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

was, all

through the anxious days of August, to have had the New York market

liquidated as far as it could be without disaster, and the level of

closing prices relatively low. How vastly greater would have been the

task of safeguarding the situation in the face of declining prices in

the "New Street Market" had the closing prices on the Exchange been

ten or fifteen points higher. The truth is that the Exchange was

closed at the very best possible moment. The market was kept open as

long as liquidation could safely be carried on (thus immensely

diminishing the pressure to be withstood during the suspension) and it

was closed at the very instant that a collapse was threatened.

 

The above facts suggest some reflections with regard to the agitation

for governmental interference with or control of the Exchange. The act

of closing necessitated the prompt decision of men thoroughly familiar

with the circumstances in a period of time actually measured by

minutes. If it had been necessary to reach government officials

unfamiliar with details, convince them of the necessity of action, and

overcome the invariable friction of public machinery, the financial

world would have been prostrated before the first move had been made.

If the Exchange had been an incorporated body, and had been closed in

the face of the difference of opinion and possible conflict of

interests that existed at the time, it would have been possible for a

temporary injunction to have been brought against its management

restraining its freedom to meet the emergency. Long before the merits

of such an injunction could have been argued in court the harm would

have been done, and ruin would have overtaken many innocent people.

The full power of a group of individuals thoroughly familiar with the

conditions to act without delay or restraint prevented a calamity

which can safely be described as national.

 

It is a fact, which will probably never be appreciated outside of the

immediate confines of Wall Street, that the Exchange was unexpectedly

thrown into a position where the interests of the whole country were

put in its hands, and that through the prompt and energetic action of

the thirty-six men who faced the awful responsibility on July 31st

financial America was saved. It is true that in saving the community

they saved themselves, but so do the soldiers who win upon the

battle-field, and in neither case is the obligation cancelled by the

selfish considerations involved. When in future the perennial outcry

against the Exchange is being fostered by those whose minds are

exclusively occupied with the evils that are inseparable from every

human institution, let us hope that once in a while some friendly

voice may be raised to remind the world of July thirty-first, nineteen

hundred and fourteen.

 

CHAPTER II THE PERIOD OF SUSPENSION

During the same morning on which the momentous action of closing was

taken the Committee of Five met and elected the President of the

Exchange as their Chairman. The acute crisis was over, the danger of a

cataclysm had been averted, but the situation that remained was big

with problems full of menace and uncertainty.

 

Just what effect the closing of the market would have was a matter of

doubt. On all previous occasions when the facilities of the Exchange

had been inadequate, or had been shut off, an unregulated market had

established itself in public places and proceeded uncontrolled. Thus

during the Civil War, when the volume of speculation had completely

outgrown the limited machinery of the old Board of Brokers, a

continuous market developed partly in the street and partly in a

basement room called the "Coal Hole" and flourished during the day,

while in the evening it was continued in the lobby of the Fifth Avenue

Hotel. This market did more business than was done upon the Exchange

itself, and a few years after the War, many of its members, who had

organized into the "Open Board of Brokers," were admitted to the Stock

Exchange in a body. The suspension of business in 1873 was too brief

to allow of the formation of a market such as the above, but, while it

continued, cash transactions for securities were being carried on

every day in the financial district.

 

Would results such as these obtain on this occasion? Much depended

upon the length of time before the Exchange could re-open, but this in

itself was a problem for which no one could venture a solution. Again,

a vast volume of contracts made on July 30th had been suspended. How

long could the enforcement of these contracts be successfully

prohibited, and above all how long would the banks and financial

institutions which were lending money on Stock Exchange collateral

refrain from calling loans when they were deprived of any measure of

the value of their security? Over its own members the New York Stock

Exchange might exercise a rigid control, and it could safely be

assumed that the other Stock Exchanges of the country would coöperate

with it, but numberless outside agencies existed such as independent

dealers unaffiliated with exchanges, and auctioneers, any of whom

might establish a market. If declining prices were made through media

of this description, and the press felt called upon to furnish them to

the public, the closing of the Exchange might not suffice to prevent

panic and disaster.

 

Oppressed by these considerations, and by an appalling sense of

responsibility, the new Committee of Five began its labors in the

morning of July 31st. The first step decided upon was to communicate

with the Bank Clearing House Committee. Mr. Francis L. Hine, President

of the Clearing House, was invited to meet the Committee of Five which

he did, a little later in the day, and presented to them the

following statement of the action taken by the Clearing House.

