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LIBRARY
umvE-sinr OF
CAiif.
SAN DIEGO
THE
WORK OF WALL STREET
AN ACCOUNT OF THE FUNCTIONS, METHODS
AND HISTORY OF THE NEW YORK
MONEY AND STOCK MARKETS
BY
SERENO S. PRATT
REVJSED, REWRITTEN AND ENLARGED
NEW YORK AND LONDON
D. APPLETON AND COMPANY
1912
ComuoHT. IPOS. 1012, Br
D. APPLETON AND COMPANY
Published September, 19M
Printed in the United States of America
PREFACE
So vast are the transactions of "Wall Street, so tremend-
ous are the interests which it serves, so fundamental to
ihe well being and prosperity of the whole world are
the operations of its systems of credit and securities, and
so varied and intricate are the problems involved in the
activities of a great international money market, that to
attempt to put within a volume of moderate size an ade-
quate account of its work, and of the principles which
underlie, and the spirit which inspires, that work, is an
undertaking of large proportions. The author hopes,
however, that he has, in good measure, achieved success.
The writing of "The Work of Wall Street" means
something more than a description of the speculative
market. The Stock Exchange is, indeed, an important
part of Wall Street, but it is not Wall Street. The finan-
cial district includes, but is not embraced by, the stock-
market. The Clearing-house, far more the Stock Ex-
change, is the heart of Wall Street. A description of the
work of Wall Street is really an account of the mighty
economic forces by which the commerce and industry of
the richest and most powerful nation of the globe are
carried on. A commercial country without a central
money market would be like a government without a
capital. The greatness of Wall Street is a visible proof
of the greatness of the United States. The work of
Wall Street is the work of facilitating, energizing, mov-
ing, expanding and safeguarding the work of the country.
Since "The Work of Wall Street" was first published
in January, 1903, many changes have taken place in the
structure of the financial center changes so important
that a thorough revision has required the making of what
vi PREFACE
is practically a new book, in matter and form, although
as much of the old is retained as has been unaffected by
the passage of time.
The three most notable changes in the machinery by
which Wall Street performs its work have been:
1. The strengthening of the Bank Clearing House by
the admission of the principal trust companies as mem-
bers; by the establishment of a system of examinations
by which the Clearing-house is enabled to maintain the
banking position more securely; and by the widening of
the scope of the bank statement and the improvement in
its form.
2. The amendment of the rules of the New York Stock
Exchange, by which improvements have been instituted in
the organization of the stock-market without destroying
its facilities for effective distribution of the securities of
the country and the better mobilization of capital; one
of the most noteworthy of these improvements being the
abolition of the Unlisted Department; and
3. An expansion, through both governmental action
and individual initiative, of that publicity which is the
surest safeguard of investor and speculator, and the
strongest preventive of the evils of deceitful manipula-
tion and dishonest promotion.
Moreover much financial history has been made in the
past ten years ; and what amounts almost to a revolution
in business so far as its relations to government is con-
cerned, is in progress. The question is being fought out
with Wall Street as a battlefield, whether the business
of the country shall be conducted on a competitive basis,
or whether modern cooperation on a big scale shall be
permitted, or whether it is possible so to combine com-
petition and cooperation as to obtain their largest effi-
ciency, without the peril of economic anarchy on the
one hand or financial tyranny on the other.
By the decisions of the courts, by the investigations
of expert commissions, and by the studies of publicists
and economists, new light has been thrown upon the
PREFACE vii
theory and practice of money and banking, and of pro-
motion and business organization.
The Monetary Commission, of which ex-Senator Al-
drich is Chairman, has drafted a plan of monetary reform
which, if adopted, will take rank with the most notable
constructive financial achievements in the history of this
country since the genius of Alexander Hamilton organized
the Treasury and established the first United States Bank.
The publications of the Commission alone constitute a
most important contribution to the literature of money,
banking and investment, and are of enormous value in
educating public opinion as to the inestimable benefits
of modern credit, properly organized and safeguarded.
Scarcely less valuable than the work of the Monetary
Commission is the report of the Railroad Securities Com-
mission, appointed by President Taft, of which Dr. Had-
ley, President of Yale University, was Chairman, and
which presents, with clearness and scientific precision the
principles that should govern the issuance of railroad se-
curities.
