The work of Wall street; an account of the functions, methods and history of the New York money and stock markets

Front matter

CORNELL

UNIVERSITY

LIBRARY

Preface To The Second Edition

So vast are the transactions of Wall Street, so tremendous are the interests which it serves, so fundamental to the well being and prosperity of the whole world are the "operations of its systems of credit and securities, and so varied and intricate are the problems involved in the activities of a great international money market, that to attempt to put within a volume of moderate size an adequate account of its work, and of the principles which underlie, and the spirit which inspires, that work, is an undertaking of large proportions. The author hopes, however, that he has, in good measure, achieved success.

The writing of "The Work of Wall Street" means something more than a description of the speculative market. The Stock Exchange is, indeed, an important part of Wall Street, but it is not Wall Street. The financial district includes, but is not embraced by, the stock market. The Clearing-house, far more than the Stock Exchange, is the heart of Wall Street. A description of the work of Wall Street is really an account of the mighty economic forces by which the commerce and industry of the richest and most powerful nation of the globe are carried on. A commercial country without a central money market would be like a government without a capital. The greatness of Wall Street is a visible proof of the greatness of the United States. The work of Wall Street is the work of facilitating, energizing, moving, expanding and safeguarding the work of the country.

Since ' ' The Work of Wall Street ' ' was first published in January, 1903, many changes have taken place in the vi PEEFACE

structure of the financial center — changes so important that a thorough revision has required the making of what is practically a new book, in matter and form, although as much of the old is retained as has been unaffected by the passage of time.

The three most notable changes in the machinery by which "Wall Street performs its work have been :

1. The strengthening of the Bank Clearing House by the admission of the principal trust companies as members; by the establishment of a system of examinations by which the Clearing-house is enabled to maintain the banking position more securely; and by the widening of the scope of the bank statement and the improvement in its form.

2. The amendment of the rules of the New York Stock Exchange, by which improvements have been instituted in the organization of the stock market without destroying its facilities for effective distribution of the securities of the country and the better mobilization of capital; one of the most noteworthy of these improvements being the abolition of the Unlisted Department; and

3. An expansion, through both governmental action and individual initiative, of that publicity which is the surest safeguard of investor and speculator, and the strongest preventive of the evils of deceitful manipulation and dishonest promotion.

Moreover much financial history has been made in the past ten years; and what amounts almost to a revolution in business so far as its relation to government is concerned, is in progress. The question is being fought out with Wall Street as a battlefield, whether the business of the country shall be conducted on a competitive basis, or whether modern cooperation on a big scale shall be permitted, or whether it is possible so to combine competition and cooperation as to obtain their largest efS-

PREFACE vii

ciency, without the peril of economic anarchy on the one hand or financial tyranny on the other.

By the decisions of the courts, by the investigations of expert commissions, and by the studies of publicists and economists, new light has been thrown upon the theory and practice of money and banking, and of promotion and business organization.

The Monetary Commission, of which ex-Senator Aldrieh is Chairman, has drafted a plan of monetary reform which, if adopted, will take rank with the most notable constructive financial achievements in the history of this country since the genius of Alexander Hamilton organized the Treasury and established the first United States Bank. The publications of the Commission alone constitute a most important contribution to the literature of money, banking and investment, and are of enormous value in educating public opinion as to the inestimable benefits of modern credit, properly organized and safeguarded.

Scarcely less valuable than the work of the Monetary Commission is the report of the Eailroad Securities Commission, appointed by President Taft, of which Dr. Hadley. President of Tale University, was Chairman, and which presents, with clearness and scientific precision, the principles that should govern the issuance of railroad securities.

The investigation in 1909 of speculation in securities and commodities by a commission appointed by Governor (now Justice) Hughes, and headed by Horace White, has served at once to demonstrate the economic value of speculation and to correct many defects in the machinery of the speculative markets.

