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of the members of the Exchange that it ought not to go much further in its rules regarding the admission of securities to the right of trading upon its floor than those which it has already established. Moreover, it is argued that if it did not provide a place on its own floor for the unlisted stocks, these stocks would be traded in outside, and its own members would be deprived of a profitable business while the investor would be deprived even of the measure of protection which he now secures.

Giving full weight to all these considerations, I nevertheless am strongly of the opinion that the Stock Exchange should and must improve its regulation of the stock market in order to remove such causes of just complaint against Wall Street as are within the power of the Exchange to correct. Instead of recommending to the corporations the issue of full reports of their operations, it should compel them to issue these reports. It should abolish absolutely the distinction between listed and unlisted stocks, and require the unlisted stocks to be listed or else throw them out of the Exchange. It should require from every corporation whose securities are dealt in on the floor full, regular and frequent reports of their earnings and expenditures. In a word, it should by its regulations require the fullest possible corporation publicity, for it is only by publicity that most of the evils of stock jobbery can be prevented.

The Stock Exchange should take measures to increase the amount of margins demanded by brokers on speculative accounts. The minimum rate is now generally 10 per cent., although many brokers demand 20 and even 25 per cent. The Stock Exchange would eliminate much of the small irresponsible gambling in stocks if it would take measures to compel its members to demand not less than 25 to 30 per cent. margins. Wall Street has been doing too much business on too little capital. This increase in the rate of margins would materially strengthen and dignify the operations of the street.

Let the federal and state governments beware how they interfere with the operations of a market. The best legislation is that legislation which will promote publicity. No tax on sales should be levied, for that is of the nature of a tax on

process of trade. Far better than a tax on sales would be a reasonable system for the licensing of brokers. That would not injure the reputable members of exchanges, but might operate to weed out illegitimate brokerage. I have not, however, thought out this proposition fully and only offer it tentatively as something infinitely better than a tax upon sales.

Suppress the Bucket Shops.


Of the Firm of S. N. Warren & Co. The essence of investment is purchase of something for the sake of the income that it yields; the essence of speculation is purchase of something with the expectation of resale at a profit within a reasonably short time. The investor thus mainly seeks income from his capital, the speculator mainly seeks increase of his capital. Of course many investors when placing their capital do so with an eye to increase as well as to income.

There is no essential difference between buying on margin and buying outright on borrowed money. The two things are essentially one and the same, the practical difference being merely the fact that brokers usually borrow the money necessary to pay for securities bought by their customers on margin instead of the customers borrowing it directly for themselves.

Further, it is wrong to speak of speculation as simply one form of gambling. Gambling is in its essence a contract determined by chance (contractus aleatorius), typical forms being dice, matching pennies, etc. Speculation is the science of appraising values of securities, foreseeing coming changes therein, and employing capital for profit in the purchase or sale of securities in accordance with such appraisal and forecasts. There are general laws governing the movements of prices and general principles upon which price movements may be forecasted and these laws and principles remove speculation per se from the class of purely gambling operations. That there is a good deal of speculation that is carried on blindly and is in effect mere gambling is undoubtedly true, but that is accidental and does not destroy the substantially scientific nature of stock speculation in itself.

The process described in the preceding paragraph performs an important economic function in continually adjusting prices to changes in value as they occur or can be foreseen and its fudamental principle is that prices tend constantly to follow values. This speculation is legitimate and economically useful. The suppression of bucket shops would go far toward doing away with the principal evils of stock speculation. The bucket shop makes gambling easy for people who should not gamble at all, and besides it performs no useful economic function, as it has no part in the making of prices and should be suppressed by law.

The effect of speculation on prices is to make fluctuations more frequent and less violent and thereby to keep a more ready market at all times than would otherwise exist. It may have the effect of driving prices higher at times than they might otherwise have gone or vice versa—but it acts as a species of flywheel all the time tending to equalize the motion and take up the change of power and speed.

I believe that it is not practicable to stop speculation without doing harm to ordinary business. To stop speculation in securities altogether would produce very grave disturbances in our financial and business system, in that it would

First.-Practically destroy the present wide and ready market for securities.

