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Garden City New York 



Copyright, 1913, by 
William C. Van Antwerp 

All rights reserved, including that of 

translation into foreign languages^ 

including the Scandinavian 


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


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

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

The Author. 






I. The Functions of the Stock Exchange 


II. The Uses and Abuses of Speculation 


III. The Bear and Short Selling 


IV. The Relationship Between the Banks 

and the Stock Exchange . . 99 

V. Publicity in Exchange Affairs; Cau- 
tions and Precautions . . .131 

VI. Panics, and the Crisis of 1907 . .183 

VII. A Brief History of Legislative At- 
tempts to Restrain or Suppress 
Speculation 223 

VIII. The Day on 'Change,with Suggestions 

for Beginners 261 

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

X. The Paris Bourse; a Monopoly Un- 
der Government .... 383 

Appendix. The Report of the Hughes Com- 
mission . . . . . .415 

Index. 447 





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

The study of any form of economic develop- 
ment, like the study of sciences and philosophies, 
requires infinite patience. But the "man in the 
street" is bored to death by such methods; he 
wants to take a short cut to his conclusions; merely 
tasting the Pierian spring he hurries on to judg- 
ments that are superficial, haphazard, and often 
crude and blundering. And yet at bottom this 



man, a good citizen with an open mind, invari- 
ably wants the truth. He may be too busy to dig 
it up himself, but he knows it when he sees it, and 
once he has grasped it he has no patience with 
those who seek to turn him from it. To this 
average man, who holds in his hands the balance 
of power in America, I venture to say something 
about markets. , 

The first thing a man asks when he wishes to 
buy is "the price." Every minute of the day, all 
over the world, that question is on men's lips. 
As it is a necessary prelude to all forms of trade, 
it follows that everything that enters into the 
making of prices becomes at once of primary im- 
portance. The more scientific the price, and the 
nicer and more accurate the making of it, the 
better the bargain for both buyer and seller and 
for trade generally, bearing in mind the distinction 
between prices, which are temporary and move 
rapidly — and values, which are intrinsic and 
move slowly. The price of a thing is what you 
can get for it; the value is its real worth to you, 
and hence it cannot be defined or measured, since 
a thousand considerations may enter into it, such 
as caprice, sentiment or association. If real values 
could be determined, they would necessarily be 
identical with prices, but as they cannot be ascer- 
tained in ordinary commodities of trade, prices 


become the really essential considerations and 
values the subordinate ones. Let us see, then, 
how prices are made, for this is one of the reasons 
why exchanges exist. 

If you want to buy, let us say, a piano, you go 
to the dealer and ask the price, and as he is the 
only person in the neighborhood who deals in 
pianos, you must either accept his offer or look 
elsewhere. But to look elsewhere takes time and 
labor; dealers In pianos are widely separated; 
moreover, there Is no open competition among 
them such as you would like, and so finally when 
you have bought you feel perhaps you have not 
secured your money's worth. You would have 
secured a much better bargain, no doubt, had there 
been twenty dealers in the room competing with 
each other, and a still better bargain had their 
number been fifty, or a hundred, or two hundred, 
because that would mean competition, and the 
more competition there Is, In close contact and 
governed by rigid business rules, the more certain 
the approach to a perfect price. Everywhere in 
the world fairs and other gatherings of merchants 
are held at periodic intervals because people 
demand them In their effort to secure proper prices 
by competitive bidding and offering. One of the 
first travelers to penetrate the heart of Africa found 
among the natives this phenomenon of trade, 


showing that it is instinctive; indeed, it may be 
traced to the earliest known period in the history 
of any people. If you arise before daybreak in 
London and go to Billingsgate and Covent Gar- 
den, or in Paris to the Halles Centrales — Zola's 
"Ventre de Paris" — you will find there the mod- 
ern type of these markets in their utmost per- 

This is why Exchanges exist, not only Stock 
Exchanges, but market-places of all kinds: Buy- 
ers seek the largest market they can get in order 
to obtain the lowest prices; sellers, in order to 
obtain the highest prices; and so It was learned 
long ago that economy of time and labor, as well 
as a theoretically perfect market, could be best 
secured by an organization under one roof of as 
many dealers In a commodity as could be found. f 
Bear in mind that this result, moreover, is best 
accomplished when the organization is so con- 
trolled by rigid rules of business morality as to 
insure to every one who does business there, great 
and small, rich and poor, an absolutely square 
deal. In such a market every purchase is made 
with the most thorough acquaintance with the 
conditions involved. Each dealer, each broker, 
each speculator, strives to obtain the best knowl- 

* Principles of the Economic Philosophy of Society, Government and 
Industry, by Van Buren Denslow, LL.D., New York, 1888, p. 99. 
t Ibid., D. 107. 


edge of the supply and demand, and the earliest 
news that may affect it, and each buyer or seller 
has an equal and a fair opportunity to profit by 
the resultant effect on the market of all these 
various agencies. The larger the body of brokers 
and traders, then, the more accurate the standards 
of value thus created. It is a pity you could 
not have bought your piano under such con- 

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

* Ibid , p. loi. Consult also "Theory of Political Economy," by W. S. 
Jevons, p. 92, and " A History of Prices," by Thomas Tooke, Part II, p. 46. 


the essential functions performed in its own field 
by a great exchange. 

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


iniquitous processes to the ultimate purchaser — 
who happens to be you or me. Every thinking 
man knows that this is rank economic error.* 

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

In desperation he looked elsewhere. West, North, 
and South, only to hear the same monotonous 
answer from commission men, "we won't buy, but 
we will handle your crop on a commission of 10 per 
cent." Meantime the crop was ripening. To make 

* Consult Report of the New York State Food Investigating Commission, 
September, 191 2. 


matters worse the railroad levied a prohibitive 
price, and refrigerator cars were not to be had. 
Finally there was nothing left but to ship by ex- 
press and trust to the commission men to treat him 
honestly". The final accounting showed that on his 
first shipment he netted 5I cents a basket, and on 
his second, 15 cents, not counting the expense of 
picking, packing, and hauling. So much for the 
producer. The consumer fared no better, for he 
had to pay $1.25 per basket for this fruit; one of 
this producer's friends actually purchasing a por- 
tion of this very consignment at that rate. The 
difference therefore between 15 cents and $1.25 
contributes some food for thought as to the cost 
of living.* 

Now contrast this experience of a grower having 
no exchange facilities with that of the Western 
farmer who deals directly with a Grain Ex- 
change. The farmer can sell his crop, even though 
it has not been planted. Whenever he sells, and 
under whatever conditions, he enjoys the authori- 
tative establishment of a price, fixed as clearly as 
matters are fixed in law. Moreover, the price 
at which he elects to sell is the best price, the 
fairest price, and the most scientific price that 
human agencies can arrive at, because it is made 

* A detailed account of this incident was published in Country Life in 
America, July i, 1912, from the pen of Graham F. Blandy, the producer. 


by world-wide competitive bidding at the hands 
of skilled men in Chicago, in New York, in Liver- 
pool, in Berlin, in Odessa, and in the Argentine, 
all competing by cable and telegraph. Think of 
the confidence he enjoys, and the liberty of action; 
think, too, what it means to him to know that the 
Exchange through which he deals is a body of 
honorable men, governed by rules, bidding pub- 
licly under one roof. 

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

Long after Europe had emerged from the dark 
centuries following the fall of the Roman Empire, 
the needs of states and governments impelled 
their rulers to resort to credit, and it was dis- 
covered that the simplest way to do it was to 


issue securities, that is to say, certificates of the 
debt. Next, it was found that in order to insure 
success for these operations, a market was required. 
Intermittent or temporary sources from which 
credit could be obtained was not enough; C07istant 
sources of credit were essential, and, as these con- 
stant sources lay in the savings of the people, 
public markets in which investors could tell the 
value of their investments from day to day followed 
as a natural course.* 

As time went on — necessarily the evolution 
was gradual — it was learned that companies 
having to do with all forms of business enterprises 
might also be formed on the same basis. The 
development of the world's business outgrew its 
infancy days of private partnerships, and corpo- 
rate organization of necessity took their place, 
now' that the discovery of credit, through the use 
of securities, had pointed the way. This cor- 
porate organization, which combines the small 

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


savings of thousands into large sums and gives to 
the masses an intelligent directing force at the 
hands of highly trained experts, depends for its 
existence on the sale of its securities. 

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

As a natural result, organization followed. Cap- 
ital was consolidated, the rights of owners were 
established, a great impulse was given to various 
new forms of inventive genius and powerful com- 
mercial enterprises of all kinds sprang into being. 
With this development the market-places or 
Stock Exchanges without which capital could not 


have been enlisted kept pace. It was found that 
transactions in the securities which represented 
the people's money should be rendered easy, 
quick, and safe, and that the very essence of 
the Exchange's functions consisted in protecting 
the people who were the actual owners of the 
enterprises by rules that would insure this 

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

Now, as our country's entire physical properties 
are valued at one hundred and thirty billions, it is 

* Charles A. Conant, "The World's Wealth in Negotiable Securities," 
Atlantic Mo7ithly, January, 1908, estimated the total American securities as 
of 190S, at $34,514,3151,382. Since that time there has been added to the 
securities listed on the New York Stock Exchange alone, a total averaging 
about one billion dollars per annum. The total given above is, therefore, a 
conservative one, since I have added to Mr. Conant's 1905 estimate only 
Stock Exchange additions, and have taken no account of the millions added 
by small corporations. 


apparent (after making allowances for securities 
that are held, by holding companies and hence are 
duplicated in the foregoing estimates) that the 
nation's securities represent more than a third of 
the nation's wealth. Again, almost two million 
people are owners of these securities. The 
Journal of Commerce and Commercial Bulletin 
published Dec. 26, 191 2, official statistics for 247 of 
the large corporations. This tabulation revealed 
the fact that the stock of these 247 corporations 
alone was owned by more than a million stock- 
holders, and it is therefore quite safe to infer that 
the number of shareholders in all American com- 
panies approaches, if it does not exceed, two 
million. I think it will not be disputed that 
where two million people own a third of the 
nation's wealth, they are entitled, just as the 
farmer is, to a perfectly constructed price-making 
machinery that will enable them to invest their 
savings, or sell their holdings. Having learned 
the difficult lesson of saving their money and the 
still more difficult one of increasing their surplus 
capital by judicious investments, are not these 
people entitled to the safeguards aflforded by a 
Stock Exchange.'' "There is no other way in 
which true prices can be made," says Mr. Horace 
White. " If the quotations so made are not 
precisely the truth in every case, they are the 


nearest approach to it that mankind has yet 

Think a moment. Until the last century prop- 
erty and trade were so insecure that, if a man 
saved money, he had to hide it, or lend it through 
money-brokers at such usurious rates as would 
compensate him for what he lost in bad debts. 
When Dr. Samuel Johnson wrote his dictionary in 
1776 no such word as "investor" was known to the 
English language in a financial sense. There were 
pirates by sea in the old days and brigands on 
land. "Sovereigns and nobles," says the editor 
of the Economist, "extorted loans only to repu- 
diate them; governments supplied their needs by 
debasing the coinage, or by issuing worthless 
money. "t To-day all this is changed by banks 

* " The Stock Exchange and the Money Market," "Annals of the American 
Academy of Political and Social Science," Vol. XXXVI, No. 3, November, 
1910, p. 567. 

t If the discovery had then been made that bits of paper could be used 
as a medium of giving mobility to capital, there would have been a Stock 
Exchange at Rome eleven centuries before Christ. M. Edmond Guillard's 
study of the subject shows that the argentarii (bankers) were then doing 
business at the imperial city, and that in addition to their central offices 
they had established branch offices at the Forum, where they gathered daily 
at a specified hour, together with the merchants, manufacturers, and capital- 
ists, carrying on a business of money-changing in a public market that 
was, in its essentials, similar to our public financial markets of to-day (" Les 
Banquiers Atheniens et Romains, trapezites et argentarii," Paris, 1875 
Guillaumin). As the business was introduced into Rome by freed Greek 
slaves, it is perhaps safe to say that the practice of dealing in public money- 
markets is in reality of still earlier origin. Plautus alludes to the crowd 
of merchants and bankers in the public square, and many chroniclers 
record the fact that at the time of Appius Claudius and Publius Sevilius, 
that is to say, five centuries before Christ, there was a public market in 
Rome known as the Assembly of Merchants (Collegium mercatorum). 


and Stock Exchanges. Yet, despite these great 
inventions, capital is and always will be timid, 
and the small investor particularly must be pro- 
tected and safeguarded in every possible way. 

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

*"A hundred years ago the use of the cheque was hardly known even in 
London, and an English country gentleman would have had infinitely more 
trouble in making a small investment than would nowadays a remote 
Australian squatter, or a wheat-grower in the wildest West of Canada. A 
letter posted to London from a distant village of Saskatchewan in 19 lo 
would arrive with far more certainty, and perhaps not less speed than a 
letter posted in 1810 from a village in Sutherland or Argyllshire. A penny 
stamp with a cheque enclosed in a brief letter of instructions to the banker, 
and the thing is done. But the thrifty Scot of 1810 would have had the 
utmost difficulty, and great expense as well as risk, in converting a similar 
amount of cash savings into an interest-bearing security. In 1710 the thing 


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

would have been practically impossible. The Bank of England had only 
just been called into existence, and, in fact, there were no bankers, no 
brokers, and no Stock Exchange in the modern sense of the word. A 
man who wished to invest, without personally employing his capital, had 
practically no choice but to buy property and let it out at a rent, or lend 
his money on mortgage. Bank of England Stock or National Debt had 
just begun to be a political speculation for the moneyed Whigs in London. 
Merchant venturers might risk a large sum in a joint-stock voyage. Other- 
wise the average Englishman at the beginning of the eighteenth century 
A. D. was hardly better off for investment than the average Athenian in 
the age of Pericles, or the average Roman in the days of Cicero." — "The 
Stock Exchange," by Francis W. Hirst, editor of the Economist, Wil- 
liams and Norgate, London. 


mission dealer and the middleman who played 
such havoc with that peach crop. It is painful to 
conceive such a situation. 

Worse than that, without a Stock Exchange to 
create standards and define the difference between 
good and bad investments, very many simple 
people would be at the mercy of an army of dis- 
honest promoters and bucket-shops, for the modern 
invention of securities has brought with it dangers 
and pitfalls. The United States once swarmed 
with these bandits — they are now rapidly being 
driven to cover — but they still ply their trade in 
other countries, where they flourish as "banks" or 
"investment" companies. These chaps, to quote 
the editor of the Economist (London), "have 
bought a lot of rubbish, usually called 'bonds,' 
from shaky industrial concerns or from half bank- 
rupt states and municipalities of South America. 
They have bought, let us say, the 6 per cent, bonds 
of the Yoko Silk Company in Japan at 60, which 
they sell you at 90, the 5 per cent, bonds of the 

Brazilian Province of at 55, which they 

sell you at 75, and a few other similar bargains. 
They tell you that if you spread your risks 
scientifically over different countries you will be 
perfectly safe. You perhaps do not realize that 
none of these securities which you are advised to 
buy are quoted in the London Stock Exchange. 


If they were the game would be impossible." 
Which is only another way of saying that if there 
were no Stock Exchanges to uphold worthy enter- 
prises and discourage bad ones, there would be 
no limit to the frauds practised upon gullible 
investors. And if this is true of a tight little 
island like England, how doubly true it is in a 
great country like ours where investors are so 
widely scattered. 

The foregoing pages will serve to show the in- 
quirer that what is happening in commerce, is 
happening in the securities which represent that 
commerce. Because commerce goes on expand- 
ing, securities must necessarily keep pace and the 
Stock Exchange must perforce grow in impor- 
tance. That much maligned individual, the 
speculator, now regards the whole, world as his 
field and is eager to enter foreign markets wherever 
there are opportunities. In 1910 more than three 
billion dollars of British capital were invested in 
American railways alone, returning one hundred 
and twenty-five millions annually in interest and 
dividends, to say nothing of the English millions 
in our lands, mines, and Industrial enterprises. 
We too are large holders of foreign securities, 
and the list of such holdings increases yearly. 
But it may be accepted as a fact that this 
enormous mass of corporate securities would not 


have found ownership had there been no Stock 
Exchange to market them, and standardize them, 
and estabhsh daily prices for them, and give 
them the certificate of character that makes 
them ideal collateral for obtaining credit. 

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

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

Another great service rendered by the Stock 
Exchange is the means it affords of readily trans- 

* Article on "Speculation" in Schonberg's " Handbuch der Politischen 
Oekonomie" (Tubingen, 1896-98). 


ferring securities from hand to hand. To appre- 
ciate the importance of this fact you have but to 
think of the difficulties and delays that attend the 
transfer of other forms of property that do not 
enjoy Exchange facilities. Real estate, for ex- 
ample, is a most excellent form of investment. 
But suppose the owner of real estate wants to sell 
in a hurry, what then.^ There is no large organ- 
ized market, there is no way by which through 
competitive bidding, he can place a correct esti- 
mate of the importance of current events upon the 
price of his land. In the urgency of his needs he 
may easily be misled by "smart" or unscrupulous 
advisers, and this risk increases in direct pro- 
portion to his remoteness from large market 

The holder of securities listed on the Stock Ex- 
change is quite differently situated. He is alto- 
gether independent. He knows the price of his 
holdings every hour of the day. He is exposed to 
no fraud, and at the mercy of no rumor and no 
unscrupulous dealer. He has positive assur- 
ance that in case of necessity, at a moment's 
notice, he can obtain at the prevailing price the 
value in cash of every Stock Exchange security 
in his box. The ticker gives him instantaneous 
quotations. All the newspapers publish author- 
ized prices for his benefit, and, as we have just 


seen, these quotations are not a one-man affair, 
but the combined judgment of thousands of ex- 
perts, bulls and bears, bankers and brokers, specu- 
lators and investors, all over the world, bidding 
and offering against each other by cable and tele- 
graph and recording the epitomized result of their 
bidding in the prices current on the Stock Ex- 
change. Such a man knows, moreover, that the 
price thus established is not merely the opinion 
of all these minds as to values to-day, but that it 
represents a critical look into the future. He 
knows, indeed, that financiers everywhere have 
in mind prospective values rather than present 
values, and so he acquires a double advantage 
in regulating his own action by the light of the 
superior knowledge thus freely given him. The 
importance of this "advance information" can- 
not be overestimated, and furnishes us with an- 
other reason why Stock Exchanges exist. 

In 1906, for example, business conditions in this 
country were the best ever known. Good crops, 
big earnings, and general optimism prevailed. 
But Stock Exchange securities did not advance in 
the last half of the year, because trained financiers 
began to foresee the first signs of trouble ahead. 
In the early months of 1907 this knowledge be- 
came more general, and a severe decline took 
place, notwithstanding the fact that the business 


of the country at large continued to be excellent. 
"What is the matter with Wall Street?" was 
the question in the press and on the lips of 
the uninformed, but Wall Street, or rather 
the Stock Exchange, was merely fulfilling its 
function as a barometer and foretelling the com- 
ing storm. 

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

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


"Importance must be attached to the protection and 
safeguards which organized Stock Exchanges give the stock 
and bond holder, in regulating brokerage transactions and 
maintaining a standard of commercial honor among brokers. 

. . In this connection it should be remembered that the 
constitution of nearly every Stock Exchange defines the 
object of the Exchange as follows: 'Its object shall be to 
furnish Exchanges, rooms and other facilities for the con- 
venient transaction of business by its members, as brokers; 
to maintain high standards of commercial honor and integ- 
rity among its members, and to promote and inculcate just 
and equitable principles of trade and business.' No person 
can be elected to membership until he has signed the con- 
stitution of the Exchange, and by such signature he obligates 
himself to abide by the same, and by all subsequent amend- 
ments thereto. The value of this organization becomes 
apparent when we take account of the gigantic frauds per- 
petrated upon innocent investors through advertising cam- 
paigns by persons unaffiliated with any recognized Exchange, 
or by certain members of unorganized curb markets. . . . 
All Stock Exchanges provide for the arbitration of disputes 
which may occur between members, and if both parties 
are willing, between members and their customers. They 
also prescribe rules governing the nature of contracts, the 
making of all oiTers and bids, the registry and transfer of 
securities on the transfer books of the corporations, and the 
conditions upon which securities may be listed upon the 
Exchange for trading purposes. Practically all stock Ex- 
changes also require that all transactions must be real, 
and that no fictitious or unreal transactions shall be per- 
mitted; that discretionary orders cannot be accepted by 
brokers; and that every member of the Exchange must keep 
complete accounts, subject at all times to examination by the 
governing committee or any standing or special committee 
of the Exchange, and under penalty of suspension, no member 


may refuse or neglect to submit such accounts, or wilfully 
destroy the same. Nor may any member, under pain of 
suspension (a serious penalty, involving not merely the loss 
■of the rights and privileges of membership, but also the stigma 
•attaching to the member as a factor in the business com- 
munity), be guilty of ' any conduct or proceeding inconsistent 
with just and equitable principles of trade.' "* 

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

* "Scope and Functions of the Stock Market." — "The Annals of the 
American Academy of Political and Social Science," Vol. XXXV, No. 3. 
[May, 1910. 


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

"The stock market acts as a reservoir and distributor of 
capital, with something of the same efficiency with which 
a series of well-regulated locks and dams operates to equalize 


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

Some day, no doubt, the United States will be- 
come a great creditor nation, as England is, and 
then the field of these operations will be extended 
to other countries. When that time comes we 
shall take a hand, through the machinery of the 
Stock Exchange, in the development of new and 
immense fields of human endeavor just as London 
does to-day. To what extent could capital ex- 
ports of such tremendous economic significance 
continue if so useful and so indispensable an in- 
stitution as the Stock Exchange were abolished or 
interrupted.^ It was Burke who said that "great 
empires and little minds go ill together," and so 

* Charles A. Conant, "The Uses of Speculation," Forum (August, 1901). 


it is with great markets and little critics. There 
can be no worthier purpose in the commercial 
world than the upbuilding of a great centre of 
credit designed to finance material enterprise, 
enrich the world, and extend the benefits of civili- 
zation to new lands and new people, based upon 
the credit supplied by the banker, the money pro- 
vided by the speculator and investor, and the safe- 
guards afforded by the Stock Exchange. And yet, 
curiously, the greater the effort in these directions, 
the greater the criticism. Just in proportion to 
the perfection with which all these agencies equal- 
ize prices, economize time and effort, and protect 
the public, so they seem to attract attention, 
comment, and attack.* 

In Wall Street, according to this viewpoint, 
everything is tainted, sinister, reprehensible, 
covetous and unscrupulous, just as it follows the 
onward march of invention, science, and progress^ 

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


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

McMaster in his "History of the People of the 
United States" tells us that in the early days in 
New England public sentiment was so aroused 


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

The lawyers made many mistakes a century 
and a half ago when the code and its practice were 
imperfectly understood in this country; so it was 
with the early history of banking; and so in our 
time Wall Street and the Stock Exchange have 
made the mistakes which any gradually develop- 
ing form of enterprise must make. But these 
mistakes are dead or dying, and, in their place, 
no doubt, there will come a better understanding 
all around. When that day dawns the thoughtful 
American will realize that the particular role 
which the Stock Exchange plays in promoting 
all forms of commercial endeavor is a boon such 
as no country in the history of earlier days ever 
enjoyed. He will contemplate his country's prog- 


ress with pride; he will rejoice in its capacity 
to outstrip other countries; he will acclaim its 
advancement toward the proud position now held 
by England, the banker and the clearing-house of 
the world. And he will learn — this thoughtful 
citizen — that material achievements like these 
cannot be attained without a market for capital 
and a market for securities.* 

* The student who wishes to go more thoroughly into the subject of 
Stock Exchange usefulness is referred to "The Annals of the American 
Academy of Political and Social Science," Vol. XXXV, No. 3, May, 1910, 
Philadelphia. "Some Thoughts on Speculation," by Frank Fayant, New 
York, 1909; "The Stock Exchange," by Francis W. Hirst, London, Williams 
& Norgate, 1911; "Wall Street and the Country," by Chas. A. Conant, 
New York, G. P. Putnam's Sons, 1904; "Story of the Stock Exchange," 
by Chas. Duguid, London, New York, E. P. Button & Co., 1902; "The 
Stock Exchange, London," Methuen & Co., 1904; "The New York Stock 
Exchange," by Francis L. Fames, New York, 1894; "Der Deutsche Kapi- 
talmarkt," by Rudolph Eberstadt, Leipzig, Duncker & Humbolt, 1901; 
"The Stock Exchange," (London), by C. D. Ingall & G. Withers, Long- 
mans, Green & Co., 1904; "A Simple Purchase and Sale Through a Stock- 
broker," by Eliot Norton, Harvard Lav. Review, Vol. VIII, No. 8; "Stock 
Exchange Investments; History, Practice, and Results," London, Simpkin, 
Marshall, Hamilton, Kent & Co., 1900. 





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

And so the "divine unrest" goes on and on, 
impelling men to speculations and explorations 
of the physical world and of the world that 
lies beyond our primitive senses, with here and 
there a high achievement, and now and then 



a miserable failure, but always on and on. 
The hypothesis of the spectacled professor blos- 
soms into a boon; the dream of the inventor be- 
comes a benefaction; the forlorn hope of the ex- 
plorer points the way to wealth. Things that were 
speculations yesterday become realities to-day. 
To-morrow.^ — nobody knows. In a free field, not 
bounded by formulae nor restricted by law of God 
or man, with money to encourage it and enterprise 
to spur it on, what may come from the speculations 
of the future passes understanding. 

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


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

If there is more speculation in material things 
to-day than there ever was before, it is because 
there are more things to speculate in, more money 


to speculate with, more people to speculate, and 
more machinery, like telephones and telegraphs, 
to facilitate speculation. Capital, credit, and 
new undertakings grow day by day and open new 
avenues of possible profit. The per capita wealth 
of nations, growing by what it feeds on, constantly 
seeks new fields for enterprise and adventure. 
The intelligence of the people increases by leaps 
and bounds, and goes peering curiously into all the 
little nooks and crannies of the world for oppor- 
tunities of gain — the apotheosis of speculative 

All forms of human endeavor in material 
things are, or were at their beginning, specula- 
tions. Every ship that goes to sea carries with 
it a speculation, and leaves another one behind 
it at Lloyds. Every man who insures his life 
or his house buys a speculation, and every com- 
pany that insures him sells one. The farmer 
speculates when he fertilizes his land, again when 
he plants his seed, and again when he sells his crop 
for future delivery, as he often does, before it is 
planted or before it has matured. The merchant 
contracts to fill his shelves long before spring 
arrives; he is speculating. The manufacturer 
sells to him, speculating on the hope or belief that 
he will be able to buy the necessary raw material, 
and again on the labor, the looms and the spindles 


necessary to make the delivery. In the South 
the grower of cotton and in AustraHa the grower 
of wool are likewise speculating on the probability 
of a crop and on the price at which they may sell 
to this manufacturer. It sounds like "this is 
the house that Jack built" in its endless chain 
of sequences; a chain, indeed, and one no stronger 
than its weakest link. Interfere with any part 
of it, and the whole commercial structure which 
it binds together falls apart. The grower, the 
manufacturer, and the merchant must speculate. 

There was twofold speculation on the part of 
our great financial barons who built our trans- 
continental railways, for they had to reckon not 
only upon the probability of profit in their under- 
takings but likewise upon the willingness of other 
speculators — you and I — to assist them by buy- 
ing a part of the securities which represented the 
outlay. To be sure it so happened that many of 
these vast speculations at first proved unsound. 
Some of them were a little premature; others 
pushed too far; they brought disaster upon the 
speculators who had put money into them. And 
yet who shall say that our great railways have 
failed to enrich the world and spread the comforts 
of civilization.^ *'But for a verdant and ever- 
green faith," says a recent writer, "salted with 
the love of risk and adventure for their own 


sakes, how could mountains be bored and waters 
bridged ? If there were not superstition there could 
be no religion; if there were not bad speculation 
there could be no good investment; if there were 
no wild ventures there would be no brilliantly 
successful enterprises." 

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

The only plan that the ingenuity of man has 
thus far devised to meet this emergency is a 
Stock Exchange. One man, or two, or a hundred 
cannot make a market, because the immense 
volume and variety of these securities make it 
impossible for any unorganized handful of brokers 
and dealers to determine a fair market price. 


What is required, and what the man whose capital 
is wanted insists upon, is an organized body of 
brokers, speculators, and investors competing 
keenly, seeking to buy cheap and sell dear, gather- 
ing and disseminating all the news, and so sharpen- 
ing the judgment and stimulating the higgling 
of buyers and sellers as to bring prices to their 
legitimate level and give them stability. Ten 
thousand competitors in this business of bringing 
prices and values together are of course better 
than one thousand; a hundred thousand would 
be better still. The Stock Exchange supplies this 
want, and will continue to supply it until a better 
plan is devised.* Meantime, since it has grown 
to its present stature by forms of speculation 
necessary to the maintenance of enterprise, any 
serious interruption of the facilities it affords will 
bring enterprise to a standstill and cause the whole 
sensitive structure of credit to collapse in terror. 
Let Professor Seligman explain this matter: 

"If a raihvay or other industry, in launching a new enter- 
prise, had to depend on the chance investors at the time of 

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


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

Here w^e have an authority who tells us that 
speculation in securities, no less than in raw 
materials, is "an indispensable function" if busi- 
ness is to go ahead. The last census shows that 
32^ per cent, of the population of the United 
States is composed of laboring men, not counting 
agricultural workers. This large army of men is 

•"Principles of Economics," by Edwin R. A. Seligman, Professor of 
Political Economy in Columbia University (N. Y., 1905). 


by no means independent; on the contrary it is 
strictly dependent on the ability of others to 
give it employment. Shut down the factories, 
curtail the operations of railways, close the 
mines and quarries, stop building and new con- 
struction, and in greater or less degree suffering 
and privation among these large masses must 

Now go a step further, and we find that the 
managers of these railways, mines, and factories, 
are in turn dependent — wholly dependent upon 
capital. They cannot go ahead with the exten- 
sions and improvements necessary to efficiency 
without borrowing money; and credit, in turn, 
will not come to their support unless a broad mar- 
ket is provided, through the Stock Exchange, for 
the securities which represent these obligations. 
Hence we see that just as every farmer in the West 
and every cotton-grower in the South must have 
a stable market for his products, so every laborer 
in our great industrial field is directly concerned 
with the maintenance of a stable market for the 
securities of the company that employs him. 
The Interests of one are the interests of all, 
and speculation, in one form or another, under- 
lies all industrial progress. ''Complaint is made 
of the evils of speculation," said the greatest 
of French economists, ^^but the evils that specu- 


lation prevents are much greater than those it 

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

He may have bought Spanish bonds at low 
prices during the war between Spain and the 

* "Nouveau Dictionnaire d'Economie Politique," by Paul Leroy-Beaulieu, 
Paris, 1892. 


United States — a somewhat speculative invest- 
ment — and in his purchase he beHeved himself 
an investor in a strict sense. Yet, when those 
bonds recovered to a normal basis and he sold out 
at a profit, was it speculation, or investment, or 
a little of both, that defined the trade? British 
consols are low to-day, and there is of course no 
safer investment, but the investor who buys them 
is influenced by the fact that a long period of 
peace seems to lie ahead, with reduced expendi- 
tures for armament and hence with diminished 
borrowings by the Government leading to a 
substantial recovery in the price of these solid 
securities. Such a man is "speculating" on 
England's abstention from war, on its limitation 
of military and naval expenditures, and on the 
probable effects of these matters on the price of 
his consols.* 

The truth seems to be that all investment is 
speculation, differing from it in degree but not 
in kind. This salient fact was recognized as long 
ago as 1825, when, despite the comparatively 
limited field for investment enterprise, A-lcCulloch 
saw what was coming and grasped the true idea 
of the part speculation and its handmaiden, 
investment, were to play in the industrial renais- 

* Consult "The (London) Stock Exchange," Francis W. Hirst, London, 
Chap. VI, p. 164, Williams & Norgate, 191 1. 


sance. Coming at a time when speculation was 
new, and subjected, as all innovations are, to 
widespread criticism and doubt, his words have 
prophetic significance. 

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

A quarter of a century later we find England's 
foremost thinker sounding the same clear note. 
John Stuart Mill was by no means a hermit phil- 

* "Principles of Economics," by J. R. McCuUoch, London, 1825. 


osopher feeding on theories. Traveler, sports- 
man, business man, statesman, and author, he 
saw things broadly and wrote for practical 
men. "Speculators," he said — and he was 
speaking of the "greedy" ones who buy and sell 
for gain — "have a highly useful office in the 
economy of society. Among persons who have 
not much considered the subject there Is a notion 
that the gains of speculators are often made by 
causing an artificial scarcity; that they create a 
high price by their own purchases and then profit 
by it. This may easily be shown to be fallacious." 
He then shows, what I have outlined elsewhere, 
that the market Is larger than any speculator or 
group of speculators, and, if this was true In 1848, 
I think It will not be disputed that it Is quite true 

Continuing, Mill says: "The operations of 
speculative dealers are useful to the public when- 
ever profitable to themselves. The Interest of 
the speculators as a body coincide with the inter- 
ests of the public; and as they can only fail to 
serve the public Interest in proportion as they 
miss their own, the best way to promote the one is to 
leave them to pursue the other in perfect freedom. 
Neither law nor opinion should prevent an operation, 
beneficial to the public, from being attended with as 
much private advantage as is compatible with full 


and free competition.''^ Mill makes no distinction 
here between investors and speculators; they are 
one and the same. In any case it is conceded 
that speculation is what makes the markets 
to-day, since 90 per cent, of the transactions that 
take place daily on the world's Stock Exchanges 
are speculations pure and simple. And this is a 
good thing. Before we go on with our subject, 
let Professor Emery explain why, and bring the 
teachings of McCuIloch and Mill down to our 
own day: 

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

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


according to comparative prices. Speculation then is vitally 
connected with the theory of value. 

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

Now we come to the evils of the business. That 
there are evils, really serious ones, no one will deny. 
To be sure many of the phases of speculation that 
are called evils are not evils at all; the statements 
made concerning them have what Oscar Wilde 
termed "all the vitality of error, and all the tedi- 
ousness of an old friend," and yet, although the 
prevalent criticism is often stupid and superficial, 
there are undeniably offensive forms of specu- 
lation that one would like to see suppressed. 
Speculation is a comparatively new phenomenon, 
and it has brought with it dangers and pitfalls. 
So also have automobiles, electricity, and steam 

* "Speculation on the Stock and Produce Exchanges of the United 
States," by Henry Crosby Emery, Professor of Political Economy at 
Yale University. New York, 1896. 


engines. But while the Stock Exchange has 
created the arena for the display of these abuses, 
It has not originated them "except," as a recent 
writer puts It, "In the sense In which one may say 
that private property has originated robbery." 

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

There Is no fixed amount of margin called for 
by brokers, as circumstances differ widely with 
the character of the securities dealt In, the stand- 
ing of the buyer, and the condition of the market; 
but In a broad way it may be said that members 
of the New York Stock Exchange exact a margin 


equivalent to ten points on middle-grade specu- 
lative issues, twenty points on high-priced and 
erratic securities, and five points -oil very low- 
priced shares that move slowly. There are, of 
course, certain securities on which no payment 
short of actual outright purchase in full would be 
accepted by reputable brokers, while on the other 
hand, in the case of securities that fluctuate but 
slightly, such as our government, state, or munici- 
pal bonds, a 5 per cent, margin would be ample. 
This is also the practice in London and Paris, 
generally speaking. In Paris the Agents de 
Change always insist upon a greater margin than 
the Coulissiers, or outside brokers, and here mem- 
bers of the New York Stock Exchange invariably 
pursue the same policy. 

This affords an opportunity to say that the local 
evil of stock speculation arising from insufficient 
margins is one that may be laid at the door of out- 
side Exchanges rather than the" Big" Exchange, as 
it is called, because, in the minor Exchanges, mar- 
gins are notoriously small, and the smaller the mar- 
gin the greater the number of "victims." Indeed, 
if it were not for this practice it would be difficult 
for members of smaller Exchanges to exist at all. 
In so far as speculation in securities may merit 
criticism, this tendency to attract poor people 
by the bait of slim margins is undeniably a very 


real evil, and one which can only be corrected b}^ 
the brokers themselves. The Hughes Committee, 
after devoting much time and labor to this matter, 
put its conclusions in these words: 

"We urge upon all brokers to discourage specu- 
lation upon small margins, and upon the Exchange 
to use its influence, and if necessary its power, 
to prevent members from soliciting and generally 
accepting business on a less margin than 20 per 

Every one connected with the New York 
Stock Exchange knows that this suggestion, like 
all the others made by the Commission, was 
received with approval by all hands, and, if a hard 

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

" Would taxation of loans made on margin transactiojis tend to discourage 
margin speculation? If so, would it he desirable to graduate the tax in accord- 
ance with the margin ratio?" 

To which the Governors replied: 

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


and fast rule could have been devised to meet 
not merely the spirit but the letter of the recom- 
mendation, the Governors of the Exchange would 
have put it into instant operation. But there are 
difficulties in the way, and one of the duties of 
the Governors is to consider very carefully all 
sides of each perplexing question that comes 
before them, not merely in the interests of the 
Stock Exchange, but with due regard to the 
common law and the interests of the public. 
Margin trading Is a matter of contract, and *'the 
right of one private person to extend credit to 
another," as the Chairman of the Hughes Com- 
mission himself points out, "is simply the right to 
make a contract, which, under the Federal Con- 
stitution, cannot be impaired by any State 

Here Is a very considerable difficulty in the way 
of restricting margin trading, and one that is not 
fully understood by the outsider. He Is prone 
to speak of contracts thus made as "gambling 
transactions," missing altogether the essential 
point that there Is a vast difference between a 
transaction with a contract behind It, enforceable 
at law, and one that has to do with bucket-shops 
and roulette, in which there Is no contract, and Is 

* "The Hughes Investigation," by Horace White, Journal of Political 
Economy, October, 1909, p. 537. 


expressly prohibited by law. No matter what his 
intent may have been when he bought, and no 
matter what margin the broker accepted — the 
buyer has the right to demand his securities at 
any time, and the broker must always be prepared 
to deliver them; conversely, the broker may 
compel the buyer to pay for and to receive the 
securities he has bought. Motives and methods 
have nothing whatever to do with the transaction. 
The broker who buys for a client to-day does 
not know, and sometimes the client himself does 
not know, whether the securities are "bought to 
keep," or are to be sold to-morrow; similarly the 
broker has no means of knowing whether the 
client, who deposited a ten-point margin at the 
time of his purchase, will or will not deposit 
another ten points to-morrow, and continue such 
payments until his securities are wholly paid for. 
In the large majority of cases the intent of the 
speculative buyer is to sell as soon as he can get 
a satisfactory profit, but that does not make him 
a gambler by any means. Why,^ Because, if 
he bets $1000 on a horse race, one party to the 
transaction wins and the other loses; whereas, if 
he deposits $1000 as margin against a stock 
speculation and makes a profit of say ^500, the 
broker loses nothing by paying him that profit 
when the account is closed. No property changes 


hands in the one case, while, in the other, actual 
property is purchased and held ready for delivery 
on demand. The law is clear in classifying the 
operations of bucket-shops with gambling trans- 
actions, because in a large majority of instances 
no actual purchase is made; the "buyer" merely 
bets in that case as to what subsequent quotations 
will be; the "trade" is between two principals, 
one of whom must lose if the other wins. 

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

That members of the New York Stock Ex- 
change endorse this view goes without saying. 


They realize more fully than is generally known 
by the public that indiscriminate and reckless 
speculation by uninformed people who are be- 
guiled into it by the lure of small margins is 
an undoubted evil that should be checked, 
and they are doing what they can to check 
it by discouraging such operations. For ex- 
ample, it would be very difficult to-day for a 
woman to open a speculative account with 
any reputable firm of brokers on the major 
exchange unless she were well known, peculiarly 
qualified for such transactions, and abundantly 
able to support them. Accounts will not be 
accepted from clerks or employees of other 
brokerage houses or of banks and other corpora- 
tions in the Wall Street district; indeed, such 
transactions are expressly forbidden by the rules 
of the Exchange. No accounts will be accepted 
from any one who is not personally known to one 
of the firm's partners — and the practice resorted 
to in earlier years of employing agents to solicit 
business under the nominal title of "office man- 
agers," "bond department managers," and all 
that sort of technical subterfuge, is likewise for- 

Members of the Exchange are not permitted 
to advertise in any way save that defined as of 
"a strictly legitimate business character," and 


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

At the moment it is difficult to see how an 
inflexible rule of 20 per cent, margins could be 
put in practice without seriously interfering with 
really sound business. . A telegraphic order may 
be received from a customer of the utmost respon- 
sibility who may happen to be in Europe. Any 
stockbroker, and any business man in mercantile 


trade, would be glad to execute for such a person 
all the orders he chose to entrust, regardless of 
margins. In such a case no question of motive 
enters into the transaction; it may ultimately 
prove to be a speculation pure and simple, or the 
buyer may cable instructions to deliver the 
securities to his bank, in which case it would 
seem to be an investment; but, regardless of 
that, an insistence by the broker on a 20 per 
cent, margin would be silly, and would merely 
drive the business elsewhere or prevent it alto- 

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


agreement or contract with the broker is a 
perfectly vaHd transaction.* 

That newspaper criticism and attacks by social 
mentors should go to extreme lengths in depre- 
cating stock speculation by crude, greedy, and 
unsophisticated people is perhaps, after all, a 
perfectly useful function, and if such critics err 
in going to great extremes, that too may be set 
down as right and proper, for it is perhaps better 
to go too far than not to go far enough. The 
interests of the Stock Exchange are the interests 
of the whole country; its welfare depends upon an 
intelligent and thrifty people; its aims are public- 
spirited and patriotic. Whatever it may lose in 

* The governors of the Stock Exchange, when asked by the Hughes 
Commission, "Would a change in the practice of dealing on margins be 
desirable?" replied as follows: 

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


the way of business from ignorant and silly 
people who are driven out of blind speculative 
undertakings leading to losses which they can 
ill afford, it will gain tenfold in imparting sound 
information through candor and publicity. On 
the other hand, unless we are prepared to abolish 
property altogether, do away with the instru- 
ments of credit, and suppress all forms of trading 
designed to supply our future requirements, we 
may as well reconcile ourselves to the inevitable 
and take what comfort we may in the reflection 
that prudence, thrift, and foresight are not to be 
eliminated, merely because the proletariat below 
stairs sometimes indulges in speculation and suffers 
the consequences of its folly. 

