THE NEW YORK STOCK EXCHANGE H. S. MARTIN ; t \ 38 a^ocneU Ittiueratg Hibratg Sttjaca, Newjotk ..Or.. Vi, rRo\?evts P >\ CORNELL UNIVERSITY LIBRARY 924 093 830 481 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924093830481 THE New York Stock Exchange A Discussion of the Business Done; Its Relation to Other Business, to Investment, Speculation and Gambling ; the Safeguards Provided by the Exchange, and the Means Taken to Improve the Character of Speculation. By H. S MARTIN Author of ' The New York Stock Exchange and the Money Trust " ' The Exchange as Seen from its Gallery ' New York 1919 Copyright 1919 By H. S. Martin All Rights Reserved Typography, Presswork and Binding by Francis Emory Fitch, Incorporated, of Forty-Seven Broad St., New York TgiS " u n *o^ — ^^fe a w a> k ^ 'H-c a S^S *a u t* 8 .a *fg 3 IS t- 1 " c ■aw «y d X SS<3° n 3 « «-S S 2 B " u) £ O C V bo ||H« ti 3 « « ^ a u-c-5 t- "S* S 5 en t- 03 Po£3 .C "3 £■ e 3 S5 t— i >> Si 3 "* ° K U t> E- T3 41 J= s w H C H & •C rt m >» P= O £+. e.a E- O ■ S u» £ ■< •D • jG ° o OS C ffl °U M o ■SS^-2 FOREWORD The New York Stock Exchange can The be said to have been begun 125 years Beginning ago — 100 years of which it has of the passed under a formulated Consti- Exchange tution. Its beginning was three years after the adoption of the Constitution of the United States and the first meeting of Congress, three years after George Wash- ington first took the oath of office as President; before coal had come into common use, while houses were still lighted by candles; 33 years before the first steam railroad; 53 years before the first tele- graph message; 64 years before the first ocean cable; 74 years before the first telephone — when the whole population of the country was less than that of New York City now; when the country's area was not one-fifth of what it is at present; when not even the wildest dreamer could have imagined trains running at sixty miles an hour, wireless telegraphy, articulated speech transmitted thousands of miles, aerial navigation, or the gigantic business enter- prises of the minute. The Exchange is the great security Business market of this country; the business on the done upon its floor is wide-spread Exchange in its interest and effect. The Hughes Committee reported in 1909 that "only a small part of the transactions is of an ii NEW YORK STOCK EXCHANGE investment character." The 1912 Congressional Committee reported "that in large measure trans- actions on it are purely speculative." Is it a gambling place, as some Gambling or assert, or a necessary link in the Business financial chain, as others claim? Place Is speculation any different from business? Is speculation the same as gambling, or is there a wide difference? If specula- tion is not gambling, should it be restricted because of inherent tendencies toward evil? If not restricted should it be encouraged, and its fundamental principles taught? Does speculation in stocks differ from investment? Is cash speculation less of an evil than margin speculation? Is selling for a decline, or shortselling an evil? Ought speculation and the Exchange be controlled by Government? These and other questions arise and should be ex- amined into. Examination shows that all busi- Results of ness is speculation, and that the busi- Examination ness of speculation is a trade, just Into These as any other business is a trade; Questions that to be successful in a business or trade, the laws of that business or trade must be known and followed. Examina- tion also shows that the laws of business govern in speculation; that what causes success or failure in business causes it equally in speculation; that while unhappy and regrettable results have followed foolish speculation by unfitted persons, earnest men have sought, have partly provided, and are seeking further provision against their occurrence. FOREWORD iii Examination also shows that most Progress — men are conscious or unconscious Impossible speculators — either they personally Without use their money in speculation, or Speculation others use it for them; that the great business nations are the great speculating nations — that progress is impossible without it; that a nation without Stock Exchanges is a nation without commerce or advancement. Examination also shows that investment and specu- lation differ in no essential details; that speculation is never gambling, and gambling is never specula- tion — their nature is unlike, their results dissimilar; that the very wide distribution of material wealth, the constantly increasing per capita of wealth, have flown out of speculation. Examination also shows that progress would have been impossible without the formation of corporations and the invention of the stock certificate; that these have made it pos- sible for the poorest and least intelligent to become partners in business with the richest and most intelligent; that the Exchange has been the great instrument in producing this- result; that it has helped honesty in trade; has steadied prices; has put the man with small capital on the same footing in trading as the man with large capital; and it has tried to earn the good will and high regard of its neighbors. Examination also shows that while now and again an unworthy mem- Integrity ber is discovered, the standard of integrity and business morals on the Exchange is as high as in any business in the world. Examination also shows that the interest of the Exchange has always been to lessen unwise specu- iv NEW YORK STOCK EXCHANGE lation, to secure honest corporation manage- ment, to safeguard stockholders; that it has been the pioneer in efforts towards those ends, and has secured more in this direction than the acts of the Federal and State Governments; and that its rules are intended to prevent, and its Committees are working for the prevention of wrongdoing and of unwise speculation. CONTENTS Chapter Page Foreword i 1. Prejudice Against Markets 1 2. Business and Speculation 19 3. Is Speculation Desirable? 37 4. Evils of Speculation 49 5. Speculation and Betting 61 6. Investment, Speculation and Gambling 69 7. Wealth; Money; Securities 85 8. The Small Investor 99 9. Market Opportunities Ill 10. Margin Trading 129 11. Partnerships and Corporations 143 12. Broker and Customer 153 13. Money, Stocks and Bonds 169 14. Money Used in Speculation 181 15. Short Selling 1 ... 195 16. Tools and Terms of Wall Street 211 17. Cautions and Precautions 221 18. What is the Stock Exchange? 229 19. The Association 233 20. The Place of Business 243 21. The Business Done. 249 22. The Exchange as a Moral Force 257 23. Appendix 269 ILLUSTRATIONS Page Broad Street in 1797 Frontispiece A Trading Post on the Floor 18 Original Agreement of 1792 36 Telegraphers on,Exchange Floor 47 A Piece of Tape and Explanation thereof 48 Map of Floor of Exchange 68 Floor of the Exchange 84 A Form of Stock Certificate 98 Part of the Bond Crowd 128 A Form for Registered Bond 152 A Form for Coupon 180 Floor of Exchange decorated for Liberty Loan Rally 194 Ticker and Key-Board 220 The Stock Exchange '.'. 228 Map of Wall Street 242 Key to Map 248 PREJUDICE AGAINST MARKETS °'In this age of the world, are we to shut our eyes to every teaching of the English speaking race? Are we to con- fess ourselves more ignorant than were our forefathers two hundred years ago? What is the history of English commerce? What has enabled it to grow and prosper, carry on its wings the light of civilization and religion and truth, all over this world? What has done it, sir, but the energies of the great commercial bodies of the world, speaking through their chambers of commerce and their boards of trade? ' ' Senator (now Chief Justice) White, United States Senate, 1892. Speculation was born when men Origin of first exchanged one desirable object Speculation for another — eatables for wearables, necessities for ornaments. As in- tercourse widened, and means of communication increased, the exchange of these commodities became the vocation of certain men — natural traders; gradually this class of men bought ahead and stored for future sales, or sold ahead and bought for future delivery; to do this they must possess exchangeables of equal or about equal value to the commodities thus bought or sold. TJiese possessions, if of similar bulk Origin of to those to be traded in, would Money require much space for storage. As ornaments were more compact in form and represented greater skill to produce, they became standards of value; the metals of which they were made and the glittering shells or stones with which they were set also became standards; thus iron, copper, silver, gold and precious jewels became the money of trade. 