Stock Exchange--short Study of Investment and Speculation

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HOME UNIVERSITY LIBRARYOF MODERN KNOWLEDGE

No. 5

Editors :HERBERT FISHER, M.A., F.B.A.PROF. GILBERT MURRAY, LiTT.D.,LL.D., F.B.A.

PROF. J. ARTHUR THOMSON, M.A.P*OF. WILLIAM T. BREWSTER, M.A.


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A complete classified list of the volumes of THEHOME UNIVERSITY LIBRARY already publishedwill befound at the back of this book.


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IQII,. V : f.;

HENR.Y JHO^T ANOf -COMPANY

THE UNIVERSITY P'RESS, CAMBRIDGE, U.S.A.


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CONTENTSCHAP. PAGE

INTRODUCTION......... 7I THE EARLY HISTORY OF BANKING ANDSTOCK-JOBBING ....... 13

II THE LONDON STOCK EXCHANGE. 180C-1910 ........... 40

III LONDON'S FOREIGN MARKET AND THEFOREIGN BOURSES ...... 76IV WALL STREET

V GOOD SECURITIES AND THE ART OF IN-VESTMENT ......... 137

VI SPECULATIVE SECURITIES AND MODES OFSPECULATION ........ iCi 1

VII WHY THE PRICES OF SECURITIES RISEAND FALL ......... 187

VIII THE CREATION OF NEW DEBT AND CAP-ITAL .... ...... 212IX CAUTIONS AND PRECAUTIONS .... 242

GLOSSARY .......... 53BIBLIOGRAPHY.... 255


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THE STOCK EXCHANGEINTRODUCTION

IN an old Pennsylvanian almanac of theeighteenth century two qualities were postu-lated for success in business: first, appli-cation or industry, and second, thrift orfrugality. The first without the second oftenleads to nothing. A man if he knows nothow to save as he gets, may keep his nose allhis life to the grindstone, and die not wortha groat at last. The old proverb, A fatkitchen makes a lean mil, should remind usmoderns that not only excess in eating anddrinking, but luxurious and expensive folliesof all kinds may drive the hardest worker intodebt and difficulty, until after long enjoymentof a good income he ends his career in povertyand dependence. This book is not concerned,however, with the moral value of thrift, oreven with the advantages which savingsbestow upon the individual. Without sav-ings indeed, or without an inherited fortune,7


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f 8 THE STOCK EXCHANGEno one can feel quite independent. Thisis a strong and sufficient moral ground fornot spending all that one earns. But ourparticular business is neither with the firstprocess of earning, nor with the second ofsaving, but with a third. We have to con-sider neither the making nor the saving ofmoney, but its investment after it has beenearned and saved. Investment is a com-paratively new word; it was not known toDr. Johnson as a financial term, and manyof the investor's facilities are essentiallymodern. Nor does our subject allow usto treat of all investments, it confines us tothat most usual form of investment in StockExchange Securities.But it is important to bear in mind through-out that the accumulation of wealth, and thereduction of poverty, and all tjie means bywhich material comforts and conveniencesare multiplied, by w^hich the arts flourish,by which letters and learning are spreadthrough all ranks of society, depend ulti-mately upon the thrift and savings of indi-viduals, assisted by the honesty, the efficiencyand the peaceful proclivities of their Govern-ments. That the virtue of saving is easy forthe rich and difficult for the poor must be


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INTRODUCTION 9confessed; that it is sometimes morally andeconomically right to spend all one's incomeand even to borrow may be admitted. But, nevertheless, progress depends upon saving, iBanks and Stock Exchanges, which facilitateand encourage saving, are themselves thefruits of saving; without saving they couldnot have been called into existence. Whencapital shrinks, when the community theyserve sinks into decay, these institutions like-wise must come to grief. Thanks, however/to the onward march of invention and science, 'as well as to the growing reluctance of nationsto engage in war, progress is now the ruleand decay the exception.The art of making money is a mysterywhich cannot be taught; and though manybooks have been written with prescriptions,for acquiring a fortune, few men have evermade themselves a penny the richer byreading them. But the art of keeping money jafter you have made it, and of increasing:your surplus capital by judicious invest-ments, can be learnt. Any person with pru-dence and self-restraint can in ordinary timesand circumstances secure himself againstserious capital depreciation, and obtain asteady dividend on the moneys he has been


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10 THE STOCK EXCHANGEable to put by from time to time. Thiswas not always so. In fact, until the lastcentury property and trade were so insecure,even in the most settled and civilised coun-tries, that a man who had saved moneywas often at a loss what to do. He mighthave to choose between spending it andhiding it away. The miser, who hoardedhis gold, because he could not trust it out ofhis sight, was to be found side by side withthe Jew, who lent it out at exorbitant ratesof interest, calculating that he would gainin usury from those who paid more than helost in bad debts. Pirates by sea, brigandson land, sovereigns and nobles who extortedloans only to repudiate them, Governmentswhich supplied their needs by debasing thecoinage, or by issuing worthless paper money

these are but samples from a big bunchof circumstances that made the accumulationand investment of wealth in olden times sodifficult and hazardous.But now, apart from the wonderful im-

provements in administration, justice, andpolice, the most skilful and successful burglarcan no longer rob a rich man of his fortune.And why? Not because the police are moreefficient, not because safes have been per-


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INTRODUCTION 11fected, not because the art of thieving hasdecayed. No, simply and solely because therich man no longer buries his gold. Hoardingis obsolete or obsolescent. It has been super-seded by two special inventions, two marvel-lously ingenious contrivances, which havemade the safe disposal of savings incom-parably simpler and easier. These inventionsare the Bank and the Stock Exchange, or,shall we say, the cheque and the StockExchange security?

In Great Britain and the United States,in Canada, Australia, New Zealand and theCape, almost every one who is in the posses-sion of a moderate income, say 300 a year,or more, has a bank account, into which hedeposits his earnings and from which hedraws his expenses. If he is of a thriftyand saving disposition, he lives well withinhis income; and when his balance at thebank grows larger than is necessary he willpick out a security and instruct his bankeror broker to buy it for him. This securitymay be a bond with coupons attached. Thepurchaser may keep the bond at home andcut off the coupons as they become due,sending them to his banker, who will exchangethem for money, and add them to his balance


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12 THE STOCK EXCHANGEat the bank. More usually he will deposithis security at a bank, leaving the bankerto look after his coupons and add them to hisbalance as they become due. Or he mayhave bought the registered stock of somepublic corporation or private company, inwhich case the dividend will be sent himregularly by post. The security, of course, ispaid for by a cheque upon his bank, and thebank takes that sum from his balance andhands it over to the broker, who buys thesecurity and takes a small commission forhis trouble. A hundred years ago the use ofthe cheque was hardly understood even inLondon, and an English country gentlemanwould have had infinitely more trouble inmaking a small investment than would nowa-days a remote Australian squatter, or a wheat-grower in the wildest West of Canada. Aletter posted to London from a distant villageof Saskatchewan in 1910 would arrive withfar more certainty, and perhaps not less speed,than a letter posted in 1810 from a village inSutherland or Argyllshire. A penny stampwith a cheque enclosed in a brief letter of in-structions to the banker, and the thing isdone. But the thrifty Scot of 1810 wouldhave had the utmost difficulty, and great ex-


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INTRODUCTION 13pense as well as risk, in converting a similaramount of cash savings into an interest-bearing security. In 1710 the thing wouldhave been practically impossible. The Bankof England had only just been called into ex-istence, and, in fact, there were no bankers,no brokers, and no Stock Exchange in themodern sense of the word. A man who wishedto invest, without personally employing hiscapital, had practically no choice but to buyproperty and let it out at a rent, or lend hismoney on mortgage. Bank of England Stockor National Debt had just begun to be a po-litical speculation for the moneyed Whigs inLondon. Merchant venturers might risk alarge sum in a joint-stock voyage. Otherwisethe average Englishman at the beginning ofthe eighteenth century A.D. was hardly betteroff for investment than the average Athenianin the age of Pericles, or the average Romanin the days of Cicero.But modern inventions have brought dan-gers as well as securities. There are manytraps and pitfalls for the would-be investor.If by very hard work a thrifty person saves100 or 1,000 one would expect him to take

very good care of it. He need not be in anyhurry. It will be perfectly safe, yielding him


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14 THE STOCK EXCHANGEa modest interest, if he deposits it in a respect-able bank or in the savings department of apost-office. Unfortunately a natural passionfor high interest, or the promise of an in-crease in his capital too often makes himan easy prey to some plausible rogue. In amoment of weakness he draws a cheque, buyssome unmarketable security, and the greaterpart if not the whole of his hard-earned sav-ings is irrevocably lost. The wild-cat prospec-tuses, concealed advertisements and inspiredtips in which so many newspapers abound areso many traps and pitfalls for the unwary.I have written this little book in the hopethat at any rate a few thousands of readersmay avoid such losses, and that somehundreds of thousands, perhaps millions, ofpounds, which might have been sunk in fraud-ulent companies, may flow through honesthands into sound securities and profitableconcerns. Wasteful expenditure and riotousliving are often truly described as an illfeature of our age and country. But thereckless waste of savings through mere care-lessness, stupidity, or credulity, may be moredeplorable than the wasteful expenditure ofincome; for it often involves helpless widowsand orphans in a wretched and unforeseen


