Stockbroking

“ Persons who conjure nightmares over the practice107 of the banks in loaning surplus funds to stockbrokers are deceiving themselves. Instead of losing by this system, every merchant and manufacturer in the land profits by it in greater or less degree. The stockbroker deals in the bonds and shares of great railway and industrial companies, which, in order to succeed, must be able to sell their certificates to the public and so raise the money necessary to provide the extensions and new construction that are constantly demanded by the public. ”

“ THE DAY ON ’CHANGE, WITH SUGGESTIONS FOR BEGINNERS The stockbroker’s praises are never sung; if he has good qualities, one seldom hears of them. Doctor Parker once defined the Stock Exchange as the “bottomless pit”: Doctor Johnson said a broker was “a low wretch”; politicians vie one with another in painting him a parasite and a social excrescence. Impatient idealists who would take a short cut to perfection assert that he is of no real economic value, and would enact laws to restrain him. ”

“ At the very best, this reserve system is accompanied by high discount and loan rates and by speculation on the stock market. High rates result inevitably from the hoarding of currency which it involves, the supply of loan funds being abnormally diminished, and speculation follows from the concentration in slack times of funds in New York City, which can only be employed in call loans on stock-exchange collateral. Stock brokers regularly take advantage of this situation, speculate themselves and inspire speculation among their customers. ”

“ Bogus stock companies appear from time to time in Wall street. An office is rented and fitted up in magnificent style, a flaring programme is issued, and seemingly substantial evidences of the stability and prosperity of the company are exhibited to inquirers. The stock offered is readily taken up by the eager to be rich crowd. A dividend, most hopefully large, is declared and paid, to stimulate investments, and then, when the market has been drained dry, the bubble bursts, the directors disappear, the office is closed, and the shareholders lose their money. ”

“ The market rose to such heights that the selling price of securities listed on the New York Stock Exchange—to say nothing of the untold billions listed on other exchanges—reached a figure far in excess of all the money in the world. Though it was reiterated time and time again that customers’ accounts with brokers were amply protected, they were of course margined with other securities, and thus the pyramid grew until it staggered the imagination even of those who built it. ”

“ Even the gray-haired wizards of Wall Street who had preached caution for two or three years, finally fell into line with the new order of things, and not only did they plunge into the market long after it had passed the point of safety, but they organized more investment trusts running into billions of dollars, and advertised far and wide for the public to buy their stock and join them in amassing fortunes. They would manage everything, and all the people had to do was to furnish the money. ”

“ Money at call and short notice would represent advances to the bill-brokers and to the Stock Exchange; and though such loans could doubtless be easily called in during normal times, they would be difficult to collect when the money-market was in a turmoil. A greater part of the advances made to the Stock Exchange, though classed as liquid assets, are in reality loans in disguise; for if the banks were to suddenly ask the stockbrokers to redeem their pledged stocks and shares, those gentlemen would be hammered in clusters ”

“ The operations of the ‘bear,’ however, make excessive inflation extremely expensive, and similarly tend to prevent a violent smash because the ‘bear,’ to realize his profits, must become a buyer. The writer has been told by several members of the New York Stock Exchange that they have seen days of panic when practically the only buyers, who were taking the vast volume of securities dumped on the exchange, were those who had sold ‘short,’ and who now turned buyers as the only way of closing their transactions. ”

“ Sooner or later, every dollar taken by the "System" through Wall Street's manipulation of stocks directly affects every man, woman, and child in the United States. Let us, for example, see how a stock slump in New York affects the owner of a small life-insurance policy in Wyoming. The shares of the American and English ocean steamship companies were bought up by the "System" at double their worth and converted into a "trust." New stocks and bonds to a number of times their value were issued and sold to the public. ”

“ No one has ever been able satisfactorily to explain why the prices of all stocks, both good and poor, and even gilt edge bonds, keep an almost even pace in the backward and forward swings, but they do; and thousands of people who have placed their savings in securities that are as sound and safe as a savings bank have viewed with alarm the crumbling market values of their investments, wondering what has happened to their [74] particular stocks or bonds, and if the slumping prices foreshadow a reduction in dividends, or if interest will be defaulted on coupons. ”

“ In years of rising prices, the 'base stock' method causes an understatement of income; for it disregards the gains actually realized through liquidation of low price stock on a high price market. In times of falling prices, it causes an overstatement of income; for it ignores the losses which result from the consumption of high price stock. This method may, like many reserves which business men set up on their books for their own purposes, serve to equalize the results of operations during a series of years. ”

“ Thus, an unusual increase in stock-in-trade may be offset by an equally large increase in current liabilities, and so would indicate that the merchant has done his buying on credit or has used borrowed working capital to increase his stock. The danger of this is apparent in a fluctuating merchandise market, particularly if the swing is generally downward. A comparison of the working capital for the two periods gives useful information. A decrease in the amount of working capital may indicate an investment of it in fixed plant which, if continued, will lead to trouble with current creditors. ”

“ When calls for the payment of balances are large and general, it is impossible for brokers whose loans are called by one bank to transfer them to another. The collateral deposited as security must, therefore, be offered for sale on the stock exchange, and the very stringency which resulted in their being so offered renders their sale, even at slaughter prices, difficult and sometimes impossible. The result at the best is a heavy fall in the prices of stock-market securities, and at the worst a stock-market panic and a suspension of payments by the banks. ”

