The work of the Stock Exchange

Preface

This book was originally published in March, 1922. Until the present time, its text has not been revised except in a few minor details.

In the New York Stock Exchange, these intervening years have been extraordinary, not only in respect to the tremendous increase in the scope and activity of the securities market, but also in respect to qualitative and frequently novel changes in its methods of administration. Rarely if ever before in the long annals of the Exchange have so few years produced so wide-spread a transformation. In consequence, the revision of this book has had to be extensive in proportion.

The events of the past few years have thus been such as to render a revision of this study increasingly desirable, and at the same time very effectually to prevent the author from accomplishing it. For, apart from the pressure of other duties, the process of evolution and change occurring within the Exchange has proved too swift and incessant to permit a fresh description of its activities to possess an even relatively adequate finality.

Just as the original text of this book was written in the dull financial period which followed the crash of 1920, so this revision has been prepared in the doldrums subsequent to the panic of 1929. While this has occurred more by accident than design, there is a real advantage in it. Photography is so much easier when the subject sits still. Nevertheless, the growth and development of the Stock Exchange still imposes a difficult problem on the author. Too many novel administrative undertakings, and too significant an economic evolution still lie ahead of America’s premier capital market to render prophecy in this revised edition much easier than in its predecessor. The author has, however, consistently endeavored to indicate such future i PREFACE direction as the continuing evolution of the Exchange seems at this time likely to take. Subsequent annual reports of its President may be depended upon to chronicle such future Stock Exchange developments as cannot now be clearly foreseen.

The past decade will undoubtedly be characterized, in the economic history of America, as the first peace-time period when the United States began to function as a creditor nation. This development, of such momentous consequence to our entire economic and social status as a nation, has inevitably made itself felt with particular force in our leading capital market on the New York Stock Exchange. Largely in order that this old American business institution might be re-interpreted in the light of the new and significant rdle which it has thus been called upon to play, the present edition of this study has been prepared.

J. Epwarp MEEKER.

New York,

October 1, 1930.

Contents

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TH EVOLUTION OF SECUMITION + « + «06 6 kK sw sw mw 8 3

The two main sources. Need of government financing. Financing with the printing press. Early methods of government borrowing. Increasing expensiveness of government. Modern government expenditure. Government securities. Evolution of the stock corporation. America’s debt to corporations. Early British companies. Seventeenth century transportation. The rise of large- scale industry. Financing the first railroads. Growth of the “trusts.” Variety of listed securities today. Chief kinds of securities. Bonds. Shares of stock. “Rights.” Preferred stock. Chief forms of securities. Registered securities. Bearer securities.

Chapter II Organized Security Markets And Their Economic Functions

Antiquity of Markets.—To establish markets is one of the most ancient and fundamental instincts of civilization. From the earliest times the development of industry has necessarily been accompanied, step for step, by the constant creation and expansion of markets which could distribute the products of industry. Even in darkest Africa the natives, still in a state of savagery, are perfectly accustomed to market places, where the buyers and sellers among them can meet to barter with each other their simple products of the chase and the fields. The oldest civilizations of the world had established market places before written history began. The battered temple pylons of ancient Egypt, for instance, show us the fisherman, the weaver, the potter, the poulterer, the farmer, and the metal-worker bartering their several products in market places centuries before currency was invented.

The markets of the classical world, developing from equally crude and primitive trading, attained a broader seope and a higher degree of organization, and played a more significant part in the processes of civilization, than historians seem to appreciate. The famous Agora, long the center of Athenian political life, where the just Aristides and the shrewd Themistocles were ostracized from the state, was originally a market place which had sprung up at the foot of the Acropolis where the seven roads of Attica converged. Long before Solon instituted the Athenian coinage system, the fisherman from the Pireus bartered his fish here for the barley. of the Attican farmers,