A number of decisions, notably those by the United States Supreme Court in the interpretation of the Sherman Anti-Trust Law, have profoundly affected the organization and conduct of big business.

Tiii PREFACE

In addition to these great changes, the past ten years have witnessed in this country a notable development of the investment market and a corresponding development of facilities for supplying the needs of investors. The science of investment is better understood, and the art of investing as practiced by capitalists, both large and small, is much more intelligent and discriminating ; while the high class bond houses by their methods of publicity and distribution are making more distinct the line marking the separation between the true and the false, the sound and the bogus.

In the meantime the volume of speculation since the panic of 1907 has materially declined, which is attributed by some to the State tax on stock transfers, amounting to two dollars per 100 shares. This tax, imposed during the administration of Governor Higgins — ^because "the State needed the money," — is uneconomic because it is a tax on sales, but it has proved a heavy revenue producer, though hurtful to the commission houses. The reduction in the volume of sales may be more properly attributable to the decline in gambling and manipulative transactions. "Wall Street, however, has passed through other periods of speculative depression and then experienced a rapid revival, as for instance, after the panic of 1893.

In this connection attention should be called to the wonderful expansion in advertising in the past decade, and especially to what has been achieved in widening the scope, improving the quality, and strengthening the power of financial advertising. Some progress at least has been made in preventing this stupendous agency for the wise and wide distribution of investments from being seized by the hands of the sharks who are ever using the advertising columns for the purpose of swindling the innocents and the fools out of their savings.

PREFACE . ix

In spite of the tremendous strain put upon capital and enterprise during the last ten years, we have as a nation made progress in material prosperity, for such are the vast resources of our country, that political and economic changes may retard growth, but cannot entirely stop growth.

In ten years the estimated wealth of the country, has increased fully $20,000,000,000. Our money in circulation has increased a billion dollars. Our bank clearings and bank deposits have doubled.

When "The Work of Wall Street" was first published in January, 1903, it was practically a pioneer in its field. It was the first attempt to describe comprehensively the machinery with which Wall Street promotes the enterprise and facilitates the exchanges of the country and provides a regulated market for securities. In the preface of the first edition it was said that, while Wall Street filled a large space in the daily papers, this was chiefly in a sensational way; and there existed a remarkable degree of ignorance regarding the actual work of the financial district, while the history of speculation, and of its effects on the development of civilization had not been deeply studied. Ten years, however, have wrought a change.

Since the issue in 1903, there have been a number of publications, books, pamphlets and articles covering in part the same field as "The Work of Wall Street." The past ten years have been a time of popular education in the theories and practices of business, and there has been a notable output of books bearing upon various branches of the subject. Of the publications — books and magazine articles — relating directly to securities and Stock Exchanges, Professor S. S. Huebner of the University of Pennsylvania gave in the Annals of the American Academy (May, 1910) a list of 198; and a majority of these have been published since "The Work of Wall Street"

X PBEFACE

was issued in 1903. Moreover since Professor Huebner made his bibliography other publications have appeared which should be added to the list. In "The Work of Wall Street" the author makes reference to over one hundred books, reports and pamphlets on money, banking and speculation.

Instead, therefore, of there being a lack of information regarding the work of Wall Street, as was the case when the first edition was issued, there is now what might almost be described as a literature on the subject. This fact might be regarded as rendering unnecessary a revision of "The Work of Wall Street" were it not for two things. There are now so many publications, relating to various branches and aspects of the Wall Street system, that there is still a place left for a book, like this, which aims at giving a comprehensive but concise account of the whole mechanism in the light of the development of the past ten years, in order that the investigator may find, in one place, thie essentials of a subject, which in some of its different parts may, perhaps, be found in larger detail in other publications. Moreover, "The Work of Wall Street," in spite of the fact that it was written ten years ago, still remains, according to Mr. F. W. Hirst of the London Economist, "the best description of the Wall Street system." Under such conditions it has seemed proper to continue its publication and to bring it up to date by discriminating revision.

