Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924019273840 Cornell University Library HG 4572.081 Speculation on the New York stock exchan 3 1924 019 273 840 1 SPECULATION ON THE NEW YORK STOCK EXCHANGE STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW EDITED BY THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY Volume LVI] [Number 1 Whole Number 137 SPECULATION ON THE NEW YORK STOCK EXCHANGE SEPTEMBER. 1904— MARCH, 1907 BT ALGERNON ASHBURNER OSBORNE Jnstructor in Economies and Industry, University of IHtlsburgh COLUMBIA UNIVERSITY LONGMANS, GREEN & CO., AGENTS London : P. S. King & Son 1913 WQk Copyright, 1913 BY ALGERNON ASHBURNER OSBORNE 1^6 to THE MEMORY OF MY FATHER AND MOTHER PREFACE There are, broadly speaking, three accepted methods of discussing the modern stock exchange in general or any single exchange in particular. One consists in picturing the stock exchange as an institution which is indispensable to the conduct of present-day business; the stock exchange is held up before us as attaining a degree of success in per- forming certain services for society generally, such as no other human institution has ever reached. Another con- demns the workings of the New York Stock Exchange and denounces everybody actively connected with it as a thief or a gambler or both. Still a third recognizes the use- fulness of the stock exchange, while it deplores evils that are incidental to it. But, because of the weaknesses of un- changeable " human nature ", these evils are depicted as in- eradicable or well-nigh so. The present monograph is not an attempt to achieve mere originality. The New York Stock Exchange, in itself, is not idealized, those operating on it are not sweepingly charac- terized as either dupes or knaves, and possible remedies for such evils as were glaringly apparent during 1906 and 1907, for example, are briefly considered, and are set forth as quite practicable. But, if discussion can be diverted from the well-trodden paths along the three main lines indicated, it seems as if a clear recognition of the evils and correctives for them may result from discussion with a new starting- point. Those who have beheld stock speculation from any one of the three viewpoints — which are almost mutually exclusive — appear to have accomplished little in the way of elucidating the subject or of curing the evils. 7] 7 8 PREFACE [8 First of all, it seems probable that, by critical analysis of the functions of organized speculation, during a period when it was exceedingly active, we may discover the ex- tent to which such speculation was a benefit to society. Criticism of certain wise saws applying to stock specula- tion seems a necessary first step in focussing attention on the evils of modern speculation. Accordingly the follow- ing monograph is largely critical of certain commonly accepted dicta regarding speculation, in the light of events briefly related in the narrative portion of the work. Con- structive suggestion is brief. It cannot be otherwise in the present stage of discussion, where most minds are so hazy on the significance of speculation. The criticism is offered, along with the suggested correctives, chiefly with a view of revivifying and redirecting discussion. The adoption of the suggested remedial measures in the near future can- not perhaps be expected. But if discussion is drawn away from its conventional courses, a distinct step in advance will be made. The expectations and aims just set forth will serve as an Apologia for this monograph. To Professor H. R. Seager for his valuable and helpful advice, and for undertaking the drudgery of reading the manuscript in its crudest stages and also the proof; and to Professor E. R. A. Seligman, who has helped in preparing the manuscript for publication, the author wishes to oflfer his heartfelt thanks. To both of them and to the other members of the Faculty of Political Science of Columbia University, under whom the author has studied, he wishes to extend his gratitude for many illuminating suggestions they have given him, often unconsciously. Their collec- tive outlook on human activity, though comprehended only in part perhaps, has been refreshing and stimulating to a degree which cannot be measured or expressed. CONTENTS PAGE Preface ...... 7 CHAPTER I Introduction 11 CHAPTER II Active Speculation : Urgent Investment Demand — September- December, igo4 21 CHAPTER III Changing Conditions of Investment : 1905 35 CHAPTER IV Tendencies toward Over- Speculation : Restricted Powers of Invest- ment Absorption — ^January-June, lgo6 49 CHAPTER V Over- Speculation and Liquidation on a Large Scale — July, 1906- March, 1907 63 CHAPTER VI The Assumed Investment Demand 79 CHAPTER VII Speculative " Anticipation of the Needs of the Market " 91 CHAPTER VIII Stock Speculation in 1906 and the Succeeding Economic Read- justment ii8 CHAPTER IX Summary, General Conclusions and Remedial Measures 144 9] 9 10 CONTENTS [lO PAGE APPENDIX I Number of Shares Sold on the New York Stock Exchange, Each Month, igoo to 1912 Inclusive I74 APPENDIX II Prices of Some Leading Speculative Stocks in the New York Stock Exchange, on the First of Each Month, September, 1904, to March, 1907, and on March 29th, 1907; 174 Vita 175 CHAPTER I Introduction " In striking contrast to the . . . legal position of the prin- cipal continental exchanges is the private and independent character of the New York Stock Exchange. This privacy has been intensified by the settled policy of the Exchange to keep its affairs as secret as possible, to attend strictly to its own business, and to resent any interference from without. It has resisted every effort toward incorporation. That an association which dominates the financial market, directs the course of investment, and settles the value of property for millions of people has for nearly a century maintained itself as a purely private organization, and will perhaps continue to do so for another hundred years, is a striking example of the confidence of people of the Anglo-Saxon race that, as fast as public wants develop, private activity will furnish the best means to satisfy them." — H. C. Emery, Speculation on the Stock an'd Produce Exchanges of the United States (i8p6). How^EVER people of the Anglo-Saxon race have relied in the past on private activity as a means of evolving the sys- tem of selling securities that will be most advantageous to the parties directly concerned with the transactions and to the community, public opinion in recent years seems to have been directed toward reforming certain defects which apparently exist in the conduct of the New York Stock Exchange. Incorporation of the Exchange, in particular, has been discussed, both at Albany and Washington, as a method of rendering the sale of securities more amenabl- to governmental control. In order to examine the results ii] II 12 SPECULATION ON NEW YORK STOCK EXCHANGE [12 obtained under the regime of unhampered private control, it has seemed worth while to consider the activities on the New York Stock Exchange in a particular period. The 31 months, from September, 1904, to March, 1907, inclusive, have been chosen for this purpose, because of the sustained activity of stock trading — measured by the number of shares sold each month — which characterized them. The degree of that activity is indicated in the following table in which sales for the 31 months chosen are compared with those in the periods of equal length, immediately preceding and following. MONTHLY RECORD OF SHARES SOLD ON THE NEW YORK STOCK EXCHANGE. Feb,,iqo2-Avg.,iqc4. Sept.,jq04-Mar.,iqa7. Apr., iqoy-Oci., iqoq. Maximum 26,567,743 (Apr., 1902) 38,512,548(530., T906) 24,966,326 (Nov., igoS) Minimum 4,972,804 (June, 1904) 12,576,469 (June, J905) 9,677,494 (Nov., 1907) Average 13,249,121 23,554,097 16,147,272 The period, during which a relatively high degree of activity was maintained, seemed particularly worthy of study, since it coincided with a striking expansion of gen- eral prosperity — both commercial and industrial — in the United States and throughout the world. This growth of prosperity, in degree and extent, was hardly interrupted during the 31 months constituting the period which has been selected for study. But if we could plot on a chart the values of index numbers, showing respectively the de- gree of the jjeneral prosperity, the volume of trading activity on the Stock Exchange, and the general prices of stocks in which trading was active, we should not find that the three curves tended to conform closely with one another. As has been said, prosperity underwent continuous expan- sion. The monthly volume of transactions on the Stock Exchange varied over a wide range, extending from 38,- 512,548 to 12,576,469 shares. Prices on the Stock Ex- change rose very perceptibly at the beginning of the period. 13] INTRODUCTION 13 underwent numerous undulations during 1905 with an up- ward tendency, exhibited a downward trend with some interruptions in 1906, and finally, in the first three months of 1907, with which the period closed, fell sharply and profoundly. The purpose of taking up in detail the activities of the New York Stock Exchange during this 31 months' period, is to discover what conclusions, if any, can be drawn legiti- mately from a study of the periodic data which are to be had in some abundance. Especially will attention be paid to the New York Stock Exchange, as its affairs were con- ducted in the 31 consecutive months chosen, with a view to ascertaining the way in which certain important functions of the typical modern stock exchange, as they are set forth in current economic discussion, were discharged. It is hoped that the general results of the investigation will show, in some degree, how effective is the organization of the New York Stock Exchange for the fulfilment of certain economic and social purposes, for which stock exchanges are, by assumption, peculiarly adapted. The two functions most generally ascribed to a large stock exchange, and pre-eminently to that of New York, by economists, are, 1. Directing the flow of capital into investments. 2. " Discounting " future events — that is, indicating gen- eral economic prosperity or dulness by the course of Stock Exchange prices, thus causing those prices to serve as a barometer for the guidance of the business community. An analysis of transactions, performed according to the rules and customs of the New York Stock Exchange over a comparatively limited period, will, it is hoped, throw some light on the degree of success with which these functions were discharged during the period in question; and also 14 SPECULATION ON NEW YORK STOCK EXCHANGE [14 will enable us to estimate the general effectiveness of Stock Exchange practice in discharging these functions at any other time. If the rise of prices on the Stock Exchange, in the last few months of 1904, throughout 1905 — with some inter- ruptions — and in the first month of 1906, had continued until the growth of general prosperity was checked in 1907, we might fairly accept prices of stocks as trustworthy in- dices, of general economic conditions. Or even if the rise had been continuous up to the autumn of 1906, followed by the sustained decline which endured through 1907 for the most part, we might regard the general movement of prices as having " discounted " the coming depression. But the conditions, under which the long decline began in Octo- ber, 1906, we shall show, had existed throughout the earlier months of 1906. During the earlier period, however, they had not developed to the point where they would exert their fullest combined effect. The conditions to which we refer are: 1. The volume of speculation for the rise in stocks. 2. The strength of the investment demand for stocks. 3. The tendency of speculation to adjust the volume of its operations to the character and strength of the in- vestment demand. The power of making the adjustment indicated is usually ascribed offhand to speculators, even though they are not aided in bringing about this adjustment by the mechan- ism of the particular market in which they operate. It has never been shown either d, priori or inductively that or- ganized speculation in itself has the faculty of guiding in- vestment. Unless the customs and formal rules of a par- ticular stock exchange are established with this definite aim in view, it has never appeared that speculators will find it to their individual interest to direct or to guide investment ; 15] INTRODUCTION 15 although the collective interest of any body of speculators is intimately concerned with the activity of investors, as we shall show later. In the economic transformations which followed the Spanish War, many huge new industrial corporations were formed, and many important railroad systems had been heroically reorganized. Some corporations, whose stocks were subject to frequent and heavy transactions in the market, and which had been firmly established before the present century, had not been seriously affected by the de- pression of the middle nineties. But in the following dec- ade they operated under such novel conditions that their securities were on a basis much like that of the new in- dustrial companies and of the reorganized railroads. Soon after the present century opened, there existed a huge mass of securities of uncertain value which were to be lodged ultimately with investors. The process of disposing of these securities was carried on to some extent in 1901 and 1902, and was briefly checked by a special concurrence of events in 1903. After many months of relative quiescence in the securities markets in 1904, the process was resumed in September of that year on a large scale; and, during the next few years the completion of this process was sought, partly by means of operations connected with the New York Stock Exchange. During that time, the task of those connected with that institution was chiefly to " di- rect the flow of capital " toward the large quantities of stocks which had been listed for dealing, but which were not yet finally absorbed by investors. To accomplish this, reliance was placed on the self-interest of the Stock Ex- change's members and patrons, conducting their various operations under the conditions imposed by the customs and formal rules of that Exchange. Those members through whom the various patrons conducted their dealings were, l6 SPECULATION ON NEW YORK STOCK EXCHANGE [i6 of course, brokers — in the strict sense. The patrons them- selves have been classified, in the report of the Hughes Committee, as follows : ( 1 ) Investors, who personally examine the facts relating to the value of securities or act on the advice of reputable and experienced financiers, and pay in full for what they buy. (2) Manipulators, whose connection with corporations issu- ing or controlling particular securities enables them under cer- tain circumstances to move the prices up or down, and who are thus in some degree protected from dangers encountered by other speculators. (3) Floor traders, who keenly study the markets and the general conditions of business, and acquire early information concerning the changes which affect the values of securities. From their familiarity with the technique of dealings on the Exchange, and ability to act in concert with others, and thus manipulate values, they are supposed to have special advantages over other traders. (4) Outside operators having capital, experience, and knowl- edge of the general conditions of business. Testimony is clear as to the result which, in the long run, attends their opera- tions; commissions and interest charges constitute a factor always working against them. Since good luck and bad luck alternate in time, the gains only stimulate these men to larger ventures, and they persist in them till a serious or ruinous loss forces them out of the " Street." (5) Inexperienced persons, who act on interested advice, " tips," advertisements in newspapers, or circulars sent by mail, or " take flyers " in absolute ignorance, and with blind confidence in their luck. Almost without exception they eventually lose. For our purposes, the above detailed classification will not be necessary. We shall consider only investors — meaning those who buy outright, not only for purposes of assured income, but also for the sake of obtaining control 1 7] INTRODUCTION 1 7 of corporate property — and speculators generally. Most of our observations will apply to classes (4) and (5), when we refer to speculators — that is, large operators and in- experienced traders. On manipulators, as such, and their activities we shall not touch. Accordingly the movement of stocks as between investors and speculators generally will be the aspect of Stock Exchange activity which will chiefly engage our attention. The nature and direction of this movement, as it was manifested on the Stock Exchange during the period chosen for study, determined the degree of success with which the process of the final disposition of stocks to investors was attended. Incidentally it may be profitable to inquire, in the course of our investigation, whether prices on the Stock Exchange were determined by conditions actually existing at the time a given set of prices was quoted, or whether future events, foreseen but dimly by ordinary observers or quite unlooked for, were so clearly apparent to speculative foreknowledge, that they were more powerful in making prices than were existing conditions. Was the smoothness or difficulty of the shifting of stocks between investors and speculators more influential on price movements? Or did speculative " discounting " of future events constitute the predominant factor in making Stock Exchange prices ? These questions have been answered repeatedly with provoking assurance and confidence, on the strength of d, priori impressions. It is hoped that considering the events of 31 months of sustained activity on the Stock Exchange will afford fuller information on these points. Mention has already been made of the wide variations in the volume of sales, month by month, on the Stock Ex- change. By way of emphasizing further the significance of the 31 months' period under consideration, there is given below the number of shares sold during each period of the 1 8 SPECULATION ON NEW YORK STOCK EXCHANGE [ig same length, extending from each September, 1900 to 1909, inclusive, to the third succeeding March in each case, that is from 1903 to 1912, inclusive, and the average monthly number of shares sold for each of these ten periods of 31 months : 31 Consecutive Months including Sept., 1900 and March, 1903 Sept., 1901 and March, 1904 Sept., 1902 and March, 1905 Sept., 1903 and March, 1906 Sept., 1904 and March, 1907 Sept., igos and March, 1908 Sept., 1906 and March, 1909 Sept., 1907 and March, 1910 Sept., 1908 and March, 191 1 Sept., 1909 and March, 1912 Total Number of Shares sold on the Stock Exchange. ■ 558,508,621 . 445,188,567 ■ 493.762,756 • 579.724.721 • 730,177.023 . 615.149.487 . 524,678,046 ■ Si9.24g.312 ■ 487.034.946 • 401.9S3.127 Average Number of Shares sold each month on the Stock Exchange. 18,016,407 14,360,922 15,927,831 18,700,797 23,554,097 19.843,532 16,925,098 16,749,978 IS.710,805 12,966,230 It will be noticed at once that the period which will par- ticularly claim our attention — extending from September, 1904, to March, 1907 — was characterized by much the larg- est total number of shares sold, and the highest monthly average, of all the periods tabulated above. Most economic discussion treats speculation on the Stock Exchange as if events in connection with it had the same injport and brought about the same results, no matter what volume of transactions took place in differing periods. The parti- cular period to be studied by us in detail was attended by an abnormally heavy volume of sales. It seems as though the significance of a 31 months' period in which more than 730 millions of shares were sold might differ essentially in character from that of a period in which the sales of only 400 millions of shares were recorded. The selected period might be characterized briefly as follows : I. It began in a pronounced revival of speculative ac- 19] INTRODUCTION ig tivity — as measured by volume of sales — after some months of relative quiescence. 2. It closed in a prolonged and thoroughgoing liquida- tion involving sales of a large number of shares. 3. It coincided with a period of uninterruptedly ex- panding general prosperity, almost vi^orld-wide in extent. 4. Its close shortly preceded a check to general pros- perity; the severe and extensive liquidation in the stock market might either : a. Have been a factor in the check to the general prosperity, or, b. Have " discounted " that check to the general prosperity. 5. Its duration was marked by a high degree of specula- tive activity as measured by average monthly sales of 23,554,097 shares, as over against 13,249,121 shares sold in the period of 31 months immediately preced- ing, and of 16,147,272 shares in the period imme- diately following. In the succeeding chapters we shall pay special regard to the demand of investors, in response to which speculators, presumably, were conducting their operations. The events of the period, which are to be studied, were chiefly those which bore on the manifestations of the investment demand and the adjustment of speculative operations to that de- mand. After we have considered events in their chrono- logical order from this aspect, we shall consider the general changes — qualitative or quantitative — undergone by the character of the investment demand; and also attempt to analyze the extent to which Stock Exchange traders modi- fied the volume and character of their activities in accord- ance with those changes. Then the possible effects on general economic conditions, arising from the speculative 20 SPECULATION ON NEW YORK STOCK EXCHANGE [20 response to investment demand in the latter part of 1906, will be taken up. Finally, any modifications which may seem desirable in the practice of trading on the New York Stock Exchange — so far as the developments of the period may indicate the need of those modifications — will be dis- cussed. But, whether the changes in Stock Exchange practice should be brought about by those having oversight of stock speculation in New York at present, or by govern- mental authority, is a question into which we shall not enter. The powers of either agency seem ample to enact and enforce any measures that may appear necessary, but the relative desirability of having either source of author- ity called upon, in preference to the other, will not come within the scope of our considerations. CHAPTER II Active Speculation : Urgent Investment Demand — september december, i904 According to the Commercial and Financial Chronicle, 1,273,623 shares were sold on the New York Stock Ex- change Monday, September 12, 1904. Not since the pre- ceding March 23d had the sales of one day been upwards of one million shares. Throughout the greater part of the spring and during the entire summer, trading on the Ex- change had been relatively inactive. But, with the heavy sales of September 12th, a new era and a new series of movements in the stock market may be said to have begun. From that date until between two and three years later — in the closing days of March, 1907 — ensued a period of public speculation in securities which has rarely been sur- passed in sustained activity of long duration. Everything appeared favorable for success in speculation for the rise — at least those factors which are ordinarily considered favorable. The surface of the money market — this too at a time of year when the western crop-moving demand should normally impose some strain — was quite untroubled. To be sure, the report of the Clearing House banks of New York issued September loth, had shown a loss of more than $9,000,000 in the combined surplus re- serves. However, the amount of that item in the bank statement stood at $38,438,250; the total reserves con- stituted 28.1 per cent, of the combined deposits. Loans were made on call at the Stock Exchange with interest 21] 21 22 SPECULATION ON NEW YORK STOCK EXCHANGE [22 rates ranging from % to 2 per cent. The gradual but steady revival of industry and commerce had not reached a point where it taxed the facilities of the money market. Whether or no the extremely low interest rates on call money served to stimulate speculation, may be doubtful; but, at any rate, those rates did not exert the repressive influence on speculative sentiment which they are supposed to do in the first month of autumn. Trade revival, after the setbacks of 1903, was becoming generally manifest. But, best of all from the brokers' viewpoint, there were many individuals with sufficient means to enable them to " discount " the prosperous future they foresaw by enter- ing into speculative commitments for the rise. With the subsequent activities of these speculators we shall be most immediately concerned. The rapid recovery from the depression of 1903 was most impressive to many superficial observers who recalled th& dreary years which had followed the crisis of the pre- ceding decade; the seeming inherent likeness of the two crises was emphasized by the fact that ten years, making up the conventional period which intervenes between suc- cessive crises, had elapsed between the two in question. The reaction from the later dulness appeared to prove that the old-time economic crisis had passed along with the nineteenth century — in this country, at least — and that, in the words of Jefferson Brick and Major Pawkins uttered many years previous, " we were a young lion ", and " had revivifying and vigorous principles within ourselves ", which would now serve to carry us through an indefinite period of unbroken prosperity. ^^It .was further seen that the reorganizations of the rail- roads on a large scale, which had been efifected in the late nineties, had attained more successful results than had been thought possible. Union Pacific, Atchison, Baltimore & 23] ACTIVE SPECULATION 23 Ohio, Northern Pacific — all had been heroically reorgan- ized, and had already shown the success of the transforma- tion even before 1903. The stock market decline of that year, accompanied as it was by a pronounced slackening of trade activity, was regarded as a most trying ordeal, through which the railroads had passed without radical damage. A falling off in gross volume of railroad busi- ness was clearly perceptible during the dull period, but late in 1904 the revival and also the improved management of American railroads began to attract attention. .^ As a factor in a revival of Stock Exchange activity^* there was, in addition to the relative ease with which American railroads and industry had withstood the over- rated depression of 1903, a large class in existence which stood ready to " discount " the future of boundless pros- perity, which it was thought lay ahead. Of this class, little can be said by way of general description or broad characterization, except that its members had no conscien- tious scruples to deter them from stock speculation, they had unlimited confidence in the country's prosperity and in their own judgment of speculative matters, and they individually possessed sufficient means to advance the vary- ing amounts of margins required by their respective brok- ers, with which they could back their several judgments. From the ranks of the very wealthy and of those moder- ately well off, from every branch of business and from every profession, from the dwellers in cities, small towns and rural districts, the speculative class was recruited. The members of this class presented among themselves as wide variations in the degree of their abilities to engage in speculation as any quality denoting acumen and astuteness can display when it is distributed throughout a large num- ber of such heterogeneous individuals. Among them might be found the operator who would not scruple to em- 24 SPECULATION ON NEW YORK STOCK EXCHANGE [24 ploy his knowledge of a corporation's affairs which he pos- sessed by virtue of being an official in the company to manipulate prices or to guide his operations in the market ; and there could also be found those who had the haziest ideas of the operations of the stock market or those who deposited their margins and entered into their commitments with the same blithe carelessness with which they would have placed their money on a whirl of the roulette wheel. To some extent, that is, in numbers varying widely from time to time, speculators of the various sorts indicated are always present in the stock market — or in any other mar- ket where the routine is so simplified that the participant does not have any other function than to make necessary payments and to give an occasional order to his broker. In 1 90 1 and the two succeeding years they had participated largely in the active markets of the Stock Exchange. Since occasional speculators of this sort usually buy for the rise, they had been generally unfortunate as a class because of the decline of prices during 1903. The ill-success of ven- tures on the long side in that year had not been so severe as to prevent their return to the market in September, 1904, with fresh accessions to their numbers. A rising movement in prices generally did not start with the renewal of activity mentioned as having taken place on September 12th, 1904. The first week of general ac- tivity was not immediately productive of rich rewards for those speculators who returned to Wall Street in that week, attracted by the previous rise in prices. To take the high and low points respectively for the stocks in which during the week occurred the largest volumes of transactions, we find that those points from' Monday, September 12th, to Saturday, September 17th, inclusive, were as follows: 25] ACTIVE SPECULATION 25 Range Railroads. High. Low. Sept. 12-17, 1904. Atchison 835^ 8oj4 254 Chicago, Milwaukee & St. Paul 159^^ i^eyi 2H Erie 32^ 29^ 3 Metropolitan Street Railway 123^ 1201^ 3J4 Missouri Pacific 99^ g6j^ 2j4 Pennsylvania 13254 127^ 5^ iReading voting trust certificates 68 J4 6s sYz Rock Island 30 27}^ 2}4 Southern Pacific 57^ 55^ 25^ Southern Railway voting trust certificates 34^^ 325^^ 2l4 Union Pacific 100 9714 2^ Industrials. Amalgamated Copper S9J4 57 2l4 American Locomotive 28^ 24J^ 3j^ U. S. Steel, common 18^ 1454 3% U. .S. Steel, preferred 695^ 64^ s}i Neither the high nor the low points here tabulated were registered on the concluding day of the week, except that, in the cases of the two classes of Steel stock, the high points were attained on Saturday. So that the first week of heightened speculative activity was not immediately pro- fitable to the increased number of speculators, nor cal- culated to encourage further heavy commitments for the rise. In fact, the first week of revived activity showed such little decided tendency on the part of prices to move in one direction or the other, that, in the next business week, September 19 to 24, inclusive, transactions involving only 3,502,548 shares, as against 5,874,209 shares in the preceding week, were recorded. In the second week named, moreover, no day's transactions amounted to one million shares; in the earlier week there had been four days in which sales exceeding that amount had been made. Indeed, the market, during the remainder of September, 26 SPECULATION ON NEW YORK STOCK EXCHANGE [26 displayed no such volume of trading as had been shown in the business week which ran from the 12th to the 19th, in- clusive. September was far ahead of the preceding months of the year in the volume of its sales, amounting to 18,- 767,264. This total is to be compared with sales of 12,- 474,789 shares in August and 12,462,393 shares in July, During the first half of the year speculation had been com- paratively quiescent, except for a brief period in the latter part of March, following the Northern Securities decision in the middle of that month. ^^ Accompanying the outburst of activity on the Stock Exchange, there occurred, in the course of the month, rises of prices of the stocks in which transactions were heaviest, indicated by the closing prices on September ist and on October ist, respectively, as follows: Change Railroads. Sept. i. Oct. i. during the Month. Atchison 80^ 8354 + 2^ Chicago, Milwaukee & St. Paul 154 160^ -|- 6^ Metropoliton Street Railway ii954 122 -|- 2% Missouri Pacific 965^ 98J4 + i^ Pennsylvania 125 132J4 -\- 7^ Reading voting trust certificates 61^4 69 +754 Rock Island 25?^ 28^^ + 2^ Southern Pacific 565^ S7% + 1% Southern Railway voting trust certificates 28^^ 33J/^ -|- 5 Union Pacific 9754 I02J4 + 5 Industrials. Amalgamated Copper S6j4 58^ + i^ American Locomotive 2074 27 -|- 6% U, S. Steel, common I2^ 185^ + SJ4 U. S. Steel, preferred 61% 74% + 1254 One cannot always speak with certainty concerning the general tendency of stocks to move, at any given time, from speculators' hands into those of investors or in the 27] ACTIVE SPECULATION 27 contrary direction — at least not with the confidence dis- played by many financial writers. The process, by which stocks were gradually sold by speculative holders to in- vestors, can only be inferred by watching the readily as- certainable manifestations of stock market phenomena. The heavy volume of transactions on the Stock Exchange was attended by rising prices, which would mean either that an appreciable effective investment demand, or else the speculative purchases in expectation of higher prices, was operative in bringing about the general advance of prices. If the latter had been chiefly instrumental in raising prices, some evidence of strain in the money market should have been apparent. But there was no such strain manifested. Call loans were still made at from 2 to 3 per cent, while at the same time the reported loans of the Clearing House banks were undergoing heavy reductions. That purchas- ing investors were present in considerable numbers and well supplied with funds was clear from the readiness with which many large bond issues were absorbed when they were offered for subscription. From the mere report of sales on the Stock Exchange and the course of prices registered there, one can only draw the vaguest inferences. But the continuous rise of prices and sustained heavy volume of sales — both taken in connection with the low call rates, diminishing volume of loans shown in the weekly reports of the Clearing House banks, and the readiness with which bonds were taken by investors — seem most reasonably explained by the inferred tendency of investors to take large amounts of dividend-paying stocks out of speculative hands. November was likewise a month characterized by heavy sales and rising prices on the Stock Exchange. The ac- tivity there was quite as intense as it had been during Octo- ber. The result of the Roosevelt-Parker presidential elec- 28 SPECULATION ON NEW YORK STOCK EXCHANGE [28 tion had been clearly foreseen for some time, and caused little interruption in the course of Stock Exchange events. Many issues of new securities were announced during November, by way of taking advantage of the easy money market and the vast investment resources which had been apparent for some time. Many of the bond issues — whether new or now finally " digested " — bore the rate of 3)4 or 4 per cent, interest, rates of return which were not to prove so alluring a short time afterward. Ap- parently any kind of securities, issued under moderately respectable auspices, appeared certain of a market; the in- vestment demand seemed limitless in its absorptive capacity. Toward the latter part of the month, however, the at- tainment of a 4 per cent, level by the Stock Exchange call rate, followed the substantial diminution, during the month, of surplus reserves held by the Clearing House banks from $16,793,650 to $8,539,075 — this, too, in spite of concurrent reductions of deposits and loans. To a large extent, the decreases in those items could have been ascribed to gold exports, amounting to $20,500,000. Regarding this it was said, "A demand to remit for American securities bought in London for New York account was at times noted and there was likewise a demand to pay for New York City revenue bonds placed abroad the previous spring and now being returned." ^ Although the investment market still displayed a readi- ness to accept all offers of securities made to it, and like- wise was absorbing large amounts of securities from the open market, the advance of the call rate to 4 per cent. — quite striking in view of the 2 and 3 per cent, rates which had prevailed for a long period preceding — the large ex- ports of gold, and the return of American securities from ' Commercial and Financial Chronicle, " iRetrospect of 1904," Jan. 7, 190S, p. 87. 