 

     "There was a meeting of the Clearing House Committee this morning

     in view of the closing of the New York Stock Exchange. It was the

     opinion of the Committee that the business and financial

     condition of New York and the entire country was sound but that

     the situation in Europe justified extreme prudence and

     self-control on the part of the United States; that the closing

     of the Stock Exchange was a wise precaution by reason of the

     disposition of all Europe to make it the market for whatever it

     wished to sell, and that in this country there was no occasion

     for any serious interruption of the regular course of business,

     either financial or mercantile."

 

After the retirement of Mr. Hine, the Chairman of the Committee on

Clearing House of the Exchange stated that all the checks given to the

Clearing House had been certified, and a notice was thereupon sent out

instructing members to call for their drafts at the usual hour. Thus

all the differences due on the day's transactions of July 30th were

settled, and a first encouraging step was taken. It was also decided

to permit the offering of call money on the floor of the Exchange.

 

The Committee held its second meeting on August 1st and the first of

the long series of problems growing out of the closing of the market

was at once presented to it. A letter from a brokerage house doing

business with Europe was received in which it was pointed out that

"arbitrageurs" who had sold stocks in New York and bought them in

London during the previous fortnight had made their deliveries by

borrowing stock in New York; that the stock purchased in London was

due to arrive on this side, and that the usual process of financing

it by returning the previously borrowed stock had been cut off through

the suspension of unfulfilled contracts. This was likely to lead to

very grave embarrassment because call money had practically

disappeared and houses to whom this foreign stock was consigned might

not be able to meet their obligation to pay for it as it arrived.

There being no arrivals of foreign stock expected that day, the

Committee deferred action, and thus gained time to think out ways and

means of meeting the difficulty.

 

The second problem presented came in the form of a request for

permission to sell securities outside of the Exchange. The firm of S.

P. Pell & Co. had suspended, and a house which had been lending

them money wished to be authorized to sell out the collateral. This

was the first of many cases brought before the Committee, during its

long tenure of office, in which individuals sought for a special

privilege to sell securities they were anxious to market while trading

in general was forbidden. In this case the applicants were referred to

that section of the Constitution of the Exchange in which it is

provided that members having contracts with insolvents shall close out

these contracts in the Exchange when the securities involved are

listed. The Exchange being closed, this provision answered the

question without necessitating any independent action on the part of

the Committee.

 

       *       *       *       *       *

 

From the moment of the closing of the Exchange a growing pressure

arose to determine just when and how it should be re-opened. The

desire for information on this point was widespread, and when the

gravity of the situation became clearer to the community, a great

anxiety developed that the re-opening should, above all, not be

premature. Realizing that the fear of sudden and ill considered action

on this question was becoming dangerous to the restoration of

confidence, the Committee of Five, at its meeting of August 3rd

authorized the following statement.

 

     "Announcement is made by the President of the Stock Exchange, in

     answer to inquiries as to when the Exchange will open, that ample

     notice of such opening will be given."

 

In spite of this notice fear that the Stock Exchange might act

injudiciously lingered for some time longer until the constant

reiteration by its officers of their intention to act only in

conjunction and in consultation with the banks permanently allayed it.

 

By Monday, August 3rd, a steady stream of letters had begun to pour in

upon the Committee asking advice and direction upon any number of

questions raised by the closing of the market, and offering every kind

of suggestion and advice. In addition to this it soon became evident

that interviews would have to be held with large numbers of people for

the purpose of securing their cooperation, influencing their conduct,

and obtaining information. The resolution of the Governing Committee

by virtue of which the Committee of Five was brought into being merely

stated that questions such as these should be considered and reported

back "at the earliest possible moment." Clearly here was an impossible

situation. The immense detail of the work which was beginning to

unfold itself could never be handled by so large a body as the

Governing Committee itself. Realizing that this difficulty must be met

without a moment's delay the Committee of Five requested the calling

of a special meeting of the Governors for twelve o'clock the same day

and presented to them the following resolution, which was unanimously

adopted.

 

     "RESOLVED: That the Special Committee of Five, appointed by the

     Governing Committee on July 31st, be, and it hereby is,

     authorized during the present closing of the Exchange, to decide

     all questions relating to the business of the Exchange and its

     members."

 

This action of the Governing Committee, while it was rendered

necessary by the peculiar requirements of the situation, was

unprecedented in the history of the Exchange, for never before had

such powers and such responsibilities been put in the hands of so few

individuals. It was one of a series of "war measures" by means of

which ends were achieved that would not have been reached in any other

way.

 

Clothed with complete authority the Committee met again in the

afternoon of August 3rd and was at once confronted with a request for

a ruling on the question of how far members were to be restrained from

dealing outside of the Exchange. After a lengthy discussion the

following was approved as their opinion.

 

     "It was the intention in closing the Stock Exchange that trading

     should be stopped and it