“The commission presented a majority report on November 11, 1893, recommending certain statutory and administrative changes. The principles on which these recommendations rested was that, in view of the importance of the interests which were represented at the Exchanges, modifications should be made with caution, and the existing complicated trade usages and methods should not be disregarded; while, on the other hand, there was no occasion for regarding with mistrust, still less with hostility, interference in the free working of industrial forces.”[83]
Up to this point, it will be observed, the German investigators followed precisely the same lines as the English Commission of 1877 and the Hughes Commission of 1909. Mistakes are recognized, but modifications are to be made “with caution.” But it so happened that the recommendations in this respect were not followed. German politics at that time were in a state of turmoil in consequence of the Agrarian agitation, and in the various phases of political expediency that attended the uproar, first the government and then the Reichstag insisted upon more and more stringent enactments concerning legislation against the Exchange, until finally a hostile law was enacted quite out of line with the original recommendations of the committee of inquiry. In other words, the politicians ignored the labors of the committee and took matters into their own hands. The three important provisions of this law were these:
(1) All exchange dealings for future delivery in grain and flour were forbidden.
(2) All exchange dealings for “the account” in the shares of mining and industrial companies forbidden.
(3) An “Exchange Register” was established in which was to be entered the name of every person who wished to engage in exchange transactions for future delivery. Contracts made by two persons entered in the register were declared binding and exempt from the defence of wager.
The immediate effect of this law on the German grain market was disastrous. Futures were not suppressed. The grain trade was simply forced by the law to give up the modern machinery that experience had developed, and go back to antiquated forms of dealing. “It was like taking machinery out of a mill,” says Frank Fayant, “and putting manufacture back to hand labor.” As to trading in securities “for the account,” here, too, the law failed utterly. Even the government—at that time most unfriendly to the Exchanges—admitted in its official reports that the law had “proved injurious to the public,” and that “the dangers of speculation have increased.” We have high authority for a detailed examination of the disaster attending this costly experiment in the remarks of Professor Emery, who tells us not merely how the German law failed, but why:
(1) Fluctuations in prices have been increased rather than diminished. The corrective influence of the bear side of the market having been restricted, the tendency to an inflated bull movement was increased in times of prosperity. This in turn made the danger of radical collapse all the greater in proportion as the bull movement was abnormal. The greater funds needed to carry stocks on a cash basis further increased the danger when collapse was threatened. The result was an increased incentive to reckless speculation and manipulation. Says the report of 1907, “The dangers of speculation have been increased, the power of the market to resist one-sided movements has been weakened, and the possibilities of misusing inside information have been enlarged.”
(2) The money market has been increasingly demoralized through the greater fluctuations in demand for funds to carry speculative cash accounts. The New York method is held in abhorrence by German financiers, who attribute to it, in large part, the wild fluctuations in New York call rates, the frequent “money panics” and the tendency to reckless “jobbery.” In proportion as the new Berlin methods approached the cash delivery system of New York, these evils have appeared there.
(3) The business of the great banks has been increased at the expense of their smaller rivals. The prohibition of trading for the account made it difficult for the latter to carry out customer’s orders because the new methods required large supplies of both cash and securities. Furthermore, an increasing share of the business of the large banks came to be settled by offsets among their customers, and the actual exchange transactions became a proportionally small part of the total transfers.
(4) This has a twofold effect. Business within the banks is done on the basis of exchange prices, but these became more fluctuating and subject to manipulation as the quantity of exchange dealings were diminished and were concentrated in a few hands. The advantages of a broad open market were lost. The object of the act had been to lessen the speculative influence over industrial undertakings. Its effect was to increase it.
(5) Finally, the effect of interference, increased cost, and legal uncertainty was to drive business to foreign exchanges and diminish the power of the Berlin Exchange in the field of international finance. The number of agencies of foreign houses increased four or five fold and much German capital flowed into other centres, especially London, for investment or speculation. This in turn weakened the power of the Berlin money market, so that even the Reichbank has at times felt its serious effects.[84]
Concerning the “Exchange Register” (which the government has now abolished as a complete failure) and the effort to keep the public out of the speculative markets, Professor Emery says:
In one sense the fate of the famous exchange register is laughable, but in a deeper sense it is genuinely sad, for the object was a worthy one and the new scheme was adopted with high hopes. Its failure was inevitable, since it did not remove the temptation to speculate. The men who felt this temptation most, and whose position least warranted their yielding to it, were of course the very last men to have themselves registered. In fact the whole public revolted. The number of registrations never reached four hundred, which number would not begin to cover the banking and brokerage concerns. The number of “Outsiders” registered never reached forty. Even the conservative banks had to choose between giving up all such business and dealing with non-registered parties.
(1) The uncertainties of the new situation were most likely to exclude the cautious and well-to-do from participation in the market. The reckless gambler of small means was less likely to be disturbed in his practices.
(2) The act aimed to establish legal certainty by means of registration. It proved a direct incentive to fraud. The customer was not legally liable on his contracts; therefore, every reckless and dishonest little plunger, who could get a broker to trust him, could take a “flyer” with everything to gain and nothing to lose. Cases increased rapidly in the courts and the worst element of the public was active to the relative exclusion of the better. Instances even occurred where a man would play both sides of the market at the offices of two different brokers and simply refuse to settle on the losing contract.
(3) As affecting this phase of the question, references should be made again to the transfer of business to foreign exchanges. Morally and socially it is as bad for the German public to speculate in cheap mining stocks on the London Exchange as to do so at home. The flow of German funds into the market for South African securities would indicate a further way in which the purposes of the act were defeated.
(4) Finally, the question must be faced of the effect of eliminating the public from the speculative market even if it could be accomplished. It is supposed sometimes that such a result would be all benefit and no injury. On the contrary, the real and important function of speculation in the field of business can only be performed by a broad and open market. Though no one would defend individual cases of recklessness or fail to lament the disaster and crime sometimes engendered, the fact remains that a “purely professional market” is not the kind of market which best fulfills the service of speculation. A broad market with the participation of an intelligent and responsible public is necessary. A narrow professional market is less serviceable to legitimate investment and trade and much more susceptible of manipulation.[85]
It is not surprising that such a law, enacted to meet political clamor, in defiance of the recommendations of the committee, and in the face of all the economic experiences of the century, should have proved a fiasco in a double sense. Not only did it fail to accomplish its purpose, but, as we have seen, it brought about a new chain of evils vastly more distressing to German commercial development than all the evils that gave it birth. The report of the Deutsche Bank for 1900 said: “The prices of all industrial securities have fallen. This decline has been felt all the more as, by reason of the ill-conceived Bourse Law, it struck the public with full force without being softened through covering purchases of speculative interests.” Four years later the same bank reported: “A serious political surprise would cause the worst panic, because there are no longer any dealers to take up the securities which, at such times, are thrown upon the market by the speculating public.” In 1905 the bank again forcibly urged the revision of the law in these words:
“In our last report we referred to the great danger which may be brought about through delaying the revision of the Bourse Laws, and we are now pointing to it again because we consider it our duty to impress again and again a wider circle of the public with the economic value of the Stock Exchange and its important relation to our financial preparedness in times of war.”
Again, the following year the bank kept pounding away on the same theme: “If it had still been necessary to furnish proof of the regrettable fact that the German Bourses are no longer able to accomplish their task—equally important to the welfare of the people as to the standing of the Empire—the trend of events during the past financial year in general, and the result of the last German Government issues in particular, would have furnished that proof.”