gg^ 
 
HOME UNIVERSITY LIBRARY 
 OF MODERN KNOWLEDGE 
 
 No. 5 
 
 Editors : 
 
 HERBERT FISHER, M.A., F.B.A. 
 PROF. GILBERT MURRAY, LiTT.D., 
 
 LL.D., F.B.A. 
 
 PROF. J. ARTHUR THOMSON, M.A. 
 P*OF. WILLIAM T. BREWSTER, M.A. 
 
A complete classified list of the volumes of THE 
 HOME UNIVERSITY LIBRARY already published 
 will be found at the back of this book. 
 
THE 
 
 STOCK EXCHANGE 
 
 A SHORT STUDY OF INVESTMENT 
 AND SPECULATION 
 
 FRANCIS W. HIRST 
 
 EDITOR OF THE ECONOMIST 
 
 NEW YORK 
 HENRY HOLT AND COMPANY 
 
 LONDON 
 WILLIAMS AND NORGATF 
 
IQII, 
 
 . V : f. ; 
 
 HENR.Y JHO^T ANOf -COMPANY 
 
 THE UNIVERSITY P'RESS, CAMBRIDGE, U.S.A. 
 
CONTENTS 
 
 CHAP. PAGE 
 
 INTRODUCTION ......... 7 
 
 I THE EARLY HISTORY OF BANKING AND 
 
 STOCK-JOBBING ....... 13 
 
 II THE LONDON STOCK EXCHANGE. 180C- 
 
 1910 ........... 40 
 
 III LONDON'S FOREIGN MARKET AND THE 
 
 FOREIGN BOURSES ...... 76 
 
 IV WALL STREET 
 
 V GOOD SECURITIES AND THE ART OF IN- 
 
 VESTMENT ......... 137 
 
 VI SPECULATIVE SECURITIES AND MODES OF 
 
 SPECULATION ........ iCi 1 
 
 VII WHY THE PRICES OF SECURITIES RISE 
 
 AND FALL ......... 187 
 
 VIII THE CREATION OF NEW DEBT AND CAP- 
 
 ITAL .... ...... 212 
 
 IX CAUTIONS AND PRECAUTIONS .... 242 
 
 GLOSSARY .......... 53 
 
 BIBLIOGRAPHY .... 255 
 
THE STOCK EXCHANGE 
 
 INTRODUCTION 
 
 IN an old Pennsylvanian almanac of the 
 eighteenth century two qualities were postu- 
 lated for success in business: first, appli- 
 cation or industry, and second, thrift or 
 frugality. The first without the second often 
 leads to nothing. "A man if he knows not 
 how to save as he gets, may keep his nose all 
 his life to the grindstone, and die not worth 
 a groat at last." The old proverb, A fat 
 kitchen makes a lean mil, should remind us 
 moderns that not only excess in eating and 
 drinking, but luxurious and expensive follies 
 of all kinds may drive the hardest worker into 
 debt and difficulty, until after long enjoyment 
 of a good income he ends his career in poverty 
 and dependence. This book is not concerned, 
 however, with the moral value of thrift, or 
 even with the advantages which savings 
 bestow upon the individual. Without sav- 
 ings indeed, or without an inherited fortune, 
 
 7 
 
f 8 THE STOCK EXCHANGE 
 
 no one can feel quite independent. This 
 is a strong and sufficient moral ground for 
 not spending all that one earns. But our 
 particular business is neither with the first 
 process of earning, nor with the second of 
 saving, but with a third. We have to con- 
 sider neither the making nor the saving of 
 money, but its investment after it has been 
 earned and saved. "Investment" is a com- 
 paratively new word; it was not known to 
 Dr. Johnson as a financial term, and many 
 of the investor's facilities are essentially 
 modern. Nor does our subject allow us 
 to treat of all investments, it confines us to 
 that most usual form of investment in Stock 
 Exchange Securities. 
 
 But it is important to bear in mind through- 
 out that the accumulation of wealth, and the 
 reduction of poverty, and all tjie means by 
 which material comforts and conveniences 
 are multiplied, by w^hich the arts flourish, 
 by which letters and learning are spread 
 through all ranks of society, depend ulti- 
 mately upon the thrift and savings of indi- 
 viduals, assisted by the honesty, the efficiency 
 and the peaceful proclivities of their Govern- 
 ments. That the virtue of saving is easy for 
 the rich and difficult for the poor must be 
 
INTRODUCTION 9 
 
 confessed; that it is sometimes morally and 
 economically right to spend all one's income 
 and even to borrow may be admitted. But, ! 
 nevertheless, progress depends upon saving, i 
 Banks and Stock Exchanges, which facilitate 
 and encourage saving, are themselves the 
 fruits of saving; without saving they could 
 not have been called into existence. When 
 capital shrinks, when the community they 
 serve sinks into decay, these institutions like- 
 wise must come to grief. Thanks, however/ 
 to the onward march of invention and science, ' 
 as well as to the growing reluctance of nations 
 to engage in war, progress is now the rule 
 and decay the exception. 
 
 The art of making money is a mystery 
 which cannot be taught; and though many 
 books have been written with prescriptions, 
 for acquiring a fortune, few men have ever! 
 made themselves a penny the richer by! 
 reading them. But the art of keeping money j 
 after you have made it, and of increasing: 
 your surplus capital by judicious invest- 
 ments, can be learnt. Any person with pru- 
 dence and self-restraint can in ordinary times 
 and circumstances secure himself against 
 serious capital depreciation, and obtain a 
 steady dividend on the moneys he has been 
 
10 THE STOCK EXCHANGE 
 
 able to put by from time to time. This 
 was not always so. In fact, until the last 
 century property and trade were so insecure, 
 even in the most settled and civilised coun- 
 tries, that a man who had saved money 
 was often at a loss what to do. He might 
 have to choose between spending it and 
 hiding it away. The miser, who hoarded 
 his gold, because he could not trust it out of 
 his sight, was to be found side by side with 
 the Jew, who lent it out at exorbitant rates 
 of interest, calculating that he would gain 
 in usury from those who paid more than he 
 lost in bad debts. Pirates by sea, brigands 
 on land, sovereigns and nobles who extorted 
 loans only to repudiate them, Governments 
 which supplied their needs by debasing the 
 coinage, or by issuing worthless paper money 
 these are but samples from a big bunch 
 of circumstances that made the accumulation 
 and investment of wealth in olden times so 
 difficult and hazardous. 
 
 But now, apart from the wonderful im- 
 provements in administration, justice, and 
 police, the most skilful and successful burglar 
 can no longer rob a rich man of his fortune. 
 And why? Not because the police are more 
 efficient, not because safes have been per- 
 
INTRODUCTION 11 
 
 fected, not because the art of thieving has 
 decayed. No, simply and solely because the 
 rich man no longer buries his gold. Hoarding 
 is obsolete or obsolescent. It has been super- 
 seded by two special inventions, two marvel- 
 lously ingenious contrivances, which have 
 made the safe disposal of savings incom- 
 parably simpler and easier. These inventions 
 are the Bank and the Stock Exchange, or, 
 shall we say, the cheque and the Stock 
 Exchange security? 
 
 In Great Britain and the United States, 
 in Canada, Australia, New Zealand and the 
 Cape, almost every one who is in the posses- 
 sion of a moderate income, say 300 a year, 
 or more, has a bank account, into which he 
 deposits his earnings and from which he 
 draws his expenses. If he is of a thrifty 
 and saving disposition, he lives well within 
 his income; and when his balance at the 
 bank grows larger than is necessary he will 
 pick out a security and instruct his banker 
 or broker to buy it for him. This security 
 may be a bond with coupons attached. The 
 purchaser may keep the bond at home and 
 cut off the coupons as they become due, 
 sending them to his banker, who will exchange 
 them for money, and add them to his balance 
 
12 THE STOCK EXCHANGE 
 
 at the bank. More usually he will deposit 
 his security at a bank, leaving the banker 
 to look after his coupons and add them to his 
 balance as they become due. Or he may 
 have bought the registered stock of some 
 public corporation or private company, in 
 which case the dividend will be sent him 
 regularly by post. The security, of course, is 
 paid for by a cheque upon his bank, and the 
 bank takes that sum from his balance and 
 hands it over to the broker, who buys the 
 security and takes a small commission for 
 his trouble. A hundred years ago the use of 
 the cheque was hardly understood even in 
 London, and an English country gentleman 
 would have had infinitely more trouble in 
 making a small investment than would nowa- 
 days a remote Australian squatter, or a wheat- 
 grower in the wildest West of Canada. A 
 letter posted to London from a distant village 
 of Saskatchewan in 1910 would arrive with 
 far more certainty, and perhaps not less speed, 
 than a letter posted in 1810 from a village in 
 Sutherland or Argyllshire. A penny stamp 
 with a cheque enclosed in a brief letter of in- 
 structions to the banker, and the thing is 
 done. But the thrifty Scot of 1810 would 
 have had the utmost difficulty, and great ex- 
 
INTRODUCTION 13 
 
 pense as well as risk, in converting a similar 
 amount of cash savings into an interest- 
 bearing security. In 1710 the thing would 
 have been practically impossible. The Bank 
 of England had only just been called into ex- 
 istence, and, in fact, there were no bankers, 
 no brokers, and no Stock Exchange in the 
 modern sense of the word. A man who wished 
 to invest, without personally employing his 
 capital, had practically no choice but to buy 
 property and let it out at a rent, or lend his 
 money on mortgage. Bank of England Stock 
 or National Debt had just begun to be a po- 
 litical speculation for the moneyed Whigs in 
 London. Merchant venturers might risk a 
 large sum in a joint-stock voyage. Otherwise 
 the average Englishman at the beginning of 
 the eighteenth century A.D. was hardly better 
 off for investment than the average Athenian 
 in the age of Pericles, or the average Roman 
 in the days of Cicero. 
 
 But modern inventions have brought dan- 
 gers as well as securities. There are many 
 traps and pitfalls for the would-be investor. 
 If by very hard work a thrifty person saves 
 100 or 1,000 one would expect him to take 
 very good care of it. He need not be in any 
 hurry. It will be perfectly safe, yielding him 
 
14 THE STOCK EXCHANGE 
 
 a modest interest, if he deposits it in a respect- 
 able bank or in the savings department of a 
 post-office. Unfortunately a natural passion 
 for high interest, or the promise of an in- 
 crease in his capital too often makes him 
 an easy prey to some plausible rogue. In a 
 moment of weakness he draws a cheque, buys 
 some unmarketable security, and the greater 
 part if not the whole of his hard-earned sav- 
 ings is irrevocably lost. The wild-cat prospec- 
 tuses, concealed advertisements and inspired 
 tips in which so many newspapers abound are 
 so many traps and pitfalls for the unwary. 
 
 I have written this little book in the hope 
 that at any rate a few thousands of readers 
 may avoid such losses, and that some 
 hundreds of thousands, perhaps millions, of 
 pounds, which might have been sunk in fraud- 
 ulent companies, may flow through honest 
 hands into sound securities and profitable 
 concerns. Wasteful expenditure and riotous 
 living are often truly described as an ill 
 feature of our age and country. But the 
 reckless waste of savings through mere care- 
 lessness, stupidity, or credulity, may be more 
 deplorable than the wasteful expenditure of 
 income; for it often involves helpless widows 
 and orphans in a wretched and unforeseen 
 
INTRODUCTION 15 
 
 yet easily avoidable poverty. With a little 
 attention and common sense these miseries 
 can be guarded against. 
 
 We shall be concerned mainly, as I have 
 said, and as the title of the book implies, with 
 investments in Stock Exchange securities, 
 and more especially in the securities which 
 are bought and sold on the London Stock 
 Exchange. Every Stock Exchange has its 
 own list of securities, and only a small number 
 of stocks are international in the sense of 
 being quoted at the same time on the Ex- 
 changes of London, Paris, Berlin, and New 
 York. But London is the banking and 
 financial centre of the world; nor can any 
 territorial limit be set to British investments. 
 Our merchants and shippers seek profit in 
 every corner of the globe; our investors 
 large and small have interests in every con- 
 tinent, and the London Stock Exchange List 
 is in itself a sort of key to the distribution) 
 of British trade and capital. Moreover, an 
 English book of this description should ap-; 
 peal directly to our American kinsmen in the I 
 United States, to Canadians, Australians, ^ 
 and New Zealanders as well as to the people! 
 now happily drawn together in a United 
 South Africa. It will, therefore, be proper 
 
16 THE STOCK EXCHANGE 
 
 within a small compass to take a wide view; 
 for, as Burke says, "Great empires and little 
 minds go ill together." 
 
 But while this is the main purpose, I have 
 aimed incidentally at bringing to bear upon 
 this subject the teachings of history. The 
 stock markets of to-day are not only more 
 interesting but far more intelligible if we can 
 approach them with the lantern of experience 
 in our hand. Those who understand a busi- 
 ness or an institution best are those who have 
 made it or grown up with it. The next best 
 thing is to learn how it has grown up, and then 
 watch or take part in its actual working. 
 
 With some of the opinions expressed in 
 later chapters the readers will often disagree. 
 Many of them are drawn less from books 
 than from conversation and observation. 
 Every genuine attempt to portray the com- 
 plex conditions of modern business life must 
 fail in a greater or less degree. The colouring 
 will be too bright here, and there too sombre. 
 Something material will be left out. Some 
 expressions may be too strong, and some fac- 
 tors may be over-emphasised. Perhaps I 
 may be accused of a certain bias in favour 
 of the investor and of the general public. 
 And this may well be. At the same time I 
 
INTRODUCTION 17 
 
 would beg to assure the reader that he and 
 I have no better friends than the numberless 
 bankers, brokers, dealers, and promoters of 
 new undertakings who practise callings so 
 useful and so indispensable with the highest 
 sense of honour, the most scrupulous in- 
 tegrity, and the most consummate ability 
 in the great financial and commercial centres 
 of the world. 
 
CHAPTER I 
 
 THE EARLY HISTORY OF BANKING AND 
 STOCK-JOBBING 
 
 STOCK EXCHANGE is an honest word. It 
 means exactly what you would expect. Just 
 as a Corn Exchange is a place where corn is 
 bought and sold, so a Stock Exchange is a 
 place where stocks are exchanged, or, if you 
 like, where stocks and shares are bought and 
 sold. It is as familiar to the modern business 
 world as a bank, and in the great commercial 
 capitals, where credit and speculation are 
 focussed, the two are invariably found to- 
 gether. In London the Stock Exchange lies 
 alongside the Bank of England, and round 
 them within a quarter of a mile are clustered 
 hundreds of British, foreign, and colonial 
 banks, exchange houses, discount houses, 
 and financial institutions of every sort and 
 kind. So in New York. There the great 
 banks and financial houses congregate about 
 Wall Street in a fashion that might point 
 
 18 
 
EARLY HISTORY 19 
 
 rather to their dependence upon the Stock 
 Exchange than to the dependence of the 
 Stock Exchange upon them. Wall Street, 
 in fact, suggests a blend of banking and 
 speculation. 
 
 But two centuries ago there were few banks 
 and no Stock Exchanges. If we go back only 
 a century our London Stock Exchange was 
 but a struggling institution, a weakling in its 
 cradle, despised and disliked by turns, often 
 threatened with extinction by an irate legis- 
 lature. Even banks were only just beginning 
 to prove their utility, and the true principles 
 of banking were understood by few. Nor had 
 any country in the world at that time a really 
 sound system of currency. The Bank of 
 England itself would not and could not give 
 five pounds for a five-pound Bank of England 
 note. Yet after 1790, when the Bank of 
 Amsterdam fell into disrepute it admitted 
 its insolvency in 1795 London had outdis- 
 tanced all competitors as a disposer of capital, 
 a dealer in credit and a manager of money 
 transactions. In a single century the revolu- 
 tion has been accomplished. In this year of 
 grace (1911) there is hardly an important 
 country except China and even China is 
 planning reform which would not be 
 
SO THE STOCK EXCHANGE 
 
 ashamed to own such a law and system of 
 currency and banking as England boasted a 
 century ago, hardly a great city in the whole 
 world whose merchants and investors are not 
 better provided with facilities than were the 
 wealthy citizens of London in 1811. A con- 
 trast so remarkable may well set us thinking 
 and lead us towards an explanation of the 
 problem we have to solve. For the Stock Ex- 
 change does not stand alone; it is not an iso- 
 lated phenomenon: it is an item in the cata- 
 logue of progress, like the post and the rail way, 
 the telegraph and the telephone. Material 
 progress and advancement are made up of 
 many parts all hanging together. Banks and 
 Stock Exchanges are the outward and visible 
 signs of a wonderful improvement in money 
 and credit. But they could not possibly be 
 what they are without one another, or without 
 a hundred other inventions. For example, 
 what would a bank or a Stock Exchange be 
 without a post-office? And what would a 
 post-office be without railways, steamers, and 
 telegraphs? And how could we have had rail- 
 ways and telegraphs if steam power and elec- 
 tricity had not been discovered and applied? 
 But, though the wonderful inventions that 
 have made the modern system of rapid travel 
 
EARLY HISTORY 21 
 
 and instantaneous communication are re- 
 sponsible for an equally wonderful system of 
 international commerce and finance, I do not 
 pretend that a Stock Exchange would be im- 
 possible without the railway and the tele- 
 graph. In fact, the London Stock Exchange 
 was founded before either was known. All 
 that is really necessary to make a Stock Ex- 
 change is a sufficient quantity of stocks and 
 shares and a sufficient number of investors or 
 speculators desirous of buying and selling this 
 sort of commodity. Indeed the philosopher, 
 looking back to the civilisation of ancient 
 Greece and Rome, may well wonder why, 
 with their baths, their theatres, their courts 
 of law, their shops and markets and banks, 
 Athens and Rome never invented or possessed 
 a Stock Exchange. But this is only another 
 way of expressing surprise that the convenient 
 device of translating capital and debts into 
 terms of interest-bearing paper was not in- 
 vented until comparatively recent times. If 
 the scheme proposed by Xenophon for a sort 
 of joint-stock bank at Athens had been 
 adopted, it might easily have led to the 
 foundation of a Stock Exchange. 
 
 Interest-bearing paper, in the sense of Stock 
 Exchange securities, was part of a contrivance 
 
22 THE STOCK EXCHANGE 
 
 of the moneyed interest to finance the Con- 
 (/ tinental wars of William of Orange. But 
 William's was not the first needy Government 
 that would have welcomed any plan for 
 relieving its necessities at the expense of 
 posterity. 
 
 Money, of course, and money-lending can 
 be traced back far beyond the Christian era. 
 Athenian lawyers in the days of Demosthenes 
 argued about mortgages on land and ships. 
 But an investor could not buy a share in a 
 company or lend money to the State by put- 
 ting a talent into Greek bonds. There were 
 no Italian rentes for a Roman citizen to buy 
 with a bag of coins bearing Csesar's image 
 and inscription. 
 
 It may well be asked why the world made 
 no steady progress in wealth until the eight- 
 eenth century, and why since then, in spite 
 of wars and armaments, plagues and famines, 
 earthquakes and conflagrations, capital has 
 accumulated at an ever-increasing rate. I am 
 inclined to think that among the various con- 
 tributory causes an improvement of money, 
 ^ a development of credit, and a multiplication 
 of investments (three closely connected facts) 
 have played a decisive part. The establish- 
 ment of sound and honest money comes first; 
 
EARLY HISTORY 23 
 
 for without this there can be no confidence, 
 and without confidence trade cannot flourish 
 and wealth cannot accumulate. 
 
 When Europe began to wake from the dark 
 centuries that followed the fall of the Roman 
 Empire, Italy took the lead not only in the 
 renaissance of art and learning, but also in 
 commerce. The Bank of Venice is supposed 
 to have been founded in 1157. In the four- 
 teenth century the Florentines forged ahead, 
 and the Bank of the Medici became the 
 financial centre of what little financial inter- 
 course and commerce then existed between 
 the principal nations. In 1401 a bank was 
 founded at Barcelona, and in 1407 the 
 Republic of Genoa, being embarrassed by a 
 multitude of loans, consolidated them into a 
 "mountain" (monte) and made this heap of 
 debt the capital of a bank which was placed 
 under the management of eight directors 
 elected by the holders of the debt or stock. 
 Various cities and territories belonging to 
 Genoa were made over to the bank as secur- 
 ity for the debt. The fame and success of the 
 Italian banks led to the foundation of small 
 lending houses in other countries by Lombard 
 merchants. Quite a number settled in Lon- 
 don, and gave their name to Lombard Street. 
 
4 THE STOCK EXCHANGE 
 
 As the Italian cities declined those of Ger- 
 many and Northern Europe rose, and the 
 Hanseatic League flourished during the fif- 
 teenth and sixteenth centuries. Then Holland 
 shook off the Spanish yoke and forged a new 
 link between freedom and wealth. The fa- 
 mous Bank of Amsterdam was founded in 
 1609. Its prime purpose was to provide a 
 good mercantile currency to remedy the evils 
 of worn and clipped coins, which harassed 
 merchants everywhere and embarrassed spe- 
 cially the trade between Holland and other 
 countries. Already the Dutch were becom- 
 ing the principal carriers and merchants of 
 Northern Europe. The bank established this 
 predominance. It received bad coins at very 
 nearly their intrinsic value, issuing coin of 
 standard weight and fineness in return. At 
 the same time it was enacted that all foreign 
 bills of exchange drawn upon, or negotiated 
 at, Amsterdam of the value of more than 600 
 guilders should be paid in bank money. Thus 
 the value of bills on Holland was raised 
 abroad, and foreign merchants found it con- 
 venient to keep an account at the Bank of 
 Amsterdam, so that they might have legal 
 money to buy foreign bills. The bank was 
 the property of the city and was under the 
 
EARLY HISTORY 25 
 
 control of four burgomasters. It was founded 
 on the principle of providing good money for 
 the finance of foreign trade in the freest and 
 most prosperous commercial port. It was also 
 a bank of deposit, and as such carried to con- 
 siderable perfection the principle of written 
 transfer. Any person who chose to lodge 
 money in the bank might transfer it from 
 his own name to that of another; and the 
 law, as we have seen, required foreign bills of 
 exchange to be paid by such transfers. The 
 device is really the same as that by which a 
 business transaction between two persons who 
 have accounts at the same bank is now settled. 
 One draws a cheque in favour of the other. 
 The amount of money at the bank remains 
 the same, but some of it is transferred in the 
 bank's book from the name of the customer 
 who drew the cheque to that of the other who 
 endorsed it. Thus there is a transfer of money 
 without any actual movement of cash. 
 
 The Bank of Amsterdam flourished for a 
 hundred and fifty years. Its fall was brought 
 about by the misconduct of its directors, 
 preceded and followed by a relative decline 
 in the commerce of Holland, which yielded 
 to the growing strength and wealth of Eng- 
 land. In one of the most instructive digres- 
 
26 THE STOCK EXCHANGE 
 
 sions of his great masterpiece, The Wealth of 
 Nations, Adam Smith explains how the money 
 current in small commercial city states like 
 Amsterdam, Hamburg, and Nuremburg con- 
 sisted largely of foreign coins, many of them 
 worn and debased, and how, in order to rem- 
 edy the inconveniences of these exchanges, 
 banks were originally established in these 
 and other cities, which came in time to serve 
 wider purposes. But larger and more self- 
 contained countries, like England and France, 
 which then depended but little upon foreign 
 commerce, were more troubled by the de- 
 fects of their own currencies than by the bad 
 coin of their neighbours. And so the Bank 
 of England originated not so much from 
 external necessities or the requirements of 
 foreign trade as from the needs of Govern- 
 ment and reasons of State. 
 
 England, indeed, had at first made but slow 
 progress in the arts of economising money and 
 manufacturing credit. The profitable busi- 
 ness of money-changing was monopolised by 
 Henry the First, John, Edward the Third, 
 and some of their successors, who established 
 the office of Royal Exchanger in London at 
 Old Change near St. Paul's and in other 
 towns. This official had the exclusive privi- 
 
EARLY HISTORY 27 
 
 lege of exchanging gold coins for silver, and 
 foreign for English money. The king farmed 
 out the office, or shared in the profits, and the 
 office in each town was called the Exchange, 
 a name still attached to many of the covered 
 markets where merchants meet to buy and 
 sell and speculate in particular commodities 
 such as w r ool, cotton, corn, as well as in stocks 
 and shares. The office, which had fallen into 
 disuse, was revived by a proclamation of 
 Charles the First, much to the dissatisfaction 
 of the goldsmiths, who had been making good 
 profits by culling out heavy coins for melting 
 or for sale to the Dutch mint. The Gold- 
 smiths' Company and the Common Council 
 appealed in vain against this ordinance; but 
 after the Commonwealth was established the 
 business of money-changing fell again into 
 the hands of the goldsmiths. Another trade, 
 that of money-lending, was monopolised by 
 the Jews from the Conquest until their expul- 
 sion in 1290, when the Lombards succeeded 
 to the craft and proved equally usurious, their 
 rates being proportioned to their risks. There 
 was also a legal rate of interest 10 per cent, 
 from 1571 to 1624, then 8 till 1651, and 
 6 till 1714, after which it was fixed at 5 
 for England, and 6 for Ireland. The term 
 
28 THE STOCK EXCHANGE 
 
 "usury" denoted any rate of interest above 
 that which the law sanctioned and enforced. 
 After Charles the First's time the goldsmiths 
 became the principal lenders and dealers in 
 money, though reinforced by the Jews whom 
 Cromwell readmitted to England. Then, 
 as Gilbart, our leading authority on English 
 banking, explains, a new era began in the 
 history of banking. "The goldsmiths, who 
 were previously only money-changers, now 
 became also money-borrowers, and allowed 
 interest on the sums they borrowed. They 
 were agents for receiving rents. They lent 
 money to the king on the security of the taxes. 
 The receipts they issued for the money lodged 
 at their houses circulated from hand to hand, 
 and were known by the name of Goldsmiths' 
 Notes. These may be considered as the first 
 kind of bank-notes issued in England." The 
 banking goldsmiths made way rapidly, and 
 attracted large quantities of cash, which 
 enabled them to advance money to Cromwell 
 and Charles the Second at high rates in ad- 
 vance of the revenues . These ' ' new-fashioned 
 bankers " were sharply criticised by the pam- 
 phleteers, and even by Sir Josiah Child, for 
 draining away money from the country to 
 London and preventing its investment in 
 
EARLY HISTORY 29 
 
 land. Here, in fact, we have a small begin- 
 ning of the modern system of investment by 
 deposit in banks. After the Restoration, it 
 is written, "King Charles the Second being 
 in want of money, these goldsmith bankers 
 took 10 per cent, of him barefacedly and by 
 private contracts. On many bills, orders, 
 tallies and debts of that king they got 20, 
 sometimes 30 per cent, to the great dis- 
 honour of the Government." In 1667, when 
 the Dutch fleet sailed up the Thames, set fire 
 to Chatham, and burnt four ships of the line, 
 there occurred the first recorded "run" on 
 our banks. The alarm was allayed by a royal 
 proclamation promising that the payments 
 to the bankers should be made as usual from 
 the Exchequer. But in 1672 the Exchequer 
 was closed and the king repudiated a debt 
 of 1,328,526 which he had borrowed of the 
 goldsmiths at 8 per cent. This shameless act 
 caused wide distress. "Not merchants only, 
 but widows, orphans and others became sud- 
 denly deprived of the whole of their property. 
 They came in crowds to the bankers, but 
 could obtain neither the principal nor the 
 interest of the money they had deposited." 
 Ultimately the king compounded after the 
 manner of Central American Republics. He 
 
SO THE STOCK EXCHANGE 
 
 refused to repay the principal, but granted a 
 patent to pay 6 per cent, interest out of his 
 hereditary excise. Then after six years he 
 again suspended payment. This Goldsmiths' 
 Debt, or Bankers' Debt, was reconsidered in 
 the years following the Revolution. After 
 some litigation the claims of the creditors 
 were partially recognised. A settlement was 
 reached in 1705, the Government agreeing to 
 pay 3 per cent, (about half the market rate) 
 on the capital with the right to discharge the 
 whole at any time by payment of one half 
 the amount originally lent. 
 
 We are now brought to the foundation of 
 the Bank of England, which coincides with 
 the first chapter in the English History of 
 Stocks and Stock Jobbing a development 
 much hated by the old Jacobites and Tories. 
 They called it "Dutch finance," and their 
 prejudice was justified partly by political, 
 partly by economic, and partly by moral 
 considerations. Politically they hated the 
 Bank and the Stock which it issued, because 
 it supplied the Government with money; for 
 the Government was the Whig Government, 
 standing between the country and the return 
 of the Stuarts. Economically they disliked 
 both Bank and Debt, because easy borrowing 
 
EARLY HISTORY SI 
 
 meant heavy expenditure on war, and an 
 increase of taxes, principally on land, to pay 
 the growing interest on the debt. Morally 
 and socially they hated the new "Dutch" 
 -finance, because it stimulated speculation, * 
 and increased the power of London and of the 
 moneyed interest at the expense of the coun- 
 try gentlemen. But the new system with all 
 its evils had come to stay, and was destined 
 not only to make many fortunes and bank- 
 ruptcies, but also to give a marvellous im- 
 petus to the growth of credit, trade and 
 capital. What happened has been often told, 
 and for our purpose it is enough to retell the 
 story very briefly. 
 
 During the seventeenth century our kings 
 generally borrowed by means of Exchequer 
 tallies, which were acknowledgments of sums 
 paid by private lenders to the Exchequer. 
 The tally was a willow stick four or five feet 
 long and about one inch square. There were 
 notches on one side to express the amount of 
 the debt, and identical descriptions of the 
 payment were written on two of the three 
 vacant sides. The stick was split in half 
 through the notches. One half was given to 
 the person making payment into the Ex- 
 chequer; the other half of the counter tally, 
 
32 THE STOCK EXCHANGE 
 
 or counter foil, was kept at the Exchequer as 
 a check. Here, it will be seen, we have at 
 once the origin of the modern cheque system 
 of our banks; and in the United States the 
 early spelling of "check" is still adhered to. 
 There were two kinds of tallies Tallies of 
 Pro and Tallies of Sol. The Tallies of Pro 
 were like a modern cheque on a banker, and 
 served as a voucher to the holder at the Ex- 
 chequer of account. This Tally was so called 
 because it was struck "Pro," i. e. for the bene- 
 fit of the person named. Tallies of Sol were 
 acknowledgments of sums paid (solutum) 
 into the Exchequer, and were issued when 
 loans were raised from the public; while 
 Tallies of Sol (as Mr. Joseph Burn points out 
 in his excellent lectures on "Stock Exchange 
 Investments") came into play when public 
 subscriptions were not forthcoming, being 
 issued in lieu of cash for the payment of ordi- 
 nary disbursements by the Government. 
 The Tally system was not abolished till 1783, 
 and served the purpose of modern Treasury 
 bills enabling the Government to borrow 
 small sums for short periods. But the action 
 of Charles the Second in repudiating the 
 Goldsmiths' Debt naturally made tallies sus- 
 pect, and increased the difficulty of borrow- 
 
EARLY HISTORY 33 
 
 ing. Hence after the Revolution the Parlia- 
 ment of William had to find money for foreign 
 wars by other methods, and in 1692 a million 
 was raised by life annuities. 
 
 In 1694 the Bank of England was founded. 
 It was the project of William Paterson, a 
 clever but speculative Scot, who afterwards 
 came to grief in the Darien enterprise. It was 
 the first of our Joint-Stock Banks, and though 
 not the first of our Joint-Stock Companies it 
 gave the first opportunity for general dealings 
 in Stocks and Shares. The scheme com- 
 mended itself to Montagu a Whig statesman 
 of great financial ability as a means of 
 raising money; and the Government granted 
 a charter to the Bank on condition that the 
 Bank should lend the whole of its original 
 capital (1,200,000) to the Government, re- 
 ceiving in return (1) 96,000 annually, i. e. 
 8 per cent, interest plus 4,000 for manage- 
 ment, (2) the right to issue notes to the extent 
 of 1,200,000 and (3) the right to do banking 
 business. In plan, therefore, and original pur- 
 pose the Bank of England resembles the Bank 
 of Genoa rather than the Bank of Amsterdam. 
 At first all went well. The tallies, which had 
 been at a heavy discount, soon rose to par. 
 But in 1696 the Bank failed in an attempt 
 
34 THE STOCK EXCHANGE 
 
 to carry out a recoinage, the currency then 
 being in a very bad state. A suspension of 
 payments followed with a depreciation of 
 bank notes and Exchequer tallies; but the 
 Bank's credit was restored with the aid of the 
 Government. In the following year the Gov- 
 ernment had to borrow another million, which 
 was added to the Bank's capital with a cor- 
 responding increase of the note issue. 
 
 In spite of the enmity of private banks the 
 Bank of England was well supported by the 
 moneyed interest. Its early issues were fully 
 subscribed, and in 1709, when the capital was 
 doubled, the whole of the new stock over 
 two millions, was issued at a premium of 15 
 per cent, and subscribed in four hours. 
 
 The National Debt meanwhile was grow- 
 ing in various ways. In 1698 the New East 
 India Company received a charter on the con- 
 dition that its capital was lent to the Govern- 
 ment. By 1711 the funded Debt had grown 
 to 11,750,000, all of which was held by 
 public investors as annuities, bank stock, 
 East India Stock, etc., at various rates of in- 
 terest. But there was also a huge unfunded 
 debt which had grown to 9 millions in 1710. 
 A new Joint-Stock Company called the South 
 Sea Company was promoted with the aid of 
 
EARLY HISTORY 35 
 
 Harley and St. John to take over this Debt. 
 In return for this it was granted trading 
 privileges, and to provide interest on its 
 9 millions of capital stock the Government 
 assigned various duties on wine, and beer and 
 tobacco, etc. For ten years the company 
 engaged in the African Ocean trade and other 
 commercial ventures with little success. Then 
 Sir John Blunt one of the directors, a cun- 
 ning and plausible scrivener, hatched another 
 scheme, and by corrupt means won over 
 Aislabie the Chancellor of the Exchequer, 
 and various other ministers and members of 
 Parliament. The idea was taken from the 
 famous Mississippi Company scheme of Law, 
 which had burst over France with such 
 disastrous ruin a year before. Undeterred 
 by this example, Blunt boldly offered to take 
 over the whole National Debt, amounting 
 to 31 millions, if the Government would 
 guarantee 5 per cent, interest for seven years 
 and 4 per cent, thereafter in perpetuity. For 
 some time the Bank of England and the South 
 Sea Company bid against each other for the 
 favour of the Government, but eventually the 
 company's offer was accepted. The company 
 then opened its first subscription of a million 
 in 100 stock at 300. Blunt opportunely 
 
36 THE STOCK EXCHANGE 
 
 circulated a report that Gibraltar and Port 
 Mahon would be exchanged with Spain for 
 some places in Peru, whereby the South Sea 
 trade would be protected and enlarged. 
 Persons of all ranks crowded to South Sea 
 House, and the stock went off like hot cakes. 
 This was in April. By midsummer there was 
 a second, and then a third subscription, 
 accompanied by promises of more and more 
 prodigious dividends. The city went mad; 
 stock-jobbers ran from coffee-house to coffee- 
 house inviting subscriptions to the great 
 bubble and to little bubble companies of all 
 descriptions. It was the first joint-stock 
 mania. "All distinction of party, religion, 
 sex, character, and circumstances," writes 
 Smollett, the historian of the time, "were 
 swallowed up in this universal concern. Ex- 
 change Alley was filled with a strange con- 
 course of statesmen and clergymen, church- 
 men and dissenters, Whigs and Tories, physi- 
 cians, lawyers, tradesmen, and even with mul- 
 titudes of females. All other possessions and 
 employments were utterly neglected; and 
 the people's attention wholly engrossed by 
 this and other chimerical schemes, which were 
 known by the denomination of bubbles. 
 New companies started up every day, under 
 
EARLY HISTORY 37 
 
 the countenance of the prime nobility. The 
 Prince of Wales was constituted Governor 
 of the Welsh copper company: the Duke of 
 Chandos appeared at the head of the York 
 buildings company: the Duke of Bridgewater 
 formed a third, for building houses in London 
 and Westminster. About a hundred such 
 schemes were projected and put in execution, 
 to the ruin of many thousands. The sums 
 proposed to be raised by these expedients 
 amounted to three hundred millions sterling, 
 which exceeded the value of all the lands in 
 England. The nation was so intoxicated with 
 the spirit of adventure, that people became 
 a prey to the grossest delusion. An obscure 
 projector, pretending to have formed a very 
 advantageous scheme, which, however, he did 
 not explain, published proposals for a sub- 
 scription in which he promised that in one 
 month the particulars of his project should 
 be disclosed. In the meantime he declared 
 that every person paying two guineas should 
 be entitled to a subscription for one hundred 
 pounds, which would produce that sum 
 yearly. In one forenoon this adventurer re- 
 ceived a thousand of these subscriptions; and 
 in the evening set out for another kingdom." 
 The third South Sea subscription was 
 
38 THE STOCK EXCHANGE 
 
 1,000 for 100 stock, and 2,000 was 
 touched before September, when the stock 
 began to fall. By September 29 it had sunk 
 to 150. Several eminent bankers and gold- 
 smiths, who had lent great sums on it, were 
 forced to stop payment and abscond. "The 
 dbb of this portentous tide was so violent that 
 it bore down everything in its way; and an 
 immense number of families were over- 
 whelmed with ruin." Walpole called in the 
 aid of the Bank, but its resources were un- 
 equal to the emergency. The king was sum- 
 moned back from Hanover; Parliament was 
 assembled, and Walpole laid before it a wise 
 scheme for restoring the public credit. So the 
 curtain closed on this strange scene of national 
 infatuation. 
 
 But it must be said, for the credit of Parlia- 
 ment, that a thorough inquiry was instituted 
 and some severe punishments meted out. In 
 the salutary reaction that followed, the Brit- 
 ish public began to appreciate the value of 
 gilt-edged securities, and the British Govern- 
 ment, under the prudent guidance of Walpole, 
 practised peace and economy. The public 
 credit responded marvellously. In Queen 
 Anne's reign 6 per cent, had been the usual 
 rate of interest on public loans. Within six 
 years of the bubble in 1726 a 3 per cent. 
 
EARLY HISTORY 39 
 
 Government stock in 10 lottery tickets was 
 issued at par, and actually sold up to 107 in 
 1739. In the wars with Spain and France 
 (1740-1747) 30 millions more in new loans at 
 various rates were added to the National 
 Debt; but in the ensuing peace credit speed- 
 ily revived, and in 1749 a successful scheme of 
 conversion was effected by which the interest 
 on the greater part of the debt was reduced 
 to 3 per cent. 
 
 Two funds were established, one being 
 called the 3 per cent, consolidated annuities. 
 Thus were created the world-famed British 
 "Consols" (i. e. consolidateds) which, through 
 many fluctuations of credit, retained "the 
 sweet simplicity of 3 per cent." for more 
 than a century. After a short interval of 
 peace London's stock and share markets were 
 again flooded with Government paper by 
 the Seven Years' War (1756-1763) which 
 added 54 millions to the National Debt in 
 lottery loans, bearing interest at 3, 3|, and 
 4 per cent, apart from the prizes. During the 
 succeeding peace some debt was paid off, and 
 some was converted from 4 per cent, to 3 
 per cent. But in 1776 the long war of Ameri- 
 can Independence broke out, and ten years 
 later, when its financial consequences became 
 
40 THE STOCK EXCHANGE 
 
 clear, the National Debt was found to have 
 been nearly doubled, having increased from 
 128 to 244 millions, while the charge for in- 
 terest had more than doubled, having risen 
 from 4,471,000 to 9,302,000. 
 
