The New York Stock Exchange in the Crisis of 1914 Part 3

Among the many agencies for dealing in securities, whose activities were suddenly cut off on July 31st, the first in importance next to the Stock Exchanges themselves were the so-called bond houses. These firms, which included in their number many prominent private bankers, were dealers on a great scale in investment bonds, and when the thunderbolt of war struck they were carrying large lines of those bonds on borrowed money which, in the ordinary course of events, would have been placed among their numerous clients. When the crisis of early August had developed, all these houses (some of them not being members of the Stock Exchange) loyally cooperated in closing up the market, and abstained from negotiating their securities even in the most private manner. By the middle of August, however, a number of them began to show decided restlessness over the embargo upon their business. The cutting off of their accustomed income, while expenses continued as usual, was not what influenced them, for this hardship was shared by all Wall Street, but the enforced carrying of securities in bank loans at so critical a time when they felt that these securities might be disposed of became a grievance.

It was urged by many of them that the careful placing of these securities would be a great aid to the situation because every investor who made a purchase would facilitate the liquidation of their loans, ease the strain on the money market, and diminish the volume of securities for sale. There was undoubtedly much to be said in favor of this view when looked at from the standpoint of the effect upon the bond houses themselves or upon the loan market, but there was another aspect of the question which was less rea.s.suring. If these houses started, at this terribly critical time, to place their securities among their clients at declining prices, and if these prices became known, which they certainly would, no one could foretell what the consequences might be. Many large inst.i.tutions, such as Insurance Companies and Savings Banks, had funds invested in bonds, and many money lenders held loans upon bonds as security; what would be the effect upon these interests if a declining market even in unlisted bonds should be publicly quoted?

Influenced by this grave uncertainty the Committee of Five resisted the pressure brought upon them by certain representatives of the bond dealers who raised this question first on the nineteenth of August.

Several of these gentlemen represented important firms and inst.i.tutions which were not members of the Exchange, and their freedom from any obligation to be controlled by the Committee created a situation which threatened to become strained. In all cases of this kind, where an independent outsider and the Committee could not come to an understanding, the practice had become established of appealing to the Clearing House Bankers to act as a court of last resort. The banks, with their power to call loans, exerted an influence which could reach every nook and corner of the business world, and, at the same time, their immense facilities for feeling the financial pulse made them the best judges of what risks it was as yet safe to take. A series of meetings consequently took place between the Bank Clearing House Committee, the representatives of the bond houses, and the Committee of Five. At the first of these meetings the bank Presidents leaned very decidedly to the views of the Stock Exchange, and it was decided to postpone any consideration of a departure from the status quo for at least a fortnight.

The general situation remaining very critical all through August, no further steps were taken until September 8th. By that date a new factor had intruded itself into the situation. Certain corporate obligations were about to come due and the refunding of these obligations, whether in fresh issues of bonds or in short term notes, was going to make it necessary to withdraw the prohibition against placing investment securities upon the market. When this necessity became clear it was decided that some strict supervision and safeguarding of the sale of bonds and notes was necessary and the so-called "Committee of Seven," appointed by the bond dealers, were requested to formulate a plan for this purpose. This Committee of Seven consisted of members of the firms of: Brown Brothers & Co.; Guaranty Trust Co.; Harris, Forbes & Co.; Kissel, Kinnicutt & Co.; Wm.

A. Read & Co.; Remick, Hodges & Co., and White, Weld & Co.

On September 9th, this Committee issued the following notice to bond dealers:

"Your Committee is pleased to report that New York City's financial needs have been taken care of satisfactorily, thereby considerably clearing the foreign exchange situation which existed when our communication of September 3d was sent out.

"The Committee is therefore of the opinion that the placing of securities owned by dealers with their private customers should be approved where the securities can be sold without disturbing the collateral loan situation and your Committee will be glad to continue to advise whenever such opportunities arise. Anything tending toward public quotations or the creating of the impression of an active or even semi-active market would unquestionably seriously disturb the loan situation.

"Transactions with bargain hunters should not be countenanced and your Committee will not approve the closing of transactions coming under this head. Prices should conform to the spirit which has prevailed during the past few weeks.

