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

Bank Clearing

House Committee, the representatives of the bond houses, and the

Committee of Five. At the first of these meetings the bank Presidents

leaned very decidedly to the views of the Stock Exchange, and it was

decided to postpone any consideration of a departure from the status

quo for at least a fortnight.

 

The general situation remaining very critical all through August, no

further steps were taken until September 8th. By that date a new

factor had intruded itself into the situation. Certain corporate

obligations were about to come due and the refunding of these

obligations, whether in fresh issues of bonds or in short term notes,

was going to make it necessary to withdraw the prohibition against

placing investment securities upon the market. When this necessity

became clear it was decided that some strict supervision and

safeguarding of the sale of bonds and notes was necessary and the

so-called "Committee of Seven," appointed by the bond dealers, were

requested to formulate a plan for this purpose. This Committee of

Seven consisted of members of the firms of: Brown Brothers & Co.;

Guaranty Trust Co.; Harris, Forbes & Co.; Kissel, Kinnicutt & Co.; Wm.

Read & Co.; Remick, Hodges & Co., and White, Weld & Co.

 

On September 9th, this Committee issued the following notice to bond

dealers:

 

     "Your Committee is pleased to report that New York City's

     financial needs have been taken care of satisfactorily, thereby

     considerably clearing the foreign exchange situation which

     existed when our communication of September 3d was sent out.

 

     "The Committee is therefore of the opinion that the placing of

     securities owned by dealers with their private customers should

     be approved where the securities can be sold without disturbing

     the collateral loan situation and your Committee will be glad to

     continue to advise whenever such opportunities arise. Anything

     tending toward public quotations or the creating of the

     impression of an active or even semi-active market would

     unquestionably seriously disturb the loan situation.

 

     "Transactions with bargain hunters should not be countenanced and

     your Committee will not approve the closing of transactions

     coming under this head. Prices should conform to the spirit which

     has prevailed during the past few weeks.

 

     "Recognizing the support which banks and other lenders of money

     have given to dealers in securities, it should be the policy of

     such dealers when securities are sold to apply the proceeds

     toward the liquidation of loans.

 

     "The Committee has considered questions of maturing obligations

     of cities and corporations and believes that the present

     situation does not warrant any attempt to issue long time bonds,

     but that such refunding should be accomplished through short time

     financing.

 

     "The Clearing House Committee and the Stock Exchange Committee

     have expressed appreciation of the coöperation shown by the

     dealers in listed and unlisted securities and if all will

     endeavor to live up to the spirit of the policy thus far adhered

     to we are sure there will be no cause for criticisms on the part

     of the banks or the Stock Exchange Committee.

 

     "Your Committee of Seven will continue to meet in the Directors'

     Room of the Chase National Bank daily, from 11 A.M. to 12 M., for

     advice on any cases where we can be of any assistance whatever."

 

The practical plan adopted was as follows:

 

Bond houses having securities of their own for sale could place them

with their clients at prices approved by the Committee of Seven. All

purchasers and sellers of bonds, acting as brokers only, were required

to file their orders with the Committee of Seven when dealing in

unlisted bonds, and with the Stock Exchange Clearing House when

dealing in listed bonds, and these two agencies were empowered to

determine minimum prices below which sales could not be made.

 

It will be seen that a very important step in the direction of

relaxation of restraints was here taken. Not only was the prohibition

of all dealings which had marked the beginning of the crisis

withdrawn, but prices below the closing sales of July 30th were to be

permitted subject to the supervision of a Committee.

 

       *       *       *       *       *

 

As has already been stated, the Committee on Clearing House had their

hands full from the time the Exchange closed, first with bringing

about the settlement of the contracts of July 30th, and secondly with

carrying on the business of making new contracts for members wishing

to trade in securities at or above the closing prices. It was

impossible, therefore, for the members of that Committee to give

personal attention to the difficult problem of determining the prices

below which listed bonds should not be sold. To meet this difficulty

it was decided that a small additional Committee of men known to be

thoroughly familiar with the bond business should be organized, and

that it should be their duty to control the liquidation of listed

bonds.

 

The carrying out of this plan at first met with a technical obstacle.

The power to appoint a Special Committee rested exclusively with the

Governing Committee of the Exchange; in order to secure action a

special meeting of that body would have to be called; in the early

weeks of September sentiment was still in so critical a state and

every act of the Exchange was so keenly watched that it was feared the

holding of an extraordinary meeting might start rumors and cause

alarm. In view of these considerations the Committee of Five hit upon

the makeshift of inviting three members of the Governing Committee,

who possessed the desired qualifications, to volunteer their services

as an advisory body in the matter of fixing prices for listed bonds.

The three members selected were Messrs. C. M. Newcombe, Vice President

of the Exchange, W. H. Remick, and W. D. Wood.

 

On the 19th of September these three gentlemen cheerfully undertook

the difficult and onerous task urged upon them, and for three months

they abandoned their own private interests and devoted their entire

time to it. Owing to the intelligent and judicious manner in which

they handled the delicate problem of conducting a liquidation in

listed bonds that should at once be effective and yet not lead to

demoralization, they placed themselves among the foremost of those to

whom the financial community owes a debt of gratitude.

