The total amount of information that is thus laid before the public is as complete and as instructive as could be desired, and yet in London and on the Continent such information is never published, although the two leading financial newspapers in London, because of the immense field covered, actually publish a mass of miscellaneous news and gossip that exceeds any similar American effort. They make it pay, too; dividends declared by these newspapers are altogether unapproached by the American financial press. The essential information lacking, however, is the number of shares dealt in, and at what prices; even if they had a thoroughly good ticker system I doubt if this information could be recorded, because the volume of business done is too great. It is encouraging in this connection to note that so eminent an economist as M. Leroy-Beaulieu frankly concedes our superiority in these matters over the practice of the foreign Exchanges and urges their immediate adoption abroad.[108]
The second serious objection that may fairly be lodged against the London system applies, as I have said, to the increased inducements offered to foolhardy and reckless speculation by the plan of deferred settlements. Whether members of the various Stock Exchanges in the world’s capitals like it or not, they must recognize the fact that there are evils in speculation just as there are benefits, and that these evils are becoming a subject of increasing comment. The recent attempt to repress speculation in Germany and the conditions which led to the appointment of the Hughes Committee in New York are signs of an aroused public sentiment that cannot be ignored.
With these examples before them, members of Exchanges everywhere must realize that if it lies within their power to discountenance and discourage foolhardy ventures into speculation by persons ill-equipped to undertake them it is their plain duty to do so. The London Stock Exchange’s system of fortnightly settlements clearly does not aim at this highly desirable object as well as the method of daily settlements employed in New York, for it requires no student to see that by postponing the settlement risks will be incurred that would be impossible if a reckoning were called for each day. Moreover, the fact that there are ten failures on the London Stock Exchange to one in New York furnishes ample proof that the precautionary restriction imposed by daily settlements is quite as important to the welfare of brokers as it is to the protection of the public.
As a matter of fact, failures of brokerage houses are peculiarly abhorrent to every one concerned. In the Paris Bourse a broker must give security at $50,000, and his bankruptcy in all cases is considered a fraudulent one, rendering him liable to arrest. The French Agents de Change enjoy an absolute government monopoly, and naturally in the circumstances they are held to the strictest accountability; but aside from that a tendency is plainly discernible nowadays in all large financial centres to demand of stockbrokers on the Exchange a rigid adherence to such business methods as will prevent bankruptcies of dealers to whom the public entrusts its money.
The danger of the London fortnightly settlement system lies not in the deferred delivery of securities, but in the fortnightly settlement of “differences.” A London broker may be actually bankrupt, yet if he is desperate or unscrupulous, knowing that his differences will not have to be settled for a fortnight, he may plunge into speculative risks fraught with the utmost danger. If the market goes his way he is saved; if it goes against him, he is still no more than bankrupt. But in his fall, as a result of this dishonest venture, he may conceivably ruin many others, and a chain of disasters may follow his excesses. It should be said in this connection that London jobbers and brokers keep a sharp watch on each other; it is extraordinary how quickly the news gets about if this man or that is over-extended. Again, either broker or jobber may discriminate in his dealings, taking care to avoid those against whom there is a suspicion.
Notwithstanding the points of merit in the New York system, at some time in the future when local Stock Exchange business has expanded to proportions approaching those of the London Exchange, modifications must be made. If banks and brokerage houses are given a week or ten days to settle transactions, everybody will have a tolerably clear idea of what money will be required, and lenders will be enabled to make provision. London passed through the 1907 panic, under this arrangement, with a maximum rate of 7 per cent., while we in New York would have been glad to pay 200 per cent., and this, despite our deplorable currency system, could not have occurred had there been ample time for the banks to make preparations.
From these observations it may be suggested that perhaps the time will come when the governors of the New York Stock Exchange may find it necessary to put in force a combination of daily settlement of differences, such as we have at present, with a periodical delivery of stock such as they have in London. Transactions for cash need not be affected by this arrangement, nor would the public lose any of the protection it now enjoys. In any case, if such a plan resulted in minimizing those violent fluctuations in our call-money market which have so long afflicted us, it would prove a permanent blessing.
As there is no currency system anywhere in the civilized world so crude and inadequate as that of the United States, it is unnecessary to say that London jobbers and brokers experience none of the difficulties with money markets that occur periodically on this side. The carry-over on the other side of the water is frequently a matter involving immense sums of money, but rates fluctuate normally and are in large measures governed by automatic processes both simple and sane. Perhaps the less said about similar conditions here the better. The spectacle presented by strong and solvent houses ransacking the street for funds secured by prime collateral and bidding 25, 50, and even 100 per cent. for accommodation—something that has occurred within the last decade and may conceivably occur again—is one upon which the candid American observer does not care to dwell; such a man may well look with longing and envy to London, where capital, credit, and currency are so firmly established that the Bank of England dominates and controls all the money markets and gold movements of the world, lending freely at home and abroad whenever funds are needed, and acting as a civilizing force in supplying with British funds the commercial needs of all new countries.
In this connection we may point out the method of borrowing from the banks the funds required to carry speculative commitments in London. It was formerly the practice for the banks to lend large sums to brokers, who employed the money inside the house in carrying over the accounts of their clients. This class of business is still large, but nowadays clients are not always satisfied to borrow through brokers, and not infrequently they go direct to the banks and borrow from them. This has the effect of disguising the real character of the business. To all appearances the securities have been bought and paid for, and the trade seems to be an investment, but the client has, as a matter of fact, “pawned” the security with a bank.
This practice is inconvenient in a way, because where the jobbers in important markets formerly compared notes at each settlement and were thus enabled to form a pretty good idea of the condition of the speculative account, it is less easy to do so nowadays, when so many clients carry on their own borrowing. A similar tendency on the part of the public is noticeable in New York, although, of course, the daily settlement on this side obviates the necessity for arriving at conclusions in advance as to the requirements of funds.