CHAPTER XII.
“CORNERS” AND THEIR EFFECT ON VALUES.
THE SENATE COMMITTEE ON “CORNERS” AND “FUTURES.”—SPECULATION BENEFICIAL
TO THE COUNTRY AT LARGE.—A REGULATION OF VALUES, AND AN IMPORTANT
AGENT IN THE PREVENTION OF PANICS.-“CORNERS” IN ALL KINDS OF
BUSINESS.—HOW A. T. STEWART MADE “CORNERS.”—ALL IMPORTING FIRMS DEAL
IN “FUTURES.”—LEGISLATION AGAINST “CORNERS” WOULD STOP ENTERPRISE
AND CAUSE STAGNATION IN BUSINESS.—ONLY THE CONSPIRATORS THEMSELVES
GET HURT IN “CORNERS.”—THE BLACK FRIDAY “CORNER.”—SPECULATION IN
GRAIN BENEFICIAL TO CONSUMERS.
The New York Stock Exchange is organized after the same manner as a
social club, such as the Union League, the Union or the Manhattan, and
not under a special charter from the Legislature. Hence it is protected
from the interference of that honorable body.
Although various attempts have been made, from time to time, at Albany,
to levy taxes upon the transactions of the Exchange, and to interfere
with the business of speculation and investment in many other ways,
these legislative designs have hitherto been happily frustrated.
Shortly after the memorable “corner” in Hannibal & St. Jo., in 1881,
another attempt was made by the Legislature to force Wall Street matters
under the jurisdiction of Albany lobbyists and “scalpers.”
The newspaper articles on the subject of the “corner” had attracted the
attention of the Legislature then in session, and naturally suggested to
some of the wiseacres of that dignified and incorruptible body that the
“corner” afforded an excellent opportunity, when the public mind was
excited on the subject, to raise an outcry against the shocking
immorality of such huge speculations.
A Senate Committee on “corners” and “futures” was therefore appointed,
and various Wall Street men were summoned to appear before it, and give
their testimony on this interesting subject. I had the honor of being
one of the witnesses cited. I promptly obeyed the subpœna in preference
to taking the risk of being hauled up for contempt and sent to durance
vile. I appeared before the Committee at the Metropolitan Hotel, and not
only answered all questions put to me, without any fashionable lapses of
memory, after the manner of certain other financiers, but I regaled the
Committee with a little dissertation on the subject of investigation. I
had letters from members of the Legislature afterwards complimenting me
for having made the points very clear. So I can say, “Praise from Sir
Hubert is praise indeed,” and therefore I am encouraged to reproduce
that effort in this volume, not so much from an intense desire to go
down to posterity as a successful orator, as from a disposition to
record my approval, in more permanent form, of the soundness of the
legislative judgment on my explanation of “corners.”
When the applause had subsided, I spoke as follows:
“Gentlemen of the Committee on Corners and Futures: Speculation is a
method now adopted for adjusting differences of opinion as to future
values, whether of products or securities. This is more common now than
in former years because the facilities for procuring information have
increased with the greater intelligence and celerity with which all
business is now conducted, and also from the greater rapidity with which
such information can be transmitted by telegraph and cable.
“In former years the results of a crop were known only when it came to
the market. Now almost everything affecting its future value is known
with a fair degree of accuracy before the crop is harvested. This
advanced information naturally becomes the subject of speculative
transactions which could not have existed in former times.
“Speculation brings into play the best intelligence as to the future of
values. It has always two sides. The one that is based principally on
the facts and conditions of the situation wins in the end, and the
result of the conflict is the nearest possible approach to correct
values. The consequences of speculation are thus financially beneficial
to the country at large.
“Speculation for a fall in prices is based upon the presumption of an
over-supply. If it succeeds, the production of the particular product is
checked until prices recover, and in the meantime production is diverted
to articles less abundant. Thus speculation proves a regulator both of
values and production. Speculation for a rise in prices is based upon a
presumption of scarcity or short supply, and its direct effect is to
quicken production and restore the equilibrium of prices.
