by James Grant
At the turn of the century, the Stock Exchange was a private association very much like a club. It was unincorporated and therefore, as its lawyers argued, beyond the reach of the laws that regulated corporations. Its object was to provide a market (as the constitution was made to read in 1902): “. . . to furnish exchange rooms and other facilities for the convenient transaction of business by its members; to maintain high standards of commercial honor and integrity among its members; and to promote and inculcate just and equitable principles of trade and business.” The attitude of the governors was that prices on the floor were set by buyers and sellers and that the Exchange, as an institution, should be as little involved in that process as possible. They reasoned that nobody was forced to trade or to buy a seat, and that those who chose to join had necessarily agreed to abide by the constitution.[5]
Although committed to free and fluctuating prices, the Exchange believed in certain fixed standards of conduct. Regarding speech, for instance, it demanded clean talk (in 1902, in keeping with the bull market, the fine for cursing was lifted from $10 to a maximum of $50) and judiciousness in advertising. It also insisted that corporations begin to divulge more of their own affairs. It forbade the members to have truck with bucket shops, where bets were laid on the prices of stocks without the formality of the shares themselves changing hands. It prohibited arbitrage between domestic exchanges (the esoteric practice of buying and selling the same security in different markets in order to exploit the differences in price that sometimes prevailed in different cities). In fact, rarely were objectionable practices banned outright. The custom was rather to declare them “detrimental to the interest and welfare of the exchange,” a phrase which it fell to the governors both to define and to apply. The most egregious sin in the eyes of the Exchange was a breach of the rule that fixed the basic rate of commission at 12½ cents a share. For the first offense a member was liable to suspension for up to five years; for the second, to expulsion. The reporting of fictitious, or “wash,” sales was also outlawed but under milder penalty. Maximum sentence was suspension for a year. A man who was tried by the governors had the right to confront his accuser but not to retain a lawyer to defend himself at the hearing.
The start of the new century found the Exchange not only richer than ever before but also more influential. W. H. Granberry, a member of the Governing Committee, illustrated the point with some fellow members in 1906. Many years before, he said, the New York Central Railroad had announced it was moving its securities transfer offices from Pine Street, which was downtown, to 42nd Street, which was all the way uptown. The Exchange protested that the remoteness of the address would complicate dealings in the company’s securities. Cornelius Vanderbilt weighed the governors’ position and said: “It is not convenient for the New York Central to have a downtown transfer office.” And, as Granberry noted, that was that. In 1904, the transfer-office situation was again thrown into confusion by a law that was seemingly at odds with the Stock Exchange rule that every listed company maintain an office in Manhattan. The Exchange insisted that the companies take steps (inconvenient but not extralegal) to comply with its rules. Every company but the largest grudgingly submitted. At length, US Steel, which had threatened to withdraw its shares from listing, also gave way. “. . . [T]he Stock Exchange,” said Granberry, “was superior to the corporation; and I believe the Stock Exchange is superior to every corporation today.”
The Exchange’s new quarters, which were opened in the spring of 1903 (and which are still in service), were capacious enough to accommodate a growing volume of business and sufficiently imposing to satisfy the members’ rising sense of place. The building was designed by the architect George B. Post and was to be finished in 1902 at a cost of $1 million. Construction dragged on for an extra year, and costs ballooned to $4 million or so however, owing in part to Broad Street’s watery subsoil, in part to an old stone safe that could not be gotten around, and in part to an extensive series of alterations in the original plans. In one of the changes the Building Committee asked that the trading-floor telephones be installed at the New Street entrance and not, as Post had them, at Broad Street. The New Street variation would save five feet of floor space, the committee said, and not incidentally make it unnecessary for the telephone clerks to clutter up the members’ entrance. Post agreed. Earlier in the planning, the Exchange had played with the idea of making the second floor the trading floor and of renting the first to banks. When it was pointed out that a crush for the elevators might develop in a financial panic, trading was restored to terra firma. (As a writer at the time put it: “Accessibility to the street and generous egress thereto from the Board Room [trading floor] was emphatically demanded.”) Bearing in mind the anarchist bombing of the French Chamber of Deputies in 1893, the Exchange decided it could do with less space in the visitors’ gallery.