2 NEW YORK STOCK EXCHANGE The acquirement of these forms of Organization wealth in amounts large enough of Business to carry on the business thus developing necessitated protection against marauders and the ability to readily handle this wealth. We, therefore, find a growth in two directions — first, organization for protection, and second, better means for effecting business opera- tions. These have both led to the same result, although by widely separated steps, and over a long period of time; the first, by combinations of persons, resulting in the establishment of corporations; the second, by the invention of readily transferable, transportable and protectable evidences of interest, such as negotiable paper, checks and drafts, and bills of exchange, with the stock certificate as the ultimate form of easily transferable, readily trans- portable, and mcst easily safeguarded evidence of wealth. These traders were, at first, local; Traveling but gradually peripatetic traders Traders became common — originally the man with the pack, over small territory, then their fellowship (for protection, as shown) resulted in the caravan, composed usually of dealers in different kinds of goods. Soon their journeyings became periodic, and from them arose the seasonal fairs, which originating in the fargone ages, are still continued in many countries. No matter how great the despotism controlling the country, these fairs were not interfered with. PREJUDICE AGAINST MARKETS 3 These events were great educators — Fairs not only through bringing into a community unknown, and oftentimes wonderfully useful and attractive wares, but also because of the interchange of knowledge which followed. On the arrival of the traders, the villagers flocked around them — thus a greater number of people were brought together than by any other then known means. The value of a market was seen. Soon local farmers and merchants held stated meetings for the sale of their produce and products — and the modern market had its beginning. These markets were of two kinds, Kinds of food markets, and goods markets Markets — although they gradually became mixed. The food markets were held at short intervals, say weekly or oftener; the goods markets were held not more frequently than four times a year. The food markets became divided, by the kinds of foods offered for sale — highly perishable goods requiring frequent markets; while those less perishable, such as grains, eggs, butter, and the like, requiring less frequent markets. On the adjournment of a food- Origin of the market day, unsold produce would Middleman be bought by local dealers, for sale between market periods to local consumers, the dealer thus becoming a middle man between farmer and townsman. By this means, spoilage or wastage of produce was often reduced, and the consumer enabled to buy in smaller quan- tities and on more convenient occasions than on 4 NEW YORK STOCK EXCHANGE market days, but, of course, at a higher price, due to expenses incurred by the dealer, such as rent, return on investment, his own and other labor, and the like. This heightened price has been the cause of much conflict between consumer and dealer. Many efforts have been made to obviate or reduce these price increases, such as co-operative stores and other combinations, each seeking to eliminate the storekeeper or middleman.* The value to the world of these Foundation markets is beyond computation; of Education to them resorted people of all classes, and this unhindered inter- course bore great fruit. Not only did the merchants display staple goods and those of the newest manu- facture, and, by comparison, fix values and stabilize prices; but they disseminated news of the world. And it is not too much to say that the beginnings of liberty f arose from the traveling packmen and the growth of the local market. It must not be supposed, however, Jealousy of that these steps occurred as smoothly Local as the telling; where the traveling Tradesmen packman brought in goods of a design later or more attractive than those carried by the local tradesman a trade jealousy was aroused, the local dealer or producer feeling that, if outside competition could be prevented, he could get a higher price and surer sale for his goods, *The establishment of the Parcels Post has a bearing on this matter, one hoped-for result of which was that direct contact between farmer and consumer would occur. This is too recent a development to pjrmit of a general conclusion; but it is the opinion of some that in many cases, the farmer is enabled to charge city prices, with no material benefit in price reduction to the consumer. Through the operation of Produce Exchanges, the farmer knows the wholesale city price, and is enabled to fix an approxi- mate retail price to his mail-order customer. tSea opinion of Chief Justice Whi'-e (then Senator) on pag3 257. PREJUDICE AGAINST MARKETS 5 "Each for himself," was the rule; Beginnings a license fee was exacted of sales- of Markets men from other localities; and so deeply grounded did this feeling against outside competition take hold, that these fees continued in this country until within the past thirty years, when the Supreme Court of the United States decided it illegal to interfere with commerce by such taxes. The license fee referred to above, Wholesale had its origin in the local market Markets tax. The setting up of local markets was followed with rules for their management; the village authorities charged a tax to those who brought in goods for sale; later, standards for goods were established, and where goods were below standard, spoiled or unfit for consumption they might be destroyed and the sellers fined. At markets in the larger cities, it became impossible, because of the crowds, to bring the producer into contact with the consumer; so wholesale markets were established, in which only producer and dealer met and bargained and where the consumer was unseen. The packman was originally a Produce goods merchant; he soon discovered, Packmen however, that food products offered a field for profit; that prices of foods varied in communities not far removed from each other; and that by buying in bulk, he could sell at a profit in smaller quantity elsewhere— or that by buying a crop before it was ripened* he might *The beginning of "Dealing in Futures." 6 NEW YORK STOCK EXCHANGE find opportunity to sell it at maturity at a higher price; and to this class of business he sometimes turned his entire attention. To carry on this increased business, Food he needed more capital, and better Control hauling facilities than as a goods merchant; and partnerships arose as a result. The trader was a marked man, and because of his greater wealth, was taxed for that wealth by being charged local license fees. In addition, the taking from a neighborhood of food products,* caused the price of the remaining food to rise in cost, thus irritating neighborhood buyers. The question of food and its control, to the detriment of the con- sumer, is perhaps the most important of all questions to the majority of mankind; and soon laws were enacted against food monopolization, and the increase of food prices through such means. • However, markets persisted; their Beginnings value could not be gainsaid. The of Exchange middlemen who bought up locally in quantities would meet in some central point, usually in the largest city of the country, and exchange their bargains, one selling to some one else nearer the point where the goods of the first were located, and buying from the other the goods nearest the first one's business headquarters, thus gaining a profit in addition to saving haulage. At these points of exchange it was found necessary to establish rules— rules as to standards of quality, *Such removals were made a criminal offense; men were pilloried and jailed for trading for profit in such goods. (See page 40.) PREJUDICE AGAINST MARKETS 7 as to means of payment, as to delivery, as to who might be privileged, by reason of business standing, to buy and sell. Guilds, composed of merchants in the same business were instituted. Then the first grain exchanges were established. Against these bitterness arose;* producer and consumer each felt that a third party was exacting tribute from both. Broadly speaking, there is complaint Complaint only against the middleman in against the food products — against the man who Middleman comes in between the farmer and the consumer. While, in every other business middlemen exist, one hears no com- plaint about them. The farmer thinks the store- keeper cuts him down in buying; the consumer thinks the storekeeper puts the price up in selling; and complaint is made by both. The service by the storekeeper to the farmer, in buying in bulk and paying at once, is overlooked; the service to the consumer, in selling in small quantity, in making delivery, in giving credit, is overlooked. The middle- man in food products only is complained against. And this complaint extends to the food exchanges. The middleman in dry goods, hardware, and other merchandise is not complained against. The value of exchanges to the world Produce has been testified to by men of all Exchanges classes, in all civilized lands; that point has been taken up under another heading. Here it may be said, that except *"It is a singular fact that markets have been the subject of popular prejudice and moral objection, almost in proportion to the perfection with which they economize time, transportation and effort, and equalize prices." — W. S. Jevons, Theory of Political Economy, 1891. 