“‘Corners’ usually come from running speculation to an excessive length,
by which the seller becomes responsible for deliveries beyond what he
can possibly make. He thereby places himself at the mercy of those with
whom he has made the contracts. These exigencies chiefly affect the
speculators themselves, and the community at large but little.
“Extreme prices usually grow out of them, but they are only momentary,
and have small effect upon regular or cash transactions, which
sympathize very remotely with these temporary and artificial quotations.
“Speculation is not to be judged by its occasional excesses, but by the
general effects which the foregoing considerations show to be
beneficial. It regulates production by instantaneously advancing prices
when there is a scarcity, thereby stimulating production, and by
depressing prices when there is over-production. It thus becomes one of
the most beneficial agents in the business world for the prevention of
panics.
“Speculation, moreover, makes a market for securities that otherwise
would not exist. It enables railroads to be built through the ready sale
of their bonds, thus adding materially to the wealth of the whole
country, and opening a more profitable market to labor. In this it
becomes the forerunner of enterprise and material prosperity in
business.
“There are ‘corners’ in all kinds of business as well as in Wall Street
speculation. Mr. A. T. Stewart, the great dry goods merchant, made more
‘corners’ during the latter part of his life than half the rest of the
business community put together. He did this mainly by contracting for
the entire and exclusive production of certain classes of goods, and as
such goods could only be bought at his establishment he had a close
‘corner’ in them, and accordingly put on his own prices.
“The greater portion of all the large mercantile firms do business in
the same way. And all the importing firms deal in futures. They sell
goods by sample, agreeing to deliver them at a future stated period,
varying from thirty days to twelve months. In the meantime the goods
have to be manufactured, and in many instances purchasers have to wait
until they are grown, and imported thousands of miles.
“If it were not for the support which comes from the ‘short’ interest in
grain and the general activity created thereby in times of depression,
which come periodically in this country, it would be in the power of the
large speculative grain dealers in Europe to manipulate prices downward,
and purchase our products every year, on raids, at prices much under the
cost of production.
“When we sell to Europe we must do so at a profit, or our transactions
don’t help to enrich the country.
“Another curious thing about ‘corners’ is that the people who organize
and manipulate them generally get most hurt in the enterprise. This was
the case with the ‘corner’ referred to in Hannibal and St. Joseph. Mr.
John Duff, of Boston, was the man in whose prolific brain that ‘corner’
originated, and the result to him was financial ruin. The stock ran up
to 350, though the short account amounted to only about 1,200 shares,
and the ‘shorts’ had to settle at 280.
“The result was similar in the ‘corner’ in Northwest in 1872,
manipulated by Jay Gould. The stock was started at 80 and it ran up to
280. It then reacted to the former figure. I believe Jay Gould was alone
in that deal, and it came pretty near crushing him, in spite of his
incomparable capacity for wriggling out of a tight place.
“Patents are ‘corners’ protected by law. The inventor has a monopoly for
seventeen years in his invention against all the world, and this gives
him a right to make and sell the article covered by his patent, often at
a profit of several hundred per cent. on the original cost, and on the
price it would bring if placed in competition in the open market, like
railroad stocks and grain.
“If it is the intention of the Legislature of this State to stop
enterprise in business, then your Committee is undertaking to accomplish
that work in the right way, but I think your success would be a public
calamity.”
I doubt the expediency of either undertaking to regulate enterprise by
law or to choke off competition by the law-making power. The result
would be woeful stagnation in business. It would crush the motives for
commercial activity and depress the creative energies of prosperity.
The law of supply and demand is the best regulator.
Congress attempted to suppress speculation in gold during the war, and
as soon as the act was passed prohibiting such dealings, the premium on
gold advanced 100 per cent. This so much terrified the wise statesmen
who concocted this sweeping measure of financial reform, that they
immediately displayed much more wisdom in hastening to have the bill
repealed.