29] ACTIVE SPECULATION 29 f abroad, all served as indications of the definite limits to the investors' absorptive capacity and the consequent strain to which the speculative body might be subjected. However, these possibilities found little reflection in Stock Exchange prices, which rose to the very end of the month. In the movement which had proceeded through the first two autumn months, money market conditions had been so easy as to be negligible factors in Stock Exchange cal- culations. Although everything during November — except the rise of the call rate to 4 per cent, already mentioned — had be- tokened the presence of purchasing investors with suffi- cient means to relieve the speculators for the rise from carrying too heavy a burden, the first serious check to the prolonged bull movement occurred on December 8th. Amalgamated Copper, particularly, was in a strategically weak market position in that it was heavily sold and pur- chased by speculative traders for the most part, and the conduct of the company's business was not on such a stable basis as to attract investors. Fierce magazine at- tacks on the management of that company and the weak position of those who were speculating in it, together com- bined to depress the price of that security. The specula- tion for the rise in many other stocks had been quite out of proportion to the investment demand for them, and they also declined in their respective prices. December 8th was the date on which occurred a panic of a minor sort, accompanied by the quotation of a 5 per cent, call rate. The next few days saw the reaction from the severe gen- eral decline of the 8th in the form of rising prices, but a pronounced fall recurred on the 12th. This latter decline was followed by a week of relative inactivity; but, after the 20th, the general rise of prices which followed the break of the 12th was accompanied by a renewed outburst 30 SPECULATION ON NEW YORK STOCK EXCHANGE [30 of activity — that is, by an increased volume of daily sales ; the latter, hov^rever, were not on the tremendous scale ob- served in October and November. On the last two busi- ness days of the year the sales on each day, the 29th and 30th, amounted, respectively, to 1,112,986 and 1,103,689 shares. The declines in prices, which occurred on December 8th and 1 2th, acted so as to offset the steadily rising tendency shown in the stock market during the remainder of the month — particularly the latter half of it — so that prices of the leading stocks did not display the " buoyancy " — to use a figure of the financial reporters — which was so evident in September, October and November, when the prices of those various stocks recorded on December ist were com- pared with prices established- on the opening business day of the following month, January 3, 1905. Nevertheless the rising tendency of prices was clearly in evidence at the close of the year 1904; the last four months of this year may be regarded as constituting the early stage of the three years' market movement we have set out to consider. The most prominent aspects of this four months' period have already been mentioned — a sustained heavy volume of transactions on the Stock Exchange, generally rising prices, and the prevalence of low call rates throughout the four months, except for the rates quoted on a few days. Whether these three striking phenomena conclusively pointed to the presence of a large body of purchasing in- vestors may be questioned. Taken all three together, they constitute strong negative evidence in contravention of the hypothesis that speculative commitments for the rise were out of all proportion to the capacity of investment absorp- tion. The ready investment in large issues of new rail- road and industrial securities which were taken during the autumn of 1904, indicated the presence of a number of 31 J ACTIVE SPECULATION 31 complaisant investing purchasers; although, in itself, this readiness did not necessarily mean that the same body of investors was engaged in lightening the load of specula- tors on the Stock Exchange. In the last three or four months of 1904 there was seen a speculative stock market of intense activity and wide ex- tent. If speculation for the rise was active and its aggre- gate transactions were on an exceedingly large scale, that large volume of transactions was carried on without ac- companying disturbance in the New York money market. There were ample funds available for call loans, with which speculative purchases could be financed; and those loans were made at the traditionally low rates of interest which are usually a distinct characteristic of Wall Street call loans. Speculative transactions, moreover, presented a larger aggregate in October and November than they did in December, toward the end of the movement. On two days in December, the general declines in the stock market appeared to indicate either an over-extended speculation for the rise, in the face of a satiated investment demand, or else they showed that speculators were entering into commitments for the rise more rapidly than purchasing in- vestors were disposed to withdraw the stocks from specu- lative hands. Such halts in a prolonged rising movement are perhaps inevitable. The characteristics of the New York Stock Exchange speculative market in the concluding months of 1904 were typical of a normal market during a time of expanding prosperity — such as are assumed in a discussion of specu- lation in general. In such a discussion, the values of the securities involved in the speculation and their desirability from the investors' viewpoint, are reckoned the chief fac- tors in determining prices. The desirability of investment securities, by assumption, becomes evident to speculators 32 SPECULATION ON NEW YORK STOCK EXCHANGE [^2 before investors perceive it. The forehanded speculators, accordingly, either purchase stocks at comparatively low prices or continue to hold those they have already pur- chased, and sell out finally to investors at higher prices than those at which the several speculative purchases have been made. Before the securities are sold by speculators to investors, their investment desirability is clouded with some uncertainty which, however, is gradually dispelled; until, at last, the soundness of the securities in question becomes so evident that they are almost entirely absorbed by investors. A few unfortunate speculators, however, are entrapped into making their purchases at the topmost prices. At these prices, comparatively few investment purchases are made. Therefore, those speculators who bought at the top are compelled to sell with great or slight losses. The number of those injudicious speculators is as- sumed to be negligible — at least, as compared to the num- ber of successful speculators, who have sold to investors on the preceding rise of prices. Moreover, the recession in prices, which accompanies the liquidation by the un- successful speculators, is supposed to attract investors who are ready enough to buy at prices somewhat less than the imaximum, at which they were not disposed to make pur- chases. To a great extent then, stocks of demonstrated worth to investors are absorbed by the latter. They pay the increased prices to speculators for carrying the stocks over a period of uncertainty. Those who assumed that speculation for the rise and in- vestment, during a period of growing prosperity, follow the course outlined above, might have pointed to the events of 1904 in the New York stock and money markets, as af- fording confirmation of their assumption. Prior to Sep- tember, in relatively small numbers, and after the 12th of that month in growing numbers, speculators were coming 33] ACTIVE SPECULATION 33 to perceive the investment demand which would soon mani- fest itself. Speculative appreciation of stocks kept in ad- vance of investors' recognition of their desirability; not, however, so far in advance that speculators were left with stocks on their hands which investors would not purchase — at least, not for any length of time. Early in December, to be sure, it seemed as if speculators had over-estimated the urgency of the investment demand. The latter, ap- parently, again exerted itself after a few days' quiescence, and speculative evaluation ran only slightly in advance df investment absorption. This tendency was noticeable up to the very end of December, 1904, and bade fair to continue indefinitely into 1905. In connection with the tendency, observable during the later months of 1904, of investment buying to lag only slightly in the rear of speculative activity, and in connection with issues of new securities, the American correspondent of the Economist, writing December 20, 1904,^ made the following observations : One of the most encouraging features now observable is the more moderate volume of business and the continued demand from abroad for the better class of American shares and bonds. There is evidence also that many non-professional traders have left the Street, and it is an excellent sign that some of them have been transferring their accounts from specu- lative to investment securities. In no other way is the confi- dence in the general situation better shown thah by the ease with which the public absorbs issue after issue of new bond flotations — Japanese, New York City, Rock Island, Mexican, Missouri Pacific, Atchison, Cincinnati, and others — not to men- tion the extraordinary volume of municipals which have been taken up by trust companies, savings banks, and investors gen- erally during the entire year. ^ Economist, Dec. 31, 1904, p. 2138. 34 SPECULATION ON NEW YORK STOCK EXCHANGE [34 The very general comment is that stocks are now in stronger hands, and that the irrational dealings in purely speculative non-dividend payers having been eliminated, the outlook is for a gradual and healthful recovery in the stock market. Whether the little traders who were burned in the conflagrations of last week and the week before will be able to extract any comfort from the reflection that stocks, once held by them expectantly, on margins, are now owned by strong interests, who bought and paid for them when they were near the lowest in the re- cent crashes, may best be left to the small traders themselves to decide. It is, however, a matter of some comfort to realize that the situation in the Street is such that it again seems practicable to estimate the probable values of securities by analyses of their earning power, the condition of general trade, and the financial situation. Reference to the latter gives an encour- aging view, for the heavy inflow of funds from the West has been enough to add to the cash held by the New York banks over and above the drafts on the latter to supply the gold which has gone abroad. CHAPTER III Changing Conditions of Investment — 1905 At the beginning of 1905, speculative a c.t""t3^ — ^cb"- ured hy vnlnme nf transsactinns on the Stock Excha nge — did not maintain the height it had displayed in the closing months o fjLQ04: — The movements o f the stock market d id not possess quite the same significance which could have been ascribed^to theih _in _the preceding year. But if de- velopments in connection with the stock market were not of a nature to encourage speculation on a very large scale — as in October and November, 1904 — no events occurred which would lead to the general discouragement of specu- lators or to the general diminution of the aggregate funds they might be willing to employ in " anticipating the needs of the market." And certainly the almost unchecked ex- pansion of general prosperity in itself seemed to offer stronger and stronger inducements to investors as the year went on. The a ttitude of i nvestors towa rd various stocks listed on the Exchange was not revealed^ with any clearness. The slight declines of'^ices," in March and- August, and also t he prono unced general _ fall^occurring in April, mighFliave point ed-ta. the tendency of speculators to over-estimate the e ffective inyestora' Hpmgnd, and to base their operations on ihe-erroneous jtidgmaa*s.-tiie}uhad..ioEmfid_on thejbasis^^f excessive estimates on this point. But, on the other hand, the extensive and appreciable net advances of prices, be- 3S] 33 36 SPECULATION ON NEW YORK STOCK EXCHANGE [36 tween January 3rd and December 30th, showed that in- vestment buying did not apparently lag far behind specu- lative operations. The monthly records of sales on the Stock Exchange were heavier than the average records for corresponding months in the preceding five years ; but in- vestment buying, which always operates to some extent, was not apparently in very much lighter volume than it had been in 1904 — so far as this could be ascertained directly. In the general mvestrnent market, .however^ striking changes took place in the course «£-Ahe. „yfar^.__Tjie_quali- tative nature of these changes was manifested in^ the char- acter of "SecwritreS' offered directly to investo rs— -b oth as to the terms on which the^securities were issued and the prices ,at' which investors were agksd -to purchase .tbeni- These changes mentioned, of course, pointed to the prevailing opinion among bankers that the investment situation had undergone transformation of some sort; they did not in- dicate directly a transformation in the character or extent of the investment demand for listed stocks. However, if we may regard the terms on which investors were invited to take various issues of bonds and other securities, as indicative of an investment demand that differed from the one revealed in 1904, we may consider in detail a number of issues of new securities which were announced in 1905, with a view to ascertaining the significance attached to them Of the Japanese government loans, through which the ex post facto financing of the Russian war was arranged, two allotments to American investors were brought out during the year. The total of the two allotments pre- sented for public subscription in this country amounted to £25,000,000; they were readily taken, in fact oversub- scribed in large amounts. Each loan bore interest at 4j^ per cent, and the bonds representing it were offered at 87^. 37] CHANGING CONDITIONS OF INVESTMENT 37 I The extent of the oversubscription may have indicated an error on the part of the bankers engaged in putting out the loans, in that they made the terms unnecessarily favorable to the subscribers. Possibly then the outcome of the sub- scription to these bonds might, at that time, have shown that the bankers had merely under-estimated the capacities of investment absorption. But the significance of these loans, in another respect, was obvious enough. If the capa- city of investment absorption had any reasonable limita- tions at all, the total amount of this country's available investment funds had been reduced by more than $100,- 000,000 in order to finance a foreign war. This consider- ation too was aside from the evident fact that European investors' resources — a main reliance of American dealers in securities — were concurrently restricted by heavy offer- ings of the same loans abroad. Whatever then might have been the other effects of the Russo-Japanese war on the general conditions, which speculators had to consider in making their forecasts, the financing of that war necessit- ated a substantial reduction in the total investment fund on which speculation ultimately depended for its general success. Not all financial authorities, however, seemed to think that the time had passed when 3^ or 4 per cent, bond? would attract investors. The Pennsylvania Railroad announced an issue of 3>4 per cent, bonds, amounting to $100,000,000, to which its stockholders were invited to subscribe. This issue was announced in March, but in May it appeared that stockholders had valued the privilege of subscription so lightly that they had applied for only 10 per cent, of the proposed issue. In spite of this rail- road's ill-success with securities of this particular nature, the Delaware & Hudson announced an issue, of 3J4 per cent, convertible bonds, amounting to $10,000,000. There 38 SPECULATION ON NEW YORK STOCK EXCHANGE [38 were put out also $10,000,000 of 3>4 per cent, ist mort- gage bonds of the Washington Terminal Company, guaran- teed jointly by the two roads directly interested in the pro- jected construction, the Baltimore & Ohio and the Phila- delphia, Baltimore & Washington. That 3^^ per cent, bonds had a definitely restricted market was indicated by the conditions and results of the issues named above. Early in 1905, at any rate, difficulties in marketing 4 per cent, bonds had not become manifest. Large issues of 4 per cent, bonds, of the Southern Pacific and Missouri Pacific in particular, were sold by bankers in February. In March the American Telephone and Telegraph Company also announced an issue of 4 per cent, bonds amounting to $25,000,000. But some months later — in June — ^there was announced another issue, consisting of $23,859,000 4 per cent, bonds of the Chicago, Burlington & Quincy Railroad, Illinois Division. At the time and throughout the re- mainder of the year, the ordinary observer would have re- garded the success of this issue as a matter of course. Not until the following year was it reported that these bonds could not be sold to investors in their entirety and that the underwriting had been attended with losses to those who participated in it. To this matter we shall refer later. But, at this point, we may compare the ultimate result of this bond issue with that of the Missouri Pacific's $25,- 000,000 issue of 4 per cent, bonds sold in February; the amount of the subscriptions to the latter issue was reported to have run as high as $200,000,000. Early in the year long-term bonds bearing interest at 4 per cent, were marketed with the same ease as in the latter part of 1904. Although the impossibility of selling the Burlington bonds did not appear during the year 1905, the fact that it was eventually reported serves to emphasize the change which many bankers had appar- 39] CHANGING CONDITIONS OP INVESTMENT 39 ently observed taking place in the nature of the in- vestment demand. The change might have consisted of a quantitative restriction or in the growth of a demand for a higher rate of return on investment funds. The issue of securities, bearing higher rates of interest than the tradi- tional 3^ or 4 per cent., might have served to bring into a restricted class of investors some who were not ordin- arily to be found there, if the apparent change arose from a diminished power of investment absorption. Or if the change in the investment market sprang chiefly from a general demand for a higher rate of return, putting out bonds at 4^^ per cent, would operate to meet that demand. Accordingly the diminishing number of 4 per cent, bond issues in 1905 and the number of 4j4 per cent, issues which appeared might have indicated a general demand for higher rates of return by an investing class that was just as well equipped to present an effective demand as it ever was, or it might have been regarded as an expedient for attracting funds from individuals to whom ordinarily such invest- ment issues would not be expected to make any appeal. The Interborough Rapid Transit Company had recourse to three-year 4 per cent, notes as a means of obtaining $10,000,000 of new capital in May. In the more stringent period of 1903, and within two years following this time, the expedient of short-term notes was quite common; but in 1905 it was not at all generally employed. The usual adjustment to the changed character of investors' require- ments was to increase the rate of interest borne by new issues of bonds, or, as in the cases of the Japanese bond issues, to offer the securities at prices well under par. In January a decision was rendered by the United States Circuit Court of Appeals in Philadelphia, which finally determined the disposal of the railroad stocks owned by the Northern Securities Company. One party to the suit that 40 SPECULATION ON NEW YORK STOCK EXCHANGE [40 elicited the decision was composed of Mr. E. H. Harriman and the allied Union Pacific interests. Since they held a controlling interest in Northern Pacific, at the time the Northern Securities Company was formed and the railroad stocks in question handed over to that company, they con- tended that the distribution of the assets of the dissolved holding company should consist of returning the stocks to their original owners. In this way the control of North- ern Pacific would again be lodged in those hands where it had lain before the Northern Securities Company was formed. The Hill-Morgan interests, however, stood out for a strictly pro-rata distribution of the company's assets ; and the decision favored their contention. The practical result of this decision, from the standpoint of Stock Exchange speculation, was eventually to throw a large portion of Northern Pacific's stock upon the open market, and later much of Great Northern's also. Thus the speculative class was to be burdened with the task of carrying large blocks of comparatively high-priced stocks until investors saw fit to purchase them in large part — if they ever should see fit to do sog — 25 J^ Amalgamated Copper u8j4 9914 — 19 American Locomotive 785^ 67^ 11^ American Smelting 174 145 29 Colorado Fuel & Iron 82^ 495^ 32^.^ Pressed Steel Car 645^ 461/$ —18^ Tennessee Coal & Iron 165 143 22 U. S. Rubber 58^ 45 _ 13^4, U. S. Steel, common 46^ 351^ ni^ U. S. Steel, preferred 11314 loi^ —115^ ' Economist, July 21, 1906, p. 1215. 55] TENDENCIES TOWARD OVER-SPECULATION 55 The declines set forth in this table afford evidence as to the weakness of investment absorption, from January to June, 1906, in that they show how little the latter availed to withdraw generally from the hands of speculators at relatively high prices the stocks in which that class of traders had been most interested. The only conclusive evidence that investment absorption had exerted itself, to the extent which was assumed to be possible, would have been the retirement of most of the stocks from the specu- lative section of the market. Speculators might, by using the supernatural penetration with which they are conven- tionally supposed to be endowed, have estimated with ap- proximate correctness the actual extent of resources pos- sessed by potential investors, even though data for that estimate were quite lacking. But they had been much mis- taken in the estimate of the urgency of investors' desires to purchase largely on the Stock Exchange at the highest prices of the first half-year, the events of which made this clearly evident. The course of trading on the Stock Exchange has just been briefly summarized, for the first half of 1906. It might be well to turn now to the consideration of evidence that is now available — and which was also available at the close of June, 1906 — as to the character and extent of the investment demand. Inquiry into changes occurring in the nature of the investment demand can best be conducted by setting forth the terms on which certain typical security issues were offered directly to investors — just as we have done in the case of issues put forth in 1905. The Pennsylvania Company in January sold an issue of 4 per cent, bonds, amounting to $20,000,000, to a large banking firm ; these bonds, however, had only 25 years to run. The Missouri, Kansas & Texas Railway also an- nounced an issue of 4j4 per cent, general mortgage bonds, 56 SPECULATION ON NEW YORK STOCK EXCHANGE [56 subject to the authorization of its stockholders, to be sought at a later date. $10,000,000 of these bonds were to be offered to stockholders at 87^4. The interest rate and the terms of the offering were strongly reminiscent of the Japanese 4j/^ per cent, loans put out in this country the preceding year. The Westinghouse Manufacturing Com- pany presented to stockholders the privilege of subscribing to an issue of $15,000,000 convertible gold Ss. In February the result of New York City's sale of $20,- 000,000 50-year 4 per cent, bonds by public bidding en- gaged the attention of financial writers. For many years previous, the City had been able to borrow at 35^ per cent, or less. But since an issue of outstanding 3j4s was quoted in the market at 98, it was thought best to have the new issue bear interest at 4 per cent. The price obtained for the bonds was 108.052, which meant that the city borrowed the money at 3.65 per cent. This compared with the rates at which some prior issues had been put forth, as follows : ' i Rate of Interest Paid by City. Date of Issue. %. Nov., 1905 3-4997 Apr., 190S 3.47 Nov., 1904 3.40 May, 1903 3.32 May, 1902 3.233 Feb., 1902 3.194 On the surface the significance of the bare data given above appeared to lie in a gradual decline in New York City's credit. But other interpretations of the relatively unfavorable terms of the issue were suggested, notably the fact that " the supply was greater than the demand "," so far as issues of general investment securities were con- * Commercial and Financial Chronicle, Feb. 24, 1906, p. 421. ' Economist, Mar. 3, igo6, p. 356. 57] TENDENCIES TOWARD OVER-SPECULATION 57 cemed. This bond sale possesses much more significance when it is compared with one in the following summer, with regard to the respective results. The Boston & Maine Railroad, in March, sold to a syndicate of Boston bankers $10,000,000 20-year deben- tures, bearing 4 per cent, interest ; the proceeds of the sale were to be used for refunding certain maturing securities of subsidiary roads." Kansas City & Southern Railway stockholders authorized an issue of $10,000,000 4^ per cent. 20-year bonds. $6,000,000 of these were to serve as collateral security for $5,100,000 5 per cent. 6-year notes, to which stockholders were permitted to subscribe at 95. These issues named above, put forth in the first three months of the year, are fairly representative of the securi- ties which the financial advisers of corporate enterprises thought best fitted to attract investors at that time. We shall bring forward two more examples of large security issues, put out respectively by the Pennsylvania Railroad and the Pennsylvania Company; one is significant in the method by which it was floated, the other in its magnitude and the character of the security by which it was repre- sented. The Pennsylvania Railroad loan, amounting to $50,000,000, was offered to French investors, on terms which made it bear 3% per cent, interest. The country to which recourse was had for obtaining this loan ap- peared to open up a new field for the sale of other Ameri- can security issues. But it was pointed out at the time that the accumulated taxes imposed by the French govern- ment on foreign securities would narrowly limit the market France could offer to American stocks or bonds.' In any case this particular outlet for new issues of securities was ° Commercial and Financial Chronicle, Mar. 10, 1906, p. 567. ''Ibid., May 26, 1906, p. 1177. 58 SPECULATION ON NEW YORK STOCK EXCHANGE [58 not employed to any extent at that time except in the one instance mentioned. The Pennsylvania Company put out an issue of i8-mo»th 4.y2 per cent, notes, amounting to $50,000,000. These it sold to its bankers at a price slightly less than par. This was the first instance in 1906 of an issue of short-term notes in any large amount ; they became quite common the next year. This same company in January had been able to sell $20,000,000 4 per cent, bonds, running 25 years, to a banking firm which presumably was able to dispose of th^ securities in question to investors with more or less readi- ness. But the passing of the 4 per cent, bond, as a readily marketable form of new security, which seemed indicated in May, was betokened more strikingly in the following month, by the reported failure to underwrite successfully the $24,000,000 4 per cent, bonds of the Chicago, Burling- ton & Quincy Railroad, Illinois Division — an issue which had been advertised as an offering to investors in June of the preceding year, merely as a routine financial under- ■ taking.^ The rumored ill-success of this underwriting pro- voked a lengthy comment from the Commercial and Finan- cial Chronicle on "Apathetic Investment Markets and the Causes." ° We need not take the " causes " given too seriously; they consisted almost solely in the limitations , imposed by legislation on the investing and underwriting activities of the life insurance companies. But the notice accorded the restricted character of the investment demand for bonds is significant in itself, to whatever causes the restriction may have been ascribed. Not only in the cases of those securities which bankers and corporations offered directly to investors, was the restricted demand of inves- ' Commercial and Financial Chronicle, June 24, 1905, p. 2620. • Ibid., June 30, 1906, p. 1468. 59] TENDENCIES TOWARD OVER-SPECULATION- 59 tors obvious. In the open market of the Stock Exchange, where speculators supposedly were intervening in the sale of stocks to investors, the long-continued declines in the prices of many active stocks from the high levels of Janu- ary, along with heavy volume of transactions, proved that investors had not absorbed the floating supply of stocks in which speculation was active during the first half of 1906. This inadequacy of the investment absorption had been ap- parent as early as February, in the first general decline of the year. Of course the failure of investors in general to absorb many denominations of stocks at the high prices of January and early February, or even at prices much below them, might have been ascribed to the investors' dis- inclination, as much as to their inability, to purchase la rgely. Moreover, the increasingly onerous terms — to the issumg corporations — ^on which new security issues were put forth in the earlier months of 1906, might at the time have been laid to the world-wide increase in interest rates. This phenomenon has been marked in recent years — ever since 1904 indeed — ^as one of prolonged duration. It was es- pecially prominent in the general activity of industry and commerce which characterized 1906. The rise in nominal interest rates,, borne by new securities, and the shorter lives of the obligations, bearing fixed rates of interest, could all be explained plausibly by the general rise of interest rates. Whether the investors, who were clamoring for increased rates of return on their investments, would event- ually display the power or inclination to retire speculative commitments to any considerable extent, was highly un- certain. During June three increases of dividends were an- nounced : on Baltimore & Ohio from a 5 to a 6 per cent, basis, and the same increase on Amalgamated Copper, while, on American Locomotive common, an initial divid- 6o SPECULATION ON NEW YORK STOCK EXCHANGE [60 end, at the rate of 2 per cent., was announced. These were the only instances of dividend increases between Feb- ruary and July — at least in the more prominent stocks favored at the time by speculators. It might still have been asserted then that investors were not attracted by stocks on which returns to their holders were not in proportion to the prosperity generally and severally enjoyed by the cor- porations represented by stocks listed on the Stock Ex- change. The extent of the prosperity and its wide dif- fusion among various railroads, were displayed in a table drawn up by the Arherican correspondent of the Econom- ist,^" setting forth the increased gross earnings of 18 rail- roads — in this country and in Canada — which, in the cases of individual roads, had amounted to more than $1,000,000, for the half-year ending June 30, 1906, as compared with the corresponding half-year of 1905. INCREASE IN GROSS EARNINGS FOR THE FIRST HALF OF I906 OVER 190$. Canadian Pacific R. R $6,946,727 Northern Pacific, Transcontinental 5,301,871 Baltimore & Ohio, Soft Coal Road 4,831,672 n Great Northern System, Transcontinental 4,542,007 Southern (Railway 3,697,429 New York Central '. 3,689,661 Louisville & Nashville 2,725,371 Illinois Central 2,490,076 Lake 'Shore & Michigan Southern 2,440,152 Missouri Pacific, General Division 2,040,186 Michigan Central 1,891,983 Grand Trunk System 1,669,692 Denver & Rio Grande 1,469,361 Wabash Railway 1,443,145 Minneapolis, St. Paul & Saulte Ste. Marie 1,373,070 Cleveland, Cincinnati, Chicago & St. Louis 1,131,495 Canada Northern 1,096,800 Colorado & Southern 1,086,524 Total $49,867,222 '« July 28, 1906, p. 1258. " Five months. 6ij TENDENCIES TOWARD OVER-SPECULATION 6l The tacit assumption of speculators in 1906 that in- vestment buying — quite unsolicited and arising merely as a result of the wide diffusion of general prosperity — would ultimately act to relieve speculative interests of the burden of their commitments seems to have been quite obviously unfounded, and to have been so regarded by the end of June. And, even if a general rise of dividends throughout the stocks listed on the Stock Exchange were to take place, it was by nO' means certain that complaisant investors possessed aggregate funds sufficient to purchase the floating supply of stocks which were either held for speculators' accounts or were incessantly passing from the hands of one speculator to another. In 1905 it had be- come fairly evident that purchases by corporations of large blocks of stock in other companies would no longer be the relatively common event it had been in the preceding few years. Institutional or corporate activity in outright buying, as a means of relief to over-extended speculators, was further limited by the San Francisco fire and by the elimination of the life insurance companies from the stock market as a result of legislative enactment, to which we have referred. Any " anticipation of the needs of the market ", which speculators might undertake would refer to the wants of the body of individual investors. Moder- ate rises of prices, accompanied by a relatively light volume of speculation, as in March, had manifested an over- estimate of the investors' inclination or power to purchase on a large scale during a brief period. Even this slight volume of speculation for the rise in March had been fol- lowed by strained conditions in the money market and a certain amount of unwilling liquidation — even before the San Francisco fire on the 17th of the following month. If speculators generally had any illusions as to the num- bers and resources of the expectant investors, bankers and 62 SPECULATION ON NEW YORK STOCK EXCHANGE [62 corporations which had to put forth securities during the early months of 1906 displayed in their actions little share or part in those illusions. The terms on which most new securities were issued implied not only a recognition of the general rise of interest rates, but also of a restricted in- vestment class which needed much stronger inducements to attract its bids for new securities than had, for example, the investors in the last few months of 1904. CHAPTER V Over-Speculation and Liquidation on a Large Scale — july, 1906 march, i907 Speculative activity, denoted by the monthly record of sales on the Stock Exchange, reached its lowest level for any month of igo6 in July. Few more than 16,000,000 shares were sold. In the middle of the month prices gen- erally began to display a rising tendency; so that in the second half-year there started apparently another of the two months' cycles in price movements which had been characteristic of the first half-year. The course of prices and of call rates, at any rate, appeared to show that specu- lation was adjusting itself and keeping its operations with- in the bounds set by the investment demand. Further evidence as to the restricted character of the general investment demand was furnished in July by the outcome of a bond sale by the Comptroller of New York City. This official attempted to dispose of $12,500,000 4s by public sale. Only $1 1,029,100 of these bonds were sold. The average price obtained made the interest rate paid by the city 3.94 per cent. This compared with an interest rate of 3.65 per cent, on the $20,000,000 issue sold in February — a rate that was considered unfavorably high at the time of the earlier sale. The relatively onerous terms on which alone New York City was able to borrow less than $12,000,000, afforded a further indication of the restrictions on the investment de- mand which were acting in July as in the preceding months. 