“ A collapse in the stock, which had been declining steadily, might seriously upset financial conditions all over the country, etc. Well, I weathered that and a couple others until I've got where I'm stumped. A bank has got the right to decide for itself what it wants to lend money on; it can decline a loan on any security or all securities offered, and what are you going to do about it? The trust companies are carrying all they can and besides they're being squeezed themselves. ”

“ The stock-market is crashing, dropping tens of millions a minute, and business men are saying: "Oh, if we only had cash to buy, but we can not get it! The banks will not loan at any price. Rates have gone up to 100 to 150 per [459] cent. and no cash is in sight." No one has money but the big insurance companies and the "System's" votaries.
Suddenly mysterious buying appears—hundreds of thousands of shares of stock, and bonds in million blocks. The crash has been stayed; the panic is over; stocks are bounding upward again ”

“ Then he noticed above all the great white columns of the Atlantic Trust and he realized that these were the first frightened outposts of the army of despair and panic which would come storming at the doors on the morrow. By the morning a dozen banks scattered over the city were besieged by frantic hordes of depositors, a dozen others hastily preparing against the impending tide of evil rumor and disaster.
With the opening of the Stock Exchange the havoc began, for with the threatened collapse of gigantic banking systems orders came pouring in from all over the country to sell at any price. ”

“ The European holders of such securities will be seriously alarmed at the prospects here, and our securities will promptly and indiscriminately be thrown upon the market for what they will bring. A violent decline of prices will be the consequence, of course, here as well as abroad. This will, indeed, in the first place affect those who deal in such securities. People who have borrowed money on their holdings will have to sacrifice them, because they cannot raise the money to protect them. There will, therefore, be a general and ruinous crash in the stock and bond market. ”

“ There were probably few among the active members of the Stock Exchange who did not, at this time, know nearly as much about the causes of the panic as 241even the three men who produced it, and among all the brokers, except those in the employment of the syndicate, only indignation was expressed at the operations of Wolf, Claybank, and Gray. The New York stockbroker is neither a Shylock nor a miser. He is usually a genial, generous sort of fellow, who prefers a bull market to a bear raid. He likes to make money himself and have everybody else make it. ”

“ Here we recognize the close connection that exists between trade and finance. The severe depression on the Stock Exchange so far impaired the market value of stocks and bonds as to make the banks and other money lenders everywhere distrustful of credits, the result being this inability to borrow, or at least to borrow all that was necessary. So it was not surprising that those with insufficient working capital were badly cramped, and had to curtail their business and make sacrifices, or go to the wall. ”

“ Is it possible, I ask, that these speculators have conceived that if they can start a policy in this Government of making every human being feel that whatever stock he possesses is already tainted with utter failure and dishonor and every form of undertaking is likewise, if you please, decreed to its death, that from this result they can frighten the body which we know as the Securities Commission from any further enforcement of the law that compels the showing of a just amount of property behind a stock before it can be issued? ”

“ I knew I was in all human probability doomed to go down before the Stock Exchange had been open an hour the next morning. All Textile stocks must start many points higher than they had been at the close, must go steadily and swiftly up. Entangled as my reserve resources were in the Coal deal, I should have no chance to cover my shorts on any terms less than the loss of all I had. At most, I could hope only to save myself from criminal bankruptcy. ”

“ But securities for which there is always a ready market are such thoroughly good collateral for loans that bankers are glad to get them.
The stockbroker is, in a way, a dealer in merchandise. Whether he buys for investment or for speculation—and remember that the boundary line between investment and speculation is often shadowy and indistinct—he pays cash for everything he buys. He then seeks advances of credit upon his wares just as the merchant does, supplementing his own capital and the deposits (margins) of his customers with call or time money from the banks. ”

“ He is under immense liabilities in various directions and he has many obligations; whereas the stockbroker feels every minute of the day that his first duty is to the bank; the customer who owns the securities in the loan must either deposit sufficient margin or the broker will sell him out, in which case the loan at the bank is paid off. Finally, it may be added that in the October panic of 1907, when merchants’ failures were announced daily, and when certain banks and trust companies closed their doors, not a single failure was announced on the New York Stock Exchange. ”

“ So many monopolies and advantages were granted to the company, that the stock rose, and the national creditor was willing to part with his annuities for stock in the company. The offer was, therefore, accepted, and the government got rid of irredeemable annuities, and obtained seven millions besides, but became debtor to the company. A company which could apparently afford to pay so large a bonus to government for its charter, and loan such large sums as the nation needed, in addition, at four per cent., was supposed to be making most enormous profits. Its stock rose rapidly in value. ”

“ But the stock-broker, as he exists in the every-day life of our community, typifies signally the gambler’s yearning to gain wealth by short cuts, and the monomania which regards as pitiable those who do not possess and display the gewgaws of feverish, fashionable materialism. There are stock-brokers in all the great capitals of the world, but nowhere has the vocation swallowed up the sons of the best people to the extent that it has done here during the last thirty years. ”

“ Germain be preferable to an aristocracy of stock-brokers?
At all events, the law of supply and demand is beginning to redeem the situation, and, if not to restore our moral credit, at least to save the rising generation from falling into the same slough. The stock-broker industry has been overstocked, and the late young capitalists in fur overcoats, with benedictory manners, wear anxious countenances under the stress of that Old World demon, excessive competition. ”