The Roman Forum.—Such, too, was the origin of the great Forum of Rome, the most famous spot in classical antiquity. (Plate 2.) For half a thousand years all European civilization was ruled from this place. But long before there was any Roman state and while the Romans were still a small and struggling provincial people, this forum had been a market place for cattle. Before the dawn of history the Campagnian peasant drove his herds into what was later destined to be the political center of the world, to barter them for the goods of other traders who also congregated there. There being no currency, goods were at first valued according to the number of cattle they sold for—a custom which was responsible for the derivation of the Latin word pecunia (money) from pecus (a herd). ;

- But the most remarkable thing about the Roman Forum is that it came again to perform its original function. Centuries have passed since the fall of the Roman Empire. The temples, the triumphal arches, the rostra with the war beaks of the captured fleets of Carthage where Cicero and Antony spoke —all these former symbols of the might of Rome have largely disappeared. The Forum today is a forlorn and desolate spot, marked only by shattered masonry and broken columns. The Roman people itself as a racial entity has long since ceased to exist. But until comparatively recent times the Forum again served as a cattle market—the campo vaccino, as the Italians called it—into which the Campagnian peasants again drove their cattle to sell. Thus this spot between the seven hills of Rome, which started as a cattle market, then became the political center of the world, and finally reverted again to a cattle market, affords a striking illustration of how deeply rooted and fundamental market places often are to mankind.

Marketing in Imperial Rome.—The purchase and sale of debts and money were conducted in imperial Rome, and perhaps even earlier in republican Athens. It is interesting to note that even in ancient Rome the financial and commercial markets were already clearly differentiated. Of the nineteen fora of Rome, those devoted to the purchase and sale of commodities were known as the fora vendalia, while the bankers and usurers (or argentarii) used to take their stand in the fora civilia or judicialia, where political activity centered and where popular assemblies and courts of justice were held. The chief forum of Pompeii reveals to the modern tourist an imposing building where the local money-lenders used to conduct their business. Of the exact extent of financial operations in those days little is really known. But some of the comments upon the daily life in Rome made by the later satirists are of interest to the Wall Street banker and broker of today. “Why,” asks Juvenal’—no feeble “muckraker,” even by modern standards—‘“do you look as woebegone as Creperius Pollio when he goes around offering a triple rate of interest and can find no fool to trust him?” The perennial outcry that the interest rates are “juggled by insiders” for their benefit is at least as old as Persius, who qualifies a sentence with the significant clause, “if by some crafty trick you flog the money market with a whipcord.”

Medieval Markets.—In the Dark Ages which followed -the fall of Rome, civilization was too unstable to permit any considerable development of either financial or commercial markets. But in the succeeding Middle Ages, wandering and periodic fairs sprang up in response to the eternal forces of supply and demand, even in the face of precarious political conditions and a hostile theology. As long as the volume of trading was so small that periodic markets sufficed to handle the business, and as long as the goods to be purchased or sold had to be brought into the market for close inspection piece by piece, fairs proved to be the most adequate form of market attainable. But when dealings grew sufficiently active, a permanent rather than an intermittent form of market became necessary. Also,

(Ainjusy YQ) wnioy ueMOY sy T, “z 9IeIq in proportion as methods of grading and standardization obviated the necessity of inspecting all products piece by piece, wholesale purchasing and selling by contract and by sample became possible, and the permanent market was able to organize itself more definitely as a bourse or exchange.

Thus it came that at the close of the Middle Ages, many of the leading bourses of Europe slowly evolved from the great but periodic and loosely organized fairs of medizeval times. Modern stock exchange practices in many cases can be traced back to an origin in these medieval fairs, where future trading was to some extent employed, money lending and money dealings of many kinds developed, and a rough and ready justice dispensed to contentious buyers and sellers by the “pie powder’’* (or “dusty foot” courts )—the historical forerunners of the governing committees of our modern exchanges. |

Civilization’s Debt to Market Places.—The social life and culture of even the most ancient cities cannot be adequately understood without considering them as market places dependent on the ever-shifting routes of trade. Most of the cities of the ancient and modern world—whether prehistoric Cnossus or modern London—have owed their location and much of their political power and cultural eminence to their usefulness as market places for goods. This fundamental relationship of market places to the wider cultural and political aspects of the cities which have in time grown up about them, is most obvious and apparent in the earlier stage of city development. For it was within their market places that the early cities of history often came to set up the statues of their gods, organize armies, talk politics, hold assemblies, and sometimes rule whole empires.

