Note: Images of the original pages are available through Internet Archive/American Libraries. See http://www. Archive. Org/details/newyorkstockexch00kahnrich THE NEW YORK STOCK EXCHANGE AND PUBLIC OPINION by OTTO H. KAHN Remarks at Annual DinnerAssociation of Stock Exchange BrokersHeld at the Astor Hotel, New YorkJanuary 24, 1917 Published by The New York Stock Exchange The New York Stock Exchange A couple of weeks ago I went to Washington to contradict under thesolemn obligation of my oath a gross and wanton calumny which, basedupon nothing but anonymous and irresponsible gossip, had been utteredregarding my name. On my way between New York and Washington, thinking that, once on thestand, I might possibly be asked a number of questions more or lesswithin the general scope of the Committee's enquiry, I indulged in alittle mental exercise by putting myself through an imaginaryexamination. With your permission, I will read a few of these phantom questions andanswers: Should the Exchange Be "Regulated"? Question: _There is a fairly widespread impression that the functions of theStock Exchange should be circumscribed and controlled by somegovernmental authority; that it needs reforming from without. What haveyou to say on that subject?_ Answer: I need not point out to your Committee the necessity of differentiatingbetween the Stock Exchange as such and those who use the StockExchange. Most of the complaints against the Stock Exchange arise from the actionof those outside of its organization and over whose conduct it has nocontrol. No doubt there have at times been shortcomings and laxity ofmethods in the administration of the Stock Exchange just as there havebeen in every other institution administered by human hands and brains. [Sidenote: _Should the Exchange be regulated?_] Some things were, if not approved, at least tolerated in the past whichare not in accord with the ethical conception of to-day. The same thing can be said of almost every other institution, even ofCongress. Until a few years ago, the acceptance of campaigncontributions from corporations, the acceptance of railroad passes byCongressmen and Senators were regular practices which did not shock theconscience either of the recipients or of the public. Now they haverightly been made and are looked upon as crimes. Ethical conceptions change; the limits of what is morally permissibleare drawn tighter. That is the normal process by which civilizationmoves forward. The Stock Exchange has never sought to resist the coming of that higherstandard. On the contrary, in its own sphere it has ever endeavored tomaintain an exemplary standard, and it has ever shown itself ready andwilling to introduce better methods whenever experience showed them tobe wise or suggestion showed them to be called for. [Sidenote: _Should the Exchange be regulated?_] In its regulations for the admission of securities to quotation, in thepublicity of its dealings, in the solvency of its members, in its rulesregulating their conduct and the enforcement of such rules, the NewYork Stock Exchange is at least on a par with any other Stock Exchangein the world, and, in fact, more advanced than almost any other. The outside market on the curb could not exist if it were not for thestringency of the requirements in the interest of the public which theStock Exchange imposes in respect of the admission of securities totrading within its walls and jurisdiction. There is no other Stock Exchange in existence in which the public hasthat control over the execution of orders, which is given to it by thepractice--unique to the New York Stock Exchange--of having every singletransaction immediately recorded when made and publicly announced onthe ticker and on the daily transaction sheet. I am familiar with the Stock Exchanges of London, Berlin and Paris, andI have no hesitation in saying that, on the whole, the New York StockExchange is the most efficient and best conducted organization of itskind in the world. [Sidenote: _Should the Exchange be regulated?_] The recommendations made by the Commission appointed by Governor Hughesat the time were immediately adopted in toto by the Stock Exchange. Certain abuses which were shown to have crept into its system severalyears ago were at once rectified. From time to time other failings willbecome apparent--there may be some in existence at this very momentwhich have escaped its attention--as failings become apparent in everyinstitution, and will have to be met and corrected. I am satisfied that in cases where public opinion or the properauthorities call attention to shortcomings which may be found to existin the Stock Exchange practice, or where such may be discovered by thegoverning body or the membership of the Exchange, prompt correction canbe safely relied upon. Sometimes and in some respects, it is true, outside observers may havea clearer vision than those who are qualified by many years ofexperience, practice and routine. If there be any measures which can be shown clearly to be conducivetowards the better fulfilment of those purposes which the StockExchange is created and intended to serve, I am certain that themembership would not permit themselves to be led or influenced byhidebound Bourbonism, but would welcome such measures, from whateverquarter they may originate. Is the Exchange Merely a Private Institution? Question: _Do I understand you to mean, then, that the Stock Exchange is simplya private institution and as such removed from the control ofgovernmental authorities and of no concern to them?