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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the existence of this market was a safeguard as long as its dimensions
could be kept restricted. An absolute prohibition of the sale of
securities, if continued too long, might have brought on some kind of
an explosion and defeated the very end which it was sought to
achieve.
This irregular dealing, as long as it remained within narrow limits
and was not advertised in the press, furnished a safety valve by
permitting very urgent liquidation. It was, however, continually
accompanied by the great danger that it might grow to large and
threatening proportions. If, in consequence of the facilities which
these unattached brokers were offering, responsible interests should
begin to take part in and help to create an open air market, the very
disasters which the closed Exchange was intended to prevent might be
brought about.
It was necessary, therefore, that the Stock Exchange authorities
should do all in their power to hold the development of this market in
check. With this end in view they not only prohibited their own
members from resorting to it, but they exerted what influence they
could upon others not to lend it their support. The banks and money
lenders were urged not to recognize the declining prices which were
established there as a basis for margining loans, as such recognition
might tend to increase the dealings. One or two large institutions
which, at first, were disposed to finance the operations conducted in
the Street were persuaded to refrain from continuing to do so, and the
press, while giving publicity now and then to the very low figures at
which some leading stocks were quoted, was induced to avoid the
practice of regularly tabulating these prices.
It having become apparent that some members of the Exchange, while
obeying the mandate to do no trading in New Street, were indirectly
helping the practice along by clearing stocks for the parties who
were making the market there, the Committee ruled (August 11th) "that
members of the Exchange are prohibited from furnishing the facilities
of their offices to clear transactions made by non-members while the
Exchange remains closed."
The final outcome was that the New Street market did more good than
harm. It relieved the situation by facilitating some absolutely
necessary liquidation, and never grew to such proportions as to
precipitate disaster, but during the long suspense and uncertainty of
the closing of the Exchange it was a constant and keen source of
anxiety to the Committee of Five.
* * * * *
Toward the end of the first fortnight after the closing of the
Exchange, the communications received by the Committee made it plain
that there were quite a large number of purchasers, attracted by the
low figures reached in the last day's trading, who were ready and
anxious to buy securities at or above the closing prices. Obviously
purchases of this kind by investors who happened to be in a position
to take securities out of the market, promised to bring relief to
interests whose position was critical and thus to fortify the general
situation. This facility could not be extended in the form of a
general permission to the members of the Exchange to make transactions
privately at or above closing prices. To have permitted as far
reaching a relaxation of restraint as this in so critical a time would
have entailed too great a risk. If any one of the eleven hundred
members had proved disloyal in the exercise of so dangerous a
privilege and privately negotiated sales at prices below those of the
closing, the whole plan of sustaining values might have been
jeopardized.
After considering the matter very carefully the Committee concluded
that the machinery and clerical force of the Stock Exchange Clearing
House could be advantageously used to supervise and control
transactions of this character, and, on August 12th, they issued the
following ruling:
"Members of the Exchange desiring to buy securities for cash may
send a list of same to the Committee on Clearing House, 55 New
Street, giving the amounts of securities wanted and the prices
they are willing to pay.
"No offer to buy at less than the closing prices of Thursday,
July 30, 1914, will be considered.
"Members of the Exchange desiring to sell securities, but only in
order to relieve the necessities of themselves or their
customers, may send a list of same to the Committee on Clearing
House, giving the amounts of securities for sale.
"No prices less than the closing prices of Thursday, July 30th,
1914, will be considered."
Thus was established a market in the Stock Exchange Clearing House
which was kept in operation until the complete reopening of the
Exchange. Immense labor and difficulty were brought upon the Clearing
House Committee in order to handle and supervise this unusual method
of trading, and the extraordinary success with which it was carried
through has entitled them to the lasting gratitude of their fellow
members. The business was conducted by having a large clerical force
tabulate the orders received and bring purchasers and sellers together
who were willing to trade in similar amounts and at similar prices. In
order to consummate a trade the Clearing House would notify both
parties, leaving it to them to carry out the delivery and payment, and
requiring them to inform the Clearing House when the transaction had
been completed.
* * * * *
The first effect of furnishing this means for establishing a
restricted market was very encouraging. A very considerable amount of
business began at once to be entered into. Many people with ready
money, who felt that securities had fallen to bargain prices, appeared
as purchasers and relieved the necessities of those who had been
embarrassed by the war crisis. A little later, however, when the
progress of the war took on a more discouraging aspect, this "Clearing
House Market" fell to the arbitrary minimum of the closing prices with
a large excess of selling as compared to buying orders, and the "New
Street Market" grew in proportion. During the darkest days of
depression the prices of a few leading stocks such as U. S. Steel and
Amalgamated Copper dropped in the Street ten points or more below
their July 30th closings, and business in the Clearing House almost
ceased, but in the later Autumn, when the rapid rise in the volume of
American exports began to foreshadow a readjustment in foreign
exchange, the New Street prices rose again to the Clearing House level
and a relatively small business in the "outlaw" market was transformed
into a relatively large business conducted under the supervision of
the Exchange.
