CHAPTER LXXXIII.
WALL STREET AS IT REALLY IS. A VINDICATION.
Many people, and some newspapers, have a false impression that Wall
Street is a gambling arena that does a great deal of harm and no good,
and that it ought to be, as far as possible, abolished, while Wall
Street speculators have been recklessly and unjustly denounced as
gamblers.
But those who know Wall Street well have no such impressions of it, or
its speculators, or of the Wall Street community of bankers and brokers.
They can, on the contrary, testify that there is no more honorable and
responsible body of men in the world than its bankers and the members of
the New York Stock Exchange, and that nowhere is honesty, integrity, and
good faith more resolutely exacted than on that Exchange, as its
constitution, by-laws, and rules clearly show; and nowhere is a black
sheep, when discovered, more quickly and severely punished than there.
The penalties involve expulsion from membership, or suspension for any
length of time the Governors may think proper for violations of its
rules, and they are rigorously enforced in all cases. The same remarks,
I am glad to say, apply substantially to the stock exchanges in Boston,
Philadelphia, Baltimore, and other cities.
During the crisis of 1907, and the exposures of corporate irregularities
that preceded it, no members of the Stock Exchange were implicated in
the wrongdoing that surprised and shocked the public. The men in control
of the life insurance companies that were examined and held up to scorn,
for their misuse and misappropriation of other people’s money, were not
members of the Stock Exchange, nor were they Wall Street men.
The men who wrecked the Metropolitan Street Railway System were not
members of the Stock Exchange, nor were those apostles of unsound
banking, the speculative bank promoters who gained control of the three
chains of New York City banks to promote their own speculative purposes,
and inadvertently paved the way to the panic; nor was a member of the
Stock Exchange responsible for the failure of the Knickerbocker Trust
Company, or at all involved in that leading event of the panic; nor was
a member of the Stock Exchange responsible for any bank, trust company,
or corporation failure, or run that occurred anywhere during the crisis,
or at any time in the panic year.
Of course there may possibly be undiscovered black sheep in Wall Street
as well as elsewhere, for we find them in church pews, and occasionally
even in church pulpits; but we should not heap wholesale condemnation
upon either Wall Street or the churches on that account.
To call the buying and selling of stocks or bonds, on the Stock
Exchange, gambling, is a misnomer, a misuse of the word, due either to
ignorance of the transactions there, or malice. It is so whether the
purchases or sales are by investors or speculators, for speculation on
the Stock Exchange is not gambling. Whether stocks, or bonds, are
bought, or sold, by investors or speculators is immaterial between the
contracting brokers on the floor of the Exchange. They know no
difference whatever. Delivery of the stocks or bonds is made by the one,
and received by the other, in every case, and payments made accordingly,
at the sale and purchase prices, investment and speculative transactions
being treated exactly alike.
A sale and purchase is the work of a moment in the Board Rooms, and no
voucher is exchanged to prove it till comparisons are made at the
brokers’ offices, usually after the Exchange closes. But no contract
thus made in an instant of time is ever repudiated, no matter how heavy
a loss it may involve to buyer or seller, for the penalty of such a
repudiation would be immediate suspension from the Stock Exchange,
followed by expulsion when proved.
Members of the Stock Exchange are not only men of assured solvency and
respectability but of good social position, and generally of large means
and more than ordinary education and culture. Most of them, too, belong
to our best clubs. Any conduct of theirs that was considered prejudicial
to the interests of the Exchange would render them amenable to
discipline, and be promptly investigated by the Governing Committee,
whose duty it is to inflict the prescribed penalties, in such cases,
without fear or favor. The fact that a membership has a market value
varying from $50,000 to $90,000 is a certain guarantee of solvency and
fair dealing under ordinary circumstances. A Stock Exchange membership
thus carries with it a large property qualification, and its owner is a
substantial citizen, who is, as we know, often one of “the Four
Hundred,” or to be seen in our best society, and whose wealth, in many
instances, amounts to millions. Preliminary to admission also he has to
submit to a searching examination by the Committee on Admissions.
Recent attacks upon the character of the New York Stock Exchange are
entirely unjustified and have been prompted by either ignorance or
prejudice. If the Stock Exchange were abolished great enterprises would
soon be paralyzed. Without its medium it would be impossible to raise
the capital for conducting our great railroad and industrial
corporations; investors would be deprived of the means of finding
profitable employment for their capital, and there would be no free
market for the many millions of securities there dealt in. Abolish the
Stock Exchange and the free play of market forces which best develop
real values; then investors would be kept in the dark and their
properties would be exposed to grosser manipulations than ever thought
of by stock market operators. The New York Stock Exchange, it should be
remembered, is nothing more than a well-systematized market place for
the exchange of or trading in securities. From the very nature of its
purpose and its organization it cannot exercise any direct control over
the management of the corporations whose securities are dealt in by its
members. It may establish certain rules as to the conduct of business by
its members, and may insist that only securities of certain standards
shall be dealt in on its floor. Beyond that it cannot go; and buyers and
sellers alike, as in all matters of business, are expected to exercise
their own intelligence as to the merits of investments. One thing is
certain, that whatever its shortcomings there is no organized body of
business men where the standards of integrity are higher and more fixed
than on the New York Stock Exchange. Its transactions are carried on
chiefly by word of mouth; the spoken word being as sacredly kept as
signed contracts. Further, there is a Board of Governors to whom any
complaint can be carried, whose purpose is to prevent all abuses within
its power and to maintain the highest possible standards of business.