63] 63 64 SPECULATION ON NEW YORK STOCK EXCHANGE [64 Whether the assumed timidity of investors — so far as rail- road securities, even of the highest character, were con- cerned — would apply also to New York City bonds, because of the many new regulative enactments by the states and the federal government — a sequence of cause and effect indicated by some financial writers ^ — may perhaps be questioned. But the considerations which kept investors from bidding in large numbers for these bonds unquestion- ably operated in the same way, though not to the same ex- tent, as they had done in the case of the Chicago, Burlington & Quincy 4s; the latter we have already mentioned as an issue which, as had been announced the preceding month, had brought losses upon its underwriters. The invest- ment demand, for reasons about which it is well not to be dogmatic, was highly restricted, so far as it applied to 4 per cent, bonds, either of railroads or of New York City. By inference there seemed little ground for assuming that the investment demand for stocks paying steady dividends was practically limitless, even under the most favoring con- ditions. The result of the bidding for the first issues of 4 per cent, bonds New York City had put out in many years, pointed to a limited investors' demand — just as the New York life insurance legislation and the heavy losses thrown upon fire insurance companies by the San Francisco fire, pointed to positive restrictions which had been placed upon the absorptive capacity of investors generally. However, a superficial consideration of the difficulties encountered in marketing 4 per cent, bonds, railroad or municipal, might, in the early summer of 1906, have led to the conclusion that the general demand of investors was for higher returns than 4 per cent, on their investments. If the dividends on stocks, in which transactions day after day on the Ex- '^ Commercial and Financial Chronicle, July 28, 1906, p. 180. 65 J OVER-SPECULATION AND LIQUIDATION 65 change were especially heavy, were raised substantially, it might have been argued, investors with ample funds might be attracted in sufficiently large numbers to take out of speculative hands the stocks which had been subject to so much uncertainty as to their investment value. Still clinging to this expectation apparently, speculators passed through July ; the volume of their transactions was not relatively large, but prices rose generally. After the first few days of the month, when a call rate of 8 per cent, was quoted, the range covered was from i J^ to 3 per cent. On the last day of the month the quotations lay within the narrow compass of 2^^ and 2j4 per cent. And on this last day the directors of the United States Steel Corpora- tion, by declaring a dividend of ^ of one per cent, for ■each quarter of the current year, put the common stock of that company back on a 2 per cent, dividend basis. In spite of the disquieting indications of the New York City bond sale, it appeared in July as if speculation for the rise and investment absorption were adjusting themselves to each other more closely than they had done in the first half of 1906. The decreased volume of sales on the Stock Exchange — which may be taken as a rough measure of speculative activity — the restoration of dividends on a stock in which speculation had been heavily concentrated, the prevalence of low call rates, and the general rise of prices, all betokened, on the surface, a decreasing tendency on the part of speculative commitments to outstrip the possibilities of investment buying. The month of August opened with the declaration of resumed dividends on Steel common and an immediately preceding month of rising prices still fresh in speculators' minds. Prices continued on their upward course through- out the first ten days or so, with some slight interruptions. Along with the continuation of the rise went a degree of 66 SPECULATION ON NEW YORK STOCK EXCHANGE [66 speculative activity somewhat more intense than it had been during July. From August ist to the i6th inclusive, a period embracing fourteen business days, 11,198,478 shares were sold on the Stock Exchange. If this rate of activity had been maintained throughout the rest of the month, sales for August would have amounted to slightly more than 20,000,000 shares — not an excessive number, as rec- ords of sales had been regarded in the preceding months of 1906. Over-speculation in the first half of August, if it was in operation, was not conspicuous. The announced resumption of dividends on Steel common was one of the favorable events which speculators had been engaged in " discounting " for some time. The tone of the reception given that announcement by the market was distinctly good; but it is uncertain whether the "buoyancy" mani- fested proceeded from speculators, who assumed that the volume of investment buying would increase as a result of the resumed dividends, or from investors who saw a pros- pect that other such actions on dividends would be taken in the near future. Call rates remained at a moderate level during the first half of August. On only one day, the 9th, was the rate as high as 5 per cent. ; and the minimum of 2 per cent, was frequently quoted. These rates, it should be borne in mind, were quoted in August when the interior demands on New York for crop-moving funds usually begin to be felt. Nevertheless the relatively low level of rates ac- companied the first signs of the crop-moving demands and moderately active speculation. August 17th marked the beginning of the second part of the month which was sharply distinguished from the first part in the course of prices and in speculative ac- tivity. On that day the declarations of dividends on Union Pacific and Southern Pacific were announced by their re- 67] OVER-SPECULATION AND LIQUIDATION 67 spective- boards of directors. The rate of Union Pacific's dividend was raised from 6 to 10 per cent, and that of Southern Pacific resumed at the rate of 5 per cent. Along with the published declaration of these dividends there was an immediate outburst of wild speculative activity. On the 1 6th sales for the day had amounted to 1,220,068 shares. They attained a total of 2,529,422 shares on the 17th. During the week of six business days following the 17th, 10,527,161 shares were sold on the Stock Exchange. In the thirteen business days of that part of August which included and followed the 17th, 20,606,418 shares were sold. During the entire month sales of 31,804,816 shares made up a monthly total, which had only been exceeded in two months of 1901 — April and May — in October, 1904, and in January, 1906. During the week which preceded the dividend declara- tions mentioned. Union Pacific had advanced about seven points in price, Southern Pacific four or five points. On the 17th the high and low prices of Union Pacific were, re- spectively, 179% and 163; so that the price moved through a range of more than 16 points in the course of the day. Southern Pacific's range, from the highest to the lowest price, extended only from 89 to 82% — little more than six points. In the six days including and preceding the 17th, 6,402,213 shares were sold; 2,341,185 shares, 36.6 per cent, of this total, were made up of the stocks of the two Harri- man roads — 1,315,550 Union Pacific and 1,025,635 South- ern Pacific. On the 17th and thereafter during the month, the entire aspect of the stock market was changed from that dis- played in the early part of August. A tremendous volume of transactions went along with the general meteoric rise of prices; the latter characterized almost every stock in the list to a striking degree, not alone the shares of the 68 SPECULATION ON NEW YORK STOCK EXCHANGE [68 two Harriman roads. The closing price of Union Pacific August I was iS3>i ; on September ist it was igiyi- The closing prices on the same two dates for Southern Pacific, were, respectively, 74^ and 90^. Atchison advanced,, during the month, from 92^ to io6>^, and Pennsylvania from 130^^ to 141^. Among the industrial stocks, American Smelting and American Sugar secured the larg- est gains in price — that is, of those stocks in which specu- lation was extensive. The revival of speculation for the rise on an enormous scale was not followed by an immediate rise of the interest rates on call loans to unduly high levels. In the week end- ing August 17 the range of rates quoted at the Stock Ex- change extended from 2 to 4^4 per cent. A maximum rate of 6 per cent, was reached the following week; and on the last day of the month, a 12 per cent, rate was quoted. The slowness with which stringency developed in the money market, following the heavy volume of speculation for the rise, might have been explained by the common report that the large operators who were engaged in promoting the bull movement had had their operations financed by loans from foreign bankers. If this report was true, and if the distribution of the bigger speculators' holdings to small outside speculators had not been carried far up to the end of August, the demands on the general call money market would not have been especially urgent. Subsequent events showed rather conclusively that the dividend declarations, on the part of the Harriman roads' directors, had not aroused investment buying at once so that it would denude the speculative section of the market of Union Pacific and Southern Pacific stocks. The extent to which the shifting of stocks from speculators to investors was in evidence or absent was to afford the final test of Stock Exchange speculators' success in " anticipating the needs of the market " during 1906. 69] OVER-SPECULATION AND LtOUIDATlON 69 With the call funds available in the local money market, brokers had increased difficulty in aiiing those of their customers, who were speculating foij the rise, to carry their commitments during September. In the four weeks of the month the successive maximum call rates were re- spectively 40, 12, 10, and 7, per cent. These relatively high rates were not effective in curbing speculative activity very decidedly or in preventing the quotations of higher prices for most speculative stocks in September than in August. However the stringent conditions in the money market affected speculative sentiment sufficiently to bring about a general halt in advancing prices throughout the month. Union Pacific lost eight points in its price between September ist and October ist; but a dividend of 5 per cent, was deducted during the month, thus accounting for a large portion of the decline. The dependence on foreign loans as a means of financing the rising movement by its promoters had made the stock market sensitive to developments in the local and foreign banking situation. The aid of Secretary Shaw was in- voked to extend the facilities of the money market. He employed the device of placing temporarily Government deposits with banks to which gold engaged for import was in transit. Municipal bonds were accepted as security for Government deposits also, provided that the Government bonds, for which the municipal securities were substituted, were used as a basis for additional banknote circulation. This encouragement given by the Secretary of the Treas- ury to gold imports drew the attention of the larger Euro- pean banks. On October loth the Reichsbank's discount rate was raised from 5 to 6 per cent. The following day the Governors of the Bank of England raised that institution's minimum rate from 4 to 5 per cent. ; at a special meeting, October 19, the rate was raised further to 6 per cent. In 70 SPECULATION ON NEW YORK STOCK EXCHANGE [70 November, the Bank of France and many other French banks refused further to discount American finance bills. Those French banks, which remained complaisant in af- fording this kind of accommodation, did so at rates of from 4 to 4j4 per cent., while the regular discount rate in the Paris money market ranged from 2^ to 3 per cent. The unmistakable evidence of a heavy volume of specu- lative commitments, a relatively light volume of investment absorption — ^practically imperceptible indeed — and condi- tions in the money market which rendered the long con- tinuance of speculative accounts inconvenient — all com- bined to bring about declines in prices on the Stock Ex- change, although these declines individually were not pro- found in October. In November the declines in many stocks, which had pro- ceeded through October, were checked to some extent The prices of many stocks made positive net advances in the course of the later month — among them, St. Paul, Louisville & Nashville, New York Central, Northern Pacific, Reading, Southern Pacific, Union Pacific, and Colorado Fuel & Iron, in which speculation had been con- centrated. Pennsylvania, in spite of having its semi- annual dividend raised from 3 to 3j4 per cent, suffered a slight fall of price between November ist and December ist Liquidation, which was halted in November, was re- sumed in December and the declines in prices which ac- companied it were pronounced and general. Investors were not impelled to absorb stocks in any large amounts even at the prices which had fallen below the relatively high levels of September or early October. As the month of December and the year drew to a close, the declines in- creased in sharpness and magnitude. The year 1906 closed then with prices falling as sharply as they had risen in the opening month of the year. 71 J OVER-SPECULATION AND LIQUIDATION 71 Almost at the end of the year there was unfolded an event, in connection with railroad financing, which rather increased the alarm and uncertainty with which specula- tors regarded both the stock and money markets. The railroad management and financiers concerned in this de- velopment were much criticized for the haste with which they proposed to put their plan into operation; but the exigencies of the money market and the necessity for rais- ing fresh sums of large amount appear to have dictated the details of the plan, rather than the desire for illicit gains through the possession of advance information. The railroads, in their efforts to effect the fresh financing which the congested state of their traffic handled with in- adequate facilities required, not only resorted to short-term notes; but those roads whose stocks were quoted at levels well above par hit on the device of inviting their stock- holders to subscribe to new issues of stock at par. At the close of 1905 the Chicago, Milwaukee & St. Paul Railway had announced its intention of pushing its lines to the Pacific Coast. By way of raising funds for this purpose a large increase of the capital stock was proposed. In December, 1906, apparently, the St. Paul's management did not cherish any illusions — whatever the speculators still retained — as to returning ease in the money market and a widening of the extent of the general investment demand. The sudden announcement, December 17, ran to the effect that certificates of rights to subscribe to new stock would be issued to stockholders at once; December 19th was named as the last day on which assigned rights could be transferred by the stockholders and an initial payment, amounting to $10,000,000, was called for to be made December 31. The amounts then outstanding of common and preferred stocks were, respectively, $58,183,900 and $49,654,400. The amount of the new issue was to con- 72 SPECULATION ON NEW YORK STOCK EXCHANGE [72 sist of $33,164,300 of new common stock and of $66,- 328,500 preferred. The magnitude of the proposed new issue and the imminent date of the relatively large initial payment required, proved rather staggering and violently affected the prices of other stocks on the list. St. Paul, for about a week prior to the announcement and for the two days immediately succeeding, was the last stock which, in the long market movement, displayed a sharp upward tendency in its price. The prosperity of the road, the high price of its stock at that time, and the announced amount of the new issue, all served to make the rights extremely valuable. Below are given the high and low prices of St. Paul common, recorded on the Stock Exchange from De- cember 8th to the 2 1st inclusive — indicating the general course of that stock's price in a two weeks' period of gen- eral liquidation and increasing speculative timidity: High. Low. High. Low. Dec. 8 1831^ 182J4 Dec. 15 ^97H I9S5^ Dec. 10 183^ 181^ Dec. 17 I995^ 196^ (New issue announced.) Dec. II 189^ 184 Dec. 18 194 183 Dec. 12 189^ 187^ Dec. 19 154 I47 (Sold ex-rights.) Dec. 13 192J4 188 Dec. 20 152^ 150 Dec. 14 198J4 192 Dec. 21 15254 iSi Following the announcement of the St. Paul's issue of new stock, there was no such sharp rise in prices generally as had followed the Harriman roads' dividend declarations in the preceding August. The stringency of the money market, which had been apparent for some months, and the dawning understanding, on the part of the speculators, of the lack of investment demand, prevented any renewal of a bull movement. The briefly enduring rise in St. Paul, im- mediately before and after the announcement of its finan- cial plans, was the last gasp of the general speculative 73] OVER-SPECULATION AND LIQUIDATION 73 movement which had its birth in September, 1904. In the last week of 1906 began the general almost uninterrupted ' decline which continued into 1907 and formed the leading feature of the stock market in that year. The chief re- sult of St. Paul's closing rally was to add to the disquieting sum of imminent events which were to impose fresh strains on t he fi nancial markets. When the second half of 1906 opened, it was clearly evident that, in the first place, no power of investment absorption had been manifested which had shown itself able to withdraw from speculators on the Stock Exchange the large quantities of stocks they had carried. It was idle to assume that an investing class, well supplied with funds, stood ready to relieve the speculators of their bur- dens. And whatever might have been the total extent of investors' resources, the San Francisco fire and the life insurance legislation had made it plain that two groups of corporations, which together made up an important section of the investing class, would be eliminated as factors in the outright purchase of st ocks. The restrictions imposed on the investing capacity of both classes of insurance com- panies constituted the only definite body of facts on which estimates of investing powers could be based. And cer- tainly the increased inducements which were held out to investors to subscribe to new issues of bonds and notes did not point to any belief, on the part of experienced bank- ers and financiers, in the existence of an unrestricted omni- vorous class of investors. Nor did the respective results of the two issues of New York City bonds, whether com- pared with each other or with the results of preceding sales of the same character, indicate an extensive demand for investment securities. In view of the positive restrictions on general invest- ment buying power and the failure of investors in large 74 SPECULATION ON NEW YORK STOCK EXCHANGE [74 numbers to appear in the first half of the year, either when prices were high or when they were low, it is difficult to see how the heavy speculation for the rise in August and September could have met with ultimate success. Of course individual speculators could sell, on a rising market, to other speculators at a profit. But this process would be brought to a halt when no more speculative purchasers appeared. This check to a general speculative movement for rising prices had occurred repeatedly throughout 1906, attended apparently with no consequences of a serious na- ture in the first half of the year. In that period, when speculation for the rise and an advance of prices had been followed by a general decline and a certain amount of li- quidation, the latter were halted in turn by renewed specu- lative purchases, which did not intervene to arrest the de- cline with which the year came to an end. The general decline, which immediately followed the sharp rise of August and September, was interrupted by no prolonged rise during October, November and Decem- ber. In November, as we have noticed, the progress of liquidation was stayed for a short period. But neither general investment buying nor heavy speculative purchases intervened to bring about any relatively prolonged rising movements such as were in evidence during the preceding March and May, for instance. The stock market, in the last three months of the year, was characterized by li- quidation which varied in its rate of progress but scarcely in its nature. The only uncertainty at the close of the year related to the low points to which prices would fall in 1907 before the elimination of weaker speculators and in- vestment buying would act to bring an end to the general decline. Liquidation continued with renewed force in January, 1907. So clearly was it under way, with no likelihood of 75] OVER-SPECULATION AND LIQUIDATION 75 its being halted before running its full course, that two great European banks apparently thought it safe to reduce their respective discount rates. The Bank of England's rate was lowered from 6 to 5 per cent, January 17, and the Reichsbank's from 7 to 6 per cent, on the 22nd. When the rising movement had been stayed the preceding October, it will be recalled, each bank, by raising its rate, had most effectively prevented gold imports by New York interests from England and Germany, with which further specula- tion for the rise might have been assisted. Throughout November and December the high rates were maintained at London and Berlin. The unmistakable liquidation, how- ever, which set in during January, removed the danger of any drain of gold to the United States, at least for the time being, and it was therefore thought safe to lower the foreign discount rates. Following the course which, in the preceding month, the Great Northern, Northern Pacific, and St. Paul Railways had adopted as a means of obtaining fresh capital, the Chicago & Northwestern announced an issue of new com- mon stock, amounting to $24,403,000, for which stock- holders could subscribe at par by paying for it in full on the following March i6th. This was the last of the large stock issues, which played so prominent a part in the last few months of the declining market; and which Mr. E. Meyer, Jr., has characterized as " the practical assessment of stockholders." ^ Another device was employed to raise capital in the shape of three-year 5 per cent, note issues which were put out by the Southern Railway, the New York Central — together with some of its subsidiary companies — and the American Telephone & Telegraph Company, in the re- ' Yale Review, " The New York Stock Exchange and the Panic of 1907," May, 1909. P- 44- 76 SPECULATION ON NEW YORK STOCK EXCHANGE [76- spective amounts of $15,000,000, $50,000,000 and $25,- 000,000. The New York, New Haven and Hartford also announced issues of obligations of dififering kinds, to the amount of $26,000,000. As we glance at the table of closing prices, on January 2nd and February ist, of those stocks in which speculators had been most interested, we see that for Southern Pacific and Steel preferred alone were gains recorded between the two dates named — and in both cases, those gains were only fractional. The losses sustained by the prices of other stocks ranged from one or two points to slightly more than thirty points — this latter amount was the decline in price suffered by Northern Pacific. The number of shares sold on the Stock Exchange, 22,702,760, exceeded that recorded for any of the three preceding months in which liquidation had been in operation. This first month's burst of unmistakable liquidation was continued in February ; in the latter month the sales on the Exchange amounted to 16,470,972 shares — a volume of transactions which indicated some slackening in the urgency of forced selling, when it is compared with the records for January. The declines in the prices of the more speculative stocks were not so sharp as they had been in January. The prices of Atchison, American Locomotive, and American Sugar rose slightly between February ist and March ist. The Pennsylvania Railroad announced in February that its issues of new securities would be concluded after it had sold $50,000,000 three-year 5 per cent, notes. For the railroads generally this issue was the last which had been put forth with some reluctance under the pressing necessity which weighed upon so many of the roads. Of the $30,000,000 New York City 4s offered in Febru- ary, $26,000,000 falling due in 1956 were taken by bidders in their entirety; but of the remaining $4,000,000, havings 77] OVER-SPECULATION AND LIQUIDATION yy shorter maturities — $1,500,000 falling due in 1926 and $2,500,000 in 19 1 6— only a part was taken. For muni- cipal bonds, as for railroad securities, the investment mar- ket was still restricted. In March liquidation became more urgent and was accompanied by sales on the Stock Exchange of 32,208,- 525 shares. The volume of transactions thus repre- sented exceeded even the extraordinary total of the preceding August, and was the heaviest recorded since January, 1906. April and May, 1901, were the only other months which have surpassed March, 1907, in this re- spect. On the 13th there were severe general declines; and on the 14th — the date of the so-called " Silent Panic " — transactions amounted to 2,571,516 shares, against 2,- 183,867 on the 13th. These two days were also those on which British Consols in London attained successive low records in the quoted prices of many years. The quota- tion of 84^Vi8 on the 13th was the lowest price since 1866, and that of 84V16 on the following day marked the lowest price since 1848. Although the low points reached March 14 on the Stock Exchange attracted the widest at- tention, that day's low prices were by no means the lowest reached in the general liquidation of the month. On the 25th, prices reached still lower levels than those at which they were quoted on the 14th. With the month of March, 1907, the period of Stock Ex- change activity Selected for study was concluded. This month was chosen as the concluding one, because the pro- found declines and panics, which characterized it, appear to have marked the end of the period of public participa- tion on a large scale in the stock market, which had be- gun in the autumn of 1904. Throughout the remaining nine months of 1907, the volume of sales on the Stock Exchange — measuring roughly the degree of speculative activity — ^presented a monthly average, amounting to 13,- 78 SPECULATION ON NEW YORK STOCK EXCHANGE [78 895,185 shares, which is much below that of the 31 months' period — running from September, 1904, to March, 1907 — amounting to 23,554,291 shares, and even less than the monthly average of 16,149,954 shares for the thirteen years, 1900 to 1912, inclusive. It appears, therefore, as if public speculation on the Stock Exchange on a rela- tively large scale ended for the time with the close of March, 1907. Of course the general decline in the stock market was not ended for 1907 by the end of March. But the de- clines which occurred later in the year, particularly those of October, were accompanied by disturbances having no immediate internal connection with the Stock Exchange. The protracted fall of prices and the liquidation which ran through the last three months of 1906 and the first three months of 1907, on the other hand, took place in a period of generally expanding prosperity and economic activity; so that the liquidation and depression of those six months appeared to have arisen from internal conditions in the stock market, rather than from conditions outside it. We may not fully agree with Mr. Meyer, when he writes in the article already cited that over-speculation for the rise on the Stock Exchange had been completely liquidated early in 1907, and that the declines of later months repre- sented Stock Exchange liquidation " for the industries and businesses of all the country, months after [the Stock Ex- change] had liquidated for itself." But much of the li- quidation subsequent to March appeared to arise from other conditions than over-extended speculation for the rise on the Stock Exchange. The difficulty of analyzing the conditions under which liquidation in the latter part of 1907 was conducted, together with the considerations we have briefly set forth, have led us to conclude the period of Stock Exchange activity selected for study with March, 1907. CHAPTER VI The Assumed Investment Demand In the preceding narrative of events, connected with Stock Exchange speculation in 1906, repeated reference has been made to the ingrained assumption of financial \ writers and speculators that a large class of investors existed, possessing in the aggregate a huge fund with whicfi that class stood ready to purchase any issue of securities that might demonstrate its desirability for investment pur- poses, whatever market price the stock of that issue might have attained when its desirability became clearly evident. Many financial writers, who undertook to interpret the events of igo6 and 1907, founded their arguments on this assumption. After the first severe decline of 1906, in February, it was declared that ^ investors had not been inclined to buy stocks generally after the rise of January because the extensive and substantial increases in dividends, for which speculators had looked and on which they based the conduct of their operations, had not been forthcoming. A former railroad president asserted later in the year that investors had been repelled by the way in which various managers of corporations, both railroad and industrial, had juggled the finances of the companies under their direction.^ We might quote, at this point, the story of the large stock issues which many of the great railroads put forth in the closing days of 1906 and early in 1907, as it ^ Commercial and Financial Chronicle, Feb. 24, igo6, p. 416. =* Ibid., Jan. S, 1907, p. 2. 79] 79 I oo SPECULATION ON NEW YORK STOCK EXCHANGE [go was told, both by Mr. E. Meyer, Jr., and by Senator LaFollette — two men who beheld the events in question from viewpoints that differed from each other as widely as was possible. Speaking from a Wall Street man's standpoint, Mr. Meyer gave the following brief account of the issues of new stock and the circumstances which led up to them: [In the latter part of 1906] the railways of the country, staggering under a load of traffic which exceeded the capacity of their equipment, - cried aloud to the investing public for funds. But railway investments had been made unattractive by radical anti-railroad legislation, by the imposition of new and onerous burdens upon railway operations, by the increased cost of operation, owing to a general advance in the prices of wages and materials, compared with a decrease in freight and passenger rates which was legislated upon the railroads — the whole thing creating a situation which resulted in the under- mining of confidence in railway values generally. ... In spite of all the handicaps, the railroads endeavored to increase their facilities to handle properly the abnormal business, and their only recourse in many instances to make these needed extensions was the practical assessment of stock- holders through the issue of new stock. Is it, therefore, any wonder that " far-sighted investors " withdrew from the situa- tion, causing the first stage of liquidation which culminated in March, 1907? ..." The following account of these events was given by Senator LaFollette : . . . The master organizations put forth all their efforts to stay the downward trend in Wall Street and to stimulate a lagging market. 8 Yale Review, " The New York Stock Exchange and the Panic of 1907," May, 1909, p. 44. 