This is why Exchanges exist, not only Stock Exchanges, but market-places of all kinds: Buyers seek the largest market they can get in order to obtain the lowest prices; sellers, in order to obtain the highest prices; and so it was learned long ago that economy of time and labor, as well as a theoretically perfect market, could be best secured by an organization under one roof of as many dealers in a commodity as could be found.2 Bear in mind that this result, moreover, is best accomplished when the organization is so controlled by rigid rules of business morality as to insure to every one who does business there, great and small, rich and poor, an absolutely square deal. In such a market every purchase is made with the most thorough acquaintance with the conditions involved. Each dealer, each broker, each speculator, strives to obtain the best knowledge of the supply and demand, and the earliest news that may affect it, and each buyer or seller has an equal and a fair opportunity to profit by the resultant effect on the market of all these various agencies. The larger the body of brokers and traders, then, the more accurate the standards of value thus created. It is a pity you could not have bought your piano under such conditions.3
Demagogues have set the agricultural classes against Wall Street and against Exchanges, but producers everywhere, in default of exchanges, are forming quasi-exchanges of their own. Every day we hear of combinations, Farmers’ Alliances, rural co-operative movements, etc., each designed to regulate the market for eggs, butter, potatoes, and such things, and each having for its purpose the very functions which govern a Stock Exchange in its own field—namely, the establishment of a fair price under the nearest possible approach to ideal conditions. It is now proposed in Congress that the Department of Agriculture shall collect and transmit to the agricultural districts by telephone and telegraph all available information concerning price movements, markets, and centres of supply and demand, this again embodying the essential functions performed in its own field by a great exchange.
In practice, of course, there can be no exchange to deal in perishable products of the farm, and this is a pity, because if such an exchange were practicable we should hear less of our old friend the cost of living. Why? Because at present the market for these commodities is controlled by commission dealers and by middlemen. The producer and the consumer are alike at the mercy of these people; the price is fixed by them; the number of bona fide dealers actually bidding against each other is limited, in many instances there is no competition whatever; the producer and the commission dealer are, moreover, widely separated; the man who sells has few sources of information, and it is the business of the dealer who buys to see that he gets none; the small producer therefore has to submit to a great inequality in price, and often to downright cheating. There is no standard. There are no rules governing the dealer, and no high-minded board to enforce his honesty. Naturally this sort of thing contributes to the cost of living, since the commission dealer, on his part, regulates his profits just in proportion to the ignorance, cupidity or remoteness of the farmer, while the middlemen, of whom there are sometimes three or four, apply the same iniquitous processes to the ultimate purchaser—who happens to be you or me. Every thinking man knows that this is rank economic error.4
A friend of mine owns a thousand-acre farm in the Shenandoah Valley, where he raised this year 10,000 baskets of peaches. He decided to seek one buyer, and he found him in the person of a Baltimore canner, who went down to Virginia, inspected the crop, and contracted for the lot on a basis of $1 for firsts, 70 cents for seconds, and 40 cents for thirds, delivered at Baltimore. Shortly after, the market was flooded with peaches from Georgia, and the Baltimore man, seeing that the crop would be plentiful, promptly “welched” on his trade, basing his action on the absurd contention that “firsts” should be three inches in diameter, although as every one knows peaches of this size are almost never to be had. This action threw all the grower’s peaches into third class, which delivered at Baltimore would have netted him about 10 cents a basket.
In desperation he looked elsewhere, West, North, and South, only to hear the same monotonous answer from commission men, “we won’t buy, but we will handle your crop on a commission of 10 per cent.” Meantime the crop was ripening. To make matters worse the railroad levied a prohibitive price, and refrigerator cars were not to be had. Finally there was nothing left but to ship by express and trust to the commission men to treat him honestly. The final accounting showed that on his first shipment he netted 5½ cents a basket, and on his second, 15 cents, not counting the expense of picking, packing, and hauling. So much for the producer. The consumer fared no better, for he had to pay $1.25 per basket for this fruit; one of this producer’s friends actually purchasing a portion of this very consignment at that rate. The difference therefore between 15 cents and $1.25 contributes some food for thought as to the cost of living.5
Now contrast this experience of a grower having no exchange facilities with that of the Western farmer who deals directly with a Grain Exchange. The farmer can sell his crop, even though it has not been planted. Whenever he sells, and under whatever conditions, he enjoys the authoritative establishment of a price, fixed as clearly as matters are fixed in law. Moreover, the price at which he elects to sell is the best price, the fairest price, and the most scientific price that human agencies can arrive at, because it is made by world-wide competitive bidding at the hands of skilled men in Chicago, in New York, in Liverpool, in Berlin, in Odessa, and in the Argentine, all competing by cable and telegraph. Think of the confidence he enjoys, and the liberty of action; think, too, what it means to him to know that the Exchange through which he deals is a body of honorable men, governed by rules, bidding publicly under one roof.
But, you will say, this is all very well in its application to a grain or cotton exchange, but how does it apply to the Stock Exchange? You concede that scientific price-making for commodities like grain and cotton is highly necessary, but you do not see that the same necessity exists for stocks and bonds. You feel, no doubt, that the one has to do with food and raiment and is therefore indispensable, while the other merely serves to stimulate speculation and gambling, and hence is altogether unnecessary. Now, in order to explain the error in this point of view, let us first see how bits of paper, called securities, came into being.
Long after Europe had emerged from the dark centuries following the fall of the Roman Empire, the needs of states and governments impelled their rulers to resort to credit, and it was discovered that the simplest way to do it was to issue securities, that is to say, certificates of the debt. Next, it was found that in order to insure success for these operations, a market was required. Intermittent or temporary sources from which credit could be obtained was not enough; constant sources of credit were essential, and, as these constant sources lay in the savings of the people, public markets in which investors could tell the value of their investments from day to day followed as a natural course.6
As time went on—necessarily the evolution was gradual—it was learned that companies having to do with all forms of business enterprises might also be formed on the same basis. The development of the world’s business outgrew its infancy days of private partnerships, and corporate organization of necessity took their place, now that the discovery of credit, through the use of securities, had pointed the way. This corporate organization, which combines the small savings of thousands into large sums and gives to the masses an intelligent directing force at the hands of highly trained experts, depends for its existence on the sale of its securities.
In order to understand that there can be no industrial progress without the issue of securities let us consider the locomotive engine. When in the early 1800’s it became apparent that this contrivance could be used to operate an entirely new method of transportation, people looked upon it, at first, as an interesting but quite useless contrivance, because to build railroads was an expensive undertaking and nobody had enough money to finance it. The inventor’s genius was not sufficient; another power was necessary to take it out of purely scientific hands and give it practical impulse. That power was credit; the way it was obtained was through the issue of securities, and the way securities were made popular vehicles of investment lay in providing a daily market for buyers and sellers.
As a natural result, organization followed. Capital was consolidated, the rights of owners were established, a great impulse was given to various new forms of inventive genius and powerful commercial enterprises of all kinds sprang into being. With this development the market-places or Stock