Although often hidden by the rhetorical flights of orators and patriots, the celebration of military triumphs, and even the more enduring artistic and social achievements of the

2 An Anglicized corruption of the French pied poudré.

superstructural city life built about it, the parent market place of the city steadily performed its less striking but more basic economic functions, The daily exchange of goods among unremembered merchants, the influx of imports, and the outflow of exports, went quietly on. While on the Acropolis Pericles was planning a greater Athenian empire, while Phidias was carving the white loveliness of the reliefs on the Parthenon, or while Plato was discoursing of immortality in the Academy, the purchase and sale of goods proceeded steadily in the Pireeus—in the main unremarked by the historians and unsung by the poets, and yet fundamentally vital to the glory and power of the Athenian state.

On the other hand, once its market place had decayed, the city which so often scorned it, so often viewed it as an objectionable congregation of noisy sharpers and rascals, was smitten as if with a palsy. Indeed, the ever-shifting routes of trade and the stern competition between market places have left a wake across the world of ruined cities, of abandoned or decayed communities, of rotting harbors, whence in better days intrepid tradesmen went down to the sea in ships to satisfy the clamor of the market place for the goods of distant lands and strange peoples.

The mere passage of time has not altered this inexorable economic law. The great cities of the present day exist at the sufferance of supply and demand. As market places they arose, and as market places they will continue to prosper, or else go the way of Venice and Carthage. America is still too young a nation to realize the full significance of her market places. There seems no particular limit set against the continual growth of her cities. Yet we too must cherish our market places, lest in the end we learn the bitter lesson which was forced upon the Phcenicians of Tyre or the Greeks of Corinth.

Evolution of the Market Place.—The earliest and simplest markets were formed by the congregation in one place of buyers and sellers, driven together by the economic necessities of trade. These original markets did not in the beginning specialize, but dealt in all kinds of goods and were located for the most part in the open places of a town. Farmers drove in from the country with foodstuffs to sell, weavers displayed their textiles, and smiths their manufactured articles. In time, money-lenders and merchants in credit also came to take part in the market, and facilitate its operations. Markets of this primitive type, at least in foodstuffs, still exist in some American and European cities, and are common in the bazaars of the immemorial East.

But as communication became easier, population (and hence the consumption of goods) greater, political and social conditions more stable and tranquil, and the volume of trading larger, a process of specialization began. At first, of course, this tendency appeared within the single original market place itself. Traders in textiles took their stand in one part of it, traders in foodstuffs in another. Sometimes, in the early international markets of Europe, the division was not so much according to the commodity as the nationality of the dealers. But with the increase in trading, certain commodities which experienced the heaviest trading tended to break away from the single original market, and form separate markets exclusively for themselves.

At first these specialized markets were often conducted in the open streets. But with a further increase in their transactions they have tended to assume the more dignified title of “exchanges,” and finally to go under a roof with restrictions upon the membership. In the course of the same evolutionary process, the development of trading in contracts for the receipt and delivery of given commodities on the floors of these exchanges or bourses, made it unnecessary to bring into the market place every individual object to be sold. The development of security certificates as evidences of the ownership of a public or a business debt, or of business equities, of course greatly facilitated the development of organized capital markets, or stock exchanges. As time went on, increasingly strict and inclusive rules were adopted to govern the character of trading on the exchanges, and also methods were gradually established for periodically clearing and settling such exchange contracts in the most efficient and economical way.