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INTRODUCTION 15yet easily avoidable poverty. With a littleattention and common sense these miseriescan be guarded against.We shall be concerned mainly, as I havesaid, and as the title of the book implies, withinvestments in Stock Exchange securities,and more especially in the securities whichare bought and sold on the London StockExchange. Every Stock Exchange has itsown list of securities, and only a small numberof stocks are international in the sense ofbeing quoted at the same time on the Ex-changes of London, Paris, Berlin, and NewYork. But London is the banking andfinancial centre of the world; nor can anyterritorial limit be set to British investments.Our merchants and shippers seek profit inevery corner of the globe; our investorslarge and small have interests in every con-tinent, and the London Stock Exchange Listis in itself a sort of key to the distribution)of British trade and capital. Moreover, anEnglish book of this description should ap-;peal directly to our American kinsmen in the IUnited States, to Canadians, Australians, ^and New Zealanders as well as to the peoplenow happily drawn together in a UnitedSouth Africa. It will, therefore, be proper


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16 THE STOCK EXCHANGEwithin a small compass to take a wide view;for, as Burke says, Great empires and littleminds go ill together.But while this is the main purpose, I haveaimed incidentally at bringing to bear uponthis subject the teachings of history. Thestock markets of to-day are not only moreinteresting but far more intelligible if we canapproach them with the lantern of experiencein our hand. Those who understand a busi-ness or an institution best are those who havemade it or grown up with it. The next bestthing is to learn how it has grown up, and thenwatch or take part in its actual working.With some of the opinions expressed inlater chapters the readers will often disagree.Many of them are drawn less from booksthan from conversation and observation.Every genuine attempt to portray the com-plex conditions of modern business life mustfail in a greater or less degree. The colouringwill be too bright here, and there too sombre.Something material will be left out. Someexpressions may be too strong, and some fac-tors may be over-emphasised. Perhaps Imay be accused of a certain bias in favourof the investor and of the general public.And this may well be. At the same time I


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INTRODUCTION 17would beg to assure the reader that he andI have no better friends than the numberlessbankers, brokers, dealers, and promoters ofnew undertakings who practise callings souseful and so indispensable with the highestsense of honour, the most scrupulous in-tegrity, and the most consummate abilityin the great financial and commercial centresof the world.


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CHAPTER ITHE EARLY HISTORY OF BANKING AND

STOCK-JOBBINGSTOCK EXCHANGE is an honest word. It

means exactly what you would expect. Justas a Corn Exchange is a place where corn isbought and sold, so a Stock Exchange is aplace where stocks are exchanged, or, if youlike, where stocks and shares are bought andsold. It is as familiar to the modern businessworld as a bank, and in the great commercialcapitals, where credit and speculation arefocussed, the two are invariably found to-gether. In London the Stock Exchange liesalongside the Bank of England, and roundthem within a quarter of a mile are clusteredhundreds of British, foreign, and colonialbanks, exchange houses, discount houses,and financial institutions of every sort andkind. So in New York. There the greatbanks and financial houses congregate aboutWall Street in a fashion that might point

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EARLY HISTORY 19rather to their dependence upon the StockExchange than to the dependence of theStock Exchange upon them. Wall Street,in fact, suggests a blend of banking andspeculation.But two centuries ago there were few banksand no Stock Exchanges. If we go back onlya century our London Stock Exchange wasbut a struggling institution, a weakling in itscradle, despised and disliked by turns, oftenthreatened with extinction by an irate legis-lature. Even banks were only just beginningto prove their utility, and the true principlesof banking were understood by few. Nor hadany country in the world at that time a reallysound system of currency. The Bank ofEngland itself would not and could not givefive pounds for a five-pound Bank of Englandnote. Yet after 1790, when the Bank ofAmsterdam fell into disrepute it admittedits insolvency in 1795 London had outdis-tanced all competitors as a disposer of capital,a dealer in credit and a manager of moneytransactions. In a single century the revolu-tion has been accomplished. In this year ofgrace (1911) there is hardly an importantcountry except China and even China isplanning reform which would not be


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SO THE STOCK EXCHANGEashamed to own such a law and system ofcurrency and banking as England boasted acentury ago, hardly a great city in the wholeworld whose merchants and investors are notbetter provided with facilities than were thewealthy citizens of London in 1811. A con-trast so remarkable may well set us thinkingand lead us towards an explanation of theproblem we have to solve. For the Stock Ex-change does not stand alone; it is not an iso-lated phenomenon: it is an item in the cata-logue of progress, likethe post and the railway,the telegraph and the telephone. Materialprogress and advancement are made up ofmany parts all hanging together. Banks andStock Exchanges are the outward and visiblesigns of a wonderful improvement in moneyand credit. But they could not possibly bewhat they are without one another, or withouta hundred other inventions. For example,what would a bank or a Stock Exchange bewithout a post-office? And what would apost-office be without railways, steamers, andtelegraphs? And how could we have had rail-ways and telegraphs if steam power and elec-tricity had not been discovered and applied?

But, though the wonderful inventions thathave made the modern system of rapid travel


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EARLY HISTORY 21and instantaneous communication are re-sponsible for an equally wonderful system ofinternational commerce and finance, I do notpretend that a Stock Exchange would be im-possible without the railway and the tele-graph. In fact, the London Stock Exchangewas founded before either was known. Allthat is really necessary to make a Stock Ex-change is a sufficient quantity of stocks andshares and a sufficient number of investors orspeculators desirous of buying and selling thissort of commodity. Indeed the philosopher,looking back to the civilisation of ancientGreece and Rome, may well wonder why,with their baths, their theatres, their courtsof law, their shops and markets and banks,Athens and Rome never invented or possesseda Stock Exchange. But this is only anotherway of expressing surprise that the convenientdevice of translating capital and debts intoterms of interest-bearing paper was not in-vented until comparatively recent times. Ifthe scheme proposed by Xenophon for a sortof joint-stock bank at Athens had beenadopted, it might easily have led to thefoundation of a Stock Exchange.

Interest-bearing paper, in the sense of StockExchange securities, was part of a contrivance


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22 THE STOCK EXCHANGEof the moneyed interest to finance the Con-

(/ tinental wars of William of Orange. ButWilliam's was not the first needy Governmentthat would have welcomed any plan forrelieving its necessities at the expense ofposterity.Money, of course, and money-lending canbe traced back far beyond the Christian era.

Athenian lawyers in the days of Demosthenesargued about mortgages on land and ships.But an investor could not buy a share in acompany or lend money to the State by put-ting a talent into Greek bonds. There wereno Italian rentes for a Roman citizen to buywith a bag of coins bearing Csesar's imageand inscription.

It may well be asked why the world madeno steady progress in wealth until the eight-eenth century, and why since then, in spiteof wars and armaments, plagues and famines,earthquakes and conflagrations, capital hasaccumulated at an ever-increasing rate. I aminclined to think that among the various con-tributory causes an improvement of money,^ a development of credit, and a multiplicationof investments (three closely connected facts)have played a decisive part. The establish-ment of sound and honest money comes first;


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EARLY HISTORY 23for without this there can be no confidence,and without confidence trade cannot flourishand wealth cannot accumulate.When Europe began to wake from the darkcenturies that followed the fall of the RomanEmpire, Italy took the lead not only in therenaissance of art and learning, but also incommerce. The Bank of Venice is supposedto have been founded in 1157. In the four-teenth century the Florentines forged ahead,and the Bank of the Medici became thefinancial centre of what little financial inter-course and commerce then existed betweenthe principal nations. In 1401 a bank wasfounded at Barcelona, and in 1407 theRepublic of Genoa, being embarrassed by amultitude of loans, consolidated them into amountain (monte) and made this heap ofdebt the capital of a bank which was placedunder the management of eight directorselected by the holders of the debt or stock.Various cities and territories belonging toGenoa were made over to the bank as secur-ity for the debt. The fame and success of theItalian banks led to the foundation of smalllending houses in other countries by Lombardmerchants. Quite a number settled in Lon-don, and gave their name to Lombard Street.