"Finally," writes Professor Emery, "the ques- 
tion must be faced of the effect of eliminating 
the public from the speculative market even if 
it could be accomplished. It is supposed some- 
times 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 mar- 
ket' is not the kind of market which best fulfils 


the services of speculation. A broad market with the 
participation of an intelligent a?id responsible public 
is necessary. A narrow professional market is less 
serviceable to legitimate investment and trade and 
much more susceptible of manipulation.''^* 

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

Yankee speculation in securities is not a marker 
to speculation in London, where the day to day 

* " Ten Years' Regulation of the Stock Exchange in Germany." Yale 
Review, May 1908, q. v., post. 


trading vastly exceeds ours, and where the 
*' Kaffir Circus" of 1894-5 and the "Rubber 
Boom" of 1909-10 exceeded any similar outburst 
ever known in America. France is the most 
prudent and thrifty of nations, yet the Panama 
mania which collapsed in 1894, although followed 
by a period of the utmost repentance and con- 
servatism, found a parallel in the crazy French 
speculation in Russian industrials which crashed 
in 191 2. There was an extraordinary speculation 
in Egyptian land and financial companies in 
Cairo in 1905-6, which, in proportion to the 
number of participants, greatly exceeded any 
boom in New York. China awakens slowly, 
but, once Its political reforms are effected, a field 
of extraordinary speculation will open there 
without a parallel In history. The Chinaman is 
not only a shrewd and competent business man, 
but he is, Mr. Hirst tell^ us, "a confirmed and 
incurable" speculator. "From time to time," 
says this writer, "the Shanghai Stock Exchange 
becomes a scene of the wildest speculation, and 
it Is safe to predict that, when a new China is 
evolved, Stock Exchanges will spring up in all 
the large towns. Of this, a foretaste was aflForded 
in the spring and summer of 1910, when Shanghai 
caught the rubber infection from London. All 
classes and races took part, but the native China- 


man plunged deepest. When the break in prices 
came, one Chinese operator was so heavily involved 
that, on his failure, many of the native banks had 
to suspend payment, with the result that for 
months the trade and credit of this great shipping 
and business centre were disorganized.* 

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

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

*"The Stock Exchange," by Francis W. Hirst, London, 191 1, p. loi" 


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

"This is what Wall Street outside of the Exchange does; 
and the only advantage which speculators in Wall Street 
have over those in other parts of the country is derived 
from larger capital, more direct and ample sources of informa- 
tion, and greater skill and promptness in the use of it. 
Wall Street speculators are likewise divided into l^uUs and 
bears pushing against each other; and all their advantages 
do not save them from making mistakes, which often result 
in losses proportioned to the magnitude of their operations. 
The 'rich men's panic' of 1903 was such an instance. The 
panic of 1 907 was another. It is sometimes said that Wall 
Street can put prices on the Stock Exchange up or down 
at its own pleasure. This is a delusion."* 

Members and friends of the New York Stock 
Exchange view with apprehension the periodic 

* "The Hughes Investigation," by Horace White, Journal of Political 
Economy, October, 1909, pp. 532-3. 


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

One has but to read the decisions of the courts 
to see that the matter of non-interference with the 
great Exchanges, on technical grounds, has become 
a fixture in our jurisprudence. "The Exchanges, " 
said Judge Grosscup of the United States Circuit 
Court, "balance like the governor of an engine 
the otherwise erratic course of prices. They 
focus intelligence from all lands, and the prospects 
for the whole year, by bringing together minds 
trained to weigh such intelligence and to fore- 


cast the prospects. They tend to steady the 
markets more nearly to their right level than if 
left to chance or unhindered manipulation."* In 
somewhat similar vein Justice Holmes of the 
United States Supreme Court, said: "Specula- 
tion ... is the self-adjustment of society 
to the probable. Its value is well known as a 
means of avoiding or mitigating catastrophes, 
equalizing prices, and providing for periods of 
want. It is true that the success of the strong 
induces imitation hy the weak, and that incompetent 
persons bring themselves to ruin hy undertaking to 
speculate in their turn. But legislatures and courts 
generally have recognized that the natural evolutions 
of a complex society are to he touched only with a 
very cautious hand, and that such coarse attempts 
at a remedy for the waste incident to every social 
function as a simple prohibition and laws to stop its 
heing, are harmful and vain, "f 

With these opinions before them, so long as the 
governors of the Stock Exchange continue their 
policy of a wise and dignified administration in 
the interest of the public they serve, there is 
nothing to fear. Corrections, remedies, improve- 
ments, and reforms will be found to be necessary 
from time to time — some of them are necessary 

* "Board of Trade Case," 88 Fed. 868, 

t "Chicago Board of Trade Case," May 8, 1905. 


at this moment, and the governors are hard at 
work on the task. To accuse them of indifference 
or neglect of duty is to deny them that form of 
intelligence which enables a man to protect his 
property. Their splendid institution has grown 
to Its present Importance and power through 
economic development that could not have been 
foreseen nor prevented. Speculation on a large 
scale has accompanied its growth, and contributed 
to it; and speculation, as we have seen, is a highly 
desirable and useful part of all business. This 
speculation numbers among its adherents people 
In all parts of the world who have a perfect right 
to speculate, and who do vastly more good than 
harm In their operations. 

It has also attracted a great many people who 
have no business to speculate, and who would be 
prevented from doing so If It were possible. The 
ignorance and cupidity of these people Is so great, 
and the pitfalls provided them by unscrupulous, 
methods outside the Exchange are so many and 
various that something has to be done to protect 
them. The Stock Exchange does not encourage 
them, but it recognizes that they have legal if not 
moral rights, and it stands ready to help them. It 
gives to such people the same information that It 
gives to the richest investor In the land. The secu- 
rities in which It deals are known to be free from 


taint; all forms of crookedness are prohibited; every 
transaction within its walls is made openly, as a 
result of free competitive bidding, and published 
broadcast to the world. What more, and what 
less, can be done? Has there ever been a time 
in the world's history when property and trade 
were so secure, and when speculation, which 
makes property and trade, was so jealously safe- 
guarded ? 

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





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

Why there should be so many bulls and so few 
bears can only be explained on the ground that 
optimism is the basis of speculation, and hope the 



essence of it. Yet the market can only go two 
ways: It is quite as likely to go down as up. 
Since sentiment should have no place in specula- 
tion one v/ould think there should be as many bears 
as bulls, more of them, in fact, because the market 
almost always goes down faster than it goes up, 
and because nine out of ten of the unforeseen 
things that occur result in lower prices. 

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

Despite the fact that the odds seem to favor 


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

One would think the ideal temperament for a 
speculator would be absolute Impartiality, with an 
open mind uninfluenced by sentiment, ever ready 
to take advantage of all fluctuations as they 
occur. The ups and downs of a stock market 


always show, on average long periods, a practi- 
cally equivalent swing each way, so it would seem 
that the speculator most likely to profit by these 
fluctuations would be one without preconceived 
prejudices, ready at all times to turn bull or bear 
as the occasion required. As a matter of fact, 
this type is the rarest of all, being confined, gener- 
ally speaking, to the professional "traders" on 
the large exchanges, necessarily a very small 
minority of the speculative group, yet withal 
perhaps the most uniformly successful. These 
men, it must be understood, are not speculators, 
but traders, a nice distinction involving "catching 
a turn," as opposed to the speculative habit of 
"taking a position." 

In active times I have known one of them 
to operate simultaneously in the New York 
Stock market, in the cotton market, and in the 
wheat market, trading at the same time in 
London and Paris, "shifting his position," or 
"switching" from the bull to the bear side twice 
in a single day, and closing all his trades at three 
o'clock with a total net profit of less than a thou- 
sand dollars on a turnover of 30,000 shares, to 
say nothing of the transactions in cotton and 
grain. It goes without saying that to do all these 
things in one day requires a curiously mercurial 
temperament, and calls for nerve and celerity 


altogether foreign to the average speculator. 
Such a man, moreover, contributes but little to 
the making of prices and values, which is the func- 
tion of large markets; his chief economic usefulness 
lies rather in the enormous revenues he pays to the 
State. The man whose operations I have just 
described contributed in a single year ^75,000 
to the State Government in stock-transfer taxes. 

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

This, as I have said, is the scientific way to look 
at it, and the correct way, but the popular way is 
something quite different. From this point of 
view the man who sells property he does not im- 
mediately possess is thought to be a menace, who 
depresses prices artificially and works a disad- 
vantage to the investor or, in the produce markets, 
to the producer. Nothing could be more fal- 
lacious than this, because of the fact that just as 


every routine sale of actual stock requires a buyer, 
so every short sale by a bear requires a purchase 
by him of equal magnitude. And it is precisely 
these repurchasing or "covering" operations of 
the bears that do the utmost good in the way of 
checking declines in times of panic or distress. 

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


lacked the steadying influence which covering by 
the bears invariably brings about. The bears are 
then, in truth the market's best friends, and the 
more there are of them, the better for all con- 
cerned when trouble comes. 

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


lost they could refuse to settle on the ground 
customarily resorted to by welchers. 

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

"Short sellers do not determine prices," says 
Professor Huebner. "By selling they simply 
express judgment as to what prices will be In the 
future. If their judgment Is wrong they will 
suffer the penalty of being obliged to go Into the 
market and buy the securities at higher prices. 
Nine tenths of the people are by nature 'bulls,' 
and the higher prices go, the more optimistic and 
elated they become. If it were not for a group of 


'short sellers,' who resist an excessive inflation, it 
would be much easier than now to raise prices^^ 
through the roof; and then, when the inflation 
became apparent to all, the descent would be 
abrupt and likely unchecked until the basement 
was reached. The operations of the 'bear,' 
however, make excessive inflation extremely ex- 
pensive, and similarly tend to prevent a violent 
smash because the 'bear,' to realize his profits, 
must become a buyer. The writer has been told 
by several members of the New York Stock Ex- 
change that they have seen days of panic when 
practically the only buyers, who were taking the 
vast volume of securities dumped on the exchange, 
were those who had sold 'short,' and who now 
turned buyers as the only way of closing their 
transactions. They were curious to know what 
would have happened in those panic days, when 
everybody wished to sell and few cared to invest, 
if the buying power had depended solely upon the 
real investment demand of the outside public. 

"In reply also to the prevalent opinion that 
'short selling' unduly depresses security values, 
it should be stated that 'short sellers' are fre- 
quently the most powerful support which the 
market possesses. It is an ordinary affair to read 
in the press that the market is sustained or 'put 
up' at the expense of the 'shorts' who, having con- 


tracted to deliver at a certain price can frequently 
easily be driven to 'cover.' Short selling is thus 
a beneficial factor in steadying prices and obvi- 
ating extreme fluctuations. Largely through its 
action, the discounting of serious depressions does 
not take the form of a sudden shock or convul- 
sion, but instead is spread out over a period of 
time, giving the actual holder of securities ample 
time to observe the situation and limit his loss 
before ruin results. In fact, there could be no 
organized market for securities worthy of the 
name, if there did not exist two sides, the 'bull' 
and the 'bear.' The constant contest between 
their judgments is sure to give a much saner and 
truer level of prices than could otherwise exist. 
'No other means,' reports the Hughes Committee, 
'of restraining unwarranted marking up and down 
of prices has been suggested to us.'"* 

So much for the functions of the bear in markets 
that deal in invested capital. In the commodity 
markets he becomes of even greater value, in- 
deed, he is well-nigh indispensable. Mr. Horace 
White, who was the Chairman of the Hughes 
Investigating Committee, cites this instance: 
"A manufacturer of cotton goods, in order to 
keep his mill running all the year round, must 

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


make contracts ahead for his material, before the 
crop of any particular year is picked. The cotton 
must be of a particular grade. He wishes to be 
insured against fluctuations in both price and 
quality; for such insurance he can afford to pay. 
In fact he cannot afford to be without it. There 
are also men in the cotton trade, of large capital 
and experience, who keep themselves informed of 
all the facts touching the crops and the demand 
and supply of cotton in the world, and who find 
their profit in making contracts for its future 
delivery. They do not possess the article when 
they sell it. To them the contract is a matter of 
speculation and short selling, but it is a perfectly 
legitimate transaction. 

"To the manufacturer It is virtually a policy of 
insurance. It enables him to keep his mills 
running and his hands employed, regardless of 
bad weather or insect pests or other uncertainties. 
The same principles apply to the miller who 
wants wheat, to the distiller, the cattle-feeder, 
and the starch-maker who wants corn, to the 
brewer who wants hops and barley, to the 
brass founder who wants copper, and so on indefi- 
nitely. Insurance is one of two redeeming feat- 
ures of such speculation; and the other, which is 
even more important, is the steadying effect which 
it has on market prices. If no speculative buying 


of produce ever took place, It would be impos- 
sible for a grower of wheat or cotton to realize a 
fair price at once on his crop. He would have to 
deal it out little by little to merchants who, in 
turn, would pass it on, in the same piecemeal way, 
to consumers. It is speculative buying which not 
only enables farmers to realize on their entire 
crops as soon as they are harvested, but enables 
them to do so with no disastrous sacrifice of price. 
When buyers who have future sales in view com- 
pete actively with each other, farmers get fair 
prices for their produce."* 

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

Speaking of farmers, it Is well known that much 
of the opposition to short selling and dealing In 
futures in the large markets finds Its chief advo- 
cates among the Western and Southern politicians 
whose constltutents are the agricultural classes. 
These gentlemen fulminate strongly against the 

* Journal of Political Economy, October, 1909, pp. 531-2. 


New York Stock Exchange and the grain and 
cotton exchanges, and in currying favor with their 
bucolic supporters they do not hesitate to con- 
demn margin trading, short seUing and every other 
phase of speculative markets. Yet it does not 
occur to them, or, if it does, they dare not refer to 
it, that In forming pools and combinations to hold 
back their wheat and cotton their constituents are 
doing the very thing which they so strongly con- 
demn in speculative centres. The farmer is, of 
course, richer than he ever was before, but never- 
theless he grows his wheat to sell, and only a few 
can carry it for any length of time without borrow- 
ing from the banks. The farmer who goes into one 
of these pools with wheat valued at ^10,000 and 
who borrows ^8000 on it from his local bank, is 
nothing more nor less than a speculator in wheat on 
a 20 per cent, margin, and the same horrid appella- 
tion describes the cotton-planter who resorts to 
similar practices.* 

Now, of course, there is no moral reason why a 
farmer should not speculate if he chooses, but 
what touches us on the raw is his Phariseeism in 
doing for himself what he professes to abhor and 
condemn in others. One is tempted to say un- 
kind things to the farmer at such times, to remind 
him, for example, that he is to-day the most back- 

* Consult the Wall Street Journal, February i8, 1909. 


ward and unprogressive factor in American busi- 
ness life. Despite the fact that the Department 
of Agriculture has spent $100,000,000 on his edu- 
cation in the last twenty years, he has not yet 
begun to learn what the German, Dutch, and 
French farmers learned years ago in intensive 
farming, nor has he mastered the art of cattle- 
raising in anything like the degree it is understood 
in the Argentine. Nature has smiled on him; he 
waxes fat with her bounty, but he does not keep 
pace with the growth of the country. Although 
enhancing prices are paid him for his product, 
he is unable to raise a crop proportionate in any 
degree to the facilities put at his disposal in the way 
of fertilizers and machinery. One would like to 
"rub it in" on the farmer, but one doesn't, "be- 
cause" as a recent writer puts it, "the farmer is a 
farnier, and therefore not a person to be lectured 
like a mere banker or broker in Wall Street." 

To the farmer, the politician, and the layman 
generally, short sales of cotton or grain are under- 
stood, approved, in fact, if the grower happens 
to be the one who profits by them. But substi- 
tute stocks and shares for wheat and cotton, and 
talk of "operations for a fall," and the layman 
thinks he smells a rat. He sees the bale of cotton 
or the carload of wheat actually moving; it is a 
concrete thing; it appeals to his senses, it is com- 


prehensible. But talk to him of bits of paper 
called stock certificates, and by a curious process 
he concludes that a short sale has no basis of 
reality and is therefore menacing and improper. 
He persuades himself that short selling ought to 
be prohibited by law, and, since Wall Street har- 
bors the chief offenders, he finds In the nearest 
politician a handy ally to assist him. These gentle- 
men, who obstinately refuse every other medica- 
ment, could be cured of their ailment by a strong 
diet of economics. They become subjects of 
medical, rather than financial, interest. They 
should dip themselves into Conant and Leroy- 
Beaulieu; they should cool off in the pages of 
Bagehot and Emery; and, by the time they have 
got into the soothing columns of the Hughes 
Commission's report, they will be ready for new 
points of view. 

As a preparatory lesson: suppose a speculator 
buys from a commission merchant a carload of 
coal of a specified grade. The coal is not in the 
possession of the commission merchant, but he 
knows where he can get it, and he knows that he 
can deliver it on the date agreed upon. Accord- 
ingly he sells it short, and enters into a binding 
contract which, happily, the courts construe to be 
perfectly legal. Now suppose the same purchaser 
wishes to buy 100 shares of Pennsylvania Railroad 


stock. All Pennsylvania stock is the same, that 
is to say any loo shares of it is just as good as 
any other lOO shares of the same property — 
the number on the certificate is of no importance 

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

* "The borrower is also bound to pay the lender whatever interest by 
way of coupons or dividends or otherwise and all bonuses and accretions 
that would have been paid to the lender on the securities he has lent had 
he kept them. These are in practice treated as increases to the market 
price of the borrowed securities. The reason for this provision is that the 
lender is the actual owner of the securities and as such owner he is entitled 
to whatever they may earn by way of interest or in any other way. He has 
simply temporarily let another have the use of them, and, since the securities 
can be and are disposed of by the borrower, the lender would lose the interest. 


stock may have declined, whereupon the bear goes 
into the market and buys the loo shares of Penn- 
sylvania at a price, say, i per cent, lower than that 
at which he sold it. 

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

Many years ago there was a law on the French 
Statute books, subsequently repealed, prohibiting 
short sales. M. Boscary de Villeplalne, a deputy 
chairman of the association of stockbrokers, was 
conversing with Napoleon regarding a pending 
discussion in the Council of State looking to the 
repeal of the law. "Your Majesty," said de 

etc., which is paid on the borrowed securities between the date that they 
are borrowed and the date when they are returned and the loan cancelled, 
unless the borrower paid an equivalent amount to him. On the other 
hand, any assessment the lender would have had to pay on the borrowed 
securities during the continuance of the loan is a charge against him; for 
such an assessment is a burden adherent to ownership. In practice it is 
treated as a reduction of the market price." — Eliot Norton "On Short 
Sales of Securities through a Stockbroker." The John McBride Co., 
New York, 1907. 


Villeplaine, "when my water carrier is at the door, 
would he be guilty of selling property he did net 
own if he sold me two casks of water instead of only 
one, which he has?" "Certainly not," replied 
Napoleon, "because he is always sure of finding 
in the river what he lacks." "Well, your Majesty, 
there is on the Bourse a river of Rentes."* 

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

* (Memorial of the stockbrokers addressed to the Minister of Finance, 
1843, p. 44, footnote. Quoted by Vidal, q. v., p. 46.) 


short" of the labor and materials which, at some 
time in the future, they hope to obtain to fulfil 
the terms of their agreements. Are all these 
worthy people "immoral"? 

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

All suggestions of impropriety in short selling 

* Some of those who admit the value of the stock market have subjected 
to severe criticism those who speculate for the fall of stocks. One reads 
constantly of the "bears" trying to accomplish such and such results by 
depressing securities. Napoleon had a long talk with MoUien, his Minister 
of Finance, in seeking to demonstrate that those who sold "short," in the 
belief that national securities would fall, were traitors to their country. 
He argued that if these men were selling national securities for future 
delivery at less than their present value they were guilty of treason to the 
State. But Mollien replied in substance: "These men are not the ones 
who determine the price; they are only expressing their judgment upon 
what it will be. If they are wrong, if the credit of our State is to be main- 
tained in the future at its former high standard, in spite of your military 
preparations, these men will suffer the penalty by having to make delivery 
at the price for which they sold, for they must go into the market and buy 
at the price then prevailing. It is their judgment, not their wish, that they 
express." — "Wall Street and the Country," by Charles A. Conant, pp. 
111-I12, G. P. Putnam's Sons, New York, 1904. 


are grotesque in their absurdity. But suppose, 
for purposes of argument, that economic errors of 
some sort were actually involved in this practice. 
How could it be regulated or controlled^ As the 
governors of the Stock Exchange stated to the 
Hughes Commission in 1909, short selling is of 
different descriptions. There is the short sale 
where the security is held in another country and 
sold to arrive pending transportation. There 
is the short sale where an individual sells against 
securities which he expects to have later, but 
which are not in deliverable form; and in this con- 
nection I call your attention to the recent sale of 
$50,000,000 of Corporate Stock of the City of 
New York where deliveries were not made for a 
period of about three months, and which stock 
was dealt in enormously, long before it was issued. 
"If a market had not been provided for it under 
those conditions," said the governors, "the loan 
could not have been placed. Then, again, there 
is the short selling of stock against which different 
and new securities are to be issued; the vendor 
knowing that he is to receive certain securities at 
a distant date, but desiring to realize upon them 
at this time. Beyond this, there is the regular sell- 
ing of short stock, either by parties who do so to 
hedge a dangerous position upon the long side of 
the market, or the sale purely and simply with the 


Intention of rebuying at a profit, should circum- 
stances favor it." 

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

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

The bear who drags a red-herring across the trail 
now and then interrupts the chase, but he cannot 
stop it; the genial optimist who has a doubtful 


concern on his hands, with a pack of enthusiastic 
buyers in full cry at his heels, is a much more 
serious matter. Good times and bull markets 
engender many questionable practices of this sort. 
*' All people are most credulous when they are most 
happy," says Walter Bagehot; "and when much 
money has just been made, when some people are 
really making it, when most people think they 
are making it, there is a happy opportunity for 
ingenious mendacity. Almost everything will be 
believed for a little while, and long before discovery 
the worst and most adroit deceivers are geographi- 
cally or legally beyond the reach of punishment. 
But the harm they have done diffuses harm, for 
it weakens credit still further.* 

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

* "Lombard Street," p. 158. 


sible by "bearish" operations designed to "hedge" 
or insure the new undertaking against loss. 

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

An instance such as this serves to show the 
difference between gambling and speculating, 
terms that are often misapplied by critics of stock 
markets. A gambler seeks and makes risks which 

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


it is not necessary to assume, and which, In their 
assumption, contribute nothing to the general 
uplift. But the speculator — in the Instance just 
cited, a bear who sells short — volunteers to as- 
sume those risks of business which must Inevit- 
ably fall somewhere, and without which the mine, 
or the factory, or the railroad could not be under- 
taken. His profession, and the daily risks he 
assumes, call for special knowledge and superior 
foresight, so that the probability of loss Is less 
than It would be to others. If he did not do it — 
if there were no bear speculators — the same risks 
would have to be borne by others less fitted to 
assume them or the useful projects in question 
would not be undertaken at all. 

So general is the employment of these hedging 
or insurance operations that In the case of cotton 
— to cite but one Instance — the business Is 
regarded by practically all cotton merchants as an 
absolute necessity under modern methods of con- 
ducting business. "An Idea of the value of the 
hedging function may be obtained," says Herbert 
Knox Smith, Commissioner of Corporations, 
^'when It is stated that in Great Britain banks 
very generally refuse to loan money on cotton 
that Is not hedged. Moreover, it Is almost uni- 
versally conceded that, since the introduction of 
hedging, failures In the cotton trade, which had 


previously been frequent, have been materially- 
reduced as a direct result of the greater stability 
with which transactions in spot cotton can be 

In conclusion it may be noted that as early as 
1732 an attempt was made In England to prevent 
short sales by law, that the law was recognized a 
mistake and subsequently repealed. To-day there 
is no law on the English Statute books restricting 
speculation In any form. In America the New 
York State Legislature enacted a law in 18 12 and 
the Federal Government In 1864, both designed 
to prevent short selling. These laws have also 
been repealed and they will not be revived. The 
bear has come to stay. As a spectre to frighten 
amateurs, he may continue for a time to stalk 
abroad o' nights; as a necessary and useful part 
of all business he is a substantial reality. And 
he Is not " Immoral. "f 

* Report of the Commissioner, Washington, 1908. 

t Despite the effort to avoid technical terms in these pages, the value of 
the bear should be considered from still another angle. Smith, a bear, sells 
short to Jones, a bull. The economic usefulness of Jones then becomes 
problematical, since he may sell out at any moment. His permanence as a 
holder or owner is merely optional, and his5usefulness in the economic scheme 
of things is impaired. As a market factor he may be ignored. But there 
is nothing optional about Smith's position, for he is now a compulsory buyer; 
his economic status is fixed; he has become a very real potential force. 





"A MILLION in the hands of a single banker is a 
great power," said Walter Bagehot; "he can at 
once lend it where he will, and borrowers can 
come to him because they know or believe that he 
has it. But the same sum scattered in tens and 
fifties through a whole nation is no power at all; 
no one knows where to find it or whom to ask for 
it." This explains the power of Wall Street. 
Money flows there for the same reason that water 
flows downhill. The great agricultural districts 
of the West, for example, will gather from their 
crops this year several hundred millions of dollars. 
They have no real economic use for all this money 
in the farming districts; the large commercial and 
industrial undertakings that help to make America 
rich and powerful are not in that neighborhood. 
Particular trades settle in particular districts, 
and the money they require must be sent to them 
from other districts. ''Commerce is curiously con- 
servative in its homes;" the steel trade concen- 


trates in and around Pittsburg, the grain trade at 
Chicago, wholesale merchants in special lines are 
always to be found huddled together in our big 
cities in neighborly intimacy; and once a trade 
has settled in one spot it remains there. The 
millions that go West to pay the farmer must 
therefore go elsewhere to pay others as fast as 
a demand for money arises, because the price 
that will be paid for it elsewhere is greater than 
the price it will bring in the farmer's pockets. 
This is doubly true because, as we have said, there 
are no imperious demands for money for com- 
mercial undertakings in the farmer's neighbor- 
hood, and, even if there were, home enterprises 
are seldom attractive; curiously enough there is 
a familiarity about them and their local promoters 
that breeds contempt. Besides, these millions 
are scattered in small sums all over the agricul- 
tural States; there is no cohesion, no concentration. 
What then becomes of these vast sums."^ They 
are deposited in the local banks, and the local 
bankers, who are wisely permitted by law to 
deposit three fifths of their legal reserves in a 
city bank, promptly transfer the funds that are 
not required at home to the bank that will pay 
interest on them. In this way large capital 
accumulates, and when we say this is a wise 
provision of the law we mean that scattered 


reserves In local country banks are of no more 
avail in emergencies than the five-dollar bills 
in the people's pockets; but, gathered into one 
great central fund that will aggregate a sum large 
enough to provide every solvent bank and business 
house with ample support in times of distress, 
they accomplish a purpose worth talking about. 

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

When money flows into the New York banks 
the popular notion seems to be that It is used to 
facilitate speculation on the Stock Exchange. 
But this is only one of Its many sources of employ- 
ment. It will supply the payroll at Pittsburg, 
it will ship grain to Europe, it will discount the 


bills of merchants, it will return to the West and 
South when they call for it to move the next crop. 
If Canada or Europe wants it, and bids high 
enough for it, they will get a share of it. Wherever 
capital is most profitable, there it will turn; it 
will rapidly leave any country that cannot pay 
for it. It is the old simile of water finding its 
own level. The first step consists iTi gathering 
the idle hoards of individuals into banks; the next 
consists in centralizing these deposits where they 
will be available for other sections of the country 
that have use for them. 

In order to attract these funds and so facilitate 
the business of the country smoothly and eco- 
nomically, the New York banks are accustomed to 
paying 2 per cent, interest on such deposits. 
Critics who seem to feel that there is something 
objectionable in the laws of gravitation, would 
prevent country banks from depositing in the 
cities by forbidding the payment of interest on 
deposits by national banks. But the laws that 
govern national banks, as Mr. Horace White 
suggests, are not the laws that govern State banks 
and trust companies, and, as these would gladly 
pay the 2 per cent, interest on deposits, they would 
be given an unfair advantage.* Critics also say 

* " The Stock Exchange and the Money Market," by Horace White, 
"Annals of the American Society of Political and Social Science," Vol. 
XXXVI, No. 3, Nov., 1910, pp. 563-573. 


that country banks should not be allowed to keep 
three fifths of their reserves in city banks, but 
then they would be at a disadvantage with the 
State banks in their neighborhood, since the 
prohibition would not apply to them. Moreover, 
if country banks were not thus permitted to de- 
posit three fifths of their reserves, what would 
they do with their funds? For long periods the 
money would remain idle, and idle funds are as 
unhealthy for the community as they are for the 

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

This discounting of commercial paper is the 


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

The stockbroker is, in a way, a dealer in mer- 
chandise. Whether he buys for investment or 
for speculation — and remember that the boun- 
dary line between investment and speculation is 
often shadowy and indistinct — he pays cash for 
everything he buys. He then seeks advances 
of credit upon his wares just as the merchant does, 
supplementing his own capital and the deposits 
(margins) of his customers with call or time 
money from the banks. To deny him these facili- 
ties is exactly the same as to deny credit to a mer- 

*Ibid., p. 564. 


chant; both are doing a perfectly legal business, 
and both contribute to the economic welfare of 
the community. 

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

* The Stock Exchange authorities were asked by the Hughes Commis- 
sioners in 1909 Vhat effect would result if this law were repealed. An 
interesting historical summary is involved in the reply to this question. 

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

"It is reasonable to assume that the repeal of this law would result in a 
recurrence of the conditions which existed prior to its enactment. Prior 
to 1882, when this Act was passed, such loans were subject to the drastic 


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

Persons who conjure nightmares over the prac- 

provisions of the Usury Law, which imposes the forfeiture of the principal 
as a penalty for violation. The Usury Law, however, as to this class of 
loans, had for years been a dead letter, and whatever risks were incurred 
through its penalties were taken by lenders without hesitation. Demand 
loans were made at interest plus a commission, and in times of money 
stringency the interest rate represented by the so-called commission attained 
proportions which have been unknown since the passage of the Act of 
1882. Extreme instances are to be found of a rate as high as 700 per cent. 
per annum. 

"Such violent fluctuations in the rate have been unknown since the 
passage of the Act of 18O2. Since that time all quotations of interest on 
call loans have been at so much per cent, per annum, not, as was formerly 
the case, at | or j of I per cent, per day. Through the extreme stringency 
which existed in the autumn of 1907, the rate ran from 12 to 30 per cent., 
with the exception, perhaps, of one or two days when practically no money 
was procurable at any price, when the quotation ran up to 100 or no p)er 
cent, per annum. It would seem demonstrated by experience that the 
law of 1882 has been a most potent factor in reducing the interest rate in 
times of stringency and in rendering it at all times more stable and equable." 


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

Prevent the banks from lending money to 
facilitate stock-market operations and business 
ceases; Interfere with It or hamper It and confidence 


is Impaired, and when these things happen the 
industrial system collapses in terror. Such has 
been the experience of modern times. Until a 
system is devised whereby large undertakings may 
enlist public support in other ways than by offering 
securities in our great Exchanges and by main- 
taining a market for them there, it is useless to 
talk of interfering with that necessary relationship 
which exists between the banks and the stock 
market. On the one hand we have the cobwebs 
and windy sophistries of politicians and doctrin- 
aires; on the other hand the test of proved effec- 
tiveness in the conduct of business. And the 
country's business cannot stop; it must go ahead. 
In the last six years more than a billion shares 
of stock have changed hands on the New York 
Stock Exchange, together with bonds of a market 
valuation exceeding five billions of dollars, and, 
under the rules, each purchase made was paid 
for in full by 2:15 p.m. of the day following the 
transaction. If all these purchases had been made 
for cash — i. e., if every customer of every broker- 
age house paid in full for his purchases, there would 
be no use for bank loans to brokers; there would be 
no speculation, and hence no progress. Securities 
purchased In the six-year period quoted were, in 
the majority of instances, bought on margin, that 
is, they were only partially paid for by the pur- 


chasers, the balance required being funished by the 
broker from his capital and by the banks from 
their loanable funds. 

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

Furthermore, when critics who do not under- 
stand the subject look askance at the volume of 
loans of the New York banks, thev must remember 
that the lending power of such institutions is 
always four times greater than the supply of money 
in its vaults. The reserve of 25 per cent, which the 
banks are required to maintain means that every 
million dollars of actual cash added to their funds 


renders possible an expansion of four million in 
loans, and every withdrawal of funds involves 
a proportionate reduction of these loans. These 
matters are self-evident. The point to bear in 
mind is that through this expansion and contrac- 
tion of loans stock-market operations are increased 
or diminished by almost automatic processes. 
"Money talks" is an old aphorism. In this case 
it is not money that talks, but credit, and the 
credit extended to stockbrokers by the banks is 
always wisely regulated to meet conditions as 
they arise. 

The customer of a brokerage house, buys, let 
us say, looo shares of St. Paul at 120, on which he 
deposits a partial payment or margin of ^15,000. 
The bank will loan to the broker 80 per cent, of 
the market value of the stock, or ^96,000, which, 
added to the ^15,00x3 deposited by the customer, 
leaves ^9000 which the broker supplies from his 
firm's capital. The broker gives to the bank, 
with the securities, a note on one of the bank's 
printed forms, which gives the bank absolute 
authority to sell the collateral whenever the 
margin shall have declined to less than 20 per cent. 
This note is so sweeping in its terms, and gives 
the bank such complete power, that a reproduction 
of it, in small type, would fill two pages of this 


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

It is apparent from a consideration of all these 
elaborate precautions that the lending of funds to 
stockbrokers is a safe business, indeed in all the 
criticism directed against Wall Street methods I 
have not yet heard it questioned. The depart- 
ment of the bank entrusted with such matters 
watches the tape with vigilance to see that the 


20 percent, margin is not impaired; if it should 
happen to be impaired, the broker's messenger is 
almost always on hand anticipating with his 
additional collateral the call that the banker 
will make. So excellent is Stock Exchange 
collateral, thus secured and thus protected, that 
the losses resulting from this class of business are 
infinitesimal. I am not a banker, but I hazard 
the opinion that it constitutes, in fact, the mini- 
mum risk in all the departments of the bank's 

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


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

Of course a few hours elapse between the 
certification and the receipt of the broker's 
checks, and in this brief interval it would be 
possible for a dishonest man to abuse the privilege 
extended him, but the fact that such a thing does 
not happen affords tenable ground for the belief 
that it will not happen. The bank does not deal 
with an individual, but with a firm, and it knows 


that the firm has a membership in the Stock 
Exchange, with a cash balance on deposit in 
the bank that extends the accommodation. Any 
banker will bear witness that the business is 
quite satisfactory and that it involves no loss. 
Moreover, this certification of stockbrokers' 
checks is essential to the maintenance of broad 
speculative markets, and, whether that portion of 
the public that criticises the practice likes it or 
not, speculation is a necessary part of our business 

It may be pertinent to remark in this connec- 
tion that the law prohibiting these certifications 
by National Banks is unnecessary and unwise, 
as is evidenced by the facility and safety with 
which it is honored in the breach. State Banks 
in New York are under no such restriction, nor 
has it occurred to our lawmakers that a neces- 
sity for the prohibition exists. The experience 
of these banks in the matter of certifications, 
like that of the National Banks, shows that the 
business is safe and sound. If the merchant 
discounts his paper for thirty, sixty, or ninety 
days, why prevent a similar accommodation to 
stockbrokers for an hour or two.'' Both are 
engaged in a strictly legitimate business upon 
which the welfare of the community in greater 
or less degree depends, and the fundamental 


purpose of a bank is to promote and encourage 
such business. That is what banks are for, and 
bank officers are supposed to know something 
about how, when, and where accommodations 
may be extended with safety to all concerned. 

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

As the ratio of reserves to liabilities at that 
time was much above the legal requirement, it 
might be inferred from this and from the l^ 
per cent, rate that money was easy; but it 
was not, as many persons in commercial pur- 
suits learned when they tried to borrow it. 

*Cf. Mr. White's article supra, p. 570. 


There was a great deal of money that was not 
being used In daily business, and one of the 
reasons was that the period was one of distrust. 
Stockbrokers got funds at i| per cent, while 
many other borrowers were required to pay 
stiffer rates, because the banks that controlled 
the money market — i. e., the loanable funds — 
were unwilling to part with them except for short 
periods and on instantly marketable security, and 
this state of mind on the part of the New York 
bankers was shared by the bankers of Europe. 
It was good banking, because it was prudent and 
conservative. In other words, at a time when 
danger threatened, bankers in all important 
centres of the world regarded Stock Exchange 
collateral as ideal security, and, as we have seen, 
the aggregate of their loanable funds pressing on 
the market kept call rates down to i|. If in 
times of doubt and distrust this form of collateral 
proves its safety, is it not a fair hypothesis that 
it is safe at all times .'' 

If the critics are correct in their contention that 
pressure of easy money in the New York market 
holds out inducements for foolhardy speculation 
on the Stock Exchange, the year 1909, just cited, 
should have witnessed a great boom in securities. 
If speculators could borrow at l§ per cent, on 
securities that netted 5 and 6 per cent., the theory 


of our adversaries is that this disproportion entices 
a large number of people into such speculative 
ventures that inflation takes place, followed by 
collapse. That nothing of the sort occurred shows 
that critics, like other less gifted persons, may err; 
it shows, too, what every thoughtful person 
knows, that booms are not created on the Stock 
Exchange, which merely reflects in its dealings 
external conditions of all sorts, among them 
psychological processes which neither brokers 
nor money markets may hope to control. As a 
matter of record, 1909 showed but little increase 
In the volume of business transacted on the 
Stock Exchange as compared with 1908, and the 
increase, such as it was, represented nothing more 
than a natural recovery from the paralysis follow- 
ing the debacle of 1907, plus an investment of 
funds at attractive levels. The same state of 
affairs prevailed In 1910. From June to December 
of that year call money rates almost never 
exceeded 3 per cent., and time money might be 
had at from 3I to 5, yet far from stimulating 
speculation ■ — far from revealing an excessive 
employment of bank funds by stockbrokers — 
transactions both in shares and bonds dwindled to 
insignificant proportions. 

Cheap money Is by no means a "bull argument" 
from the Stock Exchange point of view, because 


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

In June, July, and August, for example, con- 
ditions may warrant a hope of bountiful harvests, 
while general business is dull and idle money 
abundant. Such a prospect is always discounted, 
other things being equal, by a rise in securities, 
and money that is not yet required to market 
the crops thus finds employment as loans on 
Stock Exchange collateral. Later on, when 
reviving business leads the interior banks to call 
their New York balances, the depository banks 
meet the demand by calling loans and by advanc- 


ing rates. The speculative movement on 'Change 
is then checked or reversed just in proportion to 
the demand for money elsewhere. It may con- 
tinue for a while if the discounting process has 
not been complete, or if there remains a wide 
disparity between interest rates for money and 
net returns on securities; or if the independent 
resources of the city banks are large enough to 
furnish comfortable interest rates even after the 
westward drain has commenced, but, generally 
speaking, "the move is over," to quote the 
vernacular, by the time business men want their 
money. Nine times out of ten any monetary 
strain that results thereafter is not due to specula- 
tive operations in securities nor to any other 
cause attributable to the Stock Exchange. 

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


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

The Stock Exchange Clearing House is managed 
by a committee of five members of the Board of 
Governors of the Exchange. Each day the 
seller of stocks sends to the office of the buyer 
his "deliver" ticket, and the buyer sends to the 
seller his "receive" ticket, this transaction con- 
stituting a "comparison" by both parties, and 
an evidence that the transaction has been entered 
on their books. Before 7 p.m. of that day these 
tickets, and the sheet comprising the record, are 
sent to the Clearing House. This sheet contains 
a "receive" and "deliver" column, with all the 
transactions in each security grouped together, 
and with a balance — i. e., a debit or credit. 


struck at the bottom. If there is a credit, a draft 
on the Clearing House bank is attached; if a debit, 
a check for the balance accompanies the sheet. 

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

Nothing could be simpler and more economical 
than the manner in which the two are brought 
together. In such a system, the number of 
shares actually delivered is reduced by the Clear- 


ing House to one third of the number represented 
by the broker's actual transactions, while the 
amount of money which he must command to 
meet his daily engagements represents, on an 
average, only 25 per cent, of the actual capital 
that would be required were it not for the excellent 
system thus afforded him. Persons who wonder 
at the magnitude of Stock Exchange transactions, 
and who jump to hasty conclusions as to the 
actual capital Involved, may well reflect upon the 
manner in which this method reduces to a mini- 
mum the stockbroker's drafts upon the banks. 

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

The amount of money expended in State 


roads since automobiles came into popularity 
is probably ten times more than it was before; 
at the election in November, 191 2, a fresh total 
of ^50,000,000 was voted for "good roads" by 
the electorate in New York State. The build- 
ing of the Panama Canal has cost or will cost 
about ^365,000,000; all over the country large 
municipal or state works are under construction; 
here in New York the contract for the Erie Canal 
calls for $150,000,000, and for the city's new 
water-supply system — the Ashokan basin and 
the Kensico reservoir — $177,000,000, each con- 
tributing a share to the depletion of the normal 
supply of working capital. Meantime, to cite 
another instance. Congress appropriates $160,000,- 
000 to pensions in a single year, and $40,000,000, 
as a recent writer puts it, "for that particular 
form of graft which consists in giving a $30,000 
post office to a thirty-cent village." The railroads 
of the country alone require to-day sums of money 
equivalent to the working capital represented by 
all our bountiful harvests of 191 2. 

Aside from these matters the critic should 
remember, in fair play, that the currency famines 
which occur with periodic frequency in our country 
are due in large measure to the non-elastic nature 
of the currency, to its persistent absorption by 
the Treasury, and to the rigid restrictions which 


these abnormalities impose on the volume of 
banking credit. Conditions such as these contrib- 
uted in no small measure to our last great panic, 
and led to a premium on currency that made us 
a laughing-stock among the nations. There has 
been no such money delirium in England since 
the Napoleonic wars; no such condition in Ger- 
many since the empire was founded, and nothing 
approaching it in France, even in the commune 
and the war with Prussia. Yet in America 
we go on wobbling uncertainly under the make- 
shift act of 1908, with its currency associations 
and its emergency measures, and with the added 
fear of what may come when the Act expires in 

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


closes its doors; public confidence is shattered, and 
the whole credit system is disturbed. 

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

The three leading groups of banking interests 
in Wall Street are said to represent ^500,000,000 
of available capital each; the deposits in what are 
called the "trust banks" amount to between 


^700,000,000 and $800,000,000, while the banks 
of the whole country hold deposits of $16,000,000,- 
000. The savings banks now hold $4,450,822,522 
which is owned by 10,009,804 depositors.* 

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

Such large affairs naturally set people thinking; 
men want light; they want to know, entirely aside 
from the doctrines of political platforms and stump 

•Report of the Comptroller of the Currency, October, 30, 1912. 


orators, to what extent the relation of capital to 
business meets the test of proved effectiveness and 
economic worth. Especially do they seek informa- 
tion in this oft-discussed matter of speculation in 
securities and of the bank's relationship to it; and 
here, fortunately, there is no lack of results by 
which that relationship may be tested. 

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





If a list of "don'ts" were compiled for the public 
that is interested in the Stock Exchange, the first 
prohibition would be "don't believe all you read 
in the newspapers"; at least do a little independent 
thinking before jumping at conclusions. The rela- 
tionship 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 ma- 
chinery 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 un- 
fairly, and he is the first to defend it, editorially, 
when misconceptions and unfounded suspicions 
are rife. 

But on the other hand, newspapers want news; 
their circulation and the popularity of their 
advertising columns depend upon the skill and 



ability with which they parade. before the public 
everything that happens. If a politician or a 
clever and ambitious lawyer makes a startling 
charge against an institution that occupies a con- 
spicuous 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 edito- 
rial page there may be a sober (and deadly dull) 
analysis of the matter, revealing the politician or 
the notoriety-seeker in his true colors, but this 
is often ignored by the reader. What he wants 
with his morning coffee is his daily thrill, and 
he finds it under blatant headlines on the first 
page. Because he wants it, and because he 
won't be happy till he gets it, the newspaper 
gives it to him on a generous scale. Until we 
arrive at a Utopian state in which art, religion, 
and kindred abstractions satisfy the mind to the 
exclusion of fires, riots, suffragettes and Stock 
Exchanges, we cannot blame the newspapers for 
giving us what we want, nor the politicians for 
helping the good work along. 


And yet, as Mr. Bryce pointed out in his lec- 
tures at Yale on "The Hindrances to Good 
Citizenship," this willingness to accept as con- 
clusions 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 citi- 
zenship without any real knowledge of the prob- 
lems before them and without contributing to the 
solution of those difficulties to which the ever- 
increasing complexity of our civilization gives 

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 condi- 
tions 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 head- 
lines are we really discharging the functions of 


good citizenship? Are we not indolent? I can 
have a lively sympathy for the half-breed in the 
Canadian woods seeking information as best he 
may, but for the man in our populous and culti- 
vated 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 dema- 
gogues 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 mis- 
information 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 some- 
what lax in his duties, bewails the loss and seeks 
to enlist sympathy for himself by hazarding the 
opinion that "the money must have been lost in 
speculation in that hell-hole, the Stock Exchange." 

This from a former army officer and a gentleman, 
who subsequently states that he has no idea what 
became of the funds, but "cannot think of any 
other explanation." "Hell-hole" and the "Stock 


Exchange" constitute a good repast; the head- 
line artist contributes his quota to the feast, and 
so a portion of the pubHc 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 ab- 
sence 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 some- 
thing less than $2000 a year, takes to entertain- 
ing angels, more or less unawares, in the Great 
White Way, and matching his trained financial 
mind against 'bankers' of another kind, he al- 
ways blames Wall Street when the inevitable 
smash comes. He has been 'speculating In 
stocks,' he says. He thinks, and a great many 


people equally silly agree with him, that he- there- 
by shifts the blame for his extravagance and folly 
to other shoulders. Entirely well-meaning people, 
without the slightest conception of the real pur- 
poses 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 mis- 
guided young man to shov/ documentary evidence 
of his losses, which of course every broker must 
necessarily provide, and must keep in duplicate as 
a matter of record."* 

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 author- 
ities, 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 pxoperty- 
room, and that In the stage-setting for his sordid 

*The Wall Street Journal, August 31, 1912. 


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 producln,:^ In court a mass of worth- 
less 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 "He down" on an 
uproiitable contract can buy ^1,006,000 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, not- 
withstanding the fact that documentary evidence 
of his purchases, If there were any, Is alwa} s 
available. In this way another Indictment Is 
framed against Wall Street in the minds of 


thoughtless people. They seem to ignore the 
obviously improbable nature of the story, pre- 
ferring 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 

Furthermore, any negligence on the member's 
part in this important matter, or in other matters 
aflPecting the general welfare of the Stock Ex- 


change, places him at once within the all-embrac- 
ing 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 mem- 
bers 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 gov- 
ernors 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 insti- 
tution is trying to conceal something, yet nothing 
could be further from the fact. The Exchange 
does not Incorporate because the interests of 
the public, which It is bound to conserve, would 
suffer enormously by such a step. "In its present 
form," says the Wall Street Journal^ "the Stock 
Exchange is a private organization. It can 
inspect any member's books at any moment. 


If it suspects him of wrongdoing it can tap his 
telephone wire, and has done so in the past. It 
can terminate his jnembership 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 av/ay. Members would possess 
rights which no governing committee could ignore. 
They could resort to practices legally right and 
ethically wrong, which under the present sys- 
tem 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 incorpora- 
tion 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 pos- 
sess in the matter is to limit that supervision; 
and for this, if for no other reason, the Stock 


Exchange should fight incorporation to the last, 
and should take every proper means of publicity 
to range public opinion behind it."* 

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 out- 
side 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 pro- 
geny born every minute; the lure is the engraved 
letter-head with its "Wall Street," its list of 
"Directors," and its subtle assurance that this 

* December 7, 1912. Consult also p. 235. 


precious property now literally "given away" 
bears the endorsement of the elect, and is known 
and approved by the whole financial commun- 

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 Inves- 
tigating 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 author- 

More often still, this market and its rising prices 
do not exist at all; in any case it is only a fraudu- 
lent attempt to excite the cupidity of specu- 
lators into the belief that there is active trading 
in the particular stock offered for sale. "The 
mines," says the Chairman of the Hughes Com- 
mittee 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, inac- 
cessible, and subterranean, they are attractive 


to the class whom Tacitus had in mind when he 
said: ^'Omne ignotum pro magnifico.^^* 

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-pre- 
pared 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 ex- 
terminated. "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, 

* "The Hughes Investigation," by Horace White, Journal of Political 
Economy, October, 1909, pp. 537-8. 


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 lOO bid, lOOj asked, 
he buys at ioo| always. If he sells at the same 
quotation, he sells at lOO. He could not sell in the 
former case at lOOj, nor buy in the latter case at 


100, so he starts | per cent, "to the bad." If, 
then, he bought at lOOj, when the price is 985-^, 
his two-point margin is exhausted, although the 
price has actually declined only 1 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 fFall 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 privi- 


leges 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 inconsider- 
able 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 promo- 
tors 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 credu- 
lous. A word to his banker, or a letter to any 
responsible institution in Wall Street, will supply 


him with the necessary information and save 
him from the possibihty 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 require- 
ment diminishes so a suspicion of the solvency 
of the firm should become fixed in the mind of 
the customer. This warning applies to stock- 
brokers 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 

* In his article on "The Hughes Investigation" {Journal of Political 
Economy, October, 1909, p. 539), Mr. Horace White refers to the attempt 
of the Hughes Commission to devise a means whereby the company- 
promoter's activities might be curbed. He says: "The British 'Companies 
Act' forbids the public advertisement or sale of any securities unless the 
issuing company has been registered in a bureau of the government with 
information regarding the business to be transacted, the names of the 
officers and other persons responsible for the statements of fact, etc. Much 


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 enforcemxcnt. 

Notwithstanding these obstacles, however, the 
Stock Exchange labored zealously to close bucket- 
shops long before the officers of the law became 

time was spent by the committee in discussing the advisability of adopting 
the English system, regardless of the fact that it would be operative in 
only one state of the union, and that it would serve as an obstacle to all 
securities, sound and unsound, alike. Thus, if the Pennsylvania Railroad 
Company desired to issue a new lot of bonds it could advertise and sell 
them everywhere except in New York, without the trouble and expense 
of registration. Would it be worth while to give to other markets such an 
advantage over that of New York.? The opinion of the governors of the 
Stock Exchange was sought and was given orally, to the effect that it 
would be unwise to take the risk unless the benefits to be derived from 
registration were preponderating and reasonably certain. It was their 
belief, however, that a certificate from state officials that a company was 
registered at Albany would be interpreted by the class of investors, who 
are most liable to deception, as a certificate of the soundness of the securi- 
ties, in which case the act of registration would do more harm than good. 
The latter consideration prevailed in the committee, but recommendations 
as to advertising were made, which, if adopted by the legislature, will 
add something to the responsibilities of greedy and unscrupulous news- 
papers, while not going upon the doubtful ground of a censorship of the 


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, i^ ^^s 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 authori- 
ties has vised the application. 

Meanwhile, a secret-service has been at work, 


silently ferreting the hidden, underground chan- 
nels 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 dis- 
appearing. 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 Pre- 
cautions," 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 gen- 
tlemen 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 busi- 
ness. Such a man knows that Stock Exchanges 
occupy an Important place in the mechanism of 
modern business; he knows, too, that just in 
proportion as their functions enlarge and the scope 
of organized markets increases, so persons will 
be found who foolishly or dishonestly abuse the 
facilities there afforded. 

"Reflection," says a recent writer, "seems to 


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

This fact established, one who has been a mem- 
ber 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 recur- 
rence. 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 struc- 
ture which gives mobility to capital and flexibility 
to credit. 

In the very nature of things the development 
of each part of this gradually devised machinery 


has been attended by mistakes, by errors of judg- 
ment, 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 .f* 

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 direct- 
ly caused two Stock Exchange failures in recent 
years, failures that were, I am sorry to say, essential- 
ly the result of dishonesty. Every Stock Exchange 
house is looking for business, and a house with 
small capital sometimes gets more than it should 
attempt to handle. Such a house borrows from 
the bank, as all houses do, and allows its bankers 


a 20 per cent, margin; so far so good. But 
it accepts business from its customers on a 10 
per cent, margin, and this means financing the 
difference out of the firm's capital. If the capital 
is large, the business is safe, but if it is small, the 
house finds itself "loaded up," as the phrase is, 
and is then in such a predicament that it must 
either summon enough moral courage to refuse 
business altogether and so advertise its limita- 
tions, 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. Never- 
theless, the thing has been done, and it may 


conceivably occur again. How then may it be 
avoided ? 

As the Stock Exchange is, as we have seen, 
an unincorporated body with a set of rules which 
no legislature and no court could enforce without 
depriving a man of his constitutional prerogatives, 
it is obvious that this and all other reforms must 
come from within; all the many reforms that 
are constantly lifting the Exchange to a higher 
level come from that quarter. There are iioo 
members of the Stock Exchange and perhaps 600 
of these are engaged in active commission busi- 
ness. 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 alto- 
gether. 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 them- 
selves In striving to attain continually to a higher 


standard of business morality, and second with 
increased watchfulness by the committee having 
this matter in charge. In point of fact it is 
apparent that both these solutions are now being 
employed to a greater extent than ever before. 
The two failures that occurred some years aga 
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 govern- 
ment incorporation or regulation which must 
impair, if it does not actually destroy, their 


usefulness. Members must also see to it that 
manipulation in its improper forms is driven out 
of the Exchange, and that every conceivable pre- 
caution is taken in the listing of new securities. 
These matters I shall discuss elsewhere. Mean- 
time 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 obli- 
gations. Certainly the New York Stock Exchange 
has not witnessed so many failures in ten years. 
One of the many excellent results of the work 
of the Hughes Committee from the standpoint 
of the Stock Exchange was the publicity that 
came of it. Critics of the institution had long 
found fault with it because of its atmosphere 
of aloofness, the air of mystery that seemed to 
surround it, its silence under attack, and its 
apparent unwillingness to defend itself from 
adverse comment. This reticence, however, while 
it did harm, was more apparent than real. In 
so far as the Stock Exchange is concerned the 
advantages of publicity have long been recognized. 
The difficulty has been in having its purposes 
and its methods properly attested by competent 
authority in a way that would enlighten * the 


public and carry conviction. Members and friends 
of the Exchange feel very strongly that in this day 
and age, when the spirit of publicity is in the 
air, the Stock Exchange should fall in line with 
a resolute determination to assert itself and make 
itself heard on all proper occasions. 

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

The time has passed to sit supinely under every 


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


seekers of notoriety that "thrice is he armed who 
hath his quarrel just." 

The Stock Exchange has felt, since the report 
of the Hughes Commission in 1909, that such a 
report, by such a body of men, would inevitably 
stay the hand of many of its detractors by showing 
them just what the Exchange is trying to do, and 
just how the work is done. "The committee," 
says its chairman, "was in session about six 
months. Its expenses were paid by the members 
themselves, and since frugality was a necessity 
the services of the stenographers were dispensed 
with, the members taking only such notes of the 
testimony of witnesses as each one deemed Im- 
portant 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 volun- 
teer 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 pub- 
lished writings or otherwise, that they had some- 
thing of value to contribute to the discussion. "* 

• "The Hughes Investigation," by Horace White, Journal of Politictl 
Economy, October, 1909, p. 529. 


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 indepen- 
dence of spirit made a whitewash impossible. 
Here then was the long looked for solution.* 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 com- 
mittee's deliberations; everybody with a grievance 
might state it, and both sides were accorded 

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


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 equi- 
table 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 busi- 
ness 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 preju- 
dice which has been hard to dispel. Cammack 
had been brought up in the old school; he saw 
what was coming, but he mistook causes for 
effects. He would probably turn in his grave 


could he see the new conditions and contrast 
them with the old. As a matter of fact nothing 
could be more democratic in principle than the 
way the business Is conducted nowadays. The 
rights of stockholders to information, the reports 
and balance sheets submitted to them, the mass 
of Wall Street financial material in the magazines 
and journals, the stock ticker, the news ticker, 
the printed news bulletins, the card Index system, 
the statistical manuals and the quotation lists 
published In the morning and evening newspapers, 
together with the market letters constantly cir- 
culated 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.* 

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 specu- 
lators abroad. There are no tickers worthy of 
the name across the water, and the daily list 
of business done, as published In our newspapers. 

*One of the witnesses before the Hughes Committee actually recom- 
mended that the stock ticker be suppressed. Such a suggestion is silly 
and would lead to great confusion and many complaints from the public. 
The ticker is essential to publicity and offers the very protection which 
the Stock Exchange seeks to extend. Speculation was never so unscrupu- 
lous and wrongdoing never so abundant as in the days before this instru- 
ment was invented. 


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 imme- 
diate reform along these lines is "absolutely 
necessary" in Paris in the interest of the public* 
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 safe- 
guards. Men buy worthless mining stocks with- 
out bothering to inquire into their bona fides. 
They put their savings into new and untried 
enterprises and they neither read the balance 
sheets nor attend the meetings. A thousand 
stockholders will attend a meeting in London and 
they will have their questions answered whether 
the majority in control likes it or not. In New 
York almost nobody attends these meetings. 
The stockholder's right to information is absolute, 
but he does not go and get it, and so finally when 

* U Economiste Francois, Paris, October sth. 


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 Ex- 
change can do to protect the investor, but the 
investor himself can do rnore than all his protec- 
tors put together. His investment, however con- 
servative and secure, carries responsibilities as 
well as privileges, and it is his duty to discharge 
the one in order to safeguard the other."* 

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

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

A stockholder should never hesitate to write to the oflicers of his company 
for information. He should do it often, and he should get other stock- 
holders to do the same thing. One stockholder writing frequently may be 
regarded as a nuisance. Ten will be treated with respect, and it will be 
a very autocratic control which will venture to deny information to a 


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 can- 
not 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 helpful- 
ness."* The New York Stock Exchange has 
learned the same lesson, in a similar school. As 
an institution it realizes that if It Is to grow in 
prosperity the public must grow, and that as 

hundred stockholders, taking a legitimate step to protect their own proper 
interests. The newspapers are glad to furnish any information in their 
power, but if the stockholder would write to the company first and the 
newspaper afterward, he would probably derive more ultimate advantage. 
■ — Wall Street Journal, September 22, 1909. 

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


the public is attracted to investment and specula- 
tion 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 discour- 
aged 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 un- 
listed department, and this may very properly be 
mentioned as a distinct progression. Under the 
old system a limited number of industrial cor- 
porations were permitted to obtain a market on 
the Exchange for their securities, although they 


furnished but few figures to the Listing Com- 
mittee 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 accom- 
plished 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 conceal- 
ment 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 pro- 
tect the investor, which is the controlling motive 
of the elaborate restrictions Imposed by French 
and English laws in new security ofi"erIngs, has 
advanced far in this country within the last few 
years, and the farther it goes the more popular 
it becomes. 


That there is still work for the Listing Com- 
mittee 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 com- 
pany'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 en- 
forcible at law. These were always prohibited 
under the rules, yet despite this a flagrant instance 
of a violation was discovered in which the guilty 
were made to suffer. So far as I am aware it 
was the only case on record in which obvious 


collusion between buyer and seller in a Stock 
Exchange transaction was shown. The broker 
in this instance must have known that the Com- 
mittee 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 propor- 
tion 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 per- 
nicious; from the standpoint of economics it is 
harmful. The Stock Exchange has nothing to 
conceal, and it recognizes not only that manipula- 
tion 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 nowa- 
days in a security long dormant, as happened 
very recently in the stock of a certain gas company, 
the governors of the Exchange entrusted with 
such things take the matter in hand and put a 
stop to it if obvious manipulation can be shown 


after investigation. The public and the news- 
papers know nothing about it; the vial of their 
criticism is poured forth only when something 
escapes the watchful eye of the Exchange authori- 
ties, 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 pre- 
vent 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 under- 
stand 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 commer- 
cially 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 rail- 


ways 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 cre- 
dentials 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 enter- 
prise 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 ques- 
tion must do the same thing. They fix a price 
at which their shares are introduced in the 
market-place; let us say this price is ^100 per 
share. This is manipulation. It may happen 
that the public will not buy at that price, in 


which case the price is lowered, let us say, to 80. 
This also is manipulation. But is it improper? 
Is it subversive of good morals? Is it an un- 
healthy interference with natural laws of supply 
and demand? Is it anything less than a legiti- 
mate 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 em- 
ployed. 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 sup- 
press all forms of manipulation that are unsound 


and harmful, but until you or some other gifted 
student of economics can devise a method by 
which capital may be attracted to excellent chan- 
nels other than through the medium of an Ex- 
change, manipulation of the sort just described 
must continue or enterprise must stop. Strike 
Dut 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 


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

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

"What is still more satisfactory is the wide diffusion in the ownership 
of industrial and railroad stocks. This is not new. The Illinois Central's 
great strength for forty years was in the small stockholder, who made his 
voice heard to some purpose when "strike" legislation developed in his 
State legislature or in Congress. But the ever-widening character of the 
investment area, the recognition of the convenience and convertibility 
of Stock Exchange securities, safeguarded by sound management and full 
publicity, is a growth of the most hopeful character. It indicates a force 
of enlightened conservatism of the greatest value to the country." — The 
Wall Street Journal, October 22, 19 12. 


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 accept- 
ing any more business from Smith, but Smith is 
not a member of the Exchange, and hence he 
is not amenable to its discipline. When his next 
orders are refused he gives them to some one 
else, and if the entire Stock Exchange refused 


to accept business from him he would and could 
with perfect propriety ask his bank, or a trust 
company, or an individual to give out the orders 
under their own names. Finally, if the Exchange 
authorities were so sagacious as to be able to 
close to this man every conceivable avenue by 
which he might approach the Stock Exchange in 
New York, there would still be left open to him 
the market in Boston, or Montreal, or London, 
or any other centre in which the security was 
listed, and the pernicious effect of his manipulation 
in these cities would be felt in New York just as 
promptly and just as harmfully as if they had 
originated here. I mention this case, a purely 
hypothetical one, to show how easy it is for manip- 
ulation 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.* 

Counsel for the Congressional Committee that 

* It is truthfully declared by Courtois, in his Traiie des Operations de 
Bourse et de Change, that a fictitious movement, even on the part of the 
most powerful operators, cannot overcome the natural tendencies of values, 
and that the most that can be accomplished is sometimes to hasten or 
retard slightly the certain effect of a foreseen event. "Wall Street and 
the Country," by Charles A. Conant, p. 88, G. P. Putnam's Sons, New- 
York, I90(j 


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 Specu- 
lation," 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 com- 
modities other than in stocks and bonds. The 
instinct has always been a pronounced human 
characteristic, being a part of human progress, 
and the manifestation of it is one sign of the 
difference between man and the lower sorts of 
creatures. It is doubtful whether the general 
gambling impulse can be entirely wiped out, 
even if the mighty power of an act of Congress be 
called into requisition. If Mr. Pujo and his 
committee can abolish speculation in Wall Street 


(to say nothing of gambling, which is not the 
same thing), they may be asked to abolish every 
commodity market throughout the land, for 
there is plentiful speculation in all of them. 

"What seems to bother some representatives 
of the Pujo Committee is that the number of 
shares traded in on the Stock Exchange exceeds 
largely the number actually transferred. It is 
true, for example, that the number of shares 
of United States Steel common sold during 
last year were largely in excess of the number 
of shares outstanding, the sales amounting to 
31,266,208 shares, while the entire number out- 
standing 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 ulti- 
mate consumer. Meantime, the number of pota- 
toes 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 free 


speculative market Is in itself an element of 
value, and if it were destroyed the investor would 
be chiefly injured, while future capitalization 
for the development of the country would be 

At the outset I began by cautioning the reader 
not to cry out in alarm over the utterances of 
newspaper statesmen bent on justifying their 
existence, and determined to make the punish- 
ment 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 law- 
maker, but which to you and me may seem natural 

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 specula- 
tion is wrongful, and that the criminal nature of an 

* The Wall Street Journal, December 7, 1912- 


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. Com- 
pare 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 con- 
sidering could be brought against any Institu- 
tion 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 consid- 


ered In the light of the future as well as the 

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 com- 
mon ability. What the Stock Exchange asks of 
you and of every thoughtful citizen in the land 
is a recognition of these matters, and a patient 
survey of all that enters into them. The critic 
in "The Vicar of Wakefield" laid it down as a 
good rule that you should always say the picture 
would have been a better one if the artist had 
taken more time. Criticism offered in this spirit 
the members of the Stock Exchange can bear with 
good humor. What hurts them on the raw is 
the critic's failure to study and investigate, or, 
getting back to the text of Mr. Bryce's sermon, 
**the neglect to think." 





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

In Wall Street, where men are accustomed to 
looking forward at all times, the question is ever 
in mind as to the next panic. The last one left 
its sting; we are interested now in knowing about 

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



the future. Have we learned how to avoid these 
difficulties? May we hope to diminish their force 
and mitigate their terrors? May we rely upon 
the superior organization of business and the 
greater quantity and quality of capital to soften 
the effect of the next shock? I think not. We 
may lull ourselves into a coma of fancied security 
as we reflect upon experience and Its expensive 
lessons, but we deceive ourselves If we think that 
we shall finally arrive at a point where these 
convulsions shall cease. 

Nothing of that sort can come about among 
people strong with health and vigor, confident and 
full of energy, and Impatient for action. With 
such a people life is incessantly mobile; a con- 
stantly Increasing volume of creative activity 
impels them onward. Panics are unknown in 
dead countries and In countries that have not yet 
heard the call of progress; In all other countries 
the violence of these shocks is directly propor- 
tionate to the enterprise of the people. The more 
civilization there Is, the greater the creation of 
wealth; the more wealth there Is, the greater the 
volume of speculation that creates wealth. In 
such circumstances It is Idle to talk of a time 
when panics shall cease, because confidence and 
enterprise must ever push onward, speculation in 
material things must accompany them, supply 


must overtake demand, and human nature with 
its moods and caprices must finally pay toll. 

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

We may seem to be prepared for these periodic 
set-backs, and there may be men amongst us 
of sober reflection who are really wise enough to 
foresee the top to a normal movement, yet the 
accidents that have happened will happen again, 

— bad harvests, war, sudden failures, earthquakes, 

— these are not easily discerned in advance. 
Sanguine and ardent merchants will make the 
same old mistakes; good times will engender the 
same old hallucinations; people who see, or think 

* "Des Crises Commerciales," Clement Juglar, Paris, 1889, pp. 44-5. 


they see, wealth being created all around them, 
will always rush in and buy at the top; there will 
be too much work for the dollar to do — and after 
that the deluge. Finally, in order that we may 
not become pessimists, let us remember the words 
of the greatest of American philosophers: "The 
changes that break up at short intervals the 
prosperity of man are but advertisements of a 
nature whose law is growth." 

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


fathers said the same thing, and his children will 
follow suit.. 

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

Take the panic of 1907 as the last and most 
conspicuous example. The financial losses in- 
volved, and the extent of the disturbance of the 
machinery of credit, made it the worst panic of 
this generation. As it burst upon the country 
at a period when to the outward eye prosperity 
reigned throughout the land, men were at a loss 
to explain it. They could not understand how 


such appalling conditions could occur in such 
apparently cheerful surroundings. As everybody 
was affected by it in greater or less degree the 
whole country was full of people with a grievance. 
They were themselves directly to blame for it, but 
they looked elsewhere for the responsibility for 
their folly. 

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

Mr. John Burroughs warns us that it is one thing 
to treat your facts with imagination, but quite 


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

The panic of 1907 was not unlike many preced- 
ing financial disturbances. The opening months 
of the year had witnessed a general liquidation on 
the Stock Exchange, brought about naturally, and 
in simple, automatic compliance with economic 
laws and precedents. There had been over- 
expansion in all lines of business; careful students 
saw the portent; able men of power and influence 


heeded its warning and set corrective forces in 
motion months before the shock came. Total 
transactions in shares sold on the Stock Exchange 
had risen from 187 millions in 1904 to 284 millions 
in 1906, while the value of the securities thus sold 
increased from 12,061 to 23,393 millions of dollars 
respectively. This was too rapid growth, and the 
general liquidation that had been under way for 
months effectually corrected it, since New York 
City bank loans secured by Stock Exchange 
collateral declined, as shown by the Comptroller's 
report, from $385,652,014 in August, 1905, to 
$251,867,158 in August, 1907 — a corrective force 
represented by $133,784,856. 

The Stock Exchange has been defined as "a 
barometer of future business conditions," and 
never did a barometer give clearer warning. 
It said in effect to all the banks of the country 
and to business men generally: "There has been 
a widespread over-expansion of credit; it must 
stop; we are doing our share here in New York 
to correct it; you must do likewise." And, in 
order that there might be no failure to understand 
what was meant. New York City bank loans were 
reduced with drastic emphasis, months before the 
panic came, by nearly 35 per cent. "Without an 
exception," writes Prof. S. S. Huebner, "every 
business depression in this country has been 


discounted In our security markets from six 
months to two years before the depression became 
a reality."* Senator Burton, another authority, 
emphasizes the point further: "In addition to 
other Influences which promote an earlier rise 
and fall, there must be mentioned the more careful 
study and attention to the financial situation 
which Is given by dealers In the stock markets and 
In great financial centres. They often forecast 
the grounds for a rise or fall In prices before the 
general public Is awake to the situation."! This, 
then, was the situation In the summer of 1907. 
The Stock Exchange had "cleaned house," and 
had liquidated thoroughly, warning the country 
to go slow. 

Why was not this warning heeded.^ I recall 
vividly the dally expression of surprise, on the 
floor of the Exchange, and throughout the finan- 
cial district. In the months that elapsed between 
our March liquidation and the outbreak of the 
October panic, that the country should pay so 
little attention to "Wall Street's" admonition; 
that it should continue its unprecedented boom 
despite the plain intimation that the funds to 
support It were exhausted, and despite the general 

* "Annals of the American Academy of Political and Social Science," 
Vol. XXXV, No. 3, May, 1910, p. 13. 

f "Financial Crises and Periods of Industrial and Commercial Depres- 
sion," Theodore E. Burton, New York, 1902, p. 234. 


knowledge of every tyro in business that future 
conditions are discounted in Wall Street as freely 
as promissory notes. 

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

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


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

It is only fair to say that there was some force 
in the buoyant if superficial viewpoint of the 
country at large, for in the autumn of 1907 we 
were blessed with all the kindly fruits of the 
earth in abundance. The average crop of our 
agricultural products gathered that year was 
enormous, and behind it lay large reserves of 
wealth that had accumulated from a series of good 


crops in the years just preceding. There was, 
moreover, a partial failure of foreign crops that 
brought about heavy foreign requirements, thus 
assuring rich returns to American producers. 
Our railroads, which in the previous panic of 1893 
were so affected by declining traffic and by the 
unproductiveness of new territory into which 
they had ventured that bankruptcies became 
general, were early in 1907 in better physical 
condition than ever before. Their gross earnings 
were at a maximum; their surpluses fat with the 
profits of recent years; their credit high. A long 
accumulation of foreign-trade balances had made 
the inherent strength of the nation greater than 
ever before. Finally there was the great essential 
difference between 1907 and former years in that 
we were now, by statute law as well as in fact, 
on a gold-standard basis. 

And yet, without one unsound basic factor 
visible to superficial observers, we were suddenly 
plunged into a grave disaster — a panic which in 
actual money losses surpassed any of its predeces- 
sors. It came, this cataclysm (as the Stock Ex- 
change had vainly predicted six months earlier), 
at the worst time it could possibly come, just 
when the banks were called upon to furnish 
$200,000,000 to transport and market the crops. 
Small wonder that in the face of such an optimistic 


outlook men stood aghast at the violence of the 
panic. As they had not understood the warning, 
so they could not understand its swift fulfilment. 
In all the long processions of panic-stricken people 
who stood in line at the banks in those trying days, 
not one in a hundred could understand how an 
Institution could be solvent and yet be forced to 
suspend. Later on, smarting from losses, this 
bewilderment gave way to distrust and suspicion, 
as is often the case, humanly speaking, when men 
look elsewhere than to their own folly for the 
sources of their misfortunes. They were in a 
receptive mood when the charge was made that 
"Wall Street and the Stock Exchange" had 
brought about all this misery; they believed it to 
be true, and many still believe it. 

The charge was so widely circulated and was 
fraught with such possibilities of mischief that 
there was danger of ill-considered legislation 
directed against the Stock Exchange and sup- 
ported by ill-advised public opinion. Thus it hap- 
pened that Governor Hughes of New York, doubt- 
less moved to forestall hasty law-making, appointed 
a committee to investigate the Stock Exchange. 
In another chapter we have reviewed the work of 
this commission; meantime, the words of its chair- 
man are quoted, in passing, as a sort of ex post facto 
reply to the outcry that "Wall Street did it." 


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

I have said it was not surprising that the public 
failed to observe signs of disturbance in the happy 
conditions that seemed to prevail before the panic. 

* "The Hughes Investigation," by Horace White, Journal of Political 
Economy October, 1909, pp. 528-540 Mr. White quotes in this con- 
nection an article on "The Panic of 1907," by Eugene Meyer, Jr., 
Yale Review, May, 1909, from which many facts in this chapter have been 


The blindness of the mass of the people to these 
impending catastrophes is, indeed, a marked 
characteristic of all similar epochs. Let us di- 
gress for a moment and consider the history of 
other great disturbances. In 1825 the King's 
Speech as read by the Lord Chancellor dwells on 
"that general and increasing prosperity . 
which, by the blessing of Providence, continues 
to pervade every part of the Kingdom." This 
was in July; in December of that year the whole 
country was torn by a devastating financial crisis. 
The London Economist, in 1873, dwelt at length 
on the "astounding" progress of the Austrian 
States, and said, "All over the rich countries of 
the Danube, capital and labor are vigorously at 
work in the discovering and turning to profit the 
amazing resources which have been lying unheeded 
for centuries." This was written in March; the 
Bourse at Vienna closed its doors May 9th, and 
a panic of exceptional severity was followed by 
long and continued depression. On December 31, 
1892, R. G. Dun & Company's Weekly Review of 
Trade said: "The most prosperous year ever 
known in business closes to-day with strongly 
favorable indications for the future," and yet 
four months later the storm burst.* 

The se instances go to show how the elect may 

* Cf. Burton, supra, pp. 49-50-51. 

iqs the stock exchange from within 

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

There was a panic throughout the United 
Kingdom in April and October of 1847, yet the 
early response to changing conditions took place 
two years before, when stocks began to fail in 
July and August, 1845. In the year 1857 com- 
merce and industry expanded throughout America 
in increasing volume up to the very eve of the 
August crisis, yet the stock market in the summer 
of the preceding year gave clear warning of what 
was to occur. One year before the panic of 1873 
a similar "slump" foretold what was coming, and 
the same was true of the year preceding the panic 
of '93.* Previous to the last-mentioned crisis 
stocks began to fall, with unmistakable emphasis, 
early in 1892. Of seventeen of the most active, 
five reached their maximum price in January, 1892, 
three in February, four In March, two — Lake 
Shore and Michigan Central — in April. And as 
we have seen, Identical preliminary warnings de- 

* Ibid., pp. 217-8-9. 


veloped on the Stock Exchange from one year to 
six months before the last great panic of 1907.* 

The panic that hit the Paris Bourse in October, 
1912, causing a disturbance not equaled in 
violence since 1870, was brought about hy sowing 
the wind through an immense public speculation 
based on two fine harvests in Russia and a feverish 
revival of commercial and industrial activity all 
over Europe. Up to this point all the indicia of 
the movement — such as bank loans, building 
operations, public and private extravagance, and 

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

The panic of 1857 was due primarily to the influx of gold from California 
after its discovery in 1848, and to the intense passion for speculative gain 
which attended it. Suspension of specie payments by the banks lasted 
fifty-nine days. Complete recovery to the normal standard did not take 
place until i860, when it was again interrupted by the events antecedent 
to the Civil War of 1861. 

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

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


a blind Infatuation for speculation by a normally 
prudent nation that had not speculated on a large 
scale since the Panama debacle of 1894 — cor- 
responds exactly with conditions in America just 
preceding the 1907 crisis. The similarity between 
the two incidents goes even farther, for early in 
September of 191 2 the French bankers and 
Agents de Change^ recognizing the strained con- 
dition of credit, had deliberately put in motion 
corrective agencies designed to stop the rise with 
the least possible derangement of confidence. 

They would have succeeded, no doubt, and the 
situation would have exactly paralleled our own 
discounting processes of March, 1907, but for the 
unforeseen Balkan difficulty which, coming out 
of a clear sky, upset the plans of the conservative 
financial forces and precipitated a panic. It 
came, as a French banker explained, a week too 
soon — by which he meant that, given a little 
more time, the worst phases of the disturb- 
ance would have been avoided through gradual 
and orderly liquidation. As it stands, the panic 
will no doubt go down into French financial 
history as "the Balkan panic," just as our dis- 
turbance of 1907 is ascribed, faute de mieux^ to 
Wall Street wickedness; but in reality both the 
French and American crises had their origin in 
precisely similar causes. The Balkan news in 


Paris only precipitated what the French Bourse 
had planned to accomplish in an orderly manner, 
just as Wall Street and the Stock Exchange had 
done five years earlier in a similar emergency. 
The essential lesson of both instances is that the 
same causes which generate prosperity will, if 
pushed far, generate an equivalent adversity. 

The details of the panic of 1907 are still fresh 
in mind, and need be but briefly referred to. 
Banks and trust companies closed their doors and 
suspended payments to depositors. Cash and 
credit became almost unobtainable; we were 
face to face with demoralization. Clearing-house 
certificates were resorted to at practically all 
banking centres throughout the country; there 
was a general requirement of time notices for 
withdrawal of savings bank deposits; all normal 
credit Instruments were Impaired. The Secretary 
of the Treasury was forced to exercise heroic 
discretion in the matter of security for govern- 
ment deposits and for the very necessary increase 
of a note circulation that was then suffering from 
a spasm of contraction. There was an Immense 
hoarding of funds and a consequent drying up of 
fluid capital, while from one end of the country 
to the other, there was liquidation, business con- 
traction, retrenchment, panic, and ruin, "Wall 
Street" and the Stock Exchange had foreseen 


that the chain was only as strong as Its weakest 
link, and had done what it could to prepare the 
public for the break. To assert at this late day 
that it did aught but its full duty is humbug 
in excelsis. 

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

* Real Estate Record and Guide, 1906-7. 

fConsult Bradstreet's, 1907; the Construction News, Chicago, 1907; the 
Engineering News, 1907. 


Outside of New York the expansion in building 
operations was equall7 rapid and equally ominous, 
showing an increase in twenty-five cities alone from 
$201,300,000 in 1903 to $234,200,000 in 1904, to 
$280,400,000 in 1905 and to $307,800,000 in 
1906 — all this but a small part of the actual 
funds thus locked up throughout the whole 
country.* We thus find that one of the most 
important and inevitable causes of the panic was 
the absorption of exceptionally large amounts 
of capital in enterprises that required a consider- 
able time for completion, or which, when com- 
pleted, were not immediately profitable; and to 
them may be added factories and extensive public 
and private works of every kind. This form of 
expansion, as Senator Burton points out, when car- 
ried to extremes almost invariably brings about a 

Now let us consider. Does all this expansion 
of bank loans outside of New York and all this 
tremendous increase of building operations show 
that the Samsons of "Wall Street" were pulling 
down the temple on their own heads in order to 
slaughter the Philistines, as alleged, or does it 
show an indifference and lack of readjustment to 
the growing stringency of money, as revealed by 

* "The New York Stock Exchange and the Panic of 1907," by Eugene . 
Meyer, Jr., Yale Review, May, 1909. 


the Stock Exchange In its liquidation of March 
and April? "As a rule," said John Mill, "panics 
do not destroy capital; they merely reveal the 
extent to which it has been previously destroyed 
by its betrayal into hopelessly unproductive 
works."* There would have been no such 
"betrayal" had judicious reflection and a measure- 
ment of facts followed Wall Street's warnings. 

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

* "Credit Cycles and the Origin of Commercial Panics," Manchester 
Statistical Society, December ii, 1867. 


old merchant, I have no doubt, is but one of a 
numerous type. 

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

Booms are not made on the Stock Exchange; 
they are made in the country's fields and forests 
and workshops. Panics are not created there; 
they have their origin in mistakes and excesses 
throughout the world, and in psychologic con- 
ditions which stock markets cannot hope to 
control. The pendulum may swing far, but it 
comes back. Sooner or later the movement of 
prices tells the exact story of future business, and 
of credit, and of all the economic agencies that 
enter into them. This was not well understood 


in 1907, and, as I said at the beginning, I doubt 
if it will ever be understood in the sense that it 
will avoid a recurrence of panics. All that we 
may hope for is that periods of depression, which 
are inevitable, may not be attended in future by 
such a loss of the reasoning faculties as that 
which brought about the affair of 1907. 

Now let us consider another cause of the panic — 
the currency system, always bearing in mind the 
fact that the first and greatest cause of the panic 
was the over-expansion outside of New York that 
has just been described. The causes which we are 
now to consider were of minor importance when 
measured by this overshadowing matter; never- 
theless they played their part and must be con- 
sidered accordingly. 

Not all panics, to be sure, can be prevented 
by a perfect currency system, yet this one could 
have been measurably prevented, and "Wall 
Street" and the Stock Exchange had labored for 
years so to prevent it. At the gatherings of the 
Chamber of Commerce, at the bank meetings, at 
all the meetings of merchants and manufacturers 
for years preceding 1907, the mischievous effects 
of our currency system were proclaimed and the 
ultimate outcome predicted. Congress was peti- 
tioned again and again to remedy those intoler- 
able conditions, and to permit national banks to 


expand their circulation under proper safeguards, 
but without avail. 

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

Had the national banks of New York City 
enjoyed the right to expand their circulation in 
the manner provided by the plan of the American 
Bankers' Association, at least a part of the 
debacle would have been avoided. "The banks 


and trust companies of this city have in their 
vaults the largest store of good credit that can 
be found in any city in the world," said one of 
America's foremost economists as the panic raged, 
"but much of it is utterly unavailable because of 
our currency system. One of the trust companies 
that closed its doors has in its possession live assets 
amounting to over $50,000,000. All this credit 
is dead. It cannot do the work of a single dollar 
in the paying-teller's cage. What is wanted in 
a time like this is freedom to convert the credit 
of banks into a medium of payment that will 
satisfy the people."* 

True enough, and just what the whole financial 
community, including the Stock Exchange, had 
been repeating for years. Currency issues which 
do not provide for all situations, including not 
only ordinary demands, but also such exceptional 
cases of shrinkage as this one was, can never be 
called perfect, nor even safe. There is no health 
in them.f The most effective and the most rapid 
means of regulating and protecting the general 
credit situation is by increasing or diminishing 
the volume of outstanding bank-note currency not 

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

t Consult Burton, /M^ra, pp. 109-no: Muhleman. "Monetary Systems 
of the World," pp. 128, 130, 135, 140. 


covered by a reserve of gold or other lawful money. 
This method is employed successfully both In 
France and in Germany. The Bank of France and 
the Imperial Bank of Germany to some extent reg- 
ulate credit conditions by acting as central banks 
of discount; but their most effective action is 
by increasing or diminishing the uncovered amount 
of their outstanding notes. When additional 
currency is needed as a circulating medium they 
supply this currency by issuing notes. When 
contraction of currency, or a check upon the 
further expansion of bank credits is desirable, 
they accomplish the result by diminishing the 
volume of their outstanding notes and by raising 
the discount rate. This system is as nearly per- 
fect as any yet devised.* 

Whether we shall ever succeed in adopting it, 
or something like it, in America, is the burning 
question in our banking offices to-day. Until 
something is done, the layman who distrusts 
the plan of a central bank and looks upon Wall 
Street with abhorrence, may find satisfaction in 
knowing that the average New York banker is 
the most worried and harassed man in American 
business life. With millions of other people's 
money in his possession subject to withdrawal 

* "The Banking and Currency Problem in the United States," Victor 
Morawetz, New York, North American Review Publishing Company, 190^, 
pp. 87, rt. seq. 


by check at sight, and with millions of the best 
security" in the world in his vaults lying absolutely 
idle and worthless so far as raising currency is 
concerned, he stands between the devil and the 
deep-blue sea. Anything that frightens his 
depositors, or even remotely suggests panic, gives 
him a cold chill. People who talk of manipulation 
by New York bankers as a cause of the panic of 
1907 or any other panic are blind to the fact that 
any disturbance of normal conditions is the one 
thing that bankers would avoid as they would 
avoid the plague. 

There was a third cause of the panic in the 
course pursued by the President. In some quarters 
it is still termed "the Roosevelt panic," and there 
exists a belief that the President by his actions 
and speeches played a large part in bringing about 
the. crisis. Personally, I feel that this has been 
exaggerated. There had been, unquestionably, 
wrongdoing by certain corporation managers. 
The President, with a characteristic vigor not 
unknown to politicians, seized upon it as a theme 
for his speeches, and the "evils," the "male- 
factors," the "corruption" and "dishonesty" 
with which he bruised the air, raised a suspicion 
in many quarters as to the status and security 
of the whole financial situation and undoubtedly 
contributed to the frightened liquidation of the 


day. The impression these utterances produced 
abroad, where American securities were popular, 
was painful, and led one returning tourist to 
remark that Europe was acquiring the idea that 
we were " a nation of swindlers. " 

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

I am of the opinion that, judged by his public 
utterances, especially his October speech at 
Nashville, Tenn., the President had not the 
remotest idea that such an awful shock as the 
panic of 1907 was imminent. He was not a 
student of economic conditions; he had no famili- 
arity with crisis-producing phenomena; he had 
never seen a panic at close quarters. His speeches 
did not cause the panic, for that disturbance was 
foreordained; they served, however, to hasten it, 
to intensify it, and to keep it alive. Perhaps 
I may add that the sparks beaten by him from 
the anvil of political expediency at that un- 


fortunate moment threw more light upon the 
President himself than upon the evils he con- 
demned. Perhaps, too, that was what the Presi- 
dent most desired. In any case, the fact remains 
that just as there is too much confidence in times 
of excessive expansion, so there is too little in 
times of unreasoning depression; and that the 
President's attitude aggravated the latter situa- 
tions is undeniable. 

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

There was yet another reason for the panic, 
closely related to the attitude of the President. 
I refer to the predicament of the railways of the 
country as 1906 passed into 1907. Staggering 
under a load of traffic which sorely taxed their 
equipment, the managers of these properties 


cried aloud to the Investing public for funds. 
But capital was not to be had. Tied up in real- 
estate speculation and in quarters whence it could 
not be easily recovered, the normal supply of 
capital was immobile and inert. What was 
worse, encouraged by the attitude of the President, 
an epidemic of radical anti-railroad legislation 
became manifest in the several States, new and 
onerous burdens of taxation were imposed, and a 
wave of distrust and suspicion regarding railway 
investments was created. Simultaneously the 
cost of wages and materials advanced — both 
characteristic phenomena indicating trouble — • 
and, as a consequence of all this blockade, the 
ratio of net to gross in the matter of increased 
earnings fell from the normal proportion of about 
40 per cent, in the first nine months of 1906, to 
less than 10 per cent, in the same months of 1907. 

