one is to leave them
to pursue the other in perfect freedom. Neither law nor opinion should
prevent an operation, beneficial to the public, from being attended
with as much private advantage as is compatible with full and free
competition_.” Mill makes no distinction here between investors and
speculators; they are one and the same. In any case it is conceded that
speculation is what makes the markets to-day, since 90 per cent. of
the transactions that take place daily on the world’s Stock Exchanges
are speculations pure and simple. And this is a good thing. Before we
go on with our subject, let Professor Emery explain why, and bring the
teachings of McCulloch and Mill down to our own day:

  “Speculation has become an increasingly important factor in the
  economic world without receiving a corresponding place in economic
  science. In the field in which it acts, in the trade in grain and
  cotton and securities and the like, speculation is the predominant
  influence in determining price, and, as such, is one of the chief
  directive forces in trade and industry. But treatises in the
  English language on general economic theory and conditions have
  given very little space to this influence, which is fundamental in
  the world of economic fact....

  “It is true that forty years ago speculation was far less important
  than it is now, and there was, therefore, more justification for
  disregarding it. Professor Hadley has given due consideration to
  the new conditions which prevail in modern business. At the same
  time it should be remembered that McCulloch, already in his day,
  had grasped the true idea of the function of speculation, a fact
  shown by the incorporation of his treatment of the subject into his
  chapters on Value. Wide as is the influence of speculation, its
  force is felt primarily in the field of prices. By making prices it
  directs industry and trade, for men produce and exchange according
  to comparative prices. Speculation then is vitally connected with
  the theory of value.

  “From the point of view of theory, therefore, it is incorrect to
  attach so little importance to the function of speculation; in
  practice it is impossible to deal intelligently with the evils of
  the speculative system without first recognizing its real relation
  to business. Both the writer and the reformer must reckon more than
  they have yet done with the fact that speculation in the last half
  century has developed as a natural economic institution in response
  to the new conditions of industry and commerce. It is the result of
  steam transportation and the telegraph on the one hand, and of vast
  industrial undertakings on the other. The attitude of those who
  would try to crush it out by legislation, without disturbing any
  other economic conditions, is entirely unreasonable.”[21]

Now we come to the evils of the business. That there are evils, really
serious ones, no one will deny. To be sure many of the phases of
speculation that are called evils are not evils at all; the statements
made concerning them have what Oscar Wilde termed “all the vitality of
error, and all the tediousness of an old friend,” and yet, although
the prevalent criticism is often stupid and superficial, there are
undeniably offensive forms of speculation that one would like to see
suppressed. Speculation is a comparatively new phenomenon, and it
has brought with it dangers and pitfalls. So also have automobiles,
electricity, and steam engines. But while the Stock Exchange has
created the arena for the display of these abuses, it has not
originated them “except,” as a recent writer puts it, “in the sense in
which one may say that private property has originated robbery.”

The great evil of speculation consists in the buying of securities
or real estate or anything else with borrowed money, by uninformed
people who cannot afford to lose. Its commonest form in speculation
in securities is what is known as “margin” trading, this name being
derived from the fact that the buyer, instead of paying cash in full
for his purchase, deposits only a fractional amount of its cost, which
is intended to serve as a margin to protect the broker from loss, while
the broker pays the remaining sum necessary to complete the actual
purchase. Thus the speculator may deposit $1000 on securities costing
$10,000, while the broker furnishes the additional $9000. It is a
system in use everywhere; on the London Stock Exchange it is called
“Cover,” on the Paris Bourse, “La Couverture.”

There is no fixed amount of margin called for by brokers, as
circumstances differ widely with the character of the securities dealt
in, the standing of the buyer, and the condition of the market; but in
a broad way it may be said that members of the New York Stock Exchange
exact a margin equivalent to ten points on middle-grade speculative
issues, twenty points on high-priced and erratic securities, and five
points on very low-priced shares that move slowly. There are, of
course, certain securities on which no payment short of actual outright
purchase in full would be accepted by reputable brokers, while on the
other hand, in the case of securities that fluctuate but slightly,
such as our government, state, or municipal bonds, a 5 per cent.
margin would be ample. This is also the practice in London and Paris,
generally speaking. In Paris the _Agents de Change_ always insist upon
a greater margin than the _Coulissiers_, or outside brokers, and here
members of the New York Stock Exchange invariably pursue the same

This affords an opportunity to say that the local evil of stock
speculation arising from insufficient margins is one that may be laid
at the door of outside Exchanges rather than the “Big” Exchange, as it
is called, because, in the minor Exchanges, margins are notoriously
small, and the smaller the margin the greater the number of “victims.”
Indeed, if it were not for this practice it would be difficult for
members of smaller Exchanges to exist at all. In so far as speculation
in securities may merit criticism, this tendency to attract poor people
by the bait of slim margins is undeniably a very real evil, and one
which can only be corrected by the brokers themselves. The Hughes
Committee, after devoting much time and labor to this matter, put its
conclusions in these words:

“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.”[22]

Every one connected with the New York Stock Exchange knows that this
suggestion, like all the others made by the Commission, was received
with approval by all hands, and, if a hard and fast rule could have
been devised to meet not merely the spirit but the letter of the
recommendation, the Governors of the Exchange would have put it into
instant operation. But there are difficulties in the way, and one of
the duties of the Governors is to consider very carefully all sides
of each perplexing question that comes before them, not merely in the
interests of the Stock Exchange, but with due regard to the common
law and the interests of the public. Margin trading is a matter of
contract, and “the right of one private person to extend credit to
another,” as the Chairman of the Hughes Commission himself points out,
“is simply the right to make a contract, which, under the Federal
Constitution, cannot be impaired by any State Legislature.”[23]

Here is a very considerable difficulty in the way of restricting margin
trading, and one that is not fully understood by the outsider. He is
prone to speak of contracts thus made as “gambling transactions,”
missing altogether the essential point that there is a vast difference
between a transaction with a contract behind it, enforceable at law,
and one that has to do with bucket-shops and roulette, in which there
is no contract, and is expressly prohibited by law. No matter what
his intent may have been when he bought, and no matter what margin
the broker accepted--the buyer has the right to demand his securities
at any time, and the broker must always be prepared to deliver them;
conversely, the broker may compel the buyer to pay for and to receive
the securities he has bought. Motives and methods have nothing whatever
to do with the transaction.

The broker who buys for a client to-day does not know, and sometimes
the client himself does not know, whether the securities are “bought to
keep,” or are to be sold to-morrow; similarly the broker has no means
of knowing whether the client, who deposited a ten-point margin at
the time of his purchase, will or will not deposit another ten points
to-morrow, and continue such payments until his securities are wholly
paid for. In the large majority of cases the intent of the speculative
buyer is to sell as soon as he can get a satisfactory profit, but
that does not make him a gambler by any means. Why? Because, if he
bets $1000 on a horse race, one party to the transaction wins and the
other loses; whereas, if he deposits $1000 as margin against a stock
speculation and makes a profit of say $500, the broker loses nothing
by paying him that profit when the account is closed. No property
changes hands in the one case, while, in the other, actual property is
purchased and held ready for delivery on demand. The law is clear in
classifying the operations of bucket-shops with gambling transactions,
because in a large majority of instances no actual purchase is made;
the “buyer” merely bets in that case as to what subsequent quotations
will be; the “trade” is between two principals, one of whom must lose
if the other wins.

The Hughes Commission, as I have said, went very fully into all
these matters. It was in session six months, and many witnesses were
examined. After considering all the pros and cons of margin trading,
the experience of England and Germany in dealing with speculation, the
three-years’ debate in Congress on the Hatch Anti-Option Bill, and
the voluminous reports of the Industrial Commission, the conclusion
was reached “to urge upon all brokers,” as shown in the paragraph
cited, a general agreement on margins of not less than 20 per cent.
It must be borne in mind that this was not in the nature of a formal
recommendation, but rather as the expression of a hope that some
measure of reform might be accomplished if such concerted action by
brokers were feasible.

That members of the New York Stock Exchange endorse this view goes
without saying. They realize more fully than is generally known by
the public that indiscriminate and reckless speculation by uninformed
people who are beguiled into it by the lure of small margins is an
undoubted evil that should be checked, and they are doing what they
can to check it by discouraging such operations. For example, it would
be very difficult to-day for a woman to open a speculative account
with any reputable firm of brokers on the major exchange unless she
were well known, peculiarly qualified for such transactions, and
abundantly able to support them. Accounts will not be accepted from
clerks or employees of other brokerage houses or of banks and other
corporations in the Wall Street district; indeed, such transactions
are expressly forbidden by the rules of the Exchange. No accounts
will be accepted from any one who is not personally known to one of
the firm’s partners--and the practice resorted to in earlier years of
employing agents to solicit business under the nominal title of “office
managers,” “bond department managers,” and all that sort of technical
subterfuge, is likewise forbidden.

Members of the Exchange are not permitted to advertise in any way save
that defined as of “a strictly legitimate business character,” and
the governors are the judges of what is legitimate. The layman has
but to glance at the bare and colorless announcements made by Stock
Exchange houses in the advertising columns of our newspapers to see
how rigidly this rule is enforced; indeed 90 per cent. of the members
do not advertise at all. Best of all, speculation on “shoe-string”
margins is now almost eliminated from the major exchange. The houses
that notoriously offended in this respect ten and fifteen years ago are
to-day inconspicuous in the day’s dealings. Their business is gone--in
its very nature it could not last long--and if rumor be credited its
demise carried with it a part of the capital of the firms involved.
It was a lesson and a warning. All these instances serve to show that
the Stock Exchange is doing what it can to remedy this evil, and,
if circumstances arise in which more can be done, the governors and
members will be found a unit in enforcing whatever restrictions are

At the moment it is difficult to see how an inflexible rule of 20 per
cent. margins could be put in practice without seriously interfering
with really sound business. A telegraphic order may be received from a
customer of the utmost responsibility who may happen to be in Europe.
Any stockbroker, and any business man in mercantile trade, would be
glad to execute for such a person all the orders he chose to entrust,
regardless of margins. In such a case no question of motive enters into
the transaction; it may ultimately prove to be a speculation pure and
simple, or the buyer may cable instructions to deliver the securities
to his bank, in which case it would seem to be an investment; but,
regardless of that, an insistence by the broker on a 20 per cent.
margin would be silly, and would merely drive the business elsewhere or
prevent it altogether.

Numerous instances of a similar sort might be cited to show how
difficult it would be to enforce margin prohibitions in all these
perfectly legal contracts. Germany tried it in the law of 1896, with
disastrous consequences, which I have described elsewhere. It is a
matter that will always be a fruitful topic of discussion, yet it
differs in no essential respect from the practice of a speculator in
real estate who pays down a small percentage of a purchase price and
borrows the balance on mortgage. It is similar to what the merchant
does when he fills his shelves with goods bought with a fractional
payment in cash and the balance at some future date. In all these cases
involving property let me repeat that the deposit of a specified sum
by the principal and an agreement or contract with the broker is a
perfectly valid transaction.[24]

That newspaper criticism and attacks by social mentors should go to
extreme lengths in deprecating stock speculation by crude, greedy,
and unsophisticated people is perhaps, after all, a perfectly useful
function, and if such critics err in going to great extremes, that too
may be set down as right and proper, for it is perhaps better to go
too far than not to go far enough. The interests of the Stock Exchange
are the interests of the whole country; its welfare depends upon an
intelligent and thrifty people; its aims are public-spirited and
patriotic. Whatever it may lose in the way of business from ignorant
and silly people who are driven out of blind speculative undertakings
leading to losses which they can ill afford, it will gain tenfold
in imparting sound information through candor and publicity. On the
other hand, unless we are prepared to abolish property altogether,
do away with the instruments of credit, and suppress all forms of
trading designed to supply our future requirements, we may as well
reconcile ourselves to the inevitable and take what comfort we may
in the reflection that prudence, thrift, and foresight are not to be
eliminated, merely because the proletariat below stairs sometimes
indulges in speculation and suffers the consequences of its folly.

“Finally,” writes Professor Emery, “the question must be faced of the
effect of eliminating the public from the speculative market even
if it could be accomplished. It is supposed sometimes that such a
result would be all benefit and no injury. On the contrary, the real
and important function of speculation in the field of business can
only be performed by a broad and open market. Though no one would
defend individual cases of recklessness or fail to lament the disaster
and crime sometimes engendered, the fact remains that a ‘purely
professional market’ is not the kind of market which best fulfils the
services of speculation. _A broad market with the participation of an
intelligent and responsible public is necessary. A narrow professional
market is less serviceable to legitimate investment and trade and much
more susceptible of manipulation._”[25]

One of the difficulties with which men have to contend in a big country
like this is the apparent inability of large masses of the people to
understand other large masses. Distances are so great, occupations
so diverse, and enterprise so confining, that one whole section of
the country may not and often does not know what another section is
doing. Men are too busy to learn by travel and reading that which, in
the interest of the whole country, they should thoroughly understand.
Thus it happens that a section of the country given over, let us
say, to agricultural pursuits, having first acquired the notion that
speculation in securities is only a form of legalized robbery, assumes
that to New York City and the New York Stock Exchange is confined a
greater part of the stock speculation of the world. We have seen the
fallacy in the first of these hasty conclusions; the second may easily
be explained away.

Yankee speculation in securities is not a marker to speculation
in London, where the day to day trading vastly exceeds ours, and
where the “Kaffir Circus” of 1894–5 and the “Rubber Boom” of 1909–10
exceeded any similar outburst ever known in America. France is the most
prudent and thrifty of nations, yet the Panama mania which collapsed
in 1894, although followed by a period of the utmost repentance and
conservatism, found a parallel in the crazy French speculation in
Russian industrials which crashed in 1912. There was an extraordinary
speculation in Egyptian land and financial companies in Cairo in
1905–6, which, in proportion to the number of participants, greatly
exceeded any boom in New York. China awakens slowly, but, once its
political reforms are effected, a field of extraordinary speculation
will open there without a parallel in history. The Chinaman is not
only a shrewd and competent business man, but he is, Mr. Hirst tells
us, “a confirmed and incurable” speculator. “From time to time,” says
this writer, “the Shanghai Stock Exchange becomes a scene of the
wildest speculation, and it is safe to predict that, when a new China
is evolved, Stock Exchanges will spring up in all the large towns. Of
this, a foretaste was afforded in the spring and summer of 1910, when
Shanghai caught the rubber infection from London. All classes and races
took part, but the native Chinaman plunged deepest. When the break
in prices came, one Chinese operator was so heavily involved that, on
his failure, many of the native banks had to suspend payment, with the
result that for months the trade and credit of this great shipping and
business centre were disorganized.”[26]

I mention these incidents to show that speculation is not confined
to geographical limits. It is all a part of the “divine unrest”
inherent in each of us, and it develops and grows intense just in
proportion with the march of the civilization it serves to benefit.
In new countries, as in China, it may often go too far; sometimes in
old countries it oversteps the bounds of prudence, but any student of
these phenomena knows that, as economic processes become understood by
the masses, the intervals of time between the panics that result from
over-speculation grow wider and wider.

Another mistake of those sections of the country that do not understand
the Stock Exchange results from the indiscriminate blending of that
institution with Wall Street. Let us hear from Mr. Horace White on this
point. He was the chairman of the last committee that investigated the
Stock Exchange; he is one of our foremost economists, and he may be
assumed to understand his subject:

  “There is a widespread belief that Wall Street and the Stock
  Exchange are one and the same thing, and that all the fluctuations
  on the Exchange are caused by Wall Street. This is an error as
  glaring as it would be to suppose that all the water in the
  Mississippi River comes from the adjacent banks, ignoring the
  innumerable streams and rills that contribute their quota from
  countless unseen sources. Wall Street and the Stock Exchange are
  two different things. The men on the floor of the Exchange are the
  agents of others, executing the orders which they receive both from
  Wall Street and from other parts of the habitable globe. Some of
  them speculate on their own account, but the speculating members
  of the Exchange are divided into bulls and bears. They do not all
  push in the same direction at any one time. They simply aim to
  anticipate, each for himself, the drift of financial public opinion
  in order to take advantage of it.

  “This is what Wall Street outside of the Exchange does; and the
  only advantage which speculators in Wall Street have over those in
  other parts of the country is derived from larger capital, more
  direct and ample sources of information, and greater skill and
  promptness in the use of it. Wall Street speculators are likewise
  divided into bulls and bears pushing against each other; and all
  their advantages do not save them from making mistakes, which often
  result in losses proportioned to the magnitude of their operations.
  The ‘rich men’s panic’ of 1903 was such an instance. The panic of
  1907 was another. It is sometimes said that Wall Street can put
  prices on the Stock Exchange up or down at its own pleasure. This
  is a delusion.”[27]

Members and friends of the New York Stock Exchange view with
apprehension the periodic attacks upon their great institution made
by those who, for reasons not to be discussed here, wish to attract
popular attention. But there is no reason why these matters should
excite alarm. The Exchange purified itself long ago of the old abuses,
new ones as they occur meet with severe disciplinary measures, and it
has a certificate of good character in the report made to the sovereign
State of New York by the Hughes Commission. This commission has stated
explicitly that margin trading is a matter of contract guaranteed by
the Federal Constitution. It is not conceivable that any legislature
can ignore such a report, by such a commission, nor is it possible
that, in such event, any court could be found to uphold legislation
directed at random against an institution that bears the endorsement of
all students of economics.

One has but to read the decisions of the courts to see that the
matter of non-interference with the great Exchanges, on technical
grounds, has become a fixture in our jurisprudence. “The Exchanges,”
said Judge Grosscup of the United States Circuit Court, “balance
like the governor of an engine the otherwise erratic course of
prices. They focus intelligence from all lands, and the prospects
for the whole year, by bringing together minds trained to weigh such
intelligence and to forecast the prospects. They tend to steady the
markets more nearly to their right level than if left to chance or
unhindered manipulation.”[28] In somewhat similar vein Justice Holmes
of the United States Supreme Court, said: “Speculation ... is the
self-adjustment of society to the probable. Its value is well known
as a means of avoiding or mitigating catastrophes, equalizing prices,
and providing for periods of want. _It is true that the success of the
strong induces imitation by the weak, and that incompetent persons
bring themselves to ruin by undertaking to speculate in their turn.
But legislatures and courts generally have recognized that the natural
evolutions of a complex society are to be touched only with a very
cautious hand, and that such coarse attempts at a remedy for the waste
incident to every social function as a simple prohibition and laws to
stop its being, are harmful and vain._”[29]

With these opinions before them, so long as the governors of the Stock
Exchange continue their policy of a wise and dignified administration
in the interest of the public they serve, there is nothing to fear.
Corrections, remedies, improvements, and reforms will be found to
be necessary from time to time--some of them are necessary at this
moment, and the governors are hard at work on the task. To accuse
them of indifference or neglect of duty is to deny them that form
of intelligence which enables a man to protect his property. Their
splendid institution has grown to its present importance and power
through economic development that could not have been foreseen nor
prevented. Speculation on a large scale has accompanied its growth,
and contributed to it; and speculation, as we have seen, is a highly
desirable and useful part of all business. This speculation numbers
among its adherents people in all parts of the world who have a perfect
right to speculate, and who do vastly more good than harm in their

It has also attracted a great many people who have no business to
speculate, and who would be prevented from doing so if it were
possible. The ignorance and cupidity of these people is so great,
and the pitfalls provided them by unscrupulous, methods outside the
Exchange are so many and various that something has to be done to
protect them. The Stock Exchange does not encourage them, but it
recognizes that they have legal if not moral rights, and it stands
ready to help them. It gives to such people the same information that
it gives to the richest investor in the land. The securities in which
it deals are known to be free from taint; all forms of crookedness
are prohibited; every transaction within its walls is made openly, as
a result of free competitive bidding, and published broadcast to the
world. What more, and what less, can be done? Has there ever been a
time in the world’s history when property and trade were so secure,
and when speculation, which makes property and trade, was so jealously



The operations of “bears” in the great speculative markets and the
practice of “short selling” are riddles which the layman but dimly
comprehends. Buying in the hope of selling at a profit, and if need
be, “holding the baby” for a long time and “nursing” it until the
profit appears, is simple enough; but an Oedipus is required to solve
the enigma of selling what one does not possess, and of buying it at a
profit after the price has cheapened. It is the most complicated of all
ordinary commercial transactions. How the thing can be done at all is
a mystery; how such a man can serve a really useful economic purpose
by this process is unfathomable. The layman who tries to figure it out
thinks there is an Ethiopian somewhere in the wood-pile; the thing is
unreal and fictitious. The only way he can understand it is to turn
bear himself and learn by experience.

Why there should be so many bulls and so few bears can only be
explained on the ground that optimism is the basis of speculation, and
hope the essence of it. Yet the market can only go two ways: it is
quite as likely to go down as up. Since sentiment should have no place
in speculation one would think there should be as many bears as bulls,
more of them, in fact, because the market almost always goes down
faster than it goes up, and because nine out of ten of the unforeseen
things that occur result in lower prices.

Accidents like diplomatic entanglements, rumors of war, earthquakes,
and drought are constantly occurring to upset the plans of bulls and
bring fat profits to bears in a hurry, while matters that bring about
higher markets are generally things long anticipated, in which the
profits that accrue to the bulls come about slowly and laboriously,
and always with the attendant risk that a disturbance in any corner of
the globe may bring on a sudden smash that will undo the upbuilding of
months. In theory, therefore, there should be at least as many bears
as bulls in all active markets, but in practice the large majority are
always bulls, to whose sanguine and credulous natures the bear is a
thing apart--a gloomy and misanthropic person hovering about like a
vulture awaiting the carrion of a misfortune in the hope of a profit.
Naturally the layman cannot understand him, and would like to suppress

Despite the fact that the odds seem to favor the bears, there is an
old and true saying that no Ursa Major ever retired with a fortune.
Wall Street has seen many of them, and with perhaps one exception the
records agree that the chronic pessimists have not succeeded. Fortune
seems to have smiled on them at intervals; in the country’s early days
of construction and development mistakes were made that brought about
disaster, but in the long run such tremendous progress has resulted
in America as to defeat the aspirations of any man or group of men
who stood in its way. The big bears, as a rule, have “over-stayed
the market.” Imbued with the hope that worse things were in store,
they have been swept away by the forces they sought to oppose. One of
them, a power in his day, was so obsessed with the notion that all
prices were inflated, that he has been known to sell stocks short
“for investment.” One night when a lady at his side remarked on the
beauty of the moon, he is said to have replied with that absent-minded
mechanical skepticim inherent in the bear, “yes, but it’s too high; it
must come down.”

One would think the ideal temperament for a speculator would be
absolute impartiality, with an open mind uninfluenced by sentiment,
ever ready to take advantage of all fluctuations as they occur. The
ups and downs of a stock market always show, on average long periods,
a practically equivalent swing each way, so it would seem that the
speculator most likely to profit by these fluctuations would be one
without preconceived prejudices, ready at all times to turn bull or
bear as the occasion required. As a matter of fact, this type is the
rarest of all, being confined, generally speaking, to the professional
“traders” on the large exchanges, necessarily a very small minority
of the speculative group, yet withal perhaps the most uniformly
successful. These men, it must be understood, are not speculators, but
traders, a nice distinction involving “catching a turn,” as opposed to
the speculative habit of “taking a position.”

In active times I have known one of them to operate simultaneously
in the New York Stock market, in the cotton market, and in the wheat
market, trading at the same time in London and Paris, “shifting his
position,” or “switching” from the bull to the bear side twice in a
single day, and closing all his trades at three o’clock with a total
net profit of less than a thousand dollars on a turnover of 30,000
shares, to say nothing of the transactions in cotton and grain. It
goes without saying that to do all these things in one day requires
a curiously mercurial temperament, and calls for nerve and celerity
altogether foreign to the average speculator. Such a man, moreover,
contributes but little to the making of prices and values, which is the
function of large markets; his chief economic usefulness lies rather in
the enormous revenues he pays to the State. The man whose operations I
have just described contributed in a single year $75,000 to the State
Government in stock-transfer taxes.

The scientific way to measure the value of speculators in wide markets
is to consider the bull as one whose purchases in times of falling
prices serve to minimize the decline, and the bear as one who serves a
doubly useful purpose in minimizing the advance by his short sales and
in checking the decline by covering those sales. All these operations
serve useful economic purposes, since the more buyers and sellers there
are, the greater the stability of prices and the nearer the approach of
prices to values.

This, as I have said, is the scientific way to look at it, and the
correct way, but the popular way is something quite different. From
this point of view the man who sells property he does not immediately
possess is thought to be a menace, who depresses prices artificially
and works a disadvantage to the investor or, in the produce markets,
to the producer. Nothing could be more fallacious than this, because
of the fact that just as every routine sale of actual stock requires
a buyer, so every short sale by a bear requires a purchase by him of
equal magnitude. And it is precisely these repurchasing or “covering”
operations of the bears that do the utmost good in the way of checking
declines in times of panic or distress.

When there are no bears, or when their position is so slight as to be
inconsequential, declines are apt to run to extreme lengths and play
havoc with bulls. One often hears among acute and clever speculators
the expression “the bears are the market’s best friends,” and, though
this may seem incongruous, it is quite true. In the month in which
these lines are written there has occurred, for example, a really
severe break in prices on the Stock Exchanges at London, Paris, and
Berlin, arising from the periodic Balkan crisis. This decline ran to
disproportionate extremes, and, in fact, approached such demoralization
that more than 300,000 shares of American securities held abroad
were thrown on the New York market for what they would bring. The
reason for the severity of this decline was easily explained. The
outstanding speculative account at all European centres, while not
actually unwieldy, was almost entirely in the nature of commitments
for the rise. There was no bear account. Therefore all Stock Exchanges
were supersensitive since they lacked the steadying influence which
covering by the bears invariably brings about. The bears are then, in
truth the market’s best friends, and the more there are of them, the
better for all concerned when trouble comes.

Throughout all the political agitation in Germany which culminated
in that disastrous failure, the Bourse Law of 1896, there appears to
have been very little opposition to the bear and the practice of short
selling; nevertheless in that section of the law which prohibited
dealings for future delivery the bears found their activities
restricted. The law has now been amended, having proved a wretched
fiasco, but in the decade which attended its enforcement it was curious
to note the unanimous cry that went up in Germany for the restoration
of the bear. His usefulness in the stock market no less than in the
commodity market was recognized; his suppression was deplored. It was
found that just as his activities were restricted so the tendency
toward inflated advance and ultimate collapse was increased. The market
became one-sided, and hence lop-sided; quotations thus established were
unreal and fictitious. Moreover there was an incentive to dishonesty,
for unscrupulous persons could open a short account in one office and a
long account in another, and if the bear side lost they could refuse
to settle on the ground customarily resorted to by welchers.

“The prices of all industrial securities have fallen,” said the
Deutsche Bank in 1900, “and this decline has been felt all the
more because by reason of the ill-conceived Bourse Law, it struck
the public with full force without being softened through covering
purchases”--i. e., by the bears. Again, four years later, when the law
was still in force, the same authority states “a serious political
surprise would cause the worst panic, because there are no longer any
dealers (shorts) to take up the securities which at such times are
thrown on the market.” The Dresdner Bank in 1899 reported that the
dangers arising from this prohibition cannot be overestimated “if with
a change of economic conditions the unavoidable selling force cannot be
met by dealers willing and able to buy.”

“Short sellers do not determine prices,” says Professor Huebner. “By
selling they simply express judgment as to what prices will be in the
future. If their judgment is wrong they will suffer the penalty of
being obliged to go into the market and buy the securities at higher
prices. Nine tenths of the people are by nature ‘bulls,’ and the higher
prices go, the more optimistic and elated they become. If it were not
for a group of ‘short sellers,’ who resist an excessive inflation, it
would be much easier than now to raise prices through the roof; and
then, when the inflation became apparent to all, the descent would
be abrupt and likely unchecked until the basement was reached. The
operations of the ‘bear,’ however, make excessive inflation extremely
expensive, and similarly tend to prevent a violent smash because the
‘bear,’ to realize his profits, must become a buyer. The writer has
been told by several members of the New York Stock Exchange that they
have seen days of panic when practically the only buyers, who were
taking the vast volume of securities dumped on the exchange, were those
who had sold ‘short,’ and who now turned buyers as the only way of
closing their transactions. They were curious to know what would have
happened in those panic days, when everybody wished to sell and few
cared to invest, if the buying power had depended solely upon the real
investment demand of the outside public.

“In reply also to the prevalent opinion that ‘short selling’ unduly
depresses security values, it should be stated that ‘short sellers’ are
frequently the most powerful support which the market possesses. It is
an ordinary affair to read in the press that the market is sustained
or ‘put up’ at the expense of the ‘shorts’ who, having contracted
to deliver at a certain price can frequently easily be driven to
‘cover.’ Short selling is thus a beneficial factor in steadying prices
and obviating extreme fluctuations. Largely through its action, the
discounting of serious depressions does not take the form of a sudden
shock or convulsion, but instead is spread out over a period of time,
giving the actual holder of securities ample time to observe the
situation and limit his loss before ruin results. In fact, there could
be no organized market for securities worthy of the name, if there did
not exist two sides, the ‘bull’ and the ‘bear.’ The constant contest
between their judgments is sure to give a much saner and truer level of
prices than could otherwise exist. ‘No other means,’ reports the Hughes
Committee, ‘of restraining unwarranted marking up and down of prices
has been suggested to us.’”[31]

So much for the functions of the bear in markets that deal in invested
capital. In the commodity markets he becomes of even greater value,
indeed, he is well-nigh indispensable. Mr. Horace White, who was the
Chairman of the Hughes Investigating Committee, cites this instance:
“A manufacturer of cotton goods, in order to keep his mill running all
the year round, must make contracts ahead for his material, before
the crop of any particular year is picked. The cotton must be of a
particular grade. He wishes to be insured against fluctuations in both
price and quality; for such insurance he can afford to pay. In fact he
cannot afford to be without it. There are also men in the cotton trade,
of large capital and experience, who keep themselves informed of all
the facts touching the crops and the demand and supply of cotton in the
world, and who find their profit in making contracts for its future
delivery. They do not possess the article when they sell it. To them
the contract is a matter of speculation and short selling, but it is a
perfectly legitimate transaction.

“To the manufacturer it is virtually a policy of insurance. It enables
him to keep his mills running and his hands employed, regardless
of bad weather or insect pests or other uncertainties. The same
principles apply to the miller who wants wheat, to the distiller, the
cattle-feeder, and the starch-maker who wants corn, to the brewer
who wants hops and barley, to the brass founder who wants copper,
and so on indefinitely. Insurance is one of two redeeming features
of such speculation; and the other, which is even more important, is
the steadying effect which it has on market prices. If no speculative
buying of produce ever took place, it would be impossible for a
grower of wheat or cotton to realize a fair price at once on his crop.
He would have to deal it out little by little to merchants who, in
turn, would pass it on, in the same piecemeal way, to consumers. It is
speculative buying which not only enables farmers to realize on their
entire crops as soon as they are harvested, but enables them to do so
with no disastrous sacrifice of price. When buyers who have future
sales in view compete actively with each other, farmers get fair prices
for their produce.”[32]

And, it may be added, the same satisfactory result is attained when
bears who have sold the farmer’s crop short come to cover their short
sales by buying in the open market; their buying steadies the market if
there is a tendency to decline; if the market is strong, their buying
helps make it stronger. In either case they are the farmer’s best
friends, because the farmer profits as prices advance.

Speaking of farmers, it is well known that much of the opposition
to short selling and dealing in futures in the large markets finds
its chief advocates among the Western and Southern politicians whose
constituents are the agricultural classes. These gentlemen fulminate
strongly against the New York Stock Exchange and the grain and cotton
exchanges, and in currying favor with their bucolic supporters they do
not hesitate to condemn margin trading, short selling and every other
phase of speculative markets. Yet it does not occur to them, or, if it
does, they dare not refer to it, that in forming pools and combinations
to hold back their wheat and cotton their constituents are doing the
very thing which they so strongly condemn in speculative centres. The
farmer is, of course, richer than he ever was before, but nevertheless
he grows his wheat to sell, and only a few can carry it for any length
of time without borrowing from the banks. The farmer who goes into
one of these pools with wheat valued at $10,000 and who borrows $8000
on it from his local bank, is nothing more nor less than a speculator
in wheat on a 20 per cent. margin, and the same horrid appellation
describes the cotton-planter who resorts to similar practices.[33]

Now, of course, there is no moral reason why a farmer should not
speculate if he chooses, but what touches us on the raw is his
Phariseeism in doing for himself what he professes to abhor and condemn
in others. One is tempted to say unkind things to the farmer at such
times, to remind him, for example, that he is to-day the most backward
and unprogressive factor in American business life. Despite the fact
that the Department of Agriculture has spent $100,000,000 on his
education in the last twenty years, he has not yet begun to learn what
the German, Dutch, and French farmers learned years ago in intensive
farming, nor has he mastered the art of cattle-raising in anything like
the degree it is understood in the Argentine. Nature has smiled on him;
he waxes fat with her bounty, but he does not keep pace with the growth
of the country. Although enhancing prices are paid him for his product,
he is unable to raise a crop proportionate in any degree to the
facilities put at his disposal in the way of fertilizers and machinery.
One would like to “rub it in” on the farmer, but one doesn’t, “because”
as a recent writer puts it, “the farmer is a farmer, and therefore not
a person to be lectured like a mere banker or broker in Wall Street.”

To the farmer, the politician, and the layman generally, short sales
of cotton or grain are understood, approved, in fact, if the grower
happens to be the one who profits by them. But substitute stocks and
shares for wheat and cotton, and talk of “operations for a fall,” and
the layman thinks he smells a rat. He sees the bale of cotton or the
carload of wheat actually moving; it is a concrete thing; it appeals
to his senses, it is comprehensible. But talk to him of bits of paper
called stock certificates, and by a curious process he concludes
that a short sale has no basis of reality and is therefore menacing
and improper. He persuades himself that short selling ought to be
prohibited by law, and, since Wall Street harbors the chief offenders,
he finds in the nearest politician a handy ally to assist him. These
gentlemen, who obstinately refuse every other medicament, could be
cured of their ailment by a strong diet of economics. They become
subjects of medical, rather than financial, interest. They should dip
themselves into Conant and Leroy-Beaulieu; they should cool off in the
pages of Bagehot and Emery; and, by the time they have got into the
soothing columns of the Hughes Commission’s report, they will be ready
for new points of view.

As a preparatory lesson: suppose a speculator buys from a commission
merchant a carload of coal of a specified grade. The coal is not in
the possession of the commission merchant, but he knows where he can
get it, and he knows that he can deliver it on the date agreed upon.
Accordingly he sells it short, and enters into a binding contract
which, happily, the courts construe to be perfectly legal. Now suppose
the same purchaser wishes to buy 100 shares of Pennsylvania Railroad
stock. All Pennsylvania stock is the same, that is to say any 100
shares of it is just as good as any other 100 shares of the same
property--the number on the certificate is of no importance whatever.

The dealer to whom he applies does not happen to have 100 Pennsylvania
on hand, but he knows where he can get it, and he knows that he can
deliver it to the purchaser on the following day. So he sells it
short, and all that remains to complete his part of the contract is
the actual delivery. He is then a bear on Pennsylvania stock. He may,
if he chooses, go into the open market and buy the stock at once, so
that he will be able to deliver it in the easiest and most direct way.
Or he may feel that by waiting he may be able to buy at a lower price
than that at which he has sold it, hence, in order to make the delivery
promptly, he borrows the hundred shares from one of his colleagues, to
whom he pays the market price as security for the temporary loan of
the certificate.[34] In a day or two the price of the stock may have
declined, whereupon the bear goes into the market and buys the 100
shares of Pennsylvania at a price, say, 1 per cent. lower than that at
which he sold it.

When this certificate is delivered to him next day, he delivers it in
turn to the man from whom he borrowed the original 100 shares; his
security money is then returned to him, and the transaction is closed.
It is just as real a transaction as any other, and just as legal.
Moreover, since it is always possible to buy, but not always possible
to sell, the active presence in the market of large numbers of bears
who _must_ buy, whether they want to or not, is the very best policy of
insurance that a holder of securities could have.

Many years ago there was a law on the French Statute books,
subsequently repealed, prohibiting short sales. M. Boscary de
Villeplaine, a deputy chairman of the association of stockbrokers, was
conversing with Napoleon regarding a pending discussion in the Council
of State looking to the repeal of the law. “Your Majesty,” said de
Villeplaine, “when my water carrier is at the door, would he be guilty
of selling property he did not own if he sold me two casks of water
instead of only one, which he has?” “Certainly not,” replied Napoleon,
“because he is always sure of finding in the river what he lacks.”
“Well, your Majesty, there is on the Bourse a river of Rentes.”[35]

Napoleon felt, no doubt, that there was something inherently wrong
in selling short; even as these lines are written, counsel for a
Congressional committee is attempting to make witnesses admit that the
practice is “immoral.” But why, where, how is it immoral? It pervades
all business; no question of morals or ethics enters into it at all.
The man who sells you a motor-car has not got it; he accepts your money
and enters into an agreement to deliver the car next spring because he
knows or believes that he can make it and have it ready for delivery at
that time. Meanwhile he has sold short. A gentleman of my acquaintance
has sold thousands of storage-batteries on the same basis, although
plans for them have not yet been designed to meet the specifications.
At Cape Cod the cranberry-growers sell their crop before it has begun
to mature; all over the land contractors and builders are “going
short” of the labor and materials which, at some time in the future,
they hope to obtain to fulfil the terms of their agreements. Are all
these worthy people “immoral”?

If it is immoral to _sell_ for a purpose, it is equally immoral to
_buy_ for a purpose; in each case the purpose is the hope of a profit.
Buying for a profit is approved by every one; why not selling? In
both instances you have bought or sold for a difference in price; the
_sequence_ of the events in no way involves a question of morals, since
there is no ethical difference and no economic difference between
buying first and selling last, and selling first and buying last.
Moreover, in selling short you do no injury, since you sell to a buyer,
at his price, only what he wants and is willing to pay for.[36]

All suggestions of impropriety in short selling are grotesque in
their absurdity. But suppose, for purposes of argument, that economic
errors of some sort were actually involved in this practice. How could
it be regulated or controlled? As the governors of the Stock Exchange
stated to the Hughes Commission in 1909, short selling is of different
descriptions. There is the short sale where the security is held in
another country and sold to arrive pending transportation. There is
the short sale where an individual sells against securities which he
expects to have later, but which are not in deliverable form; and in
this connection I call your attention to the recent sale of $50,000,000
of Corporate Stock of the City of New York where deliveries were not
made for a period of about three months, and which stock was dealt in
enormously, long before it was issued.

“If a market had not been provided for it under those conditions,”
said the governors, “the loan could not have been placed. Then, again,
there is the short selling of stock against which different and new
securities are to be issued; the vendor knowing that he is to receive
certain securities at a distant date, but desiring to realize upon them
_at this time_. Beyond this, there is the regular selling of short
stock, either by parties who do so to hedge a dangerous position upon
the long side of the market, or the sale purely and simply with the
intention of rebuying at a profit, should circumstances favor it.”

Finally, there is the investor with stock in his strong-box actually
paid for and owned outright. He may wish to sell in a strong market
with the hope of repurchasing at lower prices, but for reasons of
his own he may borrow the stock for delivery rather than deliver the
securities bearing his own name. Technically he is short; he is a bear.
But in his case, as in that of the others here cited, how can this
perfectly proper method of doing business be “regulated” or interfered
with in any way? I do not think it necessary to pursue so palpable an

It has been said that the bears often resort to unfair methods to bring
about declines in prices, circulating rumors designed to alarm timid
owners of securities and thus frighten them into selling. That this
is done every now and then is undeniable, but the opportunity of the
bear in these matters is very limited, and may be easily and speedily
investigated, whereas similar practices, by the bulls in inflating
values by all sorts of grotesque assertions and promises are by no
means so easily run to earth, and do incalculably more harm.

The bear who drags a red-herring across the trail now and then
interrupts the chase, but he cannot stop it; the genial optimist who
has a doubtful concern on his hands, with a pack of enthusiastic
buyers in full cry at his heels, is a much more serious matter. Good
times and bull markets engender many questionable practices of this
sort. “All people are most credulous when they are most happy,” says
Walter Bagehot; “and when much money has just been made, when some
people are really making it, when most people think they are making it,
there is a happy opportunity for ingenious mendacity. Almost everything
will be believed for a little while, and long before discovery the
worst and most adroit deceivers are geographically or legally beyond
the reach of punishment. But the harm they have done diffuses harm, for
it weakens credit still further.”[37]

If this book were written for people instructed in economic matters
there would be no occasion to dilate upon the usefulness of bears and
the value of short selling, but since we are addressing laymen who do
not understand how the bear can be a useful factor, we may venture to
say once more that insurance is the chief advantage in his operations.
Ex-Governor White’s contribution to the subject, which I have quoted
in this chapter, is strongly supported by Mr. Conant, who shows
that valuable progress in opening new countries and developing new
industries is often made possible by “bearish” operations designed to
“hedge” or insure the new undertaking against loss.

“The broker who has a new security which he desires to place from time
to time in the future, making possible, for instance, the opening of a
new country to railway traffic, protects himself against loss resulting
from future changes in market conditions by selling other securities
for future delivery at current prices. These securities will realize
a profit when the date arrives for delivery if the market has in the
meantime become unfavorable, and will offset the loss upon his new
securities. They will have to be bought at a loss if the movement of
prices has been upward, but the upward movement will afford a profit
upon the new securities which he is seeking to place upon the market.
Thus, to quote Georges-Levy, ‘there is a genuine insurance, which the
broker will have himself organized and on which he will willingly pay
the premium for protection against any accident.’”[38]

An instance such as this serves to show the difference between gambling
and speculating, terms that are often misapplied by critics of stock
markets. A gambler seeks and makes risks which it is not necessary
to assume, and which, in their assumption, contribute nothing to the
general uplift. But the speculator--in the instance just cited, a bear
who sells short--volunteers to assume those risks of business which
must inevitably fall somewhere, and without which the mine, or the
factory, or the railroad could not be undertaken. His profession, and
the daily risks he assumes, call for special knowledge and superior
foresight, so that the probability of loss is less than it would be to
others. If he did not do it--if there were no bear speculators--the
same risks would have to be borne by others less fitted to assume them
or the useful projects in question would not be undertaken at all.

So general is the employment of these hedging or insurance operations
that in the case of cotton--to cite but one instance--the business is
regarded by practically all cotton merchants as an absolute necessity
under modern methods of conducting business. “An idea of the value
of the hedging function may be obtained,” says Herbert Knox Smith,
Commissioner of Corporations, “when it is stated that in Great Britain
banks very generally refuse to loan money on cotton that is not
hedged. Moreover, it is almost universally conceded that, since the
introduction of hedging, failures in the cotton trade, which had
previously been frequent, have been materially reduced as a direct
result of the greater stability with which transactions in spot cotton
can be conducted.”[39]

In conclusion it may be noted that as early as 1732 an attempt was made
in England to prevent short sales by law, that the law was recognized
a mistake and subsequently repealed. To-day there is no law on the
English Statute books restricting speculation in any form. In America
the New York State Legislature enacted a law in 1812 and the Federal
Government in 1864, both designed to prevent short selling. These laws
have also been repealed and they will not be revived. The bear has
come to stay. As a spectre to frighten amateurs, he may continue for a
time to stalk abroad o’ nights; as a necessary and useful part of all
business he is a substantial reality. And he is not “immoral.”[40]



“A million in the hands of a single banker is a great power,” said
Walter Bagehot; “he can at once lend it where he will, and borrowers
can come to him because they know or believe that he has it. But the
same sum scattered in tens and fifties through a whole nation is no
power at all; no one knows where to find it or whom to ask for it.”
This explains the power of Wall Street. Money flows there for the same
reason that water flows downhill. The great agricultural districts
of the West, for example, will gather from their crops this year
several hundred millions of dollars. They have no real economic use
for all this money in the farming districts; the large commercial and
industrial undertakings that help to make America rich and powerful are
not in that neighborhood.

Particular trades settle in particular districts, and the money they
require must be sent to them from other districts. “Commerce is
curiously conservative in its homes;” the steel trade concentrates in
and around Pittsburg, the grain trade at Chicago, wholesale merchants
in special lines are always to be found huddled together in our big
cities in neighborly intimacy; and once a trade has settled in one spot
it remains there. The millions that go West to pay the farmer must
therefore go elsewhere to pay others as fast as a demand for money
arises, because the price that will be paid for it elsewhere is greater
than the price it will bring in the farmer’s pockets. This is doubly
true because, as we have said, there are no imperious demands for money
for commercial undertakings in the farmer’s neighborhood, and, even if
there were, home enterprises are seldom attractive; curiously enough
there is a familiarity about them and their local promoters that breeds
contempt. Besides, these millions are scattered in small sums all over
the agricultural States; there is no cohesion, no concentration.

What then becomes of these vast sums? They are deposited in the local
banks, and the local bankers, who are wisely permitted by law to
deposit three fifths of their legal reserves in a city bank, promptly
transfer the funds that are not required at home to the bank that will
pay interest on them. In this way large capital accumulates, and when
we say this is a wise provision of the law we mean that scattered
reserves in local country banks are of no more avail in emergencies
than the five-dollar bills in the people’s pockets; but, gathered
into one great central fund that will aggregate a sum large enough to
provide every solvent bank and business house with ample support in
times of distress, they accomplish a purpose worth talking about.

This is the way they do in Europe, but say “Central Bank” in America,
and people are frightened out of their wits. They say politics would
dominate it; “the interests” would control it. The bigness of things
seems to paralyze them. But to attack a thing merely because it is big
and powerful is no argument. In a country full of big things it does
not ring true; it is un-American, and, as for the bogy of a centralized
banking control, there is infinitely more of it in New York to-day,
under the existing system, than there could possibly be under the plan
proposed by the original Aldrich measure. However, the idea of a great
Central Bank is not the subject under discussion.

When money flows into the New York banks the popular notion seems to be
that it is used to facilitate speculation on the Stock Exchange. But
this is only one of its many sources of employment. It will supply the
payroll at Pittsburg, it will ship grain to Europe, it will discount
the bills of merchants, it will return to the West and South when they
call for it to move the next crop. If Canada or Europe wants it, and
bids high enough for it, they will get a share of it. Wherever capital
is most profitable, there it will turn; it will rapidly leave any
country that cannot pay for it. It is the old simile of water finding
its own level. The first step consists in gathering the idle hoards
of individuals into banks; the next consists in centralizing these
deposits where they will be available for other sections of the country
that have use for them.