"Recognizing the support which banks and other lenders of money have given to dealers in securities, it should be the policy of such dealers when securities are sold to apply the proceeds toward the liquidation of loans.

"The Committee has considered questions of maturing obligations of cities and corporations and believes that the present situation does not warrant any attempt to issue long time bonds, but that such refunding should be accomplished through short time financing.

"The Clearing House Committee and the Stock Exchange Committee have expressed appreciation of the cooperation shown by the dealers in listed and unlisted securities and if all will endeavor to live up to the spirit of the policy thus far adhered to we are sure there will be no cause for criticisms on the part of the banks or the Stock Exchange Committee.

"Your Committee of Seven will continue to meet in the Directors'

Room of the Chase National Bank daily, from 11 A.M. to 12 M., for advice on any cases where we can be of any a.s.sistance whatever."

The practical plan adopted was as follows:

Bond houses having securities of their own for sale could place them with their clients at prices approved by the Committee of Seven. All purchasers and sellers of bonds, acting as brokers only, were required to file their orders with the Committee of Seven when dealing in unlisted bonds, and with the Stock Exchange Clearing House when dealing in listed bonds, and these two agencies were empowered to determine minimum prices below which sales could not be made.

It will be seen that a very important step in the direction of relaxation of restraints was here taken. Not only was the prohibition of all dealings which had marked the beginning of the crisis withdrawn, but prices below the closing sales of July 30th were to be permitted subject to the supervision of a Committee.

As has already been stated, the Committee on Clearing House had their hands full from the time the Exchange closed, first with bringing about the settlement of the contracts of July 30th, and secondly with carrying on the business of making new contracts for members wishing to trade in securities at or above the closing prices. It was impossible, therefore, for the members of that Committee to give personal attention to the difficult problem of determining the prices below which listed bonds should not be sold. To meet this difficulty it was decided that a small additional Committee of men known to be thoroughly familiar with the bond business should be organized, and that it should be their duty to control the liquidation of listed bonds.

The carrying out of this plan at first met with a technical obstacle.

The power to appoint a Special Committee rested exclusively with the Governing Committee of the Exchange; in order to secure action a special meeting of that body would have to be called; in the early weeks of September sentiment was still in so critical a state and every act of the Exchange was so keenly watched that it was feared the holding of an extraordinary meeting might start rumors and cause alarm. In view of these considerations the Committee of Five hit upon the makeshift of inviting three members of the Governing Committee, who possessed the desired qualifications, to volunteer their services as an advisory body in the matter of fixing prices for listed bonds.

The three members selected were Messrs. C. M. Newcombe, Vice President of the Exchange, W. H. Remick, and W. D. Wood.

On the 19th of September these three gentlemen cheerfully undertook the difficult and onerous task urged upon them, and for three months they abandoned their own private interests and devoted their entire time to it. Owing to the intelligent and judicious manner in which they handled the delicate problem of conducting a liquidation in listed bonds that should at once be effective and yet not lead to demoralization, they placed themselves among the foremost of those to whom the financial community owes a debt of grat.i.tude.

By the latter part of September methods, as described above, had been found for facilitating a restricted liquidation of listed stocks, and of listed and unlisted bonds. Nothing, however, had been done to make an outlet for unlisted stocks. The "Curb" market and certain prominent unaffiliated houses dealing in these securities had loyally played their part in suspending dealings, but symptoms began to show themselves of possible revolt, and the Committee of Five set to work to find a safety valve for this department also. The device of a supervisory Committee had proven so efficacious in other directions, that it was naturally turned to in this instance. The circ.u.mstances differed, however, in one particular. The bond dealers had spontaneously created for themselves the very efficient Committee of Seven who took their affairs in hand, but the interests involved in unlisted stocks did not show the same solidarity, and it was necessary for the Committee of Five to take a hand in initiating action.