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4 THE STOCK EXCHANGEAs the Italian cities declined those of Ger-many and Northern Europe rose, and theHanseatic League flourished during the fif-teenth and sixteenth centuries. Then Hollandshook off the Spanish yoke and forged a newlink between freedom and wealth. The fa-mous Bank of Amsterdam was founded in1609. Its prime purpose was to provide agood mercantile currency to remedy the evilsof worn and clipped coins, which harassedmerchants everywhere and embarrassed spe-cially the trade between Holland and othercountries. Already the Dutch were becom-ing the principal carriers and merchants ofNorthern Europe. The bank established thispredominance. It received bad coins at verynearly their intrinsic value, issuing coin ofstandard weight and fineness in return. Atthe same time it was enacted that all foreignbills of exchange drawn upon, or negotiatedat, Amsterdam of the value of more than 600guilders should be paid in bank money. Thusthe value of bills on Holland was raisedabroad, and foreign merchants found it con-venient to keep an account at the Bank ofAmsterdam, so that they might have legalmoney to buy foreign bills. The bank wasthe property of the city and was under the


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EARLY HISTORY 25control of four burgomasters. It was foundedon the principle of providing good money forthe finance of foreign trade in the freest andmost prosperous commercial port. It was alsoa bank of deposit, and as such carried to con-siderable perfection the principle of writtentransfer. Any person who chose to lodgemoney in the bank might transfer it fromhis own name to that of another; and thelaw, as we have seen, required foreign bills ofexchange to be paid by such transfers. Thedevice is really the same as that by which abusiness transaction between two persons whohave accounts at the same bank is now settled.One draws a cheque in favour of the other.The amount of money at the bank remainsthe same, but some of it is transferred in thebank's book from the name of the customerwho drew the cheque to that of the other whoendorsed it. Thus there is a transfer of moneywithout any actual movement of cash.The Bank of Amsterdam flourished for ahundred and fifty years. Its fall was broughtabout by the misconduct of its directors,preceded and followed by a relative declinein the commerce of Holland, which yieldedto the growing strength and wealth of Eng-land. In one of the most instructive digres-


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26 THE STOCK EXCHANGEsions of his great masterpiece, The Wealth ofNations, Adam Smith explains how the moneycurrent in small commercial city states likeAmsterdam, Hamburg, and Nuremburg con-sisted largely of foreign coins, many of themworn and debased, and how, in order to rem-edy the inconveniences of these exchanges,banks were originally established in theseand other cities, which came in time to servewider purposes. But larger and more self-contained countries, like England and France,which then depended but little upon foreigncommerce, were more troubled by the de-fects of their own currencies than by the badcoin of their neighbours. And so the Bankof England originated not so much fromexternal necessities or the requirements offoreign trade as from the needs of Govern-ment and reasons of State.

England, indeed, had at first made but slowprogress in the arts of economising money andmanufacturing credit. The profitable busi-ness of money-changing was monopolised byHenry the First, John, Edward the Third,and some of their successors, who establishedthe office of Royal Exchanger in London atOld Change near St. Paul's and in othertowns. This official had the exclusive privi-


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EARLY HISTORY 27lege of exchanging gold coins for silver, andforeign for English money. The king farmedout the office, or shared in the profits, and theoffice in each town was called the Exchange,a name still attached to many of the coveredmarkets where merchants meet to buy andsell and speculate in particular commoditiessuch as wrool, cotton, corn, as well as in stocksand shares. The office, which had fallen intodisuse, was revived by a proclamation ofCharles the First, much to the dissatisfactionof the goldsmiths, who had been making goodprofits by culling out heavy coins for meltingor for sale to the Dutch mint. The Gold-smiths' Company and the Common Councilappealed in vain against this ordinance; butafter the Commonwealth was established thebusiness of money-changing fell again intothe hands of the goldsmiths. Another trade,that of money-lending, was monopolised bythe Jews from the Conquest until their expul-sion in 1290, when the Lombards succeededto the craft and proved equally usurious, theirrates being proportioned to their risks. Therewas also a legal rate of interest 10 per cent,from 1571 to 1624, then 8 till 1651, and6 till 1714, after which it was fixed at 5for England, and 6 for Ireland. The term


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28 THE STOCK EXCHANGEusury denoted any rate of interest abovethat which the law sanctioned and enforced.After Charles the First's time the goldsmithsbecame the principal lenders and dealers inmoney, though reinforced by the Jews whomCromwell readmitted to England. Then,as Gilbart, our leading authority on Englishbanking, explains, a new era began in thehistory of banking. The goldsmiths, whowere previously only money-changers, nowbecame also money-borrowers, and allowedinterest on the sums they borrowed. Theywere agents for receiving rents. They lentmoney to the king on the security of the taxes.The receipts they issued for the money lodgedat their houses circulated from hand to hand,and were known by the name of Goldsmiths'Notes. These may be considered as the firstkind of bank-notes issued in England. Thebanking goldsmiths made way rapidly, andattracted large quantities of cash, whichenabled them to advance money to Cromwelland Charles the Second at high rates in ad-vance of the revenues . These ' ' new-fashionedbankers were sharply criticised by the pam-phleteers, and even by Sir Josiah Child, fordraining away money from the country toLondon and preventing its investment in


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EARLY HISTORY 29land. Here, in fact, we have a small begin-ning of the modern system of investment bydeposit in banks. After the Restoration, itis written, King Charles the Second beingin want of money, these goldsmith bankerstook 10 per cent, of him barefacedly and byprivate contracts. On many bills, orders,tallies and debts of that king they got 20,sometimes 30 per cent, to the great dis-honour of the Government. In 1667, whenthe Dutch fleet sailed up the Thames, set fireto Chatham, and burnt four ships of the line,there occurred the first recorded run onour banks. The alarm was allayed by a royalproclamation promising that the paymentsto the bankers should be made as usual fromthe Exchequer. But in 1672 the Exchequerwas closed and the king repudiated a debtof 1,328,526 which he had borrowed of thegoldsmiths at 8 per cent. This shameless actcaused wide distress. Not merchants only,but widows, orphans and others became sud-denly deprived of the whole of their property.They came in crowds to the bankers, butcould obtain neither the principal nor theinterest of the money they had deposited.Ultimately the king compounded after themanner of Central American Republics. He


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SO THE STOCK EXCHANGErefused to repay the principal, but granted apatent to pay 6 per cent, interest out of hishereditary excise. Then after six years heagain suspended payment. This Goldsmiths'Debt, or Bankers' Debt, was reconsidered inthe years following the Revolution. Aftersome litigation the claims of the creditorswere partially recognised. A settlement wasreached in 1705, the Government agreeing topay 3 per cent, (about half the market rate)on the capital with the right to discharge thewhole at any time by payment of one halfthe amount originally lent.We are now brought to the foundation ofthe Bank of England, which coincides withthe first chapter in the English History ofStocks and Stock Jobbing a developmentmuch hated by the old Jacobites and Tories.They called it Dutch finance, and theirprejudice was justified partly by political,partly by economic, and partly by moralconsiderations. Politically they hated theBank and the Stock which it issued, becauseit supplied the Government with money; forthe Government was the Whig Government,standing between the country and the returnof the Stuarts. Economically they dislikedboth Bank and Debt, because easy borrowing


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EARLY HISTORY SImeant heavy expenditure on war, and anincrease of taxes, principally on land, to paythe growing interest on the debt. Morallyand socially they hated the new Dutch-finance, because it stimulated speculation, *and increased the power of London and of themoneyed interest at the expense of the coun-try gentlemen. But the new system with allits evils had come to stay, and was destinednot only to make many fortunes and bank-ruptcies, but also to give a marvellous im-petus to the growth of credit, trade andcapital. What happened has been often told,and for our purpose it is enough to retell thestory very briefly.During the seventeenth century our kings

generally borrowed by means of Exchequertallies, which were acknowledgments of sumspaid by private lenders to the Exchequer.The tally was a willow stick four or five feetlong and about one inch square. There werenotches on one side to express the amount ofthe debt, and identical descriptions of thepayment were written on two of the threevacant sides. The stick was split in halfthrough the notches. One half was given tothe person making payment into the Ex-chequer; the other half of the counter tally,


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32 THE STOCK EXCHANGEor counter foil, was kept at the Exchequer asa check. Here, it will be seen, we have atonce the origin of the modern cheque systemof our banks; and in the United States theearly spelling of check is still adhered to.There were two kinds of tallies Tallies ofPro and Tallies of Sol. The Tallies of Prowere like a modern cheque on a banker, andserved as a voucher to the holder at the Ex-chequer of account. This Tally was so calledbecause it was struck Pro, i. e. for the bene-fit of the person named. Tallies of Sol wereacknowledgments of sums paid (solutum)into the Exchequer, and were issued whenloans were raised from the public; whileTallies of Sol (as Mr. Joseph Burn points outin his excellent lectures on Stock ExchangeInvestments ) came into play when publicsubscriptions were not forthcoming, beingissued in lieu of cash for the payment of ordi-nary disbursements by the Government.The Tally system was not abolished till 1783,and served the purpose of modern Treasurybills enabling the Government to borrowsmall sums for short periods. But the actionof Charles the Second in repudiating theGoldsmiths' Debt naturally made tallies sus-pect, and increased the difficulty of borrow-


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EARLY HISTORY 33ing. Hence after the Revolution the Parlia-ment of William had to find money for foreignwars by other methods, and in 1692 a millionwas raised by life annuities.

