That they will continue so to increase is open to no doubt as long as England’s abstention from war is assured; but if there should arise even the possibility of war, it would result in an embarrassment of credit with terribly serious results, such as have never been dreamed of in the world’s history. The many years of peace between the great powers, the many new countries that have been opened to commercial development, and the countless new fields of industrial endeavor that have come into being while this peace has lasted, have served to create a British credit situation huge and complicated beyond all precedent. Any serious interruption or derangement of so vast a system would find a very different situation from that which existed on the Continent in 1870. It would be appalling.
And yet, ere we go too far afield in search of the shivers, the observer must bear in mind that this great credit system of which London is the banker and clearing house, in reality knits together in its international web all the great powers, and binds them so closely together as to guarantee, in some measure, the preservation of peace. That peace hath her victories, and that the creation of wealth through industrial pursuits may serve in this way to prevent armed strife—these are, after all, encouraging indications quite as strong as treaties. To-day the bankers of London and Paris are the war lords of creation. Both these centres loan money, on early maturing bills, to all the world. Stop London’s discounts through an outbreak of war, and gold would pour into that centre at the rate of $200,000,000 a month. “It might be possible to starve her population,” says a recent writer, “but no combination of the Powers could bankrupt London. In the event of war Paris could bankrupt Germany in a week. No war could disturb the credit of the Bank of France; but the German Reichsbank would inevitably go down in the smash. All Germany’s capital is in her own shop. She is doing a great business, and, quite properly, a great part of it on borrowed money. But if her loans were called, she must put up the shutters.”[113]
Let us now observe the London broker at his work. The Stock Exchange, as has been described, settles nearly all of its transactions twice a month, upon officially appointed “account days,” which fall about the middle and the end of every month. Smith, a broker, receives an order to buy, let us say, 500 East Rands, and goes to a jobber who makes a specialty of that department. The jobber, Jones, is a wise man and a clever trader, who knows all there is to know about supply and demand and regulation of prices to meet them, otherwise he would soon be out of business. Smith does not tell him what he proposes to do, but asks for a price, which in normal markets Jones quotes at 3½ to 3-9/16, this being the method of implying, in pounds sterling, that he is prepared to buy at 70s., or to sell at 71s. 3d. The broker will probably say that the price is too wide, whereupon Jones quotes a figure “close to close,” reducing the quotation 1/64 each way, at which figure the transaction is closed.[114] Smith enters in his book that he has bought of Jones 500 East Rands at the price stated, and Jones, that he has sold at this price to Smith. The customer is then advised of the transaction, and next day he receives his stamped contract, with details covering the cost of the shares together with brokerage and other expenses, if any, and informing him of the date of the next account day, when payment will fall due.
Beneath the main floor of the Exchange is the settling room, and here the clerks of broker and jobber check the transaction that has taken place. Two days before the account the name of the person for whom the East Rands were bought is written on a ticket—hence “ticket day”—and handed to the Stock Exchange Clearing House, which, after the manner of the Stock Exchange Clearing House in New York, eliminates all the intermediaries through whose hands the shares may have passed ad interim, and puts the selling broker into direct communication, by passing him the ticket, with the broker of the buyer. This done, the seller receives the ticket with the buyer’s name on it, and prepares a transfer deed as the law requires.[115] Had the client bought the shares of an American railway instead of East Rands, the procedure following the purchase would have been somewhat different, because American shares bear a form of transfer on the back which requires the signature of the seller only, and which becomes, by reason of this fact, almost as readily negotiable as bank-notes.
In London consols can be dealt in in this way, but the customary form of conveyance of the funds, and of Indian and Colonial stocks, consists of a brief transfer on the books of the bank acting as agent for the particular issue. Thus the Bank of England keeps the books for consols and India government stocks, and sellers or their attorneys must attend personally at the bank and sign the transfer. The bank insists that every seller must be identified by a member of the Stock Exchange, whose signature must be registered there, and it places full responsibility upon these members for correct identifications. This was long a sore point with the Stock Exchange, and it was fought to a finish in the courts, but the Bank won “in a walk.”
