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CHAPTER XXV

WALL STREET AND WALL STREET BANKERS

NEW YORK knows values. Some uncharitable people say it knows nothing else. New York is a great mart, where he who has anything to sell, intellectual or material, may find a market. New York in the long run is eminently just in the valuation it puts on men and property. Everything is weighed in the balance. Wall Street knows money. It knows the present and potential value of money. It is a great reservoir and mart of liquid capital. It analyzes every proposition involving money and its judgment is almost unerring. Like money itself, Wall Street is cold, impassive, impartial, and judicial. It studies men and money and deals in both.

There are two kinds of Wall Street bankers; sellers of bonds and bank officers.

The sellers of bonds are partly retailers of bonds, partly promoters, and partly financial doctors of decrepit corporations. In time of war or after a war they also promote sales of government bonds, foreign and domestic. They are not cheap men in resuscitating comatose corporations. But they are necessary and useful. They can raise capital by making up underwriting syndicates or furnishing the capital themselves. They always aim to sell, so as to have their capital free. Bond selling is the life of their trade. They will also handle stocks if the pay is good. They are in close touch with banks, to borrow money on bonds as collateral. Hence they are directors in banks, trust companies, and insurance companies vast reservoirs of liquid capital. There is great community of interest between bond houses and bank officers. Each furnishes recruits for the other.

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During the past twenty years a new mode of underwriting and selling bonds has arisen. Companies for that sole purpose have been formed by great banks and trust companies, with the control tied up with the bank or trust company. That practically puts the bank or trust company into the underwriting and bond selling business.

Now all this is necessary if money is to be supplied to American industries and foreign governments. London formerly furnished that money and still furnishes much, but not so much as Wall Street. The system is now established. Moral responsibility is gradually putting the business into the hands of reliable bond selling corporations, allied to banks and trust companies. Personal speculation is being decried. Financial scandals, incident to the formative period of all industries, occur, but the bond houses are becoming more conservative and reliable.

Wall Street is the natural home of the promoter. There will be found the adventurer from every state and from abroad. "The Street" is a vast reservoir of cash and besides can sell securities all over the country. It is a lure for the whole world, including foreign governments. Bankers are sometimes drawn into the maelstrom and not always to their credit. The fact is that banking has no legitimate connection with promoting. Nor are bankers qualified to direct the policy and operations of railroads and industrial institutions. The business of bankers is the receipt and loaning of deposits. The London Statist well says, "Experience has demonstrated that no banking house can perform the double task of carefully and impartially weighing the claims of borrowers of the savings of the investing public and of directing the affairs of every large borrower it assists to obtain capital from the public."

Bankers in control of a corporation always want to be doing something, in making the stock active or buying something or selling something or issuing notes, stocks, or bonds. Wall Street delights in changing, consolidating, reorganizing, and recapitaliz

ing old and new concerns and combinations. It is a mistake to think that Wall Street wishes to control industry or government merely from ambition to control. Wall Street wants control to make money. Wall Street always wants to buy something, change it and then sell to the public, whether the property be a factory or a railroad. Wall Street sometimes strikes below the belt, and will wait for years to accomplish its purpose by detecting or creating a vulnerable spot in the armor of its victim. Then it is ruthless, as cruel as Moloch. Money is the God. Wall Street never attacks a full grown wolf, but will devour a crippled one, shot from the sled.

The speculative element of Wall Street is responsible for two recent corporate innovations - no par value stock, and depriving stock of its voting power. No par value stock enables promoters to issue a million shares for one hundred dollars received by the corporation. It creates a corporation without a corpus. In one recent case the promoters issued seven and a half million no par value shares, but they evidently overshot the mark and so reduced the shares to one and a half millions. Now the objection to all Under the old system

this is that it renders fraud easy and safe. where stock had a par value fraud in the issue of stock involved more or less liability. The issue of no par value stock for property is not fraud in itself but it is wonderfully well adapted to selling the stock safely to the public at a fraudulent price. It leads to stock gambling and unfair practices by which the promoters sell out to the public and vanish with the profit. The old system of watered stock was bad enough, but here the stock may be all water and the corporation a financial myth.2

So also as to that other ingenious invention of depriving stock sold to the public of a vote at corporate meetings, thus confining the voting power to stock held by the promoters. This enables no par value promoters to bottle up the control and then hold the bottle. This is power without risk of loss. The other stockholders have no vote and hence cannot turn them out.

Meantime the investor is separated from his investment and has no mortgage to protect him. The promoters can keep the control until they can sell out at a high price and again vanish with the profit. Professor Ripley attacked this whole scheme and at once the conservative element in Wall Street, acting through the Stock Exchange, responded by announcing that there is a limit beyond which this practice as to common stock might not be sanctioned by listing on the Exchange. A few days later, on March 3, 1926, the Interstate Commerce Commission in disapproving the proposed Nickel Plate, Erie, Chesapeake and Ohio, Pere Marquette consolidation, said as to depriving the preferred stock of a vote: "We cannot escape the conclusion that the plan was arranged with the intention of keeping control in the hands of its proponents even though their interest is a minority one in fact. Such an arrangement is not in accord with sound railroad practice. The Nickel Plate is the only railroad of importance in the country in which preferred stockholders do not have the right to vote, and now it is proposed to extend this feature to over $155,000,000 of new stock of a company comparable with the New York Central, Pennsylvania, and Baltimore & Ohio. The common stock of the New Company will not greatly exceed $174,000,000 out of a total capitalization of over $950,000,000. We believe it to be self-evident that the public interest requires that the entire body of stockholders of a railroad which is bonded in excess of one-half of its investment, and not a powerful few, shall be responsible for its management. This can be done only by giving them the power to control the management. The lethargy of ordinary stockholders in exercising their power to control the management of these large corporations has often been commented on, but nevertheless the power should be in their hands to use as they see fit. It is inimical to the public interest to strip stockholders of their voting power, thus rendering it so much easier to control a great transportation system by a comparatively limited amount of investment." 1

The sharpest teeth of Wall Street were pulled by the Federal Reserve Bank Act. Formerly the great capitalists at a time when loans were excessive and topheavy would suddenly through control of the banks tighten the purse strings, call the loans, demand more collateral, raise the rate of interest (sometimes to a third of one per cent a day) and when the unlucky borrower could not respond sell out the collateral on a rapidly falling market, and the capitalists would be there to buy at a low figure. This was called a "panic." It certainly was a thunderstorm that carried down everything weak. The Federal Reserve Banks now render such spoliation impossible. Those banks stand ready to furnish money when frantically needed and then gradually force liquidation because speculation is excessive. There have been no panics since that Act was passed and there will be no more except possibly in a world cataclysm.

Wall Street has the reputation of being grasping and hard.

Grasping it has been and to some extent still is. Forceful men with great opportunities are always so in a formative state of industry. Later such acts relegate the doers to the category of promoters and adventurers. Men love power, and wealth is power. In a crude way display of wealth gratifies vanity and social ambition. The sordid grasping spirit, however, sooner or later becomes a reproach. The bond houses and bond companies will always take what they can get and get what they can, but competition is reducing their commissions and underwriting charges. Large issues of bonds and stocks cannot be floated without them and they know their power. To some extent they combine, but no anti-trust law is necessary to keep them apart. Their camps are those of an armed truce. They are grasping, but competition keeps down the price. As the world goes the commissions charged by Wall Street for buying and selling securities are not excessive from one to five per cent. The corner grocer and butcher takes from fifty to one hundred per cent with little capital and less brains. And the Wall Street houses guarantee

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