 At the Peace of Versailles, in 1783, the 
 funded debt consisted of 107,000,000, 3 per 
 cent, consols, 37,000,000 3 per cent, reduced, 
 32,000,000 Four per cents., and 17,000,000 
 Fives, while a further 42 millions was owing 
 to the Bank, to the East India and South Sea 
 Companies, and to the Civil List. After 
 another breathing space the country was 
 launched upon the most disastrous and ter- 
 rible of all our wars, the war of the French 
 Revolution. Just before its commencement 
 in 1793 the Funded Debt amounted to about 
 228 millions with an interest charge of about 
 7f millions, and the unfunded or floating debt 
 was 16 millions, with an interest charge of just 
 under half a million. At the conclusion of 
 peace in 1815, according to the computation 
 of Robert Hamilton, the National Debt had 
 run up to the appalling total of 758 millions 
 and the charge for interest and annuities was 
 27,652,000. No wonder that in this last 
 period the London Stock Exchange had be- 
 come an important institution, or that great 
 
EARLY HISTORY 41 ' 
 
 fortunes had been made by contractors and 
 loan-mongers of all descriptions. No wonder 
 either that the country was submerged in 
 pauperism and its Government fast approach- 
 ing a state of bankruptcy. 
 
 From this brief account of the National 
 Debt, which must have absorbed a very great 
 part of the National Savings from 1700 up 
 to the year 1815, we may return to Stock 
 Jobbing, with which, as has been seen, the 
 
 | origin and expansion of our national war 
 loans are so intimately and even inseparably 
 associated. It has been shown how during 
 the South Sea Bubble speculation ran through 
 
 ! all ranks of London Society. But the boom 
 
 ' in South Sea Stock had, as it were, a gilt- 
 edged basis in the favour and support of the 
 Government. Harley, as Chancellor of the 
 Exchequer, had been Governor, and one of 
 the original directors was St. John (Viscount 
 Bolingbroke). In the huge swindle of 1720 
 
 |Aislabie, the Chancellor of the Exchequer, 
 and Lord Sunderland, who represented the 
 Ministry in the House of Lords, were deeply 
 implicated. No wonder, then, that rank and 
 fashion led that wild rush of speculators to 
 Change Alley. A ballad-monger of the time , 
 tells how the stars and garters vied with the j 
 meaner rabble 
 
4* THE STOCK EXCHANGE 
 
 "To buy and sell, to see and hear 
 The Jews and Gentiles squabble," 
 
 and how "the greatest ladies" 
 
 "Plied in chariots daily, 
 Or pawned their jewels for a sum 
 To venture in the Alley." 
 
 In the reaction that followed stock-job- 
 bing suffered discredit; but it was a genuine 
 profession, meeting a new and genuine need. 
 The public debt proved to be unextinguish- 
 able : the public funds grew so fast and fluctu- 
 ated so rapidly under the influence of wars 
 and rumours of wars that the quick-witted 
 gentry of Change Alley and the coffee-houses 
 found plenty of occupation. Private banks 
 and joint-stock companies were also multiply- 
 ing. Even during the mushrooii growths of 
 the South Sea Boom two sound insurance 
 companies which still exist the London As- 
 surance Corporation and the Royal Exchange 
 Assurance found recognition and capital. 
 It may be asked where all the money came 
 from. The answer is to be found in the fact, 
 upon which we have been insisting, that these 
 new interest-bearing securities gave employ- 
 ment to wealth that had previously lain idle. 
 The practice of hoarding is not easily extir- 
 
EARLY HISTORY 43 
 
 pated, and only yields to the gradual growth 
 of confidence in the credit of Government, of 
 banks, of brokers, and of established com- 
 panies. It says much for the statesmen, the 
 merchants, the bankers, and even the Stock- 
 jobbers of eighteenth century London that 
 money came out so freely in this very first 
 epoch of investment. At the Revolution one 
 fugitive is said to have carried his fortune 
 of 20,000 away with him in a strong box. 
 A generation later he would have taken it in 
 bank-notes or negotiable stock. 
 
 The jobbers were long in housing them- 
 selves. At first they frequented the Royal 
 Exchange and the Rotunda of the Bank, then 
 the coffee-houses and the streets Cornhill, 
 Lombard Street and especially Change Alley 
 and Sweetings Alley. Old Jonathan's Coffee- 
 house was a favourite resort for those who pre- 
 ferred indoor comfort to the rough and tumble 
 and exposure of Change Alley. It was burnt 
 down in 1748. But New Jonathan's took its 
 place, and, in July 1773, "the brokers and 
 others at New Jonathan's came to a resolution 
 that, instead of its being called New Jona- 
 than's it should be called The Stock Exchange, 
 which is to be wrote over the door." From 
 this time London may be said to have pos- 
 
44 THE STOCK EXCHANGE 
 
 sessed a Stock Exchange in the modern sense, 
 though much business in the public funds was 
 still transacted at the Bank, and dealings in 
 foreign securities still centred in the Royal 
 Exchange. The members of Jonathan's paid 
 a small subscription and eventually drew up 
 rules, and appointed a committee of manage- 
 ment. But daily admission could be gained 
 by a payment of sixpence. At length the 
 membership of brokers and jobbers outgrew 
 the accommodation, and at the end of the 
 eighteenth century it was determined to pro- 
 vide new quarters. A building was erected 
 close to the Bank of England, in Capel Court, 
 and opened in March 1802 with a membership 
 of about five hundred. But this belongs to 
 our next chapter. Here it only remains to 
 add that the first Stock Exchange book was 
 published in 1761. Its title ran: Every man 
 his own broker, or a Guide to Exchange Alley. 
 The author, J. Mortimer, was an economist of 
 some merit. He had been British Consul in 
 Holland and had seen the workings of the 
 Amsterdam Bourse and the arbitrage business 
 between London and Amsterdam, which was 
 already considerable in the middle of the 
 eighteenth century; for the Dutchmen were 
 fond of speculating in the London market. 
 
 
EARLY HISTORY 45 
 
 Mortimer seems to have lost money in stocks, 
 and the main purpose of his book is to warn 
 the investing public and the Government 
 against the jobbers. He therefore gives 
 minute instructions to would-be investors in 
 Government funds, showing them how to deal 
 directly with the officials at the Bank of Eng- 
 land. We shall have occasion in another 
 chapter to refer to this interesting book, which 
 ran to many editions. It shows that much of 
 the slang and many of the arts and tricks of 
 speculation were already in vogue before the 
 formation of the London Stock Exchange. 1 
 
 1 Before proceeding with the next chapter, readers un- 
 familiar with the subject should read the glossary at the end 
 of the book (p. 253). 
 
CHAPTER II 
 
 THE LONDON STOCK EXCHANGE, 1800-1910 
 
 AT the desire of the Royal Commission of 
 1877 the officials of the London Stock Ex- 
 change supplied a short summary of the 
 origin and objects of the institution. The 
 secretary stated that the earliest minutes on 
 the subject were dated December 1798, and 
 that these records referred to the existence 
 of a Stock Exchange in 1773 apparently 
 the Stock Exchange Coffee-house in Thread- 
 needle Street, to which any person was ad- 
 mitted on payment of sixpence. Already 
 these rooms were known as "the Stock Ex- 
 change," or "the House"; and although 
 transactions in the public funds were also 
 carried on in the Rotunda of the Bank of 
 England "there is little doubt that the 
 Stock Exchange Rooms afforded a ready 
 market for the operations of the bankers, 
 merchants, and capitalists connected with the 
 floating of the numerous loans raised at that 
 period for the service of the State." It is 
 46 
 
LONDON STOCK EXCHANGE 47 
 
 on record, continues this official authority, 
 that the rooms were under the control of a 
 "committee for general purposes," though 
 the expenses of management were defrayed 
 by the voluntary subscription of frequenters. 
 The functions of the committee were from the 
 first, as they have since remained, "judicial 
 as regards the settlement of disputed bar- 
 gains, and administrative as regards rules for 
 the general conduct of business, and for the 
 liquidation of defaulters' accounts." 
 
 Early in 1801 the rooms were felt to be 
 inadequate for the increased business arising 
 out of the war loans, and, moreover, "it be- 
 came apparent that the indiscriminate admis- 
 sion of the public was calculated to expose 
 the dealers to the loss of valuable property." 
 This led to the establishment of a strict 
 and privileged monopoly, resembling in some 
 respects that of the law brokers correspond- 
 ing to solicitors and jobbers to barristers. 
 A group of Stock Exchange men, having 
 acquired "a centrical situation," or site, in 
 Capel Court, raised a capital of 20,000 in 
 400 shares of 50 each and founded a new 
 institution, to which the affairs of the old 
 rooms were ultimately transferred. The first 
 stone of the new building was laid in May 
 
48 THE STOCK EXCHANGE 
 
 1801. A committee for general purposes, con- 
 sisting of thirty proprietors, was formed, who 
 elected members of the new Stock Exchange 
 by ballot, at a subscription of ten guineas 
 each. The deed of settlement (March 27, 
 1802) recites that, whereas the Stock Ex- 
 change in Threadneedle Street, where the 
 stock-jobbers and stock-brokers met, had 
 been found inconvenient, W. Hammond and 
 others had secured a site, and had "caused to 
 be erected a spacious building for the trans- 
 acting of buying and selling the public stocks 
 or funds of this kingdom." By the same 
 deed the management, regulations, and direc- 
 tion of the new Stock Exchange were vested 
 in a committee consisting of thirty members, 
 or subscribers, to be chosen annually by ballot 
 on March 25, while the treasury ship and man- 
 agement of the building were placed under 
 the sole direction of nine trustees and man- 
 agers (separate from the committee) as repre- 
 sentatives of the proprietors. By this deed of 
 settlement the London Stock Exchange was 
 governed till 1876, when a new deed (sub- 
 stantially reproducing the original deed) 
 was executed. The new Stock Exchange 
 was opened in March 1802, with a list of 
 about 500 subscribers. The regulations of the 
 
LONDON STOCK EXCHANGE 49 
 
 committee, whose main purpose was to ensure 
 the prompt and regular adjustment of all 
 transactions, were first codified and printed 
 in 1812. They have, of course, been amended 
 and enlarged from time to time to meet the 
 new conditions and expansion of business. 
 
 The constitution of the Stock Exchange 
 remains substantially unaltered, being still 
 vested in two bodies the managers and the 
 committee, the former representing the share- 
 holders or proprietors, and the latter the 
 members or subscribers. The nine managers 
 (who are elected in threes for five years by 
 the shareholders) fix the charges for admis- 
 sion of new members and appoint most of the 
 officials, excepting, of course, the secretary to 
 the committee. They also look after the 
 building. 1 The committee, on the other hand, 
 control all Stock Exchange business, and 
 administer the rules and regulations; they 
 adjudicate all questions between, and com- 
 plaints against, members, They inquire, and 
 decide, whether their rules have been com- 
 plied with by governments and companies 
 which ask for settlements or for official quota- 
 tion of their stocks in the Stock Exchange 
 
 1 There are 20,000 shares (12 paid) in the Stock Exchange 
 and 416,700 debentures outstanding. 
 
50 THE STOCK EXCHANGE 
 
 List. Their number is thirty, and they are 
 elected every year by the members. At the 
 beginning of their term the committee elect 
 a Chairman and Vice-Chairman. They also 
 elect every March, before they go out of office, 
 all the old Stock Exchange members who wish 
 to be re-elected, membership being granted 
 for one year only. Any member can object 
 to any other member being re-elected, but 
 this is a very unusual incident. The great 
 principle upon which the committee' acts, 
 and to which most of its regulations are 
 directed, is the inviolability of contracts. It 
 has power to suspend- or expel any member 
 for breaking its rules, or for non-compliance 
 with its decisions, or for dishonourable con- 
 duct. A member of the London Stock Ex- 
 change is prohibited from advertising or from 
 sending circulars to any but his own clients. 
 He is also forbidden to belong to any other 
 Stock Exchange, or "bucket shop," or other 
 competing institution. New members are 
 now compelled to become proprietors by 
 acquiring at least one Stock Exchange share, 
 paying a heavy entrance fee and an annual 
 subscription of forty guineas. Yet the pre- 
 cautions against impecuniosity are inade- 
 quate. Defaults are far too common. The 
 
LONDON STOCK EXCHANGE 51 
 
 membership of the Stock Exchange had risen 
 to about 800 in 1845. In 1877 the members 
 exceeded 2,000, and there were over 500 share- 
 holders or proprietors. In 1910 the member- 
 ship was 5,019. The average dividend on the 
 shares of the Stock Exchange had been over 
 20 per cent, during the first seventy-five 
 years of its existence; the dividend in 1909 
 was 10 a share. At first, as appears from 
 the deed of settlement, the new Stock Ex- 
 change was confined to transactions in the 
 funds. The jobbers in foreign stocks were 
 excluded, and resorted mainly to the walks 
 of the Royal Exchange. A certain amount 
 of business in the funds continued for some 
 time in the Rotunda of the Bank of England. 
 Nor did the Alley men cease to ply their 
 trade hi the streets and coffee-houses. But 
 after the close of the Napoleonic wars foreign 
 loans and mining and canal shares were in- 
 troduced into the new Stock Exchange; and 
 as all these offered higher rates of interest at 
 a time when the yield on Government loans 
 was falling, the Stock Exchange obtained a 
 large accession of business from the specula- 
 tive public. This led, it is stated, "to a 
 proper apportionment of apartments for the 
 dealing in English and foreign stocks." One 
 
52 THE STOCK EXCHANGE' 
 
 room was appropriated to British and an- 
 other to foreign government stocks, and one 
 corner of the foreign room was assigned to 
 dealings in "the shares and scrip certificates 
 of the numberless companies which from 
 time to time have been introduced." The 
 years 1824 and 1825 and 1826 saw a great 
 outburst of speculation, which found vent in 
 the flotation of many joint-stock projects as 
 well as in an output of loans to the new re- 
 publics of South America. This epoch will 
 repay closer study. It marks the beginning 
 of cosmopolitan finance, and even in a very 
 rapid survey we can afford to pause and re- 
 flect upon occurrences which have been 
 repeated or substantially reproduced at in- 
 tervals in all parts of the world. 
 
 In "a complete view of joint-stock com- 
 panies" formed in 1824 and 1825, the author, 
 Henry English, enumerated 626 joint-stock 
 projects which would have required for their 
 fulfilment a capital of 372 millions sterling! 
 Their objects were various and for the most 
 part useful. Some companies were to be 
 formed for insurance and investment; others 
 for the construction of canals and railways. 
 Many were to be local gas companies, and 
 there were mining flotations of all sorts. 
 
LONDON STOCK EXCHANGE 53 
 
 Between 1818 and 1832 and especially in 
 1824 and 1825 there were also issued in 
 London quite a number of foreign loans in 
 all perhaps some 40 millions sterling were sub- 
 scribed in this way. According to a parlia- 
 mentary paper, foreign government loans to 
 a nominal value of 34 millions were con- 
 tracted for by London houses at 23 millions, 
 while foreign mining companies and similar 
 liabilities, with a deposit of 10 per cent, paid, 
 amounted to 24 millions. A table before me 
 gives twenty-six foreign government loans in 
 all for the period 1818 to 1832, and shows that 
 of these only ten continued to pay interest in 
 1837. Of the ten survivors several defaulted 
 a little later. All the good loans (and some 
 of the bad ones) were issued either by N. W. 
 Rothschild or by T. Wilson & Co. Among 
 the curiosities of the list one notices that 
 Neapolitan credit was much better than 
 Prussian; for while Rothschild floated a 
 Prussian 5 per cent, loan in 1818 at 72, 
 the Neapolitan Fives six years later fetched 
 92^. In 1825 Ricardo sold Greek Fives 
 to the public at 56|. In 1821 Haldimand 
 issued a Spanish 5 per cent, loan at 56, 
 and two years later J. Campbell & Co. 
 issued another at 30 J! London was badly 
 
54 THE STOCK EXCHANGE 
 
 hit by the Spanish American Republics. 
 In 1824 Baring Brothers contrived to issue 
 1,000,000 Buenos Ayres Sixes at 85. Colum- 
 bia actually raised, at 6 per cent., nearly 7 mil- 
 lions sterling of nominal debt, and at prices 
 ranging from 84 to 88J. Questioned after- 
 wards as to the causes of the boom and of the 
 crisis which succeeded, a Governor of the 
 Bank of England said he thought the specula- 
 tive movement was started by the conversion 
 and reduction of Government 5 per cents, in 
 1823. These reductions "prompted almost 
 everybody to entertain any proposition for 
 investment, however absurd." The excite- 
 ment, he thought, "was further promoted 
 by the acknowledgment of South American 
 Republics by this country, and the induce- 
 ments held to those governments, in which all 
 classes of the community in England seem to 
 have engaged simultaneously." One foreign 
 mining company was described later at its 
 winding-up as "one of the projects ventured 
 in a period when it was thought the golden 
 age had been realised, and when, without a 
 proper consideration for the consequences, 
 the public too eagerly encouraged the schemes 
 of the day." Commercial credit and the ex- 
 changes were at the same time disturbed by 
 
LONDON STOCK EXCHANGE 55 
 
 speculation in iron and other raw materials; 
 and finally a crisis was precipitated by the 
 failure of Messrs. Pole & Co., an important 
 London house with large country connec- 
 tions. The strain must have been enormous; 
 for according to James Wilson, the first editor 
 and proprietor of the Economist, the total 
 subscribed, (i. e. promised) for foreign loans, 
 mines, etcl in 1824-5 was 48 millions, and for 
 home railways, banks, and other projects 126 
 millions, on which altogether only 35 millions 
 were paid up ! No wonder that a crash came. 
 After a decade of depression and quiescence, 
 when stock and share speculation took a new 
 start in connection with railways, the "little 
 go" for the sale of letters of allotment was 
 held in the Royal Exchange before the mer- 
 chants assembled, until at last the swarms of 
 the "little go" or "Alley men" became such 
 a nuisance that the beadles had to drive them 
 out. In the height of this speculation, it is 
 recorded such was the distrust of steam 
 locomotion some of the "dabblers" made a 
 price of one farthing per share for 50 shares 
 of what afterwards turned out to be one of the 
 most important of English railways. In the 
 boom years of 1834-6, joint-stock companies 
 with a total capital of 135 millions were 
 
56 THE STOCK EXCHANGE 
 
 formed, divided into more than 2j million 
 shares. New railway companies accounted 
 for over 69 millions of capital with 590 thou- 
 sand shares, banks for 23 millions capital 
 and 670 thousand shares. Allowing an aver- 
 age of 3 for deposit on each share, the total 
 sums raised were only just over 1\ millions. 
 The market recovered slowly from this out- 
 put of liabilities. But in the course of time 
 the importance and profit-making capacity 
 of the new iron roads began more and more to 
 fill the public mind. The first railway boom 
 was fairly launched in 1834-5. Within twelve 
 months over 600 distinct projects for railway 
 lines in the United Kingdom were placed be- 
 fore the public, demanding upwards of six 
 hundred millions of money. But as five or 
 six competing companies often asked parlia- 
 mentary powers for practically the same line, 
 the real capital required was very much 
 smaller. The actual capital of the British 
 lines, which were incorporated by statute in 
 1844-5 and were in course of construction, 
 was only 55 millions. Foreign railroad 
 schemes also poured in from all quarters eager 
 for British capital, and these again would 
 have absorbed from seventy to a hundred 
 millions sterling. As might have been sup- 
 
LONDON STOCK EXCHANGE 57 
 
 posed these projects, actual and anticipatory, 
 led to a great demand for, and a still greater 
 speculation in, iron, which more than doubled 
 in price and so magnified the difficulties oc- 
 casioned by the inadequacy of available 
 capital and credit. Ten years later, in a 
 warning article as to the probability of an- 
 other crisis on the analogy of the previous 
 one, which appeared in the Economist in 
 October 1845, the promotions and flotations 
 of the three periods of speculation were 
 thus compared and summarised in millions 
 sterling: 
 
 Home Schemes. Foreign. Total. Paid up and Deposits. 
 
 1824-5 156 43 204 35 
 
 1834-7 129 21 150 22 
 
 1844-5 612 79 691 78 
 
 At the time when this account was made 
 up the premiums on railways, which had not 
 yet secured an Act of Parliament, could not 
 be estimated at less than 40 millions, which 
 represented "increased wealth hanging on 
 opinion." Mr. Wilson's warning forecasts 
 proved correct, and the Stock Exchange 
 panics and liquidations, which took place in 
 the late autumn and winter of 1845-6, cul- 
 minated in the money panic and banking 
 crisis of October 1847. 
 
 An anonymous but well-informed writer 
 
58 THE STOCK EXCHANGE 
 
 affords us a glimpse of the Stock Exchange in 
 1845, at the height of the railway boom: 
 
 "The share market, which, till within the 
 last two years, was occupied with four or' 
 five distinct brokers and a number of jobbers, 
 whose means of business were very small, 
 has now become the grand focus of specula- 
 tion and legitimate business. English and 
 foreign government securities are quite de- 
 serted for the superior attractions of English 
 and foreign Railway scrip, which, of all shades 
 and character, has been freely distributed 
 throughout the United Kingdom. 
 
 "The broker and jobbers who had the first 
 'pick' of the market, must have made con- 
 siderable sums by their commissions; since 
 the other brokers and jobbers, who paid more 
 attention to the other public securities, were 
 almost discarded by their former customers, 
 who, in many cases, were led to believe that 
 the * English and Foreign Stock' broker and 
 jobber could not transact share business. 
 Indeed, it appears to have been some time 
 before the veil of mystery was removed, 
 or that the public arrived at a clear under- 
 standing of the subject. In the meanwhile 
 the old and respectable members of the House 
 had the mortification to see persons, who 
 
LONDON STOCK EXCHANGE 59 
 
 formerly had been of little reputation on the 
 Exchange, and in many instances even their 
 own clerks, carrying on an extensive and 
 profitable business in shares; and as long as 
 this lasted there was no end to the success 
 of those who had the sway of the market. 
 Gradually dealings were dispersed and spread 
 among the whole of the fraternity, and then 
 followed the height of speculation, engen- 
 dered by the general operations of the chief 
 part of the community. The shares of every 
 new company coming out at a premium, 
 induced rich and poor to thrust themselves 
 into the market; and the schemes that are 
 every day resorted to in order to gain posses- 
 sion of letters of allotment which may bring 
 a price, if the shares be. paid on, are of the 
 most multifarious, and, in many instances, 
 fraudulent description. 
 
 "Such has been the increase of business 
 in consequence of the speculation in shares 
 that the accounts which used formerly to 
 occupy not more than one or two days at 
 the outside, nearly exhaust the week, before 
 differences can be paid, transfers made, and 
 the books of the brokers regularly adjusted. 
 The extent of the transactions has increased 
 beyond measure; night and day clerks are 
 
60 THE STOCK EXCHANGE 
 
 engaged in arranging sales and purchases, and 
 conducting the correspondence which is re- 
 quired between their masters and principals. 
 "Innumerable instances are stated of 
 persons, who a few months ago were not 
 worth anything, having made their thousands 
 of pounds, and several of these are junior 
 members of the House, who were fortunate 
 enough to deal in those shares which have 
 attained high premiums. Considering the 
 time and attention required in share business, 
 the brokers do not get too well paid; although 
 there may be every reason to suppose that 
 many are obtaining immense incomes from 
 it by the inordinate influx of commissions. 
 This will, we think, be seen when we state 
 that the principal [part] of the business be- 
 ing transacted in the new scrip, upon which 
 not more than l to 3 has been paid, they 
 only realise the small commission of Is. 3d. 
 per share. If they buy or sell largely of 
 Brighton, Birmingham and Grand Junction, 
 they get the larger commission; but these 
 descriptions have not been dealt in to any 
 comparable extent with the issues of the new 
 companies. Brighton and South Eastern 
 have undergone considerable fluctuation dur- 
 ing the mania; but then, as the business was 
 
LONDON STOCK EXCHANGE 61 
 
 in a few hands, it cannot be supposed to have 
 extended its beneficial influence over the 
 whole market." 
 
 S6me fortunate brokers were said to have 
 made 3,000 and 4,000 a day by their busi- 
 ness, but not, of course, by commissions. 
 By lucky speculations they might easily have 
 made much larger amounts. One fortunate 
 individual outside the House, who held 
 largely of Churnett Valley scrip before 
 the announcement of the sanction of the 
 Board of Trade to the project, "sold at the 
 best price of the market when the announce- 
 ment was made, and netted by his one coup 
 27,000." Very large sums were made 
 and lost in London and York, and Direct 
 Northern two of the leading "fancies" 
 which were dealt in more for speculation 
 than investment. 
 
 The number of American and foreign lines 
 introduced on the London Stock Exchange 
 added to the excitement prevailing. But, 
 compared with the madness of 1825 and 1826, 
 there was this much to be said for the rail- 
 way mania of 1844-5 viz. that the new lines 
 were undertakings of vast utility and national 
 importance, and though viewed at first with 
 much jealousy and distrust, were already 
 producing results which the most sanguine 
 
6* THE STOCK EXCHANGE 
 
 liad never counted on. Consequently, writes 
 one sober critic, speculation in railway shares 
 was encouraged not only as an investment 
 likely to yield high rates of interest, but 
 also for the benefit it confers on mankind 
 at large. "The feasibility of the numerous 
 schemes, and the elements of success they 
 present, have, under these circumstances, 
 raised an unanimous feeling in their favour, 
 which, sanctioned as they have been by 
 Government superintendence and Govern- 
 ment interference, could not but contribute 
 to feed the growing desire of the public to 
 embark in them. The warnings that have 
 been given have, therefore, not been re- 
 garded, and the mania has gone on to an 
 extent almost unprecedented even by the 
 great South Sea bubble itself." 
 
 The following criticism made by the same 
 writer in 1845 was fully justified by events: 
 
 "The feasibility of the greater number 
 of the schemes brought before the public 
 has encouraged the example of starting com- 
 peting lines; while, in addition, foreign pro- 
 jects of the most questionable description 
 have come out, the shares of which have 
 maintained high premiums for a few days, 
 and have then sunk into utter worthlessness. 
 
LONDON STOCK EXCHANGE 03 
 
 Among all this incongruous mass there must 
 be part that will ripen to decay; and hence, 
 while the stability of the system itself is 
 acknowledged, it is that stability which has 
 fostered many of the sham companies of the 
 present day. When the crash does come it 
 will be terrible. The best of the securities 
 will feel it for a time, though restoration to a 
 proper value will, no doubt, follow when the 
 market shall have settled down and the web 
 of ephemeral speculation be cleared away." 
 
 It is interesting to learn from the same 
 source that the swindling and blundering 
 which marked the flotation and management 
 of British railways in those early days were 
 gradually corrected by the criticisms of a 
 few honest and competent journals. 
 
 Morier Evans, the historian of the crisis 
 of 1847-8, compared the prices of certain rail- 
 way securities in the height of the boom 
 (August 1845) and the depth of the depres- 
 sion (October 1848). Thus in August 1845, 
 Great Western rose to 236, and fell in October 
 1848 to 65J-, London and North-Western 
 rose to 254 and fell to 99; Midland rose to 
 183 and fell to 64. Northern of France rose 
 to 7f and fell to 5f . Scandals of all kinds 
 surrounded the promotion of our railways. 
 
64 THE STOCK EXCHANGE 
 
 Extortionate sums were paid for worthless 
 land. The financiers, the lawyers and all 
 concerned had such pickings and perquisites 
 that we can hardly understand (even after 
 allowing for the good work of the critics) how 
 the main English lines emerged with their 
 finances on a basis so much sounder than 
 similar undertakings in many other countries* 
 
 Capital was collected from all parts of the 
 country, and the transactions in railway 
 shares were so voluminous and universal that 
 the ordinary channels were quite inadequate. 
 Clerks at small salaries in banks and mer-' 
 chants' counting-houses openly proclaimed 
 themselves buyers and sellers of the various ' 
 favourite shares, just as if they represented. 1 
 their employers. Not only in London, but 1 
 in Manchester, Leeds, Liverpool, Glasgow,' 
 Dublin, Hull, Edinburgh and Bristol, rail- 
 way share markets were established, and the 
 business of the City was for a time equalled 
 if not surpassed by the provinces. As an 
 anxious contemporary put it on the eve of 
 the crisis: "The farmer is now as deep in 
 railway shares as the merchant, the merchant 
 as the banker; and the whole circle of society 
 is entangled in the mania." 
 
 The long list of failures that occurred in 
 
LONDON STOCK EXCHANGE 65 
 
 1847 and 1848 attests the correctness of this 
 analysis. But with every succeeding decade 
 the stability of our banks and merchant 
 houses and of all our financial institutions 
 has steadily grown with the increasing wealth 
 and intelligence of the nation. In the pages 
 of Bagehot and other writers we may read of 
 a strain on credit which caused extraordinary 
 measures to be taken by the Bank of England 
 in 1857 as a result of the American panic, and 
 again (for the last time) hi 1866, after the 
 failure of Overend Gurney. The Baring 
 Crisis of 1890 was brought about by over- 
 confidence in the pace at which Argentina's 
 potential wealth would be developed and ex- 
 ploited by British capital. In the two pre- 
 vious years over 60 millions of British capital 
 had been lent to Argentina, but in midsummer 
 1890 a loan of 5 millions for the Argentine 
 Government missed fire. A revolution and a 
 run on the banks followed. Mr. Burn says: 
 "The fall in South American securities was 
 very heavy, and the situation from August to 
 October was very delicate. There was a de- 
 cided undercurrent of opinion that several 
 houses, notably Baring's, had dangerously 
 increased their acceptances." At the weekly 
 meeting, on Thursday, Nov. 6, of the Di- 
 
66 THE STOCK EXCHANGE 
 
 rectors of the Bank of England the Bank 
 rate was unaltered, though the reserves stood 
 at only 11 millions; but on the following day 
 it was unexpectedly raised to 6 per cent., and 
 the Stock Exchange began to be alarmed. 
 However, the settlement on the following 
 Tuesday passed off without trouble. But on 
 the Wednesday three banks were reported to 
 be in difficulties. On Thursday it was learned 
 that the Bank of France had lent 3 millions 
 of gold to the Bank of England; on Friday a 
 meeting was held at the Bank to consider 
 the affairs of Messrs. Barings, and on Satur- 
 day (Nov. 15) it was definitely announced 
 that a scheme had been carried through to 
 enable them to meet their liabilities. The 
 firm's liabilities, which amounted to 21 mil- 
 lions sterling, were liquidated in the course 
 of four years; and the effects of this sup- 
 pressed crisis remained for a long time. 
 
 A speculative recovery was powerfully 
 stimulated by the wonderful discoveries and 
 skilful exploitation of the Rand mines in the 
 Transvaal by cosmopolitan groups of finan- 
 ciers, among whom Cecil Rhodes was the 
 most popular figure. This Napoleon of Cape 
 Town and Kimberley became the hero of our 
 Stock Exchange. Skilfully blending finance 
 and politics, he for a long time worked in 
 
LONDON STOCK EXCHANGE 67 
 
 alliance with the Dutch party at the Cape, 
 keeping on good terms with the Boers, and 
 simultaneously by a handsome contribution 
 to Parnell's funds he contrived to secure 
 Irish Nationalist assistance for the Chartered 
 Company. Nevertheless his reputation in 
 London was that of an empire-builder. The 
 Press fell under his sway, and the London 
 Stock Exchange responded enthusiastically 
 to all the financial schemes, good, bad and 
 indifferent, of the new South African leader 
 and his fellow magnates. But the enormous 
 fortunes made in the nineties under the 
 Kruger regime did not satisfy. Those who 
 had received much wanted more. Those 
 who had shorn one flock of investing lambs 
 wanted to shear another. Those who had 
 become millionaires on a sudden objected to 
 pay any toll whatever to the Government, 
 and conceived the idea of turning out the 
 Boers and of so producing another Kaffir 
 boom which would raise their wealth beyond 
 the utmost dreams of human avarice. In 
 pursuance of this plan fictions of all sorts 
 were circulated. Old President Kruger, ob- 
 stinate and unenlightened, but a quite human 
 mixture of shrewdness and stupidity, virtue 
 and vice, was represented as a monster of 
 tyranny and corruption. The strength and 
 
88 THE STOCK EXCHANGE 
 
 courage of the Boer farmers were made light 
 of, and Rhodes even assured the British 
 Government (then embarked on a policy of 
 interference) that the Boers could not shoot. 
 It may be doubtful how far the Cabinet 
 really meant to go, and how far it drifted 
 into an avoidable catastrophe through mere 
 mishandling of the negotiations. But, 
 whether deliberate or accidental, certain it 
 is that the war proved more disastrous to 
 the London Stock Exchange and the in- 
 terests of the City than any event which 
 had taken place since the failure of Overend 
 Gurney. A military promenade, which was 
 to have been over in a month or two, re- 
 sulted in three years of stubborn and anxious 
 warfare. The total cost, which was esti- 
 mated by Sir Michael Hicks-Beach, the 
 Chancellor of the Exchequer, in October 
 1899, at 10 millions, to be defrayed by a levy 
 on the gold mines, eventually came to about 
 250 millions, every penny of which was con- 
 tributed by British loans and British taxes. 
 For a moment, at the outbreak of the war, 
 Transvaal mining shares rose, but as soon as 
 the idea of a promenade vanished, and a long 
 prospect of difficult and costly operations 
 opened out they began to droop, and fell to 
 lower and lower depths as the war dragged 
 
LONDON STOCK EXCHANGE 69 
 
 on. Consols followed the same movement as 
 Kaffirs. They had receded partly as a result 
 of increasing expenditure and diminishing 
 Sinking Fund, partly through fear of war, 
 from a top price of 113 in 1898 to about 
 104 at the outbreak of hostilities. But the 
 "Khaki" 2f per cent, loan in the spring of 
 1900 was raised with enthusiasm, showing 
 that the public believed in a speedy ending 
 of the war and a substantial indemnity from 
 the mines. When the Milner policy of un- 
 conditional surrender was at last abandoned, 
 and the peace of Vereeniging signed, Consols 
 and Kaffirs rallied. But it was only a short 
 and feverish flicker of speculative purchases, 
 which collapsed under heavy liquidation. 
 The mining industry had been temporarily 
 ruined, the cost of living had risen, the native 
 labour had dispersed, a strange mixture of 
 luxury, waste, misery, disease, plunder and 
 demoralisation had dislocated the social 
 organism and the mechanism of business. 
 Many of the promoters and speculators who 
 had been most eaget for the war were ruined. 
 All the mining houses connected with the 
 Rand suffered severely, nor did they recoup 
 their losses by the costly experiment of 
 importing Chinese coolies. 
 ^ A declension of Consols by 20 per cent, was 
 
70 THE STOCK EXCHANGE 
 
 proportionate to the increase of supply; for 
 the National Debt was enlarged by 160 mil- 
 lions sterling in order to meet the extraordi- 
 nary expenditure on the war. For four or five 
 years the Sinking Fund was practically or 
 actually suspended, and when, under the firm 
 financial guidance of Mr. Asquith, the reduc- 
 tion of Debt was vigorously renewed at an 
 unparalleled rate, the decline of national 
 credit was checked rather than arrested; for 
 the enormous cost of the Russo-Japanese War 
 had drained many millions of British and 
 French capital into the new 5 and 6 per cent, 
 bonds of these two combatants. In fact the 
 public debts of the world, along with wars, 
 armaments and taxation, have expanded in 
 the first ten years of the twentieth century 
 more rapidly than the effective demand for 
 them. Possibly and if some limitation of 
 armaments can be arranged, probably the 
 decline of gilt-edged securities may now cease 
 and a substantial recovery commence. For 
 British Consols to yield more than 3 per cent, 
 in time of peace and prosperous trade is cer- 
 tainly abnormal. But then the scope of 
 trustee securities was extended by some 300 
 millions in 1900 for the benefit of our colonies, 
 and the growth of armaments in a dozen years 
 by 30 millions sterling represents each year 
 
LONDON STOCK EXCHANGE 71 
 
 an economic waste equivalent to what our 
 grandfathers would have considered a very 
 formidable and costly war. 
 
 The effect of the Kaffir boom in England 
 was to create a new and very popular field 
 for speculative investment. The House 
 rapidly expanded, and the mining section 
 suddenly bulged out into the Kaffir Circus, 
 which after hours filled Throgmorton Street 
 with wild and noisy confusion. The slump 
 was disastrous and protracted. The losses in 
 Chartered shares and in many of the inferior 
 mines of the Transvaal and of Rhodesia have 
 never been recovered, but in the last three or 
 four years the intrinsic merits of the Rand 
 mines, the reconciliation and union of South 
 Africa, and a great improvement in the 
 labour supply have contributed to restore 
 values to the Kaffir market and animation 
 to the Kaffir Circus. But Consols, gilt-edged 
 securities of all kinds, home, colonial and 
 foreign, British railways, bank and insurance 
 shares, breweries, and many other industrial 
 securities have all exhibited, as the direct or 
 indirect consequence of the Boer War, falls of 
 from 10 to 50 per cent. The loss of capital 
 and credit caused by such a shrinkage cannot 
 be computed; but every banker and cambist 
 in London knows how much London's prestige 
 
73 THE STOCK EXCHANGE 
 
 and influence as the headquarters of inter-^ 
 national money and exchange were shaken. 
 If those who made the war had been allowed 
 to make a tariff, the greatest emporium, 
 the greatest shipping, broking and banking 
 centre of the world would have been not only 
 shaken but shattered. Grass would have 
 grown in the port of London and in the streets 
 of the City. Gradually the London ware- 
 houses would have emptied, the shipping of 
 its port would have shrunk, the value of a 
 bill on London would have disappeared, the 
 London money market and the London stock 
 markets would by degrees have yielded their 
 proud supremacy a supremacy founded 
 upon a wise policy of political, economic, 
 commercial and financial freedom. Instead 
 of these disasters, thanks almost entirely to 
 its freedom from tariffs and consequent mono- 
 poly of wholesale markets, London has now 
 again strengthened its position as the importer 
 and re-exporter of metals and raw materials 
 of all kinds. And, thanks partly to this, 
 partly to its vast supply of free and loanable 
 capital, it has recently acquired complete 
 command of the expanding market in rubber. 
 With this control of the raw product, which 
 is now governed by the sales in Mincing Lane, 
 the acquisition and financial management 
 
LONDON STOCK EXCHANGE 73 
 
 j 
 of the new plantations for the growth of 
 
 " tame " rubber has naturally come to Great 
 Britain. The rubber boom in the spring of 
 1910 may fairly be represented as the harvest 
 which English and Scottish financiers and 
 brokers have reaped as a result of free markets 
 and unimpeded trade. 
 
 Another episode in the history of the Lon- 
 don Stock Exchange the American crisis and 
 panic of 1907 may conveniently be deferred 
 to later chapters. 
 