The transaction just cited in the case of East Rands is based on the supposition that the original buyer proposed to “take up,” or pay for his shares in full. If he is merely a speculator, hoping to sell at a profit before the settling day and pocket the difference, a somewhat different procedure is involved, especially if at the approach of settling day the hoped-for rise has not appeared. In that case he asks his broker to “carry-over,” “contango,” or “give on,” the shares he has bought, and the broker, to whom this is an hourly occurrence, naturally has at his finger tips ample facilities for doing what is required.
Going to the jobber, he says he wants to “give on” five hundred East Rands. The jobber says he will “take them in,” which means that he will lend the money until next following settlement, charging interest at, say, 5 per cent., while the broker in turn charges his client 5½ per cent. and takes the interest difference as compensation for the service. The buyer’s speculation is thus extended to the next settlement, and the statement given him shows that he has been debited with the interest upon the “making-up price,” at which the transaction is arranged. The rate of interest is called the “contango,” and “contango days” are the two days during the settlement when these arrangements are in effect:[116]
“The Stock Exchange has witnessed many periods of wild excitement and speculation, reminding one of the famous South Sea Bubble—perhaps the most remarkable “boom” on record—the story of which, however, has been so often and so vividly told by Smollett and later writers that we need only refer to it here. Just before the middle of the last century came the great railway boom. It began about 1834, and within one year more than six hundred propositions for railway lines in the United Kingdom were placed before the public, the nominal capital required being over 600,000,000 pounds sterling. Panic, of course, followed the boom; and, as an example of the rapidity with which prices moved, it may be mentioned that the Great Western Railway stock rose to 236 in 1845, and fell back to 55½ within three years, while Midland stock rose to 183 and fell to 64. After the railway boom and panic came several banking crises, of which the worst were those identified with the names of Overend, Gurney, & Co. in 1866, and of Baring Brothers in 1890. For five years after the latter, the Stock Exchange lay fallow, with business and credit worn to a shadow. Then came the famous Kaffir boom, of which it may be said that Cecil Rhodes stood out as the colossus. The madness of that boom has rarely been equaled, even in the history of the Yankee market. It makes one hot even on a cold day to think of the time when, as a clerk, one tore off coat, waistcoat, collar, and tie in order to run the faster in the settling room beneath the Stock Exchange, “passing names” (as it is technically called) in connection with that gamble. A Rugby football scrum was child’s play to the continued struggles; and, after the most violent excitement had subsided, there were always fights to be settled before one went upstairs to work the whole night through.
“A period of collapse followed this episode. After various minor upheavals there came in 1910 the rubber boom, which, perhaps with the Kaffir Gamble, more nearly recalls the excitement of 1720 than any other. The rubber boom had not, indeed, the same noble backing which the South Sea Company boasted; but clergymen and ladies were prominent operators as ‘bulls,’ ‘stags,’ or both.”[117]
The thought will no doubt occur to an American who reads these pages, whether the day will come when American banking will extend, as in England, to every quarter of the globe, and whether the New York Exchange, like its London prototype, will become a centre of the world’s commercial activities. This is a far cry, of course, and the answer will not be known in our generation. But it may be said without fear of contradiction that when a great nation like ours, in which the spirit of enterprise is manifest, has reached the point where its own domain has been developed, when it has perfected a sound banking and currency system, when it has recovered its lost shipping and mastered those economic lessons that the future has in store, it may confidently be expected to push out into new lands and supply their demands for capital.
Already we have in America a world’s storehouse of necessary commodities, with wealth and intelligence that increases by leaps and bounds. No nation stands a better chance of escaping the horrors of war and its ruinous losses. China remains a fertile field for commercial endeavor in the years to come, and our neighbors on the south may one day know us more intimately. The retrospective eye, surveying commercial and financial America in the sixties and contrasting it with America of to-day, sees clearly that progress has been made, and looks beyond toward progress to come. In any case civilization must advance and trade expand, and American energy must advance and expand with them. I wish I might visit Wall Street and the Stock Exchange a century hence.[118]