Railroads are public utilities that must continue 
to handle business oiTered them no matter what 
happens, and so, to meet all these abnormal 
demands, but one course was left open to them, 
and that was to raise funds by issues of new stock. 
This, of course, amounted practically to an 
assessment of stockholders; as an expedient it 
failed because "Wall Street" had already recog- 
nized the symptoms of disease. It was too late. 
Money and credit attract money and credit, and 


confidence attracts both. There was a shocking 
absence of confidence in the emergenc)^ of 1907, 
and the railroads suffered enormously by it. 

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

I venture the prediction that when these con- 
ditions again prevail, as they must in a great and 
vigorous country like ours, the Stock Exchange 
will still be found sounding its warnings, but it 
will not do to hope that those who learned the 
bitter lesson of 1907 will profit by that experience, 
because the condition of mental disturbance 
which is a part of every panic cannot be regulated 
by the will, nor kept within bounds by the statute 
law. The one lesson we have learned from the 
predicament of the railroads in 1907 is that there 
is a tendency toward disturbance in large acces- 


sions either of business or of capital. "At 
intervals," says Walter Bagehot, "the blind 
capital of a country is particularly large and 
craving; it seeks for some one to devour it, and 
there is 'plethora'; it finds some one, and there is 
* speculation' ; it is devoured, and there is ' panic' "* 

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

I have shown that an antiquated currency 

•"Collected Works," Vol II, p. 2. 


system played a conspicuous part in the crisis, 
through contributory negligence on the part of 
our law-makers. The part played by the Presi- 
dent has been cited as a third, though somewhat 
negligible, factor in sowing the seed of distrust, 
and also the trying position in which the great 
common carriers of the country found themselves 
after the seeds of distrust had been sown. These 
were the four causes of the panic of 1907.* 

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

* Senator Burton "Crises and Depressions," pp. 51, 52, enumerates the 
important indicia of crisis-producing conditions as follows: 

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

{b) Increased activity of established enterprises and the formation of 
many new ones, especially those which provide for increased pro- 
duction and improved methods, all requiring the change of cir- 
culating to fixed capital. 

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

(d) The general employment of labor at increasing or well-sustained 


(e) Increasing extravagance in private and public expenditure. 

(0 The development of a mania for speculation, attended by dishonest 

methods in business and the gullibility of investors. 
(g) A great expansion of discounts and loans and a resulting rise in 
the rate of interest; also a material increase in wages, attended by 
frequent strikes and by difficulty in obtaining a sufficient number 
of laborers to meet the demand. 
Not one of these indications of trouble was lacking in the period preceding 
the panic of 1907. 


hands, representing, with the transactions in 
bonds, a par valuation exceeding ^483,000,000. 

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

Finally, where do we stand .^ Orthodox econ- 
omists like Wells talk of over-production as a 
cause of panics; currency experts bewail a lack 
of circulating media; theorists of the school of 
Jevons are driven to seek In sun-spots the potent 
force of all our harvests; Levi and Mill dwell 
upon the periodicity of panics and would fix their 
appearance by schedules of time; politicians and 


thinkers-In-embryo point the finger at Wall Street, 
and yet, with all that has been written, thirteen 
great crises at home and abroad within the last 
century show that we have not begun to get at 
these disturbances. Drou^t has been a cause of 
mischief, yet we have learned to irrigate and to 
conserve; epidemics have smitten us, yet we have 
mastered sanitation; floods have ruined whole 
territories, yet we have built dikes and levees. 
But every now and then, when business seems 
to be at its best, when merchants are dividing 
large profits, and when labor is best rewarded, 
a panic occurs and the whole structure collapses. 
To say that Wall Street or Lombard Street or 
any group of men anywhere can bring such condi- 
tions to pass is to deny all the facts of experience. 
Depressions may come from any of a hundred 
causes, but panics originate in the mind; they are 
manias. Walter Bagehot gave up trying to pre- 
scribe for them because he realized that sudden 
frenzy is not an ailment to be foreseen and pre- 
vented. "But one thing is certain," he said, 
"that at particular times a great many stupid 
people have a great deal of stupid money;" 
to which he adds, "our scheme is not to allow 
any man to have a hundred pounds who cannot 
prove to the Lord Chancellor that he knows what 
to do with a hundred Dounds." When thousands 


of people ignore all the warnings of experience, as 
they always will do; when with a blind misdirec- 
tion of energy they sink borrowed capital in 
quagmires at fancy prices, as they always have 
done; and when, shorn of their all, they are 
simultaneously seized with a mania to denounce 
others for the consequences of their own folly, as 
they always must do, one cannot avoid the thought 
that perhaps Bagehot's humorous solution is the 
best that has been devised.* 

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

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

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

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

C. Wooley, Phases of Panics; a brief historical review; London, 
Good, 1897. 

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

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

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

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

H. Denis, La Depression Economique et Sociale et I'histoire des prix; 
Brussels, 1895. 

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

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

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

The Pears prize essays. London, Chatto, 1885. 

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

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





In THE Middle Ages the notion prevailed that 
there was a just and equitable price for every- 
thing, 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 13 ii one Thomas Lespicer of Ports- 
mouth was caught red-handed in London with six 
pots of Nantes lampreys stored in a fishmonger's 
cellar in the hope of a rising market. The law 
required that when he arrived in London from 
Portsmouth with his lampreys he should proceed to 
the open market under the wall of St. Margaret's 
Church in Bridge Street, and stand there four days 
selling at current prices to any one who cared to 
buy. His failure to do so, and his wickedness in 



attempting to "bull" the lamprey market by 
hiding them in the fishmonger's cellar, resulted 
in the arrest of himself and the fishmonger, and 
their trial and punishment at the hands of the 
Mayor and Alderman. 

Professor W. T. Ashley, who cites this incident 
in his "Introduction to English Economic History 
and Theory" (London 1892), also gives another 
instance in which our modern theories of natural 
rights and freedom of contract seem to be in 
hopeless conflict. John-at-Wood, a baker, was 
arrested in 1364 charged with the profane practice 
of "bulling" wheat. "Whereas one Robert de 
Cawode," the indictment reads, "had two quarters 
of wheat for sale in common market on the pave- 
ment within Newgate; he, the said John, cunningly 
and by secret words whispering in his ear, fraud- 
ulently withdrew Cawode out of the common mar- 
ket, and they went together into the Church of 
the Friars Minor, and there John bought the two 
quarters at I5|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 he 


had afterward returned to the market and boasted 
of his crime, and "this he said and did to increase 
the dearness of wheat. " Accordingly he was 
sentenced to be put in the pillory for three hours, 
and one of the sheriffs was directed to see the 
sentence executed and proclamation made of the 
cause of the 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 Revolu- 
tion, the Bank of England having been organized 
and bank shares created, a speculative outburst 
occurred that led to the enactment of fresh legis- 
lation entitled "An act to restrain the numbers and 
ill practices of brokers and stock-jobbers,"* 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, f and in 1708 City rules were established 
for brokers, obliging them to give bonds for the 
proper performance of their duties. In 171 1, 
1713, and 1719, laws were enacted similar to the 
Act of 1707. 

Then came the speculative schemes of 1720, 
of which the most famous or infamous was the 

* (8 and 9 Will, III, Ch. 32.) 
t (6 Anne, Ch. 16.) 


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 
1 20 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 prac- 
tice 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 discourage- 
ment of industry, and to the manifest detriment of trade and 

This act forbade bargains for puts and call§, and 
also "the evil practice of compounding or making 
up differences"; but its principal provision was the 
prohibition of short selling under penalty of £ioc 


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 i860, 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 certifi- 
cates 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 develop- 
ment as the world's banker, popular attack and 


criticism continued to assail it. It may be frankly 
admitted that the legitimate functions of the 
institution had been abused by foolish or unscrupu- 
lous 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 excres- 
cence on the body politic, or whether, on the other 
hand, its importance in the mechanism of modern 
business merely required improvements and re- 
forms. 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 investi- 
gations along special lines, and in 1878 its report, 
with the evidence, was published in a Parlia- 
mentary Blue Book. 

The report absolutely upheld the purposes and 
functions of the Stock Exchange and the legiti- 
macy of speculation in securities, and it went 
further in pointing out the danger of attempting 
to force any form of external control on the 


Institution. The evils of that form of Stock 
Exchange speculation which closely approaches 
mere gambling were plainly stated, and the report 
suggested that the Exchange authorities restrain 
such practice in so far as was possible. 

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


in that law, would, in our opinion, be detrimental 
to the honest and efficient control of business." 
In 1909 similar criticism in New York having 
led to the appointment of the Hughes Commission 
to inquire "what changes, if any, are advisable 
in the laws of the State bearing upon speculation 
in securities and commodities, or relating to the 
protection of investors, or with regard to the 
instrumentalities and organizations used in deal- 
ings 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 manu- 
facturer 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 quali- 
fied 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 mechan- 
isms 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 pur- 
chase of any property in which part payment is deferred. 
We, therefore, see no reason whatsoever for recommending 


the radical change suggested that margin trading be pro- 

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 improve- 
ments, and each is firmly of opinion that the 
changes recommended are such as can be car- 
ried out by the Stock Exchanges themselves 
without the assistance or interference of the legis- 

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 atten- 
tion. As a result of these deliberations, a majority 
of the commission recommended that the London 
Stock Exchange should voluntarily apply for 
a royal charter or act of incorporation, but the 
reasons upon which this recommendation were 
based had to do with the temporary or shifting 
character of the membership, which gave very 
little assurance to the public of the permanence 
and stability of the rules, since members of the 


London Stock Exchange are only elected for one 
year. It need scarcely be added that such an 
argument would not apply to the New York 
Stock Exchange. 

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

"Supposing such an application to be made, and Parlia- 
ment to be prepared to incorporate the Stock Exchange on 
the terms which are embodied in the report, the consequence 
would be that rules so established would be stereotyped, 
and could only be altered, even in the minutest details, with 
the approval of a department of the State. In my opinion 
this requirement would be either mischievous or nugatory. 
To attempt to regulate the manner in which business is 

* See appendix. 


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 incorpo- 
ration. He said: 

"In fixing my name to this report, I desire to make the 
reservations following; i. 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 estab- 
lish an open market to resort to it for business, and to give 


it exclusive confidence. This royal commission has been 
sitting more than twelve months, yet no important or reliable 
evidence has been volunteered of a character adverse to 
the general practices or conduct of business on the Stock 
Exchange. If proof be required that the internal legislation 
and administration of the Stock Exchange enforce a higher 
standard of morality than the law can reach or enacts for 
the regulation of other trades, such proof is to be found in the 
fact that recently the committee of the Stock Exchange 
were assailed at law by a member whom they expelled on a 
charge of dishonorable conduct, the lawsuit being based on 
the ground that the action of the committee was not justified 
in law. The trial lasted seven days and proved abortive, 
the distinction between the standard enforced by the com- 
mittee 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 com- 
pelled 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 sub- 
mit 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.'" 


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 pro- 
tects the patrons of the Exchange to an extent 
that would not be possible if, under incorporation, 
members could invoke their constitutional preroga- 
tives.* 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 extra- 
ordinary degree the fairness and right-mindedness 
with which members have been held to their 
obligations, the fact that, although in a number 
of instances appeals have been made to the courts 
for reinstatement by members who have been 
expelled or suspended for infraction of the rules, 
or for conduct which, although it might not be 
in violation of any express rule or regulation, 
or in violation of any law or legal obligation, the 
committee have held to be inconsistent with the 
maintenance and exercise of those standards of 

* See p. 140. 


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 Govern- 
ing Committee being reversed by the courts." 

The distinction between the expulsion of a 
member of such a voluntary unincorporated asso- . 
ciation and the expulsion or removal of a mem- 
ber 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.* 

Germany dealt with a similar situation m very 
different fashion. In the autumn of 1891 there 
were disastrous failures of certain German banking 
houses, resulting from criminal misuse of bank 
deposits and from an undue participation in 
speculative transactions by the general public. 
The outcry that followed was no new thing in 
Germany, for as early as 1888 conditions that had 
arisen in the Berlin market and the Hamburg 
coffee market had led to petitions to the Reichstag 

* For a legal opinion concerning the rights of plaintiffs arising from mem- 
berships in a corporaticm as contrasted with those arising from memberships 
in a voluntarily unincorporated association the reader is referred to White 
vs. Brownell {2 Daly at p. 337), opinion at Special Term by Justice Van 
Vorst; and the same case at General Term, opinion by Justice Dalj'. The 
■courts of New York State have on a number of occasions expressed their 
approval of the manner in which the Stock Exchange has discharged its 
functions under this form of organization. The reader's attention is 
tailed to Belton vs. Hatch, 109, New York, 597, Court of Appeals. 


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 Chan- 
cellor 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 Director- 
ate of the Reichbank, Doctor Koch. The com- 
mission 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 prin- 
ciples on which these recommendations rested 
was that, in view of the importance of the interests 
which were represented at the Exchanges, modi- 
fications should be made with caution, and the 
existing complicated trade usages and methods 
should not be disregarded; while, on the other 


hand, there was no occasion for regarding with 
mistrust, still less with hostility, interference in 
the free working of industrial forces. "* 

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 recog- 
nized, but modifications are to be made "with 
caution. " But it so happened that the recom- 
mendations 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: 

(i) 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. 

* "The German Exchange Act of 1896," by Dr. Ernst Loeb, in the 
Quarterly Journal of Economics, July, 1897. 


(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 anti- 
quated 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 pub- 
lic," and that "the dangers of speculation have 
increased." We have high authority for a de- 
tailed 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: 

(i) Fluctuations in prices have been increased rather than 
diminished. The corrective influence of the bear side of the 
market having been restricted, the tendency to an inflated 
bull movement was increased in times of prosperity. This in 
turn made the danger of radical collapse all the greater in 


proportion as the bull movement was abnormal. The greater 
funds needed to carry stocks on a cash basis further increased 
the danger when collapse was threatened. The result was 
an increased incentive to reckless speculation and manipula- 
tion. 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 ap- 
proached 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 
carrj^ out customer's orders because the new methods 
required large supplies of both cash and securities. Further- 
more, 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 eflFect 
was to increase it. 

(5) Finally, the effect of interference, increased cost, and 


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

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. 

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

(2) The act aimed to establish legal certainty by means 

*"Ten Years Regulation of the Stock Exchange in Germany," by 
Henry Crosby Emery in the Yale Review, May, 1908. 


of registration. It proved a direct incentive to fraud. 
The customer was not legally liable on his contracts; there- 
fore, every reckless and dishonest little plunger, who could 
get a broker to trust him, could take a "flyer" with every- 
thing 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 
contrar}^, 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 
oonietimes engendered, the fact remains that a "purely profes- 
sional 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.* 

It is not surprising that such a law, enacted 
to meet political clamor, in defiance of the recom- 



mendations 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 in- 
terests." Four years later the same bank 
reported: "A serious political surprise would 
cause the worst panic, because therfe 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 con- 
sider it our duty to impress again and again a 
wider circle of the public with the economic 
value of the Stock Exchange and its important 


relation to our financial preparedness in times of 

Again, the following year the bank kept pound- 
ing 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 eco- 
nomic conditions, the unavoidable selling force 
cannot be met by dealers willing and able to buy. 
It will then be too late to recognize the harm- 
ful 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 impor- 
tant economic functions until the restrictions 


upon trading for future delivery have been re- 
moved. "* 

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 Uni- 
versity in pointing out the deplorable results of 
that legislation because his study of the subject 
has made him the foremost authority. The re- 
monstrances 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" opera- 
tion 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 the 

* "The German Bourse Law," by G. Plochmann, North American Review, 
May, 1908, 


enactment of laws to right every fancied wrong. 
But the patient study of such matters, the nice 
balancing of probabilities, the penetrating investi- 
gation 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 

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


and the men who make our laws must look before 
they leap. 

Speculators in the region of criticism, whether 
of theology or economics, who find themselves face 
to face with a fact too stubborn to fit in with 
their opinions or conclusions, have but two courses 
open to them: either to reconsider in the light 
of testimony the conclusions they have reached, 
or to denounce and discredit the inconvenient 
witness. In this instance the inconvenient wit- 
ness 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 dis- 
credited; 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 18 1 2, five years before the New York Stock 
Exchange was organized, an act was passed by 
the New York State Legislature entitled "An act 
to regulate sales at public auction and to prevent 


stock-jobbing," its essential purpose being the 
prevention of short selHng — the bete-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 pos- 
session 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.* 

The effect of this law was precisely the same as 
that which followed the enactment of Sir John 

*"An act to regulate sales at public auction and to prevent stock-jobbing," 
New York State Legislature, 1812. 


Barnard's Law of 1734 in England; it did not 
prevent short selling, it accomplished no useful 
purpose, and it merely served to enable unscrupu- 
lous 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.* 

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.f In 1864 there were large issues of paper 
currency that drove gold out of circulation and 
caused it to be bought and sold as any other 
commodity. Thus a large supply of gold fell 

* "An act to regulate sales at public auction and to prevent stock-jobbing," 
New York State Legislature, 1858, repealing act of 1812. 
t "Statutes at Large," Ch. 127 and Ch. 209, repealing Ch. 127. 


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


It turned out in the end that the operations of the specu- 
lators 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 

Mr. Horace White deals with the gold specula- 
tion of the '6o'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.! 

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- 
qullt laws on the statute books dealing with specu- 
lation, but these are relatively unimportant. Some 
of the States, Wisconsin, Louisiana, California, 
Montana, North Dakota, and South Dakota, 

* "Economics," by Arthur T. Hadlej', New York, 1896. 

t "Money and Banking," by Horace White, New York, 1895. 


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*. 

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 Govern- 
ment Commissions we have described grew out 
of excess in speculation and consequent losses to 
the public, so, no doubt, future extravagance in 
the world of speculative undertakings will be 
attended by similar outcries and similar results. 
There were debates in Congress for three years over 
the Hatch Anti-Option Bill, and while this measure 
failed of enactment into law, something akin to it 
will no doubt come up again one day when the 
public is in the mood. 

It is probably true that in such event the lessons 
taught by earlier legislative experiments, and 
particularly by the German fiasco, will have their 

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


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 pre- 
mise 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 gov- 
ernors 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 pri- 
vate citizen has his responsibilities as well as the 

Looking forward toward the great questions 
of the future having to do with State regulation 
of industry and commerce of which the Stock 
Exchange is a part, the student finds no solution 
so satisfactory as the doctrine of laissez faire, 
assuming always that those in control of the 
business under scrutiny shall do their full duty. 


Under the policy England has risen to unex- 
ampled 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 an- 
swer Is to be found in Its records for the year 191 3. 
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 191 3 the 
Exchange met the issues squarely. 

Manipulation was stopped, in so far as it can be 
stopped, by the famous resolution of February 5, 
191 3, 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 exe- 
cute, 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 ficti- 
tious transactions." 

Trading on Insufficient margins was stopped by 
the resolution of February 13, 191 3, as follows: 


"Ata meeting of the Governing Committee held this day, 
the following resolutions were adopted: 

"That the acceptance and carrying of an account for a cus- 
tomer, 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 mem- 
ber 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 " jf 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 efTective 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, 


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 watcKed them at their work 
and I have no hesitation in saying that this Com.- 
mittee 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 ad- 
mit 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 sweep- 
ing; 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 Ex- 
change has tasted the fruits of a great moral victory 
.and finds it good. It follows that new prob- 


lems 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 incor- 
poration and supervision by Albany and Washing- 
ton must cease .^ I feel strongly that this is to 
happen. I know it ought to happen, and those of 
my colleagues who have worked so loyally to bring 
about these reforms will be mighty proud and 
happy when it does happen. 





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

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


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

At such times they become very earnest, and the 
listener, who perhaps never thought of it before, 
com-es away at least partially persuaded that soci- 
ety as it is constituted to-day will have to un- 
dergo a very decided transformation before It can 
get along without the machinery of which these 
maligned persons are so important a part. It has 
stood the test of time; it has come to stay; its 
fundamental idea, economy and utility in trade, 
began with the Agora of ancient Greece and the 
Forum of Rome. If there is something apocry- 
phal, then, in the tradition that derides the pro- 
fession, here at least is evidence of its early origin, 
its growth, and its power of endurance. In any 


case, membership in the Stock Exchange is to-day 
the ambition of good citizens everywhere, and 
affords to many a father a solution of the question 
at once difficult and important, "What shall we 
do with our sons?" 

There are arguments against such a career, 
of course, just as there are against all roads that 
lead anywhere this side Utopia, but nevertheless, 
a man with capital, average intelligence, and 
good health, daily contributing by his labor to 
the silent forces that ebb and flow within 
these walls, can do well on 'Change without sacri- 
ficing anything that makes for self-respect and 
without diminishing in any degree his value as a 
useful member of the community. Moreover, 
he is free from things sedentary and is brought 
into daily contact with men and affairs that 
broaden and instruct him. He becomes a think- 
ing and observing person, one whose mind never 
becomes atrophied for want of material on which 
to feed. He must be equipped with patience 
and philosophy to enable him to endure, without 
losing his nerve, the long periods of dulness that 
are a sorry part of the business, but he will not 
complain of wasted days if he learns to know that 
waste time, like waste material, may be converted 
into valuable by-products; that just as manu- 
facturers are vigilant in turning their scrap-heaps 


into commercial utilities, so, in his daily economy 
the Stock Exchange member may, if he has the 
right stuff in him, turn the ashes, slag, and refuse 
of the hour into things of practical value. Once 
he has learned to do this, the novitiate has sur- 
mounted the most serious obstacle in his pro- 

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


all in action, but they make no mistakes when 
they analyze character in their great crucible. 

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

The New York Stock Exchange is an association 
and not an incorporated body. It resembles a 
club in Its organization, and hence through its 
governing board it exercises a control over its 
members that could not be maintained by difi"er- 
ently constituted authority. From the moment 
a man signs that Ark of the Covenant, the 


constitution, and thereby becomes a member, 
he places himself, his partners, his customers, 
his employees, his books and all his business 
affairs unreservedly in the hands of the Board of 
Governors. This body, which is composed of 
members of the Exchange, is chosen in classes of 
ten, by the full Board at an annual election. 
It consists of forty members, divided into eleven 
standing committees, of some of which the Presi- 
dent, Vice-President, and Treasurer are also 

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


point that if changes were necessary they should 
come from within the Exchange itself, because 
of the broad control vested in it by its consti- 

The manner In which the Board of Governors 
handles offences as they occur, and the way 
punishment is meted out, would not have a con- 
stitutional leg to stand on if, as an incorporated 
body, offenders could invoke their legal privileges. 
Under its present organization, for example, the 
Board may, if it sees fit, intercept and cut off a 
member's telephone connection; it may dictate 
with whom he may or may not do business, and 
in its wisdom it may determine how, when, and 
where that business shall be conducted. If it Avere 
an incorporated body and each offender could 
resort to the courts in instances such as I have 
cited, what would become of its rules, and how 
could the Exchange authorities maintain its 
absolute determination to protect the public at 
all hazards.^ Under the existing system, which 
true friends of the Exchange and of the public 
may well wish to see maintained, the governors are 
enabled to find the direct way and the common- 
sense way, without being blocked by a jungle 
of legal technicality. They are not to be delayed 

* The London Stock Exchange is also an unincorporated body. See pp. 
231 et seq for the report of the royal commission bearing on this matter. 


or restricted hy alibis, by pleas of immunity, or 
by States' evidence, nor are they to be interfered 
with by the rain of legal writs through which an 
accused man, in the courts, may twist and double 
and block and delay the punishment for his sins, 
if sins there be. 

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


on behalf of the principle for which the Exchange 
stands can ever doubt it. The members them- 
selves, no matter who is punished, are a unit, and 
an enthusiastic unit, in upholding the disciplinary 
action of the governors every time. 

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

This means that a member must choose his 
partners carefully, must familiarize himself with 
what they are doing, and must know how to 
read every entry on the firm's books. Then, 
too, it is immensely satisfactory to one who has 


been on the floor all day and more or less out of 
touch with his office details to learn of his own 
knowledge each day, before he goes home, just 
where the firm stands. He looks over the cus- 
tomers' accounts, the loans, and the nature and 
amount of the firm's unemployed resources, includ- 
ing its balances at the banks. Such a man sleeps 
well, and reduces to a minimum the anxieties 
that, at critical times, make of this a nerve-racking 
occupation. It is all simple enough, and in the 
modern methods of office economy in bookkeeping 
he can do it without loss of time. Above all other 
considerations, such a man knows his business thor- 
oughly from top to bottom, and he should not think 
of investing his capital on any other basis. 

Perhaps a word will not be amiss regarding 
partnership agreements. A Stock Exchange com- 
mission business is one that should be conducted 
like any other business — that is to say, reserves 
should be laid aside and surplus balances created 
for the inevitable rainy day. That this is not 
done by all brokerage houses in the way it should 
be done is due to the curious habit that has 
grown with the years, whereby stockbrokers spend 
their money, uptown and down, with a lavish 
hand. Too many men of the younger generation 
thus give hostages to fortune in their private 
extravagances by "drawing down" their credit bal- 


ances as fast as they accrue. "Easy come, easy 
go," seems to be the guiding principle, and when 
hard times come, as come they must, debit balances 
are created that soon eat into capital account. 

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

New York Stock Exchange memberships are 
obtained in only one way. Having assured him- 
self that he can meet the requirements of the 
Committee on Admissions, and having pro- 
vided himself with two sponsors, the candidate 
enters into negotiations with the secretary of the 
Exchange for the purchase of a "seat," as it is 
termed. As there are only iioo members, and as 


the membership Is always full, he must either 
purchase the seat of a deceased member, or make 
a bid sufficiently high to attract a seller. He may, 
of course, subject to approval by the committee, 
inherit a seat or acquire it by private transfer, 
but the customary process is to buy openly 
through the secretary, a salaried officer of the 
Exchange, whose authority in matters of infinite 
detail is such as to make him a mighty power in 
executive affairs. Thereupon he pays over the 
purchase price, together with an initiation fee 
of $2000, and presents himself and his sponsors 
before the Committee on Admissions. ■ 

This committee first calls his proposer, and then 
his seconder, and they are subjected to a careful 
inquiry as to how long they have known the 
candidate, and whether in a business or social 
way; his qualifications for membership, his health, 
his character and reputation, and his previous 
business experiences are all subjected to a micro- 
scopic scrutiny. His sponsors are also asked if 
in the ordinary course of business they would 
accept his check for $20,000.* If the answers 

* The question put to sureties on the London Stock Exchange is, "Would 
you take this man's checqae for £3000 in the ordinary way of business?" 
to which an unprepared sponsor once replied, "Well, I should not pick it 

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


to these questions prove satisfactory, the candi- 
date himself is summoned and put through a 
similar examination. As his name has been 
publicly posted on the bulletin board for two 
weeks, anything detrimental concerning him 
will probably have been communicated to the 
authorities before he is examined, but if not, 
provided he proves satisfactory and the particular 
department of Stock Exchange work which he 
proposes to undertake meets with the approval 
of his inquisitors, and provided also his partners 
are not objectionable, he is elected to membership 
after he signs his name to that magnum opus, 
the constitution. 

The price paid for memberships in recent years 
has varied widely with the condition of the times 
and the state of the stock market. In the halcyon 
days of December, 1905, and the opening months 
of 1906, there were several transfers at ^95,000, 
the high-water mark. Following the panic of 
1907 seats declined in December of that year 
to ^51,000 and rose again in 1909 to ^94,000. 
The only dues are ^100 annually, together with 
^10 voluntarily paid by members to the heirs of 
each of their deceased colleagues, but this amount 
is, under the regulations of the Exchange, limited 
to $150 annually, the balance, if more than 
fifteen members die in any one year, being paid 


out of reserve funds. The sum of $10,000 which 
thus accrues to the heirs of deceased members is, 
of course, much cheaper than any other form of 
insurance. The Exchange is enabled to maintain 
it by the $10 contribution as described, and the 
general fund is kept intact because the iioo 
members actually contribute $11,000, of which 
the extra $1000 is set aside as a reserve, which 
is prudently invested. 

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


which is another way of saying that memberships 
are held at high prices because holders are pros- 
perous and will not sell. 

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


smith speaks may easily be carried too far on 

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

To-day, thanks to the prudence of the Com- 

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


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

When the new member settles down to serious 
work he will find open to him several different 
methods of doing a brokerage business, and in 
this respect the New York Exchange differs 
widely from those abroad. In London, for 
example, there are but two classes, jobbers and 
brokers, to only one of which a member may 
belong. Until very recently the distinctions be- 
tween the two classes were but vaguely defined, 
and even now frequent undercurrents of resent- 
ment are aroused between them because of the 
alleged encroachments of one class upon the 
domain of the other. In Paris, where the seventv 


Agents de Change enjoy an absolute monopoly by 
government authority, there is very decided op- 
position by the less fortunate members of the 
fraternity, and there are many who predict that 
the friction and dissatisfaction which monopolies 
arouse in this day and age will sooner or later 
bring about a reformation of the French system. • 

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

A man may, if he chooses, become a partner 
in a commission house, and confine his time to 
the execution of orders for his firm's customers. 
For these services his firm receives and is com- 
pelled to collect, by the rules, a commission of 
one eighth of i per cent. — that is to say, $12.50 
per hundred shares. Or he may be a "specialist," 
and establish his headquarters at some one spot 
in the room, and do nothing but execute orders 
entrusted to him by his fellow-members in the one 


stock or group of stocks situated at that particular 
spot. For his services In these transactions he re- 
ceives a commission of two dollars per hundred 
shares, to which is added ^1.13 if he Is required to 
"clear" the trade — 'that Is, to receive or de- 
liver the stock. The latter is called "three-and- 
a-shilling business," or "clearance business." 

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

Like the chairman of the House Committee of 


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

If the new member chooses, he may become 
what Is known as a "two-dollar broker," with 
a roving commission, executing orders for members. 


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

There are perhaps fifty " odd-lot " brokers on 
the floor, and a member may, if he pleases, take 
up this branch of the business. It has to do with 
the buying and selling of fractional lots of 
securities, on which no commission is charged 
because the peculiar nature of this business enables 
the broker to trade against his commitments as 


they arise, and thus obtain compensation for his 
services in the resultant profit. In a small way 
the odd-lot broker, like the specialist, resembles 
the London jobber. One of the houses that 
confines its operations to this "odd-lot" business 
has nine partners, seven of whom are members 
of the Exchange; another has seven partners with 
six board-members. The fact that two such houses 
should have a million dollars invested in member- 
ships, to say nothing of the large sums employed 
as capital, speaks eloquently for the volume of 
business they are called upon to handle. 

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

Another field to which a member may turn is 
that which has to do with transactions in bonds. 


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

Still another opportunity presents itself In the 
business of arbitraglng. The arbitrageurs stick 
closely to the rail along the south wall, where 
there are pneumatic tubes connecting with the 
cable offices downstairs. Their business is one 
that calls for the utmost speed, since it involves 
taking advantage of fractional differences that 
arise from time to time in the prices of stocks that 
are listed on foreign Bourses as well as on the 
New York Stock Exchange. Thus Canadian 


Pacific may sell at 270 in London and at the same 
time at 269I in New York, and as an excellent 
cable service keeps pace with these fractional 
differences, the arbitrageur may buy in New 
York and sell in London and receive a confirma- 
tion, all within three minutes.* 

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

Finally, in determining what branch of thd 
Stock Exchange business he will undertake, a 
member must consider that numerous and shifty 

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


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


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

It does not occur to the uninstructed spectator 
that mighty forces are here at work in establishing 
values; that the object of the Stock Exchange Is 
to safeguard investors; that it is the one unob- 
structed channel through which capital may flow 
from sources where it is least needed Into those 
where it may be most beneficially employed. The 
casual onlooker often gives no thought to the 
high standard of commercial honor that is main- 
tained here; he does not realize that his own 
affairs, whatever they may be, would face a 
serious situation were this very Important part of 
the modern mechanism of business to suffer 


interruption. And so it sometimes happens, in 
his hazy and nebulous impressions of the Stock 
Exchange as gathered from the visitors' gallery, 
that this man's mind is fertile ground for the 
seed which may be sowed there by every genteel 
humbug, demagogue, or quack whom he chances 
to meet. 

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

That these observations apply to the New 
York Stock Exchange need not be elaborated 
when we consider that one third of our na- 
tion's wealth is represented by its securities; 
that there are two million owners of them; 
and that, through the widespread publicity of 
Stock Exchange quotations the world over, all 
these owners are given gratis the epitomized 


judgment of experts as to the value of those 
securities each day and their prospective value 
in the future.* 

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

By 9:45 A.M. the Board is beginning to present 
a scene of animation. Of the iioo members 
not more than 600 are in attendance, and often 
not more than 400; indeed, there are members 
who have never once entered the room. But 
the attendance is increased by the presence of 
some 230 pages in uniform, wearing five-year 
service stripes, of which the sleeve of the superin- 

* Consult "The World's Wealth in Negotiable Securities," by Charles 
A. Conant, Atlantic Monthly, (July, 1908). 


tendent is adorned with eight; 30 telegraph opera- 
tors, whose business it is to hurry from place to 
place gathering quotations as they occur, and 
sending them out over the ticker, and by 550 
telephone clerks who occupy the long booths on 
the west wall, where private lines connect mem- 
bers with their offices. 

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

At each of the sixteen posts in the room, from 
twenty to forty stocks are situated, and another 
group covers the north wall. Once a position is 
assigned to any security by the committee in 
charge, it is seldom moved elsewhere, and thus, 
although there are nearly six hundred different 
issues of securities, the broker soon learns the 
location of each one and turns automatically in 


that direction when an order reaches him. At 
each of the posts, and along the north wall, the 
specialists in these various groups of stocks are 
at work before the opening of the market, entering 
the day's orders in their books, some with the 
rapid energy that betokens an active opening, 
others with an indifference that spells dulness in 
their particular line. 

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


200 or 300 per cent, for accommodation, and ruin 
stared every one in the face. 

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

Naturally, certain securities are more active 
than others, and here there are the largest crowds. 
As the limits surrounding the trading-posts are 
but vaguely defined, one crowd will sometimes 
get mixed up with another, whereupon confusion 
results, and good-natured if earnest appeals are 
heard to "get out," and "get over." Into one 
of these struggling masses a broker with an order 
or a trader with an inspiration literally hurls 
himself; each sound in the jargon of voices, which 


means only Bedlam and Babel to the visitor, is 
to him perfectly understood. He may be pushed 
this way and that, or tossed aside, or hidden 
altogether by bigger men who surround him, yet 
he has no difficulty in determining the price and 
in doing what he came there to do; all this with 
surprising celerity and accuracy. The business 
done, he hastens to his telephone, makes his 
report, and is ready for the next order. The 
manner in which some of these transactions take 
place between brokers has long been a subject of 
praise. A word, or a nod, or an upraised finger, 
or a tap on the arm, and hundreds of thousands 
of dollars change hands without a scrap of writing 
or a witness. A magazine writer thus describes it; 

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

One of the time-honored institutions of our land — one 
which has never ceased to be the centre of abuse — is the 
New York Stock Exchange. Here conspiracies are organ- 
ized for robbing the poor and grinding the rich; so despicable 
and damnable that Society is appalled. Here plots are 
hatched which will eventually destroy the nation, and here 
the Gold Barons defraud the innocent and the unwary, by 


stock issues based solely on hot air and diluted water. Here 
Senators are made, Congressmen debauched, and judges 
instructed — even plans consummated for the seduction and 
capture of the Supreme Court. All this is true — absolutely- 
true — you have only to read the daily papers to be con- 
vinced of it. 

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

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

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

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

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


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

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

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

When a "mix-up" occurs in a crowd, as when 
four or five men make claim to having supplied 
a bid simultaneously, everybody produces a coin 
and "matches" on the instant. It is a case of 
"odd man wins," and no time to lose. The 
market may be active and differences of seconds 
may spell losses of thousands. In less time than 
it takes to tell it, everything is adjusted and 
forgotten. But sometimes a mistake occurs 

* Hopkinson Smith, in the World's Work (August, 1912). 


which is not discovered by either party until after 
the market has closed. A man may think he sold 
500 shares, for example, whereas the buyer has only 
400 on his book. In a case of this sort, the dis- 
crepancy is covered "at the market" next morning 
and the loss or profit is divided. Differences 
between members are seldom irreconcilable, and 
when they assume serious proportions any third 
man will act as arbiter and .speedily settle them. 
It is a significant fact that the Committee of 
Governors selected to arbitrate disputes is rarely 
called upon. Rarely, too, is there acrimony or 
hard feeling. The use of epithets is forbidden; 
to call a man a liar means prompt suspension. 
And so they live on raw nerves, with incidents 
occurring daily that add to the strain, yet ever 
with good-humored acquiescence toward what- 
ever fortune deals out to them, and with generous 
camaraderie one to another. 

As the day advances on 'Change, new:s and 
gossip and rumors of all kinds pour in, and to 
these the active broker must devote a large part 
of his time. It is astonishing to what extent the 
public, or that part of it that lingers in brokerage 
offices, calls for news from the floor. The 
demand is insatiable. "What do you see over 
there.?" "Who is buying Steel.?" "Who is 
selling Union.?" "What's the news in Copper.?" 


"What do you think of the market?" These are 
the messages that come over the wires all day 
long, not merely from the New York offices, but 
from Montreal, Boston, Chicago, St. Louis, and 
many other points. And no matter how busy 
the floor broker may be, time must be found, 
somehow, to reply to every question as best he 
may, for at the other end of the line there is a 
customer waiting to hear from him. 

Just why this customer yearns for news from 
the floor has always been a mystery to me. What 
does he expect to learn .^ What value attaches 
to a list of names of brokers who buy or sell Steel, 
when everybody knows that really important 
principals in these matters invariably hide their 
hands .^ All the significant news of the day is 
printed on the news tickers and reaches the 
customer's eye before the broker or the floor 
knows anything about it, yet never an hour 
passes but he is importuned to "say something'* 
about what is happening on 'Change, although 
half the time nothing whatever is happening. 
The climax of this sort of thing is reached when 
the floor man is asked to predict the future course 
of the market, a request that reaches him a dozen 
times a day. Now, in the name of common sense, 
what does he know about whether the market is 
going up or down? How can a man who is 


swimming with the current tell how fast he is 
going? If he were a seer who could foretell such 
things he would have all the money in Wall 
Street, in which case he wouldn't remain a broker 
very long. 

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

Answering all the questions that come to him 
over the wires is the hardest task, and the most 
distasteful thing the floor man is called on to do. 
He knows that he doesn't know anything; from 
his point of view no information is better than 
misinformation. He feels with Josh Billings, " It's 


a mitey site better not 2 no so mutch than 2 
no so mutch that ain't so," but nevertheless he 
must continue to express views and theories and 
opinions, and predictions, whether he Hkes it or 
not. Some of his oracular utterances are illumi- 
nating. "Market is going down," he replies, 
"because there are more sellers than buyers." 
Inexorable logic. 

There was old Y , who used to talk to his 

customers sitting near his office window, which 
faced Battery Park. He was a shifty professor 
of finance who never was known to hold the same 
opinion of the stock market two days running. 
*'This market," he said one day, "is going away 
up, crops are good, money is easy, railroads are 
rolling in wealth, and — ^ look over there" — 
pointing to a line of immigrants walking through 
the park from the landing place — "the brawn 
and sinew of old Europe coming over here to 
develop our resources. " The very next day the 
market had what is called a "healthy reaction." 
Quite unmindful of his consoling prophecies of 

yesterday, old Y looked at the tape and 

said, "This market is going away down. Crops are 
poor, money is tight, railroads are in a bad way, 
and — look over there" — pointing to another 
procession of immigrants — "the scum of Europe 
coming over here to rob our American laborers." 


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

* "They are like unto children sitting in the market-place and calling 
one to another, and saying, 'We have piped unto you, and ye have not 
danced; we have mourned to you, and ye have not wept.'" 


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

Before leaving the Board after the official close, 
the broker will stop for a moment at the loan 
crowd to borrow or lend his stocks, after which 
he spends a half hour or so in his office, going over 
the events of the day with his partners and cus- 
tomers, and familiarizing himself with the day's 

* July, 1912, p. 94. 


doings. The specialists, floor traders, and two- 
dollar men, many of whom have no partners and 
no ofiice staff, will go directly home, loitering 
perhaps for a late luncheon, or something stronger, 
at the club upstairs, or at a famous cafe across 
New Street. When times are brisk it is not an 
uncommon thing for partners to remain at their 
offices until a late hour, and clerks are often on 
duty until the small hours of the morning, spend- 
ing what is left of the night at a nearby hotel in 
order to save time. 

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

Life on the Stock Exchange is by no means 
unpleasant. It is not the idle pastime that many 


writers picture it, with easy hours and long 
intervals for luncheon, nor is it the depressing 
and nerve-destroying centre that many of the 
members would have us believe. One may cer- 
tainly linger over the midday meal for hours — for 
that matter one may absent one's self altogether 
— and conversely, one may worry and fret over 
the day's vexations until life becomes unpleasant 
for him and for every one near him. But by far 
the larger number find their work as congenial as 
earning the daily bread may be, and vastly more 
diverting than many of the sedentary occupations 
in other lines of business. Elsewhere I have said 
that the long periods of dulness on the floor 
constitute the most serious obstacle the broker 
has to meet. Accustomed to physical activity 
and with a mind inured to occupation, he chafes 
under a stagnation that is foreign to his habits and 
desires, until worry — the disease of the age — 
claims him for its own. Almost every broker's 
wife knows what I mean. It becomes a habit with 
such a man; unconsciously he grows "bearish" 
on his business, on himself, and on his associates, 
and at such times he is an awful bore. 

The essential thing for a man to bear in mind 
who finds himself growing into this mood is that 
nature abhors a vacuum. His mind is empty 
because there is nothing to do; he must therefore 


find something to do — some mental occupation 
that will banish from his mind the worries that 
beset him. In order to do this many members 
of the Exchange carry some light reading in their 
pockets for use in an idle hour; at the spot where 
the National Lead Company's securities are dealt 
in the specialists maintain a compact circulating 
library of all the magazines and periodicals; others 
spend idle moments pouring over a pocket chess- 
board; the Reading Railway post has a constantly 
increasing collection of all kinds of puzzles, riddles, 
problems — anything to keep the mind active on 
the principle of similia similibus curantur. 

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

He has now become a thinking animal; he lives 
by his wits, and he suffers from the worries inci- 


dental to brain work coupled with responsibility. 
I have just said that nature abhors a vacuum — 
in his case this especially applies to his mind. 
Care and worry are not driven away merely be- 
cause he has made his "round" in 80 strokes — 
they must be pushed out by something else, some- 
thing more than mere play or sport per se. What 
he requires is a new mental interest, not merely to 
serve as a counter-irritant for the worries of to-day, 
but as an investment for all the years that are 
before him. He must have a "hobby" of some 
sort, no matter what, so long as it is a mental 
occupation which he does for the love of it — 
books, pictures, music, postage stamps — any- 
thing will do the trick so long as it occupies the 
mind and is done for fun. We old timers have 
only to look about us on the Board to see who the 
really happy men are, the men who are never 
nuisances. They are the men whose minds are 
not content with doing nothing.* 

In the matter of creature comforts, members 
of the New York Stock Exchange have provided 
themselves with everything that gentlemen re- 
quire. Their beautiful building, an architectural 
masterpiece and one of the city's ornaments, 
has often been described; here it is sufficient to 

* "Worry, the Disease of the Age," by C. W. Saleeby, M. D., F. A. 
Stokes Co. (New York, 1907). 


say that nothing is lacking in the way of con- 
veniences necessary to the physical ease of the 
members. Barbers, valets, messengers, and 
attendants of every description are on duty; a 
well-equipped hospital room is ready for emer- 
gencies; showers and needle-baths, smoking-rooms, 
lounges, writing-rooms, reading-rooms, coffee- 
rooms, and a spacious luncheon club, contribute 
their share to the refreshment of the outer and 
inner man. The luncheon club, which occupies 
the whole upper floor, is the last word in culi- 
nary perfection. In the lounging-rooms adjoining 
are all the magazines and periodicals, and the 
walls are covered with a collection of rare prints 
of old New York, together with mounted trophies 
of the hunt presented by sportsmen members. 
In other days before the Exchange built its present 
structure the club was housed in modest quarters 
across New Street and a few non-members of the 
Exchange were admitted to membership, but now 
its facilities are taxed to meet the demand, and 
membership is restricted to the Stock Exchange, 
although guests are admitted at all hours. 

