The New York Stock Exchange in the Crisis of 1914 by Henry George Stebbins Noble (romantic books to read TXT) 📖
- Author: Henry George Stebbins Noble
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"This communication is confidential and it is requested that you
do not discuss this matter with any one outside your own firm.
Your answer is expected by bearer, in order that the financing of
these drafts may be facilitated."
By three o'clock, the same afternoon, replies had been received from
thirteen houses that they expected securities on the _Olympic_ and
_Mauretania_, and had also received advices of other securities
forwarded but did not know on what steamers; the drafts to be
presented they said would be approximately for four and one half
millions. Replies from twelve other houses stated it as a possibility
but not a certainty that securities might reach them on the steamers
above mentioned to the amount of about four millions; and, finally,
twelve firms sent replies stating that they either expected no
securities or had made the necessary arrangements to finance what was
coming. These facts--so far below the estimate at first presented to
the Committee--came as a great relief, and were at once taken before
the Bank Clearing House Committee. After a careful discussion with
these gentlemen the Committee of Five again met and sent the following
communication to the firms who had reported that securities and drafts
were about to be tendered to them.
"Members of the Exchange to whom foreign drafts are presented for
payment, are requested to confer with the Committee of Five at 9
A.M. to-morrow, Thursday, the 6th inst., in the Secretary's
office, with details of such transactions in hand, when efforts
will be made to facilitate the adjustment."
The next morning the few firms who had drafts to meet on that day were
provided with the necessary loans by two banks and a trust company at
8 per cent. The amount of securities due from Europe was undoubtedly
large, but the great bulk of it had not been shipped and the shipment
of it was postponed for many weeks afterward. The extraordinary
statement that $40,000,000 or $50,000,000 were about to be landed in
New York is interesting as showing the hysterical state of mind to
which many business men had been reduced at that time. The actual
amount of stocks sold to arrive, against which borrowings had been
effected in New York, was finally shown to amount to $20,000,000. That
this amount was not increased at an embarrassing period in these
important negotiations was due in large measure to the action of the
Committee in calling together the various foreign arbitrage houses,
and securing from them an agreement to cable to their correspondents
in Europe not to make further shipments of securities, because
borrowed stocks could not be returned and deliveries effected. This as
it turned out was an important step in the right direction.
* * * * *
Owing to the sudden and severe pressure of business to which the
Committee of Five was subjected almost from the moment of its
organization, some matters were unavoidably overlooked which should
have had immediate attention. Conspicuous among these was the question
of the rate of interest to be charged upon open contracts which the
action of the Governing Committee had suspended. This matter was not
reached until the meeting of August 4th, when the following ruling
was made:
"The Special Committee rules that interest on the delivery at the
rate of 6 per cent. shall accrue from August 5th on all unsettled
contracts for delivery of securities, except that interest shall
cease when a receiver of securities gives one day's notice to a
deliverer that he is ready to receive and pay for same.
"The Special Committee further rules that sales of bonds on July
30th carry interest at the rate specified in the bond to July
31st, and that between July 31st and August 5th they are 'flat';
interest thereafter to be 6 per cent. on the amount of money
involved, subject to the exemption stated in the previous
ruling."
In view of the fact that no action had been taken up to August 4th and
that a number of private settlements had been arranged in the meantime
the Committee thought it wise to avoid a retroactive ruling, and
imposed the 6 per cent. rate from August 5th. Injustice was done, in
some cases, by permitting a lapse of five days when no interest charge
was required, but this injustice was cheerfully borne owing to the
unusual exigencies of the situation.
On this same day the Committee received the first communication which
indicated that some members of the Exchange had not yet appreciated
the necessities and dangers of the situation. This came in the form of
a letter from the Baltimore Stock Exchange which contained the
following passage:--
"A representative New York Stock Exchange house has been guilty
of going directly to one of the Trust Companies here, and made
offerings of bonds dealt in on both your Exchange and our own, at
a large concession."
The Committee directed the Secretary to make the following reply:--
"In the matter of your letter of August 1, 1914, I am instructed
by the Special Committee appointed by the Governing Committee on
July 31, 1914, to inform you that in the opinion of said
Committee the offering down of securities in places where money
is loaned on securities is most reprehensible, and that members
of this Exchange ought not to engage therein. If possible, I
would like the name of the member of the New York Stock Exchange
who made such offer."
It may be urged in extenuation of the act of the Stock Exchange house
that, August 1st being only one day after the closing, a thorough
appreciation of the gravity of the situation had not yet become
general.
* * * * *
By August 5th the work of the Committee had assumed the form that was
to continue unremittingly until the Exchange reopened four and one
half months later. A constant stream of communications either by
letter or by personal appearance filled the days sometimes from nine
o'clock in the morning until six in the afternoon. The communications
asked advice and made suggestions of every conceivable kind, but,
above all, they were loaded with problems and difficult situations
which had grown out of the breakdown of the financial machinery in
general.