The investigation in 1909 of speculation in securities
and commodities by a commission appointed by Governor
(now Justice) Hughes, and headed by Horace White, has
served at once to demonstrate the economic value of
speculation and to correct many defects in the machinery
of the speculative markets.
A number of decisions, notably those by the United
States Supreme Court in the interpretation of the Sher-
man Anti-Trust Law, have profoundly affected the or-
ganization and conduct of big business.
In addition to these great changes, the past ten years
have witnessed in this country a notable development
of the investment market and a corresponding develop-
ment of facilities for supplying the needs of investors.
The science of investment is better understood, and the
art of investing as practiced by capitalists, both large and
small, is much more intelligent and discriminating ; while
the high class bond houses by their methods of publicity
viii PREFACE .
and distribution are making more distinct the line mark-
ing the separation between the true and the false, the
sound and the bogus.
In the meantime the volume of speculation since the
panic of 1907, has materially declined, which is attributed
by some to the State tax on stock transfers, amounting
to two dollars per 100 shares. This tax imposed, during
the administration of Governor Higgins because "the
State needed the money," is uneconomic because it is
a tax on sales, but it has proved a heavy revenue pro-
ducer, though hurtful to the commission houses. The re-
duction in the volume of sales may be more properly
attributable to the decline in gambling and manipulative
transactions. Wall Street, however, has passed through
other periods of speculative depression and then expe-
rienced a rapid revival, as for instance, after the panic of
1893.
In this connection attention should be called to the won-
derful expansion in advertising in the past decade, and
especially to what has been achieved in widening the
scope, improving the quality, and strengthening the power
of financial advertising. Some progress at least has been
made in preventing this stupendous agency for the wise
and wide distribution of investments from being seized
by the hands of the sharks who are ever using the adver-
tising columns for the purpose of swindling the innocents
and the fools out of their savings.
In spite of the tremendous strain put upon capital and
enterprise during the last ten years, we have as a na-
tion made progress in material prosperity, for such are
the vast resources of our country, that political and eco-
nomic changes may retard growth, but cannot entirely
stop growth.
In ten years the estimated wealth of the country has in-
creased fully $20,000,000,000. Our money in circulation
has increased a billion dollars. Our bank clearings and
bank deposits have doubled.
When "The Work of Wall Street" was first published
PREFACE ix
in January, 1903, it was practically a pioneer in its field.
It was the first attempt to describe comprehensively the
machinery with which Wall Street promotes the enterprise
and facilitates the exchanges of the country and provides
a regulated market for securities. In the preface of the
first edition it was said that, while Wall Street filled a
large space in the daily papers, this was chiefly in a sen-
sational way; and there existed a remarkable degree of
ignorance regarding the actual work of the financial dis-
trict, while the history of speculation, and of its effects
on the development of civilization had not been deeply
studied. Ten years, however, have wrought a change.
Since the issue in 1903, there have been a number of
publications, books, pamphlets and articles covering in
part the same field as "The Work of Wall Street." The
past ten years have been a time of popular education in the
theories and practices of business, and there has been a
notable output of books bearing upon various branches
of the subject. Of the publications books and maga-
zine articles relating directly to securities and Stock
Exchanges, Professor S. S. Huebner of the University of
Pennsylvania gave in the Annals of the American Acad-
emy (May, 1910) a list of 198; and a majority of these
have been published since "The Work of Wall Street"
was issued in 1903. Moreover since Professor Huebner
made his bibliography other publications have appeared
which should be added to the list. In "The Work of
Wall Street ' ' the author makes reference to over one hun-
dred books, reports and pamphlets on money, banking
and speculation.
Instead, therefore, of there being a lack of information
regarding the work of Wall Street, as was the case when
the first edition was issued, there is now what might al-
most be described as a literature on the subject. This
fact might be regarded as rendering unnecessary a re-
vision of "The Work of Wall Street" were it not for two
things. There are now so many publications, relating to
various branches and aspects of the Wall Street system,
x PREFACE
that there is still a place left for a book, like this, which
aims at giving a comprehensive but concise account of
the whole mechanism in the light of the development of
the past ten years, in order that th'e investigator may find,
in one place, the essentials of a subject, which in some of
its different parts may, perhaps, be found in larger detail
in other publications. Moreover, ''The Work of Wall
Street, ' ' in spite of the fact that it was written ten years
ago, still remained, according to Mr. F. W. Hirst of the
London Economist, "the best description of the Wall
Street system." Under such conditions it has seemed
proper to continue its publication and to bring it up to
date by discriminating revision.