In 1694 the Bank of England was founded.It was the project of William Paterson, aclever but speculative Scot, who afterwardscame to grief in the Darien enterprise. It wasthe first of our Joint-Stock Banks, and thoughnot the first of our Joint-Stock Companies itgave the first opportunity for general dealingsin Stocks and Shares. The scheme com-mended itself to Montagu a Whig statesmanof great financial ability as a means ofraising money; and the Government granteda charter to the Bank on condition that theBank should lend the whole of its originalcapital (1,200,000) to the Government, re-ceiving in return (1) 96,000 annually, i. e.8 per cent, interest plus 4,000 for manage-ment, (2) the right to issue notes to the extentof 1,200,000 and (3) the right to do bankingbusiness. In plan, therefore, and original pur-pose the Bank of England resembles the Bankof Genoa rather than the Bank of Amsterdam.At first all went well. The tallies, which hadbeen at a heavy discount, soon rose to par.But in 1696 the Bank failed in an attempt


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34 THE STOCK EXCHANGEto carry out a recoinage, the currency thenbeing in a very bad state. A suspension ofpayments followed with a depreciation ofbank notes and Exchequer tallies; but theBank's credit was restored with the aid of theGovernment. In the following year the Gov-ernment had to borrow another million, whichwas added to the Bank's capital with a cor-responding increase of the note issue.

In spite of the enmity of private banks theBank of England was well supported by themoneyed interest. Its early issues were fullysubscribed, and in 1709, when the capital wasdoubled, the whole of the new stock overtwo millions, was issued at a premium of 15per cent, and subscribed in four hours.The National Debt meanwhile was grow-ing in various ways. In 1698 the New EastIndia Company received a charter on the con-dition that its capital was lent to the Govern-ment. By 1711 the funded Debt had grownto 11,750,000, all of which was held bypublic investors as annuities, bank stock,East India Stock, etc., at various rates of in-terest. But there was also a huge unfundeddebt which had grown to 9 millions in 1710.A new Joint-Stock Company called the SouthSea Company was promoted with the aid of


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EARLY HISTORY 35Harley and St. John to take over this Debt.In return for this it was granted tradingprivileges, and to provide interest on its9 millions of capital stock the Governmentassigned various duties on wine, and beer andtobacco, etc. For ten years the companyengaged in the African Ocean trade and othercommercial ventures with little success. ThenSir John Blunt one of the directors, a cun-ning and plausible scrivener, hatched anotherscheme, and by corrupt means won overAislabie the Chancellor of the Exchequer,and various other ministers and members ofParliament. The idea was taken from thefamous Mississippi Company scheme of Law,which had burst over France with suchdisastrous ruin a year before. Undeterredby this example, Blunt boldly offered to takeover the whole National Debt, amountingto 31 millions, if the Government wouldguarantee 5 per cent, interest for seven yearsand 4 per cent, thereafter in perpetuity. Forsome time the Bank of England and the SouthSea Company bid against each other for thefavour of the Government, but eventually thecompany's offer was accepted. The companythen opened its first subscription of a millionin 100 stock at 300. Blunt opportunely


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36 THE STOCK EXCHANGEcirculated a report that Gibraltar and PortMahon would be exchanged with Spain forsome places in Peru, whereby the South Seatrade would be protected and enlarged.Persons of all ranks crowded to South SeaHouse, and the stock went off like hot cakes.This was in April. By midsummer there wasa second, and then a third subscription,accompanied by promises of more and moreprodigious dividends. The city went mad;stock-jobbers ran from coffee-house to coffee-house inviting subscriptions to the greatbubble and to little bubble companies of alldescriptions. It was the first joint-stockmania. All distinction of party, religion,sex, character, and circumstances, writesSmollett, the historian of the time, wereswallowed up in this universal concern. Ex-change Alley was filled with a strange con-course of statesmen and clergymen, church-men and dissenters, Whigs and Tories, physi-cians, lawyers, tradesmen, and even with mul-titudes of females. All other possessions andemployments were utterly neglected; andthe people's attention wholly engrossed bythis and other chimerical schemes, which wereknown by the denomination of bubbles.New companies started up every day, under


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EARLY HISTORY 37the countenance of the prime nobility. ThePrince of Wales was constituted Governorof the Welsh copper company: the Duke ofChandos appeared at the head of the Yorkbuildings company: the Duke of Bridgewaterformed a third, for building houses in Londonand Westminster. About a hundred suchschemes were projected and put in execution,to the ruin of many thousands. The sumsproposed to be raised by these expedientsamounted to three hundred millions sterling,which exceeded the value of all the lands inEngland. The nation was so intoxicated withthe spirit of adventure, that people becamea prey to the grossest delusion. An obscureprojector, pretending to have formed a veryadvantageous scheme, which, however, he didnot explain, published proposals for a sub-scription in which he promised that in onemonth the particulars of his project shouldbe disclosed. In the meantime he declaredthat every person paying two guineas shouldbe entitled to a subscription for one hundredpounds, which would produce that sumyearly. In one forenoon this adventurer re-ceived a thousand of these subscriptions; andin the evening set out for another kingdom.The third South Sea subscription was


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38 THE STOCK EXCHANGE1,000 for 100 stock, and 2,000 was

touched before September, when the stockbegan to fall. By September 29 it had sunkto 150. Several eminent bankers and gold-smiths, who had lent great sums on it, wereforced to stop payment and abscond. Thedbb of this portentous tide was so violent thatit bore down everything in its way; and animmense number of families were over-whelmed with ruin. Walpole called in theaid of the Bank, but its resources were un-equal to the emergency. The king was sum-moned back from Hanover; Parliament wasassembled, and Walpole laid before it a wisescheme for restoring the public credit. So thecurtain closed on this strange scene of nationalinfatuation.But it must be said, for the credit of Parlia-

ment, that a thorough inquiry was institutedand some severe punishments meted out. Inthe salutary reaction that followed, the Brit-ish public began to appreciate the value ofgilt-edged securities, and the British Govern-ment, under the prudent guidance of Walpole,practised peace and economy. The publiccredit responded marvellously. In QueenAnne's reign 6 per cent, had been the usualrate of interest on public loans. Within sixyears of the bubble in 1726 a 3 per cent.


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EARLY HISTORY 39Government stock in 10 lottery tickets wasissued at par, and actually sold up to 107 in1739. In the wars with Spain and France(1740-1747) 30 millions more in new loans atvarious rates were added to the NationalDebt; but in the ensuing peace credit speed-ily revived, and in 1749 a successful scheme ofconversion was effected by which the intereston the greater part of the debt was reducedto 3 per cent.Two funds were established, one beingcalled the 3 per cent, consolidated annuities.Thus were created the world-famed BritishConsols (i. e. consolidateds) which, throughmany fluctuations of credit, retained thesweet simplicity of 3 per cent. for morethan a century. After a short interval ofpeace London's stock and share markets wereagain flooded with Government paper bythe Seven Years' War (1756-1763) whichadded 54 millions to the National Debt inlottery loans, bearing interest at 3, 3|, and4 per cent, apart from the prizes. During thesucceeding peace some debt was paid off, andsome was converted from 4 per cent, to 3per cent. But in 1776 the long war of Ameri-can Independence broke out, and ten yearslater, when its financial consequences became


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40 THE STOCK EXCHANGEclear, the National Debt was found to havebeen nearly doubled, having increased from128 to 244 millions, while the charge for in-terest had more than doubled, having risenfrom 4,471,000 to 9,302,000.At the Peace of Versailles, in 1783, thefunded debt consisted of 107,000,000, 3 percent, consols, 37,000,000 3 per cent, reduced,32,000,000 Four per cents., and 17,000,000

Fives, while a further 42 millions was owingto the Bank, to the East India and South SeaCompanies, and to the Civil List. Afteranother breathing space the country waslaunched upon the most disastrous and ter-rible of all our wars, the war of the FrenchRevolution. Just before its commencementin 1793 the Funded Debt amounted to about228 millions with an interest charge of about7f millions, and the unfunded or floating debtwas 16 millions, with an interest charge of justunder half a million. At the conclusion ofpeace in 1815, according to the computationof Robert Hamilton, the National Debt hadrun up to the appalling total of 758 millionsand the charge for interest and annuities was27,652,000. No wonder that in this last

period the London Stock Exchange had be-come an important institution, or that great


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EARLY HISTORY 41 'fortunes had been made by contractors andloan-mongers of all descriptions. No wondereither that the country was submerged inpauperism and its Government fast approach-ing a state of bankruptcy.From this brief account of the NationalDebt, which must have absorbed a very greatpart of the National Savings from 1700 upto the year 1815, we may return to StockJobbing, with which, as has been seen, the

| origin and expansion of our national warloans are so intimately and even inseparablyassociated. It has been shown how duringthe South Sea Bubble speculation ran through

all ranks of London Society. But the boom' in South Sea Stock had, as it were, a gilt-edged basis in the favour and support of theGovernment. Harley, as Chancellor of theExchequer, had been Governor, and one ofthe original directors was St. John (ViscountBolingbroke). In the huge swindle of 1720|Aislabie, the Chancellor of the Exchequer,and Lord Sunderland, who represented theMinistry in the House of Lords, were deeplyimplicated. No wonder, then, that rank andfashion led that wild rush of speculators toChange Alley. A ballad-monger of the time ,tells how the stars and garters vied with the jmeaner rabble


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4* THE STOCK EXCHANGETo buy and sell, to see and hearThe Jews and Gentiles squabble,

and how the greatest ladiesPlied in chariots daily,Or pawned their jewels for a sumTo venture in the Alley.