Prerequisites for the Creation of Exchanges.—Undoubtedly the organized exchange is the safest, the most democratic and the most efficient sort of market known, and represents the highest stage which the evolution of markets has thus far attained. However, an exchange market cannot be readily developed for many commodities or forms of property. Unless an article is widely demanded by consumers and produced in considerable quantities, there will not be sufficient trading in it to justify the creation of an exchange. Moreover, unless it can be readily graded and standardized, trading in it must usually consist only of small retail transactions, and not wholesale transactions by contract on an exchange. Furthermore, many articles, though widely produced and consumed, are too perishable to permit of handling through a highly organized exchange market. Other factors, too, such as the proportion of production or consumption controlled by a single institution, etc., also have a vital bearing on whether or not an exchange can be readily established for the given commodity.

In the gradual and confused process which has attended the higher development of markets, therefore, a considerable number of articles—and in particular, perishable foodstuffs and articles of widely varying quality and relatively small demand—have lagged behind, and have either remained in the old markets made in the street or else have moved back across the sidewalks into the retail stores. Trading in such commodities is usually sluggish and speculation in them occurs on too narrow and limited a scale to afford the fullest economic benefit to the public. In consequence, the risks involved by carrying them are considerable and the profit on their occasional sales for that reason has to be comparatively large.

But with the heavily demanded and more easily standardized commodities, the further evolutionary stage has been attained. As the Hughes Commission report clearly and directly states, “markets have sprung into being wherever buying and selling have been conducted on a large scale. Taken in charge by regular organizations and controlled by rules, such markets become exchanges.” These exchanges—or wholesale markets in staple and carefully graded articles—are commonly called “organized markets” because of the elaborate organization, comprehensive rules, and sometimes extensive mechanical equipment which they develop in the furtherance of their business.

Such organized markets developed during the last century in New York City, not only for securities, but also for cotton, cereals, and other staple commodities. All these organized markets are usually called “exchanges” in the English-speaking countries, although they sometimes take other titles, as for example, the Chicago Board of Trade. Abroad, an organized market is usually called a bourse (in French), or its equivalent in the given foreign tongue (German, boerse; Dutch, beurs; Italian, borsa; Spanish, bolsa; etc.).

The World’s Chief Organized Markets Today.—\Vhen we survey the vast panorama of the world’s present-day marketing machinery, it seems indeed a far cry to the weak and localized marketing organizations of a century ago.

In respect to security marketing alone, there are over 200 stock exchanges in the world today, of varying size and degrees of organization.* There is not a modern civilized country without its stock exchanges, and the number and size of these organizations in any single country are usually an accurate measure of the given nation’s wealth, prosperity, higher economic development and degree of civilization. Indeed, wherever stable government and active business enterprise exist, there is an inevitable tendency to found stock exchanges.

® Appendix ITa.

Even the Russian Bolsheviks, despite their vociferous abhor-_ rence of capitalism, have apparently been forced to reconstitute the Moscow and several other stock exchanges as markets — for private capital.

In the United States alone there are over 20 stock exchanges, two of which are located in New York City. The largest American organized security market is the New York Stock Exchange, and the second largest is the New York Curb Market.

Europe, as the continent so long financially dominant all over the world, has almost three times as many stock exchanges as the rest of the world put together. The Stock Exchange in London was for many decades the greatest institution of its type in the world, and even now that the New York Stock Exchange has come in some respects to rival it in size and activity, it still remains unparalleled in the vast international scope of its listings and dealings. The official market, or “Parquet” on the Paris Bourse has long been not only the headquarters for French government and company security dealings, but also a great market for foreign government loans of all descriptions. The Berliner Boerse has played a great part in the rise of Germany’s industry during the past half-century, and provides the chief market for German securities. The old Amsterdam Beurs—London’s predecessor as the world’s premier stock exchange—is still an investment market of keen sagacity and vast international scope. (Plate 3.) The leading market for Italian securities is in Milan, for Belgian securities in Brussels, and for East European issues in Vienna.