The labors of the Committee in striving to straighten out this
formidable tangle of business affairs led to their issuing a series of
rulings, which were binding upon all members of the Exchange. These
rulings were sent over the "Ticker" whenever they were passed, but on
August 5th it was decided to supplement the "Ticker" by distributing
the rulings in circular form, and thus insure the possession by every
member of a full copy of the entire number. It is a gratifying fact,
both from the standpoint of the Committee and of the Stock Exchange,
that no one of the very numerous rulings was a failure or had to be
rescinded, and that they were all accepted without cavil or serious
criticism by the members. In the relatively few cases where an
indisposition to live up to these rulings was brought to the attention
of the Committee, an appeal from them to loyalty and good judgment
never failed to bring a recalcitrant member to terms.
On this day, August 5th, a special circular was sent out to answer the
constant inquiries as to whether purchases or sales of securities were
in any way permissible during the period of closing. It contained the
following:
"When the Governing Committee ordered the Exchange closed it was
their intention that all dealings in securities should cease,
pending the adjustment of the financial situation and the
reopening of the Exchange.
"It is possible that cases may occur where an exception would be
warranted provided such dealings were for the benefit of the
situation, and in no sense of a speculative character, or
conducted in public. Any member, however, taking part in such
transactions must have in mind, his loyalty to the Exchange,
whether or not he is living up to the spirit of the laws, and
that he is not committing an act detrimental to the public
welfare."
On August 7th the question of the reopening of the Exchange again came
to the front. A letter from Baltimore was received urging that the
Exchange reopen for dealings in bonds only, and the newspapers were
so urgent for some statement on the subject that the Committee
authorized the following:
"The Special Committee of Five will not recommend to the
Governing Committee the reopening of the Exchange until in their
judgment the financial situation warrants it, and as before
stated, ample notice will be given of the proposed opening."
The question of borrowed and loaned stocks came up at this time in two
aspects, one the interest rate to be charged, and the other the
determination of the market price at which such loans should stand.
With regard to the former the Committee ruled on August 5th that
"until further notice, from and after this date, the interest rate on
all borrowed and loaned stocks shall be 6%." In the latter case they
ruled (August 10th) that "borrowed and loaned stocks must be marked to
the closing prices on Thursday, July 30th, 1914, at the request of
either party to the loan."
The effect of this second ruling was to establish the policy of
regarding the closing prices of July 30th, as the market for
securities, so that all loans, whether cash loans or stock loans,
should be figured at this level. The making of any prices below those
of July 30th was to be resisted by every available means, and the
money-lending institutions were to be urged to coöperate by
recognizing them as a basis for exacting margins. As long as this
policy could be successfully carried out the danger of financial
collapse would be averted.
It having been ruled that a lender of stock, by notifying the borrower
of his willingness to take the stock back, could stop the interest
charge on the contract, a considerable demand arose for new stock
loans to replace those in which this privilege had been exercised. The
matter of facilitating these new stock loans was taken up by the Stock
Exchange Clearing House, and this together with the negotiations for
voluntary settlement of back contracts now brought upon the Clearing
House Committee that great volume of work which increased steadily
until the reopening of the Exchange.
One step tending to increase this work was taken on August 11th, when
the Committee ruled as follows:
"Whenever a loaner of stocks gives one day's notice of
willingness to have the same returned and the borrower fails to
so return, the interest thereon shall cease. The Clearing House
of the Exchange is prepared to advise and assist in making new
stock loans and inquiries should be made in person there."
The effect of this ruling was to create a borrowing demand for stocks
at current interest rates and the Clearing House Committee became the
agency through which these stock loans were negotiated.
A further ruling, on August 11th, relative to the interest rate was to
this effect:
"That on all loans of stock made between members after this date
the rate of interest is subject to agreement between the parties
to the transactions, but should not exceed 6 per cent."
By the eleventh of August the question of the growth of an outside
unregulated market began to force itself upon the attention of the
Committee. All the organized Stock Exchanges of the country were
closed, the auctioneers had loyally agreed to abstain from making
sales, the "Curb" or recognized outside market was faithfully
coöperating to prevent dealing, the unaffiliated bankers and money
institutions were refraining even from the private sale of bonds in
which they were interested, so that for a brief period there was a
practically complete embargo on the marketing of securities. Naturally
enough, so absolute a restraint brought on a pressure which was bound
to force a vent somewhere. At first an occasional group of mysterious
individuals were seen loitering in New Street behind the Exchange. A
member of the Committee of Five, who was prone to see the humorous
side of things even in those dark days, remarked as he observed them
late one afternoon "the outside market seems to consist of four boys
and a dog."
Before long, however, this furtive little group developed into a good
sized crowd of men who assembled at ten o'clock in the morning and
continued in session until three in the afternoon. At first they met
immediately outside of the Exchange, but later they took up a position
south of Exchange Place and close to the office of the Stock Exchange
Clearing House. Their dealings increased gradually as time went on and
never ceased entirely until the Exchange
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