Fifty years in Wall Street

by Henry Clews

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.