 It remains to say a few words as to the 
 rules of the London Stock Exchange, and its 
 methods of doing business. The feature which 
 distinguishes it from provincial, colonial and 
 foreign Exchanges is the division of functions 
 between brokers and jobbers, a division which 
 seems to go back to its foundation. The job- j 
 ber works on the floor of the House, and deals 
 only with the broker. The broker takes 
 orders from the outside public and buys from 
 or sells to the jobber. Thus the broker feeds 
 the jobber much as the solicitor feeds the 
 barrister. The broker takes his commission 
 and the jobber his turn. The working of the 
 system is very simple, and may be illustrated 
 by a simple example. Jones, an investor, 
 sees that Consols stand at about 79. He 
 determines to buy 1,000 nominal, i. e. to 
 
74 THE STOCK EXCHANGE 
 
 spend 790. So he tells his broker Smith to 
 buy him that amount at the best price obtain- 
 able. Smith goes from his broker's office 
 into the House and makes his way to the 
 group of jobbers who deal in the Consol mar- 
 ket. He finds Robinson and asks him the 
 price of Consols. Robinson replies 7Sf-79, 
 meaning that he will buy at 78| and sell at 
 79. Smith buys from him at 79, and the 
 bargain is complete. Smith sends a contract 
 note to Jones which runs as follows: 
 
 1000 Consols at 79 .... 790 
 
 Contract Stamp 2s. 
 
 Commission J l 5 
 
 Jones sends a cheque for 791 7s., which 1 
 expressly includes the broker's commission, 
 and also in reality includes the jobber's 
 remuneration. This system, with its division 
 of functions, is very good for active securities 
 in which there are numerous transactions. 
 In such cases the separate existence of jobbers 
 makes for a free market and close prices. 
 There is no place in the world where good j 
 stocks are more easily and quickly realisable ; 
 at a minimum of loss, or purchasable so near 
 the market price, as on the London Stock 
 Exchange. For this and other reasons it re- 
 ceives a vast amount of American and foreign 
 
LONDON STOCK EXCHANGE 75 
 
 orders, and its official list is the largest and 
 the most international in the world. But 
 the investor should note that a quotation 
 in the official list does not mean, in the case 
 of securities seldom dealt in, that your broker 
 can at any time get a jobber to deal in the 
 stock at the nominal or quoted price. And 
 when there is a slump in a market and a rush 
 of selling orders with no support, as happened 
 in rubber shares in the months of June and 
 July 1910, the jobbers are apt to be away at 
 lunch all day, and the brokers have to report 
 to their clients that they simply cannot find a 
 purchaser. 
 
 It should be added that London Stock Ex- 
 change brokers are not allowed to advertise. 
 They- may only send circulars to their own 
 clients. The first business, therefore, of an 
 English investor is to find a good broker. 
 He will then be protected in all his transac- 
 tions by the rules and regulations of the 
 London Stock Exchange. Or if he lives in | 
 a large provincial town with a Stock Exchange j 
 of its own, he may prefer to do business with 
 one of its members a local broker. In that 
 case he will probably be just as well served. I 
 What he must avoid like the plague is the 
 outsider who offers to sell him rubbish shares 
 charging no commission. 
 
CHAPTER III 
 
 LONDON'S FOREIGN MARKET AND THE 
 FOREIGN BOURSES 
 
 A SPECIAL chapter will be dedicated to 
 "Wall Street and the American market; for 
 they stand in magnificent isolation from the 
 rest of the world, always excepting Canada 
 and Mexico. No doubt, as the population 
 grows and the pioneering or buccaneering 
 instinct finds itself cramped by the want of 
 new territories at home to explore or exploit, 
 the interest of American finance in foreign 
 affairs tends to expand. At present this ex- 
 pansion is felt mainly in two directions east- 
 wards towards China and Japan, southwards 
 through Mexico to Panama and the Spanish 
 republics. But such is the banking and 
 economic supremacy of England that a citizen 
 of the United States finds it most convenient 
 to visit Argentina or Brazil via London, and 
 many of the products of South America are 
 shipped to London before they reach their 
 76 
 
LONDON'S FOREIGN MARKET 77 
 
 ultimate destination in New York or Boston 
 or Philadelphia. It is the same with Ex- 
 change transactions. The bill on London still 
 reigns supreme. Besides, the United States is 
 still a borrower rather than a lender, which, in 
 itself, explains why there is practically no 
 foreign market on the New York Stock 
 Exchange. British consols, German and 
 Russian bonds, French rentes are unquoted 
 because they are not wanted. Even the 
 New York railway market is purely American 
 with the exception of lines like the Canadian 
 Pacific or the Mexican Group, which connect 
 with the American system. Thus London's 
 financial relations with the world in general 
 are distinguished from its relations with 
 America, and this distinction is accurately 
 reflected by the London Stock Exchange. 
 The groups of jobbers who deal in foreign 
 bonds and foreign railways stand quite apart 
 from the American crowd. 
 
 The causes that have attracted foreign 
 merchants and speculators to London from 
 the time of the Romans, well deserve detailed 
 examination. The economic historian might 
 show how admirably the estuary of the 
 Thames was adapted for commerce with all 
 the northern ports of Europe, and how, after 
 
78 THE STOCK EXCHANGE 
 
 the discovery of America, the capital of Eng- 
 land was almost bound to be the centre of 
 the commercial world. Our insular security 
 and our rich resources of coal and iron enabled 
 us to take full advantage of the inventions 
 which revolutionised manufactures, trans- 
 port, and exchange between 1750 and 1850. 
 British shipping and British manufactures, 
 though small in comparison with modern 
 ideas, were large in comparison with their 
 rivals. In capital, credit, currency, and the 
 art of banking, London got the start and 
 kept it. Necessitous foreign Governments 
 and corporations began to look to London 
 houses, like those of Rothschild and Baring, 
 to supply their small, but growing, demands 
 for capital. Sixty years ago, indeed, Paris 
 was still a formidable rival in finance, and the 
 United States in shipping. But just at this 
 critical moment England adopted the policy 
 of a free market for gold and all commodities. 
 A sound currency and an almost perfect bank- 
 ing system were firmly established at the 
 same time that perfect freedom of import- 
 ing and exporting was given to the whole 
 nation. In the course of ' a few years all 
 protective duties, and all duties upon exports 
 such as coal and machinery were entirely 
 
LONDON'S FOREIGN MARKET 79 
 
 removed. Our trade advanced by leaps and 
 bounds. British shipping expanded at such 
 a rate that before the end of the century it 
 actually represented, and still represents, 
 roughly, half the world's mercantile marine. 
 The United States, after the Civil War, 
 adopted an exactly opposite policy of re- 
 striction. Prices were artificially raised. The 
 high tariff wall, which was erected to ex- 
 clude foreign competition, raised the cost of 
 production. American manufacturers were 
 unable to compete in neutral markets, and 
 the American mercantile marine, which had 
 threatened to rival and outdistance ours, 
 dwindled into insignificance. Meanwhile, on 
 the Continent, Germany forged ahead under' 
 the stimulus of the Zollverein, which swept 
 away all the petty tariffs that had isolated 
 and impoverished its kingdoms and duchies. 
 A fairly liberal policy, aided by the adoption 
 of a gold standard, allowed German com- 
 merce to grow rapidly, and London benefited 
 enormously by the increasing wealth of 
 Hamburg and Berlin. France clung to the 
 bimetallic system, which prevented her great 
 stores of gold and capital from playing their 
 full part in international operations. 
 
 In Bagehot's Lombard Street the retro- 
 
80 THE STOCK EXCHANGE 
 
 spective eye may see how London had be- 
 come, in the seventies, the great centre for the 
 investment of capital and for the diffusion of 
 credit. With the suspension of specie pay- 
 ments by the Bank of France during the 
 Franco-German War, its use as a reservoir of 
 specie came to an end. "No one can draw a 
 cheque on it and be sure of getting gold or 
 silver for that cheque. Accordingly, the whole 
 liability for such international payments in 
 cash is thrown on the Bank of England." 
 Eight years after Bagehot wrote these words 
 in 1878 the Bank of France resumed specie 
 payments. But it could not recover its 
 position as a European settling house. And, 
 as every banker and cambist knows, the 
 stock of gold at Paris and Berlin is not acces- 
 sible, because the Bank of France can exercise 
 an option to pay in silver at the old conven- 
 tional ratio, and the Bank of Germany can 
 practically prevent gold payments when they 
 appear inconvenient. Thus, by a concur- 
 rence of natural and fortuitous circumstances 
 with the restrictive and artificial regulations 
 imposed by potential rivals, the number of 
 international bills drawn on London incal- 
 culably surpasses those drawn upon other 
 centres. It is the greatest shop, the greatest 
 
LONDON'S FOREIGN MAEKET 81 
 
 store, the freest market for commodities, 
 gold and securities, the greatest disposer of 
 capital, the greatest dispenser of credit, but 
 above and beyond, as well as by reason of all 
 these marks of financial and commercial 
 supremacy, it is the world's clearing house. 
 The wealth which it thus acquires and dis- 
 poses is vaster far than in the days of Bagehot, 
 when the London Money Market was usually 
 dependent on the Bank of England. Now, in 
 normal times, it can finance itself. In Bage- 
 hot's time the output of capital issues or loans 
 to British, foreign, and colonial borrowers 
 would vary from twenty to thirty millions a 
 year. In 1910 the figure went far above 200 
 millions. A single illustration may be given 
 of London's banking power. 
 
 In 1908, after the great American panic, 
 the United States Government appointed a 
 Commission to suggest monetary and bank- 
 ing reforms. The Commissioners came over 
 to Europe and made close inquiries. Their 
 interviews with leading bankers in London, 
 Paris and Berlin, which have lately been 
 published, constitute an invaluable accumu- 
 lation of ascertained facts and authoritative 
 opinions. At the Bank of England they 
 learned how, in times of stress, its rate 
 
82 THE STOCK EXCHANGE 
 
 dominates and controls all the money markets 
 and gold-movements of the world. The crisis 
 which broke out in New York, in October 
 1907, was the most formidable of its kind 
 ever known. There had never been such an 
 enormous demand for gold; yet the drain 
 was successfully met, and practically all that 
 the American banks required was supplied 
 in a few weeks from London without any 
 dangerous depletion of the Bank's reserve. 
 On October 31st the total bullion held by 
 the Bank was 31 millions, and the Bank rate 
 was raised to 5| per cent. On November 4th 
 it was raised to 6 per cent., and on November 
 7th to 7 per cent., the total bullion held being 
 28 millions. This rate proved effective 
 and from that time the inflow of gold from 
 abroad exceeded the outflow to New York, 
 so that on December llth the total bullion 
 was 34 millions. Gold came to London 
 from twenty-four countries, including British 
 colonies; and by the end of January, when 
 the rate had been gradually reduced to 4 per 
 cent., the Bank of England's stock of gold 
 had risen to 38 millions sterling. 
 
 With this supremacy as bullion broker and 
 arbiter of credit, as disposer of cash for 
 short periods and lender of capital to foreign 
 
LONDON'S FOREIGN MARKET 83 
 
 I 
 and colonial borrowers, it is no wonder that 
 
 London through its Stock Exchange should 
 provide the world's principal market in 
 foreign securities. Paris, of course, has its 
 specialities. It is financier-in-chief to Russia, 
 Spain, and Turkey. But the London Stock 
 Exchange list of foreign securities has no rival. 
 Hardly a country, from the gilt-edged rentes 
 of France to the comparatively worthless 
 paper of Honduras, whose stocks are not 
 dealt in freely from day to day by the lead- 
 ing jobbers of our foreign market. Their 
 observation, "with extensive view, surveys 
 mankind from China to Peru.'' 
 
 The taste of the British public for invest- 
 ment abroad has grown rapidly with the 
 increasing overflow of our surplus capital. 
 Perhaps we are a little too much inclined to 
 trust the foreigner. Certainly there is often 
 a want of discrimination. A bond yielding 
 4| or 5 per cent., with a fairly strong power 
 like Japan or a prosperous country like 
 Argentina, or a promising railway behind 
 it, may be pretty safe; but for the sake of an 
 extra 1 per cent, a certain type of investor 
 is willing to run a serious risk of losing his 
 capital in some dishonest municipality, or 
 discredited government, or in a company 
 
84 THE STOCK EXCHANGE 
 
 formed abroad for the very purpose of de- 
 frauding him. Many persons who read these 
 pages may probably have received ingenious 
 circulars suggesting that risks can be avoided 
 by a geographical distribution of capital, and 
 that in this way a high yield can be secured 
 without danger. It is at first sight a taking 
 fallacy. But a single question will discover 
 and expose it. How can four rotten com- 
 panies, located, let us say, in Brazil, Costa 
 Rica, Portugal and Russia be made less rotten 
 by the fact that they are widely separated? 
 
 Our markets for foreign bonds and foreign 
 railway securities stand, of necessity, in close 
 connection with the foreign bourses on which 
 the same or allied securities are quoted. In 
 some cases, where the credit of a country 
 rests almost entirely on its credit in London, 
 the tone of the London market will dominate 
 the tone of the domestic bourses. The dis- 
 tribution of British capital is a subject which 
 more properly belongs to a later chapter. 
 But it should here be plainly stated that our 
 foreign trade and the supremacy of the Lon- 
 don Stock Exchange in international stocks 
 depend mainly upon our exports of capital. 
 Thus London holds a great part of the ex- 
 ternal debt of Japan, and the price of Japa- 
 
LONDON'S FOREIGN MARKET 85 
 
 nese bonds depends, therefore, mainly upon 
 London's judgment of Japan's financial 
 strength at any given time. The internal 
 bonds are mainly held in Japan, yield a 
 higher rate of interest, and stand on a more 
 independent footing. Again, the great Ar- 
 gentine railways are British companies, with 
 their head offices in London, so that London 
 is the principal, if not the sole market, for 
 their bonds and shares. The external debt 
 of the Argentine Government is also held 
 mainly in London, where, in fact, the greater 
 part of it has been issued at various times by 
 Barings and other London houses. 
 
 British investments in Argentina Govern- 
 ment debt, railways, land companies, ranches, 
 etc. run to several hundred millions sterling. 
 Smaller, but still important, are our holdings 
 in Brazil, Chili, Peru, and Mexico. The 
 London house of Rothschild is the agent 
 and guardian of Brazilian finance, a delicate 
 and difficult task. The instability of the 
 Latin republics of South America is pro- 
 verbial. Upon the whole, the Governments 
 of Argentina and Chili enjoy the best credit, 
 but the security of a good Argentine or Bra- 
 zilian railroad is often preferred to that of 
 the Government, and is certainly superior 
 
86 THE STOCK EXCHANGE 
 
 to the credit of municipal or provincial 
 securities, among which there have been 
 many defaulters. It is hardly possible to 
 speak of "investment" in Central America. 
 At present, any one who buys the paper of 
 those States is a mere speculator. Bank- 
 ruptcy and repudiation are the rule, payment 
 of interest the exception. Even in South 
 America, a public authority which has not 
 within the last thirty years repudiated its 
 debt or compounded with its creditors is a 
 rare exception. No doubt, as civilisation 
 advances and trade expands, South America 
 gradually becomes a safer and safer field for 
 the investment of savings. But the utmost 
 care should be exercised, especially when 
 seductive offers of (unmarketable) bonds are 
 received through the post. It is essential 
 that the security should be quoted on the 
 London Stock Exchange, but even then the 
 price quoted may be an old one at which it 
 is easy to buy, but impossible to sell. The 
 amateur investor should make a selection, 
 and then consult a good broker on the London 
 Stock Exchange as to present prices and 
 prospects. 
 
 After the Stock Exchange of London, that 
 of Paris stands next as an international 
 
LONDON'S FOREIGN MARKET 87 
 
 ! factor, because, after London, Paris has the 
 greatest amount of disposable capital both 
 in the short and the long loan market. 
 The annual overflow of British savings into 
 foreign and colonial investments may now 
 perhaps reach 200 millions sterling; the 
 average overflow of French savings is perhaps 
 a quarter of that sum. For their size, Hol- 
 land and Belgium contribute freely, but Ger- 
 many requires most of her savings for home 
 investment, and the United States still con- 
 sumes more new capital than it produces. 
 
 The French divide their bourses into two 
 kinds commercial exchanges (bourses de com- 
 merce) and stock exchanges (bourses des 
 valeurs) . Their history goes back to mediaeval 
 times, but the clearly marked division be- 
 tween the two is comparatively modern. The 
 merchandise brokers, who operate on the com- 
 mercial exchanges, are called courtiers en 
 marchandises. The operators on stock ex- 
 changes are called agents de change. Under 
 the old regime both professions were mono- 
 polised, and both were thrown open after 
 the Revolution. The merchandise brokers 
 are still free, but after various changes the 
 French stock-broker is now again a privileged 
 person with exclusive rights, not only to 
 trade in government and other officially 
 
88 THE STOCK EXCHANGE 
 
 quoted securities, but also to negotiate bills 
 of exchange and similar instruments of credit. 
 The stock-brokers of Paris number only 
 seventy, and form a close corporation under 
 Government control. The provincial bourses, 
 of which Lyons, Bourdeaux, Marseilles, Lille, 
 and Nantes are the most important, are very 
 similarly organised. 
 
 According to M. Vidal, the author of a 
 brilliant study on this subject, the mono- 
 poly of stock-brokers and the privileges of 
 the Paris Bourse rest upon legislation of 
 1807 and 1816. A stock-broker really owns 
 an office under Government, which holds 
 from him a bond for 125,000 francs, on which 
 be receives 4 per cent. When he withdraws 
 from business he has a right to sell his office 
 ard transfer the bond to a successor whom he 
 introduces to the Government. Year by year 
 this monopoly of the stock-broker increases in 
 value as business and commissions multiply. 
 But the Government occasionally modifies 
 conditions, as in 1898, when it increased the 
 number of Paris stock-brokers from 60 to 70. 
 At first, the Paris Bourse was forbidden to 
 quote foreign securities, but this prohibition 
 was removed in 1823. But many securi- 
 ties are not quoted in the official list of the 
 Paris Bourse, either because the stock-brokers 
 
LONDON'S FOREIGN MARKET 89 
 
 (possibly under Government inspiration) have 
 not chosen to admit them, or because they do 
 not fulfil statutory conditions. Such securi- 
 ties, however, may be, and often are, dealt hi 
 on the coulisse, which may be described as 
 the curb market, so called because in former 
 times the bankers and coulissiers thronged a 
 narrow passage called La Coulisse. Anybody 
 may become a coulissier, or outside broker, 
 who likes to pay the licence duty. And 
 while dealings in French rentes are by law 
 restricted to the stock-brokers who deal on 
 the parquet, a market in these exists and is 
 tolerated on the coulisse, though the trans- 
 actions of coulissiers in these securities are 
 not recognised by courts of law. 
 
 Among foreign bourses, from this interna- 
 tional standpoint of the foreign market, Paris 
 stands easily first in power and resources. 
 The capital exports of France have long been 
 on a substantial scale, and consequently its 
 holdings of foreign securities are very large. 
 It is, of course, the great market for Russian 
 bonds; it holds most of the Spanish, Portu- 
 guese, and Turkish debt, and has considerable 
 amounts of capital invested in Egypt, Tunis, 
 Roumania, Greece, and South America. Ac- 
 cording to a skilful but perhaps exaggerated 
 
 
90 THE STOCK EXCHANGE 
 
 valuation of M. Alfred Neymarck, the foreign 
 securities now held by French capitalists 
 (Government bonds included) exceed 32 bil- 
 lion francs, say 1,300,000,000, distributed in 
 round figures as follows: 
 
 Foreign French Investments Francs, 
 
 by Countries. 
 
 1 Russia .... 9,500,000,000 
 
 2 Spain and Portugal . . 3,500,000,000 
 
 3 Egypt and Suez Canal . 3,500,000,000 
 
 4 Roumania and Greece . 3,500,000,000 
 
 5 Argentine, Brazil and 
 
 Mexico . . . 2,750,000,000 
 
 6 Tunis and French Colonies 2,500,000,000 
 
 7 Austria and Hungary . 2,000,000,000 
 
 8 Italy .... 1,150,000,000 
 
 9 China and Japan . . 1,000,000,000 
 
 10 United States and Canada 750,000,000 
 
 11 Great Britain . . . 500,000,000 
 
 12 Belgium and Holland . 500,000,000 
 
 13 Germany . . . 500,000,000 
 
 14 Turkey, Servia and 
 
 Bulgaria . . . 500,000,000 
 
 15 Switzerland 500,000,000 
 
 Total . . . 32,650,000,000 
 
 At the end of 1910 M. Neymarck raised his 
 aggregate to 35 billion francs. If, then, we 
 
LONDON'S FOREIGN MARKET 91 
 
 take Mr. Paish's not ungenerous estimate of 
 3,500,000,000 as the round figure total of 
 British investments abroad the French aggre- 
 gate is considerably more than one-third of 
 the British. It is roughly equal to the 
 French national and municipal debt; for 
 there are 26 billion francs of 3 per cent, 
 rentes, and 6 or 7 millions of municipal and 
 other lottery bonds, nearly all held by French 
 investors. M. Neymarck further estimates 
 that in normal years the French people put 
 aside in savings about 70,000,000, of which 
 a variable fraction goes abroad. This seems 
 small compared with British capital invest- 
 ments (amounting this year to 250 millions 
 sterling), which, of course, only represent 
 a portion of our national savings; but 
 it is a very large sum compared with other 
 countries. Germany's wealth is probably in- 
 creasing more rapidly than that of France, 
 but its annual surplus is usually absorbed 
 by the requirements of the Imperial and State 
 Governments and of the municipalities, whose 
 debts have been increasing at a prodigious 
 rate, as well as by the demands of a trade 
 which is largely carried on on credit. Hence 
 it is that the great Stock Exchanges of Ger- 
 many Berlin, Hamburg and Frankfurt are 
 
92 THE STOCK EXCHANGE 
 
 almost entirely concerned with imperial, state 
 and municipal loans, with German bank- 
 shares and German "industrials." But as the 
 banks and industrial companies have branches 
 in many foreign countries the whole world 
 swarms with German commercial travellers 
 a very large amount of German capital 
 must be employed abroad, more especially in 
 Russia, Scandinavia, Italy, the Low Coun- 
 tries and South America. The total German 
 capital employed abroad has been variously 
 estimated at from 500 to 1,000 millions ster- 
 ling. But there are no accurate figures. Ber- 
 lin operators often speculate heavily in 
 London. The Berlin Bourse consists of two 
 departments, the Stock Exchange and the 
 Produce Exchange, and both are supervised 
 by the Chamber of Commerce. The Stock 
 Exchange had 1,329 members in 1909; but 
 over 3,000 other persons held cards of admis- 
 sion entitling them to go on the floor of the 
 Stock and Produce Exchanges. In 1899 the 
 Berlin Stock Exchange had 1,625 members. 
 The figures for 1909 were the lowest since 
 1898. The Berlin Stock Exchange List is a 
 four-page sheet, and it includes in its official 
 quotations a large number of continental state 
 loans, foreign railways, banks, etc. The 
 
LONDON'S FOREIGN MARKET 93 
 
 Stock Exchanges of Frankfurt and Hamburg 
 are also of more than national importance. 
 Big German loans are usually issued simul- 
 taneously by a "consortium" of banking 
 houses in all the chief cities of the federated 
 empire. 
 
 The Dutch people are very active specu- 
 lators, particularly in oil companies and in 
 inferior sorts of American railroad securities. 
 The Amsterdam Bourse is in close communi- 
 cation with the London Stock Exchange. 
 The Brussels Bourse looks to both Paris and 
 London. Its speciality lies in tramway com- 
 panies, of which it was the pioneer. It has 
 established tramway systems with valuable 
 concessions, or "street franchises," in all 
 parts of the world. At Antwerp a great and 
 growing port and emporium speculation is 
 busy with raw products such as wool, rubber, 
 and coffee. The free port of Hamburg is 
 another huge emporium, and its trade breeds 
 lively speculation in sugar, coffee, etc. But 
 its Stock Exchange and money market play 
 an important part, and a crisis in Hamburg 
 is speedily visited upon Copenhagen, Stock- 
 holm, Helsingfors, and the old Hanseatic 
 towns; for Hamburg is the chief employer 
 of trading capital in the North Sea and the 
 
94 THE STOCK EXCHANGE 
 
 Baltic. Thus when Hamburg found it neces- 
 sary to contract credit and draw in loans 
 after the American collapse of 1907, there 
 followed a crop of banking failures in Copen- 
 hagen, as well as troubles in Stockholm. 
 Russian trade is largely in the hands of 
 Germany, and German is as much spoken 
 as Russian in the bourse of St. Petersburg. 
 Thanks to its high tariff, the manufactures, 
 commerce, and navigation of Russia are con- 
 trolled by monopolies and combinations, 
 which have capitalised the tariff in much the 
 same way as the more celebrated "Trusts" 
 of the United States. The largest of these, 
 "Prodameta" (from "prodet," to sell, and 
 metal), has with its subsidiaries a capital of 
 18,000,000. There are similar combinations 
 in coal, petroleum, and navigation. 
 
 But the Russian public has too little cash 
 and too* little enterprise to drive a great 
 business in stocks and shares. Here, as else- 
 where, the Russian Government's repressive 
 policy makes itself felt. The "Birsha" of 
 St. Petersburg is prohibited from dealing in 
 non-Russian securities, and even the Russian 
 banks are debarred from advancing money on 
 foreign securities. Jews and foreigners are 
 also prohibited from lending money on mort- 
 
LONDON'S FOREIGN MARKET 95 
 
 gage, with the result that first mortgages in 
 Russia have to be placed at 8 or 9 per cent, 
 interest. 
 
 The St. Petersburg Bourse is much smaller 
 than the Stock Exchanges of Glasgow, Man- 
 chester, or Liverpool, in so far as it has only 
 56 authorised brokers, who must be Russian 
 subjects, and have a monopoly of dealings 
 in Russian Government bonds. But any 
 person introduced by a broker or banker 
 may do business in the Birsha on payment 
 of a half-yearly subscription, and a stranger 
 may even be introduced for the day for a fee 
 of one rouble. There is, therefore, a strange 
 mixture of free trade and monopoly. The 
 official list of the St. Petersburg Bourse con- 
 tains about 500 securities, all Russian, the 
 chief activity being in the shares of railways 
 and banks. There is no business for the 
 account, and there are no regular settlements. 
 All stock sold must be paid for within one 
 or, at most, two days. 
 
 The two principal bourses of Spain are 
 in Madrid and Barcelona, and of late years 
 Madrid has become the more important. 
 But Spanish banking and finance are very 
 largely French; for Paris still controls the 
 principal railroads and banks of Spain. But 
 Spanish capital is growing, and the people 
 
96 THE STOCK EXCHANGE 
 
 are beginning to own a large and ever larger 
 share of the public debt. British capital is 
 mainly interested in mining and commercial 
 enterprise, especially at Bilbao, Barcelona, 
 Seville, and Juarez. Spain presents a close 
 parallel with Italy. Few things are more 
 remarkable in the last dozen years of Euro- 
 pean finance than the great upward move- 
 ment of Spanish and Italian credit. In both 
 cases the improvement may be traced to the 
 abandonment of colonial aspirations. The 
 costly wars of Italy in Somaliland and Abys- 
 sinia, and of Spain in Cuba and the Philip- 
 pines, drained both exchequers. The currency 
 depreciated and the national credit fell very 
 low. In fact, in 1898 the mean price of 
 Italian Fives was 9 If , and of Spanish Fours 
 46J. Taking the years 1898 and 1907, and 
 comparing the movements of European credit, 
 we find a fall of 19 in British consols, of 6 
 in French Threes, and of 11 in German 
 Threes, while Italian Fives rose 8, and Span- 
 ish Fours no less than 42 points. 
 
 Unfortunately, ten years of progress have 
 been checked, in the case of Spain, by the 
 Morocco War and the growth of internal 
 troubles, in the case of Italy by an expensive 
 military and naval rivalry with Austria. 
 
LONDON'S FOREIGN MARKET 97 
 
 Nevertheless the finances of Spain and Italy 
 have made an extraordinary advance all 
 the more extraordinary by contrast with the 
 general downward movement in gilt-edged 
 stocks as well as in the best railway deben- 
 tures during the last ten or twelve years. 
 
 The Italians have bought up their debt 
 (chiefly held in France) with amazing rapid- 
 ity, and are hi a fan- way to revive their 
 mediaeval prowess in international finance. 
 The chief bourses of Italy are in Rome, Turin, 
 Genoa, and Milan. An economic and Stock 
 Exchange crisis occurred in 1899-1900, and 
 again in 1907-8. Between those dates Stock 
 Exchange values expanded, and the period of 
 prosperity terminated in a great outburst of 
 speculation. The boom began in January 
 
 1905, and culminated for a time in September. 
 Then came a set back, but another rapid ex- 
 pansion followed, which terminated in March 
 
 1906. The most popular mania was for motor 
 car company shares. The 25 lire shares of one 
 company (the Fiat) were actually bought up 
 to 2,300 lire 92 times the nominal price of 
 issue. The company then subdivided its 
 shares. In November 1906 the new 10 lire 
 shares stood at 750. By October 1907 they 
 had fallen to 80 lire, and by May 1908 to 34 
 
98 THE STOCK EXCHANGE 
 
 lire. Turin was the principal market, and 
 the speculative mania produced even more 
 ridiculous excesses than the rubber share 
 mania in England. What remained of the 
 bubble was pricked in the autumn of 1907, 
 by a sudden cessation of purchasing from the 
 United States, when luxurious expenditure 
 of all kinds was curtailed after the fall of the 
 Knickerbocker Trust. The Stock Exchange 
 securities of Italy consist, first, of the na- 
 tional debt, including the nationalised rail- 
 ways, second banks, third mines, fourth 
 lighting companies, and, lastly, industrial 
 companies of all kinds, representing a more 
 or less watery capitalisation of the protec- 
 tive tariff. 
 
 More interesting to British investors than 
 either Spain or Italy are the two great rival 
 powers of the Far East, Japan and China. 
 The rise of Japan, by a rapid adoption of 
 Western methods, to the position of a strong 
 military and naval power (culminating in 
 its defeat first of China, and then of Russia) 
 has, of course, been coincident with the crea- 
 tion of a very heavy debt and a deplorably 
 heavy system of taxation. As Russia leaned 
 upon Paris, so for their war with Russia the 
 Japanese turned to London, where they con- 
 
LONDON'S FOREIGN MARKET 99 
 
 traded very large loans mostly at 5 per cent. 
 Since the conclusion of peace they have suc- 
 ceeded in keeping their expenditure within 
 their income, and by very skilful finance 
 have converted most of their debt to a 4J 
 per cent, basis. The same speculative fever 
 and spirit of commercial expansion, which 
 pervaded Europe and America in 1906 and 
 1907, invaded Japan. The Stock Exchanges 
 of Tokio and other large towns were scenes of 
 great excitement, and when the American 
 crash came, no country was more utterly 
 prostrated than Japan, dependent as it is 
 upon the United States market for its silk 
 and other exports. A great many failures 
 ensued. Banks closed their doors, and some 
 German houses, which had introduced a sys- 
 tem of long credits, came to grief. Attempts 
 to introduce British capital into Japanese 
 industrials have not been very successful, 
 though some of the best Japanese bank 
 shares have found favour. But a very large 
 amount of Japanese debt is held in London, 
 and the Japanese Government keeps ample 
 floating balances on this side, knowing well 
 how to support the market. 
 
 In quite recent years, with the suspension 
 of borrowing by the Japanese Government, 
 
100 THE STOCK EXCHANGE 
 
 the attention of English investors in the Far 
 East has been directed mainly towards China, 
 India, and the Malay States. The awakening 
 of China has been very slow, but the pace 
 has been marvellously quickened in the last 
 decade. The sagacity and trustworthiness of 
 the Chinese merchant, and the marvellous 
 industry of a vast population, are the best 
 securities of those who invest in the new 
 railways. Against the honesty of the nation 
 have to be placed the incapacity and corrup- 
 tion of the Government. There is grave 
 danger that funds subscribed to the Govern- 
 ment for railway loans may be misused or 
 devoted to other purposes. But, after all, 
 few countries can boast that they have 
 been free from railway scandals, and there 
 are grounds for thinking that great political 
 reforms may ere long renovate the whole 
 machinery of Chinese administration. The 
 railways already built appear to be profitable, 
 and now that a start has been made, it seems 
 certain that this extraordinarily promising 
 field will absorb and find profitable employ- 
 ment for a vast amount of British capital. 
 There is no reason why, eventually, Chinese 
 engineers should not become as competent 
 as Chinese bankers and merchants; but 
 
LONDON'S FOREIGN MARKET 101 
 
 until the mysterious rlddb of China lias 
 been a little further unravelled, the investor 
 in Chinese loans must regard himself as some- 
 thing of a speculator who deserves a rather 
 high interest in return for his risk. The 
 Chinaman is not only a shrewd and com- 
 petent business man: he is also a confirmed 
 and incurable gambler. From time to time 
 the Shanghai Stock Exchange becomes a 
 scene of the wildest speculation, and it is 
 safe to predict that, when a new China is 
 evolved, Stock Exchanges will spring up in 
 all the large towns, and China will become 
 subject to vicissitudes and crises as violent 
 as those which convulse the United States. 
 Of this, a foretaste was afforded in the 
 spring and summer of 1910, when Shanghai 
 caught the rubber infection from London. 
 All classes and races took part, but the native 
 Chinaman plunged deepest. When the break 
 in prices came, one Chinese operator was so 
 heavily involved that, on his failure, many 
 of the native banks had to suspend payment, 
 with the result that for months the trade 
 and credit of this great shipping and business 
 centre were disorganised. 
 
CHAPTER IV 
 
 WALL STREET 
 
 A FAR-SIGHTED and experienced operator, 
 who lately retired from the New York Stock 
 Exchange, has encouraged me to attempt a 
 brief sketch of the American system (centred 
 in New York) from the standpoint both of an 
 investor and of a speculator. On the other 
 side of the Atlantic, indeed, an adventurous 
 element enters almost invariably into almost 
 every investment, and Wall Street is the 
 synonym for speculation. The Marble Stock 
 Exchange of New York stands in Broad 
 Street* But the great banks are in Wall 
 Street. Wall Street is the nerve-centre of the 
 richest and most speculative country in the 
 world. It stands in the popular mind for 
 all that is sinister in American politics, all 
 that is reprehensible in American business, all 
 that is vast and hazardous, all that is covetous 
 and unscrupulous in high or low finance. It 
 is a term that covers a multitude of things and 
 102 
 
WALL STREET 103 
 
 provokes a multitude of thoughts in every 
 true American. For Wall Street is the ac- 
 cepted mirror and barometer of all American 
 business. There, as in a magnified Monte 
 Carlo, fortunes are won and lost, if not by the 
 hour or the day, at least by the week or 
 the month. There, too, the great trusts are 
 organised; there receiverships and profitable 
 reconstructions are arranged; there sensa- 
 tional dividends and other surprises are 
 hatched, by the insiders for the outsiders; 
 there melons are cut; there all things and 
 most persons are "done" in a strictly financial 
 sense. (But the secret of Wall Street's su- 
 premacy lies in the power of its banks as 
 manufactories and curtailers of credit?) Hence 
 it is not merely a market of bonds and shares, 
 not merely a recorder but a manipulator and 
 controller of prices. One thing about Wall 
 Street that strikes the most casual visitor is 
 its purely American character. It takes no 
 interest whatever in European securities. It 
 only cares for Europe because Europe cares 
 for America by taking an interest in American 
 securities. 
 
 Just as our Wall Brook marks the line of 
 the old Roman wall of Londinium, so Wall 
 Street marks the old Dutch wall of the little 
 
104 THE STOCK EXCHANGE 
 
 Dutch Colony of New Amsterdam; but its 
 financial story goes back hardly more than a 
 century. In 1790, the year after the adoption 
 of the Constitution, Hamilton reported to 
 Congress the plan of a national bank. In 
 1791, despite opposition from Madison, Jef- 
 ferson and other powerful men (who held a 
 central bank to be unconstitutional, because 
 the individual States had not delegated bank- 
 ing authority to Congress), the bill was passed 
 and signed by Washington. The Bank, 
 which was located in Wall Street, was mod- 
 elled on the Bank of England. Its charter, 
 limited to twenty years, expired in 1811, and 
 was not renewed. The dissolution of the 
 iBank not only deprived the country of a large 
 foreign capital, which could ill be spared, but 
 was one of the causes that led in 1814 to the 
 suspension of specie payments in most of 
 the States of New England. The second 
 Bank of the United States, which lasted from 
 1816 to 1832, was established in Philadelphia. 
 But the financial prerogative of New York 
 may fairly be dated from the year 1791, when 
 it became for a time the depository of the 
 funds of the United States Government and 
 the seat of its financial operations. 
 
 Faint echoes of Wall Street's early days 
 
WALL STREET 105 
 
 were still heard in 1880. In a gossipy 
 chronicle of that year we read: "The names 
 of the old merchants who went down to the 
 sea in ships, and of the money-changers and 
 high treasurers who, in those days, were wont 
 to come into the Street to draw from or 
 deposit in the United States Bank, the Man- 
 hattan Company, or the Bank of New York, 
 to inquire for the quotations, or to exchange 
 views on the state of the market, are almost 
 forgotten. But, moving about among these 
 phantom groups, we recognise the stateliest 
 figure of all, that of Alexander Hamilton. 
 Then we see new banks set up and operations 
 slowly widening through the terms of five 
 Presidents. But it is only within the past 
 forty-five years that Wall Street has got a 
 special significance as the centre, not only of 
 money but of speculation. From 1835 to 
 1880 a series of great inflations and corre- 
 spondent depressions occurring there furnish 
 a most protracted, singular and striking 
 chapter in the annals of finance." We may 
 now add that the thirty years which have 
 passed since 1880 have been at least as strik- 
 ing and remarkable. 
 
