The Capital Of Capitalism

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True, many of the wildest schemes in which the public lost money were conducted on the various open exchanges that did not even insist, as the Stock Exchange did, that their members prove their solvency. The watering of stock was not done by the Exchange. Insiders’ plots to bull their own companies’ shares or sell short were not concocted by Exchange members, generally speaking. The Exchange was only the means by which such actions were carried out in perfectly legal ways. It was a necessary machine for funnelling capital into growing American enterprise. The manipulation of prices that went on was considered an intrinsic part of the system.

From time to time the Exchange made attempts to protect the customers. When the listed firms were first asked to file regular financial reports, some of the presidents got indignant. “The leading corporations declined, on various pretexts, to comply with our request,” a Stock Ex- change committee reported in 1877. “We found that reports even when signed or sanctioned by men of wealth and repute were often utterly untrustworthy.” By 1895 the Exchange had succeeded in getting annual reports from listed companies and in 1900 decided to demand financial information before listing a new company, though the values assigned to assets were not seriously questioned.

The fast pace, the pressure of making expensive decisions in an instant, demanded some outlet for tensions in the brokers who spent their daytime hours on the Exchange floor. Sometimes the president’s gavel would be stolen, rowdy songs sung, quotations chalked on the back of suits, hats smashed. At Christmas, brokers brought in horns and bugles or pelted each other with snowballs. During election campaigns spurious election tickets were circulated, and fake promotion circulars extolling the Great Bric-a-brac Company could always start guffaws. New members were hazed like fraternity pledges on their first day. Even the magnificence of the Exchange’s new building, designed by James Renfrew and opened in 1903, did not quell such in-group fun. And stockbrokers, with their peculiar working hours, have always been good customers for call girls and the more elegant houses of ill repute.

Toward the end of the nineteenth century a new dimension was added to Stock Exchange activity by the appearance of the trusts. J. P. Morgan’s banking firm of Drexel, Morgan had once been a rival of Jay Cooke’s for government bond business; but while Cooke’s firm failed, precipitating the panic of 1873, Morgan’s went on to greater glory. Beginning with railroads, Morgan made a specialty of reorganizations. The murderous competition he had observed in railroads seemed to call for restraint; much better to weld small units of an industry into one big combine, theoretically more economical to operate. On the basis that the whole was greater than the sum of its parts, the new amalgamations were capitalized at much more than the combined property value of the merged firms.

The new trusts brought a flood of industrial securities into the market to replace railroad shares as the prime interest of investors. The crown jewel of the trusts was the U.S. Steel Company, put together by Morgan in 1901. James R. Keene masterminded the marketing of the first batch of its $1.4 billion worth of securities.

Morgan had another brilliant idea—to develop control over sources of capital, such as commercial banks and insurance companies, and persuade them to supply funds for the new combinations. Since Morgan’s firm always got a share of the new securities in return for handling the mergers and had directors in the institutions that bought the securities, he had a double reason for supporting, if not bulling, the stock market. That is partly why the period he dominated was by and large a bullish one.

Two crises tested the skill of this autocratic genius. After the panic of 1893 he had to come to the aid of the United States government to halt the flow of gold out of the country. And when the panic of 1907 began, the forceful old man, then over seventy, departed from an Episcopal Church convention to head a rescue party for banks about to go under. Prices were falling so fast on the Exchange that its president wanted to close down. Morgan said No. He commandeered $27 million to loan to the member firms in trouble. To leave no stone unturned, Morgan arranged for the leading New York churches to put forth encouraging sermons the following Sunday. When Morgan died in 1913, the Exchange suspended trading for two hours in his honor.

The Exchange shut its doors for a longer period at the start of World War I. Europeans were rushing to convert their investments into cash, and a panic threatened. After a few months it was clear that the United States was going to prosper by supplying the Allies with arms and food. The Exchange reopened to find itself at the start of a bull market. Not only Liberty Bonds but also a wide spectrum of stocks sold well. There was a recession after the war, but since American business held on to many of the foreign markets it had acquired during the war, there was no stagnation. The stock market, after some faltering, took off at a gallop into the great days of the twenties.