A BRIEF HISTORY OF LEGISLATIVE ATTEMPTS TO RESTRAIN OR SUPPRESS SPECULATION  
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 in224 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 15?d per bushel, being 2?d 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 he225 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 punishment.
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 the226 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 ￡100227 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 and228 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 the229 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 found230 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 recommending231 the radical change suggested that margin trading be prohibited.”
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 legislature.
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 the232 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 is233 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 give234 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 business.’”
235 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 of236 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 Reichstag237 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 other238 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.
239 (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 in240 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, and241 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 means242 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 recommendations243 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 important244 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 restrictions245 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 failure.
It is a simple matter for the querulous and discontented element of a community to reason along the lines of least resistance and demand the246 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 this247 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 reconsider.
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 prevent248 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 John249 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 fell250 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.
251 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 follows:
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 resisted.91
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,252 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 their253 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 stockbroker.
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.254 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 ownership.
“The punishment for this offense shall be as prescribed in Section 8 of Article XXIII of the Constitution regarding fictitious transactions.”
Trading on insufficient margins was stopped by the resolution of February 13, 1913, as follows:
255
“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 Constitution.
“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 follows:
“Fourth: A Committee on Business Conduct, to consist of five Members.
“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,256 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 problems257 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.