BUSINESS ADMIXISTRATION 
 TEXT BOOKS 
 
 Business Economics. 
 
 Business Organization and Management. 
 
 Advertising and Salesmanship. 
 
 Trade and Commerce. 
 
 Transportation. 
 
 Money, Banking and Insurance. 
 
 Investments and Speculation. 
 
 Accounting. 
 
 Auditing and Tost Accounting. 
 
 Business Law and Legal Forms. 
 
BUSINESS 
 ADMINISTRATION 
 
 THEORY, PRACTICE AND 'APPLICATION 
 
 Edit r-In- Ch ief 
 
 Walter D. Moody 
 
 General Managkk, the Chicago AssoaATioN of Commerce, 
 Author, "Men Who Sell Things." 
 
 Managing Editor 
 
 Samuel MacClixtock, Ph. D. 
 
 Editorial and Educational Directoir, 
 La Salle Extension UNiyEX£n.Y 
 
 This work is especially designed to meet the practical ez'ery-day nfed^ of 
 the active business vum, and contains the fundamental find basic 
 principles upon xvhich a successful business is founded, con- 
 ducted and maintained. To those looking [onvard to 
 a business lareer, this 'icork forms the basi< 
 for a practical and systematic course tn 
 "Business Administration" 
 
 published by 
 LA SALLE EXTENSION UNIVERSITY 
 
 CHICAGO 
 
n Ik'-''' 
 
 CopyrlKht, 1910, 
 LASALLE KXTENSION UNU-ERSITY. 
 
 
INVESTMENTS AND SPECULATION 
 
 ^ This treatise has been especially prepared by Louis 
 Guenther, Editor New York Financial World, and 
 presents an exhaustive treatment of all phases of in- 
 vestments and speculation and conveys to the reader's 
 mind a thorough knowledge of each. It is sup- 
 plemented by the writings of well-known financial 
 experts, capitalists and successful operators. Tt is a 
 modern, popular and authoritative exposition of the 
 principles involved in investments, the science of 
 speculation, buying for investments, short sales, stock 
 manipulation, pyramiding, bond flotation, analysis of 
 financial statements, etc., together with many concrete 
 examples and helpful suggestions for the guidance of 
 the investor and those engaged in business transactions. 
 It is also arranged to serve as a quick reference work, 
 and includes a complete table of contents, a compre- 
 hensive index and test questions. 
 
 W.\LTER O. Moody, 
 
 Editor-in-Chief. 
 
 248539 
 
INTRODUCTION TO BUSINESS ADMINISTRATION. 
 
 BY WALTER D. MOODY. 
 
 General Manager, The Chicago Association of Commerce. 
 Author of '"Men Who Sell Things." 
 
 *'The recipe for perpetual ignorance is: Be satisfied zvith your own 
 opinion and content with your knotvledge." 
 
 This is an era of the greatest commercial ac- 
 
 Business a contest tivity the world has ever known. The devel- 
 
 of wits opnicnt of business is one of the marvels of 
 
 the new century. A few years ago science, 
 
 as a factor in commerce, was little known and less appreciated. The 
 
 amazing advantages to business of intellectual attainments were utterly 
 
 without recognition. Today, however, business has become a contest in 
 
 which the quickest perception wins, thus transforming the counting room 
 
 into a battle ground upon which brain matches brain for supremacy and 
 
 success. 
 
 Ah, that enchanting word, S-U-C-C-E-S-S. It 
 Success— educated docs not require a magic key to unlock the 
 enthusiasm door to business efficiency. There is nothing 
 
 mystic, nothing mysterious in the applied 
 method of the really resourceful men in this day of great successes, of 
 marvelous achievements in business enterprise. The sum total is con- 
 tained in two words, words that electrify, nevertheless. EDUCATED 
 ENTHUSIASM. 
 
 The most formidable barrier to progress has 
 
 Changing conditions always been the sfenseless opposition of those 
 
 make to whom it would be of the greatest benefit. 
 
 opportunities Changing conditions are the order of the day, 
 
 for enlightenment has worked wonders. In 
 olden times, a man of affairs was obliged to g^uard liis property and his 
 loved ones by building a moat around his house and posting sentinels in 
 and around his estate. The time is not long past when, because of preju- 
 dice, perversity or ignorance, many men believed that opportunity knocked 
 only once at any man's door. Today, thanks to deeper insight, most men 
 belicTc that life itself is opportunity; that the very air we breathe is 
 opportunity ; that each new day presents broader opportunities for accom- 
 
INTRODUCTION 
 
 pHshinj]^ more because of better directed energy. Tliis is not alone the 
 accepted dof,'ma of the man who is making his way in the world. It is 
 tlie creed, doctrine, tenet or religion, whichever you may care to term it, 
 of the great captains of iiulnstr)' everywhere. 
 
 The more successful the man, the more docs 
 New ideas count he think, study, plan, as a part of his daily 
 
 occupation in tiie development of the affairs in 
 which he is interested. Newer and better ways to get things done is the 
 business standard employed today by successful men in all lines. Only 
 3'esterday if a man of genius advanced a new idea, he found himself 
 ridiculed and his innovation opposed on all sides because it was a new 
 idea. Today, it is different. The man of ideas counts in the trend of 
 affairs as he has never counted before. 
 
 Everything has a subjective reason. Progress 
 Must keep step with is acting as a mighty dynamic force in chang- 
 changing times ing men's viewpoint of life and things. Sup- 
 
 pose the stroke oar on a varsity crew, while in 
 a race against an opposing crew from a competitive institution, should 
 suddenly stop rowing in harmony with his associates and begin to row 
 backwards — that crew would not get very far without trouble. Suppose 
 a lawn mower should be reversed and forced to run backwards — there 
 would not be much progress made in cutting grass on that lawn. Varsity 
 crews and lawn mowers must move forward. Business men must ad- 
 vance with the times. 
 
 A great merchant in Chicago tells a good story of his youth. lie was 
 a member of a state regiment of militia. On a certain occasion, his com- 
 pany was sent out on dress parade. An old maiden aunt, with consider- 
 able colonial blood in her veins, took much pride in her nephew and his 
 company. While reviewing the parade, she was suddenly heard to ex- 
 claim: "Why, every single man in that company is out of step excepting 
 my nephew." Most men who fail to get on in the world do not realize 
 that success lies in keeping step — in making progress with changing condi- 
 tions. They generally make the mistake of thinking that the world and 
 everything in it is out of harmony with themselves. 
 
 A business man of successful experience rea- 
 
 New ideas worth lizes that ideas — newer and better principles of 
 
 searching for conducting business — are of the greatest value, 
 
 and he also knows that it pays him to search 
 for them. The same old way of doing things cannot longer be success- 
 fully employed month after month and year after year as under the old 
 regime. The business man must be modern, up-to-date. The physician 
 or lawyer finds that to compete successfully he is compelled to search 
 
INTRODUCTION 
 
 without ceasing in order that he may comprehend the advancement in 
 treatments or procedures. "To the man wlio fails belong the excuses." 
 
 President James, of the University of Illinois, 
 
 Demand for trained was asked if there was any demand from busi- 
 
 men ness houses for college-bred men. His reply 
 
 was : "The demand has been far in excess of 
 the supply since courses in business administration were established in 
 our institution seven years ago. Each year has brought many more 
 requests than we have men to recommend." Ten years ago President 
 James would have been ridiculed for advancing this new idea for the 
 establishment of a school of commerce in connection with a university. 
 Today, commercial schools are a part of the regularly established courses 
 of nearly all of the great universities of our country. Men trained in the 
 theory, practice and administration of business will always occupy the 
 best positions and will always command the greatest salaries. 
 
 All men fail at times in the accomplishment of 
 
 Value of new ideas satisfactory results in the various enterprises 
 
 in in which they are engaged, without being able 
 
 business emergencies to give an explanation. The principles that 
 
 have been applied successfully for many 
 years seem apparently to have counted for nothing. It is frequently evi- 
 dent that in such cases a very insignificant thing, a mere oversight per- 
 chance, has been the direct cause of the failure. To be able to put the 
 finger on the precise cause of the lack of success in one's method would 
 locate the cause of the disaster. Then it is that a real appreciation of 
 new ideas is fully realized. 
 
 Failure is more often chargeable to a refusa! 
 
 Men paid for what to learn by mistakes how to avoid them than it 
 
 they know — not is in making them. Experience is a good 
 
 for what they do teacher, but who can deny the value to be 
 
 gained in learning from the experience of 
 others, for we cannot all have the same experience or the same view of 
 similar experiences. There are many pathways to success, but the road 
 of in(?lvidual experience is narrow and rugged. It is a commonly ac- 
 cepted fact that for every ten dollars a high-salaried man draws, he re- 
 ceives nine dollars for what he knows and one dollar for what he does. 
 On the same basis the successful business man, employing a large force 
 of other men, realizes that his own greatest worth, as applied to his 
 affairs, lies not so much in what he can do himself as how much he can 
 encourage his employees to do. In either case, his own personal knowl- 
 edge is the power behind the throne. 
 
INTRODUCTION 
 
 The man who would secure the largest net re- 
 Knowledge in excess turn from his individual effort in the field of 
 of present needs endeavor, and he who would realize the great- 
 rccessary est possible advantage from the efforts of 
 
 those under his command must, of necessity, 
 possess knowledge — indispensable perception far in excess of the needs of 
 the moment. Discernment, like a bank account, soon runs out if it is 
 overdrawn or if it is not continually replenished. In business the "check- 
 ing system" of knowledge is the sort of account that pays best — not 
 the "savings account system." Knowledge that is simply corked up and 
 allowed to accumulate cobwebs and rust can avail nothing. The sharpest 
 vinegar is procured by constantly replenishing the old stock with new. 
 
 Reliable statistics prove that only about ten 
 
 90% failures per cent of all people who engage in business 
 
 vs. are successful and make money; the other 
 
 lO/o moneymakers ninety per cent become insolvent and fail. 
 
 That is, they do not actually encounter the 
 sheriff, or go into the hands of a receiver, but they fail nevertheless to 
 succeed in the sense of making money, and what other possible reason 
 can anyone have for engaging in business if not to accumulate money? 
 
 Why do so many fail? Ask any credit man 
 Failures due to lack and he will tell you that it is not because of 
 of intellectual the lack of capital, or other material resources, 
 
 capacity but it is due primarily to a lack of intellectual 
 
 capacity, the sort of brains that dig and work 
 and sweat until they find a way to accomplish things ; brains that go to 
 the bottom of things ; brains that are always looking for better results ; 
 brains that never abandon a problem until they have found a way to 
 solve it. A friend once told me that he inquired of the manager of a 
 house employing some throe hundred traveling men how many salesmen 
 they had. The manager replied, "Three." My friend asked, "How's 
 that? I am told your force of traveling men numbers nearly three hun- 
 dred." "Ah, that is quite different," replied the manager; "we have two 
 hundred and ninety-seven traveling men. but only three salesmen." 
 Quite likely that manager's estimate was intended to be taken figuratively 
 rather than literally.but it serves to illustrate the fact that in this great 
 United States there are millions of men, young, middle-aged and old, who 
 are content to plod along in a mediocre sort of way, heedless or unmindful 
 of the fact that opportunity, knowlcdcre. possibilities, are calling, calling, 
 calling to them to come up higher. There are hundreds of thousands of 
 other men engaged in business who sit idly bv while their trade, like the 
 
INTRODUCTION 
 
 sands in the hour glass, slowly ebbs away, and eventually is absorbed by 
 their more progressive business neighbors. 
 
 There is still another vast army of business 
 Moneymaking and men — salesmen, clerks and wage-earners of all 
 business literature classes — who are beginning to catch a glimpse 
 
 of the dawning of a new business era, the 
 greatest the world has ever known, an era impregnated with possibilities 
 and opportunities for those who are ready with wicks trimmed and oil 
 in their lamps. To the earnest latter class which is really desirous of 
 profiting by the experience of others, there is no need of elaborating the 
 possibilities embodied in this course of reading in Business Administra- 
 tion. This set of books, containing valuable business data on many sub- 
 jects, thousands of pages telling the story of success illustrated by trained 
 men wdiose names are respected everywhere, is intended to reach all 
 classes. There is absolutely nothing in print that can even approach or 
 can begin to compare with it in value as a reference library for business 
 men or excel it as a complete course of instruction for any man desirous 
 of making the best of his possibilities and opportunities in the kaleido- 
 scopic age through which the business world is now moving. 
 
 The more practical the ideas, the better the 
 Practical ideas best basis for good work. Not long since, busi- 
 ness men generally pooh-poohed the idea of 
 employing in the conduct of their business anything new, which was taken 
 from the writings and experience of others, such as is contained in this 
 remarkable series, contributed to by some of the brightest minds in the 
 business world today. There is, however, in these days unmistakably a 
 hungering and thirsting for just this new sort of literature. It fills a long- 
 felt need — fills it exactly, completely, satisfactorily. Being the author of a 
 work on salesmanship which has had a countrywide circulation, I have 
 been literally besieged by business men everwhere asking me to recom- 
 mend books treating of successful business methods, and have been cha- 
 grined to find how limited was the supply. The man who formerly was 
 prejudiced against such sources of information must now step aside 
 and make way for progress or unite with the popular demand for more 
 education and better methods. 
 
 Show me the man who says he has no pa- 
 
 Cannot afford tience for such things, and I will show you a 
 
 vs. man, like the stroke oar and the lawn mower, 
 
 can afford who does not believe in moving forward in 
 
 progress. Show me the man who says he has 
 no time to read of new methods and principles, and I will show you the 
 one who utterly fails to perceive that familiarity with business literature 
 of this kind means pecuniary advancement. Show me the man who says 
 
INTRODUCTION 
 
 he cannot afford to invest in such a set of books, and I will show you 
 one who apparently CAN afford to waste his energy in misdirected 
 effort — that energy and effort which are to every wage-earner and 
 tradesman both his stock in trade and his invested capital. 
 
 Someone has said, "There are three kinds of 
 
 Failures people in the world — the Can'ts, the Won'ts 
 
 unnecessary and the Wills, The first fail at everything; 
 
 the second oppose everything; the third suc- 
 ceed at everything-." I would add a fourth kind — the largest class of all 
 >— the Don't Trys, the "Oh-what's-the-use/' "It-doesn't-interest-me" sort 
 of people. Their name is legion ; their fault is lack of confidence. Knowl- 
 edge is the greatest inspiration of confidence to be found on earth. You 
 may not personally be held in the hope-paralyzing bontlage that produces 
 the "Oh-what's-thc-use," or "I'm-not-interested" germ, but if you are not, 
 you are exceptional. Most people are, and that is the reason that such 
 \>ersons are just about what luck, good fortune or chance make them, 
 succeeding if fortune favors them, failing if they are left to depend upon 
 their own resources. Result : Nine fail where one succeeds. 
 
 It is very fortunate, indeed, for most men that so much of their happi- 
 ness depends upon success. There is nothing on earth quite so terrible 
 to think of as failure, especially that due to lack of effort, unless possibly it 
 be the failure of a man who lacks the courage or initiative to try to make 
 the most of himself, and thus lets his best opportunities escape him. And 
 this last is really the most pitiful thing that can befall a man. It is well 
 enough to plan opportunities, but if we had the wisdom to take advantage 
 of such opportunities as naturally come to us, results would more often be 
 found in the balance on the right side of the ledger. And so I am of the 
 opinion that a clear explanation of why a very large class of people do not 
 succeed is found in some of these expressions — "I don't care," "I can't," 
 "It doesn't interest me/' or "Oh, what's the use." 
 
 One of the great objects set forth in this 
 
 Basis of all busi- Business Administration series is to supply the 
 ness success positive energy which begets courage, confi- 
 
 dence, initiative and success. We want to 
 make you feel the necessity of doing some reading, a little plain think- 
 ing, and to make as clear as possible the important things that arc in- 
 volved in the serious but very fine game of business. 
 
 With business becoming with each succeeding day more and more of 
 a science, it is high time to understand what is essential to it. Speaking 
 of the subject of "Organized Business," a great authority recently said, 
 "It is time even for business men to understand business." Again, the 
 purpose of this course in Business Aflministration is, if possible, to meas- 
 u: c the power and principles of business, to trace their ramifications, de- 
 
INTRODUCTION 
 
 fine their elements, get hold of their vital fundamentals, and so compre- 
 hend them, both in technical detail and as a mighty unit. And I am confi- 
 dent we have done all this. I find that at the foundation, the machinery 
 of business is simple, but whether it is plain or complicated, all who would 
 succeed must make every effort to comprehend it thoroughly. All I 
 care to emphasize at present is the great truth that knowledge, estab- 
 lished and classified, is the basis of all business success. This is clearly 
 established in this course of reading, and I am trying to incite your 
 imagination in writing of its merits just as I would endeavor to enable 
 you to realize it if I could talk to you personally right across my desk. 
 The observant man can see clearly the things I am talking about, but to 
 most men the mind's eye perceives not by observation, but only when the 
 imagination is stimulated. So I would stir all men to look earnestly into 
 these things, with a view to their personal betterment. 
 
 Business is far more than business as it is corn- 
 Business axioms monly understood. It is a science, and it is 
 simple to the eager, practical minds of business men that 
 
 understand we shall endeavor to convince first of that 
 
 fact, and our reasons for addressing those 
 principally concern,ed are especially good. Why? I have found that in 
 writing about business whenever I was able to make the principles so 
 plain that business men understood them, everybody else did, so it is to 
 be expected that if business axioms can be made simple enough for busi- 
 ness men to understand them, everyone will apprehend them. Every- 
 body. And it is everybody that we are attempting to reach. 
 
 For nearly thirty centuries men have recog- 
 
 Knowledge is nized the concrete wisdom of Solomon's prov- 
 
 power erb: "A wise man is strong; yea, a man of 
 
 knowledge increaseth in strength." Yet we 
 have been slow in making its application imiversal to the race. But we 
 are beginning to understand that the power inherent in knowledge applies 
 as well to commercial and industrial as to scholastic, political and social 
 life, as well to the counting room as to the pulpit, as well to the shop as 
 to the university, as well to the farm as to the bar. Knowledge is power 
 and is the only source of real intellectual sovereignty that the Creator has 
 ever entrusted to men. 
 
 In conclusion. I would say that these words are addressed to the 
 business men of America, and this designation includes the banker and 
 his clerks, the farmer and his sons, the lawyer and the law student, the 
 financier and the man who sells bonds and stocks, the merchant and his 
 clerk, the accountant and the bookkeeper, tlie manager and his assist- 
 ants — the ambitious young men of the Twentieth Century type, contem- 
 plating the pursuit of any business, trade or occupation. 
 
CONTENTS 
 
 INVESTMENTS AND SPECULATION. 
 
 PART I. 
 
 PACE 
 
 Investments and Speculation. 
 By Louis Guenther . 
 
 Introduction — 
 
 I. Defining Investment .\nd Speculation — 
 
 II. The Intelligent Employment of Capital — 
 
 III. The Earliest Investment — 
 
 IV. How Farm Mortgages are Placed — 
 V. The Influence of Loans on Money — 
 
 VI. City Real Estate Compared with Farm Lands 
 
 VII. Land and Real Estate Booms — 
 
 VIII. The Multiplicity and Complexity of Bonds — 
 
 IX. Govern.ment, St.^te and Municip.\l Bonds — 
 
 X. The A.MAZING Variety of Railroad Bonds — 
 
 XI. Public Service Bonds — 
 
 XII. Other Bonds — 
 
 XIII. Irrigation Bonds — 
 
 XIV. Bonds in Mining Enterprises — 
 XV. Ti.MBER Bonds — 
 
 XVI. Guaranteed Stocks — 
 
 XVII. Amortiz.jltion and Sinking Funds — 
 
 XVIII. Bonds for Women and Estates — 
 
 XIX. The Market for Bonds — 
 
 XX. The Character of an Enterprise — 
 
 XXI. Science of Specul.\tion — 
 
 XXII. Efforts to Prevent Speculation — 
 
 XXIII. The Mystery of a Balance Sheet — 
 
 X.XIV. The Function of Exchanges — 
 
 XXV. Methods of Trading in Stocks — 
 
 XX\'I. Methods of Trading in Stocks (Continued) — 
 
 XXVII. Operations on Other Exchanges — 
 
 XXVIII. Panics— 
 
 XXIX. Pools and Manipulation — 
 
 XXX. The Promoter's Place in Finance — 
 
 XX.XI. The Get-Rich-Quick Lure — 
 
 1 
 3 
 
 7 
 13 
 16 
 19 
 
 22 
 
 30 
 
 38 
 
 46 
 
 54 
 
 63 
 
 72 
 
 81 
 
 87 
 
 90 
 
 92 
 
 95 
 
 97 
 
 99 
 
 101 
 
 109 
 
 119 
 
 128 
 
 13R 
 
 146 
 
 154 
 
 16.1 
 
 172 
 
 179 
 
 188 
 
 198 
 
 PART II. 
 
 General Principles of Investment. 
 
 By George Garr Henry 207 
 
 Safety and Security. 
 
 By John Moody 216 
 
 The Obligation of the Investment Banker to his Clients. 
 
 By Allen G. Hoyt 231 
 
 The Study of Fundamentals and their Bearing on Security Prices. 
 
 By Thomas Gibsox 236 
 
CONTENTS 
 
 FACE 
 
 Market Movements of Securities. 
 
 By Geokgi; (]akr I1i:nrv 250 
 
 Stocks and their Features — A Division and Classification. 
 
 Hy John Adams. Jr 258 
 
 Stock Markets and Exchanges 281 
 
 Classification of Bonds. 
 
 By Frederick Lowmiai tt 312 
 
 Growinjj Popularity of Public Service Corporation Bonds as Investment. 
 By Thomas \V. Simmons 332 
 
 Forecasting^ Trade Conditions bv the Area Theory. 
 
 By Roc.ER W. Babson . .' '. 344 
 
 Wall Street Phrases and Methods. 
 
 P,y John Moody 370 
 
 Quiz Questions 381 
 
INVESTMENTS AND SPECULATION. 
 
 BY LOUIS GUENTHER. 
 
 (Born London, England, 1874; son of Utto Guenther and Rosa Guenther; 
 came to United States at age of three years; attended Public Schools of Milwaukee, 
 St. Louis and Chicago; showed inclination for Journalism, publishing during his 
 school days two different papers, one of which proved quite a success as a weekly; 
 after leaving school entered into the general advertising agency business as a 
 solicitor; branched out as publisher, establishing in 1S96 the .Mail Order Journal; 
 in 1903, started The Financial World in New York to discuss investments in a 
 manner that could be readily understood by the masses, resulting in estab- 
 lishing a financial journal which l.as gained widespread circulation and in- 
 fluence] 
 
 PART I. 
 
 INTRODUCTION. 
 
 Every head of a corporation, every business man, in 
 fact everyone employed in a responsible position and upon 
 whose judgment the success of an enterprise largely de- 
 pends, should provide himself with a general knowledge 
 of the problem of investments and speculation. 
 
 Investment and speculation are so closely associated 
 with the well-being of trade that the two are inseparable. 
 Figui'atively speaking they are the propelling forces gov- 
 erning the money market, which in turn is the vital life- 
 blood of business. This is an indisputa])le fact. It cannot 
 ho denied. 
 
 Many a UK^rchant and many a manufacturer who has 
 mastered the problem of investment and s]ieculation has 
 been able to put his knowledge to great financial advantage 
 in his ability to foresee a di-ain upon the money market and 
 its consequent effect upon interest rates by providing for 
 all his banking accommodations long l^efore interest rates 
 have hardened. 
 
 So, also, have they been able by anticipating a dcjires- 
 sion in trade to curtail expenditures and guard their credit 
 accoimts from weakness. Such a knowledge prevents them 
 from being caught off their guard l)y a sudden dropping off 
 
 B.VII— I I 
 
2 LOUIS GUENTHER 
 
 in business. And, vice versa, tlicy are in a position to detect 
 a revival in trade l)y the same Inironieter, the money 
 market. 
 
 As it is also tnio that business, whatever may be its 
 nature, is a calling, i)urely confined to the makinu: of })rofits 
 sometime or other, surplus funds are accunudated whieh are 
 intended for investment. The intelligent and safe invest- 
 ment of such idle funds requires a general knowledge of 
 investment and speculation. Fortified with such knowl- 
 edge the owner of surplus funds guards himself from se- 
 rious errors. It inculcates in him the absolute importance 
 of being guided by actual facts and not by hearsay advice 
 of others. It can harm no one to know how to differentiate 
 between investments and speculation; it can only benefit 
 him. 
 
 The author of Investments and Speculation in tliis series 
 on Business Administration has taken an unusually dry 
 subject and handles it in a style which makes it interesting 
 reading. AMiile not a text book in any sense of the word 
 it still exhaustively covers Investments and Speculation 
 and its different phases so that it conveys directly to the 
 reader's mind a thorough knowledge of the fundamentals 
 of each. Not only will tliis l)ook prove a great lu^lp t(» all 
 business men but e(|ually instructive to any who have 
 an ambition to enter the banking or ])rokerage business. 
 
 This reference book presents an exhaustive treatment 
 of all phases of Investments and Speculation, furnishing 
 the thoughtful reader with reliable information for guid- 
 ance in business transactions. * 
 
I. DEFINING INVESTMENT AND SPECULATION. 
 
 Dofiiiing the difference between investments and specu- 
 lation will not prove an easy task, as there are no fast and 
 set rules to distinouish the one from the other. 
 
 Tlie lexicographers commonly describe the word invest- 
 ment as follows: ''To lay out capital in the purchase of 
 property for pennanent use as opposed to speculation." 
 
 And then they state that speculation is: "To make a 
 purchase or investment that involves risk in the hope of 
 probable gain"; again, "As a more or less risky investment 
 of money in expectation of considerable gain." 
 
 It is plain to see that in each case the word means the 
 employment of capital for gain. Broadly speaking there 
 is no distinction between the two methods of laying out 
 capital, beyond that made in the public mind by the meas- 
 ure of risk involved. In human experience it has often 
 turned out that such measure of risk has so changed, from 
 what seemed, on the yesterday, to have been surrounded 
 by all the safeguards against loss, as to embrace all the ele- 
 ments of hazard on the morrow. 
 
 This may appear rather a strange statement. Still it is 
 an indisputable truth. A simple example will easily estab- 
 lish it: For instance, there is no safer investment in the 
 mind of the public than a government bond; at least so far 
 as our own government ])onds are concerned. Suppose, how- 
 ever, a government was conquered and its possessions in- 
 vaded by the forces of a foreign foe, what would be the 
 natural outcome of such a disaster? The securities issued 
 by the stricken nation would rapidly decline in value, 
 through the apprehension aroused among investors over 
 the uncertaintv as to how the invaders would deal with 
 the nation's creditors. They could, if they so desired, wipe 
 
 9 
 
4 LOUIS GUENTHER 
 
 the slate cloan of all debts, or they eould ediiipromise or 
 thcv could ])ay in full. Yet, as long as it is not known just 
 what the outeonic would be, the quotations of all the na- 
 tion's ()l)li.irations would Huctuate violently. As securities, 
 in reirard to the sai'ft\' of the funds invested in thcni, tliev 
 could not properly l)e classilied as investments. 
 
 Of course, such a turr of affairs with us is a remote 
 contingeney. I mention it as an extreme possibility, mere- 
 ly to emphasize my statement that there are really no im- 
 nnitable rules which will make an investment an everlast- 
 ing investment. Often, unforeseen events will reverse an 
 investment into a speculation or change what at one time 
 appeai'od a I'isky speculation t(^ a veiy desirable invest- 
 ment. 
 
 It was not very long ago, measured in years, when our 
 govennnent bonds were looked upon by foreign investors 
 as more or less a speculation. This was dui'ing the dark 
 days of our Civil War, when it seemed as if (Jladstone, the 
 British Premier, spoke the truth when he declared a new 
 nation was born by the secession of the Southern States from 
 the United States of America. The bonds then issued 
 by our Government to raise money to carry on the war were 
 viewed with sus})icion in England. Only the Cerman and 
 French investors took kindly to our securities and then 
 only after they were obtainable at bargain-counter terms. 
 
 Nor does a clash in arms between nations always tend to 
 have a serious effect upon their securities. It sometimes hap- 
 pens that economic influences depress their values to such 
 a degree as to make them a poor investment for those who 
 placed their money in them when they were regarded as 
 gilt-edged securities and were bringing high prices. This 
 is what has happened with British consols, as the govern- 
 ment obligations of the English nation are called. They 
 have steadily declined in price until this year they have 
 fallen to the lowest price in nearly eighty years. I shall 
 not here enter into a discussion of the causes responsible for 
 
•INVESTMENTS AND SPECULATION 5 
 
 this abnoiToal decline in one of the premier securities of 
 the entire world. I cite it only as another illustration in 
 support of my contention that the dividing line between in- 
 vestment and speculation is very elastic. 
 
 What may be good today, may be worth much less to- 
 morrow or even worthless. 
 
 A mortgage upon a building or a parcel of land may be 
 a very desirable investment. An upheavel of nature's 
 forces may occur on the spot where the pledged land is 
 located and destroy all the value in less time than it takes 
 to write this paragra]">h. Did this not happen in Pompeii? 
 Can it not happen again? The ashes of Vesuvius in a few 
 hours swept into total destruction all the capital permanent- 
 ly laid out in homes and in other structures of the doomed 
 city. An earthquake attacked Messina only a year or two 
 ago. AVhile Messina was not completely destroyed, the ca- 
 tastrophe did irretrievable hami to capital permanently in- 
 vested in property. And that capital, in the light of sub- 
 sequent events, could they have been foreseen, could not 
 be properly classified as being invested, since it was at 
 all times subjected to extraordinary risks, risks such as are 
 grouped under the term ''speculation," as commonly un- 
 derstood. 
 
 Men make values, not conditions; these they merely as- 
 sist in making. As long as values are thus made, uncer- 
 tainty, naturally, will surround them. If the human race 
 ]^roferred stones as money, gold then would have no value. 
 AMiat gives gold its value is its acceptance as a common 
 and standai'd medium of exchange. Anyone will take it in 
 retuni for some commodity or article he wishes to sell. It 
 is the distinction mankind makes between the degrees of 
 security which defines the division between investment and 
 speculation. 
 
 The foregoing is a demonstrable fact. 
 
 It is popularly supposed that a bond or a mortgage is 
 an investment because there is pledged to secure them 
 
6 LOUIS GUENTHER 
 
 some physical i)r()pL'rl\'. However, tins is uot always the 
 case. The property securing a bond may ho worth all that 
 it is represented for the purposes for which it is pledged, 
 but, should it be employed for other uses, might not realize 
 anywhere near the sum represented ))y the bonds. So also 
 with a mortgage. 
 
 There are bridges on some of our principal railroad sys- 
 tems that were built with the money raised from the sale 
 of bonds. As long as tlie railroads use these bridges and 
 pay rental for -their use, these bridge bonds are desiralde 
 investments, but, should the railroads abandon them, from 
 where would the interest for the bonds come? The prop- 
 erty, as old iron and steel, would never realize the capital 
 invested in them. So might be the case with a mortgage 
 on a water power plant. Tf the water sup]>ly should be- 
 come exhausted there would be no need for the power i>lant 
 and its machinery and the essential security which had 
 made the mortgage a good investment would pass with 
 the passing of the water. 
 
 Investment of money is, therefore, wholly a ]iroblem of 
 human judgment insofar as safeguarding it against what 
 are commonly assumed to be extreme risks. In fact, it is in 
 a sense a security which human judgment aims to keep 
 free from all hazard as far as it can make tliis jtossible. It 
 is taken for granted from the very begiuuiug that specu- 
 lation involves taking chances for extraordinary gains. 
 
n. THE INTELLIGENT EMPLOYMENT OF 
 
 CiiPITAL. 
 
 It is best, under the circumstances, to eliminate from 
 consideration all hazards to investments caused by the 
 caprices of unforeseen forces and conditions which human 
 judgment and foresight are powerless to control. 
 
 As much as they may interfere with the intelligent em- 
 ployment of capital, so likewise is their effect on the dura- 
 tion of human life. 
 
 It is as possible for a parent to feel certain beforehand 
 that his new born offspring will reach the scriptural age 
 of three score and ten, as it is for an investor, no matter 
 how careful he is in his selection, to positively assume the 
 absolute safety of the capital he has laid out in a given 
 security. 
 
 However, we do know, in determining the length of hu- 
 man life, the average age reached when the simple rules 
 of health are carefully followed, and no fatality, whether 
 from accident or disease, intervenes to cut it short. 
 
 So is it also the case with investments. Bv observing 
 the ordinary precautions they can be safeguarded against 
 almost every contingency except unknown eventualities. 
 
 Large investors even go so far as to protect themselves 
 against unexpected surprises. They diversify their in- 
 vestments. That is, they distril)ute their capital among 
 different securities. 
 
 On a principle somewhat similar to this, the life insur- 
 ance business is based. Instead of selecting their risks, 
 life insurance actuaries have successfully worked out a 
 standard mortality table. This table is wonderful for the 
 degi'ee of its accuracy in determining the average death 
 rate. Bv means of this mortalitv table life insurance com- 
 
 7 
 
8 LOUIS GUENTHER 
 
 panics can tell almost to the exact tipfure, the number of 
 people out of every thousand who will die each year. 
 
 Underlying their mortality table is one broad law, which 
 is that each person, before being insured, must be physi- 
 cally free from all traces of disease which can tenninate 
 fatally. Still this is but the law of averages, only by an- 
 other name. Alth<nigh not recognized very many years, 
 not over seventv-five vears at the most, this law has more 
 than justified itself as a reliable measure of safety, and tlie 
 proof is the enormous assets the life insurance companies 
 have accumulated. Collectively, their assets mount up into 
 the billions of dollars. They represent the funds that are 
 the l)ulwarks of protection for outstanding policies of be- 
 tween ten and fifteen times as much. 
 
 In a similar manner are fire, marine and other lines of 
 insurance operated. All their premiums are based on dif- 
 ferent average tables. Moreover, the same principle is now 
 a]»j)lied, more or less, to investments. That is, our large 
 banks and institutions with millions in capital at their com- 
 mand, divide their investments among different classes of 
 securities as an insurance against all risk. In this way, 
 financial loss resulting from an unforeseen hazard is so dis- 
 tributed as to cause verv little harm, and risk is reduced 
 to a minimum. 
 
 Even different states have enacted laws for the protection 
 of savings bank depositors, laws based on the theory of av- 
 erages. These laws govern the character of investments in 
 which savings banks are permitted to place their funds. 
 Some states demand of a railroad, before its bonds are ac- 
 ceptable as an investment f(U* savings bank deposits, that 
 it has paid dividends on all its outstanding stock uninter- 
 ruptedly for a certain teiTn of years; again that only first 
 mortgages on real estate can be considered desirable and 
 safe investments, and then only up to a certain amount of 
 the property's appraised value. Loans to depositors are 
 also limited. In some states, loans are restricted to not 
 
INVESTMENTS AND SPECULATION 9 
 
 more than 10 per cent of a bank's capital to any one cus- 
 tomer of the bank. Other states have empowered commis- 
 sions for the purpose of supei-^asing the issuance of new 
 securities by corporations as a protection against inflation. 
 Even cities, to\^Tis and counties are now forced by statutes 
 to keep their bonded ol)ligations within a certain percent- 
 age of the assessed value of their taxable property. All 
 these precautionary measures are adopted for the protec- 
 tion of investors and as a check against reckless banking. 
 It must be remembered that bankers must invest their de- 
 posits and make loans to pay interest to depositors. 
 
 Often you will read in the descriptive circular regard- 
 ing a bond that it is a legal investment for banks in certain 
 states. This means that the corporation Issuing the bond 
 has strictly complied with the laws of these states. 
 
 Investors accept the fulfillment of the requirements of 
 some of the states before a bond becomes a legal invest- 
 ment for their chartered banks as the hallmark of a high- 
 class security in much the same confident manner as they 
 regard the "sterling" mark on silver ware as a sign of its 
 purity. On the whole, however, investments in this coun- 
 try have proved miusually satisfactory. 
 
 AMiile it is simply impossible to estimate ac- 
 curately what the per cent of losses has been on 
 investments which have proved disastrous, neverthe- 
 less it may be taken for granted that when laid 
 side by side witli the enormous volume of capital wliich 
 has been invested in securities in this country, it comes to 
 but an infiuitesimal ])art of the whole. As the country 
 grows more settled, the per cent of loss will gradually 
 lessen. Such is the characteristic of every nation as it 
 grows older. Take p]ngland, for example; also France and 
 Holland; Germany and Austria, only in a less degree. The 
 resources of each of these nations have been so scraped 
 over by capital in its search for opportunities of profitable 
 employment, that they no longer offer the investment pos- 
 
10 LOUIS GUENTHER 
 
 sil)ilitios they once did. As a result, the majority of their 
 government and muni('ii)al u])ligati()ns, their raih-oad se- 
 curities and their hind and real estate mortgages, command 
 in their leading financial market i)laces, a ])remium which 
 reduces the average income thev vield to not much more 
 than 3 per cent per annum. There is always such a large 
 demand for these securities that they are scarce. Ultra 
 conservative investors prefer them, and are willing to fore- 
 go a part of the income which is obtainahle from securities 
 of lesser safety to secure, on the other hand, the greater 
 degree of safety for their invested capital. 
 
 And right here it is as appropriate as anywhere else to 
 explain briefly a fundamental law governing investments, 
 as well as speculations. I refer to the economic law of sup- 
 ply and demand which is as immutable in influencing the 
 prices of securities as it is in deciding the price of all our 
 leading commodities. Artificial manipulation may stay the 
 operatic »n of this law but only temporarily; sooner or later 
 it will express itself. The i)anic of 1907 is the latest illus- 
 tration of the innnutability of this law of economics. Se- 
 curity prices had been held up by sheer force for a year 
 previous, against the lessening availal)le supply of cai)ital, 
 only to finally break through the insecure support when 
 all artificial means had exhausted themselves. 
 
 It is a natural sequence for investments to rise 
 in price where the demand for them outruns the avail- 
 al)le sui»])ly. \"ice versa, it is true that their jtrices de- 
 cline when the demand is small and investments seeking 
 buyers glut the market. It is this rising and falling in 
 demand and su])])ly which causes the fluctuation in ])rices; 
 not oidy ill securities, but likewise in wheat, cotton, hay, 
 barley, oats and even in the i>i-ecious metals. Even gold, 
 the accej)ted standard for coinage among all th(^ ])rincii)al 
 nations, is a w illiiig sul)Ject to the operations of this law. 
 Some of our foremost economists contend that gold in re- 
 cent years has been mined in such large (piantities as to 
 
INVESTMENTS AND SPECULATION 11 
 
 cause the higher cost of livinq-, and eorrespondiiiG^ly to re- 
 duce investors' income. 
 
 You will think this is a strange theory. You will 
 also wonder how this can be ix)ssible. Still their conten- 
 tion is logicaL The more gold there is, the greater is a peo- 
 ple's purchasing power, and as it increases, the demand 
 forces prices up. On the other hand, however, the income 
 on a secured investment is fixed. A bond or a mortgage 
 may have been purchased some years ago at a price to yield 
 an income of 4 per cent annually, or $40 on each thousand 
 dollars. At the time of the purchase the income may have 
 been attractive. At the same time a suit of clothes mav 
 have onl}' cost $30, a hat but $3, and a pair of shoes, $4. Five 
 years hence the same suit of clothes may cost $35, the hat 
 $3.50, and the shoes $5, but the investor holding a 4 per cent 
 bond or a 5 per cent first mortgage derives no greater 
 income, although his jDurchasing power is considerably re- 
 duced. 
 
 The peculiar conditions in England, France and Hol- 
 land heretofore mentioned are recalled for no other rea- 
 son than to show that the United States is assuming some- 
 what the same characteristic. 
 
 The investors of these countries for lack of opportu- 
 nities at home pour millions of their capital every j-ear in- 
 to the development of the resources of their colonies and 
 of other countries. 
 
 While our country is far from exhausting its almost 
 unlimited resources, it has been apparent for some ^^ears 
 to keen observers that the wealth of (Hir people is repro- 
 ducing itself at such a ra]ud pace as to supply far more 
 fresh capital than is needed at home and therefore every 
 year finds us with a great deal of money to spare for invest- 
 ment in other countries. We are taking our place side by 
 side with England and France as a free and generous lender 
 of capital to smaller but growing nations. 
 
 Only since the close of the Spanish War has the United 
 
12 LOUIS GUENTHER 
 
 States participated with much older nations in lending 
 money to Ja])an, C'liina, Mexico and the South American 
 Repnl)lics. In less than fifty years, and of that more with- 
 in the last twenty years, has this country attained that posi- 
 tion of artluence which l're(|uent]y j)r(>mpts the reference 
 to us as the land of a thousand millionaires. Yet beneath 
 this phenomenal growth in wealth nuist be the intelligent 
 emi)loyment of capital. AN'hat does this mean, but the mak- 
 ing of shrewd investments ? Were this not a fact, we could 
 hardly have financed the Civil and Spanish American Wars, 
 built over )^)00,000 miles of railroads and double as manv 
 miles of local traction and intcrurban lines, vast public im- 
 provements, splendid harbors, and gas and electric light 
 plants, opened up mines of coal, silver, copper and gold, 
 built inunense refineries and smelting plants, and reared 
 all about us industries, veritable industrial Goliaths in the 
 great wealth they control and in the gi-eat amount of labor 
 they employ. 
 
 If George Washington were to come back to life, he 
 would be lost in amazement at the changes wrought in this 
 countrv, although onlv a little more than one hundred rears 
 have passed since he was laid to rest at Mt. A^'nion. 
 
 It would seem to hiui as if some wizard had visited 
 the land and wrought this remarkable change. Yet this 
 wizard has l)een none other than capital — money ])rolitably 
 invested. TIave we not here a concrete example of \hc 
 unifonn success of intelligent investment? Docs it not 
 plaiidy indicate that where ])rudence is exercised in the 
 diversification of investments, there need Itc little fear as 
 to the outcome of, or regarding the safety of, the capital 
 emploved ? 
 
III. THE EARLIEST INVESTMENT. 
 
 Now, what are the types of securities which logically 
 can be classified under the head of investments and are not 
 speculative? 
 
 In the first place, they are the securities which are con- 
 sidered safe, both in respect to the capital invested in them 
 and the income vield. 
 
 In the second place, they are securities whose market 
 value is more stable and are not affected by violent fluc- 
 tuations as sometimes, and often, too, influence securities 
 of a speculative character. 
 
 The major portion of investments is composed usually 
 of those behind which is pledged for their protection some 
 physical property or a contract agreement guaranteeing 
 the prompt payment of principal and interest by the issuing 
 party and which covenant can be legally enforced as long 
 as the debtor is in a solvent condition. However, there are 
 some shares of stock in corporations and railroads which 
 are regarded as investments because of the long period 
 during which they have paid substantial dividends without 
 interruption. 
 
 It is therefore to be clearly seen that there cannot be 
 too close a dividing line drawn to differentiate investments 
 from speculations. In every case each must be appraised 
 bv its individual qualities and not l)v a vard stick. A 
 pledged security, that is, a security behind which there is 
 some sort of lien or obligation to pay without reservation, 
 may prove, in case of insolvency, not to be an investment 
 but an outright speculation. 
 
 As there are so many different kinds of securities 
 grouped among investments, I have thought it best, for the 
 sake of avoiding confusion, to start at the very beginning 
 
 13 
 
14 LOUIS GUENTHER 
 
 with tlio earliest known type of investment and in sequence 
 describe each in its turn until we have run the entire fj^amut 
 over. At the same time it is also well to summarize ])rieflv 
 some of the elemental features liy which the conservative 
 investor detennines in his own mind the degree of their 
 safety as a security for his capital. 
 
 Loans on fann lands are no doubt the earliest fonn of 
 investment. This is to be supposed, since the first and pi'in- 
 cipal occupation of civilization was ac^-iculture. Orii^a- 
 nally, such loans were made in a most primitive way. When 
 the human race was young and acquiring its first taste of 
 civilization, it was the practice of one land o^^mer who pros- 
 pered above his neighbor from the bounty of ]\lother Earth, 
 to make loans of seed or live stock on consideration that he 
 receive in return a certain portion of the borrower's next 
 season's harvest or a certain munber of the offspring of 
 the live stock loaned. 
 
 But as civilization made progress, it was found far more 
 convenient to settle for all obligations by the payment of 
 gold and silver. Still in those early and primitive days, 
 when the commercial relations between men and races were 
 carried on crudely, lenders of capital were satisfied to ac- 
 cept the pledges of borrowers as men of honor who agreed 
 to pay their loans on a stipulated day or forfeit their land, 
 cattle, implements or whatever they pledged to secure 
 them. 
 
 Out of such transactions grew the modern indenture. 
 By this is meant the mortgage or contract whieh today 
 legally binds the borrowers to reimburse the leiuler for a 
 loan with a sti])ulated rate of interest and empowers the 
 holder of the mortgage to proceed by law. or, as it is known, 
 foreclosure proceedincfs, to take possession of the jjlcdircd 
 pro])erty and dispose of it in order to protect himself 
 against any loss of caj^ital and interest. 
 
 The ])hrasing of moi't gages has undi-rgone consider- 
 able changes. There was a time when the holder of a 
 
INVESTMENTS AND SPECULATION 15 
 
 mortgage could take possession of property upon default 
 of payment and keep it all. Now, however, the law goes 
 so far as to protect the lender in maintaining his full rights 
 in what equities may exist over a loan. That is to say, 
 every dollar realized above the face of a loan, the accrued 
 interest and all costs involved by what legal proceedings 
 are necessary to enforce pa^anent, revert to the lender. The 
 mortgage today is a legal instrument devised to protect 
 lenders of capital to the extent of their loans, interest due 
 and all costs, but no fTirther. It does not give them any un- 
 fair advantages over distressed creditors. 
 
 Not onlv are loans on ac^ricultural lands the oldest of 
 any we have a record of, but they have also proved the most 
 satisfactory. Of the world's available capital a very large, 
 if not the largest, portion is invested either outright or 
 loaned out in farm land and other real estate, also in l)uild- 
 ings and homes used by the world's population as places 
 of domicile. 
 
 Moreover, what makes loans so satisfactory when placed 
 on the individual's home or farm is the fact that a man will 
 go to extreme lengths and exhaust all his available re- 
 sources to satisfy a mortgage and continue the prompt pay- 
 ment of interest as it falls due, rather than lose the place 
 he calls his home. Next to the immediate members of his 
 familv, his home is dearest to him. This is whv such loans 
 are regarded as having in addition to the physical assets 
 2)ledged as securities, another — the moral asset, the pride 
 of the individual in keeping a roof over his family. 
 
IV. now FAUM MORTGAGES ARE PLACED. 
 
 Our small interior banks are by far the largest lenders 
 of capital on fann mortgages. Insurance companies come 
 next and after them follows the private investor. Tliat 
 this should be the case is largely the outcome of a com- 
 munity of interest. Banks and private bankers in the 
 small towTis and tillages which are the hubs for farming 
 sections, must depend principally upon the tillers of the 
 soil for their business. The deposits of the latter they in 
 turn lend out to their customers on the only collateral the 
 farmers can offer, their land, live stock or crops. 
 
 These bankers also, knowing more intimately the value 
 of the farm lands by which they are surrounded, feel a great 
 deal safer about their loans when they are put out on such 
 collateral. Yet their aggregate resources, and they are by 
 no means small, have often proved insufficient to finance 
 all the farm loans sought. 
 
 In the North, South, East and West, everywhere, in 
 fact, where there is found a prosperous farming conunu- 
 nity, there are also located brokers who do nothing save to 
 make loans on farai mortgages, which in turn, they sell to 
 institutions and investors, for whom also they act as agents 
 for the collection of interest and principal when the mort- 
 gage matures. The l)aTiks also frequently find it to their 
 pecuniary advantage to let outside investors have part of 
 their fann mortgages, for the more often they are able to 
 tuni over their loanable funds, the more money can they 
 make. 
 
 The large insurance companies, on the other hand, are 
 impelled by two reasons in diverting part of their large 
 resources to farm loans: The first is the necessity to diver- 
 sify their investments, and the second is that the legal rate 
 
 16 
 
INVESTMENTS AND SPECULATION 17 
 
 of interest in different states varies to such an extent that 
 it affords them the opportunity to increase their income 
 yield on all their outstanding investments. 
 
 For example, the legal rate of interest which may be 
 charged by lenders of money in Illinois is 6 per cent, but in 
 Georgia it is 8 per cent, while In some of the far western 
 states as high as 12 per cent can be demanded. This dif- 
 ference in the rate of interest borrowers must pay is not 
 brought about, as would seem to be the case, by any va- 
 riance in the degree of safety in the collateral they furnish, 
 but is determined bv the abundance or scarcitv of avail- 
 able capital. Such states as New York, Illinois, Indiana 
 and Massachusetts are more fortunate in the abundance 
 of capital than less favored states and this is what makes 
 it possible to borrow at a smaller rate of interest than in 
 the less populous states. In fact, in these more settled 
 communities, capital, in its eager hunt for desirable loans, 
 comes so much in keen competition as to offer itself at less 
 than the interest which the state has fixed upon as legal. 
 Thus it happens that in Massachusetts, Illinois and other 
 eastern and central states, the owners of fertile and pro- 
 ductive faiTns can, without difficulty, obtain loans on a 5 
 per cent basis. 
 
 Although Georgia may have lands whose out-turn of 
 cotton and other crops indigenous to her soil will bring 
 as much profit as the wheat and maize of the loamy, black 
 belt of Central Illinois, her wealth is not sufficient to fi- 
 nance all the needs of her people and she must provide a 
 legal interest rate attractive enough to draw to her capital 
 which is bevond her borders. Therefore, it is an axiom that 
 the less populated a state, the smaller her resources and 
 the more are her people dependent upon capital from the 
 outside, for after all, money is but a commodity to be bar- 
 gained for and which lets itself nut at the best price ob- 
 tainable by its owners. 
 
 In different states the rules vary as to the extent that 
 
 B.Vll— J 
 
18 LOUIS GUENTHER 
 
 loans may be made on farm property. In some places 
 where farm lands, because of their productivity, are in 
 eager demand, money may be ])(U'rowed on them up to 60 
 and even 70 per cent of their supposed market value, where- 
 as in states where the farms are still comparatively new 
 and which lands capital believes are not as readily saleable 
 in the event that thev must be sold to satisfv the loan, their 
 borrowing capacity is restricted to a much lower percent- 
 age. It is the demand for the land which determines the 
 equities insisted upon before a loan is obtainable, and not 
 so much the fertility and productiveness of the land itself. 
 So also is it true of the interest that is exacted from bor- 
 rowers. 
 
 Without a brief mention of an interesting development 
 in the placing of farm mortgages, the history of this form 
 of investment would not be complete. I have in mind the 
 large business that is done in faim mortgages today 
 among the class of smaller investors who, while not in a 
 position to purchase such securities outright, are still fa- 
 vored with an opportunity to place their capital in them. 
 
 From the demand of the smaller investor for farm mort- 
 gages as their ideal type of security, large companies have 
 come into existence which sell notes of their own, secured 
 by farm mortgages. The capital they obtain from the sale 
 of their obligations, they place out in farm mortgages, 
 which mortgages are in turn deposited with some trustee 
 as a security for their j^lodges to their clients. Tlies(» notes 
 are quite often laiown as debenture ])onds and sometimes 
 they are otherwise designated, as, for example, a large 
 western concern distinguishes them from its competitors in 
 the same business, as land grants, although they are in form 
 alike and are sold in as small denomination as .$100. These 
 institutions have made it so attractive to small investors 
 as to make it possible for them to purchase the notes by 
 making a partial payment and paying off the balance in 
 easy periodical payments. 
 
V. THE INFLUENCE OF LOANS ON MONEY. 
 
 At times the borrowiug requirements of our farmers 
 play a very important part in our economic life. They must 
 move their crops, and money alone is what will do this. 
 Tims it happens, that, around harvest time, the interior 
 banks find it necessary and profitable to advance money 
 to fanners on their notes, secured by their crops, until they 
 can send the produce to the central markets. 
 
 It has often happened that these loans have been pre- 
 cursors of a tight money market at a time when the avail- 
 able capital of the country has been insufficient to finance 
 both the movements of the harvest and the expansion of 
 industry. ^Miile a tight money market may be produced by 
 other causes, more often it is superinduced by this annual 
 crop demand upon the resources of our banks. 
 
 AMien this effect is produced in our financial centers, 
 it is called a pinch in money. No doubt you have heard of 
 the temi. As a business man and accustomed to negotia- 
 ting loans at your bank, possibly you have personally felt 
 its effects when vour banker informed vou that it was nee- 
 essarv to increase vour interest rate until monev became 
 easier. 
 
 By advancing interest rates, bankers aim to keep do^^Ti 
 loans within their available resources. Our peculiar bank- 
 ing structure is responsible for a condition which spares 
 none of the banks from the effect of the tiglitness in money. 
 Our banks depend one upon another. Their interests are so 
 closely inter-related and co-operative, that, like tiers, they 
 are ])uilt one on top of the other, the largest institutions at 
 the bottom; the smallest at the top. 
 
 How this is possible, I shall proceed to illustrate. Un- 
 derlying the interchangea))ility of banking credits, which 
 
 19 
 
20 LOUIS GUENTHER 
 
 is but another name for the transaction of business betT\'een 
 banks by check, are what are known as reserve centers. 
 For our national banks, wliicli are the institutions char- 
 tered by tlie National Government, certain and principal 
 cities like New York, Chicago, Boston, St. L<»uis, Cincin- 
 nati, etc., are selected as reserve centers. Custom and con- 
 venience alike have made them also reserve centers for 
 state banks, trust companies and private bankers. 
 
 Tn the banks, at these points, it is the practice of in- 
 terior banks to maintain deposits on which to issue checks 
 and drafts. Customers are constantly sendinc: monev to 
 these large commercial centers, and it would prove rather 
 inconvenient and also expensive, every time a demand was 
 made upon them for a remittance to these centers, to ship 
 the actual currency. Hence the funds they keep on rlp]^osit 
 in the larcfc reserve centers. 
 
 The banks in the reserve centers usually allow interest 
 on the deposits of other banks. To pay it they in turn lend 
 their deposits out in such manner nu<l fnrni as to make such 
 loans easily liquidable. This is accomplished by an ex- 
 pedient kn(>wn in all financial circles as lending: on call to 
 distin,e:uish loans of this character from time loans. Call 
 loans are different from time loans, in that as the principal 
 can be demanded, in the discretion of the bank, at twenty- 
 four hours' notice to the borrower, time loans. cover a defi- 
 nite period of time. 
 
 Wlior(» there is such discretionary power vested in the 
 banks over a certain form of loans, it is readily ajiparent 
 what influence may be exertcnl over tlir money market 
 when in the fall there arises a demand by the country banks 
 on their deposits held in the banks in the reserve centers. 
 This is often so heavv as to be bevond the abilitv of the 
 reserve center banks to care for comfortalily. One may 
 also readily understand the solicitude of financiers and 
 stock market speculators over this periodical drain and 
 why they so studiously watch for any signs of its advent 
 
INVESTMENTS AND SPECULATION 21 
 
 and try to forecast its effect, since it means so much to 
 them in the success of their operations. 
 
 A great deal of money is borrowed in the large com- 
 mercial centers on call, not always willingly, for bankers 
 will not lend heavily except in this way. Speculators are 
 also often forced to finance their operations with such loans 
 and therefore it behooves them to keep their thoughts on 
 the pulse of the money market, to prevent being enmeshed 
 in a money pinch. 
 
 The har^^est call for funds has caused call money, which 
 could be l)orrowed only a few days previously at as low as 
 one to two per cent, to mount up and up until it has reached 
 as many hundred per cent per annum for its use for a few 
 days. The interior banks keep drawing on their deposits 
 until their depositories, to maintain their own deposits 
 within the legal requirements, are forced quickly to run 
 up the rate of interest, to force the liquidation of loans un- 
 til their cash position is again a comfortable one. 
 
 Of course a tight market is not always superinduced 
 by the withdrawals of deposits by the outside banks. Cap- 
 ital may be in such abundance at the time as to make the 
 drain scarcely perceptible. It is only when the li(]uid cap- 
 ital is not sufficient to go readily around among all classes 
 of borrowers that it makes itself felt by such a phenom- 
 enon. 
 
 When such al)n()rmal interest rates as mentioned pre- 
 vail, s]je('ulation is I'ather i)recarious and unattractive, ex- 
 cept to those who are sellei'S of securities, and need not 
 borrow monev, since onlv in rare instances do the seen- 
 rity markets escape a severe decline in prices when r-all 
 money commands a high premium of interest. 
 
 The above serves to illustrate the intimate relationship 
 between the rural community and the city — how much the 
 one influences the other through the flow of capital be- 
 tween them and how essential thev are one to another. 
 
VI. riTY REAL ESTATE COMPARED WITH EAKM 
 
 LANDS. 
 
 By no means is it as simple to wisely select investments 
 in real estate in large cities as in farm lands. AVhere once 
 a tliuruugh knowledge about the fertility of agricultural 
 land and its nearness to a market has been gained, there 
 is a fair basis for safelv determinim? its value for either 
 the purpose of outright purchase or as collateral for loans. 
 
 But it is necessary to apply different methods to city 
 property. Location, conditions, the density of pt)pulation, 
 as well as other factors peculiar to each urban conunu- 
 nity, have much to do with its value. LTnder favoralde con- 
 ditions and environment a parcel of city land may under- 
 go a phenomenal appreciation. Again, changes may occur 
 to cause a sharp decline, especially where property has gone 
 up too rapidly. Real estate booms are not always the 
 healthiest thing for a comnumity; sometimes they peter 
 out fast. 
 
 The congestion of population in certain localities has 
 been remarkable, so mueh so as to result in making the 
 owners of property fabulously wealthy. That was because 
 the land, being a stationary quantity, always located in the 
 same place, had to serve the requirements of a multitude 
 instead of a few. It stands to reason that the more the 
 land is required by a population, constantly growing in 
 density, the higher prices will it command. 
 
 "We see and we wonder at the prevailing tendency, so 
 noticeal)le in our large cities, to build high up in the air. 
 But this is not strange or something to marvel at, for where 
 land has })ecome valuable, as happens to be the case in our 
 many large cities, it has become, from an economical stand- 
 point, much cheaper to reach up than to spread out over 
 the ground. 
 
INVESTMENTS AND SPECULATION 23 
 
 Nowhere else have wo a more graphic ilhistration of 
 tliis developniont than in Xew York City, situated, as it is, 
 on a small island, its boundaries restricted on all sides by 
 water. Almost all the available property is already oc- 
 cupied. The city's area is insufficient, and each year grow- 
 ing: more so, to provide comfortably for the density of the 
 po})ulation, with the natural outcome that the city has l)e- 
 come a city of skyscrapers, each one vicing with the other 
 in a frenzied effort to pierce the clouds with its altitude. 
 Nor are all these tall structures confined exclusively to 
 the business sections. Residential property has also be- 
 come scarce enough to force the community to erect row 
 after row of tall aj^artment houses, providing homes for 
 hundreds of families as a measure of relief from the press- 
 ing demand from the population for living quarters. Sim- 
 ilar conditions, although in a lesser degree, prevail in our 
 other large cities. 
 
 AYliere land is in such great demand, as is the case in 
 New York City, the natural evolution will be for a con- 
 tinuous enhancement in value. To what astonishing 
 lengths this appreciation can sometimes reach is startling- 
 ly illustrated by a sale made a few years ago of a small 
 piece of property in the financial district of New York, 
 barely large enough for an ordinan^ sized dwelling, at a 
 price unheard of before — a price of $600 a square foot. By 
 erecting on this property a tall office building the invest- 
 ment was made to pay. It was not difficult to till the struc- 
 ture with enough tenants willing to pay rents high enough 
 to bring a satisfactory inconio on the money put into the 
 building. 
 
 Ft^ur hundi'od years back, what only one square foot 
 of this ])roperty brought W(Mild have purchased the whole 
 island of ^Tanhattan, for the value of the trinkets Peter 
 ]^rinuet turned over to the Indians in order to acquire pos- 
 session of it, was hardly worth more than $nOO. Yet were 
 this land not serving a dense population and situated where 
 
24 LOUIS GUENTHER 
 
 it could not bo used for anything else than agricultural pur- 
 poses, it would be almost worthless, as it is incapable of 
 producing any vegetable life, so rocky and barren is the 
 soil. 
 
 The growth of our urban population has opened a field 
 for the exploitation of capital <>n a scale, the uiairnitude 
 of which is almost inconceivable. Tt has nuuU' it jilmost 
 compulsory in the purchase of a great deal of such real es- 
 tate to depend in n large measui'e on borrowed capital. 
 Sa^^ngs banks especially, find it ])rofita1)le to jilacc a 
 greater part of their deposits in loans on city property in 
 the fonn of first mortgages. But as a safeguard they C(iu- 
 fine their loans to improved jn-operty already used for 
 either business or residential purposes and bringing an in- 
 come. 
 
 The savings banks are restricted by law to such loans 
 to prevent their deposits from being tied u]^ in property 
 not producing any revenue. The idea is that this last- 
 named class of property is not quickly saleable. 
 
 Where the individiial investor places his cajMtal in loans 
 on city real estate, whether he assumes the entire loan or 
 ])ut part of it, he sh(ndd exercise the greatest care in select- 
 ing the property which is to serve as his collateral. The 
 title to the property should be without a tlaw, (►therwise 
 a cloud will be upon it, acting as a bar to its free and quick 
 transfer. AVithout a clear title no l(»an should be made. 
 Again all loans ought to be confined to a certain pro]ior- 
 tion of the appraised value (^f the property to provide a 
 sufficient equity to protect the loan. Real estate values can 
 easilv be ascertained. This information is readilv acces- 
 sible, for every city keeps a careful record, for the purpose 
 of collecting taxes, of all transfers of property and these 
 records are open to inspection. 
 
 Even here modern methods have simplified this neces- 
 sary work of investigation. Tn every city of importance, 
 institutions have grown u]) which make it their business 
 
INVESTMENTS AND SPECULATION 25 
 
 to search real estate titles and for which service they charge 
 a nominal fee. Their records are so complete that their 
 abstracts of title are accepted without question. When 
 they guarantee their titles, as most of these companies will, 
 they insure their clients against loss from any flaws. They 
 have reduced the work of searching titles to a degree of 
 accurac.v that today few buyers of property or few loans 
 are made unless the titles are first guaranteed by them. 
 
 As for the borro\\'ing capacit}" of real estate, this is 
 largely determined by its location. This relatively in- 
 creases, the nearer the land is to the center of business and 
 to transportation facilities and conversely decreases the 
 further awav its location. More monev can also be bor- 
 rowed when there are improvements in the form of build- 
 ings upon property, for the probabilities are that such real 
 estate is alwavs more readilv saleable and is more likely 
 to enhance in value as the population increases, assuring 
 a quick sale in case it is necessary to find a buyer in a hurry. 
 Of all property, outlying suburban real estate is the most 
 unsatisfactory collateral, as it lacks these essential require- 
 ments. 
 
 The capital which finds its way into real estate invest- 
 ments is drawn from various sources, coming alike from 
 large financial institutions, from wealthy individual in- 
 vestors and from the humble and thrifty masses. There is 
 an enormous business transacted in real estate mortgages. 
 To serve investors who are not able to buy mortgages out- 
 right, large financial institutions have evolved what is 
 called a first mortgage real estate bond. These bonds they 
 guarantee, both in regard to the money invested in them 
 and the interest. This, thev can safelv do, as thev first 
 
 ' *■ «. / ft. 
 
 thoroughly appraise the value of the property on which 
 these bonds are a mortgage, and satisfy themselves re- 
 garding the titles. In New York City there are several 
 of these concerns which have behind them resources in ex- 
 cess of a hundred million dollars and in no case has there 
 
26 LOUIS GUENTHEK 
 
 ever boon a (Icfanlt in tlio paynifiit of priiici]inl or intorost 
 in the niort£!:a^^o ])()n(ls behind whieh stands tlieir trnar- 
 antoo. This merely servos to show how earefnl they are 
 witli tlieir loans. 
 
 Their mortgage bonds are sold at a fignre prodncing an 
 ineomc ranging between 4h and 5 i)er cent, as they are a 
 part of a first mortgage loan and the laws of safety and 
 prudence exact that such loans be confined to desirable 
 property. There has also developed, as a result of the large 
 operations in real estate, corporations offering investors 
 somewhat more inviting inducements for the use of their 
 capital in extending their operations in real estate. A num- 
 ber of these companies have been very successful and their 
 securities are favorably received in conservative financial 
 eircles. Their securities are kno^^Tl as debenture bonds. 
 They are uot first mortgage bonds, 1)ut merely uotes of 
 these corporations and of course, to make them attractive, 
 they are placed on a 6 per cent income basis. 
 
 Some of the younger real estate and holding corpora- 
 tions even fix the interest on their debenture bonds at a 
 more attractive figure, but it is well for the investor to re- 
 member that his risk increases in proportion to the more 
 interest that is ]^aid on his money. In normal times it is 
 not difficult, in a large city, to raise money on real estate 
 for anywhere from 5 per cent to 6 per cent even when it 
 is located in the outlving sections and anv hii^her rate 
 should be carefully scrutinized. 
 
 As real estate debenture bonds have no other security 
 behind them than the credit of the corporations issuing 
 them, it is advisable to inspect carefully their financial 
 condition. The conservatively managed com]iauies are 
 aware of the need to inspire confidence in their (obligations 
 if they are to find a ready market for them and to beget 
 this confidence they make known their actual financial con- 
 dition at least once a year, some of them even going beyond 
 merely publishing a balance sheet. They employ chartered 
 
INVESTMENTS AND SPECULATION 27 
 
 accountants to certify to tlie correctness of the different 
 items of assets and liabilities, and reliable real estate ap- 
 praisers to check over their real estate holdinc^s to assure 
 their bondholders aiiainst the likelihood of anv inflation 
 or reckless management of the funds intrusted to their care. 
 
 It is well for the purchasers of the securities of the nu- 
 merous real estate concerns, to insist not only upon a com- 
 plete financial statement of their condition, but likewise 
 upon the location of their properties. In recent years quite 
 a number of these concerns have spruno- up, some of which 
 are by no means conducting their business ah^ng conserva- 
 tive lines. Their real estate holdings may be situated in 
 the outlying suburbs, considerable distance from transpor- 
 tation facilities; their value may also be inflated, as there 
 is no check upon their appraisals where no independent 
 estimate has been made by competent real estate experts. 
 
 Some of these concerns, with an idea of inspiring con- 
 fidence, have christened their securities with high-sound- 
 ing titles such as, for instance, ''participating bonds," 
 ''mutual profit-sharing bonds," and the like. Names do not 
 impart security. A number of such securities, after a per- 
 sonal investigation, have been found as hollow as a bell. 
 
 No first mortgage real estate bond should be accepted 
 as such unless it is so stipulated on the face of the bond 
 and in the indenture of the mortgage. There are second 
 and third mortgage real estate bonds, but they are graded 
 as more speculative, as they are but a lien on the value of 
 the equity above the first mortgage. This should suggest 
 what care should be exercised in their selection. While 
 some of these mortgages may be perfectly sound, in trouble- 
 some financial periods they are not the most desirable class 
 of securities to hold, especially when they are a lien on out- 
 of-the-way real estate. 
 
 Unless such mortgages are secured bv centrallv lo- 
 cated property, with a lil^eral margin of value above the 
 underlying mortgages, banks will hesitate to lend any 
 
28 LOUIS GUENTHER 
 
 money on them, while savings banks are restricted by law 
 in most states from considering such mortgages at all as 
 collateral for loans. 
 
 Second and third nidrtgages are largely the creation of 
 builders. To make it as easy as possible for buyers of 
 homes to pay off their obligations, they undertake to carry 
 a second mortgage payable in a year or more. Tt is in this 
 way builders principally finance themselves. 
 
 I know of an instance, illustrative of how undesiral)le 
 are such moi-tgages, where a woman in the panic of 1907 
 was compelled to pay a bonus of $100 to renew a second 
 mortgage of $1,000 on a substantial home in Brooklyn. Her 
 interest for one year, including this bonus, came to 16 per 
 cent. This is fairly indicative of the element of risk that 
 capital considers it assumes on such obligations. 
 
 Large office l)uildings, factories and apartment houses 
 are being financed more and more with outside capital. A 
 ])lanket mortgage is placed on these structures and then 
 s]>lit up into an issue of bonds in small denominations. 
 These bonds are then offered investors on an attractive 
 basis. This class of ])usiness is growing in large propor- 
 tions. Conservative bankers find it profitable, and the 
 bonds, when issued within proper restrictions, are an ex- 
 cellent security for tlie medium grade investor. 
 
 lieasehold lt<»nds nvo tlie latest form of real estate bonds. 
 So far, they are a security largely confined to New Y(U'k 
 City, where ]iro])erty lias become too valuable for their 
 owners to sell it outright. 
 
 The Astor, Cioelet, Hhiuelander and other large New 
 York estates owning valualde tracts of land in the heart 
 of the city follow the system of leasing their ]u'o])erty for 
 a term of years, at a sti]>ulated annual rental. The ar- 
 rangement is made by the leaseholders that the im]H'ove- 
 ments they make are to be turned over to the owners of 
 the property at the expiration of the lease for an agreed 
 sum. Leaseholds arc transferable in the same manner and 
 
INVESTMENTS AND SPECULATION 29 
 
 form as arc deeds. Bonds are also issued against tliese 
 leaseholds, but for the protection of the investors, they 
 should mature before the lease expires and there should 
 be set aside a certain portion of the revenues each year as 
 a sinking fund to retire the bonds when they fall due. 
 
 The outright purchase of real estate must be largely 
 determined by location and the income it produces. No 
 general rule can be laid down. However, it is advisa1)le 
 under all circumstances, before buying real estate, to make 
 a personal investigation of the property or employ a capa- 
 ble, experienced and honest real estate agent to make an 
 ajtpraisal of its value. Where this is done, there is slight 
 danger of making any serious mistakes. 
 
\\\. LAND AND Iv'KAL i:s'|\\TK 1500MS. 
 
 AW' (uiL;lit not to ])e too hasty in deprecating, as we are 
 often inclined, the periodical onthnrsts of speculation in 
 land in this country. This is a healthful symptom of a 
 growin<]^ nation's strong vitality, which, impatient of ex- 
 l)anding norninlly, att('ni])ts to si^rcad out witli Icajis and 
 honiids. 
 
 W'liile it may be ti'iie, that trying: to forge aliead faster 
 tlian our resources permit brings exhaustion as a penalty 
 mitil we can again take breath to catch up with the fast 
 pace set, the l^enefits of a i^ennanent character i-esulting 
 from extensive speculation in land cannot be computed. 
 Without the speculation it is seriously to be questioned 
 whether this country would have grown as ra]>i(l]y as it 
 has ill the last fifty years and the (In^at "West become so 
 densely populated. There is always the strongest sort of 
 incentive for the development of new agricultural re- 
 sources behind every boom in land. The peo]>le who ])ar- 
 tiei])ate in them are made \\\) largely of farmers who are 
 not satisfied merely with the j)urchase of new farm lands 
 to hold them for an increase in their valu(\ 'V\\vy J)uy more 
 to operate and make their "jirofits out of the larger crops 
 they ex])ect to raise from a more pmlific soil, liecause it has 
 not ])een worked over and over again. \Vhei*e, too, men 
 flock, there follows the railroad and other conveniences 
 which ai-e necessary to a growing conmiuniiy. New towns 
 s])iMng up and a demand for new industries d(n-elo])s, which 
 capital is always ]ir(j)arcd to su]i]iort when it sees there is 
 a necessity for them. Tonsidering the general •l)enefits 
 arising from land booms, we can, from a i»road standpoint, 
 well afford to suffer what temporary ill effects follow in 
 their wake. 
 
 30 
 
INVESTMENTS AND SPECULATION 31 
 
 Nor is it a racial instinct 2)cculiar to ns as a people tluit 
 we become occasionally obsessed with a blind belief in the 
 possibility of makino- a great deal of money quickly mit 
 of land throngh an immediate increase in values. The 
 same trait may be detected in the people of most of the 
 other nations whose agriciiltiii'al resources have not l)een 
 full}' developed. 
 
 It is true that the Pilgrims who came over in the Mav- 
 flower sought our ^lassachusetts shores to escape religious 
 persecution, but those who followed them in a steady and 
 constantly growing stream, were impelled l)y a wholly dif- 
 ferent reason. The letters the Pilgrims sent ])ack home 
 telling of the bounteous returns their farms in the new 
 world brought forth, inspired others to tempt fortune in 
 the larger opportunities the New World had to offer. The 
 same was true of the Dutch who settled in New" Amster- 
 dam, now New Yoi'k, and of the Cavaliers who estaldished 
 themselves in new homes in Virginia and other neighbor- 
 ing southern states skirting the Atlantic Ocean. 
 
 Aside from his occupation, the farmer is as instinctive- 
 ly human as are his brethren in the large cities. He wants 
 to make money. If he can dispose of his fami at a good 
 profit, there is a strong inclination in him to take advan- 
 tage of such an opportunity. Such chances, farmers in our 
 more densely po])ulated states have had in plenty. In 
 comparing the statistics with respect to the value of farm 
 lands in the central and western states east of the Rocky 
 Mountains, shortly after the Civil War, with those of pres- 
 ent values, we are struck forcibly with the phenomenal en- 
 hancement that has taken ]-)lace A\'ithin this comparatively 
 short period. Fanns, which in the early seventies could 
 have been had for fi-om ^10 to $15 an acre, are not 
 now obtainable at less than $100 to $125 an acre. Even 
 within the memory of the rising generation, startling in- 
 creases in land values have taken ]^lace. The opening of 
 the Sioux Eeservation m South Dakota is a case in point. 
 
32 LOUIS GUENTHER 
 
 Tliis was barely fifteen years ago. The settlers who flocked 
 to this reservation when the Government opened it, were 
 able to buy the land for a triflini:^ sum per acre. Although 
 now cultivated, this very same land changes hands at 
 jDrices varying from $60 and upward an acre, while lots in 
 the new towns which grew u]) in what was then only a 
 grazing country, which might have been had for a few 
 dollars, have increased in value from 100 per cent to 1,000 
 per cent. 
 
 Thus it was also wjth Oklahoma and Indian Territory. 
 When these new territories were opened for settlement, 
 land was extremely cheap, but the pioneer fanners who lo- 
 cated there have become rich from the soil's fertility and 
 the rise in values. 
 
 "Within the last few years, however, we have witnessed 
 a remarkable change in land speculation. There has been 
 a steady migration of American farmers into the new 
 wheat belts of Canada. Those who have watched this move- 
 ment estimate, and their estimate is considered conserva- 
 tive, that at least 300,000 American farmers have gone into 
 Manitoba, Alberta and Saskatchewan, to establish new 
 homes for themselves, having heard all about the possibil- 
 ities of raising large crops in these lands. Rapid exten- 
 sion in railroad building has followed in their foot-steps 
 to provide adequate transportation facilities for the move- 
 ment of their crops. 
 
 But this migration to a neighljoring eountry, eml)()dies 
 no unusual aspects. There is a good reason for it. Most 
 of the natural arable soil in the United States has already 
 been taken up and exploited: there remains but very little 
 new land available, that is, adaptable to the money-mak- 
 ing opportunities associated with new and virgin lands. 
 What will be the result? Henceforth we are less likely to 
 witness again such wides]»read land booms, such as marked 
 so conspicuously that ]ieriod of our growth between the 
 seventies and the earlv nineties. The value of our arable 
 
INVESTMENTS AND SPECULATION 33 
 
 lands will, of course, continue to increase, but this increase 
 will be on a more uniform and conservative scale because 
 of tlie restricted opportunities. 
 
 If we are to see, from now on, any speculative opera- 
 tion on a large scale, more likely it will take place in ir- 
 rigated lands. Here we begin to see, thus early, many of 
 the aspects which markedly distinguished our early land 
 booms. Irrigation, as the name distinctly defines, is arti- 
 ficial fanning. It means bringing to arid land what it most 
 needs to make it fertile, water. Where water has been 
 plentiful, this form of farming has proved very profitable, 
 in some districts crops being raised in proportions impos- 
 sible on arable farm lands. The Government and private 
 capital are working hand in hand to reclaim a great many 
 millions of acres of arid land capable of being properly irri- 
 gated. As fast as this arid land is put in shape to be avail- 
 able, there will develop a growing demand for it and as a 
 result of this demand, there will arise considerable specu- 
 lation. There is now being attemi)ted the experiment of 
 draining swamp lands to meet the cry for more land in 
 this countrv. The demand is for more land to raise the 
 common necessities of life for a continually increasing pop- 
 ulation. 
 
 So far we have considered only broadly the beneficial 
 effects of speculation. For guidance, though, to the indi- 
 vidual wlio may regard with favor the speculative oppor- 
 tunities in the purchase of land, the proposition must be 
 considered from a different and more specific viewpoint. 
 Unless one is thoroughly familiar with the science of farm- 
 ing, he is apt to blunder seriously in making an investment 
 in farai land, for not all land is always what it is repre- 
 sented to be. Associated with every land boom is the vio- 
 lent tendency to rush values upward, far ahead of the pur- 
 chasing power, and in consequence there is always a great 
 danger of buying at the crest of a speculative wave and 
 the buyer may then find himself with property on his 
 
 B.VII— j' 
 
34 LOUIS GUENTHER 
 
 linnds wliicli ho iiiav have to hold for some rears l)efore he 
 has chance to a^aiu ^et lid df it at a profit. Meaiiwliile 
 liis iiivestnicnt yields no income snch as capital is supposed 
 to ]trodnce to be ])rofital)ly employed. Tn addition he suf- 
 fers a direct loss, for taxes must he ])aid and im])rovements 
 made from time to time, all of which call for the outlay 
 of more capital. It may even happen that he may never 
 a^ain see the price his land cost him. There are many lo- 
 calities where this has been the fi^eneral experience. 
 
 A\'ith a person who Iniys fann land for the purpose of 
 cultivating it, there is not this danger, lie can make his 
 property produce an income while he is holding it to resell 
 at a profit. AMu-n buying land, whether for investment or 
 speculation, it is always the safer course, where it is at all 
 ix)ssible, first to visit the land and make a thorough in- 
 vestigation, not only with regard to its fertility, but to ob- 
 tain a fair idea about the value of neighboring fann lands. 
 AVhere this is done, the danger of buying at inflated values 
 is very much lessened. If a personal inspection is not pos- 
 sible, the very next best step is to depend upon some one 
 familiar with farming, and whose judgment can be de- 
 l^ended upon for advice. But the very best thing for a per- 
 son who is himself incapable of cultivating a farm, is to 
 forego such s]K'Culative opportunities, for th(^ risk is al- 
 ways the greater where one has the least knowledge abcnit 
 the character of the speculation dal)l)led in. 
 
 If is impossible to elaborate in detail nn the di ff (»rent 
 ])hases of s]^eculation in land within the restricted space 
 within which I am allowed to cover such a broad subject as 
 is contained under the heading of "Investments and Spec- 
 ulation." T c.iii onlv discuss it in the broadest light and 
 attempt to lay down such general rules for guidance as are 
 the UKtst impoi'tant, but I could not com]ih'te tliis section 
 without touching u]ion the many schemes launched from 
 time to time to intc^rest ca]iital in co-o]ierative farming. 
 
 So far as I can detennine, only a few such plans have 
 
INVESTMENTS AND SPECULATION 35 
 
 proved profitable to those who have pUieed their money in 
 them. There have been plantation schemes innumerable, 
 launched in the last few years, a great many 'in Mexico, 
 some in other tropical countries. These plans appear feas- 
 ible enous^h. The idea is to cultivate one big plantation 
 and divide the proceeds from each hai'^^est among the many 
 different owners who are the certificate holders. The main 
 trouble with most of these enterprises is that they begin 
 with an excessive capitalization, representing more than 
 the land can possilily be worth even many years hence. 
 Where this is not the mistake, the chief trouble lies in in- 
 experience in handling a plantation. Overseers are em- 
 ployed who know little about the climatic conditions and 
 about raising the crops indigenous to a tropical country. 
 One might as well transplant a native of Mexico or Yuca- 
 tan to an Illinois farm and expect from him the same de- 
 gree of efficiency as a farmer accustomed to the soil and 
 methods of cultivation. Ruliber plantations are also plen- 
 tiful but financially they have rarely proved successful. 
 All phases of farming seem to have defied so far all efforts 
 to reduce it to a co-operative basis. It still remains an in- 
 dividual science. 
 
 Of late there has appeared a tendency to concentrate 
 the ownership of large agricultural properties in tliis coun- 
 try into stock companies. In the Northwest there have 
 sprung up orchard propositions in wliich private investors 
 are solicit(^d to take "units," each unit re])resentinu: tli<^ 
 ownership of either one or a given inniilx'r of acres, and 
 the proceeds from the fniits raised on the property arc 
 apportioned among the unit holders. Tliis idea is a new 
 one. It is yet too early to judge whether the ])lnn can bo 
 made a permanent success, financially. So far it has ])cvn 
 experimental. The idea, however, is Ijcing applied to other 
 products of the soil, to oranges, to bananas and even to nuts 
 in the South. I have even become aware recently of an 
 ambitious plan to operate a large wheat farm in Canada 
 
36 LOUIS GUENTHER 
 
 on the same lines. But I still hold that the most profitable 
 fanninjj; is that where the owner of the land directly sup- 
 erintends the cultivation rather than delegates it to stran- 
 gers, who cannc^t be expected to have the same interest in 
 its success as the real owners. 
 
 Suburban real estate is and always will be a jxipular 
 outlet f(>r the speculative inclinations of a comnuniity, l)e- 
 cause there considerable money has been made out of such 
 property by those who were either wise in their selections 
 or fortunate. As a city grows in population the tendency 
 is to spread out on adjoining lands. Considerable money 
 is also lost in such speculations. Take, for example, New 
 York City. As the city is constituted at present, it covers 
 five boroughs, including Stateu Island. Boomers of New 
 York City suburban properties will so word their an- 
 nouncements as to convey the ini})ression that their prop- 
 erty is a part of the city proper, when this is far from the 
 case. How much one may be deceived is shown by an il- 
 lustration coming mider my notice regarding two small 
 suburbs on the Long Island Railroad. One of these places 
 is 36 miles distant from the City Hall, the other but 29 
 miles; yet the price placed on lots in the suburbs furthest 
 away averages about $200 a lot, whereas lots of the same 
 area in suburbs nearest to the city and having equally good 
 transportation facilities and requiring less time to reach, 
 are to be had at less than $100. Here is an object lesson 
 which requires no further discussion. 
 
 The same inflation can be found in suburban real estate 
 outside the limits of most of our large cities. Chicago, 
 when it had its suburban real estate boom, ])revious to the 
 World's Fair, was similarly afflicted and lots bought in some 
 of the mushroom outlying settlements have never agaiu 
 seen their first offering price and are likely never to see 
 it again, as the path of the city's growth has not extended 
 that far or has gone in different directions. Suburban real 
 estate, or even city real estate proper, should never be 
 
INVESTMENTS AND SPECULATION 37 
 
 purchased on mere say-so or description. It should first be 
 visited by the purchaser, who at the same time should spend 
 a little time looking- into property values in the neighor- 
 hood and finding out about transportation facilities. It is 
 the last-mentioned which makes the pro])ei'ty and lays the 
 foundation for an increase in its value. The people who 
 live in the suburbs do so for economical reasons. They can 
 build their homes and maintain them cheaper than in the 
 city itself. But they nuist have quick transit facilities to 
 and from their occupations. Along the principal avenue 
 of the movements of this element of the population, real 
 estate will always prove profitable speculation. The 
 science lies in finding where that is and then getting prop- 
 erty on a reasonable basis of value. 
 
Ym, THE :y[ULTTPLTCTTY AXD ^O^rPLEXTTY 
 
 OFBOXns. 
 
 It is only possible to fonii a clear conception of the 
 many different types of securities marked as bonds on the 
 shelves of investment dealers when they are cfronped one 
 after the other in their order of importance and marshalled 
 before the mental vision. "We may then gain a fair idea, 
 not alone of their variety, l)nt of their mnltiplicity, and 
 from that realize how their complex character can confuse 
 investors unless they are thoroughly posted in this line of 
 investments. 
 
 There are first mortgage bonds, second mortgage bonds, 
 third mortgage bonds and, on some of our large railroad 
 systems, even fourth mortgage bonds, each, in its tuni, be- 
 ing secured by a lion on the propei^ty of the railroad in the 
 sequence of its issue. To make it plain, it is best to de- 
 scribe in the beginning what is meant by a mortgage bond. 
 In character it is not different from a mortgage on a parcel 
 of real estate, except in the respect that a real estate mort- 
 gage is usually owned by one indi^^(lual, whereas there are 
 hundreds and often thousands of investors interested in 
 the same mortgage issued by a railroad or some other large 
 corporation on its property. Tlie way this is brought about 
 is as follows: First, a mortgage for the amount of the loan 
 is properly drawn up and recorded; then, in turn, it is regis- 
 tered with some trust company which acts as a trustee. 
 Ponds are issued in certain denominations against the 
 mortgage. Tlie denominations are usually m amounts of 
 $500, $1,000 or $r).000. TTowever. there is nothing to pre- 
 vent their being in $10,000 or $20,000 or even for as small 
 a figure as $100, as this is a matter largely left to the dis- 
 cretion of those bankers who arrange the bond issue. Cus- 
 
 38 
 
INVESTMENTS AND SPECULATION 39 
 
 tom, however, with us, has larj^ely favored $500 or $1,000 
 bonds. To more widely distribute bonds among smaller in- 
 vestors, bonds of $100 denomination have lately been in- 
 creasing in popularity. 
 
 Each bond represents a direct interest in the mortgage 
 for exactlv the denomination it calls for; that is to sav, the 
 borrower has j^ledged certain collateral to guarantee the 
 payment of the bond upon the expiration of a given period 
 of time, together with a fixed per cent of interest each 
 year, payable on demand, either annually, semi-annually 
 or quarterly. 
 
 The difficulty of borrowing considerable money from 
 one or a few individuals in large transactions can l)e read- 
 ily appreciated. Thus, to facilitate borrowing hj large en- 
 terprises, modem finance has evolved the scheme of split- 
 ting up the loan in so many integral parts, each part con- 
 stituting a bond. The Pennsylvania Kailroad, for example, 
 has outstanding against its main line, a first mortgage of 
 $100,000,000. Xow it is not possible to raise such a large 
 sum from one individual; therefore it is obtained throu2:h 
 many, by the means of bonds, as has already been described. 
 There is one trustee, usually a responsible trust comjiany, 
 with whom the mortgage is lodged. It is the mission of this 
 trustee to safeguard the holders of the bonds by carefully 
 scinitinizing the indentures of the mortgage to ascertain 
 and satisfy itself of their legality, and furthennore that the 
 collateral described as securing the mortgage is all safely 
 pledged and that there are no flaws. The same trust com- 
 pany, or it can be another, acts as the registrar for the 
 bonds. Its duty is to exercise proper supervision that not 
 more bonds than the amount called for by the mortgage 
 are issued. The bankers who have taken the bonds, pay 
 to the tnist company, the price agreed upon anrl have the 
 bonds authenticated by the registrars, each bond being 
 stamped, or there is engraved upon it the statement that 
 it is a certain fraction of a number of fractions, the whole 
 
40 LOUIS GUENTHER 
 
 together representing the amount of the mortgage. This 
 is to prevent an over-issue. The full terms of the mortgage 
 are seldom engraved upon a bond. They are usually 
 printed separately in the sliape of a pamphlet; the actual 
 mortgage is tiled with the trustee. The printed copies are 
 for the pur^^ose of distribution among investors. 
 
 Attached to the bonds are small coupons. If the inter- 
 est on a twenty-year bond is made payable semi-annually 
 on tlie first day of January and July and is at the rate of 
 5 per cent per annum, there is appended to each $1,000 
 bond, 40 separate coupons, each stipulating that there will 
 be paid on a given date, at a certain agreed-upon place, 
 the sum of $25, in gold nsually. In a similar manner will 
 the principal of the bond be paid when the date of maturity 
 is reached. All that is required of the holder of the bond 
 is to clip off these coupons as they fall due and deposit them 
 with his bank for collection, or he can present them in per- 
 son, or request that pa^inent be made by sending in the 
 coupons. To make it as convenient as possible for bond- 
 holders, these bonds may be registered with the corpora- 
 tions issuing them; that is, the bonds can be left in their 
 custody, with the name and address of the person to whom 
 checks foi- the interest and principal should be mailed. 
 Most bonds are made out to the bearer. This is done to 
 make possible their speedy sale and transfer. Therefore, 
 in case they are lost or stolen and fall into a third or in- 
 nocent person's possession, the loss will fall upon the origi- 
 nal owner. To safeguard against such an event, timid in- 
 vestors and trustees of estates quite often register their 
 bonds, even though thev ai-o aware that their securities, 
 lacking the advantages of a quick transfer, may realize, 
 if sold, a fractiou less on account of the delav in deliverv, 
 as the bonds must first be released on the corporation's 
 books. As the interest on the bouds falls due, it is deposited 
 with the bank where it is paid, and disbursed as the cou- 
 pons are presented. 
 
INVESTMENTS AND SPECULATION 41 
 
 "While it might seem, in dealing in large amonnts, that 
 there nuist necessarily be some confusion, this mechanism 
 devised by modern finance in handling large loans is very 
 simple in its operations. 
 
 The confusion regarding bonds, consequently, is not 
 in their method of issuance or in their manner of payment. 
 It is in determining the collateral securing them that 
 counts. Here is where the investor must exercise precau- 
 tion. Often his power of judgment must be developed to 
 a very high degree. Essentially one factor must be deter- 
 mined by bondholders for their protection, and it concerns 
 itself wholly with the equity existing behind the loan. 
 