With this end in view they consulted Mr. Herbert B. Smithers, of the firm of F. S. Smithers & Co., concerning the feasibility of having a committee formed to pa.s.s upon and control a resumption of dealings in unlisted stocks. Mr. Smithers was singled out for the reason that he was a member of the Stock Exchange whose firm was among the most prominent dealers in these securities, and the prompt and energetic way in which he undertook the task proposed to him soon convinced the Committee that they had not erred in resorting to him. He set about organizing a Committee at once and on September 24th he appeared before the Committee of Five accompanied by Messrs. A. C. Gwynne, F.

H. Hatch, A. H. Lockett, and E. K. McCormick. These gentlemen announced that they were willing to act, with Mr. Smithers as their Chairman, and a plan for the control of the market in unlisted stocks was agreed upon.

In order to clothe this Committee (which included two Stock Exchange members, two representatives of prominent outside dealers, and the President of the Curb a.s.sociation) with authority, the Committee of Five directed members of the Exchange to submit proposed dealings in unlisted stocks to them and abide by their rulings. The Stock Exchange Committee could, of course, only control its own members, but it being a fact that a very large part of the unlisted business emanated from Stock Exchange houses, it was probable that their action would determine that of unattached dealers. This expectation was, in the main, borne out, and business in unlisted stocks began to be carried on actively under the jurisdiction above described.

It is necessary to record, however, in the interest of preserving a correct picture of the happenings of this momentous time, that the smooth and gratifying operation of the various other Committees, which sprang into being to handle the numerous problems presented, was not entirely repeated in this case.

The conditions surrounding unlisted stocks seemed on the surface to be identical with those pertaining to unlisted bonds. In both cases a business that was partly in the hands of Stock Exchange members and partly in those of outside concerns was to be presided over by a mixed Committee representing both interests. In the case of the Bond Committee of Seven this supervision was accepted and cheerfully lived up to by practically all concerned. A different situation soon developed in unlisted stocks. Almost immediately certain individuals in the business began to a.s.sert that the unlisted Committee was a self appointed body which did not represent the people most concerned, and that being themselves dealers in the properties the trades in which were under their supervision, these gentlemen could not be trusted to act fairly in making their rulings. After much preliminary growling which vented itself in interviews with the Committee of Five, this antagonistic sentiment crystallized into a written protest.

On October 1st, the following statement was presented to the Committee of Five.

"GENTLEMEN:

"Owing to a general feeling of dissatisfaction amongst members and non-members of the New York Stock Exchange resulting from the formation of a Committee of Five to supervise dealings in Unlisted Securities, we, the undersigned, desire to suggest the following recommendations for your consideration:

"_First_: The personnel of the Committee be changed to the effect that same be composed of parties not identified as dealers.

"_Second_: That in stocks which have an open or active market, transactions may be made without restriction or necessity of report to the Committee, when at or above the closing prices of July 30, 1914.

"_Third_: That where securities have not had an active or open market the bid prices as published in the _Chronicle_ of August 1st, be accepted as the closing prices.

"_Fourth_: That in the case of securities where the Committee may deem it possible to trade at prices below those prevailing on July 30th, they establish minimum prices good for as long a time as the Committee deems practical, and that a list of these prices be furnished to those making application for same."

"We think that if the above recommendations are put into force, it will do away with the criticism which has been made as to the Committee as at present const.i.tuted, and by so doing increase the efficiency of this Committee on Unlisted Securities, by securing thorough and hearty cooperation on the part of all brokers and dealers in these issues."

In reply to this appeal the Committee of Five pointed out that whenever, in other cases, the action of a Committee had been invoked to supervise the transaction of business, confidence in the integrity of that Committee had been general and unquestioned. The Committee of Seven, the Committee on Clearing House, the Committee of Three, and the Committee of Five themselves had all been vested with dictatorial powers over a business in which their members were personally engaged.

In order to render trading in unlisted stocks a possibility, at the time, similar powers must be granted and similar confidence must be given to some one. The Unlisted Stock Committee were not self-appointed because they came into being at the instigation and suggestion of the Committee of Five, and to disband them after they had started upon their work, subst.i.tuting other individuals in their places, would merely stimulate fresh antagonism that might wreck the entire project. The fact that these men were dealers in outside properties especially fitted them to pa.s.s upon the reasonableness of the prices that were to be made, and there was no more reason to question their integrity of purpose than there would be to doubt that of any individuals who might take their place.

