the relationship between the banks and the stock exchange
“a million in the hands of a single banker is a great power,” said walter bagehot; “he can at once lend it where he will, and borrowers can come to him because they know or believe that he has it. but the same sum scattered in tens and fifties through a whole nation is no power at all; no one knows where to find it or whom to ask for it.” this explains the power of wall street. money flows there for the same reason that water flows downhill. the great agricultural districts of the west, for example, will gather from their crops this year several hundred millions of dollars. they have no real economic use for all this money in the farming districts; the large commercial and industrial undertakings that help to make america rich and powerful are not in that neighborhood.
particular trades settle in particular districts, and the money they require must be sent to them from other districts. “commerce is curiously conservative in its homes;” the steel trade concentrates100 in and around pittsburg, the grain trade at chicago, wholesale merchants in special lines are always to be found huddled together in our big cities in neighborly intimacy; and once a trade has settled in one spot it remains there. the millions that go west to pay the farmer must therefore go elsewhere to pay others as fast as a demand for money arises, because the price that will be paid for it elsewhere is greater than the price it will bring in the farmer’s pockets. this is doubly true because, as we have said, there are no imperious demands for money for commercial undertakings in the farmer’s neighborhood, and, even if there were, home enterprises are seldom attractive; curiously enough there is a familiarity about them and their local promoters that breeds contempt. besides, these millions are scattered in small sums all over the agricultural states; there is no cohesion, no concentration.
what then becomes of these vast sums? they are deposited in the local banks, and the local bankers, who are wisely permitted by law to deposit three fifths of their legal reserves in a city bank, promptly transfer the funds that are not required at home to the bank that will pay interest on them. in this way large capital accumulates, and when we say this is a wise provision of the law we mean that scattered101 reserves in local country banks are of no more avail in emergencies than the five-dollar bills in the people’s pockets; but, gathered into one great central fund that will aggregate a sum large enough to provide every solvent bank and business house with ample support in times of distress, they accomplish a purpose worth talking about.
this is the way they do in europe, but say “central bank” in america, and people are frightened out of their wits. they say politics would dominate it; “the interests” would control it. the bigness of things seems to paralyze them. but to attack a thing merely because it is big and powerful is no argument. in a country full of big things it does not ring true; it is un-american, and, as for the bogy of a centralized banking control, there is infinitely more of it in new york to-day, under the existing system, than there could possibly be under the plan proposed by the original aldrich measure. however, the idea of a great central bank is not the subject under discussion.
when money flows into the new york banks the popular notion seems to be that it is used to facilitate speculation on the stock exchange. but this is only one of its many sources of employment. it will supply the payroll at pittsburg, it will ship grain to europe, it will discount the102 bills of merchants, it will return to the west and south when they call for it to move the next crop. if canada or europe wants it, and bids high enough for it, they will get a share of it. wherever capital is most profitable, there it will turn; it will rapidly leave any country that cannot pay for it. it is the old simile of water finding its own level. the first step consists in gathering the idle hoards of individuals into banks; the next consists in centralizing these deposits where they will be available for other sections of the country that have use for them.
in order to attract these funds and so facilitate the business of the country smoothly and economically, the new york banks are accustomed to paying 2 per cent. interest on such deposits. critics who seem to feel that there is something objectionable in the laws of gravitation, would prevent country banks from depositing in the cities by forbidding the payment of interest on deposits by national banks. but the laws that govern national banks, as mr. horace white suggests, are not the laws that govern state banks and trust companies, and, as these would gladly pay the 2 per cent. interest on deposits, they would be given an unfair advantage.41 critics also say103 that country banks should not be allowed to keep three fifths of their reserves in city banks, but then they would be at a disadvantage with the state banks in their neighborhood, since the prohibition would not apply to them. moreover, if country banks were not thus permitted to deposit three fifths of their reserves, what would they do with their funds? for long periods the money would remain idle, and idle funds are as unhealthy for the community as they are for the banks.