 In the process of making the simplest loan, no one will, 
 for one moment, think of accepting for security, any pledge 
 wliich, in the event a borrower cannot meet his obligation 
 will not, if sold, realize at once the face of the loan, to- 
 gether with all accumulated interest and all the expense 
 caused by the legal enforcement of its payment. It is nec- 
 essary, as a precautionary measure to be fortified against 
 all possible loss, in the event of a default on the part of 
 the borrower, whether it is for interest or the pa^Tiient of 
 the principal, to exact a certain marketable value in excess 
 of the loan. Tliis is what is referred to in financial circles 
 as the equity. 
 
 By the same yard-stick, investors should measure 
 bonds, since the smaller the equity the more speculative 
 in chai'acter is a bond and in tuni a better income should it 
 \ield for the larger risk the holder must assume. Bond- 
 holders are creditors of a corporation. Tlioy are unlike 
 stockholders, who divide what ]n'ofits arc made. They 
 merely lend their cajiital in return for a fixed interest, and 
 ought, by the very nature of their position as creditors, to 
 be am])ly secured against any and all stressful business 
 weather a cor})orati<>n may meet. For that very reason 
 the collateral pledged behind bonds ou'iht at all times to be 
 subjected to the most exacting investigation. 
 
42 LOUIS GUENTHER 
 
 As has been previously stated, there are first, second, 
 third and even fourth nioi-tgage bonds, back of which there 
 is pk'dged the same j^roperty. The first mort.c:ap:e bond, 
 quite naturally, is the prime investment, yet from a point 
 of securitv, this does not alwavs indicate that second, third 
 or even fourth mort,G:a,2;e bonds are not also safe invest- 
 ments. These different degrees of direct mortgage Ijonds 
 are most frequently found issued by our large railroads. 
 This is due to the fact that the property underlying the 
 first mortgage bonds has multiplied in value so fast as to 
 have accunuilated an equity sufficiently large enough to 
 allow in perfect safety the creation of second and subse- 
 quent mortgage bonds. 
 
 The Erie Railroad is an illustration. This immense 
 railroad system has issued as many as five first mortgage 
 bonds against the same property, namely: The first, 4 per 
 cent bonds, which matured in 1907; the second, 5 per cent 
 bonds due in 1919; the third, 4 J per cent bonds due 1923; 
 the fourth, 5 per cent bonds due 1929; and the fifth, 4 per 
 cent bonds due 1928. In citing the Erie Railroad as an 
 illustration, I do not want it understood that I use it as 
 expressing my opinion that these several first mortgage 
 bonds are examples of the safest type of investments. 
 Other railroads have not been as explicit in properly cata- 
 loging their bond issues as has the Erie, and this has re- 
 sulted in nmch confusion to the average investor, who, as 
 he reads of a first mortgage bond, is most likely to assume 
 without further inquiry that it is as described literally, a 
 first mortgage without any incuni])rance ahead of it. 1 low- 
 ever, such is not always the case. ri)on reading the de- 
 scription of the bond more closely, the investor is likely 
 to run across something like the following which is the 
 exact phrasing taken from a well-known first mortgage 
 railroad bond: 
 
 The authorized issue of first mortgage 5 per cent bonds is $3.ooo,non, the 
 unissued $120,000 being reserved for the retirement of the bridge bonds. 
 
 Analyze the above paragraph carefully and its mean- 
 
INVESTMENTS AND SPECULATION 43 
 
 ing will become clear. These bonds, altlioiigli called lirst 
 mortgage bonds, are not exactly that. There is a security 
 ahead of them in these bridge bonds which must first be 
 satisfied. Without the bridge, the railroad would ])e cut in 
 two parts like a dismembered body. 
 
 Here again is another description of a fii'st mortgage 
 bond which will cast further light on this important point 
 and concerns a first mortgage 6 x^er cent railroad bond. 
 
 Amount authorized is $6,000,000; issued $2,788,000, of which $1,288,000 
 was in exchange for prior lien bonds. 
 
 To be exact, what this means is that there are ahead 
 of the first mortgage 6 per cent bonds, other bonds al- 
 ready in existence and issued against a mortgage for $1,- 
 288,000 and out of the new $6,000,000 first mortgage bonds, 
 enough bonds have been reserved in the treasury to re- 
 place the already existing bonds when they fall due. 
 
 Xo bonds can be called for payment unless there is such 
 a stipulation. Our early railroad builders never expected 
 to witness such a ra]3id expansion in value in their proper- 
 ties as occurred in their lifetime, for, otherwise, they would 
 have made some provision to cancel their first mortgage 
 bonds earlier than the full term of the loan so as to leave 
 their ])ath clear of obstructions to raise additional money 
 as the growth of their railroads required it. 
 
 Only a few years ago some of the Chicago & North- 
 Western first mortgage 7 per cent bonds matured. This 
 premier railroad system created these bonds Avhen the 
 West was still young, and at a time when it was not as easy 
 to borrow money as now, and the builders of this great 
 system, not to burden it for a long term of years with re- 
 payment of the money for its construction, imagined they 
 were driving a shrewd financial bargain when they made 
 these bonds payable in forty and fifty years. But they 
 seriously erred. Long before these bonds reached their 
 date of maturity, the Chicago & Xorth-Western was a))le 
 to borrow whatever money was required to finance all im- 
 
44 LOUIS GUENTHER 
 
 pruvuments and extensions witli l)<»nds l)eann,c: even as low 
 an interest rate as 3^ per cent, and what would have been 
 even a greater revelation to the founders of this property, 
 had they lived, would have been the fact that these low in- 
 terest-bearing bonds brought par, whereas in their day, to 
 make their 7 per cent bonds attractive, they were forced 
 to offer them at a considerable discount. 
 
 This hard lesson of our earlier financing of our rail- 
 roads has never since been neglected. Now, when a rail- 
 road or any corporation pledges any of its property as se- 
 curity foi' a bond issue and anticipates in the course of 
 time that the property will enhance greatly in value or 
 the opportunity may arise to borrow money ni(»re cheap- 
 ly, it provides for such eventualities by stipulating in the 
 mortgage the privilege of calling in the bonds for ])ayment, 
 on any given interest date, usually at a premium of from 
 5 to 10 per cent. We often come across the term in a bond 
 callable on any interest day on so many weeks' previous 
 notice at a certain price with accrued interest, accrued 
 meaning the interest due for the period l)etween the last 
 (late when interest has been paid to the date when pa^^nent 
 ill full for the bonds is to be made. 
 
 A reduction of J per cent in interest on a largo amount 
 (if money represents a tidy annual sum saved. Shrewd 
 financiers fully i-calize this. Because of their increased 
 credit and value of their property, a good many of our rail- 
 roads could, in the course of years, have effected the saving 
 of man\' millions of dollars by a ('h(»a]K'r rate of interest, 
 had they been in the position to call their early bonds is- 
 sued at a high rate of interest. They had to allow them to 
 rim out their term of issue. 
 
 "What a multiplicity of all sorts and types of bonds 
 there is now in existence may be judged from a partial 
 list here compiled. There are government bonds, state and 
 municipal, under which latter term there is a varied as- 
 sortment, such as direct obligations of the city, tax, drain- 
 
INVESTMENTS AND SPECULATION 45 
 
 age, pavcmeut, road, highway, improvement, lightius:, gas, 
 water, assessment, boulevard, etc.; there are the first mort- 
 gage railroad and corporation bonds already described, 
 and mortgage bonds following in sequence in regard to se- 
 curity; there are consolidated, extension, income, refund- 
 ing, general, construction, terminal, im]U'ovement, divi- 
 sional, equipment, convertible, collateral, lien, series, guar- 
 anteed, coal, tim])er, bridge, tunnel, vessel, debenture, par- 
 ticipating, ])urchased line, unified, branch line, joint, 
 stamped, adjustable, land grant, canal, loan, underlying, 
 redeemable, reorganization, tax exempt, purchase money, 
 sinking fund, convertible debenture, and real estate bonds 
 and many other kinds. Besides these there are trust re- 
 ceipt certificates and short term notes. 
 
 When the investor arrays all these bonds before his 
 mental vision, he will understand the full meaning of the 
 multiplicity and complexity of bonds, which has resulted 
 from the swift evolution in our modern finance. He will 
 appreciate that a trained mind is necessary to judge the 
 intrinsic value there is behind all these different names 
 given to bonds in this modern day, and he will also realize 
 how a clever financier, undei" the guise of a bond, can dis- 
 pose of a security which in all reality is no more a bond, 
 in the true sense of the term, than is the paper on which 
 this is printed. 
 
TX. nOVERNMENT, STATE AND Air^XirTPAL 
 
 IJOXDS. 
 
 Bonds issued l)y govcriiniciits, states and inuiiieipalitios 
 are in a distinet elass of their own. The vast majority of 
 these seeurities have no other pledge behind them than the 
 credit of the nation or the comnnmity issuing them. Still 
 they are looked npon as very desirable investments when 
 representing the obligations of a prosperous people. There 
 are some circumstances, however, under which bonds of 
 tliis type are not attractive to the individual investor, from 
 a viewpoint of income. 
 
 Take our own government l)onds, for exami)le. The 
 great bidk of them are owned by our national banks and 
 only a small proportion by investors, considering the many 
 millions of them that have 1)een issued. If tliey are held 
 at all bv investors or estates, it is not because of the in- 
 terest yield, ])ut on account of the assurance of their ab- 
 solute safety. 
 
 ft' 
 
 Our national bank act makes it compulsory with a na- 
 tional 1)ank, before it can issue any bank notes, to deposit 
 with the United States Treasurer, an e(iuivalent amount of 
 government bonds to secure tlie ]iayment of these notes. 
 You have no (loul)t often noticed a paper bank note on 
 the face of which was engraved the name of a national l)ank 
 and signed by the bank's president and cashier. Well, it 
 is these notes which are thus secured by the de]iosit of gov- 
 ernment l)onds. Insolvency mav overtake the bank, l)ut 
 
 ft- • 
 
 the notes are alwavs secured bv ii:()vernment bonds de- 
 posited in the United States Treasury. When a bank wishes 
 to reduce its outstanding bank notes, all it does is to col- 
 lect a sufficient mnnber of national bank notes and tender 
 them to the Treasurer of the Ignited States, upon which 
 
 46 
 
INVESTMENTS AND SPECULATION 47 
 
 tho oquivalent aiiKniiit in l)onds is released. It is not 
 necessary to tender the notes of the tendering- bank; any 
 other bank notes are equally acceptable. This is done to 
 facilitate their issuance and cancellation. 
 
 As a result of this national banking act, there has arisen 
 a broad market and a constant demand for our government 
 bonds, a demand created by an artificial market which has 
 made it possible for our Government to raise all the money 
 it needs to provide for its fiscal requirements on a 2 per 
 cent and 3 per cent basis and still place its securities at a 
 premium. The national banks find it profitable to pay this 
 premium, for they secure a small income on the bonds after 
 paying the tax and, with the notes they can issue, earn addi- 
 tional interest by lending this money out to customers. 
 Without entering into the details of this operation, in which 
 investors are not interested, it can be readily seen why it 
 is with the many national banks in existence that our na- 
 tion's bonds bring such high prices, notwithstanding they 
 bear a low rate of interest. 
 
 In England, the govenmient bonds are knoT^ni as con- 
 sols. This name was derived from an act of the British 
 Parliament consolidating the public debt and the word is 
 an abbreviation of consolidated. English consols, until re- 
 cently, commanded a price realizing slightly over 2 per 
 cent, but they have steadily fallen, since there has not been 
 the artificial market for them as is the case in the United 
 S^tates with its national debt bonds. The banking system 
 in Great "Britain is also differently organized. There the 
 note-issuing power is concentrated in a central bank, the 
 Bank of England. For a time, however, English consols 
 were under an artificial stinuilus through the adoption of 
 a postal bank system which, by enactment of Parliament, 
 could only invest deposits in British consols. As deposits 
 fall off, so does the market, for the Govenunent's securi- 
 ties narrow, at least, the artificial market provided by law. 
 Still, even with the decline which has occuiTcd and which 
 
48 LOUIS GUENTHER 
 
 at one time brought the price down below a figure not wit- 
 nessed since 1848, consols still yield less than 3 per cent, 
 indicating that the staid British investor values very high- 
 ly the credit of his nation and is perfectly content with an 
 income ranging between 2i and 3 per cent. 
 
 In like mainici- does the French jx'asant investor ap- 
 ])reciate the CJovcrnnient Rentes, as the Frendi Uovem- 
 ment securities are called; the Gennan, his government ob- 
 ligation; and equally so the people of other prosperous na- 
 tions favor their own national securities. However, not 
 all governments can borrow money on their credit as cheap- 
 1}^ as the stronger powers. Credit with them varies, as it 
 does with individuals. Some of the smaller nations are 
 forced to pay as high as 6 per cent for loans and besides 
 they not infrequently allow the underwriting bankers who 
 take the loan and agree to place the bonds, a discount for 
 their services. Some of the minor countries, where there 
 is turbulence and internal strife constantly, cannot even 
 borrow money unless at usurious rate of interest, because 
 they have no stability to offer as a reassurance that their 
 l(tans will not be repudiated. 
 
 It cost Japan almost 6 ])er cent on its loans to finance 
 its war with Russia. The Cuban Government had to ]iay 
 the same rate. Even Russia, although known to have col- 
 lected the largest reserve in gold owned by any Kuro])ean 
 power, found it necessary, when in confiict with Ja})an, to 
 tempt bankers and investors with a high interest rate be- 
 fore thev would take its securities. The bonds issued bv 
 the governments of the Argentine Rei)ubli(', Brazil, Chile, 
 Bolivia, Honduras and other South American Republics 
 can be had on a basis close to 6 per cent. This does not at 
 all refiect upon them; it merely fixes the position of their 
 credit in the money capitals of the world. As their <'redit 
 enhances they will l)e in a j^osition to refund their out- 
 standing loans on a lower interest basis. Mexico did this 
 a short time ago. That country i)laced a gold loan some 
 
INVESTMENTS AND SPECULATION 49 
 
 years ago on a 4i per cent interest basis. The country's 
 credit has increased to a point where it was found possible 
 to replace these 4A per cent bonds with a 4 per cent bond, 
 thus effecting quite a saving in fixed charges to the Gov- 
 ernment. 
 
 The interest government obligations call for is usually 
 provided by the proceeds from taxation, external or inter- 
 nal. Some countries place a tax on certain widely used 
 commodities and set the revenue aside for the payment of 
 interest on the public debt. In no other way, except in iso- 
 lated instances, are government bonds secured. Should a 
 government debt be repudiated, its payment by the holders 
 of its obligations could not be enforced by recourse to law. 
 The reason is that a government cannot be sued, since it is 
 not amenable to the statutes of any other government, while 
 its own people cannot recover from the institution they 
 themselves have created and whose laws to govern them 
 thev have enacted. 
 
 In our own countrv the freedom of the Government from 
 any civil action even goes so far as to exempt the states. 
 South Carolina repudiated some of the bonds issued during 
 the reconstruction days and neither the interest nor the 
 principal has ever been paid. Nor can the holders enforce 
 payment. Some of the bondholders have attempted, and 
 so far have succeeded, in getting a number of these bonds 
 in the possession of another state, because one state can 
 l)ring legal action against another to recover on a disputed 
 claim. South Dakota did sue South Carolina in the United 
 States Supreme Court to enforce the payment of these 
 bonds and recovered judgment, ])ut even then a state can- 
 not collect, as it cannot attach the property or revenues of 
 another state and certainly cannot take up arms against it 
 to make it pay. In the end such matters must be left to the 
 honor of a state for settlement. Fortunately, with our 
 country, instances of repudiation of public debts are very 
 rare. Only in isolated cases has it ever occurred. 
 
 B.VII— 4 
 
50 LOUIS GUENTHER 
 
 TLiL' iiu-aiLs till' (Jowriinu'iit atl(>i)ts to raise niuiiey are 
 followed on a smaller scale by the forty-eicjht separate 
 states. They have uses for funds likewise. Improvements 
 in the his^lnvavs are a constant necessitv. There are the 
 public buildings to provide for. The needs of other im- 
 provements benefiting the people of the state are constant- 
 ly arising. To provide the funds by direct taxation would 
 prove to be too burdensome and also is it unjust to force 
 one generation to share the whole burden of financing some 
 public undertaking, the advantage of which will be partic- 
 ipated in hy generations to come. The theory is, and it 
 is a very good theory, that such debts should be divided 
 equally and this is accomplished by issuing bonds running 
 for a long term of years and carrying a fixed rate of inter- 
 est. As these bonds are authorized, the state, usually 
 through its elective officer, the State Treasurer, invites bids 
 for them and disj^oses of the bonds to the highest ])idders. 
 
 The privilege of bidding for such bonds is not restricted. 
 The humblest investor can make an offer and if it is among 
 the successful tenders when the bonds are allotted to the 
 highest bidders, he will obtain the bonds to the amount of 
 his bid if there are enough to go around. There is one re- 
 striction, though, which has been adopted as a general ju-ac- 
 tice to guarantee that the bonds will be taken by the suc- 
 cessful bidders or bidder, and this is that a certified check 
 for a nominal per cent must accompany the bids as a guar- 
 antee of good faith. 
 
 How unjust it would be to have one generation carry 
 the entire burden of an imi)ortant i)iil)lic improvement, can 
 best be illustrated Ity the improvement and electrification 
 of that great highway of commerce, the Erie Canal, by the 
 State of New York. It is estimated that this work will 
 cost about $100,000,000 and to provide the funds, the legis- 
 lature, a short time ago, authorized a state bond issue to 
 the amount authorized as the work progresses. Posterity 
 will derive greater benefit from this vast undertaking than 
 
INVESTMENTS AND SPECULATION 51 
 
 will the present generation. Some states whose credit is 
 excellent, fix by statute the interest rate and even the price 
 which must be realized for whatever bonds the legislature 
 authorizes. But this is not always an advantage. Capital 
 may not be so available as to be attracted by a low rate of 
 interest, and if this is true, we witness the failure of a bond 
 issue, because there are not sufficient bids for it. This has 
 even happened with New York State, rich as it is. The 
 state, in nonnal periods, experiences no difficulty in getting 
 all the money for its requirements with a 3 per cent bond. 
 Furthennore, bankers and investors bid eagerly for the 
 bonds at a premium over the price fixed by law, at which 
 they may be sold. But during the depression following 
 the 1907 panic, there was a time when the State Treasurer 
 was compelled, because of the failure of bids, to come with- 
 in the state law's requirements to purchase an issue of 
 bonds with the available cash in the state's sinking funds. 
 The line of demarcation in credit is as pronounced with 
 states as it is in individuals. The far western and sparse- 
 ly settled states are forced to pay larger interest to tempt 
 capital. Thus you see that capital is a ruler whose power 
 is supreme. 
 
 Counties, large cities and small municipalities borrow 
 money on much the same lines of financing as are followed 
 by the states and general government. Here and there va- 
 rious restrictions exist but in general they follow the same 
 plan of raising funds. To prevent the cities from over- 
 borrowing, some states, and for that matter most of them, 
 have wisely fixed a limit. For example, no city in the ma- 
 jority of eastern states can legally authorize more bonds 
 than will equal 10 per cent of the assessed valuation of the 
 taxable property, and when it has reached this figure, it 
 must wait until there has been an increase m the value of 
 the assessable properties to permit adding to the public 
 debt. This is a wise provision, as it acts as a safeguard 
 against creating an indebtedness beyond the ability of the 
 
52 LOUIS GUENTHER . 
 
 population to comfortably carry. Such -feaels are also 
 disposed of by inviting public bids, -wbich bids, by law, 
 must be advertised. To give a distinct identity to these 
 bonds, they are usually named after the purpose for which 
 thev are issued. 
 
 A city may decide on making some street improvements; 
 therefore bonds are authorized for this purpose and desig- 
 nated as street improvement bonds or they may be court- 
 house or school bonds, highway bonds, grading bonds, etc. 
 Therefore the character of a county, city or a municipal 
 bond may be determined by the name employed to distin- 
 guish it from other bonds authorized by the same com- 
 munity. My space is too limited to go into all the details 
 governing the many thousands of such obligations which 
 have come into existence. I can only refer to them gen- 
 erally and in the broadest light. For instance, Xew York 
 City has a public debt in excess of $800,000,000, all of which 
 is represented by a great many classes of designated bonds. 
 New York Citv is a steadv borrower. It needs monev for 
 docks, for subways, for boulevards and many other mani- 
 fold forms of public improvements. Some of these bonds 
 earn their own interQst charges; for that reason they are 
 not a burden on the taxpayers. This is the case with the 
 bonds authorized to raise the money to build the subway 
 or furnish undergrouncL rapid transit facilities. Likewise 
 with the bonds issued to build the large water front piers 
 owned by the city and rented to the steamship lines. The 
 interest on other bonds is provided by taxation of the prop- 
 erty owners who are the direct beneficiaries of the improve- 
 ments. 
 
 It must be anticipated that where there is such a mul- 
 titude of communities, small and large, there will arise 
 many complications in determining the character of their 
 securities as investments. As a result, also, there will be 
 a wide range in their income yield. The business done in 
 such obligations reaches enormous totals. It would prove 
 
INVESTMENTS AND SPECULATION 53 
 
 highly interesting if it were possible to describe in one 
 section a subject which could only be adequately dealt with 
 in a whole book — the care that must be exercised by bankers 
 who make a specialty of dealing in municij^al obligations. 
 Before bidding for these bonds, such houses, through their 
 attorneys, first assure themselves that the bonds have been 
 legally issued, by which is meant that the electors authoriz- 
 ing the bonds were within the law. They must, in instances 
 where even the lec'alitv of the issue is not in doubt, satisfy 
 themselves that the conununitv can meet the taxation to 
 pay for the issue. Infrequently this is the case: A grow- 
 ing settlement, in its ambition to anticipate the future too 
 far ahead, may rashly bite off more than it can masticate, 
 and as a result, complications arise. Dealers in municipal 
 bonds wish to avoid this possible danger even when it is a 
 remote contingencv. Monev is a hard taskmaster. It has 
 no sympathies. However, considering the total obligations 
 of the multitude of our United States communities, esti- 
 mated in the neighborhood of $10,000,000,000, they have 
 had such an unusually satisfactory record as safe invest- 
 ments that investors need no other reassurance from the 
 bankers than that their legality is beyond question and the 
 amount of the issue is within reasonable bounds. 
 
X. THE AMAZTXn X'ArMKTV OF KATLHOAD 
 
 BONDS. 
 
 Til tlic issuance of bonds, onr railroads have been very 
 prolific. Xot only are they possessed of an insatiable a])- 
 petite for continuous sui)})lies of new capital, sometimes 
 for the logical jnirpose to provide for legitimate needs, and 
 on other occasions to satisfy the desire for new worlds to 
 conquer, but, to give their bonds suitable names, the makers 
 have almost exhausted the financial vocabulary. 
 
 The average investor, unless thoroughly acquainted 
 with the difference in bonds, Avill nowadays need a financial 
 text-book to distinguish one railroad bond from another, 
 and even then he may not be in a position to judge their 
 relative and intrinsic values. There are so many different 
 bonds as to recall the 57 different varieties of pickles made 
 commercially famous by a certain purveyor of condiments. 
 While there are not exactlv that manv different kinds of 
 bonds, the total is dangerously near the number. 
 
 Still the railroads are not wholly to blame for this sit- 
 uation. As has been pointed out in a previous section, the 
 early builders of our railroads never, for one moment, 
 thought their properties would ever grow with the giant 
 strides that have characterized their progress. Early in 
 their history, by erring on the side of conservatism, in 
 pledging all their assets as collateral for loans, which is all 
 ])onds really represent, thoy made it iiii]-»ossiblo in aftc^r- 
 years to directly mortgage their ]>ro])erti(\*=^ over again. 
 Thus they were com])elled to resort to other devices when 
 it became necessarv to borrow more monev, and this ac- 
 counts for the many varieties of bonds they have created. 
 The earliest railroad bond was the first mortgage bond. 
 Down to this day it is the leader among tlu^ best of bonds, 
 
 64 
 
INVESTMENTS AND SPECULATION 55 
 
 a fact that is firmly established by the rehitively small in- 
 come it yields, compared to other bonds issued by the 
 same railroad. As tliey possess the first legal rights to the 
 assets of the road in the event of financial embarrassment, 
 the security is usually accepted as an absolute guarantee 
 of the safety of the funds invested. 
 
 Of course, this does not api)ly to all first mortgage rail- 
 road bonds— onl}^ to the old-established properties. Again, 
 a first mortii'aire railroad bond does not necessarilv mean 
 that it is the first lien on all the property. The mortgage 
 may be on only such property j^ledged under the mortgage 
 as is especially drawn to cover that particular issue of 
 l)()nds. A large trunk line may have outstanding a dozen 
 or more first mortgage bonds, each bond covering a i)art of 
 the main line, and not infrequently, branch lines. 
 
 Our great railroad systems are not the result of the orig- 
 inal 2:)lans of their first builders; these men may have had 
 a nebulous idea, at the beginning of their project, of a sys- 
 tem from coast to coast, or covering a certain section of the 
 country under their control with a gridiron of rails, Init, 
 realizing all this would take time, thev contented them- 
 selves with building their road in sections, allowing the fu- 
 ture to take care of the logical development of their prop- 
 erty. 
 
 While Henry Villard planned the Xorthern Pacific, 
 other brains completed it. Ilarriman merely completed 
 the unfinished Union Pacific. He simply moulded his great 
 Pacific railroads out of what remained of the l)ankrupt 
 Central Pacific, the construction of which the Goveniment 
 aided by large sul)sidies. TamoR J. TTill never had any idea, 
 when, for a small sum of money, he secured control of a 
 jerkwater ^linnesota railroad, that eventually it would de- 
 velop into that marvelously rich transcontinental railroad 
 — the Great Northern of today. 
 
 It is by a process of evolution that a railroad's capital 
 obligations gi'ow. The one keeps pace with the other. 
 
56 LOUIS GUENTHER 
 
 Twenty years ago it never entered the head of the audacious 
 and far-sighted Cassatt, the President of the Pennsylvania 
 Railroad, at the time when the road determined to build a 
 terminus in New York City, that the Long Island Railroad 
 would one day become absolutely necessary for its expan- 
 sion, as has since proved the case, for the control of the 
 Long Island has given the Pennsylvania a commanding 
 position over the greater part of the profitable suburban 
 traflfic originating out of New York City — a business which 
 alone is regarded as capable of taking care, without de- 
 pending upon the other revenues, of the Pennsylvania's 
 huge investment of over $100,000,000, which the road spent 
 to secure a foothold in Xew York City. 
 
 If the histories of our other leading railroads were 
 carefully searched, similai' conditions would be found 
 where the roads have exjianded in entirely different direc- 
 tions from that planned by their original builders. Their 
 remarkable and ra}tid development has brought witli it 
 quite naturally some very unusual phases of financing. The 
 main lines of all the principal railroads, through the enor- 
 mous development of their traffic, long ago quickly out- 
 grew the funds raised on their first mortgage bonds. Then 
 arose the necessity of providing additional capital to take 
 care of the increased business through some other form 
 of bond against tlie very same i)roperty, although there 
 already existed liens upon it. But as there was sufficient 
 equity above the mortgage, tliis st(*p was justified. 
 
 A clear idea regarding the several classes of bonds out- 
 standing can be more easilv formed bv classifving them 
 and giving a brief description of each. It should l->e born^^ 
 in mind, however, that these definitions are not specific, 
 ])ut a]i}>ly only generally to each class. There are so many 
 peculiar features associated with railroad bonds that it 
 would be impossible to treat specifically of each issue un- 
 less the bonds of each railroad were described. Such a task 
 would require a liook more tlian twice the size of this 
 
INVESTMENTS AND SPECULATION 57 
 
 volume. For that reason tlio description I shall give of 
 each, I feel vriW at least suffice to fix its character in the 
 reader's mind. 
 
 The consolidated bond is a bond wherein is merged 
 a number of bonds previously issued. A railroad may 
 have created in former years a series of bonds directly 
 secured by its physical assets. Some of those bonds may 
 have been placed when interest rates were high, while 
 the other bonds were sold in later years at a time 
 when it was much easier to borrow capital than at the 
 earlier period. The railroads, to escape this situation, 
 evolved what is known as the consolidated bond. This was 
 done through the making of a general, or what is styled, 
 a blanket mortgage, providing that amounts of such con- 
 solidated bonds be retained by the road to equal the bonds 
 already outstanding on the property, so as to replace them 
 when they fall due. In this manner the railroads were in 
 a position to obtain additional funds without pledging ad- 
 ditional collateral. 
 
 Almost similar in character are refunding bonds. 
 Originally, they sprang into existence as a means where- 
 by the railroads could refund high interest-bearing bonds 
 which, when the road was first building, it was neces- 
 sary to sell to tempt capital into the project. It was 
 tlio i^i-actice in the earlv davs of railroad buildino: to 
 make a loan for fiftv vears. Usuallv the interest paid was 
 6 per cent; sometimes it was as high as 7 per cent. What 
 was further to the detriment of these early loans, was that 
 no callable provisions were embodied in the mortgage; 
 therefore these bonds had to run until their expiration. Al- 
 most fifty years covers the longest period of development 
 in our steam railroads. Fifty years takes us back to the 
 very beginning of our Civil War, a period when the con- 
 struction of railroads was still in its earlv stages. In con- 
 sequence there has matured and will mature, within the 
 next decade, a number of these earlv issues of railroad 
 
58 LOUIS GUENTHER 
 
 bonds. It is to take up these bonds as fast as they mature, 
 and to secure additional capital as found necessary, that 
 refundiuLj bonds bearing a lower rate of interest have been 
 and are ))eing issued. 
 
 The so-called general morfgafje bond may or may not 
 have other bonds ahead of it, but more often it will be found 
 that such is the case. The purpose behind such a bond issue 
 is to have some day, when all prior lim and branch line 
 bonds have matured, but one kind nf bond outstanding. 
 These bonds are also issued in large amounts to provide a 
 railroad's treasui'v with a reserve fund in secui'ities on 
 which to depend for additions and extensions as future de- 
 velopment may demand. 
 
 As its name implies, an extension bond is a ])ond created 
 for the purpose of raising funds to extend the railroad. 
 Usually the extension is pledged to secure the bonds. Such 
 bonds may be named first mortgage extension bonds, or 
 merely extension bonds. A divisional bond is almost exactly 
 the same, it being an obligation of a division on a railroad 
 distinct from the rest of the system, likewise a branrJi line 
 bond. There are many such bonds in existence. 
 
 Among the bonds of some of our railroads will ])e dis- 
 covered what are called unified bonds, meaning a bond 
 created to unifv in one issue a number of underlving l)onds 
 and to reduce the interest, which differs on the several is- 
 sues, into one rate. Other railroads will call a bond similar 
 in purpose an adjustable bond, implying that with the issue 
 the intention has been to adjust the bonded debt into one 
 class and have one given interest rate. 
 
 A lien bond denotes the obligation in accordance with its 
 number or name, as, for example, a first lien bond is really 
 the (lii-ect mortgage bond, although some railroads call this 
 particular issue a prior lien, im]>lying it has ]n-eferences 
 over all other liens or bonds outstanding. A seeond lien 
 bond is like a second mortgage. A third lien follows in se- 
 quence and so forth. Quite naturally it may be assumed 
 
INVESTMENTS AND SPECULATION 59 
 
 that each lien bond on the same coHateral has behind it a 
 lesser degree of security than the lien ahead of it. 
 
 Often a railroad plans improvements on a certain section 
 of the road already covered by a mortgage, and raises the 
 capital by selling what is knovm as an improvement bond— 
 a bond presumably secured by the improvements contem- 
 plated, although in reality subject to bonds already in exis- 
 tence, inasmuch as the improvements can have little value if 
 detached from the underlying structure. 
 
 The railroads likewise have found it convenient, when 
 they wish to exj^and, to acquire other roads. This is often 
 a much cheaj^er method than to construct a new line in the 
 same territory. This has brought into existence what are 
 called puvchnsc line bonds, the proceeds of which enable the 
 railroad to secure control of a rival of a feeder. These 
 bonds usually are a lien on the acquired road, subject some- 
 times to bonds that may be already pledged against it. 
 There is also the consfriiefion bond, a security issued for 
 capital to undertake new construction. There is the pur- 
 chase money bond, akin to the purchase line bond, only a 
 little broader in scope in that it may mean that the money 
 can be used to purchase something else than another road. 
 There is the tax exempt bond, so named because it is free 
 from taxation bv state or citv, not through anv legislative 
 provision, but by the mere fact that the railroad itself has 
 agreed in its mortgage to take care of all the taxes, or it 
 may, by legislation, be freed from all taxes in certain states. 
 Here it might be mentioned that in some states, in order to 
 increase the num])er of desirable securities into which the 
 funds of its savings banks ma\' be safely invested, tax-free 
 provisions are held otit and also provisions whei-eby certain 
 types of bonds become legal for investment for the funds 
 of such institutions. This explains the phrase so frequently 
 occurring in the circulars of bond dealers: "legal invest- 
 ments in such and such states." Serial bonds are like lien 
 bonds, as, for example, the Chicago, Milwaukee & St. Paul 
 
60 LOUIS GUENTHER 
 
 general mortgage bonds. The total issue is $39,978, 000, and 
 of these bonds a little over $31,000,000 comprise the Series 
 A bonds and the remainder are the Series B bonds. A rail- 
 road finds it sometimes convenient to split a large bond issue 
 into different series and name the several issues in this man- 
 ner to c:ive them a distinct identitv and maturitv. 
 
 The terminal bond is usuallv secured bv the main station 
 property owned by a road. This property, consisting of 
 valuable real estate, is at least now-a-days kept distinct 
 from all other assets and used as a collateral to secure sep- 
 arate loans. This idea is further applied to other prop- 
 erty owTied by a railroad, not directly associated with its 
 main business, as in the case of the road's harbor or water 
 business. A number of our roads, for the development of 
 this traffic, have raised money for the purchase of ferry 
 boats, lighters, vessels, and tug boats, all of which it pledges 
 for a separate loan, and each bond is specified under a sep- 
 arate name so as to easily distinguish it. Similar is the 
 case with bridge bonds, directly secured by certain bridges 
 a road has built to span certain streams. Tunnel bonds are 
 issued for the same purpose. 
 
 By a joint bond it is usually inferred that the bond 
 is jointly associated with some other bond in a partic- 
 ular lien. An nnderlyinc) bond is named thus to dis- 
 tinguish it from another bond on the same pro]ierty. A 
 redeemable bond implies that the issuing company re- 
 serves the privilege of calling upon the holder for the re- 
 turn of the bond, with accrued interest, at a specified price. 
 There are also issued bv the railroads, eanal bonds, timber 
 bonds, coal bonds, land grant bonds and so forth, each is- 
 sued against particular property, and in many instances 
 they are valuable. Take, for instance, the Reading, 
 the Lackawanna, the Delaware & Hudson, the Jersey Cen- 
 tral and the Lehigh Valley; their coal properties are among 
 the most valuable of their entire assets, as on the other hand 
 are the land grants of the Southern Pacific, the Union Pa- 
 
INVESTMENTS AND SPECULATION 61 
 
 cific and the Canadian Pacific. The land, originally granted 
 these roads by their respective governments to encourage 
 their development, has increased enormously in value 
 through the transportation facilities which have been ac- 
 corded them, and through the influx of population. 
 
 There is also what is styled a reorganization bond, an 
 oblii;-ation issued at the time when a financiallv embar- 
 rassed railroad was reorganized and again put on its feet. 
 There is the sf aw peel bond, stamped for some reason or other. 
 This is a rare bond, the Atchison being one of the very few 
 railroads having a bond of this description. Then there is 
 the registered bond, taking its name from the privilege ac- 
 corded the holder to register his name and address and the 
 amount of his bonds on the books of a railroad as a pro- 
 tection against loss or theft of his bonds. AVhen this is done 
 the bonds can only pass from one holder to another by a 
 transfer on the books, for bonds to be quickly negotiable, 
 are made out simply to bearer. 
 
 Sinking fund bonds derive the name from a provision 
 that the issuing company agrees to redeem each year a spec- 
 ified number until thev are all automatically retired. Some- 
 times a railroad carries the redeemed bonds in its own 
 treasury, using the coupons to help pay the interest on the 
 outstanding bonds, or it may agree in the mortgage to set 
 aside each year a certain per cent of the earnings as a sink- 
 ing fund to automatically retire the bonds when due, the in- 
 terest on this money helping to defray the interest on the 
 bonds. 
 
 There are also guaranteed railroad bonds, consisting 
 of bonds of controlled, leased or absorbed lines, whose 
 bonds are guaranteed by the controlling lines. Sometimes 
 these bonds are guaranteed, both as to interest and princi- 
 pal, meaning that if there is a default, the guarantor will 
 reimburse the holders in full. Some of these bonds are 
 guaranteed only as to interest, as in the case of the bonds of 
 the Western Pacific, the interest on the first mortgage 5 per 
 
62 LOUIS GUENTHER 
 
 cent ])()uds being gnarantccd by the Dcnvei' & Rio Grande, 
 but not the principal. 
 
 A class of railroad bond which in late years has jumped 
 into great poi)uharity, is the equipment bond. Nearly every 
 railroad has one or more such issues, some of the larger 
 roads having many. These bonds are secured bv the rolling 
 stock consisting of locomotives, passenger coaches and 
 freight cars. It can easily be inferred what constitutes their 
 safety in the opinion of investors when it is taken into ac- 
 count that without equipment a railroad is useless and its 
 tracks would soon consist of two streaks of rust. 
 
 Railroads have gone into receivers' hands, suspending 
 pa;^^nent of interest on a portion, if not all of their bonds 
 until they could be refinanced, but rarely have even receivers 
 avoided paying promptly the interest on equipment bonds, 
 realizing the absolute necessity of retaining the equipment. 
 Being easily moveable, this equi^unent gives the bondholders 
 a conveniently saleable collateral in the event they would 
 have to take it over to satisfy their loan, and then it would 
 not be possible to operate the road unless other equipment 
 w^as purchased. 
 
XL PUBLIC SERVICE BONDS. 
 
 There is a class of corporations owing their existence 
 to special privileges granted by communities to furnish a 
 service to the people, pi'oviding greater comforts and mak- 
 ing inter-conmiunication more convenient. Such corpora- 
 tions are known as public utility or public service com- 
 panies, and comprise those engaged in supplying transpor- 
 tation facilities, gas, electric light, heat, water and power. 
 In only one respect are these corporations analogous to cor- 
 porations in another field, and that is in regard to trans- 
 portation. In all other respects these corporations belong 
 distinctly to an individual class. The street car lines pro- 
 vide a convenient service to a congested community in 
 traveling cheaply and quickl}^ from one place to another. 
 They supply in a smaller sense the service the steam rail- 
 roads give in covering greater distances. 
 
 But only in recent years have public service cor- 
 porations come to occupy their present position of promi- 
 nence and importance as a field for the profitable ex- 
 ploitation of capital. It might also be stated 'that the 
 golden age, if there can be said to be such in the his- 
 tory of corporations, came to them with tlie advent of 
 electricity, that subtle force which introduced an eco- 
 nomic revolution in low operating cost. In the days anti- 
 dating steam and electi'icity, when horse cars were the mode 
 of transportation, the service was so slow there was little 
 profit in the business and next to nothing if the capitaliza- 
 tion was large. Nor was there much improvement with the 
 change from horse cars to cars propelled by cable. AVhile 
 it was a step forward to haul cars in trains of two or more 
 coupled to a cable car, the coal required to provide the power 
 
 to run the cable, ate up almost all that was saved by dis- 
 cs 
 
64 LOUIS GUENTHER 
 
 pcnsing with horse power. Likewise breakdowns occurred 
 so frequently with cable power as to make that an expen- 
 sive item in the operating cost. All these disadvantages, 
 however, were finallv overcome with the advent of the first 
 electric trolley car. The cost of producing power by elec- 
 tricity was reduced to a minimum. It made possible trans- 
 portation facilities to serve remote sections of large cities. 
 It gave to the smallest towTis a street car service— a direct 
 stimulus to growth. But what may be regarded as the most 
 phenomenal development has been the upbuilding of inter- 
 urban traffic, which is today making electrical roads keen 
 and aggressive competitors of the steam roads. All this is 
 possible because it costs less to operate the lines and the 
 service is maintained at low cost and is more efficient. 
 
 In what strong position electric interurban transporta- 
 tion is entrenched in this country will be readily appreciated 
 when it is known that it is possible now to start in a trolley 
 car, for instance from New York City, and almost cross the 
 whole state. There are breaks in the lines in onlv one or 
 two places which are not yet bridged by connecting electric 
 roads. The interurban practically parallels the New York 
 Central Railroad all the way from New York to Buffalo. 
 In fact thev have become such keen agc:ressors for the shc^rt 
 haul business, which, by the way, is the most profitable 
 traffic, as to compel the big railroads in self defense to ab- 
 sorb the principal electric interurban lines in order to main- 
 tain their dominating position. The New York, New TIaven 
 & Hartford was actually forced to take under its wing, 
 through a separate c<U']")oration, the interurban lines touch- 
 ing every place of impoi'tance in Connecticut and Massa- 
 chusetts, or face the penalty of heavy inroads u]ion its pas- 
 senger and light freight business. The management of the 
 Southern Pacific, seeing far ahead the possible encroach- 
 ment the electric roads in Southern Calif(U'in'a might 
 make u]K>n its earnings, did not wait until this stage was 
 reached, but secured control of all the important lines at 
 
INVESTMENTS AND SPECULATION 65 
 
 the first opportunity presenting itself. Today a traveler 
 can, by means of these long-distance trolley lines, reach al- 
 most every part of Ohio. In Indiana, similar conditions 
 prevail, as also in the larger portions of Illinois and Penn- 
 sylvania. 
 
 Nowadays a person may obtain a berth in a trolley 
 sleeper car in the evening at Dayton, Ohio, and be in 
 Indianapolis early the next morning. He may ti'avel in 
 similar comfort from Peoria to St. Louis over the Illinois 
 Traction lines. All this but gives a faint idea of the re- 
 markable evolution electric power has brought about in 
 transportation. There are prophets, whose claims are by 
 no means disbelieved, who say that it will not be long be- 
 fore the monster engines used now to haul long trains of 
 passenger coaches and freight cars will eventually be dis- 
 placed and become antiquated and a memory, as are the old 
 horse cars of twenty years ago. That this is the tendency 
 is borne out by the present use of some railroads, notably 
 the New York Central and New Haven, of large electrical 
 Westinghouse motors. The experiment is even now being 
 tested of propelling cars with electric storage batteries so 
 far with some measure of success. If this new power is 
 perfected, even greater economy in operation will be in- 
 troduced, dispensing as it will, with trolley wires and costly 
 power-generating stations which it is now absolutely neces- 
 sary to maintain. The interurban electric roads have even 
 another important advantage over their older rivals, the 
 steam roads, in that they can stop for passengers anywhere 
 desired, by the motoraian simply turning his controller. 
 The steam roads can only stop at designated stations ac- 
 cording to schedule. 
 
 That huge amounts of capital have gone into these 
 projects occasions no surprise, nor is it strange that 
 we should witness the increasing favor the public is show- 
 ing towards public service corporation securities, especial- 
 ly those of the more consei'\'ative type. Yet the evolution 
 
 B.VII— 5 
 
66 LOUIS GUENTHER 
 
 from one form of motive powt-r to aiiothci- lias brought 
 some stranji^e changes in its train. In New York City, 
 the old lines, already overcapitalized, were compelled, 
 with each change or step forward in economy of operation, 
 to increase their capital burden, with the result that in the 
 end they collapsed, in spite of the fact that in a city like 
 New York, wiiere there is such a density in population, the 
 revenues derived from carrying passengers from one part 
 of the city to another should be exceedingly profitable. But 
 by adding obligation ui)on obligation to their capital, the 
 New York traction financiers succeeded in making it ob- 
 ligatory on some of the lines to earn profits on as much as 
 $1,000,000 capital per mile and all on nickel fares. Small 
 wonder that the end w^as bankruptcy and such a tangled 
 state of affairs that a long period must elapse before the 
 New^ York surface lines can be successfully extricated from 
 their financial embarrassment. Charles T. Yerkes brought 
 about a similar state of affairs in the West Side and North 
 Side lines in Chicago, which required years to readjust, and 
 only after disastrous losses were sustained by thousands of 
 shareholders. Philadelphia is similarly afflicted with an 
 overcapitalized traction system. Happily, these cases are 
 only the direct results of an evil proceeding from the de- 
 sire of the interests in control to fatten their fortunes at 
 the expense of the public and investors. A\'here there is a 
 normal cai)italization and the properties under the control 
 of honc^st and conservative management, they have proved 
 for their shareholders a more than satisfactory source of 
 revenue, and the secured obligatioils, like the bonds, have 
 sho%Mi themselves among the safest fomis of investment. 
 But in judging this class of investment, there are a num- 
 ber of im])ortant factors which should l)e taken into consid- 
 eration. First and foremost, is the franchise under whieh the 
 pu])lic service corporati(Ui operates. Especially is this of 
 importance as far as the bonds are concerned. The fran- 
 chise is the kevnote of their success in business. AVe have 
 
INVESTMENTS AND SPECULATION 67 
 
 seen how imfortimate it sometimes turns out for a public 
 service corj^oration, when its franchise expires, as in the 
 case of the traction companies serving the cities of Chicago 
 and Clevehmd, and to a less degree likewise in Toledo and 
 Detroit. The difficulties between the cities of Chicago and 
 Cleveland and the traction companies are now adjusted on 
 terms mutuallv satisfactorv to both interests, but not with- 
 out considerable loss to shareholders and bondholders alike. 
 In Detroit and Toledo, the renewal of the franchises still 
 remains open, the cities and the companies not being able 
 to arrive at a settlement of their troubles. Eventuallv their 
 
 « 
 
 difficulties will be amicably adjusted, as the jDublic has al- 
 ways shown a disj^osition to be fair. 
 
 Public utility corporations imfortmiately are in a vul- 
 nerable position to become the shining target for ambitious 
 politicians, who, when they find they cannot win votes by 
 any other propaganda, as a last resort, turn upon these 
 corporations in their own community. By making it ap- 
 pear that they are in business to oppress the people, they 
 endeavor to arouse an agitation for the fantastic scheme 
 of public ownership and operation. It is a useful propa- 
 ganda to win votes. In most of the cities where this scheme 
 has been tried, it has proved a flat failure. And failures 
 they will continue to be until the average politician and 
 henchmen who feed at the public crib, develop capacity 
 as good business men. But as long as these clashes take 
 place, the lengih of a company's franchise is an all-impor- 
 tant question in 2:)roperly appraising its securities for in- 
 vestment and speculative puii^oses. 
 
 If the franchise expires after a company's outstanding 
 bonds mature, some authorities contend thev are safe in- 
 vestments, providing the net earnings indicate a sufficient 
 margin in excess of the fixed interest charges. In this con- 
 tention they are partly correct, since, whether the corpora- 
 tion redeems its bonds or not, the expiring loan in some man- 
 ner must be paid. 
 
68 LOUIS GUENTHER 
 
 A corporation's management, is, in my opinion, of equal 
 importance. If that management follows a policy of cater- 
 ing to public opinion and bends every energy to supply 
 its products to the community at a reasonable charge, after 
 allowing for a fair profit, the probabilities are that the com- 
 munity and the corporation will exist in peace. It has been 
 demonstrated in a number of instances that such wiselv 
 managed properties have had public opinion liohind thorn 
 when attacked by designing politicians. 
 
 Some public service corporations are very fortunate in 
 owning perpetual franchises. This places them in an un- 
 assailable position. They do not face the danger of a possi- 
 ble contest over the renewal of their privileges. The only 
 danger that may confront them is where the community 
 grants a rival company another franchise, but this does not 
 always turn to the public's advantage. This is at least 
 true as far as concerns the use of the telephone. AVhen it 
 becomes necessarj^ to use rival telephones to give a satis- 
 factory sei*\4ce, it is very seldom profitable. There is no 
 advantage where there are two charges witliout obtaining 
 anv additional benefit, when one service can do the work 
 equally well. Generally speaking, this advantage affects 
 equally all public ser\ace corporations. 
 
 There is one development in the recent financing of pub- 
 lic service corporations which should not be overlooked— the 
 tendencv towards conservatism. In this, those directlv con- 
 cerned in promoting them have shown that they have ab- 
 sorbed a lesson from past experience. They now build their 
 structures on firmer foundations. Xew ])onds issued for 
 improvements are on a more reasonable basis. In many 
 cases it is stipulated that additional bonds shall only be sold 
 up to from 75 to 85 per cent of the actual cost of additions 
 and extensions, thus creating from the very beginning a 
 substantial equity above the bonded debt. Where it is pos- 
 sible, the builders of interurban trolley lines secure private 
 rights of ways to overcome difficulties regarding franchises. 
 
INVESTMENTS AND SPECULATION 69 
 
 The states also have realized the wisdom of cultivating 
 capital rather than discouraging it from entering upon pro- 
 jects designed "to serve the public convenience. Public serv- 
 ice commissions have been created to deal intelligently 
 with this problem. These commissions are vested with the 
 power to allow the corporations under their control to in- 
 crease their capital as well as to refuse the privilege when 
 it appears that the necessity for more capital does not really 
 exist. It is also within the power of these boards to refuse 
 franchises when, in their opinion, a rival corporation, in- 
 stead of benefiting a community, adds only a burden. While, 
 of course, this system of control has some disadvantages, 
 the general good they have thus far accomplished, out- 
 wei2:hs the drawbacks. At least it shows a desire on the 
 part of the states to take the public utility corporations 
 out of politics, which is more or less at the bottom of most 
 of the friction between corporations and communities. 
 
 However, it cannot be denied that, for some years, the 
 public service corporations have as a class, made such an 
 excellent showing as consistent revenue producers, that they 
 have become popular with the investment public. The panic 
 of 1907 and the year of depression which followed gave 
 them an excellent opportunity to demonstrate their stability. 
 A great many of the companies turned this hard corner 
 with increased earnings, whereas the earnings of corpora- 
 tions operating in other fields showed a sharp falling off. 
 
 There is a logical explanation for this. It must be borne 
 in mind that the public can save little on gas, light, heat or 
 power. It must ride back and forth from business. What 
 is lost by a smaller consumption is far more than made up 
 by the increased demands of a growing population. Sta- 
 tistics prove that. 
 
 Then, also, well-managed gas, heat and electric light 
 corporations have carried on a campaign of education, 
 showing their patrons how their service may be used 
 
70 LOUIS GUENTHER 
 
 in other directions, thus increasing their patronage. 
 Electric ranges and gas stoves have proved splendid drum- 
 mers for business. The uses of electricity for advertising 
 have also been a source of considerably increased revenues. 
 Electric power plants as well as plants generating power 
 fi'om water, have made a pennanent place for themselves 
 wholly by the economy thoy have introduced in the cost of 
 power. 
 
 All these factors are worthy of consideration in so far 
 as they explain the influences behind these corporations 
 working for their success. As they are in a business of 
 providing actual necessities, they are indispensable to a 
 community. The investor, therefore, is assured that the 
 business has, at least, solid gi'ound as its foundation. 
 
 When electricitv was first discovered, it raised the fear 
 that the end of gas as a source of light had been reached, but 
 this a])prehension has proved unfounded. ^lore gas is con- 
 sumed today than ever before and the consumption is likely 
 to continue to increase. AVhile interurban electric roads 
 have done a large business and are aggressive competitors 
 of the steam roads, it is nevertheless a fact, as is shown bv 
 their increased revenues reported to the Interstate Com- 
 merce Commission, that the railroads are doing a larger 
 business than ever before. The hydro-electric power plants 
 have by no means cut into the output of the coal mines. In 
 fact, our constant growth in po]">ulation can be relied up- 
 
 071 to use all the ?iew means available for creating power, 
 light, transportation and heat. 
 
 Another fact worth v of comment, is the tendencv to- 
 wai'ds concentration of management of public service cor- 
 porations into holding companies. Quite a number of such 
 eorporatioTis have been organized and as a general rule have 
 been successful. One of these companies controlling a large 
 mimber of subsidiary companies operating in cities has 
 earned exceptional profits for its shareholders. 
 
 These holding companies, unlike their namesakes, op- 
 
INVESTMENTS AND SPECULATION 71 
 
 orating in the railroad and industrial field, are virtually 
 imnume from the restrictions placed by the Sherman law 
 over all interstate commerce, or business transacted be- 
 tween different states. Their business is all concentrated 
 in the commimities which their plants supply. Only when 
 they control electric roads crossing two states are they sub- 
 ject to the law Congress enacted to control trusts from re- 
 straining free competition. 
 
 'As it is compulsory in nearly all states for public service 
 corporations to publish detailed statements of earnings, the 
 purchasers of these securities have little difficulty in deter- 
 mining the investment opportunities and speculative possi- 
 bilities in their bonds and shares. 
 
 The truth is that there is more compulsory public- 
 ity governing this particular class of corporation than with 
 any other class. The reason is that the public, by whose will 
 they exist, have more than an ordinary interest in their 
 success and behavior. 
 
XII. OTHER BOXDS. 
 
 There still remain other means by aid of which cor- 
 porations manage to borrow money, but they do not involve 
 the necessity of pledging any tangible assets, as is the case 
 with the different ])onds described in the previous section. 
 
 It is not by their names that these bonds may be known, 
 for thev, too, are known as bonds. It is bv their character 
 that thev should be known, bv which I mean that the investor 
 ought to look carefully into them, for, masquerading, as 
 they do, under the general name of a bond, there is always 
 the possibility of acquiring a security without any intrinsic 
 value behind it, which fact is not discovered until after 
 something goes wrong. 
 
 Prominent among such securities is the income bond. To 
 the uninitiated investor, the word ' ' income ' ' has a confidence- 
 inspiring swing to it, but in all realit}^ the so-called income 
 bond only pledges the corporation to pay the promised in- 
 terest when it is earned, and not otherwise. A case in point 
 where such a bond proved no better investment than a non- 
 producing stock, was that of the income mortgage bonds 
 of the Central Railroad of Georgia, of which there are three 
 —the first, second and third preferred mortgage income 
 bonds. On the second and third income bonds, the interest 
 has not been paid for some years, and finally, in exaspera- 
 tion, the holders of the second income bonds brought suit 
 to force the company to pay them their interest first before 
 diverting the net profits to improvements. AVhile they won 
 their case, their predicament during the years when no re- 
 turns were received convevs its own lesson of the insecu- 
 rity rather than the securitv of the income that lurks be- 
 hind an investment in income bonds. Some stocks are pre- 
 ferable to income bonds. Such bonds should be thoroughly 
 
 72 
 
INVESTMENTS AND SPECULATION 73 
 
 investigated before accepted as a desirable investment ; es- 
 pecially should the profits the company is earning and has 
 earned over a period of years be looked into, for it is from 
 this source the pajTiients of the interest on the bonds are 
 derived. 
 
 There is also the collateral bond, not differing very 
 much from the income bond, except technically. Bonds 
 of this character have as their security stocks or bonds 
 in other corporations. There are many of this class of 
 bonds in existence. They are the outgrowth of the tend- 
 ency in recent years of the stronger corporation to ab- 
 sorb the business of rival corporations, and they are also 
 the direct outgrowth of the holding company plan. The 
 holding company is a form of corporation which is not it- 
 self directly engaged in business, but which holds the 
 controlling stocks and bonds of actual operating corpora- 
 tions, and against the ownership of these securities they 
 issue their own stocks and bonds. It is these holding com- 
 panies that have acquired the name of trusts. 
 
 In nearly every important industry may be found the 
 holding corporation. To mention a few, there are the Amer- 
 ican Tobacco Co., the International Harvester Co., the In- 
 terborough-Metropolitan, the Rock Island Co., the Amer- 
 ican Chicle Co., and the International ^Mercantile Marine, 
 all corporations owning the majority of the securities of 
 other coi-porations. These are only a few of them. 
 
 Some of these holding coi'porations have issued 
 bonds, pledging for theii* security either the stocks or 
 bonds of the subsidiary corporations. They are the col- 
 lateral bonds. Other corporations which do not exactly 
 come within the definition of a holding company also is- 
 sue such bonds. For this interest they depend upon the 
 earnings or income received from other underlying secu- 
 rities. 
 
 An applicable illustration of what collateral bonds are 
 is found in the Interborough-Metropolitan 4^ per cent 
 
74 LOUIS GUENTHER 
 
 collateral bonds. For each unit in this bond of two liundrcd 
 dollars, there is pledp:ed one share of stock, with a par value 
 of $100 of the Interborou.e:h Rapid Transit Pompany, which 
 operates the Subway in New York City. This underlying 
 company pays 9 per cent dividend each year on its stock, 
 which is equivalent to the 4^ per cent intorost paid on the 
 collateral bonds. 
 
 These bonds differ from income bonds onl}^ in that 
 their interest must be paid. This is an implied oblii^a- 
 tion. The interest is paid as long as the collateral se- 
 curities back of the bonds earn a sufficient income. When 
 this income falls off and a default takes place, the holder 
 of such bonds may take over the collateral by due process 
 of law. They then find themselves in the position of fall- 
 ing heir to other securities, either as stockholders or as 
 bondholders in the underlying corporations. The fact that 
 the securities were unable to earn enough to pay their in- 
 terest, in most instances does not improve the situation 
 much. From a standjxunt of safety, the majority of col- 
 lateral bonds, as a final analysis, cannot be ranked as suit- 
 al)le investments for any one dependent upon income and 
 seen r it V. 
 
 It mav well be said for some of these bonds that thev 
 are entitled onlv to the designation of bonds to distinL::uish 
 them from stocks, in that they })laee theii* holders in 
 the category of creditors of a cor])oration, whereas a 
 stockholder can only participate in the profits when there 
 are any to disburse. The one nuist l)e paid to maintain the 
 coiporation's solvency ; the other must take its chances. 
 
 Not infrequently a strong corporation employs its credit 
 merely as the sole security for an issue of bonds. At other 
 times, in addition to pledging its credit, other collateral may 
 be added. AVhere such l)onds are issued they are termed dc- 
 hcntnrc hands. In reality they are but a note like the plain 
 merchant's note such as banks discount every day without 
 calling upon the borrower f(»r any other security than his 
 
INVESTMENTS AND SPECULATION 75 
 
 name affixed to his note, acccptinp; his credit rating as suffi- 
 cient guarantee that the note \vill be paid when it matures, 
 or else if the bank is not wholly satisfied with the standing 
 of the maker of the note, it will demand, for added security, 
 that the note be endorsed by one or more persons satisfac- 
 tory to the bank. In the debenture bonds, a corporation, 
 instead of going to the banks for a loan, aj^proaches inves- 
 tors whom it is prepared to pay a fixed I'ate of interest for 
 a term of jTars, for the use of their capital. Such bonds 
 should be appraised by the rule ajDplied to a merchant's 
 note— on the credit standing of the maker, and this is us- 
 ually determined by the periodical statements of earnings 
 issued, indicating the profits in excess of all operating costs. 
 
 In the covvcrfihJc bond, modern finance has evolved a de- 
 vice to tempt forth the capital of investors who, while still 
 wishing to maintain their position as creditors of a cor- 
 poration, desire a speculative opportunity to share in the 
 future prosperity of the business. The convertible bond 
 serves this end. Such bonds carry a call upon another se- 
 curity at a given price, usually considerably in excess of 
 the market value at the time the bonds are issued. AVhen 
 the convertible price is reached, the holders of the bond may 
 exercise the privilege of exchanging their bonds into the 
 other security. The convertil)le l)onds of the Union Pacific is- 
 sued some years ago brought a round profit to those who held 
 them until the company's shares reached their conversion 
 price. The Atchison is another road where this also hap- 
 pened. Among the industrial corporations a striking ox- 
 ample is the American Telephone & Telegraph Company, 
 whose shares advanced to where it became profitabh^ for 
 the holders of an early issue of convei'tible bonds to exchange 
 them for the company's stock which was receiving 8 per 
 cent in dividend, in contrast to the smaller interest received 
 from the bonds. 
 
 Quite a number of our corporations have resorted 
 to convertible bonds as an expedient to make loans, but 
 
76 LOUIS GUENTHER 
 
 the successes attendant upon some of these issues by 
 no means cloak these securities with the character of 
 unusual investments. On not a few of this class of 
 bonds, the convertible privileges represent a forlorn hope 
 that an opportunity of making a profitable exchange may 
 present itself. Seldom are there any assets of a tangible 
 character ])lodged behind the convertible bond. If such 
 is the case, their character is stipulated in the mortgage. 
 They are considered as coming within a semi-spoculative 
 class of investments. For that very I'cason they should 
 be carefullv scrutinized bv investors. Their safetv largolv 
 depends upon the issuing company's continued prosperity. 
 
 With a description of a few more securities included in 
 the definition of bonds of a general character, I shall close 
 this section. 
 
 The most important of the securities which still re- 
 main to be described is the short term note— a useful fi- 
 nancial expedient in periods when there is a scarcity of 
 capital and, because of this condition, exacting interest 
 rates. To meet this situation, coi']-)orations borrow capital 
 for their pressing needs for only a short term of years by 
 means of notes running for a brief period, and agree to pay 
 interest on them in accordance with the current rate. Tn 
 hard times it would be folly for a corporation to make a 
 long term loan for two reasons, one of which is that such 
 a loan, at the curi*ent hi.L;li rates, would prove unusually 
 expensive if spread over a long time, and the other and 
 more important reason is the disastrous iiifiuence likely to 
 follow in depressing the price of the outstanding lionds 
 which a corporation had sold when there was a plethora 
 of monev and interest rates were low. 
 
 If the holder of a 4 per cent bond having still ten 
 years to run, saw an opportunity to replace it for a 5 
 per cent bond of his corporation which would not ma- 
 ture before their security matured, the natural inclina- 
 tion would be to exchange the one for the other. It is 
 
INVESTMENTS AND SPECULATION 77 
 
 to equalize the interest with the bonds already outstand- 
 ing, that short term notes are employed. This class of 
 securities crowd upon the market in panic years and in 
 the years of depression which follow. Other securities 
 might mature in these abnormal periods which must be 
 taken care of or capital may be needed for other purposes. 
 
 The late H. H. Rogers, rich as he was, found himself in a 
 tight corner in the panic of 1907. He was just finishing the 
 Tidewater Railroad and needed a few million dollars hur- 
 riedly. It was out of question to raise this money by offer- 
 ing first mortgage bonds, especially on an incompleted rail- 
 road. The banks were not lending any money except on 
 gilt-edged collateral. Mr. Rogers could not allow his cher- 
 ished ambition to fail in this critical period without strik- 
 ing a great blow at his prestige. He was forced to issue 
 short term notes carrying 6 per cent interest and had to 
 pledge to insure their security a large part of his invest- 
 ments in Standard Oil, and shares in banks and gas com- 
 panies—in all over $18,000,000, the income on which more 
 than a number of times provided for the interest on the 
 notes. Mr. Rogers' experience illustrates that periods are 
 reached in nearly every rich man's career when borrowing 
 monev is not an easv matter. 
 
 Nor do corporations escape the exactions placed upon 
 them by hard times. Municipalities enjoying in normal 
 times the best of credit, are forced to pay large interest to 
 borrow what money they need. A case in point is that of 
 the city of New York, Avhich although at one time, only a 
 few years previous to the 1907 panic, readily sold 3^ per 
 cent bonds at a premium, was forced to raise its interest 
 rate to 4^ per cent. 
 
 To the average investor the purchase of bonds is based 
 on the interest they pay, but that is not always the income 
 they yield. Figuring out income is a science in itself. A 
 bond may call for 4 per cent interest per annum and yet 
 may yield a larger income than a 5 per cent bond, due to the 
 
78 LOUIS GUENTHER 
 
 earlier maturity and to the fact that it is sellinj]^ at a dis- 
 count, whereas the other bond may run longer and he quoted 
 at a premium. A table is puljlished and used ])y all bond 
 dealers, bv which mav be determined what the income vield 
 is on each ]x)nd for the length of time it has to run, the price 
 it can be had for and the fixed rate of interest. 
 
 Reverting to short tenn notes, corporations by their use 
 finance their needs to bridge a period of tight money, de- 
 pending upon their ability with the return of easier con- 
 ditions to refund these obh'gations with a security which 
 calls for a more reasonable interest rate. Most of the large 
 railroads and industrial corporations have found these 
 short term (obligations a great convenience in trying times. 
 
 "We have what are known as trust receipt.^. These are 
 receipts issued by a trust comi^nny in return for se- 
 curities placed with them as custodians. These receipts, 
 like bonds, are issued in a negotiable form so that 
 dealings in them can be carried on readily. There are 
 voting trust receipts, a security protected by aui^ther 
 security for which a voting trust has been formed, con- 
 sisting of a number of directors. They are also nego- 
 tiable. The scheme of the voting trust is to maintain the 
 control of a corporation in cei^tain hands for a prescribed 
 length of time in order to insure one continued management 
 of its affairs. The idea when properly a2'>plied may turn 
 to a corporation's advantage, but sometimes it is used to 
 peiT)etuate, for a number of years, control in certain hands 
 without the necessit}^ of making heavy investments, which 
 would become the case were not all the stor-k iu a voting 
 trust. 
 
 Interim certificates are merely promises to deliver Ijonds 
 or other securities when they are ready for distribu- 
 tion and which mav not be enu:raved and all signed bv the 
 pro]ier officers when they are first offered to the public. In 
 their place, certificates, called interim certific<ites, issued to 
 bearer, are given to be exchanged when the other securities 
 are readv for delivcrv. 
 
INVESTMENTS AND SPECULATION 79 
 
 Last, ])nt not least in importance, is the cerfificnfe 
 of deposit, which, as its name indicates, identifies the 
 holder as havinc; deposited at a certain place the se- 
 curities described in the certificate. These certificates of 
 deposits are the outgrowth of the reorganizations of em- 
 barrassed corporations. When this unfoi'tunate situation 
 is reached, the more important holders of the securities 
 form a connnittee for the mutual protection of all the 
 holders of the same class of securities. An agreement is 
 dra^ATi up by attorneys, vesting this committee with certain 
 powers to effect a reorganization, and a call is issued to the 
 security holders to deposit their security with a designated 
 trust company. In signing this agTcement and upon deposit 
 of their security, the holder then appoints the committee 
 his agent or attorney to do all of the things stipulated in 
 the agreement and share ratably all the expenses his com- 
 mittee contracts for. The trust company which acts as a 
 depository issues a certificate of deposit, usually to bearer, 
 identifying the holder as the true owner of the securities 
 as described which have been deposited with it. Then, 
 when a reorganization has been brought about, whatever 
 new securities are authorized in the place of the old ones, 
 are exchanged for these certificates of deposit after all ex- 
 penses of the committee have been paid. Cei-tificates of de- 
 posit may apply equally to stocks as well as to bonds. They 
 are mei'ely mentioned here as a security which, applying 
 to bonds, may as well be described now as later. As their 
 very character shows an interest in a banknipt corporation, 
 there is hardly any necessity' to discuss their investment 
 value. That depends entiivly upon the security itself which 
 is pledged. If a first mortgage bond, then there may be be- 
 hind it more than enough property to protect the creditor in 
 full, including, even covering, the accmed interest. Rome- 
 times this does not appear to be the case, as, for example, the 
 first mortgage bonds of the insolvent Wabash-Pittsburg 
 Terminal Railroad. The holders of these bonds were com- 
 
80 LOUIS GUENTHER 
 
 pelled to fight to keep from haviug to take an inferior secu- 
 rity in return for the one thev now hold. The certificate of de- 
 posit, the negotiable instrument evolved by the reorgani- 
 zation idea, in our scheme of bringing to life once more our 
 prostrate corporations, is credited with owing its existence 
 to the ingenuity of J. P. Morgan, the greatest reorganizer, 
 more than to anvone else. 
 
 With a brief mention of commercial paper we shall have 
 disposed with this security. Essentially forming an invest- 
 ment more for banks than individuals, it will hardly inter- 
 est the student of finance unless he is shaping his education 
 towards a banking career. The degrees of safety in com- 
 mercial paper vary with the standing of the maker. Prime 
 commercial paper is the note with but simply the maker's 
 name. "With each endorsement there is indicated the exac- 
 tions placed upon the borrowers by the banks bef(n-e they 
 will make the loan. Yet this is not always true. The paper 
 of some large coi-porations, to make it readily saleable 
 throue^h note brokers, will carry a number of endorsements. 
 
XIII. IRRIGATION BONDS. 
 
 It is the history of every virile and progressive nation 
 that in time all of its land capable of subjugation to the 
 plow becomes occupied. We are in such a period now. Our 
 principal reservations, consisting of natural tillable land 
 originally set aside for the Indians, whom the country has 
 considered its wards, have all been opened for settlement 
 so that even this pre-empted land is now largely occupied 
 by white settlers. 
 
 But our population continues to grow. With its gi'owth 
 there has arisen a serious need to employ our arid lands for 
 agricultural purposes. Of such land we have enormous 
 stretches. Efforts are now made to reclaim these lands by 
 bringing water to them l)y artificial means. Not only are 
 we considering means by which the parched sands of our 
 different desert areas may be made to blossom, but we are 
 also hard at work planning how our swamp lands may be 
 redeemed for agi'icultural exploitation by draining them of 
 their stagnant ])ools and bayous. 
 
 Our po]nilati()n has gro\\Ti so large that every square foot 
 of ground that is possible to reclaim b}" artificial methods 
 is worth while saving. It matters not whether this can be 
 accomplished by irrigation or drainage. 
 
 Our o\\n government early recognized the possibility 
 of reclaiminc: its deserts bv harnessing mountain sti'eams 
 and turning their waters to beneficial use. The government 
 has already spent millions of dollars in building giant 
 reservoirs for the storage of water, and ditches to carry 
 this water to lands which needed it in order to become pro- 
 ductive. 
 
 Irrigation is ])v nu means a modern science. It is almost 
 as old as the human race itself. The ancient Egyptians of 
 
 B.vn— 6 81 
 
82 LOUIS GUENTHER 
 
 the Nile \'alloy depoDded upon it as early as in the time 
 of Ptolemy and had developed it to such a point that their 
 country was virtually the granary of the ancient world. 
 ^^'ith lis, lidwcvcr, ii'ri<:i;ation is a somewhat new problem, 
 as it was not necessary for us to go to the length of arti- 
 ficially watering land while there yet remained open for 
 settlement plentv of land well-watered ])v nature and cul- 
 tivable bv natural means. 
 
 Private capital, always keenly alive to opportunities for 
 profit, has also seen opportunities in the work of reclaiming 
 our large arid land areas. AVhat the Government could do, 
 capital felt it could do also. The result has been that within 
 the past few years a considerable number of privately or- 
 ganized irrigation projects have sprung up, capital for 
 which has been raised bv the sale of irrigation b(^nds. As 
 this class of bonds constitutes by no means a seasoned in- 
 vestment, it should ])e most carefullv considered before be- 
 ing selected as a profitable and safe medium through which 
 to make investments. 
 
 Already a large number of these projects have failed 
 because those back of them were inexperienced in this 
 particular field and allowed their optimism to becloud 
 their better judgment. It requires more than the mere 
 building of reservoirs and ditches to carry the water, 
 to assure the financial success of an irrigation project. 
 Not only is a continual supply of water requisite but 
 also the certainty of a sufficient number of farmers to settle 
 the land is necessary. Likewise, these fanners must know 
 how to cultivate successfully land supplied with the re- 
 quired water provided by artificial means, as irrigation is 
 a method of farming wholly distinct in character from that 
 followed on farm lands nourished by rainfall. 
 
 Our Government recognized the danger likely to arise 
 from the reckless exploitiition of irrigation sclu^mes and, 
 as a measure of protection for the farmer and investor alike 
 some years ago enacted what is kno"\^Ti as the Carey Act. 
 
INVESTMENTS AND SPECULATION 83 
 
 Under this act, authority was conferred upon the states 
 and territorial governments to pass upon the jjUms pre- 
 pared by privately organized irrigation projects for the con- 
 struction of reservoirs, ditches and laterals, or small canals 
 by means of which the land was to be fed with water. By 
 the same act rights to the available water supply were con- 
 ferred to prevent the overabsorption of the needed supply 
 by too many separate enterprises, but despite these wise 
 precautions, failures have occurred indicating how nnicli 
 judgment can err in an entirely new and untried held. 
 
 As irrigation bonds are a distinctly new security, it 
 is interesting to know on what they are based and how 
 they are issued. The capitalists behind these projects 
 aim to raise the money required to construct their res- 
 ervoirs, ditches and canals by the sale of first mortgage 
 irrigation bonds. The}' incorporate a company which is 
 to own all the facilities for storing the water and carry- 
 ing it to the land. They stake out the acreage for 
 which their company is to supi^ly water. They then sell 
 to newcomers the water rights for a fixed sum per acre. 
 To make the illustration clearer I shall say they ask $40 an 
 acre for their water rights. This gives the settlers perpet- 
 ual rights for the use of a certain quantity of water for their 
 land each season. To secure these water rights the farmer 
 gives a mortgage on his land. These mortgages are the col- 
 lateral pledged to secure the holders of the irrigation bonds 
 and as the fanners pay off their mortgages in easy install- 
 ments, the bonds are retired serially at different maturities. 
 The stockholders in these companies ex})ect their profits 
 from what is left after the bonded debt is cleaned up. 
 
 All this of course is feasible. Exj^eriments have proved 
 that the chemical elements in desert land, when properly wa- 
 tered, give the ground a richness and fertility which make 
 these lands prolific producers of certain agricultural prod- 
 ucts. The Twin Falls section of Idaho is a verv excc^llent 
 
 ft' 
 
 example of the large measure of success iJossible from the 
 
84 LOUIS GUENTHER 
 
 application of intelligent irrigation. Xot only has this sec- 
 tion of the state prospered in an exceptional degree by har- 
 nessing the mountain streams and diverting their waters 
 to the dry lands where most wanted, but, as a direct result 
 of the large agi'icultural population thus brought in, a num- 
 ber of prosperous towns have sprung up whirh would uovor 
 have existed under anv other conditions. 
 
 But the mere presence of water in arid countries is 
 not always a guarantee that dependence can be placed 
 upon a sufficient supply in dry seasons. Desert streams 
 are likely to thin out at the most critical time. Herein 
 lies one danger likely to threaten an ii'rigation project. 
 Skilled engineers of long experience are necessary to 
 gauge the quantity of the water supply, to build reser- 
 voirs in the I'ight places, to construct economically the 
 necessary ditches and canals so that there will be no 
 likelihood of the clogging up with the shifting sands in 
 the near future. Even then all these provisions do not make 
 for absolute safety of irrigation bonds. There must also be 
 the certainty that there is no legal flaw to the rights to the 
 water supply; also that there will be no disapj^ointment in 
 the sale of water rights sufficient to provide enough acreage 
 to redeem all the bonds and pay all the interest. The mere 
 fact that a reservior is constructed, also all the ditches and 
 canals, is not in itself a complete assurance of the safety 
 of irrigation bonds, as the farmer is supposed to pay off his 
 water rights in easy pa^^nents covering a stated number 
 of years and he can onl}" do it by obtaining his water regular- 
 
 A dry season is likely to cause an ii-rigation company 
 to default on its interest because it will be unable to collect 
 from the settlers their payments, unless behind the projects 
 are financial interests strong enough to see it safely through 
 an off season. Likewise until such projects are completed 
 and settlers for the land secured, the irrigation bonds it 
 issues, properly eonsidered, are construction bonds, that is, 
 
'INVESTMENTS AND SPECULATION 85 
 
 bonds of an incompleted enterprise whose interest must be 
 provided out of the treasury of the company until it is in 
 a position to earn revenues. 
 
 There are no bonds more speculative than bonds of this 
 character. In fact the interest their holders receive, in 
 most instances, comes directly from the very money they 
 pay in for their bonds. Because of this element of uncer- 
 tainty, it is of vital importance that the financial standing 
 of the backers of an enterprise, no matter what its char- 
 acter, be carefully weighed, to determine whether they are 
 strong enough to finance their project to completion. How- 
 ever bright the prospects may appear, no enterprise can 
 take advantage of them until it is first completely financed. 
 For the risk investors must assume in a project in the pro- 
 cess of construction, they should, in all fairness, receive, in 
 addition to the bonds they buy, a certain proportion in stock 
 as a bonus, for they speculate on the chances of success, and 
 should financial difficulties arise, which is always a possi- 
 bilitv, thev face an assessment in an effort to raise the 
 money to again put the enterprise on a going basis. 
 
 Some of the bankers who have handled such issues of secu- 
 rities have realized these elements of chance and have made 
 provisions to overcome them by guaranteeing their bonds, 
 both as to principal and interest, by the assets and income of 
 a going and prosperous concern. But not all bankers are 
 so far-seeing. The result is that in some of these issues 
 which have defaulted their holders have found themselves 
 in the distressing position of possessing a very insecure 
 bond and that thev could not be worse off had thev been 
 stockholders, instead of bondholders. 
 
 All this is clearly pointed out to the readers of this book 
 to acquaint them properly vAih the care necessary to exer- 
 cise in properly appraising the different classes of irriga- 
 tion bonds coming to their notice. 
 
 In theory, irrigation is practicable. Its value to this 
 country now and in the future cannot be disputed. As we 
 
86 LOUIS GUENTHER 
 
 gain a greater knowiodfico about its proper application, 
 there w^ll be less experimenting with other peoples' money, 
 as is always the ease when capital ventures into now and 
 untried fields. 
 
 Our Covernment, as late as 1910, authorized a large 
 issue of bonds, the ])roceeds of which ar<' to be used to 
 can-y foiw.Mid on a nnich larger scale, the ii-rigation work 
 planned by the Department of Reclamation. Those bonds 
 are to be redeemed out of the money realized l)y the 
 Government from the sale of water rights to the settlers. 
 
 Some of our western states, in an effort to reclaim their 
 arid lands, have arranged by legislation that certain dis- 
 ti-icts may organize into municipal districts and issue bonds 
 for irrigation puiT^oses. But their bonds are by no means 
 as safe as the bonds which the new government irrigation 
 laws authorize. They are in fact, in some instances, inferior 
 to irrigation bonds of privately organized enterprises. 
 These municipal irrigation disti'ict bonds depend for their 
 interest and redemption upon the ability of the connnu- 
 nity to pay the taxes. Tn a good many instances, the amount 
 of such bond issues is not based on the already existing 
 population, but on a future population that is expected 
 when the district receives the full benefit from the irriga- 
 tion planned by the issuance of the bonds. If the irriga- 
 tion project is a failure and the expected water does not 
 materialize, naturally the settlers then have no means to 
 meet their taxes and their lands which remain dry are hard- 
 ly then worth foreclosing upon. That this is possible has 
 alreadv been sho^^^l by the default of interest on a number 
 of such munici]ial irrigation district bonds of Colorado dur- 
 ing 1910 and 1911. 
 
XIV. BOXDS IN MINING ENTERPRISES. 
 
 Beyond all doubt there is no type of bonds more spec- 
 ulative than those issued against undevel()i)ed ventures, 
 whatever their nature, be it coal, silver, marble, lead, zinc, 
 gold or copper properties. For one thing they are se- 
 cured by an invisible asset, whose value can only be esti- 
 mated by the uncertain skill of mining engineers. 
 
 We are told, especially in connection with copper-mining 
 properties, that mining engineers have so far reduced their 
 profession to an exact science, as to be able to determine, 
 where indications of copper ore have been discovered, how 
 they may block out the ore and measure the amount underly- 
 ing the claims. This they claim can be done by drilling to get 
 at the percentage of copper to each ton of ore, and then, 
 by multiplying the one by the other, arrive at the value 
 of the underground deposits. In other words they contend 
 they can reduce mining to a point where there is no more 
 uncertainty regarding its ultimate outcome than in manu- 
 facturing. 
 
 I do not put any faith in this specious argument, at 
 least not so long as some of the most prominent mining 
 engineers continue making serious blunders in their esti- 
 mates. John Hays Hammond, who is regarded as one of the 
 foremost men in his profession, has repeatedly erred in his 
 reports on mining properties. 
 
 If it is possible to measure with any degree of certainty 
 the treasures Mother Earth conceals, it dues not reach far 
 beyond the coarser mineral formations like coal and marble. 
 The last mentioned, because it is of a quarry formation, 
 comes in vast quantities and wdiere found is of a perpen- 
 dicular formation, in layers or strata, thus permitting one 
 to place a certain reliance upon measurements. Coal, on 
 
 87 
 
88 LOUIS GUENTHER 
 
 the other hand, runs in liorizontal layers, for it is foi-med 
 by the c«irbonization of decayed vegetable life. The softer 
 coal, or that known as bituminous coal, lies nearest to the 
 earth's surface. As coal is found in blanket formation, it 
 is possible, where a field is discovered, to determine to a cer- 
 tain extent the quantity of the deposits by means of core 
 drillino:. 
 
 That is not true, thoui^di, of the more precious minerals. 
 Nature has not been so provident in the distribution 
 of these minerals that their quantity can be measured 
 bv any vard-stick. It is the ^vl•iter's contention that of all 
 assets, undeveloped mininu* properties do not at all ]jrop- 
 erly belong to a class of securities on which bonds should 
 be issued. An investor might as well take his chances with 
 all the other stockholders in the enterprise and share in the 
 profits if the undertaking ])roves successful. 
 
 A bond in an undeveloped mining enterprise represents 
 the most perishable kind of asset. Tf the mineral yield be- 
 comes exhausted, the property' then has no value beyond 
 the mills and mine structures, which at most, as assets, 
 are not worth veiy much, unless usable by a going mine. 
 
 The holder of a mining bond has to depend for the return 
 of his principal and interest upon the profits realized from 
 the ore produced. It is therefore necessary that the mine's 
 life and ])rodur-tion shall extend beyond the maturity of 
 the bontls issued by it. TIow can this be kimwii to a cer- 
 tainty? 
 
 Tlic majority of mining bonds are ivssucd as conver- 
 tible bonds, giving the holder the o]^]>ortunity of chang- 
 ing his position as creditor into partner at a certain fixed 
 price for the stock, but it may be assumed that if a mine 
 development points to success, the bondholder might as well 
 from the begiiuiing be a stockholder, considering all the risk 
 he has to take, for did the mine fail, he would be out in the 
 cold with the stockholders, except in that he could fore- 
 close upon barren, unproductive mining claims of no value. 
 
INVESTMENTS AND SPECULATION 89 
 
 Bonds in oil companies are of a similar class. No assur- 
 ance can be placed upon the continuation of the oil supply. 
 To satisfy ourselves as to what a dangerous class of invest- 
 ments these bonds belong, we need look no further than the 
 great mass of such defaulted securities. 
 
 Of course, I refer principally to mining companies 
 in process of development. There are mining properties 
 whose bonds come within the category of investments. 
 These bonds are, however issued by corporations which are 
 already assured of a certain production and have issued 
 bonds to provide funds for opening up new areas, but which 
 are not dependent for their redemption upon the new ores, 
 but assure their pajTiient, both as to principal and interest, 
 out of their present and known production. There is a large 
 number of such mining corporations, notably so in the case 
 of successful coal-mining companies. 
 
 I have now covered as fully as it is possible within 
 the narrow compass of a popular text-book, all the 
 principal classes of bonds. !A. reference might be made 
 to steamship bonds which have as their security the vessels 
 controlled by the corporations and also its wharves and 
 docks. The values in such bonds must be considered in the 
 light of earnings statements issued by these corporations, 
 the insurance funds on hand in case of loss of vessels, and 
 the allowances made for depreciation to provide for the 
 wear and tear in water transportation. 
 
 What wise provisions should be made against the ele- 
 ments steamship lines must constantly fight against has 
 an illr.minating illustration in the loss of the steam- 
 ship ' Republic" of the International Mercantile ^larine 
 Line, a disaster that is still fresh in our memor5\ The 
 sinking of this steamer resulted in a total loss of over 
 one million dollars. Still the loss of this palatial steamer 
 had no effect upon the corporation's resources. It had for 
 years set aside a certain percentage of the gross earnings 
 as an insurance fund for this very eventuality. 
 
XV. Ti:\rBER BONDS. 
 
 Our available timl)t'r rosonrces have reached that stage 
 of dc})lcti()n wh(M"t' what tiiiilx'r tracts remain are consid- 
 ered exceedin,L,^ly vahiahlc. Sd nmch so is this the cnndi- 
 tion that within the last few years timber bonds have come 
 to be regarded as desirable for nse as security for l)ond is- 
 sues. Standing timber of itself is only valua])le when it 
 can be cut and brought at a profit to the market. But for 
 the purpose of securing a bond issue, there are certain ele- 
 ments of risk which should be seriously taken into con- 
 sideration. Above all, the greatest risk is that of fire, which 
 is likely to quickly denude a tract of the greater part of its 
 standing timber. Insurance companies will not accept risks 
 on standing timber, for they consider the hazard as too 
 great. 
 
 The owTiers of standing timber, however, attempt 
 to guard against fire by many ingenious methods: build- 
 ing ditches and embankments through the tract to check 
 the spread of a fire; establishing patrols and fire stations; 
 cutting away the thick undergrowth ; and back-firing a for- 
 est by expenenced foresters. But notwithstanding all these 
 wise measures of precaution, bonds liased u]ion timber lands 
 should be classified as coming within the class of s]i(M-iila- 
 tive bonds, from which, Ix'cause of the risks involved, an 
 unusually good income should be received by tlutse who in- 
 vest their money in them. 
 
 A timber bond issue is based upon the quantity of stand' 
 ing timber against which the bonds are issued. "Cruisers,'' 
 or men who measure the timber, are depended upon to make 
 the estimate and on their figures and the market price tim- 
 ber commands, the bonds are issued. From this it may be 
 inferred what great dependence the investors must i)lace 
 upon the accuracy of human intelligence. 
 
 90 
 
INVESTMENTS AND SPECULATION 91 
 
 To retire the houds a certain pei-eentajj^e is set aside each 
 yoiw fr(ini the sale of the tiniher, and that percentage shouhl 
 ])e large enough to I'edeeni the honds automatically, as every 
 foot of timher cut correspondingly reduces the assets se- 
 curing the bonds, which cannot again he replaced except 
 through new growth from replanting. Where this is done, 
 it is a slow process. 
 
 There is no general rule by which the intrinsic value 
 of timber can be measured, for chance and the immeasur- 
 able human element largely enter into it. The character of 
 the men behind such propositions is equal in importance, 
 in connection with the safetv of timber bonds, to the safe 
 guards against tires. The conservative appraisal of the 
 amount of timber available, the nearness of the tract to a 
 market, the price of the timber and the percentage set aside 
 from each year's sales, all have an important bearing on 
 such bonds and demand from investors their most careful 
 scrutiny. 
 
XVI. GUARANTEED STOCKS. 
 
 Large corporations sometimes find it more convenient, 
 in securing control of smaller corporations whose strate- 
 gical position or favorable earnings will benetit them, to 
 guarantee the interest on their bonds and dividends on 
 their stock, than to lay out a considera))le amount of money 
 to acquire them. Often control cannot be acquired, as the 
 majority of the holders of the securities of the corpora- 
 tion will not part with them, but do not object to a lease 
 of their property in return for a guarantee of a certain 
 dividend upon their shares. 
 
 There are a large number of small railroads whose 
 names, if given, would be unfamiliar now to the general 
 public, although they are very prosperous properties, w^hose 
 dividends on their shares are guaranteed by other rail- 
 roads. These roads w^re taken over bv lease manv vears 
 ago, and have become so grafted into the main system of 
 their guarantor roads, that the)' are today, in all essentials, 
 a vital part of the larger corporations. 
 
 Parts of nearly all of our principal trunk lines are made 
 up of smaller roads welded into one, although existing as 
 separate cor])orations. This is the condition which inves- 
 tigation will show^ exists in the cases of the Delaware & Hud- 
 son, the Lackawanna, the Reading, the Pennsylvania, the 
 New York Central, the Lehiixh Vallev, the Jersev Central 
 and other roads. Some of the small roads whose dividends 
 these roads guarantee, existed before the holding corpor- 
 ations came into existence. The ]\rorris & Essex Railroad 
 is an example. The road w\as built before the Delaware, 
 Lackawanna & "Western, as one system, was planned. 
 
 Quite naturally these guaranteed stocks as an invest- 
 ment are graded acc(U'ding to the importance which the 
 
 92 
 
INVESTMENTS AND SPECULATION 93 
 
 properties bear to the corporations leasing them and also 
 with respect to the financial strength of the guarantors. With 
 such financially powerful corporations like the Pennsyl- 
 vania and the Lackawanna, the stocks of leased lines whose 
 dividends they guarantee, grade as high in conservative in- 
 vestment circles as do their best mortgage bonds. That is 
 why these stocks sell at a stiff premium. The dividends 
 guaranteed on some of these leased lines' stocks run as high 
 as 12 per cent to 16 per cent per annum, but they command 
 prices which i-educe their net yield close to 4 per cent per 
 annum. The holders of these securities, which consist either 
 of estates to whom the shares were left, banks, life insur- 
 ance companies and individual investors, are not anxious to 
 dispose of these stocks, as they fully realize the intrinsic 
 value of their investments. The more closely guaranteed 
 stocks are held, the more it reflects the superior position 
 accorded them in financial circles. 
 
 There are leased line guaranteed stocks which could be 
 safely regarded as immune even from the severest panic. 
 Their impregnable position is entirely due to the fact that 
 they could not be adandoned without dismembering an im- 
 portant system, a thing which the o^vners of securities 
 amounting to millions, would not permit under any cir- 
 cumstance. 
 