8 NEW YORK STOCK EXCHANGE as to farm products, there are no exchanges for dealing in articles of household consumption; exchanges for dealing in food products therefore come under con- demnation by those who look at surface conditions solely. The stock exchanges have become Stock heir to the feeling against food Exchanges exchanges, partly because of similar organization and membership, partly because of losses by those engaging in speculation on an unsound basis, partly because of stock prac- tices not under the control of the Exchange, and partly because membership in both kinds of ex- changes represent great capital. The Stock Exchange to many people is the embodiment of corporate wealth. The struggle for liberty, which has Struggle for been in progress since man first Liberty knew he was a man, developed in him certain fixed prejudices. When "might meant right," he feared the power of the overlord, who first, by his own physical strength, and later by that of his organization, imposed his will on others. When feudalism was scotched, the power of money was feared; when corporations became common, and because of necessity became of great size, their power was feared. And the place where shares in corporations are dealt in, came under the same dislike. The fact that corporations have conferred upon mankind some of the greatest benefits* mankind has ever received is forgotten when this feeling takes possession of the mind. ♦See quotation at head of chapter on "Partnerships and Corporations," page 143. PREJUDICE AGAINST MARKETS 9 Dealers on the Stock Exchange and Stock Trader on other Exchanges must be viewed Not A from different standpoints. The Middleman trader on a commodity exchange may be looked upon as a form of middleman, in that he stands (even though bene- ficially) between the producer and the consumer; but the trader on the Stock Exchange can in no sense be so looked upon — he is not a middleman in any sense. He never comes between producer and consumer. This is not a plea against the middleman or the commodity exchange; but it is a plea that whatever feeling exists against them should not be attached to the Stock Exchange. * In an interview reported in the Investiga- Wall Street Journal, October 12, tions 1912, Robert P. Doremus, the great odd lot dealer said: "Our politicians are legislating for a Wall Street of twenty years ago. The stock market is not controlled by large specula- tors creating deceptive prices by manipulative orders. That kind of business is passing away, and it may be also said that another kind, that of purely gambling accounts, carried on the lightest of mar- gins has practically gone, and is not likely to return." The feeling against exchanges has shown it- self in laws of various kinds, passed sometimes with- out examination of the facts, and sometimes after such examination. The chief of these were: (1) the statute in England in 1734 against short selling, *Each investigation of grain, cotton, wool and produce exchanges has resulted in a verdict that such exchanges benefit both producer and con- 10 NEW YORK STOCK EXCHANGE which was proved undesirable and unenforceable; (2) the statute in New York, in 1857, also against short selling, and also undesirable and unenforceable; (3) the United States law against gold speculation, which was repealed in fourteen days after its passage; (4) the investigation in 1878 of the London Stock Exchange resulting in the upholding of their system; (5) the agitation in 1888, through the sudden growth of Populism in this country, resulting in the Hatch commission, an investigation by both houses of Con- gress, and the complete upholding of grain speculation; (6) the laws against speculation adopted in Germany in 1896, and repealed gradually because of their proved unsound foundation; (7) the investigation in 1908 of the New York Stock Exchange, by the commission appointed by Governor Hughes, of New York; (8) the investigation of the Exchange in 1912 and 1913 by Congress, and (9) of 1913 by the Legislature of New York. With the three latter we are most concerned, and they will be looked into briefly. The Hatch Industrial Commission, Unlisted appointed to investigate trading Department in grain and other commodities, incidentally looked into stock trad- ing; there was about this time trading going on outside the Stock Exchange, on the Curb; criticisms of this outside trading were many and severe, both as to the kind of speculations dealt in, and the kind of dealers. The Exchange was looked to to remedy this, insofar as possible; it therefore afforded a place in the Exchange for dealing in a few of the larger and better known outside securities. This was known as the Unlisted Department. In this Department, stocks were Extension dealt in of companies which pub- of this lished a certain amount of informa- Department tion about their doings, but not so full information as was required regarding listed stocks. These companies claimed that to publish full information would be giving their competitors an unfair advantage; this plea seemed well founded, and the Exchange published transactions in Listed Stocks on one sheet and of the Unlisted Stocks on another sheet. The news- papers, however, did not so separate the trans- actions, but grouped them all together, merely placing a * in front of the Unlisted Stocks. This manner of publishing was later made the cause of bitter assaults upon the Exchange by the newspapers. Gradually the Exchange got fuller and fuller informa- tion from most of these companies, until the in- formation published about Unlisted Stocks was practically as great as that published about Listed Stocks. In 1905 a book called "Frenzied Frenzied Finance" made its appearance; it Finance was issued by a Boston broker, who had been a member of a Stock Exchange firm, but whose advertising methods caused his withdrawal from his firm. This broker attacked the exchanges; he freely admitted that for pay he had used very objectionable methods in stock speculation, but made the naive excuse that it was the "system" that was dishonest, and not men like himself who used it in the methods described by him; he claimed a change of heart, and attacked, through his book, his former employers 12 NEW YORK STOCK EXCHANGE and the "system." Along with this, he published full-page advertisements, in florid language, with catchy headlines, and street slang. They excited much attention; and it has been claimed that this attention was used to launch various enterprises in unlisted stocks. His statements regarding the "system" produced a storm of newspaper criticism of the Exchange, and may truthfully be said to have brought about the appointment by Governor Hughes of New York of the commission known as the Hughes Commission, to examine into exchanges in New York. This commission sat ten months, Hughes heard many witnesses, went into Commission a large volume of written statements, letters, complaints, etc., and made a unanimous report. It found, among other things: 1. That markets spring into existence wherever buying and selling are conducted on a large scale, and when properly organized, these markets become exchanges; 2. That speculation consists in forecasting changes in value; with buying and selling, in order to take ad- vantage of such changes; 3. That where speculation is free, fluctuations in price (ordinarily violent) become gradual, and harm- less; 4. That the rules of exchanges forbid gambling; 5. That measures should be taken to lessen specu- lation by persons not qualified to engage in it; 6. That the Exchange can accomplish more by its rules than could be accomplished by legislation. The Commission, therefore, was opposed to in- corporation of the Exchange, and suggested ten matters for the Exchange to do, directed to putting into effect Point 5, above. Of these ten suggestions, nine were adopted by the Exchange, as recited at length in the Appendix. PREJUDICE AG-A1JN5T MARKETS 13 However, the interest excited by the Investigation campaign against the Exchange was by Congress too widespread to be allayed by a report from a commission of citizens of New York; accordingly, in February, 1912, the House of Representatives at Washington pro- vided for an investigation into the alleged connection between the "Money Trust" and the Exchange, to get at the root of the so-called "system." The oral testimony taken in this investigation occupied but a short time; however, the report was not handed in until a year after the investigation had been provided for; a bill, seeking to place the Exchange under the Post Office Department accompanied the report. The report found no connection be- Incorpora- tween the Exchange and the Money tion Trust, and gives high credit to the Stock Exchange in the following words : "It is doubtful whether the Federal Government is empowered to regulate Exchanges." "Manifestly, a security privileged to be bought and sold on such an Exchange obtains a wider market and a more definite current value than one which is not." "The New York Stock Exchange is the primary market in the United States, and as such is a vital part of the financial system." 'It is the market place of the entire country and of foreign countries for securities, and the only market place in the United States where money is loaned and borrowed." "The business transacted by its members comes to them from almost every corner of the civilized world. Its hallmark as to the genuineness of a certi- ficate of interest passes current everywhere and is rightfully supervised with jealous care and at con- siderable expense to the corporations concerned." 14 NEW YORK STOCK EXCHANGE "Listing upon the Stock Exchange gives a security a wider market and a more definite current value, making it easier to sell and easier to borrow on." "Quotations on its floor determine the current value of all the greatest corporations of the country. Such quotations are adopted by the Courts and by the Comptroller of the Currency as measures of value, and upon them banks base the amount to be lent on a given security." "It undertakes to prescribe the form and conditions of every corporate security in which it authorizes dealings, and its determination is final through its control over the listing of such securities. It reserves the right to exact the minutest details of the business and affairs of the issuing corporation, to impose its will in the matter of the procedure by which the corporation shall declare and pay interest and dividends, and in the matter of the transfer and registry, and as regards endless other details. All this is very properly done." "As regards the rates of commission enforced by the Exchange, your Committee believes the present rate to be reasonable, except as to stocks say of $25 or less in value and that the Exchange should be protected in this respect by the law against a kind of competition between members that would lower the service and threaten the responsibility of members. A very low or competitive commission rate would also promote speculation and destroy the value of membership." The Congress adjourned four days after the report was filed, and the matter went over until the session beginning in the following December, when it