_ Answer: I beg your pardon, but that is not the meaning I intended to convey. While the Stock Exchange is in theory a private institution, itfulfills in fact a public function of great national importance. That function is to afford a free and fair, broad and genuine marketfor securities and particularly for the tokens of the industrial wealthand enterprise of the country, i. E. , stocks and bonds of corporations. Without such a market, without such a trading and distributing centre, wide and active and enterprising, corporate activity could not exist. [Sidenote: _Is the Exchange merely a private institution?_] If the Stock Exchange were ever to grow unmindful of the publiccharacter of its functions and of its national duty, if throughinefficiency or for any other reason it should ever become inadequateor untrustworthy to render to the country the services with constituteits raison d'être, it would not only be the right, but the duty of theauthorities, State or Federal, to step in. But thus far, I fail to know of any valid reasons to make such actioncalled for. Short Selling--Is it Justifiable? Question: _You have commenced your first answer with the words, "I need notpoint out to your Commission. " That is a complimentary assumption, butI don't mind telling you that we here are very little acquainted withthe working of the Stock Exchange or the affairs of you Wall Street menin general. What about short selling?_ Answer: I do not mean to take a "holier than thou" attitude, but personally, Ihave never sold a share of stock short in my life. Short sellers are born, not made. But if there were not people born whosell short, they would almost have to be invented. Short selling has a legitimate place in the scheme of things economic. It acts as a check on undue optimism, it tends to counteract the dangerof an upward runaway market, it supplies a sustaining force in aheavily declining market at times of unexpected shock or panic. It is avaluable element in preventing extremes of advance and decline. [Sidenote: _Short selling Is it justifiable?_] The short seller contracts to deliver at a certain price a certainquantity of stocks which he does not own at the time, but which heexpects the course of the market to permit him to buy at a profit. In its essence that is not very different from what every contractorand merchant does when in the usual course of business he undertakes tocomplete a job or to deliver goods without having first secured all ofthe materials entering into the work or the merchandise. The practice of short selling has been sanctioned by economists fromthe first Napoleon's Minister of Finance to Horace White in our day. While laws have at various times been enacted to prohibit thatoperation, it is a noteworthy fact that in every instance I know ofthese laws have been repealed after a short experience of theireffects. [Sidenote: _Short selling Is it justifiable?_] I am informed on good authority--though I cannot personally vouch forthe correctness of the information--that there is no short selling onone nowadays fairly important Stock Exchange, --that of Tokyo, Japan. You will have seen in the papers that when President Wilson's peacemessage (or was it the German Chancellor's peace speech?) became knownin Tokyo, the Stock Exchange there was thrown into a panic of suchviolence that it had to close its doors. It attempted to reopen acouple of days later, but after a short while of trading was againcompelled to suspend. Assuming my information to be correct, you have here an illuminatinginstance of cause and effect. Short selling does become a wrong when and to the extent that themethods and intent of the short seller are wrong. The short seller who goes about like a raging lion [or bear] seekingwhom he may devour; he who deliberately smashes values by dint ofmanipulation or artificially intensified selling amounting in effect tomanipulation, or by spreading alarm through untrue reports or eventhrough merely unverified rumors, does wrong and ought to be punished. [Sidenote: _Short selling Is it justifiable?_] Perhaps the Stock Exchange authorities are not always alert enough andthorough enough in running down and punishing deliberate wreckers ofvalues and spreaders of evil omen; perhaps there is altogether notenough energy and determination in dealing with the grave and dangerousevil of rumor mongering on the Stock Exchange and in brokers' offices. But after all even Congress, with the machinery of almost unlimitedpower at its hand, does not always seem to find it quite easy to huntthe wicked rumor-mongers to their lairs and subject them to adequatepunishment. Yet the unwarranted assailing of a man's good name is a more grievousand heinous offence than the assailing, by dint even of false reports, of the market prices of his possessions. I need hardly add that the practices to which I have above referred areequally wrong and punishable when they aim at and are applied to theartificial boosting of prices as when the object is the artificialdepression of prices. Does the Public Get "Fleeced"? Question: _We hear or read from time to time about the public being fleeced. There is a good deal of smoke. Isn't there some fire?_ Answer: If people do get "fleeced, " the fault lies mainly with outsidepromoters or unscrupulous financiers, over whom the Stock Exchange hasno effective control. Some people imagine themselves "fleeced, " whenthe real trouble was their own get-rich-quick greed in buying highlyspeculative or unsound securities, or having gone into the marketbeyond their depth, or having exercised poor judgment as to the time ofbuying and selling. Against these causes I know of no effective remedy, just as there is no way to prevent a man from overeating or eating whatis bad for him. In saying this, I do not mean to imply that stockbrokers have not aduty in the premises. [Sidenote: _Does the public get fleeced?