The newer and poorer continents, however, show the same tendency to found stock exchanges as soon as political stability develops, and modern business methods are inaugurated. The United States, indeed, has developed organized security markets on a scale rivalling those of Europe. But the young nations of Africa, Australasia and the Americas, and even the

\ is ayury UvA ~}- ley om COWILEWY | vsune progressive nations of Asia like Japan, have also organized stock exchanges of international importance.

This same trend toward a higher organization of markets could, if space permitted, be instanced with the world’s leading staple commodities. Metals, cotton, wool, wheat, corn, rye, barley, pork, sugar, coffee, rice, silk, rubber—these are only the outstanding commodities which have developed produce exchanges. Commodity exchanges in different parts of the world frequently stand in closer relationship than do the corresponding stock exchanges, since the former deal in the same single commodity purchased everywhere, while the latter deal in different security issues of a more localized demand.

Centripetal Tendencies of Wholesale Trade.— Wholesale commerce has always shown an inherent and irresistible tendency to gravitate into great trading centers or markets. Predominant markets are therefore nothing new. When America was as yet an unknown wilderness, predominantly active and influential centers for commerce and finance successively developed abroad in Venice, Florence, Bruges, Antwerp, Amsterdam, and London, to say nothing of the many other important but more local European marketing centers. Still further back in history, when America had yet to be discovered and when the Dark Ages still brooded over Europe, there were leading markets in the more civilized areas of the Levant and the Far Fast. For many centuries it has been found that the more purchases and sales of a particular commodity gravitate into a single trading market, the broader it becomes and the fairer _ are its prices.

As trade has freed itself from the shackles of uneconomic and frequently mistaken legislation, and as readier means for swift and dependable communication and transportation have been developed, this centripetal tendency of wholesale trade of almost all kinds has been greatly stimulated and increased. The result has been the rise of certain exchanges to a leading position in national and even international trade in particular commodities. If the price of capital is today mainly established on the New York Stock Exchange in Wall Street, so too the price of cotton is made chiefly on the New York Cotton Exchange in William Street, and the price of cereals chiefly on the Chicago Board of Trade. This higher centralization of wholesale trade, whether conducted on exchanges or not, is a normal and desirable economic evolution, and in the long run legislation should not attempt artificially to halt it. More and more, therefore, in this day of steam railways, telephones, telegraphs, radios, cables, stock tickers and airplane mails, there is a steadily increasing trend toward the centralization of markets, and the subordination of all but the great central market places to more purely local operations. This trend does not, however, necessitate the decline of local markets, but merely develops in them local and speeial functions which they are best able to perform.

In the United States, the tendency toward centralization of markets is clearly shown by the Federal tax statistics * on security and commodity sales, according to which about ninetenths of stock sales in this country occur in New York City (either on the New York Stock Exchange—the largest American organized security market, or on the New York Curb Market—the second largest American stock exchange, or in the unorganized New York “over-the-counter” market), while a large proportion of exchange transactions in produce occur either in Chicago on its Board of Trade or in New York on its several commodity exchanges.

Economic Functions of Organized Securities Markets.— The benefits of the higher organization of securities markets into stock exchanges have been recognized throughout the civilized world for at least the past century, not only by practically all economists who have adequately studied the subject, and by every competent governmental investigation ever made concerning them, but also by millions of individuals in their

* Cf. Appendix ITb.

practical endeavor to invest funds. Nevertheless, it is somewhat difficult to classify even the leading beneficial functions of the organized stock exchanges, because of their considerable number and constant inter-relations. Some of these functions are only more intensified forms of what exists more or less in any market, while still others are peculiar to organized markets. Here the attempt will be made to deal with basic functions only, and many minor services will be left for later chapters to elaborate. The analysis is confined to stock exchanges, but in part, of course, applies also to exchanges for produce or commodities.