came before a Senate Committee, which, after several hearings, allowed the matter to drop. The House report made several Manipula- references to the subject of inani- tion pulation, and recommended that the Exchange "prohibit so far as possible the execution of simultaneous or substantially simultaneous orders from the same person or persons to buy and sell the same security for the purpose of creating an appearance of activity therein, and any orders the purpose of which is to inflate or depress the price of a security." PREJUDICE AGAINST MARKETS 15 The practice had already been prohibited by the Exchange, in the following words: "Fictitious trades are forbidden; any member vio- lating this rule shall be liable to suspension for a period not exceeding twelve months," and members had been disciplined for violating that rule; however, it was seen the rule could very wisely be extended. A curious coincidence now comes to light, in that, in all of the newspaper attacks only one grain of constructive work is No Change shown; the thousands of dollars of Ownership spent in invective, and in discussion, contained only one useful germ, and this the Exchange now adopted. In an advertise- ment of January 28, 1910, the Boston broker suggested the adoption of a rule stating that "A matched trade is one where the stock, bonds or securities involved do not in fact change ownership by or because of the transaction." The rule adopted by the Exchange reads: "That no Stock Exchange member, or member of a Stock Exchange firm shall give, or with knowledge execute, orders for the purchase or sale of securities which would involve no change of ownership." Just before the House of Representa- New York tives committee reported, the New Legislature York State Legislature began its session of 1913. Governor Sulzer made a special report to the Legislature, suggesting that speculation be made the subject of special study. In due course, bills were introduced, some of which failed of passage, and other were adopted. These followed very closely rules already in force on the Exchange and existing State laws. The Legislature refused to incorporate the Exchange. 16 NEW YORK STOCK EXCHANGE To carry out the recommendations Committee of the House of Representatives and on Business the State Legislature, the Exchange Conduct provided a new Committee, a Com- mittee on Business Conduct, whose duties are stated as follows: "It shall be the duty of this Committee to consider matters relating to the business conduct of members with respect to customers' accounts. "It shall also be the duty of this Committee to keep in touch with the course of prices of securities listed on the Exchange, with the view of determining when improper transactions are being resorted to. "It shall have power to examine into the dealings of any members, with respect to the above subjects, and report its findings to the Governing Committee." The very wide powers of the Committee are seen; they have been conscientiously exercised, to the good of the public and the Exchange. The possi- bilities of fictitious transactions on the Floor of the Exchange are very limited; as pointed out else- where, trades must be made at fixed points, and openly; brokers, with orders from "all parts of the civilized world" are gathered at those points; the members of Committees are all men actively engaged upon the Floor and wide awake; the penalties imposed by the Exchange are very severe — the stigma of dishonesty, loss of business standing, of business itself. Therefore, while a certain proportion of men in all callings fail of being honest, the likeli- hood of their doing so in the Exchange is minimized. "It is sometimes said that Wall Controlling Street can put the prices on the the Market Stock Exchange up or down, at its pleasure. This is a delusion."* "Wall Street is like the ocean; no man can control •Horace White, Journal 0/ Political Economy, October, 1909. PREJUDICE AGAINST MARKETS 17 it. It is full of eddies and currents. The thing to do is to watch them, to exercise a little common , sense, and on the wave of speculation to come in on the top."* "The most powerful operators cannot overcome the natural tendencies of values; the most they can do is sometimes to hasten or retard the certain effects of a foreseen event." f It has been seen that speculation is Resume a natural accompaniment of every business operation; that it automat- ' ically results in the establishment of markets and exchanges; that only traders in food products can be considered as coming between producer and con- sumer, and that stock traders are not properly subject to that criticism; that investigations of stock markets have resulted in showing that the Exchange is in the forefront in every movement looking to the protection of the public. It would therefore seem that prejudice against the Exchange is unfounded, and that proper explanation of its position would remove that prejudice. •Courtois, Traitee dea Operations de Bourse el de Change. tC. A. Conant, 1904. A TRADING POST Stocks must be bought openly, a*d only at the Post to whwh they are assigned. The figures on the dials show^the last price at which the stock was sold, see also pages 68 and 84. BUSINESS AND SPECULATION "A real distinction exists between speculation which' is carried on by persons of means and experience, and based on an intelligent forecast, and that which is car- ried on by persons without these qualifications. The former is closely connected with regular business." — Hughes Committee. 1909. "All business is uncertain — all business is speculation; the term 'speculation,' however, is commonly restricted to business of exceptional uncertainty. The uninitiated believe that chance is so large a part of speculation that it is subject to no rules, is governed by no laws; this is a serious error." — Unknown writer. All material wealth is in the form of Kinds of property, and property is of but two Property kinds, real and personal. Houses, lots, farms, and buildings are real property; all other property is personal property — furniture, clothing, jewelry, cash, stocks and bonds are personal property. Stocks and bonds being property, are Securities subject to all laws governing prop- are Property erty, such as purchase and sale, attachment for debt, inheritance, taxation, transfer, and the like. Business is the purchase and sale Business of property, carried on for profit. The buying and selling of real prop- erty is known as the real estate business; the buying and selling of personal property is called by the name of whatever the particular kind of property the dealer specializes in, such as the dry goods business, the hardware business, the jewelry busi- 20 NEW YORK STOCK EXCHANGE ness, banking, brokerage, and the like. No form of dealing in personal property is less "legitimate" than any otl er form, if the business is conducted according to law. Speculation is the risking of money Speculation* in any legitimate way, in the hope of profit. Speculation is also called by the name of the articles speculated in, such as a business speculation, real estate speculation, cotton, grain, wool, sugar, stock, coffee, produce or other speculation. To be engaged in business is con- The Business sidered an honor — is looked upon Man as an indication of solid qualities; the business men of a community are considered its foremost citizens. Is being engaged in speculation any less honorable? By being engaged in speculation, we mean not only being a stock broker, but also being a buyer and seller of stocks — whether that be the sole, or merely incidental, business. Are the risks of speculation different from those of business? No man should take up a business of Who Should which he knows nothing, and risk Engage in his time and capital in it. Cus- Business or tomarily, he has had an apprentice- Speculation ship or clerkship in it, has studied its principles, probabilities or possi- bilities. The same thing is true of speculation, or should be true — that no one should risk his time and ♦"People will endeavor to forecast the future, and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable. Its value is well known, as a means of avoiding or mitigating catastrophes, equalizing prices and providing for periods of want." — Justice Holmes, 1905, in U. S. Supreme Court. BUSINESS AND SPECULATION 21 capital on some unknown venture, but should have made it the subject of as much investigation as he would apply before engaging in a business. For instance, no one would engage in the shoe business without knowing something about shoes; and it is equally true that no one ought engage in speculating in the stock of a shoe company without looking into the condition of and possibilities of the shoe business, both as respects the particular company and general business conditions. Among the offenses for which men Reckless are excluded from the Exchange is and one that is known as "reckless and Unbusiness- unbusinesslike conduct." Theprin- like ciples of business are made, by the rules of the Exchange, to apply to speculation in stocks and bonds. The taking of unusual or foolish risks is forbidden, under penalty of practical expulsion. Speculators outside Exchange membership should take no unusual or foolish risks. The taking of ordinary business risk is the common, everyday concomitant of life — whether you con- sciously risk your money or not, it is being risked — but the taking of foolish risk, the engaging in half-baked, unthought-out, sure-to-fail enterprises, or in good enterprises on insufficient capital and reserve,- is something to be avoided by member and non-member alike. It will, however, be said that specu- Comparative lation presents greater risks than Risk business. Reflection shows this can- not be true. For example, to engage in business a person must