there is no other way but for the country banker to take care of his customers first, and then send as much of his surplus as the law permits to the centre that will pay him the best return and the safest return. this is good business; it makes money; it is sound economics. and before the critic goes into a paroxysm over the fear that speculation in stocks will absorb all this wealth once it finds its way to new york, let me remind him, to cite but one instance, that short-time commercial paper, representing actual commodities moving to market, has the first call. the minneapolis miller’s ninety-day bill, accepted by a reliable merchant and based on an actual carload of flour, has in all normal times a preferred claim on the banker’s funds.
this discounting of commercial paper is the104 ideal function of banking, to quote mr. white, and if there were always a sufficient supply of good bills to absorb all the bank’s loanable credit, with an inflow of cash from maturing bills equal to the outgo of new ones, there would be no occasion for bankers to look elsewhere to keep their funds mobile—and the critic would be out of work.42 but this does not often happen, because the bank’s loanable funds normally exceed the amount of acceptable paper, and at such times the banker makes advances on goods or securities, and, if goods and securities are not pressing for loans, he will place his funds elsewhere, where a demand exists. but securities for which there is always a ready market are such thoroughly good collateral for loans that bankers are glad to get them.
the stockbroker is, in a way, a dealer in merchandise. whether he buys for investment or for speculation—and remember that the boundary line between investment and speculation is often shadowy and indistinct—he pays cash for everything he buys. he then seeks advances of credit upon his wares just as the merchant does, supplementing his own capital and the deposits (margins) of his customers with call or time money from the banks. to deny him these facilities is exactly the same as to deny credit to a merchant;105 both are doing a perfectly legal business, and both contribute to the economic welfare of the community.
the popular idea is that loanable funds thus borrowed by stock exchange houses constitute a diversion of money from the merchants who need it. not so. even if the banks were disposed to use all their loanable funds in mercantile loans and discounts they could not do so, because a part of these funds may be called for at any time, and it is not good banking to lend too large a proportion of call money on time. the merchant wants 30, 60, and 90 day money, and he wants it at a rate not to exceed 6 per cent.; the stockbroker is compelled by the nature of his business to borrow a large part of his money on call, and he pays whatever the banks choose to charge for it. incidentally it may be said that no usury law is violated, even if 100 per cent. is charged, because the new york law legalizes any rate of interest on call loans of $5000 and upward, secured by collateral.43
106 as a matter of fact, far from being put at a disadvantage by the banking methods that provide call loans to stock exchange houses, the merchant or manufacturer enjoys banking facilities which the stock exchange may never hope to enjoy. the merchant is able to secure banking accommodations upon his personal credit, that is, by discounting his own promissory notes or single-name paper unsecured by pledge of collateral. but the stockbroker, however ample his resources and his credit, can only obtain loans upon collateral securities. any attempt to resort to his personal credit or his personal paper would be construed as a confession of weakness, and his good name at the banks would suffer accordingly.
persons who conjure nightmares over the practice107 of the banks in loaning surplus funds to stockbrokers are deceiving themselves. instead of losing by this system, every merchant and manufacturer in the land profits by it in greater or less degree. the stockbroker deals in the bonds and shares of great railway and industrial companies, which, in order to succeed, must be able to sell their certificates to the public and so raise the money necessary to provide the extensions and new construction that are constantly demanded by the public. if fresh capital could not be enlisted in this way, additions and improvements would cease. the merchant who requires the railroads to ship his goods, and the manufacturer whose demands for new side-tracks, cars, and other equipment are unceasing, are therefore directly interested in the maintenance of a broad and stable speculative market for securities at all times, because in that way only are funds to be raised for the requirements of trade and industry. there would have been no railroads in this country had there not been speculators to build them, nor could the money have been raised had there not been other speculators to buy the shares with the aid of the banks.