All infractions of the rules are promptly punished. Certainly, whoever
begins throwing stones at the New York Stock Exchange should first look
and see if his own window-panes are not in danger.
A great deal of nonsense is also heard about speculation. Now,
speculation, like many other good things, may be carried to excess, and
is then injurious and open to the severest criticism. But speculation
within reasonable limits is most beneficial. It is one of the main
incentives to enterprise. Crush this disposition to venture, or the
willingness to accept a risk, and enterprise would languish, trade and
industry would decline, and we should gradually settle down to certain
industrial and commercial decay. In the present highly developed state
of modern civilization speculation is a motive power of the first
importance, and being a part of human nature itself cannot be
eradicated. In the course of ordinary business, speculation is the
natural balance wheel of trade, furnishing a class of operators who are
willing to buy or sell when others for various reasons are disinclined.
Moreover, by keeping up the conflict between a large body of buyers and
sellers the true value of securities or commodities is more safely
determined than when speculation is entirely absent. The short seller is
always a buyer at a lower price, and therefore a supporter in case of
decline. Conversely, the long buyer restrains undue advances by selling
to secure his profits. Again, the banker is better able to judge the
value of collateral in a free and active market, a factor which is much
to the advantage of both legitimate borrowers and lenders who may not
have the remotest interest in speculative movements. The giving of
credit and the making of loans is very largely dependent upon a thorough
test of values such as speculation only often determines. Of course
speculation is sometimes carried to excess, and much injury results in
consequence. Such excesses which are the consequence of defects in human
nature must always be expected and are better corrected by experience
and public opinion than by any artificial regulation. Who has not the
right to profit from good business judgment, especially if that judgment
incurs the risk of the future; and who should complain if his own
judgment leads him into losing transactions? Concerning speculation
there is also another foolish misconception. Speculation is frequently
confounded with gambling, although the two are radically different.
Speculation is based upon knowledge and facts, whereas gambling deals
solely with chance. It is a fallacy to suppose that any but a small
percentage of transactions on the New York Stock Exchange come under the
head of gambling. What difference is there between buying stocks and
bonds on part payment, or margin as it is often called, and buying land
or houses or other property with only one-fifth in cash and carrying the
balance on mortgage? Such transactions are speculative, are strictly
moral, and entirely a matter of business judgment. All operations
entering into the future are necessarily speculative. So far as the New
York Stock Exchange is concerned its rules are drawn for the strict
purpose of protecting legitimate trading, and an actual transfer of
property is required for every transaction. Of course, abuses exist in
all trades and will continue to exist, rendering it the more necessary
to use a little intelligent discrimination before condescending to loose
denunciation, which may easily do much harm and no good.
The President’s attack on options in his recent message to Congress
certainly cannot apply to any business transacted on the New York Stock
Exchange, as options are not dealt in there. Options of from three to
sixty days were dealt in a great many years ago, but were abandoned long
since. Every purchase and sale now made on the floor of the New York
Stock Exchange provides for a delivery on the day of purchase, or the
following day, and payment made therefor upon delivery of the security,
and no law can possibly be passed by Congress, or the State Legislature,
to prevent a broker thus buying securities for a customer on part
payment on terms satisfactory to himself, any more than a law could be
enacted to prevent a dry goods, hardware, grocer, or merchant in any
other line from extending credit to his customers. Nearly all the
business of the world is thus transacted, and could not be done on a
large scale otherwise. In London, however, most of the business is
virtually on an option basis, as it provides for fortnightly
settlements, there being two settlement periods each month, which can be
extended from time to time indefinitely at the option of the parties
connected therewith.