8i] THE ASSUMED INVESTMENT DEMAND gl This is history, Mr. President. They forced dividend pay- ments. They made them extravagant. The Baltimore & Ohio, the Pennsylvania, the Santa Fe, the New York Central, the Union Pacific, the other companies, declared dividends lav- ishly. It was not so difficult. The traffic of the country paid for it all. The stock market responded and stocks took new high records. Determined to outface appearances, the groups ordered a new issue of stocks. In the last half of 1906 not less than $500,000,000 of railway stocks alone were thrown upon the market, dividend issues keeping step with stock issues. It was designed to betoken a carnival of prosperity. It was expected that the country investors would respond in the old way and their money be drawn into this financial center to prop it up. But the public did not come in. Railroad securities had fallen into disrepute. Watered when the roads were built, watered when they were merged into systems, watered again when the systems were grouped, railroad stocks and bonds were regarded by the public with a suspicion bor- dering on contempt. Morgan and Rockefeller and Harriman and Hill were almost daily making some new move in the great game, but the public had one answer : " It is water ; more water." * We need not stop to reconcile the discrepancies in these two narratives of the same events, or to question the ac- curacy of statements made by either author. Both agree, at any rate, on the fact that large issues of new stock were put out by various railroads ; and also they take for granted the existence of an expectant class of investors who would have been able to buy the stocks if they had felt inclined to do so; their not doing so, according to each author, arose from the fact that the new issues presented no at- tractions to them, because of distrust awakened by causes which differed according to the account read. This dis- * LaFoUette's Weekly, " The Truth about the Panic of 1907," March 15, 1913, p. S- 82 SPECULATION ON NEW YORK STOCK EXCHANGE [82 trust — whether it sprang from the dreaded consequences of governmental regulation of railroads or from the public's conviction that these new issues of stock were "water; more water " — had been the unique cause for the inves- tors' refusal to buy the stocks in question and to withdraw them from the market. Both the Stock Exchange apolog- ist and the radical Western Senator are at one in assuming the presence of an investing class with available money resources of indefinite extent. The two interpretations, given above, of events leading up to the panics of 1907 — like all the differing forms of these two types of interpretations — point with emphasis to the distrust of investors. But we may seriously question the validity of the assumption which the authors of both accounts almost explicitly state. V\'^as there any evidence that throughout 1906 a large investing class continually stood ready tO' purchase any securities which came up to certain requirements — with respect to security or the pros- pect of steady income yield — formulated by speculators? We certainly have no direct evidence that any such class existed during that year and 1907, at any rate. Most of our indirect evidence — on which our chief reliance must be placed — of the attitude of prospective investors and of the strength of the demand they could present, was fur- nished by the size of various bond issues, the rates of interest they bore, and the terms on which they were of- fered to investors ; and also by the ultimate results of the offerings where these were ascertainable. This indirect evidence pointed to a steady contraction of the general investment fund which was applicable to the purchase of securities in the New York financial markets. At the beginning of the period we undertook to consider — running from September, 1904, to March, 1907 — inves- tors appeared willing to take up any issue of bonds with the 83] THE ASSUMED INVESTMENT DEMAND %o utmost readiness. So striking was the omnivorous char- acter of investment absorption in the latter part of 1904 and early in 1905 that it drew the attention of the financial press. In the Economist, December 31, 1904, there ap- peared a comment on this tendency, as displayed in the New York financial markets; and as a further indication of the strong investment demand, for bonds at least, we quote the following: The extremely active demand for bonds of the better class still constitutes one of the noteworthy features of the situa- tion. After the set-back experienced in 1903, a marked re- vival occurred, it will be remembered, during 1904. Indeed, the avidity with which new bond issues were taken up in this last-mentioned year was one of the most striking characteristics of that period. Month after month one new loan after an- other was brought out, and not the least difficulty was experi- enced in finding purchasers for these enormous additions to the investment list of securities; about the only point insisted on, apparently, was that the new obligations should be of un- doubted character. The short-term notes issued by the rail- roads during the last two years have almost disappeared from the market. This demand for the better grade of securities has continued up to the present time, and whenever a new loan is brought out the whole offering is quickly absorbed." The investment demand did not apparently, however, retain the omnivorous character, so noticeable in the last of 1904, through the following calendar year. It was thought best in 1905 by the bankers who had charge of two Ameri- can allotments of Japanese government loans, to offer the securities representing those loans, which bore interest at the rate of 4j4 per cent, to subscribers at 87^. The large extent to which both allotments were oversubscribed may ° Commercial and Financial Chronicle, Jan. 21, 190S, p. 185. 84 SPECULATION ON NEW YORK STOCK EXCHANGE [84 indicate the possibility that more favorable terms for the borrowers could have been obtained. But the issue by several railroads of bonds, on terms almost exactly the same as those of the Japanese loans, pointed to a certain change in the character of the investment demand. To be sure, neither of the railroads, issuing the securities we have mentioned, enjoyed such prosperity as to establish its credit on the highest possible plane beyond peradventure. But the rates of interest on the new securities and the low prices at which they were offered stand out strikingly as over against the 4 per cent, bonds which had been so com- mon up to a short time previous. There was a tendency to shorten the lives of bonds and to raise the rates of interest which they bore. Not only the bonds of railroads and other corporations were put forth at interest rates which gradually rose, but the same tendency was observable in New York City bonds. Shortly before 1906, New York City had been able to put out abundant issues of 3^^ per cent, bonds. Early in 1906, an issue of 4 per cent, bonds was sold by the city at a price which netted 3.65 per cent, interest, allowing for the length of that issue's maturity. Another issue in July of that year, amounting to only $12,500,000, could not be sold in its entirety, and those of which the Comptroller was able to dispose were sold on an average interest basis of 3.94 per cent. The results of this sale were subjected to wide comment. Thus, by the middle of 1906, the Comptroller of New York City, in putting out new issues, was beset with difficulties, much the same, in kind though not in degree, as those encountered by railroad managers who at this time desired to make new issues of securities. In June the reported failure to underwrite successfully the marketing of $24,000,000 Chicago, Burlington & Quincy Railroad, Illinois Division 4s had shown the limitations placed on the investing market in some directions. 85] THE ASSUMED INVESTMENT DEMAND 85 Although the difficulty of selling the best classes of rail- road bonds to investors directly may have indicated the distrust aroused by proposed governmental regulation, the decreasingly favorable terms of successive New York City bond sales, throughout the period, can hardly be ascribed to that distrust. The physical restrictions which had been imposed on investment powers of absorption along certain lines by the San Francisco fire and the life insurance legis- lation, had been mentioned in the spring of 1906 as factors which might lead to disturbance. Attention, after being drawn most powerfully to these quantitative restrictions on the investment market, was apparently diverted to other phenomena. It was felt that, because an apparently limit- less and omnivorous investment absorption had manifested itself in 1904, it must always exist, potentially at any rate, so long as the country's prosperity endured. As a matter of fact, nothing whatever was known lay speculators of the nature and extent of the investment de- mand throughout the entire period we have considered — that is, the possibility that this demand would extend to stocks listed on the Exchange. The individual speculator for the rise — whether he sold to obtain a profit or to limit the extent of his losses — cared little, nor has be ever cared, whether the buyer was another speculator or an investor. His eyes were fixed on the course of prices. Those prices might express concretely an extensive and effective in- vestment demand; or they might merely reflect the col- lective efifort of speculators to "anticipate" an assumed investment demand. The future course of prices, at any time, would be determined, in the speculator's mind, by the increasing or diminishing worth of a given stock to in- vestors ; that worth in its turn would depend on the general prosperity of the country, the company's earnings, and the amount of those earnings paid out in the form of 86 SPECULATION ON NEW YORK STOCK EXCHANGE [86 divide nds. Doubtless, some data with regard to the rate of investment buying could have been obtained — or with regard to the extent of investment selling — in connection with the several stocks which were either attracting or repelling investors ; but no such information was ever forth- coming. It was much more convenient, even if it was a course subject to a high degree of risk, to assume the existence of a huge investment fund which would be ap- plied to the outright purchase of stocks which fulfilled cer- tain formal requirements, at prices considerably in advance of those at which most of the speculative commitments had been entered upon. But there was a factor in operation which would have tended to weaken the powers of investment buying in 1906, aside from the cramping of the fire insurance com- panies by the San Francisco fire and life insurance com- panies by state legislation, with regard to the part they could play as purchasers of stocks in the open market; and quite aside from the huge capital issues of the preceding two years, or from the losses incurred in the Russo- Japanese war. It is a platitude of English financial mar- kets that the prices of investment stocks and the general activity of trade tend to take divergent courses. This arises from the inducement offered many investing busi- ness men to sell their securities, when trade is active, and to employ the money they obtain from the sales in more profitable ways. Of course this tendency is obscured by the likelihood that investment securities will have a tend- ency to rise as the companies they represent share in the prosperity usually going along with active trade. When trade rather tends to become less active, investment pur- chases are made on an increased scale. This varying tendency of investment buying, a British financial truism, is hardly recognized in this country. Pos- 87] THE ASSUMED INVESTMENT DEMAND 87 sibly this is due to the fact that many holders of Ameri- can investment securities are foreigners whose only inter- est in American business activity has been to draw divid- ends and interest from the securities which are favorably affected by that activity. Thus the tendency, which in England acts so as to obscure the inverse relation between trade and security prices, had been prior to 1906 more prominent in this country than the main tendency expressed in the " axiom " of the financial market, as the Economist denominates it." So long as expanding prosperity and heightened com- mercial activity proceeded at a much more rapid rate in this country than in Europe, foreign investors would not have presented to them the strong inducements tO' sell that concurrent activity in their own countries would offer. But, when the maximum capacities of industry and com- merce were undergoing a world-wide strain, as in 1906, the urgency of an effective investors' demand would be much weakened. And in view of the widespread and in- tense business activity of that year, the tacit assumption, on the part of speculators generally and of many financial writers, that a practically unlimited investors' demand existed for stocks paying steady dividends, with little re- gard for prices, appears to have been additionally unwar- ranted. The narrowing of the general investment market was quite clearly indicated throughout 1905 and 1906 in the diminishing volume of bond issues and in the increas- ing rates of interest they bore. It is difficult to see how, in the face of the perceptibly decreasing capacity for absorbing new bond issues and the increase in economic activity of every sort, the assumption mentioned could have been regarded seriously. The events, which would tend to weaken faith in it, were apparent to all by the middle of 8 Economist, Feb. 22, 1913, p. 408. 88 SPECULATION ON NEW YORK STOCK EXCHANGE [88 igo6 and were discussed very widely; but speculators, for the remainder of the year, and others who have since dis- cussed their activities, still adhered to the belief that the investing class possessed sufficient means to take off specu- lators' hands the large amounts of stocks in the market, had they so desired, and that the condition which pre- vented investors' buying on a large scale had been their unwillingness to do so. Upon the causes of this assumed unwillingness much of the discussion has since hinged. It must not be supposed that all of the sales made on the Stock Exchange during 1906 represented merely the inter- change of stocks among speculators, and that investment buying was quite lacking. The latter doubtless operated in some degree pretty steadily throughout the whole year and during 1907. But investors revealed not the slight- est tendency to increase their purchases of those stocks which were advanced in price as a result of speculative buying or possibly of manipulation. As to the extent and nature of outright purchases on the Stock Exchange for the account of investors at any given time nothing was known or has ever been known by the general body of speculators If little information was to be obtained concerning in- vestment purchases, nothing more was known of investors' selling. If, for example, the rise of the Union Pacific's dividend from 6 to 10 per cent, in August, 1906, might have acted as a lure to investors, causing them to purchase in lai-ge amounts, the rise of 22 points in price, which followed in the course of a few days after the increase of the dividend, offered equally strong inducements to those investors who might have bought at prices below the low point of August 17th, to sell at a profit. The sum of general expectations in 1906 consisted in assuming the existence of investors possessing in the ag- gregate a huge volume of resources; to those imaginary 8g] THE ASSUMED INVESTMENT DEMAND gg investors:— they may fairly be so considered since they never once furnished evidence of their existence — was attributed the formulation of certain requirements which the stocks they bought must possess, such as financial stability and a satisfactory rate of return to their respective possessors. Underlying any thought which speculators for the rise be- stowed on their operations in 1906, was the assumed exist- ence of the investing class. Not only did speculators ab- stain from seeking direct evidence that this class existed to the extent that the speculators, and some superficial writers on these matters, imagined; but they were given abundant evidence that the powers of the actually existing investment class had been greatly weakened. All this in- formation — somewhat indirect in its bearing on Stock Ex- change investments .perhaps, but still quite worthy of at- tention — although accessible to the speculators, was disre- garded ; an extensive general rise of prices occurred in Au- gust and September, and a large body of speculators entered the market, utterly unmindful of the restrictions on invest- ment powers generally. The course of prices, in the lead- ing dividend-paying stocks, from September, 1906, to the subsequent March, and the volume of transactions in those months, indicated the degree of correctness with which speculators had estimated the intensity and effectiveness of the investment demand. In order to justify the general course of speculation in the summer of 1906 and to estab- lish the approximate correctness of its forecasts, it would be necessary to show that most of the dividend-paying stocks, which speculators particularly favored in August, were absorbed shortly afterward by investors at the prices to which they had advanced. But was this the case? In the protracted general decline, extending over a number of months, the stocks in which transactions maintained a large volume, were those which advanced most sharply in August go SPECULATION ON NEW YORK STOCK EXCHANGE [go and September, supposedly in response to an investment demand which, during those months, was presumably anti- cipated by speculators. The expectations of speculators were not shown to have been wholly incorrect by the rates of dividends in subsequent months or years — not even in 1908, the year of general depression. Dividends on Union Pacific, Southern Pacific, and Reading have not been low- ered since August, 1906. Nevertheless the prices of these three stocks, and of many of the same class, underwent tremendous declines. It is difficult to see how any other explanation of the fall of prices than a speculative over- estimate of the investment demand during the autumn of 1906 and the following winter, can be regarded as satisfying. President Hadley writes, " When speculation anticipates an actual demand, it is of great service to the commun- ity 'V and further, " Legitimate speculation involves anti- cipation of the needs of the market and a power to assume risks in making contracts to meet these needs. A failure to fulfil either of these requirements makes the operation an undesirable one for the public to tolerate." * If we ac- cept President Hadley 's test of the legitimate character of speculation — that it " anticipate the needs of the market " — and then recall to mind the events on the New York Stock Exchange during 1906 and up to March, 1907, we may decide whether speculation, as it manifested itself in those fifteen months, in the words of Professor Emery, " consisted in assuming the inevitable economic risks of changes in value" — his definition of speculation — or in " placing money on the artificially created risks of some fortuitous event "," as he defines gambling to distinguish it from speculation. ''Economics, p. no, ^ Ibid., p. 124. i> Speculation on the Stock and Produce Exchanges of the United States, p. loi. CHAPTER VII Speculative "Anticipation of the Needs of the Market " The disastrous outcome of Stock-Exchange speculation in 1906 and the unsoundness of the' assumption that an un- limited investment power existed in that year which, through no fault of the speculators, was not exercised, make it ap- pear that the volume of speculative commitments for the rise went far beyond the actual powers of investment buy- ing. Indeed it seems as if speculation was carried on with- out any regard to the extent and character of the restricted investment demand. In the earlier months of 1906 specu- lation for the rise showed little tendency to adjust the volume of its operations to investors' capabilities; and in the late summer and early autumn, speculators on the long side of the market seemed to have extended themselves be- yond the utmost possibilities of any investment absorption which might have set in. No evidence that this absorp- tion exerted itself has been produced, either at the rela- tively high prices on the Stock Exchange in September, 1906, or during the period of falling prices from September to the subsequent March — in sufficient strength, at any rate, to withdraw from speculators the stocks in which they had traded most extensively. Speculation in 1906 ' seemed to reveal a tendency to advance prices far beyond the levels at which investors would buy, and finally brought general disaster on those who acted on the assumption that an unlimited investment demand existed. 91] 91 92 SPECULATION ON NEW YORK STOCK EXCHANGE [92 This brief summary of speculative activity in 1906 does not accord with the conventional conception of that phenomenon. Engaged in this form of activity, accord- ing to traditional economic supposition, are traders of preternatural acumen and foresight. It seems almost in- conceivable that traders endowed with such rare qualities could seriously miscalculate the urgency of the demand or the extent of the resources at the command of the inves- tors to whom the final sale of speculative stocks, it was expected, would be made. If those who participate in speculation possess generally such a high degree of sagacity, it does not seem possible that they should have been guided in their activities by a belief regarding the possibilities of investment buying, both as to its strength and characters which proved to be so wide of the truth. In order to ascertain the possibility that speculation can go far beyond the capacity of investment absorption in such a market, we may first of all consider the business of a Wall Street commission house — ^that is, a firm of brok- ers in the strict sense — and the motives which would lead the members of one of these firms to act in such a way as to conduct its business most profitably. Any person who is not a member of the Stock Ex- change, desiring to deal in securities on that Exchange, must do so through a broker who is a member of that in- stitution. The principal of this broker may be an investor or belong to any one of the four classes into which specu- lators — except floor traders — are divided in the report of the Hughes Committee.^ That is, if a purchase of stocks, for example, is desired, the principal may either have his broker buy them and then pay to the broker the full pur- chase price and the commission — that is, purchase for in- ' Vide ch. i, p. 16. 93] " NEEDS OF THE MARKET" 93 vestment; or else he may deposit only a part of the pur- chase price and becomes a speculator on margin for the rise. Thus a broker, conducting a general commission business, has two classes of customers, speculators and investors. It is to the Stock-Exchange broker's immediate interest that he have more speculators among his customers than investors. This is due to the prevalent rate of commission on Stock-Exchange purchases and sales. The authorities of the Exchange have prescribed a minimum rate of com- mission which the broker must charge for services ren- dered on behalf of customers who are not members of the Exchange; and the enforcement of this minimum rate is rigorous and inflexible. This rate — amounting to one- eighth of one per cent, of the par value of the shares bought or sold, as the case may be, or 123^ cents on each share of $100 par value — is the same on a transaction whether it be for the account of a speculator or an in- vestor. A higher rate may of course be charged, but prac- tically the minimum prevails, with few exceptions, among brokers in Wall Street. The actual cost to the broker of executing a speculative order for a customer is much less than that of carrying out an investment order. Speculative transactions are usu- ally in loo-share lots of stocks or multiples thereof; and the sales and purchases of such lots can be made to offset each other on the Stock Exchange Clearing House sheet. On this sheet, the tickets, the books of the firm, and the blotters, comparatively few entries altogether need be made. Since only the balances of stocks, as they appear on the Clearing House sheet, need be delivered or received, the handling of securities for an individual speculator is al- most entirely avoided. The only details connected with margin transactions are the purchase and sale on the floor of the Exchange, some routine correspondence and a few 94 SPECULATION ON NEW YORK STOCK EXCHANGE [94 bookkeeping entries. Since the prevailing unit in a transaction on margin consists of one hundred shares, the commissions for the purchase and sale, both of which are necessary to the completion of the usual speculative oper- ation, amount to twenty-five dollars for each hundred shares. In carrying out the order — whether it consist of a pur- chase or a sale — of an investor, much more routine work is necessary. Moreover, each transaction requires separ- ate individual attention, which is not necessary in the same degree for speculative orders. If the transaction involves an odd lot, that is a number of shares less than one hun- dred — and most investment orders are of this character — it cannot go through the Clearing House. The transaction, after the sale or purchase on the floor is reported, must be " compared ", that is, it must be confirmed by the respective office forces of the two brokers who enter into the trans- action. Since odd-lot sales are not cleared, the delivery and receipt of the stock involved in the transaction must be performed separately in each case. Then, finally, if the investor be a purchaser, his broker must usually arrange for the transfer of the stock into the principal's name, with all the care in clerical work and in handling the securities which that series of operations requires. All these routine details are as necessary for the purchase and transfer of one share as for the same operations applied to ninety-nine shares. But the prevailing charge, in the case of one share, is one-ninety-ninth of that exacted in a purchase of ninety- nine shares. For small odd lots, indeed, it is doubtful whether the commission, 12J/2 cents for each share, yields any profit to the broker when allowance is made for the cost and trouble involved in the series of acts outlined above. The prevailing rate of commission is charged, irrespec- 95] "NEEDS OF THE MARKET" gg tive of the character of the transaction — speculative or in- vestment — and without regard to the greater or less num- ber of shares. It is therefore obviously to the individual broker's interest that he should have as great a number of speculative orders as possible — involving loo-share lots of stock — and not too many odd-lot investment purchases to carry out. As for the latter, it may be said that orders of this nature have, so far as is known, never been gener- ally discouraged by brokers; but from individual brokers this relatively unprofitable class of business meets with only a passive reception. Of course, it is handled diligently and honestly, almost without exception, by brokers on the Stock Exchange. But such encouragement to trade in stocks as the rules of the Exchange, the ethics of the busi- ness and the conscience of the broker permit him to extend to his customers, is directed toward speculation rather than investment — that is, with regard to transactions in those stocks which are listed on the Exchange. The fol- lowing of customers which a broker may have, and to which he desires to add continually fresh accessions, con- sists chiefly of speculators rather than of investors; and whatever efforts he is permitted to put forth in attracting new customers are bent toward having them speculate. Thus in 1906, as will always be the case under the pre- vailing rate of commission, those numerous members of the Stock Exchange who were chiefly occupied in acting as brokers, in the strict sense, each for a greater or less num- ber of principals, were interested in having their respective customers engage, for the most part, in speculation on mar- gin; they did not seek to stimulate investment. Each broker probably knew in a general way that many other brokers' respective interests were identical with his, as re- garded the character of their customers' transactions, and that every other broker presumably would strive to at- p6 SPECULATION ON NEW YORK STOCK EXCHANGE [gQ tract speculative orders and would be, at best, coldly re- ceptive toward orders from investment purchasers. None of these brokers could know — since each kept the details of his business to himself — what the extent of speculative commitments in various stocks might- be; nor could he know of the rate at which investment absorption or un- loading was generally proceeding, except insofar as he could draw inferences from the character of his own par- ticular business. The broker's chief concern was to have as large a volume of speculative orders given him as pos- sible. If he was not interested in encouraging invest- ment, and knew that few other brokers were doing so, he looked to the attractions offered by many stocks from time to time on the Exchange to draw investing purchasers. The latter presumably would retire the speculative commit- ments into which his own customers and those of other brokers had entered. Brokers generally held to the com- mon belief that investment buying of unlimited extent would set in toward any stock that displayed the qualifica- tions which presumably appealed to investors, in the way of yielding a steady income. The class which constitutes the general speculative " public ", in such a year as 1906, is as hard to characterize particularly as is the imaginary swarm of investors as- sumed to have been hovering over the market during that year. As has been said, the speculators came from every walk in life occupied by those who have at hand several hundred or a few thousand dollars apiece — business or pro- fessional — and possessing every possible degree of intelli- gence. Perhaps classes (4) and (5) of the patrons of the Stock Exchange, as those were designated by the report of the Hughes Committee, furnish as close a description as we shall ever obtain ; these are : 97] "NEEDS OF THE MARKET" gy (4) Outside operators, having capital, experience and knowl- €dge of the general conditions of business. . . . (5) Inexperienced persons, who act on interested advice, " tips," advertisements in newspapers, or circulars sent by mail, or " take flyers " in absolute ignorance, and with blind ■confidence in their luck. . . . As was pointed out, the large body of speculators for the rise in 1906 — or at any other time, for that matter — were not primarily concerned with the character of the purchasers to whom they finally sold in completing their several trades — whether investors or speculators. Such attention as they gave to the advice of others, to the earnings of the cor- porations in whose stocks they were severally interested and to the general prosperity of the country, together with the extent of their respective resources, guided them in the conduct of their operations. Inquiry into the sound- ness of the assumption as to the extent of the investment demand for particular stocks did not appear necessary to them. Probably this class shared the generally foggy ap- prehension of the economic transformations which had taken place since the Spanish War, and had also shared the rather wide diffusion of prosperity which went along with those transformations. For the most part, the individual members of the speculative class were not entirely occu- pied in following the course of the stock market. Such men as were living on independent incomes frequently had numerous interests outside Wall Street. Those specula- tors " on the side," who were engaged in various occupa- tions removed from the stock market, found much in the active period of 1906 to divert their attention from events in the financial district. And, moreover, if most of them did Tiot risk all their property or any very considerable part of it on the success of their different ventures, they were rather inclined to limit the extent of their possible losses 98 SPECULATION ON NEW YORK STOCK EXCHANGE [gg by placing "stop orders" with their brokers. Few of them stood ready to abide by their commitments in the event of a prolonged decline in prices. They were of the class which would buy heavily on a sharply rising market, tending by the extent of their combined purchases to raise prices still further, and would sell freely on a sharp de- cline, making it still sharper. However undesirable the above class of speculators may be, from the standpoint of the common interest, they were sufficiently acceptable as brokers' customers. Throughout 1906, as at times for several years previous, their orders were taken in large volume, and executed with striking effect. In such months as October and November, 1904, March, April and December, 1905, January and August, 1906, these outside speculators were particularly prominent and numerous in the stock market, and in March, 1907, was beheld their final manifestation in large numbers during the period we are considering. In actually bringing these speculators to the market in such hordes, the brokers could not of course be the prime movers. The efifect on the popular mind of the striking economic and financial phenomena previous to 1904, and the rise of prices, which was occasionally so striking, had acted upon many people in such a way as to direct them toward stock speculation. As it happened, many persons inclined in that direction in 1906 had the means to gratify their inclinations. The brokers, whom they had to em- ploy in order to engage in speculation, were of all things loath to discourage speculation among their customers. In fact, the 'chief activities of brokers in 1906, as at other times, consisted in getting in touch with just such a class as the potential speculators made up and in encouraging them to undertake ventures in the stock market. The brokers, it has been said, played a part in the pro- 99] "NEEDS OF THE MARKET" qq motion of speculation which was not very active. The existence of a large class of potential speculators depended on conditions largely beyond the control of the commis- sion houses. But these houses naturally extended every facility at their command to welcome the coming of the large class of speculative customers. Since the prevailing rate of commission and the differing characters of trans- actions for speculative and for investment purposes made the investors much less profitable than the speculators to the brokers, speculative customers were more welcome to the brokers than were .investing purchasers. Provided then that speculators came forward in sufficiently large numbers and the investing class did not, of its own accord and with- out active encouragement, manifest itself by heavy pur- chases which would keep step with speculative commitments, over-speculation was inevitable. Over-speculation, arising as we have indicated, does not necessarily impose checks upon itself, as it was conducted in 1906. As the volume of speculative commitments, ac- companying the rise of prices, expands, it may far exceed the extent of investment buying so long as fresh specula- tive purchases continue to be made. Of course the process must end, when the speculators cease their purchases through lack of further means or from disinclination to venture further, and general investment buying does not step in to retire the heavy aggregate of commitments for the rise which have been made. When the limits of the re- sources, which speculators are willing or able to devote to providing their requisite margins, have been reached with- out the intervention of investment buying, prices will in- evitably fall, whatever may be the supposed attractions of various stocks to hypothetical investors. And the extent of the ensuing decline will depend partly on the excess of the speculative commitments for the rise over the actual lOo SPECULATION ON NEW YORK STOCK EXCHANGE [loo investors' purchases at the highest price levels, and partly on the amount of investing purchases which are made as prices fall. It may be objected that the growing need of funds for speculators, which would be manifested by a rise of call rates if the speculators unduly over-estimated the demands of investors, would tend to act as a corrective to over- speculation by bringing about a rise in the level of inter- est rates on call loans. As the stock market in New York is organized to handle public speculation, however, the rise or fall of call rates does not directly affect outside specu- lators. The interest, which they are charged by their brokers, is computed on the basis of a fixed rate, say 6 per cent., in times either of ease or of stringency in the money market. In such months as September, 1904, the interest rate with which customers are charged is not generally low- ered to 2 per cent. Nor in such months as November, 1906, is the rate of interest charged customers as high as 25 per cent. The brokers themselves are the parties to stock speculation upon whom high interest rates bear heavily in times of stringency. But since all brokers are not charged the maximum rate each day by lenders, and since those who pay the highest rates are comparatively few in number, this direct pressure of high call rates on the brokers does not operate very effectively to check speculation on the part of their customers. About the only action these high rates can exert is in the nature of inducing the brokers to per- suade some bullish customers to reduce their commitments. This action is neither generally immediate nor very ef- fective in reducing the volume of speculation. Furthermore, we can hardly regard the prevalence of low call rates as a very powerful stimulant to speculation. Mr. Horace White has pointed to low rates, which endure for lOl] "NEEDS OF THE MARKET" jqi extended periods, as tending to " incite speculation." ^ It is implied, both in his direct statement to that effect and in two passages of the Hughes Committee's report," that low call rates act immediately and directly to swell the volume of speculative commitments. We have seen that, because of the incidence of the high rates upon the brokers, the rise of call rates does not act as a direct check on the operations of outside speculators. And since the brokers do not lower the rate of interest charged their customers when the call rate falls very low, the quotation of low rates does not serve directly to encourage speculation on the part of the outside " public." If the general body of speculators were commonly charged the quoted rates on their margin ac- counts, they would doubtless prove quickly responsive to changes in those rates by extending their commitments as call rates fell and reducing them appreciably as those rates rose. But the brokers intervene between the lenders of call money and the general body of speculators, gaining all the advantage of low rates and bearing all the burden of high rates, so that the operations of the speculators are not in general affected directly by changes in call rates. Only to the extent that brokers, who are able to obtain call funds at prevailing low rates, undertake to speculate on their own account, do low rates incite speculation directly. But ^Annals of the American Academy of Political and Social Science, vol. xxxvi, p. 565. 