In the reaction that followed stock-job-bing suffered discredit; but it was a genuineprofession, meeting a new and genuine need.The public debt proved to be unextinguish-able : the public funds grew so fast and fluctu-ated so rapidly under the influence of warsand rumours of wars that the quick-wittedgentry of Change Alley and the coffee-housesfound plenty of occupation. Private banksand joint-stock companies were also multiply-ing. Even during the mushrooii growths ofthe South Sea Boom two sound insurancecompanies which still exist the London As-surance Corporation and the Royal ExchangeAssurance found recognition and capital.It may be asked where all the money camefrom. The answer is to be found in the fact,upon which we have been insisting, that thesenew interest-bearing securities gave employ-ment to wealth that had previously lain idle.The practice of hoarding is not easily extir-


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EARLY HISTORY 43pated, and only yields to the gradual growthof confidence in the credit of Government, ofbanks, of brokers, and of established com-panies. It says much for the statesmen, themerchants, the bankers, and even the Stock-jobbers of eighteenth century London thatmoney came out so freely in this very firstepoch of investment. At the Revolution onefugitive is said to have carried his fortuneof 20,000 away with him in a strong box.A generation later he would have taken it inbank-notes or negotiable stock.The jobbers were long in housing them-selves. At first they frequented the RoyalExchange and the Rotunda of the Bank, thenthe coffee-houses and the streets Cornhill,Lombard Street and especially Change Alleyand Sweetings Alley. Old Jonathan's Coffee-house was a favourite resort for those who pre-ferred indoor comfort to the rough and tumbleand exposure of Change Alley. It was burntdown in 1748. But New Jonathan's took itsplace, and, in July 1773, the brokers andothers at New Jonathan's came to a resolutionthat, instead of its being called New Jona-than's it should be called The Stock Exchange,which is to be wrote over the door. Fromthis time London may be said to have pos-


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44 THE STOCK EXCHANGEsessed a Stock Exchange in the modern sense,though much business in the public funds wasstill transacted at the Bank, and dealings inforeign securities still centred in the RoyalExchange. The members of Jonathan's paida small subscription and eventually drew uprules, and appointed a committee of manage-ment. But daily admission could be gainedby a payment of sixpence. At length themembership of brokers and jobbers outgrewthe accommodation, and at the end of theeighteenth century it was determined to pro-vide new quarters. A building was erectedclose to the Bank of England, in Capel Court,and opened in March 1802 with a membershipof about five hundred. But this belongs toour next chapter. Here it only remains toadd that the first Stock Exchange book waspublished in 1761. Its title ran: Every manhis own broker, or a Guide to Exchange Alley.The author, J. Mortimer, was an economist ofsome merit. He had been British Consul inHolland and had seen the workings of theAmsterdam Bourse and the arbitrage businessbetween London and Amsterdam, which wasalready considerable in the middle of theeighteenth century; for the Dutchmen werefond of speculating in the London market.


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EARLY HISTORY 45Mortimer seems to have lost money in stocks,and the main purpose of his book is to warnthe investing public and the Governmentagainst the jobbers. He therefore givesminute instructions to would-be investors inGovernment funds, showing them how to dealdirectly with the officials at the Bank of Eng-land. We shall have occasion in anotherchapter to refer to this interesting book, whichran to many editions. It shows that much ofthe slang and many of the arts and tricks ofspeculation were already in vogue before theformation of the London Stock Exchange. 1

1 Before proceeding with the next chapter, readers un-familiar with the subject should read the glossary at the endof the book (p. 253).


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CHAPTER IITHE LONDON STOCK EXCHANGE, 1800-1910AT the desire of the Royal Commission of

1877 the officials of the London Stock Ex-change supplied a short summary of theorigin and objects of the institution. Thesecretary stated that the earliest minutes onthe subject were dated December 1798, andthat these records referred to the existenceof a Stock Exchange in 1773 apparentlythe Stock Exchange Coffee-house in Thread-needle Street, to which any person was ad-mitted on payment of sixpence. Alreadythese rooms were known as the Stock Ex-change, or the House ; and althoughtransactions in the public funds were alsocarried on in the Rotunda of the Bank ofEngland there is little doubt that theStock Exchange Rooms afforded a readymarket for the operations of the bankers,merchants, and capitalists connected with thefloating of the numerous loans raised at thatperiod for the service of the State. It is

46


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LONDON STOCK EXCHANGE 47on record, continues this official authority,that the rooms were under the control of acommittee for general purposes, thoughthe expenses of management were defrayedby the voluntary subscription of frequenters.The functions of the committee were from thefirst, as they have since remained, judicialas regards the settlement of disputed bar-gains, and administrative as regards rules forthe general conduct of business, and for theliquidation of defaulters' accounts.

Early in 1801 the rooms were felt to beinadequate for the increased business arisingout of the war loans, and, moreover, it be-came apparent that the indiscriminate admis-sion of the public was calculated to exposethe dealers to the loss of valuable property.This led to the establishment of a strictand privileged monopoly, resembling in somerespects that of the law brokers correspond-ing to solicitors and jobbers to barristers.A group of Stock Exchange men, havingacquired a centrical situation, or site, inCapel Court, raised a capital of 20,000 in400 shares of 50 each and founded a newinstitution, to which the affairs of the oldrooms were ultimately transferred. The firststone of the new building was laid in May


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48 THE STOCK EXCHANGE1801. A committee for general purposes, con-sisting of thirty proprietors, was formed, whoelected members of the new Stock Exchangeby ballot, at a subscription of ten guineaseach. The deed of settlement (March 27,1802) recites that, whereas the Stock Ex-change in Threadneedle Street, where thestock-jobbers and stock-brokers met, hadbeen found inconvenient, W. Hammond andothers had secured a site, and had caused tobe erected a spacious building for the trans-acting of buying and selling the public stocksor funds of this kingdom. By the samedeed the management, regulations, and direc-tion of the new Stock Exchange were vestedin a committee consisting of thirty members,or subscribers, to be chosen annually by balloton March 25, while the treasuryship and man-agement of the building were placed underthe sole direction of nine trustees and man-agers (separate from the committee) as repre-sentatives of the proprietors. By this deed ofsettlement the London Stock Exchange wasgoverned till 1876, when a new deed (sub-stantially reproducing the original deed)was executed. The new Stock Exchangewas opened in March 1802, with a list ofabout 500 subscribers. The regulations of the


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LONDON STOCK EXCHANGE 49committee, whose main purpose was to ensurethe prompt and regular adjustment of alltransactions, were first codified and printedin 1812. They have, of course, been amendedand enlarged from time to time to meet thenew conditions and expansion of business.The constitution of the Stock Exchangeremains substantially unaltered, being stillvested in two bodies the managers and thecommittee, the former representing the share-holders or proprietors, and the latter themembers or subscribers. The nine managers(who are elected in threes for five years bythe shareholders) fix the charges for admis-sion of new members and appoint most of theofficials, excepting, of course, the secretary tothe committee. They also look after thebuilding. 1 The committee, on the other hand,control all Stock Exchange business, andadminister the rules and regulations; theyadjudicate all questions between, and com-plaints against, members, They inquire, anddecide, whether their rules have been com-plied with by governments and companieswhich ask for settlements or for official quota-tion of their stocks in the Stock Exchange

