the value of a security depends mainly upon (1) the rate of interest, (2) the safety of the principal, and (3) the likelihood of the principal or the rate of interest either rising or falling. These are the main causes of a rise or fall in securities.

But the business of the Stock Exchange operators is to endeavor to forecast and discount in advance the natural fluctuations of intrinsic value. In the old days before the telegraph, fortunes were made by getting early information, or spreading false information of victories and defeats, which would enhance or depress the price of stocks. The first Rothschild laid the foundations of his immense fortune by getting early news of important events. Nowadays the principle is still the same, but the art of anticipation has been made. much more doubtful and complicated. Telegraphs and telephones are open to all. What everybody reads in his morning paper is of no particular use to anybody in a speculative sense. Besides, many foreign governments keep large funds in London and Paris for the express purpose of supporting the market. Hence in the market for Government bonds, big movements are rare.

When we come to the prices of railroad and industrial stocks the causes of movement are much more difficult to detect, and the possibilities of making large profits by inside knowledge is much greater. The newspapers may be the conscious or unconscious tools of the manipulators. In new countries the banks are likely to be a working part of the speculative machinery. Thus in the United States those who use great fortunes in finance frequently have a controlling interest in a bank. What is called a "community of interest" may be established which will control important railroads and huge industrial corporations, as well as a number of banks and trust companies. The various ways in which such a community may manipulate a susceptible market like Wall Street might be made the subject of a long and fascinating volume.

Suppose that a powerful group wishes to create the appearance of a general trade depression in the United States. To do so is not at all impossible. The controlled railways may announce and even partially carry out a policy of reduced orders for rails, equipment, and repairs. They may ostentatiously proclaim an addition to the number of idle cars. Well-disciplined combinations of steel and textile mills may declare a curtailment of production. Banks may suddenly become ultra-conservative; the open accounts and credits of small speculative customers may be closed. In this way a general. feeling of despondency can be created. Stocks will fall, partly in consequence of the action of the banks, causing a compulsory liquidation of speculative accounts, partly through the voluntary action.

of speculators who think that trade, earnings, profits, and dividends are likely to decline. Thus a bear market is created. The syndicate can now employ huge funds to advantage in profitable purchases of those stocks and shares which fall most and are most responsive to ups and downs. Such a policy of course represents great difficulties and dangers. It must be carried out very cautiously and very secretly, and very honorably as between the members. And if it is too successful it may create a slump, or a panic, in which the community of interests may itself be seriously involved. For these and other reasons American operators and manipulators do not frequently enter upon a concerted plan for colossal bear operations. Such a scheme is unpopular. It offends public sentiment. A long bearish movement, accompanied by unemployment, reduced earnings, and economies in expenditure, produce all manner of unpleasant consequences, economic, social, and political. In fact big men often boast that they never operate upon the short side, never play for a fall.

Such a movement as that sketched above is comparatively rare, cautious, and temporary. Wall Street has of course to wait upon circumstances. Sometimes it is caught by the circumstances. But it must always try to adjust itself to economic and political conditions. A political assassination, a war, a movement against the trusts, unfavorable decisions in the courts, an unexpected downfall of the favourite political party, a catastrophe like the San Francisco earthquake such events as these may produce an irresistible flood of liquidation against which the strongest combination of bankers and corporation men will struggle in vain. In a general scramble produced by some unexpected event there is more likely to be a general loss than a general profit. For in the history of speculation the unexpected event is usually a calamity.

Real prosperity is built up gradually. The Stock Exchange anticipates and exaggerates it, until the speculative fabric has been reared so high above the real foundation that a crash is seen to be inevitable. Generally speaking, because of superior knowledge, the insiders are able to unload at high levels, just as they have been able to load at low levels. So, by speculating in stocks of a national size and significance, the outside public loses more than it gains. It begins to buy when they are dear, and it begins to sell when they are cheap.

For purposes of scientific analysis we may rest the theory of Stock Exchange quotations upon a distinction between prices and values. Prices are temporary; values are intrinsic; they move slowly. The price represents the momentary market value of a stock

or bond. The value is the real worth, a thing undefinable and impossible to ascertain. If the real value were ascertainable and available to the public then price and value would be identical, and in the case of gilt-edge securities, the two are as nearly as possible identical. But intrinsic values themselves change like everything else in the world. They depend mainly upon (1) the rate of interest, (2) the margin of surplus earning power or revenue.

Both stocks and bonds are also affected in their intrinsic value by the money market and the relationship of the supply of capital seeking investment to the demand for capital by new flotations. The intrinsic value of common stock depends also upon the actual efficiency of the corporation, the condition of its plant, the skill of its management, and the contentment, intelligence, and industry of its whole staff.

