In every boom companies are formed primarily if not exclusively to take advantage of the public’s appetite for all kinds of stocks. Also there are belated promotions. The reason why promoters make that mistake is that being human they are unwilling to see the end of the boom. Moreover, it is good business to take chances when the possible profit is big enough. The top is never in sight when the vision is vitiated by hope. The average man sees a stock that nobody wanted at twelve dollars or fourteen dollars a share suddenly advance to thirty—which surely is the top—until it rises to fifty. That is absolutely the end of the rise. Then it goes to sixty; to seventy; to seventy-five. It then becomes a certainty that this stock, which a few weeks ago was selling for less than fifteen, can’t go any higher. But it goes to eighty; and to eighty-five. Whereupon the average man, who never thinks of values but of prices, and is not governed in his actions by conditions but by fears, takes the easiest way—he stops thinking that there must be a limit to the advances. That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits. The big money in booms is always made first by the public—on paper. And it remains on paper.
XXII
One day Jim Barnes, who not only was one of my principal brokers but an intimate friend as well, called on me. He said he wanted me to do him a great favour. He never before had talked that way, and so I asked him to tell me what the favour was, hoping it was something I could do, for I certainly wished to oblige him. He then told me that his firm was interested in a certain stock; in fact, they had been the principal promoters of the company and had placed the greater part of the stock. Circumstances had arisen that made it imperative for them to market a rather large block. Jim wanted me to undertake to do the marketing for him. The stock was Consolidated Stove.
I did not wish to have anything to do with it for various reasons. But Barnes, to whom I was under some obligations, insisted on the personal-favour phase of the matter, which alone could overcome my objections. He was a good fellow, a friend, and his firm, I gathered, was pretty heavily involved, so in the end I consented to do what I could.
It has always seemed to me that the most picturesque point of difference between the war boom and other booms was the part that was played by a type new in stock-market affairs—the boy banker.
The boom was stupendous and its origins and causes were plainly to be grasped by all. But at the same time the greatest banks and trust companies in the country certainly did all they could to help make millionaires overnight of all sorts and conditions of promoters and munition makers. It got so that all a man had to do was to say that he had a friend who was a friend of a member of one of the Allied commissions and he would be offered all the capital needed to carry out the contracts he had not yet secured. I used to hear incredible stories of clerks becoming presidents of companies doing a business of millions of dollars on money borrowed from trusting trust companies, and of contracts that left a trail of profits as they passed from man to man. A flood of gold was pouring into this country from Europe and the banks had to find ways of impounding it.
The way business was done might have been regarded with misgivings by the old, but there didn’t seem to be so many of them about. The fashion for gray-haired presidents of banks was all very well in tranquil times, but youth was the chief qualification in these strenuous times. The banks certainly did make enormous profits.
Jim Barnes and his associates, enjoying the friendship and confidence of the youthful president of the Marshall National Bank, decided to consolidate three well-known stove companies and sell the stock of the new company to the public that for months had been buying any old thing in the way of engraved stock certificates.
One trouble was that the stove business was so prosperous that all three companies were actually earning dividends on their common stock for the first time in their history. Their principal stockholders did not wish to part with the control. There was a good market for their stocks on the Curb; and they had sold as much as they cared to part with and they were content with things as they were. Their individual capitalisation was too small to justify big market movements, and that is where Jim Barnes’ firm came in. It pointed out that the consolidated company must be big enough to list on the Stock Exchange, where the new shares could be made more valuable than the old ones. It is an old device in Wall Street—to change the colour of the certificates in order to make them more valuable. Say a stock ceases to be easily vendible at war. Well, sometimes by quadrupling the stock you may make the new shares sell at 30 or 35. This is equivalent to 120 or 140 for the old stock—a figure it never could have reached.