In making this revision the author has believed that it was better to leave untouched that which has stood the test of ten years, and make only such alterations and additions as were rendered necessary by the actual changes in the system itself and by a larger view of the subject. This has required, however, the omission of much old matter, and much new writing, with the net result of materially increasing the size of the volume and making it

PEEFACB xi

virtually a new book. The author has deemed it to be in the interest of the student to include, in its entirety, in this edition, the report of the Hughes Commission on speculation, to which he has added a number of notes of his own for the further enlightenment of the reader. The chapter on the Stock Exchange Clearing House, having received the approval of the Chairman of the Clearing House Committee when first published, is continued, unchanged except for a slight explanatory note.

New chapters on the function and the scope of Wall Street, on investment, speculation and gambling, and on reading the market, have also been introduced, and much new matter has been added in the chapters on "The Stock Company," "Listing of Securities," "The Stock Exchange," "The Credit Institutions and the Clearing House," "The Bank Statement and the Movement of Money," "The Investment Market," "The Curb Market," "Foreign Exchange and the Balance of Trade," and "Panics." In fact most of the book has been rewritten. Numerous citations from economic and financial authorities have been added, and most of the chapters conclude with a bibliography.

To Mr. James G. Cannon, President of The Fourth National Bank, a leading authority on commercial credits and Clearing Houses, the author owes the original inspiration for this book, as well as valuable assistance in the gathering of material. The author is also indebted to Mr. Maurice L. Muhleman, Secretary of the Hughes Commission, and formerly Deputy Assistant United States Treasurer, for important new matter in the chapter on "The Subtreasury" and also for further assistance. He desires likewise to make large acknowledgment of help to his friend and former colleague, Mr. Thomas F. "Woodlock, once editor of The Wall Street Journal, but now member of the New York Stock Exchange.

xii PEErACE

In the revision moreover he has had the active assistance of his son, Mr. Thomas B. Pratt, of The Wall Street Journal.

The author himself has had for several years no connection whatever with the securities market, and in view of his other interests, he would not have undertaken a further description or analysis of its mechanism, if it had not been for the fact that he felt the responsibility resulting from his authorship of "The Work of Wall Street"; and as it had to be revised, he believed that it was his special duty to perform the labor.

Returning to his study of the Wall Street system, after several years of absence, he finds that his outlook upon it as a friendly but discriminating critic is unchanged, and he repeats what he said in the preface to the first edition:

"The author has conceived his duty to be that of a reporter rather than of an editor. He has sought to present the, facts as they are, leaving to others to inquire why they are not something very different. He has endeavored to maintain an impartial attitude toward Wall Street, neither seeking to defend it against just criticism nor joining in the too common assault upon it as a blot upon civilization. No one can study this theme with unbiased mind without being impressed with the indispensable place the stock market fills in modern business, of the great value of its manifold services to the world, and of the extraordinary efficiency of its mechanism. ' '

Wall Street depends upon the country for its sustenance, but Wall Street is essential to national progress. Any attempt on the part of Wall Street to abridge the liberty or throttle the natural growth of the country, or any attempt on the part of the country in anger, revenge, or ignorant passion to destroy Wall Street would be

PREFACE xiii

equally ruinous, for a house divided against itself cannot stand.

S. S. P.

Publishers' Note to the Third Edition

This revision of the late Sereno S. Pratt's "The "Work of Wall Street," by his former friend and editorial associate in financial journalism, Dr. John Franklin Crowell, brings this valuable volume up to date in respect to the developments between 1912 and 1920, without sacrificing any of the historical setting based on the author's extended firsthand acquaintance with the Street. Practically all of the old chapters have been retained, and several new ones have been added, including one on "Wall Street and the Federal Reserve Bank," another on "Liquidations in Peace and War, ' ' and a final one on ' ' Wall Street and the World Market." Much of the Hughes Commission report, formerly printed in an appendix, has been interwoven with the text in the chapter, "Criticisms of Wall Street." Numerous new topical paragraphs have been incorporated here and there, making, with the added chapters and the introduction of the new matter, easily the most comprehensive and complete survey of the field which the volume attempts to cover, that has ever been published.

