What is of especial interest to a Wall Street man who looks over the enormous list of London’s Stock Exchange securities is the function and method of the Listing Committee that has to pass on all these concerns before admitting them to the House. In New York the Stock Exchange’s “Committee on Stock List” insists that the applicant company must be able to show at least one year’s earnings—a most important condition. In London somewhat different conditions prevail. The committee looks into the bona fides of an applicant company and makes inquiries concerning the people behind it, but it does not require that it shall have done business for at least a year and show a year’s earnings, because if that were insisted upon as a condition precedent, the banks would not finance it, nor the public support it. They have no “curb market” in London where a new company may pass through a seasoning or preparatory period while awaiting admission to the Stock Exchange, and as a settlement day with Stock Exchange authority is rigorously insisted upon by those who provide the funds, it follows that companies must be admitted at least to “official settlement” privileges as soon as they are organized.
One point upon which the London Exchange authorities lay great weight in the admission of new securities, consists in obtaining assurances that a sufficient number of shares has been allotted to the public before admission is granted. This is a thoroughly wise precaution, designed to prevent corners and, as far as possible, improper manipulation. Another very interesting, and I may say, a very wise precautionary measure of the London method of listing, is the prohibition placed upon vendor’s shares—a plan that might well be adopted in New York. In London, for example, a vendor—i. e., a seller of the property—who receives shares in consideration of the sale, cannot have his shares listed until six months have elapsed after shares of the company have been offered to the public. The protection afforded the public by this plan is obvious, and requires no further comment.[109]
If the London share certificates required, as in New York, only a simple endorsement for transfer, much of the annoyance and confusion that sometimes takes place would be avoided. The market for mining shares, for example, had until 1888 only a very small place in the London Stock Exchange, but the discovery of gold in the Witwatersrand changed all that, and by 1894 the number of brokers engaged in handling mining shares actually exceeded those in any other department. It was found necessary to provide a special day—one day before the regular settlement commenced—for carrying over bargains in mines, but owing to the fact that mining shares, like nearly all securities in London, were “registered” and not “to bearer,” the clearing house was taxed beyond its powers by the immense volume of work thrown upon it, and once or twice it broke down completely.
An extraordinary number of small investors bought fractional shares; the offices of the companies were not prepared for the rush and could not handle the large carry-over, hence for a time the “Kaffir Circus,” as the speculative mania of the day was called, promised to embarrass seriously the whole Exchange machinery. All this could have been avoided by making the shares “to bearer.” Yet the London authorities feel—and not without reason when we consider the volume of their business and the remoteness of their clientele in many instances—that bearer certificates are not safe, and that what is lost in the time spent in transferring certificates is amply compensated in the resultant security against fraud and forgery.
It is interesting to note in connection with the enormous business done on the London Exchange—a business which makes New York’s high totals seem insignificant—on what a vast scale London’s exports of capital are conducted. This may properly be noticed here, since these capital exports have great economic significance and bear close relationship to the transactions on the Stock Exchange; indeed were it not for the work done by the Exchange in providing markets and settlements and all the details of the security business, it is fair to say there could be no such public issues of capital. In 1910, for example, new capital expenditures amounted to the extraordinary figure of £267,439,000, of which £60,296,500 was expended in the United Kingdom, £92,378,100 in the various British possessions, and £114,764,500 in foreign countries. Of the grand total £49,974,000 went into foreign railways, £10,096,000 into Indian and Colonial railways, £35,631,600 into Colonial government loans, £18,431,000 into foreign government loans, £18,343,100 into explorations, and £19,143,800 into rubber.[110] The year 1910 was, of course, a year of great prosperity in England, and it was a year made famous by speculative activity in various directions, especially in rubber, so that the totals given above are larger than they had ever been before. But the point for us in America to bear in mind in considering these figures is their immense significance as showing England’s complete supremacy in capital, credit, and the art of banking.
The immense number of securities dealt in, coupled with the speculative propensities of the people and the ramifications of British finance, naturally go to make that Exchange a peculiarly sensitive and vulnerable spot, and the American visitor may well wonder what would happen there if the ancient bogy of war between England and any other first-rate power should some day become a reality. War is, as every one knows, the greatest destroyer of capital. England’s little Transvaal war cost $1,000,000 a day, and by the Chancellor of the Exchequer’s report resulted in a total expenditure of $1,085,000,000. The war between Russia and Japan cost upward of $3,000,000 daily and $2,000,000,000 all told. What a great war would cost England if that country were to cross swords with one of the powers may be conjectured; what would happen in the Stock Exchange taxes the imagination.
In the month in which these lines are written the London Stock Exchange and all the continental Bourses are having their periodic scare over a war in the Balkans. British consols have fallen almost seven points from the high price of the year; French rentes seven, German 3s. six, and Russian 4s. seven.[111] These are very severe declines for government securities of that class, and if they can fall abruptly over difficulties in the Balkans, what would happen were these countries themselves involved in war with foemen of their own class? Russian consolidated 4s. fell eleven points and Japanese 5s. twelve in the first month of the Manchurian war, and in our war with Spain, Spanish 4s. fell from 61 to 29¾. If such things can happen to government securities, what would happen to all the 9000 odd industrial and kindred securities dealt in on the London Exchange should England take up the sword with, let us say, Germany? We are not left to conjecture on this point, for in the week that has just witnessed the Balkan scare there have been some really tremendous slumps in securities—collapses out of proportion, it would seem at this distance, to the magnitude of the political issues threatened.
In Paris, for example, there has just been witnessed a two-day break of 185 points in Sosnoviche Collieries, a one-day break of 165 points in Bakou Naphtha, a decline within a few hours of 115 points in Russian Naphtha and overwhelming breaks of from 50 to 150 francs in Paris Light and Transport shares, Rio Tintos, and Electrics. No such demoralization has been seen in any foreign financial market within twenty-five years. This slump was no doubt due in large part to a top-heavy speculative position and to consequent financial congestion, but it was the Balkan war-cloud that caused the real difficulty none the less, and it supplies an outsider with an idea of what may happen in a real emergency.
Foreigners are prone to speak of Yankee speculation as foolhardy and reckless, as no doubt it is at times, but never in American history has there been a panic with anything like the severe declines, in so brief a period, as those just recorded. For that matter, we in America have never experienced a boom in any sense commensurate with London’s rubber boom of 1909–10, nor a collapse as sudden and as thoroughly deserved as that which followed it. Again, London’s Kaffir Circus of 1894–5, and the furious speculation in Panama shares in Paris in the early nineties, have had no parallel in American stock markets. This is only another way of saying that the speculative mania which seizes upon nations at periodic intervals is not a matter of latitude and longitude in any sense.[112]
In trying to picture what would happen in the London Stock market should such a war as that which Englishmen are always discussing really occur, we must take into account not only the mass of securities that would be directly affected, but also the great burden borne by London banks and bankers in security issues all over the world. On another page we have seen that London’s capital expenditures on new issues in various quarters of the globe in a single year exceeded £267,000,000; in the quarter just closed (September, 1912), these disbursements ran £25,000,000 above the previous year.