In order to attract these funds and so facilitate the business of the
country smoothly and economically, the New York banks are accustomed
to paying 2 per cent. interest on such deposits. Critics who seem to
feel that there is something objectionable in the laws of gravitation,
would prevent country banks from depositing in the cities by forbidding
the payment of interest on deposits by national banks. But the laws
that govern national banks, as Mr. Horace White suggests, are not the
laws that govern State banks and trust companies, and, as these would
gladly pay the 2 per cent. interest on deposits, they would be given
an unfair advantage.[41] Critics also say that country banks should
not be allowed to keep three fifths of their reserves in city banks,
but then they would be at a disadvantage with the State banks in their
neighborhood, since the prohibition would not apply to them. Moreover,
if country banks were not thus permitted to deposit three fifths of
their reserves, what would they do with their funds? For long periods
the money would remain idle, and idle funds are as unhealthy for the
community as they are for the banks.

There is no other way but for the country banker to take care of
his customers first, and then send as much of his surplus as the
law permits to the centre that will pay him the best return and the
safest return. This is good business; it makes money; it is sound
economics. And before the critic goes into a paroxysm over the fear
that speculation in stocks will absorb all this wealth once it finds
its way to New York, let me remind him, to cite but one instance, that
short-time commercial paper, representing actual commodities moving to
market, has the first call. The Minneapolis miller’s ninety-day bill,
accepted by a reliable merchant and based on an actual carload of
flour, has in all normal times a preferred claim on the banker’s funds.

This discounting of commercial paper is the ideal function of banking,
to quote Mr. White, and if there were always a sufficient supply of
good bills to absorb all the bank’s loanable credit, with an inflow
of cash from maturing bills equal to the outgo of new ones, there
would be no occasion for bankers to look elsewhere to keep their funds
mobile--and the critic would be out of work.[42] But this does not
often happen, because the bank’s loanable funds normally exceed the
amount of acceptable paper, and at such times the banker makes advances
on goods or securities, and, if goods and securities are not pressing
for loans, he will place his funds elsewhere, where a demand exists.
But securities for which there is always a ready market are such
thoroughly good collateral for loans that bankers are glad to get them.

The stockbroker is, in a way, a dealer in merchandise. Whether he buys
for investment or for speculation--and remember that the boundary line
between investment and speculation is often shadowy and indistinct--he
pays cash for everything he buys. He then seeks advances of credit upon
his wares just as the merchant does, supplementing his own capital and
the deposits (margins) of his customers with call or time money from
the banks. To deny him these facilities is exactly the same as to deny
credit to a merchant; both are doing a perfectly legal business, and
both contribute to the economic welfare of the community.

The popular idea is that loanable funds thus borrowed by Stock Exchange
houses constitute a diversion of money from the merchants who need
it. Not so. Even if the banks were disposed to use all their loanable
funds in mercantile loans and discounts they could not do so, because
a part of these funds may be called for at any time, and it is not
good banking to lend too large a proportion of call money on time. The
merchant wants 30, 60, and 90 day money, and he wants it at a rate not
to exceed 6 per cent.; the stockbroker is compelled by the nature of
his business to borrow a large part of his money on call, and he pays
whatever the banks choose to charge for it. Incidentally it may be
said that no usury law is violated, even if 100 per cent. is charged,
because the New York law legalizes any rate of interest on call loans
of $5000 and upward, secured by collateral.[43]

As a matter of fact, far from being put at a disadvantage by the
banking methods that provide call loans to Stock Exchange houses,
the merchant or manufacturer enjoys banking facilities which the
Stock Exchange may never hope to enjoy. The merchant is able to
secure banking accommodations upon his personal credit, that is, by
discounting his own promissory notes or single-name paper unsecured by
pledge of collateral. But the stockbroker, however ample his resources
and his credit, can only obtain loans upon collateral securities. Any
attempt to resort to his personal credit or his personal paper would be
construed as a confession of weakness, and his good name at the banks
would suffer accordingly.

Persons who conjure nightmares over the practice of the banks in
loaning surplus funds to stockbrokers are deceiving themselves. Instead
of losing by this system, every merchant and manufacturer in the land
profits by it in greater or less degree. The stockbroker deals in the
bonds and shares of great railway and industrial companies, which,
in order to succeed, must be able to sell their certificates to the
public and so raise the money necessary to provide the extensions and
new construction that are constantly demanded by the public. If fresh
capital could not be enlisted in this way, additions and improvements
would cease. The merchant who requires the railroads to ship his goods,
and the manufacturer whose demands for new side-tracks, cars, and other
equipment are unceasing, are therefore directly interested in the
maintenance of a broad and stable speculative market for securities
at all times, because in that way only are funds to be raised for the
requirements of trade and industry. There would have been no railroads
in this country had there not been speculators to build them, nor could
the money have been raised had there not been other speculators to buy
the shares with the aid of the banks.

Prevent the banks from lending money to facilitate stock-market
operations and business ceases; interfere with it or hamper it and
confidence is impaired, and when these things happen the industrial
system collapses in terror. Such has been the experience of modern
times. Until a system is devised whereby large undertakings may enlist
public support in other ways than by offering securities in our great
Exchanges and by maintaining a market for them there, it is useless
to talk of interfering with that necessary relationship which exists
between the banks and the stock market. On the one hand we have the
cobwebs and windy sophistries of politicians and doctrinaires; on the
other hand the test of proved effectiveness in the conduct of business.
And the country’s business cannot stop; it must go ahead.

In the last six years more than a billion shares of stock have changed
hands on the New York Stock Exchange, together with bonds of a market
valuation exceeding five billions of dollars, and, under the rules,
each purchase made was paid for in full by 2:15 P.M. of the day
following the transaction. If all these purchases had been made for
cash--i. e., if every customer of every brokerage house paid in full
for his purchases, there would be no use for bank loans to brokers;
there would be no speculation, and hence no progress. Securities
purchased in the six-year period quoted were, in the majority of
instances, bought on margin, that is, they were only partially paid for
by the purchasers, the balance required being furnished by the broker
from his capital and by the banks from their loanable funds.

There is a popular fallacy as to the amount of actual cash required to
finance these enormous Stock Exchange transactions; persons who are not
well informed often entertain the impression that it is much larger
than it really is. As a matter of fact considerably more than 90 per
cent. of the business of the banks is done through the Clearing House,
an institution designed, as every one knows, to minimize the transfer
of actual cash and to simplify the payment of balances. If these
clearings seem large--they are, in fact, twice as large in New York as
in all the other cities of the Union added together--it is not alone
because more speculation in securities takes place in New York, but
because this happens to be the centre where many other cities balance
their claims against each other.

Furthermore, when critics who do not understand the subject look
askance at the volume of loans of the New York banks, they must
remember that the lending power of such institutions is always four
times greater than the supply of money in its vaults. The reserve of
25 per cent. which the banks are required to maintain means that every
million dollars of actual cash added to their funds renders possible
an expansion of four million in loans, and every withdrawal of funds
involves a proportionate reduction of these loans. These matters are
self-evident. The point to bear in mind is that through this expansion
and contraction of loans stock-market operations are increased or
diminished by almost automatic processes. “Money talks” is an old
aphorism. In this case it is not money that talks, but credit, and the
credit extended to stockbrokers by the banks is always wisely regulated
to meet conditions as they arise.

The customer of a brokerage house buys, let us say, 1000 shares of
St. Paul at 120, on which he deposits a partial payment or margin of
$15,000. The bank will loan to the broker 80 per cent. of the market
value of the stock, or $96,000, which, added to the $15,000 deposited
by the customer, leaves $9000 which the broker supplies from his
firm’s capital. The broker gives to the bank, with the securities, a
note on one of the bank’s printed forms, which gives the bank absolute
authority to sell the collateral whenever the margin shall have
declined to less than 20 per cent. This note is so sweeping in its
terms, and gives the bank such complete power, that a reproduction of
it, in small type, would fill two pages of this book.

It empowers the bank to sell as it pleases--if the broker fails to pay
the loan on demand, or to keep the margin at 20 per cent.--all the
securities in the loan; it authorizes the bank to seize any deposit the
broker may have in the institution; the bank may itself purchase all
or any part of the securities thus sold, and all right of redemption
by the broker is waived and released. This instrument would seem, _per
se_, a pretty strong hold on the broker, but the bank’s security does
not end there. In making the loan the bank knows that the borrower is
a member of the New York Stock Exchange, and that presupposes capital,
with at least one Stock Exchange membership, worth to-day about
$60,000. It knows, too, that a fundamental rule of all Stock Exchange
brokers is to protect the bank at all hazards, not merely because the
personal honor of the broker is involved, but because the business
could not be conducted otherwise.

It is apparent from a consideration of all these elaborate precautions
that the lending of funds to stockbrokers is a safe business, indeed
in all the criticism directed against Wall Street methods I have not
yet heard it questioned. The department of the bank entrusted with
such matters watches the tape with vigilance to see that the 20 per
cent. margin is not impaired; if it should happen to be impaired, the
broker’s messenger is almost always on hand anticipating with his
additional collateral the call that the banker will make. So excellent
is Stock Exchange collateral, thus secured and thus protected, that the
losses resulting from this class of business are infinitesimal. I am
not a banker, but I hazard the opinion that it constitutes, in fact,
the minimum risk in all the departments of the bank’s business.

In any case, when trouble comes and panic conditions prevail, it
requires no stretch of the imagination to say that the stockbroker’s
loan is a better loan than that of, let us say, the silk merchant, for
he, perhaps, cannot easily repay. He is under immense liabilities in
various directions and he has many obligations; whereas the stockbroker
feels every minute of the day that his first duty is to the bank;
the customer who owns the securities in the loan must either deposit
sufficient margin or the broker will sell him out, in which case the
loan at the bank is paid off. Finally, it may be added that in the
October panic of 1907, when merchants’ failures were announced daily,
and when certain banks and trust companies closed their doors, not a
single failure was announced on the New York Stock Exchange.

Another objection often lodged by critics of present-day banking
conditions, has to do with the practice of New York banks in the
over-certification of brokers’ checks. These over-certifications are
held to be objectionable because the National Banks are forbidden by
law to certify for a sum greater than the drawer has on deposit. In
practice it works out this way: The broker’s clearing-house sheet of
to-day tells him what payments he has to make, so on the following
morning he acquaints his bank with the fact that payments are to be
made necessitating certifications beyond the amount of his deposit.
He then sends to the bank the promissory note of his firm, payable on
demand, and the bank credits his account with the proceeds. As the day
advances the broker’s checks come in and are credited to the account,
which is always balanced and the note paid off before the close of the
day’s business. The risk is nominal.

Of course a few hours elapse between the certification and the receipt
of the broker’s checks, and in this brief interval it would be possible
for a dishonest man to abuse the privilege extended him, but the fact
that such a thing does not happen affords tenable ground for the belief
that it will not happen. The bank does not deal with an individual, but
with a firm, and it knows that the firm has a membership in the Stock
Exchange, with a cash balance on deposit in the bank that extends the
accommodation. Any banker will bear witness that the business is quite
satisfactory and that it involves no loss. Moreover, this certification
of stockbrokers’ checks is essential to the maintenance of broad
speculative markets, and, whether that portion of the public that
criticises the practice likes it or not, speculation is a necessary
part of our business life.

It may be pertinent to remark in this connection that the law
prohibiting these certifications by National Banks is unnecessary
and unwise, as is evidenced by the facility and safety with which it
is honored in the breach. State Banks in New York are under no such
restriction, nor has it occurred to our lawmakers that a necessity for
the prohibition exists. The experience of these banks in the matter
of certifications, like that of the National Banks, shows that the
business is safe and sound. If the merchant discounts his paper for
thirty, sixty, or ninety days, why prevent a similar accommodation
to stockbrokers for an hour or two? Both are engaged in a strictly
legitimate business upon which the welfare of the community in greater
or less degree depends, and the fundamental purpose of a bank is to
promote and encourage such business. That is what banks are for, and
bank officers are supposed to know something about how, when, and where
accommodations may be extended with safety to all concerned.

Mr. Horace White cites the year 1909 as an illustration of the
employment of loanable bank funds by brokers which brings up another
point. For long periods in that year, money loaned on call on the floor
of the New York Stock Exchange at 1½ per cent., while our banks were
paying 2 per cent. to the interior banks to which the money belonged.
This does not necessarily mean that the banks were losing money;
because the greater part of these funds was employed in time loans and
in commercial discounts at 3 and 4 per cent., thus raising the average
income rate. There is also to be considered the unearned increment
which the bank gains by “holding” its depositor, even though no large
profit accrues from the funds thus deposited.[44]

As the ratio of reserves to liabilities at that time was much above
the legal requirement, it might be inferred from this and from the 1½
per cent. rate that money was easy; but it was not, as many persons in
commercial pursuits learned when they tried to borrow it. There was a
great deal of money that was not being used in daily business, and one
of the reasons was that the period was one of distrust. Stockbrokers
got funds at 1½ per cent. while many other borrowers were required
to pay stiffer rates, because the banks that controlled the money
market--i. e., the loanable funds--were unwilling to part with them
except for short periods and on instantly marketable security, and
this state of mind on the part of the New York bankers was shared by
the bankers of Europe. It was good banking, because it was prudent
and conservative. In other words, at a time when danger threatened,
bankers in all important centres of the world regarded Stock Exchange
collateral as ideal security, and, as we have seen, the aggregate of
their loanable funds pressing on the market kept call rates down to 1½.
If in times of doubt and distrust this form of collateral proves its
safety, is it not a fair hypothesis that it is safe at _all_ times?

If the critics are correct in their contention that pressure of easy
money in the New York market holds out inducements for foolhardy
speculation on the Stock Exchange, the year 1909, just cited, should
have witnessed a great boom in securities. If speculators could
borrow at 1½ per cent. on securities that netted 5 and 6 per cent.,
the theory of our adversaries is that this disproportion entices a
large number of people into such speculative ventures that inflation
takes place, followed by collapse. That nothing of the sort occurred
shows that critics, like other less gifted persons, may err; it
shows, too, what every thoughtful person knows, that booms are not
created on the Stock Exchange, which merely reflects in its dealings
external conditions of all sorts, among them psychological processes
which neither brokers nor money markets may hope to control. As a
matter of record, 1909 showed but little increase in the volume of
business transacted on the Stock Exchange as compared with 1908, and
the increase, such as it was, represented nothing more than a natural
recovery from the paralysis following the débacle of 1907, plus an
investment of funds at attractive levels. The same state of affairs
prevailed in 1910. From June to December of that year call money rates
almost never exceeded 3 per cent., and time money might be had at from
3½ to 5, yet far from stimulating speculation--far from revealing an
excessive employment of bank funds by stockbrokers--transactions both
in shares and bonds dwindled to insignificant proportions.

Cheap money is by no means a “bull argument” from the Stock Exchange
point of view, because it arises from dull conditions in commerce and
industry, and there can be no boom in the securities which represent
the nation’s business unless mills and factories and railroads are
prosperous. There have been more bull markets with tight money, or with
money in the neighborhood of 6 per cent., than in cheap money markets
of the sort just described. This is not equivalent to saying that a
prolonged rise can be conducted through a period of dear money. As a
matter of Stock Exchange experience such a condition seldom arises,
because the Stock Exchange discounts the future, foresees those
economic conditions that spell prosperity for the country, and advances
the prices of securities on a money market that has not yet felt the
demands of improved conditions.

In June, July, and August, for example, conditions may warrant a hope
of bountiful harvests, while general business is dull and idle money
abundant. Such a prospect is always discounted, other things being
equal, by a rise in securities, and money that is not yet required
to market the crops thus finds employment as loans on Stock Exchange
collateral. Later on, when reviving business leads the interior banks
to call their New York balances, the depository banks meet the demand
by calling loans and by advancing rates. The speculative movement on
’Change is then checked or reversed just in proportion to the demand
for money elsewhere. It may continue for a while if the discounting
process has not been complete, or if there remains a wide disparity
between interest rates for money and net returns on securities; or if
the independent resources of the city banks are large enough to furnish
comfortable interest rates even after the westward drain has commenced,
but, generally speaking, “the move is over,” to quote the vernacular,
by the time business men want their money. Nine times out of ten any
monetary strain that results thereafter is not due to speculative
operations in securities nor to any other cause attributable to the
Stock Exchange.

A word should be said here concerning the Stock Exchange Clearing
House, because just as the Clearing House of the associated banks
ascertains and pays the balances of its members with a minimum outlay
of coin and legal tender notes and with great economy of time and
labor, so the Stock Exchange Clearing House stands the strain of an
enormous business, reduces the volume of checks and deliveries, and
relieves both the banks and the stockbrokers of an amount of risk and
confusion that would be well-nigh intolerable.

In order that the layman, for whom these pages are written, may
understand what this means, it may be said that if 500,000 shares of
stock are sold in a day on the Stock Exchange, and if we assume the
average price of these stocks to be 50, the checks paid out on that
day would be $25,000,000, and in a year at that rate certifications
would be necessary involving the stupendous total of $7,500,000,000.
This clumsy if not impossible method the Clearing House was designed
to avoid. Moreover, the actual daily transfer of such a volume of
securities is largely obviated by the Clearing House system, and thus
another and highly important economy is effected.

The Stock Exchange Clearing House is managed by a committee of five
members of the Board of Governors of the Exchange. Each day the seller
of stocks sends to the office of the buyer his “deliver” ticket, and
the buyer sends to the seller his “receive” ticket, this transaction
constituting a “comparison” by both parties, and an evidence that the
transaction has been entered on their books. Before 7 P.M. of that day
these tickets, and the sheet comprising the record, are sent to the
Clearing House. This sheet contains a “receive” and “deliver” column,
with all the transactions in each security grouped together, and with a
balance--i. e., a debit or credit, struck at the bottom. If there is a
credit, a draft on the Clearing House bank is attached; if a debit, a
check for the balance accompanies the sheet.

When the Clearing House receives this sheet a simple and a very
ingenious process ensues which relieves the broker of a great deal
of trouble, risk, and labor. If he has bought and sold, let us say,
an equal amount of stock, comprising numerous transactions, instead
of having to draw checks for all these separate trades, the Clearing
House settles the whole day’s transactions by a single check for the
actual balance. If his numerous purchases and sales do not balance,
and if there are various lots of stock to receive and deliver, the
Clearing House eliminates a host of intermediaries and puts him into
direct touch with one firm to whom he delivers, and with one from
whom he receives. He may have had no transaction with the firms thus
arbitrarily assigned to him; that makes no difference. The books of
the Clearing House always balance; somewhere a firm is entitled to a
receipt of stock, and somewhere another firm will be found to deliver
it to him.

Nothing could be simpler and more economical than the manner in which
the two are brought together. In such a system, the number of shares
actually delivered is reduced by the Clearing House to one third of
the number represented by the broker’s actual transactions, while the
amount of money which he must command to meet his daily engagements
represents, on an average, only 25 per cent. of the actual capital
that would be required were it not for the excellent system thus
afforded him. Persons who wonder at the magnitude of Stock Exchange
transactions, and who jump to hasty conclusions as to the actual
capital involved, may well reflect upon the manner in which this method
reduces to a minimum the stockbroker’s drafts upon the banks.

In a larger sense, if the critic in these matters affecting the
relationship of banks to stockbrokers feels aggrieved at what he
thinks is an improper diversion of funds, he must remember that the
comparative scarcity of capital to-day--which is at the bottom of his
complaint--is not due in any sense to Stock Exchange speculation,
for there has been almost no extensive speculation in this quarter
from 1907 down to November, 1912. To find the cause of the scarcity
of capital--and it is unquestionably scarce--he must consider the
immense destruction of tangible wealth in the last decade, and the
extraordinary tendency to convert floating forms of capital into fixed
and immobile forms.

The amount of money expended in State roads since automobiles came
into popularity is probably ten times more than it was before; at the
election in November, 1912, a fresh total of $50,000,000 was voted for
“good roads” by the electorate in New York State. The building of the
Panama Canal has cost or will cost about $365,000,000; all over the
country large municipal or state works are under construction; here
in New York the contract for the Erie Canal calls for $150,000,000,
and for the city’s new water-supply system--the Ashokan basin and the
Kensico reservoir--$177,000,000, each contributing a share to the
depletion of the normal supply of working capital. Meantime, to cite
another instance, Congress appropriates $160,000,000 to pensions in a
single year, and $40,000,000, as a recent writer puts it, “for that
particular form of graft which consists in giving a $30,000 post office
to a thirty-cent village.” The railroads of the country alone require
to-day sums of money equivalent to the working capital represented by
all our bountiful harvests of 1912.

Aside from these matters the critic should remember, in fair play, that
the currency famines which occur with periodic frequency in our country
are due in large measure to the non-elastic nature of the currency,
to its persistent absorption by the Treasury, and to the rigid
restrictions which these abnormalities impose on the volume of banking
credit. Conditions such as these contributed in no small measure to
our last great panic, and led to a premium on currency that made us a
laughing-stock among the nations. There has been no such money delirium
in England since the Napoleonic wars; no such condition in Germany
since the empire was founded, and nothing approaching it in France,
even in the commune and the war with Prussia. Yet in America we go on
wobbling uncertainly under the makeshift act of 1908, with its currency
associations and its emergency measures, and with the added fear of
what may come when the Act expires in 1914.

The situation in America is substantially this: Business drives ahead
at a tremendous pace, with perils on every side, chiefly anxious to be
undisturbed. Matters run along smoothly for a while; then something
happens--there is too much optimism or too much confidence--and a
smash. It is not due to speculation in securities, because, as in 1907,
the stock markets are the first to see what is coming and to discount
it. But speculation in lands, or in manufacture, or in railroad
construction go on and on; there is too much work for the dollar
to do; the currency system breaks down; here and there a financial
institution closes its doors; public confidence is shattered, and the
whole credit system is disturbed.

Then there arises a noble army of critics who, with the best intentions
but with insufficient knowledge and study, set to work to remedy
conditions they do not understand by methods untried and unpractical,
that only add to the general confusion. More harm than good results
when the physician, brusquely entering the sick-room, tells the
patient he is a very sick man, denounces the lobster that poisoned
him, and departs with a general condemnation of shellfish, but without
prescribing suitable remedies. Persons who denounce the relationship
existing between banks and stockbrokers are in most instances upright
citizens of high character, but until a little patient study of
conditions has enabled them to speak with authority upon matters that
are necessarily complex and delicate, they cannot accomplish any really
useful purpose. “The wicked are wicked, no doubt,” said Thackeray, “and
they go astray, and they fall, and they come by their deserts; but who
can tell the harm that the very virtuous may do?”

The three leading groups of banking interests in Wall Street are said
to represent $500,000,000 of available capital each; the deposits in
what are called the “trust banks” amount to between $700,000,000 and
$800,000,000, while the banks of the whole country hold deposits of
$16,000,000,000. The savings banks now hold $4,450,822,522 which is
owned by 10,009,804 depositors.[45]

As we have not yet reached the point of abolishing property altogether,
we may concede that these great combinations can do for individual
business and for the country at large what cannot be done without
them. They furnish the large sums which, from time to time, are
required by the Government, the State, the town, the manufacturer,
the tradesman, and the speculator, and to each of these--especially
the speculator--the tremendous development of this country is due.
Because of speculation in securities, the 26,000 million dollars’ worth
of capital represented on the New York Stock Exchange by the stocks
and bonds of railroad and industrial corporations have found a public
market through which necessary capital has been raised, and the total
increases yearly by about one billion dollars. This is “big” business,
to be sure, but it is the bigness of the whole people, for the welfare
of each is the welfare of all.

Such large affairs naturally set people thinking; men want light; they
want to know, entirely aside from the doctrines of political platforms
and stump orators, to what extent the relation of capital to business
meets the test of proved effectiveness and economic worth. Especially
do they seek information in this oft-discussed matter of speculation in
securities and of the bank’s relationship to it; and here, fortunately,
there is no lack of results by which that relationship may be tested.

Pragmatism tells us that as phenomena appear, become mighty, and
persist in accordance with natural processes, so they demonstrate their
ultimate good and their obvious usefulness. In its especial application
to the matters we have discussed, pragmatism teaches us to wait for
results in estimating a particular business method, and then to study
it in its relation to _all_ business. Applying this test to the use of
loanable bank funds by those who deal or speculate in the things that
represent American enterprise, we find that the very existence of these
enterprises depends upon the maintenance of these methods. Finally,
both the banks and the Stock Exchange are the trustees of the property
of others, and in that capacity their reciprocal relations are certain
to be attended by greater caution than if they dealt in a freehanded
way with their own property. The magnitude of their undertakings spells
responsibility, and responsibility breeds sobriety.



If a list of “don’ts” were compiled for the public that is interested
in the Stock Exchange, the first prohibition would be “don’t believe
all you read in the newspapers”; at least do a little independent
thinking before jumping at conclusions. The relationship between
the Stock Exchange and the metropolitan press is, with perhaps one
exception, cordial in the extreme. The newspaper man is a thinking
person; if he were not he could not hold his job. He knows, for
example, that the Stock Exchange is an indispensable part of the
machinery of modern business; he is aware of the fact that it maintains
a high standard of probity. He would be the last man to attack the
institution unfairly, and he is the first to defend it, editorially,
when misconceptions and unfounded suspicions are rife.

But on the other hand, newspapers want news; their circulation and
the popularity of their advertising columns depend upon the skill
and ability with which they parade before the public everything that
happens. If a politician or a clever and ambitious lawyer makes a
startling charge against an institution that occupies a conspicuous
place in our affairs, that is news, and the newspaper must print it. In
order to make the news attractive to the jaded palate of its readers
the dry-as-dust parts must be skimmed off, and seasoning added in such
peppers and vinegars as the occasion permits, with a final dash of
spice in the shape of pungent headlines that will arrest and hold the

Somewhere off in the dim recesses of the editorial page there may
be a sober (and deadly dull) analysis of the matter, revealing the
politician or the notoriety-seeker in his true colors, but this is
often ignored by the reader. What he wants with his morning coffee is
his daily thrill, and he finds it under blatant headlines on the first
page. Because he wants it, and because he won’t be happy till he gets
it, the newspaper gives it to him on a generous scale. Until we arrive
at a Utopian state in which art, religion, and kindred abstractions
satisfy the mind to the exclusion of fires, riots, suffragettes and
Stock Exchanges, we cannot blame the newspapers for giving us what we
want, nor the politicians for helping the good work along.

And yet, as Mr. Bryce pointed out in his lectures at Yale on “The
Hindrances to Good Citizenship,” this willingness to accept as
conclusions the scare-heads in newspapers which are not, and never
were intended to formulate serious opinions, lays us open to the
charge of indolence; “the neglect to think” thus becomes a serious
phase of a deficient sense of civic duty. In countries where men are
imperfectly educated, or in rural districts where means of acquiring
knowledge are small and scant--where men lead isolated lives out of
reach of libraries and learning--they ask advice of the priest or the
village schoolmaster, and thus vicariously discharge the duties of
citizenship without any real knowledge of the problems before them and
without contributing to the solution of those difficulties to which the
ever-increasing complexity of our civilization gives rise.

Now if we apply this line of thought to the study of such economic
problems as arise in our country from time to time, we find that the
same conditions apply. We fancy ourselves immeasurably better off
than the uncultured frontiersman who must rely for his information
upon the priest or the schoolmaster, but in our dumb submission to
the rant of the hustings and the scare of the headlines are we really
discharging the functions of good citizenship? Are we not indolent?
I can have a lively sympathy for the half-breed in the Canadian woods
seeking information as best he may, but for the man in our populous
and cultivated communities who is too lazy to turn to our great public
libraries for light on the vexed and vexing economic problems of the
day, contenting himself with the half-baked opinions of demagogues and
quacks--for such a man it is difficult to say a good word. There is
hope for the one; the other is the most menacing and discouraging type
in our citizenship.

Take up the morning newspaper almost every day and we find the crude
essence of this misinformation paraded in a way that makes us sorry
for a public that cries for such stuff. A custodian of public funds,
collected for the purpose of erecting a monument, is found very
recently to have squandered the money entrusted to him. One of his
co-trustees, who must have been somewhat lax in his duties, bewails the
loss and seeks to enlist sympathy for himself by hazarding the opinion
that “the money _must have been_ lost in speculation in that hell-hole,
the Stock Exchange.”

This from a former army officer and a gentleman, who subsequently
states that he has no idea what became of the funds, but “cannot think
of any other explanation.” “Hell-hole” and the “Stock Exchange”
constitute a good repast; the headline artist contributes his quota
to the feast, and so a portion of the public that feeds on this meat
arises from the table with the satisfying conviction that another awful
indictment has been leveled at the Exchange, notwithstanding an utter
absence of proof or evidence of any kind tending to show that the
delinquent trustee had lost a dollar in Wall Street. And suppose he did
so lose it, what then? Is the Stock Exchange or any other market-place
a “hell-hole” merely because a thief whom nobody suspects squanders his
money there? Suppose he had spent it in automobiles, or in real-estate
speculations, or in campaign contributions, or in foreign missions,
would the same amiable characterization apply?

Another familiar instance of making Wall Street the scapegoat is seen
in the “explanations” of defaulting bank clerks. “When a young bank
employee,” says a financial journal, “with a wife and two children in
Flatbush, and a salary of something less than $2000 a year, takes to
entertaining angels, more or less unawares, in the Great White Way,
and matching his trained financial mind against ‘bankers’ of another
kind, he always blames Wall Street when the inevitable smash comes.
He has been ‘speculating in stocks,’ he says. He thinks, and a great
many people equally silly agree with him, that he thereby shifts the
blame for his extravagance and folly to other shoulders. Entirely
well-meaning people, without the slightest conception of the real
purposes for which the financial centre of a nation exists, say: ‘Here
is another indictment against sinful Wall Street. Let us kiss away
the tears of this misguided young man, who now promises to be good.’
They never think of asking the misguided young man to show documentary
evidence of his losses, which of course every broker must necessarily
provide, and must keep in duplicate as a matter of record.”[46]

A police officer whose salary has never exceeded $3000 a year is
arrested, and it is shown that he possesses a fortune of $100,000.
Where did he get it? Why, he made it in the course of nine months
of remarkably successful speculation in Wall Street, and one of his
henchmen, too stupid to know that everybody in Wall Street keeps a set
of books, promptly came forward to endorse this explanation. Proofs
were sought by the authorities, and the lie was, of course, exposed,
but the readiness with which the frugal officer sought to fall back
upon this hoary explanation shows that it is a permanent fixture of the
crook’s property-room, and that in the stage-setting for his sordid
accumulations there must be the familiar Wall Street background.

Another notorious pastime, that seems to be well known to every one
but the officers of the courts, consists in the practice of fraudulent
bankrupts in producing in court a mass of worthless securities as
evidence that the bankrupt’s money has been “legitimately” lost in
speculation. The certificates thus exhibited are beautifully engraved
memorials of defunct mining concerns, sold at so much a pound by
well-known dealers. It is related that a person who wished to keep ever
before his eyes a lesson and a warning once papered the walls of his
house with a wagon-load of this junk, which he was able to purchase at
less than the price of ordinary wall paper.

Any scamp who intends to “lie down” on an unprofitable contract can buy
$1,000,000 nominal of the stuff at waste-paper rates. He is assured
of the sympathy of his family and friends, and, if it does not occur
to the lawyers to inquire who his brokers were, and when, where,
and how these purchases were made, he stands a good chance of going
the way of all undetected swindlers, notwithstanding the fact that
documentary evidence of his purchases, if there were any, is always
available. In this way another indictment is framed against Wall Street
in the minds of thoughtless people. They seem to ignore the obviously
improbable nature of the story, preferring rather to make Wall Street
the scapegoat, and by “Wall Street,” in the majority of cases, they
mean the Stock Exchange, yet the Stock Exchange had no more to do with
it than Trinity Church, at one end of Wall Street, has to do with a
stevedore’s crap-game at the other end.

So far as concerns the case of the crooked bank clerk, it is perfectly
well known, or at least it should be, that no member of the New York
Stock Exchange is permitted under its rules to have any speculative
or investment relations whatever with employees of banks or trust
companies, or of other brokerage houses. The Exchange authorities
enforce this rule to the letter. Disgrace and expulsion faces the man
who would attempt it. More than that, members are unusually careful
in investigating customers’ accounts for reasons involving their own
safety in actions that may be brought in the courts; so rigorously is
this care exercised that accounts are repeatedly refused where the bona
fides of the customers are not fully understood by at least one of the
firm’s partners.

Furthermore, any negligence on the member’s part in this important
matter, or in other matters affecting the general welfare of the Stock
Exchange, places him at once within the all-embracing grasp of that
one of the Exchange’s by-laws which has to do with “any act detrimental
to the interests of the Exchange.” This is a large order, and its
importance is well understood by the members. They know, and all those
who so freely criticise the Stock Exchange could find out if they
inquired, that the power of the Board of Governors to supervise every
action of its members is vastly greater than any power that could be
vested in the courts. There are constitutional limits to the authority
of common law; there are no limits whatever to the powers of the
governors in dealing with members.

This leads us to consider another popular criticism of the Stock
Exchange, based on its unwillingness to abandon its present
organization and incorporate under State regulation. The public seems
to feel that this reluctance to submit to State or Federal control
shows that the institution is trying to conceal something, yet nothing
could be further from the fact. The Exchange does not incorporate
because the interests of the public, which it is bound to conserve,
would suffer enormously by such a step. “In its present form,” says the
_Wall Street Journal_, “the Stock Exchange is a private organization.
It can inspect any member’s books at any moment. If it suspects him of
wrongdoing it can tap his telephone wire, and has done so in the past.
It can terminate his membership for conduct which no legislation could
possibly touch. One reason, in fact, for its admittedly high standard
of probity is the power, at once democratic and despotic, exercised by
the Governing Committee elected by all the members.

“But if the Stock Exchange were reorganized under State supervision,
much of this power would be taken away. Members would possess rights
which no governing committee could ignore. They could resort to
practices legally right and ethically wrong, which under the present
system would be visited by swift punishment. Any member of the public,
now, who can show the Stock Exchange committee an act by a broker
toward him legally defensible but morally wrong, can secure that
broker’s expulsion from the Stock Exchange. Under State incorporation
he could only obtain redress by prolonged litigation.... No legislative
safeguards are needed. The Stock Exchange now possesses a power of
supervision over its members which neither Congress nor the State
legislature could give. The only power our lawmakers really possess in
the matter is to limit that supervision; and for this, if for no other
reason, the Stock Exchange should fight incorporation to the last, and
should take every proper means of publicity to range public opinion
behind it.”[47]

An instance in which Wall Street in general, and the Stock Exchange in
particular, occasionally comes under the ban of more or less hysterical
public condemnation, results from the work of company promoters and
swindlers, wholly outside the Exchange’s jurisdiction. In spite of
the vigilance of the postal authorities and the police, every now and
then a swindler finds his way into this forbidden ground, and here he
plies his trade. Sometimes it is a land scheme, sometimes it is timber,
recently it was wireless telegraphy, often it is a gold mine.

The promoter of these enterprises does not permit himself or his
affairs to come under the scrutiny of the banks, the Stock Exchange,
or the Clearing House. He fights shy of the curb market as it is now
organized, and avoids the watchful eye of the metropolitan newspapers
that enjoy the pastime of exposing frauds. His ways are ways of
darkness. His methods are mailing lists; his victims are that numerous
progeny born every minute; the lure is the engraved letter-head with
its “Wall Street,” its list of “Directors,” and its subtle assurance
that this precious property now literally “given away” bears the
endorsement of the elect, and is known and approved by the whole
financial community.

Whenever he can do so, the artful gentleman behind this bait contrives
to have a market for his wares. He cannot do this anywhere in New
York, for the curb market, once the refuge of the swindler, is now
closed to him, thanks to the improved morale of the curb brokers
themselves, and to the recommendations of the Hughes Investigating
Committee. Consequently the dishonest company promoter is forced to
manufacture his market in another city, where fluctuations in the price
of his wares are made to order, usually on a rising scale, without
interference by the authorities.

More often still, this market and its rising prices do not exist at
all; in any case it is only a fraudulent attempt to excite the cupidity
of speculators into the belief that there is active trading in the
particular stock offered for sale. “The mines,” says the Chairman of
the Hughes Committee in discussing these swindling operations, “are
situated in distant places, as Nevada, Alaska, Canada, Mexico, and even
in South America. In proportion as they are remote, inaccessible, and
subterranean, they are attractive to the class whom Tacitus had in
mind when he said: “_Omne ignotum pro magnifico_.”[48]

The halcyon days of these enterprises are now drawing to a close. Their
field of operations is becoming more and more limited, the postal
authorities are redoubling their energies, the newspapers are closing
their advertising columns, and the victims who have birthdays every
minute are, it is hoped, growing wiser. In any case immense losses
have been incurred, and immense harm done. To appreciate the extent of
it, one has but to look over the circle of one’s own acquaintances,
and count the worthless specimens of the engraver’s art that have
found a resting-place--permanently, I fear--in homes ill-prepared to
house them. Each one of these chromos has left its sting--each one has
excited a bitterness and resentment that, in the misdirected anger of
losers who will not see their own folly, is too often flung at Wall
Street and at the Stock Exchange.

The bucket-shop method is better known and easier to detect--hence it
is rapidly being exterminated. “Bucketing,” as it is called, usually
flourishes in small towns at a considerable distance from New York.
Formerly it thrived in the larger cities, even those adjacent to the
Metropolis, but it has now been driven from these places. It professes
to trade in stocks for its customers, and its office windows are
usually decorated with signs that indicate, though they do not always
say so plainly, that the house is identified with “the Stock Exchange.”

It allows its customers to trade on what is called “a two-point
margin,” that is to say, the buyer or seller is “wiped out” when the
market has fluctuated two points against the price at which the trade
is made. The word of the house must be accepted for the veracity of its
prices, which, however, are supplied to it by telegraph from New York.
Bear in mind that these prices are not telegraphed to the customer,
but to the mysterious persons in the rear office of the shop. They
call themselves brokers--this bucket-shop fraternity--but they are not
brokers in any sense by which that elastic term is used. They have not
even the “redeeming vices” of gamblers; they are swindlers.

The trader in such a place starts with all the odds in favor of the
house. To be exact he pays two commissions and the market “turn” is
against him _ab initio_. If the stock is 100 bid, 100¼ asked, he buys
at 100¼ always. If he sells at the same quotation, he sells at 100. He
could not sell in the former case at 100¼, nor buy in the latter case
at 100, so he starts ¼ per cent. “to the bad.” If, then, he bought
at 100¼, when the price is 98¼–½, his two-point margin is exhausted,
although the price has actually declined only 1¾ per cent. Thus he is
required to bet heavy odds on what is really no better than an even
money chance, even allowing that the prices are honest.

But they are not honest, because in the large majority of such
transactions the prices are “rigged,” that is to say, the bandits
who run the shop run it to win and not to lose, and “fix” the prices
accordingly. The player is thus required to give odds by laying 3 to 4
not on what the price of a stock will be, which is ruinous enough in
all conscience, but on what his opponent will choose to make it! Since
we are talking of gambling now and not of any real transaction, we may
as well adopt the vernacular of the fraternity and say plainly that the
bucket-shop man holds the stakes, cuts, shuffles, and deals the cards,
and then telegraphs you what your hand is. And the loser at this joyous
pastime thinks he has been robbed by Wall Street.

The game works against the player in yet another sense, as the _Wall
Street Journal_ points out, for when you buy stock you are entitled
not merely to the stock itself, but to all the privileges which it
carries, and not the least of these privileges is the effect which
your purchase will have on the market. That is to say, if ten thousand
purchasers throughout the country should buy even small amounts of
a certain stock on a given day, the combined effect of all these
purchases would undoubtedly lift its price on the Stock Exchange, and
thus we see that each buyer’s action carries with it a privilege of
no inconsiderable proportions. But the keeper of the bucket-shop does
not buy any stock for you at all; he merely makes a bet with you as to
what the price will be--and so, having robbed you of your money, he now
robs you of the privilege which goes with your money, since the alleged
purchase of a million shares of your stock in bucket-shops would not
have the slightest influence on its price at the Stock Exchange.

The man who has saved money by his own enterprise and thrift is a
fool if he gives his savings to mining “bonanzas” through the itching
palms of promoters, or to bucket-shops through the lure of slender
margins. The very fact that promoters always play upon the theory that
distance will lend enchantment to the view, and solicit their funds
solely by means of prospectuses, should be a sufficient warning to the
most credulous. A word to his banker, or a letter to any responsible
institution in Wall Street, will supply him with the necessary
information and save him from the possibility of loss.

As to the bucket-shops, if he is in doubt, he has but to follow the
same procedure. The New York Stock Exchange authorities will gladly
tell him whether the so-called “banker and broker” is really a member
of the Stock Exchange, and the local bank nearest at hand will expose
any fraud if it is called upon for information. As to the two-point
margin bait, it is a good rule that the smaller the margin asked for,
the less strength there is behind the house that asks it, and just in
proportion as the margin requirement diminishes so a suspicion of the
solvency of the firm should become fixed in the mind of the customer.
This warning applies to stockbrokers no less than to bucket-shoppers.
If the stockbroker takes from you a ten-point margin, and from somebody
else a two-point margin, you may be sure your money is being used to
finance the other customer’s trade, and you should lose no time in
withdrawing your funds from such a house.[49]

I often think that those who so freely criticize the Stock Exchange
would have applauded it could they have witnessed the fight between the
Exchange and the bucket-shops. In England, because telegraphs are a
Government monopoly, the transmission of prices by or to bucket-shops
is effectually barred, and the same is true of the telephone. But in
this country the transmission of prices by wire is not a breach of law,
and the difficulties that have attended the attempt to suppress the
transmission of racing news by wire to poolrooms shows that even if it
were prohibited there would be great difficulty in its enforcement.

Notwithstanding these obstacles, however, the Stock Exchange labored
zealously to close bucket-shops long before the officers of the law
became active, and, while the work thus done was not published
broadcast, it was none the less effective. Many a bucket-shop
proprietor doing business a few years ago under a high-sounding company
title probably never knew what hit him when the raid took place. It was
the strong arm of the Stock Exchange working unostentatiously that did
it, and in that good work it saved from further losses a large number
of innocent people who used the establishment with no knowledge of its
real character.

As long ago as 1875, in its contracts with the telegraph company, the
Stock Exchange began restrictive measures to prevent its quotations
from reaching the bucket-shops. In 1878 still more forcible measures
were employed, and in 1882 positive steps were taken by which the
Exchange authorities personally inspected the telegraph company’s
quotation contracts with its patrons. To-day this is carried to such an
extreme in the determination to protect the public from the impositions
of those who might in devious ways convey these quotations to improper
hands that even members of the Exchange may not install wires from
their offices to outsiders until the proper committee of Stock Exchange
authorities has viséd the application.

Meanwhile, a secret-service has been at work, silently ferreting the
hidden, underground channels in which the bucket-shop is forced to
conduct its operations. Thanks to this good work and to that now done
along similar lines by the Federal authorities, this form of rascality
is rapidly disappearing. Is it too much to hope that at least a part
of the unmerited criticism of the Stock Exchange by the victims of
bucket-shops may also disappear?

In heading this chapter “Cautions and Precautions,” my purpose was not
merely to warn the credulous outsider against the news items of the day
as related to the Stock Exchange, nor was it solely to point out to him
the pitfalls and dangers that exist under the Wall Street mask. I had
in mind also a word of caution to Stock Exchange members themselves.
That these gentlemen are more sinned against than sinning is, or it
should be, apparent to anybody who has taken the trouble to learn the
A B C’s of the business. Such a man knows that Stock Exchanges occupy
an important place in the mechanism of modern business; he knows, too,
that just in proportion as their functions enlarge and the scope of
organized markets increases, so persons will be found who foolishly or
dishonestly abuse the facilities there afforded.

“Reflection,” says a recent writer, “seems to have little part in the
intellectual equipment of the assailants of organized markets. The fact
that the stock market is sometimes abused by people who know nothing of
its purposes or are incapable of understanding the mighty influences
which dominate it, is no reason for considering it as a harmful
excrescence on the body politic.”

This fact established, one who has been a member of the Stock Exchange
for many years may, in a spirit of complete loyalty to the institution,
comment freely on some of the mistakes within the Exchange itself,
errors of judgment or sins of omission that have given to the popular
criticism of the day its one supporting prop. Admitting mistakes freely
is the surest way of correcting them; frequent reminders of them serve
to keep one on guard against their recurrence. The history of deposit
banking, for example, has been, like the history of the Stock Exchange,
a story of gradual development to meet growing conditions, and this
is true also of the history of note issues, joint stock companies,
clearing houses, cable transfers and of all the instruments that enter
into that economic structure which gives mobility to capital and
flexibility to credit.

In the very nature of things the development of each part of this
gradually devised machinery has been attended by mistakes, by errors
of judgment, and by occasional wrongdoing, yet we do not condemn the
national banking system because there were once wildcat banks; we do
not utter hasty judgments on stock-companies because in other days they
were badly organized and incompetently managed; we do not withhold
our support from railways because they once erred by pushing too
ambitiously into projects that ruined innocent stockholders; we do not
abandon our form of government because there was once civil war. No,
but we try to keep all these things in view in order to profit by them,
and to see to it that they do not happen again. We say of individuals
that no man’s vices are sufficient reasons for not admiring his
virtues. Why not apply the same code to business?

One of the mistakes of members of the Stock Exchange in the past has
been in trying to do too much business on too little capital. This is
a subject that calls for plain speaking, since it directly caused two
Stock Exchange failures in recent years, failures that were, I am sorry
to say, essentially the result of dishonesty. Every Stock Exchange
house is looking for business, and a house with small capital sometimes
gets more than it should attempt to handle. Such a house borrows from
the bank, as all houses do, and allows its bankers a 20 per cent.
margin; so far so good. But it accepts business from its customers on a
10 per cent. margin, and this means financing the difference out of the
firm’s capital. If the capital is large, the business is safe, but if
it is small, the house finds itself “loaded up,” as the phrase is, and
is then in such a predicament that it must either summon enough moral
courage to refuse business altogether and so advertise its limitations,
or abandon its moral courage, sell its customer’s stocks “short” and
incur the risk of buying them back cheaper.

The latter course is dishonest; it is in fact nothing more or less than
a form of “bucketing,” since the customer must lose for the broker to
save himself, while, if the customer wins, the broker may not be able
to pay. This is not a common practice of course--first, because 99
per cent. of the members are absolutely honest; second, because the
majority of those who carry accounts on the books of Stock Exchange
houses are wise enough to acquaint themselves with the firm’s resources
and to withdraw when too much business becomes apparent, and, third,
even though a broker were not himself essentially honest, he would
not dare expose himself to the expulsion and disgrace that would
attend exposure. Nevertheless, the thing has been done, and it may
conceivably occur again. How then may it be avoided?