 The early history of public finance in the 
 United States was sadly marred by dis- 
 
106 THE STOCK EXCHANGE 
 
 honesty, and this dishonesty may probably 
 be traced to the bad traditions of currency 
 that came from the colonial days. The de- 
 basement of a paper currency was a favourite 
 device for reducing foreign debts, and new 
 issues of paper were often made when a 
 colony was in need of money. These ruinous 
 expedients not only debased public credit and 
 public money, they also undermined confi- 
 dence and lowered the character of banking 
 and mercantile transactions. The establish- 
 ment of the Federal Union and of the United 
 States Bank led to an improvement; but from 
 time to time suspension of payments oc- 
 curred, individual states repudiated their 
 debts, and vicious currency legislation caused 
 widespread loss, distrust and confusion, by 
 which insiders with knowledge grew rich at 
 the expense of the community. Possibly, 
 indeed probably, the speculative temper of 
 the American people is derived from the ups 
 and downs of its currency; certainly many of 
 the worst financial crises may be traced di- 
 rectly or indirectly to unsound money and the 
 insecure basis of credit. But, besides this, the 
 rarefied air of New York acts like champagne 
 upon a nervous and excitable population. 
 The association known as the New York 
 
WALL STREET 107 
 
 Stock Exchange was formed at the beginning 
 of the nineteenth century by a baker's dozen 
 of stock-dealers, who met under a sycamore 
 tree in Wall Street, opposite to the present 
 banking house of Brown Brothers & Co., and 
 would job off small lots of "governments," or 
 stock in the Manhattan Company and Bank 
 of New York. In 1816 there was a permanent 
 organisation of 28 members, and in 1837 
 when Rothschild's agents in New York, the 
 big firm of Josephs, fell with a crash the 
 New York Stock Exchange had become a 
 power and a danger to a community which 
 was rapidly developing a thirst for stock and 
 share speculation. But in the year 1862 
 there sprang up a formidable competitor 
 called at first the Public Board and later the 
 Open Board of Brokers. This was the time 
 of the Civil War. The printing presses of the 
 North were issuing greenbacks by the million. 
 Ruined merchants turned in despair to 
 speculation, and flocked to the "coal hole," 
 as the subterranean department in William 
 Street was called, where the first sessions of 
 this Public Board were held. According to 
 a contemporary who witnessed these scenes, 
 "lawyers whose tastes were speculative rather 
 than litigious, more than one clergyman 
 
108 THE STOCK EXCHANGE 
 
 whose pastoral labours were unremunera- 
 tive, broken-down operators, merchants out 
 of business, clerks out of situations, Jews 
 'native and to the manner born/ as well as 
 the greenest and most unsophisticated parties 
 from the rural districts, swelled the motley 
 throng." The ups and downs of the war, dis- 
 torted by telegraphic manipulations, helped 
 the brokers and commission agents and 
 money-changers; for rapid fluctuations in 
 greenbacks and stocks of all kinds held 
 together an active crowd of speculators. 
 A sharp competition arose between the Old 
 Board and the New. The New offered to do 
 business at ^ brokerage, i. e. 3 dollars and 
 12 cents on a hundred shares. The Old Board 
 thereupon lowered its commission rates from 
 J per cent, to | per cent., and resolved to expel 
 any member who dealt with the rival body. 
 Meanwhile the Wall Street soil produced of 
 a sudden a wondrous mushroom growth of 
 bankers and brokers. "The basements of 
 William, Wall and Broad Streets and of Ex- 
 change Place seemed to have been suddenly 
 penetrated with innumerable burrows in- 
 habited by new and singular animals mostly 
 rodents gnawing at the vast cheese of spec- 
 ulation." Promoters offered the usual wild- 
 
WALL STREET 109 
 
 cat schemes that appear and are subscribed 
 for in such times gold claims in Colorado, 
 copper franchises in Wisconsin, and so on. 
 In such cases distance often lent enchantment 
 to the view. Fluctuations of the currency 
 during the war made all transactions hazard- 
 ous. When greenbacks were issued it was 
 hoped that they would circulate at par with 
 the gold dollar. But early in 1862 a premium 
 on gold appeared, and in July 1864 the pre- 
 mium touched 285, and the cash value of 
 the paper dollar fell to its lowest point 36 
 cents. A gold exchange was opened in New 
 York called the Gold Room, which at one 
 time had between four and five hundred 
 members. There was often wild speculation 
 made in gold futures, and on one celebrated 
 Black Friday (September 24, 1869) Jay 
 Gould and others made a corner in gold 
 which caused heavy losses to many unfor- 
 tunate merchants. 
 
 Meanwhile the Open Board of Brokers 
 flourished exceedingly, and in 1864 moved to 
 a hall in 16 Broad Street. But after the war, 
 when amalgamations came into favour, the 
 two Boards and another Board for the buying 
 and selling of Government bonds were united 
 under the title of the New York Stock and 
 
110 THE STOCK EXCHANGE 
 
 Exchange Board, the same whose marble 
 palace now fronts on Broad Street. In this 
 splendid hall business is conducted in strict 
 accordance with an elaborate constitution 
 and by-laws. Membership is restricted, a 
 seat can be bought only at a very high price. 
 Infringements of rules are severely punished 
 by fine, suspension, or expulsion. It differs 
 from the London Stock Exchange in various 
 ways. First, there is no distinction between 
 jobbers and brokers. All members are both 
 or either. Hence there is only one transac- 
 tion no middleman stands between the 
 public and the market. 
 
 This first distinction the New York Stock 
 Exchange has in common with all the Stock 
 Exchanges of the Old and the New World, 
 so far as we are aware. The jobber is a Lon- 
 don creation, and he has not been imitated. 
 Whether it is due to him or to some other 
 cause, such as the banking supremacy of 
 London, that the stock and share market of 
 London is the freest market of its kind in the 
 world is a question in dispute, and one that 
 cannot easily be answered. The New York 
 Exchange also differs from ours in the rigidity 
 of its commission law. A New York broker 
 charges one-eighth commission per cent, on 
 
WALL STREET 111 
 
 the par value, each way, neither more nor 
 less. This is very profitable work. In Lon- 
 don of course by arrangement, especially 
 when the business is on a large scale, lower 
 rates can be obtained without offending 
 against the laws and rules of the Stock Ex- 
 change. As a centre of speculative activity 
 New York has no rival. The publicity of its 
 quotations is only matched by the rapidity 
 with which they are circulated to the most 
 distant towns of the American continent. 
 This is all due to the tape machine, called 
 "the Ticker," an American invention which 
 has been developed in an extraordinary way 
 during the last thirty years. The reliability 
 of tape prices is remarkable, and any mistake 
 is speedily corrected. The tape machine is 
 not officially recognised. Nevertheless its 
 mechanical efficiency has been proved, and it 
 contributes an invaluable check upon dis- 
 honest brokers. Tape machines are to be 
 found all over the States; you see them in 
 secluded health resorts, where an enterpris- 
 ing New York broker may have taken a room 
 in order to cater for the adventurous instincts 
 of the tired millionaire. The same contri- 
 vance enables far away newspapers to give 
 their readers a complete list of New York 
 
THE STOCK EXCHANGE 
 
 prices on the following morning. But for 
 these machines and their extension the 
 volume of speculation would without doubt 
 be reduced enormously. It is difficult to see, 
 now that the tape machine and the telephone 
 have been perfected, how the invention of 
 aids and facilities to speculation can go much 
 further. By these means the actual prices of 
 securities and the alluring bait of incessantly 
 , fluctuating favourites are kept before a 
 naturally speculative public all the time* 
 With a tape machine by his side the banker, 
 the merchant, the manufacturer can sip the 
 sweet excitements of the Stock Exchange in 
 his arm-chair. To watch the tape machine 
 is the main business of some and the main 
 pleasure of others. Certainly this invention 
 is the grand cause of the expansion of specu- 
 lative business. If it could be extinguished 
 the Stock Exchange would probably be de- 
 nuded of half its members and the Other half 
 would find their profits heavily reduced. 
 The whole American public has been edu- 
 cated to the "ticker." Its services to the in- 
 vestor must be set against the stimulus it has 
 given to gambling on the Stock Exchange. 
 But when all deductions have been made 
 and of course an active market means a free 
 
WALL STREET US 
 
 market and closer quotations it can hardly 
 be admitted among the inventions that have 
 made the world more civilised. 
 
 The fortnightly settlements of London 
 would be impossible in New York, though it 
 is almost incredible to an English broker that 
 the day's transactions can be settled, as New 
 York settles them, by the day. 
 
 On one record occasion the Clearing-house 
 settled and balanced transactions in about 
 3,200,000 shares, of an approximate value of 
 50 millions sterling. This test proved con- 
 clusively the perfection of New York's finan- 
 cial machinery for settling Stock Exchange 
 transactions. Brokers obtain their funds 
 through two species of loans, called respec- 
 tively "Time" loans and "Call" loans. 
 Tune loans are made for a specified date. 
 Call loans are a speciality of the New York 
 market. Brokerage houses in ordinary times 
 carry 60 per cent, of their borrowings in 
 Tune loans and 40 per cent, in Call loans. 
 Negotiations for time money are carried on 
 directly with the lenders or with street 
 brokers they select to represent them. Call 
 loans are negotiated on the Stock Exchange 
 much after the manner in which stocks are 
 bought and sold. These "Call" loans are 
 
114 THE STOCK EXCHANGE 
 
 all made upon collateral which must have an 
 aggregate market value of at least 20 per 
 cent, above the face value of the loan. A 
 call loan can be terminated by either party 
 the next day, or any day thereafter, by giv- 
 ing notice before 1 o'clock, and must be paid 
 at once when the lender calls it. Similarly 
 in London bankers lend out funds "at call 
 or short notice." 
 
 Before noon the banks and Trust compa- 
 nies notify their brokers in what is called 
 the "money crowd" on the Stock Exchange 
 to lend a stated amount of money. At about 
 2.30 in the afternoon this crowd is thickest 
 and noisiest. By then the Stock Exchange 
 knows pretty accurately how much it will need, 
 and its brokers go into the "crowd " to bid 
 for what they want, buying money from the 
 bankers' agents at the lowest rate obtainable. 
 
 This Stock Exchange money market of 
 New York rests upon the solid economic basis 
 of supply and demand. Occasional attempts 
 are made to manipulate it, but generally 
 without result. A few of the banks and Trust 
 companies never ask more than 6 per cent, 
 per annum for their money, even in times 
 of panic; but at such times their brokers, 
 instead of offering their money publicly, go 
 
WALL STREET 115 
 
 about privately, selecting the most reputable 
 houses, and generally ask for gilt-edged 
 dividend-paying securities as collateral, and 
 for larger margins than are demanded in 
 quieter times. The extreme rates that are 
 published represent loans of small sums to 
 the needy and poorer class of borrowers. If 
 there were no adequate supply of call money 
 available New York Stock Exchange methods 
 would have to be changed. The daily settle- 
 ment is universal in the Stock Exchanges 
 of the United States, and is doubtless one 
 of the causes why failures or defaults are so 
 commendably rare. 
 
 The profession of broker on the New York 
 Stock Exchange is indeed a very remunerative 
 one. Most of the members are well off and 
 many of them are rich. Until they have 
 saved a sufficient capital out of their com- 
 missions they often have the good sense to 
 avoid speculation. But when they once have 
 money free they begin to invest and operate 
 for their own account, or, as they say, "take 
 an interest in the market." A clever man in 
 this position, who is really in the swim and 
 the know, can usually do well for himself; 
 and it is surprising how many of these pro- 
 fessionals have the self-restraint to avoid 
 
116 THE STOCK EXCHANGE 
 
 great risks. They know from the experience 
 of unfortunate clients the danger of "over- 
 trading," and as over-trading is the character- 
 istic vice of the amateur speculator a word 
 here may be in season. "The rapid expan- 
 sion of an investor into a speculator," said 
 a successful Wall Street broker to the writer, 
 "is one of our most familiar sights." A man 
 comes down to a broker's office with five 
 thousand dollars, and says he wants to invest 
 it to the best advantage. The broker asks 
 him whether he wishes to make a pure invest- 
 ment or whether he would like his holding to 
 have "a speculative tail" to it. In nine 
 cases out of ten the investor admits that he 
 had the idea of increasing his capital in mind 
 when he came there. The broker then ex- 
 plains to him that he can safely buy $10,000 
 worth of securities, on which he can pay 50 
 per cent., and the broker will lend him the 
 balance of the purchase money at current 
 rates of interest. The broker says, in effect: 
 "I will buy you ten thousand dollars' worth 
 of stock with your five thousand dollars, and 
 with five thousand additional dollars, which 
 I will borrow for you from month to month 
 at 5 per cent, or whatever is the market rate, 
 as long as you like to hold the stock." Our 
 
WALL STREET 117 
 
 investor is captivated by the plan. He 
 neglects the possibility of a fall, in which 
 case his losses are doubled, because his mind 
 is taken up with the probability and practical 
 certainty of a rise. He has opened his ac- 
 count in Wall Street en the basis of what is 
 known as a 50 per cent, margin. He is half 
 investor, half speculator. The fluctuations 
 of the market begin to excite him. If he 
 loses, he wants to make good the loss. If he 
 gains, his appetite for more is whetted. He 
 hovers about Wall Street listening eagerly 
 for points. Presently he meets a tipster, 
 who suggests something better and hints to 
 the novice that he may quadruple his gains 
 if he contents himself with a 25 per cent, 
 margin, owning only a quarter of the stock 
 which is to make his fortune. His own spec- 
 ulative investment begins to look very small 
 and slow to him, as he listens to the feverish 
 and exaggerated talk all around him, and 
 reads the inspired utterances of the secular 
 and financial press. The temptation to in- 
 crease his risks without increasing his capital 
 is nearly irresistible, and in a comparatively 
 short time he has 50,000 dollars' worth of 
 stocks with only the same original capital of 
 5,000 dollars, owing his broker 45,000 dollars 
 
118 THE STOCK EXCHANGE 
 
 instead of 5,000. He is then, of course, in a 
 position in which a small decline in prices 
 will swamp all his capital. The investor 
 has become a speculator, in reality a 
 plunger. He is over-trading; the nerve strain 
 is making him miserable, but he can't stop. 
 A 10 per cent, decline wipes him out. No 
 matter how good a security may be, there 
 are many unforeseen events which may cause 
 a fall of 10 per cent, in its market price 
 without affecting in the least its real value. 
 But such temporary fluctuations seldom 
 cause, even in panics, a 50 per cent, depre- 
 ciation in the value of investment securities, 
 so that our investor would have been com- 
 paratively safe if he had not yielded to the 
 temptation to "over-trade." But whether 
 his capital is risked or not, the more he bor- 
 rows and the more he shifts his securities 
 the greater, in fact, the cost of his holdings 
 in interest and commissions the more prob- 
 abilities weigh against his emerging from 
 Wall Street with a profit. 
 
 In his Twenty Years of Inside Life in Wall 
 Street, Mr. Fowler relates an incident of this 
 kind which may be condensed to serve as an 
 illustration. One day, in January 1865, a 
 rough farmer, entering the office of a Wall 
 Street broker, produced from his portly wallet 
 
WALL STREET 
 
 two documents, the first a certificate of good 
 character from the local school-master, the 
 other a certificate of $ ? 300 deposit in the 
 bank of his native village. Next he spread 
 out on the table a cutting from a newspaper 
 headed "Petroleum," setting forth that the 
 books of the Sixtieth National Petroleum 
 Company were still open to subscription; 
 capital $1,000,000 in $10 shares, and the 
 Company was generously allowing the public 
 to buy them at $3 a share. The property 
 consisted of 30 acres in the very midst of 
 the oil region, quite near to the celebrated 
 Buchanan farm; three wells already sunk, 
 and room for more; every indication of oil; a 
 dividend of 2 per cent, a month guaranteed; 
 books to be closed positively and irrevocably 
 on the 21st instant. 
 
 "Them air Petrollum shares is what I've 
 come for. Two per cent, a month dividend 
 is enough for me," said the rustic. This was 
 at the height of the oil boom. The brokers 
 tried hard to dissuade their client; but only 
 by quoting the agricultural maxim, "Don't 
 put all your eggs in one basket," could they 
 prevail on him to invest no more than $1,300 
 in this company, keeping the balance of a 
 thousand for other tempting opportunities. 
 They went to the office of the Petroleum 
 
120 THE STOCK EXCHANGE 
 
 Company, paid in the money, and received 
 certificates for 433 shares. The investor 
 was charmed with the certificates. In the 
 foreground was engraved a flowing well, 
 sending up a jet 100 feet into the air and fall- 
 ing in a graceful parabolic curve into a huge 
 tank inscribed with the company's name. 
 Near by was a pyramid of barrels, and in the 
 background several vessels and railroad trains 
 were being laden with petroleum. The petro- 
 leum fever had raged eight months and cul- 
 minated in February, after bubble companies 
 with a nominal capital of 300 million dollars 
 had been organised. A special Petroleum 
 Stock Exchange had been created, which, 
 dying soon afterwards, had its remains incor- 
 porated with the Mining Stock Board, another 
 product of another contemporary bubble. 
 
 Five months afterwards the rustic lost faith 
 in petroleum, and sold his stock at 10 cents a 
 share; but he was more fortunate with his 
 balance. First he "sold short" in gold and 
 made $5,000. Then he became a bull of 
 Erie and made another $5,000; then, in spite 
 of his brokers, he fell into the claws of the 
 Lobster. They lost sight of him for three 
 months until one day in November, when he 
 rushed into the office, crying: "The Lobster 
 has busted, and I'm busted." 
 
WALL STREET 121 
 
 He had just $200 left. It was a damp, chill 
 day; every one looked blue, but the rustic's 
 face was the bluest of all. They took him 
 and cheered him with a certain beverage, and 
 then found that the poor man had borrowed 
 money from friends in his village to meet the 
 demands of the rapacious Lobster for more 
 margin. The debt weighed on his mind; but 
 at this point an operator joined them in high 
 spirits. He had just made a little pile out of 
 a heavy fall in Prairie du Chien. It had 
 already fallen to 91, and he predicted it would 
 fall to 50 inside of the week, and volunteered 
 to sell calls in it at 110 which should be 
 deliverable at any time in the next thirty 
 days. The rustic's face brightened and he 
 gave this new friend his last $200 for a call of 
 200 (hundred dollar) shares. The operator 
 filled out a form, signed it and sent it to his 
 broker, who guaranteed it. 
 
 The document would run as follows : 
 
 New York, November , 1865. 
 For Value received the Bearer may CALL 
 ON ME for Two Hundred Shares of the 
 Ordinary Stock of the Prairie du Chien 
 Company at 110 per cent, at any time in 
 thirty days from date. The bearer is entitled 
 
THE STOCK EXCHANGE 
 
 to all dividends or extra dividends declared 
 during the time. 
 
 Signed : 
 
 The stock called Prairie du Chien, or Prairie 
 Dog, was not inconveniently large for the pool 
 made by Stimpson and Marston in the au- 
 tumn of this year (1865). There were only 
 about 29,000 shares to be handled. In August 
 the stock had broken to 33. The pool pro- 
 ceeded with the utmost secrecy to buy nearly 
 all the stock. On the Saturday when the 
 rustic bought his call it had risen to par. " On 
 the following Monday it sold from 125 to 250 
 in twenty minutes, amid the fiercest excite- 
 ment ever known before in the Brokers* 
 Board." 
 
 On that "black bear Monday," when our 
 hero reached the lobby of the Brokers' Board 
 Prairie du Chien had just struck 200. Trem- 
 bling with joy he fumbled forth his lucky 
 "call," sent it in to his broker, and in three 
 minutes had sold his 200 shares at 210. Ten 
 minutes later he "called" upon his operating 
 bear friend, who bought the stock at 225 and 
 delivered it to the party who had just bought 
 the 200 shares at 210. In 48 hours the two 
 hundred dollars had swollen to $20,000, for 
 each of his two hundred 100-dollar shares had 
 
WALL STREET 123 
 
 doubled in value between the time when he 
 bought the call and the time when he sold it. 
 
 After this happy event the rustic might 
 have retired to his village as an agricultural 
 capitalist. Unfortunately, but naturally 
 enough, history relates that he became en- 
 amoured of "calls and puts." He never 
 thought of returning in glory and comfort to 
 his village, but hunted for new opportunities 
 in the street, "until one fine day in February 
 he heard that Henry Keep was selling calls 
 in Old Southern at a price slightly above the 
 market, and promptly secured calls for 500 
 shares duly signed by Henry Keep. Hearing 
 of Keep's sales, and reasoning that Keep was 
 not such a fool as to sell calls on Old Southern 
 if it were going to rise, the bears bought his 
 calls freely and used them as a margin to sell 
 short. A little later, when the price had risen 
 considerably, Keep began selling "puts," 
 also on favourable terms. Then the bulls 
 bought these "puts" and used them as mar- 
 gins to buy Old Southern. Thus the wily 
 operator stiffened the price doubly, first by 
 inducing short sales at a low price, next by 
 inducing purchases at a high price. 
 
 A "put," be it remembered, is in form 
 exactly like a call; only for the key words 
 
124 THE STOCK EXCHANGE 
 
 "CALL ON ME" you substitute "DE- 1 
 LIVER ME," so that while the person who 
 buys a call does so in hope of the price rising 
 within the time prescribed, the person who 
 buys a "put" does so in hope of it falling. Our 
 hero held his call for 500 shares until Old 
 Southern touched 98, when he "called," re- 
 ceived the stock, sold it for cash at 100, and 
 netted a profit of $12,000. Successful and 
 elated, the farmer now blossomed out as a 
 City man, sought the aid of a fashionable 
 tailor and cultivated Wall Street society. A 
 new acquaintance dazzled him with the story 
 of the Pacific Mail. Its fluctuations from 
 1850 to 1864 had scattered fortune and ruin 
 through the crowd of speculators. In Decem- 
 ber 1861, when the Trent affair threatened 
 war with England, it had fallen to 69. The 
 capital stock was 4 million dollars in 40,000 
 shares. But in 1862 a powerful ring acquired 
 26,000 shares, which were transferred to a 
 banking firm to hold as trustees for five years 
 for the joint benefit of members of the ring. 
 After 1864, with the end of the war the price 
 of the stock began to rise by leaps and bounds. 
 The public demand was met with generous 
 supplies. In 1865 the capital was increased 
 from 4 to 10 million dollars, and the price 
 
WALL STREET 125 
 
 was 240. Next year, when the capital was 
 doubled and the price 180, the trustees of the 
 pool held 130,000 shares. Soon afterwards 
 L. W. Jerome, then a giant of the Stock 
 Exchange, bought 100,000 shares from the 
 trustees of the pool at 20 per cent, below the 
 market price, and began to unload artfully 
 but slowly. Unfortunately for him the winter 
 brought currency troubles and a severe de- 
 pression. The market was deluged with 
 stock, and in a few days Pacific Mail fell from 
 163 to 115. In later years the watered stock 
 of this steamship company sank to 10; but 
 the fall to 115 pretty nearly ruined Jerome, 
 who was only saved from extinction by the 
 charity of the pool, which released him from 
 part of his contract. "The same blow," we 
 are told, "which felled this financial giant 
 also struck hard upon our bucolic pigmy." 
 Dazzled by the fortunes won in Pacific Mail, 
 he had bought 400 shares at 175, putting up 
 a margin of no less than 60 per cent., "a dead 
 open and shut thing" as he expressed it, 
 certainly a judicious and ample margin in 
 ordinary cases. But in thirty days this 
 margin was wiped out. He sold his four 
 hundred shares at the lowest panic price, 
 losing $24,000. For a month the agriculturist 
 
1S6 THE STOCK EXCHANGE 
 
 retired to the backwoods with a poor remain- 
 der of $5,000. But he returned, and by a 
 series of lucky turns, raised it in eight months 
 to $13,000. Then he ran across his Pacific 
 Mail adviser, who gave him another inside 
 tip about Atlantic Mail. Unwarned by his 
 experience with its Pacific sister, he listened 
 to the story of its wonderful promise. It had 
 fallen 20 per cent, and must recover. So he 
 bought 100 shares at 93, depositing a 10 per 
 cent, margin. That very day Atlantic Mail 
 began to drop. It hung for a while at 87, and 
 then broke 64 per cent, in an hour. Again 
 our poor friend sold at the lowest point, 23. 
 It usually happens so. After this calamity 
 he retired finally from Wall Street with $2,500 
 in his wallet, just $200 more than he had 
 brought with him originally. His first, best 
 broker asks why he did not retire with his 
 $30,000 safely invested, and replies 
 
 "Operators come into the street with the 
 intention of making 5 or 10 or 20,000 dollars, 
 which having been done, they say they will 
 draw out their profits and retire. But they 
 don't. Their broker blandly hovers over and 
 guards their precious little piles for himself. 
 He inquires in an insinuating voice, just as 
 he is going to the Board, whether his cus- 
 
WALL STREET 127 
 
 tomer 'has anything to say.' The customer 
 generally has something to say in the shape 
 of an order to buy or sell, and then in five 
 minutes, or thereabouts, he finds his pile is 
 locked fast as a margin in the fond embrace 
 of his broker, who sits over it and feeds upon 
 it till what with interest, commissions, turns, 
 losses, etc., the precious little pile dwindles, 
 and finally disappears." 
 
 It hardly ne*eds argument to prove that the 
 odds are heavily against the amateur specu- 
 lator. If he is not actually fleeced and 
 swindled he is far more likely than not to 
 lose. It is like betting against the bank. 
 The wear and tear of commissions and stamps 
 and interest eats away his capital, even if 
 the luck is evenly balanced. As an example 
 of the means by which the small fry find 
 their way into the mouth of the great pike 
 operators a very old story may be revived. 
 Jay Gould or some such person on one 
 occasion being asked for advice by the pastor 
 of a rich and fashionable New York Taber- 
 nacle, whispered a recommendation of Pacific 
 Mail and promised to reimburse the pious 
 man if his purchases of that stock should 
 result in loss. When the pastor came to him 
 later, deeply distressed by a heavy personal 
 
128 THE STOCK EXCHANGE 
 
 loss, Gould was as good as his word, and 
 promptly handed him a cheque for the 
 amount. " But how about my parishioners? " 
 inquired the reverend gentleman. "You 
 placed no ban of secrecy upon me, and their 
 losses are enormous." To which Gould re- 
 plied calmly, "They were the people I was 
 after." Thus was verified a Japanese prov- 
 erb: "The darkest place is just below the 
 candlestick." 
 
 Mr. Thomas Gibson, in a recent analysis 
 of the art of speculation, has described the 
 results of a careful examination of 4,000 
 speculative accounts spread over a period of 
 ten years. Four points were established. 
 
 1. Most of the operations were pure gam- 
 
 bling. 
 
 2. Success almost invariably led to excess 
 
 and disaster. 
 
 3. There was a marked tendency to buy at 
 
 the top and sell at the bottom. 
 
 4. About 80 per cent, of the accounts 
 
 showed a final loss. 
 
 Thus, apart from all the worry, work, and 
 anxiety, four-fifths of these eager fortune 
 hunters actually lost money as well as time. 
 In another case 500 speculative accounts in 
 Steel Common taken from the books of differ- 
 
WALL STREET 129 
 
 ent firms between July 1901 and March 1903 
 (in both of which months the stock sold at 
 37) gave the following results: In 343 cases 
 the accounts terminated in loss; 88 showed a 
 profit; 52 fairly balanced; and in 17 cases the 
 Steel Stocks were taken up by the purchasers 
 to be held "in all cases at a considerable 
 paper loss." So wide of the mark is the 
 popular fancy that stock market speculation 
 on borrowed money is a hopeful enterprise. 
 It is a curious fact that comparatively few, 
 even among professional operators, are to be 
 found often on the bear side. I have met 
 hardened speculators who boasted that they 
 never had done, and never would do anything 
 so immoral as to try to make money in this 
 way "out of other men's losses" by the fall of ; 
 a' stock. But a very little reflection will show 
 that no code of ethics can make a valid dis- 
 tinction between betting that a horse will win 
 and betting that it will lose. It may be wrong 
 to buy beyond your purse when things look 
 cheap, or to sell more than you possess when 
 they look dear. But there is exactly the same 
 moral objection to either course, and of course 
 there is nothing like a bear contingent to 
 steady and check a falling market. The 
 speculator for a rise who is trying to sell in a 
 
130 THE STOCK EXCHANGE 
 
 falling market has every reason to be grateful 
 to the speculator for a fall who has sold 
 "short," and is therefore forced to buy stock 
 in order to meet his obligations. Theoreti- 
 cally a successful operator should be capable 
 of bearish and bullish moods, for, on the 
 whole, over a period of years stocks and 
 shares tend to maintain their level, though 
 great changes in price may result from great 
 wars, which destroy vast quantities of capital 
 and create vast quantities of Government 
 debt, or from long periods of peace when capi- 
 tal accumulates and interest falls. But bear 
 operations, especially on a large scale, are very 
 dangerous, because there may be a shortage of 
 available stock, and in that case holders may 
 squeeze the bear to any extent and force kim 
 to buy back at ruinous prices. This may ac- 
 count for some of the almost superstitious 
 objections entertained against bear opera- 
 tions. A shrewd old New York broker, just 
 before retiring, told a young disciple, "If I 
 had to live my life over again I would always 
 be a bull, but I would not always have an 
 interest." In other words, he would only 
 speculate in a rising market. At other times 
 he would be content with his commissions. 
 To return to Wall Street. Since the end 
 
WALL STREET 131 
 
 of the Civil War it has seen three crises, each of 
 which may be said to have marked the end 
 of a distinctive epoch in finance. The panic 
 of 1873 when Jay Cooke came to grief and 
 the New York Stock Exchange closed for ten 
 days stopped the construction of railways 
 between the Great Lakes and the Pacific coast 
 a productive work which found peaceful 
 occupation for the million disbanded soldiers 
 of the Civil War, and had so solved what 
 seemed the almost insoluble problem of that 
 vast accession of idle men to the labour 
 market. After five years' rest and recupera- 
 tion another era of speculative expansion 
 commenced in 1878, anticipating the resump- 
 tion of specie payments, and lasted with 
 many ups and downs for about six years, 
 during which time many thousands of miles 
 of railway were built parallel to, and in com- 
 petition with, some of the most prosperous 
 existing lines. The capital embarked in these 
 new adventures proved, for the most part, 
 unfortunate for the original investors; hence, 
 after the panic of 1884 brought this second 
 era of prosperity to an end, there followed a 
 period of transition during which these new 
 and at first unprofitable lines were being 
 absorbed by the older and stronger corpora- 
 
THE STOCK EXCHANGE 
 
 tions. Then came another outburst of specu- 
 lation, which was marked by the entry of 
 large foreign operators into the New York 
 market, and by a great development of Lon- 
 don's dealings in Americans, or "Yankees," 
 as they were called. A check to this was 
 administered by the Baring crisis. But the 
 collapse in New York was not quite due, and 
 was postponed till 1893; its proximate cause 
 being the vicious silver legislation of the 
 United States Government. A heavy cloud of 
 depression hung over Wall Street until 1896, 
 when Mr. McKinley was elected President on 
 a straight gold platform. This restored the 
 confidence of the moneyed interest, and laid 
 the train for a new era of speculative activity. 
 By the Dingley tariff the profits of favoured 
 manufacturers were enormously increased at 
 the expense of the general public, and upon 
 the passing of the Tariff there followed in 
 logical sequence the organisation of trusts 
 to stifle competition and raise prices to the 
 utmost limit of the protective and prohibitive 
 duties. From the Wall Street point of view 
 this chapter may be called the capitalising of 
 the tariff. It lasted till the Stock Exchange 
 and banking crisis of 1907. That disastrous 
 collapse of credit started with the run on the 
 
WALL STREET 133 
 
 Knickerbocker Trust in October, and ended 
 in a suspension of cash payments which was 
 continued for many weeks by nearly all the 
 banks in practically all parts of the United 
 States. 
 
 This crisis and its consequences, political, 
 social and economic, are still vivid in the 
 memory. But though the crisis stands out 
 clear and the consequences are undeniable, 
 a lively controversy still rages about its 
 causes. Perhaps it may here be affirmed that 
 the unhealthy conditions caused by tariff 
 and trusts on the one hand, and by the cur- 
 rency and banking laws on the other, were 
 largely responsible for the severity of the 
 cataclysm; for the storm, after blowing 
 down the whole fabric of credit, left behind 
 it not only a long and deep depression in 
 almost every branch of industry but a wide- 
 spread and apparently irresistible popular 
 resentment against the Tariff. 
 
 Each of the crises named was marked by 
 one common feature a suspension of pay- 
 ment by the New York banks; and in the 
 case of all except the last the funds of the 
 Wall Street banks were mainly employed in 
 loans on Stock Exchange collateral for the 
 purpose of speculative operations. Indeed, 
 
134 THE STOCK EXCHANGE 
 
 Wall Street and the Stock Exchange were 
 till the late nineties practically synonymous 
 terms, so that a banking crisis would naturally 
 attend any really severe crisis upon the Stock 
 Exchange. But the reason why the Wall 
 Street banks could not withstand the "runs" 
 of October. 1907 was rather different; for in 
 the era of great trust and corporate flotations 
 after 1906 immense sums of bank money had 
 been loaned to the managers under "syndi- 
 cate agreements." This money had been 
 available for Stock Exchange operations; but 
 now there were Stock Exchange loans and 
 syndicate loans in Wall Street, and the latter 
 proved not to be liquid like the former. When 
 the liquidation of Stock Exchange loans was 
 finished, and creditors of the banks were still 
 clamorous, there was nothing for the banks to 
 do but suspend payment; for the syndicate 
 loans were found to be quite unwieldy and 
 uncollectable in such an emergency. 
 
 The fact that one institution in New York 
 was financing 81 syndicates at one time, will 
 give some idea of the extent to which the re- 
 sources of Wall Street were used outside of 
 the Stock Exchange when the collapse came 
 in 1907. Since that time the current has 
 changed back again to Stock Exchange 
 
WALL STREET 135 
 
 operations, and now there is direct manipula- 
 tion of prices of securities on the Stock Ex- 
 change by groups of capitalists who had for 
 some years devoted their operations almost 
 entirely to the creation and management of 
 syndicates. 
 
 The New York Stock Exchange business 
 differs radically in one respect from all others : 
 its dealings are practically confined to home 
 corporations. Canadian Pacific Railway 
 shares are dealt in sparingly, and there is a 
 nominal market for some issues of Japanese 
 bonds. There used to be a market for some 
 Mexican rails, but now a recorded sale rarely 
 appears. American investments have always 
 been sufficiently attractive to hold the bulk 
 of American capital. This will change some 
 day, but not soon. Some day American 
 colonial securities will probably be quoted 
 and actively dealt in. There is a steady ab- 
 sorption of good shares by small investors. 
 Every year the registry of stock holders 
 shows an increase in numbers in most of the 
 old-established dividend-paying corpora- 
 tions. Hence comes the demand for more 
 public control of corporations and more 
 protection for investors. The business of 
 the New York Stock Exchange will be- 
 
13(5 THE STOCK EXCHANGE 
 
 come more of an investment character, as 
 American securities develop into sure revenue 
 producers. Railway shares that used to be 
 of doubtful value have become sound invest- 
 ments, and there are comparatively few low- 
 priced shares now available for the shrewd 
 investor who likes to buy shares that may 
 ultimately become revenue producing. Such 
 buyers, if they still fancy American securi- 
 ties, must eventually turn to the ordinary 
 shares of industrial corporations, of which 
 there will be a large assortment from which 
 to choose; but the market for them will not 
 be so broad and speculatively attractive as 
 it has been for the ordinary shares of railway 
 corporations. It may always be possible to 
 buy but not always possible to sell. The 
 tendency of public opinion is to force the 
 New York Stock Exchange to protect the in- 
 terests of dealers in its securities with the 
 utmost possible care. 
 
CHAPTER V 
 
 GOOD SECURITIES AND THE ART OP 
 
 INVESTMENT 
 
 AFTER our survey of Stock Exchanges in 
 the past and the present my readers will be 
 prepared for some critical examination of 
 the area and modes of investment. The 
 difference between investment and specula- 
 tion cannot be defined accurately; but every 
 one has a rough idea of a line which divides 
 safety, with the certainty of a reasonable 
 interest, from risk, with all its possibilities 
 of loss or profit. The theme of speculation! 
 will be developed in our next chapter. Our 
 present object is to direct the attention of 
 the genuine investor, who wants his interest \ 
 to be as high as is compatible with the safety 
 of his principal, to some of the general rules 
 and considerations that should limit and 
 guide his choice. 
 
 The largest and most varied list of securi- 
 ties in the world is the "Daily Official List" 
 137 
 
138 THE STOCK EXCHANGE 
 
 of the London Stock Exchange. It now con- 
 sists of sixteen large pages. The price of 
 a single copy is sixpence. It is published by 
 the Trustees and Managers of the Stock 
 Exchange, under the authority of the Com- 
 mittee, at 4, Copthall Buildings, London, 
 E.G. Largely as the result of the ever- 
 increasing tendency both at home and abroad 
 ^o give commercial and industrial under- 
 takings the form of joint-stock companies, 
 the London list has expanded very rapidly in 
 the last half -century. Up to the, year 1867 
 one page sufficed, then four till 1889, then 
 eight till 1900, and twelve from 1900 to 1902, 
 when it reached its present limit of sixteen. 
 In the last twenty -five years the total nominal 
 value of all the securities quoted has nearly 
 doubled from 5,480,000,000 in 1885 to 
 10,200,000,000 in 1909, about twice the 
 nominal capital value of the securities quoted 
 on the Paris Bourse according to the latest 
 statement that I have seen. In 1902 the total 
 par value of the listed and unlisted securities 
 dealt in on the New York Stock Exchange 
 was only about 3,000,000,000. 
 
 The London Stock Exchange List is sub- 
 divided into thirty-eight different classes of 
 ,very varying importance. The Foreign 
 
GOOD SECURITIES 139 
 
 market, including the loans of foreign gov- 
 ernments and foreign provincial and muni- 
 cipal issues, deals with a nominal capital of 
 over three thousand million pounds sterling. 
 Other great groups are 
 The Consol market, includ- 
 ing colonial and municipal 
 
 issues 1737 millions- 
 
 The Home railway market . 1220 
 American railroads, includ- 
 ing U. S. steel 1803 
 
 Foreign railway market . . 571 
 Colonial " . . 229 " 
 
 Indian . . 145 
 
 Then there are the immense markets of 
 home banking, insurance, shipping, gas, 
 waterworks, canals, mining, industrial, finan- 
 cial and miscellaneous, comprising about 
 1,500,000,000 of nominal values. The mis- 
 cellaneous market includes a great number 
 of British companies working abroad or in 
 the colonies, or partially at home and par- 
 tially abroad, such as land, mining, rubber, 
 nitrate, telegraphs, etc. In the foreign bond 
 market only a fraction of the capital invested 
 is British. In American railways, British 
 capital comes easily next after American. 
 In all the other markets of the London 
 
140 THE STOCK EXCHANGE 
 
 Stock Exchange home investors own the 
 whole, or a greatly preponderating share. 
 Before leaving the list we shall do well to 
 insist again, at the risk of repetition, that it 
 is not always possible to buy or sell at the 
 prices quoted. A jobber cannot be forced 
 to deal. The real test of saleability is the 
 column showing "business done," which 
 indicates clearly enough what are the active 
 securities. Among inactive securities there 
 are many (such as small but sound State 
 and municipal loans) which are saleable 
 enough. On the other hand, small specula- 
 tive securities such as rubber and oil com- 
 panies, and many other commercial and in- 
 dustrial ventures, are easily got rid of 
 when for some reason or other speculation 
 flourishes, but are at other times almost un- 
 marketable. The best markets for local 
 industrials are often found on provincial 
 Stock Exchanges, such as Glasgow, Man- 
 chester, or Liverpool. 
 
 For investment purposes securities may be 
 divided into public and private, the former 
 being based on public credit backed by taxes 
 (or rates), and the latter on private credit 
 backed by profits, good will, and tangible 
 assets. 
 