Contents

PEErACE V,

I. — Evolution of Wall Street 1-35

Origin of money, stocks and speculation — ^Begin- '- nings of the English and French stock markets — Wall Street has imported, but Americanized their methods — Early history of the Street — Speculation that set in after the Eevolutionary War — The brokers' agreement of 1792 — The first financial machinery — The stock market of 1801 — ^Panie of 1812 — Early conference of bankers — Organization of the Stock Exchange — New York forges ahead of Philadelphia — Foreign bankers appoint American agents — Listing of first railroad stock — London trading in American securities — Struggle between Jackson and the United States Bank — Excited speculation between 1830 and 1840 — ■ Early market reports — Panic of 1837-41 — Philip Hone's description of Wall Street in 1842— The telegraph, 1842 — Boom caused by discovery of gold in California — Overspeculatiou brings on panic of 1857— Wall Street during the Civil War— Establishment of bank and stock clearances, and introduction of the cable, the stock indicator, and the telephone — Speculation in gold — Black Friday and the Erie wars — ^Fanie of 1873 — The Exchange closes its doors — Boom of 1879 — Panics of 1884, 1890 and 1893— The McKinley boom— The "Captains of Industry" — A new era in Wall Street History — The cooperation issue — Eegulation of railroads — The big gold production — Panic of 1907 — ^Dissolution of big holding companies — Plans of E. H. Harriman — Men who have made Wall Street famous — More recent developments — War financing — Expansion of the mechanism of money and speculation — The progressive stages of market evolution — The world market.

Chapter I Evoi.tjtion Of Wall Street

Long indeed has been the evolution producing the sensitive and powerful mechanism of Wall Street, which has developed, naturally and inevitably, in response to human needs. The principal processes of the money market may be traced in their origin to the earliest times of which history makes record, and checks and bills of exchange had their beginning in ancient Rome, although banking in its modem sense may be said to date from the establishment of the Bank of England in 1649. ' ' The deposit currency" by which business transactions are mostly carried on to-day is a still more modern development. Corporations also existed in Rome; but the limited liability stock company is a modem discovery, and, in connection with steam and electricity, it has constituted one of a trinity of inventions that has revolutionized the world's business. By its means the unit of commercial enterprise has expanded from the neighborhood, and even the State, to the dimensions of the continent ; the number of individuals, who may unite in the conduct of an industry, from three or four partners to a group of 120,000 to 150,000 stockholders; and the size of a market from the limits of a single city to the scope of the world. The stock company has enormously increased the opportunity and the power of cooperation in business. The inestimable benefits of this cooperation are eagerly desired, while its power is feared; and thus the problem, of how best to subject this power to adequate control without unwiselylimiting its opportunities for good, constantly confronts us.

Origin of Stock Market. — Stock-certificates were a product of the seventeenth century. The first great modern company was the East India Company, which was incor. porated in 1600. Soon after that the Hudson Bay Company sprang into existence. But it was not until the latter part of that century that the shares in these companies began to be actively traded in.

Stock speculation is therefore a development of modern business, although the taking of long risks in trade is as old as commerce itself; and Homer relates how after the combat of Hector and Ajax, the fleet arriving from Lemnos' strands discharged cargoes of wine, which were sold to the hosts of warriors in exchange for brass, iron, oxen, and slaves. This was truly a great speculation.