As the Stock Exchange is, as we have seen, an unincorporated body with
a set of rules which no legislature and no court could enforce without
depriving a man of his constitutional prerogatives, it is obvious that
this and all other reforms must come from within; all the many reforms
that are constantly lifting the Exchange to a higher level come from
that quarter. There are 1100 members of the Stock Exchange and perhaps
600 of these are engaged in active commission business. A committee of
the governors can enter any member’s office at any time, and demand
every book or record without reserve. It has absolute power to compel
him to do anything that in its wisdom seems desirable. If he is doing
too much business on too little capital, he can be forced to restrict,
or to retire from business altogether. Failure to comply immediately
means expulsion and a peculiarly stinging disgrace. Naturally in
the face of these despotic powers any plan of mutually guaranteeing
brokers’ accounts, such as that employed by Lloyds in London, or by the
_Agents de Change_ on the Paris Bourse, would seem unnecessary.

The remedy lies, first with the members themselves in striving to
attain continually to a higher standard of business morality, and
second with increased watchfulness by the committee having this matter
in charge. In point of fact it is apparent that both these solutions
are now being employed to a greater extent than ever before. The two
failures that occurred some years ago as a result of this iniquitous
practice hurt the Exchange, and stung the members to the quick. It can
never happen again if the vigilance of the governors can prevent it,
and yet every now and then a bank fails even under the watchful eye of
the bank examiner. No committee and no group of committees can watch
the books of 600 houses engaged in a business in which the dividing
line between sound and unsound business may be crossed and recrossed
with surprising suddenness many times a day. The members themselves
must look to this, and that is what they are doing to-day, as never
before, with an earnestness begotten of real pride in their great

If they do not do it, if they relax in any degree the vigilance upon
which the proper conduct of their business depends in this important
respect, they will be forced sooner or later to resort to the plan of
guaranteeing the accounts of their fellow members, or to submit to
that form of government incorporation or regulation which must impair,
if it does not actually destroy, their usefulness. Members must also
see to it that manipulation in its improper forms is driven out of the
Exchange, and that every conceivable precaution is taken in the listing
of new securities. These matters I shall discuss elsewhere. Meantime it
is cheering to note that Stock Exchange failures, whether arising from
this or any other cause, are diminishing in number. In London, at the
account day immediately following the failure of the house of Baring,
thirty Stock Exchange houses announced their inability to meet their
obligations. Certainly the New York Stock Exchange has not witnessed so
many failures in ten years.

One of the many excellent results of the work of the Hughes Committee
from the standpoint of the Stock Exchange was the publicity that came
of it. Critics of the institution had long found fault with it because
of its atmosphere of aloofness, the air of mystery that seemed to
surround it, its silence under attack, and its apparent unwillingness
to defend itself from adverse comment. This reticence, however, while
it did harm, was more apparent than real. In so far as the Stock
Exchange is concerned the advantages of publicity have long been
recognized. The difficulty has been in having its purposes and its
methods properly attested by competent authority in a way that would
enlighten the public and carry conviction. Members and friends of the
Exchange feel very strongly that in this day and age, when the spirit
of publicity is in the air, the Stock Exchange should fall in line with
a resolute determination to assert itself and make itself heard on all
proper occasions.

If a sub-committee of Congress retains as counsel a shrewd lawyer who
by devious ex-parte methods reads into the record and thence into the
newspapers only such biased and prejudiced information as will do harm
to the Exchange, while rigidly excluding all that properly belongs
there by way of refutation and explanation, energetic steps should be
taken to remedy this obvious injustice by invoking that spirit of fair
play which is essential to any judicial inquiry. These are not the days
of the Inquisition. We have progressed beyond the point of the Star
Chamber. Members of the Stock Exchange know that they will receive fair
play from the newspapers whenever they seek it, but they cannot expect
to find their side of the case stated unless they themselves take the
necessary steps to secure its presentation. And the way to do this is
to proceed with energy and determination against every avenue from
which the malicious slander or the insidious suggestion emanates.

The time has passed to sit supinely under every sinister attack and
imagine that a consciousness of rectitude will suffice as an answer.
Let the Exchange bestir itself. If, as happened very recently, a judge
on the bench can so lose his poise as to say to a common thief at the
bar, “You have committed a petty theft and you must go to jail--but
had you gone down to the Stock Exchange and stolen a million you would
go free”--such an unworthy utterance should be handled promptly and
without gloves by the Exchange authorities, and the same course of
treatment should be applied vigorously to every thoughtless minister
of the gospel and every cheap politician who, because the Exchange
has so long remained silent, may think that such silence entitles him
to utter any libel that comes to mind. The newspaper that publishes
the original utterance of this judge or that preacher will publish
also the steps taken by the Exchange to bring him to book, and even
though the slanderer may escape the consequences of his act through
the technicalities of the law, or otherwise, the knowledge that the
Exchange is at last aroused from its lethargy and in a fighting mood
will serve to deter others from similar indiscretions. I violate no
confidence when I say that henceforth the Stock Exchange will be found
defending itself manfully, and I venture to remind all noisy seekers
of notoriety that “thrice is he armed who hath his quarrel just.”

The Stock Exchange has felt, since the report of the Hughes Commission
in 1909, that such a report, by such a body of men, would inevitably
stay the hand of many of its detractors by showing them just what
the Exchange is trying to do, and just how the work is done. “The
committee,” says its chairman, “was in session about six months. Its
expenses were paid by the members themselves, and since frugality was
a necessity the services of the stenographers were dispensed with, the
members taking only such notes of the testimony of witnesses as each
one deemed important to the matter in hand. The officers of all the
Exchanges in New York City were invited to appear before the committee
and answer questions both orally and in writing, and all of them
responded promptly and courteously, as often as they were asked to do
so. Many volunteer witnesses, citizens of the State, were heard. None
such was refused a hearing. Citizens of other States were not called,
or accepted, as witnesses unless they had given evidence, by published
writings or otherwise, that they had something of value to contribute
to the discussion.”[50] This committee was composed of Horace White,
Chairman; Charles A. Schieren, David Leventritt, Clark Williams, John
B. Clark, Willard V. King, Samuel H. Ordway, Edward D. Page, Charles
Sprague Smith, Maurice L. Muhleman.

Nobody who read these names doubted the independence and public spirit
of its members. It was precisely the sort of committee that all
fair-minded men welcomed. The high character of the members carried
assurance of their good faith; their wisdom and practical experience
meant a critical analysis of the subject; their independence of
spirit made a whitewash impossible. Here then was the long looked for
solution.[51] If there were abuses, nobody was more anxious to know of
them and of the remedies for them than the members of the Exchange;
if indefensible conditions existed nobody stood readier to correct
them. It was felt that this was the first and greatest step toward
publicity under the right conditions, and that a valuable contribution
to the popular knowledge of an intricate and greatly misunderstood
subject would result. There was nothing ex-parte or one-sided about
the committee’s deliberations; everybody with a grievance might state
it, and both sides were accorded fair play. But, _mirabile dictu_,
the very fact of its fairness is found, three years later, to afford
a reason for flouting it at the hands of counsel for a congressional
sub-committee that will not hear both sides! Is there anything just
or equitable in the proceedings of such a body, or in the prejudiced
emanations of its precious lawyer? Is it conceivable that the
law-making branch of our government will give serious heed to a report
thus conceived in bias and born in inquisition? I think not.

Passing to more agreeable topics, the late Addison Cammack is said to
have remarked on one occasion that publicity was ruining the business
of Wall Street and the Stock Exchange and would ultimately drive it all
away. Those were the days of inadequate and unreliable balance sheets,
of suppressed reports of earnings and assets, of accounts that were
never subjected to independent audits, and of a general atmosphere of
mystery that led to financial abuses of all kinds. As a result of those
conditions there was created in the public mind another vague aversion
toward the Stock Exchange, and a popular prejudice which has been
hard to dispel. Cammack had been brought up in the old school; he saw
what was coming, but he mistook causes for effects. He would probably
turn in his grave could he see the new conditions and contrast them
with the old. As a matter of fact nothing could be more democratic
in principle than the way the business is conducted nowadays. The
rights of stockholders to information, the reports and balance
sheets submitted to them, the mass of Wall Street financial material
in the magazines and journals, the stock ticker, the news ticker,
the printed news bulletins, the card index system, the statistical
manuals and the quotation lists published in the morning and evening
newspapers, together with the market letters constantly circulated by
brokerage houses, these are evidences that the public is entitled to
full information and that many avenues by which it may safeguard its
interests are always open.[52]

It has long been known that investors and speculators in America enjoy
vastly more safety in their market operations through these various
avenues of publicity than do investors and speculators abroad. There
are no tickers worthy of the name across the water, and the daily list
of business done, as published in our newspapers, with bid and asked
prices and total transactions in detail, is unheard of among all the
Bourses of Europe. The eminent French economist, Paul Leroy-Beaulieu,
speaks very earnestly of the superiority of our New York Stock Exchange
system in this matter; he says the need for a similar method in France
is “very urgent,” that the information thus spread broadcast is “very
instructive,” that the pledge of publicity “is better assured in the
United States than in any other country of the world,” and that an
immediate reform along these lines is “absolutely necessary” in Paris
in the interest of the public.[53]

This leads to another word of caution suggested by the fact that the
public, despite what is done for it, does not always avail itself of
these safeguards. Men buy worthless mining stocks without bothering
to inquire into their bona fides. They put their savings into new
and untried enterprises and they neither read the balance sheets nor
attend the meetings. A thousand stockholders will attend a meeting in
London and they will have their questions answered whether the majority
in control likes it or not. In New York almost nobody attends these
meetings. The stockholder’s right to information is absolute, but he
does not go and get it, and so finally when something goes wrong he
writes angry letters to the newspapers and damns both Wall Street
and the Stock Exchange because he has been burned, although the fire
escape and the extinguisher were always at his hand. “It is all very
well” says the _Wall Street Journal_, “to talk about what the law,
the newspaper press, and the Stock Exchange can do to protect the
investor, but the investor himself can do more than all his protectors
put together. His investment, however conservative and secure, carries
responsibilities as well as privileges, and it is his duty to discharge
the one in order to safeguard the other.”[54]

He must learn to make inquiries, to discriminate, to use his wits, to
read mortgages, to study sinking funds and operating ratios. He must
eschew the financial columns of questionable newspapers and confine
his attention to those of established probity. He must not put all his
investment eggs into one basket. The Stock Exchange cannot do all this
for him, but it is always ready to help him, and the information he
requires may be had for the asking.

In a recent public address the president of a great American railway
sounded an encouraging note. “We railway men,” he said, “have been in a
practical school, having taken a thorough course in working economics.
We have learned that a railway can thrive only as a result of the
prosperity of the community it serves, and that the best policy, from
the viewpoint of permanent railway interests, is one of co-operative
helpfulness.”[55] The New York Stock Exchange has learned the same
lesson, in a similar school. As an institution it realizes that if it
is to grow in prosperity the public must grow, and that as the public
is attracted to investment and speculation by the soundness of the
institution through which it deals so it requires and must receive full
information and an assurance of fair play. “Co-operative helpfulness”
is the only way. Members of the Exchange who become discouraged now and
then must bear this in mind. In the face of every harassing annoyance
they must never cease their work of keeping their house in order, and
of inviting that portion of the public that is open-minded to lend
a hand. Their labors resemble the task of Sisyphus; like him they
must cultivate the spirit of “everlasting hope,” and when unworthy
assailants seek to prejudice the popular mind, they must stand forth,
give blow for blow, and never say die.

Pessimists may blind their eyes to the manifold evidences of material
progress on every hand, but just as the workshop, the farm, the
school, the hospital, and the bank, each supplies proof of continuing
improvement, so also in its sphere of usefulness does the Stock
Exchange. Within a few years, for example, it has rid itself of the
unlisted department, and this may very properly be mentioned as
a distinct progression. Under the old system a limited number of
industrial corporations were permitted to obtain a market on the
Exchange for their securities, although they furnished but few figures
to the Listing Committee in return. This was a practice wholly at
variance with the duty of the Exchange to protect the investor, since
it practically assures him that corporations admitted to the Exchange
have demonstrated their worth to the authorities. That character and
countenance should be given to the so-called “unlisted department” was
a mistake, and it has been abolished.

In this reform the Listing Committee accomplished a twofold blessing in
setting the Exchange right with the public by ridding their institution
of anything approaching the blind pools of early days and at the same
time forcing certain wealthy corporations to abandon their policy
of concealment or lose the privilege of the floor. Certainly if the
country’s leading steel corporation can afford to take its 150,000
stockholders and its 250,000 employees into its confidence and treat
the whole public, including its competitors, with entire frankness,
there is no insuperable difficulty about the others. In any case the
desire to protect the investor, which is the controlling motive of
the elaborate restrictions imposed by French and English laws in new
security offerings, has advanced far in this country within the last
few years, and the farther it goes the more popular it becomes.

That there is still work for the Listing Committee to do goes without
saying. One of the most promising improvements that comes to mind at
the moment is the one employed in London, where shares of new companies
are not admitted to the Board unless a sufficiently large allotment
has been made to the public. This is also the rule in New York, but
perhaps we may add to its effectiveness by increasing the size of the
public allotments. Another praiseworthy feature of the London system is
that which has to do with vendor’s shares, which are not listed until
six months after the admission of the company’s securities. Under this
plan if one or more individuals secure a block of stock in payment for
properties in the concern, they are prevented from unloading those
shares on the public until a sufficient time has elapsed to determine
the merit of the property.

Another instance of progress made in recent years in the internal
mechanism of the Exchange, is the abolition of fictitious transactions
or “wash sales,” utterly indefensible transactions not enforceable
at law. These were always prohibited under the rules, yet despite
this a flagrant instance of a violation was discovered in which the
guilty were made to suffer. So far as I am aware it was the only case
on record in which obvious collusion between buyer and seller in a
Stock Exchange transaction was shown. The broker in this instance must
have known that the Committee would demand his books and that it would
appear that no genuine bargain had taken place. If he did not know
it, he knows it now. The example made of him will, I fancy, prevent a
recurrence of the episode.

This leads to the subject of “manipulation,” as it is termed, or the
uses to which the facilities of the Exchange are sometimes put to give
certain stocks an appearance of activity out of proportion to their
normal movement. Now we must assume as our major premise in discussing
this matter that any artificial interference with the natural operation
of supply and demand is pernicious; from the standpoint of economics
it is harmful. The Stock Exchange has nothing to conceal, and it
recognizes not only that manipulation exists, but that at times it
assumes the proportions of a real evil. Therefore it is doing what
it can to stop it, and it will continue to do so. Whenever unwonted
activity arises nowadays in a security long dormant, as happened very
recently in the stock of a certain gas company, the governors of the
Exchange entrusted with such things take the matter in hand and put a
stop to it if obvious manipulation can be shown after investigation.
The public and the newspapers know nothing about it; the vial of their
criticism is poured forth only when something escapes the watchful
eye of the Exchange authorities, as must inevitably happen now and
then. But if these critics could know how indignant the members of the
Exchange became when the Hocking Coal episode occurred, and if they
could see the resolute determination of all hands to prevent another
such occurrence, they would at least give the Exchange credit for
faithfully attempting to suppress manipulation of the flagrant sort.

The fact is that all forms of manipulation are by no means improper;
some of it performs a useful service and is a necessary and legitimate
part of the functions of the Exchange. To understand how true this is
let us consider, for example, the case of a corporation that has been
organized, let us say, to develop a group of recently discovered coal
properties in new territory. This is legitimate endeavor as applied to
American enterprise; in a broad sense it is the spirit of adventure and
speculation that has made our country commercially rich and powerful.

Now, in order to develop this enterprise, it is necessary to ask the
public to buy its shares or its certificates of debt and thus become
partners in the undertaking. In that way our great railways were built
and our Western country opened to progress. But the public will not
support the new enterprise until it knows something of its merits, and
accordingly the company introduces its property through the medium of
that great central market-place--the Stock Exchange--furnishing the
Exchange authorities with its credentials in minute detail.

At this point the so-called manipulation takes place. The securities
are new, the company may wish to advertise them, attract attention to
them, and solicit a public interest in the laudable enterprise that
lies behind them, all of which is as right and proper as it is for any
merchant to establish a market for any new article on his shelves. To
accomplish his purpose the merchant must first fix an arbitrary price;
if the public will not buy at that price he must “manipulate” a lower
price, and in all his subsequent dealings there must be manipulation
of one form or another designed to conform to the supply and demand in
that particular article.

The men behind the coal company in question must do the same
thing. They fix a price at which their shares are introduced in
the market-place; let us say this price is $100 per share. This is
manipulation. It may happen that the public will not buy at that price,
in which case the price is lowered, let us say, to 80. This also is
manipulation. But is it improper? Is it subversive of good morals? Is
it an unhealthy interference with natural laws of supply and demand? Is
it anything less than a legitimate method of attracting capital into
worthy enterprises?

Critics are invited to remember that the Stock Exchange does not buy
or sell anything; it merely acts as a market-place through which,
among other things, capital may be directed from channels where it
is least needed into those where it may be most beneficially and
profitably employed. If, therefore, an oil company or a coal company
or any other enterprise whose ultimate success cannot fail to enrich
the community seeks to market its wares--i. e., its securities--and
thereby enable itself to do business, where else is it to turn save to
the Stock Exchange, and how is it to fix an attractive market price at
the outset save by what is termed manipulation? Nobody is compelled to
buy; as for selling, any holder of 100 shares or any other number of
shares can sell them at will, and no amount of manipulation can prevent
him from a free exercise of this privilege. You may depend upon it,
Mr. Critic, that the Stock Exchange will take pains to suppress all
forms of manipulation that are unsound and harmful, but until you or
some other gifted student of economics can devise a method by which
capital may be attracted to excellent channels other than through the
medium of an Exchange, manipulation of the sort just described must
continue or enterprise must stop. Strike out the word “manipulation,”
and substitute “establishment of values” in transactions of this sort,
and the practice seems to become, as it really is, in keeping with the
finest traditions of the market-place.[56]

It is a difficult matter for the Stock Exchange authorities to suppress
all forms of manipulation that are plainly and admittedly improper.
Such things do exist; the difficulty is in devising ways and means
of preventing them. Mr. Smith, a non-member of the Exchange, may
be interested in a certain security to which he wishes to give an
appearance of activity. He calls Brown, a stockbroker, and instructs
him to buy 5000 shares “at the market.” Then he telephones Jones,
another stockbroker, to sell 5000 shares. Brown and Jones are each
in ignorance of the other’s order, but they meet in the crowd where
this stock is dealt in, and their orders combine to give the market an
appearance of animation. The governors are as determined to stop this
sort of thing as the most energetic critic could wish; they send for
the two brokers and the facts are revealed. But as each was entirely
innocent of wrongdoing, and as no rule of the Exchange and no law of
the land has been violated, what is to be done?

They may caution both brokers against accepting any more business from
Smith, but Smith is not a member of the Exchange, and hence he is not
amenable to its discipline. When his next orders are refused he gives
them to some one else, and if the entire Stock Exchange refused to
accept business from him he would and could with perfect propriety ask
his bank, or a trust company, or an individual to give out the orders
under their own names. Finally, if the Exchange authorities were so
sagacious as to be able to close to this man every conceivable avenue
by which he might approach the Stock Exchange in New York, there
would still be left open to him the market in Boston, or Montreal, or
London, or any other centre in which the security was listed, and the
pernicious effect of his manipulation in these cities would be felt
in New York just as promptly and just as harmfully as if they had
originated here. I mention this case, a purely hypothetical one, to
show how easy it is for manipulation of this sort to find employment,
despite all that may be done to suppress it. Perhaps somewhere in
the noble army of critics there may be one who can devise a means of
meeting this issue. If so, let him stand forth and speak. The Stock
Exchange, root, stock, and branch, will be glad to hear from him.[57]

Counsel for the Congressional Committee that is in session as these
lines are written seeks to raise another dreadful ghost with which to
frighten ignorant people in his alleged “discovery” that a great part
of the business done on the Stock Exchange is speculation. He parades
through the newspapers the fact that the number of shares bought and
sold often largely exceeds the number transferred on the companies’
books. In a chapter on “The Uses and Abuses of Speculation,” I have
attempted to show that the more speculators there are in a market, the
better and safer the market, and I rest this dictum on the authority of
every student of modern markets. In this connection let us consider the
opinion of a thoughtful newspaper writer. “There is no doubt,” he says,
“that the committee will find that there is speculation in Wall Street,
just as there is speculation elsewhere, and in commodities other than
in stocks and bonds. The instinct has always been a pronounced human
characteristic, being a part of human progress, and the manifestation
of it is one sign of the difference between man and the lower sorts
of creatures. It is doubtful whether the general gambling impulse can
be entirely wiped out, even if the mighty power of an act of Congress
be called into requisition. If Mr. Pujo and his committee can abolish
speculation in Wall Street (to say nothing of gambling, which is not
the same thing), they may be asked to abolish every commodity market
throughout the land, for there is plentiful speculation in all of them.

“What seems to bother some representatives of the Pujo Committee is
that the number of shares traded in on the Stock Exchange exceeds
largely the number actually transferred. It is true, for example,
that the number of shares of United States Steel common sold during
last year were largely in excess of the number of shares outstanding,
the sales amounting to 31,266,208 shares, while the entire number
outstanding was only 5,084,952. The ratio of six to one suggests
healthy activity in the market for steel stocks. It is conceivable that
a block of stocks may pass through many hands before it arrives at
its ultimate owner, just as a crop of potatoes passes through a long
chain of handlers and buyers and dealers before it reaches the ultimate
consumer. Meantime, the number of potatoes has neither increased nor

“But the potato crop, which easily changes hands six times in a year,
is finally eaten. The stocks go on forever. The legitimate holder is
not injured if they change hands not six, but sixty times, provided
he is secured by proper publicity, which the Stock Exchange assures.
The free speculative market is in itself an element of value, and
if it were destroyed the investor would be chiefly injured, while
future capitalization for the development of the country would be

At the outset I began by cautioning the reader not to cry out in alarm
over the utterances of newspaper statesmen bent on justifying their
existence, and determined to make the punishment fit the crime. Stocks
will always be bought and sold, they will pass from hand to hand just
as horses are traded and lands are exchanged. The modest dollar, too,
will continue to pass from pocket to pocket, having a thousand owners
and performing a thousand functions many of which may alarm a timid and
unsuspecting lawmaker, but which to you and me may seem natural enough.

When you read that a great Congressman is determined to put the Steel
corporation into bankruptcy and throw its 250,000 employees out of
business, depend upon it he is only trying to justify his job for the
benefit of this constituents. When somebody else seeks to mend his
fences by the noisy announcement that the Stock Exchange reeks with
improper manipulation, that speculation is wrongful, and that the
criminal nature of an institution is directly proportionate to its
size, remember that the votes of your fellow-citizens put this man
in office and that you and they must foot the bill, since it is your
money that pays for all these junkets, all these investigations, and
all these political excursions. More than that, you must pay your share
of the $160,000,000 for pensions, of the $40,000,000 for post-offices,
and of the countless millions for rivers and harbors, and these, too,
are voted with amiable frugality by the gentlemen who see nightmares in
banks, Clearing Houses, and Stock Exchanges.

Finally, try to investigate and study all these matters for yourself.
Read the men who have spent their lives in the study of economics.
Compare the results attained by our great financial institutions with
those reached in similar lines abroad. In the particular application
of these studies to the New York Stock Exchange, you will find that
charges such as we have been considering could be brought against any
institution that has stood the test of time and made the mistakes
that fallible human beings must make. You will find that if changes
and improvements seem to come about slowly it is not because of the
unwillingness of the Exchange to remedy these conditions, but because
of the gravity and deliberation with which they must be considered in
the light of the future as well as the present.

The management and control of a great public business, especially
one that has long survived public criticism, is no light matter. It
requires more than common industry, and more than common ability. What
the Stock Exchange asks of you and of every thoughtful citizen in the
land is a recognition of these matters, and a patient survey of all
that enters into them. The critic in “The Vicar of Wakefield” laid it
down as a good rule that you should _always_ say the picture would have
been a better one if the artist had taken more time. Criticism offered
in this spirit the members of the Stock Exchange can bear with good
humor. What hurts them on the raw is the critic’s failure to study and
investigate, or, getting back to the text of Mr. Bryce’s sermon, “the
neglect to think.”



A panic is a state of mind. It cannot be regulated by statute law
nor preached down by press or pulpit. At such times, suspicion,
apprehension, and alarm take possession; reflection and sobriety
are crowded out; men do and say irrational and unreasoning things;
incidents trifling in themselves are exaggerated into undue
proportions; all kinds of difficulties are conjured into the
imagination. The best that can be said of such a phenomenon is that it
is of brief duration.[59]

In Wall Street, where men are accustomed to looking forward at all
times, the question is ever in mind as to the next panic. The last one
left its sting; we are interested now in knowing about the future.
Have we learned how to avoid these difficulties? May we hope to
diminish their force and mitigate their terrors? May we rely upon the
superior organization of business and the greater quantity and quality
of capital to soften the effect of the next shock? I think not. We
may lull ourselves into a coma of fancied security as we reflect upon
experience and its expensive lessons, but we deceive ourselves if we
think that we shall finally arrive at a point where these convulsions
shall cease.

Nothing of that sort can come about among people strong with health
and vigor, confident and full of energy, and impatient for action.
With such a people life is incessantly mobile; a constantly increasing
volume of creative activity impels them onward. Panics are unknown
in dead countries and in countries that have not yet heard the call
of progress; in all other countries the violence of these shocks is
directly proportionate to the enterprise of the people. The more
civilization there is, the greater the creation of wealth; the more
wealth there is, the greater the volume of speculation that creates
wealth. In such circumstances it is idle to talk of a time when panics
shall cease, because confidence and enterprise must ever push onward,
speculation in material things must accompany them, supply must
overtake demand, and human nature with its moods and caprices must
finally pay toll.

Vast industrial, commercial, and credit expansions lie somewhere
ahead, and somewhere ahead excesses and indiscretions the world over
must play their part and exact their penalties. We should cease to be
surprised at these vicissitudes, for, “paradoxical as it may seem, the
riches of nations can be measured by the violence of the crises which
they experience.”[60] Moreover, panics are rarely such unmitigated
calamities as they are pictured by those who experience them. At least
they serve to place automatic checks upon extravagance and inflation,
restoring prices to proper levels and chastening the spirit of
over-optimism. In a world of swift changes they are soon forgotten.

We may seem to be prepared for these periodic set-backs, and there
may be men amongst us of sober reflection who are really wise enough
to foresee the top to a normal movement, yet the accidents that have
happened will happen again,--bad harvests, war, sudden failures,
earthquakes,--these are not easily discerned in advance. Sanguine and
ardent merchants will make the same old mistakes; good times will
engender the same old hallucinations; people who see, or think they
see, wealth being created all around them, will always rush in and buy
at the top; there will be too much work for the dollar to do--and after
that the deluge. Finally, in order that we may not become pessimists,
let us remember the words of the greatest of American philosophers:
“The changes that break up at short intervals the prosperity of man are
but advertisements of a nature whose law is growth.”

Another phenomenon quite as curious as that of panics, and one that is
similarly psychological, is the unhesitating, slam-bang zeal with which
we place the responsibility for these misfortunes on the shoulders
of others. We, as a people, have brought the disaster upon ourselves
by reason of our indiscretions. We have lost our heads and entangled
ourselves in a mesh of follies. But we do not admit such reproaches,
even in our communings with self. Not at all. The fault lies elsewhere,
and it is balm to our bruises to place it elsewhere with indignant
energy. It will not do to preach at such times about currency systems,
laws of supply and demand and kindred generalities, for these are
abstract and vague to a mind inflamed by losses. What such a man wants
is a head to hit; something concrete, a target for his exploding wrath.
And he never hesitates. He says Wall Street did it. His fathers said
the same thing, and his children will follow suit.

Now here is a strange thing. After a man has said, “Wall Street did it”
over and over again, he believes it, just as he believes or takes for
granted a similar tedious reiteration by the humble katydid. To such a
man, the thing he _wants_ to believe, when stated over and over again,
comes by repetition to fix itself in the mind as a demonstrated truth,
notwithstanding an utter absence of proof or of reasoning. He says
“Wall Street,” or “the Stock Exchange,” until he can think of nothing
else. It is a catch-phrase, short and sweet, which he hammers home to
his own ineffable satisfaction, and he thinks it and broods over it to
his heart’s content. The politician then comes along with his cures for
all the ills of society, and, finding Wall Street a convenient means of
perpetuating his accidental notoriety, his voice joins the harmony. The
indictment is then complete.

Take the panic of 1907 as the last and most conspicuous example. The
financial losses involved, and the extent of the disturbance of the
machinery of credit, made it the worst panic of this generation. As it
burst upon the country at a period when to the outward eye prosperity
reigned throughout the land, men were at a loss to explain it. They
could not understand how such appalling conditions could occur in
such apparently cheerful surroundings. As everybody was affected by it
in greater or less degree the whole country was full of people with
a grievance. They were themselves directly to blame for it, but they
looked elsewhere for the responsibility for their folly.

That sinister influences were at work was, in the popular mind,
undeniable; and by that same token we are pretty close to “Wall
Street” when we talk of things sinister. At about that time a member
of Congress made a speech in which he asserted, with all the art of
katydid repetition so dear to the heart of the true believer, that
the Stock Exchange was the cause of the panic. Rich men broke the
market and “held the bag,” he said, while panic-stricken owners of
property poured the invested savings of a lifetime into that capacious
receptacle. Nothing could be simpler. Newspapers must print such
things, and the public found what it wanted on the first page. Even
to-day, five years after the fact, this delightful explanation of the
1907 panic blossoms like the rose as a political campaign progresses.
The voice of the hustings “knows its business.”

Mr. John Burroughs warns us that it is one thing to treat your facts
with imagination, but quite another thing to imagine your facts.
Sufficient time has elapsed since 1907 to soften, somewhat, the bias
and prejudice created by the events of that year, and perhaps there
may be among us minds open to reason. The New York Stock Exchange
feels, honestly, that a great injustice was done it by the criticism
and abuse so generously poured out in the first shock of that event.
Far from causing the crisis, its members assert that the institution
fulfilled one of its most useful functions in giving ample warning
of its approach, and that, when those warnings were disregarded, it
concentrated all its machinery on the task of restoring order from
chaos. They speak feelingly when they say that never in its history has
the Stock Exchange been called upon to deal with so great an emergency,
and never has it demonstrated so admirably its fundamental purposes.
When they make these statements they offer to prove them. Let us
examine the proofs.

The panic of 1907 was not unlike many preceding financial disturbances.
The opening months of the year had witnessed a general liquidation
on the Stock Exchange, brought about naturally, and in simple,
automatic compliance with economic laws and precedents. There had
been over-expansion in all lines of business; careful students saw
the portent; able men of power and influence heeded its warning
and set corrective forces in motion months before the shock came.
Total transactions in shares sold on the Stock Exchange had risen
from 187 millions in 1904 to 284 millions in 1906, while the value
of the securities thus sold increased from 12,061 to 23,393 millions
of dollars respectively. This was too rapid growth, and the general
liquidation that had been under way for months effectually corrected
it, since New York City bank loans secured by Stock Exchange collateral
declined, as shown by the Comptroller’s report, from $385,652,014 in
August, 1905, to $251,867,158 in August, 1907--a corrective force
represented by $133,784,856.

The Stock Exchange has been defined as “a barometer of future business
conditions,” and never did a barometer give clearer warning. It said in
effect to all the banks of the country and to business men generally:
“There has been a widespread over-expansion of credit; it must stop;
we are doing our share here in New York to correct it; you must do
likewise.” And, in order that there might be no failure to understand
what was meant, New York City bank loans were reduced with drastic
emphasis, months before the panic came, by nearly 35 per cent. “Without
an exception,” writes Prof. S. S. Huebner, “every business depression
in this country has been discounted in our security markets from
six months to two years before the depression became a reality.”[61]
Senator Burton, another authority, emphasizes the point further: “In
addition to other influences which promote an earlier rise and fall,
there must be mentioned the more careful study and attention to the
financial situation which is given by dealers in the stock markets
and in great financial centres. They often forecast the grounds for
a rise or fall in prices before the general public is awake to the
situation.”[62] This, then, was the situation in the summer of 1907.
The Stock Exchange had “cleaned house,” and had liquidated thoroughly,
warning the country to go slow.

Why was not this warning heeded? I recall vividly the daily expression
of surprise, on the floor of the Exchange, and throughout the financial
district, in the months that elapsed between our March liquidation
and the outbreak of the October panic, that the country should pay so
little attention to “Wall Street’s” admonition; that it should continue
its unprecedented boom despite the plain intimation that the funds to
support it were exhausted, and despite the general knowledge of every
tyro in business that future conditions are discounted in Wall Street
as freely as promissory notes.

Had the business interests of the country so much as inquired into that
warning they would have found by turning to the Comptroller’s reports
of the loans of national banks for the entire country that such loans
had expanded from $3,726 millions in 1904 to $4,679 millions in 1907.
They would have seen that whereas the New York City banks _contracted_
their loans by nearly $134,000,000 from August, 1905, to August, 1907,
loans and discounts by the banks of the whole country in that period
actually _expanded_ $700,000,000. Surely it will not be urged that
Wall Street or the Stock Exchange had anything to do with bringing
about this expansion. On the contrary, it shows that speculation in
commercial lines, in new enterprises, in lands and in all the various
forms that “out-of-town” banks are expected to finance, went on and
on in vastly increasing volume long after the danger signal had been
hoisted on the Stock Exchange, and in utter disregard of the warnings
those signals conveyed.[63]

As the summer of 1907 advanced, speculation throughout the country
continued in rapidly increasing volume, while on the Stock Exchange
there was an almost complete cessation of activity. Business men of
the West and South seemed to feel that as there had been no serious
failures, and as the decline in the stock market had restored values
to an attractively low basis, there would be a normal recovery similar
to that which followed the panic of 1893. They felt that the trouble,
whatever it was, had now been corrected, and in this fancied security
they went about with further expansion of their business enterprises,
confident that no serious difficulties were in store. The Stock
Exchange was often cynically referred to in that period as “the only
blue spot on the map.” Its members were cheerfully invited by a Western
newspaper to “shake off their torpor and join the Sunshine movement.”

It is only fair to say that there was some force in the buoyant if
superficial viewpoint of the country at large, for in the autumn
of 1907 we were blessed with all the kindly fruits of the earth in
abundance. The average crop of our agricultural products gathered
that year was enormous, and behind it lay large reserves of wealth
that had accumulated from a series of good crops in the years just
preceding. There was, moreover, a partial failure of foreign crops that
brought about heavy foreign requirements, thus assuring rich returns
to American producers. Our railroads, which in the previous panic of
1893 were so affected by declining traffic and by the unproductiveness
of new territory into which they had ventured that bankruptcies
became general, were early in 1907 in better physical condition than
ever before. Their gross earnings were at a maximum; their surpluses
fat with the profits of recent years; their credit high. A long
accumulation of foreign-trade balances had made the inherent strength
of the nation greater than ever before. Finally there was the great
essential difference between 1907 and former years in that we were now,
by statute law as well as in fact, on a gold-standard basis.

And yet, without one unsound basic factor visible to superficial
observers, we were suddenly plunged into a grave disaster--a panic
which in actual money losses surpassed any of its predecessors. It
came, this cataclysm (as the Stock Exchange had vainly predicted six
months earlier), at the worst time it could possibly come, just when
the banks were called upon to furnish $200,000,000 to transport and
market the crops. Small wonder that in the face of such an optimistic
outlook men stood aghast at the violence of the panic. As they had
not understood the warning, so they could not understand its swift
fulfilment. In all the long processions of panic-stricken people who
stood in line at the banks in those trying days, not one in a hundred
could understand how an institution could be solvent and yet be forced
to suspend. Later on, smarting from losses, this bewilderment gave way
to distrust and suspicion, as is often the case, humanly speaking, when
men look elsewhere than to their own folly for the sources of their
misfortunes. They were in a receptive mood when the charge was made
that “Wall Street and the Stock Exchange” had brought about all this
misery; they believed it to be true, and many still believe it.

The charge was so widely circulated and was fraught with such
possibilities of mischief that there was danger of ill-considered
legislation directed against the Stock Exchange and supported by
ill-advised public opinion. Thus it happened that Governor Hughes of
New York, doubtless moved to forestall hasty law-making, appointed a
committee to investigate the Stock Exchange. In another chapter we
have reviewed the work of this commission; meantime, the words of its
chairman are quoted, in passing, as a sort of _ex post facto_ reply to
the outcry that “Wall Street did it.”

“The immediate cause of the panic,” he says, “was a simultaneous rush
to sell securities, by holders who perceived that there was trouble in
the money market, and who wanted cash to meet maturing obligations.
These holders were not Wall Street men merely, but people in all parts
of the country who had invested some of their savings in stocks and
bonds. The very _raison d’être_ of the Stock Exchange is to supply a
market where invested capital can be quickly turned into cash, and vice
versa. The remoter cause of the panic was a long course of speculation
in all kinds of property, real and personal, that had pervaded all
parts of the country, and many parts of the Old World, and had now
reached its climax.” Mr. White here adds in a footnote that it has been
“_shown conclusively that speculation on the Stock Exchange was not the
chief contributor to the collapse of 1907, but that speculation on a
much wider scale, through the length and breadth of the land, was the
exciting cause_.”[64]

I have said it was not surprising that the public failed to observe
signs of disturbance in the happy conditions that seemed to prevail
before the panic. The blindness of the mass of the people to these
impending catastrophes is, indeed, a marked characteristic of all
similar epochs. Let us digress for a moment and consider the history of
other great disturbances. In 1825 the King’s Speech as read by the Lord
Chancellor dwells on “that general and increasing prosperity ... which,
by the blessing of Providence, continues to pervade every part of the
Kingdom.” This was in July; in December of that year the whole country
was torn by a devastating financial crisis. The London _Economist_,
in 1873, dwelt at length on the “astounding” progress of the Austrian
States, and said, “All over the rich countries of the Danube, capital
and labor are vigorously at work in the discovering and turning to
profit the amazing resources which have been lying unheeded for
centuries.” This was written in March; the Bourse at Vienna closed its
doors May 9th, and a panic of exceptional severity was followed by long
and continued depression. On December 31, 1892, R. G. Dun & Company’s
_Weekly Review of Trade_ said: “The most prosperous year ever known
in business closes to-day with strongly favorable indications for the
future,” and yet four months later the storm burst.[65]

These instances go to show how the elect may err in estimating
conditions, despite the fact that in two of these three memorable
crises ample warnings of an impending catastrophe were proclaimed in
the stock market long before these prophecies of continued expansion
were printed. In each instance the portent was ignored; in each the
ultimate penalty was paid. So it was in our own great crisis of 1907,
and so it will always be.

There was a panic throughout the United Kingdom in April and October
of 1847, yet the early response to changing conditions took place two
years before, when stocks began to fail in July and August, 1845. In
the year 1857 commerce and industry expanded throughout America in
increasing volume up to the very eve of the August crisis, yet the
stock market in the summer of the preceding year gave clear warning of
what was to occur. One year before the panic of 1873 a similar “slump”
foretold what was coming, and the same was true of the year preceding
the panic of ’93.[66] Previous to the last-mentioned crisis stocks
began to fall, with unmistakable emphasis, early in 1892. Of seventeen
of the most active, five reached their maximum price in January,
1892, three in February, four in March, two--Lake Shore and Michigan
Central--in April. And as we have seen, identical preliminary warnings
developed on the Stock Exchange from one year to six months before the
last great panic of 1907.[67]

The panic that hit the Paris Bourse in October, 1912, causing a
disturbance not equaled in violence since 1870, was brought about
by sowing the wind through an immense public speculation based on
two fine harvests in Russia and a feverish revival of commercial and
industrial activity all over Europe. Up to this point all the indicia
of the movement--such as bank loans, building operations, public and
private extravagance, and a blind infatuation for speculation by a
normally prudent nation that had not speculated on a large scale since
the Panama débacle of 1894--corresponds exactly with conditions in
America just preceding the 1907 crisis. The similarity between the two
incidents goes even farther, for early in September of 1912 the French
bankers and _Agents de Change_, recognizing the strained condition of
credit, had deliberately put in motion corrective agencies designed to
stop the rise with the least possible derangement of confidence.

They would have succeeded, no doubt, and the situation would have
exactly paralleled our own discounting processes of March, 1907, but
for the unforeseen Balkan difficulty which, coming out of a clear sky,
upset the plans of the conservative financial forces and precipitated
a panic. It came, as a French banker explained, a week too soon--by
which he meant that, given a little more time, the worst phases of
the disturbance would have been avoided through gradual and orderly
liquidation. As it stands, the panic will no doubt go down into French
financial history as “the Balkan panic,” just as our disturbance of
1907 is ascribed, _faute de mieux_, to Wall Street wickedness; but
in reality both the French and American crises had their origin in
precisely similar causes. The Balkan news in Paris only precipitated
what the French Bourse had planned to accomplish in an orderly manner,
just as Wall Street and the Stock Exchange had done five years earlier
in a similar emergency. The essential lesson of both instances is that
the same causes which generate prosperity will, if pushed far, generate
an equivalent adversity.

The details of the panic of 1907 are still fresh in mind, and need be
but briefly referred to. Banks and trust companies closed their doors
and suspended payments to depositors. Cash and credit became almost
unobtainable; we were face to face with demoralization. Clearing-house
certificates were resorted to at practically all banking centres
throughout the country; there was a general requirement of time notices
for withdrawal of savings bank deposits; all normal credit instruments
were impaired. The Secretary of the Treasury was forced to exercise
heroic discretion in the matter of security for government deposits and
for the very necessary increase of a note circulation that was then
suffering from a spasm of contraction. There was an immense hoarding
of funds and a consequent drying up of fluid capital, while from one
end of the country to the other, there was liquidation, business
contraction, retrenchment, panic, and ruin. “Wall Street” and the Stock
Exchange had foreseen that the chain was only as strong as its weakest
link, and had done what it could to prepare the public for the break.
To assert at this late day that it did aught but its full duty is
humbug _in excelsis_.

I have already cited one instance, the country’s expanding bank loans
as contrasted with “Wall Street’s” contraction, to show how plainly the
warning was conveyed. As another instance, take the immobilization of
capital tied up in the enormous real-estate speculation then prevalent.
In New York City alone the increase in mortgages recorded jumped from
455 millions in 1904 to 755 millions in 1905, an increase over the
previous years of 32.7 per cent, and 66 per cent, respectively.[68]
The figures showing the increase in building permits are similarly
significant, revealing the fact that in 1905, 1906, and the early
months of 1907, money was pouring into new construction at a rate
without precedent. In Greater New York alone, not including Queens
County, building permits granted in 1904 amounted to $153,300,000,
and in 1905 to $229,500,000, and in the face of disaster this rate of
increase continued up to the very eve of the panic.[69]

Outside of New York the expansion in building operations was equally
rapid and equally ominous, showing an _increase_ in twenty-five
cities alone from $201,300,000 in 1903 to $234,200,000 in 1904,
to $280,400,000 in 1905 and to $307,800,000 in 1906--all this but
a small part of the actual funds thus locked up throughout the
whole country.[70] We thus find that one of the most important and
inevitable causes of the panic was the absorption of exceptionally
large amounts of capital in enterprises that required a considerable
time for completion, or which, when completed, were not immediately
profitable; and to them may be added factories and extensive public and
private works of every kind. This form of expansion, as Senator Burton
points out, when carried to extremes almost invariably brings about a

Now let us consider. Does all this expansion of bank loans outside of
New York and all this tremendous increase of building operations show
that the Samsons of “Wall Street” were pulling down the temple on their
own heads in order to slaughter the Philistines, as alleged, or does it
show an indifference and lack of readjustment to the growing stringency
of money, as revealed by the Stock Exchange in its liquidation of
March and April? “As a rule,” said John Mill, “panics do not destroy
capital; they merely reveal the extent to which it has been previously
destroyed by its betrayal into hopelessly unproductive works.”[71]
There would have been no such “betrayal” had judicious reflection and a
measurement of facts followed Wall Street’s warnings.

A shrewd man, one of the old school of New York City wholesale
merchants, who has nothing whatever to do with Wall Street or the Stock
Exchange, yet whose trade arteries extend to many parts of the country,
has long governed his business by the published reports of Stock
Exchange transactions. If he sees there revealed a wholesome, normal,
and conservative expansion in all lines of business and a money market
that betrays no uneasiness as to the future, he presses on into new
lines of endeavor, confident that the immediate future is serene. If he
finds an urgent liquidation on ’Change, with the coincident phenomena
of impaired credit instruments, he draws in his lines and waits. It
makes no difference to him who is rocking the boat, nor why; experience
has taught him that if it rocks, the time has arrived to go ashore. And
this steady old merchant, I have no doubt, is but one of a numerous

Those who ignore the economic tides that ebb and flow through the
medium of the Stock Exchange as they did in 1907, do so because they
do not understand that these great market movements are really but
expressions of natural laws. If there is a rising tide--a boom--it is
attributed by thoughtless people to speculation and gambling. If there
is a bad break, it is caused by panic-stricken repentant sinners, or
by the activities of the bears. The essential point that is missed
here lies in the fact that, while bulls and bears alike may have their
brief hour, sooner or later, regardless of them, the market responds to
actual conditions and discounts the future of those conditions.

Booms are not made on the Stock Exchange; they are made in the
country’s fields and forests and workshops. Panics are not created
there; they have their origin in mistakes and excesses throughout the
world, and in psychologic conditions which stock markets cannot hope
to control. The pendulum may swing far, but it comes back. Sooner or
later the movement of prices tells the exact story of future business,
and of credit, and of all the economic agencies that enter into them.
This was not well understood in 1907, and, as I said at the beginning,
I doubt if it will ever be understood in the sense that it will avoid
a recurrence of panics. All that we may hope for is that periods of
depression, which are inevitable, may not be attended in future by
such a loss of the reasoning faculties as that which brought about the
affair of 1907.

Now let us consider another cause of the panic--the currency system,
always bearing in mind the fact that the first and greatest cause of
the panic was the over-expansion outside of New York that has just
been described. The causes which we are now to consider were of minor
importance when measured by this overshadowing matter; nevertheless
they played their part and must be considered accordingly.