GOOD SECURITIES 141 
 
 The best Government loans, starting with 
 British Consols and French Rentes, and end- 
 ing with the Imperial and State loans of 
 Germany, yielded at the close of 1910 from 
 3 to 4 per cent, interest. Twelve years ago 
 they yielded from 2f to 3j per cent. The 
 change has come about mainly through 
 enormous borrowings for wars and increased 
 armaments. If, as seems now happily not im- 
 probable, we may look forward to a period of 
 abstention from war, with limitations of mili- 
 tary and naval expenditure by arrangement 
 among the Powers, a substantial appreciation 
 in the credit of these gilt-edged securities 
 (especially British and German) can confi- 
 dently be predicted, though it may be long 
 before we return to the levels of 1897 and 
 1898. With the increasing demands for public 
 improvements of all kinds, the output of 
 municipal loans throughout the world is a 
 formidable competitor with the borrowing 
 propensities of national governments. For- 
 tunately, the good municipal loans are gener- 
 ally well spent for purposes which are directly 
 or indirectly profitable. The investor is also 
 protected, as a rule, either by a sinking fund, 
 or by a provision for repayment at par on 
 a given date, or by a statutory limitation 
 
142 THE STOCK EXCHANGE 
 
 of the total indebtedness in accordance with 
 the assessable value of the town, or by more 
 than one of these methods in combination. 
 No British municipality has ever, since the 
 Municipal Corporations Act of 1835, failed 
 to pay its interest punctually. Among the 
 States of the American Union there were 
 some scandalous repudiations in the days of 
 Sidney Smith, which have been immortal- 
 ised by the stinging pen of that wittiest of 
 economic and political writers. However, 
 with a mere handful of exceptions the record 
 of North American and colonial towns has 
 been clean for a generation, and their credit 
 is deservedly high. But as the coupons upon 
 the city bonds of the United States are not 
 payable in London, they are of little interest 
 to English investors. Some care should be 
 exercised in regard to the size of towns; for 
 small colonial villages, which might almost be 
 wheeled out of the municipal area in a single 
 night, sometimes call themselves "cities," 
 and get their bonds hawked about in London. 
 The investor should wait for a good pro- 
 spectus or take the issue of a decent-sized 
 colonial town which is duly quoted in the 
 London Stock Exchange list. But he may 
 well be satisfied with a slightly lower rate of 
 
GOOD SECURITIES 143 
 
 interest in home municipal stocks, from 
 which, if he is an "inscribed" holder, he will 
 receive his interest regularly without trouble. 
 All the larger issues are readily marketable at 
 any moment, though of course the jobber's 
 turn is rather bigger than in the case of 
 consols. 
 
 To judge the value of second-class public 
 securities requires a rather wide knowledge 
 of political and financial conditions. A rough 
 criterion is the market's own appreciation. 
 But the market seldom discriminates ade- 
 quately between loans for war or armaments 
 and loans for capital and reproductive pur- 
 poses. The value of its judgment is rather 
 technical as between different securities of 
 the same class. But a nation groaning 
 under a dead-weight debt contracted for war 
 is in a very much inferior position to that of 
 a country like Canada which has borrowed 
 mainly for reproductive purposes. And in 
 the same country there may be many public 
 issues of very varying merit. Thus a close 
 study of the various Greek bonds will show 
 why the railway loan is considered the best, 
 and so yields the lowest rate of interest. 
 Similar distinctions may be made in the case 
 of Turkish, Argentine, Chinese, and Bra- 
 
144 THE STOCK EXCHANGE 
 
 zilian loans. As a rule, in the case of coun- 
 tries which are financially weak and over- 
 burdened with debt, the market prefers 
 loans specially mortgaged on some branch 
 of the customs or inland revenue. In coun- 
 tries with rising credit the lower interest 
 loans standing well below par are the most 
 attractive. A railway bond guaranteed by 
 the Government has a double security, and 
 may in some cases be preferred to a direct 
 Government issue. Indeed, the unguaranteed 
 bonds of the best British railway companies 
 in South America often yield a lower rate of 
 interest than those of the Government whose 
 territory they serve. Generally speaking, 
 investors, who do not wish to lose their 
 capital, should avoid the municipal, and 
 provincial issues of South America, and all 
 Central American loans, and all the loans of 
 Venezuela, Colombia and other minor re- 
 publics of South America. To judge by ex- 
 perience and present conditions, Argentina, 
 Chile, and Brazil are the most secure of South 
 American States. But even in these, as well 
 as in Mexico, there are elements of political 
 danger and social disorder which cannot be 
 overlooked. 
 
 Turning from public to private securities, 
 
GOOD SECURITIES 145 
 
 we are faced by an entirely new set of con- 
 siderations, and the task of the investor is 
 far more difficult and complicated. By a 
 skilful and cautious use of local knowledge 
 a careful buyer may often secure for himself 
 a high rate of interest with comparatively 
 little risk. But even so he will be well advised 
 not to entrust all his eggs to a local basket. 
 In case of the accidents and misfortunes 
 due to unforeseen frauds, or unsuspected 
 mismanagement, or fashion, or competition, 
 any local concern may come to grief. A town 
 or part of a town may decay, an industry 
 may decline, the values and rents of lands, 
 houses, factories, and shops, may shrink and 
 dwindle to the most alarming extent. Cer- 
 tainly those who have capital should take 
 care that a good part of it is distributed 
 among unassailable securities of a national 
 or international character. 
 
 Let us now pass to the technicalities of 
 joint-stock companies their bonds, their pre 
 ference stocks, and their ordinary shares, and 
 to the general merits of the security which 
 various species of undertakings offer. 
 
 During the last seventy or eighty years 
 railway enterprise has probably proved the 
 most productive and profitable of all invest- 
 
146 THE STOCK EXCHANGE 
 
 ments. The early promotions of course con- 
 tained a large sprinkling of swindles. The 
 early railroad pioneers were often of the 
 buccaneering type a type not yet extinct 
 in new countries. But in the average case 
 where the promoters have attained an average 
 standard of honesty, and the engineers an 
 average standard of skill, the faith of the 
 investor has been justified. So far no in- 
 vention for land transport has appeared 
 which seems at all likely to vie with the steel 
 car, drawn by steam or electricity along steel 
 rails, in cheapness and celerity. It might 
 seem that steamships should provide equally 
 attractive openings to the investor. But 
 here a vital difference emerges. Almost 
 every railway enjoys at least a partial mono- 
 poly. It has a route fixed and permanent, 
 which no competitor can use without its 
 consent. The people along the route must 
 use it for travelling or freight, and it is only 
 in densely populated countries that an alter- 
 native line is often available without great 
 loss of time and convenience. But the sea is 
 a public highway open to all. No shipping 
 company can exclude a competitor from its 
 route. And as soon as a lucrative monopoly 
 begins to be enjoyed, another company, or a 
 
GOOD SECURITIES 147 
 
 swarm of tramps, is almost certain to appear. 
 Tramways and improved roads, with bicycles 
 and motor cars, have no doubt reduced 
 short distance passenger traffic in some places, 
 but they also act as feeders to a trunk line. 
 There may be a future danger to railroad 
 investors in aeroplanes and flying machines; 
 but at present the peril seems to attach to 
 the persons rather than to the competitors of 
 aeronauts. Telegraph companies are threat- 
 ened by telephones and marconigrams, but 
 so far they seem likely to survive. The tele- 
 phone is a quick substitute for the personal 
 interview. The telegram is a quick sub- 
 stitute for the letter. Each has its special 
 use, and therefore the capital invested in 
 each may continue to yield interest. So, 
 again, many substitutes have been invented 
 for rubber; but none of them has yet proved 
 at all formidable. 
 
 It would be possible to fill many pages 
 in this way discussing the probable future of 
 the different branches of commerce and 
 industry into which capital is being and has 
 been poured by investors. But our special 
 purpose here is to define broadly what is 
 a satisfactory security, leaving the investor 
 to speculate upon and allow for the possi- 
 
148 THE STOCK EXCHANGE 
 
 bility of any particular business being super- 
 seded by the invention of a superior process 
 or a cheaper substitute. And here it may be 
 well to begin by accepting, with limitations, 
 the received opinion that, in the sphere of 
 private or commercial as distinguished from 
 government and public stocks, the best 
 security is a first mortgage upon any flourish- 
 ing enterprise which can offer ample assets. 
 It is not every undertaking that can provide 
 satisfactory security for the issue of bonds. 
 In fact, it may almost be said that a real 
 freehold estate, with a market value consid- 
 erably above the total issue of first mortgage 
 bonds, is the only case in which a first mort- 
 gage in itself offers anything like an impreg- 
 nable security even in a stable and civilised 
 country. For this purpose, pastoral or agri- 
 cultural land is superior to urban values, as 
 it is generally subject to less violent fluctua- 
 tions. But even here there is the possibility 
 of a confiscatory land tax and that passed 
 by the Labour Government in Australia in 
 1910 almost deserves the epithet which will 
 make a heavy reduction in the selling value 
 of the lands of a pastoral company, and so 
 endanger the capital even of those who hold 
 first mortgage bonds on the property. The 
 
GOOD SECURITIES 149 
 
 value of a first mortgage rests on the fact 
 that if the interest is not paid the mortgagees 
 can immediately seize and sell the property. 
 Where the property consists of real estate, 
 timber, or other valuable and marketable 
 goods in ample amount, and the courts of 
 justice can be relied on, the security may 
 be called perfect. But in nine cases out of 
 ten the property of the corporation or com- 
 pany owes most of its value to the under- 
 taking as a whole. As Mr. E. S. Meade 
 puts it, in his excellent treatise on Corpora- 
 tion Finance, "When the property of the 
 company is specialised to the use of a particu- 
 lar business, such as a railroad or manufactur- 
 ing plant, where the business must be carried 
 on in a certain place and by people who are 
 skilled in its management, and where the 
 property, once devoted to a particular use, 
 can be turned to no other use, the real 
 security of the creditor is not the property 
 but the earnings of the property." On 
 this view the much-vaunted first mortgage 
 on a railroad owes its value to the fact not 
 that it enables you to sell the property, but 
 that it is a first charge on the earnings. In 
 other words, the American first mortgage 
 bond is no better than the floating charge 
 
150 THE STOCK EXCHANGE 
 
 of an ordinary English debenture, ^nd if 
 the surplus earnings in bad times are less it 
 is really less valuable. Other things being 
 equal, a well-covered first preference is almost 
 as good as an equally well-covered bond or 
 debenture. Let us put the American first 
 mortgage bond to the practical test of 
 bankruptcy. 
 
 If we look at the actual wording of the 
 1897 mortgage securing "the first lien con- 
 vertible four per cent, gold bonds" of the 
 Union Pacific Railroad Company (a typically 
 gilt-edged investment though the line was in 
 a receiver's hands twenty years ago) we find 
 that it assigns to the trustee all the several 
 lines of railroad; property, terminals, prem- 
 ises, etc., belonging to the railroad company. 
 Under this and other mortgage deeds the 
 trustee for the bondholders has large and 
 sweeping powers over the property of the 
 corporation in the event of bankruptcy. 
 He can, in theory, sell the property, or enter 
 upon it and operate it, applying the proceeds 
 or revenues to the liquidation of its debts. 
 In theory, I say, and according to the letter 
 of the law, the property of a corporation 
 which fails to pay interest on its bonds, or 
 to meet them when due, is to be seized by 
 
GOOD SECURITIES 151 
 
 the trustee and sold. It is for this that the 
 mortgage deed was drawn, for this that the 
 trustee exists. A similar procedure is actually 
 carried out in small bankruptcies. But in 
 large affairs the American law does not 
 work. Just as, in a panic, American banks 
 are allowed to suspend cash payments with- 
 out closing their doors, so (to quote our 
 previous authority) "the theory of the cor- 
 poration mortgage cannot in many cases 
 be carried out." 
 
 How, then, is the mortgage made null and 
 void, and "the property protected against 
 its creditors"? It is done "by invoking the 
 aid of a court of equity." A receivership 
 is the easy and comfortable haven into which 
 in troublous times an American corporation 
 steers. I am not exaggerating. Mr. Meade, 
 who has studied the law and the facts ex- 
 haustively, declares that "at the first threat 
 of disaster" the directors, "who see long 
 before any creditor the impending insolvency 
 of the company, fly to the shelter of a court 
 of equity." Equity shields them from the 
 law, and bars the best secured creditors 
 from their legal remedy. The judge usually 
 appoints the chief lawyer of the bankrupt 
 corporation, or possibly even its president, 
 
THE STOCK EXCHANGE 
 
 as receiver. Or he may, and often does in 
 smaller cases, appoint some unsuccessful 
 lawyer connected with the court; for a 
 receivership is a paid office, and receiver- 
 ships, especially in bad times, are large 
 fountains of patronage. The plea, we are 
 told, which usually prevails with the judge 
 on these occasions, is that, unless the court 
 intervenes and appoints a receiver, the 
 creditors of the company will seize upon its 
 property. But exactly the same plea could 
 be urged in respect of a house-owner who 
 failed to pay interest on his mortgage. The 
 only difference is that in the case of a cor- 
 poration the stockholders, who own it, are 
 a numerous body. . 
 
 To get the money or substitute for money 
 that he needs to carry on the business, the 
 receiver usually resorts to what are called 
 "receiver's certificates." A receiver's certifi- 
 cate is "a short term note secured by a first 
 mortgage upon all the property in the re- 
 ceiver's hands." The plight of the first 
 mortgage bondholder may now be imagined. 
 He has not only lost his legal remedy for 
 recovering his principal, but an equitable 
 first mortgage has been put in front of his 
 legal first mortgage. When, therefore, the 
 first mortgage bond of American law is put 
 
GOOD SECURITIES 153 
 
 to the sole test for which it was intended, 
 it only too frequently proves to be not worth 
 the paper it was written upon. In course of 
 time, no doubt, the interest on the bond may 
 be resumed, and its value may be restored. 
 But it is not in practice the security which it 
 professes to be in theory. Equity has taken 
 away what the law gave. Looking back 
 over thirty years, the ordinary stockholder 
 in a sound and well-conducted company like 
 the Pennsylvania has been better off for 
 dividends, and better secured as to principal, 
 than the owner of the highly-valued first 
 mortgage gold bonds of many American 
 railroad corporations. 
 
 The prestige of the American first mortgage 
 bond is so great and so undeserved, and its 
 superiority to the ordinary English debenture 
 so frequently asserted, that I shall borrow 
 from Mr. Meade a concrete illustration of the 
 risks a receiver is allowed to run. First of 
 all, however, it may be asked whether the 
 bondholders take the receivership and the 
 receiver's certificates lying down? Appar- 
 ently not, but they spend their money vainly 
 in equitable suits. 
 
 "Existing creditors of the company are 
 violently opposed to the issue of receiver's 
 certificates of large amount, and often appeal 
 
154 THE STOCK EXCHANGE 
 
 to the court not to allow the receiver to place 
 this new incumbrance ahead of the lien on 
 their security. Their pleas are, however, 
 usually disregarded. The court usually 
 stands by its own appointee, the receiver, and 
 is usually guided as to the necessity of the 
 issue of certificates by the receiver's recom- 
 mendations. The amount of money which 
 the receiver will spend upon the property 
 depends on his conception of his duties." 
 
 So much for the practice as stated by a 
 friendly writer. Now for the illustration. 
 In 1896 the Baltimore and Ohio went into a 
 receivership. Two receivers were appointed. 
 The road was in a bad way. What was to 
 be done? The proper thing, I submit, would 
 have been for the receivers, acting as trustees 
 for the bondholders, to endeavour first of all 
 to sell the line on favourable terms to some 
 stronger neighbour and competitor like the 
 Pennsylvania or the Chesapeake. But the 
 receivers were ambitious and clever. They 
 saw a chance of making a reputation and 
 took it. They issued receiver's certificates 
 and car-trust certificates as freely as if they 
 were in charge of the purse of Fortunatus. 
 They spent enormous sums on reconstruc- 
 tion and equipment. Mr. Meade writes: 
 
 "Earnings were heavily drawn upon, and 
 
GOOD SECURITIES 155 
 
 in many instances bondholders were forced 
 to wait until the property on which they 
 had a lien was put into condition to earn the 
 interest. . . . This work was not carried 
 through without severe opposition. Suit 
 after suit was brought by security-holders 
 to restrain the receivers from increasing the 
 burdens of the property. It was urged that 
 they were destroying the value of the first 
 mortgage bonds by their reckless issue of 
 certificates. . . . Their policy was denounced 
 as a gross usurpation of power." 
 
 The policy, we are told, was abundantly 
 justified by success. The efficiency and earn- 
 ing power of the road was improved. But 
 mark the writer's summing up. "The Balti- 
 more and Ohio receivers took great risks. 
 They applied a desperate remedy to a des- 
 perate situation. Their success on this ac- 
 count was all the more conspicuous and bril- 
 liant." Running great risks! That is all 
 very well for ordinary shareholders, who put 
 their money into speculative securities know- 
 ing that they stand to win or lose much. 
 But bondholders do not lend their money 
 on those terms. They accept a small rate of 
 interest in return for a guarantee that their 
 principal is safe, and that if the interest 
 fails, the principal can be promptly regained 
 
156 THE STOCK EXCHANGE 
 
 by process of law. They stood to gain noth- 
 ing except their principal by the desperate 
 and brilliant risks run at their expense by 
 the receivers. They naturally and rightly 
 objected. Many of them probably sold their 
 bonds at a heavy depreciation. It is no 
 answer to say that it all turned out well in 
 the end and that it was good business for the 
 stockholders. The affair reflects credit, no 
 doubt, on the managing skill and enterprise 
 of the receivers; but it proves the emptiness 
 of the theoretical superiority of first mort- 
 gage bonds in America over other prior 
 charges, and should serve as a tremendous 
 warning to investors not to put any faith in 
 these documents beyond what may prop- 
 erly attach to an ordinary debenture. The 
 bonds of a weak company, as I have said, 
 may be less secure and reliable than the or- 
 dinary stock of a strong one. 
 
 In America, of course, these warnings are 
 largely unnecessary; but bonds, even of in- 
 dustrial corporations in the United States 
 and Canada, as well as in Mexico and South 
 America, have been so widely and skilfully 
 advertised in London, that the guileless in- 
 vestor, unaware of precedent and practice, 
 fancies that he has got hold of a gilt-edged 
 security with a fairly high rate of interest, 
 
GOOD SECURITIES 157 
 
 and that even in the event of bankruptcy 
 his capital must be returned to him intact. 
 This is a complete delusion. In most cases 
 he is an unintentional speculator in loss, with 
 very little to gain in case the company, after 
 default, becomes a prosperous concern. From 
 this point of view he would do far better 
 to buy preference stock with a cumulative 
 dividend. The bond buyer in a rickety 
 railroad or industrial corporation surrenders 
 the chance of participation in increased 
 earnings in exchange for the doubtful guar- 
 antee of a fixed rate of interest and a legal 
 document (which will probably be dis- 
 honoured) entitling him to prompt posses- 
 sion of the property in case of default. 
 
 American bonds are either for long or short 
 terms. Of the long term bonds, which alone 
 are suitable to the ordinary investor, there 
 are three main varieties, namely, first and 
 second mortgage bonds, collateral trust 
 bonds, and car trust (or equipment) certifi- 
 cates. Owing to the established doctrine of 
 receiverships, none of these are what they 
 pretend to be perfect securities. In every 
 case the security depends upon the prosper- 
 ity of the company or corporation and the 
 amount of surplus revenue which remains 
 after the interest on the bond has been paid. 
 
158 THE STOCK EXCHANGE 
 
 Provided a property is otherwise free and 
 there is a guarantee that it shall remain un- 
 encumbered, I can see little to choose be- 
 tween a first mortgage bond, an equipment 
 bond, and an ordinary debenture. But if 
 there is any conceivable risk of bankruptcy 
 the would-be investor, who is really in search 
 of safety, should turn aside from the glittering 
 bond and buy a public security issued by some 
 respectable government or municipality. 
 
 A debenture may be defined as a certificate 
 of debt issued by a corporation or company, 
 without mortgage or collateral security. In 
 the United States the debenture holder is 
 legally an unsecured creditor; the bond- 
 holder is legally secured but equitably un- 
 secured. What the debenture holder pos- 
 sesses is (1) a prior claim to earnings, and (2) 
 a right of action against the company if they 
 fail to pay him his interest or to repay him 
 his principal when due. Of course, if there 
 is a first mortgage upon the property of an 
 undertaking which has issued debentures a 
 first mortgage bond is better than a deben- 
 ture. The purchaser of a debenture should 
 take care that this is not and cannot be the 
 case. The so-called income bond is a bond on 
 which the interest or income is only payable 
 according to the discretion of the directors, 
 
GOOD SECURITIES 159 
 
 though in the event of a receivership the 
 principal must ultimately be repaid if the 
 money will go round. In this respect it is 
 superior to preference stock, but as the in- 
 terest of an income bond is not cumulative, 
 it is in another respect inferior to a cumulative 
 preference. The objection to bonds of all 
 kinds in countries whose courts do not allow 
 the legal security to become effective has 
 now been clearly stated. The capital may 
 be lost or locked up for an indefinite time 
 in a receivership. Otherwise the value of a 
 specific security is, as we have seen, greatest 
 where the assets of the company are really 
 saleable apart from its good-will as a going 
 concern. A land or pastoral company, or 
 a well-situated shop with a valuable site, 
 are cases in point. Machinery often proves 
 almost worthless when an industrial company 
 goes bankrupt. In England a right of fore- 
 closure is a real and effective right, and a 
 debenture with a trust deed containing this 
 right and attaching sufficiently valuable free- 
 hold property to the debentures for the pur- 
 pose, safeguards the security of the principal, 
 apart from the earning power of the concern. 
 Provision for a sinking fund is another valu- 
 able item that may appear in a debenture 
 trust deed ; and if the deed is properly drawn 
 
160 THE STOCK EXCHANGE 
 
 and the assets attached are not undervalued, 
 it will be found that the price of the deben- 
 tures will shrink comparatively little when 
 the profits of the company dwindle. This is 
 naturally the reverse of an American bond- 
 holder's experience when his corporation be- 
 gins to go downhill towards a receivership. 
 
 To sum up the matter. An investor who 
 really wishes to sleep over his debentures, 
 and is not disposed to haggle about a quarter 
 or half per cent., should first and foremost 
 look to see what margin there has been of 
 earnings over and above fixed charges in 
 years of depression. Next he will read the 
 trust deed, if any, to see the nature of the 
 debenture or mortgage issue. Then he will 
 find out what sort of consideration the courts 
 of justice of the country or State in which 
 the corporation is formed are accustomed to 
 give (a) to bondholders in case the concern 
 goes bankrupt, and (b) to foreigners. Eng- 
 lish investors often find that litigation in 
 foreign courts is merely throwing good money 
 after bad. A British company, whether 
 working abroad or at home, is certainly to be 
 preferred to a foreign company, other things 
 being equal. American company law varies 
 from State to State, and is often most un- 
 satisfactory to shareholders. Lastly, let the 
 
GOOD SECURITIES 161 
 
 investor keep always in mind that an ill- 
 covered bond, so far from being a gilt-edged 
 security, may be of all speculations the one 
 least likely to prove profitable. 
 
 When we leave debentures or bonds to 
 buy company stock we put aside all thought 
 of trying to secure our principal in the event 
 of failure and bankruptcy. As a rule, the 
 purchaser, even of a preference stock, can 
 only claim that it ranks before ordinary 
 stock in the distribution of earnings. True 
 it is sometimes provided that in the event of 
 a company being dissolved or wound up, 
 either compulsorily or voluntarily, the holders 
 of preferred stock shall rank before the 
 holders of ordinary or common stock in the 
 distribution of assets. But in such cases 
 there are not likely to be any assets left after 
 the creditors have been satisfied. There are 
 various other legal devices by which the 
 technical position of a preference holder may 
 be strengthened in the articles of association 
 or incorporation, and of these, perhaps the 
 most valuable is a limitation on the power of 
 the directors to mortgage the property; for 
 of course mortgages and debentures take pre- 
 cedence of preferred stock, and every addi- 
 tion to indebtedness impairs the position of 
 preference shareholders. The main division 
 
162 THE STOCK EXCHANGE 
 
 of preference stocks is, however, into cumu- 
 lative and non-cumulative. "Cumulative" 
 means, in the case of companies whose profits 
 fluctuate heavily, that in good times the 
 preference shareholder may hope to recover 
 in a lump the dividends which he has lost in 
 whole or in part during periods of depression. 
 But as the control of a company is usually 
 possessed by the common stock it often hap- 
 pens that this right has to be compromised 
 during a reconstruction. That is to say, in 
 order to avoid a winding up, in which every- 
 thing might be lost, the preference share- 
 holder has to consent to forego his past 
 claims for the sake of keeping the company 
 and his future hopes alive. But, of course, 
 the cumulative type is far the better. The 
 ordinary stock of good railways is often an 
 excellent investment in times of depression 
 and bad trade. Concerning the common 
 stock in American industrial companies, a 
 critical student observes: "It is usually 
 ,?old at a low figure, liberal representations 
 concerning anticipated earnings being made 
 to influence its purchase. These representa- 
 tions are not often realised." 
 
 One or two general observations upon 
 investments in both ordinary and preference 
 shares may fitly close this chapter. In the 
 
 
GOOD SECURITIES 163 
 
 first place, a natural monopoly or a franchise 
 conferred by public charter is the most stable 
 basis for investment. The most dangerous 
 imaginable prop for a company to rest upon 
 is a bounty or a protective tariff which may 
 at any time be withdrawn or swept away. 
 An industry which flourishes without tariff 
 aid in a protected country is presumably in 
 a very strong condition. The most impor- 
 tant consideration of all is the management, 
 and here the advantage of investment in a 
 local concern with which the investor is 
 well acquainted can readily be perceived. If 
 some change in the management occurs of 
 which he disapproves, he can probably get 
 out without much loss (if there is any sort 
 of a market) before the concern begins to 
 go downhill. Last, but not least, the time 
 to invest in industrial and commercial en- 
 terprises of all kinds is in periods of trade 
 depression, when dividends and prices are 
 low. A prospectus of a new company usually 
 appears in moments of buoyancy and pros- 
 perity, and on such occasions a subscription 
 is of course likely to prove unfortunate. But 
 this consideration does not, of course, apply 
 to new issues of well-established companies, 
 which may at any time require more capital 
 for the profitable extension of business. 
 
CHAPTER VI 
 
 SPECULATIVE SECURITIES AND MODES OF 
 SPECULATION 
 
 PROBABLY even in an old and conservative 
 country like England the average investor 
 is a speculator in the sense that he not only 
 wishes his investment to yield him interest 
 but also hopes and expects that he will some 
 day be able to sell out at a profit. Such an 
 aspiration is perfectly natural and legitimate. 
 Anybody who has large sums to invest will 
 very properly ask: "Is this a good time for 
 investment?" meaning, of course: "Are 
 stocks just now cheap and below their normal 
 level?" Thus, towards the close of a war 
 the credit of the belligerents is apt to be ab- 
 normally low, and so long as there is enough 
 revenue left to pay interest on the debt there 
 is a good opportunity for investment. Many 
 investors in England and France made very 
 handsome profits by buying Spanish bonds 
 during Spain's war with the United States, 
 164 
 
SPECULATIVE SECURITIES 165 
 
 or the bonds of Russia and Japan when those 
 two Powers were at war in Manchuria. In 
 this respect speculative panics and banking 
 crises resemble wars. Immense profits were 
 reaped by purchasers of American railroad 
 stocks in the autumn and winter of 1907, 
 when the American market, owing to the 
 complete collapse of credit, was in a state of 
 prostration, and dozens of sound securities 
 had fallen 50 per cent, below their normal 
 value. But when stocks or commodities are 
 really cheap the public is usually timid; when 
 they rise to absurd heights it rushes in and 
 buys madly. A man really seems to require a 
 great and unusual amount of courage to buy 
 freely when securities are cheap, and none at 
 all to buy when they are dear. People think 
 and act in mobs; and the speculative fever 
 always rages in an atmosphere of high 
 prices. 
 
 But a very sharp distinction must be drawn 
 between the speculator who buys speculative 
 securities, or "rubbish," and the speculator 
 who buys sound investment stocks. Thus 
 in the American market there are well-known 
 gambling counters such as Erie or Wabash 
 or Southern Common non-dividend payers 
 which have no intrinsic value and therefore 
 
166 THE STOCK EXCHANGE 
 
 move very rapidly in times of excitement. 
 There is all the difference in the world be- 
 tween these and the Union Pacific, which has 
 paid a dividend of 10 per cent, for several 
 years past. And yet in the last six years the 
 Union Pacific has fluctuated between a 
 maximum of 211 and a minimum of 74. Most 
 remarkable certainly almost romantic is 
 the history of this line. A friend of mine of 
 middle age well remembers buying Union 
 Pacifies at 8 and selling out at 13. In periods 
 of excitement these marvels are dilated upon, 
 and new Harrimans are conjured up who 
 might perform similar wonders with the Erie 
 or the Southern Railway. But > nearly all 
 markets have rubbishy shares which serve as 
 gambling counters. Thus the foreign market 
 has the bonds of Honduras, and of other 
 defaulting states, or provinces, or municipali- 
 ties, of Central and South America. Every 
 industrial market has ordinary shares in well- 
 watered companies which may have been 
 successful in their day, but are now practically 
 hopeless. Even our staid Home Railways 
 have weaker brethren, who seldom show their 
 heads above the dividend line. 
 
 But there is one whole class of securities 
 which are essentially speculative from causes 
 
SPECULATIVE SECURITIES 167 
 
 peculiar to themselves. The mining markets 
 and the new market for shares in rubber 
 securities are speculative, not because they 
 yield no dividends but because it is so difficult 
 to form a correct estimate of their value from 
 month to month or f rcm year to year. There 
 are, for example, the South African gold 
 mines, known as "Kaffirs," which date from 
 the sensational discoveries on the Rand in the 
 eighties of last century. There is the great 
 De Beers monopoly of diamonds at Kim- 
 berley a monopoly created by Mr. Rhodes 
 and Mr. Beit, but now threatened by the dis- 
 coveries in German South- West Africa. There 
 are the silver mines of the United States, 
 Mexico and Canada. There are copper mines 
 innumerable in all parts of the world from 
 Rio Tinto, most ancient and renowned of all, 
 in Spain, to the latest American discoveries. 
 There are the old tin mines of Cornwall, the 
 modern tin mines of Malay and the modernest 
 of Nigeria. Nor have we mentioned the gold, 
 silver, and copper mines of Australia, among 
 which Coolgardie and Broken Hill are pre- 
 eminent, or the gold mines of West Africa, 
 familiarly called the Jungle in Throgmorton 
 Street. In the year 1907 the leading pro- 
 ducers of gold were 
 
168 THE STOCK EXCHANGE 
 
 Ounces. 
 
 Africa .... 7,536,000 
 
 U. S. A. . . . 4,335,000 
 
 Australia . . . 3,619,000 
 
 Mexico . . . 925,000 
 
 Russia . . . 900,000 
 
 The Mining List of the London Stock 
 Exchange contains a vast selection of good, 
 bad, and indifferent companies. But even 
 the best are rather speculative. And why? 
 First of all, they are dwindling securities. A 
 mine which has yielded an average of 10 per 
 cent, in dividends for the last five years looks 
 very cheap, but may be very dear; for it 
 may not have more than ten years of profit- 
 able life. Buying shares in a successful mine 
 is a little like buying the unexpired lease of a 
 house without knowing the date at which it 
 will expire. 
 
 In the second place, however honestly 
 however scientifically conducted a mine may 
 be, it is practically impossible in nearly all 
 cases (even assuming the market value of the 
 ore to remain stable) to estimate its value for 
 investment. When will the mine be worked 
 out? When will it cease to pay? Nobody 
 knows; even the experts can only guess, and 
 
SPECULATIVE SECURITIES 169 
 
 their public guesses are not always believed. 
 The truth is that, in the flotation and finance 
 of mines, engineers and geologists play very 
 much the same part that valuers do as wit- 
 nesses in arbitrations and rating appeals. 
 It is their business to make out the best 
 valuation they can for their clients, and every 
 mining failure in the world has been intro- 
 duced to the credulous public by highly 
 coloured pseudo-scientific "reports" from 
 "eminent geologists." 
 
 Gold exercises a mysterious attraction over 
 the uneducated mind, especially in the City 
 and on the Stock Exchange. A tiny parcel 
 of gold is watched with far more interest than 
 a large cargo of mutton. The very elect are 
 sometimes strangely excited over the import 
 or export of a few thousand sovereigns or a 
 small quantity of bullion. Hence it has been 
 found easy to float a gold mine on less evi- 
 dence of the existence of gold than would be 
 needed in any other case though perhaps 
 "Baron" Albert Grant's "Emma" silver 
 mine might be cited by partisans of the white 
 rival. The unfortunate purchasers of Emma 
 shares found out afterwards that there was 
 neither silver nor title, and eventually for 
 every 20 subscribed they received back only 
 
170 THE STOCK EXCHANGE 
 
 a paltry shilling. Most people have heard 
 the punning epigram 
 
 , "Titles a king can give, honours he can't; 
 
 Titles without honour are but a Baron Grant." 
 
 But it is less commonly known that after 
 the Emma Silver Mine fiasco some wit added 
 
 " Yes, but you 're in an even worse dilemma 
 If you cannot get a title to your Emma." 
 
 Nevertheless, while the ordinary mining 
 prospectus should be put into the waste- 
 paper basket by any one who is not a mining 
 expert with special knowledge, well-established 
 mines of all kinds, from coal to gold, are 
 legitimate, useful, and often profitable ven- 
 tures. If the risk is well understood and well 
 distributed, and if the wasting character 
 of the securities is generously allowed for 
 by the recipient of dividends, there is no 
 reason why people of fortune should not 
 include a proportion of mining shares in 
 their holdings. 
 
 The degree of risk that attaches depends 
 largely upon the nature of the product. Gold, 
 fortunately for gold-standard countries, has 
 proved itself to be during the last hundred 
 years one of the stablest of all commodities. 
 Of course the nominal price of gold in a 
 
SPECULATIVE SECURITIES 171 
 
 country with a gold currency does not vary at 
 all. By the regulation of the London Mint, an 
 ounce of standard gold bullion is coined into 
 3 17s. 10|cL But people seldom take gold 
 bullion to the Mint, as they would have to 
 wait some time before receiving the coin. 
 The Bank of England acts as an intermediary. 
 It takes gold at 3 17s. 9d. and pays cash, the 
 difference of three halfpence per ounce be- 
 tween the Bank price and the Mint price 
 representing the Bank's discount and its 
 charge for the work involved. Since the 
 closing of the Indian Mints in 1893 to the free 
 coinage of silver, the Indian rupee has been 
 fixed at Is. 4dL and is therefore now a silver 
 representative of a gold standard. Australia 
 coins sovereigns of the same weight and fine- 
 ness as England, while in Canada the British 
 sovereign and the United States eagle are both 
 legal tender to any amount. The currency of 
 the United States is much complicated and 
 sadly in need of reform. But the standard is 
 really gold, the units being the gold dollar 
 weighing 25.8 grains and the gold eagle (or 
 ten-dollar piece) weighing 258 grains. An 
 English sovereign exchanges for about 4 dol- 
 lars 87 cents. But though the price of gold is 
 necessarily invariable in countries where there 
 
173 THE STOCK EXCHANGE 
 
 is a real gold standard, and where the Gov- 
 ernment undertakes to coin gold at a fixed 
 rate by weight, it does not follow that the 
 real price of gold is immutable. As a matter 
 of fact it varies constantly. For the real price 
 of gold is its purchasing power. In a silver- 
 standard country the price of silver is fixed, 
 while the price of gold is the amount you can 
 purchase at any tune in the standard silver 
 coin. 
 
 Hence in Great Britain, or the colonies, or 
 the United States, when we talk of rising 
 or falling prices we are talking of gold prices. 
 When we say that prices are rising we mean 
 that the value or purchasing power of gold is 
 diminishing, and when we say that prices are 
 falling we mean that its value or purchasing 
 power is rising. It is, therefore, wrong to 
 think of a gold mine as producing a metal 
 whose value is fixed or permanent. Its price 
 in a gold standard country is fixed, but its 
 value varies. Nevertheless, the comparative 
 stability of gold (proved by index numbers 
 which measure it in terms of commodities) 
 does certainly reduce one of the speculative 
 elements that play an important part in 
 mining shares. 
 
 After gold probably silver and iron and 
 
SPECULATIVE SECURITIES 173 
 
 coal come next in order of stability; though 
 silver has fallen enormously in the last 
 forty years. From 1868 to 1872 the aver- 
 age price of silver was 60 pence per ounce. 
 In 1902-3 it fetched only 24 pence. Iron 
 mines are now very largely owned by iron and 
 steel companies, of which the hugest example 
 is the Steel Trust of the United States a 
 vast concern built up by Mr. Carnegie and 
 sold on his retirement to Messrs. J. P. Morgan 
 & Co., who formed thereout the Billion Dollar 
 Trust. It is said to own something like half 
 the iron ore of the United States, and it man- 
 ufactures all kinds of iron and steel goods. It 
 has also the distinction of being almost the 
 only United States industrial corporation 
 whose securities are dealt in freely on the 
 London Stock Exchange and quoted on the 
 London Stock Exchange List. As the value 
 of iron is more likely to increase than dimin- 
 ish, its debentures are probably at least as 
 good a security as those of a first-class railway 
 company. A good deal of water has been 
 squeezed out of the ordinary shares by the 
 application of profits to capital; and the 
 profits ought to be increased rather than 
 diminished, if a sweeping reduction of the 
 American Tariff now a possible if not a 
 
174 THE STOCK EXCHANGE 
 
 probable event should be effected, bringing 
 with it a diminution in the cost of production. 
 That the American iron and steel industry 
 needs no protection is generally admitted. 
 
 No doubt the most speculative ores are 
 copper and tin, and in these cases the investor 
 must expect his shares to fluctuate as wildly 
 as the metals. A boom in trade usually 
 raises the prices of tin and copper far above 
 their normal level, and a slump like that of 
 October 1907 causes a corresponding dip or 
 depression. Thus between 1904 and the 
 spring of 1907 the price of copper nearly 
 doubled, and that of tin rose about 40 per 
 cent. Tin, however, is more easily cornered 
 than copper, as the output is much smaller. 
 
 Speculation in the metal soon brings about 
 an inflation of the shares, and when the 
 bubble is pricked many of those who fancied 
 they were successful investors, awake to 
 discover that they have been unsuccessful 
 gamblers. The shadow thrown by commod- 
 ity prices on share prices is often a long one, 
 simply because a small fall may wipe out 
 profits and dividends. Thus the movements 
 of copper company shares are apt to be far 
 more violent than those of copper. The 
 shares of Amalgamated Copper fluctuated 
 
SPECULATIVE SECURITIES 175 
 
 in 1904 between a lowest of 44 and a highest 
 of 85, in 1907 between a lowest of 43 and a 
 highest of 124. The great Rio Tinto mines 
 of Spain, on the other hand, produce other 
 metals also, and so have been more steady. 
 