prevent the banks from lending money to facilitate stock-market operations and business ceases; interfere with it or hamper it and confidence108 is impaired, and when these things happen the industrial system collapses in terror. such has been the experience of modern times. until a system is devised whereby large undertakings may enlist public support in other ways than by offering securities in our great exchanges and by maintaining a market for them there, it is useless to talk of interfering with that necessary relationship which exists between the banks and the stock market. on the one hand we have the cobwebs and windy sophistries of politicians and doctrinaires; on the other hand the test of proved effectiveness in the conduct of business. and the country’s business cannot stop; it must go ahead.
in the last six years more than a billion shares of stock have changed hands on the new york stock exchange, together with bonds of a market valuation exceeding five billions of dollars, and, under the rules, each purchase made was paid for in full by 2:15 p.m. of the day following the transaction. if all these purchases had been made for cash—i. e., if every customer of every brokerage house paid in full for his purchases, there would be no use for bank loans to brokers; there would be no speculation, and hence no progress. securities purchased in the six-year period quoted were, in the majority of instances, bought on margin, that is, they were only partially paid for by the purchasers,109 the balance required being furnished by the broker from his capital and by the banks from their loanable funds.
there is a popular fallacy as to the amount of actual cash required to finance these enormous stock exchange transactions; persons who are not well informed often entertain the impression that it is much larger than it really is. as a matter of fact considerably more than 90 per cent. of the business of the banks is done through the clearing house, an institution designed, as every one knows, to minimize the transfer of actual cash and to simplify the payment of balances. if these clearings seem large—they are, in fact, twice as large in new york as in all the other cities of the union added together—it is not alone because more speculation in securities takes place in new york, but because this happens to be the centre where many other cities balance their claims against each other.
furthermore, when critics who do not understand the subject look askance at the volume of loans of the new york banks, they must remember that the lending power of such institutions is always four times greater than the supply of money in its vaults. the reserve of 25 per cent. which the banks are required to maintain means that every million dollars of actual cash added to their funds110 renders possible an expansion of four million in loans, and every withdrawal of funds involves a proportionate reduction of these loans. these matters are self-evident. the point to bear in mind is that through this expansion and contraction of loans stock-market operations are increased or diminished by almost automatic processes. “money talks” is an old aphorism. in this case it is not money that talks, but credit, and the credit extended to stockbrokers by the banks is always wisely regulated to meet conditions as they arise.
the customer of a brokerage house buys, let us say, 1000 shares of st. paul at 120, on which he deposits a partial payment or margin of $15,000. the bank will loan to the broker 80 per cent. of the market value of the stock, or $96,000, which, added to the $15,000 deposited by the customer, leaves $9000 which the broker supplies from his firm’s capital. the broker gives to the bank, with the securities, a note on one of the bank’s printed forms, which gives the bank absolute authority to sell the collateral whenever the margin shall have declined to less than 20 per cent. this note is so sweeping in its terms, and gives the bank such complete power, that a reproduction of it, in small type, would fill two pages of this book.
111 it empowers the bank to sell as it pleases—if the broker fails to pay the loan on demand, or to keep the margin at 20 per cent.—all the securities in the loan; it authorizes the bank to seize any deposit the broker may have in the institution; the bank may itself purchase all or any part of the securities thus sold, and all right of redemption by the broker is waived and released. this instrument would seem, per se, a pretty strong hold on the broker, but the bank’s security does not end there. in making the loan the bank knows that the borrower is a member of the new york stock exchange, and that presupposes capital, with at least one stock exchange membership, worth to-day about $60,000. it knows, too, that a fundamental rule of all stock exchange brokers is to protect the bank at all hazards, not merely because the personal honor of the broker is involved, but because the business could not be conducted otherwise.
