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

INTRODUCTION

The year 1914 has no precedent in Stock Exchange history. At the

present time (1915), when the great events that have come to pass are

still close to us, even their details are vivid in our minds and we

need no one to rehearse them. Time, however, is quick to dim even

acute memories, and Wall Street, of all places, is the land of

forgetfulness. The new happenings of all the World crowd upon each

other so fast in the financial district that even the greatest and

most far-reaching of them are soon driven out of sight. This being the

case, it has seemed to the writer of these pages that some record

should be kept among the brokerage fraternity of what was so great an

epoch in their history, and that this record could best be written

down by one who happened to be very favorably placed to know the story

in its entirety.

 

Of course the archives of the Exchange will always contain the minutes

of Committees and other documentary material embodying the story of

the past, but this dry chronicle is never likely to see the light

except when unearthed by law courts or legislative committees. It

seems worth while, therefore, to disentangle the essential thread of

the tale of 1914 from the mass of unreadable detail in the minute

books, and put it in a shape where those who are interested may look

it over.

 

This is not an easy task. To differentiate the interesting and the

essential from the mass of routine material is, perhaps, not very

difficult, but to present this segregated matter in a form that will

not be monotonous is much more of a problem. The proceedings of a

Committee that has been in continuous session must, when written down,

partake of the nature of a diary, and to that extent be tiresome

reading. We shall, therefore, have to ask the indulgence of any one

who happens to look into these pages, and beg him to pass over the

form for the sake of the substance. That the substance itself is of

deep interest goes without saying. It was given to the Stock Exchange

to play a great part in a momentous world crisis, and it must be of

profound interest to know how that part was played.

 

Stock Exchanges are a relatively recent product of modern

civilization, and like new comers in every field they are suspected

and misunderstood. The most complex of all problems are economic

problems, and the functions of Stock Exchanges form a most intricate

part of political economy. It has, consequently, been a noticeable

phenomenon in all contemporary industrial society that the activities

of the stock markets have been a constant subject of agitation and

legislative meddling. Most of this meddling has been based upon

ignorance and misunderstanding, but in a broad view this ignorance and

misunderstanding are excusable owing to the novelty and above all the

great complexity of the factors at work. One of the needs of the time,

therefore, is that the public, and their representatives in the

Legislatures, should be enlightened as fast as possible with regard to

the immensely important uses of these institutions, and to the

operation of their very delicate machinery.

 

The World crisis of 1914 forced upon us an object lesson on the

question of speculative exchanges in general which ought to be of

lasting profit. For years agitators had been hard at work all over the

country urging the suppression of the Cotton Exchanges, and claiming

that they contained gamblers who depressed the price of the cotton

growers' product. In the summer of 1914 the dreams of these agitators

were realized. The Cotton Exchanges were all closed and the cotton

grower was given an opportunity of testing the benefits of a situation

where there was no reliable agency to appraise the value of cotton.

The result may be summed up in the statement that the reopening of the

Cotton Exchanges met with no opposition. A similar object lesson was

furnished in the case of the Stock Exchanges. They were all closed,

and for a few weeks some profound thinkers in the radical press stated

that the country was showing its ability to dispense with them. When

the time for their reopening came, however, there was no agitation to

prevent it. On the contrary it was hailed as a sign of the resumption

of normal financial conditions in the United States.

 

This evidence that the experience of 1914 has cast a much needed light

on the public value of speculative exchanges, gives a further excuse

for describing in some detail how the experience was passed through by

that greatest of all these institutions, the New York Stock

Exchange.

 

CHAPTER I THE CLOSING OF THE EXCHANGE

The Stock Exchange is in the second century of its existence and in

that long period of time (long relatively to the number of years

during which Stock Exchanges have been known to the world) it has been

forced to close its doors only twice. The first occasion was the great

panic of 1873, the after effect of civil war when trading was

suspended for ten days; the second came with the outbreak of the world

War in the close of July, 1914. These two remarkable events differ

profoundly in the gravity of the circumstances which brought them

about. In 1873, although the financial disturbance was one of the

greatest the United States has ever experienced, the trouble was

mainly local and did not seriously involve the entire world. The

Exchange was not closed in anticipation of a catastrophe but was

obliged to shut down after the crash had taken place, in order to

enable Wall Street to gather up its shattered fragments. The measure

of this crisis was the ten days during which trading was suspended.

 

Far different from these were the circumstances surrounding July 31st,

On that eventful date a financial earthquake of a violence

absolutely without precedent shook every great center of the

civilized world, closing their markets one by one until New York, the

last of all, finally suspended in order to forestall what would have

surely been a ruinous collapse. The four and a half months during

which this suspension continued stand to the ten days closing of 1873

in a proportion which fitly illustrates the relative gravity of the

two historic upheavals.

