The Stock Exchange from Within

by William C. Van Antwerp

Meanwhile, other leading financial institutions took up the same cry. Thus the Dresdner Bank in its report in 1899 said: “The danger which lies in the ban put on speculation, especially in the prohibition of trading for future delivery in mining and industrial securities, will become manifest to the public, if, with a change of economic conditions, the unavoidable selling force cannot be met by dealers willing and able to buy. It will then be too late to recognize the harmful effects of the Bourse Law.” In 1902 the Disconto-Gesellschaft reports: “The unfortunate Bourse Laws continue to be a grave obstacle to business activity.” And again in 1903: “The Bourse will not be able to resume its important economic functions until the restrictions upon trading for future delivery have been removed.”[86]

The lesson to be learned from the failure of the German Bourse Law of 1896, and from the frank recognition of that failure as evidenced by the repeal of 1908, cannot be overestimated in its importance. It is inconceivable that law-makers of to-day may ignore such a warning. I have quoted freely from Professor Emery of Yale University in pointing out the deplorable results of that legislation because his study of the subject has made him the foremost authority. The remonstrances of the German banks and business men have also been cited because they were on the spot; they saw and felt the prostration of German business that followed swiftly on the heels of this law; they were a unit in pronouncing it a wretched failure. In the appendix to this work will be found the report of the Hughes Commission in which the ten experts on that board unanimously reported “the evil consequences” of Germany’s experiment, its “grotesque” operation in practice, and its utter failure.

It is a simple matter for the querulous and discontented element of a community to reason along the lines of least resistance and demand the enactment of laws to right every fancied wrong. But the patient study of such matters, the nice balancing of probabilities, the penetrating investigation of similar experiments elsewhere and the analysis of their bearing on the larger affairs affected by them—all this requires critical judgment of a high order. When such an issue is evolved laymen stand aside for a while, until the evidence of experts has been submitted to minds competent to decide in accordance with evidence.

Applying this principle to the ever-present menace of legislation in America directed against the Stock Exchange, we find each witness testifying to the fact that the German law of 1896, far from benefiting the public, injured it immeasurably. It put a premium on reckless speculation and offensive manipulation; it demoralized the money market; it choked the small banks and made virtual monopolies of the large ones; just in proportion as it stifled speculation it put an end to industrial undertakings that depend for their success upon the spirit of adventure and risk; it drove money and credit out of Germany and into London and Paris; it removed from the Berlin market the support of the bears, thus exposing the whole investment structure to violent collapse. The layman must consider this and the men who make our laws must look before they leap.

Speculators in the region of criticism, whether of theology or economics, who find themselves face to face with a fact too stubborn to fit in with their opinions or conclusions, have but two courses open to them: either to reconsider in the light of testimony the conclusions they have reached, or to denounce and discredit the inconvenient witness. In this instance the inconvenient witness cannot be denounced; his name is legion. Every merchant in Germany will tell you the Bourse Law was a sad mistake and will deplore its enactment. Nor can such witnesses be discredited; therefore the advocate who believes that in legislation lies the remedy for what he conceives to be the evils of speculation must perforce choose the other horn of the dilemma; he must reconsider.

It is a gratifying fact that in America, where law-makers are prone to enact a hodge-podge of laws on every conceivable subject, there has been no such serious mistake made by the Federal Government as that which occurred in Germany. In 1812, five years before the New York Stock Exchange was organized, an act was passed by the New York State Legislature entitled “An act to regulate sales at public auction and to prevent stock-jobbing,” its essential purpose being the prevention of short selling—the bête-noir of all the early amateurs in economics. This was the only anti-speculation act ever placed on the New York Statute books. The act read:

That all contracts, written or verbal, hereafter to be made, for the sale or transfer, and all wagers concerning the prices, present or future, of any certificate or evidence of debt due by or from the United States or any separate State, or any share or shares of stock of any bank, or any share or shares of stock of any company, established or to be established by any law of the United States, or any individual State, shall be, and such contracts are hereby declared to be, absolutely void, and both parties are hereby discharged from the lien and obligation of such contract or wager; unless the party contracting to sell and transfer the same shall at the time of making such contract be in actual possession of the certificate or other evidence of such debt or debts, share or shares, or to be otherwise entitled in his own right, or duly authorized or empowered by some person so entitled to transfer said certificate, evidence, debt or debts, share or shares so to be contracted for. And the party or parties who may have paid any premium, differences or sums of money in pursuance of any contract, hereby declared to be void, shall and may recover all such sums of money, together with damages and costs, by action on the case, in assumpsit for money had and received for the use of the plaintiff to be brought in any court of record.[87]

The effect of this law was precisely the same as that which followed the enactment of Sir John Barnard’s Law of 1734 in England; it did not prevent short selling, it accomplished no useful purpose, and it merely served to enable unscrupulous speculators to “welch” on their contracts. In 1858 it was repealed, and short selling, having demonstrated its usefulness in many ways, was thenceforth declared to be legal in a statute which read as follows:

No contract, written or verbal, hereafter made for the purchase, sale, transfer, or delivery of any certificate or other evidence of debt due by or from the United States, or any separate State, or of any share or interest in the stock of any bank, or of any company incorporated under the laws of the United States, or of any individual State, shall be void or voidable for want of consideration, or because of the non-payment of any consideration, or because the vendor, at the time of making such contract, is not the owner or possessor of the certificate or certificates, or other evidence of such debt, share or interest.[88]

The United States Government’s attempt to regulate or restrict speculation is confined to a single instance, the Gold Speculation Act of 1864, a law which enjoyed a brief existence of but fifteen days.[89] In 1864 there were large issues of paper currency that drove gold out of circulation and caused it to be bought and sold as any other commodity. Thus a large supply of gold fell into the hands of speculators, and as its price rose more than 100 per cent., the public jumped to the conclusion that this portentous increase was due to the operations of speculators, and that the rise could be stopped by prohibiting such practices, hence all gold speculation was forbidden by statute. As a fallacy this was monumental. Professor Hadley tells the story in this way: