by John Brooks
The second part of the study, duly issued in July, concentrated on stock-exchange operations, recommending that brokers’ commissions on trades be lowered, that the freedom of action of specialists be drastically curtailed, and that floor traders—those exchange members who play the market with their own money on the floor itself, deriving from their membership the unique advantages over nonmembers of being at the scene of action and of paying no commissions to brokers—be legislated right out of existence through the interdiction of their activities. The third and final part, out in August, was probably the harshest of the three—and in view of political realities the most quixotic. Turning its attention to the wildly growing mutual-fund business, the S.E.C. now recommended outlawing of the kind of contract, called “front-end load,” under which mutual-fund buyers agreed (and still agree) to pay large sales commissions off the top of their investment. It also accused the New York Stock Exchange of leaning toward “tenderness rather than severity” in disciplining those of its members who have broken its rules.
If the Special Study’s rigor irritated much of Wall Street, its air of elaborate fairness was equally galling to some of the younger and more hot-eyed S.E.C. staff men, one of whom wrote a parody of Cary’s letter of transmittal that delighted no one more than Cary himself:
Sir:
I have the honor to transmit the first segment of the Old Testament. The first segment includes … five chapters … and is referred to as the Torah.
At the outset we emphasize that, although ten specific recommendations for improvements in rules and practices are made, the Torah demonstrates that neither the fundamental structure of society nor of the tribal chiefs requires drastic reconstruction.… The Torah should not impair public confidence in society, but should strengthen it as suggestions for raising standards are put into practice. Serious shortcomings are apparent (see Chapter III on Sodom and Gomorrah) and the Torah, of course, has concentrated on their analysis. Yet it is not a picture of pervasive sinful activity and in this respect contrasts markedly with the reign of Genghis Khan. …
4
All in all, the Special Study was a blueprint for a fair and orderly securities market, certainly the most comprehensive such blueprint ever drawn up, and if all of its recommendations had been promptly put into effect, what follows in this chronicle’s later chapters would be a different tale. But, of course, they were not. Once the study had been published, there began the long, tedious, and often frustrating process of fashioning the recommendations into a bill and of getting the bill passed by Congress. There were meetings of S.E.C. men with representatives of the securities business; here the chance of frayed tempers was lessened by the prominent presence among the Wall Streeters of Cary’s friend Amyas Ames. (Interestingly, Wall Street mounted no campaign of diehard intransigence against any bill such as Whitney had generaled in 1934. Three decades had passed; Wall Street and Washington had learned to live with each other, and Keith Funston, whatever his limitations, was no Richard Whitney.) Then there were endless Congressional hearings, and almost endless Congressional and bureaucratic cross-currents. The Controller of the Currency complained that the S.E.C. was trying to usurp his power over banks, Congressman John Dingell of Colorado complained that the S.E.C. was not being tough enough, and another liberal, Senator Eugene McCarthy, made a speech attacking the bill as too tough, only to recant later with the admission that he had misunderstood some of its provisions. The law that was finally passed—the Securities Acts Amendments of 1964—had two main sections, one extending S.E.C. jurisdiction to include some twenty-five hundred over-the-counter stocks (about as many as were traded on the New York and American exchanges combined), and the other giving the government the authority to set standards and qualifications for securities firms and their employees.
As far as it went, it was a good law, a landmark law, a signal achievement for Cary and his egghead crew. But it fell far short of what the Special Study had asked for. Not a word, for example, about mutual-fund abuses; no new restrictions on the activities of specialists; and nothing to alter the Stock Exchange’s habit of “tenderness” toward its erring members. Those items had been edited out in the course of the political compromises that had made passage of the bill possible. And for Cary the greatest disappointment must surely have been that the Act left the club about as private as it had been before. The New York Stock Exchange continued to have thirty-three governors, only three of them nonmember representatives of the public; and of those three, two continued customarily to be corporation heads hardly likely to be passionate proponents of the small-investor point of view. The Exchange continued to have rules and qualifications for election to its board that stacked the deck strongly in favor of “floor” members—those who never dealt with the public and often felt little concern for its welfare—over “upstairs” members, the commission brokers who were more inclined to consider the public because their livelihood depended on it. And—bitterest pill of all—there continued to be floor traders, those specially favored Exchange members who, to Cary, were the very crux of the private-club issue.
When Cary had come to the S.E.C. there had been more than three hundred Exchange members who sometimes availed themselves of their privilege of trading for their own accounts on the floor (and who, unlike the specialists, were not even responsible for maintaining orderly markets in the stocks in which they traded). The Special Study asked that their privilege be revoked out of hand. A fierce outcry—probably the fiercest against any of the study’s recommendations—arose first from the Stock Exchange and later from business in general. The sacred freedom of the marketplace was invoked, and so, at the other extreme, was the welfare of the investing public. The Exchange commissioned the management firm of Cresap, McCormick and Paget to study the problem and come up with a conclusion as to whether floor trading served the public weal or not.
Built into this situation was one of those moral absurdities that are so dismayingly common in American business life. The Stock Exchange, largely run by floor traders and their allies, had a vested interest in finding that floor traders serve a socially useful purpose. Cresap, McCormick and Paget, being on the Exchange payroll, had a vested interest in pleasing the Exchange. If a schoolmaster were to assign one of his pupils to write an essay (to be graded by the schoolmaster himself) on whether or not he was a good schoolmaster, it might be cause for merriment all around. Similar practices cause little mirth in business life because they are done all the time.
Cresap, McCormick and Paget labored mightily. One may imagine the Exchange’s gratification when the report, finished at last, concluded that abolition of floor trading would decrease liquidity and thereby introduce a dangerous new volatility into Stock Exchange trading, doing “irreparable harm” to the free and fair operation of the auction market. But perhaps the Exchange’s gratification was less than complete. The magisterial authority of the report was somewhat sullied when James Dowd, head of the Cresap team that had compiled it, stated publicly that his actual finding had been that floor trading was far from an unmixed blessing for the public, and accused the Stock Exchange of having tampered with the report before publishing it. It seemed that the schoolmaster had not entirely liked the student’s report on him, and so had exercised his prerogative to improve upon it. Cary wanted to hold S.E.C. hearings on the matter, but was voted down by his fellow commissioners.
At all events, the report as finally published did not seem to be a triumph of logical thought.
Essentially, what it said was that if a few insiders with a definable advantage over everybody else were to be ruled out of the stock-market game, the interests of everybody else would be irreparably harmed. It sounded like Alice Through the Looking Glass. But the myth of the perfectly free market is still strong, and moreover, there was a grain of truth—just a grain—in the liquidity argument in favor of floor trading. At all events, enough of the people’s tribunes in Washington accepted the Stock Exchange’s point of view to keep abolition of f
loor trading out of the 1964 Act.
Thus frustrated, Cary’s S.E.C. came to achieve through administration much of what it had failed to achieve through legislation. In August 1964, just before the bill became law, it issued stringent new rules under its pre-existing authority requiring Stock Exchange members to pass a qualifying examination before being allowed to operate as floor traders, and once qualified, to hand in after each day’s trading a form detailing each of their transactions. Whether through the threat of exposure, or the extra work, or just the insult to dignity implied in the test and the daily reports, the new rules had the desired discouraging effect on floor trading. “They sat us down with a pencil and a glass of water and handed us this test, right in the Board of Governors room,” a floor trader cried in outrage. “Our seats were even spaced far apart, so we couldn’t crib!” Shortly after imposition of the new rules, the number of floor traders on the Stock Exchange dropped from three hundred to thirty. As an important factor in the market, floor trading was finished. Cary had won through indirection.
5
On November 22, 1963, Wall Street did itself little credit. During the twenty-seven minutes between the moment when the first garbled rumors of the President’s assassination in Dallas reached the Stock Exchange floor and the emergency closing of the market at 2:07 P.M., stocks declined at their fastest rate in the Exchange’s 170-year history to erase $13 billion in values. For an ordinary citizen to react to news of a President’s death by thinking first of protecting, if not of enlarging, his personal treasure, is perhaps defensible behavior in a materialistic civilization, though it can hardly be called attractive behavior. But for investment professionals, whose jobs have a fiduciary aspect, to react similarly is not defensible. A certain small percentage of the $13 billion lost that day apparently went into the pockets of Stock Exchange members. A subsequent S.E.C. report maintained that a few specialists—among them, those who dealt in Korvette, International Telephone and Telegraph, American Motors, and American Photocopy—not only failed to perform the stabilizing function to which they were pledged but rather acted in such a way as to aggravate the decline. Asked to comment on these findings, Funston said, “Quite humanly, some people do not perform as well as others in a crisis”—a strangely mild reaction, some felt, to the stock-market equivalent of looting during a fire.
Did the pathetic, rootless Lee Harvey Oswald really kill for once and all the spirit of a proud nation? Or had the nation, having citizens who could act as some did in Wall Street, lost all unnoticed the spirit at some earlier time? Those are questions still unanswered a decade later. For the short term, the nation and its barometer, Wall Street, chose—quite humanly—to pretend that nothing irreparable had happened, that no national wound had been opened, that everything was somehow going to be all right. On November 26, the first day of business after the assassination, the market performed its symbolic function of eliminating—literally wiping out—the damage that had been done Friday, by producing the greatest one-day rise in its history. And the new President, wanting to thank someone for this timely miracle, grabbed his telephone and congratulated Funston.
The rise continued through December; 1963 ended with the Dow at an all-time high, and when the Stock Exchange trading volume for the year was added up, it, too, came to an all-time record, topping even 1929. Then came 1964, a market year for bulls to dream about, as everyone’s taxes were cut and an American space craft took the first close-up pictures of the moon and northern children went to Mississippi to spread the gospel of equal rights (three not to return) and the United States asserted itself at Tonkin Gulf (“Don’t tread on me!”) and people talked about what was “In” and what was “Out” and Johnson was elected President in his own right along with the most liberal Congress ever. In Wall Street’s little world, meanwhile: in February, the Dow went through 900; in April, Texas Gulf Sulphur hit the biggest mine of modern times near Timmins, Ontario, touching off a wild binge of speculation along Toronto’s Bay Street, and Lowell Birrell turned up in New York to face charges; in June, Funston put down a mild rebellion of Stock Exchange members against his administration, commenting jocularly that he, like a former Yale football coach, aimed to keep his constituents “sullen but not mutinous” (Exchange members quickly got in the spirit by appearing on the floor wearing buttons reading SULLEN or MUTINOUS); in August, the Securities Acts Amendments were passed, showing that God was properly in his heaven if all was not quite right with the world; in December, the Stock Exchange finally unveiled its new 900-character-a-minute ticker that could handle 10 million shares a day without delay and thus laid the ghost of the May 1962 mess; and at the end of the year it was found that so many previous Wall Street records had fallen that it was hardly worth keeping track of them any more. No one could know, of course, that 1964 would be the last year of the decade in which the market would rise in an almost straight line.
Meanwhile, Cary’s day as Wall Street’s conscience came to an end. He found himself less happy under Lyndon Johnson as President than he had been under Kennedy; Johnson had a habit of telephoning him from time to time about political matters, something Kennedy had never done. Moreover, in December 1963, Johnson called the heads of all the various regulatory agencies into the Cabinet Room of the White House and said to them, in connection with the role of regulation, “we are challenged … to concern ourselves with new areas of cooperation before we concern ourselves with new areas of control.” It was a clear enough warning to slow down and not rock the boat; and Cary, over the following months, gradually made up his mind that he had been at the S.E.C. long enough. He resigned on August 20, 1964, the day the Securities Acts Amendments became law, and was succeeded by Manuel F. Cohen, who, Johnson’s warning notwithstanding, would run a reasonably tough S.E.C. regime over the next five years. As for Bill Cary, gentle strongman or strong gentleman, he went back to his favorite parlay, teaching law at Columbia and practicing it one day a week in Wall Street.