Of course all these changeful elements of intrinsic value enter into prices. But as prices sometimes fluctuate violently, it is obvious that they must also be affected by other causes. These may be summed up under two heads: (1) False rumors, which have got about either by design or through the carelessness or mistakes of newsmongers; and (2) Rigs, pools, combinations, and other technical devises, by which the market is either flooded with, or made bare of, a particular stock or group of stocks.

88. The Functions of Exchanges11

BY CHARLES A. CONANT

The fundamental function of the exchanges is to give mobility to capital. Without them the stocks and bonds of the share company could not be placed to advantage. No one would know what their value was on a given day, because the transactions in them would be private and unrecorded. The opportunities for fraud would be multiplied a hundred fold. The mobility for capital afforded by the corporation would be meager and inadequate if the holder of its bonds and shares did not know that at any moment he could take them to the exchanges and sell them. The publicity prevailing in stock-exchange quotations gives the holder of a security not only the direct benefit of publicity, but the opinion of the most competent financiers of Europe and America. If they were dealing with him privately, they might withhold the information. But the

"Adapted from Wall Street and the Country, 88-116. Copyright by the author (1904).

quoted price stands as a guide to even the most ignorant holder of securities.

The second benefit is in affording a test of the utility to the community of the enterprises which solicit the support of investors. The judgment of experts is there expressed, through the medium of price, on the utility of the object dealt in. If an unprofitable railroad is built in the wilderness of Manitoba, the investor does not have to hunt up information on the freight and passengers carried: he has only to look at the quotations on the New York Stock Exchange to know at once the judgment of experts on it as a commercial venture. If the investor finds that the stocks of cottonmills are declining, he makes up his mind that there are no further demands for cotton mills. If stocks are exceptionally high, he knows that the public demands more cotton mills, and that an investment in them will prove profitable. All this information is put before the investor in a single table of figures. It would be practically unattainable in any other form. Thus there is afforded to capital throughout the world an almost unfailing index of the course in which new production should be directed.

Suppose for a moment that the stock markets of the world were closed, that it was no longer possible to learn what concerns were paying dividends, what their stocks were worth, how industrial establishments were faring. How would the average man determine how new capital should be invested. He would have no guide except the most isolated facts gathered here and there at great expense and trouble. A great misdirection of capital and energy would result. The stock market is the great governor of values,the guide which points the finger to where capital is needed and where it is not needed.

The very sensitiveness of the stock market is one of its safeguards. Again and again it is declared in the market reports that certain events have been discounted. As a consequence when the event actually happens, it results in no such great disturbance to values as was expected. Is it not better that this discounting of future possibilities should occur? Is it desirable that capital and production should march blindly to the edge of a precipice and then leap off, instead of descending a gradual decline? This discounting of the market enables the man who holds a given security to convert it into money without being ruined. It enables the prudent man to hold on to his securities and even to buy those of the frightened and more excited.

Another important influence of the stock exchange is that which it exerts upon the money market. The possession by any country

of a large mass of salable securities affords a powerful guarantee against the effects of a severe money panic. If in New York there arises a sudden pressure for money, the banks call in loans and begin to husband their cash. If they hold large quantities of securities salable on the London or Paris or Berlin market, a cable order will effect the sale of these in an hour, and the gold proceeds will soon be available. These securities prevent sudden contraction and expansion in the rate of loans. This influence of the stock market. has much the effect of a buffer upon the impact of two solid bodies. Crises are prevented when they can be prevented, and when they cannot they are anticipated, and their force is broken. Securities are in many cases better than money. If a large shipment of money has to be made from New York to London, it is much more economical to ship securities of the same amount than to ship kegs of gold. Credit is forwarded by cable and the securities follow by mail. All markets are thus brought into touch with each other, and respond to a fluctuation of a fraction of one per cent, but without the confusion and crash which would ensue if every sudden pressure for money was felt upon a market naked of such securities.

There is another important consideration in this influence of the stock market upon modern society, which will perhaps gather up and bring into a clearer light some of the other points which have been made. The stock market, by bringing all values to a level in a common and public market, determines the direction of production in the only way in which it can be safely determined under the modern industrial system of production in anticipation of demand. It does so by offering the highest price for money and for the earnings of money at the point where they are most needed. It is only through the money market and the stock exchange together that any real clue is afforded of the need for capital, either territorially or in different industries. Capital is attracted to securities that are selling high because the industries they represent are earning well. Consequently there results a closer adjustment of production to consumption, of the world's work to the world's need, than would be possible under any other system.

89. The Experience of Germany with Stock Exchanges??

In 1892 a commission was appointed by the German government to investigate the methods of the Berlin Exchange. The regular business of the Exchange embraced both securities and commodi

22 Adapted from The Report of the Hughes' Committee (N. Y.) on Speculation in Securities and Commodities (1909).