 A comparatively new commodity, rubber, 
 promises to outdo even copper in rapidity of 
 movement; for its price has moved in the 
 last few years from Ss. per Ib. to l&s., and 
 back in the summer and autumn of 1910 from 
 12s. to 6s. Until recent years practically all 
 the rubber marketed was "wild" rubber; 
 that is to say, it was obtained by tapping wild 
 rubber trees, mainly in Brazil and the Congo. 
 Fortunately for humanity seeing that the 
 collection of wild rubber, especially in the 
 Congo, has been accompanied by the most 
 atrocious barbarities it has been discovered 
 that the "Hevea Brasiliensis," the best 
 variety of rubber tree, can be cultivated 
 successfully in the Malay Peninsula, Ceylon, 
 and some other tropical countries. A few of 
 the first experimental plantations produced 
 remarkable results, and already hi 1908 and 
 1909 a good many Englishmen and Scots, 
 who had special knowledge of their own, 
 began to invest in rubber plantations. To- 
 wards the end of 1909, as rubber rose in price, 
 
176 THE STOCK EXCHANGE 
 
 owing to a greatly increased demand from the 
 United States for motor tyres, etc., it began to 
 dawn on the public that rubber investments 
 offered phenomenal profits. Just because 
 a few skilfully managed plantations, with 
 rubber at an exceptionally high price, did 
 really seem to be worth many times the ori- 
 ginal capital, it was assumed that rubber 
 trees could be planted by anybody almost 
 anywhere so as to yield similarly marvellous 
 results. The London company promoters 
 saw their opportunity. The public was evi- 
 dently "on the feed." It wanted rubber 
 shares, and it got them to the tune of many 
 millions in the spring of 1910. There were 
 plenty of unsuccessful planters of tea, coffee, 
 etc., in Ceylon and Malaya, who were de- 
 lighted to sell "suitable" land at some high 
 multiple of its true value. So boards of di- 
 rectors were assembled, printing presses were 
 set to work, and hundreds of rubber planta- 
 tion companies were floated upon a credulous 
 and voracious public. Clerks and office boys, 
 footmen and nursemaids, subscribed with 
 eagerness, and followed the tips of the Daily 
 Menace with the unsuspecting simplicity 
 of their masters and mistresses. It was a 
 sad example of plundering and blundering. 
 
SPECULATIVE SECURITIES 177 
 
 Never, perhaps, since the Kaffir boom had so 
 many small savings been transferred into less 
 meritorious pockets. 
 
 But the distinctions between speculation 
 and investment are by no means exhausted 
 by merely regarding the quality of the pur- 
 chase. It is true that a man who buys Erie 
 Common, or Nicaragua bonds, or puts his 
 money into a new rubber company, is a 
 speculator, while a man who buys Pennsyl- 
 vania Stock or German Threes, or puts his 
 money into a new issue of an English munici- 
 pality, is an investor. But there is plenty 
 of speculation in gilt-edged securities; and in 
 ordinary times the typical speculator is the 
 fool who gambles with borrowed money. A 
 man with 100 who buys a Central American 
 "security" and puts it away in the hope that 
 (though it yields him no interest) it will rise 
 before long and enable him to clear out at a 
 handsome profit is far less likely to suffer 
 than the man who buys, say, 5,000 of some 
 good security for the account, and uses his 
 hundred pounds to pay contangoes and 
 differences. How heavy are the odds against 
 this sort of speculator we have shown by 
 statistics in our chapter on Wall Street. 
 But as long as civilisation lasts people will 
 
178 THE STOCK EXCHANGE 
 
 go on playing this foolish game in the face 
 of all experience. Just as in the case of a 
 lottery the chance of a gain outweighs the 
 probability of a loss. 
 
 A correspondent of mine once inquired: 
 "Is 5 per cent, necessarily speculative? Is 
 6 per cent, only to be had from speculations? 
 Is it gambling to buy mining shares which 
 yield anything between 5 and 10 per cent.? 
 Where can the line be drawn?" A stock- 
 broker, being asked wherein consisted the 
 difference between investment and specula- 
 tion, answered that speculation means dealing 
 for carry-over purposes, while investment ap- 
 plies to any case where the purchase is paid 
 for. Another, with a Balfourian turn of mind, 
 held that the real distinction depends on the 
 intention of the purchaser. If a man buys a 
 security and takes it up to hold he is an inves- 
 tor, no matter what the security may be, no 
 matter how rash or prudent the choice. On 
 this view there are different kinds of investors. 
 Thus one buys gilt-edged securities if the 
 chief object is to make absolutely sure of 
 regular dividends; or, again, if the main 
 desire is to have a large income another will 
 buy ordinary and preference stocks with a 
 high yield regardless of risk. Lastly, those 
 
SPECULATIVE SECURITIES 179 
 
 aim at a future appreciation of capital 
 rather than at immediate or regular dividends, 
 may buy a speculative stock like Grand 
 Trunk, or Steel Common, or some unlucky 
 industrial, which appears to be struggling out 
 of its difficulties, intending of course to watch 
 it carefully and look ahead (which is what 
 the word "speculation" implies), whereas the 
 gilt-edged man prefers something he can sleep 
 over. Upon this view speculation comes in 
 where the buyer's intention is not to pay but 
 to get out with a profit if possible before the 
 end of the account, or after a series of con- 
 tinuations at some future account. Such a 
 man may fairly be said to be playing or 
 gambling with his money, and not dealing 
 with it seriously or permanently as it is the 
 intention of an investor to do. I am not quite 
 satisfied to allow the distinction between 
 speculation and investment to rest upon in- 
 tention. The foundation is rather too slip- 
 pery. It reminds me of the eminent sophist 
 who, at an early stage of our fiscal contro- 
 versy, argued that the question whether a 
 duty is protective or not depends upon 
 whether the Government imposing it in- 
 tended it to be protective. 
 
 If, as a matter of fact, a man is running 
 risks and is speculating he cannot be called 
 
180 THE STOCK EXCHANGE 
 
 an investor on the ground that he is unaware 
 of the fact that he is running speculative 
 risks. Perhaps a distinction may be drawn, 
 however, between a member of the outside 
 public and a person who is actually in the 
 market. The moment an outsider begins to 
 borrow, and gets out of his depths, he is 
 certainly gambling or speculating, even if 
 the stocks he is interested in are Consols. 
 On the other hand, a member of the Stock 
 Exchange, who makes a regular business of 
 buying and selling shares, can hardly be called 
 a speculator in any vicious sense if he works 
 with borrowed money. A member of the 
 Stock Exchange almost always has an interest 
 in the market, and probably uses his credit 
 freely; but it is difficult to see much difference 
 between him and a wholesale dealer or mer- 
 chant in wheat, cotton, wool, etc., who often 
 has to rely on his banker for 75 per cent, of 
 the value of his purchases. 
 
 So much for the difference between specula- 
 tion and investment. But we have still to 
 touch upon the technical side of the subject, 
 which calls for a brief statement of the mode 
 or modes of conducting speculation on the 
 London Stock Exchange; and for this pur- 
 pose we may accept as a practical definition 
 
SPECULATIVE SECURITIES 181 
 
 of the speculator a person who interests him- 
 self in the temporary fluctuations of shares, 
 who bets or wagers (though not within the 
 meaning of the Gaming Acts) that certain 
 securities will rise or fall. If the contract were 
 a gaming contract within the meaning of the 
 Gaming Acts it would be null and void in the 
 eyes of the law, and neither party would be 
 able to enforce it. The reason why a specula- 
 tive contract with a Stock Exchange broker is 
 legal and enforceable is that the motive of the 
 buyer or seller has nothing to do with the 
 contract. The broker may not, and often 
 does not, know whether his client will take up 
 the purchase, or whether he will actually part 
 with the stock which he instructs the broker 
 to sell. One plain difference between a Stock 
 Exchange speculation and a bet upon a horse 
 is that in the case of the bet one party loses 
 and the other gains, whereas if A commissions 
 B to buy him 100 of shares and they rise to 
 110, B loses nothing by paying 10 to A on 
 the conclusion of the account. But, generally 
 speaking, when speculation in stocks is carried 
 on with an outside broker or "bucket shop" 
 (i. e. between two principals) the law holds it 
 to be a gaming contract. This is in itself 
 a sufficient reason against speculative persons 
 
182 THE STOCK EXCHANGE 
 
 dealing with these establishments. If they 
 win heavily they will very likely not be 
 paid. 
 
 . The reader will probably have a pretty 
 clear idea from previous chapters of the two 
 kinds of speculation for the rise and for the 
 fall. The Bull, who speculates for the rise, 
 buys stock, and the Bear, who speculates for 
 the fall, sells it. The one buys in the hope of 
 selling at a profit; the other sells in the hope 
 of buying back after the stock has cheapened, 
 and so pocketing the difference. A bear 
 operator is said to sell "short," because he 
 sells what he has not got, and when the time 
 comes to fulfil the contract he has to borrow 
 stock. As the fluctuations of stock their 
 ups and downs must on the average over a 
 long period be more or less equivalent, it 
 would follow that the operator least likely 
 to lose would be the person with a "flair" for 
 the market who was just as ready to be a 
 bear as to be a bull. But as a matter of fact 
 the great majority of speculators are always 
 bulls. Optimism seems to be of the essence of 
 speculation. A boom like the Kaffir boom, or 
 the rubber boom, requires the enthusiastic 
 co-operation of a credulous public. The 
 public understands how it may make money 
 
SPECULATIVE SECURITIES 183 
 
 out of a rise, but it cannot understand how to 
 make money out of a fall. So it will borrow 
 for the rise but not for the fall. 
 
 On the London Stock Exchange there are 
 monthly accounts or settlements for the 
 Consol market, and "fortnightly" accounts, 
 varying from 11 to 14 days, for other stocks. 
 The actual account or settlement covers four 
 days: (1) the Mining Contango Day; (2) 
 the general Contango Day; (3) the Ticket or 
 Name Day; (4) the Account Day, formerly 
 known as the Settlement, or Pay Day. Ac- 
 count therefore means either the whole "fort- 
 night" or month over which an account runs, 
 or the actual days of settlement, or the Fourth 
 Day of the Settlement. For "Contango" 
 another name is "Continuation" or "Carry 
 over." The two Contango days are of com- 
 paratively modern growth, necessitated by 
 the increasing volume of speculative accounts 
 which require extra days for the settling of 
 bargains. Stocks and shares bought or sold 
 for the current account must be either paid 
 for on Pay Day, or carried over (continued) 
 on Contango Day. The speculator for the 
 rise, who does not wish to cut a loss or realise 
 a profit, instructs his broker to carry over or 
 continue his shares. In that case the trans- 
 
184 THE STOCK EXCHANGE 
 
 action is postponed for a consideration, and 
 interest is charged for holding over the stock 
 to the next settlement. This interest is called 
 the contango rate. Thus, as a rule, the bull 
 pays a contango rate, and the bear who is 
 speculating for a fall is said to "take in" the 
 securities and to receive the rate or contango. 
 But sometimes in a depressed and bearish 
 market, the bear has to pay a "backwarda- 
 tion" instead of receiving a contango. It is 
 all a question of demand and supply. If there 
 is a demand for money and a plentiful supply 
 of stock there is a contango; if there is a 
 scarcity of stock for delivery against sales 
 there is a "backwardation" to be paid by 
 sellers who are short of stock. If on balance 
 there are securities which cannot be adjusted, 
 the bulls have to pay for an excess, or the 
 bears for a deficiency. In the case of the 
 bears this means either delivering the stock 
 they have sold, or borrowing it from a holder, 
 undertaking to replace it on the next account 
 day. All this is very difficult and technical. 
 But it is worth even the investor's while to 
 master the rudiments of the subject; for 
 temporary causes of market fluctuations have 
 to be allowed for. Enough has at least been 
 said to show that the bull is a fictitious buyer, 
 who borrows money in order to keep his pur- 
 
SPECULATIVE SECURITIES 185 
 
 chase going, while the bear is a fictitious seller, 
 who borrows stock in order to keep his sale 
 going. Both have to pay commissions, either 
 at each account or at the end of the transac- 
 tion, and both either pay or receive "differ- 
 ences" according as they gain or lose during 
 each account. The student of market fluctua- 
 tions is interested in the contango rate. If it 
 is high it shows that there are a great number 
 of bulls, if it is low or disappears into a "back- 
 wardation" it shows that the bears are pre- 
 dominant. In either event there is likely to 
 be a change in the market as a result of profit- 
 taking along with real sales in the one case 
 and real purchases in the other. But of late 
 years another kind of speculation has become 
 fashionable, which tends to rob stock ex- 
 change operators of this index to the condition 
 and immediate future of a market. Instead 
 of paying contango rates and commissions, a 
 speculator will pledge securities with his bank, 
 and with the loan so obtained will buy other 
 securities and hold for a rise. The advantage 
 of this method is that there is no commission 
 or contango rate. The disadvantage to the 
 mere gambler is that his speculation is limited 
 by the amount of securities he can pledge. 
 Moreover, the scientific operator, who wishes 
 to benefit by foreseeing a fall as well as a rise, 
 
186 THE STOCK EXCHANGE 
 
 is helpless. If he leans on a banker's loan 
 he can only be a bull; if he wants to sell stock 
 short he must go to a broker and follow the 
 method above described. 
 
 It remains to describe "options," a favour- 
 ite method with members of the Stock Ex- 
 change and one much in vogue with foreigners. 
 There are three kinds of options. 
 
 (1) The Put. Smith contracts to pay Jones 
 money for the right to sell him a certain se- 
 curity on a given date, at a named price. 
 
 (2) The Call. Smith contracts to pay Jones 
 money for the right to buy from him a certain 
 security on a given date, at a named price. 
 
 (3) The Put and Call, or Double Option, 
 known in Wall Street as a "straddle." 
 Under this the person who buys the option 
 buys the right either to sell or buy the se- 
 curity named on a given date, at a named 
 price. The double option usually costs 
 double as much as the Put or the Call. 
 
 If the line between common speculative 
 accounts and a bet or wager appears rather 
 fine, it is almost invisible in the case of 
 options to the naked eye of an ordinary ob- 
 server, and hardly visible in the case of a 
 double option, even to the sharp eyes of judges 
 whose lives have been given up to the mak- 
 ing and refining of distinctions. 
 
CHAPTER VII 
 
 WHY THE PRICES OF SECURITIES 
 RISE AND FALL 
 
 To the economist few inquiries are more 
 difficult or more fascinating than that which 
 is directed to the causes of price movements. 
 It leads him into the remotest abstractions 
 of monetary theory, into subtle disquisitions 
 on the delicate fabric of credit, and some- 
 times carries him through a maze of statistics 
 into imaginary parallels between the recur- 
 rence of sun spots and of commercial crises. 
 To the business man who must always be 
 something of a speculator for he wants to 
 buy for the future when things are cheap and 
 be short of stock when they are dear a scent 
 for prices is of overwhelming practical im- 
 portance. But he can seldom afford to take 
 long views. He proceeds mainly by rule of 
 thumb. The gold problem, and the silver 
 problem, and the credit problem are to him 
 unsolved and insoluble puzzles. Perhaps, 
 187 
 
188 THE STOCK EXCHANGE 
 
 even if he could understand the professors, 
 he would not get along very much better. 
 
 Still there are principles and rules drawn 
 partly from experience, partly from the 
 operations of reason and common sense, 
 which deserve to be plainly stated even 
 though our space is altogether too limited for 
 any exhaustive discussion. In the first place, 
 the prices both of commodities, and securities 
 depend upon the law of supply and demand. 
 If the world's demands for woollen and 
 worsted cloth remain unchanged while the 
 supply of sheep's wool increases, then the 
 price of wool is bound to fall; if they decrease 
 then the price rises. Again, if the supply of 
 wool remains constant, and the demand for 
 cloth rises or falls, the price of wool will rise 
 or fall until an equilibrium is attained. 
 Other things being equal, an increase of 
 supply or a diminution of the demand lowers 
 the price, while a decrease of the supply or 
 an augmentation of the demand raises it. 
 Thus when to meet the expenses of the 
 Boer War our Government issued more 
 than 150 millions of Consols and Exchequer 
 bonds, and Treasury bills, the price of Con- 
 sols fell heavily; and when the war was over, 
 it was found that the proportion by which 
 
PRICES OF SECURITIES 189 
 
 the National Debt had increased corre- 
 sponded almost exactly with the proportion 
 by which the price of Consols had fallen, 
 showing that the public demand for gilt- 
 edged securities had remained fairly constant. 
 There is therefore at least one fundamental 
 cause of price variations which applies equally 
 to commodities and securities. 
 
 Again, as was indicated in the preceding 
 chapter, a close parallelism is to be found 
 when you have a security whose rate of inter- 
 est depends on the profit derived from a raw 
 material. The shares in copper mines, or 
 tin mines, or rubber plantations, are obvious 
 cases in point. The market for the shares 
 fluctuates freely with the selling price of the 
 product. It was the enormous rise in the price 
 of rubber from 3s. to 12,?. per Ib. that caused 
 the rubber share boom; and as soon as the 
 prices of rubber at the auctions in Mincing 
 Lane began to fall the downward movement 
 in rubber shares commenced. While rubber 
 prices were at the top, rubber plantation com- 
 panies were floated successfully by the hour. 
 When the slump came the fish ceased to bite, 
 and the company promoter turned his atten- 
 tion from rubber to other things. 
 
 Another supposed connection between com- 
 modity prices and security prices may be 
 
190 THE STOCK EXCHANGE 
 
 noted. Except in countries with a silver 
 standard, or in those unhappy communities 
 which are at the mercy of an inconvertible 
 paper currency, prices mean gold prices. 
 Hence a great increase in the production of 
 gold tends to reduce its purchasing power and 
 so to raise prices, while a great diminution 
 in the output tends to increase the purchasing 
 power and so to lower the general level of 
 prices. But in the case of interest-bearing 
 securities this factor is almost negligible; for 
 the value of the security depends primarily 
 upon the rate of interest which it bears, and 
 the rate of interest has no real connection with 
 the relation between the quantity of gold in 
 the world and the quantity of securities. 
 Roughly speaking, the yield of Consols was 
 much the same (about 3 per cent.) in 1750, 
 in 1850, and in 1910; but of course the out- 
 put of gold and the relation between gold and 
 securities, or gold and silver, or gold and 
 credit were so entirely different at the three 
 dates that no scientific mind would dream of 
 attempting to bring these things into com- 
 parison. The fluctuations of the Bank of 
 England's gold reserve are a barometer of the 
 London money market, and gilt-edged securi- 
 ties naturally tend to fall when the short loan 
 
PRICES OF SECURITIES 191 
 
 and discount rates rise. But the price, or pur- 
 chasing power, of gold has no connection with 
 the price of money or credit. Money may 
 become dearer while the output of gold 
 diminishes, or cheaper while it increases. 
 
 And here for the sake of clearness, in order 
 to make quite plain what money is and what 
 it does and why its purchasing power varies 
 at different times in the' same country, and at 
 the same time in different countries where 
 different standards or different tariffs are in 
 force, we shall permit ourselves to digress a 
 little upon the meaning of money. 
 
 Modern monetary systems may be divided 
 into three main varieties gold standard, sil- 
 ver standard, and inconvertible paper. Gold 
 standard countries usually have a token cur- 
 rency of silver and copper or nickel for the 
 convenience of retail purchases, and also 
 bank-notes issued by the authority of the State 
 for the transference of large sums. If the gold 
 standard is absolute, as in England, then 
 bank-notes are absolutely and at all times con- 
 vertible into gold. In France, which retains a 
 system aptly described as limping bimetallism, 
 the notes of the bank of France may be met 
 by that institution in either gold or silver, 
 and as the silver is not worth its face value 
 
192 THE STOCK EXCHANGE 
 
 a bill on Paris cannot compete with a bill on 
 London for international purposes. But in 
 France and in all the countries of the Latin 
 Union, however large the stock of silver and 
 however much silver predominates in the 
 actual currency, the prices current are gold 
 prices, the purchasing power of the silver coin 
 being not its intrinsic value but its conven- 
 tional value as a fraction of the napoleon 
 or other gold coin having a certain fineness 
 and weight. Thus so many sovereigns ex- 
 change for so many napoleons simply because 
 both are gold coins of a known weight; and so 
 many shillings exchange for so many francs 
 because 20 shillings go to a pound and 20 
 francs to a napoleon. In China, on the other 
 hand, which (in so far as it has any standard 
 at all) has a silver standard, the prices are 
 silver prices, and their movements are quite 
 independent of movements in gold-standard 
 countries. Thus in a given month the price 
 of wheat or rice may fall in Pekin while it 
 rises in Paris or London. This means that 
 all the world over an ounce of silver will buy 
 more wheat at the end of the month than at 
 the beginning, and, conversely, that an ounce 
 of gold will buy less wheat all the world over, 
 at the end than at the beginning of the month. 
 
PRICES OF SECURITIES 193 
 
 It also means that the price of silver in gold 
 currency has risen while the price of gold in 
 silver currency has fallen. 
 
 The worst kind of currency is an incon- 
 vertible paper currency, and some important 
 countries, such as Russia and Brazil, are still 
 on a paper basis. They endeavour however, 
 by keeping a large gold reserve in a central 
 bank, to maintain a fixed relation between 
 gold and paper. Where no such relation is 
 maintained, as in Chile, the most deplorable 
 and fraudulent confusions result. There is, 
 indeed, nothing so demoralising to business 
 as an inconvertible paper currency which 
 fluctuates in accordance with the "dis- 
 cretion" of a corrupt Government. It will 
 be seen, then, that commercial relations be- 
 tween gold-using countries are comparatively 
 simple, but that exchanges between gold and 
 silver standard countries, or gold and paper 
 countries, may be extremely changeful and 
 hazardous. In such cases a speculative ele- 
 ment enters into international transactions. 
 It was this consideration among others that 
 prompted the British Government to regulate 
 the Indian currency and to fix the value of 
 the rupee so that the external trade of India 
 with its chief customers might be simplified, 
 
194 THE STOCK EXCHANGE 
 
 and its internal prices might not suffer from 
 the fluctuations of a metal so variable as 
 silver had then become. 
 
 The slight variations of exchange between 
 gold-standard countries depend upon the 
 balance of trade and indebtedness at any 
 given time. If in order to balance indebted- 
 ness it is necessary to send gold from London 
 to Paris or New York the exchange is said to 
 be unfavourable to England and vice versa. 
 This uncertainty, it will readily be under- 
 stood, introduces a slight element of specula- 
 tion into the arbitrage dealings between the 
 leading bourses. 
 
 But whether it be of gold, or silver, or 
 paper, money in every country of the world 
 is the measure of value and the medium of 
 exchange. The price of a thing is its value 
 as measured in the country's money. When 
 the farmer exchanges his wheat for clothing 
 and machinery, he does not barter. He first 
 sells his wheat for money, and then uses the 
 money to buy what he needs. The proper- 
 ties of good money as the professors rightly 
 declare are that it should be portable, 
 coinable, divisible, indestructible, and stable 
 in value. "Portable" really means "pre- 
 ' eious" as gold or diamonds are precious, i. e. 
 
PRICES OF SECURITIES 195 
 
 small and costly. "Coinable" means that 
 it can easily be melted, cast into equal sizes, 
 and stamped with a recognisable mark. 
 Thus gold, silver, copper, are ductile and 
 coinable. "Divisible" means that it must 
 not lose value when divided. Thus two half- 
 ounces of gold or copper are worth as much as 
 one ounce. But if a large gem is cut into 
 small ones it may lose most of its value. 
 "Indestructibility" is a most important 
 quality. The wear and tear of a. gold coin 
 is so incredibly small that hardly any saving 
 is effected by keeping the gold in banks and 
 issuing gold certificates like the one-pound 
 notes in Scotland. The possession in so 
 remarkable degree of all these qualities has 
 led to the establishment of gold as the stan- 
 dard of value and measure of exchange in 
 most countries, with silver as the subsidiary 
 coin and copper or nickel as token for petty 
 payments. The last-named property of good 
 money "stability in value" requires a few 
 words of explanation. By what can only be 
 described as a piece of great good fortune the 
 value (that is to say the purchasing power) 
 of gold has been during the last century ex- 
 traordinarily steady. If you look at any par- 
 ticular commodity such as wheat, or wool, 
 
196 THE STOCK EXCHANGE 
 
 or cotton, or iron, or silver, or rubber, you will 
 find that its prices in gold fluctuate enor- 
 mously from year to year, and sometimes even 
 from month to month. But if you take 
 twenty commodities you find that their prices 
 hardly ever rise and fall together. Thus in 
 the old days, when harvests were all-impor- 
 tant, it used to be said that if wheat were cheap 
 wool would be dear, and vice versa. For 
 when the poor had cheap bread they could 
 buy clothes, and so there was a greatly in- 
 creased demand for wool, and wool necessarily 
 rose in price. Of course a great diminution 
 in the output of gold will ultimately increase 
 its purchasing power and lower the general 
 level of prices, whereas a great increase of 
 the output, such as that which followed the 
 gold discoveries in Australia in the middle, or 
 the gold discoveries on the Rand at the end 
 of last century, must tend to decrease the 
 value and lower the purchasing power of gold, 
 that is to raise the gold prices of commodities. 
 But just because of its indestructibility the 
 mass of gold in the world is so enormous in 
 comparison with what the mines can add to 
 it in a year that the effect of an increase or 
 diminution in output is at first very slight; 
 and whenever the supply is enlarged the effect 
 
PRICES OF SECURITIES 197 
 
 is apt to be balanced or nearly balanced either 
 by an increase in the production of other com- 
 modities or by an enlarged demand for gold 
 from Governments which have established a 
 gold currency, or from banks which wish to 
 strengthen their reserves of the precious metal. 
 The relation between gold and credit is 
 subtle and difficult. Many able writers main- 
 tain stoutly that gold is the basis of credit, 
 and city men are very fond of attributing 
 changes in the price of money, movements 
 of securities and upheavals of credit to gold 
 production or gold movements. But gold 
 is by no means essential to credit. Credit 
 exists in all civilised countries, where there 
 is a demand for it by substantial persons, 
 without regard to the question whether there 
 is a gold standard or not. The real basis of 
 credit is credibility. Gold cannot make credit 
 or cure credit. Bankers may come to grief 
 at a time when the reserves of gold are un- 
 usually large. A bank with a 25 per cent, 
 reserve of gold against its liabilities may 
 collapse through misuse of credit when a bank 
 with a 5 per cent, reserve, conservatively 
 managed, may be perfectly safe and unassail- 
 able. On the other hand, great gold dis- 
 coveries and a greatly increased output of 
 
198 THE STOCK EXCHANGE 
 
 gold may cause a general rise of prices, which 
 again may produce a fever of speculation. 
 And as a speculative boom causes a strain 
 upon credit, the money markets of the world 
 become tight and a general crisis and depres- 
 sion will result. Thus there may be, and at 
 times there is, a close causal connection 
 between gold and credit or gold and specula- 
 tion. The best known example is perhaps 
 to be found in the events following the gold 
 discoveries in Australia. But this inquiry 
 would take us too far from our path. 
 
 But whatever be the relationship of gold to 
 the money market, the money market cer- 
 tainly has a far greater effect upon the prices 
 of securities than upon the prices of commo- 
 dities. For speculative buying and selling 
 affect nearly all classes of stocks and shares; 
 and gilt-edged securities, which can be sold at 
 a moment's notice, are always in demand 
 when money is unlendable in the short loan 
 market. At such a time capitalists who lend 
 in this market are apt to buy consols and kin- 
 dred securities, keeping them until money 
 and discount rates rise. Thus consols tend to 
 rise owing to professional buying, when money 
 is cheap, and to fall, owing to professional 
 selling, when money becomes dearer. There 
 
PRICES OF SECURITIES 199 
 
 is therefore a real connection between the 
 price of consols and the bank rate; and when 
 the consol market hears of a probable or act- 
 ual rise in the bank rate it usually anticipates 
 this sequence and makes consols a fraction 
 lower. And as a general rule a rise in the 
 bank rate (by enhancing the charges for bor- 
 rowed money) acts in restraint of specula- 
 tion, not only in stocks and shares, but also 
 in grain, cotton, copper, rubber, iron, tin and 
 other commodities which lend themselves to 
 speculation in futures. 
 
 But by this time a reader may be getting 
 impatient. He may be saying, and probably 
 is saying, to himself: "Why cannot he come 
 to business, and tell me why Stock Exchange 
 prices jump up and down in such extraordi- 
 nary ways without the least regard to gold, 
 or bank rate, or any of these abstruse pheno- 
 mena?" Perhaps the writer has a secret 
 sympathy with this critic. At any rate he 
 will bow to the wish, and give as plain answer 
 as he can to a plain question. 
 
 In the first place, apart altogether from 
 the causes which affect the prices of com- 
 modities as well as the prices of securities, 
 the value of a security depends mainly 
 upon a quality or attribute which a bale of 
 
800 THE STOCK EXCHANGE 
 
 cotton, or a ton of coal, or a suit of clothes, 
 does not possess. It is either actually or 
 potentially interest-bearing. This quality is 
 visible in a bond with coupons attached. A 
 bond like that for example which is bought by 
 subscribers to a Prussian State loan will have 
 attached to it quarterly or half-yearly cou- 
 pons, which can be cashed on the date when 
 they become due anywhere in Germany, or 
 in almost any great centre of finance. If the 
 interest is 4 per cent, and the coupons are 
 half-yearly, each coupon attached to a bond 
 for a thousand marks will be exchangeable for 
 20 marks cash. If the Prussian Government 
 promises to redeem the bond at the end of a 
 period, say of twenty years, at par, it is 
 obvious that at its maturity the bond will be 
 worth par, neither more nor less. So if the 
 purchaser got it at a subscription price of 990 
 marks he will get the principal back with 10 
 marks additional. In the mean time it will 
 rise and fall according to the conditions, first 
 of German credit, secondly of the interna- 
 tional rate of interest. If the German Gov- 
 ernment has a long series of deficits, its credit 
 will tend to fall; if it has a long series of sur- 
 pluses and is so able to reduce debt, its credit 
 will tend to rise. But these tendencies may be 
 
PRICES OF SECURITIES 201 
 
 wholly or in part counteracted by antagonist 
 tic movements of an international character. 
 A great war like that between Japan and 
 Russia destroys a vast amount of capilal 
 and absorbs vast quantities of savings. 
 Money which might have bought German 
 bonds was diverted by high and attractive 
 rates of 5, 6 or 7 per cent, into the new bonds 
 issued by Russia and Japan for the purpose of 
 defraying war expenses. But the Prussian 
 State bond, to which we have referred, is not 
 likely to fluctuate much, and the limits of its 
 fluctuation will be more and more restricted 
 the more nearly it approaches its maturity, 
 when the holder of it is entitled to be paid off 
 in cash. Thus, while the intrinsic value of a 
 coat or a pair of boots depends upon its 
 warmth, durability, fit, etc., the value of a 
 security depends mainly upon (1) the rate of 
 interest, (2) the safety of the principal, (3) the 
 likelihood of the principal or the rate of inter- 
 est either rising or falling. The quality of a 
 good bond is security of a fixed rate of interest 
 and security of principal. The quality of a 
 good share is the probability that it will rise in. 
 value, and that the rate of interest or dividend 
 will improve. Here, then, we have the main 
 causes of a rise or fall in securities. 
 
202 THE STOCK EXCHANGE 
 
 But the business of Stock Exchange opera- 
 tors is to endeavour to forecast and discount 
 in advance the natural fluctuations of intrinsic 
 value. In the old days, before the telegraph, 
 when postal communications were slow and 
 untrustworthy, fortunes were made by getting 
 early information, or spreading false informa- 
 tion, of victories and defeats, which would 
 enchance or depress the price of Government 
 stocks. Thus the London stock-jobbers in 
 the days of the French wars had private 
 messengers and carrier pigeons to bring them 
 news. In accordance with these reports, the 
 insiders would first buy or sell the funds and 
 then publish the report, and sell what they 
 had bought to the public or buy from it what 
 they had sold. The first Rothschild, or rather 
 the founder of the house, laid the foundations 
 of his immense fortune by getting early news 
 of important events. 
 
 Nowadays the principle is still the same, 
 but the art of anticipation has been made 
 much more doubtful and complicated. Tele- 
 graphs and telephones are open to all. Every 
 one can watch from day to day, and almost 
 from hour to hour, the progress of wars and 
 revolutions abroad. What everybody reads 
 at the same time in his morning paper is of 
 
PRICES OF SECURITIES 203 
 
 no particular use to anybody in a speculative 
 sense. Besides, many foreign governments 
 especially the sturdy borrowers keep large 
 funds in London and Paris for the express 
 purpose of supporting the market. Hence 
 in the market for Government bonds, except 
 when insiders know in advance about some 
 pending reorganisation of the finances of 
 some discredited Government, big movements 
 are rare, and the losses or profits they cause 
 are widely distributed. Consequently suc- 
 cessful jobbers in the foreign market of the 
 London Stock Exchange, and in the con- 
 sol market, live and flourish on their daily 
 turnover rather than upon occasional specu- 
 lative scoops, though no doubt their success 
 largely depends upon their skill in acquiring 
 a good store of stocks when they are cheap 
 and upon being short of them when they are 
 dear. 
 
 When we come to the prices of railroad and 
 industrial stocks the causes of movement are 
 much more difficult to detect, and the possi- 
 bility of making large profits by inside know- 
 ledge is much greater. The newspapers may 
 be the conscious or unconscious tools of the 
 manipulators. In new countries the banks 
 are apt to be a working part of the speculative 
 
204 THE STOCK EXCHANGE 
 
 machinery. Thus in the United States those 
 who use great fortunes in finance frequently 
 have a controlling interest in a bank, or even 
 in a chain of banks. What is called "a com- 
 munity of interests" may be established 
 which will control perhaps important rail- 
 roads and huge industrial corporations, as 
 well as a number of banks and trust com- 
 panies. The various ways in which such a 
 "community" may manipulate a susceptible 
 market like Wall Street might be made the 
 subject of a long and fascinating volume. 
 Suppose that a powerful group wishes to 
 create the appearance, and even temporarily 
 the reality, of a general trade depression in 
 the United States, or at least to exaggerate 
 a depression which actually exists. This is 
 not at all impossible. The controlled railways 
 may announce and partially carry out a 
 policy of reduced orders for rails, equipment 
 and repairs. They may ostentatiously pro- 
 claim an addition to the number of idle cars. 
 Well-disciplined combinations of steel and 
 textile mills may declare a curtailment of 
 production the closing of some mills, short 
 time in others, etc. Banks may suddenly 
 become ultra conservative; the open accounts 
 and credits of small speculative customers 
 
PRICES OF SECURITIES 205 
 
 may be closed. In this way a general feeling 
 of despondency can be created. Stocks will 
 fall, partly in consequence of the action of 
 the banks causing a compulsory liquidation 
 of speculative accounts, partly through the 
 voluntary action of speculators and specula- 
 tive investors who think that trade, earnings, 
 profits and dividends are likely to decline. 
 Thus a bear market is created. The syndi- 
 cate or pool or community of interests can 
 now employ huge funds to advantage in pro- 
 fitable purchases of those stocks and shares 
 which fall most and are most responsive to 
 ups and downs of trade. Such a policy of 
 course represents great difficulties and dan- 
 gers. It must be carried out very cautiously, 
 and very secretly, and very honourably as be- 
 tween the members. Leakages are disastrous. 
 And if it is too successful it may create a 
 slump, or a panic, leading to widespread ruin 
 in which the community of interests may itself 
 be seriously involved. For these and other 
 technical reasons, touched upon in our chapter 
 on Wall Street, the great American operators 
 and manipulators do not very frequently 
 enter upon a concerted plan for colossal bear 
 operations. Such a course is unpopular. 
 It offends public sentiment. Rapid ups and 
 
206 THE STOCK EXCHANGE 
 
 downs of stocks and shares give a general 
 and pleasurable excitement, appealing to the 
 speculative nature and traditions of the 
 people. But a long bearish movement, accom- 
 panied by unemployment, short time, reduced 
 earnings and profits and general economies 
 in the style of living and expenditure, pro- 
 duces or may produce all manner of unpleas- 
 ant consequences economic, social, and 
 political. In fact, there is a sort of moral 
 sentiment against bearish operations on a 
 grand scale, which makes Wall Street (the 
 greatest financial manipulator in the world) 
 the home of the bull who tosses securities up 
 rather than of the bear who tears them down. 
 Big men the so-called giants often boast 
 that they never operate on the short side, 
 never play for a fall. 
 
 The sketch "bear" operation of a great 
 community of interests, which has been out- 
 lined above, is therefore comparatively rare, 
 cautious and temporary. Wall Street has of 
 course to wait upon circumstances. Some- 
 times it is caught by circumstances. But 
 whether circumstances hurt or hinder, it 
 must always try to adjust itself to economic 
 and political conditions. A political assas- 
 sination, a war, a movement against the 
 
PRICES OF SECURITIES 207 
 
 trusts, unfavourable decisions in the courts, 
 an unexpected downfall of the favourite party, 
 a catastrophe like the San Francisco earth- 
 quake such events as these may produce an 
 irresistible and unforeseen flood of liquidation 
 against which the strongest combination of 
 bankers and corporation men will struggle 
 in vain. In a general scramble produced by 
 some unexpected event insiders and outsiders 
 are for once on a par. But in such cases 
 there is more likely to be a general loss than 
 a general profit. For in the history of specu- 
 lation the unsuspected and unexpected event 
 is usually a calamity. Real prosperity is 
 built up gradually. The Stock Exchange 
 anticipates and exaggerates it, until the 
 speculative fabric has been reared so high 
 above the real foundation that a decline, 
 which may become a crash, is seen to be 
 inevitable. Generally speaking, with their 
 superior knowledge of banking and trade 
 conditions, the insiders are able to unload 
 at high levels just as they have been able to 
 load at low levels. We may draw from 
 American experience this general conclusion, 
 that by speculating in stocks of a national 
 size and significance the outside public loses 
 far more than it gains. It begins to buy 
 
308 THE STOCK EXCHANGE 
 
 when they are dear, and it begins to sell 
 when they are cheap. It knows nothing of 
 "rigs," "corners," "pools," and "commu- 
 nities of interest," until long after they are 
 dissolved. But the same person who loses 
 in the general market may gain in the local 
 market. Take, say, the inhabitant of a rising 
 provincial town in one of the Western States. 
 He may lose heavily in Southern, or Erie, or 
 Steels, or Union Pacific. But he may make 
 a modest fortune by judicious investments in 
 local light railways (often called in America 
 "interurban") or industrial corporations, or 
 trading companies, of which Wall Street 
 knows nothing. 
 
 For the purposes of scientific analysis we 
 may rest our theory of Stock Exchange 
 quotations upon a distinction between prices 
 and values. Prices are temporary; they shift 
 rapidly; values are intrinsic; they move 
 slowly. The price represents the momentary 
 market view of a stock or bond what you 
 can get for it on the exchange if you instruct 
 your broker to sell. The value is the real 
 worth a thing undefinable and impossible 
 to ascertain. If the real value were ascer- 
 tainable and available to the public then 
 price and value would be identical, and in 
 
PRICES OF SECURITIES 209 
 
 the case of gilt-edged securities we may say 
 that price and value are as nearly as possible 
 identical. For intrinsic values do change, 
 like everything else in this world. They may 
 be said, in the case of bonds and preference 
 stocks, to depend mainly upon 
 
 1. The rate of interest. 
 
 2. The margin of surplus earning power, or 
 
 revenue. 
 
 In the case of a bond there is also, first, the 
 quality of the security pledged as guarantee 
 of the principal, and, second, the date of 
 maturity or redemption. The first may 
 change, as land, buildings, machinery, etc., 
 change hi value. The second is always 
 changing, getting nearer day by day. 
 