In making this revision the author has believed that it
was better to leave untouched that which has stood the
test of ten years, and make only such alterations and ad-
ditions as were rendered necessary by the actual changes
in the system itself and by a larger view of the subject.
This has required, however, the omission of much old mat-
ter, and much new writing, with the net result of ma-
terially increasing the size of the volume and making it
virtually a new book. The author has deemed it to be in
the interest of the student to include, in its entirety, in
this edition, the report of the Hughes Commission on
speculation, to which he has added a number of notes of
his own for the further enlightenment of the reader. The
chapter on the Stock Exchange Clearing House, having
received the approval of the Chairman of the Clearing
House Committee when first published, is continued, un-
changed except for a slight explanatory note.
New chapters on the function and the scope of Wall
Street, on investment, speculation and gambling, and
on reading the market, have also been introduced, and
much new matter has been added in the chapters on
"The Stock Company," "Listing of Securities," "The
Stock Exchange," "The Credit Institutions and the
Clearing House," "The Bank Statement and the Move-
ment of Money," "The Investment Market," "The Curb
PREFACE xi
Market," "Foreign Exchange and the Balance of
Trade," and "Panics." In fact most of the book has
been rewritten. Numerous citations from economic and
financial authorities have been added, and most of the
chapters conclude with a bibliography.
To Mr. James G. Cannon, President of The Fourth Na-
tional Bank, a leading authority on commercial credits
and Clearing Houses, the author owes the original in-
spiration for this book, as well as valuable assistance in
the gathering of material. The author is also indebted to
Mr. Maurice L. Muhleman, Secretary of the Hughes Com-
mission, and formerly Deputy Assistant United States
Treasurer, for important new matter in the chapter on
"The Subtreasury" and also for further assistance. He
desires likewise to make large acknowledgment of help
to his friend and former colleague, Mr. Thomas F. Wood-
lock, once editor of the "The Wall Street Journal," but
now member of the New York Stock Exchange.
In the revision moreover he has had the active assist-
ance of his son, Mr. Thomas B. Pratt, of "The Wall
Street Journal."
The author himself has had for several years no con-
nection whatever with the securities market, and in view
of his other interests, he would not have undertaken a
further description or analysis of its mechanism, if it had
not been for the fact that he felt the responsibility result-
ing from his authorship of ' ' The Work of Wall Street ' ' ;
and as it had to be revised, he believed that it was his
special duty to perform the labor.
Returning to his study of the Wall Street system, after
several years of absence, he finds that his outlook upon
it as a friendly but discriminating critic is unchanged,
and he repeats what he said in the preface to the first edi-
tion:
"The author has conceived his duty to be that of a re-
porter rather than of an editor. He has sought to pre-
sent the facts as they are, leaving to others to inquire why
they are not something very different. He has endeav-
xii PREFACE
ored to maintain an impartial attitude toward Wall
Street, neither seeking to defend it against just criticism
nor joining in the too common assault upon it as a blot
upon civilization. No one can study this theme with un-
biased mind without being impressed with the indispens-
able place the stock-market fills in modern business, of
the great value of its manifold services to the world, and
of the extraordinary efficiency of its mechanism; and
without, at the same time, realizing how vast are the
evils to which it gives rise, how short and easy is the
step from beneficent investment to reckless and unprin-
cipled gambling, and how great is the peril of overspecu-
lation."
"Wall Street depends upon the country for its suste-
nance, but Wall Street is essential to national progress.
Any attempt on the part of Wall Street to abridge the
liberty or throttle the natural growth of the country, or
any attempt on the part of the country in anger, revenge,
or ignorant passion to destroy Wall Street would be
equally ruinous, for a house divided against itself can-
not stand.
The first edition was dedicated to J. Edward Simmons
as a type of all that is best in the work of Wall Street.
