5. Stock Exchanges
An essential part of the machinery of investment banking is the stock exchange. This is a place where the buyers and sellers of securities or their agents regularly meet for the transaction of business. It may be a portion of a street or a market place or a room in a building. A fully equipped modern exchange contains a large room equipped with telegraphic and telephonic communication with the most important parts of the country in which it is located and of the world, with apparatus for registering prices and easily communicating information to its members, and with the offices needed for the accommodation of the clerks and other employees required. Either by posts or in some other manner the precise places in it in which each security or group of securities is to be dealt in is also usually indicated.
The purpose of the stock exchange is to facilitate and to regulate dealings in securities. It facilitates such dealings by providing as nearly perfect means as is possible for putting buyers and sellers into communication with each other, and for collecting and making available to them the information they need. To this end they provide for daily meetings at fixed hours; they make and publish lists of the securities dealt in; they speedily record and, through the telegraph and the telephone, communicate to all quarters of the globe the prices at which securities change hands; and through the meeting room equipped as before described they make it possible for buyers and sellers, no matter where located, to communicate with each other in a very short period to time. They regulate such dealings by establishing and rigidly enforcing rules and regulations for listing, transferring, clearing, and paying for securities and for other matters pertaining to the conduct of their members.
These institutions serve investment banks as well as private investors, constituting the machinery which connects them all. They thus enlarge the area and scope of the markets for securities, and greatly increase the mobility of capital. Without them the surplus savings of one locality would only very slowly and with difficulty find their way to other localities where they are needed, with the result that capital would lie idle or be very inefficiently employed in some places while in others natural and human resources would be undeveloped or very inefficiently developed.
Existing stock exchanges differ considerably in the manner in which they are organized and managed, in methods of doing business, and in the scope of their operations. Some of them are incorporated and others unincorporated; some restrict their membership to a prescribed number, others admit as many as are able and willing to comply with the conditions imposed; some are local in their scope, some national, and others international. In this country all the exchanges deal in local securities chiefly, except the one in New York City, which is national in its scope. The London exchange does a larger business in international securities than any other, but the Paris and Berlin exchanges, as well as those located at the other important European capitals, and the one at New York share in it to a greater or less degree.
Stock exchanges have suffered in reputation, and their real functions and merits have been obscured by the abuses to which they have been subjected. Connected with their legitimate business of facilitating the investment of capital, various forms of speculation have developed which in some cases have degenerated into gambling pure and simple. The better managed ones have striven to rid themselves of these abuses, and in some countries, notably in Germany, legislative bodies have taken a hand. The results, however, have proved only partially successful.
Some forms of speculation are not only legitimate but necessary in modern business life, and these shade into the illegitimate, unnecessary, and positively harmful forms by such short and easy steps as to render it difficult, and perhaps impossible, to draw a line between the two which can serve as a guide for regulations of an administrative or legislative kind.
6. Some Defects in Our Investment Banking Machinery
A comparison of our investment banking machinery with that of European countries, especially Germany, reveals important differences. Among these the most notable are the wide use there and the almost complete absence here of the following: (a) the resort to cooperation as a means of revealing and making available the basis for credit of large numbers of people who lack capital but could use it to the advantage of themselves and of the nation; (b) the long-period mortgage loan repayable on the annuity plan and the mortgage bond as a means of accumulating capital for such loans; and (c) the cooperation of the state and other public bodies and of capitalists and philanthropically disposed persons in developing the credit possibilities of the masses and in directing the flow of proper portions of the stream of capital in their direction.
In the development of investment banking institutions in this country, individual initiative prompted by self-interest has been the chief, and except in the case of savings banks, the sole motive force. The result is that most of them have been organized in the interests of lenders rather than borrowers and serve best the purposes of big business and of persons already possessed of large credit by virtue of their wealth or their business reputations. Under these conditions, while enormous amounts of capital in the aggregate have been invested in agriculture and urban real estate, the former has suffered relatively in comparison with transportation, manufacturing, and speculation.