The trading floor was expanded by 60 percent, however, more light and ventilation were provided, a new safe of 776 tons was built, and on Broad Street, above six Corinthian columns, a group of marble statuary was mounted of which the central figure symbolized Integrity. For the members’ convenience a complete emergency hospital was established on the fourth floor and baths were provided in the basement. On the day of the grand opening, April 22, 1903, confetti and ticker tape fluttered from the windows of the buildings nearby. At the Stock Exchange, the new boardroom was decked in palms and floral pieces and American flags. Just after 11 a.m., to general applause, J. P. Morgan made his way through the crowd to the speakers’ platform. The Reverend Dr. Morgan Dix of Trinity Church offered the invocation—“The silver is Thine and the gold is Thine, O Lord of Hosts . . .”—and Rudolph Keppler, president of the Exchange, described the construction as a feature of the national destiny. It was, he said, “. . . but one of the many astounding changes that typify our onward march toward supremacy, and give lasting and monumental expression to the unexampled progress and prosperity with which our beloved country has been blessed.” A congratulatory statement from the oldest member was read, and with that, three cheers were given, Morgan being in especially strong voice.
It was easy enough for progressive critics to point up the inevitable lapses between what the Exchange professed and what it did: for example, the occasional blatant manipulations or such self-serving practices as that which gave the members first call on the proceeds of the sale of a bankrupt member’s seat. However, what distinguished the Stock Exchange was not so much its laxness as its honor. At least in professional matters, a member was expected to be as good as his word.
A public-relations disaster but a financial boon to Wall Street in the 1890s was the rise of the large industrial company, or “trust.” At the start of the decade the stock market was mainly involved in railroads, and as late as 1900 the bellwether New York Stock Exchange trading issue was the Missouri Pacific Railroad; the industrial company was an odd fish. In the early 1890s the most actively traded industrial was the National Cordage Company, a would-be rope monopoly that hanged itself (as everybody said) on the eve of the Panic of 1893. Public feeling against the trusts ran high, and the Cordage collapse shook even professional Wall Street. The day after the announcement of the Cordage failure, the shares of General Electric Company, suffering in sympathy, dropped to $58 a share from $84. In the long depression, merger activity—the consolidation of small companies to exploit the economies of large-scale production and ultimately, the promoters hoped, to monopolize—declined. It resumed again in the McKinley bull market, which served as a greater incentive to merge and to issue new securities than the Sherman Act proved a deterrent. In 1894 The Wall Street Journal had deemed only two industrial securities important enough to include in its twelve-stock average: American Sugar and Western Union. By 1896, it had compiled an average entirely of industrials, as follows: American Cotton Oil, American Sugar Refining, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal & Iron, US Leather
(preferred), and US Rubber. Beginning its career at 40.94 on May 26, 1896, the Dow Jones Industrial Average slumped by August 8 of that year to 24.48, its all-time low; but three years later, in the summer of 1899, it had more than tripled, to 77. “Every conceivable line of manufacturing had its trust,” a historian of the period wrote. “Conservative bankers, shrewd business men, and doctrinaire economists became infected with the virus of large-scale production. People condemned the trusts one moment and bought their securities the next. It was the harvest time of promoters.”