 

In the light of these facts we are justified in asserting that the

events of 1914 are the most momentous that have so far constituted the

life and history of the New York Stock Exchange, and consequently that

some record of, and commentary upon, these facts may be of value to

the present members of that body and of interest and profit to its

future members.

 

It is in the nature of panics to be unforeseen, but the statement may

be truly made that some of them can be more unforeseen than others.

The panic of 1907 was preceded by anxious forebodings in the minds of

many well informed people, whereas the Venezuela panic in 1895, being

due to the sudden act of an individual, came out of a clear sky. To

the latter class distinctively belongs the great convulsion of 1914.

While the standing armies of Europe were a constant reminder of

possible war, and the frequent diplomatic tension between the Great

Powers cast repeated war shadows over the financial markets, the

American public, at least, was entirely unprepared for a world

conflagration. Up to the final moment of the launching of ultimata

between the European governments no one thought it possible that all

our boasted bonds of civilization were to burst over night and plunge

us back into mediæval barbarism. Wall Street was therefore taken

unaware, and so terrific was the rapidity with which the world passed,

in the period of about a week, from the confidence of long enduring

peace to the frightful realization of strife, that no time was given

for men to collect their thoughts and decide how to meet the

on-rushing disaster.

 

Added to the paralyzing effect of this unheard of speed of action,

there came the disconcerting thought that the conditions produced were

absolutely without precedent. Experience, the chart on which we rely

to guide ourselves through troubled waters, did not exist. No world

war had ever been fought under the complex conditions of modern

industry and finance, and no one could, for the moment, form any

reliable idea of what would happen or of what immediate action should

be taken. These circumstances should be kept clearly in mind by all

who wish to form a clear conception of this great emergency, and to

estimate fairly the conduct of the financial community in its efforts

to save the day.

 

The conditions on the Stock Exchange, when the storm burst, were in

some respects very helpful. Speculation for several years had been at

a low ebb, so that values were not inflated nor commitments extended.

Had such a war broken out in 1906, with the level of prices then

existing, one recoils at the thought of what might have happened.

Furthermore, the unsettled business outlook due to new and untried

legislation had fostered a heavy short interest in the market, thereby

furnishing the best safeguard against a sudden and disastrous drop.

This short interest was a leading factor in producing the

extraordinary resistance of prices in New York which caused so much

favorable comment during the few days before the closing. It were well

if ill-informed people who deprecate short selling would note this

fact.

 

During the week preceding July 31st, therefore, in the face of a

practical suspension of dealings in the other world markets, the New

York market stood its ground wonderfully. The decline in prices,

though it became violent on July 30th, showed no evidence of collapse.

There was a continuous market everywhere up to the last moment, and

call money was obtainable at reasonable prices. Here was a perplexing

problem when the closing of foreign Bourses raised the question of how

long we should strive to keep our own Exchange open.

 

To close the recognized public market for securities, the market which

is organized and safeguarded and depended upon as a standard of

values, is an undertaking of great responsibility in any community. To

take this step in New York, which is one of the four preeminent

financial centers of the world, involved a responsibility of a

magnitude difficult adequately to estimate. Upon the continuity of

this market rest the vast money loans secured by the pledge of listed

securities; numberless individuals depend upon it in times of crisis

to enable them to raise money rapidly by realizing on security

investments and thus safeguarding other property that may be

unsaleable; the possessor of ready money looks to it as the quickest

and safest field in which to obtain an interest return on his funds;

and the business world as a whole depends upon it as a barometer of

general conditions.

 

Add to this the fact that speculative commitments by individuals from

all over the world, which have been based upon the expectation of an

uninterrupted market, are left in hopeless and critical suspense if

this market is suddenly removed, and it becomes apparent that to close

the Exchange is manifestly to inflict far-reaching hardship upon vast

numbers of people. It is also sure to be productive of much injustice.

In bad times sound and solvent firms are anxious to enforce all their

contracts promptly so as to protect themselves against those that are

overextended; an obligatory suspension of business compels these

solvent firms, in many cases, to help carry the risks of the insecure

ones and deprives the provident man of the safety to which he is

entitled.

 

When such facts as these are duly weighed by the agencies having the

authority to close the stock market, it becomes clear that duty

dictates a policy of hands off as long as a continuous market persists

and purchasers continue to buy as the decline proceeds. This was well

illustrated in the acute panic of 1907 when an enormous open market

never ceased