The simple reason that such laws will not work in practice is that where
there is a will there is generally a way to evade them. This is the case
with the very best of such laws that can possibly be framed. Take the
usury laws for example. The methods of getting around these are
numerous, and there is practically no limit to the rate of interest that
can be exacted except the conscience of the lender, which is frequently
very elastic. Daniel O’Connell said he could drive a coach and six
through any act of Parliament. Jake Sharp was also of opinion that he
could run a double-track horse-car railroad through the best act that
could be framed by any Albany Legislature. Jake was checked in his
career at considerable trouble and expense, but his case illustrated
that the rule referred to holds good generally in legislation.
The fact, however, that it seldom happens that anybody gets badly hurt
in “corners,” except the conspirators themselves, is sufficient
protection for the general public, and should set the minds of
legislators at rest, if they mean to do legitimate business in their
law-making capacity.
The conspirators in “corners” are usually left high and dry without any
market for their fictitious values, and the “corner” very frequently has
the effect of putting the property out of the speculative market for a
long time. The fate of Han. & St. Jo. is a warning to those who
manipulate “corners.” The stock was seldom quoted for months afterwards.
Take the case of Black Friday for example. It was most disastrous to the
parties intimately connected with it. It came near proving Gould’s ruin,
and he has not got over the moral effect of it yet. The probability is
it will be an heirloom in his family, a skeleton in the Gould closet for
generations to come. Gould and Black Friday have become synonymous in
the minds of many people, and the further from Wall Street the more the
distinction becomes confounded.
In making these remarks I have no intention of throwing any reflection
upon Mr. George Gould, who seems to be a very promising young man for a
rich man’s son. His careful education has, no doubt, done much to
counteract the drawbacks incident to the sons of wealthy men to which I
have referred more fully in another part of this book. His maternal
training, I understand, has been of the most exemplary kind. This will
go far to offset the disadvantages to a business career, which the
accident of his birth in luxurious surroundings, according to my theory,
otherwise entails. If his brain is composed of the genuine plastic
material out of which the craniums of successful financiers are made, he
may learn to forget that he has been nursed in the lap of luxury, and
look back with due respect to the hole whence his father was digged and
the rock whence he was hewn. He may have brains enough, possibly, to
reflect with more pride on that ingenious mousetrap that first brought
his father into prominence, than the gew-gaws of the gilded palace in
Fifth avenue, the luxuries of the handsome parlors and rich
conservatories at Irvington, and the gorgeous trappings of his father’s
yacht and palace cars. I have, therefore, great hopes that George will
be a conspicuous exception to the rule I have propounded elsewhere
regarding rich men’s sons.
When a large mercantile firm buys up goods in any line so that nobody
else has the same goods, it then has a “corner” in these goods.
“Corners” in goods differ from “corners” in Wall Street in regard to
their influence on the organizers. They don’t act like a boomerang as
the Wall Street “corners” mostly do. The “corner” is sometimes sustained
during the life of the manipulator, as in the case of Mr. Stewart.
The successors of the great operators sometimes maintain it, but in this
instance Judge Hilton made a signal failure, though in some respects he
is a far abler man than Stewart was. Yet, he had not the genius, for
working “corners,” of his eminent predecessor. He is, probably, so well
learned in the law that he has too much inclination to go around the
“corners.”
One thing is certain, very few of these merchants can become wealthy
except through the medium of “corners.” It is by these peculiar methods
that nearly all large fortunes are amassed in their line, and in a
perfectly legitimate manner, too, whatever casuists and hair-splitting
moralists may say or think about the matter. The tendency to make
“corners” seems to be interwoven in our business methods, and to play an
important part in the struggle for existence. So I don’t see what we are
going to do about it without a radical change in that compendium of the
best political wisdom that the world has ever seen. I refer to the
Constitution of the United States. All the acumen and sophistry which
the most astute Philadelphia lawyer could bring to bear upon it has
hitherto failed to show that there is anything in this wonderful
document opposed to the liberty of making “corners.”
As Mr. Gladstone has truly said: “This document is the most wonderful
work ever struck off at a given time by the brain and purpose of man.”
I hold there is nothing in the Constitution opposed to the freedom of
making “corners,” and that all the evils resulting from these
speculative inventions can be met and counteracted by business methods,
and the laws regulating the ordinary concerns of life without resorting
to any rigid or special methods.