 Railroad policies enter largely into the policy of absorb- 
 ing other roads bj^ means of leasing. The elimination of 
 competition at times, is behind the policy. At other times 
 one road will acquire control of another to keep an impor- 
 tant rival from gaining an entrance into a certain territory. 
 Again the purpose behind such a deal may consist simply 
 of the idea that the lease would prove profitable. 
 
 The long-headed people back of the Canadian Pacific 
 had plans to get into Chicago. To build a road to the im- 
 portant traffic-originating centers would prove a costly bit 
 of financing, and even then it would remain a serious prob- 
 lem whether a new line could earn its board. Therefore, 
 
94 LOUIS GUENTHER 
 
 when the Wisconsin Central was in the market, the Cana- 
 dian Pacific saw an opportunity to reach Chicago without 
 great expense, by leasing this property, in return for wliich 
 it guaranteed a small dividend on the road's preferred stock. 
 
 In the expansion of our railroads, the practice of ab- 
 sorbing, by lease, important roads with whirh an alliance 
 would be pr{»fita))le will go on steadily. With the growth 
 of traffic on these leased lines, their business frequently 
 turns into the treasury of the controlling road a good profit, 
 as they are entitled to the profits in excess of what is re- 
 quired for the dividends they guarantee. 
 
 As the earnings of the leased lines are ineluded in the 
 earnings of the controlling lines, there is no way of detor- 
 niining what is their actual income return. But in this the 
 investor is not actually interested, as long as the guarantors 
 hold good their guaranty. It is realized that they cannot de- 
 fault in the payment of the dividends without losing control 
 of the property, which they seldom desire to do. 
 
 Industrial corporations also guarantee the dividends of 
 rivals they have absorbed. Their guaranteed stocks should 
 be judged hy the margin of ]U'ofits they report in their an- 
 nual statements. In this manner their securitv as invest- 
 mcnts can be properly appraised. 
 
XVII. AMORTIZATION AND SINKING FUNDS. 
 
 Amortization means the reduction of debt. A corpora- 
 tion issuing bonds may prefer to provide for their payment 
 when they mature through a sinking fund, for the account 
 of which a stated sum is set aside each year, rather than to 
 rely on other means to discharge the debt when it falls due. 
 
 This policy has many advantages. It makes it much 
 easier to discharge the debt, as the payments made when 
 spread over a period of years are less burdensome than 
 when provided in a lump sum. Then, also, contributions 
 to a sinking fund to amortize gradually a bonded obliga- 
 tion, can be made to earn interest, which interest, compound- 
 ing itself, also accumulates money towards the pajanent of 
 the debt. Thus money is made to earn money. 
 
 It is frequently provided, in the interest of a sinking 
 fund, that bonds, for the retirement of which the sinking 
 fund has been created, can be repurchased at a stated price, 
 either by call upon the holders of the bonds or in the open 
 market. A corporation either then cancels the bonds and 
 reduces its fixed charges, or pays into the sinking fund the 
 coupons of the bonds which have been purchased for its 
 account. 
 
 There are various ways by which a sinking fund oper- 
 ates. They cannot all be mentioned here. But a ])(>nd that 
 has set aside for its retirement a sinking fund, or for which 
 arrangements have been made to amortize by gradual pay- 
 ments is considerably strengthened as an investment where 
 the operations of a corporation are profitable. 
 
 The fact that a sinking fund has been created for the 
 retirement of certain bonds is not alone proof of strength. 
 If a corporation is making no profit, it cannot lay aside 
 money for its sinking fund. Certainly it ainnot take the 
 
 95 
 
96 LOUIS GUENTHER 
 
 necessary money out uf its capital, as that only weakens the 
 corporation in one direction, without strengthening it in an- 
 other. 
 
 Where the advantage of amortization lies, is in connec- 
 tion with bonds issued b}^ producing mine companies, and 
 cori)orations engaged in operating in perishable assets. By 
 setting aside a part of the proceeds from the sale of its prod- 
 ucts, it is more certain to retire the bonds whon thoy ma- 
 ture. Without a sinking fund, surh coi-porations face the 
 danger of not having the money on hand to pay off the bonds 
 and have no way of attaining it, should their properties ex- 
 haust themselves, 
 
XVIII. BONDS FOR WOMEN AND ESTATES. 
 
 Investments for women and estates ought to have elim- 
 inated all the speculative elements, as far as human fore- 
 sight can guard against them. Women and children belong 
 to a class of investors who can least afford to take risks, 
 no matter how small, as they have no means of repairing 
 their losses in the event that any of their securities go 
 wrong, dependent, as they are, upon the continuation of 
 their incomes. 
 
 An ilhistration of how necessary it is to exercise ex- 
 treme care when making investments for women and es- 
 tates is recalled in a distressing case that came to my at- 
 tention as the outcome of the failure of the Third Avenue 
 Railroad. An elderlv woman was left 300 shares of the 
 stock in this company when they were selling around $200 
 a share and when there was not even a breath of suspicion 
 that anything could go wrong with this property. This 
 stock represented an investment at the then market price 
 of over $60,000 and was sufficient to give the woman an in- 
 come of over $3,000 a year, enough to jDrovide for all her ne- 
 cessary comforts. Overnight her fortune was swept away 
 and her income vanished as the result of the faihire of the 
 company. In place of comfort for her declining years she 
 saw poverty staring her in the face. She was finally pre- 
 vailed to seil \\vv stock for $30 a share, stock that cost $200, 
 for she had no means with which to pay a large assessment, 
 and on the interest she receives from her money in a strong 
 savings bank, she is finding it hard to make both ends meet. 
 
 It would have been far better for this woman to have 
 had her $60,000 invested in government bonds even though 
 they would have brought her an income of only $1,200 a 
 year. 
 
 B.VII— 7 ^"^ 
 
98 LOUIS GUENTHER 
 
 I cite this ciisc to clearly point out that the smallest risk 
 can quickly become the j^reatest risk. Such bonds as con- 
 struction bonds, mining bonds, collateral bonds, unsecured 
 debenture bonds and notes, or for that matter any bonds un- 
 less properly secured by physical assets, belong to invest- 
 ments that camiot be safely recommended to dependent 
 women or estates. In saying this, there is no intention to 
 retk'ct ui)on the desirable securities of this class, of which 
 there are many, but to emphasize the advisability of miui- 
 mizint; all risks. 
 
 Securitv for such investors is the foremost considera- 
 tion. Income is secondary. The undoing of most of these 
 investors di recti v results from a desire to increase the in- 
 come at the expense of safety. 
 
 In the selection of investments for women and estates 
 the suggestion is made that the same rules be applied as 
 govern the investments of savings banks in Massiichusetts, 
 New York, Connecticut, Illinois, Ohio, Pennsylvania and 
 other states. These laws are the combined result of tho 
 most careful study in determining the safest character of 
 investments. 
 
 Copies of these laws may be easily secured by writing 
 to the secretary of state of each of the respective states. 
 
XIX. THE MARKET FOR BONDS. 
 
 Much discussion has arisen over the question as to 
 whether a bond is in a stronger position as an investment 
 if it has a quick market or not. It cannot be denied that 
 marketability has certain advantages, but on the other side 
 of the question, there is also the indisputable argument 
 that the broader a market for a bond, the less income it 
 brings. This question is one largely decided by the needs 
 of the investor. If he desires a permanent investment, one 
 which it is his intention to hold until maturity, the ques- 
 tion of a market is not of prime importance. The question 
 is important, however, for those investors and banking in- 
 stitutions forced to realize quickh^ upon their securities in 
 order to obtain funds. 
 
 If a market were the essential requirement for all in- 
 vestments, manv inactive bonds would be excluded from 
 consideration, even though from a point of absolute se- 
 curity, they are sometimes far safer than some bonds which 
 may be sold readily at any moment they arc offered. To a 
 large extent would this be true of real estate and farm mort- 
 gages, which are excellent investments and are purchased 
 to hold until they fall due. Nor is a quick market the most 
 desirable for timid investors. A general decline in the se- 
 curity markets which may have no bearing at all upon in- 
 vestment values might harass these timid souls through their 
 fears to sacrifice their securities when there is no warrant 
 for it. 
 
 Fear cannot be reasoned with intelligently. No panic 
 ever takes place in which there is not also Avitnessed a whole- 
 sale slaughter of frantic investors, who, a few months later, 
 keenly regret that their fears made them throw their se- 
 curities on the market. It is because of this that I say that 
 
 99 
 
100 LOUIS GUENTHER 
 
 an active market is not essential to the permanent investor. 
 If the bonds he holds are those of a solvent corporation and 
 sufficiently secured, a decline in the market price below 
 what the security cost him, does not impair his investment. 
 It must be paid one hundred cents on the dollar when due. 
 In the meanwhile, market fluctuations cannot interfere with 
 the continuation of the income. 
 
 It is security that is most desirable, not a market, nor 
 should investors be influenced seriouslv bv the theoretical 
 discussion about the increased production of gold reducinpj 
 the purchasing power of gold, which may affect the income 
 of an investor in making the return go less further than be- 
 fore, for the income is fixed. "We are now in this year of 
 1911 passing through a period of liquidation which is again 
 bringing to a lower scale the cost of living, by the decline 
 in commodities. All such discussions arc more or less 
 theoretical. 
 
XX. THE CHARACTER OF AN ENTERPRISE. 
 
 Over one liimdred million dollars annually are engulfed 
 in the whirlpool of predatory finance. This is the amount 
 one conservative estimate places as the tribute paid each 
 vear by credulous investors to the modernized American 
 confidence man who has deserted gold bricks and green 
 goods for the more inviting opportunities offered in selling 
 worthless shares. 
 
 It is difficult to explain how it is that a people, normally 
 intelligent as a class, permit themselves to be victimized 
 each vear out of such an enormous toll. Greed alone is not 
 responsible for their credulity. A more logical reason is 
 to be found in the great ignorance shown by the average 
 investor of the character of securities. The majority act up- 
 on the assumption that everything is right without first in- 
 vestigating. They rest their faith in the honesty of the men 
 who are asking them to invest their money. They assume 
 that the public authorities would never permit these men 
 to carry on their business were they aware beforehand of 
 their dishonesty and that the powerful newspaper press 
 would never allow them to use their pages to advertise their 
 securities unless their backers were honest. 
 
 Unfortunately the authorities proceed upon the theory 
 that it is none of their business to act upon the initiative or 
 that they suspect a fraud is being perpetrated. They con- 
 tend that more pressing duties occupy their time and they 
 cannot afford to investigate all the investment propositions 
 as soon as they make their appearance. They, therefore, 
 wait until a complaint is lodged with them before bestirring 
 themselves and in most cases a swindle has by that time gone 
 too far and already the greater part of the mischief has 
 been perpetrated by the time some victim has become sus- 
 
 101 
 
1^2 LOUIS GUENTHER 
 
 picious onoii,i!:li to lodge a complaint. As far as some of our 
 powerful newsixnpers are coucenied, it is unfortunate that 
 their moi'alitv is no more thaiia eold business morality. Some 
 of their puhlishei'S maintain that their readers must exer- 
 cise their own intelligence ah<>nt tlic investments offered 
 ill the advertising columns. '^J'hev sav thev do not I'ccoui- 
 mend them. They require and desire the large revenue 
 derived from illegitimate financial advertising, running 
 into the thousands every year, and are perfectly willing to 
 salve their consciences bv assuming an innocence of knowl- 
 edge as to the real character of the proposition offered. 
 
 A prominent government official has severely arraigned 
 the newspapers which accept this class of advertising for 
 their share of the guilt in the annual loot which the dishon- 
 est investment proposition takes from the public. He has 
 charged that these swindles could not exist without the co- 
 o])eration of these newspapers. P)Ut this is not all true. 
 The liberty to use the mails for the distribution of prospect- 
 uses, literature and letters is equally responsible for their 
 existence and success. If the newspapers were not as ac- 
 cessible as they are these schemes would still be carried on 
 through the mails. 
 
 If it were possible, without encroaching upon the lil)erty 
 of the i)ress and the use of the mails, to bring about an in- 
 telligent co-operation between the newspapers and the postal 
 authorities to surround investment pi-opositions with ]n'op- 
 er restrictions, thei-e can be no qu(^stiou but that the harm 
 they do could be materially curbed. Even then unsuspect- 
 ing and uninquiring investors cannot be wholly protected 
 against their own ignorance. There is but one way for them 
 to guai'd themselves against outright swindles and this is 
 ])y tlic cxci-cise of a little common intelligence. 
 
 M1ie brief investigation before investing will, in the ma- 
 ioritv of instances, save the investor his monev. But the 
 usual practice is to invest first and investigate afterwards. 
 At least my experience in my correspondence with invest- 
 
INVESTMENTS AND SPECULATION 103 
 
 ors who have bought doubtful securities, shows this to be 
 the tendency. I purpose here to outline some of the essen- 
 tial factors relating to ever}" enterprise about which invest- 
 ors should fully post themselves. If they follow the course 
 laid down, there is little chance of any swindles getting 
 their money. 
 
 The Nature of the Enterprise. 
 
 It is important to consider seriously the nature of the 
 enterprise. If its basis is sound, the prospect is good for its 
 success under a capable management. This may be deter- 
 mined by a comparison with undertakings of a similar char- 
 acter, by which it can be showm if they are profitable else- 
 where. Competition is also an important factor to con- 
 sider. AYliat sort of competition will be met with and what 
 degi-ee of opposition must be faced? Has the enterprise 
 peculiar advantages over others in a similar line? This 
 should be brought out, as well as all the advantages indi- 
 cating that the enterprise can be profitably conducted un- 
 der existing conditions. These are the general problems to 
 which investors would do well to give the first serious 
 thought. 
 
 When satisfied in this regard, the next step is a careful 
 examination of the plan of organization. Corporation laws 
 differ. Some states are more liberal than others, some 
 states even going so far as to invite the incorporation of 
 enterprises by loose laws, none of which is for the benefit 
 of the stockholders. 
 
 The corporation laws of Maine, Delaware, New Jersey, 
 North Dakota and Arizona are all so framed as to vest the 
 management of a corporation with such discretionary power 
 and secrecy that it works the gi*eatest harm to the stock- 
 holders. The stricter the laws under which an enterprise 
 is incoiiiorated the greater are the interests of the stock- 
 holders safeguarded. The amount of capital is very im- 
 portant. The more reasonable, the greater are the chances 
 
104 LOUIS GUENTHER 
 
 of success. No less important is the manner of the issu- 
 ance of the stocks. Has it been issued in whole or in part 
 in return for the property turned over by the incoi-pora- 
 tors? If so, in what proportion and for what property? A 
 knowledge of this will throw some light upon whether the 
 money of investors will be used for the exploitation of the 
 business of the enterprise or flow into the pockets of the 
 promotei'S. 
 
 Is the stock offered for sale full paid and non-assessable? 
 It is the law of some states that stock bought for less than 
 its par value places on shareholders the liability for the 
 difference in case of insolvency. Suit can be started by the 
 creditors for the recovery of the difference. Corporations 
 evade this statute by turning over the assets for the shares, 
 in this manner making them full paid and non-assessable. 
 Part of this stock, if not the whole, is then put into the 
 treasury to be sold to secure working capital. It should also 
 be determined whether any of the stock has preference and 
 of what this preference consists. Foreknowledge in this re- 
 spect is to be fore- warned against any suip rises. By know- 
 ing what, if any, stock remains unissued and is hold in the 
 treasury, one may tell the sources of new revenue open to 
 the corporation, as new capital can be raised as it is needed 
 by the growih of the business. A copy of the by-laws should 
 be examined carefully, as from them the prospective share- 
 holder can determine the extent of the powers vested in the 
 officers and directors of the corporation. 
 
 Who has the stock control? The character of the men 
 is such that it can either make or break a coi-poration. In 
 their hands rest the rights of the smaller stockholders. Are 
 they men whose past conduct in the management of corpora- 
 tions is such as to assure that the rights of the minority 
 shareholders will be fully maintained? Finally, in the plan 
 of organization are there any unusual features in the char- 
 ters of the by-laws which may be employed in the future to 
 the detriment of the stockholders? 
 
INVESTMENTS AND SPECULATION 105 
 
 Present Condition of the Enterprise. 
 
 An examination in this respect can be divided into three 
 classifications : First, into the property ; second, into opera- 
 tion ; and third, into the finance. 
 
 To begin with the first, there is the property or the rights 
 controlled. Herein are the elements of success. Has it any 
 value and how have the values been estimated? The an- 
 swer to this inquiry can determine the measure of conserva- 
 tism or exaggeration back of the enterprise. 
 
 If the properties or rights are o'^Tied outright the more 
 certain the foundation on which the enterprise is being 
 built. Less assured is the future where the properties are 
 held under lease, license, grant, option or otherwise, for the 
 failure to comply with some terms is liable to break the con- 
 tract and the loss of the property. If the property is owned 
 outright, the titles should be perfect. If there are any en- 
 cumbrances on the properties or rights, the investor should 
 know it, and what the amount is. If thev are not owned 
 outright, the holding papers should be in proper form and 
 it ought to be known also if the holding terms are reason- 
 able, satisfactory and safe. ^ 
 
 With all the facts kno^vn, then some ideas ought to be 
 formed as to what the property is likely to bring in case 
 liquidation is forced, and with all these facts before the in- 
 vestor, he can form an intelligent conclusion regarding the 
 present condition of the enterprise. 
 
 Coming to the second consideration as to operation, the 
 first thing which should be found out is : AVhat have been 
 the operations up to the time the investor is asked to pur- 
 chase the shares? Then, what have been the results and to 
 what extent have they proved profitable? Another fact to 
 ascertain is whether difficulties have been encountered, and, 
 if any, their nature. Find out about the demand for the 
 product or the operation of the enterprise and what is its 
 present status financially, as well as physically. Then, are 
 
106 LOUIS GUENTHER 
 
 the books proporly kept and are they open to the inspection 
 of the sliarelioklers? 
 
 The third consideration, and one wliich relates to the 
 very heart of an enterprise, is the state of the finances. 
 Fii'st, there are the assets as they exist— their cliaracter and 
 their actual value. At least an investic^ation of the assets 
 will ixuard ai^ainst a later discovery that thev are niostlv of 
 paper value and not real. It is important to have a clear 
 knowledge regarding the debts, claims, fees, rents, royalties 
 or other pa^^nents or ol)ligations due and which must be 
 met. 
 
 Knowing this, the next step is to ascertain the resources 
 available, out of which these debts are to be paid. Who 
 handles the money and what safeguards are provided to 
 prevent improper disbursements? It is also important to 
 know what, at present, the running expenses are and what 
 they are likely to be, including the salaries of the officers 
 and managers, to ascertain whether these important outlays 
 are upon a consei'^^ative basis. 
 
 Then there are the directors. "Who are they? A\'liat 
 is the past record and present business standing of 
 each? VTho are the active members of the board? AVho, 
 if any, are inactive? Are the meetings held regularly and 
 are they fully attended? VTlw compose the executive com- 
 mittee, if any, and what are their powers? Above all it 
 should be ascertained if the directors are stockholders io a 
 material amount. It is but reasonable to suppose that if 
 they are financially interested in the prosperity of a cor- 
 poration, the more conservative will their management be. 
 
 Who ar<' the ofReors? '\Miat are their previous reeovds? 
 What are theii* special present qualiti(^ati(^ns? Are they 
 able to Work togethei* without friction? What conipensa- 
 ti(tn do thev receive or are thev to receive, and are thev in- 
 terested in the enterprise beyond their salaries? What is 
 the general ]>lan of o])erations they have majiped out for 
 themselves and what led to their adoption? 
 
INVESTMENTS AND SPECULATION 107 
 
 Some General Questions. 
 
 With a clear intelligence regarding the above problems, 
 there still remain some general features which should be 
 thoroughly investigated. Serious consideration should be 
 accorded to the previous history of the enterprise or the 
 property or undertakings on which it is based. If inven- 
 tions enter prominently, what is the previous record of the 
 inventor? By whom are the statements made, and is the 
 party making them reliable? Finally, are there any con- 
 tracts or obligations not now effective by which the enter- 
 prise may subsequently be effected? 
 
 With all these facts before the investor and carefully 
 considered, he is at least assured against falling a prey to 
 any financial sharps. Neither they nor theii' enterprises 
 could furnish a clean bill of health where probed by an ex- 
 amination as thorough as assured by the different ques- 
 tions outlined in this section. While they are by no means 
 a complete assurance against loss, as an honest enterprise 
 mi<iht meet with difficulties and manv have, thev do raise 
 sufficient safeguards against downright dishonesty. In 
 conclusion, it may be said that the investor should demand 
 before parting with a penny of his money, a complete finan- 
 cial statement, including item by item the assets and the 
 liabilities, the earnings and the expenses, of a going con- 
 cern. In another section, a specimen statement is subnutted 
 to demonstrate how figures sometime can be made to lie in 
 a way to do credit to a Baron ^Munchausen. 
 
 If investors will conduct an investigation such as has 
 been here proposed, there will be veiy few who will, by the 
 exercise of a little bit of intelligence, have ciiuse to com- 
 plain that they have been victimized. They vnW have locked 
 the stable door before the horse has been stolen. 
 
 Swindlers operating in the financial field are unable to 
 reply properly to all these questions and even should they, 
 their answers would not hold together well. Discrepancies 
 
108 LOUIS GUENTHER 
 
 would show themselves here and there so glaringly as to at 
 once eliminate their proposition from the consideration of 
 intelligent investors. 
 
 It is possible to deceive a person with one lie, but a half 
 dozen or more lies will not stick together. In fact, conserva- 
 tive 1)ankers employ this searching investigation to deter- 
 mine to their satisfaction, the character and possibilities of 
 an enterprise proposed to them to underwrite its securities. 
 If they depend upon this information, why should not in- 
 vestors ? 
 
XXI. SCIENCE OF SPECULATION. 
 
 Call it what you will, speculation will always be with us. 
 Prudes may fro\\Ti upon it, superficial thinkers may con- 
 fuse it with the commonest forms of gambling, and sociol- 
 Qo-ists mav dream of the dav when envy, aml)ition and cove- 
 tousness will be a thing of the past and the human race can 
 exist in peace without these human traits, but their agita- 
 tions and outcries can no more check speculation than hu- 
 man ingenuity can devise a scheme to control the tides. 
 
 AVhat the blood is to the human body, speculation is to 
 business. It is absolutely a necessary part of it. The only 
 difference, if there is at all a diff'erence, is in the form it as- 
 sumes. AVhat would business be without incentive ? In fact 
 incentive is all there is at the bottom of speculation. ]\[en 
 are willing to take risks to acquire wealth. They are willing 
 to stake their capital upon opportunities which appeal to 
 their judgment. 
 
 From the pioneer who heedlessly plunges into a track- 
 less waste to find a new home with greater opportunities 
 for the acquisition of wealth, to the modern capitalist, who, 
 to control the trade in a given conmiodity, plans gigantic 
 trusts, is a long line of speculators, as speculation is be- 
 hind all their ambitions. The inventor who is, apparently, 
 of all men the least of speculators, takes greatest specula- 
 tive chances, for he uses up time and energy to shape his 
 ideas into some form where they can be of practical use and 
 should he fail has wasted them utterly and lost all. 
 
 Illustration after illustration could be given to demon- 
 strate how speculation in a greater of less degree enters in- 
 to the material welfare of each individual. 
 
 "Without speculation no business could progress. It is 
 the d^Tiamic power behind every incentive to activity and 
 
 109 
 
110 LOUIS GUENTHER 
 
 procuress. It is the desire for gain wliicli prompts the ineep- 
 tioii of every veiitinc If it is all that, then it can be read- 
 ily seen licw necessary speculation is. In fact, speculation 
 in its hiiihest form has shaped the course of history and 
 often changed the map of the world. 
 
 While the discovery of America bv Cohnnbus was acci- 
 dental, the real jiurpose behind his venturesome journey was 
 to find a shorter route to India. After he found a new hem- 
 isj)here his discovery inflamed the spirit of conquest among 
 numerous intrepid explorers, few of whom set out upon 
 their expeditions with any thought of planting their coun- 
 try's standard over new" territory for the mere sake of 
 fame. JMost all of them w^ent hunting for new treasures and 
 to expand the commerce of their nations. Cortez was only 
 a looter. He and his soldiers despoiled ^lontezuma and the 
 Incas of their treasure for his king, himself and his men. 
 Pizarro did the same. The Indians, our real Americans, 
 were not originally blood-tliirsty savages, but a peaceal^le 
 race of primitive men who welcomed the appearance of the 
 white men among them. Their friendship was only turned 
 into hate wdien thej^ began to realize that the white man 
 came among them solely to WTest their land and posses- 
 sions from them. 
 
 Behind most wars among nations tliere is the connnercial 
 instinct. This is but another form of speculation, except 
 on its grandest scale. Instead of between individuals it is 
 ])etween nations that a rivalry for acquisition exists and this 
 rivalry clashes to a point where it arouses the martial spirit 
 of a race to acquire by force of arms what cannot be secured 
 by i)i'a(M'rul measures. 
 
 Wci-c it not for the rich diamond mines at Kimbci'ly 
 and the gold mines of dnlminiesburg in South Africa, there 
 never would have been such a historical event as the Boer 
 AVnr. It was not an insult upon English pride wliich 
 prom])tc(l John Bull to si)end over a billion dollars to hum- 
 ble the hardy dutch nation under Krueger, but the posses- 
 
INVESTMENTS AND SPECULATION 111 
 
 sion of the rich mines was the real goal. But once the con- 
 flict was on, national pride forced the English nation to 
 carry it to a victorious end, whatever the cost. Tlie same 
 
 * - 
 
 cause, the retention of India under the British flag, brought 
 about the Sepoy mutiny. 
 
 Going back further into the history of England, the loss 
 of her American colonies is directly traceable to the greed 
 of her capitalists. Out of their enlarged opportunities they 
 wanted to get all their was possible despite the danger of 
 trespassing by their heavy exactions upon the peaceable 
 nature of the colonists. The tea tax was the spark which set 
 aflame the American revolution. 
 
 No tax can be construed as a patriotic measure. It is 
 a scheme for material aggrandizement. George III, to 
 enrich the exchequer of his nation and indirectly the per- 
 sonal fortunes of his subjects, attempted to do it by forc- 
 ing the colony in America to pay his country a greater trib- 
 ute. For his efforts to lay hands on more money, England 
 lost an important colony. What, then, was this war, when 
 stripped of all its romanticism, but the result of specula- 
 tion'? It was a case of a nation's greed overstepping itself. 
 
 And so it was in the late war between Japan and Russia. 
 Patriotism and national ])i-ide had no share in bringing 
 about this conflict. Rich Manchuria and the possession of 
 Corea, which also meant the dominance over the commerce 
 of China, were at the bottom of the conflict. Japan wanted 
 this enormous business. Russia was equally covetous. It 
 was therefore inevitable that the friction between the two 
 nations, wholly the outcome of their commercial expan- 
 sion, could be settled only by war and the prize fall to the 
 victor after sacriflcing many hundred thousands of lives 
 and piling up a huge war debt for each as a heritage for 
 many future generations. 
 
 What is true of nations is also true of individuals. They 
 seek greater opportunities to make money. Between in- 
 dividuals their interests when they conflict are fought out 
 
112 LOUIS GUENTHER 
 
 in the arcDa of competition. The mastery falls to those who 
 are the shrewder and more aggressive contenders. Yet be- 
 neath the outward semblance of competition is the greater 
 force— speculation. We cannot get away from it. AVher- 
 cver wo turn we are brought face to face with it. 
 
 By no moans, either, is speculation in any sense a mod- 
 ei-n force. It is as old as the human race. Only when the 
 luinian race no longer exists will speculation become extinct. 
 
 Our own Bible bi'ings down to us the tradition of how 
 Joseph bought up all the wheat in Egypt l)ecause ho shrewd- 
 ly detected there would be a famine in the land. AVhat was 
 this but speculation? In reality Joseph was the tirst man 
 we know of to corner wheat. Nowadays men speculate 
 in the same cereal. They watch the weather map care- 
 fully and spend considerable money each year gathering 
 statistics in an endeavor to form an idea as to the extent 
 of the harvest. As they form their opinions they trade in 
 the wheat long before it is out of the ground and ready 
 for the market. They buy if they believe the crop will fall 
 short, to resell it later at a higher market price, or if, on 
 the other hand, they arrive at the conclusion that the crop 
 will be plentiful, they sell it in anticipation of a decline in 
 the price expecting to reimburse themselves frc^m the dif- 
 ference in the price they agreed to deliver it for months 
 previous to the harvest and the lower price. If they are 
 mistaken in their judgment, they, of course, are out of 
 pookot. The only difference between their trading and that 
 of Joseph is that whereas he bought the wheat outright, 
 they deal in contracts without ever seeing the cereal. 
 
 Guglielmo Ferraro, the great modern Italian historian, 
 in his fascinating history of "The Greatness and Decline 
 of Rome," gives a very interesting account of how specu- 
 lation was at the very bottom of most of the conquests of 
 the Roman legionaries over the other barbaric nations and 
 to many it may be exceedingly interesting to know that for 
 nearlv a centurv before the birth of Christ, the Romans were 
 
INVESTMENTS AND SPECULATION 113 
 
 already bining shares in large land operations which were 
 carried on throughout the colonies of Rome. So even the 
 buying of shares, regarded as a modern evolution, is by no 
 means new. 
 
 Lucullus, Rome's first great expansionist, inaugurated 
 the fashion. His conquest of Mithridates first oj^ened 
 the eyes of the Romans to the luxuries and refinement of 
 the East. The talents and sesterces he brought back to 
 Rome incited in the Roman aristocracy the lust for greater 
 conquest. The rich money lenders were prompted to fi- 
 nance the expeditions and the ambitions of the Roman war 
 lords. Pompey conquered other nations, turning over their 
 rich lands to the powerful Italian land operators, who in 
 turn invited the smaller speculators to join them in their 
 extensive operations. Caesar continued Rome's policy of 
 conquest in Gaul and Britain. Behind all his w^ars was the 
 sordid object of enriching himself and his followers with 
 the tributes exacted from the smaller and weaker tribes 
 which his legions subdued— all for one object, to extend 
 the wealth of Rome, to give the speculators a greater field 
 for their operations. 
 
 Thus it is seen that we have many historical precedents 
 to justify speculation. More than this, they indicate that 
 behind each step of progress the human race has made, 
 speculation has been the impelling force and modern con- 
 ditions have changed it but slightly. 
 
 What, however, is the science of speculation ? AYe often 
 hear of this appellation being applied to it. Roughly speak- 
 ing, to me there does not seem to be anything like a science 
 of speculation, in the sense that we are accustomed to use 
 the term, beyond a few general though uncertain rules. 
 There is a science of chemistiy. The knowledge gained of 
 it can be verified by exact observation. Certain conclusions 
 can be demonstrated beyond peradventure by obtaining the 
 exact result which an investigator sets out to obtain. There 
 is an exact science in astronomy, in medical research, in 
 
 B.VII— 8 
 
114 LOUIS GUENTHER 
 
 pooinetry, in inctcorulogy, and in nicta})liysics. Knowledge 
 of laws and rules must first be acquired to prepare a pei'son 
 to undertake iiroficiently the study in these sciences. 
 
 But I should like to ask hr»w any course of study in spec- 
 ulation could be outlined on which reliance can be placed. 
 Familiarity with the objects engaging one's speculative 
 instincts of course are aljs<»lutely essential to success. A 
 general knowledge of conditions helps considerably when 
 coupled with a keen perception of what their effects are 
 likelv to be, but as these conditions constantly yryv, there 
 is no way by which a knowledge of them can be verified Ijy 
 exact observation. 
 
 Possibly vuu have seen at some time or another, a chart 
 indicating the trend of the stock or grain markets. A piece 
 of paper squared off in blocks, each row representing a 
 cvcle of time, most usuallv a vear, and across these bh^cks 
 there will be a wa^T line running either htncritudinallv or 
 perpendicularly. This line is supposed to trace the trend of 
 vnices. Such charts have manv followers who foolishlv be- 
 lieve they can replace judgment with a greater degree of 
 accuracy. But they more frequently go wrong than they 
 prove right. They might be accurate guides were similar 
 conditions present, when the charts would indicate a re- 
 currence in a swing in prices upward or do^^Tlward as the 
 case might be, but this is not always the case, fate having 
 a strange inconsistency in bringing forward miexpected 
 events which wholly change the course of human expecta- 
 tions. 
 
 l*revious to the sharp ]ianic of 1907 the concensus of 
 opinion among our great millionaires who accumulated 
 their vast wealth as a result of the unusual period of pros- 
 perity which set in with the election of William ^FcKinley 
 as President, was that the country had not vet exhaust(>d 
 the good times. Shrewd men like Henry H. Rogers, AVil- 
 liam A. Pockefeller and others equally powerful, were con- 
 firmed bulls on the country and backed their faith of much 
 
INVESTMENTS AND SPECULATION 115 
 
 liigliei" prices for the leading securities listed on the New 
 York Stock Exchange by accumulating vast blocks of 
 shares. 
 
 According to the signs of the charts, their position was 
 correct. The flood tide in the prices of stocks had not been 
 reached. But without a visible sign of a lowering cloud 
 in the business horizon, a fatality occurred which rent asun- 
 der all their well-laid plans and involved them in huge 
 losses. The panic of 1907 came unheralded by any of those 
 advance signs which in the ordinary course of events cast 
 their shadows before the eyes of shrewd students of condi- 
 tions. 
 
 That fatality was the San Francisco earthquake. It 
 came like a bolt from a clear sky. The destruction of over 
 $200,000,000 of actual wealth proved like a vacuum bursting, 
 in which money required elsewhere had to rush in, to 
 mitigate human suffering and prevent the total ruin of 
 fortunes invested in the stricken citv. It found the credit 
 structure of the moneyed centers in the country in a vul- 
 nerable position. No money in large volume could readily 
 be spared within so shoii; notice without withdrawal from 
 other channels and as the necessity was most urgent, sacri- 
 fice had to be made by letting go of the more quickly sale- 
 able assets, which were securities. The earthquake caused 
 the panic ; that was unexpected. 
 
 Another indication that there is no accuracy to specu- 
 lation is the explosion of the theory regarding the recur- 
 rence of panics. For some years we have held to the belief 
 that between panics an interval of about twenty years 
 elapses. But of late, money panics have occurred with 
 greater frequency. From 1900 to 1910 there were two 
 panics, varying in degree of intensity. 
 
 If it were at all possible to gauge accurately beforehand 
 the years in which we are to see great prosperity and then 
 adversitv, there would be hardlv anv necessitv for the exer- 
 cise of the keener perception upon which successful spec- 
 
116 LOUIS GUENTHER 
 
 Illation must depend for a profitable fruition. All that 
 would be needed is to watch for the unfailing signs and tlien 
 trim sails accordingly. 
 
 Another fallacy we often fall into, is the belief that a 
 panic in Wall Street is a localized affair and cannot dis- 
 turb the prosperity of the country. AVe have seen an im- 
 pression extant something akin to this durincr 1907. Other 
 parts of the country were confident they would not foci the 
 effect and the press was particularly concerned in point- 
 ing editorially to reasons explaining and emphasizing this 
 view. But it was not six months afterwards before the en- 
 tire country was in the grip of the depression the panic 
 superinduced. In a few^ months the banks in the large in- 
 terior cities were forced, because of the scarcitv of monev, 
 to resort to clearing-house certificates as a measure to re- 
 lieve the stringency. 
 
 Money has its capital centers in each country. As money 
 is the basis of credit and is also the life fluid of business, 
 it cannot be otherwise than that the prosperity of a coun- 
 try will be disturbed and checked when there occurs a ]">anic 
 in the principal money centers. Then a condition of 
 atrophy is brought about. Business receives a swift check, 
 almost always unexpectedly and when least prepared for it. 
 
 Sometimes a panic is brought about by the most unusual 
 occurrences. At times it comes by the most unexpected 
 happenings and the direct cause will always be found in 
 the over-extension of speculation. 
 
 One instance I have in mind was the sudden death of 
 Governor Roswell P. Flower, who was a great market fac- 
 tor and who, because of his unusual success as a specula- 
 tor, had behind him a great following in the securities in 
 which it was known he w^as most largely interested. His 
 death, overnight, paralyzed his following. They were 
 thro^^^l in a panic of fear by the sudden loss of their leader. 
 What were imposing fortunes the day before were swept 
 away as if by a tidal wave, and in place of the wealth there 
 
INVESTMENTS AND SPECULATION 117 
 
 was ruin, on the day following, to thousands of specula- 
 tors, caused by the sheer and heartsickening decline in 
 prices of securities. 
 
 Another similar case of the unexpected, but this time 
 not from the death of a great financial captain, was the 
 memorable flurry in Xorthern Pacific stock as a result of 
 the Titanic struggle for control of this important railroad 
 system between E. H. Harriman and his banking ally, the 
 great banking house of Kuhn Loeb & Co., on one side, and 
 James J. Hill, backed by no less a great banker than J. 
 Pierpont Morgan, on the other, Northei'n Pacific shot up 
 to $1,000 a share. Were it not for a private settlement on 
 the price after peace was again restored between the two 
 rival factions, the financial district w^ould have been a mass 
 of wreckage, since but little of the stock sold under con- 
 tract to deliver next day was obtainable, as the control was 
 held tightly by Plill and Morgan. 
 
 Jay Gould's efforts to corner gold, when gold in Wall 
 Street was still considerable of a speculative commodity 
 and there was a room in the Stock Exchange set aside for 
 traders in it and known as the Gold Room, brought Black 
 Fridav, one of the blackest davs in our financial annals. 
 
 These illustrations will confirm the contention I make 
 that it is the unexpected which changes the course of specu- 
 lation. It is the unexpected against which no precaution 
 can be taken. To the lay mind it will be somewhat puzzling 
 how the effect can be so ruinous. With a little clearer 
 knowledge in the rough of how speculation is carried on it 
 will be more readilv understood. 
 
 Most speculators do not buy outright, that is, with their 
 o^vn money. They usually operate on margins. That is, 
 they will buy a block of stock, it can be wheat, cotton or 
 something else just as well, through a broker, paying a cer- 
 tain percentage of the purchase price and leaving it to the 
 broker to arrange a loan with his bank for the balance. On 
 this balance the speculator pays interest. 
 
118 LOUIS GUENTHER 
 
 As the stock declines he is forced to protect his equity 
 ill tlie stock ]\v ]nittin^ up more money or iiiarj^in, and if 
 lie has not the cai)ita1 or comes to the couclusi(Hi that the 
 decline will continui' and does not c^ire to run the risk of 
 fui-ther loss, he sells out or is sold out, the bank liquidates 
 its loan, the })roker deducts his commission, and if there is 
 nnythini:: left, tlie speculator .uets the Italance. If he is in 
 deht heyoiid his niarixin he must make the difference good. 
 P>ut it seldom reaches this point, as the loans made are care- 
 fully watched and closed ere the lender's margin is ex- 
 hausted. 
 
 In i)anics, or when the unexpected ha])pens, the change 
 in ])rices occurs so swiftly and suddenly that often the spec- 
 ulator has no time to protect liims(>lf before his loans are 
 liquidated as a matter of precaution. As for the outright 
 holders of securities, thev are harassed hv fear to unload 
 to prevent further losses. In such times securities are reck- 
 lessly thro\\Ti upon the market from all sides, and prices 
 smash. 
 
XXTI. EFFORTS TO PREYFXT RPECULATIOX. 
 
 There breaks forth periodically from prudish, but woll- 
 mcaniug jocople, jDrotcsts against all forms of speculation 
 in stocks or commodities. Appeals are made regularly to 
 the legislative arm of the Government to put a stop to spec- 
 ulation through the enactment of repressive laws. These 
 out-bursts of public temper usually arise out of a specula- 
 tive debauch or directly result from abnormally high prices, 
 which speculators are charged with bringing about. 
 
 These outcries are typical of restless human nature. 
 The public as a whole sometimes acts as one big machine, 
 permitting itself to be propelled unthinkingly hither and 
 thither by some forceful leader or set of agitators who mo- 
 mentarily have caught the popular fancy. These risings 
 are sometimes successful and laws to curb or wholly sup- 
 press speculation are framed. 
 
 Nor is this aroused state wholly a characteristic of the 
 American people, who are, an^^way, a cosmopolitan nation 
 made up of many races. It breaks forth among the peoples 
 of other nations. The Gemians, stolid as they are, rebelled 
 against the speculation in grain, claiming it enriched only 
 the millers and placed a heavy burden upon consumers. A 
 gi'eat outcry arose in Holland following the insane spec- 
 ulation in tulips centuries ago. England felt the clamor 
 frequently and most pronouncedly after the collapse of the 
 South Sea bubble, while France was rent with the protest 
 of the populace against speculation twice, in a way t(t be- 
 come historic: The first time, when John Eaw's grandiose 
 Mississip])i ])ubl)le ])urst, and the othci-, when the De Les- 
 seps Panama Canal scheme smashed. 
 
 With us, a year hardly passes but that there is intro- 
 duced either in Congress or in the assemblies of our dif- 
 
 119 
 
120 LOUIS GUENTHER 
 
 fercnt states, laws to stop margin-trading, as speculation 
 in stocks is called, or dealing in options, either in grain or 
 cotton. But up to the present time no laws have been en- 
 acted to interfere seriously with speculation. Our more 
 sober intelligence has so far checked any attempt to con- 
 struct bars against a practice which serious thinkers real- 
 ize is the very incentive of our material progress. 
 
 Germany once succeeded in stopping speculation in 
 grain. The farmers and the consumers soon felt, as a re- 
 sult, that the burden fell upon them and not upon the 
 traders, who formerlv dealt in this commoditv on the 
 Bourse. Without a public market on which a price for 
 their gi*ain could be made through free and open barter- 
 ing, the farmers had to sell for any price they could get and 
 never knew whether the price was standard. The millers 
 had the price-making power for flour wholly within their 
 control. It was not long before the Germans were equally 
 as anxious for the restoration of trading in grain on the 
 Bourse as thev were a few vears before to i)ut it dowTi bv 
 force of law. 
 
 The rise in public opinion against speculation has its 
 counterpart in similar demonstrations against the liquor 
 traffic and yet wherever the law has succeeded in driving 
 liquor out of a community, statistics have proved the pres- 
 ence of a greater number of inelu'iates than when the traffic 
 was allowed to be carried on in moderation and under the 
 supervision of the authorities. 
 
 The minister of the gospel from his pulpit thunders 
 against the evils of speculation with no less vigor than he 
 portrays all the sins of the flesh for which Demon Drink is 
 responsi])le. As they are popular themes they lend them- 
 selves readily to the eloquence of orators. Nor is this all : 
 Blind ignorance, greed and rashness are responsible for 
 many unfortunate victims of each of these twin evils in 
 their eyes; therefore, they have many shining targets upon 
 which to aim their shafts of invective. 
 
INVESTMENTS AND SPECULATION 121 
 
 But the deeper and more tolerant thinker peers be- 
 neath the superficial exterior and sees there a plausible and 
 justifiable reason for the use of liquor. Wine and beer used 
 in moderation never harmed a race. The Germans are no 
 less virtuous than any other race because their favorite 
 beverage is beer. The only difference is that their liking 
 for this mild drink has been kept within the bounds of 
 moderation. The corrective against the evils of intemper- 
 ance lies in education in pointing out the harm which comes 
 from over-indulgence. Laws cannot be relied upon to curb 
 the appetite. 
 
 With speculation it is much the same. Intelligent spec- 
 ulation is no crime. It is not gambling. It is merely pit- 
 ting human shrewdness against the uncertainties of the fu- 
 ture. For that matter, life itself is a speculation in which 
 ministers, prudes and agitators hope to avoid sickness and 
 accident and live their allotted span of life. Between spec- 
 ulation and gambling there is as much difference as there is 
 between night and day. Speculation commands the exer- 
 cise of the greatest measure of acumen, where gam])liug 
 trusts ever}i:hing to luck and the turn of a card. 
 
 Experience has demonstrated far too convincingly that 
 wherever speculation has been leashed by the iron bonds 
 of the law, the effect has been almost an immediate stop- 
 page in the material progress of the country. Market places 
 where average prices are created are destroyed, which in it- 
 self is a great detriment, as the sellers cannot know whether 
 or not the buyers are paying them a fair price for their pro- 
 ducts. 
 
 Almost Everyone Speculates. 
 
 A man believes that a corner store in his neighborhood 
 is a good location for a dry goods business. He leases the 
 store for a year or a teiTn of years at a good rental. He 
 contracts for a large bill of goods. He has his store sub- 
 stantiallv fitted out. In fact he has invested considerable 
 
122 LOUIS GUENTHER 
 
 nioiK y in his cnti'ipiisc and made himself liable to whole- 
 sale merchants for a stiff V)ill of goods, before he has even 
 sold a paper of needles, all Ix'eanse he has arrived at the con- 
 clusion that the location he has selected for his business 
 is favoral)le for the d('velo]iment of a good trade. Xo one 
 would dare charge liim with speculation. If any one did 
 so, that man would be regarded as a hare-brained crank. 
 Yet the storekeeper is speculating just as much as if he had 
 V)ought so many shares of a stock whose earnings would 
 justify the belief that there would be an enhancement in 
 value. If ]»eople failed to patronize his store, and if sales 
 were insufficient to bring a profit, he would have to suffer 
 losses represented in the difference between what this stock 
 brings and what it cost, and his loss of time and rent until 
 he could rent the store to some one else before the expiration 
 of his lease. 
 
 Fond parents, when they send their children to college 
 to acquire an education to fit them for their struggle of 
 existence, may not realize that when they invest their money 
 upon the education of their loved ones, they are speculat- 
 ing upon the children's using the opportunity pro]>erly. 
 Their boy or girl may absolutely waste the opportunity 
 in frivolities and leave college even less fitted for life's 
 battle than other young people whose parents' circum- 
 stances were such as to make it impossible for them to ob- 
 tain a c(tllege education. 
 
 A tailor cannot tell when he is laying in a stock (^f 
 woolens whether they will meet the publie taste. Tic de- 
 pends entirely upon his judgment when placing his orders, 
 which he does months before the season has set in. Is he not 
 speculatiTig? 
 
 Whv, even the grocer speculates when in the early morn- 
 ing he drives his wagon to the market for his daily sup]")ly 
 of greens, vegetables and dairy ]iroducts. R<1 does the 
 butcher in his trade. Tie figures that his regular patrons 
 will order a certain supply of meat. He also knows that if 
 
INVESTMENTS ANL SPECULATION 123 
 
 they fail to do so, what is left over must be made good out 
 of his daily profits. 
 
 AVlicn the farmer tills his soil and puts it to seed in the 
 sprinj;-, he speculates, does he not, on a favorable outcome 
 of his harvest? Not only does he speculate but long before 
 the time has been reached to garner the fruits of his sea- 
 son's toil, he has already pledged part of the harvest for 
 loans at his bank, dejDending entirely upon his crops to take 
 them up. 
 
 Human endeavor, whichever way it is directed, largel}^ 
 speculates upon a favorable outcome. The manufacturer 
 invests considerable money in raw products to turn into 
 finished articles, and in labor, counting upon a steady de- 
 mand from consumers for his profits. If he needs money, 
 he borrows from the bank, expecting to repay the loans 
 from his sales. The wholesale merchant, whether he deals 
 in dry goods, coal, groceries, jewelry or the dozen and one 
 staple commodities, does the same and assumes the same 
 risk, putting his judgment against the future. 
 
 In going into these minute details, I merely attempt to 
 show what misconception exists regarding speculation. 
 The critics take the shadow for the substance and hold the 
 sul)stance responsible for the evil effects of the shadow. 
 
 If a man fails in speculation and is ruined in conse- 
 quence, he is pitied and speculation pilloried before pul)lic 
 opinion as a crime. 
 
 If he fails in business as a result of misjudging his op- 
 portunities, he is not pitied, but condemned as an inca- 
 pable business man, although underlying ])oth misfortunes 
 there must have been the same cause, a gi'eed to bite off 
 more than could be cared for, or greed to acquire a fortune 
 quickly, even at the risk of rashness. 
 
 There are any number of people who buy real estate 
 or farm lands every year, knowing full well they have not 
 the money to purchase it outright. They make their pur- 
 chases subject to the encumbrances or mortgages already 
 
124 LOUIS GUENTHER 
 
 standing against the property. AVhat money they pay out 
 is for the equity and nothing else. They are confident of 
 their ability to care for the interest on the mortgages. They 
 expect their equity to increase in value sufficiently to en- 
 able them to tuiu over their property to some other buyer at 
 a good profit. 
 
 Even the more humble wage worker does this when he 
 buys his home on the installment plan from a builder, who 
 himself, to construct the house, has already plastered it 
 with a mortgage to his banlv, and the interest on which 
 mortgage the wage-earner must pay in addition to paying 
 off the equity in easy installments. 
 
 In each instance, the buyer is buying on a margin ex- 
 actly in a similar manner as he would buy on margin cer- 
 tain stocks or certain quantities of grain or cotton. Some 
 one else lends him the money on the unpaid balance on which 
 he pays interest. Yet some people hold this practice to be 
 wrong, to be gambling, while they hold the purchase of real 
 estate on part payment and financing the remainder by a 
 loan as a legal and ethiciil transaction. If the one be wrong, 
 the other is also. 
 
 Moreover, there are as many failures through over-ex- 
 tension in real estate operations as in stock speculation. As 
 many people have their property sold through foreclosure, 
 because of their inability to meet their interest, as there are 
 people who have their speculative commitments in stocks 
 closed out through iua])ility to provide more margin. 
 
 The evil in speculation is not in speculation itself. Where 
 it arises most is through ignorance of conditions. Un- 
 scrupulous brokers and mercenary ''tipsters" are to a large 
 degree responsible for the odium so frequently heaped up- 
 on speculation. They tempt people into the whirli-iool, 
 where the most acute .iudgment must be exercised. These 
 people have no knowledge of the principles of speculation, 
 but the operator drags them in by appealing to their greed 
 and cupidity. They are told about what great fortunes are 
 
INVESTMENTS AND SPECULATION 125 
 
 made on a few liiuidreds or thousands. They are induced 
 to so over-extend themselves that the movement in their 
 specuh\tion of a few points against them completely wipes 
 them out. The most festering sores on speculation have 
 been the bucket-shops. Their gain lies in the losses suffered 
 by their patrons. The more they can shake out, the greater 
 the profits; therefore, it was at all times to their inter- 
 est to tempt their customers to operate on slim margins. 
 Fortunately, these concerns, which were no more than gam- 
 bling shops, as they very seldom bought securities outright 
 and in which speculation was reduced to guessing on the 
 day to day fluctuations and not infrequently from hour to 
 hour, have now been driven out of business by most of the 
 states. Of late the United States Government has also 
 tfiken a hand in extinguishing them, as it can do since their 
 existence depends upon transacting most of their business 
 through the mails. 
 
 However, equally mendacious is the "tipster," the ad- 
 vertising tipster who brazenly proclaims in large t\^e that 
 he is in a position to tell beforehand certain movements 
 in securities. These charlatans succeed in garnering a 
 harvest of ignorant and greedy victims who, with a child- 
 like faith, swallow their statements in absolute confidence, 
 and plunge blindly into buying the stocks recommended to 
 them as going to jump many j^oints, only in the end to lose 
 all their money. It is paradoxical that some peo])le will be- 
 lieve such stories coming from strangers, but when it comes 
 to business transactions with which they are familiar, they 
 are as shrewd in their bartering as the chief character in 
 ** David Ha rum." 
 
 If the average person would only pause to think that if 
 these tipsters were so certain of success even in a tithe of 
 their supposed information, they could make in a night a 
 fortune large enough to place them above want for the rest 
 of their natural lives and beyond all necessity of retailing 
 their information for the twenty or ten dollars they succeed 
 
126 LOUIS GUENTHER 
 
 in cajoling i'l-oin trusting, aiiibitiuus persons who strive to 
 get rich hurriedly on inside information, most of which is 
 purely guess work. 
 
 Yet these Cagliostros of the linancial centers have con- 
 tributed largely to the disrepute speculation occasionally 
 falls to in this countrv, due to the laxitv of the auth(trities, 
 who, it seems, might find some way tn drive them out nf 
 business. 
 
 There are also the so-called financial geniuses wh<» have 
 devised a system of reducing speculation to an accurate 
 science, who by charts or other devices, claim they can accu- 
 rately gauge the fluctuation in prices so that there is no 
 risk whatever. Scheme after scheme of this character has 
 been launched, each one finding some following, at times 
 lai'ge, at other tmies but a beggar's guard of embryonic 
 speculators. Some have been put forth by sincere fools; 
 others by outright crooks who know only too well how to at- 
 tune their plans to the credulity of the public. But none 
 ever succeed. One by one they go to pieces, leaving in their 
 wake a train of victims. 
 
 Speculation cannot be harnessed to comply with any man- 
 made laws. Keen insight into conditions, a thorough famil- 
 iarity with the earnings of certain properties, or the C(Ui(li- 
 tion of the crops, if this is the commodity in which a spec- 
 ulation is concerned, and a clear knowledge of the tenden- 
 cies and trend, are abilities making for successful specula- 
 tion, and they are individualistic, not mechanical. A person 
 might as well try to bi-eak the T>ank of ^lonte Carlo on a 
 system (»r any other game of chance as to attempt to reduce 
 speculation to a science. 
 
 It cannot be done, for there are too manv elements of 
 uncertaintv. Life itself consists of uncertainties. AVithal, 
 intelligent speculation is absolutely necessary tt> the mate- 
 rial progress of a nation. Risks must be taken to make head- 
 way in business as well as in the purchase of securities or 
 connnodities. 
 
INVESTMENTS AND SPECULATION 127 
 
 The country as a whole lias spent all the pvoeeeds of a 
 harvest in anticipation of it, long before it gets to the mar- 
 kets, and immediately starts upon contracting liabilities, ex- 
 pecting to meet them out of the next harvest. When it over- 
 does this and is disappointed, the country pays the penalty 
 by a business depression. We discount the future, and in 
 doing so, speculation plays the largest part. It is impos- 
 sible to denv this fact. 
 
 None of our railroads, nor any of our largest corpora- 
 tions could have ever attained their prominence or magni- 
 tude were there not an army of optimists confident of their 
 growth, willing to take chances in the enhancement of the 
 value of their securities when they were low. Where would 
 these properties have raised their necessary capital without 
 these speculators? 
 
 And when we consider that, as a result, many millions of 
 persons find emplo^^nent, we can see one of the great bene- 
 fits arising from speculation. 
 
 Speculation in itself is vitally necessary. Its abuses 
 are what we should strive to control. IMuch of that can be 
 done away with by the spread of intelligence regarding its 
 operations. 
 
XXIII. THE MYSTERY OF A B^U^AXCE SHEET. 
 
 Corporations whose securities are largely in the hands 
 of tlie public ought to furnish their shareholders a state- 
 ment of their financial condition at least once a year. Ac- 
 conipanying this annual report there should be a statement 
 of the earnings and disbursements during the year. 
 
 Shareholders have a right to know what the managers of 
 their corporations are doing in a business way and how 
 their proi>erties are being managed by those chosen among 
 them to officer and direct them. 
 
 Not all corporations, however, do this. Various reas- 
 ons are given in explanation. Some claim that in making 
 their affairs known they lay their trade secrets before com- 
 petitors. Other corporations assert there is nothing to be 
 gained by revealing their profits as long as the stockhold- 
 ers are receiving dividends regularly, but that such disclos- 
 ures are likely to subject them to annoying inquisitions 
 from tax gatherers. In answer to the first statement it is to 
 be said that financial statements can be prepared so as not 
 to reveal trade secrets. In answer to the second claim, no 
 corporation ought to shirk paying its legitimate propor- 
 tion of taxes. 
 
 Secrec)^ regarding financial operations has a bad effect 
 U])on confidence as it rightly should have. Unless a corpor- 
 ation is a strong one and has had an enviable financial rep- 
 utation for years, the refusal to make its affairs known to 
 the shareholders has the inevitable tendencv to create the 
 suspicion that not all is as well with it as the corporation 
 would wish to have the shareholders believe. 
 
 As a matter of i»ii1)lic policy, the National Government 
 has made it cominilsory for the railroads to make monthly 
 reports of earnings and operating expenses to the Inter- 
 
 128 
 
INVESTMENTS AND SPECULATION 129 
 
 state Commerce Coimnission and ^vllile these reports still 
 lack clarity in makinpj them intelligible to most sharehold- 
 ers, they at least afford the opportunity to make intelligible 
 comparisons. Some of the states make it also compulsory 
 for the public service corporations to file their earnings for 
 public inspection. But compulsion is far from satisfactory 
 in supplying shareholders with information, as is the case 
 when corporations recognize their rights and of their own 
 accord willingly publish statements. 
 
 The majority of our coi^orations have come to rec- 
 ognize their obligations to their stockholders in this respect 
 and at regular intervals issue earning statements and an 
 annual report at least once a year. The great United States 
 Steel Corporation even goes so far in recognizing the rights 
 of its more than 200,000 stockholders as to publish at least 
 once a month the tonnage in steel orders booked. 
 
 As far as the earnings and operating expenses are con- 
 cerned, there can be little about them to confuse the intell- 
 igent stockholder. There can be no jockeying with these 
 figures for any length of time without the fact becoming 
 apparent very soon. 
 
 A\niere the lay mind, unfamiliar with the intricacies of 
 bookkeeping is likely to be puzzled, is in the corporation's 
 balance sheet which is supposed to give to the stockholders 
 an accounting of its assets and liabilities. It is here that a 
 good deal of educational work is necessary. The appraised 
 value of a coi'poration 's assets must be largely accepted up- 
 on faith. A large number of corporations, however, in an 
 effort to convince shareholders regarding the authenticity 
 of the appraisement of their financial condition go so far 
 as to secure an independent audit by certified accountants, 
 a method which has been verv well received and can usuallv 
 be relied upon. 
 
 But an independent audit is not always such as it should 
 be. T have often seen certified statements of this character 
 which would no more convince me that the balance sheet 
 
 B.VII— 9 
 
130 LOUIS GUENTHER 
 
 sii])niittcd was conservative than had the corporations sub- 
 mitted the figures unvouched for. Some of these account- 
 ants sini})]}- certify that tliev liave checked the different 
 items on a corjKn-ation's book and have found tlieni as rep- 
 resented. This, bluntly stated, merely means that they have 
 accepted them as being correct without carefully going into 
 the matter to determine whether there has been any infla- 
 tion in ap})raising the assets with the purpose in view of es- 
 tablishing a strong financial showing. 
 
 To what an extent a financial statement can be made to 
 falsify, I publish herewith a statement issued a few years 
 ago by a wireless telegraph concern which had been engaged 
 in the fraudulent exploitation of its shares until the Gov- 
 ernment stepped in and init a stop to the swindle. This is 
 the statement : 
 
 ASSETS. 
 
 Patents and patent rights $ 5,005,100.00 
 
 Stock in treasury (par) 5.310,41(».(K) 
 
 Stocks and bonds in other companies — book value 14.128,610.00 
 
 Cash in treasury and treasury agents 109,400.70 
 
 Office furniture and fi.xtures 3.975.38 
 
 Factory material on hand 9,285.55 
 
 Factories and equipments 2.), 99(5. 94 
 
 liilis and accounts receivable 17(),49S.08 
 
 Land stations and real estate 215.442.50 
 
 Boat stations 287.500.00 
 
 $25,272,219.15 
 LIABILITIES. 
 
 Capital stock (authorized issue) $20,000,000.00 
 
 Bills and accounts payable (current monthly) 15,556.37 
 
 Surplus 5,256.662.78 
 
 $25,272,219.15 
 
 Here is a statement which superficially present.s a very 
 strong financial position. Taken on its face, it shows a book 
 value for the shares which are of a par value of $\0, of over 
 $12.50, not including its speculative possibilities. On this 
 flimsy financial statement the financial sharks who were 
 operating this scheme succeeded in selling considerable 
 stock for as high as $?>0 a share, or three times its par value. 
 The par value is the value of the shares as printed on the 
 
INVESTMENTS AND SPECULATION 131 
 
 face of the certificate of stock. The very fact that so many 
 people accepted this financial statement as representing the 
 actual financial condition of the corporation, is sufficient 
 proof in itself that very few investors look behind figures, 
 although a great many things may be concealed there. 
 
 To an analytical mind the first glance at this statement 
 would arouse at once a justifiable suspicion that there was a 
 great deal of inflation contained in the security. Investiga- 
 tion would have revealed the fact that an abnormal valua- 
 tion was placed on "patents and patent rights." Going 
 further, the item of stocks and bonds in other companies 
 was apparent on the face of it to be gi-ossly exaggerated. 
 If nothing else would suggest this conclusion, the state- 
 ment "book value" would have done so, since a well-man- 
 aged corporation whose affairs are conservatively con- 
 ducted does not value securities owned in other corpora- 
 tions at their book value, but market or liquidatable value. 
 
 In this instance it happened that these stocks and bonds 
 were all in defunct concerns taken over by this concern and 
 which had little, if any, value. As for the value of the "land 
 stations and real estate" and "boat stations," thev were 
 also arbitrarily appraised. 
 
 The result is that instead of there being a surplus of 
 $5,256,662.78 as indicated, there was a deficit after the in- 
 flation in "patents" of $5,005,100.00, in "stock in the treas- 
 ury" of $5,310,410.00, and in "stocks and bonds in other 
 companies" of $14,128,610.00 had been deducted from the 
 assets. Together these three items aggregated $24,444,120.00. 
 Deducting them from the assets left only $840,099, if what 
 can be considered actual physical value of the remaining 
 items are accepted as represented. Placed side by side with 
 the liabilities, there is then a deficit of $19,184,457, instead 
 of a surplus of $5,256,662.78, a hopeless case of insolvency 
 as the shareholders' stock is practically worthless. 
 
 The illustration serves to enlighten the readers of this 
 book with respect to the possibilities tkat lie in juggling 
 
132 LOUIS GUENTHER 
 
 figures in making up a financial statement where tlie work 
 is in charge of unscrupulous people. 
 
 Such items in a financial statement as "good-will,'* 
 "patent rights," "trade marks," etc., should never be in- 
 cluded among the assets. In the first place, they are not 
 tangible assets. There is no wav bv which a market value 
 may be placed upon them. I do not assert that they have 
 no worth at all, for in some instances they are quite valua- 
 ble, but what that value is can onlv be determined when an 
 offer is made for them. 
 
 The mere assumption on the part of the directors that 
 the)^ would not sell these assets except at the figures at 
 which they have valued them in their statement, by no means 
 makes them w^ortli that much. Thev mav never receive such 
 
 ft ft- 
 
 an offer. 
 
 Such items should be carried as concealed assets. To 
 use them for the purpose of striking a balance in a corpor- 
 ation's financial statement must arouse at once the belief 
 in the intelligent investor's miud that their function is to 
 perform the work of inflation, to make a better showing 
 than really exists. What is more, under the cover of such 
 assets, insolvency can be concealed, as the value of these 
 assets may be correspondingly increased as the liabilities 
 grow. 
 
 Creditors of a corporation, however, are very soldc^m 
 deceived by these assets. They do not pay their bills. When 
 the creditors cannot get their money promptly, it is not long 
 before the corporation is thrown into bankru])tcy. When 
 this occurs the unsuspecting shareholders who have l)eeu 
 going along unsuspiciously in the belief that their corpora- 
 tion was in a strong financial shape, are rudely awakened 
 to the existence of a contrarv state of affairs. 
 
 ft 
 
 A financial wit once described the surplus item in a fi- 
 nancial statement as a corporation's ash heap on which 
 were thrown all the undesi \able items which it was advis- 
 able to keep from too prying eyes. The descri23tion, how- 
 
INVESTMENTS AND SPECULATION 133 
 
 ever, is far-fotclied. With reputable corporations the sur- 
 plus stands for exactly what it means, the excess in assets 
 over the liabilities. It is the reverse with corporations of 
 the other type. 
 
 For a financial schemer concerned only in roping in 
 credulous investors, juggling figures so as to get at a healthy 
 surplus is the least difficult part of his work. In the finan- 
 cial statements which dishonest promotors concoct for their 
 ventures, all of them mani; ulate the figures. Their main 
 concern is in getting people to believe in their figures. 
 
 I am reminded of a case which occurred some years ago 
 where a Get-Rich-Quick Wallingford succeeded in deceiv- 
 ing even some very shrewd bankers by including for a large 
 amount among his assets the item ''Government and other 
 bonds," thereby establishing for his venture a robust sur- 
 plus upon which he was able to secure quite a number of 
 loans. This item included one government bond of the de- 
 nomination of $1,000. All the other bonds were not worth 
 the paper on which they were printed. 
 
 That a surplus at times is meaningless was demonstra- 
 ted some 3'ears ago by the failure of the Baltimore & Ohio, 
 which had been allowed by the younger generation of the 
 founders of the propert}^ to run down. Up to the day of the 
 failure the annual statement carried a surplus in excess of 
 $3(),000,000. But there was no suiplus. The alleged surplus 
 proved to be an item against which the railroad chargc^l sup- 
 posed equities and expenditures whieh were regarded as 
 investments. The management was deceiving itself quite as 
 much as it did the stockholders. 
 
 AVliat T should regard an illuminating financial state- 
 ment conservatively prepared is the following, recently sub- 
 mitted to its shareholders by one of the smaller electrical 
 manufacturing companies: 
 
 ASSETS. 
 PLANT. 
 
 Lands. Suildinprs. tools, patterns, equipment, etc., (less Reserve 
 
 for Depreciation deducted $547,903.99) $1,348,366.70 
 
134 LOUIS GUENTHER 
 
 PATENTS. 
 
 Patents at cost dcss depreciation deducted. $104,832.37) 25,000.00 
 
 STOCKS AND BONDS 24.021.42 
 
 MERCHANDISE. 
 
 At factory — at shop cost $f>r,.'i.230.24 
 
 Consignment — at shop cost fi4.s{)0.20 
 
 CURRENT ASSETS. 
 
 Accounts receivable 5;76fi.407.80 
 
 Less reserve for doubtful accounts lo.ooo.oo 
 
 $756,407.80 
 
 Bills receivable 31.539.14 
 
 Cash 136.909.41 
 
 730,030.44 
 
 924.916.35 
 
 Total merchandise and current assets 1.654.946.79 
 
 Total $3,052,334.91 
 
 CAPITAL AND LLABILITIES. 
 
 CAPTTAT, STOCK $1,958,375.00 
 
 CURRENT LIABILITIES. 
 
 Accounts pavable $ 22,398.57 
 
 Notes payable 657.500.00 
 
 SURPLUS. 
 
 Balance January 1, 1910 284,719.75 
 
 Net prolit ironi operation for the 
 
 year 1910 $278,144.11 
 
 Less interest paid $ 44,300.02 
 
 Less dividends paid 104.502.50 148,802.52 129,341.59 
 
 679.898.57 
 
 Balance /or December 31, 1910 414,061.34 
 
 Total $3,052,334.91 
 
 This financial statcmont is as coniplcto in essential in- 
 foTination for the sliaroholdors as the other and previous 
 statement is lacking in it. Tn this statement the cost of pat- 
 ents is placed at a nominal sum, so small in fact as to show 
 that their valne ahout represents the actual outlay to secure 
 the patents. The other item, ''stocks and honds/' is also 
 so small as to be insi<]:nificant. What makes the statement 
 stronc: and carries the im]iression that the corporation has 
 tnkcii its stockholders wholly into its confidence, is the care 
 taken to show ever^'thinc: as it actually is. 
 
 Tn KuLcland the shareholders take a .c:reater interest in 
 the affairs of their corporations. They do not do as many 
 American shareholders do — leave it mostly to the officers 
 and directors to represent them at their annual meetings 
 through proxies. They come to the meetings in ninnhers 
 prepared to heckle the chairman thoroughly regarding dif- 
 
INVESTMENTS AND SPECULATION 135 
 
 f eroDt items in the annual statement about wliicli they have 
 just cause for criticism. 
 
 If more heckling were done by the stockholders in this 
 country at their annual meetings, more care would be ex- 
 ercised by the directors of our corporations to have their 
 annual statements comprehensive. There would be less 
 mysticism in connection with the different items. We have 
 the habit of leaving such matters, as vital as they are, to 
 others. Each item in a financial statement should be care- 
 fully scrutinized and when there is any doubt in the mind a 
 courteous request to the secretary for more detailed facts 
 should bring the desired information. Any effort at con- 
 cealment is a reason to arouse your suspicion unless a satis- 
 factory explanation is offered. 
 
 In late years in the capitalization of industrial corpor- 
 ations, the tendency has been to depart from our more con- 
 servative methods of basing the capital on physical assets, 
 with a reasonable margin for future growth. Instead, the 
 earning possibilities of a corporation are capitalized. If a 
 corporation has indicated it can earn $100,000 a year, the 
 capital is placed around $1,000,000, and so on, irrespective 
 of its actual assets. Fundamentally this idea is wi'ong. It 
 is at the bottom of our evil of stock-watering. It robs secu- 
 rities of book value and places them upon the intangible 
 basis of earning power. 
 
 That this is true a simple illustration will prove by re- 
 ducing stock to a partnership arrangement. One would 
 hardly pay for a half-interest in a partnership $100,000 be- 
 cause of the fact that the business was making $20,000 a year 
 which divided between two partners would reduce the rev- 
 enue for each to $10,000, or 10 per cent. There are too many 
 contingencies likely to arise that would reduce the revenue 
 to a much smaller sum. Yet it is on this very idea that some 
 of our captains of industry base their capital for their ven- 
 tures. 
 
XXIV. TTTK FrXPTTOX OF EXCTTAXOES. 
 
 ^loro than a hniKlred years ago a small p*oup of men 
 sat in a building located in what is now the lioart of New 
 York's financial district and organized an Exchange. Their 
 object was the common one of meeting daily to deal in the 
 few securities for which at the time there was a market. 
 
 New York, then, although even thus early the financial 
 capital of the struggling young country, was still a small 
 city, not much larger in ])i>pulation than that <>f All)any to- 
 day. But it already had a number of thi'iving l)anks and 
 small industries in which its wealthy citizens were tinan- 
 cially interested and it was the idea to provide a convenient 
 place where these stocks could be bought and sold that was 
 responsible for the establishment of the Exchange. 
 
 The founders of the Exchange, which still exists as the 
 New York Stock Exchange, desired their organization to 
 be an exclusive one. Therefore iiistead of publicly incor- 
 porating their association under the laws of the state, they 
 formed a club whose object w^as to bring the members to- 
 gether for commercial, instead of social, intercourse. 
 
 As a club the members could of course arbitrarily control 
 its policy. They could decide without any outside interfer- 
 ence who might join their organization. This rule still pre- 
 vails. AVhile the members are free to sell their membership, 
 the Stock Exchange, or club, as it really is, retains com])lete 
 jurisdiction over the membershii). The Exchange can ac- 
 cept or reject the applicatinn for niemb(>rshi]i of any ]iur- 
 chaser of a seat. 
 
 A seat on the Stock Exchange is what a membership is 
 called. It is a figurative expression, as there are no chairs 
 on the floor of the l-'xchange. There is too nmch activity to 
 permit trading in securities in such leisurely fashion. The 
 
 136 
 
INVESTMENTS AND SPECULATION 137 
 
 term, however, has been handed down from the early days 
 of the Stock Exchange when the business transacted was of 
 limited volume. There were then chairs in the little room in 
 which the members gathered, in which they could lounge 
 while the secretary read the offers and bids the members 
 of the organization made and upon which they governed 
 their dealings between themselves. Such calls were made 
 but once a day. From that practice the term **a seat on the 
 Stock Exchange" originated. 
 
 Yet, the Stock Exchange, or for that matter any of our 
 other exchanges, are not original with us, or are their func- 
 tions vastl}^ different from those of the exchanges in other 
 countries. Primarily they sprung into existence in response 
 to the urgent demand for a central clearing-house for secu- 
 rities or commodities in which the public is vitally inter- 
 ested. Our New York Stock Exchange is closely patterned 
 after the London Stock Exchange. Our grain and cotton 
 exchanges have for their models the leading exchanges on 
 the other side dealing in similar commodities. 
 
 It is equally true in this country, as it is abroad, that the 
 leading exchanges are a law unto themselves. Their func- 
 tions are of such vastly important character that the slight- 
 est disturbance to their subtle influence is at once felt even 
 to the most extreme ends of our commercial sphere of oper- 
 ation. 
 
 Politically the center of a nation's power is at its cap- 
 ital. Commercially, though, it is at the moneyed center of 
 the comitiy and it is here also that the most powerful and 
 influential exchanges will be found. In the United States, 
 New York City is the moneyed capital of the countiy; in 
 Canada, ^lontreal : in England, London ; in Gennany, Ber- 
 lin; in France, Paris; in Australia, Vienna; and in Holland, 
 Amsterdam. 
 
 We little realize, and much less appreciate, how abso- 
 lutely essential to our material progress are our exchanges. 
 While it may be true that we possibly could get along with- 
 
138 LOUIS GUENTHER 
 
 out them, it is iicvorthck'ss a truism that witliout thi'Ui our 
 commercial advancement would proceed at a snail's pace. 
 Simmered down to its hist analysis, the principal function of 
 exchaneres is to provide a central market. They serve as 
 a place for quick transactions. They make it possible to bar- 
 ter in securities or commodities in seconds, whereas without 
 their existence it could not be done in a day's time, some- 
 times longer, for the sellers would be forced to go hunting 
 for buyers and even when they finally got together it would 
 still be a question between them whether the prices agreed 
 upon were fair. 
 
 Time and distance is a great factor. The foundei-s <»f 
 our Stock Exchange desired to save the one and cut down 
 the other when they organized the Exchange over a century 
 ago, and in doing this they were but following a natural im- 
 pulse. They were merely com])lying with the dictates of 
 economic laws which make themselves felt in everv nation, 
 whether its native tongue be English, Cxerman, Italian or 
 French. 
 
 While primarily the object of an exchange is to provide 
 convenience in trading, it exercises other functions of no 
 less importance. Besides bringing traders together, ex- 
 changes also exert a strong tendency towards an equilil)rium 
 ill prices. That is to say, by gathering about them a large 
 community interested in certain securities for which they 
 are the central market, there quite naturally follows free 
 and unrestrained bidding and offering, through which is 
 established, in accordance with prevailing conditions, a 
 greater stability to values. Their price-making function, as 
 determined by the dealings transacted between their mem- 
 bers, furnished the banking interests of the country a fair 
 index as to the extent loans may safely be made upon secu- 
 rities. Herein alone is a function of an exchange of inesti- 
 mable value. 
 
 Another function of an exchange is that of acting as 
 barometers of trade. They anticipate the ebb and flow of 
 
INVESTMENTS AND SPECULATION 139 
 
 prosperity long before the changes make themselves felt 
 upon the surface of business. In times of panic they act 
 as a bulwark of strength even in face of the ruthless slaugh- 
 ter in prices, for we could imagine what might possibly oc- 
 cur in the form of demoralization if there were no place 
 where securities could be readilv sold when demands for 
 ready capital press a community. 
 
 I am now discussing generally the functions of exchang- 
 es and not dealing with the character of their operations. I 
 am attempting to show how they fulfill one of the principal 
 necessities to our economic well-being— to prove how utterly 
 foolish it would be to make any attempt to legislate them 
 out of existence. Controlled thev should be, but onlv in so 
 far as to comix'l them to properly exercise their functions. 
 Beyond that they ought not to be disturbed. Any legislative 
 restriction aiming at their extinction is but a blow at the 
 foundations of a nation's progress and prosperity. 
 
 A seat on the New York Stock Exchange has sold close 
 to $100,000. It has been some years since the value of a seat 
 has been as low as $50,000. We have here, figuratively 
 speaking, some idea of its importance. It shows that a mem- 
 bership is an exceedingly valuable privilege and, as the 
 country grows older and wealthier, it is likely to increase 
 in value. 
 
 The popular imi)ression is that what makes the seats on 
 the Exchange so valuable is the limited membership. This 
 is more or less a fallacy. There are other exchanges in Xew 
 York City, a smaller stock exchange and a produce ex- 
 change ; the membership of each of these exchanges is also 
 limited. Yet the privilege or entree to their floors can be 
 had for a nominal sum— a bagatelle compared to the price 
 of a Stock Exchange seat. The vast amount of business 
 transacted every year on the Stock Exchange alone is re- 
 sponsible for the high price the seats bring. 
 
 To belong to the London Stock Exchange costs more 
 than a seat on our Exchange for the London Exchange does 
 
140 LOUIS GUENTHER 
 
 even a much larger business. In France, however, where 
 the Government controls the Bourse and limits the member- 
 ship to a select few, the privilege is exceedingly valuable, a 
 recent estimate making a membership worth as high as one 
 million dollars. 
 
 Still it is not to be wttndered at that men are to be found 
 willing to i^ay such large sums of money to exercise these 
 privileges. Often in single active sessions on our Stock 
 Exchange as many as 2,000,000 shares of stock are dealt in 
 and there have been sessions when the totals have reached 
 as high as 3,000,000 shares and this does not include at all, 
 the transactions in bonds which reach large proportions. 
 
 What this means in dollars and cents mav best be illus- 
 trated by a short example in figures. The unit of trading 
 on the Stock Exchange is $100, so that, if a stock has a i>ar 
 value of only $50 each, 100 shares reported in the transac- 
 tions really stands for 200 shares of stock. To make plainer 
 this unit of trading, I call attention to such stocks as Read- 
 ing, Lehigh Valley, Pennsylvania and AVestinghouse Elec- 
 tric. Although traded in on the basis of a $100 par value, 
 these stocks are issued only at $50 par value and are 
 called on the Stock Exchange' half-shares. If a pei-son 
 were to purchase 100 shares of any one of these stocks on 
 the Stock Exchange unit, he would be really buying only 50 
 shares. 
 
 Now, were we to strike an average ]^rice of $50 as the 
 price realized for all stocks sold (»n the Stock Exchange in a 
 single active session, the total business would represent a 
 turn-over in wealth of $150,000,000 for 3,0()0.0()0 shares; 
 $100,000,000 foi' 2,000,000 shares and $50,000,000 for 1,000,- 
 000 shares. The average I have taken is a reasonable one 
 for there are many securities listed on the Xew York Stock 
 Exchange conunanding prices considerably above their ]"»ar 
 value of $100 and a small numbei* under $;50 a share, while 
 somewhere between that and $100 is the range in prices of 
 a lai'ge mim1)er of securities; for instance, Pennsvlvania, 
 
INVESTMENTS AND SPECULATION 141 
 
 New Haven, Consolidated Gas, Readini;-, St. Paul, Lacka- 
 wanna, Cliicai^o & Northwestern, Southern Pacific, Union 
 Pacific and Jersev Central, to mention only a few of our 
 well-known securities, a price considei"a])ly in excess of 
 their par value. 
 
 By the rules of the Exchange a nieml)er is not permitted 
 to charge his client more than J per cent of the par value 
 of the stock as his conunission, nor can a member charge 
 less except when executing an order for another member ; 
 then he is allowed to make a charge of $2 for each 100 shares. 
 This conmiission to the customer comes to $12.50 on each 
 100 shares of stock and $1.25 on each $1,000 denomination in 
 bonds. 
 
 I am going into these small details to emphasize and 
 drive home the realization of what a vast and gigantic busi- 
 ness machine the Stock Exchange is. If its members handled 
 orders for 3,000,000 shares for their clients, in one session 
 their conunissions would reach $365,000. If these orders 
 were between members, the commissions would be only $60,- 
 000; on 2,000,000 shares for clients, they would receive as 
 conmiission $250,000 ; between members, only $40,000 ; and 
 on 1,000,000 shares for clients, commissions of $125,000; 
 between members, but $20,000. 
 
 With such possi])iHties for making money, it can be read- 
 ily understood why men will eagerly pay as high as $100,- 
 000 for the privilege of belonging to the Stock Exchange. 
 It is safe to say that in an active year of speculation the 
 public pays as nuu'h as $100,000,000 in commissions to the 
 members of the Stock Exchange on stocks alone and almost 
 as much fnv ])onds l)ought on its floor and not over the 
 counter. In this estimate there is not included the broker- 
 age the pu])Iic pays to members of the grain and cotton ex- 
 changes as well as to the minor exchanges of the counti'v, of 
 which there are quite a nuni])er scattered through our diffei*- 
 ent large cities. 
 
 But it is not in the commissions the members of the Ex- 
 
142 LOUIS GUENTHER 
 
 c'liaiigc receive tliat the most imposin^^ statistics arc to be 
 found. Tt is in the ac:tn'cp:ate wealth the}^ are instrumental 
 in swinp:in^^ back and forth, wliicli causes astnnislnncnt and 
 reflects tlie i^reat power of the Exchange. 
 
 Here again, by striking an average for the 300 or more 
 days in a year tlie Stuck Exchange does ])usiness of only 
 500,000 shares as the daily volume of transactions, we arrive 
 at the enormous total of $15,000,000,000 in securities chang- 
 ing hands, not considering bonds at all in this estimate. 
 Some years tlie figures are even larger. 
 
 It is true that a great many of the active securities 
 change ownership many times during an active session. It 
 is a fact also that there is considerable duplication and that 
 a great bulk of securities are bought and sold by speculators 
 with no intention to hold for more than a short time and to 
 be disposed of as soon as there is a ])rotit, or when the hold- 
 ers are compelled to let go on account of exhausted margins, 
 but the multiplicity of transactions can in no way overshad- 
 ow the real function of the Exchange, which is, as already 
 stated, that of a central market. In like measure is the 
 statement true of the cotton and grain exchanges, where, in- 
 stead of shares, commodities are bought and sold. 
 
 Viewing our exchanges, therefore, in their proper light, 
 we nmst appreciate their im])ortance. AVere it not for their 
 ability to make capital mol)ile, there would exist a great dis- 
 parity in ])rices. It stands to reason that the greater the 
 number of buyers and s<'llers gathered together, the lietter 
 and firmer tone there will be to values because of the con- 
 centrated market. 
 
 It is not because Reading <»v I^nitinl States Steel shares 
 are superior securities in point of intrinsic worth to a good 
 many other securities that makes it ])ossib]e to Wud a market 
 f(»r them at a moment's notice. It is due ti> the fact that 
 thev have a concentrated and active market which the Stock 
 Exchange alone has made possible. Peo})le will buy these 
 stocks and buy others equally active and listed on the Ex- 
 
INVESTMENTS AND SPECULATION 143 
 
 change as they realize they can sell them quickly and at frac- 
 tional changes in the price, and banks will lend money on 
 them with equal readiness for the same reasons. They will 
 do this in preference to purchasing unlisted securities as a 
 market, for this latter class of securities may not be avail- 
 able at the time one is most wanted. Thus we see where 
 the exchanges perform two useful purposes, that of being a 
 price-making arbiter, a power unto itself of fixing values, 
 and that of being a quick and facile market, rapidly regulat- 
 ing itself to existing conditions. 
 
 In a larger way and almost unconsciously, the exchanges 
 accomplish what a country at all times is in need of, and 
 that is a source through which to raise capital for the devel- 
 opment of its resources. By the facilities for trading that 
 they are in a position to offer, they quicken the speculative 
 instincts of the people. 
 
 It would have been impossible to have raised the cap- 
 ital for the billion and half United States Steel Corporation 
 without the Stock Exchange and its facilities. It opened the 
 sluice ways to the nation's wealth. It made at once possible 
 the marketing of its shares. 
 
 The fact is undeniable that capital can be more quickly 
 raised for general industry and for the expansion of our 
 railroads when the public is aware that there will be 
 a market for the new securities. What the public wants 
 is a market in which it can sell as well as buy and 
 this the Exchange provides. Cai)ital gravitates to the 
 moneyed centers. This is a natural law as nnich as is the 
 law of gi-avity which makes the apple fall to the earth. It 
 will flow to the center where it can beget the largest return 
 for its use. AVhat is more natural then, tlian that it should 
 congest itself about the portals of the principal exchanges 
 and its masters avail themselves of their facilities. For 
 capital has its masters. If they are not in the form of the 
 *' captains of industry" as we are wont to call our pi'eat un- 
 derwriting bankers, they are unconsciously in the shape of 
 
144 LOUIS GUENTHER 
 
 acciuinilated deposits in the Ijaiiks. These deposits, to em- 
 ploy tlieinselves protital)ly aud still be instantly available 
 for other pnrposes, find the avenue whereby this object can 
 be accomplished through loans on securities listed on the 
 exchange or in commodities, as in grain, cotton or metals. 
 
 That is the underlving reason fully explaining why it is 
 that oui' exchanges, like a great big drag net, can attract to 
 its doors from every direction and from what seems the 
 most inaccessible places, the liquid c^ipital of the nation. 
 
 Our exchanges bring in the capital from the four points 
 of the compass, some of it for investment, other portions for 
 speculation and again other portions, the minor part, from 
 foolish people who, sad to say, deliberately attempt to ac- 
 quire wealth overnight by simple gambling on the tiuctua- 
 tions. To the shrewd and fortunate ones, the Exchange re- 
 turns their money with substantial profits. From the mis- 
 guided and unfortunate ones, it exacts its toll. Such will 
 always prove the case. There is no law to i)revent it. It is 
 but one of the phases of the operation of the exchanges over 
 which no control can be exercised, for in their function of es- 
 tablishing i^rices there is no way to jDrevent gambling in the 
 fluctuations in the quotations. 
 
 It has been pointed out by reformers that this could be 
 done by prohil)iting margin-trading, by forcing the outright 
 I)urchase of securities and commodities. But this is a foolish 
 conclusion. Suppose this were attempted. What then, would 
 liai>i)en? Instead of the brokers arranging the loan the i)ur- 
 chaser of a security would attend to it. He could not be 
 prevented from borrowing a certain sum of money from a 
 ])ank on securities if there was in existence a law conq)ell- 
 ing him to purchase securities outright. 
 
 If margin-trading is illegal, either from a mural or legal 
 standpoint, then it is equally illegal to purchase real estate 
 subject to an incumbrance. Fundamentally the practice is 
 not WTong. Where it is at fault is its abuse by people who, 
 iK'causc of their financial circumstances, ought not to buy 
 
INVESTMENTS AND SPECULATION 145 
 
 on margin any more than a person with a few thonsand 
 dollars should attempt to buy a piece of property he could 
 not carry, but does carry it because he expects to sell it at 
 a profit before he is called upon for more money. This is 
 not speculation ; it is gambling. 
 
 The real purpose of an exchange is to make capital mo- 
 l)ile by gathering it together. It provides capital with the 
 opportunities to make money. It opens channels for 
 investments. It is a price maker, a barometer of trade, in 
 fact it is a gTcat big heart through which come the power 
 and blood needed to feed the arteries of conmaerce. With- 
 out them the commercial progress of a country could be put 
 back many years. 
 
 B.VII— 10 
 
XXV. .METHODS OF TRADING IX STOCKS. 
 
 All transactions on the New York Stock Exchange are 
 for cash. There is no niargin-tradinu'. Members must set- 
 tle all differences between them for the transactions of the 
 previous 24 hours before or at " llannnond's Time" or 2:15 
 ]). m. At that time all securities nuist ])e delivered. All stocks 
 bought on the ])revious day nmst then be accepted, and all 
 stocks sold, delivered. Otherwise a purchase or a sale is 
 not good. 
 
 If a member cannot settle, he is declared insolvent, and 
 the secretary announces his embarrassment from the ros- 
 trum of the Exchange. His accounts are then closed. The 
 Exchange assumes no responsibility for the liabilities of a 
 bankrupt member. They fall entirely upon the members 
 who are unfortunate enough to be the creditors of the insol- 
 vent member. 
 
 AVhatever value a member's seat possesses, however, ac- 
 cording to the rules of the Exchange, reverts to his cred- 
 itors. While failures on the Exchange are unavoidable, the 
 percentage is no larger than in other lines of business. 
 
 The Exchange operates a clearing-house, nuich on the 
 same ])lan as the clearing-house for an association of banks. 
 This clearing-house makes it convenient for the nu^mbers 
 to settle their obligations to one another with the least de- 
 lay. 
 
 It wotdd prove a slow and cumbersome process were it 
 necessary every time a member bought stock for a client to 
 draw a cheek to the menil)er from whom it was ])urchased or 
 if stock was sold, to deliver the certificate to the Iniyer and 
 in turn receive a clu^'k. Through the cleai*ing-h(^use such 
 details are sim]dified. Each member has an account against 
 which is credited stocks bought and debitcMl with stocks 
 sold, and settlement made accordingly. 
 
 146 
 
INVESTMENTS AND SPECULATION 147 
 
 But tlu' uiechauism of the clearing-house is not of such 
 importance as are the methods of trading employed on the 
 Stock Exchange. These methods may be broadly divided 
 into two forms ; after this they mav be subdivided. 
 
 First there is the purchase of securities outright. This 
 is the simplest form. All that is necessary in this case is 
 to give a member of an Exchange an order to buy a certain 
 amount of stock at a given price, or at the market price. The 
 broker has the order executed and he delivers the security, 
 charging the usual commission of J per cent. His transac- 
 tion is completed when the stock is delivered. 
 
 Market orders are much more easily executed, as thev 
 G:ive the broker full liberty to buy at whatever the market 
 price may be at the time tlie order is given, but such orders 
 are not always to the advantage of the customer. In an ac- 
 tive session a stock may jump a number of points in price 
 before the broker can fill his customer's order. Sometimes 
 it occurs in a declining market, that a market order is filled 
 at a lower price than a customer expected. Still, it is not a 
 practice among shrewd traders to place market orders, es- 
 pecially in inactive securities or those stocks in which there 
 is very little trading when it can be avoided. 
 