 

       *       *       *       *       *

 

By the latter part of September methods, as described above, had been

found for facilitating a restricted liquidation of listed stocks, and

of listed and unlisted bonds. Nothing, however, had been done to make

an outlet for unlisted stocks. The "Curb" market and certain prominent

unaffiliated houses dealing in these securities had loyally played

their part in suspending dealings, but symptoms began to show

themselves of possible revolt, and the Committee of Five set to work

to find a safety valve for this department also. The device of a

supervisory Committee had proven so efficacious in other directions,

that it was naturally turned to in this instance. The circumstances

differed, however, in one particular. The bond dealers had

spontaneously created for themselves the very efficient Committee of

Seven who took their affairs in hand, but the interests involved in

unlisted stocks did not show the same solidarity, and it was necessary

for the Committee of Five to take a hand in initiating action.

 

With this end in view they consulted Mr. Herbert B. Smithers, of the

firm of F. S. Smithers & Co., concerning the feasibility of having a

committee formed to pass upon and control a resumption of dealings in

unlisted stocks. Mr. Smithers was singled out for the reason that he

was a member of the Stock Exchange whose firm was among the most

prominent dealers in these securities, and the prompt and energetic

way in which he undertook the task proposed to him soon convinced the

Committee that they had not erred in resorting to him. He set about

organizing a Committee at once and on September 24th he appeared

before the Committee of Five accompanied by Messrs. A. C. Gwynne, F.

Hatch, A. H. Lockett, and E. K. McCormick. These gentlemen

announced that they were willing to act, with Mr. Smithers as their

Chairman, and a plan for the control of the market in unlisted stocks

was agreed upon.

 

In order to clothe this Committee (which included two Stock Exchange

members, two representatives of prominent outside dealers, and the

President of the Curb Association) with authority, the Committee of

Five directed members of the Exchange to submit proposed dealings in

unlisted stocks to them and abide by their rulings. The Stock Exchange

Committee could, of course, only control its own members, but it being

a fact that a very large part of the unlisted business emanated from

Stock Exchange houses, it was probable that their action would

determine that of unattached dealers. This expectation was, in the

main, borne out, and business in unlisted stocks began to be carried

on actively under the jurisdiction above described.

 

It is necessary to record, however, in the interest of preserving a

correct picture of the happenings of this momentous time, that the

smooth and gratifying operation of the various other Committees, which

sprang into being to handle the numerous problems presented, was not

entirely repeated in this case.

 

The conditions surrounding unlisted stocks seemed on the surface to be

identical with those pertaining to unlisted bonds. In both cases a

business that was partly in the hands of Stock Exchange members and

partly in those of outside concerns was to be presided over by a mixed

Committee representing both interests. In the case of the Bond

Committee of Seven this supervision was accepted and cheerfully lived

up to by practically all concerned. A different situation soon

developed in unlisted stocks. Almost immediately certain individuals

in the business began to assert that the unlisted Committee was a self

appointed body which did not represent the people most concerned, and

that being themselves dealers in the properties the trades in which

were under their supervision, these gentlemen could not be trusted to

act fairly in making their rulings. After much preliminary growling

which vented itself in interviews with the Committee of Five, this

antagonistic sentiment crystallized into a written protest.

 

On October 1st, the following statement was presented to the Committee

of Five.

 

 

     "GENTLEMEN:

 

     "Owing to a general feeling of dissatisfaction amongst members

     and non-members of the New York Stock Exchange resulting from the

     formation of a Committee of Five to supervise dealings in

     Unlisted Securities, we, the undersigned, desire to suggest the

     following recommendations for your consideration:

 

     "_First_: The personnel of the Committee be changed to the effect

     that same be composed of parties not identified as dealers.

 

     "_Second_: That in stocks which have an open or active market,

     transactions may be made without restriction or necessity of

     report to the Committee, when at or above the closing prices of

     July 30, 1914.

 

     "_Third_: That where securities have not had an active or open

     market the bid prices as published in the _Chronicle_ of August

     1st, be accepted as the closing prices.

 

     "_Fourth_: That in the case of securities where the Committee may

     deem it possible to trade at prices below those prevailing on

     July 30th, they establish minimum prices good for as long a time

     as the Committee deems practical, and that a list of these prices

     be furnished to those making application for same."

 

     "We think that if the above recommendations are put into force,

     it will do away with the criticism which has been made as to the

     Committee as at present constituted, and by so doing increase the

     efficiency of this Committee on Unlisted Securities, by securing

     thorough and hearty coöperation on the part of all brokers and

     dealers in these issues."

 

In reply to this appeal the Committee of Five pointed out that

whenever, in other cases, the action of a Committee had been invoked

to supervise the transaction of business, confidence in the integrity

of that Committee had been general and unquestioned. The Committee of

Seven, the Committee on Clearing House, the Committee of Three, and

the Committee of Five themselves had all been vested with dictatorial

powers over a business in which their members were personally engaged.

In order to render trading in unlisted stocks a possibility, at the

time, similar powers must be granted and similar confidence must be

given to some one. The Unlisted Stock Committee were not

self-appointed because they came into being at the instigation and

suggestion of the Committee of Five, and to disband them after they

had started upon their work, substituting other individuals in their

places, would merely stimulate fresh antagonism that might wreck the

entire project. The fact that these men were dealers in outside

properties especially fitted them to pass upon the reasonableness of

the prices that were to be made, and there was no more reason to

question