 Both stocks and bonds are, of course, also 
 affected in their intrinsic value by the money 
 market and by the relationship of the supply 
 of capital seeking investment to the demand 
 for capital by new flotations. When the new 
 demand exceeds the supply of new money 
 capital is withdrawn from old issues, and 
 values tend to fall. The intrinsic value of com- 
 mon stock depends also in a supreme degree 
 upon the actual efficiency of the corporation 
 or company, the condition of its plant, the 
 
310 THE STOCK EXCHANGE 
 
 skill of its management, and the contentment, 
 intelligence and industry of its whole staff. 
 
 Of course, all these changeful elements of 
 intrinsic value enter into prices. But as 
 prices sometimes fluctuate violently from 
 day to day, and even from hour to hour, it is 
 obvious that they must also be affected by 
 other causes. What these are, or may be, 
 the reader will now be able to supply for him- 
 self. But they may be summed up under 
 one or two heads: 
 
 1. False rumours, which have got about 
 either by design or through the careless- 
 ness and mistakes of newsmongers. 
 Very often a depressing rumour is 
 merely a gross exaggeration of some 
 tiny bit of comparatively trifling truth. 
 
 2. Rigs, pools, combinations and other 
 technical devices by which the market 
 is either flooded with, or made bare of, 
 a particular stock or groups of stock. 
 
 A competent, and by no means unfriendly, 
 observer of Wall Street, where manipulation 
 is a fine art, thus describes the class of pro- 
 fessional speculators "who make the stock 
 market their life study and business." 
 
 "These men base their operations, or try 
 to, on values as measured by income; but 
 
PRICES OF SECURITIES 
 
 they study value so as to be able to buy at 
 less than value, and then they work to sell at 
 as much more than value as they can get. 
 They employ every means in their power to 
 make stocks attractive to investors and other 
 possible buyers when they are 'long' and 
 want to sell, or to make the market appear 
 doubtful or dangerous when they are 'short' 
 and want to buy." 
 
 This may help the outsider to realise why 
 "for days, weeks, and sometimes for months," 
 prices may represent manipulation rather 
 than intrinsic value. This may also help him 
 to see why a clever man, who really wants 
 to speculate with any probability of success, 
 must become the member of a great Stock 
 Exchange or enter a community of financial 
 interests. It is safe to invest, but it is utterly 
 unsafe to speculate, on intrinsic values. The 
 insider who spends his life in watching and 
 manipulating prices is often a very poor 
 investor, a very poor judge of intrinsic 
 values. The outsider surveying the world's 
 politics and finance and commerce with a 
 calm and unimpassioned judgment may be, 
 and probably is, an excellent investor; but 
 if he attempts to guess at prices by the day 
 and the week without inside knowledge he is 
 sure to come to grief. 
 
CHAPTER VHI 
 
 THE CREATION OF NEW DEBT 
 AND CAPITAL 
 
 FOB many reasons a good citizen, as well 
 as a good investor, should take some trouble 
 to understand the methods by which govern- 
 ments and municipalities and companies 
 borrow, or obtain new capital. Anybody 
 who can criticise public finance is a useful 
 and influential person. The investor who can 
 criticise prospectuses and balance-sheets for 
 himself is in a strong position; for both are 
 protected by an atmosphere of advertisement 
 from the great majority of newspaper critics. 
 The city journalist is seldom allowed a free 
 hand. It is a bad policy for both parties. 
 The reader of a city page wants neither puff 
 nor blackmail, but honest, discriminating, 
 responsible criticism; and if he does not get 
 it he may either drop the newspaper or drop 
 the idea of subscribing for the issue. What 
 he usually finds in his newspaper, when a 
 212 
 
CREATION OF NEW DEBT 213 
 
 prospectus is advertised, is a colourless sum- 
 mary; and sometimes the prospectus is pre- 
 ceded a few days before by some article, 
 apparently spontaneous, but really paid for, 
 descanting upon the wonderful resources of 
 the region which the new company is going 
 to exploit, or the extraordinary profits likely 
 to be derived by the lucky person who in- 
 , vests, from the very thing on which the 
 prospectus is going to found its appeal. Im- 
 pecunious foreign governments and munici- 
 palities often condescend to bait the ground 
 beforehand with carefully prepared statistics 
 of their prosperity. The beggar's rags excite 
 charity, but the investor's purse is not opened 
 by pity. When a country is on the verge of 
 a new loan it is apt to appear before its credi- 
 tors in very fine raiment. Boasting precedes 
 borrowing. This, of course, does not apply 
 to first-class countries, whose debts are gilt- 
 edged securities. They merely issue state- 
 ments of what money they want, and leave 
 the public to apply to the issuing house or 
 banking syndicate which has undertaken the 
 floating of the loan. This is often the most 
 favourable opportunity of securing an abso- 
 lutely good security. You get your inscribed 
 stock or bond-to-bearer for yourself without 
 
214 THE STOCK EXCHANGE 
 
 brokerage fees, and it may very likely go to 
 a premium, as a government or local author- 
 ity generally issues at something well below 
 the market price for fear that the loan should 
 prove unsuccessful and injure the prestige 
 of the administration. The same reasoning 
 applies to colonial government securities, and 
 also, perhaps, to the loans of countries of 
 the second rank, so long as the investor is 
 reasonably well informed about their debts 
 and prospects as well as about the technical 
 features of the new loan. Hence there is a 
 very large class of new issues to which, in my 
 judgment, the following sweeping statement 
 by a very able financial critic is not at all 
 applicable: 
 
 "We arrive inevitably at the conclusion 
 that any investor, who has no special know- 
 ledge to work on, commits a very serious 
 indiscretion by subscribing for any new issue 
 on his own judgment, based on a perusal of 
 the prospectus, and without the counsel and 
 advice of his stockbroker. It cannot be too 
 early grasped by any one who is in a position 
 to invest money that the judicious investor 
 is the investor who rejoices in a good broker, 
 trusts him, and takes his advice." 
 
 Agreed that the beginning of wisdom in 
 
CREATION OF NEW DEBT 215 
 
 investment is to contract a business friend- 
 ship with a good broker, who must of course 
 be a member of the London Stock Exchange, 
 or of some good provincial Exchange, it does 
 not follow that the end of wisdom is to trust 
 him blindly, unless, indeed, the broker is 
 abnormally wise and the client abnormally 
 foolish. A person of reasonable aptitude 
 and shrewdness, who can give, say, one per 
 cent, of his business time to looking after his 
 savings, ought to be able to form an opinion 
 of his own; and so long as he contents him- 
 self with good securities yielding from 3j to 
 4| per cent, he will probably do best by sub- 
 scribing from time to time for suitable issues 
 of government and other stocks. But when 
 securities are cheap, and nothing new offers, 
 you may simply instruct the branch manager 
 of your bank, who instructs his London 
 broker, to buy any security you want. There 
 is no loss in so doing, as it is the practice 
 of the London Stock Exchange brokers to 
 divide their commission with the bank from 
 which they receive instructions. But the 
 advice of Mr. Hartley Withers, which I have 
 quoted and criticised, is sound enough if we 
 limit it to the ordinary company prospectus. 
 These, as he says, "should be scanned in a 
 
216 THE STOCK EXCHANGE 
 
 spirit of jaundiced criticism, and with the 
 most pessimistic readiness to believe that 
 they are speciously alluring traps laid by some 
 designing financier to relieve the reader of 
 some of his money." In such cases the ad- 
 vice of an expert, or better still, of two, will 
 probably save you from loss; for even the 
 shrewdest and most enlightened persons are 
 sometimes caught by the glittering bait of 
 a prospectus which would never have been 
 issued to the public had it really been the 
 profitable certainty it professes to be. 
 
 And here we come to a very important con- 
 sideration too often left out of account in 
 discussions of capital issues. I mean that in 
 Great Britain, at all events, there is never any 
 difficulty in raising capital locally or privately 
 for the creation or extension of any business 
 which offers a reasonable probability of large 
 profits. A really good thing from Glasgow, 
 or Yorkshire, or Lancashire, or the Midlands, 
 seldom comes to London to be floated on the 
 public. The insiders naturally keep it to 
 themselves and their friends. Sometimes, no 
 doubt, a brilliantly successful manufacturer or 
 merchant, who has built up his business and 
 wishes to retire, may think that he will get 
 the biggest price for the good-will by turning 
 
CREATION OF NEW DEBT 217 
 
 the concern into a limited liability company. 
 But what is good for him may be very bad 
 for the public. They are invited, perhaps, 
 to over-capitalise the concern. The vendor, 
 after selling his business to the company, 
 may remain as managing director, but his 
 interest is no longer so keen. He is as rich 
 as any one could need to be whatever the fate 
 of the company. He sold at the zenith of his 
 fortunes, and the investing public, buying, as 
 usual, at the top, this time by subscription, 
 sees the profits declining year by year from 
 "the average profits of the last two years" 
 upon which the prospectus was based. In 
 many of these cases the debentures are a 
 fairly good security, especially if they are 
 well protected by real assets. They are also 
 protected by English law; for companies of 
 this description are usually incorporated 
 under the Companies' Consolidation Act of 
 1908. Foreign and colonial companies, 
 which raise capital in England and register 
 abroad, are not under our Companies Acts. 
 The laws under which they register may give 
 poor protection to shareholders, and in any 
 case the situation of English shareholders 
 who seek justice from a foreign or colonial 
 court is not often enviable. Besides, such a 
 
218 THE STOCK EXCHANGE 
 
 company may be seriously injured by un- 
 fair if not confiscatory legislation, of which 
 there have been recent instances in the pro- 
 vince of Ontario and the commonwealth of 
 Australia, to say nothing of South American 
 republics. 
 
 But a very large part of our capital ex- 
 ports goes into companies like Argentine 
 railways, Ceylon tea, Malay rubber planta- 
 tions and the like, which are duly registered 
 in London; and in view of the fact that the 
 most profitable enterprises at home are never 
 open to public subscription it would be ab- 
 surd to advise investors who have a taste for 
 industrials and commercial ventures to avoid 
 all foreign and colonial prospectuses. 
 
 For obviously in new countries like Ar- 
 gentina, or old but unexploited countries like 
 China, where capital is very scarce, capital 
 has to be attracted by the offer of favourable 
 terms. Too often, no doubt, the difference 
 between what the lender gives and what the 
 creditor gets is monstrously large. One has 
 heard of a corrupt South American Gov- 
 ernment which sought for money in London 
 and got it apparently at 6 per cent.; for the 
 loan was a 6 per cent, loan issued to the 
 public at par, or thereabouts. But the 
 
CREATION OF NEW DEBT 219 
 
 issuing house bought the loan at 75 per cent., 
 and after the various representatives, negotia- 
 tors, and officials had handled it, the purposes 
 for which the loan was nominally floated 
 probably did not receive more than 50 per 
 cent, of the sums so greedily supplied by our 
 simple and gullible public. Is it surprising 
 that a loan like this, nominally at 6, really 
 at 12, per cent., proves unreproductive, that 
 the impecunious province or municipality 
 after a year or two fails to pay the interest, 
 that there is a grave scandal, and eventually 
 a composition by which the investors lose 
 perhaps half their subscriptions? 
 
 Much might be said if we had room for 
 such a digression on the economic signifi- 
 cance of our capital exports. But that the vast 
 importance of this subject may be appreciated 
 we shall here set out in detail the Economist's 
 table of London's public issues of capital for 
 the full twelve months of 1910, when as a 
 result partly of great prosperity, partly of 
 general buoyancy and speculative activity, 
 partly of the very special and extraordinary 
 boom in rubber plantations an amazing 
 record was established over the previous 
 figures for 1909 or any similar period. 
 
 The British Government in 1910 raised 
 
220 
 
 THE STOCK EXCHANGE 
 
 21,000,000 by Exchequer bonds for the 
 purpose of repaying the outstanding portion 
 of the War Loan. This sum was not really 
 
 ANALYSIS OF NEW CAPITAL APPLICATIONS. 
 
 Description. 
 
 Total 
 1909. 
 
 Total 
 1910. 
 
 i 
 
 British. Government loans 
 
 
 
 3,840,000 
 29,152,600 
 22,072,100 
 4,899,700 
 6,590,800 
 10,624,700 
 400,000 
 11,244,500 
 30,766,700 
 
 160,000 
 4,340,500 
 3,621,600 
 3,044,500 
 nil 
 nil 
 4,335,900 
 1,578,200 
 3,589,400 
 5,924,200 
 1,918,200 
 2,560,100 
 
 7,194,500 
 10,510,400 
 1,511,300 
 976,800 
 825,500 
 1,025,100 
 1,709,500 
 1,938,100 
 6,001,900 
 
 
 
 24,595,000 
 35,631,600 
 18,431,000 
 1,627,900 
 4,308,500 
 7,119,400 
 3,715,000 
 10,096,000 
 49,974,700 
 
 562,400 
 2,595,700 
 4,234,500 
 18,343,100 
 675,000 
 250,000 
 6,086,300 
 320,400 
 5,169,900 
 19,143,800 
 9,466,400 
 5,409,300 
 
 6,160,000 
 4,701,000 
 368,500 
 131,700 
 1,503,700 
 1,313,200 
 4,600,000 
 10,789,000 
 11,116,100 
 
 Colonial " .... 
 
 
 British Municipal and County loans 
 Colonial Corporations 
 
 Foreign 
 
 British railways 
 
 Indian and Colonial railways . . . 
 Foreign railways 
 
 Mining Companies 
 
 South African 
 
 Other mines 
 
 Exploration and financial 
 
 Breweries and distilleries 
 
 Merchants, importers and exporters 
 
 
 
 Rubber 
 
 Oil 
 
 Iron, coal, steel, and engineering . . 
 Electric lighting, power, telegraphs, 
 etc 
 
 
 Motor traction and manufacturing . 
 Gas and water 
 
 Hotels, theatres, and entertainments 
 Patents and proprietary articles . . 
 Docks, harbours, and shipping . . . 
 
 
 
 182,356,800 
 
 267,439,100 
 
CREATION OF NEW DEBT 
 
 new capital, but a continuation of an old 
 public debt. The Colonial and Indian Gov- 
 ernments were as usual large borrowers. 
 Foreign Governments made less heavy de- 
 mands, thanks to the abstinence of Russia 
 and Japan. The foreign railway figure of 
 close upon fifty millions is practically all 
 for North and South America. The United 
 States lines issued large amounts of bonds, 
 while all the Argentine railways were floating 
 debentures or increasing their preference 
 capital in order to meet the expenditure 
 entailed by their policy of rapid extension. 
 The rubber and oil totals were inflated by the 
 rush of prospectuses at the time of the boom, 
 and the "exploration and financial" figure was 
 also swollen by the many finance companies 
 formed in connection with the same outburst 
 of speculation. The increase in the banks and 
 insurance total is due to the Banco Espanol 
 del Rio de la Plata which doubled its 
 capital. 
 
 The foregoing table shows the destination 
 of the new capital according to its purposes; 
 the table on our next page shows its destina- 
 tion according to countries. 
 
 The United Kingdom total includes the 
 Government borrowing, and the capitals of 
 
222 THE STOCK EXCHANGE 
 
 DESTINATION OF NEW CAPITAL. 
 
 
 Whole year 
 1909. 
 
 Whole year 
 1910. 
 
 United Kingdom total . . . . 
 
 
 18,681,400 
 
 
 60,296,500 
 
 British Possessions 
 India and Ceylon 
 
 15,336,100 
 
 17 991 600 
 
 South Africa 
 
 11 291 500 
 
 3 379 100 
 
 Canada 
 
 26 814 200 
 
 36 882 500 
 
 Australasia 
 Other British Possessions . . 
 
 11,380,300 
 9,936,100 
 
 13,385,200 
 20,739,700 
 
 Total British Possessions . . . 
 Foreign Countries 
 Russia 
 
 74,758,200 
 9 472 500 
 
 92,378,100 
 3 918 800 
 
 Finland 
 
 2 328 400 
 
 143 000 
 
 Denmark 
 
 487 500 
 
 1 089 000 
 
 Sweden 
 
 881 000 
 
 
 Norway 
 
 381 100 
 
 50 000 
 
 United States 
 
 15 905 400 
 
 39 590 100 
 
 Brazil 
 
 9 218 600 
 
 11 813 900 
 
 Argentine 
 
 21 738 100 
 
 22 865 000 
 
 Chili 
 
 4,098,000 
 
 4 684 600 
 
 Mexico 
 
 9,109,600 
 
 5 087 100 
 
 Central America 
 
 1,591,700 
 
 35 000 
 
 Other South American Republics 
 China 
 
 2,615,800 
 740 000 
 
 3,141,500 
 1 610 100 
 
 Japan 
 
 4 723 600 
 
 
 Austria-Hungary 
 
 
 f 4 098 000 
 
 Bulgaria 
 
 
 3 603 600 
 
 Greece 
 
 
 1 572 100 
 
 France . 
 
 
 900 000 
 
 Turkey 
 
 
 
 1 431 000 
 
 Germany and Possessions . . 
 Dutch East Indies 
 
 > 5,625,900* 
 
 ] 794,000 
 4 382 900 
 
 Cuba 
 
 
 1 916 200 
 
 Philippine Islands 
 
 
 403 900 
 
 Other foreign countries . . . 
 
 
 . 1,634,700 
 
 Total foreign countries .... 
 
 88,917,200 
 
 114,764,500 
 
 Total for whole year 
 
 182,356,800 
 
 267,439,100 
 
 
 
 
 * Not separately distinguished until 1910. 
 
CREATION OF NEW DEBT 
 
 most of the investment companies formed to 
 conduct or finance operations on the Stock 
 Exchange. The British Possessions figure is 
 nearly 18,000,000 above 1909, owing to the 
 demands of Canada, and the rush of money to 
 the Straits Settlements for rubber cultivation. 
 The only other point requiring mention is 
 the increased flow of capital from England 
 to Europe, which has mostly been applied 
 to developing the oilfields of Austria and 
 Bulgaria. 
 
 The promotion of a new company in Lon- 
 don has been described with vivacity and 
 veracity by Mr. Hartley Withers, in his recent 
 book on Stocks and Shares; the problems and 
 operations of American promoters in the 
 flotation of new undertakings and the com- 
 bining of old ones into new trusts and cor- 
 porations have been expounded critically and 
 exhaustively by Mr. Edward S. Meade, in his 
 clever study of Corporation Finance. In new 
 countries like Canada, Argentina or Aus- 
 tralia, and in countries like the United States 
 which are still filling up and present ever fresh 
 openings for the profitable employment of new 
 capital, the promoter plays an all-important 
 part in economic developments. The function 
 has been so much abused that the name is 
 
224 THE STOCK EXCHANGE 
 
 in evil odour. But an honest promoter, with 
 a good eye for a good opening and the skill 
 and credit to utilise his opportunity, is really 
 a public benefactor and deserves to be well 
 rewarded. If he is unscrupulous, floats bad 
 propositions, and takes more than his share, 
 he is a public nuisance, and probably in the 
 long run will suffer the rogue's fate. For, 
 happily, honesty is the best policy; and it 
 pays particularly well in walks where dis- 
 honesty is particularly prevalent. 
 
 From the standpoint of general utility 
 there is all the difference between the pro- 
 moter of a real new enterprise and the pro- 
 moter of a trust or combination. The former 
 is calculated to increase wealth; the latter is 
 rather likely to diminish it. The former 
 is good for employment, the latter is likely 
 to reduce it. The former increases the 
 good things of the world and multiplies the 
 conveniences of life. The latter aims at 
 restricting them and so increasing their cost. 
 One is addition, the other subtraction. One 
 enlarges the world's resources and enriches 
 the consumer by giving him something new; 
 the other exploits him by establishing a 
 monopoly and so forcing him to pay higher 
 prices or to pay the old prices for inferior 
 
CREATION OF NEW DEBT 225 
 
 articles. The idea that union means strength 
 and that great size means great profits in 
 industrial combinations has been circulated 
 and believed for a generation. But there 
 are signs that the cult is dying down. A 
 strict combination of all the manufacturing 
 concerns in a protective country may enable 
 them to extract every possible penny of the 
 protective duty out of the consumers. That 
 they should unite for this purpose is the most 
 natural and certain thing hi the world, and 
 to attain the end a promoter is often needed. 
 The reason why they so often have to go to 
 Wall Street, or to some similar financial 
 centre, is that they cannot all agree how the 
 capital shall be watered and how the shares 
 shall be subdivided. Very often, indeed, the 
 scheme or proposition is made by a promoter, 
 and the individual manufacturers are in- 
 duced to come in by tempting offers, or 
 threats of ruin if they stay out. From the 
 investor's point of view, the history of these 
 unions, associations, trusts, or combinations 
 has been generally disappointing. Many of 
 them are waterlogged from the outset. In 
 a free trade country they cannot raise prices 
 on account of foreign competition. In a 
 protected country prices have already been 
 
226 THE STOCK EXCHANGE 
 
 raised, and what they gain by raising them 
 higher they may lose by diminished con- 
 sumption. The keenness and energy of 
 the individual employer is lost by centra- 
 lisation. Much is often wasted at the outset 
 by buying worthless mills with antiquated 
 plant, merely to close them down. Then 
 other independents crop up who have also 
 to be bought up if there are funds for the 
 purpose. 
 
 The absolute or relative failure of nearly 
 all the English combines which have been 
 floated on the market is too well known 
 to be insisted upon. In the United States 
 the idea of converting every branch of indus- 
 try into a single trust a consolidation of 
 all competing plants with a view to extract- 
 ing monopoly profits has been carried further 
 than anywhere else. Under the shelter of 
 the tariff huge concerns have grown up; by 
 the zeal of the promoter they have been 
 enlarged into million and billion dollar trusts. 
 In a sense, all the competitors are promoters, 
 and in this sense the transaction has usually 
 been very profitable; for the watering of 
 capital merely means that the promoters 
 have received from the public far more money 
 than the consolidated concerns are worth. 
 
CREATION OF NEW DEBT 227 
 
 In some celebrated cases, after a series of 
 years in which the common stock has received 
 no dividends and the preferential sharehold- 
 ers have been only irregularly paid, a good 
 deal of water has been squeezed out and 
 fortunes have been made by large operators 
 who bought stock in years of depression. But 
 I am inclined to think that if all the industrial 
 combinations promoted and marketed in the 
 United States and listed in New York or 
 other American Stock Exchanges could be 
 examined historically from the standpoint of 
 the original investors and subscribers (leaving 
 out those who received some part of the pro- 
 motion profits in stock) the record would 
 prove disappointing. 
 
 The promoter who is consolidating com- 
 petitive interests into a trust or association 
 may appeal for support on various grounds: 
 
 1. Competition will be eliminated and so 
 
 prices can be raised and controlled. 
 In times of depression prices can be 
 maintained by curtailing output and 
 closing factories. 
 
 2. A centralised management can effect 
 
 the economies that belong to large 
 operations. Superfluous persons can 
 
28 THE STOCK EXCHANGE 
 
 be dismissed regardless of local 
 claims. 
 
 3. The size of the concern should enable 
 
 it to get very favourable terms from 
 railways and from producers. A large 
 buyer can afford also to deal sternly 
 with small customers who seek to 
 cancel orders or "readjust contracts" 
 when trade becomes bad. 
 
 4. A large combination is in a better 
 
 position to resist the demands of 
 organised labour. 
 
 All these propositions are plausible, but all 
 contain a mixture of truth and error. To the 
 last one, for instance, it may be urged that 
 just as it is easier to deal with organised 
 labour than with undisciplined labour, so 
 labour leaders can extract terms more easily 
 from the executive of a federation than from 
 individual employers. Moreover, if a com- 
 bination in restraint of trade deals harshly 
 with labour it becomes unpopular and may 
 become the object of legislative or adminis- 
 trative attack. The economy of large opera- 
 tions is often more than off-set by central 
 mismanagement. The directors of a big trust 
 may be directors of banks and many other 
 
CREATION OF NEW DEBT 229 
 
 concerns. Their income may be derived 
 mainly from financial operations. Their 
 interest in, and the time they can spare to, 
 the trust may be, and probably is, very small. 
 In any case, half-a-dozen men sitting in a 
 central office and issuing orders to local 
 factories of which they have no practical ex- 
 perience are usually a poor substitute for the 
 individual manager who has made the busi- 
 ness by his own exertions and is now enjoying 
 the capital sum for which he has exchanged 
 his concern. The ingenuity of the corporation 
 lawyer who frames the trust will overcome all 
 the technical difficulties, but it is generally 
 found that a great concern cannot be fairly 
 capitalised. The proper basis for determining 
 the value of all the plants together would be 
 the earning power of each individual plant 
 averaged over a series of years. But a little 
 reflection will show that when it comes to 
 capitalisation all will expect to get more than 
 their concerns are really worth, and all will 
 succeed in various degrees. Very often the 
 trust promoter is forced to "fight for his own 
 hand," as one of them expressed it, through- 
 out a long and complicated course of dip- 
 lomacy, associating with the stronger mem- 
 bers of the trade and squeezing others. He 
 
230 THE STOCK EXCHANGE 
 
 has to keep his eye, of course, on the public, 
 and in most cases, as Mr. Meade puts it, his 
 business is "to buy plants from their owners 
 at one price and sell them to the investor at a 
 higher price." When, by alliance, persuasion, 
 and coercion, the promoter has "assembled 
 his proposition," he will approach bankers. 
 In important cases a syndicate will be formed 
 and a financial plan devised, consisting usu- 
 ally of bonds, preference and common stock. 
 In the case of a consolidation, bonds are usu- 
 ally issued in part payment to the individual 
 concerns. Thus, when the Steel Trust was 
 floated by Messrs. J. P. Morgan, Mr. Carne- 
 gie and his associates were in such a command- 
 ing position that they were able to demand 
 successfully no less than three hundred million 
 dollars of first mortgage bonds. Preference 
 stocks also play a very important part. Thus 
 large industrial companies in the United 
 States (mostly consolidations) supply at the 
 present time over one hundred issues of pre- 
 ferred stocks. 
 
 When a company is floated to develop some 
 new traffic or industry, the promoter is often 
 an engineer with banking connections. The 
 promoting engineer is defined by Mr. Meade 
 as "a firm or corporation engaged in the busi- 
 ness of building trolley roads, power plants, 
 
CREATION OF NEW DEBT 231 
 
 railroads; doing all kinds of engineering and 
 construction work within a certain field." 
 Such firms, especially in London and other 
 great money centres, will often have a large 
 capital as well as a big credit. They will 
 possess a skilled organisation of engineers, 
 chemists, lawyers, and accountants. British, 
 German, and French engineering and promot- 
 ing firms of this type are prepared to under- 
 take contracts and promote enterprises in all 
 parts of the world. There are great advan- 
 tages in an engineering contractor being as- 
 sociated with and interested in the success of a 
 great engineering enterprise. But it is not de- 
 sirable that after the company has been 
 formed it should be controlled by its contrac- 
 tor, because the contractor is always inter- 
 ested in construction. If, for example, the 
 dominating interest in a railroad company is 
 the contractor, he is apt to be always extending 
 the line, regardless of shareholders' interests, 
 in order to provide his own firm with work. 
 
 Small flotations usually originate with local 
 men, especially landowners who desire to sell 
 their land on favourable terms for coal, oil, or 
 similar propositions. 
 
 Among the preparations made for the float- 
 ing of a new company, or for an issue of new 
 
232 THE STOCK EXCHANGE 
 
 capital by an old one, none is more important 
 than the underwriting of shares. In few 
 cases can a promoter afford to appeal to the 
 public until the sale of his wares has been thus 
 guaranteed. By acting as underwriters for 
 new issues, City capitalists often make very 
 large profits, though from time to time, when 
 the public fails to bite, they stand to lose. 
 Thus when a new issue is unsuccessful, or 
 partially unsuccessful, it is announced that 
 the underwriters have been left with, say, 
 75 per cent, on their hands. A few years ago 
 the underwriters in ordinary cases merely 
 engaged to take any shares which might not 
 be subscribed by the public, so that such a 
 result would have been thought very disap- 
 pointing. But now it is becoming more and 
 more common for the issuers to stipulate that 
 the underwriters shall actually purchase at 
 the price named whatever quantity of shares 
 they may have underwritten; so that, 
 whereas the old form of an underwriting con- 
 tract merely obliged the underwriters to take 
 a fixed amount or a fixed proportion condition- 
 ally, the new form obliges them to take it 
 absolutely. In other words, there is a "firm," 
 as distinct from a hypothetical undertaking. 
 The underwriters are allotted then- shares 
 
CREATION OF NEW DEBT 233 
 
 and actually receive them. But whether 
 they underwrite "firm" or no, the vast 
 majority of Stock Exchange men who engage 
 in this business buy the new issue for the 
 purpose of selling it at a profit to their clients. 
 .And this they can usually do, if it is at all 
 promising; for even if, after the stock is 
 issued, it stands at a discount of 2 per cent., 
 yet, if it has been underwritten at a discount 
 of 5 per cent., an underwriting broker or 
 banker can still dispose of it gradually to his 
 clients on very satisfactory terms. But be- 
 sides the underwriters who underwrite in 
 order to sell as quickly as possible the specu- 
 lative underwriters there is also now a very 
 large and important class of underwriters, 
 who underwrite good securities with a view 
 to holding them as investments. Conspicuous 
 among these are the insurance companies, 
 which have grown to be very great and im- 
 portant factors in the capital and investment 
 market. For short dated issues such as the 
 short term notes, with which London is often 
 flooded by American railroads and industrial 
 corporations, and even by American cities, 
 the banks compete with the insurance com- 
 panies. These short term notes " mature "- 
 i. e. are repaid at various dates, and an in- 
 
234 THE STOCK EXCHANGE 
 
 surance company often likes to have a security 
 of this sort, which will pay good interest and 
 mature, or fall due, in a year when an extra 
 amount of revenue will be required for bo- 
 nuses. Banks, again, when money is cheap 
 and plentiful, find that by purchasing such 
 notes they can get a run of comparatively 
 high interest for a few months. But an in- 
 surance company does not need to keep its 
 capital liquid in the same way as a bank. It 
 is a great investor. In fact, in the case of the 
 biggest companies the investment department 
 is becoming as important as the insurance de- 
 partment. By underwriting good issues an 
 insurance manager does better, as a rule, than 
 by buying securities in the open market; for 
 in this way he gets them well below the market 
 price. That part of a new issue, therefore, 
 which is bought by an insurance company is 
 taken permanently off the market and stowed 
 away. And it will be held firmly for the sake 
 of the interest, without much regard to its 
 price fluctuations, for an indefinite period, un- 
 less (as sometimes happens) some great con- 
 flagration like the San Francisco disaster 
 forces a company to realise part of its holdings. 
 Hence it often happens that, when a new issue 
 has to be taken very largely by the underwrit- 
 
CREATION OF NEW DEBT 235 
 
 ers, it is better placed and more firmly held 
 than when it is over-subscribed by the public; 
 for the outsiders who subscribe for new issues 
 are often "stags," who apply for far more 
 than they could really buy in the hope of be- 
 ing able to sell shortly afterwards at a pre- 
 mium. In that case the premium rapidly runs 
 off under a fire of sales, and the stock may 
 stand for a long time at a discount. 
 
 There is, of course, a vast difference be- 
 tween good underwriters and bad ones. Dur- 
 ing the rubber and oil boom, in the early 
 months of 1910, there was a great rush of pop- 
 ular issues many of which afterwards proved 
 to be bubble companies. In that case, as Mr. 
 Withers recently pointed out in a valuable 
 article (Investor's Monthly Manual, Oct. 1910) 
 underwriting is "a simple and easy method 
 of putting a nice cheque into one's pocket by 
 merely undertaking to do something which 
 one is most unlikely to be asked to do." 
 Most interesting stories, he adds, are told of 
 profits so made and of resultant banquets by 
 more or less impecunious gentlemen in the 
 West End, who, having a sort of semi-con- 
 nection with the City, acquired the privilege 
 of underwriting, on generous terms, blocks of 
 shares in rubber or oil companies for which 
 
236 THE STOCK EXCHANGE 
 
 they could not possibly have paid had they 
 been called upon to do so. "This sort of un- 
 derwriter is merely an impudent fraud, like 
 anybody else who takes money in return for 
 a promise that he could not keep. Luckily, 
 he can only make his appearance when the 
 public is demented by one of its periodical 
 speculative manias." Of course the weak 
 underwriters of this class are often caught, 
 especially towards the end of a boom when 
 the public is glutted. Many poor City clerks, 
 as well as smart West Enders, were left at the 
 end of the rubber boom with quantities of 
 unsaleable scrip, liable to heavy calls which 
 they could not meet. A respectable new ven- 
 ture will never make underwriting arrange- 
 ments of this sort. It may perhaps be legiti- 
 mate, where the risk is high, for the under- 
 writers' commission to run up to 10 per cent.; 
 but where it runs up to 25 per cent, the sub- 
 scribing public which knows nothing of all 
 this is obviously being swindled. In any 
 case, whenever the underwriting arrange- 
 ments, made behind the scenes, do not ensure 
 that the shares underwritten can be taken up 
 and paid for in short, whenever the under- 
 writers are not men of substance and credit 
 the subscribing public is shamefully wronged. 
 
CREATION OF NEW DEBT 237 
 
 It would be greatly to the advantage of the 
 City if these scandals could be made im- 
 possible by legislation. 
 
 There are, therefore, two distinct types of 
 underwriters shading off into one another: 
 (1) The speculative underwriter, who under- 
 writes to sell; and (2) the investing under- 
 writer, who underwrites as a real purchaser, 
 to obtain and hold securities. Both kinds 
 do the work for a commission by means of 
 which they obtain the shares at anything 
 from 1 to 25 per cent, (or even more) below 
 the nominal price. The solid underwriter is 
 of course mainly concerned with good public 
 loans, home, foreign, and colonial, or bond 
 issues of railways and industrial companies, 
 whereon the commission or discount is not 
 very large. But it is one of the weakest 
 points of a prospectus that it does not dis- 
 close either the price at which the issue has 
 been taken by the issuing houses, or the com- 
 mission which has been paid to underwriters. 
 Information of this sort, however, generally 
 leaks out in the City, and is conveyed by the 
 best informed City editors to the public. 
 
 It is generally provided in the prospectus 
 of a new issue, whether by a public authority 
 or by a private company, that a subscriber 
 
238 THE STOCK EXCHANGE 
 
 shall pay by instalments spread over several 
 months. This method, which is now practi- 
 cally universal, was introduced by the British 
 Government during the eighteenth century, 
 and in some cases a system of underwriting 
 was adopted in those early days of public 
 borrowing either in order to enrich favoured 
 individuals or for the more legitimate purpose 
 of ensuring success. In the tenth edition of 
 Mortimer's Every Man his own Broker, issued 
 in 1775, the system then in vogue is described 
 as follows: 
 
 "When the Parliament has voted these 
 supplies, and resolved on the ways and means 
 of raising them, a subscription is set on foot, 
 and is either open to the public, in which case 
 every responsible person is at liberty to apply, 
 by a proper letter to the right honourable the 
 Lords Commissioners of the Treasury, for 
 leave to be admitted to be a contributor, 
 naming in his letter the sum he desires to 
 contribute; or else it is private, that is to 
 say, a certain number of persons of fortune 
 have agreed to be answerable for the whole 
 sum to be subscribed; and have made the 
 required deposit. In this case, the only step 
 to be taken, by those who are not of the num- 
 ber just mentioned, is to apply to them for 
 
CREATION OF NEW DEBT 239 
 
 such part of the subscription as you want, 
 which if you are a particular friend, they will, 
 perhaps, spare you without any premium, 
 or for a very small one; for it is not to be 
 presumed, that any inconsiderable number 
 of men, who have subscribed for the whole 
 sum to be raised, intend, or can keep it, but 
 that they propose to include in their subscrip- 
 tion, all their friends and acquaintances. 
 Sometimes the subscription lies open to the 
 public at the bank or at the Exchequer, and 
 then every person is allowed to subscribe what 
 he thinks proper; and if, upon casting up 
 the whole, there is a surplus subscribed, as 
 has generally been the case, the sum each 
 subscriber has subscribed, is reduced in a 
 just proportion, so as to make in the whole, 
 the sum granted by Parliament. 
 
 "As soon as conveniently may be, after 
 the subscription is closed, receipts are made 
 out, and delivered to the subscribers, for the 
 several sums by them subscribed. . . . The 
 first deposit is generally of fifteen per cent., 
 and is made on or about the time of sub- 
 scribing; the second is about a month after, 
 and so on till the whole is paid in, which is 
 generally in October; each monthly payment 
 being either ten or fifteen per cent. Those, 
 
240 THE STOCK EXCHANGE 
 
 who chuse to pay the whole sum before the 
 appointed day of payment, are allowed three 
 per cent, from the time of such payment to 
 October. The subscription receipts thus paid 
 in full, are called in the Alley, Heavy-Horse, 
 because the gentlemen of the Alley can make 
 greater advantage than three per cent, by the 
 Light-Horse, and therefore they will not give 
 so good a price for the Heavy; nay, some of 
 them will have absolutely nothing to do with 
 it, for this reason, that they can buy a thou- 
 sand pound, Light-Horse (with one payment 
 made) for the same money as one hundred 
 pounds heavy, and by buying for the Light, 
 they have an opportunity of sporting with, 
 and gaining a profit on, a nominal thousand, 
 for the same money that it would cost to buy 
 an hundred Heavy. Light-Horse, therefore, 
 is the commodity to jobb with." 
 
 The advantage of "Light-Horse" to specu- 
 lators, of course, was that a small amount of 
 cash would buy a large amount of paper value. 
 After the first payment, for example, a person 
 could buy for 75 a receipt for 500 scrip, 
 and for much less if, according to custom, 
 the value of the lottery ticket were deducted. 
 No doubt, many purchasers of Light-Horse 
 were persons of small capital who bought for 
 
CREATION OF NEW DEBT 241 
 
 the rise and were anxious to sell or get out as 
 soon as possible. When a cheap and tempt- 
 ing prospectus appears nowadays it is always 
 over-subscribed in the same way by small 
 operators who sell out the moment a good 
 premium is established. But sometimes they 
 are disappointed. The issue does not go to a 
 premium. In that case, writes Mortimer, the 
 disappointed gambler in Light-Horse scrip 
 "may put it out to nurse, that is, deposit it 
 in the hands of some moneyed man, who for 
 a proper consideration will pay upon it and 
 keep it as his security till the proprietor has 
 an opportunity of selling it to advantage." 
 
 Those acquainted with the problems of 
 modern banking, and the competition be- 
 tween commerce and the Stock Exchange for 
 accommodation, will be interested to know 
 that 150 years ago "a branch of business 
 perhaps as considerable as any amongst the 
 bankers near the Alley" was the taking in 
 of various kinds of paper, such as scrip, long 
 annuities, etc., in pawn. At one time, in- 
 deed, the pawning of scrip became so large 
 and profitable a business that the bankers 
 and bill brokers of Lombard Street "openly 
 refused to discount bills, to the great detri- 
 ment of the commercial interest." 
 