give up all other means of livelihood — no man can successfully conduct a 22 NEW YORK STOCK EXCHANGE business, while employed by another; his business will require all his time and attention. To engage in business, before he can take in a dollar, he must put out many dollars, and bind himself in many ways. He must lease a store, binding himself for rent, per- haps, for a long period; must put in fixtures, stock, and other facilities; must engage help; must do some advertising — thus incurring many expenses, some of them for more than just the current time. Most of these must be met out of his cash capital — it is very rare that the new merchant can get credit for the things enumerated above. But to engage in a speculation, the person needs only his margin, plus reserve; his expenses are at a minimum, and are confined to commission; if he is buying a dividend- paying stock, his dividends will take care of interest on the borrowed money. The Internal Revenue Department A of the Government has just put out Government a ruling (March 11, 1918) covering Definition what losses are deductible on your income tax report. We will quote here only a part of this ruling: "Losses, for income tax purposes, are divided into two classes: A. Those incurred in business or trade. B. Those resulting from transactions entered into for profit, but not connected with the taxpayer's regular business or trade." The Department gives two examples which, con- cretely put, are: That where a person is "regularly engaged in buying securities, or improved or unim- proved real property with the intention of selling the same as early as possible at a profit" a loss incurred therefrom is deductible as a loss from BUSINESS AND SPECULATION 23 "business or trade"; but if he is not so regularly engaged, such loss "may only be claimed under certain other provisions." The opinion of the Department is thus seen to be that real estate and stock operations, if conducted regularly and as a man's sole occupation are "business or trade," but if not so conducted are something different, regular performance and sole attention making the differ- ence between "business" and "speculation." But is speculation different from business? The relation of the character of Real Estate operations in real estate and in and Stocks stocks is very close. Both, are bought in most cases on part pay- ment and (when not paid for in full at purchase) are pledged against the balance of the purchase money. The buyer is in law and in fact the sole owner of both, and as such owner is at liberty to sell when- ever he so desires. He is as to both, responsible for interest, taxes and other charges, and from both gets such revenue as his property earns. In either case, if he displays good or poor judgment, profit or loss follows, as the case may be. Our question is, however, not only Moral as to the form in which the business Difference is done, but as to the character of the business itself. Of course it will be admitted that all business is done at a risk. Does the fact, if it be a fact, that speculation in stocks is a greater risk than speculating in dry goods, change the nature of the speculation? Is there any moral difference between buying, say, $1,000 worth of cloth, and buying $1,000 worth of stock of the mill which weaves the cloth? 24 NEW YORK STOCK EXCHANGE Bradstreets annual compilation of Causes of business failures divides the causes Failure in of failure in business into two main Business classes: 1. Those due to the faults of the insolvent; and 2. Those not so due.* The first class produces about 80% of the failures, chargeable to incompetence and in- experience, lack of capital, unwise credits, speculation outside of regular business, f neglect of business, personal extravagance and fraudulent disposition of property. The second class produces about 20% of the failures, chargeable to specific conditions (dis- aster, etc.), failure of others and competition. Lack of capital causes about 33% or say one-third of the failures; incompetence, 27%; inexperience, 4%; neglect, 2%; or say, another one-third ; fraud, 10%; specific conditions, 16%; and minor causes make up the other one-third. The matters which the business man Principles of must consider are, tersely put: Business 1. In what business shall I engage (which includes what kind of stock shall I carry)? 2. How much shall I buy? 3. What price shall I pay for it? 4. With cash or on credit? 5. If the latter, how much in cash, and how much on deferred payment? 6. How much reserve capital shall I keep? 7. What will be the expense of con- *One of the members of the Hughes Commission which investigated the Exchange in 1908, a wholesaler was much impressed with the rule of the Exchange compelling the carrying out of a bargain, unless both parliei con- sented to a cancellation. He said: "This is not the custom in business; during the panic of 1907 enough orders were canceled on my books to have caused my failure in business, had I not been fortunate enough to make provision to meet the situation." Recent cancellations of war orders gives a peculiar point to the difference upon this subject between a business order and a speculative order. ■(■"Business enterprises now tend more and more to become speculative in character." — Charles Gide, Principles of Economics. Paris 1S89. BUSINESS AND SPECULATION 25 ducting the business? 8. What profit shall I hope for? 9. Shall I hold for the profit, for a larger profit, or sell before the profit is attained? 10. Whom shall I trust? 11. How far shall I trust them? These are the speculative risks of business. The risks of stock speculation are Principles of similar to those just named as the Speculation speculative risks of business: 1. What stock shall I buy?* 2. How much shall I buy? 3. What price shall I pay for it? 4. With cash, or on credit? 5. If the latter, how much in cash, and how much on deferred payments? 6. How much reserve capital shall I keep? 7. What will be the expense of speculating? 8. What profit shall I hope for? 9. Shall I hold for the profit, for a larger profit, or sell before the profit is attained? 10. Whom shall I trust? 11. How far? Few realize that the business man The must be a good buyer as well as a Principles good salesman — that the profits de- Applied pend on good buying. This is equally true as to stock speculation. A purchase of salable goods or stocks is the first requisite toward success. Either goods out of fashion, out of season, of flashy nature; or unlisted or little known stocks, are equally a poor purchase, and lead to bargain sales. Overpurchasing has the same result. Paying too much forgoods or for stock, predicates sales at a loss; buying them solely for cash, under the above conditions, does not improve the matter. Goods or stocks well bought, however, "*Sp«culation. as we have said, ought never to bear on stock imperfectly known." — Henry Hamon, 1865. 26 NEW YORK STOCK EXCHANGE are just as good a purchase, on part cash and part credit, as if bought all cash— indeed, if well bought, are better bought on part credit, provided expenses are not too heavy (in business— such expenses as rent, help, interest; in stock speculation such ex- penses as commissions, interest, taxes) ; and provided a sufficient reserve is kept in hand to meet contin- gencies. What profit to hope for, what profit to take, whether to sell at a loss, are questions met by every merchant, by every speculator. The time to sell out is as important in business as in speculation. The merchant must determine as to his customers who to trust and how far; the speculator, who to trust and how far — as to advice, information, the broker employed. The late Secretary of the Chamber Taking a of Commerce said, in a recent work: Risk "The essence of speculation is risk, and risk is an element in all commer- cial and credit transactions; if the taking of risks is immoral, than all trade is wicked"* — (Pratt). In both stock speculation and general merchandizing, risk-taking is the most common element. The basis on which risk is taken, makes for success or for failure, but does not change the character of the transaction. Much business is done on credit — not one merchant in ten thousand buys his goods for cash, with his own money. When he does buy for cash, he most likely pays with borrowed money t (which is sound business); the stock speculator, ♦"Speculation Is the purchase or sale of anything in the hope of profit from an anticipated change in its price. It differs from ordinary trade only inHdegree." — Professor Seligman, Columbia University. Principles of Economics, 1905. tMerchants often make quite a profit by borrowing from a bank for"30 days at 6% (meaning H% interest) and claiming the cash discount on goods, often 2 % or more. BUSINESS AND SPECULATION 27 who buys and sells stocks on borrowed money, if his purchase is wise, is equally engaged in sound business. The soundness of the purchase, plus the state of the market, plus his means for payment, plus contingencies, are elements of the speculator's risk; the soundness of his purchase, plus good business conditions, fair skies, plus his means for payment, are elements of the merchant's risk. Both business and speculation are Hope for founded on the same basis — hope Gain for gain, from something bought to sell again, or sold to buy again. Whether flour is bought by one merchant from another to fill engagements, or to make a profit, or to sell to customers; or bought by the same mer- chant from another merchant in the Board of Trade, does not change the character of the transaction — both are business, both are speculation. As the eminent economist, McCul- Foresight loch, said: "Speculation is only and another name for foresight."