_] On the contrary, they have a very distinct and comprehensive dutytowards their clients, especially those less familiar with stock marketand financial affairs, and towards the public at large. And they havefurthermore the duty to abstain from tempting or unduly encouragingpeople to speculate on margin, especially people of limited means, andfrom accepting or continuing accounts which are not amply protected bymargin. In respect of the latter requirement, the Stock Exchange hasrightly increased the stringency of its rules some years ago, and itcannot too sternly set its face against an infringement of those rulesor too vigilantly guard against their evasion. Against unscrupulous promotion and financiering a remedy might be foundin a law which should forbid any public dealing in any industrialsecurity [for railroad and public service securities the existingCommissions afford ample protection to the public] unless itsintroduction is accompanied by a prospectus setting forth everymaterial detail about the company concerned and the security offered, such prospectus to be signed by persons who are to be held responsibleat law for any wilful omission or misstatement therein. [Sidenote: _Does the public get fleeced?_] Such a law would be analogous in its purpose and function to the PureFood Law, Any, let us call it, "anti-fleecing" law which went beyondthat purpose and function would overshoot the mark. The Pure Food Lawdoes not pretend to prescribe how much a man should eat, when he shouldeat or what is good or bad for him to eat, but it does prescribe thatthe ingredients of what is sold to him as food must be honestly andpublicly stated. The same principle should prevail in respect of theoffering and sale of securities. If a drug contains water, the quantity or proportion must be shown onthe label, so that a man cannot sell you a bottle filled with waterwhen you think you are buying a tonic. In the same way the proportionof water in a stock issue should be plainly and publicly shown. The purchaser should not be permitted to be under the impression thathe is buying a share in tangible assets when, as a matter of fact, heis buying expectations, earning capacity or goodwill. These may be, andoften are, very valuable elements, but the purchaser ought to beenabled to judge as to that with the facts plainly and clearly beforehim. [Sidenote: _Does the public get fleeced?_] The main evil of watered stock lies not in the presence of water, butin the concealment or coloring of that liquid. Notwithstanding theunenviable reputation which the popular view attaches to watered stock, there are distinctly two sides to that question, always provided thatthe strictest and fullest publicity is given to all pertinent factsconcerning the creation and nature of the stock. Do "Big Men" Put the Market Up or Down? Question: _Is it not a fact that some of the "big men" get together from timeto time and determine to put the market up or down so as to catchprofits going and coming?_ Answer: As to "big men" meeting to determine the course of the stock market, that is one of those legends and superstitions inherited from oldendays many years ago when conditions were totally different from whatthey are now, and when the scale of things and morals, too, weredifferent, which it is hard to kill. The fluctuations of the stock market represent the views, the judgmentand the conditions of thousands of people all over the country, andindeed, in normal times, all over the world. The current which sends market prices up or down is far stronger thanany man or combination of men. It would sweep any man or men aside likedriftwood if they stood in its way or attempted to deflect it. [Sidenote: _Do "big men" put the market up or down?_] True, men at times discern the approach of that current from afar offand back their judgment singly, or sometimes even a few of themtogether, as to its time and effect. They may hasten a little theadvent of that current, they may a little intensify its effect, butthey have not the power to either unloosen it or stop it. If by the term "big men" you mean Bankers, let me add that a genuineBanker has very little time and, generally speaking, equally littleinclination to speculate, and that his very training and occupationunfit him to be a successful speculator. The Banker's training is to judge intrinsic values, his outlook must bebroad and comprehensive, his plans must take account of the longerfuture. The Speculator's business is to discern and take advantage ofimmediate situations, his outlook is for tomorrow, or anyhow for theearly future; he must indeed be able at times to disregard intrinsicvalues. [Sidenote: _Do "big men" put the market up or down?_] The temperamental and mental qualifications of the Banker andSpeculator are fundamentally conflicting and it hardly ever happensthat these qualifications are successfully combined in one and the sameperson. The Banker as a stock market factor is vastly and strangelyover-estimated, even by the Stock Exchange fraternity itself. May I add, in parenthesis, that a sharp line of demarcation existsbetween the speculator and the gambler? The former has a useful andprobably a necessary function, the latter is a parasite and a nuisance. He is only tolerated because it seems impossible to abolish him withoutat the same time doing damage to elements the preservation of which isof greater importance than the obliteration of the gambler. To the Members of the Exchange Now by this time the Committee would surely feel that it has had asurfeit of my wisdom, as I am sure you must feel, but if you will beindulgent a very little while longer, I should like to say a few wordsmore to you whose guest I have the honor to be this evening. My recent observation of and contact with Congressmen and others inWashington have once more fortified my belief that the men by and largewhom the country sends to Washington to represent it, desire and