3 Extracts from the Report of the Hughes Committee— "... There almost annually recurs an inordinately low rate for • call loans ', at times less than i per cent. During the prevalence of this abnormally low rate speculation is unduly incited, and speculative loans are very largely expanded. . . . " . . The repeal of the statute [exempting demand loans of $S,ooo, or more, secured by collateral, from the scope of the New York State usury law] would affect only the conditions when high rates of interest are exacted, and not those of abnormally low rates, which really pro- mote excessive speculation." I02 SPECULATION ON NEW YORK STOCK EXCHANGE [102 brokers' operations of this sort have played relatively slight part in periods of pronounced over-speculation. The sus- tained heavy volume of speculative transactions, during the period we are studying particularly, had its rise in a wide- spread participation in the market of a large class of out- side speculators. These speculators, unable to gain any ad- vantage from relatively low call rates, were not incited to speculation by the latter. At least the universally custom- ary practice of brokers in maintaining the constancy of the interest rates they charge their customers does not appear to offer a direct incitement to speculation. And no in- ductive study of call rates and speculative activity — or over- speculation — has shown that any correlation between the two exists. It is in the collective emotions of the general body of speculators, and in the resources which they feel inclined to risk on the course of the stock market, that the volume of speculation takes its rise. If the stories of vast fortunes made in financial operations and the movement of prices on the Stock Exchange seem, in the popular opinion, to present opportunities for successful speculation, we may look for a heavy volume of speculative commitments for the rise; provided that there are many persons of ample means, as we have indicated, who will respond readily to such stimuli as the events of 1906 and the few preceding years furnished. In a market where many outside speculators are present, prices reflect primarily the general strength or weakness of the speculative position. This position is determined by the correctness or the falsity of the estimate, which specu- lators make and on which they act, of the investors' demand, existing or prospective; and also by the extent to which fresh speculative commitments for the rise are tending to raise prices or by the point of time at which the volume of new ventures is appreciably reduced with more or less sud- 103] "NEEDS OF THE MARKET" 103 denness. Speculators in such a market can do little more: than indicate, by their operations, the secure or perilous state of their own separate situations with respect to the concurrent state of the market; they are hardly able to " discount " events many months in the future, as Professor Huebner asserts that they did in the latter part of 1906.* His summary interpretation of the speculators' actions at that time runs as follows : . . . Not only does the stock market afford a valuable pro- tection to the holder of securities and direct the flow of cap- ital, but it also serves a most useful purpose to all business men by " discounting the future " and by thus affording a register of prospective values for property other than that listed on the exchanges. It is this discounting process which has given our stock exchange the appellation of " barometer of future business conditions." As pointed out in other papers of this volume, speculation deals with the future and not with the present or the past. The stocks and bonds of our corpora- tions aggregate so large a proportion of the world's wealth, and represent such a variety of industries, that a marked rise or decline in the general level of prices is the surest indica- tion — in fact, an almost unfailing index of coming prosperity or depression. And the all-important fact is, that such changes of prices on the exchanges always precede, that is to say, dis- count the event, and do not follow, or occur concurrently. Without an exception, every business depression in this coun- try has been discounted in our security markets from six months to two years before the depression became a reality. The financial and business panic of 1907 serves as the latest illustration of the significant fact. The business conditions of 1906 were the best that this country has ever enjoyed. Mills were running overtime, railroads were congested with traffic, and real estate operations were booming. The press was filled * Annals of the American Academy of Political and Social Science, vol. XXXV, p. 13 (494). I04 SPECULATION ON NEW YORK STOCK EXCHANGE [104. with the most roseate " write-ups " and predictions, yet, de- spite the good news, security prices showed little gain follow- ing the month of August. The earmarks of coming financial and business distress were at hand. The stock market was serving its purpose as the pivotal point where thousands of the brainiest men of the world were acting on judgments which had reference to the future and not to the present.. Stocks were for sale by those who reasoned correctly and knew, and were purchased by those who did not know so much. They were even sold at a sacrifice, and as knowledge of the coming state of business affairs percolated from one stratum of investors to another, the selling movement be- came more violent, and in March of 1907 we had our first, stock-exchange panic. A rebound in prices occurred, but stocks- were still for sale, and in July we had our second panic. In the meantime, however, business was excellent, and the press of nearly the whole country wondered what all the trouble was about, and why the Wall Street gamblers were thus losing their senses. The business depression, however, followed, and when it was a reality to even the most ignorant, the stock market had clearly discounted the event, and prices of securi- ties refused to yield further. When business was at its worst,, and the public press blue as indigo, stock-market prices were again merrily ascending. The exchange was again the pivotal point where thousands of the best minds of the country were expressing their judgment of the future, and were willing to convert their cash into securities, because of the anticipated increase in value. This ascription of the " discounting " faculty — founded on the familiar saying, of doubtful accuracy, " Wall Street discounts everything " — to the operations of s^peculators, throughout the autumn of 1906 and the greater part of 1907, is rather obscure in its implications. What was " discounted ", for instance, in the decline of Union Pacific's- price from 195^, its highest point recorded September 13, I05] "NEEDS OF THE MARKET" 105 1906, to 120^ in the following March, and later to 100, October 24, 1907? On this stock a dividend at the annual rate of 10 per cent, had been earned the previous fiscal year, ending June 30, 1906, with a comfortable margin of surplus. Ever since that year. Union Pacific has continued to pay 10 per cent, dividends and to earn them with the utmost ease. If we are to assume that the market price of a stock represents the collective opinion of its capacity for paying steady dividends, the " discounting ", reflected in the fall of price, amounting to ys% points in six months, seems rather puzzling. If 1908 had been characterized by the general passing of dividends on stocks listed on the Ex- change, which suffered enormous declines of price between the summer of 1906 and the following spring, we might be willing to ascribe preternatural foresight and intelligence to the speculators who were active in September and October, 1906. But the objective qualifications, possessed by most of the dividend-paying stocks, which it was assumed in 1906 would render them highly desirable for investment purposes, were retained in large part by those stocks dur- ing 1907 and the succeeding year of depression. As to the barometric service rendered by the general decline, which began in the autumn of 1906, it seems to have been rather costly to those who provided it, and little appreciated by those whom it was assumed to have benefited. The whole conception of " discounting ", as one of the stock market's chief functions, is based on the hypothesis, commonly accepted without question, that " a slight fluctu- ation in the value of a product tends to produce a violent fluctuation in the value of the establishment producing it." ^ This principle is currently believed to explain fully the movements, over a long period and to a wide extent, of 5 T. N. Carver, " A Suggestion for a Theory of Industrial Depres- sions," Quarterly Journal of Economics, vol. xvii, p. 497- Io6 SPECULATION ON NEW YORK STOCK EXCHANGE [io6 prices in the stock market. Even accompanied by the qualifications Professor Carver imposes in his statement of this principle, as it is given above, we cannot regard the " general law " as an adequate explanation of stock market price movements or as a safe foundation on which to erect the theory of the " discounting " function. At best it can only be true when investors in a market far exceed the speculators in numbers and in the volume of their trans- actions, and also when the speculators have at their com- mand resources ample to protect them against slight or Serious miscalculations in their forecasts. This principle can only hold good also when all the profits of a railroad or of an industrial corporation are distributed periodically among the owners. When the owners, for example a mul- titude of stockholders, generally receive annually a fixed amount on each share of their stock holdings, and the com- pany almost always earns more than is needed for the distribution of these dividends, slight fluctuations in the excess of profits over dividends should hardly be reflected in the capitalized amounts of those fluctuations in the price of the stock. For instance, the Great Northern Railway earned in the successive fiscal years, from 1909 to 1912 inclusive, respectively, 8.33, 8.47, 8.34. and 10.31, per cent, on its capital stock, in amounts available for dividends. But, during each year, it paid only 7 per cent, dividends on its one class of stock. If its practice had been to distribute the entire surplus among its stockholders each year, with- out harm to its equipment, slight fluctuations in the amount of net earnings would probably have been followed by rela- tively violent fluctuations in the market price of its stock. However, the practice of distributing among stockholders only a part of the sums available for dividends serves to weaken the operation of the tendency indicated by Pro- fessor Carver. As he, moreover, presents the qualification, I07] "NEEDS OF THE MARKET" 107 " the fluctuations in the value of producers' goods are never actually so violent as the foregoing illustrations have sup- posed, mainly for the reason that not every rise or fall in the value of products is believed to be permanent." Unless the " general law " — in its unqualified forni — operates to its fullest extent, " discounting the future " by speculators will not in general be very effective. And, furthermore, un- less the general decline of prices on the Stock Exchange, which proceeded quite steadily from September, 1906, to October, 1907, can be shown to have foreshadowed a gen- eral, sweeping reduction of dividends, which was to have a certain character of permanence, the explanation of the prolonged decline in question cannot be obtained by recourse to speciilative " discounting." So far as the individual outside speculator is concerned, his immediate interest, as he sees it, is not closely bound up with having a pressing investment demand act upon the market. If he purchases a given stock and afterward other speculators purchase the same stock in sufficient aggre- gate amount to advance the price beyond the point at which the first speculator bought, he can, if he desires to convert his gains, sell to another speculator at an advanced price, just as much to his immediate advantage as if he sold to an investor. When the speculator, whose account shows a profit on his purchase, decides to sell and obtain his profit, the chief focus of his attention is the price at which he can sell — regardless of the purchaser's being another specu- lator or an investor. He may of course consider the pos- sibility of manipulation's part in fixing the price of his particular stock. But the actual strength of the invest- ment demand is never considered a factor which may be potent in determining the price of a given stock at any one time. Those banking institutions or other agencies which lend lo8 SPECULATION ON NEW YORK STOCK EXCHANGE [jog money on demand to Stock-Exchange speculators are not directly interested in the correctness of the speculative anticipation of the market's needs. The Stock-Exchange market for call money is primarily a convenience to lenders. When the bankers, individually or collectively, have in their hands funds which will remain with them for an undeter- mined period, the demand for loans, readily payable on demand, furnished by the speculators, provides lenders with the means of employing those funds profitably for as long or as short a period as the funds in question are left at their disposal in whole or in part. Thus the national banks, trust companies, private banking houses, agencies of for- eign banks— all the various lenders of funds in the form of Wall Street demand loans — regard that part of the money market, in which such loans are made, as chiefly a con- venience to themselves individually and collectively. The relatively secure basis for the great bulk of demand loans does not necessitate a very careful scrutiny of the investors' effective demand as compared with the aggregate volume of open speculative accounts. The lenders generally assume the existence of a speculative demand for call money which is practically without limit. Although the supply of avail- able funds may be very extensive as compared with the speculative demand so that the call rates may fall as low as I per cent, at times, the assumption of a limitless specu- lative demand is in general a safe one to make for practical purposes — ^at least the level of call rates at any time will af- ford a sensitive index of its soundness. Since, with the more conservative lenders, the call money market is only a convenient field in which funds, that other- wise would have to lie idle, may be employed, those who lend greater or less sums on call have no immediate inter- est in checking or in inciting speculation. The interests of any one banking institution diflfer from those of others to 109] "NEEDS OF THE MARKET" 109 such a degree as to prevent the banks, or any considerable number of them, from combining to seek the repression of over-speculation if the latter manifests itself. The develop- ment of the mechanism for lending money on the Stock Ex- change has gone so far that, even in such a panic as that of March 14th, 1907, the lenders have slight occasion to fear that they will incur losses on their outstanding loans So that the prospect of an excessive over-estimate of the investment demand, on the part of speculators, which may be clearly indicated to careful observers, and the likelihood that such an over-estimate will end in a severe panic, do not tend to bring about the curbing of speculation by those who are accustomed to finance speculation by means of call loans. Lenders in the money market need have nO' close oversight of the tendency of speculative anticipation to go far be- yond the investment demand. There is no factor, as far as the organization of the New- York Stock Exchange and the conduct of sales under its rules of procedure have been developed, which would act as a restraint on over-speculation. The essential condi- tion for excessive speculation on a large scale lies in the presence and participation of a number of individuals, each one convinced of his ability to gain by speculation or rather careless of the amount he may lose in that form of activity. If the utility to each speculator of the amount he risks on his ventures is not very large, he may not make any careful study on which he will base his forecasts. However the amounts, which individual outside speculators stand to lose, are limited — partly by the fact that most speculators of the kind mentioned have absorbing interests removed from the stock market. They have not the strong inducements to carry stocks, which they have bought on margin, over a period of falling prices and depression, that would be pre- sented to those who are speculators by profession. Individ- I lo SPECULATION ON NEW YORK STOCK EXCHANGE [no ual speculators' losses, in 1906 and 1907 at any rate, have not of late amounted to great sums. Only when the num- ber of speculators becomes exceedingly large and remains so throughout an extended period of falling prices, will the aggregate of losses sustained by unfortunate speculators for the rise attain a considerable volume. A period of the sort indicated will follow either an excessive speculation in the face of restricted buying — which may conceivably occur in a time of abounding prosperity — after further specula- tive commitments for the rise tend to decrease in amount, or else it may follow a high degree of speculative activity which is interrupted by the occurrence of some event that renders a given security or all those of a certain class un- desirable for investment purposes. In the latter case, the distrust will be shared by speculators with investors, so that the former will retire their commitments much more rapidly than they would do if the decline of prices followed ex- cessive speculation in a period of apparently boundless, ex- panding prosperity. But where general prosperity persists, along with the decline of stock market prices, speculators tend to retire very slowly from the market. For the value of most stocks, according to the objective tests which the speculator applies, should increase in a period of general prosperity; and, by Wall Street conventions, these are the only criteria of value — particularly were they emphasized in 1906. The power of investors themselves to make an effective evaluation and to manifest it by extensive pur- chases, was disregarded. And, as in 1906, this is the usual course of Stock-Exchange speculators. It is assumed that the state of general business conditions and the success, with which the operations of the corporations represented by particular stocks are conducted, determine the extent to which a limitless investment fund will be employed in ac- quiring those particular stocks. The individual specula- Ill] "NEEDS OF THE MARKET" m tor, through the ready possibility of selling to other specu- lators if he wishes to do so, has no immediate interest in the actual existence of an adequate investing class. Ac- cordingly the assumption of this class' existence is quite satisfying to speculators generally. There is then no internal agency or factor existing in the New York stock market itself to prevent extensive over- speculation. Nothing whatever tends to bring the volume of speculation in different stocks into approximate con- formity with investment buying or selling. The individ- ual speculators themselves do not feel the pressing import- ance of rather full information with regard to the volume and rate of investment absorption. As we have shown, a speculative class, of large numbers and means for the deposit of an enormous aggregate of margins, may enter into ex- tensive ventures on the Stock Exchange, and, by heavy speculative buying, raise prices sharply to very high levels ; in fact, this process will not cease except through exhaus- tion of the speculators' resources for further margins. And all this can go on without intelligent reference to the actual investment demand. In 1906, indeed, we have seen that any judgment on this demand, which was founded on an assumption of its limitless extent, might be quite erroneous and yet constitute the underlying basis of speculative ex- pectations and actions generally. The individual brok- er's chief interest — at that time, as always — lay in having the buying orders, which were entrusted to him, so far as possible, of a speculative character and as little as possible consisting of odd-lot investments. The banks and other agencies which, primarily as a matter of their own conveni- ence, assisted speculation by advances in the shape of de- mand loans, were not interested in the adjustment of specu- lation and investment in their relative volumes. The rules of the Stock Exchange and the customs of conducting the 112 SPECULATION ON NEW YORK STOCK EXCHANGE [112 operations subject to them had been developed in the pur- suit of the end, or " ideal ", which, Mr. Meyer writes, " is freedom for the transfer of securities in the most simple and convenient manner, with the least possible friction and the fewest possible restrictions consistent with the protec- tion of the rights of the owners and dealers in securities." Simplicity in the conduct of routine transactions, together with inflexible mechanical honesty, had been attained to a very high degree by those associated with the New York Stock Exchange in 1906, especially by those who were chiefly engaged in buying and selling. However much had been accomplished in the efficiency of clerical routine and the adherence to a lofty standard of business integrity, no provision was made for adjusting the volume of speculative commitments to that of investment transactions or to the character of the latter. And if no action by the authori- ties of the Exchange had been taken to obtain the needed adjustment, the interests of the brokers or bankers, as a whole or individually, would not lead them to enter upon any such action. Nor was the automatic operation of the prevailing level of call rates effective in compelling specu- lators to give attention, in spite of themselves, to the in- vestment demand or to the relative volume of their own aggregate commitments. To the fortuitous advent and retirement of speculators, and also of investors, was left the final outcome of the general course of the market. Investors' operations arose out of their own effective desires and the objective quali- fications of the stocks they proposed to purchase. Specu- lators had in mind the same qualifications and acted with- out proper regard for the extent of the investment demand — the " needs of the market ", which President Hadley says speculation must " anticipate ", in order to be accepted as legitimate. In view of the considerations which apparently 113] " NEEDS OP THE MARKET " j i , moved speculators in 1906, and the changes in the extent and character of the investment demand, which had taken place in the two previous years, the close accordance of speculation and investment would have been a highly im- probable event. The unknown financial capabilities of the speculative class alone imposed restrictions on the extent to which its operations might outrun the effective invest- ors' demand. Perhaps they will constitute the only check on over-speculation so long as " capital's freedom of move- ment " on the Stock Exchange, as that is understood at present, must be regarded as inviolable against interference of any sort. We may not look for the frequent recurrence of specu- lation on a large scale, quite out of proportion to the pos- sibilities of investment absorption. Only at the end of such a period as followed the Spanish war in this country, would speculation be likely to be conducted on a scale sufficient far to outdistance investment buying. In a relatively pro- longed period of general economic activity, the general in- vestment fund becomes appreciably contracted, when there is a heightened demand for liquid capital to finance the in- creased activity. An active period of considerable duration had preceded the summer of 1906. The financing of the Russo-Japanese war, after its conclusion, the San Francisco fire's effect on the investing capabilities of fire insurance companies, and the life insurance legislation in New York State, had directly and definitely acted so as to restrict the total investment fund which could be devoted to purchases on the Stock Exchange. Since the emotions of speculators responded most readily to developments which would doubt- less have been efifective in attracting an unrestricted invest- ing class, if the latter had existed, there were inevitable out- breaks of speculation for the rise in 1906 as the expansion of prosperity became more and more generally obvious. 1 14 SPECULATION ON NEW YORK STOCK EXCHANGE [ 1 14 It was to the immediate interest of no influential class concerned with Stock Exchange activity that speculation's volume should conform to the extent of investment buy- ing. As is always the case under existing conditions, specu- lation could go beyond investment capacity to any extent, with no curb on its excessive " anticipation of the needs of the market ", except the eventual exhaustion of its de- votees' resources. This exhaustion was manifested tempor- arily in some of the earlier months of 1906 — such as Febru- ary, April and June. Finally in August and September, it appeared as if almost every potential speculator had been lured into the stock market and had ventured all of his re- sources that were available for speculation. The decline, which sooner or later was inevitable in the presence of the inadequate investment demand, set in. Unlike the situ- ations in the preceding March or May, no body of specula- tors reappeared in sufficient numbers to arrest the declines from the high prices of September and to bring about a renewed rise of prices. Speculation for another expected rise of prices could only avail to make the general decline of prices, from October to March inclusive, more gradual than it might have been. But however useful operations of this nature may have been, from the standpoint of the common interest, the individuals who participated in them incurred a large aggregate of losses. Individual specula- tors for the rise during the six months' decline were, of course, not interested in making the decline gradual; they desired to profit by the expected turn in the general course of prices. Had the insignificant power of investment buy- ing been generally apparent to speculators by the middle of 1906, they probably would not have entered the stock market to the extent that they did from August to the end of the year. But no definite information regarding the extent of investment purchases was accorded them; and IIS] " -^^S^-S" OF THE MARKET " j i e they did not inquire concerning it. When they proceeded to act on the assumption of the unlimited investment de- mand and to go far beyond the actual extent of that de- mand, there was no agency in the New York financial markets, as they were organized in 1906 — and are now or- ganized for that matter — to adjust speculation to invest- ment; and it has never appeared that speculators, despite the high degree of sagacity attributed to them by tradition, had the power in 1906, or at any other time, to estimate the strength of any movement in the market, such as the rate of investment absorption, on which data were quite lacking. The fall of prices which followed September, 1906, seemed then to represent the liquidation of commitments for the rise in large volume, based on an excessive over- estimate of the investment demand or " the needs of the market " — not the " discounting " of a comparatively re- mote depression. Distinguishing stock speculation from speculation in com- modities subject to world-wide demand. Professor Emery wrote in 1896 : An article must be the subject of a general world-wide de- mand before extensive speculation in that article is possible. A more limited demand may allow of a limited amount of speculative trade, but, in general, speculation will arise only where the commodity is one of the staples of the world market. . . . . . . Securities . . . offer a field of great speculation be- cause of their fluctuating values. They differ from specula- tive commodities in that they are of a fixed, not an uncertain, supply. Their values, however, are uncertain, since they de- pend on a fluctuating demand. The demand itself is deter- mined by the market estimate of earning capacity. Allowing the possibility of a " limited amount of specula- 1 1 6 SPECULATION ON NEW YORK STOCK EXCHANGE [ 1 16 tive trade " in articles subject to a limited demand, implies that stock speculation should be conducted with constant re- gard to the urgency of the investors' demand and its varia- tions from time to time. On this conformity of the oper- ations of speculators with those of investors the whole ques- tion of the legitimate nature of stock speculation appears to turn. If it can ever be shown that Stock-Exchange speculators for the rise have consciously adjusted their oper- ations to the manifested power of investment absorption, their operations may fairly be said to have been legitimate at that time. But when the activity of speculation has varied with no attention to investors' actions except such as was required in assuming the existence of a class of in- vestors with unlimited resources, speculation would conform to investment only as a result of pure chance. The con- sideration of Stock-Exchange events in 1906 leads to the conclusion that the advent of a large number of speculators in 1906 brought about a sustained activity of speculation, which ran far beyond the " needs of the market ", that is the effective wants of investors. And it further appears that speculation, based on an excessive over-estimate of the " needs of the market ", was not restrained by the in- dividual, members of the Stock Exchange, by the authori- ties of that institution, or by any other agency in the New York financial markets. In fact the only action, apparently, having in view the restraint of over-speculation on the Stock Exchange, was taken in the autumn of 1906 by cer- tain large European banks which raised their respective dis- count rates or refused to discount American finance bills any further. This action only served to check certain phases of speculative activity, and was applied some time after speculators had effectively over-estimated the invest- ment demand. Accordingly it was not effective in check- ing incipient over-speculation, much less did it avail to pre- 117] " NEEDS OF THE MARKET" 1^7 vent that form of mischievous activity. So long as specu- lators in large numbers, partly on the strength of the un- warranted assumption as to the capacity of investment ab- sorption, and partly in the expectation of selling at ad- vanced prices to other speculators, entered into commit- ments for the rise, no close scrutiny of the existing invest- ment demand was made by them. And, moreover, if a large class existed, having the inclination and the resources to venture into speculation, no restraint on their activities was ever imposed aside from the wane of their inclinations or the exhaustion of their resources. Possibly we shall not soon witness such a concurrence of conditions as brought about the high degree of speculative activity manifested in 1906 and in the sixteen months which preceded that year. If, however, those conditions ever again concur, we may look for a period of over-speculation on the Stock Exchange which will only be checked by the crippling of those who engage in it. This, at least, seems the only means by which over-speculation can be brought to an end, so long as the brokers' interests remain the same as in 1906, and the Stock- Exchange authorities confine the exercise of their extensive powers to maintaining an exalted standard of mechanical honesty in the dealings of its members with each other and with their customers. Utter disregard for the actual strength of the " needs of the market ", which speculation supposedly " anticipates ", may be looked upon as a factor in bringing on inevitable disaster. Just how costly and wasteful it is to hope for the checking of over-speculation by the financial weakening of those involved in it, may be a question which cannot be discussed very fully at this point ; but in the next chapter we shall consider some possible ef- fects of over-speculation on such a large scale as was ap- parent in 1906. CHAPTER VIII Stock Speculation in 1906 and the Succeeding Economic Readjustment " Je mehr Zwischenhande an einem Produktions- oder Ab- satzprozesse teilnehmen, desto weiter muss das Ausbleiben der schlieszlichen Zahlung seinen storenden Einfluss ausdehnen, desto mehr namentlich den Konsumptionsmut des Publikums lahmen." — W. Roscher, Nationalokonomik des GeimrbUeisses. 