* And Prudence business without foresight is sure to become a failure. In his A. B. C. of Speculation, S. S. Nelson said: "The man who is prudent and careful in carrying on a store, a factory or a real estate business, seems to think that different methods should be employed in dealing in stocks; nothing is further from the truth." The new Income Tax Law has Merchants classified stock brokers, as "mer- in Stocks chants in stocks." This definition is a departure in the right direction, *" Cool-headed men are the most fortunate speculators because honest speculation is nothing else than discretion applied to private or public securities." — Manual of Stock Exchange. 28 NEW YORK STOCK EXCHANGE indicating a broadening of the heretofore narrow view that the business of stock brokers is different from that of other merchants; stock speculators are "actually "merchants in stocks," and therefore busi- ness men. Lack of capital— buying beyond Causes of one's ability to care for and properly Failure in protect, causes many losses in specu- Speculation lation, as it does in business. Incom- petence and Inexperience — a lack of knowledge* of the security purchased and of the principles of speculation — causes many others. Unwise credits — buying from brokers of unknown standing causes others. Neglect of business — inattention to the market, failure to give one's broker proper directions, causes some losses. Dis- asters cause many — the outbreak of a war, the sinking of a Lusitania, the assassination of a ruler, the destruction of a factory, a serious railroad wreck, causes still others. Each of the causes of business failure operates to cause speculative failures. As an instance of business over- Overtrading trading, the following case can be in Real cited: The house in which the Estate writer lives is one of twenty-one, built at the one time by one builder; he had previously bought a plot of ground, sold half of it for enough to have the balance clear, and then built the houses referred to. Instead, however, of build- ing a few houses, to see what their sale would be, *"The success or failure of a man engaged in manufacturing, transportation, or in agriculture depends more upon his skill as a prophet than upon his industry as a producer." — Professor Hadley (of Yale), "Economics," 189tj. BUSINESS AND SPECULATION 29 he built up the entire property. The houses were at that time not readily salable, and the result was his failure in business. Had he applied the rules of business he would have tested out the neighbor- hood, the real estate market, and general conditions; would not have overbought building materials, would have kept a reserve of cash, and would have made a profit, or at the worst, only a limited loss. No one can be blamed in this case but the builder; yet such a case, in buying stocks, would have been blamed on speculation. The proportion of those failing to Data not those engaged in business is given Complete as about 1H%J* but the figures collected include only failures by which other business houses were caused a loss. Fail 7 ures of small dealers, by which other houses made no loss ; of persons engaged in the professions, such as physicians, lawyers, civil, mechanical, electrical and other engineers, actors, brokers, real estate dealers and farmers are not included; and the enormous number of cases in which the original capital is exhausted, and an enterprise dies of starvation, after perhaps using up the funds of relatives and friends, are not taken into account. Also the very large number of those who start in a profession or business, exhaust their means, and then give it up are excluded. It would seem, if these were taken into account, the proportion of failures by reason of incompetence, inexperience, and lack of capital would be enormously increased. *For a comparison of failures of members of the Exchange and national banks, see page 51. 30 NEW YORK STOCK EXCHANGE If in comparison with business fail- Losses by ures, the losses of persons by stock Speculation speculation were confined to those not engaged in the professions, or those who lose some part or all of their own capital, but cause no loss to "other business houses," it must be apparent that the losses through specula- tion would compare very favorably with those made through business. And if, in the statistics of business failures, these excluded classes were in- cluded, it would seem likely that the tradition that "the larger number of those who enter business are doomed to ultimate failure," is nearer true than is comforting. Business is best described as "a Speculations continuous speculation." The ar- of Business, tides bought, their price, the expense Farming of business, the attendant condi- tions are constantly changing. By business man, we do not mean the merchant only, but anyone who operates an industry, or produces or deals in materials. The farmer is a business man — and the greatest of all speculators; he must determine what crop to plant, and how much; what stock to propagate, and how much — risking money and labor, at the mercy of time and the elements, of commercial and industrial changes — to produce a crop, the amount and outcome from which he cannot even estimate. The miller, who determines what kind of cloth to weave, what kind of grain to grind, is also a speculator, taking all the risks that fall to the stock speculator. BUSINESS AND SPECULATION 31 Banking is looked upon as one of Banking and the most conservative of businesses; Speculation requiring a high degree of judgment as to conditions, and as to the amount of money to risk. Bankers lend their own and other people's money on real estate, perhaps as great a speculative risk as any; they lend to farmers, subject to the uncertainties just enumerated; they lend to merchants, subject to the risks referred to, under Failures; and they lend on securities. And it is a well known fact that they lose less money by loans on securities than on any other loans.* But more than this — banks must be ready to repay depositors; lending all their money to growers (to be repaid when the crop is harvested), or to merchants (to be repaid when the goods are sold), would mean that repayment to depositors on demand would be impossible; so they keep on hand the vast amounts of stock and bonds pointed out elsewhere herein. The banker, therefore, to protect Good his depositors, must have good Judgment judgment as to what securities to in Stocks buy, what securities to loan upon — in other words, be a good business- speculator; for he, too, is subject to the risks which speculators, whether in merchandise or in stocks, must encounter, as set forth above, f Some seek to distinguish between The Nimble business and speculation because Sixpence of the quickness of changes in the latter; but the maxim, "A nimble *A prominent banker said recently in the hearing of the writer that his bank had loaned hundreds of millions of dollars on stocks and had never lost a dollar on such loans. tPages 24 and 25. 32 NEW YORK STOCK EXCHANGE sixpence is better than a slow shilling" is the business maxim of today. "Quick sales, small profits," is another form of the same motto, adopted by many business houses of the day. Demosthenes said: "Wealth is of The Value two kinds— money and credit, the of Credit latter being the greater." And Daniel Webster said: "Credit has done more, a thousand times more, to enrich nations than all the mines of the world." As has been pointed out not one Credit in merchant in ten thousand buys for Business cash, or with his own money. But speculation on part payments, on borrowed money, is condemned by many who do not realize that it is not the question of the debt assumed, but of the means in hand, or available, which makes the difference between a sound and an unsound transaction. A foolish purchase is always unsound, whether on credit or for cash. Credit is one of the greatest of assets — the testimony of the late J. P. Morgan that he had loaned as high as a million dollars to a man, solely on his credit, is the experience (to a smaller extent) of all business men. "When a man requests a line of credit with us,'' said the credit man of a big wholesale house, "he always seems surprised to learn how comparatively little interest I display in learning how much he has and how extremely anxious I am to discover how much he knows. "My experience has taught me that mere money can be easily lost. But ability and character — those are the stable, permanent assets which can create more money."