Not all panics, to be sure, can be prevented by a perfect currency
system, yet this one could have been measurably prevented, and “Wall
Street” and the Stock Exchange had labored for years so to prevent it.
At the gatherings of the Chamber of Commerce, at the bank meetings, at
all the meetings of merchants and manufacturers for years preceding
1907, the mischievous effects of our currency system were proclaimed
and the ultimate outcome predicted. Congress was petitioned again and
again to remedy those intolerable conditions, and to permit national
banks to expand their circulation under proper safeguards, but without

When the storm burst, a most impressive object lesson in practical
finance resulted. What was at worst but a normal stringency of the
circulating medium developed, when added to abnormal demands from the
country at large, into conditions that created great alarm. There was
no way by which the banks of the country could use the resources which
they actually possessed to meet the urgent requirements of the hour.
A great nation of enterprising people found itself--and still finds
itself--compelled to do a banking business differing in degree, but not
in kind, from the old-woman-and-her-stocking system of finance. The
way our bankers got down on their knees to London and Paris in that
emergency, frankly admitting their inability, under our old flint-lock
laws, to handle a situation which foreign bankers meet without
difficulty, is a subject at once painful and humiliating. Literally our
bankers begged for help and got it. Some day we shall have to beg again.

Had the national banks of New York City enjoyed the right to expand
their circulation in the manner provided by the plan of the American
Bankers’ Association, at least a part of the débacle would have been
avoided. “The banks and trust companies of this city have in their
vaults the largest store of good credit that can be found in any
city in the world,” said one of America’s foremost economists as the
panic raged, “but much of it is utterly unavailable because of our
currency system. One of the trust companies that closed its doors
has in its possession live assets amounting to over $50,000,000. All
this credit is dead. It cannot do the work of a single dollar in the
paying-teller’s cage. What is wanted in a time like this is freedom to
convert the credit of banks into a medium of payment that will satisfy
the people.”[72]

True enough, and just what the whole financial community, including the
Stock Exchange, had been repeating for years. Currency issues which do
not provide for _all_ situations, including not only ordinary demands,
but also such exceptional cases of shrinkage as this one was, can never
be called perfect, nor even safe. There is no health in them.[73] The
most effective and the most rapid means of regulating and protecting
the general credit situation is by increasing or diminishing the volume
of outstanding bank-note currency not covered by a reserve of gold
or other lawful money. This method is employed successfully both in
France and in Germany. The Bank of France and the Imperial Bank of
Germany to some extent regulate credit conditions by acting as central
banks of discount; but their most effective action is by increasing
or diminishing the uncovered amount of their outstanding notes. When
additional currency is needed as a circulating medium they supply
this currency by issuing notes. When contraction of currency, or a
check upon the further expansion of bank credits is desirable, they
accomplish the result by diminishing the volume of their outstanding
notes and by raising the discount rate. This system is as nearly
perfect as any yet devised.[74]

Whether we shall ever succeed in adopting it, or something like it, in
America, is the burning question in our banking offices to-day. Until
something is done, the layman who distrusts the plan of a central bank
and looks upon Wall Street with abhorrence, may find satisfaction
in knowing that the average New York banker is the most worried and
harassed man in American business life. With millions of other people’s
money in his possession subject to withdrawal by check at sight, and
with millions of the best security in the world in his vaults lying
absolutely idle and worthless so far as raising currency is concerned,
he stands between the devil and the deep-blue sea. Anything that
frightens his depositors, or even remotely suggests panic, gives him
a cold chill. People who talk of manipulation by New York bankers as
a cause of the panic of 1907 or any other panic are blind to the fact
that any disturbance of normal conditions is the one thing that bankers
would avoid as they would avoid the plague.

There was a third cause of the panic in the course pursued by the
President. In some quarters it is still termed “the Roosevelt panic,”
and there exists a belief that the President by his actions and
speeches played a large part in bringing about the crisis. Personally,
I feel that this has been exaggerated. There had been, unquestionably,
wrongdoing by certain corporation managers. The President, with a
characteristic vigor not unknown to politicians, seized upon it as
a theme for his speeches, and the “evils,” the “malefactors,” the
“corruption” and “dishonesty” with which he bruised the air, raised a
suspicion in many quarters as to the status and security of the whole
financial situation and undoubtedly contributed to the frightened
liquidation of the day. The impression these utterances produced
abroad, where American securities were popular, was painful, and led
one returning tourist to remark that Europe was acquiring the idea that
we were “a nation of swindlers.”

All panics are largely psychological, and this was no exception. The
President’s public speeches came at a time when emotion, apprehension,
and alarm filled men’s minds; and at a time when those irrational moods
were most likely to exaggerate the difficulties that existed, and to
conjure up difficulties that did not exist. Panics _seem_ to come from
lack of money, the real difficulty is lack of confidence, and it was to
this that the President’s course directly contributed.

I am of the opinion that, judged by his public utterances, especially
his October speech at Nashville, Tenn., the President had not the
remotest idea that such an awful shock as the panic of 1907 was
imminent. He was not a student of economic conditions; he had no
familiarity with crisis-producing phenomena; he had never seen a
panic at close quarters. His speeches did not cause the panic, for
that disturbance was foreordained; they served, however, to hasten
it, to intensify it, and to keep it alive. Perhaps I may add that the
sparks beaten by him from the anvil of political expediency at that
unfortunate moment threw more light upon the President himself than
upon the evils he condemned. Perhaps, too, that was what the President
most desired. In any case, the fact remains that just as there is too
much confidence in times of excessive expansion, so there is too little
in times of unreasoning depression; and that the President’s attitude
aggravated the latter situations is undeniable.

But by what stretch of the imagination can the Stock Exchange be
credited with playing any part in this third cause of the panic?
If temporary depression results from exposure of wrongdoing among
railroad, industrial, or financial institutions, nowhere in the land
is execration poured forth upon the evil-doers more vigorously than
within its four walls. Far from complaining, the Stock Exchange and the
whole investment community welcome such exposures, despite their effect
on the market, for the precise reason that their own protection and
benefit, if nothing else, is promoted by it.

There was yet another reason for the panic, closely related to the
attitude of the President. I refer to the predicament of the railways
of the country as 1906 passed into 1907. Staggering under a load of
traffic which sorely taxed their equipment, the managers of these
properties cried aloud to the investing public for funds. But capital
was not to be had. Tied up in real-estate speculation and in quarters
whence it could not be easily recovered, the normal supply of capital
was immobile and inert. What was worse, encouraged by the attitude of
the President, an epidemic of radical anti-railroad legislation became
manifest in the several States, new and onerous burdens of taxation
were imposed, and a wave of distrust and suspicion regarding railway
investments was created. Simultaneously the cost of wages and materials
advanced--both characteristic phenomena indicating trouble--and, as
a consequence of all this blockade, the ratio of net to gross in the
matter of increased earnings fell from the normal proportion of about
40 per cent. in the first nine months of 1906, to less than 10 per
cent. in the same months of 1907.

Railroads are public utilities that must continue to handle business
offered them no matter what happens, and so, to meet all these abnormal
demands, but one course was left open to them, and that was to raise
funds by issues of new stock. This, of course, amounted practically
to an assessment of stockholders; as an expedient it failed because
“Wall Street” had already recognized the symptoms of disease. It was
too late. Money and credit attract money and credit, and confidence
attracts both. There was a shocking absence of confidence in the
emergency of 1907, and the railroads suffered enormously by it.

With this matter certainly Wall Street had nothing to do; it could not
in fact do more than it had just done in pointing out to the country
at large, through a drastic process of liquidation, the obvious
withdrawal of far-sighted investors from a situation that had become
tense. Nor can the railroads be censured, because the great volume of
business that confronted them was not created by them, and yet had to
be transported by them. The fault lay, of course, in the wholesale
and reckless expansion of all lines of industry, and in the immensely
increased extravagance of public and private life.

I venture the prediction that when these conditions again prevail, as
they must in a great and vigorous country like ours, the Stock Exchange
will still be found sounding its warnings, but it will not do to hope
that those who learned the bitter lesson of 1907 will profit by that
experience, because the condition of _mental_ disturbance which is a
part of every panic cannot be regulated by the will, nor kept within
bounds by the statute law. The one lesson we have learned from the
predicament of the railroads in 1907 is that there is a tendency toward
disturbance in large accessions either of business or of capital. “At
intervals,” says Walter Bagehot, “the blind capital of a country is
particularly large and craving; it seeks for some one to devour it, and
there is ‘plethora’; it finds some one, and there is ‘speculation’; it
is devoured, and there is ‘panic.’”[75]

Summarized briefly, I have attempted to show in the foregoing pages
that the Stock Exchange for many months prior to the panic had been
steadily liquidating and contracting, and had served notice on the
country at large that the time had come to put a stop to the prevalent
over-expansion. It has been demonstrated that instead of heeding these
warnings the general business of the country, as evidenced by the
increases in loans and commercial discounts and by an over-speculation
in real estate and in public and private extravagances, continued to
expand up to the very eve of the panic, and was stopped then and there
only by sheer lack of capital. Nothing can be of greater importance
in any consideration of the 1907 crisis than that its overshadowing
cause was the attempt to do too much business on too little capital,
and compared with this all other aspects of that situation are of minor

I have shown that an antiquated currency system played a conspicuous
part in the crisis, through contributory negligence on the part of our
law-makers. The part played by the President has been cited as a third,
though somewhat negligible, factor in sowing the seed of distrust, and
also the trying position in which the great common carriers of the
country found themselves after the seeds of distrust had been sown.
These were the four causes of the panic of 1907.[76]

How well the Stock Exchange did its work in that great emergency is a
matter of record. It did not close its doors; there were no failures;
no relaxation of the protection afforded the public; no departure
from the high standard of morality which is ever its goal. In one
week, ending October 25th, 5,166,560 shares passed through its hands,
representing, with the transactions in bonds, a par valuation exceeding

Now, in the very nature of things, a financial panic is the inability
of many debtors to meet their obligations, plus the fear that many
others may be in the same plight. At such a time men hasten to sell
for cash that for which there is the readiest market. Thus they sell
securities because securities are immediately convertible; thus they
turn to the Stock Exchange, because that is what Stock Exchanges are
for. Hence it follows that in a crisis such as that of 1907 the ruinous
decline manifests itself more sharply, and is felt more keenly, on the
Stock Exchange than on the Cotton Exchange or the Produce Exchange. Men
turn to it for first aid to the injured, and the greater the casualty
list, the more marked is the disturbance of values. That this is not
well understood by the public often unfortunately leads to suggestions
of improper methods where none exist.

Finally, where do we stand? Orthodox economists like Wells talk of
over-production as a cause of panics; currency experts bewail a lack
of circulating media; theorists of the school of Jevons are driven to
seek in sun-spots the potent force of all our harvests; Levi and Mill
dwell upon the periodicity of panics and would fix their appearance by
schedules of time; politicians and thinkers-in-embryo point the finger
at Wall Street, and yet, with all that has been written, thirteen great
crises at home and abroad within the last century show that we have
not begun to get at these disturbances. Drought has been a cause of
mischief, yet we have learned to irrigate and to conserve; epidemics
have smitten us, yet we have mastered sanitation; floods have ruined
whole territories, yet we have built dikes and levees. But every now
and then, when business seems to be at its best, when merchants are
dividing large profits, and when labor is best rewarded, a panic occurs
and the whole structure collapses.

To say that Wall Street or Lombard Street or any group of men
anywhere can bring such conditions to pass is to deny all the facts
of experience. Depressions may come from any of a hundred causes, but
panics originate in the mind; they are manias. Walter Bagehot gave up
trying to prescribe for them because he realized that sudden frenzy
is not an ailment to be foreseen and prevented. “But one thing is
certain,” he said, “that at particular times a great many stupid people
have a great deal of stupid money;” to which he adds, “our scheme is
not to allow any man to have a hundred pounds who cannot prove to the
Lord Chancellor that he knows what to do with a hundred pounds.” When
thousands of people ignore all the warnings of experience, as they
always will do; when with a blind misdirection of energy they sink
borrowed capital in quagmires at fancy prices, as they always have
done; and when, shorn of their all, they are simultaneously seized with
a mania to denounce others for the consequences of their own folly,
as they always must do, one cannot avoid the thought that perhaps
Bagehot’s humorous solution is the best that has been devised.[77]



In the Middle Ages the notion prevailed that there was a just and
equitable price for everything, and that any person who tried to obtain
more than this price was a sinner. Trade for gain was anathema; the
man who bought the principal commodities of that time, such as corn
or herrings, with a view to selling them at a profit, was guilty of
“craft and sublety”--as the old English statutes read--that infallibly
cost him his goods and brought him to the pillory. Thus in the year
1311 one Thomas Lespicer of Portsmouth was caught red-handed in London
with six pots of Nantes lampreys stored in a fishmonger’s cellar in
the hope of a rising market. The law required that when he arrived in
London from Portsmouth with his lampreys he should proceed to the open
market under the wall of St. Margaret’s Church in Bridge Street, and
stand there four days selling at current prices to any one who cared to
buy. His failure to do so, and his wickedness in attempting to “bull”
the lamprey market by hiding them in the fishmonger’s cellar, resulted
in the arrest of himself and the fishmonger, and their trial and
punishment at the hands of the Mayor and Alderman.

Professor W. T. Ashley, who cites this incident in his “Introduction to
English Economic History and Theory” (London 1892), also gives another
instance in which our modern theories of natural rights and freedom
of contract seem to be in hopeless conflict. John-at-Wood, a baker,
was arrested in 1364 charged with the profane practice of “bulling”
wheat. “Whereas one Robert de Cawode,” the indictment reads, “had two
quarters of wheat for sale in common market on the pavement within
Newgate; he, the said John, cunningly and by secret words whispering
in his ear, fraudulently withdrew Cawode out of the common market, and
they went together into the Church of the Friars Minor, and there John
bought the two quarters at 15½d per bushel, being 2½d over the common
selling price at that time in the market, to the great loss and deceit
of the common people, and to the increase of the dearness of wheat.”
At-Wood denied this heinous offence and “put himself on the country,”
whereupon a jury was empanelled, which gave a verdict that At-Wood had
not only thus bought the grain, but that he had afterward returned
to the market and boasted of his crime, and “this he said and did to
increase the dearness of wheat.” Accordingly he was sentenced to be put
in the pillory for three hours, and one of the sheriffs was directed
to see the sentence executed and proclamation made of the cause of the

So far as I am aware the Statutes of Henry III and Edward I, under
which these culprits were punished, constitute the earliest official
attempts to repress speculation by law. After the Revolution, the Bank
of England having been organized and bank shares created, a speculative
outburst occurred that led to the enactment of fresh legislation
entitled “An act to restrain the numbers and ill practices of brokers
and stock-jobbers,”[78] but this law lapsed or was repealed ten years
later. In 1707 a law was passed licensing brokers and making it
unlawful for unlicensed brokers to do business,[79] and in 1708 City
rules were established for brokers, obliging them to give bonds for the
proper performance of their duties. In 1711, 1713, and 1719, laws were
enacted similar to the Act of 1707.

Then came the speculative schemes of 1720, of which the most famous or
infamous was the South Sea Company, designed to make fortunes for its
shareholders in the slave-trade and in whale fishing. It was followed
by many other projects almost fantastic in their wildness to each of
which the public subscribed liberally. Where all the money came from
that kept this disastrous speculative mania alive is something one
would like to know. There seems to have been no limit to it. South Sea
shares stood at 120 in April of 1720; in July they had reached 1020,
and, after that, the collapse. The company became a “bubble,” and a
burst one at that--and a great popular outcry followed. It resulted, in
1734, in the passage of Sir John Barnard’s “Act to Prevent the Infamous
Practice of Stock-Jobbing,” the preamble reciting:

  “Whereas, great inconveniences have arisen, and do daily arise, by
  the wicked, pernicious, and destructive practice of stock-jobbing,
  whereby many of His Majesty’s good subjects have been and are
  diverted from pursuing and exercising their lawful trades and
  vocations to the utter ruin of themselves and their families, to
  the great discouragement of industry, and to the manifest detriment
  of trade and commerce.”

This act forbade bargains for puts and calls, and also “the evil
practice of compounding or making up differences”; but its principal
provision was the prohibition of short selling under penalty of £100
for each transaction. There was, of course, an appeal to the courts,
which held that the statute did not apply to foreign stocks nor to
shares in companies, but only to English public stocks, a decision that
effectually put an end to the usefulness of the law. It remained on the
statute books, however, and it was occasionally resorted to by persons
who sought to evade the fulfillment of their speculative contracts--a
class of persons known to-day as “welchers.”

Finally, in 1860, the law was repealed altogether, the repeal act
reciting that Sir John Barnard’s Act “imposed unnecessary restrictions
on the making of contracts for sale, and transfer of public stocks and
securities.” Thus the first serious attempt to regulate speculation in
securities by law, and specifically to prohibit short selling, came to
be recognized as a failure by the frank admission of government. In
1867 the so-called Leeman Act became law, prohibiting all sales of bank
stock unless the numbers of the certificates sold were specified--an
attempt to prevent short selling of bank stock. Even this law was
subsequently repealed, and England, to-day, has no law on the statute
books restricting speculation.

As the London Stock Exchange grew in influence and importance,
reflecting England’s development as the world’s banker, popular attack
and criticism continued to assail it. It may be frankly admitted that
the legitimate functions of the institution had been abused by foolish
or unscrupulous persons, just as every important branch of business and
politics has been misused, the world over, since civilization began.
The question therefore arose whether these occasional sharp practices
proved the Exchange to be an excrescence on the body politic, or
whether, on the other hand, its importance in the mechanism of modern
business merely required improvements and reforms. In this situation,
which occurred in 1877, and which caused considerable agitation on
the part of both parties to the controversy, a royal commission was
appointed “to inquire into the origin, objects, present constitution,
customs, and usages of the London Stock Exchange.” The Exchange and its
critics thus reached the parting of the ways. A year was spent by the
commission in examining witnesses and conducting investigations along
special lines, and in 1878 its report, with the evidence, was published
in a Parliamentary Blue Book.

The report absolutely upheld the purposes and functions of the Stock
Exchange and the legitimacy of speculation in securities, and it went
further in pointing out the danger of attempting to force any form
of external control on the institution. The evils of that form of
Stock Exchange speculation which closely approaches mere gambling were
plainly stated, and the report suggested that the Exchange authorities
restrain such practice in so far as was possible.

As the conclusions of the royal commission are of very great
importance, marking as they do the first serious official study in
modern times of the Stock Exchange theory, I quote from the Blue Book
in the hope that Stock Exchange critics of to-day may understand how
these conclusions were reached. “In the main,” reads the report, “the
existence of the Stock Exchange and the coercive action of the rules
which it enforces upon the transaction of business and upon the conduct
of its members has been salutary to the interests of the public. We
wish to express our conviction that any external control which might
be introduced by such a change should be exercised with a sparing
hand. The existing body of rules and regulations have been formed with
much care, and are the result of the long experience and vigilant
attention of a body of persons intimately acquainted with the needs
and exigencies of the community for whom they have legislated. Any
attempt to reduce this rule to the limits of the ordinary laws of the
land, or to abolish all checks and safeguards not to be found in that
law, would, in our opinion, be detrimental to the honest and efficient
control of business.”

In 1909 similar criticism in New York having led to the appointment of
the Hughes Commission to inquire “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,” the
commission reported to the Governor, after six months of laborious
investigation, in these words:

  “Speculation in some form is a necessary incident of productive
  operation. 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. For the
  merchant or manufacturer speculation performs a service which has
  the effect of insurance. 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 legislation. We are unable to see how a 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. Purchasing securities on margin is as legitimate
  a transaction as the purchase of any property in which part
  payment is deferred. We, therefore, see no reason whatsoever for
  recommending the radical change suggested that margin trading be

Here are two reports at an interval of thirty-one years, made by
independent investigators of high character, concerning the two
foremost Stock Exchanges in the world. Both of these reports recommend
changes and improvements, and each is firmly of opinion that the
changes recommended are such as can be carried out by the Stock
Exchanges themselves without the assistance or interference of the

As the London Stock Exchange is a voluntary association similar to
that in New York, it was inevitable that the question of incorporation
should have been brought before the royal commission of 1877, and that
the question as to whether the public interest would be promoted by
such incorporation should be given careful attention. As a result of
these deliberations, a majority of the commission recommended that the
London Stock Exchange should voluntarily apply for a royal charter or
act of incorporation, but the reasons upon which this recommendation
were based had to do with the temporary or shifting character of the
membership, which gave very little assurance to the public of the
permanence and stability of the rules, since members of the London
Stock Exchange are only elected for one year. It need scarcely be added
that such an argument would not apply to the New York Stock Exchange.

Now it so happened that, despite this opinion by the royal commission,
the London Exchange was not compelled to incorporate, and remains
to-day a purely voluntary association or club. The reason for this
lies, in large measure, in the very intelligent minority opinions filed
with the Board’s report by those of its members who dissented from the
recommendation. As this is a matter of interest to members and friends
of the New York Stock Exchange, I give herewith the substance of these
dissenting opinions, calling the reader’s attention to the fact that
the Hughes Commission of 1909 rejected similar proposals regarding the
New York Stock Exchange.[80] The Hon. Edward Stanhope, M. P., said,
regarding the proposed application for a charter:

  “Supposing such an application to be made, and Parliament to be
  prepared to incorporate the Stock Exchange on the terms which are
  embodied in the report, the consequence would be that rules so
  established would be stereotyped, and could only be altered, even
  in the minutest details, with the approval of a department of the
  State. In my opinion this requirement would be either mischievous
  or nugatory. To attempt to regulate the manner in which business
  is conducted in the great money market of England is going far
  beyond the province of the State, nor is any government department
  in any way qualified to undertake it. The report, indeed,
  recommends that external control should be exercised with a sparing
  hand. But experience seems to show that the first commercial
  crisis, or the discovery of any gigantic fraud, would cause a
  pressure for further restrictions which the department entrusted
  with these duties could not possibly withstand. If incorporation
  is to be anything more than a theory, it seems to me that it must
  either be imposed compulsory upon the Stock Exchange, or it must be
  offered to them on terms which will make it worth their while to
  accept it. The first alternative I reject, for the reason given by
  the select committee on foreign loans, that it would destroy that
  freedom which is the life and soul of the institution. If, however,
  any voluntary scheme commends itself to the opinion of the Stock
  Exchange, its primary condition should be to reserve to that body
  absolute liberty in the transaction of their ordinary business (as
  to which we are all of opinion that, speaking generally, no just
  fault can reasonably be found), and also the power of adapting
  their rules, with the utmost ease and freedom, to the varying wants
  of the time.”

Mr. S. R. Scott of the dissenting minority was even more emphatic in
his objections to incorporation. He said:

  “In fixing my name to this report, I desire to make the
  reservations following: 1. With regard to incorporation, I object
  to recommend it for the following reasons: Hitherto, the Stock
  Exchange has been carried on with great success as a voluntary
  association, and has had a vigorous growth. It has not enjoyed a
  single legal privilege, yet it has thriven and the public have
  neglected more than one effort to establish an open market to
  resort to it for business, and to give it exclusive confidence.
  This royal commission has been sitting more than twelve months,
  yet no important or reliable evidence has been volunteered of a
  character adverse to the general practices or conduct of business
  on the Stock Exchange. If proof be required that the internal
  legislation and administration of the Stock Exchange enforce a
  higher standard of morality than the law can reach or enacts for
  the regulation of other trades, such proof is to be found in
  the fact that recently the committee of the Stock Exchange were
  assailed at law by a member whom they expelled on a charge of
  dishonorable conduct, the lawsuit being based on the ground that
  the action of the committee was not justified in law. The trial
  lasted seven days and proved abortive, the distinction between the
  standard enforced by the committee and the statutory provisions of
  the law not being appreciated by the special jury promiscuously
  selected from various trades, although quite intelligible to
  the judge. In maintaining this high standard the committee are
  compelled to go beyond the common law, binding their members to
  the observance of their rules and practices, even though not
  enforceable in a court of law. If, however, they should submit to
  incorporation, their rules would have to be assimilated to the
  law, and their freedom of action would be curtailed--results which
  might tend to cripple them in sustaining the standard alluded
  to, and operate in many ways as a hindrance to that rapidity of
  action which is an absolute necessity in critical times. Further,
  incorporation implies, in some sort, monopoly, and it remains to be
  proved that the public would gain by any restriction of the freedom
  of trade, even in stocks and shares. I adhere to the opinion
  expressed in 1875 by the Committee on Foreign Loans, on page 47 of
  their report, as follows: ‘That such a body (the Stock Exchange)
  can be hardly interfered with by Parliament without losing that
  freedom of self-government which is the only life and soul of

As I have outlined elsewhere in this volume the cogent objections
to incorporation of the New York Stock Exchange, it only remains to
say here that the great argument against such a step consists in the
Governing Committee’s absolute power of summary discipline over the
members, a power that greatly exceeds the authority of the common law,
and one that protects the patrons of the Exchange to an extent that
would not be possible if, under incorporation, members could invoke
their constitutional prerogatives.[81] Said the governors in reply
to a question of the Hughes Commission: “Appeals to the courts have
been rare, considering the number of cases in which such power of
discipline has been exercised, but we may well cite as substantiating
in an extraordinary degree the fairness and right-mindedness with
which members have been held to their obligations, the fact that,
although in a number of instances appeals have been made to the courts
for reinstatement by members who have been expelled or suspended for
infraction of the rules, or for conduct which, although it might not
be in violation of any express rule or regulation, or in violation of
any law or legal obligation, the committee have held to be inconsistent
with the maintenance and exercise of those standards of honorable
dealing which it is the function of the Exchange to inculcate and
maintain; nevertheless, in the last twenty-eight years there has not
been a single instance of the judgment of the Governing Committee being
reversed by the courts.”

The distinction between the expulsion of a member of such a voluntary
unincorporated association and the expulsion or removal of a member
of a corporation is very important. The moment the body receives a
charter a different set of principles comes into play as regulating the
relations between the member and the body.[82]

Germany dealt with a similar situation in very different fashion. In
the autumn of 1891 there were disastrous failures of certain German
banking houses, resulting from criminal misuse of bank deposits and
from an undue participation in speculative transactions by the general
public. The outcry that followed was no new thing in Germany, for as
early as 1888 conditions that had arisen in the Berlin market and the
Hamburg coffee market had led to petitions to the Reichstag demanding
remedies for speculative evils. The cumulative effect of these
difficulties was such that, as related by Doctor Loeb, bills directed
against speculation on the Exchanges were introduced in November,
1891. “As early as February 16, 1892,” according to this authority,
“the Chancellor of the Empire appointed a commission of inquiry of
twenty-eight members, most of them lawyers, but with representation
also of landed proprietors, economists, and merchants. The chairman was
the President of the Directorate of the Reichbank, Doctor Koch. The
commission began its inquiries in April, 1892, held 93 sessions, and
summoned 115 witnesses, of whom the great majority were persons engaged
in the transactions which it was proposed to regulate. The commission
also made inquiries as to the state of legislation and trade usages in
the several states of the Empire and in foreign countries.

“The commission presented a majority report on November 11, 1893,
recommending certain statutory and administrative changes. The
principles on which these recommendations rested was that, in view
of the importance of the interests which were represented at the
Exchanges, modifications should be made with caution, and the existing
complicated trade usages and methods should not be disregarded; while,
on the other hand, there was no occasion for regarding with mistrust,
still less with hostility, interference in the free working of
industrial forces.”[83]

Up to this point, it will be observed, the German investigators
followed precisely the same lines as the English Commission of 1877
and the Hughes Commission of 1909. Mistakes are recognized, but
modifications are to be made “with caution.” But it so happened that
the recommendations in this respect were not followed. German politics
at that time were in a state of turmoil in consequence of the Agrarian
agitation, and in the various phases of political expediency that
attended the uproar, first the government and then the Reichstag
insisted upon more and more stringent enactments concerning legislation
against the Exchange, until finally a hostile law was enacted quite out
of line with the original recommendations of the committee of inquiry.
In other words, the politicians ignored the labors of the committee and
took matters into their own hands. The three important provisions of
this law were these:

  (1) All exchange dealings for future delivery in grain and flour
  were forbidden.

  (2) All exchange dealings for “the account” in the shares of mining
  and industrial companies forbidden.

  (3) An “Exchange Register” was established in which was to be
  entered the name of every person who wished to engage in exchange
  transactions for future delivery. Contracts made by two persons
  entered in the register were declared binding and exempt from the
  defence of wager.

The immediate effect of this law on the German grain market was
disastrous. Futures were not suppressed. The grain trade was simply
forced by the law to give up the modern machinery that experience
had developed, and go back to antiquated forms of dealing. “It was
like taking machinery out of a mill,” says Frank Fayant, “and putting
manufacture back to hand labor.” As to trading in securities “for the
account,” here, too, the law failed utterly. Even the government--at
that time most unfriendly to the Exchanges--admitted in its official
reports that the law had “proved injurious to the public,” and that
“the dangers of speculation have increased.” We have high authority for
a detailed examination of the disaster attending this costly experiment
in the remarks of Professor Emery, who tells us not merely _how_ the
German law failed, but _why_:

  (1) Fluctuations in prices have been increased rather than
  diminished. The corrective influence of the bear side of the
  market having been restricted, the tendency to an inflated bull
  movement was increased in times of prosperity. This in turn made
  the danger of radical collapse all the greater in proportion as
  the bull movement was abnormal. The greater funds needed to carry
  stocks on a cash basis further increased the danger when collapse
  was threatened. The result was an increased incentive to reckless
  speculation and manipulation. Says the report of 1907, “The dangers
  of speculation have been increased, the power of the market to
  resist one-sided movements has been weakened, and the possibilities
  of misusing inside information have been enlarged.”

  (2) The money market has been increasingly demoralized through
  the greater fluctuations in demand for funds to carry speculative
  cash accounts. The New York method is held in abhorrence by
  German financiers, who attribute to it, in large part, the wild
  fluctuations in New York call rates, the frequent “money panics”
  and the tendency to reckless “jobbery.” In proportion as the new
  Berlin methods approached the cash delivery system of New York,
  these evils have appeared there.

  (3) The business of the great banks has been increased at the
  expense of their smaller rivals. The prohibition of trading for the
  account made it difficult for the latter to carry out customer’s
  orders because the new methods required large supplies of both
  cash and securities. Furthermore, an increasing share of the
  business of the large banks came to be settled by offsets among
  their customers, and the actual exchange transactions became a
  proportionally small part of the total transfers.

  (4) This has a twofold effect. Business within the banks is done on
  the basis of exchange prices, but these became more fluctuating and
  subject to manipulation as the quantity of exchange dealings were
  diminished and were concentrated in a few hands. The advantages of
  a broad open market were lost. The object of the act had been to
  lessen the speculative influence over industrial undertakings. Its
  effect was to increase it.

  (5) Finally, the effect of interference, increased cost, and legal
  uncertainty was to drive business to foreign exchanges and diminish
  the power of the Berlin Exchange in the field of international
  finance. The number of agencies of foreign houses increased four
  or five fold and much German capital flowed into other centres,
  especially London, for investment or speculation. This in turn
  weakened the power of the Berlin money market, so that even the
  Reichbank has at times felt its serious effects.[84]

Concerning the “Exchange Register” (which the government has now
abolished as a complete failure) and the effort to keep the public out
of the speculative markets, Professor Emery says:

  In one sense the fate of the famous exchange register is laughable,
  but in a deeper sense it is genuinely sad, for the object was a
  worthy one and the new scheme was adopted with high hopes. Its
  failure was inevitable, since it did not remove the temptation
  to speculate. The men who felt this temptation most, and whose
  position least warranted their yielding to it, were of course the
  very last men to have themselves registered. In fact the whole
  public revolted. The number of registrations never reached four
  hundred, which number would not begin to cover the banking and
  brokerage concerns. The number of “Outsiders” registered never
  reached forty. Even the conservative banks had to choose between
  giving up all such business and dealing with non-registered parties.

  (1) The uncertainties of the new situation were most likely to
  exclude the cautious and well-to-do from participation in the
  market. The reckless gambler of small means was less likely to be
  disturbed in his practices.

  (2) The act aimed to establish legal certainty by means of
  registration. It proved a direct incentive to fraud. The customer
  was not legally liable on his contracts; therefore, every reckless
  and dishonest little plunger, who could get a broker to trust
  him, could take a “flyer” with everything to gain and nothing to
  lose. Cases increased rapidly in the courts and the worst element
  of the public was active to the relative exclusion of the better.
  Instances even occurred where a man would play both sides of the
  market at the offices of two different brokers and simply refuse to
  settle on the losing contract.

  (3) As affecting this phase of the question, references should
  be made again to the transfer of business to foreign exchanges.
  Morally and socially it is as bad for the German public to
  speculate in cheap mining stocks on the London Exchange as to do so
  at home. The flow of German funds into the market for South African
  securities would indicate a further way in which the purposes of
  the act were defeated.

  (4) Finally, the question must be faced of the effect of
  eliminating the public from the speculative market even if it
  could be accomplished. It is supposed sometimes that such a result
  would be all benefit and no injury. On the contrary, the real and
  important function of speculation in the field of business can only
  be performed by a broad and open market. Though no one would defend
  individual cases of recklessness or fail to lament the disaster
  and crime sometimes engendered, the fact remains that a “purely
  professional market” is not the kind of market which best fulfills
  the service of speculation. A broad market with the participation
  of an intelligent and responsible public is necessary. A narrow
  professional market is less serviceable to legitimate investment
  and trade and much more susceptible of manipulation.[85]

It is not surprising that such a law, enacted to meet political
clamor, in defiance of the recommendations of the committee, and in
the face of all the economic experiences of the century, should have
proved a fiasco in a double sense. Not only did it fail to accomplish
its purpose, but, as we have seen, it brought about a new chain of
evils vastly more distressing to German commercial development than
all the evils that gave it birth. The report of the Deutsche Bank for
1900 said: “The prices of all industrial securities have fallen. This
decline has been felt all the more as, by reason of the ill-conceived
Bourse Law, it struck the public with full force without being softened
through covering purchases of speculative interests.” Four years later
the same bank reported: “A serious political surprise would cause the
worst panic, because there are no longer any dealers to take up the
securities which, at such times, are thrown upon the market by the
speculating public.” In 1905 the bank again forcibly urged the revision
of the law in these words:

“In our last report we referred to the great danger which may be
brought about through delaying the revision of the Bourse Laws, and we
are now pointing to it again because we consider it our duty to impress
again and again a wider circle of the public with the economic value
of the Stock Exchange and its important relation to our financial
preparedness in times of war.”

Again, the following year the bank kept pounding away on the same
theme: “If it had still been necessary to furnish proof of the
regrettable fact that the German Bourses are no longer able to
accomplish their task--equally important to the welfare of the people
as to the standing of the Empire--the trend of events during the past
financial year in general, and the result of the last German Government
issues in particular, would have furnished that proof.”

Meanwhile, other leading financial institutions took up the same cry.
Thus the Dresdner Bank in its report in 1899 said: “The danger which
lies in the ban put on speculation, especially in the prohibition
of trading for future delivery in mining and industrial securities,
will become manifest to the public, if, with a change of economic
conditions, the unavoidable selling force cannot be met by dealers
willing and able to buy. It will then be too late to recognize the
harmful effects of the Bourse Law.” In 1902 the Disconto-Gesellschaft
reports: “The unfortunate Bourse Laws continue to be a grave obstacle
to business activity.” And again in 1903: “The Bourse will not be able
to resume its important economic functions until the restrictions upon
trading for future delivery have been removed.”[86]

The lesson to be learned from the failure of the German Bourse Law of
1896, and from the frank recognition of that failure as evidenced by
the repeal of 1908, cannot be overestimated in its importance. It is
inconceivable that law-makers of to-day may ignore such a warning. I
have quoted freely from Professor Emery of Yale University in pointing
out the deplorable results of that legislation because his study of
the subject has made him the foremost authority. The remonstrances of
the German banks and business men have also been cited because they
were on the spot; they saw and felt the prostration of German business
that followed swiftly on the heels of this law; they were a unit in
pronouncing it a wretched failure. In the appendix to this work will be
found the report of the Hughes Commission in which the ten experts on
that board unanimously reported “the evil consequences” of Germany’s
experiment, its “grotesque” operation in practice, and its utter

It is a simple matter for the querulous and discontented element of a
community to reason along the lines of least resistance and demand the
enactment of laws to right every fancied wrong. But the patient study
of such matters, the nice balancing of probabilities, the penetrating
investigation of similar experiments elsewhere and the analysis of
their bearing on the larger affairs affected by them--all this requires
critical judgment of a high order. When such an issue is evolved
laymen stand aside for a while, until the evidence of experts has been
submitted to minds competent to decide in accordance with evidence.

Applying this principle to the ever-present menace of legislation in
America directed against the Stock Exchange, we find each witness
testifying to the fact that the German law of 1896, far from benefiting
the public, injured it immeasurably. It put a premium on reckless
speculation and offensive manipulation; it demoralized the money
market; it choked the small banks and made virtual monopolies of the
large ones; just in proportion as it stifled speculation it put an
end to industrial undertakings that depend for their success upon the
spirit of adventure and risk; it drove money and credit out of Germany
and into London and Paris; it removed from the Berlin market the
support of the bears, thus exposing the whole investment structure to
violent collapse. The layman must consider this and the men who make
our laws must look before they leap.

Speculators in the region of criticism, whether of theology or
economics, who find themselves face to face with a fact too stubborn to
fit in with their opinions or conclusions, have but two courses open to
them: either to reconsider in the light of testimony the conclusions
they have reached, or to denounce and discredit the inconvenient
witness. In this instance the inconvenient witness cannot be denounced;
his name is legion. Every merchant in Germany will tell you the Bourse
Law was a sad mistake and will deplore its enactment. Nor can such
witnesses be discredited; therefore the advocate who believes that in
legislation lies the remedy for what he conceives to be the evils of
speculation must perforce choose the other horn of the dilemma; he must

It is a gratifying fact that in America, where law-makers are prone to
enact a hodge-podge of laws on every conceivable subject, there has
been no such serious mistake made by the Federal Government as that
which occurred in Germany. In 1812, five years before the New York
Stock Exchange was organized, an act was passed by the New York State
Legislature entitled “An act to regulate sales at public auction and to
prevent stock-jobbing,” its essential purpose being the prevention of
short selling--the bête-noir of all the early amateurs in economics.
This was the only anti-speculation act ever placed on the New York
Statute books. The act read:

  That all contracts, written or verbal, hereafter to be made, for
  the sale or transfer, and all wagers concerning the prices, present
  or future, of any certificate or evidence of debt due by or from
  the United States or any separate State, or any share or shares of
  stock of any bank, or any share or shares of stock of any company,
  established or to be established by any law of the United States,
  or any individual State, shall be, and such contracts are hereby
  declared to be, absolutely void, and both parties are hereby
  discharged from the lien and obligation of such contract or wager;
  unless the party contracting to sell and transfer the same shall
  at the time of making such contract be in actual possession of
  the certificate or other evidence of such debt or debts, share
  or shares, or to be otherwise entitled in his own right, or duly
  authorized or empowered by some person so entitled to transfer
  said certificate, evidence, debt or debts, share or shares so to
  be contracted for. And the party or parties who may have paid any
  premium, differences or sums of money in pursuance of any contract,
  hereby declared to be void, shall and may recover all such sums of
  money, together with damages and costs, by action on the case, in
  assumpsit for money had and received for the use of the plaintiff
  to be brought in any court of record.[87]

The effect of this law was precisely the same as that which followed
the enactment of Sir John Barnard’s Law of 1734 in England; it did
not prevent short selling, it accomplished no useful purpose, and
it merely served to enable unscrupulous speculators to “welch” on
their contracts. In 1858 it was repealed, and short selling, having
demonstrated its usefulness in many ways, was thenceforth declared to
be legal in a statute which read as follows:

  No contract, written or verbal, hereafter made for the purchase,
  sale, transfer, or delivery of any certificate or other evidence
  of debt due by or from the United States, or any separate State,
  or of any share or interest in the stock of any bank, or of any
  company incorporated under the laws of the United States, or
  of any individual State, shall be void or voidable for want of
  consideration, or because of the non-payment of any consideration,
  or 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 such debt, share or interest.[88]

The United States Government’s attempt to regulate or restrict
speculation is confined to a single instance, the Gold Speculation
Act of 1864, a law which enjoyed a brief existence of but fifteen
days.[89] In 1864 there were large issues of paper currency that drove
gold out of circulation and caused it to be bought and sold as any
other commodity. Thus a large supply of gold fell into the hands of
speculators, and as its price rose more than 100 per cent., the public
jumped to the conclusion that this portentous increase was due to
the operations of speculators, and that the rise could be stopped by
prohibiting such practices, hence all gold speculation was forbidden by
statute. As a fallacy this was monumental. Professor Hadley tells the
story in this way:

  The effect was precisely the opposite of what had been anticipated.
  Every man who was engaged in foreign trade had to provide security
  for being able to make gold payments in the immediate future,
  if called upon to do so. Being prevented from dealing with
  speculators, he now had to accumulate a reserve of his own. This
  caused an increased demand for gold at a time when it was unusually
  difficult to maintain an adequate supply. Under two weeks’
  operation of the act the price of a hundred gold dollars rose from
  about two hundred paper dollars to very nearly three hundred. So
  obvious was its evil effect that it was hurriedly repealed as a
  means of preventing further commercial disasters.

  Again, in the early part of 1866, there was a rise in the price of
  gold, which was attributed by public opinion to the speculators.
  Their machinations were defeated, not by legislation, but by the
  issue to the market of a part of the gold lying in the Treasury of
  the United States. For the moment the price of gold fell and people
  rejoiced that the plans of the speculators had been defeated.
  But a short time later, when the war between Prussia and Austria
  caused a demand for gold in Europe, there were large exports of the
  metal, and its price arose by natural causes. The United States was
  obliged to buy back, at a decided loss, a part of the gold which
  the Treasury had so unwisely issued.

  It turned out in the end that the operations of the speculators in
  anticipating the wants of the future would have prevented a loss to
  the country, and that the attempt of the Treasury to defeat those
  operations was attended with expense both to the government and to
  the mercantile community.[90]

Mr. Horace White deals with the gold speculation of the ’60’s as

  During seventeen years the business of the country was regulated
  by the quotations of the Gold Exchange. The export trade of
  the country necessitated the selling of gold in advance of its
  delivery. A buyer of wheat or cotton for export would make his
  purchase according to the current price of gold, but he would not
  get his returns from abroad in some weeks. If the price of gold
  should fall, meanwhile, he would be a loser. So, he would sell at
  once the gold he expected to receive later.... Black Friday and its
  evil consequences were due to the existence of a bad currency and
  a fluctuating standard of value. The Gold Room was at that time
  a necessity. Business could not be carried on without it, but it
  offered temptations and facilities for gambling which could not be

In the various States of the Union, where law-making goes on all the
time with surprising zeal, there is, of course, a bewildering array
of crazy-quilt laws on the statute books dealing with speculation,
but these are relatively unimportant. Some of the States, Wisconsin,
Louisiana, California, Montana, North Dakota, and South Dakota, have
laws similar to those of New York State, legalizing short sales of
commodities and securities. Other States prohibit dealing in futures,
short sales, corners, forestalling and speculation in general, and two
States actually license bucket-shops.[92]

It by no means follows because of the failure of the German Bourse
Law of 1896 and of all similar earlier attempts to regulate or
restrict speculation, that the issue has become moribund and that
nothing more will be heard of it. On the contrary, just as each one
of these abortive attempts at legislation; and each of the Government
Commissions we have described grew out of excess in speculation and
consequent losses to the public, so, no doubt, future extravagance
in the world of speculative undertakings will be attended by similar
outcries and similar results. There were debates in Congress for three
years over the Hatch Anti-Option Bill, and while this measure failed of
enactment into law, something akin to it will no doubt come up again
one day when the public is in the mood.

It is probably true that in such event the lessons taught by earlier
legislative experiments, and particularly by the German fiasco, will
have their effect in checking hasty legislation; in any event it would
seem impossible that the teachings of all the economists--scientific
contributions to literature that to-day comprise a large library--can
be ignored in any future discussion of this subject. Meantime,
accepting as our major premise the enduring presence of speculation
as a fixed and immutable characteristic of human nature the world
over--there remains the plain warning to Stock Exchanges and their
governors that fences must be mended as gaps occur, and that the
control of the business in the interest of the public must be the loyal
motive of all these institutions. It will not suffice to whitewash
indefensible conditions, nor to hide from public scrutiny any detail of
a business which that public is asked to support. Conversely, it may
be pertinent to say that in the effort to remedy some of the evils of
speculation the private citizen has his responsibilities as well as the

Looking forward toward the great questions of the future having to
do with State regulation of industry and commerce of which the Stock
Exchange is a part, the student finds no solution so satisfactory as
the doctrine of _laissez faire_, assuming always that those in control
of the business under scrutiny shall do their full duty. Under the
policy England has risen to unexampled commercial supremacy, while
America, because serious mistakes have been made, finds its advocates
of State regulation growing daily in number, with consequent danger to
all its delicate commercial machinery.

In these circumstances how has the Exchange met its duties and its
responsibilities? The answer is to be found in its records for the year
1913. Prior to that time there was undeniably a careless acceptance of
old standards without inquiring too closely into them; letting things
drift was the rule. But it is never too late to mend, and in 1913 the
Exchange met the issues squarely.

Manipulation was stopped, in so far as it can be stopped, by the famous
resolution of February 5, 1913, reading as follows:

“At a meeting of the Governing Committee held this day, the following
resolution was adopted:

  “_Resolved_: That no Stock Exchange member, or member of a Stock
  Exchange firm, shall give, or with knowledge execute, orders for
  the purchase or sale of securities which would involve no change of

  “The punishment for this offense shall be as prescribed in Section
  8 of Article XXIII of the Constitution regarding fictitious

Trading on insufficient margins was stopped by the resolution of
February 13, 1913, as follows:

  “At a meeting of the Governing Committee held this day, the
  following resolutions were adopted:

  “That the acceptance and carrying of an account for a customer,
  either a member or a non-member, without proper and adequate
  margin, may constitute an act detrimental to the interest and
  welfare of the Exchange, and the offending member may be proceeded
  against under Section 8 of Article XVII of the Constitution.

  “That the improper use of a customer’s securities by a member
  or his firm is an act not in accordance with just and equitable
  principles of trade, and the offending member shall be subject
  to the penalties provided in Section 6 of Article XVII of the

  “That reckless or unbusinesslike dealing is contrary to just and
  equitable principles of trade, and the offending member shall be
  subject to the penalties provided in Section 6 of Article XVII of
  the Constitution, in every case in which the offense does not come
  within the provisions of Section 5 of Article XVI thereof.”

It is one thing to adopt a rule, but it is quite another to enforce it.
In order that there might be no miscarriage on this point, the Exchange
on March 5, 1913, took the one necessary step to make these reforms
effective by the appointment of a Committee on Business Conduct, as

  “Fourth: A Committee on Business Conduct, to consist of five

  “It shall be the duty of this Committee to consider matters
  relating to the business conduct of members with respect to
  customers’ accounts.

  “It shall also be the duty of this Committee to keep in touch
  with the course of prices of securities listed on the Exchange,
  with the view of determining when improper transactions are being
  resorted to.