it is apparent from a consideration of all these elaborate precautions that the lending of funds to stockbrokers is a safe business, indeed in all the criticism directed against wall street methods i have not yet heard it questioned. the department of the bank entrusted with such matters watches the tape with vigilance to see that the112 20 per cent. margin is not impaired; if it should happen to be impaired, the broker’s messenger is almost always on hand anticipating with his additional collateral the call that the banker will make. so excellent is stock exchange collateral, thus secured and thus protected, that the losses resulting from this class of business are infinitesimal. i am not a banker, but i hazard the opinion that it constitutes, in fact, the minimum risk in all the departments of the bank’s business.
in any case, when trouble comes and panic conditions prevail, it requires no stretch of the imagination to say that the stockbroker’s loan is a better loan than that of, let us say, the silk merchant, for he, perhaps, cannot easily repay. he is under immense liabilities in various directions and he has many obligations; whereas the stockbroker feels every minute of the day that his first duty is to the bank; the customer who owns the securities in the loan must either deposit sufficient margin or the broker will sell him out, in which case the loan at the bank is paid off. finally, it may be added that in the october panic of 1907, when merchants’ failures were announced daily, and when certain banks and trust companies closed their doors, not a single failure was announced on the new york stock exchange.
113 another objection often lodged by critics of present-day banking conditions, has to do with the practice of new york banks in the over-certification of brokers’ checks. these over-certifications are held to be objectionable because the national banks are forbidden by law to certify for a sum greater than the drawer has on deposit. in practice it works out this way: the broker’s clearing-house sheet of to-day tells him what payments he has to make, so on the following morning he acquaints his bank with the fact that payments are to be made necessitating certifications beyond the amount of his deposit. he then sends to the bank the promissory note of his firm, payable on demand, and the bank credits his account with the proceeds. as the day advances the broker’s checks come in and are credited to the account, which is always balanced and the note paid off before the close of the day’s business. the risk is nominal.
of course a few hours elapse between the certification and the receipt of the broker’s checks, and in this brief interval it would be possible for a dishonest man to abuse the privilege extended him, but the fact that such a thing does not happen affords tenable ground for the belief that it will not happen. the bank does not deal with an individual, but with a firm, and it knows114 that the firm has a membership in the stock exchange, with a cash balance on deposit in the bank that extends the accommodation. any banker will bear witness that the business is quite satisfactory and that it involves no loss. moreover, this certification of stockbrokers’ checks is essential to the maintenance of broad speculative markets, and, whether that portion of the public that criticises the practice likes it or not, speculation is a necessary part of our business life.
it may be pertinent to remark in this connection that the law prohibiting these certifications by national banks is unnecessary and unwise, as is evidenced by the facility and safety with which it is honored in the breach. state banks in new york are under no such restriction, nor has it occurred to our lawmakers that a necessity for the prohibition exists. the experience of these banks in the matter of certifications, like that of the national banks, shows that the business is safe and sound. if the merchant discounts his paper for thirty, sixty, or ninety days, why prevent a similar accommodation to stockbrokers for an hour or two? both are engaged in a strictly legitimate business upon which the welfare of the community in greater or less degree depends, and the fundamental115 purpose of a bank is to promote and encourage such business. that is what banks are for, and bank officers are supposed to know something about how, when, and where accommodations may be extended with safety to all concerned.