The atmosphere in the city is often trying in the 
summer months because of the excessive humidity, 
and extraordinary measures were resorted to in 
the construction of the building to minimize this 
unpleasantness on the crowded floor, where the 


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

The history of the New York Stock Exchange 
has been written many times, and need be but 


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

The development of the New York Stock 
Exchange in its early days was but a record of 
the country's growth, and this in turn depended 
upon speculation. It was, indeed, speculation 
such as the world had never witnessed. How our 


western borders were extended as the railroads 
pushed onward; how trade was stimulated 
throughout Christendom by the discovery of gold 
in California; how the national debt expanded 
a I the time of the Civil War; and how, after the 
war, construction went ahead at tremendous 
pace — all these served to fan the flames of adven- 
ture and enterprise, which are the bases of specu- 
lation. The panics of 1837, 1857, and 1873, 
severe enough to give pause to another and less 
vigorous nation, seem in the retrospect to have 
been but starting points for a fresh development 
of the national spirit — a spirit which owes to 
speculation the extension of frontiers, the bridging 
of waters, the unlocking of mountains, and the 
transportation of wealth. In this splendid work 
of conquering a continent the Stock Exchange 
has kept pace with the march of Industry. It has 
supplied the one great central market for the 
expression of the country's progress as measured 
by the country's securities, and it will continue 
to do so as long as an evergreen faith in America 
exists among Its people. 

The Stock Exchange is often defined as the 
nerve-centre of the world, and, just as every 
happening of importance finds an instant effect 
on the market, so members instinctively apply 
to current events habits of close analysis and nice 


discrimination. A failure at Amsterdam may 
result in liquidation in Atchisons, long a favorite 
of Dutch investors; prolonged drought in the 
Argentine may increase our foreign shipments of 
grain; a great engineering project, like the Assouan 
Dam, may lead to handsome contracts for Ameri- 
can steel-makers; any fluctuation in rates of for- 
eign exchange must be watched carefully to see if 
exports or imports of gold are impending; if a rich 
man dies possessed of large amounts of certain 
securities, sellers must be critically observed for 
evidences of liquidation by the heirs; speeches in 
Congress or in Parliament, or the unguarded utter- 
ances of statesmen, must be weighed and measured 
for their effect on the public mind; a great fire 
may lead to selling of investments by insurance 
companies; a revolution in Mexico may imperil 
American investments there; if there are political 
disturbances in the Balkans, the continental 
Bourses may be frightened; every move of the 
great foreign banks must then be watched closely, 
for the bankers to-day are the war-lords of crea- 
tion, and so every event of importance the world 
over makes its impression on the Stock Exchange 

What is going on in the Transvaal or in Alaska, 
the latest outbreak in China, the areas of baro- 
metric pressure in the grain country, the ravages 


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

Critics in what may be termed the impressionist 
school — accustomed to a free, instantaneous, and 
often meaningless handling of their subject — are 
prone to condemn the Exchange because the 
action of the market when large reforms in 
business are impending seems to imply hostility 
to those reforms on the part of members. This 
may be typical modern impressionism, but it is all 
wrong. If the market declines when, for example, 
a large corporation finds itself at odds with the 
law, the downward tendency of the securities 


affected is the result of natural laws with which 
stockbrokers have nothing to do. They arc but 
agents. Ten thousand owners of securities 
throughout the land may simultaneously be- 
come alarmed and sell — a familiar psychologic 
phenomenon which depresses prices — but to say 
that this result expresses the hostility of the 
Stock Exchange to the enforcement of the 
Anti-Trust Law is nothing less than an evidence 
of critical strabismus. 

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


strengthens the hands of every member and gives 
him fresh courage. 

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

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


lands of which the mere existence is but a faint 
recollection of your schoolboy studies. 

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

Naturally, in the cosmopolitan atmosphere of the 
Stock Exchange tastes are catholic and run to wide 
extremes. One of the members is a student of 
Russian literature in all its phases; he can tell you 
of its folklore, its peasantism, its liberal thought 
and its ethical ideals of society; Dostoyevski is his 
hobby and Melshin the poet. Beside him stands 
a man who has mastered the culinary art; the joy 


of his life is to prepare with his own hands, for the 
palates of his fastidious guests, dainty dishes and 
wonderful sauces that make an invitation to his 
table something worth having. On-e of the 
members is an animated concordance of Shelley, 
whom he studies with almost fanatical zeal; 
another is a disciple of Heine, whom he adores. 
There stands a man who went into the heart 
of Africa as no white man had ever done — 
through Somaliland into Abyssinia, thence to 
Lake Rudolph to hunt elephants, south to Victoria 
Nyanza, and finally, after hunting all the wild 
game of the district, on foot to the West Coast. 

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

Here are some who charged up Kettle Hill and 


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

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


in farms and extensive country estates, where one 
grows rare orchids and another breeds highly 
prized cattle, or sheep, or horses, or dogs, or 

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

There are some talented musicians on the floor, 
men who are not only proficient themselves, but 
who by their liberal support of all forms of music 
do much to encourage and maintain New York's 
supremacy as a musical centre. Grand opera, 
the Philharmonic Society, the symphony orches- 
tras, the choral organizations, and the army of 
virtuosi from abroad who have earned applause 


and money on these shores — all are accorded 
cordial support by Stock Exchange members. 
One of them gives rein to his altruistic tendencies 
by providing free concerts once a week for the 
submerged tenth in a crowded foreign quarter of 
the East Side. 

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

There is little need to speak of the New York 
Stock Exchange's charities and benefactions, 
because these are well known. Scarcely a day 
passes that some one of the members does not 


ask of his fellows a contribution, however small, 
for a worthy charity with which he or the ladies 
•of his family have come in contact, and Invariably 
the mite is freely given, although there may not 
be time to spare to hear the story. The private 
and unostentatious benefactions of members go 
on at all times, and cannot be' discussed here. 

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

Never in my experience on the floor have I 
heard a complaint from a deserving employee 
of the Stock Exchange. Salaries are wisely in- 
creased with length of service, pensions are given 
by the governors to aged servants; hospitals, 
medical treatment, nurses, and sanitariums are 


provided for the sick, and funds are supplied to 
families of deceased employees. A spirit of help- 
fulness, sympathy, and generosity is in the very 
air of the Stock Exchange, an absolutely fine spirit 
that takes pride, too, in caring for its own members 
who have been unfortunate. 

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





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



any covered place where merchants met to buy 
and sell commodities. 

After the money-changers came the money- 
lenders — Jews, more Lombards, and finally the 
Guild of Goldsmiths. The last named, having 
long practised the business of money-lending, 
finally became money-borrowers, issuing receipts 
for these borrowings known as Goldsmiths' Notes 
— the earliest form of English bank-notes — and 
the first step in the convenient process of trans- 
lating capital, and debt, and credit, into bits of 
interest-bearing paper.* This was the state of 
English finance until 1694, when the Bank of 
England was founded, and stocks and shares 
came into being since the bank was a joint-stock 
affair. That the invention of stock certificates 
was a popular one, and that the authorities and 
the public seized upon it as a convenient means 
of directing capital into new and hitherto untried 
forms of enterprise is seen by the rapidity with 
which fresh undertakings were put forth. In 
1698 the New East India Company loaned its 

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


capital to the government; by 171 1 there was a 
funded debt of £11,750,000 in the shape of bank 
stock, East India stock, and annuities. There 
was also the famous South Sea Company, to be 
followed ten years later by a reorganization of the 
company with its first subscription of a million 
in £100 stock at £300, and a second and third 
subscription of larger magnitude, each accom- 
panied by prodigious pi'omises, and each snapped 
up with avidity by a public saturated with the 
new and hazardous pastime of speculation. 

"All distinction of party, religion, sex, char- 
acter, and circumstance," writes Smollett, the 
historian of the time, "were swallowed up in this 
universal concern. Exchange Alley was filled 
with a strange concourse of statesmen and clergy- 
men, churchmen and dissenters, Whigs and 
Tories, physicians, lawyers, tradesmen, and even 
with m.ultitudes of females. All other professions 
and employments were utterly neglected; and the 
people's attention wholly engrossed by this and 
other chimerical schemes, which were known by 
the denomination of bubbles. New companies 
started up every day, under the countenance of 
the prime nobility. The Prince of Wales was 
constituted governor of the Welsh Copper Com- 
pany; the Duke of Chandos appeared at the head of 
the York Buildings Company; the Duke of Bridge- 


water formed a third, for building houses in London 
and Westminster. About a hundred such schemes 
were projected and put in execution, to the ruin 
of many thousands. The sums proposed to be 
raised by these expedients amounted to three 
hundred millions sterling, which exceeded the 
value of all the lands in England. The nation was 
so intoxicated with the spirit of adventure that 
people became a prey to' the grossest delusion. 
An obscure projector pretending to have formed 
a very advantageous scheme, which, however, he 
did not explain, published proposals for a sub- 
scription in which he promised that in one month 
the particulars of his project should be disclosed* 
In the meantime he declared that every person 
paying two guineas should be entitled to a 
subscription for £ioo, which would produce that 
sum yearly. In the forenoon this adventurer 
received a thousand of these subscriptions; and in 
the evening set out for another kingdom." 

No sooner were there bits of paper to deal In 
than jobbers or brokers sprang up to handle 
them, and by natural gregarious processes these 
dealers gathered in one spot. Thus competition 
was stimulated and active markets created. 
The rotunda of the bank and the Royal Exchange 
were their first haunts, indeed until Archbishop 
Laud drove them out they were to be found bar- 


gaining on the wide floors of St. Paul's Cathedral. 
As the business expanded they took to the neigh- 
boring streets and coffee houses, and so Change 
Alley, Jonathan's Coffee House, Cornhill, Lom- 
bard Street and Sweeting's Alley became their 
familiar retreats. Old Jonathan's burned down 
in 1748 and New Jonathan's in Threadneedle 
Street succeeded it. Here, in July, 1773, "the 
brokers and others at New Jonathan's came to a 
resolution that, instead of its being called New 
Jonathan's, it should be called 'The Stock Ex- 
change,' which is to be wrote over the door." 
Thus while business in the public funds was still 
conducted on a large scale at the bank, and deal- 
ings in foreign securities still centred at the Royal 
Exchange, London may be said to have had a 
Stock Exchange in the modern sense from that 
day in 1773 when the name was "wrote over the 
door" at New Jonathan's.* 

We have authority for the early history of the 
London Stock Exchange in a report made in 1877 
by the officials of the institution to the Royal 
Commission. From this report it appears that 

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


the Stock Exchange at New Jonathan's In 1773 
"afforded a ready market for the operations of 
the bankers, merchants, and capitalists connected 
with the floating of the numerous loans raised at 
that period for the service of the State." The 
members or frequenters paid a subscription of 
sixpence to defray expenses, drew up rules, and 
placed its control in the hands of a "Committee 
for General Purposes." The functions of this 
committee were then, as now, "judicial as regards 
the settlement of disputed bargains, and adminis- 
trative as regards rules for the general conduct 
of business and for the liquidation of defaulter's 
accounts." The earliest minutes on record are 
dated December, 1798, 

War loans and a national debt increasing by 
leaps and bounds, with consequent activity in 
corLsols, was the principal source of business in 
those early days, and as these increased, so also 
the savings of the public and a new national 
spirit led to a steady growth in the business of 
dealing in securities. The dim receding voice 
of those early days still echoes in Capel Court 
through the medium of two holidays — May 1st 
and November 1st. More than a century ago 
these days marked the closing of the Bank of 
England's books for the transfer of consols, and 
as consols were the only things then traded in, 


there was nothing for stockbrokers to do on those 
occasions; hence they took a holiday. And they 
still close the Exchange on these days — an elo- 
quent instance of the Englishman's adherence to 

By 1 801 there was not room enough in the 
old building, and, moreover, the report says: 
"It became apparent that the indiscriminate 
admission of the public was calculated to expose 
the dealers to the loss of valuable property.'* 
Accordingly a group of Stock Exchange men 
acquired a site in Capel Court, close to the bank, 
raised a capital of £20,000 in four hundred shares 
of £50 each, and in May, 1801, laid the foundation 
of what has become through numerous additions 
the London Stock Exchange of to-day. The 
building was opened in March, 1802, with a list 
of five hundred subscribers, and the deed of settle- 
ment (March 27, 1802), vested the management 
in a committee of thirty members, chosen annually 
by ballot, with nine trustees and managers, sepa- 
rate from the committee, to have charge of the 
treasury and represent the proprietors. Although 
the rules and regulations have been amended and 
enlarged from time to time to meet new conditions, 
the constitution of the London Stock Exchange 
remains substantially unaltered. 

As it stands to-day, there are nine managers 


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

"The great principle upon which the com- 
mittee acts," says Mr. Francis W. Hirst, "and 
to which most of its regulations are di- 
rected, is the inviolability of contracts. It 
has power to suspend or expel any member for 
violating its rules, or for non-compliance with 
its decisions, or for dishonorable conduct. A 
member of the London Stock Exchange is pro- 


hibited from advertising or from sending circulars 
to any but his own clients. He is also forbidden 
to belong to any other Stock Exchange, or ' bucket- 
shop,' or other competing institution. New mem- 
bers are now compelled to become proprietors 
by acquiring at least one Stock Exchange share, 
paying a heavy entrance fee and an annual sub- 
scription of forty guineas. Yet the precautions 
against impecuniosity are inadequate. Defaults 
are far too common."* 

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

The plan of compelling each new member to 
become a shareholder or proprietor was devised 

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


to meet this difRculty, and in a measure it has 
succeeded. "Within the course of the next half 
century," says the Quarterly Review, " it Is pretty 
certain that the Stock Exchange, as a company, 
will belong to the members, of whom each will 
have a stake in the enterprise; and that happy 
consummation, when it arrives, will put an end 
to a good many minor problems which still 
harass the House in its workings, and possibly 
check those bolder plans for reform which are;, 
advocated by many of the members."* The 
difficulties arising from these causes had their 
origin, as we have seen, as far back as the year 
1801, when the new building was erected. As 
only the wealthier members of the association had 
provided the capital for the Capel Court structure, 
in order to protect their investment, they de- 
manded control of its financial affairs; thus the 
Stock Exchange thenceforth consisted of two 
distinct bodies, proprietors and subscribers. 

While there is but one way by which a man 
may become a member of the New York Stock 
Exchange, in the London Exchange there are 
various ways. The most direct way, and the 
easiest but most expensive way, is to pay an 
entrance fee of 500 guineas, and find three mem- 
bers who will stand surety for four years for the 

* The Quarterly Review, July, 1912. 


sum of £500 each, this £500 being forfeited to 
the estate if the member is "hammered" — i. e., 
if he fails during the period. The candidate must 
in addition buy three Stock Exchange shares, the 
price of which at present is about £190 each.* 
He must also purchase from a retiring member 
a nomination, which can be bought at present 
for £40, although they have sold as high as 
£700. Candidates who wish to join the Exchange 
under easier conditions may have their entrance 
fees reduced to 250 guineas if they have served 
for four years in the Stock Exchange as a clerk; 
and for these candidates concessions are also made 
in respect to sureties, of which they need provide 
but two, and to shares, of which they are required 
to buy but one instead of three. The committee 
is also empowered to elect each year a few candi- 
dates without nomination. 

This is a rather curious practice which requires 
a word of explanation. In England, as elsewhere, 
there is a latent objection to monopolies of all 
forms, and the foresighted governors of the 
Exchange, with an eye to the possibility of diffi- 
culties that might be raised against their institu- 
tion at some time in the future on the ground of 
monopoly, hit upon this expedient as a precaution- 
ary measure. Should such objection be raised, 

* There are 20,000 shares (£13 paid) and £416,700 debentures outstanding. 


the governors have only to admit a few more 
members without nomination. The door is thus 
thrown open; and there is no de facto monopoly. 
It is very simple and very ingenious. 

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

From this it will be seen that a man who wants 
to become a member of the London Stock Ex- 
change without first serving an apprenticeship of 
four years as clerk must pay for his entrance fee 
500 guineas, his shares £570, his nomination £40, 
and his annual dues 40 guineas, or a total of 
about £1150, of which £570, the price of his 
shares, yields him a return in Stock Exchange 
dividends. These shares are, of course, excellent 
investments, and the managers may be relied 
upon to see to it that their value is not impaired. 
During the first seventy-five years of its existence 
Stock Exchange shares paid an average dividend 
of 20 per cent.; for the last completed year the 
dividend was 100 per cent. No one person may 


hold more than 200 shares, and holders must be 
members of the Exchange in all cases except those 
where representatives of proprietors acquired 
their shares before December 31, 1875. When a 
proprietor dies, his shares must be sold to a member 
within twelve months. The membership is not 
limited, strictly speaking, and whereas in 1802. 
there were 500 members, in 1845 there were 800, 
in 1877, 2000, and in 1910, 5019. 

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

One important respect in which the London 
Stock Exchange differs from all others — Ameri- 
can, Continental, or Provincial — is the division 
of its members into two classes, jobbers and 
brokers, a division that appears to be as old as 
the Exchange itself. As to which of these classes 
it is better to belong there are differences of opin- 
ion, but the wise men in the business seem to be 
a unit in recommending a few years' experience 
as a broker to be followed by the business of the 
jobber. The broker, under the London system, 
deals with the outside public and acts merely as 


agent between the public and the jobber, with 
whom he trades on the floor of the Exchange. 
The jobber, on his part, is not allowed to deal 
with the public at all, but must confine his 
activities to the brokers and to his fellow jobbers. 
^'Thus the broker," as Mr. Hirst puts it, "feeds the 
jobber much as the solicitor feeds the barrister," 
or, continuing the metaphor, we may say that 
like the barrister the jobber gets the cause celebre 
and all the great prizes, and like the solicitor the 
broker hunts up the business and must be content 
with small returns. The broker works for his 
commission; the jobber for what he can get out 
of the trade in the way of a profit. 

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


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

In active securities where there are very many 
transactions, Mr. Hirst is disposed to think that 
the separate existence of jobbers makes for a free 
market and close prices the very essence of an 
Exchange's functions. This may be true, since 
the jobber is a host in himself, specialist, specu- 
lator, trader and jobber — all in one. Where 
there is a free market, the presence of such a par- 


ticlpant undoubtedly adds to It, as any one knows 
who has dealt with him in lots of from 5,000 to 
10,000 shares, at a difference of only a sixteenth. 
Such a market is a close market in excelsis. 
But in the ^New York Stock Exchange the same 
result is obtained far more openly and above- 
board by the presence in all active securities of 
a host of such jobbers — brokers, traders, special- 
ists, and speculators — each actively bidding and 
offering by voice and gesture, and without col- 
lusion, and each thereby contributing to the 
making of the freest possible market and the 
closest possible price. In New York no middle- 
man stands between the public and the market. 
It is a fact recognized by all economists that the 
larger the number of dealers and the freer the 
competitive bidding, the more accurate the result- 
ant ■ price and the nearer its approach to true 
value; hence it would seem to follow that in this 
highly desirable attainment the New York system 
is superior to that of London. The same comment 
applies to the market for inactive securities. In 
London, notwithstanding the quotations printed 
in the Official List, the public has no assurance 
that jobbers can be found to deal at those prices, 
or at prices approaching them. "And when there 
is a slump in the market and a rush of selling 
orders with no support," as Mr. Hirst candidly 


admits, "as happened in rubber shares in the 
months of June and July, 1910, the jobbers are apt 
to be away at lunch all day, and the brokers have 
to report to their clients that they simply cannot 
find a purchaser."* 

Such things do not happen in the New York 
Exchange, for when there is a slump in any group 
of shares, instantly there gathers a number of 
individuals who are there for the very purpose 
of making a market. It may be a "soft" market, 
with wide fluctuations, but it is a market for all 
that, and the timely absence at an all-day luncheon 
of any one man or any group of men cannot pos- 
sibly affect it. There have been occasions on the 
New York Stock Exchange, no doubt, where a 
broker with a "hurry" order in a very inactive 
security has not found a market awaiting him, 
but there are various ways by which he may 
seek the desired market and ultimately he is sure 
to find it. In any case such an incident is the 
exception that proves the rule that a free market, 
affording all the advantages which excellent 
markets possess, is nowhere to be found more 
easily and more quickly than on the floor of the 
New York Stock Exchange. "American securi- 
ties," says the Paris correspondent of the Journal 

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


of Commerce in his cabled despatches of October 
23, 1912 — referring to the Balkan crisis in that 
city — "may with complete conservatism be 
regarded as having received a splendid advertise- 
ment in the French market by reason of their 
recent remarkable instantaneous conversion into 

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

Such a system, it would seem, is all very well 
for the jobber, but quite unfair to the outsider 
and to the conscientious broker who is striving 
all the while to protect the interests of the public 


and maintain the welfare of the Exchange. In- 
deed, as it works out in London, the broker has 
all the worst of it in many ways. Even though 
the jobber *'runs a book," as the phrase is, his 
work is done at 4 p. m. — when the market 
closes — and if he is not doing a large business 
he may then follow his inclinations. Unless his 
business involves dealing in South Africans or 
Americans, his work is substantially completed 
with the official closing of the Exchange. But 
the broker, on the other hand, enjoys no such 
freedom. After the closing he must go to his 
office — for in the nature of things he must 
have one — and there he will find correspondence 
awaiting him, orders to be executed in the "Street 
markets," and telephone messages to send to his 
customers. The mere fact that a London broker 
must use the London telephone is in itself a curse, 
for nowhere under the canopy is there a telephone 
service so dreadful and so exasperating. 

Even in the ebb-tide of a dwindling summer 
business the London broker, who cannot begin 
his day's correspondence until four, finds it 
difficult to leave his ofiice until an hour long after 
his American colleague has played his eighteen 
holes or dressed for dinner. Aside from the hor- 
rors of the telephone service, this is due in a meas- 
ure to the fact that they have no ticker in 


London and the mechanical efficiency with which 
this machine faithfully records all over America 
each fluctuation of the market, finds no counter- 
part in England. The broker in London has 
therefore to perform, in a measure, the work 
of the ticker in New York. Perhaps I should not 
say they have no tickers in London. In point 
of fact there is such an instrument, identical with 
our own, which four or five times a day, at stated 
intervals, reels off' with mechanical monotony a 
list of quotations in certain active securities — 
the same group every day. They are limited in 
number, almost nobody looks at them, and many 
really enterprising houses do not install them 
at all. 

Worst of all, the London broker until very 
recently was not properly paid for his work; he 
was not protected by a rigorous commission law, 
as we are in the New York Exchange. In New 
York a broker charges | per cent, commission 
on the par value of every hundred shares in 
which he deals for a non-member, each way, 
and the rules of the Exchange compel him to 
collect it in all cases. The slightest departure 
from this rule, however technical it may be, is 
severely punished, and no statute of limitations 
or other expedient will save him from the conse- 
quences of it. Thus all the brokers are insured 


an equal footing; competition for business is 
prevented, and the public which the Exchange 
seeks to serve is assured of equally fair dealing 
in every quarter. So rigorously is this rule 
enforced that the large and important branch of 
the Exchange's business which has to do with 
joint-account trading between New York and 
foreign centres has recently been seriously re- 
stricted because, in the judgment of the governors, 
it involved an infraction of this Important com- 
mission law. 

On May 22nd of this year (191 2) the London 
Stock Exchange put into effect an official scale 
of commissions, which was designed to remedy 
the unfortunate conditions that had prevailed, 
and this scale is now enforced. It provides for 
a charge of | per cent, on British government 
securities, Indian government stocks and foreign 
government bonds; j per cent, on certain other 
special cases, | In railroad ordinary and de- 
ferred ordinary stocks at prices of £50 or under, 
and a sliding scale on shares transferable by 
deed, ranging from commissions of i|d. per share 
to 2s. 6d. per share. On American shares the com- 
mission to be charged is 6d. per share on a price 
of ^25 or under, gd. on prices from $25 to $50, is. 
on prices from ^50 to ^100, is, 6d. on prices from 
^100 to ^150; and 2s. on prices over $200. 


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

The system of settlements twice a month as 
employed in London Is another method quite 
different from that employed in New York, and 
one, too, that seems to suffer by comparison with 
our system. On the New York Stock Exchange 
everything is settled on the day following the 
transaction. Each broker and each customer 
knows just where he stands, and every trade is 
settled In full when the next day ends. Tell an 
English broker that on a single day our Clearlng- 
House settled and balanced transactions In more 


than 3,000,000 shares of an approximate value 
of 50,000,000 sterling and he gasps. He says 
that such a thing would be impossible in London, 
and he is right, it would be impossible indeed. 
Clearings in London vastly exceed ours, but they 
do not occur daily; indeed our system would not 
do at all in a centre that transacts, as London 
does, a large international business in which 
transfers must be sent hourly to Egypt and India 
and to all quarters of the globe. Daily clearings 
in such circumstances would be very troublesome 
and vexatious. 

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

A gentleman who was for many years identified 
with a London firm of jobbers, and who Is now a 
member of the New York Stock Exchange and, 
therefore, quite familiar with the different methods 


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

Another point of difference between the methods 
of the two Exchanges lies in the phlegmatic deliber- 
ation of the Englishman. Here in New York 
there is a slap dash, touch-and-go system that is 
greatly facilitated by the use of the telephone and 
the private telegraph lines; a single commission 
house has 10,000 miles of leased lines. In London, 
where telephones and private lines are but spar- 
ingly used by brokers and clients, a broker often 
finds on his desk in the morning three or four hun- 
dred letters and telegrams. The care and atten- 
tion required to handle an enormous lot of orders 
given in this deliberate manner is something with 


which New York stockbrokers are quite unfamiliar; 
indeed it may be doubted if they could meet 
such an emergency with their present facilities. 

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

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


together with the bid and offered price of each 
security at the market's close. 

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

The total amount of information that is thus 
laid before the public is as complete and as in- 
structive as could be desired, and yet in London 
and on the Continent such information is never 
published, although the two leading financial 
newspapers In London, because of the immense 
field covered, actually publish a mass of miscella- 
neous news and gossip that exceeds any similar 
American effort. They make It pay, too; divi- 
dends declared by these newspapers are alto- 
gether unapproached by the American financial 
press. The essential information lacking, how- 
ever, is the number of shares dealt in, and at what 


prices; even If they had a thoroughly good ticker 
system I doubt if this information could be 
recorded, because the volume of business done Is 
too great. It is 'encouraging in this connection 
to note that so eminent an economist as M. 
Leroy-Beaulieu frankly concedes our superiority 
In these matters over the practice of the foreign 
Exchanges and urges their Immediate adoption 

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

With these examples before them, members 
of Exchanges everywhere must realize that if it 
lies within their power to discountenance and 

* U Economiste Francais, Paris, October S, 1912. 


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

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


methods as will prevent bankruptcies of dealers 
to whom the public entrusts Its money. 

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

Notwithstanding the points of merit in the 
New York system, at some time in the future 
when local Stock Exchange business has expanded 
to proportions approaching those of the London 
Exchange, modifications must be made. If banks 
and brokerage houses are given a week or ten days 


to settle transactions, everybody will have a 
tolerably clear Idea of what money will be required, 
and lenders will be enabled to make provision. 
London passed through the 1907 panic, under 
this arrangement, with a maximum rate of 7 
per cent., while we in New York would have 
been glad to pay 200 per cent., and this, despite 
our deplorable currency system, could not have 
occurred had there been ample time for the banks 
to make preparations. 

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

As there is no currency system anywhere in the 
civilized world so crude and inadequate as that 
of the United States, it is unnecessary to say that 
London jobbers and brokers experience none of 


the difficulties with money markets that occur 
periodically on this side. The carry-over on the 
other side of the water is frequently a matter 
involving immense sums of money, but rates 
fluctuate normally and are in large measures gov- 
erned by automatic processes both simple and 
sane. Perhaps the less said about similar condi- 
tions here the better. The spectacle presented by 
strong and solvent houses ransacking the street 
for funds secured by prime collateral and bidding 
25, 50, and even 100 per cent, for accommodation 
■ — something that has occurred within the last 
decade and may conceivably occur again — is one 
upon which the candid American observer does 
not care to dwell; such a man may well look with 
longing and envy to London, where capital, credit, 
and currency are so firmly established that the 
Bank of England dominates and controls all the 
money markets and gold movements of the world, 
lending freely at home and abroad whenever funds 
are needed, and acting as a civilizing force in 
supplying with British funds the commercial needs 
of all new countries. 

In this connection we may point out the method 
of borrowing from the banks the funds required 
to carry speculative commitments in London. 
It was formerly the practice for the banks to lend 
large sums to brokers, who employed the money 


inside the house in carrying over the accounts of 
their clients. This class of business is still large, 
but nowadays clients are not always satisfied to 
borrow through brokers, and not infrequently they 
go direct to the banks and borrow from them. 
This has the effect of disguising the real character 
of the business. To all appearances the securities 
have been bought and paid for, and the trade 
seems to be an investment, but the client has, 
as a matter of fact, "pawned" the security with a 

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

A word should be said about the methods of 
London stockbrokers In carrying stocks for their 
customers, because this also is quite different from 
the practice In New York. Here the strongest 
houses rarely loan stocks, unless attracted by 


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

Again, from the stockbroker's point of view, if 
he buys securities on margin for a customer, he 
(the broker) must either carry them with the 


jobber or with another broker, or he will have 
to pay the government tax himself. Naturally 
he hastens to loan them, because, should the 
client sell the securities in the course of the 
next account when they would have to be de- 
livered, the broker would lose the tax. He 
avoids this loss by instructing a jobber to con- 
tango or carry-over the securities until the fol- 
lowing account day. On the other hand, if the 
broker is certain that his client has purchased 
his securities for a long pull on a margin basis, 
he will often pay for the stock himself, transfer 
it to his own name, and willingly submit to the 
government tax, knowing that he can recover the 
outlay from the handsome rate of interest charged 
the client. 

Another vital point of difference between the 
London and the New York Stock Exchange lies 
in the nature and volume of the business done. 
Americans are prone to think of their foremost 
Exchange as one which, in the volume and extent 
of its transactions, compares favorably with the 
great Bourses of the world; they like to think 
of New York as the financial centre of the universe, 
and they paint rosy pictures of America as a 
great creditor nation. But they err in each of 
these ambitious dreams. The New York Stock 
Exchange, with all its magnitude, cannot compare 


with its London prototype; New York is by no 
means the financial centre of the world, and 
America is not a creditor, but a debtor nation. 

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

The New York Stock Exchange business differs 
radically from that of all other great Exchanges 


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

The London Daily List covers sixteen pages 
as large as our daily newspapers, each page 
printed closely in small type, and containing the 
names, amounts, interest dates, rates of dividend, 
and occasional quotations of approximately 4700 
different listed securities. This long list, more- 
over, contains the names only of the securities 


that have received an official settlement and an 
official quotation as well. There are certainly 
as many more securities dealt in that have not 
received an official quotation and hence are not 
permitted to appear in the List, so that the total 
number of different securities represented on the 
London Exchange in one or both of these ways 
probably exceeds 9000, half of them occupying 
a position somewhat similar to the Unlisted 
Department which once had a place on the New 
York Stock Exchange, but which is now abolished. 
It is the largest and most varied list of securities 
in the world. The price of a single copy is six- 
pence; it is published by the trustees and mana- 
gers, under the authority of the committee. 
Not the least interesting feature of the List is its 
continued expansion in the last half-century. 
Up to the year 1867 one page sufficed, then four 
till 1889, eight till 1900, twelve till 1902, and 
sixteen thereafter, this expansion closely following 
the nominal value of the securities quoted, which 
were £5,480,000,000 in 1885 and £10,200,000,000 
in 1909. The latter figure is about equal to the 
combined nominal capital value of the securities 
quoted on the Paris Bourse and the New York 
Stock Exchange. In 1907 the total number of 
bonds then listed on the New York Stock Ex- 
-hange was 1 100, and the total number of stocks 


502, these together representing a total par value 
of ^21,079,620,430, In 1912 this total amounted 
to 1,028 bonds and 555 stocks, with an aggregate 
par value of $26,243,291,803. 

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


these the Commercial and Industrial Companies 
List is by far the largest, covering three pages. 
A cursory glance over this really formidable 
Official List brings forcibly to mind London's 
supreme position as banker, broker, and clearing 
house for the wide world, while it emphasizes the 
constantly increasing overflow of British capital 
into channels that make for enterprise and devel- 
opment even in the most remote quarters of the 
globe. Here we find set forth Ceylon, Fiji, 
Tasmania, and Cape of Good Hope debentures; 
Stocks of Saskatchewan, Antigua, Johannesburg 
and the Straits Settlements; Harbor Board Mort- 
gages of Oamaru and Wanganui; Rangoon Sterling 
Loans; Municipal Stocks of Pernambuco; Buda- 
pest, St. Louis, Tokio, Lima and Aarhus; Ecuador 
salt bonds and bonds of the Grand Duchy of 
Finland; securities of the Greek Piraeus Larissa 
Railway, Honduras 10 per cent, loans, loans of 
Liberia, Persia and Siam, and certificates of the 
Venezuela Diplomatic Debt. There are securi- 
ties of the Ionian Bank, the Natal Bank and the 
Bank of Abyssinia. The Terra del Fuego Devel- 
opment Company is represented, and likewise 
Amazon Telegraphs, Malacca Rubbers, Singapore 
Electrics, Rangoon Tramways, Montevideo Water 
Works, and Sao Paulo Match Factories. Soda 
and newspapers, theatres and sawmills, hotels 


and clothiers, sponges and molasses, soaps and 
cereals, these are some of the items that catch 
the eye as one glances over the List. What 
would be found there if all the securities admitted 
to the House were published in the List may be left 
to conjecture; and what will this eloquent array 
of enterprise in figures look like a century hence, 
if the List continues its present rate of growth? 
As Great Britain is a country where there is 
never any difficulty about raising capital for the 
creation or extension of any business which offers 
a reasonable probability of large profits, it is 
natural that new countries where capital is scarce 
and credit scarcer should turn to London. Thus 
governments, municipalities, company promoters 
and manufacturers from all over the world are 
constantly making application for funds with 
which to supply their needs. Greek railways, 
Abyssinian banks, Ceylon tea and Malay rubbers 
hasten to register themselves at the world's 
centre of capital and offer their shares to a public 
whose taste for all kinds of world-wide industrial 
and commercial ventures seems never likely to 
be satiated, since the really good and profitable 
home enterprises are seldom open to public 
subscription. The insiders in those bonanzas 
naturally keep their treasures to themselves 
and their friends, unless after a time the con- 


cern is turned into a limited liability company 
with good-will as a conspicuous asset and over- 
capitalization as the dominating motive; then, 
as elsewhere, the market is invited to assist. But 
that is another story. 

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


by those who provide the funds, It follows that 
companies must be admitted at least to "ofh- 
•cial settlement" privileges as soon as they are 

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

* Rule 150 reads as follows: "The committee will not fix a special settling 
day for bargains in shares or securities issued to the vendors, credited 
as full or partly paid, until six months after the date fixed for the special 
settlement in the shares or securities of the same class subscribed for by 
the public, but this does not necessarily apply to reorganizations or amal- 
gamations of existing companies, or to cases where no public shares are 
issued for cash " — Rules and Regulations of the Stock Exchange. London, 
June 3, 191 1, pp. 64-5. 


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

An extraordinary number of small in- 
vestors bought fractional shares; the offices of 
the companies were not prepared for the rush 
and could not handle the large carry- 
over, hence for a time the "Kaffir Circus," as 
the speculative mania of the day was called, 
promised to embarrass seriously the whole Ex- 
change machinery. All this could have been 
avoided by making the shares "to bearer." Yet 


the London authorities feel — and not without 
reason when we consider the volume of their 
business and the remoteness of their clientele in 
many instances — that bearer certificates are not 
safe, and that what is lost in the time spent in 
transferring certificates is amply compensated in 
the resultant security against fraud and forgery. 
It is interesting to note in connection with the 
enormous business done on the London Exchange 
— a business which makes New York's high totals 
seem insignificant — on what a vast scale Lon- 
don's exports of capital are conducted. This 
may properly be noticed here, since these capital 
exports have great economic significance and bear 
close relationship to the transactions on the Stock 
Exchange; indeed were it not for the work done 
by the Exchange in providing markets and settle- 
ments and all the details of the security business, 
it is fair to say there could be no such public 
issues of capital. In 1910, for example, new 
capital expenditures amounted to the extraor- 
dinary figure of £267,439,000, of which £60,296,500 
was expended in the United Kingdom, £92,378,100 
in the various British possessions, and £1 14,764,500 
in foreign countries. Of the grand total £49,974,- 
000 went Into foreign railways, £10,096,000 into 
Indian and Colonial railways, £35,631,600 into 
Colonial government loans, £18,431,000 into for- 


eign government loans, £18,343,100 into explora- 
tions, and £19,143,800 into rubber.* The year 
1910 was, of course, a year of great prosperity in 
England, and it was a year made famous by 
speculative activity in various directions, espe- 
cially in rubber, so that the totals given above are 
larger than they had ever been before. But 
the point for us in America to bear In mind in 
considering these figures is their immense signifi- 
cance as showing England's complete supremacy 
In capital, credit, and the art of banking. 

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

* These figures are taken from Mr. Hirst's Chapter VIII on "The 
Creation of New Debt and Capital," pp. 212-241. 


war would cost England If that country were to 
cross swords with one of the powers may be 
conjectured; what would happen in the Stock 
Exchange taxes the imagination. 

In the month in whith these lines are written 
the London Stock Exchange and all the conti- 
nental Bourses are having their periodic scare over 
a war in the Balkans. British consols have fallen 
almost seven points from the high price of the year; 
French rentes seven, German 3s. six, and Russian 
4s. seven.* These are very severe declines for 
government securities of that class, and if they 
can fall abruptly over difficulties in the Balkans, 
what would happen were these countries them- 
selves involved in war with foemen of their own 
class? Russian consolidated 4s. fell eleven points 
and Japanese 5s. twelve in the first month of the 
Manchurian war, and in our war with Spain, 
Spanish 4s. fell from 61 to 29!. If such things can 
happen to government securities, what would hap- 
pen to all the 9000 odd industrial and kindred 
securities dealt in on the London Exchange should 
England take up the sword with, let us say, 
Germany.^ We are not left to conjecture on this 
point, for in the week that has just witnessed 

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


the Balkan scare there have been some really 
tremendous slumps in securities — collapses out 
of proportion, it would seem at this distance, 
to the magnitude of the political issues threatened. 

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

Foreigners are prone to speak of Yankee specu- 
lation as foolhardy and reckless, as no doubt it 
is at times, but never in American history has there 
been a panic with anything like the severe declines, 
in so brief a period, as those just recorded. For 
that matter, we in America have never experi- 
enced a boom in any sense commensurate with 
London's rubber boom of 1909-10, nor a collapse 
as sudden and as thoroughly deserved as that 


which followed it. Again, London's Kaffir Circus 
of 1894-5, ^^^ ^h^ furious speculation in Panama 
shares in Paris in the early nineties, have had no 
parallel in American stock markets. This is 
only another way of saying that the speculative 
mania which seizes upon nations at periodic 
intervals is not a matter of latitude and longitude 
in any sense.* 

In trying to picture what would happen in the 
London Stock market should such a war as that 
which Englishmen are always discussing really 
occur, we must take into account not only the 
mass of securities that would be directly affected, 
but also the great burden borne by London 
banks and bankers in security issues all over 
the world. On another page we have seen that 
London's capital expenditures on new issues in 
various quarters of the globe in a single year ex- 
ceeded £267,000,000; in the quarter just closed 
(September, 191 2), these disbursements ran 
£25,000,000 above the previous year. 

That they will continue so to increase is open 
to no doubt as long as England's abstention from 
war is assured; but if there should arise even the 

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


possibility of war, it would result in an embarrass- 
ment of credit with terribly serious results, such as 
have never been dreamed of in the world's history. 
The many years of peace between the great 
powers, the many new countries that have been 
opened to commercial development, and the 
countless new fields of industrial endeavor that 
have come into being while this peace has lasted, 
have served to create a British credit situation 
huge and complicated beyond all precedent. Any 
serious interruption or derangement of so vast 
a system would find a very different situation 
from that which existed on the Continent in 
1870. It would be appalling. 

And yet, ere we go too far afield in search of the 
shivers, the observer must bear in mind that this 
great credit system of which London is the banker 
and clearing house, in reality knits together in 
its international web all the great powers, and 
binds them so closely together as to guarantee, 
in some measure, the preservation of peace. 
That peace hath her victories, and that the 
creation of wealth through industrial pursuits may 
serve in this way to prevent armed strife — these 
are, after all, encouraging indications quite as 
strong as treaties. To-day the bankers of London 
and. Paris are the war lords of creation. Both 
these centres loan money, on early maturing 


bills, to all the world. Stop London's discounts 
through an outbreak of war, and gold would pour 
into that centre at the rate of $200,000,000 a 
month. "It might be possible to starve her 
population," says a recent writer, "but no com- 
bination of the Powers could bankrupt London. 
In the event of war Paris could bankrupt Ger- 
many in a week. No war could disturb the credit 
of the Bank of France; but the German Reichsbank 
would inevitably go down in the smash. All 
Germany's capital is in her own shop. She is 
doing a great business, and, quite properly, a 
great part of it on borrowed money. But if her 
loans were called, she must put up the shutters."* 
Let us now observe the London broker at his 
work. The Stock Exchange, as has been de- 
scribed, settles nearly all of its transactions twice 
a month, upon officially appointed "account 
days," which fall about the middle and the end of 
every month. Smith, a broker, receives an order 
to buy, let us say, 500 East Rands, and goes to a 
jobber who makes a specialty of that department. 
The jobber, Jones, is a wise man and a clever 
trader, who knows all there is to know about 
supply and demand and regulation of prices to 
meet them, otherwise he would soon be out of 
business. Smith does not tell him what he pro- 

* The Wall Street Journal, November 13, 1912. 


poses to do, but asks for a price, which in normal 
markets Jones quotes at 3I to 3^^, this being the 
method of implying, in pounds sterling, that he 
is prepared to buy at 70s,, or to sell at 71s. 3d. 
The broker will probably say that the price is 
too wide, whereupon Jones quotes a figure "close 
to close," reducing the quotation -5-^ each way, 
at which figure the transaction is closed.* Smith 
enters in his book that he has bought of Jones 
500 East Rands at the price stated, and Jones, 
that he has sold at this price to Smith. The 
customer is then advised of the transaction, and 
next day he receives his stamped contract, with 
details covering the cost of the shares together 
with brokerage and other expenses, if any, and 
informing him of the date of the next account 
day, when payment will fall due. 