  “It shall have power to examine into the dealings of any members
  with respect to the above subjects, and report its findings to the
  Governing Committee.”

This Committee is composed of Governors of the Exchange in actual
business on the floor. Members call it “The Police Committee,” which
is correct. Its members are constantly on the watch for evidences of
wrongdoing, and the broad powers entrusted to them under the resolution
above quoted give them ample authority to act summarily. I have watched
them at their work and I have no hesitation in saying that this
Committee is the most important influence for good that has ever been
made a part of the machinery of any stock exchange in the world. The
most prejudiced critic of the Exchange will I think admit the truth of
this statement.

These three important additions to the Stock Exchange machinery have
met all the objections thus far encountered. They are broad and
sweeping; they are rigidly enforced and they have come to stay. Sooner
or later they must be adopted and enforced by all exchanges elsewhere.
I think it may be said that having gone so far, the Exchange has tasted
the fruits of a great moral victory and finds it good. It follows that
new problems as they arise will be met in the same spirit. All plans
can be improved, all work can be better done. The main thing is to
get started on the right path. After that the task is easy. And it is
immensely satisfying to feel that the Exchange has definitely chosen to
hew its path along new lines of business ethics.

A few years must pass no doubt before the public recognizes the
importance of these reforms, but in the end they must be recognized
and appraised at their real value. Is it too much to hope, when that
day dawns, that public sentiment will force the demagogue and the
notoriety-seeking critic into the background, and cheerfully give the
Stock Exchange a hand? Is it unreasonable to predict that if we keep
our house in order, talk of incorporation and supervision by Albany
and Washington must cease? I feel strongly that this is to happen. I
know it ought to happen, and those of my colleagues who have worked so
loyally to bring about these reforms will be mighty proud and happy
when it does happen.



The stockbroker’s praises are never sung; if he has good qualities, one
seldom hears of them. Doctor Parker once defined the Stock Exchange as
the “bottomless pit”: Doctor Johnson said a broker was “a low wretch”;
politicians vie one with another in painting him a parasite and a
social excrescence. Impatient idealists who would take a short cut
to perfection assert that he is of no real economic value, and would
enact laws to restrain him. In the novels and on the stage he becomes
sleek, cunning, convivial, and slippery, while there is ever about him
a rank smell of money and a Machiavellian sublety that enables him
to get something for nothing. Without understanding him and without
comprehending his devious ways, we feel somehow that he lacks what Lord
Morley calls “original moral impetus,” and that in some mysterious way
there is a stratagem lurking in all his actions. When he enters the
stage or the story we say:

    “By the pricking of my thumbs,
     Something wicked this way comes.”

Members of the Stock Exchange are more or less familiar with Baron
Munchausen and Mother Goose--for if rumor be credited both these
characters live in Wall Street--so they accept with good humor the epic
touch of playwright and novelist who thus take poetic liberties with
them and their profession. But the iron enters into their souls when
you term them non-producers and parasites, and long into the night they
will debate it with heat, bringing down the lath and plaster on their
detractors with the heavy artillery of all the orthodox economists, and
painting in gloomy colors the picture of a commercial world without its
great Exchanges.

At such times they become very earnest, and the listener, who perhaps
never thought of it before, comes away at least partially persuaded
that society as it is constituted to-day will have to undergo a very
decided transformation before it can get along without the machinery of
which these maligned persons are so important a part. It has stood the
test of time; it has come to stay; its fundamental idea, economy and
utility in trade, began with the Agora of ancient Greece and the Forum
of Rome. If there is something apocryphal, then, in the tradition that
derides the profession, here at least is evidence of its early origin,
its growth, and its power of endurance. In any case, membership in the
Stock Exchange is to-day the ambition of good citizens everywhere, and
affords to many a father a solution of the question at once difficult
and important, “What shall we do with our sons?”

There are arguments against such a career, of course, just as there
are against all roads that lead anywhere this side Utopia, but
nevertheless, a man with capital, average intelligence, and good
health, daily contributing by his labor to the silent forces that ebb
and flow within these walls, can do well on ’Change without sacrificing
anything that makes for self-respect and without diminishing in any
degree his value as a useful member of the community. Moreover, he
is free from things sedentary and is brought into daily contact with
men and affairs that broaden and instruct him. He becomes a thinking
and observing person, one whose mind never becomes atrophied for want
of material on which to feed. He must be equipped with patience and
philosophy to enable him to endure, without losing his nerve, the
long periods of dulness that are a sorry part of the business, but
he will not complain of wasted days if he learns to know that waste
time, like waste material, may be converted into valuable by-products;
that just as manufacturers are vigilant in turning their scrap-heaps
into commercial utilities, so, in his daily economy the Stock Exchange
member may, if he has the right stuff in him, turn the ashes, slag, and
refuse of the hour into things of practical value. Once he has learned
to do this, the novitiate has surmounted the most serious obstacle in
his profession.

His days on “the floor,” as it is commonly termed, will bring him in
contact with many different types. He will find here all that is finest
in human character, and many withering things that are most fatal to
it; these he may find anywhere, because there will always be men who
carry all sail and no ballast, “men who cannot believe life real until
they make it fantastic.” But the Stock Exchange is a great leveler;
infallibly its swift analysis of character will search him out, weigh
him and measure him, and place him just where he deserves to be.
Nowhere else among business men does this silent and sure appraisal of
worth find a more perfect result. It has nothing to do with the size of
one’s purse nor the blue in one’s veins; it takes no account of what a
man has been nor of what his ancestors were. Commercial honor is what
counts, and within these four walls it is raised to a high plane and
maintained with reverence. They live a touch-and-go life, with quick
changes and nerves all in action, but they make no mistakes when they
analyze character in their great crucible.

Those brutal aphorisms, “money talks,” “might makes right,” “whatever
is, is right,” and all similar phrases, become meaningless in the
matter-of-fact subordination of externals that one witnesses daily on
’Change, where life is stripped of all save elementals. It is character
that “talks” here, not money; if might makes right, it is the might of
decency and not of brute force or “pull”; whatever is, is “right” only
so far as it conforms to the code of gentlemen and exalts the square
deal. Unless a candidate understands this in its fullest sense, and is
determined to make it his goal, he had better avoid the Stock Exchange.
Conversely, we find in this critical atmosphere another reason why
honorable men are ambitious to become members, for it is something
inspiriting to have won the discriminating approval of a critical
assembly abounding in experience and guided by good traditions.

The New York Stock Exchange is an association and not an incorporated
body. It resembles a club in its organization, and hence through its
governing board it exercises a control over its members that could not
be maintained by differently constituted authority. From the moment
a man signs that Ark of the Covenant, the constitution, and thereby
becomes a member, he places himself, his partners, his customers,
his employees, his books and all his business affairs unreservedly
in the hands of the Board of Governors. This body, which is composed
of members of the Exchange, is chosen in classes of ten, by the full
Board at an annual election. It consists of forty members, divided
into eleven standing committees, of some of which the President,
Vice-President, and Treasurer are also members.

It has been urged in times past, by those who have not understood
the peculiar powers of this Governing Board, that the Stock Exchange
should incorporate in the manner provided by law, and thus place
its affairs within the control of the State authorities, so that if
mistakes occur and wrongdoing becomes evident offenders may be dealt
with by the legal authority vested in the Courts. But the essential
point altogether missed in this suggestion lies in the fact that the
absolute power vested in the Board of Governors, by the existing plan,
gives the Stock Exchange authorities vastly greater control over its
members than any law on the statute books could possibly give. The
Hughes Commission, which went thoroughly into the affairs of the Stock
Exchange in 1909, recognized this fact, and its report emphasized the
point that if changes were necessary they should come from within the
Exchange itself, because of the broad control vested in it by its

The manner in which the Board of Governors handles offences as
they occur, and the way punishment is meted out, would not have a
constitutional leg to stand on if, as an incorporated body, offenders
could invoke their legal privileges. Under its present organization,
for example, the Board may, if it sees fit, intercept and cut off a
member’s telephone connection; it may dictate with whom he may or may
not do business, and in its wisdom it may determine how, when, and
where that business shall be conducted. If it were an incorporated
body and each offender could resort to the courts in instances such
as I have cited, what would become of its rules, and how could the
Exchange authorities maintain its absolute determination to protect the
public at all hazards? Under the existing system, which true friends
of the Exchange and of the public may well wish to see maintained, the
governors are enabled to find the direct way and the common-sense way,
without being blocked by a jungle of legal technicality. They are not
to be delayed or restricted by alibis, by pleas of immunity, or by
States’ evidence, nor are they to be interfered with by the rain of
legal writs through which an accused man, in the courts, may twist and
double and block and delay the punishment for his sins, if sins there

Wonderment is often expressed by men in other lines of business at the
severity of the punishment sometimes inflicted by the governors in this
autocratic control. To expel or even to suspend a member, and thus
bring upon him great pecuniary loss as well as disgrace, all because of
an offence which might go unpunished in other professions, naturally
seems to an outsider to be unnecessarily severe. The answer to this is,
of course, that the governors, recognizing their great duty, accept
as a public trust the power and the ability to maintain it. No matter
whose head is hit, the rules will always be vigorously enforced because
they are designed to protect the public--a public, I am sorry to say,
that has not always tried to understand what the Exchange stands for.
That is why no statute of limitations can interfere to protect any
one of its members from the penalties that attend a departure from
the straight line of business morality. A rigid enforcement _from
within_ is the only efficient way, and no one who knows the governors
and their arduous labors on behalf of the principle for which the
Exchange stands can ever doubt it. The members themselves, no matter
who is punished, are a unit, and an enthusiastic unit, in upholding the
disciplinary action of the governors every time.

The best course for a young man to pursue who wishes to become a member
is first to spend a year or more as clerk in a well-regulated broker’s
office. The business is by no means intricate, and there are details
with which he should familiarize himself. If in future years his
partners are absent, he can then go over his firm’s books and acquaint
himself, as he should, with all its affairs. A dishonest partner could
ruin him, or, what is worse, disgrace him, for the governors recognize
no distinctions as between partners, nor is ignorance accepted as an
excuse. Office partners who are not members of the Exchange do not
always understand the rules, nor the rigorous spirit in which they are
enforced, and just as the Board member is held accountable for his
partners, so he must pay the penalty for their misconduct.

This means that a member must choose his partners carefully, must
familiarize himself with what they are doing, and must know how to
read every entry on the firm’s books. Then, too, it is immensely
satisfactory to one who has been on the floor all day and more or less
out of touch with his office details to learn of his own knowledge each
day, before he goes home, just where the firm stands. He looks over the
customers’ accounts, the loans, and the nature and amount of the firm’s
unemployed resources, including its balances at the banks. Such a man
sleeps well, and reduces to a minimum the anxieties that, at critical
times, make of this a nerve-racking occupation. It is all simple
enough, and in the modern methods of office economy in bookkeeping he
can do it without loss of time. Above all other considerations, such a
man knows his business thoroughly from top to bottom, and he should not
think of investing his capital on any other basis.

Perhaps a word will not be amiss regarding partnership agreements. A
Stock Exchange commission business is one that should be conducted like
any other business--that is to say, reserves should be laid aside and
surplus balances created for the inevitable rainy day. That this is not
done by all brokerage houses in the way it should be done is due to
the curious habit that has grown with the years, whereby stockbrokers
spend their money, uptown and down, with a lavish hand. Too many men of
the younger generation thus give hostages to fortune in their private
extravagances by “drawing down” their credit balances as fast as they
accrue. “Easy come, easy go,” seems to be the guiding principle, and
when hard times come, as come they must, debit balances are created
that soon eat into capital account.

No hard and fast rule can be laid down to meet conditions like these,
but the best method I have seen, and the one most wisely designed
to avoid mishaps for beginners, consists in a partnership agreement
by which each member of the firm may draw a monthly sum, worked out
to meet his normal requirements, _and no more_. All that remains is
then turned into capital account, where it draws interest, becomes a
producer, and grows by what it feeds on. I have in mind a firm of young
men who some years ago resorted to this method of compulsory saving,
with such success that, despite the vicissitudes of the passing years,
the members comprising it are now all wealthy, attributing their good
fortune wholly to this wise and provident copartnership agreement.

New York Stock Exchange memberships are obtained in only one way.
Having assured himself that he can meet the requirements of the
Committee on Admissions, and having provided himself with two
sponsors, the candidate enters into negotiations with the secretary
of the Exchange for the purchase of a “seat,” as it is termed. As
there are only 1100 members, and as the membership is always full,
he must either purchase the seat of a deceased member, or make a bid
sufficiently high to attract a seller. He may, of course, subject to
approval by the committee, inherit a seat or acquire it by private
transfer, but the customary process is to buy openly through the
secretary, a salaried officer of the Exchange, whose authority in
matters of infinite detail is such as to make him a mighty power in
executive affairs. Thereupon he pays over the purchase price, together
with an initiation fee of $2000, and presents himself and his sponsors
before the Committee on Admissions.

This committee first calls his proposer, and then his seconder,
and they are subjected to a careful inquiry as to how long they
have known the candidate, and whether in a business or social way;
his qualifications for membership, his health, his character and
reputation, and his previous business experiences are all subjected to
a microscopic scrutiny. His sponsors are also asked if in the ordinary
course of business they would accept his check for $20,000.[94] If the
answers to these questions prove satisfactory, the candidate himself
is summoned and put through a similar examination. As his name has
been publicly posted on the bulletin board for two weeks, anything
detrimental concerning him will probably have been communicated to
the authorities before he is examined, but if not, provided he proves
satisfactory and the particular department of Stock Exchange work which
he proposes to undertake meets with the approval of his inquisitors,
and provided also his partners are not objectionable, he is elected
to membership after he signs his name to that _magnum opus_, the

The price paid for memberships in recent years has varied widely with
the condition of the times and the state of the stock market. In the
halcyon days of December, 1905, and the opening months of 1906, there
were several transfers at $95,000, the high-water mark. Following
the panic of 1907 seats declined in December of that year to $51,000
and rose again in 1909 to $94,000. The only dues are $100 annually,
together with $10 voluntarily paid by members to the heirs of each of
their deceased colleagues, but this amount is, under the regulations
of the Exchange, limited to $150 annually, the balance, if more than
fifteen members die in any one year, being paid out of reserve
funds. The sum of $10,000 which thus accrues to the heirs of deceased
members is, of course, much cheaper than any other form of insurance.
The Exchange is enabled to maintain it by the $10 contribution as
described, and the general fund is kept intact because the 1100 members
actually contribute $11,000, of which the extra $1000 is set aside as a
reserve, which is prudently invested.

If we accept the fallacious argument that a thing is worth just what
one can get for it, there can be no argument as to the value of Stock
Exchange memberships, but that is not the way to approach the subject.
It may be said with certainty that no matter how much has been paid
in the past, or how much may conceivably be paid in the future, a
purchaser who devotes to his business the same time and labor that
he would devote to any other business in which a similar capital was
invested will always be able to earn a good return. Those awful periods
of stagnation will appear now and then, and accidents in the shape of
losses will occur and return again to plague him, but, nevertheless,
the hard worker will find no cause for complaint when he sums up,
let us say, a five-year average. This is demonstrated by the fact
that it is only on rare occasions a Stock Exchange member changes his
vocation, which is another way of saying that memberships are held at
high prices because holders are prosperous and will not sell.

In considering the value of Stock Exchange memberships it is important
to include the “unearned increment” that goes with them. Despite all
that may be said against it by members themselves, who in dull times
denounce their calling with cynical extravagance, membership carries
with it certain undefined advantages. It is a centre of the financial
world in America; the business is one that quickens enterprise and
encourages adventure; it undeniably gives a man a certain standing
and character among his fellows; he is always abreast of the times,
his hours are not long, he acquires habits of deduction, analysis,
and observation that sharpen his wits and give zest to life; he is
surrounded at all times by a great storehouse of wit, wisdom, and
experience, and from the very nature of his business he is often
brought into contact with important news of which he can take advantage
and which may lead to highly profitable opportunities for investment or
speculation. He would be less than human if he did not avail himself of
such opportunities, and the business would lose much of its enjoyment;
indeed “the tranquillity of dispassionate prudence” of which Goldsmith
speaks may easily be carried too far on ’Change.

When a newly elected member makes his appearance on the floor he is
taken to the rostrum by one of his sponsors, who introduces him to
the Chairman. That formality concluded, he is greeted by shouts of
“New Tennessee,” and is instantly surrounded by a howling mob of young
members bent on initiating him. The origin of this war-cry, “New
Tennessee,” is an enigma one would like to solve, but it is lost in
obscurity. Even the board-room antiquarians have no clue. One of the
members tells me that his grandfather, who was a member of the old
Exchange that stood at the corner of Wall and William streets in the
early 1830’s, often told him that the phrase was in use then, just as
it is to-day. Its early origin, at least, is thus established, and
one’s curiosity concerning it is proportionately increased. However it
originated, it remains the popular slogan, and when a shrill-voiced
member in any part of the room cries out above the din, “New
Tennessee,” there a crowd of the boisterous younger element gathers to
welcome a new member.[95]

To-day, thanks to the prudence of the Committee of Arrangements (which
has charge of the board-room discipline), the hazing of new members
is confined to harmless pranks, but up to a year ago the process was
a severe one. Newspapers rolled into clubs were used to beat the
novitiate over the head; he was pelted with everything within reach;
his collar and tie were torn off, and after a hundred strong young men
had thus jostled and mauled and pounded him all over the room, he was a
sorry sight. It began to be felt, after a peculiarly severe hazing of
this sort, that something might happen one day to bring reproach upon
the Exchange and sorrow to the members themselves, so the committee
wisely put a stop to the practice.

When the new member settles down to serious work he will find open to
him several different methods of doing a brokerage business, and in
this respect the New York Exchange differs widely from those abroad. In
London, for example, there are but two classes, jobbers and brokers,
to only one of which a member may belong. Until very recently the
distinctions between the two classes were but vaguely defined, and
even now frequent undercurrents of resentment are aroused between them
because of the alleged encroachments of one class upon the domain
of the other. In Paris, where the seventy _Agents de Change_ enjoy
an absolute monopoly by government authority, there is very decided
opposition by the less fortunate members of the fraternity, and there
are many who predict that the friction and dissatisfaction which
monopolies arouse in this day and age will sooner or later bring about
a reformation of the French system.

Here there are no such distinctions, and no friction. A member may be
any one of several different kinds of brokers, or he may be all of
them at once, if his arms and legs will stand the strain, and if his
financial resources will enable him to meet the losses arising from
mistakes. These mistakes are a sorry part of the business, and they are
bound to occur every now and then, no matter how careful a man may be,
but I have observed that they come about most frequently in the case of
men who try to do too much.

A man may, if he chooses, become a partner in a commission house, and
confine his time to the execution of orders for his firm’s customers.
For these services his firm receives and is compelled to collect, by
the rules, a commission of one eighth of 1 per cent.--that is to say,
$12.50 per hundred shares. Or he may be a “specialist,” and establish
his headquarters at some one spot in the room, and do nothing but
execute orders entrusted to him by his fellow-members in the one stock
or group of stocks situated at that particular spot. For his services
in these transactions he receives a commission of two dollars per
hundred shares, to which is added $1.13 if he is required to “clear”
the trade--that is, to receive or deliver the stock. The latter is
called “three-and-a-shilling business,” or “clearance business.”

The vocation of the specialist is one that causes frequent comment and
ill-merited abuse. It has been charged that he sometimes exercises
arbitrary power in executing his orders, and complaint is heard that
the price at which he deals is not always a fair price. My observation
is that four times out of five the fault lies, not with the specialist,
but with the broker who gives him the order. The latter has been trying
to do too much, he has held the order in his hand whilst engaged
elsewhere in the hope of saving the commission for himself, and then,
when he has “missed his market,” turns the order over to the specialist
and shifts the responsibility to his shoulders. This is scarcely fair,
and it simply should not happen. The customer protests at the delay and
at the price; he is told the specialist is responsible, and straightway
another voice joins the chorus that holds the specialist in abhorrence.

Like the chairman of the House Committee of a club, the specialist
is made to bear everybody’s burdens; he is the target for all the
criticism that any one chooses to hurl at him. And yet he is one of
the most useful and indispensable features of the Exchange machinery.
Without him there would be no market whatever in very many securities;
like the London jobber, he is constantly on the spot, ready to take
chances by creating at his personal risk a market where none may have
existed. If it be urged that the specialist should not speculate, but
should confine himself solely to executing the orders on his books, it
may be answered that in such a case he would often be useless, for in
many instances the orders on his books are insufficient in volume to
establish a close market or anything approaching it. By reason of his
speculations a market is created; without them it may not exist. He
speculates, therefore, for the same reason that jobbers in the London
market speculate, and dealers in wheat, cotton, and wool. Like them, he
must have goods on hand to supply the demand, and in the purchase of
these goods (securities) he speculates, legitimately, on the hope or
belief that buyers will appear.

If the new member chooses, he may become what is known as a “two-dollar
broker,” with a roving commission, executing orders for members in
any part of the room at $2 per hundred shares. The “two-dollar man,”
as he is termed, is a hard worker above his fellows. He labors for a
minimum wage; he must work every day or forego his revenues, for he
cannot delegate his orders to any one else and receive a commission
for these vicarious services. He takes big risks, because he has many
orders from many different houses; the least inattention means loss.
I have known one of these two-dollar men to lose $10,000 on a mistake
on a 500-share order from which his commission was but $10. He is
supposed to be a mine of information concerning floor gossip; his value
to the houses that employ him lies quite as much in his ability as
a newsgatherer as in his skill as a broker. He is on the jump every
minute. The one redeeming feature of his business is that he has no
office responsibilities, and none of the burdensome--and sometimes
painful--duties that attend the stockbroker’s relations to his clients.

There are perhaps fifty “odd-lot” brokers on the floor, and a member
may, if he pleases, take up this branch of the business. It has to do
with the buying and selling of fractional lots of securities, on which
no commission is charged because the peculiar nature of this business
enables the broker to trade against his commitments as they arise,
and thus obtain compensation for his services in the resultant profit.
In a small way the odd-lot broker, like the specialist, resembles the
London jobber. One of the houses that confines its operations to this
“odd-lot” business has nine partners, seven of whom are members of
the Exchange; another has seven partners with six board-members. The
fact that two such houses should have a million dollars invested in
memberships, to say nothing of the large sums employed as capital,
speaks eloquently for the volume of business they are called upon to

This business, which includes fractional lots of securities from one to
a hundred shares, is one of the most important on the floor, since it
represents, very largely, the purchases and sales of an army of small
investors all over the world. To such customers, very properly, the
Stock Exchange gives the best it has, safeguarding their interests with
quite as much care as it bestows on the greatest of market operators.
The handling of all the odd-lot orders that accumulate in a busy day,
the skill required in the office-machinery, the vigilance of the floor
expert, and the foresight necessary to conduct the trading operations
of the firm make this a most fascinating business.

Another field to which a member may turn is that which has to do with
transactions in bonds. The “bond-crowd,” as it is called, makes its
headquarters on a platform under the east gallery. There are about
fifty of these “bond-men,” and the compensation paid them for their
service is the same as that paid on stocks, ten thousand dollars in
bonds being reckoned equivalent to 100 shares. As there are twice as
many bonds as stocks listed on the Exchange, one would think a larger
number of brokers than this little coterie would be required to handle
the transactions, but, despite this disparity in the relative size of
the lists, it so happens that very many of the listed bond issues are
rarely dealt in, and hence there is no surplus business. Moreover,
brokers from all parts of the room are constantly executing their own
bond orders without having recourse to the assistance of brokers who
make this department a specialty.

Still another opportunity presents itself in the business of
arbitraging. The arbitrageurs stick closely to the rail along the south
wall, where there are pneumatic tubes connecting with the cable offices
downstairs. Their business is one that calls for the utmost speed,
since it involves taking advantage of fractional differences that arise
from time to time in the prices of stocks that are listed on foreign
Bourses as well as on the New York Stock Exchange. Thus Canadian
Pacific may sell at 270 in London and at the same time at 269½ in
New York, and as an excellent cable service keeps pace with these
fractional differences, the arbitrageur may buy in New York and sell in
London and receive a confirmation, all within three minutes.[96]

Because of its complexity and its risks, arbitraging is not a business
that appeals to beginners on the floor. One must have reliable
colleagues on the foreign Exchanges who are constantly watchful and
alert, and who are moreover possessed of sufficient capital to finance
large transactions. In addition, there are labyrinthine difficulties
to surmount in the way of commissions, interest charges, insurance of
securities in transit, fluctuations in the money markets abroad and at
home, cable tolls, letters of confirmation, rates of foreign exchange,
settlement days, contangoes, and many other matters. Unless a man has
had a long experience in the difficult art of arbitraging, he had
better shun it or prepare for trouble.

Finally, in determining what branch of the Stock Exchange business
he will undertake, a member must consider that numerous and shifty
contingent known as “floor traders.” These gentlemen afford an
interesting study. They do not accept orders; each man is in business
for himself. They entertain no illusions, and they recognize no
alliances with each other. Each one follows his own inclinations, and
does not permit himself to be moved by tips, or rumors, or gossip, or
sentiment. He scoffs brazenly at all forms of “inside information.” His
power of observation is keen, and his habit of analysis and deduction
is wonderfully developed. In the surging crowd around an active
stock he sees things with microscopic eye, and acts with surprising
promptness; once his conclusions are reached, speed and agility are
relied upon to do the rest. Age cannot wither, nor custom stale, his
infinite variety. He is a bull one minute, and a bear the next. He is
intent, resourceful, suspicious, vigilant, and ubiquitous. He asks no
quarter, and gives none. Now he is sphinx-like, deaf, inscrutable and
impenetrable; now exploding with the frenzy of battle. You may stand
and chat with him, and he may seem to listen to you. In reality he does
not hear you at all. His roving eye is elsewhere, his mind is intent on
other things. In the middle of a sentence he may leave you abruptly and
go tearing from crowd to crowd like a thing possessed, the incarnation
of energy.

Visitors in the gallery who look down upon the scene on the floor in
active markets, when all the Stock Exchange elements just described are
striving at their utmost, come away in wonderment. The scene is one
they do not understand. Such tumult is foreign to anything in their
experience, and in their failure to recognize the economic forces at
work in the animated panorama before their eyes they are prone to
form superficial and erroneous opinions. The disorderly nature of the
work seems to impress the visitor forcibly, yet the Stock Exchange is
perfectly orderly; transactions involving millions come and go without
the slightest friction. Nothing could work more smoothly.

It does not occur to the uninstructed spectator that mighty forces
are here at work in establishing values; that the object of the Stock
Exchange is to safeguard investors; that it is the one unobstructed
channel through which capital may flow from sources where it is
least needed into those where it may be most beneficially employed.
The casual onlooker often gives no thought to the high standard of
commercial honor that is maintained here; he does not realize that his
own affairs, whatever they may be, would face a serious situation were
this very important part of the modern mechanism of business to suffer
interruption. And so it sometimes happens, in his hazy and nebulous
impressions of the Stock Exchange as gathered from the visitors’
gallery, that this man’s mind is fertile ground for the seed which may
be sowed there by every genteel humbug, demagogue, or quack whom he
chances to meet.

It may be admitted freely that the facilities afforded by Stock
Exchanges, like all other great public utilities, are sometimes
foolishly or dishonestly abused, but by no stretch of the imagination
can such abuses attain to the mischief done by those who would deceive
people into the belief that the Stock Exchange, because it deals with
large affairs in a large way, has some improper quality about it. Many
minds, many hands, and many hours of patient labor have been bestowed
on the making of the chronometer which is a vital part of a great
ship; yet a child may “put it out of business,” and destroy the ship’s

That these observations apply to the New York Stock Exchange need not
be elaborated when we consider that one third of our nation’s wealth
is represented by its securities; that there are two million owners
of them; and that, through the widespread publicity of Stock Exchange
quotations the world over, all these owners are given gratis the
epitomized judgment of experts as to the value of those securities
each day and their prospective value in the future.[97]

The Stock Exchange is open for business from 10 A.M., to 3 P.M., and
on Saturdays from 10 to 12 noon. The broker reaches his office between
9 and 9:30 A.M., looks over his correspondence, makes a mental note of
the general status of the firm’s affairs, glances at the morning’s news
that is rapidly reeling off the ticker, reads the prices cabled over
from the London Stock Exchange which has been in session four hours,
and thus in a general way acquaints himself with what may be expected
at the opening of the New York market. The two-dollar broker and the
specialist do not concern themselves greatly with such matters, and
frequently they go directly to the floor without stopping at their

By 9:45 A.M. the Board is beginning to present a scene of animation.
Of the 1100 members not more than 600 are in attendance, and often not
more than 400; indeed, there are members who have never once entered
the room. But the attendance is increased by the presence of some 230
pages in uniform, wearing five-year service stripes, of which the
sleeve of the superintendent is adorned with eight; 30 telegraph
operators, whose business it is to hurry from place to place gathering
quotations as they occur, and sending them out over the ticker, and by
550 telephone clerks who occupy the long booths on the west wall, where
private lines connect members with their offices.

These clerks are not permitted to go on the floor. Their employers,
who rent the telephones from the Exchange, pay $50 annually to the
institution as a fee for each clerk. As their duties are extremely
important, involving the transmission by ’phone of orders and reports
that often run into millions, it will be seen that this small army of
private line operators is of necessity highly trained. An instant’s
relaxation or inattention, or a failure to transmit promptly and
correctly the verbal messages entrusted to them, may conceivably lead
to confusion and losses of great importance.

At each of the sixteen posts in the room, from twenty to forty stocks
are situated, and another group covers the north wall. Once a position
is assigned to any security by the committee in charge, it is seldom
moved elsewhere, and thus, although there are nearly six hundred
different issues of securities, the broker soon learns the location
of each one and turns automatically in that direction when an order
reaches him. At each of the posts, and along the north wall, the
specialists in these various groups of stocks are at work before the
opening of the market, entering the day’s orders in their books, some
with the rapid energy that betokens an active opening, others with an
indifference that spells dulness in their particular line.

At Post 4, in the northeast corner, there is also an ante-market
gathering, for this is the spot where stocks and money are borrowed and
loaned. This “loan crowd,” as it is called, was formerly the gathering
to which one turned to gauge the market position of the bear party,
since the borrowing of stocks by “shorts,” as done here, furnished an
index of the strength or weakness of that interesting element. But
of late it has lost its ancient prestige as a guide in such matters,
because in order to hide the information sought, borrowing of stocks on
a large scale is now done privately. This “crowd” has been the scene of
some tremendous excitement, as in the Northern Pacific corner of May
9, 1901, when the price soared to $1000 per share and the shorts were
trapped, and on that day in October, 1907, when money, after loaning at
125 per cent., was not to be had, for a time, at any price, although
brokers with the best collateral would have paid 200 or 300 per cent.
for accommodation, and ruin stared every one in the face.

As the hour of ten draws near, activities increase. On the south
wall the arbitrageurs are busy deciphering their code messages and
distributing orders, many hundred telephone bells are ringing in the
long booths where clerks are hastily writing their messages; crowds
of visitors gather in the gallery, while beneath it the bond-brokers
prepare for their labors; indicator boards on the north and south
walls, like great kaleidoscopes, display and hide their number with
the same electric suddenness that seems to characterize everything and
everybody--then bang! the gong rings, the chairman’s gavel falls, and
another day begins. Yesterday is embalmed with the Pharaohs; they never
speak here of what _has_ happened, but only of what _will_ happen--and
this is a new day.

Naturally, certain securities are more active than others, and
here there are the largest crowds. As the limits surrounding the
trading-posts are but vaguely defined, one crowd will sometimes get
mixed up with another, whereupon confusion results, and good-natured
if earnest appeals are heard to “get out,” and “get over.” Into one
of these struggling masses a broker with an order or a trader with
an inspiration literally hurls himself; each sound in the jargon of
voices, which means only Bedlam and Babel to the visitor, is to him
perfectly understood. He may be pushed this way and that, or tossed
aside, or hidden altogether by bigger men who surround him, yet he has
no difficulty in determining the price and in doing what he came there
to do; all this with surprising celerity and accuracy. The business
done, he hastens to his telephone, makes his report, and is ready for
the next order. The manner in which some of these transactions take
place between brokers has long been a subject of praise. A word, or
a nod, or an upraised finger, or a tap on the arm, and hundreds of
thousands of dollars change hands without a scrap of writing or a
witness. A magazine writer thus describes it:

  One pastime of the American public is the manly sport of throwing
  mud. A shovelful of scandalous mud--a clean white target, and many
  a reputable and disreputable citizen is having the time of his
  life. We bespatter our philanthropists, our statesmen, merchants,
  lawyers, and divines. We vilify our art, our architecture (I take
  a hand in that sometimes myself), our literature, or anything else
  about which some one has spoken a good word.

  One of the time-honored institutions of our land--one which has
  never ceased to be the centre of abuse--is the New York Stock
  Exchange. Here conspiracies are organized for robbing the poor
  and grinding the rich; so despicable and damnable that Society is
  appalled. Here plots are hatched which will eventually destroy
  the nation, and here the Gold Barons defraud the innocent and
  the unwary, by stock issues based solely on hot air and diluted
  water. Here Senators are made, Congressmen debauched, and judges
  instructed--even plans consummated for the seduction and capture of
  the Supreme Court. All this is true--absolutely true--you have only
  to read the daily papers to be convinced of it.

  There is one thing, however, which you will not find in the
  daily papers. It is not sufficiently interesting to the average
  reader who needs his hourly thrill; and this one thing is the
  unimpeachable, clear, limpid honesty of its members.

  When you buy a house even if both parties sign, the agreement is
  worthless unless you put up one American dollar and get the other
  fellow’s receipt for it in writing. If you buy a horse or a cow, or
  anything else of value, the same precaution is necessary. So too if
  you sign a will. Your own word is not good enough. You must get two
  others to sign with you before the Surrogate is satisfied.

  None of this in the Stock Exchange. A wink, or two fingers held up,
  is enough. Often in the thick of the fight when the floor of the
  Exchange is a howling mob, when frenzied brokers shout themselves
  hoarse and stocks are going up and down by leaps and bounds, and
  ruin or fortune is measured by minutes, the lifting of a man’s hand
  over the heads of the crowd is all that binds the bargain.

  What may have happened in the half hour’s interim, before the
  buyer and seller can compare and confirm, makes no difference in
  the bargain. It may be ruin--possibly is--to one or the other,
  but there is no crawling--no equivocation--no saying you didn’t
  understand, or “I was waving to the man behind you.” Just this
  plain, straight, unvarnished truth, “Yes, that’s right--send it in.”

  If it be ruin, the loser empties out on the table everything he
  has in his pockets; everything he has in his bank; all his houses,
  lots, and securities--often his wife’s jewels, and pays 30, 40, or
  70 per cent., as the case may be.

  What he has saved from the wreck are his integrity and his good
  name. In this salvage lies the respect with which his fellows hold

  Every hand is now held out. He has stood the test, he has made
  good. Let him have swerved by a hair’s breadth and his career in
  the Street would have been ended.[98]

Of course mistakes and misunderstandings do sometimes occur, and these
are the banes of the broker’s life. He will lose $500 with equanimity
on a personal venture, but he will howl in distress over a loss of
$25 on a mistake, and apply to himself a lurid mosaic of epithets
because of it. The one merely shows bad judgment and is one of the
little amenities; the other he feels is stupidity. At such times the
stockbroker adopts Talleyrand’s bold hyperbole when he heard of the
death of the Duc d’Enghien, “It is worse than a crime; it is a blunder.”

When a “mix-up” occurs in a crowd, as when four or five men make claim
to having supplied a bid simultaneously, everybody produces a coin and
“matches” on the instant. It is a case of “odd man wins,” and no time
to lose. The market may be active and differences of seconds may spell
losses of thousands. In less time than it takes to tell it, everything
is adjusted and forgotten. But sometimes a mistake occurs which is not
discovered by either party until after the market has closed. A man may
think he sold 500 shares, for example, whereas the buyer has only 400
on his book. In a case of this sort, the discrepancy is covered “at the
market” next morning and the loss or profit is divided. Differences
between members are seldom irreconcilable, and when they assume serious
proportions any third man will act as arbiter and speedily settle them.
It is a significant fact that the Committee of Governors selected
to arbitrate disputes is rarely called upon. Rarely, too, is there
acrimony or hard feeling. The use of epithets is forbidden; to call a
man a liar means prompt suspension. And so they live on raw nerves,
with incidents occurring daily that add to the strain, yet ever with
good-humored acquiescence toward whatever fortune deals out to them,
and with generous camaraderie one to another.

As the day advances on ’Change, news and gossip and rumors of all kinds
pour in, and to these the active broker must devote a large part of
his time. It is astonishing to what extent the public, or that part of
it that lingers in brokerage offices, calls for news from the floor.
The demand is insatiable. “What do you see over there?” “Who is buying
Steel?” “Who is selling Union?” “What’s the news in Copper?” “What do
you think of the market?” These are the messages that come over the
wires all day long, not merely from the New York offices, but from
Montreal, Boston, Chicago, St. Louis, and many other points. And no
matter how busy the floor broker may be, time must be found, somehow,
to reply to every question as best he may, for at the other end of the
line there is a customer waiting to hear from him.

Just why this customer yearns for news from the floor has always been
a mystery to me. What does he expect to learn? What value attaches to
a list of names of brokers who buy or sell Steel, when everybody knows
that really important principals in these matters invariably hide their
hands? All the significant news of the day is printed on the news
tickers and reaches the customer’s eye before the broker or the floor
knows anything about it, yet never an hour passes but he is importuned
to “say something” about what is happening on ’Change, although half
the time nothing whatever is happening. The climax of this sort of
thing is reached when the floor man is asked to predict the future
course of the market, a request that reaches him a dozen times a day.
Now, in the name of common sense, what does he know about whether the
market is going up or down? How can a man who is swimming with the
current tell how fast he is going? If he were a seer who could foretell
such things he would have all the money in Wall Street, in which case
he wouldn’t remain a broker very long.

Just watch him; he is as busy as a man can be; his hands are full of
orders, his head is occupied with many anxieties, his eye is on the
indicator board, or scanning the room; arms and legs are working as
fast as nature will permit; he must concentrate at all times. His
ears ring with the strife of the room; all sorts of rumors, many of
them ridiculous, are hastily whispered to him; “boos” and groans from
the bears, shrieks and yells from the bulls--this is the sort of
thing he hears all the day long. How can he form an opinion when thus
distracted? He stands too close to the picture; he lacks perspective.
What such a man thinks of the market isn’t worth anything; indeed, he
does not “think” at all except about executing his orders, and heaven
knows that is enough to engross him.

Answering all the questions that come to him over the wires is the
hardest task, and the most distasteful thing the floor man is called
on to do. He knows that he doesn’t know anything; from his point of
view no information is better than misinformation. He feels with Josh
Billings, “It’s a mitey site better not 2 no so mutch than 2 no so
mutch that ain’t so,” but nevertheless he must continue to express
views and theories and opinions and predictions, whether he likes it
or not. Some of his oracular utterances are illuminating. “Market is
going down,” he replies, “because there are more sellers than buyers.”
Inexorable logic.

There was old Y----, who used to talk to his customers sitting near
his office window, which faced Battery Park. He was a shifty professor
of finance who never was known to hold the same opinion of the stock
market two days running. “This market,” he said one day, “is going away
up, crops are good, money is easy, railroads are rolling in wealth,
and--look over there”--pointing to a line of immigrants walking through
the park from the landing place--“the brawn and sinew of old Europe
coming over here to develop our resources.” The very next day the
market had what is called a “healthy reaction.” Quite unmindful of his
consoling prophecies of yesterday, old Y---- looked at the tape and
said, “This market is going away down. Crops are poor, money is tight,
railroads are in a bad way, and--look over there”--pointing to another
procession of immigrants--“the scum of Europe coming over here to rob
our American laborers.”

If that portion of the public which buys and sells stocks often has its
little joke at the expense of brokers, so also brokers in their turn
frequently have cause to laugh at their clients. “Cheer up,” was the
message sent over the wire by a hopeful broker to a despondent client;
“cheer up, the market can only go two ways.” “Yes,” was the reply,
“but it has so damn many ways of going those two ways.” During the
rubber boom of 1910 on the London Stock Exchange, a broker wired to a
client in Ireland, “Rise in bank rate considered likely,” to which he
received a prompt reply, “Buy me five hundred.” A telegram came over a
private line one day last summer from a customer in Montreal. It was
a deadly dull period, when, owing to the indifference of the public,
stockbrokers were not making expenses. “What are you chaps doing over
there?” said the telegram. “Why don’t you start something?” to which
the floor member replied, “Read St. Luke 7:32.”[99] This must have been
the same member who, when customers were few and far between, hastily
’phoned his office partner, “Put all our customers into copper,” to
which his partner replied with grim resignation, “He won’t be down

When the gong rings at three, the day’s work on ’Change is at an end,
and the shouting and the tumult dies. It is then 8 P.M. in London,
and there in the Street hard by the Exchange, even at that ungodly
hour, brokers and jobbers in the “Yankee” market are still at work
in all kinds of weather. “The American market,” says the (London)
_Quarterly Review_, “continues, as a rule, to deal up to 8 P.M. (5 P.M.
on Saturdays), when the cable offices on this side close down. Up to
that time wires are coming in continually from New York with orders
and prices; and a man would be ill advised to undertake jobbing in the
American market unless he has a splendid constitution and lives within
easy reach of town. Every year the Yankee market levies a death-tax
upon its members through the medium of pneumonia and other complaints
brought on by long exposure in the Street after official hours; and
very little is done to provide these late dealers with adequate
accommodations or shelter.”[100]

Before leaving the Board after the official close, the broker will
stop for a moment at the loan crowd to borrow or lend his stocks,
after which he spends a half hour or so in his office, going over the
events of the day with his partners and customers, and familiarizing
himself with the day’s doings. The specialists, floor traders, and
two-dollar men, many of whom have no partners and no office staff, will
go directly home, loitering perhaps for a late luncheon, or something
stronger, at the club upstairs, or at a famous café across New Street.
When times are brisk it is not an uncommon thing for partners to remain
at their offices until a late hour, and clerks are often on duty until
the small hours of the morning, spending what is left of the night at a
nearby hotel in order to save time.

Holidays are not numerous on the Stock Exchange, being limited
to the days set apart by law, and to very rare occasions in dull
times when by petition of a majority of the members a Saturday half
holiday is granted by the governors. It is felt, very properly, that
special holidays should be granted but rarely, because the intimate
relationship of the banks to brokerage houses is such that whenever
the banks are doing business large borrowers should always be prepared
to meet calls that may be made upon them. On the London Exchange, what
with bank holidays and the festival seasons of the Church of England,
the stockbroker has many more holidays than his American colleague.

Life on the Stock Exchange is by no means unpleasant. It is not the
idle pastime that many writers picture it, with easy hours and long
intervals for luncheon, nor is it the depressing and nerve-destroying
centre that many of the members would have us believe. One may
certainly linger over the midday meal for hours--for that matter one
may absent one’s self altogether--and conversely, one may worry and
fret over the day’s vexations until life becomes unpleasant for him and
for every one near him. But by far the larger number find their work as
congenial as earning the daily bread may be, and vastly more diverting
than many of the sedentary occupations in other lines of business.
Elsewhere I have said that the long periods of dulness on the floor
constitute the most serious obstacle the broker has to meet. Accustomed
to physical activity and with a mind inured to occupation, he chafes
under a stagnation that is foreign to his habits and desires, until
worry--the disease of the age--claims him for its own. Almost every
broker’s wife knows what I mean. It becomes a habit with such a man;
unconsciously he grows “bearish” on his business, on himself, and on
his associates, and at such times he is an awful bore.

The essential thing for a man to bear in mind who finds himself growing
into this mood is that nature abhors a vacuum. His mind is empty
because there is nothing to do; he must therefore _find_ something to
do--some mental occupation that will banish from his mind the worries
that beset him. In order to do this many members of the Exchange
carry some light reading in their pockets for use in an idle hour;
at the spot where the National Lead Company’s securities are dealt
in the specialists maintain a compact circulating library of all the
magazines and periodicals; others spend idle moments pouring over a
pocket chessboard; the Reading Railway post has a constantly increasing
collection of all kinds of puzzles, riddles, problems--anything to keep
the mind active on the principle of _similia similibus curantur_.

The newcomer on the Stock Exchange will do well to fortify himself
in some such way, for it may be accepted as gospel truth that the
paralyzing effect of worry in this peculiar environment will inevitably
lead to hasty actions, mistakes, and errors of judgment, unless the
victim learns early in the game how to arm himself against these
misfortunes. One word more: When the day’s work is done, the young
member must learn Doctor Saleeby’s great lesson, that a round of the
links, or a set at tennis, or any other form of outdoor diversions so
dear to the youngster’s heart, will not of themselves suffice to banish

He has now become a thinking animal; he lives by his wits, and he
suffers from the worries incidental to brain work coupled with
responsibility. I have just said that nature abhors a vacuum--in his
case this especially applies to his mind. Care and worry are not
driven away merely because he has made his “round” in 80 strokes--they
must be pushed out by something else, something more than mere play
or sport _per se_. What he requires is a new _mental_ interest, not
merely to serve as a counter-irritant for the worries of to-day, but
as an investment for all the years that are before him. He must have
a “hobby” of some sort, no matter what, so long as it is a mental
occupation which he does for the love of it--books, pictures, music,
postage stamps--anything will do the trick so long as it occupies the
mind and is done _for fun_. We old timers have only to look about us on
the Board to see who the really happy men are, the men who are never
nuisances. They are the men whose minds are not content with doing

In the matter of creature comforts, members of the New York Stock
Exchange have provided themselves with everything that gentlemen
require. Their beautiful building, an architectural masterpiece and
one of the city’s ornaments, has often been described; here it is
sufficient to say that nothing is lacking in the way of conveniences
necessary to the physical ease of the members. Barbers, valets,
messengers, and attendants of every description are on duty; a
well-equipped hospital room is ready for emergencies; showers and
needle-baths, smoking-rooms, lounges, writing-rooms, reading-rooms,
coffee-rooms, and a spacious luncheon club, contribute their share
to the refreshment of the outer and inner man. The luncheon club,
which occupies the whole upper floor, is the last word in culinary
perfection. In the lounging-rooms adjoining are all the magazines
and periodicals, and the walls are covered with a collection of rare
prints of old New York, together with mounted trophies of the hunt
presented by sportsmen members. In other days before the Exchange built
its present structure the club was housed in modest quarters across
New Street and a few non-members of the Exchange were admitted to
membership, but now its facilities are taxed to meet the demand, and
membership is restricted to the Stock Exchange, although guests are
admitted at all hours.