mr. horace white cites the year 1909 as an illustration of the employment of loanable bank funds by brokers which brings up another point. for long periods in that year, money loaned on call on the floor of the new york stock exchange at 1? per cent., while our banks were paying 2 per cent. to the interior banks to which the money belonged. this does not necessarily mean that the banks were losing money; because the greater part of these funds was employed in time loans and in commercial discounts at 3 and 4 per cent., thus raising the average income rate. there is also to be considered the unearned increment which the bank gains by “holding” its depositor, even though no large profit accrues from the funds thus deposited.44
as the ratio of reserves to liabilities at that time was much above the legal requirement, it might be inferred from this and from the 1? per cent. rate that money was easy; but it was not, as many persons in commercial pursuits learned when they tried to borrow it.116 there was a great deal of money that was not being used in daily business, and one of the reasons was that the period was one of distrust. stockbrokers got funds at 1? per cent. while many other borrowers were required to pay stiffer rates, because the banks that controlled the money market—i. e., the loanable funds—were unwilling to part with them except for short periods and on instantly marketable security, and this state of mind on the part of the new york bankers was shared by the bankers of europe. it was good banking, because it was prudent and conservative. in other words, at a time when danger threatened, bankers in all important centres of the world regarded stock exchange collateral as ideal security, and, as we have seen, the aggregate of their loanable funds pressing on the market kept call rates down to 1?. if in times of doubt and distrust this form of collateral proves its safety, is it not a fair hypothesis that it is safe at all times?
if the critics are correct in their contention that pressure of easy money in the new york market holds out inducements for foolhardy speculation on the stock exchange, the year 1909, just cited, should have witnessed a great boom in securities. if speculators could borrow at 1? per cent. on securities that netted 5 and 6 per cent., the theory117 of our adversaries is that this disproportion entices a large number of people into such speculative ventures that inflation takes place, followed by collapse. that nothing of the sort occurred shows that critics, like other less gifted persons, may err; it shows, too, what every thoughtful person knows, that booms are not created on the stock exchange, which merely reflects in its dealings external conditions of all sorts, among them psychological processes which neither brokers nor money markets may hope to control. as a matter of record, 1909 showed but little increase in the volume of business transacted on the stock exchange as compared with 1908, and the increase, such as it was, represented nothing more than a natural recovery from the paralysis following the débacle of 1907, plus an investment of funds at attractive levels. the same state of affairs prevailed in 1910. from june to december of that year call money rates almost never exceeded 3 per cent., and time money might be had at from 3? to 5, yet far from stimulating speculation—far from revealing an excessive employment of bank funds by stockbrokers—transactions both in shares and bonds dwindled to insignificant proportions.
cheap money is by no means a “bull argument” from the stock exchange point of view, because118 it arises from dull conditions in commerce and industry, and there can be no boom in the securities which represent the nation’s business unless mills and factories and railroads are prosperous. there have been more bull markets with tight money, or with money in the neighborhood of 6 per cent., than in cheap money markets of the sort just described. this is not equivalent to saying that a prolonged rise can be conducted through a period of dear money. as a matter of stock exchange experience such a condition seldom arises, because the stock exchange discounts the future, foresees those economic conditions that spell prosperity for the country, and advances the prices of securities on a money market that has not yet felt the demands of improved conditions.
in june, july, and august, for example, conditions may warrant a hope of bountiful harvests, while general business is dull and idle money abundant. such a prospect is always discounted, other things being equal, by a rise in securities, and money that is not yet required to market the crops thus finds employment as loans on stock exchange collateral. later on, when reviving business leads the interior banks to call their new york balances, the depository banks meet the demand by calling loans and by advancing119 rates. the speculative movement on ’change is then checked or reversed just in proportion to the demand for money elsewhere. it may continue for a while if the discounting process has not been complete, or if there remains a wide disparity between interest rates for money and net returns on securities; or if the independent resources of the city banks are large enough to furnish comfortable interest rates even after the westward drain has commenced, but, generally speaking, “the move is over,” to quote the vernacular, by the time business men want their money. nine times out of ten any monetary strain that results thereafter is not due to speculative operations in securities nor to any other cause attributable to the stock exchange.
a word should be said here concerning the stock exchange clearing house, because just as the clearing house of the associated banks ascertains and pays the balances of its members with a minimum outlay of coin and legal tender notes and with great economy of time and labor, so the stock exchange clearing house stands the strain of an enormous business, reduces the volume of checks and deliveries, and relieves both the banks and the stockbrokers of an amount of risk and confusion that would be well-nigh intolerable.