According to Maeaulay, the term "stock-jobbers" was first used in England in 1688, and he gives an entertaining account of the beginnings of the English stock market at that time. A multitude of new companies, genuine and bogus, were organized, and an active speculation in their shares led to the first boom in industrials of which' we have any account. In 1693 a play was produced satirizing stock-brokers. Shakespeare, years before, had used the word ' ' broker ' ' as many as six times, but not as referring to dealers in stocks. "Time bargains," "bulls," "bears," "puts," and other technical terms of speculation were first used at the end of the seventeenth century and at the beginning of the eighteenth. So large became the unorganized market for securities, that in 1697 Parliament enacted a law to check the evils of speculation, and provided a system of licenses for brokers. Three or four years later Daniel DePoe, in one of his pamphlets, attacked stock- jobbing.

The First Stock Patnics. — This early mania for stockspeculation reached its height at nearly the end of the first quarter of the eighteenth century, in the promotion of the South Sea Company in England and of John Law 's Mississippi Company in France. The collapse of these two bubble companies caused the world 's first great panics in 1720. Guizot, in his history, gives a short but interesting account of the career of John Law, and of the intense excitement created in Paris by his bold financial conceptions. It was found necessary to close the entrances to Quineampoix Street, where the Paris brokers had their headquarters, in order to put a stop to the feverish tumult arising from desperate speculation. So many immense fortunes were won and then lost at that time that this ditty was everywhere sung in the streets :

On Monday I bought share on share; On Tuesday I was a millionaire; )n Wednesday took a grand abode; Jn Thursday in my carriage rode; On Friday drove to the opera ball; On Saturday came to the paupers' hall.

Shortly after the failure of John Law the Paris Bourse was legally founded, in 1726, but the ' ' Change de Paris, ' ' out of which it may be said to have sprung, had a history running back to 1304.^

The English Parliament passed an act to prevent stock-jobbing in 1734, and forty years later another act was passed to prevent short selling. For nearly a century the curb market existed in 'Change Alley in London, and on July 5, 1773, the London Stock Exchange was formed. Thus the complicated machinery of the money

* For further information consult E. Vidal on ' ' History and Methods of the Paris Bourse." See also Guizot 's "Popular History of France," Chajpter LI, tr. Black.

and stock markets, the banks, the exchanges, and the processes of speculation are importations into Wall Street. This country has improved, has Americanized them, but did not originate them.

Beginnings of Wall Street. — Less than forty years after the organization of the London Stock Exchange a stock market began to develop in Wall Street. In the United States, as well as in England, a craze for speculation had sprung up after the long war of the American Revolution, especially in public lands and public debts.

The struggle for independence had strained the resources of the colonies to the utmost, and much suffering had been caused their people. But with the revival of commerce after the war better times set in. The first Congress, sitting in Federal Hall, on Wall Street, had issued bonds, called stock, to assume the war debts of the States, and about $80,000,000 of securities were thus offered to the public. Other stocks had also been issued. In December, 1781, the Bank of North America had been incorporated in Philadelphia. Less than three years later, in February, 1784, a meeting of merchants was held to establish the Bank of New York. Hamilton drew up the plan and constitution of this bank, the first to be founded in this city. Among the places at which subscriptions were received was the office of William Maxwell, No. 4 Wall Street. In 1791 Congress passed, and Washington signed, Hamilton's measure for the establishment of the first United States Bank.

Speculation in the securities thus created set in. Wall Street became a market for them. It is recorded that early in 1792 there was an office for the public sale of stocks at No. 22 Wall Street. A stock list of that year gives quotations of 6 per cent. United States stock, and of the shares of the United States Bank and the Bank of North America. A number of men engaged in the busi-

KVOLTTTION OF WALL STREET &

ness of buying and selling these stocks on commission. Their favorite meeting-place was near a buttonwood tree which stood in front of No. 68 Wall Street. In 1792 Leonard Bleeker and 23 other brokers, as a result of a meeting held at Corre's Hotel, entered into an agreement "solemnly promising £ind pledging" themselves "not to buy or sell any kind of public stock at a less rate than Vi per cent, commission on the specie value." The date of this agreement was May 17. This was the earliest beginning of the Stock Exchange, although there was no regular organization until twenty-five years later. With this agreement may be said to have begun the history of Wall Street as the seat of the Stock Market.

