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one gets from absolute security and pure interest, the more speculative the transaction becomes, until finally a point is reached where speculation, which, from a proper point of view, is an intelligent taking of risk, merges into gambling which is in the nature of mere blind betting on chances.

In Wall Street an investment is usually regarded as a purchase of securities with payment in full on delivery, the securities then being deposited in a place of safe-keeping for the sake of the income. But most investors in America buy not merely for income, but for gain through enhancement of price, and thus has developed a class of so-called “speculative investments.” Many of these so-called investments are of so hazardous a character as to be more of a gamble than the most speculative of dealings in which there may be no actual exchange of property and only differences in price considered. In Wall Street a speculation is usually regarded as a credit or margin transaction. Yet a purchase upon margin based on intelligent consideration of earning power may involve comparatively little risk, much less so, in fact, than is involved in many so-called "legitimate” merchandise or real estate transactions. On the other hand, the margin transaction, so far as the principle is concerned, may be made a mere staking of money on the fluctuation in price. But there is a difference between a stock exchange margin and a bucket shop margin. In the former case there is always an actual transaction in the exchange. In the latter case there is no transaction, no exchange of property; a mere bet is registered and the “broker” is practically nothing more than a bookmaker.

So many investments are speculative and so many speculations have an investment quality, that for practical working purposes no line can be drawn between investment and speculation. They must stand or fall together. The use of credit, of course, might be prohibited in the purchase and sale of securities, but how this could be justified unless credit was also prohibited in all transactions of business is inconceivable to my mind. A sure way to get rid of the abuses of credit would be to abolish credit, but that would be like killing a man in order to cure his toothache.

In principle there is no essential difference between buying on margin and buying outright on borrowed money; but in practice there is a difference. Both are credit transactions. In the margin transaction the purchaser of stocks borrows the difference between his margin and the market value of the stock from his broker. In the other case, the purchaser borrows the money from a bank or other money lender. There is no essential difference in principle between the use of credit by the speculator and the use of credit by the merchant. Yet, when I made such a statement as this recently to Mr. Bryan, he said in reply that I was insulting his intelligence.”

In practice, there might be a considerable difference in buying on margin and buying outright on borrowed money. In buying outright on borrowed money one would first have to have sufficient capital to obtain the collateral necessary to secure the loan needed to make the purchase. He would be in the same position as the broker who before he can borrow money upon securities must have the securities in his possession in order to deposit them as collateral for the loan. In buying upon margin, however, one does not need to have any more than the necessary margin. He deposits that with the broker, who then supplies all the remaining necessary capital and makes the purchase. Of course if one could borrow all the money necessary to make an outright cash purchase of securities without first having to deposit the securities as the collateral, there would be no vital difference between that and the margin transaction.

The questions as to whether speculation in securities is simply one form of gambling and as to whether there is such a thing as legitimate speculation may be considered together. Speculation in securities is not one form of gambling. Gambling may, indeed, and often is, carried on by the use of the machinery of speculation, but speculation is legitimate. It is the abuse of speculation that is illegitimate and harmful. Gambling is essentially destructive, not constructive. Speculation calls for thought, for investigation, for labor, and as a part of the modern organization of exchange, it is essentially constructive. The speculator is the scout, the pioneer of enterprise, and he has made possible the rapid development of civilization on the American continent. Speculation performs a beneficent economic work. As Henry George said in his “ Progress and Poverty," “ The effect of speculation is simply to equalize supply and demand and to steady the interplay of production and commerce by an action analogous to that of a fly-wheel in a machine.” Speculation facilitates production in one case and prevents over-production in another. It mobilizes


capital rapidly for one great enterprise after another and sustains a continuous market for securities.

To prevent people from taking speculative risks as is proposed in the Hepburn bill would destroy the exchanges which undertake to provide an organized and regulated market for securities, it would strike at thrift and investment as well as at speculation, it would transfer from Wall Street to Montreal or to London the great speculative market of Wall Street, it would prejudice every branch of American business, it would shatter the system of collateral loans, it would weaken, if not destroy, New York as an international money market, and it would retard the growth of the United States by at least a generation.