1 There are 20,000 shares (12 paid) in the Stock Exchangeand 416,700 debentures outstanding.


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50 THE STOCK EXCHANGEList. Their number is thirty, and they areelected every year by the members. At thebeginning of their term the committee electa Chairman and Vice-Chairman. They alsoelect every March, before they go out of office,all the old Stock Exchange members who wishto be re-elected, membership being grantedfor one year only. Any member can objectto any other member being re-elected, butthis is a very unusual incident. The greatprinciple upon which the committee' acts,and to which most of its regulations aredirected, is the inviolability of contracts. Ithas power to suspend- or expel any memberfor breaking its rules, or for non-compliancewith its decisions, or for dishonourable con-duct. A member of the London Stock Ex-change is prohibited from advertising or fromsending circulars to any but his own clients.He is also forbidden to belong to any otherStock Exchange, or bucket shop, or othercompeting institution. New members arenow compelled to become proprietors byacquiring at least one Stock Exchange share,paying a heavy entrance fee and an annualsubscription of forty guineas. Yet the pre-cautions against impecuniosity are inade-quate. Defaults are far too common. The


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LONDON STOCK EXCHANGE 51membership of the Stock Exchange had risento about 800 in 1845. In 1877 the membersexceeded 2,000, and there were over 500 share-holders or proprietors. In 1910 the member-ship was 5,019. The average dividend on theshares of the Stock Exchange had been over20 per cent, during the first seventy-fiveyears of its existence; the dividend in 1909was 10 a share. At first, as appears fromthe deed of settlement, the new Stock Ex-change was confined to transactions in thefunds. The jobbers in foreign stocks wereexcluded, and resorted mainly to the walksof the Royal Exchange. A certain amountof business in the funds continued for sometime in the Rotunda of the Bank of England.Nor did the Alley men cease to ply theirtrade hi the streets and coffee-houses. Butafter the close of the Napoleonic wars foreignloans and mining and canal shares were in-troduced into the new Stock Exchange; andas all these offered higher rates of interest ata time when the yield on Government loanswas falling, the Stock Exchange obtained alarge accession of business from the specula-tive public. This led, it is stated, to aproper apportionment of apartments for thedealing in English and foreign stocks. One


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52 THE STOCK EXCHANGE'room was appropriated to British and an-other to foreign government stocks, and onecorner of the foreign room was assigned todealings in the shares and scrip certificatesof the numberless companies which fromtime to time have been introduced. Theyears 1824 and 1825 and 1826 saw a greatoutburst of speculation, which found vent inthe flotation of many joint-stock projects aswell as in an output of loans to the new re-publics of South America. This epoch willrepay closer study. It marks the beginningof cosmopolitan finance, and even in a veryrapid survey we can afford to pause and re-flect upon occurrences which have beenrepeated or substantially reproduced at in-tervals in all parts of the world.

In a complete view of joint-stock com-panies formed in 1824 and 1825, the author,Henry English, enumerated 626 joint-stockprojects which would have required for theirfulfilment a capital of 372 millions sterlingTheir objects were various and for the mostpart useful. Some companies were to beformed for insurance and investment; othersfor the construction of canals and railways.Many were to be local gas companies, andthere were mining flotations of all sorts.


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LONDON STOCK EXCHANGE 53Between 1818 and 1832 and especially in

1824 and 1825 there were also issued inLondon quite a number of foreign loans inall perhaps some 40 millions sterling were sub-scribed in this way. According to a parlia-mentary paper, foreign government loans toa nominal value of 34 millions were con-tracted for by London houses at 23 millions,while foreign mining companies and similarliabilities, with a deposit of 10 per cent, paid,amounted to 24 millions. A table before megives twenty-six foreign government loans inall for the period 1818 to 1832, and shows thatof these only ten continued to pay interest in1837. Of the ten survivors several defaulteda little later. All the good loans (and someof the bad ones) were issued either by N. W.Rothschild or by T. Wilson & Co. Amongthe curiosities of the list one notices thatNeapolitan credit was much better thanPrussian; for while Rothschild floated aPrussian 5 per cent, loan in 1818 at 72,the Neapolitan Fives six years later fetched92^. In 1825 Ricardo sold Greek Fivesto the public at 56|. In 1821 Haldimandissued a Spanish 5 per cent, loan at 56,and two years later J. Campbell & Co.issued another at 30J London was badly


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54 THE STOCK EXCHANGEhit by the Spanish American Republics.In 1824 Baring Brothers contrived to issue1,000,000 Buenos Ayres Sixes at 85. Colum-bia actually raised, at 6 per cent., nearly 7 mil-lions sterling of nominal debt, and at pricesranging from 84 to 88J. Questioned after-wards as to the causes of the boom and of thecrisis which succeeded, a Governor of theBank of England said he thought the specula-tive movement was started by the conversionand reduction of Government 5 per cents, in1823. These reductions prompted almosteverybody to entertain any proposition forinvestment, however absurd. The excite-ment, he thought, was further promotedby the acknowledgment of South AmericanRepublics by this country, and the induce-ments held to those governments, in which allclasses of the community in England seem tohave engaged simultaneously. One foreignmining company was described later at itswinding-up as one of the projects venturedin a period when it was thought the goldenage had been realised, and when, without aproper consideration for the consequences,the public too eagerly encouraged the schemesof the day. Commercial credit and the ex-changes were at the same time disturbed by


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LONDON STOCK EXCHANGE 55speculation in iron and other raw materials;and finally a crisis was precipitated by thefailure of Messrs. Pole & Co., an importantLondon house with large country connec-tions. The strain must have been enormous;for according to James Wilson, the first editorand proprietor of the Economist, the totalsubscribed, (i. e. promised) for foreign loans,mines, etcl in 1824-5 was 48 millions, and forhome railways, banks, and other projects 126millions, on which altogether only 35 millionswere paid up No wonder that a crash came.

After a decade of depression and quiescence,when stock and share speculation took a newstart in connection with railways, the littlego for the sale of letters of allotment washeld in the Royal Exchange before the mer-chants assembled, until at last the swarms ofthe little go or Alley men became sucha nuisance that the beadles had to drive themout. In the height of this speculation, it isrecorded such was the distrust of steamlocomotion some of the dabblers made aprice of one farthing per share for 50 sharesof what afterwards turned out to be one of themost important of English railways. In theboom years of 1834-6, joint-stock companieswith a total capital of 135 millions were


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56 THE STOCK EXCHANGEformed, divided into more than 2j millionshares. New railway companies accountedfor over 69 millions of capital with 590 thou-sand shares, banks for 23 millions capitaland 670 thousand shares. Allowing an aver-age of 3 for deposit on each share, the totalsums raised were only just over 1\ millions.The market recovered slowly from this out-put of liabilities. But in the course of timethe importance and profit-making capacityof the new iron roads began more and more tofill the public mind. The first railway boomwas fairly launched in 1834-5. Within twelvemonths over 600 distinct projects for railwaylines in the United Kingdom were placed be-fore the public, demanding upwards of sixhundred millions of money. But as five orsix competing companies often asked parlia-mentary powers for practically the same line,the real capital required was very muchsmaller. The actual capital of the Britishlines, which were incorporated by statute in1844-5 and were in course of construction,was only 55 millions. Foreign railroadschemes also poured in from all quarters eagerfor British capital, and these again wouldhave absorbed from seventy to a hundredmillions sterling. As might have been sup-


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LONDON STOCK EXCHANGE 57posed these projects, actual and anticipatory,led to a great demand for, and a still greaterspeculation in, iron, which more than doubledin price and so magnified the difficulties oc-casioned by the inadequacy of availablecapital and credit. Ten years later, in awarning article as to the probability of an-other crisis on the analogy of the previousone, which appeared in the Economist inOctober 1845, the promotions and flotationsof the three periods of speculation werethus compared and summarised in millionssterling:

Home Schemes. Foreign. Total. Paid up and Deposits.1824-5 156 43 204 351834-7 129 21 150 221844-5 612 79 691 78At the time when this account was made

up the premiums on railways, which had notyet secured an Act of Parliament, could notbe estimated at less than 40 millions, whichrepresented increased wealth hanging onopinion. Mr. Wilson's warning forecastsproved correct, and the Stock Exchangepanics and liquidations, which took place inthe late autumn and winter of 1845-6, cul-minated in the money panic and bankingcrisis of October 1847.An anonymous but well-informed writer


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58 THE STOCK EXCHANGEaffords us a glimpse of the Stock Exchange in1845, at the height of the railway boom:The share market, which, till within thelast two years, was occupied with four or'five distinct brokers and a number of jobbers,whose means of business were very small,has now become the grand focus of specula-tion and legitimate business. English andforeign government securities are quite de-serted for the superior attractions of Englishand foreign Railway scrip, which, of all shadesand character, has been freely distributedthroughout the United Kingdom.The broker and jobbers who had the first'pick' of the market, must have made con-siderable sums by their commissions; sincethe other brokers and jobbers, who paid moreattention to the other public securities, werealmost discarded by their former customers,who, in many cases, were led to believe thatthe * English and Foreign Stock' broker andjobber could not transact share business.Indeed, it appears to have been some timebefore the veil of mystery was removed,or that the public arrived at a clear under-standing of the subject. In the meanwhilethe old and respectable members of the Househad the mortification to see persons, who


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LONDON STOCK EXCHANGE 59formerly had been of little reputation on theExchange, and in many instances even theirown clerks, carrying on an extensive andprofitable business in shares; and as long asthis lasted there was no end to the successof those who had the sway of the market.Gradually dealings were dispersed and spreadamong the whole of the fraternity, and thenfollowed the height of speculation, engen-dered by the general operations of the chiefpart of the community. The shares of everynew company coming out at a premium,induced rich and poor to thrust themselvesinto the market; and the schemes that areevery day resorted to in order to gain posses-sion of letters of allotment which may bringa price, if the shares be. paid on, are of themost multifarious, and, in many instances,fraudulent description.Such has been the increase of businessin consequence of the speculation in sharesthat the accounts which used formerly tooccupy not more than one or two days atthe outside, nearly exhaust the week, beforedifferences can be paid, transfers made, andthe books of the brokers regularly adjusted.The extent of the transactions has increasedbeyond measure; night and day clerks are


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60 THE STOCK EXCHANGEengaged in arranging sales and purchases, andconducting the correspondence which is re-quired between their masters and principals.