There were amalgamations in copper, glue, hay, steel, flour, needles, thread, elevators, and envelopes, among other lines of business. Some redeemed the hopes of investors. Thus in 1898 came Otis Elevator and International Paper; in 1899, American Smelting & Refining and United Shoe Machinery. Others fell flat, vindicating only the axiom that business involves risk. The American Bicycle Company, for example, which had won a commanding position in two-wheeled transportation, failed in 1902 in an attempt to manufacture automobiles. A study of thirteen major consolidations of the period found that, over the course of nine years, seven of the companies returned something to the stockholders in dividends and capital gains (standout performer: United Shoe Machinery, up 22.7 percent a year) while six did not (including, unexpectedly, Allis-Chalmers and American Can). One curious flash in the pan was the United States Flour & Milling Trust. The stock was offered to the public on September 11, 1899, at $51 a share. On September 20, it broke 32 points, from $56 to $24 a share, on negligible trading volume. By February 1900 the corporation was bankrupt.
In railroads too the 1890s were a time of consolidation, but the mergers were typically the result of distress, not prosperity. In 1894, at the end of the panic, the Interstate Commerce Commission reported that 192 railroad corporations were bankrupt, representing a combined capitalization of $2.5 billion, no less than a quarter of the par, or face, value of all outstanding railroad bonds and stock. “This, as a record of insolvency,” the commission said, “is without parallel in the previous history of American railways, except it be in the period from 1838 to 1842.”
Among the causes of failure was always and by definition an unsustainable burden of debt. The Union Pacific, for example, which succumbed as a result of overall bad management, and the Norfolk & Western, which suffered from overexpansion, had scarcely made ends meet before the depression. In 1892, each earned just 5 percent more than what it owed its creditors. When income slipped below that slender margin each was a bankrupt. The failed lines all needed new financing and lower fixed charges, which meant that the security holders, many of whom were British and understandably out of sorts over the turn of events in America, had to agree to make do with less. To devise a satisfactory plan and make it stand up was typically the work of J. P. Morgan and his detail-minded staff. Not until 1897 did another up-and-coming railroad man, Edward H. Harriman, make a serious bid for the Morgan reorganization business. From the point of view of corporate finance, the 1890s were very much the Morgan epoch.
What was new in the railroad debacle was its scale and the correspondingly greater size of the corporate units into which the surviving lines were merged. In 1887, only twenty-eight railroads controlled one thousand or more miles of track; by 1896, there were forty-four. The proportion of the nation’s track miles held by thousand-mile roads climbed to 57 percent from 44 percent. The wave of industrial consolidation that had broken at the turn of the century found its counterpart in railroading: between July 1, 1899, and November 1, 1900, more than an eighth of the country’s railroad mileage was “absorbed in various ways,” as the ICC noted. “At the beginning of the decade,” a chronicler of railroads wrote, “there had been innumerable great independent systems, each with its own group of subsidiaries, but each competing against rival systems in the same regions. At the end of the decade there were practically no independent systems; the various systems had been drawn into a few huge combinations which were dominated by a single man or a small group of men working in harmony with each other.” Thus in the South, the Atlantic Coast Line, the Southern, and the Seaboard Air Line had emerged under the domination of Morgan. Before the depression, five transcontinental lines had vied for business; as the new century opened there were two, the northwestern roads under Hill’s control and those to the south under Harriman’s. By 1902, the ICC was worrying about monopoly instead of ruinous competition, while the surviving lines were beginning to have cause to worry about the ICC.
As new lines succeeded old, brokers like Baruch applied themselves to the complicated study of which securities should be bought and sold. It was easy to believe that railroads were so deeply mired in law and reorganization that nothing of value would ever come out of them again. Construction, by late in the decade, had almost stopped; some 70 percent of railroad common stock paid no dividends. In the event, however, reorganizations were effected, railroad vital signs, by 1900, began to return to normal and the optimism of those who saw opportunity in distress was amply rewarded. Railroad bonds, declared Henry Clay Frick, in this happier time, were the “Rembrandts” of investments.