areendeavoring, honestly and painstakingly, to do their duty according totheir light and conscience, and that, making reasonable allowance forthe element of party considerations, they represent very fairly theviews and sentiments of the average American. [Sidenote: _The pioneer period of economic development is ended_] Most of them are men of moderate circumstances. Very few of them havehad occasion to familiarize themselves with the laws, the history andthe functionings of finance and trade; to come into relation to the bigbusiness affairs of the country, or to compare views with its activebusiness men. It may be assumed that, very naturally, not a few of them have failedto come to a full recognition of the facts that the mighty pioneerperiod of America's economic development came definitely to an end adozen years ago, that with it came to an end practices and methods andethical conceptions, which in the midst of the magnificent achievementsof that turbulent period were, if not permitted, yet to an extentsilently tolerated, and that business has willingly fallen into lineand kept in line with the reforms which were called for in business asin other walks of our national life. The opinions of the world, and particularly of the political world, travel along well worn roads. Men are reluctant to go to the effort ofreconsidering opinions once definitely formed and fixed. [Sidenote: _The vacuum cleaner of reform and regulation_] Many in and out of Congress are still under the controlling impress ofthe stormy years when certain deplorable occurrences affectingcorporations and business men were brought to light, when it wasdemonstrated that certain abuses which had accumulated during well nightwo generations needed to be done away with for good and all, and whenthe people went through the ancient edifice of business with the vacuumcleaner of reform and regulation, using it very thoroughly, perhaps, inspots, a little too thoroughly. Not a few politicians are still sounding the old battle cry, althoughthe battle of the people for the regulation and supervision ofcorporations was fought to a finish years ago _and won by the people_, and although the people themselves of late, on the few occasions whena direct proposition has been put up to them, such as recently inMissouri, have indicated that they consider the punitive andprobationary period at an end and want business to be given a fairchance and a square deal. When the right of suffrage was thrown open to the masses of the peoplein England, a great Englishman said, "Now we must educate our masters. " In this country it is not so much a question of educating our masters, the people and the people's representatives [who, moreover, wouldresent and refuse to tolerate for a moment any such patronizingassumption], as of getting them to know us and getting ourselves toknow them. [Sidenote: _The need for closer contact and better understanding_] All parties concerned will benefit from coming into closer contact witheach other and becoming acquainted with each other's viewpoints. Can we honestly say that we are doing our full share to bring aboutsuch contact and to get ourselves and what we believe in properlyunderstood, believe in not only because it happens to be our job inlife and our self-interest, but because in the general scheme of thingsit serves a legitimate and useful and necessary function for ourcountry? How many of us have taken the trouble to seek the personal acquaintanceof the Congressmen or Assemblymen or State Senators representing ourrespective districts? How many of us make an effort to come into personal relationship withpeople, both here and in the West, outside of our accustomed circles?Yet an ounce of personal relationship and personal talk is worth manypounds of speech making and publicity propaganda. [Sidenote: _"To be one of fifteen men around a table"_] When you look a man in the face and talk to him and question him andrealize in the end that he is sincere in his viewpoint, whether youshare it or not, and that he is made of the same human stuff as you, and has neither horns nor claws nor hoofs, much animosity, manypreconceived notions are apt to vanish and you are not so cocksure anylonger that the other fellow is a destructive devil of radicalism or abloated devil of capitalism, as the case may be. I recall in this connection an incident which concerns my great friend, the late E. H. Harriman. He talked to me about his wish to be electedto a certain railroad board. I said, "I don't really see what use thatwould be to you. You would be one of fifteen men, of whom presumablyfourteen would be against you. " He answered: "I know that, but all theopportunity I ever want is to be one of fifteen men around a table. " And the result has shown that that was all the opportunity he needed. We cannot all have the conquering genius and force of a Harriman, butevery one of us, in a greater or lesser degree, every one in somedegree has the power of co-operating in the vastly important task ofpersonal propaganda for a better understanding, a juster appreciationof each other, between East and West and South, between what is termedWall Street and the men who make our laws, between business and thepeople. [Sidenote: _This is the age of publicity_] This is the age of publicity, whether we like it or not. Democracy isinquisitive and won't take things for granted. It will not be satisfiedwith dignified silence, still less with resentful silence. Business and business men must come out of their old time seclusion, they must vindicate their usefulness, they must prove their title, theymust claim and defend their rights and stand up for their convictions. Nor will business or the dignity of business men be harmed in theprocess. No healthy organism is hurt by exposure