The method of doing business in “futures” prevails on the Cotton and
Produce Exchanges, and could not well be transacted, to the extent of
making an active market for the benefit of the producers, on any other
basis, in my opinion. To do away with dealings in futures would simply
do away with the exchanges, which would be to the disadvantage of the
farmers. A farmer, as soon as he ascertains that his crop is secure,
makes a calculation of how long it will take to put it in his barn,
thrash it out, and transmit it to Chicago, and he sells it to deliver
during that month or a later one, thus ridding himself of any further
risk of fluctuation in the price, and is made happy thereby. If he is
deprived of such a market, it puts him back to the old way of doing
business, when the large dealers from Liverpool, Chicago, and other
quarters sent their agents direct to the farmers at harvest time, and by
bringing all kinds of discouraging influences to bear upon them made
them sell at a fraction above the cost of production; as against this
they are at present able to hold their crop back and get the highest
price. In having the ready market which now exists the farmers have all
become rich. Why, therefore, change the present plan, which has given so
much prosperity to the producers of cotton and other products, to what
might be likely to reverse their present satisfactory condition?
Members of the New York Stock Exchange, in cases of insolvency, are
required, by the rules, to immediately notify the Stock Exchange of
their inability to meet their contracts, and the selling or buying in
“under the rule,” to close defaulted contracts, if there are any,
usually follows the announcement of a failure and failure carries with
it suspension. But failures in the Stock Exchange are very few and far
between, considering that there are eleven hundred members. They are
indeed far below the average of failures in mercantile business, and
they are generally followed by satisfactory settlements and readmission
to membership, and a resumption of business.
This speaks well for both the integrity and the conservatism of Stock
Exchange houses. It is very seldom that what would be called a bad
failure occurs among them. There are, in fact, no abuses on the Stock
Exchange, for trickery and unfair dealing is impossible, owing to the
strictness of the surveillance and discipline constantly maintained over
the members, who are also themselves punctilious in keeping their
contracts and observing the rules, and doing only what is fair and
square in business. This is essential to their own interests and
success, as bankers and brokers, without regard to the penalty of
suspension, or expulsion, for any irregularity. That penalty they
approve of, for it is a protection for all of them, except an occasional
black sheep that they are glad to see weeded out of the Exchange.
How necessary the Stock Exchange is to the banks was shown during the
recent crisis, as in preceding panics, when to protect themselves they
were forced to call in their loans by wholesale, and where necessary to
at once liquidate the collaterals. It was the Stock Exchange that made
this liquidation possible, and saved many of the banks and trust
companies from suspension, as well as many bankers and brokers, who were
enabled by it to pass through the trying ordeal, instead of going to the
wall in Wall Street.
The Stock Exchange therefore obviously performs a great and very useful
and important function in monetary affairs, besides being the barometer
of values for stocks and bonds, as measured by prices, while the cotton
and the grain exchanges perform a similar service with regard to those
speculative commodities.
Yet one effect of the crisis of 1907 has been to give a new impulse to
Wall Street detraction, and sharpen the teeth and claws of the
detractors. While many are mistaken enough to hold Wall Street
responsible for the past year’s financial disaster, many more are
equally mistaken in declaring that President Roosevelt caused them by
his speeches and the Government prosecutions of law-breaking railway and
Industrial Corporations. Both charges are unreasonable and false, but
this consideration is a small matter to those who have no hesitation in
making reckless assertions which they are unable to prove, and who are
as ready to vent their spite as they are their prejudices.
Many indeed without knowing anything about Wall Street speculation, and
who have never speculated anywhere, blame speculation for a host of
evils that are in no way due to it. Some of them would even close the
Stock Exchange to stop speculation there, forgetting apparently that
this would deprive investors and banking institutions as well as
speculators of a market for securities, and make all the stocks and
bonds now listed and dealt in there practically unmarketable. In such an
event there would most certainly be a fall in their prices greater than
any we witnessed in 1907.
It is true that in the manipulation of stocks matched orders may have
been occasionally resorted to, despite the rule against it on the Stock
Exchange, but it is only because of the difficulty, or impossibility, of
discovering or proving it, for there is no body of men subject to
stricter discipline, or more amenable to it, than the members of the New
York Stock Exchange, nor any more patriotic, as their generous acts
during the Civil War, and at other times, have abundantly shown.
Neither should it be forgotten that they pay the State of New York a tax
of two dollars on every hundred shares of stock they sell, which is an
important source of revenue to the commonwealth. That the Stock
Exchange, as a free market for securities, is indispensable to the
country is beyond question. It is necessary to our national needs, and I
am proud of being one of the oldest of its members, my membership dating
from 1864; and I am able from long personal experience and observation
to testify to the integrity, soundness, and general good character of my
fellow members and the banking community of Wall Street.
Therefore take my word for it that Wall Street is not as black as it is
painted, and that anyone’s money is as safe there as anywhere in
business, if properly placed, and handled with good judgment. If any of
it is lost it is by its owner, and he has only himself to blame for his
ill luck. But it is always to the interest of his banker and broker to
have him make money, for when a customer loses his money his broker in
some degree shares the loss by losing him as a customer.
In conclusion, I hope that if any of you ever take a flyer in Wall
Street, you will come out of it, with flying colors, on the winning
side, and with a good opinion of the Street proportioned to the
magnificence of your success!
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