QUESTIONS FOR DISCUSSION 1. How do you account for the pre-eminence of Great Britain in the field of foreign investment? 2. Indicate the economic consequences of British foreign investments to (a) Great Britain, (b) to the countries in which the investments were placed. 3. State the essential principle of the investment trust. 4. Does the investment trust always sell its own obligations to an investing public? 5. What is the security of an individual who invests in foreign securities through the intermediation of an investment trust? 6. Enumerate the factors which led to a shift in America's financial position during the war from a debtor to a creditor nation. 7. Review the last part of chapter viii on the effect of the war on the European exchanges and then summarize the causes of the present depreciation of foreign exchange. 8. Look up the present exchange rates on the leading European countries. Compute the effect in each case on the cost of imported goods. 9. Just how would the development of American investment trust affect exchange rates? 10. State the important principles of the Edge law. 11. Describe concretely what security you would have in purchasing one of the bonds of an institution organized under the Edge law. 12. What regulation and supervision do you think is needed for the control of investment trusts? 13. Two schools of thought have developed in connection with the relationship of America to European reconstruction: one holds that vast loans must be made by the United States to Europe; the other that the only remedy for the situation is European thrift, hard work, and the early development of favorable trade balances for the European belligerents. With which do you agree? 14. "To grant large loans would be an unwise and uncharitable policy for all parties concerned, because it would push nearer the precipice both debtor and creditor country instead of leading them in the opposite direction toward gradual recuperation." Discuss 15. "Europe cannot greatly increase exports without large imports of raw materials, and prices of raw materials are prohibitive in view of present exchange rates." What would be your way out of the dilemma? 16. What effect would the cancellation of indemnities and international debts have upon exchange rates? Would you favor such cancellation? 17. "For the vast number of American consumers, a recession of prices is of infinitely greater importance than boosted exports sold at high prices to purchasers whose natural limit of credit has been fairly exhausted." Discuss. 18. What conclusion do you draw from a study of the chart on page 271 showing the shift in the world's gold supply during the war? 19. Do you conclude that the emergence of the United States as a creditor nation is an unmitigated good fortune? REFERENCES FOR FURTHER READING America's Opportunity. A booklet published by the Mechanics and Metals National Bank, New York. Foreign Financing under the Edge Act. A pamphlet published by the Guaranty Trust Company of New York. Kahn, Otto H.: Impressions from a Journey in Europe. A pamphlet distributed by the Committee of American Business Men, 47 West 34th St., New York. Keynes, J. M.: The Economic Consequences of the Peace, chaps. v-vii. Vanderlip, Frank A.: What Happened to Europe? Warburg, Paul M.: "Europe at the Crossroads," Political Science Quarterly, December, 1920. CHAPTER XVI THE STOCK EXCHANGE AND CAPITAL RAISING In the chart on page 136 showing the financial institutions. associated with the raising of capital under modern conditions, the stock exchange was placed at one side and designated "a great central market place." The reason for this, as already indicated, is that the exchange is not a direct intermediary between the borrowing corporation and the lender of funds, its services being rather of an indirect nature. We shall find, however, that the stock exchange is of vital importance to practically all of the institutions that make up the financial structure of society. In considering the importance of the stock exchange from the point of view of capital raising, it will not be pertinent to enter upon a discussion of the evils of speculation, manipulation, "wash sales," the ethics of future trading, the system of "puts and calls," etc. The purpose here is merely to reveal the part that the stock exchange actually plays in connection with the process of capital raising. I. HISTORY OF STOCK EXCHANGES The rise of stock exchanges is directly associated with the development of the corporation as a capital-raising device. From the moment shares of stock were issued by corporations, trading in them by both investors and speculators began. "No sooner were there bits of paper to deal in than jobbers or brokers sprang up to handle them, and by natural gregarious processes these dealers gathered in one spot." The nature of the earliest stock speculation in England is described in the quotation from Bagehot given on pages 144-46 above. Twenty years later there developed a great speculative mania, which culminated in the South Sea Bubble of 1717. In this early speculation jobbers and brokers first congregated on the rotunda of the Bank of England and at the Royal Exchange, which had been established for the purpose of exchanging abraised and clipped, foreign and domestic coins. Later, as the business expanded, neighboring streets and coffee houses were utilized, and Exchange Alley, Old Jonathan's Coffee House, Corn Hill, Lombard Street, and Sweeting's Alley became the centers of activity. When Old Jonathan's burned down in 1748, New Jonathan's, located in Threadneedle Street, succeeded it. By common consent of the brokers who traded there, New Jonathan's was converted in 1773 into The Stock Exchange, which was "wrote over the door." The New York Stock Exchange, as at present organized, is the result of more than a century of evolution. The first organization of stock brokers in the metropolis dates from 1792, though it was not until 1817 that the organization assumed a very definite form. The rules and regulations governing its operations have been modified and extended from time to time to meet the changing requirements of a rapidly expanding industrial and financial system. The New York Curb, or outside market, really antedates the New York Stock Exchange, the latter indeed having been an outgrowth of street trading in the eighteenth century. Long before the organization of the Stock Exchange in 1792, a group of brokers was accustomed to congregate daily around a tree in the old-time financial district of New York and there execute orders for customers. The incorporation of these brokers into a formal organization did away for a time with outside trading; but under varying conditions and more or less continuously there has been curb trading throughout the nineteenth century. It was not, however, until the great development in stock operations, brought about by the great era of corporate development and financial consolidation beginning about 1898, that the Curb market became of real importance. It now affords a public market place where persons can buy and sell securities which are not listed on any organized exchange. The Consolidated Stock Exchange was organized in 1875 for trading in mining securities; but it altered its name, as well as the scope of its business, in 1886. At the present time by far the greater part of the trading on the consolidated exchange is in securities that are listed upon the New York Stock Exchange. The Consolidated also deals in shares, however, that are not listed on the main exchange, as well as in certain mining securities that are excluded therefrom. It further differs from the big exchange in that it makes a specialty of broken lots, that is, transactions in less than one hundred share units, which is the minimum on the regular exchange. The average annual sales of shares of stock on the New York Stock Exchange in the decade 1899-1909 was 196,500,000, at prices which involved an annual average turnover of $15,500,000,000. During this same decade bond transactions averaged about $800,000,000 a year. This is at the rate of about 650,000 shares per day of a par value of $100 for stock, and about 260,000 one-hundred-dollar bonds. During the great stock market activity of the summer of 1919, as high as 2,000,000 shares were traded in a day, while for many weeks the daily sales never were less than a million shares. Curb transactions were roughly as follows for the year 1908: bonds $66,000,000; stocks, of which 90 per cent were industrials, $46,595,000. The sales on the Consolidated Exchange average around 50,000,000 shares per annum. II. THE ORGANIZATION OF EXCHANGES The New York Stock Exchange is a voluntary association, limited to 1,100 members, of whom about 700 are active. Of the remainder, some are residents of other cities. Memberships on the Exchange have usually been sold for about $80,000, though a record of more than $100,000 was recently established. Numerous prominent capitalists hold memberships merely for the purpose of availing themselves of the reduced commission charges which the rules authorize between members. The Exchange as such does no business; it merely provides facilities to members, and regulates their conduct, insuring that all |