to the open air. No dignity isworth having or merited or capable of being long preserved which cannothold its own in the market place. Democracy wants "to be shown. " It is no longer sufficient for thesuccessful man to claim that he has won his place by hard work, energy, foresight and integrity. [Sidenote: _The use of the power that goes with success_] Democracy insists rightly that a part of every man's ability belongs tothe community. Democracy watches more and more carefully from year toyear what use is being made of the rewards which are bestowed uponmaterial success, and particularly whether the power which goes withsuccess is used wisely and well, with due sense of responsibility andself-restraint, with due regard for the interests of the community. And if the consensus of enlightened public opinion should come toconclude that on the whole it is not so used, the people will findmeans to limit those rewards and to curtail that power. And what is true of the public attitude towards individuals holds goodequally of its attitude towards organizations such as the StockExchange. There can be little doubt that a great deal of misconception prevailsas to its methods, spirit and practices, as to its functions, purposesand its place in the country's economic structure. It is of great and urgent importance that the Stock Exchange shouldleave nothing undone to get itself better and more correctlyunderstood. It should not only not avoid the fullest publicity andscrutiny, but it should welcome and seek them. [Sidenote: _The Stock Exchange a National Institution_] It has nothing to hide and it should be glad to show that it hasnothing to hide. It should miss no opportunity to explain patiently andin good temper what it is and stands for, to correct misunderstandingsand erroneous conception. If it is attacked from any quarter deserving of attention, it should goto the trouble of defending itself. If it is made the object ofcalumny, it should contradict and confound the slanderer. Its members should ever remember that while in theory the StockExchange is merely a market for the buying and selling of securities, actually and collectively they constitute a national institution ofgreat importance and great power for good or ill. They are officers of the court of commerce in the same sense in whichlawyers are officers of the court of law. They should not be satisfiedwith things as they find them, they should not take the way of leastresistance, they should ever seek to broaden their own outlook andextend the field and scope of the Stock Exchange's activities. [Sidenote: _American opportunity for foreign trade_] One of the reasons for London's financial world position is that itsStock Exchange affords a market for all kinds of securities of allkinds of countries. The English Stock Broker's outlook and general ordetailed information range over the entire inhabited globe. It islargely through him that the investing or speculative public is keptadvised as to opportunities for placing funds in foreign countries. Heis an active and valuable force in gathering and spreading informationand in enlisting British capital on its world-wide mission. The viewpoint of the average American investor is as yet rather anarrow one. Investment in foreign countries is not much to his liking. The regions too far removed from Broadway do not greatly appeal to himas fields for financial fructification. Yet, if America is to avail herself fully of the opportunities for hertrade which the world offers, she must be prepared to open her marketsto foreign securities, both bonds and stocks. If America aspires to an economic world position similar to England's, she must have amongst other things financial [such as, first of all, adiscount market] a market for foreign securities. [Sidenote: _We are at a turning point in American History_] In educating first themselves and then the public to an appreciation ofthe importance and attractiveness of such a market, with due regard tosafety, and to the prior claim of American enterprise in its owncountry, the members of the Stock Exchange have an immense field fortheir imagination, their desire for knowledge and their energy. We all of us must try to adjust our viewpoint to the situation whichthe war has created for America, and to the consequences which willspring from that situation after the war will have ceased. As Mr. Vanderlip so well said in a recent speech: "Never did a nationhave flung at it so many gifts of opportunity, such inspiration forachievement. We are like the heir of an enormously wealthy father. Nonetoo well trained, none too experienced, with the pleasure-lovingqualities of youth, we have suddenly, by a world tragedy, been madeheir to the greatest estate of opportunity that imagination everpictured. " America is in a period which for good or ill is a turning point in herhistory. Her duty and her responsibility are equally as great as heropportunity. Shall we rise to its full potentiality, both in a materialand in a moral sense? The words of an English poet come to my mind: "We've sailed wherever ships can sail, We've founded many a mighty state, God grant our greatness may not stale Through craven fear of being great. " It is not "craven fear" that will prevent us from attaining the summitof the greatness which it is open to America to reach, for fear hasnever kept back Americans--any more than Englishmen--and never will. Indifference, slackness and sloth, lack of breadth and depth in thoughtand planning; the softening of our fibre through easy prosperity andluxury; unwise or hampering laws, inadequacy of vision and ofpurposeful, determined effort, individual and national, are what wehave to guard against. God grant America may not fail to grasp and hold that greatness whichlies at her hand!