Innumerable instances are stated ofpersons, who a few months ago were notworth anything, having made their thousandsof pounds, and several of these are juniormembers of the House, who were fortunateenough to deal in those shares which haveattained high premiums. Considering thetime and attention required in share business,the brokers do not get too well paid; althoughthere may be every reason to suppose thatmany are obtaining immense incomes fromit by the inordinate influx of commissions.This will, we think, be seen when we statethat the principal [part] of the business be-ing transacted in the new scrip, upon whichnot more than l to 3 has been paid, theyonly realise the small commission of Is. 3d.per share. If they buy or sell largely ofBrighton, Birmingham and Grand Junction,they get the larger commission; but thesedescriptions have not been dealt in to anycomparable extent with the issues of the newcompanies. Brighton and South Easternhave undergone considerable fluctuation dur-ing the mania; but then, as the business was


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LONDON STOCK EXCHANGE 61in a few hands, it cannot be supposed to haveextended its beneficial influence over thewhole market.S6me fortunate brokers were said to have

made 3,000 and 4,000 a day by their busi-ness, but not, of course, by commissions.By lucky speculations they might easily havemade much larger amounts. One fortunateindividual outside the House, who heldlargely of Churnett Valley scrip beforethe announcement of the sanction of theBoard of Trade to the project, sold at thebest price of the market when the announce-ment was made, and netted by his one coup27,000. Very large sums were made

and lost in London and York, and DirectNorthern two of the leading fancieswhich were dealt in more for speculationthan investment.The number of American and foreign lines

introduced on the London Stock Exchangeadded to the excitement prevailing. But,compared with the madness of 1825 and 1826,there was this much to be said for the rail-way mania of 1844-5 viz. that the new lineswere undertakings of vast utility and nationalimportance, and though viewed at first withmuch jealousy and distrust, were alreadyproducing results which the most sanguine


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6* THE STOCK EXCHANGEliad never counted on. Consequently, writesone sober critic, speculation in railway shareswas encouraged not only as an investmentlikely to yield high rates of interest, butalso for the benefit it confers on mankindat large. The feasibility of the numerousschemes, and the elements of success theypresent, have, under these circumstances,raised an unanimous feeling in their favour,which, sanctioned as they have been byGovernment superintendence and Govern-ment interference, could not but contributeto feed the growing desire of the public toembark in them. The warnings that havebeen given have, therefore, not been re-garded, and the mania has gone on to anextent almost unprecedented even by thegreat South Sea bubble itself.The following criticism made by the samewriter in 1845 was fully justified by events:The feasibility of the greater numberof the schemes brought before the publichas encouraged the example of starting com-peting lines; while, in addition, foreign pro-jects of the most questionable descriptionhave come out, the shares of which havemaintained high premiums for a few days,and have then sunk into utter worthlessness.


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LONDON STOCK EXCHANGE 03Among all this incongruous mass there mustbe part that will ripen to decay; and hence,while the stability of the system itself isacknowledged, it is that stability which hasfostered many of the sham companies of thepresent day. When the crash does come itwill be terrible. The best of the securitieswill feel it for a time, though restoration to aproper value will, no doubt, follow when themarket shall have settled down and the webof ephemeral speculation be cleared away.

It is interesting to learn from the samesource that the swindling and blunderingwhich marked the flotation and managementof British railways in those early days weregradually corrected by the criticisms of afew honest and competent journals.

Morier Evans, the historian of the crisisof 1847-8, compared the prices of certain rail-way securities in the height of the boom(August 1845) and the depth of the depres-sion (October 1848). Thus in August 1845,Great Western rose to 236, and fell in October1848 to 65J-, London and North-Westernrose to 254 and fell to 99; Midland rose to183 and fell to 64. Northern of France roseto 7f and fell to 5f . Scandals of all kindssurrounded the promotion of our railways.


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64 THE STOCK EXCHANGEExtortionate sums were paid for worthlessland. The financiers, the lawyers and allconcerned had such pickings and perquisitesthat we can hardly understand (even afterallowing for the good work of the critics) howthe main English lines emerged with theirfinances on a basis so much sounder thansimilar undertakings in many other countries*Capital was collected from all parts of thecountry, and the transactions in railwayshares were so voluminous and universal thatthe ordinary channels were quite inadequate.Clerks at small salaries in banks and mer-'chants' counting-houses openly proclaimedthemselves buyers and sellers of the various 'favourite shares, just as if they represented.their employers. Not only in London, but 1in Manchester, Leeds, Liverpool, Glasgow,'Dublin, Hull, Edinburgh and Bristol, rail-way share markets were established, and thebusiness of the City was for a time equalledif not surpassed by the provinces. As ananxious contemporary put it on the eve ofthe crisis: The farmer is now as deep inrailway shares as the merchant, the merchantas the banker; and the whole circle of societyis entangled in the mania.The long list of failures that occurred in


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LONDON STOCK EXCHANGE 651847 and 1848 attests the correctness of thisanalysis. But with every succeeding decadethe stability of our banks and merchanthouses and of all our financial institutionshas steadily grown with the increasing wealthand intelligence of the nation. In the pagesof Bagehot and other writers we may read ofa strain on credit which caused extraordinarymeasures to be taken by the Bank of Englandin 1857 as a result of the American panic, andagain (for the last time) hi 1866, after thefailure of Overend Gurney. The BaringCrisis of 1890 was brought about by over-confidence in the pace at which Argentina'spotential wealth would be developed and ex-ploited by British capital. In the two pre-vious years over 60 millions of British capitalhad been lent to Argentina, but in midsummer1890 a loan of 5 millions for the ArgentineGovernment missed fire. A revolution and arun on the banks followed. Mr. Burn says:The fall in South American securities wasvery heavy, and the situation from August toOctober was very delicate. There was a de-cided undercurrent of opinion that severalhouses, notably Baring's, had dangerouslyincreased their acceptances. At the weeklymeeting, on Thursday, Nov. 6, of the Di-


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66 THE STOCK EXCHANGErectors of the Bank of England the Bankrate was unaltered, though the reserves stoodat only 11 millions; but on the following dayit was unexpectedly raised to 6 per cent., andthe Stock Exchange began to be alarmed.However, the settlement on the followingTuesday passed off without trouble. But onthe Wednesday three banks were reported tobe in difficulties. On Thursday it was learnedthat the Bank of France had lent 3 millionsof gold to the Bank of England; on Friday ameeting was held at the Bank to considerthe affairs of Messrs. Barings, and on Satur-day (Nov. 15) it was definitely announcedthat a scheme had been carried through toenable them to meet their liabilities. Thefirm's liabilities, which amounted to 21 mil-lions sterling, were liquidated in the courseof four years; and the effects of this sup-pressed crisis remained for a long time.A speculative recovery was powerfullystimulated by the wonderful discoveries andskilful exploitation of the Rand mines in theTransvaal by cosmopolitan groups of finan-ciers, among whom Cecil Rhodes was themost popular figure. This Napoleon of CapeTown and Kimberley became the hero of ourStock Exchange. Skilfully blending financeand politics, he for a long time worked in


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LONDON STOCK EXCHANGE 67alliance with the Dutch party at the Cape,keeping on good terms with the Boers, andsimultaneously by a handsome contributionto Parnell's funds he contrived to secureIrish Nationalist assistance for the CharteredCompany. Nevertheless his reputation inLondon was that of an empire-builder. ThePress fell under his sway, and the LondonStock Exchange responded enthusiasticallyto all the financial schemes, good, bad andindifferent, of the new South African leaderand his fellow magnates. But the enormousfortunes made in the nineties under theKruger regime did not satisfy. Those whohad received much wanted more. Thosewho had shorn one flock of investing lambswanted to shear another. Those who hadbecome millionaires on a sudden objected topay any toll whatever to the Government,and conceived the idea of turning out theBoers and of so producing another Kaffirboom which would raise their wealth beyondthe utmost dreams of human avarice. Inpursuance of this plan fictions of all sortswere circulated. Old President Kruger, ob-stinate and unenlightened, but a quite humanmixture of shrewdness and stupidity, virtueand vice, was represented as a monster oftyranny and corruption. The strength and


