If we look about us to-day we find in all the great centres of the world Stock Exchanges at work in this important field. We find that just in proportion to the confidence which a country feels in the strength and uprightness of such a market, so enterprise goes forward with vigor, and so the national wealth increases. The success of one enterprise in its appeal to public credit through the medium of the Stock Exchange invariably leads to another; thus commerce and industry develop. Securities in America alone, aggregate the enormous total of forty-three billion dollars.7
Now, as our country’s entire physical properties are valued at one hundred and thirty billions, it is apparent (after making allowances for securities that are held by holding companies and hence are duplicated in the foregoing estimates) that the nation’s securities represent more than a third of the nation’s wealth. Again, almost two million people are owners of these securities. The Journal of Commerce and Commercial Bulletin published Dec. 26, 1912, official statistics for 247 of the large corporations. This tabulation revealed the fact that the stock of these 247 corporations alone was owned by more than a million stockholders, and it is therefore quite safe to infer that the number of shareholders in all American companies approaches, if it does not exceed, two million. I think it will not be disputed that where two million people own a third of the nation’s wealth, they are entitled, just as the farmer is, to a perfectly constructed price-making machinery that will enable them to invest their savings, or sell their holdings. Having learned the difficult lesson of saving their money and the still more difficult one of increasing their surplus capital by judicious investments, are not these people entitled to the safeguards afforded by a Stock Exchange? “There is no other way in which true prices can be made,” says Mr. Horace White. “If the quotations so made are not precisely the truth in every case, they are the nearest approach to it that mankind has yet discovered.”8
Think a moment. Until the last century property and trade were so insecure that, if a man saved money, he had to hide it, or lend it through money-brokers at such usurious rates as would compensate him for what he lost in bad debts. When Dr. Samuel Johnson wrote his dictionary in 1776 no such word as “investor” was known to the English language in a financial sense. There were pirates by sea in the old days and brigands on land. “Sovereigns and nobles,” says the editor of the Economist, “extorted loans only to repudiate them; governments supplied their needs by debasing the coinage, or by issuing worthless money.”9 To-day all this is changed by banks and Stock Exchanges. Yet, despite these great inventions, capital is and always will be timid, and the small investor particularly must be protected and safeguarded in every possible way.
These small investors, no less than the large ones, require great convenience and promptness for their operations; they live in such widely remote parts of the country as to necessitate the placing of full reliance on prices made by the Stock Exchange; they must have the most accurate information; they must know that their brokers are working to obtain the best knowledge of supply and demand; they want prices fixed by the most scientific competition and by the largest possible number of competitors—brokers, speculators, and investors alike; they require a market in which they can sell and get their money at once; above all things they must know beyond peradventure that they are dealing with reputable men who uphold a fine standard of honor. These are added reasons why the Stock Exchange exists.10
If it did not exist, there would be no standard market for a large part of the country’s material wealth, indeed, as we have seen, a very great deal of this wealth could not have been created at all. At the risk of repetition let me say that the investor on the one hand, and the patent or the railway on the other hand, have nothing in common. Left to themselves, they would never meet; they would be useless, because resources and money must be brought together in order to create wealth. A primary function of the Stock Exchange is to bring them together, and by standardizing prices, create values. Similarly, the investor, without the Stock Exchange to guide him, would have nowhere to turn for a fair price secured by competitive bidding. He might turn to his local banker, or to individual and unorganized brokers, and trust to their honesty to invest his savings for him, but the local banker and the isolated broker would then be in the same position as the commission dealer and the middleman who played such havoc with that peach crop. It is painful to conceive such a situation.
Worse than that, without a Stock Exchange to create standards and define the difference between good and bad investments, very many simple people would be at the mercy of an army of dishonest promoters and bucket-shops, for the modern invention of securities has brought with it dangers and pitfalls. The United States once swarmed with these bandits—they are now rapidly being driven to cover—but they still ply their trade in other countries, where they flourish as “banks” or “investment” companies. These chaps, to quote the editor of the Economist (London), “have bought a lot of rubbish, usually called ‘bonds,’ from shaky industrial concerns or from half bankrupt states and municipalities of South America. They have bought, let us say, the 6 per cent. bonds of the Yoko Silk Company in Japan at 60, which they sell you at 90, the 5 per cent. bonds of the Brazilian Province of—— at 55, which they sell you at 75, and a few other similar bargains. They tell you that if you spread your risks scientifically over different countries you will be perfectly safe. You perhaps do not realize that none of these securities which you are advised to buy are quoted in the London Stock Exchange. If they were the game would be impossible.” Which is only another way of saying that if there were no Stock Exchanges to uphold worthy enterprises and discourage bad ones, there would be no limit to the frauds practised upon gullible investors. And if this is true of a tight little island like England, how doubly true it is in a great country like ours where investors are so widely scattered.
The foregoing pages will serve to show the inquirer that what is happening in commerce, is happening in the securities which represent that commerce. Because commerce goes on expanding, securities must necessarily keep pace and the Stock Exchange must perforce grow in importance. That much maligned individual, the speculator, now regards the whole world as his field and is eager to enter foreign markets wherever there are opportunities. In 1910 more than three billion dollars of British capital were invested in American railways alone, returning one hundred and twenty-five millions annually in interest and dividends, to say nothing of the English millions in our lands, mines, and industrial enterprises. We too are large holders of foreign securities, and the list of such holdings increases yearly. But it may be accepted as a fact that this enormous mass of corporate securities would not have found ownership had there been no Stock Exchange to market them, and standardize them, and establish daily prices for them, and give them the certificate of character that makes them ideal collateral for obtaining credit.
Dr. W. Lexis, of Gottingen, like all other economists, recognizes the fact that Stock Exchanges are economic necessities. Here are his opinions:
“The existence of a broad, continuous market is an economic necessity in the modern scheme of widespread investment of capital. Even though the market-place is largely filled with speculators, it is plain that the greater the number of traders in securities, the greater will be the facility for buying and selling any quantity of securities. The stock market is a powerful aid in floating new issues of public securities. The speculative market takes them at once and keeps them in the floating supply until they have shown their value. The stock market also renders a useful service in giving a continuous guide to the success or failure of industrial undertakings, and the worth of their securities. The more speculators there are trading in any particular security, the greater is the opportunity to learn the real conditions of the undertaking. Private investors, from a study of the speculative market in the securities they own, receive in this way a continuous market opinion on the condition of the corporations in which they are shareholders.”11
Another great service rendered by the Stock Exchange is the means it affords of readily transferring securities from hand to hand. To appreciate the importance of this fact you have but to think of the difficulties and delays that attend the transfer of other forms of property that do not enjoy Exchange facilities. Real estate, for example,