8. Auflage. A decline of prices on the Stock Exchange which ac- companies or precedes a general financial panic and com- mercial depression, is conventionally ascribed either to gen- eral " liquidation of the businesses of the coimtry " — ^which are supposed to have become over-extended — or to specu- lative " discounting " of the depression. Upholders of either view consider prices of stocks either merely S)mip- tomatic of existing general conditions or as affording baro- metric forecasts of future conditions. And if over-specu- lation on the Stock Exchange is clearly manifested for a considerable time before the panic occurs, it is said offhand that speculation in other directions was also overdone. The aggregate losses incurred in Stock-Exchange speculation, during a year or a shorter period, are not regarded in the conventional treatment of panics and their connection with speculation of that sort. Even if more than 133,000,000 shares of stock, of more than $11,100,000,000 total value, are sold during a profound and steady decline over a rela- tively short period of six months, the losses incurred in the 118 [118 119] STOCK SPECULATION IN 190e jjg speculation involving that volume of operations are disre- garded in discussing the conditions which gave rise to the general depression. The number of shares sold and their total value as given above were both exceeded in the six months' decline on the Stock Exchange, which ran from October, 1906, to March, 1907, inclusive. We have already noticed Professor Huebner's explanation of this decline as an example of speculation's " discounting " the coming de- pression. We may now give attention to the view of over- speculation in 1906 and 1907 as an interesting incident but a negligible factor in the violent economic readjustments of 1907 and 1908. It is maintained that the thoroughgoing liquidation and tremendous declines at the end of 1906 and early in 1907 cannot be dismissed as important factors in bringing about the disturbances of 1907 and 1908. Perhaps if only 10,- 000,000 shares had been sold on the New York Stock Ex- change in the six months of falling prices, one might dis- regard the losses suffered by the speculators for the rise who participated in those sales. But the volume of transac- tions which accompanied the declines on the Stock Ex- change seems to make the liquidation worthy of considera- tion as a factor in the later disturbances of a more gen- eral character. A typical " proof " that Stock-Exchange speculation in itself had no part in bringing on the panic of October, 1907, is contained in Mr. Meyer's article in the Yale Review, which has already been cited. This article is to be con- sidered in some detail, since it presents a widely accepted view of stock speculation's place in the readjustments of 1907. In itself the article need not be taken seriously any more than most of the reflections on stock speculation that litter economic texts and periodicals. However, the posi- tion of the writer as a member of the Governing Committee I20 SPECULATION ON NEW YORK STOCK EXCHANGE [120 of the Stock Exchange, the respectability of the periodical for which he wrote, and the approval of the chairman of the Hughes Committee which was placed on Mr. Meyer's " proof ",^ have led us to turn our attention to this article. In connection with the panic of October, 1907, and the events which led up to it, Mr. Meyer wrote : . . . This panic, with its great excitement and the tre- mendous liquidation which marked the closing months of 1907 on the Stock Exchange, which was simply a manifestation of the contraction and liquidation of the business of the country, was looked upon as a Wall Street " gamblers' panic." As a matter of fact, Wall Street, the Stock Exchange, had quietly liquidated many months before.^ Thus asserting that " the Stock Exchange had quietly liquidated many months before ", Mr. Meyer dismisses with a wave of his hand the possibility that over-speculation in the stock market could have had any influence in bringing on the panic of October, 1907, or the succeeding depression of 1908. What degree of belief is accorded his statement or other statements to the same effect arises from the widely accepted fallacies bound up with the theory of the stock market's " discounting " faculty. One of those fallacies consists in regarding prices on the Stock Exchange as mere barometric forecasts of coming events. The number of speculators, the general extent of the resources they might have devoted to speculation, and the volume of their trans- actions, are not considered. Price movements in such a ^ " In the Yale Review for May, 1909, Mr. Eugene Meyer, Jr., has shown conclusively that speculation on the stock exchange was not the chief contributor to the collapse of 1907, but that speculation on a much wider scale, through the length and breadth of the land, was the exciting cause." Horace White, " The Hughes Investigation," Journal of Political Economy, vol. xvii, p. 528, note. = Op. cit., p. 45. 121 ] STOCK SPECULATION IN 1906 121 month as June, 1904, when the sale of 4,972,804 shares was recorded, are taken to have just as much importance as in January, 1906, when 38,512,548 shares were sold. Ac- cording to the " discounting " or " barometric " theory, the two bodies of speculators, who were respectively active in both months, were equally intelligent and foreseeing, and their judgments, expressed in the quoted prices, were just as valuable in one month as in the other. Speculators of all classes, and at all times, are preternaturally acute and fore- knowing, whether they are present in such numbers as to give rise to average transactions each day of 100,000 or 1,000,000 shares. And moreover it appears to be the common belief that months of panic and depression are equally significant, whether, as in March, 1907, 32,208,525 shares were sold, OJ" I7i333>793» ^.s in October of the same year. Accord- ingly, if early in 1907 severe declines of prices occurred in a month which was characterized by extensive liquidation by speculators, liquidation on the part of general business was predominant during other months later in the year. Therefore, the usual argument runs, with more or less cogency, general business in 1907 was " over-extended ", concurrently with speculation for the rise on the Stock Exchange, and to the same extent. The upholders of this view quite ignore the circumstance that the profound de- clines of prices in March, 1907 — when internal liquidation of the stock market was supposedly in progress — were ac- companied by a volume of sales in excess of that which went along with the declines of October, taken to represent liquidation by general business interests, by 86 per cent. Mr. Meyer, however, does take into account the records of sales on the Stock Exchange. What use he makes of them will appear from the following passage : One of the proofs that stock-exchange expansion and con- 122 SPECULATION ON NEW YORK STOCK EXCHANGE [122 traction had run their course before the panic of the autumn, is the exhibit of transactions on the Exchange for a series of years preceding the breakdown. The following table gives the number of shares sold on the New York Stock Exchange and their total value from the years 1903 to 1907 inclusive, to- gether with increase or decrease as compared with the pre- vious year: Transactions Increase or Total Value, Increase or in shares. Decrease, Millions Decrease. Millions. %■ of Dollars. %. 1903 161 11,000 1904 187 +6.1 12,061 + 9.1 1905 263 +40-2 21,295 +76-8 1906 284 +8.0 23,393 + 9-9 1907 196 — 3I.O 14,757 —36.8 From the year 1903 to the year 1906, the total number of transactions increased from 161 to 284 million shares, a gain of 76.4 per cent. The total value represented by these shares was, in 1903, 11,000, and 1906, 23,393 milHons of dollars, a gain of 1 12.6 per cent. From 1906 to 1907 a great contraction took place, reducing total transactions from 284 to 196 millions, equivalent to 31 per cent., and the total value from 23,393 to 14,757 millions, equivalent to 37 per cent., approximately. The significant fact is, however, that this shrinkage had already begun early in the year and would have been much greater but for the num- ber of shares thrown over in the March panic. The sales in January fell from 38,500,000 shares in 1906 to 22,700,000 shares in 1907, and in February from 21,700,000 to 16,500,000. Then came the heavy transactions in mid-March, which ad- vanced the record for that month from 19,500,000 shares in 1906 to 32,200,000 shares in 1907. Even with this phenomenal increase, which can certainly not be ascribed to speculation for the rise, the first quarter of the year showed a decline in dealings from 79,900,000 shares in 1906 to 71,400,000 shares in 1907. The second quarter, ending June 30, showed a de- 123] STOCK SPECULATION IN 1906 J23 dine from 68,700,000 shares in 1906 to 44,800,000 shares in 1907, and the third quarter showed approximately the same decline from 74,200,000 in 1906 to 40,600,000 shares in 1907. Note that all these changes took place before the trouble in the Mercantile National Bank, which led to the general panic. In other words, liquidation had been effected upon a large scale in the Stock Exchange without causing serious failures, and the market may be said to have been at a level even below the normal and indicating no sort of speculative expansion. If the general business of the country had been sound, the stock market would probably have remained for a time qui- escent and begun to move slowly upward under the beneficial effects of the liquidation — as in 1904.' The chief point advanced in the first part of the passage quoted is that stock speculation, as measured by yearly rec- ords of Stock Exchange sales, was much less active in 1907 than in 1908; therefore over-speculation in 1907 could have had little to do with bringing on the October panic of the later year. But the differing characters of the two years are not taken into account. Over against 1907, with its first ten months given over to well-nigh unchecked liquida- tion, is set 1906, during which speculation for the rise at times achieved certain degrees of temporary success. In the same way, the comparison drawn between the respective first quarters of 1906 and 1907, with regard to speculative activity, is quite misleading. In 1906, January was char- acterized by rising prices going along with intense specu- lative activity, and in March also prices rose generally al- though speculation was not so active as it had been in the first month of the year. The intervening month of Febru- ary had witnessed a sharp general fall of prices following the active speculation with which the year had opened. In the first three months of 1907, however, the character of the 3 Op. cit., p. 36. 124 SPECULATION ON NEW YORK STOCK EXCHANGE [124 general stock market movement was clearly one of unre- strained liquidation. Mr. Meyer is quite correct, if he means to imply that there was less hopeful speculation for the rise early in 1907 than in the corresponding period of 1906. But a widespread distribution of losses incurred by mistaken speculation on the long side prevailed in 1907, as against the sustained fortunate speculation for the rise which manifested itself in January and March of 1906. The total actual values of the shares sold on the Stock Ex- change during the first quarter of 1906 amounted to $6,- 756,000,000, for the first quarter of 1907, $5,706,000,000, Therefore, following the line of Mr. Meyer's argument, the total activity of speculation in the first quarter of 1906 exceeded that of 1907. But the sales of shares possessing the aggregate value of $5,706,000,000 from January to March, 1907, were attended by severe general declines of prices. We may be sure that most speculators for the rise — the category to which most outside traders belong — lost heavily during these three months as a result of their ven- tures. That is, so far as the 71,400,000 shares sold early in 1907 represented speculation for the rise — either in the purchases or in the liquidating sales — it was almost uni- formly unsuccessful. This could not be said of speculation for the rise in the 79,700,000 shares sold, January to March, 1906. Generally rising prices throughout January rewarded most speculators for the rise who ventured into the mar- ket and retired in that month. The month of falling prices and of liquidation, February, had a record of 21,699,800 shares sold on the Exchange — slightly less than that of January, 1907, and far below the record of March, 1907. The liquidation, which was not halted from January to March, 1907, continued a movement which had set in during the preceding October — although the last three months of 1906 had not been characterized by the pronounced and 125] STOCK SPECULATION IN 1906 ^^c. severe fall of prices which marked the later three months named. Not only from January to March, 1907, did specu- lative commitments for the rise inflict heavy losses, almost without exception. Losses also attended this class of oper- ations throughout October and December, 1906 — and to a slighter degree, perhaps, in the intervening month of November. We may fairly assume that the sales of stocks, having an aggregate value of $5,706,000,000, during a period when the prices of those stocks were generally declining, would result in a large total loss if speculation for the rise was im- portant at all at the time. A violent readjustment and transfer of property rights would follow the speculators' purchases and subsequent forced sales. That the losses in- cident to the liquidation and the accompanying decline could be so insignificant that they could have no connection with a shortly succeeding financial panic and general economic depression, seems hardly believable; and it does not appear that Mr. Meyer has established the impossibility of any such connection. Nor does he seem to be any more successful in his ef- forts to show that " over-extension was general " in other lines of economic endeavor than in stock speculation, and that declines in Stock Exchange prices were only barometric indications of the coming depression. He attempts to do this by appealing to the increased number of building per- mits in New York and other cities, and also of mortgages recorded in Manhattan and the Bronx, in the years preced- ing 1907. Mere volume of operations or transactions, how- ever, does not necessarily betray over-speculation in any degree — much less is it an index of over-speculation's ex- tent. For instance, in October and November, 1904, very large volumes of sales on the New York Stock Exchange were recorded. Prices nevertheless continued to rise; not 126 SPECULATION ON NEW YORK STOCK EXCHANGE [126 for months did the obvious signs of over-speculation make their appearance. We are told by Mr. Meyer that in Greater New York during 1906 and 1907, the amounts of rec- orded mortgages stood, respectively, at $723,000,000 and $519,000,000, and that, for the same years, the building permits amounted to $205,900,000 and $175,500,000. But these statements give us no convincing evidence of any over- speculation in real estate. The building and speculation may have been conducted in response to an adequate de- mand, so far as that was ascertainable during the years in question. Our information concerning the force of final demand and the extent of speculative over-estimate of it on the Stock Exchange is more abundant and fuller. Dur- ing 1906 it was evident that the possible extent of the final absorption of securities in the New York market had been narrowly restricted by a combination of conditions. More- over it was seen that speculative " anticipation " had re- peatedly displayed a tendency to go far beyond the revealed power of this absorption, even before August, 1906. A general entrance of speculators into the stock market took place in that month. These speculators in effect tmdertook to anticipate an assumed urgent and extensive investors' demand, which never revealed itself. Throughout the de- cline of prices which followed September, 1906, the volumes of transactions in stocks, which had advanced most sharply in price during the summer, maintained records of trans- actions proportionate to the total volumes of sales of all shares on the Stock Exchange. Accordingly we concluded that investment absorption at the higher price levels had failed to operate, and had likewise not operated to the ex- pected extent through the protracted declines from those levels. The continued recurrence of weekly transactions in Union Pacific, for example, aggregating more than 500,000 shares. 127] STOCK SPECULATION IN 1906 ^^7 from October to March inclusive, afforded a rough indica- tion of speculators' over-estimate of investors' wants. And, resulting from the action of speculators, based on this over- estimate, heavy losses were suffered, distributed among a large body of speculators on a small scale. There has never been offered any evidence of real-estate speculators' going so far ahead of ultimate demand in 1906, as did the specu- lators on the New York Stock Exchange. Certainly there are no inherent tendencies in urban real- estate speculation, as it is conducted at present, to proceed unchecked without reference to the character of the final purchasers' numbers or their powers ; this tendency, on the part of Stock-Exchange speculation, has already been pointed out. Individual borrowers on mortgage must in general submit to an examination by the prospective lenders or mortgagees as to the nature of their operations and in- tentions, and their abilities also must undergo some scrutiny. The possessors of funds available for investment in mort- gages or real-estate loans have inducements to conduct a preliminary investigation. Such an investigation does not appear necessary to the lender of funds to brokers in Wall Street, that are readily payable on demand, as to the ends which are sought by means of the credit he is asked tO' ex- tend. Nor in the case of building construction, has this sort of operation a tendency to proceed without any regard to the existence of the ultimate purchasers or users. The demand by investors or users of buildings is, in its extent and urgency, frequently apparent to casual observers, and much more so to those who make real-estate dealings their occupation. Stock speculation in 1906, as we have seen, was carried on without attention, on the part of those engaged in it, to the actual conditions of the investment demand or to the nature of its manifestations. Neither the brokers, who acted 128 SPECULATION ON NEW YORK STOCK EXCHANGE [128 as agents of the speculators, nor the various lenders of call money, who financed stock speculation, were interested in checking over-speculation. And there were no mechanical checks, such as the rise of the call rates, which would avail to curb over-speculation, except a diminishing flow of the speculators' resources into fresh commitments. If then we desire to prove the comparative insignificance of the extent of stock speculation in 1906 and 1907, we must show that speculators in those two years lost a relatively slight aggre- gate as compared with the total losses incurred in speculative building and in real-estate operations. So far as the monthly index number of the Economist threw any light on the demand for commodities generally, its attainment of a maximum for the period at the end of May, 1907, and its subsequent decline indicated a slackening of that demand some months before the October panic. In fact the decline of the index number after the end of May pointed to a relaxed demand soon after the completion of the Stock-Exchange liquidation — that is, if we regard that liquidation as having run its course by the spring of 1907. The lessened demand and the prospects of relaxed economic activity were noticed also in the Economist — with particular reference to this country — as early as April and May.* Over-extension of world-wide extent, to which the panic of 1907 and subsequent disturbances are vaguely ascribed, means — if it means anything — that the facilities of industry and trade had generally been so multiplied as to furnish more of their products and services than the general needs of the community required for their satisfaction. But in 1906 and early in 1907 there was slight indication that over- extensive capitalization had gone beyond the manifested general demand. Indeed all indications pointed to the diffi- * Economist, April 27, 1907, p. 730. Ihid., May 11, 1907, p. 823. 129] STOCK SPECULATION IN 1906 ^^Q culties of satisfying the expanding effective demand of con- sumers and of those who availed themselves of such facili- ties as the agencies of trade could place at their disposal. Putting out issues of bonds in large amounts had become so difficult of accomplishment and so onerous that railroad and industrial corporations had well-nigh desisted from at- tempts in that direction long before the end of 1906. Mills and factories were working over-time in the efforts to fill the heaped-up orders with which they were almost over- whelmed. Railroads were finding their chief difficulty in attempting to move the freight with which their lines were congested. The railroads, late in 1906 and early in 1907, were compelled to raise fresh supplies of capital either by means of large issues of new stock or by floating short-term notes bearing relatively high rates of interest. Whether we regard the stock issues in question as " the practical assess- ment of the stockholders", or as "water: more water", and the issues of notes as the raising of funds on an " in- secure and temporary basis " " and direct our criticism to- ward these expedients accordingly, it is difficult, as we look back, to see what other courses lay open to the railroads. They could either obtain funds by the means they adopted, or else continue their attempts to handle the enormous volume of traffic offered them with the existing inadequate facilities. That the agencies of transportation and of com- merce had been equipped to an extent beyond that required for the satisfaction of the existing urgent demand, there was not the slightest evidence as 1906 drew to a close. The in- dicated form of the crisis and of the depression was rather that of under-consumption than of over-capitalization of the equipment for production. Had speculators on the Stock Exchange, who purchased ^ A. D. Noyes, Forty Years of American Finance, p. 360. 130 SPECULATION ON NEW YORK STOCK EXCHANGE [130 stocks at relatively high prices in September, 1906, been operating in an easy world money market, they might have maintained the high level of prices with the aid of foreign loans until investment absorption, proceeding at a com- paratively slow rate, had exerted itself to its full extent. But large market operators, who were interested in main- taining prices, could not obtain the funds to carry out their purposes, either in this country or abroad. The task of maintaining prices, if that were feasible, was left to the body of outside speculators, each operating on a small scale, and swayed by the actual extent of his own resources and by his emotions, and each working for his own individual interests. This unorganized class proved to be quite unable to prevent the fall of prices, which lasted from October, 1906, to March, 1907. If the number of speculators and the aggregate of their commitments had been comparatively insignificant, the necessary liquidation in the stock market might have been accomplished without its being in itself an occasion for disturbance. But the large volume of speculative ven- tures that were still open in the early autumn of 1906, and the number of them which appeared to have been made dur- ing the prolonged decline, meant that the aggregate losses of unsuccessful speculators might eventually play an important part in determining the form of the economic readjustment which would be necessary in the near future. That read- justment might assume the form of a financial panic, a gen- eral depression and prostration of industry, or merely an orderly, thoroughgoing liquidation of ventures more or less speculative in character. If the general Stock-Ex- change decline, which set in early in the autumn of 1906, had signified speculative liquidation, it remained to be seen whether the losses incidental to its completion and to the more or less violent readjustments which accompanied it, would be sufficient to impinge on other lines of economic 131] STOCK SPECULA TION IN 1906 j ^ j activity. Probably liquidation and declining prices, with a volume of transactions such as was recorded in 1907, from April to October, would not have had sufficient weight to affect general business on the side of demand. But specula- tion for the rise of the volume observed in August and September, 1906, which ultimately turned out to be unsuc- cessful since it was undertaken in the face of an utterly in- adequate investment demand, and which was persistently carried on even during the progress of the decline — might conceivably have had a most powerful effect on general con- ditions. It makes considerable difference, in estimating the aggregate losses incurred during a decline of some months' duration, whether 50 or 100 millions of shares were sold while the decline lasted. If the lower number of shares were sold in the course of a prolonged decline, the accompanying liquidation might be an almost wholly unmixed benefit to the community, attended by no serious consequences. But this would not mean that a decline in which more than twice that number of shares changed hands would indicate a wholly desirable and beneficial liquidation. The losses in the latter event might be of such aggregate volume as to constitute a mighty factor in affecting the extent of the general consumers' effective demand. In current discus- sion, the course of prices on the Stock Exchange is regarded as the same sort of barometric index, no matter whether the transactions, performed while the prices are recorded, attain a volume of 100,000, 500,00, or 1,000,000 shares. But if, in furnishing an index of approaching conditions by means of Stock-Exchange prices, a very large number of persons are supplying the power for the recording mech- anism, and very large sums are devoted to that purpose also, the general good or ill fortune of those employed in providing this barometric service may play an important role in determining the future conditions which the specula- tors are supposed to " discount." 132 SPECULATION ON NEW YORK STOCK EXCHANGE [132 As a suggestion, the possibility is offered that the losses sustained by unsuccessful speculators for the rise in the decline of six months' duration — October, 1906, to March, 1907, inclusive — on the Stock Exchange, involving sales of 133,133,566 shares, might readily amount to a total which would seriously affect the character and strength of the ef- fective consumers' demand for commodities generally. The total number of shares sold, which has just been given, might be compared with the total of 112,742,583 shares sold, April to October, 1907, inclusive; during the latter seven months, we are told by Mr. Meyer, the Stock Ex- change was engaged in liquidating for the over-extended business interests of the country. Even if we felt prepared to accept this arbitrary division into periods, one of com- pleted internal liquidation by stock speculators from Octo- ber, 1906, to March, 1907, and the other one of liquidation by the Stock Exchange for outside interests, from April to October, 1907 — we should feel that stock speculation had been much more over-extended in the autumn of 1906 and in the first few months of 1907, than general business had been in the later months of 1907. We reach this conclusion by noting the declines in prices and volumes of sales in the two periods, during which liquidation for stock speculators and for general business interests, respectively, is said to have taken place. Prices on the Stock Exchange reached lower levels in October and November, 1907, than those to which they had fallen in the preceding March. But the ex- tent of declines of prices and the volumes of transactions, in those stocks most subject to speculation, in the period ex- tending from October, 1906, to March, 1907, far exceeded, almost without exception, the declines and volumes of trans- actions in the same stocks during the seven months, April to October, 1907, inclusive. If then the liquidation in general business was severe enough to account in part for the panic 133] STOCK SPECULATION IN 1906 j^, of October and the depression of 1908, it seems as if the Stock-Exchange over-extension and liquidation might be considered factors of importance. If we are to estimate the extent of over-extension and the necessary liquidation by declines of prices and volumes of sales on the Stock Exchange — and it does not appear that Mr. Meyer has ap- plied any more rigorous tests — we should conclude that in Stock-Exchange speculation, during the latter part of 1906, was centered a degree of over-extension, at the very least, equal to that apparent in general business. Had speculative activity, from October to March — that is, volumes of sales in various speculative stocks — shown a progressive diminution as the liquidation proceeded, the losses of speculators for the rise might, have been regarded as negligible in considering the developments that led up to the later panics of 1907 and the general depression of 1908. If investment absorption had not operated to the expected extent at the higher price levels, it might have appeared that it had operated when prices fell somewhat below those levels, in the event that speculative activity decreased as the decline went on. The extent to which speculation was main- tained in seven of the more prominent speculative stocks is shown in the tables given below. In the seven stocks chosen — ^five railroads and two industrials — aggregate transac- tions, amounting to 65,294,365 shares, constituted 54.8 per cent, of total sales on the Stock Exchange during the six months' decline of 1906 and 1907, which presumably repre- sented Stock-Exchange liquidation. Except in the cases of Baltimore & Ohio and Southern Pacific, the volume of transactions in each of the stocks selected, relatively to total transactions, showed little diminution in the later months over the earlier months of the decline. Not only did in- vestment buying fail to act extensively in these stocks, so as to withdraw them from the speculative market; but a 134 SPECULATION ON NEW YORK STOCK EXCHANGE [134 large portion of each issue was left in the hands of specu- lators. Although the readiness with which these stocks could be sold and shifted from one speculator to another lessened the probability that individual operators sustained heavy losses, the large number of these stocks sold during the profound general decline would inevitably result in heavy losses scattered among a large number of speculators. The significance of the volume of sales and fall of prices may better be comprehended by taking up the trading activ- ity in each stock of the seven selected. Below are the tables to which we have referred : Note. — The number of shares of Reading, as given in the tables below, is one-half that given in the records, taken from the Commer- cial and Financial Chronicle. Dividing by 2 the published volume of transactions seemed best, in order to make the volumes of sales in Reading, the stock of which is made up of shares having par values of $50 each, comparable with sales in the other six stocks entering into these tables, each of which is made up of shares having a par value of $100. One-half the published volume of sales in Reading is likewise subtracted from the total volumes of sales of all stocks on the Ex- change, thus making those totals differ from the totals which are given in the Appendix. NUMBER OF SHAKES SOLD MONTHLY, AUGUST, I906, TO MARCH, ipO/, INCXU- SIVE, OF THE FOLLOWING STOCKS ON THE NEW YORK STOCK EXCHANGE. 1906. Atchison. Bait. & O . Reading. So. Pacific. Union Pac. August .... 1,321,250 333,521 1,530,450 3.180,195 4,881,650 September October . . November December 1907 January . . February . March . . . 910,090 739,173 3,266,610 1,502,957 2,930,950 601,355 248,405 2,143,62s 932,870 2,851,760 357,945 109,040 2,226,815 669,440 2,896,17s 670,660 146,750 2,558,140 420,764 2,643,600 1,058,700 112,360 2,285,237 936,79s 2,589,315 501,480 95,787 1,955,808 497,280 2,055,370 1,386,945 239,812 2,917,54s 1,063,540 4,203,735 Totals .... 4,577,08s 952,154 14,087,170 4,520,689 17.239,955 (Oct., 1906-Mar., 1907.) 135] STOCK SPECULATION IN 1906 j-; Total Stocks Total All 1906. Amal.Co.p. U.S. Steel. Selected. Stocks. A"g"st 2,865,600 3,136,598 17,177,264 30,274,366 September .... 2,611,795 2,061,900 14,023,47s 22,751,660 0<^obtr 2,091,275 2,772,060 11,641,350 19,750,505 Nov«'"l'er 1,175,965 1,236,074 8,671,454 17,173,315 December i,437,4So 1,300,220 9,I77,S84 17,898,912 1907 Jan>iary 2,601,990 2,200,785 11,785,182 20,417,520 ^e'^ruary 1,205,182 1,227,628 7,538,535 14,515,164 March 3,103,878 3,564,805 16,480,260 29,290,980 Totals 11,615,740 12,301,572 65,294,365 119,046,396 (Oct., 1906-Mar., 1907.) We have repeatedly shown that the good or ill success of a speculative movement which accompanies a rise of prices can be determined by the evidence of investment absorption at the topmost prices attained as the result of speculative buying. If, after the highest price levels have been at- tained, recorded dealings in stocks which have been ad- vanced to those levels display only insignificant proportions, we may conclude, provisionally at least, that investment ab- sorption has operated to the extent anticipated by specula- tors. As illustrations, we may consider the recorded volumes of transactions and the price movements, from July, 1906, to March, 1907, inclusive, in Atchison, Baltimore & Ohio, Reading, Southern Pacific, Union Pacific, Amalga- mated Copper, and United States Steel common, respec- tively. Atchison's yearly dividend rate was increased from 4 to S per cent, in October, 1906, Baltimore & Ohio's from 5 to 6 per cent, in June. Reading's dividend rate of 4 per cent, was not changed, but this stock is representative of a class of securities, including among others Amalgamated Copper, perennially favored by speculators. The dividend increases of Southern Pacific and of Union Pacific, as we have seen, gave the signal for the outburst of intensely ac- 136 SPECULATION ON NEW YORK STOCK EXCHANGE [136 tive speculation in August, 1906. On the last day of July, dividends at the rate of 2 per cent, on Steel common were resumed. On none of these stocks, with the exception of Amalgamated Copper, have dividends been subsequently lowered below the levels of 1906, and on some of them those paid at that time have been increased. Atchison's price, after reaching a maximum of iio>4 in September, suffered a net decline from that point to 89%, March 29, 1907, amounting to 20^ points : the low price in March was 82^. During this pronounced decline, ex- tending from October, 1906, to March, 1907, 4,577,085 shares were sold. Baltimore & Ohio's price in September reached 125^^. During the six following months of liquidation it under- went a net decline of 27^ points — ^to 97.J4, March 29: goyi was the lowest price on March 26th. This fall of price in six months was accompanied by the sales of 952,- 154 shares. Reading's price declined from the maximum of Septem- ber, 156%, to 104^, March 29: in the panic of March 14th a low price of 91 was reached. This drop of 52^^ points occurred, during the course of sales amounting to 14,087,170 shares.* From Southern Pacific's maximum price 97 J4, attained in September, there was a net decline of 16% points to 80^, March 29. A low price, 69%, was recorded on March 14th. In the six months of falling prices, 4,- 520,689 shares were sold. The six months' liquidation in Union Pacific, involving a net loss — from 195%, the maximum price of September, to 134%, March 29 — of 6oj4 points, took place while 17,- 239-955 shares were sold. The low price of March was 120 J4- ° Actual recorded sales of shares, having a par value of $50 each, amounted to twice this number, that is 28,174,340 shares. 