The New York Stock Exchange in the Crisis of 1914 Part 2

The next morning the few firms who had drafts to meet on that day were provided with the necessary loans by two banks and a trust company at 8 per cent. The amount of securities due from Europe was undoubtedly large, but the great bulk of it had not been shipped and the shipment of it was postponed for many weeks afterward. The extraordinary statement that $40,000,000 or $50,000,000 were about to be landed in New York is interesting as showing the hysterical state of mind to which many business men had been reduced at that time. The actual amount of stocks sold to arrive, against which borrowings had been effected in New York, was finally shown to amount to $20,000,000. That this amount was not increased at an embarra.s.sing period in these important negotiations was due in large measure to the action of the Committee in calling together the various foreign arbitrage houses, and securing from them an agreement to cable to their correspondents in Europe not to make further shipments of securities, because borrowed stocks could not be returned and deliveries effected. This as it turned out was an important step in the right direction.

Owing to the sudden and severe pressure of business to which the Committee of Five was subjected almost from the moment of its organization, some matters were unavoidably overlooked which should have had immediate attention. Conspicuous among these was the question of the rate of interest to be charged upon open contracts which the action of the Governing Committee had suspended. This matter was not reached until the meeting of August 4th, when the following ruling was made:

"The Special Committee rules that interest on the delivery at the rate of 6 per cent. shall accrue from August 5th on all unsettled contracts for delivery of securities, except that interest shall cease when a receiver of securities gives one day's notice to a deliverer that he is ready to receive and pay for same.

"The Special Committee further rules that sales of bonds on July 30th carry interest at the rate specified in the bond to July 31st, and that between July 31st and August 5th they are 'flat'; interest thereafter to be 6 per cent. on the amount of money involved, subject to the exemption stated in the previous ruling."

In view of the fact that no action had been taken up to August 4th and that a number of private settlements had been arranged in the meantime the Committee thought it wise to avoid a retroactive ruling, and imposed the 6 per cent. rate from August 5th. Injustice was done, in some cases, by permitting a lapse of five days when no interest charge was required, but this injustice was cheerfully borne owing to the unusual exigencies of the situation.

On this same day the Committee received the first communication which indicated that some members of the Exchange had not yet appreciated the necessities and dangers of the situation. This came in the form of a letter from the Baltimore Stock Exchange which contained the following pa.s.sage:--

"A representative New York Stock Exchange house has been guilty of going directly to one of the Trust Companies here, and made offerings of bonds dealt in on both your Exchange and our own, at a large concession."

The Committee directed the Secretary to make the following reply:--

"In the matter of your letter of August 1, 1914, I am instructed by the Special Committee appointed by the Governing Committee on July 31, 1914, to inform you that in the opinion of said Committee the offering down of securities in places where money is loaned on securities is most reprehensible, and that members of this Exchange ought not to engage therein. If possible, I would like the name of the member of the New York Stock Exchange who made such offer."

It may be urged in extenuation of the act of the Stock Exchange house that, August 1st being only one day after the closing, a thorough appreciation of the gravity of the situation had not yet become general.

By August 5th the work of the Committee had a.s.sumed the form that was to continue unremittingly until the Exchange reopened four and one half months later. A constant stream of communications either by letter or by personal appearance filled the days sometimes from nine o'clock in the morning until six in the afternoon. The communications asked advice and made suggestions of every conceivable kind, but, above all, they were loaded with problems and difficult situations which had grown out of the breakdown of the financial machinery in general.

The labors of the Committee in striving to straighten out this formidable tangle of business affairs led to their issuing a series of rulings, which were binding upon all members of the Exchange. These rulings were sent over the "Ticker" whenever they were pa.s.sed, but on August 5th it was decided to supplement the "Ticker" by distributing the rulings in circular form, and thus insure the possession by every member of a full copy of the entire number. It is a gratifying fact, both from the standpoint of the Committee and of the Stock Exchange, that no one of the very numerous rulings was a failure or had to be rescinded, and that they were all accepted without cavil or serious criticism by the members. In the relatively few cases where an indisposition to live up to these rulings was brought to the attention of the Committee, an appeal from them to loyalty and good judgment never failed to bring a recalcitrant member to terms.

