A word should be said here concerning the Stock Exchange Clearing House, because just as the Clearing House of the associated banks ascertains and pays the balances of its members with a minimum outlay of coin and legal tender notes and with great economy of time and labor, so the Stock Exchange Clearing House stands the strain of an enormous business, reduces the volume of checks and deliveries, and relieves both the banks and the stockbrokers of an amount of risk and confusion that would be well-nigh intolerable.
In order that the layman, for whom these pages are written, may understand what this means, it may be said that if 500,000 shares of stock are sold in a day on the Stock Exchange, and if we assume the average price of these stocks to be 50, the checks paid out on that day would be $25,000,000, and in a year at that rate certifications would be necessary involving the stupendous total of $7,500,000,000. This clumsy if not impossible method the Clearing House was designed to avoid. Moreover, the actual daily transfer of such a volume of securities is largely obviated by the Clearing House system, and thus another and highly important economy is effected.
The Stock Exchange Clearing House is managed by a committee of five members of the Board of Governors of the Exchange. Each day the seller of stocks sends to the office of the buyer his “deliver” ticket, and the buyer sends to the seller his “receive” ticket, this transaction constituting a “comparison” by both parties, and an evidence that the transaction has been entered on their books. Before 7 P.M. of that day these tickets, and the sheet comprising the record, are sent to the Clearing House. This sheet contains a “receive” and “deliver” column, with all the transactions in each security grouped together, and with a balance—i.e., a debit or credit, struck at the bottom. If there is a credit, a draft on the Clearing House bank is attached; if a debit, a check for the balance accompanies the sheet.
When the Clearing House receives this sheet a simple and a very ingenious process ensues which relieves the broker of a great deal of trouble, risk, and labor. If he has bought and sold, let us say, an equal amount of stock, comprising numerous transactions, instead of having to draw checks for all these separate trades, the Clearing House settles the whole day’s transactions by a single check for the actual balance. If his numerous purchases and sales do not balance, and if there are various lots of stock to receive and deliver, the Clearing House eliminates a host of intermediaries and puts him into direct touch with one firm to whom he delivers, and with one from whom he receives. He may have had no transaction with the firms thus arbitrarily assigned to him; that makes no difference. The books of the Clearing House always balance; somewhere a firm is entitled to a receipt of stock, and somewhere another firm will be found to deliver it to him.
Nothing could be simpler and more economical than the manner in which the two are brought together. In such a system, the number of shares actually delivered is reduced by the Clearing House to one third of the number represented by the broker’s actual transactions, while the amount of money which he must command to meet his daily engagements represents, on an average, only 25 per cent. of the actual capital that would be required were it not for the excellent system thus afforded him. Persons who wonder at the magnitude of Stock Exchange transactions, and who jump to hasty conclusions as to the actual capital involved, may well reflect upon the manner in which this method reduces to a minimum the stockbroker’s drafts upon the banks.
In a larger sense, if the critic in these matters affecting the relationship of banks to stockbrokers feels aggrieved at what he thinks is an improper diversion of funds, he must remember that the comparative scarcity of capital to-day—which is at the bottom of his complaint—is not due in any sense to Stock Exchange speculation, for there has been almost no extensive speculation in this quarter from 1907 down to November, 1912. To find the cause of the scarcity of capital—and it is unquestionably scarce—he must consider the immense destruction of tangible wealth in the last decade, and the extraordinary tendency to convert floating forms of capital into fixed and immobile forms.
The amount of money expended in State roads since automobiles came into popularity is probably ten times more than it was before; at the election in November, 1912, a fresh total of $50,000,000 was voted for “good roads” by the electorate in New York State. The building of the Panama Canal has cost or will cost about $365,000,000; all over the country large municipal or state works are under construction; here in New York the contract for the Erie Canal calls for $150,000,000, and for the city’s new water-supply system—the Ashokan basin and the Kensico reservoir—$177,000,000, each contributing a share to the depletion of the normal supply of working capital. Meantime, to cite another instance, Congress appropriates $160,000,000 to pensions in a single year, and $40,000,000, as a recent writer puts it, “for that particular form of graft which consists in giving a $30,000 post office to a thirty-cent village.” The railroads of the country alone require to-day sums of money equivalent to the working capital represented by all our bountiful harvests of 1912.
Aside from these matters the critic should remember, in fair play, that the currency famines which occur with periodic frequency in our country are due in large measure to the non-elastic nature of the currency, to its persistent absorption by the Treasury, and to the rigid restrictions which these abnormalities impose on the volume of banking credit. Conditions such as these contributed in no small measure to our last great panic, and led to a premium on currency that made us a laughing-stock among the nations. There has been no such money delirium in England since the Napoleonic wars; no such condition in Germany since the empire was founded, and nothing approaching it in France, even in the commune and the war with Prussia. Yet in America we go on wobbling uncertainly under the makeshift act of 1908, with its currency associations and its emergency measures, and with the added fear of what may come when the Act expires in 1914.
The situation in America is substantially this: Business drives ahead at a tremendous pace, with perils on every side, chiefly anxious to be undisturbed. Matters run along smoothly for a while; then something happens—there is too much optimism or too much confidence—and a smash. It is not due to speculation in securities, because, as in 1907, the stock markets are the first to see what is coming and to discount it. But speculation in lands, or in manufacture, or in railroad construction go on and on; there is too much work for the dollar to do; the currency system breaks down; here and there a financial institution closes its doors; public confidence is shattered, and the whole credit system is disturbed.
Then there arises a noble army of critics who, with the best intentions but with insufficient knowledge and study, set to work to remedy conditions they do not understand by methods untried and unpractical, that only add to the general confusion. More harm than good results when the physician, brusquely entering the sick-room, tells the patient he is a very sick man, denounces the lobster that poisoned him, and departs with a general condemnation of shellfish, but without prescribing suitable remedies. Persons who denounce the relationship existing between banks and stockbrokers are in most instances upright citizens of high character, but until a little patient study of conditions has enabled them to speak with authority upon matters that are necessarily complex and delicate, they cannot accomplish any really useful purpose. “The wicked are wicked, no doubt,” said Thackeray, “and they go astray, and they fall, and they come by their deserts; but who can tell the harm that the very virtuous may do?”
The three leading groups of banking interests in Wall Street are said to represent $500,000,000 of available capital each; the deposits in what are called the “trust banks” amount to between $700,000,000 and $800,000,000, while the banks of the whole country hold deposits of $16,000,000,000. The savings banks now hold $4,450,822,522 which is owned by 10,009,804 depositors.45
As we have not yet reached the point of abolishing property altogether, we may concede that these great combinations can do for individual business and for the country at large what cannot be done without them. They furnish the large sums which, from time to time, are required by the Government, the State, the town, the manufacturer, the tradesman, and the speculator, and to each of these—especially the speculator—the tremendous development of this country is due. Because of speculation in securities, the 26,000 million dollars’ worth of capital represented on the New