The atmosphere in the city is often trying in the summer months because
of the excessive humidity, and extraordinary measures were resorted to
in the construction of the building to minimize this unpleasantness
on the crowded floor, where the presence of a large number of men
in a greater or less degree of physical animation but adds to the
general discomfort. To meet this condition an air-cooling plant was
provided--the first and the foremost example of its kind in existence,
both in point of magnitude and in the exacting demands involved.
By means of this remarkable triumph of mechanical skill, outer air
at a temperature of say 90° is taken into the basement, eighteen
hundred pounds of water (humidity) are squeezed out of it per hour,
it is purified and cleansed through many walls of cheesecloth, the
temperature is refrigerated down to 60°, and then, after again raising
it to a point at which no dangerous results may affect a member passing
in and out of the room, it is finally supplied to the great floor and
again exhausted by methods that obviate drafts or dangerous currents
of any kind. Aside from the members and attendants, the only person
having access to the floor is the chief engineer who controls this
remarkable air-cooling plant. A wizard in a way, it is curious to watch
him threading in and out of the busy crowds, tasting and feeling the
air which, under the black art of his necromancy, turns intolerable
conditions into others quite delightful.

The history of the New York Stock Exchange has been written many times,
and need be but briefly referred to here. Something approaching an
organization was effected May 17, 1792, when, under a tree which
stood opposite what is now 60 Wall Street, twenty-four “Brokers for
the Purchase and Sale of Public Stocks” signed an agreement to charge
not less than a commission of ¼ per cent. It was a day of small
things; the national debt was but $17,993,000; there was but one
bank in the town. Through the fragmentary data that has survived, we
learn that occasional meetings of the brokers were held during the
next twenty-five years at the old Tontine Coffee House, at Wall and
Water streets. In 1817 the formal organization was effected and the
meeting-place fixed at the Merchants’ Exchange, later the site of the
Custom House, and now the property of the National City Bank. In 1853
the Stock Exchange moved to Beaver Street and in 1865 to its present
situation. The “Open Board of Brokers,” a rival organization, was
absorbed in 1869, and ten years later the “Gold Board” also joined
forces with the parent body.

The development of the New York Stock Exchange in its early days was
but a record of the country’s growth, and this in turn depended upon
speculation. It was, indeed, speculation such as the world had never
witnessed. How our western borders were extended as the railroads
pushed onward; how trade was stimulated throughout christendom by the
discovery of gold in California; how the national debt expanded at the
time of the Civil War; and how, after the war, construction went ahead
at tremendous pace--all these served to fan the flames of adventure
and enterprise, which are the bases of speculation. The panics of
1837, 1857, and 1873, severe enough to give pause to another and less
vigorous nation, seem in the retrospect to have been but starting
points for a fresh development of the national spirit--a spirit which
owes to speculation the extension of frontiers, the bridging of waters,
the unlocking of mountains, and the transportation of wealth. In this
splendid work of conquering a continent the Stock Exchange has kept
pace with the march of industry. It has supplied the one great central
market for the expression of the country’s progress as measured by
the country’s securities, and it will continue to do so as long as an
evergreen faith in America exists among its people.

The Stock Exchange is often defined as the nerve-centre of the world,
and, just as every happening of importance finds an instant effect on
the market, so members instinctively apply to current events habits of
close analysis and nice discrimination. A failure at Amsterdam may
result in liquidation in Atchisons, long a favorite of Dutch investors;
prolonged drought in the Argentine may increase our foreign shipments
of grain; a great engineering project, like the Assouan Dam, may lead
to handsome contracts for American steel-makers; any fluctuation in
rates of foreign exchange must be watched carefully to see if exports
or imports of gold are impending; if a rich man dies possessed of large
amounts of certain securities, sellers must be critically observed
for evidences of liquidation by the heirs; speeches in Congress or in
Parliament, or the unguarded utterances of statesmen, must be weighed
and measured for their effect on the public mind; a great fire may
lead to selling of investments by insurance companies; a revolution in
Mexico may imperil American investments there; if there are political
disturbances in the Balkans, the continental Bourses may be frightened;
every move of the great foreign banks must then be watched closely, for
the bankers to-day are the war-lords of creation, and so every event of
importance the world over makes its impression on the Stock Exchange

What is going on in the Transvaal or in Alaska, the latest outbreak
in China, the areas of barometric pressure in the grain country,
the ravages of the boll-weevil, the market in pig iron, the latest
labor difficulty, the tendencies of Socialism, the cost of living,
the outgivings of our law-makers--a knowledge of all these and many
similar matters is a necessary part of the stockbroker’s trade, and
serves to keep his mental activities considerably above the dull level
of mediocrity. Naturally this sort of occupation gives a zest to
life, and makes impossible the sedentary dry-rot which the impatient
broker sometimes thinks is upon him. At any rate no Sherman Law can be
invoked to prevent him from learning all there is to know about men
and affairs; and just as he becomes trained in habits of inquiry, and
proficient in using facts as stepping-stones to conclusions, so he
becomes a valuable and useful member of the community.

Critics in what may be termed the impressionist school--accustomed
to a free, instantaneous, and often meaningless handling of their
subject--are prone to condemn the Exchange because the action of the
market when large reforms in business are impending seems to imply
hostility to those reforms on the part of members. This may be typical
modern impressionism, but it is all wrong. If the market declines
when, for example, a large corporation finds itself at odds with the
law, the downward tendency of the securities affected is the result
of natural laws with which stockbrokers have nothing to do. They are
but agents. Ten thousand owners of securities throughout the land
may simultaneously become alarmed and sell--a familiar psychologic
phenomenon which depresses prices--but to say that this result
expresses the hostility of the Stock Exchange to the enforcement of the
Anti-Trust Law is nothing less than an evidence of critical strabismus.

The men for whom I presume to speak, far from being hostile or
indifferent to the call of revitalized business morality, are quite
as deeply imbued with the potent spirit of business reform as are the
men who make the country’s laws. Careful, well-considered legislation
that broadens and deepens the channels of American development, that
provides adequate supervision and such publicity as will guard against
selfish perversion, is welcomed with gratitude by the Stock Exchange.
Any thinking man ought to see at a glance that the very object of the
Exchange’s existence is benefited by such laws, and prospers with their
enforcement. The Cordage Trust, the Salt Trust, the Bicycle combination
and the Hocking Coal episode are still bitter memories on ’Change; any
law that will prevent a recurrence of these and kindred calamities is
a law that strengthens the hands of every member and gives him fresh

It would be difficult to find anywhere a more intelligent and
interesting group of men than the members of the New York Stock
Exchange. Some of them are men of peculiar personal charm, others are
distinguished for especial ability in various ways, others are men with
hobbies, nearly every one knows something that is worth knowing, and,
what is better, talks of what he knows in the manner of culture. Given
an idle hour with a wish to learn, and every dip of the net into the
intellectual waters of this gathering brings up some new and delightful
specimen to amuse and instruct.

The dean of the Stock Exchange, for example, who has been an active
member for fifty-five years, and who is now eighty, spends several
months of each year in exploring all the little nooks and crannies of
the globe, remote and inaccessible places that are _terra incognita_ to
your casual tourist. He is a mine of information; to know him means,
in a way, a liberal education. If you are fortunate enough to have an
hour’s chat with him (for when at work on the floor he is quite as
active as any other youngster), you will find yourself in contact with
a traveler of rare charm and culture, who will take you into strange
lands of which the mere existence is but a faint recollection of your
schoolboy studies.

He will tell you, with all his delightfully fresh and buoyant
enthusiasm, of Agra and its Pearl Mosque, and of the surpassing beauty
of the world’s architectural masterpiece--the Taj Mahal--with its
marbles, its mosaics, and its lapis-lazuli. He will take you into
Thibet, the Forbidden Land, through the jungles of the faraway Celebes,
into the least-known corners of the Straits Settlements, and to the
lonely isle of Robinson Crusoe. On his vacation next year he is going
to the Falkland Islands, somewhere down Patagonia way, and the year
after a letter may come from him sent out from the headwaters of the
Yukon, or ferried down the Congo from Stanley Falls. Wherever his fancy
roams, there this adventurer goes; no thought of sickness or danger or
difficulty is permitted to interfere with his delightful hobby.

Naturally, in the cosmopolitan atmosphere of the Stock Exchange tastes
are catholic and run to wide extremes. One of the members is a student
of Russian literature in all its phases; he can tell you of its
folklore, its peasantism, its liberal thought and its ethical ideals
of society; Dostoyevski is his hobby and Melshin the poet. Beside him
stands a man who has mastered the culinary art; the joy of his life
is to prepare with his own hands, for the palates of his fastidious
guests, dainty dishes and wonderful sauces that make an invitation to
his table something worth having. One of the members is an animated
concordance of Shelley, whom he studies with almost fanatical zeal;
another is a disciple of Heine, whom he adores. There stands a man who
went into the heart of Africa as no white man had ever done--through
Somaliland into Abyssinia, thence to Lake Rudolph to hunt elephants,
south to Victoria Nyanza, and finally, after hunting all the wild game
of the district, on foot to the West Coast.

Near by is a traveler fresh from Mukden, the scene of the world’s
greatest battle; he can tell you, too, some curious and little-known
details of the awful engagement at 203-Metre Hill. Our Civil War has
its survivors in a dozen Board members of to-day. One of them was shot
twice at Shiloh and lived to fight the Sioux; another was a captain
under Burnside at Antietam, charged the bridge at the head of all that
was left of his company, and was rewarded for conspicuous gallantry;
another was shot through the lungs at the second battle of Bull Run and
lived through the carnage at Gettysburg; another was thrice wounded at
Gettysburg and again in the Wilderness.

Here are some who charged up Kettle Hill and San Juan Hill in Cuba,
and there are men who served in the navy throughout that war. Officers
of high rank in the National Guard and the Naval Reserve, members of
important public bodies, such as the Municipal Art Commission, the
Palisades Commission, the Public School Board and the various hospital
boards; mayors and other officers of suburban communities, sheriffs
and deputy-sheriffs, presidents of clubs, wardens and vestrymen of
churches, men beloved for their philanthropies, Oxford men, Cambridge
men, Heidelberg men, graduates of all the American universities--with
these and very many more like them, one is brought into intimate daily

There is a legion of collectors, and these are always interesting
people. One of them “goes in” for old silver, of which he has gathered
a valuable display; many others collect prints, etchings, or paintings;
another takes pardonable pride in his Elizabethan early editions,
particularly his First Folio; another has published a standard work on
the portraits of Lincoln, of which he possesses nine original negatives
and many rare copies of negatives; others devote leisure hours to
collecting porcelains and ceramics of all kinds, postage-stamps, coins,
rugs, and tapestries. You will find here men of bucolic tastes, with
hobbies in farms and extensive country estates, where one grows rare
orchids and another breeds highly prized cattle, or sheep, or horses,
or dogs, or poultry.

As you pause in the day’s work to listen to these interesting people
talking of their pet diversions, you see why it is that hobbies are so
necessary to the modern mind, and particularly to the worried mind of
the Stock Exchange man. You see that the man who has nothing to divert
him in leisure hours is becoming a really rare type, whereas the man of
curious, busy, and active brain, who must have a hobby to be happy, is
becoming more and more common. In this very marked tendency among the
members of the Exchange there has been a great improvement within the
last decade, and one, as I have said, that not only serves to banish
the cares of to-day, but promises to become a valuable investment for
the years that lie ahead.

There are some talented musicians on the floor, men who are not only
proficient themselves, but who by their liberal support of all forms
of music do much to encourage and maintain New York’s supremacy as a
musical centre. Grand opera, the Philharmonic Society, the symphony
orchestras, the choral organizations, and the army of virtuosi from
abroad who have earned applause and money on these shores--all are
accorded cordial support by Stock Exchange members. One of them gives
rein to his altruistic tendencies by providing free concerts once a
week for the submerged tenth in a crowded foreign quarter of the East

In the realm of amateur sport and sportsmanship the Exchange has
many enthusiastic devotees. There are several tennis champions, one
of them holding a title in singles for seven years, and another a
title in doubles for five years. Famous university oarsmen, football
and baseball players, American golf champions, expert yachtsmen and
commodores of fleets, four-in-hand drivers, polo players, horse-show
judges, breeders and owners of famous stables, racquet, court-tennis,
and squash champions, deep-sea fishermen and disciples of the placid
Izaak, who lure their game from cowslip banks; hunters in every quarter
of the world, motor-boat racers, swimmers, men of muscle and mind, men
of brain and brawn, these are types that keep ever in mind the _joie
de vivre_, the blue sky above, and all the stimulating enthusiasms of

There is little need to speak of the New York Stock Exchange’s
charities and benefactions, because these are well known. Scarcely a
day passes that some one of the members does not ask of his fellows
a contribution, however small, for a worthy charity with which he or
the ladies of his family have come in contact, and invariably the mite
is freely given, although there may not be time to spare to hear the
story. The private and unostentatious benefactions of members go on at
all times, and cannot be discussed here.

When the _Titanic_ went down, a fund of $25,000 was raised in a day,
and a committee of members of the Exchange was on the pier when the
survivors arrived to do what could be done. The Mississippi floods
met with a similar response; indeed, every great calamity that spells
suffering and sorrow and need finds an instant expression of sympathy
and practical assistance from the floor. In times of national gravity,
such as an outbreak of war, the Exchange will always be heard from
with its volunteers and its funds for equipping a regiment; hospitals,
churches, and all worthy charities well know that appeals are responded
to with a zeal that is alike nonsectarian and generous.

Never in my experience on the floor have I heard a complaint from a
deserving employee of the Stock Exchange. Salaries are wisely increased
with length of service, pensions are given by the governors to aged
servants; hospitals, medical treatment, nurses, and sanitariums are
provided for the sick, and funds are supplied to families of deceased
employees. A spirit of helpfulness, sympathy, and generosity is in the
very air of the Stock Exchange, an absolutely fine spirit that takes
pride, too, in caring for its own members who have been unfortunate.

Finally, let it be said that the Stock Exchange man is human. He knows
the “rub of the green,” he suffers as all men suffer, but he does not
complain, nor solicit odds. All he asks is fair play; a little patient
study of what the Exchange stands for; a little better understanding
of its usefulness in our commercial life; a little recognition of each
man’s effort to uphold a high standard of business honor; a little of
the cordial support which he himself, with stout optimism, extends to
every worthy thing.



There were Exchanges in London in the sixteenth century. Merchants from
Lombardy had given their name to a street, and had flourished so well
that they had branched out in the business of money-changing--that is,
of exchanging worn, abrased and clipped coins, foreign and domestic,
for those of standard weight and fineness. As trade increased and the
first faint signs of progress in the matter of wealth began to develop,
it was seen that this business of exchanging money was sufficiently
important to warrant royal recognition; accordingly there was created
the office of Royal Exchanger, and the person entrusted with this
office was given the privilege of exchanging coins in the manner
described. Smaller offices for the purpose were farmed out in other
English towns, and each place where the business was carried on thus
came to be known as “The Exchange,” a name that was ultimately applied
to any covered place where merchants met to buy and sell commodities.

After the money-changers came the money-lenders--Jews, more
Lombards, and finally the Guild of Goldsmiths. The last named,
having long practised the business of money-lending, finally became
money-borrowers, issuing receipts for these borrowings known as
Goldsmiths’ Notes--the earliest form of English bank-notes--and the
first step in the convenient process of translating capital, and debt,
and credit, into bits of interest-bearing paper.[102] This was the
state of English finance until 1694, when the Bank of England was
founded, and stocks and shares came into being since the bank was
a joint-stock affair. That the invention of stock certificates was
a popular one, and that the authorities and the public seized upon
it as a convenient means of directing capital into new and hitherto
untried forms of enterprise is seen by the rapidity with which fresh
undertakings were put forth. In 1698 the New East India Company
loaned its capital to the government; by 1711 there was a funded
debt of £11,750,000 in the shape of bank stock, East India stock, and
annuities. There was also the famous South Sea Company, to be followed
ten years later by a reorganization of the company with its first
subscription of a million in £100 stock at £300, and a second and
third subscription of larger magnitude, each accompanied by prodigious
promises, and each snapped up with avidity by a public saturated with
the new and hazardous pastime of speculation.

“All distinction of party, religion, sex, character, and circumstance,”
writes Smollett, the historian of the time, “were swallowed up in this
universal concern. Exchange Alley was filled with a strange concourse
of statesmen and clergymen, churchmen and dissenters, Whigs and Tories,
physicians, lawyers, tradesmen, and even with multitudes of females.
All other professions and employments were utterly neglected; and
the people’s attention wholly engrossed by this and other chimerical
schemes, which were known by the denomination of bubbles. New companies
started up every day, under the countenance of the prime nobility. The
Prince of Wales was constituted governor of the Welsh Copper Company;
the Duke of Chandos appeared at the head of the York Buildings Company;
the Duke of Bridgewater formed a third, for building houses in London
and Westminster. About a hundred such schemes were projected and put
in execution, to the ruin of many thousands. The sums proposed to be
raised by these expedients amounted to three hundred millions sterling,
which exceeded the value of all the lands in England. The nation was so
intoxicated with the spirit of adventure that people became a prey to
the grossest delusion. An obscure projector pretending to have formed a
very advantageous scheme, which, however, he did not explain, published
proposals for a subscription in which he promised that in one month
the particulars of his project should be disclosed. In the meantime he
declared that every person paying two guineas should be entitled to
a subscription for £100, which would produce that sum yearly. In the
forenoon this adventurer received a thousand of these subscriptions;
and in the evening set out for another kingdom.”

No sooner were there bits of paper to deal in than jobbers or brokers
sprang up to handle them, and by natural gregarious processes these
dealers gathered in one spot. Thus competition was stimulated and
active markets created. The rotunda of the bank and the Royal Exchange
were their first haunts, indeed until Archbishop Laud drove them out
they were to be found bargaining on the wide floors of St. Paul’s
Cathedral. As the business expanded they took to the neighboring
streets and coffee houses, and so Change Alley, Jonathan’s Coffee
House, Cornhill, Lombard Street and Sweeting’s Alley became their
familiar retreats. Old Jonathan’s burned down in 1748 and New
Jonathan’s in Threadneedle Street succeeded it. Here, in July, 1773,
“the brokers and others at New Jonathan’s came to a resolution that,
instead of its being called New Jonathan’s, it should be called ‘The
Stock Exchange,’ which is to be wrote over the door.” Thus while
business in the public funds was still conducted on a large scale at
the bank, and dealings in foreign securities still centred at the Royal
Exchange, London may be said to have had a Stock Exchange in the modern
sense from that day in 1773 when the name was “wrote over the door” at
New Jonathan’s.[103]

We have authority for the early history of the London Stock Exchange in
a report made in 1877 by the officials of the institution to the Royal
Commission. From this report it appears that the Stock Exchange at New
Jonathan’s in 1773 “afforded a ready market for the operations of the
bankers, merchants, and capitalists connected with the floating of the
numerous loans raised at that period for the service of the State.”
The members or frequenters paid a subscription of sixpence to defray
expenses, drew up rules, and placed its control in the hands of a
“Committee for General Purposes.” The functions of this committee were
then, as now, “judicial as regards the settlement of disputed bargains,
and administrative as regards rules for the general conduct of business
and for the liquidation of defaulter’s accounts.” The earliest minutes
on record are dated December, 1798.

War loans and a national debt increasing by leaps and bounds, with
consequent activity in consols, was the principal source of business in
those early days, and as these increased, so also the savings of the
public and a new national spirit led to a steady growth in the business
of dealing in securities. The dim receding voice of those early days
still echoes in Capel Court through the medium of two holidays--May
1st and November 1st. More than a century ago these days marked the
closing of the Bank of England’s books for the transfer of consols, and
as consols were the only things then traded in, there was nothing for
stockbrokers to do on those occasions; hence they took a holiday. And
they still close the Exchange on these days--an eloquent instance of
the Englishman’s adherence to tradition.

By 1801 there was not room enough in the old building, and, moreover,
the report says: “It became apparent that the indiscriminate admission
of the public was calculated to expose the dealers to the loss of
valuable property.” Accordingly a group of Stock Exchange men acquired
a site in Capel Court, close to the bank, raised a capital of £20,000
in four hundred shares of £50 each, and in May, 1801, laid the
foundation of what has become through numerous additions the London
Stock Exchange of to-day. The building was opened in March, 1802, with
a list of five hundred subscribers, and the deed of settlement (March
27, 1802), vested the management in a committee of thirty members,
chosen annually by ballot, with nine trustees and managers, separate
from the committee, to have charge of the treasury and represent the
proprietors. Although the rules and regulations have been amended and
enlarged from time to time to meet new conditions, the constitution of
the London Stock Exchange remains substantially unaltered.

As it stands to-day, there are nine managers who represent the
shareholders or proprietors, and thirty committeemen, who look after
the administration of the Exchange and the well-being of the members.
The managers are elected in threes for terms of five years by the votes
of the shareholders. They fix the admission fees, appoint almost all
the officials, and look after the building and the property in general,
while the thirty committeemen enforce the rules and regulations,
adjudicate differences, and regulate the admission of securities.
They are elected every year by the members, and they choose from
their number a chairman and vice-chairman. In March of each year,
before retiring from office, the committee elects all the old Stock
Exchange members who wish to be re-elected, membership on the London
Exchange being granted for one year only. Any member may object to the
re-election of any other member, but this is a very unusual incident.

“The great principle upon which the committee acts,” says Mr. Francis
W. Hirst, “and to which most of its regulations are directed, is the
inviolability of contracts. It has power to suspend or expel any member
for violating its rules, or for non-compliance with its decisions,
or for dishonorable conduct. A member of the London Stock Exchange
is prohibited from advertising or from sending circulars to any but
his own clients. He is also forbidden to belong to any other Stock
Exchange, or ‘bucket-shop,’ or other competing institution. New members
are now compelled to become proprietors by acquiring at least one Stock
Exchange share, paying a heavy entrance fee and an annual subscription
of forty guineas. Yet the precautions against impecuniosity are
inadequate. Defaults are far too common.”[104]

In such a dual form of control as that of these managers and
committeemen it is obvious that causes of friction must of necessity
arise from time to time, and that jarring and discord are inevitable.
The owners or proprietors are, of course, a minority of the members,
and their decisions on matters that come before them are necessarily
biased in favor of a course that will increase the dividends on their
shares. Naturally they would favor a practically unlimited membership,
since the dividends are largely acquired from this source.

The plan of compelling each new member to become a shareholder or
proprietor was devised to meet this difficulty, and in a measure it
has succeeded. “Within the course of the next half century,” says the
_Quarterly Review_, “it is pretty certain that the Stock Exchange, as
a company, will belong to the members, of whom each will have a stake
in the enterprise; and that happy consummation, when it arrives, will
put an end to a good many minor problems which still harass the House
in its workings, and possibly check those bolder plans for reform which
are advocated by many of the members.”[105] The difficulties arising
from these causes had their origin, as we have seen, as far back as the
year 1801, when the new building was erected. As only the wealthier
members of the association had provided the capital for the Capel Court
structure, in order to protect their investment, they demanded control
of its financial affairs; thus the Stock Exchange thenceforth consisted
of two distinct bodies, proprietors and subscribers.

While there is but one way by which a man may become a member of the
New York Stock Exchange, in the London Exchange there are various
ways. The most direct way, and the easiest but most expensive way,
is to pay an entrance fee of 500 guineas, and find three members who
will stand surety for four years for the sum of £500 each, this £500
being forfeited to the estate if the member is “hammered”--i. e., if he
fails during the period. The candidate must in addition buy three Stock
Exchange shares, the price of which at present is about £190 each.[106]
He must also purchase from a retiring member a nomination, which can
be bought at present for £40, although they have sold as high as £700.
Candidates who wish to join the Exchange under easier conditions may
have their entrance fees reduced to 250 guineas if they have served for
four years in the Stock Exchange as a clerk; and for these candidates
concessions are also made in respect to sureties, of which they need
provide but two, and to shares, of which they are required to buy but
one instead of three. The committee is also empowered to elect each
year a few candidates without nomination.

This is a rather curious practice which requires a word of explanation.
In England, as elsewhere, there is a latent objection to monopolies of
all forms, and the foresighted governors of the Exchange, with an eye
to the possibility of difficulties that might be raised against their
institution at some time in the future on the ground of monopoly, hit
upon this expedient as a precautionary measure. Should such objection
be raised, the governors have only to admit a few more members without
nomination. The door is thus thrown open; and there is no _de facto_
monopoly. It is very simple and very ingenious.

In all these cases the annual subscription, or dues, is the same.
These, which were originally 10 guineas, then 20 and 30, are now 40 for
all new members, while old members pay, of course, the subscription
prevailing at the time of their election. As a condition precedent to
election, a candidate must present himself before the committee with
his sureties, and each of them must give satisfactory answers to the
questions put to him.

From this it will be seen that a man who wants to become a member of
the London Stock Exchange without first serving an apprenticeship of
four years as clerk must pay for his entrance fee 500 guineas, his
shares £570, his nomination £40, and his annual dues 40 guineas, or a
total of about £1150, of which £570, the price of his shares, yields
him a return in Stock Exchange dividends. These shares are, of course,
excellent investments, and the managers may be relied upon to see to
it that their value is not impaired. During the first seventy-five
years of its existence Stock Exchange shares paid an average dividend
of 20 per cent.; for the last completed year the dividend was 100 per
cent. No one person may hold more than 200 shares, and holders must be
members of the Exchange in all cases except those where representatives
of proprietors acquired their shares before December 31, 1875. When
a proprietor dies, his shares must be sold to a member within twelve
months. The membership is not limited, strictly speaking, and whereas
in 1802 there were 500 members, in 1845 there were 800, in 1877, 2000,
and in 1910, 5019.

I say the membership is not limited, but when the time arrives, as
it probably will within this generation, that the 20,000 shares are
divided at the ratio of three shares for each member, 6666 members will
then own all the shares and the membership will be full. Hence there
is, in a way, a limit to the total membership.

One important respect in which the London Stock Exchange differs from
all others--American, Continental, or Provincial--is the division of
its members into two classes, jobbers and brokers, a division that
appears to be as old as the Exchange itself. As to which of these
classes it is better to belong there are differences of opinion, but
the wise men in the business seem to be a unit in recommending a few
years’ experience as a broker to be followed by the business of the
jobber. The broker, under the London system, deals with the outside
public and acts merely as agent between the public and the jobber,
with whom he trades on the floor of the Exchange. The jobber, on his
part, is not allowed to deal with the public at all, but must confine
his activities to the brokers and to his fellow jobbers. “Thus the
broker,” as Mr. Hirst puts it, “feeds the jobber much as the solicitor
feeds the barrister,” or, continuing the metaphor, we may say that
like the barrister the jobber gets the _cause célêbre_ and all the
great prizes, and like the solicitor the broker hunts up the business
and must be content with small returns. The broker works for his
commission; the jobber for what he can get out of the trade in the way
of a profit.

The system in vogue in the New York Stock Exchange would seem to
possess many advantages over this curious division of functions between
the two classes. Here, as every one knows, brokers are not restricted
in their operations; the field is alike open to all members, and the
market is not limited by placing it in the hands of any one man or
any group of men. On the London Exchange the attempt to define strict
dividing lines between brokers and jobbers has not been successful; for
years there has been a strong undercurrent of resentment between them
because of acts which each regards as encroachments by the other upon
its especial domain.

The quarrel reached an acute stage in the paralysis that hit the Stock
Exchange after the South African war; there were too many members and
too little business. Brokers took it upon themselves to make prices and
to deal directly with other brokers and with outsiders, disregarding
the jobbers altogether; and jobbers in turn sought in self-defence
to establish connections of their own, outside the Stock Exchange,
and with non-members. Both parties have violated the spirit, if not
the letter of the Stock Exchange rules, and even at the present time,
when much stricter rules have been passed defining the limitations of
each division, the same unfortunate feeling of resentment is heard
daily. Violations of the rule, however technical, are bound to create
friction, and friction among the members of a Stock Exchange is not a
good thing for the members nor for the business. Fortunately, there is
nothing of that sort in the New York Exchange.

In active securities where there are very many transactions, Mr. Hirst
is disposed to think that the separate existence of jobbers makes
for a free market and close prices the very essence of an Exchange’s
functions. This may be true, since the jobber is a host in himself,
specialist, speculator, trader and jobber--all in one. Where there is
a free market, the presence of such a participant undoubtedly adds to
it, as any one knows who has dealt with him in lots of from 5,000 to
10,000 shares, at a difference of only a sixteenth. Such a market is
a close market _in excelsis_. But in the New York Stock Exchange the
same result is obtained far more openly and above-board by the presence
in all active securities of a host of such jobbers--brokers, traders,
specialists, and speculators--each actively bidding and offering by
voice and gesture, and without collusion, and each thereby contributing
to the making of the freest possible market and the closest possible
price. In New York no middleman stands between the public and the

It is a fact recognized by all economists that the larger the number
of dealers and the freer the competitive bidding, the more accurate
the resultant price and the nearer its approach to true value; hence
it would seem to follow that in this highly desirable attainment the
New York system is superior to that of London. The same comment applies
to the market for inactive securities. In London, notwithstanding the
quotations printed in the Official List, the public has no assurance
that jobbers can be found to deal at those prices, or at prices
approaching them. “And when there is a slump in the market and a rush
of selling orders with no support,” as Mr. Hirst candidly admits, “as
happened in rubber shares in the months of June and July, 1910, the
jobbers are apt to be away at lunch all day, and the brokers have to
report to their clients that they simply cannot find a purchaser.”[107]

Such things do not happen in the New York Exchange, for when there is
a slump in any group of shares, instantly there gathers a number of
individuals who are there for the very purpose of making a market. It
may be a “soft” market, with wide fluctuations, but it is a market for
all that, and the timely absence at an all-day luncheon of any one
man or any group of men cannot possibly affect it. There have been
occasions on the New York Stock Exchange, no doubt, where a broker
with a “hurry” order in a very inactive security has not found a
market awaiting him, but there are various ways by which he may seek
the desired market and ultimately he is sure to find it. In any case
such an incident is the exception that proves the rule that a free
market, affording all the advantages which excellent markets possess,
is nowhere to be found more easily and more quickly than on the floor
of the New York Stock Exchange. “American securities,” says the Paris
correspondent of the _Journal of Commerce_ in his cabled despatches
of October 23, 1912--referring to the Balkan crisis in that city--“may
with complete conservatism be regarded as having received a splendid
advertisement in the French market by reason of their recent remarkable
instantaneous conversion into cash.”

In the course of many years of active experience as broker, trader,
and speculator, I do not now recall an instance in which I was unable
to find a market on the New York Exchange for any security, however
inactive, which I wished to buy or sell. If the specialist in this
particular stock cannot satisfy me with his quotation, there are
always room traders to whom I may submit my offer; there are also
arbitrageurs, wire houses, and banking houses interested in this
particular security. Somewhere among all these agencies the New York
broker must inevitably find or create a market. But I fancy he would
have a sorry time of it were he restricted, under the rules, to dealing
with a jobber who “is apt to be away at lunch all day,” when trouble
comes and risks are involved.

Such a system, it would seem, is all very well for the jobber, but
quite unfair to the outsider and to the conscientious broker who is
striving all the while to protect the interests of the public and
maintain the welfare of the Exchange. Indeed, as it works out in
London, the broker has all the worst of it in many ways. Even though
the jobber “runs a book,” as the phrase is, his work is done at 4
P.M.--when the market closes--and if he is not doing a large business
he may then follow his inclinations. Unless his business involves
dealing in South Africans or Americans, his work is substantially
completed with the official closing of the Exchange. But the broker, on
the other hand, enjoys no such freedom. After the closing he must go
to his office--for in the nature of things he must have one--and there
he will find correspondence awaiting him, orders to be executed in the
“Street markets,” and telephone messages to send to his customers.
The mere fact that a London broker must use the London telephone is
in itself a curse, for nowhere under the canopy is there a telephone
service so dreadful and so exasperating.

Even in the ebb-tide of a dwindling summer business the London broker,
who cannot begin his day’s correspondence until four, finds it
difficult to leave his office until an hour long after his American
colleague has played his eighteen holes or dressed for dinner. Aside
from the horrors of the telephone service, this is due in a measure
to the fact that they have no ticker in London and the mechanical
efficiency with which this machine faithfully records all over America
each fluctuation of the market, finds no counterpart in England. The
broker in London has therefore to perform, in a measure, the work of
the ticker in New York. Perhaps I should not say they have no tickers
in London. In point of fact there is such an instrument, identical with
our own, which four or five times a day, at stated intervals, reels
off with mechanical monotony a list of quotations in certain active
securities--the same group every day. They are limited in number,
almost nobody looks at them, and many really enterprising houses do not
install them at all.

Worst of all, the London broker until very recently was not properly
paid for his work; he was not protected by a rigorous commission law,
as we are in the New York Exchange. In New York a broker charges ⅛ per
cent. commission on the par value of every hundred shares in which he
deals for a non-member, each way, and the rules of the Exchange compel
him to collect it in all cases. The slightest departure from this rule,
however technical it may be, is severely punished, and no statute of
limitations or other expedient will save him from the consequences of
it. Thus all the brokers are insured an equal footing; competition for
business is prevented, and the public which the Exchange seeks to serve
is assured of equally fair dealing in every quarter. So rigorously
is this rule enforced that the large and important branch of the
Exchange’s business which has to do with joint-account trading between
New York and foreign centres has recently been seriously restricted
because, in the judgment of the governors, it involved an infraction of
this important commission law.

On May 22nd of this year (1912) the London Stock Exchange put into
effect an official scale of commissions, which was designed to remedy
the unfortunate conditions that had prevailed, and this scale is now
enforced. It provides for a charge of ⅛ per cent. on British government
securities, Indian government stocks and foreign government bonds; ¼
per cent. on certain other special cases, ⅛ in railroad ordinary and
deferred ordinary stocks at prices of £50 or under, and a sliding scale
on shares transferable by deed, ranging from commissions of 1½d. per
share to 2s. 6d. per share. On American shares the commission to be
charged is 6d. per share on a price of $25 or under, 9d. on prices from
$25 to $50, 1s. on prices from $50 to $100, 1s. 6d. on prices from $100
to $150; and 2s. on prices over $200.

In many other transactions the commission to be charged is left to the
discretion of the broker who may, if he is doing a large business with
a client in high-priced and low-priced shares on which the official
scale of commission varies, arrange to charge ⅛ on all transactions,
regardless of the rules. Whatever the London broker may lose in the
quality of his commissions as compared with the New York broker
appears, however, to be compensated by their quantity. A firm of
jobbers of my acquaintance once handled in a single day 262,000 shares
of “Americans” alone, and when it is borne in mind that this was but
one of perhaps 150 firms doing a similar business, an idea may be
gained as to how London brokers and jobbers contrive to keep the wolf
from the door.

The system of settlements twice a month as employed in London is
another method quite different from that employed in New York, and
one, too, that seems to suffer by comparison with our system. On the
New York Stock Exchange everything is settled on the day following the
transaction. Each broker and each customer knows just where he stands,
and every trade is settled in full when the next day ends. Tell an
English broker that on a single day our Clearing-House settled and
balanced transactions in more than 3,000,000 shares of an approximate
value of 50,000,000 sterling and he gasps. He says that such a thing
would be impossible in London, and he is right, it would be impossible
indeed. Clearings in London vastly exceed ours, but they do not
occur daily; indeed our system would not do at all in a centre that
transacts, as London does, a large international business in which
transfers must be sent hourly to Egypt and India and to all quarters
of the globe. Daily clearings in such circumstances would be very
troublesome and vexatious.

The New York system, however, makes failures and defaults commendably
rare, while the London system, by postponing the day of reckoning,
actually invites over-extensions in speculation leading to failures
that could not possibly occur here. To make this point clear to the
layman it may be said concisely that the man who settles daily is in a
safer position both toward himself and his creditors than is the man
who postpones his settlement. The daily settlement protects the public,
as well, by putting limits on speculative commitments. These matters
are self-evident.

A gentleman who was for many years identified with a London firm of
jobbers, and who is now a member of the New York Stock Exchange and,
therefore, quite familiar with the different methods employed in these
Exchanges, tells me that the London system of brokers and jobbers,
commission laws, and fortnightly settlements, is the best possible
system for the London Exchange, while the very different methods
employed in New York seem to him to be the best that can be devised for
the New York Exchange. This may be true, since conditions governing the
two markets are widely different. In New York the whole system is cash;
in London, credit. Here brokers may accept business with considerable
freedom, knowing that but a single day elapses before the reckoning; in
London brokers exercise greater caution because they must trust their
clients until settlement day.

Another point of difference between the methods of the two Exchanges
lies in the phlegmatic deliberation of the Englishman. Here in New York
there is a slap dash, touch-and-go system that is greatly facilitated
by the use of the telephone and the private telegraph lines; a single
commission house has 10,000 miles of leased lines. In London, where
telephones and private lines are but sparingly used by brokers and
clients, a broker often finds on his desk in the morning three or
four hundred letters and telegrams. The care and attention required
to handle an enormous lot of orders given in this deliberate manner
is something with which New York stockbrokers are quite unfamiliar;
indeed it may be doubted if they could meet such an emergency with
their present facilities.

Publicity, as we are learning in the New York Stock Exchange, is
a prime requisite of the business, and the advantages that thus
accrue through the use of the ticker and the published summary of
each transaction in the day’s work cannot be overestimated in its
importance to the public and to the banks. In London, where a jobber
may buy or sell large quantities of securities, the business is done
quietly. Outside of the active participants in a transaction, nobody is
permitted to know anything about it. There is no ticker service worthy
of the name, nor is there a list of transactions published at the end
of the day.

This, it seems obvious, would not do at all in America. We have here
not only the ticker-tape, which prints an almost instantaneous report
of prices all over the country, together with the volume of business
done at those prices, but there are similar reports of the day’s
business printed in all the morning and evening papers--one of the
last-named going so far as to reproduce on its financial page a copy
of the day’s tape from beginning to end. All the newspapers, moreover,
print opening, high, low, and closing prices, together with the bid
and offered price of each security at the market’s close.

In the course of the two days in which these lines are written, for
example, 257,000 shares of Reading Railroad stock have changed hands
within a range of 1⅜ per cent. The public is enabled, through the
medium of the news-ticker, to learn who the buyers and sellers were
that engaged in these transactions; the tape shows the specific volume
of business done at each fraction, the various news agencies contain
all the information and gossip that throws any light on the matter, and
the financial columns of the morning and evening newspapers comment
freely for the public benefit.

The total amount of information that is thus laid before the public is
as complete and as instructive as could be desired, and yet in London
and on the Continent such information is never published, although the
two leading financial newspapers in London, because of the immense
field covered, actually publish a mass of miscellaneous news and gossip
that exceeds any similar American effort. They make it pay, too;
dividends declared by these newspapers are altogether unapproached
by the American financial press. The essential information lacking,
however, is the number of shares dealt in, and at what prices; even if
they had a thoroughly good ticker system I doubt if this information
could be recorded, because the volume of business done is too great. It
is encouraging in this connection to note that so eminent an economist
as M. Leroy-Beaulieu frankly concedes our superiority in these matters
over the practice of the foreign Exchanges and urges their immediate
adoption abroad.[108]

The second serious objection that may fairly be lodged against the
London system applies, as I have said, to the increased inducements
offered to foolhardy and reckless speculation by the plan of deferred
settlements. Whether members of the various Stock Exchanges in the
world’s capitals like it or not, they must recognize the fact that
there are evils in speculation just as there are benefits, and that
these evils are becoming a subject of increasing comment. The recent
attempt to repress speculation in Germany and the conditions which led
to the appointment of the Hughes Committee in New York are signs of an
aroused public sentiment that cannot be ignored.

With these examples before them, members of Exchanges everywhere must
realize that if it lies within their power to discountenance and
discourage foolhardy ventures into speculation by persons ill-equipped
to undertake them it is their plain duty to do so. The London Stock
Exchange’s system of fortnightly settlements clearly does not aim
at this highly desirable object as well as the method of daily
settlements employed in New York, for it requires no student to see
that by postponing the settlement risks will be incurred that would be
impossible if a reckoning were called for each day. Moreover, the fact
that there are ten failures on the London Stock Exchange to one in New
York furnishes ample proof that the precautionary restriction imposed
by daily settlements is quite as important to the welfare of brokers as
it is to the protection of the public.

As a matter of fact, failures of brokerage houses are peculiarly
abhorrent to every one concerned. In the Paris Bourse a broker must
give security at $50,000, and his bankruptcy in all cases is considered
a fraudulent one, rendering him liable to arrest. The French _Agents
de Change_ enjoy an absolute government monopoly, and naturally in
the circumstances they are held to the strictest accountability; but
aside from that a tendency is plainly discernible nowadays in all large
financial centres to demand of stockbrokers on the Exchange a rigid
adherence to such business methods as will prevent bankruptcies of
dealers to whom the public entrusts its money.

The danger of the London fortnightly settlement system lies not in the
deferred delivery of securities, but in the fortnightly settlement of
“differences.” A London broker may be actually bankrupt, yet if he is
desperate or unscrupulous, knowing that his differences will not have
to be settled for a fortnight, he may plunge into speculative risks
fraught with the utmost danger. If the market goes his way he is saved;
if it goes against him, he is still no more than bankrupt. But in his
fall, as a result of this dishonest venture, he may conceivably ruin
many others, and a chain of disasters may follow his excesses. It
should be said in this connection that London jobbers and brokers keep
a sharp watch on each other; it is extraordinary how quickly the news
gets about if this man or that is over-extended. Again, either broker
or jobber may discriminate in his dealings, taking care to avoid those
against whom there is a suspicion.

Notwithstanding the points of merit in the New York system, at some
time in the future when local Stock Exchange business has expanded to
proportions approaching those of the London Exchange, modifications
must be made. If banks and brokerage houses are given a week or ten
days to settle transactions, everybody will have a tolerably clear
idea of what money will be required, and lenders will be enabled to
make provision. London passed through the 1907 panic, under this
arrangement, with a maximum rate of 7 per cent., while we in New York
would have been glad to pay 200 per cent., and this, despite our
deplorable currency system, could not have occurred had there been
ample time for the banks to make preparations.

From these observations it may be suggested that perhaps the time
will come when the governors of the New York Stock Exchange may find
it necessary to put in force a combination of daily settlement of
differences, such as we have at present, with a periodical delivery
of stock such as they have in London. Transactions for cash need not
be affected by this arrangement, nor would the public lose any of the
protection it now enjoys. In any case, if such a plan resulted in
minimizing those violent fluctuations in our call-money market which
have so long afflicted us, it would prove a permanent blessing.

As there is no currency system anywhere in the civilized world so crude
and inadequate as that of the United States, it is unnecessary to say
that London jobbers and brokers experience none of the difficulties
with money markets that occur periodically on this side. The carry-over
on the other side of the water is frequently a matter involving immense
sums of money, but rates fluctuate normally and are in large measures
governed by automatic processes both simple and sane. Perhaps the less
said about similar conditions here the better. The spectacle presented
by strong and solvent houses ransacking the street for funds secured
by prime collateral and bidding 25, 50, and even 100 per cent. for
accommodation--something that has occurred within the last decade and
may conceivably occur again--is one upon which the candid American
observer does not care to dwell; such a man may well look with longing
and envy to London, where capital, credit, and currency are so firmly
established that the Bank of England dominates and controls all the
money markets and gold movements of the world, lending freely at home
and abroad whenever funds are needed, and acting as a civilizing
force in supplying with British funds the commercial needs of all new

In this connection we may point out the method of borrowing from the
banks the funds required to carry speculative commitments in London. It
was formerly the practice for the banks to lend large sums to brokers,
who employed the money inside the house in carrying over the accounts
of their clients. This class of business is still large, but nowadays
clients are not always satisfied to borrow through brokers, and not
infrequently they go direct to the banks and borrow from them. This has
the effect of disguising the real character of the business. To all
appearances the securities have been bought and paid for, and the trade
seems to be an investment, but the client has, as a matter of fact,
“pawned” the security with a bank.

This practice is inconvenient in a way, because where the jobbers
in important markets formerly compared notes at each settlement and
were thus enabled to form a pretty good idea of the condition of the
speculative account, it is less easy to do so nowadays, when so many
clients carry on their own borrowing. A similar tendency on the part
of the public is noticeable in New York, although, of course, the
daily settlement on this side obviates the necessity for arriving at
conclusions in advance as to the requirements of funds.

A word should be said about the methods of London stockbrokers in
carrying stocks for their customers, because this also is quite
different from the practice in New York. Here the strongest houses
rarely loan stocks, unless attracted by unusual rates of interest; in
London it is the common practice of even the best houses to carry-over,
or as we term it, loan, a great part of the commitments entered into
during the account. One reason for this is that in London customers buy
their stocks outright more frequently than is done here. Scalping small
profits is not practised on anything like the New York scale. Most of
the stocks dealt in do not pass from hand to hand like American stocks,
but must have a transfer form with the name and address of the buyer
and seller attached to the certificate. There is also a government
stamp-tax of ½ per cent. on the money involved, which tax must be paid
by the buyer when the stock is transferred to him. When the buyer sells
this stock he may not have immediate use for the proceeds, and so,
instead of delivering the stock standing in his name, he instructs his
broker to borrow it from account to account, thus receiving interest on
his money. The tax is a heavy one--figured in American money it amounts
to $50 per hundred shares at par--and the Englishman very naturally
resorts to methods such as these to recoup at least a part of it.

Again, from the stockbroker’s point of view, if he buys securities on
margin for a customer, he (the broker) must either carry them with the
jobber or with another broker, or he will have to pay the government
tax himself. Naturally he hastens to loan them, because, should the
client sell the securities in the course of the next account when
they would have to be delivered, the broker would lose the tax. He
avoids this loss by instructing a jobber to contango or carry-over the
securities until the following account day. On the other hand, if the
broker is certain that his client has purchased his securities for a
long pull on a margin basis, he will often pay for the stock himself,
transfer it to his own name, and willingly submit to the government
tax, knowing that he can recover the outlay from the handsome rate of
interest charged the client.

Another vital point of difference between the London and the New York
Stock Exchange lies in the nature and volume of the business done.
Americans are prone to think of their foremost Exchange as one which,
in the volume and extent of its transactions, compares favorably with
the great Bourses of the world; they like to think of New York as
the financial centre of the universe, and they paint rosy pictures
of America as a great creditor nation. But they err in each of these
ambitious dreams. The New York Stock Exchange, with all its magnitude,
cannot compare with its London prototype; New York is by no means the
financial centre of the world, and America is not a creditor, but a
debtor nation.