120 in order that the layman, for whom these pages are written, may understand what this means, it may be said that if 500,000 shares of stock are sold in a day on the stock exchange, and if we assume the average price of these stocks to be 50, the checks paid out on that day would be $25,000,000, and in a year at that rate certifications would be necessary involving the stupendous total of $7,500,000,000. this clumsy if not impossible method the clearing house was designed to avoid. moreover, the actual daily transfer of such a volume of securities is largely obviated by the clearing house system, and thus another and highly important economy is effected.
the stock exchange clearing house is managed by a committee of five members of the board of governors of the exchange. each day the seller of stocks sends to the office of the buyer his “deliver” ticket, and the buyer sends to the seller his “receive” ticket, this transaction constituting a “comparison” by both parties, and an evidence that the transaction has been entered on their books. before 7 p.m. of that day these tickets, and the sheet comprising the record, are sent to the clearing house. this sheet contains a “receive” and “deliver” column, with all the transactions in each security grouped together, and with a balance—i. e., a debit or credit,121 struck at the bottom. if there is a credit, a draft on the clearing house bank is attached; if a debit, a check for the balance accompanies the sheet.
when the clearing house receives this sheet a simple and a very ingenious process ensues which relieves the broker of a great deal of trouble, risk, and labor. if he has bought and sold, let us say, an equal amount of stock, comprising numerous transactions, instead of having to draw checks for all these separate trades, the clearing house settles the whole day’s transactions by a single check for the actual balance. if his numerous purchases and sales do not balance, and if there are various lots of stock to receive and deliver, the clearing house eliminates a host of intermediaries and puts him into direct touch with one firm to whom he delivers, and with one from whom he receives. he may have had no transaction with the firms thus arbitrarily assigned to him; that makes no difference. the books of the clearing house always balance; somewhere a firm is entitled to a receipt of stock, and somewhere another firm will be found to deliver it to him.
nothing could be simpler and more economical than the manner in which the two are brought together. in such a system, the number of shares actually delivered is reduced by the clearing122 house to one third of the number represented by the broker’s actual transactions, while the amount of money which he must command to meet his daily engagements represents, on an average, only 25 per cent. of the actual capital that would be required were it not for the excellent system thus afforded him. persons who wonder at the magnitude of stock exchange transactions, and who jump to hasty conclusions as to the actual capital involved, may well reflect upon the manner in which this method reduces to a minimum the stockbroker’s drafts upon the banks.
in a larger sense, if the critic in these matters affecting the relationship of banks to stockbrokers feels aggrieved at what he thinks is an improper diversion of funds, he must remember that the comparative scarcity of capital to-day—which is at the bottom of his complaint—is not due in any sense to stock exchange speculation, for there has been almost no extensive speculation in this quarter from 1907 down to november, 1912. to find the cause of the scarcity of capital—and it is unquestionably scarce—he must consider the immense destruction of tangible wealth in the last decade, and the extraordinary tendency to convert floating forms of capital into fixed and immobile forms.
the amount of money expended in state123 roads since automobiles came into popularity is probably ten times more than it was before; at the election in november, 1912, a fresh total of $50,000,000 was voted for “good roads” by the electorate in new york state. the building of the panama canal has cost or will cost about $365,000,000; all over the country large municipal or state works are under construction; here in new york the contract for the erie canal calls for $150,000,000, and for the city’s new water-supply system—the ashokan basin and the kensico reservoir—$177,000,000, each contributing a share to the depletion of the normal supply of working capital. meantime, to cite another instance, congress appropriates $160,000,000 to pensions in a single year, and $40,000,000, as a recent writer puts it, “for that particular form of graft which consists in giving a $30,000 post office to a thirty-cent village.” the railroads of the country alone require to-day sums of money equivalent to the working capital represented by all our bountiful harvests of 1912.