 In buying bonds on the Stock Exchange, or for that mat- 
 ter, over the counter of a bond house, it is understood that 
 accrued interest is added to the price, although this is not 
 mentioned. For example, a bond bought in May, whose in- 
 terest is due in July, carries three months' interest which is 
 represented in the coupon attached to the bond. This inter- 
 est for the period between January and ]\[ay properly be- 
 longs to the holder (tf tlic bond from whom it is purchased, 
 and must be paid to him in addition to the purchase price. 
 
 When a stock is sold, tlic same proceedings are followed. 
 The member of the Exchange disposes of the security at a 
 fixed or market price, and when the sale is confimied and 
 the stock delivered, the broker pays his client, less his fixed 
 brokerage. 
 
148 LOUIS GUENTHER 
 
 The more complex form of operation uu the Stock Ex- 
 change is that of trading on margins. This, as already ex- 
 plained in the previous section, is a method of doing business 
 by which brokers finance the purchase or sale of securities 
 in part for their clients. Say, for example, a customer wish- 
 es to jDurchase one hundred shares of Union Pacific stock. 
 Suppose at the time the stock may be selling at $150 a share. 
 The buyer does not wish to purchase the stock outright, 
 which would cost him $15,000, plus $12.50, the broker's com- 
 mission. The customer makes a deposit, say, of $1,500, or 
 10 per cent of the purchase price. Members, unless they are 
 thoroughly satisfied with the financial responsibility of a 
 client, will not accept a deposit of less than 10 per cent of 
 the market price of securities, and will often demand more 
 if the securities desired have an inactive market. Some 
 inactive stock brokers will not buy for customers except by 
 outright purchase, since those stocks have no wide market 
 and the brokers do not wish to be ciiught with them on their 
 hands in case their customers cannot take them up. 
 
 But since the majority of Stock Exchange members will 
 buy active stocks for clients on a 10 per cent margin, the il- 
 lustration will serve my purpose in explaining in detail how 
 such orders are handled. After the customer deposits his 
 margin and gives his order, the broker, upon executing it, 
 arranges with his bank for a loan for the greater part of 
 the purchase price. It is the usual custom for banks to lend 
 on active securities up to 80 per cent of their market value, 
 always with the proviso that the borrower must deposit ad- 
 ditional collateral if the market price declines to where the 
 bank's equity in the loan is impaired. 
 
 With a loan from his bank for approximately 80 per 
 cent of the market price of a stock, with his customer having 
 deposited 10 per cent margin, there remains for the broker 
 therefore, only 10 per cent, which he must provide out of 
 his own capital. On some securities he must put up more, 
 while others he must finance wholly out of his own cajntal. 
 
INVESTMENTS AND SPECULATION 149 
 
 as tlic banks will make no loans on thorn. Here we have a 
 succinct ilhistration of what is called margin-trading in its 
 simplest form. Now, if Union Pacific stock advances to 
 $160 a share, the customer then has a profit of $10 a share, 
 or $1,000 on his one hundred shares, less, of course, commis- 
 sion and the interest he owes on the balance due on the 
 stock. 
 
 Although not stated, it is usually understood, unless 
 agi'eed otherwise, that all loans on stocks are call loans, made 
 on the prevailing rate of interest on such loans throughout 
 the period the bank carries the stock. 
 
 Call loans differ from time loans in that the lender is em- 
 powered to demand at his discretion and without previous 
 notice from the borrower, the pajTnent of his loan. AVith 
 a time loan, or a loan extending over a specified j^eriod, the 
 lender nuist wait for payment until the loan matures. 
 
 Large Stock Exchange operators whose business is worth 
 having because of the large profits in commissions, in their 
 trading, have an advantage over small traders as they can 
 privately arrange through their brokers for time loans at 
 reasonable rates of interest as a safeguard against any un- 
 usual flurry in interest rates, as is likely to occur in an ex- 
 cited period of speculative activity. 
 
 When there is an accunuilation of capital in the vaults of 
 the banks, interest rates on call loans are unusually low. 
 There have been times when such loans could be made by 
 large borrowers at interest rates as low as one per cent. But 
 this condition may quickly change. It is often reversed 
 around the crop-moving period, when interior banks 
 draw on their central bank reserves to provide for the bor- 
 rowing demand at home. Then it is when loanable capital 
 becomes scarce, and conmiands a premium. Call loans will 
 then sometimes jump to 100 per cent or more. 
 
 During the so-called Gates boom in stocks, call loans 
 touched as high as 200 per cent. For one half hour, in Oc- 
 tober, during the climax of the 1907 panic, call loans were 
 
150 LOUIS GUENTHER 
 
 not in 1)0 liad at any price, althou^li fi-cnziod brokers, whose 
 tense and Maiidied faces saw disaster starinj;: them in the 
 face, were willing: to make any terms to get money to save 
 them from the ruin that seemed inevitable. A powerful 
 bankinir syndicate was hurriedly formed to lend $25,000,000 
 on the Stock Exchanu^e. The monev was obtained, and it 
 saved the day. 
 
 In adverting to the varial)ility of interest rates for call 
 money it is my puri)ose to direct attention to the inliucnce 
 these changes exert on speculation. In fact observing spec- 
 ulators watch call money interest rates almost as closely as 
 they study ])revailing tendencies and conditions in trade, to 
 determine their etfect upon security prices. 
 
 Take up once more the case of the imaginary buyer of 
 one hundred shares of Union Pacific stock. If he has a 
 profit, he can close his account and draw from his broker 
 his margin, plus the additional amount represented by the 
 advance in his stock, or if he desires to extend his operation, 
 the increase in his credit balance allows him then to do so. 
 
 On the other hand, if Union Pacific, costing $150 a share, 
 declines in price, say in the neighborhood of $140, where the 
 Ijroker fears an impairment of his customer's margin, to 
 the point of exliaustion, he will call upon him for an addi- 
 tional margin and unless this deposit is immediately forth- 
 coming it is within the broker's discretion to close the ac- 
 count, sell the stock and settle with his customer. He does 
 not have to wait until the stock touches $140 a share before 
 doing this. For his own protection, he is allowed this priv- 
 ilege and it is so stated in the agreement the cust(^mer signs 
 when i)lacing an order. 
 
 Tile operation slightly varies when a buyer turns a seller 
 of stock. A sjx'culatoi-, l)elieving that Union Pacific around 
 $150 a share is selling too high, will sell the stock through the 
 broker at this i)rice. Sui»])ose he agrees to sell one hundred 
 shares. He deposits with his broker a margin <»f 10 jx-r 
 cent or $1,500. As he is selling, he does not have to borrow 
 
'INVESTMENTS AND SPECULATION 151 
 
 any money. He simply agrees to deliver one hundred shares 
 for $150 a share when he is ready to do it. Should Union 
 Pacific decline to $140 a share, the seller could buy one hun- 
 dred shares in the open market at this price and by so do- 
 ing would be making a delivery of his stock on his selling 
 contract. As he has sold it for $150 and bought it for $140 
 he has made a profit of $10 a share or $1,000 on his sale of 
 one hundred shares. The greater the decline in the price, 
 the larger his profit. But should Union Pacific advance in- 
 stead of decline in price, every point above $150, the price 
 he agreed to deliver it for, means a loss of one dollar on 
 each share as each j^oint represents the equivalent of one 
 dollar. If the stock advances to $160 a share, his margin 
 would be exhausted unless he had made an additional de- 
 posit to further protect himself. 
 
 Now, we here have an illustration of what is called mar- 
 gin-trading, and upon which so much abuse is heaped by 
 reformers who regard it as a malevolent influence upon the 
 country. Plow inconsistent is the assertion can be demon- 
 strated. A man of wealth or even one in comfortal)le cir- 
 cumstances may feel perfectly justified in the purchase of 
 a block of stock on margin. He may not wish to tie up the 
 entire purchase price by paying for it outright, although if 
 necessary he could advance the whole amount and take 
 the securities out of the market and put them away in his 
 safe. Has he not the right to make such a purchase? To 
 deny him the privilege and permit a tradesman to use his 
 credit for the purchase of goods would be unfair and unjust. 
 
 Suppose he were cut off from the ])rivilege of trading in 
 this manner through a mem])er of the Stock Exchange, he 
 could not be prevented from carrying out a similar opera- 
 tion though more cumbersome, in another form. If he has 
 credit at his bank he could l^orrow the money to buy the 
 stock outright, and when it has been delivered to him take 
 it over to the bank and pledge it as collateral for his loan. 
 When the stock shows him a profit he could then sell it, pay 
 
152 LOUIS GUENTHER 
 
 the loan and the matter would be closed. Assuredly banks 
 could not be prevented from makinjj^ loans upon ccood collat- 
 eral. That is their business. It is one of the principal main- 
 stays for the profitable eni])l(»yment of their deposits. 
 
 Between the two methods there is no difference, save the 
 one operation is more mobile than the other. There is noth- 
 ing fundamentally wrong in margin-trading. It is not an 
 evil. The evil lies in the abuse of the system by persons 
 whose circumstances and lack of knowledge does not justify 
 their trading in this manner. Such people attempt to do the 
 impossible on a ** shoe-string." To some extent it is the 
 fault of the brokers, but it is fair to say on behalf of the 
 majority of the members of the Stock Exchange, that they 
 do not encourage speculation among those whose financial 
 resources are limited, or by the ignorant, while speculative 
 accounts of women are regarded as particularly offensive 
 by the Stock Exchange itself. 
 
 It is well-nigh impossible to wholly exclude these peo- 
 ple from speculation. Somehow or other they will gamble 
 in some fonn or other, and find a means to satisfy their 
 cravings. The Government put a stop to the Louisiana lot- 
 tery, yet the people kept on gambling. Racing was stopped 
 by different states, but the restrictive measures failed to 
 check betting on the races. So is it true with card-]ilayiug. 
 Illegal it is, but gambling rooms continue to thrive. 
 
 There are other abuses of the machinery of the Stock Ex- 
 change, as T shall try to point out later, but tliey can in a 
 large measure be controlled without enforcing the suicidal 
 policy of striking a blow at the foundations of the function 
 it performs for the country— of providing it with a great 
 central market f(U' the greatest mass of its securities. 
 
 Selling stock on margin is regarded a greater evil than 
 even buying on margin. No one should sell Avhat he does 
 not own, is generally the claim made to justify this conten- 
 tion, llow inconsistent this is can also be easily demonstra- 
 ted. All of our millers sell flour loug before they loiow what 
 
INVESTMENTS AND SPECULATION 153 
 
 tlio liarvcst is to be. Tlicv bank on the correctness of their 
 judgment as to the size of the crop, expecting to buy their 
 wheat cheap enough from the farmers to make a gO(xl profit 
 out of the difference. The contractor agrees to buikl a house 
 for a certain price, relying on his judgment of the market 
 for labor and material to net him a good profit, although in 
 the meanwhile prices could have gone up above his estimate. 
 Even the laborer sells his labor ** short,'' and theoretically, 
 when he finds he cannot make his living expenses squai'e 
 with his wages, he has lost money. 
 
 AVherein then is the difference between the examples just 
 cited and selling securities ? If a person believes a security 
 is commanding, in his opinion, too high a price, he is morally 
 justified in selling it, even if he does not own it, as much as 
 the miller has the right to sell flour he expects to grind from 
 next season's wheat harvest, or the contractor estimates on 
 constructing a building from material h(^ has not yet bought 
 or labor he has not yet hired. 
 
 Kor can the lay mind fully appreciate, without being 
 thoroughly familiar with the economic value of specuhition, 
 what a great bulwark the selling of securities which are not 
 owned at the time they are sold is in times of stress, and 
 when everyone seems to be anxious to unload securities. In 
 such times these ** short" sales are the only mainstay of the 
 market. What has been sold and is not owned, must be 
 boudit back sooner or later bv the sellers so that thev mav 
 turn their profits into cash. Were it not f(n' these "short" 
 sales buttressing the market, ]")rices would not only decline 
 perpendicularly, but they would fall all to pieces and the 
 widespread fear it would arouse would have a most disas- 
 trous result. 
 
xxAX :mt:tttods of tt^adtxc tx sTorxs. 
 
 (Continued.) 
 
 On the stock c'Xclian,ii:os, the dollar mark is the sicrn of 
 values and it is divisible into fractions of ciL;hths. Kach 
 ii stands for 12^ cents of the dollar. To more clearly illus- 
 trate the pro})osition, take, as an exami)le, such a popular 
 stock as United States Steel and suppose it is reported in the 
 openinp: quotations as selling at the even mark of j^TO a 
 share. The next quotation is at 70j^: this means the stock 
 has been bought for $70.12 J. If the quotation is 70], it rep- 
 resents $70.25 ; at $70|^, it is $70.37 J ; at $70i, it is $70.50 ; at 
 $705, it is $70.67 J ; at $70^, it is $70.75 ; at $70g, it is $70.87 ; 
 and then $71. Conversely, every eighth fraction less in the 
 reported price of a stock represents a loss of exactly 12i 
 cents in its market value and correspondingly a greater loss 
 ■when the fractional declines are larger. 
 
 On the board of trade or the produce exchange the trans- 
 actions in grain are on the basis of bushels. On the cotton 
 exchange cotton is bought and sold in bales. On the grain 
 exchange tlic dollar is the mark of vahu^ and it is also di- 
 visible into fractions as small as 1/16. In cotton it is divided 
 into points. 
 
 On the stock exchanges are to be found shares and bonds 
 only. On the grain exchanges agricultural ]u-o(luets are the 
 stajdes in ^vhi('h the public liarters, including live stock 
 and the different farm ])roduets. The po])ular staples form- 
 ing the bulk of the business are wheat, corn, oatvS, rye and 
 barley. From a li-adiiig standpoint the lesser stajdes are 
 live stock, undei* whieh head are cattle, hogs, lard and tal- 
 low. Tiive stock is sold by the pound; lard and tal- 
 low by the tier. On the cotton exchange all the dealings are 
 confined to cotton and its principal constituent, cotton seed 
 
 154 
 
INVESTMENTS AND SPECULATION 155 
 
 oil. In Xc'w Yoik City there is an important coffee ex- 
 elianiie and a metal exchange, bnt neither one has nuieh of 
 a ]>nhlic following-. As important as are onr dairy })roducts, 
 sucli as milk, eggs and Initter, in point of aggregate money 
 value, very little trading is done in them on the exchanges. 
 Whatever speculation there is in them is carried on directly 
 among the dealers who, under favorable circumstances, 
 sometimes attempt a coalition in their interests to maintain 
 higher prices and tow^ards that end the storage houses prove 
 an important ally, as they enable the dealers to store their 
 purchases until they can market them at profitable prices. 
 
 The followers of the different exchanges are divided into 
 two camps. We know them as "bulls" and "bears." The 
 bulls on the stock exchanges are the optimists, are the men 
 who are prepared to back their judgment of the betterment 
 of trade and its cousequent reflection in a better price for 
 securities. "With the bears it is different. They see the 
 darker side of business and expect to benefit by a decline in 
 values w^hich may be brought about by slackening in trade 
 and from commercial disasters which they try to anticipate 
 through sales of securities before the occurrence of the 
 troul)le. 
 
 On the constructive side of values are ranged the ])ulls; 
 on the destructive side, the bears. Although, in ])ubli(' o]-)in- 
 ion, the bear's position is an unenvia])le one, his is a neces- 
 sary role in the scientific game of speculation. As ali'eady 
 pointed out, the bears in a critical period act as about the 
 onlv mainstav against a wholesale destruction of values. 
 
 Still, it is more or less a stock market truism that there 
 are few chronic bears who, in the long course of events, 
 have kept the large fortunes they were popularly supiiosed 
 to have made, notwithstanding that their o]iportunities for 
 quick and substantial profits, when their position is the cor- 
 rect one, are much greater. 
 
 Our greatest stock market bears, those who have made 
 stock market history died comparatively poor men. Occa- 
 
156 LOUIS GUENTHER 
 
 sionally tlioro passes over the stock iiiarkft horizon a motoor 
 ill the shajx' of a successful aii(lspectaciilar])ear"svli(»lia])p('7is 
 in pluiiiic on a decline in security prices at a psycliol<>i::icaI 
 iiininent and is carried by tlic avalanche in the slauixhter of 
 values from coni])arative o])scurity to a position of threat 
 wealth. Yet, usually liis good fortune is only temporary. 
 Somehow or other these striking lignres seem not to realize 
 that stock values can no more continuously decline tliaii thev 
 can constantly and without interruption keep going up. 
 Thev overstav their market and within a short time all their 
 wealth slips away as easily as it came to them. 
 
 A recent illustration of this, and wliich is still remem- 
 ])ered, is that of J. Brandt Walker, a daring Chicago specu- 
 lator, who burst into fame as a big stock market bear on the 
 eve of the great panic of 1907. The newspapers all over the 
 country printed columns about the many milli(»ns he was 
 credited with making, '^riiere can be no question about his 
 temporary success; no doulit his profits ran into millions, 
 but it was less than a year later that he lost all his winnings 
 and, as a i^rominent stock market figure he became only a 
 memorv. 
 
 ft' 
 
 The chronic bear sooner or later invites disaster upon 
 himself. So also does the chronic bull. I'lie successful trad- 
 er is that person who can adapt his opinions to the long 
 trend in the course of values, whether it be downwai'd or 
 n])ward. That there takes place periodically an adjustment 
 in business cannot be refuted, but it does not occur at reg- 
 uhir ])eriods, for if such were the case much of the uncer- 
 tainty cctnneeted with s]ieculation and upon which it thi-iv(^s 
 would be elimiiKited. Adjustments often c(^me quite sud- 
 denlv and nnexpectedlv. There will come a cheek to a 
 boom. It usually occurs when we ha\(' exhausted, in the 
 ra]Md haste for expansion, all the availabh* cajntal at our 
 command. In the same oi-der a cheek to a decline will oeeur 
 when all the force<l liquidation has been com])lete(l. Be- 
 tween the two extremes there takes i)lace a period of stag- 
 
INVESTMENTS AND SPECULATION 157 
 
 nation, a sort of pause in our activities, a pause to afford an 
 opportunity to form new conclusions. 
 
 Yet, broadly speaking, every one who deals in securities 
 is at one time or another a bull or a bear. AVhen a person 
 sells a stock it is the sign that he has concluded the rise in 
 the stock's value has reached its apex and he is willing to 
 let someone also take the chance of a further appreciation. 
 He may sell for other reasons. Nevertheless, whatever the 
 cause, the seller is constructively a bear. On the other hand, 
 the buver is a bull. If he is buving a stock he has sold to 
 someone previously to make his delivery, it is the sign that 
 he has decided in liis own interest that the decline in value 
 has run its course. But in a growing country the predomi- 
 nance of opinion is towards the bullish side of the market. 
 It is a natural position. 
 
 J. Pierpont jMorgan gave it as his opinion some years ago 
 that anyone who is not a bull in this country would eventu- 
 ally go broke. His saying has become a stock market adage 
 and not without good reason. Our financial history so far 
 has clearly shown that the country has emerged from every 
 panic and depression stronger than ever and capable of 
 greater progress. 
 
 In the eighties, when nearly two-thirds of our railroad 
 mileage was in charge of the courts, men who had faith in 
 the country's future, men like Morgan, Hill, Kennedy, Van- 
 derbilt and others, were laying the foundations for their 
 present huge fortunes, whereas other men who could not 
 see the sunlight behind the heavy clouds of pessin^ism, one by 
 one went broke. 
 
 Then, too, it is only a natural trait of human nature to be 
 a bull. Uiiderlying the greatest progress is the spirit of op- 
 timism. It naturally corners to most all of us to see the 
 })rightest side of ])usiiu'ss. In fact, our wishes are fathers 
 to this hope. Our ]U"osperity individually and collectively 
 has progress as its foundation. ^lorgan knew this and that 
 is why he gave utterance to this now famous axiom. 
 
158 LOUIS GUENTHER 
 
 The very fact that nearly nine out of ton people are 
 naturally bulls in their inclination is what bucket-shop op- 
 erators banked on in the successful conduct of their out- 
 lawed business before the authorities decided up(^n a con- 
 certed plan to put a stop to them. Bucket-shops are in- 
 stitutions which never buy anythinix, l)ut sini])]y Lrainble 
 ac:ainst the judii^inent of their customers. A l)ear })anic or a 
 bear market was essentially necessary for tlieir success as 
 such moves wiped out the ]\i]'>er ]^rofits of their customers, 
 most of whom were perpetually "long" of stocks, or chronic 
 bulls. These concerns were simply pfamblini!: ])la<'es whose 
 backers bet their capital on the price fluctuations against the 
 capital of their clients. AVhen l)ueket-sh(>ps were tolerated 
 a long protracted bull mai'ket usually saw a great mortal- 
 ity in their number, whilst a bear market found them sj^rout- 
 ing in numbers as fast as mushrooms. 
 
 In the grain, cotton and coffee markets, the position of 
 the bulls and bears is a reversal of that occuined in the 
 stock market. The bull on these staples is not the advance 
 agent of prosperity. He does not expect to see higher ]iric- 
 es because of the greater out-turn in the harvest. Higher 
 l^rices come to him as a result of a shortage in crops. The 
 bear is really the bull considered in the light of the benefit 
 accruing to the pul)lic from his operations. He works for 
 lower prices on his expectations of a bumper harvest. 
 
 You will be interested in the definitions of some of the 
 principal terms employed to designate trading on the dif- 
 ferent exchanges. The "longs" and the "shorts" are other 
 names to differentiate between the bulls and the bears. The 
 "longs" buy for a rise, the "shorts" sell for a deeline. 
 
 "Ex dividend" means that on the given day when a cor- 
 poration's books close for the payment of the dividend to 
 all stockholders of record, the stock is quoted with the divi- 
 dend deducted from the price. Unless this is known the 
 lower price of a stock selling "ex dividend" is likely to con- 
 fuse the uninitiated. AVhen Union Pacific declares a quar- 
 
INVESTMENTS AND SPECULATION 159 
 
 terly dividend of 2^ per cent and should the price of the 
 shares be $175 the day previous, tlie day the books close, 
 Union Pacitic will sell ''ex dividend," or at $172.50, meaning 
 that the $2.50, the equivalent of the dividend on each share, 
 has been deducted. It is the same when a corporation de- 
 clares a stock dividend in addition to a cash dividend. Sears 
 Roebuck & Co., in 1911, gave the stockholders a stock divi- 
 dend amounting to about the equivalent of $12 a share. The 
 day after the stock dividend was payable the stock sold, stock 
 and cash "ex dividend," or about $14 less than on the pre- 
 vious days. 
 
 "Rights," which one sees frequently mentioned, denote 
 the market value of the pi'ivilege accorded to stockholders 
 of record in a corporation to purchase additional shares it 
 has authorized. In value these rights vary in accordance 
 with the market premium the stock may command. 
 
 Of course, if a stock is selling for less than its par value, 
 there is no value to the rights to subscribe for new stock. 
 But with some corporations such rights are extremely profit- 
 able. It has been estimated for some years back that besides 
 their cash dividend the stockholders in such a prosperous 
 corporation as the Chicago & North- Western have received 
 i-ights to more stock which brought their average return 
 upon their investment nearer to 25 per cent than 7 per cent, 
 provided that they availed themselves of their privilege to 
 sell their "rights." 
 
 A corporation with a $100,000,000 capital may elect, up- 
 on the favorable vote of the majority stockholders, to in- 
 crease its capital by $10,000,000. Each shareholder would 
 then have the privilege to take ten new shares for each 
 ratio of one hundred shares owned. If the stock sells for $125 
 the market value for one Inmdred shares would be $12,500, 
 and for ten shares $1,250. Therefore, if a corporation offers 
 its shareholders the ])rivilege to take the newly authorized 
 stock at par, the rights would be worth $250 on each block of 
 ten shares or $25 on each share. 
 
160 LOUIS GUENTHER 
 
 111 stock inarkot parlaiico, tlioso rij^lits avo also ralk'd a 
 ''iiicleii ciittiiiLz:. " 'I'hcsc "melons" may consist of new 
 slock (ii- the (listril)ution of a lar^^^ extra divicU'iKk citlicr in 
 I'unn (if casli or stock. Siicli ])ros])ccts fi'cfjiicntly lead to a 
 considcrahU' out])nrst of s})ccukition in the shares wliich 
 are expected to receive liberal treatment. 
 
 While the bulk of the business on the Stock Kxchan.c:e i^ 
 transacted in tlic unit of one hundred shares or niulti])le 
 thereof, there is also considerable business done in smaller 
 units and to desii;nate this tradine; the term "odd lot" or 
 fractional orders has been coined amonj:: brokers, meaning 
 the purchase or sale of shares in less number than one hun- 
 dred shares. 
 
 An "Irish" dividend is a term of sardonic derision. It 
 stands for an assessment levied by an embarrassed cor])or- 
 ation on its stockholders in an effort to re-organize and place 
 itself once more among solvent corporations. 
 
 '^riien there are such contracts as "puts," "calls," 
 "s]M-eads" and "straddles." A "put" is a contract which 
 gives the holder the right to deliver to the maker »)f the 
 contract a number of shares of stock at a s]iecitied ]^rice 
 within a limited time. On the other hand a "call" gives 
 llie holder the right to demand from the maker of the con- 
 tract a certain number of sliares at a specified ]»rice within 
 a limited time. 
 
 SjM'culators often make such contracts with <»th(M-s as a 
 ]>it'cautionaiy measure to limit their losses. The buyei*s 
 of these "]Mit" and "call" coiiti-acts ])ay a certain ])iice for 
 this privilege to demand or deHv(>r stock within the time lim- 
 ited by the contract. 
 
 A, for exam]>le, will buy one hiindicd shares of Amer- 
 ican Tar S: Foundry stock for $()0 a sliai"(\ Tfe may not wish 
 to take more than a loss of $5 on each share, so he sells a 
 "put" to B on one hundred shares, good for thirty days for 
 $150. Should the stock decline ]>elow 55 within these thii'ty 
 days, eacli point decline re-i)resents a ]>rofit to V* of ^100 on 
 
INVESTMENTS AND SPECULATION 161 
 
 the one Iniiidred shares. If the stock goes to the $50 a share 
 tlieii B, the holder of the "put" can go into the market, buy 
 the one hundred shares at a cost of $5,000 and deliver it to 
 A, the maker of the contract, for $5,500. His profit then 
 would be $500, the difference less the cost of the "put," 
 $150, and the broker's commission, $12.50, or $337.50. Should 
 the stock not decline during the term of his contract, he is 
 only out his $150. 
 
 The operation is similar in a "call" contract. A, in this 
 instance, will sell one hundred shares of Car & Foundry 
 stock at $60 in anticipation of a decline but wishes to limit 
 his loss to $5, that is, he w^mts to protect himself against any 
 further advance than $65 a share. So he sells to B a "call" 
 contract that gives B the privilege of calling upon him for 
 one hundred shares at any price above $65 a share within 
 the specified thirty days. Every point advance above $65 
 represents then a profit of $100 to B, less the cost of his 
 call and broker's commission. 
 
 The cost of such privileges varies in accordance with 
 the duration for wdiich they are given : the shorter the time, 
 the cheaper the price ; and the longer the time the dearer the 
 price. The only risk involved to the purchasers of these 
 privileges is their cost. They are out this money if the op- 
 portunity to exercise their privilege at a profit fails to offer 
 itself within the specified time. General conditions and the 
 technical position of the stock market usually determine the 
 market value of "put" and "call" contracts. 
 
 A "spread" is a privilege to combine a "put" and a 
 "call" contract. The holder of a "spread" has paid for a 
 privilege for a certain time to either deliver a stock at a 
 stipulated price to the maker of the contract, or call u2)on 
 him for the stock. In buying a "spread" contract the pur- 
 chaser expects to profit through a large advance as well as 
 a decline. In either case, should the stock pass his contract 
 price, he could execute his "spread" and take his profit, 
 figured on the same basis as illustrated in the "put" con- 
 
 B.VII— 11 
 
162 LOUIS GUENTHER 
 
 tract. Slutuld the stock l)<»tli advance and decline witliin 
 the contract period to a favoral>le point of execution, the 
 lioldci- of a "s])r('ad" would doubly prolit, but should it 
 t(»U('li neither li;4Ui'<' then lie is out the money the "spread" 
 has cost him. 
 
 A "straddle" is not unlike a "spread" contract, except 
 that it is made at the market and the execution of either 
 one of its privilee^es nullities the other. The cost of the 
 "straddle," however, is the most expensive of any of these 
 mentioned privileges. 
 
 These contracts are favorites with small speculators who 
 are willing to assume the risk the privilege cost for either 
 a "call" or a "put" on a stock in the expectation that the 
 chance will occur during the life of their contract to execute 
 it at a profit. However, such privileges ought to have the 
 endorsement of a member of the Stock Exchange. They are 
 only good if the maker of the contract is himself solvent. 
 
 There are other technical terms employed in the Stock 
 Exchange operations, but they are of minor importance. 
 The reader already knows what a margin is, also that inter- 
 est must be paid on the balance of securities which remains 
 unpaid. 
 
 "Ai-])itraging" is a form of trading requiring the 
 most scientific skill and rapidity of thought. It means tak- 
 ing advantage in the difference in prices on the same se- 
 curities between two markets, and may be transacted profit- 
 ably even on the variation of a slight fraction. The princi- 
 ])al arbitrage business is done between New York and Lon- 
 don Stock Exchanges. 
 
XXVII. OPERATIONS ON OTHER EXCHANGES. 
 
 0])erations on the grain exchanges are for future de- 
 liveries. AVheat, corn and oats are dealt in according to 
 grades. If an operator buys a certain number of bushels 
 of wheat he does so with the understanding that he wall ac- 
 ee])t and settle for what he has bought on or before de- 
 livery day wdien the wheat must be tendered him ; vice versa, 
 he agrees to deliver the w^heat if he is the seller. 
 
 All deliveries must be made on the last day of the month, 
 when all settlements are also made and if the operator is 
 unable to meet his contracts, it is at once a confession of 
 insolvency and his contracts are bought in for his account 
 on the same basis of settlement as on the stock exchange. 
 
 In reading over the grain quotations in the daily press, it 
 is to be noticed that the grain concerned in the trading is 
 designated by different months. This implies that all sales 
 and purchases are for the wiieat or other coarser grains, 
 wliich must be settled for on the last da}^ of the designated 
 month. 
 
 The two principal crops in wheat on which the live- 
 liest speculation converges are the Spring and Wiiiter 
 wheats. The last day of May is usually an important day 
 on the Chicago Board of Trade, for it is settlement day for 
 one of the principal crops. In size the Spring wheat crop 
 is the smaller. The Winter wheat crop is the lai'ger of the 
 two. 
 
 In New York there is a i)ro(luce exchange wliicli was 
 organized at the height of our large export business, but 
 with the falling away of this part of our grain business, 
 trading on this exchange has narrowed considerably. 
 
 It seems to be the fate of large agricultural nations for 
 their exports of agricultural products to grow smaller as 
 
 163 
 
164 LOUIS GUENTHER 
 
 tlicir p(>pulation iiiciTasos. It was uot so many years ai^o, it 
 will bo renieinliered, that our export of wheat was depended 
 upon by financiers to establish foi- iis a lar^^e credit balance 
 alirond, tluis providing gold to ini})ort when it was most 
 needed. But for this purpose we can Tin longer depend up- 
 on our wheat. Tn fact, we raise now only one important 
 stai)le which we still sell abi'oad in large quantities — tliat is 
 our cotton. 
 
 James J. TTill al)out hit tlie nail nn the liead when 
 he descrilx'd our decline as a wheat-exporting nation, 
 when he said it was to be expected that we would not have 
 much to spare after feeding the mouths of OO.OOO.OOO jjeo- 
 ple. It was not that we grew less wheat but we wei-e not 
 keeping pace in increasing our acreage. AVe are a nuich 
 larger family t(>day than ten years ago and use for our own 
 domestic i)urposes, the bulk of the crop. 
 
 Our greatest crop in quantity is corn, but we do not ex- 
 port as much of it as wt could spare. Our corn crop has 
 grown steadily until now it causes no surprise when the yield 
 reaches such an enormous total as 3,000,000,000 bushels an- 
 nually. 
 
 The value of our harvest, inchuling all the live stock and 
 dairy ])roducts was last year estimated by the government 
 agrii'ultural statistical department to be over $9,(K)(),0()(),()00. 
 Of this wealth the corn cro]) alone ciuiti'ibutes nearly 20 per 
 cent; wheat comes next; after that the cotton yield. The 
 value of such minor crops, such as hay, rye, llaxseed, etc., 
 runs into the hundreds of milli(His; so also with that once 
 despised growth of uncultivated fields, alfalfa, oi- long shoot 
 grass. The hen with whose industry even the busy city 
 housewife is thoroughly ae(juainted, contributes each year 
 nearly $200,000,000 to the nation's wealth. 
 
 The out-turn of our fields is really the corner stone of our 
 prosperity. As it is all new wealth, reproducing itself every 
 year, it can be readily seen without my pointing to if, how 
 nuicli every artery of business depends upon our harvest for 
 
INVESTMENTS AND SPECULATION 165 
 
 its life. It is this woaltli which supplies the blood that keeps 
 trade ^oinc: along briskly. While our mining industry is 
 second in importance, its prosperity largely depends upon 
 the continuation of good harvests. 
 
 The smaller the crops we raise, the more diminished 
 is our prosperity. A crop failure would be disastrous. 
 Fortunately, for a good many years we have escaped 
 such a calamity. Our imnuinity from such a misfortune 
 for nearly twenty years is largely credited to the grad- 
 ual improvements in our agricultural methods. Whether 
 this is true or not remains to be demonstrated. There 
 are many who doubt that this is a logical explanation 
 and the consist(>ncy of the weather supports at least to 
 some extent their skepticism. But this is neither here nor 
 there. The point I wish to make is the natural evolution in 
 speculation in these important staples in which the opera- 
 tors specializing in them are concerned to no greater extent 
 than are the operators in stocks and in cotton. For them 
 all a large crop spells prosperity; a short crop, a period 
 of adversity; and it is quite natural that all keep a sharp 
 eye on the weather conditions and the prc^liminary crop 
 estimates which the Government publishes during the grow- 
 ing season. 
 
 But the large grain houses do not rely entirely up- 
 on the Government's figures. The majority, to supply 
 their clients with intelligent information as to the progress 
 of the different crops, employ men to travel over the crop 
 belts and make their reports. These men, because of their 
 training and keen perception, have acquired the reputa- 
 tion of being crop experts. 'A number of them fi-om their 
 reports might also be said to have an inclination to regard 
 themselves as naturalists, for in (heir own vernacular they 
 have added some species to the number and kinds of bugs 
 and insects destructive to farm products. One species in 
 ]iarticular is the June bug, which very few people knew un- 
 til the crop experts discovered it. 
 
166 LOUIS GUENTHER 
 
 "When Rpi-iiif|j Inirsts upon us, the crop experts get busy, 
 and until tlie season closes and the several crops are safely 
 in the barns, we are liable to have a half dozen crop scares 
 caused by the different conditions, maybe thi-ou^di lack of 
 moisture, bu<T:s, a protracted dry season or early and severe 
 frosts. Still, were it not for all these elements of uncer- 
 tainty interspersinc: themselves in the period between the 
 seeding and the final harvest, there would be little specula- 
 tion. 
 
 It is fi-om these uncertain elements that differences of 
 opinion arise which make bears of some people and bulls 
 of others, while with stock market operators, althouiih only 
 on-lookers, th(\v nevei'theless form their judgment as to the 
 course of their market from the crop prospects, and they 
 strive to correctly anticipate them in their conunitments. 
 Furthermore, there are a large number of industrial cor- 
 porations and railroads, known as the granger roads, for 
 they largely depend for their principal traffic on a generous 
 harvest, whose prosperity is vitally wrapped up in our 
 crops. For that reason it is well for every student of finance 
 to know of what importance the crops are to us. 
 
 In other directions is the attention of the operator 
 on the grain exchange drawm. He watches the progress of 
 the harvest in Argentine, Russia and Canada, the three 
 countries which still rank as the large exporting nations, 
 as it is the size of their crops which affects the price of the 
 sur])lus in our crops that can be exported. A small crop 
 in these countries means higher ]u-ices for what portion of 
 our cereals we can sell abroad. 
 
 If th(» ])eople of Europe took UKU-e kindly t(^ corn, we 
 would have here a nucleus foi- an extremely imj^oi-tant ex- 
 port business. I->ut ])eo]de abroad do not take kindly to 
 corn, still considering it largely a food fit only for live stock, 
 rather than for human beings. 
 
 In the ])ro(luetioii of cotton this country largely retains 
 itsmonoi)oIy. "\\'e have only one competitor worth consider- 
 
INVESTMENTS AND SPECULATION 167 
 
 ing— Eg}7')t, and eveu there the cotton crop is in the a^ejre- 
 gate, compared with ours, of small proportions. Our cotton 
 crop runs between 12,000,000, to 17,000,000 bales each sea- 
 son. A bale weighs about 500 pounds. 
 
 Dealing in cotton is all done on contracts calling for fu- 
 ture delivery and for brevity they are designated in the 
 market reports as *' futures." The quotations are divided 
 into points, each point representing one cent and so many- 
 points make a bale. What is called spot cotton means cot- 
 ton for immediate delivery and on hand. 
 
 There are two princiijal cotton exchanges in this coun- 
 try—the Xew York Cotton Exchange, and the New Or- 
 leans Cotton Exchange. Between them a considerable 
 business is done. The operations on the Liverpool Cotton 
 Exchange are closely intertwined with the dealings upon 
 our own cotton exchanges, for Liverpool is the greatest dis- 
 tributing market for our enormous exports of cotton. The 
 importance of our principal cotton exchange, which is the 
 New York Cotton Exchange, as a center of speculation is 
 apparent from the fact that, next to the New York Stock 
 Exchange, its memberships command the highest price. 
 
 Among the other exchanges the Boston Stock Exchange 
 is by far the most important. The principal securities 
 on its boards are largely mining stocks, and those consist 
 mostly of the copper stocks. But even of them the New 
 York Stock Exchange has absorbed a large number. The 
 transactions there are along lines similar to those on the 
 New York Stock Exchange. So also with the Chicago Stock 
 Exchange. But in Chicago we have an exchange with an 
 imposing structure for its home but transacting very little 
 business. This exchange has never recovered from the 
 shock it received at the time the ]\Ioore Brothers first 
 took their flyer on a large scale in the stock market, using 
 the Diamond ^Fatrh Co. shares as their object of manipu- 
 lation. As a result of their operations, the Chicago Stock 
 Exchange, which was then located at Dearborn and Monroe 
 
168 LOUIS GUENTHER 
 
 Streets, was foirod to close its doors for a few days to pre- 
 vent a panic. All the brokers, wlien they tried to liquidate 
 thrir Diamond Match Co. stoek, found there was no market 
 upon which to sell and the exchanp' sto])])ed doint:: business 
 temporarily, to enable brokers to effect jn'ivate settlements. 
 The disastrous experience of the Mooi'e Brothers spread 
 tile belief that the Cliica.ti;o Stock Exchan.u^e did not ]>rovidc 
 a market big enouu:h for large operations, from which im- 
 pression it appears never to have recovered. Even at the 
 present time there is seldom a day when the total trans- 
 actions reach 3,000 shares in all, and this business is mostly 
 done in securities of local entc^-prises whose issues are not 
 large enough to w^arrant their listing on the New York Stock 
 Exchange. 
 
 Conditions on the Philadelphia Stock Exchange are 
 similar but not in sucli a pronounced form. 'J'hc ]>rin- 
 cipal securities, like Lehigh Valley and the Philadelphia 
 Company, which were once the popular stocks on this ex- 
 change, have finally found their way to New York City 
 which seems to be the logical center for all securities, and 
 to which thev final h' come when readv for the broadest 
 market. 
 
 There are smaller exchanges in llic other Icp.ding cities 
 like Cleveland, Cincinnati, Pittsbui-g, and Si. J^ouis, but 
 the business done on them is in small proportions and hard- 
 ly worth mentioning. Even that small business is all in 
 local securities. AN'hilc all these points are important fi- 
 nancial centers, most of the transactions in S(*curitics are 
 made over the counters of the investment concerns. 
 
 '^riie y(tunger members of the Pittsburg Stock l-^xchange 
 tried, in the h(>pe to revive operations on a more extended 
 scale, to introduce dealings in mining shares. For a while 
 their plans met with partial success, but it was a dangerous 
 Innovation, as results soon ]n-oved. 
 
 As most of the shares were in mining enter})rises in the 
 early development stages, the operations resulted disas- 
 
INVESTMENTS AND SPECULATION 169 
 
 troiisly ill most cases to all who participated in the specula- 
 tion, and this was mainly caused by the enthusiasm of the 
 brokers, who, although ignorant in the first i:>lace of the 
 fact that such securities are in most cases precarious specu- 
 lations, still were desirous to give them a rousing introduc- 
 tion by a campaign of manipulation which ran prices up to 
 excessive heights. The fall was sudden and disastrous. The 
 exchange has not yet recovered from this ill-starred episode. 
 
 San Francisco has a mining exchange, where the nature 
 of the mining business is better understood, and as the city 
 is the natural banking center of the industry, it is also the 
 logical market for these securities. There is a smaller min- 
 ing exchange in Salt Lake City, and one also in Butte, 
 Mont., and one in Duluth, Minn. 
 
 The development in the oil industry in California 
 brought into existence an exchange for dealings in oil stocks. 
 Whether it is to become a permanent exchange remains 
 to be seen. AVlien oil was first discovered in Penusvlvania, 
 Oil Citv had an oil exchange and it thrived while the excite- 
 ment lasted. But as an important factor it passed away 
 with the collapse of the oil boom. Such was also the case 
 in Beaumont, Tex., when oil was first discovered in that 
 part of the state. It, too, went out of existence with the 
 passing of the boom. 
 
 With a brief mention of the New York and Boston Curb 
 markets, I shall have finished with the i>rineipal ex- 
 changes in the country. The New York Curl) is a j^e- 
 culiar institutioii. Tiitil the present, there has Ix'cn no 
 sort of control over it. The brokers who traded there 
 were under no rules of restraint whatever. Any secu- 
 rity could be listed there, for what a listing meant was 
 merely that some broker introduced it to the other brokers 
 who were billing to execute orders in it. If there was 
 enough business in old clothes and shoes, they could just 
 as well have executed orders in them, if there was any 
 money to be made. A market as lax as this could not es- 
 
170 LOUIS GUENTHER 
 
 cai)o bocomintc the scene of a large number of finaneial 
 scandals which \vas nnfortunate for its own prosperity, as 
 the crookedness revealed, in the end, drove the ]ni])lic away 
 when it realized no efforts were made to protect investors 
 from financial sharks. 
 
 Fortunately for the Curb market, which can be made 
 an important market, an important reform was inaugurated 
 in the formation of an organization to supervise its con- 
 duct, pass upon all securities, and the character of brokers. 
 This will restore the market in public confidence, provided 
 the reforms inaugurated are vigorously enforced. Quite 
 an array of securities now listed on the Stock Exchange 
 have found their way there through the Curb market, where 
 they made their first bow to the public. 
 
 The Boston Curb market was organized along this line a 
 year ago and is now housed in a building. AVhik' a few in- 
 dustrial stocks are dealt in on both these markets, the \n-m- 
 cipal listings are in mining stocks. 
 
 The most important market for our securities abroad is 
 in London. There some of them are listed on the Stock 
 Exchange; the greater numl)er, however, are listed on the 
 Curb. There is a difference in tiuK^ between these markets 
 of about five hours, a sufhcient margin for trading between 
 the two. American traders will sometimes sell in London 
 five hours ahead of the New York market and buy their 
 stocks back in Xew York the same day, expecting to j^n^fit 
 by a decline here as a cause of a weak opening in our stocks 
 ill London. 
 
 The London market quotations sometimes exert a pro- 
 nounced inlluence u])on (►ur own shares, and consequently 
 stock uini'ket operators closely watch Ijondon ])rices which 
 are on hand liefore our own dav's business sessi(m bcLrins. 
 
 There is some dealing on the Berlin Bourse in the Ameri- 
 can stocks, but not to an extent worth menti<tning. Of late, 
 France has shown considerable interest in our securities, a 
 few of which have succeeded in forcing their way into the 
 
INVESTMENTS AND SPECULATION 171 
 
 sacred jiroriiiet of tlio ''parqiiotto," which is the Bourse 
 proper. But the majority of American securities in the 
 Paris market are still kicking their heels out on the 
 "Coulisse," which, as a market, corresponds to our Curb. 
 
 IT(^lland, next to England, is the most important market 
 for American securities. 
 
XXVIII. PANICS. 
 
 There are two kinds of panics— one, a commercial or 
 business panic, the other, a stock market panic. A com- 
 mercial panic affects the country as if it were stricken with 
 paralysis. In most cases it is superinduced Ijy over-ex- 
 pansion. A stock market panic is an affair more localized, 
 whose injurious influences may prove of temporary dura- 
 tion oidy. 
 
 Some economic theorists attribute the responsi])ility for 
 business panics to an excess of speculati(>n. I am, however, 
 inclined to the opinion that specidation is rather the s\nnp- 
 tom of it than the actual cause. It is a human trait, durin.LC 
 prosperous periods, when money-makinc: becomes a com- 
 paratively easy task, to keep on expanding as long as cap- 
 ital can be borrowed with which to spread out. 
 
 The result is an excess in speculation. The easier profits 
 come, the more daring is the use for which they are em- 
 ployed. Afen, who have accunuilated their foi-tunes rapidly, 
 are anxious to doul)l(» their wealth, then tri]ilo it and then 
 rpiadruplc it. The more they make, tlic inoi-c they want, us- 
 ually. Tlicy blindly ])luuge ahead without considering that 
 the r)ace thev set cannot alwavs be maintained. Thev raise 
 their structures on weak foundations. Therefore, th(\v are 
 totally un])i-e])arcd to withstand any ]iressui'e placed upon 
 theii- resources bv a sudden tinhtenintx in the su])])lv of 
 
 a 11* 
 
 ca])it;il, of which they have been free ])orrowers and they 
 quickly tind themselves financially embarrassed. 
 
 Creditors demand their monev; thev cannot alwavs get 
 it. As other creditors are in tui*n dependent U]ion them, 
 they are quickly and similarly affected. Like a ])rairie fire, 
 financial embarrassment tlu^n Jnni])s from one ]dace to an- 
 other, hurtling over wi-ak business structures and impairing 
 
 172 
 
INVESTMENTS AND SPECULATION 173 
 
 sound ones. A policy of drastic curtailment is luiriiudly 
 euforced in every direction. Capital grows extremely ap- 
 prehensive and is not ol^tainable except at usurious rates 
 of interest and only on gilt-edged collateral. Fear also 
 largely enters as a factor into a business panic. In fact it 
 is from fear the name "panic" originates. There is a sud- 
 den rush of creditors for their storm cellars and when such 
 stampedes occur, values are sacrificed and often go begging. 
 It is then that the unprotected suffer the most. They are 
 com2:)Osed of that class of borrowers who have borrowed 
 until they have nothing left in reserve— no other collateral 
 to offer to protect their outstanding loans when pa\inent 
 is demanded without delay. 
 
 Here we find a real estate operator forced into banli- 
 ruptcy because he was over-extended, there a wholesale 
 merchant, and at another point a large retail merchant. 
 Banks are discovered to be in a weak position, for their 
 loans are in collateral which cannot be marketed quickly 
 and their reserve in cash is at such a low ebb they cannot 
 lung withstand a run from affrighted depositors. All this 
 is the psychological side of a panic. 
 
 While i)anics are largely the logical outcome of over- 
 expansion, the severity of their effect is produced by fear. 
 This is demonstrated frequently enough in the process of re- 
 adjustment following, when embarrassed ventures are 
 brought back to solvencv without aiiv loss to the creditors. 
 
 Nor do panics often throw ])efore them the shadows of 
 their coming. They more generally burst upon us un- 
 heralded and when least expected. The first signs of our 
 last panic, that of 1907, appeared in March, when there oc- 
 curred a sharp and sudden ])i'eak in the prices of securities, 
 for what reason few at the time were aware and others only 
 half surmised. The real cause was the sudden demand for 
 a large amount of capital from interior banks when the fi- 
 nancial centers were unpi-epared to meet it. 
 
 It may be somewhat difficult to those unacquainted with 
 
174 LOUIS GUENTHER 
 
 our intricate financial machinery to detennine liow a sud- 
 den demand for money can affect securities so seriously. 
 But it will !)(' better understood when some light is thrown 
 on our peculiar banking structure. Our national banks are 
 compelled to maintain a certain per cent of their deposits 
 at the reserve centers. The ])anks in which they keep these 
 deposits allow interest on them while tliey in turn, to earn 
 this interest, must lend it out in demand loans, which loans 
 are principally upon securities having an active market. 
 
 Thus it happens that loans on such securities are the 
 first to be called. The borrowers, finding their loans called, 
 find they cannot borrow elsewhere and are forced to sell 
 their collateral for what they can obtain. They have no 
 other recourse. Such were the conditions on the day in 
 March, 1907, when the first signs appeared in the stock 
 market of the panic of that year. In Octol)er when the pres- 
 sure could no longer be withstood it burst in all its fury. 
 It required almost a year and a half for the country to get 
 over its worst effects. The recuperation has been slow% 
 as it always is, as it takes some time before the damage can 
 be repaired. 
 
 That the stock market should furnish the first warnings 
 of a panic, is but natural. It is here in the first place where 
 over-speculation, the most pronounced symptom of a ])anic 
 converges and as it is a quick market it is here also that 
 lenders of capital hurriedly rush to liquidate their loans, 
 and tret their monev back. Months afterwards the effects 
 begin to make themselves felt at distant points. 
 
 Imagine a i>ool of water into which a pebble is cast, ^t 
 first the ])ebble makes a small ri])ple l)ut rapidly one ripple 
 after another is formed each in larger dimensions until 
 finally the entire edge of the pool is affected. This is exact- 
 ly what ha]>])ens in a business panic: first to be affected are 
 the financial centers, then its circle of influence extends 
 further, until finally the whole country is engulfed. 
 
 But with all their bad effects, panics arc useful, since 
 
INVESTMENTS AND SPECULATION 175 
 
 they are viewed as necessary at times to bring about an ad- 
 justment between industry and caj^ital available for its ex- 
 })l()itation and such I'eadjustnu^nts come at varying inter- 
 vals. I shall not here enter upon a long discussion a])out 
 the causes back of panics and some of the remedies proposed 
 to ward them off. This subject can be better left to others, 
 for it could be extended into chapters while the space at 
 my command is limited. I shall, however, touch upon the 
 agitation for a Central Bank as one of the means to prevent 
 panics and, if it cannot accomplish this, it can at least tem- 
 per the severity of their effects. The idea in back of a Cen- 
 tral Bank is to provide a citadel of financial strength that 
 could be depended upon to automatically expand or contract 
 credit facilities. In England, France, Germany and the 
 other continental nations are such institutions. Wliile they 
 do not succeed in staving off a period of business stagna- 
 tion, thev at least demonstrate that thev can minimize the 
 harm through their note-making powers. 
 
 We need some like institution patterned along some- 
 what similar lines in this country which through its credit 
 facilities could extend aid wdiere most urgently needed and 
 required. As incoherent as is our banking system today, 
 our ])anks attem]^t the functions of a Central Bank iii a 
 panic through their associations and by means of clearing- 
 house checks that temporarily take the place of money un- 
 til all danger of large withdrawals of deposits has passed. 
 This was done in the panic of 1907 as well as during a num- 
 ber of previous panics. 
 
 If we can consider that there are any visible forerunnc^rs 
 of panics, carrying warnings ahead of their coming, I should 
 say that they would make themselves apparent in at least 
 three forms, namely, an excess of laud speculation, exces- 
 sive interest rates and an abnormal shrinkage in the re- 
 serves held by the banks. These reseiwes are the percentage 
 of cash to the amount of deposits on hand to meet the de- 
 mand from depositors. But these indications are not in- 
 
176 LOUIS GUENTHER 
 
 fallible, for it has often occurred lli;it wiiore there existed 
 nil the e()iiditi<nis poiiitiii}; to a panic, a j>anic ncvci* oc- 
 curred, for correctives Avcrc apjilicd in time. 
 
 ^^^lat makes au excess in land speculation a dau,ii:ei'ous 
 lueuace, is that it is the uiost unli([ui(lal)le form (d' collateral 
 of any for loans in hard times. Buyers caun<tt he found 
 "when they are Avanted. Land speculation is also the last 
 extreme of speculation. It marks the period of s])eculative 
 excesses. Theref(U-e its proii^ress is closely watched by keen 
 students of financial conditicnis. 
 
 The tii;htenin,u- in interest rates denotes a p:rowin<;- scar- 
 city of available ca]ntal. Money follows the law of su]ii)ly 
 and demand, as it is but a commodity in the tinal analysis. 
 If there is plenty of money, interest rates are low and coi*- 
 respondiuLily they increase as it becomes scarce. The dif- 
 ference between loans and deposits of the banks shows their 
 availa])le cash resources. The smaller the difference, the 
 greater the dancjer to business and the weaker is the struc- 
 ture to withstand the assaults of a panic or fear on the part 
 of creditors. 
 
 Corners Can Cause Stock Market Panics. 
 
 Stock market panics can, however, take ]>lace without 
 disturbing the country's prosperity. Their bad effects can 
 be localized. But such flui-ries of fright are largely caused 
 by the attempt on the ]X\rt of daring spc^culators or power- 
 ful financial interests to corner certain stocks. 
 
 The Xoi'thern Pacific corner is an exami)le of this. The 
 late i;;. It. Ilarriman, to prevent himself from being ex- 
 cluded as a railroad factor from the Northwest, made au 
 effort to buy enough shares in the open market to acquire 
 control of the Xoi-thern Pacific. 0]i]-)osing his efforts were 
 James T. Hill and and J. P. iSforgan, who in turn wei-e buy- 
 ing all the stock they could lay hands on to ])revent Ilarri- 
 man's securing control. A good deal more stock was sold to 
 both by s]")eculators than there was authorized by tlie r<»ad 
 or was outstanding, willi the result that when the time for 
 
INVESTMENTS AND SPECULATION 177 
 
 the delivery of the shares drew near the sellers began to 
 scent the scarcity of the stock and began frantically to bid 
 for what they had sold and could not deliver, bidding it up 
 rapidly until it touched a price of $1,000 a share. The day 
 will long be remembered in the annals of the New York 
 Stock Exchange, as it was a day of intense fear and demor- 
 alization. It meant the ruin of a great many Stock Ex- 
 change members if they could not get the shares of North- 
 ern Pacific they sold and in turn would have dragged dowm 
 to bankruptcy other members who were not concerned in 
 the Northern Pacific speculations but were large creditors 
 of the members who were involved. The warring financial 
 interests were aware of the dangerous conditions and ar- 
 ranged matters so that a private settlement could be effected 
 and l\v their efforts the danger of a great many failures 
 was averted. The panic lasted but a day. Beyond the Stock 
 Exchange it did not extend. The only individuals injured 
 were the stock market speculators. Yet the case clearly 
 illustrates how a panic might occur on the Stock Exchange 
 and go no further. 
 
 But corners are very dangerous things to attempt. They 
 verv seldom succeed. A corner, to be successful must be so 
 operated that the security whose price was bid up to a high 
 figure can be in turn sold readily. It happens at times where 
 this is impossible. 
 
 ]\lany corners have been attempted on the Chicago Board 
 of Trade. *'01d Hutch," as Mr. Hutchinson, a wary spec- 
 ulator was nick-named, tried it a number of times only to 
 find himself penniless in the end. 
 
 Young "Joe" Leiter had the idea that a crop of wheat 
 would not reach its usual proportions, so he kept on buy- 
 ing all the wheat that the other traders were willing to sell 
 him and which had to be delivered to him on a certain day. 
 On paper his profits ran into the millions. To turn those 
 profits into c<ash his coraer depended ui>on the ina))ilify of 
 those who sold him their wheat to make deliveries which 
 
 B. VII— 12 
 
178 LOUIS GUENTHER 
 
 would force thorn to buy it hiwk from liim to make their con- 
 tra ets good. 
 
 But wlien the final dav for delivery came around, wheat 
 poured in upon Leiter from jjlaces he never expected any 
 existed. Elevators were ransacked for wlieat and rushed 
 in cars to Chicago. There was such a deluge of the cereal 
 upon the young speculator that his wheat corner was quick- 
 ly knocked to pieces and instead of profits in the millions, 
 Leiter lost all his fortune and a few millions which his 
 wealthy sire had to put up to square his son's accounts. 
 
 Another spectacular speculator who came to grief on the 
 Chicago Board of Trade as the result of his efforts to corner 
 wheat, was "Ed" Patridge. Most of us still remember the 
 Waterloo which overtook Sully when he attemj^ted to cor- 
 ner the available cotton crop. 
 
 There have, th(^ugh, been men who successfully operated 
 corners. One of these speculators is Charles Patten, the 
 Chicago speculator. He has cornered oats, wheat and cotton 
 successfully in their turn and has reaped millions as his 
 gains for his daring. He now claims he has withdrawn 
 from the market. If he holds to this resolution he will 
 retain his millions, but should he venture back into the Pit 
 and try to repeat his s]">eculative coups, there arc many who 
 believe he would lose what he lias by trying to nin a corner 
 once too often. 
 
 It is fortunate that the Stock Exchange does not 
 tolerate any attempts to corner a security, as it realizes the 
 harm which could arise from such attem])ts. Through its 
 discretionary power it can enforce private settlements and 
 largely interfere with the profits which could be made from 
 a corner and this, of course, discourages any deliberate and 
 preconceived ])lan to bring about a corner. The Xorthern 
 Pacific corner served as a good lesson towards this end. 
 
XXIX. POOLS AND MANIPULATIOX. 
 
 A great deal of the speculation on the New York Stock 
 Exchange is artificial. By this I mean that it fails to reflect 
 the actual transaction in securities by the trading public. 
 Such artihcial speculation aims to incite, through a display 
 of activity, a buying or selling movement in certain secu- 
 rities and then leaves the attainment of its pur2:)ose to the 
 imi)etus such efforts have started. 
 
 A number of brokers will often organize what we call 
 a pool, to exploit certain stocks. ^lany such pools are con- 
 stantly operating in the stock market, especially when the 
 trading is active. These pools work with great cleverness.. 
 They pull their strings behind the scenes and only the 
 shrewdest market observers can trace their operations. 
 
 Only when some cog in their plans slips, as occurred 
 in the case of the Cohunbus & Hocking Coal & Iron pool, 
 does the public get any inkling of how pools operate and 
 then when their operations become known, the revelations 
 do not always reflect credit upon the Stock Exchange. 
 
 What happened to the Columbus & Hocking Coal & Iron 
 1)001 was this: The members of this pool, after they had 
 succeeded in rigging the price of the company's stock to 
 over $90 a share, and they began to suspect that the pub- 
 lic could not be induced to buv their stock at fancv prices 
 grew apprehensive about how they were to get rid of their 
 holdings, and to get out whole, started to betray one anntlier 
 in their selfish desire to protect themselves. AVIkti this 
 treacliery become known, tli(M-o was a sudden rusli to sell 
 and within a few minutes the i)o(»I was smashed. Tlic stock, 
 whicli only an houi- lu'Tnic bad been quoted around $90, 
 declined rapidly and did not stop until it touched a price 
 around $10 a share. Two Stock Exchange firms which were 
 
 179 
 
180 LOUIS GUENTHER 
 
 financing the pool failed, while James R. Keene, the pool's 
 manager and manipulator, lost not only a big slice of his 
 fortune, but a goodly part of his reputation likewise. 
 
 To be successful, a pool must sell its accumulated hold- 
 ings to the public at a profit, but in this it does not always 
 succeed, since the public is at times too wary to be caiight. 
 
 An amusing instance showing what strange effects can 
 sometimes be brought about by a slight misha]'* in orders 
 given by a pool, occurred in 1910 in the preferred shares 
 of the Rock Island Company. It seemed that on the night 
 before this incident happened, a leading operator in this 
 stock, wiio was managing this pool, ])laced large buying or- 
 ders in the stock with different Stock Exchange members, 
 but forgot at the same time to give enough selling orders to 
 balance the fluctuations in the stock so as to make them 
 api)ear nonnal and not arouse any suspicions. AYhat took 
 place was startling. The sinniltaneous appearance of these 
 large buying orders without any offerings of the stock, re- 
 sulted in a sky-rocket advance of $30 a share in the pi-ice 
 in less than fifteen minutes and when it became knowTi that 
 a serious blunder had been made in the distribution of the 
 orders, there was a foot-ball rush to sell, the stock sliding 
 back quickly to the price from which it had started but a 
 quarter of an hour previously. The error ever after put 
 the stock under suspicion. The ]iublic would have none of 
 it and for months afterwards Rock Island shares were care- 
 fully shunned by speculators. 
 
 The way j)ools operate is interesting. A group of Stock 
 Exchange members will agree to form a pool, which in 
 some instances they call a S}Tidicate, to provide a more 
 dignified tone to their scheme. Pools are not always formed 
 by meml)ers; they may be organized )\v speculat(U'S as wtU 
 who in no way arc affiliated with the Stock Exchange. 
 Each member of the pool agrees to handle a certain amount 
 of the stock in which the pool is interested and these orders 
 are distributed at scale prices over a certain period of time. 
 
INVESTMENTS AND SPECULATION 181 
 
 In this manner efforts are made to induce activity towards 
 whatever direction, up or dowTi, the pool plans. If the 
 pool's plans are successful and it has succeeded in distri])u- 
 i'mg: at a pi'ofit wliat stock was pTirchased, or has covered 
 what stock was sold short at a profit, a distribution is made 
 among the members. 
 
 Sometimes a pool makes enormous profits. The losses 
 are equally great where a pool's plans meet with defeat. 
 A powerful pool was organized in United States Steel com- 
 mon stock in 1907, in the midst of the panic. This pool, for- 
 tified with millions of capital and aided, as some authorities 
 claim, by the Steel Corporation itself, which through its 
 charter is empowered to deal in its ovm. securities, persis- 
 tently bought all the stock coming upon the market. This 
 buying kept United States Steel conunon stock like a rock, 
 withstanding all pressure, around $20 a share throughout 
 these parlous days. 
 
 The firmness in the price of the stock had the desired in- 
 fluence when confidence and reason again returned. The 
 strength of United States Steel common stock was a topic 
 that was on every one's lips and firmly implanted in the 
 public's mind. The stock became the popular speculative 
 mediiun and steadily advanced in market value until it 
 touched a price near $95 a share. In the interval, the rise 
 in the stock was assisted by a mnnber of increases in its 
 dividend. The millions the pool had to Tise to support the 
 stock were nuiltiplied a numl)er of times by the advance 
 in its value which followed. 
 
 In some financial quarters pools and their purposes are 
 justified by the claim that the public will not notice a secu- 
 rity, irrespective of what merit it possesses, unless there is 
 some leadership and it is such leadership they aim to supply. 
 
 Probably there is some logic in their contention. Yet 
 not all pools arc organized on such a praiseworthy ]^lan. 
 Quite often they are formed to inveigle the trading public 
 with some security at prices wholly out of proportion to 
 
182 LOUIS GUENTHER 
 
 tlu'ir intrinsic vnlues. Most of tlic criticism involving tlio 
 New York Stock Kxclianuc in recent vears mav be directlv 
 traced to operations of this cliarafter. 
 
 Pools arc largely responsible for tin- niani]»nlatiou in 
 stocks, about which so much is written and which is so fre- 
 quently mentioned in the financial reviews in the daily 
 press. The weight of their orders makes a stock rise or fall 
 and often to such an extent as to frighten real holders to 
 throw their shares onto the market or cause a scurrving to 
 buy in anticipation of a good advance. Pools work upon 
 the avarice and credulity of the public or on its fears. 
 
 Before Governor Hughes of New York State apprnnted 
 a conmiittee of citizens to investigate the operation on the 
 Stock Exchange with the purpose of recommending re- 
 forms for the protection of the pul)lic, pools were all(>wed 
 to carry on their mani])ulations with almost no restraint 
 whatever. "While ''wash" sales and "matched" orders were 
 not openly tolerated, they were secretly connived at and per- 
 mitted. 
 
 "Wash" sales are sales where two or moi-e members 
 p:o\ together to buy or sell stocks between thems(>lves to es- 
 tablish quotations so that they may be reported in the offi- 
 cial transactions of the Stock Exchange. This is also true 
 with "matched" orders, which is but another name for 
 "wash" sales. One broker will have an order to buy one 
 hundred shares or more at a certain ]»rice .-md another 
 bi'oker an order to sell a similar amount of stock at the same 
 ]irice, each older emanating from the same source. The pub- 
 lic, unaware that these orders arc artificial, accept them as 
 actual transactions. 
 
 P)ut this .sort of dece])tion is now largely a thing of the 
 past as a result of the investigation made by (iov. Hughes' 
 committee. lAnother ]u'actice, now forbidden, is the one by 
 which a member was allowed to bid for or offer a certain 
 price for a large block of stock, but did not have to execute 
 the order unless exactl}^ the amount of stock his order called 
 
INVESTMENTS AND SPECULATION 183 
 
 for was offered, or taken, at his price. This practice al- 
 lowed a member to bid $160 for a block of 10,000 shares, 
 all or none, when the price was only $150, very well know- 
 ing beforehand that no other member could fill his order. 
 Orders like this were mere bluffs made ostentatiously to 
 impress the public. Now a member, whatever he makes a 
 bid, must take stock in whatever blocks it is offered and this, 
 of course, negatives the sort of manipulation just described 
 and which is designed to deceive the public. 
 
 All manipulation, however, does not spring from pool 
 operations. Some of it is caused by large underwriting 
 bankers who in bringing out an issue of new securities listed 
 on the Stock Exchange, bring about an advance in the price 
 of the already outstanding securities in order to create a 
 good impression for their prospective financing and secure 
 for it a successful reception on the part of the public, which 
 is more likely to be keen for anything indicating a likeli- 
 hood of a quick profit. 
 
 On the floor of the Stock Exchange are arranged rows 
 of posts, around each of which gather the traders who trade 
 in a certain security. To facilitate the trading, each mem- 
 ber selects some stock of wliieh he wishes to make a specialty 
 and makes his headquarters while on the floor at the post 
 allotted to his security. As examples, one member acts as 
 specialist in Reading Railroad stock, another in Union 
 Pacific shares and so on. For the more active shares there 
 may be a number of specialists. They execute orders in 
 their specialties for a commission of $2 for each one hun- 
 dred shares when the orders are fi'om fellow members. In 
 this way members are saved a good deal of running about 
 on the floor of the Exchange and also considei'ablo of their 
 time. 
 
 But the specialists in the more inactive shares are often 
 subjected to severe criticism. They are in a position to 
 make considerable money if not over-scrupulous. They are 
 in a position to execute an order of their own before that of 
 
184 LOUIS GUENTHER 
 
 a cnstomor. For cxam]»lo, a ciistomor pvos a market order 
 to sell 100 shares of an inactive stoek. The specialist could, 
 were he so inclined, l)reak the ])rice three or four points and 
 Ituv in the stock his customer sold. To the next Iniver who 
 came alone: he could sell this very same stock at an advance 
 of two or tliree points, makinir not only his commission fi'om 
 both seller and ])uyer but also the difference in i>i-ice. I 
 don't say that this is done, but contend it can be done and 
 believe that amon^ the much needed reforms should be more 
 stringent supervision over the sjDccialists in the more in- 
 active securities. 
 
 Some of the Pitfalls of Speculation. 
 
 I cannot attempt to elaborate upon the many different 
 pitfalls dug by crafty schemers to catch imwary and igno- 
 rant speculators. On this one subject alone a book might 
 be written. The bucket-shops, for one, have proved the 
 principal menace to the public but fortunately they no 
 longer exist to the great extent they once did, n(»w that the 
 Government has gone after them with a big stick. A l)ucket- 
 shop, as already described, is nothing less than a gambling 
 room. Bucket-shops can only carry on a prosperous business 
 by misleading their patrons. This they do by inducing 
 them to take on stocks likely to decline or sell stocks more 
 liable to go \i\). 
 
 It is always to the best interest and protection for a 
 person who wishes to deal in stocks or conuuodities to awry 
 on his tiansactions through a member of n regular exchange, 
 as such transactions thus come under the su])ervision of 
 the members, who are compelled actually to execute all 
 their orders. For a member to be caught "bucketing" or- 
 ders means his expulsion from any re])Utable exchange. 
 By dealing with members a patron is also dealing with a 
 person of more or less financial responsibility and one 
 whose commission is sufficient compensation for the services 
 he performs. Moreover, it is possible for a customer, when 
 
INVESTMENTS AND SPECULATION 185 
 
 transacting his business throngli a mom])cr, to check his 
 orders from the official records. 
 
 "Tips" on the market are the bane of speculators. They 
 prove the ruin of a great many. A speculator will hear from 
 some one about whom he knows nothing and with whom he 
 has scraped up a passing acquaintance in some bi'okerage 
 office, that such and such a stock is either going up or about 
 to have a big break. He hurries to get in on the "good 
 thing." In most instances such tips are mere guesses. On 
 such flimsy foundations many speculators will sometimes 
 stake a small fortune. Ts it then any wonder that they soon 
 lose all their money? Other speculators will pay a weekly 
 or monthly stipend to some advertising tipsters for inside 
 information. The inconsistency of such ad^ace is plainly 
 apparent when it is know^n that if these self -criers of their 
 ability to forecast prices were only correct about a small 
 part of their prognostications, they could retire in a short 
 wiiile with great big fortunes. 
 
 Yet these financial charlatans month after month catch 
 a new crop of suckers; otherwise they could not continue 
 in the game as long as they do. 
 
 It is a remarkable ]ihase of human nature that prompts 
 individuals to back with their money the claims of perfect 
 strangers, but when it comes to buying even only a pair of 
 socks they will inspect them closely to be sure they are get- 
 ting what they bargained for. Still it is true, for, were 
 this not a fact, no such schemes like the 520 per cent Frank- 
 lin Syndicate operated by a clerk by the name of ^filler or 
 the Dean SjTidicate or the Storey Cotton S^nidicate op- 
 erated by ex-convicts, could l)e ]iossible. These were all 
 blind pools, so to speak. They advertised that speculation 
 could be conducted profitably and without loss and would 
 declare out of their supposed operations bic: weekly divi- 
 dends. The Franklin S^-udicate, while it lasted, paid 10 
 per cent weekly dividends. They secured some person in a 
 comnmnity as a customer and it would not be long before 
 
186 LOUIS GUENTHER 
 
 the diipo would !)(' tcllinc: all his noi.c:hV>ors about tho fat 
 dividonds bo was roeoiviue^. Tbo result would bo tbat tbo 
 eui)idity of otbors was arousod and tlioy also f<'ll victims. 
 
 Tboir scbouios woro siniplo. Tbo dividonds paid oamo 
 from tbo monoy tboir dupos sent, and not from spooulation. 
 In tbo oarly sta^os of tbe crooked ,ii:amo, tbo dividonds paid 
 did not amount to verv mueb and for every dollar distrib- 
 uted in tbis way tboy woro sure of ton more oomina' back. 
 Few of tboir \irtinis ever ,u"ot tbeir money back, f(»r tbey 
 kept sending more monoy tban tboy rocoivod so as to in- 
 crease tboii" large profits. A day must come wben sucb 
 scbemes as tlieso are raided or tbeir operators d(^eide to 
 make a big clean up. Tbon all tbeir dupos find tbat tbey 
 have not been speculating but bave boon swindled out of 
 their money. 
 
 Luckily, sucb discretionary pools, as tboy are styled, 
 have ceased to exist. The authorities are now too watch- 
 ful. But in tboir place have sprung up individuals who will 
 handle speculative accounts for clients for a share of tbe 
 profits. They catch their full measure of victims. Those 
 people are merely gambling with tbeir clients' money. If 
 they guess rightly, tbey take a share of tbe in-ofits; if not, 
 their customers, not tboy, lose monoy. 
 
 Tn tbo fii'st place, no person should speculate who has 
 no knowledge of securities. One nmst not forgot that in- 
 trinsic value and ])ossil)le increase in income return are tbo 
 moving forces behind a rise in tbe price of a security, and 
 conversely, a do})rociation in 1lic intrinsic value and the 
 likelihood of a reduction in 1lic dividend, are behind a de- 
 cline in tho pi'ico of a security. 
 
 Such possibilities can l)o detected oidv bv close studv of 
 prevailing conditions and by thorough analysis of tho earn- 
 ings statement, as ]»ul)lisbed by corporati<ms. 
 
 Tn fact, t<t be successful in speculation a ]iorson must 
 devote as close study to conditions as bo would to any pro- 
 fession ho desires to master. 
 
INVESTMENTS AND SPECULATION 187 
 
 Speculation is a rich man's pastime, not a poor man's 
 road to fortune. Tlie latter has no business in it. A rich man 
 is in a i)osition to recuperate his losses by patient waitinrj. 
 If he is a buyer, he can take his securities out of the market, 
 put them away in his strong box and bide his time until they 
 not only recover their price but go high enough so that there 
 is a prolit in them for him. If he is seller, he can close his 
 transaction, sell again at a higher level until the decline an- 
 ticipating takes place. But even then men who adopt this 
 method are not always right in their conclusions. 
 
 The most successful speculators are the actual investors 
 who buy their securities outright after a severe break in 
 prices and store them away until a recovery occurs in which 
 they can resell at a profit. They do not buy more than they 
 can well afford to buy and as they own the securities out- 
 right they cannot be called upon for margin. 
 
XXX. THE PROMOTER'S PLACE IX FIXAXCE. 
 
 He ^vll<^ proves himself a successful and capa])le pro- 
 moter is a very useful individual. As the difficult task falls 
 to him oL' bringiuL!: capital and oi)portunity together for 
 their nuitual exploitation, no one am disi)ute that such 
 men, when honest in their efforts, really perform a vt iv 
 valuable service when they succeed in raising aipital to 
 finance legitimate and meritorious enterprises. 
 
 In reality they are the men who tind legitimate oppor- 
 tunities in which capital may be i^roHtaldy employed. Born 
 optimists as they are, they are never at a loss to devise meth- 
 ods of presenting their projects in a form sufficient to in- 
 terest people of means. 
 
 Todav, manv cities and towns are richer in either new 
 industries, electric light, gas, or water plants, or transpor- 
 tation facilities, because of the efforts of some promoter 
 whose confidence that such ventures would prove profitable, 
 induced him to devote all his time and energies to raise the 
 required capital to start them. Many communities owe their 
 railroad facilities to the same tireless ])oomers. 
 
 But not all promoters are ui)right and honest. Some are 
 shifty and dishonest and are in tlie l)usiness to plunder in- 
 vestois. Honest i)romoters are constructionists; they are 
 the men who do things in an honest way, never undertaking 
 any ])ro})osition unless they are first thoroughly satisfied 
 it is sound, and then they stick to it until it is a success. 
 The crooked pi-omoter is the reverse; he is an individual 
 who is not only indifferent as to the ultimate outcome of a 
 project, but mercenary, since he has but one pui])ose al- 
 ways in mind, which is to use his schemes to unload stocks 
 or bonds on investoi-s, caring little whether the securities 
 are sound or not. His schemes are only traj^s to catch the 
 
 188 
 
INVESTMENTS AND SPECULATION 189 
 
 money of the joiiblic, and are not newly developed oppor- 
 tunities for making money. It is unfortunate that this type 
 of promoter is largely in the majority. Because of their 
 pernicious efforts the business of promoting has in late 
 years come into bad odor, although undeservedly, as it is 
 a line of work that alw^ays will be necessary. Men capable 
 of bringing capital and enterprises together will always be 
 required ; their services cannot very well be dispensed with. 
 
 The legitimate promoter has no brass band to herald 
 him; he works very quietly and unostentatioush^ He is 
 a mole who keeps burrowing along without noise. If he 
 is planning a merger of a number of industrial concerns, 
 to bring about greater degree of stability for a certain line 
 of manufacture, he usually starts by obtaining options on 
 the plants and has his plans and statistics showing the pos- 
 sible profits wtII worked out before he is ready to lay them 
 before capitalists. If he is bent upon building a new rail- 
 road or furnishing a community with some very much 
 needed public service, he first has his rights of way or fran- 
 chises safely tucked in his pocket before undertaking to 
 raise the necessary capital. He never begins half-way, as 
 he realizes the futility of attempting to induce large capital- 
 ists to finance his projects unless he is in a position to fullill 
 every promise he makes. 
 
 Furthermore, a promoter w^ho has a good money-mak- 
 ing opportunity and is intelligent enough to present it prop- 
 erly, usually experiences no difficulty in finding capital for 
 it. Capital is hunting him as nuich as he is seeking it. The 
 promoter, however, whom the i)ul)lic must watch very care- 
 fully and be on giiard against, is the man who has a half- 
 baked scheme which he wishes investors to finance entirely 
 and take all the chances, liv may not exactly be a knave, 
 but simply a fool who imagines he has a good thing and be- 
 lieves he can raivse enough money to exploit it by a direct 
 appeal to the multitude of investors. Whether he is a knave 
 or a fool, the result to the investor in the end is equally 
 
190 LOUIS GUENTHER 
 
 disastrous, if enough capital is not raised. All those then 
 ^vh() have hacked the promoter's confident promises with 
 their capital, lose it when the critical period is reached, when 
 more capital is required, hut can no longer he ol)tain(^d. 
 
 Every year hundreds ujoon hundreds of such ventures 
 succunih, for from their inception they never really have 
 a chance to demonstrate what they are capahle t>f accom- 
 jilishing, merely through lack of sufficient capital. 
 
 The intelligent and successful promoter guards against 
 such a contingency. He usually deals with wealthy capital- 
 ists and large underwriting l)ankers who are prepared to 
 pledge all the necessary capital to insure the completion of 
 the project hefore inviting investors to participate. They 
 at least go to all lengths to he sure of their ground. It was in 
 this way the steel merger, copper merger, and a dozen 
 other well-known mergers were organized hy shrewd pro- 
 moters. Their securities may have been watered, ])ut at 
 least they always had a market. 
 
 Criticism may properly l)e directed at this watered cap- 
 ital, but it must be said in behalf of the original promoters 
 that the holders of their stocks could realize something on 
 them whenever they wanted to sell. As much cannot be 
 claimed for the stocks of tlie number of shift v schemes ex- 
 ])loited during the last twenty years, by means of flam- 
 boyant and extravagant newspaper advertising. To men- 
 tion the names of all of them would alone require a 
 book as bulky as an Encyclopedia Britannica. ^lost of the 
 secui'ities issued l>v tlieso schemers are now W(u-thless. 
 AVhat money the puljlic invested in flicni has been nm\- 
 pletely lost. 
 
 Only one general rule can be suggested by which an in- 
 vestor may judge the standing of a pr()m(>ter who is en- 
 deavoring to enlist ca])ital. That rule is to find what is the 
 prcanoter's reputation in the financial conununity— whether 
 he has any previous successes to his credit, never to accept 
 his mere statements as facts, but compel him to furnish a 
 
INVESTMENTS AND SPECULATION 191 
 
 complete financial report T\'ln('li will show how much cap- 
 ital his project will require and then what assurances he 
 can j^ive that he will be able to raise it all. 
 
 By an investigation of his character it is possible to 
 learn whether the proposition is of a substantial character, 
 or the promoter is simply trying to raise a large amount of 
 capital "on a shoe string." Other than this there are no 
 specific rules. There are so many different ventures con- 
 stantly being brought out and such a great variety in the 
 plans adopted to raise capital, that each proposition must 
 be judged individually and according to its merits. 
 
 Listed and Unlisted Securities. 
 
 "We hear considerable pro and con about listed securities. 
 The subject is very much discussed not only wherever secu- 
 rity buyers congregate, but frequently in the financial col- 
 umns of the newspapers. The most convincing argument 
 brought forward by champions of listed securities is that 
 the latter have a market. That is to sav, thev can be sold 
 when it comes necessary to sell them. Their point is that 
 individuals, when they make an investment, wish to be in 
 a i^osition where they can always sell what they buy. Then 
 they also contend that it is much easier to obtain loans up- 
 on securities listed on some Exchange. But fallacy is to 
 be found in all their arginnents. 
 
 Standard Oil shares are not listed on the Stock Ex- 
 change. This security is traded in on the open market and 
 there is not the least difficulty experienced in quickly find- 
 ing a buyer, should one wish to sell the stock, nor will a per- 
 son be turned out of doors by any banker if he wishes to 
 borrow any money, as there is no more desirable collateral 
 for a loan than the shares of the Standai-d Oil Co. There 
 are any number of other desirable stocks in a similar posi- 
 tion, alth(High they are not listed. A few which might 
 be mentioned are Royal P>aking Powder, Singer Sewing 
 ^lachine, American T}q:>efounders, Otis Elevator, Borden's 
 Condensed Milk, and so on. 
 
192 LOUIS GUENTHER 
 
 lu tlic final analysis, it is not wlicther a stock is listed 
 or not which gives it marketability, but its intrinsic merit 
 as an investment. This is what the buyers of stocks first 
 consider, and quite properly. Furthermore, this element is 
 [also what bankers first seek t<» determine when making 
 loans or at least they should do so. if a corpoi-ation is doing 
 a lai\<;e business, has i'^v years ])aid ^ood dividends and con- 
 .tinues to pay them, then it should not be difficult to sell the 
 stock when the occasion to do so arises, or to borrow money 
 'upon it. i 
 
 |i?t Listed stocks are decidedly at a disadvanta.a:e with 
 neiTous security holders, for anv extreme fluctuations in 
 their prices mi,i2:ht prompt them on the spur of the moment 
 and without thinking, to sell when they should not, or buy 
 when they ought to let them alone. 
 
 There are also many securities listed on the Stock Ex- 
 change, which, so far as commanding a ready market, might 
 as well never have been there, so inactive are they. Nor is 
 this to their discredit. It may be a case, as it often proves, 
 that the shares are so closelv held bv investors that very 
 little stock comes into the market. Tlic position of the 
 shares of the Eastman Kodak Company of Rochester, N, 
 Y., is an example of this. The stock has ]iaid sudi a good 
 rate of dividends for years that those wlio (.wn it are re- 
 luctant t(t part with it. The shai'es of the express com- 
 panies, although also listed, are inactive a good deal of 
 the time foi- the verv same reason. There are some listed 
 stocks in which sometimes days will pass without as much 
 as one hundred shares changing hands. 
 
 I mention this only to prove that all the advantages arc 
 not always with listed stocks. There are a great many equal- 
 ly good secui'ities not on the Exchange which it would be 
 the height of folly for investors to ignore ])ecause of the 
 absence fi-om the listing department. 
 
 When a person buys a security he is promjited to do so 
 because of its value and prospects. That is the cardinal 
 
INVESTMENTS AND SPECULATION 193 
 
 principle in making profitable investments and no one will 
 dispute the argument. While I am not decrying the ad- 
 vantages of securities that are listed, I at least cannot see 
 where it is a mistake when a corporation fails to place its 
 securities on the Exchange. 
 
 I have been told by directors of corporations that they 
 have refrained from listing their stocks because of a fear 
 that if they did so the stocks would be in danger of being 
 manipulated, where as it is their desire to keep the stocks 
 free from all stock juggling and have them sell strictly upon 
 their merits. In taking this view they are quite right, for 
 nothing will prejudice a security in the opinion of the public 
 more quickly than a suspicion that the fluctuations in its 
 market prices are artificial. There is no way to prevent 
 this being done on the Exchange should some of the brokers 
 conclude they could make a good profit in buying quietly a 
 block of stock and then by a display of strength in the quo- 
 tations, distribute their stock on a scale of rising prices. 
 After they are through with their maneuvering, the stock 
 might decline rapidly in price to the great impainnent of 
 its market position, although nothing has happened to de- 
 preciate its intrinsic merits. This is what makes some cor- 
 porations hesitate to list their securities. 
 
 When the Governors of the New York Stock Exchanges 
 devise means to make manipulation extremely difficult, I 
 am inclined to think the hesitancy shown by directors of the 
 smaller corporations to list their stocks will be very largelv 
 removed. Towards this end the suggestion has been prof- 
 fered to prevent brokers from buying stocks for their own 
 account. Whether or not this is practicable is a de])atable 
 question. 
 
 But as long as a stock has intrinsic merit behind it, re- 
 turns good dividends and has borne a good reputation, it 
 is immaterial from the investor's viewpoint whether it is 
 listed or not. It is well to remember that that which has 
 value may be sold and money borrowed on it. 
 
 B. VII— 13 
 
194 LOUIS GUENTHER 
 
 Mining, Oil and Other Bonds. 
 
 Ever so often it seems to ])e our misfortune to run into 
 a l)oom of some kind (»r (•tlier when the p(»i)nlar fancy for 
 investments turns in (me jiarticular direction and then dis- 
 cretion and good judgment which solx-r-minded people are 
 supposed to exercise, are cast aside in a frenzy to gamble. 
 If it is not in mining, then it is for the exploitatit)n of a 
 newly discovered oil tiekl ; if it is not for that, then it is some- 
 thing else wliieh has taken hold of the public fancy. It is 
 during such Ijooms that the flotation of new securities 
 reaches its flood tide. 
 
 A great many j^eople then appear to be obsessed with 
 but a single idc^a, to acqiiire wealth overnight. AVhen pop- 
 ular fancy runs wild for a certain class of securities, it 
 is a harvest time for unscrupulous manufacturers of se- 
 curities. 
 
 Yet this is not a phenomenon exclusively characteristic 
 with us. Nearlv everv other nation is afilicted more or less 
 at some time or other, with the same sort of wild speculative 
 mania. The phlegmatic Dutch had a black tulip craze when 
 fabulous sums were paid for this ])ul1). >^ ranee was turned 
 into a nation of besottened gamblers by John T.aw with 
 his fanciful Mississip])i bul)ble, and more recently by De 
 Lesseps and Ilirsch with their more ambitious l*anama 
 Canal scheme. AVe are inclined to look u])on the French as 
 a thiiftN' r.icc, vet these ineidents prove thev can be aroused 
 mider ])eculiar circumstances to throw millions away ou 
 baubles. 
 
 In Knghnid such debacles result frequently, AVhile 
 France was royally entertaining John Law and pouring 
 immense riches into his lap to squander, Fnglishmen were 
 no less shorn of all sober sense in their great greed to get 
 the immense wealth which the South Sea trading enter- 
 prises, and there were a half-dozen of them, promised to 
 bring. With the same rash spirit they launched upon the 
 
INVESTMENTS AND SPECULATION 195 
 
 ^vil(lly speciilativo sclienies converging npon the dovolop- 
 ment of the new gold fields of Africa and only recently 
 something approaching a frenzied boom in rubber company 
 shares developed and has since collapsed. 
 
 There was a boom in 1849, due to the discovery of gold 
 in California, but our first extensive boom, which is remem- 
 bered by the present generation, and which reached any 
 large proportions, was the speculation in oil, when the first 
 large oil area in this country was discovered in Pennsyl- 
 vania. People from all over flocked to the oil district. 
 The early comers made money. Their successes lured oth- 
 ers. In this way the fever spread until it ran wild until it 
 died from exhaustion. 
 
 The pioneers are the ones who usually make the money 
 in a boom. They are able to do this through the willingness 
 of those who follow to jDay fancy prices for their holdings. 
 They, in turn, hand them over to other late comers. The 
 bubble, once started, continues to expand as long as there 
 are people who will take what others have to offer at a good 
 profit, which in ])()()ni times attains fanciful pro]')ortions. 
 But finally there comes a pause when every one rushes to 
 sell in an anxiety to cash in their paper profits, but buyers 
 are scarce. Then the bottom drops out of the boom, the bub- 
 ble bursts and property or investments which only a short 
 while before were figured in dollars, are not worth cents. 
 Such, in brief, is the history of booms. 
 
 The author distinctly remembers the Texas oil boom, 
 which it was his good fortune to observe at close range from 
 its inception to its collapse. A week after oil was discovered 
 the rush began to the new field. Beaumont, Texas, which 
 was the center of the new field, grew from a small lumber 
 town of not more than (),000 po})ulation to a bustling city of 
 25,000 peo])le, all this ])ottoin('d on a fi"(^nzicd hunt for 
 wealth. The Lucas Gusher brought this lioi-dc of ];)co])]('. 
 It was spouting oil at the rate of 70,000 barrels a day. Tliis 
 excited the imagination of the masses. 
 
196 LOUIS GUi^NTHER 
 
 Nothing was more easy to estimate than that such a 
 production meant enormous wealth. At fifty cents a barrel 
 the new well was showing a production of $35,000 daily 
 which was all right on paper. If one well could show this, 
 then the profits on a half-dozen would reach enormous pro- 
 portions. Oil land which could be bought a month before for 
 only a few dollars an acre, jumped by leaps and bounds in 
 price and in a few months was changing hands on the basis 
 of $1,000,000 and over an acre. Derricks were built so close 
 together that it was impossible, in some places, to walk be- 
 tween them. 
 
 The outcome was the great over-production of oil, for 
 which there was no market. Oil was soon begging for ])uy- 
 ers. The price declined until not more than three cents a 
 barrel was obtainable. But this was not the only mishap to 
 befall the field. The large number of wells drilled on the 
 same spot almost exhausted the field in a year's time. More 
 than a thousand different oil companies were promoted, all 
 with varying capital, fi-om a modest $50,000 to several mil- 
 lion dollars. The public invested, it is conservatively esti- 
 mated, nearly $100,000,000 in actual cash, most of whieh has 
 been lost, as there are today only a few oil companies com- 
 pared to the number formerly in this field, and they are 
 largely o^^^led by three or four large corporations. 
 
 It is the same with mining. The Cripple Creek, Gold- 
 field, Tonapah and Cobalt booms sucked up one hundred 
 dollars, the money of misguided investors, where it returned 
 one dollar in dividends. Porcupine, the new gold camp in 
 Canada, is likely to repeat history. It is not that these 
 camps lack opportunities for successful ex]-)loitation ; it is 
 due to the public rushing heedlessly into these things and 
 taking anything offered T\ithout investigation, snapping 
 at them like a school of hungry fish at the bait thrown out. 
 