On this day, August 5th, a special circular was sent out to answer the constant inquiries as to whether purchases or sales of securities were in any way permissible during the period of closing. It contained the following:

"When the Governing Committee ordered the Exchange closed it was their intention that all dealings in securities should cease, pending the adjustment of the financial situation and the reopening of the Exchange.

"It is possible that cases may occur where an exception would be warranted provided such dealings were for the benefit of the situation, and in no sense of a speculative character, or conducted in public. Any member, however, taking part in such transactions must have in mind, his loyalty to the Exchange, whether or not he is living up to the spirit of the laws, and that he is not committing an act detrimental to the public welfare."

On August 7th the question of the reopening of the Exchange again came to the front. A letter from Baltimore was received urging that the Exchange reopen for dealings in bonds only, and the newspapers were so urgent for some statement on the subject that the Committee authorized the following:

"The Special Committee of Five will not recommend to the Governing Committee the reopening of the Exchange until in their judgment the financial situation warrants it, and as before stated, ample notice will be given of the proposed opening."

The question of borrowed and loaned stocks came up at this time in two aspects, one the interest rate to be charged, and the other the determination of the market price at which such loans should stand.

With regard to the former the Committee ruled on August 5th that "until further notice, from and after this date, the interest rate on all borrowed and loaned stocks shall be 6%." In the latter case they ruled (August 10th) that "borrowed and loaned stocks must be marked to the closing prices on Thursday, July 30th, 1914, at the request of either party to the loan."

The effect of this second ruling was to establish the policy of regarding the closing prices of July 30th, as the market for securities, so that all loans, whether cash loans or stock loans, should be figured at this level. The making of any prices below those of July 30th was to be resisted by every available means, and the money-lending inst.i.tutions were to be urged to cooperate by recognizing them as a basis for exacting margins. As long as this policy could be successfully carried out the danger of financial collapse would be averted.

It having been ruled that a lender of stock, by notifying the borrower of his willingness to take the stock back, could stop the interest charge on the contract, a considerable demand arose for new stock loans to replace those in which this privilege had been exercised. The matter of facilitating these new stock loans was taken up by the Stock Exchange Clearing House, and this together with the negotiations for voluntary settlement of back contracts now brought upon the Clearing House Committee that great volume of work which increased steadily until the reopening of the Exchange.

One step tending to increase this work was taken on August 11th, when the Committee ruled as follows:

"Whenever a loaner of stocks gives one day's notice of willingness to have the same returned and the borrower fails to so return, the interest thereon shall cease. The Clearing House of the Exchange is prepared to advise and a.s.sist in making new stock loans and inquiries should be made in person there."

The effect of this ruling was to create a borrowing demand for stocks at current interest rates and the Clearing House Committee became the agency through which these stock loans were negotiated.

A further ruling, on August 11th, relative to the interest rate was to this effect:

"That on all loans of stock made between members after this date the rate of interest is subject to agreement between the parties to the transactions, but should not exceed 6 per cent."

By the eleventh of August the question of the growth of an outside unregulated market began to force itself upon the attention of the Committee. All the organized Stock Exchanges of the country were closed, the auctioneers had loyally agreed to abstain from making sales, the "Curb" or recognized outside market was faithfully cooperating to prevent dealing, the unaffiliated bankers and money inst.i.tutions were refraining even from the private sale of bonds in which they were interested, so that for a brief period there was a practically complete embargo on the marketing of securities. Naturally enough, so absolute a restraint brought on a pressure which was bound to force a vent somewhere. At first an occasional group of mysterious individuals were seen loitering in New Street behind the Exchange. A member of the Committee of Five, who was p.r.o.ne to see the humorous side of things even in those dark days, remarked as he observed them late one afternoon "the outside market seems to consist of four boys and a dog."