Beneath the main floor of the Exchange Is the 
settling room, and here the clerks of broker and 
jobber check the transaction that has taken 
place. Two days before the account the name 
of the person for whom the East Rands were 
bought is written on a ticket — hence "ticket 
day" — and handed to the Stock Exchange 
Clearing House, which, after the manner of the 
Stock Exchange Clearing House in New York, 

* On the New York Stock Exchange the minimum difference between 
prices is one eighth and sphtting of this fraction is prohibited save in the 
case of "rights" to subscribe or similar instances. 


eliminates all the intermediaries through whose 
hands the shares may have passed ad interim, 
and puts the selling broker into direct communi- 
cation, by passing him the ticket, with the broker 
of the buyer. This done, the seller receives the 
ticket with the buyer's name on it, and prepares 
a transfer deed as the law requires.* Had the client 
bought the shares of an American railway instead 
of East Rands, the procedure following the pur- 
chase would have been somewhat different, be- 
cause American shares bear a form of transfer on 
the back which requires the signature of the 
seller only, and which becomes, by reason of this 
fact, almost as readily negotiable as bank-notes. 
In London consols can be dealt in in this way, 
but the customary form of conveyance of the 
funds, and of Indian and Colonial stocks, con- 
sists of a brief transfer on the books of the bank 
acting as agent for the particular issue. Thus 
the Bank of England keeps the books for consols 
and India government stocks, and sellers or their 
attorneys must attend personally at the bank 
and sign the transfer. The bank insists that 
every seller must be identified by a member of the 
Stock Exchange, whose signature must be regis- 
tered there, and it places full responsibility upon 

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


these members for correct identifications. This 
was long a. sore point with the Stock Exchange, 
and it was fought to a finish in the courts, but 
the Bank won "in a walk." 

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

Going to the jobber, he says he wants to 
"give on" five hundred East Rands. The jobber 
says he will "take them in," which means that 
he will lend the money until next following 
settlement, charging interest at, say, 5 per cent., 
while the broker in turn charges his client 5^ 
per cent, and takes the interest difference as 
compensation for the service. The buyer's specu- 
lation is thus extended to the next settlement, and 
the statement given him shows that he has been 


debited with the interest upon the "making-up 
price," at which the transaction is arranged. 
The rate of interest is called the "contango," 
and "contango days" are the two days during 
the settlement when these arrangements are in 
effect :* 

" The Stock Exchange has witnessed many periods of wild 
excitement and speculation, reminding one of the famous 
South Sea Bubble — perhaps the most remarkable "boom" on 
record — the story of which, however, has been so often and 
so vividly told by Smollett and later writers that we need 
only refer to it here. Just before the middle of the last 
century came the great railway boom. It began about 1834, 
and within one year more than six hundred propositions for 
railway lines in the United Kingdom were placed before the 
public, the nominal capital required being over 600,000,000 
pounds sterling. Panic, of course, followed the boom; and, 
as an example of the rapidity with which prices moved, it 
may be mentioned that the Great Western Railway stock 
rose to 236 in 1845, and fell back to 55^ within three years, 
while Midland stock rose to 183 and fell to 64. After the 
railway boom and panic came several banking crises, of 
which the worst were those identified with the names of 
Overend, Gurney, & Co. in 1866, and of Baring Brothers 
in 1890. For five years after the latter, the Stock Exchange 
lay fallow, with business and credit worn to a shadow. 
Then came the famous Kaffir boom, of which it may be said 

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


that Cecil Rhodes stood out as the colossus. The madness 
of that boom has rarely been equaled, even in the history of 
the Yankee market. It makes one hot even on a cold day to 
think of the time when, as a clerk, one tore off coat, waistcoat, 
collar, and tie in order to run the faster in the settling room 
beneath the Stock Exchange, "passing names" (as it is 
technically called) in connection with that gamble. A 
Rugby football scrum was child's play to the continued 
struggles; and, after the most violent excitement had sub- 
sided, there were always fights to be settled before one went 
upstairs to work the whole night through. 

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

The thought will no doubt occur to an American 
who reads these pages, whether the day will come 
when American banking will extend, as in Eng- 
land, to every quarter of the globe, and whether 
the New York Exchange, like its London proto- 
type, will become a centre of the world's com- 
mercial activities. This is a far cry, of course, 
and the answer will not be known in our genera- 
tion. But it may be said without fear of con- 

* The methods of transacting business on the London Stock Exchange 
are admirably stated in condensed form in an article by Walter Landells 
in the Quarterly Review, July, 1912, pp. 88-109, and I am indebted to his 
article for many of the foregoing facts, and for this brief summary of London's 
booms and crises. 


tradiction that when a great nation Hke ours, 
in which the spirit of enterprise is manifest, has 
reached the point where its own domain has been 
developed, when it has perfected a sound banking 
and currency system, when it has recovered its 
lost shipping and mastered those economic lessons 
that the future has in store, it may confidently 
be expected to push out into new lands and supply 
their demands for capital. 

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

* In addition to the authorities quoted in the foregoing chapter, the atten- 


tion of the reader is directed to the following works having to do with the 
London Stock Exchange: 

Lombard Street, by Walter Bagehot, New York, Chas. Scribncr's, and 

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

Stock Exchange Law and Practice, by W. A. Bewes, London, Sweet & 
Maxwell, 19 10. 

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

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





"Patriotism makes it a duty for us to acknowl- 
edge the fact that the Bourse represents one of 
the live forces of France," wrote Anatole Leroy- 
Beaulieu in one of the finest tributes ever paid to 
a Stock Exchange. "It has been for France an 
instrument of regeneration after defeat, and it 
remains for us a powerful tool in war and In peace. 
Let us recall the already remote years of our 
convalescence, after the invasion, years at once 
sorrowful and comforting, when with the gloom 
of defeat and the suffering of dismemberment, 
mingled the joy of feeling the revival of France. 
Whence came our first consolation, our first vin- 
dication before the world? Whether glorious or 
not, it originated on the Bourse." 

The victorious Prussians were at the door in 
the humiliating crisis of 1870 and '71 to which 
the author refers, France was prostrate. Alsace 
and parts of Lorraine were to be ceded to the 
victors, together with an Indemnity of five 



billion francs, and Paris was in control of the 
Reds. In that dreadful saturnalia of violence 
and crime which has made the name of the Com- 
mune infamous, the honor of France was threat- 
ened, and the credit of the new Republican 
government, especially its ability to maintain its 
authority and to fulfill its terms with the Prus- 
sians, seemed hopeless and cheerless indeed. How 
Thiers became the brains of the rehabilitation of 
France, with what vigor he entered upon the task 
that has handed down his name as the most 
influential political figure in French history ^ — -with 
what rigorous measures MacMahon suppressed 
the Commune — these are spectacular incidents 
with which every schoolboy is familiar. But 
the work of the Bourse in that episode — silent, 
unobtrusive, and lacking the sensational features 
of ■ which popular histories are made, is by no 
means so well known, although upon its labors 
devolved the real upbuilding of France. Thiers 
never ceased to congratulate himself on the 
assistance it gave the country at a time when the 
liberation of French territory hung in the balance. 
"The Paris market came out unscathed from 
the ruins of the war and of the Commune," 
continues our author, "and straight from the 
hardly ratified peace and quelled insurrection it 
threw itself into the work for France's regeneration; 


because It was, indeed, for France's regeneration 
that the stockbrokers and merchandise brokers 
worked under Thiers and MacMahon. In the 
worst days the Bourse had the uncommon merit 
of showing an example of faith in France. When 
more than one pohtical skeptic and discouraged 
thinker allowed themselves to write down upon 
the crumbling walls of our burned-down palaces 
"Finis Galliae, " the Bourse kept its faith in 
France and her fortune, and that faith in France 
was spread by it all around, at home and abroad. 
" Speculation was patriotic in its way; it exhib- 
ited a confidence in our resources which the discre- 
tion of many a wise man rated as foolhardy. Have 
we already forgotten our great loans for liberation? 
Without the Bourse, these colossal loans, the 
amount of which exceeded the dreams of financiers, 
would never have been subscribed for, or, if ever, 
it would have been only at rates much more 
onerous for the country. Without the Bourse, 
our French rentes would not have taken such 
rapid flight; our credit, restored even more 
quickly than our armies, would not have equaled 
that of our victors, on the very morrow of our 
defeat. In that regard, all that justice demanded 
us to say previously of the higher banking institu- 
tions may with right be repeated concerning the 


"To those who lived through that pale dawn of 
France's recovery — the rush of the Bourse and 
of capitalists to offer us the thousands of millions 
which we required exceeded the eagerness and 
boldness of speculation. But even if we were to 
consider it but gambling and betting for specula- 
tion, such speculation was betting for France's 
regeneration; it bravely placed its bet on the 
vanquished. Those national and foreign finan- 
ciers, who have been accused of pouncing upon 
her like birds of prey, brought to the noble 
wounded their dollars and their credit, and if they 
reaped a profit thereby, are we to reproach them 
for It, when they helped us to reconstruct our 
armies, our fleet, and our arsenals.? 

" If France regained her rank among the nations 
of the world so quickly, the credit for it should be 
mainly given to the Bourse. And to Its services 
in war, we should, if we wanted to be just, also add 
its services in time of peace. Without the exten- 
siveness of the Paris market, and the stimulus 
given to our capitalists through speculation, how 
many things would have remained unaccomplished 
in the recklessly overdriven condition of our 
finances.'' We should have been unable to com- 
plete our railroad system, or renew our national 
stock of tools, or create beyond the seas a colonial 
empire which shall cause France to be again one 


of the great world powers. When the Bourse 
is on trial, such credentials should not be over- 
looked. Before condemning it in the name of 
morality and private interests, a patriot should 
give due consideration to its services rendered for 
the national weal; if all its defects and misdeeds 
be heaped up on one scale tray, then services of 
like importance will easily counterbalance them. "* 
Singing the praises of Stock Exchanges is a 
thankless task, and one that falls upon deaf ears. 
The very nature of its functions makes dull read- 
ing. It cannot hope to enlist the lively enthusiasm 
of the casual observer, nor has it picturesqueness 
to brighten the pages of history. The layman 
visits the great exchanges as a matter of course; 
the scene is animated and diverting; he sees the 
outward manifestations of energy and move- 
ment, but too often he misses the great silent 
forces at work. The eye has a fine time of it, but 
the intellect comes away empty. These are 
reasons why I have ventured to quote the fore- 
going passages from M. Leroy-Beaulieu. Some- 
where in his earnest tribute to the work of the 
Paris Bourse the reader may find food for thought. 

* Anatole Leroy-Beaulieu, La Regence de I'argent, " Revue des Deux 
Mondes." February 25, 1897, pp. 894 and 895. 

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


The Bourse in Paris differs from all others in 
that its membership consists of but seventy. 
These Agents de Change, as they are called, enjoy 
an absolute monopoly not only to trade in govern- 
ment and other officially listed securities, but 
also to negotiate bills of exchange and similar 
instruments of credit. In these circumstances it 
is easy to see why the Bourse is an institution 
of enormous strength, notwithstanding the fact 
that, because of the deep-rooted conservatism of 
the French in financial matters, it stands a poor 
second to London in international business. 

It exists by virtue of the decree of October 7, 
1900, regulating the execution of article 90 of the 
Code du Commerce and of the law of March 28, 
1885, as modified by the decree of January 29, 
1898. These laws provide that Agents de Change 
of -the Paris Bourse must be French citizens over 
twenty-five years of age, and in possession of 
civil and political rights; they must be nominated 
by official decree signed by the President of the 
Republic. They must have performed their 
military service or satisfied the law as to such 
service, they must produce a certificate of fitness 
and good character signed by the heads of several 
banking and commercial firms. Agents de Change 
are, in reality, officers of the government, since 
the seventy ministerial appointees are entrusted 


with the exclusive right of dealing in government 
securities; all such dealings, in fact, when not 
made directly by private individuals, must be 
made through Agents de Change. 

The enjoyment by stockbrokers of a complete 
monopoly under government is sufficiently unique 
to warrant an inquiry as to the origin of such a 
curious privilege. The employment of stock- 
brokers by persons who wished to sell certificates, 
or other negotiable instruments of the period, 
was made obligatory by an edict of Louis XIV 
in 1705. Twenty "offices" (memberships) of 
brokers in Paris were then created, and these 
twenty were accorded a monopoly similar to that 
of to-day. Prior to that period there had been 
^'offices" of exchange brokers, bank brokers, and 
merchandise brokers, but the King felt that 
these were not contributing enough to the Royal 
exchequer and swept them all away in the edict 
of 1705, when the present system had its birth. 
The wars and the King's extravagances had 
placed the exchequer in a bad way, and between 
1691 and 1709, some 40,000 privileges of various 
kinds were sold for cash, among them the privilege 
under which these twenty men were to do the 
business of stockbroking in Paris. "Sire," said 
Pontchartrain, "every time Your Majesty creates 
an office, God creates a fool to buy it. " 


But the stockbrokers were not to remain in 
undisturbed possession of their new privileges, 
for, whenever the state of the Royal finances was 
low, the King withdrew the old offices in order 
to grant new ones, always for cash, to fresh 
buyers, and this was repeated again and again. 
Thus the next King Louis XV, whose personal 
follies, together with the schemes of the Scotch- 
man, John Law,* brought the country to the 
verge of ruin, repealed in 1726 the Edict of 1705 
and returned to it again in 1733. His successor, 
the weak and incapable Louis XVI, repeated this 
performance in 1785, 1786, and in 1787. In 1788, 
the stockbrokers having agreed to waive accumu- 
lated interest on their security deposits, were 
again established in their powerful monopoly. 
The critical financial situation that arose in the 
early days of the Revolution saw them again 
legislated out of office (June 27, 1793); the Bourse 
was closed, the stockbrokers arrested and their 
goods confiscated, because, in the imperfectly 
understood economics of the period, the decline in 
Frenchpaper currency Cassignats) was attributed, 
faute de mieux, to stock-jobbing. Two years later 
the Bourse was opened again, and after eight days 
■ — the assignat continuing to decline, it was again 
closed. Meantime France went Into bankruptcy. 

* John Law was the inventor of "bearer" certificates. 


In 1 801 the modern Bourse was established and 
firmly fixed. by the legislative work of the Consu- 
late. The law then enacted requires that stock- 
brokers be appointed to their public trust by the 
government, which shall be guided in its choice 
by their moral character and their professional 
knowledge, and shall, besides, demand the pledg- 
ing of a part of their fortune with the State as a 
guarantee of their good conduct and of proper 
expiation for their errors or failures. The law 
also emphasizes the principle of the freedom of 
commerce, expressly stating that nobody is 
obliged to have recourse to an intermediary, if he 
does not desire it. Further, the stockbrokers 
were subjected to several regulations with a view 
to prevent speculation and stock-jobbing. Thus, 
they were obliged to keep a journal; their books 
were to' be marked and signed by the president 
of the Tribunal de Commerce; they could not trade 
nor carry on banking for their own account; no 
one who had been in bankruptcy was allowed to 
assume the duties of a stockbroker. 

The law also makes the stockbroker responsible 
for the delivery of the securities sold and for the 
payment of the sums stipulated, even before 
either have been received by him from his clients, 
his security being appropriated for this pledge 
if need be. This responsibility was intended as 


a check upon transactions for future delivery, 
which, however, were made legal in 1885.* This 
law of 1 801, it will be observed, provided that 
stockbrokers were to be appointed by the govern- 
ment, and that their commissions were subject 
to repeal. In 1816 they scored a great advantage 
by securing the enactment of a rneasure by which 
they were permitted to introduce their successors 
with the consent of the government. This "right 
of introduction," says M. Vidal, "is practically 
an article for sale. The stockbroker, on retiring, 
does not sell his office (membership), but he sells 
to his successor the right of introduction. " 

The price of this right in recent years has varied 
from 1,500,000 to 2,000,000 francs (^300,000 to 
^400,000). A candidate, proving satisfactory to 
the government, must in addition deposit 250,000 
francs (^50,000) as a bond or security " to the 
government, which pays interest on the deposit, 
and 120,000 francs (^24,000) as a fee to the 
caisse commune of the chamhre syndicate, which 
means the treasury funds of the institution. 
The variations in the price of the "offices" or 
mem.berships have an interesting history. The 
first office sold was valued at 30,000 francs; about 
1830 they rose to 850,000 francs; after the July 

*"The History and Methods of the Paris Bourse," by E. Vidal, Senate 
Document No. 573, Sixty-first Congress (Second session), pp. 161-2. 


Revolution they fell to 250,000 francs, and rose 
again to 950,000 francs before 1848. They 
declined at* that time to 400,000 francs, and in 
1857 reached 2,400,000 francs. After the war 
they fell to 1,400,000 francs.* In 1898, when the 
number of Agents de Change was increased from 
sixty to seventy under the government's reorgani- 
zation, designed to meet the expansion in business, 
it was provided that each of the ten new members 
should purchase the ofhces from the old members 
at 1,372,000 francs each. 

While the stockbrokers, as I shall term the 
Agents de Change henceforth, are placed by law 
under the disciplinary rule of the Minister of 
Finance, they themselves, as an association, 
choose by ballot a governing board {chambre 
syndicate) of eight of their members, to whom, 
with a chairman (Syndic) are entrusted the 
maintenance of discipline, the listing of securities, 
and all general matters concerning the welfare 
of the body. 

In addition to the exclusive privileges entrusted 
to stockbrokers as already cited, they are consti- 
tuted the sole authority for the quotations of 
the securities in which they deal, including 
quotations of metals; they alone give the necessary 
certificates for transfers of government securities 

■* "Operations de Bourse et de Change," Courtois, 13th ed., p. 239. ' 


on terms provided by law; they regulate processes 
by which lost or stolen certificates are rendered 
non-negotiable or restored to owners; they may 
be commissioned by the courts to negotiate loans, 
to liquidate pledged securities, and to dispose of 
the property of minors. Settlement days In 
Paris are similar to those In London, occurring 
twice a month. That at the end of the month 
lasts five days, and that In the middle of the 
month four days. French rentes are settled 
only at the end of the month. 

In forming partnerships, only one person In 
the firm is entitled to act as stockbroker; the 
other partners must be simply financial partners, 
responsible for losses, as "special" partners 
are in New York, to the extent of the capital 
contributed. The holder of the membership 
must be the owner, in his own name, of at least 
one quarter of the sum representing the purchase 
price of his membership, plus the amount of the 
bond or security given. Stockbrokers are for- 
bidden by law to disclose the name of any person 
for whom they buy or sell; for this reason all 
dealings are made in the broker's own names, as 
are also transfers. They must not, under any 
circumstances, carry on trading or banking opera- 
tions for their own account, under penalty of 
expulsion. The bankruptcy of a stockbroker Is 


prima facie a fraudulent bankruptcy, rendering 
him liable" to arrest and other penalties, even 
under circumstances where an outsider would be 

While the impression prevails in many quarters 
that members of the Bourse are made responsible 
by law for any liabilities that may be incurred 
by their colleagues, such^ is not the case. The 
practice is, however, that the chambre syndicale, 
or governing body, voluntarily meets the liabilities 
of defaulting members from the general funds, 
although not compelled to do so. The nature of 
the monopoly which stockbrokers enjoy in Paris, 
and their position as officers of the French Execu- 
tive government, renders this a thoroughly wise 
method, for, as we shall presently see, there is 
grave opposition to the exclusive rights entrusted 
to them, and it would not be good policy to fan 
the flames of this hostility by anything less than 
a mutual guarantee of solvency. 

Rates of commission to be charged by stock- 
brokers on the Paris Bourse are fixed by the decree 
of the Minister of Finance (July 22, 1901). These 
are the minimum charges, and no stockbroker is 
allowed to reduce them under any circumstances. 
He may, however, and usually does, share them 
with intermediates who bring him business. 

If a client gives, say, an order to buy "at the 


average price" (cours moyen), the transaction takes 
place in this way: Before the opening of the 
session the stockbrokers and their clerks meet 
in a special room, where bids and offers are made 
"at the average price," which is as yet undeter- 
mined; it will be decided during the session. 
When an offer and a bid coincide, the transaction 
is closed; only the price is missing. When the 
bell rings to announce the opening of the market, 
the brokers and their clerks leave the special room 
and proceed to the public hall around the railed 
enclosure {corheille) whereupon the day's business 

As orders are executed the dealer gives the 
price to a marker, whose entries establish the 
prices for the official quotation list, and, when this 
has been made up, those who have traded on the 
basis of "the average price "ascertain it by striking 
a mean between the high and low level. If only 
one price is quoted, that, of course, takes the place 
of the average price. If orders are given at fixed 
prices, or "at the market," they are executed as 
elsewhere. It is important to note in this connec- 
tion, that the market in Paris enjoys an intimate 
connection with many banks and credit institu- 
tions that act as intermediates in procuring 
business. Orders transmitted to the Bourse 
by the Bank of France in 1908, for account of its 


clients, amounted to 98,721, involving 500,000,000 
francs capital. 

While, as we have seen, stockbrokers alone 
have the right to deal in government and other 
listed securities, there are very many securities 
dealt in, in Paris, that have not been admitted to 
the Official List, either because the stockbrokers 
did not care to adopt them or because the secu- 
rities did not fulfill the very rigorous statutory 
conditions. These may, however, be dealt in 
outside the Bourse, and the law recognizes and 
protects such transactions. In what I have 
written heretofore, I have confined myself to the 
operations of the parquet, meaning the stock- 
brokers market, and so called because of the 
parquet floor on which they stand; we come now 
to the dealings on the coulisse, or curb, named 
from the narrow passageway, la coulisse, in which 
these curb brokers congregate. This market is 
called "the banker's market" {marche en hanque)^ 
but for our purpose we may call these dealers 
curb brokers, as distinquished from the stock- 
brokers of the parquet.* The number of curb 
brokers is not limited; any one may become a 

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


coullssler if he is a French subject. He must 
have a capital of 100,000 francs in order to do 
business in the cash market for rentes, and of 
500,000 francs for the settlement market. The 
curb is governed, as is the parquet, hy two cham- 
bres syndicaie, one for the account, and one for 
the cash market. 

Although the French law provides that dealings 
In French rentes are the sole prerogative of the 
monopoly of stockbrokers, and fixes punishment 
for any Intrusion into that field, the curb brokers, 
as a matter of fact, deal extensively and openly 
in rentes, and are powerful competitors of the 
stockbrokers. Their operations are not valid, 
strictly speaking, but they are tolerated by the 
government for the reason that the credit of the 
State Is benefited by making the market for rentes 
as free and extensive as possible. This tacit rec- 
ognition by the government, of the fundamental 
law of economics that wide and unrestricted 
markets are the best markets, would seem on its 
face to raise a point as to the wisdom of a system 
that perpetuates a monopoly of seventy stock- 
brokers. The question is not. a new one; it has 
been agitating financial Paris for years. Monop- 
olies of any kind are not considered beneficial 
In this enlightened age; monopolies that make 
markets and establish values and prices are 


peculiarly abhorrent. On this point we nnay 
quote M. Vidal, the author of a brilliant study 
on this subject: 

"The actual financial power of the Paris stock- 
broker is put forward as an argument," he says, 
speaking of the argument in favor of continuing 
the monopoly, "and it is affirmed that our finan- 
cial market is the first in the world. In our 
opinion, even granting that this is true, which is 
far from having been proven, the cause is con- 
founded with the effect. When a country, owing 
to its geographical location, its climate, and the 
character of its inhabitants, possesses numerous 
natural riches, and even moral riches, they co- 
operate in increasing its wealth; when it has the 
advantage of certain political and economic condi- 
tions, when it enjoys a monetary and commercial 
organization which promotes, instead of paralyz- 
ing, human activity in most of its manifestations, 
then that country is rich and deserves to be rich. 
And it may then happen that some organi- 
zation, defective in itself, and the source of 
manifold vexations, is nevertheless prosperous, as 
much on account of certain facts of adaption as 
because it unavoidably lies within the reach of the 
rays of national wealth. It reflects that wealth. 

"But the Paris Bourse does not owe its pros- 
perity to its organization. Seventy ministerial 


appointees entrusted with the negotiation of 
one hundred and thirty bilHons of. transfer- 
able securities are powerful personalities. They 
would be more powerful if they were but 
thirty-five. They would be more powerful if 
there were but twenty of them, or ten, or five, 
or even one, if there were in the market but one 
autocrat, a single arbiter of securities, centralizing 
bids and offers, and the king of the Bourse, just 
as we see in America an oil king and a steel king. 
In such a case the soundness of a market is more 
seeming than real. If that system had been 
applied to provisions and merchandis'e, infinitely 
more necessary for consumption than rentes or 
shares in companies, the market for wine, bread, 
and meat, appropriated by a few barons, might, 
perhaps, be stupendously high, but in this respect 
experience speaks in favor of freedom of trade only. 
"It seems, therefore, necessary that public and 
private credit should enjoy the benefit of an 
organization more pliable and more in harmony 
with the general condition of a country's com- 
merce. Let us therefore beware of mistaking the 
appearance of force for force itself — a deception 
that should impress us no more than the sight of 
the effigies of iron-clad warriors, standing on rich 
trappings in a military museum. If our financial 
market were opened to all who have funds and 


understand the profession, it would be stronger 
still. If the market's favorable situation were 
distributed among several hundred Individuals, 
the division of risks would render the market more 
stable, competition would secure for our market 
the desired elasticity, and, If wanted, regulation 
under the supervision of the Minister of Finance 
would create a condition halfway between un- 
limited freedom, which, with more or less reason, 
scares so many people, and monopoly, which is 
an old outfit, in no way suiting our customs, and 
disturbing the harmony of our laws without 
rendering the services expected from it ."* 

From the point of view of an American this 
would seem to be an unanswerable argument. 
If seventy men are constituted sole managers 
of a market for 130,000,000,000 francs of trans- 
ferable securities, one of two things Is sure to 
happen; either a public market will establish Itself 
outside these seventy men, or the seventy will 
prevent the establishment of the public market. 
The first of these alternatives has occurred in the 
establishment of the coulisse; the second would 
have occurred if the stockbrokers could have 
accom.plished it. 

While the government took no hand in the 

* "History and Methods of the Paris Bourse," by E. Vidal, published 
by the National Monetary Commission, Washington, 1910, pp. 262-3-4. 


matter, It was recognized that the coulisse 
gave to the public market a breadth and activ- 
ity that did great good; as a matter of fact 
it benefited the stockbrokers themselves In 
a large way, for it enabled them to obtain 
from the government liberties not formerly 
enjoyed, but practised freely by the coulisslers, 
such as transactions in time bargains, dealings in 
foreign securities, and similar concessions. This 
grant of a right to do business on time, or as we 
term it "future delivery," was a tremendous step 
forward, since it removed an obstacle in the way 
of large speculative markets that had long been 
abolished In other financial centres. It put a 
stop to the "welching" of speculators on the plea 
of the gambling act. It legalized short sales, and 
it established a distinct advance In economic 
progress. To that extent the stockbrokers are 
Indebted to their neighbors on the curb.* 

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

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

"Experience shows that the plea of gambling has never protected any- 
body but those of bad faith, and has only encouraged the excess of specula- 
tion, as was stated by M. Andrieux in his report presented to the Chamber 
in 1877, in the name of the Seventh Commission of Initiative. 

"Prompted by these reasons, and, considering that the present legislation, 
far from preventing gambling, encourages it; considering that bad faith 
finds protection in the jurisprudence sanctioned; and, further considering 


Meanwhile, the opposition to the monopoly 
of the stockbrokers continues. "At all times," 
says M. Vidal, "whenever there have been 
privileges, some men have been found to oppose 
them. Of course, these men are not theorists or 
pedants; they are simply men whom this or that 
privilege prevents from working freely, and who 
represent the manifestation of that mysterious 
force of things which tends toward freedom of 
trade. Commercial law owes its birth only to 
these protestations of practical men in apparent 
revolt against the laws, which become the uncon- 
scious shapers of future legislation. From the 
day when there was an Agent de Change there 
was a "coulissier. " The first called the second 
a thief, because he encroached upon his privilege. 
The second hurled back the compliment, because 
the privilege robbed him of his natural right."* 

This has a familiar American ring. In 1843 
a voluminous report to the Minister of Justice 
by the stockbrokers asked that the coulisse be 

that in commercial affairs, as in any other, it behooves to allow every 
one his full freedom, as well as to hold him responsible for his actions — 
I beg to suggest that an address be sent to the Minister of Commerce, 
confirming the letter of the Chamber of Commerce of November 21;, 1877, 
and requesting the Government to introduce a bill in the Chambers, declaring 
that article 1965 of the Code civil does not apply to debts resulting from 
dealings for future delivery, and that articles 421 and 422 of the Code 
penal are repealed." 

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

* Vidal, p. 217, supra. 


destroyed. Nothing came of it, but in 1859 
another attempt succeeded; the coulisse was 
suppressed. But the level of public credit which, 
it was hoped, would be raised by the suppression, 
actually sank. The business of the coulisse, and 
the market it created, disappeared with the 
coulisse itself. The government was very sensi- 
tive then as now in the matter of market prices 
for its rentes, and after the laborious process of 
hoisting them to 71, it was distressing to find that, 
coincident with the abolition of the curb market, 
they had fallen to 69. So, in 1861, the coulisse 
was permitted to reappear, and I fancy the days 
of its suppression are now at an end. 

But the old hostility will break out again when 
business slackens, for the French have a saying 
that "horses fight when there is no more hay in 
the- manger. " The problem is a pretty one from 
any angle, especially from the standpoint of Ameri- 
can stockbrokers. It would seem plain that the 
monopoly, as such, cannot forever continue, yet 
the government faces a financial power of tremen- 
dous strength — a Frankenstein which the State 
itself has created — "and of which," to quote 
M. Vidal, "it can rid itself only by indemnifying 
it. " At the present time the 70 memberships 
are worth 96,000,000 francs as a grand total; 
meantime, the longer the problem is postponed 


the more valuable they will become as the size 
and importance of the Paris market increases. 

"But the French government does not seem 
inclined to study the question seriously; first, 
because the stockbrokers would have to be indem- 
nified; and, secondly, because the stockbrokers 
themselves are desirous of holding on to their 
present monopoly. As time passes, the securities, 
continually on the increase, tend to increase their 
profits. A financial power has been created whose 
existence, whose ever spreading influence, forms 
the subject of a serious economic problem, which 
some day may turn out to be an even more serious 
political problem. "* 

It is interesting to note, in passing from this 
subject, that a much larger business is done in 
the coulisse than in the parquet, due to the fact 
that the curb brokers are not restricted in their 
securities as are the stockbrokers. The market 
for foreign securities alone, on the curb, has made 
wealthy men of many of the coulissiers. They 
publish a special quotation list, and while they 
have no officially fixed commission rates, these 
are established by custom and in practical opera- 
tion they work satisfactorily. As might be 
expected, the curb brokers require from their 
custom ers smaller margins than those exacted 

* Ibid, p. 276. 


by the stockbrokers — another reason why their 
business is large; again, the clients of the curb 
broker may attend the Bourse with him, be 
present and confer with him while he buys or sells 
for them, and in this way get into close touch 
with the market, a privilege not so easily enjoyed 
by the client of the stockbroker. 

The" Official Paris Bourse is open from 12 noon 
to 3 p. M.; the coulisse from 11 145 a. m. to 4 p. m. 
The Official List is published daily, and is divided 
into two parts, the first containing a full list of 
all the officially listed securities and of the dealings 
in them, and the second part a list of the dealings 
in what we used to call in New York "the unlisted 
department. " Rates of Exchange, prices of gold 
and silver bullion, quotations of treasury bonds, 
and the rates of the Bank of France for discounts, 
interest, and loans, are also included. The coulisse 
also issues a list. 

The volume of transferable securities in nego- 
tiation through the medium of the Paris stock 
markets was estimated by JVT. Alfred Neymarck 
in his report to the Institut International de 
Statistique, session of 1907, at 155,000,000,000 
francs, an amount slightly in excess of the listed 
securities on the New York Stock Exchange. 
Of this total, which has been incre sed somewhat 
since 1907 through the admission of various Rus- 


sian industrial securities, 65,000,000,000 francs 
were in French securities, 67,000,000,000 in 
foreign securities on the official (parquet) market, 
and 18,000,000,000 on the coulisse. Of home 
securities, the value of French rentes is here 
estimated at 24,000,000,000 francs, of bonds of 
the City of Paris, of treasury bonds, including 
those of the department and colonies, at 3,069,- 
000,000; insurance securities at 702,000,000; those 
of the Credit Foncier at 4,447,000,000; of banks 
and credit companies at 3,101,000,000; of railroad 
and navigation companies at 24,268,000,000; of 
railways and tramways at 2,200,000,000; of elec- 
tricity, iron mills, foundries, and coal mines, at 

Of the foreign securities in the French market, 
Russian securities were valued at 10,000,000,000 
francs in 1907, although they are to-day consider- 
ably in excess of that sum; divers foreign govern- 
ment funds at 47,000,000,000 and foreign railway 
securities at 6,000,000,000.* 

Next to London, Paris easily leads the markets 
of the world from the standpoint of power and 
resources in an international sense. It is the 
great market for Russian bonds and for Russian 
industrials, speculation in the latter having 
reached such volume in 191 2 as to lay the French 

* Ibid, pp. 192-3. 


public open to the charge of having lost its head, 
something that has not occurred in France since 
the Panama frenzy of 1894. France also holds 
most of the Spanish and Portuguese (3,500,000,000 
francs) debt and has large capital invested in 
Egypt and the Suez Canal (3,500,000,000 francs). 
Capital investments in Roumania and Greece, 
Argentine, Brazil and Mexico, Tunis and the 
French colonies, Austria and Hungary, Italy, 
China and Japan, United States and Canada, 
Great Britain, Belgium and Holland, Germany, 
Turkey, Servia and Bulgaria, and Switzerland, 
aggregate 16,150,000,000 francs, distributed in 
value in the order named. 

The caution of French investors is proverbial; 
notwithstanding the two outbursts of imprudence 
that have occurred in this generation, it is difficult 
to 'induce the Frenchman to place his money in 
anything 'not a safe interest-yielding security 
under French laws. In no other country is 
investment raised to a higher plane, and specu- 
lation confined to a lower one. The political 
nature of the relationship between France and 
Russia has resulted from time time, in patriotic 
subscription of French funds to Russian govern- 
ment loans, and thence to Russian industrials of 
all kinds, but the latter have suffered so severely 
in the demxoralization of the autumn of 191 2 as 


to justify the prediction that their popularity 
with the French has been seriously impaired. 

As to Russian government loans, the French 
investor is in a secure position, most of these 
issues having been endorsed by such powerful 
banks as the Bank of France, the Credit Lyonnais, 
the Comptoir d' Escompte, and the Societe Gen- 
erale, and, indeed, it is to banks such as these 
and to the myriad smaller institutions throughout 
the country that investors of the peasantry and 
the middle classes are accustomed to turn for 
advice in financial matters. The large speculative 
clientele, as we know it in America, in England, 
and in Germany, is a decided minority in France, 
and those who indulge freely in speculation are 
canny and shrewd beyond their fellows in other 
lands. The foresight with which they diagnosed 
the events of the Boer War in 1899, and the celerity 
with which they disposed of their large speculative 
holdings of South African mining shares at top 
prices, is said by those who witnessed it to have 
been a prodigy of speculative skill. 

Like all other careful observers French econ- 
omists realize in a large sense that the creation 
of negotiable instruments and their distribution 
throughout all the countries of the world through 
the medium of the Stock Exchange is a very real 
cause of the wealth of nations; indeed, this point 


seems to be more thoroughly understood and 
appreciated by the mass of the French people 
than by the public elsewhere. When, in 1885, 
the government legalized transactions for future 
delivery and thus placed transactions in securities 
in the same category, under common law, with all 
other commercial transactions, it established 
a free market in France that has done wonders 
for the credit expansion of the Republic — an 
expansion likewise due, in no small measure, to 
the growth and development of the coulisse and 
to the consequent enlargement of a market that 
must have been restricted, of necessity, by a 
too rigorous strengthening of the stockbroker's 
monopoly. In a word, the government, by 
France, of credit in its higher forms, clearly rec- 
ognizes that as states, railways, and industrial 
enterprises have need to resort to credit through 
issues of securities, a wide market in constant 
contact with sources of wealth is required, and 
that nothing should be done by the government 
to interfere with the ebb and flow of these essential 

"The creating and successive issuing of this 
mass of securities," to quote M. Neymarck, 
"always easy to purchase and to sell on the 
Bourse, have been the real cause of credit expan- 
sion. They were instrumental in accomplishing 


real marvels In France and abroad. As personal 
property has- increased, endeavors have been made 
to render exchanges easy, and to make transfers 
as little expensive as possible; transferable secu- 
rities, owing to their denomination, their form, 
their mode of maturity for the payment of in- 
terest, their conditions for redemption, and the 
ease with which they are negotiated, have been 
brought within the reach of all purses, and have 
thus developed the spirit of saving. The consoli- 
dation of capital, under the form of stock com- 
panies, issuing shares and bonds that everybody 
can obtain, encompasses on all sides the civilized 
nations of the world. 

"We may say, with Paul Leroy-Beaulieu, that 
now, owing to capital being accumulated in the 
shape of negotiable instruments, it is the stock 
company which takes us on a journey; often it 
provides us with food and lodging, sells us coal 
and Hght, makes up our clothing, and even sells 
it to us; it procures news for us and inspires our 
newspapers. Further, it insures our lives and 
our dwellings; it feeds the unassuming Parisian in 
the 'Bouillons' (cheap cook-shops), and feasts the 
stylish Parisian in the fashionable wine taverns. 

"The distribution of all these securities has 
materially contributed to the formation of small 
inheritances. It has influenced the development 


of savings institutions, mutual benefit societies, 
pension funds, and insurance; it has thus rendered 
invaluable service in the public role it has fulfilled. 
Thanks to it, these companies multiply and 
increase as the capitalization of their funds is 
made easier. 

"It has also had another result. It has shown 
that there is no longer a plutocracy, but a veritable 
financial democracy; when these thousands of 
millions of certificates are minutely segregated, 
there are only found atoms of certificates of 
stocks and bonds, and atoms of income — so 
great is the number of capitalists and independent 
individuals who divide these securities and these 
incomes among themselves. "* 

* Remarks of M. Alfred Neymarck, at the International Congress of 
Securities, 1900, quoted by Vidal, pp. 166-7. 


OF 1909 





New York, June 7, 1909 
Hon. Charles E. Hughes, 
Governor, Albany, N. Y.: 

Dear Sir: The committee appointed by you on December 14, 
1908, to endeavor to ascertain 

"what changes, if any, are advisable in the laws of the State bear- 
ing upon speculation in securities and commodities, or relating to 
the protection of investors, or with regard to the instrumentalities 
and organizations used in dealings in securities and commodities 
which are the subject of speculation," 

beg leave to submit the following report : 

We have invited statements from those engaged in speculation 
and qualified to discuss its phases; we have taken testimony offered 
from various sources as to its objectionable features; we have con- 
sidered the experience of American States and of foreign countries 
in their efforts to regulate speculative operations. In our inquiry 
we have been aided by the officials of the various exchanges, who 
have expressed their views both orally and in writing, and have 
aflforded us access to their records. 


Markets have sprung into being wherever buying and selling have 
been conducted on a large scale. Taken in charge by regular organi- 
zations and controlled by rules, such markets become exchanges. In 
New York City there are two exchanges deahng in securities and 
seven in commodities. In addition there is a security market, with- 
out fixed membership or regular officers, known as the "Curb." 
The exchanges dealing in commodities are incorporated, while those 
dealing in securities are not. 



Commodities are not held for permanent investment, but are 
bought and sold primarily for the purpose of commercial distribu- 
tion; on the other hand, securities are primarily held for investment; 
but both are subject of speculation. Speculation consists in fore- 
casting changes of value and buying or selling in order to take ad- 
vantage of them; it may be wholly legitimate, pure gambling, or 
something partaking of the qualities of both. In some form it is a 
necessary incident of productive operations. When carried on in 
connection with either commodities or securities it tends to steady 
their prices. WTiere speculation is free, fluctuations in prices, other- 
wise violent and disastrous, ordinarily become gradual and com- 
paratively harmless. Moreover, so far as commodities are con- 
cerned, in the absence of speculation, merchants and manufacturers 
would themselves be forced to carry the risks involved in changes of 
prices and to bear them in the intensified condition resulting from 
sudden and violent fluctuations in value. Risks of this kind which 
merchants and manufacturers still have to assume are reduced in 
amount, because of the speculation prevailing; and many of these 
milder risks they are enabled, by "hedging," to transfer to others. 
For the merchant or manufacturer the speculator performs a service 
which has the effect of insurance. 

In law, speculation becomes gambling when the trading which it 
involves does not lead, and is not intended to lead, to the actual 
passing from hand to hand of the property that is dealt in. Thus, in 
the recent case of Hurd vs. Taylor (i8i N. Y., 231), the Court of 
Appeals of New York said: 

"The law of this State as to the purchase and sale of stocks is well 
settled. The purchase of stocks through a broker, though the party 
ordering such purchase does not intend to hold the stocks as an 
investment, but expects the broker to carry them for him with the 
design on the part of the purchaser to seU again the stocks when 
their market value has enhanced is, however, speculative, entirely 
legal. Equally so is a 'short sale,' where the seller has not the stock 
he assumes to sell, but borrows it and expects to replace it when the 
market value has dechned. But to make such transactions legal, 
they must contemplate an actual purchase or an actual sale of 
stocks by the broker, or through him. If the intention is that the 
so-called broker shall pay his customer the difference between the 
market price at which the stocks were ordered purchased and that 
at which they were ordered sold, in case fluctuation is in favor of the 
costomer, or that in case it is against the customer, the customer 
shall pay the broker that difference, no purchases or sales being made, 
the transaction is a wager and therefore illegal. Such business is 
merely gambling, in which the so-caUed commission for purchases 
and sales that are never made is simply the percentage which in other 
gambling games is reserved in favor of the keeper of the estabUsh- 


This is also the law respecting commodity transactions. 

The rules of all the exchanges forbid gambling as defined by this 
opinion; but they make so easy a technical dcli\ery of the property 
contracted for, that the practical effect of much speculation, in point 
of form legitimate, is not greatly different from that of gambling. 
Contracts to buy may be privately offset by contracts to sell. The 
offsetting may be done, in a systematic way, by clearing houses, or 
by "ring settlements." Where dehveries are actually made, property 
maj' be temporarily borrowed for the purpose. In tliese ways, 
speculation which has the legal traits of legitimate deahng may go 
on almost as freely as mere wagering, and may have most of the 
pecuniary and immoral eff'ects of gambling on a large scale. 

A real distinction exists between speculation which is carried on 
by persons of means and experience, and based on an intelligent 
forecast, and that whicii is carried on by persons without these 
qualifications. The former is closely connected with regular business. 
While not unaccompanied by waste and loss, this speculation accom- 
phshes an amount of good which ofi'sets much of its cost. The latter 
doe's but a small amount of good and an almost incalculable amount 
of evil. In its nature it is in the same class with gambhng upon the 
race-track or at the roulette table, but is practised on a vastly larger 
scale. Its ramifications extend to all parts of the country. It 
involves a practical certainty of loss to those who engage in it. A 
continuous stream of wealth, taken from the actual capital of in- 
numerable persons of relatively small means, swells the income of 
brokers and operators dependent on this class of business; and in 
so far as it is consumed hke most income, it represents a waste of 
capital. The total amount of this waste is rudely indicated by the 
obvious cost of the vast mechanism of brokerage and by manipula- 
tors' gains, of both of which it is a large constituent element. But 
for a continuous influx of new customers, replacing those whose 
losses force them out of the "street," this costly mechanism of specu- 
lation could not be maintained on anything like its present scale. 