 This is what happened also in the great industrial boom 
 following ^IcKinley's inauguration as President in 1897. In 
 those days it seemed that all promoters had to do to induce 
 
INVESTMENTS AND SPECULATION 197 
 
 the public to pour its money in upon them was to incorpor- 
 ate a company, plan the manufacture of something and ar- 
 range in their prospectuses a mass of statistics demonstrat- 
 ing how much money could be made. It is needless to say 
 where things are done thus loosely that the majority of the 
 enterprises never can reach beyond the embryonic stock-sell- 
 ing stage. 
 
XXXI. THE GET-RICII-QUICK LURE. 
 
 Uutil recent years, the Get-Rich-Quick Game had at- 
 tracted little attention, althon.uh it had heen an evil in the 
 domain of finance which had slowly but steadily grown for 
 years until it had reached proj^ortions where it had actually 
 become a serious menace to our national prosperity. But it 
 could no longer be ignored. It spread so far that the neces- 
 sity was forced on the different states and even on our 
 National Government to devise rigid restrictions to check 
 the invasion u]^on our people made by the multitude of such 
 schemes which have been continuously cropping up. 
 
 The Get-Rich-Quick Game, as conducted in this country, 
 is no longer a small factor. President Taft regarded all 
 such schemes as constituting a danger to our prosperity, 
 serious enough to make it ineuni])ent on him t<» devote a 
 pai-agra])h in one of his recent messages recommending that 
 drastic action be taken against these swindles. 
 
 The losses the public sustains through get-rich-quick 
 schemes is enormous. But the greatest harm following does 
 not come to intelligent people, as they are not so easily de- 
 luded; l)y far the larger number of victims is drawn from 
 the huni))ler classes, the thrifty accumulators of capital, 
 who, being totally ignorant of the first sound principles gov- 
 erning investments, and still anxious to make their money 
 yield the largest income, grasp eagerly at different proposi- 
 tions bi-ought to their attention beciiusc they promise enor- 
 mous returns. 
 
 The amomit which credulous investors lose each year in 
 our many different Wallingford schemes to acquire wealth 
 overnight and on a few hundred dollars, cannot be estimated 
 accurately. Still, I believe I am not exaggerating, but un- 
 derestimating the total loss, when I place the amount be- 
 
 198 
 
INVESTMENTS AND SPECULATION 199 
 
 twecn $150,000,000 and $200,000,000 every year. This cer- 
 tainly is a liiig-c amount of capital to throw a"SYay upon ven- 
 tures which never have had a ghost of a chance to succeed 
 from their veiy inception, because they were conceived at 
 the start in the womb of dishonest v. 
 
 I \\'as asked some months ago by ]\Ir. C. ^I. Keys, the 
 financial editor of World's Work Magazine, to prepare some 
 statistics of the more prominent get-rich-quick fakes foisted 
 on American mone}^ savers during the last few years. In 
 the preparation of these statistics I went no further l^ack 
 than seven vears and included onlv such schemes which 
 emanated principally from the eastern financial centers. 
 
 The statistics I furnished World's Work included forty- 
 two oil comiDanies, with an aggregate cai)italization of $83,- 
 448,128; one hundred nineteen mining companies with an 
 aggregate capitalization of $527,882,500; and eighty-two 
 companies of a miscellaneous character, with an aggregate 
 capitalization of $448,269,780. This list was only a partial 
 one and included only such schemes still fresh in the pub- 
 lic's mind. Where one was mentioned there were two score 
 or more unnamed, because space to include them was not 
 availa])le. 
 
 Yet here in this incomplete list we see a total capital in 
 excess of one billion dollars, of which but an infinitesimal 
 part actually went into the development of these enter- 
 prises: th(^ larger part drifted to the pockets of dishonest 
 promoters, went for flamboyant advertising in the not over- 
 scrupulous newspapers, or was squandercul on large com- 
 missions to stix'k salesmen and their sub-agents. All the 
 millions investors threw in these schemes proved a total 
 loss. A country eannot long continue to prosper which will 
 tolerate the snuffing out of so much of its available capital 
 each year. 
 
 The Get-Rich-Quick Oame is a convenient blind for the 
 high-class confidence man to hide behind. Until the authori- 
 ties, following the lead of the National Government, be- 
 
200 LOUIS GUENTHER 
 
 came aggressive and made up their miiuls that it was high 
 time to stop this form of brazen phmder, crooks and crafty 
 promoters found the occupation of despoiling the masses 
 from such vantage points as fiscal agents, fake bankers and 
 brokers extremely congenial, nor were the risks they as- 
 sumed great. Compared to them, hold-up men were indi- 
 viduals of some couraije, for thev at least alwavs invited 
 danger from a counter-attack when they assaulted wayfar- 
 ers to get theii- booty. The get-rich-quick shark was seldom 
 in danger from physical violence, for if one of his victims 
 came to seek him out in his office to force hmi to return his 
 plunder by physical persuasion, he was never to be found 
 around. 
 
 The get-rich-quick schemer works along clever lines. He 
 acquires mining claims or a lease on some oil property some- 
 where near where a real boom is on and at once starts a 
 company, capitalizing it for a large amount, or he may get 
 hold of some new invention, like the wireless telegraph, or 
 the wireless telephone, and subject them to the same process 
 of inflation. This preliminary step taken, he next proceeds 
 to have stock certificates and attractive literature printed, 
 promising profits ranging from two hundred to as many 
 thousand per cent. Then he is ready for his work of pluck- 
 ing investors of all the money they can spare. 
 
 One of their effective schemes is to offer their stock at 
 a low price, much under its par value. They fix on a low 
 price the better to convince their dupes with their plausible 
 argiunents that the investment will rapidly advance in value. 
 In many instances, they hold forth promis(\^ that their stock 
 will reach a jirice far in excess of its par value as soon a3 
 their enterprise begins to pay large dividends, which are 
 never declared unless fake payments are made and then 
 they are used merely as a bait to be withdra^^Tl later on. 
 
 The difference in the price at which a victim may buy 
 stock and what it is sure to reach, according to the promoter, 
 is represented to him as the profits he can easily make. The 
 
INVESTMENTS AND SPECULATION 201 
 
 profit is so vastly in excess of what it is possible for con- 
 servative investments to return that the lure catches igno- 
 rant and greedy investors, but not intelligent people, who 
 will investigate thoroughly before biting on the mere prom- 
 ises made by people entirely unknown to them. 
 
 Another scheme adopted by get-rich-quick operators is 
 to announce an advance in the price of the stock and urge 
 that it be bought for the profit which can be made from the 
 increase in its market value : this is what thev all sav. If 
 a stock is offered for ten cents a share and will be advanced 
 to 20 cents a share, it is pointed out that the investor will 
 make 100 per cent. This snare catches a great many vic- 
 tims. The stock has not advanced one mill in value ; all that 
 has taken place is that it has been arbitrarily marked up in 
 price. If any effort to sell the stock w^re made by an invest- 
 or, he would find out that, virtually, there was no genuine 
 market for its sale. 
 
 All sorts of efforts are made to secure the consent of 
 men having some reputation to act as directors for get-rich- 
 quick schemes; some are innocently drawn into the game 
 through an honest belief that it is a good thing and certain 
 of success ; others, again, act for a more mercenary purpose, 
 giving their services in return for a salar}" or a big block of 
 stock which they expect to sell at a profit. 
 
 There is a telegraph company whose stock is widely ex- 
 ploited by a concern in the East, which borders as near to a 
 disreputable promotion as it is possible to get without its 
 authors breaking into the ])enitentiary, for which a number 
 of very well-kno\^Ti public men are acting as an advisory 
 board and among whom is a famous divine. Yet not one of 
 these men ever attended a meeting of the company. They 
 have consented to act as an advisory committee upon the 
 plea of others that their presence will be a guarantee that 
 the enterprise will be free from stock jobbery. The general 
 reputation of these men is proof of their integrity ; they are 
 the innocent cat's-paws of crafty promoters behind the 
 
202 LOUIS GUENTHER 
 
 scheme, who use their names and high character to inveigle 
 the public into buying the stock. This is by no means an 
 isolated case. There are anv num])er of simihir illustrations 
 which could be given. Get-rich-quick promoters are fully 
 aware of the power the names of reputal)l(' men have upon 
 the purse strings of credulous investors and they cmi)loy 
 every means to secure such men as directors in their enter- 
 prises. 
 
 Sometimes it occurs that men in good repute will l)elieve 
 they have a good thing. Likely they have, but unfortunately 
 they fall among the crooks in linance who enamor them 
 with promises of quickly raising all the capital to develop 
 their enterprises and ruin them in a short while by their 
 dishonest operations. This often happens. I remember a 
 legitimate industrial enterprise which fell among the tinan- 
 cial Philistines who robbed it from all sides and tinally 
 forced it into bankruptcy. After that experience it was im- 
 possible to raise any money for it. 
 
 If a fake advance in the price of a stock fails to entrap 
 victims, then fraudulent dividends are tried. The backers 
 of get-rich-quick schemes are never at a h^ss to spring any 
 cou]i if it will suffice to bi-iug them money. They will guar- 
 antee to buy stock back within a eci'lain time at a liigher 
 price, if that will catch a sucker, with ik* intention of living 
 U]) to theii- ])romises, and as they are hnancially irrespon- 
 sible it is useless to start any legal action against them, as 
 no monev could be recovered after once thev obtain a 
 strangle hold uj)on it. 
 
 A few years ago some get-rich-quick mining promoters 
 devised, so they claimed, a i)lan for a guaranty against loss. 
 The scheme consisted of a trust fund inti» which were de- 
 posited a certain number of shares in each of the companies 
 they ])rom(tte(l. It was a sort of grab box. If the investor 
 was dissatisMed with one stock he had ])urchase(l beciiuse it 
 did not \n\y dividends or advance in price (juickly enough, 
 he could turn his stock into this depository and take out 
 
INVESTMENTS AND SPECULATION 203 
 
 some other stock which he fancied the more. As all the 
 stocks were equally worthless there was no protection 
 against loss. Still it was a good argument and had a good 
 effect while the scheme still had the flavor of novelty. 
 
 When this plan wore out its welcome, fake bonding com- 
 panies were started. These companies guaranteed to repay 
 the investor in twenty years, some in ten years, all the money 
 they had paid for a stock, if in the meanwhile it did not 
 prove profitable, but a failure. This also sounded convinc- 
 ing but none of these bonding companies was ever solvent 
 or could ever live up to its guarantee. After the authorities 
 closed u\) a number for operating an illegal business, all the 
 others disappeared quickly. 
 
 As already i-elated in previous sections, the Government 
 has been carrying on a vigorous campaign to rid the coun- 
 try of fraudulent financial schemes, including the innumer- 
 able get-rich-quick ventures. The Government is in the 
 best position to carry on this work very effectively. Such 
 schemes cannot succeed unless they are allowed the free 
 use of the mails, as it is by means of the mails the promoters 
 try to reach investors and to catch them in their claws. By 
 branding them as frauds and denying them the use of the 
 mails, these fakers cannot very well succeed. 
 
 Still this is a slow process of extermination, as it requires 
 an investigation in each case, sometimes extending over 
 months before any retaliatory action can be taken, in the 
 meanwhile considerable mischief can be done, for the get- 
 rich-quick schemer is a shifty individual. He does not be- 
 lieve in procrastination ; he fully appreciates that it cannot 
 be long before his ventures must attract unfavorable notice 
 and therefore he wishes to gather in his loot before he is 
 smoked out. Nor does he stay long with any one scheme, but 
 transfers his activities noiselessly and rapidly from one to 
 another. Often the same crooked individual, before he lands 
 behind the bars, has foisted on his dupes a dozen or more 
 get-rich-quick ventures. One of them promoted as many as 
 
204 LOUIS GUENTHER 
 
 forty-six compauies before the Government caught him, 
 each one of which was an out and out fraud. 
 
 In the get-rich-quick business, "the sucker list" plays 
 a very important part. This list is made up of names of 
 people who are knowii to bite at worthless truck. Such 
 people are the "suckers.*" These "sucker" lists are graded. 
 In one raid by the Government of the offices of one get-rich- 
 quick concern, there was found a card index list of "suck- 
 ers'* marked according to their measures of credulity 
 *^good," "fair" and ^'worth trying." 
 
 Once a person writes for literature to any one of these 
 harpies he is for years afterwards tagged as a "sucker." 
 From then on he will be bombarded with all kinds of liter- 
 ature from all the get-rich-quick sharks, eveiyone of whom 
 is exceedinglv anxious to make him wTalthv without anv 
 effort on his part. His name is peddled from one to another. 
 His name is bandied about or sold, as a large business is 
 done among promoters with "sucker" lists, a name bringing 
 all the way from one cent to one dollar, according to its pos- 
 sible value as a source of good plucking. 
 
 Hundreds of people are impoverished every year by get- 
 rich-quick schemes. It is surprising to what extent a mania 
 for w^orthless stocks siezes on some classes. I remember an 
 instance where a western court was compelled to appoint a 
 guardian for one man in order to keep intact the remainder 
 of his fortune, which at one time was quite large, and save 
 it from being entirely squandered on get-rich-quick stocks. 
 This deluded individual had bought liberally of stocks in 
 every fake to which his attention was called until he had 
 thi-owni awav nearlv $:100.000. "When he was asked whv he 
 did it, he said he felt that among the many stocks he had 
 bought a number would prove very successful, so nuich so, 
 that they would more than double what losses he had sus- 
 tained in the worthless investments. 
 
 This is a theory obsessing a great many persons. They 
 proceed on the belief that if one out of twenty stocks even 
 
INVESTMENTS AND SPECULATION 205 
 
 partially realizes the profits claimed for all, they will be 
 so rich thev can afford to lose on the other nineteen. The 
 twentieth, the good thing, somehow never comes up to their 
 measure. 
 
 It has been suggested that an effective curb could be 
 placed upon this evil by the Government, compelling every 
 enterprise offering its stock to the public to take out a 
 national charter providing as its principal requirement the 
 filing under oath with the Secretary of the Treasury of a 
 complete statement of its financial condition, which state- 
 ment would be open to public inspection or a copy could be 
 obtained by an investor for a nominal sum. It is claimed, 
 and not without reason, that such publicity would very 
 quickly develop any fraud if it existed and enable the Gov- 
 ernment to stop any further stock sale until an investiga- 
 tion disproved the charges. 
 
 The idea is a very good one. Tt would be even more 
 effective were all the directors forced to acknowledge under 
 oath the genuineness of the financial statement filed and if 
 it were further provided that any perjury or false swearing 
 was punishable with a jail sentence, instead of a fine. Then 
 it is likely individuals who valued their good names would 
 use the proper precautions not to carelessly connect their 
 names with any fraudulent promotion. 
 
 Still no investor is in danger of falling a prey to a dis- 
 honest or visionary promotion if common sense is exercised. 
 By inquiring into the character of the people promoting the 
 venture and by getting a financial statement, they will in a 
 large measure protect themselves. Even should they not 
 feel themselves competent to judge, which in itself suggests 
 they ought to be doubly careful of what they take hold of. 
 then they should consult some reputable newspaper or bank- 
 er. These latter would only too willingly advise them sin- 
 cerely of their danger, if any existed. Ignorance alone is 
 responsible for two-thirds of the money losses in invest- 
 ments. Ignorance cauont be protected unless it alone seeks 
 tlie protection. 
 
FOREWORD. 
 
 *' People will endeavor to forecast the future and make 
 agreements according to their prophecy. Speculation of 
 this kind by competent men is the self-adjustment of society 
 to the probal)le." — Judge Holmes in a U. S. Supreme Court 
 Decision. 
 
 *' A study of past disturbances leads to the conviction that 
 no severe depression has occurred which was not preceded 
 by loud warnings. These warnings ought not to pass un- 
 heeded and in order to recognize them promptly, it is neces- 
 sary that accurate statistics be furnished. Much improve- 
 ment has been accomplished in the last few years, though 
 it is to be regretted that so much of our statistical informa- 
 tion is fragmentary or inaccurate. Official and private pub- 
 lications furnish much valuable information 
 
 Other statistics, which are inadequate or lacking and which 
 would be of great value, are those pertaining to the em- 
 ployment of labor, capital invested i]i new enterprises, 
 amounts expended in new construction, volume of produc- 
 tion in the various kinds of manufactures, and statistics of 
 state banks and savings institutions similar to those per- 
 taining to national banks. After making due allowance 
 for the insufficiency of statistics, it nuist be said that the 
 failure to pay sufficient attention to those already avail- 
 able is equally to be regretted." — Senator Theodore E. 
 Burton. 
 
 208 
 
PART II. 
 GENERAL PRINCIPLES OF INVESTMENT. 
 
 BY GEORGE GARR HENRY. 
 
 [Of Salomon & Compaii}-, Bankers, New York; Former Vice-President, 
 Guaranty Trust Company, New York.] 
 
 With tlk' iiiuneiise increase in wealth in the United 
 States during the last decade and its more general distri- 
 bution, the problem of investment has assumed correspond- 
 ingly greater importance. As long as the average business 
 man was an habitual borrower of money and possessed no 
 private fortune outside of his interest in his business, he 
 was not greatly concerned with investment problems. The 
 surplus wealth of the country for a long time was in the 
 hands of financial institutions and a few wealthy capitalists. 
 These men, the officers and directors of banks, savings- 
 banks, and insurance companies, and the possessors of 
 hereditary wealth, were thoroughly equipped by training 
 and experience for the solving of investment problems and 
 needed no help in the disposition of the funds under their 
 control. During the last ten years, however, these condi- 
 tions have been greatly altered. The number of business 
 men today in possession of funds in excess of their private 
 wants and business requirements is far greater than it was 
 ten years ago, and is constantly increasing. These men are 
 confronted with a real investment problem. 
 
 While they have not always recognized it, the pro])lem 
 which they are called upon to solve is really twofold— it 
 concerns the safeguarding of their i)rivate fortune and the 
 wise disposition of their business surplus. They have us- 
 ually seen the first part of this problem, but mA. all have 
 succeeded in clearly understanding the second. When the 
 treatment of a man's business surplus is spoken of as an 
 investment problem, it is meant, of course, not his work- 
 ing capital, which should be kept in liquid fonn for im- 
 
 207 
 
208 GEORGE GARR HENRY 
 
 mediate needs, but that portion of his surplus which is set 
 aside for emergencies. It is coming to be a recognized prin- 
 ciple that every business enterprise of whatever kind or 
 size should establish a reserve fund. It is felt that the pos- 
 session of a reserve fund puts the Ijusiness upon a secure 
 foundation, adds to its linancial strength and reputation, 
 and greatly increases its credit and borrowing capacity. 
 The recognition of this fact, combined with the ability to 
 set aside a resei-vo fund, has lu-ought many men to a con- 
 sideration of the best way in which to dispose of it. It is 
 obviously a waste of income to have the surplus in bank- 
 accounts ; more than that, there would be a constant tempta- 
 tion to use it and to confuse it with working capital. Its 
 best disposition is plainly in some safe interest-bearing se- 
 curity, which can be readily sold. 
 
 Confronted with the double problem thus outlined, what 
 measure of success has attended the average business man 
 in its solution? 
 
 It is safe to say that the average man has found it easier 
 to make mone}^ than to take care of it. Money-making, for 
 him, is the result of successful activity in his o\m line of 
 business, with which he is thoroughly familiar, while the 
 investment of money is a thing apart from his l)usiness, 
 with which he is not familiar, and of which he may have had 
 little practical experience. His failure to invest money 
 wisely is not due to any want of intelligence or of proper 
 care and foresight on his part, as he sometimes seems to be- 
 lieve, but simply because he is ignorant of the principles of 
 a business which differs radically from his own. 
 
 The investment of monev is a banker's business. When 
 the average man has funds to invest, whether he be a busi- 
 ness man or a pure investor, he should consult some ex- 
 perienced and reliable investment banker just as he would 
 consult a doctor or a la"\v}'er if he were in need of medical 
 or legal advice. This book is not intended to take the place 
 of consultation with a banker, but to supplement it. 
 
GENERAL PRINCIPLES OF INVESTMENT 209 
 
 The advantage of such consultation is showTi by the fact 
 that if a man attempts to rely on his own judgment, he is 
 almost certain not to do the best thing, even if his business 
 instinct leads him to avoid those enterprises which arc 
 more plainly unpromising or fraudulent. It should be re- 
 mc^nbered, however, that widows and orphans are not the 
 onlv ones ensnared by attractive advertisements and the 
 promise of brilliant returns. In most cases, widows' and 
 orphans' funds are protected by conscientious and conserva- 
 tive trustees, and it is the average business man who fur- 
 nishes the money wiiicli is ultimately lost in all propositions 
 which violate the fundamental laws of investment. 
 
 The average man is led into these unwise investments 
 through a very natural error of judgment. Accustomed to 
 take reasonable chances and to make large returns in his 
 own business, he fails to detect anything fundamentally 
 wrong in a proposition sim})ly because it promises to pay 
 well. He forgets that the rate of interest on in ifested money, 
 or pure interest, is very small, and that anything above that 
 can only come as payment for management, as he makes in 
 his own business, or at the sacrifice of some essential factor 
 of safetv which \\ill usually lead to disaster. 
 
 For the successful investment of money, however, a 
 good deal more is required than the mere ability to select 
 a safe security. That is only one phase of the problem. 
 Scientific investment demands a clear understanding of the 
 fundamental distinctions between different classes of se- 
 curities and strict adherence to the two cardinal principles, 
 distribution of risk and selection of securities in accordance 
 with real requirements. 
 
 One of the most important distinctions is that between 
 jiromises to pay and equities. Bonds, real-estate mortgages, 
 and loans on collateral represent somebody's promise to pay 
 a certain sum of money at a future date; and if the promise 
 be good and the security ample, the holder of the promise 
 will be paid the money at the time due. On the othei* hand, 
 
 B.II— 14 
 
210 GEORGE GARR HENRY 
 
 cquiticfi, such as the capital stocks of })aiikin^, railway, and 
 industrial C()r})orations. roprosent only a certain rosidnary 
 share in the assets and proiits of a working concern, after 
 pa}^nent of its obliji^ations and fixed cbar^^es. Tlie value of 
 this residuary share mav be larc:e or small, niav increase or 
 diminish, but in no c<ise can the holder of such a share re- 
 quire any one, least of all the company itself, to redeem 
 the certificate representing]: his interest at the price he paid 
 for it, nor indeed at any price. If a man buys a $1,000 
 railroad bond, he knows that the railroad, if solvent, will 
 ]iay him $1,000 in cash when tlie bond is due. But if he 
 buys a share of railroad stock, his only chance of getting 
 his money back, if he should wish it, is that some one else 
 will want to buy his share for what he paid for it, or more. 
 In one case he has bought a promise to pay, and in the other 
 an cquiti). 
 
 It is not the intention, from the foregoing, to draw the 
 conclusion that equities under no circumstances are to be 
 regarded as investments, because many of our bank and rail- 
 road stocks, and even some of our public-utility and in- 
 dustrial stocks, have attained a stability and permanence of 
 value and possess sufficiently long dividend records to jus- 
 tify their consideration when investments are contem]ilated ; 
 l)ut it is essential that the investor should have a thorough 
 luiderstanding of the distinction iuxohcd. 
 
 The i^rinciple of distribution of risk is a simple one. 
 It involves no more than ol)edience to the old rule which 
 forbids putting all one's eggs in the same basket. The num- 
 ber of men who carry out this principle with any thonnigh- 
 ness, however, is very small. Proper distribution means not 
 onl\' the division of ])roperty among the various fonns of 
 investment, as railroad bonds, uuniicipals, mortgages, pub- 
 lic utility bonds, etc., but also the ])reservati«»n of j)roper 
 geogra]diical propoi-tions within each form. Adherence to 
 this principle is perhaps not so impoi'tant for private in- 
 vestors as for institutions. A striking instance of the need 
 
GENERAL PRINCIPLES OF INVESTMENT 211 
 
 for insistence upon its observance in the institutional field 
 was furnished by one of the fire-insurance companies of 
 San Francisco after the earthquake. It appeared that the 
 company's assets were largely invested in San Francisco 
 real estate and in local enterprises generalh^ where the bulk 
 of its fire risks were concentrated. As a result, the very ca- 
 tastrophe which converted its risks into actual liabilities de- 
 prived its assets of all immediate value. This instance serves 
 to show the importance of the principle and the necessity 
 for its observance. 
 
 The principle of selection in accordance with real re- 
 quirements is more complex. It involves a thorough under- 
 standing of the chief points which must be considered in the 
 selection of all investments. These are five in number: 
 (1) Safety of principal and interest, or the assurance of re- 
 ceiving the 2)rincipal and interest on the dates due ; (2) rate 
 of income, or the net return which is realized on the actual 
 amoimt of money invested; (3) convertihility into cash, or 
 the readiness with which it is possible to realize on the in- 
 vestment; (4) prospect of appreciation in value, or that 
 growth in intrinsic value which tends to advance market 
 price ; and (5) stahility of market price, or the likelihood of 
 maintaining the integrity of the principal invested. 
 
 The five qualities above enumerated are present in dif- 
 ferent degrees in every investment, and the scientific in- 
 vestor naturally selects those securities which possess in a 
 high degree the qualities upon which he wishes to place 
 emi)hasis. A large part of the prol)lem of investment lies 
 in the careful selection of securities to meet one's actual re- 
 quirements. The average investor does not thoroughly im- 
 derstand this point. He does not realize that a high de- 
 gree of one quality involves a lower degree of other qual- 
 ities. He may have a general impression that a high rate 
 of income is apt to indicate less assurance of safety, but he 
 rarely applies the same reasoning to other qualities. "When 
 he buys securities, he is quite lilvely to pay for qualities which 
 
212 GEORGE GARR HENRY 
 
 he does not need. It is very common, for example, when 
 he wishes to make a permanent investment and has no 
 thoii^^ht of reselling, to find him purchasing securities which 
 possess in a high degi'ee the quality of convertibility. 
 From his point of view, this is pure waste. A high degree 
 of convorti))ilitv is onlv obtained at tlie sacrifice of some 
 other quality— usually rate of income. Tf he were to use 
 moiT cai'(^ in his selections, he could probal)ly find some other 
 security })ossessing equal safety, equal stability, and equal 
 ]^romise of appreciation in value, wliich would yield con- 
 sid('i-al)ly greater revenue, lacking only ready convertibility. 
 Thus lie W(tuld satisfy his real requirements and obtain a 
 greater income, at the expense only of a quality which he 
 does not need. 
 
 The quality of convertibility divides investors into 
 classes more sharply than any other quality. For some in- 
 vestors convertibility is a matter of small importance; for 
 others, it is the paramount consideration. Generally speak- 
 ing, the private investor does not need to place much em- 
 phasis upon the quality of convertibility, at least for the 
 larger part of his estate. On the other hand, for a business 
 surplus, ready convertibility is an absolute necessity, and 
 in order to secure it, something in the way of income must 
 usually be sacrificed. 
 
 Again, some investors are so situated that they can in- 
 sist strongly upon promise of appreciation in value, while 
 others cannot afford to do so. Rich men whose income is 
 in excess of their wants, can afford to forego something 
 in the w;iy of yearly return for the sake of a strong prospect 
 of a})]')rcciation in value. Such men naturally buy bank 
 and trust-company stocks, whose general characteristic is 
 a small return upon the money invested, but a strong like- 
 lihood of appreciation in value. This is owing to the gen- 
 eral practice of well-regulated banks to distribute only 
 about half their earnings in di\idends and to credit the rest 
 to surplus, thus insuring a steady rise in the book value 
 
GENERAL PRINCIPLES OF INVESTMENT 213 
 
 of the stock. Rich men, again, can afford to take chances 
 with, the quality of safety, for the sake of greater income, 
 in a way which poor men should never do. In practice, 
 however, if the writer's observation can be depended upon, 
 it is usually the poor men who take the chances— and lose 
 their money. 
 
 In the quality of safety, there is a marked difference 
 between safety of principal and safety of interest. With 
 some investments the principal is much safer than the in- 
 terest, and vice versa. This can best be illustrated by ex- 
 amples. The bonds of terminal companies, which are 
 guaranteed as to interest, under the terms of a lease, by the 
 railroads which use the terminal, are usually far safer as 
 to interest than as to j^rincipal. While the lease lasts, the 
 interest is i)robably perfectly secure, but when the lease ex- 
 pires and the bonds mature, the railroads may see fit to 
 abandon the terminal and build one elsewhere, if the city 
 has grown in another direction, and the teiTninal may cease 
 to have any value except as real estate. On the other hand, a 
 new railroad, built in a thinly settled but rapidly gi'owing 
 part of the country, may have difficulty in bad years in meet- 
 ing its interest charges, and may even go into temporary 
 default, but if the bonds are issued at a low rate per mile 
 and the management of the road is honest and capable, the 
 safety of the principal can scarcely be questioned. 
 
 Stability*- of market price is frequently a consideration 
 of great importance. This quality should never be confused 
 with the qTiality of safety. Safety means the assurance 
 that the maker of the obligation will pay principal and in- 
 terest when due ; stability of market price means that the 
 investment shall not shrink in quoted value. These are 
 very different things, though frequently identified in peo- 
 ple's minds. An investment may possess assured safety 
 of principal and interest and yet suffer a violent decline 
 in quoted price, owing to a change in general business 
 and financial conditions. In times of continued business 
 
214 GEORGE GARR HENRY 
 
 prosperity vorv ]n'j}i rates are demaiuled iov tlie use of 
 money, because the liquid capital i>i' the country, to a hirt^e 
 extent, has been converted into lixed forms, in the develo])- 
 ment of new mines, the ))uildinpj of new factories and i-ail- 
 roads, and in the improvement and extension of existing 
 properties. These higli rates have the effect of reducing 
 the price level of investment securities because peo])le liav- 
 ing such securities are apt to sell them in order to lend the 
 money so released, thus maintaining the parity between the 
 yields upon free and invested capital. 
 
 As an ilhistration of this tendency, within the last few 
 years New Yoi'k City 3^ per cent bonds have declined from 
 no to 90, without the slightest suspicion of their safety. 
 Their inherent qualities have changed in no respect except 
 that their prospect of appreciation in quoted price has be- 
 come decidedly brighter. Their fall in price has l^een due 
 to two factors, one general and the other special— first, the 
 absorption of liquid capital and consequent rise in interest 
 rates, occasioned by the unprecedented business activity of 
 the country, and, second, to the unfavorable technical posi- 
 tion of the bonds, due to an increased supply in the face 
 of a decreased demand. 
 
 It will be seen that the question of maintaining the in- 
 tegrity of the money invested is a matter of great impor- 
 tance and deserves to rank as a fifth factor in determining 
 the selection of investments, although it is not an inh(M'ent 
 quality of each investment, but is dependent for its effect 
 upon genei'al conditions. Tf i1 is essential to tlie investor 
 that his security should not shrink in quoted ]n-ice. his b(^st 
 investment is a real-estate mortgage, which is not quoted 
 and eonsequently does not fluctuate. For the investment of 
 a business sui'])lus, however, where a high degree of con- 
 ver1il)ility is required, real-estate mortgages will not an- 
 swer, and the best way to guard against shrinkage is to 
 purchase a short-tenn security, whose a]iproach to maturity 
 will maintain the price close to par. 
 
GENERAL PRINCIPLES OF INVESTMENT 215 
 
 The foregoing coiimients, in a brief and imperfect way, 
 serve to indicate the main points which should be considered 
 \n the selection of securities for investment. The main les- 
 son which it is sought to draw is the necessity that a man 
 should have a thorough understanding of his real require- 
 ments before he attempts to make investments. For a private 
 investor to go to a banker and ask him to suggest a security 
 to him without tellinc: him the exact nature of his wants 
 is about as foolish as it would be for a patient to go to a 
 l)hysieian and ask him to give him some medicine without 
 telling him the symptoms of the trouble which he wished 
 cured. In neither case can the adviser act intelligently un- 
 less he knows what end he is seeking to accomplish. 
 
 It is plainly impossible within the limits of a single 
 volume to consider the needs of all classes of investors. 
 Special attention will be paid to the requirements of a busi- 
 ness surplus and of the private investor. In the field of 
 private investment two distinct classes can be recognized— 
 those who are dependent upon income from investments and 
 those who are not. Both classes must be considered. For 
 the investment of a business surplus, safety, convertibility, 
 and stability of price are the qualities to be emphasized ; for 
 investors dependent upon income, safety and a high re- 
 turn ; and for those not dependent upon income, a high re- 
 turn and prospect of apin-eciation in value. In the various 
 articles contained in this volume, bonds, mortgages and 
 stocks of different kinds are considered in turn, their ad- 
 vantages and disadvantages analyzed, and their adapta- 
 bility to the requirements of a business surplus and of 
 private investment discussed. 
 
SAFETY AND SECURITY. 
 
 BY JOHN MOODY. 
 
 [Author of "The Truth About the Trusts"; Editor of "Moody's Manual of 
 Railroad and Corporation Securities," etc.] 
 
 Unless ho has had nnich previous experience, the pros- 
 pective investor ^vho wishes to i)ut his money at work 
 throuLch Wall Street channels, will be confronted at the 
 outset with the (juestions of "safety" and "security." 
 Knowing only more or less definitely that he ought not to 
 expect a return of more than 4 to 5 j)er cent, if he wishes to 
 invest his money securely, he naturally seeks more expert 
 advice from a ])anker, broker or general dealer in invest- 
 ment securities. And he is wise in doing this, provided he 
 exercises good judgment in the selection of the broker or 
 dealer. But brokers and dealers in investment securities 
 are, of course, not infallible; their judgment is sometimes 
 biased, and they may, for one reason or another, give mi- 
 sound advice. Plence, it is all the more necessary that the 
 investor should inform himself regarding the merits of a 
 given security, as well as train himself in the art of an- 
 alyzing investments in general. 
 
 The truth is, that while there are certain fixed rules for 
 proper guidance, every bond must l)e judged by itself in 
 order to be analyzed correctly. For instance, a man may 
 be advised to invest only in "first mortgages," on the hypoth- 
 esis that by putting this limitation upon his field of in- 
 vestment, he will there])v insure its safetv. But such ad- 
 vice, ap])lied ])roadly and without qualification, is essential- 
 ly unsound. A fourth, fifth or tenth mortgage on some 
 properties may be far more secure than a first mortgage on 
 others. For instance, the Reading Company 4s, selling at 
 104, are a much safer security than were the first mortgage 
 
 216 
 
SAFETY AND SECURITY 217 
 
 bonds of the Centralia & Chester R. R., issued in 1S95, 
 although the former are an eighth mortgage on parts of 
 the main-line of the Reading system and were originally a 
 lirst mortgage on no part of the property. Yet they are 
 well secured, while the other bond defaulted early in its 
 life and its holders were obliged to sacrifice a large part of 
 their principal in the reorganization which followed the de- 
 fault. Thus it will be seen that to merely advise the in- 
 vestor to confine his investments to first mortgages may be 
 most misleading. 
 
 Another unsafe method of judging the safety of bonds, 
 is to assume that, because they are secured on part of a 
 large railroad system and "underlie" one or more issues of 
 secondarv bonds, their securitv is absolutelv assured. This, 
 like the former theory, contains some vital flaws, and while 
 it holds good in the majority of instances, if followed in 
 others, it brings very disastrous results. Many large and 
 important railroad corporations absorb tributary or com- 
 peting lines under one plan or another, but they do not 
 alwaj^s guarantee the securities of these lines. Bond issues 
 are frequently "assumed" by a controlling company, ac- 
 cording to statements circulated, but unless thev have been 
 specifically guaranteed, either by the acquiring corporation 
 or by some other equally responsible concern, it does not 
 necessarilv follow that the credit of the latter is back of 
 the security at all. The acquired line may turn out an un- 
 profitable and losing investment, with the result that the 
 larger or controlling line will want either to unload its 
 burden or to scale down the obligations of the branch to a 
 sum approximately less than the latter is currently earn- 
 ing. There are many methods whereby this can be done, as 
 has been proved many times. It is vital, therefore, that the 
 investor should base his entire judgment of value on the 
 property itself, regardless of the parent company, unless 
 indeed the latter has absolutely assumed and guaranteed 
 the principal and interest of the bond. 
 
218 JOHN MOODY 
 
 A third error, wliicli is very common, is to assume that 
 because a Ixnul is listed cm one or more of the stock ex- 
 clian.c^es, it is therefore safer or in better st^iiidiiig than 
 otherwise. Such ;i iit)tion is entirely unsound, as there are 
 far more bonds of the liighest .ijrade and (»f the best security 
 traded in on the various markets outside of the exchanges 
 themselves. The chief advantas^e of a security's l)ein^ 
 listed on an exchange is that it there])y secures a fixed 
 quotation, ])ut the fact of its being listed does not l)ear upon 
 its safety in anv wav. While it is true that manv of the 
 best secured ])onds and stocks are listed on the exchanges, 
 it is also true that many of the least secured are listed as 
 well. 
 
 In contemi)lating an investnuait in a given security, 
 each case should be judged on its own merits. In the case 
 of a railroad bond, it is not the question of whether the is- 
 sue is a first mortgage or a Idanket mortgage, but wliether 
 the value of the property on which it is secured is sufficient- 
 ly in excess of the amount of the mortgage, and whether 
 the income from the property is sufficiently in excess of tlio 
 amount required for meeting the interest on the bonds and 
 all prior obligations. And in defining value, we mean, of 
 course, permanent earning power, for it is chiefly 
 the permanent or growing earning ]>ower that makes the 
 value. For instance, the New York, New Haven and Ifai't- 
 ford railroad lines, between New York and Boston, are 
 l)onded and ('a])italized for an amount far in excess of tlu^ 
 cost of replacing the actual movable pro]>ei"ty of the com- 
 ])any. T^ut tlieic are other assets besides rails and equip- 
 ment which make railroad i)roperty valuable. These are 
 its location, its exclusive rights of way and its terminal 
 sites or ])rivileges. Tt is from these that flows its chief earn- 
 ing power. The six hundred odd miles of railroad in the 
 New Jersey Central svstem mav not re])resent much moi-e 
 movable pro])erty than a like mileage of railroad in Mexico, 
 and mav not have originally cost much more to build. But 
 
SAFETY AND SECURITY 219 
 
 the vast dift'ereiice in value will be round in the location, 
 in the vahie of the land, a value which has been created by 
 the influx or growth of population. This is such an im- 
 portant factor that the value of a property at once a})- 
 preciates if a tendency towards more rapid growth appears, 
 while it tends to fall in all cases w^here the contrary tend- 
 ency develops.* 
 
 The rights of way and terminal sites and privileges are 
 therefore the first features to bear in mind in analyzing the 
 earning power, or value. And it must also be borne in mind 
 that it is the permanent, or average, earning power rather 
 than the possible temporarj^ income, which is to be consid- 
 ered. By permanency is meant a matter of generations, 
 rather than vears. ]\rost railroad bonds, nowadavs, run 
 from forty to one hundred years, and the investor must 
 naturallv be assured that there is not likelv to be anv real 
 
 • » • 
 
 depreciation in the property, if properly maintained, in the 
 generations to come. His first thought, then, must be to 
 ascertain if the influx of population around and along the 
 lines of the property promises to continue indefinitely; and 
 at the same time he must detennine whether the value of 
 this and the suiTounding land is such that the creation of a 
 rival right of way is out of question. In other words, his 
 fundamental asset (the site) must be practically exclusive, 
 for it is the condition of exclusiveness that gives it most of 
 its value. 
 
 Having assured himself as to this, his next care will be 
 to see that the probable average earning capacity of the 
 property in the poorest times is well in excess (50 per cent 
 at least) <^f all requirements for interest on this mortgage 
 and all prior charges, as well as for full maintenance of the 
 property in every respect. The investigation of this phase 
 of the enterprise is frequently a difficult one, as reports and 
 
 *This effect of population on land values is brought out most clearly and 
 scientifically in a book recently written by Richard M. Hurd. President of the 
 Mortcrage Bond Co.. New York, entitled "Principles of City Land Values." 
 Copies supplied by The Moody Corporation, $1.50 each. 
 
220 JOHN MOODY 
 
 income accounts are often so misleading in arrangement 
 and make-up that the careless investor is frequently de- 
 ceived by an elaborate display of figures which may mean 
 very little. 
 
 But even though the investor has thoroughly informed 
 himself regarding the above characteristics, there are many 
 other uncertainties which are to be avoided or overcome. 
 However, if he has been careful to see that the conditions 
 described above are all present in a given investment, his 
 chances of losing his money will be reduced to a minimum. 
 If, on the other hand, he neglects these precautions, and 
 adopts other rules for analyzing the security or i)Uts his 
 trust in the "sav-so" of this or that authoritv, then he 
 stands in great danger of sooner or later coming to grief, 
 as will be shown in the following pages. 
 
 Many years ago the careless legislation of many of the 
 states permitted railroad and other corporations to decide 
 for themselves, absolutely without restriction, the amounts 
 of obligations they might i)ut out, and therefore it was no 
 wonder that the privilege was abused, and the making of 
 shares and Ijonds, the latter represented to be amply 
 secured by mortgage liens, was carried to criminal excess. 
 One illustration will siifiice. 
 
 The old Arkansas Central Railway Company, located in 
 the State of Arkansas, built only forty-eight miles of its 
 projected road. The road was of narn^w gauge, with very 
 light iron, and in eveiy way cheaply constructed. Tt cost 
 less than ten llmusand dollars per mile, including equip- 
 ment. As has Itccii the case with most com})anies building 
 railways in new territory, helj^ in its behalf was asked from 
 the communities to be benefited, and their bonds, amount- 
 ing to nearly half a million dollars, were given it by the 
 counties, cities, etc. Under a statute providing for aid to 
 railroads when their beds c(uild be utilized for levee pur- 
 poses, the company got $160,000 of state bonds. Under 
 another statute it got, as a loan from the state, the latter 's 
 
SAFETY AND SECURITY 221 
 
 bonds to the amount of $1,350,000, which were to be a first 
 lien on the property. After such abundant assistance, it 
 would have appeared hardly necessary for the company 
 to put out obligations of its own. However, it proceeded 
 to market and issue its own debentures to the amount of 
 $2,500,000, of which $1,200,000 purported to be secured by 
 first mortgage, a representation that, for reasons already 
 stated, was not correct. In addition, a considerable amount 
 of stock certificates were issued. Altogether, nearly $5,000,- 
 000 of paper w^as put out and negotiated on the basis of 
 forty-eight miles of narrow-gauge road. But this proved 
 to be insufficient. The road, for non-pa}Tiient of interest 
 on its bonds, soon passed into the hands of a receiver, 
 who found it in such an unfinished state, that with the 
 court's penuission, he issued a considerable amount of his 
 own certificates to provide for necessary repairs and better- 
 ments. Then the road, the product of such an outlay, was 
 sold at ])ublic auction and brought the magnificent sum 
 of $40,000, which was paid, not in cash, but in receiver's 
 certificates that had been purchased at a great discount 
 from their face! 
 
 Twenty or thirty years ago, nearly all first-class securi- 
 ties, outside of "governments" and "municipals," were 
 steam railroad bonds and stocks. But we now have stocks 
 and bonds upon the market representing nearly all con- 
 ceivable kinds of property, industrial and manufacturing 
 companies, telegraphs, telephones, gas, electric light and 
 traction companies, water-works, bridges, oil and gas wells, 
 factories and mills of every description, patent rights of 
 all sorts, steamboat lines, apartment houses, realty enter- 
 prises, and even cemeteries. And not only are properties 
 of manv kinds used to issue bonds on, but manv kinds of 
 bonds are often issued upon the same properties. Thus 
 we find among our railroads and other coiporations not 
 only first, second and third mortgages, but income bonds, 
 debentures, convertible bonds, consolidated bonds, redemp- 
 
222 JOHN MOODY 
 
 tion bonds, renewal Ixdids, terminal lionds, divisional 
 bonds, sinking fnnd bonds, "))lanket-mortgage'" bonds, 
 collateral tiMist bonds, equipment bonds, partieii)ating 
 bonds, joint bonds, and l)onds ad nauseam, until they lap 
 and overlap in seemingly endless complication. Not that 
 merely, but one issue of bonds is sometimes made the liasis 
 of other issues. Indeed, one of the money-making devices 
 of the time is the fonnati(m of companies that issue their 
 bonds on the security of the other people's bonds that they 
 have purchased, either yielding a higher rate of interest 
 or obtained at lower prices than they expect to realize for 
 their issues. There seems, in fact, to be no limit to the 
 production of securities that are spread before capitalists 
 and investors. There never was a time when it was so 
 easy to invest monev and to lose it. Of the securities that 
 are offered with first-rate recommendations, it is probable 
 that about one-third are actually good, one third have some 
 value, and one-third are practically worthless. Hence the 
 verv natural inference that whatever art there mav be in 
 
 » * 
 
 the matter of investing is to be exercised chiefly in tlie 
 avoidance of unworthy offerings, and it is to that point 
 first that a profitable discussion must be mainly directed. 
 For the condition of things described, the laws of some 
 of our states in giving coiporations almost limitless power 
 to issue negotiable paper, as well as in permitting all sorts 
 of companies to incorporate themselves, are, undcMil^edly, 
 verv largely to blame. Our banks are closely watched and 
 very jiroperly restrained from taking ]^eo])le's money on 
 false pretenses; ])ut is it nuich betti'i- f<»r industi-ial and 
 other corporations to take it by means of legalized ficti- 
 tious evidences of value? Banks and insurance com])anies 
 are bv no means the onh' institutions that need watching. 
 One of the reforms that would seem to be worth considera- 
 tion is legislation ]n'ohibitory of the creation l)y companies 
 existing by authority of law of stocks and securities not 
 representing cash actually paid into their treasuries, or 
 
SAFETY AND SECURITY 223 
 
 proprietary interests whose values are to be detenniued 
 by disinterested parties. Texas has incorporated substan- 
 tially sueli a provision in her constitution. Her example 
 should be followed bv all other commonwealths. 
 
 But the securitv behind or beneath the debenture or 
 other paper obligatory is not the only thing to be looked 
 into by the investor. Even the form of the document may 
 be important. A case in point, inasmuch as it shows how 
 the preparation of an imdertaking for the paj^ment of 
 money may change its apparent value, would seem in this 
 connection to be appropriately quoted. Some years ago 
 certain townships in the State of Missouri were desirous 
 of aiding the construction of railroads with their credit. 
 The state legislature, to that end, passed an act authoriz- 
 ing the issue and sale of bonds obligatory upon them; but 
 it was stipulated — a very singular provision — that, instead 
 of being put out by the townships, the bonds should be 
 executed by the officials of the counties in which they were 
 located. Accordingly debentures aggregating several 
 million dollars were thus prepared and disposed of. The 
 bonds bore the seals of the counties and the signatures 
 of their officials. On the back and at the top of each signa- 
 ture, in large letters, were the words ** county bond." The 
 instrument began with the recital, in the usual form, that 
 it was issued by the county, but further on, and in the 
 smallest type employed, came the statement that it was 
 executed for and in behalf of a certain to^\^lshi]), which 
 alone was to be responsible for its payment. These bonds 
 were extensively advertised as *' county bonds," and prob- 
 ably in most instances, certainly in many, were sold as 
 such, and it was not until purchasers i^arted with their 
 money, that they discovered that, instead of getting the 
 bonds of well-known and wealthv counties, thev had 
 secured only the obligations of townships they had never 
 heard of before. It was then manifest enough that they 
 had been made the victims of a piece of very sharp and very 
 
224 JOHN MOODY 
 
 shabby practice. lu many cases the buyers of bonds and 
 other securities learn, when it is too late, that their pur- 
 chases, owing to some obscure and apparently innocent 
 passage that had been overlooked or disregarded, are very 
 different from wliat they thought they were getting. How 
 often have careless investors who supposed they were pur- 
 chasing undertakings that would be good for long terms of 
 years, and who probably paid premiums to obtain them, 
 ascertained at the end of comparatively short intervals 
 that they were forced to accept in payment the amounts 
 nominated in the bonds in consequence of unnoticed clauses 
 giving their makers power to redeem their oi)tion! The 
 lesson of such cases is obvious enough. It is that no one 
 should buv a bond or stock ^vithout first having carefullv 
 read the certificate. This may seem like an unnecessary 
 warning; but in truth it is a most material one. Thousands 
 and thousands of dollars have been lost by the neglect of 
 this simple precaution. "I didn't read the bond" is the ex- 
 planation that has again and again been offered when time 
 has disclosed a different investment from the one intended 
 to be paid for. The fact is that comparatively few un- 
 professional bond and stock purchasers ever carefully 
 examine the instruments they acquire. They look at the 
 headings, those parts that are in big letters, and take the 
 rest for granted. It is a most unwise practice. Unless you 
 are previously familiar with the document in all its ]iarts, 
 don't fail fn read it before you buy. Ixcnd i1 all. the little 
 ty])e as well as the big type, the indorsements, the coupons, 
 and all. Don't take somebody's else word for it. Examine 
 the seal. Hie signatures, and even the embellishments. 
 Somethincr mav be disclosed that will ehan^e vour mind and 
 save vour monev. 
 
 Ihit if there are trieks in the making of securities, even 
 more are to be a])]irehended in the selling of them, and 
 should be guarded against with corresponding diligence. 
 It is a nota))le fact that no poor securities are ever offered. 
 
SAFETY AND SECURITY 225 
 
 They are always good so long as tiiey are on the market. 
 It is only after they have been purchased that they prove 
 to be worthless. Interest has never been known to fail 
 on bonds that are seeking investors, although default has 
 sometimes followed verv closelv on the sale of the last ob- 
 ligations. Indeed, it is no secret that interest is some- 
 times paid out of the proceeds of the bonds, the purchasers 
 in this way getting a portion of their own money ]:)ack 
 while the process of marketing them is going forward, al- 
 though such a thing has seldom been known to happen after 
 the entire issue has been disposed of. The advertisements 
 of some bondsellers are often marvellous productions. No 
 such securities as they have to offer have ever been on the 
 market before. They are absolutely safe; they pay extra 
 rates of interest, etc., etc. The wonder is that witli so 
 much capital seeking investment, it is found necessary to 
 advertise such perfections at all! In such cases it is hardly 
 necessary to say that the only safe rule for investors is to 
 find other uses for their money, however strong the temp- 
 tation mav be. 
 
 A common expedient of bond-makers and bond-mer- 
 chants is to fortify their issues with the favorable opinions 
 of eminent lawyers. This is particularly the case when the 
 obligations of municiiialities or of com))anies that are de- 
 pendent upon contracts with munici]x\lities are offered, 
 some municipalities having in the past shown an unpleas- 
 ant disposition to go back on their undei'takings. No ex- 
 ceptions can be taken to the practice referred to, as counsel 
 learned in the law should in such cases always be consulted; 
 but the writer has to sav that he has never vet known a 
 security so poor that a lawyer's opinion could not be had 
 to back it. Such testimonials should be taken for what 
 they are worth, and no more. 
 
 When so manv seductive baits are offered, so manv nets 
 and traps, contrived and constructed by clever brains and 
 cunning fingers, are spread for the capture of those having 
 
 B. VII— IS 
 
226 JOHN MOODY 
 
 money, is it snrprisinc^ that tho careless and erediiloiis are 
 victimized, and even that tlic satracious and ])rudent sliould 
 sometimes be taken in? Nevertheless, for the losses they 
 have sustained, investors, as a rnh', have themselves chiefly 
 to ])lanH'. The mistakes made, in nine cases out of ten, liave 
 been tlic i)urcliase of "cheap" securities. The hojK' of 
 realizini; a little metre than ordinary interest, by buying 
 paper at a discoimt, has proved to be the rock on wliicli nii- 
 numliered capitalists have split. In addition to their 
 money's worth, they have endeavored to get something for 
 nothing, with the result of most generally getting nothing 
 for something. It is remarkaljle how blind are peo])le, 
 ordinarily sagacious enough to make money, to the fact that 
 property cannot i^ay a revenue beyond its jti-oducing ca])ac- 
 ity. For instance, how can a trolley company, whose line 
 is wholly or mainly Iniilt from the proceeds of nioitgage 
 bonds, sell them at a heavy discount, besides allowing large 
 commissions for the selling, and then pay both this interest 
 and dividends on a large issue of watered stock? Or how 
 can a poor agriculturist, occupying a half-improved farm 
 out on the frontier, with a family to support and grain sell- 
 ing verily above the cost of production, pay ten or twelve 
 per cent upon the capital with which he does business .^ 
 
 Bv what rule or rules is the investor to govern himself? 
 No formula can guarantee him absolute safety. One thing, 
 however, he can properly count u]^on. viz.. that he nnist 
 expect to ]ydy a fair ])rice for a good security — one that will 
 retui'ii him no more than a moderate interest on his money. 
 If he wants to speculate and is willing to take risks, that 
 is another thing, lie can then look for bargains. The cajii- 
 talist or investor who sends his monev into a new section, 
 or puts it into a new mechanical ])rocess. or a new construc- 
 tive enterprise, may or may not make a hit, but for the 
 ordinai'v and c(mservative o]ierator, the conditions of tln^ 
 commercial and linaneial world give warning that only 
 reasonable jn-olits are to be looked for. The lirst and main 
 
SAFETY AND SECURITY 227 
 
 thing to be studied is safety. And yet tliere is such a tiling 
 as going too far in the matter of prudence. The investor 
 may pay too dearly for safety. There are securities which, 
 compared with others that are to be had, sell at prices nuich 
 above their real worth. The reason is that everybody 
 knows them to be good, and investors who don't want to 
 take the trouble to investigate, or are afraid to trust both 
 their own judgment and the counsels of their friends, are 
 willing to pay extra prices for them. But there are plenty 
 of others that may be had at lower figures, which are just 
 as good. There is no reason in the world why the investor 
 should not safely invest at a rate that will generally yield 
 him 4 per cent to 5 per cent interest, and have his invest- 
 ment as secure as any property can be under human super- 
 vision. As heretofore stated, with the creation of new en- 
 terprises and properties, and the development of old ones, 
 new securities are constantly appearing in this country 
 and a fair share of them ought to be good. Indeed, our 
 securities ought to be the best in the world. The sure and 
 rapid growth of our resources supplies a reliable support 
 as long as fair intelligence and common honesty attend 
 their production. The only thing is to choose with discre- 
 tion, so many doubtful and even fraudulent issues appear- 
 ing at the same time; Init no more judgment is really de- 
 manded than in purchasing lands or cattle. 
 
 Two common and often fatal mistakes should l)e 
 avoided. One is in relying solely upon the advice of an- 
 other. No one competent to form an opinion for himself 
 should put his pecuniary interests unresei'vedly in the keep- 
 ing of another. Such absolute confidence invites betrayal. 
 By far the greater munber of losses to investors have been 
 in securities purchased exclusively on the reconunendation 
 of interested outside parties. "While it is well to Lid the 
 opinion of a reputable broker, the purchaser should in- 
 vestigate for himself. The other mistake is to give prefer- 
 ence unifoi'mly to listed securities. As pointed out at the 
 
228 JOHN MOODY 
 
 beginning of this article, many persons seem to think that 
 stocks and bonds must have a value if they are quoted at 
 some stock exchange, forgetting how many fancies have 
 been ballooned until they have burst at such places. On 
 the contrary, such a position is likely to expose them to 
 manipulation for i»urely speculative purposes. Stock-ex- 
 change quotations are often unsafe guides to buyers. They 
 represent not mc^rely the value of the property but also the 
 pitch of speculation at the time. When securities are con- 
 verted into foot-balls for gamblers to play with, they are 
 pretty certain to be too high or too low. The main advan- 
 tage they can have is a readier marketability in case of an 
 urgent need to sell; l)ut it is at the times when such need 
 is likely to exist that they are pretty certain to be at the 
 lower point. No speculative help can long take the place 
 of real value. Securities, in the long run, must stand upon 
 their merits, and purchasers have merely to follow business 
 principles as taught by the canons of common sense. 
 
 In seeking investments, and especially long time invest- 
 ments, there are several things to be taken into account. 
 There is not only the question of the kind of security to pur- 
 chase, but the question of the time of purchase. There are 
 opportunities to be looked for as well as pitfalls to be 
 shunned. It is during periods and seasons of depression, 
 when securities are forced upon the market, often to be 
 sacrificed — and such opportunities are certain to come if 
 waited for long enough — that the shrewd investor finds his 
 richest harvest. That, however, cannot be said of the ordi- 
 nary investor. lie usually buys when securities are up and 
 confidence is unimpaired, and becoming frightened as the 
 market values go down, sells when they are at the bottom, 
 and holds his money to reinvest in something else no better, 
 and probably not as good, when the tide has turned. As 
 a rule, the best time to invest is when others are unload- 
 ing. In money matters it is never safe to follow ''the 
 crowd." Nor is it safe, (which is little more than the ex- 
 
SAFETY AND SECURITY 229 
 
 pressiou of the same idea in another form) to purchase a 
 security when it is on the ''boom." A peculiarity of our 
 money market, conservative as it is popularly supposed to 
 be, is that it is constantly changing its favorites. Its offer- 
 ings come in waves. Its dealings at one time may be chiefly 
 in railways, at another in industrial obligations, and at an- 
 other the excitement mav run to minins: shares or mort- 
 gages on ranches and real estate. For the time all profes- 
 sional brokers and bond and share sellers urge their cus- 
 tomers to adopt the popular issue, of which, as the result 
 of the increased demand, there is almost certain to be ex- 
 cessive, if not fraudulent production. To yield to the pres- 
 sure of such a time is alwavs riskv. Old and tried secu- 
 rities, like old friends, are likel}^ to be the truest and the 
 best. 
 
 One thing the investor would do well never to forget, 
 is that there are always plenty of good securities in the 
 market. No one with money need ever fear that others will 
 get all the solid investments, and, in the apprehension that 
 there will not be enough of that sort to go around, put up 
 with an inferior article. Don't let him choose what is not 
 altogether satisfactory, under the impression that nothing 
 else as good or better will offer. If he does so, sooner or 
 later he will regret it. Something good always comes to 
 him who waits with money in his hand. 
 
 Another thing of a precautionary nature it is well 
 enough for the investor to do, and that is to scatter his pur- 
 chases. The old a'dage about not putting all the eggs in 
 one basket applies with peculiar force to investments. The 
 tendency with those having moderate sums to invest, and 
 who need to be the most circumspect, is to make up their 
 minds in favor of a single line of securities and put every- 
 thing there. Of course, a failure in that quarter is particu- 
 larly disastrous. The writer knew a man, some years ago, 
 who decided in favor of municipal oliligations, saying that 
 he had satisfied himself that, on the whole, there was noth- 
 
230 JOHN MOODY 
 
 ing else so rolialilo. Arcoi-dincjly lio put his entire available 
 means into thcin. I'lit itracticiiii,^ .•ihundant preeantion. as 
 lie sii])]i(isc(l, lie (lixidcd liis money equally anionfj nuuii('i]ial 
 issues of Illinois, Missouri and Kansas, they ha vine: the 
 most pa])er at that time on the market. He thought he was 
 entirely safe as to princi]ial. But soon after a wave of 
 repudiati(m sentiment swept over that part of the country, 
 and evei'v one of his Ixtiids was left in default. It is well 
 enough to scatter in kind as well as in locality. 
 
 Against the theory of scattering investments, men some- 
 times (juote the advice of Andrew Carnegie to *'put all 
 your eggs in one basket, and watch the basket." This 
 principle, however, while sound enough for the expert or 
 specialist who is in a situation at all times to see and watch 
 the basket, is not applicable to the average ordinary in- 
 vestor. The average investor sim})ly cannot "watch the 
 basket" in the way implied by ]\Ir. rarnegie, and there- 
 fore it is a safe princi])le for him, undi-r all ordinary cir- 
 cumstances, to limit his chances of loss to the greatest pos- 
 sible extent through a wide and judicious distribution of his 
 capital. 
 
THE OBLIGATION OF THE INVESTMENT BANKER TO 
 
 HIS CLIENTS. 
 
 BY ALLEN G. HOYT. 
 
 [Of N. W. Halscy & Co.] 
 
 Investment banking is a serious, responsible business. 
 An investment banker is in one sense like a mercbant. He 
 buvs securities at wbolesale and sells them at retail. In an- 
 other sense he is a counsellor. He must offer his clients 
 sound advice regarding their investments. He nuist recom- 
 mend to each customer securities adapted to the particular 
 needs of that customer. 
 
 The banker as a merchant is under the heaviest of obli- 
 gations to handle goods of honest vahie. He may not take 
 advantage of the principle of ** Caveat emptor." Unlike 
 most wares sold by merchants, the goods a bond dealer 
 handles must never wear out. They must remain vsound and 
 true for ten, twenty, or fifty years, and at the end of their 
 life thev must be redeemed at their full face value. 
 
 The investment banker, therefore, who has a proper ap- 
 preciation of the nature of his calling will make the matter 
 of safety of the securities he handles his chief concern. He 
 will bring to his aid all his skill, judgment and experience, 
 to assure himself of the soundness of the bonds he offers. 
 
 The responsibilities of the bond dealer are particularly 
 heavy for another reason. His client frequently when buy- 
 ing securities relies absolutely and com])letely upon his 
 recommendations. The investor has neither the time, the 
 money, the knowledge, noi* the ex])erience necessary to en- 
 able him to determine the value of the bonds he is buying. 
 He is completely in the banker's hands. Tbc dealer of the 
 right sort will not regard liulitly the obligations imposed 
 upon him by the relation of trust which he bears to his client. 
 
 231 
 
232 ALLEN G. HOYT 
 
 The banker ou.c:lit to be exeeedin.ely careful of the ehar- 
 acter of the bonds he sells. People buy of him for invest- 
 ment; they are not speculating and they cannot afford to 
 lose. ]\lany of his clients are al)Solutely dependent upon the 
 income from the securities they Iniy for the wherewithal 
 with which to live. If any of the securities turn out to be 
 worthless some of the holders may actually suffer foi- the 
 necessities of life. The bond buyer does not expect to take 
 any chances; he is a loaner of money and all he is promised 
 for parting" with his money is the pa^inent of the loan at ma- 
 turity with a certain specified rate of interest for the use of 
 the money bv the borrower. The bond buver who buvs the 
 securities of a corporation, for instance, will be entitled to 
 receive only the interest on his money and the payment of 
 the principal at maturity. No matter how successful the 
 corporation may be the bond buyer e^ets no part of the sur- 
 plus earninc^s of the corporation, however larcje they may 
 become. The earninp:s, above the pa^nnent of the interest 
 on the indebtedness, belong to the stockholders, who are. in 
 fact, the oAMiers of the property. If any risks are to l)e in- 
 curred, the stockholders should take them. The bondholder 
 is merely a creditor; he is concerned only in the security for 
 his l(»an and that security ought to be ample. 
 
 So the investment banker, in investigating this matter 
 of the safety of the bonds he offers to his elients, spends a 
 great amount of his time and money. He brings all his 
 skill, judgment and experience to bear on this all-important 
 question, and if the banker is lacking in skill, if his judg- 
 ment is faulty, or if his ex]ierience iii his profession has been 
 limited, disaster is almost certainly in store for him and his 
 clients through the i^urchase of unsound securities. 
 
 Tti dealing in public utility and iTidustrial bonds, the 
 respoTisibility of the banker to his clients is particularly 
 heavy. Public utility or public service corporations are 
 companies whieh sup])ly such necessities of modern urban 
 existence as gas for lighting and heating, electricity for 
 
THE INVESTMENT BANKER 233 
 
 lighting and power and transportation by means of surface, 
 elevated or sub^Yay lines. Public utility bonds, as a class, 
 rank higher than industrial bonds, because the earnings 
 of public utility corporations are not subject to the same 
 fluctuations from year to year, and because in years of busi- 
 ness depression, the earnings do not shrink nearly so severe- 
 ly as do the earnings of most industrial corporations. 
 
 AYhen a banker handles an issue of public utility bonds, 
 he, either alone or with associates, handles the entire issue. 
 Pie becomes identified with the property and on him is the 
 entire responsibility for the future history of the bonds. 
 Therefore, the examination which the conscientious banker 
 makes before he purchases an issue of public service corpor- 
 ation bonds is particularly thorough and exhaustive. He 
 not only emjjloys his own experts but calls to his aid outside 
 engineers, auditors and corpoi'ation lawyers of the highest 
 rank. He investigates the character of the comnumity 
 served, the condition and value of the property by a mort- 
 gage on which the bonds are secured, the management, the 
 adequacy of the earnings, the franchises, the question of 
 over-capitalization, the chance of future success, the legal- 
 ity of the ])ond issue, and so forth. He studies the corpora- 
 tion from every point of view possible. 
 
 It is my opinion that if the public service corporation 
 bond meets the i-equirements of the conservative, conscien- 
 tious and successful banker, there is no other security so well 
 adapted to the needs of the average investor. 
 
 Such bonds are safe : they yield a higher rate of interest 
 than do other classes of bonds of equal merit and their mar- 
 ket history, for the past ten years at least, compares very 
 favorably with that of railroad and municipal bonds. 
 
 Public service coi-porations have, as a class, grown and 
 prospered greatly during the past decade. This has been to 
 a considerable extent due to the rapid growth of the munic- 
 ipalities they have served. The recent census has demon- 
 strated that nearlv all American cities of substantial size 
 
234 ALLEN G. HOYT 
 
 have increased materially in population since the enumer- 
 ation of 190U. The statistics of our better jjublic service 
 corporations show that their business has grown even more 
 ra])i(ll\-. With a more general appreciation of the merits 
 of the riglit kind of corporation securities, there has devel- 
 oiK'd a broader demand for them. AVhile during the past 
 decade there has l)een a decline in the prices of most liigli 
 grade railroad and municipal bonds, due probably to the 
 fact that capital is worth more today than it was ten years 
 ago, corporation bonds, since they bear the higher rate of 
 interest now demanded by capital, sell close to the prices 
 they brought ten or fifteen years ago. The broader demand 
 for this class of bonds taken in connection with the gro\\'th 
 in strength and prestige of the issuing companies has pre- 
 vented them from showing the same decline in market value 
 that has overtaken railroad and munici]xal bonds. 
 
 As I have said before, the responsibilities of the banker 
 in dealing in corporation bonds are particularly heavy. As 
 the banker iisuallv buvs an entire issue, the bonds are held 
 cxclusivelv bv his own clients, and he must not onlv be con- 
 vinced that the bonds are safe but he must make a market 
 for them as well, in order that his clients may borrow on 
 them or convert them into cash, if they find it necessary to 
 do so. The banker must not only assure himself that the 
 bonds are sound when he buys them but that they will ron- 
 tinue safe under whatever conditions mav arise. lie usuallv 
 kee]is in touch with the property as long as the bonds are out- 
 standing and often by advice or moral ]iressure or some oth- 
 er influence he is able to prevent ill-considered action on the 
 part of the owners of the property which might prejudice 
 the standing of the securities. 
 
 That our better bankers do not regard lightly their re- 
 sponsiliilities to their clients I can illustrate by an example 
 which has come to my attention. 
 
 In one case the facts were about as follows: (T have 
 changed them sufficiently to prevent identification of the 
 
THE INVESTMENT BANKER 235 
 
 particular situation). A group of bankers handled the 
 bonds of a hydro-electric company. The company had been 
 in operation but a comparatively short time, when a terrilic 
 fl(H)d carried away the dam and did other damage which 
 virtually destroyed the power plant. The bankers came for- 
 ward and reconstructed the dam and the power house at a 
 cost of about three quarters of a million dollars. For their 
 advances to the company they took junior securities, wiiich 
 have a very questionable value. It will be a great many 
 years before the bankers will get back the money they ad- 
 vanced, if— in fact— they ever do. They took this action 
 with a view only of protecting the interests of their clients 
 who had purchased the first mortgage bonds of the company. 
 Had they not provided the funds for the reconstruction of 
 the dam and plant, their bondholders would have suffered 
 heavy losses. The bankers, although they WTre not legally 
 liable, preferred to make a heavy sacrifice rather than have 
 their bondholders suffer. 
 
 AVhile this is an exceptional case, the dealer in corpora- 
 tion bonds ought to enjoy a high standing, the best of credit 
 and to have ample resources at his command. The secu- 
 I'ities handled by a banker with such a standing are exceed- 
 in alv unlikelv to cause their owners anv trouble, but if bv 
 any chance the corporation issuing the bonds is overtaken by 
 misfortune, the banker will be in a position to aid the cor- 
 poration financially, if the situation warrants, or to demand 
 that his clients as bondholders be treated fairly by the re- 
 ceiver and that thev are not defrauded or bilked bv anv 
 
 • • • 
 
 equitable reorganization or other scheme. 
 
 Such an instance as T have mentioned shows how strong 
 a sense of honor governs the actions of some bankers and 
 how highly they regard their obligations to their clients. 
 
THE STUDY OF FUNDAMENTALS AND THEIR 
 BEARING ON SECURITY PRICES. 
 
 BY THOMAS GIBSON. 
 
 [Author of "The Pitfalls of Speculation. ' 'The Cycles of Speculation." "The 
 Increasing Gold Supply." etc.] 
 
 The examination of fuudaiiieiilaLs as to tlii'ir bearing on 
 security values and prices and as a means of intelligently 
 forecasting price movements is a most importaiit study. 
 Such examinations I regret to state are frequently char- 
 acterized as useless. This is because the study is not care- 
 fully and conscientiously conducted with a clear understand- 
 ing of what must be done and what must be expected. 
 
 One of the most common, and at the same time, most 
 fatal of the errors we are apt to fall into, in conducting our 
 investigations, is the attempt to reconcile present conditions 
 with the action of the stock market. Security prices always 
 move ahead of basic developments, never after or in connec- 
 tion with such developments. Tn 1905 and 190(). for ex- 
 am])le, we had a gi-eat advance in the stock market. This 
 advance represented the anteriority of security ])rices, the 
 anticipation marketwise of the great business boom of IDCT. 
 But when that business boom arrived, the stock market had 
 fully discounted it and had begun the woik of discounting 
 the depression of 1910 and 1911. This precession of prices 
 when not clearly understood causes many jieojile to say 
 that the security mai'ket is irrational ; that it does not act as 
 it should act; that prices decliiu" in good times and advance 
 in bad times, etc. 
 
 Nevertheless, security prices are, in the last analysis, 
 aJwfii/s based on values, and values are in turn dependent 
 largely upon prosperity and basic conditions. Good man- 
 agement, economical administration, territorial growth and 
 other things must be considered in arriving at true values 
 
 236 
 
FUNDAMENTALS AND SECURITY PRICES 237 
 
 but widespread prosperity is tlie most important single 
 factor. Prices frequently become divorced temporarily 
 from values through manipulation, fighting for control or 
 technical conditions, but the hiatus must sooner or later 
 disappear and prices and values will be reconciled. It is 
 when prices are lower or higher than values, present or 
 prospective, that we have our greatest speculative oppor- 
 tunities. I wish to explain, parenthetically, that in using 
 the word speculation or its derivatives, I employ it in its 
 broadest sense and not according: to its popular usage. Spec- 
 ulation is not confined to gaml)ling on margins. Any man 
 who buys because he believes a thing to be cheap and in the 
 belief that it will advance in price is speculating, whether 
 he pays cash or buys on margin. That definition applies to 
 coal or bricks or real estate or to anything else. It is not 
 confined to securities alone. 
 
 As security prices always anticipate fundamental con- 
 ditions, it is necessary in our study of basic causes that we 
 must deal with the future and with what is now^ unknown. 
 This may appear paradoxical, but it is not so. What we 
 undertake is, by a study of precedent and an examination 
 of present development, to arrive at reasonable conclusions 
 as to the future and to act accordingly. 
 
 The examination of precedent is most important. Such 
 examinations carefully conducted will show us with a rea- 
 sonable degree of accuracy what has followed certain con- 
 ditions in the past and what may be expected to follow simi- 
 lar conditions in the future. We will also learn in about 
 what ratio our population, cultivated acreage, earnings, 
 etc., should nafuraUf/ increase and we may so decide wheth- 
 er advancement is deficient, normal or abnormal. 
 
 Students of fundamentals frequently fall into a very 
 serious error by allowing their examination of precedent to 
 extend over too brief a period. Comparisons of one month 
 with a preceding month are ridiculous, as such comparisons 
 do not allow for seasonable changes. There are certain lean 
 
238 THOMAS GIBSON 
 
 and fat months or seasons in all lines of l)usinoss. And the 
 t'onipaiisons of one yoai' witli a jn'ocoding year are also fre- 
 quently insulTicient. Tf, foi- exani])le, our railroad earn- 
 intis should hound \m aluioimallv foi* two vears as thev did 
 ill 1909 and 1910, a moderate I'eaetion in the followini^: year 
 Would not he unusual or diseoura.iring. Tn the year 1909, 
 the .«,n'oss earnings of all railroads in the Ignited States ad- 
 vanced $278,038,372 as compared with 1908, and in 1910 
 they increased $229,840,433 as compared with 1909. But 
 even after this unprecedented gain, we hear numerous com- 
 plaints ])ecause of some small decreases in certain months 
 of 1911. 
 
 Let me point out another instance which even more dis- 
 tinctly illustrates the folly of such comparisons. A few 
 days ago an article appeared in a leading tinancial organ, 
 bemoaning the increase in our idle cars. It was shown that 
 idle cars in ^fay, 1911, amounted to about 187,000 cars as 
 compared with only 122,000 in May, 1910. Xothing was 
 said about ^^fay being the month in which we almost in- 
 varia])ly find the largest number of idle cars, but what makes 
 the argimient most inadequate and misleading is the com- 
 parison with a single year. Tf tlie writer of that screed 
 had taheii the pains to go back a little further he would have 
 found that the number of idle cars in ^fay, 1911. was the 
 smallest in recent years ii'ifh fltr shif/lr crccj^fioti of HH". 
 Tn M-Av, 1907, we had 300,000 idle cars and in November of 
 that year a shorfar/r of 90.000 cars: in :\ray, 1908, we had 
 over 400.000 idle cars and in October only 100,000. Tn May, 
 1909, w." had 285,000 idle cars and in October a shortage 
 of 5,400 cars. Idle cars at certain seasons are inevital^le. 
 They are necessary. We must have them in the cro})-m(>v- 
 ing pei'iod oi- business would be thrown into chaos. Tn the 
 dull months we camiot retire our sur])lus cars on the same 
 plan as is proposed for surplus banknotes. As our ]^o]nila- 
 tion grows and as we build idle cars to meet such growth, 
 we should, everything being equal, have more idle cars in 
 the dull periods from year to year. 
 
FUNDAMENTALS AND SECURITY PRICES 239 
 
 I cannot pretend in the space at inv disposal to ^ive a 
 ('onii)reliensive formula for the study of fundamentals, but 
 T will oft'er a few suggestions on three of the most impor- 
 tant factors to be considered, that is, crops, money and for- 
 eign trade. 
 
 Crops. 
 
 The products of the soil is the most important of all our 
 fundamental factors, for upon our ability to produce com- 
 modities for our own uses, and to sell for export, money 
 conditions, foreign trade balances and other factors are 
 largely dependent. In examining this phase of the ques- 
 tion we can easily arrive at the probable production of min- 
 erals or other products not affected seriously by climatic 
 changes, but the agiicultural products require more care- 
 ful attention. A large acreage does not insure a large yield. 
 We had a striking example of this in the spring wheat crop 
 of 1910. Acreage was the largest on record but in the month 
 of July the condition of the growing ci-ops suffered so se- 
 verely from drought, that a very small crop was harvested. 
 Such a calamitv could not be foreseen, l)ut fortimatelv such 
 acute changes are rare and may be classed as accidents. 
 
 In most cases we can get a fair idea of the probable crops 
 some time before they are harvested. Looking at this year's 
 prospects for spring wheat we may begin our study in the 
 following manner: The fall of 1910 was a dry period in 
 the Northwest. Therefore we mav reasonablv assume that 
 the soil did not store up a sufficient amount of surplus 
 moisture and that hea^y rainfall would be necessary to 
 make a good crop in 1911. The spring of 1911 was 
 an ideal one for planting, however, and too much mois- 
 ture in the ground in the planting ]>eriod is not necessaiy 
 or desirable. Under such conditions the plant fakes on 
 a rapid growth, greatly accelerated by periods of sun- 
 shine. The roots of the plant do not find it necessary to 
 go down for moisture hut spread out over the ground and 
 
240 THOMAS GIBSON 
 
 the stand is poor. If a j)criod of dnnicss follows you can 
 pull up liaudfuls of the stalks with no physical effort. The 
 best crops are made when the roots are deep and when suffi- 
 cient rainfall follows to nourish the j^lant. Therefore our 
 spring wheat crop of 1911 was well started but was depend- 
 ent upon a heavy rainfall for a time. By keepiui^ a close 
 watch of the developments, we can arrive at a fair estimate 
 of the outcome long before the crop is harvested. 
 
 In examining the crop reports of the government or 
 private documents, we must not be discouraged because cer- 
 tain months show a decline in conditions or a certain amount 
 of abandoned acreage. The start is almost invariably bet- 
 ter than the finish. The Department of Agriculture will 
 this year adopt the method of allo^\ing for normal dete- 
 rioration in expressing quantitative estimates of production, 
 and this will simplify the mattter somewhat. We should 
 also take into consideration the fact that a too favoral)le 
 showing in the first reports is not a good thing. This is 
 particularly true of cotton. In the last twenty years we 
 have only twice started the cotton season wih a June condi- 
 tion as high as 90. In 1896 the June condition was 97.2 and 
 in 1902 it was 95.1. On both occasions the crop was a fail- 
 ure. The condition at harvest in 1896 was 60.7, and in 1902, 
 58.3. On the other hand the lowest June conditions in 
 twenty years were in 1903, 1905 and 1907, and in each in- 
 stance the condition at harvest was higher than in cither 
 1896 or 1902. Our greatest crops (1904, 1906 and 190S) 
 were made on a rlune c(>ndition of 83.0, 84.6 and 79.7, respec- 
 tivelv. From 80 to 85 mav be considered the safest and 
 most normal June condition. 
 
 In estimating the probable effect upon security prices 
 of large or small crcjps, we should give particular attention 
 to the sujiply and demand of the world. A large crop at 
 home and a short crop in countries which import our food- 
 stuffs or cotton makes for greater demand and consequently 
 higher prices for our exportable surplus. This in tuni 
 
FUNDAMENTALS AND SECURITY PRICES 241 
 
 means larger trade balances and better money conditions, 
 and better money conditions work in favor of higher se- 
 curity prices. 
 
 The use of fertilizers, the ravages of insects and other 
 factors will require attention, but the task is not so formid- 
 able as it may appear. The Government furnishes for the 
 asking a great deal of competent literature on the subject, 
 and the reports of railroad corporations and individuals 
 are freely published in trade organs and the daily press. 
 What must be studiously avoided is the tendency to take too 
 much for granted. Every year we have a batch of good and 
 bad reports from interested people who misrepresent pros- 
 pects or conditions in order to further personal aims, but a 
 comprehensive examination of the su])ject will easily en- 
 able us to separate the true from the false and the reason- 
 able from the unreasonable. 
 
 Money. 
 
 Money conditions represent one of the greatest funda- 
 mental factors. In applying money conditions and pros- 
 pects to the probable course of security movements, we find 
 many phenomena which are easily read and which are 
 almost certain in their effects. I will not attempt to pass 
 on the merits or demerits of our miserable currency system, 
 or to discuss the numerous cures suggested, but will touch 
 briefly on the broader influences which are easily examined. 
 
 Interest rates show seasonable variations because of the 
 plethora of money in certain seasons and the demand for 
 money in other seasons. The trend of interest rates in De- 
 cember is usually upward throughout that month and dur- 
 ing the first week or ten days of January. They then tend 
 rapidly downward until near the first of March. This is 
 due to the fact that money becomes tighter in December in 
 preparation for our great cash January disbursements in 
 interest and dividends on bonds, notes and stocks. This 
 money, being distributed, finds its way back into the banks 
 
 B.VII— 16 
 
242 THOMAS GIBSON 
 
 or tlic market, and lower interest rates follow. ^loney 
 usually advances more rapidly from the middle of June un- 
 til the last of September than at any other period of the 
 year. This is also due, but only in part, to the i)reparation 
 for July disbursements for interest and dividends. More 
 importaiit, hnwovci-, is the demand tlirouglutut tlic months 
 of duly, Au^nst and September for crop-movini!: purposes 
 and the i)ayment of farm oblifi:ations. Tn December we fre- 
 quently find an advancing security market in connection 
 with higher money rates. This represents the anteriority 
 of stock prices. Speculators know that money will soon 
 flow back not only into the banks, but into securities, and 
 they will buy in anticii)ation of such a rise. Also we find 
 frequently an advancing trend in the three months of high- 
 est money rates, for our crop j^rospects are then pretty well 
 established and if they are good, we can afford to i»ay high 
 rates for fluids to be employed in speculative ventures, be- 
 cause of the promise of higher security prices in the future. 
 
 We cannot safely argue, therefore, that an advancing 
 market is improbal)le in a period of high or advancing rates 
 for money. Nor can we consider low or declining rates a 
 sufficient reason for higher security jirices. A plethora of 
 money may spell stagnation in general business and lack of 
 contidcncc in future progress. There arc certain indica- 
 tions, however, which will greatly aid us in anixiiig at I'ca- 
 sonablv correct conclusions. 1 will mention two of them. 
 
 By constant examination of the percentage of loans to 
 deposits and of specie to loans, we may easily determine 
 when we are on safe or dangerous groinid. We nuist look 
 at both phases of this factor. If the percentage of loans to 
 deposits is iniduly high, this condition may be mitigated by 
 a cori'espondingly lii^h ]>crcc7itnLre of s]ieci(^ to loans or, 
 (•11 the otlicr hand, if tlic percentage dt' loans to deposits does 
 not a]i])ear undnly high l)ut the ]iereentage of specie to loans 
 is very low, we may be in a dangerous position. It is when 
 the two spread apart— when loans go up and specie falls— 
 
FUNDAMENTALS AND SECURITY PRICES 243 
 
 that the worst condition is indicated. In 1907, I caHed at- 
 tention to this factor and the danger from the conditions 
 which then existed, not hesitating to predict a great decline 
 in security ]'>rices as the result. In an article published in 
 February, 1907, 1 drew the following conclusions : 
 
 "In order to illustrate the importance of the money 
 situation and the tidelitv with Avhich market movements 
 have followed monetary conditions, the following records 
 are set forth, covering important movements of i-ecent years. 
 
 *'In 1890, twenty stocks listed on the New York Stock 
 Exchange were selling at an average price of about $87 per 
 share. The j^ercentage of loans to deposits was about 95 
 per cent and the percentage of specie to loans a])out 20 per 
 cent. In November of that year, loans advanced to 102 per 
 cent as compared with deposits, and specie declined to about 
 18 per cent of loans. The stocks mentioned declined to an 
 average price of $64 per share and later in 1901 to about 
 $61 per share. From 1891 to 1893, there was some alter- 
 nate improvements and retrogression in money conditions, 
 all of which was accurately reflected in stock prices. 
 
 "In 1893, the proportion of loans to deposits rose to 
 about 109 per cent and the proportion of specie to loans de- 
 clined to 13 per cent. The average price of the twenty 
 stocks reached about $47 per share. (The panic of 1893.) 
 
 "In 1894, the proportion of loans to deposits fell to 80 
 per cent and specie to loans rose to 30 per cent. This was 
 due to the liquidation of 1893. Stock prices showed some 
 betteiTiient, rising to about $57 per share. The severe drub- 
 bing of 1893 had made public investors nervous and had 
 in many cases incapacitated them for stock mni'kct oprra- 
 tions. That was to come later. 
 
 "In 1896, the pTo]V)rtimi of loans to deposits rose to 
 102 per cent, and specie to loans fell to 10 per cent. Stocks 
 reached their lowest level in July of this year ($42 per share 
 for the 20 stocks mentioned). j 
 
 "From 1896 to 1898, a gradual improvement was ap- 
 
244 THOMAS GIBSON 
 
 parent. Through all this period stock prices faithfully re- 
 flected money conditions. In July, 1897, the proportion of 
 specie to loans rose to 30 per cent and loans to deposits fell 
 to 83 per cent. Stocks began advancing, and in March, 1899, 
 the average price (^f the 20 stocks considered was about $^5 
 per share. 
 
 "Tu June, 1900, the average price of the twenty stocks 
 considered was about $75 per share. The proportion of 
 specie to loans was about 22 per cent and the propoi-tion 
 of loans to deposits about 90 per cent. From January, 1901, 
 until September, 1902, money conditions did not improve, 
 but stocks continued to advance. There were large crops, 
 and a general wave of expansion and prosperity swept the 
 country. In September, 1902, the proportion of loans to 
 deposits was 99 per cent and the proportion of specie to 
 loans about 17 per cent. ]\rean while stocks were high— 
 $128 per share for our twenty stocks. Conditions, though 
 temporarily ignored, asserted themselves in 1903, and in 
 September of that year the average price of the twenty 
 stocks was about $88 per share ; the percentage of loans to 
 deposits was 101 per cent and specie to loans 19 per cent. 
 The money situation had not changed materially, but the 
 stock market was making a deferred pa^nnent. 
 
 *'In August, 1904, the proportion of loans to deposits had 
 fallen to 90 per cent and specie to loans had risen to 25 per 
 cent. The stock market was steadily advancing, and in 
 January, 1906, stocks reached their pinnacle— $138 per 
 share for the twenty securities considered. 
 
 "And this brings us down to January, 1907. The pro- 
 poi*tion of loans to deposits is about 102 per cent. The ]n'o- 
 ])ortion of specie to loans is about 17 per cent. 
 
 "The average ]-)rice of our twenty stocks is about $130 
 per share. 
 
 "What is the use of talking about a bull market, a 
 'Spring rise' or manipulation in the face of such conditions 
 as this?" 
 
FUNDAMENTALS AND SECURITY PRICES 245 
 
 The other point referred to is the income yield on sea- 
 soned securities at different stages of the market. Every 
 advance in prices cuts down the yield and every decline in 
 prices increases the yield so long as the rate of dividend 
 remains unchanged. Stock prices went so high in the latter 
 part of 1906 that the average return on a number of stand- 
 ard dividend-paying securities was reduced to about 3J 
 per cent. In the panic of 1907, prices went so low that these 
 same stocks, with no change in dividend rates, showed a 
 return of 7 per cent on money invested. It was not difficult 
 to determine that stocks were too high in the former pei'iod 
 and too low in the latter period. In the first case, money 
 was worth more than 3 per cent in all lines of business ; in 
 the latter case, it was worth less than 7 per cent. The con- 
 clusion w^as obvious, yet so prone are public speculators 
 and investors to become elated in boom periods and de- 
 pressed in panic periods, that this glaring evidence of what 
 would happen later was lost sight of or disregarded. I will 
 offer the opinion that in normal times, seasoned securities 
 should return about 5 per cent or midway between the two 
 extremes cited above.* 
 
 Our Foreign Trade. 
 
 Our imports and exports of merchandise are an impor- 
 tant factor bearing on prosperity and consequently on se- 
 curity prices. In periods of prosperity and inflation we 
 become wasteful, careless and extravagant. Our imports 
 rise and our exports fall and the net balance shrinks. This 
 must be corrected before we are again in a normal trade 
 position. 
 
 In examining the progress of our trade balances we will 
 find that we are steadily inidergoing a change in the char- 
 acter of our exports. Our shipments of foodstuffs decrease 
 or at least do not increase in ratio to our growth of popula- 
 tion and production. Cotton is now the only important 
 
 * The rate of return on these selected securities now averages 5.40 per cent. 
 
246 THOMAS GIBSON 
 
 agrieultunil i^roduct which shows a steady increase in our 
 exports .171(1 this is partly due to a steady advance in the 
 avera^c^ })rice secured for the staple. Twenty years ago 
 cotfnii made up less than 20 per cent (in dollars) of our 
 nierchaudisc ('.\])(>rts; ten years ago it made up about 24 
 per cent and in IDIO about 29 })er cent. Cotton is our big 
 *' money crop." 
 
 But in this failing off of our exportable surplus of most 
 agricultural products there is nothing to be alarmed about. 
 Our exports of manufactured and partly manufactured 
 goods grow rapidly to fill the gap. That is the history of 
 all new countries. At first they l)egin to exchange their raw 
 materials for such manufactured goods as are required and 
 gradually, as population and facilities grow, to consume 
 raw materials and to produce manufactured goods for do- 
 mestic use or for sale. It would not be at all inimical to our 
 progress or prosperity if we gradually come to a point where 
 we actually import foodstuffs or textiles for our own needs. 
 
 As has been stated, I realize the impossibility of setting 
 f(trth, in a limited space, anything definite or comprehen- 
 sive on so great a subject as the study of fundamentals. All 
 I have hoped to do is to offer suggestions which will start 
 the student in the right path and to point out some of the 
 most common fallacies in regard to the most important 
 basic factors. It may appear that the subject is too broad 
 and complicated to be successfully undertaken except as 
 an exclusive study, but I do not believe this is the case. One 
 I'xamination will lead to another, the confusing problems 
 will be ra])idly cleared up, the study will ])e found most in- 
 teresting and profital)le and in a short time the man who 
 devotes a little time each day to the intelligent examination 
 of those factors will find himself abreast of the tim(\s and 
 his general conception of business affairs greatly broad- 
 ened. 
 
FUNDAMENTALS AND SECURITY PRICES 247 
 
 Extracts From an Address by Thomas Gibson on the Stand- 
 ard Oil Decision Before the Finance Forum of New York. 
 
