The New York Stock Exchange in the Crisis of 1914 by Henry George Stebbins Noble (portable ebook reader .txt) 📕

reopened. In all probability

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