— H. J. Barrett, N. Y. World. BUSINESS AND SPECULATION 33 Bradstreet's figures are that above Lack of 95% of the failures were by those Credit "of very moderate or no credit rating," with less than 1% of those "of very good credit, or higher." These figures show conclusively that numbers of men who engage in business without sufficient mental or material means, and on poor advice and bad judgment, come to grief, just as men who buy securities under similar circumstances find a similar end ; but that those with reserves are more likely to prove successful. . The blame, therefore, should not be Placing the placed upon the kind of business Blame Where engaged in, but upon the kind of It Belongs man and the way in which he engages in it. Because men fail in business and because men fail in stock speculation should not give either a bad name or operate to keep others from engaging in either. Rather, the reasons for failures should be made clear, the basic principles of business and speculation made a matter of fundamental education, and intending engagers thereby given the opportunity to see what perils confront, and what benefits ensue, in both busi- ness and stock speculation. Placing one's means in business is Investment not an investment — one can hardly Jn Business be said to "invest" in a business; the nature of business is that of a constant change and is opposed to the thought of investment. Investment contemplates the placing of a sum of money in a venture, for a fixed period, at a fixed interest, with the return of the principal 34 NEW YORK STOCK EXCHANGE at the end of the term; but in business as in speculation the period is unknown, the interest varying, the risk is unknown, the outcome uncer- tain, the return of the principal problematical. As pointed out elsewhere, the owner A of small means cannot engage in Comparison business alone, nor procure a part- nership in a desirable firm; and, as the statistics show, without adequate capital and experience he cannot succeed; yet with the same amount of means, he can procure a participating interest in some safe business enterprise, conducted by high business talent, and with great business honesty, and which, by reason of large capital resources, is not likely to fail. Some persons think that only those Not Every should speculate who can afford to Man Should lose; nothing could be further from Speculate the true spirit of speculation, than to hold such a theory, because true speculation, while contemplating loss — considers all the risks, provides against them, and so surrounds one's judgment with reserves of capital as to in- sure against loss. It is true, however, that many persons should not speculate — for instance, those whose minds are .easily influenced, those without strict and sterling business principles, persons of feeble judgment, those who allow anxieties to prey upon them — these should keep away from any operations which involve risk, not only opera- tions in the stock market, but in general business as well. The amount of money one has at risk is not a factor; but the "wise or unwise way in which BUSINESS AND SPECULATION 35 one risks it is a factor; and the person who engages in a venture, feeling at the outset that he can afford to lose, is apt to exercise so little caution as to almost insure a loss. The conclusion seems unavoidable Two Kinds of that speculation is divisible into Speculation two classes — and only two, viz.: 1st, that which takes into consider- ation earning power during the time a profit is being arrived at; and 2d, that which takes into consider- ation only the hoped-for profit. The first includes transactions in proved securities, such as dividend- paying stocks, interest-bearing bonds, the purchase of paid-up life insurance, and deposits in banks; the second includes transactions in unproved se- curities and new ventures, in which risk is great and hoped-for profit thought to be commensurate with risk — and, strangely enough, also includes all forms of general business, business being conducted solely in the hope of a profit and without regard to the earning power of the means at risk other than the profit. Business, therefore, may be said to be, pure speculation — the buying of anything solely for profit — as with unproved securities; while the buying of proved securities may be said to be either investment-speculation or speculative-investment, according to the degree of risk taken and of the expected dividend or interest return. It must be clear that the specula- The Same tions of business, and the business Basis of speculation are founded upon the same basis, governed by the same rules and to be judged by the same standards. 6*rh&t*aJl/ cS.'Z"#l£^L *~ fcfc^^^<*~£&*i~.fJv l hi.-i //ft THE ORIGINAL AGREEMENT WHICH MARKED THE CORNER STONE OP THE NEW YORK STOCK EXCHANGE IN 1703, IS SPECULATION DESIRABLE? "The wish of improving his condition, of acquiring wealth, is deeply implanted in man. It is a passion which, duly regulated by sound principles, secures social improvement and national prosperity." — Manual of the Exchange, 1865. Each era in history seems to have A Specula- some distinguishing point, some one tive Era outstanding feature which gives it a character and provides for it a name. The present era is beyond doubt the greatest speculative era in the history of the world. Specu- lation is not as wild today as it has been at times, for instance, in that of the Holland tulip craze or the Mississippi bubble; but it is wider spread and has a deeper hold than at any previous time. The wealth of the United States has doubled in the past fifteen years; and such an enormous increase must, in itself, produce speculation. Values are con- stantly changing, new enterprises are beginning, and men becoming more used to gigantic ventures. The average person having broached Ignorance to him for the first time the question Regarding "Is Speculation desirable?" may feel Speculation disqualified to answer it. He may have moral qualms as to a favorable answer, yet feel insufficient knowledge of the subject to give an unfavorable answer. His answer will depend largely upon his education, the newspaper he reads, his business, the kind of friends he has, and his own experience or that of his friends with speculation. 38 NEW YORK STOCK EXCHANGE Certain forms of commercial busi- Business and ness are so surrounded by or con- Speculation nected with speculation in wool, cotton, coffee, sugar, iron, grain, produce, stocks, real estate and other things, as to make it sure the answer will be favorable. Cer- tain personal surroundings or experiences may produce an unfavorable answer.* The relation of speculation to other business is considered fully elsewhere herein. It is not so many years since the Is Life question was fiercely debated, "Is Insurance life insurance desirable?" Within Desirable the past thirty years, the writer heard the noted divine, T. DeWitt Talmadge preach his famous sermon, defending life insurance against others who asserted, with much cogency, that life insurance is contrary to Scripture and is opposed to the Divine command, "Take no thought for the morrow," and to the Pauline in- junction "Cast all your care on Him, for He careth for you." It is one of the curiosities of history that in every European country except England life insurance was at its beginning and for long years prohibited; in France, for instance, it was declared unlawful, "because it is an offence against public decency to set a price upon the life of a freeman, which is above all valuation." f •Professor Emery, in his treatise on "Speculation in the United States/' says: "Few things have called forth greater extremes of praise and blame than modern organized speculation. On one side it is strongly denounced as being morally wrong in itself, or as being in addition to this a disastrous influence in business. This view is perhaps that of a large majority of respectable persons outside of business life, and of the greater part of the newspaper press. On the other side the system is as strongly upheld." tSee also paragraph on "Insurance and Gambling," under heading, "Investment, Speculation and Gambling." IS SPECULATION DESIRABLE? 39 Aside from the religious standpoint, Life life insurance was thought to be, Insurance and frowned down upon as, a form and Lotteries of lottery. While it was recognized that "all men must die" the fact that some men, upon dying, could leave a sum of money to their estate at a small cost, while others dying would leave the same sum at a much higher cost, was con- sidered as essentially gambling, not differing from a lottery; and the fact that part of the gain in life insurance is from those who lapse, or fail to continue until the end, was felt to be a further gambling feature and therefore an additionally immoral matter. Most persons know what relation Marine Lloyd's has to the shipping industry ; Insurance yet very few know that this great business grew out of the agreement by the shippers who drank coffee in David Lloyd's little coffee-room that each would share in the loss of a ship or cargo belonging to any of the others, on the occurrence of such a loss; that this method of underwriting or insuring was viciously attacked,* and Lloyd's coffee-house was denominated a "public gambling house which ought to be suppressed." To-day a shipper sending out cargo or vessel unin- sured would be deemed mentally incompetent. The same sort of attack was made Is the upon charging of interest on loans Charging of of money. It was forbidden by the Interest ancient Hebraic law, as laid down Immoral? in Exodus 22, Leviticus 25, and Ezekiel 18; it was taken up into ♦Accidents and storms at sea, are legally known as "acts of God." It was considered blasphemous to endeavor to provide against "an act of God." 40 NEW YORK STOCK EXCHANGE the law of many lands; and "it took centuries of thought and experimental legislation and practice to separate legitimate from unjust usury."* "The old corn laws were in many ways analogous to the laws against lending money at interest". The same sort of attack was made Is Business upon conducting of business as a Immoral? livelihood. All trading for gain was considered immoral, and was con- demned by Church and State. The removal of goods or produce from one community to another was made a criminal offense. Men were put into "pillory and gaol" for trading merely "for gain."f It took centuries to get rid of these restrictions; not until the beginning of the nineteenth century were they entirely abandoned. Prejudice still persists, however, against many forms of business. Any consideration of the desirability The Effect of of speculation must take into ac- Speculation count its effect upon the State and upon the individual; also whether it is economically sound; moral or immoral; legal or illegal. Such consideration can be but briefly attempted in a work of this character, and much of value and interest must be either tersely put, or entirely omitted. However, such phases of the matter as seem most vital will be taken up in turn. *J. S. Nicholson, "History of English Corn Laws." tA large speculative element is involved in trade of every kind In mediaeval times, when the socialistic theory of value was generally accepted Jin "i \ Wa V eBard u d Wlth - 1 sus P icious eye; and the attempt to buy an article when it was cheap, with a view to selling it when it became dear, was ™96 severest penalties."