from the commercial banks. This they are enabled to do only because the stocks and bonds in which they are dealing are a satisfactory collateral security for bank loans, in consequence of their ready salability through the mechanism provided by the stock exchange. In case the underwriters elect to dispose of their holdings, it is obvious that the stock market provides the opportunity.

The securities that are unloaded by the underwriters, moreover, become subject to speculative activities, largely through "margin" trading, with the commercial banks again furnishing a large percentage of the funds required. Many securities, particularly those of a highly speculative nature, are also traded in on the curb before any of them are purchased for investment, these operations again being made possible mainly by margin trading on borrowed funds.

These unmarketed, or "undigested," securities may remain subject to speculative activity for considerable periods of time, not infrequently for several years, depending upon the state of the investment market and the character of the security in question. This speculation, conducted with funds borrowed from commercial banks on amply margined collateral security, thus makes it possible for a corporation to procure the funds required in developing its business, even though its securities do not as yet commend themselves to ultimate investors. The corporation is thus enabled gradually to demonstrate by industrial achievement its merits as an enterprise. Meanwhile the subjecting of its securities to the test of speculation gradually serves to indicate their actual value and thus to induce individuals to "pick them up" for investment purposes.

It should be observed that at this place the analysis ties back with that in the chapter on the marketing of low-grade or speculative securities. Here is clearly one way of raising capital for untried enterprises that does not place the risks upon the investing public. It is, moreover, a method of very great importance; for many of the high-grade stocks of the present time that are held largely by investors, have passed through a probationary period as purely speculative issues.

It has been estimated, indeed, that stock speculation served as a means of furnishing probably the largest share of the fixed capital that was used in the great period of industrial expansion following 1898. The volume of stocks and bonds that was annually being issued by new corporations far outran the absorbing power of the investment market, and hundreds of millions in securities could not be sold to ultimate investors. The National City Bank of New York estimates that in 1900 over 60 per cent of the stock of our largest corporations whose securities were listed on the New York Stock Exchange was held in the names of stock brokerage houses and represented speculative accounts. "The history of the capitalization of our leading corporations shows that new stock issues almost invariably run through a period in which they are largely held by the speculative public in brokers' names (on funds borrowed from the commercial banks), the proportion so held gradually diminishing through a number of years as the investment buyers gradually purchase them to keep."

Stock markets, investment banks, commercial banks, speculators, and investors are thus intricately related to the process of marketing corporate securities; and the entire mechanism would break down if any of its interdependent parts should cease to function. In the absence of a securities' market borrowing corporation and investing public—including savings banks and insurance companies would alike be without an indispensable index of relative values. Without both the stock market and the commercial banking system, underwriters and distributors of securities would find it impossible to conduct their operations. The stock market could not perform its function in "carrying and testing" unseasoned securities in the absence of commercial bank loans to speculators; and the commercial banks, in turn, could not make loans to speculators if it were not for the stock exchange, which at once indicates the value of the collateral offered as security for the loans and makes possible its ready sale in case of need. The full significance of the part that the commercial banks play in the process cannot, however, be made clear until we have

studied the commercial banking mechanism in some detail. We shall also find that the stock exchange performs a very important rôle in connection with the raising of working capital.

QUESTIONS FOR DISCUSSION

1. "The Stock Exchange provides a market for the purchase and sale of securities of relatively high grade. The Curb and the Consolidated Exchange furnish a market place for the purchase and sale of securities of low grade and in small lots." Do you think that the Consolidated Exchange and the Curb market are less important than the Stock Exchange?

2. Show in what way the stock market is of service to each of the financial institutions with which it is connected in the chart on page 136.

3. Do the requirements for listing stock on the New York Stock Exchange insure that the stocks quoted will have a high value? Precisely what is the advantage of these "listing" requirements? 4. What is meant by: bulls? bears? speculators? brokers? 5. What is meant by short selling? How is delivery of the securities effected?

6. If short selling were prohibited, would there be as accurate an adjustment of the prices of securities to their real values?

7. Would it be possible to have a stock market and quotations of shares without a pecuniary unit of values?

8. What is meant by margin trading? Of what significance is it? 9. What sources of information as to stock and bond values are available for the general public?

10. Consult the financial section of your daily newspaper, the Commercial and Financial Chronicle, the New York Evening Post (Saturday edition), and the Wall Street Journal; and write a statement of the nature of the information there available. II. Are the weekly market letters, daily newspaper quotations, special quick news, and "ticket services" of importance to the investor or only to the speculator?

12. What are the services rendered by brokerage houses? How do they make their earnings?

13. What is the purpose of the leased wire system?

14. What are bucket shops? Specifically how do they differ from brokerage offices?

15. Show concretely how the stock exchange aids in directing the distribution of capital.

16. If the stock market indicates that larger returns are to be derived from investments in industries that are manufacturing luxuries than in those that are producing necessities, and capital (and labor) are in consequence directed in increasing amounts to the luxuries trades, is the result necessarily socially advantageous? 17. Enumerate as many groups of people or institutions as possible that make use of the stock exchange.

18. In what ways does the stock exchange promote investment ?. 19. "If it were not for speculation in securities, a large percentage of the issues of newly organized corporations would not be ultimately absorbed." Why?

20. Several years of speculation often result in the adjusting of stock prices at a very low figure, due to the low earning power of the issuing corporation. In a case of this kind, speculation finally ceases, and it is impossible to induce the investing public to purchase the securities for investment. Who has borne the loss in such a case? What is the economic advantage of such speculation?

REFERENCES FOR FURTHER READING

Conant, Charles A.: Wall Street and the Country.

Emery, Henry C.: Speculation on the Stock and Produce Exchanges of the United States.

Fayant, Frank H.: Some Thoughts on Speculation.

Van Antwerp, William C.: The Stock Exchange from Within. Report of Governor Hughes' Committee on Speculation in Securities and Commodities (1909). Published in Money Trust Investigation, 1913.

CHAPTER XVII

TRUST COMPANIES AND THE MODERN FINANCIAL SYSTEM

In many respects the most interesting financial institution of the present day is the trust company. The growth of these institutions, called into being to meet the diverse requirements of a capitalistic economic system, has been nothing short of phenomenal during the past forty years, and especially since the era of financial consolidation which began with the turn of the century. Popularly confused with the type of business organization that was declared illegal under the Sherman AntiTrust law, the trust company is, in truth, only a new kind of financial institution that has developed to fill the gaps in a hitherto incomplete financial structure. In the course of its evolution, however, it has not only rounded out the financial system; it has invaded the field of most of the other financial institutions as well. The trust company has thus been felicitously designated "the department-store of finance," and "the omnibus of financial institutions."

The first trust companies in the United States, organized early in the last century, combined the business of insurance with that of trustee for individuals and estates. Now, however, all forms of insurance except fidelity and suretyship have been taken over by the regular insurance companies; and even these two are more and more being surrendered to specialized fidelity institutions. Although the rapid increase in the number and size of private fortunes and estates in the second half of the nineteenth century has greatly expanded the volume of trustee business for individuals, it has been the growth of the corporation which has given the trust company its largest and most distinctive field of enterprise. The great variety of ways in which the trust company is of service to the corporate system of finance will be revealed below.