PUBLICITY IN EXCHANGE AFFAIRS; CAUTIONS AND PRECAUTIONS  
If a list of “don’ts” were compiled for the public that is interested in the Stock Exchange, the first prohibition would be “don’t believe all you read in the newspapers”; at least do a little independent thinking before jumping at conclusions. The relationship between the Stock Exchange and the metropolitan press is, with perhaps one exception, cordial in the extreme. The newspaper man is a thinking person; if he were not he could not hold his job. He knows, for example, that the Stock Exchange is an indispensable part of the machinery of modern business; he is aware of the fact that it maintains a high standard of probity. He would be the last man to attack the institution unfairly, and he is the first to defend it, editorially, when misconceptions and unfounded suspicions are rife.
But on the other hand, newspapers want news; their circulation and the popularity of their advertising columns depend upon the skill and132 ability with which they parade before the public everything that happens. If a politician or a clever and ambitious lawyer makes a startling charge against an institution that occupies a conspicuous place in our affairs, that is news, and the newspaper must print it. In order to make the news attractive to the jaded palate of its readers the dry-as-dust parts must be skimmed off, and seasoning added in such peppers and vinegars as the occasion permits, with a final dash of spice in the shape of pungent headlines that will arrest and hold the appetite.
Somewhere off in the dim recesses of the editorial page there may be a sober (and deadly dull) analysis of the matter, revealing the politician or the notoriety-seeker in his true colors, but this is often ignored by the reader. What he wants with his morning coffee is his daily thrill, and he finds it under blatant headlines on the first page. Because he wants it, and because he won’t be happy till he gets it, the newspaper gives it to him on a generous scale. Until we arrive at a Utopian state in which art, religion, and kindred abstractions satisfy the mind to the exclusion of fires, riots, suffragettes and Stock Exchanges, we cannot blame the newspapers for giving us what we want, nor the politicians for helping the good work along.
133 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 of134 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 “Stock135 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 many136 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 sordid137 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 of138 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,139 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.140 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 Stock141 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 this142 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 attractive143 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,144 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, 100? asked, he buys at 100? always. If he sells at the same quotation, he sells at 100. He could not sell in the former case at 100?, nor buy in the latter case at145 100, so he starts ? per cent. “to the bad.” If, then, he bought at 100?, when the price is 98?–?, his two-point margin is exhausted, although the price has actually declined only 1? 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 privileges146 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 supply147 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
148 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 became149 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,150 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 to151 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 machinery152 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 bankers153 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 may154 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 higher155 standard of business morality, and second with increased watchfulness by the committee having this matter in charge. In point of fact it is apparent that both these solutions are now being employed to a greater extent than ever before. The two failures that occurred some years ago as a result of this iniquitous practice hurt the Exchange, and stung the members to the quick. It can never happen again if the vigilance of the governors can prevent it, and yet every now and then a bank fails even under the watchful eye of the bank examiner. No committee and no group of committees can watch the books of 600 houses engaged in a business in which the dividing line between sound and unsound business may be crossed and recrossed with surprising suddenness many times a day. The members themselves must look to this, and that is what they are doing to-day, as never before, with an earnestness begotten of real pride in their great organization.
If they do not do it, if they relax in any degree the vigilance upon which the proper conduct of their business depends in this important respect, they will be forced sooner or later to resort to the plan of guaranteeing the accounts of their fellow members, or to submit to that form of government incorporation or regulation which must impair, if it does not actually destroy, their156 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 the157 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 every158 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 noisy159 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.”50160 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 accorded161 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 grave162 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,163 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 when164 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
165 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 as166 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 they167 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.
168 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 obvious169 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 shown170 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 railways171 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, in172 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 unsound173 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
174 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 refused175 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 that176 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 Street177 (to say nothing of gambling, which is not the same thing), they may be asked to abolish every commodity market throughout the land, for there is plentiful speculation in all of them.
“What seems to bother some representatives of the Pujo Committee is that the number of shares traded in on the Stock Exchange exceeds largely the number actually transferred. It is true, for example, that the number of shares of United States Steel common sold during last year were largely in excess of the number of shares outstanding, the sales amounting to 31,266,208 shares, while the entire number outstanding was only 5,084,952. The ratio of six to one suggests healthy activity in the market for steel stocks. It is conceivable that a block of stocks may pass through many hands before it arrives at its ultimate owner, just as a crop of potatoes passes through a long chain of handlers and buyers and dealers before it reaches the ultimate consumer. Meantime, the number of potatoes has neither increased nor diminished.
“But the potato crop, which easily changes hands six times in a year, is finally eaten. The stocks go on forever. The legitimate holder is not injured if they change hands not six, but sixty times, provided he is secured by proper publicity, which the Stock Exchange assures. The free178 speculative market is in itself an element of value, and if it were destroyed the investor would be chiefly injured, while future capitalization for the development of the country would be paralyzed.”58
At the outset I began by cautioning the reader not to cry out in alarm over the utterances of newspaper statesmen bent on justifying their existence, and determined to make the punishment fit the crime. Stocks will always be bought and sold, they will pass from hand to hand just as horses are traded and lands are exchanged. The modest dollar, too, will continue to pass from pocket to pocket, having a thousand owners and performing a thousand functions many of which may alarm a timid and unsuspecting lawmaker, but which to you and me may seem natural enough.
When you read that a great Congressman is determined to put the Steel corporation into bankruptcy and throw its 250,000 employees out of business, depend upon it he is only trying to justify his job for the benefit of this constituents. When somebody else seeks to mend his fences by the noisy announcement that the Stock Exchange reeks with improper manipulation, that speculation is wrongful, and that the criminal nature of an179 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 considered180 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.”