 Personally my chief interest in the Standard Oil decision 
 is as to its bearing on security values and prices. Dur- 
 ing the last few days I have frequently heard the statement 
 from those interested in security price movements, that 
 the importance of the ruling marketwise was overestimated. 
 In my opinion it is underestimated. Tlie question of 
 the final construction of the Sherman law has acted 
 as a depressing and repressing influence on all lines of 
 business activity for a long time. The opinion has been 
 offered at times by men whose utterances command 
 respectful attention that a strict interpretation of the 
 Shemian act would be revolutionary in its effects on 
 business; we have been told that there was a possibility, 
 or even a probability, that general business disruption and 
 practical confiscation would follow the handing down of the 
 Standard Oil and American Tobacco decisions. The rulings 
 of the Court in the Standard Oil case prove that these 
 fears were not justified. 
 
 So great has been the apprehension from this cause that 
 important projects have been delayed or abandoned, and 
 even in cases where promoters or capitalists had confidence 
 in the sanity and integrity of our greatest judicial body, 
 the lurking fear has been present that through the neces- 
 sity of a strict construction of the letter of the law, a serious 
 condition would arise. In the stock market a great many 
 people who had mon(\v to invest and who were satisfied 
 Avith fundamental conditions and future promise have re- 
 frained from entering the market. A still greater numlier 
 who were confident that no measure whieh aimed at the 
 life of business coml^inations could endure, have defeiTcd 
 purchases in the belief that the temporary effects of ad- 
 verse findings would give them an opportunity to buy at 
 lower prices. Still others have considered it no worse than 
 
248 THOMAS GIBSON 
 
 an eiTor on the side of prudence to await the outcome, even 
 if such delay meant that they must pay somewhat higher 
 prices for their prospective purchases. 
 
 The recent depression in general business has been due 
 partly to this waiting attitude and partly to natural and 
 basic causes. The two combined have caused unusual un- 
 certainty, and consequently, unusual caution. The effect 
 has been most keenly felt in the securities markets. That 
 part of the depression which was due to basic causes would 
 not have exercised so gi*eat an effect on speculative ven- 
 tures, for Wall Street always looks ahead of present condi- 
 tions and discoTuits the future. Periods of business de- 
 pression or activity are always reflected in stock prices long 
 before they appear. Thus, 1907 was a banner year in gen- 
 eral business and a panic year in the stock market, and 
 1908 was a year of advancing prices and business depres- 
 sion. "We can foresee the probable future of business with 
 some degree of accuracy, but it would be paradoxical to say 
 that we could foresee an uncertainty. 
 
 In my opinion this uncertainty is now at an end, at 
 least for some time to come. So great has been the disturb- 
 ing influence of the pending interpretation of the law that 
 the study of basic conditions and prospects has been 
 neglected or confused. We can now look with a clearer 
 vision and a broader perspective at such things as crop 
 prospects, money conditions, and other fundamentals which 
 always go to make for prosperity or depression. If we had 
 been compelled to await the Supreme Court rulings until 
 fall, it would have been a bad thing, for a great many peo^^le 
 would have argued somewhat as follows: 
 
 "Yes, we And crop prospects excellent; we are satisfied 
 
 with the material progress and conditions of the country, 
 
 but we are afraid of the Shennan law. We cannot measure 
 
 or even sunnise its nature or its effect. '* 
 
 »#*#*♦♦ 
 
FUNDAMENTALS AND SECURITY PRICES 249 
 
 A layman necessarily looks at the Standard Oil decision 
 in a very different light from what a lawyer does. As it 
 appears to me the meaning is about as follows : 
 
 A corporation or combination of capital which by auto- 
 cratic and high-handed methods crushes out competition 
 and gains practical or absolute control of a certain commod- 
 ity and thus obtains power to arbitrarily fix prices and stiHe 
 competition, is inimical to the interests of the people and is 
 amenable to the punishment provided under this act. But 
 a corporation or combination of capital which combines for 
 the purpose of increasing administrative and operating effi- 
 ciency and by so doing effects economies or gains facilities 
 which permit it to undersell competitors who employ an- 
 tiquated methods, is for the benefit of the people and does 
 not come within the law. The mere reading of the w^ord 
 "reasonable" into the law is vigorously objected to by 
 manv lawvers, but this criticism must be based on technical 
 grounds alone. No one can object to the word itself in any 
 connection. I am not competent to express an opinion as 
 to whether or not such decisions should be construed liter- 
 ally and upon the evidence of innocence or guilt alone, 
 without reference to the infentton of the law, l)ut in accept- 
 ing the findings of the Supreme Court in this or any other 
 case, it appears to me that we should be content with the 
 fact that such rulings represent the consensus of opinion 
 formed after mature deliberation bv our hiiihest tribunal. 
 No citizen has a right to impute motives to the Supreme 
 Court; no one, at least no layman, has a right to reOect 
 upon the legal ability of its members. Our Chief Executive 
 is also in accord with the si)irit of this decision as is evi- 
 denced by a full reading of his message of January, 1910.* 
 
 * This statement was questioned by the audience, but was fully supportea 
 by quoting extracts from President Taft's rnessage of January. 1910. A single 
 paragraph from that message had been widely quoted by the press, which, 
 standing alone, put the President in the light of holding opinions at variance 
 with the recent findings of the Supreme Court in the Standard Oil ca«e. A 
 full reading of the message will show absolutely that the President was in 
 complete accord with the court findings. — T. G. 
 
MARKET MOVEMENTS OF SECURITIES. 
 
 BY GEORGE GARR HENRY. 
 
 (Of Salomon & Company, Bankers, New York; Former Vice-President, 
 Guaranty Trust Company, New York.] 
 
 There is no question connected with the investment of 
 money more important than the ability to judge whether 
 general market conditions are favorable for the purchase 
 of securities. 
 
 After learning how to judge the value of every foim of 
 investment, a man may still be unsuccessful in the invest- 
 ment of money unless he acquires also a lirm grasp upon 
 the general principles which control the price movements 
 of securities. By this it is not meant tliat a man needs to 
 have an intimate knowled2:e of technical market conditions 
 wliereby to estimate temporary fluctuations of minor im- 
 portance, but rather that he should have clearly in mind 
 the causes which operate to produce the larger swings of 
 prices. If an investor acquires such a knowledge, he is 
 enabled to take advantage of large price movements in such 
 a way as materially to increase his income, and, at the same 
 time, avoid carrying upon his books securities which may 
 have cost much more than their current market quotations. 
 If he can recognize tlie indications which point to the hc- 
 ginning of a pronounced upward swing in securities, and if 
 he can equally recognize the signs which indicate that the 
 movement has culminated, he can liquidate the securities 
 which he bought at the inc(>ption of the rise or transfer 
 them to some short-term issues whose near aj'tproach to 
 maturity will render them stable in ]>ri(^e. allowing the 
 downward swing to proceed without disturbing him. It 
 it not expected, of course, that the average business man 
 will be able to realize completely this ideal of investment, 
 
 250 
 
MARKET MOVEMENTS OF SECURITIES 251 
 
 but it is hoped that the following- analysis will give him a 
 clearer conception of the principles involved. 
 
 Broadly speaking, the market movements of all nego- 
 tiable securities are controlled by two influences, sometimes 
 acting in opposition to each other and sometimes in concert. 
 One of these influences is the loaning rate of free capital ; 
 the other is the general condition of business. A low rate 
 of interest or the likelihood of low rates has the effect of 
 stinuilating security prices, because banks and other money- 
 lending institutions are forced into the investment market 
 when they cannot loan money to advantage. Conversely, 
 a high rate of interest or the prospect of high rates has the 
 effect of depressing prices, because banking institutions sell 
 their securities in order to lend the money so released. The 
 automatic working of this process tends to produce a con- 
 stant adjustment between the yields upon free and invested 
 capital. When money rates are low, securities tend to ad- 
 vance to the point where the return upon them is no greater 
 than that derived from the loaning of free ciipital. AVhen 
 rates are high, securities tend to decline to a point where 
 the return is as great. This exi:)lains the influence of the 
 first factor. 
 
 The other factor is the general condition of business. 
 Good business conditions, or the promise of good conditions, 
 tend to advance security prices, because they indicate larger 
 earnings and a stronger financial condition. Poor business 
 conditions, or an unpromising outlook, have the reverse 
 effect. 
 
 The larger movements of security prices are always the 
 resultant of the interaction of these two forces. When they 
 work together the effect is irresistible, as when low in- 
 terest rates and the prospect of good business conditions 
 occur together, or when hic:h money rates occur in the face 
 of an indicated falling off in business activity. At such 
 times all classes of securities swing together. For the most 
 part, however, money rates and business conditions are op- 
 
252 GEORGE GARR HENRY 
 
 posed in their influence, rates being low when business is 
 bad and Iiigh when business is good. Usually the worse 
 business conditions bect)ni(', the easier money grows; while 
 the more active business becomes, the higher money rates 
 rise. The effect of this antagonism between tlie controlling 
 causes is to produce movements of different projoortions 
 and sometimes in different directions in different classes 
 of securities. High-grade bonds may be declining, middle- 
 grade bonds remaining stationary, and poor bonds advanc- 
 ing, all at the same time. This serves to give a very irreg- 
 ular ai)i)earance to the security markets, and appears to 
 justify the widely held opinion that security prices are a 
 pure matter of guesswork, and that they are controlled only 
 by manipulation and special influences. A clear conception 
 of the nature of the influences which are always silently 
 at work reconciles these apparent inconsistencies and makes 
 it plain that general price movements are determined by 
 laws as certain in their operation as the laws of nature. 
 
 This may be illustrated by a single example. Let us 
 assume that interest rates are low and business conditions 
 bad with prospect of still lower interest rates and still more 
 unpromising business conditions. "What will be the effect 
 upon different classes of securities'? High-grade bonds, 
 such as choice municipals, whose safety cannot l)e im- 
 paired by any extent of depression in business, will ad- 
 vance because their market price is influenced almost wholly 
 by money rates. If their interest is certain to be paid, no 
 matter what business conditions may become, they cannot 
 be greatly affected by a reduction of earnings, and conse- 
 quently the influence of low money rates is left to act prac- 
 tically alone. ]\liddle-grade bonds, such as second-class 
 railroad issues, will remain almost stationarv, low monev 
 rates tending to advance their price and the fear of de- 
 creased earnings tending to depress them. The lowest grade 
 of bonds and stocks, whose margin of security even in good 
 times is not very great, will probably suffer in price be- 
 
I»IARKET MOVEMENTS OF SECURITIES 253 
 
 cause the fear of default in iuterest and of reduction in 
 dividends will operate much more strongly than the mere 
 stimulus of low interest rates. Of course, securities cannot 
 be clearly separated into these three classes, but shade 
 imperceptibly into one another. The classification is 
 adopted only for purposes of illustration. 
 
 Up to this point we have been concerned merely in show- 
 ing that the market movements of negotiable securities are 
 controlled bv the influence of certain factors. A more im- 
 portant question now remains to be considered, viz. : whether 
 the effect of these two influences is to produce general 
 swings in prices which may be depended upon with com- 
 parative certainty, and, if so, what indications are afforded 
 to the investor of the commencement or culmination of such 
 a movement. The answer must be that the combined effect 
 of the two influences described is to produce definite and 
 regular swings in prices, and that the indications which 
 define the movements are not difficult to follow. 
 
 A general survey of the history of every industrial na- 
 tion reveals the fact that business conditions undergo alter- 
 nate periods of prosperity and depression extending in 
 clearly defined cycles of substantially uniform length. By 
 tracing the usual course of interest rates and of business 
 conditions throughout one of these cycles, a general idea 
 can be formed of the way in which the joint influences 
 operate to produce price movements. To what extent the 
 course of iuterest rates is a cause as well as a result of 
 changing business conditions, we shall not attempt here to 
 estimate, but will be content to note carefully the general 
 course which rates for money pursue throughout the cycles. 
 Immediately after a financial crisis, which usually closes 
 an era of great lousiness prosperity, money rates become 
 abnoiTnallv easv. AVithin a few months from the climax 
 of the crisis, monev accumulates in enormous volume in 
 financial centers. This is caused by the great diminution 
 of busmess activity which renders unnecessary a large part 
 
254 GEORGE GARR HENRY 
 
 of the circulating medium that was formerly required to 
 transact the greater volume of ))usiness. To the extent to 
 which this accumulation of money merely reflects a redun- 
 dancy of currency as distinguished from real liquid ci\]n- 
 tal, it can have little effect in encouraging the resuni])ti(»n 
 of business activity. As time passes, however, and ect)no- 
 mies in operation commence to make themselves manifest, 
 and especially as waste and extravagance are curtailed, the 
 country as a whole commences to accunuilate real liquid 
 capital ; that is to say, its total production leaves a surplus 
 over the amount of consumption. Tn the state of business 
 feeling which has been pictured, the undertaking of new 
 business ventures or additions to existing properties would 
 . not lie approved, so that the surplus wealth created finds its 
 way into bank deposits as liquid capital. The competitive 
 attempt to loan this capital at a time when borrowers are 
 few produces merely nominal interest rates. This continues 
 for some time. It is only graduall^v as confidence returns 
 and as the spirit of initiative begins to reassert itself that 
 some part of the liquid capital created each year is diverted 
 into fixed forms. Here and there some enterprising group 
 of men will develop a mine, lay a new piece of railway, or 
 make some addition to an existing undertaking. For some 
 length of time, however, the liquid capital of the country not 
 only remains unimpaired, but is continually increasing. 
 After a time a change comes. The annual surplus of ])ro- 
 duction, tli(»iigh larger than before, is only sutlicient to 
 provide for the new undertakings which the growing op- 
 timism demands. Interest rates rise moderately in resjionse 
 to the added demand for capital. A few years further along, 
 as business activity increases and success appears plaiidy 
 to wait upon new ventures, the demand f(^r new c<apital with 
 which to develop increased facilities and new enterprises 
 exceeds the annual supply of wealth created. Prosperity 
 having increased, another factor commences to assert itself. 
 The spirit of economy and thrift which had prevailed 
 
MARKET MOVEMENTS OF SECURITIES 255 
 
 throughout the years of depression gives place to extrava- 
 gance, tile demand for luxuries, and other unproductive 
 forms of expenditure. While the total production is much 
 greater than in the lean years, the margin of production is 
 not proportionately as great, and this amount is insufficient 
 to meet the demands upon it. The supplies of liquid capital 
 stored up during the years of depression are resorted to, 
 and they serve to provide the new capital for a few addi- 
 tional years. Interest rates at once reflect the encroachment 
 upon stored-up capital, and their rise gives the first real 
 warning of the country 's true position. The ojotimistic busi- 
 ness men do not heed the warning. After exhausting all 
 the real capital available in the countrj^ they proceed to 
 borrow extensively from foreigners or from government 
 banks— in this countr}^ from the national government 
 through bank deposits. Every step which can be taken 
 to induce foreigners to part with their capital is resorted 
 to. Tf foreigners will not buy long-term bonds, short-term 
 notes are created. If the foreigners refuse these, they are 
 asked to make loans secured by the new bonds and notes. 
 The rates of interest offered are so attractive that consid- 
 erable sums are usually obtained, and the pressure of busi- 
 ness activitv continues further. Finallv the dav of reckon- 
 
 * ft V 
 
 ing arrives when some incident, usually unimpiu'tant in it- 
 self, first suggests to the lenders of money that their debtors 
 whom they know to be overextended may not be able to pay 
 their loans. The attempt to collect their loans produces a 
 financial crisis which brings to an end the period of pros- 
 perity. 
 
 The foregoing is a description of the more important 
 stages through which business conditions pass from crisis 
 to crisis. Different cycles vary in particular details, but 
 all agree in essential outlines. Sometimes special influences 
 are at work, which operate to shorten or prolong the cycle. 
 The approach of a crisis will be retarded by inflation of 
 the currencv, for the excess finds its wav into bank vaults 
 
256 GEORGE GARR HENRY. 
 
 and increases the volume of loanable credit. The effect of 
 such inflation, however, is wholly disastrous, because the 
 addition to the supply of capital is fictitious, not real, and 
 only defers the day of reckoning for a greater catastrophe. 
 On the other hand, the approach of a crisis can be greatly 
 hastened by wars, conflagrations, and other agencies which 
 destroy capital, and by attacks upon capital and the con- 
 duct of corporate business, for such attacks tend to render 
 capital timid and produce the same effect as a violent cur- 
 tailment of the supply. These are only some of the many in- 
 fluences which might become operative, but they serve to 
 show the necessitv for careful consideration of all the fac- 
 tors at work if a true conception of the condition and ten- 
 dencies of business is to be formed. 
 
 From the general account given above of the successive 
 phases of a credit cycle, it is possible to summarize the course 
 of interest rates and the course of business conditions, 
 ^loney rates become suddenly easy after a crisis, remain 
 low or grow easier for a period of several years, and then 
 rise continuously until the next crisis, advancing with great 
 rapidity toward the close of the cycle. Business conditions 
 remain poor or grow worse a few years after a crisis. Liqui- 
 dation is taking place, prices are going down, and the un- 
 certainty of the outlook causes diminished activity. There- 
 after, however, conditions improve and activity increases 
 with fair uniformity until it reaches the high tension of the 
 period immediately preceding the crisis. The course of in- 
 terest rates and the course of business conditions may both 
 be deflected by the operation of special influences, but the 
 general tendencies are substantially as outlined. The re- 
 sult of the operation of these joint factors may be traced 
 in the mai'ket movements of any class of securitv desired. 
 Let us consider their effect in producing the market swings 
 of the highest grade of investment issues and of the lowest 
 grade, those which are affected only by money rates and 
 those which are affected almost whollv bv business condi- 
 tions. 
 
MARKET MOVEMENTS OF SECURITIES 257 
 
 Emerging from the strain of the crisis at their lowest 
 point, high-gTade bonds, such as the best municipal and 
 railroad issues, advance rapidly as interest rates decline, 
 continuing their advancing tendency throughout the period 
 of business depression which follows upon the heels of the 
 crisis. As business conditions improve, their position, while 
 perfectly secure before, is further strengthened and an 
 added stimulus is given to their rise. About the middle of 
 the cycle when the business outlook is very promising, and 
 before interest rates have sustained any material advance, 
 the prices of high-grade bonds are usually at their highest 
 point. From that time forward they commence to decline, 
 in spite of the increasing prosperity of the country, under 
 the influence of rising monev rates. Thev make their lowest 
 prices in the midst of the crisis, when the strain upon capital 
 is greatest and the outlook for business most unpromising. 
 
 On the other hand, bonds of the lowest grade (whose 
 margin of securit}^ is least), do not commence to recover 
 materially in price, in spite of the influence of low money 
 rates during the hard times which follow the crisis, the in- 
 fluence of reduced earnings and the fear of default of in- 
 terest holding them in check. As the outlook becomes 
 brighter, tliey advance ra])idly in price so long as they yield 
 more than current money rates. At some point, difficult 
 to deteiTnine in advance but usually well along toward the 
 end of the cycle, they reach their high point and thereafter 
 decline under the influence of the growing stringency in 
 money. 
 
 Between these two extremes, every class of secunty is 
 to be found. The better ones will tend to resemble, in their 
 market movements, the course pursued by the choicest 
 bonds; the poorer ones will approximate the lowest class. 
 In every case, however, unless special influences operate to 
 produce variations, the market swing of a given security 
 should be easily conjectured by an investor who gives care- 
 ful attention to the relative weight which is likely to attach 
 to each determining influence. 
 
 . B.VII— 17 
 
STOCKS AND THEIR FEATURES— A DIVISION AND 
 
 CLASSIFICATION.^ 
 
 BY JOHN ADAMS, JR. PHILADELPHIA. 
 
 In the followiii.2: article stock ccrtiliciitcs will be classified 
 (1) accord i 11 j;' to their par value, (2) according to the con- 
 ditions regarding their issue (i. e., Avhether the stock is full- 
 paid or assessable), and (3) according to the rights and 
 limitations attaching to common and preferred stocks. Fol- 
 lowing this threefold classification the article will next 
 discuss debenture stocks and those stock certificates which 
 are analogous to preferred. Emphasis will be given only 
 to such stocks as are listed on some stock exchange in the 
 United States, though at times it will be necessarv to touch 
 upon shares traded in elsewhere. 
 
 In the first place stock certific<ates may be classified 
 according to their ]^ar value. The great majority of imiior- 
 tant railroad, industrial and financial corporations have 
 issued stock with a par value of $100 ; at the Siinie time, how- 
 ever, some of the best railroad stocks in the ccnintry, such 
 as the Pennsylvania Railroad, Reading, Delaware, Lacka- 
 wanna & Western, and Lehigh Valley, have a par value of 
 only $50. Among the largest industrial concerns with shares 
 of only $50 par may be mentioned the Westinghouse Electric 
 Company, th(^ LTnited Gas Improvement Company, I^ehigh 
 Coal and Navigation, Pittsburg Brewing, and Cambria Steel. 
 It will be noticed that these com])anies are mainly incor- 
 porated in the State of Pennsylvania, and it may be said 
 that the $50 share for railroads and industrials is largely 
 local to the Keystone Stnte. l^x;nn]»les of large companies 
 with a stock of this par value incorporated elsewhei-e are 
 
 •Courtesy of the NimnU of thr American Academy of Political and Social 
 Science 
 
 258 
 
STOCKS AND THEIR FEATURES 259 
 
 extremely few. The shares of two or three unimportant 
 railways have a par value of $25, but that figure is found 
 primarily in the issues of Boston "coppers," such as Ana- 
 conda, Calumet and Hecla, Old Dominion, Osceola, Quincy, 
 Tamarack, Wolverine, etc. Generally speaking, these are 
 stocks of proved value, since their average price is many 
 times the figure stamped on the face of their certificates. 
 In the mining field we also find a large number of lower 
 par values, i. e., in multiples of five dollars and even one 
 dollar a share or lower. In most instances, however, these 
 shares represent mining concerns which are traded in on the 
 curb markets or on the exchanges of San Francisco, Salt 
 Lake City or Colorado Springs. 
 
 According to the laws of most states any par value what- 
 ever may be fixed for the stock. Consequently there are 
 par values all the way from one cent, in certain mining and 
 oil-well properties, to a few banks and trust companies, 
 such as the Humboldt Savings Bank, and the Union Trust 
 Company of San Francisco, and the West Side Bank of 
 '^niwaukee, each with shares of a par value as high as $1,000. 
 The New Jersey corporation laws, under whose fostering 
 influence most large industrials have been incorporated, 
 provide that any par value whatever may be chosen ; but it 
 must be emphasized that the vast majority of stock issues 
 of sufficient importance to be listed on a large exchange 
 have a par value of $100. It is also practically the universal 
 rule for corporations to have the same par for all classes 
 of its stock where there is more than one issue. Only one 
 exception has been found to this rule, the Northern Com- 
 mercial Company, which has $1,622,800 of common stock 
 witli a par of $100, and $1,620,000 preferred stock of a par 
 value of only five dollars. If every share casts one vote, 
 the reason for the difference may be infevr<"(l. 
 
 Some stocks, strange as it may seem, have no par value 
 whatever. Thus, the Great Northeni ore propeii:ies con- 
 stitute a trust created in 1006, consisting of 1,500,000 
 
260 JOHN ADAMS 
 
 ^'trustees' certificates t)!" Ijcncficial interest," one of which 
 was given to every share of the Great Northern Railway 
 Company wlien the mineral lands of that corporation were 
 segregated. The Adams Express Company, a voluntary 
 association, dating from 18r)4, likewise has 120,000 shares 
 of no stipulated par value, ])aying dividends of eight dollars 
 per share annually. Similarly, the East Boston Company, 
 a Massachusetts corpoi-ation going back to 1833, has IjIO.OOO 
 shares of no par value ; and among other companies which 
 have ad<)i)ted this plan several might l)e mentioned which 
 to all intents and purposes have given theii* stock a par 
 value of $100, though a "share" of no par value whatever 
 is employed;! e., the Boston and Worcester Electric Com- 
 panies and the Boston Suburban Electric, each with pre- 
 ferred stock entitled to four dollars a year cumulative divi- 
 dends and $100 in case of dissolution. 
 
 This Massachusetts idea, if we may so term it, was also 
 applied in the reorganization plans of the Chicago Railways 
 Company. The cajutal stock of this company is $100,000, 
 which is used as a basis for 265,000 "participation certif- 
 icates" of four series: The first of 30,800 ''parts," the 
 second of 124,300, the third of G0,000, and the fourth 
 of 50,000. The first three are entitled, in order, to eight 
 dollars cumulative dividends, and to $100 on dissolution. 
 The fourth series gets the surplus dividends aiid capital. 
 The stocks of these companies thus really have a par value 
 of $100 under a different name — using d(^llars for dividends 
 instead of percentages, and allowing the preferred $100 on 
 dissolution. The reason for this policy may be found in 
 the fact that shareholders cannot be held liable up to the 
 "par value" for eorporation debts, as is the case in some 
 states; and again when the capital consists of "parts" of 
 no par value there may exist a good superficial answer to 
 the charge of "stock watering." 
 
 A further classification of stock cei'tificates can be made 
 with reference to their issue; i. e., into issued and outstand- 
 
STOCKS AND THEIR FEATURES 261 
 
 ing, unissued, and treasury stock. Unissued stock is that 
 which has been authorized but not vet disposed of. It 
 merely represents the right to admit new stockholders and 
 has no value in itself. It has no active stock rights and is not 
 an asset of the corporation. It usually is reserved for va- 
 rious corporate purposes, such as the conversion of bonds 
 or the purchase of new lines or plants. Treasury stock, on 
 the other hand, is best described bv Wood in words which 
 have been frequently quoted: It is stock "issued and out- 
 standing which has come into the possession of the corpora- 
 tion which issued it by purchase, donation, or in liquidation 
 of a debt. If it has been issued full-paid it remains so, even 
 if sold again below par, and it is considered an asset of the 
 corporation for bookkeeping purposes. But such stock, so 
 long as it is held by the corporation or its representatives 
 as treasury stock, participates neither in dividends nor in 
 the meetings of the corporation as treasury stock; though 
 it still represents a paid-for interest in the property of the 
 corporation." Treasury stock is issued, but is evidently 
 not outstanding. Examples most frequently occur in mi- 
 ning companies, though there the term is usually misap- 
 plied, being used to describe unissued stock in the company's 
 treasury. Among industrials holding a considerable amount 
 of treasury stock may be mentioned the United States Cast 
 Iron Pipe and Foundry Company, the Pacific Coast Com- 
 pany, the American Beet Sugar Company, and the Pitts- 
 burg Brewing Company. 
 
 Stocks can also be classified according to whether they 
 are full-paid or assessable. Full-paid stock is simply that 
 which has been fully paid for as required by law in money, 
 property or labor. The certificates of such stocks are issued 
 stamped "full-paid and non-assessable," and. in the absence 
 of any special statute on the subject, carry with them no 
 legal liability. Assessable stock, on the other hand, is that 
 which has not been fully paid for by its subscriber. Just 
 as Boston is the home of many mining shares with a par 
 
2G2 JOHN ADAMS 
 
 value of $25, so it is also the market for many assessable 
 shares. Calumet and Hccla stock has paid in only $12 on 
 a par Taluo of $25; Franklin, $10.20; Tamarack, $13; Al- 
 louez, $22.25; Wolverine, $13; etc. Simihirly, in the Metro- 
 politan Securities Comjiany, one of the constituent cor])()ra- 
 tions of the Interborough-]\Ietropolitan Company, only $75 
 has been paid in on a par of $100 : the Philadel])hia Electric 
 Company, only $15 on a par value of $25 ; the Union Trac- 
 tion Company of Philadelphia, only $17.50, thoui^di it is 
 now receiving a guaranteed dividend of 6 per cent on its 
 $50 par value. It should be emphasized, however, that out- 
 side of mining and public utility corporations, assessable 
 shares are comparatively few. Very few instances of such 
 stock are listed on the New York Stock Exchange. The 
 legal status of assessable stock is such that creditors of the 
 corporation can hold the owners of the shares liable for the 
 difference between the amount actually paid in and the par 
 value of the stock. 
 
 Turning next to a discussion of the various features of 
 common and preferred st(^ck, we find that the classification, 
 to be complete, must be very elaborate. An outline is in- 
 serted on page 263 to enable the reader to follow more 
 readily the following classification. 
 
 ** Common stock," meaning the junior issue, when there 
 is preferred stock, or stock analogous to ])referred, some- 
 times has a real preference in regard to voting, for there 
 are instances where the preferred gives up the right to vote 
 as a consideration for its receiving regular dividends. The 
 usual provision is that if such disbursements are discon- 
 tinued for a certain period, varying with the individual 
 coi-j-yoration, the preferred stock shall resume its voting 
 l^ower. Leading corporations in which the conuiion stock 
 has exclusive voting power, under tlic foi'cgoing conditions, 
 are American Smelters Securities, American Tobacco, In- 
 terboroucrh-^fetropolitan, Koyal Baking Powder, and 
 United Cigar ^fanufacturers' Company. All of them, with 
 
STOCKS AND THEIR FEATURES 
 
 263 
 
 the exception of the Iiiterboroiigh-Metropolitan Company, 
 have maintained reguhir dividends ; the latter defaulted in 
 its obligations toward its preferred stock in 1907, so that 
 at the present time this issue has full voting rights. 
 
 CLASSIFICATIONS OF STOCK CERTIFICATES ACCORDING TO THE 
 
 RIGHTS AND LIMITATIONS ATTACHING TO 
 
 VARIOUS TYPES OF STOCKS. 
 
 1. Common. 
 
 2. Deferred. 
 
 Dividends (always) 
 
 3. Preferred, as to -< 
 
 Assets 
 
 Voting power 
 
 Otiier features 
 
 { 
 
 Cumulative (industrials, gener- 
 ally). 
 
 Non-cumulative (railroads, gen- 
 erally). 
 
 Railroads (not often). 
 Industrials (generally). 
 
 Exclusive (seldom). 
 Special (often). 
 
 rCallable. 
 < Convertible. 
 L Participating. 
 
 4. Stocks analogous to Preferred 
 
 5. Debenture. 
 
 Interest-bearing. 
 Special stock. 
 Guaranteed. 
 Founders'. 
 
 Common stock generally has the right to receive all the 
 surplus remaining for dividends after tlic i»ic4Vrred has 
 been paid its stipulated percentage; and in a growing coun- 
 try such as the United States this feature is vahial)k\ pro- 
 vided there is any worth in the company. The Union Pa- 
 cific Railroad common receives 10 per cent, but the pre- 
 ferred is forever limited to 4 per cent. The American To- 
 bacco Company began with a regular 6 per cent dividend 
 on the pi-eferred and 20 per cent on the common, but in- 
 creased the amount paid on the common almost annually, 
 
234 JOHN ADAMS 
 
 until now it stands at 35 per cent. These two companies are 
 exceptional, but there are scores of well-known corp(jra- 
 tions, such as Atchison, American Light and Traction, 
 American Radiator, American Smiff. II. B. Clatlin Com- 
 pany, Eastman Kodak, and Philadelphia Company, to 
 name only a few, where the common receives more, and 
 frequently a great deal more, than the preferred. It is to 
 be noted, however, that in some cases the preferred partici- 
 pates in the surplus left after dividends of a certain per- 
 centage on the common have been paid. This class of pre- 
 ferred stock, and its relation to the junior issues, will be 
 treated later in its ajDpropriate place. It is evidently not 
 an advantage to the connnon stock to have such jDreferred 
 stock ahead of it. 
 
 Common stock usually has the right to share equally 
 with the preferred in the corporate assets on the dissolution 
 of the company. In many cases, however, especially the 
 New Jersey industrials, which include practically all the 
 large "trusts," the preferred stock has a preference in this 
 respect. It is evident that in corporations where the com- 
 mon stock receives a large dividend, as those named in the 
 preceding paragraph, that on the distribution of the prop- 
 erty producing such a revenue the common would receive 
 more than the preferred. Conversely, if the company were 
 weak, and especially if preferred dividends were in default, 
 it is easily conceivable that the conuuon would receive little 
 or nothing, as in the latter case all back cunnilative divi- 
 dends ai'e generally treated as an additional part of the 
 preferred capitalization. 
 
 "Deferi-ed" stock is an issue commonly used in England, 
 but only infrequently met with in the United States. The 
 name itself is largely explanatory of its nature. It is an 
 issue on which dividends are deferred until dividends on 
 some other variety of stock, or interest on some particular 
 bonds, have been paid. The common stock of companies 
 possessing this issue is usually divided into two parts— one, 
 
STOCKS AND THEIR FEATURES 265 
 
 the "B," or ordinary stock, and the deferred, or "A" stock, 
 which receives no dividends until a certain fixed rate has 
 been paid upon the "B" stock. Both of these issues are 
 junior, of course, to the "preference stock," as it is called 
 in England. The corporations which possess this class of 
 stocks are usually English either in their inception, location 
 or management. In this country we may mention Arizona 
 Copper, and the Alabama, New Orleans, Texas & Pacific 
 Junction Railways, Limited, as examples. The old Alabama 
 Great Southern Railroad, which has merged into an Amei-- 
 ican company of the same name in 1906, and the National 
 Railroad of Mexico, merged with the Mexican Central in 
 1908 into the National Railways Company of Mexico, both 
 possessed this feature. None of these issues, however, has 
 ever been of importance on the stock exchange. 
 
 Having explained the nature of deferred stock, we may 
 now consider preferred stock. This class may have a 
 preference in any one, any two, or all three, of three parti- 
 culars; i. e., dividends, always; assets, generally; and voting 
 power, at times. It may also be ''callable," ''convertible," 
 or "participating." 
 
 Such stock always has a preference over the conmion as 
 regards dividends, which may be either "cumulative," or 
 "non-cumulative," the former being in the nature of a fixed 
 charge, because if the corporation is unable to pay the divi- 
 dend in one year, it must l)c paid in succeeding years, to- 
 gether with the dividends for those years, before the com- 
 mon can receive an^-tliing. No such duty attaches to non- 
 cumulative stock. If the dividend cannot be paid this year, 
 the rights of the common to share in next year's earnings 
 are in nowise impaired. "Railroads are non-cunuilative, 
 industrials generally ciunulative," so runs the rough-and- 
 ready distinction. It is not exact, since, as the accompany- 
 ing table shows, there are numerous railroads that have a 
 cumulative dividend feature in their preferred stock issue: 
 
 It is of importance to notice that of late it seems cus- 
 
266 JOHN ADAMS 
 
 Amount of 
 Name. Preferred Stock Cumulative Remarks. 
 
 Outstanding. Rate. 
 
 Allegheny Valley ?17, 174,000 3% Mostly exchanged for 
 
 Pennsylvania R. R. 
 stock. 
 
 Central Pacific 1.1. 600,000 4% 
 
 Chicago & Alton 879,300 4% "Prior lien and par- 
 
 ticipating stock." 
 
 Cincinnati, New Orleans & 
 Texas Pacilic 2,453,400 5% 
 
 Rutland 9,057,600 7% About 180% in arrears. 
 
 tomary in railroad leorgaiiizations to insert a cunnilative 
 clause for the preferred stock in the new charter. But divi- 
 dends do not become cunnilative for a few years, in order 
 to give the road an opportunity to become firmly esta))lished 
 before it must meet the fixed cumulative dividend obliga- 
 tion. Pcre Marquette first preferred stock, to the extent of 
 over eleven millions, became a 4 per cent cumulative issue 
 after June, 1911; Chicago Great Western preferred, over 
 forty-one millions, is to be 4 per cent cumulative after June, 
 1914; the Seaboard Company, the holding corporation for 
 the Seaboard Air Line, gave 5 per cent cumulative divi- 
 dends, after July, 1910, on its issue of over six millions 
 of first preferred. In fact, there is over $150,000,000 of 
 preferred railway capital that is now, or soon will be, re- 
 ceiving cumulative dividends. But this amount, large as it 
 may seem, is relatively small, comjiared with the total of 
 more than $1,500,000,000 of preferred stock of Anu'rican 
 railroads outstanding. 
 
 The general rule referred to a moment ago is correct in 
 stating that industrial preferred stock issues are generally 
 cumulative, since about two-thirds of them contain this 
 feature. Among the imjxirtant corporations that have not 
 included this cumulative feature may be mentioned: Amer- 
 ican Car and Foundry, American Linseed, the Pacific Coast 
 Company issues. Pressed Steel Car, Sloss-Shcfiield, and 
 United States Rubber, first and second i)ref erred. These 
 companies, however, arc not important relatively in their 
 
STOCKS AND THEIR FEATURES 267 
 
 agrrreo-atc capital when compared ^Yitll American Smelting, 
 American Sugar, American Tobacco, United States Steel, 
 ajid other large issues which contain the cunudative fea- 
 ture. The non-cimiulative preferred shares among indus- 
 trials generally represent corporations not of the first rank. 
 The Uirge companies— the ''trusts"— had to make their 
 preferred stock attractive to investors by adding the cumu- 
 lative feature when thev came to market their securities in 
 the great era of trust promotion. 
 
 Under the subject of common stocks, the preference as 
 to assets on dissolution which the preferred often enjoys 
 was spoken of. This feature is quite general, as w^as there 
 stated, among industrials, but not common in the case of 
 railroads. The following important railway systems, how- 
 ever, have incorporated this feature in their charters; At- 
 chison, Chicago & Alton, Chicago Great Western, Hock- 
 ing Valley, National Railways of Mexico, first and second 
 preferred in order; Norfolk & Western, Pere Marquette, 
 Rock Island, and Seaboard Company. In tliis list will be 
 noted the three recently reorganized corporations which 
 have cumulative dividends. Evidently it is becoming cus- 
 tomary to give the preferred stock of new railways as many 
 benefits as possible. In the case of industrials it is advisable 
 to reverse the classification, as w\as done under dividends, 
 and name only those stocks which are not preferred as to 
 assets, viz. : American Sugar, Philadelphia Company, 
 Pittsburg Coal, and United Railways of St. Louis. Prac- 
 tically every large industrial concern has its preferred stock 
 protected by giving it this preference should it ever be- 
 come necessary to distribute the corporate assets. This, 
 of course, will generally be an advantage, but in the case 
 of very strong comjianies it may not be, as has already been 
 pointed out. To obviate this a few concerns, all unimpor- 
 tant, have provisions like the ^[erchants Warehouse Com- 
 pany, to the effect that the preferred stock has the first 
 claim on all assets up to $100 a share, and then shares the 
 
268 JOHN ADAMS 
 
 balance with the common after that issue has received $150 
 a share. As stated before, according to the laws of the 
 State of Xew Jersey, inider which most of the large indus- 
 trials have incorporated, preferred stockholders are to re- 
 ceive preference in the distribution of coi-porate assets on 
 dissolution, up to par, the balance going to the ccnnmou 
 stock (Act of 1896, sec. 86, ch. 185). In a few instances 
 the preferred stock has a preference to an amount over par. 
 Dominion Coal, for example, is preferred up to $115 a share. 
 Electric Storage Battery, on the other hand, is only pre- 
 ferred up to $10 a share, although the par value is $50. In 
 most cases, too, unpaid cumulative dividends must be settled 
 for out of assets before the common stock can receive any- 
 thing. 
 
 The superior voting right which the conmion stock some- 
 times possesses has already been spoken of. The preferred, 
 likewise, in some instances, carries the entire voting power, 
 though not so often as the common, and generally in less 
 important corporations. The Rock Island rnmpany is the 
 only example of first rank where the preferred stock has 
 exclusive voting power. This fact was instrumental in the 
 stock exchange investigation of the sensational rise in the 
 common stock on December 27, 1909, and its equally sudden 
 decline, for it conclusively negatived the idea of a ''fight f<u- 
 control," and stamped the movement as purely manipula- 
 tive. On the other hand, the preferred stock often has a 
 voting preference in regard to special matters— usually in 
 case of the creation (U- increase of funded debt, or the en- 
 largement of the preferred issue itself. More than a ma- 
 ioritv of the issue, usuallv two-thirds to three-fourths, is 
 required to sanction such changes. The following preferred 
 stock issues, among others, may be cited as possessing such 
 features: Atchison. National Railways of ]\rexico, Norfolk 
 & AVestern, Reading, both first and second preferred. South- 
 ern, American Can, American Snuff, Central Leather, Tn- 
 terborough-Metropolitan, Sears-Roebuck & Co., United 
 
STOCKS AND THEIR FEATURES 269 
 
 Cigar Manufacturers, etc. As a general rule, such provi- 
 sions are not of great practical value. 
 
 Mention may be made here of the various classes of pre- 
 ferred stock, and the safeguard that is occasionally thrown 
 around preferred dividends in the shape of what may be 
 called "dividend funds." The difference between a first 
 and second preferred stock is this : that while both are senior 
 to the common, the first preferred ranks ahead of the sec- 
 ond in regard to receiving dividends, and in some cases has 
 priority as regards assets, also. Of the corporations whose 
 stocks are active on the New York Exchange only about 5 
 per cent possess two or more classes of preferred. Space 
 will not permit the giving of a complete list of corporations 
 having more than one issue of preferred stock. A few im- 
 portant corporations, however, should be mentioned as be- 
 longing to this class: Colorado & Southern, Erie, National 
 Railways of Mexico, New York, Chicago & St. Louis, Perc 
 Marquette, Reading, Seaboard Company, St. Louis & San 
 Francisco, ^Mieeling & Lake Erie, American Smelters Se- 
 curities, Associated ^Ferchants, H. B. Claflin Company, Chi- 
 cago Railways, Pacific Coast, and United States Rubber. All 
 of these corporations have two classes of preferred stock, 
 except the Chicago Railways Company, which has three, as 
 has also Concord & Montreal. No instance of a corporation 
 having more than three classes of preferred stock has been 
 found. 
 
 A few corporations have made provision for the accumu- 
 lation of a certain fund out of which dividends on the pre- 
 ferred shall be paid during times of business depression, 
 when earnings are not sufficient to meet such pa^nnents. 
 The National Railways Company of ^Mexico affords an ex- 
 ample. To insure semi-annual pa^mients of one per cent on 
 the first preferred for three years from January 1. 1908, 
 a separate fund of $1,800,000 of prior lieu bonds and $1,200,- 
 000 of guaranteed general bonds was set aside, and these 
 or their proceeds may be drawn upon to the extent that net 
 
270 JOHN ADAMS 
 
 profits shall not ])e sufficient to make such pa\iiiouts. A 
 similar provision attaches to the preferred stock of United 
 Factories, Limited. United Cigar Manufacturers and 
 Rears-"Roebuck & Co. have requirements that a sur])lus of 
 $1,000,0(H\ in eaeh case, shall he accumulated before any 
 dividend shall he ])aid on the connnon. This, of course, 
 serves as a i)rotecti()n to the preferred stockholders, for if 
 there ^vere no such surplus "svhen net earnings were little 
 above the amount needed for preferred dividends, it mii^dit 
 not be deemed advisable to declare such dividends, unless 
 there wei'e such a surplus fund to fall back upon for work- 
 ing capital. But, as said before, such provisions are in- 
 frequent. 
 
 It is proper to state here that what is comnKuily known 
 as **pref erred" stock need not necessarily, in many cases, 
 be called ))y that name at all. Under the laws of many 
 states, stock ]")ossessing the characteristics, of preferred 
 stock mav be kno'^Ti by almost anv name, so louir as that 
 name does not genei'ally import some other variety of stock. 
 Concord & ^lontreal has its stock divided into classes 1,11, 
 11 r, and TV, class IV corresponding to common stock. In 
 this case, however, the distinction is of very little practical 
 account, because all four classes are guaranteed 7 per cent 
 di\idends by the Boston & Elaine Railroad. With the Chi- 
 cago Railways Company, however, it is different, since its 
 ** participation cei-tificates," series I, IT and III, as ex- 
 l)lained previously, are really preferred, while series IV is 
 ccmimon. At any rate, the inunense majority of cor])ora- 
 tions call their j (referred stock sinqdy ''jn-ef erred." 
 
 It should next be noted that preferred stocks may pos- 
 sess any one of three special features— they may be ''call- 
 able," ''convertilde" or "])artici])ating." Very many pre- 
 ferred stocks are issued to ])roeure money f<>r corporate 
 jmri^oses on the inception of the company, when not nuich 
 could be realized by the sale of connnon stock, and bonds 
 could be marketed only at a discx:)unt. Such companies may 
 
STOCKS AND THEIR FEATURES 271 
 
 have hopes that in time thi'ir business will so improve that 
 by issuing bonds at a low interest rate, or by selling addi- 
 tional common stock they can retire the preferred stock, 
 leaving the common stock in a much better position. Hence 
 the callable feature may be inserted. This is never obligatoiy 
 on the corporation, but merely optional with the directors. 
 It is the opposite of the convertible feature, which de- 
 pends on the stockholders' option. On the following page is 
 a table of callable preferred stocks, showing their provi- 
 sions as to the time of redemption, and the calling price. If 
 no time is specified, the company's option is understood. 
 
 A much larger list could be compiled, Init it is better 
 to present only typical or fairly large companies. The in- 
 dustrials are generally redeemable at a premium, and are 
 hedged with definite provisions regarding the time at whicl^ 
 the company may exercise its right. The railroads, on the 
 contrary, are nearly always callable at par, and at any time 
 the company may choose. It is generally considered a 
 disadvantage to have a stock callable, as the holder must 
 then seek new fields for his capital, usually just when the 
 investment begins to look attractive. A company never calls 
 stock when it is in difficulties; Tonopah, of Nevada, called 
 its preferred just before it began dividend payments on the 
 common; and Northern Pacific, which was called at par, 
 January 1, 1902, had been paying dividends only a few 
 vears. 
 
 ft 
 
 On the other hand, it is usually advantageous to possess 
 a convertible stock. Here the option is with the stock- 
 holder, not with the company. The Reading Company's sec- 
 ond preferred stork is an exception, being convertible into 
 one-half first preferred and one-half common at par on vote 
 of the directors. As the common is now selling about $30 
 above its par of $50, and the first preferred only a little 
 below i)ar, the ccmvertible feature is valuable, and explains 
 why the second preferred sells at a level considerably above 
 the first. There is, however, a clause that is seldom repro- 
 
272 JOHN ADAMS 
 
 TABLE OF CALLABLE PREFERRED STOCKS. 
 
 Railroads. Time. Price. Remarks. 
 
 Chicago Gr. Western Par and div'nds "If and jvhen al- 
 lowed by law." 
 
 Erie, 1st and 2d p'fd Par 
 
 Hocking Valley Par 
 
 Reading. 1st p'fd Par 
 
 Reading. 2d p'fd Par "If and when al- 
 
 lowed by law." 
 
 Seaboard Co., 1st p'fd Par 
 
 Seaboard Co.. 2d p'fd. .\fter 1912 no "Provided 1st pre- 
 
 ferred has been 
 redeemed or <-■•" 
 Industrials. verted." 
 
 American Cotton Oil 105 
 
 Am. Cities Ry. and 
 
 Light On any dividend 
 
 date 107} and div'nds 
 
 Am. Smelters, Sees. 
 
 "B" .^fter 19.30 Par 
 
 Amcr. Typefounders. On 30 days' notice. 105 "Only by vote of 
 
 two-thirds of di- 
 rectors." 
 
 Borden's Cond. Milk 110 ".All. or any." 
 
 Consolidated Gas. of 
 
 Baltimore 120 and div'nds 
 
 Dominion Coal and 
 
 Iron After May 1. 1910. 125 and div'nds If not previously 
 
 converted into 
 Dominion Iron and common. 
 
 Steel On 3 mo's' notice. 115 and div'nds Sul)ject to conver- 
 
 sion for 30 days 
 after notice. 
 General .Asphalt On 90 days' notice. 110 Subject to conver- 
 
 sion during pe- 
 Michigan State Tele- riod of noti.c 
 
 phone Feb. 1 of any year. Par and div'nds 
 
 National Lead Par 
 
 Sears, Roebuck A- Co 125 and div'nds "All, or any." 
 
 United Railways In- 
 vestment 110 and div'nds 
 
 diicod in statistioal works, i. o., tliat the socoiul is callaUc at 
 par, "if and when allowed by law," which is apparently 
 nnkno^^^^. or if known, disre,c:arded, by those who keep the 
 second preferred at its present price level, in the hope that 
 the directors will allow conversion. It reminds one of the 
 story, probably nntrno, that ^\v. TTarriman did not know. 
 
STOCKS AND THEIR FEATURES 273 
 
 when he bought Northern Pacific preferred that the stock 
 could be called before the directors took that action. Cer- 
 tain it is that their power so to do was never paraded before 
 the public, and it lay, a secret to the "outsiders," in the re- 
 cesses of the railroad's charter. 
 
 lAjnong industrials, Allis-Chahners preferred stock is 
 convertible into common at par, but, of course, no one is 
 doing so, as the common is selling around 12, and the pre- 
 ferred about 40. Associated Merchants first preferred stock 
 is convertible into second preferred or common stock at par 
 while the books are open; Dominion Coal preferred, into 
 common at par before May 1, 1910 ; and Dominion Iron and 
 Steel preferred into common at par, and at any time. Elec- 
 tric Storage Battery allows conversion on the same terms 
 as the Dominion Iron and Steel Company, and practically 
 all of the preferred has been converted. The General 
 Asphalt Company allows conversion on the basis of $150 
 common stock for $100 preferred ; and the Hudson & ]\Ian- 
 hattan Railway, into common at 110. The list is not so long 
 as that of the callable preferred issues. Southern Pacific, 
 on July 15, 1909, gave its preferred stockholders three 
 options; $115 in cash, or $20 cash and $100 in 4J per 
 cent twenty-year debenture bonds, or conversion into com- 
 mon, par for par. Practically all of the holders of the 
 preferred issue availed themselves of the conversion privi- 
 lege. The holders took a stock paying one per cent less 
 dividend than they formerly received, but the company has 
 as large possibilities before it as Union Pacific did a few 
 years ago, and they undoubtedly will be rewarded in the end, 
 for they now have a "general" stock, which has the right to 
 all earnings after interest charges have been met. The con- 
 version feature as attached to bonds is old and much em- 
 ployed, but when connected "^^ith preferred stocks is com- 
 paratively recent, and has been criticised in court decisions. 
 
 The participating feature of certain preferred stocks is 
 comparatively unknown to the public; yet it is of the ut- 
 
 B.VII— 18 
 
274 JOHN ADAMS 
 
 most importance, for it is practically only in this class of 
 pref('r]-('d storks tliat the ImldcM* has an inponio unlimited 
 cxce])t l)v tile (•(iin})any's earning ixtwcr. In cumulative 
 preferred stocks he is nearly always limited to his fixed per- 
 centacje, ]mi hci-c he shares with the common stock, the sur- 
 plus remaining: after a certain amount has heen paid on that 
 class. Following is a table showing the principal railroad 
 and industrial com]^anies that have included this feature, 
 togethei" with the terms of the participation : 
 
 TABLE OF PARTICIPATING PREFERRED STOCKS. 
 
 Then 
 
 Railroads. Preferred Common After Which. 
 
 Receives. Receives. 
 
 Buffalo, Roch. & Pittsbg 6% 6% Both share pro rata. 
 
 C, M. & St. Paul 7% 7% Both share pro rata. 
 
 Chicago & Northwestern .... 7% 7% Preferred 37f , then common 
 
 3%, then share pro rata. 
 
 C. St. P.. M. & 7% 7% Both share pro rata. 
 
 Hocking Valley 4% 4% Both share pro rata. 
 
 Iowa Central 5% 5% Both share pro rata. 
 
 Lake Eric & Western 6% 6% Both share pro rata. 
 
 Minn. & St. Louis 5% 5% Both share pro rata. 
 
 M.. St. P. & S. S. M 7% 7% Both share pro rata. 
 
 X. Y. C. & St. L.. 1st p'f'd 57o 5% Second preferred .'i'^o. then 
 
 all share. 
 
 Pittsburg, Clcv., Cin. & St. Preferred S^r. then common 
 
 Louis 4% 3% 5%, then share. 
 
 Wabash 7% 7% Both share equally. 
 
 Wisconsin Central 4% 4% Both share equally. 
 
 Industrials. 
 
 Allis-Chalmcrs 7% 7% Preferred receives X'^i extra. 
 
 Associated Merchants. 1st and 
 
 2d preferred 7% 7% Both preferreds receive J/o 
 
 for each 1% paid on com- 
 mon over 7%. 
 
 Consolidated Traction 6% 6% Both share equally. 
 
 Electric Storage Battery 1% 1% Both share equally. 
 
 Pacific Coast. 2d preferred 49o 4% Both share equally. 
 
 Westinghousc Electric 7% 7% Both share equally. 
 
 Among the railroads, Chicago & North Western preferred 
 stock is now receiving 1 per cent additional, and the same 
 is true of the Pittsburg, Cincinnati, Chicag*^ & St. Louis 
 
STOCKS AND THEIR FEATURES 275 
 
 Railroad. In the industrials, Pacific Coast second preferred 
 is now on a 5 per cent basis with the common; Electric 
 Storage Battery has 4 per cent paid to it instead of one per 
 cent ; AVestinghouse Electric for four years before the panic 
 of 1907, which threw it into the hands of a receiver, was paid 
 10 per cent, and is now paying its regular 7 per cent. In 
 a few of these companies, such as Allis-Chalmers of Wa- 
 bash, the participation feature is of little value, as there is 
 small chance that earnings will ever permit of any pay- 
 ments at all on the common. How^ever, most of the corpora- 
 tions, whose preferred stocks are not now participating with 
 the common, are paying regular dividends on their senior 
 issue, and there is a fair prospect that in time, as the coun- 
 try develops and grows richer, the earnings will so increase 
 that the right to participate with the common in surplus 
 earnings will be a valuable feature of the preferred. The 
 same remarks apply to conversion, which may not be ad- 
 visable now, but which, with the onward march of this 
 "bull" country, as it has frequently been termed, will in 
 the future become a prized feature of stock that has been 
 bought for the "long pull." 
 
 Following our classification of stocks we may now con- 
 sider those stocks which are analogous to preferred. The 
 first of these is interest-bearing stock which is really only 
 another name for preferred stock. For interest (instead 
 of dividends) must be paid upon it before there can be any 
 disbursements on the common. Paradoxical as it may seem 
 to the idea of a stock contrasted with that of a l)()iid, the 
 payment of interest may be enforced at law, as the sub- 
 scription to the stock is regarded "as a contract in tlie nature 
 of an agreement to pay a dividend, but is lawful only when 
 it can be construed as requiring pa^inent of such interest 
 from profits alone." Such issues are obsolete today. There 
 is no reason, however, why a corporation should not issue 
 such stock, should it deem it ad\isable. From the records 
 we have selected the following examples: 
 
276 JOHN ADAMS 
 
 Detroit & ^Milwaukee, acquired by the Great Western 
 of Canada, wliich in turn was absorbed by the Grand Trunk. 
 
 Cleveland & Toledo, leased to the Cleveland, Painesville 
 & Ashtabula, which was consolidated with the Lake Shore. 
 
 Vermont &: ^fassachusetts, leased to Boston & Elaine. 
 
 Pittsburi]: & Connellsville, merged with the Baltimore 
 <^' Oliio. 
 
 Pittshurc: &: Stouhensville, acquired by the Steubens- 
 ville & Indiana, whifh was taken over by the Pittsburg, 
 China s:o & St. Louis, which was ultimatelv absorbed bv the 
 Pennsylvania Company. 
 
 Ti'oy & Greenfield, acquirod by the Troy & Boston, which 
 was taken over by the Fitchburg, which in turn was leased 
 to the Boston S: "^^aine. 
 
 All of the above companies were comparatively small, 
 mid all have been absorbed by larger systems, generally leav- 
 ing no trace of their stock. Consequently, the subject is 
 of but little more than academic interest. 
 
 ''Special stock" is a creation of certain ^Lassachusetts 
 statutes, especially the Acts of 1855 and 1882. Lender the 
 latter enactment, manufacturing ''and other corporations,'' 
 by vote of three-quarters of their stockholders at a meeting 
 called especially for this purpose, may authorize "special 
 stock," which must never exceed two-thirds of the actual 
 capital, bearing semi-annual dividends not exceeding 4 per 
 cent and subject to redemption at par after a fixed date, 
 which must be expressed on the certificate. The holder 
 of such stock is in no case liable for the debts of the coi-pora- 
 tion. Instances of such stock crop out now and then be- 
 cause of lawsuits over the rights of their holders, but as 
 these generallv onlv occur after the iusolvencv of the cor- 
 poratiou, they are of little use if we wish a present example. 
 The Boston Machine Company had such stock, as did th* 
 Greenfield Tool Company, but both are defunct. The near- 
 est modei-n analogy is a callable preferred stock, but it also 
 resembles in some wavs a short-term note, for the oblicration 
 
STOCKS AND THEIR FEATURES 277 
 
 to pay dividends is absolute, not, as in interest-bearing or 
 ordinary preferred stock, contingent on there being suiB- 
 cient profits so to do, and it is also usually redeemable in a 
 short time. 
 
 "Guaranteed stock" is a term properly applied to the 
 stock of a company, the dividends on which are guaranteed 
 by another corporation, provided there are sufficient earn- 
 ings to meet them, but not otherwise. It is sometimes er- 
 roneously employed as describing preferred stock, i. e., the 
 corporation giiaranteeing the dividends on its own stock. 
 Guaranteed stocks usually arise from a consolidation or 
 lease of one road, or industrial corporation, with or to an- 
 other, and are much more frequently found in the case of 
 railroads than industrials. A" full list of all the guaranteed 
 stocks in the country would occupy pages, and thus only a 
 few important examples are given : 
 
 Railroad. Guarantor. Terms. 
 
 Catawissa Reading 5% on stock, and $8,000. 
 
 Central of Vermont Grand Trunk Traffic guarantee. 
 
 Cleveland & Pittsburg Penna 7% on stock, and bond in- 
 terest. 
 
 Concord & Montreal B. & M 77c on stock. 
 
 Delaware P. W. & B. (Penna.) . . Net earnings. 
 
 Fitchburg B. & M 5% on preferred, 1% on 
 
 common, bond interest 
 and expenses. 
 
 Old Colony N. Y., X. H. & H 77c. and stock convertible 
 
 into New Haven. 
 
 Pittsburg. Ft. Wayne, etc. . . Penna 7% on stock and on "special 
 
 improvement," etc. 
 
 Among industrial corporations guarantees of stock are 
 rare. American Smelters Securities, preferred "B," is the 
 only example of importance. They are generally confined 
 to public service corporations. Most guarantees are suc- 
 cessful—the guarantor maintaining the di\idends promised. 
 Some are not, but there are few as bad as the lease of the 
 Pere Marquette to the Cincinnati, Hamilton & Dayton for 
 999 years, in March, 1905, for 5 per cent on the common 
 and 4 per cent on the preferred of the former, both com- 
 
278 JOHN ADAMS 
 
 panics goiiij^ info tlio liaiids of a receiver in Deeeniber of 
 the same year. Tlie lease was subsequently annulled. Tt 
 ar;,nies a close study of the earnin<^s and finan<'ial condition 
 of the com[)any itself, a careful scrutiny of the affairs of 
 the guarantor, and not the mere acceptance of the word 
 ''guarantee" as proof of the possession of a gilt-edged in- 
 vestment. 
 
 The leased-line stock of the Illinois Central, amounting 
 to $10,000,000, and paying 4 per cent, secured by the deposit 
 of stocks of ecpial value, comjxared with $123.5.") '2.000 com- 
 mon, may be said, in a sense, to be *', guaranteed," though it 
 is not within the definition given above. Similarly, the 
 stocks with provisions for the accunuilation of special 
 funds, or surpluses, mentioned before, have something in 
 the nature of a guarantee, though they are evidently not 
 
 li 
 
 guaranteed." 
 
 ''Founders' stock" is practically unkno-^Ti in this coun- 
 try. Xo instance can be found in the manuals, though it 
 may exist in small corporations. Briefly, it may ])e said to 
 be stock ranking ahead of preferred, entitled to a certain 
 fixed dividend and then to a certain proporti(Ui of the sur- 
 l)lus after dividends on all classes have been paid. As- 
 sume a corpoiation with $100,000 G per cent founders' 
 stock, $4,900,000 G per cent preferred, and 5,000,000 conunon 
 stoek, and a balance for dividends for the year of $1,000,- 
 000, The founders' stock would receive $6,000, the pre- 
 ferred $294,000, and the ccmunon, say, $250,000. The sur- 
 plus for the yeai- would then be $450,000. The founders' 
 stock is entitled to a certain ]u-oporti(Ui of this — tixed by 
 the articles of incorj)oration— usually one-quarter to (Uie- 
 half. Thus, in addition to its 6 per cent, this class would 
 be ].aid fr(»m $112,500 to $225,000. making an extra divi- 
 dend of from ^V1\ to 225 per cent, according to the pro])or- 
 tion of the sur]ilus it would receive. If we were to capi- 
 talize the last figui'e at G ])er cent, the stock would be worth 
 about $3,800 a share. There ar<' other provisions concerning 
 
STOCKS AND THEIR FEATURES 279 
 
 the method of arriving at the amount to be distributed in 
 dividends, but this is the most usual. It was formerly com- 
 mon in England, but is now looked upon with disfavor. 
 Such stock is usually given to promoters, or to persons of 
 iulluence in consideration of their lending the weight of 
 their names to new corporations, and is, naturally, highly 
 valued by its fortunate possessors. Under the laws of New 
 Jersev it is legal to create such stock. 
 
 Having described the various classes of preferred stocks 
 and their characteristics, and those analogous to preferred 
 issues, there still remains for discussion the so-called de- 
 benture stock. This class of stock mav be said to be on the 
 margin between mortgage bond issues and regular stock 
 issues. To the ordinary person a "debenture" signifies a 
 non-mortgage bond. But it is also used to describe a stock. 
 The whole amount secured mav be *' treated as borrowed 
 capital consolidated into one mass for the sake of conven- 
 ience," and certificates issued entitling the holder "to a cer- 
 tain sum, part of this mass." It differs from stock in that 
 the company promises, generally in the form of a covenant, 
 to pay interest on specified dates. This interest has priority 
 over dividends on any class of stock whatever, whether guar- 
 anteed or not. Such issues are common in England and 
 Canada, but rare in the United States, though debenture 
 bonds are well known here. The old Chicago Great Western 
 Railway had such an issue, which, as it sh(Mild, fared much 
 better in the reorganization than either of the preferred 
 stocks. The Green Bav & AVestern Railroad has two classes 
 of debentures-class "A," $600,000; class "B," $7,000,000 
 —compared with $2,500,000 of common stock. The Cana- 
 dian Pacific, also, has a large issue of irredeemable del)entur(' 
 stock — for such stock may l^e thus issued, or with provisions 
 providing for redem]^tion after a certain date. The Cana- 
 dian Northern Ontari<^ has debentures to be paid off in 
 1936, while those of the Canadian Noi-thern Quebec are per- 
 petual. 
 
280 JOHN ADAMS 
 
 Throiipfhout this classification nothing has been ?aid of 
 values, the present task being mainly one of ex]")osition, and 
 not of advice. In closing, we express the hope that intend- 
 ing purchasers will look well to the class of stock in which 
 they contemplate investing, examining all of the provisions 
 of that particular issue, consulting, if necessary, the articles 
 of incoi']:>oration of the company. Only by knowing the 
 provisions of the stock certificate— is it callable or con- 
 vertible, participating or not, preferred as to assets, etc., and 
 any other special features that may exist— can an investor 
 be prepared, not only to avoid losses, but to gain safety and 
 profits. A fundamental error in regard to the features of 
 the stock may defeat the results of the most painstaking 
 analysis of value, and when such provisions can usually be 
 so easily ascertained, there is no reason for encountering 
 risks, or allowing profits to escape that might otherwise 
 accrue. 
 
STOCK MARKETS AND EXCHANGES. 
 
 FROM OFFICIAL REPORT ON NEW YOR5C STOCK EXCHANGE. 
 
 The Subject in General. 
 
 Markets have sprung into being wherever buying and 
 selling have been conducted on a large scale. Taken in 
 charge by regular organizations and controlled by rules, 
 such markets become exchanges. In New York City there 
 are two exchanges dealing in securities and seven in com- 
 modities. In addition there is a security market, without 
 fixed membership or regular officers, known as the "Curb." 
 The exchanges dealing in commodities are incorporated, 
 while those dealing in securities are not. 
 
 Conmiodities are not held for permanent investment, 
 but are bought and sold primarily for the purpose of com- 
 mercial distribution ; on the other hand, securities are pri- 
 marily held for investment; but both are subjects of specu- 
 lation. Speculation consists in forecasting changes of value 
 and buying or selling in order to take advantage of them ; it 
 may be wholly legitimate, pure gambling, or something 
 partaking of the qualities of both. In some form it is a nec- 
 essary incident of productive operations. When carried on 
 in connection with either commodities or securities it tends 
 to steady their prices. Where speculation is free, fluctua- 
 tions in prices, otherwise violent and disastrous, ordinarily 
 become gradual and comparatively harmless. Moreover, so 
 far as commodities are concerned, in the absence of specu- 
 lation, merchants and manufacturers would themselves be 
 forced to carry the risks involved in changes of prices and 
 to bear them in the intensified condition resulting from sud- 
 den and violent fluctuations in value. Risks of this kind 
 which merchants and manufacturers still have to assume are 
 reduced in amount, because of the speculation prevailing; 
 
 281 
 
282 STOCK MARKETS AND EXCHANGES 
 
 and many of these milder risks they are enabk'd, by "hedg- 
 ing," to transfer to others. For the merchant or manufae- 
 tiirer the speculator performs a service which has the effect 
 of insurance. 
 
 In law, speculation becomes gam])lin^ when the trading 
 which it involves does not lead, and is not intended to lead, 
 to the actual passing from hand to hand of the property 
 dealt in. Thus, in the recent case of Hurd v. Taylor (181 
 N. Y., 231), the Court of Appeals of Xew York said : 
 
 "The law of this State as to the purchase and sale of 
 stocks is well settled. The imrchase of stocks through a 
 broker, though the party ordering such purchase does not 
 intend to hold the stocks as an investment, but expects the 
 broker to carry them for him with the design on the pai't of 
 the jmrchaser to sell the stocks again when their market 
 value has enchanced, is, however speculative, entirely legal. 
 Equally so is a 'short sale,' where the seller has not the stock 
 he assumes to sell, ])ut borrows it and ex]iects to re]dace it 
 when the market value has declined. But to make such 
 transactions legal, they must contemplate an actual pur- 
 chase or an actual sale of stocks by the broker, or through 
 him. If the intention is that the so-called broker shall pay 
 his customer the difference between the market price at 
 which the stocks were ordered purchased and that at wliich 
 they were ordered sold, in case such fluctuation is in favor 
 of the customer, or that in case it is against the custouior, 
 the customer shall pay the broker that difference, no ])ur- 
 chases or sales being made, the transaction is a wmlici' and 
 therefore illegal. Such business is merely gainl»ling, in 
 which the so-called commission for ])iirchases and sales that 
 are never made is simply the percentage which in other 
 gambling games is reserved in favor of the keeper of the 
 establishment." 
 
 This is also the law respecting commodity transactions. 
 
 The rules of all the exchanges forbid gambling as defined 
 by this opinion; but they make so easy a technical delivery 
 
STOCK MARKETS AND EXCHANGES 283 
 
 of the property contracted for that practical effect of much 
 speculation, in point of form legitimate, is not greatly differ- 
 ent from that of gambling. Contracts to buy may be pri- 
 vately offset by contracts to sell. The offsetting may be 
 done, in a systematic way, by clearing houses, or by "ring 
 settlements. ' ' Where deliveries are actually made, property 
 may be temporarily borrowed for the purpose. In these 
 ways speculation which has the legal traits of legitimate 
 dealimi- mav Qo on almost as freelv as mere wagering, and 
 may have most of the pecuniary and immoral effects of 
 gambling on a large scale. 
 
 A real distinction exists between speculation which is 
 carried on by persons of means and experience, and based 
 on an intelligent forecast, and that wiiich is carried on by 
 persons without these qualifications. The former is closely 
 connected with regular business. While not unaccompanied 
 by waste and loss, this speculation accomplishes an amount 
 of good which offsets much of its cost. The latter does but 
 a small amount of good and an almost incalculable amount 
 of evil. In its nature it is in the same class with gambling 
 upon the race-track or at the roulette table, but is practiced 
 (m a vastly larger scale. Its ramifications extend to all parts 
 of the country. It involves a practical certainty of loss to 
 those who engage in it. A continuous stream of wealth, 
 taken from the actual ca])ital of innumerable persons of rel- 
 atively small means, swells the income of brokers and oper- 
 ators dependent on this class of business; and in so far as it 
 is consumed like most income, it represents a waste of cap- 
 ital. The total amount of this waste is rudely indicated by 
 the obvious cost of the vast mechanism of brokerage and by 
 mani])ulators' gains, of both of which it is a large constitu- 
 ent element. If there were not a continuous infiux of new 
 customers, re])la<iiig those whose losses force them out of 
 the "Street," this costly mechanism of speeulation could 
 not possibly be maintained on anything like its present 
 scale. 
 
284 STOCK MARKETS AND EXCHANGES 
 
 The Problem to Be Solved. 
 
 The problem, wherever speculation is strongly rooted, 
 is to eliminate that which is wasteful and morally destruc- 
 tive, while retainin.c: and allowing free play to that which is 
 beneficial. The difliculty in the solution of the problem lies 
 in the practical impossibility of distinguishing what is virtu- 
 ally gambling from legitimate speculation. The most fruit- 
 ful policy will be found in measures which will lessen specu- 
 lation by persons not qualified to engage in it. In carrying 
 ont such a policy exchanges can accom])lish more than legis- 
 latures. In connection with our reports on the different ex- 
 changes, as well as on the field of investment and speculation 
 which lies outside of the exchanges, we shall make recom- 
 mendations directed to the removal of various evils now ex- 
 isting and to the reduction of the volume of speculation of 
 the gambling t^-^^e. 
 
 The New York Stock Exchange. 
 
 The Xow York Stock Exchange is a voluntary associa- 
 tion, limited to 1.100 meml^ers, of whom about 700 are ac- 
 tive, some of them residents of other cities. Mt'Uiber- 
 ships are sold for about jfSO.OOO. The Exchange as sucli 
 does no business, merely providing facilities to mem- 
 bers and regnlating their conduct. The governing power is 
 in an elected committee of fortv members and is plenary in 
 scope. The business tran.sacted on the floor is the purchase 
 and sale of stocks and bonds of corporations and govern- 
 ments. Practically all transactions must be com]ileted by 
 deliveiy and payment on the following day. 
 
 The mechanism of the Exchange, provided by its consti- 
 tution and rules, is the evolution of more than a century. 
 An organization of stock brokers existed here in 1792, 
 acquiring more definite fc^i-m in 1S17. It seems certain that 
 for a long period the members were brokers or agents only; 
 at the present time many are principals as well as agents, 
 
STOCK MARKETS AND EXCHANGES 285 
 
 trading for themselves as well as for their customers. A 
 number of prominent capitalists hold memberships merely 
 for the purpose of availing themselves of the reduced com- 
 mission charge which the rules authorize between mem- 
 bers. 
 
 The vohmie of transactions indicates that the Exchange 
 is today probably the most important financial institution 
 in the world. In the past decade the average annual sales 
 of shares have been 196,500,000, at prices involving an an- 
 nual average turnover of nearly $15,500,000,000 ; bond trans- 
 actions averaged about $800,000,000. This enonnous busi- 
 ness affects the financial and credit interests of the country 
 in so large a measure that its proper regulation is a matter 
 of transcendent importance. While radical changes in the 
 mechanism, which is now so nicely adjusted that the trans- 
 actions are carried on with the minimum of friction, might 
 prove disastrous to the whole country, nevertheless meas- 
 ures should be adopted to correct existing abuses. 
 
 Patrons of the Exchange. 
 
 The patrons of the Exchange may be divided into the 
 following gi'oups : 
 
 (1) Investors, who personally examine the facts relating 
 to the value of securities or act on the advice of reputable 
 and experienced financiers, and pay in full for what they 
 buv. 
 
 (2) Manipulators, whose connection with corporations 
 issuing or controlling particular securities enables them 
 under certain circumstances to move the prices up or down, 
 and who are thus in some degree protected from dangers 
 encountered by other speculators. 
 
 (3) Floor traders, who keenly study the markets and 
 the general conditions of business, and acquire early infor- 
 mation concerning the changes which affect the values of 
 securities. From theii' familiarity with the technique of 
 dealings on the Exchange, and ability to act in conceii" with 
 
286 STOCK MARKETS AND EXCHANGES 
 
 others, and thus iiiauipiUate values, they are supposed to 
 liave special advantages over other traders. 
 
 (4) Outside operators havi^ig cajntal, experience, and 
 knowledge of the general conditions of business. Testimony 
 is clear as to the result which, in the long run, attends their 
 operations; connnissions and interest charges constitute a 
 factor always working against them. Since good luck and 
 bad luck alternate in time, the gains only stinmlate these 
 men to larger ventures, and they persist in them till a se- 
 rious or ruinous loss forces them out of the ** Street." 
 
 (5) Inexperienced persons, who act on interested advice, 
 "tips," advertisements in newsjiapers, or circulars sent by 
 mail, or ''take flyers," in absolute ignorance, and with blind 
 confidence in their luck. Almost without exception they 
 eventually lose. 
 
 Character of Transactions. 
 
 It is unquestionable that only a small part of the trans- 
 actions upon the Exchange is of an investment character; 
 a substantial part may be characterized as virtually gam- 
 bling. Yet we are iniable to see how the State could distin- 
 guish by law between proper and improjicr transactions, 
 since the forms and the mechanisms used are identical. 
 Rigid statutes directed against the latter would seriously 
 interfere with the former. The experience of Germany and 
 similar legislation is illuminating. But the Exchange, with 
 the plenary power over members and their operations, could 
 provide correctives, as we shall show. 
 
 Margin-Trading. 
 
 Purchasing securities on margin is as legitimate a trans- 
 action as a purchase of any othei- pro]ierty in which part 
 pa}nnent is deferred. We therefore see no reason whatso- 
 ever for recommending the radical change suggested, that 
 margin-trading be ]irohibited. 
 
 Two practices are prolilic of losses, namely, buying active 
 
STOCK MARKETS AND EXCHANGES 287 
 
 securities on small margins and buying unsound securities, 
 paying for them in full. The losses in the former case are 
 due to the quick turns in the market, to which active stocks 
 are subject; these exhaust the margins an<l call for more 
 money than the purchasers can sui)])ly. The losses in the 
 latter case are largely due to misrepresentations of inter- 
 ested parties and unscrupulous manipulations. 
 
 To correct the evident misrepresentation and manii)uhi- 
 tion, we shall offer in another part of this report certain rec- 
 ommendations. In so far as losses are due to insufficient mar- 
 gins, they would be materially reduced if the customary per- 
 centage of margins were increased. The amount of mar- 
 gin which a l)roker requires from a speculative buyer of 
 stocks depends, in each case, on the credit of the buyer; and 
 the amount of credit wliicli one person may extend to an- 
 other is a dangerous subject on which to legislate. Upon 
 the other hand, a rule made by the Exchange could safely 
 deal with the prevalent rate of margins required from cus- 
 tomers. In preference, therefore, to recommending legisla- 
 tion, we urge upon all brokers to discourage specidation up- 
 on small margins, and upon the Exchange to use its in- 
 fluence, and, if necessary, its power, to prevent members 
 from soliciting and generally accepting business on a less 
 margin than 20 per cent. 
 
 Pyramiding. 
 
 ^'Pyramiding," whicli is the use of paper profits in stock 
 transactions as a mai'gin for further connnitments, should 
 be discouraged. The practice tends to produce more ex- 
 treme fluctuations and more rai)id wi])ing out of margins. 
 If the stock ])rokers and the l)anks would make it a nde 
 to value securities for the purpose of margin or collateral, 
 not at the current price of the moment, but at the average 
 price of, say, the previous three months (])rovided that such 
 average price were not higher than the price of the moment), 
 the dangers of i^yramidiug would be largely prevented. 
 
288 STOCK MARKETS AND EXCHANGES 
 
 Short-Selling. 
 
 TTc have been strongly urged to advise the prohibition 
 or limitation of short sales, not only on the theory that it is 
 wrong to agree to sell what one does not possess, but that 
 sueh sales reduce the market price of the securities involved. 
 We do not think, that it is WTong to agree to sell something 
 that one does not now possess, but expects to obtain later. 
 Contracts and agreements to sell, and deliver in the future, 
 property which one does not possess at the time of the con- 
 tract are common in all kinds of business. The man who has 
 **sold short" must some dav buv in order to return the stock 
 which he has borrowed to make the short sale. Short-sellers 
 endeavor to select times when pi'ices seem high in order to 
 sell, and times when prices seem low in order to buy, their 
 action in both cases serving to lessen advances and diminish 
 declines of price. Tn other words, short-selling tends to pro- 
 duce steadiness in prices, which is an advantage to the com- 
 munity. No other means of restraining unwarranted mark- 
 ing up and down of prices has been suggested to us. 
 
 The legislation of the 9>f(\fo of New York on the subject 
 of short-selling is significant. Tn 1812 the Legislature 
 passed a law declaring all contracts for the sale of stocks 
 and l)onds void, unless the seller at the time was the actual 
 o\\'ner or assignee thereof or authorized l)y such o^^^ler ov 
 assignee to sell the same. Tn 1S58 this act was repcnled by 
 a statute now in force, which i-eads as follows: 
 
 **An agreement for the purchase, sale, transfer or deliv- 
 erv of a certificate or other evidence of debt, issued bv the 
 United States or ]\v any State, or municipal or other cor- 
 poration, or any share or interest in the stock of any bank, 
 corporation or joint-stock association, incorporated or or- 
 ganized under the laws of the United States or of any State, 
 is not void, or voidable, because the vendor, at the time of 
 making such contract, is not the owner or possessor of the 
 certificate, or certificates, or other evidence of debt, share or 
 interest.*' 
 
STOCK MARKETS AND EXCHANGES 289 
 
 It has been urged that this statute "specifically legalizes 
 stock gambling." As a matter of fact, however, the law 
 would be precisely the same if that statute were repealed, 
 for it is the well-settled common law of this country, as 
 established by the decisions of the Supreme Court of the 
 United States and of the State courts, that all contracts, 
 other than mere wagering contracts, for the future purchase 
 or sale of securities or commodities are valid, whether the 
 vendor is, or is not, at the time of making such contract, 
 the OA^Tier or possessor of the securities or commodities in- 
 volved, in the absence of a statute making such contracts ille- 
 gal. So far as any of these transactions are mere wagering 
 transactions, they are illegal, and not enforceable, as the 
 law now stands. 
 
 It has been suggested to us that there should be a re- 
 quirement either by law or by rule of the Stock Exchange, 
 that no one should sell anv securitv without identifving it 
 bv numljer or otherwise. Such a rule would cause great 
 practiciil difficulties in the case of securities not present 
 in New York at the time when the owner desires to sell them, 
 and would increase the labor and cost of doing business. 
 But, even if this were not the effect, the plan contemplates a 
 restriction upon short sales, which, for the reasons set forth 
 above, seems to us undesirable. It is true that this identifi- 
 cation plan exists in England as to sales of bank shares 
 (Leeman act of 1867) ; but it has proved a dead letter. It 
 has also been used in times of apprehended ]')nuic up(tu the 
 French Bourse, but ()i)ini()iis in regard. to its effect there 
 are conflicting. AVhile some contend that it has been useful 
 i]i ]^reventing ]^anics, others affirm that it has bcf^n used 
 simply for the "i^urpose of protecting bankers who were 
 loaded down with certain securities whirli they were try- 
 ing to distribute, and who, through ])olitic<il influence, pro- 
 cured the adoption of the rule for their special benefit. 
 
 B.VII— 19 
 
290 STOCK MARKETS AND EXCHANGES 
 
 Manipulation of Prices. 
 
 A subject to which we have devoted mucli time and 
 thoiic:ht is that of the iiiaiiii)ulation of prices by ][\v'j:o in- 
 terests. This falls intu two general classes: 
 
 (1) Tliat whioh is resorted to for the purpose of mak- 
 ing a market for issues of new securities. 
 
 (2) Tliat which is designed to serve merely specula- 
 tive purposes in the endeavor to make a profit as the result 
 of fluctuations which have been planned in advance. 
 
 The first kind of manipulation has certain advantages, 
 and wIk^u not accompanied by '' matched orders" is un- 
 ol)jectionable per se. It is essential to the organization and 
 carrying through of imi)ortant enterprises, such as largo 
 corporations, that the organizers should be able to raise 
 the money necessary to complete them. This can be done 
 onlv bv the sale of securities. Large blocks of securities, 
 such as are frequently issued by railroad and other com- 
 panies, cannot be sold over the counter or directly to the 
 ultimate investor, whose confidence in them can, as a rule, 
 be o7ilv gradually established. They nmst, theref(U*e, if sold 
 at nil, I»t' disposed of to some syndicate, who will in turn 
 pass tlicHi f'H 1<> uiiddlcUK'n or speculators, until, in the 
 course of tim(\ they find their way into the boxes of inves- 
 tors. But })rudent investors arc not likely to be induci'il 
 to buy securities which are not regularly quoted on some 
 exchange, and which they cannot sell, or on which they can- 
 not borrow money at their pleasure. If the securities are 
 really good and bids and offers bona fide, open to all sellei-s 
 aTul buyers, the operation is harmless. It is merely a method 
 of bri]iging new investments into ]niblic notice. 
 
 Till' second kind of manijudation mentioned is undoubt- 
 edly o])en to serious cviticisui. It h;is for its objoct cither 
 the creation of high ]iriccs for ])articular stocks in order to 
 draw in the ]iulilic as luiyers and t<» unload u]ion them the 
 holdings of the operators, or to depress the prices and in- 
 
STOCK MARKETS AND EXCHANGES 291 
 
 duco the public to sell. There have been instances of gross 
 and unjustifiable manipulation of securities, as in the case 
 of American Ice Stock. While we have been unable to dis- 
 cover any complete remedy short of abolishing the Stock 
 Exchange itself, we are convinced that the Exchange can 
 prevent the worst forms of this evil by exercising its in- 
 fluence and authority over the members to prevent them. 
 AVhen continued manipulation exists it is patent to expe- 
 rienced observers. 
 
 "Wash-Sales" and "Matched Orders.** 
 
 In the foregoing discussion we have confined ourselves 
 to bona fide sales. So far as manipulation of either class 
 is based upon fictitious or so-called "wash-sales," it is open 
 to the severest condemnation, and should be prevented by all 
 possible means. These fictitious sales are forbidden by the 
 rules of all the regular exchanges, and are not enforceable at 
 law. They are less frequent than many persons suppose. A 
 transaction must take place u^Don the floor of the Exchange 
 to be reported, and if not reported does not serve the pur- 
 pose of those who engage in it. If it takes place on the 
 floor of the Exchange, but is purely a pretense, the brokers 
 Involved run the risk of detection and expulsion, which is 
 to them a sentence of financial death. There is, however, 
 another class of transactions called "matched orders, "which 
 differ materially from those already mentioned, in that they 
 are actual and enforceable contracts. "VYe refer to that class 
 of transactions, engineered by some manipulator, who sends 
 a number of orders simultaneously to differnit brokers, 
 some to buv and some to sell. These brokers, without know- 
 incf that other brokers have countervailing orders from the 
 same principal, execute their orders uj^on the floor of the 
 Exchange, and the transactions become binding contracts; 
 they cause an appearance of activity in a certain security 
 which is unreal. Since they are legal and binding, we find 
 a difficulty in suggesting a legislative remedy. But where 
 
292 STOCK MARKETS AND EXCHANGES 
 
 the activities of two or more brokers in certain securities 
 become so extreme as to indicate manipulation rather than 
 genuine transactions, the officers of the Exchange would be 
 remiss unless they exercised their influence and autliority 
 upon such members in a way to cause them to desist from 
 such suspicious and undesirable activity. As already 
 stated, instances of continuous manipulation of particular 
 securities are patent to cvorv experienced obsen'er, and 
 could without difficulty be discouraired, if not prevented, by 
 prompt action on the part of the Exchange authorities. 
 
 Comers. 
 
 The subject of corners in the stock market has engaged 
 our attention. The Stock Exchange might properly adopt 
 a rule providing that the governors shall have power to de- 
 cide when a corner exists and to fix a settlement price, so 
 as to relieve innocent persons from the injury or ruin which 
 may result therefrom. The mere existence of such a rule 
 would tend to prevent corners. 
 
 Failures and Examination of Books. 
 
 We have taken testimony on the subject of recent fail- 
 ures of brokers, where it has been discovered that they were 
 insolvent for a long period prior to the public declaration 
 of failure, and where their activities after their insolvency 
 not only caused great loss to their customers, but also, owing 
 to their efforts to save themselves from bankruptcy, worked 
 great injury to innocent outsiders. For cases of this char- 
 acter there should be a law analogous to that forbidding 
 banks to accept deposits after insolvency is known ; and we 
 recommend a statute making it a misdemeanor for a broker 
 to receive any securities or cash from any customer (except 
 in liquidating or fortifying an existing account), or to make 
 any further purchases or sales for his own account, after 
 he has become insolvent; with the provision that a broker 
 shall be deemed insolvent when he has on his books an ac- 
 
STOCK MARKETS AND EXCHANGES 293 
 
 count or accounts which, if liquidated, would exhaust his 
 assets, unless he can show that he had reasonable ground 
 to believe that such accounts were good. 
 
 The advisability of requiring bj^ State authority an ex- 
 amination of the books of all members of the Exchange, 
 analogous to that required of banks, has been urged upon us. 
 Doubtless some failures would be prevented by such a sys- 
 tem rigidly enforced, although bank failures do occur in 
 spite of the scrutiny of the examiners. Yet the relations 
 between brokers and their customers are of so confidential 
 a nature that we do not recommend an examination of their 
 books by any public authority. The books and accounts of 
 the members of the Exchange should, however, be subjected 
 to periodic examination and inspection pursuant to rules 
 and regulations to be prescribed by the Exchange, and the 
 result should be promptly reported to the governors thereof. 
 
 It is vain to say that a body possessing the powers of the 
 board of governors of the Exchange, familiar with every de- 
 tail of the mechanism, generally acquainted with the char- 
 acteristics of members, cannot improve present conditions. 
 It is a deplorable fact that with all their power and ability 
 to be informed, it is generally only after a member or a 
 fiiTQ is overtaken by disaster, involving scores or hundreds 
 of innocent persons, and causing serious disturbances, that 
 the Exchange authorities take action. No complaint can be 
 registered against the severity of the punishment then 
 meted out ; but in most cases the wrongdoing thus atoned 
 for, which has been going on for a considerable period, might 
 have been discovered under a proper system of supervision, 
 and the vastly preponderant value of prevention over cure 
 demonstrated. 
 
 Rehypothecation of Securities. 
 
 We have also considered the subject of reh^-pothecating, 
 loaning and other use of securities by brokers who hold 
 them for customers. So far as any broker applies to his 
 
294 STOCK MARKETS AND EXCHANGES 
 
 own use any securities belonging to a customer, or hypoth- 
 ecates them for a greater amount tlian the unpaid balance 
 of the purchase price, without the customer's consent, he 
 is undoubtedlv t^uiltv of a conversion under the law as it 
 exists today, and we call this fact to the attention of brokers 
 and the public. When a broker sells the securities |)ur- 
 chased for a customer who has paid therefor in whole or 
 in part, excejjt upon the customer's default, or disposes of 
 them for his own benefit, he should be held guilty of larceny, 
 and we recommend a statute to that effect. 
 
 Dealing for Clerks. 
 
 The Exchange now has a rule forbidding anv member 
 to deal or carrv an account for a clerk or emi)love of anv 
 other member. This rule should be extended so as to pre- 
 vent dealing for an account of any clerk or subordinate em- 
 ploye of any bank, tinjst company, insurance comjiany, or 
 other moneyed cori:)oration or banker. 
 
 Listing Requirements. 
 
 Before securities can be bought and sold on the Ex- 
 change, they must be examined. The committee on Stock 
 List is one of the most important ])arts of the organization, 
 since public confidence depends u])on the honesty, im])ar- 
 tiality, and thorijughness of its W(»rk. While the Exchange 
 does not guarantee the character of any securities, or alTii in 
 that the statements filed by the ])r(>moters are true, it certi- 
 fies that due diligence and caution have been used by ex- 
 perienced men in examining them. Admission to the list, 
 therefore, establishes a presum})tion in t'axor of the sound- 
 ness of the .security so admitted. Any securities authorized 
 to be bought and sold on the Exchange, which have not been 
 subjected to such serutiny, are said to be in the unlisted de- 
 partment, and traders who deal in them do so at their owti 
 ri.sk. We have given consideration to the subject of verify- 
 iug the statements of fact contained in the papers filed with 
 
STOCK MARKETS AND EXCHANGES 295 
 
 the applications for listing, but we do not rcconnnond that 
 either the State or the Exchange take such responsi])ility. 
 Any attempt to do so would undoubtedly give the securities 
 a standing in the eyes of the public which would not in all 
 cases be justified. In our judgment, the Exchange should, 
 however, adopt methods to compel the filing of frequent 
 statements of the financial condition of the companies whose 
 securities are listed, including balance sheets, income and 
 expense accounts, etc., and should notify the public that 
 these are open to examination under proper rules and regu- 
 lations. The Exchange should also require that there be 
 filed with future applications for listing a statement of what 
 the capital stock of the company has been issued for, show- 
 ing how much has been issued for cash, how much for prop- 
 erty, with a description of the property, etc., and also show- 
 ing what commission, if any, has been paid to the promo- 
 ters or vendors. Furthermore, means should be adopted 
 for holding those making the statements responsible for the 
 truth thereof. The unlisted department, except for tem- 
 porary issues, should be abolished. 
 
 Fictitious Trades. 
 