The problem, wherever speculation is strongly rooted, is to elim- 
inate that which is wasteful and morally destructive, while retaining 
and allowing free play to that which is beneficial. The difficulty 
in the solution of the problem Ues in the practical impossibility of 
distinguishing what is virtually gambling from legitimate speculation. 
The most fruitful policy will be found in measures which will lessen 
speculation by persons not qualified to engage in it. In carrying out 
such a policy exchanges can accomplish more than legislatures. In 
coimection with our reports on the dift"erent exchanges, as well as on 
the field of investment and speculation which lies outside of the 
exchanges, we .shall make recommendations directed to the removal 


of various evils now existing and to the reduction of the volume of 
speculation of the gambling type. 


The New York Stock Exchange is a voluntary association, limited 
to I ICO members, of whom about 700 are active, some of them resi- 
dents of other cities. Memberships are sold for about $So,ooo. 
The Exchange as such does no business, merely providing facilities 
to members and regulating their conduct. The governing power is 
in an elected committee of forty members and is plenary in scope. 
The business transacted on the floor is the purchase and sale of stocks 
and bonds of corporations and governments. Practically all trans- 
actions must be completed by delivery and payment on the following 

The mechanism of the Exchange provided by its constitution and 
rules, is the evolution of more than a century. An organization of 
stockbrokers existed here in 1792, acquiring more definite form in 
181 7. It seems certain that for a long period the members were 
brokers or agents only; at the present time many are principles as 
well as agents, trading for themselves as well as for their customers. 
A number of prominent capitalists hold memberships merely for the 
purpose of availing themselves of the reduced commission charge 
which the rules authorize between members. 

The volume of transactions indicates that the Exchange is to-day 
probably the most important financial institution in the world. 
In the past decade the average annual sales of shares have been 
196,500,000 at prices involving an annual average turnover of nearly 
$15,500,000,000; bond transactions averaged about $800,000,000. 
This enormous business affects the financial and credit interests of 
the'country in so large a measure that its proper regulation is a matter 
of transcendent importance. While radical changes in the mechan- 
ism, which is now so nicely adjusted that the transactions are carried 
on with the minimum of friction, might prove disastrous to the whole 
coimtry, nevertheless measures should be adopted to correct existing 


The patrons of the Exchange may be divided into the following 

(i.) Investors, who personally examine the facts relating to the 
value of securities or act on the advice of reputable and experienced 
financiers, and pay in full for what they buy. 

(2.) Manipulators, whose connection with corporations issuing 
or controlhng particular securities enables them under certain cir- 
cumstances to move the prices up or down, and who are thus in some 
degree protected from dangers encountered b}' other speculators. 

(3.) Floor traders, who keenly study the markets ^nd the general 


conditions of business, and acquire early information concerning 
the changes which affect the values of securities. From their famili- 
arity with the technique of dealings on the Exchange, and ability 
to act in concert with others, and thus manipulate values, they are 
supposed to have special advantages over other traders. 

(4.) Outside operators having capital, experience, and knowledge 
of the general conditions of business. Testimony is clear as to the 
result which, in the long run, attends their operations; commissions 
and interest charges constitute a factor always working against them. 
Since good luck and bad luck alternate in time, the gains only stimu- 
late these men to larger ventures, and they persist in them till a 
serious or ruinous loss forces them out of the "Street." 

(5.) Inexperienced persons, who act on interested advice, "tips," 
advertisements in newspapers, or circulars sent by mail, or "take 
flyers" in absolute ignorance, and with bhnd confidence in their 
luck. Almost without exception they eventually lose. 


It is unquestionable that only a small part of the transactions upon 
the Exchange is of an investment character; a substantial part may 
be characterized as virtually gambling. Yet we are unable to see 
how the State could distinguish by law between proper and improper 
transactions, since the forms and the mechanisms used are identical. 
Rigid statutes directed against the latter would seriously interfere 
with the former. The experience of Germany with similar legisla- 
tion is illuminating. But the Exchange, with the plenary power over 
members and their operations, could provide correctives, as we shall 


Purchasing securities on margin is as legitimate a transaction as a 
purchase of any other property in which part payment is deferred. 
We therefore see no reason whatsoever for recommending the radical 
change suggested, that margin trading be prohibited. 

Two practices are prolific of losses — namely, buying active securi- 
ties on small margins and buying unsound securities, paying for them 
in full. The losses in the former case are due to the quick turns in the 
market, to which active stocks are subject; these exhaust the mar- 
gins and call for more money than the purchasers can supply. The 
losses in the latter case are largely due to misrepresentations of 
interested parties and unscrupulous manipulations. 

To correct the evils of misrepresentation and manipulation, we 
shall offer in another part of this report certain recommendations. 
In so far as losses are due to insufiicient margins, they would be ma- 
terially reduced if the customary percentage of margins were in- 
creased. The amount of margin which a broker requires from a 
speculative buyer of stocks depends, in each case, on the credit of 
the buyer; and the amount of credit which one person may extend 


to another is a dangerous subject on which to legislate. Upon the 
other hand, a rule made by the Exchange could safely deal with the 
prevalent rate of margins required from customers. In preference, 
therefore, to recommending legislation, we urge upon all brokers to 
discourage speculation upon small margins and upon the Exchange 
to use its influence, and, if necessary, its power, to prevent members 
from sohciting and generally accepting business on a less margin 
than 20 per cent. 


"Pyramiding," which is the use of paper profits in stock transac- 
tions as a margin for further commitments, should be discouraged. 
The practice tends to produce more extreme fluctuations and more 
rapid wiping out of margins. If the stockbrokers and the banks 
would make it a rule. to value securities for the purpose of margin 
or collateral, not at the current price of the moment, but at the 
average price of, say, the previous two or three months (provided 
that such average price were not higher than the price of the mo- 
ment) , the dangers of pyramiding would be largely prevented. 


We have been strongly urged to advise the prohibition or limita- 
tion of short sales, not only on the theory that it is wrong to agree 
to sell that what one does not possess, but that such sales reduce 
the market price of the securities involved. We do not think that 
it is wrong to agree to sell something that one does not now possess, 
but expects to obtain later. Contracts and agreements to sell, 
and deliver in the future, property which one does not possess at the 
time of the contract, are common in all kinds of business. The man 
whohas "sold short" must some day buy in order to return the stock 
which he has borrowed to make the short sale. Short sellings en- 
deavor to select times when prices seem high in order to sell, and times 
when prices seem low in order to buy, their action in both cases 
serving to lessen advances and diminish declines of price. In other 
words, short selling tends to produce steadiness in prices, which is 
an advantage to the community. No other means of restraining 
unwarranted marking up and down of prices has been suggested 
to us. 

The legislation of the State of New York on the subject of short 
selling is significant. In 181 2 the Legislature passed a law declaring 
all contracts for the sale of stocks and bopds void, unless the seller 
at the time was the actual owner or assignee thereof or authorized 
by such owner or assignee to sell the same. In 1858 this act was 
repealed by a statute now in force, which reads as follows : 

"An agreement for the purchase, sale, transfer, or delivery of a 
certificate or other evidence of debt, issued by the United States 
or by any State, or municipal or otbtr corporation, or any share or 


interest in the stock of any bank, corporation or joint-stock asso- 
ciation, incorporated or organized under the laws of the United 
States or of any State, is not void, or voidable, because the vendor, 
at the time of making such contract, is not the owner or possessor 
of the certificate, or certificates, or other evidence of debt, share or 

It has been urged that this statute "specifically legalizes stock 
gambhng." As a matter of fact, however, the law would be precisely 
the same if tliat statute were repealed, for it is the well-settled com- 
mon law of this country, as established by the decisions of the 
Supreme Court of the United States and of the State courts, that all 
contracts, other than mere wagering contracts, for the future pur- 
chase or sale of securities or commod'ties are valid, whether the 
vendor is, or is not, at the time of making such contract, the owner 
or possessor of the securities or commodities involved, in the absence 
of a statute making such contracts illegal. So far as any of these 
transactions are mere wagering transactions, they are illegal, and not 
enforceable, as the law now stands. 

It has been suggested to us that there should be a requirement 
either by law or by rule of the Stock Exchange, that no one should 
sell any security without identifying it by a number or otherwise. 
Such a rule would cause great practical difliculties in the case of 
securities not present in New York at the time when the owner 
desires to sell them, and would increase the labor and cost of doing 
business. But even if this were not the effect, the plan contemplates 
a restriction upon short sales, which, for the reasons set forth above, 
seems to us undesirable. It is true that this identification plan exists 
in England as to sales of bank shares (Leeman act of 1867); but it 
has proved a dead letter. It has also been used in times of appre- 
hended panic upon the French Bourse, but opinions in regard to its 
effect there are conflicting. While some contend that it has been 
useful in preventing panics, others afiirm that it has been used simply 
for the purpose of protecting bankers who are loaded down with 
certain securities which {hey were trjang to distribute, and who, 
through political influence, procured the adoption of the rule for their 
special benefit. , 


A subject to which we have devoted much time and thought is 
that of the manipulation of prices by large interests. This falls 
into two general classes: 

(i.) That which is resorted to for the purpose of making a market 
for issues of new securities. 

(2.) That which is designed to serve merely speculative purposes 
in the endeavor to make a profit as the result of fluctuations Vvhich 
have been planned in advance. 


The first kind of manipulation has certain advantages, and when 
not accompanied by "matched orders" is unobjectionable per se. 
It is essential to the organization and carrying through of important 
enterprises, such as large corporations, that the organizers should be 
able to raise the money necessary to complete them. This can be 
done only by the sale of securities. Large blocks of securities, such 
as are frequently issued by railroad and other companies, cannot be 
sold over the Counter or directly to the ultimate investor, whose con- 
fidence in them can, as a rule, be only gradually established. They 
must therefore, if sold at all, be disposed of to some syndicate, who 
wiU in turn pass them, on to middlemen or speculators, until, in the 
course of time, they find their way into the boxes of investors. But 
prudent investors are not Ukely to be induced to buy securities 
which are not regularly quoted on some exchange, and which they 
cannot sell, or on which they cannot borrow money at their pleasure. 
If the securities are really good and bids and offers bona fide, open to 
all sellers and buyers, the operation is harmless. It is merely a 
method of bringing new investments into public notice. 

The second kind oi manipulation mentioned is undoubtedly open 
to serious criticism. It has for its object either the creation of high, 
prices for particular stocks, in order to draw in the pubUc as buyers 
and to unload upon them the holdings of the operators, or to depress 
the prices and induce the public to sell. There have been instances 
of gross and unjustifiable manipulation of securities, as in the case 
of American Ice stock. While we have been unable to discover any 
complete remedy short of abolishing the Stock Exchange itself, we 
are convinced that the Exchange can prevent the worst forms of 
this evil by exercising its influence and authority over the members 
to prevent them. \\ hen continued manipulation exists it is patent 
to experienced obser\^ers. 

"wash sales" and "matched orders" 

In the foregoing discussion we ha\'e confined ourselves to bona 
fide sales. So far as manipulation of either class is based upon 
fictitious so-called "wash sales," it is open to the severest condem- 
nation, and should be prevented by all possible means. These 
fictitious sales are forbidden by the rules of aH the regular exchanges, 
and are not enforceable at law. They are less frequent than many 
persons suppose. A transaction must take place upon the floor of 
the Exchange to be reported, and if not reported does not serve the 
purpose of those who engage in it. If it takes place on the floor of 
the Exchange, but is purely a pretence, the brokers involved run the 
risk of detection and expulsion, which is to them a sentence of financial 
death. There is, however, another class of transactions called 
"matched orders," which differ materially from those already men- 
tioned, in that they are actual and enforceable contracts. We refer 
to that class of transactions, engineered by some manipulator, who 
sends a number of orders simultaneously to different brokers, sow^ 


to buy and some to sell. These brokers, without knowing that other 
brokers have counter\'aiIing orders from the same principal, execute 
their orders upon the floor of the Exchange, and the transactions 
become binding contracts; they cause an appearance of activity in 
a certain security which is unreal. Since they are legal and bind- 
ing, we find a difficulty in suggesting a legislative remedy. But 
where the activities of two or more brokers in certain securities be- 
come so extreme as to indicate manipulation rather than genuine 
transactions, the officers of the Exchange would be remiss unless 
they exercised their influence and authority upon such members in 
a way to cause them to desist from such suspicious and undesirable 
activity. As already stated, instances of continuous mani])ulation 
of particular securities are patent to every experienced observer, 
and could without difficulty be discouraged, if not prevented, by 
prompt action on the part of the Exchange authorities. 

The subject of corners in the stock market has engaged our atten- 
tion. The Stock Exchange might properly adopt a rule providing 
that the governors shall have power to decide when a corner exists 
and to fix a settlement price, so as to relieve innocent persons from 
the injury or ruin which may result therefrom. The mere existence 
of such a rule would tend to prevent corners. 


We have taken testimony on the subject of recent failures of 
brokers, where it has been discovered that they were insolvent for 
a long period prior to their public declaration of failure, and where 
their activities after the insolvency not only caused great loss to their 
customers, but also, owing to their efforts to save themselves from 
bankruptcy, worked great injury to innocent outsiders. For cases 
of this character, there should be a law analogous to that forbidding 
banks to accept deposits after insolvency is known; and we recom- 
mend a statute making it a misdemeanor for a broker to receive any 
securities or cash from any customer (except in Uquidating or fortify- 
ing an existing account), or to make any further purchases or sales 
for his own account, after he has become insolvent; with the pro- 
vision that a broker shall be deemed insolvent when he has on his 
books an account or accounts which, if liquidated, would exhaust 
his assets, unless he can show that he had reasonable ground to 
believe that such accounts were good. 

The advisabiUty of requiring by State authority an examination 
of the books of all members of the Exchange, analogous to that re- 
quired of banks, has been urged upon us. Doubtless some failures 
would be prevented by such a system rigidly enforced, although 
bank failures do occur in spite of the scrutiny of the examiners. 
Yet the relations between brokers and their customers are of so con- 


fidential a nature that we do not recommend an examination of their 
books by any public authority. The books and accounts of the 
members of the Exchange, should, however, be subjected to periodic 
examination and inspection pursuant to rules and regulations to be 
prescribed by the Exchange, and the result should be promptly 
reported to the governors thereof. 

It is vain to say that a body possessing the powers of the board 
of governors of the Exchange, familiar with every detail of the 
mechanism, generally accjuainted with the characteristics of mem- 
bers, cannot improve present conditions. It is a deplorable fact 
that with all their power and ability to be informed, it is generally 
only after a member or a firm is overtaken b}^ disaster, involving 
scores or hundreds of innocent persons, and causing serious disturb- 
ances, that the Exchange authorities take action. No complaint 
can be registered against the severity of the punishment then meted 
out; but in most cases the wrongdoing thus atoned for, which has 
been going on for a considerable period, might have been discovered 
under a proper system of supervision, and the vastly preponderant 
value of prevention over cure demonstrated. 


We have also considered the subject of rehj'pothecating, loaning, 
and other use of securities by brokers who hold them for customers. 
So far as any broker applies to his own use any securities belonging 
to a customer, or hypothecates them for a greater amount than the 
unpaid balance of the purchase price, without the customer's con- 
sent, he is undoubtedl}' guilty of a conversion under the law as it 
exists to-day, and we call this fact to the attention of brokers and 
the public. \\Tien a broker sells the securities purchased for a cus- 
tomer who has paid therefor in whole or in part, except upon the 
customer's default, or disposes of them for his own benfit, he should 
be held guilty of larceny, and we recommend a statute to that effect. 


The Exchange now has a rule forbidding any member to deal or 
cany' an account for a clerk or employee of any other member. 
This rule should be extended so as to prevent dealing for account 
of any clerk or subordinate employee of any bank, trust company, in- 
surance company, or other moneyed corporation or banker. 


Before securities can be bought and sold on the Exchange, they 
must be examined. The committee on Stock List is one of the most 
important parts of the organization, since pubhc confidence depends 
upon the honesty, impartiahty, and thoroughness of its work. While 


the Exchange does not guarantee the character of any securities, or 
aftirm that the statements filed by the promoters are true, it certifies 
that due dihgence and caution have been used by ex[)erienced men 
in examining them. Admission to the Hst, therefore, establishes a 
presumption in favor of the soundness 01 the security so admitted. 
Any securities authorized to be bought and sold on the Exchange, 
which have not been subjected to such scrutiny, are said to be in the 
unlisted department, and traders who deal in them do so at their 
own risk. We have given consideration to the subject of verifying 
the statements of fact contained in the papers filed with the appHca- 
tions for listing, but we do not recommend that either the State or 
the Exchange take such responsibility. Any attempt to do so would 
undoubtedly give the securities a standing in the eyes of the public 
which would not in all cases be justified. In our judgment, the 
Exchange, should, however, adopt methods to compel the filing of 
frequent statements of the financial condition of the companies whose 
securities are listed, including balance sheets, income and expense 
accounts, etc., and should notify the public that these are open to 
examination under proper rules and regulations. The Exchange 
shoidd also require that there be filed with future applications for 
listing a statement of what the capital stock of the company has been 
issued for, showing how much has been issued for cash, how much for 
property, with a description of the property, etc., and also showing 
what commission, if any, has been paid to the promoters or vendors. 
Furthermore, means should be adopted for holding those making 
the statements responsible for the truth thereof. The unlisted de- 
partment, except for temporary issues, should be abolished. 


Complaint is made that orders given by customers are sometimes 
not actually executed, although so reported by the broker. We 
recommend the passage of a statute providing that, in case it is 
pleaded in any suit by or against a broker that the purchase or sale 
was fictitious, or was not an actual bona fide purchase or sale by the 
broker as agent for the customer, the court or jury shall make a 
special finding upon that fact. In case it is found that the purchase 
or sale was not actual and bona fide the customer shall recover three 
times the amount of the loss which he sustained thereby; and copies 
of the finding shall be sent to the district attorney of the county 
and to the Exchange, if the broker be a member. 


The Exchange should insist that all trading be done on the basis 
of a reasonably small unit (say 100 shares of stock or $1000 of bonds), 
and should not permit the offers of such lots, or bids for such lots, 
to be ignored by traders offering or bidding for larger amounts. 
The practice now permitted of allowing bids and offers for large 


amounts, all or none, assists the manipulation of prices. Thus a 
customer may send an order to sell loo shares of a particular stock 
at par, and a broker may offer to buy looo shares, all or none, at 
loi, and yet no transaction take place. The bidder in such a case 
should be required to take all the shares offered at the lower price 
before bidding for a larger lot at a higher price. This would tend to 
prevent matched orders. 


We have also considered the subject of the Stock Exchange Clear- 
ing House. While it is undoubtedly true that the clearing of stocks 
facilitates transactions which may be deemed purely manipulative, 
or virtually gambling transactions, nevertheless we are of the opinion 
that the Exchange could not do its necessary and legitimate business 
but for the existence of the clearing system, and, therefore, that it is 
not wise to abolish it. 

The transactions in stocks which are cleared are transcribed each 
day on what are called "clearing sheets," and these sheets are passed 
into the Clearing House and there filed for one week only. In view 
of the value of these sheets as proving the transactions and the prices, 
they should be preserved by the Exchange for at least six years, and 
should be at the disposal of the courts, in case of any dispute. 


We have received complaints that specialists on the floor of the 
Exchange, dealing in inactive securities, sometimes buy or sell for 
their own account while acting as brokers. Such acts without the 
principal's consent are illegal. In every such case recourse may be 
had to the courts. 

Notwithstanding that the system of dealing in specialties is sub- 
ject to abuses, we are not convinced that the English method of 
distinguishing between brokers and jobbers serves any better purpose 
than our own practice, while its introduction here would complicate 
business. It should also be noted that the practice of specialists 
in buying and selling for their own account often serves to create a 
market where otherwise one would not exist. 


Complaint has been made of branch offices in the city of New York, 
often luxuriously furnished and sometimes equipped with lunch 
rooms, cards, and liquor. The tendency of many of them is to in- 
crease the lure of the ticker by the temptation of creature comforts, 
appealing thus to many who would not otherwise speculate. The 
governors of the Exchange inform us that they reahze that some of 


these oflBces have brought discredit on the Exchange, and that on 
certain occasions they have used their powers to suppress objection- 
able features. It seems to us that legitimate investors and specula- 
tors might, without much hardship, be compelled to do business at 
the main offices, and that a hard-and-fast rule against all branch 
offices in the city of New York might well be adopted by the Ex- 
change. In any event, we are convinced that a serious and effective 
regulation of these branch otlices is desirable. 


We have been strongly urged to recommend that the Exchange be 
incorporated in order to bring it more completely under the authority 
and supervision of the State and the process of the courts. Under 
existing conditions, being a voluntary organization, it has almost 
unlimited power over the conduct of its members, and it can subject 
them to instant discipline for wrongdoing, which it could not exercise 
in a summary manner if it were an incorporated body. We think 
that such power residing in a properly chosen committee is distinctly 
advantageous. The submission of such questions to the courts 
would involve delays and technical obstacles which would impair 
discipline without securing any greater measure of substantial 
justice. While this committee is not entirely in accord on this 
point, no member is yet prepared to advocate the incorporation 
of the Exchange and a majority of us advise against it, upon the 
ground that the advantages to be gained by incorporation may be 
accomplished by rules of the Exchange and by statutes aimed directly 
at the evils which need correction. 

The Stock Excliange in the past, although frequently punishinfi; 
infractions of its rules with great severity, has, in our opinion, at 
times failed to take proper measures to prevent wrongdoing. This 
has been probably due not only to a conservative unwillingness to 
interfere in the business of others, but also to a spirit of comradeship 
which is very marked among brokers, and frequently leads them to 
overlook misconduct on the part of fellow-members, although at the 
same time it is a matter of cynical gossip and comment in the street. 
The public has a right to expect something more than this from the 
Exchange and its members. This committee, in refraining from 
advising the incorporation of the Exchange, does so in the expectation 
that the Exchange will in the future take full advantage of the powers 
conferred upon it by its voluntary organization, and will be active 
in preventing wrongdoing such as has occurred in the past. Then 
we believe that there will be no serious criticism of the fact that it 
is not incorporated. If, however, wrongdoing recurs, and it should 
appear to the public at large that the Exchange has been derelict in 
exerting its powers and authority to prevent it, we believe that the 
public will insist upon the incorporation of the Exchange and its 
subjection to State authority and supervision. 



There is a tendency on the part of the pubUc to. consider Walt 
Street and the New York Stock Exchange as one and the same thing. 
This is an error arising from their location. We have taken pains 
to ascertain what proportion of the business transacted on the Ex- 
change is furnished by New York City. The only reliable sources 
of information are the books of the commission houses. An investi- 
gation was made of the transactions on the Exchange for a given day, 
when the sales were 1,500,000 shares. The returns showed that on 
that day 52 per cent, of the total transactions on the Exchange 
apparently originated in New York City, and 48 per cent, in other 


The Consolidated Exchange was organized as a mining stock 
exchange in 1875, altering its name and business in 1886. Although 
of far less importance than the Stock Exchange, it is nevertheless 
a secondary market of no mean proportions; by far the greater part 
of the trading is in securities listed upon the main exchange, and the 
prices are based upon the quotations made there. The sales average 
about 45 ,000,000 shares per annum. The fact that its members make 
a specialty of "broken lots," i. e., transactions in shares less than the 
100 unit, is used as a ground for the claim that it is a serviceable 
institution for investors of relatively small means. But it is obvious 
that its utility as a provider of capital for enterprises is exceedingly 
limited; and that it affords facihties for the most injurious form of 
speculation — that which attracts persons of small means. 

It also permits dealing in shares not listed in the main exchange, 
and. in certain mining shares, generally excluded from the other. 
In these cases it prescribed a form of listing requirements, but the 
original listing of securities is very rarelj' availed of. The rules also 
provide for dealing in grain, petroleum, and other products. Wheat 
is, however, at present the only commodity actively dealt in, and 
this is due solely to the permission to trade in smaller lots than the 
Produce Exchange unit of 5000 bushels. 

There are 1225 members, about 450 active, and memberships 
have sold in recent years at from $650 to $2000. In general the 
methods of conducting business are similar to those of the larger ex- 
change, and subject to the same abuses. 

Very strained relations have existed between the two security 
exchanges since the lesser one undertook in 1886 to deal in stocks. 
The tension has been increased by the methods by which the Con- 
solidated obtains the quotations of the other, through the use of the 
"tickers" conveying them. It is probable that without the use of 
these instruments the business of the Consolidated Exchange would 
be paralyzed; yet the right to use them rests solely upon a technical 
point in a judicial decision which enjoins their removal. 




Connected with operations on the Slock Exchange are a class of 
manipulations originating elsewhere. The values of railway se- 
curities, for example, depend upon the management of the companies 
issuing them, the directors of which may use their power to increase, 
diminish, or even extinguish them, while they make gains for them- 
selves by operations on the Exchange. They may advance the price 
of a stock by an unexpected dividend, or depress it by passing an 
expected one. They may water a stock by issuing new shares, with 
no proportionate addition to the productive assets of the company, 
or load it with indebtedness, putting an unexpected lien on the share- 
holders' property. Such transactions afifect not only the fortunes 
of the shareholders, who are designedly kept in ignorance of what 
is transpiring, but also the value of investments in other similar 
companies the securities of which are affected sympathetically. 
Railroad wrecking was more common in the last half-century than 
it is now, but we have some glaring examples of it in the debris 
of our street railways to-day. 

The existence and misuse of such powers on the part of directors 
are a menace to corporate property and a temptation to officials 
who are inclined to speculate, leading them to manage the property 
so as to fill their own pockets by indirect and secret methods. 

A holding company represents the greatest concentration of power 
in a body of directors and the extreme of helplessness on the part of 
shareholders. A corporation may be so organized that its bonds 
and preferred stock represent the greater part of its capital, while 
the common stock represents the actual control. Then, if a second 
company acquires a majority of the common stock, or a majority 
of the shares that are likely to be voted at elections, it may control 
the former company, and as many other companies as it can secure. 
The shareholders of the subsidiary companies may be thus prac- 
tically deprived of power to protect themselves against injurious 
measures and even to obtain information of what the holding com- 
pany is doing, or intends to do, with their property. 

As a first step toward mitigating this evil we suggest that the share- 
holders of subsidiary companies, which are dominated by holding 
companies, or voting trusts, shall have the same right to examine the 
books, records, and accounts of such holding companies, or voting 
trusts, that they have in respect of the companies whose shares 
they hold, and that the shareholders of holding companies have the 
same right as regards the books, records, and accounts of the sub- 
sidiary companies. The accounts of companies not merged should 
be separately kept and separately stated to their individual stock- 
holders, however few they may be. 

We may point out the fact that the powers which holding com- 


panics now exercise were never contemplated, or imagined, when 
joint stock corporations were first legalized. If Parliament and 
Legislatures had foreseen their growth they would have erected 
barriers against it. 


Our attention has been directed to the well-known abuses fre- 
quently accompanying receiverships of large corporations, and more 
especially public service corporations, and the issue of receivers' 
certificates. We feel that the numerous cases of long-drawn-out 
receiverships, in some instances lasting more than ten years, and 
of the issue of large amounts of receivers' certificates, which take 
precedence over even first mortgage bonds, are deserving of most 
serious consideration. 

Legislation providing for a short-time limitation on receiverships 
or for a hmitation of receivers' certificates to a small percentage of 
the mortgage liens on the property, could be rendered unnecessary, 
however, by the action of the courts themselves along these hues, 
so as to make impossible in the future the abuses which have been 
so common in the past. 


It has been urged that j'our committee consider the influence of 
the money market upon security speculation. 

As a result of conditions to which the defects of our monetary and 
banking systems chiefly contribute, there is frequently a congestion 
of funds in New York City, when the supply is in excess of business 
needs and the accumulated surplus from the entire country generally 
is thereby set free for use in the speculative market. Thus there 
almost annually occurs an inordinately low rate for "call loans," 
at times less than i per cent. During the prevalence of this 
abnormally low rate speculation is unduly incited, and speculative 
loans are very largely expanded. 

On the other hand, occasional extraordinary industrial activity, 
coupled with the annually recurring demands for money during the 
crop-moving season, causes money stringency, and the calling of 
loans made to the stock market; an abnormally high interest rate 
results, attended by violent reaction in speculation and abrupt fall 
in prices. The pressure to retain funds in the speculative field at 
these excessively high interest rates tends to a curtailment of reason- 
able accommodation to commercial and manufacturing interests, 
frequently causing embarrassment and at times menacing a crisis. 

The economic questions involved in these conditions are the sub- 
ject of present consideration by the Federal authorities and the 
National Monetary Commission. They could not be adjusted or 
adequately controlled either through Exchange regulation or State 



The usury law of this State prohibits the taking of more than 6 
per cent, interest for the loan of money, hut by an amendment adopted 
in 18S2 an exception is made in the case of loans of $5000, or more, 
payable on demand and secured by collateral. It is claimed by some 
that, since this exception enables stock speculators, in times of great 
stringency, to borrow money by paying excessively high rates of 
interest, to the exclusion of other borrowers, a repeal of this jsrovision 
would check inordinate speculation. We direct attention, however, 
to the fact that the statute in question excepts such loans as are 
secured by warehouse receipts, bills of lading, bills of exchange, and 
other negotiable instruments. Hence its operation is not limited 
to Stock Exchange transactions, or to speculative loans in general. 
Moreover, the repeal of the statute would affect only the conditions 
when high rates of interest are exacted, and not those of abnormally 
low rates, which really promote excessive speculation. P^inally, our 
examination indicates that prior to the enactment of the statute 
of 1882 such loans were negotiated at the maximum (6 per cent.), 
plus a commission, which made it equivalent to the higher rate; 
and a repeal of the statute would lead to the resumption of this 
practice. Therefore, as the repeal would not be beneficial, we cannot 
recommend any legislation bearing upon the interest laws of the State, 
unless it be the repeal of the usury law altogether, as we believe that 
money will inevitably seek the point of highest return for its use. In 
nine States of the Union there are at present no usury laws. 


There is an unorganized stock market held in the open air diu-ing- 
exchange hours. It occupies a section of Broad Street. An en- 
closure in the centre of the roadway is made by means of a rope, 
within which the traders are supposed to confine themselves, leaving 
space on either side for the passage of street traffic; but during days 
of active trading the crowd often extends from curb to curb. 

There are about 200 subscribers, of whom probably 150 appear on 
the curb each day, and the machinery of the operations requires the 
presence of as many messenger boys and clerks. Such obstruction 
of a public thoroughfare is obviously illegal, but no attempt has been 
made by the city authorities to disperse the crowd that habitually 
assembles there. 

This open-air market, we understand, is dependent for the great 
bulk of its business upon members of the Stock Exchange, approxi- 
mately 85 per cent, of the orders executed on the curb coming from 
Stock Exchange houses. The Exchange itself keeps the curb market 
in the street, since it forbids its own members engaging in any trans- 
action in any other security exchange in New York. If the curb 
were put under a roof and organized, this trading could not be 



The curb market has existed for upward of thirty years, but only 
since the great development of trading in securities began, about the 
year 1897, has it become really important. It aiiords a public mar- 
ket-place where all persons can buy and sell securities which are not 
listed on an}^ organized exchange. Such rules and regulations as 
exist are agreed to by common consent, and the expenses of main- 
tenance are paid by voluntary subscription. An agency has been 
established by common consent through which the rules and regula- 
tions are prescribed. 

This agency consists solely of an individual who, through his long 
association with the curb, is tacitly accepted as arbiter. From this 
source we learn that sales recorded during the year 1908 were 
roughly as follows: 

Bonds $66,000,000 

Stocks, industrials, shares 4,770,000 

Stocks, mining, shares 41,825,000 

Oflicial quotations are issued daily by the agency and appear 
in the public press. Corporations desiring their securities to be 
thus quoted are required to afford the agency certain information, 
which is, however, superficial and incomplete. There is nothing 
on the curb which corresponds to the listing process of the Stock 
Exchange. The latter, while not guaranteeing the soundness of the 
securities, gives a prima facie character to those on the list, since 
the stock list committee takes some pains to learn the truth. The 
decision of the agent of the curb are based on insufi&cient data, and 
since much of the work relates to mining schemes in distant States 
and Territories, and foreign countries, the mere fact that a security 
is quoted on the curb should create no presumption in its favor; 
quotations frequently represent "wash sales," thus facihtating 
swindling enterprises. 


Bitter complaints have reached us of frauds perpetrated upon 
confiding persons, who have been induced to purchase mining 
shares because they are quoted on the curb; these are frequently 
advertised in newspapers and circulars sent through the mails as 
so quoted. Some of these swindles have been traced to their fountain 
heads by the Post Office Department, to which complaint has been 
made; but usually the swindler, when cornered, has settled privately 
with the individual complainant, and then the prosecution has failed 
for want of testimony. Meanwhile the same operations may con- 
tinue in many other places, till the swindle becomes too notorious 
to be profitable. 


Notwithstanding the lack of proper supervision and control over 
the admission of securities to the privilege of quotation, some of 
them are meritorious, and in this particular the curb performs a 
useful function. The existence of the cited abuses does not, in 
our judgment, demand the aboHtion of the curb market. Regula- 
tion is, however, imperative. To require an elaborate organization 
similar to that e.xisting in the Exchanges -would result in the forma- 
tion of another curb free from such restraint. 

As has been stated, about 85 per cent, of the business of the curb 
comes through the offices of members of the New York Stock 
Exchange, but a provision of the constitution of that E.xchange 
prohibits its members from becoming members of, or dealing, 
on, any other organized Stock Exchange in New York, Accord- 
ingly, operators on the curb market have not attempted to form 
an organization. The attitude of the Stock Exchange is there- 
fore largely responsible for the existence of such abuses as result 
from the want of organization of the curb market. The brokers 
dealing on the latter do not wish to lose their best customers, 
and hence they submit to these irregularities and inconven- 

Some of the members of the Exchange dealing on. the curb have 
apparently been satisfied with the prevailing conditions, and in their 
own selfish interests have maintained an attitude of indifference 
toward abuses. We are informed that some of the most flagrant 
cases of discreditable enterprises finding dealings on the curb were 
promoted by members of the New York Stock Exchange. 


The present apparent attitude of the Exchange toward the curb 
seems to us clearly inconsistent with its moral obhgations to the 
community at large. Its governors have frequently avowed before 
this committee a purpose to. co-operate to the greatest extent for 
the remedy of any evils found to exist in stock speculation. The 
curb market as at present constituted affords ample opportunity 
for the exercise of such helpfulness. 

The Stock Exchange should compel the formulation and enforce- 
ment of such rules as may seem proper for the regulation of business 
on the curb, the conduct of those dealing thereon, and, particularly, 
for the admission of securities to quotation. 

If the curb brokers were notified that failure to comply with such 
requirements would be followed by an application of the rule of 
non-intercourse, there is little doubt that the orders of the Exchange 
would be obeyed. The existing connection of the Exchange gives 
it ample power to accomplish this, and we do not suggest anything 
implying a more intimate connection. 

Under such regulation, the curb market might be decently housed 
to the relief of its members and the general pubhc. 



A large part of the discredit in the pubhc mind attaching to 
"Wall Street" is due to frauds perpetrated on the small investor 
throughout the country in the sale of worthless securities by means 
of alluring circulars and advertisements in the newspapers. To 
the success of such swindling enterprises a portion of the press con- 

Papers which honestly try to distinguish between swindling adver- 
tisements and others may not in every instance succeed in doing 
so; but reachness to accept advertisements which are obviously 
traps for the unwary is evidence of a moral delinquency which should 
draw out the severest public condemnation. 

So far as the press in the large cities is concerned the correction 
of the evil lies, in some measure, in the hands of the reputable 
bankers and brokers; who, by refusing their advertising patronage 
to newspapers notoriously guilty in this respect, could compel them 
to mend their ways, and at the same time prevent fraudulent 
schemes from deriving an appearance of merit by association with 
reputable names. 

Another serious evil is committed by men who give standing to 
promotions by serving as directors without full knowledge of the 
affairs of the companies, and by allowing their names to appear 
in prospectuses without knowing the accuracy and good faith of 
the statements contained therein. Investors naturally and properly 
pay great regard to the element of personal character, both in the 
offering of securities and in the management of corporations, and 
can therefore be deceived by the names used in unsound promotions. 


We have given much attention to proposals for compelling regis- 
tration, by a bureau of the State government, of all corporations 
whose securities are offered for public sale in this State, accompanied 
by information regarding their financial responsibihty and prospects, 
and prohibiting the public advertisements or sale of such securities 
without a certificate from the bureau that the issuing company has 
been so registered. The object of such registration would be to 
identify the promoters, so that they might be readily prosecuted 
in case of fraud. Such a system exists in Great Britain. The 
British "Companies Act" provides for such registration, and the 
"Directors' Liability Act" regulates the other evil referred to above. 
Some members of your committee are of the opinion that these 
laws should be adopted in this country, so far as they will fit con- 
ditions here. 

This would meet with some difficulties, due in part to our multiple 
system of State government. If the law were in force only in this 
State, the advertisement and sale of the securities in question would 
be unhindered in other markets, and companies would be incorporated 


in other States, in order that their directors and promoters should 
escape liability. The certificate of registration might be accepted 
by inexperienced persons as an approval by State authority of the 
enterprise in (question. P"or these reasons the majority of your 
committee does not recommend the regulation of such advertising 
and sale by State registration. 

In so far as the misuse of the post-office for the distribution of 
swindling circulars could be regulated b}' the Federal authorities 
the officials have been active in checking it. They inform us that 
vendors of worthless securities are aided materially by the oppor- 
tunity to obtain fictitious price quotations for them on the New 
York Curb market. 


For the regulation of the advertising evils, including the vicious 
"tipster's" cards, we recommend an amendment to the Penal Code 
to provide that any person who advertises, in the public press, or 
otherwise, or publishes, distributes or mails, any prospectus, circular, 
or other statement in regard to the value of any stock, bonds, or 
other securities, or in regard to the business affairs, property, or 
financial condition of any corporation, joint stock association, 
copartnership or individual issuing stock, bonds, or other similar 
securities, which contains any statement of fact which is known to 
such person to be false, or as to which such person has no reasonable 
grounds for believing it to be true, or any promises or predictions 
which he cannot reasonably justify, shall be guilty of a misdemeanor; 
and, further, that every newspaper or other publication printing 
or publishing such an advertisement, prospectus, circular, or other 
statement, shall, before printing or publishing the same, obtain 
from the person responsible for the same, and retain, a written 
and signed statement to the effect that such person accepts responsi- 
bility for the same, and for the statements of fact contained therein, 
which statement shall give the address, with street number, of such 
person; and that the publisher of any such newspaper or other 
publication which shall fail to obtain and retain such statement 
shall be guilty of a misdemeanor. 


Bucket-shops are ostensibly brokerage offices, where, however, 
conunodities and securities are neither bought nor sold in pursuance 
of customers' orders, the transactions being closed by the payment 
of gains or losses, as determined by price quotations. In other 
words, they are merely places for the registration of bets or wagers; 
their machinery is generally controlled by the keepers, who can 
delay or manipulate the quotations at will. 

The law of this State, which took effect September i, igo8, makes 
the keeping of a bucket-shop a felony, punishable by fine and im- 


prisonment, and in the case of corporations, on second offences by 
dissolution or expulsion from the State. In the case of individuals 
the penalty for a second offence is the same as for the first. These 
penalties are imposed upon the theory that the practice is gambling; 
but in order to establish the fact of gambling it is necessary, under 
the New York law, to show that both parties to the trade intended 
that it should be settled by the payment of differences, and not by 
delivery of property. Under the law of Massachusetts it is neces- 
sary to show only that the bucket-shop keeper so intended. The 
Massachusetts law provides heavier penalties for the second offence 
than for the first, and makes it a second offence if a bucket-shop is 
kept open after the first conviction. 


We recommend that the foregoing features of the Massachusetts 
law be adopted m this State; also that section 355 of the act of 1908 
be amended so as to require brokers to furnish to their customers iti 
all cases, and not merely on demand, the names of brokers from whom 
shares were bought and to whom they were sold, and that the fol- 
lowing section be added to the act: 

Witness's privilege: 

No person shall be excused from attending and testifJ^ng, or 
producing any books, papers, or other documents before any court 
or magistrate, upon any trial, investigation, or proceeding initiated 
by the district attorney for a violation of any of the provisions of 
this chapter, upon the ground or for the reason that the testimony 
or evidence, documentary or otherwise, required or him may tend 
to convict him of a crime or to subject him to a penalty or forfeiture; 
but no person shall be prosecuted or subjected to any penalty or 
forfeiture for or on account of any transaction, matter, or thing 
concerning which he may so testify or produce evidence, documentary 
or otherwise, and no testimony so given or produced shall be received 
against him upon any criminal investigation or proceeding. 

There has been a sensible diminution in the number of bucket- 
shops in New York since the act of 1908 took effect, but there is 
still much room for improvement. 

Continuous quotations of prices from an exchange are indis- 
pensable to a bucket-shop, and when such quotations are cut off 
this gambling ends; therefore every means should be employed to 
cut them off. 


The quotations of exchanges have been judicially determined 
to be their own property, which may be sold under contracts limiting 
their use. In addition to supplying its own members in New York 
City with its quotations, the Stock Exchange sells them to the 


telegraph companies, under contracts restricting the delivery of the 
service in New York Citj' to subscribers approved by a committee 
of the Exchange; the cc^jitracts are terminable at its option. This 
restriction would imply a purpose on the part of the Exchange to 
prevent the use of the quotations by bucket-shop keepers. But 
the contracts are manifestly insuflicient, in that they fail to cover 
the use of the service in places other than New York City; if corrobo- 
ration were needed it could be found in the fact that the quotations 
are the basis for bucket-shop transactions in other cities. In such 
effort as has been made to control these quotations the Exchange 
has been hampered to some extent by the claim that telegraph com- 
panies are common carriers, and that as such they must render 
equal service to all persons offering to pay the regular charge therefor. 
This claim has been made in other States as well as in New York, 
and the telegraph companies have in the past invoked it as an excuse 
for furnishing quotations to people who were under suspicion, 
although it was not possible to prove that they were operating 
bucket-shops. Recent decisions seem to hold that this claim is not 
well-founded. We advise that a law be passed providing that, so far 
as the transmission of continuous quotations is concerned, telegraph 
companies shall not be deemed common carriers, or be compelled 
against their volition to transmit such quotations to any person; 
also a law providing that if a telegraph company has reasonable 
ground for believing that it is supplying quotations to a bucket- 
shop, it be criminally liable equally with the keeper of the bucket- 
shop. Such laws would enable these companies to refuse to furnish 
quotations upon mere suspicion that parties are seeking them for 
an unlawful business, and would compel them to refuse such service 
wherever there was a reasonable ground for believing that a bucket- 
shop was being conducted. 


Tickers carrj^ing the quotations should be licensed and bear a 
plate whereon should appear the name of the corporation, firm, or 
individual furnishing the service or installing the ticker, and a 
license number. Telegraph companies buying or transmitting 
quotations from the exchanges should be required to publish semi- 
annually the names of all subscribers to the service furnished, and 
the number and location of the tickers, in a newspaper of general 
circulation published in the city or town in which such tickers 
are installed. In case the service is furnished to a corporation, firm, 
or person, in turn supplying the quotations to others, like particulars 
should be published. A record, open to public inspection, should 
be kept by the installing company showing the numbers and location 
of the tickers. Doubtless local boards of trade, civic societies, and 
private individuals would, if such information were within their 
reach, lend their aid to the authorities in the enforcement of the law. 