~President Hadley of Yale, "Er-onomics " IS SPECULATION DESIRABLE? 41 The beneficial effect of speculation The Effect on upon the State cannot be over- the State estimated; to it are directly due such improvements as city water- works, electric and other lighting works, irrigation works, railroads, trolley roads, steamship companies, bridges, and the innumerable improvements which would never have been made by public money, and having been made with private money have bene- fitted the public beyond compare. None of the great enterprises of modern times could have been under- taken, except by the co-operation of thousands of persons who, believing in the success of and value to be derived from these enterprises, placed their money in them — an act of speculation only. * The effect of speculation upon the The Effect individual is not perhaps so clearly on the perceptible. It is undoubtedly the Individual case that many pioneers in the pur- chase of stocks of the transcontin- ental railroads, and in the original elevated rail- road companies, lost money by these ventures; it is undoubtedly the fact, in ventures in many kinds of new enterprises, that success is not always assured; and that in no sort of business can success always be assured. It must be apparent that some men will succeed in a business while other men, with the same capital, the same business knowledge, and the same apparent conditions, will fail; that the "personal equation" is a large factor. Are these results to be credited to, or charged against the business, or the man? Because a man fails in a business or in a speculation, because men overdo *Sre quotation on page 91 from "History of Materialism." 42 NEW YORK STOCK EXCHANGE or underdo in any direction, is the effort of engaging in business or speculation in those directions to be decried? It is with all of this in mind that we must approach the question "Is Speculation Desirable?" No one will assert, because these Money pioneers lost some or all of their "Lost" in money so invested, that the enter- Speculation prices thus begun should not have been begun; or that the investors should not have made the investment. The faith shown in the future of our country, the application of the money to the employment of mechanics, engineers, and others, the problems met— unsuc- cessfully at first, but later victoriously — all prove that the enterprises were proper ones for investment, even though possibly begun on an improperly con- ceived and perhaps unbusinesslike basis. Loss of money in an unsuccessful venture, as is elsewhere pointed out,* is often the means of saving larger sums of money by preventing the rash undertaking of "half-baked" ideas. In addition, every business man knows that he must spend a fair proportion of his means in "experimenting" before he can be assured of success; and money lost in promoting proper enterprises is merely money spent on experi- mentation — and therefore is really not lost. It is asserted by some, because it Ease of is easier to engage in speculation Speculation than it is in business, that this ease shows its undesirable nature; these matters are considered under the chapter headings, "Business and Speculation," "Investment; Specu- lation and Gambling," and "Margin Trading." *See substitute "Value of the Speculation," page 62. IS SPECULATION DESIRABLE? 43 The moral effect of speculation is said to be unfor- tunate; that speculators are led to "expect some- thing for nothing," and that they therefore cease productive effort to become hangers-on at specu- lative centers. As to the bulk of speculators, nothing can be farther from the truth; as to the few, it may be the case — in fact, in every walk and pursuit of life, in every form of business are to be found the reckless, the indifferent, the foolish, the gullible. How to prevent them from their own dispositions is a study worthy of the best attention. Education seems the only solution — education through reading, reflection, experience; with the proper amount of the first two ingredients but little of the latter should be necessary. •Speculation on the Exchange is Losses by charged with much for which it is "Specula- not responsible. For instance, the tions" daily papers often carry advertise- ments, setting forth the desirability of buying stocks, the facts regarding which are unknown, the prices of which perhaps are to be advanced upon a certain date; and the public is asked to buy into these schemes. Fake mining enterprises are started, and house-to-house solicitors sell stocks to kitchenmaids, with promises of future profits at "guaranteed" prices. Or a mail-order broker skips with the cash of his victims; an insur- ance solicitor, or a feed salesman, or a man engaged in an}' of a dozen different lines gets his name in the papers, and is announced as a "well known broker;" and the meed of discredit each of these brings is ofttimes laid at the door of "speculation" upon the Exchange. 44 NEW YORK STOCK EXCHANGE As Professor Hadley, of Yale, has Speculation said: "A large speculative element in Trade is involved in trade of every kind." Business men are, therefore, specu- lators. And, as is also shown elsewhere, the bulk of the security behind assets of the banks, life insurance companies, and other similar enter- prises, is stocks and bonds. Their business could not be conducted without such assets, compact in form, safely handled, easily realized upon; and their purchase is, in the ultimate, a form of investment-speculation. Of course, speculation of this character, by such concerns, is desirable — most desirable. If the bank, as a bank, is therefore a speculator for its depositors, and such speculation is desirable, is it any less desirable for the depositor to use his means himself, instead of having his bank do so? If desirability hinges on morality, the answer will be affirmative; if on its successfulness, the answer is two-fold — theoretical and practical. Theoretically, the answer to this Theoretical question would be, that if he invests and in the same things his bank does, Practical on the same terms, and the same risks, his individual and personal speculation should be as desirable as if made by the bank for .him and for his fellow-depositors col- lectively. Practically, the answer would be that , the experience* of the bank gives its ventures an *One reason why individual investments cannot be expected to turn out as well as the investments of a bank, would be that an individual invest- ment would likely be in one security, while the bank's investments would be in many securities — in which case a loss on one might be offset by a gain on another. The adage about "Not carrying all one's eggs in one basket," at once comes to mind; however, an investment, properly entered upon, would seem as likely to succeed, whether entered upon by an individual, or by a bank. IS SPECULATION DESIRABLE? 45 advantage over those of the individual, even though he has purchased the same things, upon the same terms, as did the bank. The morality of speculating rests in Morality of part on the capabilities of the ven- Speculation turer — his intelligence, steadiness, capital and reserve. No one can recognize quite as well as does the broker just what the dangers are from foolish speculation, nor just what the benefits are from correct speculation. Most men are speculators, consciously or unconsciously. The conscious, intelligent speculator takes the whole risk in the hope of reaping the entire reward; the unconscious speculator takes a lessened risk and secures but part of the reward. Speculation on a sound basis in a legitimate enterprise is moral — other speculation is immoral. The answer of the future to the ques- The Answer tion, "Is Speculation Desirable?" of the cannot fail to be similar to the Future answers given to those already answered questions, "Is Life Insur- ance Desirable?" "Is Marine Insurance Desirable?", "Is an Interest Charge Immoral?", "Is Business Immoral?" Speculation is a form of insurance, a form of business, an undertaking both for present interest return, and with hope of future profit. Attempts to suppress it by law have been repealed as unwise, and intelligent opinion is steadily veering toward a better understanding and higher appre- ciation of its beneficial effect, upon individuals and society as a whole. An opinion given by the United States Supreme Court can well be quoted: "Speculation of this kind by competent men is the self-adjustment of society to the probable. Its value is well known as a means of avoiding or mitigating catastrophes, equalizing prices and providing for periods of want." 46 NEW YORK STOCK EXCHANGE That which "mitigates catastrophes" and "pro- vides for periods of want" would seem highly desirable. The crux of the quotation is, of course, the word "competent." Ideal speculation predi- cates competency, which in turn implies education or experience, sound judgment, proper capital — in fact, proper business qualifications. Specu- lation by incompetents is deprecable. There can be no doubt, with proper education, that the public will as surely veer to a favorable answer on this most important matter, as it has on the other questions raised in this chapter. GROUP OF TELEGRAPHERS REPORTING SALES On one side of the pedestal in the foreground is a telegraph instrument. The man at it is sending out the prices brought to him by the three others; on the opposite side of the pedestal is a ticker on which the prices appear almost instantly. See page 48 for a piece of tape and 220 for the ticker keyboard and the ticker instrument. U3 CO flflCl a: O _