Before long, however, this furtive little group developed into a good sized crowd of men who a.s.sembled at ten o'clock in the morning and continued in session until three in the afternoon. At first they met immediately outside of the Exchange, but later they took up a position south of Exchange Place and close to the office of the Stock Exchange Clearing House. Their dealings increased gradually as time went on and never ceased entirely until the Exchange reopened. In all probability the existence of this market was a safeguard as long as its dimensions could be kept restricted. An absolute prohibition of the sale of securities, if continued too long, might have brought on some kind of an explosion and defeated the very end which it was sought to achieve.

This irregular dealing, as long as it remained within narrow limits and was not advertised in the press, furnished a safety valve by permitting very urgent liquidation. It was, however, continually accompanied by the great danger that it might grow to large and threatening proportions. If, in consequence of the facilities which these unattached brokers were offering, responsible interests should begin to take part in and help to create an open air market, the very disasters which the closed Exchange was intended to prevent might be brought about.

It was necessary, therefore, that the Stock Exchange authorities should do all in their power to hold the development of this market in check. With this end in view they not only prohibited their own members from resorting to it, but they exerted what influence they could upon others not to lend it their support. The banks and money lenders were urged not to recognize the declining prices which were established there as a basis for margining loans, as such recognition might tend to increase the dealings. One or two large inst.i.tutions which, at first, were disposed to finance the operations conducted in the Street were persuaded to refrain from continuing to do so, and the press, while giving publicity now and then to the very low figures at which some leading stocks were quoted, was induced to avoid the practice of regularly tabulating these prices.

It having become apparent that some members of the Exchange, while obeying the mandate to do no trading in New Street, were indirectly helping the practice along by clearing stocks for the parties who were making the market there, the Committee ruled (August 11th) "that members of the Exchange are prohibited from furnishing the facilities of their offices to clear transactions made by non-members while the Exchange remains closed."

The final outcome was that the New Street market did more good than harm. It relieved the situation by facilitating some absolutely necessary liquidation, and never grew to such proportions as to precipitate disaster, but during the long suspense and uncertainty of the closing of the Exchange it was a constant and keen source of anxiety to the Committee of Five.

Toward the end of the first fortnight after the closing of the Exchange, the communications received by the Committee made it plain that there were quite a large number of purchasers, attracted by the low figures reached in the last day's trading, who were ready and anxious to buy securities at or above the closing prices. Obviously purchases of this kind by investors who happened to be in a position to take securities out of the market, promised to bring relief to interests whose position was critical and thus to fortify the general situation. This facility could not be extended in the form of a general permission to the members of the Exchange to make transactions privately at or above closing prices. To have permitted as far reaching a relaxation of restraint as this in so critical a time would have entailed too great a risk. If any one of the eleven hundred members had proved disloyal in the exercise of so dangerous a privilege and privately negotiated sales at prices below those of the closing, the whole plan of sustaining values might have been jeopardized.

After considering the matter very carefully the Committee concluded that the machinery and clerical force of the Stock Exchange Clearing House could be advantageously used to supervise and control transactions of this character, and, on August 12th, they issued the following ruling:

"Members of the Exchange desiring to buy securities for cash may send a list of same to the Committee on Clearing House, 55 New Street, giving the amounts of securities wanted and the prices they are willing to pay.

"No offer to buy at less than the closing prices of Thursday, July 30, 1914, will be considered.

"Members of the Exchange desiring to sell securities, but only in order to relieve the necessities of themselves or their customers, may send a list of same to the Committee on Clearing House, giving the amounts of securities for sale.

"No prices less than the closing prices of Thursday, July 30th, 1914, will be considered."