Measures should be taken also to control the direct wire service 


for the transmission of quotations, and for the prompt discontinuance 
of such service in case of improper use thereof. In short, every 
possible means should be employed to prevent bucket-shops from 
obtaining the continuous quotations, without which their depreda- 
tions could not be carried on a single day. 


Of the seven commodity exchanges in the city of New York, 
three dealing with Produce, Cotton, and Coffee, are classed as of 
major importance; two organized by dealers in Fruit and Hay, are 
classed as minor; and two others, the Mercantile (concerned with 
dairy and poultry products) and the Metal (concerned with mining 
products) are somewhat difficult of classification, as will appear 


The business transacted on the three major exchanges is mainly 
speculative, consisting of purchases and sales for future delivery 
either by those who wish to eliminate risks or by those who seek 
to profit by fluctuations in the value of products. "Cash" or 
"spot" transactions are insignificant in volume. 

The objects, as set forth in the charters, are to provide places for 
trading, establish equitable trade principles and usages, obtain and 
disseminate useful information, adjust controversies, and fix by-laws 
and rules for these purposes. 

Trading in differences of price and "wash sales" are strictly pro- 
hibited under penalty of expulsion. All contracts of sale call for 
delivery, and unless balanced and canceled by equivalent contracts 
of purchase, must be finally settled by a delivery of the merchandise 
against cash payment of its value as specified in the terms of the 
contract; but the actual delivery may be waived by the consent of 
both parties. Possession is for the most part transferred from the 
seller to the purchaser by warehouse receipts entitling the holder 
to the ownership of the goods described. 


The selling of agricultural products for future delivery has been 
the subject of much controversy in recent years. A measure to 
prohibit such selling, known as the Hatch Anti-Option bill, was 
debated at great length in Congress during the years 1892, 1893, and 
1894. Although it passed both House and Senate in different 
forms, it was finall}' abandoned by common consent. As shown 
hereafter, similar legislation in Germany has proved injurious; and 
when attempted by our States it has either resulted detrimentally 
or been inoperative. The subject was exhaustively considered by 
the Industrial Commission of Congress which in 1901 made an 
elaborate report (Vol. VI), showing that selling for future delivery, 


based upon a forecast of future conditions of supply and demand, 
is an indispensable part of the world's commercial future delivery 
has been the subject of machinery, by which prices are, as far as 
possible, equalized throughout the year to the advantage of both 
producer and consumer. The subject is also treated with clearness 
and impartiality in the Cyclopedia of American Agriculture, in an 
article on "Speculation and Farm Prices"; where it is shown that 
since, the yearly supply of wheat, for example, matures within a com- 
paratively short period of time somebody must handle and store the 
great bulk of it during the interval between production and con- 
sumption. Otherwise the price will be unduly depressed at the 
end of one harvest and correspondingly advanced before the begin- 
ning of another. 

Buying for future delivery causes advances in prices; selling short 
tends to restrain inordinate advances. In each case there must be 
a buj'er and a seller and the interaction of their trading steadies 
prices. Speculation thus brings into the market a distinct class 
of people possessing capital and special training who assume the 
risks of holding and distributing the proceeds of the crops from one 
season to another with the minimum of cost to producer and con- 

A considerable part of the business done by these exchanges 
consists of "hedging." This term is applied to the act of a miller, 
for example, who is under contract to supply a given quantity of 
flour monthly throughout the year. In order to insure himself 
against loss he makes a contract with anybody whom he considers 
financially responsible, to supply him wheat at times and in the 
quantities needed. He "hedges" against a possible scarcity and 
consequent rise in the price of wheat. If the miller were restricted 
in his purchases to persons in the actual possession of wheat at 
the time of making the contract he would be exposed to monopoly 
prices. If the wheat producer were limited in his possibilities of sale 
to consumers only, he would be subjected to the depressing effects 
of a glut in the market in June and September, at times of harvest. 

To the trader, manufacturer, or exporter, the act of transferring 
the risk of price fluctuations to other persons who are willing to 
assume it, has the effect of an insurance. It enables him to use 
all of his time and capital in the management of his own business 
instead of devoting some part of them to contingencies arising from 
unforeseen crop conditions. 


In order to ehminate the risk of a shortage of specific grades of 
the merchandise thus traded in, contracts generally permit the deliv- 
ery of alternative grades, within certain limits, at differential prices; 
and if the grade to be delivered be not suitable for the ultimate 


needs of the purchaser, it can under ordinary circumstances be 
exchanged for the grade needed, by the payment of the differential. 
It is true that in this exchange of grades there is sometimes a loss or 
a profit, owing to some unexpected diminution or excess of supply 
of the particular grade wanted, due to the weather or other natural 

Deposits of cash margins may be required mutually bj' members 
at the time of making contracts, and subsequent additional ones if 
market fluctuations justify. 

Dealings for outsiders are usually upon a lo per cent, margin; 
obviously, if this margin were increased generally, say to 20 per cent., 
a considerable part of the criticism due to losses in speculation, 
particularly as to the Cotton Exchange, would be eliminated. 

The major part of the transactions are adjusted by clearing 
systems, the method most prevalent being "ring settlements," 
by which groups of members having buying and selling contracts 
for identical quantities, offset them against each other, canceling 
them upon the payment of the differences in prices. 


The New York Produce Exchange was chartered by the Legis- 
lature in 18&2, under the style of the "New York Commercial 
Association." The charter has been amended several times; in 
1907 dealing in securities, as well as in produce, was authorized. 
There are over 2000 members, but a larger number are inactive. 
Some members are also connected with the Stock and Cotton E.x- 
changes. The business includes dealing in all grains, cottonseed oil, 
and a dozen or more other products; wheat is, however, the chief 
subject of trading, and part thereof consists of hedging by and for 
millers, exporters, and importers, both here and abroad. The 
quantity of wheat received in New York in the five years 1904-1908 
averaged 21,000,000 bushels annually. No record of "cash" sales 
is kept. The reported sales of "futures" show in five years an 
annual average of 480,000,000 bushels, the year 1907 showing 
610,000,000. Although some of these sales were virtually bets 
©n price differences, aU of them were contracts enforcible at law. 


The greater part of the transactions are settled by a clearing 
system. The Clearing Association is a separate organization, duly 
incorporated, with a capital of $25,000. AU members of the asso- 
ciation must settle daily by the clearing system; other members of 
the Exchange ma}' do so. The Clearing Association assumes 
responsibility for the trades of all its members, and accordingly 
controls the exaction of margins from members to each other, and 
may increase them at any time if the fluctuations require it. The 
records of the clearings show day by day the status of each member's 


trading — how much he may be "long" or "short" in the aggre- 
gate. Thus the members have a system of protection against each 
other; the welfare of all depends upon keeping the commitments of 
each within safe hmits. The official margin system operates as a 
commendable restraint upon over-speculation. 

From our examination of the trading in mining stocks recently 
introduced, we conclude that the lack of experience of this body 
in this class of business has resulted in a neglect of proper safeguards 
to the investor and an undue incitement to speculative transactions 
of a gambhng nature, and should not be tolerated on the Produce 


The New York Cotton Exchange was incorporated by a special 
charter in 1871. Its membership is limited to 450. It is now the 
most important cotton market in the world, as it provides the means 
for financing about 80 per cent, of the crop of the United States, 
and is the intermediary for facilitating its distribution. In fact, 
it is the world's clearing house for the staple. Traders and manu- 
facturers in Japan, India, Egypt, Great Britain, Germany, France, 
and Spain, as well as the United States, buy and sell here daily 
and the business is still increasing. 

Cotton is the basis of the largest textile industry in the world. 
The business is conducted on a gigantic scale in many countries 
by means of vast capital, complicated machinery, and varied 
processes involving considerable periods of time between the raw 
material and the finished product. Selling for future delivery is 
necessary to the harmonious and uninterrupted movement of the 
staple from producer to consumer. Nearly all the trading, beginning 
with that of the planter, involves short selling. The planter sells 
to the dealer, the dealer to the spinner, the spinner to the weaver, 
the weaver to the cloth merchant, before the cotton of any crop year 
is picked. Dealers who take the risk of price fluctuations insure 
all the other members of this trading chain against losses arising 
therefrom and spare them the necessity of themselves being specu- 
lators in cotton. The risks connected with raising and marketing 
cotton must be borne by some one, and this is now done chiefly 
by a class who can give their undivided attention to it. 


The grading of cotton is the vital feature of the trade. When no 
grade is specified in the contract, it is construed to be middling. 
There are now eighteen grades, ranging from middling stained up 
to fair. This classification differs somewhat from that of other 
markets, and last January the Department of Agriculture at Wash- 
ington took up the subject of standardizing the various grades for 
all American markets. The New York Cotton Exchange partici- 


pated in this work; a standard was thus adopted, the types of which 
were supplied by its classification committee. It varies but little 
from the one previously in use here. The samples chosen to repre- 
sent the several types are now sealed, in possession of the Depart- 
ment of Agriculture, awaiting the action of Congress. 

The cotton plant is much exposed to vicissitudes of the weather. 
A single storm may change the grade of the crop in large sections 
of the country. It becomes necessary therefore to provide some 
protection for traders who have made contracts to deliver a par- 
ticular grade which has Ijecome scarce by an accident which could 
not be foreseen. For this purpose alternative deliveries are allowed 
by the payment of corresponding price differentials, fLxed by a com- 
mittee of the Exchange twice annually, in the months of September 
and November. 

Settlements of trades ma}' be made individually, or by groups 
of members, or through a clearing system, the agency of which is 
a designated bank near the Exchange. No record is kept of the 
transactions, but it is probable that for a series of years the sales 
have averaged fully 50,000,000 bales annually. 


There have been in the past instances of excessive and unreason- 
able speculation upon the Cotton Exchange, notably the Sully 
speculation of 1904. We believe that there is also a great deal of 
speculation of the gambling type mentioned in the introduction to 
this report. In our opinion, the Cotton Exchange should take meas- 
ures to restrain and so, far as possible, prevent these practices, 
by disciplining members who engage in them. The officers of the 
Exchange must in many cases be aware of these practices, and 
could, in our opinion, do much to discourage them. 


The Coffee Exchange was incorporated by special charter in 
1885. It has 320 members, about 80 per cent, active. 

It was established in order to supply a daily market where coffee 
could be bought and sold and to fix quotations therefor, in dis- 
tinction from the former method of alternate glut and scarcity, with 
wide variations in price — in short, to create stability and certainty 
in trading in an important article of commerce. This it has accom- 
plished; and it has made New York the most important primary 
coffee market in the United States. But there has been recently 
introduced a non-commercial factor known as "valorization," a 
governmental scheme of Brazil, by which the public treasury has 
assumed to purchase and hold a certain percentage of the coffee 
grown there, in order to prevent a decHne of the price. This has 
created abnormal conditions in the coffee trade. 


All transactions must be reported by the seller to the superin- 
tendent of the Exchange with an exact statement of the time and 
terms of delivery. The record shows that the average annual sales 
in the past five years have been in excess of 16,000,000 bags of 250 
pounds each. 

Contracts may be transferred or offset by voluntary clearings by 
groups of members. There is no general clearing system. There 
is a commendable rule providing that, in case of a "corner," the 
officials may fix a settlement price for contracts to avoid disastrous 


Of the exchanges 'which we have classed as minor, those dealing 
with Fruit and Hay, appear to be in nowise concerned with specula- 
tion. No sales whatever are conducted on them, all transactions 
being consummated either in the places of business of the members 
or at public auction to the highest bidder. No quotations are 
made or published. 

In the case of the other two commodity exchanges, the Mercantile 
and the ISIetal, new problems arise. Although quotations of the 
products appertaining to these exchanges are printed daily in the 
public press, they are not a record of actual transactions amongst 
members, either for immediate or future delivery. 

It is true that on the Mercantile Exchange there are some desultory 
operations in so-called future contracts in butter and eggs, the 
character of which is, however, revealed by the fact that neither 
delivery by the seller nor acceptance by the buyer is obligatory; 
the contract may be voided by either party by payment of a maxi- 
mum penalty of 5 per cent. There are nominal "calls," but trading 
is confessedly rare. The published quotations are made by a com- 
mittee, the membership of which is changed periodically. That 
committee is actually a close corporation of the buyers of butter 
and eggs, and the prices really represent their views as to the rates 
at which the trade generally should be ready to buy from the farmers 
and country dealers. 

Similar, but equally deceptive, is the method of making quotations 
on the Metal Exchange. In spite of the apparent activity of dealings 
in this organization in published market reports, there are no actual 
sales on the floor of the Metal Exchange, and we are assured that 
there have been none for several years. Prices are, however, 
manipulated up and down by a quotation committee of three, 
chosen annually, who represent the great metal-selling agencies as 
their interest may appear, affording facilities for fixing prices on 
large contracts, mainl}' for the profit of a small clique, embracing, 
however, some of the largest interests in the metal trade. 

These practices result in deceiving buyers and sellers. The making 
and pubhshing of quotations for commodities or securities by groups 
of men calling themselves an exchange, or by any other similar 


title, whether incorporated or not, should be prohibited by law, 
"where such quotations do not fairly and truthfully represent any 
bona fide transactions on such exchanges. Under present conditions, 
we are of the opinion that the Mercantile and Metal Exchanges 
'do actual harm to producers and consumers, and that their charters 
should be repealed. 


In 1892 a commission was appointed by the German Government 
to investigate the methods of the Berlin Exchange. The regular 
business of this exchange embraced both securities and commodities; 
it was an open board where anybody by paying a small fee could 
trade either for his own account, or as a broker. The broker could 
make such charge as he pleased for his services, there being no 
fixed rate of commission. Settlements took place monthly. Margins 
were not always required. Under these circumstances many unde- 
sirable elements gained entrance to the Exchange and some glaring 
frauds resulted. 

The commission was composed of government officials, merchants, 
bankers, manufacturers, professors of political economy, and journal- 
ists. It was in session one year and seven months. Its report was 
completed in November, 1893. Although there had been a wide- 
spread popular demand that all short selling should be prohibited, 
the commission became satisfied that such a pohcy would be harmful 
to German trade and industry, and they so reported. They were 
willing, however, to prohibit speculation in industrial stocks. In 
general the report was conservative in tone. 

THE LAW OF 1896 

The Reichstag, however, rejected the biU recommended by the 
commission and in 1896 enacted a law much more drastic. The 
landowners, constituting the powerful Agrarian party, contended 
that short selling lowered the price of agricultural products, and 
demanded that contracts on the Exchange for the future delivery 
of wheat and flour be prohibited. The Reichstag assented to this 
demand. It yielded also to demands for an abatement of stock 
speculation, and prohibited trading on the Exchange in industrial 
and mining shares for future delivery. It enacted also that every 
person desiring to carry on speculative transactiorft be required to 
enter his name in a public register, and that speculative trades by 
persons not so registered should be deemed gambling contracts and 
void. The object of the registry was to deter the small speculators 
from stock gambling and restrict speculation to men of capital and 

The results were quite different from the intention of the legis- 
lators. Verj' few persons registered. Men of capital and character 
dechned to advertise themselves as speculators. The small fry 


found no difficulty in evading the law. Foreign brokers seeing a 
new field of activity opened to them in Germany, flocked to Berlin 
and established agencies for the purchase and sale of stocks in Lon- 
don, Paris, Amsterdam, and New York. Seventy such offices were 
opened in Berlin within one year after the law was passed, and did 
a flourishing business. German capital was thus transferred to 
foreign markets. The Berhn Exchange became insignificant and 
the financial standing of Germany as a whole was impaired. 


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

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


The evil consequences of the law of 1896 broughl ibout its partial 
repeal in 1908. By a law then passed the govern aent may, in its 
discretion, authorize speculative transactions in inr-ustrial and min- 
ing securities of companies capitalized at not less .han $5,000,000; 
the Stock Exchange Register was abolished; all persons whose names 
were in the " Handels-register " (commercial di ectory), and all 
persons whose business was that of dealing in secur ies, was declared 
legally bound by contracts made by them on tre Exchange. It 
provided that other persons were not legally bond by such con- 
tracts, but if such persons made deposits of cash or ;ollateral security 
for speculative contracts, they could not reclaim them on the plea 
that the contract was illegal. 

In so far as the Reichstag in 1896 had aimed to prevent small 
speculators from wasting their substance on the Exchange, it not 


only failed, but, as we have seen, it added a darker hue to evils 
previously existing. 

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


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

Respectfully submitted, Horace White, Chairman, 
Charles A. Schteren, 
DAvn> Leventritt, 
Clark Williams, 
John B. Clark, 
WiLLARD V. King, 
Samuel H. Ordway, 
Edward D. Page, 
Charles Sprague Smith, 

Maurice L. Muhleman, Secretary. 


Business Conduct Committee, 255 

Margins, insufficient margins prohibited, 255 and 256 

Manipulation prohibited, 254 

Resolutions adopted by the Exchange; 

against manipulation, 254 

against light margins, 255 

on business conduct, 255 


Asterisks indicate foot-notes 

Account Day, in London, 

372- . . 

Advertising, Abuse of, 434. 

Advertising, by members 
prohibited, 56. 

Agents de Change, 51. 

Agents de Change (see Paris 

Agora, of Greece, 262. 

Aldrich, plan, loi. 

AUard A., Crises in France, 

American Acad, of Polit. and 
Social Science, 16*, 26*, 
32*, 80*, 102*, 191*. 

American Bankers' Associa- 
tion, 207. 

American, finance of future, 


American Institute of Bank- 
ing, 208*. 

Arbitrage brokers, duties of, 

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

Assignats, 390, 

Atlantic Monthly, 288*. 

Bagehot, Walter, on Cre- 
dulity of Speculators, 92. 

Bagehot, Walter, on Bank- 
ing, 99. 

Bagehot, Walter, on Panics, 
215-218; Lombard Street, 


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

Banking and Currency Prob- 
lem in U. S., by Victor 
Morawetz, 209*. 

Banking facilities in London, 

Bank loans, N. Y. (1904- 
1907), 190; in the U. S. 
(1904- 1 907) 192; in Lon- 
don, 362. 

Bank of England, 324, 328, 


Bank of England, Origin of, 

Bank of France and cur- 
rency, 209; and Bourse, 
396; and Germany, 209. 

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

Bank, deposits in N. Y., 125. 

Bankers as peacemakers, 

Bank stock, earliest form of, 

Baring, A., on Financial 

Crises, 219*. 
Baring failure, 156, 376. 




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

Barometer, The Stock Ex- 
change as a, 23, 190, 308, 


Bearer certificates, 365, 374. 

Bears, Value of, 76; in Ger- 
many, 77. (See short sell- 

Benefactions and charities of 
members, 317. 

Bewes, W. A., Stock Exchange 
Law and Practice, 379*. 

Bisschop, W. R., Rise of the 
London Money Market, 


Black Friday, 251. 

Blackmar, Frank W. on 
Legislation against Specu- 
lation, 255. 

Bond brokers on'Change, 282. 

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

Bourse, Origin of, 12*. 

Bourse, Paris. (See Paris). 

Bradstreet's, 202*. 

Branch offices, 426. 

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

Browning, R., on Currency, 

Bryce, James, on Good Citi- 
zenship, 133. 

Bucket-shops, 55, 143, 252, 

Bucket-shops, War against, 

Burr, Aaron, 31. 
Burton, Theodore E., on 

Financial Crises, 183*; on 

Forecasting, 191, 197, 198. 

Burton, Theodore E., on 
Crisis-producing condi- 
tions, 216*. 

Burton, Theodore E., on 
Currency, 208. 

Business on 'Change, how 
conducted, 288, et seq. 

Cable service. Excellence of, 

Cammack, Addison, on pub- 
licity, 161. 

Capital of brokerage houses, 

Capital, reasons for scarcity 
of, 122; exports of in Lon- 
don, 366. 

Carry-over, contango, 375-6*. 

Central Bank in America. 


Certificates, registered and 
bearer, 365, 374. 

Certifications of stock- 
broker's checks, 113. 

Chamber of Commerce, N. 
Y., 206. 

Chambre Syndicale, of Paris 
Bourse, 393. 

Change Alley, 327. 

Charities and benefactions 
of members, 317. 

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

China, Speculative possi- 
bilities in, 62. 

Clearance Orders, 279. 

Clearing House, N. Y. 
Banks, 109. 

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



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

Coffee Exchange, 442. 

Colbert, and the French 
manufacturers, 254. 

Collectors, on 'Change, 315. 

Collegium mercatorum at 
Rome, 16*. 

Commercial honor on 
'Change, 264. 

Commission dealers in mar- 
kets for produce, 8. 

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

Committee of Arrangements 
277. _ 

Committee on Stock List, 
requirements of, 363. 

Companies Act, in England, 

"Comparisons" by stock- 
brokers, 120. 

Competition, essential to 
freedom of trade, 5. 

Comptroller of Currency, 
Report of, 126*. 

Conant, Charles A., on Ex- 
tablishment of prices, 28. 

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

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

Conant, Charles A., on 
Value of American Securi- 
ties, 14*. 

Consolidated Stock Ex- 
change, 428. 

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

Construction News (Chicago), 

Contango, 375-6*. 

Control of members by 

governors, 265. 
Conveniences for members, 


Cordage Trust, 30, 311. 

Corner in Northern Pacific 
stock, 290. 

Corners, 30; opinions of 
Hughes Commission, 423. 

Corn Laws, History of the, J. 
Shield Nicholson, 255. 

Cost of Living, 8. 

Cotton Exchange, 441. 

Coulisse, in Paris, 397, ct 
seq; membership, 398; ori- 
gin, 401; progress, 402; 
history, 404; volume of 
business, 405. 

Coulissiers, 51. 

Courtois, A., on manipula- 
tion, 175*; Operations de 
Bourse, 393*. 

Credit Cycles and Origin of 
Parties, John Mill, 204*. 

Crises and depressions, 183*. 

Criticism of the Stock Ex- 
change, 29. 

Crocker, W. H., on depres- 
sions, 219*. 

Curb market, 141, 431-2-3. 

Currency and the panic of 
1907, 206, 210. 

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

Currency, panic of 1893, 

Daily settlements in N. Y., 

Daly, Justice, opinion, 236*. 



Denis, H., depressions, 219*. 

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

Depositors in banks, num- 
ber of, 126. 

Depressions, in relation to 
panics, 183*. 

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

Deutsche Kapitalmarkt, by 
Rudolph Eberstadt, 32*. 

Dictionnaire d' Economie Poli- 
tique, by Paul Leroy- 
Beaulieu, 44*. 

Discipline, as maintained on 
'Change, 266-7, 277. 

Disconto-Gesellschaft, opin- 
ion on Bourse Law, 244. 

Discounting the future, 23. 

Disputes and differences, 
adjustment of, 294. 

Diversions of members, 313. 

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

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

Duguid, Chas., Story of the 
Stock Exchange, 32*. 

Eadie, J , on panics, 219*. 
Eames, Francis L., on The 

N. Y. Stock Exchange, 

East India Company, 325. 
Eberstadt, Rudolph, Der 

Deutsche Kapitalmarkt, 32* 
Economics, by Francis W. 

Blackmar, 255. 
Economiste Franfais, 163*, 

349*- . 
Economist, London, 16, 18*, 
19, 197. (See Hirst, Francis 

Egyptian Speculation, 62. 

Emery, Henry Crosby, on 
Advantages of broad specu- 
lative markets, 61. 

Emery, Henry Crosby, on 
German Bourse Law, 239, 
et seq; on control of specu- 
lation, 256-7-8. 

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

Employes on 'Change, 289, 

Etigineering News, 202*. 

England, capital exports, 28. 

England, Laws of, affecting 
company organizations, 

England, Laws, of affecting 
short sales, 95. 

English capital in America, 

English Corn Laws, History 
of, by J. Shield Nichol- 
son 255. 

English Economic History, 
Introduction to, by W. T. 
Ashley, 224. 

Exchange, Origin of, 12*. 

Exchange Register, in Ger- 
many, 241. 

Exchanges, in London in 
early days, 323. 

Exchequer, English, 324*. 

Exports of capital by Lon- 
don, 366. 

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



Fairs, in primitive coun- 
tries, 5. 

Farmers' Alliance, 7. 

Farmers, Speculation by, 83. 

Faya.nt,Frank,Some Thoughts 
on Speculation, 32*, 68*, 

Fictitious transactions, 425. 

Financial Crises, etc., by 
Theo. E. Burton, 183*, 

Financial press in London, 


Fortnightly Review, on panics, 

Forum, at Rome, 262. 

France, Volumes of Securi- 
ties in, 406. 

French Government, atti- 
tude toward stockbrokers' 
monopoly, 401. 

Future delivery, transac- 
tions for, In France, 402, 
410; in America, 438. 

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

Gambling in bucket-shops, 

Georges-Levy, on short sales, 


German Bourse Law, The, by 
Geo. Plochmann, 245*. 

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

German credit in 1912, 372. 

German Exchange Act of 
1896, by Dr. Ernst Loeb, 

German Government bonds, 
decline in, 368. 

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

Gold Room, 251, 307. 

Goldsmiths' Notes, in Eng- 
land, 324. 

Gold Speculation Act of 
1864, 249. 

Gossip and news on 'Change, 


Gould, Jay, 30. 

Government bonds, as affec- 
ted by war, 368. 

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

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

Grain Exchanges, 10. 

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

Guarantee of stockbrokers, 
154; in Paris, 395. 

Guild of Goldsmiths, 324. 

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

Hadley, Arthur T., EconO' 

mics, 250. 
Harvard Law Review, 32*. 
Hatch Anti-Option Bill, 55, 

Hazing of new members, 276. 
Hedging in cotton futures, 

81, 94, 416, 439. 
Hirst, Francis W., on Early 

Exchange in London, 327*; 

on Stock Exchange rules. 



330; on functions of job- 
bers, 336; on creation of 
new debt, 365*; on Chinese 
Speculation, 63; Early 
English Speculation, 18*; 
The Stock Exchange, 32*, 
45*, 63*. 

History of N. Y. Stock 
Exchange, 306. 

History of the People of the 
U. S., by McMaster, 30. 

Hobbies of members, 312. 

Hocking Coal & Iron Com- 
pany, 30, 311. 

Holding Companies, 429. 

Holidays on 'Change, 301. 

Holmes, Justice, of the U. S. 
Supreme Court, on specu- 
lation, 66. 

Honor and character on 
'Change, 264. 

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

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

Hughes Investigation, The, 
by Horace White, 64*. 

Hyndman, H. M., Com- 
mercial Crises, 219. 

Incorporation of Stock Ex- 
change (London), 231-5. 

Incorporation of Stock Ex- 
change, N. Y., 139, 235, 
265; opinion of Hughes 
Commission, 427. 

Ingall, C. D., The Stock 
Exchange (London), 32*. 

Insurance, as effected by 
hedging, 81. 

Interest, rates of, in 1909-10, 

Investors in France, cau- 
tion of, 408. 

Inventor, dependent upon 
capital, 13. 

Investment, its relation to 
speculation, 44. 

Investor, Origin of word, 16. 

Jevons, W. S., on prices, 7*. 

Jevons, W. S., on sun- 
spots, 217. 

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

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

Jonathan's Coffee House, 


Journal of Accountancy, regu- 
lation of speculation, 258*. 

Journal of Commerce and 
Commercial Bulletin, on 
Volume of Securities in 
America, 15, 339- 

Journal of Political Economy 
53*, 64*, 82*, 143*, 147*, 
159*, 196*. 

Jugiar, Clement, Des Crises 
Commerciales, 185*, 219*. 

Kaffir Circus in London, 62, 

365, 370, 376. 
Keene, James R., 30. 

Labor, Dependence on 
Stock Exchange, 43. 

Labor, Percentage of, 
America, 42. 




Laissez faire, theory of, 253. 
Landells, Walter, on London 

Stock Exchange, 376-7*. 
Law in England affecting 

companies, 147, 434. 
Law in England, affecting 

short sales, 95; affecting 

specualtion, 225. 
Law in N. Y. regulating 

speculation, 247; repealed 

Law, John, 390*. 
Laws affecting short sales 

in U. S., 95, 246; repealed, 

247; decision of court, 416, 

Laws of France, short sales, 

404, 410. 
Laws of various states, affect- 
ing speculation, 251. 
Law, Usury, in N. Y., 105*. 
Leeman Act of 1867, 227. 
Legislation recommended by 

Hughes Commission, 435. 
Lending andborrowingstocks, 

N. Y. and London, 354-5. 
Leroy-Beaulieu, Anatole, on 

Paris Bourse, 383 et seq., 

Leroy-Beaulieu, Paul, Nou~ 

veau Dictionnaire d'Econo- 

mic Politique, 44*; on 

Publicity, 163, 349; on 

Speculation, 44. 
Lexis, Dr. W., on Necessity 

for Stock Exchanges, 21. 
Liability of stockbrokers in 

Paris, 395. 
Listing of new securities, 

168; N. Y. and London 

363; vendor's shares, 364; 

opinion of Hughes Com- 
mission, 424. 

Lloyds, 38. 

Lloyd, W. W., on Panics, 

"Loan Crowd," 290. 

Loans by banks to stock- 
brokers, no, 190. 

Lombard Street, by Walter 
Bagehot, 92*, 379*. 

London Exchanges in XVI 
Century, 323. 

London Money Market, Rise 
of the, by W. R. Bisschop, 


London Stock Exchange, 
history of, 326, et seq; 
management of, 329; rules, 
335; stockbrokers, 332; ad- 
mission, 332-3; entrance 
fees, etc., 333 ; capital stock, 
333*; precautions against 
monopoly, 333; jobbers, 
336-7-8; commissions, 342; 
settlement days, 344; pub- 
licity, 347; borrowings 
from banks, 353; transfers, 
355; volume of business, 
356-7; official list, 358 et 
seq.; securities as affected 
by war, 368; the day's 
work, 372. 

London Stock Exchange, 
unincorporated, 267*. 

London, The world's banker, 

Luncheon Club, The, 305. 

Manhattan Banking Com- 
pany, 31. 

Manipulation, efforts of gov- 
ernors to suppress, 169, 

Manipulation, value of, 170. 



Manipulation, opinions of 
Courtois and Conant, 


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

Margin, speculation on, 50, 

Margins required by stock- 
brokers, 147. 

Margin Trading a feature of 
all business, 58. 

Margin Trading a matter of 
contract, 53. 

Margin Trading defined by 
Hughes Commission, 419. 

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

Market in Paris as affected 
by stockbrokers' mono- 
poly, 397 et seq. 

Markets, defined by Hughes 
Commission, 415. 

Markets for produce, 6. 

Marshall, Alfred, on legis- 
lation, 255. 

Matched orders, 422. 

AlcCulloch, J. R., Principles 
of Economics, 46*. 

McMaster on Public Senti- 
ment in Early Days, 30. 

McVey, Frank L., on Stock 
Exchange Usefulness, 41*. 

Mechanism of the City, The, 
by Ellis T. Powell, 379*. 

Memberships, how obtained, 
271; prices of, 273; value 
of, 274. 

Members of Stock Exchange, 
interesting personalities, 
2,12 et seq. 

Memorial of Paris stock- 
brokers, 88*. 

Metal Exchange, 443. 
Meyer, Eugene, Jr., on Panic 

of 1907, 196*, 203*. 
Middlemen in markets for 

produce, 8. 
Mills, John, on panics, 204. 
Mining shares in London, 365. 
Mississippi Bubble, 390. 
Mistakes in executing orders, 

278, 293-4. 
Modern Industrialism, by 

Frank L. McVey, 41*. 
MoUien, on short sales in 

Paris, 89* 
Monetary Systems of the 

World, by Maurice M. 

Muhleman, 208*. 
Money and Banking, by 

Horace White, 251*. 
Money, high rates for, 106*, 

116, 290, 353. 
Money, rates for, as affect- 
ing speculation, 118, 430; 

as affected by deferred 

deliveries, 352. 
Monopoly, on London Stock 

Exchange, precaution 

against, 333; of Paris 

Bourse, 388 et seq., 399. 
Morawetz, Victor, on cur- 
rency, 209*. 
Mortimer, J., Every man his 

own broker, 327*. 
Muhleman, Maurice, M., 

Mulhall, Michael G., on 

Prices, 219*. 
Musicians on 'Change, 316. 

Napoleon, on short selling, 

87, 89*. 
National Banks contrasted 

with State Banks, 103. 



National Banks of U. S., 
loans (1904-1907), 192. 

National Monetary Com- 
mission, 426. 

New Joanthans, 327. 

News and gossip on 'Change, 

Newspapers, attitude toward 
Stock Exchange, 132. 

"New Tennessee," 276. 

New York State Food In- 
vestigation Committee's 
report, 9* 

Neymarck, Alfred, on vol- 
ume of French securities, 
406, 410. 

Nicholson, J. Shield, on 
Corn Laws. 255. 

North American Review, icx)*, 


Norton, Eliot, on Purchase 
and sales of securities, 32*. 

Norton, Eliot, on short sell- 
ing 86*. 

Notes, of stockbrokers, iii. 

Odd-lot brokers, duties of 
281; extent of business, 

Open Board of Brokers, 

Opinions of floor-brokers as 

to market, 297. 
Overend, Gurney & Co., 

failure of, 376. 

Panama mania in France, 62, 

370, 408. 
Panic of 1 907, conditions 

antecedent to, 24. 
Panic of 1873, in Austria, 

197; in America, 199*, 


Panic of 1825, in England, 
197; of 1847, in England, 

Panic of 1912, in Paris, 199, 
200, 369. 

Panic of 1837, in U. S., 199*, 

Panic of 1857, in U. S., 198-9, 

Panic of 1893, in U. S., 197- 

Panic of 1907, its origin, 189; 
effect, 201. 

Panics, crises and depres- 
sions, 183*. 

Panics of the future, 184; 
opinion of Mills, 204, 


Paris Bourse, Balkan Crisis, 
369; after war with Ger- 
many, 383-87; Agents de 
Change, 388 et seq; his- 
tory, 388-9; the form of 
monopoly, 389; origin of 
monopoly, 389-390; regula- 
tions, 391; "right of intro- 
duction," 392; exclusive 
privileges, 393; settlements 
394; _ prohibitions, 394; 
liabilities, 395; rates of 
commission, 395; methods 
and transactions, 396 (see 
coulisse); objections to 
monopoly, 398 et seq; 
differences with the cou- 
lisse, 404; volume of busi- 
ness, 405; caution of pub- 
lic, 408. 

Paris Bourse, History and 
Methods of, by E. Vidal, 

Parquet, in Paris, 397 et 



Partners of members, and 

partnership agreements, 

Pears Prize Essays, 219*, 
Personalities on 'Change, 312 

et seq. 
Plochmann, George, on Ger- 
man Bourse Law, 245*. 
Powell, Ellis T., The Mech- 

ism of the City, 379*. 
Pragmatism, in economic 

phenomena, 127. 
Prices, Relation to value, 4. 
Principles of Economics, by 

Alfred Marshall, 255. 
Principles of Economics, by 

Edwin R. A. Seligman, 

42*, 254. 
Principles of Economics, by 

J. R. McCulloch, 46*. 
Principles of Money and 

Banking, by Chas. A. 

Conant, 93*. 
Produce Exchange, 440. 
Promoters, swindles of, 141. 
Publicity in N. Y. contrasted 

with London, 347. 
Pujo. Committee, 176. 
Punishment of members, 

Pyramiding, opinion of 

Hughes Commission, 420. 

Quarterly Review, London, 300 

332, 377*- 
Quotations, the property of 
the Exchange, 436. 

Railroads in U. S., in 1906- 

7, 212. 
Real Estate, Market for, 22. 
Real Estate Record and 

Guide, 202*. 

Real Estate Speculation, in 
N. Y., 202; in other cities, 

Receiverships, 430. 

Reforms, attitude of mem- 
bers toward, 311; in list- 
ing new securities, 364. 

Regulation of Stock Ex- 
change in Germany, Henry 
Crosby Emery, 241*. 

Rentes, as affected by war, 
368; settlement days, 394; 
market for, 398, 404. 

Rhodes, Cecil, 377. 

Rise of the London Money 
Market, by W. R. Biss- 
chop, 379*. 

Roosevelt, Theodore, and the 
panic of 1907, 210-212. 

Royal Commission of 1877, 
— 238-9, 231-2. 

Rubber boom, in London, 62, 


Russian government bonds, 
as aifected by war, 368. 

Russian industrial securi- 
ties in France, 62. 

Salaries of employees, 318. 

"Scalping," 355. 

Scapegoat, making the Stock 
Exchange a, 137. 

Schonberg, "Handbuch" on 
Speculation, 21*. 

Scott, S. R., on incorpora- 
tion of London Stock 
Exchange, 233. 

Securities, Origin of, 11. 

Securities, Owners of in 
America, 14-15- 

Securities, Volume of in 
America, 14-15. 



Securities, Volume of in 
London, 360; in Paris, 
406, et seq; in N. Y., 
359-60. . 

Seligman, Edwin R. A., on 
Legislation, 254. 

Seligman, Edwin R. A., on 
Principles of Economics, 

Settlement days, London 
Stock Exchange, 344, 349; 
N. Y. Stock Exchange, 
345; comparisons, 351. 

Settling Room, in London, 

Shanghai Stock Exchange, 

Sherman Law, 199*. 

Short selling, opinion of 
Prof. Huebner, 78; legal- 
ized in Paris, 402*; opin- 
ion of Court, 416; opinion 
of Hughes Commission, 

Silver purchasing clause, re- 
peal of, 199*. 

Smith, Adam, on Specula- 
tion, 37. 

Smith, Adam, The Wealth of 
Nations, 37. 

Smith, C. W., on depressions 

Smith Herbert Knox, on 
hedging cotton, 94. 

Smith, Hopkinson, on 
methods of brokers, 292. 

Smollett, on South Sea Bub- 
ble, 325-6. 

South Sea Bubble, 226, 325. 

Spanish government bonds, 
as affected by war, 368. 

Specialists, duties of, 278; 
vindications of, 279; opin- 

ion of Hughes Commis- 
sion, 426. 

Speculation, a feature of all 
enterprise, 38. 

Speculation, in America con- 
trasted with that abroad, 

Speculation, in American 
development, 307; con- 
trasted with England, 366; 
in France, 408-9. 

Speculation, in China, 62. 

Speculation, in Egypt, 62. 

Speculation, in France, 62. 

Speculation, in Gold, (1864, 
1866), 250. 

Speculation, in London, 62. 

Speculation, in relation to 
investment, 44. 

Speculation, J. S. Mill, 47. 

Speculation not gambling, 
53, 54, 416, 417, 419, 421 

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

Speculation, opinion by 
Judge Grosscup, 65. 

Speculation, opinion by U. S. 
Supreme Court, 66. 

Speculation, origin of the 
word, 36. 

Speculation, Some Thoughts 
on, by Frank Fayant, 32*, 
68,* 239, 252*. _ 

Speculation, as distinguished 
from trading, 74. 

Sponsors of candidates for 
memberships, 272. 

Sportsmen on 'Change, 317. 

Stamp Tax, N. Y., 75; in 
London, 355. 

Stanhope, Edward, on incor- 



poration of London Stock 

Exchange, 232. 
State Banks contrasted with 

National Banks, 103. 
Statist, The (London) on 

Hughes Investigation, 256. 
Stockbrokers in London (See 

London Stock Exchange); 

in Paris, (Paris Bourse). 
Stock certificates, registered 

and bearer, 365. 
Stock companies in France, 

Stock Exchange and The 

Money Market, by Horace 

White, IC2. 
Stock Exchange, Distinc- 
tion between Wall Street 

and, 64. 
Stock Exchange Law and 

Practice, by W. A. Bewes, 

Stock Exchange (London), by 
C. D. Ingall & G. Withers, 

32 • 

Stock Exchange, N. Y., 
Rules governing brokers, 
138, the day's work 288 
et seq. 

Stock Exchange, N. Y., the 
building, 304-5; history, 
307; mechanism, 418. 

Stock Exchange, Story of the, 
by Chas. Duguid, 32*. 

Stock Exchange, The, by 
Francis W. Hirst, 32*, 45*. 

Stock Exchange, The (Lon- 
don) Francis W. Hirst, 
327*, 330*, 338, 367.* 

Stock Exchange, The N. Y., 
by Francis L. Fames, 32*. 

Stockholders, Rights of, 162, 
164, 173*. 

Stocks and Shares, by Hart- 
ley Withers, 379.* 
"Switching," 74.. 

Telephone clerks, on 'Change, 
their duties, 289. 

Temperature of air on 
'Change, how regulated, 

Ten years regulation of the 
Stock Exchange in Ger- 
many, by Henry Crosby 
Emery, 61*. 

Ticker, value of, 162*; in 
London, 341-2; in N. Y,, 

.347, 437- 
Ticket Day in London, 373. 
Timidity of capital, 17. 
Tontine Coffee House, 307. 
Tooke, Thos., on Prices, 7*. 
Traders, as distinguished 

from speculators, 74; 

operations of, 285. 
Trading posts, on 'Change, 

Transactions in securities, 

panic of 1907, 216. 
Transactions on 'Change, how 

conducted, 288, et seq. 
Transfer of certificates, in 

London, 355, 365, 374. 
Transfer Tax, in N. Y., 75, 

in London, 355. 
Trust Laws, attitude of 

brokers toward, 311. 

Unlisted Department of 

Stock Exchange, 166. 
Usury Law, in N.Y., 105, 431. 

Values, Relation to prices, 4. 
Van Vorst, Justice, opinion, 



Vendors' shares, in London, 


Vidal, E., History and 
methods of Paris Bourse, 
392, monopoly of Bourse, 

.399, 401*, 403, 404- . 
Vidal, E., on Origin of 

Bourse and Exchanges, 

Villeplaine, Boscary de, on 

short selling, 88. 
Visitors' Gallery, 286. 

Wall Street and the Country, 
by Chas. A. Conant, 29,* 


Wall Street, distinction be- 
tween the Stock Exchange 
and, 64. 

Wall Street Journal, 83*, 136, 
139, 145, 165*, 173*, 178*, 

Wall Street not the Stock 
Exchange, 428. 

War, between England and 
a first-rate power, 367, et 

War, cost of, 367. 

War, Franco-German, 383, 
et seq. 

"Wash Sales," 168, 422. 

"Welchers," 227, 249; in 
Paris, 402. 

Wealth of Nations, The, 37. 

White, Horace, on banking 
laws, 102, 104; on com- 
pany promoters, 142, 147*; 

on gold speculation, 251; 
on margin transactions, 
53*; on money rates, 
115; on short selling, 80; 
on Stock market quota- 
tions, 15; on the distinc- 
tion between Wall Street 
and the Stock Exchange, 
64; on the Hughes Com- 
mission, 159; on the panic 
of 1907, 196; on the panics 
of 1837, 1857 & 1873, 199*. 

Withers, G., The Stock Ex- 
change (London), 32*. 

Withers, Hartley, Stocks and 
Shares, 379*. 

Witwatersrand, discovery of 
gold in, 365. 

Wood, Henry, Political 
Economy, 219*. 

Woolley, C., Phases of Panics 

World's Wealth in Securities, 
by Chas. A. Conant, 288*. 

World's Work The, 294*. 

Worry on 'Change, 302 et 

Worry the Disease of the Age, 
by Dr. C. W. Saleeby 304*. 

Yale Review, 61*. 

Yale Review, on German 
Stock Exchange Law, 241*. 

Yale Review, on panic of 
1907, 196*. 

"Yankee market," in Lon- 
don, 300. 


AA 001 118 697