The railroad reorganizations bore the stamp of a long-running trend in American finance: a decline in long-term rates of interest. In the last quarter of the nineteenth century, rates paid to depositors at savings banks, for example, fell from 6 percent to 3½ percent. The prices of bonds that paid a relatively high rate of interest accordingly rose. Chicago & Northwest Railroad 7 percent bonds, for instance, appreciated in value from $830 to $1,450 in about twenty-five years. At the lower price, the issue yielded about 8½ percent; at the higher price, less than 3½ percent. In the 1890s it could be reasonably assumed that interest rates would continue to fall, and that, according to the mathematics of bond prices, long-term issues would appreciate more than short-term ones. The hapless holders of defaulted railroad debt, having had no choice but to settle for lower annual interest payments, asked for, and often received, as a kind of consolation, longer maturities. Until the reorganizations of the 1890s, bonds of forty years or more were comparatively rare in America. Now they became commonplace. Hundred-year bonds were forthcoming from the Reading & Atchison and 150-year bonds from the Northern Pacific.
The bond market in those days was almost a perfect inversion of what it was later to become. At the turn of the century the risk to bondholders was default—that the railroad in which they had invested would fail—or the early redemption of sound securities, and not, as in the 1970s, the risk of a general destruction of values by inflation. Even amidst the currency turmoil of the middle 1890s the trend to lower long-term rates continued. Nowadays all maturity classes are volatile; then, only the market for short-term money. The currency was, as the phrase went, “inelastic.” When the demand for funds increased at crop-moving season, no Federal Reserve System was on hand to lend to hard-pressed banks. By the same token, no Federal Reserve was available to buy the Treasury’s debt with money it had created out of thin air just for that purpose. The price of short-term money, therefore, varied with supply and demand, occasionally shooting up to 100 percent and even higher on the Stock Exchange in a panic and receding to 1 percent or 2 percent in quiet times.
The strength of the long-term bond market was a mirror image of the health of the dollar. At the turn of the century the currency was sturdy to a fault. Between 1893 and 1896, farm prices fell by 22 percent, indicating a proportional rise in the value of money in terms of commodities. This was the inflationary arrangement reversed. In the South and West a cry went up for silver, a cheaper and more plentiful monetary metal than gold and one calculated to bring higher prices. In the East, sentiment opposed inflation and favored gold, the existing standard of money. Since 1879 the dollar had been convertible into gold at a fixed price: $20.67 an ounce. A tribute to the Republic’s finances under the gold standard was that this right of redemption had been largely unexercised. Between 1879 and 1893 just $34 million of Treasury notes had been turned in for gold. Paper was preferred on simp
le grounds of convenience. In March and April of 1893, however, the public began to demand gold itself. What caused this shift were two laws, one of which was Gresham’s. It held that bad money drives good out of circulation. The other law, passed by Congress, directed the Treasury to buy silver, which was depreciating in value, with paper, and to offer to redeem the paper with gold. Accordingly the public descended on the Treasury. In 1888 the government’s gold reserve had exceeded $200 million. In 1895, it briefly sank to $41 million.
Although the act to require silver purchases was repealed in the fall of 1893, the run on the Treasury’s gold continued. Not only was more gold going out; as the depression deepened, less was coming in. The silver agitation was not quelled. Foreigners, appalled by the mismanagement of the Atchison, Topeka & Santa Fe, among other large railroads, exchanged American securities for gold. Twice in 1894 the Administration sold bonds to restore the Treasury’s gold reserve, but no sooner was more paper issued than it too was redeemed in an “endless chain.” In 1895 the Administration enlisted Morgan and August Belmont to obtain gold from abroad. In 1896 more bonds were sold, a total, in three years, of nearly $300 million. (A vast sum: in the 1890s the federal government’s annual outlays ran in the neighborhood of $350 million; in 1899, when bills for the Spanish-American War were falling due, spending barely topped $600 million.) The Democrats in 1896 contentiously produced the champions of both sides of the silver issue. President Cleveland, who had saved the gold standard, was repudiated by his party for Bryan, the arch silverite. But Bryan, in his turn, was defeated by William McKinley, a Republican, and the gold standard was saved again.