Second.-By destroying the market for securities it would practically abolish the system of collateral loans which is the keystone of our banking system, and would cause enormous disturbances in banking relations throughout the country—and

Third. It would utterly blight the system of enterprise in corporate form through which capital is constantly pioneering and to which the great industrial developments of the country (e. g., the railroad), are mainly due, and would cause a tremendous economic setback, the effects of which would persist as long as speculation was prohibited.

You ask: “How can the evils of speculation be lessened by changes in the rules of the New York Stock Exchange?” The rules of the Exchange have been mainly drawn with the object of establishing and maintaining a true and a ready market for securities, preventing so far as it can be prevented the making of false quotations, etc. Its system of daily settlements is much less calculated to facilitate rash speculation than the foreign system of periodical settlements and to that extent the rules already tend to curb it in some measure. I do not, however, see that it is the function of the Stock Exchange to do more than provide a market-place for securities of legitimate character and by its rules to ensure that fraudulent transactions and quotations shall not be made therein. The present rules seem well devised for that purpose. It must be remembered that the Exchange cannot guarantee the value of securities dealt in on its floor. I doubt that it is possible for the Stock Exchange by its rules to do much more than it has done and does to protect the integrity of the market. The only state or federal legislation on the subject that seems to me serviceable is legislation to abolish “bucket shops.”

The Real Value of Speculation.

Manager, Investment Department, Malcolm & Coombs.

There are two methods of justifying speculation. One is a matter of law, and can be changed; the other is a matter of fact, and cannot be changed. The recent feverish activity of our legislators at Washington and at Albany to introduce bills aimed at the exchanges bears witness to the statement that law can be changed-provided legislators know just what they want and then get together. I know of a legislator who was told that short sales of stocks were bad—that the brokers through short sales, in some mysterious fashion, invariably robbed their clients and that short selling had brought about the recent panic. He was a new beginner" in legislative halls, yet an opportunity seemed to present itself to attain undying glory. He discovered a statute fifty years old repealing previous statutes against short sales. Without troubling to inquire further into the facts, he prepared a bill once more to do away with short sales.

He was a lawyer, but he did not know that the court had decided, that, unless so specified, the delivery of a particular certificate of stock can no more be required than the delivery of a particular bushel of wheat or bale of cotton or ton of coal.

The economic value of speculation as a part of the machinery of distribution in highly organized society is popularly misunderstood or wholly unrecognized. Speculation needs justification far less than it needs explanation. “Speculation by competent men is the self-adjustment of society to the probable," says Justice Holmes of the United States Supreme Court. As a matter of logic it follows that such a self-adjustment minimizes fluctuations in prices. Stock, produce, cotton and other exchanges are merely an evolution, a growth or development from the working of natural laws in economic society. The chief reason for their existence and their growth is their efficiency in bringing the producer and the consumer closer and closer together. It is obvious that a great central market where every man's idea of value may be expressed must result in narrower fluctuations than many widely separated local markets or no real markets at all. Were it not obvious, a study of the effects of the German Exchange Act of 1896 would make it so. Statistics of the Chicago Board of Trade, covering a period of several decades, show that as speculation grew in extent and its machinery became efficient, the average fluctuation in prices became less and the difference between high and low prices during any year had a tendency to decrease.

The function of the speculator is a simple one. He is an equalizer of prices. He stands ready at all times to buy at a price, and actually to pay for, the commodity in which he deals, stocks, grain, cotton, coffee, copper, pig-iron, etc. Thus, in periods when demand from consumers slackens, the speculator does much to maintain prices. He also stands ready, in periods when demand from consumers is urgent and supply limited, to sell, and, in the case of stocks, actually to deliver by borrowing, the commodity in which he deals, or, in the case of grain and other commodities, to give to the purchaser the right to enforce delivery.

Ignorance, mystery and secrecy put one party to a bargain at a disadvantage. Fraud thrives on them. By all means let us have detailed bank statements, far greater publicity about the affairs of corporations, greater accuracy in Government crop reports, and, generally, the fullest information possible, to the end that the exchanges shall become increasingly efficient and useful to the community. A large part of the business of the country must be based upon the prices quoted on the exchanges. The greater the public information upon which quoted prices are made, the more likely is the average man to achieve a degree of competency in the element of speculation that necessarily resides in the conduct of every business enterprise. In the direction of the greatest possible amount of public information lies the true solution of the problem of minimizing the incidental evils of speculation.

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