As to bucket shops, I would say that they are simply places where bets on prices are made and should be suppressed like pool rooms. Their suppression, however, would not wholly remove the evils of stock gambling, for stock gambling, as has been indicated, can be carried on with the tools of the organized stock market. But while this is true, it would be unfair to confound stock exchange trading with bucket shop gambling. No injury would be inflicted to legitimate business by the suppression of the bucket shop, but in dealing with the evil of gambling in the organized stock market care must be taken lest in striking at this evil we do not destroy the market itself, for, to quote the language of the Supreme Court of the United States: “The natural evolutions of a complex society are to be touched with only a cautious hand, and such attempts at a remedy for the waste incident to every social function as a simple prohibition and laws to stop its being, are harmful and vain."

Speculation sometimes produces wide fluctuations in prices, and these fluctuations, though often necessary in order that the market may readjust values to changed conditions, are disturbing and harmful. When these fluctuations are the result of manipulation, either for the marketing of securities at inflated prices or for the depreciation of other people's property by the circulation of false and malicious reports, this manipulation amounts to a criminal conspiracy; it is nothing more nor less than wholesale thievery. The general effect of speculation, however, is to bring about a true balance of prices. No other method of ascertaining values could be devised than that of an open and free market, and the New York stock market is, on the whole, the freest in the country and it usually registers with marvelous sensitiveness the varying conditions of business.

It is impracticable in my judgment to stop speculation without doing harm to ordinary business.

The New York Stock Exchange has provided in many respects an admirable organization for the stock market, and it may be said in general that most of the evils of Wall Street, of which the country has made complaint, were evils which originated outside rather than inside the Stock Exchange. Few people realize the service which the Stock Exchange has given even in its simple mechanism for the engraving and registration of securities, thus preventing forgery and duplication. Few people realize also how large is the service which has been given by the Exchange in the listing of its $20,000,000,000 of securities. The system of trading upon the Stock Exchange is simple, effective and legitimate. The rules of the Exchange require a high standard of financial responsibility and personal honor among the members.

The constitution of the New York Stock Exchange declares that “Its object shall be to furnish exchange rooms and other facilities for the convenient transaction of their business by its members as brokers; to maintain high standards of commercial honor and integrity among its members; and to promote and inculcate just and equitable principles of trade and business."

Its main business therefore is to provide a place where a stock market may be housed and carried on, and this function it performs admirably. The members of the Exchange may between the hours of 10 and 3 meet on the floor of the Exchange and buy or sell such securities as have been admitted to the privileges of being dealt in on the Exchange. The method of trading is simplicity itself, consisting merely of competitive offers and competitive bids for the securities. The law of supply and demand is given free play and the securities are sold to those who offer the most for them. A broker purchasing a stock or a bond must be prepared to accept the same on delivery within twenty-four hours and pay for the same by certified check upon some banking institution of good standing. Nothing could be more legitimate and sound than this method of conducting business. A member guilty of fraud is expelled. A member unable to fulfill his contracts is suspended.

How much further than this the Stock Exchange may properly go in regulation of the stock market has long been a matter of controversy. John R. Dos Passos, the acknowledged authority on the law of Wall Street, holds that it is entirely reasonable " to confine and limit the jurisdiction of the Stock Exchange to those matters which arise between its members in the course of their business with each other as brokers; otherwise its judicial powers might be extended to embrace every affair of human life, which was never intended and which the law would not permit."

The severest criticism of the Stock Exchange has been in relation to its listing of securities to be traded in on the floor. The Exchange admits to its privileges two classes of securities which are called “listed ” and “unlisted." The requirements for the listed stocks are numerous, and, so far as they go, strict, and these requirements, as has already been indicated, afford a valuable protection to the investors of the country. Besides these requirements, the Exchange recommends to the various corporations whose securities are admitted to its list that “they shall print, publish and distribute to stockholders at least fifteen days prior to annual meetings a full report of their operations during the preceding fiscal year, together with complete and detailed statements of all their income and expenditures, and a balance sheet showing their financial condition at the close of the given period."

While the unlisted stocks are traded in on the Exchange under practically the same conditions as the listed securities, the requirements for admission to the unlisted department are much less strict than those of the so-called listed stocks. The unlisted department was created in order to provide a place for trading in securities of companies which were unwilling to provide the information demanded by the Exchange in its listed department and which were unwilling to make public to its stockholders and the investing market regular reports of their earnings and financial condition.

Now it is manifestly impossible for the Stock Exchange by any rules to guarantee to investors the soundness of the securities which are dealt in on its floor. The Exchange cannot undertake to safeguard investors against the mistakes of their own judgments. And it is decidedly the opinion of a large number

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