Thus was established a market in the Stock Exchange Clearing House which was kept in operation until the complete reopening of the Exchange. Immense labor and difficulty were brought upon the Clearing House Committee in order to handle and supervise this unusual method of trading, and the extraordinary success with which it was carried through has ent.i.tled them to the lasting grat.i.tude of their fellow members. The business was conducted by having a large clerical force tabulate the orders received and bring purchasers and sellers together who were willing to trade in similar amounts and at similar prices. In order to consummate a trade the Clearing House would notify both parties, leaving it to them to carry out the delivery and payment, and requiring them to inform the Clearing House when the transaction had been completed.

The first effect of furnishing this means for establishing a restricted market was very encouraging. A very considerable amount of business began at once to be entered into. Many people with ready money, who felt that securities had fallen to bargain prices, appeared as purchasers and relieved the necessities of those who had been embarra.s.sed by the war crisis. A little later, however, when the progress of the war took on a more discouraging aspect, this "Clearing House Market" fell to the arbitrary minimum of the closing prices with a large excess of selling as compared to buying orders, and the "New Street Market" grew in proportion. During the darkest days of depression the prices of a few leading stocks such as U. S. Steel and Amalgamated Copper dropped in the Street ten points or more below their July 30th closings, and business in the Clearing House almost ceased, but in the later Autumn, when the rapid rise in the volume of American exports began to foreshadow a readjustment in foreign exchange, the New Street prices rose again to the Clearing House level and a relatively small business in the "outlaw" market was transformed into a relatively large business conducted under the supervision of the Exchange.

It is an interesting detail, worth mentioning, that the ruling of the Committee quoted above, which established a market in the Clearing House, used the permissive word "may" in stating that orders to buy and sell might be sent to that inst.i.tution. This was soon taken advantage of by a few individuals who proceeded to conduct private transactions among themselves. Their excuse was that if transactions were merely permitted in the Clearing House it became optional as to whether they should take place there or elsewhere. Within a few days thereafter the Committee amended the ruling by subst.i.tuting the word "must" for the word "may." The great responsibility attached to promulgating rulings, which were to be the law during this critical period, is made more apparent when it is realized that the ill considered use of a single word might bring on unforeseen and perhaps dangerous consequences.

During the month of August a constantly increasing pressure from every conceivable direction was exerted to break down the dam with which the Committee was striving to hold back the natural flow of dealings in securities. By letter and by personal appearance before the Committee individuals, in and out of the Exchange, strove to induce them to countenance transactions at prices below the arbitrary level of the closing. In addition to this agitation among individuals and firms, restlessness began to show itself in some of the other Exchanges. At one time the Stock Exchange of a great neighboring city, which had permitted restricted dealings exactly similar to those carried on in New York, wished to have those dealings regularly quoted in the newspapers; at another time a movement developed on the Consolidated Stock Exchange to establish some kind of restricted public dealing on their floor. The Committee of Five were obliged to labor hard and a.s.siduously to hold this pressure back and keep the dam intact, and its efforts were ably and loyally seconded by the Committee of the Bank Clearing House whose great influence was unremittingly exerted to prevent the danger of premature action of any kind.

On September 1st the Clearing House banks were anxious to determine what was the amount, measured in money, of securities sold in New York by Europe and not yet received. The object of obtaining this information was to know what demand would be made upon the loan market if, at any time, these securities should be shipped. At the suggestions of the bankers the Committee of Five summoned before them representatives of all the houses doing a foreign business and requested them to send answers, as promptly as possible, to the following two questions:

_First:_ "Amount due Europe for securities received to date and not yet paid."

_Second:_ "Amount due Europe for securities already sold but not received from Europe."

On the following morning answers were handed in showing that the amount received and not yet paid for was $699,576.11, and that the amount due Europe on securities sold but not yet received was $18,236,614.15. The rapidity and accuracy with which this important information was obtained, without any publicity or disturbance of confidence, is interesting as showing the efficiency of the intimate cooperation between the banks and the Stock Exchange.