But, you will say, this is all very well in its application to a grain or cotton exchange, but how does it apply to the Stock Exchange? You concede that scientific price-making for commodities like grain and cotton is highly necessary, but you do not see that the same necessity exists for stocks and bonds. You feel, no doubt, that the one has to do with food and raiment and is therefore indispensable, while the other merely serves to stimulate speculation and gambling, and hence is altogether unnecessary. Now, in order to explain the error in this point of view, let us first see how bits of paper, called securities, came into being.
Long after Europe had emerged from the dark centuries following the fall of the Roman Empire, the needs of states and governments impelled their rulers to resort to credit, and it was discovered that the simplest way to do it was to issue securities, that is to say, certificates of the debt. Next, it was found that in order to insure success for these operations, a market was required. Intermittent or temporary sources from which credit could be obtained was not enough; constant sources of credit were essential, and, as these constant sources lay in the savings of the people, public markets in which investors could tell the value of their investments from day to day followed as a natural course.[6]
As time went on—necessarily the evolution was gradual—it was learned that companies having to do with all forms of business enterprises might also be formed on the same basis. The development of the world’s business outgrew its infancy days of private partnerships, and corporate organization of necessity took their place, now that the discovery of credit, through the use of securities, had pointed the way. This corporate organization, which combines the small savings of thousands into large sums and gives to the masses an intelligent directing force at the hands of highly trained experts, depends for its existence on the sale of its securities.
In order to understand that there can be no industrial progress without the issue of securities let us consider the locomotive engine. When in the early 1800’s it became apparent that this contrivance could be used to operate an entirely new method of transportation, people looked upon it, at first, as an interesting but quite useless contrivance, because to build railroads was an expensive undertaking and nobody had enough money to finance it. The inventor’s genius was not sufficient; another power was necessary to take it out of purely scientific hands and give it practical impulse. That power was credit; the way it was obtained was through the issue of securities, and the way securities were made popular vehicles of investment lay in providing a daily market for buyers and sellers.
As a natural result, organization followed. Capital was consolidated, the rights of owners were established, a great impulse was given to various new forms of inventive genius and powerful commercial enterprises of all kinds sprang into being. With this development the market-places or Stock Exchanges without which capital could not have been enlisted kept pace. It was found that transactions in the securities which represented the people’s money should be rendered easy, quick, and safe, and that the very essence of the Exchange’s functions consisted in protecting the people who were the actual owners of the enterprises by rules that would insure this result.
If we look about us to-day we find in all the great centres of the world Stock Exchanges at work in this important field. We find that just in proportion to the confidence which a country feels in the strength and uprightness of such a market, so enterprise goes forward with vigor, and so the national wealth increases. The success of one enterprise in its appeal to public credit through the medium of the Stock Exchange invariably leads to another; thus commerce and industry develop. Securities in America alone, aggregate the enormous total of forty-three billion dollars.[7]
Now, as our country’s entire physical properties are valued at one hundred and thirty billions, it is apparent (after making allowances for securities that are held by holding companies and hence are duplicated in the foregoing estimates) that the nation’s securities represent more than a third of the nation’s wealth. Again, almost two million people are owners of these securities. The Journal of Commerce and Commercial Bulletin published Dec. 26, 1912, official statistics for 247 of the large corporations. This tabulation revealed the fact that the stock of these 247 corporations alone was owned by more than a million stockholders, and it is therefore quite safe to infer that the number of shareholders in all American companies approaches, if it does not exceed, two million. I think it will not be disputed that where two million people own a third of the nation’s wealth, they are entitled, just as the farmer is, to a perfectly constructed price-making machinery that will enable them to invest their savings, or sell their holdings. Having learned the difficult lesson of saving their money and the still more difficult one of increasing their surplus capital by judicious investments, are not these people entitled to the safeguards afforded by a Stock Exchange? “There is no other way in which true prices can be made,” says Mr. Horace White. “If the quotations so made are not precisely the truth in every case, they are the nearest approach to it that mankind has yet discovered.”[8]
Think a moment. Until the last century property and trade were so insecure that, if a man saved money, he had to hide it, or lend it through money-brokers at such usurious rates as would compensate him for what he lost in bad debts. When Dr. Samuel Johnson wrote his dictionary in 1776 no such word as “investor” was known to the English language in a financial sense. There were pirates by sea in the old days and brigands on land. “Sovereigns and nobles,” says the editor of the Economist, “extorted loans only to repudiate them; governments supplied their needs by debasing the coinage, or by issuing worthless money.”[9] To-day all this is changed by banks and Stock Exchanges. Yet, despite these great inventions, capital is and always will be timid, and the small investor particularly must be protected and safeguarded in every possible way.
These small investors, no less than the large ones, require great convenience and promptness for their operations; they live in such widely remote parts of the country as to necessitate the placing of full reliance on prices made by the Stock Exchange; they must have the most accurate information; they must know that their brokers are working to obtain the best knowledge of supply and demand; they want prices fixed by the most scientific competition and by the largest possible number of competitors—brokers, speculators, and investors alike; they require a market in which they can sell and get their money at once; above all things they must know beyond peradventure that they are dealing with reputable men who uphold a fine standard of honor. These are added reasons why the Stock Exchange exists.[10]
If it did not exist, there would be no standard market for a large part of the country’s material wealth, indeed, as we have seen, a very great deal of this wealth could not have been created at all. At the risk of repetition let me say that the investor on the one hand, and the patent or the railway on the other hand, have nothing in common. Left to themselves, they would never meet; they would be useless, because resources and money must be brought together in order to create wealth. A primary function of the Stock Exchange is to bring them together, and by standardizing prices, create values. Similarly, the investor, without the Stock Exchange to guide him, would have nowhere to turn for a fair price secured by competitive bidding. He might turn to his local banker, or to individual and unorganized brokers, and trust to their honesty to invest his savings for him, but the local banker and the isolated broker would then be in the same position as the commission dealer and the middleman who played such havoc with that peach crop. It is painful to conceive such a situation.