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

whom you expect drafts to be presented.

 

     "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