A firm stand was thus taken in defence of this new Committee, and they succeeded in carrying on their work successfully up to the time when the amelioration of conditions enabled them to disband. It must be regretfully recorded, however, that the petty jealousy and distrust which had appeared in connection with this episode continued to show themselves in a desultory way until the end. A few individuals threw what impediments they could in the path of this Committee, and thereby furnished the only exception to the wonderful exhibition of loyalty and self effacement that manifested itself in every other department.

When the Exchange suddenly closed its doors, an immense number of people, consisting of employees of the Exchange itself and the clerical forces of all the many brokerage houses, were rendered idle.

As soon as it became evident that the suspension of business was going to be indefinitely prolonged, the grave question arose as to the extent to which these people would be thrown out of employment. The Stock Exchange at once set the generous example of deciding to retain its entire force without reduction of wages, and this decision was carried through for the entire four and one half months of suspension.

A more difficult problem, however, confronted the brokerage houses.

Many of these firms had very heavy office rents and fixed charges of various kinds; their business had been showing meager profits and even losses for some years and, the length of the period of closing being impossible to forecast, they did not dare to undertake burdens that might get them into difficulties. The result was that a few strong houses, with philanthropic proclivities, carried their clerical forces through on full pay, but the majority were obliged to cut them down in various ways. In some cases the full force was retained on greatly reduced salaries, in others salaries were reduced and part of the force discharged, and the net result was that a great number of unfortunates were either thrown into unemployment altogether or placed in very straightened circ.u.mstances.

It is an interesting fact, bearing on the popular superst.i.tion that Wall Street is peopled by unprincipled worshippers of the dollar who are incapable of those finer qualities of character which are confined exclusively to other walks of life, that there is no region in which a quicker response to the call of the needy can be obtained than on the floor of the Stock Exchange. Even though the brokers were facing an indefinite period of starvation themselves, with expenses running on one side and receipts cut off on the other, the moment it became clear that severe suffering had come upon the clerical forces of the Street a movement was at once set on foot to start measures of relief and a.s.sistance. Perhaps the best way to convey an idea of the form which this a.s.sistance took is to quote from a report on the subject made by one of those who generously gave his time to the work. What follows is in his own words.

"A phase of the extraordinary and unprecedented conditions prevailing in the Financial District, commonly known as 'Wall Street,' was the necessity for cutting down office expenses, and though many firms carried their salary list intact, a considerable number laid off from one half to two thirds of their employees, and subsequent events developed the fact that some of them discharged practically their entire force.

"About the middle of September, the distress said to exist among the Wall Street employees, who had lost their positions as a result of the war in Europe, prompted Mr. C. E. k.n.o.blauch to suggest that some concerted action be taken to meet this emergency, if only as a temporary expedient. A number of informal discussions of the subject with fellow members of the Exchange, and further evidences of the existence of a wider field for the work than was at first realized, culminated in a call for a meeting in the office of Tefft & Company and immediate organization.

"Officers having been duly elected, the personnel of the Committee was declared to be as follows:--James B. Mabon, W. H. Remick, Graham F.

Blandy, R. H. Thomas, W. W. Price, G. V. Hollins, C. E. k.n.o.blauch, C.

J. Housman, G. M. Sidenberg, Townsend Lawrence, T. F. Wilc.o.x, Erastus T. Tefft, Chairman; Charles L. Burnham, Secretary; Edward Roesler, Treasurer.

"The t.i.tle of the Committee was formally agreed upon as 'The Wall Street Employees' Relief Committee.'

"Through the courtesy of Mr. Clarence Mackey, the offer of a suite of rooms on the second floor of the Commercial Cable Building, 20 Broad Street, for the use of the Committee, at no charge for rent, was gratefully accepted, and arrangements for occupation were made at once. Mr. Oswald Villard, through a member of the Committee, evidenced his interest by offering temporary use of rooms in the _Evening Post_ Building for the purposes of the Committee.