Perhaps in time America’s relationship to England and to the rest of
the world may change in these matters--certainly its increase in per
capita wealth and real property is such as to justify the hope--but
at present the day when we may speak of American financial supremacy
seems a long way off. We have not yet forgotten, for example, the
panic of 1907, and our helpless situation as revealed by our demand
for gold, nor are we likely soon to forget the funds that were then
promptly supplied us by London without any dangerous depletion of the
Bank of England’s reserve. So smoothly, so automatically are these
large affairs conducted by the Bank that the outflow of gold to New
York found a prompt response in the inflow from twenty-four countries,
including the Colonies. Within six weeks after the American drain
began, the bank’s stock of bullion actually exceeded its original
store. Small wonder that Englishmen are proud of their bank; and that
London should have become the world’s centre for the investment of
capital and the diffusion of credit.

The New York Stock Exchange business differs radically from that of
all other great Exchanges in the one respect that its dealings are
practically confined to home corporations, whereas the Bourses in
Paris and Berlin, and more particularly the Stock Exchange in London,
embrace in their daily lists securities representing many different
countries all over the world. Here we have Canadian Pacific Railway
shares, and various Mexican Railway securities, together with some
issues of Japanese and German bonds, London Underground Railway bonds,
and a few others. But these, with the exception of Canadians, are dealt
in sparingly and with a rather nominal market. Our list of securities
is composed almost entirely of home rails and industrials companies,
representing, to be sure, an enormous total of capital investment and
signifying the tremendous growth of a comparatively new country backed
by the energies of a thrifty and enterprising people, but compared with
the London Stock Exchange’s Daily Official List ours is meagre in the

The London Daily List covers sixteen pages as large as our daily
newspapers, each page printed closely in small type, and containing
the names, amounts, interest dates, rates of dividend, and occasional
quotations of approximately 4700 different listed securities. This long
list, moreover, contains the names only of the securities that have
received an official settlement and an official quotation as well.
There are certainly as many more securities dealt in that have not
received an official quotation and hence are not permitted to appear in
the List, so that the total number of different securities represented
on the London Exchange in one or both of these ways probably exceeds
9000, half of them occupying a position somewhat similar to the
Unlisted Department which once had a place on the New York Stock
Exchange, but which is now abolished.

It is the largest and most varied list of securities in the world. The
price of a single copy is sixpence; it is published by the trustees
and managers, under the authority of the committee. Not the least
interesting feature of the List is its continued expansion in the
last half-century. Up to the year 1867 one page sufficed, then four
till 1889, eight till 1900, twelve till 1902, and sixteen thereafter,
this expansion closely following the nominal value of the securities
quoted, which were £5,480,000,000 in 1885 and £10,200,000,000 in 1909.
The latter figure is about equal to the combined nominal capital value
of the securities quoted on the Paris Bourse and the New York Stock
Exchange. In 1907 the total number of bonds then listed on the New York
Stock Exchange was 1100, and the total number of stocks 502, these
together representing a total par value of $21,079,620,430. In 1912
this total amounted to 1,028 bonds and 555 stocks, with an aggregate
par value of $26,243,291,803.

The London List is conveniently divided into thirty-eight different
classes, among them British Funds, Corporation and County Stocks of
the United Kingdom, Public Boards, Colonial and Provincial Government
Securities, Indian and Colonial and Provincial Government Securities,
Indian and Colonial Corporation Stocks, Foreign Corporation Stocks and
Bonds, Ordinary Shares and Stocks of English Railways, Railways leased
at fixed rentals, Railway Debenture Stocks and Guaranteed Stocks and
Shares, together with preference shares, Indian Railways, Indian Native
Raj and Zemindary loans, Railways in British possessions, American
Railroad Stocks and Bonds, Securities of Foreign Railways, Banks and
Discount Companies, Breweries and Distilleries, Canals and Docks,
Miscellaneous Commercial and Industrial Companies, Electric Lighting
and Power Companies, Financial, Land, and Investment Companies,
Financial Trusts, Gas Companies, Insurance Companies, Iron, Coal, and
Steel Companies, Mines, Nitrates, Shipping, Tea, Coffee and Rubber,
Telegraphs and Telephones, Tramways and Omnibus, and Water Works.
Of these the Commercial and Industrial Companies List is by far the
largest, covering three pages.

A cursory glance over this really formidable Official List brings
forcibly to mind London’s supreme position as banker, broker, and
clearing house for the wide world, while it emphasizes the constantly
increasing overflow of British capital into channels that make for
enterprise and development even in the most remote quarters of the
globe. Here we find set forth Ceylon, Fiji, Tasmania, and Cape of
Good Hope debentures; Stocks of Saskatchewan, Antigua, Johannesburg
and the Straits Settlements; Harbor Board Mortgages of Oamaru and
Wanganui; Rangoon Sterling Loans; Municipal Stocks of Pernambuco;
Budapest, St. Louis, Tokio, Lima and Aarhus; Ecuador salt bonds and
bonds of the Grand Duchy of Finland; securities of the Greek Piraeus
Larissa Railway, Honduras 10 per cent. loans, loans of Liberia, Persia
and Siam, and certificates of the Venezuela Diplomatic Debt. There
are securities of the Ionian Bank, the Natal Bank and the Bank of
Abyssinia. The Terra del Fuego Development Company is represented,
and likewise Amazon Telegraphs, Malacca Rubbers, Singapore Electrics,
Rangoon Tramways, Montevideo Water Works, and Sao Paulo Match
Factories. Soda and newspapers, theatres and sawmills, hotels and
clothiers, sponges and molasses, soaps and cereals, these are some
of the items that catch the eye as one glances over the List. What
would be found there if all the securities admitted to the House were
published in the List may be left to conjecture; and what will this
eloquent array of enterprise in figures look like a century hence, if
the List continues its present rate of growth?

As Great Britain is a country where there is never any difficulty about
raising capital for the creation or extension of any business which
offers a reasonable probability of large profits, it is natural that
new countries where capital is scarce and credit scarcer should turn
to London. Thus governments, municipalities, company promoters and
manufacturers from all over the world are constantly making application
for funds with which to supply their needs. Greek railways, Abyssinian
banks, Ceylon tea and Malay rubbers hasten to register themselves at
the world’s centre of capital and offer their shares to a public whose
taste for all kinds of world-wide industrial and commercial ventures
seems never likely to be satiated, since the really good and profitable
home enterprises are seldom open to public subscription. The insiders
in those bonanzas naturally keep their treasures to themselves and
their friends, unless after a time the concern is turned into a
limited liability company with good-will as a conspicuous asset and
over-capitalization as the dominating motive; then, as elsewhere, the
market is invited to assist. But that is another story.

What is of especial interest to a Wall Street man who looks over the
enormous list of London’s Stock Exchange securities is the function and
method of the Listing Committee that has to pass on all these concerns
before admitting them to the House. In New York the Stock Exchange’s
“Committee on Stock List” insists that the applicant company must be
able to show at least one year’s earnings--a most important condition.
In London somewhat different conditions prevail. The committee looks
into the bona fides of an applicant company and makes inquiries
concerning the people behind it, but it does not require that it shall
have done business for at least a year and show a year’s earnings,
because if that were insisted upon as a condition precedent, the banks
would not finance it, nor the public support it. They have no “curb
market” in London where a new company may pass through a seasoning or
preparatory period while awaiting admission to the Stock Exchange,
and as a settlement day with Stock Exchange authority is rigorously
insisted upon by those who provide the funds, it follows that
companies must be admitted at least to “official settlement” privileges
as soon as they are organized.

One point upon which the London Exchange authorities lay great
weight in the admission of new securities, consists in obtaining
assurances that a sufficient number of shares has been allotted to
the public before admission is granted. This is a thoroughly wise
precaution, designed to prevent corners and, as far as possible,
improper manipulation. Another very interesting, and I may say, a
very wise precautionary measure of the London method of listing, is
the prohibition placed upon vendor’s shares--a plan that might well
be adopted in New York. In London, for example, a vendor--i. e., a
seller of the property--who receives shares in consideration of the
sale, cannot have his shares listed until six months have elapsed after
shares of the company have been offered to the public. The protection
afforded the public by this plan is obvious, and requires no further

If the London share certificates required, as in New York, only a
simple endorsement for transfer, much of the annoyance and confusion
that sometimes takes place would be avoided. The market for mining
shares, for example, had until 1888 only a very small place in the
London Stock Exchange, but the discovery of gold in the Witwatersrand
changed all that, and by 1894 the number of brokers engaged in handling
mining shares actually exceeded those in any other department. It was
found necessary to provide a special day--one day before the regular
settlement commenced--for carrying over bargains in mines, but owing to
the fact that mining shares, like nearly all securities in London, were
“registered” and not “to bearer,” the clearing house was taxed beyond
its powers by the immense volume of work thrown upon it, and once or
twice it broke down completely.

An extraordinary number of small investors bought fractional shares;
the offices of the companies were not prepared for the rush and could
not handle the large carry-over, hence for a time the “Kaffir Circus,”
as the speculative mania of the day was called, promised to embarrass
seriously the whole Exchange machinery. All this could have been
avoided by making the shares “to bearer.” Yet the London authorities
feel--and not without reason when we consider the volume of their
business and the remoteness of their clientele in many instances--that
bearer certificates are not safe, and that what is lost in the time
spent in transferring certificates is amply compensated in the
resultant security against fraud and forgery.

It is interesting to note in connection with the enormous business done
on the London Exchange--a business which makes New York’s high totals
seem insignificant--on what a vast scale London’s exports of capital
are conducted. This may properly be noticed here, since these capital
exports have great economic significance and bear close relationship
to the transactions on the Stock Exchange; indeed were it not for the
work done by the Exchange in providing markets and settlements and all
the details of the security business, it is fair to say there could be
no such public issues of capital. In 1910, for example, new capital
expenditures amounted to the extraordinary figure of £267,439,000, of
which £60,296,500 was expended in the United Kingdom, £92,378,100 in
the various British possessions, and £114,764,500 in foreign countries.
Of the grand total £49,974,000 went into foreign railways, £10,096,000
into Indian and Colonial railways, £35,631,600 into Colonial government
loans, £18,431,000 into foreign government loans, £18,343,100 into
explorations, and £19,143,800 into rubber.[110] The year 1910 was,
of course, a year of great prosperity in England, and it was a year
made famous by speculative activity in various directions, especially
in rubber, so that the totals given above are larger than they had
ever been before. But the point for us in America to bear in mind in
considering these figures is their immense significance as showing
England’s complete supremacy in capital, credit, and the art of banking.

The immense number of securities dealt in, coupled with the speculative
propensities of the people and the ramifications of British finance,
naturally go to make that Exchange a peculiarly sensitive and
vulnerable spot, and the American visitor may well wonder what would
happen there if the ancient bogy of war between England and any
other first-rate power should some day become a reality. War is, as
every one knows, the greatest destroyer of capital. England’s little
Transvaal war cost $1,000,000 a day, and by the Chancellor of the
Exchequer’s report resulted in a total expenditure of $1,085,000,000.
The war between Russia and Japan cost upward of $3,000,000 daily and
$2,000,000,000 all told. What a great war would cost England if that
country were to cross swords with one of the powers may be conjectured;
what would happen in the Stock Exchange taxes the imagination.

In the month in which these lines are written the London Stock
Exchange and all the continental Bourses are having their periodic
scare over a war in the Balkans. British consols have fallen almost
seven points from the high price of the year; French rentes seven,
German 3s. six, and Russian 4s. seven.[111] These are very severe
declines for government securities of that class, and if they can fall
abruptly over difficulties in the Balkans, what would happen were
these countries themselves involved in war with foemen of their own
class? Russian consolidated 4s. fell eleven points and Japanese 5s.
twelve in the first month of the Manchurian war, and in our war with
Spain, Spanish 4s. fell from 61 to 29¾. If such things can happen to
government securities, what would happen to all the 9000 odd industrial
and kindred securities dealt in on the London Exchange should England
take up the sword with, let us say, Germany? We are not left to
conjecture on this point, for in the week that has just witnessed
the Balkan scare there have been some really tremendous slumps in
securities--collapses out of proportion, it would seem at this
distance, to the magnitude of the political issues threatened.

In Paris, for example, there has just been witnessed a two-day break of
185 points in Sosnoviche Collieries, a one-day break of 165 points in
Bakou Naphtha, a decline within a few hours of 115 points in Russian
Naphtha and overwhelming breaks of from 50 to 150 francs in Paris Light
and Transport shares, Rio Tintos, and Electrics. No such demoralization
has been seen in any foreign financial market within twenty-five years.
This slump was no doubt due in large part to a top-heavy speculative
position and to consequent financial congestion, but it was the
Balkan war-cloud that caused the real difficulty none the less, and
it supplies an outsider with an idea of what may happen in a real

Foreigners are prone to speak of Yankee speculation as foolhardy and
reckless, as no doubt it is at times, but never in American history
has there been a panic with anything like the severe declines, in so
brief a period, as those just recorded. For that matter, we in America
have never experienced a boom in any sense commensurate with London’s
rubber boom of 1909–10, nor a collapse as sudden and as thoroughly
deserved as that which followed it. Again, London’s Kaffir Circus of
1894–5, and the furious speculation in Panama shares in Paris in the
early nineties, have had no parallel in American stock markets. This is
only another way of saying that the speculative mania which seizes upon
nations at periodic intervals is not a matter of latitude and longitude
in any sense.[112]

In trying to picture what would happen in the London Stock market
should such a war as that which Englishmen are always discussing really
occur, we must take into account not only the mass of securities that
would be directly affected, but also the great burden borne by London
banks and bankers in security issues all over the world. On another
page we have seen that London’s capital expenditures on new issues in
various quarters of the globe in a single year exceeded £267,000,000;
in the quarter just closed (September, 1912), these disbursements ran
£25,000,000 above the previous year.

That they will continue so to increase is open to no doubt as long as
England’s abstention from war is assured; but if there should arise
even the possibility of war, it would result in an embarrassment of
credit with terribly serious results, such as have never been dreamed
of in the world’s history. The many years of peace between the great
powers, the many new countries that have been opened to commercial
development, and the countless new fields of industrial endeavor that
have come into being while this peace has lasted, have served to create
a British credit situation huge and complicated beyond all precedent.
Any serious interruption or derangement of so vast a system would find
a very different situation from that which existed on the Continent in
1870. It would be appalling.

And yet, ere we go too far afield in search of the shivers, the
observer must bear in mind that this great credit system of which
London is the banker and clearing house, in reality knits together
in its international web all the great powers, and binds them so
closely together as to guarantee, in some measure, the preservation of
peace. That peace hath her victories, and that the creation of wealth
through industrial pursuits may serve in this way to prevent armed
strife--these are, after all, encouraging indications quite as strong
as treaties. To-day the bankers of London and Paris are the war lords
of creation. Both these centres loan money, on early maturing bills,
to all the world. Stop London’s discounts through an outbreak of war,
and gold would pour into that centre at the rate of $200,000,000 a
month. “It might be possible to starve her population,” says a recent
writer, “but no combination of the Powers could bankrupt London. In
the event of war Paris could bankrupt Germany in a week. No war could
disturb the credit of the Bank of France; but the German Reichsbank
would inevitably go down in the smash. All Germany’s capital is in her
own shop. She is doing a great business, and, quite properly, a great
part of it on borrowed money. But if her loans were called, she must
put up the shutters.”[113]

Let us now observe the London broker at his work. The Stock Exchange,
as has been described, settles nearly all of its transactions twice
a month, upon officially appointed “account days,” which fall about
the middle and the end of every month. Smith, a broker, receives an
order to buy, let us say, 500 East Rands, and goes to a jobber who
makes a specialty of that department. The jobber, Jones, is a wise
man and a clever trader, who knows all there is to know about supply
and demand and regulation of prices to meet them, otherwise he would
soon be out of business. Smith does not tell him what he proposes
to do, but asks for a price, which in normal markets Jones quotes at
3½ to 3-9/16, this being the method of implying, in pounds sterling,
that he is prepared to buy at 70s., or to sell at 71s. 3d. The broker
will probably say that the price is too wide, whereupon Jones quotes a
figure “close to close,” reducing the quotation 1/64 each way, at which
figure the transaction is closed.[114] Smith enters in his book that
he has bought of Jones 500 East Rands at the price stated, and Jones,
that he has sold at this price to Smith. The customer is then advised
of the transaction, and next day he receives his stamped contract,
with details covering the cost of the shares together with brokerage
and other expenses, if any, and informing him of the date of the next
account day, when payment will fall due.

Beneath the main floor of the Exchange is the settling room, and here
the clerks of broker and jobber check the transaction that has taken
place. Two days before the account the name of the person for whom the
East Rands were bought is written on a ticket--hence “ticket day”--and
handed to the Stock Exchange Clearing House, which, after the manner
of the Stock Exchange Clearing House in New York, eliminates all
the intermediaries through whose hands the shares may have passed ad
interim, and puts the selling broker into direct communication, by
passing him the ticket, with the broker of the buyer. This done, the
seller receives the ticket with the buyer’s name on it, and prepares
a transfer deed as the law requires.[115] Had the client bought the
shares of an American railway instead of East Rands, the procedure
following the purchase would have been somewhat different, because
American shares bear a form of transfer on the back which requires the
signature of the seller only, and which becomes, by reason of this
fact, almost as readily negotiable as bank-notes.

In London consols can be dealt in in this way, but the customary
form of conveyance of the funds, and of Indian and Colonial stocks,
consists of a brief transfer on the books of the bank acting as agent
for the particular issue. Thus the Bank of England keeps the books for
consols and India government stocks, and sellers or their attorneys
must attend personally at the bank and sign the transfer. The bank
insists that every seller must be identified by a member of the Stock
Exchange, whose signature must be registered there, and it places full
responsibility upon these members for correct identifications. This
was long a sore point with the Stock Exchange, and it was fought to a
finish in the courts, but the Bank won “in a walk.”

The transaction just cited in the case of East Rands is based on the
supposition that the original buyer proposed to “take up,” or pay for
his shares in full. If he is merely a speculator, hoping to sell at a
profit before the settling day and pocket the difference, a somewhat
different procedure is involved, especially if at the approach of
settling day the hoped-for rise has not appeared. In that case he asks
his broker to “carry-over,” “contango,” or “give on,” the shares he has
bought, and the broker, to whom this is an hourly occurrence, naturally
has at his finger tips ample facilities for doing what is required.

Going to the jobber, he says he wants to “give on” five hundred East
Rands. The jobber says he will “take them in,” which means that he
will lend the money until next following settlement, charging interest
at, say, 5 per cent., while the broker in turn charges his client
5½ per cent. and takes the interest difference as compensation for
the service. The buyer’s speculation is thus extended to the next
settlement, and the statement given him shows that he has been
debited with the interest upon the “making-up price,” at which the
transaction is arranged. The rate of interest is called the “contango,”
and “contango days” are the two days during the settlement when these
arrangements are in effect:[116]

  “The Stock Exchange has witnessed many periods of wild
  excitement and speculation, reminding one of the famous South
  Sea Bubble--perhaps the most remarkable “boom” on record--the
  story of which, however, has been so often and so vividly told by
  Smollett and later writers that we need only refer to it here.
  Just before the middle of the last century came the great railway
  boom. It began about 1834, and within one year more than six
  hundred propositions for railway lines in the United Kingdom were
  placed before the public, the nominal capital required being over
  600,000,000 pounds sterling. Panic, of course, followed the boom;
  and, as an example of the rapidity with which prices moved, it may
  be mentioned that the Great Western Railway stock rose to 236 in
  1845, and fell back to 55½ within three years, while Midland stock
  rose to 183 and fell to 64. After the railway boom and panic came
  several banking crises, of which the worst were those identified
  with the names of Overend, Gurney, & Co. in 1866, and of Baring
  Brothers in 1890. For five years after the latter, the Stock
  Exchange lay fallow, with business and credit worn to a shadow.
  Then came the famous Kaffir boom, of which it may be said that
  Cecil Rhodes stood out as the colossus. The madness of that boom
  has rarely been equaled, even in the history of the Yankee market.
  It makes one hot even on a cold day to think of the time when, as
  a clerk, one tore off coat, waistcoat, collar, and tie in order to
  run the faster in the settling room beneath the Stock Exchange,
  “passing names” (as it is technically called) in connection with
  that gamble. A Rugby football scrum was child’s play to the
  continued struggles; and, after the most violent excitement had
  subsided, there were always fights to be settled before one went
  upstairs to work the whole night through.

  “A period of collapse followed this episode. After various minor
  upheavals there came in 1910 the rubber boom, which, perhaps with
  the Kaffir Gamble, more nearly recalls the excitement of 1720 than
  any other. The rubber boom had not, indeed, the same noble backing
  which the South Sea Company boasted; but clergymen and ladies were
  prominent operators as ‘bulls,’ ‘stags,’ or both.”[117]

The thought will no doubt occur to an American who reads these pages,
whether the day will come when American banking will extend, as in
England, to every quarter of the globe, and whether the New York
Exchange, like its London prototype, will become a centre of the
world’s commercial activities. This is a far cry, of course, and the
answer will not be known in our generation. But it may be said without
fear of contradiction that when a great nation like ours, in which the
spirit of enterprise is manifest, has reached the point where its own
domain has been developed, when it has perfected a sound banking and
currency system, when it has recovered its lost shipping and mastered
those economic lessons that the future has in store, it may confidently
be expected to push out into new lands and supply their demands for

Already we have in America a world’s storehouse of necessary
commodities, with wealth and intelligence that increases by leaps and
bounds. No nation stands a better chance of escaping the horrors of war
and its ruinous losses. China remains a fertile field for commercial
endeavor in the years to come, and our neighbors on the south may
one day know us more intimately. The retrospective eye, surveying
commercial and financial America in the sixties and contrasting it with
America of to-day, sees clearly that progress has been made, and looks
beyond toward progress to come. In any case civilization must advance
and trade expand, and American energy must advance and expand with
them. I wish I might visit Wall Street and the Stock Exchange a century



“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

“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

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

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

“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

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





                        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.


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

  “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, 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 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.


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.


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.


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,” 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.


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.


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

(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


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.


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.


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

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.


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.


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.


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


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.


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.


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.


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.


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.


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.


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 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.



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.


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.


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

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 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.


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

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.


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.


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.


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

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.


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.


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.


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


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.


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.


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


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.


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 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.


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.


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.


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

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 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.


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 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

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.


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

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.


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 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.


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

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.


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 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.


This, however, was not the most serious consequence of the new law.
While bankers and brokers, in order to do any business at all, were
required to register, their customers were not compelled to do so.
Consequently the latter could speculate through different brokers on
both sides of the market, pocketing their profits and welching on their
losses as gambling contracts. Numerous cases of this kind arose, and in
some the plea of wagering was entered by men who had previously borne a
good reputation. They had yielded to the temptation which the new law
held out to them.

Another consequence was to turn over to the large banks much of the
business previously done by independent houses. Persons who desired to
make speculative investments in home securities applied directly to the
banks, depositing with them satisfactory security for the purchases. As
the German banks were largely promoters of new enterprises, they could
sell the securities to their depositors and finance the enterprises
with the deposits. This was a profitable and safe business in good
times, but attended by dangers in periods of stringency, since the
claims of depositors were payable on demand. Here again the law worked
grotesquely, since customers whose names were not on the public
register could, if the speculation turned out badly, reclaim the
collateral or the cash that they had deposited as security.


The evil consequences of the law of 1896 brought about its partial
repeal in 1908. By a law then passed the government may, in its
discretion, authorize speculative transactions in industrial and mining
securities of companies capitalized at not less than $5,000,000; the
Stock Exchange Register was abolished; all persons whose names were in
the “Handels-register” (commercial directory), and all persons whose
business was that of dealing in securities, was declared legally bound
by contracts made by them on the Exchange. It provided that other
persons were not legally bound by such contracts, but if such persons
made deposits of cash or collateral security for speculative contracts,
they could not reclaim them on the plea that the contract was illegal.

In so far as the Reichstag in 1896 had aimed to prevent small
speculators from wasting their substance on the Exchange, it not only
failed, but, as we have seen, it added a darker hue to evils previously

Germany is now seeking to recover the legitimate business thrown away
twelve years ago. She still prohibits short selling of grain and flour,
although the effects of the prohibition have been quite different from
those which its supporters anticipated. As there are no open markets
for those products, and no continuous quotations, both buyers and
sellers are at a disadvantage; prices are more fluctuating than they
were before the passage of the law against short selling.


Our cordial thanks are due to the Chamber of Commerce of the State of
New York for the free use of rooms in its building for our sessions,
and of its library, and other facilities.

    Respectfully submitted, HORACE WHITE, Chairman,
                            CHARLES A. SCHIEREN,
                            DAVID LEVENTRITT,
                            CLARK WILLIAMS,
                            JOHN B. CLARK,
                            WILLARD V. KING,
                            SAMUEL H. ORDWAY,
                            EDWARD D. PAGE,
                            CHARLES SPRAGUE SMITH,




[1] Principles of the Economic Philosophy of Society, Government and
Industry, by Van Buren Denslow, LL.D., New York, 1888, p. 99.

[2] _Ibid._, p. 107.

[3] _Ibid._, p. 101. Consult also “Theory of Political Economy,” by
W. S. Jevons, p. 92, and “A History of Prices,” by Thomas Tooke, Part
II, p. 46.

[4] Consult Report of the New York State Food Investigating Commission,
September, 1912.

[5] A detailed account of this incident was published in _Country
Life in America_, July 1, 1912, from the pen of Graham F. Blandy, the

[6] Bourses or Exchanges, as we know them to-day, undoubtedly owe
their origin to the Jews. M. Vidal’s scholarly work explains that the
persecutions which those untiring and courageous merchants experienced
in Spain after the expulsion of the Moors caused them to emigrate
to Holland, where the market-place was called _Change_ (Exchange)
and where in later years there was to be established, as a result of
their labors, the famous Bank of Amsterdam, which was for a century
the foremost institution of its kind in the world. The modern use of
the word Change or Exchange is thus plainly traced. The word Bourse
originated at Bruges, where, according to one authority, merchants
gathered at the house of one of their number known as van der Burse.
Other historians state that the word originated from the three purses
(bourses) carved on the gable of the house in which the meetings were

[7] Charles A. Conant, “The World’s Wealth in Negotiable Securities,”
_Atlantic Monthly_, January, 1908, estimated the total American
securities as of 1905, at $34,514,351,382. Since that time there has
been added to the securities listed on the New York Stock Exchange
alone, a total averaging about one billion dollars per annum. The total
given above is, therefore, a conservative one, since I have added to
Mr. Conant’s 1905 estimate only Stock Exchange additions, and have
taken no account of the millions added by small corporations.

[8] “The Stock Exchange and the Money Market,” “Annals of the American
Academy of Political and Social Science,” Vol. XXXVI, No. 3, November,
1910, p. 567.

[9] If the discovery had then been made that bits of paper could be
used as a medium of giving mobility to capital, there would have been
a Stock Exchange at Rome eleven centuries before Christ. M. Edmond
Guillard’s study of the subject shows that the _argentarii_ (bankers)
were then doing business at the imperial city, and that in addition
to their central offices they had established branch offices at the
Forum, where they gathered daily at a specified hour, together with the
merchants, manufacturers, and capitalists, carrying on a business of
money-changing in a public market that was, in its essentials, similar
to our public financial markets of to-day (“Les Banquiers Atheniens et
Romains, trapézites et argentarii,” Paris, 1875 Guillaumin). As the
business was introduced into Rome by freed Greek slaves, it is perhaps
safe to say that the practice of dealing in public money markets is
in reality of still earlier origin. Plautus alludes to the crowd of
merchants and bankers in the public square, and many chroniclers record
the fact that at the time of Appius Claudius and Publius Sevilius, that
is to say, five centuries before Christ, there was a public market in
Rome known as the Assembly of Merchants (Collegium mercatorum).

[10] “A hundred years ago the use of the cheque was hardly known even
in London, and an English country gentleman would have had infinitely
more trouble in making a small investment than would nowadays a remote
Australian squatter, or a wheat-grower in the wildest West of Canada.
A letter posted to London from a distant village of Saskatchewan
in 1910 would arrive with far more certainty, and perhaps not less
speed than a letter posted in 1810 from a village in Sutherland or
Argyllshire. A penny stamp with a cheque enclosed in a brief letter
of instructions to the banker, and the thing is done. But the thrifty
Scot of 1810 would have had the utmost difficulty, and great expense
as well as risk, in converting a similar amount of cash savings into
an interest-bearing security. In 1710 the thing would have been
practically impossible. The Bank of England had only just been called
into existence, and, in fact, there were no bankers, no brokers, and
no Stock Exchange in the modern sense of the word. A man who wished to
invest, without personally employing his capital, had practically no
choice but to buy property and let it out at a rent, or lend his money
on mortgage. Bank of England Stock or National Debt had just begun to
be a political speculation for the moneyed Whigs in London. Merchant
venturers might risk a large sum in a joint-stock voyage. Otherwise the
average Englishman at the beginning of the eighteenth century A. D. was
hardly better off for investment than the average Athenian in the age
of Pericles, or the average Roman in the days of Cicero.”--“The Stock
Exchange,” by Francis W. Hirst, editor of the _Economist_, Williams and
Norgate, London.

[11] Article on “Speculation” in Schonberg’s “_Handbuch der Politischen
Oekonomie_” (Tubingen, 1896–98).

[12] “Scope and Functions of the Stock Market.”--“The Annals of the
American Academy of Political and Social Science,” Vol. XXXV, No. 3.
May, 1910.

[13] Charles A. Conant, “The Uses of Speculation,” _Forum_ (August,

[14] Suppose for a moment that the stock markets of the world were
closed, that it was no longer possible to learn what railways were
paying dividends, what their stocks were worth, how industrial
enterprises were faring--whether they were loaded up with surplus goods
or had orders ahead. Suppose that the information afforded by public
quotations on the stock and produce exchanges were wiped from the slate
of human knowledge. How would the average man, how even would a man
with the intelligence and foresight of a Pierpont Morgan, determine
how new capital should be invested? He would have no guides except
the most isolated facts gathered here and there at great trouble and
expense. A greater misdirection of capital and energy would result than
has been possible since the organization of modern economic machinery.
“Wall Street and the Country,” by Charles A. Conant, pp. 92–93.--G. P.
Putnam’s Sons, New York, 1904.

[15] The student who wishes to go more thoroughly into the subject of
Stock Exchange usefulness is referred to “The Annals of the American
Academy of Political and Social Science,” Vol. XXXV, No. 3, May, 1910,
Philadelphia. “Some Thoughts on Speculation,” by Frank Fayant, New
York, 1909; “The Stock Exchange,” by Francis W. Hirst, London, Williams
& Norgate, 1911; “Wall Street and the Country,” by Chas. A. Conant,
New York, G. P. Putnam’s Sons, 1904; “Story of the Stock Exchange,” by
Chas. Duguid, London, New York, E. P. Dutton & Co., 1902; “The Stock
Exchange, London,” Methuen & Co., 1904; “The New York Stock Exchange,”
by Francis L. Eames, New York, 1894; “Der Deutsche Kapitalmarkt,”
by Rudolph Eberstadt, Leipzig, Duncker & Humbolt, 1901; “The Stock
Exchange,” (London), by C. D. Ingall & G. Withers, Longmans, Green
& Co., 1904; “A Simple Purchase and Sale Through a Stockbroker,” by
Eliot Norton, _Harvard Law Review_, Vol. VIII, No. 8; “Stock Exchange
Investments; History, Practice, and Results,” London, Simpkin,
Marshall, Hamilton, Kent & Co., 1900.

[16] The Stock Exchange is an organization of individuals formed for
the purpose of listing securities and for facilitating the sale and
delivery of stocks.... Through its agency corporations are enabled to
sell their shares and get the money capital to conduct their business.
The Stock Exchange has come into existence because of a demand for
trade facilities that will adjust differences of opinion in reference
to future values of corporation securities and give the purchaser some
idea of values. (“Modern Industrialism,” by Frank L. McVey, Professor
of Political Economy in the University of Minnesota. N. Y., 1904.)

[17] “Principles of Economics,” by Edwin R. A. Seligman, Professor of
Political Economy in Columbia University (N. Y., 1905).

[18] “Nouveau Dictionnaire d’Economie Politique,” by Paul
Leroy-Beaulieu, Paris, 1892.

[19] Consult “The (London) Stock Exchange,” Francis W. Hirst, London,
Chap. VI, p. 164, Williams & Norgate, 1911.

[20] “Principles of Economics,” by J. R. McCulloch, London, 1825.

[21] “Speculation on the Stock and Produce Exchanges of the United
States,” by Henry Crosby Emery, Professor of Political Economy at Yale
University. New York, 1896.

[22] In its effort to study all possible remedial methods affecting
speculation on margins, the Hughes Commissioners in 1909 put this
question to the Governors of the Stock Exchange:

“_Would taxation of loans made on margin transactions tend to
discourage margin speculation? If so, would it be desirable to graduate
the tax in accordance with the margin ratio?_”

To which the Governors replied:

“In our opinion the taxation of loans could not be made upon margin
transactions, as the lender of the money would be absolutely ignorant
as to whether the securities pledged with him were carried on margin
or whether they were owned absolutely. Any species of taxation upon
loans would work a great injury to the money prosperity of the banking
institutions of the City of New York. Loans are made to individuals and
institutions upon bona fide property; they are also made to borrowers
of money upon stocks and bonds offered to the institution, which are
marginal in their nature; further, they are made upon securities only
in part marginal, and any effort to distinguish would be practically
impossible and would retard the entire business of the community. The
effect of taxation upon loans would be to drive capital instantly from
the city, and would force a species of financial institution to arise
in every State which would profit by our inquisitorial laws, should
such be enacted, to their own advantage and to our serious detriment.
Such a restriction upon the free lending of money is not only unsound,
impossible of enforcement, but could not help resulting in a constant
evasion of the law.”

[23] “The Hughes Investigation,” by Horace White, _Journal of Political
Economy_, October, 1909, p. 537.

[24] The governors of the Stock Exchange, when asked by the Hughes
Commission, “Would a change in the practice of dealing on margins be
desirable?” replied as follows:

“The practice of dealing on margins is absolutely essential to the
conduct of many transactions, whether in stocks or bonds. To prohibit
it would be to deny to a man the right to invest his funds and to
purchase property upon such terms as he pleases. As well might the
purchase of real estate, where a portion of the consideration is left
on mortgage, be prohibited. The responsibility of the individual enters
so largely into these transactions that it will be impossible to define
specific instances where the margin would be too small or unnecessarily
great. It is to be left to the discretion of the bankers, as well
as to the judgment of those who furnish the money upon which these
transactions are based. There may be certain classes of securities,
like city bonds or government bonds, where a very small margin is
ample. There may be other transactions in stocks selling at very
high prices where a very strong margin should be required. Like many
other details of a banking and brokerage business, these matters are
frequently subjects of arrangement, whereby the broker protects himself
and a satisfactory protection is given to him by his client. It would
be manifestly impossible for the enactment of rules or regulations
suitable to every case, and, in conclusion, we would say that it is
almost unknown for an institution, bank, or trust company, to lose
money upon any loans made on margins to members of the Stock Exchange
in good standing.”

[25] “Ten Years’ Regulation of the Stock Exchange in Germany.” _Yale
Review_, May 1908, _q. v._, _post_.

[26] “The Stock Exchange,” by Francis W. Hirst, London, 1911, p. 101.

[27] “The Hughes Investigation,” by Horace White, _Journal of Political
Economy_, October, 1909, pp. 532–3.

[28] “Board of Trade Case,” 88 Fed. 868.

[29] “Chicago Board of Trade Case,” May 8, 1905.

[30] Several authorities among those quoted in this chapter have been
taken from Mr. Frank Fayant’s pamphlet, “Some Thoughts on Speculation,”
N. Y.., 1909. It would be difficult to compress in small space a more
instructive array of data than that presented in Mr. Fayant’s work.

[31] “Scope and Functions of the Stock Market,” by Prof. S. S. Huebner,
Ph. D., University of Pennsylvania. “Annals of the American Academy of
Political and Social Science,” Vol. XXXV, No. 3, May, 1910.

[32] _Journal of Political Economy_, October, 1909, pp. 531–2.

[33] Consult the _Wall Street Journal_, February 18, 1909.

[34] “The borrower is also bound to pay the lender whatever interest by
way of coupons or dividends or otherwise and all bonuses and accretions
that would have been paid to the lender on the securities he has lent
had he kept them. These are in practice treated as increases to the
market price of the borrowed securities. The reason for this provision
is that the lender is the actual owner of the securities and as such
owner he is entitled to whatever they may earn by way of interest or
in any other way. He has simply temporarily let another have the use
of them, and, since the securities can be and are disposed of by the
borrower, the lender would lose the interest, etc., which is paid on
the borrowed securities between the date that they are borrowed and
the date when they are returned and the loan cancelled, unless the
borrower paid an equivalent amount to him. On the other hand, any
assessment the lender would have had to pay on the borrowed securities
during the continuance of the loan is a charge against him; for such an
assessment is a burden adherent to ownership. In practice it is treated
as a reduction of the market price.”--Eliot Norton “On Short Sales of
Securities through a Stockbroker.” The John McBride Co., New York, 1907.

[35] (Memorial of the stockbrokers addressed to the Minister of
Finance, 1843, p. 44, footnote. Quoted by Vidal, _q. v._, p. 46.)

[36] Some of those who admit the value of the stock market have
subjected to severe criticism those who speculate for the fall of
stocks. One reads constantly of the “bears” trying to accomplish such
and such results by depressing securities. Napoleon had a long talk
with Mollien, his Minister of Finance, in seeking to demonstrate that
those who sold “short,” in the belief that national securities would
fall, were traitors to their country. He argued that if these men were
selling national securities for future delivery at less than their
present value they were guilty of treason to the State. But Mollien
replied in substance: “These men are not the ones who determine the
price; they are only expressing their judgment upon what it will be.
If they are wrong, if the credit of our State is to be maintained in
the future at its former high standard, in spite of your military
preparations, these men will suffer the penalty by having to make
delivery at the price for which they sold, for they must go into the
market and buy at the price then prevailing. It is their judgment, not
their wish, that they express.”--“Wall Street and the Country,” by
Charles A. Conant, pp. 111–112, G. P. Putnam’s Sons, New York, 1904.

[37] “Lombard Street,” p. 158.

[38] Charles A. Conant, “Principles of Money and Banking” (New York,
1905). The reader is invited to consult, in this connection, that
portion of the Report of the Hughes Commission, (see Appendix) having
to do with short selling.

[39] Report of the Commissioner, Washington, 1908.

[40] Despite the effort to avoid technical terms in these pages, the
value of the bear should be considered from still another angle. Smith,
a bear, sells short to Jones, a bull. The economic usefulness of Jones
then becomes problematical, since he may sell out at any moment. His
permanence as a holder or owner is merely optional, and his usefulness
in the economic scheme of things is impaired. As a market factor he may
be ignored. But there is nothing optional about Smith’s position, for
he is now a _compulsory_ buyer; his economic status is fixed; he has
become a very real potential force.

[41] “The Stock Exchange and the Money Market,” by Horace White,
“Annals of the American Society of Political and Social Science,” Vol.
XXXVI, No. 3, Nov., 1910, pp. 563–573.

[42] _Ibid._, p. 564.

[43] The Stock Exchange authorities were asked by the Hughes
Commissioners in 1909 what effect would result if this law were
repealed. An interesting historical summary is involved in the reply to
this question.

“In our opinion the repeal of such a law would simply lead to constant
evasions, which would cause the law to be practically a dead letter,
and it is far better to leave it as it is, and to allow the supply and
demand to regulate the rate for money.

“It is reasonable to assume that the repeal of this law would result in
a recurrence of the conditions which existed prior to its enactment.
Prior to 1882, when this Act was passed, such loans were subject to the
drastic provisions of the Usury Law, which imposes the forfeiture of
the principal as a penalty for violation. The Usury Law, however, as
to this class of loans, had for years been a dead letter, and whatever
risks were incurred through its penalties were taken by lenders without
hesitation. Demand loans were made at interest plus a commission, and
in times of money stringency the interest rate represented by the
so-called commission attained proportions which have been unknown since
the passage of the Act of 1882. Extreme instances are to be found of a
rate as high as 700 per cent. per annum.

“Such violent fluctuations in the rate have been unknown since the
passage of the Act of 1882. Since that time all quotations of interest
on call loans have been at so much per cent. per annum, not, as was
formerly the case, at ⅛ or ¼ of 1 per cent. per day. Through the
extreme stringency which existed in the autumn of 1907, the rate ran
from 12 to 30 per cent., with the exception, perhaps, of one or two
days when practically no money was procurable at any price, when the
quotation ran up to 100 or 110 per cent. per annum. It would seem
demonstrated by experience that the law of 1882 has been a most potent
factor in reducing the interest rate in times of stringency and in
rendering it at all times more stable and equable.”

[44] Cf. Mr. White’s article _supra_, p. 570.

[45] Report of the Comptroller of the Currency, October, 30, 1912.

[46] The _Wall Street Journal_, August 31, 1912.

[47] December 7, 1912. Consult also p. 235.

[48] “The Hughes Investigation,” by Horace White, _Journal of Political
Economy_, October, 1909, pp. 537–8.

[49] In his article on “The Hughes Investigation” (_Journal of
Political Economy_, October, 1909, p. 539), Mr. Horace White refers
to the attempt of the Hughes Commission to devise a means whereby
the company-promoter’s activities might be curbed. He says: “The
British ‘Companies Act’ forbids the public advertisement or sale of
any securities unless the issuing company has been registered in a
bureau of the government with information regarding the business to be
transacted, the names of the officers and other persons responsible for
the statements of fact, etc. Much time was spent by the committee in
discussing the advisability of adopting the English system, regardless
of the fact that it would be operative in only one state of the union,
and that it would serve as an obstacle to all securities, sound and
unsound, alike. Thus, if the Pennsylvania Railroad Company desired to
issue a new lot of bonds it could advertise and sell them everywhere
except in New York, without the trouble and expense of registration.
Would it be worth while to give to other markets such an advantage over
that of New York? The opinion of the governors of the Stock Exchange
was sought and was given orally, to the effect that it would be unwise
to take the risk unless the benefits to be derived from registration
were preponderating and reasonably certain. It was their belief,
however, that a certificate from state officials that a company was
registered at Albany would be interpreted by the class of investors,
who are most liable to deception, as a certificate of the soundness of
the securities, in which case the act of registration would do more
harm than good. The latter consideration prevailed in the committee,
but recommendations as to advertising were made, which, if adopted by
the legislature, will add something to the responsibilities of greedy
and unscrupulous newspapers, while not going upon the doubtful ground
of a censorship of the press.”

[50] “The Hughes Investigation,” by Horace White, _Journal of Political
Economy_, October, 1909, p. 529.

[51] The report of the Hughes Investigating Committee is published in
full in the appendix to this volume.

[52] One of the witnesses before the Hughes Committee actually
recommended that the stock ticker be suppressed. Such a suggestion
is silly and would lead to great confusion and many complaints from
the public. The ticker is essential to publicity and offers the very
protection which the Stock Exchange seeks to extend. Speculation was
never so unscrupulous and wrongdoing never so abundant as in the days
before this instrument was invented.

[53] _L’Economiste Français_, Paris, October 5th.

[54] When the first issue of Union Pacific convertible bonds matured,
so many people had failed to notice that their bonds could be exchanged
dollar for dollar against the stock, selling at much higher price with
greater yield, that the company extended the time for conversion. It
would have been entirely warranted in paying off such bondholders at
par, but it spent considerable sums in advertising them of a privilege
they should have known all about. In the face of all this, bonds
came in for conversion many months after the extended time, and the
bondholder sincerely believed that he had a grievance because his bond
was redeemed at par.

The same thing happened in the case of the old St. Paul 7’s, which
were convertible into preferred stock. Bondholders allowed themselves
to be paid off at par for a bond which had been standing at 170 and
apparently had never read the terms of their own mortgage. What can the
law, the press, or the banker do against such criminal negligence as
this? And if bondholders are remiss, what shall be said of the average
stockholder? He is improving undoubtedly, but he has still a great deal
to learn. His right to information is unquestionable, but he fails to
exercise it in anything like the degree he should. It is to be feared
also that he does not take a great deal of trouble in learning to
analyze such reports and balance sheets as may be submitted to him.

A stockholder should never hesitate to write to the officers of his
company for information. He should do it often, and he should get other
stockholders to do the same thing. One stockholder writing frequently
may be regarded as a nuisance. Ten will be treated with respect,
and it will be a very autocratic control which will venture to deny
information to a hundred stockholders, taking a legitimate step to
protect their own proper interests. The newspapers are glad to furnish
any information in their power, but if the stockholder would write to
the company first and the newspaper afterward, he would probably derive
more ultimate advantage.--_Wall Street Journal_, September 22, 1909.

[55] Address by President Finlay of the Southern Railway, before the
Transportation Club of Indianapolis, October, 1912.

[56] “If there is one man who really understands the nature of the
transactions in the New York Stock Exchange from day to day, it
is Robert L. Doremus, the chairman of the Stock Exchange Clearing
House Committee, which has the power to lay bare the character of
any broker’s business. His reputation for veracity is of that high
character which Wall Street demands from the men in its responsible
positions. When he says that the main influence in any day’s trading is
a legitimate and widespread demand for sound securities, in lots small
enough to be within reach of the investor of moderate means, he is
talking facts and not theories.

“Our politicians, however, are legislating for a Wall Street of twenty
years ago. The stock market is not controlled by large speculators
creating deceptive prices by manipulative orders. That kind of business
is passing away, and it may be said that another kind, that of the
purely gambling accounts carried on the lightest of margins, has
practically gone, and is not likely to return. The few houses whose
business is still of this character are dying of dry-rot; while the
active houses who are doing the real business of the stock market
report their speculative accounts so broadly margined as to be of a
semi-investment character.

“What is still more satisfactory is the wide diffusion in the
ownership of industrial and railroad stocks. This is not new. The
Illinois Central’s great strength for forty years was in the small
stockholder, who made his voice heard to some purpose when “strike”
legislation developed in his State legislature or in Congress. But
the ever-widening character of the investment area, the recognition
of the convenience and convertibility of Stock Exchange securities,
safeguarded by sound management and full publicity, is a growth of
the most hopeful character. It indicates a force of enlightened
conservatism of the greatest value to the country.”--The _Wall Street
Journal_, October 22, 1912.

[57] It is truthfully declared by Courtois, in his _Traité des
Opérations de Bourse et de Change_, that a fictitious movement, even on
the part of the most powerful operators, cannot overcome the natural
tendencies of values, and that the most that can be accomplished is
sometimes to hasten or retard slightly the certain effect of a foreseen
event. “Wall Street and the Country,” by Charles A. Conant, p. 88,
G. P. Putnam’s Sons, New York, 1904.

[58] The _Wall Street Journal_, December 7, 1912.