 Complaint is made that orders given by customers are 
 sometimes not actually executed, although so reported by 
 the broker. We recommend the passage of a statute, pro- 
 viding that, in case it is pleaded in any suit by or against a 
 broker that the purchase or sale was fictitious, or was not 
 an actual bona fide purchase or sale by the broker as agent 
 for the customer, the court or jury shall make a special find- 
 ing upon that fact. Tn case it is found that the purchase or 
 sale was not actual and bona fide, the customer shall recover 
 three times the amount of the loss which he sustained there- 
 by; and copies of the finding shall be sent to the district at- 
 torney of the county and to the Exchange, if the broker be 
 a member. 
 
296 STOCK MARKETS AND EXCHANGES 
 
 Unit of Trading. 
 
 The Exchange should insist that all trading be done on 
 the basis of a reasonably small unit (sav 100 shares of stock 
 or $1,000 of bonds), and should not permit the offers of such 
 lots, or bids for such lots, to be ignored by traders offering 
 or bidding for larger amounts. The practice now permitted 
 of allowing bids and offers for large amounts, all or none, 
 assist the manipulation of prices. Thus a customer may 
 send an order to sell 100 shares of a particular stock at par, 
 and a broker mav offer to buv 1,000 shares, all or none, at 
 101, and yet no transaction take place. The bidder in such 
 a case should be required to take all the shares offered at 
 the lower price before bidding for a larger lot at a higher 
 price. This would tend to prevent matched orders. 
 
 Stock Clearing House. 
 
 "We have also considered the subject of the Stock Ex- 
 change Clearing House. \\'hile it is undoubtedly true that 
 the clearing of stocks facilitates transactions which may 
 be deemed purely manipulative, or virtually gambling trans- 
 actions, nevertheless we are of the opinion that the Ex- 
 change could not do its necessary and l(\u:itimate business 
 but for the existence of the clearing system, and, therefore, 
 that it is not wise to abolish it. 
 
 The transactions in stocks which are cleared are trans- 
 scribed each day on what are called "clearing sheets," and 
 these sheets are passed into the Clearing House and there 
 filed for one week only. In view of the value of these sheets 
 as proving the transactions and the prices, they should be 
 preserved by the Exchange for at least six years, and should 
 be at the disposal of the courts, in case of any dispute. 
 
 Specialists. 
 
 We have received complaints that specialists on the floor 
 of the Exchange, dealing in inactive securities, sometimes 
 
STOCK MARKETS AND EXCHANGES 297 
 
 buy or sell for their own account while acting as brokers. 
 Such acts without the principal's consent are illegal. In 
 every such case recourse may be had to the courts. 
 
 Notwithstanding that the system of dealing in special- 
 ties is subject to abuses, we are not convinced that the Eng- 
 lish method of distinguishing between brokers and jobbers 
 serves any better purpose than our own practice, while its 
 introduction here would complicate business. It should also 
 be noted that the practice of specialists in buying and sell- 
 ing for their o^\ti account often serves to create a market 
 where otherwise one would not exist. 
 
 Branch Offices. 
 
 Complaint has been made of branch offices in the city of 
 New York, often luxuriously furnished and sometimes 
 equipped with lunch rooms, cards, and liquor. The ten- 
 dency of many of them is to increase the lure of the ticker 
 by the temptation of creature comforts, appealing thus to 
 many who would not otherwise speculate. The governors of 
 the Exchange inform us that they realize that some of these 
 offices have brought discredit on the Exchange, and that on 
 certain occasions they have used their powers to suppress 
 objectionable features. It seems to us that legitimate inves- 
 tors and speculators might, without much hardship, be com- 
 pelled to do business at the main offices, and that a hard- 
 and-fast rule against all branch offices in the City of New 
 York might well be adopted by the Exchange. In any event, 
 we are convinced that a serious and offoctivo regulaticm of 
 these branch offices is desirable. 
 
 Incorporation of Exchange. 
 
 We have been strongly urged to recommend that the Ex- 
 change be incorporated, in order to bring it more completely 
 under the authority and supervision of the State and the 
 process of the courts. Under existing conditions, being a 
 voluntary organization, it has almost unlimited power over 
 
298 STOCK MARKETS AND EXCHANGES 
 
 the conduct of its iiiciubers, and it ran subject tliein to in- 
 stant discipline for wroncj-doini^, wliicli it could not exercise 
 in a sulnmal'^■ manner if it were an incorporated bodv. AVe 
 think that such ])ower residing in a properly chosen com- 
 mittee is distinctly advantac^a'ous. The submission of such 
 questions to the courts would involve delays and technical 
 obstacles which would im})air discipline without securing 
 anv greater measure of substantial justice. While this com- 
 mittee is not entirely in accord on this point, no meml)er is 
 yet prepared to advocate the incorporation of the Kxchange 
 and a majority of us advise against it, upon the ground that 
 the advantages to be gained by incorporation may be ac- 
 complished by rules of the Exchange and hy statutes aimed 
 directly at the evils which need correction. 
 
 The Stock Exchange in the past, although frequently 
 punisliing infractions of its rules with great severity, has, 
 in our opinion, at times failed to take proper measures to 
 prevent wrongdoing. This has been probably due not only 
 to a conservative miwillingness to interfei'e in the business 
 of others, but also to a spirit of comradeship which is very 
 marked among brokers, and frequently leads them to over- 
 look misconduct on the part of fellow-members, although at 
 the same time it is a matter of cynical gossip and conunent 
 in the street. The public has a right to expect something 
 more than this from the Exchange and its members. This 
 committee, in refraining from advising the incorporation of 
 the Exchange, does so in the ex]iectation that the Exchange 
 will in the future take full advantage of the ]iowers con- 
 ferred ui)on it by its voluntary organization, and will be ac- 
 tive in ])reventing wrongdoing. Then we believe that there 
 will be no serious criticism of the fact tliat it is not incor- 
 ])orated. If, however, wrongdoing recui's, and it a]»]H*ars to 
 the public at large that the Exchange has been derelict in 
 exerting its ])owers and authority to ju'event it, we believe 
 that the ])ublic will insist u]ion the incor]->oration of the Ex- 
 change and its subjection to state authority and sujicrvision. 
 
STOCK MARKETS AND EXCHANGES 299 
 
 Wall Street as a Factor. 
 
 There is a tendeiiev on tlie part of the public to consider 
 Wall Street and the New York Stock Exchange as one and 
 the same thing. This is an error arising from their location. 
 We have taken pains to ascertain what proportion of the 
 ])nsiness transacted on the Exchange is furnished by New 
 York City. Tlu^ only reliable sources of information are 
 the books of the commission houses. An investigation was 
 made of the transactions on the Exchange for a given day, 
 when the sales were 1,500,000 shares. The returns showed 
 that on that day 52 per cent of the total transactions on the 
 Exchange apparently originated in New York City, and 
 48 per cent in other localities. 
 
 The Consolidated Stock Exchange. 
 
 Tlie Consolidated Exchange was organized as a minmg 
 stock exchange in 1875, altering its name and business in 
 1886. Although of far less importance than the Stock Ex- 
 change, it is nevertheless a secondary market of no mean 
 proportions; by far the greater part of the trading Is in se- 
 curities listed upon the main exchange, and prices are based 
 upon the quotations made there. The sales average about 
 45,000,000 shares per annum. Tlie fact that its members 
 make a specialty of ''broken lots," i. e., transactions in 
 shares less than the 100 unit, is used as a ground for the 
 claim that it is a serviceable institution for investors of rel- 
 atively small means. But it is obvious that its utility as a 
 provider of ca]utal for enterprises is exceedingly liuiited; 
 and that it affords faeilities for the most injui-ious form of 
 speculation — that whieh attracts ]iersons of small means. 
 
 It also permits dealing in shares not listed in the main 
 exchange, and in certain mining shares genei-ally excluded 
 from the other. In these cases it prescribes a form of 
 listing requirements, but the original listing of securities is 
 very rarely availed of. Tlie rules also provide for dealing 
 
300 STOCK MARKETS AND EXCHANGES 
 
 in grain, petroleum, and other products. "Wheat is, how- 
 ever, at present the only commodity actively dealt in, and 
 this is due solely to the permission to trade in smaller lots 
 than the Produce Exchange unit of 5,000 hushels. 
 
 There are 1,225 members, about 450 active, and mem- 
 berships have sold in recent years at from $650 to $2,000, 
 In general the methods of conducting business are similar 
 to those of the larger exchange, and subject to the same 
 abuses. 
 
 Very strained relations have existed between the two 
 security exchanges since the lesser one undertook in 1886 
 to deal in stocks. The tension has been increased by the 
 methods by which the Consolidated obtains the quotations 
 of the other, through the use of the ''tickers" conveying 
 them. It is probable that without the use of these instru- 
 ments the business of the Consolidated Exchange would be 
 paralyzed; yet the right to use them rests solely upon a 
 technical point in a judicial decision which enjoins their 
 removal. 
 
 Holding Companies. 
 
 Connected with operations on the Stock Exchange are a 
 class of manipulations originating elsewhere. The values 
 of railway securities, for examjile, depend upon the man- 
 agement of the companies issuing them, the directors of 
 which may use their power to increase, diminish, or even 
 extinguish them, while they make gains for themselves 
 by operations on the exchange. They may advance the 
 price of a stock by an unexpected dividend, or de])ress it 
 by passing an expected one. Tliey may water a stock by is- 
 suing new shares, with no proportionate addition to the 
 productive assets of the company, or load it with indebt- 
 edness, putting an unexpected lien on the shareholders' 
 property. Such transactions affect not only the fortunes 
 of the shareholders, who are designedly kept in ignorance 
 of what is transpiring, but also the value of investments in 
 
STOCK IVIARKETS AND EXCHANGES 301 
 
 other similar companies, the securities of which are affected 
 s^^llpathetically. Railroad wrecking was more common 
 in the last half century than it is now, but we have some 
 glaring examples of it in the debris of our street railways 
 today. 
 
 The existence and misuse of such powers on the part of 
 directors are a menace to corporate property and a temp- 
 tation to officials who are inclined to speculate, leadina; 
 them to manage the property so as to fill their own pockets 
 by indirect and secret methods. 
 
 A liolding company represents the greatest concentra- 
 tion of power in a body of directors and the extreme of 
 helplessness on the part of shareholders. A corporation 
 may be so organized that its bonds and preferred stock 
 represent the gi^eater part of its capital, while the common 
 stock represents the actual control. Then, if a second com- 
 pany acquires a majority of the common stock, or a majority 
 of the shares that are likely to be voted at elections, it 
 may control the fonner company, and as many other com- 
 panies as it can secure. The shareholders of the subsidiary 
 companies may be thus practically deprived of power to 
 protect themselves against injurious measures and even to 
 obtain information of what the holding company is doing, 
 or intends to do, with their property. 
 
 As a first step toward mitigating this evil we suggest 
 that the shareholders of subsidiary companies, which are 
 dominated by holding companies, or voting trusts, shall 
 have the same right to examine the books, records and ac- 
 counts of such holding companies, or voting trusts, that 
 they have in respect of the companies whose shares they 
 hold, and that the shareholders of holding companies have 
 the same right as regards the books, records and accounts 
 of the subsidiary companies. The accounts of companies 
 not merged should be separately kept and separately stat- 
 ed to their individual stockholders, however few they may 
 be. 
 
302 STOCK MARKETS AND EXCHANGES 
 
 Wo may point out the fact that the powers wliidi ]i<»ld- 
 ing c()in])anies now exercise were never contemplated, or 
 ima.2:ined, when joint-stock corporations were first legal- 
 ized. If P.irl lament and legislatures had forseen their 
 growth, ihcy W(»uld June erected harriers against it. 
 
 Receiverships. 
 
 Our attention has heen directed to "the well-known ahus- 
 es frequently accompanying receiverships of large cor- 
 porations, and more esj^ecially puhlic service corporations, 
 and the issue of receivers' certificates. AVe feel that the 
 numerous cases of long drawn-out receiverships, in some 
 instances lasting more than ten years, and of the issue 
 of large amounts of receivers' certificates which takc^ }>re- 
 cedence over even first mortgage bonds, are deserving of 
 most serious consideration. 
 
 Legislation providing for a short-time limitation on 
 receiverships, or for a limitation of receivers' certificates 
 to a small percentage of the mortgage liens on the pro})- 
 ertv, could be rendered unnecessarv, however, bv the ac- 
 tion of the courts themselves along these lines, so as to 
 make common past abuses imi3ossibk' in the future. 
 
 Effects of the Money Market on Speculation. 
 
 Tt has l)een urged that vour eoniniittee consider the in- 
 flueuee of the money market upon security si>eculation. 
 
 As a result of conditions to which the defects of our 
 monetarv and banking svstems chieflv contribute, there 
 is frequently a congestion of funds in New York City, when 
 the supi>ly is in excess of Imsiness needs and tlie accumu- 
 lated sur]dus frrim the entire country generally is thereby 
 set free for use in Ihe speculative market. Tluis there al- 
 most annually occurs an inordinately low rate for "call 
 loans," at times less than one per cent. During the prev- 
 alence of this abnonnally low rate speculation is unduly 
 incited, and speculative loans are very largely expanded. 
 
STOCK MARKETS AND EXCHANGES 303 
 
 On the other hand, occasional extraordinary industrial 
 activity, coupled with the annually recurring demands for 
 money during the crop-moving season, causes money strin- 
 gency, and the calling of loans made to the stock market; an 
 abnomially high interest rate results, attended by violent 
 reaction in speculation and al)ru]it fall in prices. The 
 pressure to retain funds in the speculative field at these 
 excessivelv hie;h interest rates tends to a curtailment of 
 reasonable accommodation to commercial and manufac- 
 turing interests, frequently causing embarrassment and at 
 times menacing a crisis. 
 
 The economic questions involved in these conditions 
 are the subject of present consideration by the Federal 
 authorities and the National ^lonetary Commission. They 
 could not be adjusted or adequately controlled either 
 through Exchange regulation or State legislation. 
 
 The Usury Law. 
 
 The usury law of this State prohibits the taking of more 
 than 6 per cent interest for the loan of money, but by an 
 amendment adopted in 1882 an exception is made in the 
 case of loans of $5,000 or more, payable on demand and se- 
 cured by collateral. It is claimed by some that, since this 
 exception enables stock speculators, in times of great 
 stringency, to bon*ow money by paying excessively high 
 rates of interest, to the exclusion of other borrowers, a re- 
 peal of this provision would check inordinate speculation. 
 We direct attention, however, to the fact that the statute 
 in question excepts such loans as are secured by warehouse 
 receipts, bills of lading, bills of exchange, and other nego- 
 tiable instruments. Hence, its operation is not limited to 
 Stock Exchange transactions, or to speculative loans in 
 general, ^loreover, the repeal of the statute would affect 
 only the conditions when high rates of interest are exacted, 
 Avhich really ]n'omote excessive speculation. Finally, our 
 examination indicates that prior to the enactment of the 
 
304 STOCK MARKETS AND EXCHANGES 
 
 statute of 1882 such loans were negotiated at the maximum 
 (6 per cent), plus a commission, which made it equivalent 
 to the higher rate; and a repeal of the statute would lead 
 to the resum]^ti.on of this practice. Therefore, as the repeal 
 would not be beneficial, we cannot recommend any legisla- 
 tion bearing ui)on the interest laws of the State unless it 
 be the repeal of tlie usury law nltogether, as we believe that 
 money will inevitably seek the point of highest return 
 for its use. Tn nine states of the Union there are at present 
 no usurv laws. 
 
 The Curb Market. 
 
 There is an unorganized stock market held in the open 
 air during exchange hours. It occupies a section of Broad 
 Street. An enclosure in the center of the roadway is made 
 by means of a rope, within which the traders are supposed 
 to confine themselves, leaving space on either side for the 
 passage of street traffic; but during days of active trading 
 the crowd often extends from curl) to curb. 
 
 There are about 200 subscribers, of whom ])rol)ably 150 
 appear on the curb each day, and the machinery of the op- 
 erations requires the presence of as many messenger boys 
 and clerks. Such obstruction of a public thoroughfare is 
 obviously illegal, but no attempt has been made by the 
 city authorities to disperse the crowd that habitually as- 
 sembles there. 
 
 This open-ail' market, we understand is dependent for 
 the great bulk of its l)usiness upon members of the Stock 
 Exchange, a])])7-oxiniately 85 per cent of the orders execu- 
 ted on the curb coming from Stock Exchange houses. The 
 Exchange itself keeps the curb market in the street, since 
 it forbids its own members engaging in any transaction 
 in anv other securitv exchange in New York. If the curb 
 were put under a roof and organized, this trading could not 
 be maintained. 
 
STOCK MARKETS AND EXCHANGES 305 
 
 Its Utility. 
 
 The curb market has existed for upwards of thirty years, 
 but only since the great development of trading in secu- 
 rities began, about the year 1897, has it really become im- 
 portant. It affords a public market place where all per- 
 sons can buy and sell securities which are not listed on any 
 organized exchange. Such rules and regulations as exist 
 are agreed to by common consent, and the expenses of 
 maintenance are paid by voluntary subscription. An agen- 
 cy has been established by common consent through which 
 the lilies and regulations are prescribed. 
 
 This agency consists solely of an individual who, 
 through his long association with the curb, is tacitly ac- 
 cepted as arbiter. From this source we learn that sales 
 recorded dunng the year 1908 were roughly as follows: 
 
 Bonds .....' $66,000,000 
 
 Stocks, industrials, shares 4,770,000 
 
 Stocks, mining, shares 41,825,000 
 
 Official quotations are issued daily by the agency and 
 appear in the public press. Corporations desiring their se- 
 curities to be thus quoted are required to afford the agency 
 certain information, which is, however, superficial and in- 
 complete. There is nothing on the curb which corresponds 
 to the listing process of the Stock Exchange. The latter, 
 while not guaranteeing the soimdness of the securities, 
 gives a prima facie character to those on the list, since the 
 stock list committee takes some pains to learn the truth. 
 The decisions of the agent of the curb are based on insuffi- 
 cient data, and since much of the work relates to mining 
 schemes in distant states and territories, and foreign coun- 
 tries, the mere fact that a security is quoted on the curb 
 should create no presumption in its favor; quotations fre- 
 quently represent ''wash sales," thus facilitating enter- 
 prises. 
 
 B.VII— 20 
 
306 STOCK MARKETS AND EXCHANGES 
 
 Evils of Unorganized Status. 
 
 Bitter complaints have reached us of frauds perpetrated 
 upon confiding jiersons, who have been induced to purchase 
 mining shares because they are quoted on the curb; these 
 are frequently advertised in newspapers and circulars sent 
 through the mails as so quoted. Some of these swindles 
 liave been traced to their fountain-heads bv the Post Office 
 I)ei>artnient, to which complaint has been made; but usu- 
 ally the swindler, when cornered, has settled privately 
 with the individual complainant, and then the prosecution 
 has failed for want of testimony. ^leanwhile the same op- 
 erations may continue in many other places, till the swindle 
 becomes too notorious to be profitable. 
 
 Notwithstanding the lack of proper supervision and 
 control over the admission of securities to the privilege of 
 quotation, some of them are meritorious, and in this partic- 
 ular the curb performs a useful function. The existence of 
 the cited al)uses does not, in our judgment, demand tlie 
 abolition of the curb market. Regulation is, however, im- 
 perative. To require an elaborate organization similar to" 
 that existing in the exchanges would result in the foiina- 
 tion of another curb free from such restraint. 
 
 As has been stated, about 85 per cent of the l)usiness of 
 the curb comes through the offices of members of the New 
 York Stock Exchange, but a provision of the constitution 
 of that Exchange prohibits its members from liecoming 
 members of, or dealing on any other organized Stock Ex- 
 change in New Y(U'k. Accordincrly, operatoi^s on the curb 
 market have not att(>m]")ted to form an organization. The 
 attitude of the Stock Exchange is therefore largely respon- 
 sil)le for the existence of sucli abuses as result from the 
 want of organization of the curl) market. The brokers 
 dealing on tlie latter do not wish to lose their best custom- 
 ers, and hence they submit to these irregularities and in- 
 conveniences. 
 
STOCK MARKETS AND EXCHANGES 307 
 
 Some of the members of the Exchange dealing on the 
 curb have apparently been satisfied with the prevailing 
 conditions, and in their own selfish interests have main- 
 tained an attitnde of indifference toward abnses. We are 
 informed that some of the most flagrant cases of discred- 
 itable enterprises finding dealings on the cnrb were pro- 
 moted by members of the New York Stock Exchange. 
 
 Reformation of the Curb. 
 
 The present apparent attitude of the Exchange toward 
 the curb seems to us clearly inconsistent with its moral ob- 
 ligations to the community at large. Its governors have 
 freqTU'utly avowed before this committee a purpose to co- 
 operate to the greatest extent for the remedy of any evils 
 found to exist in stock speculation. The cm'b market as at 
 present constituted aft"(U-ds amj^le opportunity for the ex- 
 ercise of such helpfulness. 
 
 The Stock Exchange should compel the formulation and 
 enforcement of such rules as may seem proper for the regu- 
 lation of business on the curb, the conduct of those dealing 
 thereon, and, particularly, for the admission of securities 
 to quotation. 
 
 If the curb brokers were notified that failure to comply 
 with such requirements would be followed by an applica- 
 tion of the rule of non-intercourse, there is little doubt that 
 the orders of the Exchange would be obeyed. The exist- 
 ing connection of the Exchange gives it am]^le power to ac- 
 complish this, and we do not suggest anything implying 
 a more intimate connection. 
 
 Under such regulation, the curl) market might be de- 
 cently housed to the relief of its members and the general 
 pul)Iic. 
 
 The Abuse of Advertising. 
 
 A large part of the discredit in the public mind attach- 
 ing to "Wall Street" is due to frauds perpetrated on the 
 
308 STOCK MARKETS AND EXCHANGES 
 
 small investor throughout the country in the sale of worth- 
 less securities bv means of allurins: circulars and adver- 
 tisements in the newspapers. To the success of such swin- 
 dling enterprises a portion of the press contributes. 
 
 Papers which honestly try to distinguish between swin- 
 dling advertisements and others, may not in every instance 
 succeed in doing so; but readiness to accept advertisements 
 which are obviously traps for the unwary is evidence of a 
 moral delinquency which should draw out the severest pub- 
 lic condemnation. 
 
 So far as the press in the large cities is concerned the 
 correction of the e^il lies, in some measure, in the hands of 
 the reputable bankei*s and brokers, who, by refusing their 
 advertising patronage to newspapers notoriously guilty in 
 this respect, could compel them to mend their ways, and at 
 the same time prevent fraudulent schemes from deriving 
 an appearance of merit by association with reputable 
 names. 
 
 Another serious evil is committed by men who give 
 standing to promotions by serving as directors without full 
 knowledge of the affairs of the companies, and by allowing 
 their names to appear in prospectuses without knowing the 
 accuracy and good faith of the statements contained there- 
 in. Investors naturally pay great regard to the element of 
 personal character, both in the offering of securities and in 
 the management of corporations, and can therefore be de- 
 ceived by the names used in unsound promotions. 
 
 British System Considered. 
 
 We have given much attention to proposals for com- 
 pelling registration, by a bureau of the State government, 
 of all corporations whose securities are offered for public 
 sale in this State, accompanied by information regarding 
 their financial responsibility and prospects, and prohibiting 
 the public advertisement or sale of such securities without a 
 certificate from the bureau that the issuing company has 
 
STOCK MARKETS AND EXCHANGES 309 
 
 been so registered. The object of such registration would be 
 to identify the promoters, so that they might be readily pros- 
 ecuted in case of fraud. Such a svstem exists in Great 
 Britain. The British "Companies Act'' provides for such 
 registration, and the "Directors' Liability Act" regulates 
 the other evil referred to above. Some members of your 
 committee are of the opinion that these laws should be 
 adopted in this country, so far as they will fit conditions 
 here. 
 
 This would meet with some difficulties, due in part to 
 our multiple system of State government. If the law were 
 in force only in this State, the advertisement and sale of the 
 securities in question would be unhindered in other mar- 
 kets, and companies would be incorporated in other States, 
 in order that their directors and promoters should escape 
 liability. The certificate of registration might be accepted 
 by inexperienced persons as an approval by State author- 
 ity of the enterprise in question. For these reasons the 
 majority of your committee does not recommend the reg- 
 ulation of such advertising and sale by State registration. 
 
 In so far as the misuse of the post office for the distribu- 
 tion of swindling circulars could be regulated by the Fed- 
 eral authorities, the officials have been active in checking 
 it. They inform us that vendors of worthless securities 
 are aided materially by the opportunity to obtain fictitious 
 price quotations for them on the New York Curb market. 
 
 Legislation Recommended. 
 
 For the regulation of the advertising evils, including 
 the vicious "tipster's" cards, we recommend an amendment 
 to the Penal Code to provide that any person who adver- 
 tises, in the public press or other^vise, or publishes, distrib- 
 utes or mails, any prospectus, circular or other statement 
 in regard to the value of any stock, bonds, or other secu- 
 rities, or in regard to the business affairs, property, or finan- 
 cial condition of any corporation, joint-stock association, 
 
310 STOCK MARKETS AND EXCHANGES 
 
 copartiuTship nr iiidividual issuing stuck, bonds, vv other 
 similar secnriti<'S, which contains anv statement of fact 
 vvhicli is known t(> such person to be false, or as to which 
 such person lias no reasonable grounds for believing it to ])e 
 true, or any promises or predictions which he cannot reason- 
 ably justify, shall be guilty of a misdemeanctr; and, further, 
 that every newspaper or other publication printing or pub- 
 lishing such au advertisement, prospectus, circular, or oth- 
 er statement, shall, before printing or })ublishing the same, 
 obtain from the person responsible for the same, and retain, 
 a written and signed statement to the effect that such 
 person accepts resjX)nsil)ility for the same, and for the 
 statements of fact contained therein, which statement shall 
 give the address, with street numl)er, of such person; and 
 that the publisher of any such newspaper or other publica- 
 tion which shall fail to o])tain and retain such statement 
 shall be guilty of a misdemeanor. 
 
 Bucket-Shops. 
 
 Bucket-shops are ostensibly brokerage offices, where, 
 however, commodities and securities are neither bought 
 nor sold in jjursuance of customers' orders, the transac- 
 tions being closed by the payment of gains or losses, as de- 
 termined by price quotations. In other words, they are 
 merely places for the registration of bets or wagers; their 
 machinery is generally controlled by the keepers who can 
 delay or manipulate the quotations at will. 
 
 The law of this State, which took effect September 
 1, H>ns, makes the keei)ing of a bucket-shoj) a fehmy. ]mu- 
 isha)>le by fine and im])risoinuent, and in the case of coi-- 
 porations, on second olfenses l)y dissolution or ex])ulsion 
 from the State. Tn ihe case of individuals Ihe ]K'nalty for 
 a second offense is the same as for the first. These penal- 
 ties are imposed up<tn the theory that the ]>i"actice is gam- 
 bling ; but in order to establish the fact of gambling it is nec- 
 essary, under the New York law, to show that both parties 
 
STOCK MARKETS AND EXCHANGES 311 
 
 to the trade intended that it should l)e settled by the pay- 
 ment of differences, and not by delivery of property. Un- 
 der the law of Massachusetts it is necessary to show only 
 that the bucket-shop keeper so intended. The Massachu- 
 setts law provides heavier penalties for the second offense 
 than for the first, and makes it a second offense if a bucket- 
 shoj) is kept open after the first conviction. 
 
 Amendment of Law Recommended. 
 
 AYe recommend that the foregoing features of the Massa- 
 chusetts law be adopted in this State; also that section 355 
 of the act of 1908 be amended so as to require brokers to 
 furnish their customers in all cases, and not merely on de- 
 mand, the names of brokers from whom shares were bought 
 and to whom they were sold; and that the following section 
 be added to the act: 
 
 AYitness 's privilege : 
 
 No person shall be excused from attending and testify- 
 ing, or producing any books, papers, or other documents 
 before any court or magistrate, upon any trial, investiga- 
 tion, or proceeding initiated by the district attorney for a 
 violation of any of the provisions of this chapter, upon the 
 ground <»i- for the reason that the testimony or evidence, 
 documcntai'v or otherwise, required of him may tend to 
 convict him of a crime or subject him to a penalty or for- 
 feiture; but no person shall ])c prosecuted or sul^jected to 
 any forfeiture for or on account of any transaction, matter, 
 or thing concerning whicli he may so testify or produce ev- 
 idence, documentary or otherwise, and no testimon}' so 
 given or produced shall be received against him upon any 
 criminal investigation or proceeding. 
 
 There has been a sensible diminution in the number of 
 bucket-shops in New York since the act of 1908 took effect. 
 
 Continuous quotations of prices from an exchange are 
 indispensable to a bucket-shop, and when such quotations 
 are cut off this gamljling ends. 
 
CLASSIFICATION OF BONDS.* 
 
 BY FREDERICK LOWNHAUPT. 
 
 [ From Lownhaupl'i "Investment Bonds."] 
 
 American financiers have often been under necessity of 
 producing a security with new and attractive features. 
 At times distinctive and peculiar conditions have had to 
 be met. With characteristic ingenuity they have usually 
 succeeded, in consequence of which there is now a diversity 
 of securities that quite demand close study for a full ap- 
 preciation of their scope and nature. Great coi-porate 
 needs have produced volume, coincident with which have 
 been developed two characteristics of the bond branch of 
 the security market, variety and novelty. The average 
 investor is perplexed to distinguish various issues so he 
 may make a conservative judgment. He is not alone. 
 Many another, though familiar with finance, is nonplussed 
 to make a clear and comprehensive classification. Some 
 difficulty arises from difference of name where the issues 
 are identical with the exception of some unimportant fea- 
 ture. When the chief characteristic or some distinctive 
 feature is taken as a basis, the task is comparatively easy; 
 but beyond such general distinctions classification becomes 
 somewhat involved. Several are used by financial writers, 
 differing in detail yet built upon ]iractically the same foun- 
 dation. All are essentially correct. Indeed it is impos- 
 sible to make an arrangement of bonds admitting of no 
 variation. 
 
 The most general is to group them under one or the 
 other of two heads, namely, Mortgage and Debenture 
 bonds. Enlarging somewhat upon this they are grouped 
 as ^lortgage, Equipment, Land Grant, Collateral Trust, 
 Prior Lien, Debenture and Income, which is about the 
 
 •Courtesy of Messrs. G. P. Putnam's Sons. 
 
 312 
 
CLASSIFICATION OF BONDS 313 
 
 greatest number of general groups practicable; a finer divi- 
 sion immediately emphasizes distinctions of individual is- 
 sues. Prom a market point of view solely, bonds and fund- 
 ed investments are often put into three divisions, railway, 
 industrial, and miscellaneous. From this same point of 
 view, under miscellaneous bonds are included industrial 
 issues and so making this division to consist of issues of 
 foreign governments, public service corporations and in- 
 dustrial companies. The present classification proceeds 
 differently by presenting the bonds arranged under cor- 
 porate groups and then considering the individual issues. 
 
 Before discussing the bonds it is expedient to consider 
 the issuing cor])oi'ations, with a brief inquiry into their na- 
 ture and classification. Though not prerequisite to an un- 
 derstanding of the subject such general knowledge con- 
 tributes measurably toward a clear conception of the nature 
 and functions of the various bonds. It is important to 
 know in what division each corporation lies and in a general 
 way what t^^oes of bonds it issues. 
 
 Of corporations there are three kinds: Public, Quasi- 
 Public, and Private, their names indicating, in a measure, 
 their functions. The public corporation, very generally 
 called municipal, is a political division empowered by law 
 to do such acts as are necessary for the well being and ad- 
 vancement of the commonwealth ; its particular functions 
 are many and it is conducted for no gain save the public 
 good; its operations are limited to the territory over which 
 it has jurisdiction and its officers are largely elected by 
 its citizens. Municipal corporations are classified by law, 
 generally according to population and assessed valuation, 
 and their powers are defined according to class. Cities 
 and counties are representative examples. The private 
 corporation is exactly the opposite; it is formed for 
 pecuniary gain and its activities may be universal; it gets 
 its being and powers from the law, and, when not violating 
 its provisions, is not amenable in any sense. In organiza- 
 
314 FREDERICK LOWNHAUPT 
 
 tion and operation it is entirely different from tlie pul)lic 
 corporation and is typified in a mannfaeturin^^ company. 
 Quasi-])nl)lic corporations partake of the nature of Ixtth 
 l>ul)]ic and private, thon,i,di in law they are considered as 
 of the latter kind. Tlieir services, nevertheless, are es- 
 sentially ])nl)lie— hence, the classification. Formed 
 })rimarily for private gain, they have rights that are strictly 
 private and hevond legislative control, vet thev mav be sub- 
 jected to consideral)le regulation ])y State and Federal 
 authorities. The steam railroads and public service cor- 
 ])orations fall in this categor}^ Of those corporations other 
 than iniblic, there are manv whose status is not vet clearlv 
 and finally defined, since auth<»rities on the subject are 
 divided. The best legal minds are far from unanimous 
 on the identity of some corporations in so far as it is fixed 
 by their functions. Whether these functions are private 
 or quasi-public is a mooted question. With this as a safe 
 ])asis, investment bonds mav be classified first l)v two great 
 general divisions, putting into one those issued by public 
 corporations and into the other those issued by ]n'ivate and 
 quasi-] )ublic roi-] (orations. 
 
 Municipal and State. 
 
 Considering these general divisions, in the first we find 
 three classes under which may be grouped, liowcvci- desig- 
 nated by name, all of such securities issued Ity ])ul»Iic cor- 
 I)orations, I^ci-y municipality is under the necessity of 
 maintaining juiblic works and making im))rovements, such 
 as building (A' 1 (ridges, sewers, and waterworks U) finance 
 which it is generally necessary to issue bonds. Part of this 
 funded (lel)t is often known as cor])orate stodc which is 
 onlv those long-term Ixnids issued for iK'iinanent im- 
 ])rovements in distincti(>n to the assessment bonds issued 
 to provide funds for all woi'k done by contract, the ex- 
 pense of which is to be collected by assessment from ])rop- 
 ertv benefited b\- the work. Likewise everv State has 
 
CLASSIFICATION OF BONDS 315 
 
 similar duties; additional liii2;li\vays may be needed — a canal 
 may be demanded l)y business conditions — the require- 
 ments for educational purposes may be enlarii;in.2^, for all 
 of which, after the proper legislative authorization, the 
 funds are usually provided by an issue of bonds. 
 
 Federal Government. 
 
 The Federal Government, too, has many matters to look 
 after. Its duties are all public, of course, but their scope 
 is much broader. It must finance such projects as are 
 authorized by proper legislation. Building a canal such 
 as the Panama, for instance, would generally be financed 
 by bond issue, as would the prosecution of a war. The 
 general acceptation of the tenn ''municipal" as ap])lied 
 to bonds, contemplates those minor civil divisions smaller 
 than a state, although, strictly speaking, all public cor- 
 porations are municipal. 
 
 Industrial, Railroad, Public Service. 
 
 Tn the second general division, private and quasi-]">ublic 
 Corporations, there are a greater number of classes. Every 
 progressive manufacturing company has need for a new 
 capital from time to time; growth of business means en- 
 largement of plant or acquirement of other plants. To 
 finance these operations, in part at least, bond issues are 
 often made. Consolidation and extension of the great net 
 work of steam railways throughout this country jn-oduces 
 great amounts of bonds; the railways unceasingly increase 
 their mileage and improve their facilities. Numerous trac- 
 tion lines, which operate largely in cities, also produce 
 a considerable amount of bonds. The marvellous develop- 
 ment of electric motive power has given a great stinudus 
 to this form of enten')rise, and much of the necessary 
 capital is obtained through ]>ond issue. Another source 
 from which many bonds are put into the market are public 
 service coi-porations. The rapid growth of the country 
 
316 FREDERICK LOWNHAUPT 
 
 necessitates installation of public utilities everywhere, and 
 accordingly new waterworks are built, new gas, electric, 
 and power plants are constructed and telephone facilities 
 extended. The call for funds in this direction is largely 
 met bv issue of this kind of security. Still other bonds, al- 
 though comparatively few, are placed on the market — those 
 issued by navigation lines whose needs are similar t<» those 
 of other transportation companies in the way of new equip- 
 ment, new and larger terminals, etc., and which are pro- 
 vided to some extent bv bond issues. 
 
 Improvement, Equipment. 
 
 Considering issues individually, some are found to be the 
 natural product of the growth of corporations. Any cor- 
 poration may issue a type of improvement bond to finance 
 specific or general permanent improvements and if there is 
 definite security, a condition wholly dependent upon the 
 kind of corporation, it generally takes the fonn of an en- 
 cumbrance on the property benefited. The railroads are 
 practically alone in issue of what are kno\\Ti as extension 
 and construction bonds, both of which finance the building 
 of new trackage, and are usually secured by a first mortgage 
 on the property created; their issue is progressive with the 
 work. Again railroads often buy up other railroad prop- 
 erties and sometimes need more land for terminals. An is- 
 sue of purchase money bonds may be made, secured by a 
 lien on the property obtained. This acquired ju'operty 
 may have a debt, and where such is the case, the purchaser 
 usually provides for it. However, this is not exclusively 
 a railroad type although practically all of this name have 
 come from that source. It is frequently necessary for a 
 railroad to increase the number of its cars to care for grow- 
 insr business, and there mav be no other available means 
 of obtaininc: necessarv funds save through an issue of "Car- 
 Trust" or equipment bonds. Strictly speaking, a *' Car- 
 Trust" bond (or certificate, as it is sometimes kno^^-n), is 
 
CLASSIFICATION OF BONDS 317 
 
 an obligation issued by a concern known as a car trust. 
 Its security is the cars, which have been purchased from a 
 manufacturing company and rented to a railroad company 
 until full payment is made, periodical payments being pro- 
 vided for, which go to make payments on the bonds. The 
 equipment obligation differs in that it is not issued by a 
 car trust and is somewhat broader in scope, including, as 
 it may, locomotives, boats, etc. This distinction should be 
 remembered for yet another reason, and that is, that equip- 
 ment bonds are not necessarily railroad issues: a manu- 
 facturing company may, quite as well, put out such bonds 
 to purchase machinery and equipment. 
 
 Founders, Mortgage, Refunding. 
 
 A bond rarely used in this country but quite well known 
 abroad is termed founders. It is generally given to the 
 promoters of an enterprise in the nature of a bonus in a 
 similar manner that stock is given in this country. 
 Technicallv, it mav be considered more as stock than as a 
 bond though it is often designated by the latter term. Ac- 
 companying the imiversal tendency toward corporate con- 
 solidation has come the necessity of bond issues adapted 
 to this condition. To this end we have such securities as 
 general mortgage bonds which may be issued by any cor- 
 poration other than public and are generally secured by 
 a lien on the property in its entirety. In scattered in- 
 stances they constitute a first lien; but are gencrallv sub- 
 ject to some prior liens. Akin to this are consolidated and 
 ^'Blanket" mortgage bonds. The former usually puts a 
 new security on an entire group of properties already fully 
 covered individuallv and while therefore secured bv a 
 mortgage on all the properties, this lien too is generally 
 subject to some of prior right. Scarcely any distinction 
 is to be made between the so-called "Blanket" mortgage 
 bond and the two others just mentioned. The term is 
 generic m its significance and whenever used, which is 
 
318 FREDERICK LOWNHAUPT 
 
 seldom, is little else than synonymous — it may aptly de- 
 scribe either of the otheis. In the issue oi" such c(»mpre- 
 honsivc ni()rt,ii:a.i::os provision is almost invariably made for 
 ret'unclin;^ other issues as they mature, these issues being 
 much smaller and generally a i)rior lien and being provided 
 for l)y an ai-rangcnicnt lor their exchange for the proper 
 amount of the larger issue. Very frequently, however, 
 issues are made specifically designed for tlie purpose of re- 
 funding, which gives the name to a very large amount of 
 bonds at ])resent in the market. Any kind of corp(jration 
 may issue these, which are essentially a continuation of a 
 former debt beyond its maturity. When the matiu'ing 
 bond is not retired in exchange for a proportionate amount 
 of the new^ issue, it is cancelled and payment made through 
 sale of part of the issue. Refunding issues are generally 
 as well secured as the bonds they retire. A few corpora- 
 tions, mostly railroads, have found it expedient to consoli- 
 date much of their funded del)t, covei'ing it by only one 
 issue of bonds known as unified. In this way a simi)lilica- 
 tion is accomplished ])y uniting luider a single issue a mass 
 of miscellaneous obligations. The advantages to be de- 
 rived from this procedure are not a few. One is increased 
 facility of management of the del)t — another, the generally 
 better market which the new security enj(\vs over those it 
 displaces. The whole operation is indeed in most respects 
 analogous to refunding. What differences exist are unim- 
 portant. 
 
 Lien. 
 
 The rehabilitation of many corporations, through rear- 
 rangement of their liuances, before or after a critical jioint 
 was reached, evolved a number of ty])es peculiar to such 
 conditions. Kehabilitation after this manner was in every 
 instance a form of reorganization out of which came such 
 bonds as reorganization lien. The characteristics of these 
 issues grew out of the attending circumstances and they 
 
CLASSIFICATION OF BONDS 319 
 
 were generally vested with only a junior lien on the prop- 
 erty reorganized. But as reorganization of a company 
 means settlement of the claims of the various interested 
 parties on a satisfactory basis, there has been issued oc- 
 casionally a form of bond in many respects similar to the 
 last mentioned and called adjustment. Always an out- 
 gnnvtli of such conditions, its features have been de- 
 termined accordingly. In this way additional capital for 
 improvements has been realized, while a lien, only junior 
 in its preferment, has been given. An excellent example 
 of this type of security is the Atchison, Topeka & Santa 
 Pe 4 per cent adjustment issue, growing out of reor- 
 ganization of that road in 1896. The success of a reor- 
 ganization plan is generally dependent upon the ability to 
 secure additional funds. So to insure this, it has some- 
 times been necessary to give a preferential claim to those 
 providing the funds. A prior lien bond has therefore 
 been issued. Practically all such issues are railroad ol)liga- 
 tions secured by mortgage but are not always, as might 
 naturally be supposed, the first ol)ligation of the issuing 
 company. The name is but a relative temi and may mean 
 no more than that the bond is prior to some other specified 
 issue. As mortgages covering prior lien bonds are usually 
 general in character, embracing much property, they are, 
 like all such, subject to other liens. The distinction there- 
 fore, between prior lieu bonds and those having a prior 
 lieu is to be marked. Tlu^ I'j-ic Railroad, among others, has 
 a representative prior lien issue. 
 
 Income. 
 
 Insolvency and reorganization produce still another 
 bond. At such times concessions are required of some se- 
 curity holders, and for the compensation of those making 
 the sacrifice there is issued the income bond. With few 
 exceptions, this has been its orgin; it is, however, fast dis- 
 appearing from the lists. Briefly stated, it is an obligation 
 
320 FREDERICK LOWNHAUPT 
 
 the interest on which is payable out of net earnings after 
 all fixed charges have been met. Interest, therefore, is 
 contingent, being entirely dependent upon the earnings of 
 the company and still further uncertain, in that it is payable 
 or not in the discretion of the mangement. Sometimes it 
 is cumulative, standing as a charge ahead of all dividends 
 on the stock. Generally such bonds are mortgage secured 
 as to i^rincipal and are always a jimior lien. 
 
 Assented Income. 
 
 The status of an income bond may be changed by agree- 
 ment. Absorption of a small line of railway by a great 
 system usually brings about a modification of the securities 
 of the former; the larger company may wish to withdraw 
 certain issues, for which privilege it makes attractive offers 
 to the holders. Tn the case of the assented income bond 
 a fixed and regular interest return is assured where form- 
 erly it was contingent. For this the company is given some 
 privilege, say perhaps to retire them before maturity at 
 a stipulated price. Concurrence of the bondholders in 
 such an arrangement gives rise to the name. 
 
 Collateral Trust. 
 
 A t}^')Q of bond which came into prominence and favor 
 within the past few years but whose po]^iilarity is now 
 waning, is that which depends for its safety entirely or 
 almost entirely upon the pledge of other securities usually 
 taken from the treasury of the issuing company or system 
 and placed in trust, under the terms of the collateral mort- 
 gage, to secure payment of principal and interest. These 
 securities may consist wholly or in part of stocks or 
 bonds, and are generally the obligations of auxiliary com- 
 panies. Up to about the year 1900, bonds were exten- 
 tensivelv used as securitv and nearlv all of first and 
 second mortgage; subsequently, deposit of stock only 
 became the general practice. Under variously named 
 
CLASSIFICATION OF BONDS 321 
 
 issues, practically all of the railways and many •other cor- 
 porations report large collateral trust mortgages. Many 
 such issues have found their source in the holding com- 
 pany, a corporation having no independent credit and 
 usually operating no properties and whose assets con- 
 sist largeh' of stocks and bonds of other companies. In 
 fact, this, with but one other kind, the debenture, is the 
 only bond obligation such a company can issue. A large 
 number of companies are both holding and operating, when 
 of course, they may issue any kind. Typical examples of 
 a purely holding company were to be found in the Northern 
 Securities Company and the United States Steel Corpora- 
 tion when it was first organized. At present, the United 
 States Steel Corporation, Pennsylvania Railroad, and 
 Union Pacific Railroad are excellent examples of companies 
 both holding and operating. 
 
 Joint. 
 
 What may be a collateral trust obligation (though it 
 may be any other) is the joint bond; as such it was exempli- 
 fied in the Great Northern-Northern Pacific Joint 4's is- 
 sued in 1901 and secured by deposit of Chicago, Burlington 
 & Quincy Railroad stock. Taking this as representative, 
 it is a security issued by two or more companies (usually 
 two), each company being liable for its proportion of the 
 bonds, both principal and interest. Provision is usually 
 made that should either company default in its obligations, 
 the company not defaulting shall become owner of the en- 
 tire property and shall liecome liable in severalty upon all 
 covenants contained in the bonds. 
 
 Participating. 
 
 Past success in the flotation of some large blocks of col- 
 lateral trust bonds may be attributed to one or more special 
 features embodied. An expedient that has been used is 
 permission to share beyond the regular fixed rate of inter- 
 
 B.VII— 21 
 
322 FREDERICK LOWNHAUPT 
 
 est in profits that niij^ht accnio under certain eonditions. 
 The arrani^^enient as generally carried out allows ])articipa- 
 tion to a si)ecitied i)roi>ortion in any increased dividend 
 that may be declared on the nnderlyinj^: stock collateral. 
 A notable example was the Oreiron Short Line R. R. 4's is- 
 sued in 1902. Another bond that enjoys the possibility 
 of larger return thr(ni<,di increased income or profits on 
 underlying: collateral is that known as profit sharing. The 
 form is very seldom used, the best-kno^^^l issue being that 
 of the London LTnderground Electric Railways. Its se- 
 curity lies in deposit of stock as a basis, which stock is de- 
 posited at a certain price, the provisions of the mortgage 
 permitting its sale when the market assures a jirofit, the 
 sale price of course being above that at which the stock was 
 deposited as collateral. In the event of disposition of tiie 
 stock prior to the due date of the bonds the holders share 
 in the profits realized from such sale. 
 
 Convertible. 
 
 The convertible jjond is the eml)odiment of anotlier idea 
 involving profit-sharing provisions. A^ery frequently a 
 corporation cannot issue stock to advantage as a means 
 of obtaining funds for its needs and is therefore restricted 
 to some method entailing pledge of its property or credit. 
 Prevailing conditions may hold out large promises of suc- 
 cess for an issue of convertible bonds as the only ty]ie ex- 
 actly filling the requirements of the situation. This 
 privilege of conversion, the feature of this type, is incor- 
 ]>orate(l in the mortgage and allows the holder to convert 
 his securitv into some other form of obligation, usuallv 
 stock, within a spi'citied time and at a sjiecified rate. What 
 may become the source of profit is the j)ossible high market 
 price on the stock at the time the privilege is exercised. 
 P)y then exchanging the bonds for stock and turning that 
 into the market a substantial profit could be realized. A 
 high quotation for the stock substantially indicates sound 
 
CLASSIFICATION OF BONDS 323 
 
 business conditions and increased profits in which the 
 convcrtibk; bondhokkn* is thus privik\i^ed to share. 
 
 Sinking Fund Redeemable. 
 
 Most bonds run for a definite period of time; that is, they 
 are intended to live out their allotted number of years. 
 Among- those otherwise designed are some subject to re- 
 purchase by the issuing corporation within a specified time 
 or at a certain date. To accomplish this a certain amount 
 of money is set aside — more often annually — to retire the 
 bonds at that time. It is customary with many nuniicipal 
 and public seryice corporations and also with nearly all 
 companies whose assets are gradually depleted by the 
 operations of business to follow this plan, thus establish- 
 ing what is known as a sinking fund. All bonds that may 
 be retired in that way are so called. Sinking fund bonds 
 of all but public corporations are generally protected by 
 a mortgage, which contains, if the bond itself does not, 
 the proyisions relatiye to the operation. A\Tien bonds are 
 subject to a sinking fund, or liable to be retired at the 
 option of the maker, they are said to be redeemable. 
 
 Irredeemable, Perpetual, Annuity. 
 
 In contradistinction to those so affected are some whose 
 life is practically intenninable, sometimes referred to as 
 perpetual bonds. Very seldom issued, they are an obliga- 
 tion whose retirement is not proyided for by any specified 
 date of maturity. Ordinarily this would necessitate pur- 
 chase in the open market or refunding, should it be desir- 
 able to retire them. This is true, of course, so long as all 
 proper conditions exist. Should default in interest occur, 
 the principal, which is mortgage secured where not a public 
 corporation obligation, becomes instantly due. The same 
 principal is worked out in all essential particulars in the 
 annuity bond whose chief characteristic is obyiously per- 
 petuity. Of this last type very few companies have any 
 
324 FREDERICK LOWNHAUFT 
 
 OTitstaiiding, those most prominent being the Long Island 
 Railroad and Lehigh Valley Railroad issues. As for ir- 
 redeemable bonds as a class they are not nmnerous. Sev- 
 eral of the states— Kentucky for one— have small amounts 
 and about an equal number of railroad corporations have 
 a few. Further examples may be found in British Consols 
 and the Rentes of Fi-ance and other foreign countries, 
 though they differ fundamentally from American issues. 
 In those countries no paper evidence of debt is issued 
 for a mere record of the obligation is always considered 
 sufficient. 
 
 Exempt, Non-exempt. 
 
 Lender property classification, bonds become subject to 
 the laws imposing taxation. But not all. Those released 
 from such liability are thereby given a prominent and de- 
 sirable feature and enjoying this privilege are called ex- 
 empt. But the term ''exempt" is used in another sense — 
 to indicate immunity from call for sinking fund purposes. 
 This fact is peculiar to a few issues at present in the 
 market; a portion only is subject to retirement by such a 
 fund and that part which may be so retired is specially 
 designated as non-exempt. Again, there are bonds whose 
 life might be uncertain and their value unstable were they 
 to remain under the same conditions as issued. Indeed 
 it may be imperative through reorganization or other- 
 wise that the force of the obligation be lessened and its 
 terms modified; or again, new or different privileges may 
 be granted to the holders of an issue, or some mutual agree- 
 ment may be made involving a change of conditions, such 
 as the reduction of interest or the insertion of the call 
 privilege. The record of such changed conditions is usually 
 stamped upon the bond and thereby becomes a part of the 
 instrument. Of course, anv bond mav be so treated and 
 would then have this additional qualifier, stamped. This 
 bond is seldom used. 
 
CLASSIFICATION OF BONDS 325 
 
 Guaranteed, Endorsed. 
 
 One of the conditions frequently included in a bond con- 
 tract is that of guarantee, where payment of either princi- 
 pal or interest or both is assured by the promise of another 
 corporation. It accepts the liability, contingently, as the 
 case may be, and consequently enhances in a greater 
 or less degree the value of the obligation as an investment. 
 These bonds are frequently spoken of as endorsed, inas- 
 much as the guarantee is quite generally given by endorsing 
 the instrument to that effect. 
 
 Subsidy, Land Grant. 
 
 For the purpose of classification, the subsidy bond may 
 justly be considered as a guaranteed obligation. Here, 
 by pledging itself to pay the interest on bonds issued for 
 construction purposes, a government assists in establish- 
 ment and support of an enterprise deemed advantageous 
 to the public. Or else, what amounts to a subsidy, it gives 
 special rights, powers, and privileges, and perhaps the 
 enjoyment of absolute or conditional immunity from taxa- 
 tion. Formerly municipalities and states subsidized 
 largely, in one form or another, l)ut it is no longer 
 practicable, and indeed it is generally impossible for them 
 to do so. Notwithstanding this, in one or two states 
 municipal aid may yet be extended by legislative authority 
 in exempting from taxation or by endorsing or issuing 
 bonds in the case of gas works, water woi-ks, railroads, etc. 
 Thirty years ago these practices were widely prevalent 
 in the United States, principally in support and encourage- 
 ment of railroad building. Foreign governments still em- 
 ploy this means of promoting undertakings. Subsidizing, 
 however, does not always take the form of payment of 
 interest or principal or the bestowal of prerogatives. Build- 
 ing of the great transcontinental lines of this country was 
 made possible, at the time they were laid do^^^l, by substan- 
 
326 FREDERICK LOWNHAUPT 
 
 tial gifts of public land from the Government. Bonds were 
 issued to raise funds for construction, and the lands were 
 pledi^^'d under a mortgage for their redemption. These 
 lands were gradually sold and the proceeds applied to pay 
 interest on these bonds and to form a sinking fund to retire 
 them eventually. ^lost of these bonds have been with- 
 drawn and as the public d<tmain is not now large and the 
 roads originally benefited are practically in a position to 
 take care of their financial needs without governmental 
 assistance, this type of obligation will soon be extinct. 
 Thus it is that land grant bonds are distinctively railroad 
 issues. Beyond these gifts of land the Federal Government 
 rendered no material aid to roads except in very few in- 
 stances. 
 
 Terminal. 
 
 Scarcely less distinctive as a railroad bond is that form 
 of obligation secured by mortgage on terminal })roperty 
 and usually given by a terminal company. The stock of 
 such a company is generally held by a road or association 
 of roads having common terminal facilities and known as 
 a terminal company. Provision for principal and inter- 
 est is made by pa^^nents of rental by each company. This 
 is the general practice although railway companies as such 
 have issued terminal bonds, their interest becoming a 
 proper charge on the revenues of the company. 
 
 Divisional. 
 
 The integral parts of nearly all great railroad systems 
 bear sej^arate mortgages which were placed upon them 
 l)efore their consolidation. These ])arts are designated as 
 divisions, and the bonds issued for their account are se- 
 cured by a lien on the respecti\(' ]»ai-t only. The obli- 
 gati(tn, however, is that of the ])arent com})any, the term 
 merely indicating that the security given is some specific 
 division of the property. 
 
CLASSIFICATION OF BONDS 327 
 
 1-2-3-4-5 Mortgage, Debenture. 
 
 Extremes meet when wo consider the purely first mort- 
 gage bond and the debenture, the characteristic of the for- 
 mer being its absohite priority of lien. A bond that may 
 rightfully be called first mortgage is, in fact, not subject 
 to any other liens, its security ])eiug a mort,c:age to which 
 all others are subsquent. Strictly speaking, any such 
 bonds should be protected by a mortgage senior in position 
 on all the property denominated, yet in practice the un- 
 derlying mortgage has sometimes been made first on only 
 a portion of the property. Tliere have been also second, 
 third, fourth, and fifth mortgage bonds, all, of course, 
 respectively junior in their lien, but they have passed out 
 of favor to an extent that any beyond second are practically 
 unkno^^^l now. ComjDlete absence of representative physi- 
 cal security in so far as a mortgage is concerned is the 
 dominant characteristic of the debenture bond. In reality 
 it differs little from a promissory note being generally a 
 simple promise to pay. In effect it is a very formal note. 
 It is generally a last claim on the properties of the issu- 
 ing company and is inferior to all other of its bonds. 
 Obviously none but corporations of a high character and 
 whose status is well defined can successfully issue this 
 type. The tenn ' ' debenture ' ' means de])t. Under this brc^ad 
 interpretation other obligations are sometimes so called. 
 Principal among these are some bonds issued by 
 municipalities in Canada. The debenture is an idea char- 
 acteristically English and one that may be said to have been 
 borrowed by some of the larger and stronger corporations 
 of this country. A few railroad C(U'porations have out- 
 standing what are known as ''plain" bonds which are 
 nothing more or less than debentures having likewise no 
 mortgage security. 
 
 From the foregoing, a relationship, more or less near, 
 between the character of a bond and its name, is evi- 
 
328 FREDERICK LCWNHAUPT 
 
 dent. "With some it is very close, the name indirating 
 clearly the nature of the obligation; with others, but vague- 
 ly explanatory, conveying only a meager idea of its nature. 
 At best a name is no more than a descriptive terai or com- 
 bination of terms qualifying each other, any one of which 
 may represent the chief feature of a howl. With accumu- 
 lating issues on a property it is often difficult to name suit- 
 ably a new one so as to make it fully expressive; hence the 
 necessity of long, often confusing and sometimes ap- 
 parently conflicting, combinations. The name, however, 
 is not always the result of circumstances of this nature. 
 It would not be without precedent should sinister motives 
 actuate a company in describing a proposed bond issue. 
 Certain terms of course are technicallv admissible in names; 
 }'et this has sometimes been presumed upon to an extent 
 actually misleading. AVhile some names are indeed 
 adequately descriptive, mere titles, often signifj'ing only 
 part, mean little from the viewpoint of investment. Every 
 issue must be studied carefully and examined on its own 
 merits. 
 
 In the title of almost every bond one term at least is an 
 index of its nature. For example, names like assessment, 
 tax relief, and the like, instantly indicate municipal issues; 
 we know at a glance the class of the issuing corporation. 
 The relative position of a bond issue is a matter of vital 
 importance. To some extent this is shown in names. 
 Again, the specific purpose of issue is many times embodied 
 in the name; special features and unusual j^rivileges are 
 betokened and nearly always there is evidence of the 
 presence and nature or the absence of security. 
 
 The su])ioined classification, number two, proceed inc: 
 along this line shows in a general way the bonds whose 
 names indicate their function, security or its absence, se- 
 curity and function, maturity conditions and conditions 
 existing during life. The other tabular form follows the 
 text early in this article, beginning with the great classes 
 
CLASSIFICATION OF BONDS 329 
 
 of corporations, considering the various kinds of cor- 
 porations in each class and the different types of bonds 
 issued by each. Both these classifications admit of many 
 variations, but in the main they present the numer- 
 ous issues corresponding closely to common practice. Hav- 
 ing considered the comiDonent terms of names, it is inter- 
 esting to note the variety of combinations wrought out: 
 
 First Lien and Collateral Trust. 
 
 First ^lortgage and Collateral Trust. 
 
 First Consolidated Mortgage. 
 
 First Lien and Consolidated. 
 
 First Refunding Mortgage. 
 
 First and Refunding. 
 
 First Extension Mortgage. 
 
 First and Collateral. 
 
 First Lien and Convertible. 
 
 First Lien and Refunding. 
 
 First General Mortgage. 
 
 First Mortgage Extension. 
 
 General First ^lortgage. 
 
 General Refunding Mortgage. 
 
 General Lien Railway and Land Grant. 
 
 General Second Mortgage. 
 
 General Third ^fortgage. 
 
 General Lien Divisional First ^lortgage. 
 
 General and Refunding Mortgage. 
 
 General Consolidated and First ^lortgage. 
 
 Railroad and Land Grant General First ^lortgage. 
 
 Prior Lien Railway and Land Grant. 
 
 Refunding and Extension. 
 
 Collateral Trust and First Lien. 
 
 Consolidated First and Collateral Trust. 
 
 Refunding and Improvement. 
 
 Consolidated First and Extension. 
 
330 
 
 FREDERICK LOWNHAUPT 
 
 No. 1. 
 
 PUBLIC 
 
 Municipal 
 
 4 State 
 
 ^Federal Gov't. 
 
 Railroad 
 
 QUASI-PUBLIC < Pviblic Service 
 
 ^Traction 
 
 PRIVATE 
 
 ''industrial 
 and 
 Others 
 
 Refunding 
 Sinking Fund 
 Improvement, etc. 
 
 Purchase Money 
 Refunding 
 Improvement 
 Fxtcnsion 
 Construction 
 Adjustment 
 Unified 
 
 Reorganization Lien 
 Consolidated Mortgage 
 1st. -nd, rird, Mortgage 
 General Mortgage 
 Divisional 
 Collateral Trust 
 Debenture 
 Sinking Fund 
 Income 
 Terminal 
 Land Grant 
 Real Estate 
 Prior Lien 
 Joint 
 Car Trust 
 Irredeemable 
 Assented Income 
 Annuity 
 Convertible 
 Participating 
 .Profit Sharing 
 
 Debenture 
 Construction 
 Consolidated Mortgage 
 1st Mortgage 
 General Mortgage 
 Collateral Trust 
 Income 
 Equipment 
 Sinking Fund 
 Convertible 
 Founders 
 ^Real Estate 
 
CLASSIFICATION OF BONDS 
 
 331 
 
 No. 2. 
 
 FUNCTION 
 
 SECURITY 
 
 (,as to principal or interest 
 or both) 
 
 SECURITY AND FUNCTION 
 
 MATURITY CONDITIONS 
 
 CONDITIONS DURING LIFE 
 
 Purchase Money 
 Refunding 
 Improvement 
 Extension 
 Construction 
 Adjustment 
 Unified 
 
 Reorganization Lien 
 Consolidated Mortgage 
 ^Subsidy 
 
 1st Mortgage 
 2nd Mortgage 
 3rd Mortgage 
 General Mortgage 
 Divisional 
 
 Guaranteed or Endorsed 
 Collateral Trust 
 Debenture 
 Income 
 Terminal 
 Land Grant 
 Real Estate 
 Prior Lien 
 ^Joint 
 
 { 
 
 Car Trust 
 Equipment 
 
 Redeemable 
 Irredeemable 
 Profit Sharing 
 Non-Exempt 
 Assented Income 
 ^Annuity 
 
 ''Convertible 
 
 Stamped 
 
 Exempt 
 ^.Participating 
 
GROWING POPULARITY OF PUBLIC SERVICE COR- 
 PORATION BONDS AS INVESTMENT. 
 
 BY THOMAS W. SIMMONS. 
 [Of Bertron, Griscom & Jenks.] 
 
 Students ui* investment securities have for some years 
 been interested observers of the growing popularity of 
 public service corporation bonds as investments. The in- 
 creasing favor of such securities has not been confined to 
 anv one class of buvers. The result has not been attained 
 suddenly. Some prejudice had to be overcome, and the ad- 
 vance has been contested step by step by opposing interests. 
 Only because they merited confidence has the faith of invest- 
 ors been secured. Proof of the present popularity of public 
 service corporation bonds is found in statistics recently 
 compiled by the Comptroller of the Currency of the United 
 States Treasury Department. The report covers invest- 
 ments held by all reporting l^anking institutions of the Unit- 
 ed States, embracing national, state, savings, private banks 
 and trust companies. A comparison of the figures of June 
 30, 1910, with those of the same date in 1909 shows that 
 during said year these institutions reduced their holdings 
 of municipai bonds by $46,7:"59,7SS, and their holdings of 
 railroad bonds by $10G,0G0,r)20, while increasing their in- 
 vestments in public service corporation bonds by $23,017,- 
 ^67. Thus it is sIkavii that the latter class has not only won 
 its way to popular favor, but has received very strong recog- 
 nition at the hands of discriminatinc: officials of banking in- 
 stitutions, who are qualified to pass intelligent judgment up- 
 on the merits of investments. 
 
 Tn the light of these facts, tlie in-esent popularity of 
 public service corporation bonds as investments must be 
 acknowledged. That this popularity will continue, no well- 
 
 332 
 
PUBLIC SERVICE CORPORATION BONDS 333 
 
 informed student of investment securities doubts. Care- 
 fully selected public service corporation bonds contain all 
 the elements of safe and desirable investments. That all 
 such issues cannot be safely bought goes without saying, but 
 the percentage of good bonds has largely increased during 
 recent years, until now, with the exercise of ordinary pru- 
 dence, they may be safely bought by all classes of institu- 
 tional and private investors, with the exception, only, of 
 savings banks and trustees, who are limited to that particu- 
 lar class of securities prescribed by the statute laws of their 
 respective States. Even these restrictions are being re- 
 moved, and many States now permit savings banks and 
 trustees to invest in the best public utility bonds. It is con- 
 fidently predicted that the number will be materially in- 
 creased as these securities continue to pass successfully the 
 test of time and as their merits shall become better under- 
 stood. 
 
 As it is well known that public utility bonds have not 
 always been favorably regarded by careful investors, it is 
 interesting to know what has brought about the change. 
 This may be clearly understood in the light of the history of 
 such securities. 
 
 Like all innovations and improvements, public service 
 corporations have had their periods of gi'owth and experi- 
 ment. Only a few years since, the horse car and the coal-oil 
 lamp were in general use. From these to the rapid and con- 
 venient service of the present day has been a long step, but 
 it has covered only a few years. That which was at first an 
 experiment is now a necessity of modern life. Experiments 
 are usually attended by mistakes ; and the origin and gro^\'th 
 of electric railway, gas and electric light companies consti- 
 tute no exception to the rule. 
 
 Until the advantages of the service furnished by these 
 corporations were fully understood, and while both construc- 
 tion and operation were in their experimental stage, it was 
 natural that the former should not have been of a permanent 
 
334 THOMAS W. SIMMONS 
 
 character and that tlic latter sliould have been unskillful. 
 The p'eat ini])etns that the service of these corporations 
 has given to general business and to suburban development 
 was then undreamed of. The machinery used by such com- 
 panies was imjx'rfeet, and expert management was un- 
 known. Pro})erties wcic almost without exception con- 
 structed and operated under the su])ervision of local men, of 
 bankci's, lawyers, merchants and mamifaoturers. These 
 men possessed neither technical nor practical knowledge of 
 the business, and their mistakes were manv and costlv. Sta- 
 tistics were lacking which would have enabled capable en- 
 gineers to have foretold the success or failure of contemi)la- 
 ted electric railway, gas or electric lighting systems. Be- 
 cause confidence was lacking, financing was difficult and 
 expensive, and too frequently the proceeds of securities 
 sold were either through ignorance or actual dishonesty mis- 
 applied. Vast amounts which should liave been judiciously 
 expended for construction and equii)ment were annually 
 put into the pockets of promoters or paid to politicians for 
 privileges or protection. Only recently has it become fully 
 understood that in the management of these large cor})or- 
 ations honesty is the best policy, and that a public, satisfied 
 by good service at reasonable cost, constitutes the best safe- 
 guard against unfair competition ov ]irejudiced attack. 
 Even the laws governing these companies were for many 
 years either inadequate (tr unfair, and there was lacking 
 those legal precedents which are so uecessiiry to both the 
 investor's confidence and protection. As the discovery of 
 gold in a new country always attracts a large class of the 
 lawless and unscrupulous, so this new field of finance was 
 quickly invaded by many inex|)erienced and ))v some dis- 
 honest manipulators, whose only desire was to mamifacture 
 securities, sell them to the public, and then quickly retire 
 with the sj)oils. Had these conditions continued, public 
 service corporation Ixtnds would never have attained popu- 
 larity among investors. 
 
PUBLIC SERVICE CORPORATION BONDS 335 
 
 It is only noccssary to compare public utility companies 
 of today with those of even the recent past in order to fully 
 understand the change that has taken place. If a simile may 
 be permitted for the purpose of illustration, it may be said 
 that formerly these corporations represented the inexperi- 
 ence and inunaturity of youth, while those of today are the 
 child grown in experience, knowledge and strength to the 
 full stature of a man. 
 
 Today every properly equipped bond house maintains 
 numerous departments, the sole business of which is to in- 
 vestigate conditions, examine properties, and supervise the 
 issuance of securities. Experts are employed in all branch- 
 es of this work, and every phase of the situation is covered. 
 The locality in which the public service corporation under 
 consideration is operating, or in which it is contemplated it 
 will operate, is fully investigated. The size, density and 
 character of population is taken into account; the perma- 
 nency and probable growth of the community ; the character 
 of its industries and whether or not these are diversified, or 
 whether they are principally of one kind and therefore sub- 
 ject to periodical depressions of a serious character, are all 
 regarded as matters of great importance. Then, too, polit- 
 ical conditions are looked into for the purpose of determin- 
 ing the likelihood of fair or prejudicial legislation. These 
 questions vitally affect franchise rights, upon the mainte- 
 nance of which the success of eveiy public service corpora- 
 tion depends. The attitude of some city governments and 
 even of some state governments is still so antagonistic to 
 utility companies that careful bankers are unwilling to risk 
 their money or that of their clients in securities that may be 
 jeopardized by the attacks of politicians who are willing 
 even to destroy values in order to feed a popular prejudice 
 which, in the main, they originally created. 
 
 AVithout discussing the question of the wisdom of munic- 
 ipal ownership in some cases, it is apparent that many agi- 
 tations which have, at least temporarily, unsettled values, 
 
336 THOMAS W. SIMMONS 
 
 have been based upon nothing more reasonable than the de- 
 sire of one political party or faction to obtain success at the 
 polls. In almost all cases in this country, municipal owner- 
 ship, when tried, has proved anything but profitable, and in 
 almost every case, too, in which this has been true, the result 
 could have been foreseen from the bej^inninc; bv anv reason- 
 ably well-informed person, if the cpiestion had been consid- 
 ered solely from a business standpoint and with a mind free 
 from bias and uninfluenced by popular clamor. 
 
 Not only does the far-sighted investment banker look 
 carefully into political conditions before investing his mon- 
 ey ill communities in which there is a popular prejudice 
 against public service corporations, but he even hesitates to 
 invest in States in which the courts of last resort have not 
 by their decisions established precedents which mark out a 
 safe course for him to follow. 
 
 The question of locality having been favorably passed 
 upon, the investigation is next directed to the i>roperty it- 
 self. Such an examination requires the skill of experts in 
 both construction and operation. The Ijcst talent obtain- 
 able is employed for this work. Such men do not simply re- 
 port upon present values, but they foretell with surprising 
 accuracy' what the future success of a propei-ty ^vill be. They 
 can estimate future earnings and future expenditures ^^^th 
 remarkable certainty, and thus furnish statistics which can 
 be safely taken as a basis for present and future financing. 
 Thus a banking house, before purchasing investment bonds 
 offered for sale, not only knows iho valno of the property 
 which at the time constitutes the security behind the bonds, 
 but it also knows what the future financial requirements of 
 the coni])any will be, and whether or not future earnings 
 will justify the same. 
 
 Formerly while ]Mi])lic utility companies and the ma- 
 chinery used by thorn were hai'dlv more than experiments, 
 construction was cheaply done. Today machinery of known 
 efficiency is used and construction is of the most pennanent 
 
PUBLIC SERVICE CORPORATION BONDS 337 
 
 and expensive character. Cheap things are seldom eco- 
 nomical and they are never so in the matter under discus- 
 sion. Therefore bonds issued today by public utility com- 
 panies constitute a lien on exceedingly valuable physical 
 property, the working life of which is known before the 
 careful banker invests his money in them. 
 
 The matter of present and prospective earnings is also 
 an important one. While no definite rule can be laid do\^Ti 
 as applicable to all cases, careful banking houses require 
 that net earnings shall largely exceed all bond interest, the 
 usual requii'ement being that they shall amount to from one 
 and one-half times to twice said interest. With present earn- 
 ings equalling said amounts, with estimated future earn- 
 ings maintaining the same proportion of safety, and with 
 the issuance of treasury bonds carefully restricted by mort- 
 gage provisions, not only are present values established but 
 adequate future values are insured also. Not only do in- 
 vestment bankers of the best standing today insist upon all 
 these requirements but they go much further to protect their 
 own interests and those of their customers. They employ 
 the best legal talent obtainable to examine into the legal- 
 ity of franchises, to pass upon titles to property, to prepare 
 mortgages and contracts, to attend to all the legal require- 
 ments of the or2:anization and operation of public service 
 corporations and the issuance of their securities. Resolu- 
 tions passed by directors, the minutes of their meetings and 
 tlie votinc: of stockholders are supervised by lawyers of 
 high standing in the field of corporation law. The banker 
 also insists that mortgages and contracts shall contain pro- 
 visions which the companies frequently consent to reluc- 
 tantly, but which are insisted upon because experience has 
 taught that they are necessary to insure the future safety 
 of the bonds he is to offer for sale. One of the most com- 
 mon of these requirements is that restricting the future is- 
 suance of treasury bonds. Not only must present earnings 
 justify the initial issue but the bankers require that further 
 
 B.VII— 22 
 
338 THOMAS W. SIMMONS 
 
 Ijoiids shall not ho issued unless the present ratio of net earn- 
 in<i-s to bond interest shall be maintained. Another jirovi- 
 sion of iniiHU-tance is that which permits the issuance of 
 treasury bonds only to the extent of a certain percentage of 
 the cost of future extensions, imjirovements or acquisitions 
 of property. This usually ranges from GO to 85 per cent. 
 Such restrictions, while permitting bonds to be issued in the 
 interest of increasing ])usiness, put a chock u]ion manage- 
 ment which if unchecked might be prejudicial to the inter- 
 ests of security holders. 
 
 AVhile the foregoing describes many safeguards now 
 throTMi around carefully issued public service cor]ioration 
 bonds and is sufficient to show^ the marked contrast between 
 present-day issues and those of former times, the precau- 
 tions recited by no means constitute all the safeguards at 
 present employed. A potent factor in the organization and 
 management of public service corporations in many states 
 today is the public service commission. These ccnmnis- 
 sions, when clothed with proper legal authority, are at once 
 both the corporation's and the security holder's guardian 
 and best friend. On one hand they protect the corporation 
 against ruinous competition, and on the other insure the in- 
 vestor against the issuance of securities which do not ro]u-e- 
 sent reasonable values. These commissions not only limit 
 the nniount of capitalization but they go further and pre- 
 scribe the purposes for wdiich the proceeds of bonds shall 
 be expended. They also frequently recpiire the establish- 
 ment of amortization funds which insure the proper main- 
 tenance of pi'operties. 
 
 AVhile such commissions sometimes incur the strong op- 
 position of comj)anics under their control ])y limiting charg- 
 es for electric railway transportation and for gas and elec- 
 tric light service, they often prove to be the corporation's 
 best friend by this very regulation, for such service gener- 
 ally insures a satisfied public which in turn often consti- 
 tutes the company's most valuable asset. Another benefit to 
 
PUBLIC SERVICE CORPORATION BONDS 339 
 
 the corporation which has attended regulation of capitaliza- 
 tion, is the increased confidence it gives the investor. This 
 not only enables the corporation to finance its needs more 
 easily, but as the commission prescribes the minimum price 
 at wliich the company may sell its bonds, it frequently re- 
 sults in enabling it to obtain a higher price than would oth- 
 erwise be the case. For a long time there was a deep-seated 
 antagonism on the part of public utility companies to the in- 
 terference of public service commissions. This antago- 
 nism is fast disappearing and so salutary have many of the 
 commission's requirements proved to be that some large 
 holding companies which ot^^i and operate properties in 
 states which have no such commissions, have adopted many 
 of the rules relative to amortization and other matters which 
 have been prescribed by commissions in other states. 
 
 The foregoing deals only with public utility companies, 
 but as the bonds of such corporations are offered to the in- 
 vestor in competition with railroad and industrial issues, it 
 is pertinent to this article to compare the respective desir- 
 ability of these classes of investments. However, industrial 
 propositions are so directly affected by business depressions, 
 or the reverse, as well as by the dangers of competition, and 
 they have so little in common with the other two classes, that 
 their merits as investment securities must usually be con- 
 sidered either from the standpoint of very large income 
 Afield or the opportunities they sometimes afford for profits 
 through wide market fluctuations. Therefore they may 
 properly be omitted from this comparison. Tt is however 
 freely admitted that some industrial issues do constitute sat- 
 isfactory investments. The other two classes have much in 
 common and may properly be compared. The scope of this 
 article will not pennit more than a passing' word in this con- 
 nection, and we shall therefore be content to call attention 
 to but a few of the argmnents most frequently advanced in 
 favor of public service corporation l)onds over those of 
 the railroad class. Some of these are the following: 
 
340 THOMAS W. SIMMONS 
 
 (a) It is practically impossible today to obtain first 
 mortgage railroad bonds on large systems at prices that 
 yield a satisfactory income to indiyidual inyestors, while 
 first mortgage bonds issued by representatiye public seryice 
 corporations are still obtainable on from a 4.90 to a 5J per 
 cent basis. 
 
 (b) Such junior lien, refunding or consolidated mort- 
 gage railroad bonds as are at present obtainable on a satis- 
 factory income basis, are either secured by a mortgage on 
 some segregated part of a large system, or else they are so 
 com})letely dominated by prior liens, that in case of fore- 
 closure the holders would be completely at the mercy of 
 larger or preferred interests. In contrast with this, public 
 seryice corporations are usually in such great demand and 
 they so commonly come within the power of competing bank- 
 ers to finance that the holders of the bonds of such companies 
 enjoy a protection that is impossible to the holders of rail- 
 road bonds of the class last mentioned. The pul)lic seryice 
 corporation bond is generally secured by a mortgage lien on 
 a yaluable segregated property for which there would be 
 many competitiye l)idders in the eyent of foreclosure, while 
 the railroad issues referred to are in most cases a lien on 
 only a part of a great system, the chief yalue of which is to 
 the system to which it belongs, and for which, in case of fore- 
 closure, there would probably be no competitiye bidding. 
 
 (c) Railroads are mainly dependent for tonnage either 
 upon manufacturing enterprises, such as the large steel 
 interests, etc., or upon crops, and therefore during periods 
 of industrial depression or in the eyent of serious crop 
 failure their earnings fall off tremendously. On the other 
 hand public service corporations furnishing gas. electric 
 railway or electric light seryice have shown surprising sta- 
 bility in earnings, even during financial panics and pro- 
 longed periods of industrial inactivity. Experience has 
 shown that people use almost as much gas and electricity 
 for lighting purposes and ride on street cars almost as much 
 
PUBLIC SERVICE CORPORATION BONDS 341 
 
 in bad times as in good times. Many public utility com- 
 panies actually showed increased earnings during the panic 
 of 1907 and the dull business year of 1908, while a very large 
 percentage maintained their former rate of earnings during 
 said time. 
 
 (d) In periods of disturbed condition in the stock mar- 
 ket active listed railroad bonds often fluctuate widely in 
 price for reasons entirely independent of those which affect 
 the security behind the bonds. Such issues are frequently 
 carried in margin accounts and as prices fall margins are 
 wiped out and bonds are forced for sale with a consequen- 
 tial further drop in quotations. The same is not true of the 
 great majority of public service coi-poration issues. These 
 are seldom listed on stock exchanges, are infrequently 
 bought for speculative purposes and they are therefore not 
 often carried on margin. Quotations on such issues are 
 generally not the subject of violent fluctuations. While a 
 general market disturbance will undoubtedly affect their 
 quotations to some extent, some interesting statistics have 
 been comjiiled w^hich tend to show that the decline which 
 such issues experience in a falling stock market averages 
 only about one-third of that experienced by active listed 
 railroad bonds. 
 
 The investor who has read the foregoing will naturally 
 ask the question, "If so much care is necessary in determin- 
 ing the safety of public service corporation bonds, how 
 may they be safely bought by those who have funds seeking 
 investment?" A complete and satisfactory answer to this 
 question and one that will cover all cases cannot be given, 
 but there are a few rules, which, if followed, all except min- 
 imum business risks will be eliminated and more than this 
 the average investor does not require. When more is nec- 
 essary investments should be sought only among Govern- 
 ment, municipal or underlying first mortijage issues which 
 yield only from about 2 to 4 per cent. The few important 
 rules referred to are as follows : 
 
342 THOMAS W. SIMMONS 
 
 1st. Never buy bonds on a purely consti-uetion propo- 
 sition. Such issues sometimes turn out satisfact(>rily ])ut 
 the percentage of such cases is so small that it docs not afifcct 
 the general application of the rule. Construction proposi- 
 tions necessarily include manv uncertain elements; (»riginal 
 estimates of cost are frequently exceeded, unlooked f(»r de- 
 lays in completion are generally encountered, time is al- 
 ways necessary to demonstrate the earning power of even 
 good i)roperties, and in the meantime hnancial burdens 
 incident t(^ all these thiniis must be carried ])v the banking 
 interests which are backing the i)roposition. Such ven- 
 tures are inconsistent with the elements of stability and 
 safety necessary to strictlv investment securities. Such 
 undertakings are in the very nature of things speculative 
 and while the final outcome is often profital)le the average 
 investor cannot afford to take the risk, and perhaps those 
 who can had better not subject themselves to the worry, anxi- 
 ety and delay which attend the average construction propo- 
 sition. 
 
 2nd. Select only bonds on large properties which oper- 
 ate in established and thickly populated comnuniities. These 
 are free from many hazards incidental to small ])roperties. 
 The latter maj^ be seriouslv affected ])v accidents or bv even 
 one negligent act which may result in a verdict for heavy 
 damages on account of death or injury which may i-esult. 
 Then too small companies do not often enjoy the possibility 
 of large increases in earnings which attend the ra]ud growth 
 of population in large connnunities. Another advantage^ 
 in large issues is the bi'oader market which is created for 
 them, making them more readily saleable and theref(U"e 
 more desirable to those who seek an investment which mav 
 be quickly coiiverted into cash whenever occasion requires. 
 
 3rd. A very important rule to follow is to avoid the se- 
 curities of companies which operate in what is commonly 
 called a **one industry conununity." Such com]^anies fre- 
 quently enjoy long periods of prosperity only to see earnings 
 
PUBLIC SERVICE CORPORATION BONDS 343 
 
 suddenly decrease enormously on account of a cessation of 
 activity in the particular industry upon which the entire 
 prosperity of the community depends. 
 
 4th. Statements of actual earnings should be required 
 and these should be carefully scrutinized to ascertain the re- 
 lation of operating expenses to gross income, while net earn- 
 ings should be carefully considered in comparison with fixed 
 charges. Usually net earnings ranging from 50 per cent 
 to 100 per cent in excess of total bond interest should be in- 
 sisted on, and of course interest on general bills payable 
 nuist be regarded if the ])ills payable account be large. 
 
 5th. There yet remains the most important rule of all. 
 If this be invariably followed all other rules may be ignored. 
 
 Deal Only with Reliable Bankers. 
 
 Investment bond houses of the best type have for so long 
 been telling investors that their best safeguard lies in deal- 
 ing T^^th a properly equipped house of the highest standing, 
 that many are now acting on this advice, realizing that it is 
 not either feasible or possible for even the most experienced 
 and best informed investor to properly pass upon the mer- 
 its of securities. It is certain, however, that very few, even 
 of those who follow this advice, fully realize how wise and 
 necessary such a course really is. 
 
FORECASTING TRADE CONDITIONS BY THE AREA 
 
 THEORY. 
 
 BY ROGER W. BABSON. 
 
 [Author of "Standard Business Barometers," etc.] 
 
 History of Plots and Charts. 
 
 From time immi'morial men have been making plots 
 with the idea of forecasting trade, meteorological, astro- 
 nomical and other conditions. The earliest plots of which 
 we find record are those prepared by the Eg^-ptians, 
 remnants of which exist on monuments and stone tablets. 
 We find that the rise and fall of the Nile River was charted 
 by the statistical department of the Pharaohs for the pur- 
 pose of forecasting future changes in the height of the river. 
 
 The Greeks also devoted considerable attention to the 
 study of charts and plots, although their work was more 
 along astronomical lines. They charted the heavens and 
 worked out verv interestinc; and intricate charts wherebv 
 they thought they could forecast future storms and other 
 events. The Romans also studied charts with the idea of 
 forecasting trade conditions, and in a work which I am now 
 reading on the conditions of Roman trade at the time of 
 Julius Caesar, some very interesting data are given, wliile 
 the records of Genoa and Venice show clearly the attempts 
 which their merchants made along these lines. 
 
 As is well known, Columbus and his contemporaries, 
 Sir Walter Scott and his contemporaries, and others, made 
 studies similar to much being done today; but space will not 
 permit us to go into further detail concerning the histor- 
 ical end of this work. Sufficient it is to say that all of these 
 charts were based simply on one dimension. As the old 
 philoso])hers believed the W(U-ld was flat and missed the 
 other factor in their geographical studies, so they all seemed 
 
 344 
 
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FORECASTINa TRADE CONDITIONS 345 
 
 to miss the importance of considering the second dimen- 
 sion in their studies of charts. In other words, up to with- 
 in the past decade, all charts of business and trade con- 
 ditions have been based either on the record of time or the 
 record of intensity, and have been what are known as single 
 line charts. 
 
 One Vital Error of Past Work. 
 
 For instance, when the Egj^tians charted the flow of 
 the river Kile, they considered simply the height of the 
 water and not the force at which it was flowing. In the 
 same way, when economists have charted the prices of 
 conmiodities, they have simply considered the height 
 reached by these prices without considering the period of 
 time during which these prices have remained high or low. 
 If, for instance, the normal price of wheat is $1.00 a bushel 
 and the previous high point was $1.50 a bushel, they have 
 considered the price of $1.25 as only a medium high price, 
 believing that the next upward movement would approxi- 
 mately reach and perhaps exceed $1.50 before the market 
 turned. In short, thev have failed to recognize that it con- 
 sumed as much "energy," so to speak, to keep the price 
 at $1.25 for a year or more as it would to keep it at $1.50 
 for a few months. Therefore, the vital point to remember 
 about the Area Theory is, that when prices, clearings, fail- 
 ures, earnings, etc., remain at medium high figures for a 
 long period of time, it is equivalent to their being at a much 
 higher figure for a short period of time. 
 
 The Same Error Prevailed Throughout All Scientific Study. 
 
 Not only did the old philosophers and economists make 
 this mistake of considering one dimension in their study 
 of trade and finance, but also made the same error in their 
 study of mechanics, chemistry, medicine, astronomy and 
 all of the sciences. Comparatively speaking it was only a 
 short tune ago that engineers began to base their work on 
 
346 ROGER W. BABSON 
 
 the foot-poinids roiisiimcd, instead of tlie one factor of space 
 or weii^lit. W'licn our universities were first founded, a 
 force was not considei'ed tlie jirodurt of two factors. It was 
 not tlioup^lit that it required the same enei-,c:y to move one 
 pound tlirou«j:li TOO feet of space as to ninvc 100 ])(>unds 
 throu^di one foot of space. The law of ''action and reaction 
 heing equal when the total force involved is considered" 
 was not recopiized ]\v the scientists until some time after 
 Newton died. We wlio graduated from leading universities 
 witliin the jiast few years are accustomed to think that the 
 law of action and reaction has always been taught in con- 
 nection with scientific studies ; but such is not the case. 
 
 The Area Theory Is not New Except as Applied to Trade 
 
 and Finance. 
 
 Therefore, the adaptation of this great law to economics 
 and psychology" is not a new departure, hut sim]dy a ])art 
 of an evolution which has been going on in all the other 
 sciences during the past 200 years, and has only recently 
 reached its present state of perfection. Therefore, the first 
 point which I wish to impress upon you is that practically 
 all previous chart work has been based on only one dimen- 
 sion, namely, either time or intensity, ancl not upon their 
 product; and secondly, I wish to impress \^M^^^ you that 
 the present-day work, in which T am so greatly interested, 
 is not based upon one dimension but upon the product of 
 two dimensions. This simply brings economics and ]isy- 
 ehological investigations up to the same ]^oint to whieh 
 chemistry, mechanics, astronomy and the other sciences have 
 progressed. 
 
 Description of Composite Plot. 
 
 So much for the theorv involved, and now n word con- 
 ceming the concrete case whieh we are discussing here, 
 namely, that of forecasting trade conditions by the Com- 
 posite Plot of business conditions. (See page 344.) This 
 
FORECASTING TRADE CONDITIONS 347 
 
 plot is a bird's-eye view of business conditions in the United 
 States from January 1, 1903, up to the present time, a 
 period of over seven years. In our compiling offices, we 
 have, of course, this plot going back much farther and 
 worked out on various different lines; but the plot placed 
 before you covering the past seven years is suliicient for 
 explanatory purposes. The outline of this area shows the 
 fall and rise in business conditions during these seven years, 
 and how this chart is made up I will explain later. What 
 I now wish to emphasize is that the theory of this plot is 
 based on the great law of action and reaction about which 
 I have spoken. This plot you will see consists of four areas, 
 and we will call them A, B, C, and D. It will be seen that 
 each area consists of two dimensions, the horizontal width 
 which represents time, and the depth or height which rep- 
 resents the intensity of the period of depression or the 
 period of prosperity, according to whether the area is below 
 or above the slanting line of growth. 
 
 No Reason for the Areas Being of Similar Shape. 
 
 Now the old idea was that the periods of depression and 
 prosperity must come with some regularity; that is, that 
 we must have a period of depression every so many years. 
 After the days of Joseph, the Eg>^:)tians thcnight that this 
 must come every seven years, while certain financial writers 
 nowadays think it must come either every ten or twenty 
 years; but no definite regularity can be counted upon, as it 
 all depends upon the intensity of the period. If the de- 
 pression is very severe, conditions will mend very quickly 
 and it will be of short duration; or if the period of pros- 
 perity is reckless and extraordinary, it can last only a rela- 
 tively short time. On the other hand, if the depression is 
 slight, it will take some years to readjust conditions; and in 
 the same way, if the period of prc^sperity is moderate, it will 
 last a longer number of years. Therefore, the position 
 taken by many financial writers that history will repeat 
 
348 ROGER W. BABSON 
 
 itself, and, as panics have come T\'ith certain regularity at 
 times past, said regularity will continue in the future, has 
 absolutely no economic basis. In the same way, those who 
 believe that prices must reach a certain height before they 
 turn to go d(n\iiward, or must reach a certain low point be- 
 fore they can turn to go ui)ward, are absolutely wrong in 
 their assumptions. Ever^-thing depends on the product of 
 the two factors and not upon either factor independently. 
 