137] STOCK SPECULATION IN 1906 j,-, The maximum price of Amalgamated Copper, ii7>4, was reached in October. By March 29th the price had fallen to 88 >^ — a decline of 285^ points. From October to March, 11,615,740 shares were sold. United States Steel common's maximum price of October was soyi. A fall of 14^^ points to 35^ took place in this stock's price up to March 29th, along with sales of 12,- 301,572 shares. We may ask whether the sales of 17,239,958 shares of Union Pacific and the 60-point decline in its price, would be more significant in the widespread losses distributed among speculators, or in " discounting " a depression of relatively short duration which had no effect on the divid- ends paid holders of this particular stock. In connection with " discounting " future events, it might be pointed out that Amalgamated Copper alone, of the seven stocks, had its dividends reduced as a result of the depression of 1908. The percentages of declines from the maximum prices in September or October to March 29th were, respectively, for Atchison 19, for Baltimore & Ohio 22, for Reading 33, for Southern Pacific 17, for Union Pacific 31, for Amalga- mated Copper 24, and for United States Steel common 29. In the case of Reading, we may consider whether sales of 28,174,340 shares — amounting to the equivalent of 14,- 087,170 " full " shares — during a period of six months, while the price fell 50J4 points or 33 per cent., would have brought upon speculators an insignificant aggregate of losses — an aggregate which could not have been a factor in the declining urgency of the general consumers' demand late in 1907 and in 1908. The mechanism of Stock-Exchange routine and brokers' clerical facilities, together with the diligence that brokers displayed in pursuing their individual interests, had been so efficient in conducting the liquidation, that the latter, as 138 SPECULATION ON NEW YORK STOCK EXCHANGE [138 Mr. Meyer writes, " had been effected without causing seri- ous failures." This fact — the general absence of failures on the part of Stock-Exchange members — testifies merely to the sound development of routine procedure in the conduct of speculative operations; the efificiency of brokers' pro- cedure could not avail to prevent declining prices and heavy speculative losses. Further to set forth the inadequacy of investment ab- sorption as a means of protecting speculators from the losses incident to the prolonged decline from October to March, the following table has been drawn up, showing the percentages of total transactions formed, respectively, by the volumes of transactions in each of the seven stocks that have been selected for our particular consideration : Aug. 1906- Oct. 1906- Jan. 1907- Oct. 1906- Sept. 1906. Dec. 1906. Mar. 1907. Mar. 1907. Atchison 4.2 3.0 4.6 3.9 Baltimore & Ohio 2.0 0.9 0.7 0.8 Reading g.o 12.6 11. i 11.8 South. Pac. 8.8 3.7 3.9 37 Un. Pac 14.7 1S.3 13-8 i4-5 Amal. Cop 10.3 8.6 10.8 9.8 U. S. Steel 9.8 9.7 10.9 10.3 7 Stocks 58.8 53.8 55-8 54-8 In Baltimore & Ohio and in Southern Pacific, the volumes of transactions during the first three months of the general decline, October to December, 1906, diminished appreciably, as compared with the volumes of transactions during Au- gust and September, the two months in which a general rise of prices took place. This is particularly evident when ap- plied to the proportion of total transactions formed by the respective volumes of transactions in those two stocks, as shown in the table of percentages. A slighter diminution in the relative speculative activity centred in Atchison and Amalgamated Copper is also indicated by that table for the 139] STOCK SPECULATION IN 1908 j^g last three months of 1906. But in Reading, Union Pacific and United States Steel, no diminution of activity, relative to activity of trading in all stocks, is noticeable; in fact, relative activity in the first two named rather increased. So that, although this table indicates the possibility that invest- ment absorption had acted in Atchison, Baltimore & Ohio, and Southern Pacific, rather more than it had in all stocks on the Exchange, it had not acted, so far as Reading and Union Pacific, were concerned, in the direction of relieving speculators of the burden of carrying those stocks through those months of pronounced decline. And absorption by outright purchasers or by strong speculative interests did not avail to relieve speculators of their involuntarily as- sumed task from January to March, 1907, in the cases of Atchison, Reading, Union Pacific, Amalgamated Copper, and United States Steel — three months in which the general decline of the preceding quarter was continued with in- creased force. The task of carrying the more prominent speculative stocks was undertaken and distributed among a multitude of speculators, on whom fell an aggregate of losses which, it is maintained, cannot be considered negligible as a factor in the general disturbance in the latter part of 1907. At any rate, the contention that the total losses incurred by speculators for the rise may be disregarded appears to involve the assumption of a heavy burden of proof. Con- sider the transactions in Union Pacific for the first three months of 1907 alone. While, in this quarter, 8,848,420 shares were sold, the price fell between 40 and 50 points, and reached a price on March 14th almost 60 points below that of January ist. There seems no ground for asserting that the losses incident to transactions in this particular stock during the three months were negligible. When the respective volumes of commitments for the rise and for I40 SPECULATION ON NEW YORK STOCK EXCHANGE [140 the decline, together with the amounts of sales and pur- chases by investors, are still unknown — as they always have been — no assertion as to the effect, or lack of effect, pro- duced by the losses of speculators in Union Pacific, can have any sound basis. It seems, however, much more conceiv- able that the speculators' losses, in the few months preced- ing April, 1907, constituted a factor of considerable import- ance in determining the form of the subsequent general economic readjustment. And in connection with Reading also, of which the equivalent of 14,087,170 " full " shares was sold while a six months' decline took place amounting to more than 40 points, the same observations should hold good. The tables show incidentally how far investment absorp- tion fell short of the strength anticipated by speculation from August, 1906, to March, 1907. But with that matter we are not immediately concerned at this point. We ob- tain from the tables some conception of the volume of liquidation and of its severity, which was necessitated by over-speculation and slight absorption, both of which were manifested in the latter part of 1906. The losses brought upon speculators who operated during the prolonged liquida- tion, if they are ever revealed by a monumental process of accounting research, will probably be thought worthy of consideration, along with " an excessive shortage of money which . was because of extraordinary business ' booms ' in this country. Great Britain and Germany, as well as ad- ventitious and enormous wastes of capital such as had been caused by the San Francisco fire and the Russo-Japanese War ", as factors " which intensified the distressful condi- tions in October, 1907," ' and which served to bring about ' Letter of J. P. Morgan & Co., Feby. 25, 1913, to the Honorable A. P. Pujo, Chairman Committee on Banking and Currency, House of Representatives. 141 ] STOCK SPECULATION IN 1906 j.j in part the diminished consumers' demand that was a fea- ture of the depression in 1908. Speculative attempts to anticipate an imaginary investment demand for stocks ap- pear to have constituted one of the most important lines of economic activity during 1906 in this country. It was a business which ran steadily at a loss for a number of months. If one of the country's most important divisions of business can be run at a heavy loss, without having the loss play some part in a shortly succeeding financial panic and general depression, it would be well to have an explana- tion of its absence of effect on general conditions that would be fuller and more convincing than the explanation advanced by Mr. Meyer. This explanation has been ac- cepted by most of those who believe that the action of Stock- Exchange prices is purely symptomatic, reflecting general conditions, or that the " discounting " faculty is possessed by speculators on the Stock Exchange. If conditions, under which organized stock speculation is carried on, permit the creation of speculative commit- ments entirely out of proportion to the powers of final absorption, it might be well to know how far over-specula- tion can proceed before the inevitable losses it brings on individual traders will affect general economic condi- tions. That speculative operations, in other fields than that of the stock market, were of a large volume, at a time when over-speculation existed on the Stock Exchange, does not prove that speculative over-extension also existed in them to the same extent. And that over-speculation on a much smaller scale than that revealed in 1906 has not apparently affected general economic conditions, does not prove that the speculative " anticipation " of the market's imagin- ary needs in 1906 had no part in bringing on the panic of October, 1907, and the depression of 1908. It cannot very well be maintained that over-speculation 142 SPECULATION ON NEW YORK STOCK EXCHANGE [142 on the Stock Exchange was the " cause " of the panic of October, 1907, or of the depression which followed. But if information ever becomes available concerning the extent of speculative losses sustained in the autumn of 1906 and in the winter and early spring of 1907, it might be em- ployed in a serious effort to ascertain the possibility that those losses attained a volume sufficient to bring about a pronounced restriction of the general demand for the pro- ducts of industry and the services of commerce — a restric- tion which was the most striking feature of the depression of 1908. Premonitions of a lessened demand were voiced as early as April, 1907, in an English financial journal, with reference to this country.* We may obtain convincing evidence at some future time that speculation in real estate, or in any other goods which permit that form of activity, had been carried on with the same blithe disregard, on the part of its participants, for the ultimate demand, that was shown by Stock-Exchange specu- lators in 1906, and on an equally large scale. Then we may consider all speculators' accumulated losses as constitut- ing a factor in bringing on the general depression which set in shortly after the completion of the Stock-Exchange liquidation. As we have suggested, evidence on these points is more readily available with regard to speculation on the Stock Exchange than in other fields of activity. But the difficulty of financing extensions of industrial and commer- cial facilities, which were urgently required in 1906 by an insistent consumers' demand, rather indicates that the gen- eral business of the country had not gone too far in prepar- ing to satisfy the existing wants of consumers. We have no evidence that any other class of traders had generally so far over-estimated the capacity of the community to re- ^ Economist, April 27, 1907, p. 730. Ibid., May 11, 1907, p. 823. I43J STOCK SPECULATION IN 1906 14^ ward its services, as had Stock-Exchange speculators in the summer and early autumn of 1906. Although we may not be able to establish the connection between over-speculation of this particular sort and the panic of October, 1907, we may look for some future investigator, with fuller informa- tion at his command, to discover some degree of likelihood that such a connection existed. CHAPTER IX Summary, General Conclusions, and Remedial Measures " Unfortunately the question of the social expediency of dealing in futures is mixed up with the wider question of the expediency of stock and commodity speculation as it is now carried on in the financial centres of the country. It is notor- ious that this speculation is not confined to men who make it a business and are trained for it in the hard school of experi- ence, but that it is also indulged in intermittently by a great army of men and women whose only qualifications are a taste for gambling and the consciousness of having money to invest. . . . How to confine speculation to those who have aptitude and training for it and to discourage stock and commodity gambling is one of the economic problems of the day." — Prof. H. R. Seager, Introduction to Economics. The events which attended Stock-Exchange speculation during the months from September, 1904, to March, 1907, have now been considered. The attempt has also been made to analyze the conditions under which stock speculation in those months was conducted. Two important functions, conventionally attributed to stock exchanges, were men- tioned in the opening chapter. These were, first, the di- rection of the flow of the investment fund, and, second, the " discounting " of future events by the course of prices recorded in organized trading on the Exchange. The ex- tent to which operators on the Stock Exchange and the governing authorities of that institution performed those functions has already been noticed at some length and with 144 [144 I45J SUMMARY, GENERAL CONCLUSIONS 145 some repetition. We concluded that the New York Stock Exchange, acting through the speculators who deal in ac- cordance with its rules and customs, is not fitted for the performance of those two chief functions which are con- ventionally ascribed to organized speculation under all con- ditions. This conclusion was derived from a priori con- siderations based on analysis of the motives which im- pelled the Stock-Exchange authorities, the brokers and the individual speculators. Moreover, our study of specula- tive activity in 1906 and 1907 has not led us to admit that speculators in those years, incidentally to the pursuit of their individual selfish interests, either guided the flow of capital into investment or " discounted " the October panic of 1907 and the depression of 1908. In 1906 particularly and the preceding few years, we concluded that the New York Stock Exchange, as an in- stitution, and its individual members had played no active part in " directing the flow of capital " into investment. A broad market was provided in which investors could buy or sell, according to their several desires. But, since the attraction of investors and the execution of their or- ders offered little prospect of gain to the brokers, the latter were quite passive in taking orders from investors. The brokers, indeed, rendered honest and capable services, al- most without exception, to those investors who sought them out. So inert, however, were the Stock Exchange and its individual members — that is, those members who were act- ing strictly as brokers — with regard to investment orders, that they could not be said to have played any part what- soever in " directing " the disposal of the investment fund with any conscious purpose to do so. Slight attention, throughout the brief period we considered, was paid to the strength or character of the investment demand — so slight that no information was ever sought on these points, much 146 SPECULATION ON NEW YORK STOCK EXCHANGE [146 less obtained or published — by those connected with the Stock Exchange. The conventional assumption that there existed a numerous class of investors, having unlimited funds on hand, satisfied the speculators and also, apparently, those who acted as their brokers. We have considered the " discounting " of future events by speculators, especially the " discounting " of the panic of October, 1907, and the subsequent depression by the prolonged general decline of prices which set in after Sep- tember, 1906. " Discounting " did not appear to furnish an adequate explanation of that decline, or of the revealed tendency of speculative activity in the autumn of 1906 and for some months afterward. Probably the unsatisfactory nature of the " discounting " theory arises chiefly from the lack of detailed information as to the mechanism through which it works. For example, why should severe falls of price have occurred in stocks whose dividends were not lowered during the depression which those falls of price were supposed to " discount " ? From the high prices of September, 1906, Baltimore & Ohio, Reading, Union Pacific, and United States Steel common suffered declines by the end of the following March, which ranged from 22 to 33 per cent. The dividends on none of them have been low- ered since 1906, not even during 1908, the year in which the depression was felt most keenly. Amalgamated Cop- per, on the other hand, declined in price only 23. i per cent, from its high price, September, 1906, to March, 1907; and yet its dividend rate was reduced shortly afterward by 75 per cent. — from 8 to 2 per cent. — as a result of the de- pression which particularly affected the copper market. The slight degrees of dependence shown between the extent of the declines in individual stocks and their subsequent value to investors make us loath to accept the " discounting " faculty as an attribute, either of speculators or of Stock-Ex- 147] SUMMARY, GENERAL CONCLUSIONS 147 change prices. If, in 1906 and 1907, the declines in separ- ate stocks had borne some quantitative relation to subse- quent changes in dividends, or if all stocks in the list had fallen in price to nearly the same extent — expressed either absolutely in dollars per share or in percentages — the " dis- counting " theory might deserve a serious and painstaking investigation in the belief that it might be verified induc- tively. The violent rises in prices, however, from the end of June to various dates in September would tend to make us skeptical with regard to the superhuman quality of specu- lative foreknowledge; for what event which occurred in Sep- tember did all these advances in price "discount"? Most certainly they did not forecast general investment absorp- tion in that month or during the six following months. Nor has it ever been shown why the autumn of 1906 should have been the mystic season when speculators began to " dis- count " a panic and depression more than a year in the future. These considerations led us to seek other explana- tions of the general decline of Stock-Exchange prices, from October, 1906, to March, 1907, than those offered by the " discounting " theory. It has been shown that speculation on the New York Stock Exchange was seriously hampered in discharging the two functions just mentioned, and is still hampered under the conditions that persist at the present time. In the first place, the Stock Exchange, as such, and brokers exercise little control over the volume of speculation at any given time. We may not know precisely the conditions which gave rise to prolonged and intense activity of speculation on the part of the " public ", such as was witnessed during the 31 months' period we undertook to study. Few of these conditions, however, can be affected by the Stock Exchange or by its members. If general economic condi- tions — or even broader causes — lead many outsiders to 148 SPECULATION ON NEW YORK STOCK EXCHANGE [148 speculate in the stock market, brokers can only provide facilities for the reception of these outside speculators. They cannot whip up speculation during a dull season, and they do not find it to their interest to restrain it when it goes too far. All that can be done is to establish connec- tions in districts , where speculators are to be found, and to treat speculative customers, when they enter the market, in such a way as to encourage them in their activities. Brokers and others connected with the Stock Exchange cannot take a much more active part in arousing speculative activity than can a fisherman who uses a pound-net in at- tracting the fish he desires to catch. It has already been said that brokers, of all things, are not desirous of restraining over-speculation, for reasons which have been indicated in preceding chapters and which will be further set forth. If outsiders, desiring to engage in speculation, seek to indulge their inclinations through a broker, the latter will throw no obstacle in their way. Ex- cessive speculation conceivably might go so far as to shift a large proportion of existing property rights in the com- munity from one set of owners to another, and carry on this shifting to any extreme, without any brokers' action inter- posing to check it. When any number of persons, no mat- ter how large, wishes to enter into speculative ventures, there exists no force, either in Stock Exchange procedure or in the self-interest of brokers, which will at least prevent their making the initial purchases or sales, as the case may be, by which they individually commit themselves to specu- lation on one side of the market or the other. The emo- tional state of the outsider who undertakes speculation, and the difficulty of comprehending the underlying philosophy and the process of short selling, explain in part perhaps the proneness of such a speculator as the outsider to commit himself to a rise of prices rather than to a fall. In periods 149] SUMMARY, GENERAL CON-CLUSIONS 149 of great speculative activity, accordingly, aggregate com- mitments on the long side far outweigh the volume of speculation for the decline. The ease with which a sale or a purchase can be made in a broad market, such as a large modern stock exchange pro- vides, and the fact that Stock-Exchange routine conceals the respective identities of both parties from each other, ac- count largely for the disregard shown by speculators for the actual or prospective state of the investment demand. This demand determines ultimately the " needs of the mar- ket " which speculators are supposed to " anticipate." The speculator accordingly does not know the source from which he buys or the purchaser to whom he sells, and this ignorance tends to make him disregard general investment buying or selling. The considerations moving the specula- tor help to an understanding of the almost unbelievable recklessness of the speculators in 1906. As at other times, they did not trouble themselves to inquire into investment operations, or else they rested content with the easy be- lief in the existence of an investing class, possessing un- limited funds in the aggregate, but varying in the strength of its inclinations to buy or sell on the Stock Exchange. At any rate, a vague reliance on that belief was the only form of attention paid by speculators to the investment de- mand in 1906 and 1907. Moreover, it has been seen that the brokers individually were interested in having a much heavier volume of specu- lative business than of investment orders, since the former was far and away the more profitable. Every facility which the broker was permitted to provide for the enlargement of his business was applied to inciting speculation. Orders for investment purchases were received without enthusiasm by most brokers. The wideflung connections with other cities and towns, and the extensive system of branch offices 150 SPECULATION ON NEW YORK STOCK EXCHANGE [150 had the purpose of making speculation convenient and easy for those outsiders who were brought into touch with the New York stock market by these means. Accordingly the advent of a large body of speculators, creating a volume of commitments out of all proportion to the possibilities of the investment demand, met with no restraint on the part of the brokers — nor on the part of the Stock Exchange acting throu gh its governing authority. It was pointed out that the relative profitableness of specu- lative and investment orders to brokers rested on the pre- vailing rate of commission charged by them. This rate depended on the number of shares involved in a given trans- action, and was charged uniformly either on a purchase or on a sale made on the Stock Exchange. It did not make any difference in .general, where the shares were sold or purchased in hundred-share lots or multiples thereof, whether the shares purchased were afterward carried on margin or transferred to the buyer. But the differing char- acter of the orders executed meant widely varying degrees of trouble and expense to the broker. One-eighth of one per cent, of the par value of the stock, the minimum rate of commission prescribed by the rules of the Stock Ex- change, was the prevailing rate, almost without exception. In the case of small odd lots of stock bought and trans- ferred for investors, it is highly doubtful whether the commission exacted covered the expense which the com- plete series of transactions brought upon the broker who performed them. The authorities of the Stock Exchange did not exert the despotic power which they have over the activities of the individual members, in seeking to adjust the volume of speculative operations to the strength of the effective in- vestors' demand. Apparently those authorities were and are guided by the idea that the play of self-interest of 151 J SUMMARY, GENERAL CONCLUSIONS 151 Speculators, brokers and investors will serve to bring about the desirable adjustment. The powers of the Governing Committee were invoked chiefly to maintain a high standard of honesty in the dealings of members among themselves and with their customers. It seems to have been the pre- valent conception of " capital's freedom of movement " that those having control of capital at any given time should be allowed to dissipate it in over-speculation at their pleasure. Restraint of any widespread tendency toward over-specula- tion would not only interfere with " capital's freedom of movement ", but would also tend to restrict in volume the most profitable portion of the individual Stock-Exchange member's operations as a broker^ Since adherence to the laisses-faire policy, with regard to restraint of over-specu- lation, appeared most advantageous to the brokers' interests, no action was taken by the Stock Exchange to bring specu- lation into conformity with investment. The Stock-Ex- change authorities, in 1906 and ever since, have been dili- gent in seeking to attain the " ideal " of their institution, to which we have already referred, as it has been formu- lated by Mr. Meyer. It consists of "freedom for the transfer of securities in the most simple and convenient manner, with the least possible friction and the fewest possible re- strictions consistent with the protection of the rights of the owners and dealers in securities." It was pointed out, when this " ideal " was previously cited, that its fullest attain- ment would not necessarily lead to any adjustment of oper- ations, on the part of speculators, to the " needs of the mar- ket " — that is, to the effective investment demand. Cer- tainly in 1906 and 1907, there was no relaxation in the pursuit of this " ideal ", and yet there was abundant evi- dence that all the energy expended in that pursuit had not aided in restraining over-speculation. Another direction in which the powers of the Stock Ex- 152 SPECULATION ON NEW YORK STOCK EXCHANGE [152 change were exercised was in that of enforcing the pre- scribed minimum rates of commission, and in seeing that no rebate or deduction was made from the commission apply- ing to any particular transaction. Punishment for depart- ures from the ordained rates of commission was inflicted inexorably and heavily. But the enforcement of the pre- scribed minimum rates of commission, to which so much effort was devoted, would not do much toward adjusting the volume of speculation to that of investment *^ny tendency then that speculation for the ri^ might have shown in 1906 to go far beyond the requirements of the investment demand would encounter no check from the authorities of the Stock Exchange. They devoted themselves to the pursuit of ends quite removed from those of curbing over-speculation^. It may appear a digression to have treated at such length the purposes which the Stock- Exchange authorities have had exclusively in view. They have been considered, however, because any criticism of Stock-Exchange procedure is met frequently by its de- fenders' pointing to the diligence which has been shown in simplifying the routine and enforcing a high standard of integrity among those who follow that routine. The sim- plifying of routine and mechanical honesty have not proved to be very effective in the restraint of over-speculation. As was said in a preceding chapter, those whose interest in the speculative field lies in regarding it as a province of the money market in which funds temporarily in hand can be lent on demand, are not concerned with the restraint of over-speculation. The machinery for lending on call has been so perfected that a high degree of over-speculation does not threaten those who lend to speculators' brokers with losses through the default of the borrowers. And the ease with which one speculator can trade with another and the ignorance of either party to a sale on the Stock Exchange 153] SUMMARY, GENERAL CONCLUSIONS 153 of the other's identity — not to speak of the other's pur- poses — have tended to make individual speculators care- less of the urgency and character of the investment demand. Public opinion, when it does not consider speculation — of any volume and bearing any proportion at all tO' the in- vestment demand — as discharging some vaguely useful so- cial function, so long as its routine is conducted honestly, looks upon it as a means of parting fools from their money with least inconvenience to anybody els^ Aggregate losses in the stock market are regarded by the average man as negligible. If " the stupid money of stupid people " is lost in the performance of socially useful functions by specula- tors, the value of the service appears to be well worth the cost. No attention is given to a system of organized specu- lation that conceivably may heap an aggregate of losses upon those who engage in it, necessitating a general economic readjustment throughout the whole community. Specula- tive prices, in the public mind, are vaguely symptomatic of general economic conditions, either existing or soon to exist The operations of speculation also are thought to be mere incidents in the general economic life. These operations are not supposed, according to tradition, to constitute a volume of transactions that may form an important factor in determining conditions, according as their general suc- cess is good or ill. Public attention, as expressed in legislative acts, is usu- ally concentrated upon phases of speculation which distin- guish its conduct from that of other business. The re-hypo- thecation of securities particularly excites the suspicion of the business man or lawyer whose comprehension of Stock- Exchange practice is rather hazy. Perennial efforts are put forth to make this practice accord with the usages of ordinary business. Manipulation also has drawn the un- favorable notice of political speakers and of legislators. 154 SPECULATION ON NEW YORK STOCK EXCHANGE [154 Objections to this abuse seem to rest partly on the medieval predication of a " just price " for every economic com- modity and service, and partly on the conception of specu- lation as a game of chance which should be played fairly. The manipulator, accordingly, is viewed in much the same light as is the gambler who uses a roulette wheel with an electro-magnetic attachment or who plays with marked cards. Those manifestations of speculative activity which are obvious and picturesque, or else which differ most strik- ingly from those observed in ordinary business, draw most attention. It appears to be taken for granted that specu- lators should carry on their operations in utter ignorance of the investment demand. Every other attempt to " anti- cipate the needs of the market ", on the part of industry and commerce, is made with the fullest knowledge of the market and its needs that can be obtained. That specula- tors should be quite without knowledge of their ultimate market and that all their operations should be shrouded in secrecy, is commonly accepted. Possibly this is because of the general vague idea, to which reference was just made, that after all speculation is a game of chance. In such a game too much foreknowledge of the probabilities of suc- cess would be undesirable, from the sportsman's viewpoint. Thus it has come about that no effort has been made by legislators, by the authorities of the Stock Exchange, by bankers connected with Stock-Exchange activities, or by members acting in concert, to make the volume of specula- tive transactions conform to the investment demand, even so far as the latter could be estimated approximately. Ad- justing the volume of speculation to the extent of the in- vestment demand would tend to interfere with " capital's freedom of movement " — as that is conceived. This ad- justment would also be prejudicial to the immediate inter- 155] SUMMARY, GENERAL CONCLUSIONS 155 ests of brokers, as those interests are understood at present. Moreover the tendency of speculation to exceed investment in volume of operations is either accepted as a platitude or else to speculation is ascribed the faculty of adjusting its transactions to those of investors, merely by virtue of the superhuman sagacity commonly attributed to those who en- gage in it. It seems difficult to accept the tendency of speculation to go beyond the " needs of the market " as inevitable. At least we cannot content ourselves with the belief that it is inevitable. And the activities of speculators in the period we have considered do not lead us to believe that speculators always have the inherent power of adjusting the volume of their operations to the demands of investors. So long as speculative purchases are made in the face of an inadequate investment demand, speculators for the rise can hope to gain by selling, most probably, to other speculators. If the rate and volume of investment absorption is quite generally un- known, the process of speculators' selling at a profit to othei speculators will end when no more speculators come for ward to buy. When that point will be reached no specula tor in a broad market can foretell. With no knowledge either of the investment demand or of the available specu- lative resources, speculators on the Stock Exchange con- duct their operations in the greatest uncertainty. Never- theless if speculators for the rise were in general prepared to abide by their commitments when the market, for a time, goes contrary to their expectations, they could not perhaps be regarded as merely gambling on the state of the un- known investment demand or on the uncertain continuation of speculative buying. But, even when they do not place definite " stop-loss " orders with their brokers to limit the extent of their possible losses, most outside speculators either have only limited amounts to lose in the market, 156 SPECULATION ON NEW YORK STOCK EXCHANGE [15.6 or else they do not desire to lose more than certain sums, varying with the individuals. The usual venture for the rise made by an outside speculator takes the form of wager- ing that investment absorption, speculative buying, or both together, will raise prices to a point where he can obtain a satisfactory profit before either investment or speculative buying will be exhausted so that prices will fall to a point where he must sell in order to confine his loss to the amount which he can afford, or is willing, to lose. The amount of the loss he can sustain may be well determined in the specu- lator's mind at the time he enters the market. But the ex- tent of the investment demand and the duration of specula- tive purchasing are so enshrouded in mystery for him that his venture is little more than a gambling transaction. And the raising of prices to relatively high levels, as a result of speculative purchases in heavy volume — such as was wit- nessed in the summer of 1906 — where investment absorp- tion fails to exert itself, and the decline of prices after- ward, accompanied by an insignificant volume of invest- ment buying, appear to constitute a service of doubtful util- ity to investors or to the community. It seems, therefore, as if it might be worth while to curb any system of specula- tion in which separate transactions are carried out on a basis little different from that of gambling, and which ap- pears to render no useful economic or social service. In- deed, over-speculation and the resulting liquidation, it has been seen, might conceivably go to the extreme of con- stituting a powerful factor in a violent economic readjust- ment and depression. We shall therefore consider in con- clusion certain measures which might possibly assist in changing conditions so little conducive to the general well- being. 