1. Increased Safety of Dealings.—The higher organization of a stock exchange greatly increases the safety with which security dealings can be carried on, either by its own members or by the public, through its collective regulations, facilities, and discipline. Impossible for practical reasons in an unorganized market, the collective adoption and enforcement of rules are the first task of a stock exchange. Marketing practices upon it are soon standardized, and irregular or fraudulent methods of dealing in securities are sternly stamped out. The membership of the market becomes selective, and persons of improper character or business associations are excluded from it. Forged or fraudulent securities are barred from the market. Insistence is placed upon honest quotations. In these and countless other less important ways, the market in organizing as a stock exchange, becomes a collective force for commercial integrity.

The national effect of this increased safety of dealings created by stock exchanges is to foster security investment, and to develop a broader, firmer, and more active securities market. As its volume of trading increases, the public can deal in the stock exchange through its member-brokerage firms not only more safely but also as a rule more cheaply than in a duller, less organized market. There is, in fact, the same trend toward lowered costs through increased volume of activity in a stock exchange, that Mr. Ford has made famous in automobile production. As a stock exchange grows, it likewise produces a concentration of collective intelligence and current news regarding security values, which in turn increases the safety of dealings in it.

2. Superior Marketability—Most unorganized security markets are intermittent and spasmodic in operation. But, due mainly to its greater safety of dealings, a stock exchange market tends to become continuous, with the ability to facilitate speedy purchases and sales. For this reason, securities listed on a stock exchange are as a rule much more negotiable than those not so listed, even irrespective of the inherent character of the securities themselves. This is perhaps the most basic economic service rendered by stock exchanges, and is of enormous practical significance. Its full value to business can be gauged only by what happens when the vital quality of negotiability is lacking. It is a well-known and yet frequently overlooked axiom in practical business life that “a thing is worth what you can get for it.” Your automobile, for which you paid $2,500 and which you cheerfully inventory at $1,500, is in reality worth to you only what you can actually sell it for, whether it be $2,000 or $200. It is, of course, equally true of securities, that at any given time they are actually worth what you can sell them for, no more and no less. But there is this important difference. There is no organized market for used cars. If you suddenly find you must sell your automobile, you must call on your friends, and your friends’ friends, and skilfully talk automobiles to them. You must consult garages and agencies, and perhaps in addition spend both time and money in advertising your car in the newspapers, in order to find a buyer. In a word, you are forced yourself to create a market in which to sell your automobile.

But when you wish to sell your too shares of United States Steel, or any other listed stock for that matter, you can do so instantly’ and without especial exertion on your part, for the stock market on the New York Stock Exchange is already organized and is ready at all times to absorb your buying or selling orders.

The usefulness of this quality of marketability which stock exchanges confer upon their listed securities has often been demonstrated by the very different behavior of the organized and unorganized security markets during a crisis. The latter type are “fair weather” markets, which do well enough perhaps while rosy optimism reigns, but which have a disconcerting way of vanishing almost completely when the pressure of heavy selling appears. During a drastic decline in security prices, the loosely organized security markets for the time being simply cease to function. The issues ordinarily marketed there are rendered practically unsalable. Under the circumstances, the banks naturally hesitate to lend funds on such non-negotiable security collateral. But on the Stock Exchange, though prices may fall sharply, security holders can always sell at a price, and furthermore they are more quickly furnished with actual sales prices by which to judge the current value of their holdings. At such times, however, many security holders are apt to sell their Stock Exchange securities to protect their unsalable non-listed securities, and in this way the organized market is forced to bear the brunt of the whole selling movement in all securities.

One important reason for this continued negotiability of listed securities arises from the “short sale,” as will be pointed out in more detail.° At times, the only buying power in the stock market consists of the so-called “‘short-interest.”” No one, as a rule, sells short in an unorganized market because of the difficulty of borrowing stock to deliver, and as a result in such a market holders are not protected in a crisis by the existence of a “short interest.” As a rule, also, the superior quotation service of a stock exchange more quickly draws the attention of bargain-hunting investors to securities whose price has fallen, and by mobilizing their purchasing succeeds more easily in stabilizing the market.