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88 THE STOCK EXCHANGEcourage of the Boer farmers were made lightof, and Rhodes even assured the BritishGovernment (then embarked on a policy ofinterference) that the Boers could not shoot.It may be doubtful how far the Cabinetreally meant to go, and how far it driftedinto an avoidable catastrophe through meremishandling of the negotiations. But,whether deliberate or accidental, certain itis that the war proved more disastrous tothe London Stock Exchange and the in-terests of the City than any event whichhad taken place since the failure of OverendGurney. A military promenade, which wasto have been over in a month or two, re-sulted in three years of stubborn and anxiouswarfare. The total cost, which was esti-mated by Sir Michael Hicks-Beach, theChancellor of the Exchequer, in October1899, at 10 millions, to be defrayed by a levyon the gold mines, eventually came to about250 millions, every penny of which was con-tributed by British loans and British taxes.For a moment, at the outbreak of the war,Transvaal mining shares rose, but as soon asthe idea of a promenade vanished, and a longprospect of difficult and costly operationsopened out they began to droop, and fell tolower and lower depths as the war dragged


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LONDON STOCK EXCHANGE 69on. Consols followed the same movement asKaffirs. They had receded partly as a resultof increasing expenditure and diminishingSinking Fund, partly through fear of war,from a top price of 113 in 1898 to about104 at the outbreak of hostilities. But theKhaki 2f per cent, loan in the spring of1900 was raised with enthusiasm, showingthat the public believed in a speedy endingof the war and a substantial indemnity fromthe mines. When the Milner policy of un-conditional surrender was at last abandoned,and the peace of Vereeniging signed, Consolsand Kaffirs rallied. But it was only a shortand feverish flicker of speculative purchases,which collapsed under heavy liquidation.The mining industry had been temporarilyruined, the cost of living had risen, the nativelabour had dispersed, a strange mixture ofluxury, waste, misery, disease, plunder anddemoralisation had dislocated the socialorganism and the mechanism of business.Many of the promoters and speculators whohad been most eaget for the war were ruined.All the mining houses connected with theRand suffered severely, nor did they recouptheir losses by the costly experiment ofimporting Chinese coolies.^ A declension of Consols by 20 per cent, was


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70 THE STOCK EXCHANGEproportionate to the increase of supply; forthe National Debt was enlarged by 160 mil-lions sterling in order to meet the extraordi-nary expenditure on the war. For four or fiveyears the Sinking Fund was practically oractually suspended, and when, under the firmfinancial guidance of Mr. Asquith, the reduc-tion of Debt was vigorously renewed at anunparalleled rate, the decline of nationalcredit was checked rather than arrested; forthe enormous cost of the Russo-Japanese Warhad drained many millions of British andFrench capital into the new 5 and 6 per cent,bonds of these two combatants. In fact thepublic debts of the world, along with wars,armaments and taxation, have expanded inthe first ten years of the twentieth centurymore rapidly than the effective demand forthem. Possibly and if some limitation ofarmaments can be arranged, probably thedecline of gilt-edged securities may now ceaseand a substantial recovery commence. ForBritish Consols to yield more than 3 per cent,in time of peace and prosperous trade is cer-tainly abnormal. But then the scope oftrustee securities was extended by some 300millions in 1900 for the benefit of our colonies,and the growth of armaments in a dozen yearsby 30 millions sterling represents each year


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LONDON STOCK EXCHANGE 71an economic waste equivalent to what ourgrandfathers would have considered a veryformidable and costly war.The effect of the Kaffir boom in Englandwas to create a new and very popular fieldfor speculative investment. The Houserapidly expanded, and the mining sectionsuddenly bulged out into the Kaffir Circus,which after hours filled Throgmorton Streetwith wild and noisy confusion. The slumpwas disastrous and protracted. The losses inChartered shares and in many of the inferiormines of the Transvaal and of Rhodesia havenever been recovered, but in the last three orfour years the intrinsic merits of the Randmines, the reconciliation and union of SouthAfrica, and a great improvement in thelabour supply have contributed to restorevalues to the Kaffir market and animationto the Kaffir Circus. But Consols, gilt-edgedsecurities of all kinds, home, colonial andforeign, British railways, bank and insuranceshares, breweries, and many other industrialsecurities have all exhibited, as the direct orindirect consequence of the Boer War, falls offrom 10 to 50 per cent. The loss of capitaland credit caused by such a shrinkage cannotbe computed; but every banker and cambistin London knows how much London's prestige


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73 THE STOCK EXCHANGEand influence as the headquarters of inter-^national money and exchange were shaken.If those who made the war had been allowedto make a tariff, the greatest emporium,the greatest shipping, broking and bankingcentre of the world would have been not onlyshaken but shattered. Grass would havegrown in the port of London and in the streetsof the City. Gradually the London ware-houses would have emptied, the shipping ofits port would have shrunk, the value of abill on London would have disappeared, theLondon money market and the London stockmarkets would by degrees have yielded theirproud supremacy a supremacy foundedupon a wise policy of political, economic,commercial and financial freedom. Insteadof these disasters, thanks almost entirely toits freedom from tariffs and consequent mono-poly of wholesale markets, London has nowagain strengthened its position as the importerand re-exporter of metals and raw materialsof all kinds. And, thanks partly to this,partly to its vast supply of free and loanablecapital, it has recently acquired completecommand of the expanding market in rubber.With this control of the raw product, whichis now governed by the sales in Mincing Lane,the acquisition and financial management


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LONDON STOCK EXCHANGE 73jof the new plantations for the growth of tame rubber has naturally come to GreatBritain. The rubber boom in the spring of

1910 may fairly be represented as the harvestwhich English and Scottish financiers andbrokers have reaped as a result of free marketsand unimpeded trade.Another episode in the history of the Lon-don Stock Exchange the American crisis and

panic of 1907 may conveniently be deferredto later chapters.

It remains to say a few words as to therules of the London Stock Exchange, and itsmethods of doing business. The feature whichdistinguishes it from provincial, colonial andforeign Exchanges is the division of functionsbetween brokers and jobbers, a division whichseems to go back to its foundation. The job- jber works on the floor of the House, and dealsonly with the broker. The broker takesorders from the outside public and buys fromor sells to the jobber. Thus the broker feedsthe jobber much as the solicitor feeds thebarrister. The broker takes his commissionand the jobber his turn. The working of thesystem is very simple, and may be illustratedby a simple example. Jones, an investor,sees that Consols stand at about 79. Hedetermines to buy 1,000 nominal, i. e. to


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74 THE STOCK EXCHANGEspend 790. So he tells his broker Smith tobuy him that amount at the best price obtain-able. Smith goes from his broker's officeinto the House and makes his way to thegroup of jobbers who deal in the Consol mar-ket. He finds Robinson and asks him theprice of Consols. Robinson replies 7Sf-79,meaning that he will buy at 78| and sell at79. Smith buys from him at 79, and thebargain is complete. Smith sends a contractnote to Jones which runs as follows:

1000 Consols at 79 .... 790Contract Stamp 2s.Commission J l 5Jones sends a cheque for 791 7s., which 1

expressly includes the broker's commission,and also in reality includes the jobber'sremuneration. This system, with its divisionof functions, is very good for active securitiesin which there are numerous transactions.In such cases the separate existence of jobbersmakes for a free market and close prices.There is no place in the world where good jstocks are more easily and quickly realisable ;at a minimum of loss, or purchasable so nearthe market price, as on the London StockExchange. For this and other reasons it re-ceives a vast amount of American and foreign


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LONDON STOCK EXCHANGE 75orders, and its official list is the largest andthe most international in the world. Butthe investor should note that a quotationin the official list does not mean, in the caseof securities seldom dealt in, that your brokercan at any time get a jobber to deal in thestock at the nominal or quoted price. Andwhen there is a slump in a market and a rushof selling orders with no support, as happenedin rubber shares in the months of June andJuly 1910, the jobbers are apt to be away atlunch all day, and the brokers have to reportto their clients that they simply cannot find apurchaser.

It should be added that London Stock Ex-change brokers are not allowed to advertise.They- may only send circulars to their ownclients. The first business, therefore, of anEnglish investor is to find a good broker.He will then be protected in all his transac-tions by the rules and regulations of theLondon Stock Exchange. Or if he lives in |a large provincial town with a Stock Exchange jof its own, he may prefer to do business withone of its members a local broker. In thatcase he will probably be just as well served. IWhat he must avoid like the plague is theoutsider who offers to sell him rubbish sharescharging no commission.


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Documents

Stock Exchange--short Study of Investment and Speculation