The Nature Of Exchanges. Origin Of The New York Stock Exchange. Part 3

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This section is from the "Investment And Speculation" book, by Louis Guenther. Also see Amazon: Investment And Speculation.

The Nature Of Exchanges. Origin Of The New York Stock Exchange. Part 3

Viewing our exchanges, therefore, in their proper light, we must appreciate their importance. Were it not for their ability to make capital mobile, there would exist a great disparity in prices. It stands to reason that the greater the number of buyers and sellers gathered together, the better and firmer tone there will be to values because of the concentrated market.

It is not because Reading or United States Steel shares are superior securities in point of intrinsic worth that a market can be found for them at a moment's notice. It is due to the fact that they have a concentrated and active market which the stock exchange alone has made possible. People will buy these stocks and buy others equally active and listed on the exchange because they realize that they can sell them quickly and at fractional changes in the price, and banks will lend money on them with equal readiness for the same reasons. They will buy these listed securities in preference to unlisted securities because there may be no market for this latter class of securities at the time one is most wanted. Thus we see that the exchanges perform two useful purposes, that of being a price-making arbiter, a power unto itself of fixing values, and that of being a quick and facile market, rapidly regulating itself to existing conditions.

In a larger way and almost unconsciously, the exchanges accomplish what a country at all times is in need of, and that is a channel through which to raise capital for the development of its resources. By the facilities for trading that they are in a position to offer, they quicken the speculative instincts of the people.

It would have been impossible to raise the capital for the billion-and-half United States Steel Corporation without the stock exchange and its facilities. It opened the sluice ways to the nation's wealth. It made immediately possible the marketing of its shares.

The fact is undeniable that capital can be more quickly raised for general industry and for the expansion of our railroads when the public is aware that there will be a market for the new securities. What the public wants is a market in which it can sell as well as buy, and this the exchange provides. Capital gravitates to the money centers. This is a natural law like the law of gravity which makes the apple fall to the earth. It will flow to the center where it can beget the largest return for its use. What is more natural then, than that it should congest itself about the portals of the principal exchanges and its masters avail themselves of their facilities. For capital has its masters. If they are not in the form of the "captains of industry," as we are wont to call our great underwriting bankers, they are unconscious masters in the shape of accumulated deposits in the banks. These deposits, to employ themselves profitably and still be instantly available for other purposes, find the avenue whereby this object can be accomplished through loans on securities listed on the exchange or in commodities, as in grain, cotton, or metals.

That is the underlying reason why our exchanges, like great drag nets, can draw to their doors from every direction and from what seem the most inaccessible places, the liquid capital of the nation.

Our exchanges bring in the capital from the four points of the compass, some of it for investment, some for speculation, and some, the minor part, from foolish people who, sad to say, deliberately attempt to acquire wealth overnight by simple gambling on the fluctuations. To the shrewd and fortunate ones, the exchange returns their money with substantial profits. From the misguided and unfortunate ones, it exacts its toll. It will always be so. There is no law to prevent it. It is but one of the phases of the operation of the exchanges over which no control can be exercised, for in their function of establishing prices there is no way to prevent gambling in the fluctuations in the quotations.

It has been pointed out by reformers that this could be done by prohibiting margin-trading, by forcing the outright purchase of securities and commodities. But this is a foolish conclusion. Suppose this were attempted; what would happen? Instead of the brokers' arranging the loan, the purchaser of a security would attend to it. He could not be prevented from borrowing a certain sum of money from a bank on securities if there were in existence a law compelling him to purchase securities outright.

If margin-trading is wrong, either from a moral or from a legal standpoint, then it is equally wrong to purchase real estate subject to an incumbrance. Fundamentally the practice is not wrong. The fault lies in its abuse by people who, because of their financial circumstances, ought not to buy on margin any more than a person with a few thousand dollars should attempt to buy a piece of property he could not carry because he expects to sell it at a profit before he is called upon for more money. This is not speculation; it is gambling.

The real purpose of an exchange is to make capital mobile by gathering it together. It provides capital with the opportunities to make money. It opens channels for investments. It is a price maker, a barometer of trade, a great heart through which comes the blood to feed the arteries of commerce. Without them the commercial progress of a country would be put back many years.