To dispose of “corners” or abolish them on the large scale to which I
have alluded would presume an entire revolution in our social system,
and to attack them piecemeal, as the Legislature frequently does,
involves a very suspicious kind of discrimination, and is at variance
with the spirit of the Constitution. In fact it often amounts to a kind
of thinly-disguised blackmail.
The truth is, that it is almost impossible to legislate against
“corners” without aiming a fatal blow at speculation itself, which, as I
have shown, is a vital principle in the regulation of values, the
stability of business, and the prevention of panics.
I believe the men of most experience, not only in Wall Street, but in
other departments of finance and commerce, will bear me out in the
statement that a market where even values are considerably inflated by
speculation, is more desirable than a period of depression. The result,
in the long run, is the greatest good to the greatest number. I don’t
believe that the ghost of Jeremy Bentham himself could rise up and
consistently condemn this statement.
I believe that speculation in grain and provisions is materially
beneficial to consumers, and that the latter are better off, one year
with another, and less liable to be menaced with periodical famines,
than if there were no speculation in these necessities of life.
Before leaving this prolific theme of “corners” I wish to say a few
words about my own experience in that line. The only “corner” in which I
have ever been materially hurt during my long business experience was
one manipulated by the State of Georgia.
This Sovereign State issued and granted altogether about eight millions
of bonds, all bearing the great seal, properly signed and legally issued
for full value. I advanced over two million dollars in good money on a
part of these bonds. Shortly after this transaction, the State of
Georgia ascertained through a garbled report of a committee sent to this
city by the Georgia Legislature, that all these bonds were held outside
of her own borders. The Legislature then passed an act of repudiation,
thereby reducing the value of the bonds from par to that of waste paper.
When I discovered that my little pile of two million dollars in what I
considered good securities would no longer exchange for greenbacks, I
had a very disagreeable sensation of having been “cornered” by the high
toned and chivalrous representatives of the State of Georgia, which,
through its lawmakers, claimed the sovereign right to do wrong to the
citizens of a sister State.
In the Harlem “corner,” which is referred to in another place, contracts
to deliver at 110 were settled at 179.
About three million dollars were taken out of the pockets of the bears.
Several prominent houses went down in the struggle. The result of the
“corner” was that the bulls were saddled with the entire capital stock
of the property.
One broker, who had sold calls at 150 and was requested to fulfil his
contracts when the stock had advanced to 250, was very much in the same
position as Glendower’s spirits, which were called from the vasty deep
but would not come. “I don’t see anything here,” he said, “about
delivering. You can call, but I don’t mind it.”
There were two “corners” in Harlem. The Common Council was cornered in
one and the Legislature in the other.
In the Rock Island “corner” the bulls bought 20,000 shares more than
existed, and the price rose from 110 to 150.
London financiers have a fearful horror of “corners.” Hence the London
Stock Exchange is very chary about listing our railroads, especially
those with a moderate number of shares.
“Corners” are seldom profitable, and the parties connected with them can
hardly escape getting badly hurt unless they are prepared to own and
carry the entire property. Even in that event, it is usually put out of
the speculative market for a considerable time.
The Hudson “corner” was one of the most successful. It paid a profit of
12 per cent. There was a profit of 4½ on the Rock Island “corner.”
The first “corner” of which there is any record in Wall Street was in
Morris Canal, an old “fancy” now almost forgotten except for its
“corner.” It had been forced upward as fancies frequently are, until it
was far above its intrinsic value, and several operators began to sell
“short.”
After this operation had gone on for some time a pool was formed to
protect it, and the pool bought it all up and locked it up in a trunk.
The operation was new to the Street and the bears were astounded, but
when called upon to settle they became furious, and accused the
manipulators of the “corner” of entering into a conspiracy. The “bulls”
asked the “bears” why they had sold what they did not possess and could
not procure.
The dispute was referred to the arbitration of the Board of Brokers, and
that eminent body, then unsophisticated in the arts of speculation, took
what seemed to them an equitable view of the case, and decided it in
favor of the “shorts,” who, on the ground of conspiracy on the part of
the clique, were relieved from fulfilling their obligations.
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