It is an interesting detail, worth mentioning, that the ruling of the
Committee quoted above, which established a market in the Clearing
House, used the permissive word "may" in stating that orders to buy
and sell might be sent to that institution. This was soon taken
advantage of by a few individuals who proceeded to conduct private
transactions among themselves. Their excuse was that if transactions
were merely permitted in the Clearing House it became optional as to
whether they should take place there or elsewhere. Within a few days
thereafter the Committee amended the ruling by substituting the word
"must" for the word "may." The great responsibility attached to
promulgating rulings, which were to be the law during this critical
period, is made more apparent when it is realized that the ill
considered use of a single word might bring on unforeseen and perhaps
dangerous consequences.
During the month of August a constantly increasing pressure from every
conceivable direction was exerted to break down the dam with which the
Committee was striving to hold back the natural flow of dealings in
securities. By letter and by personal appearance before the Committee
individuals, in and out of the Exchange, strove to induce them to
countenance transactions at prices below the arbitrary level of the
closing. In addition to this agitation among individuals and firms,
restlessness began to show itself in some of the other Exchanges. At
one time the Stock Exchange of a great neighboring city, which had
permitted restricted dealings exactly similar to those carried on in
New York, wished to have those dealings regularly quoted in the
newspapers; at another time a movement developed on the Consolidated
Stock Exchange to establish some kind of restricted public dealing on
their floor. The Committee of Five were obliged to labor hard and
assiduously to hold this pressure back and keep the dam intact, and
its efforts were ably and loyally seconded by the Committee of the
Bank Clearing House whose great influence was unremittingly exerted to
prevent the danger of premature action of any kind.
On September 1st the Clearing House banks were anxious to determine
what was the amount, measured in money, of securities sold in New York
by Europe and not yet received. The object of obtaining this
information was to know what demand would be made upon the loan market
if, at any time, these securities should be shipped. At the
suggestions of the bankers the Committee of Five summoned before them
representatives of all the houses doing a foreign business and
requested them to send answers, as promptly as possible, to the
following two questions:
_First:_ "Amount due Europe for securities received to date and
not yet paid."
_Second:_ "Amount due Europe for securities already sold but not
received from Europe."
On the following morning answers were handed in showing that the
amount received and not yet paid for was $699,576.11, and that the
amount due Europe on securities sold but not yet received was
$18,236,614.15. The rapidity and accuracy with which this important
information was obtained, without any publicity or disturbance of
confidence, is interesting as showing the efficiency of the intimate
coöperation between the banks and the Stock Exchange.
* * * * *
Among the many agencies for dealing in securities, whose activities
were suddenly cut off on July 31st, the first in importance next to
the Stock Exchanges themselves were the so-called bond houses. These
firms, which included in their number many prominent private bankers,
were dealers on a great scale in investment bonds, and when the
thunderbolt of war struck they were carrying large lines of those
bonds on borrowed money which, in the ordinary course of events, would
have been placed among their numerous clients. When the crisis of
early August had developed, all these houses (some of them not being
members of the Stock Exchange) loyally coöperated in closing up the
market, and abstained from negotiating their securities even in the
most private manner. By the middle of August, however, a number of
them began to show decided restlessness over the embargo upon their
business. The cutting off of their accustomed income, while expenses
continued as usual, was not what influenced them, for this hardship
was shared by all Wall Street, but the enforced carrying of securities
in bank loans at so critical a time when they felt that these
securities might be disposed of became a grievance.
It was urged by many of them that the careful placing of these
securities would be a great aid to the situation because every
investor who made a purchase would facilitate the liquidation of their
loans, ease the strain on the money market, and diminish the volume
of securities for sale. There was undoubtedly much to be said in favor
of this view when looked at from the standpoint of the effect upon the
bond houses themselves or upon the loan market, but there was another
aspect of the question which was less reassuring. If these houses
started, at this terribly critical time, to place their securities
among their clients at declining prices, and if these prices became
known, which they certainly would, no one could foretell what the
consequences might be. Many large institutions, such as Insurance
Companies and Savings Banks, had funds invested in bonds, and many
money lenders held loans upon bonds as security; what would be the
effect upon these interests if a declining market even in unlisted
bonds should be publicly quoted?
Influenced by this grave uncertainty the Committee of Five resisted
the pressure brought upon them by certain representatives of the bond
dealers who raised this question first on the nineteenth of August.
Several of these gentlemen represented important firms and
institutions which were not members of the Exchange, and their freedom
from any obligation to be controlled by the Committee created a
situation which threatened to become strained. In all cases of this
kind, where an independent outsider and the Committee could not come
to an understanding, the practice had become established of appealing
to the Clearing House Bankers to act as a court of last resort. The
banks, with their power to call loans, exerted an influence which
could reach every nook and corner of the business world, and, at the
same time, their immense facilities for feeling the financial pulse
made them the best judges of what risks it was as yet safe to take. A
series of meetings consequently took place between the
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