The fact is that all forms of manipulation are by no means improper; some of it performs a useful service and is a necessary and legitimate part of the functions of the Exchange. To understand how true this is let us consider, for example, the case of a corporation that has been organized, let us say, to develop a group of recently discovered coal properties in new territory. This is legitimate endeavor as applied to American enterprise; in a broad sense it is the spirit of adventure and speculation that has made our country commercially rich and powerful.
Now, in order to develop this enterprise, it is necessary to ask the public to buy its shares or its certificates of debt and thus become partners in the undertaking. In that way our great railways were built and our Western country opened to progress. But the public will not support the new enterprise until it knows something of its merits, and accordingly the company introduces its property through the medium of that great central market-place—the Stock Exchange—furnishing the Exchange authorities with its credentials in minute detail.
At this point the so-called manipulation takes place. The securities are new, the company may wish to advertise them, attract attention to them, and solicit a public interest in the laudable enterprise that lies behind them, all of which is as right and proper as it is for any merchant to establish a market for any new article on his shelves. To accomplish his purpose the merchant must first fix an arbitrary price; if the public will not buy at that price he must “manipulate” a lower price, and in all his subsequent dealings there must be manipulation of one form or another designed to conform to the supply and demand in that particular article.
The men behind the coal company in question must do the same thing. They fix a price at which their shares are introduced in the market-place; let us say this price is $100 per share. This is manipulation. It may happen that the public will not buy at that price, in which case the price is lowered, let us say, to 80. This also is manipulation. But is it improper? Is it subversive of good morals? Is it an unhealthy interference with natural laws of supply and demand? Is it anything less than a legitimate method of attracting capital into worthy enterprises?
Critics are invited to remember that the Stock Exchange does not buy or sell anything; it merely acts as a market-place through which, among other things, capital may be directed from channels where it is least needed into those where it may be most beneficially and profitably employed. If, therefore, an oil company or a coal company or any other enterprise whose ultimate success cannot fail to enrich the community seeks to market its wares—i. e., its securities—and thereby enable itself to do business, where else is it to turn save to the Stock Exchange, and how is it to fix an attractive market price at the outset save by what is termed manipulation? Nobody is compelled to buy; as for selling, any holder of 100 shares or any other number of shares can sell them at will, and no amount of manipulation can prevent him from a free exercise of this privilege. You may depend upon it, Mr. Critic, that the Stock Exchange will take pains to suppress all forms of manipulation that are unsound and harmful, but until you or some other gifted student of economics can devise a method by which capital may be attracted to excellent channels other than through the medium of an Exchange, manipulation of the sort just described must continue or enterprise must stop. Strike out the word “manipulation,” and substitute “establishment of values” in transactions of this sort, and the practice seems to become, as it really is, in keeping with the finest traditions of the market-place.[56]
It is a difficult matter for the Stock Exchange authorities to suppress all forms of manipulation that are plainly and admittedly improper. Such things do exist; the difficulty is in devising ways and means of preventing them. Mr. Smith, a non-member of the Exchange, may be interested in a certain security to which he wishes to give an appearance of activity. He calls Brown, a stockbroker, and instructs him to buy 5000 shares “at the market.” Then he telephones Jones, another stockbroker, to sell 5000 shares. Brown and Jones are each in ignorance of the other’s order, but they meet in the crowd where this stock is dealt in, and their orders combine to give the market an appearance of animation. The governors are as determined to stop this sort of thing as the most energetic critic could wish; they send for the two brokers and the facts are revealed. But as each was entirely innocent of wrongdoing, and as no rule of the Exchange and no law of the land has been violated, what is to be done?
They may caution both brokers against accepting any more business from Smith, but Smith is not a member of the Exchange, and hence he is not amenable to its discipline. When his next orders are refused he gives them to some one else, and if the entire Stock Exchange refused to accept business from him he would and could with perfect propriety ask his bank, or a trust company, or an individual to give out the orders under their own names. Finally, if the Exchange authorities were so sagacious as to be able to close to this man every conceivable avenue by which he might approach the Stock Exchange in New York, there would still be left open to him the market in Boston, or Montreal, or London, or any other centre in which the security was listed, and the pernicious effect of his manipulation in these cities would be felt in New York just as promptly and just as harmfully as if they had originated here. I mention this case, a purely hypothetical one, to show how easy it is for manipulation of this sort to find employment, despite all that may be done to suppress it. Perhaps somewhere in the noble army of critics there may be one who can devise a means of meeting this issue. If so, let him stand forth and speak. The Stock Exchange, root, stock, and branch, will be glad to hear from him.[57]
Counsel for the Congressional Committee that is in session as these lines are written seeks to raise another dreadful ghost with which to frighten ignorant people in his alleged “discovery” that a great part of the business done on the Stock Exchange is speculation. He parades through the newspapers the fact that the number of shares bought and sold often largely exceeds the number transferred on the companies’ books. In a chapter on “The Uses and Abuses of Speculation,” I have attempted to show that the more speculators there are in a market, the better and safer the market, and I rest this dictum on the authority of every student of modern markets. In this connection let us consider the opinion of a thoughtful newspaper writer. “There is no doubt,” he says, “that the committee will find that there is speculation in Wall Street, just as there is speculation elsewhere, and in commodities other than in stocks and bonds. The instinct has always been a pronounced human characteristic, being a part of human progress, and the manifestation of it is one sign of the difference between man and the lower sorts of creatures. It is doubtful whether the general gambling impulse can be entirely wiped out, even if the mighty power of an act of Congress be called into requisition. If Mr. Pujo and his committee can abolish speculation in Wall Street (to say nothing of gambling, which is not the same thing), they may be asked to abolish every commodity market throughout the land, for there is plentiful speculation in all of them.
“What seems to bother some representatives of the Pujo Committee is that the number of shares traded in on the Stock Exchange exceeds largely the number actually transferred. It is true, for example, that the number of shares of United States Steel common sold during last year were largely in excess of the number of shares outstanding, the sales amounting to 31,266,208 shares, while the entire number outstanding was only 5,084,952. The ratio of six to one suggests healthy activity in the market for steel stocks. It is conceivable that a block of stocks may pass through many hands before it arrives at its ultimate owner, just as a crop of potatoes passes through a long chain of handlers and buyers and dealers before it reaches the ultimate consumer. Meantime, the number of potatoes has neither increased nor diminished.
“But the potato crop, which easily changes hands six times in a year, is finally eaten. The stocks go on forever. The legitimate holder is not injured if they change hands not six, but sixty times, provided he is secured by proper publicity, which the Stock Exchange assures. The free speculative market is in itself an element of value, and if it were destroyed the investor would be chiefly injured, while future capitalization for the development of the country would be paralyzed.”[58]