Fifty years in Wall Street

by Henry Clews

Capitalists who for the past two or three years had been dissatisfied with the returns of ordinary investments and who had gone into hazardous speculations and extensive underwriting of new bond issues in the hope of large and quick profits, have been sobered by their heavy losses and are now seeking safety in prime investment bonds.

Had the market for bonds not improved as it has, it would have been practically impossible for the New York Central and other Railway Companies to have marketed the large amount of notes they have succeeded in selling since the beginning of this year. The after effects of the panic, as well as the panic itself, would also have been far worse than anything we have witnessed had it not been for the previous heavy stock-market liquidation, a liquidation that in many cases had been practically continuous from the end of 1906, and that was most drastic and disastrous in August, 1907.

That the banking situation has become normal is indicated by the elimination of loan certificates and the resumption of normal methods by all the Clearing Houses in the United States, and particularly by the resumption of the weekly detailed bank statements by the New York Clearing House. This occurred on February 8th for the first time after their suspension on October 26, 1907, and was supplemented by statements of the non-Clearing House banks and Trust Companies, including actual as well as average conditions. This last is a new and commendable feature, which every Saturday will enable us to learn how all the banking institutions in New York City and its several boroughs stand, both individually and collectively, in their average and their actual condition.

That we are assured of a superabundance of money at low rates of interest is evident from the large and growing accumulations of surplus funds in the banks from Maine to California, and the light demand. All the indications favor a protracted period of extreme ease in the money market, modified only by gold exports and the withdrawal by the Government, from time to time, of some and probably a large part of its deposits in national banks. This again reminds us that the Sub-Treasury system makes the Government an unlimited hoarder of money, with only evil results. This, alone, calls for its modification.

But while the large aggregate of the surplus funds of the banks testifies to the return of confidence, and with it the return to banking channels of hoarded money, it also reflects the dullness of trade and much idle machinery and unemployed labor. Hence the bank clearings of the United States in January were twenty-five per cent less than in January, 1907. This condition of affairs has been and still is severely felt by the Railways, whose largely reduced gross and net earnings and long lines of empty cars tell why a number of them, like many industrial corporations, have reduced or passed their dividends, or paid them in scrip. More railway and industrial corporations will probably have to accommodate themselves to circumstances and do likewise in consequence of reduced earnings. That we expect, and are prepared for, while the trade depression lasts, and hence we all hope and trust it will be short.

Meanwhile we cannot ignore the political situation in this Presidential year, and the disturbing and depressing effect of the recent message of President Roosevelt to Congress, with its onslaught on Wall Street, followed by the unjust bitter attack of Mr. Bryan on Stock Exchange speculation, which he denounced as gambling. Wall Street was thus ground between the upper and nether millstones of the Republican and the Democratic parties; it was fired on from both sides with hot shot, grape and canister, without any good reason.

Speculation in stocks, as conducted through Stock Exchange brokers, is no more gambling than speculation in real estate or ordinary merchandise. All trade is more or less speculative because it involves risks. If it did not involve risk there would not be so many mercantile failures as there are every year, yet no one calls trade gambling. Every time a merchant buys a line of goods, he makes a venture, not knowing whether they will rise or depreciate in market value on his hands. He buys also on credit, just as he gives credit to his customers; and what is the difference in principle between this form of credit and the credit a stock broker gives his customers who pay ten per cent on the par value of their purchases while the broker provides the balance and holds the stocks as security? This is the margin, which is a credit in the account of each of them; and I call it a credit instead of a margin, which is a better word for brokers to use.

The present anti-speculation crusade is accompanied by many delusions and very imperfect ideas concerning the conditions and equities of business operations. Who is to decide which are speculative transactions and which are not? Business cannot be conducted without making contracts entering into the future, and that is speculation. The builder who contracts to build you a home is a speculator; the manufacturer who agrees to deliver a thousand cases of cotton goods sixty days hence is dealing in futures, and all operations extending into the future are unavoidably of a speculative character. Even marriage is often called a lottery. It is quite impossible and thoroughly stupid to try to eliminate speculation, for it is an essential element in all business transactions, except those for cash. If business were reduced to the latter basis, it would soon become injuriously restricted and more exposed to corners and violent fluctuations than ever.

As to legitimate or illegitimate speculation, who is to decide between the two, and where is the line to be drawn? If the investor buys securities in advance of his income, expecting to complete the purchase later on, is that legitimate? Suppose circumstances compel him to change his mind and sell before his original purchase is completed, is that legitimate? And in what respect does such a transaction differ from the ordinary marginal contract? It may, perhaps, differ in intent; for the speculator usually buys with a view to taking advantage of temporary fluctuations. Yet, who would be bold enough to investigate the intentions of buyers or sellers? Only the most drastic kind of force could compel divulgence of such secrets, and is it possible to establish any such system of espionage in this country? Speculation, as often stated in these advices, when confined to reasonable limits is beneficial. It is the natural balance wheel of commerce and finance. By its means and through the conflict of opinion between buyers and sellers real values are established by simpler and more reliable means than by any other known methods. No Government investigation will ever ascertain the real value of our railroads so well as the higgling and bargaining between buyers and sellers, which is alike the moving spirit of commerce and the arbiter of values on all Stock Exchanges the world over. Speculation is liable to be carried to excess, and abuses in speculative methods undoubtedly exist; but these are better corrected by a strong and elevated public opinion than through any legal measures based upon political claptrap. There is a flood of nonsense in this campaign against speculation, anti-option, etc., which does not find believers here but may in other parts of the country. It consists very largely of political humbug, and is nothing more than one of the usual methods by which crafty politicians play upon the ignorance and prejudice of the masses for their own advantage. After the elections this mania will probably pass away, to be then recognised as one of the psychological features usually following a panic. Previous instances of this sort of agitation were the granger and populist movement, which exhibited many of the present symptoms of political insanity. Nevertheless, such agitation may do serious harm, and its fallacies should be fearlessly exposed in order to prevent the people from being deceived and misled. Even now this agitation, especially us manifested in hostile State Legislatures, is seriously interfering with that restoration of confidence that is absolutely necessary to business recovery. It is keeping both capital and labor idle. Capital is proverbially timid, and until such attacks cease enterprise is sure to be more or less repressed. Of course there are abuses that need rectifying, but it is folly to carry restraint to the point of extinction. Because a few individuals play golf to harmful excess, would any sane person suppress so wholesome a sport? Yet that is precisely the policy of many of the reformers of the present day. Too frequently these reform movements savor of ignorance. Their purpose is frequently admirable; but the country sadly needs more sanity in their application.

President Roosevelt condemns “options” very vigorously, as if they were now dealt in on the Stock Exchange, as they once were, ranging from three to sixty days; but they have not been traded in there for many years, all purchases and sales of stock being deliverable and receivable on the day following the transactions on the floor of the Exchange, except those specifically for “cash,” which means, to be delivered and received the same day. But on the Cotton, Produce and Coffee Exchanges, and Chicago Board of Trade, nearly all the transactions are in “futures”—and these are a boon to cotton and grain growers and coffee importers, who, through them, can sell their growing crops and importations months before they actually possess and are ready to deliver them, so in advance making sure of the prices they will get for their farm products and importations.