 What the Areas Show. 
 
 Therefore, to apply this theory to the plot before us, 
 we see that the only feature worthv of studv is not the 
 length, or breadth, or height or dti)tli of these four areas, 
 but rather the product of their lengths and breadths, name- 
 ly, their area in square inches. It is the area which repre- 
 sents business conditions : area A represents the depression 
 of 1903 and 1904; area B, the period of prosperity of 1905 
 and 1906; area C, the depression of 1907 and 1908; and 
 area D, the present period of prosperit}^ which our great 
 West is now enjoying. Granting, however, that these areas 
 show the business conditions of the country during the past 
 few vears, von now ask how these areas can be used for fore- 
 casting trade conditions, and I can very briefly and plainly 
 answer this point. 
 
 The Areas Should Theoretically be Equal. 
 
 Granting that the black line represents the normal line 
 of growth of the country, and the outline of the black areas 
 the condition of trade, then these areas must be absolutely 
 equal. For if this country were willing to grow normally, 
 we should have no periods of reckless prosperity or periods 
 of depression ; but for all that we go above this normal line 
 of growth, we must rest a corresponding amount below it, 
 although— and this is the important point to remember— 
 we take our rest in areas and not in depth. In other words, 
 a veiy shallow area extending over a long number of years 
 
FORECASTING TRADE CONDITIONS 349 
 
 is equivalent to a very deep area extending over one or two 
 years. I will repeat this important point; namely, that if 
 the black line represents the line of growth and the area of 
 the black plots represents the condition of trade, then these 
 areas must be absolutely equal, from the law that action 
 and reaction are equal when the total force is considered. 
 Of course, it is impossible with the present data which the 
 Government supplies to get this line of growth correct. 
 Moreover the black areas are made up of only a compara- 
 tively few subjects, when they should doubtless contain 
 many more. Therefore in practice these areas will not be 
 equal ; but they should be near enough equal for practical 
 purposes in forecasting trade conditions. So much for the 
 first statement. 
 
 How to Forecast the Future by the Area Theory. 
 
 Now, granting that these areas must be equal, it will be 
 seen that the present period of prosperity is about two- 
 thirds consumed, and that one-third remains. Therefore, 
 to forecast trade conditions, it is simply necessary to ascer- 
 tain how long we shall be in consuming this remaining 
 third. The plot shows at a glance that a period of read- 
 justment is ahead and that the next great movement 
 must be below the line of growth; but we wish to know 
 more than that ; namely, how long it will be before we 
 enter this depression? This depends upon the *'rate of 
 flow," so to speak; if conditions will moderate, we may be 
 two or three vears consuminc: this remainincr third of the 
 period. On the other hand, if the throttle is opened wide 
 and conditions are pushed and business is forced, we may 
 use it up in a comparatively few months. 
 
 Therefore, to return to the subject of forecasting trade 
 conditions, it vriW be seen at a glance that, based on the 
 area theory, we are facing a period of readjustment or de- 
 pression to be worked out below the line of growth, and 
 that this depression will probably come sometime within 
 
350 ROGER W. BABSON 
 
 the ucxt few years, cloi)C'iKliiig on the rate of flow which can 
 only be told by watching this plot each week. If each week 
 it increases in height, we niay be sure that the period of 
 depression is rapidly approaching. On the other hand, if 
 it decreases in height and business flattens out and keeps 
 only a little above the line of growth, it is safe to assume 
 that present trade conditions will last for two or three years 
 more. 
 
 Subjects Upon Which the Composite Plot Is Based. 
 
 These Composite Plots may be made in various ways 
 and based on figures of almost an unlimited number of sub- 
 jects; but after talks with loading economists and psy- 
 chologists throughout the world, our work is conlined to 
 the subjects under the following twelve headings: 
 
 MercantUc Conditions. 
 Innnigration. 
 Bank Clearings. 
 Failures. 
 New Building. 
 
 Monetary Conditions. 
 
 Domestic Money Rates. 
 Surplus Reserves. 
 Foreign ^loiiey Rates. 
 Commodity Prices. 
 
 J n vestment Conditions. 
 
 Stock Market Conditions. 
 Condition of Leading Crops. 
 Political Conditions. 
 Railroad Earnings. 
 
 Had T space, T would take up each of these twelve sub- 
 jects in detail, showing the figures l)y months for ten 
 years, and the figures by jienrs back to the Civil War, with 
 each subject illustrated by a distinct and separate chart. 
 
FORECASTINa TRADE CONDITIONS 351 
 
 Individual Charts Are Also Useful. 
 
 Such iudividual charts also show graphically the trend 
 of conditions and the relation of trade today with similar 
 periods during previous cycles. Although these individual 
 cliarts cannot be depended upon of themselves, they are dis- 
 tinctly helpful in checking the Composite Plot. If the Com- 
 posite Plot increases in height, it is well to note the indi- 
 vidual plots and ascertain to what this is due. Not only 
 are some subjects of more importance than others, but cer- 
 tain subjects may be especially affected by specific condi- 
 tions which are more accidental than fundamental. More- 
 over the individual charts are of great value in studying 
 certain subjects, as, for instance, banking conditions. Thus, 
 in addition to studying the Composite Plot, which enables 
 one to forecast the broad monetary conditions, one ought to 
 give special attention to the following separate charts: 
 
 Relation of Loans to Deposits, 
 
 Relation of Loans to Aggregate Resources, 
 
 Relation of Reserves to Deposits, 
 together with several other charts which I might mention, 
 such as Failures, Clearings, etc. 
 
 An Illustration Showing the Use of a Chart on Bank 
 
 Clearings. 
 
 Few bank men understand the true significance of the 
 chart on Bank Clearings. For instance, go back tomoTrow 
 and ask an officer of your liank what the chart of Bank 
 Clearings shows, and he will tell you that it shows only 
 the activitv of general trade. This is true; but it does not 
 give a hint of the dangerous feature of large Bank Clear- 
 ings. If increased Bank Cleai'ings si]n]ily show increased 
 trade, the larger the cleariiigs the better, and a constant 
 .gro\^i:h would ])e distinctly favorable. Large Bank Clear- 
 ings, however, show something mueh more vital. They 
 show the rapidity with which money is being circulated. 
 
352 ROGER W. BABSON 
 
 They show the extent to which our currency is inflated, as 
 a dollar passing through six hands in one week answers 
 the same purpose as do six dollars passing through one 
 hand during the week. In other words, our currency is not 
 only inflated by the use of paper money and credit in its 
 various diversified forms, but is being inflated by our huge 
 bank clearim^ svstem. Some dav this clearing svstem will 
 receive a iar which will bring a financial and monetarv 
 ]ianic on this country which has not been seen since 1837. 
 Money circulated in this way at such a rapid rate as sho\Mi 
 bv the chart on Bank Clearings, when retarded, will receive 
 a shock which will have the same effect as suddenly de- 
 stroying a large proportion of our actual currency. Space, 
 however, will not permit us to study the charts independ- 
 ently and therefore I am simply describing our Composite 
 Plot, so-called, which is a combination of these various 
 figures and charts into one chart. 
 
 General Description of the Composite Plot. 
 
 This Composite Plot may be made in two ways. We could 
 first make individual plots, and then take a composite photo- 
 graph of them all ; but in practice there is a much simpler 
 way. This simpler way is to take the latest figures on all of 
 these subjects, and, by barometer scales, combine and re- 
 duce all these figures to one common index number, on 
 the same principle as used by the London Economist for 
 combining and reducing the prices of a large numlier of 
 commodities to one index number. This index number we 
 then plot, taking January, 1903, as '*0." Of course, theoreti- 
 cally there is no reason why we should call conditions exist- 
 ing at that time as "0" any more than ''plus 25" or **minus 
 25"; but for convenience we start with "0" i]i 1003. You 
 will note that the period itself really starts with the first of 
 February, 1903. at about *'3" and as each little square rep- 
 resents one month, it will be noticed that the first two weeks 
 of Febniarv trade r(^nditions remained about constant: but 
 
FORECASTINa TRADE CONDITIONS 353 
 
 the last two weeks tliey advanced about five points to "8." 
 During the month of March trade conditions advanced 
 about one point, while during April they dropped down to 
 about ''2." From this point it is very easy to follow trade 
 conditions by the edge of the black area. When this is un- 
 derstood, our periods of depression and prosperity stand 
 out vei*v clearlv. 
 
 Illustrating How the Figure Was Derived January, 1910. 
 
 As during my talks last year in this countrj' and Europe, 
 I was continually being asked how this Composite Plot 
 was made, I will now explain this in detail, taking January, 
 1910, as a typical month. 
 
 First, let me exj^lain the meaning of certain terms: 
 
 Actual Figures.— V^^e call all figures as reported, Actual 
 Figures. These arc the regTilar statistics familiar to every- 
 one. These Actual Ficr^n-es are in manv denominations. 
 For example. Bank Clearings are expressed in dollars, Crop 
 Production in bushels, Inunigration in number of people 
 arriving, certain railroad statistics in number of cars, etc. 
 
 Index Figures.— To comliine all these in one figure, it is 
 necessary to do away with these different denominations, 
 and express all in one abstract figure, or Index. That is, 
 all Actual Figiu^es must be compared by means of some one 
 principle. 
 
 Scale Figures.— To accomplish this, we introduce a set 
 of intennediate figures called the Scale Figures. 
 
 The steps by whieh these Scale and Index Figures are 
 obtained are as follows: Take, for instanee, the Actual 
 Figures for Inunigration from 1898 to 1908, inchisive. The 
 Actual Figure, 18,300, for the year 1901 was found to be 
 the lowest for that month of the ten year period and was 
 placed at the lower end of the Scale Table for January. 
 56,200 (in 1905) was found to ])e the bigliest Actual Figure 
 in January during the same time, and was therefore placed 
 at the high end of the Scale Ta])]e. Tlie difference between 
 the two Actual Figures was 37,900, which was divided by 
 
 B.VII— 23 
 
354 ROGER W. BABSON 
 
 10, aiul tho result, 3,790, added to 18,300 to make the second 
 fif^ure, 22,090, added again to tliat for the next, 25,880, and 
 so on in arithmetir^al ]^rogrcssion np to 56,200, the liighest 
 Actual Figure. 
 
 In February, the lowest Actual Figui-e was approxi- 
 mately 23,400, in 190S: tlie highest, 68,700, in 1906. The 
 difference, 45,300, divided l)y 10, equals 4,530, which, added 
 to 23,400, gives 27,930, and successively, the other figures 
 opposite February. Working out each month in the same 
 manner, we have as a result a ta))le which gives a scale for 
 each month in which the left and light ends are Actiial 
 Figures, and the figures between, proportional or mathe- 
 matically graded figiires. These are what we mean by Scale 
 Figures. 
 
 Placing the Index Fir/ures over fJie Scale Fifjures.— 
 We then arrange the Scale Figures in columns, ]ilacing zero 
 over the the column whose average approximates most 
 closely to the average conditions of the years 1903 and 
 1904, that is, the depression following the 1903 panic. This 
 date is taken arbitrarily as the starting j^oint of the Ba- 
 rometer. We then place the other Index Figures in series 
 to the left and light of zero. 
 
 E.rfension of Scales. — If llu' volume of Ijusiness in- 
 creases, so as to go beyond the scales, higher scale figures 
 are added, using the same arithmetical progression as at 
 first, so that the actual condition of the years 1898-1908 
 senTS as a constant by which to compare succeeding years. 
 Scales similar to this one on Immigration have lieen pre- 
 pared for all the subjects, and with these in hand, we are 
 prepared to combine our figures and prepare a Composite 
 Plot. 
 
 The next step is to segregate the different subjects into 
 tlu'ce groups: ^Icrf-antile Conditions; ^ronetary Condi- 
 tions: and TnvestuKMit Conditions. The manner of arriv- 
 ing at tlie Indox Figure for each subject is discussed on 
 the following pages. 
 
FORECASTING TRADE CONDITIONS 355 
 
 Mercantile Conditions. 
 
 1. Immigration. 
 
 2. New Building. 
 
 3. Failures. 
 
 4. Bank Clearings. 
 
 Monetary Conditions, 
 
 1. Commodity Prices. 
 
 2. Surplus Reserves. 
 
 3. Foreign Money Rates. 
 
 4. Domestic Money Rates. 
 
 Investment Conditions. 
 
 1. Condition of Leading Crops. 
 
 2. Railroad Earnings. 
 
 3. Political Factors. 
 
 4. Stock Market Conditions. 
 
 The Mercantile Group. 
 
 1. Ln migration -f 4i.— We will first obtain an Index 
 Figure for Immigration. The Actual Figure for January, 
 1910, was 50,243. Consulting our Scale Figures for Jan- 
 uary, we find that 50,243 is near the high end of the scale, 
 between 48,620 and 52,410; so the Index Figure will be be- 
 tween + 40 and + 50. Or. in dotnil: 
 
 (1) 50,243—48,620 = 1,623, or the difference between 
 the Actual Figure and the next lower Scale Figure. 
 
 (2) yw) X 10= -^^=4 (number of points to be ad- 
 ded to obtain exact Index Figure). 
 
 (3) 4 added to -f 40 = -f 44, as an index of unskilled 
 labor conditions leased upon government figures. This gives 
 an Index Figure of + 44 for Immigration. 
 
 2, Xew Building + 73. — We next will take New Build- 
 ing, for which we have an Actual Figure of $33,443,030, 
 which comes between 33,370,000 (+ 70) and 35,900,000 
 (H- 80). 
 
366 ROGER W. BABSON 
 
 (n :^:^,443,000— 33,370,000 = 73,000. 
 
 ^_. 73.000 ,,.730^000_ 
 
 ^^^ 251.000-"^ ^^^~251,000~'^- 
 
 (3) 3 added to + 70 ^ + 73, as an index of construc- 
 tion work l)aPod upon i^ermit figures compiled from the 
 Construction News. This gives an Index Figure of -\- 73 
 for New Building. 
 
 3. Failures O. — During January, 1910, tlicre were some 
 very large failures, which dropped the figure to zero, thus 
 giving vs an Index Figure of for Failures. (Owing to 
 the unusually heavy liabilities of these few failures, the 
 Scale Figures would have placed the Index at about— ISO, 
 a fiinire not iustified bv the fundamental conditions in this 
 field.) This figure serves as a very good index of the retail 
 trade, based upon Dun's and Bradsti-eet's Reports. 
 
 4. Bank Clearings + 102.— lu the case of Bank Clear- 
 ings, a weekly Index is always used, because in the Weekly 
 Barometer Letter we use the report for the preceding week. 
 The Actual Figures of each month are divided by the num- 
 ber of calendar days in that month, and the quotient mul- 
 tiplied by 7. The result is a set of Scale Figures comparing 
 with the weekly reports. When the monthly figure is used, 
 it is divided by the number of calendar days and the quo- 
 tient multi])liod by 7. Thus, to obtain the Index Figure for 
 January, 1910, the Total Bank Clearings, excluding New 
 York — $5,887,868,000, were reduced to a weekly average. 
 
 $5,887,868,000-4-31 x 7 = $1,329,714,000. 
 Proceeding as before: 
 
 (1) 1,329,000,000—1,324,000,000 (Index + 100) = 
 $5,000,000. 
 
 s^ooaooo ^p._ioo_^ 
 
 ^^^ 58,000,000 ''^^^~ SS""' 
 
 (3) 2 added to -f 100 = + 102, as an index of general 
 trade conditions, based on Clearings as compiled by the 
 W. B. Dana Co. Tliis gives us an Index Figure of -\- 102 
 for Bank Clearings. 
 
FORECASTING TRADE CONDITIONS 367 
 
 The Monetary Group. 
 
 1. Commodity Prices -\- 123.— In the case of Com- 
 modity Prices, we use Bradstreet's Index for January 1, 
 1910, which was 9.23. Proceeding as before : 
 
 (1) 9.23—9.20 (Index + 120) =0.03. 
 
 03 
 
 (2) ^t-15=3. 
 
 (3) 3 added to + 120 = + 123, as an index of domestic 
 requirements for money based upon Bradstreet's Index. 
 This gives us an Index Figure of -\- 123 for Commodity 
 Prices. 
 
 2. Surplus Reserves -\- 66.— The next subject we come 
 to is Surplus Reserves, and in this case, we use an inverted 
 scale. Heavy reserves like those in 1904 and 1908 are char- 
 acteristic of a depression. Reduction of reserves, although 
 not favorable in the long run, is, for the purpose of the 
 Index, taken to mean increased business and increased de- 
 mand for money. Below $5,000,000 this subject is put on 
 what we call the deficit scale, declining quickly to zero as 
 the reserves are wiped out, and reading — 66 for a deficit of 
 $50,000,000, as in November, 1907. 
 
 Proceeding as usual (but with inverted scale) we find 
 that the Januarv average Surplus Reserves equal $22,708,- 
 081. 
 
 (1) 27,500,000 (Index -f 60)— 22,708,081 = 4,800,000. 
 
 (') 7.500.000^10 = 6. 
 
 (3) 6 added to -f 60 = + 66, as index of domestic supply 
 of money based upon official bank figures. This gives us an 
 Index Figure of -\- 66 for Surplus Reserves. 
 
 3. Foreign Money Rates + J.5.— For indexing both 
 foreign and domestic money rates, the scales are similar. 
 In both cases, the Index Figure advances 10 points to every 
 gain of J of 1 per cent in the actual figures. 
 
 In January, 1910, the official rates of the Bank of Eng- 
 
358 ROGER W. BABSON 
 
 land, Bank of Franco and tlio Tmpovial Bank of Berlin 
 avt'rau,ed '.Y'r, per cent, .i^ivin.u an index i^^i^nire of — ');'), 
 which serves as an index of forei^^n monetary conditions 
 based n])()n official reports. TJiis (jivcs an Index Figure of 
 -j- 55 for Foreign Money Bates. 
 
 4, Domesfie Money Rates -{- 5^.— The averap^e domestic 
 bank rate for Janiiary, 1910, was 4.^ per cent, ^i^'i^i.? ^ fi.unre 
 of + 50, as an index of domestic money conditions showing 
 the confidence of the banking comnninity. This gives an 
 Index Figure of -\- 50 for Domestic Money Rates. 
 
 Note: In indexing money rates above 6 per cent an 
 average occurring only in a period of financial distui'liance, 
 a panic scale has to be substituted by the statistician in 
 charge, according to conditions shown by a majority of the 
 other subjects. On this panic scale the Index would move 
 to — 60 I'apidly when rates were advancing from 6 per cent 
 to 8 per cent or above. 
 
 The Investment Group. 
 
 1. Crops + 70.— To index the C(mdition of leading 
 crops, Corn and AVheat are added together and the result 
 I'educed to an index. 
 Corn (1909) 2,772,376,000 bushels 
 AVhcat (1909) 737,189,000 bushels 
 
 Total 3,r)()9,r)6r),000 busliels 
 
 (1) 3,509,r)(5r),000— 3,500,000,000 (Index + 70) =9,565,- 
 000. 
 
 9.565.000 
 
 ^"^ 70.000.000 -^ ' ^ -" ' • 
 
 (3) 1 added to + 70 = + 71. 
 
 '^i'his gives an Index Figui-e of -j- 71 for the crop situa- 
 tion. During the winter, the crop figure remains stationary, 
 but changes according to senile as soon as the first estimates 
 of the new ci*op are reeeivcHl. 'j'his is the great agricultural 
 index of our nation, based u])on government reports. 
 
FORECASTING TRADE CONDITIONS 359 
 
 Therefore, for Jmmanj, 1910, ire use an Index Figure of 
 -f- 71 for Crops. 
 
 2. Railroad Earnings + <5^. — For studying railroad 
 traffic, Ave use Idle Car Figures as issued from week to week, 
 and the Index is later revised by the statistics for the gross 
 earnings of 10 railroads. January gross earnings were 
 $55,828,736. 
 
 (1) 55,828,000—55,488,000 (Index + 80) = 340,000. 
 _340,000 
 
 ^^^ 1,894.000^ lu— z. 
 
 (3) 2 added to + 80 = + 82 as an index of investment 
 earnings based upon official figures of our own compilation. 
 This gives ns an Index Figure of -\- 82 for Bailroad Earn- 
 ings. 
 
 3. Political Factors + 7^.— This factor has been added 
 by request, but is used with an arbitrary Index Figure, no 
 Scale or Actual Figures being obtainable. The Index for 
 Political Factors stands at + 70 for ordinary conditions, 
 and is modified according to the opinion of the office as to 
 the relative importance of ordinary current events. This 
 gives us an Index Figure of + 70 for Politic(d Factors. 
 
 4. Stock Market Conditions + 65.— The average of the 
 high and low points in January for the 20 Kailroads = 
 125.40. 
 
 (1) 125.40—125.00 (Index +60) = .40 
 
 (2) t;5;x5 = 2. 
 
 (3) 2 + 60 = + 62. 
 
 The average of the high and low points of 12 Industrials 
 in January was 94.50. 
 
 (1) 94.'50— 93.75 (Index + 55) = .75. 
 
 (2) y^x5=3. 
 
 (3) 3 + 55 = + 58. 
 
 Averaging 62 and 58, gives as an Index Figure for the whole 
 
360 ROGER W. BABSON 
 
 group of stocks, + 60, provided no weight is given to the 
 number of shares traded in, which for January, 1910, was 
 24,538,049, or an average of 5,540,000 per week. Wlien the 
 average figure for the stocks in a "bull" market is between 
 -j- 60 and + 80, we add 5 for every million in excess of 
 5,000,000 shares traded in, per week, or subtract 5 for every 
 million under tliat figure. In this instance, we add 5, mak- 
 ing the Stock ^larket Index + 65, based upon actual quota- 
 tions of our own compilation. TJiis gives us an Index 
 Figure of + 65 for Stock Marlxef Conditions. 
 
 Summary Figures. 
 
 Mercantile -f 6'4.— The result of the preceding is that 
 for the Mercantile Group we have : 
 
 1. Immigration + 44 
 
 2. New Building + 73 
 
 3. Failures 
 
 4. Bank Clearings, -f 102, which in order to give 
 
 double weight, we consider -f 204 
 
 This makes a total of +321 
 
 Divided by 5, gives a Summary Index 
 
 Figure for Mercantile Conditions of + 64 
 Monetary -\- 69.— Id. the same way, we have Index Fig- 
 ures for the Monetary Group as follows: 
 
 1. Commodity Prices -f 123 
 
 2. Sur]ilus Beserves + 66 
 
 3. Foreign Money Rates + 55 
 
 4. Domestic ^loney Rates, -f 50, to which we also 
 
 give double weight, calling it -\- 100 
 
 This makes a total of ^ -f- 344 
 
 Divided by 5, gives a Summary Index 
 
 Figure for Monetary Conditions of. . + 69 
 Investment -\- 7:^.— In the same way we add together the 
 Index Figures on Investment Conditions, viz. : 
 
 1 . Crops -f 71 
 
 2. Railroad Earnings + 82 
 
FORECASTING TRADE CONDITIONS 361 
 
 3. Political Factors -\- 70 
 
 4. Stock ^lai'ket Conditions, -f 6d, which we 
 
 double, and consider + 130 
 
 This makes a total of + 353 
 
 Divided by 5, gives a Summary Index 
 
 Figiire for Investment Conditions of + 71 
 
 Final Siimmari/.—The final step is to add these three 
 independent Summary Figures, viz: +64 + 69 +71 = 
 + 204, and to divide by 3, which gives us a Final Summary 
 Index Figure of + 68. litis is the figure appearing on the 
 Composite Plot. 
 
 In all these processes, the Index Figure is obtained from 
 the Actual Figure in one way. The Scales and Indexes are 
 all made up on the same principle; the only differences are 
 those which have been needed for small adjustments as de- 
 scribed under Money Rates, Surplus Reserves, and Share 
 Transactions. The only feature wherein the personal equa- 
 tion enters, is in the weighting or the doubling of the Index 
 Figures on Bank Clearings, under the Mercantile Group, 
 of Domestic Money Bates, under the Monetary Group, and 
 of Stock Market Conditions, under the Investment Group. 
 This results in giving us 13^/3 per cent to these three sub- 
 jects, and 67:5 per cent to each of the other nine, which makes 
 a total of 100 per cent. 
 
 So much for the theory and the mechanical end of the 
 work. Now a word as to its a])i)lication. 
 
 Why Manufacturers and Merchants Should Study the 
 
 Composite Plot. 
 
 1. The Composite Plot aids the Credit Department. 
 
 The most successful manufacturers and merchants have 
 found that the system of '^ fixed" credit limits for cus- 
 tomers is absolutely wrong in principle, unjust to cus- 
 tomers, unfair to the sales force and a source of danger to 
 the firm. 
 
 Instead, they use a system of "flexible" credit limits by 
 
362 
 
 ROGER W. BABSON 
 
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FORECASTINa TRADE CONDITIONS 363 
 
 which credits are increased and decreased in accordance 
 with the rehition between present and normal business and 
 monetary conditions, i, T/iJ*5 system Invuriahly results in 
 greatly increased sales and yet insures that a firm sliall be, 
 in a strong financial position at a time of panic or business 
 crisis. A study of failures shows that the majority are duo 
 to unwieldv "notes parable." 
 
 The Composite Plot enables firms to keep accurately 
 informed as to present and future trade conditions and to 
 know whether to buy more merchandise or not, whether to 
 exj^and or to contract, whether to branch out or go slowly. 
 No large sums of money are made today by simply buy- 
 ing and selling in the same market. The most successful 
 wool merchants, the most successful steel contractors and 
 the wealthiest lumber dealers are those who study trade 
 conditions and buy when every one else is down and out 
 and liquidate w^hen all their competitors are optimistic and 
 expecting more business. How did J. P. Morgan's father 
 make his money in the dry goods business? IIow did Car- 
 negie make his monov in the steel business ? How did Mar- 
 shall Field make his? These men studied fundamental con- 
 ditions and bought or sold, contracted or expanded, in ac- 
 cordance with what these black areas show. 
 
 3. But, granting that your credit svstem is satisfactory 
 — and it isn't unless you use flexi])le credits — and granting 
 that vou now usually buy at the lowest and sell at the 
 highest, you still need to watch this Composite Plot. 
 
 4. Why? Because it is easier to sail with the wind 
 than always against it. AVhateyer your policy, whatever 
 your line of business, you employ capital, you own or I'ent 
 a building and usually have employes, and, in every move 
 vou make from the time vou enter vour office in the morn- 
 ing until you leave at night, you should have in your mind 
 a definite idea as to whether we are having a period of pros- 
 perity or a period of decline and about when the change 
 may be expected. 
 
364 ROGER W. BABSON 
 
 And now a word regarding the general investment of 
 money. 
 
 The Composite Plot Shows When to Buy and When to Sell 
 
 Securities. 
 
 The idea that one should invest money as soon as it ac- 
 cunudates, is absolutelv wronir. The most successful in- 
 vestors are those who confine their purchases to hip^h-u^rade 
 securities and devote their attention to dctenninini;- when 
 to buy, when to sell and when to remain out of the market. 
 Conditions are always suitable for one of these three 
 courses, and the Composite Plot always shows which of the 
 three courses one should pursue. ]Moreover, by a study 
 of this plot, it is possible to determine, with absohite ac- 
 curacy, the present condition of the country and the exact 
 relation between said present conditions and what would 
 be normal conditions. This relation shows whether hii2:her 
 or lower security prices may be expected. Of course, no 
 plots are of any use for forecasting daily or weekly move- 
 ments ; but, when correctly interpreted, this Comjiosite Plot 
 unfailin<::lv shows the trend of trade, monev rates and in- 
 vestment prices. 
 
 For years, fundamental statistics have been accumu- 
 lated, aualvzed and studied bv the most successful invest- 
 ors. Bv use of the Area Theorv, niv book, "Business 
 Barometers," shows how $2,500 invested, about f(U-ty-tive 
 years ago, in the most conservative stocks of that day, such 
 as Lackawanna, Illinois Central, New York Central, etc., 
 (which, moreover, were then selling almost as hi<j:h as in 
 1907), would now amount to over $1,800,000 if said stocks 
 had been bought and sold in accordance with what funda- 
 mental statistics have clearlv sho^^Tl. Said investor could 
 have confined his investments strictlv to those ten hic:h- 
 grade securities— without borrowing or buying on margin 
 —and moreover would have boui]:ht and sold onlv eisfht 
 times, making a total of only sixteen transactions with an 
 
FORECASTINa TRADE CONDITIONS 365 
 
 average of about three years aj^art. If this illustration were 
 based on highest and lowest prices, or if intermediate move- 
 ments were considered, or if less conservative stocks were 
 purchased, the result might be made much larger. Our 
 illustration eliminates risk, chance and extraordinary con- 
 ditions and shows only what any person with $2,500 can 
 safely accumulate in a comparatively few years, by simply 
 following the system of waiting until the early part of an 
 area below the line of growth has been formed and then buy- 
 ing outright high-grade dividend-paying stocks, holding 
 these stocks until this area has been wholly completed and 
 a prosperitj^ area above the line has got well underway — say 
 J consumed— when these stocks should be sold. The money 
 should then be kept in trust companies on deposit or in- 
 vested in short-term notes or commercial paper until this 
 prosperity area is completed and an area below the line of 
 growi:h has been started, when the same stocks may be pur- 
 chased again. 
 
 To forecast trade conditions, four steps are necessary: 
 
 1. Accumulating each week the data on these various 
 sul)jects and reducing each set of figures to common denomi- 
 nators. 
 
 2. Combining each week all of these common denomi- 
 nators into one figure, using the same to extend this Com- 
 posite Plot. 
 
 3. Interpreting this plot based on the *'law of action 
 and reaction" to determine in what period we now are and 
 what will be the next period. 
 
 4. "Watching this chart each week to study the ''rate of 
 flow" and to determine when the next period will be at an 
 end. 
 
 Practical Uses of the Work. 
 
 As stated, this Composite Plot shows us to be now on 
 the ebb tide and that we are facing a period of readjust- 
 ment; but as to when this readjustment is coming and 
 
366 ROGER W. BABSON 
 
 wlu'tlicr it will conic in the form of a panic or a dull period 
 of d('})rcssion can onl}^ be based on the present "rate of 
 flow." 
 
 I have endeavored briefly but conscientiously to cover 
 the subject assigned nie. 1 have endeavored to exi)lain my 
 work in an honest, frank manner, showinL: you its weak- 
 nesses, as well as the stren.i::th thereof. Althoudi I have 
 emphasized the fact that the Area Theory is absitlutely 
 sound, 1 have taken pains to mention that in the application 
 of the theory certain assumptions nnist still be made. How- 
 ever, this is true with every science, and even the great 
 physician or surgeon who receives a fabulous sum for an 
 hour's work will tell you that probably twenty years hence 
 he will look back with shame upon the woi-k he is doing 
 today. 
 
 Therefore, although the science is by no means per- 
 fect, yet I wish to impress upon you that it has reached 
 a stage where it demands your most careful attention. 
 Therefore, whether or not you agree with my conclusions, 
 I beg of you to give the work your most careful and con- 
 scientious study and deduce conclusions for yourself. 
 
 The future of this nation does not depend on its battle- 
 ships or its railroad rates, its statesmen, its diphanats, but 
 rather upon the integrity and strength of our great indus- 
 tries, and cspcciaJIj/ upon you business men and ymmg men 
 who are a distinct factor in the operation of these indus- 
 tries. Our nation is just like a big rough boy, needing to be 
 curbed during its prosperity, needing to be encouraged and 
 cheered up during its depression, and, as T have preached 
 from the Atlantic to the Pacific, f(»r each additional one 
 of you who l)egins to study this woi-k, the coming ]ieriod 
 of de])ression will be so nuich less severe and the nation's 
 industries will permanently be on a sounder and stronger 
 basis. 
 
 So nuich for the theory and the mechanical end of the 
 work ; now a word as to its apijlication. 
 
FORECASTING TRADE CONDITIONS 367 
 
 Why Successful Bankers Should Watch the Composite 
 
 Plot. 
 
 Most banks expend too little time and money studying 
 fundamental statistics and in forecasting future money con- 
 ditions. 
 
 With a general foreknowledge of the tendency of rates, 
 a bank may so arrange its maturities as to obtain at least 
 one-half of one per cent more on outstanding loans than is 
 possible ^Yithout such knowledge. It may be necessary to 
 allow a customer to choose either the "rate" or the "matur- 
 ity"; but l)anks should insist upon their right to fix the 
 other factor, and, doing so, should have in mind the tendency 
 of the money market. If the tendency is uj^ward and the 
 borrower desires to pay only the market rate, the bank 
 should insist on a short loan; Avhile if the borrower 
 desires a long-time loan, the bank should insist on a rate 
 a})()ve current market pi'ices. The reverse is true if the ten- 
 dency of money is downward. (See money line on Com- 
 posite Plot.) 
 
 To buy bonds when money is cheap, in order to obtain a 
 higher income than can be obtained on notice, is a very 
 dangerous practice, as banks then purchase bonds after the 
 price has advanced and are often compelled to sell them at 
 a loss during the next money stringency or else refuse ac- 
 commodation to customers. By studying this Composite 
 Plot, however, a bank may safely purchase high-grade secu- 
 rities with the expectation of later selling them at a profit, 
 because such banks know when the time for selling said 
 securities is at hand. The most conservative banks pur- 
 chase for permanent investment only government and such 
 bonds as can be counted as "Reserve," and purehase gen- 
 eral corporation bonds onhj for the purpose of selling again 
 at a profit in the course of a short time. In other words, 
 they buy bonds preceding a period of cheap money when 
 bonds are always low, and sell them before money again 
 becomes high. 
 
368 ROGER W. BABSON 
 
 Such banks not only receive an income of about 4 per 
 cent upon such securities and a profit of from 10 per cent 
 to 20 ])er cent when they sell, but also are always in the 
 strongest possible condition with very large reserves at 
 the time of a crash or monev strinG:encv. Therefore, the 
 study of fundamental statistics and especially this Com- 
 posite Plot, not only enables banks to receive greater income 
 from their loans and larger profits from the purchase and 
 sale of securities, but insures that such banks buy only the 
 highest grade of securities and, moreover, sell them before 
 the money is needed for customers. 
 
 Why Bond Dealers and Stock Brokers Should Watch This 
 
 Composite Plot. 
 
 During twelve years given exclusively to work for the 
 largest bond and stock exchange firms, I have found that 
 some firms are always prepared for every change in mone- 
 tary and investment conditions and universally profit there- 
 by, while others are often unprepared and either sustain 
 losses or are handicapped by heavy commitments. More- 
 over, in nearly every ease, I found that these most suceessful 
 firms fjave mucli study to fundamcutal statistics and based 
 their business policy in accordance irith what such statistics 
 foretold. Firms who have watched these figures during the 
 past years have always been prepared for every period of 
 high prices by having previously purchased large auKnnits 
 of long-term bonds at low prices. As money rates have in- 
 creased, such firms and their customers have gradually re- 
 duced their loans and changed securities. By such a pc^licy 
 they are always able to trade at the market and still make 
 a ])rofit. When these figures have foretold a coming jieriod 
 of money stringency, such firms have purchased and recom- 
 mended only short-term notes* and bonds maturing within 
 
 *Matiy do not become interested in short-time notes until money rates 
 are high and when investors should be buying long-term b<ind<. Of course 
 this is the time for corporations to become interested therein, but not bond 
 dealers, who should purchase and recommend short-time notes before money 
 rates are high and when bonds are selling at top prices. 
 
FORECASTING TRADE CONDITIONS 369 
 
 one or hvo years, which insured that they and their cus- 
 tomers would at critical times have large cash balances in 
 order to take advantage of the next period of low prices. 
 Such firms not only make great profits, while at the same 
 time keeping themselves in an imj^i'egnably strong financial 
 condition, but create a most loyal and valuable clientele. 
 Therefore, all bond dealers and brokers should constantly 
 watch this Composite Plot to forecast trade conditions. 
 
 B.VII— 24 
 
WALL STREET PHRASES AND METHODS. 
 
 BY JOHN MOODY. 
 
 [Author of "The Truth About the Trusts"; Editor of "Moody's Manual 
 of Railroad and Corporation Securities," etc.] 
 
 In the Wall Street field many teiTiis and phrases are 
 used whieh are not familiar to the outsider and therefore 
 require dctiuitinn in a book of this kind. In faet, many 
 praetieal Wall Street people, while elearly understanding 
 the meaning of such and such a phrase or word, cannot al- 
 ways concisely define it, or convey its exact meaning to 
 the inquirer. In the following pages the chief terms and 
 phrases relating to the modes and general mechanism of 
 the Street are briefly defined and explained. The various 
 words or phrases are taken up in alphabetical order. 
 
 Arbitrage. The buying and selling of the same secu- 
 ritv in different markets, as New York and London, or 
 New York and Chicago, for the purpose of making a i)rofit 
 from the difference in quotation between the two markets. 
 This trading is of course based on temporary differences in 
 prices between the markets, which are due from some 
 special cause. If all things were equal every stock would, 
 of course, have the same value in every market in which 
 it is dealt in. There are two kinds of arbitrage dealings 
 in stocks between New York and London. One operation 
 is known as the ''spread" and the other the "back-spread." 
 
 Averaging. This is a speculative term which is used 
 to describe purchases or sales of stock which are made 
 when the market is rising or falling, as the case may be, for 
 the purpose of improving the position of the buyer or seller 
 ill the matter of his average price for all his securities. 
 For instance, if 100 shares are ])urchased at 95 and tlie 
 price declines to 75, the averager will purchase another 
 
 370 
 
WALL STREET PHRASES AND METHODS 371 
 
 hundred shares at 75, thus bringing the average cost of 
 his total hoklings to 85. Hence, as soon as the i^rice of the 
 stock recovers to over 85 he will have a profit on his entire 
 transactions. 
 
 Bear. This is the name for a speculator who sells stock 
 short in expectation of buying it back at a lower price. In 
 order to do this he of course borrows a certificate to de- 
 liver against his sale, and when he has bought in or 
 "covered" he uses the new bought certificate to repay the 
 loaner. 
 
 Bill of Exchange. This is a written order or request 
 from one person to another for payment to a third party, 
 the amount paid being charged to the one who issues or 
 signs the bill. There is in reality no difference between 
 a "bill of exchange" and an ordinary draft, but the former 
 tenn is commonly applied to an order for money payable 
 in a foreign countrv, whereas the same sort of order ]X\v- 
 able witliin the country of its origin is known as a "draft." 
 
 Blind Pool. A ])lind pool in the stock market is one 
 where the members join together and C(mtri])ute capital, 
 agreeing that only the manager shall have full charge of 
 the pool and know in what way the m(niey is to 1)e used. 
 Blind pools are not confined to stocks but may be carried 
 on in a scheme of almost anv nature. 
 
 Bobtail Pool. This is a terai which usually applies to 
 a small or infonmal pool in stocks. In such cases the 
 members join together to move the stock either up or down 
 and then each is usually allowed to suit liis own plens- 
 uro in closinq- out his interest in tlie pool. 
 
 Bucketing. This is a tenn used to describe sales made 
 by a broker for his own account aiid risk against cus- 
 tomers' purchases or purchases by the broker against cus- 
 tomers' sales. Tt is a reprehensible practice and is usually 
 done to enable the brokei* to speculate against his cus- 
 tomers' trades. Tn such instances the broker vnus if his 
 customers lose, or he loses if his customers win. 
 
372 JOHN MOODY 
 
 Bucket-Shop. This is a place usually advertised as a 
 brokerage office where bets are made on regular stock ex- 
 change quotations. No actual transactions take place. 
 Usually money is put up by the customer and a commis- 
 sion is charged for buying and selling the same as on a 
 regular exchange. When the quotations show a ])rofit to 
 the customer, he is privileged to demand his prolit; when 
 the limit of the customer's margin has been reached in the 
 price of the stock, the customer has lost his bet and his 
 money and is "wiped out." 
 
 Call. A call on a stock is a contract or agreement bind- 
 ing the issuer to deliver to the holder of the call the stock 
 named therein within a certain time, at a certain price, 
 if the holder shall so demand. For instance, the one issu- 
 ing a call will agree to deliver one hmulred shares of a 
 specified stock within thirty days at 110 if the purchaser 
 makes a demand for it. Should the stock be selling at 106 
 the issuer of the call may be able to sell his promise for 
 $100. The purchaser of the call will then hold the same, 
 and if the stock rises above 111 within the thirty days lie 
 will ('.ill upon the issuer for the hundred shares at 110 and 
 probably sell the same in the market at or over 111, thus 
 realizing a profit. A contract of the same kind applying to 
 the short side of the market is known as a "put." 
 
 Corner. A corner in a stock is caused by the ]">urchase 
 by a pool or other interest of all the fl(\Tting or purchasable 
 stock of the company, after which the ]^rice can be advanced 
 at the will of those creating the corner. Sjieculators who 
 are short of the stock and are imable to buy or borrow to 
 make delivery or return stock which thev have borrowed, 
 are thus forced into a corner and "squeezed." They must 
 settle with the buyers at the buyers' o^^^l prices. 
 
 Covering. This is a term used in the stock market to 
 describe the act of buying stocks or commodities for the 
 puri:)ose of closing short contracts — buying back stocks 
 pre^^ously sold but which were not possessed when sold. 
 
WALL STREET PHRASES AND METHODS 373 
 
 Due Bill. In stock exchange parlance a due bill is a 
 promise to pay a dividend which has been declared but has 
 not yet been paid by the company. For instance, a stock 
 certificate may be purchased in the market after the trans- 
 fer books of the corporation have been closed, or the trans- 
 fer of the stocks may not have been made, but by agree- 
 ment the dividend is to go to the purchaser, and not to 
 the party in whose name the certificate stands. When the 
 dividend is paid to the original party the due bill is pre- 
 sented to him and he passes the dividend over to the pur- 
 chaser. 
 
 Flat. This signifies ''without interest." When bonds 
 are sold flat no charge is made to the buyer for the accrued 
 interest, as the interest is included in the price of the bond. 
 On the New^ York Stock Exchange all bonds are sold at 
 ''flat" prices, but in private transactions a large majority 
 of the sales are made on an "accrued interest" basis. The 
 term "flat" is also used in relation to the lending of stocks. 
 When stocks are lent flat the lender does not pay interest 
 to the borrower of this stock. Otherwise the borrower will 
 pay the lender the market value of the stock and the lender 
 will pay interest to the borrower on his money. 
 
 Giving up. This term is used in the stock markets to 
 describe a broker who executes an order for another broker 
 and whose connection with the transaction then ends. In 
 reporting to the broker to whom he sells or from whom 
 he buys the name of the broker for whom he is acting, he 
 is said to "give up" the latter. The latter receives the 
 stock and completes the transaction. 
 
 Hypothecation. This signifies the pledging of securities 
 or other property as collateral for loans. In Wall Street, 
 where stocks are purchased on margin and carried by a 
 broker for his customer, they are usually hj'pothecated, 
 or deposited as collateral in loans with banks or trust com- 
 panies or other loaners of monev. In this wav the broker 
 secures the capital to carry the stocks for his customer. 
 
374 JOHN MOODY 
 
 Irish Dividend. This is a term sometimes used to de- 
 scribe not a dividend, but au assessment on a stock. 
 
 Joint Account. Tlie term for a transaction in which two 
 or more brokers or speculators join together \'nr tlicir 
 mutual beuetit or risk in carrviui^ througli a transaction. 
 
 Long of stocks. This is the phrase used when a specu- 
 lator is a bull; that is to say when his account shows a 
 balance of stocks on the loug or bull side. The opposite 
 condition is to be short of stocks and be ou the bear side. 
 
 Manipulation. This word a])pUes to the operation of 
 working stocks both up and d(»wn on the exchanges, both 
 ways at once. A well-known method of manii)ulating a 
 stock is to i)ut through on the exchange a number of ticti- 
 tious sales, one broker agreeing to purchase at a certain 
 price from another and the latter then agreeing to rejun-- 
 chase the same stock at the same or another price. This 
 arrangement is sometimes carried on between various 
 brokers, each transaction being offset in S(nne wav bv an- 
 other. As a result there may be a large number of quota- 
 tions reported with no actual sales. These quotations are 
 commonly known as **wash" transactions, and the ])ur- 
 pose usually is to create outside interest in the stock and 
 start a s]i(*culatiou in it among genuine buyers and sellers. 
 
 Margin. This is the word used to describe money de- 
 posited with a broker for speculation in st(^eks, grain or 
 other eouniindities. Tn st(^cks the margin re(|uired ranges 
 from 5 ]M>r cent to fJO per cent, de]^endent u]^on the char- 
 acter of the security ]")urchased. The average margin is 
 10 per cent, which amounts to $1,000 (ni the (U'dinary (Hie 
 hundred shares of stock. The margin ]u*otects the cus- 
 toTuer down to a ]")rice ten ]ioints below the price he has 
 paid, if he is Inug of stock, and leu points above the ]'>rice 
 he has received if he is short of the stock. As his margin 
 becomes narrower because of the change in the market 
 prices he is required to put up more money or else have his 
 accoimt closed out. 
 
WALL STREET PHRASES AND METHODS 375 
 
 Outside broker. This tonn descri])cs a broker who is 
 not a moinbcr of the regiihir exchaiicje, l)iit Avho deals in 
 securities either on the streets or elsewhere. In New York 
 City an outside broker is one who deals in what is kn(jwn 
 as the outside market or on the curl). There are nowadays 
 a very large number of stocks and bonds which are traded 
 in in this outside market, and these outside brokers usu- 
 ally conduct just as legitimate a business as those who 
 make trades on the stock exchange. 
 
 Passing a dividend. This does not mean declaring a 
 dividend, as many people assume, but it means failure to 
 declare a dividend that had previously been regularly paid. 
 "Wlien the company specifically states that it will not pay a 
 similar dividend to that which previouslj^ had been paid, 
 then it is said that the dividend is stopped. But when no 
 official action is taken and the dividend simply is not de- 
 clared by the directors, it is said to have been ''passed." 
 
 Privilege. This is a general name for a call, a put, a 
 spread or a straddle, infonnation as to each of these terms 
 being supplied under their own headings. In any kind of 
 privilege the purchaser of the same is not liable for loss 
 beyond the amount actually paid for it. 
 
 Put. A put on a stock is the reverse of a call, ])oing a 
 written contract or agreement binding the issuer to receive 
 from the holder the stock named in tlio agreement within 
 a certain time at a certain price if the holder shall so de- 
 mand. The act of delivering such stock to the issuer of 
 the contra of is generally kno^^^l as "putting" the stock. 
 
 Pyramiding. This describes operati(ms by the use of pa- 
 per profits made in transactions not yet closed and, therefore, 
 not yet in hand. For instance, one may purchase one hun- 
 dred shares of stock at 50 on a margin of 10 per rent of the 
 par value. If the stock advances to 60 the purchaser will 
 then have 20 per cent margin and he will purcliase one 
 hundred shares more. If the price then goes to 70 he will 
 purchase two hundred shares more, giving him four him- 
 
376 JOHN MOODY 
 
 dred in all. If it next goes to 80 he will then purchase four 
 hundred shares more, giving him eight hundred shares in 
 all, on which he has a margin of 10 per cent, or $8,000. Up 
 to this point his paper profits will be $7,000. If the market 
 continues in its rise, he will continue accumulating stock 
 until his account shows very large accumulated paper 
 profits. If he then sells out he will have turned his profits 
 into cash, hut if the market suddenly drops ten points he 
 will not only have lost the profit on the last transaction, but 
 will have lost everything. In other words, the inverted 
 pyramid will have fallen and luiiied him in the crash. 
 
 Spread. A spread is a put and call combined and is 
 practically the same as a straddle. If the stock goes below 
 the price named in the put end, plus the cost of the spread, 
 the holder makes a profit; also if the stock goes above the 
 price named in the call end, plus the cost of the spread, 
 the holder of the spread also profits. In other words, the 
 purchaser of a spread is said to "play the two ends against 
 the middle"; he has two chances to make moncv and his 
 loss in any case is limited to the cost of the spread. 
 
 Straddle. A straddle is similar to a spread with the ex- 
 ception that only one price is named in it. The stock may 
 be called for or delivered at this one price only. As in the 
 other cases, the stock must go up or down more than the 
 amount paid for the straddle before there is a ]trofit in it. 
 
 Under the rule. Tliis is a term used to describe an of!i- 
 cial transaction made on the New York Stock Exdiange. 
 In case a member of the Exchange fails to receive or de- 
 liver stock in accordance witli his contract of purchase or 
 sale, the stock in question is bought or sold, as the case may 
 ))e, by the chairman of the Exchange for the account of the 
 delinquent memlier, and any difTcrence in cost is charged 
 or credited to him. "When transactions of this kind are 
 put through they are known as ])urchascs or sales made 
 ** under the nile.'' 
 
 Washing. This term describes the operation of simul- 
 
WALL STREET PHRASES AND METHODS 377 
 
 taneous buying and selling the same stocks for the purpose 
 of making quotations and inducing outside speculation or 
 interest in the stock by imparting apparent activity to it. 
 Washing is usually employed when manipulation of some 
 kind is in progress. 
 
 Watered stock. A term used to describe the capital 
 stock of a company which is not supposed to be represented 
 with a corresponding amount of assets. The term as used 
 is a vague one and is subject to several interpretations. 
 For instance, when a stock dividend is declared the original 
 stock is said to be watered to that extent, unless the newly 
 issued stock represents added property or value in some 
 form. 
 
 Ex-dividend. When a stock upon which a dividend has 
 been declared is sold and the price is not to include the 
 amount of the dividend to be shortly paid, the stock is said 
 to be sold "ex-dividend." 
 
 In Wall Street no one is always right; cheap advice is 
 plentiful; some men leani only by failing; losses make us 
 more cautious; interrogate before you negotiate; money 
 is most valued when lost; don't buy an Qgg until it is laid; 
 fraud is built on misrepresentation; speculation begins 
 when certainty ends; opportunity is often lost by deliber- 
 ating; get infonnation before you invest, not after; get an 
 investment that will let you sleep; it is idle to wait for your 
 ship to come in unless you have sent one out; those who 
 lament their misfortunes are generally they who do not 
 recognize their opportunities; buyers of stock belong to 
 two classes: those who trade on tendencies and who take 
 hold wherever the market is active without much reference 
 to values or prices, and those who always try to buy when 
 prices are down instead of when they are up. 
 
 In Wall Street the investor detennines the prices of 
 stocks in the long run. This statement is sometimes dis- 
 puted by those who point to the fluctuations which are con- 
 fessedly made by manipulators without regard to value. 
 
378 JOHN MOODY 
 
 It is true that sueli fluctuations do occur, but when the 
 mauipulatiou is over the influence of the investor is again 
 felt. If he decides that a given stock is worth only so much 
 the manipulator will ultimately be compelled to accept that 
 valuation, because manipulation cannot be kept uj). The 
 general object of manipulation is to buy below value and 
 sell above value. 
 
 *'An important influence of the stock exchanges, and in 
 some ways also of the produce exchanges, is the influence 
 they exert upon the money market. The possession by any 
 coimtry of a large mass of salable securities affords a power- 
 ful guarantee against the affects of a severe money panic. If 
 in New York there arises a sudden pressure of money, so 
 that confidence becomes impaired and people having con- 
 tracts entitling to future or immediate delivery of money in- 
 sist that these contracts shall be executed in money instead 
 of other fonns of promises, what happens? The banks call 
 in loans and begin to hold their cash. If they hold large 
 quantities of securities salable on the London, Paris or 
 Berlin market a cable order will affect the sale of these in 
 an hour, and the gold proceeds will be on their way across 
 the Atlantic in a day. 
 
 "Wonderful has been the effect within the last twenty- 
 five years of this steady influence of the stock market upon 
 the demand for money and upon the smoothness of the 
 operations of the mechanism of the exchanges. AVhat has 
 just been put in a crude form by referring to a crisis oc- 
 curs daily and Ikmu'Iv on the stock exchanges, and prevents 
 sudden contraction and expansion in the rate for loans. 
 The manufacturer goes ]-)lacidly on ]">aying his 4 or 5 ]H'r 
 cent for commercial loans, when if there were no stock 
 exchanges where securities could be sold in one market at 
 a slight profit over another, he would find that his bank 
 was firet charging 7 or 8 per cent, then dropping to 3 or 4 
 and then going back to 8. By means of the facilities which 
 the stork ninrkct affords for placing rrodit instantly at the 
 
WALL STREET PHRASES AND METHODS 379 
 
 command of one market or another the pressure for money 
 is mitigated, and has put a limited effect upon the commer- 
 cial borrower. Such pressure as now occurs is transferred 
 to the borrower on call— the broker in stocks, who thus 
 acts as insurer for the commercial borrower. This influence 
 of the stock market has much the effect of a buffer upon the 
 impact of two solid bodies. Crises are prevented when they 
 can be prevented, and when they cannot they are antici- 
 pated, and their force is broken into a mild succession of 
 ripples instead of a tidal wave."— Chas. A. Conant, "Wall 
 Street and the Country." 
 
QUESTIONS IN 
 INVESTMENTS AND SPECULATION 
 
 Distinction Between Investment and Speculation. 
 
 1. TMiat is the distinction between investment and spec- 
 ulation? Pages 3, 5. 
 
 2. How may a mortgage become a speculation? 
 
 Pages 5, 6. 
 
 3. How do large investors protect their capital against 
 unknown risk? Page 7. 
 
 4. Show how some states protect investors. Pages 8, 9. 
 
 5. What is the rcLation between the output of gold and 
 the income from investments? Pages 10, 11. 
 
 6. "What are some of the evidences of wise investments 
 in the United States? • Page 12. 
 
 Real Estate Loans. 
 
 1. Name two characteristics of a safe investment. 
 
 Page 13. 
 
 2. What was the earliest form of investment? Page 14. 
 
 3. Describe brieflv the historv of farm loans. 
 
 Pages 14, 15. 
 
 4. Wliv are real estate loans the most satisfactorv? 
 
 Page 15. 
 
 5. What determines the rate of interest paid on loans? 
 
 Page 17. 
 
 6. Outline three ways in which the small investor may 
 secure fann mortgages. Pages 16, 18. 
 
 7. Show how har^^est time affects interest rates on loans. 
 
 Pages 19-21. 
 
 8. What is a reserve center? Page 20. 
 
 381 
 
382 QUIZ QUESTIONS 
 
 9. Distiiii^niisli between call and time loans. Page 20. 
 
 10. What factors enter into the value of city real estate? 
 
 Page 22. 
 
 11. AVhat precaution should he taken before investing in 
 city real estate loans? Page 24. 
 
 12. Show why a first mortgage real estate ])ond is desir- 
 alde. Pages 25, 26. 
 
 13. Why should investment in real estate debenture bonds 
 be made with extra care? Page 26. 
 
 14. What is the nature of a leasehold bond? Pages 28, 29. 
 
 Land and Real Estate Booms. 
 
 1. Show how^ land booms may benefit communities. 
 
 Page 30. 
 
 2. Wliv are extensive land booms in the United States 
 not likely to take place again? Page 32. 
 
 3. Show how land booms often bring losses to investors. 
 
 Page 33. 
 
 4. What points should be investigated before pui-diasiug 
 a farm? Page 34. 
 
 5. Describe the stock-company plan of owning large agri- 
 cultural properties. Page 35. 
 
 6. What is the fii'st essential of suburban real estate? 
 
 Page 37. 
 
 Multiplicity of Bonds. 
 
 1. Explain the difference lietwecn a mortgage ])ond and 
 a real estate mortgage. Page 3S. 
 
 2. Wliat is meant by the term ''equity''? Page 41. 
 
 3. Why is provision now made for redeeming bonds be- 
 fore maturity? Pages 43, 44. 
 
 4. Name the various kinds of bonds. Pages 44, 45. 
 
 Government, State and Municipal Bonds. 
 
 1. Explain how national banks derive jn'ofit from low 
 rate government bonds. Page 47. 
 
INVESTMENTS AND SPECULATION 383 
 
 2. What security is behind government bonds? 
 
 Pages 46, 49. 
 
 3. What facts nuist be investigated by bankers before 
 pui"chasing municipal bonds? Page 53. 
 
 Railroad Bonds. 
 
 1. A\'hat has caused the great variety of railroad bonds? 
 
 Page 54. 
 
 2. Name and explain at least ten classes of railroad 
 bonds. Page 57. 
 
 3. What advantage and disadvantage has a registered 
 bond? Page 61. 
 
 Public Service and Other Bonds. 
 
 1. Define a public service corporation. Page 63. 
 
 2. What is the first requisite for the safety of a pul)lic 
 service corporation bond? Pages 66, 67. 
 
 3. Explain why the stability of public service corpora- 
 tion bonds is generally unaffected by panics. 
 
 Pages 69, 70. 
 
 4. How does an income bond differ from a mortgage 
 bond? Page 72. 
 
 5. What is a holding corporation? Page 73. 
 
 6. Tell what vou know about collateral bonds; debenture 
 bonds. Pages 73, 74. 
 
 7. Whv should convertible bonds be carefullv scruti- 
 nized? Page 76. 
 
 8. Explain the use of the short tenn note. Pages 76, 78. 
 
 Irrigation, Mining, and Timber Bonds. 
 
 1. Give the reasons whv irriijation bonds are considered 
 among the most speculative of all bonds. Pages 82-85. 
 
 2. What do bonds of undeveloped mining properties lack 
 to make them safe investments? Page 88. 
 
 3. Under what conditions is a mining bond fairly safe? 
 
 Page 89. 
 
384 QUIZ QUESTIONS 
 
 4. What is the greatest risk in timber bonds? Page 90. 
 
 5. Upon what are timber bond issues based? Page 9CL 
 
 Guaranteed Stocks. 
 
 1. Explain the merits of guaranteed stocks. Pages 92, 93. 
 
 2. Exphiin how railroad guaranteed stocks come into ex- 
 istence. Pages 93, 94. 
 
 Amortization and Sinking Funds. 
 
 1. Define amortization. Page 95. 
 
 2. What are the advantages of amortization? Page 95. 
 
 3. Tell how a sinking fund operates. Pages 95, 96. 
 
 The Market for Bonds. 
 
 1. Why is an active market not essential to the penna- 
 nent investor? Pages 99, 100. 
 
 2. Explain how a quick market may bring loss to inves- 
 tors. Page 99. 
 
 Character of an Enterprise. 
 
 1. AMiat statistics prove the need of financial education 
 among investors? Page 101. 
 
 2. Name the points to be considered in investigating the 
 nature of an enterprise. Pages 103, 104. 
 
 3. What three factors should enter into an examinati(Ui 
 of the i^resent condition of an enterprise. Page 105. 
 
 Science of Speculation. 
 
 1. Is speculation necessary to business? Explain. 
 
 Pages 109, 110. 
 
 2. What part did speculation have in the formation of 
 the United States? Page 111. 
 
 3. Give proof that speculation is not a modern force. 
 
 Pages 112, 113. 
 
 4. Explain why speculation cannot be said to be a science. 
 
 Pages 113, 114. 
 
INVESTMENTS AND SPECULATION 385 
 
 5. Why are speculative charts poor guides for the inves- 
 tor? Page 114. 
 
 6. Discuss margins in specuhxtion. Pages 117, 118. 
 
 Efforts to Prevent Speculation. 
 
 1. Give an instance of harm caused bv elimination of 
 speculation. Page 120. 
 
 2. What is the difference between speculation and gam- 
 bling? Page 121. 
 
 3. ^Mierein lies the evil in speculation? Page 124. 
 
 4. Name one of the benefits arising from speculation. 
 
 Pa2:e 127. 
 
 '&' 
 
 The Mystery of a Balance Sheet. 
 
 1. 'Wliy should a corporation render financial statements 
 to its stoclvholders ? Page 128. 
 
 2. AVhat items should not appear among the assets of a 
 trustworthy financial statement? Page 132. 
 
 3. AMiat is the proof of a good asset? Page 132. 
 
 4. Give a list of assets that should appear in the state- 
 ment of a healthy manufacturing concern. Page 133. 
 
 Functions of Exchanges. 
 
 1. Outline the functions of stock exchanges. 
 
 Page 138, 139. 
 
 2. Explain what makes a seat on a stock exchange of 
 great value. Page 141. 
 
 3. Distinguish between si^eculation and gambling. 
 
 Pages 144, 145. 
 
 Methods of Trading. 
 
 1. Desciibe two methods of trading employed on the 
 stock exchange. Pages 147-151. 
 
 2. Show the difference between ''bulls" and "bears" in 
 the stock market. Pages 155, 157. 
 
 B.VII— 25 
 
386 QUIZ QUESTIONS 
 
 3. Tell how bucket-shops arc operated. Pa^e 158. 
 
 4. What is the incauiug of the tcim "cx-dividcnd" ? 
 
 Pages 158, 159. 
 
 5. How do "i>iit" and "call" contracts operate? 
 
 Pages 160, 161. 
 
 6. AVhat do you understand is the difference between a 
 curb market and a stock exchange ? Pages 169, 17U. 
 
 Panics. 
 
 1. What was the cause of the panic of 1907. 
 
 Pages 173, 174. 
 
 L!. Wliat are some of the symptoms of a coming ])usiness 
 
 panic? Explain. Pages 175, 176. 
 
 Pools and Manipulation. 
 
 1. Describe the workings of a i)ool. Pages 180, 181. 
 
 2. How are stocks manipulated? Pages 182, 183. 
 
 3. Why should only the rich man indulge in speculation? 
 
 Page 187. 
 
 The Promoter's Place in Finance. 
 
 1. p]xplain the promoter's place in tinancc. Pages 188, 189. 
 
 2. AVhat is the best way for an invest(»r to judge a pro- 
 moter? * Pages 189, 190. 
 
 3. Why is the nn]i-listing of a stock no disadvantage to 
 the investor? Pages 192, 193. 
 
 4. Dcsciibc the workings of a got-rich-quick mining 
 scheme. ^ Pages 200, 201. 
 
 General Principles of Investment. 
 
 1. Show win" a bond is generally a better investment 
 than a stock. * Pages 209. 210. 
 
 2. Name and ex]^lain the principles of selection of invest- 
 ments. Pages 211-214. 
 
 3. How mav a banker be compared with a physician? 
 
 Pages 208, 215. 
 
INVESTMENTS AND SPECULATION 387 
 
 Safety and Security. 
 
 1. Outline the points to be considered in judging the 
 value of a railroad bond. Pages 218-220. 
 
 2. How may safety in a security be a disadvantage to the 
 investor? Page 227. 
 
 3. Why is a stock exchange quotation often no indication 
 of the real value of a security? Page 228. 
 
 4. Name two safe rules for the investor to follow. 
 
 Pages 228, 229. 
 
 Obligation of Investment Banker. 
 
 1. Explain the relation between the responsible invest- 
 ment banker and his clients. Pages 231-233. 
 
 2. Why is the public service corporation bond one of the 
 best for the average investor? Pages 233, 234. 
 
 Fundamentals and Security Prices. 
 
 1. Show how crops affect the prices of securities. 
 
 Pages 240, 241. 
 
 2. How are security prices affected by money conditions? 
 
 Pages 241-245. 
 
 3. Explain the effect of the Standard Oil decision on secu- 
 rity prices. Pages 247-249. 
 
 Market Movements of Securities. 
 
 1. Illustrato how money rates influence different grades 
 of securities differently. Pages 252, 253. 
 
 2. Describe the important stages through which business 
 conditions pass from rrisis to crisis. Pages 253-255. 
 
 Stocks and Their Features. 
 
 1. What is meant by the par value of a share of stock? 
 
 Pages 258-260. 
 
 2. What do you understand by assessable stock? 
 
 Pages 261, 262. 
 
388 QUIZ QUESTIONS 
 
 3. What two advantages often lie in common stock? 
 
 Pages 262, 263. 
 
 4. Name the various kinds of stocks. Page 263. 
 
 5. Explain the nature of prefei'red stock. Page 265. 
 
 6. Ilnw ni.iy conunon stock dividends be affected when 
 the preferred stock is cunudative? Pages 265, 266. 
 
 7. AVhat benefit usually rests iu preferred stock as to 
 assets? ^ Pages 267, 268. 
 
 8. Why is callable stock often a disadvantage to tlu' 
 holder? Page 271. 
 
 9. Explain the advantage of possessing a convertible 
 stock. Pages 271-273. 
 
 10. Why are participating preferred stocks preferable 
 to ordinary preferred stocks? Pages 274, 275. 
 
 Stock Markets and Exchanges. 
 
 1. IIow does the law distinguish between speculation and 
 gambling? Page 282. 
 
 2. "Wliat do you laiow about the New" Y(U'k Stock Ex- 
 change? Pages 284, 285. 
 
 3. Why should the present practice of margin-trading 
 be changed ? Page 287. 
 
 4. Why is short-selling not considered gambling? 
 
 Pages 288, 289. 
 
 5. TTow ai'e securities listed on the (exchange? Page 294. 
 
 6. Describe the Consolidated Stock Exchange of New 
 York. Pages 299, :^00. 
 
 7. Tell h(»w the cui'l) market obtained its name. Page 304. 
 
 8. Wherein lies the evil of the curb market? 
 
 Pages 305, 306. 
 
 Classification of Bonds. 
 
 1. Describe the three kinds of corporations. Page 313. 
 
 2. Diseuss the three large classes of bonds. 
 
 York. Pages 299, 300. 
 
INVESTMENTS AND SPECULATION 389 
 
 Public Service Corporation Bonds. 
 
 1. What points are covered in an investigation of a pnb- 
 lic service corporation? Disenss. Pages 335-338. 
 
 2. What is the function of public service commissions? 
 
 Pages 338, 339. 
 
 3. Give four reasons why public service corporation 
 bonds are growing in popularity. Pages 340, 341. 
 
 4. Give five rules to follow in buying public ser\dce cor- 
 poration bonds. Pages 342, 343. 
 
 Forecasting Trade Conditions. 
 
 1. How does the area theor^^ differ from the early forms 
 of charts? Page 345. 
 
 2. AVhat relation exists between the area of prosperity 
 and the area of depression? Pages 348, 349. 
 
 3. How are trade conditions forecasted by the area 
 theory? Pages 349, 350. 
 
 4. What is the use of the index figure in making a com- 
 posite plot? Page 353. 
 
 5. How does the composite plot aid the merchant? 
 
 Pages 361, 363. 
 
 6. ^liy should bankers watch the composite ph^t? 
 
 Pages 367, 368. 
 
 Wall Street Phrases and Methods. 
 
 1. How may a speculator recover his loss by averaging? 
 
 Pages 370, 371. 
 
 2. How may pyramiding bring ruin to a speculator? 
 
 Pages 375, 376. 
 
 3. How is it true that in the long run investors determine 
 the price of stocks? Pages 377, 378. 
 
INDEX 
 
 INVESTMENTS AND SPECULATION. 
 
 ADVERTISIXG— 
 
 assists fraud. 307, 308. 
 AMORTIZATION— 
 
 detinition of, 95. 
 ARBITRAGE— 
 
 term explained, 370. 
 AREA THEORY— 
 
 forecasting trade conditions by, 344- 
 36y. 
 ASSETS— 
 
 false, in financial statements, 130, 
 132. 
 
 proof of good, 132. 
 
 what constitutes good assets in finan- 
 cial statements, 133, 134. 
 AVERAGING— 
 
 term explained, 370, 371. 
 
 BANKERS— 
 
 clients and investments, 231-235. 
 
 deal with reliable, 343. 
 
 investigate bond issues, 232-234. 
 
 obligation of, to clients, 231-235. 
 BEAR— 
 
 term explained, 155-157, 371. 
 BILL OF EXCHANGE— 
 
 term explained, 371. 
 BLIND POOL— 
 
 term explained, 371. 
 BOBTAIL POOL— 
 
 term explained, 371. 
 BONDS— 
 
 accrued interest added to price, 147. 
 
 active market not essential, 99. 100. 
 
 business conditions afTect price of, 
 257. 
 
 classifications of, 329-331. 
 
 collateral, described. 73. 74, 320, 321. 
 
 convertible, described, 75, 76, 322. 
 
 debenture, described, 26, 74, 75, 327. 
 
 equity in, 41. 
 
 first mortgage real estate, 25. 
 
 form of, important. 223, 224. 
 
 government. 46-49. 315. 
 
 government, when decline in value. 
 3. 
 
 improvement. 316. 
 
 income, described, 72. 
 
 interest and income not always the 
 same, 77, 78. 
 
 investment banker and his clients, 
 232-235. 
 
 irrigation, highly speculative, 85. 
 
 BONDS— Continued 
 
 irrigation, security behind, 83-86. 
 kinds of, enumerated, 44, 45, 329- 
 
 333. 
 leasehold, definition of, 28, 29. 
 lien. 318, 319. 
 
 mining, safe and unsafe, 87-89. 
 money rates affect, difTerently, 252, 
 
 253. 
 mortgage, described, 38-40, 327. 
 municipal, 51-53, 314, 315. 
 private and quasi-public, 315, 316. 
 public service corporation, 63-67, 
 
 332-341. 
 
 investigation of, 335-338. 
 
 popularity of, 332, 340. 
 railroad, 54-62, 218-220. 
 
 kinds of, 54-62. 
 
 value considered, 218-220. 
 redemption of, provided for, 44. 
 refunding, 318. 
 rules for safe investment, 
 safety of, considered, 216- 
 state. 50, 51, 315. 
 
 342 
 -218. 
 
 343. 
 
 with. 
 
 as mvest- 
 
 stocks compared 
 
 ments, 209, 210. 
 subsidj-, 325. 
 timber, 90, 91. 
 
 women and estates should avoid cer- 
 tain, 98. 
 BONDMARKET— 
 
 active, not essential for perma- 
 nent investor, 99, 100. 
 BOOMS— 
 
 illustrations of, 194-197. 
 
 BRITISH CONSOLS— 
 
 explanation of, 47, 48. 
 
 have fallen to low price, 4. 
 BUCKETING— 
 
 term explained, 371. 
 
 BUCKET-SHO PS- 
 forbidden by law, 184, 310. 
 gambling shops, 125. 
 kept in operation by bulls, 158. 
 term explained. 372. 
 
 BULLS— 
 
 defined, 155-157. 
 
 CALL— 
 
 term explained, 372. 
 CALLABLE PREFERRED STOCK— 
 
 discussed, 271. 
 
 391 
 
392 
 
 INDEX 
 
 CALL LOAN'S— 
 
 discussed, 20. 149, 150. 
 CAPITAL— 
 
 gravitates to money centers, 113, 
 144. 
 
 how protected by large investors, 7. 
 
 interest rates determined by amount 
 of. 17. 
 
 markets abroad. 170. 171. 
 
 no absolute security in investment, 7. 
 
 panics caused bv demand for, 173, 
 174. 
 CERTIFICATES OF DEPOSIT— 
 
 defined, 79, 80. 
 CHARTS— 
 
 history of, 344-345. 
 
 single line, 34.">. 
 CITY REAL ESTATE— 
 
 care necessar>' in investing in, 24. 
 
 compared with farm land, 22. 
 
 factors influencing value of, 22. 
 CLEAR I .\'G H O U SE— 
 
 in New York Stock Exchange, 146, 
 296. 
 COLL.\TERAL TRUST BONDS— 
 
 discussed. 73, 74, 320, 321. 
 COMMON STOCK— 
 
 advantages of, 262-264. 
 CONSOLS— 
 
 explanation of, 47, 48. 
 
 have fallen to low price, 4. 
 CONVERTIBLE BONDS— 
 
 discussed, 7.'>, 76, 322. 
 CONVERTIBLE STOCKS— 
 
 di.scussed, 271-273. 
 CORNERS— 
 
 panics caused by. 176. 
 
 term explained. 176-178, 372. 
 CORPORATIONS— 
 
 financial statements false and true, 
 130-134. 
 
 financial statements should be rend- 
 ered stockholders, 128. 
 
 kinds of, 313, 314. 
 COVERING— 
 
 term explained, 372. 
 CRO PS- 
 cotton exchanges, 167. 
 
 grain exchanges, 163-166. 
 
 money market affected by, 19-21. 
 
 security prices affected by, 240, 241. 
 
 watched bv experts, 16."), 166. 
 CUMULATIVE DIVIDENDS— 
 
 discussed, 26.'")-267. 
 CURB MARKET— 
 
 description of New York, 304-307. 
 
 evils of. SO.-), 306. 
 
 origin of name, 304. 
 
 stock exchange distinguished from, 
 169, 170. 
 
 DEBENTLT^E BONDS— 
 described, 327. 
 
 DEBENTURE BONDS— Continued 
 
 investment in real estate debenture 
 bonds should be made with 
 care, 26. 
 DEBENTURE STOCK— 
 
 discussed, 279. 
 DEFERRED STOCK— 
 
 discussed, 264, 265. 
 DUE BILL— 
 
 term explained, 373. 
 
 ENTERPRISES— 
 finances of, 106. 
 how to investigate, 103-108. 
 operation of, 105. 
 organization of, 103. 
 property of, 105. 
 
 EQUITY— 
 
 compared with promise to pay, 209- 
 210. 
 
 meaning of, in bonds, 41. 
 EX-DIVIDEND— 
 
 meaning of, 138, 159, 377. 
 
 FARM LAND— 
 
 compared with city real estate, 22. 
 loans on, most satisfactory, 15. 
 points to be considered in buying. 34. 
 stock-company plan of owning, 35. 
 
 FINANCIAL STATEMENTS— 
 false and true, 130-134. 
 stockholders should receive, 128. 
 
 FLAT— 
 
 term explained, 373. 
 FOUNDERS' STOCK— 
 
 discussed, 278, 279. 
 FR.\UD— 
 
 advertising assists. 307. 308. 
 
 amount invested in, annually, 101. 
 
 newspapers aid investment in, 101, 
 102. 
 FUNDAMENTALS— 
 
 discussion of. 239-246. 
 
 security prices, relation between, 
 236-246. 
 
 GAMBLING— 
 
 bucket-shops, 125. 184, 310. 
 
 defmed in law, 282. 
 
 difficult to distinguish, 284. 
 
 speculation distinguished from, 121, 
 144, 145. 
 GET-RICH-QUICK SCHEMES— 
 
 government is lighting, 19S, 200. 
 
 losses from, 199. 
 
 sugRested curb on, 205. 
 
 workings of, 200-203. 
 GIVING UP— 
 
 term explained, 373. 
 GOLD— 
 
 supply of. influences investment in- 
 come, 11. 
 
INDEX 
 
 393 
 
 GOVERXMEXT BOXDS— 
 
 British, described, 47, 48. 
 
 decline in value, possible, 3. 
 
 foreign, 48. 
 
 national banks invest in, 46, 47. 
 
 sccuritv behind, 4it. 
 GRAIX E'XCHAXGES— 
 
 discus'sed, IG:?-!!)*). 
 GUARAXTEED STOCK— 
 
 discussed, 277, 278. 
 
 HOLDIXG COMPAXIES— 
 
 described. 7;i, :«)O-302. 
 HYPOTHECATIOX— 
 
 term explained, 373. 
 
 IMPROVEMEXT BOXDS— 
 
 described, 316. 
 IXTEREST— 
 
 course of money, after crisis, 2.")6. 
 
 investment, small compared with 
 business, 209. 
 
 security prices affected by rate of, 
 251. 2r)2. 
 IXTEREST-BEARIXG STOCKS— 
 
 discussed, 275, 276. 
 IXTEREST RATES— 
 
 crops intlucnce. 19-21. 
 
 determined bv amount of capital, 17. 
 IXTERIM CERTIFICATES— 
 
 defined, 78. 
 IXVESTMEXTS— 
 
 advice may be fatal, 227. 
 
 amount lost annually in, 101. 
 
 banker's business, 208, 215. 
 
 banker's place in, 231-235. 
 
 bonds distinguished from stocks, 
 209. 210. 
 
 city real estate compared with farm 
 lands. 22. 
 
 definition of. 3. 
 
 distinguished from speculation, 5, 6. 
 
 distribution of risk, 209, 210. 
 
 farm land loans the most satisfac- 
 tory, 15. 
 
 farm lands, points to be considered 
 in buying, 34. 
 
 first form of. 14. 
 
 form of document should be ex- 
 amined, 223. 224. 
 
 fraud, amount of. 101. 
 
 fundamental law governing. 10. 
 
 get-ricb-quick schemes cause great 
 losses, 199. 
 
 government and municipal bonds 
 sati.s factory, 53. 
 
 guaranteed stocks. 92-94. 
 
 how to investigate enterprises. 103- 
 108. 
 
 income influenced by supply of gold, 
 11. 
 
 interest small compared with busi- 
 ness interest, 209. 
 
 IXVESTMEXTS— Continued 
 
 irrigation bonds highly speculative, 
 85. 
 
 market quick, not always essential, 
 99, 100. 
 
 mining bonds highly speculative, 87, 
 88. 
 
 no absolute safety for capital, 7. 
 
 no unchangeable rules governing, 4. 
 
 principles of, 209-211. 
 
 private and business, 215. 
 
 problem of human judgment, 6. 
 
 protected by state laws, 8, 9. 
 
 public service corporation bonds, 69, 
 332-338. 
 
 railroad bonds of many varieties, 57- 
 62. 
 
 result of wise investments in United 
 States 12 
 
 rules for safe. 228-230, 342, 343. 
 
 safe, for women and estates, 98. 
 
 safety may cost too much, 227. 
 
 safety of bonds considered, 216-218. 
 
 selection important, 211-215. 
 
 short term notes, 76, 77. 
 
 timber bonds are speculative, 90. 
 
 vital force in business, 1. 
 IXVESTORS— 
 
 how protect their capital, 7. 
 
 rules for, 228-230, 342. 343. 
 
 speculation, who should avoid, 186, 
 187. 
 IRISH DIVIDEXD— 
 
 term explained, 160, 374. 
 IRRIGATIOX BOXDS— 
 
 governmental attempt to protect, 82, 
 83. 
 
 highly speculative, 85. 
 
 security behind, 83-86. 
 JOIXT ACCOUXT— 
 
 term explained, 374. 
 
 LAXD BOOMS— 
 
 communities benefited by, 30. 
 disaster resulting from. 33. 34. 
 no more likely in United States, 32. 
 
 LEASEHOLD BOXDS— 
 definition of, 28, 29. 
 
 LIEX BOXDS— 
 
 discussed, 318, 319. 
 
 LOAXS— 
 
 call and time, distinguished, 20. 
 city real estate, 22, 24 
 
 care necessary in making. 24. 
 factors influencing value of, 
 82. 
 LOXG OF STOCKS— 
 
 term explained, 158, 374. 
 
 MAXIPULATIOX— 
 
 of stock prices, 290. 291. 
 pools used for. 182. 
 term explained, 374. 
 
394 
 
 INDEX 
 
 MARGIN'S— 
 
 evils of trading in, 152. 
 
 term explained, 117, 118, 374. 
 
 trading in. 148. 1.50-153. 
 M.\TCHED ORDERS— 
 
 discussed, 291, 292. 
 METHODS— 
 
 Wall Street. :^70-379. 
 MINING BONDS— 
 
 safe and unsafe, 87-89. 
 MONEY- 
 
 course of rates after crisis, 256. 
 
 security prices affected by interest 
 rates, 2r)l, 252. 
 MONEY M.XRKET- 
 
 crops influence, 19-21. 
 
 security prices affected by, 241-245. 
 
 speculation influenced by, 302, 303. 
 MORTG.\GFS— 
 
 distinguished from mortgage bonds, 
 38. 
 
 farm land. 14-18. 
 
 first form of investment, 14. 
 how placed, 16. 18. 
 
 real estate bonds desirable, 25, 26. 
 MUNICIP.\L BONDS— 
 
 how financed, 51-53. 
 
 issuance of. 314. 315. 
 
 legality and taxation of, 53. 
 
 NEW YORK CON SOLI n.\TED 
 
 STOCK EXCH.\XGE— 
 
 description of, 299, .^00. 
 NEW YORK CURB M.XRKET— 
 
 description of, ,104-307. 
 NEW YORK STOCK EXCHANGE- 
 
 annual business of, 140. 
 
 clearing-house, 146, 296. 
 
 commission charged, 141. 
 
 description of, 136, 137. 284-298. 
 
 incorporation not recommended, 
 297. 298. 
 
 legislation recommended, 309-311. 
 
 listing of slock. 294. 
 
 margin-trading on, 286, 287. 
 
 patrons of. 285, 286. 
 
 short-selling on, 288, 289, 
 
 OUTSIDE BROKER— 
 term explained, 379. 
 
 PANICS— 
 
 benefits of, 175. 
 causes of, 173, 174, 176. 
 central bank might prevent, 175. 
 corners may cause, 176. 
 kinds of, 172. 
 occur irregularly, 115. 
 public service corporations general- 
 ly unafTected by, 69. 
 speculation symptom of. 172. 
 warnings of, 175, 176, 
 
 PARTICIPATING PREFERRED 
 
 STOCKS— 
 discussed, 274, 275. 
 
 PARTICIPATION CERTIFICATES— 
 
 described. 260. 
 PAR VALUE— 
 
 meaning of. in stocks, 258, 259. 
 PASSING A DIVIDEND— 
 
 term explained, 375. 
 PHRASES— 
 
 Wall Street, 370-379. 
 PLOTS— 
 
 history of, 344-345. 
 POOLS— 
 
 operations of. 179-181. 
 stocks manipulated by means of, 182. 
 PREFERRED STOCK— 
 
 discussed. 265-269. 
 PRICES— (See Security Prices). 
 PRIVATE AND QUASI PUBLIC 
 BONDS— 
 described, 315, 316. 
 PRIVILEGE— 
 
 term explained, 375. 
 PRODUCE EXCHANGES— 
 cotton operations. 167. 
 grain operations. 163-166. 
 trading on. 154, 1.55. 
 PROMOTER- 
 
 how ma.y an investor judge, 189-191. 
 place of. in finance. ISS. 1S9. 
 PUBLIC SERVICE COMMISSIONS— 
 
 function of. 338. 339. 
 PUBLIC SERVICE CORPORATION 
 BONDS— 
 first-class for average investor. 233, 
 
 234. 
 franchise first requisite for safety. 
 
 66. 67. 
 investigation of, 335-338. 
 popularity growing. 332. 333. 
 reasons for popularity, 340, 341. 
 stabilitv of, (•.<». 70. 
 PUBLIC SERVICE CORPORA- 
 TIONS— 
 bonds of. 63-67. 332-341. 
 commission^nromote stability of, 69. 
 holding cflHtfues formed. 70, 71. 
 panics do ^^Kiffect, 69, 70. 
 progress o^R33, 334. 
 PL'T- 
 
 term explained, 160. 375. 
 PYRAMIDING— 
 
 term expMlined. 375, 376. 
 
 RAILROAD BONDS— 
 
 kinds of, 54-62, 221. 222. 
 
 v.nhie of. considered. 218-220. 
 REDEMPTION— 
 
 provision for. in bonds. 44. 
 REFUNDING BONDS— 
 
 described, 318. 
 
INDEX 
 
 395 
 
 REHYPOTHECATION OF SECURI- 
 TIES— 
 discussed, 293, 294. 
 
 RIGHTS IN STOCK— 
 
 detined, 159. 
 RISK— 
 
 chansfcs continually, 3, 4. 
 
 distribution, a principle of invest- 
 ment, 209, 210. 
 
 SAFETY— 
 
 importance of, 227. 
 methods of judging, in bonds, 21C- 
 218. 
 
 SECURITY— 
 
 banker's obligation to clients, 231- 
 
 235. 
 document form important, 223, 224. 
 essential rather than income, 98. 
 essential rather than market, 100. 
 government bonds and taxation, 49. 
 irrigation bonds, 83-86. 
 listed and unlisted. 191-193, 228. 
 one-third worthless, 222. 
 principle of selection, 211-215. 
 rules to follow in investing. 228-230. 
 safety costs, 227. 
 
 SECURITY PRICES— 
 
 basis of, 236. 
 
 business conditions affect, 257. 
 
 causes of regular changes in, 253- 
 257. 
 
 conditions influencing, 10, 251, 252. 
 
 crops affect, 240, 241. 
 
 fluctuation caused by supply and de- 
 mand, 10. 
 
 foreign trade affects, 245. 24G. 
 
 fundamentals, relation between. 236- 
 246. 
 
 money market affects, 241-245. 
 
 Standard Oil decision and effect on, 
 247-249. 
 
 stock exchanges affect, 138. 
 SHORTS— 
 
 detined, 158. 
 SHORT S.VLES— 
 
 defined, 288, 289. * 
 SHORT TERM .VOTES— 
 
 described, 76, 77. 
 SINKING FUNDS— ^ 
 
 operation and advantages of, 95, 96. 
 SPECULATION— 
 
 ancient force, 112, 113. 
 
 artificial, 179. 
 
 benefits arising from, 127. 
 
 booms, 194-197. 
 
 bucket-shops aided, 125. 
 
 charts are poor guides in, 114, 115. 
 
 common in every-day life, 121-124. 
 
 corners may cause panics, 176. 
 
 definition of, 3, 237. 2S1-283. 
 
 efforts to prevent, 119-121. 
 
 SPECULATION— Continued 
 
 elimination of, brought injury to 
 (jermany, 120. 
 
 essential to business, 109, 110. 
 
 evil in, 124-12."). 
 
 fundamental law governing, 10. 
 
 gambling distinguished from, 121, 
 144, 145. 
 
 history shaped by, 110, 111. 
 
 how differs from investment. 5, 6^ 
 
 land booms, 30, 33, 34. 
 
 loss in get-rich-quick schemes, 199. 
 
 margins in. 117. 118. 151-153. 
 
 money market influences, 302, 303. 
 
 not a sxrience, 113, 114. 
 
 pitfalls of, 184-187. 
 
 rich man's pastime, 187. 
 
 symptom of panics, 172. 
 
 vital force in business, 1. 
 
 who should not indulge in, 186, 187. 
 SPREAD— 
 
 term explained, 161, 376. 
 STATE BONDS— 
 
 how disposed of, 50. 
 
 issuance of, 315. 
 STOCK CERTIFICATES— 
 
 classification of, 263. 
 
 participation certificates, 260. 
 
 par value of, meaning of, 258, 259. 
 STOCK EXCHANGES— 
 
 barometers of trade, 138, 139. 
 
 capital attracted by, 144. 
 
 commission charged in New York, 
 141. 
 
 curb markets distinguished from, 
 169, 170. 
 
 function of, 138, 143. 
 
 in Boston, 167. 
 
 in Chicago, 167, 168. 
 
 in New York, 136, 137, 284-298. 
 
 margin-trading on, 144, 148. 286, 287. 
 
 matched orders, 291, 292. 
 
 membership valuable, 139, 140. 
 
 methods of trading on, 147. 
 
 prices influenced by, 138. 
 
 quotations on, 154, 228. 
 
 rehypothecation of securities, 293, 
 294. 
 
 securities of. how listed, 294. 
 
 wash-sales in, 291. 
 STOCKS— 
 
 assessable, 201. 262. 
 
 callable, disadvantage of. 271. 
 
 common. 
 
 262-264. 
 
 convertible, advantage of. 271-273. 
 
 cumulative dividend, 265-267. 
 
 debenture. 279. 
 
 deferred. 264. 265. 
 
 ex-dividend, meaning of, 158, 159, 
 
 377. 
 founders', 278, 279. 
 guaranteed, 92-94, 277, 278. 
 how listed, 294. 
 
396 
 
 INDEX 
 
 STOCKS — Continued 
 
 interest-hearing. 27."), 276. 
 
 Irish dividend, defined, 160. 
 
 listed and unlisted. 191-193, 228. 
 
 manipulation of, through pools, 182. 
 
 margin-trading in. H8, I,"i0-l.'j3. 
 
 participating preferred, 274, 275. 
 
 pools used to exploit, 179-181. 
 
 preferred, 265-269. 
 
 prices of, manipulation of, 290, 291. 
 
 put and call contracts, explained, 
 160, 161. 
 
 ri^'hts, defined, 159. 
 
 spread and straddle contracts, ex- 
 plained, 161, 162. 
 
 test of good, 193. 
 easury, 261. 
 STR.ADDI E— 
 
 term explained, 161, 376. 
 SUBSIDY BOXDS— 
 
 discussed. 325. 
 SUBURB.W REAL ESTATE— 
 
 first essential of, 37. 
 
 TIMBER BOXDS— 
 described, 90, 91. 
 
 TREASURY STOCK— 
 
 discussed, 261. 
 TRUSTEE— 
 
 duties of, in re mortgage bonds, 
 39-40. 
 
 TRUST RECEIPTS— 
 defined, 78. 
 
 UNDER THE RULE— 
 
 term explained, 376. 
 USURY— 
 
 discussed, 303, 304. 
 
 VALUE— 
 
 made by men, 5. 
 
 WASHING— 
 
 term explained, 376, 377. 
 
 WASH-SALES— 
 condemned, 291. 
 
 WATERED STOCK— 
 
 term explained, 377. 
 WOMEN— 
 
 investments for, should be safe, 98. 
 
THIS BOOK IS DUE ON THE LAST DATE 
 STAMPED BELOW 
 
 AN INITIAL FINE OF 25 CENTS 
 
 WILL BE ASSESSED FOR FAILURE TO RETURN 
 THIS BOOK ON THE DATE CUE. THE PENALTY 
 WILL INCREASE TO 50 CENTS ON THE FOURTH 
 DAY AND TO $I.OO ON THE SEVENTH DAY 
 OVERDUE. 
 
 OCT 28 1935 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 LD 21-lOOm 7,'33 
 
'-M-^ 
 
 YD 0555 
 
 I' 
 
 ■ 6L.3 
 
 .A 
 
 248539 
 

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