157] SUMMARY, GENERAL CONCLUSIONS 157 Remedial Measures Repeated reference has been made to the prevailing rate of commission charged by New York Stock-Exchange mem- bers, and the part it plays in leading the brokers to promote speculation, so far as they are able, rather than investment in stocks listed on the Exchange. We are concerned with measures that may tend to bring about the adjustment of speculation to investment demand. We shall therefore con- sider possible changes in the commission rate which would presumably make investment purchases, on the part of their principals, more desirable to brokers, as compared with transactions performed for speculators, than they are un- der the present rules. As we have seen, the brokers' interest in encouraging speculation rather than investment buying, in such a year as 1906, by every permissible means, rests on the rate of commission which has prevailed for many years on the New York Stock Exchange. With this fact standing out as it does, it is puzzling to account for the passage in the report of the sub-committee of the House Committee on Banking and Currency, popularly known as the " Money Trust " committee, which recommends specifically that commission rates on the stock exchanges be left unchanged.^ Perhaps this can be explained by the usual action of most similar governmental investigators, which consists in inquiring in- to the more epic and picturesque manifestations of organ- ized speculation, such as manipulation; certainly the sub- ject of commission rates does not possess the striking quali- ties which would readily attract the attention of a Congres- sional investigator. Any body of investigators, having little acquaintance with a restricted portion of the field it 1 " [With regard to stock exchanges it is recommended] that the present rates of commission ... be not now disturbed." 158 SPECULATION ON NEW YORK STOCK EXCHANGE [158 is called upon to cover, might easily pass over such a point as the rates of commission, which would seem to have little importance to eyes that are intent on the more striking as- pects of Stock-Exchange speculation. Since the prevailing rate of commission — exacted with- out distinction on transactions for either speculators or in- vestors — makes investment orders much less profitable and desirable to brokers than are speculative orders, the prin- ciple on which revision of commission rates should rest appears to be that of making rates of commission higher on investment orders than on orders of speculators. The particular application of this principle might consist of lowering the existing prescribed minimum rate — I2j4 cents per share of $100 par value — for speculators in loo-share lots. However it appears that the commission, computed on the basis of the rate named, possibly fails to cover the expense where it is exacted for the purchase and subsequent transfer of small lots of stock. For smaller lots, the re- latively low charge of 12^ cents might very well be raised to a point where it would cover any expense incurred by the broker and yield him a rate of profit comparable to that at present obtained from speculative orders. In fact, the system of charging i2}4 cents on the sale or purchase of each share stands out as quite illogical when the question of investment transactions in small lots is considered. Par- ticularly in view of the fact that the actual sale and the handling of the securities involves as much trouble in the case of one share as in that of 99 shares, does the un- reasonableness of charging a relatively low commission uniformly for each share seem glaring. So that a revision of the prescribed commission rates must tend to make the execution of investment orders more attractive to brokers as compared with carrying out speculative orders. A re- vision should also assure the broker a larger payment for 159] SUMMARY, GENERAL CONCLUSIONS 159 his services on the purchase for an investor of a few shares and on the transfer of the stock. These two considerations must be kept prominently in mind. The London Stock Exchange, during the past few months, has put in force a prescribed scale of commissions, after permitting its members for many years to charge ac- cording to their individual discretions, which was confirmed in its revised form, February 12, 1913. The rates pre- scribed vary according to various classes of securities — British Government, Indian Government Stock, shares transferable by deed, shares passing by delivery^ etc. — but our concern is with the rates prescribed for shares in the American market. These rates are given in the following table, reproduced from the Economist of February 15th, 1913:^ SHARES OF $50 OR $IOO DENOMINATION DEALT IN IN THE AMERICAN MARKET. s. d. Price $25 or under o 6 per share. Over $25 to $50 o 9 per share. Over $50 to $100 I o per share. Over $100 to $150 I 6 per share. Over $150 to $200 2 o per share. With 6d. rise for every $50, or portion thereof, in price. Of course Stock-Exchange practice in London differs from that in New York in that the fortnightly clearing of sales involves much trouble for the broker in the " carry- over ", when speculative commitments remain open during the process of clearing. The market prices of stocks there- fore enter more prominently into the question of the com- mission rates than they would do in New York. Never- theless the rates lately adopted in this case recognize the fact that transactions in two different securities may vary 2 P. 332. l6o SPECULATION ON NEW YORK STOCK EXCHANGE [i6o in the cost of service to the broker if the respective mar- ket prices vary markedly from each other. And while the prescribed minimum rate of one-eighth of one per cent., irrespective of market price or of the number of shares, in New York does not duly recognize the relatively slight increase in the cost of the broker's services with the in- crease in number of shares passing in a given transaction, the following exceptions to the prescribed rates of the Lon- don Stock Exchange, as they are given below, accord with that principle : A broker may, at his discretion, when in his opinion the value of any principal's business justifies it, but only in the case of a transaction in which the consideration exceeds £i,ooo, charge that principal a reduced commission on any transaction, but in no case shall such reduced commision be less than one- half of the minimum scale as laid down. . . . A broker may, at his discretion, when in his opinion the value of any principal's business justifies it, charge that prin- cipal a uniform commission of is. 6d. per share on shares passing by delivery when the price exceeds £25,^ and at his like discretion a uniform commission of 6d. per share on shares dealt in in the American Market on any order for not less than 50 shares. Permission is thus given brokers, by the above excep- tions, to charge reduced commissions on orders where the consideration money exceeds f 1,000 or to charge a uniform commission of sixpence on each share for transactions in not less than 50 American shares. It is recognized that there is a lower cost of service per share on large orders than on small. Disregard of this principle and also of the » On " all other shares passing by delivery ", the prescribed minimum commission is computed at the rate of one-quarter of one per cent, of the consideration money. l6i] SUMMARY, GENERAL CONCLUSIONS igi likelihood that on small orders the commission of one- eighth of one per cent, of the par value may not suffice to cover the trouble and expense brought upon the broker, has allowed the prevalence of that rate in New York to con- tinue, so that orders for speculators on margin have proved to be much more profitable to brokers than are investment purchases followed by transfer of the stock to the principals buying it. Even before the adoption of the official commission rates in London, when the rates were subject to private contract between the broker and his principal, the higher cost of services rendered investing purchasers, as over against the cost of transactions on margin, was an accepted truism on the London Stock Exchange ; * and it was the practice to charge a higher rate on the former than on the latter class of transactions. Until the same procedure is adopted by members of the New York Stock Exchange, either by gen- eral voluntary action on their part, or in compliance with a formal rule of the Stock Exchange, brokers will always find it to their interest to have their business largely made up of speculative orders and commitments rather than of the relatively costly and troublesome investment transac- tions. And, if ever speculation tends to extend its opera- tions far beyond the needs of the investment demand — as it did in 1906 — the over-speculation will probably meet with no general restrictive action on the part of the brok- ers. Nor' will investment be encouraged so as to relieve speculation of its load. Most assuredly the practice of the London Stock Exchange in distinguishing rates of com- mission on speculative transactions from those for inves- tors has not always availed to prevent over-speculation. But a revision of the commission rates in New York, in * Economist, July 9, 1904, P- "53. 1 62 SPECULATION ON NEW YORK STOCK EXCHANGE [162 accordance with the principle indicated, might lead the brokers, in periods like that of 1906 and 1907, to encour- age investment more actively and to incite speculation, less persistently than they have done in the past ten or twelve years. In conjunction with other measures, looking to the adjustment of speculation's volume to that of investment, a revision of the commission rates or a change in the pre- vailing practice might serve the same purpose as those other measures. Conditions call particularly for a revision of rates of com- mission on purchases of small lots of stock for investment purposes, followed by transfer to the buyer — and possibly on sales of small lots. The prevailing rate of 121^ cents for each share seems illogical in that it possibly does not cover the cost of the service, when the number of shares purchased amounts to five or less. A minimum commis- sion, for example $2.50, might be charged on each trans- action of this nature, where the number of shares amounts to twenty or less. Then the anomaly of brokers' charging generally, on transactions which, from the standpoint of the common interest, are most desirable, a rate that is not remunerative, would be removed. Or else the revision might take the form of charging a prescribed rate for each share — varying either according to market price, as in the present scale of the London Stock Exchange, or on some other logical principle — and also imposing a fee for the transfer of stock, irrespective of the number of shares. It is most desirable that the present discrepancy in the respective rates of profit to the broker, arising from specu- lative and investment transactions, be overcome. It might even be expedient to permit a lower rate than one-eighth of one per cent, of the par value, or $12.50 for each hun- dred shares, to be charged on speculative transactions. This might be accomplished by prescribing, for example, 163] SUMMARY, GENERAL CONCLUSIONS 163 a minimum rate of V32 of one per cent, of the par value, or even as little as one-sixteenth of one per cent. These alternative rates would amount to $9-3754 and $6.25, re- spectively, on each transaction in one hundred shares, as over against the present amount of $12.50. It does not appear that conditions in New York imperatively require the lay- ing down of rates that vary according to the market price of the security involved, such as those recently prescribed by the London Stock Exchange. But if the raising of rates of commission on investment orders should not sufifice to remove the present wide variation in the rates of profit on orders for speculators and for investing buyers, some permitted reduction in the rate of commission charged for orders executed on a margin basis might be advisable. Lowering the commission rate for orders executed on margin does not appear calculated to furnish any incite- ment to speculation. The difference between one-quarter of one per cent. — the rate of the commission on both pur- chase and sale which are necessitated in a speculative trans- action — and say one-eighth of one per cent, would hardly tempt the average outside speculator, who is usually led to trade by the prospect of gaining by a rise or fall in price of two or three points at least. No more probable is it that small investing purchasers would be repelled by the minimum fixed charge of $2.50, the amount we have sug- gested merely as an example — it might be made more or less than this particular amount to advantage. The most important consideration, in revising the rates of commis- sion laid down by the New York Stock Exchange, is to shift the brokers' interest from that of encouraging specu- lation by every means within their power and of giving investment orders only a passive reception, to the point where orders from investors will present to them some measure of the attraction now possessed exclusively by 1 64 SPECULATION ON NEW YORK STOCK EXCHANGE [164 orders from speculators on margin who deal in hundred- share lots. An intelligent and logical revision of commission rates might make brokers less interested in arousing speculation to a point where it would far exceed the needs of the market. In order to concentrate the attention of banks and bankers, and others who are called upon to finance the oper- ations connected with Stock-Exchange speculation, it might be advisable to have the offsetting of sales through the Stock Exchange Clearing House performed weekly instead of daily, as has been done since this method was adopted in 1892. This at any rate would stimulate the quest of banking devices in this country by which funds temporarily in bankers' hands for undetermined periods might be profit- ably employed. Moreover at present speculators and brok- ers are wont to assume the unrestricted capacity of the New York money market to provide any amount of call funds which speculation may require to carry its commit- ments over from day to day. Weekly clearings of sales would, for one thing, remove the advantage of ready con- vertibility which Stock-Exchange call loans possess in this country to the exclusion of other banking assets, by render- ing them less capable of being liquidated any day, on a few hours' notice, at the lender's or borrower's pleasure. The additional benefit might be secured of causing all concerned in Stock-Exchange operations — brokers, speculators and money lenders — to give more heed to the possible demands of speculators, the available facilities of the money market, and the adjustment of each to the other. The question of weekly or fortnightly clearings of sales, as over against the present system of daily clearings, cannot be treated here with any thoroughness. Weekly clearings are suggested tentatively with particular regard to the adjustment of speculative volume of operations, not only to the investment l6s] SUMMARY, GENERAL CONCLUSIONS 165 demand, but also to the supply of call funds in the money market. Even more important than weekly clearings would be the requirement that weekly reports should be made by each member — firm or individual — of the Stock Exchange, giv- ing the volume and nature of speculative commitments out- standing for customers' accounts. And also a detailed re- port of investment orders received and executed each week should be made by the members. The authorities of the Stock Exchange could then publish the totals in some de- tail, both of speculative commitments outstanding among its members and also of the investment orders received and executed. The details of individual members' busi- ness would not have to be published generally, even in sum- mary form. The present general ignorance of speculative operations and also of the volume and rate of investment buying or selling, might in this way be dispelled to some extent. As the situation now stands, the slightest scrap of information on either point would be a valuable addition to general knowledge. Such reports as are suggested might be made to some designated official or standing committee of the Stock Ex- change and the summary totals published. With these re- ports in hand, the authorities of the Exchange could pro- ceed intelligently if they ever took it upon themselves to bring about the adjustment of speculation to investment and to enable the former to " anticipate the needs of the market." The previous supineness of the Stock Exchange as an organized body in dealing with over-speculation might be excused on the ground of insufficient knowledge. But the broad powers of the authorities over members individu- ally would enable them with little difficulty to obtain the information outlined above. This could enlighten them as to the necessity for repressive or regulative action on their 1 66 SPECULATION ON NEW YORK STOCK EXCHANGE [i66 part and guide them in taking such action, should they decide on that course. Reports of the sort mentioned would be more useful than would be the periodic examinations of individual brokers' books, such as, we are told, were discussed in the sessions of the Hughes Committee." These proposed examinations, however, had chiefly the purpose of maintaining oversight of the individual brokers' finan- cial stability. The relatively infrequent failures of brok- ers, to which defenders of the Stock Exchange insistently point, appear to make this oversight a reform of slight ur- gency. In any case, examinations conducted "with the view of preventing or minimizing failures ", would not neces- sarily aid in adjusting the volume of speculation to the in- vestment demand, which is the purpose of the suggestions now under consideration. Another recommendation of the Hughes Committee that was incorporated in its report — and also of the Pujo Com- mittee — that at least 20 per cent, margin be required on every transaction, would probably act effectively in curbing over-speculation to some extent. In that it would keep out of the stock market those who were not able or willing to deposit that amount of margin, it should d priori inevit- ably reduce the volume of speculative commitments below the point it would reach if this requirement were not en- forced. At times, as we have seen, the volume of those commitments far exceeds the investment demand. The re- quirement in question should therefore act to correct any tendency toward over-speculation that might reveal itself. But a careful inquiry into the relative degrees of sagacity ° " Differences of opinion arose in the committee as to the advisability of requiring periodical examinations of the books of brokers, cor- responding to the examinations of national banks, with the view of preventing or minimizing failures." — Horace White, " The Hughes In- vestigation." Journal of Political Economy, vol. xvii, p. 540. 167] SUMMARY, GENERAL CONCLUSIONS 167 possessed respectively by those who would put up at least 20 per cent, margin and those who would not do so, might be necessary in order to determine the approximate amount of benefit to be obtained from the enactment and enforce- ment of the requirement. In 1906 and 1907, for example, we do not know how many of the speculators were forced to liquidate their holdings by actual exhaustion of the re- sources they could devote to speculation, and how many were led to do so by unwillingness — aside from their ability to deposit additional margin — to stand by their commit- ments through a prolonged decline. Doubtless the demand for a margin of at least 20 per cent, would serve to exclude a particularly undesirable — ^f rom the standpoint of the com- mon interest — type of " shoestring " speculator. For that reason, it seems entirely worthy of adoption; even though we do not know, in times of heavy over-speculation, just what proportion of those ill-fitted to enter into stock mar- ket ventures are formed by speculators who are unable or unwilling to put up a margin of the amount suggested. Below is a brief outline of the measures which have been suggested with the aim in view of restricting any tendency toward over-speculation on the Stock Exchange in such a year as 1906. These are as follows : I. Revision of the rate of commission. To make investment orders more profitable to the brokers than they have been relatively to speculative orders, by a. Prescribing a fixed minimum charge — covering the broker's trouble and expense — on investment transactions in 20 shares or less; with perhaps an additional charge for the transfer of stock at the buyer's direction. b. Reducing the prescribed minimum rate to be charged on speculative transactions. 1 68 SPECULATION ON NEW YORK STOCK EXCHANGE [i68 c. Prescribing minimum rates which would vary with the market price of the securities involved in a given transaction." d. Permitting the charging of lower rates on larger orders. ° 2. Weekly clearings of sales through the Stock Exchange Clearing House. To draw closer attention to the volume of speculation at a given time, and to the facilities of the money- market, on the part of a. Speculators. b. Brokers. c. Lenders of call money. To lessen the advantage of Stock-Exchange call loans, in point of ready convertibility, over other forms of loans. 3. Weekly reports by individual members to the Stock Ex- change of outstanding speculative commitments and of investment orders received and executed. Also publication by the Stock Exchange of summaries of above reports. To give information regarding relative volumes of speculation and investment to a. Speculators, assisting them to conduct their oper- ations more intelligently. b. Stock-Exchange authorities, enabling them to as- certain the need for any regulative action on their part. Data to guide them in any action which may seem advisable. 4. Requiring at least 20 per cent, margin — recommended by the Hughes Committee and also by the Pujo Com- mittee. " c. and d. are suggested by the recently adopted rules of the London Stock Exchange. Their effectiveness in view of New York Stock- Exchange practice might be questioned. 169] SUMMARY, GENERAL CONCLUSIONS 169 To curb mischievous over-speculation by a. Reducing the absolute volume of speculation, since it would presumably exclude from the mar- ket a numerous class of speculators. b. Making the speculative class largely consist of operators better able to endure a relatively severe decline — however it might affect their willing- ness to do so. No one of the above measures alone could have been de- pended on to repress such overmastering tendencies in the direction of over-speculation as were revealed in the earlier years of this century, especially in 1906. For instance, the public's proneness to speculate in that year could hardly have been restrained by a body of brokers who, be- cause of commission rates adjusted to that end, might have been indifferent as to whether their customers were mostly speculators or mostly investors. But had a logical scale of comnlission rates then prevailed, had weekly clearings of sales through the Stock Ex- change been the rule instead of daily clearings, had the existing volume of speculative commitments and of investment buying been made known generally by per- iodic reports at frequent intervals, and had a requirement of 20 per cent, margins been rigorously enforced — it seems highly unlikely that a volume of over-speculation for the rise, such as was reached in August and September, 1906, would have occurred. Of all four suggestions, that of revising the commission rates seems most fundamentally important. But it might not be of much avail in such a year as 1906 unless it were accompanied by the other meas- ures proposed. The prevailing rate of commission — mak- ing speculative orders profitable to a much higher degree than orders executed in small lots of stock for investors — will make it to the brokers' interest to incite speculation 170 SPECULATION ON NEW YORK STOCK EXCHANGE [170 rather than investment, so long as it is maintained. The continued maintenance of this rate has brought about those developments in the business of the broker by w^hich the routine of his operations and the provision of facilities for his customers are all devoted to the encouragement of speculation and to the economical and simple performance of transactions in connection with it. And so long as this rate persists, all that a broker can do in protracted dull periods is to sit idle and wish for a revival of speculative activity. Under this rate the individual members will never find it to their interest to assist in performing that basic function of the modern stock exchange, " directing the flow of capital into investment " — that is, in the stocks listed on the Exchange. An adjustment of the commission rates, along the lines suggested, might make the New York Stock Exchange a more effective agency in this " direction of the flow of capital ", than it has been in recent years. Certainly in the period studied its efficient performance of this func- tion, we concluded, was not in evidence at all, except insofar as it provided a broad market wherein any investor might buy or sell on his own initiative. As to the periodic reports on the volume of speculation and on the investment demand, it seems entirely desirable that speculators should have some definite information on which they can base their " anticipation of the needs of the market." In failing to provide this information, the New York Stock Exchange has not been remiss above all other institutions of that type. It seems to be commonly ac- cepted that speculators should carry on their operations in the densest ignorance of the general needs of the market and of the activities of other speculators. This apparently has arisen from the attitude of the public and of many persons connected with speculation, which we have shown seems to govern objections to manipulation, and which 171 ] SUMMARY. GENERAL CONCLUSIONS 171 consists in regarding speculation as a game of mingled skill and chance. To afford any information regarding the ulti- mate market on which speculators depend for success, in the minds of many, would be like permitting a whist player to look over his opponents' hands at the beginning of play. Carried on without the aid of the information indicated, which could be readily obtained, speculation can never ad- just itself closely to investment needs, nor can it " consist in assuming the inevitable risks of changes in value." One can hardly predicate " inevitableness "of risks that arise from speculators' failing to equip themselves with the knowledge of fundamental conditions which is readily ac- cessible. And so long as it is carried on thus blindly, specu- lation will never consist in anything else than in " placing money on the artifically created risks of some fortuitous event." But if all readily ascertainable manifestations of the investment demand are brought to their attention, specu- lators may intelligently undertake the useful economic and social service of " anticipating the needs of the market." The necessity for any regulative action to be taken by the Stock-Exchange authorities in the future, looking to the ad- justment of speculation and investment, as a result of the fuller information they may then obtain, will depend on the strength of the general inclination to speculate. It may be uncertain as to how far the publication of weekly reports, such as have been suggested, and the requirement of 20 per cent, margins will restrain undue eagerness to venture into the stock market. Possibly developments having no internal connection with the Stock Exchange may prevent any such tendency from manifesting itself again to the extent that it did in 1906. But if a general desire to speculate blindly on the New York Stock Ex- change again seizes a numerous class in the community, the organization of that market and the conduct of its 172 SPECULATION ON NEW YORK STOCK EXCHANGE [172 routine, as they stand at present, will play little part in •correcting or restraining the mischievous fulfilment of that desire. Measures such as those that have been suggested, and possibly some others, should make the New York Stock Exchange an efficient agency in " directing the flow of capital into investment " ; and prices registered in the course of operations carried out by speculators having some knowl- edge of their ultimate market, might very possibly serve to " discount " future conditions. APPENDIX I. NUMBER OF SHARES SOLD ON THE NEW YORK STOCK EXCHANGE, EACH MONTH, 1900 TO 1912, INCLUSIVE. igoo igoj igo2 1903 '904 '9°5 jgo6 igo7 jgo8 igog igio jgti igi2 January 9.843.716 30,285,055 14.779.223 16,001,222 12,262,624 20,792,558 38,512,548 22,702,760 16,594.895 17.z75.500 24,538,649 10,416,526 10,906,138 February 10,195.392 21,902,822 12,986,943 10,922,017 8,787,259 25,239,088 21,699,800 16,470,972 9.839.706 12,337.199 16,012,626 10,194,217 7,086,544 March 14.446,782 27,060,968 11,957,409 15.095.306 11,440,956 29,138,838 19,467,684 32,208,525 15.939,255 13.650.595 14,988,179 6,823,868 14,552,052 April 14.772.973 41,719,086 26,567,743 12,293,058 8,205,529 29,298,456 24,330.919 19,235,652 11,648,123 19.05S.618 14,089,639 5.639.350 15.959.338 May 9.519.473 35,292,203 13.532.353 12,467,588 5,290,110 20,517,560 24,026,049 15,827,245 20,975,022 16,495.230 11,918,978 11,115,578 13,662,747 June 7,308,687 19,795,612 7.834.768 15.396.741 4,972,804 12,576,469 20,340,391 9.749.415 9,652,437 20,322,230 16,292,870 10,508,400 7,219,721 July 6,230,493 16,024,668 16,352,231 14.903.758 12,462,394 13.273,655 16,346,221 12,811,354 13.857.563 12,806,965 14.254.713 5476,559 7.158.324 August 4,020,654 10,772,021 14,314,627 » 4.370,943 12,474,789 20,205,735 31,804,816 15.561.583 18,881,265 24.637.783 10,392,788 14.994.533 8,952.358 September .... 5,169,966 13,990,195 20,972,253 10,795.453 18,767,264 16,012,044 26,018,270 12,223,541 17,582,499 19.981,675 7.673.529 1 7.395.957 10,107,204 October 10,895,083 14,036,082 16,361,124 12,896,893 32,574,449 17,674,807 21,894,130 17.333.793 14,266,901 21.739.514 13,452,381 10,936,901 14,166,896 November 22,565,336 18,314,962 17,126,062 10,730,979 31,981,066 26,823,550 19,400,130 9.677.494 24,966,326 18.769,870 10,713469 14,919486 8,725,317 December . 23,411,629 16,750,985 15,718,667 15,228,143 28,092,821 31,528,396 20,457,052 12,636490 23,002,354 17.560,015 9,822,240 9.055.883 12,631,786 II. PRICES OF LEADING SPECULATIVE STOCKS ON THE NEW YORK STOCK EXCHANGE, ON THE FIRST OF EACH MONTH, SEPTEMBER, 1904, TO MARCH, 1907, AND ON MARCH 29, 1907. Railroads. Atchison Bait. & O Reading South. Pac Union Pac....' Industrials, Amalgam. Cop. Steel, common 1904. Sept. I- 86% 61% S6>^ Oct. I.Nov. I S3H 86 69 I 73 S1% 61 9lK 102% i«o>^ I I 56% 58>i (>9K 12% lZ% 20>^ Dec. 1905- Jan. 3. Feb. i. 88 j 883^1 881.^ 98>^ 105% i02>^ I I ! I i I Mar. I. Apr. i. May i. June 1. 1 July I.Aug. i.'Sept. i, I I i i I i 89 781^ 80 67% 81 32% "4% 72 88Ji 66% 74% 83J-4 80I4 107% 1083^ i04>^ 95 j 94% 9°H 70% 67>^l 6o>g •33 «30%i ii9>^ 76K SoH 78K 30%' 3' I 34% 35?^! 3°H 93hi «23 S3H i>l% 90^ Oct. i.|Nov. I. Dec. i. 9P% 88% 87 "3^ "4% 1"%' "2%; 112)^1 1123^ 100 1053^ 116 64 127M 8234 27)^ 31% 6SM 131 84% 123%; 1283^ 65%| 693^ n^% 82Ji 35%; 36% 70% «33>i 83% 38>^ 38 '33)i 84% •37 68% '35M 90% 31% 1906. I 1 i Jan. 2. 'Feb. I. Mar. i. Apr. 1, 89K: 93% 893^1 94% «I3>^ "5%; "0>^ "2 i5S>i I49>6 139 14')^ 136M 663^1 69%' 653i 150% 111% 43^ 116 45 •o7>^ 40% «37 693^ i57>i '09% 42 I I I I ' I May I. June i.[ July 2. Aug. I. Sept.l. Oct. I. 'Nov. i. ^9%. 89% t 107%' I07?;i I23Ji 64% '47M 104% 4> 140% 88 92% 1063^ 105% 100% 116% 121 150 108 1213^ 67 '43 97^ "7?i i23>^ ii83i '3'% 136% i 74%' 90?^ 1 «53}i »9'Ji 1023^ 40%j 34%| 4')^ 109% 46% •5°% I38>i I 93% 90>^ 183% 45% J8o% «09% 46 Dec. I, 1043^ •19% •47% 94Ji 187 ••3% 475i 1907. Jan. 2. •04% 1203^ Feb. I. Mar. I. 101% ii6>^ •34Ji' 122% I 93>i! 93>^ 180 172)^ "5>^ 48% "2>^ 44% Mai. 29. 102% 110% "5% 9i>^ «7i>^ 110% 44M 89% 97>^ I04>^ 88% 35?^ in tht mtvi of l^iewr '^av'h The University includes the following : - , ^ . Columbia College, founded in 1754, and Barnard College, founded in 1889, offering to men and women, respectively, programmes of study which may he begun either in September or February and which lead normally in from three to four years to the degrees of Bachelor of Arts and Bachelor of Science. The programme of study in Columbia College makes it possible for a well qualified student to satisfy the requirements for both the bachelor's degree in arts or science and a professional degree in law, medicine, technology or education in six, five and a half or five years as the case may be. The Faculties of Political Science, Philosophy and Pure Science, offering advanced programmes of study and investigation leading to the degrees of Master of Arts and Doctor of Philosophy. The professional schools of Law, established in 1858, offering courses of three years leading to the degree of Bachelor of Laws. Medicine. The College of Physicians and Surgeons, established in 1807, offering four-year courses leading to the degree of Doctor of Medi- cine. Mines, foimded in 1863, offering courses of four years leading to degrees in Mining, Engineering and in Metallurgy. Chemistry and Engineering, Set apart from School of Mines in 1896, offer- ing four-year courses leading to degrees in Chemistry and in Civil, Electrical. Mechanical and Chemical Engineering. Teachers College, founded in 1888, offering in its School of Education courses in the history and philosophy of education and the theory and practice of teaching, leading to appropriate diplomas and the degree of Bachelor of Science in Education ; and in its School of Practical Arts founded in 1912. courses in household and industrial arts, fine arts, music, and physical training leading to the degree of Bachelor of Science in Practical Arts. All the courses in Teachers College are open to men and women. Fine Arts, offering a programme of indeterminate length leading to a certificate or a degree in Architecture, and a programme in Music, for wliich suitable academic recognition will be given. Journalism, founded in 1912, offering a four-year course in Journalism leading to the deorree of Bachelor of Literature. Pharmacy. The New York College of Pharmacy, founded in 1831, offer- ing courses of two aud three years leading to appropriate certifi- cates and degrees. In the Summer Session the University offers courses giving both gen- eral and professional training which may be taken either with or witlJoul regard to an academic degree or diploma. Through its system of Extension Teaching the University offers many courses of study to persons unable otherwise to receive academic training. The Institute of Arts and Sciences provides lectures, concerts, read- ings aud recitals — approximately two hundred and fifty in number— in a single season. 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