The whole country then contained about as many inhabitants as Massachusetts has now. New York had a population of 33,000, and about 3,400 dwelling-houses. The settled part of the city did not extend above Chambers Street. Wall Street, so called from the old stockade, or wall, that protected the early Dutch city from the Indians, was in 1792 an important street. The City — afterward called the Federal — Hall had been erected there in 1699, on the present site of the Subtreasury, and here Washington had been inaugurated as President in 1789. Hamilton lived nearly opposite, not far from the corner of Broad Street. The lower part was even then given up to trade, but the upper part was a parade-ground of fashion, and many leading families had their residences there. Trinity Church then, as now, stood on Broadway facing Wall Street.

Organization of Chamber of Commerce. — As early as 1752 the merchants had a meeting-place, or Exchange, on Broad Street near Pearl. In 1768 the Chamber of Commerce was organized in the long room of Fraunce's Tavern, a building still standing ; and it is of interest to note that questions of money engaged its earliest attention. In

1786 the Chamber protested in vain against the State issuing irredeemable paper money as legal tender. In 1794 the merchants established the Tontine Coffee-House on "Wall Street, and this continued the center of the business life of New York until 1827. Here the stock-brokers met for some time.

The first financial machinery required by the new country was banks, and the first great lesson taught by these institutions, as has been well said, was punctuality. The value of time as an asset in business became more and more appreciated. The success of the Bank of New York led to the founding (1799) of the Bank of the Manhattan Company, in the starting of which Aaron Burr was largely instrumental. From 1792 to 1801 the number of banks increased from 3 to 23, with a total capital of $33,550,000. A few fire and marine insurance companies had also been organized. The supply of securities available for investment and speculation made therefore quite a stock market. The following advertisement, which appeared in the first issue of the Evening Post, November 16, 1801, gives an idea of the dimensions of this market :

PRICES OF STOCKS

6 per Cent. Funded Debt 98f per Cent.

3 per Cent. . .do. . . .do 56i a 57

8 per Cent. Loan li2J

6 per Cent. Navy Loan par.

BANK STOCK

United States Bank 143 a 143| p. ct.

New York (dividend off) 131|

Manhattan 132

INSURANCE SHARES

New York InBurance Co 128 per cent

Columbian .... ditto 137 a 138

United ditto 118 o 119

Bills of Exchange at 60 days sight

On London 100 a 101 per cent.

On Hamburgh 36 a 38 cts. p. mk. b.

On Amsterdam 40 cents per guilder.

E. BENJAMIN, Stock and Exchange Broker, November 14. No. 50 Wall Street.

At this time all the banks and insurance companies but one, and the Chamber of Commerce, were located in "Wall Street, then, as now, the financial center. As the banks were paying 15 to 18 per cent, dividends, there was no small demand for their stocks. "With the growth of the country and tlie rapid settlement of what is now known as "the Middle "West," which was then the frontier, new banks were created, and the speculation in their shares increased. The history of "Wall Street from this time becomes practically the history of the agricultural, industrial, and commercial development of the United States.

Distress in 1812. — The banking capital of the country in 1812 was more than $70,000,000. In this year the second struggle with England began, and the long closing of the ports and the cost of the war caused much distress. The Government had difficulty in floating a war loan. The bankers held a meeting at the Manhattan Bank on August 22, and took measures for their protection. Thus, a hundred years ago, the bankers realized the importance of concerted action in financial crises. During this panic — the first of any importance from which "Wall Street suffered — 90 banks in different parts of the country failed. The war over, a new period of expansion set in. The charter of the first United States Bank having expired, the second bank of that name was incorporated in 1816, and for nearly a quarter of a century this institution virtually controlled the course of the markets.

Organization of the Stock Exchange. — Speculation in bank stocks had become so extensive that it was necessary to organize the stock market into an exchange, and in