aside from these matters the critic should remember, in fair play, that the currency famines which occur with periodic frequency in our country are due in large measure to the non-elastic nature of the currency, to its persistent absorption by the treasury, and to the rigid restrictions which124 these abnormalities impose on the volume of banking credit. conditions such as these contributed in no small measure to our last great panic, and led to a premium on currency that made us a laughing-stock among the nations. there has been no such money delirium in england since the napoleonic wars; no such condition in germany since the empire was founded, and nothing approaching it in france, even in the commune and the war with prussia. yet in america we go on wobbling uncertainly under the makeshift act of 1908, with its currency associations and its emergency measures, and with the added fear of what may come when the act expires in 1914.
the situation in america is substantially this: business drives ahead at a tremendous pace, with perils on every side, chiefly anxious to be undisturbed. matters run along smoothly for a while; then something happens—there is too much optimism or too much confidence—and a smash. it is not due to speculation in securities, because, as in 1907, the stock markets are the first to see what is coming and to discount it. but speculation in lands, or in manufacture, or in railroad construction go on and on; there is too much work for the dollar to do; the currency system breaks down; here and there a financial institution125 closes its doors; public confidence is shattered, and the whole credit system is disturbed.
then there arises a noble army of critics who, with the best intentions but with insufficient knowledge and study, set to work to remedy conditions they do not understand by methods untried and unpractical, that only add to the general confusion. more harm than good results when the physician, brusquely entering the sick-room, tells the patient he is a very sick man, denounces the lobster that poisoned him, and departs with a general condemnation of shellfish, but without prescribing suitable remedies. persons who denounce the relationship existing between banks and stockbrokers are in most instances upright citizens of high character, but until a little patient study of conditions has enabled them to speak with authority upon matters that are necessarily complex and delicate, they cannot accomplish any really useful purpose. “the wicked are wicked, no doubt,” said thackeray, “and they go astray, and they fall, and they come by their deserts; but who can tell the harm that the very virtuous may do?”
the three leading groups of banking interests in wall street are said to represent $500,000,000 of available capital each; the deposits in what are called the “trust banks” amount to between126 $700,000,000 and $800,000,000, while the banks of the whole country hold deposits of $16,000,000,000. the savings banks now hold $4,450,822,522 which is owned by 10,009,804 depositors.45
as we have not yet reached the point of abolishing property altogether, we may concede that these great combinations can do for individual business and for the country at large what cannot be done without them. they furnish the large sums which, from time to time, are required by the government, the state, the town, the manufacturer, the tradesman, and the speculator, and to each of these—especially the speculator—the tremendous development of this country is due. because of speculation in securities, the 26,000 million dollars’ worth of capital represented on the new york stock exchange by the stocks and bonds of railroad and industrial corporations have found a public market through which necessary capital has been raised, and the total increases yearly by about one billion dollars. this is “big” business, to be sure, but it is the bigness of the whole people, for the welfare of each is the welfare of all.
such large affairs naturally set people thinking; men want light; they want to know, entirely aside from the doctrines of political platforms and stump127 orators, to what extent the relation of capital to business meets the test of proved effectiveness and economic worth. especially do they seek information in this oft-discussed matter of speculation in securities and of the bank’s relationship to it; and here, fortunately, there is no lack of results by which that relationship may be tested.
pragmatism tells us that as phenomena appear, become mighty, and persist in accordance with natural processes, so they demonstrate their ultimate good and their obvious usefulness. in its especial application to the matters we have discussed, pragmatism teaches us to wait for results in estimating a particular business method, and then to study it in its relation to all business. applying this test to the use of loanable bank funds by those who deal or speculate in the things that represent american enterprise, we find that the very existence of these enterprises depends upon the maintenance of these methods. finally, both the banks and the stock exchange are the trustees of the property of others, and in that capacity their reciprocal relations are certain to be attended by greater caution than if they dealt in a freehanded way with their own property. the magnitude of their undertakings spells responsibility, and responsibility breeds sobriety.