Mr. Simmons has since died after a business career
crowned with honorable achievement.
S. S. P.
CONTENTS
CHAPTER PAGE
I. EVOLUTION OF WALL STREET 1-35
Origin of money, stocks and speculation Be-
ginnings of the English and French stock-
markets 'Wall Street has imported, but Amer-
icanized their methods Early history of the
Street Speculation that set in after the Revo-
lutionary War The brokers' agreement of 1792
The first financial machinery The stock-mar-
ket of 1801 Panic of 1812 Early conference
of bankers Organization of the Stock Exchange
New York forges ahead of Philadelphia
Foreign bankers appoint American agents List-
ing of first railroad stock London trading in
American securities Struggle between Jackson
and the United States Bank Excited specula-
tion between 1830 and 1840 Early market
reports Panic of 1837-'41 Philip Hone's descrip-
tion of Wall Street in 1842 Establishment of the
Subtreasury system Boom caused by discovery
of gold in California Overspeculation brings on
panic of 1857 Wall Street during the civil war
Establishment of bank and stock clearances,
and introduction of the cable, the stock indicator,
and the telephone Speculation in gold Black
Friday and the Erie wars Panic of 1873 The
Exchange closes its doors Boom of 1879 Panics
of 1884, 1890, and 1893 The McKinley boom
The "Captains of Industry" A new era in Wall
Street History The co-operation issue Regula-
tion of Railroads The Big Gold Production
Panic of 1907 Dissolution of big holding com-
panies Plans of E. H. Harriman Men who have
made Wall Street famous Recent changes in ar-
chitecture and methods Expansion of the mech-
xiii
xiv CONTENTS
CHAPTER PAGE
anism of money and speculation The progressive
, stages of market evolution.
( II. GENERAL VIEW OF WALL STREET 36-44
The shortest and the longest street The man
who is "in Wall Street" Boundaries of the Fi-
nancial District and position of its Prominent
Buildings The Chamber of Commerce Concen-
tration of capital in the Street Comparison with
London Vastness and Provincialism Conserva-
tive force in the country.
III. FUNCTION OF WALL STREET 45-48
The Gateway of Commerce Facilitates the flow
of money Promotes enterprise Safeguards
commerce Maintains the Credit System Aids
in the diffusion of wealth The price charged for
its services Seat of Stock and Money Markets.
IV. SCOPE OF WALL STREET 49-57
Statistics of number of corporations and amount
of securities Sixty per cent, of nation's wealth
represented by stocks and bonds Millions of
holders of securities Bank credits based on
stocks and bonds Securities listed in New York
Stock Exchange Expansion in forty-three years
Foreign securities listed Comparison with
London Exportation of Capital Foreign com-
merce International and domestic exchanges
Money Power.
V. THE STOCK-MARKET
A place where incomes are bought and sold
Macaulay's account of the beginnings of the
English market The reason for such a market
and the evils to which it is exposed Stock ex-
changes essential to civilization Provide places
for investment of savings Savings-bank depos-
itors and insurance policy holders in the market
by proxy Advantages of stocks and bonds for
investment Upon the foundation of investment
has been built a vast superstructure of specu-
lation Lines drawn between investment and
CONTENTS xv
CHAPTER PAGE
speculation and speculation and gambling
The merchant and the speculator Speculation
a method for adjusting differences of opinion
as to future values Point where it becomes a
disease of the mind Public in the Street
Entire supply of stocks sold three times over
Overspeculation Study of records of sales and
what may be learned from them Sales in bull
and bear periods of twelve years Division of
the market into manipulation, room trading and
actual business by pools and public Average
number of persons in the market all the time
Bulls and bears, longs and shorts, professionals
and lambs Average number of different stocks
traded in Railroads and industrials The dif-
ferent groups of stocks Sympathetic effect of
one group upon another.
VI. INVESTMENT, SPECULATION AND GAMBLING . . 77-90
Sight, faith and chance Need of new definitions
* Buying for income and for profit True distinc-
tion between speculation and gambling The
state of mind Intent of the operator Same ma-
chinery for all Interference with economic law
Supreme Court opinion A Civil War Illustra-
tion Lincoln's view Speculation in gold
Short Selling The two sides of speculation
Value of speculators Balance wheel of indus-
try Beecher's opinion Morality of taking
risks People who should not speculate Women
Persons of limited capital Trustees of other
people's money.