6
In mid-1965 the market underwent a substantial correction—from 940 to 840 on the Dow, or just over 10 percent. It began in late spring, and President Johnson was soon on the phone again, asking Funston to do something about it. Funston may be presumed to have explained to the President that it was neither proper nor possible for him to control the course of stock prices; shortly afterward, Johnson is known to have called Cohen at the S.E.C. and asked him to do something. For a change, Funston and the S.E.C. had a problem in common: a President who thought the market could be made to do what he wanted it to do when he wanted it to be done.
Then on the first day of June, William McChesney Martin, Jr., once the high-level Wall Street white wing and now the respected old warhorse who had been chairman of the Federal Reserve Board since 1951, gave the principal address at a Commencement Day luncheon of the Alumni Federation at Columbia University in New York City. As boss of the Fed, Martin had long since gained a reputation as any federal administration’s dour conscience in economic matters, ever counselling unpleasant restraints on money and credit while the politicians in the White House and Congress revelled in the political hay that was to be harvested from expansionist policies that promoted stock-market booms. In particular, relations between Johnson and Martin were said to have become severely strained over this very issue. Now, at Columbia, Martin preached a ripsnorting sermon of old-time economic religion. He saw, he said, “disquieting similarities between our present prosperity and the fabulous twenties,” with the concomitant unsettling implication that the present boom might end as painfully as had the earlier one. “Then as now,” he pointed out,
many government officials, scholars, and businessmen were convinced that a new economic era had opened, an era in which business fluctuations had become a thing of the past, in which poverty was about to be abolished, and in which perennial economic progress and expansion were assured.
He spoke of the resolve of “responsible leaders” (for which it took no genius to read “Lyndon Johnson and his
economic advisers”) to prevent a repetition of 1929—“but,” he went on, “while the spirit is willing, the flesh, in the form of concrete policies, has remained weak. With the best intentions, some experts seem resolved to ignore the lessons of the past.” Getting down to specifics, he ticked off the similarities he saw between the present and the period just before 1929: then as now, there had been seven years of virtually uninterrupted economic progress, in each case following a period of disruption by war; then as now, world prosperity was unequally concentrated in the developed countries and, within them, in their industrialized sectors; then as now, private domestic debt was soaring, and the supply of money and bank credit was continuously growing with no increase in gold supply; then as now, international indebtedness has risen along with domestic, and the payments position of the main reserve money center—Britain in the first instance, the United States in the second—was shaky in the extreme. In sum, Martin saw the footprints of impending disaster everywhere. Toward the end, he shaded the picture somewhat by pointing out some differences between the two situations—for example, national income was better distributed now, wholesale prices were more nearly stable, stock-market credit was under better control. But even so, the old preacher, when he sat down, had painted the fires of economic Hell in vivid colors, and had warned sinners and blameless alike that they all stood on the edge of the descent.
The Dow dropped 9.81 points that very day. In the next three weeks it dropped another 60 points, to its lowest level in nearly a year. Wall Street began talking of the “Martin market.” Meanwhile, Johnson did not deign to take public notice of Martin’s tongue-lashing, or to alter his expansionist policies. July arrived without any apocalypse, and then the market turned around. It kept charging upward the rest of the year, passing the old Dow record of 940 in October, a month when the Stock Exchange saw its busiest week in history up to then, with almost 45 million shares changing hands. (And when had that previous record been set? At the end of October and the start of November, 1929.) The Martin market was consigned emphatically to the past—and so, it seemed, was Martin himself as a prophet.