CHAPTER IX 
 
 CAUTIONS AND PRECAUTIONS 
 
 IN the preceding chapters Stock Exchange 
 securities have been discussed principally 
 from the standpoints of London and New 
 York. In some respects Paris and Berlin are 
 equally interesting, especially in their banking 
 ramifications and in the alliance dangerous 
 to both which public diplomacy has con- 
 tracted with high finance. But if the financial 
 panorama of the old world and the new had 
 to be studied from two centres only, there is 
 no doubt that Lombard Street and Wall 
 Street should be chosen. The city of London, 
 with all its vast and delicate financial organi- 
 sation clustering round the Bank and the 
 Stock Exchange and Lloyds, directing, con- 
 trolling, guiding or influencing rates of in- 
 terest and discount, rates of exchange and 
 rates of insurance in all parts of the world, is 
 unique as a market for commodities, a 
 market for stocks, and a market for capital. 
 Here all these things are bought and sold on 
 
 242 
 
CAUTIONS AND PRECAUTIONS 243 
 
 an international scale. It would be a mis- 
 take to say that London is not speculative. 
 For one thing the City entertains too many 
 canny but venturesome Scots to allow such 
 a charge to be brought. But there is so 
 much old wealth, such long traditions of 
 caution and stability, so keen a sense of re- 
 sponsibility among those in command of the 
 leading banks and houses, that London, with 
 its unequalled annual surplus or overflow of 
 capital for export, should be reckoned rather 
 as the capital city of banking and invest- 
 ment than as the chosen home of speculation. 
 That second title belongs of right to New 
 York. It borrows money from across the 
 Atlantic in order to lend it to the West. Its 
 Stock Exchange list is reprinted hourly by 
 the tape machine from New Orleans to San 
 Francisco, and from San Francisco to Mon- 
 treal. Over ninety millions of people are 
 animated by the palpitations of Wall Street. 
 This ferment of speculation over so vast a 
 continent has its good and its evil sides. At 
 times it becomes an international danger, 
 and ends in a panic which sweeps away 
 thousands of apparently flourishing concerns, 
 scattering gloom over the trade and securi- 
 ties of the whole world. But the rapid de- 
 
244 THE STOCK EXCHANGE 
 
 velopment of material resources, mining, agri- 
 culture, manufactures, transportation, is of 
 necessity associated with speculation. For 
 speculation in the best sense is the investment 
 of capital and the use of credit to finance 
 enterprises which promise to yield handsome 
 profits. But for a verdant and evergreen 
 faith, salted with the love of risk and adven- 
 ture for their own sakes, how could mountains 
 be bored and waters bridged? If there were 
 not superstition there could be no religion, 
 if there were no bad speculations there would 
 be no good investments, if there were no wild 
 ventures there would be no brilliantly success- 
 ful enterprises; the same sort of sentiment 
 which gave Dr. Cook a temporary notoriety 
 invested Nansen with permanent fame. New 
 York, then, must be valued fairly, not as a 
 sort of gambling hell, but as a nerve centre 
 of North American enterprise. It is the 
 ultimate temple and court of high finance 
 before which nearly all important local 
 propositions for large enterprises through- 
 out the States of the Union, and often far 
 beyond its northern and southern bounda- 
 ries, ultimately bow the knee. 
 
 Nevertheless, those cautions and precau- 
 tions which it has been our purpose to throw 
 
CAUTIONS AND PRECAUTIONS 245 
 
 in the path of rash investment, are by no 
 means to be slighted merely because material 
 enterprise, enriching the world and spreading 
 the comforts of civilisation through hitherto 
 inhospitable and barren regions, is necessarily 
 based upon the credit provided by the banker 
 and the money provided by the speculator. 
 Those who have saved money by their own 
 enterprise and thrift are fools if they lend it 
 gladly on promises of romantic profits in 
 distant regions. It is a good principle to 
 remember that if an enterprise is really very 
 promising, money will be found somehow 
 locally, by those who have seen it with their 
 own eyes. When doubtful propositions have 
 to be floated the promoters always calculate 
 that distance will lend enchantment to the 
 view. They try to raise their money among 
 people who can only read their prospectus. 
 
 Of course there are not many hard and fast 
 rules in business life; but there are some in 
 connection with investment with which the 
 reader of these pages will have become 
 acquainted. In recapitulating some of them 
 we may be able to add a few further 
 hints. 
 
 First of all, an investor may of course be 
 well advised to insure himself against death, 
 
246 THE STOCK EXCHANGE 
 
 sickness, fire, burglary, etc., so reducing that 
 annual surplus which would otherwise be 
 available for investment proper. Then, sec- 
 ondly, he may use another part of his surplus 
 to buy his own house by instalments. Often, 
 though not always, he may thus make a very 
 high rate of interest on his money; and if in 
 the neighbourhood in which he lives rents are 
 tending to rise year by year, he may look not 
 only for a high rate of interest but for an ap- 
 preciation of his principal. But when he 
 comes to the purchase of a Stock Exchange se- 
 curity he should be careful, in the first place, 
 that he buys it from a respectable quarter, 
 i. e. from an official broker of a good Stock 
 Exchange, or from a respectable banker, who 
 acts as an intermediary. Any one who is in 
 the happy position of being able to invest 
 frequently should certainly be in touch with a 
 good broker, or better still, with two, if eti- 
 quette does not stand in the way. He may 
 very well ask his broker to send a short list of 
 securities of various types and yields to com- 
 pare with his own list. The advertisements 
 and circulars which come by post from unau- 
 thorised brokers and bucket shops (often 
 with some grand title to suggest that they 
 are "investment" companies or "bankers") 
 
CAUTIONS AND PRECAUTIONS 247 
 
 should be treated with the same respect as 
 a German invitation to a lottery. Some- 
 times these companies have the impudence 
 to ask you for a list of your investments, 
 and to promise you that if you will take 
 their advice they will be able to exchange 
 them for equally good securities which will 
 yield you one or two per cent. more. And 
 they will charge you no commission! 
 
 This is very kind indeed, and many simple 
 folk respond to their appeal. Probably the 
 so-called "bank" or "investment" company 
 has bought a lot of rubbish, usually called 
 "bonds," from shaky industrial concerns, or 
 from half bankrupt states and municipalities 
 of South America. They have bought, let us 
 say, the 6 per cent, bonds of the Yoko Silk 
 Company in Japan at 60, which they sell you 
 at 90, the 5 per cent, bonds of the Brazilian 
 
 Province of at 55, which they sell you at 
 
 75, and a few other similar bargains. They 
 tell you that if you then spread your risks 
 scientifically over different countries you will 
 be perfectly safe. You perhaps do not realise 
 that none of these securities which you are ad- 
 vised to buy are quoted in the London Stock 
 Exchange. If they were, the game would be 
 impossible. As it is, you cannot know what 
 
248 THE STOCK EXCHANGE 
 
 your philanthropic company actually gave 
 for them, and if asked they explain that 
 officially quoted stocks never go so cheap as 
 those they are able to offer you. Some time 
 after you have been gulled you may be forced 
 to sell one of these bargains, and then, if your 
 company is still in existence, it will tell you 
 that all the stocks you bought from them have 
 fallen heavily in price, or at least that they are 
 not immediately saleable. They will perhaps 
 promise to make inquiries and try to find a 
 purchaser. Your best hope then is, by 
 threatening them with exposure, to force 
 them to pass on the rubbish they have sold 
 you to some equally foolish and inexperienced 
 person. That is not a pleasant thought. But 
 if you can persuade a bucket shop to buy its 
 wares back at any sort of price, you may be 
 sure it will not keep them in its larder. 
 
 The theory of geographical distribution is 
 perfectly harmless so long as you keep to 
 good marketable securities for which there 
 are official quotations. But there is very 
 little in it. It is a mistake, of course, to keep 
 all your money in one security or in one trade, 
 or in securities connected with one trade. 
 But it would be silly to interpret the proverb 
 about eggs so literally that one should make 
 
CAUTIONS AND PRECAUTIONS 249 
 
 a special effort to scatter one's money in tinjr 
 parcels over the face of the globe. 
 
 Another important caution is to beware of 
 shares not fully paid up. Many bank and 
 insurance shares are of this description. The 
 majority are safe; but the possible risk is 
 too serious for any one of moderate means to 
 undertake. On the other hand, good shares 
 of this kind, with a liability of perhaps from 
 75 to 50 per cent., which might be called up 
 in an emergency, yield a rather high rate of 
 interest, and you can insure against a call at a 
 very trifling expense. If you have insured 
 yourself at Lloyds you can hold shares of this 
 description and sleep on them comfortably. 
 
 Apart from circulars, the investor may 
 easily be trapped by what he reads in news- 
 papers, especially the concealed advertise- 
 ments which often appear as articles in organs 
 not known to be disreputable. Every one 
 who has had any experience of the press knows 
 the difficulties and dangers, the temptations 
 and embarrassments, by which its proprietors, 
 managers, and editors are surrounded. In 
 Paris, if not elsewhere, there are newspapers 
 (which may be politically square) whose 
 financial columns are let to an advertising 
 company! I do not know of any sovereign. 
 
250 THE STOCK EXCHANGE 
 
 remedy. It is only by degrees that a reader 
 can discover which papers are independent 
 and which are not, which are flabbily opti- 
 mistic, which are hopelessly and slavishly 
 corrupt. Newspapers are apt to shift from 
 one class to another as they change their pro- 
 prietors, management, and staff. Sometimes 
 a respectable journal, finding its advertising 
 revenue dwindle, will abandon criticism of 
 prospectuses, in order not to give offence. I 
 am glad to think and to feel sure that this 
 policy is bad in the long run. The loss of 
 reputation and interest will prove far worse 
 for revenue than the slight temporary disad- 
 vantages which it is sought to obviate. 
 
 The three qualities an investor should 
 demand and look for in his newspaper are 
 
 1. Honesty, i. e. unpurchasable candour. 
 
 . Sound information about conditions at 
 home and abroad. 
 
 3. Criticism directed not merely to the dark 
 side of the picture, but to all the con- 
 siderations, good, bad and indifferent, 
 which affect security values. 
 
 It is right that newspaper criticisms of 
 City finance should err, if at all, on the side 
 of pessimism. For the average reader errs on 
 the other side. It is the crude and greedy 
 
CAUTIONS AND PRECAUTIONS 251 
 
 optimism of a speculative public that allows 
 so many transparently false ventures to be 
 successfully launched. But if the number of 
 honest newspapers and of journalists finan- 
 cially competent could be multiplied in all 
 parts of the world, vast sums now wasted 
 could be saved, and many a rogue's avenue 
 to affluence would be closed. To found and 
 maintain a good newspaper is one of the most 
 useful, public spirited, and patriotic services 
 that a man can perform. But it is a task not 
 to be lightly undertaken. 
 
 For the rest, the investor, having found his 
 Stock Exchange, his broker, and his news- 
 papers, and bearing in mind such precepts 
 touching bonds, preference stocks, etc., as we 
 have been able to provide, will, if he be wise, 
 above all remember not on any account to 
 allow his investment to exceed his capital. 
 The so-called investor who buys ten times 
 more than he owns is a miserable, nervous, 
 and timid creature; for every movement in 
 his "investments" causes him ten times the 
 amount of perturbation which it ought to 
 cause him. He is always cutting losses, or 
 jumping at small profits, instead of letting 
 his original judgment stand. Besides, na 
 investor, unless he be an absolute insider. 
 
252 THE STOCK EXCHANGE 
 
 could hope to make money after borrowing at 
 4 or 5 per cent, and paying commissions. 
 It is like playing against the bank at Monte 
 Carlo. The essence of investment is that 
 it should be for long periods, with the reser- 
 vation that the investor should keep a suf- 
 ficiently close watch on his holding to be 
 ready to take advantage of any substantial 
 rise which, in his judgment, is not likely to 
 last. People should take care to keep abreast 
 of political and economic events in foreign 
 countries in which they are financially in- 
 terested. You may have holdings in Spain, 
 Greece, Turkey, Egypt, Japan, China or 
 South America. In such cases you should 
 keep an eye on communications in respectable 
 newspapers dealing with affairs in these 
 countries, more especially if they are critical. | 
 Rose-coloured accounts, accompanied by open r 
 or concealed advertising, are more than 
 worthless. They rather provoke suspicion; 
 for they suggest that a show of prosperity and 
 strength is being made in London for the 
 purpose of some impending credit operation. 
 
GLOSSARY 
 
 Account Day. The last of the three days on which London 
 Stock Exchange bargains are settled. 
 
 Allotment. When a new loan is issued to the public sub- 
 scriptions are invited. If the loan has not been oversub- 
 scribed the applicants receive allotment in full. If it has 
 been oversubscribed the amount has to be allotted, or 
 divided up, among the applicants. 
 
 Arbitrage. Stock Exchange transactions between two coun- 
 tries. If the same stock is cheaper in New York than in 
 London it may pay a London operator to execute an order 
 in New York, and vice versa. Similar transactions be- 
 tween the London and the Provincial Stock Exchanges 
 are called shunting. 
 
 Bear. An operator who sells "short," with a view to re- 
 purchasing at a profit. 
 
 Bonds. Securities representing the debts of a public authority 
 or of a company, and in the latter case often secured by a 
 mortgage. They are usually to "bearer," with interest 
 coupons attached, and are transferable by delivery. 
 
 Broker. This term is used in a special sense for a member of 
 the London Stock Exchange who buys or sells securities 
 for the public, from or to the jobber. 
 
 Bucket Shop. A term of reproach sometimes applied gener- 
 ally to all outside brokers not connected with a Stock 
 Exchange. Some are unloading shops which advertise 
 to catch investors; others are gambling shops which offer 
 facilities to speculators. 
 
 Butt. An operator who buys stock for which he does not 
 mean to pay, with a view to reselling at a profit. 
 
 Bullion. Gold or silver in bars. 
 
 Carry Over. The continuation of speculative bargains from 
 one account to another on the London Stock Exchange. 
 
 Coupons. Interest tickets attached to bonds, which the owner 
 cuts off from time to time as they become due for payment. 
 
 Dealer. See Jobber. 
 
 253 
 
254 THE STOCK EXCHANGE 
 
 Debentures. A general term for bonds, but not necessarily or 
 usually including a mortgage. It usually means a floating 
 charge on the assets of a company. The leading English 
 debentures are the debenture stock of English railways. 
 In case of default on interest the debenture holders (though 
 there is no mortgage on the line) can put the property 
 in the hands of a receiver. 
 
 Deferred Stocks. Stocks which can only receive interest after 
 a dividend has been paid on preference and preferred 
 ordinary. 
 
 Dividend. Divisible profit; the interest declared from time 
 to time by a company on its shares, and paid to its share- 
 holders. 
 
 GiU-edged Securities. A term applied to Consols and other 
 first-class securities which are regarded as quite safe. 
 
 Jobber. Jobbers, or dealers, are members of the London Stock 
 Exchange who stand in the house and "make prices," 
 buying from, or selling to, the brokers. 
 
 Kaffirs. The Stock Exchange name for South African mining 
 shares. 
 
 Liability. For shares not fully paid up the holder is liable in 
 case the company fails or requires more capital. Thus, on 
 a ten pound share, with one pound paid, the liability is 
 nine pounds. 
 
 Liquidation. The winding up of a company in bankruptcy. 
 To liquidate is to realise or sell out securities. A liquid 
 asset is a security which can easily and quickly be turned 
 into cash. 
 
 Margin. The excess percentage over and above the market 
 price of a security deposited with a banker in return for a 
 loan. Thus a banker may require a five per cent, margin 
 of protection on Consols, and ten per cent on railway 
 stocks. Margin is sometimes called "cover." When a 
 security depreciates and the margin runs off, more cover is 
 required, otherwise the security will be sold. 
 
 Options. (See p. 186). 
 
 Ordinary or Common Stock. The lowest class of security 
 except where deferred stock has been issued. Ordinary 
 ranks after preference, as preference ranks after debenture 
 for interest. 
 
 Par Value. The face value of a stock. The par value of a ten 
 pound share is 10, that of a hundred pound share 100. 
 
 Preference or Preferred Stock. Securities which rank before 
 ordinary or common stock for dividend. 
 
 Prospectus. A published invitation to the public to invest in 
 a new loan or company. 
 
GLOSSARY 255 1 
 
 Put an& Call. (See p. 186.) 
 
 Rente. A French term for debt or public funds. French 
 
 rentes are the equivalent of British Consols. 
 Script. The paper receipt for a new security, on which only 
 
 one or two instalments have been paid. 
 Short. Selling "short," i. e. selling what one has not got. tr 
 
 (See Bear.) 
 
 Sinking Fund. A fund set apart for the redemption of debt. 
 Trustee Stocks. Securities in which Trustees are authorised 
 
 by law to invest. 
 Turn. The jobber's turn is the difference between the prices 
 
 at which he will buy and sell a security. 
 Underwriting. An agreement to take a new capital issue at a 
 
 price below that at which it is offered to the public. Th 
 
 discount is the underwriter's commission. 
 Watered Stock. A company which increases its nominal cap- 
 ital without improving its assets is said to water its stock. 
 
 BIBLIOGRAPHY 
 
 1. Stocks and Shares, by Hartley Withers (London: Smith 
 Elder & Co., 1910). 
 
 This, like the author's previous treatise, "The Meaning of Mone 
 immediately became a standard book. Mr. Withers, as City Editor of 
 
 Morning Post, has of course an intimate acquaintance with London finance, 
 which appears in every page of this scholarly and brilliant volume. 
 
 2. Stock Exchange Law and Practise, by W. A. Bewes (Lon- 
 don: Sweet & Maxwell, 1910). 
 
 An excellent book addressed to lawyers and professional men, which large 
 Investors should place on their shelves for reference. It deals with the rules 
 and regulations of the London Stock Exchange, Its relations to provincial 
 exchanges, and to English law as Interpreted by the courts. 
 
 3. The History, Law and Practise of the Stock Exchange, by 
 A. P. Poley and F. H. Carruthers Gould (London: Pitman & 
 Sons, 1907). 
 
 This Is an alternative to the preceding work In our list, and has consid- 
 erable merits of its own. 
 
 4. Stock Exchange Securities, by [Sir] Robert Giffen (London: 
 George Bell & Sons, 1877). 
 
 Essays by the celebrated economist and statistician on the causes of fluc- 
 tuations in Stock Exchange Securities. 
 
 5. Stock Exchange Investments in Theory and Practise, by 
 Joseph Burn, 1909 (London: C. & E. Layton, 1909). 
 
 An admirable course of lectures delivered to students at the Institute 
 of Actuaries, full of historical Information and practical guidance. 
 
256 THE STOCK EXCHANGE 
 
 6. A Plain Guide to Investment and Finance, by T. E. 
 Young (London: Macdonald & Evans, 1908). 
 
 The first part of this useful book contains a good deal of practical guidance 
 to investors. 
 
 7. Every Man His Own Broker, by J. Mortimer. 
 
 The first book on London Stock Jobbing. The first edition was published 
 In 1761. 
 
 8. The Work of Wall Street, by Sereno S. Pratt (New York: 
 D. Appleton & Co., 1910). 
 
 The book was written in 1903, and though not brought up to date in this 
 edition, is by far the best description I have read of the Wall Street system. 
 
 9. Forty Years of American Finance, by A. D. Noyes (New 
 York: G. P. Putnam's Sons, 1909). 
 
 A trustworthy history of American finance from 1865 to 1907. 
 
 10. Corporation Finance, by Edward S. Meade (New York: 
 D. Appleton & Co., 1910). 
 
 A most illuminating work to which the present writer is very much in- 
 debted. It is chiefly concerned with the promotion and marketing of Ameri- 
 can railroad and industrial securities. 
 
 11. The History and Methods of the Paris Bourse, by E. Vidal. 
 
 A learned and acute study published at Washington in 1910 by the National 
 Monetary Commission of the United States (61st Congress, 2nd Session, 
 Document No. 573). 
 
 12. London Stock Exchange Commission. Minutes of Evi- 
 dence. London, 1878 [C. 2157. 1]. 
 
 This contains the evidence of many official and leading members of the 
 London Stock Exchange, with important descriptions and criticisms of its 
 organisation and methods thirty-three years ago. 
 
HENRY HOLT AND COMPANY 
 
 THE HOME UNIVERSITY 
 
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 LITERATURE AND ART. 
 
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 73. EURIPIDES AND HIS AGE. By Gilbert Murray, Regius Pro- 
 fessor of Greek, Oxford. 
 
 101. DANTE. By Jefferson B. Fletcher. Columbia University. An inter- 
 pretation of Dante and his teaching from his writings. 
 
 2. SHAKESPEARE. By John Masefield. "One of the very few in- 
 dispensable adjuncts to a Shakespearean Library." Boston 
 Transcript. 
 
 81. CHAUCER AND HIS TIMES. By Grace E. Hadow, Lecturer Lady 
 Margaret Hall, Oxford; Late Reader, Bryn Mawr. 
 
 97. MILTON. By John Bailey. 
 
 59. DR. JOHNSON AND HIS CIRCLE. By John Bailey. Johnson's life, 
 
 character, works, and friendships are surveyed; and there is a notable 
 vindication of the "Genius of Boswell." 
 
 83. WILLIAM MORRIS: HIS WORK AND INFLUENCE. By A. Clut- 
 ton Brock, author of "Shelley: The Man and the Poet." William Morris 
 believed that the artist should toil for love of his work rather than the 
 gain of his employer, and so he turned from making works of art to 
 remaking society. 
 
 73. SHELLEY, GODWIN AND THEIR CIRCLE. By H. N. Braihford. 
 
 The influence of the French Revolution on England. 
 
70. ANCIENT ART AND RITUAL. By Jane E. Harrison, LL. D., D. 
 Litt. "One of the 100 most important books of 1913." New York 
 Times Review. 
 
 45. MEDIEVAL ENGLISH LITERATURE. By W. P. Ker, Professor 
 of English Literature, University College, London. "One of the 
 soundest scholars. His style is effective, simple, yet never dry." 
 The Athenaeum. 
 
 87. THE RENAISSANCE. By Edith Sichel, author of "Catherine de 
 Medici," "Men and Women of the French Renaissance." 
 
 89. ELIZABETHAN LITERATURE. By J. M. Robertson, M. P., 
 
 author of "Montaigne and Shakespeare," "Modern Humanists." 
 
 27. MODERN ENGLISH LITERATURE. ByG.H.Mair. From Wyatt 
 and Surrey to Synge and Yeats. "One of the best of this great series." 
 Chicago Evening Post. 
 
 61. THE VICTORIAN AGE IN LITERATURE. By G. K. Chesterton. 
 
 40. THE ENGLISH LANGUAGE. By L. P. Smith. A concise history 
 of its origin and development. 
 
 66. WRITING ENGLISH PROSE. By William T. Brewster, Professor 
 of English, Columbia University. "Should be put into the hands 
 of every man who is beginning to write and of every teacher of English 
 who has brains enough to understand sense." New York ^ ur ^. 
 
 58. THE NEWSPAPER. By G. Binney Dibblee. The first full account 
 from the inside of newspaper organization as it exists to-day. 
 
 48. GREAT WRITERS OF AMERICA. By W. P. Trent and John 
 
 Erskine, Columbia University. 
 
 93. AN OUTLINE OF RUSSIAN LITERATURE. By Maurice Baring, 
 
 author of "The Russian People," etc. Tolstoi, Tourgenieff, Dos- 
 toieffsky, Pushkin (the father of Russian Literature,) Saltykov (the 
 satirist,) Leskov, and many other authors. 
 
 31. LANDMARKS IN FRENCH LITERATURE, By G. L. Strachey, 
 
 Scholar of Trinity College, Cambridge. "It is difficult to imagine 
 how a better account of French Literature could be given in 250 pages." 
 London Times. 
 
 64. THE LITERATURE OF GERMANY. By J. G. Robertson. 
 
 62. PAINTERS AND PAINTING. By Sir Frederick Wedmore. With 
 16 half-tone illustrations. 
 
 38. ARCHITECTURE. By Prof. W. R. Lethaby. An introduction to 
 the history and theory of the art of building. 
 
 108. PATRIOTISM IN LITERATURE. By John Drinkwater. 
 
 109. MUSIC. By Sir W. H. Hadow. 
 
NATURAL SCIENCE. 
 
 DISEASE AND ITS CAUSES. By W. T. Councilman, M. D., 
 
 LL. D., Professor of Pathology, Harvard University. 
 SEX. By J. Arthur Thompson and Patrick Geddes, joint authors 
 of "The Evolution of Sex." 
 
 PLANT LIFE. By J. B. Farmer, D. Sc., F. R. S., Professor of Bot- 
 tany in the Imperial College of Science, London. This very fully 
 illustrated volume contains an account of the salient features of plant 
 form and function. 
 
 THE ORIGIN AND NATURE OF LIFE. By Benjamin M. Moore, 
 Professor of Bio-Chemistry, Liverpool. 
 
 CHEMISTRY. By Raphael Meldola, F. R. S., Professor of Chem- 
 istry, Finsbury Technical College. Presents the way in which the 
 science has developed and the stage it has reached. 
 ELECTRICITY. By Gisbert Kapp, Professor of Electrical En- 
 gineering, University of Birmingham. 
 
 THE MAKING OF THE EARTH. By J. W. Gregory, Professor of 
 Geology, Glasgow University. 38 maps and figures. Describes 
 the origin of the earth, the formation and changes of its surface and 
 structure, its geological history, the first appearance of life, and its 
 influence upon the globe. 
 
 MAN: A HISTORY OF THE HUMAN BODY. By A. Keith, M. D., 
 Hunter ian Professor, Royal College of Surgeons, London. Shows 
 how the human body developed. 
 
 NERVES. By David Fraser Harris, M. D., Professor of Physi- 
 ology, Dalhousie University, Halifax. Explains in non-technical 
 language the place and powers of the nervous system. 
 AN INTRODUCTION TO SCIENCE. By Prof. J. Arthur Thomson, 
 Science Editor of the Home University Library. For those unac- 
 quainted with the scientific volumes in the series, this should prove 
 an excellent introduction. 
 
 EVOLUTION. By Prof. J. Arthur Thomson and Prof. Patrick 
 Geddes. Explains to the layman what the tide means to the scien- 
 tific world. 
 
 ASTRONOMY. By A. R. Hinks, Chief Assistant at the Cambridge 
 Observatory. "Decidedly original in substance, and the most readable 
 and informative little book on modern astronomy we have seen for a 
 long time." Nature. 
 
 PSYCHICAL RESEARCH. By Prof. W. F. Barrett, formerly Presi- 
 dent of the Society for Psychical Research. 
 
 THE EVOLUTION OF PLANTS. By Dr. D. H. Scott, President 
 of the Linnean Society of London. The story of the development 
 of flowering plants, from the earliest zoological times, unlocked from 
 technical language. 
 
 BIOLOGY. By J. Arthur Thomson and Patrick Geddes. 
 
43. MATTER AND ENERGY. By F. Soddy, Lecturer in Physical 
 Chemistry and Radioactivity, University of Glasgow. "Brilliant. 
 Can hardly be surpassed. Sure to attract attention." New York 
 Sun. 
 
 41. PSYCHOLOGY, THE STUDY OF BEHAVIOUR. By William Me- 
 
 Dougall, of Oxford. A well digested summary of the essentials of the 
 science put in excellent literary form by a leading authority. 
 
 42. THE PRINCIPLES OF PHYSIOLOGY. By Prof. J. G. McKendrick, 
 
 A compact statement by the Emeritus "Professor at Glasgow, for 
 uninstructed readers. 
 
 37. ANTHROPOLOGY. By R. R. Marett, Reader in Social Anthro- 
 pology, Oxford. Seeks to plot out and sum up the general series of 
 changes, bodily and mental, undergone by man in the course of 
 history. "Excellent. So enthusiastic, so clear and witty, and so 
 well adapted to the general reader." American Library Association 
 Booklist. 
 
 17. CRIME AND INSANITY. By Dr. C. Mercier, author of "Crime 
 and Criminals," etc. 
 
 12. THE ANIMAL WORLD. By Prof . F. W. Gamble. 
 
 15. INTRODUCTION TO MATHEMATICS. By A. N. Whitchead, 
 author of "Universal Algebra." 
 
 PHILOSOPHY AND RELIGION. 
 
 69. A HISTORY OF FREEDOM OF THOUGHT. By John B. Bury, 
 M. A., LL. D., Regius Professor of Modern History in Cambridge 
 University. Summarizes the history of the long struggle between 
 authority and reason and of the emergence of the principle that co- 
 ercion of opinion is a mistake. 
 
 96. A HISTORY OF PHILOSOPHY. By Clement C. J. Webb, Oxford. 
 
 35. THE PROBLEMS OF PHILOSOPHY. By Bertrand Russell, Lee- 
 turer and Late Fellow, Trinity College, Cambridge. 
 
 60. COMPARATIVE RELIGION. By Prof. J. Estlin Carpenter. "One 
 of the few authorities on this subject compares all the religions to 
 see what they have to offer on the great themes of religion." Chris- 
 Han Work and Evangelist. 
 
 44. BUDDHISM. By Mrs. Rhys Davids, Lecturer on Indian Philoso- 
 phy, Manchester. 
 
 46. ENGLISH SECTS: A HISTORY OF NONCONFORMITY. ByW.B. 
 
 Selbie. Principal of Manchester College, Oxford. 
 
 
55. MISSIONS: THEIR RISE AND DEVELOPMENT. By Mrs. MM- 
 dell Creighton, author of "History of England." The author seeks to 
 prove that missions have done more to civilize the world than any 
 other human agency. 
 
 52. ETHICS. By G. E. Moore, Lecturer in Moral Science, Cambridge. 
 Discusses what is right and what is wrong, and the whys and where- 
 fores. 
 
 C5. THE LITERATURE OF THE OLD TESTAMENT. By George F. 
 Moore. Professor of the History of Religion, Harvard University "A 
 popular work of the highest order. Will be profitable to anybody 
 who cares enough about Bible study to read a serious book on the 
 subject." American Journal of Theology. 
 
 88. RELIGIOUS DEVELOPMENT BETWEEN OLD AND NEW TESTA- 
 MENTS. By R. H. Charles, Canon of Westminster. Shows how 
 religious and ethical thought between 180 P. C. and 100 A. D. grew 
 naturally into that of the New Testament. 
 
 50. THE MAKING OF THE NEW TESTAMENT. By B. W. Bacon, 
 
 Professor of New Testament Criticism, Yale. An authoritative 
 summary of the results of modern critical research with regard to 
 the origins of the New Testament. 
 
 SOCIAL SCIENCE. 
 
 91. THE NEGRO. By W. E. Burghardt DuBois, author of "Souls of 
 Black Folks," etc. A history of the black man in Africa, America and 
 elsewhere. 
 
 77. CO-PARTNERSHIP AND PROFIT SHARING. By Aneurin WU- 
 liaras, Chairman, Executive Committee, International Co-opera- 
 tive Alliance, etc. Explains the various types of co-partnership and 
 profit-sharing, and gives details of the arrangements, now in force in 
 many of the creat industries. 
 
 99. POLITICAL THOUGHT: THE UTILITARIANS. FROM BENT- 
 HAM TO J. S. MILL. By William L. P. Davidson. 
 
 103. ENGLISH POLITICAL THOUGHT. From Locke to Bentham. By 
 Harold J. Laski, Professor of Political Science in the London School of 
 Economics. 
 
 98. POLITICAL THOUGHT: FROM HERBERT SPENCER TO THE 
 PRESENT DAY. By Ernest Barker, M. A. 
 
 79. UNEMPLOYMENT. By A. C. Pigou, M. A., Professor of Political 
 Economy at Cambridge. The meaning, measurement, distribution, 
 and effects of unemployment, its relation to wages, trade fluctuations, 
 and disputes, and some proposals of remedy or relief. 
 
80. COMMON-SENSE IN LAW. By Prof. Paul Vinogradoff, D. C. L., 
 
 LL. D. Social and Legal Rules Legal Rights and Duties Facts 
 and Acts in Law Legislation Custom Judicial Precedents Equity 
 The Law of Nature. 
 
 49. ELEMENTS OF POLITICAL ECONOMY. By S. J. Chapman, 
 
 Professor of Political Economy and Dean of Faculty of Commerce 
 and Administration, University of Manchester. 
 
 11. THE SCIENCE OF WEALTH. By J. A. Hobson, author of "Prob- 
 lems of Poverty." A study of the structure and working of the modern 
 business world. 
 
 1. PARLIAMENT. ITS HISTORY, CONSTITUTION, AND PRAC- 
 TICE. By Sir Courtenay P. Ilbert, Clerk of the House of Commons. 
 
 16. LIBERALISM. By Prof. L. T. Hobhouse, author of "Democracy and 
 Reaction." A masterly philosophical and historical review of the subject. 
 
 5. THE STOCK EXCHANGE. By F. W. Hirst, Editor of the London 
 Economist. Reveals to the non-financial mind the facts about invest- 
 ment, speculation, and the other terms which the title suggests. 
 
 10. THE SOCIALIST MOVEMENT. By J. Ramsay Macdonald, Chair- 
 man of the British Labor Party. 
 
 28. THE EVOLUTION OF INDUSTRY. By D. H. MacGregor, Professor 
 of Political Economy, University of Leeds. An outline of the recent 
 changes that have given us the present conditions of the working classes 
 and the principles involved. 
 
 29. ELEMENTS OF ENGLISH LAW. By W. M. Geldart, Vinerian 
 Professor of English Law, Oxford. A simple statement of the basic 
 principles of the English legal system on which that of the United 
 States is based. 
 
 32. THE SCHOOL: AN INTRODUCTION TO THE STUDY OF EDU- 
 CATION. By J. J. Findlay, Professor of Education, Manchester. 
 Presents the history, the psychological basis, and the theory of the 
 school with a rare power of summary and suggestion. 
 
 6. IRISH NATIONALITY. By Mrs. J. R. Green. A brilliant account 
 of the genius and mission of the Irish people. "An entrancing work, 
 and I would advise every one with a drop of Irish blood in his veins 
 or a vein of Irish sympathy in his heart to read it." New Yor\ Time* 
 Review. 
 
 107. STUDY OF HEREDITY. By Ernest William MacBride. 
 
GENERAL HISTORY AND GEOGRAPHY. 
 
 102. SERBIA. By L. F. Waring, with preface by J. M. Jovanovitch, 
 Serbian Minister to Great Britain. The main outlines of Serbian 
 history, with special emphasis on the immediate causes of the war. 
 and the questions in the after-the-war settlement. 
 
 33. THE HISTORY OF ENGLAND. By A. F. Pollard, Professor of 
 English History, University of London. 
 
 95. BELGIUM. By R.C.K. Ensor, Sometime Scholar of Balliol College. 
 The geographical, linguistic, historical, artistic and literary associa- 
 tions. 
 
 100. POLAND. By J. Alison Phillips, University of Dublin. The history 
 of Poland with special emphasis upon the Polish qustion of the pre- 
 sent day. 
 
 34. CANADA. By A. G. Bradley. 
 
 72. GERMANY OF TO-DAY. By Charles Tower. 
 
 78. LATIN AMERICA. By William R. Shepherd, Professor of His- 
 tory, Columbia. With maps. The historical, artistic, and commercial 
 development of the Central South American republics. 
 
 18. THE OPENING UP OF AFRICA. By Sir H. H. Johnston. 
 
 19. THE CIVILIZATION OF CHINA. By H. A. Gtfes, Professor of 
 Chinese, Cambridge. 
 
 36. PEOPLES AND PROBLEMS OF INDIA. By Sir T. W. Holderness, 
 
 "The best small treatise dealing with the range of subjects fairly in- 
 dicated by the title." The Dial. 
 
 26. THE DAWN OF HISTORY. By J. L. Myers, Professor of Ancient 
 History, Oxford. 
 
 92. THE ANCIENT EAST. By D.G. Hogarth, M. A.,F. B. A.,F.S. A., 
 Connects with Prof. Myers's "Dawn of History" (No. 26) at about 
 1000 B. C. and reviews the history of Assyria, Babylon, Cilicia, Persia 
 and Macedon. 
 
 30. ROME. By W. Warde Fowler, author of "Social Life at Rome," etc. 
 
 13. MEDIEVAL EUROPE. By H. W. C. Davis, Fellow at Balliol Col- 
 
 lege, Oxford, author of "Charlemagne," etc. 
 3. THE FRENCH REVOLUTION. By Hilaire Belloc. 
 
 57. NAPOLEON, By H. A. L. Fisher, Vice-Chancellor of Sheffield Uni- 
 versity. Author of "The Republican Tradition in Europe." 
 
 20. HISTORY OF OUR TIME. (1885-1911). By C. P. Gooch. 
 
 22. THE PAPACY AND MODERN TIMES. By Rev. William Barry, 
 D. D., author of "The Papal Monarchy," etc. The story of the rise and 
 fall of the Temporal Power. 
 
 108. WALES. By W. Watkin Davies, M.A.. F.R. Hist.S., Barrister-at- 
 Law, author of "How to Read History," etc. 
 
110. EGYPT, By E. A. Wallis Budge. 
 
 104. OUR FORERUNNERS. By M. C. Burkitt, M.A., F.S.A. A com- 
 prehensive study of the beginnings of mankind and the culture of th e 
 prehistoric era. 
 
 4. A SHORT HISTORY OF WAR AND PEACE. By G. H. Pern., 
 
 author of "Russia in Revolution," etc. 
 94. THE NAVY AND SEA POWER. By David Hannay, author of "Short 
 
 History of the Royal Navy," etc. A brief history of the navies, sea 
 
 Power, and ship growth of all nations, including the rise and decline 
 
 of America on the sea, and explaining the present British supremacy. 
 8. POLAR EXPLORATION. By Dr. W. S. Bruce, Leader of the 
 
 "Scotia" expedition. Emphasizes the results of the expeditions. 
 51. MASTER MARINERS. By John R. Spears, author of "The His- 
 
 tory of Our Navy," etc. A history of sea craft adventure from the 
 
 earliest times. 
 
 86. EXPLORATION OF THE ALPS. By Arnold Lunn, M. A. 
 7. MODERN GEOGRAPHY. By Dr. Marion Newbigin. Shows the re- 
 lation of physical features to living things and to some of the chief in- 
 stitutions of civilization. 
 
 76. THE OCEAN. A GENERAL ACCOUNT OF THE SCIENCE OF 
 THE SEA. By Sir John Murray/K. C. B., Naturalist H. M. S. "Chal- 
 lenger," 1872-1876, joint author of "The Depths of the Ocean," etc. 
 
 84. THE GROWTH OF EUROPE. By Granville Cole, Professor of 
 Geology, Royal College of Science, Ireland. A study of the geology 
 and physical geography in connection with the political geography. 
 
 105. COMMERCIAL GEOGRAPHY. By Marion I. Newbigin. Funda- 
 mental conceptions of commodities, transport and market. 
 
 AMERICAN HISTORY. 
 
 47. THE COLONIAL PERIOD (1607-1766). By Charles McLean An- 
 drews, Professor of American History, Yale. 
 
 82. THE WARS BETWEEN ENGLAND AND AMERICA (1763-1815). 
 By Theodore C. Smith, Professor of American History, Williams 
 College. A history of the period, with especial emphasis on The Re- 
 volution and The War of 1812. 
 
 67. FROM JEFFERSON TO LINCOLN (1815-1860). By William Mac- 
 Donald. Professor of History, Brown University. The author makes 
 the history of this period circulate about constitutional ideas and slavery 
 sentiment. 
 
 25. THE CIVIL WAR (1854-1865). By Frederick L. Paxson, Professor 
 of American History, University of Wisconsin. 
 
 39. RECONSTRUCTION AND UNION (1865-1912). By Paul Leland 
 Haworth. A History of the United States in our own times. 
 
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