[59] The distinction between “panics,” “crises,” and “depressions,” are
clearly stated in the opening chapter of “Financial Crises and Periods
of Industrial and Commercial Depression,” by Theodore E. Burton, D.
Appleton & Co., N. Y., 1902. In the following pages, I use the terms as
they are commonly applied in Wall Street, although this application is
not always governed by sound etymology. Thus in Wall Street we speak of
“the panic of 1907,” meaning broadly the events of that entire year.
Strictly speaking a “panic” is the brief period of a day or an hour of
unreasoning fear, brought about by the “crisis” of a money scarcity
which preceded it. The period of commercial and financial suffering,
which continues after the panic and the crisis have passed, is the

[60] “Des Crises Commerciales,” Clément Juglar, Paris, 1889, pp. 44–5.

[61] “Annals of the American Academy of Political and Social Science,”
Vol. XXXV, No. 3, May, 1910, p. 13.

[62] “Financial Crises and Periods of Industrial and Commercial
Depression,” Theodore E. Burton, New York, 1902, p. 234.

[63] The report of the New York State Superintendent of Banks for the
same period emphasizes this point by showing a steady _contraction_ of
loans by State banks and trust companies of New York City during the
period quoted, while all other authorities reveal a steady _expansion_
in loans by similar institutions outside the city.

[64] “The Hughes Investigation,” by Horace White, _Journal of Political
Economy_ October, 1909, pp. 528–540. Mr. White quotes in this
connection an article on “The Panic of 1907,” by Eugene Meyer, Jr.,
_Yale Review_, May, 1909, from which many facts in this chapter have
been taken.

[65] _Cf._ Burton, _supra_, pp. 49–50–51.

[66] _Ibid._, pp. 227–8–9.

[67] The panic of 1837 was caused by a great expansion of banking
and bank credits, and an intense speculation in real estate. In 1830
there were 329 banks in the country with a capital of $110,000,000. In
1857 there were 788 with a capital of $290,000,000. When the crisis
was subsequently examined it was found that there had been an actual
shrinkage of $2,000,000,000 in the value of the assets of the country,
and that $600,000,000 of indebtedness had been wiped out by bankruptcy.

The panic of 1857 was due primarily to the influx of gold from
California after its discovery in 1848, and to the intense passion
for speculative gain which attended it. Suspension of specie payments
by the banks lasted fifty-nine days. Complete recovery to the normal
standard did not take place until 1860, when it was again interrupted
by the events antecedent to the Civil War of 1861.

The antecedents of the crisis of 1873 were identical with every other
commercial crisis--namely, speculation--the act of buying with a view
to selling at a higher price, and overtrading, or the act of buying and
selling too much on a given capital. Most commonly these two elements
are accompanied by two others, viz.--the destruction or loss of
previously accumulated capital, and the rapid conversion of circulating
into fixed capital. Speculation and destruction of capital usually go
together in preparing the way for a crisis.--Horace White, _Fortnightly
Review_, Vol. XXV, p. 819.

The panic of 1893 was distinctly a currency panic. By a curious paradox
it came at a time when the volume of currency was unprecedentedly
large and constantly increasing. But the inception of the disaster had
to do with its quality rather than its quantity. The repeal of the
silver purchasing clause of the Sherman Law, November 1, 1893, restored
confidence by assuring the commercial world that the existing volume of
silver coin would be maintained on a parity with gold.

[68] _Real Estate Record and Guide_, 1906–7.

[69] Consult _Bradstreet’s_, 1907; the _Construction News_, Chicago,
1907; the _Engineering News_, 1907.

[70] “The New York Stock Exchange and the Panic of 1907,” by Eugene
Meyer, Jr., _Yale Review_, May, 1909.

[71] “Credit Cycles and the Origin of Commercial Panics,” Manchester
Statistical Society, December 11, 1867.

[72] Remarks of Joseph French Johnson, dean of the New York University
School of Commerce, at the American Institute of Banking, October 25,

[73] Consult Burton, _supra_, pp. 109–110; Muhleman. “Monetary Systems
of the World,” pp. 128, 130, 135, 140.

[74] “The Banking and Currency Problem in the United States,” Victor
Morawetz, New York, _North American Review_ Publishing Company, 1909,
pp. 87, _et. seq._

[75] “Collected Works,” Vol II, p. 2.

[76] Senator Burton “Crises and Depressions,” pp. 51, 52, enumerates
the important indicia of crisis-producing conditions as follows:

  (_a_) An increase in prices of commodities and later of real estate.

  (_b_) Increased activity of established enterprises and the
  formation of many new ones, especially those which provide for
  increased production and improved methods, all requiring the change
  of circulating to fixed capital.

  (_c_) An active demand for loans at higher rates of interest.

  (_d_) The general employment of labor at increasing or
  well-sustained wages.

  (_e_) Increasing extravagance in private and public expenditure.

  (_f_) The development of a mania for speculation, attended by
  dishonest methods in business and the gullibility of investors.

  (_g_) A great expansion of discounts and loans and a resulting
  rise in the rate of interest; also a material increase in wages,
  attended by frequent strikes and by difficulty in obtaining a
  sufficient number of laborers to meet the demand.

Not one of these indications of trouble was lacking in the period
preceding the panic of 1907.

[77] The student who wishes to inquire at length into the subject
of panics, crises, and depressions will find useful aids in the
authorities already quoted, and in the following additional works:

A. Allard, La Crise Agricole et manufacturiere devant la Conference
monetaire de Bruxelles; Brussels, 1893.

A. Baring (Lord Ashburton), The Financial and Commercial Crises
Considered; London, Murray, 1847.

C. W. Smith, Commercial gambling, the principal cause of depression in
agriculture and trade; London, Low, 1893.

C. Wooley, Phases of Panics; a brief historical review; London, Good,

C. Juglar, A brief history of panics and their periodical occurrences
in the United States; New York, Putnam, 1893.

E. Goodby & W. Watt, The present depression in trade, its causes and

Henry Wood, The Political Economy of Natural Law, Boston, Lee &
Sheppard, 1894.

H. M. Hyndman, Commercial Crises of the Nineteenth Century; London,
Swan Sonnenschein & Co., 1892.

H. Denis, La Dépression Économique et Sociale et l’histoire des prix;
Brussels, 1895.

J. Eadie, Panics in the money market, etc.; New York, 1893.

Michael G. Mulhall, History of Prices Since 1850; London, Longmans,
Green & Co., 1885.

R. Browning, The Currency considered with a view to the effectual
prevention of panics; London, 1869.

The Pears prize essays. London, Chatto, 1885.

W. W. Lloyd, Panics and their panaceas; London, Harrison, 1869.

W. H. Crocker, The cause of hard times; Boston, Little, Brown & Co.,

[78] (8 and 9 Will, III, Ch. 32.)

[79] (6 Anne, Ch. 16.)

[80] See appendix.

[81] See p. 140.

[82] For a legal opinion concerning the rights of plaintiffs arising
from memberships in a _corporation_ as contrasted with those arising
from memberships in a _voluntarily unincorporated association_ the
reader is referred to White vs. Brownell (2 Daly at p. 337), opinion at
Special Term by Justice Van Vorst; and the same case at General Term,
opinion by Justice Daly. The courts of New York State have on a number
of occasions expressed their approval of the manner in which the Stock
Exchange has discharged its functions under this form of organization.
The reader’s attention is called to Belton vs. Hatch, 109, New York,
597, Court of Appeals.

[83] “The German Exchange Act of 1896,” by Dr. Ernst Loeb, in the
_Quarterly Journal of Economics_, July, 1897.

[84] “Ten Years Regulation of the Stock Exchange in Germany,” by Henry
Crosby Emery in the _Yale Review_, May, 1908.

[85] _Ibid._

[86] “The German Bourse Law,” by G. Plochmann, _North American Review_,
May, 1908.

[87] “An act to regulate sales at public auction and to prevent
stock-jobbing,” New York State Legislature, 1812.

[88] “An act to regulate sales at public auction and to prevent
stock-jobbing,” New York State Legislature, 1858, repealing act of 1812.

[89] “Statutes at Large,” Ch. 127 and Ch. 209, repealing Ch. 127.

[90] “Economics,” by Arthur T. Hadley, New York, 1896.

[91] “Money and Banking,” by Horace White, New York, 1895.

[92] In the appendix to his work, “Some Thoughts on Speculation,” New
York, 1909, Mr. Frank Fayant gives a summary of the laws of all the
States, pp. 57–58. I am greatly indebted to this pamphlet for many
authorities quoted in this chapter.

[93] The London Stock Exchange is also an unincorporated body. See pp.
231 _et seq._ for the report of the royal commission bearing on this

[94] The question put to sureties on the London Stock Exchange is,
“Would you take this man’s cheque for £3000 in the ordinary way of
business?” to which an unprepared sponsor once replied, “Well, I should
not pick it out.”

A similar question by the governors of the New York Stock Exchange once
met with the reply, “Yes, but I would have it certified as quickly as

[95] A similar cry, “Fourteen hundred,” was long used for the same
purpose on the London Stock Exchange. For a time there were but 1399
members, and each stranger who appeared was thought to be number 1400.
Hence, the words came to be applied to all new members, long after the
membership exceeded that figure.

[96] The celerity and accuracy of the cable service between New York
and foreign centres, as perfected in arbitraging, has no parallel
elsewhere. Twenty minutes are often required to complete a cable
transaction between the London Stock Exchange and the Paris Bourse,
and so it frequently happens, where speed is required, that messages
between those two centres are cabled by way of New York.

[97] Consult “The World’s Wealth in Negotiable Securities,” by Charles
A. Conant, _Atlantic Monthly_, (July, 1908).

[98] Hopkinson Smith, in the _World’s Work_ (August, 1912).

[99] “They are like unto children sitting in the market-place and
calling one to another, and saying, ‘We have piped unto you, and ye
have not danced; we have mourned to you, and ye have not wept.’”

[100] July, 1912, p. 94.

[101] “Worry, the Disease of the Age,” by C. W. Saleeby, M. D., F. A.
Stokes Co. (New York, 1907).

[102] The English Exchequer has left a permanent impression on the
language no less than on the world’s finance. Such words as “cheque,”
“tally,” and “stocks,” in the sense of securities, possess an
interesting history easy to trace. If one lent money to the Bank of
England down to so comparatively recent a period as one hundred years
ago, tallies for the amount were cut on willow sticks just as they
were cut at the Exchequer in the time of the Crusades; the bank kept
the “foil,” and the lender the “stock”--the earliest “bank-stock” on
record. Very recently a bag of Exchequer tallies was found in a chapel
of Westminster Abbey.

[103] The first Stock Exchange book was published in 1761--“Every
Man His Own Broker, or a Guide to Exchange Alley,” by J. Mortimer.
Mortimer, Mr. Hirst tells us, had been British Consul in Holland,
and had seen the workings of the Amsterdam Bourse and the arbitrage
business between London and Amsterdam, which was considerable in the
middle of the eighteenth century. The book shows that many phases
of speculation were already in vogue before the Stock Exchange was
formally organized.

[104] “The (London) Stock Exchange,” Francis W. Hirst, London, Williams
and Norgate, 1910. The attention of the reader is invited to this
book. As a short study of investment and speculation in England it is
exceedingly instructive, doubly so in that it comes from the pen of the
editor of the _Economist_.

[105] The _Quarterly Review_, July, 1912.

[106] There are 20,000 shares (£13 paid) and £416,700 debentures

[107] It should be said, in fairness to the London jobber, that the
incident here mentioned by Mr. Hirst is a rare exception.

[108] _L’Economiste Français_, Paris, October 5, 1912.

[109] Rule 150 reads as follows: “The committee will not fix a
special settling day for bargains in shares or securities issued
to the vendors, credited as full or partly paid, until six months
after the date fixed for the special settlement in the shares or
securities of the same class subscribed for by the public, but this
does not necessarily apply to reorganizations or amalgamations of
existing companies, or to cases where no public shares are issued for
cash.”--Rules and Regulations of the Stock Exchange. London, June 3,
1911, pp. 64–5.

[110] These figures are taken from Mr. Hirst’s Chapter VIII on “The
Creation of New Debt and Capital,” pp. 212–241.

[111] It should be said that at least a part of the decline in these
securities had taken place before the Balkan scare became a reality.
A foreknowledge of what was impending may have influenced the earlier
decline; certainly the event itself accentuated and hastened it.

[112] London jobbers were, in a way, instrumental in checking the
furious speculation in “rubbers” toward the culmination of the boom of
1909–10. Their absolute refusal to carry rubber shares for brokers, and
their concerted insistence that such shares should be paid for in full
on the ensuing account day, undoubtedly put the brakes on a furious
speculation, and prevented many failures.

[113] The _Wall Street Journal_, November 13, 1912.

[114] On the New York Stock Exchange the minimum difference between
prices is one eighth and splitting of this fraction is prohibited save
in the case of “rights” to subscribe or similar instances.

[115] In the settling room on ticket day stocks that are not cleared
pass by ticket from broker to broker in much the same way as that
provided by the Clearing House.

[116] Although an effort has been made in these pages to avoid
complicated Stock Exchange technique, the contango, which is not fully
understood in America, requires technical explanation. It may be
defined as a double-bargain, in that it consists of a sale for cash of
the stock previously bought which the broker does not wish to carry,
and a repurchase for the new settlement two weeks ahead, of the same
stock at the same price as the sale, plus interest agreed upon up to
the date of that settlement.

[117] The methods of transacting business on the London Stock Exchange
are admirably stated in condensed form in an article by Walter Landells
in the _Quarterly Review_, July, 1912, pp. 88–109, and I am indebted to
his article for many of the foregoing facts, and for this brief summary
of London’s booms and crises.

[118] In addition to the authorities quoted in the foregoing chapter,
the attention of the reader is directed to the following works having
to do with the London Stock Exchange:

Lombard Street, by Walter Bagehot, New York, Chas. Scribner’s, and Sons.

Stocks and Shares, by Hartley Withers, London, Smith Elder, 1910.

Stock Exchange Law and Practice, by W. A. Bewes, London, Sweet &
Maxwell, 1910.

Rise of the London Money Market, 1640–1826, by W. R. Bisschop, London,
King, 1910.

The Mechanism of the City, by Ellis T. Powell, London, King, 1910.

[119] Anatole Leroy-Beaulieu, La Régence de l’argent, “Revue des Deux
Mondes.” February 25, 1897, pp. 894 and 895.

(M. Leroy-Beaulieu is the elder brother of Paul, the French economist.
In 1881 he became professor of modern history at the Ecole Libre des
Sciences Politiques, and in 1887 was made a member of the Academy of
Moral and Political Sciences. His fame as a publicist is established.)

[120] John Law was the inventor of “bearer” certificates.

[121] “The History and Methods of the Paris Bourse,” by E. Vidal,
Senate Document No. 573, Sixty-first Congress (Second session), pp.

[122] “Opérations de Bourse et de Change,” Courtois, 13th ed., p. 239.

[123] Provincial bourses in France are divided into two classes--those
with parquets, and those without them. Bourses with parquets are those
at Lyons, Bordeaux, Marseilles, Nantes, Toulouse, and Lille. The
Minister of Finance is in control of these parquet bourses, while the
Minister of Commerce controls those that have no parquet.

[124] “History and Methods of the Paris Bourse,” by E. Vidal, published
by the National Monetary Commission, Washington, 1910, pp. 262–3–4.

[125] The report of the Paris Chamber of Commerce, February 8, 1882,
which paved the way for this reform, is interesting reading:

“An administration of justice which would permit a speculator to carry
on two deals of equal importance with two different brokers, one for
a rise and the other for a fall, and, while collecting from one the
profit he had made to advance the plea of gambling toward the other,
in order to avoid paying the loss which the operation showed--such an
administration, I say, could not hold any longer; that fact alone would
condemn it.

“Experience shows that the plea of gambling has never protected
anybody but those of bad faith, and has only encouraged the excess
of speculation, as was stated by M. Andrieux in his report presented
to the Chamber in 1877, in the name of the Seventh Commission of

“Prompted by these reasons, and, considering that the present
legislation, far from preventing gambling, encourages it; considering
that bad faith finds protection in the jurisprudence sanctioned; and,
further considering that in commercial affairs, as in any other, it
behooves to allow every one his full freedom, as well as to hold him
responsible for his actions--I beg to suggest that an address be sent
to the Minister of Commerce, confirming the letter of the Chamber
of Commerce of November 25, 1877, and requesting the Government to
introduce a bill in the Chambers, declaring that article 1965 of the
Code civil does not apply to debts resulting from dealings for future
delivery, and that articles 421 and 422 of the Code penal are repealed.”

The law legalizing dealings for future delivery was enacted March 28,
1885, and formally promulgated April 8, 1885.

[126] Vidal, p. 217, _supra_.

[127] Ibid, p. 276.

[128] _Ibid_, pp. 192–3.

[129] Remarks of M. Alfred Neymarck, at the International Congress of
Securities, 1900, quoted by Vidal, pp. 166–7.


_Asterisks indicate foot-notes_

  Account Day, in London, 372.

  Advertising, Abuse of, 434.

  Advertising, by members prohibited, 56.

  Agents de Change, 51.

  Agents de Change (see Paris Bourse).

  Agora, of Greece, 262.

  Aldrich, plan, 101.

  Allard A., Crises in France, 219*.

  _American Acad. of Polit. and Social Science_, 16*, 26*, 32*,
          80*, 102*, 191*.

  American Bankers’ Association, 207.

  American, finance of future, 377.

  American Institute of Banking, 208*.

  Arbitrage brokers, duties of, 283.

  Ashley, W. T., on Economic History, 224.

  Assignats, 390.

  _Atlantic Monthly_, 288*.

  Bagehot, Walter, on Credulity of Speculators, 92.

  Bagehot, Walter, on Banking, 99.

  Bagehot, Walter, on Panics, 215–218;
    _Lombard Street_, 378*.

  Balkan Crisis of 1912, 76, 340, 368, 369.

  _Banking and Currency Problem in U. S._, by Victor Morawetz, 209*.

  Banking facilities in London, 362.

  Bank loans, N. Y. (1904–1907), 190;
    in the U. S. (1904–1907), 192;
    in London, 362.

  Bank of England, 324, 328, 357.

  Bank of England, Origin of, 18*.

  Bank of France and currency, 209;
    and Bourse, 396;
    and Germany, 209.

  Banks, certifications of checks, 113;
    borrowings by London brokers, 353.

  Bank, deposits in N. Y., 125.

  Bankers as peacemakers, 371.

  Bank stock, earliest form of, 324.*

  Baring, A., on Financial Crises, 219*.

  Baring failure, 156, 376.

  Barnard, Sir John, Act to prevent stock-jobbing, 226.

  Barometer, The Stock Exchange as a, 23, 190, 308, 309.

  Bearer certificates, 365, 374.

  Bears, Value of, 76;
    in Germany, 77. (See short selling).

  Benefactions and charities of members, 317.

  Bewes, W. A., _Stock Exchange Law and Practice_, 379*.

  Bisschop, W. R., _Rise of the London Money Market_, 379*.

  Black Friday, 251.

  Blackmar, Frank W. on Legislation against Speculation, 255.

  Bond brokers on ’Change, 282.

  Borrowing and lending stocks in N. Y.. and London, 353–4.

  Bourse, Origin of, 12*.

  Bourse, Paris. (See Paris).

  Bradstreet’s, 202*.

  Branch offices, 426.

  Brokers in London, relation to jobbers, 335, 339;
    methods, 372 et seq. (See London Stock Exchange).

  Browning, R., on Currency, 219*.

  Bryce, James, on Good Citizenship, 133.

  Bucket-shops, 55, 143, 252, 435.

  Bucket-shops, War against, 149.

  Burr, Aaron, 31.

  Burton, Theodore E., on Financial Crises, 183*;
    on Forecasting, 191, 197, 198.

  Burton, Theodore E., on Crisis-producing conditions, 216*.

  Burton, Theodore E., on Currency, 208.

  Business Conduct Committee, 255

  Business on ’Change, how conducted, 288, _et seq._

  Cable service, Excellence of, 284*.

  Cammack, Addison, on publicity, 161.

  Capital of brokerage houses, 152.

  Capital, reasons for scarcity of, 122;
    exports of in London, 366.

  Carry-over, contango, 375–6*.

  Central Bank in America, 101.

  Certificates, registered and bearer, 365, 374.

  Certifications of stockbroker’s checks, 113.

  Chamber of Commerce, N. Y., 206.

  Chambre Syndicale, of Paris Bourse, 393.

  Change Alley, 327.

  Charities and benefactions of members, 317.

  Chicago Board of Trade Case in U. S. Circuit Court, 65;
    in U. S. Supreme Court, 66*.

  China, Speculative possibilities in, 62.

  Clearance Orders, 279.

  Clearing House, N. Y. Banks, 109.

  Clearing House, N. Y. Stock Exchange, 119, 426;
    London, 365, 373.

  Clearings, volume of, in N. Y. and London, 344.

  Coffee Exchange, 442.

  Colbert, and the French manufacturers, 254.

  Collectors, on ’Change, 315.

  Collegium mercatorum at Rome, 16*.

  Commercial honor on ’Change, 264.

  Commission dealers in markets for produce, 8.

  Commissions, rate of, N. Y., 278, 281;
    in London, 342;
    in Paris, 395.

  Committee of Arrangements, 277.

  Committee on Stock List, requirements of, 363.

  Companies Act, in England, 147*.

  “Comparisons” by stockbrokers, 120.

  Competition, essential to freedom of trade, 5.

  Comptroller of Currency, Report of, 126*.

  Conant, Charles A., on Establishment of prices, 28.

  Conant, Charles A., on Short-sales, 89*, 93*;
    on manipulation, 175*.

  Conant, Charles A., on Stock Exchange Quotations, 29*.

  Conant, Charles A., on Value of American Securities, 14*.

  Consolidated Stock Exchange, 428.

  Consols, as affected by war, 368;
    dealings in, 374.

  _Construction News_ (Chicago), 202*.

  Contango, 375–6*.

  Control of members by governors, 265.

  Conveniences for members, 304.

  Cordage Trust, 30, 311.

  Corner in Northern Pacific stock, 290.

  Corners, 30;
    opinions of Hughes Commission, 423.

  _Corn Laws, History of the_, J. Shield Nicholson, 255.

  Cost of Living, 8.

  Cotton Exchange, 441.

  Coulisse, in Paris, 397, _et seq._;
    membership, 398;
    origin, 401;
    progress, 402;
    history, 404;
    volume of business, 405.

  Coulissiers, 51.

  Courtois, A., on manipulation, 175*;
    _Opérations de Bourse_, 393*.

  _Credit Cycles and Origin of Panics_, John Mill, 204*.

  Crises and depressions, 183*.

  Criticism of the Stock Exchange, 29.

  Crocker, W. H., on depressions, 219*.

  Curb market, 141, 431–2–3.

  Currency and the panic of 1907, 206, 210.

  Currency, famines in America, 123;
    inadequate laws, 352, 357;
    contrasts with London, 353.

  Currency, panic of 1893, 199*.

  Daily settlements in N. Y., 349.

  Daly, Justice, opinion, 236*.

  Denis, H., depressions, 219*.

  Denslow, Van Buren, on Prices and Values, 6*.

  Depositors in banks, number of, 126.

  Depressions, in relation to panics, 183*.

  Deutsche Bank, opinion on Bourse Law, 78, 243.

  _Deutsche Kapitalmarkt_, by Rudolph Eberstadt, 32*.

  _Dictionnaire d’Economie Politique_, by Paul Leroy-Beaulieu, 44*.

  Discipline, as maintained on ’Change, 266–7, 277.

  Disconto-Gesellschaft, opinion on Bourse Law, 244.

  Discounting the future, 23.

  Disputes and differences, adjustment of, 294.

  Diversions of members, 313.

  Doremus, Robert L., on transactions, 173*.

  Dresdner Bank, opinion on Bourse Law, 78, 244.

  Duguid, Chas., _Story of the Stock Exchange_, 32*.

  Eadie, J, on panics, 219*.

  Eames, Francis L., on The N. Y. Stock Exchange, 32*.

  East India Company, 325.

  Eberstadt, Rudolph, _Der Deutsche Kapitalmarkt_, 32*.

  _Economics_, by Francis W. Blackmar, 255.

  _Economiste Français_, 163*, 349*.

  Economist, London, 16, 18*, 19, 197. (See Hirst, Francis W.).

  Egyptian Speculation, 62.

  Emery, Henry Crosby, on Advantages of broad speculative markets, 61.

  Emery, Henry Crosby, on German Bourse Law, 239, _et seq._;
    on control of speculation, 256–7–8.

  Emery, Henry Crosby, on Speculation on the Stock Exchange and Produce
          Exchanges of the U. S., 49*.

  Employes on ’Change, 289, 318.

  _Engineering News_, 202*.

  England, capital exports, 28.

  England, Laws of, affecting company organizations, 147.

  England, Laws, of affecting short sales, 95.

  English capital in America, 20.

  _English Corn Laws_, History of, by J. Shield Nicholson 255.

  _English Economic History, Introduction to_, by W. T. Ashley, 224.

  Exchange, Origin of, 12*.

  Exchange Register, in Germany, 241.

  Exchanges, in London in early days, 323.

  Exchequer, English, 324*.

  Exports of capital by London, 366.

  Failures, of stockbrokers, 112, 152, 156;
    in London, 331;
    in Paris, 350, 395;
    opinion of Hughes Commission, 423.

  Fairs, in primitive countries, 5.

  Farmers’ Alliance, 7.

  Farmers, Speculation by, 83.

  Fayant, Frank, _Some Thoughts on Speculation_, 32*, 68*, 239, 252*.

  Fictitious transactions, 425.

  _Financial Crises_, etc., by Theo. E. Burton, 183*, 191*.

  Financial press in London, 348.

  _Fortnightly Review_, on panics, 199*.

  Forum, at Rome, 262.

  France, Volumes of Securities in, 406.

  French Government, attitude toward stockbrokers’ monopoly, 401.

  Future delivery, transactions for, in France, 402, 410;
    in America, 438.

  Gambling as distinguished from speculating, 53–54, 417, 419, 421.

  Gambling in bucket-shops, 144.

  Georges-Levy, on short sales, 93.

  _German Bourse Law, The_, by Geo. Plochmann, 245*.

  German Bourse Law of 1896, 77, 236 _et seq._, 254;
    opinion of Hughes Commission, 444.

  German credit in 1912, 372.

  _German Exchange Act of 1896_, by Dr. Ernst Loeb, 238*.

  German Government bonds, decline in, 368.

  Germany, Regulation of the Stock Exchange in, 61*.

  Gold Room, 251, 307.

  Goldsmiths’ Notes, in England, 324.

  Gold Speculation Act of 1864, 249.

  Gossip and news on ’Change, 295.

  Gould, Jay, 30.

  Government bonds, as affected by war, 368.

  Governors of the Stock Exchange on Freedom of Margin transactions, 59*;
    on Margin transactions, 52*;
    on Short sales, 90;
    on Usury law, 105*;
    on Incorporation, 235.

  Governors of the Stock Exchange, their power over members, 139, 154;
    method of choosing, 266.

  Grain Exchanges, 10.

  Grosscup, Judge, on Value of Stock Exchange, 65.

  Guarantee of stockbrokers, 154;
    in Paris, 395.

  Guild of Goldsmiths, 324.

  Guillard, Edmond, on Origin of Stock Exchanges, 16*.

  Hadley, Arthur T., _Economics_, 250.

  _Harvard Law Review_, 32*.

  Hatch Anti-Option Bill, 55, 252.

  Hazing of new members, 276.

  Hedging in cotton futures, 81, 94, 416, 439.

  Hirst, Francis W., on Early Exchange in London, 327*;
    on Stock Exchange rules, 330;
    on functions of jobbers, 336;
    on creation of new debt, 365*;
    on Chinese Speculation, 63;
    Early English Speculation, 18*;
    _The Stock Exchange_, 32*, 45*, 63*.

  History of N. Y. Stock Exchange, 306.

  _History of the People of the U. S._, by McMaster, 30.

  Hobbies of members, 312.

  Hocking Coal & Iron Company, 30, 311.

  Holding Companies, 429.

  Holidays on ’Change, 301.

  Holmes, Justice, of the U. S. Supreme Court, on speculation, 66.

  Honor and character on ’Change, 264.

  Huebner, S. S. on Stock Exchange safeguards, 25;
    on Usefulness of bears, 78;
    on discounting future, 190.

  Hughes Commission on German Bourse Law, 245;
    on Margins, 52;
    on Short selling, 80;
    on Curb market 142. (See also Appendix.)

  _Hughes Investigation, The_, by Horace White, 64*.

  Hyndman, H. M., Commercial Crises, 219.

  Incorporation of Stock Exchange (London), 231–5.

  Incorporation of Stock Exchange, N. Y., 139, 235, 265;
    opinion of Hughes Commission, 427.

  Ingall, C. D., _The Stock Exchange_ (London), 32*.

  Insurance, as effected by hedging, 81.

  Interest, rates of, in 1909–10, 116.

  Investors in France, caution of, 408.

  Inventor, dependent upon capital, 13.

  Investment, its relation to speculation, 44.

  Investor, Origin of word, 16.

  Jevons, W. S., on prices, 7*.

  Jevons, W. S., on sun-spots, 217.

  Jobbers, in London, 277, 335;
    relation to brokers, 336, 340;
    methods, 372 _et seq._

  Johnson, Joseph F., on panic of 1907, 208*.

  Jonathan’s Coffee House, 327.

  _Journal of Accountancy_, regulation of speculation, 258*.

  _Journal of Commerce and Commercial Bulletin_, on Volume of Securities
          in America, 15, 339.

  _Journal of Political Economy_ 53*, 64*, 82*, 143*, 147*, 159*, 196*.

  Juglar, Clément, _Des Crises Commerciales_, 185*, 219*.

  Kaffir Circus in London, 62, 365, 370, 376.

  Keene, James R., 30.

  Labor, Dependence on the Stock Exchange, 43.

  Labor, Percentage of, in America, 42.

  _Laissez faire_, theory of, 253.

  Landells, Walter, on London Stock Exchange, 376–7*.

  Law in England affecting companies, 147, 434.

  Law in England, affecting short sales, 95;
    affecting speculation, 225.

  Law in N. Y. regulating speculation, 247;
    repealed 248.

  Law, John, 390*.

  Laws affecting short sales in U. S., 95, 246;
    repealed, 247;
    decision of court, 416, 420.

  Laws of France, short sales, 404, 410.

  Laws of various states, affecting speculation, 251.

  Law, Usury, in N. Y., 105*.

  Leeman Act of 1867, 227.

  Legislation recommended by Hughes Commission, 435.

  Lending and borrowing stocks, N. Y. and London, 354–5.

  Leroy-Beaulieu, Anatole, on Paris Bourse, 383 _et seq._, 387*.

  Leroy-Beaulieu, Paul, _Nouveau Dictionnaire d’Economie Politique_, 44*;
    on Publicity, 163, 349;
    on Speculation, 44.

  Lexis, Dr. W., on Necessity for Stock Exchanges, 21.

  Liability of stockbrokers in Paris, 395.

  Listing of new securities, 168;
    N. Y. and London 363;
    vendor’s shares, 364;
    opinion of Hughes Commission, 424.

  _Lloyds_, 38.

  Lloyd, W. W., on Panics, 219*.

  “Loan Crowd,” 290.

  Loans by banks to stockbrokers, 110, 190.

  _Lombard Street_, by Walter Bagehot, 92*, 379*.

  London Exchanges in XVI Century, 323.

  _London Money Market, Rise of the_, by W. R. Bisschop, 379*.

  London Stock Exchange, history of, 326, _et seq._;
    management of, 329;
    rules, 330, 364*;
    membership, 332, 335;
    stockbrokers, 332;
    admission, 332–3;
    entrance fees, etc., 333;
    capital stock, 333*;
    precautions against monopoly, 333;
    jobbers, 336–7–8;
    commissions, 342;
    settlement days, 344;
    publicity, 347;
    borrowings from banks, 353;
    transfers, 355;
    volume of business, 356–7;
    official list, 358 _et seq._;
    securities as affected by war, 368;
    the day’s work, 372.

  London Stock Exchange, unincorporated, 267*.

  London, The world’s banker, 366.

  Luncheon Club, The, 305.

  Manhattan Banking Company, 31.

  Manipulation, efforts of governors to suppress, 169, 174.

  Manipulation, opinions of Courtois and Conant,175*.

  Manipulation, opinion of Emery, 257;
    comment of Hughes Commission, 421.

  Manipulation prohibited, 254

  Manipulation, value of, 170.

  Margin, speculation on, 50, 51, 52.

  Margins, insufficient margins prohibited, 255 and 256

  Margins required by stockbrokers, 147.

  Margin Trading a feature of all business, 58.

  Margin Trading a matter of contract, 53.

  Margin Trading defined by Hughes Commission, 419.

  Market in N. Y. compared with London, 340.

  Market in Paris as affected by stockbrokers’ monopoly, 397 _et seq._

  Markets, defined by Hughes Commission, 415.

  Markets for produce, 6.

  Marshall, Alfred, on legislation, 255.

  Matched orders, 422.

  McCulloch, J. R., _Principles of Economics_, 46*.

  McMaster on Public Sentiment in Early Days, 30.

  McVey, Frank L., on Stock Exchange Usefulness, 41*.

  _Mechanism of the City, The_, by Ellis T. Powell, 379*.

  Memberships, how obtained, 271;
    prices of, 273;
    value of, 274.

  Members of Stock Exchange, interesting personalities, 312 _et seq._

  Memorial of Paris stockbrokers, 88*.

  Metal Exchange, 443.

  Meyer, Eugene, Jr., on Panic of 1907, 196*, 203*.

  Middlemen in markets for produce, 8.

  Mills, John, on panics, 204.

  Mining shares in London, 365.

  Mississippi Bubble, 390.

  Mistakes in executing orders, 278, 293–4.

  _Modern Industrialism_, by Frank L. McVey, 41*.

  Mollien, on short sales in Paris, 89*.

  _Monetary Systems of the World_, by Maurice M. Muhleman, 208*.

  _Money and Banking_, by Horace White, 251*.

  Money, high rates for, 106*, 116, 290, 353.

  Money, rates for, as affecting speculation, 118, 430;
    as affected by deferred deliveries, 352.

  Monopoly, on London Stock Exchange, precaution against, 333;
    of Paris Bourse, 388 _et seq._, 399.

  Morawetz, Victor, on currency, 209*.

  Mortimer, J., _Every man his own broker_, 327*.

  Muhleman, Maurice, M., 208*.

  Mulhall, Michael G., on Prices, 219*.

  Musicians on ’Change, 316.

  Napoleon, on short selling, 87, 89*.

  National Banks contrasted with State Banks, 103.

  National Banks of U. S., loans (1904–1907), 192.

  National Monetary Commission, 426.

  New Joanthan’s, 327.

  News and gossip on ’Change, 295.

  Newspapers, attitude toward Stock Exchange, 132.

  “New Tennessee,” 276.

  New York State Food Investigation Committee’s report, 9*.

  Neymarck, Alfred, on volume of French securities, 406, 410.

  Nicholson, J. Shield, on Corn Laws. 255.

  _North American Review_, 209*, 245*.

  Norton, Eliot, on Purchase and sales of securities, 32*.

  Norton, Eliot, on short selling, 86*.

  Notes, of stockbrokers, 111.

  Odd-lot brokers, duties of 281;
    extent of business, 282.

  Open Board of Brokers, 307.

  Opinions of floor-brokers as to market, 297.

  Overend, Gurney & Co., failure of, 376.

  Panama mania in France, 62, 370, 408.

  Panic of 1907, conditions antecedent to, 24.

  Panic of 1873, in Austria, 197;
    in America, 199*, 308.

  Panic of 1825, in England, 197;
    of 1847, in England, 376.

  Panic of 1912, in Paris, 199, 200, 369.

  Panic of 1837, in U. S., 199*, 308.

  Panic of 1857, in U. S., 198–9, 308.

  Panic of 1893, in U. S., 197–8–9*.

  Panic of 1907, its origin, 189;
    effect, 201.

  Panics, crises and depressions, 183*.

  Panics of the future, 184;
    opinion of Mills, 204, 377.

  Paris Bourse, Balkan Crisis, 369;
    after war with Germany, 383–87;
    Agents de Change, 388 _et seq._;
    history, 388–9;
    the form of monopoly, 389;
    origin of monopoly, 389–390;
    regulations, 391;
    “right of introduction,” 392;
    exclusive privileges, 393;
    settlements 394;
    prohibitions, 394;
    liabilities, 395;
    rates of commission, 395;
    methods and transactions, 396 (see coulisse);
    objections to monopoly, 398 _et seq._;
    differences with the coulisse, 404;
    volume of business, 405;
    caution of public, 408.

  _Paris Bourse, History and Methods of_, by E. Vidal, 392*.

  Parquet, in Paris, 397 _et seq._

  Partners of members, and partnership agreements, 270–1.

  _Pears Prize Essays_, 219*.

  Personalities on ’Change, 312 _et seq._

  Plochmann, George, on German Bourse Law, 245*.

  Powell, Ellis T., _The Mechanism of the City_, 379*.

  Pragmatism, in economic phenomena, 127.

  Prices, Relation to value, 4.

  _Principles of Economics_, by Alfred Marshall, 255.

  _Principles of Economics_, by Edwin R. A. Seligman, 42*, 254.

  _Principles of Economics_, by J. R. McCulloch, 46*.

  _Principles of Money and Banking_, by Chas. A. Conant, 93*.

  Produce Exchange, 440.

  Promoters, swindles of, 141.

  Publicity in N. Y. contrasted with London, 347.

  Pujo Committee, 176.

  Punishment of members, 267.

  Pyramiding, opinion of Hughes Commission, 420.

  _Quarterly Review_, London, 300, 332, 377*.

  Quotations, the property of the Exchange, 436.

  Railroads in U. S., in 1906–7, 212.

  Real Estate, Market for, 22.

  _Real Estate Record and Guide_, 202*.

  Real Estate Speculation, in N. Y., 202;
    in other cities, 203.

  Receiverships, 430.

  Reforms, attitude of members toward, 311;
    in listing new securities, 364.

  _Regulation of Stock Exchange in Germany_, Henry Crosby Emery, 241*.

  Rentes, as affected by war, 368;
    settlement days, 394;
    market for, 398, 404.

  Resolutions adopted by the Exchange;
    against manipulation, 254
    against light margins, 255
    on business conduct, 255

  Rhodes, Cecil, 377.

  _Rise of the London Money Market_, by W. R. Bisschop, 379*.

  Roosevelt, Theodore, and the panic of 1907, 210–212.

  Royal Commission of 1877, 238–9, 231–2.

  Rubber boom, in London, 62, 369.

  Russian government bonds, as affected by war, 368.

  Russian industrial securities in France, 62.

  Salaries of employees, 318.

  “Scalping,” 355.

  Scapegoat, making the Stock Exchange a, 137.

  Schonberg, “Handbuch” on Speculation, 21*.

  Scott, S. R., on incorporation of London Stock Exchange, 233.

  Securities, Origin of, 11.

  Securities, Owners of in America, 14–15.

  Securities, Volume of in America, 14–15.

  Securities, Volume of in London, 360;
    in Paris, 406, _et seq._;
    in N. Y., 359–60.

  Seligman, Edwin R. A., on Legislation, 254.

  Seligman, Edwin R. A., on Principles of Economics, 42*.

  Settlement days, London Stock Exchange, 344, 349;
    N. Y. Stock Exchange, 345;
    comparisons, 351.

  Settling Room, in London, 372.

  Shanghai Stock Exchange, 62.

  Sherman Law, 199*.

  Short selling, opinion of Prof. Huebner, 78;
    legalized in Paris, 402*;
    opinion of Court, 416;
    opinion of Hughes Commission, 420.

  Silver purchasing clause, repeal of, 199*.

  Smith, Adam, on Speculation, 37.

  Smith, Adam, _The Wealth of Nations_, 37.

  Smith, C. W., on depressions 219*.

  Smith Herbert Knox, on hedging cotton, 94.

  Smith, Hopkinson, on methods of brokers, 292.

  Smollett, on South Sea Bubble, 325–6.

  South Sea Bubble, 226, 325.

  Spanish government bonds, as affected by war, 368.

  Specialists, duties of, 278;
    vindications of, 279;
    opinion of Hughes Commission, 426.

  Speculation, a feature of all enterprise, 38.

  Speculation, in America contrasted with that abroad, 62.

  Speculation, in American development, 307;
    contrasted with England, 366;
    in France, 408–9.

  Speculation, in China, 62.

  Speculation, in Egypt, 62.

  Speculation, in France, 62.

  Speculation, in Gold, (1864, 1866), 250.

  Speculation, in London, 62.

  Speculation, in relation to investment, 44.

  Speculation, J. S. Mill, 47.

  Speculation not gambling, 53, 54, 416, 417, 419, 421.

  _Speculation on the Stock & Produce Exchanges of the U. S._, by Henry
          Crosby Emery, 49*.

  Speculation, opinion by Judge Grosscup, 65.

  Speculation, opinion by U. S. Supreme Court, 66.

  Speculation, origin of the word, 36.

  _Speculation, Some Thoughts on_, by Frank Fayant, 32*, 68*, 239, 252*.

  Speculation, as distinguished from trading, 74.

  Sponsors of candidates for memberships, 272.

  Sportsmen on ’Change, 317.

  Stamp Tax, N. Y., 75;
    in London, 355.

  Stanhope, Edward, on incorporation of London Stock Exchange, 232.

  State Banks contrasted with National Banks, 103.

  _Statist, The_ (London) on Hughes Investigation, 256.

  Stockbrokers in London (See London Stock Exchange);
    in Paris, (Paris Bourse).

  Stock certificates, registered and bearer, 365.

  Stock companies in France, 410–11.

  _Stock Exchange and The Money Market_, by Horace White, 102.

  Stock Exchange, Distinction between Wall Street and, 64.

  _Stock Exchange Law and Practice_, by W. A. Bewes, 379*.

  _Stock Exchange_ (London), by C. D. Ingall & G. Withers, 32*.

  Stock Exchange, N. Y., Rules governing brokers, 138;
    the day’s work 288 _et seq._

  Stock Exchange, N. Y., the building, 304–5;
    history, 307;
    mechanism, 418.

  _Stock Exchange, Story of the_, by Chas. Duguid, 32*.

  _Stock Exchange, The_, by Francis W. Hirst, 32*, 45*.

  _Stock Exchange, The_ (London) Francis W. Hirst, 327*, 330*, 338, 367*.

  _Stock Exchange, The N. Y._, by Francis L. Eames, 32*.

  Stockholders, Rights of, 162, 164, 173*.

  _Stocks and Shares_, by Hartley Withers, 379*.

  “Switching,” 74.

  Telephone clerks, on ’Change, their duties, 289.

  Temperature of air on ’Change, how regulated, 305.

  _Ten years regulation of the Stock Exchange in Germany_, by Henry
          Crosby Emery, 61*.

  Ticker, value of, 162*;
    in London, 341–2;
    in N. Y., 347, 437.

  Ticket Day in London, 373.

  Timidity of capital, 17.

  Tontine Coffee House, 307.

  Tooke, Thos., on Prices, 7*.

  Traders, as distinguished from speculators, 74;
    operations of, 285.

  Trading posts, on ’Change, 289.

  Transactions in securities, panic of 1907, 216.

  Transactions on ’Change, how conducted, 288, _et seq._

  Transfer of certificates, in London, 355, 365, 374.

  Transfer Tax, in N. Y., 75, in London, 355.

  Trust Laws, attitude of brokers toward, 311.

  Unlisted Department of Stock Exchange, 166.

  Usury Law, in N. Y., 105, 431.

  Values, Relation to prices, 4.

  Van Vorst, Justice, opinion, 236*.

  Vendors’ shares, in London, 364.

  Vidal, E., _History and methods of Paris Bourse_, 392;
    monopoly of Bourse, 399, 401*, 403, 404.

  Vidal, E., on Origin of Bourse and Exchanges, 12*.

  Villeplaine, Boscary de, on short selling, 88.

  Visitors’ Gallery, 286.

  _Wall Street and the Country_, by Chas. A. Conant, 29*, 175*.

  Wall Street, distinction between the Stock Exchange and, 64.

  _Wall Street Journal_, 83*, 136, 139, 145, 165*, 173*, 178*, 372*.

  Wall Street not the Stock Exchange, 428.

  War, between England and a first-rate power, 367, _et seq._

  War, cost of, 367.

  War, Franco-German, 383, _et seq._

  “Wash Sales,” 168, 422.

  “Welchers,” 227, 249; in Paris, 402.

  _Wealth of Nations, The_, 37.

  White, Horace, on banking laws, 102, 104;
    on company promoters, 142, 147*;
    on gold speculation, 251;
    on margin transactions, 53*;
    on money rates, 115;
    on short selling, 80;
    on Stock market quotations, 15;
    on the distinction between Wall Street and the Stock Exchange, 64;
    on the Hughes Commission, 159;
    on the panic of 1907, 196;
    on the panics of 1837, 1857 & 1873, 199*.

  Withers, G., _The Stock Exchange_ (London), 32*.

  Withers, Hartley, _Stocks and Shares_, 379*.

  Witwatersrand, discovery of gold in, 365.

  Wood, Henry, _Political Economy_, 219*.

  Woolley, C., _Phases of Panics_, 219*.

  _World’s Wealth in Securities_, by Chas. A. Conant, 288*.

  _World’s Work, The_, 294*.

  Worry on Change, 302 _et seq._

  _Worry the Disease of the Age_, by Dr. C. W. Saleeby 304*.

  _Yale Review_, 61*.

  _Yale Review_, on German Stock Exchange Law, 241*.

  _Yale Review_, on panic of 1907, 196*.

  “Yankee market,” in London, 300.



Transcriber’s Notes

Punctuation, hyphenation, and spelling were made consistent when a
predominant preference was found in the original book; otherwise they
were not changed.

Questionable accent marks in non-English words were neither added nor
removed by Transcriber.

Simple typographical errors were corrected; unbalanced quotation
marks were remedied when the change was obvious, and otherwise left

Duplicate chapter title pages were removed by Transcriber.

The index was not systematically checked for proper alphabetization or
correct page references. The original book contained a supplement of
omissions to the Index; in this eBook, those omissions have been merged
into the Index.

Footnotes, originally at the bottoms of pages, have been collected,
sequentially renumbered, and moved to follow the Appendix.

The two illustrations are the publisher’s and printer’s logos.

Footnote 30, originally on page 68, was not referenced in the text.
Transcriber added a reference at the end of the text on that page.

Page 255: “Section 5 of Article XVI” was printed imperfectly, so the
“5” may be a “3”.

Page 408: Transcriber added “to” in “from time to time”.

Page 452: The Index reference to a footnote on page 258 is not

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