VII. VALUES AND PRICES 91-103
The table of sales and quotations Phenomena
of sudden changes in prices Wide fluctuations
in a day, a month, and a year Stocks paying
the same dividends sell at different prices Dif-
ficult to reconcile the apparent inconsistency of
prices What constitutes value? Wall Street is
always striving to discount the future Prices
often vary from the measures of value Effect of
xvi CONTENTS
CHAPTER PAGE
manipulation Scientific theory of values and
prices The Dow theory The primary, secon-
dary, and tertiary movements Close study of
real values essential to success The law of aver-
ages Stock-market charts and systems Gould's
description of Wall Street The Woodlock state-
ment of tides and eddies
VIII. THE STOCK COMPANY 104-124
The stock certificate the corner-stone of Wall
Street The corporation defined Tendency to
convert all forms of business into companies
Advantage over partnerships Par value How a
stock company is formed Work of the promoter,
the banker, the lawyer, and the underwriting
syndicate Progress of a stock certificate from
the organizer to the investor New Jersey cor-
porations Definitions of a trust Changes in
meaning Holding companies Stock watering
Corporation problem Advantages and abuses of
stock company system Cooperation Efficiency
Economy Limited liability Continuity Dif-
fusion of wealth Concentration Democracy
Mobility Measure of value Impersonality
Monopoly Power Oppression Criminal promo-
tion Organization Various methods for safe-
guarding control Certificates of stock described
Requirements of the Exchange as to engrav-
ing Divisions of stock, preferred and common
Various classes of bonds Foreclosure of a mort-
gage Creating a debt to pay dividends illegit-
imate finance.
IX. LISTING OF SECURITIES 125-132
Definition The Exchange does not guarantee
values, but has strict rules governing admission
to the list Position of the Exchange authorities
Publicity Safeguards are numerous Listing
requirements Full reports of operation and
financial condition required Statistics of listing.
X. THE NEW YOBK STOCK EXCHANGE . . 133-162
CONTENTS xvii
CHAPTEB PAGE
Need of organizing the market Number of
Stock Exchanges Objects and mechanism In-
sists upon honorable dealings Limits to powers
and responsibilities A national institution
Number of out-of-town members Branch offices
Members who are principals Two-dollar
brokers Room traders Specialists Average at-
tendance Qualifications for membership Values
of seats Expulsion for fraud Rates of commis-
sion Hours of opening and closing Duties of
the Chairman Scenes at the opening The Ex-
change as a show place for tourists Methods of
trading The broker's pad Device for calling
members Orders by telephone Work of a board
member Precedence of bids and offers No fic-
titious trading permitted Sale of privileges pro-
hibited System of comparisons Rules for de-
livery Assignment of stock Ex-dividend trans-
actions Borrowing of stocks Selling short ex-
plained Bond dealings Stock Exchange fail-
ures Government of the Exchange Distinction
of the presidency The Exchange building
Mechanism compared with the London Stock
Exchange Arbitrage dealings Dissemination of
news "How's London?" Method of receiving
London Quotations.
r XL NEW YOBK STOCK EXCHANGE CLEARING-HOUSE . 163-181
Growth of stock-market limited by ability of
money market Limit seemed to be reached in
1892 Stock clearances were then established
Early history Report of special committee
Legality of clearances System proved adequate
in panic of 1893 and boom of 1901 Clearances
in those years Stock Clearing-House capable of
indefinite expansion Operation of clearances ex-
plained, with illustrations of blanks and forms
used Secrecy maintained.
XII. TOOLS OF WALL STREET 182-197
Most of the tools are time-savers Work of the
stock indicator Abbreviations of the tape
2
xviii CONTENTS
CHAPTER PAGE
Number of impressions in a year Statistics of
stock transactions Bird's-eye view of twelve
years The ticker a time-keeper Exchange re-
ports, but does not guarantee quotations Work
of the telegraph Leased wires The cable has
revolutionized the commerce of the world Cable
codes The telephone in Wall Street The news
agencies The news "tickers" and news slips